pandemics, politics & economics...robert p. hartwig, phd, cpcu clinical associate professor of...
TRANSCRIPT
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Pandemics, Politics & Economics:P/C Insurance in an Era of Uncertainty
Robert P. Hartwig, PhD, CPCUClinical Associate Professor of Finance, Risk Management & Insurance
Darla Moore School of Business ♦ University of South [email protected] ♦ 803.777.6782
Target Markets2020 Summit WeekOctober 19, 2020
mailto:[email protected]
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Pandemics & P/C Insurance: Outline P/C Insurers: Overcoming Uncertainty With Strength Financial Overview: The Industry’s Financial Position Amid the COVID-19 Pandemic
COVID-19: Potential Coronavirus Impacts on Key Lines
Investment Market Issues: Volatility Rules, Low Interest Rates are Back
The Economy and COVID-19: Overview & Outlook
Commercial Lines Rate Trends & Reinsurance Market Developments
Litigation/Tort Trends
Federal & State COVID-19 Initiatives Impacting Commercial Insurers
Summary, Conclusions and Q&A
-
3
P/C Insurance Industry: Financial Overview Amid the
COVID-19 PandemicThe P/C Insurance Industry Entered the COVID-19 Pandemic from a Position of
Financial Strength
Economic, Financial Market, Regulatory and Tort Risks Are Major
Challenges Going Forward3
-
4
Policyholder Surplus (Capacity), 2006:Q4–2020:H1
Sources: ISO, A.M .Best; Risk and Uncertainty Management Center, University of South Carolina.
($ Billions)
$487
.1$4
96.6
$512
.8$5
21.8
$478
.5$4
55.6
$437
.1$4
63.0 $490
.8$5
11.5 $540
.7$5
30.5
$544
.8$5
59.2
$559
.1$5
38.6
$550
.3
$567
.8$5
83.5
$586
.9$6
07.7
$614
.0$6
24.4 $653
.4
$671
.6$6
73.9
$675
.2$6
74.2
$673
.7$6
76.3
$700
.9$7
17.0 $7
50.7 $781
.5$7
42.1 $7
79.5
$802
.2$8
12.2 $8
47.8
$771
.9 $81
9.7
$662
.0
$570
.7
$566
.5
$505
.0$5
15.6
$517
.9
$400$450$500$550$600$650$700$750$800$850$900
06:Q
407
:Q1
07:Q
207
:Q3
07:Q
4
08:Q
108
:Q2
08:Q
308
:Q4
09:Q
109
:Q2
09:Q
309
:Q4
10:Q
1
10:Q
210
:Q3
10:Q
411
:Q1
11:Q
211
:Q3
11:Q
412
:Q1
12:Q
2
12:Q
312
:Q4
13:Q
113
:Q2
13:Q
313
:Q4
14:Q
114
:Q2
14:Q
314
:Q4
15:Q
215
:Q4
16:Q
116
:Q4
17:Q
217
:Q4
18:Q
318
:Q4
19:Q
1
19:Q
219
:Q3
19:Q
420
:Q1
20:Q
2
Financial Crisis
(-16.2%)
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.
Drop due to near-record 2011 CAT losses
(-4.9%)
Policyholder Surplus is the industry’s financial cushion against large insured events, periods of economic stress and
financial market volatility. It is also a source of capital to underwrite new risks.
The P/C insurance industry entered the COVID-19 pandemic
from a position strength and was able to withstand the 9.0% surplus decline in Q1 2020
-
P/C Industry Net Income After Taxes, 1991–2020E* 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% 2016 ROAS = 6.2% 2017 ROAS =5.0% 2018 ROAS = 8.0% 2019: ROAS = 7.7%
*2020 estimate based on annualized actual 1H:20 figure of $25.0B. ROE figures are GAAP; 1Return on avg. surplus. Excludes Mortgage & Financial Guaranty insurers for years (2009-2014). Sources: A.M. Best, ISO.
