Join us in celebrating our 30th year Close announcement

Actuarial Consulting

Now That California FAIR Plan Assessments Are Real – Urgent Action May Be Required

by Mitchell Paden

As mentioned in the Potential Impacts of the LA Fires on California’s Property Insurance Marketplace blog, the possibility for assessments from the California FAIR Plan loomed large. That fear has become a reality, as the FAIR Plan, on February 11, 2025, levied its first assessment to member companies since 1994. The assessment totaled $1 billion and will be assigned based on the market share of the member companies. For the largest insurers in the state like State Farm, these assessments add many millions of dollars to the already significant bills they owe in the aftermath of the fires. Now that assessments have been made, what does it mean for the state’s property insurers beyond just the large bill?

$1 Billion Today, More in the Future?

Though the total assessment of $1 billion is significant, it does not necessarily mean that it is sufficient to cover all of the FAIR Plan’s costs. It is possible that the $1 billion amount was chosen specifically to coincide with the Commissioner’s September 3, 2024 Bulletin that laid out the rules for companies to recoup a portion of those assessments. That bulletin allows insurers to submit rule filings to the California Department of Insurance (“the CDI”) for approval to enable insurance companies to recoup up to 50% of those assessments in the form of a “temporary supplemental fee” that would be charged to policyholders over a period of 24 months. The FAIR Plan has said that roughly 97% of the claims submitted so far have been residential, which means the personal lines assessment is already close to that first billion. The FAIR Plan’s estimated exposure in the Palisades alone is $5 billion, so the potential threat of future assessments down the road is still very real. Once the assessments go beyond $1 billion in one calendar year, the bulletin allows that recoupment percentage to increase to 100%. Insurers may file to recoup as much as possible, so future assessments could add significant cost to the residential property premiums that are already straining consumers.

The CDI and the FAIR Plan are aware of the risk of future assessments and what it could mean for California residents, so the state has already begun enacting measures to try and make sure that doesn’t happen. For starters, Assembly Bill 226 (“the Bill”) was introduced by the state in January. The “FAIR Plan Stabilization Act” would allow the state to issue bonds to support the FAIR Plan to help it recover from large-scale disasters and increase its ability to pay claims. The bonds could help pay policyholders to begin rebuilding their lives, which is something that is sorely needed. The earlier the reconstruction efforts start, the better.  It is unclear, however, how much the FAIR Plan might need in bonds, and it would not save insurance companies from the risks of future assessments. The Bill requires the FAIR Plan; if supported by bonds, lines of credit, or any other payment mechanism; to assess insurance companies “in the amounts and at the times necessary to timely pay in full all obligations.” So, while the BIll could help prevent further assessments in the short term, companies may still be exposed to more assessments in the long-term, and this time, it could come with interest.

Will Consumer Groups Stop Recoupments?

As mentioned, FAIR Plan assessment recoupments require a rule filing in order to implement the temporary supplemental fees and recoup their FAIR Plan assessments. Despite the very unique nature of these filings, they would still be subject to the public review period required by Proposition 103. The public review period allows an interested party, such as a consumer group, the opportunity to intervene on these filings. One consumer group that seems to have plans for review of these recoupment filings is Consumer Watchdog. In a public statement, Consumer Watchdog argues that insurance companies charging policyholders for FAIR Plan assessments is “contrary to the law” because the statute enacting the FAIR Plan requires insurers, not consumers to “participate proportionally in the “writings, expenses, profits, and losses” of the Fair Plan.” There is also a question about the legality of insurer’s abilities to implement the temporary fees if their reinsurance providers cover the FAIR Plan assessments as companies like Mercury General Corporation have indicated publically. The executive director of Consumer Watchdog is on record saying that they will “be exploring every legal option to protect (consumers) from those surcharges” (https://calmatters.org/economy/2025/02/homeowners-insurance-costs-rising-in-california-fair-plan/). 
It seems like a safe bet that the FAIR Plan assessment filings will be challenged by the consumer groups, but how successful they will be in limiting or even stopping these FAIR Plan recoupments remains to be seen. 

Do Commercial Carriers Understand Their Bill?

It is well known that the assessments are billed to insurers based on market share, but insurers should be mindful of how that market share is determined. This is especially true for commercial insurers who may have received a much larger bill than expected after seeing the commercial side received just 3% of the total assessment. The participation rates for the residential assessments can include allied lines premiums when calculating the participation rates, even though many carriers have premiums in that annual statement line that are exclusively commercial. This has led to situations where an insurer who only writes commercial business receives a much larger-than-expected bill because they are receiving a portion of the residential bill. Companies can send corrections to the FAIR Plan to get their participation rates adjusted, but they are only given 30 days to do so which means as of now, it is likely too late to correct for this most recent bill. Commercial carriers should be sure to make any necessary corrections to participation rates now to prevent overstated bills moving forward.

How Quickly Will Companies be Able to Implement the Temporary Fees?

While debates about the validity of the supplemental fees go on in the background, they will not deter companies from making FAIR Plan assessment filings. For the first billion in assessments, many commercial carriers may have assessment bills so small that it may not warrant the cost of implementing the supplemental fee. We expect that the vast majority of personal lines insurers in the state, however, will make filings to add the supplemental fees to their programs given the heavy weighting of assessments to residential the residential side.  

The current rules laid out by the CDI allow supplemental fees to be filed as a pass-through to reinsurers, so even companies with coverage for the assessments will likely make a filing to get as much back as possible for their reinsurance partners. This means that the CDI could be receiving a lot more filings than normal in a relatively short amount of time, with the potential to impact department review times, not only for these filings but for pending filings and/or subsequent filings unrelated to the FAIR Plan. The hope is that the clear filing requirements laid out by the CDI will make the filings easy to review and allow these filings to be reviewed quickly, but until the full scope of the filings is known, that remains only a hope. It is unclear what role public intervention on these filings will play, as well. With all these uncertainties, it is of the utmost importance that any filings submitted for these temporary supplemental fees be clear and complete to help facilitate the quickest possible review. The actuarial consultants at Perr&Knight have already been contacted by multiple companies about doing just that, and is well equipped to get companies on the road to offset the costs of the recent FAIR Plan assessments.

Contact the state filings experts at Perr&Knight today.

