p14228 - iii ppt template 4:3 · 5 cyber insurance 4,048 7,489 85% ... terrorism auto affordability...

President’s Report

Insurance Information Institute

Board of Directors Meeting

June 13, 2016; Washington, D.C.

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

Key Insurance Issues In the News

Media Index

NFIP and Post-Sandy Claims

Unclaimed Life Insurance Policies

Top Insurance Issues:What’s Hot, What’s Not

Technology Spiked, Catastrophes Crashed

4

Top Issues, P/C, First Five Months 2015 vs. First Five Months* 20161

*Through May 15. 1Based on a search of Meltwater News

Top Issues 2015 2016 % Increase/Decrease

1 Auto 12,506 15,872 27%

2 Solvency 5,944 13,174 122%

3 Driverless Cars 3,138 8,909 184%

4 Homeowners 5,755 8,113 41%

5 Cyber Insurance 4,048 7,489 85%

6 Wildfires 614 5,961 871%

7 Market Conditions 4,122 5,716 39%

8 Tort 2,536 5,081 100%

9 Earthquakes 3,502 4,854 39%

10 Insurance Fraud 4,582 4,764 4%

11 Terrorism 7,815 4,247 -46%

12 Climate Change 1,879 4,151 121%

13 Pay-As-You Go/Telematics 2,162 4,104 90%

14 Tornadoes 2,257 2,953 31%

15 Hurricanes 1,451 2,576 78%

16 Flood Insurance 2,223 2,437 10%

17 Workers Comp 1,350 1,843 37%

18 Sharing Economy 503 1,352 169%

19 Drones and Insurance 409 709 73%

20 Price Optimization 329 690 110%

21 Winter Storms & Insurance 522 666 28%

22 Aviation 241 416 73%

23 Gun Liability 98 314 220%

24 Systemic Risk 189 236 25%

25 Auto Affordability & CFA 247 155 -37%

26 Credit Scoring 84 152 81%

27 Riots 944 143 -85%

Total 69,041 106,368 54%

5

I.I.I. Media Index, P/C, First Five Months 2015 vs. First Five Months* 20161

Percent Increase/Decrease from Previous Year


-85%

-46%

-37%

4%

10%

25%

27%

28%

31%

37%

39%

39%

41%

73%

73%

78%

81%

85%

90%

100%

110%

121%

122%

169%

184%

220%

871%

-200% 0% 200% 400% 600% 800% 1000%

RiotsTerrorism

Auto Affordability & CFAInsurance FraudFlood Insurance

Systemic RiskAuto

Winter Storms & InsuranceTornadoes

Workers CompEarthquakes

Market ConditionsHomeowners

AviationDrones and Insurance

HurricanesCredit Scoring

Cyber InsurancePay-As-You Go/Telematics

TortPrice Optimization

Climate ChangeSolvency

Sharing EconomyDriverless Cars

Gun LiabilityWildfires

Interest in technology issues remains high though growth was

superseded by other a number of topic

issues

CFA’s messaging traction is slipping

Gun liability (and terrorism) was already will

surging before Orlando

6

I.I.I. Media Index, P/C, First Five Months 2015 vs. First Five Months* 20161


0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000

RiotsCredit Scoring

Auto Affordability & CFASystemic Risk

Gun LiabilityAviation

Winter Storms & InsurancePrice Optimization

Drones and InsuranceSharing Economy

Workers CompFlood Insurance

HurricanesTornadoes

Pay-As-You Go/TelematicsClimate Change

TerrorismInsurance Fraud

EarthquakesTort

Market ConditionsWildfires

Cyber InsuranceHomeowners

Driverless CarsSolvency

Auto

2016

2015

7

Top Issues, L/H, First Five Months 2015 vs. First Five Months* 20161


Top Issues 2015 2016% Increase/Decrease

1 Health Insurance 59,837 69,216 16%

2 Annuities 55,158 79,139 43%

3 Solvency 36,387 52,115 43%

4 Life Insurance 23,499 46,526 98%

5 Retirement 3,874 9,313 140%

6 Long Term Care Insurance 547 710 30%

7 Unclaimed Benefits 82 186 127%

Total 179,384 257,205 43%

8

I.I.I. Media Index, L/H, First Five Months 2015 vs. First Five Months* 20161


59,837

55,158

36,387

23,499

3,874547 82

69,216

79,139

52,115

46,526

9,313

710 1860

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

HealthInsurance

Annuities Solvency Life Insurance Retirement Long TermCare Insurance

UnclaimedBenefits

2015

2016

9

I.I.I. Media Index, L/H, First Five Months 2015 vs. First Five Months* 20161

Percent Increase/Decrease from Previous Year


140%

127%

98%

43% 43%

30%

16%

0%

20%

40%

60%

80%

100%

120%

140%

160%

Retirement UnclaimedBenefits

Life Insurance Annuities Solvency Long TermCare Insurance

HealthInsurance

10

I.I.I. Media Index, P/C, 2014 vs. 2015*Percent Increase/Decrease from Previous Year

*Based on a search of Lexis/Nexis (January 1–December15)

139%

122%

87%

55%50%

45%

26% 22%14% 13% 11%

2% 2%

-2% -3% -5% -7% -8% -8% -12%-14%-14%-15%-16%

-28%-36%

-57%

-100%

-50%

0%

50%

100%

150%Interest in Technology Issues Impacting the

Insurance Industry Are Surging; Trend Will Continue in 2016.

Coverage of Catastrophe Issues Plunged (Except for

Riots, Wildfire)

11

U.S. Insured Catastrophe Losses

*Estimate through 12/31/15 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, a Verisk Analytics business; Insurance Information Institute.

2013/14 Were Welcome Respites from 2011/12, Among the Costliest Yearsfor Insured Disaster Losses in U.S. History.

Longer-term Trend is for More—Not Fewer—Costly Events

$14.4

$5.0$8.2

$38.9

$9.1

$27.2

$13.0$11.3

$3.9

$14.8$11.9

$6.3

$35.8

$7.8

$16.8

$34.7

$75.7

$10.9$7.7

$30.1

$11.8$14.9

$34.6$36.1

$13.1

$15.5$15.0

$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

Billi

on

s (

$ 2

01

5)

2012 was the 3rd

Most Expensive Year Ever for

Insured Cat Losses

$15B in Insured Cat Losses Through 12/31/15 (Est.)

12

The NFIP and Post-Sandy ClaimsPBS Frontline

PBS Frontline segment, “The Business of Disaster,” aired May 24, 2016 (my taping was on Feb. 3 in Washington, DC).

A truncated audio version ran the same day on NPR

Focus was on the role private insurance carriers play in the flood insurance claims process, alleging that insurers are underpaying claims in order to make a greater profit

While it was a contentious interview, we were able to get many of the industry’s key messages across

I also “live tweeted” throughout the show with facts about flood insurance—including video testimony from FEMA’s Brad Kiesermanasserting that “no evidence of fraud” was found by FEMA when examining how WYO companies settled insurance claims for Sandy-related damages

The program so far has not generated additional interest with either national or local media in locations directly affected by Sandy

https://www.youtube.com/watch?v=IFxWWxUOuWo

13

Unclaimed Life Insurance PoliciesCBS 60 Minutes

CBS’s 60 Minutes segment, “Not Paid,” on how insurers handle unclaimed life insurance policies aired Sunday, April 17

Industry was represented by Dr. Steven Weisbart, CLU, the I.I.I.’s chief economist and a life insurance subject matter expert

Steve worked for TIAA-CREF for 25 years before coming to I.I.I.

After a fairly contentious interview, the I.I.I. was prepared to respond to any negative media attention following the airing, but did not received a single media call on the issue.

Emerging Issues

Auto Claims/Rates

Insurance and Technology

Cuba

Catastrophe Losses

Increasing Auto Claim Frequency and Severity

An Improving Economy Always Drives Up Frequency, but Other Factors Are in Play

16

Auto Severity & Frequency by Coverage: Trending Up in 2015

2.2%1.1%

10.2%

0.8%

4.1%

6.4%

3.5%

5.7%

-1.7%-2.5%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Bodily Injury Property Damage

Liability

PIP Collision Comprehensive

Severity Frequency

Annual Change, 2015 Over 2014

Frequency and Severity Were Up Across Most Coverage Types in 2015; A Trend Likely to Continue in 2016

Source: ISO/PCI Fast Track data; Insurance Information Institute

17

Collision Coverage: Severity & Frequency Trends Are Both Higher in 2015

2.8%

1.3%

4.1%

1.3%

5.7%

-1.8%

-3.6%

2.5%

-2.4%-1.8%

4.4%

0.8%

3.9%3.1%

0.1% 0.5%

-2.3%

-0.1%-1.4%

-0.5%

0.9%

2.4%

-6%

-4%

-2%

0%

2%

4%

6%

8%

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 Has Clearly Reversed, Consistent with

Experience from Past Recoveries


18

Collision Loss Ratio Trending Upward:Private Passenger Auto, 2010 – 2015

67.7%

71.5% 71.5%

75.7%77.1%

78.9%

62%

64%

66%

68%

70%

72%

74%

76%

78%

80%

2010 2011 2012 2013 2014 2015

Loss Ratio

Collision Loss Ratios are Trending Steadily Upward


19

Bodily Injury: Severity Trend Is Up, Frequency Decline Has Ended—Rising?

