BEST’S GUIDE TO

UNDERSTANDING THE
INSURANCE INDUSTRY
An overview for those
working with and in
one of the world’s
most interesting and
vital industries.

2023 EDITION
 About Us
Founded in 1899, AM Best is the world’s first credit rating agency. It all began
with the founder working out of a one-room office in New York City and grew to
become what is now the largest credit rating agency in the world specializing in
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AM Best Rating Services assesses the creditworthiness of and/or reports

on over 16,000 insurance companies worldwide. Our credit ratings are
independent, indicative and interactive, and summarize our opinion on
an insurance company’s ability to pay claims, debts and other financial
obligations in a timely manner. Our commentary, research and analysis provide
additional insight.

AM Best Information Services integrates credit ratings, commentary, research

and analysis with insurance news, financial data and thought leadership
to help consumers and professionals make more-informed personal and
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Visit www.ambest.com.
Table of Contents
Chapter 1: Industry Overview Chapter 6: Fiscal Fitness & AM Best
For Those Interested in the Insurance Industry. . . . . . . . . . . . . . . 2 Insurance Stands Traditional Product Cycle on Its Head. . . . 73
Insurance: Financial Protection From Risks. . . . . . . . . . . . . . . . . . . 3 The Risk of Financial Impairment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
By the Numbers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Overview: Best’s Credit Rating Evaluation. . . . . . . . . . . . . . . . . . 75
How Insurers Make Money. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 AM Best’s Insurance Information
Products and Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
The Economics of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
How Insurance Is Sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Important Functions of Insurance Organizations. . . . . . . . . . . 11 Spotlights

Insurance Entities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Does Insurance Cause Some People to Lie? Behavioral

Economics Has the Remedy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Chapter 2: Property/Casualty Survey: Colleges Need to Better Prepare
Property/Casualty Market at a Glance. . . . . . . . . . . . . . . . . . . . . . 20 Future Insurers for Real World. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Property/Casualty Coverage Types and Automakers Build New Insurance Future. . . . . . . . . . . . . . . . . . . . 27
Lines of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Insurance Coverage Questions Surround
Emerging NIL Industry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Chapter 3: Life & Annuity
Staid Annuities Get Star Treatment in Movie About the
Life Market at a Glance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Importance of Guaranteed Retirement Income. . . . . . . . . . . 42
Life Insurers Chasing Wider Range of Opportunities . . . . . . 36 Startup Founder Hopes to Help People Find `Ferrari in the
Important Lines of Life Business and Products. . . . . . . . . . . . . 38 Garage’ by Taking Life Settlements Mainstream. . . . . . . . . . . 45
Annuity Products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Biometrics Laws and Regulations Poised to Become a
Flashpoint for Insurers, Market Watchers Say. . . . . . . . . . . . . . .54
Accident & Health Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Legalized Recreational Marijuana Is a Growing Business
Chapter 4: Health With Insurance Challenges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Health Market at a Glance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 FIU Extreme Events Director: Prototype Facility Will Test
Developing Issues for Health Insurers. . . . . . . . . . . . . . . . . . . . . . . 50 Forces of a Cat 6 Hurricane. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Major Types of Health Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Insurance Leaders: Time to Better Protect,Shore Up
Coastal Homeowners’ Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Products and Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
COVID-19 Mortality Trends, Interest Rates and Climate
Common Health Insurance Terms. . . . . . . . . . . . . . . . . . . . . . . . . . 53 Change Seen as Key . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Chapter 5: Reinsurance/Alternative
Risk Transfer
Overview of Reinsurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59
Developing Issues in Reinsurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Alternative Risk Transfer and Risk Financing. . . . . . . . . . . . . . . . 62
Insurance-Linked Securities and Structured
Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
 Best’s Guide to Understanding For Those Interested
the Insurance Industry in the Insurance Industry
2023 Edition
Published by AM Best
A M Best publishes Understanding the Insurance
Industry to provide a clear picture of how the
insurance industry operates, generates revenue and
provides opportunities for people of varied talents and
AM BEST COMPANY, INC.
interests.
OLDWICK, NJ

CHAIRMAN, PRESIDENT & CEO: Arthur Snyder III It’s designed to provide readers with a high-level
overview of the insurance industry, particularly how it
SENIOR VICE PRESIDENTS: Alessandra L. Czarnecki, operates in the United States. It’s also designed to be a
Thomas J. Plummer gentle and broad introduction to the insurance industry
GROUP VICE PRESIDENT: Lee McDonald for students, new employees, prospects and those
who would like to learn more about one of the most
AM BEST RATING SERVICES, INC. interesting and important financial services industries.
OLDWICK, NJ
We’ve designed this book in six sections: industry
PRESIDENT & CEO: Matthew C. Mosher overview, property/casualty (also known as nonlife
insurance), life, health, reinsurance and alternative risk
EXECUTIVE VICE PRESIDENT & COO: James Gillard
transfer, and the function of AM Best in the industry.
EXECUTIVE VICE PRESIDENT & CSO: Andrea Keenan
Articles were prepared by members of AM Best’s
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editorial team. Some content is extracted from
Stefan W. Holzberger, James F. Snee
Special Reports produced by AM Best, from articles in
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ALL RIGHTS RESERVED. No portion of this content may be
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of AM Best.
 Chapter 1: Industry Overview

Insurance: Financial
Protection From Risks

I nsurance protects against the financial risks that are

present at all stages of people’s lives and businesses.
Insurers protect against loss—of a car, a house, even a
life—and pay the policyholder or designee a benefit in
the event of that loss. Those who suffer the loss present
a claim and request payment under the insurance
coverage terms, which are outlined in an insurance
policy. Insurers typically cannot replace the item lost
but can provide financial compensation to address the
economic hardship caused by a loss.

All aspects of life include exposure to risk. Individuals

and businesses are presented with the following
choices: Accept the risk and the consequences of a
loss if it happens, avoid the risk by not engaging in the
risk-taking activity, or manage the risk by procuring
insurance. Those who don’t procure insurance coverage
are responsible for the full loss. Those who obtain
coverage succeed in “transferring the risk” to another
organization, typically an insurance company.

Purchasing insurance is the most common risk transfer

mechanism for people and organizations. The money
paid from the insured is known as the premium. In
return, the insurer agrees to pay a designated benefit in
the event of the agreed-upon loss.

By the Numbers

I nsurance takes advantage of concepts known as

risk pooling and the law of large numbers. Many
policyholders pay a relatively small amount in
premiums to protect themselves against a possible
larger loss. When a sufficient number of insureds make
that same choice, the funds available to pay claims

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Chapter 1: Industry Overview

increase, and the chances of any single person or group • Protection against outliving one’s financial resources.
exhausting the available funds grow smaller.
Nonlife insurers, known as the property/casualty sector
In risk pooling, insurers can accept a diverse and large in the United States and Canada, in general offer two
number of risks, so long as many people participate basic forms of coverage:
in the insurance process, and the insured risks are • Property insurance provides protection against most
individually unpredictable and infrequent. Although risks to tangible property occurring as the result
an insurer may accept risks from a large number of of prespecified perils such as collision, fire, flood,
people, only a small portion of those are likely to suffer earthquake, theft or other perils.
an insured financial loss during the period of insurance • Casualty, or liability, insurance is broader than
coverage. Risk pooling allows insurers to pay claims to property and often provides coverage of an individual
the few from the funds of the many. or organization for negligent acts or omissions.

What insurers sell is protection against economic loss. A well-known form of casualty insurance, auto liability
These losses are outlined in contracts or documents coverage, protects drivers in the event they are found to
known as insurance policies. be at fault in an accident.

Life and health insurers cover three general areas: A driver found to be at fault may be responsible for
• Protection against death. medical expenses, repairs and restitution to other
• Protection against poor health or unexpected people involved in the incident.
medical costs.

How Insurers Make Money

Insurance companies primarily make money in

two ways: from investments and by generating an
underwriting profit—that is, collecting premiums that
If an insurer has predominantly short-term
obligations—for example, homeowners’ policies which
pay out in a relatively short period— the float is usually
exceed insured losses and related expenses. invested in short-term liquid instruments to enable
the insurers to pay out on claims as they happen.
It all begins with underwriting. Insurers, whether life or
nonlife, must assess the risk and gauge the likelihood of If the needs are long term, a portfolio containing fixed-
claims and the value of those claims. income securities, such as bonds and mortgage loans,
may also include preferred and common stocks, real
Insurance companies invest assets that are set aside to estate and a variety of alternative asset classes.
pay claims brought by policyholders. The insurance
“float” represents the available reserve, or the funds Life insurers also establish separate accounts for
available for investment once the insurer has collected nonguaranteed insurance products, such as variable life
premiums but is not yet obligated to pay out in claims.

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 Chapter 1: Industry Overview

insurance or annuities, which provide for investment Life insurers who offered variable annuity products
decisions by policyholders. with rich guarantees to their policyholders also
suffered, as they used options to hedge these
Property/casualty insurers traditionally have been more guarantees. During a time of peak stock market
conservative with the asset side of their balance sheets, volatility, these options became very expensive,
primarily due to the high levels of risk on the liability resulting in losses.
side. For example, catastrophe losses can wipe out years
of accumulated premiums in some lines. Few winners emerged. However, the mutual insurance
sector managed to remain somewhat unscathed by the
The global recession of the previous decade hurt downturn. Ater the recession, meanwhile, the Federal
nearly all aspects of the insurance industry, as Reserve’s attempts to battle the economic weakness by
many companies experienced declining revenues lowering the fed funds rate resulted in a chronic low
and investment losses. Companies with risky asset interest rate environment limited the ability of life and
portfolios such as an outsized exposure to mortgage- other insurers to benefit from fixed investments such
backed securities, equities and high yield bonds as bonds. That may change, depending on economic
suffered disproportinately. conditions that could spur higher inflation.

The Economics of Insurance

M ore than 2,624 property/casualty companies and

742 life/health insurance companies are included
in AM Best’s files for the United States and Canada.
US Insurance Industry – Jobs by Sector
U.S. Insurance Employment 2.84 million

AM Best’s global database includes information on Insurance Agencies and Brokerages 913,200

more than 17,000 insurance companies worldwide. Direct Life and Health Carriers 909,300
Insurers pay claims in property, liability, life, health, Third-Party Administrators 211,200
annuity, reinsurance and other forms of coverage. In Claims Adjusting 55,600
the United States alone, the broader insurance industry Direct Title and Other Direct 95,100
provides employment to 2.8 million people. Direct Property/Casualty 532,000
Reinsurance Carriers 26,200
Insurance organizations play a vital role in the U.S.
Source: U.S. Department of Labor.
and other economies. They protect individuals and
businesses from unexpected financial loss. Money
they receive as premiums is invested in the economy. afford to purchase real estate and equipment, to hire
Protection from financial loss provides a sense of more employees and fund expansion.
security to individuals and businesses, which are freer
to pursue business and personal opportunities with Premiums collected from insureds, often known as
less worry about financial devastation. Businesses can policyholders, are invested by insurance organizations

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Chapter 1: Industry Overview

Insurance Density – Annual Per Capita Insurance Premiums (2020)

Sources: Swiss Re sigma and Axco.

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 Chapter 1: Industry Overview

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Chapter 1: Industry Overview

Best’s Rankings
World’s Largest Insurance Companies – 2023 Edition
Based on 2020 Net Nonbanking Assets.
2020 2019 Country of 2020 Net Nonbanking %
Rank Rank AMB# Company Name Domicile Assets (US$ 000) Change*
1 1 0 8 50 14 Allianz SE Germany 1,261,940,234 4.90
2 3 085085 AXA S.A. France 950,598,568 2.77
3 2 058182 Prudential Financial, Inc. United States 940,722,000 4.93
4 8 086446 Ping An Ins (Group) Co of China Ltd China 883,921,884 16.49
5 4 05833 4 Berkshire Hathaway Inc. United States 873,729,000 6.85
6 6 058175 MetLife, Inc. United States 795,146,000 7.38
7 5 090826 Nippon Life Insurance Company Japan 776,720,328 6.88
8 10 0524 46 China Life Insurance (Group) Company China 776,376,157 12.15
9 7 0 8 6120 Legal & General Group Plc United Kingdom 774,781,625 1.75
10 11 066866 Manulife Financial Corporation Canada 688,785,058 8.80
11 13 085124 Assicurazioni Generali S.p.A. Italy 669,121,764 5.86
12 12 085909 Aviva plc United Kingdom 651,607,417 4.31
13 9 095689 Japan Post Insurance Co., Ltd. Japan 636,812,794 -2.08
14 16 058702 American International Group, Inc. United States 586,481,000 11.70
15 14 046417 Dai-ichi Life Holdings, Inc. Japan 577,106,514 5.97
16 17 08524 4 Aegon N.V. Netherlands 546,475,851 0.98
17 18 086056 CNP Assurances France 543,616,259 0.49
18 19 09 3 3 10 Crédit Agricole Assurances France 536,783,775 2.71
19 15 090906 National Mut Ins Fed Agricultural Coop Japan 531,654,523 1.47
20 21 085485 Life Insurance Corporation of India India 520,495,238 18.99
21 20 085925 Prudential plc United Kingdom 516,097,000 13.62
22 26 050910 Great-West Lifeco Inc. Canada 469,823,376 33.10
23 22 050457 Zurich Insurance Group Ltd Switzerland 439,299,000 8.55
24 23 090828 Meiji Yasuda Life Insurance Company Japan 417,243,955 7.89
25 24 06169 1 New York Life Insurance Company United States 414,250,000 11.46
* Percent change is based upon local currency.
Source: Best’s Financial Suite-Global; data as of Dec. 13, 2021.

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 Chapter 1: Industry Overview

until they are paid out. Investor Warren Buffett has investment trusts and the like. Insurers have also
famously championed the value of “float”—funds held funded mortgages for commercial borrowers and
by insurance companies until they must be paid—as developers, which in turn use the money to build
an important source of investment capital. However, commercial centers, shopping centers, apartments,
insurers must be cautious and risk averse with the warehouses and houses.
majority of their investments, both to satisfy regulators’
demands and to be able to pay unexpected and The insurance industry is part of the larger financial
large claims. services industry, which includes banks, brokerages,
mutual funds, credit unions, trust companies, pension
Insurance companies are large holders of bonds, funds and similar organizations. Traditional barriers
particularly those issued by corporations and between industries have disappeared in part. Mutual
similar sources. They typically invest small portions funds can be sold by insurance companies and banks.
of their available funds in stocks. Life insurers Equities brokers handle cash management accounts.
have traditionally played larger roles in real estate Banks have become active sellers of life insurance
investments, although a portion of those investments and annuities and other insurance products. Insurers
has shifted from direct ownership of commercial themselves have developed products that include
properties to more liquid investments in real estate savings, protection and investment elements.

How Insurance Is Sold

I nsurance is sold through a variety of channels,

including face to face by insurance agents and
brokers, over the internet, through the mail, by phone,
from the interview may become the basis the
underwriter uses in decision-making. As a benefit
to the consumer, many agents—called independent
in workplace programs and through associations and agents—represent several insurance companies,
affinity groups. and may have a better view of each company’s
risk-selection threshold.
Insurance agents can be exclusive—tied to a particular
insurer—or independent, representing several insurers. A “captive” or “tied” agent works primarily with a
Insurance brokers usually represent the insured client single insurer or a group of insurers, and may receive
but can sometimes act as an insurance agent. business leads or some sort of special preference for
having that relationship. The insurer often offers
The insurance agent (or producer) can be a key benefits, such as health coverage, marketing support
component in the underwriting process by taking and training to the captive agent.
the role of intermediary.
Generally speaking, insurance companies with a
Unlike the underwriter, the agent is positioned to captive agent force also may see better policyholder
meet with the applicant, ask pertinent questions retention. For starters, independent agents are less
and gauge responses. Information gathered likely to follow policyholders from one state to

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Chapter 1: Industry Overview

Best’s Rankings
World’s Largest Insurance Companies – 2023 Edition
Based on 2020 Net Premiums Written.
2020 2019 Country of 2020 Net Premiums %
Rank Rank AMB# Company Name Domicile Written (US$ 000) Change*
1 1 058106 UnitedHealth Group Incorporated 1 United States 201,478,000 6.21
2 2 086446 Ping An Ins (Group) Co of China Ltd China 118,754,056 0.14
3 4 0524 46 China Life Insurance (Group) Company China 111,156,155 6.20
4 10 051149 Centene Corporation 1
United States 107,370,000 49.72
5 6 058180 Anthem, Inc. United States 105,726,000 11.61
6 5 070936 Kaiser Foundation Group of Health Plans 2
United States 102,933,365 5.85
7 3 085085 AXA S.A. France 101,308,605 -8.68
8 7 0 8 50 14 Allianz SE Germany 93,645,846 -1.47
9 8 085320 People’s Ins Co (Group) of China Ltd China 79,573,492 -0.14
10 9 085124 Assicurazioni Generali S.p.A. Italy 79,193,720 -2.74
11 12 058052 Humana Inc. 1 United States 74,186,000 17.85
12 11 020 0 1 3 State Farm Group 2 United States 71,116,271 0.19
13 13 05833 4 Berkshire Hathaway Inc. United States 64,901,000 3.33
14 14 08657 7 Munich Reinsurance Company Germany 64,294,456 7.24
15 16 070080 CVS Health Corp Group United States 56,701,017 8.99
16 17 085485 Life Insurance Corporation of India India 55,008,395 6.27
17 18 090598 China Pacific Insurance (Group) Co Ltd China 51,701,496 3.74
18 15 090826 Nippon Life Insurance Company Japan 46,283,351 -9.22
19 25 069 1 5 4 Health Care Service Corporation Group United States 44,910,745 12.13
20 21 090906 National Mut Ins Fed Agricultural Coop Japan 44,140,813 5.95
21 29 085068 HDI V.a.G. Germany 43,481,675 3.87
22 19 046417 Dai-ichi Life Holdings, Inc. Japan 42,927,009 -3.17
23 22 058175 MetLife, Inc. United States 42,034,000 -0.48
24 26 051114 Liberty Mutual Holding Company Inc. United States 40,624,000 2.03
25 30 058454 Progressive Corporation United States 40,568,700 7.96
* Percent change is based upon local currency. 1
Premiums shown are earned premiums. 2
AM Best consolidation; U.S. companies only.
Source: Best’s Financial Suite-Global; data as of Dec. 13, 2021.

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 Chapter 1: Industry Overview

another when they move; many independent agents brokers additional compensation based on how the
are not licensed in multiple states. Larger insurance business performs.
organizations may have the resources to track and
follow an insured, and they may alert a new agent in Direct Sales: Direct selling of insurance to consumers
the area to where the policyholder has moved. through mail, internet or telephone solicitations has
exploded in recent years. Insurance companies can
In addition to agents, the following channels are used to bypass commissions by removing the agent from the
get the business of insurance done: transaction, although marketing and other associated
costs can offset the savings.
Brokers: These producers do not necessarily work for
an insurance company. Instead, the broker will place Increasingly, online relationships are facilitated by
policies for clients with the carrier offering the most traffic aggregators—basically an alternative term for
appropriate rate and coverage terms. The broker is price-comparison sites. The aggregator service links
rewarded by the carrier, often at a rate that differs from the consumer to the insurer. Aggregator companies
that paid to the carrier’s agents. receive a commission from product providers when a
policy is sold. They also may charge a fee based on any
Managing General Agents: These individuals or click-through to those providers.
organizations are granted the authority by an insurer
to perform a wide array of functions that can include The aggregator service can present challenges on
placing business and issuing policies. two fronts: The site encourages consumers to select
insurance policies based almost exclusively on price,
Agents are paid commissions based on the value and direct sales are a threat to the independent agent.
and type of products they sell. Some insurers pay

Important Functions of Insurance Organizations

I nvestment: Insurers look to investment managers

to make sure they have the funds available to pay
claims in a timely manner, match expected losses
their training to help insurers set rates, develop and
price policies and coverage, determine reserves for
anticipated claims and develop new products that
with investments that mature or become available at provide coverage at a profit. Actuaries must pass
appropriate times and help generate income that will extensive exams to earn their formal designations.
contribute to profits. Investment professionals handling Actuaries play influential roles in all sectors of
insurance assets have an additional constraint: Insurers insurance, including property/casualty, life, health
are prohibited by state regulators from investing too and reinsurance. The role of actuaries grows as
heavily in riskier, more-volatile instrument. noninsurance industries—such as hedge funds, risk
modelers and capital markets participants—become
Actuarial: Insurance is based on probability and involved in developing risk products and programs.
statistics. Actuaries are skilled in both areas and use

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Chapter 1: Industry Overview

Best’s Rankings
Top 10 US Holding Companies – 2023 Edition
Ranked by Assets.
($ 000)
Rank AMB# Company Name 2021 Total Assets 2020 Total Assets % Change
1 05833 4 Berkshire Hathaway Inc. 958,784,000 873,729,000 9.7%
2 058182 Prudential Financial, Inc. 937,582,000 940,722,000 -0.3%
3 058175 MetLife, Inc. 759,708,000 795,146,000 -4.5%
4 058702 American International Group, Inc. 596,112,000 586,481,000 1.6%
5 058709 Lincoln National Corporation 387,301,000 365,948,000 5.8%
6 0 5 59 3 1 Jackson Financial Inc. 375,484,000 353,456,000 6.2%
7 058179 Principal Financial Group, Inc. 304,657,200 296,627,700 2.7%
8 0514 09 Equitable Holdings, Inc. 292,262,000 275,397,000 6.1%
9 046498 Brighthouse Financial, Inc. 259,840,000 247,869,000 4.8%
10 058106 UnitedHealth Group Incorporated 212,206,000 197,289,000 7.6%
Source: Holding Companies database.