State Farm Sounds the Alarm in California

by Brett Horoff

Over the last eight months, State Farm General has pleaded its case to the California Department of Insurance (“the Department”) for higher rates while the company’s financial position continued to deteriorate during this timeframe. The Los Angeles wildfires in January of this year provided the company further support for the needed rate increase. It also led the company to describe its financial position as a potential dire situation.

Our actuarial consulting experts weigh in on what’s happening with State Farm General, and what it means for California’s homeowners insurance market.

Commissioner Seeks More Information

Since the proposed rate change is above +6.9% and a consumer group intervened in the State Farm General rate filings, the consumer group can request rate hearings on each filing. While the commissioner cannot approve the rate filings prior to the results of the rate hearings, State Farm General has requested an interim emergency rate increase and stated, “the Department believes … that based upon information currently available, an interim rate increase, subject to refunds with interest pending a final determination by the commissioner of its legality, is appropriate in this instance and would be lawfully issued.”1

Rather than expeditiously approving the requested interim rate increase, which the commissioner’s own Department recommended, the commissioner thought it would be more prudent to obtain additional information from State Farm before approving the rate increases and ordered a meeting between State Farm, the Department, and Consumer Watchdog, which took place on February 26. The commissioner wanted answers to questions on State Farm’s financial stability, the need for urgent relief, the impact on policyholders, the justification of its claims, and the potential for financial support from the parent company.

It’s important to note the difference between State Farm General (“SF General”) and State Farm Mutual (“SF Mutual”). They are two separate companies operating financially independently of each other. SF General is a stock company owned by SF Mutual that was formed specifically to write California businesses, primarily homeowners and commercial multi-peril. In contrast, State Farm’s auto business in California is written through SF Mutual rather than through SF General.

Why Is Emergency Action Needed?

SF General, the largest homeowners carrier in the state, triggered a regulatory Company Action Level Event last year after failing to meet the NAIC’s Risk-Based Capital ratio requirements. AM Best subsequently downgraded the Financial Strength Rating for SF General to a B in March 2024. These events happened prior to the wildfires, which put further stress on SF General’s financial position. Recently, S&P Global placed its ‘AA’ rating for SF General on credit watch with negative implications.

Currently, SF General has estimated their wildfire losses to be $7.6 billion2. Most of the losses will be covered by reinsurance, which is primarily provided by their parent company, SF Mutual, at a rate that is below the market rate, according to information in the company’s rate filing. SF General has the following reinsurance2 in place:

  • Catastrophe Excess of Loss: $250 million attachment point / $8.92 billion limit effective July 1, 2024 through June 30, 2025 with one reinstatement of coverage limits per year.
  • Aggregate Excess of Loss Catastrophe: $375 million attachment point / $600 million limit net of other available reinsurance limit effective July 1, 2024, through June 30, 2025, which is not subject to a reinstatement provision.
  • Excess of loss on personal and commercial liability umbrella lines effective October 1, 2024, through September 30, 2025.
  • Excess of loss on high-value personal and commercial property risk effective January 1, 2025, through December 31, 2025.

After reinsurance, SF General has estimated their retained losses to be approximately $212 million1.  Given SF General’s reinsurance limit, an event with losses the size of the Los Angeles wildfires in January was not out of the realm of possibility.  

FAIR Plan Assessment

On top of the wildfire losses, SF General mentioned it “will be required to book its share of FAIR Plan losses on its financial statements, regardless of whether an assessment is issued. SF General’s participation rate for dwelling losses (commercial losses are treated separately) is expected to be around 16%.”3

The FAIR Plan issued an assessment of $1 billion, which may be partially recouped from policyholders over a two-year period to the extent that the insurer was not reimbursed through reinsurance. Depending on the cause of the wildfires and whether a utility company bears any fault, there may also be subrogation recoveries, which could eventually reduce the wildfire losses. SF General has estimated their share of the FAIR Plan losses to be approximately $400 million1.

Potential Regulatory Oversight Due to Inadequate Surplus

SF General reported their surplus to be $1.04 billion1 as of year-end 2024, which is a substantial drop from its value of $4.08 billion3 in 2016. Additionally, SF General’s initial estimate of the reduction in surplus due to the wildfires is $400 million1, which would leave it with approximately $600 million in surplus and an in-force book of business that is inadequately priced based on its rate filings.

As of December 31, 2024, SF General’s authorized control level risk-based capital (where the state commissioner may place the insurer under regulatory control) was $691 million. Given SF General’s latest estimate of its surplus, the company has experienced an authorized control level event and will, at the very least, need to provide its domiciliary state (Illinois) with corrective actions the insurer is taking to improve its financial position. The domiciliary state also has the authority to take regulatory control of the company.

Will State Farm Mutual Provide Financial Assistance?

In SF General’s pending rate filing3, it states the following:

“There are no plans for State Farm General to seek financial support from State Farm Mutual, the parent company of State Farm General. State Farm General is an independent and self‐sustaining legal entity within the State Farm group of companies and is managed to meet solvency requirements on an individual entity basis without regard to the solvency or financial condition of any other affiliated entity.”    

The State Farm brand would take a big hit to the extent SF General were to be taken over by the Department in their domiciliary state due to their financial condition. Additionally, they may lose a portion of their personal and commercial auto book of business written through SF Mutual, which had written premium of $4.87 billion in 2023.

One would think this delivers enough value for SF Mutual to provide financial assistance to SF General, but this does not factor in the difficulty of maintaining price adequacy in California and potential future underwriting losses due to inadequate rates. Right now, at the current rate and surplus level, SF General represents a risky investment for SF Mutual, which may produce negative returns for the parent company. Over the last two years, SF General has had a combined net underwriting loss of $1.655 billion, excluding the Los Angeles wildfires.

Dire situations require immediate action. The interim rate increases provide some help. Ultimately, State Farm General must reduce their market share in California property, which will take several years. If AM Best further downgraded the company, and/or banks stopped accepting them as an insurer on home loans, this would expedite the decrease in the company’s market share – far from an ideal solution. Only time will tell what path SF General takes.