2.1%1.7%

3.7%

1.8%

4.1%

-5.4%

-3.8% -4.0% -4.2%

-2.2%

0.0%

-1.1%

2.2%3.0%

2.0%

5.9%5.7%4.7%

2.9%

1.1%

0.0% 0.0%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Severity Frequency



Cost Pressures Will Increase if BI Frequency and Severity Trends Persist

20

Property Damage Liability: Severity and Frequency Are Up

1.8% 1.9%

4.0%3.4%

6.4%

-1.6%

-3.5% -3.4%

0.6% 0.6%0.0%

1.4% 1.1%

2.9%3.6%

2.0% 2.0%

-0.4%

0.4%0.9% 1.2%0.3%

-4%

-2%

0%

2%

4%

6%

8%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Severity Frequency


Severity/Frequency Trends Have Been Volatile, But Rising Severity since 2011 Is a Concern


21

No-Fault (PIP) Liability: Severity is Up, Frequency Relatively Flat*

3.2% 2.9% 3.2% 3.5%

-4.8%-5.7%

-4.1%

-6.4%

6.6%

-3.4%-2.1%

-5.8%

-0.8%

10.2%

-1.3%

4.7%

2.4%

6.4% 6.5% 6.8%

5.2%5.4%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015**

Severity Frequency

*No-fault states included are: FL, HI, KS, KY, MA, MI, MN, NY, ND and UT.



No-Fault Systems Are Less Problematic in Some States but Still of Concern in Some, Such as MI

22

Comprehensive Coverage: Frequency and Severity Trends Are Volatile

15.4% 15.3%

-14.5%

7.3%

-1.7%

-9.8%

-6.3%

1.3%

5.8%

-8.9%-7.0%

2.6%

-2.5%

15.5%

-1.4% -1.5%

12.6%

-8.1%-5.9%

-3.1%

1.8%

6.2%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Severity Frequency


Weather Creates Volatility for Comprehensive Coverage

Severe weather is a principal cause of the spikes in both

frequency and severity


23

Drivers of Increasing Auto Claim Frequency and Severity

Increase in Miles Driven

Lower Gas Prices

More Youthful Drivers

More Expensive Vehicles

Lack of Investment in Highway Infrastructure

Increased Speed Limits

Distracted Driving

Driving Under the Influence of Marijuana

I.I.I. research paper on issue will soon be released

Working to reframe the issue with media, public policy makersInsurersare only the messenger

Public health crisis as deaths and injuries soar

Successful in Georgia, where rate increases have generated the most media attention

Will testify before GA House and Senate Insurance Cmtes.

Use similar strategy in other problematic states

I.I.I. appearances on the Today Show, NBC Nightly News already in the works

I.I.I. Strategies

24

Change in Auto Fatalities by State: Especially Severe in Georgia

7%

11%

12%

16%

22%

-1%

8%

-5% 0% 5% 10% 15% 20% 25%

GA (1,394)

SC (954)

KY (748)

NC (1,396)

USA (38,300)

VA (755)

TN (961)

SOURCE: Estimates from National Safety Council.

2015 vs. 2014

Fatalities in Southeast Rising Faster Than USA

as a Whole

GA’s auto fatality rate has increased at a pace nearly 3 times that of the US overall

and far in excess of any other state in the region

Insurance and TechnologyInformation and Misinformation

Applications of Technology in P/C Insurance Have Gripped the Mediaas Have Industry Solutions

26

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

Problem Solution Opportunity

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

Cyber Risk and Insurance

Cyber Risk is a Rapidly EmergingExposure for Businesses Large andSmall in Every Industry

28

157

321

446

656

498

662

419

470

614

783 781

66.9

19.1

127.7

35.7

222.5

16.2

22.9

17.5

92 85.6

169.1

0

50

100

150

200

250

100

200

300

400

500

600

700

800

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

# Data Breaches # Records Exposed (Millions)

Data Breaches 2005-2015, by Number of Breaches and Records Exposed

Source: Identity Theft Resource Center (updated as of January 6, 2016).

The 781 Reported Data Breaches in 2015 was Virtually Unchanged from the Record 783 Reported in 2014. The Number of Exposed Records

Soared to 169.1 Million, an Increase of 97.5%.

# Data Breaches

Millions of

Records

Exposed

http://www.idtheftcenter.org/images/breach/ITRCBreachReport2015.pdf

29

Data/Privacy Breach:Many Potential Costs Can Be Insured

DataBreachEvent

Costs of Notifying Affecting

Individuals

Business Income Loss

Forensic Costs to Discover Cause

Cyber Extortion Payments

Regulatory Fines at Home & Abroad

Lost Customers and Damaged

Reputation

Costs of Notifying Regulatory Authorities

Defense and Settlement Costs

30

Estimated Cyber Insurance Premiums Written, 2014–2020F

Sources: Advisen (2014 est.); PwC (2015, 2020); Insurance Information Institute.

$1.5$2.0

$7.5

$0

$1

$2

$3

$4

$5

$6

$7

$8

2014 2015E 2020F

Bil

lio

ns

Cyber Insurance Premiums Written Could More Than

Triple to $7.5 Billion by 2020.

I.I.I.’s Cyber Risk Paper Issued October 2015.

The Sharing (On-Demand) Economy

Area of Extreme Interest – And InsurersAre Providing Solutions for this DynamicEconomic Segment

32

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 QuestionsHave Arisen

Insurance Solutions are Increasingly Available to Fill the Many Insurance Gaps That Arise

33

Ride Sharing Regulation/Legislation andStatus of ISO Filings as of 9/30/15

Source: ISO.

Status Ride Sharing Legislation/Regulation

Status of ISO Filings

AA

AA

AP

P

A

A

P

P

A A

PA

AA

A

P

AA

A

AP

Adopted/Enacted

Pending

Failed

TNC Model

Adopted/Enacted

Pending

Failed

TNC Model

ISO TNC Filing Approved – (17) – A

ISO TNC FilingPending – (7) – P

Regulation, Politics and theSharing Economy

Insurers Need to Operate in a Complex and Rapidly Changing Regulatory Environment

35

35

The Sharing Economy Has Grown—And Attracted Political Scrutiny

36

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

37

Regulatory Issues Abound as Well, With Implications for Insurance Coverages

In California, Uber Driver Is Employee,

Not Contractor: AgencyBy Sarah McBride and Dan Levine

A driver for Uber is an employee, not a contractor, according to a California ruling that eventually could push up costs for the smartphone-based ride hailing service and hurt the closely watched start-up's valuation.

The California Labor Commissioner's decision could ripple through the burgeoning industry of providing services via smartphones, with potential implications for other “crowdsourced” services such as Uber rival Lyft, chore service TaskRabbit, and cleaning service Homejoy.

– Reuters, June 18, 2015

http://www.reuters.com/journalists/sarah-mcbride

http://www.reuters.com/journalists/dan-levine

38

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

https://www.theselfemployed.com/gig-economy/infographic-inside-the-new-economy/

39

Americans Who Offer Services in the Sharing/Gig Economy Are Statistically More Prone to Workplace Injury


economy/ based on a poll by Time magazine, Bursten-Marsteller,The Aspen Institute; Insurance Information Institute.

Young, Urban Minority Males Are the Most Likely to Offer their Services in the Sharing Economy


40

Opinions Are Split on Whether the Sharing Economy Needs More Regulation


economy/ based on a poll by Time magazine, Bursten-Marsteller and The Aspen Institute; Insurance Information Institute.

The most frequent

offerers of services through online

platforms are equally

divided over the need for

more regulation


Auto Technology & the Future of Auto Insurance

Technology Promises Safer Cars andHighways, BUT Some Analysts, Mediaand Many in Silicon Valley Are PredictingDoom for Auto Insurers

42

Media is Obsessed with Driverless Vehicles: Often Predicting the Demise of Auto Insurance

Source: Boston Consulting Group.

By 2035, it is Estimated That 25% of New Vehicle Sales Could Be

Fully Autonomous Models

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?

43

I.I.I. Poll: Driverless CarsQ. Would you be willing to ride in a driverless car?

Source: Insurance Information Institute Annual Pulse Survey

The Percentage Willing to Ride in a Driverless Car Remains at 43%; 71% of People Over 64 Were Unwilling to Ride.

40% 40% 43% 43%

59% 58% 56% 55%

1% 2% 2% 2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

May 2014 May 2015 Nov 2015 May 2016

Yes No Don't Know

44

I.I.I. Poll: Auto InsuranceQ. Would you be willing to ride in a driverless car?

Source: Insurance Information Institute Annual Pulse Survey.

The Percentage Willing to Ride in a Driverless Car Rose Slightly. 71 Percent of People Over 64 Were Unwilling to Ride.

The Percentage Willing to Ride in a Driverless Car Rose Slightly; 71% of People Over 64 Were Unwilling to Ride.