$14,
178
$5,8
40$1
9,31
6$1
0,87
0 $20,
598
$24,
404 $3
6,81
9$3
0,77
3$2
1,86
5
$3,0
46$3
0,02
9
$62,
496
$3,0
43
$35,
204
$19,
456 $
33,5
22$6
3,78
4$5
5,87
0$5
6,82
6$4
2,92
4$3
6,81
3$5
9,99
4$5
0,00
0
$38,
501
$20,
559
$44,
155
$65,
777
-$6,970
$28,
672
-$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 17 18 20E
COVID impacts will likely have a negative influence on Net Income in 2020, but too
soon to determine magnitude
$ Millions
-
ROE: Property/Casualty Insurance by Major Event, 1987–2020:H1* (est.)
6
*Excludes Mortgage & Financial Guarantee in 2008 – 2014. 2020:H1 estimate is based on actual Q1 2020 figure of 8.8%.
Sources: ISO, Fortune; USC RUM Center.
-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 16 17 18 19 20*
P/C Profitability Is Influenced Both by
Cyclicality and Volatility
Hugo
Andrew, Iniki
Northridge
Lowest CAT Losses in 15 Years
Sept. 11
Katrina, Rita, Wilma
4 Hurricanes
Financial Crisis* ROE fell by 8.3 pts from 12.7% to 4.4%
(Percent)
Record Tornado Losses
Sandy
Low CATs
Harvey, Irma, Maria,
CA Wildfires
2019 7.7%
2020:H1 7.0% (Est.)
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Profitability & Politics
7
How Is Profitability Affected by the President’s Political Party?
-
15.10%8.93%
8.65%8.35%8.33%8.20%
7.98%7.68%
6.98%6.97%6.90%
5.43%5.03%
4.83%4.68%
4.43%3.55%
16.43%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
CarterReagan II
NixonClinton I
G.H.W. BushG.W. Bush II
Obama IIClinton IIReagan I
Nixon/FordTruman
TrumpEisenhower IEisenhower II
G.W. Bush IObama I
JohnsonKennedy/Johnson
OVERALL RECORD: 1950-2019*
Democrats 8.1%Republicans 7.8%
Party of President has marginal bearing on profitability of P/C insurance industry
P/C Insurance Industry ROE by Presidential Administration, 1950-2019*
*Trump figure is 2017-2019 average. ROEs for the years 2008-2014 exclude mortgage and financial guaranty segments.Source: Risk and Uncertainty Management Center, University of South Carolina.
-
Net Premium Growth (All P/C Lines): Annual Change, 1971—2020:H1
-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 17 18 19 20
(Percent)1975-78 1984-87 2000-03
*Pre-COVID-19 forecast from A.M. Best Review & Preview (Feb. 2020). NOTE: Shaded areas denote “hard market” periodsSources: A.M. Best (1971-2013, 2020F), ISO (2014-19); Risk & Uncertainty Management Center, Univ. of South Carolina .
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.
2020F: 3.8%*2020:H1: 2.9%
2019: 3.6%2018: 10.8%2017: 4.6%2016: 2.7%2015: 3.5%2014: 4.2
2013: 4.4%2012: +4.2%
2020 OutlookPre-COVID: 3.8%Through H1: 2.9%
-
Potential Impacts of COVID-19 on Written Premium in 2020, by Key LineLine Estimated Premium ImpactWorkers Compensation 12.5% to 25% reduction in premium written in 2020
(equates to $5.9B to $11.75B DWP)Business Interruption & Contingency
7% to 13% reduction in premium volume (US & UK)
General Liability* $1.5B to $6.3B premium reduction in USPersonal Auto ~$10B in refunds, rebates
(equates to ~4% of DWP)Personal Travel Insurance 29% to 78% reduction in premium written (US & UK)Personal/Comm. Motor ~10% reduction in US; 0% to 11% reduction in UKMarine/Aviation/Transport $0.7B-$1.5B (US); $0.6 - $1.2B (UK)
10
*Includes nursing home professional liability.Source: Derived from Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic (Fig.11, 14), May 2020. and other sources; Risk and Uncertainty Management Center, University of South Carolina.
