overview & outlook for the commercial p/c insurance ...overview & outlook for the commercial...
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Overview & Outlook for the Commercial P/C Insurance Industry in 2016 & Beyond
Trends, Challenges & Opportunities
Insurance Information Institute
September 15, 2016
Robert P. Hartwig, Ph.D., CPCU, Special Consultant
Insurance Information Institute 110 William Street New York, NY 10038
Tel: 917.453.1885 [email protected] www.iii.org
2
Insurance Industry:Financial Update & Outlook
2015 Was a Reasonably Good Year and Similar to 2014
2016: Could Be Similar to 2015
2
P/C Industry Net Income After Taxes1991–2016:Q1 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 ROAS = 8.4%
•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; 2015E is annualized figure based actual figure through Q3 of $44.0
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
5,8
70
$5
6,6
22
$1
3,9
16
$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
16:Q
1
Net income in Q1:2016 on an
annualized basis was on
track to match full-year 2015
$ 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
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2015
*Profitability = P/C insurer ROEs. 2011-15 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 8.4%
2015: 8.4%
5
ROE: Property/Casualty Insurance by Major Event, 1987–2015
* 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 15
P/C Profitability Is Both by Cyclicality and Ordinary Volatility
Hugo
Andrew, Iniki
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
-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
1950 - 1970
Low
Volatility
P/C Insurance Industry ROE: Magnitude of Cyclicality, Volatility Changes Over Time, 1950-2015
.
Source: Insurance Information Institute
1971 - 1992
Extreme
Volatility
1993 - 2008
Moderate
Volatility
2009 - Present
Modest
Volatility
7
Return on Equity by Financial Services Sector vs. Fortune 500, 2004-2015*
*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 15E
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
8
RNW All Lines, 2005-2014 Average:Highest 25 States
19
.9
19
.0
14
.0
13
.3
13
.2
13
.0
11
.9
11
.7
11
.7
11
.5
11
.3
11
.1
11
.0
10
.9
10
.8
10
.6
10
.6
10
.5
10
.3
10
.0
9.9
9.6
8.9
8.9
8.8
8.3
0
2
4
6
8
10
12
14
16
18
20
22
HI AK VT ME ND FL WY NH VA ID UT NC WA MA SC OH WV OR DC CA RI CT MD NM SD MT
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: 7.7%
(Percent)
9
7.8
7.8
7.7
7.5
7.5
7.4
7.3
7.3
7.1
7.1
7.0
6.9
6.8
6.5
6.3
6.2
6.1
5.5
5.1
5.1
4.7
4.1
3.4
1.7
-7.4
-9.4
-11
-9
-7
-5
-3
-1
1
3
5
7
9
PA WI US IL TX IA KS MN AR NE IN CO AZ KY MO TN NV NJ GA NY DE AL MI OK MS LA
RNW All Lines, 2005-2014 Average:
Lowest 25 States
Source: NAIC; Insurance Information Institute.
Some of the least profitable states over the past decade
were hit hard by catastrophes
(Percent)
10
23
.9
22
.6
19
.2
15
.8
14
.7
14
.6
14
.3
13
.3
13
.3
12
.5
11
.9
11
.7
11
.6
11
.4
11
.4
10
.8
10
.8
10
.4
10
.2
10
.1
9.9
9.6
9.6
19
.0
18
.0
14
.0
0
5
10
15
20
25
30
AK DC HI VT OR NH ME OH RI ID MA MN WI MD IA WY CO NC CT VA ND KS NM WA SD UT
Sources: NAIC; Insurance Information Institute
RNW Commercial Auto,
2005-2014 Average: Highest 25 States
(Percent)
11
9.4
9.3
9.1
8.9
8.8
8.8
8.4
8.3
8.2
8.0
6.0
6.3
6.2
5.2
5.2
4.9
4.9
4.6
3.9
3.3
-2.3
-2.4
6.36
.87.2
8.1
-4
-2
0
2
4
6
8
10
NE IN WV AZ IL CA SC PA AR TN MO US OK KY MT TX NY GA MI DE MS NJ FL AL NV LA
Sources: NAIC; Insurance Information Institute
(Percent)
RNW Commercial Auto,
2005-2014 Average: Lowest 25 States
12
13
.0
12
.6
12
.4
11
.6
10
.9
10
.8
9.7
9.3
7.9
7.9
7.7
7.7
7.7
7.5
7.4
7.4
7.3
7.2
7.2
7.1
19
.0
9.6
14
.0
0
2
4
6
8
10
12
14
AR AK NV HI DC TX OH FL MI MO AL CA IN MS NE KS VT MA WV VA TN UT LA
Sources: NAIC; Insurance Information Institute
RNW Workers Compensation,
2005-2014 Average: Highest 25 States
(Percent)
13
7.1
6.9
6.8
6.8
6.7
6.6
6.6
6.5
5.9
8.0
6.0
4.5
4.5
4.4
4.3
4.1
4.0
3.4
3.0
2.9
2.4
2.1
4.7
4.7
4.75
.1
0
1
2
3
4
5
6
7
8
NH KY RI MN US ME NM PA MT SD OR NC CT GA NY AZ MD NJ CO SC IA IL WI ID DE OK
Sources: NAIC; Insurance Information Institute
(Percent)
RNW Workers Compensation,
2005-2014 Average: Lowest 25 States
14
P/C Insurance Industry Combined Ratio, 2001–2016:Q1*
* 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 (2014-2015); Figure for 2010-2013 is from A.M. Best P&C Review and Preview, Feb. 16, 2016.
95.7
99.3101.1
106.5
102.5
96.4 97.097.8 97.3
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 16:Q1
As Recently as 2001, Insurers Paid Out
Nearly $1.16 for Every $1 in Earned Premiums Relatively
Low CAT Losses, Reserve Releases
Heavy Use of Reinsurance Lowered Net
Losses
Relatively Low CAT Losses, Reserve Releases
Higher CAT
Losses, Shrinking Reserve
Releases, Toll of Soft
Market
Sandy Impacts
Lower CAT
Losses
Best Combined Ratio Since 1949 (87.6)
Avg. CAT Losses,
More Reserve Releases
3 Consecutive Years of U/W Profits: First Time Since
1971-73Cyclical Deterioration
Elevated CATs
Source: A.M. Best; Barclays research for estimates.
Reserve Change
P/C Insurance Loss Reserve Development, 1992 – 2017E*
Reserve releases are expected to gradually taper off slowly, but
will continue to benefit the bottom line and combined ratio
through at least 2017
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
26
28
30
32
34
36
38
40
42
44
46
48
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12
14
Note: Data through 1934 are based on stock companies only. Data include state funds beginning in 1998.
Source: A.M. Best; Insurance Information Institute.
Economic Shocks,
Inflation:
1976: 22.0%
Tort Crisis
1985/86: 22.2%
Post-9/11
2002:15.3%
Twin
Recessions;
Interest Rate
Hikes
1987: 3.7% Great
Recession:
2010: -4.9%
ROE
2015 3.4%
NPW Premium Growth: Peaks & Troughs in the P/C Insurance Industry, 1926 – 2015
Great Depression
1932: -15.9% max drop
Post WW II Peak:
1947: 26.2%
Start of WW II
1941: 15.8%
1950-70: Extended period of stability in growth and
profitability. Low interest rates, low inflation, “Bureau” rate regulation all played a role
1970-90: Peak premium growth was much higher in this period while troughs were comparable. Rapid inflation, economic
volatility, high interest rates, tort environment all played roles
1988-2000: Period of
inter-cycle stability
2010-20XX? Post-
recession period of
stable growth?