40%

58%

2%

May 2015 May 2016

No

Don’t Know

Yes43%

55%

2%

No

Don’t Know

Yes

45

I.I.I. Poll: Driverless CarsQ. Would you be willing to ride in a driverless car?


The Percentage Willing to Ride in a Driverless Car Remains at 43%; 71% of People Over 64 Were Unwilling to Ride.

40% 40%43% 43%

59% 58%56% 55%

1% 2% 2% 2%

0%

10%

20%

30%

40%

50%

60%

70%

May 2014 May 2015 November 2015 May 2016

Yes No Don't Know

46

I.I.I. Poll: Driverless CarsWhy Americans Would Not Want to Ride in a Driverless Car, May 20161

1 Based on those who would not ride in a driverless car. Respondents could give more than one answer.


84%

74% 72%

62%59%

42%36%

1% 1%0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Would NotFeel Safe

Don't Wantto Give Up

Control

ComputerCould BeHacked

Cars WouldBe Too

Expensive

Would BeLiable for

AnyAccident

WouldCollect

PersonalData

Would BeBoring

None ofThese

Don’t Know

Safety Concerns Are Paramount Among Those Who Would Avoid Driverless Cars.

47

#RiskyRide

SXSWMarch 13, 2016, Austin, TX

48

2015: Transportation Incidents on the Rise

Is It Possible for Passengers to Hack Commercial Aircraft?– Federal Highway Administration Report, 1997

Hackers Show They Can Take Control of Moving Jeep Cherokee– Wall Street Journal, July 21, 2015

Fiat Chrysler Issues Recall Over Hacking– The New York Times, July 24, 2015

Hackers Cut a Corvette’s Brakes Via a Common Car Gadget– Wired, August 11, 2015

49

I.I.I. Poll: Telematics

1Asked of those who have auto insurance.


More Than Half of Auto Policyholders Would Allow Their Insurer toCollect Their Driving Information in Order to Set Premiums.

QI’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

39%

18%

42%

1%

Allow if Premium Went Down

Allow Whether or Not Premium Went Down

NotAllow

Don’t Know

50

Send in the Drones: Potential Rapid Adoption in Industry; Media Love 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.

http://www.propertydrone.org/

The “Internet of Things”

Capturing Economic Value Amid a Shifting Insurer Value Chain

52

The Internet of Things and theInsurance Industry

Sources: McKinsey Global Institute, The Internet of Things: Mapping the Value Beyond the Hype,

June 2015; Insurance Information Institute.

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”?

53

The ‘Internet of Things’ and ‘The Insurance-Net of Things’

54

Aviation

Rail & Public

Transport

Trucking & Fleet

Vehicles

Marine

Transport

Private Motor

Vehicles

The Insurance Industry’s Future Is in the Cloud…

The Cloud

55

Aviation

Rail & Public

Transport

Trucking & Fleet

Vehicles

Marine

TransportPrivate Motor

Vehicles

The Cloud

The Insurance Industry’s Future Is in the Cloud…

Human Beings

56

Wearables Show Significant Potential to Reduce Workplace Injury, Death

Wearables Today Can Monitor:

Location

Heart Rate

Temperature

Steps/Exertion

Sweat

Sleep

In the Near Future Could Monitor:

Glucose Level

Oxygen Levels

Pain

Nausea

57

The Internet of Things and the Insurance Industry Value Chain

Sources: Willis Capital Markets & Advisory; Insurance Information Institute.

The Insurance Industry Value Chain is Changing for Many Reasons.

The Future?

Asset Manager/

Capital Provider

Data

Owner

Analytics

Engine

Distributor

Today’s value chainHistorical value chain

Reinsurer

Asset

ManagerInsurer

Reinsurance Broker

Alternative

Capital

Broker Bank Agg Direct

Reinsurer

Asset

ManagerInsurer

Reinsurance Broker

Broker Bank

58

Who owns the data? Where does It flow? Who does the analytics? Who is the capital provider?

The Internet of Things and the Insurance Industry Value Chain

Sources: Willis Capital Markets & Advisory; Insurance Information Institute.

Asset Manager/

Capital Provider

Data OwnerAnalytics

Engine

Distributor

Possibly including:

Possibly including:

Possibly including:

The Future?

Wearables and Beyond…

Where the “Internet of Things”Meets Health, Disability and Workers Compensation Insurance

60

Beyond Wearables: Ingestibles and Implantables, VR Could Have Big Impacts, Too

Ingestibles:

Body Chemistry

View Malignancies

Detect Diseases

Medication Adherence

Implantables

Smart Fabrics

Virtual Reality

Computer Simulated Reality

Augmented Reality

Real World EnvironmentSupplemented by ComputerGenerated Inputs

61

A Few Outstanding Issues (Among Many)

Worker Status

Are Workers Independent Contractors or Employees?

Privacy

Where is the Dividing Line Between Data That is Useful or Necessary for the Conduct of Business and Truly Private Information?

Security

How Will Data be Protected?

How Will the Inevitable Breaches be Managed?

Data Ownership and Portability

Who Owns the Data? Is the Data Portable?

Insurance

Need for Evolving Property and Liability Coverages

Concern Over Disintermediation

6262

INSURANCE TECHNOLOGY:

FIN TECH ZEROES IN

Number and Value of Deals Is Increasing

In Search of the Elusive Insurance ‘Unicorn’

InsureTech…

Silicon Valley Has Set Its Sights on Insurance: The Number and Value of Investments in Insurance Start-Ups Are Increasing

64

64

$62 $29 $22 $18

$240

$31 $44 $71 $37$107

$29

$133

$415

$148$82

$171

$1,848

$369

$272

$650

$32

6

10

54

13

1011

13

18

11

20

9

1820

27

19

22

27

34

30

47

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

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

15:Q

3

15:Q

4

16:Q

1

Inv

es

tme

nt

0

5

10

15

20

25

30

35

40

45

50

Nu

mb

er o

f De

als

($ Millions)

Investment in insurance

tech is rising

Insurance tech deals reached a new record

in 2016:Q1

Source: CB Insights at https://www.cbinsights.com/blog/insurance-tech-overview-q1-2016/; Insurance Information Institute.

Insurance Technology Financing Trend: Change Is Coming

https://www.cbinsights.com/blog/insurance-tech-overview-q1-2016/

65

Insurance Tech Activity by Area of Interest, 2013 – 2016:Q1

38 30 51 68

6270

4932

0

10

20

30

40

50

60

70

80

90

100

2013 2014 2015 2016:Q1

Health Insurance Tech Non-Health Insurance Tech Total

Silicon Valley and the venture capital community have the insurance industry in their sights. Most will fail. Some will succeed.

Source: CB Insights at https://www.cbinsights.com/blog/insurance-tech-overview-q1-2016/; Insurance Information Institute.

(Percent)

With the ACA in the rear view window, non-health insurance tech accounts for

the majority of investment

https://www.cbinsights.com/blog/insurance-tech-overview-q1-2016/

Opening of Insurance Markets in Cuba

67

Opening of Insurance Markets in Cuba

Source: Insurance Information Institute.

March 2016 I.I.I. research paper on the current and potential scale and scope of the Cuban insurance market

Release to coincide with President Obama’s historic visit to the island

Potential exists but the market is tiny, with many economic, cultural, political and regulatory obstacles

Longer run, opportunities exist for insurers and reinsurers but these will require substantial legislative and regulatory reforms

Published an Opinion piece in the Financial Times in May

Summary of I.I.I. Research

Resurgent Catastrophe Losses

2016 YTD Catastrophe Loss Update

69

Resurgent Catastrophe Losses

YTD Insured CAT Losses total $X.X billion

Large Scale Hail Events with States Like TX Very Hard Hit

Major Flood Events Impact Comprehensive Auto Coverage and Some Commercial Lines

Ft. McMurray Wildfire Costliest for Insured Losses in Global History

Some of this will wind up in U.S. retrocessional market

End of the Respite?

70


*Through 6/12/16 in 2016 dollars.



$14.4

$5.0$8.2

$38.9

$9.1

$27.2

$13.0$11.3

$3.9

$14.8$11.9

$6.3

$35.8

$7.8

$16.8

$34.7

$75.7

$10.9$7.7

$30.1

$11.8$14.9

$34.6$36.1

$13.1

$15.5$15.2

$10.3

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

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*

Billi

on

s (

$2

01

5)

$10.3B in YTD Insured Cat Losses

in 2016

2013/14/15 Were Welcome Respites from 2011/12, Among the Costliest Years for Insured Disaster Losses in U.S. History. Longer-term Trend is for More –

Not Fewer – Costly Events. 2016 Off to More Severe Start

2012 was the 3rd Most Expensive Year Ever for

Insured Cat Losses.

71

Combined Ratio Points Associated with Catastrophe Losses: 1960-2016E*

*2010s represent 2010-2015E. 2016 figure is I.I.I. estinate through 6/12/16

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.

Sources: ISO (1960-2009); A.M. Best (2010-15E) Insurance Information Institute.

