The Treasury Department’s Federal Insurance Office (FIO) issued its first Annual Report in 2013. The annual reports, along with other documents and material, are published on Treasury’s website. The Annual Reports are published in September each year and review FIO’s activities, its interactions with federal agencies and state and international insurance regulators, and developments in the insurance industry, in the previous calendar year and often the first half of that current calendar year. The September 2024 FIO will report on 2023 activities and presumably on the first half of 2024.
The Annual Report begins with a table of contents, a glossary, and a table of figures. The Report is seventy-one pages. Pages one through nine summarize FIO’s activities in 2022 and the first half of 2023, with a more detailed descriptions of FIO’s Cyber Insurance Initiative and its oversight of the Terrorism Risk Insurance Program (TRIP). This is followed by a sixty-one-page Insurance Industry Financial Overview and Outlook.
The period examined is calendar year 2022 and various activities in 2023. The financial condition reported is as of December 31, 2022. Financial pressures weighing on the industry in 2022 included market volatility, inflationary pressure, monetary tightening, and natural catastrophes for the Property Casualty Sector. In 2022, premiums increased but at a slower pace than in 2021 for most types of insurance. In 2022, however, surplus decreased for the first time since 2008 which brought the worldwide financial crisis.
The states and territories regulate most insurance in the United States and its possessions. However, after the 2008 financial crisis Congress enacted the Dodd-Frank Act, which significantly changed how the federal government regulates financial institutions, including the establishment of the Federal Insurance Office (FIO), a new unit within Treasury Department.
It is charged with identifying vulnerabilities in the regulation of insurers that could cause a systemic crisis, any non-bank financial company which should be regulated by the Federal Reserve, state insurance measures preempted by U.S. agreements with foreign entities, and insurers for whom the Federal Deposit Insurance Corp. (FDIC) should become a receiver.
FIO has a significant role on international insurance issues and represents the United States at the International Association of Insurance Supervisors (IAIS) and advises the Treasury Secretary on international prudential regulatory issues and negotiating “covered agreements.” FIO sits on the IAIS Executive Committee, along with several state insurance regulators.
In line with the administrations’ priorities, FIO spent significant time on three issues: climate change, cyber insurance, and the IAIS Insurance Capital Standards.
FIO first announced its intent to collect climate-related data from homeowners insurers in 2022 and issued a request for comment on its proposed survey in October 2022. Industry and the NAIC objected to FIO’s proposed data collection effort, and FIO requested the necessary Office of Management and Budget (OMB) approval in November 2023, which was obtained in early 2024. Critics renewed their opposition, and, on March 8, 2024, FIO and the NAIC agreed to collaborate on data collection with information to be collected and initially analyzed by the NAIC.
Independent of its own data collection efforts, FIO released a report on June 27, 2023, titled, “Insurance Supervision and Regulation of Climate Related Risks.” The report assessed issues and gaps in supervision and regulation and provided twenty policy recommendations, many related to the need for the states and the NAIC to obtain additional information and perform additional data analysis.
FIO also assisted the Financial Stability Oversight Council (FSOC) with its Climate-Related Financial Risk Committee, which issued its report on July 28, 2023, which discusses actions underway to support capacity building and disclosure, address data gaps, and assess climate-related financial risks. FIO serves on the steering committee for the EU-US Insurance Dialogue Project, which during 2022–2023 centered on climate change risk and resilience, and is on the IAIS’s executive committee, which has also done extensive work in this area.
As cyber terror intensifies, FIO’s activities and duties have increased. President Biden has directed FIO to work with the Cybersecurity & Infrastructure Security Agency (CISA) to coordinate national cybersecurity and cyber-insurance programs and responses related to insurance markets, including evaluating whether a federal insurance backstop was warranted by the risks and potential financial exposure from catastrophic cyberattacks on “critical infrastructure.”
In September 2022, FIO issued and then extended a Request for Comments on a Potential Federal Insurance Response to Catastrophic Cyber Incidents. FIO has received numerous comments from insurers, reinsurers, insurance producers, academics, think tanks, and cyber insurance and cybersecurity companies. These comments, along with information from its TRIP data calls, and other sources including international bodies, inform its recommendations and activities. FIO reported that these comments support a federal insurance response.
On March 1, 2023, President Biden released his National Cybersecurity Strategy. Strategic Objective 3.6 required an assessment of the need and possible structure of a federal cyber insurance program. Its Implementation Plan released in July 2023 identified FIO as the lead agency to implement Objective 3.6. FIO was to complete its initial assessment by the first quarter of 2024.