-
Potential Impacts of COVID-19 on LOSSES in 2020, by Key LineLine Estimated Loss ImpactWorkers Compensation $0.2B - $92B (depends on severity of pandemic
and “presumption” determination)Business Interruption & Contingency
$2B - $22B (US); $1.1B - $13.9B (UK)
General Liability* $0.7B to $27B loss across US & Bermuda marketsPersonal/Comm. Motor $26B - $57B reduction in personal auto and $4.2B
- $9.4B commercial (US); $1 - $7B overall reduction in UK
Mortgage $0 - $1.7B loss across US & Bermuda marketsD&O $0.6 - $4.0 loss across US & Bermuda marketsMarine/Aviation/Transport $0.3B-$1.3B reduction (US); $0.6 - $1.1B (UK)
11
*Includes nursing home professional liability.Source: Derived from Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic (Fig.11, 14), May 2020. and other sources; Risk and Uncertainty Management Center, University of South Carolina.
-
P/C Insurance Industry Combined Ratio, 2001–2020:H1*
*Excludes Mortgage & Financial Guaranty insurers 2008--2014.*First Half 2020.Sources: A.M. Best, ISO (2014-2019).
95.7
99.3101.1
106.5
102.5
96.4 97.097.8
100.799.298.9
103.7
99.2101.0
92.6
100.898.4
100.1
107.5
115.8
90
100
110
120
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20**
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
Cyclical Deterioration
Sharply higher CATs are driving
large underwriting losses and
pricing pressure
Pre-COVID 2020 Combined Ratio Est.
99.1 (A.M. Best)
COVID-19 has had no
discernable net impact on
pre-COVID expectations for under the
combined ratio though
Q2 2020
-
COVID-19 Announced Losses vs. Top-Down Industry Estimates (as of May 12, 2020)
*Lloyd’s CEO John Neil appearance on CNBC, May 14, 2020: https://www.cnbc.com/2020/05/14/lloyds-of-london-coronavirus-will-be-largest-loss-on-record-for-insurers.htmlSources: Company disclosures, Dowling & Partners, Barclays Research, Autonomous Research, BofA Global Research, UBS Securities, Willis Towers Watson from Artemis.bm accessed at https://www.artemis.bm/news/consensus-emerging-on-30bn-to-100bn-covid-19-industry-loss-willis-re/; Risk and Uncertainty Management Center, University of South Carolina.
Global P/C COVID-19 loss consensus $30B - $100B
(~$60B as midpoint)
UBS
30-60bn
Q1 reported COVID claims totaled $4.2B according to Willis, but Q2 will be a truer
reflection of actual loss
Lloyd’s: Says its own p/c claims could reach $4.3B by June 30. Estimates global p/c losses at $107B; Global investment losses = $96B*
https://www.cnbc.com/2020/05/14/lloyds-of-london-coronavirus-will-be-largest-loss-on-record-for-insurers.htmlhttps://www.artemis.bm/news/consensus-emerging-on-30bn-to-100bn-covid-19-industry-loss-willis-re/
-
Estimated Monthly U.S. Business Interruption Coronavirus Losses for Small Business—Potential Range (
-
Paper on Insurability of Pandemic Risk
Large scale business continuity risks from pandemics are generally note insurable in the private sector
Business continuity risks are largely undiversifiable within private insurance markets and are highly correlated with other risks (e.g., investment risks)
Large scale business continuity losses pose a potentially systemic risk to the industry and overall economy
Import role for government Download at: https://www.uscriskcenter.com/wp-content/uploads/2020/05/Uninsurability-of-Pandemic-Risk-White-Paper-Hartwig-APCIA-FINAL-WORD.pdf
https://www.uscriskcenter.com/wp-content/uploads/2020/05/Uninsurability-of-Pandemic-Risk-White-Paper-Hartwig-APCIA-FINAL-WORD.pdf
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16
Catastrophe Loss Update: Major Driver of Rate Pressure
CAT Losses for the Decade Just Ended Were Up Materially—Costliest Ever
Primary, Reinsurance and Retro MarketsAll Impacted and Are Pressuring Rates
COVID Pressure Kicks Off the New Decade16
-
U.S. Inflation-Adjusted Cat Losses
Sources: Property Claims Service, a Verisk Analytics business; Insurance Information Institute.