Best’s Rankings
Top 10 US Holding Companies – 2023 Edition
Ranked by Revenue.
($ 000)
Rank AMB# Company Name 2021 Total Revenue 2020 Total Revenue % Change
1 05833 4 Berkshire Hathaway Inc. 354,636,000 286,415,000 23.8%
2 058106 UnitedHealth Group Incorporated 287,597,000 257,141,000 11.8%
3 044026 Cigna Corporation 174,274,000 164,753,000 5.8%
4 058180 Anthem, Inc. 138,639,000 121,867,000 13.8%
5 051149 Centene Corporation 126,801,000 111,595,000 13.6%
6 058052 Humana Inc. 83,596,000 77,155,000 8.3%
7 058182 Prudential Financial, Inc. 71,340,000 57,116,000 24.9%
8 058175 MetLife, Inc. 71,080,000 67,842,000 4.8%
9 058702 American International Group, Inc. 55,101,000 43,736,000 26.0%
10 058312 The Allstate Corporation 50,588,000 41,909,000 20.7%
Source: Holding Companies database.

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 Chapter 1: Industry Overview

Underwriting: At the heart of insurance is the Claims: Sometimes called the “product” that insurance
art and science of assuming risk. Underwriters companies deliver, claims are handled by departments
use a combination of data gathering and analysis, that usually operate in two areas: at the offices of the
interviewing and professional knowledge to evaluate insurer and in the field through claims adjusters. Claims
whether a given risk meets the insurer’s standards for are requests for payment based on losses believed by the
prudent evaluation. Their job is to evaluate whether policyholder to be covered under an insurance policy.
given risks can be covered and, if so, under what terms. Claims personnel evaluate the request and determine
Underwriting departments often have the authority the amount of loss the insurer should pay. Requests
to accept or reject risks. Perhaps the most significant for claims payment can come directly to insurers or be
responsibility of underwriters is to determine handled by agents and brokers working directly with
premium that recognizes the likelihood of a claim the insured. Claims adjusters can work directly for an
and enables the insurer to earn a profit. Some of the insurer or operate as independent businesses that can
process has been automated, such as when auto and work for multiple insurers. Claims adjusters often have
homeowners insurers access information like driving designated levels of authority to settle claims. Adjusters
and property records. Applicants for life insurance and serve as claims investigators and sometimes conduct
some forms of health coverage may be asked to obtain elaborate investigations in the event of suspected
medical evaluations. fraudulent claims.

Insurance Entities

O wnership of traditional insurance companies

generally comes in two structures, mutual and
stock, although insuring entities may take a number
Reciprocal insurance companies resemble
mutual companies. Whereas a mutual insurance
company is incorporated, the reciprocal company
of other forms, including reciprocal exchanges and is run by a management company, referred to as
risk retention groups. Mutual insurers are owned by an attorney-in-fact.
and run for the benefit of their policyholders. Relative
to insurance companies with shareholder ownership, Many mutuals were able to grow during the credit
mutual insurers have less access to the capital markets crunch of the late 2000s. Their growth is limited,
to raise money. Many mutual insurance companies however, because capital has to be generated
have been formed by people or businesses with a internally, as there are no shares to sell. Some top
common need, such as farmers, firefighters and former mutual insurance companies, including
lumbermen. Mutuals may pay a return of premium or Metropolitan Life and Prudential, have demutualized
“policyholder dividend” back to the policyholder if the to become shareholder-owned public companies.
company has strong financial results and a lower-than- Typically, demutualization is done to raise capital
expected level of claims. Policyholders also have the or expand operations. Other companies, including
ability to vote on company leadership and have a say in Pacific Life and Liberty Mutual, took an intermediate
certain corporate governance issues. step and became part of a mutual holding
company structure.

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Chapter 1: Industry Overview

Holding company structures, employed primarily in Best’s Rankings

the U.S., provide easier access to the capital markets, Top 20 Global Brokers – 2023 Edition
whereby shares can be sold to help raise capital. The Ranked by 2021 Total Revenue.
(US$)
holding company owns a significant amount, if not all,
of another company’s or other companies’ common 2021 2020 2021 Total
stock. Many insurance companies are part of a holding Rank Rank Broker Revenue

company structure, with the publicly traded parent 1 1 Marsh McLennan $19.80 billion
company owning stock of the subsidiary or the
2 2 Aon plc $12.20 billion
controlled insurance company or companies.
3 3 WTW $9.00 billion
Captive insurance companies insure the risks
4 4 Arthur J. Gallagher & Co. $6.90 billion
of their parent group or groups, and sometimes
will insure risks of the group’s customers. Captive 5 5 Hub International $3.23 billion
insurers have become more high profile in recent
years after many U.S. states and some international 6 6 Brown & Brown Inc. $3.05 billion

jurisdictions adopted legislation and rules 7 9 Acrisure LLC $2.97 billion

encouraging captives to locate in their domiciles.
8 11 Alliant Insurance Services Inc. $2.90 billion
Risk retention groups are liability insurance 9 7 Truist Insurance Holdings Inc. $2.88 billion
companies owned by policyholders. Membership is
limited to people in the same business or activity, 10 8 Lockton Inc. $2.80 billion
which exposes them to similar liability risks. The 11 10 USI Insurance Services LLC $2.30 billion
purpose is to assume and spread liability exposure to
members and provide an alternative risk financing 12 12 AssuredPartners Inc. $2.04 billion
mechanism for liability. These entities are formed
13 13 NFP Corp. $1.90 billion
under the Liability Risk Retention Act of 1986.
14 14 Amwins Group Inc. $1.80 billion
Stock companies answer to owners and
15 15 Howden Group Holdings $1.57 billion
policyholders. Investment strategies that benefit
shareholders—seeking growth and profit—could be 16 16 The Ardonagh Group $1.30 billion
carried out to the detriment of policyholders Mutuals,
17 17 CBIZ Inc. $1.10 billion
on the other hand, are owned by policyholders, so the
focus likely will be on affordability and dividends. 18 18 EPIC Insurance Brokers & Consultants $806.1 million

19 n/a AmeriTrust Group Inc. $667.6 million

It is difficult to compare profitability generated by
public and mutual companies. One thing is certain, 20 20 Fanhua Inc. $513.3 million
however: No particular organizational structure is a
Sources: Company information.
cure-all for poorly conceived or executed strategies.

14
 Spotlight

Does Insurance Cause Some

People to Lie? Behavioral
Economics Has the Remedy
Some 24% of consumers think it’s
acceptable to pad an insurance claim. At
least one insurer is fighting back with a
new business model.

B y understanding and applying the principles of

behavioral economics, insurance companies
can increase customer satisfaction and ultimately
increase profitability, according to a recent study from
Celent. Andrew Schwartz, an analyst at Celent and the
author of the study, Applying Behavioral Economics to
Insurance, discussed the findings with AM Best Audio.
Following is an edited transcript of the interview.

What is behavioral economics?

The central message of behavioral economics is that
humans do not always make rational choices that will
maximize utility and that we’re often motivated by
things like heuristics, which are rules of thumb and
biases. However, many of these irrational choices
are quite predictable through the application of
behavioral economics.

Your study examines why insurance causes

some people to lie. Why does it?
The very premise of insurance goes against our present
bias heuristic, which means that we tend to value
short-term gains. When someone pays a premium and
a loss doesn’t occur, they might perceive the insurance
as an unwise investment because there’s no tangible
return. As a result, the policyholder may become

www.ambest.com
Spotlight

resentful because they view their insurance policy as a Are insurers buying into the concept of
monthly sunk cost rather than as a mitigation tool. behavioral economics?
Lemonade has coined themselves
Above all, there is an adversarial a behavioral economics carrier.
business model, because the They have tried to remove the
carrier and the policyholder both misaligned carrier-policyholder
are unsatisfied, and they think dynamic by changing the
that the other one’s goals are not fundamental business model.
aligned with theirs. Obviously, They tell the policyholder that
for the policyholder, the goal is to they retain a flat 25% of premiums
pay a policy and quickly become to cover expenses, 15% is used
indemnified and made whole in to cover reinsurance, and the
a time of need. For the insurance remaining 60% is set aside to
company, the incentive, and it’s settle claims. Their excess profits
not necessarily an evil one, is the are donated to a preselected
perception of the policyholder to charity, known as their giveback
probably maximize profitability. prop. The policyholder can choose
from 34 nonprofits, select the one
That misalignment leads to some where they want to earmark their
people rationalizing cheating and Andrew excess premium.
potentially padding a legitimate Schwartz
claim because they feel like That’s going to incentivize a
they aren’t given the value that more honest claim because the
they needed. An interesting statistic was that 24% of policyholder’s cheating the charity of their choosing
respondents in an Insurance Research Council poll if they’ve had a claim. Now if you look at the actual
said they thought it was acceptable to pad an insurance process, it’s clear that what Lemonade is doing also is
claim by a small amount to make up for deductibles that improving the customer experience and reducing fraud.
they’re required to pay. —John Weber

Listen to the interview

with Andrew Schwartz.

16
 Spotlight

Survey: Colleges Need

to Better Prepare Future
Insurers for Real World
Recruiters and hiring managers who
participated in the 2022 Best’s Review
college survey discussed the importance
of on-the-job training and developing
experience in an insurance education.

R ecruiters and hiring managers who participated

in the 2022 Best’s Review college survey say an
insurance education must focus on what’s necessary for
a job that requires a personal touch.

They’re happy to give new hires on-the-job training.

But insurers want would-be professionals to know
what they’re doing before they even walk through
the door.

“Students also need to be exposed to more types of

insurance jobs in the industry rather than focusing
on underwriting for the carrier side during their time
in school: claims-adjusting, surety, sales, service,
actuary, risk managers, etc.,” said Ashley Hacker, a
client service manager at Gallagher Global Brokerage.
That’s the message working professionals delivered
when they participated in Best’s Review’s 2022 survey
of best college insurance programs, saying schools
need to do a better job of getting their students ready
for the real world and exposing them to the tricks of
the trade.

Morgan Wyman, an account executive with CBI

Insurance, said she got solid training from Eastern
Kentucky University, which was the top vote-getter in

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Spotlight

the Best’s Review poll. But she believes that too much of products gives the knowledge to be able to sell those
her colleagues’ training is focused on areas that don’t products better, and help people get what they
involve the practical learning that’s necessary for a job truly need.”
that requires a personal touch.
EKU graduate Josh Boone, an agent with the
“I believe that the educational materials and lessons are Kentucky Farm Bureau, said more real-life situational
excellent and provide students a solid foundation for content can help better prepare students for the
their future in insurance,” she said. “However, I believe challenges they face on any given day. “Learning
it would be beneficial for the students to learn how the what a typical day looks like to work in a particular
concepts and theories they learn relate to real-world, field or position really helps students understand
on-the-job scenarios.” Wyman said too many of the what direction to go once starting a career,”
materials provided to college students focus on theory, Boone said.
but “theories don’t always apply if you want to go into
claims or sales or something different, so I think they Exposing students to the real world also means
could be doing a better job at that.” providing professional services in the classroom,
the survey’s respondents said. A number of schools
“The theories I refer to are those in the CPCU provide training and opportunities for taking
[Chartered Property Casualty Underwriter] courses, professional licensing exams, but Wyman said she
which are great,” Wyman said. “The CPCU courses believes more colleges should allow students to take
pave a clear path for those who want to be more in an the licensing exam prior to graduating—without
underwriting or product development role/career. having to take a 20-hour course. “I just wish I could
I think every student should be exposed to these have been licensed without taking the course while
courses, but I think there need to be more classes that I was still in school. I believe interns would be more
highlight other areas in the industry, such as claims, attractive to employers if they are licensed. Employers
sales, risk management and loss prevention, etc.” often struggle with legal issues having an unlicensed
staff member,” she said.
While on the job, Wyman said, new insurance
professionals should connect to people in underwriting, Hacker, another EKU grad, recommended that
sales or claims “so they’re not spending the majority schools improve networking by creating an “accessible
of the first five to six years in their careers figuring out Rolodex” of student and alumni contacts in each
what exactly they want to do. I think that our graduates, school to share with other schools. “EKU does already
especially at EKU, graduate with a ton of knowledge and have a Rolodex,” she said. “Several school insurance
a ton of background that could be beneficial at any job, programs are also involved with the Gamma Iota
whether it’s the agency or company side,” she said. Sigma professional association that may be able to
assist in coordinating. I recommend all students join
Trey Boggs, an account representative for State Farm their local chapter since it does provide a wide-scale
in Kentucky and an EKU graduate, said sales is a networking opportunity for students and alumni,
big part of the industry, and “educating on specific but I do think it would be helpful for schools to

18
 Spotlight

communicate and have access to all insurance hands-on with so many different types of businesses
industry contacts outside of GIS as well.” and people.”

Wyman said an insurance major isn’t always very At Eastern Kentucky University, Wyman said, people
attractive to students. But would-be professionals from the RMI department went to her classes and
could develop a passion for the job if they’re mentored “explained the program and how great it was.” But
properly. “Universities that offer a degree in RMI she said it initially sounded boring. “But then I took
need to figure out how to get students excited about one class, and the only reason why I really loved it was
the insurance industry,” she said. “From the outside because of the professors,” she said. “The professors
looking in, insurance doesn’t seem like it would be from that program were the best out of all the
a fun and exciting career. But once you’re involved, departments in the business school. Very hands-on
you realize this industry is the exact opposite. It’s there, 24/7.”
fun, exciting, competitive and full of amazing people. —Tom Davis
It is one of the only industries where you get to be

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Chapter 2: Property/Casualty

Property/Casualty
Market at a Glance

P roperty/casualty is known as nonlife insurance

in many parts of the world. The word “property”
usually refers to physical things, including autos,
buildings, ships and other concrete items that can be
lost, damaged or otherwise become a financial loss
to the insured. The word “casualty” usually refers to
the concept of liability, and is often associated with
coverage of negligent acts or omissions. Some of
the largest casualty coverages include auto liability,
professional liability, workers’ compensation and
general liability. The relative size of property/casualty
insurers is often gauged by premiums collected.

In the United States, property/casualty insurers file

a special statement with the National Association
of Insurance Commissioners. The filing is designed
to determine premiums and losses by lines of
business and to give an accurate view of the insurer’s
reserving for loss.

As of this publication, AM Best’s database contained

filing statements for 2,624 total single companies
operating in the U.S. property/casualty market.
According to the U.S. Department of Labor, 532,000
people work in the property/casualty industry.

According to AM Best’s 2022 Review & Preview report,

the property/casualty industry faces a range of issues.

“Adverse reserve development is a leading cause of

insurer insolvency. As a result, reserve adequacy
remains a critical rating issue for AM Best. Loss and
loss adjusted expense (LAE) reserves are typically
the largest liability on a P/C insurer’s balance
sheet. Underestimating those liabilities may have
 Chapter 2: Property/Casualty

a material negative effect on an insurer’s reported US Property/Casualty –

surplus, potentially resulting in adverse rating action. Top Insurers – 2023 Edition
Unexpected or larger-than-expected changes in an Ranked by 2021 Net Premiums Written.
insurer’s reserve position may materially affect the (US$ Billions)
assessment of the company’s balance sheet strength and State Farm Group (000088)
enterprise risk management.”

On the homeowners segment, AM Best wrote: Berkshire Hathaway Ins (000811)

“Surplus levels continue to support the underlying
risks for most U.S. homeowners carriers despite
the adverse impact of more frequent and severe Progressive Ins Group (000780)
weather events, supply chain disruptions and
inflationary pressures. ... Key countervailing factors
include elevated catastrophe activity and higher Allstate Ins Group (000008)
reinsurance pricing.”

On the auto segment, AM Best wrote: “Most personal Liberty Mutual Ins Cos (000060)
auto writers maintain consistently favorable capital
positions built on use of newer technology and data
analytics to supplement underwriting, claims-handling, Travelers Group (018674)
and rate-making. ... Distracted driving continues to
play a significant part in loss trends and will remain an
industry issue. Furthermore, the economic recovery USAA Group (004080)
has highlighted a scarcity of qualified truck drivers,
which—along with pandemic-related disruptions—has
in turn placed strain on quality of the workforce, a Chubb INA Group (018498)
factor in claims frequency and severity. However, the
growing use of telematics and other technologies are
helping transport companies and their insurers address Nationwide Group (005987)
such concerns.”

On the surplus lines sector, AM Best wrote: “Insurers Farmers Ins Group (000032)
remain interested in entering the excess and surplus
lines markets, be it through startups, new affiliates
in established insurance organizations or a fronting 0 10 20 30 40 50 60 70
company. Capacity continues to grow, with all
indications that expectations remain sensible.” Source: – Aggregates & Averages Property/Casualty
United States & Canada, 2022 Edition.

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Chapter 2: Property/Casualty

US Property/Casualty – Property/Casualty Coverage

Top Insurers – 2023 Edition Types and Lines of Business
Ranked by 2021 Gross Premiums Written.
(US$ Billions)
State Farm Group (000088) P roperty insurance covers damages or loss of
property. As a result, rates can be significantly
higher in areas susceptible to perils such as hurricanes.
Casualty insurance covers indemnity losses and legal
Berkshire Hathaway Ins (000811) expenses from losses such as bodily injury or damage
that the policyholder may cause to others.

Progressive Ins Group (000780) When a loss occurs, insurance companies establish a
claim reserve for the amount of the expected cost of the
claim using a projection of estimated loss costs over a
Allstate Ins Group (000008) period of time. While property reserves are established
when a property loss occurs and are usually settled
soon after a loss, casualty reserves are established for
Liberty Mutual Ins Cos (000060) losses that may not be paid or settled for years (i.e.
medical professional liability, workers’ compensation,
production liability and environmental-related claims).
Travelers Group (018674) These long-tail lines of business are so named because
of the length of time that may elapse before claims are
finally settled.
Chubb INA Group (018498)
Determining and comparing profitability among
property/casualty companies typically is achieved
USAA Group (004080)
through the combined ratio, which measures the
percentage of claims and expenses incurred relative to
premiums earned/written. A combined ratio of less than
Farmers Ins Group (000032)
100 means that the insurer is making an underwriting
profit. Companies with combined ratios over 100 still
may earn an operating profit, however, because the ratio
does not account for investment income.
Nationwide Group (005987)

Property/casualty insurance generally falls into two

areas of concentration: personal and commercial lines.
0 10 20 30 40 50 60 70 80

Source: – Aggregates & Averages Property/Casualty The two largest product lines within the personal lines
United States & Canada, 2022 Edition.
sector are auto insurance and homeowners insurance.

22
 Chapter 2: Property/Casualty

Commercial lines include insurance for businesses, US Property/Casualty –

professionals and commercial establishments. There Top Insurers – 2023 Edition
are many more varieties of commercial lines products Ranked by 2021 Total Admitted Assets.
than personal lines. The largest two lines are workers’ (US$ Billions)
compensation and other liability. Berkshire Hathaway Ins (000811)

Personal Lines of Business

Personal insurance protects families, individuals and State Farm Group (000088)
their property, typically homes and vehicles, from
loss and damage. Auto and homeowners coverages
dominate mostly because of legal provisions that Liberty Mutual Ins Cos (000060)
mandate coverage be obtained.

Auto: The largest line of business in the property/casualty Travelers Group (018674)
sector is auto insurance. According to AM Best’s BestLink
database, the top 50 groups writing auto insurance
captured 95% of the total market in 2021, or $247 billion Chubb INA Group (018498)
of the $261 billion for all U.S. auto coverage. The largest
writer of U.S. private passenger auto is State Farm Group,
and the largest writer of all auto coverage overall is Allstate Ins Group (000008)
now Progressive.

