2023 Insurance Outlook: What’s New in the New Year
By Michael Giusti
With the new year upon us, several areas within the insurance industry are primed for changes, while others are hoping for a little normalcy.
From election-driven changes to navigating inflation, and from surviving the cryptocurrency meltdown to dealing with a new normal in the realm of special events, the insurance industry is looking ahead to a potentially action-packed 2023.
Election Impact on Insurance
In the insurance world, most politics happen at the state level, but there are some big-picture issues decided at the federal level, and 2023 is going to see congressional power shift back to a divided Congress for the first time since the 2018 midterms.
With Republicans retaking the House of Representatives and the Democrats gaining a seat in the Senate, few people are looking for earth-shattering bipartisan legislation working its way to the White House any time soon. But that doesn’t mean the insurance industry can forget about Washington.
The biggest changes will come at the committee level, particularly in the House Financial Services Committee where much of the oversight over the insurance industry happens. With the gavel changing hands to a Republican, enforcement and oversight priorities are likely to shift as well.
And while the Senate Banking Committee is staying in Democrat hands, the head Republican on the committee retired, meaning the top Republican will be a fresh face.
The biggest federal insurance issues to come before those committees likely will begin with the role of the Federal government in the ongoing COVID-19 pandemic — particularly when it comes to reimbursements for testing and therapeutics, which have begun shifting to private insurers.
The other big Federal issue is with flood insurance. The National Flood Insurance Program has officially changed to its new underwriting standard, known as Risk Rating 2.0. This standard was meant to bring policy premiums more in line with risks, but it has translated to huge increases for many working-class communities. Prominent congressional officials from both sides of the aisle have said they intend to bring the issue up in the coming months.
The most consequential political force at the state level promises to be Florida, which was already reeling from a struggling homeowner’s insurance market before getting hit by two major hurricanes.
In an effort to stabilize its insurance market, Florida will convene a special legislative session in the coming weeks to try to find some legislative fixes to its insurance woes.
In South Dakota, voters approved a Medicaid expansion. And in her acceptance speech, the re-elected Kansas governor said she intends to push for a Medicaid expansion in her state.
In Arizona, voters approved changes to how medical debt is handled.
Inflation is being felt across many different segments of the insurance industry, but the big-picture result of inflation actually comes from the tools the Federal Reserve is using to fight inflation — higher interest rates. With higher rates comes a higher weighted average cost of capital, meaning it just costs more to get access to the money necessary to back each policy, potentially increasing the costs of the premium.
Specific to autos, inflation has also been hurting insurers in that the costs to replace or repair vehicles after an accident has been going up over the past two years.
A glimmer of good news for insurers comes with the fact that prices for used vehicles appears to be stabilizing somewhat. According to the most recent numbers from the St. Louis Federal Reserve, used vehicle prices were up only 2% year over year in October, and were actually down 5% from their highs in January.
New vehicle prices are still stubbornly high, but according to the Fed numbers, the number of vehicles available for sale is edging up, with new vehicle inventories rising a bit – 30% higher than a year ago. More vehicles for sale could eventually lead to more competition and eventually help push prices down, reducing costs for insurers after accidents.
Still, the cost to repair vehicles is remaining high – up 10% year over year.
Stubbornly high prices have been hurting the homeowner’s market as well.
According to the Fed numbers, the cost to repair a home is still high – up 10% from a year ago. The cost of home repair materials alone is up 31% from before the pandemic began in 2020.
The potentially good news in the homeowner’s market is that home repair materials, while still high, are down 22% from their highs earlier this year.
Rising interest rates are leaking into the mortgage market, up to 6.6% for a 30-year fixed rate. Higher rates have a downward pressure on prices, and in many markets, home values have begun to fall, as have the number of sales for new houses.
In the health care realm, medical inflation continues to outpace the overall inflation rates.