4037
79
104
53
1980s:$5 B
1990s: $15 B
2000s: $25 B2010s: $35 B
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
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
Bill
ion
s, 2
01
8 $
Average forDecade Hurricane
Andrew WTC
Katrina, Rita, Wilma
Average Insured Loss per Year for 1980-2019 is $19.8 Billion
Harvey, Irma, Maria
36
2020:H1 CAT losses in the US totaled ~$20B (not including COVID-
related losses)
As of Oct. 4, 2020, more
than 4 million acres of
woodland had been
destroyed by wildfire in CA
alone this year
-
Top 20 Most Costly Disastersin U.S. History—Katrina Still Ranks #1
18
(Insured Losses, 2017 Dollars, $ Billions)*
$9.3 $9.7 $10.0$11.7$14.2$14.2$15.9
$18.0$19.8$21.9
$25.3$26.0$27.1
$51.6
$5.9 $6.0 $7.1 $7.5 $7.9 $8.3
$0
$10
$20
$30
$40
$50
$60
Jeanne(2004)
Frances(2004)
Rita (2005)
Torn./T-Storms (2011)
Torn./T-Storms (2011)
Hugo (1989)
Ivan (2004)
Charley(2004)
Michael(2018)
Wilma(2005)
Camp Fire(2018)
Ike (2008)
Harvey (2017)
Irma (2017)
Sandy(2012)
Maria (2017)
Northridge(1994)
9/11 (2001)
Andrew(1992)
Katrina(2005)
8 of the top 20 mostly costly insured events in US history occurred during the 2010s
17 of the 20 Most Expensive Insurance Events in US History Have Occurred Since 2004
*Estimated.Sources: PCS, RMS, Karen Clark & Co; USC Center for Risk and Uncertainty Management adjustments to 2017 dollars using the CPI.
COVID-19 insured property losses remain highly
uncertain, but could easily make the top 10
-
19
0
50
100
150
200
250
300
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
(Percent)
US Reinsurance Pricing Is Sensitive to CAT Activity and Ultimately Impacts Primary Insurance Pricing, Terms and Conditions. COVID Will Pressure RoL into 2021
Post-Andrew surge
US Property Catastrophe Rate-on-Line Index: 1990 – 2020*
*As of January 1 each year.Source: Guy Carpenter; Artimes.bm accessed at: http://www.artemis.bm/us-property-cat-rate-on-line-index
Post-9/11 Adjustment
Post Katrina, Rita, Wilma
period
Post-Ike adjustment Adjustment
following record tornado losses in 2011 and Sandy in
2012
Record CATs in 2017 and high CAT losses in 2018/19 pressured US
reinsurance prices in recent years (+9.0% in 2020, +2.6% in 2019,
+7.5% in 2018)
2020 Global RoL+5%
http://www.artemis.bm/us-property-cat-rate-on-line-index
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INVESTMENTS: THE NEW REALITY
Investment Performance Is a Key Driver of Insurer Profitability
Aggressive Rate Cuts Will Adversely Impact Invest Earnings
Financial Crisis Déjà Vu?
-
Property/Casualty Insurance Industry Investment Income: 2000–2020E
$38.9$37.1$36.7
$38.7
$54.6
$51.2
$47.1$47.6$49.2$48.0$47.3$46.4$47.2$46.6
$48.9
$59.6$61.4
$52.8
$39.6
$49.5$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18* 19 20
Due to persistently low interest rates, investment income remained below pre-crisis levels for a decade. Lower interest rates post-COVID will drive investment income down once again.
*2020 figure is annualized based on H1 actual of $26.4B. 2018-19 figures are distorted by provisions of the TCJA of 2017. Increase reflects such items as dividends from foreign subsidiaries.
