Regulator’s view: Tighter reinsurance rates create market headaches
Mike Chaney, Commissioner at the Mississippi Insurance Department, speaks about the challenges of tighter reinsurance markets and inflation.
Andrew Putwainposted on Monday, October 30, 2023
Andrew Putwain: Can you tell us about your background and the Department’s remit and structure?
Mike Chaney: The department is organised with a Commissioner, a Deputy Commissioner, and several Directors covering Consumer Affairs, P&C rating, investigations, Examinations, Life and Health-including Long Term care healthcare, and HR issues.
We have every kind of natural disaster that occurs in the US in our state – hurricanes, wildfires, earthquakes, tornadoes, hail – which means my roles vary, and I wear several different hats. I’m also the state fire marshal, and I oversee first responders. Our work also means we interact with emergency management agencies at both the state and federal levels. We work with the Center for Medicare & Medicaid Services (CMS), which oversees the federal marketplace.
Combining all these duties comes back to one thing: you need a regulator to make sure that consumers are protected, and companies are solvent.
"Consumers must have insurance that covers the three As: 1) available, 2) affordable, 3) accountable."
Before I was Commissioner, I spent seven years in the Mississippi House of Representatives and eight years as a state senator. I’ve also spent time in the oil and gas industry – and in forest products manufacturing, where I had experiences with insurance and environmental issues. I invested in an insurance company in the 1980s.
I consider myself a neophyte to insurance as it’s an ever-changing product. I served on the insurance committee in the Senate so, as a former investor and owner, I understood the industry to a degree. You must understand the consequences of what happens if companies invest in the wrong bonds or securities.
This has become an issue for us, so we utilise the National Association of Insurance Commissioners’ (NAIC) securities evaluation office and examination division.
Andrew: What is the Department’s approach to market regulation – and what are you focused on in terms of policy?
Mike: Consumers must have insurance that covers the three As: 1) available, 2) affordable, 3) accountable.
Given the high cost of reinsurance, this is currently a challenge. A lot of the difficulty comes down to global problems – for example, the war in Ukraine and tensions in the Middle East, catastrophic events, and politics.
These conflicts affect the price of reinsurance and where reinsurers can invest their capital to get returns. This, in turn, affects us because the industry and state have to buy reinsurance for our plans that write wind and hailstorm coverage for homeowners that live within fifty miles of the Gulf coastline. The problem is that private carriers don’t want to write that coverage due to the high risk and reinsurance cost.
Andrew: What are the most pressing legislative difficulties you encounter?
Mike: Being an ex-legislator, I understand the legislative process and have used that knowledge to see these issues from both sides.
You need to have proper services to fulfil your statutory mission. This means ensuring we have proper funding. Legislators also need to understand the difference between a rural area having, for example, a fire truck – and how this relates to the cost of reinsurance and the reinsurance period for consumers with homeowner insurance policies.
The other issue we have with legislative authorities is understanding health insurance, which is extremely complicated. Our main concern is ensuring that legislators understand the correlation between affordable health insurance and the availability of health care. Mississippi is mostly rural, so we cover a lot of areas. Proper coverage and good law enforcement mean a functioning economy.
We don’t control Medicaid and Medicare – which are overseen by the executive branches of the state and federal governments and the federal government respectively– but they relate to general health insurance, and we have to know how the market operates so we don't have funding squeezes. In 2023, our funding is about $13 million, and the insurance industry brings in around $400 million in tax revenue – but it’s a never-ending battle to make sure there is proper funding.
Andrew: What do you see as the biggest asset management issues the department faces?
Mike: The most pressing asset management concern is the mitigation of risk and loss if a catastrophic event occurs. For us, that largely means building codes and mitigation to strengthen structures.
After Hurricane Katrina, we needed new building codes otherwise FEMA would not supply the money to rebuild the destroyed Public infrastructure – so we established and enforced building codes that enable us to have lower insurance premiums. This has affected those insurers on the Gulf Coast. Now, if you rebuild a house on the Gulf Coast that had been destroyed in a weather event, you have to be at least 18.3 feet above sea level, which is well above the climate change modelling of a three feet sea rise in the next three decades.
Some states had to grant large rate increases to keep their wind pools solvent after the weather events of the past two years.
By comparison, our wind pool is one of the most solvent in the country based on what we have as Total Insured Value (TIV) which is about $2.4 billion. Our windpool’s surplus, assessment authority and reinsurance protection total about $1 billion.
"I’m reluctant to let surplus line carriers into the state when we don’t think they’re solvent."
If there were another Katrina or category four hurricane, our loss would probably be 30 to 35% of the insured value. This risk mitigation feeds into building codes, which contribute to maintaining solvency for the companies that write on the coast.
Other big issues we monitor include surplus line or non-admitted carriers. These companies are based outside Mississippi, so we don’t regulate their rates; we just ensure they are solvent enough to do business here. They don’t participate in our guarantee funds, so if they go bankrupt, consumers are on the hook. So, I’m reluctant to let surplus line carriers into the state when we don’t think they’re solvent.
