The Factors Influencing the High Cost of Insurance for Consumers

The Factors Influencing the High Cost of Insurance for Consumers

Statement of
Baird Webel
Acting Section Research Manager
Before
Committee on Financial Services
Subcommittee on Housing and Insurance
U.S. House of Representatives
Hearing on
“The Factors Influencing the High Cost of
Insurance for Consumers”
November 2, 2023
Congressional Research Service
https://crsreports.congress.gov
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Congressional Research Service
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Chairman Davidson, Ranking Member Cleaver, and Members of the Subcommittee, thank you for the
opportunity to testify before you today. My name is Baird Webel. I am a Specialist in Financial
Economics at the Congressional Research Service (CRS) focusing on non-health insurance issues. CRS’s
role is to provide objective, nonpartisan research and analysis to Congress. CRS takes no position on the
desirability of any specific policy or policy outcome. Any arguments presented in my written and oral
testimony are for the purposes of informing Congress, not to advocate for a particular policy outcome.
My testimony today will begin with a brief introduction regarding the current issues in property and
casualty insurance markets1 and then address specific drivers of the rising insurance prices and reduced
insurance availability that many people are experiencing. I look forward to answering any questions the
committee members may have.
Introduction
Insurance consumers across the United States have been experiencing higher prices and gaps in coverage,
which in many cases are affecting property and casualty insurance that is crucial for everyday life. The
overall price of personal motor vehicle insurance has increased 18.9% in the past full year.2 Homeowners
insurance price increases are lower, at 8.8% for calendar year 2023 so far, but some states are seeing
larger increases.3 Possibly more distressing to consumers have been areas where insurers may be pulling
out altogether, leaving people unable to find insurance at all except for state-created insurers of last resort
(or residual market mechanisms), which may offer coverage that is more expensive or less complete than
private coverage.4 The rising prices of insurance extend as well to business coverage. Commercial
property insurance has seen 23 consecutive quarters of increased premiums. The latest survey (2nd
Quarter, 2023) showed the highest average increase among insurance lines—18.3%—for property
insurance.5
Cycles in insurance prices and availability are not uncommon, particularly for property and casualty
insurance.6 Periods of high prices and reduced availability are termed hard markets, with soft markets
referring to periods of relatively low prices and wider availability. Hard markets can occur when
particularly unexpected events occur in claims payouts or in an insurer’s asset/investment portfolio or
when both sides of an insurer’s balance sheet are affected.

1 Property insurance is “coverage protecting the insured against loss or damage to real or personal property from a variety of
perils, including but not limited to fire, lightening, business interruption, loss of rents, glass breakage, tornado, windstorm, hail,
water damage, explosion, riot, civil commotion, rain, or damage from aircraft or vehicles,” while casualty insurance is “a form of
liability insurance providing coverage for negligent acts and omissions such as workers compensation, errors and omissions,
fidelity, crime, glass, boiler, and various malpractice coverages.” See National Association of Insurance Commissioners (NAIC),
“Glossary of Insurance Terms,” https://content.naic.org/consumer_glossary. In general, property and casualty insurance is one of
the broadest categories into which insurance is divided, along with life insurance and health insurance.
2 “Motor vehicle insurance” detailed expenditure category from U.S. Bureau of Labor Statistics, Table 2, Consumer Price Index
for All Urban Consumers (CPI-U): U.S. city average, https://www.bls.gov/news.release/cpi.t02.htm.
3 Jason Woleben, “Farmers, USAA Boost Homeowner Insurance Rates by Double Digits in 2023,” S&P Global, October 3, 2023,
https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/farmers-usaa-boost-homeowner-insurance-
rates-by-double-digits-in-2023-77690424.
4 Most of these insurers of last resort are known generally as Fair Access to Insurance Requirements (or FAIR) plans. For more
information, see NAIC, “Fair Access to Insurance Requirements (FAIR) Plans,” updated February 1, 2023,
https://content.naic.org/cipr-topics/fair-access-insurance-requirements-fair-plans.