17
Policyholder Surplus, 2006:Q4–2016:Q1
Sources: ISO, A.M .Best.
($ 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
$675.2
$672.4
$673.7
$676.3
$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
15:Q
4
16:Q
1
2007:Q3Pre-Crisis Peak
Surplus as of 3/31/16 stood at a record high $676.3B
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 $0.76 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 2016in very strong financial condition.
Profitability & Politics
1818
How Is Profitability Affected by the President’s Political Party?
15.10%
8.93%
8.80%
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
Nixon
Obama II
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: 1950-2015*
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, 1950-2015*
-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- 2015*
Obama
.
*2015 data is through Q3.
Source: Insurance Information Institute
21
Trump vs. Clinton:Issues that Matter to P/C Insurers
Issue Trump Clinton
Economy Supply Side-Like Philosophy:Lower taxesFaster real GDP
growth; Deficits likely grow as tax cuts are combined with targeted increased spending on Homeland Security, Defense, etc.
Keynesian Philosophy: More government spending on infrastructure, education, social services; Deficits likely increase as tax increases likely difficult to pass
Interest Rates May trend higher with larger deficits; Shift from monetary policy to fiscal focus (tax cuts, government spending)
Status quo at the Fed; Net impact on interest rates unclear
Taxes Favors lower tax rates for corporate and personal income tax rates; Tax code overhaul?
Unlikely to reduce taxes or embark on major overhaul of tax code
International Trade
Protectionist Tendencies (appeal primarily to manufacturing sector)
Has criticized Trans-PacificPartnership but is a realist on international matters
Tort System Doesn’t like trial lawyers butseems to like filing lawsuits
Status Quo
Energy Laissez-faire; Less “green” Status Quo
Source: James Madison Institute, February 2008.
ME
NH
MA
CT
PA
WV
VA
NC
LA
TX
OK
NE
ND
MN
MI
IL
IA
ID
WA
OR
AZ
HI
NJ
RI C+
DE
AL
VT
NY
MD
SC
GA
TN
AL
FL
MS
ARNM
KYMOKS
SDWI
IN
OH
MT
CA
NV
UT
WY
CO
AK
= A= B= C= D= F= NG
Source: R Street Insurance Regulation Report Card, December 2015
B+ A
B
A-
B+
B
A
A-
C
C
BB
D
F
C
C+
A C-
B
D
C
C
BC
A
B
B
A
B
B
C+
B
B
B+
C
B
B
A-
C+
C
C
CD
B
D+
D
D D
D
2015 Property and Casualty InsuranceRegulatory Report Card
Not Graded: District of Columbia
INVESTMENTS: THE NEW REALITY
23
Investment Performance is a Key Driver of Profitability
Depressed Yields Will Necessarily Influence Underwriting & Pricing
23
Property/Casualty Insurance Industry Investment Income: 2000–2016:Q11
$38.9$37.1 $36.7
$38.7
$54.6
$51.2
$47.1 $47.6$49.2
$48.0 $47.3$46.4
$43.6
$39.6
$49.5
$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 16*
Due to persistently low interest rates, investment income fell in 2012, 2013 and 2014 but showed a small (1.9%) increase in 2015—
another drop in 2016 seems likely.
1 Investment gains consist primarily of interest and stock dividends. Sources: ISO; Insurance Information Institute.
($ Billions)Investment earnings are still below their 2007 pre-crisis peak
*Annualized figure based on actual Q1:2016 net investment income earned of $10.893B.
25
U.S. Treasury Security Yields:A Long Downward Trend, 1990–2016*
*Monthly, constant maturity, nominal rates, through August 2016.
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 '16
Recession2-Yr Yield10-Yr Yield
Yields on 10-Year U.S. Treasury Notes have been essentially
below 5% for more than a 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.
Despite the Fed’s December 2015 rate hike, yields
remain low though short-
term yields have seen some gains;
Yield curve is flattening.
25
Net Investment Yield on Property/ Casualty Insurance Invested Assets, 2007–2016P*
4.5
4.2
4.0
3.8
3.4
3.6
3.1
3.73.8
3.6
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 15E 16P
The yield on invested assets remains low relative to pre-crisis yields. The Fed’s plan to raise interest rates in late 2015 has pushed up some yields, albeit quite modestly.
Sources: A.M. Best; 2015E-2016P figures from A.M. Best P/C Review and Preview, Feb. 2016; Insurance Information Institute
(Percent) Estimated book yield in 2016 is down about 140
BP from pre-crisis levels
27
Interest Rate Forecasts: 2016 – 2021F
3.0%
2.2%
1.7%
2.2%
3.4%
3.7% 3.8% 3.9%
0.1%0.3%
0.9%
2.3%
2.7%2.9%
0%
1%
2%
3%
4%
5%
15 16F 17F 18F 19F 20F 21F 15 16F 17F 18F 19F 20F 21F
A full normalization of interest rates is unlikely until 2019, more than a decade after the onset of the financial crisis.
Yield (%)
Sources: Blue Chip Economic Indicators (9/16 for 2016 and 2017; for 2018-2021 3/16 issue); Insurance Info. Institute.
3-Month Treasury 10-Year Treasury
10-year yields are actually down
in 2016
28
Treasury Yield Curves: Pre-Crisis (July 2007) vs. April 2016*
0.18% 0.22%0.36%
0.54%0.80%
1.61%1.84%
4.82%4.96% 5.04% 4.96%
4.82% 4.82% 4.88% 5.00% 4.93% 5.00%5.19%
1.31%0.96%
2.65%
2.24%
0%
1%
2%
3%
4%
5%
6%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
April 2016 Yield Curve
Pre-Crisis (July 2007)
Treasury yield curve remains near its most depressed level in at least 45
years. Investment income is depressed as a result. Fed began to raise rates
in Dec. 2015, but yields unlikely to return to pre-crisis levels anytime soon
The Fed Began to Raise Rates in Dec. 2015 but Market Volatility and Weakness Abroad Have Made Additional Hikes Difficult
*As of April 22, 2016.
Source: Federal Reserve Board of Governors: http://www.federalreserve.gov/releases/h15/data.htm; Insurance Information Institute.
29
Annual Inflation Rates, (CPI-U, %),1990–2017F
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
1.5 1.6
0.1
1.3
2.3
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 15 16F17F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 4/16 (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
30
P/C Insurer Net Realized Capital Gains/Losses, 1990-2015
Sources: A.M. Best, ISO; 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
0.2
8
$9
.41
-$1
9.8
1
$9
.24
$6
.00
$1
.66
-$25
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Insurers Posted Net Realized Capital Gains in 2010 - 2015 Following Two Years of Realized Losses During the Financial Crisis. Realized Capital
Losses Were a Primary Cause of 2008/2009’s Large Drop in Profits and ROE.
($ Billions) Realized capital gains rose sharply as equity markets
rallied in 2013-14
Property/Casualty Insurance Industry Investment Gain: 1994–20151
$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$56.6$
56.6
$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 Flat in 2015 as Investment Income Rose Marginally and Realized Capital Gains Fell Slightly
1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B; 2015 figure is through Q3 2015.Sources: ISO, SNL; Insurance Information Institute.
($ Billions)
Investment gains in 2015 were unchanged from 2014 and still well below the pre-crisis highs
32
-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*
32
CAPITAL/CAPACITY
33
Capital Accumulation Has Multiple Impacts
Alternative Capital Impacts?
