florida property & casualty insurance market update property & casualty insurance market...
TRANSCRIPT
Florida Property & Casualty Insurance Market Update
Trends, Challenges & Opportunities
Florida Chamber of Commerce Insurance Summit
Orlando, FL
October 27, 2015
Download at www.iii.org/presentations
Robert P. Hartwig, Ph.D., CPCU, President & Economist
Insurance Information Institute 110 William Street New York, NY 10038
Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org
2
Insurance Industry Financial Performance
2014 Was a Reasonably Good Year
2015: A Repeat of 2014?
2
P/C Industry Net Income After Taxes1991–2015:H1 2005 ROE*= 9.6%
2006 ROE = 12.7%
2007 ROE = 10.9%
2008 ROE = 0.1%
2009 ROE = 5.0%
2010 ROE = 6.6%
2011 ROAS1 = 3.5%
2012 ROAS1 = 5.9%
2013 ROAS1 = 10.2%
2014 ROAS1 = 8.4%
2015:H1 ROAS = 9.2%
•ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.
Sources: A.M. Best, ISO; Insurance Information Institute
$1
4,1
78
$5
,84
0
$1
9,3
16
$1
0,8
70
$2
0,5
98
$2
4,4
04 $3
6,8
19
$3
0,7
73
$2
1,8
65
$3
,04
6
$3
0,0
29
$6
2,4
96
$3
,04
3
$3
5,2
04
$1
9,4
56 $
33
,52
2
$6
3,7
84
$5
5,5
01
$3
0,9
72
$3
8,5
01
$2
0,5
59
$4
4,1
55
$6
5,7
77
-$6,970
$2
8,6
72
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15:H
1
Net income fell modestly
(-12.5%) in 2014 vs. 2013
$ Millions
-5%
0%
5%
10%
15%
20%
25%
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
E
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2015E
*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude
mortgage and financial guaranty insurers.
Source: Insurance Information Institute; NAIC, ISO, A.M. Best, Conning
1977:19.0%1987:17.3%
1997:11.6% 2006:12.7%
1984: 1.8% 1992: 4.5% 2001: -1.2%
9 Years
History suggests next ROE
peak will be in 2016-2017
ROE
1975: 2.4%
2013 9.8%
2014 8.2%
2015E: 8.8%
5
ROE: Property/Casualty Insurance by Major Event, 1987–2015E
* Excludes Mortgage & Financial Guarantee in 2008 – 2014. Sources: ISO, Fortune; Insurance Information Institute.
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15E
P/C Profitability Is Both by Cyclicality and Ordinary Volatility
Hugo
Andrew
Northridge
Lowest CAT Losses in 15 Years
Sept. 11
Katrina, Rita, Wilma
4 Hurricanes
Financial Crisis*
(Percent)
Record Tornado Losses
Sandy
Low CATs
Modestly higher CATs
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
11
13
Economic Shocks,
Inflation:
1976: 22.2%Tort Crisis
1986: 30.5%
Post-9/11
2002: 22.4%
Great
Recession:
2009: -9.0%
ROE
2014E 4.0%
Commercial Lines NPW Premium Growth:1975 – 2014E
Recessions:
1982: 1.1%
Commercial lines is prone to more cyclical volatility that personal
lines. Recently, growth has stabilized in the 4% to 5% range.
1988-2000: Period of
inter-cycle stability
2010-20XX? Post-
recession period of
stable growth?
Note: Data include state funds beginning in 1998.
Source: A.M. Best; Insurance Information Institute.
Post-Hurricane
Andrew Bump:
1993: 6.3%
Post Katrina
Bump:
2006: 7.7%
7
P/C Insurance Industry Combined Ratio, 2001–2015:H1*
* Excludes Mortgage & Financial Guaranty insurers 2008--2014. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014: = 97.0.
Sources: A.M. Best, ISO.
95.7
99.3100.8
106.3
102.4
96.7 97.2 97.6
101.0
92.6
100.8
98.4100.1
107.5
115.8
90
100
110
120
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15:H1
As Recently as 2001, Insurers Paid Out
Nearly $1.16 for Every $1 in Earned Premiums Relatively
Low CAT Losses, Reserve Releases
Heavy Use of Reinsurance Lowered Net
Losses
Relatively Low CAT Losses, Reserve Releases
Higher CAT
Losses, Shrinking Reserve
Releases, Toll of Soft
Market
Cyclical Deterioration
Sandy Impacts
Lower CAT
Losses
Best Combined Ratio Since 1949 (87.6)
Avg. CAT Losses,
More Reserve Releases
A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs
Combined Ratio / ROE
* 2008 -2014 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2014 combined ratio including M&FG insurers is 97.0; 2013 = 96.1; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%.
Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.
97.5
100.6 100.1 100.8
92.7
101.299.5
101.0
96.7 97.2 97.6
102.4
106.5
95.7
14.3%
15.9%
12.7%
10.9%
7.4% 7.9%
4.7%
6.2% 9.2%8.2%
9.6%8.8%
4.3%
9.8%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015:H1
0%
3%
6%
9%
12%
15%
18%
Combined Ratio ROE*
Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs
A combined ratio of about 100 generates an ROE of ~7.0% in 2012/13, ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Lower CATs helped ROEs in 2013-15:Q2
9
Return on Equity by Financial Services Sector vs. Fortune 500, 2004-2014*
*GAAP basis. Sources: ISO, Fortune; Insurance Information Institute.
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
04 05 06 07 08 09 10 11 12 13 14
Fortune 500 P/C Insurers Life Insurers Commercial Banks(Percent)
Average: 2004 - 2014
Fortune 500: 13.9% Commercial Banks: 9.8%
Life: 8.2% P/C: 7.1%
Banks and Insurers Have Substantially Underperformed the Fortune 500 Since the Financial Crisis
10
Return on Net Worth (RNW) All Lines:2004-2013 Average
25
.6
18
.4
13
.4
13
.2
9.2
8.9
7.9
7.8
7.1
7.1
6.6
4.9
-1.0
-5
0
5
10
15
20
25
30
Fire
Inla
nd Mar
ine
All
Oth
er
Med
ical
Pro
f Lia
bility
Com
m A
uto T
otal
Com
mer
cial M
P
All
Lines
Oth
er L
iabili
ty
Work
ers
Com
p
PP A
uto T
otal
Hom
eowner
s M
P
Farmow
ners
MP
Alli
ed Lin
es
Source: NAIC; Insurance Information Institute.
Commercial lines have tended to be more profitable than
personal lines over the past decade
-5%
0%
5%
10%
15%
20%
25%
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12
14
*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude
mortgage and financial guaranty insurers.
Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
1977:19.0%
1987:17.3%
1997:11.6%
2006:12.7%
1984: 1.8%
1992: 4.5%
2001: -1.2%
ROE
1975: 2.4%
2013 9.8%
2015E 8.8%
Back to the Future: Profitability Peaks & Troughs in the P/C Insurance Industry, 1950 – 2015E*
1969: 3.9%
1965: 2.2%1957: 1.8%
1972:13.7%
1966-67:
5.5%1959:6.8%
1950:8.0%
1950-70: ROEs were lower in this period. Low interest rates,
low inflation, “Bureau” rate regulation all played a role
1970-90: Peak ROEs were much higher in this period while troughs
were comparable. High interest rates, rapid inflation, economic
volatility all played roles
1990-2010s: Déjà vu. Excluding mega-
CATs, this period is very similar to the 1950-1970 period
12
Distribution of Direct Premiums Written by Segment/Line, 2013
Sources: A.M. Best; Insurance Information Institute research.
Personal/Commercial lines split has been about 50/50 for many years
Pvt. Passenger Auto is by far the largest line of insurance and is currently the most important source of industry profits
Billions of additional dollars in homeowners insurance premiums are written by state-run residual market plans
Distribution Facts
Commercial Lines$269.2B/51%
2013
Pvt. Pass Auto$180.8B/34%
Homeowners$80.7B/15%
13
RNW All Lines by State, 2004-2013 Average:Highest 25 States
20
.5
18
.4
14
.6
14
.3
13
.4
13
.3
12
.3
12
.1
12
.0
12
.0
11
.7
11
.4
11
.1
11
.1
10
.9
10
.8
10
.7
10
.7
10
.5
10
.5
10
.3
9.9
9.8
9.8
9.6
9.5
0
2
4
6
8
10
12
14
16
18
20
22
24
HI AK VT ME WY ND VA ID NH UT WA SC MA NC OH DC CA OR RI WV CT IA NE SD MT MD
The most profitable states over the past decade are
widely distributed geographically, though none
are in the Gulf region
Source: NAIC; Insurance Information Institute.
Profitability Benchmark: All P/C
US: 7.9%
14
9.2
8.6
8.4
8.3
8.2
8.2
8.1
8.0
7.9
7.7
7.7
7.5
7.4
6.8
6.6
6.4
6.1
5.7
5.3
5.2
5.0
4.3
2.5
1.9
-6.9
-9.3
-14
-12-10
-8
-6
-4-2
0
2
46
8
10
NM FL TX WI KS MN CO PA US AR IL IN AZ MO KY TN NV NJ GA NY DE MI AL OK MS LA
RNW All Lines by State, 2004-2013 Average:
Lowest 25 States
Source: NAIC; Insurance Information Institute.
Some of the least profitable states over the past decade
were hit hard by catastrophes
15
19
.0
14
.3
14
.2
13
.9
13
.7
13
.5
12
.4
12
.1
11
.3
11
.3
10
.8
10
.7
10
.5
9.9
9.9
9.9
9.7
9.6
9.5
9.3
9.2
9.2
9.1
9.0
8.9
8.8
0
2
4
6
8
10
12
14
16
18
20
22
HI ME DC ID VT ND AK NH IA WY OH MN WV AZ OR VA CA RI CO KS CT WI NM MT UT IN
RN
W P
PA
*Latest available.
Sources: NAIC.
Hawaii was the most profitable state for auto insurers from 2004-2013
Return on Net Worth: Pvt. Passenger Auto,
10-Year Average (2004-2013*)
Top 25 States(Percent)
16
8.8
8.6
8.6
8.6
8.5
8.3
8.1
7.8
7.7
7.6
7.5
7.5
7.4
7.1
6.3
6.2
6.1
5.9
5.8
5.6
5.0
4.5
4.4
3.8
3.3
-2.5
-3
-1
1
3
5
7
9
NE
MD
SD
WA IL NY
MA
TX
PA
AL
AR
MO
SC
US
NC
TN
NJ
DE
GA
KY
OK
MS
FL
NV
LA MI
RN
W A
uto
Return on Net Worth: Pvt. Passenger Auto,
10-Year Average (2004-2013*)
*Latest available.
Sources: NAIC
Michigan was the least profitable state for auto insurers from
2004-2013
(Percent) Bottom 25 States
17
42
.6
23
.6
21
.0
20
.9
20
.2
20
.0
19
.3
18
.4
17
.6
15
.9
15
.8
15
.6
15
.3
14
.7
14
.6
13
.8
13
.0
12
.2
11
.0
11
.0
10
.8
10
.7
10
.6
19
.0
18
.0
14
.00
5
10
15
20
25
30
35
40
45
50
HI DC DE RI NV CA SC VA AK OR MA NY VT WA UT ME MD CT ID NH NC AZ PA WY MI TX
RN
W H
O
*Latest available.
Sources: NAIC.
Return on Net Worth: Homeowners Insurance,
10-Year Average (2004-2013*)
Hawaii was the most profitable state for home insurers from 2004-2013 due to the absence
of hurricanes during this period
(Percent)Top 25 States
18
10
.2
9.9
7.8
7.1
6.6
6.3
5.8
4.2
-0.3
8.0
6.0
-2.8
-3.3
-4.0
-4.3
-5.9
-8.2
-10
.2
-13
.1
-16
.0
-19
.6
-25
.8
-2.4
-2.4-0
.5
-0.4
-30
-25
-20
-15
-10
-5
0
5
10
15
WV NM ND IA NJ US MT WI IL SD NE FL CO MO OH KS IN AR KY MN GA TN AL OK LA MS
RN
W H
O
*Latest available.
Sources: NAIC
Hurricanes Katrina and Rita made Louisiana and Mississippi the least profitable states for home insurers
from 2004-2013
Bottom 25 States(Percent)
Return on Net Worth: Homeowners Insurance,
10-Year Average (2004-2013*)
Profitability in Florida’s over the past decades is still
weighed down by the record storm losses of 2004/05
Source: A.M. Best; Barclays research for estimates.
Reserve Change
P/C Insurance Loss Reserve Development, 1992 – 2016E*
Reserve releases are expected to gradually taper off, but will
continue to benefit the bottom line and combined ratio through
at least 2016
Profitability & Politics
2020
How Is Profitability Affected by the President’s Political Party?
15.10%
9.00%
8.93%
8.65%
8.35%
8.33%
7.98%
7.68%
6.98%
6.97%
5.43%
5.03%
4.83%
4.68%
4.43%
3.55%
16.43%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
Carter
Reagan II
Obama II
Nixon
Clinton I
G.H.W. Bush
G.W. Bush II
Clinton II
Reagan I
Nixon/Ford
Truman
Eisenhower I
Eisenhower II
G.W. Bush I
Obama I
Johnson
Kennedy/Johnson
*Truman administration ROE of 6.97% based on 3 years only, 1950-52;.
Source: Insurance Information Institute
OVERALL RECORD: 1950-2014*
Democrats 7.72%Republicans 7.85%
Party of President has marginal bearing on profitability of P/C insurance industry
P/C Insurance Industry ROE by Presidential Administration, 1950-2014*
-5%
0%
5%
10%
15%
20%
25%
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12
14
BLUE = Democratic President RED = Republican President
Tru
ma
n Nixon/Ford
Ke
nn
ed
y/
Jo
hn
so
n
Eis
en
ho
wer
Ca
rte
r
Reagan/Bush I Clinton Bush II
P/C insurance Industry ROE by Presidential Party Affiliation, 1950- 2014
Obama
.
Source: Insurance Information Institute
23
Profitability and Growth in Florida P/C Insurance
Markets
Analysis by Line and Nearby State Comparisons
24
RNW All Lines: FL vs. U.S., 2004-2013
Source: NAIC.
-40%
-30%
-20%
-10%
0%
10%
20%
30%
04 05 06 07 08 09 10 11 12 13
US All Lines FL All Lines
P/C Insurer profitability in FL is above that of the US
overall over the past decade
US: 7.9%
FL: 8.6%
(Percent)
25
RNW PP Auto: FL vs. U.S., 2004-2013
Source: NAIC.
0%
2%
4%
6%
8%
10%
12%
14%
04 05 06 07 08 09 10 11 12 13
US PP Auto FL PP Auto
Average 2004-2013
US: 7.1%
FL: 4.4%
26
RNW Comm. Auto: FL vs. U.S.,2004-2013
Source: NAIC.
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
04 05 06 07 08 09 10 11 12 13
US Comm Auto FL Comm Auto
(Percent)
Commercial Auto profitability in FL is
generally below the US average
Average 2004-2013
US: 9.2%
FL: 4.7%
27
RNW Comm. Multi-Peril: FL vs. U.S.,2004-2013
Sources: NAIC.
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
04 05 06 07 08 09 10 11 12 13
US Comm M-P FL Comm M-P
(Percent)
Average 2004-2013
US: 8.9%
FL: 7.4%
28
RNW Homeowners: FL vs. U.S.,2004-2013
Sources: NAIC.
-200%
-150%
-100%
-50%
0%
50%
100%
04 05 06 07 08 09 10 11 12 13
US HO FL HO
(Percent)Average 2004-2013
US: 6.6%
FL: -0.4%
Even With Returns Near 30 Percent for Much of
the Decade, Florida Insurers Lost Money on
Homeowners Line.
29
RNW Workers Comp: FL vs. U.S.,2004-2013
Sources: NAIC.
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
04 05 06 07 08 09 10 11 12 13
US WComp FL Wcomp
(Percent)
Average 2004-2013
US: 7.1%
FL: 10.5%
All Lines: 10-Year Average RNW FL & Nearby States
2.5%
7.9%
8.6%
11.4%
-6.9%
5.3%
-10% -5% 0% 5% 10% 15%
South Carolina
Florida
US
Georgia
Alabama
Mississippi
Source: NAIC, Insurance Information Institute
2004-2013
Florida All Lines profitability is below the US average and above the regional average
PP Auto: 10-Year Average RNW FL & Nearby States
4.5%
7.1%
7.4%
7.6%
4.4%
5.8%
0% 2% 4% 6% 8%
Alabama
South Carolina
US
Georgia
Mississippi
Florida
Source: NAIC, Insurance Information Institute
2004-2013
Florida PP Auto profitability is below the US and regional
average
32
Top Ten Most Expensive And Least Expensive States For Automobile Insurance, 2012 (1)
RankMost
expensive statesAverage
expenditure RankLeast
expensive statesAverage
expenditure
1 New Jersey $1,219.93 1 Idaho $534.56
2 D.C. 1,154.91 2 South Dakota 556.51
3 New York 1,152.45 3 Iowa 561.26
4 Florida 1,127.93 4 North Dakota 576.08
5 Louisiana 1,112.53 5 Maine 582.43
6 Delaware 1,065.37 6 Wisconsin 598.84
7 Michigan 1,048.87 7 North Carolina 611.48
8 Rhode Island 1,034.50 8 Nebraska 616.78
9 Connecticut 986.73 9 Wyoming 618.81
10 Massachusetts 976.65 10 Kansas 632.07
(1) Based on average automobile insurance expenditures.
Source: © 2014 National Association of Insurance Commissioners.
Florida ranked 4th as the most expensive state in 2012, with an average expenditure for auto insurance of $1,127.93.
Comm. Auto: 10-Year Average RNW FL & Nearby States
4.7%
6.4%
9.2%
9.5%
3.7%
5.7%
0% 2% 4% 6% 8% 10%
South Carolina
U.S.
Georgia
Mississippi
Florida
Alabama
Source: NAIC, Insurance Information Institute
2004-2013
Florida Commercial Auto profitability is below the US and regional average
Comm. M-P: 10-Year Average RNW FL & Nearby States
-1.6%
7.4%
8.9%
10.5%
-6.4%
5.0%
-10% -5% 0% 5% 10% 15%
South Carolina
U.S.
Florida
Georgia
Alabama
Mississippi
Source: NAIC, Insurance Information Institute
2004-2013
Florida Commercial Multi-Peril profitability
is below the US average and above the
regional average
Homeowners: 10-Year Average RNW FL & Nearby States
-13.1%
-0.4%
6.6%
20.0%
-25.8%
-8.2%
-30% -20% -10% 0% 10% 20% 30%
South Carolina
U.S.
Florida
Georgia
Alabama
Mississippi
Source: NAIC, Insurance Information Institute
2004-2013
Florida Homeowners profitability is below the US average and above the regional average
36
Top Ten Most Expensive And Least Expensive States For Homeowners Insurance, 2012 (1)
Rank Most
expensive statesHO average
premium RankLeast
expensive statesHO average
premium
1 Florida $2,084 1 Idaho $538
2 Louisiana 1,742 2 Oregon 567
3 Texas 1,661 3 Utah 580
4 Oklahoma 1,501 4 Wisconsin 631
5 Mississippi 1,314 5 Washington 648
6 Alabama 1,248 6 Nevada 674
7 Rhode Island 1,233 7 Delaware 678
8 Kansas 1,213 8 Arizona 691
9 Connecticut 1,160 9 Ohio 721
10 New York 1,158 10 Maine 741
(1) Includes policies written by Citizens Property Insurance Corp. (Florida) and Citizens Property Insurance Corp. (Louisiana), Alabama Insurance
Underwriting Association, Mississippi Windstorm Underwriting Association, North Carolina Joint Underwriting Association and South Carolina
Wind and Hail Underwriting Association. Other southeastern states have wind pools in operation and their data may not be included in this chart.
Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides “all risks” coverage (except those
specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written.
(2) The Texas Department of Insurance developed home insurance policy forms that are similar but not identical to the standard forms. In addition,
due to the Texas Windstorm Association (which writes wind-only policies) classifying HO-1, 2 and 5 premiums as HO-3, the average premium for
homeowners insurance is artificially high.
Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days of insured coverage for a single dwelling. The NAIC
does not rank state average expenditures and does not endorse any conclusions drawn from this data.
Source: ©2014 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited
without written permission of NAIC.