5 Council of Insurance Agents and Brokers, “Commercial Property/Casualty Market Index Q2/2023,” p. 2, downloadable at
https://www.ciab.com/download/38548/?tmstv=1692214688.
6 Life insurance, particularly on the claims side, tends to be much more stable than property and casualty insurance. In addition,
most life insurers also have substantial annuity business, in which changes in death rates work in the opposite direction than in
life insurance.
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High prices and unavailable insurance tend to draw policymakers’ attention to insurance markets and
possible solutions to these issues. Most such solutions, like insurance regulation generally, are enacted at
the state level. States typically focus on lines of insurance such as auto, homeowners, or workers’
compensation, where such insurance may be required by a third party. At the federal level, government
interventions occur less frequently. Examples include:
• The Terrorism Risk Insurance Act, which provides a federal reinsurance backstop for the
terrorism coverage following the 9/11 terrorist attacks;7
• The Liability Risk Retention Act, which aimed to increase insurance supply through
reducing regulatory burden during a liability insurance crisis in the 1980s;8 and
• The National Flood Insurance Program, which provides flood insurance directly to
individuals and businesses following the pullout of private insurance from the flood
market in the 1960s.9
Insurance prices generally react to a wide variety of factors at both the systemic and the individual levels.
The current rising prices and limited availability in property and casualty insurance markets can largely
be traced to the interplay between two different factors: (1) a macroeconomic environment marked by
sharply rising inflation and interest rates and lower investment returns and (2) increasing losses from
natural catastrophes. In addition, particular aspects of the insurance regulatory system in two large states,
Florida and California, have generally been seen as contributing to market issues in those states.
Inflation, Interest Rates, and Investments
Insurance at its most basic level is a relatively simple economic proposition—a premium is paid for an
insurer to take on a risk and then pay out a claim for future loss if the negative outcome occurs. The
obvious focus in such an equation is estimating the probability of loss and the size of the claim. Nearly as
important, however, can be the fact that the premium is paid in dollars today, while claim is paid out in
dollars in the future. If inflation and interest rates or other investment returns remain relatively constant,
or at least as expected, over the time period, then this can be relatively easily incorporated into the
calculation of premiums. If these variables change dramatically and unexpectedly, however, the insurance
equation can become highly uncertain, and insurers may struggle to price correctly, with swings in pricing
as a result.
Inflation through the 2010s remained unusually low compared to the previous decades, typically around
or below the 2% threshold used by the Federal Reserve. Insurers, along with the rest of the financial
system, had become quite accustomed to the situation. The COVID-19 pandemic dramatically changed
the situation, with annual inflation spiking to 7% in 2021 and 6.5% in 2022. Beyond the headline number,
even higher price spikes and supply chain difficulties in particular sectors had spillovers into particular
lines of insurance. Inflation increases in building materials and costs fed particularly into homeowners
and commercial property insurance rates, as a large percentage of claims in these insurance lines involve
rebuilding and repairing structures. The supply chain issues involving computer chips had an unexpected
impact on new car supply due to the increased technological features in new cars. This resulted in higher
costs for used cars and car repairs that fed back into auto insurance rates. In addition, the pandemic seems

7 For more information, see CRS In Focus IF11090, The Terrorism Risk Insurance Act (TRIA), by Baird Webel.
8 For more information, see CRS Report RL32176, The Liability Risk Retention Act: Background, Issues, and Current
Legislation, by Baird Webel.
9 For more information, see CRS In Focus IF10988, A Brief Introduction to the National Flood Insurance Program, by Diane P.
Horn.
