Industry Insights Vol III, Issue 3

In this Section

The Growing World Of Cannabis Insurance
Am Best Downgrades Of P&c Personal Lines Reaches New Height With Downgrade Of State Farm General Insurance Co.
Hurricane Predictions And Impacts To The Insurance Industry

MarshBerry’s Perspectives for High Performance (PHP)

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The Growing World Of Cannabis Insurance

The legalization of cannabis for medicinal and recreational purposes has opened the door to a thriving new industry. The recreational legalization of cannabis in the U.S. has evolved rapidly, going from 11 states in 2020, to 24 states in 2024 (as of June 30, 2024). An additional 16 states have legalized it for medical use. But alongside the opportunities, cannabis businesses face unique challenges, one of which is securing proper insurance.

An Increasing Need for Unusual Coverage

Since cannabis remains illegal at the federal level, many traditional insurance companies are hesitant to offer coverage to cannabis businesses. This is because they fear violating federal laws or facing penalties. And because cannabis businesses come with unique risks, it’s also difficult for cannabis companies to obtain normal insurance coverage through admitted insurers. Most need to go through the excess and surplus lines market to find typical P&C, or liability and workers’ compensation coverage, and it tends to be more costly than other business insurance. Cannabis-based businesses include wholesalers and distributors, hydroponic shops, and dispensaries. Most policies cover theft, property damage, crop loss, and liability claims.

Several factors contribute to the need for specialized cannabis insurance:

Federal Legality: Federal prohibition makes cannabis businesses ineligible for many traditional insurance products.
Unique Risks: Cannabis faces risks beyond those of typical businesses. This includes crop loss, product liability due to psychoactive effects, and regulatory compliance issues.
Product Specificity: Standard product liability coverage might not encompass the complexities of cannabis-infused products, like edibles.
Evolving disruptions: Regulations and risks continuously change, and these businesses may face more challenges to operate legally than any other type of market.

The cannabis industry as a whole is highly profitable yet more dangerous than almost any other industry, adding another layer of complexity to running these businesses.

Growth in the Cannabis Market Creates Insurance Opportunities

With increasing legalization across the U.S., the cannabis industry is flourishing. Cannabis use today goes beyond just recreational and medical – the cosmetic, pharmaceutical, and food & beverage industries are contributing to the rising popularity of cannabis products.

As demonstrated in the chart below, forecasts for cannabis sales are expected to rise for the foreseeable future.

The demand for specialized insurance is surging; there are now approximately 30 insurers willing to provide coverage for the cannabis business world – up from only six in 2020. “We are quite bullish on the growth in this particular sector,” says John Donahue, president of M.J. Hall & Company, a surplus lines brokerage. “This is the first emerging market to hit the insurance space in a considerable amount of time.”¹

Still, many large providers are hesitant to jump in. Not only is the cannabis world complex, risky, and restrictive, its newness means less historical data to help with developing policies, identifying appropriate coverage, handling claims, and properly assessing risk. Lloyd’s of London once offered coverage to the U.S. cannabis industry but ongoing legal uncertainty led them to withdrawal the policy from their products.

With federal legalization a potential future development, the landscape of cannabis insurance will most likely evolve further. This rapidly growing market presents exciting opportunities for insurers and brokers willing to navigate the unique needs of this burgeoning industry.

Am Best Downgrades Of P&C Personal Lines Reaches New Height With Downgrade Of State Farm General Insurance Co.

In March of 2024, AM Best downgraded the financial strength rating of State Farm General Insurance Co. (State Farm General), a subsidiary of State Farm that provides personal liability homeowners business in California, from A to B (excellent to fair). AM Best also downgraded State Farm General’s long-term issuer credit rating (ICR) from “a” (excellent) to “bb+” (fair) and stated that the outlook for the insurer’s long-term ICR was negative.² State Farm has the largest market share in the U.S. homeowners segment, with a 18% market share.³Parent company State Farm continues to be rated A++.