0.81.11.1

0.1

0.9

3.6

0.4

1.2

0.40.8

1.3

0.30.40.7

1.5

1.0

0.40.4

0.7

1.8

1.1

0.6

1.4

2.0

1.3

2.0

0.50.5

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

3.33.3

8.1

2.7

1.6

5.0

2.6

4.6

9.6

8.0

3.5

4.0

3.1

5.5

0

2

4

6

8

10

12

60 65 70 75 80 85 90 95 00 05 10 15

Co

mb

ine

d R

ati

o P

oin

ts

The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades.

Avg. CAT Loss Component of the Combined Ratio by Decade

• 1960s: 1.04 • 1990s: 3.39

• 1970s: 0.85 • 2000s: 3.52

• 1980s: 1.31 • 2010s: 5.46*

Catastrophe Losses as a Share of All

Losses Reached a Record in 2011.

72

Top 16 Most Costly Disasters in U.S. History:Katrina Still Ranks #1

Sources: Property Claim Service, a Verisk Analytics business; Insurance Information Institute inflation adjustments to 2014 dollars using the CPI.

$4.6 $5.7 $5.8 $6.9 $7.3 $7.7 $8.1 $9.0 $9.4$11.4

$13.8

$19.3

$24.6 $25.3 $26.4

$50.2

$0

$10

$20

$30

$40

$50

$60

Irene(2011)

Jeanne(2004)

Frances(2004)

Rita(2005)

Tornados/T-Storms

(2011)

Tornados/T-Storms

(2011)

Hugo(1989)

Ivan(2004)

Charley(2004)

Wilma(2005)

Ike(2008)

Sandy*(2012)

Northridge(1994)

9/11Attack(2001)

Andrew(1992)

Katrina(2005)

Ins

ure

d L

os

se

s (

Bil

lio

ns $

20

14

)

12 of the 16 Most Expensive Events in U.S. History Have Occurred Since 2004.

Storm Sandy in 2012 Was the Last Mega-Cat

to Hit the U.S.

Includes Tuscaloosa, AL,

Tornado

Includes Joplin, MO,

Tornado

73

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1995-20141

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: Property Claim Services, a Verisk Analytics business.

40.7%

39.2%

6.8%

6.2%

5.4%

Winter Storms – $26.9

Hurricanes & Tropical Storms – $161.2

Events Involving Tornadoes (2) – $154.9

Other (5) – $0.2, 0.1%

Terrorism – $24.5

Geological Events – $0.5, 0.1%

Wind / Hail / Flood (3) – $21.4

Fires (4) – $6.0, 1.5%

Tornado Share of Cat Losses is

Rising.

Winter Storm Losses Were Much Above

Average in 2014/15 and Will Push This Share Up.

Wind Losses by Far Cause the Most

Catastrophe Losses, Even if Hurricanes/TS

Are Excluded.

Insured Cat Losses from 1995-2014 Totaled

$395.6B, an Average of $19.8B per Year or $1.65B per Month.

$ Billions

74

Number of National Flood Insurance Program Policies in Force at Year-End, 1980-2015*

Source: National Flood Insurance Program. * As of July, 2015

2.104 2.017

2.478

3.477

4.369

4.962

5.656 5.684 5.700 5.645 5.646 5.620 5.5695.351

5.151

0

1

2

3

4

5

6

80 85 90 95 00 05 07 08 09 10 11 12 13 14 15*

Mil

lio

ns

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.

75

Take-up Rates for Various Types of Insurance in the U.S.

Sources: CA Earthquake Wall Street Journal; 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.

12% 14%

40%

52%

62%

87%95%

99%

0%

20%

40%

60%

80%

100%

CAEarthquake

Flood Renters Cyber Terrorism Pvt.Passenger

Auto

Home WorkersComp

Ta

ke

-up

Ra

te

Take-up Rates Vary Widely by Type of Coverage.

http://www.wsj.com/articles/california-pushes-homeowners-to-insure-against-earthquakes-1440980138

76

Earthquakes Since 1980 and Recent Area Impacted by Induced Seismicity

Sources: U.S. Geological Survey; Insurance Information Institute.

http://www.usgs.gov/blogs/features/usgs_top_story/induced-earthquakes-raise-chances-of-damaging-shaking-in-2016/?from=title

77

2016 Natural and Induced Earthquake Damage Forecast

Sources: U.S. Geological Survey; Insurance Information Institute.

http://www.usgs.gov/blogs/features/usgs_top_story/induced-earthquakes-raise-chances-of-damaging-shaking-in-2016/?from=title

Profitability & Politics

How is Profitability Affected by the President’s Political Party?

Bob, This is not on the agenda, but I left these slides in here in case you want to touch on the political landscape given that it’s an election year.

79

P/C Insurance Industry ROE by Presidential Administration, 1950-2015*

*Truman administration ROE of 6.97% based on 3 years only, 1950-52.


3.55

4.43

4.68

4.83

5.03

5.43

6.97

6.98

7.68

7.98

8.33

8.35

8.65

8.93

8.93

15.10

16.43

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Kennedy/Johnson

Johnson

Obama I

G.W. Bush I

Eisenhower II

Eisenhower I

Truman

Nixon/Ford

Reagan I

Clinton II

G.W. Bush II

G.H.W. Bush

Clinton I

Nixon

Obama II

Reagan II

Carter

ROE

OVERALL RECORD: 1950–2015*

■ Democrats 7.72%

■ Republicans 7.85%

Party of President Has Marginal Bearing on Profitability of P/C Insurance Industry.

80

P/C Insurance Industry ROE by Presidential Party Affiliation, 1950-2015


-5%

0%

5%

10%

15%

20%

25%

50 54 58 62 66 70 74 78 82 86 90 94 98 02 06 10 14

RO

E

Tru

ma

n

Nix

on

/Fo

rd

Ke

nn

ed

y/J

oh

ns

on

Eis

en

ho

wer

Ca

rte

r

Re

ag

an

/

Bu

sh

I

Cli

nto

n

Bu

sh

II

Ob

am

a

■ Democratic President ■ Republican President

81

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 Has criticized Trans-Pacific Partnership

but is a realist on international matters

Tort System Doesn’t like trial lawyers but seems

to like filing lawsuits

Status Quo

82

2015 Property and Casualty InsuranceRegulatory Report Card

Source: R Street Insurance Regulation Report Card, December 2015.

Not Graded: District of Columbia

= A

= B

= C

= D

= F

= NG

AK

C WA

C ND

C MN

C+

MI

C

KS

C+

OK

C

IN

C+

AL

C GA

C

WV

C

PA

C

HI

D

CA

D

MT

D

TX

D AL

D

MS

D+

FL

D

NY

D

UT

A

NE

A-

IA

A

KY

A

SC

A-

VA

A

VT

A OR

B ID

B

NV

B+

AZ

B NM

B

CO

B

WY

B+

SD

B+

WI

B

IL

B MO

B

AR

B

OH

B

ME

B NH

B MA C-RI C+CT B

NJ BDE CMDB

TN A-

NC

F

Preparing for Hurricane Season

Confronting Complacency

Jeanne Salvatore, Chief Communications Officer

84

2016 Atlantic Hurricane SeasonI.I.I. Communications Plan

* NOAA’s National Coastal Population Reprt

A Demographic Perfect Storm Goal

Massive influx of new coastal residents who have never experienced a major storm.

Combined with an existing population that has been lulled into complacency by the lack of a hurricane over the last several years.

Resulting in large numbers of coastal residents from Maine to Texas who are unprepared for the 2016 hurricane season.

Educate coastal residents about what they need to do now to financially protect themselves with the right amount and type of insurance.

85

2016 Hurricane Season

Objectives

Reinforce to the media and public policymakers that the I.I.I. is the “go to” place for insurance information, expert advice, facts and stats, and economic analysis.

Empower consumers and small business owners with educational material so that they understand all of their insurance options, including flood insurance.

Assure consumers and others that the insurance industry has the financial strength to pay claims after a disaster.

Position the insurance industry as “economic first responders.”

86


Target Audiences Condo/co-op owners

Hispanics

New Coastal Residents

Renters

Senior Citizens

Small Business Owners

87


Strategic Partnerships

Convinced FEMA and NOAA to include “Insurance” as a crucial element in preparing for hurricanes and in their news conferences and educational initiatives. Including:

Providing talking points and I.I.I. resources to FEMA’s Craig Fugate, NOAA’s Rick Knabb and NFIP’s Roy Wright.

A seat on FEMA’s Hurricane Plane in 2017, which will be used to promote hurricane preparedness and for post-disaster communications.

Providing content for FEMA’s blog during the 2016 hurricane season.

Incorporated insurance education into the National Hurricane Conference, the Florida’s Governor’s Hurricane Conference and others to explain the role insurance plays to emergency managers, regulators and first responders.

Maximize the industry’s resources by coordinating pre-and post-hurricane activities among organizations such as IBHS and FLASH, as well as the advocacy trades.

88


Reach out to top tier national and local media in hurricane prone areas to educate the public about how insurance works.

Conduct a Satellite Media Tour in English and Spanish on “insuring against a disaster.”

Expand I.I.I.’s successful Spanish language insurance helplines to include additional news markets – Florida, New Jersey, New York and Texas.