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to have had a significant impact on driving behavior, with increased traffic fatalities and increase
insurance claim severity.10
Increases in underlying prices have a fairly direct and obvious effect on insurance pricing, while increases
in interest rates are not as straightforward. Investments in bonds make up approximately 50% of insurer
assets.11 For the decade or more that interest rates, along with inflation, were very low, investing in bonds
resulted in relatively low income for insurers, thus squeezing profitability. Increasing interest rates will
increase this income for newly purchased bonds or variable rate bonds. But for the large stock of existing
fixed rate bonds, increasing interest rates reduce the value of these bonds, and the steeper the increase, the
greater the drop in value. This effect on insurers’ capital levels is essentially immediate, compared to the
increase in interest income, which occurs over time. Drops in the value of other investments, such as the
approximately 33% that general property and casualty insurers held in equities in 2022, have a
straightforward effect, decreasing insurer capital and surplus levels.12
In 2022, the Federal Reserve hiked interest rates to fight inflation, and equity markets reacted negatively
to both rising inflation and interest rates. For the overall property and casualty industry, the effects can be
seen in, for example, a 90.8% fall in overall realized capital gains, with a $9.9 billion realized loss on
bonds. Overall surplus fell 7.1%, the first decline since 2017.13 In another example, one report by a
reinsurance broker found that reinsurer capital levels among larger reinsurers dropped by 12% in 2022,
the first decline since at least 2015.14 Drops in insurance capital result in reduced capacity and supply of
insurance unless insurers are able to raise additional capital, which will be an additional expense. In either
case, this is likely to feed through to higher insurance prices.
Increasing Catastrophe Losses
Large-scale losses from natural events—primarily tropical and other severe storms but also events such as
wildfires, floods, and droughts—have been increasing over the past decades. These increasing losses have
been largely attributed to population growth in disaster-prone areas, rising property values in hazardous
areas, inadequate building codes, and climatological changes in weather patterns and storm intensities.15
The National Oceanic and Atmospheric Administration (NOAA) tracks “weather and climate disasters”
causing more than a billion dollars (inflation-adjusted) in overall damages/costs since 1980. Such events
have increased in number from 33 in the 1980s to 131 in the 2010s and 84 in the 2020s so far. The

10 National Highway Traffic Safety Administration, “NHTSA Estimates for 2022 Show Roadway Fatalities Remain Flat After
Two Years of Dramatic Increases,” press release, April 20, 2023, https://www.nhtsa.gov/press-releases/traffic-crash-death-
estimates-2022; and Insurance Research Council, “IRC: U.S. Auto Claim Severity Surged During Pandemic,” press release, July
18, 2023, https://www.insurance-research.org/sites/default/files/downloads/
IRC%20News%20Release%20Trends%20in%20Personal%20Auto%20Insurance%20July%2018.pdf.
11 NAIC, “U.S. Property and Casualty and Title Insurance Industries—2022 Full Year Results,” p. 8, https://content.naic.org/
sites/default/files/inline-files/
2022%20Annual%20Property%20%26%20Casualty%20%26%20Title%20Insurance%20Industries%20Analysis%20Report.pdf.
12 Capital and surplus are “a company’s assets minus its liabilities.” See NAIC, “Glossary of Insurance Terms.”
13 NAIC, “U.S. Property and Casualty and Title Insurance Industries—2022 Full Year Results,” p. 9.
14 Gallagher Re, “Reinsurance Market Report, Results for Full-Year 2022,” April 2023, p. 4, https://www.ajg.com/gallagherre/-/
media/files/gallagher/gallagherre/reinsurance-market-report-for-full-year-2022.pdf.
15 See, for example, W. J. Wouter Botzen, Olivier Deschenes, and Mark Sanders, “The Economic Impacts of Natural Disasters: A
Review of Models and Empirical Studies,” Review of Environmental Economics and Policy, vol. 13, no. 2 (2019), pp. 167-188,
https://www.journals.uchicago.edu/doi/epdf/10.1093/reep/rez004; Adam B. Smith, “2022 U.S. Billion-Dollar Weather and
Climate Disasters in Historical Context,” Climate.gov, January 10, 2023, https://www.climate.gov/news-features/blogs/beyond-
data/2022-us-billion-dollar-weather-and-climate-disasters-historical; MunichRe, “Climate Change and Its Consequences,”
https://www.munichre.com/en/risks/climate-change.html; and Chandan Banerjee et al., “A Perfect Storm: Natural Catastrophes
and Inflation in 2022,” Swiss Re Institute, p. 4, https://www.swissre.com/institute/research/sigma-research/sigma-2023-01.html.