Impact on the California Homeowners Insurance Market

No matter what happens, SF General’s homeowners market share will be decreasing in California. Although it is similar to SF Mutual’s homeowners market share in other states, the California regulatory environment, combined with the state’s exposure to wildfires and the lack of diversification across other lines of business, requires substantially more surplus for SF General to continue insuring approximately 20% of the homeowners market. To mitigate risk, SF General obtains reinsurance primarily from their parent company, which, to their credit, prevented SF General’s insolvency after the Los Angeles wildfires. The company’s financial position puts it in a very risky position for potential insolvency in the future without financial assistance from the parent company and the approval of its pending rate increase filings.

While the commissioner has aggressively pursued changes to improve the homeowners market, such as changing the regulations to allow catastrophe modeling and the net cost of reinsurance in determining the indicated rate level, it remains to be seen whether this will resolve the issues in the homeowners market. According to StateFilings Pulse, the quarterly publication authored by Perr&Knight’s expert actuarial consulting team, the median number of days from filing submission to approval was 294 days in 2024. The Department has plans to drastically reduce the time to approve rate filings, and insurers are eagerly awaiting the full implementation of those plans.

Over the next year, the homeowners market will likely continue to have availability issues with many insurers sitting on the sidelines waiting to see the impact of the changes implemented by the Department. As of September 2024, the FAIR Plan reported annual growth in policies in-force and premium of 28.9% and 58.6%, respectively. More growth can be expected for the FAIR Plan.

While the current situation does not look good, our actuarial consulting experts believe talented individuals at the Department and within the insurance industry will fix the current issues faced by the California homeowners market leading to changes that make the state better equipped to deal with the future.

Contact Perr&Knight today to discuss your actuarial and state filing support needs.

  1. State Farm General letter dated February 25, 2025, addressed to Commissioner Lara. ↩︎
  2. State Farm General pending rate filing, SERFF Tracking SFMA-134139896, for attachment points and limits, and 2023 annual statement Management’s Discussion and Analysis for effective dates and reinstatement provision. ↩︎
  3. State Farm General letter dated February 25, 2025 addressed to Commissioner Lara – Attachment. ↩︎

Opportunities in the Growing Collector Auto Movement

by Michael Goldman

By: Michael Goldman and Natasha Paz

Classic cars are unique properties for which coverage under a standard auto policy might be insufficient. For insurance companies, pricing these products isn’t as straightforward as traditional auto policies. Whereas traditional auto policies are built around a vehicle’s depreciation over time, collectible car policies consider that the asset’s value potentially appreciates with age.

While classic car ownership was once a specialized market, today’s owner demographics are shifting. Many car collectors are still of the boomer generation, but more and more younger drivers are investing in collector cars as hobbies or as stylish rides around town. This shift is fueled by younger drivers with more disposable income, a heightened interest in classic car restoration, and a rising appreciation for vintage vehicles.

The definition of a “classic car” is changing, too. “Classic” no longer refers solely to chrome-heavy sedans from the 50s and 60s. Now, certain cars from the 1970s – and even the 80s and 90s – are categorized as “modern” classics. As the U.S. vehicle fleet ages and more consumers shift to hybrid or electric, a niche market for classic combustion engine vehicles is emerging, and supplies will continue to shrink over time.

Per Credence Research, the vintage car market is expanding rapidly, expected to double in size1 over the next decade. Though classic cars still often obtain coverage from standard auto insurance carriers, specialty insurance policies offer benefits to both policyholders and insurance companies. This all adds up to an opportunity for insurance companies to develop products that are appropriately priced to take advantage of this growing market sector.

Here are some insurance product development insights from the actuarial consulting experts at Perr&Knight to keep in mind when writing new classic car programs or re-evaluating your existing programs.

Value of the Vehicle

Unlike standard automobiles, where the value of the vehicle is expected to decrease with usage, the value of collector cars usually rises over time. Establishing the value of a classic car isn’t as straightforward as with a modern vehicle. One of the main challenges is that there is no standard, agreed-upon industry definition of a “classic” or “collectible” car.

Autos that often fall into this category do share some features, such as:

  • Most (but not all) are at least 25 years old
  • Exotic cars (e.g. Lotus, Maclaren, Maserati)
  • Cars with historical value (e.g. Model-T, hot rod)

From there, insurance companies work with policyholders to establish a predetermined “agreed value” of the vehicle. This value can be established based on appraisal data, interviews with the insured, and research on the value of similar vehicles. The agreed value becomes the amount paid in the case of total loss or theft and is used to determine if the vehicle will be repaired or considered a total loss. The “agreed value” also protects the policyholder against vehicle depreciation in the event of a claim.

Discounted Rates

Though drivers of classic cars tend to have many years (potentially decades) of safe driving behavior under their belts, the shift towards a younger demographic means that many collector car drivers have shorter driving histories. That said, collectors of any age tend to be extra careful with these vehicles – both on the road and in storage.

Classic vehicles are usually not driven as often or with the same risk tolerance as a modern daily ride, so these behaviors can play a factor in insurance product development when establishing rates.   

Because of this careful driving and increased attention to maintenance, collector vehicles are generally involved in fewer accidents than their modern counterparts. This factor can result in pricing differences when compared with traditional policies and potentially lower rates for classic vehicle owners.

Pricing Classic Car Policies

One of the most useful ways to gain intelligence on pricing is to review competitor filings and look at the kinds of variables used in successful programs. Not all states make filing information public, but for those that do, reviewing market share, checking financial statements for profitability, and looking at the pricing variables in their programs are all solid indicators of how a competing program might function in the same jurisdiction. For states without public records, information from available sources creates a solid foundation, which can then be adjusted based on other known variables for the region.

Actuarial consulting experts like the team at Perr&Knight have extensive experience evaluating multiple factors – some obvious, some less common – to develop profitable pricing strategies for classic car programs.

State-Specific Nuances

As with all insurance product development, regulation varies by state. Our actuarial consulting and product development departments have decades of experience navigating the ins and outs required by individual states. Therefore, consulting with experts throughout product development and filing can save time and increase speed to market by spotting and correcting issues that might be questioned by regulators.

Today, many opportunities exist to augment business with new classic car policies or update existing coverage. The challenges related to pricing these policies also offer opportunities to create unique products. Differences in the definition of “classic” – along with all the expected complexity of developing any insurance policy – mean that classic car product development could benefit from a seasoned actuarial consulting team. Keeping the above in mind will help you steer clear of obstacles when developing or updating your classic/collectible auto program.