Auto insurance includes collision, liability, comprehensive, Amer Intl Group (018540)
personal injury protection and coverage in the event
another motorist is uninsured or underinsured.
Progressive Ins Group (000780)
Homeowners: The second-largest line of personal
property/casualty insurance is homeowners,
representing $120 billion in direct premiums USAA Group (004080)
written for the U.S. property/casualty industry in
2021. Historically, the leading cause of U.S. insured
catastrophe losses has been hurricanes and tropical Nationwide Group (005987)
storms, followed by severe thunderstorms and winter
storms. The top 50 groups writing homeowners
multiperil coverage represented 88% of the U.S. market 0 10 20 30 40 50 60
for homeowners coverage, according to AM Best’s
BestLink database. The largest writer of homeowners Source: – Aggregates & Averages Property/Casualty
United States & Canada, 2022 Edition.
multiperil coverage is State Farm Group.

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Chapter 2: Property/Casualty

US Property/Casualty – Commercial Lines of Business

Top Insurers – 2023 Edition Commercial insurance protects businesses, hospitals,
Ranked by 2021 Policyholders’ Surplus. governments, schools and other organizations from losses.
(US$ Billions)
Berkshire Hathaway Ins (000811) Two of the largest lines in the commercial segment are
workers’ compensation and general liability.

State Farm Group (000088) Workers’ Compensation: Insurers on behalf of

employers pay benefits regardless of who is to blame for
a work-related injury or accident, unless the employee
USAA Group (004080) was negligent. In return, the employee gives up the
right to sue.

Liberty Mutual Ins Cos (000060) General Liability: General liability insurance protects
businessowners (the “insured”) from the risks of
liabilities imposed by lawsuits and similar claims.
Travelers Group (018674) Liability insurance is designed to offer its insureds
specific protection against third-party insurance claims;
in other words, payment is not typically made to the
Allstate Ins Group (000008) insured, but rather to someone suffering loss but who
is not a party to the insurance contract. In general,
damages caused by intentional acts are not covered
Amer Intl Group (018540) under general liability insurance policies. When a claim
is made, the insurance carrier has the duty to defend
the insured.
Chubb INA Group (018498)
Other major lines of business in the property/casualty
commercial sector include:
Nationwide Group (005987)
Aircraft (all perils): Often excluded under standard
commercial general liability forms. Coverage for
FM Global Group (018502) aircraft liability loss exposure can include hull (physical
damage) and medical payments coverages.

0 50 100 150 200 250 300 350 Allied Lines: Coverage for loss of or damage to real
or personal property by reason other than fire. Losses
Source: – Aggregates & Averages Property/Casualty from wind and hail, water (sprinkler, flood, rain), civil
United States & Canada, 2022 Edition.
disorder and damage by aircraft or vehicles are included.

24
 Chapter 2: Property/Casualty

Boiler and Machinery: Coverage for damage to boilers, and the like. Protection can include on- and
pressure vessels and machinery. off-premises exposure.

Burglary and Theft: Coverage to protect against Commercial Auto: Coverage to protect against
burglary, theft, forgery, counterfeiting, fraud financial loss because of legal liability for injury to

US Property/Casualty – Top Lines – 2023 Edition

Ranked by 2021 Direct Premiums Written.
(US$ 000)
Direct Premiums Direct Premiums
Business Line Written Business Line Written
Private Passenger Auto Liability $152,905,405 Ocean Marine $4,653,061

Homeowners Multiple Peril 118,522,901 Products Liability 4,428,399

Private Passenger Auto Physical Damage 108,607,215 Warranty 4,054,573

Other Liability – Occurrence 64,018,283 Earthquake 3,875,609

Workers’ Compensation 52,153,460 Federal Flood 3,139,626

Other Liability – Claims-Made 41,708,212 Aircraft 2,530,479

Commercial Auto Liability 41,448,677 Credit 2,488,377

Commercial Multiple Peril – Non-Liability 32,641,483 Boiler & Machinery 2,392,001

Inland Marine 29,728,393 Other Accident & Health 2,188,560

Fire 18,799,492 Fidelity 1,421,920

Allied Lines 18,052,680 Other Lines 1,319,208

Commercial Multiple Peril – Liability 17,319,158 Excess Workers’ Compensation 1,313,617

Multiple Peril Crop 14,888,372 Private Crop 1,267,702

Commercial Auto Physical Damage 12,347,351 Private Flood 1,005,774

Medical Professional Liability 10,904,410 Burglary & Theft 475,070

Surety 7,434,087 Financial Guaranty 398,015

Mortgage Guaranty 5,715,829 Credit Accident & Health 182,172

Farmowners Multiple Peril 4,976,320 International 52,649

Group Accident & Health 4,955,267 Total Property/Casualty Industry $794,313,842

Note: Data for some companies in this report has been received from the NAIC. Reflects Grand Total (includes Canada and U.S. Territories).
Source: — State/Line (P/C Lines) - P/C, US; Data as of: June 11, 2022.

www.ambest.com 25
Chapter 2: Property/Casualty

persons or damage to property of others caused by the Medical Professional Liability: Protects against
insured’s commercial motor vehicle. failure to use due care and the standard of care
expected from a doctor, dentist, nurse, hospital or other
Commercial Multiple Peril: Commercial insurance health-related organization.
coverage combining two or more property, liability
and/or risk exposures. Mortgage Guaranty: Insurance against financial loss
because of nonpayment of principal, interest and other
Fidelity: Coverage for employee theft of money, amounts agreed to be paid under the terms of a note,
securities or property, written with a per-loss limit, a bond or other evidence of indebtedness that is secured
per-employee limit or a per-position limit. Employee by real estate.
dishonesty coverage is one of the key coverages
provided in a commercial crime policy. Multiple Peril Crop: Protects against losses caused by
crop yields that are too low. This line was developed
Financial Guaranty: Credit protection for investors initially by the U.S. Department of Agriculture.
in municipal bonds, commercial mortgage-backed
securities and auto or student loans. Provides financial Ocean Marine: Provides protection for all types of
recourse in the event of a default on the bond or oceangoing vessels and their cargo, as well as legal
other instrument. liability of owners and shippers.

Fire: Coverage for loss of or damage to real or Products Liability: Protection against loss arising out
personal property due to fire or lightning. Losses from of legal liability because of injury or damage resulting
interruption of business and loss of other income from from the use of a product or the liability of a contractor
these sources are included. after a job is completed.

Inland Marine: Coverage for goods in transit and Surety: Guarantee that the principal of a bond will act
goods, such as construction equipment, subject to in accordance with the terms established by the bond.
frequent relocation.

26
 Spotlight

Automakers Build
New Insurance Future
As data and technology pervade the car
manufacturing industry, automakers
have made fresh inroads into insurance.

F or more than a century, carmakers and automobile

insurers have largely kept to their own lanes. That
was before data ruled. In 2022 data and technology
have inspired the automobile industry to get more
involved in the insurance side of the ledger, prompting
an increase in the number of interindustry partnerships
and more.

For auto insurers, partnerships and other steps car

manufacturers have taken to edge their way into the
insurance industry offer a way to gain and maintain
market share in the highly competitive personal auto
space, AM Best Senior Director Richard Attanasio said.
Offering products directly and at the point of a vehicle
sale brings carriers an avenue of distribution with
potentially lower expense levels and additional insight
that can help set rates, he said.

Insurers working closely with manufacturers agree

that they benefit from access to new data and driving
behaviors, and how that impacts losses as automation
advances and interest in electric vehicles surges.
And carmakers who establish their own insurance
operations can acquire a “natural feedback loop on
driving patterns, effectiveness of safety features, etc.,
which allows them to further hone their product to
meet customer expectations,” Attanasio said.

Points of entry vary by manufacturer and even

by country. For instance, Tesla progressed from

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Spotlight

broker to fronting agency partner to insurance Each side decides direction for the insurance product,
subsidiary. Swiss Re and BMW collaborated to craft such as if, how and when to embed insurance in
a vehicle-specific insurance the buying process. Klett said
rating parameter for primary For auto insurers, partnerships and embedding is most strategic
carriers globally to calculate other steps car manufacturers for manufacturers with a niche
premiums. Some carmakers, have taken to edge their way into market, where customers think a
like Toyota, are building out the insurance industry offer a way company like Tesla or Rivian has
insurance brokerages. Others to gain and maintain market share a better handle on the needs of
teamed up with carriers on in the highly competitive their vehicles’ owners. “They’re
embedded products. personal auto space. direct-to-consumer OEMs. The
buying, the servicing is different.
Toyota overtook Ford as the It’s not the same as a Ford or
leading car brand in the U.S. in Toyota,” said Klett.
2021, based on 1.9 million vehicle
sales, according to market and Specialized manufacturers, such
consumer data company Statista. as Rivian, are notably invested
Ford had 1.8 million, followed in streamlining the entire
by Chevrolet’s 1.5 million. car-owning experience, said Sarah
Nationwide has partnered Jacobs, Nationwide vice president
with the top two, as well as of personal lines product
startup electric “adventure” development, and will lean into
vehicle Rivian. the process.

Nationwide gains knowledge Toyota Financial Services

and strengthens trust by is an owner of independent
expanding original equipment property/casualty insurance
manufacturer partnerships, agency Toyota Insurance
said Senior Vice President of Richard Management Solutions (TIMS),
Corporate Development Angie Attanasio which distributes product from
Klett, creating “a relationship multiple carriers. Will Nicklas,
within their ecosystem that president of Toyota Insurance,
builds upon the customer having the say, the acknowledged manufacturers’ earlier reluctance to
power and determining the path of an experience.” enter the highly competitive auto insurance market in
Carmakers and insurance partners today take a the United States.
customer-first approach that varies from company to
company, said Klett. Choose a manufacturing partner “But I think when we decided that cars were going
carefully, she advised, with an eye on aligning values to be connected, and there were going to be a lot
and strategies. more services that we could provide to customers, it

28
 Spotlight

made a lot of sense,” he said. “When you think about as a primary insurer. In about 30 other countries or
how insurance plays a role in car ownership, every markets VW is an insurance broker, the company said.
six months, maybe every 12 months, a customer is
renewing an insurance policy. We saw it as a gap in the “The technology of the cars, especially the car data, gain
ownership experience.” an increasing importance for the development of our
motor insurance products,” a Volkswagen spokesperson
Nicklas thinks of TIMS as “this new, connected said. “For example, in Germany the safety features of
tissue, or this glue that’s bringing these two industries the cars have a direct influence on the motor insurance
together” for a “really powerful collaboration.” pricing.” The company hopes to gain telematics
experience and integrate insurance offers into VW
According to the TIMS website, working with Toyota onboard systems.
companies and external partners allows the broker
to harness data and technology to “improve safety, Brandy Mayfield, senior vice president and managing
convenience and save customers time and money.” director, digital economy for Aon, said partnerships
between manufacturers and insurers offer an attractive
The Counterpoint middle ground.
Some insurance industry experts think the
partnerships are helping carriers and manufacturers, “As manufacturers build differentiated products, they
but they doubt Tesla will inspire other carmakers to want to make sure carriers have capacity to insure
become underwriters. They cite the complexity of newer/different technology. Manufacturers also want
regulatory approvals, particularly in the United States, to minimize friction in the insurance purchase journey
and profit and loss swings in auto, even among large, and create continued revenue streams from their
legacy insurers. buyers,” she said.

Risk Information Inc. Editor Brian Sullivan On the other hand, she said, “shifting from acting as a
put it bluntly: “There is no advantage at all to a broker to an insurer presents a significant leap in terms
traditional auto manufacturer owning a traditional of regulatory complexity, capital intensity and moving
insurance company.” the brand into a new category with mixed views
from consumers.”
Jacobs said regulatory work can’t be underestimated.
Insurance is “very challenging to break into.” “For original equipment manufacturers to make that
investment there will have to be a clear opportunity
Barriers are a little easier to clear in some other to differentiate from traditional insurers or meet
countries, particularly with a carrier partner. truly unmet needs in the marketplace,” she added.
Volkswagen Autoversicherung AG was founded in 2013 “Carmakers must determine what they’re solving for by
as a joint venture between Allianz Versicherungs-AG setting up their own insurance structure: more clients,
and Volkswagen Financial Services AG. Volkswagen a differentiated insurance product, etc. Many also want
Autoversicherung AG offers auto insurance in Germany to capitalize on profits from the insurance space.”

www.ambest.com 29
Spotlight

Carriers can grow a book for certain auto types more Tesla’s chief executive officer. “The car insurance thing
rapidly than in the traditional market, she said. is a bigger deal than it may seem. A lot of people are
Customers may get improved paying 30%, 40% as much as their
access to parts and repair services, lease payment for the car, in car
increasing satisfaction with “There is no advantage at all to a insurance.” Tesla said its real-time
insurers and carmakers. Doubly traditional auto manufacturer insurance is based on measurable
important for newer vehicles with owning a traditional driving behavior.
limited production is “a network insurance company.”
to quickly obtain parts and Technology Roots
repair,” said Mayfield. Twenty-two years ago, when
OnStar was collecting vehicle
Tesla’s push into insurance was usage data in 34 of General
reported to be motivated by Motors’ then-54 models, a
reducing the cost of ownership. spokesman said the onboard
Repair costs ran higher because automobile information system
fewer technicians are familiar was working on partnering with
with the connected, electric insurers. OnStar’s inducement
vehicle. Tesla was known for included cost savings because
supply chain challenges even insurers wouldn’t need to develop
before the pandemic, extending data-gathering equipment and
repair times. then get it into vehicles.

“Other manufacturers could That was three years before

take a similar approach and Progressive Corp.—which has
offer insurance directly,” since become the third-largest
Attanasio said, although it Brian private passenger writer in
would require a significant Sullivan the United States, according
amount of industry knowledge to AM Best data—piloted a
and infrastructure, including a usage-based insurance program
high level of product/pricing sophistication and policy to research driving habits. In 2008, Progressive started
administration and claims capabilities. offering customers the option of tying driving data
to premiums.
Entrepreneur Elon Musk drew distinctions between
how automaker Tesla Motors’ insurance operations Telematics adoption lagged through the years, even as
cover auto risk compared to the traditional insurance the ease improved from the early days, when consumers
industry, which he said suffers from too many players were required to install dongles to access UBI. Now
extracting part of the premium along the insurance that smartphones are common, telematics options
value chain. “Insurance is quite significant,” said Musk, from multiple carriers are just an app away. The amount

30
 Spotlight

of information an insurer can gather comes close to Ford affiliate American Road Services Co. offers Ford
carmaker-installed monitoring systems, said Sullivan. Insure, underwritten by Nationwide Mutual Insurance
Co. and its affiliates. Ford Insure customers employ
Mayfield, however, raised a prime consumer FordPass App, which is compatible with smartphones,
concern: data privacy. “Dealership agents should and FordPass Connect, an optional feature on some of
be prepared to answer a similar line of questioning the carmaker’s models—on newer vehicles to transmit
from consumers: What information from their data on miles driven, hard braking, accelerating, and
vehicles will manufacturers plan to share with stop-and-go and night driving.
insurance companies?”
Ford’s insurance messaging mirrors that of partner
That’s a problem for carmakers because the distribution Nationwide for the general public. “While that discount
system incentivizes salespeople to sell vehicles as is being calculated, you automatically get a 10%
quickly and with as little friction as possible, said discount just for signing up,” Ford Insure notes on its
Sullivan. “All a salesperson wants is to get the car off the website, promoting auto insurance discounts as high as
lot. Anything that might get in the way of closing the 40% and potential additional savings by bundling other
sale immediately will be ignored by sales and finance vehicles, home or pet insurance with auto coverage.
people in dealerships. Insurance is far more complicated
than selling rust protection add-ons.” Jacobs thinks 70% of new customers will opt in to UBI
plans within five years, based on current trends.
Connected carmakers are already collecting enormous
amounts of data on how vehicles are driven and Sullivan isn’t surprised, seeing the day when drivers
maintained. That can give them an edge, albeit a minor who decline to use telematics are presumed to be
one, as telematics becomes more widely accepted, high-mileage or high-risk policyholders. Even if they’re
according to Sullivan, even as many car buyers opt to not, they will pay more for the privilege of privacy,
retain a degree of privacy, or at least the right to decide he predicted.
who has access to their personal movements and habits, —Renée Kiriluk-Hill
and when.

www.ambest.com 31
Spotlight

Insurance Coverage Questions

Surround Emerging NIL Industry
The name, image and likeness
environment in college sports is
compared to the wild, Wild West, and
this includes the insurance aspect.

I n the world of big college sports, things don’t always

play out the way they’re supposed to. The star
pitcher for your university’s baseball team can lock
up a name, image and likeness (NIL) deal, then get
benched after a few bad outings. “How do you insure
that?” Stephens Insurance Senior Vice President and
General Counsel Patrick McAlpine asked. The answer
is different depending on the state, and it’s part of what
former University of Kansas football player Pat Brown
describes as “the wild, Wild West.”

The rules are the result of O’Bannon v. NCAA, a 2009

lawsuit brought against the National Collegiate Athletic
Association by former UCLA basketball player Ed
O’Bannon, who sought compensation for use of his NIL
in a video game. His victory opened the door for other
athletes to be compensated, and the NIL world exploded
in 2021 with the emergence of collectives—groups of
alumni and boosters who are not associated with the
university—that arrange NIL deals with athletes.

“These individuals or entities are just collectively

working together, and there’s no real governing
structure,” McAlpine said. “That makes it really hard to
insure anything if there’s not an entity, a corporation,
an LLC or something like that because underwriters
are immediately going to have problems with an
unincorporated group of people, especially doing
something novel like this.”
 Spotlight

Brown, now director of risk management & insurance Brown said he wonders if the emergence of NIL money
and an investment adviser for Edmonds Duncan, said will impact scholarship and Pell Grant money to the
athletes have to be concerned about getting injured, and point where the student-athlete will be on their own to
they also have to be aware that they may now be a target get insurance.
because of the money they make. “If an athlete gets into
a scenario where he or she signs a contract, but then Sean Clifford, a current Penn State University football
they don’t fulfill the obligation, is that company going player who founded Limitless NIL to help student
to come after that athlete?” Brown said. “In this litigious athletes navigate their way through this new frontier,
society that we are in, I can certainly see something like said there is currently no issue with the NCAA program.
that happening.” He can see the potential issues.

Another question concerns the issue of catastrophic In January 2022, Stephens Insurance announced that
injury coverage for athletes. The NCAA, which it had reached an NIL deal with University of Arkansas
oversees the governance of college sports, has disability linebacker Bumper Pool. “In Arkansas, our NIL law
insurance in place for “exceptional student athletes” says that we actually have to continue payments for
playing at member institutions who obtain pre- the contracted period, even if they don’t play, they get
approved financing, according to the NCAA’s website. hurt or they leave the team,” McAlpine said. “You have
It protects them against future loss as a professional to structure your contract to take into account for that,
athlete, and is administered by three subsidiaries of at some cost.”
Tokio Marine HCC. —Anthony Bellano

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Chapter 3: Life & Annuity

Life Market at a Glance

L ife/health insurers cover the risks of dying, offer

retirement savings products and provide a variety of
protections against disability, specific types of illness
and more. As of this publication, AM Best’s database
contained annual filings for 1,966 total single combined
life & health companies operating in the United
States. Life insurers often have longer investment and
coverage horizons because retirement and mortality
are often events that are decades away. The relative size
of life/health insurers is often gauged by assets under
management. Life insurers have increasingly embraced
annuities and other forms of retirement savings, as
sales of traditional life products have been flat or grown
modestly, although this trend has reversed somewhat
since COVID-19, and baby boomers transition into
retirement.

The U.S. life/health industry recorded $645 billion

in total premiums and $5 trillion in total cash and
invested assets as of 2021, the most recent full year
available. Lines of business include individual life,
group life, individual annuities, group annuities,
supplemental contracts, credit life, industrial life, group
accident & health, credit accident & health and other
accident & health.

According to the 2022 edition of Best’s Aggregates

& Averages, Life/Health, United States and Canada,
Prudential of America Group leads the list of largest
life/health industry groups and unaffiliated single
companies with $707 billion in total admitted assets as
of year-end 2021.