33
34
Policyholder Surplus, 2006:Q4–2016:Q1
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
$675.2
$672.4
$673.7
$676.3
$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
15:Q
4
16:Q
1
2007:Q3Pre-Crisis Peak
Surplus as of 3/31/16 stood at a record high $676.3B
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 $0.76 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 2016in very strong financial condition.
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
$550
$600
$650
$700
$750
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15
US Policyholder Surplus:1975–2015*
* As of 12/31/15.
Source: A.M. Best, ISO, Insurance Information Institute.
“Surplus” is a measure of underwriting capacity. It is
analogous to “Owners Equity” or “Net Worth” in non-
insurance organizations
($ Billions)
The Premium-to-Surplus Ratio Stood at $0.76:$1 as of12/31/15, a Near Record Low (at Least in Recent History)
Surplus as of 12/31/15 was a near-record $673.7, down 0.2% from $675.2 of 12/31/14, and up 54.1%
($236.6B) from the crisis trough of $437.1B at 3/31/09
36
Alternative Capital
36
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 $50B. It has more than doubled in the past three years.
Alternative Capital as a Percentage of Traditional Global Reinsurance Capital
2014 data is as of June 30, 2014.
Source: Aon Benfield Analytics; Insurance Information Institute.
4.6%
5.7% 5.9% 5.8%5.4%
6.5%
8.4%
10.2%
11.5%
0%
2%
4%
6%
8%
10%
12%
2006 2007 2008 2009 2010 2011 2012 2013 2014
Alternative Capital’s Share of Global Reinsurance Capital Has More Than Doubled Since 2010.
Catastrophe Bond Issuance and Outstanding: 1997-2015
948.2
874.2
1,062.5
1,142.0
966.9
989.5
1,988.2
1,142.8
1,499.0
4,614.7
7,187.0
3,009.9
3,396.0
4,599.9
4,107.1
5,855.3
7,083.0
8,026.7
7,898.2
4,289.0
5,085.0
7,677.0
13,416.4
12,538.6
12,508.2
12,195.7
12,342.8
14,839.3
18,576.9
22,867.8
25,960.5
0
5,000
10,000
15,000
20,000
25,000
30,000
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
New Issuance Outstanding
39
Risk Capital Amount ($ Millions)
Cat Bond Issuance Declined Slightly in 2015 from 2014’s Record Pace. Lower Yields on Bonds Explain Some of the Contraction.
Source: Guy Carpenter, Artemis accessed at http://www.artemis.bm/deal_directory/cat_bonds_ils_issued_outstanding.html .
US Property CAT Rate on Line Index & Global Reinsurance ROE
40
Record traditional capacity, alternative capital and low CAT activity have pressured reinsurance prices; ROEs are own only very modestly
Source: Barclays PLC from Guy Carpenter; Insurance Information Institute.
US Property CAT ROL Global Reinsurance ROE
GLOBAL M&A UPDATE:A PATH TO GROWTH?
41
Are Capital Accumulation, Drive for Growth and Scale Stimulating
M&A Activity?
41
42
U.S. INSURANCE MERGERS AND ACQUISITIONS,P/C SECTOR, 1994-2015 (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
$39,6
07
$55,825
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Tra
ns
ac
tio
n v
alu
es
0
20
40
60
80
100
120
140
Nu
mb
er o
f tran
sa
ctio
ns
($ 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 in
2015 totaled $39.6B, its highest
level since 2000
43
Huge Shift from Domestic M&A Activity to Cross-Border
.Source: Thomson Reuters as of Oct. 2015 from Geneva Association Newsletter Insurance and Finance, Jan. 2016, presentation “Facts vs. Sentiment: Deals in the Insurance Sector,” by Aviva CEO Mark Wilson.
The share of M&A deal volume that was cross-border
more than doubled in 2015
44
M&A Activity Has Shifted Away from Europe and Towards Asia and N. America
.Source: Thomson Reuters as of Oct. 2015 from Geneva Association Newsletter Insurance and Finance, Jan. 2016, presentation “Facts vs. Sentiment: Deals in the Insurance Sector,” by Aviva CEO Mark Wilson.
Asian, N. American deal volumes were up
sharply in 2015
45
Growth
Premium Growth Rates Vary Tremendously by State and
Over Time, But…
45
46
-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
16
Net Premium Growth (All P/C Lines): Annual Change, 1971—2016:Q1
(Percent)
1975-78 1984-87 2000-03
Shaded areas denote “hard market” periodsSources: A.M. Best (1971-2013), ISO (2014-16).
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.
2016 Q1: 3.2%
2015: 3.4%
2014: 4.2
2013: 4.4%
2012: +4.2%
Outlook
2016F: 3.2%
2017F: 3.0%
-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
2015 3.4%
NPW Premium Growth: Peaks & Troughs in the P/C Insurance Industry, 1926 – 2015
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?
48
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%
49
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
50
Commercial Lines Growth and Pricing Trends
Survey Results Suggest Commercial Pricing Has
Flattened Out, with Impacts on Growth
50
-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
15E
Economic Shocks,
Inflation:
1976: 22.2%Tort Crisis
1986: 30.5%
Post-9/11
2002: 22.4%
Great
Recession:
2009: -9.0%
ROE
2015E 3.3%
Commercial Lines NPW Premium Growth:1975 – 2015E
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%
52
Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2015
75
.5
36
.5
30
.1
26
.8
26
.6
24
.0
22
.2
21
.5
17
.0
16
.7
15
.4
14
.7
14
.4
12
.8
12
.0
11
.5
10
.3
10
.2
9.9
9.8
9.8
9.2
9.2
9.1
9.0
8.8
0
10
20
30
40
50
60
70
80
ND
SD
VT
NE
OK IA TX
KS
MN IN WI
WY
CO
MA
NY
CT
ME
NJ
CA
NM
UT
AR ID RI
US IL
Pe
ce
nt
ch
an
ge
(%
)
Sources: NAIC via SNL Financial; Insurance Information Institute.
Top 25 States
44 states showed commercial lines growth from 2007
through 2015
Growth Benchmarks: Commercial
US: 9.0%
53
Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2015
8.4
7.8
7.7
7.3
7.2
7.1
6.9
6.8
6.6
6.5
6.3
6.3
6.2
5.6
5.5
5.3
4.7
1.6
-1.2
-2.4
-4.1
-4.7
-5.1
-6.8
-17
.5
-21
.6
-25
-20
-15
-10
-5
0
5
10
WA
OH
GA
MT
TN
MO
NH
MS
PA
MI
VA
MD
AK
KY
SC
NC LA
AL
DC
OR
DE AZ
HI
FL
NV
WV
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
Sources: NAIC via SNL Financial; Insurance Information Institute.
Eight states write less commercial business than
they did in 2007
54
$19.5
$21.8
$24.6$25.4 $25.8
$23.8
$22.1$21.2 $21.2
$22.1
$24.0
$25.7
$28.0
$26.6 $26.7 $26.7
$15
$17
$19
$21
$23
$25
$27
$29
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15E
Sources: A.M. Best (2000-2014); Conning (2015F); Insurance Information Institute.