Contact Perr&Knight today to chat with our actuarial consulting team or for insurance product development support.

  1. https://www.credenceresearch.com/report/north-america-classic-cars-market ↩︎

Potential Impacts of the LA Fires on California’s Property Insurance Marketplace

by Mitchell Paden

The devastating Palisades, Eaton, and Hughes fires could go down in history as the most economically destructive disaster, with damage estimates reaching $250 billion or higher. The results of these changes will likely have a significant impact on the way P&C insurance is written in the state of California for years to come.

Our actuarial consulting experts have been following this event closely, as have many in the insurance industry. The situation is still fluid, and the potential ramifications of the fires on the California property insurance marketplace are too numerous to touch on in just one blog. This includes one of the biggest potential ramifications: the looming threat of California FAIR Plan assessments on insurers in the state for the first time since 1994 (stay tuned for an upcoming blog on that very topic!).

For now, we are focusing our thoughts on how the aftermath of the fires may converge with recent changes enacted by the California Department of Insurance regarding rate filings.

Wildfire Models Step into the Spotlight

The ink is barely dry on the recent rule changes allowing wildfire models to be used in California property rate filings. Though the implementation of the new rules has not even occurred yet (the California Department of Insurance website estimates they will be included in updated rate filing instructions at some point during the first quarter of 2025), companies are already beginning to strategize on the best path forward for achieving adequate rates.

Ironically, California did not formally approve the use of wildfire models until December 2024, mere weeks before the Los Angeles fires broke out. Prior to this, insurance companies could not use any models regarding potential wildfire losses in their rate filings. Instead, companies were required to show at least twenty years of catastrophe loss experience, that combined wildfire losses with many other catastrophe perils (e.g., severe storms), to support their catastrophe load without the ability to place more emphasis on recent years.

As wildfires in the state have grown in both frequency and intensity, scenarios based on loss experience for the previous two decades often underestimate the current risk. As such, companies have often felt this prevented them from filing what they viewed to be adequate rates. This is one of a variety of reasons so many carriers ceased writing new business in the state.

The new wildfire model rules formally approved in December give companies an option to help bridge the gap between historical ratios and present risk by allowing wildfire catastrophe models to be used in rate filings.

The use of these wildfire models does come with conditions, though. It requires companies to write additional business in the wildfire-prone areas that many carriers ceased writing and are currently being served by California’s FAIR Plan. Though some feel that the requirement to write more wildfire-prone exposure will keep companies from utilizing the models, the ability to file for a rate level more closely aligned with present day wildfire risk may outweigh the risks that come with the increased wildfire exposure for some companies.

Our team of actuarial consulting experts see a few different reasons that some may choose to take this route and accept the conditional requirements for wildfire model use in pursuit of adequate rates.

  1. Rate Filing Data Evaluation Rules: California requires that the evaluation date of data in a filing be a traditional quarter-end (March 31, June 30, September 30, and December 31). Since the Los Angeles fires started the second week of the new year, insurance companies are unable to submit filings – or even begin assembling filings – that include these fire losses until at least April. Use of wildfire models would allow companies to replace all actual wildfire losses with modeled data that could be available sooner and provide a quicker path to submission.
  2. Inclusion of Complete Wildfire Risk: As mentioned earlier, the use of the previously required historical ratios led to catastrophe provisions that were often understated relative to today’s catastrophe risk. The use of wildfire models would allow companies to do a filing now that can support a rate that recognizes a more complete picture of a company’s wildfire risk rather than waiting multiple years for the recent increased fire activity to gain more weight in the historical catastrophe ratios.
  3. Subrogation Uncertainty: There have been multiple lawsuits filed claiming that the Eaton fire in Altadena, CA, was ignited by electrical equipment operated by Edison International and Southern California Edison. Under state law, utility companies, rather than insurance companies, are liable for damages if their equipment starts a wildfire. So, if Edison loses these lawsuits, much of the loss from that fire will need to be included net of subrogation recoveries from the utility company (or proceeds from the sale of subrogation rights). The same could be true for the other fires as the investigations continue into how they started. Wildfire models measure prospective risk rather than prior liability, allowing them to be used without having to potentially wait for legal liability to be determined (though the Department may want to make sure that all models have been adjusted to reflect company exposure after these recent fires).

Our expert actuaries are already fielding calls from insurance companies interested in shifting to wildfire model-based loss scenarios in their rate filings. In addition, wildfire model vendors are submitting models to the state as part of the Department’s Pre-application Required Information Determination (“PRID”) Procedure. Models that are approved via this process will help streamline the rate filing review since the model itself will already have been approved by California regulators.

For companies that are looking to get a head-start on a rate filing that utilizes wildfire models, we recommend conducting vendor research and selecting one of these approved models so that when California does formalize the instructions for submissions, companies will have modeled losses that can be quickly included in a rate filing and help expedite that filing’s review from the Department.

Net Cost of Reinsurance in Rate Filings Looms Large

Just days before 2025, California also approved new rules that allow for companies to include the net cost of reinsurance in rate filings for the first time. An industry average net cost of reinsurance could be calculated and included alongside other expenses allowable under Proposition 103.

Like wildfire models, use of the net cost of reinsurance comes with conditions in the form of increased writings in wildfire-prone areas. The increased exposure would also likely lead to increased reinsurance costs in proportion to the new risk and result in playing catch-up in times of rising reinsurance costs, which the fires will likely cause. This would be exacerbated if the industry average is not enough to fully represent company costs being paid for reinsurance.

The proposed rules do include an alternative approach that would allow companies to use their own reinsurance terms in the net cost of reinsurance calculations, but doing so would require the public disclosure of their reinsurance contracts, a condition that most companies feel they are not willing to meet.

Though there is no guarantee that the industry average will be enough to support each individual company, and there are many questions still to be answered on how it may impact proposed rates, including the net cost of reinsurance in a filing could help bridge the gap stemming from currently having no reinsurance consideration at all. The Department’s timeline estimates that the net cost of reinsurance will not be included in the rate filing instructions until the second quarter of 2025, so companies looking to maximize the tools available to file more adequate rates may wait until then to file rates using both the net cost of reinsurance and the wildfire models that upon which company reinsurance rates are often based. 