Risk Profile
The risk profile of life insurance is very different from
that of property/casualty insurance. Life insurance
 Chapter 3: Life & Annuity

Best’s Rankings
Top 10 US Life/Health Companies – Top 10 US Life/Health Companies –
2023 Edition 2023 Edition
Ranked by 2021 Direct Premiums Written. Ranked by 2021 Net Premiums Written.
(US$ 000) (US$ 000)
Direct Net
Premiums Premiums
Rank Company Name AMB# Written Rank Company Name AMB# Written
1 UnitedHealth Life Companies 069973 55,548,345 1 UnitedHealth Life Companies 069973 56,244,294
2 Aetna Life Group 070202 41,263,331 2 Prudential of America Group 070189 45,960,754
3 Prudential of America Group 070189 40,071,744 3 New York Life Group 069714 34,621,033
4 Massachusetts Mutual Life Group 069702 37,889,900 4 Aetna Life Group 070202 29,926,933
5 MetLife Life Ins Companies 070192 36,645,192 5 MetLife Life Ins Companies 070192 26,774,801
6 New York Life Group 069714 34,980,851 6 Massachusetts Mutual Life Group 069702 25,285,698
7 Lincoln Finl Group 070351 28,130,421 7 Cigna Life Group 07017 3 22,938,914
8 Northwestern Mutual Group 069515 23,546,581 8 Northwestern Mutual Group 069515 22,551,259
9 Cigna Life Group 07017 3 23,536,708 9 AIG Life & Retirement Group 070342 22,248,353
10 Athene US Life Group 070478 23,314,094 10 Jackson Natl Group 069578 20,024,506

Top 10 US Life/Health Companies – Top 10 US Life/Health Companies –

2023 Edition 2023 Edition
Ranked by 2021 Total Admitted Assets. Ranked by 2021 Capital & Surplus.
(US$ 000) (US$ 000)
Total
Admitted Capital &
Rank Company Name AMB# Assets Rank Company Name AMB# Surplus
1 Prudential of America Group 070189 707,207,343 1 TIAA Group 070362 42,972,680
2 MetLife Life Ins Companies 070192 461, 4 3 7,11 7 2 Northwestern Mutual Group 069515 29,283,152
3 New York Life Group 069714 392,916,326 3 Massachusetts Mutual Life Group 069702 26,268,606
4 Massachusetts Mutual Life Group 069702 365,446,331 4 New York Life Group 069714 22,616,667
5 TIAA Group 070362 360,223,526 5 Prudential of America Group 070189 20,136,840
6 AIG Life & Retirement Group 070342 345,824,628 6 MetLife Life Ins Companies 070192 19,078,958
7 Northwestern Mutual Group 069515 334,756,177 7 State Farm Life Group 070126 15,542,718
8 Lincoln Finl Group 070351 334,508,148 8 Thrivent Finl for Lutherans 006008 13,694,795
9 Jackson Natl Group 069578 321,914,245 9 AIG Life & Retirement Group 070342 12,470,936
10 John Hancock Life Insurance Group 069542 309,176,249 10 Pacific Life Group 069720 11,353,204

Source: AM Best data.

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Chapter 3: Life & Annuity

is generally more asset-intensive, and most product life insurance itself isn’t necessarily an investment.
liabilities have a substantially longer duration. But for insurance companies, and especially life
insurers, profitability is largely dependent on
The main purpose of life insurance is to cover the investment performance. In general, life insurers
risk of dying too early or, in the case of annuities, the have enough data surrounding life expectancies
risks that may come with living longer than expected. and risk classes to determine rates and to accurately
Policies help beneficiaries maintain their standard of predict claims.
living after the policyholder dies. They also can protect
beneficiaries and insureds from the possibility of Because a policy can remain in effect for decades, life
outliving their assets. insurers’ obligations tend to be relatively long term. As
a result, many insurers invest in longer-duration assets
While some types of life insurance include a savings such as long-term bonds and real estate.
component that can provide retirement income,

Life Insurers Chasing Wider Range of Opportunities

A M Best’s annual Review & Preview report details

a range of key trends shaping the future for life/
annuity insurers.
segment continues to improve, leading to more-
advanced underwriting standards. AM Best expects
to see more granularity and underwriting capabilities
on the mortality front for both life and longevity
Companies continue to characterize COVID-19 insurance. Actuaries typically benefit from large data
mortality as having an earnings impact as opposed sets that have stood the test of time. Although historical
to a balance sheet impact, suggesting no significant data is by no means indicative of the future, it does help
changes to reserves. Most carriers continue to actuaries frame a problem to understand the order of
experience higher mortality rates than usual, magnitude and sense of direction of a certain situation.
resulting in slightly favorable developments for Modeling can support informed decisions, but the type,
long-term care. In 2021, mortality was higher for quality and timeliness of data used remain challenges.
working-age populations, which affected both
individual and group life claims. Some carriers Life/annuity insurers’ business profiles have changed
playing both sides of the equation also benefited rapidly the past couple of years. Companies have been
from the longevity impact. To date, the long-term de-risking their liability profiles since the financial
implications of COVID-19 mortality on liabilities and crisis of 2008-2009. Actions such as divesting in-force
future pricing assumptions appear minimal. However, legacy blocks and cutting back or discontinuing sales of
questions remain about mortality due to other causes, higher capital-intensive or interest-sensitive products
illnesses and conditions. (universal life products with secondary guarantees,
variable annuities with living benefits, fixed deferred
COVID-19 forced carriers to use more digitized annuities with high minimum guaranteed crediting
approaches to underwriting. Big Data in the life/annuity rates) have accelerated the past two years. More life/

36
 Chapter 3: Life & Annuity

annuity insurers have exited from the individual life life with secondary guarantees. New entrants
and annuity lines of business, and there has been typically have expertise to manage and source
a considerable increase in divestments and block fixed-income assets, which they use in their overall
reinsurance transactions recorded during this time, portfolio. In this macroeconomic environment, every
although AM Best has expected to see a trend the other competitive advantage players can leverage counts.
way for some insurers given the higher prevailing
interest rate environment. Life/annuity carriers began to market fixed-indexed
linked annuities (FILAs) in 2021. This new and
The industry has seen its share of M&A and startups innovative product should not be confused with the
over the past few years. Capital efficiency and improved RILA or buffer annuity, a variable annuity that can
asset management have been common themes. be sold only by SEC-registered advisers. The FILA
Many on-site companies—especially publicly traded captures some of the appeal of the RILA by allowing
companies that focus on buybacks and returns on policyholders to expose some of the credited interest
equity—have attempted to offload capital-intensive to market risk for the chance to achieve higher gains.
businesses. The supply of capital has risen to meet The FILA is not an SEC-registered product because it
this demand, with many new players entering the does not put the principal at risk.
capital-intensive liability space.

There have typically

been a few common
themes among the US Life/Health – Asset Distribution (2021)
($000)
capital providers. Private
equity players with an Mortgage Loans:
$639,851,468
ability to source and
Real Estate

Other Invested Assets (Schedule BA):

manage fixed-income $292,036,655
assets have established
Other Investments

Cash & Short-Term Investments:

a presence in Bermuda. Derivatives
$148,022,242
Many players want to Stocks:
Total Bonds: $135,997,340
put capital and fixed-
$3,534,388,644 Contract Loans:
Contract Loans

income assets to work, $131,491,614

and long-term capital- Stocks*

Derivatives:
intensive liabilities have $96,808,926
been an avenue of choice Cash & Short-Term Investments
Other Investments:
for them. These lines $40,723,965
of businesses include Real Estate:
$22,836,617
Other Invested Assets (Schedule BA)

fixed annuities, variable

annuities, pension risk Source: – Aggregates & Averages Life/Health United States & Canada, 2022 Edition.
Securities are reported on the basis prescribed by the National Association of Insurance Commissioners.
Mortgage Loans

transfer, and universal

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Chapter 3: Life & Annuity

Another product innovation came when BlackRock In their ongoing search for growth, life/annuity
Inc. teamed with Brighthouse and Equitable insurers are engaging with consumers in new ways and
Holdings to provide an annuity option in a new diversifying their overall distribution strategies. In an
target-date retirement product for 401(k) plans. AM Best survey on distribution in the segment, 35% of
Called LifePath Paycheck solution, the annuity respondents said that direct-to-consumer (DTC) was
option provides retirees with a guaranteed stream of the channel most under consideration to develop. The
income for life by allowing them to use up to 30% of move to DTC is part of an overall strategy for many
their 401(k) balance to purchase the annuity. insurers to use a multichannel approach rather than
the traditional independent or career agents to market
their products.

Important Lines of Life Business and Products

L ife insurers market a variety of life products that

range from simple to complex.
Whole Life: Whole life pays a death benefit and also
accumulates a cash value. These have a high initial
expense strain for the issuing company due to large
Total Life, In Force & Issued: The size of a life first-year commissions to agents, who get a percentage
company can be measured by the face amount of its of premiums. Over time, whole life provides an income
portfolio—that is, the amount of life insurance it has stream to the company and the agent. It carries
issued as well as the amount in force. In force is the total premium, death benefit and cash value guarantees that
face amount of insurance outstanding at a point in time. other products don’t provide.
Issued measures the face amount of policies an insurer
has sold within a given time period. Universal Life: These are flexible premium policies
that incorporate a savings element. The cash values
Permanent Life: Permanent life provides death that are accumulated are put into investments with
benefits and cash value in return for periodic the intention of earning more in interest. Those
payments. Cash surrender value, or nonforfeiture accumulations can be used to reduce later premiums
value, is the sum of money an insurance company or to build up the cash value. For companies offering
will pay a policyholder who decides to cancel this product, the premium payment flexibility adds
the policy before its expiration or before the an element of uncertainty, as does the potential for
policyholder’s death. Over the long term, these changing market conditions that can affect interest
products usually produce solid, sustainable rates. The next generation of this product line, universal
profitability that is derived from adequate pricing, life with secondary guarantees, offers competitive rates
underwriting and investment returns. Permanent while providing long-term premium and death benefit
life products include whole life, universal life and guarantees, regardless of actual performance. The
variable universal life. tight pricing and high reserve requirements can limit
profitability. Indexed universal life is now the most
popular iteration of universal life.

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 Chapter 3: Life & Annuity

Variable Universal Life: These flexible premium policies, which are designed for longer durations. Term
policies allow for investment of the cash value into life, which is a highly competitive product, is marketed
mutual fund-like accounts the insurance carrier through many traditional distribution channels, as well
holds in separate accounts rather than in its general as through financial institutions, banks and various direct
account. Because policy values will vary based on the distribution channels including the internet. More recent
performance of investments, these policies present an products offer long-term premium guarantees, where
investment risk to the policyholder. Rather than having the premium is guaranteed to be the same for a given
a monthly addition to the cash value based on a declared period of years. Return of premium (ROP) term products
interest-crediting rate, the accumulated cash value have also become popular of late, offering policyowners
of the variable policy is adjusted daily to reflect the a refund of all premiums paid if the insured is still alive
investment experience of the funds selected. Insurers at the end of the term period. Concerns to insurers
can be susceptible to profit fluctuations because of the include high lapse rates, compressed margins and high
equity market’s effect on mutual fund fees. In addition, reserve requirements.
the insurer lacks control over separate account assets,
and policyholder behavior may impact profitability. Group Life: Generally in the form of term life, group
life is marketed to employers or association groups.
Term Life: Term life provides protection for a specified The cost also may be shared by the participant and
period of time. It pays a benefit only if the insured’s death the master policyholder, usually the employee and
occurs during the coverage period. It can be considered a employer, respectively. Typically, an initial benefit
pure protection product and a consumer’s entry-level life level may be paid by the employer, and, in some cases,
insurance product. Term periods typically range from one employees may elect to pay for additional coverage.
year to 30 years, although there are annually renewable As with term life, competition is intense.

Annuity Products

I nsurance companies provide annuities, which,

at their most basic, are contracts that ensure an
income stream. A payment or series of payments
Challenges to the Annuity Industry
Life insurance companies must minimize the risk
of disintermediation. This happens when deferred
is made to an insurance company, and in return, annuity holders seeking higher-yielding alternatives
the insurer agrees to pay an income for a specified withdraw funds prematurely (often during periods
time period. Annuities can take many forms but of increasing interest rates), and force companies
have a couple of basic properties: an immediate or to pay these surrenders by liquidating investments
deferred payout with fixed (guaranteed) or variable that may be in an unrealized loss position. Insurers
returns. Consequently, different annuity types can can mitigate this risk by matching the duration of its
resemble certificates of deposit, pensions or even interest-sensitive liability portfolio with the duration
investment portfolios. of its asset portfolio, and by selling a diversified
portfolio of products. Insurers also mitigate risk

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Chapter 3: Life & Annuity

by designing deferred annuities with market-value However, the long-term nature of these products
adjustments on surrender values. exposes the insurer to reinvestment risk and
longevity risk.
Immediate Annuities: These annuities are
designed to guarantee owners a predetermined Group Annuities: These differ slightly from individual
income stream on a monthly, quarterly, semiannual annuities in that the payout is dependent on the life
or annual basis in exchange for a lump sum. Options expectancy of all members of the group rather than on
are limited from the annuity holder’s perspective, so one individual. Many company retirement plans, such
profits are generally less volatile in the short term. as 401(k) plans, are annuities that will pay a regular
income to the retiree. Tax-deferred annuity plans—
Best’s Rankings 403(b) and 457 plans—utilize group annuities as the
Top US Life Reinsurers – 2023 Edition investment vehicle for participant contributions.
Ranked by 2021 Individual Life Insurance In Force.
Individual
Deferred Annuities: Deferred annuities are a type of
Amount in long-term savings product that allows assets to grow
AMB# Company Name Force ($ 000) tax-deferred until annuitization.
009080 RGA Reinsurance Company 1,778,685,283
Fixed-Deferred Annuities: These products guarantee
007283 Swiss Re Life & Health America Inc. 1,760,361,768
a minimum rate of interest during the time the account
070253 SCOR Life US Group 1,700,933,330 is growing and typically guarantee a minimum benefit
upon annuitization.
Munich American Reassurance
006746 1,221,833,669
Company
For the issuer, fixed annuities are subject to significant
Hannover Life Reassurance Co of asset/liability mismatch risks, as described above.
068031 1,210,828,591
America
Also, when interest rates fall, spread earnings—or
006234 General Re Life Corporation 288,295,764 the difference between the yield on investments and
009791 Canada Life Assurance Company USB 245,332,693
credited rates—can decrease, and asset cash flows must
be reinvested at lower rates.
PartnerRe Life Reinsurance Co of
061745 104,787,766
America
Fixed-Indexed Annuities: These products are credited
060560 Wilton Reassurance Company 90,881,557 with a return that is based on changes in an equity
008863 Optimum Re Insurance Company 85,608,548
index. The insurance company typically guarantees a
minimum return. Payouts may be periodic or in a lump
006976 Employers Reassurance Corporation 70,640,865 sum. The potential for gains is an attractive feature
009096 M Life Insurance Company 61,57 1, 5 21 during favorable market conditions; however, gains
may not be as favorable as those available from variable
Source: annuities or straight equity investments. Sales of these

40
 Chapter 3: Life & Annuity

products may decline if equity markets go through a annuities at the riskier end of the product continuum,
prolonged downturn or a prolonged upturn. from the standpoint of the issuing insurer.

Variable Annuities: The participant is given a range Because variable annuities allow for investments in
of investment options, typically mutual funds, from equity and fixed-income securities, they are regulated
which to choose. The rate of return on the purchase by the U.S. Securities and Exchange Commission. Fixed
payment, and the amount of the periodic payments, annuities and fixed-indexed annuities are not securities
will vary depending on the performance of the selected and, as such, are not regulated by the SEC.
investments and the level of expense charges in
the product. Registered Index-Linked Annuities: A hybrid
between a variable annuity and a fixed-indexed
Variable annuity sales tend to slump during unfavorable annuity, these products offer somewhat more of an
equity market conditions. In addition, the primary upside growth potential than traditional fixed-indexed
sources of revenue for these products are account annuities in exchange for a certain level of downside
value-based fees, which also decline when market risk, although less than traditional variable annuities.
conditions deteriorate. Relatively thin margins, As registered products, they can only be sold by
increasing product complexity (e.g. guaranteed living FINRA-registered representatives.
benefits) and volatile capital requirements put variable

Accident & Health Products

C redit Accident & Health: This insurance covers a

borrower for accidental injury, disability and related
health expenses. It is designed specifically to make
of a single employer, or union members, and
their dependents. Insurance is provided under a
single policy, with individual certificates issued to
monthly payments until the insured can recover and each participant.
resume earning income to repay the debt. If an individual
is totally disabled for the life of the loan, the policy would Other Accident & Health: Products that fall into this
pay the remaining balance, in most cases, but only one category could be policies for individuals that cover
month at a time. major medical, disability insurance, long-term care,
dental, dread disease or auxiliary coverages such as
Group Accident & Health: These plans are Medicare supplement.
designed for a natural group, such as employees

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Spotlight

Staid Annuities Get Star

Treatment in Movie About the
Importance of Guaranteed
Retirement Income
The Baby Boomer Dilemma, a
documentary film by Doug Orchard,
tells how annuities in retirement
portfolios can guard against “haircuts”
to traditional pensions or Social Security
benefits, as well as potential volatility in
defined contribution plans.

E ver ponder exactly what it means for filmmakers to

have their movies obtain a rating from the Motion
Picture Association? Probably not.

But for documentarian Doug Orchard, that was a key

question for his film The Baby Boomer Dilemma, which
explores shortcomings in the current retirement
system and the role of annuities within portfolios.
Securing the film’s PG rating meant it could be shown
in theaters, but he said it also carried another kind of
status—an imprimatur from the MPA that the film
wasn’t just an infomercial or long-form sales pitch for a
financial product.

In fact, it’s the first movie about annuities to be rated

by the MPA. The film’s website describes the movie as
“an exposé of America’s retirement experiment.” It had
a limited theatrical release in late 2021 and is available
for streaming.

“I had a model in my mind going in, and my model for

the framework of this film was I wanted to do a deep
 Spotlight

dive into pensions, I wanted to do a deep dive into Experts interviewed for the movie include Nobel
Social Security, I wanted to do a whole deep dive into Prize-winning economists Robert C. Merton of
the deferred comp plans—which the Massachusetts Institute
is where most people put their “I wanted to do a deep dive into of Technology and William F.
money—and then I wanted to pensions, I wanted to do a deep Sharpe of Stanford University.
do a deep dive into annuities,” dive into Social Security, I wanted Other notable names include
Orchard said. “What I wanted to to do a whole deep dive into the Olivia S. Mitchell of the
look at was what the guarantee deferred comp plans—which is Wharton School of the
is and who’s the guarantor of where most people put their University of Pennsylvania
that guarantee and how healthy money—and then I wanted to do a and executive director of the
are they.” deep dive into annuities.” Pension Research Council;
Brigitte C. Madrian, dean,
Orchard takes an in-depth Marriott School of Management
look at both public and private at Brigham Young University;
pensions, the rise of 401(k) and David F. Babbel, a Wharton
retirement plans, Social Security School professor and Goldman
and annuities. The latter is Sachs alum.
presented in the last half of the
film as a means of preserving a Government figures include
guaranteed income stream to David M. Walker, who served as
guard against an unexpected U.S. comptroller general from
loss in retirement accounts or 1998 to 2008, a former Social
reductions to pension or Social Security trustee and former
Security benefits that may be acting executive director of
instituted if those funds become the Pension Benefit Guaranty
too depleted. Corp.; U.S. Rep. Mike Gallagher,
a Republican from Wisconsin
Interspersed with traditional who has introduced the Time to
documentary footage and Rescue United States’ Trusts Act
interviews are fictional scenes to establish committees tasked
featuring Abe Mills, an actor and with drafting legislation to
a singer with the band Jericho Doug strengthen federal trust funds
Road; his wife, Rachel Mills; and Orchard on the brink of insolvency; and
their children playing the family Eric Cioppa, the 2019 president
of a Florida driving instructor of the National Association
whose plans are muddied when the market drops two of Insurance Commissioners and Maine insurance
months before his planned retirement. commissioner at the time the movie was filmed.

www.ambest.com 43
Spotlight

It also features industry experts such as Ted Benna, slots for $15,000 each and contributing producer slots
referred to as the “father of the 401(k)”; Edward for $10,000 each. To avoid any ties to the backers,
Siedle, a former Securities and Exchange Commission real or imagined, he had two other people handle the
attorney who pioneered forensic pension audits; Sheryl money and didn’t learn the names of donors until the
Moore, chairwoman and founder of Wink Inc., as well movie was finished, and credits were being made. The
as the industry’s competitive intelligence expert and film raised about $310,000, he said.
fact-checker; and Tom Hegna, host of Don’t Worry,
Retire Happy! on PBS. Orchard said the movie was a look in part at what the
retirement guarantee is and who is backing that pledge.
The Film’s Background News accounts of pension deficits in public systems in
Orchard is a documentarian who has directed seven places such as California and Illinois, as well as looming
films including The Power of Zero, about the national Social Security deficits, sparked his interest and
debt, and Fasting, which delves into intermittent fasting prompted the movie.
as a dietary practice. He said the topic of health has
always fascinated him, along with the national debt, He said the health of those systems was what really
which is touched upon in several of his movies. interested him. “That’s what I felt like would ultimately
be most interesting, because that’s the part I don’t hear
For The Baby Boomer Dilemma, he chose a novel anyone talk about,” he said. “What happens when it
funding technique. Put off by a past attempt at doesn’t happen?”
crowdfunding a project through Indiegogo, this time —Terrence Dopp
he took a different path. He sold 13 executive producer

44
 Spotlight

Startup Founder Hopes to

Help People Find `Ferrari in
the Garage’ by Taking Life
Settlements Mainstream
Lucas Siegel, the founder and chief
executive officer of Harbor Life
Settlements, wants to make the life
settlements industry work similarly to the
way homes are sold and bought online.
By doing that, he’s hoping his company
and the larger industry will grow by making
the process more transparent and
navigable for consumers.