Solvency regulation in the United States is based on the “Aggregation Method” and differs from the approach taken by the IAIS’s Insurance Capital Standard (ICS), which follows the European Union’s Solvency II system. The IAIS has spent much of the last decade developing and now implementing its ICS prudential standards, which many countries are expected to adopt. The IAIS is now evaluating whether the U.S. Aggregation method is sufficiently comparable to the ICS and produces comparable regulatory results; it should release its findings in December 2024. A finding of “equivalency” is essential for U.S. domiciled and internationally active life and property casualty insurers, as it would enable them to compete in other jurisdictions on a level regulatory playing field. Accordingly, it may be the most important international regulatory issue related to insurance for FIO, the Federal Reserve Board and the NAIC. FIO’s report summarizes this work infra.
FIO is responsible for administering TRIP and requires all participating insurers to submit information, subject to certain reporting exemptions., Sharing knowledge about terrorism risks is encouraged, and FIO issued a report on small insurer competitiveness in the terrorism risk insurance marketplace. FIO reconvened the Advisory Committee on Risk-Sharing Mechanisms (ACRSM) on July 26, 2023. There was discussion of the small insurer study and FIO’s request for comment on a potential federal insurance response to catastrophic cyber incidents.
FIO also assists other federal agencies. FIO helped Federal Emergency Management Agency’s (FEMA) transfer of $502.5 million of risk from the National Flood Insurance Program to the private reinsurance market in January 2023 with $275 million of capital markets placement of coverage over three years.
The sixty-page Section II, Industry Overview, is divided into subsections A, B, and C. A covers the domestic market; B covers the capital markets; and C covers the international market. A is broken down further into (1) financial performance and condition; (2) Life and Health Sector; (3) Property and Casualty Sector; (4) market performance; and (5) domestic outlook. Subsection A2, relating to life and health, also contains the next two “boxes” in the report: Box 2: The Pension Risk Transfer Market; and Box 3: Trends in Offshore Reinsurance for the U.S. Life/Retirement Sector. Section 3 property and casualty contains the next box: Box 4: Cyber Insurance Market. Section 5 domestic outlook contains the FIO report’s fifth and final box: Box 5: Technology, Data Use, and Privacy.
Inflationary pressures that emerged in 2021 escalated in 2022, as the consumer price index reached a forty-year high: 9.1% in June 2022. The Federal Reserve increased the federal funds rate 4.25% by year end 2022. The insurance industry surplus contracted for the first time since 2008 because of unrealized capital losses and other factors. Rising rates decreased the value of fixed income securities.
Life and Health revenue was up 9% to $1.03 trillion. Capital losses increased by 30% to $10.8 billion. Obviously, the ratio of revenue to capital losses is about 100 to 1. That large ratio makes it hard to imagine the category of Life and Health ending up upside down. Also, interest rate increases contributed to Life and Health’s capital losses. By year end 2023, rates were trending down. However, at least one recent study suggests that higher long-term rates are good for Life and Health, particularly annuities. The Federal Reserve chair predicted in December 2023 that the trend of lower rates was likely to continue. That was heralded as good news for everybody, including both Property and Casualty. and Life and Health. However, a thirty percent increase in capital losses was a very big increase. If similar increases follow, this author would foresee that eventually Life and Health would be upside down. There is nothing stated along these lines in the FIO 2023 Annual Report, but, despite its goal to be a watchdog of the insurance industry, FIO behaves less like a watchdog and more like a cheerleader.
According to FIO, the 2023 outlook looks decent. However, the sector took on more risk in 2022 than ever before. This risk included more issuance of paper for its own financing, more loans to banks, higher levels of reinsurance, more reliance on reserves, more use of alternative investments, and more annuity products. The net leverage ratio was almost 12% in 2022 up from 11.2%. Shifts in investment strategies to bolster returns has resulted in a less liquid portfolio. If unexpected shocks to the life and health sector arise, it may be less mobile as it tries to deal with those shocks.
The Property and Casualty sector is greatly affected by the increasing number of severe weather events, including decreased surplus. FIO states, “The industry will need to adapt to heightened catastrophic expenses.” This 2023 Annual Report, however, was silent as to suggestions for those adaptations.
For 2022, the total Property and Casualty sector direct premiums written reached a record level at $876 billion, marking a 10% increase over 2021 levels and the second consecutive year of strong growth following two years of much more moderate increases. However, reinsurance increased by 22% which brought net Property and Casualty premiums down to $776 billion.
The loss ratio was about 60% for years 2018, 2019, and 2020. In 2021, it jumped to 62.37% and in 2022 to 66.44%. Expenses, salaries, benefits, admin, and policy holder dividends all dropped so the combined ratio did not go up as much as it might have. Nevertheless, it was about 99% for four years in a row 2018 to 2021. Then it jumped to 102.73%. This increase was attributed to inflation and loss severity.
Net investment income for the Property and Casualty sector swelled by 27% to $71 billion in 2021, while cash and invested assets balances decreased by a slight one percent to $2.2 trillion. As a result, the net yield on invested assets jumped to 3.22% in 2022 from 2.65% in 2021. Rising short-term interest rates and an inverted yield curve favored the generally shorter-duration P&C asset portfolio (compared to the Life and Health investment portfolio).