Florida ranked as the most expensive state for homeowners insurance in 2012, with an average expenditure of $2,084.
Workers Comp: 10-Year Average RNW FL & Nearby States
4.6%
7.3%
7.9%
10.5%
3.1%
7.1%
0% 2% 4% 6% 8% 10% 12%
Florida
Alabama
Mississippi
U.S.
Georgia
South Carolina
Source: NAIC, Insurance Information Institute
2004-2013
Florida Workers Comp profitability is above the US average and above the regional
average
38
All Lines DWP Growth: FL vs. U.S., 2005-2014
Source: SNL Financial.
2.3
%
3.4
%
0.5
%
-2.1
%
-3.3
%
0.0
%
3.7
%
4.6
%
5.5
%
4.4
%
10
.3% 1
3.9
%
-1.2
%
-9.1
% -6.5
%
1.3
% 3.7
% 5.8
%
4.3
%
3.7
%
-15%
-10%
-5%
0%
5%
10%
15%
20%
05 06 07 08 09 10 11 12 13 14
US DWP: All Lines FL DWP: All Lines
(Percent)Average 2005-2014
US: 1.9%
FL: 2.6%
39
Comm. Lines DWP Growth: FL vs. U.S., 2005-2014
Source: SNL Financial.
2.6
% 4.6
%
-0.1
%
-4.0
%
-7.3
%
-2.5
%
5.1
%
5.1
%
6.1
%
4.3
%
12
.6%
15
.3%
-3.3
%
-11
.7%
-9.7
%
-3.4
%
2.2
%
5.6
%
5.5
%
6.7
%
-17%
-12%
-7%
-2%
3%
8%
13%
18%
05 06 07 08 09 10 11 12 13 14
US DWP: Comm. Lines FL DWP: Comm. Lines
(Percent)
Average 2005-2014
US: 1.4%
FL: 2.0%
40
Personal Lines DWP Growth: FL vs. U.S., 2005-2014
Source: SNL Financial.
2.2
%
2.3
%
1.2
%
-0.1
%
1.1
% 2.5
%
2.2
% 4.2
%
5.1
%
4.8
%
8.5
%
1.0
%
-6.5
%
-3.5
%
5.4
%
4.9
%
5.9
%
3.5
%
1.7
%
12
.8%
-11%
-6%
-1%
4%
9%
14%
05 06 07 08 09 10 11 12 13 14
US DWP: Pers. Lines FL DWP: Pers. Lines
(Percent)
Average 2005-2014
US: 2.6%
FL: 3.4%
41
Private Passenger Auto DWP Growth: FL vs. U.S., 2005-2014
Source: SNL Financial.
0.5
%
0.4
%
0.0
%
-0.3
%
-0.1
%
1.5
%
1.5
%
3.5
% 4.6
%
4.9
%
-2.9
%
-2.8
%
-3.2
%
3.2
%
0.3
%
2.6
%
-3.3
%
-3.1
%
-5.2
%
-5.2
%
-6%
-4%
-2%
0%
2%
4%
6%
05 06 07 08 09 10 11 12 13 14
US DWP: PP Auto FL DWP: PP Auto
(Percent)
Average 2005-2014
US: 1.6%
FL: -2.0%
42
Homeowner’s MP DWP Growth: FL vs. U.S., 2005-2014
Source: SNL Financial.
7.4
%
7.4
%
4.2
%
0.5
% 3.8
%
4.9
%
3.8
%
5.7
%
6.2
%
4.4
%
21
.1%
31
.9%
6.7
%
-4.3
%
9.2
%
3.9
%
6.6
%
4.6
%
-0.6
%
-15
.6%
-20%
-10%
0%
10%
20%
30%
40%
05 06 07 08 09 10 11 12 13 14US DWP: HO Lines FL DWP: HO Lines
(Percent)
Average 2005-2014
US: 4.8%
FL: 6.3%
INVESTMENTS: THE NEW REALITY
43
Investment Performance is a Key Driver of Profitability
Depressed Yields Will Necessarily Influence Underwriting & Pricing
43
Property/Casualty Insurance Industry Investment Income: 2000–2015E1
$38.9$37.1 $36.7
$38.7
$54.6
$51.2
$47.1 $47.6$49.2
$48.0 $47.3$46.2 $46.8
$39.6
$49.5
$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15E
Due to persistently low interest rates,investment income fell in 2012, 2013 and 2014.
1 Investment gains consist primarily of interest and stock dividends. *2015 figure is estimated based on annualized data through Q2.Sources: ISO; Insurance Information Institute.
($ Billions)Investment earnings are still below their 2007 pre-crisis peak
Distribution of Invested Assets: P/C Insurance Industry, 2013
Stocks, 22%
Bonds, 62%
All Other, 10%
Cash, Cash Equiv. &
ST Investments, 6%
Source: Insurance Information Institute Fact Book 2015, A.M. Best.
Total Invested Assets = $1.5
Trillion
$ Billions
46
U.S. Treasury Security Yields:A Long Downward Trend, 1990–2015*
*Monthly, constant maturity, nominal rates, through August 2015.
Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15
Recession2-Yr Yield10-Yr Yield
Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.
U.S. Treasury yields plunged to historic lows in 2013. Longer-
term yields rebounded then sank fell again.
46
47
Treasury Yield Curves: Pre-Crisis (July 2007) vs. June 2015
0.01% 0.02% 0.09%0.28%
0.69%
2.10%2.36%
4.82%4.96% 5.04% 4.96%
4.82% 4.82% 4.88% 5.00% 4.93% 5.00%5.19%
1.68%
1.07%
3.11%2.85%
0%
1%
2%
3%
4%
5%
6%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
June 2015 Yield Curve
Pre-Crisis (July 2007)
Treasury yield curve remains near its most depressed level
in at least 45 years. Investment income is falling as a result. Even when the Fed begins to raise rates, yields unlikely to return to
pre-crisis levels anytime soon
The Fed Is Actively is Signaling that it Is Likely to Begin Raising Rates Later in 2015 but Only Very Gradually
Source: Federal Reserve Board of Governors; Insurance Information Institute.
Net Yield on Property/Casualty Insurance Invested Assets, 2007–2015*
4.38
4.17
4.02
3.87
3.63 3.61
3.743.82
3.44
3.0
3.2
3.4
3.6
3.8
4.0
4.2
4.4
4.6
07 08 09 10 11 12 13 14 15*
The yield on invested assets remains low relative to pre-crisis yields. The Fed’s plan to raise interest rates in late 2015 has already pushed up some yields, albeit quite modestly.
*2015 figure is the average of the four quarters ending in 2015:Q2.Sources: SNL Financial; Insurance Information Institute
(Percent) Book yield in 2015 is down 77 BP from pre-crisis levels
49
Interest Rate Forecasts: 2015 – 2021
3.1%
2.2%
2.7%
3.4%
3.8%4.0% 4.0% 4.0%
0.1%
0.8%
2.0%
2.8%
3.1% 3.1%
0%
1%
2%
3%
4%
5%
15F 16F 17F 18F 19F 20F 21F 15F 16F 17F 18F 19F 20F 21F
A full normalization of interest rates is unlikely until the 2020s, more than a decade after the onset of the financial crisis.
Yield (%)
Sources: Blue Chip Economic Indicators (10/15 for 2015 and 2016; for 2017-2021 10/15 issue); Insurance Info. Institute.
3-Month Treasury 10-Year Treasury
The end of the Fed’s QE program in 2014 and a
stronger economy have yet to push longer-term
yields much higher
50
Annual Inflation Rates, (CPI-U, %),1990–2016F
2.82.6
1.51.9
3.3 3.4
1.3
2.52.3
3.0
3.8
2.8
3.8
-0.4
1.6
3.2
2.1
1.51.7
0.2
2.0
2.9
2.4
3.23.0
5.14.9
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15F 16F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 9/15 (forecasts).
Slack in the U.S. economy and falling energy prices suggests that inflationary pressures should remain subdued for an extended
period of times
Annual Inflation Rates (%)
Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the
commodity bubble reduced inflationary pressures in 2009/10
Inflationary expectations have slipped
(due in part to falling energy
costs) allowing the Fed to
maintain low interest rates
51
-1.8
%
-1.8
%
-2.0
%
-3.6
%
-3.3
%
-3.3
%
-3.7
%
-4.3
%
-5.2
%
-5.7
%
-7.3%
-1.9
%
-2.1
%
-3.1
%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
Per
sona
l Lin
es
Pvt P
ass
Aut
o
Per
s Pro
p
Com
mer
cial
Com
ml A
uto
Cre
dit
Com
m P
rop
Com
m C
as
Fidel
ity/S
uret
y
War
rant
y
Sur
plus
Lin
es
Med
Mal
WC
Rei
nsur
ance
**
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
*Based on 2008 Invested Assets and Earned Premiums
**US domestic reinsurance only
Source: A.M. Best; Insurance Information Institute.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
51
52
P/C Insurer Net Realized Capital Gains/Losses, 1990-2015:Q2
*Through Q2 2015.Sources: A.M. Best, ISO, SNL, Insurance Information Institute.
$2
.88
$4
.81
$9
.89
$9
.82
$1
0.8
1 $1
8.0
2
$1
3.0
2
$1
6.2
1
$6
.63
-$1
.21
$6
.61
$9
.13
$9
.70
$3
.52 $8
.92
-$7
.90
$5
.85
$7
.04
$6
.18
$1
1.3
7
$1
0.0
6
$8
.19
-$1
9.8
1
$9
.24
$6
.00
$1
.66
-$25
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15*
Insurers Posted Net Realized Capital Gains in 2010 - 2014 Following Two Years of Realized Losses During the Financial Crisis. Realized Capital
Losses Were a Primary Cause of 2008/2009’s Large Drop in Profits and ROE.
($ Billions) Realized capital gains rose sharply as equity markets
rallied in 2013-14
Property/Casualty Insurance Industry Investment Gain: 1994–2015:Q21
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$64.0
$31.7
$39.2
$53.4$56.2
$54.2
$58.7
$31.6
$56.2
$58.0
$51.9
$56.9
$0
$10
$20
$30
$40
$50
$60
$70
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11 12 13 14 15*
Total Investment Gains Were Down Slightly in 2014 as Low Interest Rates Pressured Investment Income but Realized Capital Gains Remained
Robust
1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B; 2015 figure is through Q2 2015.Sources: ISO, SNL; Insurance Information Institute.
($ Billions)
Investment gains in 2014 will rival the post-crisis
high reached in 2013
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12
14
*Through Oct. 9, 2015.
Source: NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html Ins. Info. Inst.
Tech Bubble
Implosion
Financial
Crisis
Annual Return
Energy Crisis
2015*:
-2.1%
S&P 500 Index Returns, 1950 – 2015*
Fed Raises Rate
Volatility is endemic to stock markets—and may be increasing—but there is no persistent
downward trend over long periods of time
55
Distribution of Bond Maturities,P/C Insurance Industry, 2003-2013
14.4%
15.4%
16.0%
16.0%
15.2%
15.7%
15.6%
16.0%
14.9%
16.6%
16.5%
29.8%
29.2%
28.8%
29.5%
30.0%
32.4%
36.4%
39.5%
41.2%
40.4%
38.8%
31.3%
32.5%
34.1%
34.1%
33.8%
31.2%
29.0%
27.1%
27.3%
27.6%
29.3%
15.4%
15.4%
13.6%
13.1%
12.9%
12.7%
11.9%
11.2%
10.4%
9.8%
9.8%
9.2%
7.6%
7.6%
7.4%
8.1%
8.1%
7.1%
6.2%
6.2%
5.7%
5.7%
0% 20% 40% 60% 80% 100%
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Under 1 year
1-5 years
5-10 years
10-20 years
over 20 years
Sources: SNL Financial; Insurance Information Institute.
The main shift over these years has been from bonds with longer maturities to bonds with shorter maturities. The industry first trimmed its holdings of over-10-year bonds
(from 24.6% in 2003 to 15.5% in 2012) and then trimmed bonds in the 5-10-year category (from 31.3% in 2003 to 27.6% in 2012) . Falling average maturity of the P/C industry’s
bond portfolio is contributing to a drop in investment income along with lower yields.
CAPITAL/CAPACITY
56
Capital Accumulation Has Multiple Impacts
Alternative Capital Impacts?
56
57
Policyholder Surplus, 2006:Q4–2015:Q2
Sources: ISO, A.M .Best.
($ Billions)
$487.1
$496.6
$512.8
$521.8
$478.5
$455.6
$437.1 $463.0 $
490.8 $511.5 $
540.7
$530.5
$544.8
$559.2
$559.1
$538.6
$550.3
$567.8
$583.5
$586.9 $607.7
$614.0
$624.4 $
653.4
$671.6
$673.9
$674.7
$672.4
$662.0
$570.7
$566.5
$505.0
$515.6
$517.9
$400
$450
$500
$550
$600
$650
$700
06:Q
4
07:Q
1
07:Q
2
07:Q
3
07:Q
4
08:Q
1
08:Q
2
08:Q
3
08:Q
4
09:Q
1
09:Q
2
09:Q
3
09:Q
4
10:Q
1
10:Q
2
10:Q
3
10:Q
4
11:Q
1
11:Q
2
11:Q
3
11:Q
4
12:Q
1
12:Q
2
12:Q
3
12:Q
4
13:Q
1
13:Q
2
13:Q
3
13:Q
4
14:Q
1
14:Q
2
14:Q
3
14:Q
4
15:Q
2
2007:Q3Pre-Crisis Peak
Surplus as of 6/30/15 stood at a near-record high $672.4B
2010:Q1 data includes $22.5B of
paid-in capital from a holding
company parent for one insurer’s
investment in a non-insurance
business .
The industry now has $1 of surplus for every $0.73 of NPW,close to the strongest claims-paying status in its history.
Drop due to near-record 2011 CAT losses
The P/C insurance industry entered 2015in very strong financial condition.
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
$550
$600
$650
$700
$750
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 14
US Policyholder Surplus:1975–2015:Q2*
* As of 6
*As of 6/30/15.
Source: A.M. Best, ISO, Insurance Information Institute.
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in
non-insurance organizations
($ Billions)
The Premium-to-Surplus Ratio Stood at $0.76:$1 as of6/30/15, a Near Record Low (at Least in Recent History)
Surplus as of 6/30/15 was a near-record $672.4, down 0.3% from the record $674.7 of 12/31/14 but up 53.8% ($235.3B) from the crisis trough of $437.1B at 3/31/09
$0.50
$0.60
$0.70
$0.80
$0.90
$1.00
$1.10
$1.20
$1.30
$1.40
$1.50
$1.60
$1.70
$1.80
$1.90
$2.00
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*
Premium-to-Surplus Ratio:1985–2014*
* As of 12/31/14.
Source: A.M. Best, ISO, Insurance Information Institute.
The larger surplus is in relation to premiums—the lower the P:S ratio—and the great the industry’s capacity
to handle the risk it has accepted
(Ratio of NWP to PHS)
The Premium-to-Surplus Ratio Stood at $0.73:$1 as of12/31/14, a Record Low (at Least in Recent History)
Surplus as of 12/31/14 was $0.73:$1, a near-record low (at least in modern history)
9/11, Recession & Hard Market
P/C Industry: Loss Reserve-to-Surplus Ratio, 1971-2014
Source: Calculations from A.M. Best and ISO data by Insurance Information Institute.
1.2
1.1
1.4
2.1
2.0
1.9
1.9
1.9
1.9
1.8 1
.91
.91
.92
.12
.02
.0 2.1
2.0
2.0 2
.11
.9 2.0
1.8
1.8
1.6
1.4
1.2
1.1
1.1
1.1 1
.21
.41
.21
.21
.21
.11
.11
.31
.11
.0 1.1
1.0
0.9 0.9
0%
50%
100%
150%
200%
250%
1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
RBC requirements took effect with 1994 Annual Statement.
The industry has become less
leveraged since 1994
The Property/Casualty Industry Adjusted Its Risk Portfolio in Response to Risk-Based Capital Requirements Implemented in 1994.
Inflation, Liability Crisis Increased Reserves, Plunging Stock Prices Depleted Surplus
61
Alternative Capital
61
New Investors Continue to Change the Reinsurance Landscape
First I.I.I. White Paper on Issue Was Released in March 2015
Global Reinsurance Capital (Traditional and Alternative), 2006 - 2014
2014 data is as of June 30, 2014.
Source: Aon Benfield Analytics; Insurance Information Institute.
Total reinsurance capital reached a record $570B in 2013, up 68% from
2008.
But alternative capacity has grown 210% since 2008, to $50B. It has more than doubled in the past three years.
Alternative Capital as a Percentage of Traditional Global Reinsurance Capital
2014 data is as of June 30, 2014.
Source: Aon Benfield Analytics; Insurance Information Institute.
4.6%
5.7% 5.9% 5.8%5.4%
6.5%
8.4%
10.2%
11.5%
0%
2%
4%
6%
8%
10%
12%
2006 2007 2008 2009 2010 2011 2012 2013 2014
Alternative Capital’s Share of Global Reinsurance Capital Has More Than Doubled Since 2010.
Growth of Alternative Capital Structures, 2002 - 2014
2014 data is as of June 30, 2014.
Source: Aon Benfield Analytics; Insurance Information Institute.
Collateralized Re’s Growth Has Accelerated in the Past Three Years.
Collateralized Reinsurance and Catastrophe Bonds Currently Dominate the Alternative Capital Market.
Catastrophe Bond Issuance and Outstanding: 1997-2015:Q2
94
8.2
87
4.2
1,0
62
.5
1,1
42
.0
96
6.9
98
9.5
1,9
88
.2
1,1
42
.8
1,4
99
.0
4,6
14
.7
7,1
87
.0 3,0
09
.9
3,3
96
.0
4,5
99
.9
4,1
07
.1
5,8
55
.3
7,0
83
.0
8,0
26
.7 3,8
42
.2
4,2
89
.0
5,0
85
.0
7,6
77
.0
13
,41
6.4
12
,53
8.6
12
,50
8.2
12
,19
5.7
12
,34
2.8
14
,83
9.3
18
,57
6.9
22
,86
7.8
21
,55
9.6
0
5,000
10,000
15,000
20,000
25,000
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15*
New Issuance Outstanding
65
Risk Capital Amount ($ Millions)
Cat Bond Issuance Appears to Be Slowing Down in 2015 from 2014’s Record Pace. Lower Yields on Bonds Explain Some of the Contraction.
Source: Guy Carpenter.
Largest Sponsors of ILS, Year-End 2014
66
Two of the Largest ILS Issuers Are Government-Sponsored Insurers. Nine Government-Related Insurers Have $4.6 Billion in Outstanding Securities.
Source: Artemis.bm; Insurance Information Institute.
Reinsurance Pricing: Change in Rate on Line for Cat Business
2014 reflects change through June 30 from prior year end. 2015 is for January 1 renewals..
Source: Guy Carpenter; Insurance Information Institute.
Catastrophe Prices Fell 11 Percent on January 1 Renewals, Driven by Emergence of New Capital, Mild Catastrophe Losses.
14% 14%
-11%
-6%-9%
-16%
10%
-12%
-3%
7%
-7%
-17%
-11%
-20%
-10%
0%
10%
20%
30%
40%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
(Change from Previous Year)
Japan, NZ Quakes, US Tornadoes.
2001-02: WTC Losses, Falling
Stock, Bond Prices Dry Up Capital.
2006: Higher Rates After Record Hurricanes.
76%Alternative
Capital, Low Levels of
Catastrophe Drive Rates
Down.
ILS Issuance by Trigger
Source: Artemis.bm; Insurance Information Institute.
Terms Are Shifting Away From ‘Objective’ Triggers (Favored by Investors) Toward Indemnity Trigger (Favored by Insurers).
69
Questions Arising from Influence of Alternative Capital
What Will Happen When Investors Face Large-Scale Losses?
What Happens When Interest Rates Rise?
Does ILS Have a Higher Propensity to Litigate?
How Much Lower Will Risk Premiums Shrink/ROLs Fall?
Will There Be Spillover Into Casualty Reinsurance?
Will Alternative Capital Drive Consolidation?
4. M&A UPDATE:A PATH TO GROWTH?
70
Are Capital Accumulation, Drive for Growth and Scale Stimulating
M&A Activity?