1 Investment gains consist primarily of interest and stock dividends. Sources: ISO; University of South Carolina, Center for Risk and Uncertainty Management.
($ Billions)
Investment income had just recovered from a decade-long slump. Aggressive Fed
actions and recession are pushing interest rates lower and will adversely impact investment income for years to come.
-
Net Investment Yield on Property/Casualty Insurance Invested Assets, 2007–2020F*
4.4
4.0
4.6 4.5
3.7 3.8 3.73.4
3.7
3.2 3.1 3.13.4
3.1 3.0
4.6
4.23.9
2.5
3.0
3.5
4.0
4.5
5.0
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20F
The yield on invested assets remains low relative to pre-crisis yields. Fed rate increases beginning in late 2015 through 2018 halted the slide in yields, but rate cuts in
2019/2020 will preclude future gains
Sources: NAIC data, sourced from S&P Global Market Intelligence; 2017-19 figures are from ISO. 2020F is from the Risk and Uncertainty Management Center, Univ. of South Carolina.
(Percent) Investment yields remained depressed--down about 150 BP from pre-crisis
levels. COVID-19 Fed rate cuts, bond purchases will push asset yield down
Average: 1960-2019 = 4.9%Low: 2.8% (1961)
High: 8.2% (1984/85)
-
-50%
-40%
-30%
-20%
-10%
0%10%
20%
30%
40%
50%
60%50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20
*
,*Through Oct. 14, 2020.Source: NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html; Center for Risk and Uncertainty Management, University of South Carolina
Tech Bubble Implosion
Financial Crisis
Annual Return
Energy Crisis
S&P 500 Index Returns, 1950–2020*
Fed Raises Rates
The S&P 500 was up 28.9% in 2019, the best year since 2013, following a decline
of 6.2% in 2018. 2020 has seen extraordinary volatility but the S&P 500 is
actually up for the year*
2020 YTD+7.98%
2019: +28.9%2018: -6.2%2017: +19.42016: +9.5
http://pages.stern.nyu.edu/%7Eadamodar/New_Home_Page/datafile/histretSP.html
-
THE ECONOMY
COVID-19 Pandemic Will Directly and Severely Impact Growth As Exposure Growth Rapidly Shrinks
The Strength of the Economy Has Always Influenced Growth in Insurers’ Exposure Base Across Most Lines
The Links Between the Economy and the P/C Insurance Industry Are Strengthening
-
US Real GDP Growth*
* Estimates/Forecasts from Wells Fargo Securities.Source: US Department of Commerce, Wells Fargo Securities 10/20; Center for Risk and Uncertainty Management, University of South Carolina.
2.7%
1.8%
-1.3
%-2
.8%
2.5%
2.2% 2.7% 4.5%
0.8% 1.4% 3.5%
2.1%
1.2% 3.1% 3.2%
2.9%
2.5% 3.5%
2.9%
1.1% 3.1%
2.0%
2.1%
-5.0
%
28.6
%6.
1%5.
2%3.
9%2.
9%2.
3%
-31.4%
3.1%3.6%
2.5%
1.8%
1.1%4.
1%
1.8% 2.1%
1.6%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
2008
2009
2010
2011
2012
2013
2014
2015
16:1
Q16
:2Q
16:3
Q16
:4Q
17:1
Q17
:2Q
17:3
Q17
:4Q
18:1
Q18
:2Q
18:3
Q18
:4Q
19:1
Q19
:2Q
19:3
Q19
:4Q
20:1
Q20
:2Q
20:3
Q20
:4Q
21:1
Q21
:2Q
21:3
Q21
:4Q
Demand for Insurance Will Be Severely Impacted As the Economy Slows but Is Expected to Improve by Late Q3 and into Q4
Real GDP Growth (%)
“Great Recession”
began in Dec. 2007
Financial Crisis
Economic recovery from COVID is strong, but
economic losses likely not recovered before late 2021.