A t first glance, the real estate market doesn’t seem like

an obvious comparison to anything touching on the
life insurance industry.

Yet the property market is exactly where Lucas Siegel,

founder of Harbor Life Settlements, is looking for
inspiration as he tries to grow both his company and the life
settlements space beyond a niche and into the mainstream.

He’s looking toward the “Zillowfication” of a previously

opaque world. Such a scenario would include an open
market for buying and selling policies—akin to the
online real estate portal — that he hopes builds consumer
confidence and entices more into the industry. Along the
way he wants to make selling insurance policies a go-to
component of finance to the benefit of individuals and the
larger industry.

“We see the asset class, and the future of this asset class,
as something that should be created off a template of real

www.ambest.com
Spotlight

estate,” Siegel said. “If you were selling your house, would To grow it, Siegel is hoping to entice greater consumer
you sell it to the one guy with a sign that says ‘We buy ugly interest through My Policy Predictor, an online tool
houses’? Or would you put it on MLS [multiple listing that functions much like the online Zestimate real
service] and try to get a bunch of offers to try and drive up estate calculators on the website Zillow, which allow
the price?” homeowners to gauge an approximate value of their home.
Based upon that number, they can then decide whether to
Siegel describes Harbor Life Settlements as a marketing list the property.
technology company operating within the world of life
settlements, rather than as an entity focused solely on On the professional side, the company also has developed
insurance-related products. He said just 2% of those who an artificial intelligence tool that combs through the client
would benefit from selling a policy wind up doing so. books of financial advisers and flags those policies ripe
for a settlement. Brokers can then notify people of the
“Every year in the U.S. there are some $200 billion in life potential value.
policies that are lapsing that could have been sold. People
just don’t know,” he said. “That means 98% of the time Asset Value
people are just throwing away their assets that they could In both cases, if a client thinks the price is attractive
have sold.” enough, they can list the policy through an online auction
site on which prospective buyers—hopefully—drive up the
Overlooked Option price. Harbor Life Settlements bought the underlying code
Life settlements involve the sale of life insurance policies for the exchange from eBay, and the theory is similar in that
for a sum that is above what the carrier would pay out for a consumer will offer the policy and receive bids.
the cash surrender value but less than the full death benefit.
The buyer of the policy must pay all premiums throughout Siegel is betting that increased knowledge on the part
the life of the insured, making life expectancy a critical part of policyholders will translate to a greater comfort and
of the transactions. willingness to sell.

According to a 2021 report by Conning Insurance Research, “We believe fundamentally that people have the right to
the life settlements market saw a fifth-straight year of know the value of their assets. Period,” he said. “They have
growth in the amount of face value settled in 2020 even the right to know the value of their house. They have the
amid the disruption caused by the COVID-19 pandemic. right to know the value of their car. And they have the right
The virus could even be a factor in growth going forward, to know the resale value of their life insurance policy.”
as so-called COVID long-haulers look to settle policies.
The prime benefits are twofold, he said. Expanding the
The firm’s average 10-year forecast of the industry’s growth market and making life settlements more common will
is about $233 billion, and the outlook calls for annual create an enormous new source of liquidity for Americans,
volume of new settlements of $7.3 billion, both figures up Siegel said. At the same time, he said, every net-worth
from previous estimates. The industry is evolving more calculation prepared by advisers based solely on surrender
toward the direct-to-consumer market, the report said.

46
 Spotlight

values is wrong, and the process will become more possesses or should be applied to it,” Conway said. “It
common through education and transparency. creates in the public’s mind a perception that this is not the
Van Gogh in the basement. It’s an
It’s also designed to take an “We believe fundamentally that obligation and nothing more.”
underwriting process that people have the right to know the
traditionally stretches as much as value of their assets. Period. Hidden Fees
three months and compress it into a They have the right to know the In 2021, ordinary life insurance
one-minute stage driven by AI. value of their house. They have lapses fell to a 10-year low of 4.1%,
the right to know the value of according to Best’s Special Report: US
Siegel said life settlement their car. And they have the right Life: Earnings Decline in 2021 Despite
underwriting has traditionally to know the resale value of their Highest New Premium Growth in Over
been painful and inexact; he called life insurance policy.” Three Decades. To put that number
estimating life expectancy “brutal.” in context, in 2020 there was a
Data-hoarding by carriers has been total of more than $55.3 trillion
a long-standing problem, he said. of in-force life insurance across
the industry.
“They have all the data, but they
make money because 90% of people Yuhmei Chen, a senior financial
lapse their policy—they pay for 30 analyst covering insurance-linked
years and get nothing,” Siegel said. securities at AM Best, said the life
“The less transparent settlements settlements industry has gotten
are, the more lapsation will happen, more attention since its beginning,
which increases their net worth.” with viatical settlements in the
early 1980s during the onset of
Christopher Conway, a principal the HIV crisis. In many states,
and chief development officer at regulations have become more
life expectancy underwriter ISC stringent, she said.
Services, said insurance companies
are in the business of taking Settlements have faced pushback
premiums and managing money Lucas from the life insurance industry
rather than paying death benefits. Siegel because lapse rates are factored into
The marketing of life insurance as a the business models and pricing
needed liability rather than an asset of most insurance contracts, she
has created a climate in which policyholders too often don’t said. As a result, some insurance carriers raise the cost of
know selling a policy is an option. insurance for certain products. Still, Chen said, the lack of
transparency has crimped the business.
“That establishes within the consumer’s mind a different
perspective about that instrument than it actually

www.ambest.com 47
Spotlight

“What people talk about a lot are the hidden fees—the Enough Room
commissions to the broker and the providers’ fees,” she Steven Shapiro, president and chief executive officer at New
said. “Brokers are supposed to work York-based Q Capital Strategies,
for the sellers, the policyholders, to Because consumers don’t know a life settlement provider and
get them the highest price to sell selling a policy is an option, “it servicer, said as a buyer he’s worked
the policy, but from the provider’s creates in the public’s mind a with brokers and also bought
point of view they want to be able to perception that this is not the Van policies on Harbor Life’s platform.
buy a policy for the least price.” Gogh in the basement. It’s an He doesn’t see the two as mutually
obligation and nothing more.” exclusive and said one possible
Brokers retain a large amount of outcome is consumers choosing
control over the process and can whichever option makes sense in
factor in those fees, as well as their their case.
relationship with prospective
buyers, as they present offers to Brokers by nature gravitate to larger
clients. “As a seller you don’t really policies, while technology-focused
know how many bidders there are solutions might be the right choice
because you get the information for people who are looking to sell
from the broker. I think that’s the policies with a smaller face value,
thing,” Chen said. he said.

John Welcom, who is founder and “They’re just two different

CEO of Welcome Funds (JW), a approaches,” Shapiro said. “One is
life settlements broker in Florida, using a technology approach to the
and chairman of the Life Insurance bidding process, and the other is
Settlement Association, said most just using a more personal approach
states have regulations concerning to relationships and calls. I think
transparency that include upfront Christopher there’s a place for both of them.”
disclosure of all fees and a full
Conway
accounting of the bids JW receives Siegel said the technology and
for a policy. Harbor Life Settlements together
will change the entire life insurance industry as it inverts
“The fact is that transparency happens on a majority of the traditional model of how consumers and advisers view
the transactions that we close,” Welcom said. “Every settlements. “They’ve got a Ferrari sitting in the garage that
regulated state has a different law, and we have a notice of they didn’t even realize they had,” he said. “It’s going to
disclosure within our applications for each state so that we liberate financial advisers to give financial advice.”
can comply.” —Terrence Dopp

48
 Chapter 4: Health

Health Market at a Glance

H ealth insurers focus principally on providing health

care coverage and related protection products.
AM Best’s database contains annual filing information
for more than 1,200 single health insurance companies
in the United States.

Health insurers typically have shorter investment

horizons than life insurers or property/casualty insurers
that focus on liability coverage. Health insurers are
measured by premiums and membership in their
programs, sometimes known as “covered lives.”

The most recent report by the Kaiser Family Foundation

estimates that 48.5% of the U.S. population was
covered by employer-sponsored health insurance in
2021. Another 21.1% was covered by Medicaid, a joint
federal-and-state program for those of limited financial
means. Another 14.3% of the population was covered
by Medicare, which is designed for seniors. About 8.6%
of the U.S. population has no insurance. Individuals
who purchase health insurance on their own account
for 6.1%, and 1.3% of the population is covered under
the military.

Comprehensive health insurance policies pay benefits

for insureds for preventative care and when they
become ill or injured. Managed care is the most
common form of coverage. In managed care, insurance
companies establish fee agreements with doctors and
hospitals who provide health care services.

If health insurance is provided through employment,

the employer typically pays the insurer a set amount
of money in advance for all health care costs. The
employee may have to contribute a portion of the
premium to the employer via a payroll deduction.

www.ambest.com
Chapter 4: Health

US Health – Ownership of The employee then pays a flat amount for the services
Top 10 Urgent Care Centers – 2023 Edition as either a copayment or a percentage of the cost of
Ranked by Number of Locations, 2021. covered services provided.
Urgent Care Center/
Owner % of Total Centers In most managed care plans, doctors or hospitals are
CVS Minute Clinic/CVS Health
chosen from a network of providers. Some managed
care plans allow visits to doctors outside the network, at
1,246 11.6
a greater cost to the employee.
Concentra Urgent Care/Select Medical
579 5.4
Some of the largest carriers of health insurance are Blue
Cross Blue Shield plans and publicly traded companies.
Healthcare Clinic at Walgreens/Walgreens Blue Cross Blue Shield companies operate independently
486 4.5 as part of an association. Blue Cross companies originally
focused on hospitalization coverage. Blue Shield
AFC Urgent Care/American Family Care companies originally focused on coverage for doctor
224 2.1 visits. The two associations merged, and its independent
licensees now provide health insurance coverage options
MedExpress Urgent Care/UnitedHealth Group for employer groups and individuals.
220 2.1

US Healthworks*/Select Medical Developing Issues for

196 1.8 Health Insurers
NextCare Urgent Care/NextCare
Medicaid Enrollment to Decline: The Families First
176 1.6
Coronavirus Response Act (FFCRA), enacted early in
FastMed Urgent Care/ABRY Partners the pandemic, provided additional federal funding to
134 1.2
states as long as eligibility of Medicaid members was
maintained for the duration of the COVID-19 public
The Clinic at Walmart/Walmart health emergency (PHE). With states unable to conduct
113 1.1 eligibility checks and disenroll members through
the redetermination process, Medicaid enrollment
CareNow Urgent Care/HCA Healthcare reached record highs. Some of the new enrollees may
110 1.0 have found new employment and transitioned to
group commercial coverage but remained enrolled
0 150 300 450 600 750 900 1050 1200 1350
in Medicaid programs due to the inability of states to
*US Healthworks was aquired by Dignity Health in 2015 and subsequently perform redeterminations. This resulted in much lower
sold to Select Medical in 2018.
Source: Solv Top 100 Urgent Care and Walk-in Clinic Brands.
utilization and claims costs for the Medicaid segment,
leading to record profitability. The Consolidated

50
 Chapter 4: Health

Appropriations Act of 2023 included a provision which growth provides ample opportunities for scaling new
no longer ties Medicaid redeterminations to the end of technologies and innovative vertical integration.
the PHE. States may begin the Medicaid redetermination
process and disenroll individuals beginning April 1, However, as the group market remains very sizable and
2023. As a result, AM Best expects Medicaid enrollment ripe for new solutions, several carriers came out with
will begin to moderate in late third quarter 2023, with innovative group benefit designs in 2022. Whether
declines accelerating in the fourth quarter of 2023 and these new products will be adopted by the market
into the first quarter of 2024. remains to be seen, but AM Best expects that carriers will
increase their focus on offering novel solutions for the
Medicare Advantage Continues to Grow: It is well group segment.
known that Medicare Advantage (MA) plans have been
growing in popularity as these plans offer additional Dental Insurers Facing Regulatory Pressure: Several
benefits usually at a lower cost compared to traditional states are in the process of implementing minimum
Medicare with a Medicare supplement policy. The loss ratio requirements. In 2022, Massachusetts passed
lower cost of these products combined with additional a public ballot measure that requires carriers to meet an
benefits and budget-conscious seniors has driven a shift annual aggregate loss ratio of 83% for dental plans. If the
in enrollment, with a membership growth rate in the loss ratio is lower than 83%, the insurer will be required
high single digits for the past 10 years. AM Best believes to refund the excess premiums, similar to the minimum
that some of these gains in MA membership have come medical loss ratio on medical. The New Mexico Office of
from traditional Medicare, as an increasing number of the Superintendent of Insurance also is implementing
members switch during open enrollment. Additionally, a minimum loss ratio requirement for both dental and
the absolute enrollment gains in MA and other health vision plans. While Massachusetts and New Mexico are
plans has been higher than the increase in total finalizing details, other states are contemplating adding
Medicare beneficiaries. According to the Congressional a minimum loss ratio requirement with a focus on dental
Budget Office Baseline Projections released in May products. Dental earnings could be negatively impacted
2022, this trend is expected to continue as the number by minimum loss ratios, which could put more pressure
of individuals in MA steadily rise, and by 2032 MA on smaller insurers that tend to have higher expense
is expected to have a market penetration rate of 57% ratios and lower loss ratios. These companies may not be
compared with over 40% today. able to adjust the expense ratio in a short period of time
to make the product reasonably profitable.
Commercial Market Expected to Be in Focus:
The commercial group segment has received less Mergers &Acquisitions: AM Best expects mergers and
attention from carriers in the recent past, owing to a acquisitions (M&A) in the segment to be focused on
lack of membership growth, lower regulatory pressures non-insurance operations and vertical integration. Large
and more-limited opportunities for medical cost carriers will continue to look for enhanced capabilities
management, compared to other lines of business. in care management and care delivery, which will allow
Large national carriers have focused their attention on insurers to lower the cost of care and deliver innovative
the government segment, where continuous revenue solutions to clients. Carriers have shown greater interest

www.ambest.com 51
Chapter 4: Health

in various types of home health vendors, as well as physician. More of the costs to receive care outside the
primary care clinics with multiple locations. These assets network are shouldered by the member.
remain very fragmented, with many local and regional
businesses operating in the market. Large national POS (Point of Service): The member designates a
carriers established a process where the review of various primary care physician but retains the option to receive
level M&A opportunities is ongoing and only large-scale services from doctors without a referral or go outside the
transactions are discussed publicly. network for care and shoulder a larger portion of the cost.

Fee-for-service: Also called an indemnity plan, this

Major Types of Health Plans was once the traditional route for coverage. There is no
network of preapproved providers; members can see any
HMO (Health Maintenance Organization): Members doctor or hospital. These plans cost the most and have
select a primary care physician, who oversees all aspects dwindled sharply in the past 30 years.
of the member’s medical care and provides referrals
to specialists. Most services received from doctors or High-Deductible Health Plan (HDHP) with a pretax
hospitals out of the plan’s network are not covered. Health Savings Account (HSA): The HSA pays for
qualified and routine health care expenses with tax-free
PPO (Preferred Provider Organization): A network of money until the deductible is met; then the insurance
doctors, hospitals and other health care providers make coverage takes over. HSA funds can be used for expenses
up the organization, but the PPO also allows members the HDHP doesn’t cover, and HSA balances carry forward
to see specialists and out-of-network doctors or hospitals to future years.
without needing prior authorization from a primary care

Products and Terms

Health products come in a wide variety of forms and medical and pharmacy costs. Some plans combine a
address basic health needs, ranging from preventative health plan with a Health Savings Account.
and basic medical care to specialized forms of illness and
accident coverage. Health products include: Health Savings Account: Participants and/or their
employers may contribute pretax money to be used
Indemnity Health Plan: This may be offered on an for qualified medical expenses. HSAs, which are
individual or group basis. Members choose their own portable, must be linked to a high-deductible health
doctor or hospital. The carrier then pays a fixed portion insurance policy.
of total charges. Indemnity plans are often known as
fee-for-service plans. Health Reimbursement Arrangement: An HRA is a
fund provided by the employer that employees utilize for
High-Deductible Health Plan: This option may feature covered services. Any leftover funds can carry over from
low premiums and an integrated deductible for both year to year. However, HRAs are not portable.

52
 Chapter 4: Health

Dental Plan: Traditional dental plans may help cover Flexible Spending Account: A program in which
preventive, basic and major services. employees may contribute pretax money to be used for
medical expenses—including copays, coinsurance and
Dental Preferred Provider Organization: This plan any noncovered services or over-the-counter medication.
offers discounts to members who use in-network Funds in a flexible spending account cannot be carried
dental providers. over from year to year.

Vision Plan: A vision care plan may cover regular eye Medicare Advantage: This provides Medicare-eligible
exams, treatment for conditions and assistance with individuals the benefits of traditional Medicare, plus
corrective lenses. additional features and benefits such as wellness
programs and case management services. Individuals
Pharmacy: Plans may cover part or all of prescription who select Medicare Advantage agree to use in-
drug costs. network doctors and hospitals or face much higher
out-of-pocket costs.

Common Health Insurance Terms

Coinsurance: For health insurance, it is a percentage of what insurance covers. For example, some HMOs
each claim after the deductible is paid by the policyholder. require a $20 copayment for each office visit, regardless
For a 20% health insurance coinsurance clause, the of the type or level of services provided during the visit.
policyholder pays for the deductible plus 20% of covered Copayments are not usually specified by percentages.
benefits. After paying 80% of losses up to an out-of-pocket
maximum, the insurer starts paying 100% of losses. Disease Management: A system of coordinated health
care services and communications with members who
Copayment: A predetermined, flat fee an individual have certain medical conditions.
pays for covered health care services, in addition to

www.ambest.com 53
Spotlight

Biometrics Laws and

Regulations Poised to Become
a Flashpoint for Insurers,
Market Watchers Say
The stakes are high for insurers because
the penalties faced by their insureds are
potentially astronomical.

Biometrics, such as fingerprint readings and retinal

scans, have been around for years. But market watchers
say their mpact on the insurance industry is just
beginning. And in response to recent legal, legislative
and regulatory developments, insurers will likely
respond with tighter policy wording and deeper risk
management, they said.

The first state law to regulate biometric data, the

Biometric Information Privacy Act of Illinois, was
enacted in 2008 and remains the toughest law of
its kind in the country, said Cort Malone with the
policyholder firm Anderson Kill. It carries stiff
penalties: $1,000 per negligent violation and $5,000
per intentional or reckless violation.

Texas, Washington, Virginia, California, New York and

Arkansas all have biometric laws on the books, he said.
More laws likely are on the way.

Giving insurers pause is a decision by the Illinois

Supreme Court, which in 2021 ruled consumers
under BIPA do not have to show they were injured
by a violation of the law—just that a violation
allegedly occurred.
 Spotlight

In West Bend Mutual Insurance Co. v. Krishna Schaumburg The Illinois law in particular is snaring businesses of all
Tan, the court held a class-action complaint for violations sizes, said Chris Keegan, cyber and technology practice
of BIPA—due to the collection and dissemination of leader at Brown & Brown Insurance.
customer fingerprints—alleged personal or advertising
injury that triggered the insurer’s duty to defend, said “We’re seeing a really quick uptick in the number of
Andrew Barrios of Reed Smith. small private actions that are coming in,” Keegan said.
“They’re not the headline cases, but there’s a lot of
Two important aspects of the ruling should concern them. They’re small, and they add up.” BIPA cases in
insurers and companies using biometric technology, 2020 numbered 264, up from 220 in 2019.
he said.
Suits between consumers and companies using—or
“First, the court construed the term ‘publication’ misusing—biometric devices and data are the first
broadly in favor of the insured, defining it to wave, Malone said. “The insurance battles have
include both communication of information really just been the tip of the iceberg with the
to the public at large and communication of first handful of cases, because one of the things
information to a single party,” Barrios said that is happening is that people are letting the
in an email. “Second, the court held that the underlying biometric litigation play out before
catchall provision of a violation of statutes gearing up and going into phase two, which is
exclusion did not apply to preclude coverage, fighting over whether there’s going to be coverage
construing it narrowly to apply only to statutes for those settlements or not,” Malone said. “I do believe
governing methods of communication, which the the insurance litigation is going to be fairly quick to
court held did not include BIPA.” follow over the next few years.”