70
71
U.S. INSURANCE MERGERS AND ACQUISITIONS,P/C SECTOR, 1994-2014 (1)
$5,1
00
$11,5
34
$8,0
59
$30,8
73
$19,1
18
$40,0
32
$1,2
49
$486
$20,3
53
$425
$9,2
64
$35,2
21
$13,6
15
$16,2
94
$3,5
07
$6,4
19 $
12,4
58
$4,6
51
$4,3
97
$6,7
23
$55,825
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Tra
ns
ac
tio
n v
alu
es
0
20
40
60
80
100
120
140
Nu
mb
er o
f tran
sa
ctio
ns
($ Millions)
(1) Includes transactions where a U.S. company was the acquirer and/or the target.
Source: Conning proprietary database.
M&A activity in the P/C sector was up sharply in 2014 but remains well
below pre-crisis or late 1990s levels.
M&A activity in 2015 will
likely reach its highest level since 1998
Update: Alleghany Corp. announced in May 2015 that it is considering the sale of TransAtlantic Holding Co. (TransRe).
*Source: Conning; Insurance information Institute.
Top Global P&C M&As in 2014 - YTD 2015
Acquirer TargetTransaction
Value
ACE (Switzerland) Chubb (US) $28,300
Exor (Italy) PartnerRe Ltd. (Bermuda) $6,900
Zurich (Switzerland) RSA (UK) 8,000
XL Group plc (Ireland) Catlin Group Ltd. (Bermuda) 4,200
RenaissanceRe Holdings Ltd.
(Bermuda) Platinum Underwriters Holdings Ltd. (Bermuda) 1,900
Fairfax Financial Holdings Ltd.
(Canada) Brit Insurance Holdings NV (Netherlands) 1,880
Desjardins Financial Corp. (Canada)
State Farm's property/casualty and life insurance
operations in Canada (Canada) 1,500
TPG Capital LP The Warranty Group, Inc. (Canada) 1,500
Fosun International Ltd. (China) Caixa Seguros e Saude SGPA SA (Portugal) 1,360
Progressive Corp. ARX Holding Corp. 875
Assured Guaranty Ltd. (Bermuda) Radian Asset Assurance, Inc. 810
Mapfre S.A. (Spain)
German and Italina operations of Direct Line
Insurance Group plc (Germany/Italy) 701
Validus Holdings Ltd. (Bermuda) Western World Insurance Group, Inc. 690
ACE Ltd. (Switzerland) P&C business from Itau Seguros S.A. (Brazil) 685
Recent M&A Transactions Involving Lloyd's and Bermuda Re/Insurers
Date Acquirer TargetDeal Value
$ BillionDec 2012 Aquiline Equity Redstar 0.1Jun 2013 Enstar/Stone Point Atrium 0.2Jul 2013 Enstar/Stone Point Torus 0.7Aug 2013 Ian Beaton and Management Ark Syndicate Management 0.4Aug 2013 Lancashire Cathedral 0.4Aug 2013 AmTrust Sagicor 0.1Sep 2013 ANV Jubilee Managing Agency N/ADec 2013 Sompo Canopius 1.0Feb 2014 Qatar Insurance Company Antares 0.2Jul 2014 BTG Pactual Ariel Re 0.4Nov 2014 RenaissanceRe Platinum Underwriters 1.9
Dec 2014 XL Group Catlin 4.1Jan 2015 PartnerRe AXIS 11.0*Feb 2015 Fairfax Financial Holdings Brit 1.9
*Deal was not complete as of 6/4/15 and a rival bid from Italian investment firm Exor was still under consideration.
Source: Swiss Re sigma 3/2015; Insurance information Institute.
74
What’s Driving Global Insurance M&A Activity and Will It Continue?
Excess Capital in Global Reinsurance and Primary Commercial Insurance in US
(Re)Insurers, like corporations in many industry, are sitting are large amounts of cash accumulated since the Global Financial Crisis that earns very little
Alternative Capital
Slow Top Line (Premium) Growth
Slowdown in Pace of Earnings Growth/ROE
Low Interest Rates Make Debt Financing for Acquisitions Attractive
Concern that interest rates in US may soon rise so best to act now
Desire to Achieve Economies of Scale
Peer Pressure/Momentum
Management concerns about being “left out”
75
Growth
Premium Growth Rates Vary Tremendously by State and
Over Time, But…
75
76
-5%
0%
5%
10%
15%
20%
25%
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15*
Net Premium Growth (All P/C Lines): Annual Change, 1971—2015:H1
(Percent)
1975-78 1984-87 2000-03
Shaded areas denote “hard market” periodsSources: A.M. Best (1971-2013), ISO (2014-15).
Net Written Premiums Fell 0.7% in 2007 (First Decline
Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.
2015:H1: 4.1%
2014: 4.1%
2013: 4.4%
2012: +4.2%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
26
28
30
32
34
36
38
40
42
44
46
48
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12
14
Note: Data through 1934 are based on stock companies only. Data include state funds beginning in 1998.
Source: A.M. Best; Insurance Information Institute.
Economic Shocks,
Inflation:
1976: 22.0%
Tort Crisis
1985/86: 22.2%
Post-9/11
2002:15.3%
Twin
Recessions;
Interest Rate
Hikes
1987: 3.7% Great
Recession:
2010: -4.9%
ROE
2015E 4.1%
NPW Premium Growth: Peaks & Troughs in the P/C Insurance Industry, 1926 – 2015E
Great Depression
1932: -15.9% max drop
Post WW II Peak:
1947: 26.2%
Start of WW II
1941: 15.8%
1950-70: Extended period of stability in growth and
profitability. Low interest rates, low inflation, “Bureau” rate regulation all played a role
1970-90: Peak premium growth was much higher in this period while troughs were comparable. Rapid inflation, economic
volatility, high interest rates, tort environment all played roles
1988-2000: Period of
inter-cycle stability
2010-20XX? Post-
recession period of
stable growth?
78
Direct Premiums Written: Total P/CPercent Change by State, 2007-2014
70
.7
36
.7
36
.2
30
.3
29
.4
26
.8
24
.7
23
.7
21
.6
20
.7
19
.2
19
.2
18
.6
18
.1
18
.0
17
.0
15
.2
15
.1
15
.0
14
.9
14
.8
14
.7
14
.4
14
.2
13
.8
13
.5
0
10
20
30
40
50
60
70
80
ND
OK
SD
TX
NE
KS IA VT
WY
CO
MN IN MI
TN
AR
WI
GA
SC
NJ
OH
AK
KY
VA
LA
CT
MT
Pe
ce
nt
ch
an
ge
(%
)
Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 StatesNorth Dakota was the country’s growth leader over the past 7 years with premiums written
expanding by 70.7%, fueled by the state’s energy boom
Growth Benchmarks: Total P/C
US: 13.0%
79
Direct Premiums Written: Total P/CPercent Change by State, 2007-2014
13
.4
13
.1
13
.1
13
.0
13
.0
12
.9
12
.4
12
.2
11
.7
11
.0
10
.5
9.4
9.4
9.2
9.1
8.2
6.3
6.0
4.7
2.2
1.3
-0.8
-1.6
-4.3
-7.3
-12
.9
-15
-10
-5
0
5
10
15
MO
NY
UT
US
NM
MS
MA
AL
NC
MD
WA RI
NH IL PA ID
ME
CA
OR FL
AZ
DC HI
WV
NV
DE
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
Sources: SNL Financial LC.; Insurance Information Institute.
Growth was negative in 4 states and DC between
2007 and 2014
Florida experienced almost no net growth
between 2007 and 2014
80
Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2014
80
.4
36
.8
33
.3
29
.4
24
.8
22
.5
21
.0
20
.6
15
.2
14
.6
13
.9
11
.8
10
.3
8.7
8.5
8.4
8.0
7.9
7.6
7.1
6.6
5.9
5.9
5.8
5.4
4.5
0
10
20
30
40
50
60
70
80
90
ND
SD
VT
OK
NE IA
KS
TX
WY
AK IN
MN WI
MA
AR
CT
NY
NJ
CO
NM
OH LA
US
MS
NH
MO
Pe
ce
nt
ch
an
ge
(%
)
Sources: SNL Financial LLC.; Insurance Information Institute.
Top 25 States
43 states showed commercial lines growth from 2007
through 2014
Growth Benchmarks: Commercial
US: 5.9%
81
Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2014
4.5
4.4
4.2
4.1
3.9
3.8
3.7
3.3
3.3
3.2
3.1
2.8
2.8
2.2
2.1
1.4
0.9
-1.3
-3.2
-5.3
-6.5
-6.9
-9.2
-10
.7
-19
.9
-22
.2
-25
-20
-15
-10
-5
0
5
10
MI
TN
MD
MT
CA RI
WA
GA
PA
UT IL
KY
VA
NC
ME
SC ID AL
DC HI
FL
OR AZ
DE
NV
WV
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
Sources: SNL Financial LLC.; Insurance Information Institute.
Commercial lines premium volumes in
FL will likely note return to pre-crisis
levels until 2016
Nearly half the states have yet to see commercial lines premium
volume return to pre-crisis levels
82
Direct Premiums Written: Workers’ CompPercent Change by State, 2007-2014*
35
.1
27
.1
27
.1
24
.4
22
.3
20
.6
18
.7
14
.6
11
.7
9.4
7.5
7.1
6.7
4.2
3.9
3.8
2.7
1.7
0.5
0.1
0.1
0.0
-1.1
-1.1
-1.3
-5
0
5
10
15
20
25
30
35
40
IA CA
SD
NY
OK
NJ
CT
KS
NE MI
MS IN
MN
US
NM TX WI
IL
CO
GA
VA
NH
PA RI
MD
Pe
ce
nt
ch
an
ge
(%
)
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.
Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 States
Only 21 states have seen works comp premium volume
return to pre-crisis levels
83
Direct Premiums Written: Worker’s CompPercent Change by State, 2007-2014*
-2.6
-2.9
-3.6
-4.8
-6.0
-8.5
-9.1
-9.2
-9.2
-11
.7
-12
.2
-13
.5
-14
.4
-17
.1
-17
.9
-19
.4
-19
.5
-23
.4
-25
.2
-29
.5
-30
.3
-34
.9
-80-75-70-65-60-55-50-45-40-35-30-25-20-15-10-50
VT
DC
MA ID NC AZ
MO LA
TN
AR
SC
ME
AK
AL
FL
KY
UT
MT HI
DE
OR
NV
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.
Sources: SNL Financial LC.; Insurance Information Institute.
States with the poorest performing economies also produced some of the most
negative net change in premiums of the past 7 years
Florida’s construction dependent economy was
devastated when the housing bubble collapsed, causing payrolls and WC
premium volumes to plunge
84
Pricing Trends
Survey Results Suggest Commercial Pricing Has
Flattened Out but Personal Lines Are Up
84
Commercial Lines Rate Change by Month (vs. Year Earlier), July 2001 – Sep. 2015
Jul-02, 33%
Feb-05, 0%
Dec-07, -16%
Oct-11, 0%
Sep-13, 5%
Dec-14, 0%
Jul-15, 1%
-20%
-10%
0%
10%
20%
30%
40%
Jul-
01
Dec-0
1
May-0
2
Oct-
02
Mar-
03
Aug-0
3
Jan-0
4
Jun-0
4
Nov-0
4
Apr-
05
Sep-0
5
Feb-0
6
Jul-
06
Dec-0
6
May-0
7
Oct-
07
Mar-
08
Aug-0
8
Jan-0
9
Jun-0
9
Nov-0
9
Apr-
10
Sep-1
0
Feb-1
1
Jul-
11
Dec-1
1
May-1
2
Oct-
12
Mar-
13
Aug-1
3
Jan-1
4
Jun-1
4
Nov-1
4
Apr-
15
Sep-1
5
79 Months of Rates < 0%
85
SOURCE: MarketScout, Insurance Information Institute.
Commercial Insurance Rate Changes Are Fairly Stable
Not Much of A Hard Market,
By Historic Standards
Sept. 2015:
-1.5%
86
CIAB: Average Commercial Rate Change, All Lines, (1Q:2004–2Q:2015)
-3.2
%-5
.9%
-7.0
%-9
.4%
-9.7
% -8.2
%-4
.6% -2
.7%
-3.0
%-5
.3%
-9.6
%-1
1.3
%-1
1.8
%-1
3.3
%-1
2.0
%-1
3.5
%-1
2.9
%-1
1.0
%-6
.4%
-5.1
%-4
.9%
-5.8
%-5
.6%
-5.3
%-6
.4%
-5.2
%-5
.4% -2
.9%
2.7
% 4.4
%4
.3%
3.9
% 5.0
%5
.2%
4.3
%3
.4%
2.1
%1
.5%
-0.5
%0
.1%
-0.7
%-1
.5%
-2.5
%
-0.1
%0
.9%
-0.1
%
-16%
-11%
-6%
-1%
4%
9%
1Q
04
2Q
04
3Q
04
4Q
04
1Q
05
2Q
05
3Q
05
4Q
05
1Q
06
2Q
06
3Q
06
4Q
06
1Q
07
2Q
07
3Q
07
4Q
07
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
1Q
15
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.Source: Council of Insurance Agents & Brokers; Insurance Information Institute
KRW Effect
Pricing as of Q2:2015 had remained (slightly) negative
(Percent)
Q2 2011 marked the last of 30th
consecutive quarter of price declines
87
Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2015:Q1
Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Percentage Change (%)
Peak = 2001:Q4 +28.5%
KRW : No Lasting Impact
Pricing turned positive in
Q3:2011, the first increase in nearly 8 years
Trough = 2007:Q3 -13.6%
Pricing Turned Negative in Early
2004 and Remained that
way for 7 ½ years
Rate trends are roughly flat, some carriers
reporting small gains, others flat, others small
declines
88
Change in Commercial Rate Renewals, by Line: 2015:Q2
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Major Commercial Lines Renewals Were Mixed to Flat in Q2:2015; EPL, D&O and Commercial Auto Led the Way
Percentage Change (%)
-0.2%
0.5% 0.7%
1.5%
-5.4%
-3.0%-2.7% -2.6%
-2.0% -1.9%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
Co
mm
erc
ial
Pro
pe
rty
Ge
ne
ral
Lia
bili
ty
Um
bre
lla
Bu
sin
ess
Inte
rru
ptio
n
Co
nstr
uctio
n
Wo
rke
rs
Co
mp
Su
rety
Co
mm
erc
ial
Au
to D&
O
EP
L
Employment Practices rate increases are large
than any other line, followed by D&O and
Commercial Auto
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
89
How the Risk Dollar is Spent (U.S. Firms with Revenues Under $1 Bill)
Total Property Premiums, 21%
Property Retained Losses, 1%
Total Liability Premium, 19%
Liability Retained Losses, 4%
Total Management Liability Costs, 6%
Total Workers Comp. Premiums, 10%
Workers Comp Retained Losses, 9%
Total Professional Liability Costs, 9%
Total Med. Mal. Costs, 10%
Total Marine and Aviation Costs, 4%
Total Administrative Costs, 6%
Total Fidelity, Surety & Crime Costs, 1%
Source: 2015 RIMS Benchmark Survey; Insurance Information Institute.
90
Monthly Change in Auto Insurance Prices, 1991–2015*
*Percentage change from same month in prior year; through July 2015; seasonally adjusted
Note: Recessions indicated by gray shaded columns.
Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
-2%
0%
2%
4%
6%
8%
10%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15
Cyclical peaks in PP Auto tend to occur roughly every 10 years (early
1990s, early 2000s and likely the early 2010s)
“Hard” markets tend to occur
during recessionary
periods
Pricing peak occurred in late
2010 at 5.3%, falling to 2.8% by Mar. 2012
July 2015 reading of 5.4% is up from 4.2%
a year earlier
91
Underwriting Performance
91
Homeowners Insurance Combined Ratio: 1990–2015F
11
3.0
11
7.7
15
8.4
11
3.6
10
1.0 10
9.4
10
8.2
11
1.4 1
21
.7
10
9.3
98
.2
91
.7 96
.4
85
.4 91
.7
11
4.5
10
3.1
10
3.8
11
9.4
10
1.4
87
.7 92
.4 96
.6
11
8.4
11
2.7 12
1.7
80
90
100
110
120
130
140
150
160
170
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14F 15F
1
Homeowners Performance in 2011/12 Impacted by Large Cat Losses. Extreme Regional Variation Can Be Expected Due to
Local Catastrophe Loss Activity
92
Hurricane Ike
Hurricane Sandy
Record tornado activity
Hurricane Andrew
Sources: A.M. Best (1990-2014F);Conning (2015F); Insurance Information Institute.
93
Homeowners Multi-Peril Loss & ALAE Ratio, 2014:Highest 25 States
14
2.8
13
2.6
11
6.0
10
2.5
80
.4
80
.2
74
.6
69
.2
66
.8
66
.8
65
.8
62
.4
60
.7
59
.3
59
.2
58
.7
58
.2
58
.0
56
.4
55
.5
54
.1
52
.4
51
.7
51
.2
51
.1
50
.3
0
20
40
60
80
100
120
140
160
MT NE SD CO IA MI IL VT PA ID WY GA DE MD AR WV WA MO MS WI IN SC OR TN US AZ
Lo
ss &
AL
AE
Rati
o
(%)
Sources: SNL Financial; Insurance Information Institute.
MT had the worst loss ratio in 2014, followed by
NE and SD…
94
Homeowners Multi-Peril Loss & ALAE Ratio, 2014:Lowest 25 States and DC
50
.1
49
.3
48
.9
48
.3
48
.1
47
.7
47
.3
46
.0
45
.8
45
.6
45
.2
44
.1
43
.2
42
.0
41
.0
40
.8
40
.2
37
.7
37
.5
37
.1
36
.2
32
.8
32
.3
28
.0
27
.3
25
.7
0
10
20
30
40
50
60
CA NJ OH TX AL ME KY NC NM NH NY NV UT MN KS DC CT VA AK RI MA ND LA HI FL OK
Lo
ss &
AL
AE
Rati
o (
%)
Sources: SNL Financial; Insurance Information Institute.
OK and FL had the best performances in 2014. Traditionally
high cat-loss states did well last year due to unusually low cat activity
Florida Citizens Exposure to Loss, 2002 – 2015* ($ Billions)
*As of October 6, 2015.
Source: PIPSO; Florida Citizens https://www.citizensfla.com/about/bookofbusiness/; Insurance Information Institute (I.I.I.).
$154.6
$195.5 $206.7 $210.6
$408.8
$485.1
$421.9$406.0
$460.7
$510.7
$228.9$202.0
$173.4
$429.4
$0
$100
$200
$300
$400
$500
$600
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*
FL Citizens exposure to loss is down 66% ($337.3B) from its
2011 peak)
A lack of major hurricanes, ample private sector/reinsurer capital and capital market interest—combined with structural changes to Citizens—have combined to take Citizens policy count and exposure to their lowest levels in many years
Florida Citizens Policy Count, 2003 – 2015* (Thousands)
*As of October 6, 2015. All other figures are as of Dec. 31.
Source: Florida Citizens https://www.citizensfla.com/about/bookofbusiness/; Insurance Information Institute (I.I.I.).
820.3874.0
810.0
1,298.9 1,304.9
1,084.21,029.3
1,283.5
1,472.4
1,314.8
661.2
574.1
1,021.7
0
200
400
600
800
1,000
1,200
1,400
1,600
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*
A lack of major hurricanes, ample private sector/reinsurer capital and capital market interest—combined with structural changes to Citizens—have combined to take Citizens policy count and exposure to their lowest levels in many years
Florida Citizen’s policy count is down by nearly
900,000 (61%) from its 2011 peak
Private Passenger Auto Combined Ratio: 1993–2017F
10
1.7
10
1.3
10
1.3
10
1.0
10
9.5
10
7.9
10
4.2
98
.4
94
.3
95
.1
95
.5 98
.3 10
0.2
10
1.3
10
1.0
10
2.0
10
2.1
10
1.6
10
2.3
10
2.2
10
2.3
10
2.4
99
.5 10
1.1
10
3.5
80
85
90
95
100
105
110
115
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15F 16F 17F
Private Passenger Auto Underwriitng Performance Is Exhibiting Remarkable Stability
97Sources: A.M. Best (1990-2014); Conning (2015F – 2017F); Insurance Information Institute.
