Sampson: Broad approach needed to address California’s fundamental problems

Two of the biggest issues for APCIA members are rebalancing risk in response to natural catastrophes and tackling litigation abuse, the association’s CEO David Sampson has told this publication.

Speaking in the run-up to this year’s APCIA Annual Meeting, Sampson said he expected key topics of discussion among attendees to include: insurers rebalancing their risk and reducing exposure in response to elevated nat cat losses; the impact of recent high inflation working through rate filings; and the detrimental impact on costs of legal system abuse and social inflation.

Insurers have pulled back in some areas recently, most notably California. But Sampson stressed that such a drastic move is a last resort for carriers.

“You think of all of the efforts that insurers have put into gaining market share in places like California or Florida, the advertising that's done, the agency system on the ground that's been developed, and those relationships,” he said. “The last thing that insurers want to do is pull out after making all of those investments, but you still have to balance your book of risk.”

Sampson said that progress has been made in Florida following sweeping reforms, with new carriers established in the state, a high volume of policies approved for take-out from Citizens and reinsurance capacity increasing.

“It's going to take a while for all of that to wash through the system, but there are encouraging signs in Florida,” he said.

In contrast, California continues to be a “very challenging” market, Sampson said, pointing to an outdated regulatory system, an increased incidence of wildfires and a dramatically higher number of homes that are being built in the wildland-urban interface.

“Insurers are still living with an antiquated regulatory system that does not allow them to use forward-looking catastrophe models in their rate filings and does not allow for the inclusion of reinsurance costs in their rate filings,” he said.

Sampson pointed to the increasing number of insureds in the California FAIR Plan as evidence of the dysfunction in the state’s insurance system.

“Something is really wrong in the California marketplace and so there's a need for regulatory reform,” he said. “There is the need to expedite the timeline that it takes insurers to get rate in California based on losses. There is a need for forward-looking cat models. There's a need for the ability to include reinsurance cost.”

California insurance commissioner Ricardo Lara has taken some steps since last year to push through insurance reforms that can be implemented without legislative approvals.

Sampson said this is helpful but that “there needs to be a broad, systemic approach” because there are “some fundamental issues that need to be addressed” in the state.

Shining a light on litigation abuse

Another issue that APCIA has also been vocal about is litigation abuse.

Sampson noted that in the past two years insurers’ loss adjustment expenses incurred, including legal costs, increased by 15.7 percent. He highlighted that plaintiff lawyers spent $2.4bn on more than 26 million local legal advertisements last year, according to the American Tort Reform Association.

Investments in US litigation funding, or third-party litigation financing, increased to $15.2bn in 2023, which Sampson said means “hidden investors see someone else's lawsuit as a profit center”.

Sampson said that individuals on the US Treasury sanctions list and major global sovereign wealth funds are among those investing in third-party litigation financing. “Something's fundamentally wrong when people see this as just another structured financial product, and so we're trying to shed light on that,” he said.

Sampson also highlighted the thought leadership APCIA does based on its data-driven research.

“Our research division has done a number of white papers on insurance cost drivers, dealing with the impact of economic inflation, social inflation and legal system abuse. We presented that not only to the NAIC as a whole, but we have briefed virtually every insurance commissioner on what insurers are experiencing,” he said.

Sampson said that APCIA’s efforts have helped increase awareness of the impact on insurers from increased natural disasters, economic inflation, social inflation and regulatory restrictions.

“I think you've seen this year more and more regulators who are working constructively with insurers to make sure that there's rate adequacy,” he said.

Sampson noted that the twin pillars for state insurance regulators are regulating market conduct to make sure consumers are treated fairly, and regulating solvency.

He said that there is now a lot more recognition of the second pillar, noting “if there's not rate adequacy it impedes the ability of insurers to be there for the future to pay future claims”.

A more populist political environment

The APCIA Annual Meeting this year is taking place against the backdrop of the upcoming US presidential election.

When asked what is at stake for the industry in the election, Sampson commented that the industry has been targeted by politicians.

“It was targeted by President Biden specifically before he dropped out of the race,” Sampson said. “He accused the industry of charging higher premiums based on a person's race, which is absolutely false. We don't collect data on race.”

Sampson also noted that former president Donald Trump in recent weeks has also attacked the insurance industry.

“So regardless of who wins the upcoming election, we are facing a more populist political and policy environment where businesses are going to be attacked,” he said. “That's one of the big issues that we'll be talking to our members about – how those threats are likely to emerge in a more populous political environment and how we are prepared to address those on all fronts.”