This week Russ Dubisky, executive director of S.C. Insurance Service, returns to discuss interesting insurance news and views. He has selected a variety of questions on topics that will interest our readers.
I believe an appropriate beginning for Newberry Notes is to ask Dubisky to remind our readers of the undertaking of the S.C. Insurance News Service.
“The South Carolina Insurance News Service is a trade association that represents 14 of the leading property/casualty insurance companies that do business in this state. We communicate on behalf of our member companies to be an information-based resource for interested parties. Our organization also believes in consumer initiatives that help develop a more educated consumer public,” said Dubisky.
1) Insurance is a big industry for our state. How does insurance impact our economy?
The insurance industry in South Carolina has a major impact on the state’s economy. It provides over 30,000 jobs, pays about $158 million in state premium taxes, and contributes about $3.6 billion to South Carolina’s gross state product (which is about 2.2 percent of the total). Of perhaps greater importance, insurance companies in 2011 paid almost $4.4 billion in claims to help individuals and businesses recover from losses.
The insurance industry is a vital contributor to this state’s economy. Not only does the industry provide thousands of jobs and pay millions in state taxes, but it also helps consumers recover quickly after a loss. Insurance companies help businesses, individuals, and families rebound after a catastrophe, which makes our communities and our economy more resilient.
On the surface, many think that insurance only serves one purpose: to protect you from a significant financial loss. And while that protection is the product insurers offer their customers, you can see that the industry makes a more significant impact to the economy in aggregate.
We live in an environment where most American families depend on loans to purchase cars, homes, and/or to start a business. If insurance were not available to protect those assets, banks and other lenders would be less willing to offer loans. Insurance really provides a necessary lubricant that provides protection for that collateral and helps stimulate our credit-based economy.
2) As 2012 is drawing to a close, we survived yet another year without a hurricane, but some others were not as fortunate. How will Sandy and some of the other events this year impact the insurance industry?
The insurance industry actually had a fairly modest year in terms of losses until Hurricane (super-storm) Sandy hit the northeast.
While Sandy’s losses are still a moving target, most of the recent estimates are somewhere between $25 billion and $50 billion, with $10 billion to $20 billion of that being insured losses. Most projections exclude losses incurred by the federal government’s National Flood Insurance Program (which expect losses of up to $12 billion).
In any case, Sandy is positioned to become the second-most costly catastrophe in U.S. history, behind only Hurricane Katrina ($41 billion).
Automobile claims now total more than 230,000, and in Manhattan alone, some 22 million square feet of business property was initially put out of commission. Sandy damaged or destroyed 305,000 housing units, compared to 214,000 for Katrina.
We are reminded that is isn’t simply the size and strength of these storms that matter. Defining storms as Category 1,2, or 3, is a meteorological definition and doesn’t necessarily equate to the amount of damage. In terms of losses, location, population density, and the concentration of insured values of businesses and homes play a significant role in the economic impact of these events. While South Carolina has the 24th highest population, we have some $229.6 billion in insured coastal exposure, which is the 8th highest in the country.
The good news is that even with Sandy, the insurance industry is still in position to make good on their promises to their customers and pay claims.
3) How were South Carolina’s homeowners impacted this year?
We don’t know what South Carolina’s figures will be for 2012, for several more months. However, in 2011, a year in which we did not have a hurricane, homeowners insurers had a loss ratio of 79.2. That means that for every dollar that your homeowners insurance company collected in premium, it paid 79.2 cents in claims. That figure does not include administrative and operational costs. The industry average for expenses is typically between 25 percent and 45 percent. The average combined ratio, which includes expenses and claims, was 107. That means that as an industry, homeowners insurers (even the most efficient companies) experienced a loss in a year that we weren’t hit with a mega-catastrophe such as a hurricane.
Those numbers aren’t intended to make anyone feel sorry for the industry, but rather to illustrate how difficult it can be for insurers that are literally in the business of preparing for and predicting future events. It also shows that the low severity and non-catastrophe claims (a kitchen fire or theft) add up very quickly.
4) How could that impact our insurance rates next year?
Rates are quite complicated in the sense that they are influenced by a number of different factors. I always think it is important to remind folks that it is rarely ever one single thing that impacts rates going forward. That remains true in this situation.
Recent indications however are trending towards an increase in insurance rates. It is impossible to say what an average increase might look like because there are so many variables based on companies and the individual policyholder.
In addition to more frequent, non-catrosphoic losses, insurers have experienced poor investment returns, growing populations (especially near the coast), increased exposures, and indications that natural disasters are likely to be more frequent and severe in the future.
However, South Carolina has a competitive market place. Competitive markets offer consumers the opportunity to find the best possible rate for their individual risks. Fortunately, homeowners in Newberry are not forced to unfairly subsidize the coastal residents who have a higher risk.
5) We just had a presidential election and all of the 170 state legislative seats were up for reelection. How might the results impact the insurance industry?
The election results provided support for the old adage, “the more things change, the more they stay the same,” and the status-quo seemed to prevail.