98
Florida Average No-Fault Claim Severity, 2009:Q1 - 2015:Q2*
$7
,09
8
$7
,24
6
$7
,46
4
$7
,57
3
$7
,76
7
$7
,84
1
$7
,99
9
$8
,29
1
$8
,44
3
$8
,62
0
$9
,05
9
$9
,32
2
$9
,55
3
$9
,69
1
$9
,30
1
$9
,01
6
$8
,63
8
$8
,42
9
$8
,44
6
$8
,29
7
$8
,22
4
$8
,25
4
$8
,02
7
$8
,06
3
$7
,82
1
$7
,97
9
$5,000
$5,500
$6,000
$6,500
$7,000
$7,500
$8,000
$8,500
$9,000
$9,500
$10,000
09:Q
1
09:Q
2
09:Q
3
09:Q
4
10:Q
1
10:Q
2
10:Q
3
10:Q
4
11:Q
1
11:Q
2
11:Q
3
11:Q
4
12:Q
1
12:Q
2
12:Q
3
12:Q
4
13:Q
1
13:Q
2
13:Q
3
13:Q
4
14:Q
1
14:Q
2
14:Q
3
14:Q
4
15:Q
1
15:Q
2
The Average Cost of No-Fault Claims in Florida Rose Rapidly Until mid-2012 but Has Dropped in Recent Years
*All figures are the average of the most recent four quarters ending in each period,.Source: ISO/PCI Fast Track data; Insurance Information Institute.
No-fault claim severity (average cost per claim) hit
peak in 2012 but is down significantly since then
99
Florida No-Fault Paid Claim Frequency, 2015:Q2*
1.4
8
1.4
7
1.5
4
1.6
2
1.7
0 1.8
0
1.8
9
1.9
8
2.0
1
2.0
2
2.0
2
1.9
1
1.8
9
1.8
9
1.9
1
1.9
0
1.8
5
1.7
6
1.6
1
1.5
7
1.5
5
1.5
5
1.5
6
1.6
2
1.6
3
1.7
1
1.7
3
1.00
1.20
1.40
1.60
1.80
2.00
2.20
08:Q
4
09:Q
1
09:Q
2
09:Q
3
09:Q
4
10:Q
1
10:Q
2
10:Q
3
10:Q
4
11:Q
1
11:Q
2
11:Q
3
11:Q
4
12:Q
1
12:Q
2
12:Q
3
12:Q
4
13:Q
1
13:Q
2
13:Q
3
13:Q
4
14:Q
1
14:Q
2
14:Q
3
14:Q
4
15:Q
1
15:Q
2
The Frequency of No-Fault Claims in Florida Is Rising Once Again
*All figures are the average of the most recent four quarters ending in each period,.Source: ISO/PCI Fast Track data; Insurance Information Institute.
No-fault claim frequency rose until mid-2011 and hit a trough in early 2014 but is once gain
showing some signs of increase
100
Collision Coverage: Severity & Frequency Trends Are Both Higher in 2015*
2.8%
1.3%
4.2%
1.6%
4.7%
-1.8%
-3.6%
2.5%
-2.4%
-1.4%
4.2%
1.4%
3.9%3.1%
0.1%0.5%
-2.3%
-0.1%
-1.4%-0.5%
0.9%
2.3%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*
Severity Frequency
Annual Change, 2005 through 2015*
The Recession, High Fuel Prices Helped Temper Frequency and Severity, But this Trend Will Likely Be Reversed Based on
Evidence from Past Recoveries
*2015 figure is for the 4 quarters ending with 2015:Q2.
Source: ISO/PCI Fast Track data; Insurance Information Institute
10
9.4
11
0.2
11
8.8
10
9.5
11
2.5
11
0.2
10
7.6
10
4.1
10
9.7
11
0.2
10
2.5 1
05
.4
91
.1
93
.6
10
4.2
98
.9
10
2.4
10
7.9
10
3.5
94
.8
94
.3
98
.3 99
.210
2.0
11
1.1
11
2.3
12
2.3
90
95
100
105
110
115
120
125
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
F
16
F
Co
mm
erc
ial L
ine
s C
om
bin
ed
Ra
tio
*2007-2012 figures exclude mortgage and financial guaranty segments.
Source: A.M. Best (1990-2014); Conning (2015-16F) Insurance Information Institute.
Commercial Lines Combined Ratio, 1990-2016F*
Commercial lines underwriting performance improved in 2013/14 but higher cats, diminishing prior year reserves and rising loss cost trends in some lines could push
combined ratios higher
101
Commercial Auto Combined Ratio: 1993–2015F
11
2.1
11
2.0
11
3.0
11
5.9
10
2.7
95
.2
92
.9
92
.1
92
.4
94
.1 96
.8 99
.1
97
.8
10
3.4 10
6.8
10
6.7
10
3.4
10
5.2
11
8.1
11
5.7
11
6.2
80
85
90
95
100
105
110
115
120
125
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15F
Commercial Auto is Expected to Improve Only Slowly as Rate Gains Barely Offset Adverse Frequency and Severity Trends
102Sources: A.M. Best (1990-2014);Conning (2015F); Insurance Information Institute.
Commercial Property Combined Ratio: 2007–2016F
72
.4
10
5.8
83
.3 86
.5
85
.8 90
.1
90
.7
10
6.5
10
5.8
82
.7
70
75
80
85
90
95
100
105
110
07 08 09 10 11 12 13 14 15F 16F
Commercial Property Underwriting Performance Has Been Volatile in Recent Years, Largely Due to
Fluctuations in CAT Activity
Source: Conning Research and Consulting.103
General Liability Combined Ratio: 2005–2016F
11
2.9
95
.1 99
.0
94
.2
10
4.1
99
.7 10
1.6
10
2.8
10
3.110
7.1 11
0.8
99
.6
80
85
90
95
100
105
110
115
05 06 07 08 09 10 11 12 13 14 15F 16F
Commercial General Liability Underwriting Performance Has Been Volatile in Recent Years
Source: Conning Research and Consulting.104
Workers Compensation Combined Ratio: 1994–2014P
10
2.0
97
.0 10
0.0
10
1.0
11
2.6
10
8.6
10
5.1
10
2.7
98
.5
10
3.5
10
4.5 1
10
.6 11
5.0
11
5.0
10
8.0
10
1.0
98
.0
12
1.7
10
7.0
11
5.3
11
8.2
80
85
90
95
100
105
110
115
120
125
130
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14P
Workers Comp Results Began to Improve in 2012. Underwriting Results Deteriorated Markedly from 2007-2010/11 and Were the Worst They Had Been in a Decade.
Sources: A.M. Best (1994-2009); NCCI (2010-2014P) and are for private carriers only; Insurance Information Institute.105
WC results have improved markedly
since 2011
Commercial Multi-Peril Combined Ratio: 1995–2016F
11
9.0
11
9.8
10
8.5
12
5.0
11
6.2
11
6.1
10
4.9
10
1.9
10
5.5
95
.4 97
.6
94
.2 96
.1
10
2.1
94
.1
10
3.0
10
3.5
10
0.7
11
6.8
11
3.6
11
5.3
12
2.4
11
5.0
11
7.0
97
.3
89
.0
97
.7
93
.8
83
.8
89
.8
10
8.4
98
.7 10
2.5
12
0.1
11
1.9
94
.4 96
.7
10
1.3
10
1.8
11
3.1
11
5.0 1
21
.0
80
85
90
95
100
105
110
115
120
125
130
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15F 16F
CMP-Liability CMP-Non-Liability
Commercial Multi-Peril Underwriting Performance is Expected to Remains Stable in 2015 Assuming Normal
Catastrophe Loss Activity
*2015F-2016F figures are Conning figures for the combined liability and non-liability components.Sources: A.M. Best; Conning; Insurance Information Institute.
106
Inland Marine Combined Ratio: 2004–2015F
82
.5
89
.9
77
.3 79
.5
97
.1
96
.1
83
.7
83
.3
82
.2
93
.3
89
.3
86
.2
70
75
80
85
90
95
100
04 05 06 07 08 09 10 11 12 13 14E 15F
Inland Marine Underwriting Performance Has Been Consistently Strong for Many Years
Source: A.M. Best (2004-2014E); Conning Research and Consulting (2015F).107
108
Insured Catastrophe Losses
2013/14 and YTD 2015 Experienced Below
Average CAT Activity After Very High CAT
Losses in 2011/12
Winter Storm Losses Far Above Average in
2014 and 2015108
109
$1
3.0
$1
1.3
$3
.9
$1
4.8
$1
1.9
$6
.3
$3
5.8
$7
.8
$1
6.8
$3
4.7
$1
0.9
$7
.7
$3
0.1
$1
1.8
$1
4.9
$3
4.6
$3
6.1
$1
3.1
$1
5.5
$1
1.0
$75.7
$1
4.4
$5
.0 $8
.2
$3
8.9
$9
.1
$2
7.2
$0
$10
$20
$30
$40
$50
$60
$70
$80
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15*
U.S. Insured Catastrophe Losses
*Through 9/30/15 in 2015 dollars.
Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.)
Sources: Property Claims Service/ISO; Insurance Information Institute.
2013/14 Were Welcome Respites from 2011/12, among the Costliest Years for Insured Disaster Losses in US History. Longer-term Trend is for
more—not fewer—Costly Events
2012 was the 3rd most expensive year ever for
insured CAT losses
$11.0B in insured CAT losses though
9/30/15
($ Billions, $ 2014)
109
US Insured CAT Losses Through Q3to Date: 30 Events =$11 Billion in Claims
Source: PCS; Insurance information Institute.
Top 10 Insured CAT Losses Through 2015 Q3: 30 Events = $11 Bill. in Claims
Source: PCS; Insurance information Institute.
Top 10 Largest NFIP Flood Claim Payout Events
Source: NFIP; Insurance information Institute http://www.iii.org/issue-update/flood-insurance
Loss Events in the US, 1980 – 2014Overall and Insured Losses
113
Overall losses
(in 2013 values)*
Insured losses
(in 2013 values)*
*Losses adjusted
to inflation based
on CPI.
Overall losses totaled $25bn; Insured losses totaled $15.3bn
50
100
150
200
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Source: Property Claim Services, MR NatCatSERVICE.
$ Billions 2015 First Half:
$8.2 Billion Insured Losses
$12.0 Overall Losses
114
Number of National Flood Insurance Program
Policies in Force at Year-End, 1980-2015*
Source: National Flood Insurance Program.
* As of July, 2015
2.1
04
2.0
17 2.4
78
3.4
77
4.3
69 4
.96
2
5.6
56
5.6
84
5.7
00
5.6
45
5.6
46
5.6
20
5.5
69
5.3
51
5.1
51
0
1
2
3
4
5
6
1980 1985 1990 1995 2000 2005 2007 2008 2009 2010 2011 2012 2013 2014 2015*
(milli
on
s)
The number of NFIP policies in force has
plunged by 549,000 or 9.6% since 2009, even
as coastal development surges and sea levels rise
115
10% 14%
40%
52%62%
87%95% 99%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
CA
Earthquake
Flood Renters Cyber Terrorism Pvt.
Passenger
Auto
Home Workers
Comp
Sources: CA Earthquake (WSJ, http://www.wsj.com/articles/california-pushes-homeowners-to-insure-against-earthquakes-1440980138 ); Flood and Renters (I.I.I. June 2015 Pulse Survey); Cyber (Advisen, 2015); Terrorism (Marsh Global Analytics, 2014 Terrorism Risk Insurance Report, April 2014; data for 2013); Pvt. Passenger Auto (Insurance Research Council, Uninsured Motorists, 2014 Edition, data for 2012); Home and Workers Comp (I.I.I. estimates); Insurance Information Institute research.
Take-Up Rates for Various Types of Insurance in the U.S.
Take-Up Rate
Take-up rates vary widely
by type of coverage
116
Top 16 Most Costly Disastersin U.S. History—Katrina Still Ranks #1
(Insured Losses, 2014 Dollars, $ Billions)
$8.1 $9.0 $9.4 $11.4$13.8
$19.3
$24.6 $25.3$26.4
$50.2
$7.7$7.3$6.9$5.8$5.7$4.6
$0
$10
$20
$30
$40
$50
$60
Irene (2011) Jeanne
(2004)
Frances
(2004)
Rita
(2005)
Tornadoes/
T-Storms
(2011)
Tornadoes/
T-Storms
(2011)
Hugo
(1989)
Ivan
(2004)
Charley
(2004)
Wilma
(2005)
Ike
(2008)
Sandy*
(2012)
Northridge
(1994)
9/11 Attack
(2001)
Andrew
(1992)
Katrina
(2005)
Storm Sandy in 2012 was the last mega-CAT
to hit the US
Includes Tuscaloosa, AL,
tornado
Includes Joplin, MO, tornado
12 of the 16 Most Expensive Events in US History Have Occurred Since 2004
Sources: PCS; Insurance Information Institute inflation adjustments to 2014 dollars using the CPI.
117
Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2015F*
*2010s represent 2010-2014.
Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.
Source: ISO (1960-2010); A.M. Best (2011-15E) Insurance Information Institute.
0.4
1.2
0.4 0
.8 1.3
0.3
0.4 0
.71
.51
.00
.40
.4 0.7
1.8
1.1
0.6
1.42
.01
.32
.00
.50
.5 0.7
3.0
1.2
2.1
8.8
2.3
5.9
3.3
2.8
1.0
3.6
2.9
1.6
5.4
1.6
3.3
3.3
8.1
2.7
1.6
5.0
2.6
3.4
9.4
8.0
3.9 4
.4 4.9
3.6
0.9
0.1
1.1
1.1
0.8
0
1
2
3
4
5
6
7
8
9
10
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades
Avg. CAT Loss Component of theCombined Ratio
by Decade
1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 5.82*
Combined Ratio Points Catastrophe losses as a share of all
losses reached a record high in 2011
118
Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1995–20141
0.1%
1.5%5.4%
0.1%
6.2%
6.8%
39.2%
40.7%
1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2014 dollars.
2. Excludes snow.
3. Does not include NFIP flood losses
4. Includes wildland fires
5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.
Source: ISO’s Property Claim Services Unit.
Hurricanes & Tropical Storms, $161.2
Fires (4), $6.0
Events Involving Tornadoes (2), $154.9
Winter Storms, $26.9
Terrorism, $24.5
Geological Events, $0.5
Wind/Hail/Flood (3), $21.4
Other (5), $0.2
Wind losses are by far cause the most catastrophe losses,
even if hurricanes/TS are excluded.
Tornado share of CAT losses is
rising
Insured cat losses from 1995-2014
totaled $395.6B, an average of $19.8B per year or $1.65B
per month
Winter storm losses were much above average in 2014/15 are
will push this share up
119
$1,839.5
$781.9 $780.0$632.1 $566.1
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
Winter Storm
(Feb 16-22)
Flooding, Hail,
Tornadoes &
Wind Event
(Apr 18 - 21)
Flooding, Hail,
Tornadoes &
Wind Event
(Apr 7 - 10)
Flooding, Hail,
Tornadoes &
Wind Event
(Apr 24-28)
Flooding, Hail,
Tornadoes &
Wind Event
(May 6-13)*Through June 10, 2015.
Sources: PCS unit of Verisk Analytics; Insurance Information Institute.
Top 5 Insured Catastrophe Losses in 2015*
As in 2014, a “Polar Vortex” event was the most costly cat through the first half of 2015 with $1.84 billion in insured losses
($ Millions)
In 2015, Winter Storm cat events
resulting in $2.3 billion in insured
losses, little changed from $2.4 billion
in 2013. These figures are about
double the long-term average.
**Losses adjusted to
inflation based on
country CPI
*Winter storms include
winter damage, blizzard,
snow storm and cold
wave 120
1 000
2 000
3 000
4 000
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Source: Property Claim Services, MR NatCatSERVICE.
$ Billions, in 2014 Dollars
2015 insured winter storm losses totaled $2.3B, similar to 2014 and about double the
long-run average
Three of the four most costly years ever for insured losses from winter storms and
damage occurred in the 1990s, led by the “Storm of the Century” in 1993.
5-year running average
Winter Storm and Winter Damage Events in the US, 1980-2015 (2014 US$)
Natural Disaster Losses in the U.S.,First Half 2015
As of July 1, 2015
Number
of
Events Fatalities
Estimated Overall
Losses (US $m)
Estimated Insured
Losses (US $m)*
Severe Thunderstorm 38 66 7,000 5,100
Winter Storms & Cold Waves 11 80 3,800 2,900
Flood, Flash Flood 10 4 500 150
Earthquake & Geophysical 1 - - -
Tropical Cyclone 2 4 Loss est. in progress Loss est. in progress
Wildfire, Heat Waves, &
Drought18 - 1,300 Minor market loss
Totals 80 154 12,600 8,200
121
*Source: Property Claim Services (PCS) as of 7/7/2015; Munich Re.
As of January, 2015
Number of
Events Fatalities
Estimated Overall Losses
(US $m)
Estimated Insured Losses
(US $m)
Severe
Thunderstorm62 98 17,000 12,300
Winter Storm, winter
damage, cold wave,
snow storm
13 115 3,700 2,300
Flood, flash flood, storm
surge20 5 1,800 500
Earthquake &
Geophysical, landslides11 45 750 150
Tropical Cyclone 2 1 95 Minor market losses
Wildfire, Heat, & Drought 11 2 1,700 Minor market losses
Totals 119 266 25,000 15,300
122
Natural Disaster Losses in the US, 2014Based on perils
Source: Munich Re.
123
The World is Warmer...With One Big Exception!
HIGHLIGHTS
• 2014 was the warmest year
across global land and
ocean surfaces since
records began in 1880.
• 9 of the 10 warmest years in
the 135-year period of
record have occurred in the
21st century. 1998 currently
ranks as the fourth warmest
year on record.
• January to May 2015
warmest first five months on
record!
Source: NOAA; Munich Re.
124
Top 11 Insured Loss Events from Riots and Civil Commotion
*As of 6/10/15.
Source: PCS unit of Verisk Analytics; Insurance Information Institute
Year Deaths Date StateInsured Loss When
Occurred
Insured Losses
(2014 $MM)
1992 14 Apr 29 - May 4 CA 775,000,000 1,307.7
1980 62 May 17 - 19 FL 65,250,000 187.5
1967 48 Jul 23 - 31 MI 41,500,000 294.2
1965 87 11-Aug CA 38,000,000 285.6
1977 99 Jul 13 - 14 NY 28,000,000 109.4
1967 47 Jul 12 - 21 NJ 11,000,000 78.0
1966 20 12-Jul IL 4,000,000 29.2
2015 0 Apr 18 – May 1 MD 23,900,000 23.9*
1971 63 Jun 13 - 15 NM 3,000,000 17.5
1977 11 Jul 13 - 14 NY 2,000,000 7.8
1968 77 Jul 23 - 24 OH 1,500,000 10.2April 2015 Baltimore riots were designated a PCS CAT event on April 29 (first PCS designation for a riot in 23 years) as of 6/10/15 insured losses
totaled $23.9 million (2014 Ferguson riots did not receive PCS designation)
125
Insurance Coverage for Riots and Civil Commotions: Home, Auto and Business Auto, homeowners, and business insurance policies generally include
coverage for property losses caused by riots and civil commotions
Homeowners policies pay to repair, or rebuild, an insured home if its structure is damaged or destroyed as the result of a riot or civil commotion, as well as to replace the homeowner’s personal belongings if they are damaged or stolen during the event.
If the home is rendered uninhabitable by the damage caused by a riot or civil commotion, policyholders can file an additional living expenses (ALE) claim to finance their temp. housing expenses until the residence has been repaired.
The optional comprehensive coverage on an auto insurance policy reimburses losses to a vehicle due to damage caused by falling objects, fire, riots and vandalism, among other things.
Standard business property insurance policies provide coverage for the structure of the building as well as the contents inside, and cover losses arising from riots or civil commotion. Business interruption (BI) coverage, whereby the policyholder can file a claim for lost income, is usually only triggered when the insured business incurs direct physical damage.
Source: Insurance Information Institute, www.iii.org .