COVID CRASHQ2 2020
plunged by 31.4%
-
The Economy Drives P/C Insurance Industry Premiums:2006:Q1–2020:Q2*
Direct Premium Growth (All P/C Lines) vs. Nominal GDP: Quarterly Y-o-Y Pct. Change
Sources: SNL Financial; U.S. Commerce Dept., Bureau of Economic Analysis; ISO; I.I.I.; Risk and Uncertainty Management Center, University of South Carolina.
-6%
-4%
-2%
0%
2%
4%
6%
8%
2008:Q1
2008:Q3
2009:Q1
2009:Q3
2010:Q1
2010:Q3
2011:Q1
2011:Q3
2012:Q1
2012:Q3
2013:Q1
2013:Q3
2014:Q1
2014:Q3
2015:Q1
2015:Q3
2016:Q1
2016:Q3
2017:Q1
2017:Q3
2018:Q1
2018:Q3
2019:Q1
2019:Q3
2020:Q1
DWP y-o-y change y-o-y nominal GDP growth
Negative GDP growth in the first half of 2020, will cause DWP to decelerate sharply but with a lag and likely turn
negative in some lines. Rebates, discounts and rate decreases will amplify the deceleration.
Direct written premiums track nominal GDP fairly tightly over time, suggesting the P/C insurance industry’s growth prospects inextricably linked to economic performance.
-
Unemployment Rate: Jan. 2019 – Sept. 2020
Source: US Bureau of Labor Statistics; Risk and Uncertainty Management Center, University of South Carolina.
Unemployment Rate
3.7%3.7%3.5%3.6%3.5%3.5%3.6%3.5%4.4%
14.7%13.3%
11.1%10.2%
8.4%7.9%
3.7%3.6%3.6%3.8%3.8%4.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Jan-19
Feb-19
Mar-19
Apr-19
May-19
Jun-19
Jul-19
Aug-19
Sep-19
Oct-19
Nov-19
Dec-19
Jan-20
Feb-20
Mar-20
Apr-20
May-20
Jun-20
Jul-20
Aug-20
Sep-20
COVID-19 shutdowns pushed the unemployment rate up to a shocking 14.7% in April before
improving beginning in May
11.4M jobs were created from May through Sept. (after a loss of 22.2M in March/April)
helping bring down the unemployment rate to 7.9% from its April peak of 14.7%. So far,
~50% of jobs lost have been recovered.
California:Feb. 2020: 3.9% (record low)
Peak: 16.4% (Apr./May)Aug. 2020: 11.4%
-
US Unemployment Rate Forecast: 2007:Q1–2021:Q4
4.5%
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
%4.9
%4.7
%4.7
%4.4
%4.3
%4.1
%4.1
%3.9
%3.8
%3.8
%3.9
%3.6
%3.6
%3.5
% 3.8%
13.0%
8.8%
7.6%
7.1%
6.8%
6.3%
5.9%
9.6%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%07
:Q1
07:Q
207
:Q3
07:Q
408
:Q1
08:Q
208
:Q3
08:Q
409
:Q1
09:Q
209
:Q3
09:Q
410
:Q1
10:Q
210
:Q3
10:Q
411
:Q1
11:Q
211
:Q3
11:Q
412
:Q1
12:Q
212
:Q3
12:Q
413
:Q1
13:Q
213
:Q3
13:Q
414
:Q1
14:Q
214
:Q3
14:Q
415
:Q1
15:Q
215
:Q3
15:Q
416
:Q1
16:Q
216
:Q3
16:Q
417
:Q1
17:Q
217
:Q3
17:Q
418
:Q1
18:Q
218
:Q3
18:Q
419
:Q1
19:Q
219
:Q3
19:Q
420
:Q1
20:Q
220
:Q3
20:Q
421
:Q1
21:Q
221
:Q3
21:Q
4
Great RecessionRising unemployment eroded payrolls and
WC’s exposure base.Unemployment peaked at 10% in late 2009.
= actual; = forecastsSources: US Bureau of Labor Statistics; Wells Fargo Securities (10/20 edition); Risk and Uncertainty Management Center, University of South Carolina.
