P&C insurer CSAA sees solutions for California market's woes

CSAA's California dreams

October 29, 2024 4:26 PM

CSAA headquarters building in Walnut Creek, Calif.

Since CSAA Insurance Group is closely affiliated with AAA and sells its auto insurance, it's often seen as the only insurer associated with the AAA brand. That isn't the case, with the Auto Club of Southern California and Auto Club Group in Michigan also offering insurance. CSAA, however, operates in 23 states. A majority of CSAA's business is in California, and in that state the insurer is dealing with many losses from wildfires sparked due to climate change. Digital Insurance spoke with Mike Zukerman, president and CEO, CSAA Insurance Group, about environmental challenges for insurers and catastrophe modeling, auto insurance issues, and how AI can "surprise and delight" CSAA's policyholders. Zukerman took over the CEO position a little over a year ago.

What are your thoughts on how the insurance industry is confronting environmental and climate changes?

Mike Zukerman of CSAA — Mike Zukerman, CEO, CSAA.

Climate change is real. Given our concentration, we are exposed to wildfire risk here in California. Of course, wildfire risk isn't the only risk facing America, as I think Helene and Milton will remind you. But I'm an optimist. Despite the history of wildfire risk in California. I personally think we're on the cusp of better times ahead.

California is definitely a disrupted marketplace. That said, the California Department of Insurance has done a pretty good job over the last year or so in approving necessary rate increases to allow companies to have a rate that matches the risk.

As a not-for-profit, we don't want to price too high. We want to make sure our prices are commensurate with the risk we're taking. If that happens, we don't have to non-renew anybody. We can take ... as many customers as will come to us. A lot of companies in California are starting to approach rate adequacy – getting some rate in the system that's appropriate, with inflation easing and the cost of capital coming down, which, of course, is a big driver of a lot of the companies that have left the state. They needed to preserve capital after they had a pretty bad 2023. We're going to start seeing some companies coming back into the market.

We never left, by the way. We've been open for business the entire time, but others have stopped writing new business in the state, and it's really been disruptive for the customer. So far, I haven't seen a lot of action to stabilize the market from these companies coming back in, but we will start to see them dip their toe in the waters, especially if we have a light wildfire year this year. So far, it's been pretty good in Northern California. I do feel good about the confluence of events that might actually help stabilize this marketplace.

How could California and large insurers agree on a catastrophe model that is viable for homeowners in the state?

I'm not an actuary, but I know enough to be dangerous. But actuarially, California bases its pricing on historical models. We all know that the future is going to be different than the past. Future, forward-looking cat models are essential. That's easy to say. Everybody agrees with that. Even the Department [of Insurance] agrees with that.

Cat models are important. But the devil's always in the details in something like this. Some of the consumer groups, some folks at the Department of Insurance are naturally going to be wary about the insurers themselves, especially the for-profit insurers, the stock-based insurers defining their own cat models, because there's definitely an opportunity there to be less accurate than they should be. The Department is focused properly on looking at third-party models. There's a partnership that the Department has just instituted with Humboldt State University to develop cat models. There are third-party organizations that serve the insurance industry that are trying to develop them as well. I'm hopeful that over the next several months, we're going to converge on an approach.

The other factor here is they haven't allowed the cost of reinsurance to be included in rate modeling, and that's changing as well. The Department has shown a willingness to listen and to consider divergent viewpoints. It's good that we have a regulator that's paying attention and understands that we have a disrupted marketplace, and that one of the ways to solve that problem is through regulatory reform.

Cat models are one of three big areas. The others are the cost of reinsurance and the speed of approvals. In the past, it could be a year or more to get a rate approved. Rate relief delayed is rate relief denied. That's what really causes a lot of the big carriers to throw up their hands and leave.

What does CSAA look at or develop in insurtech and its applications to underwriting or risk?

Leading the way here is the Gen AI revolution. There's a lot of applications in underwriting. As this market softens, in auto in particular, we're starting to see a lot of competition. This hard market that we've had over the last few years, was really caused by inflation and an inability for companies to develop rates that match the risk and the cost of repairing automobiles. A lot of carriers were resistant to taking on new customers.