50
100
150
200
250
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Loss events in the US, 1980 – 2014Number of events
126
Meteorological events
(Tropical storm,
extratropical storm,
convective storm,
local storm)
Hydrological events
(Flood,
mass movement)
Climatological events
(Extreme temperature,
drought, forest fire)
Geophysical events
(Earthquake, tsunami,
volcanic activity)
Number of Events
7
72
24
16
2014 Total:
119 Events
Source: Geo Risks Research, NatCatSERVICE
The number of loss events surged from 2006 – 2010,
though insured losses remained elevated through 2012
2015 First Half:
80 Events
Convective Loss Events in the USOverall and insured losses, 1980 – 2014
127
$ Billions
Analysis contains:
severe storm, tornado, hail, flash
flood and lightning
10
20
30
40
50
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
*Losses adjusted to inflation based on CPI
Source: Geo Risks Research, NatCatSERVICE
Overall losses
(in 2014 values)*
Insured losses
(in 2014 values)* The period from 2008-2014 has been the most expensive on
record for insured losses from “Convective Events” (severe thunderstorms, tornado, hail,
lightning and flash flood)
2015 First Half:
$5.1 Billion Insured Losses
$7.0 Overall Losses
128
Federal Disaster Declarations Patterns:
1953-2015
128
Disaster Declarations Set New Records in Recent Years
Number of Federal Major Disaster Declarations, 1953-2015*
13 1
7 18
16
16
7 71
21
22
22
0 25
25
11
11
19
29
17
17
48
46
46
38
30
22 2
54
22
31
52
42
13
42
7 28
23
11
31
38
45
32 3
63
27
54
46
55
04
54
5 49
56
69
48 5
26
37
55
98
19
94
76
24
54
143
0
20
40
60
80
100
120
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
*
*Through October 25, 2015.
Source: Federal Emergency Management Administration; http://www.fema.gov/disasters; Insurance Information Institute.
The Number of Federal Disaster Declarations Is Generally Rising and Set New Records in 2010 and 2011 Before Dropping in 2012-2014
The number of federal disaster declarations set a new record in 2011, with 99, shattering 2010’s
record 81 declarations.
There have been 2,244 federal disaster
declarations since 1953. The average
number of declarations per year is 36 from
1953-2014, though there haven’t been that few recorded since 1995.
41 federal disasters have declared so far in 2015*
129
130
Federal Disasters Declarations by State, 1953 – 2015: Highest 25 States*
90
81
76
69
67
61
61
58
57
56
56
56
54
54
53
52
51
51
51
50
47
47
45
44
41
0
10
20
30
40
50
60
70
80
90
100
TX CA OK NY FL KY LA AL AR MO IA WV MS TN IL NE MN KS WA PA OH VA ND SD ME
Dis
as
ter
De
cla
rati
on
s
Over the past 62 years, Florida has had the 5th
highest number of Federal Disaster Declarations
*Through Oct. 25, 2015. Includes Puerto Rico and the District of Columbia.
Source: FEMA: http://www.fema.gov/disasters; Insurance Information Institute.
131
Federal Disasters Declarations by State, 1953 – 2015: Lowest 25 States*
43
40
40
39
39
37
36
34
30
29
28
28
27
26
25
25
24
23
23
20
18
17
15
13
12
11
11
0
10
20
30
40
50
NC AK IN GA VT WI NJ NH MA OR HI NM MI PR MD MT AZ ID CO CT SC NV DE DC RI UT WY
Dis
as
ter
De
cla
rati
on
s
Over the past 60 years, Wyoming and Utah had
the fewest number of Federal Disaster
Declarations
*Through Oct. 25, 2015. Includes Puerto Rico and the District of Columbia.
Source: FEMA: http://www.fema.gov/disasters; Insurance Information Institute.
132
Natural Hazard Risk Scores, 2014Highest 25 States*
94
.5
79
.7
79
.2
75
.6
72
.1
69
.5
69
.0
66
.8
66
.4
65
.4
64
.9
61
.5
61
.0
60
.9
59
.7
57
.8
57
.3
57
.1
56
.7
55
.3
52
.8
52
.3
51
.9
51
.9
51
.8
0
10
20
30
40
50
60
70
80
90
100
FL RI LA CA MA KS CT OK SC DE OR NJ IA TX NC MO DC MS AR NH ID MD CO NE IL
Ha
za
rd R
isk
Sc
ore
Note: Score is based on data on 9 natural hazards: flood, wildfire, tornado, storm surge, earthquake, straight-line wind, hurricane, wind, hail and sinkhole.
*Analysis Includes DC. Excludes Alaska and Hawaii due to limited natural hazard risk data.
Sources: CoreLogic release “CoreLogic Identifies US States at Highest Risk of Property Damage Loss from Natural Hazards,” Sept. 10, 2014; Insurance Information Institute.
Florida received the highest Natural Hazard
Risk Score
133
Natural Hazard Risk Scores, 2014Bottom 24 States*
50
.7
50
.6
50
.1
49
.4
47
.3
46
.5
45
.2
43
.8
42
.8
42
.4
42
.3
38
.5
38
.2
37
.9
36
.4
34
.5
31
.5
30
.2
28
.8
28
.3
27
.5
25
.0
20
.7
20
.2
0
10
20
30
40
50
60
IN GA NV AL KY TN UT NM AZ VA WA WI SD MT MN OH ME WY PA VT ND NY WV MI
Ha
za
rd R
isk
Sc
ore
Note: Score is based on data on 9 natural hazards: flood, wildfire, tornado, storm surge, earthquake, straight-line wind, hurricane, wind, hail and sinkhole.
*Analysis Includes DC. Excludes Alaska and Hawaii due to limited natural hazard risk data.
Sources: CoreLogic release “CoreLogic Identifies US States at Highest Risk of Property Damage Loss from Natural Hazards,” Sept. 10, 2014; Insurance Information Institute.
Michigan and West Virginia received the lowest Natural
Hazard Risk Score
Workers Compensation Operating Environment
134
Workers Comp Results Have Improved Substantially in Recent Years
134
135
Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2015:Q1
Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.
Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates); Insurance Information Institute.
Billions
$5,500
$5,750
$6,000
$6,250
$6,500
$6,750
$7,000
$7,250
$7,500
$7,7500
5:Q
1
05
:Q2
05
:Q3
05
:Q4
06
:Q1
06
:Q2
06
:Q3
06
:Q4
07
:Q1
07
:Q2
07
:Q3
07
:Q4
08
:Q1
08
:Q2
08
:Q3
08
:Q4
09
:Q1
09
:Q2
09
:Q3
09
:Q4
10
:Q1
10
:Q2
10
:Q3
10
:Q4
11
:Q1
11
:Q2
11
:Q3
11
:Q4
12
:Q1
12
:Q2
12
:Q3
12
:Q4
13
:Q1
13
:Q2
13
:Q3
13
:Q4
14
:Q1
14
:Q2
14
:Q3
14
:Q4
15
:Q1
Prior Peak was 2008:Q3 at $6.54 trillion
Recent trough (2009:Q1) was $6.23 trillion, down
5.3% from prior peak
Growth rates2011:Q1 over 2010:Q1: 5.5%2012:Q1 over 2011:Q1: 4.2%2013:Q1 over 2012:Q1: 2.5%2014:Q1 over 2013:Q1: 4.3%2015:Q1 over 2014:Q1: 4.4%
135
Latest (2015:Q1) was $7.66 trillion, a new peak--$1.34 trillion above 2009 trough
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
$25
$30
$35
$40
$45
$50Wage & Salary DisbursementsWC NPW
136
Payroll Base* WC NWP
Payroll vs. Workers Comp Net Written Premiums, 1990-2014P
*Private employment; Shaded areas indicate recessions. WC premiums for 2014 are from NCCI.
Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.
Continued Payroll Growth and Rate Gains Suggest WC NWP Will Grow Again in 2015
7/90-3/91 3/01-11/0112/07-6/09
$Billions $Billions
WC premium volume dropped two years before
the recession began
WC net premiums written were down $14B or 29.3% to
$33.8B in 2010 after peaking at $47.8B
in 2005
Workers Compensation Combined Ratio: 1994–2014P
10
2.0
97
.0 10
0.0
10
1.0
11
2.6
10
8.6
10
5.1
10
2.7
98
.5
10
3.5
10
4.5 1
10
.6 11
5.0
11
5.0
10
8.0
10
1.0
98
.0
12
1.7
10
7.0
11
5.3
11
8.2
80
85
90
95
100
105
110
115
120
125
130
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14P
Workers Comp Results Began to Improve in 2012. Underwriting Results Deteriorated Markedly from 2007-2010/11 and Were the Worst They Had Been in a Decade.
Sources: A.M. Best (1994-2009); NCCI (2010-2014P) and are for private carriers only; Insurance Information Institute.137
WC results have improved markedly
since 2011
Workers Compensation Premium: Fourth Consecutive Year of IncreaseNet Written Premium
31.0 31.3 29.8 30.5 29.126.3 25.2 24.2 23.3 22.3
25.0 26.129.2
31.134.7
37.8 38.6 37.633.8
30.3 29.932.3
35.136.9 38.5
35.3 35.734.3
35.433.6
30.128.5
26.9 25.9 25.0
28.6
32.1
37.7
42.3
46.547.8
46.544.3
39.3
34.6 33.8
36.4
39.541.8
44.2
0
10
20
30
40
50
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14P
State Funds ($ B)
Private Carriers ($ B)
Pvt. Carrier NWP growth was +4.3% in 2014, +5.1% in 2013 and 8.7% in 2012
$ Billions
Calendar Yearp Preliminary
Source: NCCI from Annual Statement Data.
Includes state insurance fund data for the following states: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT.
Each calendar year total for State Funds includes all funds operating as a state fund that year.
139
2014 Workers Compensation Direct Written Premium Growth, by State*
PRIVATE CARRIERS: Overall 2014 Growth = +4.6%
*Excludes monopolistic fund states (in gray): OH, ND, WA and WY.
Source: NCCI.
While growth rates
varied widely, most
states experienced
positive growth in
2014
140
2013 Workers Compensation Direct Written Premium Growth, by State*
PRIVATE CARRIERS: Overall 2013 Growth = +5.4%
*Excludes monopolistic fund states (in white): OH, ND, WA and WY.
Source: NCCI.
While growth rates varied widely, all states
experienced positive growth in 2013
141
Workers Compensation Components of Written Premium Change, 2013 to 2014
Written Premium Change from 2013 to 2014
Net Written Premium—Countrywide +4.6%
Direct Written Premium—Countrywide +4.6%
Direct Written Premium—NCCI States +4.5%
Components of DWP Change for NCCI States
Change in Carrier Estimated Payroll +4.7%
Change in Bureau Loss Costs and Mix -1.4%
Change in Carrier Discounting +0.4%
Change in Other Factors +0.8%
Combined Effect +4.5%
Sources: Countrywide: Annual Statement data.
NCCI States: Annual Statement Statutory Page 14 for all states where NCCI provides ratemaking services.
Components: NCCI Policy data.
Growth is now almost entirely payroll driven
WC Approved Changes in Bureau Premium Level (Rates/Loss Costs)
12.1
7.4
10.0
2.9
-6.4
-3.2
-6.0
-8.0
-5.4
-2.6
3.5
1.2
4.9
6.6
-6.0-6.5
-8.8-7.8
-3.2-2.1
-1.2
0.4
8.4
2.2
0.5
-2.2
-10
-5
0
5
10
15
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15p
Percent
Calendar Year
Cumulative
1990–1993
+36.3%
Cumulative 2000–2003
+17.1%
Cumulative 2004–2011
-30.8%
Cumulative 1994–1999
-27.8%
*States approved through 4/24/15.
Note: Bureau premium level changes are countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by applicable
rating organization, relative to those previously approved.
Source: NCCI.
By Effective Date for Total Market
Approved rates/loss costs are down for the first time since 2010
Cumulative 2011–2014
+11.8%
143
WC Approved or Filed and Pending Change in NCCI Premium Level by State
Latest Change for Voluntary Market
*Excludes monopolistic fund states (in gray): OH, ND, WA and WY.
Source: NCCI.
While growth rates
varied widely, most
states experienced
positive growth in
2014
144
WC Approved or Filed and Pending Change in NCCI Premium Level by State
Note: Premium level changes are approved changes are approved or filed and pending changes in advisory rates, loss costs and rating values as of
4/24/15 as filed by applicable rating organization, relative to those previously approved. SC is filed and pending. IN and NC are in cooperation with
state rating bureaus.
Source: NCCI.
Latest Change for Voluntary Market
Excludes Law-Only Filings
The majority of states experienced decreases in
rates/loss costs over
Workers Compensation Lost-Time Claim Frequency Declined in 2014
145
-4.4
-9.2
0.3
-6.5
-4.5
0.5
-3.9
-2.3
-4.5
-6.9
-4.5 -4.1 -3.7
-6.6
-4.5
-2.2
-4.3-4.9
10.6
-3.8
-6
-2.9-2.0
3.6
-0.8
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14p
Indicated
Adjusted*
Frequency Change: 2007—2012
Contracting: 7.97.1 -9.3%
Manufacturing: 13.612.0 -11.8%
Percent
Accident Year*Adjustments primarily due to significant audit activity.
2014p: Preliminary based on data valued as of 12/31/2014.
Source: NCCI Financial Call data, developed to ultimate and adjusted to current wage an voluntary loss cost level; Excludes high deductible
policies; 1994-2013: Based on data through 12/31/13. Data for all states where NCCI provides ratemaking services, excluding WV.
Frequency is the number of lost-time claims per $1M pure premium at current wage and voluntary loss cost level
Cumulative Change of –51.1%
(1994–2013 adj.)
$9
.8
$9
.5
$9
.2
$9
.7
$9
.8
$1
0.4
$1
1.2
$1
2.2
$1
3.5
$1
4.8
$1
6.1
$1
6.6
$1
7.4
$2
2.3
$2
2.5
$2
2.2
$2
2.2
$2
2.6
$2
3.6
$1
8.1
$1
7.5
$1
9.2
$2
0.8
$2
1.9
+0.0%
-2.5%+1.0%+9.1% +1.3%
+5.9%+3.1%
+1.0%+4.6%+3.1%
+9.2%
+10.1%
+10.1%
+9.0%
+7.7%+5.9%
+1.7%+4.9%-2.8%-3.1%+1.0%
+6.6%
5
7
9
11
13
15
17
19
21
23
25
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14p
Indemnity
Claim Cost ($ 000s)
Accident Year
Workers Comp Indemnity Claim Costs: Modest Increase in 2014
Average indemnity costs per claim were up 4% in
2014 to $23,600, the largest increase since 2008
Average Indemnity Cost per Lost-Time Claim
+4%+1.9%
Cumulative Change = 141%
(1991-2014p)
2014p: Preliminary based on data valued as of 12/31/2014.
1991-2013: Based on data through 12/31/2013, developed to ultimate
Based on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.
4.2%
5.2%5.6%
4.7%
6.3%
2.3%
1.1%
4.7% 4.6%
2.7%
1.1%
5.9%
7.7%
9.0%
10.1%
4.6%
5.9%
6.6%
9.1%
1.9%4.3%
2.7%
3.0%3%2.9%
2.3%
1.1%3.5%
3.6% 3.1%
1.0%
0%
1.3%1.0%
-2.5%
1.0%
1.7%
10.1%
9.2%
3.1%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
95 97 99 01 03 05 07 09 11 13
Change in CPS Wage Change in Indemnity Cost per Lost-Time Claim
WC Indemnity Severity vs. Wage Inflation, 1995 -2014p
2014p: Preliminary based on data valued as of 12/31/2014; 1991-2010: Based on data through 12/31/2010, developed to ultimate. Based on the states
where NCCI provides ratemaking services. Excludes the effects of deductible policies. CPS = Current Population Survey.
Source: NCCI
Annual Change 1994–2014
Indemnity Claim Sev.: +4.6
US Avg. Weekly Wage: +3.4%
Indemnity severities usually
outpace wage gains
WC indemnity severity turned
positive again in 2011
Workers Compensation Medical Severity:Moderate Increase in 2014
148
Accident Year
Annual Change 1991–1993: +1.9%
Annual Change 1994–2001: +8.9%
Annual Change 2002–2010: +6.0%
Average Medical Cost per Lost-Time ClaimMedical
Claim Cost ($000s)
$8
.1
$8
.2
$8
.1
$8
.8
$9
.1
$9
.8
$1
0.8
$11
.7
$1
2.9
$1
3.9
$1
5.7
$1
7.1
$1
8.4
$1
9.4
$2
0.9
$2
2.1
$2
3.4
$2
5.0
$2
6.0
$2
6.1
$2
6.8
$2
7.4
$2
8.3
$2
9.4
+6.8%+1.3%-2.1%+9.0%+5.1%
+7.4%+10.1%
+8.3%
+10.6%+7.3%
+13.5%
+8.8%
+7.7%+5.4%
+7.8%
+5.8%
+5.9%
+6.9%+4.0%+0.5%
+2.4%+2.4%
+3.2%+4%
5
10
15
20
25
30
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14p
2014p: Preliminary based on data valued as of 12/31/2014.
1991-2013: Based on data through 12/31/2013, developed to ultimate
Based on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.
Cumulative Change = 263%
(1991-2014p)
Accident Year
Medical severity for lost time claims was up 4% in 2014, the
largest increase since 2009
149
Workers Comp Change in Medical Severity by State, Avg. Annual Change, 2009-2013
Percent
Source: NCCI’s Analysis of Frequency and Severity of Claims Across the Country as of 12/31/13 on ncci.com.
Values reflect methodology and state data underlying the most recent rate/lost cost filing.
TX changes are for the years 2010-2013.
While growth rates
varied widely, most
states experienced
positive growth in
2014
The change in lost-time medical severities from 2009-2013 ranged from a low of -6% to a high of 9%
150
Annual Inflation Rates, (CPI-U, %),1990–2016F
2.82.6
1.51.9
3.3 3.4
1.3
2.52.3
3.0
3.8
2.8
3.8
-0.4
1.6
3.2
2.1
1.51.7
0.2
2.2
2.9
2.4
3.23.0
5.14.9
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15F 16F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 5/15 (forecasts).
Slack in the U.S. economy and falling energy prices suggests that inflationary pressures should remain subdued for an extended
period of times
Annual Inflation Rates (%)
Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the
commodity bubble reduced inflationary pressures in 2009/10
Inflationary expectations have slipped
(due in part to falling energy
costs) allowing the Fed to
maintain low interest rates
Workers CompensationChange in Medical Severity Comparison to Change in Medical Consumer Price Index (CPI)
5.1
7.4
10.1
8.3
10.6
7.3
13.5
8.8
7.7
5.4
7.8
5.8 5.9
6.9
4.0
0.5
2.4 2.4
34.0
4.5
3.5
2.83.2
3.54.1
4.6 4.7
4.04.4 4.2 4.0
4.4
3.73.2 3.4
3.03.7
3 2.4
0
2
4
6
8
10
12
14
16
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14p
Change in Lost-Time Medical Claim Severity
Change in US Medical CPI
Percent Change
Year
Average Annual Change: 1994—2014
Lost-Time Medical Severity: +6.4%
US Medical CPI: +3.7%
2014p: Preliminary based on data valued as of 12/31/2014.
Sources: Severity: 995-2013: Based on data through 12/31/2013, developed to ultimate
Based on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.
US Medical CPI: US Bureau of Labor Statistics.
4.5%
3.5%
2.8%3.2%
3.5%4.1%
4.6% 4.7%
4.0%4.4% 4.2% 4.0%
4.4%
3.7%3.2% 3.4%
2.5% 2.4%
5.1%
7.4%
10.1%10.6%
13.5%
5.4%
7.8%
5.9%
6.8%
4.0% 4.0%
3.0%3.7%
3.2%
2.4%2.4%
0.5%
5.8%
8.8%
7.7%
7.3%
8.3%
0%
2%
4%
6%
8%
10%
12%
14%
16%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14p
Change in Medical CPI
Change Med Cost per Lost Time Claim
WC Medical Severity Generally Outpaces the Medical CPI Rate
Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
Average annual increase in WC medical severity from 1995 through 2014 was well above the medical CPI (6.4% vs. 3.7%), but the gap has narrowing. Lost-time medical
severities appear to on the rise again.
-1%
0%
1%
2%
3%
4%
5%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*
Change in Medical CPI CPI-All Items
Medical Cost Inflation vs. Overall CPI, 1995 – 2014*
*July 2014 compared to July 2013.
Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
Average Annual Growth Average
1995 – 2013
Healthcare: 3.8%
Total Nonfarm: 2.4%
Though moderating, medical inflation will continue to exceed inflation in the overall economy
U.S. Health Care Expenditures,1965–2022F
$42
.0$
46
.3$
51
.8$
58
.8$
66
.2$
74
.9$83.2
$93
.1$
10
3.4
$11
7.2
$13
3.6
$15
3.0
$17
4.0
$195.5
$22
1.7
$25
5.8
$29
6.7
$33
4.7
$36
9.0
$40
6.5
$444.6
$47
6.9
$51
9.1
$58
1.7
$64
7.5
$72
4.3
$79
1.5
$857.9
$92
1.5
$97
2.7
$1,0
27
.4$
1,0
81
.8$
1,1
42
.6$
1,2
08
.9$1,2
86.5
$1,3
77
.2$
1,4
93
.3$
1,6
38
.0$
1,7
75
.4$
1,9
01
.6$
2,0
30
.5$2,1
63.3
$2,2
98
.3$
2,4
06
.6$
2,5
01
.2$
2,6
00
.0$
2,7
00
.7$
2,8
06
.6$2,9
14.7
$3,0
93
.2$
3,2
73
.4$
3,4
58
.3$
3,6
60
.4$
3,8
89
.1$
4,1
42
.4$
4,4
16
.2$
4,7
02
.0$
5,0
08
.8
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
19
20
21
22
U.S. health care expenditures have been on a relentless climb for most of the past half century, far outstripping population growth,
inflation of GDP growth
154
From 1965 through 2013, US health care expenditures had
increased by 69 fold. Population growth over the same period increased by a factor of just 1.6. By 2022, health spending will have
increased 119 fold.
$ Billions
Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-
Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
19
20
21
22
National Health Care Expenditures as a Share of GDP, 1965 – 2022F*
Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-
Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.
1965
5.8%
Health care expenditures as a share
of GDP rose from 5.8% in 1965 to
18.0% in 2013 and are expected to
reach 19.9% of GDP by 2022
% of GDP
2022 19.9%
1980:
9.2%
1990:
12.5%
2000:
13.8%
2010:
17.9%
Since 2009, heath expenditures as a %
of GDP have flattened out at about 18%--the
question is why and will it last?
THE ECONOMY
156
The Strength of the Economy Will Greatly
Influence Insurer Exposure Base
Across Most Lines
156
157
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.
Source: US Department of Commerce, Blue Economic Indicators 10/15; Insurance Information Institute.
2.7
%1.8
%-1
.8%
1.3
%-3
.7%
-5.3
%-0
.3%
5.0
%2.3
%2.2
%2.6
%2.4
%0.1
%2.5
%
1.3
%4.1
%2.0
%1.3
% 3.1
%0.4
%2.7
%1.8
% 3.5
%-0
.9%
4.6
%4.3
%2.1
%0.6
%3.9
%2.1
%2.7
%
2.6
%2.7
%2.6
%2.6
%
-8.9%
4.5
%
1.4%
4.1
%1.1
%1.8
%2.5
% 3.6
%
3.1
%
-9%
-7%
-5%
-3%
-1%
1%
3%
5%
7%
2
00
0
2
00
1
2
00
2
2
00
3
2
00
4
2
00
5
2
00
6
2
00
7
08
:1Q
08
:2Q
08
:3Q
08
:4Q
09
:1Q
09
:2Q
09
:3Q
09
:4Q
10
:1Q
10
:2Q
10
:3Q
10
:4Q
11
:1Q
11
:2Q
11
:3Q
11
:4Q
12
:1Q
12
:2Q
12
:3Q
12
:4Q
13
:1Q
13
:2Q
13
:3Q
13
:4Q
14
:1Q
14
:2Q
14
:3Q
14
:4Q
15
:1Q
15
:2Q
15
:3Q
15
:4Q
16
:1Q
16
:2Q
16
:3Q
16
:4Q
Demand for Insurance Should Increase in 2016 as GDP Growth Continues at a Steady, Albeit Moderate Pace and Gradually Benefits the Economy Broadly
Real GDP Growth (%)
Recession began in in June
2009
The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%
Q1 2014/15 GDP data were hit hard by this year’s “Polar Vortex”
and harsh winter
State Leading Economic Indicators through November 2015
Sources: Federal Reserve Bank of Philadelphia at http://www.philadelphiafed.org/index.cfm ;Insurance Information Institute.158
Growth in the West is
finally beginning to pick up
The economic outlook for most of the US is generally
positive, though flat-to-negative for 10 states, several
of them energy dependent
159
Real GDP by State Percent Change, 2014*:Highest 25 States
6.3
5.2
5.1
5.1
4.7
3.6
3.1
3.0
2.8
2.8
2.7
2.7
2.5
2.3
2.3
2.3
2.2
2.2
2.1
1.9
1.9
1.9
1.8
1.8
1.8
1.7
0
1
2
3
4
5
6
7
ND TX WY WV CO OR UT WA OK CA ID FL NY GA NH MA US SC OH MI MN LA MT KS PA TN
Pe
rce
nt
Ch
an
ge
(%
)
*Advance statistics
Sources: U.S. Bureau of Economic Analysis; Insurance Information Institute.
North Dakota was the economic growth juggernaut of the US
in 2014—by far
Only 7 states experienced growth in excess of 3% in 2014, which is a
growth rate we would see nationally in a more typical recovery
Growth Benchmarks: Real GDP
US: 2.2%
160
1.6
1.4
1.4
1.2
1.2
1.2
1.0
1.0
1.0
1.0
0.9
0.8
0.8
0.8
0.7
0.7
0.6
0.6
0.6
0.4
0.4
0.4
0.2
0.0
-1.2
-1.3-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
DC NC AZ IL RI DE WI KY NM NV MO AR HI MD NE AL SD VT CT IA IN NJ ME VA MS AK
Pe
rce
nt
Ch
an
ge
(%
)Real GDP by State Percent Change, 2014*:
Lowest 25 States
*Advance statistics
Sources: US Bureau of Economic Analysis; Insurance Information Institute.
Mississippi and Alaska were the
only states to shrink in 2014
Growth rates in 16 states were still below 1% in 2014, including in AL
161
Percent Change in Real GDP by State, 2013
Sources: US Bureau of Economic Analysis; Insurance Information Institute.
162
Labor Market Trends
Massive Job Losses Sapped the Economy and Commercial/Personal
Lines Exposure, But Trend Has Greatly Improved
162
163
Unemployment and Underemployment Rates: Still Too High, But Falling
2
4
6
8
10
12
14
16
18
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
Jan
11
Jan
12
Jan
13
Jan
14
Jan
15
"Headline" Unemployment Rate U-3
Unemployment + Underemployment RateU-6
“Headline” unemployment
was 5.1% in Sep. 2015. 4.5% to
5.5% is “normal.”
Source: US Bureau of Labor Statistics; Insurance Information Institute.
January 2000 through September 2015, Seasonally Adjusted (%)
Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is continuing to improve.
163
U-6 soared from 8.0% in March
2007 to 17.5% in October 2009; Stood at 10.0% in Sept. 2015.8% to 10% is
“normal.”
23
15
21
70
52
12
65
73
-71
32 6
4 81
55
3-1
15
-10
6-2
21
-21
5-2
06
-26
1-2
58
-42
2-4
86
-77
6 -69
3-8
21
-69
8-8
10
-80
1-2
94
-42
6-2
72
-23
2 -14
1-2
71
-15
-23
22
0-3
8
19
29
4 11
01
20
11
71
07
19
91
49
94
72
22
32
313
20
16
61
86
21
91
25
26
81
77
19
12
22
36
42
28
24
61
02
13
17
51
72
13
61
59
25
52
11
21
52
19 26
31
64
18
82
22
20
11
70
18
01
53
24
72
72
86
18
31
75 22
33
13
23
82
72
24
32
09
23
52
18
41
43
19
20
2 26
11
17 1
89 2
52
21
81
95
10
01
18
11
3
(1,000)
(800)
(600)
(400)
(200)
0
200
400
600
Jan-0
7F
eb-0
7M
ar-
07
Apr-
07
May-
Jun-0
7Jul-07
Aug-
Sep-
Oct-
07
Nov-
Dec-
Jan-0
8F
eb-0
8M
ar-
08
Apr-
08
May-
Jun-0
8Jul-08
Aug-
Sep-
Oct-
08
Nov-
Dec-
Jan-0
9F
eb-0
9M
ar-
09
Apr-
09
May-
Jun-0
9Jul-09
Aug-
Sep-
Oct-
09
Nov-
Dec-
Jan-1
0F
eb-1
0M
ar-
10
Apr-
10
May-
Jun-1
0Jul-10
Aug-
Sep-
Oct-
10
Nov-
Dec-
Jan-1
1F
eb-1
1M
ar-
11
Apr-
11
May-
Jun-1
1Jul-11
Aug-
Sep-
Oct-
11
Nov-
Dec-
Jan-1
2F
eb-1
2M
ar-
12
Apr-
12
May-
Jun-1
2Jul-12
Aug-
Sep-
Oct-
12
Nov-
Dec-
Jan-1
3F
eb-1
3M
ar-
13
Apr-
13
May-
Jun-1
3Jul-13
Aug-
Sep-
Oct-
13
Nov-
Dec-
Jan-1
4F
eb-1
4M
ar-
14
Apr-
14
May-
Jun-1
4Jul-14
Aug-
Sep-
Oct-
14
Nov-
Dec-
Jan-1
5F
eb-1
5M
ar-
15
Apr-
15
May-
Jun-1
5Jul-15
Aug-
Sep-
Monthly Change in Private Employment
January 2007 through Sept. 2015 (000s, Seasonally Adj.)
Private Employers Added 13.03 Million Jobs Since Jan. 2010 After Having Shed 5.01 Million Jobs in 2009 and 3.76 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Monthly losses in Dec. 08–Mar.
09 were the largest in the post-WW II
period
118,000 private sector jobs were created in Sept.
164
Jobs Created
2014: 3.042 Mill
2013: 2.452 Mill
2012: 2.315 Mill
2011: 2.396 Mill
2010: 1.282 Mill
3,042,000 jobs were created in 2014, the most since 1997
165
US Unemployment Rate Forecast4
.5%
4.5
%4
.6%
4.8
%4
.9% 5.4
% 6.1
%6
.9%
8.1
%9
.3%
9.6
% 10
.0%
9.7
%9
.6%
9.6
%
8.9
%9
.1%
9.1
%8
.7%
8.3
%8
.2%
8.0
%7
.8%
7.7
%7
.6%
7.3
%7
.0%
6.6
%6
.2%
6.1
%5
.7%
5.6
%5
.4%
5.2
%5
.0%
4.9
%4
.8%
4.8
%4
.7%
9.6
%
4%
5%
6%
7%
8%
9%
10%
11%
07
:Q1
07
:Q2
07
:Q3
07
:Q4
08
:Q1
08
:Q2
08
:Q3
08
:Q4
09
:Q1
09
:Q2
09
:Q3
09
:Q4
10
:Q1
10
:Q2
10
:Q3
10
:Q4
11
:Q1
11
:Q2
11
:Q3
11
:Q4
12
:Q1
12
:Q2
12
:Q3
12
:Q4
13
:Q1
13
:Q2
13
:Q3
13
:Q4
14
:Q1
14
:Q2
14
:Q3
14
:Q4
15
:Q1
15
:Q2
15
:Q3
15
:Q4
16
:Q1
16
:Q2
16
:Q3
16
:Q4
Rising unemployment eroded payrolls
and WC’s exposure base.
Unemployment peaked at 10% in late 2009.
* = actual; = forecasts
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (10/15 edition); Insurance Information Institute.
2007:Q1 to 2016:Q4F*
Unemployment forecasts have been revised modestly
downwards. Optimistic scenarios put the
unemployment as low as 5.0% by Q4 of 2015.
Jobless figures have been revised
downwards for 2015/16
166
Unemployment Rates by State, September 2015:Highest 25 States*
7.3
6.8
6.7
6.7
6.4
6.3
6.2
6.1
6.0
6.0
5.9
5.8
5.8
5.7
5.7
5.6
5.4
5.4
5.3
5.3
5.2
5.2
5.2
5.2
5.1
5.1
5.1
0
2
4
6
8
WV NM DC NV AK AZ OR MS AL LA CA GA NC SC TN NJ IL RI MO PA AR CT FL WA MD NY US
Un
em
plo
ym
en
t R
ate
(%
)
*Provisional figures for September 2015, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In September, 37 states and the District of Columbia had over-the-month unemployment rate decreases, 6 states had increases, and 7 states had no change.
In
167
5.1
5.0
5.0
4.9
4.6
4.5
4.5
4.4
4.4
4.4
4.3
4.3
4.2
4.2
4.1
4.0
4.0
3.8
3.7
3.6
3.6
3.5
3.4
3.4
2.9
2.8
0
1
2
3
4
5
6
US KY MI DE MA IN OH KS ME OK VA WI ID TX MT CO WY MN VT IA UT SD HI NH NE ND
Un
em
plo
ym
en
t R
ate
(%
)
Unemployment Rates by State, September 2015:
Lowest 25 States*
*Provisional figures for September 2015, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In September, 37 states and the District of Columbia had over-the-month unemployment rate decreases, 6 states had increases, and 7 states had no change.
CONSTRUCTION INDUSTRY OVERVIEW & OUTLOOK
168
The Construction Sector Is Critical to the Economy and the P/C Insurance Industry
168
169
Value of New Private Construction: Residential & Nonresidential, 2003-2015*
Billions of Dollars
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
03 04 05 06 07 08 09 10 11 12 13 14 15*
Non Residential
Residential
Private Construction Activity Is Moving in a Positive Direction though Remains Well Below Pre-Crisis Peak; Residential Dominates
$298.1
$15.0
$613.7
New Construction peaks at $911.8. in 2006
Trough in 2010 at $500.6B,
after plunging 55.1% ($411.2B)
2015: Value of new pvt. construction hits $788.0B as of
Aug. 2015, up 57.5% from the 2010 trough but still 13.5% below
2006 peak
169
$261.8
$238.8
$404.7
$383.3
*2015 figure is a seasonally adjusted annual rate as of August.
Sources: US Department of Commerce http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
170
Value of Construction Put in Place, August 2015 vs. August 2014*
7.0%
32.9%
6.5%
13.7%
16.5% 16.1% 16.9%
0%
5%
10%
15%
20%
25%
30%
35%
Total
Construction
Total Private
Construction
Residential--
Private
Non-
Residential--
Private
Total Public
Construction
Residential-
Public
Non-
Residential--
Public
Overall Construction Activity is Up Again After Languishing in Early 2015; State/Local Sector Government Sector May Be Recovering as Budget
Woes Ease in Some Jurisdictions
Growth (%)
Private sector construction activity is up in both the
residential and nonresidential segments
*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
Private: +16.5% Public: +7.0%
Public sector construction activity is finally beginning to
create less drag up after years of decline
171
Value of Private Construction Put in Place, by Segment, Aug. 2015 vs. Aug. 2014*
0.4%
15.2%7.7%
-5.0%
25.5%
11.2%
-8.8%
58.4%63.1%
16.5% 16.1%16.9%
43.2%
27.7%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
To
tal
Pri
vate
Co
nstr
ucti
on
Resid
en
tial
To
tal
No
nre
sid
en
tial
Lo
dg
ing
Off
ice
Co
mm
erc
ial
Healt
h C
are
Ed
ucati
on
al
Reli
gio
us
Am
usem
en
t &
Rec.
Tra
nsp
ort
ati
on
Co
mm
un
icati
on
Po
wer/
Uti
lity
Man
ufa
ctu
rin
g
Private Construction Activity is Up in Most Segments in the Second Half of 2015; Expansion Should Continue
Growth (%) Led by the Manufacturing, Lodging, Office and Amusement & Recreations segments, Private nonresidential sector construction
activity continues to rise after plunging during the “Great Recession.”
*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
172
Value of Public Construction Put in Place, by Segment, Aug. 2015 vs. Aug. 2014*
-8.4%
4.4%0.5%
13.6%
7.2% 7.0%9.2%
5.1%
15.3%
9.4%7.0%
32.9%
6.5%
13.3%
28.1%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
To
tal
Pu
bli
c
Co
nstr
ucti
on
Resid
en
tial
To
tal
No
nre
sid
en
tial
Off
ice
Co
mm
erc
ial
Healt
h C
are
Ed
ucati
on
al
Pu
bli
c S
afe
ty
Am
usem
en
t &
Rec.
Tra
nsp
ort
ati
on
Po
wer
Hig
hw
ay &
Str
eet
Sew
ag
e &
Waste
Dis
po
sal
Wate
r S
up
ply
Co
nserv
ati
on
&
Develo
p.
Public Construction Activity is Beginning to Recover from its Long Contraction which Will Drive Demand in Many Commercial Insurance Lines
Growth (%)
*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
Public sector construction activity finally up in most segments after many months of decline, pushing up public entity risk
exposures
Residential, Commercial and Conservation lead public
sector construction
173
$314.9$304.0
$286.4$278.2
$269.0 $273.1
$298.2
$216.1 $220.2$234.2
$255.4
$289.1
$308.7
$0
$50
$100
$150
$200
$250
$300
$350
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*
($ Billions)
Government Construction Spending Peaked in 2009, Helped by Stimulus Spending, but Contracted As State/Local Governments Grappled with
Deficits and Federal Sequestration; Only Now Recovering
Value of New Federal, State and Local Government Construction: 2003-2015*
*2015 figure is a seasonally adjusted annual rate as of June; http://www.census.gov/construction/c30/historical_data.html
Sources: US Department of Commerce; Insurance Information Institute.
Construction across all levels of government
peaked at $314.9B in 2009
Austerity Reigns
Govt. construction MAY finally be turning around; still down $16.7B
or 5.3% since 2009 peak
174
Construction Employment,Jan. 2010—Sept. 2015*
*Seasonally adjusted.
Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
5,5
81
5,5
22
5,5
42
5,5
54
5,5
27
5,5
12
5,4
97
5,5
19
5,4
99
5,5
01
5,4
97
5,4
68
5,4
35
5,4
78
5,4
85
5,4
97
5,5
24
5,5
30
5,5
47
5,5
46
5,5
83
5,5
76
5,5
77
5,6
12
5,6
29
5,6
29
5,6
28
5,6
27
5,6
08
5,6
23
5,6
32
5,6
41
5,6
49
5,6
68
5,6
84
5,7
24
5,7
46
5,7
98
5,8
15
5,8
13
5,8
33
5,8
56
5,8
54
5,8
66
5,8
93
5,9
18
5,9
53
5,9
37 6,0
06
6,0
32
6,0
62
6,1
03
6,1
14
6,1
21
6,1
52
6,1
69
6,1
91
6,2
01
6,2
31
6,2
75
6,3
16
6,3
47
6,3
35
6,3
65
6,3
77
6,3
78
6,3
83
6,3
88
6,3
96
5,400
5,500
5,600
5,700
5,800
5,900
6,000
6,100
6,200
6,300
6,400
6,500
Jan-1
0F
eb-1
0M
ar-
10
Apr-
10
May-1
0Jun-1
0Jul-10
Aug-1
0S
ep-1
0O
ct-
10
Nov-1
0D
ec-1
0Jan-1
1F
eb-1
1M
ar-
11
Apr-
11
May-1
1Jun-1
1Jul-11
Aug-1
1S
ep-1
1O
ct-
11
Nov-1
1D
ec-1
1Jan-1
22/3
0/2
0M
ar-
12
Apr-
12
May-1
2Jun-1
2Jul-12
Aug-1
2S
ep-1
2O
ct-
12
Nov-1
2D
ec-1
2Jan-1
3F
eb-1
3M
ar-
13
Apr-
13
May-1
3Jun-1
3Jul-13
Aug-1
3S
ep-1
2O
ct-
13
Nov-1
3D
ec-1
3Jan-1
4F
eb-1
4M
ar-
14
Apr-
14
May-1
4Jun-1
4Jul-14
Aug-1
4S
ep-1
4O
ct-
14
Nov-1
4D
ec-1
4Jan-1
5F
eb-1
5M
ar-
15
Apr-
15
May-1
5Jun-1
5Jul-15
Aug-1
5S
ep-1
5
Construction employment is +948,000 above
Jan. 2011 (+17.4%) trough
(Thousands)
Construction and manufacturing employment constitute 1/3 of all WC payroll exposure.
175
Construction Employment, Jan. 2003–Sept. 2015
Note: Recession indicated by gray shaded column.
Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute.
5,000
5,500
6,000
6,500
7,000
7,500
8,000
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15
The “Great Recession” and housing bust destroyed 2.3 million constructions jobs
The Construction Sector Was a Growth Leader in 2014-15 as the Housing Market, Private Investment and Govt. Spending Recover. WC Insurers Will Benefit.