The Importance of a Complete Rate Application

With so many significant changes to the allowable support in a rate filing, it is easy to forget that California also updated the rules about what constitutes a “complete” rate application. These new rules have been implemented into the rate filing instructions, so any company looking to move quickly in the aftermath of the fires should make sure that the filing package is as complete, accurate, and reconciled as possible. Public notice of filings will not take place until the state deems the application complete, so it is crucial that insurance companies carefully review all supporting documentation and model scenarios before submitting their filing to the state. Failure to do so will cause a delayed public notice date and a longer review of the submission.

The best way to speed along the process for everyone is to make the regulator’s job easier by ensuring that forms and supporting documentation are complete and ready to go, something that Perr&Knight routinely works together with the state to help achieve.

Contact the state filing experts at Perr&Knight today.

Factors Impacting Personal Auto Premiums and Claim Costs in 2025

by Dee Dee Mays

According to the Bureau of Labor Statistics, the increases in auto insurance premiums that have exceeded 15% year over year since March 2023 have tempered in 4th quarter 2024.

Still, the annual change from December 2023 to December 2024 is at 11% – nearly four times the increase in the total CPI during the same period.

What can we expect in the coming year?

Expect Lower Premium Increases

Based on a review of submitted rate filings by Perr&Knight’s actuarial consulting experts, we expect to continue to see lower increases in auto insurance premiums in 2025. Filings available from S&P Market Intelligence as of early January 2025 show that the overall proposed impact of rate changes started decreasing for filings submitted in the fourth quarter of 2023. The declining rate increases continued through third quarter 2023 and stabilized in fourth quarter 2024[1].

Cost Changes Influenced by Multiple Factors

Changes in various CPI indices can give us an idea of the recent changes in the costs underlying auto insurance claims for insurers:

  • The cost of used cars and trucks has somewhat stabilized, but is lower for all of 2024 compared to 2023. This would lower the costs of total loss claims, but actuaries also need to consider the impact on salvage recoveries when developing historical losses to their ultimate amounts.
  • Vehicle repair costs continue to increase at a higher rate than average costs, despite the improvement in average repair cycle times[2].
  • Medical care and hospital services indices have been relatively flat in the second half of the year, which may help control claims costs, including bodily injury.

The change in the frequency of claims is combined with the change in claims severity driven by the items above to determine the total change in costs. The National Highway Traffic Safety Administration recently released some positive news regarding the continued decline in traffic fatalities during the first three quarters of 2024[3].

However, the amount of driving is influenced by fuel costs, which are lower in the second half of 2024, based on CPI data. Lower fuel costs typically increase the miles driven, leading to more vehicles on the road and potentially contributing to a higher frequency of accidents.

Some Higher Premiums and More Shopping

Insureds purchasing policies for the minimum required limit will see their premiums increase in California, Virginia, and Utah. The minimum financial responsibility limits in these three states are increasing effective January 1, 2025. As we have noted previously, the increase in California can be significant. See “Are You Prepared for California’s Increase in Minimum Limits?”

Monitoring of auto rate filings in 2024 by our actuarial consulting experts has shown that some companies appear to be driven to grow their market share by implementing overall premium reductions or offering discounts to entice new business.

One example is GEICO’s introduction of a “Welcome Factor” in most states in 2024. This factor provides a 9% discount for new business relative to the rate for renewal business (prior to considering any caps on rate changes). However, this discount gradually erodes to 6% at first renewal, 3% at second renewal, and then disappears for the third and subsequent renewals. Given this, new insureds with GEICO will see their premiums increase at renewal, absent other changes.

Additionally, consumers are increasing their rate of shopping for auto insurance in 2024. According to TransUnion, shopping for auto insurance increased by 19% in 2024Q3[4].

A Hazy Road Ahead

Unlike 2022 and 2023, when we saw almost exclusively rate increases, 2024 saw some companies implement decreases. The path forward for auto insurance rates in 2025 is not clear.

Some underlying costs have been lower, but there is the potential for tariffs to increase costs for auto insurers[5]. Comprehensive claims will be influenced by changes in the frequency and intensity of weather-related claims. The frequency of property damage and collision claims is also impacted by weather if insureds are driving in less ideal conditions.

Insurance companies should continually monitor internal results, external indices, and competitor filings to ensure that they quickly spot trends that will require an update to their rate levels.

Working with actuarial consulting experts like the team at Perr&Knight can help you evaluate your overall rate need as well as provide detailed analyses by rating variable. In addition, our Predictive Analytics department can provide an automated view of experience by rating variable to visually identify what is driving results. 

Contact Perr&Knight today for a review of your personal auto program.

[1] Statistics were compiled through data obtained from S&P Market Intelligence.

[2] J.D. Power 2024 U.S. Auto Claims Satisfaction Study.

[3] Traffic Crash Deaths | Early Estimates Jan-Sept 2024 | NHTSA

[4] 2025 Personal and Commercial Lines Annual Insurance Outlook | TransUnion

[5] Auto Insurance Costs Seen Rising Further With Tariffs – Bloomberg

Are Your Rate Levels Stale? Six Questions to Ask When Determining Growth and Profitability Goals

by Steven Rosso

Congratulations! You just got that ever-elusive rate increase approved. And much like the insurance cycle that alternates between a soft market and a hard market, you’re likely now shifting your focus from profitability to growth. However, given the time lags built into filing for rate increases and the challenges associated with recent market conditions, those new rate levels may already be outdated.

You should continuously evaluate your book of business to monitor both macro and micro trends to facilitate your drive toward profitable growth. This blog delves into questions our actuarial consulting team recommends you should be asking yourself immediately after your new rate levels are released to ensure you’re meeting your targets relative to profitability and growth. Though we examine this issue through a homeowners insurance-specific lens, the principles apply to all lines of business.

GROWTH

What are your growth goals?

A growth analysis should start with identifying your target market and evaluating key performance indicators like year-over-year growth and real-time book composition evaluations. More important is to identify how your growth compares relative to competitors and whether you can access untapped markets to grow your customer base.