State Farm General’s balance sheet strength was one of the main reasons for the ratings change. The other rating components included: operating performance assessed as marginal; business profile was neutral; and enterprise risk management was appropriate. The AM Best ratings update came shortly after State Farm announced that it would not renew about 72,000 policies across personal and commercial lines in California, which comprised about 2% of State Farm’s book of business in the state.³

Three months later, in June 2024, State Farm reversed its decision and announced that it would renew the California policies. However, it came with the requirement that clients will need to secure fire coverage from the California FAIR plan, the state insurance program that covers fire as a peril but not other coverages such as liability.⁴ In 2023, State Farm stopped issuing new homeowners insurance policies in the state of California, driven by risks from natural catastrophes.

AM Best noted that the carrier’s policyholder surplus has been deteriorating, resulting in declines in overall risk-adjusted capitalization and weaker balance sheet metrics. Increasing claims severity impacting State Farm General’s umbrella and commercial multi-peril lines contributed to these declines.⁵

Downgrades of Personal Lines Insurers on the Rise

In December 2023, AM Best downgraded the Financial Strength Rating (FSR) of Nationwide Property & Casualty Group from A+ (Superior) to A (Excellent). While in August 2023, Allstate Insurance Group received an AM Best downgrade to its long-Term ICR from “aa” (Superior) to “aa-” (Superior). Both downgrades are a reflection of the challenging macro-economic trends and recent catastrophic events, impacting operating and underwriting results.

“Declines in capitalization and deteriorating operating performance drove the rating downgrades in the personal lines segment,” said Helen Andersen, industry analyst, AM Best, in a press release. “AM Best expects market trends to continue to have a negative impact on the U.S. personal lines insurers. Carriers that are slow to address challenges or do not have the means, expertise or technological capabilities to keep pace with changes in the environment will likely face ratings pressure.”⁶

State Farm General was only the latest large insurer to be downgraded by AM Best. In fact, the number of credit rating downgrades of U.S. personal lines insurers issued by AM Best more than doubled in 2023 compared to 2022 – from 18 to 39.

While profitability at personal lines insurers has improved from 2022 and 2023 levels, there are still challenges in the sector that place firms at risk of potential credit downgrades. According to AM Best’s 2023 P&C Snapshot, personal auto and homeowners lines had a combined $32.8 billion net underwriting loss in 2023, compared to $40 billion in 2022. Homeowners saw a large impact from severe weather losses.

“With only one hurricane to make landfall in the United States in 2023, most catastrophe losses were from secondary perils,” said David Blades, associate director, Industry Research and Analytics for AM Best. “Personal lines insurers have been aggressively pursuing rate and pricing increases for a few renewal cycles now to reflect calculated rate needs more accurately, and to spark a reversal of recent underwriting losses. However, regulatory constraints, inflationary pressures and more frequent and severe weather-related events continue to dampen results.”⁷

Potential Impact on Distribution

Credit rating downgrades of additional carriers could affect distribution as some insurance brokerages prefer to work with only A-rated insurance companies, which helps to ensure their clients are working with financially stable carriers. Many insurance brokers with clients who are currently covered by a downgraded carrier will work on a strategy for switching coverage to another insurance company – if the client desires.

Further downgrades of other insurers could result in some lenders downgrading firms as non-viable homeowners insurance providers if they only work with A-rated carriers. This could potentially impact millions of policyholders and affect consumers’ home purchases due to insurance availability or affordability concerns.

The downgrade of State Farm along with the broader factors impacting the personal lines sector raises questions about which other carriers might face downgrades, given the issues around nuclear verdicts, inflation, increased natural catastrophes, and litigation costs that continue to impact the industry. Brokerage firms may want to understand the potential implications on certain carriers, and proactively strategize and plan to protect their clients with carriers that have the financial strength to be there to protect their customers when they need it most.