The unemployment rate peaked at 14.7% in April
(13.0% Q2 avg.)
At 3.5%, the unemployment rate in Feb. 2020 WASat its lowest point
in 50 years.
-
Government Mandated Business Closures Were the Real Black Swan, Not the Coronavirus
Sources: CDC; Risk and Uncertainty Management Center, University of South Carolina
• The US (and world) has endured several other major infectious disease outbreaks killing 100,000+ Americans without shutting down the economy
• Hong Kong Flu (1968-70)• Asian Flu (1957-58)
• It is the reaction to the virus that is unprecedented and represents the true Black Swan event
• The ramifications of this decision will be consequential for a generation (e.g., $3 trill. in debt)
-
30
Commercial Lines Growth, Underwriting Performance
& Pricing Cyclicality
Pricing Pressures Are Intensifying
30
-
-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 15 17 19
Economic Shocks, Inflation:
1976: 22.2%Tort Crisis
1986: 30.5%Post-9/11
2002: 22.4%
Great Recession:2009: -9.0%
ROE
2019: +6.7%
Commercial Lines NPW Premium Growth:1975 – 2019
Recessions:1982: 1.1%
Commercial lines is prone to far more cyclical volatility that
personal lines.
1988-2000: Period of
inter-cycle stability
Commercial lines premium
growth has been sluggish
for years, reflecting weak
pricing environment.
Note: Data include state funds beginning in 1998. Source: A.M. Best; Insurance Information Institute; Univ. of South Carolina Center for Risk and Uncertainty Management, ISO.
Post-Hurricane Andrew Bump:
1993: 6.3%
Post Katrina Bump:
2006: 7.7%
2016: -1.1%
2018: +14.4%
-
CIAB: Average Commercial Rate Change, All Lines, 2011:Q1–2020:Q2*
-0.1% 0.9
% 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% -3.2%
-3.3% -2.
5%-2.
8% -1.3%
0.3% 1.7
% 2.4% 3.5
% 5.2% 6.2
% 7.5% 9.3
% 10.8%
-2.9%
1.6%
1.5%
-16%
-11%
-6%
-1%
4%
9%
14%
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
3Q19
4Q19
1Q20
2Q20
*Latest available.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; Center for Risk and Uncertainty Management, Univ. of South Carolina.
Largest increase since 2003 for some accounts
(Percent)
Renewals turned positive in late 2011
in the wake of record tornado
losses and Hurricane Sandy
High CAT losses and poor underwriting results in recent years combined with COVID pressures, reduced capacity,
lower interest rates and increased uncertainty are exerting significant pressure on markets with overall
rates up by +9.3% as of Q1 2020
-
Change in Commercial Rate Renewals, by Line: 2020:Q2
Source: Council of Insurance Agents and Brokers; USC Center for Risk and Uncertainty Management.
Percentage Change (%)
3.5%6.5% 6.8% 6.8%
9.4% 9.6% 9.7%
13.3%
16.8%20.0%
0.7% 1.4% 1.6%2.3% 3.1% 3.4%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Wor
kers
Com
p
Terro
ris,
Sur
ety
Bro
ker E
&O
Floo
d
Mar
ine
Bro
ker E
&O
Cyb
er
Gen
eral
Liab
ility
Con
stru
ctio
n
EP
L
Com
mer
cial
Aut
o
Bus
ines
sIn
terru
ptio
n
Com
mer
cial
Pro
perty D&
O
Um
brel
la
All major commercial lines experienced
increases in Q2 2020
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Umbrella now leads all major commercial lines in terms of rate gains,
exceeding D&O and CP
-
78%
66%
62%
50%
35%
10%
80%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Availability ofCoverage
Pricing
Renewals
Underwriting Trends
Carrier Ability toCollect Premium
Accuracy of ExposureData
Other
COVID-19’s largest impacts on producers
relate to coverage availability and price
COVID-19 Issues Impacting Producers, 2020:Q2*
Note: CIAB, Q2 2020 COVID-19 Supplement accessed at: https://www.ciab.com/download/25840/; Risk and Uncertainty Management Center, University of South Carolina.
https://www.ciab.com/download/25840/
-
Weekly Number of COVID-Related Lawsuits Filed:(Weeks Ending Mar. 16, 2020 to Sept. 21, 2020)
35Source: Covid Coverage Litigation Tracker, University of Pennsylvania School of Law. Accessed 10/10/20 at: https://cclt.law.upenn.edu
The number of new cases filed is declining with just 16 filed
the week ending Sept. 21.