The increase in net investment income was essentially offset, however, by a 90% decline in realized capital gains. Realized capital gains on investments were almost $2 billion in 2022, compared to nearly $18 billion in 2021. All fixed income and preferred stock categories recorded net realized capital losses in 2022 versus gains in 2021, but net gains on unaffiliated common stocks were sufficiently strong to leave the overall position in a slight net gain for the year.
The Property and Casualty sector’s net income decreased by 31% in 2022 to $43.5 billion from the $63.3 billion reported in 2021, as shown in Figure 32. Despite solid growth in net premiums earned (up 8%) in 2022, the sector experienced a significant underwriting loss of $22.3 billion as compared to a small loss of $491 million in 2021. The increase in net investment income and the deterioration in capital losses led to a decrease in pre-tax operating income of 31% to $49.6 billion in 2022 from $72.3 billion in 2021. A similar reduction in federal income taxes led to a decrease in net income of 31%.
While the Property and Casualty sector maintained positive cash flows from operations of $104 billion in 2022, they declined by over 18% from $127.3 billion in 2021. As shown in Figure 39, premiums collected, net of reinsurance, exceeded benefit and loss-related payments by only 68% at year-end 2022, sharply down from 88% and 87% for the years ending 2021 and 2020, respectively.
The direct written premium grew 51% to $7.2 billion in 2022 up from $4.8 billion in 2021. $7.2 billion is still only 1% of the Property and Casualty total. Will growth slow? FIO suggests a decrease in the rate of increase of premium rates fueled premium growth. Rates are said to have risen by 62% in 2022, which was less than 2021.
At year-end 2022, the United States remained the world’s largest single-country insurance market, with a 44% market share of global direct premiums written. This market share increased by approximately 3.3% compared to 2021 and is the highest level since 2019. When viewed as a single market, the European Union’s combined share of global direct premiums written (17%, or $1.1 trillion) is the next largest, although its market share dropped by 2.1% from 2021. China remained the second-largest single-country insurance market, with 10% of global direct premiums written for 2022. Collectively, the twenty largest of the world’s (single country) insurance markets accounted for 91% of global direct premiums written. Globally, direct premiums written increased by less than 1% (in nominal terms, unadjusted for inflation) in 2022, as a 4% decline in global life insurance premiums was slightly more than offset by a 4% rise in global non-life premiums. For the same period, global GDP expanded by an estimated 3.5% (in nominal terms).
FIO’s conclusion to the annual report is a cursory single paragraph. In the coming year, FIO will continue to monitor macroeconomic and other developments affecting the U.S. insurance industry and consumers. The effects to insurers from increased catastrophe exposure, as well as the accelerated shift to digital technology and the heightened need for cybersecurity, are among the considerations that FIO will continue to analyze.
The report does not address the fundamental question: Is there too much risk in the insurance industry? FIO says Property and Casualty as well as Life and Health continued to maintain their financial health in 2022. While multiple risks may affect this financial health, FIO’s message still echoes the general view that the industry is okay.
Does FIO have the stature, the regulatory authority, the will, the mission, the resources, and the expertise to fully measure and articulate insurance industry risks? Not currently, and unfortunately, FIO is the one representative of the American people responsible for evaluating the property casualty and life insurance sectors nationwide.
There are risky forces at play. How risky is climate? What will be done? What will happen? Can cyber really be insured? Should cyber be insured? What does market performance show? What can be expected? What is FIO’s outlook? Is FIO reliable? For one-stop shopping about Federal involvement in insurance, FIO is it. For now, all those interested in any Federal points of view regarding insurance (outside of health) remain well advised to pay attention to FIO throughout the year and its annual report.
While we pay attention to FIO, couldn’t it flex its muscles a bit more to accomplish its mission to lessen risks in the industry and to head off a financial crisis? To accomplish these goals, Congress will need to provide FIO with at least some regulatory authority, which much of the industry and the NAIC would oppose. Might FIO recommend to the Federal Reserve that more regulation of certain carriers by the Federal Reserve is necessary? Since the Dodd-Frank Act, the Federal Reserve has had the responsibility to monitor and regulate insurers who could present systemic risks, and FIO’s recommendations to the Federal Reserve need not usurp or challenge the current state-based paradigm. Who should FIO suggest be so examined by the Federal Reserve? Should it be limited to the five or so of the largest insurers in terms of direct written premium in the main insurance categories who are not already regulated by the Federal Reserve? FIO is currently a nonvoting member of FSOC. Might FIO ask the Treasury Secretary and FSOC to allow FIO to be a voting member, and, if so, would this give FIO’s recommendations more weight?
Can FIO’s increased advisory role in this area not be inferred to have been recommended by FIO’s original mandate and to be a very important part of the mandate?