$ Billion
In contrast to positive PP Auto NPW growth, Commercial Auto premiums fell 21.3% between 2005 and 2011 due to soft market conditions in
commercial lines and negative exposure trends, though growth resumed in 2012
Commercial Auto InsuranceNet Written Premium, 2000–2015F
55
Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2016: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 (%)
Trough = 2007:Q3 -13.6%
KRW : No Lasting Impact
Pricing turned positive in Q3:2011, the first inrease in
nearly 8 years; Q1:2015 renewals were down 2.8%;
Some insurers posted stronger numbers.
Peak = 2001:Q4 +28.5%
Pricing Turned Negative in Early
2004 and Remained that
way for 7 ½ years
56
Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2016: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.
1999:Q4 = 100
Pricing for smaller accounts has been
more stable than for larger accounts
57
CIAB: Average Commercial Rate Change, All Lines, (1Q:2004–2Q:2016)
-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
%-2
.3%
-3.3
%-3
.1%
-2.8
%-3
.7%
-3.9
%
-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
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
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 Q2:2016 remained somewhat negative
(Percent)
Q2 2011 marked the last of 30th
consecutive quarter of price declines
58
Change in Commercial Rate Renewals, by Line: 2016:Q2
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Major Commercial Lines Renewals Were Mixed to Down in Q2:2016; EPL and Commercial Auto Saw Gains
Percentage Change (%)
-0.4% -0.3%
0.8%
2.4%
-6.0%
-4.3%-3.6%
-3.0% -2.8% -2.5%
-7.0%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
Co
mm
erc
ial
Pro
pe
rty
Wo
rke
rs
Co
mp
Ge
ne
ral
Lia
b
Bu
sin
ess
Inte
rru
ptio
n
Um
bre
lla
Co
nstr
uctio
n
Su
rety
D&
O
EP
L
Co
mm
erc
ial
Au
to
Commercial Auto rate increases are larger than any other line, followed
by EPL
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
59
Underwriting Performance
59
10
9.4
11
0.2
11
8.8
10
9.5 1
12
.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
95
.2
99
.0 10
0.1
10
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
E
16
F
17
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 (2015E-17F) Insurance Information Institute.
Commercial Lines Combined Ratio, 1990-2017F*
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
60
Commercial Property Combined Ratio: 2007–2017F
72
.4
10
5.8
83
.3 86
.5
85
.8 88
.1 90
.5
91
.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 17F
Commercial Property Underwriting Performance Has Improved in Recent Years, Largely Due to
Diminished CAT Activity
Source: Conning Research and Consulting.61
General Liability Combined Ratio: 2005–2017F
11
2.9
95
.1 99
.0
94
.2
10
4.1
99
.7 10
1.6
10
3.7
10
3.5
10
4.010
7.1 11
0.8
99
.680
85
90
95
100
105
110
115
05 06 07 08 09 10 11 12 13 14 15F 16F 17F
Commercial General Liability Underwriting Performance Has Been Volatile in Recent Years
Source: Conning Research and Consulting.62
Commercial Auto Combined Ratio: 1993–2017F
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
6.2
10
7.6
10
8.6
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 15E16F17F
Commercial Auto Results Are Challenged as Rate Gains Barely Have Yet to Offset Adverse Frequency and Severity Trends
63Sources: A.M. Best (1990-2014);Conning (2015E-2017F); Insurance Information Institute.
Commercial Multi-Peril Combined Ratio: 1995–2017F
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
96
.9
10
1.8
10
2.3
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 15E16F17F
CMP-Liability CMP-Non-Liability
Commercial Multi-Peril Underwriting Performance is Expected to Deteriorate Slightly in the 2015 - 2017 Period
Assuming Normal Catastrophe Loss Activity
*2015E-2017F figures are Conning figures for the combined liability and non-liability components.Sources: A.M. Best; Conning; Insurance Information Institute.
64
Inland Marine Combined Ratio: 2004–2017F
82
.5
89
.9
77
.3 79
.5
97
.1
96
.1
83
.7
83
.3
82
.2
83
.2
83
.7
93
.3
89
.3
86
.2
70
75
80
85
90
95
100
04 05 06 07 08 09 10 11 12 13 14 15F 16F 17F
Inland Marine Underwriting Performance Has Been Consistently Strong for Many Years
Source: A.M. Best (2004-2014); Conning Research and Consulting (2015F-2017F).65
10
3.7
10
8.0
96
.4 99
.8
10
6.6
10
7.9 1
15
.7
13
0.4 13
6.0
15
4.7
14
2.3
13
7.3
11
0.9
10
0.9
91
84
.4
77
.9
85
.4
82
.0 88
.0 93
.3
89
.5
10
3.5
10
4
10
3.7
10
3.7
12
7.9
70
80
90
100
110
120
130
140
150
160
170
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
Medical Malpractice Combined Ratio vs. All Lines Combined Ratio, 1991-2017F
Source: AM Best (1991-2014); Conning (2015-17F) Insurance Information Institute.
MPL insurers in 2015 paid out an estimated $1.04 in loss and expense for every $1 they earned in premiums
In 2001, med mal insurers paid out $1.55 for every dollar earned
The dramatic improvement over the past decade has restored MPL’s viability, though some
deterioration has occurred and is expected to continue
66
Workers Compensation Combined Ratio: 1994–2016F
10
2.0
97
.0 10
0.0
10
1.0
11
2.6
10
8.6
10
5.1
10
2.7
98
.5
10
3.5
10
4.5 1
10
.6 11
5.0
11
5.0
10
8.0
10
1.0
98
.0
98
.5
99
.5
12
1.7
10
7.0
11
5.3
11
8.2
80
85
90
95
100
105
110
115
120
125
130
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14P15F16F
Workers Comp Results Began to Improve in 2012. Underwriting Results Deteriorated Markedly from 2007-2010/11 and Were the Worst They Had Been in a Decade.
Sources: A.M. Best (1994-2009); NCCI (2010-2014P) and are for private carriers only; Insurance Information Institute (2015-16F).67
WC results have improved markedly
since 2011
Workers Compensation Operating Environment
68
Workers Comp Results Have Improved Substantially in Recent Years
68
Workers Compensation Premium: Fifth Consecutive Year of IncreaseNet Written Premium
31.0 31.3 29.8 30.5 29.126.3 25.2 24.2 23.3 22.3
25.0 26.129.2
31.134.7
37.8 38.6 37.633.8
30.3 29.932.3
35.136.9 38.5 39.7
35.3 35.734.3
35.433.6
30.128.5
26.9 25.9 25.0
28.6
32.1
37.7
42.3
46.547.8
46.544.3
39.3
34.6 33.8
36.4
39.541.8
44.245.5
0
10
20
30
40
50
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15p
State Funds ($ B)
Private Carriers ($ B)
Pvt. Carrier NWP growth was +2.9% in 2015, +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.
70
2015 Workers Compensation Direct Written Premium Growth, by State*
PRIVATE CARRIERS: Overall 2015 Growth = +4.3%
*Excludes monopolistic fund states (in gray): OH, ND, WA and WY.
Source: NCCI.
While growth rates
varied widely, most
states experienced
modest positive
growth in 2015
71
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
72
Workers Compensation Components of Written Premium Change, 2014 to 2015
Written Premium Change from 2014 to 2015
Net Written Premium—Countrywide +2.9%
Direct Written Premium—Countrywide +4.3%
Direct Written Premium—NCCI States +2.5%
Components of DWP Change for NCCI States
Change in Carrier Estimated Payroll +4.5%
Change in Bureau Loss Costs and Mix -4.0%
Change in Carrier Discounting -0.3%
Change in Other Factors +2.2%
Combined Effect +2.5%
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
Workers Comp Approved Changes in Bureau Premium Level, 2000-2016p
73
0.6
-1.2-0.5
2.5
0.4
-0.2 -0.3
-3.0-3.8
-5.1
-2.6
-1.3
2.1
-0.2
-1.4
-4.5
-3.4
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16p
Indicated
Adjusted*
Percent
Accident YearNote: Bureau premium level charges reflect approved changes in advisory rates, loss costs, assigned risk rates relative to those approved in
NCCI states only IN and NC are filed in cooperation with state rating bureaus.