One area of insurance that could actually stand to benefit from inflation is the life insurers. Life insurance companies invest excess premiums that aren’t used to pay out policies. And life insurers prefer safer investments. With the federal fund rate near zero for years, that meant that life insurance companies had to move to higher-risk investments to chase a return.
With the Federal Reserve pushing up its interest rate target, that means that life insurers can move back to longer-term Treasury Bills to help rebalance their portfolios and bring down their overall risk profile.
Cryptocurrency in 2023
By the end of 2021, cryptocurrency was flying high, with Bitcoins selling for more than $65,000. But 2022 was not kind to cryptocurrency, with a huge valuation slide capped with the epic bankruptcy of crypto marketplace FTX.
By its nature, cryptocurrency is decentralized without major regulatory oversight (for now), but that doesn’t mean there isn’t insurance made to cover it.
There are a few insurance companies that specialize in covering cryptocurrency. There isn’t enough capacity in the market to cover every coin out there, but policies are still being written, even in light of the recent meltdown.
Standard cryptocurrency policies include theft, loss of access, business risk, and decentralized finance coverages.
Theft coverage protects coins from being taken by an unauthorized party.
Loss of access protects coins if their owner loses their keys or wallet, or otherwise loses the ability to access those coins.
Business risk policies are similar to any other business’ risks policies — such as errors and omissions coverage for cryptocurrency company officers.
And decentralized finance, or DeFi coverage protects the underlying technology — typically the blockchain — if it were to fail to perform in the ways it is expected.
With the FTX bankruptcy still in its early phases, it is unclear how much, if any insurance the marketplace was carrying, or whether individual coin holders were protected by policies.
One major liability question emerging from the FTX scandal is whether celebrity spokespeople who did commercials for the exchange could be personally liable for promoting it. A class action lawsuit has been filed against high-profile celebrity promoters including Tom Brady and Larry David.
As lawsuits in that space play out, it is going to offer a good indication for how well any applicable policies performed, and what risk appetite insurers have for cryptocurrency moving forward.
The special events news that dominated 2022 was the failure of Ticketmaster to effectively deliver concert tickets to the passionate fanbase of Taylor Swift.
In December, many of those fans have now filed lawsuits against Ticketmaster, and its parent company, Live Nation Entertainment.
But according to Kerri McDonald of RV Nuccio & Associated Insurance Brokers, it is unlikely those lawsuits will become a huge insurance issue because Live Nation more than likely was self-insuring their events.
Taylor swift’s ticket sale issues gave the industry a black eye, but mass casualty events, such as the Travis Scott Astroworld concert crowd crush in 2021 or the Ariana Grande terror attack in 2017 are what truly concern insurers.
Costs to insure events are also going up following huge losses from COVID-19 cancelations.
Higher insurance costs now appear baked into the ticket prices for the near future, McDonald said.
“I can confidently say we aren’t going to see many more $50 concert tickets,” McDonald said.
Another issue weighing on special events coverage is a limited capacity among reinsurers.
And for policies that are being written, most now include full communicable disease exclusions, so even if the performer gets the flu and has to cancel a show, it is now not covered by standard policies. And those standard policies are coming with much higher limits now, as well.
From a consumer insurance perspective, there are a few things to consider when thinking about households working to go green.
First, with the Inflation Reduction Act reworking the rules around electric vehicle subsidies, many households may be considering an EV for their next vehicle purchase.
On the surface, insurance for an EV works exactly like insurance for an internal combustion engine vehicle. But it is a bit more nuanced than that.
Since as a rule, at least for now, EVs tend to cost more to begin with, their premiums are going to be higher. But other factors also tend to drive higher insurance rates for EVs. For one, they are more likely to be totaled in an accident because of the high cost to repair a damaged battery pack.
Also, otherwise simple repairs of an EV can cost more than an internal combustion vehicle because there aren’t as many auto shops certified to work on them, and because there aren’t as many on the road, there aren’t a lot of aftermarket parts being made to serve them.