Work with NBC News to create a dial-in insurance program with station volunteers. Pilot program to begin in August.

Strategically use I.I.I.’s social media outreach to promote preparedness messages and post disaster communications.

After a disaster, deploy the I.I.I.’s disaster website if necessary and issue news releases to be one step ahead of the news cycle.

Media Outreach

Attracting Millennials to Insurance Careers

A New I.I.I. Initiative

90

“My Career in Insurance Is…”

In the next decade, insurance businesses need to fill 400,000 positions that will be left vacant by mature workers “aging out” of the workforce. These organizations need to take action now to recruit their next wave of leaders, thinkers, and innovators.

To help engage the Millennial Generation and showcase the variety and vitality of insurance careers , the I.I.I. created “My Career in Insurance Is ….: Opportunity, Reward, and a Career Path Without Limits.”

In this short video, we meet five young persons who come from very different backgrounds, but in insurance found the same thing: Careers that matter.

Opportunity, Reward, and a Career Path with No Limits.

Trends in Personal Auto Insurance Costs

Rising Frequency, Severity in the Largest P/C Line

James Lynch, Chief Actuary

92

Why Personal Auto Loss Ratios are Rising: Severity & Frequency by Coverage, 2015 vs. 2014Annual Change, 2015 Over 2014

Source: ISO, a Verisk Analytics company; Insurance Information Institute.

Across All Personal Coverage Types (Except Comprehensive) in 2015, Frequency and Severity Rose. This Pattern is Likely to Continue in 2016

4.1%

6.4%

3.5%

5.7%

-1.7%

2.2%1.1%

10.2%

0.8%

-2.5%-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Bodily Injury Property DamageLiability

PIP Collision Comprehensive

Severity Frequency

93

Collision Claims: Frequency TrendingHigher in 2015Annual Change, 2005 through 2015


For a Long Time, Claim Frequency Has Been Falling, But Since 2009 This Trend Seems to Have Reversed

-1.8%

-3.6%

2.5%

-2.4%

-1.4%

-0.5%

0.9%

-1.8%

2.4%

4.4%

0.8%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

94

Collision Claims: Severity Trending Higher in 2009-2015Annual Change, 2005 through 2015


The Great Recession and High Fuel Prices Helped to Temper Claim Severity, But These forces Have Clearly Reversed, Consistent with

Experience from Past Recoveries

3.9%

3.1%

0.1% 0.5%

-2.3%

-0.1%

2.8%

1.3%

4.1%

1.3%

5.7%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

95

Collision Claims: Pure Premium (Losses per Insured Unit), 2011:Q4–2015:Q4

Note: Number of claims is for four quarters ending in quarter shown.

Source: ISO/PCI Fast Track data; Insurance Information Institute.

Over the Latest Four Years,the Collision Pure Premium Rose by 19.75%

-0.3%

3.0% 2.9% 3.8% 6.6% 6.7% 6.3% 6.2% 5.8% 4.3% 5.3% 5.8% 6.6%

$170.39

$174.30$176.41

$178.51

$181.60

$186.02$187.53

$189.51$192.07

$194.07

$197.50

$200.59

$204.75

-2%

0%

2%

4%

6%

8%

10%

$150

$160

$170

$180

$190

$200

$210

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

% Chg from Prior Yr (right scale) Pure Premium (left scale)

96

America is Driving More Again:Total Miles Driven*, 1990–2016Billions of Miles Driven

*Moving 12-month total. Data through February 2016, the latest available.Note: Recessions indicated by shaded columns.Sources: Federal Highway Administration (http://www.fhwa.dot.gov/policyinformation/travel_monitoring/tvt.cfm); National Bureau of Economic Research (recession dates); Insurance Information Institute.

2,000

2,200

2,400

2,600

2,800

3,000

3,200

Ja

n-9

0

Jan-9

1

Ja

n-9

2

Ja

n-9

3

Ja

n-9

4

Ja

n-9

5

Ja

n-9

6

Ja

n-9

7

Ja

n-9

8

Ja

n-9

9

Ja

n-0

0

Ja

n-0

1

Ja

n-0

2

Ja

n-0

3

Jan-0

4

Ja

n-0

5

Ja

n-0

6

Ja

n-0

7

Ja

n-0

8

Ja

n-0

9

Ja

n-1

0

Ja

n-1

1

Ja

n-1

2

Ja

n-1

3

Ja

n-1

4

Ja

n-1

5

Ja

n-1

6

Some of the 1990-2007 growth

in miles driven (+43.9%) is due

to population growth (+20.7%)…

…but the population grew by

6.6% from 2007-2015 and miles

driven didn’t grow at all.From November 2007 until January 2015, miles driven was below the

prior peak for 87 straight months—over 7 years! Previous record was

in the early 1980s (39 months)

Recordsin 2015/6

97

More Miles Driven=> More Collisions, 2006–2015Billions of Miles Driven in Prior Year

Sources: Federal Highway Administration (http://www.fhwa.dot.gov/policyinformation/travel_monitoring/tvt.cfm); Rolling Four-Qtr Avg. Frequency from Insurance Services Office; Insurance Institute for Highway Safety; Insurance Information Institute.

The More Miles People Drive, the More Likely They are to Get in an Accident, Helping Drive Claim Frequency Higher

5.5

5.6

5.7

5.8

5.9

6.0

2,850

2,900

2,950

3,000

3,050

3,100

3,150

06

:Q1

06:Q

3

07

:Q1

07

:Q3

08

:Q1

08

:Q3

09

:Q1

09

:Q3

10

:Q1

10

:Q3

11

:Q1

11

:Q3

12

:Q1

12

:Q3

13

:Q1

13

:Q3

14

:Q1

14

:Q3

15

:Q1

15

:Q3

Miles Driven (left axis) Collision Claim Frequency (right axis)

Overall Collision Claims Per 100 Insured Vehicles

Recession

98

Why Are People Driving More Miles?Cheap Gas?Billions of Miles Driven in Prior Year

Sources: Federal Highway Administration (http://www.fhwa.dot.gov/policyinformation/travel_monitoring/tvt.cfm); Energy Information Administration; Insurance Institute for Highway Safety; Insurance Information Institute.

Gas Prices Don’t Seem Correlated With Miles Driven

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

2,850

2,900

2,950

3,000

3,050

3,100

3,150

06

:Q1

06:Q

3

07

:Q1

07

:Q3

08

:Q1

08

:Q3

09

:Q1

09

:Q3

10

:Q1

10

:Q3

11

:Q1

11

:Q3

12

:Q1

12

:Q3

13

:Q1

13

:Q3

14

:Q1

14

:Q3

15

:Q1

15

:Q3

Miles Driven (left axis) Gas Prices (right axis)

Average Price Per Gallon

Recession

99

Why Are People Driving More Miles?Jobs?Billions of Miles Driven in Prior Year

Sources: Federal Highway Administration (http://www.fhwa.dot.gov/policyinformation/travel_monitoring/tvt.cfm); Seasonally Adjusted Employed from Bureau of Labor Statistics; Insurance Institute for Highway Safety; Insurance Information Institute.

People Drive to and from Work and Drive to Entertainment. Out of Work, They Curtail Their Movement

132

134

136

138

140

142

144

146

148

150

152

2,850

2,900

2,950

3,000

3,050

3,100

3,150

06

:Q1

06:Q

3

07

:Q1

07

:Q3

08

:Q1

08

:Q3

09

:Q1

09

:Q3

10

:Q1

10

:Q3

11

:Q1

11

:Q3

12

:Q1

12

:Q3

13

:Q1

13

:Q3

14

:Q1

14

:Q3

15

:Q1

15

:Q3

Miles Driven (left axis) # Employed (right axis)

Millions Employed

Recession

100

Comparing Gas Prices, Employment onCollision Frequency

Sources: Seasonally Adjusted Employed from Bureau of Labor Statistics; Energy Information Administration; Rolling Four-Qtr Avg. Frequency from Insurance Services Office; Insurance Information Institute.

Gas Price vs.

Collision Frequency

Number Employed vs.

Collision Frequency

5.50

5.55

5.60

5.65

5.70

5.75

5.80

5.85

5.90

5.95

6.00

1.75 2.25 2.75 3.25 3.75

5.50

5.55

5.60

5.65

5.70

5.75

5.80

5.85

5.90

5.95

6.00

135 140 145 150 155

101

More People Working and Driving≥ More Collisions, 2006–2016Number Employed, Millions

Sources: Seasonally Adjusted Employed from Bureau of Labor Statistics; Rolling Four-Qtr Avg. Frequency from Insurance Services Office; Insurance Information Institute.

When People are Out of Work, They Drive Less. When They Get Jobs,They Drive to Work, Helping Drive Claim Frequency Higher

5.5

5.6

5.7

5.8

5.9

6.0

138

140

142

144

146

148

150

152

06

:Q1

06

:Q3

07

:Q1

07

:Q3

08

:Q1

08

:Q3

09

:Q1

09

:Q3

10

:Q1

10

:Q3

11:Q

1

11

:Q3

12

:Q1

12

:Q3

13

:Q1

13

:Q3

14

:Q1

14

:Q3

15

:Q1

15

:Q3

16

:Q1

Number Employed (left scale) Collision Claim Frequency (right scale)

Overall Collision Claims Per 100 Insured Vehicles

Recession

102

Severity: Driving Fatalities are RisingAnnual Change in Motor Vehicle Deaths

Sources: National Safety Council, Insurance Information Institute.