2016p: Preliminary based on data valued as of 4/15/2015.
Source: NCCI
Cumulative Change = –20.1%
(1994–2016p)
74
Latest Change for Voluntary Market
*As of 4/15/16. Excludes monopolistic fund states (in gray): OH, ND, WA and WY.
Source: NCCI.
WC Approved or Filed and Pending Change in NCCI Premium Level by State*
Many states have
seen rates rates
drop recently
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%
Workers Compensation Lost-Time Claim Frequency Declined in 2015
76
-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
-3.9
-5.4
-3
-1.7
-3.0
3.6
-0.9
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15p
Indicated
Adjusted*
Percent
Accident Year*Adjustments primarily due to significant audit activity.
2015p: Preliminary based on data valued as of 12/31/2015.
Source: NCCI Financial Call data, developed to ultimate and adjusted to current wage an voluntary loss cost level; Excludes high deductible
policies; 1994-2014: Based on data through 12/31/14. 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
Average Annual Change = –3.6%
(1994–2014)
$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
6.2
$1
6.7
$1
7.5
$2
2.4
$2
2.6
$2
2.2
$2
2.2
$2
2.9
$2
3.2
$2
3.5
$1
8.2
$1
7.6
$1
9.3
$2
0.8
$2
2.1
-0.1
%
-2.2
%
+0
.6%
+9
.3%
+0
.9%
+5
.9%
+3
.1%
+1
.0%
+4
.6%
+3
.1%
+9
.2%
+1
0.1
%
+1
0.1
%
+9
.0%
+7
.7%
+5
.9%
+1
.7%
+4
.9%
-2.8
%
-3.1
%
+1
.0%
+6
.6%
5
7
9
11
13
15
17
19
21
23
25
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14p 15p
Indemnity
Claim Cost ($ 000s)
Accident Year
Workers Comp Indemnity Claim Costs: Slight Increase in 2015
Average indemnity costs per claim were up 1% in
2015 to $23,500
Average Indemnity Cost per Lost-Time Claim
+1
%
+1
.5%
Cumulative Change = 140%
(1991-2015p)
2014p: Preliminary based on data valued as of 12/31/2014.
1991-2013: Based on data through 12/31/2013, developed to ultimate
+2
.9%
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%
9.3%
2.9%2.3%4.3%
2.7%
3.0%3%2.9%
2.3%
1.1%3.5%
3.6%
1.0%
3.1%
1.5%
0%
0.9%0.6%
-2.2%
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 15p
Change in CPS Wage Change in Indemnity Cost per Lost-Time Claim
WC Indemnity Severity vs. Wage Inflation, 1995 -2015p
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; Insurance Information Institute
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:Small Decrease in 2015
79
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
6.2
$2
6.3
$2
6.8
$2
7.3
$2
8.0
$2
8.8
$2
8.5
+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%
+7.0%+4.5%+0.4%
+2.2%+2.0%
+2.3%+3.0%
-1%
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 14 15p
2015p: Preliminary based on data valued as of 12/31/2015.
1991-2013: Based on data through 12/31/2014, developed to ultimate
Based on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.
Cumulative Change = 252%
(1991-2015p)
Accident Year
Medical severity for lost time claims was down 1% in 2015, the first decline in
at least 20 years
80
Annual Inflation Rates, (CPI-U, %),1990–2017F
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
1.5 1.6
0.1
1.3
2.3
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 15 16F17F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 4/16 (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
7.0
4.5
0.4
2.2 2.02
3.0
-1.0
4.5
3.52.8
3.2 3.54.1
4.6 4.74.0
4.4 4.2 4.04.4
3.73.2 3.4
3.03.7
3 2.4 2.6
-2
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 14 15p
Change in Lost-Time Medical Claim Severity
Change in US Medical CPI
Percent Change
Year
Average Annual Change: 1994—2015
Lost-Time Medical Severity: +5.9%
US Medical CPI: +3.6%
2015p: Preliminary based on data valued as of 12/31/2015.
Sources: Severity: 995-2013: Based on data through 12/31/2014, 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% 2.6%
5.1%
7.4%
10.1%10.6%
13.5%
5.4%
7.8%
5.9%
6.8%
4.0% 4.0%
-1.0%
3.0%3.7%
3.2%
2.4%2.4%
0.5%
5.8%
8.8%
7.7%
7.3%
8.3%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
95 97 99 01 03 05 07 09 11 13 15p
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 2015 was well above the medical CPI (5.9% vs. 3.6%), 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
$6
47
.5$
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
84
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?
86
Insured Catastrophe Losses
2013-2015 Experienced Below Average
CAT Activity After Very High CAT Losses in
2011/12
2016 Is On Track to Surpass Recent Years
86
87
$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
5.2
$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 16*
U.S. Insured Catastrophe Losses
*Through 6/30/16. 2016 figure stated in 2016 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.
2013/14/15 Were Welcome Respites from 2011/12, among the Costliest Years for Insured Disaster
Losses in US History. 2016 Is Off to a Costlier Start.
2012 was the 3rd most expensive year ever for
insured CAT losses
$11.0B in insured CAT losses though
6/30/16
($ Billions, $ 2015)
87
88
Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2016F*
*2010s represent 2010-2015.
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 (1960-2009); A.M. Best (2010-16E) Insurance Information Institute.
0.4
1.2
0.4 0
.8 1.3
0.3
0.4 0.7
1.5
1.0
0.4
0.4 0.7
1.8
1.1
0.6
1.4 2
.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
4.6
9.6
8.0
3.5 4
.03
.14
.7
3.6
0.9
0.1
1.1
1.1
0.8
0
2
4
6
8
10
12
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
20
16
F
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: 5.47*
Combined Ratio Points Catastrophe losses as a share of all
losses reached a record high in 2011
89
Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1996–20151
0.2%1.8%
4.9%
6.1%
7.5%
40.2%
39.2%
1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2015 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, $158.6
Fires (4), $7.3
Events Involving Tornadoes (2), $158.6
Winter Storms, $30.4
Terrorism, $24.6
Other Wind/Hail/Flood (3), $19.9
Other (5), $0.8
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 1996-2015
totaled $404.1B, an average of $20.2B per year or $1.68B
per month
Winter storm losses were much above average in 2014/15 pushing
this share up
Top 3 States for Insured Catastrophe Losses, 1996-2005 (in 2015 Dollars)
90
Texas, Florida and New York lead the country in insured catastrophe losses over the past 20 years. These 3 states accounted for nearly 1/3 of
all insured catastrophe losses over the past two decades
Source: PCS/Verisk for 2016 Insurance Fact Book, Insurance Information Institute.
91
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.