In some states, Tesla is partnering with an insurance company and using its anonymized on-board telematics data to help build a better risk profile to hopefully bring down their insurance costs.
Energy efficient upgrades in the home could also require some insurance thought.
If something is permanently attached to the home, such as solar panels or backup batteries, they would typically be automatically covered by a homeowner’s insurance policy. But not all insurance companies cover solar panels. There are some policies that specifically exclude their coverage.
If solar panels are specifically excluded, it may mean that a separate rider may be needed to protect them from wind damage or hail, for example. Or it may mean that the homeowner has to shop for another policy altogether.
Solar panels may also be excluded from coverage if they are built anywhere but on the main structure of the home, such as on top of a detached garage or shed, or if they are built to stand alone in the lawn.
Adding environmentally friendly upgrades does typically raise the value of the home, which may translate to higher premiums.
There are some advocates who see insurance costs as a hinderance to these green upgrades and are calling for insurance subsidies to help defray these costs, but there hasn’t been much traction in most states for such a move.
Young Life Insurance
One emerging trend in selling life insurance is targeting sales pitches to younger customers. Typically, life insurance is targeted to older buyers who have dependents who would struggle if the policyholder would die and not have their income anymore.
But, in targeting younger buyers, the script is a little flipped.
Instead of protecting younger dependents, these polices would help protect parents or guardians who might be taking on some risks on behalf of the child.
One place would be private student loans. Federal student loans, and even Parent PLUS loans are discharged once the student dies. But there are private loans that do not get automatically discharged and that the parent may be left having to pay back after the student dies.
And it isn’t just student loans – parents are also co-signing for other loans, be it a car loan or a mortgage, to help their children get a leg up.
If those children were to die, the parent would be left having to pay back that co-signed loan. And that is where these younger life insurance customer sales pitches are targeted.
As a rule, a small term life policy on a young person meant to protect those co-signed loans would not be very costly, and many agents out there are seeing these as a good sales pitch opportunity.
One constant truism is that in any market, having more options can help drive down costs, and that is absolutely true of insurance. According to the Transunion Personal Lines Trends Perspectives Report, even though shopping around had been looking like it was about to take off in the third quarter, the effects of the Florida hurricanes seems to have muted that action.
But shopping around is a tried-and-true way of ensuring each policyholder is getting the best value out of a policy.
Price conscious buyers can also ask their agents about telematics programs, which are not always well known or understood by buyers, and even some agents. In auto insurance, telematics devices can plug into the vehicle’s onboard diagnostic port, or even use a smartphone app or the vehicle’s computer suite to track driving habits and price policies accordingly. In some cases, buyers can save as much as 30% by opting into a telematics program (and driving safely.)
But telematics devices are also finding their way into homeowner’s policies. Emerging devices, such as networked burglar alarms, fire alarms, and even devices to detect and prevent potentially devastating water leaks and burst pipes are all being written into policy discounts.
Insurers are even looking to technology to help the underwriting, claims processing, and shopping experience. These so-called insuretech companies are doing a lot to leverage things like aerial and satellite photography, as well as public databases to help insurers provide their services more efficiently.
For 2023 one thing most industry watchers agree on is that many lines will be seeing higher premiums.
They are also casting a warry eye toward the reinsurance market. Reinsurers are massive financial services companies that insurance companies use to protect themselves from catastrophic losses. And all signs point to reinsurance rates, which underly nearly every insurance policy, will likely be going up when they are renewed in January.
These higher costs are driven by inflation and the higher cost of capital, but also by higher losses due to climate change, the ongoing pandemic, and even massive losses coming out of the war in Ukraine.
But, despite the potentially higher rates, one thing many people are hoping for is a more normal year, potentially marked by a pandemic that continues to retreat and potentially taming inflation.
Michael Giusti, MBA, is senior writer and analyst for InsuranceQuotes.com