-7.0%

-5.9%

2.2%

1.5%2.0%

0.7%

-0.4%

0.1%

-2.5%

2.2%

1.0%

3.6%

-1.4%

0.4%0.9%

-0.1%

-3.0%

-9.5%-9.0%

-2.4%

-0.1%

3.1%

-2.9%

0.1%

8.0%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Driving Has Been Getting Safer for Decades, But Recent Trend is Discouraging—38,300 Deaths in 2015

Seatbelt Use Rose to 62% of Drivers, From 49% in ‘90

Big Drop-off Due to the Great Recession

Insurance Industry:Financial Update & Outlook

2015 Was a Reasonably Good Year and Similar to 2014

2016: Could Be Similar to 2015

Steven Weisbart, Ph.D., CLU, Chief Economist

104

14

,17

8

5,8

40

19

,31

6

10

,87

0 20

,59

8

24

,40

4 36

,81

9

30

,77

3

21

,86

5

20

,55

9

-6,970

3,0

46

30

,02

9

38

,50

1

44

,15

5

65

,77

7

62

,49

6

3,0

43

28

,67

2

35

,20

4

19

,45

6

33

,52

2

63

,78

4

55

,50

1

56

,60

0

-$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

Milli

on

sP/C Industry Net Income After Taxes1991-2015

*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, a Verisk Analytics company; Insurance Information Institute.

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 ROAS1 = 8.4%

Net Income in 2015 is on Par with 2014.

105

*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.

Sources: Insurance Information Institute; Natl. Assoc. of Insurance Comm.; ISO, a Verisk Analytics company; A.M. Best, Conning.

2.4%

19.0%

1.8%

17.3%

4.5%

11.6%

-1.2%

12.7%

9.8%

8.4%

8.4%

-5%

0%

5%

10%

15%

20%

25%

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

RO

E

9 Years

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975-2015

History Suggests Next ROE Peak Will Be in

2016–2017.

106

Commercial Lines NPW Premium Growth:1975-2015E

Note: Data include state funds beginning in 1998.

Sources: A.M. Best; Insurance Information Institute.

-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

RO

E

Recessions:1982: 1.1%

Economic Shocks, Inflation:

1976: 22.2%

Tort Crisis1986: 30.5%

Post-Hurricane Andrew Bump:

1993: 6.3%

Great Recession:2009: -9.0%

Post-9/112002: 22.4%

Post Katrina Bump:

2006: 7.7%

1988–2000: Period of Inter-cycle Stability

2015E 3.3%

2010–20xx? Post-

recession Period of

Stable Growth?

Commercial Lines is Prone to More Cyclical Volatility That Personal Lines. Recently,

Growth Has Stabilized in the 4% to 5% Range.

107

RNW All Lines, 2005-2014 Average:Highest 25 States

Sources: National Association of Insurance Commissioners; Insurance Information Institute.

19.919.0

14.013.3 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 9.68.9 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

Profitability Benchmark: All P/C

U.S.: 7.7%

108

RNW All Lines, 2005-2014 Average: Lowest 25 States

Sources: National Association of Insurance Commissioners; Insurance Information Institute.

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 6.15.5

5.1 5.14.7

4.13.4

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

Some of the Least Profitable States Over the Past Decade Were Hit Hard By Catastrophes.

109

Return on Equity by Financial Services Sector vs. Fortune 500, 2004-2015*

*GAAP basis.

Sources: ISO, a Verisk Analytics company; 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

Banks and Insurers Have Substantially Underperformed the Fortune 500 Since the Financial Crisis.

Average: 2004–2014

Fortune 500: 13.9%

Commercial Banks: 9.8%

Life: 8.2%

P/C: 7.1%

110

Reserve Change

P/C Insurance Loss Reserve Development, 1992-2017E*

Sources: A.M. Best; Barclays research for estimates.

Reserve Releases Are Expected to Taper Off Slowly, But They Will Continue to Benefit the Bottom Line and Combined Ratio Through At

Least 2017.

111

Policyholder Surplus, 2006:Q4-2015:Q4

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.

Sources: ISO, a Verisk Analytics company; A.M. Best.

487497

513522518 516

505

479

456

437

463

491

511

541531

545559

567559

539550

571568583 587

608 614624

653662

672674 675 672664

674

$400

$450

$500

$550

$600

$650

$700

06:Q4 07:Q4 08:Q4 09:Q4 10:Q4 11:Q4 12:Q4 13:Q4 14:Q4

Bil

lio

ns

Surplus as of 12/31/15 Stood at $674B, a Near-Record High.

The P/C Insurance Industry Entered 2016 in Very Strong

Financial Condition.

The Industry Now Has $1 of Surplus for Every $0.75 of NPW, Close to the Strongest

Claims-paying Status in its History.

2007:Q3Pre-Crisis Peak

Drop Due to Near-Record 2011 CAT Losses

Investments: The New Reality

Investment Performance is a Key Driver of Profitability

Depressed Yields Will Necessarily Influence Underwriting & Pricing

113

4.85

4.44

4.03

4.59 4.50 4.494.20

3.933.73 3.83 3.68

3.433.65

3.18

0%

1%

2%

3%

4%

5%

6%

02 03 04 05 06 07 08 09 10 11 12 13 14 15

P/C Insurer Portfolio Yields,2002-2015

Sources: NAIC data, sourced from S&P Global Market Intelligence; Insurance Information Institute.

P/C Carrier Yields Have Been Falling for Over a Decade, Reflecting the Long Downtrend in Prevailing Interest Rates. Even as Prevailing Rates Rise in the Next Few Years,

Portfolio Yields Are Unlikely to Rise Quickly, Since Low Yields of Recent Years Are “Baked In” to Future Returns.

114

Distribution of Bond Maturities,P/C Insurance Industry, 2005-2015

Sources: National Association of Insurance Commissioners data, sourced from S&P Global Market Intelligence; Insurance Information Institute.

16.0%

16.0%

15.2%

15.7%

15.6%

16.0%

14.9%

16.6%

16.5%

16.8%

16.3%

28.8%

29.5%

30.0%

32.4%

36.4%

39.5%

41.2%

40.4%

38.8%

37.1%

35.8%

34.1%

34.1%

33.8%

31.2%

29.0%

27.1%

27.3%

27.6%

29.3%

30.8%

33.7%

13.6%

13.1%

12.9%

12.7%

11.9%

11.2%

10.4%

9.8%

9.8%

9.6%

9.0%

7.6%

7.4%

8.1%

8.1%

7.1%

6.2%

6.2%

5.7%

5.7%

5.7%

5.1%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Under 1 year

1-5 years

5-10 years

10-20 years

Over 20 years

Two main shifts over these years:From 2008 to 2011-12, from bonds with longer maturities to bonds with shorter maturities.

But beginning in 2013, the reverse.Note, however, that the percentages in bonds with maturities over 10 years continues to drop.

115

U.S. Treasury Security Yields:A Long Downward Trend, 1990-2016*

*Monthly, constant maturity, nominal rates, through April 2016.

Sources: Federal Reserve Bank at federalreserve.gov/releases/h15/data.htm; National Bureau of Economic Research (recession dates); Insurance Information Institute.

Bonds Constitute Slightly More Than 2/3 of P/C Industry Investments.Roughly 36% of P/C Bonds Are in 1-5-Year Durations, So They Will Respond to Rising Interest

Rates in Just a Few Years. But Nearly Half of the Bond Portfolio is in 5-Year or Longer Durations, Which Will Take Longer to Rise.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2-Yr Yield

10-Yr Yield

■ Recession

Despite the Fed’s December 2015 Rate Hike,

Yields Remain Low Though Short-term Yields Have Seen Some Gains.

Yields on 10-year U.S. Treasury Notes Have Been Essentially Below 5% for a Full Decade.

http://www.federalreserve.gov/releases/h15/data.htm

116

Distribution of Invested Assets*: P/C Insurance Industry, 2015

*unaffiliated investmentsSources: SNL Financial; Insurance Information Institute

68%

18%

6%8%

Bonds

All Other

Cash, Cash Equiv. & ST Investments

Stocks

Total Invested Assets= $1.53 Trillion

117

3.073.37

2.69

2.10 2.171.98 2.04

2.272.58

3.07 3.10

4.07 3.994.22

4.46

0%

1%

2%

3%

4%

5%

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

P/C Insurers: Below-Investment-Grade (BIG) Bonds as a Percent of Total Bonds, 2001-2015


Chasing Yield? As a Group, P/C Carriers Have Increased the Percentage of Bond Investments in Riskier Instruments. Since 2006, That Percentage Has Risen About 250 Basis Points.

As Interest Rates Rise, Will This Percentage Return to Pre-recession Levels?