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inflation-adjusted costs have increased along with the frequency, from $21.4 billion per year in the 1980s
to $130.8 billion per year in the 2020s. Table 1 below reproduces the NOAA findings.
Table 1. NOAA Comparisons of U.S. Billion-Dollar Disaster Statistics
CPI-Adjusted, as of October 10, 2023
Billion-Dollar
Percent of
Time Period
Disasters
Events/Year
Cost
Total Cost
Cost/Year
1980-1989
33
3.3
$213.6B
8.1%
$21.4B
1990-1999
57
5.7
$326.8B
12.4%
$32.7B
2000-2009
67
6.7
$604.2B
22.9%
$60.4B
2010-2019
131
13.1
$967.4B
36.7%
$96.7B
2020-2023
84
21.0
$523.1B
19.9%
$130.8B
All Years
(1980-2023)
372
8.5
$2,635.1B
100.0%
$59.9B
Source: NOAA, “Bil ion-Dol ar Weather and Climate Disasters: United States Summary,” https://www.ncei.noaa.gov/
access/bil ions/state-summary/US.
Note: Cost statistics not included for Hurricane Idalia (August 2023).
These NOAA findings cover overall losses, not just those losses covered by insurance. However, U.S.
insurance markets are highly developed, and a larger percentage of economic losses tends to be covered
by insurance in the United States compared to the rest of the world. For example, in 2022, U.S. economic
losses due to catastrophes was 53% of the global total, but the insured losses were 74% of the global
total.16 The most destructive single event in 2022 was Hurricane Ian, which caused over $100 billion in
damages with $60 billion insured.17
Increasing disaster losses are occurring across the globe, and the global experience matters particularly in
catastrophe insurance, as losses in almost any country are significantly borne by global reinsurers. Thus, a
catastrophe on the other side of the world can result in a decreasing amount of insurance capacity—and
likely higher prices—in the United States. According to Swiss Re, 2022 global insured losses totaled $125
billion, following $121 billion in 2021. With $173 billion in losses in 2017, three of the five largest loss
years have occurred in relatively short succession. (The other two years were 2011 and 2005.) The
average yearly loss for the three decades from 1992 to 2021 was less than $60 billion.18
Large hurricanes, such as Ian, cause outsized losses, but so-called secondary perils—lower cost but higher
frequency events—caused higher combined losses in 2022 and have become a substantial source of
concern.19 Through the third quarter of 2023, nine of the 10 costliest global insured loss events in the year
were secondary peril events in the United States—the wildfires in Hawaii and eight different severe
convective storms, with losses from $2.3 billion to $5 billion per event.20 In the western United States,

16 Gallagher Re, “Natural Catastrophe Report of 2022,” p. 10, https://www.ajg.com/gallagherre/-/media/files/gallagher/
gallagherre/gallagher-re-nat-cat-review-2022.pdf.
17 Munich Re, “Climate Change and La Niña Driving Losses: The Natural Disaster Figures for 2022,” January 10, 2023,
https://www.munichre.com/en/company/media-relations/media-information-and-corporate-news/media-information/2023/
natural-disaster-figures-2022.html.
18 Banerjee et al., “A Perfect Storm,” pp. 5-6.
19 Gallagher Re, “Natural Catastrophe Report of 2022,” p. 10.
20 Aon, “Q3 Global Catastrophe Recap,” October 2023, p. 7, https://www.aon.com/getmedia/7107985e-43d8-412b-a674-
7722112cc2b0/20231018-q3-2023-catastrophe-recap.pdf. The single most costly event was an earthquake in Turkey and Syria at
$5.7 billion in insured losses.