In South Carolina, the General Assembly will see a number of new faces in January, but Republican majorities will remain in both chambers. Republicans increased their Senate margin by one seat on Tuesday (27-19), and House will remain at a 77 – 47 split in favor of the GOP (however, three districts did swing).
In terms of leadership, Sen. John Courson, President pro tempore won his bid for reelection, as did Speaker of the House Bobby Harrell. Both Sen. Courson and Speaker Harrell have professional insurance backgrounds. Sen. Larry Martin, chairman of the Senate Judiciary Committee, and Rep. Bill Sandifer, chairman of the House Labor, Commerce and Industry Committee were both reelected and are expected to maintain their chairman posts.
In other notable races, Katrina Shealy was elected as a petition candidate over longtime Senator and Rules Committee chairman Jake Knotts. Ross Turner was selected over former chairman of the Senate Banking and Insurance Committee chairman David Thomas in a hotly contested primary, and was unopposed in the general election. Both Shealy and Turner work as independent insurance agents.
Incumbent Senator Wes Hayes won his race and is rumored to be named as the new chairman for the Senate Banking and Insurance Committee. On the House side, Beth Bernstein won over Rep. Joan Brady who chaired the House Insurance Subcommittee. Bernstein owns her own law firm in Columbia.
The bigger news story relative to insurance and state government was the Governor’s appointment of long-time insurance industry representative Ray Farmer as the Director of Insurance. That position still requires confirmation from the senate, but has been vacant for since the end of 2011.
Farmer has a background working with the industry and several associations and state governments. I am confident that he understands the necessary balance between consumers and industry.
A healthy marketplace offers consumers plenty of choices at competitive rates, and helps people recover quickly after a loss without unfair subsidies and mechanisms that will pass disaster restoration costs along to citizens through taxes and/or assessments.”
6) Are there any particular insurance issues that our readers can expect when the legislature convenes in January?
The first issue will be the senate confirmation of Ray Farmer as the new Director of Insurance.
We also think that rental car insurance and the current regulatory model on homeowners insurance may also be items of interest.
As for rental car insurance, some states require the rental car company to provide the primary statutory minimum coverage in cases when there is an automobile accident involving a rented vehicle. Other states allow the rental car company’s coverage to be secondary to the renter’s insurance. South Carolina case law since 1964 provides that the vehicle owners’ insurance is primary when the vehicle is loaned or rented in the state.
If legislative changes require the drivers’ insurance to become primary, we could expect changes in the way auto insurance is priced and costs would be spread among all insurers’ policyholders within the state, instead of to those who rent vehicles.
By having the rental car company as the primary source of coverage when an accident occurs, accident costs are passed along by the rental car company in its rates. Those costs are borne only by those who rent vehicles. Other drivers – who do not rent cars – would not be affected by rental car companies’ rate increases; in other words, they would not need to pay more to subsidize renters, many of whom are from out of state.
There are additional concerns on the property side of the equation. Having the owner’s insurance as the primary coverage provides more predictability for insurers and allows them to more appropriately match rate to risk. Insurers know exactly which vehicles are being insured, for example. We think that the current system provides an environment that has more predictability and more closely matches rate to risk as costs are borne only by those renting vehicles.
There’s another item that we expect to gain some attention this session.
We have recently seen a lot of negative press in coastal markets in South Carolina on insurance rates.
Some sources have been actively pushing for insurance reforms citing unjustified insurance increases and minimal exposures to catastrophes such as hurricanes.
I want to address this by first stating that the NAIC reports that South Carolina’s annual average homeowners rate is fourth lowest among southeastern and gulf states. That is mostly because inland homeowners like those here in Newberry. However, some residents along the coast feel that they are paying too much for their insurance.
Secondly, South Carolina indeed has exposure to catastrophic hurricanes that cause significant damage well beyond their specific point of landfall. The state has more than 187 miles of direct exposure to hurricanes with $229 billion in insured property along the coast. That coastal exposure represents over a quarter of the state’s total insured value (neighboring states NC and GA have only 9% and 5% of their respective exposures along the coast).
Risk analysts estimate that if Hurricane Hugo hit today, there would be about $10.9 billion in insured losses (Hugo caused $4.2 billion in 1989). Insurers must prepare now to ensure their ability to pay claims after a hurricane devastates our coast. Without insurance, a family that pays $2,000 a year to ensure their $150,000 home would have to be lucky for 75 years to cover one total loss.
Since the implementation of the Omnibus Coastal Reform Act of 2007, the insurance laws and regulatory environment governing South Carolina’s insurance market are viewed in a superior light and serve as a model for other states faced with similar exposures.
As I mentioned earlier, competition benefits consumers, and a healthy marketplace means insurers have enough claims paying capacity to help their customers recover quickly after a loss without unfair subsidies and mechanisms that will pass disaster restoration costs along to citizens through taxes and/or assessments. An insurance system that includes citizen assessments to pay for losses is more a strategy of hope than protection.
We understand that insurance may be expensive, but it remains the best way for most of us to protect our financial assets against loss.”
7) Where can readers find more information about these and other insurance-related topics?
Readers are encouraged to visit our website at SCinsurance.net. Also, your local insurance agent, broker, or company is always a good resource for individuals who have questions about their own insurance.