Now that's changing. Insurance is fundamentally a commodity business. How do you differentiate? Price is one way. Service is another way. AI and technology tools allow us to get more granular with risks and better segment risks. We're spending a lot of time on what we call 'next generation' auto and home, to do better risk segmentation.

AI also plays a key role in claims – in the ability to triage claims, to get the right person looking at a claim in an appropriate way, especially when it's been a serious injury or another situation that potentially could turn into a very serious claim. Being in a serious car accident or having a house burn down is one of the most disruptive things in someone's life. It's important for us to get on top of that quickly. That good service will help us with retention, which helps us with this softening market.

We really want to surprise and delight our customers and provide the best possible service we can. AI is a fantastic tool to help us do that. At the same time, we're cognizant of the risks. AI does present a lot of risks. It's new. We've all seen some of the silly responses we've gotten from Chat GPT, the six finger pictures.

We have to be careful to keep AI human-centric, not just turn this technology loose on its own. We have an AI council run through our strategy and innovation functions, that takes on new ideas, considers the risk, and provides a green light or a red light on moving forward. But we're actively looking at underwriting claims and other opportunities to improve the customer experience.

Auto repair costs have increased in part because of how much technology has been added to vehicles. How does CSAA manage that?

That's just a given. The $500 bumper of 15 years ago is now a $3,000 bumper because it has all these proprietary sensors in it. At the same time, those sensors make cars safer. Is it an equal trade off? No. The cost to repair an automobile is a fairly static problem, and appropriate rates can address that.

The other big factor here is legal system abuse, third-party litigation funding. It's not just repairing automobiles, it's injuries and their severity. When you've got hedge funds and private equity funding the legal system, it creates pretty abusive situations where there's a lot of hands out. The aggrieved, the injured party, is not any better off, but there's a lot of other people making money off of those situations, and that is probably the biggest driver that we're seeing in the cost of automobile claims.

Florida is really a model for solving this problem, and they haven't banned it. All they've done is create transparency. In California, there is no transparency on who's behind litigation, who's funding it. Florida has mandated more disclosure around that. Other states have done the same. That's all we really need here. Just let the jury make the decision. When most juries get hold of all this out-of-state dark money that's profiting off of people's misery, they don't like it.

We absolutely are committed to paying claims appropriately and making sure that our customers who are injured are made as whole as they can be, based on the policy they bought. But there are a lot of tricks of the trade in the plaintiffs' world that are causing those costs to skyrocket, and a lot of it can be traced back to third-party litigation funding.

What do you hope to achieve in the leadership role for CSAA?

We exist to serve AAA, so we are not focused on lots of growth, but we have to be profitable. The legacy I want to leave is to double down on surprising and delighting our customers. When you look at customer satisfaction scores, everyone excludes USAA because they're so much better than everyone else at delighting customers.

We can be there too, and we do a good job at it already, but we can do better. This is just about being there for our customers when they need us most, helping them deal with life's uncertainties – being member-centric, customer-centric, and charging the right rate for risks.

When they contact us to buy a new policy, change a car on their policy or make a claim, it's important that it's a really delightful experience. Every interaction we have with a customer is driven by our employees. Having a really happy workforce that looks forward to getting out of bed in the morning and coming to work, whether it's down the hall or in an office, that's really important to me.

We're a leader in sustainability, and I'm really, really proud of the efforts we've made there. One pillar is doing our own part, and the second is influencing the rest of the industry and others with stakeholder engagement. We had a goal of reducing our carbon footprint by 50% over 2016 levels by next year. We already achieved that last year.

We have a climate resiliency challenge, along with IDEO and Aon, with $1 million in prizes for solutions that help communities prevent, prepare for and recover from climate related disasters. We're one of the first investors in the Blue Forest Conservations Forest Resilience Bond, and we helped establish the California Wildfire Innovation Fund. We committed $25 million to support ventures that decrease the severity and frequency of wildfire catastrophes.

We're going to continue to do those things, because everybody has to do their part. Establishing as an example what can be done will help the industry copy us and and improve the wildfire resilience overall in [California], and at the same time provide a better environmental footprint for everyone.