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wildfire has become a particular concern, with insurers in California citing increased wildfire risks as a
particular reason for limiting insurance offered there.21
Insurance Regulation and Market Disruption
In general, insurance is a highly regulated industry with complex products, many of which span long time
frames. Insurers generally face solvency regulation (which focuses on making sure they have sufficient
resources to fulfill the promises of future payments made in their products) as well as regulation of both
the content and the pricing of their products. (Illinois is the only state that does not have widespread
regulation of insurance rates.) Product regulation is heavily focused on the insurance products most
widely purchased by individual consumers, such as homeowners insurance. Each state government has a
department or other entity charged with licensing and regulating insurance companies and those
individuals and companies selling insurance products. The National Association of Insurance
Commissioners, comprised of each state’s insurance regulator, fosters some uniformity in insurance
regulation, particularly in insurer solvency regulation. Substantial differences, however, do remain,
particularly in insurance rate regulation.
In a highly regulated environment, it is possible for regulation to become in some way out of step with the
market and potentially contribute to market disruptions rather than solving market issues—the usual goal
of regulation. This was seen, for example, in the Michigan automobile insurance market in the past, and
the State of Michigan enacted reforms in 2019 intended to address issues in this market.22 Recently,
California and Florida, two large states already buffeted by exposures to the increasing catastrophe losses
discussed above, have both undertaken regulatory changes in response to recent insurance market
disruptions. California’s regulatory issues have generally been seen to largely revolve around how
insurance rates are set, while Florida’s have revolved more around how insurance claims are resolved.
California’s system of rate regulation in particular has drawn critics who see it as “restrictive price
controls so disruptive that many insurers are curtailing their business operations.”23 Others, however, see
this system as being “protective of insurance policyholders through laws and policies aimed at limiting
rate increases.”24 The California rate regulatory process is more complex than in many states, involving
both prior approval of rates by the insurance regulator and a process whereby consumers can
independently intervene in the rate approval process if a proposed rate increase is higher than 7% and be
compensated if they provide valuable technical input.25 In addition to this regulation of the size of rate
increases, regulations allowed only historical data to be used in setting homeowners insurance rates (not
forward-looking models) and also disallowed reinsurance expenses as legitimate costs that can be built

21 See, for example, Christopher Flavelle, Jill Cowan, and Ivan Penn, “Climate Shocks Are Making Parts of America
Uninsurable. It Just Got Worse,” New York Times, May 31, 2023, https://www.nytimes.com/2023/05/31/climate/climate-change-
insurance-wildfires-california.html.
22 For a discussion of issues in Michigan auto insurance reforms and arguments for further actions, see Amanda Nothaft and
Patrick Cooney, “Building on Michigan’s Auto Insurance Reform Law,” University of Michigan, December 2021,
https://sites.fordschool.umich.edu/poverty2021/files/2021/12/PovertySolutions-Auto-Insurance-Reform-PolicyBrief-
December2021.pdf.
23 Testimony of Jerry Theodorou, before U.S. Congress, Senate Committee on Banking, Housing, and Urban Affairs,
Perspectives on Challenges in the Property Insurance Market and the Impact on Consumers, 118th Cong., 1st sess., September 7,
2023, https://www.banking.senate.gov/hearings/perspectives-on-challenges-in-the-property-insurance-market-and-the-impact-on-
consumers.
24 Thomas Frank, “California Scared Off Its Biggest Insurer. More Could Follow,” Climatewire, May 31, 2023,
https://www.eenews.net/articles/calif-scared-off-its-biggest-insurer-more-could-follow/.
25 California Department of Insurance, “Information Sheet: Proposition 103 Intervenor Process,” https://www.insurance.ca.gov/
01-consumers/150-other-prog/01-intervenor/info.cfm.
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into the rate base.26 Rather than reducing regulations, a representative for the Consumer Federation of
America has argued that such models need additional regulatory scrutiny and that the reinsurance industry
needs more regulation before such costs should be accepted in primary insurance rates.27
The California Insurance Commissioner recently announced a number of regulatory changes aimed at
improving conditions in the insurance market. With regard particularly to the criticisms of the regulatory
process, the changes will allow usage of “catastrophe modeling and California-only net reinsurance costs
in rates”28 while requiring companies to increase the number of policies offered in high-risk areas. With
regard to rate regulation, the new rules are aimed at improving the timeliness and transparency of rate
review. The rulemaking process for this initiative has just begun, and the target for implementation is
December 2024, so the actual impact on California’s market will likely not be known for some time.