Construction employment troughed at 5.435 million in
Jan. 2011, after a loss of 2.291 million jobs, a 29.7% plunge
from the April 2006 peak
175
Construction employment
peaked at 7.726 million in April 2006
(Thousands)Construction
employment as of Sept. 2015 totaled 6.396 million, an
increase of 961,000 jobs or 17.7% from
the Jan. 2011 trough
Gap between pre-recession
construction peak and today: 1.33 million jobs
176
(Millions of Units)
New Private Housing Starts, 1990-2021F
1.4
8
1.4
7 1.6
2
1.6
4
1.5
7
1.6
0 1.7
1 1.8
5 1.9
6 2.0
7
1.8
0
1.3
6
0.9
1
0.5
5
0.5
9
0.6
1 0.7
8 0.9
2 1.1
0
1.1
3 1.2
8 1.4
2
1.4
7
1.4
7
1.5
01
.50
1.3
51.4
6
1.2
9
1.2
0
1.0
11.1
9
0.3
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15F 16F 17F 18F 19F20F 21F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/15); Insurance Information Institute.
Insurers Are Continue to See Meaningful Exposure Growth in the Wake of the “Great Recession” Associated with Home Construction: Construction Risk
Exposure, Surety, Commercial Auto; Potent Driver of Workers Comp Exposure
New home starts plunged 72% from 2005-2009; A net
annual decline of 1.49 million units, lowest since records began
in 1959
Job growth, low inventories of existing homes, low mortgage rates and demographics should continue to stimulate new home construction
for several more years
177
Units in Multiple-Unit Projectsas Percent of Total
U.S.: Pct. Of Private Housing Unit StartsIn Multi-Unit Projects, 1990-2015
21
.4%
23
.1%
21
.4%
20
.6%
21
.5%
20
.6%
20
.3%
18
.9%
17
.7%
17
.0%
18
.6% 22
.8%
31
.3%
19
.7%
19
.7%
29
.3%
31
.4%
33
.3%
36
.0%
34
.3%
20
.5%
17
.7%
12
.6%
14
.2%
17
.1%
25
.0%
0%
10%
20%
30%
40%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15*
*January through April 2015; April is preliminary; calculations based on seasonally adjusted at annual ratesSources: U.S. Census Bureau, New Residential Construction in April 2015 and earlier releases; next release June 16, 2015; Insurance Information Institute calculations.
For the U.S. as a whole, the trend toward multi-unit housing projects (vs. single-unit homes) is recent. Commercial insurers with Workers Comp,
Construction risk exposure, and Surety benefit.
A NEW NORMAL?In 5 of the last 7 years, over 30% of housing
unit starts were in 5+-unit projects
178
Rental-Occupied Housing Units as % of Total Occupied Units, Quarterly, 1990:Q1-2015:Q1
30%
31%
32%
33%
34%
35%
36%
37%
90
:Q1
91
:Q1
92
:Q1
93
:Q1
94
:Q1
95
:Q1
96
:Q1
97
:Q1
98
:Q1
99
:Q1
00
:Q1
01
:Q1
02
:Q1
03
:Q1
04
:Q1
05
:Q1
06
:Q1
07
:Q1
08
:Q1
09
:Q1
10
:Q1
11
:Q1
12
:Q1
13
:Q1
14
:Q1
15
:Q1
Sources: US Census Bureau, Residential Vacancies & Home Ownership in the First Quarter of 2015 (released April 28, 2015) and earlier issues; Insurance Information Institute. Next Census Bureau report to be released on July 28, 2015.
Trough in 2004:Q2 and Q4 at 30.8%
Since the Great Recession ended in June 2009, renters occupied 5.7 million more units (+15.6%).
178
Latest was 36.3% in 2015:Q1
Trend down began in 1994:Q3 from
36.2% in Q2
Increasing percent of
owners
Increasing percent of
renters
179
I.I.I. Poll: Renter’s Insurance
Source: Insurance Information Institute Annual Pulse Survey.
29% 31%35%
37%40%
10%
20%
30%
40%
50%
60%
70%
2011 2012 2013 2014 2015
The Percentage of Renters Who Have Renters Insurance Has Been Rising Since 2011.
Q. Do you have renters insurance? 1
1Asked of those who rent their home.
Americans are increasingly choosing to rent, but are slow to understand the
need to insure, exacerbating the underinsurance gap
180
Rental Vacancy Rates, Quarterly,1990:Q1-2015:Q1
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
11.5
90
:Q1
91
:Q1
92
:Q1
93
:Q1
94
:Q1
95
:Q1
96
:Q1
97
:Q1
98
:Q1
99
:Q1
00
:Q1
01
:Q1
02
:Q1
03
:Q1
04
:Q1
05
:Q1
06
:Q1
07
:Q1
08
:Q1
09
:Q1
10
:Q1
11
:Q1
12
:Q1
13
:Q1
14
:Q1
15
:Q1
Sources: US Census Bureau, Residential Vacancies & Home Ownership in the First Quarter of 2015 (released April 28, 2015) and earlier issues; Insurance Information Institute. Next Census Bureau report to be released on July 28, 2015.
Peak vacancy rate 11.1% in
2009:Q3
Before the 2001 recession, rental vacancy rates were 8% or less.We’re below those levels now. => More multi-unit construction?
180
Percent vacant
Latest vacancy rate was 7.1%
in 2015:Q1
Vacancy rate 10.4% in 2004:Q1
ENERGY SECTOR: OIL & GAS INDUSTRY FUTURE IS BRIGHT
BUT VOLATILE
181
US Is Becoming an Energy Powerhouse but Fall in Prices
Will Have Negative Impact
181
5.19 5.08 5.005.35 5.47 5.65
6.49
7.44
8.679.31 9.53
5.09
0
2
4
6
8
10
12
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015F
2016F
U.S. Crude Oil Production, 2005-2016P
Source: Energy Information Administration, Short-Term Energy Outlook (January 15, 2015) , Insurance Information Institute.
Millions of Barrels per Day
Crude oil production in the U.S. is expected to increase by 90.6% from 2008 through 2016—and could overtake
Saudi Arabia as the world’s largest oil producer
20.2 19.9 20.019.5
18.919.4
20.221.1
21.622.4
24.0
25.3 25.6
20.6
10
12
14
16
18
20
22
24
26
28
00 01 02 03 04 05 06 07 08 09 10 11 12 13
U.S. Natural Gas Production, 2000-2013
Source: Energy Information Administration, Short-Term Energy Outlook (April 8, 2014) , Insurance Information Institute.
Trillions of Cubic Ft. per Year
The U.S. is already the world’s largest natural gas producer—
recently overtaking Russia. This is a potent driver of commercial
insurance exposures
184
Employment in Oil & Gas Extraction,Jan. 2010—Sept. 2015*
*Seasonally adjusted
Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
156.7
157.6
158.7
158.1
158.4
159.7
160.2
161.5
161.4
161.0
162.7
164.3
166.6 169.2
170.1
171.2
172.6
174.0 176.6
178.2
178.7
180.6
181.3
182.3
184.7
185.2
186.2
187.8
188.6
189.3
189.4
189.4
190.5
192.2
193.1
194.6
194.0
193.8
193.1
192.5
193.0
193.4
193.3
193.1
194.0
194.0
194.0
195.4
193.7
194.6
196.4
197.6
198.6
198.4
199.4
201.5
201.0
201.2
199.4
197.6
197.7
194.4
194.2
193.2
193.6
192.1
191.0
150
160
170
180
190
200
210
Ma
r-10
Ma
y-1
0
Ju
l-1
0
Se
p-1
0
Nov-1
0
Ja
n-1
1
Ma
r-11
Ma
y-1
1
Ju
l-1
1
Se
p-1
1
Nov-1
1
Ja
n-1
2
Ma
r-12
Ma
y-1
2
Ju
l-1
2
Se
p-1
2
Nov-1
2
Ja
n-1
3
Ma
r-13
Ma
y-1
3
Ju
l-1
3
Se
p-1
3
Nov-1
3
Ja
n-1
4
Ma
r-14
Ma
y-1
4
Ju
l-1
4
Se
p-1
4
Nov-1
4
Ja
n-1
5
Ma
r-15
Ma
y-1
5
Ju
l-1
5
Se
p-1
5
Oil and gas extraction employment was up
28.8% by Oct. 2014 but falling energy prices have taken their toll
(000)
Employment in the O&G segment is down 5.2%
since its Oct. 2014 peak
MANUFACTURING SECTOR OVERVIEW & OUTLOOK
185
The U.S. Was Experiencing a Mini Manufacturing Renaissance but Headwinds from Weak Export
Markets and Strong Dollar Hurt185
58
.35
7.1
60
.45
9.6
57
.85
5.3
55
.15
5.2
55
.3 56
.9 58
.25
8.5
60
.86
1.4
59
.75
9.7
54
.2 55
.85
1.4 52
.55
2.5
51
.85
2.2 53
.1 54
.15
1.9 5
3.3 54
.15
2.5
50
.25
0.5
50
.7 51
.65
1.7
49
.95
0.2
53
.1 54
.2
50
.74
9.0
50
.95
5.4
55
.75
6.2
56
.45
7.0
56
.55
1.35
3.2
53
.7 54
.95
5.4
55
.3 57
.15
9.0
56
.65
9.0
58
.75
3.5
52
.95
1.5
51
.5
51
.3
40
45
50
55
60
65
Jan-1
0F
eb-1
0M
ar-
10
Apr-
10
May-1
0Jun-1
0Jul-10
Aug-1
0S
ep-1
0O
ct-
10
Nov-1
0D
ec-
Jan-1
1F
eb-1
1M
ar-
11
Apr-
11
May-1
1Jun-1
1Jul-11
Aug-1
1S
ep-1
1O
ct-
11
Nov-1
1D
ec-
Jan-1
2F
eb-1
2M
ar-
12
Apr-
12
May-1
2Jun-1
2Jul-12
Aug-1
2S
ep-1
2O
ct-
12
Nov-1
2D
ec-
Jan-1
3F
eb-1
3M
ar-
13
Apr-
13
May-1
3Jun-1
3Jul-13
Aug-1
3S
ep-1
3O
ct-
13
Nov-1
3D
ec-
Jan-1
4F
eb-1
4M
ar-
14
Apr-
14
May-1
4Jun-1
4Jul-14
Aug-1
4S
ep-1
4O
ct-
14
Nov-1
4Jan-1
5F
eb-1
5M
ar-
15
Apr-
15
ISM Manufacturing Index(Values > 50 Indicate Expansion)
January 2010 through April 2015
The manufacturing sector expanded for 62 of the 64 months from Jan. 2010 through Apr. 2015. Pace of recovery has been uneven due to
economic turbulence in the U.S., Europe and China and the high dollar.
Source: Institute for Supply Management at http://www.ism.ws/ismreport/mfgrob.cfm; Insurance Information Institute.
Manufacturing continues to expand in 2015
186
187
Manufacturing Growth for Selected Sectors, 2015 vs. 2014*
-0.5%
2.0%
-2.2%
6.3%
-9.7%
2.3%
-34.0%
-4.1%-2.4%
8.8%
-3.7%
3.0%
9.7%
0.1%3.1%
-40%-35%-30%-25%-20%-15%-10%
-5%0%5%
10%15%
All
Ma
nu
factu
rin
g
Du
rab
le M
fg.
Wo
od
Pro
du
cts
Pri
ma
ry
Me
tals
Fa
bri
ca
ted
Me
tals
Ma
ch
ine
ry
Ele
ctr
ica
l
Eq
uip
.
Co
mp
ute
rs &
Ele
ctr
on
ics
Tra
nsp
ort
atio
n
Eq
uip
.
No
n-D
ura
ble
Mfg
.
Fo
od
Pro
du
cts
Pe
tro
leu
m &
Co
al
Ch
em
ica
l
Pla
stics &
Ru
bb
er
Te
xtile
Pro
du
cts
Manufacturing Is Expanding in Many Sectors But Declining Energy Prices Are Dragging Down Industry Figures. Continued Gortwh Across a Number of
Sectors that Will Contribute to Growth in Insurable Exposures Including: WC, Commercial Property, Commercial Auto and Many Liability Coverages
Growth (%)
Manufacturing of durable goods is stronger than
nondurables in 2015
*Seasonally adjusted; Date are YTD comparing data through February 2015 to the same period in 2014.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/
Durables: +3.0% Non-Durables: -9.7%
Impact of falling energy prices
188
16
.9
16
.5
16
.1
13
.2
10
.4
11
.6
12
.7
14
.4
15
.5 16
.4 17
.2
17
.3
17
.2
17
.1
17
.0
16
.9
17
.0
16
.9
16
.617
.1
17
.5
17
.8
17
.4
9
10
11
12
13
14
15
16
17
18
19
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15F 16F 17F 18F 19F 20F 21F
(Millions of Units)
Auto/Light Truck Sales, 1999-2021F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/15); Insurance Information Institute.
New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2014-15 is
still below 1999-2007 average of 17 million units, but a robust recovery is well underway.
Job growth and improved credit market conditions will boost auto sales in
2014 and beyond
Truck, SUV purchases by
contractors are especially strong
Yearly car/light truck sales will likely continue at current levels, in part replacing cars that were held onto in 2008-12. New vehicles will generate more physical damage insurance coverage but will be more expensive to
repair. PP Auto premium might grow by 5% - 6%.
Sales have returned to pre-
crisis levels
189
Manufacturing Employment,Jan. 2010—Sept. 2015*
11,4
60
11,4
60
11,4
66
11,4
97
11,5
31
11,5
39
11,5
58
11,5
48
11,5
54
11,5
55
11,5
77
11,5
90
11,6
24
11,6
62
11,6
82
11,7
07
11,7
15
11,7
24
11,7
47
11,7
60
11,7
62
11,7
70
11,7
69
11,7
97
11,8
34
11,8
57
11,8
99
11,9
16
11,9
30
11,9
41
11,9
65
11,9
61
11,9
48
11,9
51
11,9
47
11,9
61
11,9
80
12,0
02
12,0
06
12,0
06
12,0
07
12,0
05
11,9
83
12,0
11
12,0
22
12,0
40
12,0
72
12,0
86
12,1
02
12,1
22
12,1
31
12,1
42
12,1
54
12,1
77
12,1
91
12,2
05
12,2
14
12,2
37
12,2
82
12,3
01
12,3
18
12,3
21
12,3
27
12,3
27
12,3
33
12,3
34
12,3
45
12,3
27
12,3
18
11,250
11,500
11,750
12,000
12,250
12,500
Ja
n-1
0F
eb
-10
Ma
r-1
0A
pr-
10
Ma
y-1
0Ju
n-1
0Ju
l-1
0A
ug
-10
Se
p-1
0O
ct-
10
No
v-1
0D
ec-1
0Ja
n-1
1F
eb
-11
Ma
r-1
1A
pr-
11
Ma
y-1
1Ju
n-1
1Ju
l-1
1A
ug
-11
Se
p-1
1O
ct-
11
No
v-1
1D
ec-1
1Ja
n-1
22
/30
/2M
ar-
12
Ap
r-1
2M
ay-1
2Ju
n-1
2Ju
l-1
2A
ug
-12
Se
p-1
2O
ct-
12
No
v-1
2D
ec-1
2Ja
n-1
3F
eb
-13
Ma
r-1
3A
pr-
13
Ma
y-1
3Ju
n-1
3Ju
l-1
3A
ug
-13
Se
p-1
3O
ct-
13
No
v-1
3D
ec-1
3Ja
n-1
4F
eb
-14
Ma
r-1
4A
pr-
14
Ma
y-1
4Ju
n-1
4Ju
l-1
4A
ug
-14
Se
p-1
4O
ct-
14
No
v-1
4D
ec-1
4Ja
n-1
5F
eb
-15
Ma
r-1
5A
pr-
15
Ma
y-1
5Ju
n-1
5Ju
l-1
5A
ug
-15
Se
p-1
5
Manufacturing employment has been a surprising source of strength in the economy. Employment was at a multi-year high until recently.
*Seasonally adjusted.
Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
(Thousands) Since Jan 2010, manufacturing employment is up (+858,000 or +7.5%) but has slipped in recent months as economies abroad weaken, hurting
exports of manufactured goods
190
$200,000
$300,000
$400,000
$500,000
Jan-
92
Jan-
93
Jan-
94
Jan-
95
Jan-
96
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan 01
Jan 02
Jan 03
Jan 04
Jan 05
Jan 06
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
12-Jan
13-Jan
14-Jan
14-Jan
Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—March 2015
* Seasonally adjusted; Data published May 4, 2015.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/
Monthly shipments in March 2015 are similar to pre-crisis (July 2008) peak but has declined in recent months due to the strong US dollar and weakness abroad.
Manufacturing is energy-intensive and growth leads to gains in many commercial exposures: WC, Commercial Auto, Marine, Property, and various Liability Coverages.
$ Millions
190
The value of Manufacturing Shipments in March 2015 was $482.2B—down 5.1% since the
July 2014 record high of $508.1B
0
20
40
60
80
100
120
Recession
191
Index of Total Industrial Production:*A Near Peak as of December 2014
*Monthly, seasonally adjusted, through December 2014 (which is preliminary). Index based on year 2007 = 100
Sources: Federal Reserve Board at http://www.federalreserve.gov/releases/g17/ipdisk/ip_sa.txt . National Bureau of Economic Research (recession dates); Insurance Information Institute.
Peak at 100.82 in December 2007 (officially the 1st
month of the Great Recession)
Insurance exposures for industrial production will continue growing in 2015, and commercial insurance premium volume with them. Y-o-Y growth to December 2014
was 4.6%. Both production and premium volume growth for 2015 should exceed this.
191
December 2014 Index at 106.5
Many economists expect business
investment to rise in 2015
66%
68%
70%
72%
74%
76%
78%
80%
82%
Mar
01
Jun 0
1
Sep
Dec
Mar
02
Jun 0
2
Sep
Dec
Mar
03
Jun 0
3
Sep
Dec
Mar
04
Jun 0
4
Sep
Dec
Mar
05
Jun 0
5
Sep
Dec
Mar
06
Jun 0
6
Sep
Dec
Mar
07
Jun 0
7
Sep
Dec
Mar
08
Jun 0
8
Sep
Dec
Mar
09
Jun 0
9
Sep
Dec
Mar
10
Jun 1
0
Sep
Dec
Mar
11
Jun 1
1
Sep
Dec
Mar
12
Jun 1
2
Sep
Dec
Mar
13
Jun 1
3
Sep
Dec
Mar
14
Jun 1
4
Sep
Dec
Mar
15
Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures
Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 192
Percent of Industrial Capacity
Hurricane Katrina
March 2001-November 2001
recession
Capacityutilization is falling due to strong dollar
and falling energy prices
The US operated at 78.4% of industrial capacity in Feb. 2015, well above the June
2009 low of 66.9% but is still below pre-recession levels.
March 2001 through March 2015
192
December 2007-June 2009 Recession
The closer the economy is to operating at “full
capacity,” the greater the inflationary pressure
60
65
70
75
80
85
90
95
100
105
110
Recession
193
Index of Total Industrial Production:*Strong Dollar Is a Headwind
*Monthly, seasonally adjusted, through March 2015 (which is preliminary). Index based on year 2007 = 100
Sources: Federal Reserve Board at http://www.federalreserve.gov/releases/g17/ipdisk/ip_sa.txt . National Bureau of Economic Research (recession dates); Insurance Information Institute.
Peak at 100.82 in December 2007 (officially the 1st
month of the Great Recession)
Insurance exposures for industrial production will continue growing in 2015, and commercial insurance premium volume with them. Y-o-y growth to December 2014
was 4.6%. Both production and premium volume growth for 2015 should exceed this.
193
April 2015 Index at 105.2
Many economists expect business
investment to rise in 2015
9. CYBER RISK & CYBER INSURANCE
194
Cyber Risk is a Rapidly Emerging Exposure for Businesses Large and
Small in Every Industry
194
Data Breaches 2005-2015, by Number of Breaches and Records Exposed
# Data Breaches/Millions of Records Exposed
*Figures as of June 30, 2015, from the Identity Theft Resource Center,http://www.idtheftcenter.org/images/breach/ITRCBreachReport2015.pdf
157
321
446
656
498
419
470
614
400
783
662
117.6
85.692.0
17.522.9
35.7
19.1
66.9
222.5
16.2
127.7
100
200
300
400
500
600
700
800
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 *2015
0
20
40
60
80
100
120
140
160
180
200
220
# Data Breaches # Records Exposed (Millions)
The total number of data breaches (+27.5%) hit a record high of 783 in 2014, exposing 85.6 million records. Through June 30, this year has
seen 117.6 million records exposed in 400 breaches.*
Millions
High Profile Data Breaches, 2014-2015
Date Company Description of Breach
May 2015 OPM Hackers broke into U.S. Government Personnel Office stealing personal identifying information of as many as 14 million civilian U.S. government employees.