Convective Loss Events in the USOverall and insured losses, 1980 – 2015
92
$ Billions
Analysis contains:
severe storm, tornado, hail, flash
flood and lightning
*Losses adjusted to inflation based on CPI
Source: Geo Risks Research, NatCatSERVICE
Overall losses
(in 2015 values)*
Insured losses
(in 2015 values)* The period from 2008-2015 has
been the most expensive on record for insured losses from “Convective Events” (severe thunderstorms, tornado, hail,
lightning and flash flood)
Winter Storm Losses in the US1980 – 2015 (Overall and Insured Losses)*
93
Overall losses
(in 2015 values)*
Insured losses
(in 2015 values)*
*Losses adjusted to
inflation based on CPI.Source: Property Claim Services, MR NatCatSERVICE.
$ Billions
Winter storm losses have been increasing rapidly in recent years
*Winter storms
include also winter
damages, blizzards
and cold waves
US Property CAT Rate on Line Index & Global Reinsurance ROE
94
Record traditional capacity, alternative capital and low CAT activity have pressured reinsurance prices; ROEs are own only very modestly
Source: Barclays PLC from Guy Carpenter; Insurance Information Institute.
US Property CAT ROL Global Reinsurance ROE
THE ECONOMY
95
The Strength of the Economy Will Greatly
Influence Insurer Exposure Base
Across Most Lines
95
96
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.
Source: US Department of Commerce, Blue Economic Indicators 9/16; 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
%2.0
%2.6
%2.0
%0.9
%0.8
%1.1
% 2.9
%2.4
%2.2
%2.3
%2.2
%2.1
%
-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
17
:1Q
17
:2Q
17
:3Q
17
:4Q
Demand for Energy Should Increase in 2016-17 as GDP Growth Continues at a Steady, Albeit Moderate Pace and Gradually Benefits the Economy Broadly
Real GDP Growth (%)
Recession began in Dec, 2007
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
97
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
.9%
4.8
%4
.8%
4.7
%4
.6%
4.6
%4
.5%
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
17
:Q1
17
:Q2
17
:Q3
17
: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 (9/16 edition); Insurance Information Institute.
2007:Q1 to 2017:Q4F*
Unemployment forecasts have been revised modestly
downwards. Optimistic scenarios put the
unemployment as low as 4.4% by Q4 of 2016.
Jobless figures have been revised
downwards for 2016
Trucking Employment: 2006–2016*
1,4
35
.7
1,4
39
.0
1,3
88
.3
1,2
68
.7
1,3
81
.6
1,4
16
.7
1,4
55
.9
1,4
60
.7
1,2
50
.8
1,3
01
.1
1,3
49
.1
1,000
1,050
1,100
1,150
1,200
1,250
1,300
1,350
1,400
1,450
1,500
06 07 08 09 10 11 12 13 14 15 16*
Trucking employment is up by more than 200,000 or 16.8% since 2010
*Seasonally-adjusted monthly average through Aug 2016Source: US Census Bureau; Insurance Information Institute.
98
(000)
99
Construction Employment,Jan. 2010—Aug. 2016*
*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
91
6,4
10 6,4
84
6,5
49
6,5
97
6,6
15
6,6
28
6,6
65
6,6
59
6,6
41
6,6
35
6,6
46
6,6
40
5,400
5,500
5,600
5,700
5,800
5,900
6,000
6,100
6,200
6,300
6,400
6,500
6,600
6,700
6,800
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
5O
ct-
15
Nov-1
5D
ec-1
5Jan-1
6F
eb-1
6M
ar-
16
Apr-
16
May-1
6Jun-1
6Jul-16
Aug-1
6
Construction employment is +1.205 million above
Jan. 2011 (+22.2%) trough
(Thousands)
Construction and manufacturing employment constitute 1/3 of all WC payroll exposure.
100
Employment in Oil & Gas Extraction,Jan. 2010—Aug. 2016*
*Seasonally adjusted
Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
156.4
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
191.7
190.0
186.7
185.0
182.9
181.7
179.7
177.9
175.7
174.4
172.9
172.0
172.8
150
160
170
180
190
200
210
Fe
b-1
0
Ap
r-10
Ju
n-1
0
Au
g-1
0
Oct-
10
Dec-1
0
Fe
b-1
1
Ap
r-11
Ju
n-1
1
Au
g-1
1
Oct-
11
Dec-1
1
Fe
b-1
2
Ap
r-12
Ju
n-1
2
Au
g-1
2
Oct-
12
Dec-1
2
Fe
b-1
3
Ap
r-13
Ju
n-1
3
Au
g-1
3
Oct-
13
Dec-1
3
Fe
b-1
4
Ap
r-14
Ju
n-1
4
Au
g-1
4
Oct-
14
Dec-1
4
Fe
b-1
5
Ap
r-15
Ju
n-1
5
Au
g-1
5
Oct-
15
Dec-1
5
Fe
b-1
6
Ap
r-16
Ju
n-1
6
Au
g-1
6
Oil and gas extraction
employment is down up 14.2%
since Oct. 2014 as oil prices remain
depressed
(000)
Employment peaked in Oct. 2014 at 201,500—its highest
level since Dec. 1986.
CONSTRUCTION INDUSTRY OVERVIEW & OUTLOOK
101
The Construction Sector Is Critical to the Economy and the P/C Insurance Industry
101
102
Value of New Private Construction: Residential & Nonresidential, 2003-2016*
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 16*
Non Residential
Residential
Private Construction Activity Is Moving in a Positive Direction though Remains Well Below Pre-Crisis Peak; Residential Dominates
$298.1
$613.7
New Construction peaks at $911.8. in 2006
Trough in 2010 at $500.6B,
after plunging 55.1% ($411.2B)
2016: Value of new pvt.construction hits
$875.0 as of Jul. 2016, up 74.8% from the 2010
trough but still 4.0% below 2006 peak
102
$261.8
$238.8
$447.9
$398.3
*2016 figure is a seasonally adjusted annual rate as of July.
Sources: US Department of Commerce http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
103
Value of Construction Put in Place, 2016 vs. 2015*
-3.1%
4.7%
-3.2%
0.0%
1.0%0.3%
1.7%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
Total
Construction
Total Private
Construction
Residential--
Private
Non-
Residential--
Private
Total Public
Construction
Residential-
Public
Non-
Residential--
Public
Overall Construction Activity is Up Slighty, Having Decelrated from Early 2016; State/Local Sector Government Sector Was Recovering but Is
Experienced Renewed Weakness
Growth (%)
Private sector construction activity is up in both the
residential and nonresidential segments
*seasonally adjusted data through July 2016.Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
Private: +1.0% Public: -3.1%
Public sector construction activity is finally beginning to
create less drag up after years of decline
104
Value of Private Construction Put in Place, by Segment, 2016 vs. 2015*
1.2%
-0.3%
1.6%
0.0%0.4%
1.2% 1.1%
3.9%
-3.9%
1.0%0.3%
1.7%
-1.2%
4.6%
-5%-4%-3%-2%-1%0%1%2%3%4%5%6%
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 2016; Expansion Should Continue
Growth (%) Construction activity has slowed in 2016, but led by the
Office and Manufacturing segments, the sector continues to expand after plunging during
the “Great Recession.”