118

10

11

2

11

4

10

3 3

1

4

3

0

2

1

0

2

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

Un

de

r0

.1%

0.1

1%

-0

.99%

%

1%

-1

.99%

2%

-2

.99%

3%

-3

.99%

4%

-4

.99%

5%

-5

.99%

6%

-6

.99%

7%

-7

.99%

8%

-8

.99%

9%

-9

.99%

10%

-1

0.9

9%

11%

-1

1.9

9%

12%

-1

2.9

9%

13%

-1

6.9

9%

17%

and

over

Nu

mb

er

of

Gro

up

sP/C Insurer Groups Holdings of BIG* Bonds as a Percent of Total Bonds, 2014

*Below Investment Grade

Sources: NAIC, via SNL Financial; Insurance Information Institute.

There is a Wide Disparity Among Insurance Groups Regarding Holdings of Below-investment-grade Bonds. Some Hold None (Or Almost None);

a Few Have Over 10% of Their Bond Portfolio in BIGs.

The 67 Groups Graphed Are Those with Over $3 Billion in Cash & Admitted Assets as of Year-end

P/C Industry Average

119

Property/Casualty Insurance Industry Investment Income: 2000-20151

$38.9

$37.1 $36.7

$38.7$39.6

$49.5

$52.3

$54.6

$51.2

$47.1 $47.6$49.2

$48.0 $47.3$46.2

$47.2

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Billi

on

s

Due to Persistently Low Interest Rates,Investment Income is Basically Stuck at its 2009 Level

Investment Earnings Are Still Below Their 2007 Pre-crisis Peak.

1Investment gains consist primarily of interest and stock dividends.

Sources: ISO, a Verisk Analytics company; Insurance Information Institute.

120

P/C Insurer Net Realized Capital Gains/Losses, 1990-2015

Sources: A.M. Best, ISO, SNL, Insurance Information Institute.

2.884.81

9.89 9.82

1.66

6.00

9.2410.81

18.02

13.02

16.21

6.63

-1.21

6.619.13 9.70

3.52

8.92

-19.81

-7.90

5.857.04 6.18

11.3710.06

9.40

-$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*

Bil

lio

ns

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 2008-09’s Large Drop in Profits and ROE.

Realized Capital Gains Rose Sharply as Equity Markets Rallied in 2013-14.

121

Property/Casualty Insurance Industry Investment Gain: 1994-20151

1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.

*2005 figure includes special one-time dividend of $3.2B

Sources: ISO, a Verisk Analytics company; NAIC data, sourced from S&P Global Market Intelligence; Insurance Information Institute.

35.4

42.847.2

52.3

58.0

51.956.9

44.4

36.0

45.348.9

59.455.7

64.0

31.7

39.2

53.456.2

54.258.7

56.2 56.6

$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

Bil

lio

ns

Investment Gains in 2015 were Virtually the Same as Those Earned in 2010-14 but Still Well Below the

Pre-crisis High.

Total Investment Gains Were Flat in 2015 as Realized Capital Gains Remained Robust.

122

0.4

1.2

2.3

2.72.9 3.0

2.0

2.7

3.43.7 3.8 3.9

0%

1%

2%

3%

4%

5%

6%

16F 17F 18F 19F 20F 21F 16F 17F 18F 19F 20F 21F

Yie

ld

Interest Rate Forecasts: 2016-2021

Sources: Blue Chip Economic Indicators (5/16 for 2016 and 2017; for 2018-2021 3/16 issue); Insurance Information Institute.

A “Normalization” of Interest Rates is Unlikely Until 2019, More than a Decade After the Onset of the Financial Crisis.

Note how flat the Yield Curve is Expected to be.

3-Month Treasury 10-Year Treasury

The End of the Fed’s QE Program in 2014 and its First Rate Increase in Dec.

2015 Have Yet to Push Longer-term Yields Much Higher

Underwriting Performance

124

Net Premium Growth (All P/C Lines): Annual Change, 1971-2015

Shaded areas denote “hard market” periods

Sources: A.M. Best (1971-2013), ISO (2014-15).

-5%

0%

5%

10%

15%

20%

25%

71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 14

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: 3.4%2014: 4.1%2013: 4.4%2012: 4.2%

Outlook

2016F: 4.0%

2017F: 3.8%

1975–78 1984–87 2000–03

125

Direct Premiums Written: Total P/CPercent Change by State, 2007-2014Top 25 States


70.7

36.7 36.2

30.3 29.426.8

24.7 23.721.6 20.7

19.2 19.2 18.6 18.1 18.0 17.015.2 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

% C

ha

ng

e

Growth Benchmarks: Total P/C

U.S.: 13.0%

North 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.

126

Direct Premiums Written: Total P/CPercent Change by State, 2007-2014Bottom 25 States


13.4 13.1 13.1 13.0 13.0 12.912.4 12.2

11.711.0

10.59.4 9.4 9.2 9.1

8.2

6.3 6.0

4.7

2.21.3

-0.8-1.6

-4.3

-7.3

-12.9-15%

-5%

5%

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

% C

ha

ng

e

Growth was Negative in 4 States and DC Between 2007 and 2014.

127

Payroll vs. Workers Comp Net Written Premiums, 1990-2015E

*Private employment; Shaded areas indicate recessions. WC premiums are from NCCI through 2014; I.I.I. estimate for 2015.

Sources: NBER (recessions); Federal Reserve Bank of St. Louis (annualized as of Q3 2015); NCCI; I.I.I.

Continued Payroll Growth and Rate Gains Suggest WC NWP Will Grow Again in 2016.

$25

$30

$35

$40

$45

$50

$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 15E

WC

NW

P (B

illion

s)

Pa

yro

ll B

ase

* (B

illi

on

s)

Wage & Salary Disbursements

WC NPW

7/90–3/91 3/01–11/01 12/07–6/09

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.

http://research.stlouisfed.org/fred2/series/WASCUR

128

Workers Compensation Premium: Fourth Consecutive Year of Increases

P: 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.

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

26.925.9

25.0

28.6

32.1

37.7

42.3

46.547.8

46.544.3

39.3

34.6 33.8

36.4

39.5

41.8

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

Net

Wri

tten

Pre

miu

m (

Bil

lio

ns)

State Funds ($ B)

Private Carriers ($ B)

Calendar Year

Pvt. Carrier NWP Growth was +4.3% in 2014, +5.1% in 2013 and 8.7% in 2012.

129

P/C Insurance Industry Combined Ratio, 2001-2015*

*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, a Verisk Analytics company; 2010-2015E is from A.M. Best P&C Review and Preview, February 16, 2016.

115.8

107.5

100.198.4

100.8

92.6

95.7

101.099.3

101.1

106.5

102.5

96.4 97.097.8

90

100

110

120

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned Premium.

Heavy Use of Reinsurance Lowered Net

Losses.

Best Combined

Ratio Since 1949 (87.6)

Cyclical Deteriora-

tion

Higher CAT Losses, Shrinking Reserve Releases, Toll of

Soft Market

Sandy Impacts

Lower CAT

Losses

Relatively Low CAT Losses, Reserve

Releases

Avg. CAT Losses, More

Reserve Releases

3 Consecutive Years of U/W Profits; 1st time

since 1971-73

130


*Estimate through 12/31/15 in 2015 dollars.



$14.4

$5.0$8.2

$38.9

$9.1

$27.2

$13.0$11.3

$3.9

$14.8$11.9

$6.3

$35.8

$7.8

$16.8

$34.7

$75.7

$10.9$7.7

$30.1

$11.8$14.9

$34.6$36.1

$13.1

$15.5$15.0

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

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*

Billi

on

s (

$2

01

5)

$15B in Insured Cat Losses Through 12/31/15 (est.).

2013/14/15 Were Welcome Respites from 2011/12, Which WereAmong the Costliest Years for Insured Disaster Losses in U.S. History.

Longer-term Trend is for More – Not Fewer – Costly Events.

2012 was the 3rd Most Expensive Year Ever for

Insured Cat Losses.

The Economy

The Strength of the Economy Will Greatly Influence Insurer Exposure Base Across Most Lines

132

-1.8

1.3

-3.7

-8.9

-5.3

-0.3

1.4

5.0

2.3 2.22.6 2.4

0.1

2.5

1.3

4.1

2.0

1.3

3.1

0.4

2.7

1.8

4.5

3.5

-0.9

4.64.3

2.1

0.6

3.9

2.01.4

0.8

2.3 2.4 2.4 2.3 2.3 2.2 2.1

-11%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

08:1Q 09:1Q 10:1Q 11:1Q 12:1Q 13:1Q 14:1Q 15:1Q 16:1Q 17:1Q

Rea

l G

DP

Gro

wth

U.S. Real GDP Growth,* Quarterly

*Estimates/Forecasts (gold bars) from Blue Chip Economic Indicators.

Sources: U.S. Department of Commerce, Blue Chip Economic Indicators 5/16; Insurance Information Institute.

Demand for Insurance Should Increase Slowly in 2016 as GDP Growth Continues at a Steady, Albeit Moderate Pace

and Gradually Benefits the Economy Broadly.