For example, demographic changes or quote activity may highlight that certain areas have an increasing percentage of new construction homes. Similarly, underserved markets, such as secondary/seasonal homes or properties with prior claims that have been fully mitigated, may be easily won given the limited competition stemming from recent market constriction. Either situation offers the opportunity to target customers unidentified by your competitors.

How do you measure whether you are meeting your growth goals?

Impacts to conversion rates and retention rates stemming from rate increases can be predicted by evaluating the elasticity of the market. While changes to policy counts may appear extreme, changes to premium tie better to profitability and could make rate proposals more palatable.

Also, monitoring rate change implementations ensures that rates released to a production environment align with those presented in an approved rate filing. Strategies like these ensure that rate adjustments drive long-term growth as expected and in a compliant and profitable manner.

How can you act to better meet your growth goals in the future?

Once you understand your target market and your competitors’ performance, you’re well-suited to identify customers to fuel growth. There may be distribution-specific nuances to consider to ensure your rate levels don’t appear artificially high or low, such as when and how you default to actual cash value or replacement cost coverage on a roof.

Analyses of the insurance market, competitor quoting platforms, and demographic data can help you identify how you can tailor your product offering to better grow and serve your customer base. Working with actuarial consulting experts like the team at Perr&Knight can help.

PROFITABILITY

What are your profitability goals?

A profitability analysis should start with a review of key performance indicators like loss ratios, expense ratios, and combined ratios. Even better is to benchmark these metrics against competitors to place your performance in an industry context. Once you understand how others in your same distribution channel, target market, and geographic footprint perform, you can better understand where you want to fit within the market and what profits are attainable.

How are you measuring whether you’re meeting your profitability objectives?

Actuarial indications should be supplemented with items like inflation indices and industry net trends to gauge how profitable the program is within the market. For example, replacement cost recalculations at renewal accurately recognize cost inflation of labor and materials for repairs. You can also segment your book of business to identify problem areas, such as exposure to homes with older roofs or significant fencing in wind-prone areas. Once identified, you can address these problems through improved pricing or underwriting to improve profitability.

How can you act to better generate more profits going forward?

You are not the only one taking action in this challenging market. Your company may be nonrenewing homes with prior water claims, while another is declining homes partially covered by trees.

Identifying competitor actions, anticipating the evolving customer base, and adjusting pricing or underwriting are vital to avoid scenarios of adverse selection that could undermine your profitability goals.

Consistent evaluation is key

Profitability and growth are metrics that must be placed within the context of the market and evaluated consistently, especially after the release of a product change. By identifying your goals and implementing data-based solutions to meet those goals, you can increase confidence in your performance, even in a challenging market like the current homeowners insurance industry.

Though this blog focused on homeowners insurance, the principles apply to all lines of business. The actuarial consulting experts at Perr&Knight can help you identify what questions you need to be asking, how to find answers to those questions, and how to act on those answers to ensure your rate levels are consistently up-to-date and to facilitate your drive toward profitable growth.

Contact Perr&Knight today to discuss how our experts can help your company achieve your growth and profitability goals.

Opening Doors: My Summer Internship at Perr&Knight

by Zach Ferdico

This past summer, as I stepped into the offices of Perr&Knight in Jersey City, I couldn’t help but feel a wave of excitement and anticipation. Securing an internship here was a dream come true—a chance to immerse myself in the professional world I was eager to join.

As a Business Marketing student at Northeastern University, I’ve always sought opportunities that would not only challenge me but also enhance my personal and professional growth. My internship at Perr&Knight did just that. Situated in the bustling environment of their Jersey City office, I found myself right in the heart of corporate dynamics, surrounded by professionals who were masters of their craft.

One of the unique aspects of my internship was the office culture. The casual office lunches were not just meals; they were my window into the lives and experiences of my colleagues. These gatherings, along with a memorable crew event for the Northeast region—complete with a competitive game of bingo and delicious catered food—helped me connect with team members not just in my office but across the region. Although I missed winning at bingo by just one number, the laughter and camaraderie made it a winning experience in every other way.

Professionally, I was positioned under the guidance of Kyle Hales in Perr&Knight’s Risk Strategies & Solutions practice area. This placement allowed me to collaborate across multiple departments, tackling a variety of tasks that broadened my understanding of our industry. A significant project for the state of Arkansas taught me a valuable lesson: most business problems in the actuarial consulting industry require creative, nuanced solutions. This project, like others, pushed me to refine my technical skills, particularly in PowerPoint and Excel. The need to produce client-ready deliverables accelerated my learning, turning initial struggles into skills on which I now pride myself.

The interaction didn’t stop at internal meetings. I frequently communicated with clients—ranging from newcomers with fresh insurance product ideas to seasoned clients requiring regular updates. These interactions were not just transactions; they were real relationships being built, providing me with invaluable experience in professional communication.

Reflecting on these three months, the lessons I’ve learned extend beyond technical skills. The nuances of professional life—such as the importance of detail in every deliverable and how one presents oneself in the workplace—were underscored daily. At Perr&Knight, I learned that professionalism isn’t just about how you dress or how much you know about your work; it’s about embodying confidence and competence in every interaction, truly taking the extra initiative to fully understand and address a client’s needs.

As I look back, I realize that my internship was not just about learning to navigate the corporate world; it was about discovering how to open doors to future opportunities through hard work, creativity, and a genuine commitment to excellence. At Perr&Knight, I didn’t just observe; I participated, grew, and left with a blueprint for my future career.

A Day in the Life of a Perr&Knight Intern

by Natalie Galvez

Michael Jordan once said, “You miss 100% of the shots you never take.” Taking on a role as an intern at Perr&Knight would not have been possible without taking that leap of faith. From exciting work events that I helped organize to interesting project work, my internship has provided me with valuable opportunities to evolve and develop both personally and professionally in a very short amount of time.  

The Interview

I researched Perr&Knight before I considered applying, learning about the types of work the actuarial consulting firm does, and getting a sense of the company’s values. I admired their strong commitment to their clients and the high level of service and expertise provided. On the day of my interview, I was even more impressed by how professional the people that I met in person were. I could see myself working with this team! When Perr&Knight contacted me later, I was thrilled to be chosen for the role.

Day in the Life

My daily activities include maintaining the digital signage in all offices, as well as working directly with managers and directors on both short-term and long-term projects related to marketing, administration, accounting as well as human resources. I have also been involved in assisting with onboarding and employee promotions.