*seasonally adjusted through Jul. 2016.Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
105
(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
1.0
0 1.1
1
1.1
9 1.3
0 1.4
3
1.4
6
1.4
71
.49
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 15 16F 17F 18F 19F20F 21F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (9/16 for 2016-17; 3/16 for 2018-21F; 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, still-low mortgage
rates and demographics should continue to stimulate new home
construction for several more years
106
Value of Public Construction Put in Place, by Segment, 2015 vs. 2016*
2.5%
-8.3%
1.8%0.0% -0.1%
-0.3%
-0.1%
-0.3%
-6.1%
-27.1%
-3.1%
4.7%
-3.2%-0.2%
-12.5%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
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 Surged in Early 2016 but Contracted Again by Mid-Year. A Resumption of the Recovery is Likely which Will Help Drive
Demand in Many Commercial Insurance Lines
Growth (%)
*seasonally adjusted through July 2016.Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
Public sector construction activity slowed by mid-2016
Power, Commercial and Educations led declines in public sector construction
107
$314.9$304.0
$286.4 $279.3 $270.7 $275.7$291.3
$278.2
$216.1 $220.2$234.2
$255.4
$289.1$308.7
$0
$50
$100
$150
$200
$250
$300
$350
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
*
2016
*
($ 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: 2003-2016*
*2016 figure is a seasonally adjusted annual rate as of July; 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 has slowed in 2016; still down $36.7B or 11.7%
since 2009 peak
108
Construction Employment, Jan. 2003–Dec. 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
108
Construction employment
peaked at 7.726 million in April 2006
(Thousands)Construction
employment as of Dec. 2015 totaled 6.538 million, an
increase of 1.103MM jobs or 20.2% from
the Jan. 2011 trough
Gap between pre-recession
construction peak and today: 1.19 million jobs
MANUFACTURING SECTOR OVERVIEW & OUTLOOK
109
The U.S. Manufacturing Sector Is Being Buffeted by a High Dollar,
Weak Export Markets and Plunging Oil Prices
109
110
$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
15-Jan
Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—December 2015
* Seasonally adjusted; Data published Feb. 4, 2016.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/
Monthly shipments in Nov. 2014 exceeded the pre-crisis (July 2008) peak but has declined in recent months. Weakness abroad, falling energy prices and a strong dollar are hurting the sector, especially exports. Manufacturing growth leads to gains in many commercial
exposures: WC, Commercial Auto, Marine, Property, and various Liability Coverages.
$ Millions
110
The value of Manufacturing Shipments in Dec. 2015 was
$467.0B—down 8% from the July 2014 record high of $508.1B
58.3
57.1
60.4
59.6
57.8
55.3
55.1
55.2
55.3 5
6.9 5
8.2
58.5
60.8 61.4
59.7
59.7
54.2 5
5.8
51.4 52.5
52.5
51.8
52.2 53.1 54.1
51.9 5
3.3 54.1
52.5
50.2
50.5
50.7 51.6
51.7
49.9
50.2
53.1 54.2
50.7
49.0
50.9
55.4
55.7
56.2
56.4
57.0
56.5
51.3
53.2
53.7 5
4.9
55.4
55.3
57.1
59.0
56.6
59.0
58.7
55.5
53.5
52.9
51.5
51.5 5
2.8 53.5
52.7
51.1
50.2
50.1
48.6
48.2
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
4D
ec-
Jan-1
5F
eb-1
5M
ar-
15
Apr-
15
May-1
5Jun-1
5Jul-15
Aug-1
5S
ep-1
5O
ct-
15
Nov-1
5D
ec-
ISM Manufacturing Index(Values > 50 Indicate Expansion)
January 2010 through December 2015
The manufacturing sector expanded for 68 of the 72 months from Jan. 2010 through Dec. 2015. Manufacturing sector now appears to be in contraction
due to weakness abroad, strong dollar and collapse in oil prices
Source: Institute for Supply Management at http://www.ism.ws/ismreport/mfgrob.cfm; Insurance Information Institute.
Manufacturing began to contract in late 2015
111
112
Manufacturing Growth for Selected Sectors, 2015 vs. 2014*
-2.3%-2.1%
3.4%8.0%
-9.6%
-1.3%
-32.2%
-2.3%-2.3%
2.6%
-4.2%
1.8%
-0.6%
-9.5%
-0.6%
-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 Contracting Across a Number of Sectors, Especially Petroleum. Adverse Exposure Impacts Are Likely for: WC, Commercial
Property, Commercial Auto and Certain Liability Coverages
Growth (%)
Manufacturing of non-durable goods is weaker
than for durables
*Seasonally adjusted; Date are YTD comparing data through November 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: +1.8% Non-Durables: -9.6%
113
Manufacturing Employment, Jan. 2003–December 2015
Note: Recession indicated by gray shaded column. Data are seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
11,000
11,500
12,000
12,500
13,000
13,500
14,000
14,500
15,000'0
3
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
Manufacturing employment was growing slowly but steadily from 2010 through 2014 but has been flat in 2015. Automation, a slowing world economy, the strong dollar
and other factors have held the growth rate down.
Manufacturing employment hit a
trough at 11.45 million in Feb. and
Mar. 2010
113
Manufacturing employment was
declining, slowly, before the Great Recession
(Thousands)
Latest (Dec 2015) at 12.33 million
114
Manufacturing Employment,Jan. 2010—December 2014*
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
41
11,8
70
11,9
10
11,9
20
11,9
26
11,9
35
11,9
57
11,9
43
11,9
25
11,9
31
11,9
38
11,9
51
11,9
65
11,9
88
11,9
84
11,9
77
11,9
72
11,9
65
11,9
48
11,9
63
11,9
93
12,0
11
12,0
46
12,0
53
12,0
61
12,0
81
12,0
85
12,0
94
12,1
09
12,1
30
12,1
54
12,1
57
12,1
69
12,1
93
12,2
22
12,2
39
11,250
11,500
11,750
12,000
12,250
12,500Jan-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
22/3
0/2
Mar-
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
4D
ec-
Manufacturing employment is a surprising source of strength in the economy. Employment in the sector is at a multi-year high.
*Seasonally adjusted.
Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
(Thousands)Since Jan 2010, manufacturing
employment is up (+877,000 or +7.7%)and still growing.
115
Employment in Oil & Gas Extraction,Jan. 2010—Aug. 2016*
*Seasonally adjusted
Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
156.4
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
191.7
190.0
186.7
185.0
182.9
181.7
179.7
177.9
175.7
174.4
172.9
172.0
172.8
150
160
170
180
190
200
210
Fe
b-1
0
Ap
r-10
Ju
n-1
0
Au
g-1
0
Oct-
10
Dec-1
0
Fe
b-1
1
Ap
r-11
Ju
n-1
1
Au
g-1
1
Oct-
11
Dec-1
1
Fe
b-1
2
Ap
r-12
Ju
n-1
2
Au
g-1
2
Oct-
12
Dec-1
2
Fe
b-1
3
Ap
r-13
Ju
n-1
3
Au
g-1
3
Oct-
13
Dec-1
3
Fe
b-1
4
Ap
r-14
Ju
n-1
4
Au
g-1
4
Oct-
14
Dec-1
4
Fe
b-1
5
Ap
r-15
Ju
n-1
5
Au
g-1
5
Oct-
15
Dec-1
5
Fe
b-1
6
Ap
r-16
Ju
n-1
6
Au
g-1
6
Oil and gas extraction
employment is down up 14.2%
since Oct. 2014 as oil prices remain
depressed
(000)
Employment peaked in Oct. 2014 at 201,500—its highest
level since Dec. 1986.
Trucking Employment: 2006–2016*
1,4
35
.7
1,4
39
.0
1,3
88
.3
1,2
68
.7
1,3
81
.6
1,4
16
.7
1,4
55
.9
1,4
60
.7
1,2
50
.8
1,3
01
.1
1,3
49
.1
1,000
1,050
1,100
1,150
1,200
1,250
1,300
1,350
1,400
1,450
1,500
06 07 08 09 10 11 12 13 14 15 16*
Trucking employment is up by more than 200,000 or 16.8% since 2010
*Seasonally-adjusted monthly average through Aug 2016Source: US Census Bureau; Insurance Information Institute.
