ERIT. M9. Leonard Interview. rates.Tort. CAT. PE Investment

Persistent premium growth remains the industry’s headline issue
- Rough rule-of-thumb from Bureau of Labor Statistics (BLS) data → roughly +5\% per year for the past seven years
- Compounded: (1+0.05)^7\approx1.41 → ≈ 40 % gross, but reported carrier filings (through 2021) plus estimated 2022-24 data place the realised rise closer to ≈ 20 %
- Variation is large – geography, peril mix, dwelling type, past loss history, and regulator stance all reshape the customer-level experience
Two perspectives of the same problem
- Policyholder view – “Availability & Affordability”
- Carrier view – “Economically Viable Coverage” (must at least break even over the cycle)

Core profitability yard-stick = combined ratio (CR)
- \text{CR}=\frac{\text{losses}+\text{LAE}+\text{expenses}}{\text{earned premium}}
- Benchmarks offered by Dr. Léonard
- Good: \text{CR}=95 (underwriting gain of 5 ¢ per premium dollar)
- Bad: \text{CR}=105 (underwriting loss of 5 ¢ per dollar)
Reality: Many carriers, especially in catastrophe-exposed states, run at underwriting losses and rely on investment income to finish in the black
- Florida: No homeowners insurer posted an underwriting profit in the past decade

Climate change = higher frequency AND severity of hurricanes, hail, wildfire, flood
Migration amplifies impact (people moving “into harm’s way”):
- Fast-growth states = Florida, Texas, N. & S. Carolina
- Previously “safe” inland or up-coast tracts now incur surge, flood & wind as storms track north
Example: Coastal hardening in Florida pushes floodwater inland → new loss geographies

19th-century deforestation + re-planting means many urban/suburban trees now reach ~100-year life span → more fall damage in storms
Broader national theme: deteriorating infrastructure compounds cat loss totals

Class actions & third-party litigation funding (TPLF) raise severity; post-event mass-suit models proliferate
Adds frictional cost across the book, regardless of individual claims behaviour

Pandemic-era rebuild cost index surged ≈ 40 % while average premiums rose < 20 %, widening the adequacy gap
Re-emerging geopolitical shocks (Red Sea, Taiwan, etc.) threaten a second-wave inflation pulse

Iconic events (e.g.
- Baltimore bridge collapse ⇒ BI claims → “tail event”
- Not a primary rating driver; day-to-day bell-curve attritional losses dominate rate needs

Insurance is state-regulated – 50 separate commissioners + NAIC
- Some states = prior-approval, others = file-and-use
Example metrics:
- CA Commissioner Lara: Allows catastrophe models but requires carriers to expand writings and reveal methodology (mitigate Lehman-style black-box risk)
- Florida 2023 reforms – anti-assignment-of-benefits, attorney-fee revamp, one-way fee repeal; early data = moderating rate trajectory

Needed to align premium with peril amid large variance
Regulatory push-back rooted in fair-lending / red-lining history – must balance actuarial equity and social equity
Long-run expectation: Wider premium dispersion (low-risk ZIPs cheaper, high-risk coastal/inland-flood ZIPs dearer)

Renters insurance far more stable: ≈ +5 % total over five years
- Illustrative figure: \$10 per month ≈ \$100{,}000 personal-property & liability limits
Affordability conversations must include tenants, not just owners

Standard market imposing dwelling-value caps or exiting high-risk coast/wildfire zones
Solution = specialty carriers or surplus-lines capacity targeting \text{ROE} via:
- Higher premiums
- Private mitigation services – helicopters, in-house fire crews (AIG example; Beyoncé CA estate)
Historic parallel – 18th/19th-century fire marks: plaque on façade signalled paid-up policy; company brigade would respond only if plaque present

Reinsurers house the most sophisticated forward-looking models (climate scenarios, hail, geopolitical risk, etc.)
Dynamic models supplement but do not replace rear-view-mirror actuarial rate indications
Capacity strategy: Strip away the fat-tail slice (take e.g.
- Normal bell-curve tail = 2.5\% left/right; climate shift yields fatter 10\% tails; facultative or ILW deals can absorb \approx\,7.5\% restoring closer-to-normal distribution)

Nuclear verdicts enlarge the upper severity tail but do not drive the median
Reform (e.g.
- Florida 2023) curbs growth but cannot neutralise inflation or climate pressure alone – multifactor interplay

Downtown office malaise ⇒ adaptive reuse path (office → residential)
- Works best for Class-A towers → triggers café, grocery, street-level vibrancy
Early “green flags” visible in macro data
- Uptick in construction employment, capital spending, and commercial starts
Bankruptcy/repricing cycle expected to recycle assets to economic uses

Lumber two-by-four price journey
- Pre-COVID: \$1.95
- Peak: \$15.00
- Current: \$4 (still easing, may settle near \$3)
Traded commodities correct faster than labour-heavy services ⇒ rebuild-cost indices finally moving down

Dominant role = brokerage roll-ups
- Typical PE horizon → buy regional broker, add-on acquisitions, optimise back-office, sell in ≈ 5 yrs at ×5 multiple
Limited appetite for carrier capitalisation – underwriting returns (5 %-ish) too low for PE hurdle rates
Some PE money enters via cat bonds, sidecars, or specialty reinsurers where higher risk/return fit the mandate

Car-rental counter: Immediate legal-advert pop-up (“Call us BEFORE the accident!”) – micro-level instance of social-inflation marketing
Only privately run insurance library – Boston; hand-drawn fire maps list hydrant hose capacity – testament to industry’s data lineage

Affordability vs actuarial fairness tension intensifies with granular pricing
- Risk-based truth can conflict with social-policy goals
Climate migration is partly informed, partly unaware – underscores need for consumer education on hazard geography
Tort system provides essential consumer recourse; reform must prune abuse without muting legitimate redress (Erin Brockovich archetype)
Industry-regulator relations largely collaborative; both aim at solvent, responsive markets

Annual personal-lines increase ≈ \Delta P=5\%
5-yr compound: P{5}=P{0}(1+0.05)^5 \Rightarrow \approx 27.6\% (reported ~20 % after regulatory drag)
Pandemic replacement-cost spike: +40\% vs premium <+20\%
Renters: \$10\;\text{per mo}\;\Rightarrow\;\$100{,}000 coverage**
Underwriting break-even window: 95 \le CR \le 105

“We don’t need a person; we need the everything.” – Dr.
Léonard on carriers’ need to fund multiple Katrina-scale years

(End of study notes)