Report highlights man-made crises in property insurance

Crises in property insurance markets today frequently have little to do with Mother Nature. Instead, man-made crises in the form of legal system abuse, claims fraud and regulatory interference are the root causes of most market instability.

That is the message of a new report published jointly by the American Property Casualty Insurance Association, the Reinsurance Association of America, the Association of Bermuda Insurers and Reinsurers, and Robert Hartwig, clinical associate professor of finance and director of the Risk and Uncertainty Management Centre at the University of South Carolina.

The report–It’s not just the weather. The man-made crises roiling property insurance markets–warns legislators and regulators that urgent action is needed to protect against man-made catastrophes.

“Weather-related disasters are becoming increasingly common–and costly. Disaster-claim payouts by insurers now approach $50 billion per year, on average, up some 25% from a decade ago, adjusted for inflation,” the report says.

“Climate change, rapid population growth in disaster-prone states and, more recently, inflation all play important roles in driving the cost of insuring natural disasters upward. Yet managing these risks is precisely what insurers are equipped to do, while bringing relief and protection to the millions of home and business owners impacted by these tragic events each and every year. At the same time, property insurance markets in many states are showing signs of stress. Indeed, several markets are in a state of crisis, with a number of insurers recently becoming insolvent.”

The report analyses the origins, root causes and consequences of increasing stress and instability in property insurance markets, using several of the most severely impacted states as case studies.

“Just as with natural disasters, the cost of these man-made crises is measured in billions of dollars,” the report continues. “But unlike perils such as hurricanes, wildfires, and tornados–which can be readily modelled and priced by insurers–legal system abuses, fraud, and misguided regulation cannot.”

It adds: “These unmodelled and largely uncontained risks are in some cases solvency threatening, obligating insurers to take drastic steps to protect and conserve capital, with predictably adverse consequences on price, coverage availability, and competition.

“Fixing the nation’s imperilled property insurance markets is an insurance industry priority. But insurers cannot restore these markets to health alone. To do so requires a focused and enduring commitment by state legislators and regulators to adopt meaningful legal system reforms, attack fraud at its source, and promote regulatory stability.”

To facilitate that objective, this paper concludes with a series of concrete recommendations for addressing each of these root causes of instability. Collectively, these recommendations form an action plan that, if adopted, the authors say can help restore stability to property insurance markets in the nation’s most disaster-prone states.

“To fix broken property insurance markets, insurers have urged state lawmakers and regulators to focus on addressing the underlying issues roiling those markets. Legal system reform, anti-fraud measures, and promoting regulatory stability and mitigation to help reduce future losses are imperative to restoring market health in catastrophe-prone markets,” the report concludes.