Hurricane Predictions And Impacts To The Insurance Industry

Hurricane season is upon us, with Hurricane Beryl making landfall in the U.S. on July 8, 2024, as the first major storm of the year. It was the earliest-forming category 5 hurricane on record. Beryl knocked out power for 2.5 million homes in Texas, leading President Biden to declare a federal emergency disaster for the state. Analysts state that Beryl has already caused $2.5 billion in insured losses in Texas alone.⁸Although Texas is not the only place Beryl made landfall, losses are predicted to far exceed $30 billion when all is said and done.

A Higher than Usual Hurricane Season Predicted

The National Oceanic and Atmospheric Administration (NOAA) has predicted higher hurricane activity for 2024, with an 85% chance of an above-normal season. Florida is particularly vulnerable, as a bad hurricane season could have profound and far-reaching effects in a state that is already facing insurance challenges.

Florida’s Insurance Challenges

With the population boom, climate change, natural disasters, and costs from nuclear legal verdicts, insurers are already struggling to make profit. Many Floridians are unable to get insurance at all, while major providers, such as Farmers, Bankers Insurance, and AIG, have all withdrawn business in the state. Remaining insurers have drastically increased premiums for Florida homeowners; Citizens, a state-run insurance company, has already announced plans to increase its rates by 14% next year.⁹ All of these factors are driving lawmakers to take action to try to curb the crisis.

Recently, Florida Governor Ron DeSantis signed House Bill 1503, allowing surplus lines insurers to take over policies from Citizens Property Insurance Corporation. Citizens provides coverage to homeowners who can’t find insurance from private companies. The goal of this bill is to reduce the number of policies Citizens handles, as it is currently covering a lot of high-risk properties. By transferring these policies to surplus lines insurers, Citizens can better manage its resources and potentially reduce the financial risk to the state.

Nuclear verdicts were another impediment. Florida alone was responsible for 79% of the country’s homeowner lawsuits but only carried 9% of policies.¹⁰ In 2023, Governor DeSantis signed House Bill 837, which aims to reduce the numerous, and sometimes frivolous, lawsuits against insurance companies.

Impact on the Reinsurance Market

Also carefully watching these predictions is the reinsurance market, but reinsurers seem to be less skittish about the hurricane forecast. “I have yet to have a reinsurer tell me that they would…provide less reinsurance in Florida as a result of the forecasts that are coming out,” said Adam Schwebach, executive vice president at Gallagher. “Most reinsurers that have historically focused on Florida would be comfortable taking risk regardless of the forecast. That’s something that’s built into their pricing models.” If storms do cause major damage, it just about guarantees an increase to reinsurance rates next year, but current year is generally set.

Natural Catastrophes are Impacting Rates

While June is still early in the year, and ahead of peak hurricane season, there may be a (temporary) sunny side for Florida consumers, as multiple insurance carriers filed for rate decreases or no increases in 2024. While this doesn’t guarantee that rates will go down, it may be a positive sign for the future. Experts say that the Florida insurance market was starting to show signs of recovery, even making a modest profit after almost ten years of loss.

Despite stabilizing rate increases over the first half of the year, a bad storm season could reverse that trend. Insurers are already hiking up premiums to offset losses and with NOAA predictions, they will most likely increase again.

Tornados led to Oklahoma home coverage costs increasing 42% between 2018 and 2023 while Texas soared to 60% in the same time period.¹¹ Oklahoma Department of Insurance Commissioner Glen Mulready predicts we haven’t seen the last of rate increases, “Everyone is taking a hit with these storms, and that has to lead to increased premiums to cover those losses. It’s unfortunate but it’s true.”

These natural disasters have contributed to inflation in the past by increasing the cost of things like building materials, groceries, and gas, and not just in hurricane vulnerable areas. Recall how Hurricane Katrina’s damage to offshore rigs led to refineries halting production and gas prices increasing across the country.

Sources:

In This Issue

Focused Insights: Is Your Firm Ready For a "What If" Scenario?

U.S. Macroeconomic Indicators

M&A Market Update

Public Broker Performance