116
(000)
0
20
40
60
80
100
120
Recession
117
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.
117
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
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. 118
Percent of Industrial Capacity
Hurricane Katrina
March 2001-November 2001
recession
“Full Capacity” The US operated at 79.7% of industrial capacity in Dec. 2014, well above the June
2009 low of 66.9% but is still below pre-recession levels.
March 2001 through Dec. 2014
118
December 2007-June 2009 Recession
The closer the economy is to operating at “full
capacity,” the greater the inflationary pressure
TECHNOLOGY, DISRPTORS AND INSURANCE
119
Applications of Technology in P/C Insurance Have Gripped the Media as
Have Industry Solutions
119
120
Interest in Technology Issues and Insurance Is Surging: Presents Opportunity
Insurers are at the intersection of many of the most important technological innovations of the early 21st century
ProblemSolutionOpportunity
Industry is too often depicted as a technology laggard
I.I.I. is highlighting the industry as being on the technological cutting edge—an innovative, nimble industry with solutions for managing countless new risks of the current era:
Sharing economy Cyber Auto Technology
Supply Chain Climate Risk Drones
Wearable devices The “Internet of Things”
Positions industry well with customers, investors, current and prospective workers/Millennials, regulators/legislators and (tech) media
121
CYBER RISK AND INSURANCE
Cyber Risk is a Rapidly Emerging Exposure for Businesses Large and
Small in Every Industry
Data Breaches 2005-2015, by Number of Breaches and Records Exposed
# Data Breaches/Millions of Records Exposed
Source: Identity Theft Resource Center (updated as of Jan. 6, 2016);http://www.idtheftcenter.org/images/breach/ITRCBreachReport2015.pdf
157
321
446
656
498
419
470
614
781783
662169.1
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 781 reported data breaches in 2015 was virtually unchanged form the record 783 reported in 2014. The number of exposed records
soared to 169.1 million, and increase of 97.5%.
Millions
Data/Privacy Breach:Many Potential Costs Can Be Insured
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
123
124
$1.5$2.0
$7.5
$0
$1
$2
$3
$4
$5
$6
$7
$8
2014 2015E 2020F
Estimated Cyber Insurance Premiums Written, 2014 – 2020F
Cyber insurance premiums written could more than
triple to $7.5 billion by 2020
Source: Advisen (2014 est.); PwC (2015, 2020); Insurance Information Institute.
$ Billions
I.I.I.’s Cyber Risk paper issued
Oct. 2015
125
THE SHARING (ON-DEMAND) ECONOMY
Area of Extreme Interest—And Insurers Are Providing Solutions for this
Dynamic Economic Segment
126
Sharing/On-Demand/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 insurance questions have arisen
Insurance solutions are increasingly available to fill the many insurance gaps that arise
127
Labor on Demand: Huge Implications for the US Economy, Workers & Insurers
Source: ISO.
Ridesharing Regulation/Legislation and Status of ISO Filings as of 9/30/15
128
Status of ISO FilingsStatus Ride Sharing
Legislation/Regulation
129
Percent of Americans Who Have Engaged in the “Gig/Sharing Economy” by Transaction
Sources: The SelfEmployed.com accessed at https://www.theselfemployed.com/gig-economy/infographic-inside-the-new-
economy/ based on a poll by Time magazine, Bursten-Marsteller and The Aspen Institute; Insurance Information Institute.
About 22% of Americans have offered services in the sharing economy
Service platforms have the most direct link to WC; 11% of Americans
have offered their services
Drivers have significant WC exposures
130
Americans Who Offer Services in the Sharing/Gig Economy Are Statistically More Prone to Workplace Injury
Sources: The SelfEmployed.com accessed at https://www.theselfemployed.com/gig-economy/infographic-inside-the-new-
economy/ based on a poll by Time magazine, Bursten-Marsteller and The Aspen Institute; Insurance Information Institute.
Young, Urban Minority Males Are the Most Likely to Offer their Services in the Sharing Economy
131
The Sharing Economy Can’t Escape Politics and Regulation
132
Political Skepticism About the‘Gig’ Economy
"Many Americans are
making extra money renting
out a spare room, designing
a website ... even driving
their own car. This on
demand or so called 'gig'
economy is creating
exciting opportunities and
unleashing innovation, but
it's also raising hard
questions about
workplace protections
and what a good job will
look like in the future."
--Hillary Clinton,
July 13, 2015
133
AUTO TECHNOLOGY &
THE FUTURE OF AUTO INSURANCE
Technology Promises Safer Cars and Highways, BUT Some Analysts, Media
and Many in Silicon Valley Are Predicting Doom for Auto Insurers
134
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; Insurance Information Institute.
Questions
Are auto insurers monitoring these trends?
How are they reacting?
Will or Amazon or FinTech take over the industry? (cars/sales)
Will the number of auto insurers shrink?
How will liability shift?
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I.I.I. Poll: Telematics
Q. I’m going to ask you a question about your opinion of insurance companies
collecting information about how and when you drive in order to set your auto
insurance premium. Please tell me which statement you agree with. Would you…1
1Asked of those who auto insurance.
Source: Insurance Information Institute Annual Pulse Survey.
More Than Half of Auto Policyholders Would Allow Their Insurer to Collect Their Driving Information In Order to Set Premiums.
1%
39%
18%
42%
Don’t know
Allow if premium went
down
Allow whether or not premium went down
Would not allow
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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
FAA granting Section 333 exemptions for commercial use and testing of UAS
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
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THE ‘INTERNET OF THINGS’
Capturing Economic Value Amid a
Shifting Insurer Value Chain
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The Internet of Things and the Insurance Industry
The “Internet of Things” will create trillions in economic value throughout the global economy by 2025
What opportunities, challenges will this create for insurers?
What are the impact on the insurance industry “value chain”?Sources: McKinsey Global Institute, The Internet of Things: Mapping the Value Beyond the Hype,
June 2015; Insurance Information Institute.
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The Internet of Things and the Insurance Industry Value Chain
Source: Willis Capital Markets & Advisory; Insurance Information Institute.
The Insurance Industry Value Chain Is Changing for Many Reasons
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The Internet of Things and the Insurance Industry Value Chain
Source: Willis Capital Markets & Advisory; Insurance Information Institute.
Who owns the data? Where does It flow? Who does the analytics? Who is the capital provider?
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A NEST Case Study
Nest: A Leader in the “Internet of Things”
Collision Course or Cooperation with the
Insurance Industry?
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Telematics for Your Home:The Internet of Things
The home is the next frontier for telematics
Rapidly becoming a crowded space
How and with whom will insurers partner?
Can control increasing array of household systems remotely
Heat, A/C
Fire, CO detection
Security Systems
Cameras/Monitors
Appliances
Lighting
Technology is adaptive
Uses sensors and algorithms to learn about you
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Partnerships with Insurers: Selling Safety and Savings Simultaneously
Source: https://nest.com/insurance-partners/ accessed 1/10/16; Insurance Information Institute research.
Nest is actively seeking to partner with insurers. As of Jan. 10, 2016, Nest listed 2 insurance partners offering discounts in a number of states
Shifting Legal Liability & Tort Environment
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Will the Tort PendulumSwing Against Insurers?
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$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.
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
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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:
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