Mar 2015 Premera Blue Cross Data breach compromises financial and medical records of 11 million customers.
Feb 2015 Anthem, Inc Massive data breach after hackers gained access to corporate data base containing personal information of as many as 80 million current and former U.S. customers and employees.
Dec 2014 Sony Pictures Entertainment
Hacker break-in involving theft of unreleased motion pictures, and theft of more than 25 gigabytes of sensitive data on tens of thousands of Sony employees, including social security numbers, medical and salary information.
Nov 2014 Staples Point-of-sale (POS) malware attack and breach exposing customer data, and resulting in compromise of 1.2 million records.
Sept 2014 Home Depot Huge data breach exposes 56 million credit and debit cards and 53 million email addresses.
Aug 2014 Community Health Systems
Cyber attack originating in China resulted in data breach, compromising 4.5 million patient
records. Hackers broke into company’s computer system by exploiting Heartbleed bug.
June/July 2014
JP Morgan Chase Massive data breach compromised data associated with 76 million household and 7 million small business accounts. Hackers obtained personal identifying nformation.
June 2014 PF Changs Security breach affected customers at 33 restaurants located in 16 states, with potential credit and debit card data stolen.
May 2014 eBay Massive data breach exposed records of site’s 233 million customers, including names, email addresses, physical addresses, phone numbers and birthdates.
Feb 2014 Michaels Stores Possible fraudulent activity on some U.S. payment cards used at Michaels stores suggests it may have experienced data security attack, exposing 2.6 million records.
Jan 2014 Snapchat Security breach compromises phone numbers and usernames for 4.6 million accounts.
Jan 2014 Neiman Marcus Hacker break-in exposed unknown no. of customer cards, compromising est. 1.1 million records.
Nov/Dec 2013
Target Malware stored on Target’s checkout registers led to theft of data from about 40 million credit
and debit card accounts and the personal information of up to 70 million customers.
Sources: Identity Theft Resource Center; Insurance Information Institute (I.I.I.) research.
Worldwide Cybersecurity Spending, 2011- 2016F
($ Billions)
$55.0
$60.0
$65.9
$71.1
$76.9
$83.2
7.9%8.4%8.2%
8.2%
9.8%
$50
$55
$60
$65
$70
$75
$80
$85
2011 2012 2013 2014F 2015F 2016F
0%
2%
4%
6%
8%
10%
12%
Worldwide Cybersecurity Spending % Change from Previous Year
Cybersecurity Spending Is Rising Sharply, Up by About 8%+ Annually through 2016—a Projected Increase of $12.1 Billion from 2014 to 2016
Cybersecurity spending increased by an estimated $5.2B in 2014, $5.8B in 2015 and $6.3B in 2016
Source: Gartner Group; Insurance Information Institute; Adapted from Wall Street Journal: “Financial Firms Boost Cybersecurity Funds,” Nov. 17, 2014.
197
198
Top 10 Global Business Risks for 2015
Source: Allianz Risk Barometer on Business Risks 2015
9%
11%
13%
15%
16%
17%
18%
27%
30%
46%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Theft, fraud, corruption
Political, social upheaval, war
Intensified competition
Market stagnation or decline
Loss of reputation or brand value (e.g. from social media)
Cyber crime, IT failures, espionage
Changes in legislation and regulation
Fire, explosion
Natural catastrophes
Business interruption, supply chain risk
Cyber is one of the most significant movers in this year’s Risk Barometer rankings, gaining five percentage points to move into the top 5 global business
risks for the first time.
199
2014 Data Breaches By Business Category, By Number of Breaches
5.5%
11.7%
7.3%
42.5%
33.3%
Source: Identity Theft Resource Center, http://www.idtheftcenter.org/ITRC-Surveys-Studies/2014databreaches.html
The majority of the 783 data breaches in 2014 affected business and medical/healthcare organizations, according to the Identity Theft Resource Center.
Business, 258 (33.3%)Govt/Military, 92 (11.7%)
Banking/Credit/Financial, 43 (5.5%)
Educational, 57 (7.3%)
Medical/Healthcare, 333 (42.5%)
200
State sponsored groups: Foreign government sponsored
Sophisticated and well-funded
Organized cyber criminals: Traditional organized crime groups
Loosely organized global hacker crews
Hacktivists: Politically-motivated hackers
Increasing capabilities
Insiders: Easy access to sensitive information
Difficult to detect
Terrorists: Destruction of physical and digital assets
Evolving Threats: Cyber Crime and Cyber Terrorism
Source: Lewis Brisbois, Practical Strategies to Address Cyber Risk in Your Business, November 2014
201
Main Causes of Data Breach Globally
30%
29%
42%
*The most common types of malicious or criminal attacks include malware infections, criminal insiders, phishing/social engineering and SQL injection.
Source: 2014 Cost of a Data Breach Study: Global Analysis, the Ponemon Institute, sponsored by IBM, May 2014
Malicious or criminal attacks are most often the cause of data breach globally. Some 42 percent of incidents concern a malicious or criminal attack, while 30
percent concern a negligent employee or contractor (human factor).
Malicious or criminal attack*
Human error
System glitch
202
US: Most Costly Types of Cyber Crimes, Fiscal Year 2014
4%4%
6%
8%
10%
13%
14%
18%
23%
Source: 2014 Cost of Cyber Crime: United States, Ponemon Institute.
Malicious code, denial of service and web-based attacks account for more than 55 percent of the total annualized cost of cyber crime experienced by 59 U.S. companies.
Malicious code
Viruses, Worms, Trojans
Denial of service
Botnets
Malware
Malicious insiders
Stolen devices
Phishing + social engineering
Web-based attacks
203
US: External Cyber Crime Costs: Fiscal Year 2014
2%2%
18%
38%
40%
* Other costs include direct and indirect costs that could not be allocated to a main external cost category
Source: 2014 Cost of Cyber Crime: United States, Ponemon Institute.
Information theft (40%) and business disruption or lost productivity (38%) account for the majority of external costs due to cyber crime.
Information theft
Equipment damagesOther costs*
Revenue loss
Business disruption
Data/Privacy Breach:Many Potential Costs Can Be Insured
Source: Zurich Insurance; Insurance Information Institute
Data Breach Event
Costs of notifying affecting
individuals Defense and settlement
costs
Lost customers and damaged
reputation
Cyber extortion payments
Business Income Loss
Regulatory fines at home & abroad
Costs of notifying
regulatory authorities
Forensic costs to discover
cause
204
Source: Insurance Information Institute research.
The Three Basic Elements of Cyber Coverage: Prevention, Transfer, Response
Loss Prevention
Post-Breach Response
(Insurable)
Loss Transfer
(Insurance)
Cyber risk management today involves
three essential components, each designed
to reduce, mitigate or avoid loss. An
increasing number of cyber risk products
offered by insurers today provide all three.
205
206
I.I.I.’s New Cyber Risk Report (Oct. 2015): Cyber Risks Threat and Opportunity
I.I.I.’s 3rd report on cyber risk:
Cyber Risk: Threat and Opportunity
Provides information on cyber
threats and insurance market
solutions
Global cyber risk overview
Quantification of threats by
type and industry
Cyber security and cost of attacks
Cyber terrorism
Cyber liability
Insurance market for cyber riskhttp://www.iii.org/white-paper/cyber-risks-
threat-and-opportunities-100715
207
PWC Survey: Cybercrime Costs Greater for U.S. Companies
Source: 2014 Global Economic Crime Survey, PWC.
19%
7%
8%
3%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Lost $50,000 to $1
million
Lost $1 million or
more
2014Global 2014 USA
U.S. organizations are more at risk of suffering financial losses in
excess of $1 million due to cybercrime.
208
Marsh: Percentage of U.S. Companies Purchasing Cyber Insurance Increased in 2014
*Take-up rate refers to the overall percentage of clients that purchased standalone cyber insurance.
Source: Benchmarking Trends: As Cyber Concerns Broaden, Insurance Purchases Rise, Marsh Risk Management Research Briefing, March 2015
8%
12%
18%
21%
21%
22%
26%
32%
50%
16%
11%
13%
14%
17%
17%
16%
22%
45%
13%
6%Manufacturing
Communications, Media and Tech
Retail/Wholesale
Power and Utilities
Financial Institutions
Services
Hospitality and Gaming
Education
Health Care
All Industries
Take-up rate 2014* Take-up rate 2013
Ever larger numbers of insureds seek financial
protection via cyber insurance. The
percentage of U.S. companies buying cyber
insurance rose to 16 percent in 2014.
209
Marsh: Total Limits Purchased, By Industry –Cyber Liability, All Revenue Size
Source: Benchmarking Trends: As Cyber Concerns Broaden, Insurance Purchases Rise, Marsh Risk Management Research Briefing, March 2015
$22.0
$4.2
$9.9 $10.5$9.5
$11.1$10.2
$13.2
$19.7
$6.7
$23.5
$10.5$12.0
$14.9
$21.0
$4.4
$22.2
$12.8
All Industries Comms, Media
& Technology
Education Financial
Institutions
Health Care Manufacturing Power and
Utilities
Retail/Wholesale Services
Avg. 2013 Limits Avg. 2014 Limits
Average limits purchased for cyber risk rose to $12.8 million for all industries and all company sizes in 2014. Power and utility companies witnessed the sharpest
percentage increase in average limits, at 59 percent.
($ Millions)
210
Marsh: Total Limits Purchased, By Industry –Cyber Liability, Revenue $1 Billion+
Source: Benchmarking Trends: As Cyber Concerns Broaden, Insurance Purchases Rise, Marsh Risk Management Research Briefing, March 2015
$27.8
$40.3
$7.6
$26.4
$44.4
$31.4
$53.5
$20.8$17.6
$40.4
$35
$11.2
$41.2
$25
$57
$9
$43.7
$34.1
All Industries Comms, Media
& Technology
Education Financial
Institutions
Health Care Manufacturing Power and
Utilities
Retail/Wholesale Services
Avg. 2013 Limits Avg. 2014 Limits
Among larger companies, average cyber insurance limits purchased increased by 22 percent to $34.1 million in 2014, from $27.8 million in 2013.
($ Millions)
211
Cyber Liability: Historical Rate (price per million) Changes
4.2%
2.8%
2.3%
2.9%
2.7%
2.1%
2.7%
3.6%
14:Q1 14:Q2 14:Q3 14:Q4
Average Total Price Per Million Change
Average Primary Price Per Million Change
Cyber insurance premiums were generally volatile in 2014 due to increased frequency and severity of losses.
Average rate increases at renewal for both primary layers and total programs were lower in Q4 2014 than in Q1.
Source: Benchmarking Trends: As Cyber Concerns Broaden, Insurance Purchases Rise, Marsh Risk Management Research Briefing, March 2015
212
INDUSTRY DISRUPTORS
Technology, Society and the Economy Are All
Changing at a Rapid Pace
Will Insurers Keep Pace?
212
213
Technology and Insurance
213
Rapid Technological Innovations Are Impacting Many Segments of the
P/C Insurance Industry
214
Media is Obsessed with Driverless Vehicles: Often Predicting the Demise of Auto Insurance
By 2035, it is estimated that 25% of new vehicle
sales could be fully autonomous models
Source: Boston Consulting Group.
Questions
Are auto insurers monitoring these trends?
How are they reacting?
Will Google take over the industry?
Will the number of auto insurers shrink?
How will liability shift?
215
On-Demand/Sharing/Peer-to-Peer Economy Impacts Many Lines of Insurance
The “On-Demand” Economy is or will impact many segments of the economy important to P/C insurers
Auto (personal and commercial)
Homeowners/Renters
Many Liability Coverages
Professional Liability
Workers Comp
Many unanswered insurance questions
Insurance solutions are increasingly available to fill the many insurance gaps that arise
216
A Few Thoughts on the Future of Auto Insurance
Global auto insurance premiums written total about $600B
~80% personal, 20% commercial
US accounts for more than 1/3 of this total (about $210B in 2014)
Innovations in automobile safety will, over time, reduced claim frequency but severities could still rise as repair costs escalate
Claim activity clearly not immune to economy
Frequency declines could lead price declines, aiding profitability
More cars, not fewer will be on highways in the US, world
Exposure (insured car years) grows even as frequency declines
Timeline for large numbers of mass produced autonomous vehicles on American highways is wildly optimistic
Mid-2030s is more likely timeframe; Transition occurring through mid-century
Tech media is enamored with anything involving Google, Apple
Auto insurance will be the largest, most important of all P/C lines for many years to come
217
Labor on Demand: Huge Implications for the US Economy, Workers & Insurers
*From publically available sources as of June 2, 2015.
Source: ISO/Verisk.
TNC Ridesharing Arrangements: Insurance Applicability
218
The concern was that TNCs were seeking to offload risk on to personal auto insurers. An increasing number of
personal auto insurers have developed solutions to ensure that coverage gaps are minimized
Source: ISO.
Ridesharing Regulation/Legislation and Status of ISO Filings as of 9/30/15
219
Status of ISO FilingsStatus Ride Sharing
Legislation/Regulation
220
Send in the Drones: Potential Rapid Adoption in Industry; Media Loves It
Drones or Unmanned Aerial Vehicle (UAV)
technology is seeing rapid adoption rate in
many industries, including insurance
~700,000 drones in US by year-end
FAA granting Section 333 exemptions for
commercial use and testing of UAS
FAA will require most drones to be
registered by year-end 2015.
At least 5 insurers have received
permission to test
Wide variety of applications: claims, pre-
event property inspections…
Insurers partnering with construction
industry to guide R&D and regulation of
UAV use via Property Drone Consortium:
www.propertydrone.org
Shifting Legal Liability & Tort Environment
221
Will the Tort PendulumSwing Against Insurers?
221
222
Over the Last Three Decades, Total Tort Costs as a % of GDP Appear Somewhat Cyclical, 1980-2013E
$0
$50
$100
$150
$200
$250
$300
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12E
To
rt S
ys
tem
Co
sts
1.50%
1.75%
2.00%
2.25%
2.50%
To
rt Co
sts
as
% o
f GD
P
Tort Sytem Costs Tort Costs as % of GDP
($ Billions)
Sources: Towers Watson, 2011 Update on US Tort Cost Trends, Appendix 1A
Tort costs in dollar terms have remained high but relatively stable since the mid-2000s., but are down
substantially as a share of GDP
Deepwater Horizon Spike
in 2010
1.68% of GDP in 2013
2.21% of GDP in 2003
= pre-tort reform peak
223
Commercial Lines Tort Costs: Insured vs. Self-(Un)Insured Shares, 1973-2010
Billions of Dollars
$0
$20
$40
$60
$80
$100
$120
$140
$160
73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Self (Un) Insured Share
Insurer Share
Tort Costs and the Share Retained by Risks Both Grew Rapidly from the mid-1970s to mid-2000s, When Tort Costs Began to Fall But Self-
Insurance Shares Continued to Rise
$9.5
$15.0
$6.0
1973: Commercial Tort Costs
Totaled $6.49B, 94% was insured,
6% self-(un)insured
1985: $46.6B 74.5% insured,
25.5% self-(un)insured
1995: $83.6B 69.5% insured,
30.5% self-(un)insured
2005: $143.5B 66.4% insured,
33.6% self-(un)insured
2009: $126.5B 64.4% insured,
35.6% self-(un)insured
Sources: Towers Watson, 2011 Update on US Tort Cost Trends, III Calculations based on data from Appendix 4. 223
224
Commercial Lines Tort Costs: Insured vs. Self-(Un)Insured Shares, 1973-2010
Percent
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Self (Un) Insured Share
Insurer Share
The Share of Tort Costs Retained by Risks Has Been Steadily Increasing for Nearly 40 Years. This Trend Contributes Has Left
Insurers With Less Control Over Pricing.
1973: 94% was insured,
6% self-(un)insured
1985:74.5% insured,
25.5% self-(un)insured
1995: 69.5% insured,
30.5% self-(un)insured
2005: 66.4% insured,
33.6% self-(un)insured
2010: $138.1B 56.6% insured, 44.4% self-(un)insured
(distorted by Deepwater Horizon event with most losses retained by BP)
Sources: Towers Watson, 2011 Update on US Tort Cost Trends, III Calculations based on data from Appendix 4. 224
225
$750,392$653,898
$782,657
$1,045,048 $1,009,788
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
2009 2010 2011 2012 2013
Average Personal Injury Jury Award,2009 – 2013
Average awards in Personal Injury cases
have increased by more than 1/3 in recent years
Source: Current Award Trends in Personal Injury, 54th Edition; Insurance Information Institute.
226
$3
,12
3,9
50
$1
39
,76
8
$5
2,6
80
$6
8,2
18
$3
4,8
77
$7
45
,00
0
$1
21
,89
4
$3
,48
6,9
00
$5
87
,00
0
$1
61
,18
7
$3
51
,82
9
$1
,27
3,1
39
$6,392,270
$1
,00
9,7
88
All Liabilities Product Liabilities Business
Negligence
Medical
Malpractice
Premises Liability Personal
Negligence
Vehicular Liability
2013 Median 2013 Average
Porducts Liability and Medical Malpractice cases tend to have among the highest jury awards
Median and Average Personal Injury Jury Award by Type of Liability, 2013
Source: Current Award Trends in Personal Injury, 54th Edition; Insurance Information Institute.
227
14%
16%
14% 14%
16%
13%
14%
14%
15%
15%
16%
16%
17%
2003-04 2005-06 2007-09 2010-11 2012-13
Percent of Personal Injury Jury Awards Over $1 Million, 2003 – 2013*
The share of $1MM+ jury awards has returned ot
its pre-crisis high
*Latest available.
Source: Current Award Trends in Personal Injury, 53rd and 54th Editions; Insurance Information Institute.
228
$1,476
$1,137
$1,002$918
$836 $808 $769 $732
$518$431
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
Antitrust Nursing
Homes
DefamationToxic Torts Motor
Vehicle
Intellectual
Prop
Products
Liability
Worker/
Negligence
Med Mal Breach of
Contract
Dollar Value of Top 100 Verdicts in 2013 by Cause of Action, 2013
Many causes of action can give rise to
catastrophic casualty claims, including
motoe vehicle claims
Source: VerdictSearch as cited in Reevaluating Excess Casualty Protection as Liability Losses Increase,
Marsh Risk Management Research Briefing, Oct. 2014.
($ Millions)
Business Leaders Ranking of Liability Systems in 2015
Best States
1. Delaware
2. Vermont
3. Nebraska
4. Iowa
5. New Hampshire
6. Idaho
7. North Carolina
8. Wyoming
9. South Dakota
10. Utah
Worst States
41. Arkansas
42. Missouri
43. Mississippi
44. Florida
45. New Mexico
46. Alabama
47. California
48. Illinois
49. Louisiana
50. West Virginia
Source: US Chamber of Commerce 2015 State Liability Systems Ranking Study; Insurance Info. Institute.
New in 2015
Vermont
New Hampshire
North Carolina
South Dakota
Drop-offs
Minnesota
Kansas
Virginia
North Dakota
Newly Notorious
Arkansas
Missouri
Rising Above
Oklahoma
Montana
229
230
The Nation’s Judicial “Hellholes”: 2014/2015
Source: American Tort Reform Association; Insurance Information Institute
West VirginiaIllinois
Madison County
New York City Asbestos
Litigation
Watch List
Atlantic County, New Jersey
Mississippi Delta
Montana
Nevada
Newport News, Virginia
Philadelphia, Pennsylvania
Dishonorable Mention
AL Supreme Court
PA Supreme Court
California
Florida
Volkswagen: Massive tort actions, fines, penalties certain. Are others vulnerable? Issue of cheating on
environmental standards and liability looms large.
Assignment of Benefits issue
looms large in FL
www.iii.org
Thank you for your timeand your attention!
Twitter: twitter.com/bob_Hartwig
Download at www.iii.org/presentations
Insurance Information Institute Online:
231