The big problem with surplus lines relates to what I said earlier about building on the Gulf Coast. Insurers there cover expensive homes and undercut the wind pool or commercial wind carriers because it’s profitable to insure these properties. People who are affluent and own houses in Coastal zones can pay the higher insurance premiums that non-admitted companies charge as markets tighten up. When the market becomes tighter due to draconian reinsurance cost, non-admitted companies raise fees to maintain a profitable rate of return. Most homeowners are unable to afford the higher premiums and are essentially trapped, without affordable coverage options.
Surplus lines-non admitted companies usually increase rates after a catastrophic event, which is a tricky market capacity balance for regulators. We want surplus line writers in the market, but we also want them to be fair and affordable in their rate structure and underwriting.
Andrew: Are recessionary conditions and other macroeconomic issues a key concern for insurers – and how have regulators been navigating the current volatile environment?
Mike: Inflation and potential recessionary conditions put pressure on rates and the capacity of companies to write coverage. This affects insurance as it does most industries worldwide. Rate and capacity issues always concern regulators.
"Understanding the impact of macroeconomics and global events in the marketplace is a challenge for regulators since there are no similar related historical comparisons available."
Many regulators have utilised state quasi-governmental insurers of last resort to provide homeowners and limited commercial coverage as market capacity tightens up. This gives consumers options to maintain coverage, which is usually a requirement of their mortgage holder.
Understanding the long-term impact of macroeconomics and global events in the marketplace is a challenge for regulators since there are no similar related historical comparisons available. I rely on fellow regulators such as the National Conference of Insurance Legislators (NCOIL) and the NAIC for figuring out how to navigate this environment.
Andrew: How have macroeconomic conditions – recent bank failures, rate hikes by the Fed, and ongoing inflation – changed the way insurers’ portfolios are monitored? What do you expect for the future?
Mike: Rate hikes by the Fed do affect us and we want to make sure everyone understands why. It impacts insurance rates including healthcare costs. If you have people on a fixed income they may have to choose between paying for their medications and food, before paying for insurance. So, to protect consumers, we rely on fellow regulators NCOIL and the NAIC for figuring out how to navigate this environment. Regulators and carriers must adapt to survive.
My examiners have seen insurance carriers replace periodic monitoring of market shifts in underwriting with real-time monitoring of microsegments of the market. They have supplemented their monitoring of internal indicators with monitoring of external data of competitors, using methods to adjust underwriting. We as regulators are not privy to these methods.
Regulators do not always have the historical knowledge available to monitor the changing macroeconomic conditions and I believe we will start relying more on proprietary Artificial Intelligence (AI) for monitoring to supplement our other sources. We interact with other offices that have different issues than we do – so we know how to approach these new problems when they do occur. This is the real value of the NAIC, since regulation in the US is state based, we rely heavily on them for guidance.
"I worry that regulators and the industry are not addressing the new future challenges of AI, consumer protection, Federal intervention, Climate issues, and the use of ESG."
Over the last few years, to survive, regulators, like insurance carriers, have shown flexibility and resilience in overcoming a host of obstacles, especially the impact of the pandemic and the economic fallout from the Russia-Ukraine conflict. Through capital and flexible technology, our systems and capabilities have improved. These strategies, while costly, have paid off.
I worry that regulators and the industry are not jointly addressing the evolving new future challenges of AI, consumer protection, Federal intervention, Climate issues, and the use of ESG.
The road ahead is rough and rocky with multiple potholes of recession threats, rising inflation, interest rates, and loss costs; the looming, climate change, ESG mandates and geopolitical upheaval. Regulators and the industry struggle to understand competition from InsurTechs and even noninsurance entities such as under-regulated e-retailers and manufacturers, to name a few.
As a group, we must be proactive and balance our risk with new technology and innovation and at the same time let the industry maintain profitability.
Andrew: What are your thoughts on the resurgence of insurance linked securities (ILS)? Do they work for Mississippi?
Mike: I believe Insurance Linked Securities are a valuable tool for transferring risk from natural catastrophic events and provide a source of funding for the industry, especially the P&C sector. Mississippi has the ability to issue CAT bonds but has chosen not to because we have very good ratios of TIV to risk coverage. ILSs are not viable for Mississippi. We have a high RBC surplus ratio to TIV and have purchased reinsurance at fairly decent rates due to longstanding relationships with reinsurers. If our windpool does not maintain rate adequacy, we may have to consider CAT bonds or other types of ILSs with specific triggers such as Parametric or Modelled Loss securities.
Insurance Linked Securities are a viable source for a state like Florida or Texas because they have high total insured values (TIV) and need better capital ratios and more reinsurance for their TIV exposures. Louisiana might also look into it; it’s another tool in a box you can use to address certain capital and funding problems.
Our bills for wind pools are designed for economic development and do not cover people who are not responsible. If you need to issue those bonds, it’s okay, but understand you then need to pay them back.