The stakes are high for insurers because the penalties Along with that, Malone and others said, carriers will
faced by their insureds are potentially astronomical. tighten up policy wording to broaden exclusions. They’ll
In February 2022 Texas Attorney General Ken Paxton also dig deeper into company practices and whether they
sued Meta, the parent company of Facebook, alleging require consent to collect the data, the legal observers
Meta collected and used Texans’ facial geometry data said. “They’re going to start looking with a jaundiced
in violation of the Texas Capture or Use of Biometric eye at providing this type of coverage because of the
Identifier Act. Facebook allegedly collected billions of excessive potential penalties out there,” Malone said.
data points that theoretically could generate trillions in
penalties, Malone said. The one flip side to that, Malone added, is insurers can
do what they’ve always done—analyze the marketplace,
Facebook already was among the tech giants that paid study the risks and come up with premiums that are
a large amount to settle BIPA complaints, paying $650 appropriate for the risks they are being asked to cover.
million in 2020 to settle one case, records show.
—Timothy Darragh

www.ambest.com 55
Spotlight

Legalized Recreational Marijuana

Is a Growing Business With
Insurance Challenges
Best’s Underwriting Reports and Best’s
Loss Control Reports provide insights
into the lines of coverage, exposures
and loss control for recreational
marijuana dispensaries.
The use of recreational marijuana has been legalized in
19 states and the District of Columbia, with more states
considering the possibility, according to the National
Organization for the Reform of Marijuana Laws.

But while states with legalization saw sales of cannabis

initially rocket to millions of dollars, prices are coming
down in areas due to market saturation. Some states are
having a hard time getting the legal cannabis industry
off the ground, and insurance surrounding recreational
marijuana continues to be an issue.

Many large carriers are avoiding insuring state-

approved cannabis-related businesses, but for those
who do, there are a number of risks and obstacles that
need to be considered, according to Best’s Underwriting
and Loss Control Resources.

“Because it is still considered a Schedule 1 drug by the

federal government, it’s very hard to get bank accounts
for these dispensaries, so most of the dispensaries are
cash-only businesses,” Best’s Underwriting and Loss
Control Resources Senior Assistant Editor Suzanne
LaCorte said.
 Spotlight

Number of Dispensaries Is Growing

In Michigan, from January to June 2022 the number of
growers increased by 71%, and the number of retailers
by 17%, according to the Oakland Press.

Legal sales of recreational marijuana in New Jersey

began in April 2022, according to dispensaries.com. In
California, the Los Angeles Times writes that “high taxes,
local bans and overregulation” are making it difficult
for state-licensed vendors to compete with black
market dealers.

As the number of recreational marijuana dispensaries

has grown, Best’s Underwriting Reports has identified
10 lines of coverage for the businesses and has ranked
the risk exposure associated with the challenges facing Following are excerpts of the lines of coverage reports
the industry. that have the highest hazard index rankings.

Those lines are Automobile Liability; General Liability:

Premise and Operations; General Liability: Products-
Completed Operations; Directors and Officers Best’s Hazard Index
Liability; Employment Practices Liability; Workers’ Line of Coverage Best’s Hazard Index
Compensation; Crime; Property; Business Interruption; Crime 7
and Inland Marine. General Liability: Premises and 6
Operations
Best’s Hazard Index ranks the risk exposure for Lines General Liability: Products-Completed 6
Operations
of Business as Low (1-3), Medium (4-6), and High (7-9).

Photo by FREDERIC J. BROWN/AFP via Getty Images

Lines of Coverage
Crime dishonesty exposure in the form of pilferage of products
The crime exposure for medical marijuana dispensaries and embezzlement could also exist.
will be substantial due to the potential for robberies.
Most American dispensaries will only accept cash for General Liability: Premises and Operations
purchases because of U.S. federal banking laws that The General Liability: Premises and Operations
prohibit banks from doing business with companies exposure for marijuana dispensaries will be significant
that cultivate, process or sell marijuana. An employee due to the potentially large number of daily visitors.

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Spotlight

Visitors will include customers, delivery personnel and regarding testing the quality of the cannabis products,
government inspectors. Slips, trips and falls will be the states have developed their own regulations regarding
main exposure. A Cyber Insurance Liability exposure testing, labeling and packaging. Also, some product
will exist if the dispensary stores customer information labels might not identify the appropriate use or strength
on a computer network that can be accessed through of the marijuana, which could result in claims. If the
the internet. insured bakes or makes marijuana-infused edibles (e.g.,
brownies, cookies, gummy bears), then this exposure
General Liability: Products-Completed will be increased due to the potential for the food
Operations spoiling or for inaccurate dosages in each piece. Because
The General Liability: Products-Completed Operations there could be overlap between General Liability:
exposure for marijuana dispensaries will be significant Products-Completed Operations and Professional
due to the potential for mold, fungus, pesticides and Liability, both lines of coverage should be written by the
other contaminants in the products, which could make same insurer for the same limits if possible.
customers sick. Because there are no federal regulations

Loss Control
On-Site Inspection: • Are “Employees Only” signs posted outside of all
• Does the insured have a vault equipped with several storage areas from which visitors are prohibited, such
tool-, torch-, explosive-, water- and fire-resistant, as where cannabis products are kept?
NRTL-listed, time-delay safes where cash and • Are stockrooms equipped with self-locking doors?
marijuana are stored? • What types of marijuana does the insured sell?
• Are motion alarms and biometric locks installed • Is there a kitchen on site where the insured prepares
throughout the premises? cookies, candies and other marijuana-infused edibles?
• Are security cameras placed throughout the premises, • For edibles, are all ingredients, including nuts, wheat
including near vaults? and other allergens, clearly stated on all packages?
• What is the layout of the premises?
—Anthony Bellano

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 Chapter 5: Reinsurance/Alternative Risk Transfer

Overview of Reinsurance

B roadly put, reinsurance is insurance for insurers.

Insurance companies face many risks in their daily

operations, including:
• Asset risk, related to the changing nature of
investment values.
• Credit risk, related to obligations owed by customers
and/or debtors.
• Liability risk, related to potential losses due to
inadequate pricing or reserving, or from catastrophes
and other events.

Reinsurance indemnifies the primary insurer against

those potential losses. The primary insurer, or ceding
company, transfers a portion of risk to the reinsurer.
How much risk and what conditions trigger the
reinsurance are specified in the treaties. Generally, the
primary carrier retains a fair amount of the risk.

Reinsurance allows insurers to increase the maximum

amount they can insure. However, most reinsurance
contracts do not absolve the ceding insurer of
responsibility to pay the insurance claims should the
reinsurer fail. The first reinsurance companies were
born out of a major fire in 1842 that burned a large
section of Hamburg, Germany, and killed at least
50 people. The conflagration exposed the inability
of insurers to cope with such a catastrophe, and
the insurers recognized the need to distribute risk
portfolios among several carriers.

For a basic reinsurance scenario, take an office building

worth $20 million. A primary carrier may accept the
risk of loss and then turn to a reinsurer, agreeing to
cover the first $10 million and ceding the rest. If losses
at the building were to exceed the primary layer of

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Chapter 5: Reinsurance/Alternative Risk Transfer

$10 million, say $14 million, the reinsurer would be automatically takes the risk for all policies that are
called upon to cover the remaining $4 million. covered by the treaty, and not just one particular policy.

In a case like this, the arrangement is said to be a Facultative reinsurance, on the other hand, is done
nonproportional agreement, also known as an excess more on a case-by-case basis. The reinsurance is issued
of loss agreement. In proportional agreements, the after an individual analysis of the situation and by
primary insurer and reinsurer share the liability risk deciding coverage case by case. The reinsurer can
proportionately. In the case of a quota share agreement, determine if it wants some or all of the risk associated
the primary insurer and reinsurer split the premiums with that particular policy. This arrangement usually
and losses on a fixed percentage basis. takes place when the risks are so unusual or so large
that they aren’t covered in the insurance company’s
The two basic types of reinsurance arrangements are standard reinsurance treaties.
treaty and facultative. Treaty reinsurance contractually
binds the insurer and reinsurer together, with respect Reinsurers also can purchase reinsurance to cover their
to certain specified business. The treaty requires the own risk exposure or to increase their capacity. This
insurer to cede all the risks specified by the agreement process is called a retrocession.
with the reinsurer, and the reinsurer must assume
those specified risks. This means that the reinsurer

Global Reinsurance – Total Dedicated Reinsurance Capital – 2023 Edition

(US$ Billions)
600
Traditional Capital Third-Party Capital

500
94 95
90
88
400 87 95
60 68 75
48
300 19

200
292 320 340 332 345 345 341 394 429 475 435
100

0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022P
Sources: AM Best data and research; Guy Carpenter.

60
 Chapter 5: Reinsurance/Alternative Risk Transfer

Developing Issues in Reinsurance

AM Best’s market segment outlook for the global Global Reinsurance – Primary Insurance
reinsurance industry, issued in late 2022, details issues vs. Reinsurance NPW Allocations
shaping the environment for reinsurers.
Primary Reinsurance

Negative pressures on reinsurers’ results over the past 100

few years have been driven not only by traditional
natural catastrophe events, but also by the growth of
80
secondary perils, the pandemic and more recently, the
74.9 67.8 66.2 64.1
Ukraine-Russia conflict. This has been compounded
by economic, social and geopolitical uncertainty 60
in general. Although the segment remains well
capitalized, the instability of financial results and 40
inability of most players to meet their cost of capital
has tested investors’ risk tolerance. The accumulation 20
of small to medium-sized events has had a material 25.1 32.2 33.8 35.9
impact on claims ratios, sometimes at unexpected 0
times of the year (e.g., Winter Storm Uri in Texas) 2018 2019 2020 2021
or outside their usual geographical scope (e.g., Sources: AM Best data and research.

Hurricane Ida, affecting areas as far north as Canada).

Extremely unusual events (such as the weather system
Bernd floods in Western Europe) are occurring, A problem that was originally considered temporary
as wildfires and floods increase in frequency and (caused mainly by pandemic-related supply chain
severity worldwide. disruptions) has become more of a long-term concern.
This has led, as expected, to steep and ongoing
Some companies have been actively shrinking their increases in interest rates—with their consequential
property cat exposures or even modifying their impact on the stock and credit markets, as well as on
organization structures and exiting altogether, economic activity in general.
although a few players—including some of the
largest European reinsurers—seem to see the current Unlike previous hardening cycles, new capital has not
environment as an opportunity to improve profit had a material impact on market conditions. After
margins and consolidate their market positions even early signs of enthusiasm and the emergence of a few
further. startups since 2019, execution has been slow and
inconsistent. Regulatory and recruitment delays have
The big question at the moment is about the potential played a role. Business plans have been downsized or
impact that inflation—which remains stubbornly changed suddenly based on opportunistic deals rather
high across the world—may have on ultimate claims. than on solid strategies. Several products have not

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Chapter 5: Reinsurance/Alternative Risk Transfer

yet seen the light of day. Crucially, investors remain terms and conditions are commonplace. Despite higher
extremely cautious. demand and improved pricing, the volatility of recent
claims remains the key issue. Issues with regard to
Third-party capital, while typically expected to react trapped capital have not gone away completely. “Loss
more swiftly to market conditions, seems subject to creep” remains well within the memory of investors.
the same level of skepticism. More restrictive covers,

Alternative Risk Transfer and Risk Financing

The blurring of boundaries between insurance and Structured finance is a complex process of
capital markets is most evident in structured finance, transferring risk, often with the purpose of raising
part of an area that is broadly known as alternative capital. Much of the activity revolves around risk
risk transfer. securitization, whereby the involved assets are
not used as collateral as is typically found in a loan
The highest-profile members of the ART community scenario. Instead, funds from investors are advanced
are captives—insurance or reinsurance companies to the originator based on the history of those assets,
owned by their insured clients and located in indicating a cash flow into the originator’s business.
jurisdictions, or domiciles, that may be tax- The assets are then transferred by the originator to a
friendly or may have reduced capital and reserve separate legal entity—a special purpose vehicle—that
requirements. Captives typically are formed by one in turn issues securities to the investors. Interest and
or more noninsurance companies when traditional principal paid on those securities are financed by the
market coverage is more limited, or when the parent cash flow.
companies wish to have more direct control of their
own risks.

Insurance-Linked Securities and Structured Transactions

Capital markets participants, reinsurers, brokers the catastrophe happens, the funds go to the insurer to
and insurers continue to collaborate in various cover claims.
combinations to create new risk-based offerings,
including: Sidecars: Separate, limited-purpose companies
generally formed and funded by investors (usually
Natural Catastrophe Bonds: An alternative to hedge funds) that work in tandem with insurance
reinsurance, these securities are used by insurers companies. The reinsurance sidecar purchases certain
to protect themselves from natural catastrophes. insurance policies from an insurer and shares in the
Typically, they pay higher yields because investors profits and risks. It is a way for an insurer to share risk.
could lose their entire stake in the event of a disaster. If If the policies have low claim rates while in possession
of the sidecar, the investors will make higher returns.

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 Chapter 5: Reinsurance/Alternative Risk Transfer

Best’s Rankings
Top 25 World’s Largest Reinsurance Groups – 2023 Edition
Ranked by 2021 Unaffiliated Gross Premiums Written.
(US$ Millions)1
Reinsurance Premiums Written
Total
Life & Non-Life Non-Life Only Ratios3
Shareholders’
Rank Company Name Gross Net Gross Net Funds2 Loss Expense Combined
1 Munich Reinsurance Company 46,836 44,417 32,610 31,482 35,047 68.7 30.9 99.6
2 Swiss Re Ltd. 39,202 36,965 23,131 22,381 23,678 67.4 29.7 97.1
3 Hannover Rück SE4 31,443 27,344 21,773 18,827 14,447 69.3 28.7 98
4 Canada Life Re 23,547 23,514 N/A N/A 23,854 N/A N/A N/A
5 SCOR S.E. 19,933 16,242 9,319 7,939 7,251 72 28.6 100.6
6 Berkshire Hathaway Inc. 19,906 19,906 14,285 14,285 514,930 71.9 23.3 95.1
7 Lloyd's5, 6 19,343 14,263 19,343 14,263 48,242 65.8 29.4 95.2
8 China Reinsurance (Group) Corporation 17,808 16,181 6,956 6,608 16,104 66.6 28.4 95.1
9 Reinsurance Group of America Inc. 13,348 12,513 N/A N/A 13,014 N/A N/A N/A
10 Everest Re Group Ltd. 9,067 8,536 9,067 8,536 10,139 71.6 26.5 98.1
11 PartnerRe Ltd. 8,204 7,134 6,557 5,511 7,544 64.6 25.9 90.5
12 RenaissanceRe Holdings Ltd. 7,834 5,939 7,834 5,939 7,078 74.6 27.5 102.1
13 Korean Reinsurance Company 7,145 5,102 6,043 4,078 2,126 86.4 14.2 100.6
14 Transatlantic Holdings, Inc 6,034 5,387 6,034 5,387 5,398 69.2 30.2 99.5
15 General Insurance Corporation of India7 5,821 5,172 5,630 4,987 7,938 88.8 19.3 108.1
16 AXA XL 5,480 4,313 5,480 4,313 13,139 72.6 31.2 103.8
17 Arch Capital Group Ltd. 5,094 3,254 5,094 3,254 13,546 67.8 26.4 94.2
18 MS&AD Insurance Group Holdings, Inc. 7, 8, 11 4,393 N/A 4,393 N/A 14,668 N/A N/A 97.7
19 Pacific LifeCorp 4,098 3,620 N/A N/A 17,005 N/A N/A N/A
20 Sompo International Holdings, Ltd. 3,855 3,417 3,855 3,417 7,433 63.5 29.5 93.1
21 MAPFRE RE, Compañía de Reaseguros S.A.10 3,719 3,165 3,080 2,534 2,035 69.3 28.7 98.1
22 Assicurazioni Generali SpA 3,670 3,670 1,242 1,242 36,101 83.5 27.9 111.4
23 R+V Versicherung AG9 3,421 3,421 3,421 3,421 2,435 76 26.3 102.2
24 Validus Reinsurance, Ltd. 3,171 2,452 3,171 2,452 3,548 72.4 28.6 101
25 The Toa Reinsurance Company, Limited7, 8 2,988 2,453 2,127 1,690 2,614 77.6 32.5 110.2
1 All non-US$ currencies converted to US$ using foreign exchange rate at company’s fiscal year-end.
2 As reported on balance sheet, unless otherwise noted.
3 Non-Life only.
4 Net premium written data not reported, net premium earned substituted.
5 Lloyd’s premiums are reinsurance only. Premiums for certain groups within the rankings also may include Lloyd’s Syndicate premiums when applicable.
6 Total shareholders’ funds includes Lloyd’s members’ assets and Lloyd’s central reserves.
7 Fiscal year ended March 31, 2021.
8 Net asset value used for total shareholders’ funds.
9 Ratios are as reported and calculated on a gross basis.
10 Premium data excludes intergroup reinsurance.
11 Based on Arch Capital Group Ltd. consolidated financial statements and includes Watford Re segment.
NA = Information not applicable or not available at time of publication.
Sources: AM Best data and research.

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Chapter 5: Reinsurance/Alternative Risk Transfer

Embedded Value (Closed Block) Securitizations:

US Health Premium Ceded by Product – An insurer can close a block of policies to new business
2023 Edition and receive immediate cash from investors in exchange
($ Billions)
for some or all of the future earnings on that block
Non-
Affiliated Affiliated of business. The pledged assets remain with the
Medicare Part D 0.6 0
insurer and are potentially available in the event of an
insolvency.
Accident Only/AD&D 0.5 0.3
Critical Illness 0.6 0.2
Securitization of Structured Settlements:
Limited Benefit 0.1 1
A structured settlement is an annuity used for
Dental 0.8 0.8 settling personal injury, product liability, medical
FEHBP 3.5 0 malpractice and wrongful death cases. The defendant
Long-Term Care 2.5 2.2 (typically, a liability insurer) discharges its obligation
Medicare Supplement (Medigap) 3.5 1.4 by purchasing an annuity from a highly rated life
Other Medical 6.3 0.3 insurance company. Securitization of annuity cash
LTDI 3.1 4.4
flows is achieved through the use of a bankruptcy-
remote SPV. The issuer of the securities, the SPV, raises
Stop Loss/Excess Loss 4.3 3.2
funds from investors that are used to purchase annuity
Medicare Advantage 4.2 3.9
cash flows from the annuitants. The cash flows received
Other Health 5.3 3.6 by the issuer are used primarily to service the principal
Comprehensive Major Medical 5.4 6.2 and interest payments due the investors.
Managed Medicaid 11.6 0.9
Source: , 2022 Mortality Catastrophe Bonds: Investors in these
bonds lose money only if a level of deaths linked to a
catastrophic event exceeds a certain threshold. The
Surplus Notes and Insurance Trust-Preferred event’s trigger is extreme (for example, a pandemic).
CDOs: Surplus notes and trust-preferred CDOs These are a derivative of natural cat bonds.
(collateralized debt obligations) provide another
funding source for small and midsized insurance Life Settlement Securitizations: A life settlement
companies that find it costly to issue capital on their contract is a way for a policyholder to liquidate a
own. These companies can access the capital markets life insurance policy. A portfolio of these contracts
through the use of the surplus notes/insurance trust- may be securitized to provide a source of capital.
preferred pools. Securities in these pools are issued by However, certain variables, such as regulatory issues
a stand-alone SPV and sold to investors. The proceeds and the uncertainties associated with predicting life
of the notes are used to purchase the transaction’s expectancies, can create obstacles that may slow their
collateral, which consists of surplus notes and path to the marketplace.
insurance trust-preferred securities.

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 Chapter 5: Reinsurance/Alternative Risk Transfer

Securitization of Reinsurance Recoverables: US Reinsurance Ceded – 2023 Edition

Insurance and reinsurance companies have been ($ Thousands)
finding alternative ways to reduce their exposure Face Amount Ceded Reinsurance Ceded
to uncollectible recoverables and reduce the 2012 24,544,115,924 153,787,611
concentration risk associated with ceded exposures. 2013 24,682,585,921 188,836,700
One approach is the securitization of reinsurance 2014 25,334,718,741 98,957,757
recoverables, which involves a structured debt 2015 25,789,736,121 189,366,383
instrument that transfers risk associated with
2016 28,097,632,584 197,264,278
uncollectible reinsurance to the capital markets. This
2017 29,381,123,985 220,735,508
risk transfer may also be accomplished through the use
of collateralized debt obligation technology. 2018 32,647,861,345 298,252,008
2019 33,155,639,479 234,907,561
2020 34,941,015,159 295,835,462
2021 35,667,860,746 379,685,905
Source:

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Spotlight

FIU Extreme Events Director:

Prototype Facility Will Test
Forces of a Cat 6 Hurricane
One of the goals of the Florida International
University facility is to anticipate and learn
from what a Category 6 hurricane would
bring. The damage and destruction from a
185 mph sustained event hitting a highly
developed U.S. coastline would be
unprecedented.