Florida’s exposure to hurricanes has long been a stress on the insurance market. A primary recent
challenge, however, according to the Florida Office of Insurance Regulation (OIR) has been “an increase
in the frequency and severity of litigated claims.”29 While insurance claims rules may seem an unlikely
source of high insurance prices, aspects of the Florida system—particularly provisions on attorneys’ fees
and assignment of benefits—have resulted in numbers of claims litigation that are higher than in other
states.30 For example, according to the latest OIR figures for 2021, insurance claims in the state amounted
to 6.9% of all claims nationwide, but 76% of the nationwide claims lawsuits were opened in the state.
Somewhat similarly, the insurance rating agency A. M. Best has calculated that Florida’s share of
homeowners insurance premiums is approximately 10%, while the share of “defense and cost
containment” (DCC)31 expenses paid out of those premiums is over 30% of the nationwide DCC
expenses. According to OIR, the DCC expenses totaled approximately $3 billion in the state.32 The state
enacted reforms to this system in late 2022 and 2023, primarily in Florida Senate Bill 2A and House Bill
837.33 As this legislation is proactive, affecting claims going forward, it will be some time before results
are clear as to the effects of the changes. However, some insurers are reporting benefits of the reforms,

26 See California State Assembly Committee on Insurance, Informational Hearing, The California FAIR Plan, Background,
March 8, 2023, pp. 6-7, https://ains.assembly.ca.gov/sites/ains.assembly.ca.gov/files/
FAIR%20Plan%20hearing%20background.pdf.
27 Testimony of Doug Heller, before U.S. Congress, Senate Committee on Banking, Housing, and Urban Affairs, Perspectives on
Challenges in the Property Insurance Market and the Impact on Consumers, 118th Cong., 1st sess., September 7, 2023,
https://www.banking.senate.gov/hearings/perspectives-on-challenges-in-the-property-insurance-market-and-the-impact-on-
consumers.
28 California Department of Insurance, “Sustainable Insurance Strategy,” https://www.insurance.ca.gov/01-consumers/180-
climate-change/SustainableInsuranceStrategy.cfm.
29 Florida OIR, “Property Insurance Stability Report,” July 1, 2023, p. 3, https://floir.com/docs-sf/default-source/property-and-
casualty/stability-unit-reports/july-2023-isu-report.pdf.
30 For a discussion of, and viewpoint on, assignment of benefits and attorneys’ fees, see Fred Karlinsky et al, “Florida
Assignment of Benefit Abuse: Recent Developments,” Federation of Regulatory Counsel, July 12, 2019, https://www.forc.org/
Public/Journals/2019/Articles/Summer/Vol30Ed2Article1.aspx.
31 A. M. Best, “US Homeowners Line Well Capitalized, but Weather Events Pose Significant Uncertainty,” September 29,2022,
p. 8, downloadable at https://news.ambest.com/newscontent.aspx?refnum=245263. DCC expenses include court fees, fees for
lawyers, fees for expert witnesses, preparing for trial, etc.
32 Florida OIR, “Property Insurance Stability Report,” p. 3.
33 For summaries of the legislation by the Florida Insurance Consumer Advocate, see Florida Department of Financial Services,
“Recent Property Insurance Changes,” https://www.myfloridacfo.com/division/ica/propertyinsurancechanges.
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with Florida Citizens United (the state FAIR plan) saying that it was receiving fewer lawsuits.34

Disclaimer
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34 Jean Eaglesham, “As Storm Damages Mount, States Try to Make It Harder to Sue Insurers,” Wall Street Journal, October 19,
2023, https://www.wsj.com/finance/as-storm-damages-mount-states-try-to-make-it-harder-to-sue-insurers-e7f88720.
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