The Q4:2008 Decline was the Steepest Since the Q1:1982 Drop of 6.8%.

Q1 2014 & 2015 GDP Data Were Hit Hard by “Polar

Vortex” and Harsh Winter.

Recession Began in Dec. 2007.

133

Yearly U.S. Real GDP Growth: Range of Forecasts, 2016-2021

Sources: Blue Chip Economic Indicators, May 2016 issue for 2016–2017; Mar. 2016 issue for 2018–2021; Insurance Information Institute.

2.0%

2.6% 2.6% 2.6% 2.6%2.5%

1.8%

2.3%2.2%

2.1%2.2%

2.1%

1.6%

1.9%

1.7%

1.5%

1.8%1.7%

1.0%

1.5%

2.0%

2.5%

3.0%

2016 2017 2018 2019 2020 2021

Top 10 Avg Median Bottom 10 Avg

All Forecasts Expect U.S. Growth to be Fairly Steady in 2017-21;The Main Difference Among Them is the Level of Economic Activity.

134

ISM Manufacturing Index (Values > 50 Indicate Expansion), January 2010-May 2016

Sources: Institute for Supply Management; Insurance Information Institute.

The Manufacturing Sector Expanded for 68 of the 72 Months from January 2010 Through December 2015.

Manufacturing Contracted in 2015:Q4 and 2016:Q1 but is Expanding Again.

55

.35

5.1

55

.25

5.3

56

.95

8.2

58

.56

0.8 61

.45

9.7

59

.75

4.2

55

.85

1.4 5

2.5

52

.55

1.8

52

.2 53

.1 54

.15

1.9

53

.3 54

.15

2.5

50

.25

0.5

50

.7 51

.65

1.7

49

.95

0.2

53

.1 54

.25

1.3

50

.74

9.0

50

.95

5.4

55

.7 56

.25

6.4 57

.05

6.5

51

.35

3.2 53

.75

4.9 55

.45

5.3

57

.15

9.0

56

.65

9.0

58

.75

5.5

53

.55

2.9

51

.55

1.5

52

.8 53

.55

2.7

51

.15

0.2

50

.14

8.6

48

.04

8.2

49

.55

1.8

50

.8 51

.3

45

50

55

60

65

Jun 10 Oct 10 Feb 11 Jun 11 Oct 11 Feb 12 Jun 12 Oct 12 Feb 13 Jun 13 Oct 13 Feb 14 Jun 14 Oct 14 Feb 15 Jun 15 Oct 15 Feb 16

As of May,3 Consecutive

Months of Expansion

http://www.ism.ws/ismreport/mfgrob.cfm

135

ISM Non-Manufacturing Index (Values > 50 Indicate Expansion), January 2010-May 2016

Sources: Institute for Supply Management via https://research.stlouisfed.org/fred2/data/NMFCI.txt; Insurance Information Institute.

The Non-Manufacturing Sector Expanded in Every Month After January 2010.The Pace of Expansion Has Slowed in 2016 But Not Ended.

49

.65

0.8

53

.25

5.6

55

.55

4.6

54

.85

2.7 5

3.6

55

.35

6.7

57

.05

7.2

57

.35

5.8

55

.35

5.0

54

.35

3.6

53

.65

2.4

52

.85

3.1

52

.85

5.7

55

.55

5.5

54

.55

4.4

53

.85

2.4 53

.05

4.7

54

.2 55

.1 56

.05

5.1 55

.65

5.1

53

.85

4.0

54

.1 55

.05

6.7

53

.8 54

.65

4.1

53

.4 54

.45

2.6

53

.95

5.2 5

6.3

56

.7 57

.3 58

.05

7.9

56

.35

9.3

56

.95

6.9

57

.15

6.9 57

.55

5.9

56

.25

9.6

58

.35

6.7

58

.35

6.6

55

.85

3.5

53

.4 54

.55

5.7

52

.9

45

50

55

60

65

Jan 10 May 10 Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12 Jan 13 May 13 Sep 13 Jan 14 May 14 Sep 14 Jan 15 May 15 Sep 15 Jan 16 May 16

http://www.ism.ws/ismreport/mfgrob.cfm

136

Nonfarm Payroll (Wages and Salaries):Quarterly, 2005-2015:Q3

Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.

Sources: Sources: NBER (recessions); Federal Reserve Bank of St. Louis; National Bureau of Economic Research (recession dates); Insurance Information Institute.

$5,500

$5,750

$6,000

$6,250

$6,500

$6,750

$7,000

$7,250

$7,500

$7,750

Prior Peak was 2008:Q3, $6.54 Trillion.

Recent Trough (2009:Q1) was $6.23 Trillion, Down

5.3% from Prior Peak.

Latest (2015:Q3) was $7.90 Trillion, a New Peak--$1.34 Trillion Above 2009 Trough.

Growth Rates• 2011: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:Q3 Over 2014:Q3: 5.1%

Billi

on

s

http://research.stlouisfed.org/fred2/series/WASCUR

137

Manufacturing Employment, January 2003-May 2016

Note: Recession indicated by gray shaded column. Data are seasonally adjusted.

Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute.

Manufacturing Employment Grew Slowly But Steadily from 2010 Through 2014 But Has Been Flat in 2015-16. Automation, a Slowing World Economy, the Strong Dollar

and Other Factors Have Held the Growth Rate Down.

11,000

11,500

12,000

12,500

13,000

13,500

14,000

14,500

15,000

03 04 05 06 07 08 09 10 11 12 13 14 15 16

Th

ou

sa

nd

s

Manufacturing Employment was Declining, Slowly, Before the Great

Recession.

Manufacturing Employment Hit a

Trough at 11.45 Million in Feb. and Mar. 2010. Latest

(May 2016) at 12.29 Million

138

Construction Employment, Jan. 2003-May 2016

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

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Th

ou

sa

nd

s

The Construction Sector Was a Growth Leader in 2014-15 as the Housing Market, Private Investment and Government Spending Recover. Flat so

far in 2016. WC Insurers Will Benefit from the Employment Growth.

Construction Employment Peaked

at 7.726 Million in April 2006.

The “Great Recession” and Housing Bust Destroyed

2.3 Million Constructions Jobs.

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.

Construction Employment as of May 2016 Totaled

6.645 Million.

Gap Between Pre-recession Construction Peak and

Today: 1.08 Million Jobs.

139

Private Housing Starts, 1990-2021F

Sources: U.S. Department of Commerce; Blue Chip Economic Indicators (5/16 for 2016–17; 3/16 for 2018–21F); Insurance Information Institute.

1.19

1.01

1.201.29

1.461.35

1.481.471.621.64

1.571.60

1.711.85

1.962.07

1.80

1.36

0.91

0.550.590.61

0.780.92

1.101.111.21

1.341.431.461.47 1.49

0.0

0.5

1.0

1.5

2.0

2.5

3.0

90 92 94 96 98 00 02 04 06 08 10 12 14 16F 18F 20F

Un

its

(M

illi

on

s)

Insurers 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.

Job Growth, Low Inventories of Existing Homes, Still-low

Mortgage Rates and Demographics, Should Continue to Stimulate

Housing Unit Construction for Several More Years.

New Home Starts Plunged 72% from 2005–2009; A Net Annual Decline of 1.49 Million

Units, Lowest Since Records Began in 1959.

140140

Units in Multiple-Unit Projectsas Percent of Total

US: Pct. Of Private Housing Unit StartsIn Multi-Unit Projects, 1990-2016*

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%

35

.0%

29

.8%

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 16*

*2016:Q1 Based on seasonally-adjusted data. Sources: U.S. Census Bureau; 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 6 of the last 8 years, over 30% of housing

unit starts were in 5+-unit projects

141

Rental-occupied Housing Units as % of Total Occupied Units, Quarterly, 1990:Q1-2015:Q1

Sources: U.S. 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.

30%

31%

32%

33%

34%

35%

36%

37%

90:Q1 91:Q3 93:Q1 94:Q3 96:Q1 97:Q3 99:Q1 00:Q3 02:Q1 03:Q3 05:Q1 06:Q3 08:Q1 09:Q3 11:Q1 12:Q3 14:Q1

Since the Great Recession Ended in June 2009,Renters Occupied 5.7 Million More Units (+15.6%).

Trough in 2004:Q2 and Q4 at 30.8%

Latest was 36.3% in 2015:Q1.

Increasing Percent of Renters

Trend Down Began in 1994:Q3 from 36.2% in Q2.

Increasing Percent of Owners

142

Value of New Private Construction: Residential & Nonresidential, 2003-2015*

*2015 figure is a seasonally adjusted annual rate as of November.

Sources: U.S. Department of Commerce; Insurance Information Institute.

$613.7

$238.8

$427.9

$298.1

$261.8

$400.3

$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*

Billi

on

s

Residential Non Residential

Private Construction Activity Is Moving in a Positive Direction Though It Remains Well Below Pre-Crisis Peak; Residential Dominates.

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 $828.2B as of Nov. 2015,

Up 65.4% from the 2010 Trough but Still 9.1% Below 2006 Peak.

http://www.census.gov/construction/c30/c30index.html

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