T he intensity of hurricanes continues to rise, resulting in

higher sustained wind speeds and increased flooding
and storm surge. Since 1924 there have been more than
three dozen documented hurricanes in the North Atlantic
that packed wind speeds of 157 miles per hour or higher and
reached a Category 5 level on the Saffir-Simpson Hurricane
Wind Scale.

As waters in the Atlantic continue to warm, the potential

is created for storms to intensify even more and produce
sustained wind speeds that could reach as high as 200 mph.
Richard Olson, director of the Extreme Events Institute at
Florida International University, spoke with AM Best TV
about FIU’s grant from the National Science Foundation to
design and prototype a facility to test 200 mph winds, waves
and storm surge.

“What we’re hoping to do is inform the public sector, the

private sector and the insurance industry to get ahead of the
loss curves, so that the reserves and coverages are tailored for
what is coming, not for what has happened in the past.”

Following is an edited transcript of the interview.

 Spotlight

Can you tell us about the award FIU How will you partner with other universities
received from the National Science and private companies on this project?
Foundation and your Our university partners, it’s a power
plans to create a state- group. I call it the dream team for
of-the-art storm facility “Our intention is to design and research—University of Florida,
that will be able to test prototype a facility that can Oregon State University, Stanford,
the forces of a storm integrate extreme winds, storm Notre Dame, Georgia Tech, Illinois,
with wind speeds in surge water movement, wave Colorado State, Wayne State and
excess of 200 mph? action and then flooding. You the private firm Aerolab, which has
The key to understanding have to get all of the components extensive experience with wind
what we’re facing is to try of a hurricane together in a single tunnel creation.
to stay with and hopefully experimental facility if we want to
ahead of nature as nature truly understand not only what When you look at the combination
changes. Hurricanes have we’re facing, but what we will be of research expertise, it’s really
three components. They have facing in the years to come.” important, because this is a
the wind, of course, which complementary team where
everyone realizes, but there’s everybody brings a particular
also the storm surge and the experience and expertise to the
wave action on top of the table. It’s a research dream team, as
storm surge. That leads to far as I’m concerned­—although our
flooding and water impacts. researchers, they’re more modest
than I am. I can’t imagine a better
People forget that you hide team of research universities.
from wind but you run
from water. Water is the What’s driving the rising
actual principal cause of intensity of hurricanes in the
death in most hurricanes. Atlantic Basin, and is that
Our intention is to design prompting the need for a
and prototype a facility new category on the Saffir-
that can integrate extreme Simpson scale? What would
winds, storm surge water be the characteristics of a Cat
movement, wave action and 6 storm and the benefits of
then flooding. You have to Richard such a designation?
get all of the components of a Olson First, I have to say that Category
hurricane together in a single 6 does not officially exist for the
experimental facility if we National Hurricane Center, NOAA’s
want to truly understand not only what we’re facing, National Hurricane Center. Category 5 starts at 157
but what we will be facing in the years to come. mph wind speed.

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Spotlight

I have to tell you, when I saw Hurricane Patricia off You already talked about Dorian and some
the west coast of Mexico in 2015, Patricia hit 214 mph. of the other hurricanes we’ve seen over
Then in 2019, we had Dorian next door to us in the the years. In recent years, are there other
Bahamas. Dorian [winds] hit 185 mph sustained, right hurricanes in the Atlantic Basin that would
next door to South Florida. fall into the designation of a Category 6
event?
Truth of the matter is, Dorian swung at the last minute, We’ve seen what can happen with our urbanization
thankfully, to the north, but for several days it looked and our coastal development, and the way we get
like it was heading up 8th Street in Miami. That really hit, especially within the first 10 to 15 miles of the
got our attention. This is more personal. When I see a coastline, by the combinations of wind and water. That
storm at 185 mph or 180 even, anything above that, it includes flooding. None of us will forget Hurricane
just feels like a different—I know I’m not supposed to Katrina in New Orleans and the storm surge along the
say that it’s a thing, but it felt like a different animal. I Gulf Coast.
was looking at that storm and I was going—I’ve been
through a few hurricanes here—“I am really scared.” These are learning events—actually, they’re teaching
events—but you have to be paying attention to do
It looked different, and I saw those numbers. For us the learning. For me, Hurricane Dorian in 2019 was a
here, we call this our Cat 6 project. teaching event that we missed, because it didn’t hit us,
because it swung north.
What potential physical damages and
other types of losses could a storm of that We didn’t actually pay enough attention to what could
magnitude cause? have happened with a 185 mph sustained storm hitting
You have your finger on the key question. Dr. Rick a major urban area like Miami. We have to get ahead
Knabb at The Weather Channel, who is a former of what storms like Dorian will present to us. It’s a
director of the National Hurricane Center, captured challenge to learn from what nature is doing and how
it by saying these storms are bigger, stronger, nature is changing. The damage and destruction from a
wetter, slower. 185 mph sustained event hitting a U.S. coastline that is
highly developed would be unprecedented.
The loss curve, the loss estimates—we have to get
ahead of those because right now, it isn’t just additive. How will research from the testing facility
There are points, obviously, when we’re looking at very be used? How will those findings aid in the
extreme winds, storm surge and wave action, where creation of more-resilient communities and
we’re going to see—or we have the risk of—damage and protection of civil infrastructure during
destruction that we’ve just never seen before. extreme events?
One of the keys to what we call community resilience
is to see not only the physical components, but how
the physical components of resilience will mesh with
social, economic and even political aspects. The public

68
 Spotlight

wants to be able to trust science and government that What are the next steps for the new storm
we can get ahead of these increasing hazard events. testing facility? When will it be operational?
When do you expect to start seeing data
For me, when you look at resilience, you’re looking at and results from the testing?
it as a multidimensional requirement, and we have to The National Science Foundation is very careful with
include social, economic, policy, political, public health its funding. This is a design and prototype project
along with the evolving hazard. It is the challenge of because NSF is not going to invest in a large-scale
the next 30 to 50 years. facility—the eventual facility could be the size of a
football stadium. They’re not going to do that until we
How will insurers be able to use the research can demonstrate with our university research partners
and benefit from the findings? that the design and the prototype at a scale, that they’re
What we’re hoping to do is inform the public sector, the both feasible. At that point, then the science and the
private sector and the insurance industry to get ahead engineering will come together for a major proposal.
of the loss curves so that the reserves and coverages are
tailored for what is coming, not for what has happened Now, time frame. There is a chance that we could
in the past. retrofit an existing facility and add fans, etc. That’s one
option. The other option is to build a new facility from
Craig Fugate, the director of FEMA in the Obama the ground up, brand new. We don’t know yet. Maybe
administration, had three words to describe resilience. a retrofit would work. Maybe it would be better to do a
He said insurance is resilience. facility from the ground up.

No truer words have ever been spoken. The insurance Then we will do the prototype, and if everything
industry is the financial backbone for most people to be proves out, then this integration or combination if we
able to bounce back, which is vernacular understanding go with a different option. Then this kind of research—
of resilience. which would be wind, surge, wave, flooding—I would
say in three to four years, we could hopefully be
Without the insurance industry, and without [insurers] starting that.
being, in a sense, together with nature and, from my
point of view, ahead of natural hazards, we are going Then it’s a question of construction. I think we’re
to be in deep trouble. They need to be on the curve—I still looking six, seven years out. We’re trying to go as
would say ahead of it—of potential losses. fast as we can, but you can’t go too fast or you’ll make
a mistake.
The losses look like they’re going to be going up with
these more intense hurricanes.

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Spotlight

FIU’s Extreme Events Institute has been you get an evacuation order, people don’t trust, or have
doing so many exciting things over the had bad experiences with previous evacuation orders.
years. Can you share some of the other They don’t follow the evacuation. That’s what we call
projects you’ve been working on? life safety risk. We’re very enthused about that.
We work very closely with NOAA’s National Hurricane
Center, which is on the FIU campus. We have been We also have the hurricane public loss model, which is
working with them very closely on storm surge in the a wind-based model for insurance losses in the state of
Caribbean Basin. Not just the islands, but also the east Florida. One other project that is the basis for what we’re
coasts of the Central American nations. doing is the current Wall of Wind, which is a hurricane
simulator capable of reaching Category 5, 157 mph. I’ve
One of the more exciting aspects is that we’re providing seen it hit 162, and it shook me up.
the technology that supports high-resolution but low- —Lori Chordas
cost storm surge mapping. In many countries, when
Photo courtesy of NSF-NHERI Wall of Wind, Florida International University

70
 Spotlight
Insurance Leaders: Time to
Better Protect, Shore Up Coastal
Homeowners’ Properties
Insurance leaders say federal, state and local governments
need to better protect coastal homeowners from severe
weather by making sure their homes are built properly and
safeguarded correctly—particularly against floods.

In Louisiana and Texas, the biggest long-term issue is the

lack of strong building codes and enforcement of such
codes, said Michael Quigley, executive vice president
and head of property underwriting & multiline risk
quantification, Munich Re U.S.

Jon Schnautz, assistant vice president of state and

policy affairs, National Association of Mutual Insurance
Companies, said NAMIC has pushed enhanced building
codes in many states and “better thought processes into
where development occurs in risky areas,” as well as tax
credits. He also cited inflation as a troubling factor for
protecting and rebuilding in coastal states because it
impacts the costs of building supplies and repairs.

Schnautz and Quigley both said homeowners insurers can

learn from Florida, irrespective of the Sunshine State’s
problems with fraud.

“The few positives about Florida from a property

insurance perspective are the strong building codes
and relative quality of the built environment,” Quigley
said. “All coastal states should focus on strengthening
their built environment and increasing community and
economic resiliency by promoting mitigation efforts and
appropriate land use and by mandating and enforcing
stronger building codes that can address the impacts of a
changing climate.”

www.ambest.com
Spotlight

Insureds won at the federal level in September 2022 the can down the road every 12 months. But what is
when the U.S. House of Representatives passed a clear is that we still need a market to protect these
stopgap spending bill that includes an extension of the risks, and the NFIP is it right now.”
National Flood Insurance Program.
Molinaro said ending coverage for properties that are
The Biden administration’s proposals for reform repeated flood risks would create a protection gap,
include ending coverage for properties that see as homeowners and mortgage holders alike would
repeated flooding. face availability and affordability issues. “Perhaps one
way around this could be for the NFIP to require any
AM Best Senior Financial Analyst Anthony Molinaro properties having repetitive claims to mitigate using
said that since 5 million Americans nationwide rely some form of federal funding and no-interest loans or
on the NFIP each year to protect their homes and sell these properties to the government at fair market
businesses, an extension was necessary. “For many of value. Unfortunately, some of these properties are
the coastal properties, private insurers cannot compete in low-income communities where affordability is
with the rates offered by NFIP,” Molinaro said. “These the issue.”
properties are also considered the most vulnerable. —Anthony Bellano
So the long-term solution is still unclear at this point,
which is why the U.S. government continues to kick

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 Chapter 6: Fiscal Fitness & AM Best

Insurance Stands Traditional

Product Cycle on Its Head
Most industries work as follows:

• Build product.
• Incur costs.
• Price product.
• Sell product.
• Generate revenue.

But insurance works largely in reverse:

• Build product.
• Price product.
• Sell product.
• Generate revenue.
• Incur costs.

The significance of this reversed revenue/cost cycle

is that the product is priced and sold based on an
estimate of future costs to be incurred. These estimates
can be wrong for any number of reasons, including
catastrophes, claim cost inflation, changes in legal
climate, newly identified exposures not known at the
time the insurance policy was sold, social changes,
investment market fluctuations and other factors.

This also means that insurers must be very good

at predicting the future and very prudent in
administering their business over the long term.
This strategy directly results in what are known as
underwriting cycles and is why insurance insolvencies
sometimes spike in periods following catastrophes or
market disruptions.

The insurance industry is less tangible in that the

actual cost of its product isn’t precisely known at the

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Chapter 6: Fiscal Fitness & AM Best

time of sale. The true cost is determined at a later liability, these scenarios still cause a supply shock. A
point, often much later. Yet risk is taken on along simplified explanation is that the insurance cycle is
with unpredictable, exogenous factors that ultimately driven by supply and demand. If capacity is lacking, the
determine profit or loss. While insurers gauge the price of risk transfer goes up.
probability of a large catastrophic event or some latent

The Risk of Financial Impairment

The business of insurance, because of the inverted liquidation. Conservation is undertaken in certain
cycle in which revenues are received well before cases for the purpose of obtaining control of the entity
claims are incurred and must be paid (or even known), and conserving assets while a review of the situation
presents special concerns. There are myriad issues, but is conducted. Rehabilitation is undertaken when it
the basic concern is assuring to the extent reasonably appears that special actions are required to maintain
possible that insurance policy premiums and deposits the entity’s solvency, but with these actions, solvency
received by an insurer today will be available for appears possible. Insolvent liquidation is judged
payment of claims and other policy benefits (perhaps necessary when it is clear that the entity’s assets
many years) in the future. will not be sufficient to discharge all of the entity’s
obligations.
As a result, the insurance industry is subject to
extensive regulation in the United States and According to earlier studies by AM Best, impairments
in most other countries. In general, regulatory varied by line of business, with workers’ compensation
oversight focuses on three primary elements: market insurers suffering the most impairments. Fraud has
soundness, including rate regulation and promoting been a frequently identified cause, but most failures
adequate insurance availability and healthy levels can be understood as general business failures
of competition; market conduct, including review associated with poor business strategy/execution and
of market participant practices to assure proper weak management.
conduct and fairness in dealings with customers; and
financial soundness, including ongoing surveillance of State guaranty funds exist to cover unpaid claims
insurance entities’ financial condition and a variety of of insolvent insurers, but these guaranty funds are
possible regulatory actions that may be taken if there generally limited to certain types of insurance and
are indications of financial distress. have thresholds of the amounts they can pay. There
may also be considerable delays associated with
In the United States, financial soundness regulatory payments by guaranty funds.
actions may consist of required company action plans,
various forms and levels of regulatory supervision It therefore continues to be in the strong interest
and licensure actions. In certain instances these of policyholders to choose their insurance provider
actions are insufficient and the next level of action carefully and to monitor the provider’s financial health
involves conservation, rehabilitation and/or insolvent throughout the policy period. AM Best has a strong

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 Chapter 6: Fiscal Fitness & AM Best

role in this effort by providing interactive ratings evaluations of balance sheet strength, operating
evaluations on an ongoing basis. performance and other critical factors. Not
surprisingly, impairments have occurred much more
The AM Best interactive rating process is voluntary frequently with companies choosing not to subject
and subjects companies to independent, objective themselves to this rigorous process.

Overview: Best’s Credit Rating Evaluation

The foundation of AM Best’s credit rating process Broad Components of the Rating Process
is an ongoing dialogue with the rated company’s
management. Each interactively rated entity is
assigned a rating analyst who manages the interaction
with company management and conducts the
fundamental credit rating analysis described in
AM Best’s rating criteria. The analyst monitors the
financial and nonfinancial results and significant
developments for each rated entity or issue in their
portfolio. While ratings are generally updated annually,
a rating review can take place any time AM Best
becomes aware of a significant development that could
impact the rating.

The ongoing monitoring and dialogue with

management occurs through scheduled rating
meetings, as well as interim discussions on key trends
and emerging issues as needed. These meetings afford
the rating analyst the opportunity to review factors
that may affect the company’s rating(s). These factors maintains the integrity of the rating process. The rating
include its strategic goals, financial objectives and process consists of the following:
management practices.
Compile Information
Best’s Credit Ratings (BCRs) are initially determined To develop an initial BCR, or to update an existing
and periodically updated through a defined rating BCR, the rating analyst may gather detailed public
committee process. The rating committee itself and proprietary financial information and use this
consists of analytical staff and is chaired by senior information to develop a tailored agenda for a rating
rating officers. The committee approach ensures rating meeting. A scheduled rating meeting with the
consistency across different business segments and company is a key source of additional quantitative
and qualitative information, including clarification

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Chapter 6: Fiscal Fitness & AM Best

of information previously received or obtained. potential risks to an Best’s Long-Term

Key executives are present to discuss their areas organization’s financial Issuer Credit
of responsibility, including strategy, distribution, health, which can Rating
underwriting, reserving, investments, claims, include underwriting, Long-Term ICR FSR
enterprise risk management and overall financial credit, interest rate, aaa, aa+ A++
results and projections. country and market risks,
as well as economic and aa, aa- A+
In arriving at a rating decision, AM Best relies regulatory factors. The a+, a A
primarily on information provided by the rated analysis may include a- A-
entity, although other sources of information may be comparisons to peers,
used in the analysis. Typical information provided industry standards and bbb+, bbb B++
includes a company’s annual and quarterly (if available) proprietary benchmarks, bbb- B+
financial statements, presented in accordance with the as well as the bb+, bb B
customs or regulatory requirements of the country assessment of operating
of domicile. Other information and documents that plans, philosophy, bb- B-
may be reviewed include, but are not limited to: management, risk b+, b C++
interim management reports on emerging issues, appetite and the implicit
b- C+
regulatory filings, certified actuarial and loss reserve or explicit support of a
reports, investment guidelines, internal capital parent or affiliates. ccc+, ccc C
models, Own Risk and Solvency Assessment reports, ccc-, cc C-
annual business plans, Best’s Supplemental Rating Determine the c D
Questionnaire or other supplemental information Rating
ICR = Issuer Credit Rating
requested by AM Best, information provided through All BCRs are initially FSR = Financial Strength Rating
scheduled rating meetings and other discussions with determined and Note: The rating symbols A++,
management, and information available in the public subsequently updated by A+, A, A-, B++, B+ are registered
certification marks of AM Best
domain. Ultimately, if AM Best is unable to obtain the a rating committee. The Rating Services Inc.
information deemed necessary to appropriately review rating analyst prepares a
and analyze the rated entity (before or after the initial rating recommendation
rating release or subsequent rating update) or if the for rating committee
quality of the information is deemed unsatisfactory, review and deliberation based on an analytical
AM Best reserves the right to take a rating action based process. Each rating recommendation is reviewed and
on reasonable assumptions, withdraw an existing modified, as appropriate, through a rigorous committee
interactive rating, or cease the initiation of any process that involves a rating analyst presenting
new BCR. information and findings to committee members. All
rating recommendations are voted on and approved by
Perform Analysis committee. Rating committee members are all rating
The analytical process incorporates a host of analysts who have the relevant skills and knowledge
quantitative and qualitative measures that evaluate to develop the type of rating opinion being discussed.

76
 Chapter 6: Fiscal Fitness & AM Best

Rating opinions reflect a thorough analysis of all of the rating committee determination to the requesting
information known by AM Best and believed to be party serves as the dissemination of a private BCR.
relevant to the rating process.
Monitor Activities
Disseminate the Rating Once an interactive BCR is disseminated publicly
For BCRs intended to be made public, the rating or privately, AM Best monitors and updates the
committee determination is communicated to the rating by regularly analyzing the company’s
entity (or its representatives) being rated before being creditworthiness. Rating analysts monitor current
publicly disseminated. Private BCRs are disseminated entity-specific developments (e.g., financial
directly to the company following the conclusion of the statements, public documents, news events)
rating committee. and trending industry conditions to evaluate
their potential impact on ratings. Significant
The primary distribution method for the public developments can result in an interim rating
dissemination of a BCR is the AM Best website; in some evaluation, as well as modification of the rating
cases, it may be republished in a press release. Notification or outlook.

AM Best’s Insurance Information Products and Services

About AM Best Below are some of AM Best’s wide array of

Founded in 1899, AM Best is the world’s largest credit products and services. For more information,
rating agency specializing in the insurance industry. visit www.ambest.com/sales.
Headquartered in the United States, the company does
business in over 100 countries with regional offices in Best’s Insurance Reports® is an indispensable resource
London, Amsterdam, Dubai, Hong Kong, Singapore and for understanding the creditworthiness and financial
Mexico City. strength of insurance companies. It offers the details and
analysis behind Best’s Credit Ratings, the latest financial
AM Best Rating Services assesses the creditworthiness data and company information, along with tools and
of and/or reports on over 16,000 insurance companies features to enhance your research.
worldwide. Our commentary, research and analysis
provide additional insight. Best’s Financial Suite offers quality, detailed data, insurer
ratings and analytical tools for top-tier research. Take
AM Best Information Services integrates credit ratings, advantage of our unique perspective to get a complete
commentary, research and analysis with insurance picture of the insurance industry. Available data includes:
news, financial data and thought leadership to help • Global • Solvency II
consumers and professionals make informed personal
and business decisions. • US • Canada

www.ambest.com 77
Chapter 6: Fiscal Fitness & AM Best

Best’s Capital Adequacy Ratio Model – P/C, US and Best’s Aggregates & Averages lets you benchmark
Global lets you evaluate an insurer’s capitalization insurance company performance against industry
and risk profile with a model that is consistent with aggregates, and observe industry trends.
the methodology used by AM Best analysts, capturing
the combined impact of financial risks associated with
adverse market conditions.