Contributing to different projects in a variety of departments also tested my skillset in real-time situations. For example, I organized an Italian cooking class for the team, which involved reaching out to multiple businesses to find a suitable host and setting up the date, time, and form of payment. The event itself was a lot of fun, with everyone making gourmet pizza and focaccia, as well as sampling different appetizers and wine. Everyone left with goodies to eat later at home! Additionally, I handled the research portion for an actuarial department in-person meeting, which involved calculating airfare, hotel, and other additional costs to discover the best possible location. It will be exciting to hear how the meeting went later this year!

My day concludes by checking in with my supervisor and asking any outstanding questions. I have been lucky to have had a great supervisor who was also a great mentor.

What I Learned

First and foremost, I gained valuable insights into business-to-business interactions in the insurance space, which was completely new to me. Being part of an actuarial consulting firm has allowed me to build my understanding of crucial topics such as state filings, regulatory compliance, and accounting. It provided a firsthand perspective on roles from actuaries to billing coordinators. I am surrounded by people who inspire and motivate me to work even harder towards my goals.

And no great story is complete without a great ending. I’m excited to share that I have been offered a full-time position with Perr&Knight as an Administrative Assistant! I know this outcome was unique, but I am happy that the feeling was mutual and that I’ll be able to start my career at a great company, where I already feel at home.

Know This Before Entering the Employer Stop-Loss Market

by Alexander Brill

By: Alexander Brill and Juliann Schiano

New medical breakthroughs are creating higher demand for stop-loss coverage – a big opportunity for today’s insurers. With an appropriate understanding of state-specific regulatory requirements, settling on key decisions about coverages and exclusions, and partnering with a knowledgeable actuarial and product development firm, companies looking to provide this type of coverage can plan accordingly and accelerate speed-to-market.

Based upon recent nationwide product filing and support services experience with a couple of large insurance company clients, our expert actuaries and product development consultants have seen some key new healthcare and policy considerations that insurance companies should keep in mind when developing stop-loss products for employers.

Gene and Cell Therapy

Gene and cell therapy are new forms of treatment that can cost hundreds of thousands – sometimes millions – of dollars. This presents a unique challenge for stop-loss insurers since they predominantly use experience rating when developing rates. Prior experience will not capture these expensive new treatments, which have only been around for a few years. An experienced actuarial firm can assist in compiling and interpreting available data to develop accurate rates.

Coverage Period (Paid-Year vs. Incurred-Year Coverage Basis)

In response to customer demand, insurers increasingly provide stop-loss coverage on a paid-year basis – a significant difference from typical medical health plans.

In stop-loss insurance, the distinction between “paid-year” and “incurred-year” basis is crucial for determining when claims are covered. “Paid-year” basis covers claims paid within the policy year, regardless of when the underlying medical event occurred. This means that even if a claim is for an event that occurred during a previous year, it will be covered as long as the payment is made during the current policy year. On the other hand, “incurred-year” basis covers claims for medical events during the policy year, even if the actual payment is made after the policy year ends. The choice between these methods impacts how risks are managed and can affect premiums and coverage periods.

Insureds expecting high claims to be paid for medical treatments incurred in the prior year will likely request coverage on a “paid-year basis.” They are also more likely to be in the market for new stop-loss plans since they are aware of high-cost payments due in the upcoming year.

Lasering

Lasering (the practice of excluding individual members or certain treatments from coverage) is popular in part due to gene and cell therapy – but presents regulatory challenges. A dozen states prohibit lasering. An additional three states only allow lasering if the underlying medical plan allows lasering.

In Perr&Knight’s recent countrywide filing on behalf of our client, five additional states had objections, requiring the insurer to limit the use of lasering or give detailed explanations for examples of where lasering might be applied.

State-Specific Restrictions

Navigating the regulatory landscape for stop-loss products is a challenge, due to variations in requirements between states. Here are the most common state-specific issues for companies submitting countrywide filings:

  • Small employer group regulatory requirements
  • Run-in/run-out period requirements
  • Underwriting guidelines
  • Attachment point restrictions
  • Lasering restrictions
  • Group size restrictions
  • Loss ratio restrictions

DOI Review Times

Certain states take much longer to review form and rate submissions, and are more likely to raise objections and require additional transmittals. It’s important to budget time appropriately with this in mind.

Medical Inflation/Refiling Rates

Medical inflation and rapid technological changes make it necessary to refile rates and rules every few years. Knowing when and how to update rates and/or rules in a cost-effective manner is important. Working with a seasoned actuarial firm like Perr&Knight is advantageous – our expert state filing teams can help companies be proactive about refiling.

Suggestions for Working with Actuarial and Product Design Consulting Partners

Partnering with experienced actuaries and product design consultants can help streamline product development and filing. Here are some useful suggestions to keep in mind before and during the development phase:

  • Decide if your potential clients are large or small groups
  • Prioritize the jurisdictions in which you will be filing
  • Decide whether you are doing experience rating vs. manual vs. non-experience rating (note: all filings will incorporate pricing for both)
  • Determine whether you want to cover gene therapy, as this will affect pricing
  • Share whether or not you will use lasering. If so, your actuarial firm can provide appropriate guidance.

Contact the team at Perr&Knight today to learn more about stop-loss coverage.

Navigating Rising Insurance Premiums: Exploring Four Alternative Options for Businesses

by Kyle Hales

In today’s volatile market, businesses often face the challenge of rising insurance premiums, which can significantly impact their bottom line. When the cost of insurance seems disproportionate to the value received, it’s crucial for companies to explore alternative risk management strategies. While the commercial insurance marketplace functions as a reasonably effective means to transfer insurance related risk, it is by no means a perfectly efficient model. Commercial insurance carrier expenses such as commissions, marketing, advertising, premium taxes and many overhead expenses are incorporated into the final premiums paid by policyholders, resulting in a deadweight loss to the risk transfer process.

Additionally, insurance companies price policies to cover the long-term average expected losses and charge a premium for the risk they assume (profit and contingency load/charge). The insurers use the risk premium to increase their capital and surplus over time to provide for funds needed in years with high claim costs that will deplete capital and surplus. By retaining more of the risk, the expense component and risk surcharge of the insurance premiums paid to carriers would be reduced or eliminated, potentially producing significant savings for the policyholder.