GUIDE TO BEST’S FINANCIAL STRENGTH RATINGS – (FSR)

A Best’s Financial Strength Rating (FSR) is an independent opinion of an insurer’s financial strength and ability to meet its ongoing insurance policy and contract obligations. An FSR is not assigned to
specific insurance policies or contracts and does not address any other risk, including, but not limited to, an insurer’s claims-payment policies or procedures; the ability of the insurer to dispute or deny
claims payment on grounds of misrepresentation or fraud; or any specific liability contractually borne by the policy or contract holder. An FSR is not a recommendation to purchase, hold or terminate
any insurance policy, contract or any other financial obligation issued by an insurer, nor does it address the suitability of any particular policy or contract for a specific purpose or purchaser. In addition,
an FSR may be displayed with a rating identifier, modifier or affiliation code that denotes a unique aspect of the opinion.

Best’s Financial Strength Rating (FSR) Scale

Rating Rating Rating Category
Categories Symbols Notches* Definitions
Superior A+ A++ Assigned to insurance companies that have, in our opinion, a superior ability to meet their ongoing insurance obligations.
Excellent A A- Assigned to insurance companies that have, in our opinion, an excellent ability to meet their ongoing insurance obligations.
Good B+ B++ Assigned to insurance companies that have, in our opinion, a good ability to meet their ongoing insurance obligations.
Assigned to insurance companies that have, in our opinion, a fair ability to meet their ongoing insurance obligations. Financial strength is vulnerable
Fair B B-
to adverse changes in underwriting and economic conditions.
Assigned to insurance companies that have, in our opinion, a marginal ability to meet their ongoing insurance obligations. Financial strength is vulnerable
Marginal C+ C++
to adverse changes in underwriting and economic conditions.
Assigned to insurance companies that have, in our opinion, a weak ability to meet their ongoing insurance obligations. Financial strength is very
Weak C C-
vulnerable to adverse changes in underwriting and economic conditions.
Assigned to insurance companies that have, in our opinion, a poor ability to meet their ongoing insurance obligations. Financial strength is extremely
Poor D -
vulnerable to adverse changes in underwriting and economic conditions.
* Each Best’s Financial Strength Rating Category from “A+” to “C” includes a Rating Notch to reflect a gradation of financial strength within the category. A Rating Notch is expressed with either a second plus
“+” or a minus “-”.

Financial Strength Non-Rating Designations

Designation Designation
Symbols Definitions
Status assigned to insurers that are publicly placed, via court order into conservation or rehabilitation, or the international equivalent, or in the absence of a court order, clear
E regulatory action has been taken to delay or otherwise limit policyholder payments.
F Status assigned to insurers that are publicly placed via court order into liquidation after a finding of insolvency, or the international equivalent.
Status assigned to rated insurance companies to suspend the outstanding FSR when sudden and significant events impact operations and rating implications cannot be evaluated
S due to a lack of timely or adequate information; or in cases where continued maintenance of the previously published rating opinion is in violation of evolving regulatory requirements.
NR Status assigned to insurance companies that are not rated; may include previously rated insurance companies or insurance companies that have never been rated by AM Best.

Rating Disclosure – Use and Limitations

A Best’s Credit Rating (BCR) is a forward-looking independent and objective opinion regarding an insurer’s, issuer’s or financial obligation’s relative creditworthiness. The opinion represents a
comprehensive analysis consisting of a quantitative and qualitative evaluation of balance sheet strength, operating performance, business profile and enterprise risk management or, where appropriate,
the specific nature and details of a security. Because a BCR is a forward-looking opinion as of the date it is released, it cannot be considered as a fact or guarantee of future credit quality and therefore
cannot be described as accurate or inaccurate. A BCR is a relative measure of risk that implies credit quality and is assigned using a scale with a defined population of categories and notches.
Entities or obligations assigned the same BCR symbol developed using the same scale, should not be viewed as completely identical in terms of credit quality. Alternatively, they are alike in category
(or notches within a category), but given there is a prescribed progression of categories (and notches) used in assigning the ratings of a much larger population of entities or obligations, the categories
(notches) cannot mirror the precise subtleties of risk that are inherent within similarly rated entities or obligations. While a BCR reflects the opinion of A.M. Best Rating Services, Inc. (AM Best) of
relative creditworthiness, it is not an indicator or predictor of defined impairment or default probability with respect to any specific insurer, issuer or financial obligation. A BCR is not investment advice,
nor should it be construed as a consulting or advisory service, as such; it is not intended to be utilized as a recommendation to purchase, hold or terminate any insurance policy, contract, security or
any other financial obligation, nor does it address the suitability of any particular policy or contract for a specific purpose or purchaser. Users of a BCR should not rely on it in making any investment
decision; however, if used, the BCR must be considered as only one factor. Users must make their own evaluation of each investment decision. A BCR opinion is provided on an “as is” basis without
any expressed or implied warranty. In addition, a BCR may be changed, suspended or withdrawn at any time for any reason at the sole discretion of AM Best.
For the most current version, visit www.ambest.com/ratings/index.html. BCRs are distributed via the AM Best website at www.ambest.com. For additional information regarding the development of a BCR
and other rating-related information and definitions, including outlooks, modifiers, identifiers and affiliation codes, please refer to the report titled “Guide to Best’s Credit Ratings” available at no charge
on the AM Best website. BCRs are proprietary and may not be reproduced without permission.
Copyright © 2023 by A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED. Version 121719

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 Chapter 6: Fiscal Fitness & AM Best

GUIDE TO BEST’S ISSUER CREDIT RATINGS – (ICR)

A Best’s Issuer Credit Rating (ICR) is an independent opinion of an entity’s ability to meet its ongoing financial obligations and can be issued on either a long- or short-term basis. A Long-Term ICR is
an opinion of an entity’s ability to meet its ongoing senior financial obligations, while a Short-Term ICR is an opinion of an entity’s ability to meet its ongoing financial obligations with original maturities
generally less than one year. An ICR is an opinion regarding the relative future credit risk of an entity. Credit risk is the risk that an entity may not meet its contractual financial obligations as they come
due. An ICR does not address any other risk. In addition, an ICR is not a recommendation to buy, sell or hold any securities, contracts or any other financial obligations, nor does it address the suitability
of any particular financial obligation for a specific purpose or purchaser. An ICR may be displayed with a rating identifier or modifier that denotes a unique aspect of the opinion.

Best’s Long-Term Issuer Credit Rating (Long-Term ICR) Scale

Rating Rating Rating Category
Categories Symbols Notches* Definitions
Exceptional aaa - Assigned to entities that have, in our opinion, an exceptional ability to meet their ongoing senior financial obligations.
Superior aa aa+ / aa- Assigned to entities that have, in our opinion, a superior ability to meet their ongoing senior financial obligations.
Excellent a a+ / a- Assigned to entities that have, in our opinion, an excellent ability to meet their ongoing senior financial obligations.
Good bbb bbb+ / bbb- Assigned to entities that have, in our opinion, a good ability to meet their ongoing senior financial obligations.
Assigned to entities that have, in our opinion, a fair ability to meet their ongoing senior financial obligations. Credit quality is vulnerable to adverse
Fair bb bb+ / bb-
changes in industry and economic conditions.
Assigned to entities that have, in our opinion, a marginal ability to meet their ongoing senior financial obligations. Credit quality is vulnerable to
Marginal b b+ / b-
adverse changes in industry and economic conditions.
Assigned to entities that have, in our opinion, a weak ability to meet their ongoing senior financial obligations. Credit quality is vulnerable to adverse
Weak ccc ccc+ / ccc-
changes in industry and economic conditions.
Assigned to entities that have, in our opinion, a very weak ability to meet their ongoing senior financial obligations. Credit quality is very vulnerable
Very Weak cc -
to adverse changes in industry and economic conditions.
Assigned to entities that have, in our opinion, a poor ability to meet their ongoing senior financial obligations. Credit quality is extremely vulnerable
Poor c -
to adverse changes in industry and economic conditions.
* Best’s Long-Term Issuer Credit Rating Categories from “aa” to “ccc” include Rating Notches to reflect a gradation within the category to indicate whether credit quality is near the top or bottom of a particular
Rating Category. Rating Notches are expressed with a “+” (plus) or “-” (minus).

Best’s Short-Term Issuer Credit Rating (Short-Term ICR) Scale

Rating Rating Category
Categories Symbols Definitions
Strongest AMB-1+ Assigned to entities that have, in our opinion, the strongest ability to repay their short-term financial obligations.
Outstanding AMB-1 Assigned to entities that have, in our opinion, an outstanding ability to repay their short-term financial obligations.
Satisfactory AMB-2 Assigned to entities that have, in our opinion, a satisfactory ability to repay their short-term financial obligations.
Assigned to entities that have, in our opinion, an adequate ability to repay their short-term financial obligations; however, adverse industry or economic conditions
Adequate AMB-3
likely will reduce their capacity to meet their financial commitments.
Assigned to entities that have, in our opinion, questionable credit quality and are vulnerable to adverse economic or other external changes, which could have a
Questionable AMB-4
marked impact on their ability to meet their financial commitments.

Long- and Short-Term Issuer Credit Non-Rating Designations

Designation Designation
Symbols Definitions
d Status assigned to entities (excluding insurers) that are in default or when a bankruptcy petition or similar action has been filed and made public.
Status assigned to insurers that are publicly placed, via court order into conservation or rehabilitation, or the international equivalent, or in the absence of a court order, clear
e
regulatory action has been taken to delay or otherwise limit policyholder payments.
f Status assigned to insurers that are publicly placed via court order into liquidation after a finding of insolvency, or the international equivalent.
Status assigned to rated entities to suspend the outstanding ICR when sudden and significant events impact operations and rating implications cannot be evaluated due to a lack of
s
timely or adequate information; or in cases where continued maintenance of the previously published rating opinion is in violation of evolving regulatory requirements.
nr Status assigned to entities that are not rated; may include previously rated entities or entities that have never been rated by AM Best.

Rating Disclosure: Use and Limitations

A Best’s Credit Rating (BCR) is a forward-looking independent and objective opinion regarding an insurer’s, issuer’s or financial obligation’s relative creditworthiness. The opinion represents a comprehensive
analysis consisting of a quantitative and qualitative evaluation of balance sheet strength, operating performance, business profile and enterprise risk management or, where appropriate, the specific nature
and details of a security. Because a BCR is a forward-looking opinion as of the date it is released, it cannot be considered as a fact or guarantee of future credit quality and therefore cannot be described
as accurate or inaccurate. A BCR is a relative measure of risk that implies credit quality and is assigned using a scale with a defined population of categories and notches. Entities or obligations assigned
the same BCR symbol developed using the same scale, should not be viewed as completely identical in terms of credit quality. Alternatively, they are alike in category (or notches within a category), but
given there is a prescribed progression of categories (and notches) used in assigning the ratings of a much larger population of entities or obligations, the categories (notches) cannot mirror the precise
subtleties of risk that are inherent within similarly rated entities or obligations. While a BCR reflects the opinion of A.M. Best Rating Services, Inc. (AM Best) of relative creditworthiness, it is not an indicator
or predictor of defined impairment or default probability with respect to any specific insurer, issuer or financial obligation. A BCR is not investment advice, nor should it be construed as a consulting or
advisory service, as such; it is not intended to be utilized as a recommendation to purchase, hold or terminate any insurance policy, contract, security or any other financial obligation, nor does it address
the suitability of any particular policy or contract for a specific purpose or purchaser. Users of a BCR should not rely on it in making any investment decision; however, if used, the BCR must be considered
as only one factor. Users must make their own evaluation of each investment decision. A BCR opinion is provided on an “as is” basis without any expressed or implied warranty. In addition, a BCR may
be changed, suspended or withdrawn at any time for any reason at the sole discretion of AM Best.
For the most current version, visit www.ambest.com/ratings/index.html. BCRs are distributed via the AM Best website at www.ambest.com. For additional information regarding the development of a BCR
and other rating-related information and definitions, including outlooks, modifiers, identifiers and affiliation codes, please refer to the report titled “Guide to Best’s Credit Ratings” available at no charge on
the AM Best website. BCRs are proprietary and may not be reproduced without permission.
Copyright © 2023 by A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED. Version 121719

www.ambest.com 79
Chapter 6: Fiscal Fitness & AM Best

Underwriting & Loss Control Resources presents reports on hundreds of businesses and municipal services,
written from the underwriter’s and loss control manager’s point of view.

Best’s News & Research Service provides access to a full spectrum of industry research, analysis and news
published by AM Best on the global insurance market.

Other products and services include:

Ratings Rate Filing Information

Best’s Credit Ratings - Feed Best’s State Rate Filings®
Best’s Credit Ratings Mobile App Regulatory Filing Application
Best’s Custom Services BestESP®
News & Research Additional Services & Programs
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Best’s Review Best’s Insurance Professional Resources
BestWire Best’s Preferred Publisher Program
Reports, Research and Rankings Best’s Regulatory Center
Multimedia Resources Redistribution
Data Analytics Tools to Leverage Your Best’s Credit Rating
Best’s Custom Services
Best’s Credit Reports
Best’s Financial Reports
Best’s Library Center

To learn more about AM Best products and services, contact our Customer Support Services department via email
or at (800) 424-2378 or (908) 439-2200, ext. 5742, 8:30 a.m. to 4:30 p.m. ET.

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 Spotlight

COVID-19 Mortality Trends,

Interest Rates and Climate
Change Seen as Key Issues
for Actuaries in 2023
Volatility is likely to continue, according
to a roundtable discussion at a recent
SOA conference.

A ctuaries don’t typically like uncertainty, but

that’s what they can expect in 2023, according
to Nik Godon, director of insurance consulting and
technology at WTW.

Elevated mortality trends, rising interest rates and

climate risk were key topics during a roundtable
discussion at a recent SOA ImpACT conference in
Orlando, Florida. The conference brought together
more than 1,600 actuaries to discuss hot topics in the
industry and further continuing education.

In addition to its conference, the Society of Actuaries

also has launched two new programs: a certificate
program for actuaries and others working with
data topics involving climate risk, and an affiliate
membership supporting the pipeline for new
actuaries.

Godon was one of the panelists on “WTW

Roundtable—The Circus Is in Town: Rising Interest
Rates, Long-Term Impacts of COVID-19 Mortality
and More!” Godon spoke with Best’s Review about
these topics, and an edited transcript follows.

The roundtable discussion covered three

key topics: interest rates and the economy,
www.ambest.com
Spotlight

COVID-19 mortality, and climate risk. What with asymptomatic cases, many of them mild cases,
were some of the takeaways? but also many severe cases. And that leaves us with
a lot of uncertainty. Is there going to be a permanent
I’ll start with COVID mortality. In 2020, everyone impact? And if so, how much?
was asking if the increased mortality was just a blip.
It continued in 2022, not Should you be assuming
necessarily at the same levels some form of increase in
as in 2020 and 2021, but still “Part of the roundtable message mortality, relative to what
having a material impact on was volatility is likely going to you thought it might be
excess deaths in the U.S. The continue. And from an interest before COVID?
conversation at the roundtable rate perspective, generally people Some actuaries argue COVID
was around the fact that we assume: ‘Interest rates are up. You killed off the elderly and those
now know this is likely not just guys have been complaining for with preexisting conditions,
a temporary blip. such a long time that they’ve been meaning it simply accelerated
low. Aren’t you just super happy?’ certain deaths, and maybe the
There’s been an overall The answer to that question people who are still around are
increase in the entire U.S. of depends on the blocks of business stronger. So maybe mortality
excess deaths, with COVID that you have.” will be slightly improved
being one of the causes. But going forward.
other causes have also
increased recently, such as There generally seems to
accidents or overdoses. be consensus that in the
short term you are still
So there’s this going to have some excess
expectation that mortality happening. But
mortality may be elevated the real debate is over the
in the near term. A lot of long term. Are things going
actuaries think there’s to be worse or better? We
going to be an extension just don’t know. Depending
into 2023 of some kind. on what actuarial exercise
you’re doing, some caution
But the broader question or prudence in what you’re
is, are there permanent assuming, with sensitivity
impacts here that might testing in either direction,
change long-term may be the way to go.
mortality as a result Nik
of COVID? You’ve had Godon
millions of Americans

82
 Spotlight

What about the economic issues? consumption demand from people locked up because
2022 [was] very volatile, [with] a lot of rapid of COVID that has been released. That doesn’t
movement both in inflation and interest rates. necessarily go away in the short term either.

Part of the roundtable message was volatility is A lot of insurance companies over the last few
likely going to continue. And from an interest rate years, as interest rates have been low, have been
perspective, generally people assume: “Interest rates lengthening the duration of their bonds to protect
are up. You guys have been complaining for such against further declines in interest rates. And some
a long time that they’ve been low. Aren’t you just have been going riskier to compensate for investment
super happy?” yields that have been coming down.

The answer to that question depends on the blocks of Those things are putting companies, relative to
business that you have. For longer-term business, like before, in a worse position to benefit from the rise
long-term care and universal life, interest rates going in interest rates. Interest rates going up means the
up will generally benefit insurance companies longer losses on longer-term bonds will have been bigger
term. But insurance companies have other blocks like and you don’t have as much money rolling over to
fixed deferred annuities where lots of people have take advantage of these higher interest rates.
3% guarantees from older days. A lot of concern had
been how long are they going to keep these policies? There’s also been spread widening on some of the
Now you have this really fast increase in interest rates riskier bonds. So again, if you’ve gone riskier, you’re
and people with what were thought to be attractive potentially seeing more of these riskier assets with
guarantees of 3% can get a new contract at 5% or more greater potential losses if you have to sell them. So
guaranteed for five, seven, 10 years and so on. some actions that companies have taken to try to
compensate for lower interest rates could mean they
Many people think if inflation continues to be high, may take more losses and may not be able to benefit
the Fed will continue to increase interest rates. If we as much from the rise in interest rates.
go into recession and inflation gets tamped down,
you would expect the Fed to go in the other direction What about climate change?
because unemployment’s going up and maybe they Climate risk is a core issue for property and casualty
[increased] interest rates too high. companies. They have to worry about storms, fires,
floods and the property damage that comes from
That goes back to my volatility question. It’s hard to these natural disasters. It’s less obvious how climate
know where interest rates may go based on all these risk impacts life insurance actuaries.
other factors, inflation being one of them.
There are more demands on insurance companies
Think of the war on Ukraine. That’s part of the driver on the investment side in particular. What is your
of increased energy prices and inflation. You’ve still climate footprint? Are you investing in potential
got supply chain issues. You had all of this pent-up contributors to an increase in climate risk?

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Spotlight

There’s pressure in disclosing what you are investing Are there other issues or topics on the
in and the climate impact of those investments. minds of actuaries as we head into 2023?
You’ve also got more risk depending on the location of Financial reporting changes for public insurance
assets. Do you invest in a lot of real estate in Florida? companies [started] on Jan. 1, 2023. You’ve got the
U.S. GAAP changes known as LDTI—Long Duration
Another question is what will climate risk, global Targeted Improvements. If you are an international
warming, do from a mortality perspective? If climate company, you’ve got IFRS 17. Some companies have a
risk continues to get worse, there might be some few more years to deal with the U.S. GAAP changes.
longer-term impacts from both health and mortality If they’re privately held, they have at least two more
perspectives. When there are large heat waves, there years until 2025. There’s a significant amount of effort
typically are excess deaths in the elderly population. in the entire industry, not just for actuaries but for
accountants, too, to get ready for reporting on what,
Drought and lack of water is another effect of climate in some cases, are very significant changes in how
change. Many places are starting to run out of water. insurance business is reported.
What does that mean from a health perspective?
There are questions on whether these reporting
So on the life insurance risk side, it is not fully clear changes will drive longer-term changes in what
yet how climate is going to impact mortality. There products are offered and how we view profitability.
is more short-term focus on the impact on asset That’s certainly an ongoing big topic that will
and investment. continue to be a challenge for people well into 2023
and possibly beyond. So that still is a very hot topic.
Should actuaries be concerned about the
climate risk issue? M&A is still having a significant impact on the
Actuaries should at least start to be aware because industry. Companies are evaluating whether or not
their companies are going to have to start disclosing they want to divest of annuity blocks or UL blocks. So
more information on it. that continues to be a hot topic.

There are new courses and training being developed Finally, topics around innovation and modernization
from an actuarial perspective to provide more insight continue to be at the forefront of industry discussions.
and background for those who are interested in those The greater use of data in underwriting and ethical
topics, such as the climate risk certificate under considerations surrounding that continue to be an
development by the SOA. Because we do think this important topic that is growing in importance from
topic is going to be growing in importance. an actuarial perspective.

—Patricia Vowinkel

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