This blog delves into four viable options we have identified over decades of actuarial consulting: self-insuring, forming a captive insurance company, creating a risk retention group or risk purchasing group, and starting a traditional insurance carrier. Each option comes with its own set of pros and cons, which we’ll explore to help you make an informed decision. The ideal option depends on a multitude of variables, most importantly the size of the company.

Option 1: Self-Insuring

What Is Self-Insuring? Self-insuring occurs in various forms, including electing or increasing deductibles or self-insured retentions, increasing co-insurance/quota-share percentages, setting up a certified self-insured entity or self-funding risk – that is, not purchasing insurance coverages at all. Each option consists of a company setting aside its own funds to cover all or some potential losses rather than purchasing first dollar insurance from a third-party provider.

Pros:

  • Cost Savings: Avoids and/or reduces the premium costs associated with traditional insurance.
  • Simplicity: Options such as increasing deductibles or self-insured limits are very easy to implement and don’t require significant changes to the underlying insurance policy.

Cons:

  • Financial Risk: Potential for significant financial exposure in the event of large or unexpected claims. This also increases the variability of the underlying company’s financial performance.
  • Capital Requirements: May require substantial upfront capital to ensure sufficient reserves.

Option 2: Forming a Captive Insurance Company

What Is a Captive Insurance Company? A captive insurance company can take on various forms, the most common of which is a wholly owned subsidiary created to provide insurance to its parent company and possibly its affiliates. This entity operates like a traditional insurer but serves only the needs of its parent organization.

Pros:

  • Customization: Ability to design insurance coverage tailored to specific business risks without the constraints of standard insurance policies.
  • Cost Efficiency: Potential for long-term savings and profit from underwriting income.
  • Risk Management: Improved risk management and loss prevention practices due to direct oversight.
  • Tax Benefits: Potential for favorable tax treatment under certain conditions.
  • Control: Direct control over claims handling and risk management.

Cons:

  • Initial Costs: High setup costs and ongoing administrative expenses.
  • Regulatory Oversight: Subject to insurance regulations, which can vary significantly by jurisdiction.
  • Management Complexity: Requires expertise in insurance management and regulatory compliance.
  • Capitalization: Need for adequate capitalization to meet regulatory and risk-bearing requirements.

Option 3: Risk Retention Groups (RRGs) and Risk Purchasing Groups (RPGs)

Risk Retention Groups (RRGs) and Risk Purchasing Groups (RPGs) are both mechanisms that allow businesses to manage and finance risk, particularly in the context of liability insurance. Here’s a high-level discussion of their pros and cons:

Risk Retention Group (RRG)

Pros:

  • Customization: RRGs allow member businesses to tailor insurance policies specifically to their needs, leading to potentially better coverage.
  • Cost Savings: By pooling resources and avoiding the commercial insurance market, RRGs can reduce insurance costs.
  • Control: Members have more control over the insurance process, including underwriting, claims handling, and risk management.
  • Stability: RRGs can provide stable insurance availability even in hard markets when commercial insurance becomes expensive or unavailable.
  • Flexibility: Can cover a wide range of liability exposures, except workers’ compensation.

Cons:

  • Capitalization Requirements: Establishing an RRG requires significant initial capitalization, which can be a barrier for smaller businesses.
  • Regulatory Complexity: While RRGs are regulated under federal law, they must also comply with some state regulations, which can be complex and burdensome.
  • Limited to Liability Insurance: RRGs can only provide liability insurance, not other types, such as property insurance.
  • Risk Concentration: If the group is not well-diversified, losses can be substantial, affecting all members.

Risk Purchasing Group (RPG)

Pros:

  • Access to Insurance Markets: RPGs allow members to access insurance markets and products that they might not be able to on their own.
  • Purchasing Power: By purchasing insurance as a group, RPG members can often obtain better rates and terms than they could individually.
  • Not Capital Intensive: RPGs do not require a significant level of capitalization.
  • Regulatory Simplicity: RPGs are generally subject to less regulatory oversight as compared to RRGs and captives.

Cons:

  • Limited Control: Members of an RPG have less control over the insurance policies and terms since they are purchasing group policies from insurers.
  • Standardization: Insurance policies purchased through RPGs are less likely to be customized to the specific needs of each member.
  • Dependent on Insurers: RPGs still rely on commercial insurers to provide the coverage, which can lead to issues if the insurer decides to exit the market or change terms.
  • Limited Coverage Scope: RPGs are typically limited to liability insurance and might not be able to meet all the insurance needs of their members.

Option 4: Starting a Traditional Insurance Carrier

What Is Starting a Traditional Insurance Carrier? Starting a traditional insurance carrier involves creating a fully operational insurance company that not only provides coverage for the parent company but also can offer insurance products to external clients. In general, without an experienced actuarial consulting partner, this isn’t a viable option for most individuals coming from outside the insurance world.

Pros:

  • Revenue Generation: Opportunity to generate revenue by offering insurance to third parties.
  • Market Influence: Ability to influence market practices and set industry standards.
  • Brand Extension: Enhances brand presence and adds a new dimension to the business portfolio.

Cons:

  • High Barriers to Entry: Significant financial investment, regulatory hurdles, and operational complexities.
  • Operational Risk: Exposure to underwriting, market, and operational risks inherent in the insurance industry.
  • Regulatory Compliance: Must meet stringent regulatory requirements, including capital adequacy and solvency.
  • Management Expertise: Requires specialized personnel who have knowledge and experience in running an insurance business.

Conclusion

When faced with rising insurance premiums, businesses have several strategic options to consider. Self-insuring, forming a captive insurance company, creating an RRG or RPG, and starting an insurance carrier each present unique opportunities and challenges. The right choice depends on the company’s size, financial strength, risk appetite, and long-term business objectives. By carefully weighing the pros and cons of each option, companies can make informed decisions that align with their risk management strategy and overall business goals.

Take Action: If you’re considering alternative risk management strategies, consult with the actuarial consulting and risk strategies experts at Perr&Knight today to explore the best option for your business. With the right approach, you can gain greater control over your insurance costs and enhance your company’s financial stability.

Contact Perr&Knight today to get started.