16
79
https://cclt.law.upenn.edu/
-
36
Tort Environment: The Return of Social Inflation?
36
Tort Costs Are Under Pressure from a Variety of Different Factors
-
Average Jury Awards, 1999 – 2017 (latest available)
$725 $747 $756$800 $799
$1,018$1,022$950
$1,077$1,046
$654
$806
$1,098$1,010$1,042
$1,132
$1,355
$1,847
$500
$700
$900
$1,100
$1,300
$1,500
$1,700
$1,900
$2,100
1999 2001 2003 2005 2007 2010 2012 2014 2016
Source: Jury Verdict Research; Current Award Trends in Personal Injury (58th Edition), Thomson Reuters; Risk and Uncertainty Management Center, Univ. of South Carolina.
The average jury award reached an all-time record high in 2017.
Median Award = $50,000 (also a record)
-
The Nation’s Judicial Hellholes: 2019 – 2020
38Source: American Tort Reform Association; Risk and Uncertainty Management Center, Univ. of South Carolina.
Florida
IllinoisCook, Madison
& St. Clair Counties
Louisiana
Watch List CO Supreme Court Florida MD General Assem. MT Supreme Court PA Supreme Court WV Supreme Ct.
Dishonorable Mention
AK Supreme Court KS Supreme Court OR Supreme Court
Minnesota Supreme Ct./Twin
Cities
NYC
St. LouisPhiladelphia
Court of Common Pleas
New Jersey Legislature
Oklahoma
California
-
Shareholder Class Action Lawsuits*
*As of Oct. 9, 2020.Source: Stanford University School of Law (securities.stanford.edu); Risk and Uncertainty Management Center, Univ. of South Carolina.
164 20
216
323
118
811
117
324
120
9 216
498
266
227 238
182
119 1
7622
216
817
5 188
151 165
168 20
827
141
240
240
427
8
0
100
200
300
400
500
600
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
Shareholder litigation is surging, in part due to suits associated with M&A activity. Major
implications for D&O coverage.
Late 1990s: Tech IPO Flops
Y2KIncrease in M&A
RecentCOVID-19CannabisOpioids
Data Breach Cryptocurrency
MeToo
-
Data Breaches 2005-2019, by Number of Breaches and Records Exposed
# Data Breaches
Source: Identity Theft Resource Center.
Millions of Records Exposed
40
The number of data breaches and
records exposed is generally rising
157321
446
656498
419 447
1091
1632
1244
1473
662783 780
619
197.6164.7
127.7
16.2
222.5
66.9
19.135.7
22.9 17.3
87.9 85.6
177.9
366
446.5
100
300
500
700
900
1100
1300
1500
1700
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019*0
50
100
150
200
250
300
350
400
450
# Data Breaches # Records Exposed (Millions)
-
41
Federal and State COVID-19 Initiatives Impacting Commercial Insurers
-
P/C Insurance Coverage & COVID-19
Insurers have received tens of thousands of claims related to COVID-19 lossesWorkers comp Event Cancellation Trade Credit
Business Interruption Travel Insurance Mortgage
GL D&O EPL
Crises tend to precipitate efforts to stretch contract language in an effort to: Find coverage where none exists
Find coverage where none was intended
Find coverage for which no premium was paid
Politicians frequently pile on: Zero political risk
-
Business Interruption Coverage (BIC) & COVID-19
Business interruption policies clearly exclude COVID-19 claims
The ISO Business Income form contains the following language: “We will pay for the actual loss of Business
Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration”. The “suspension” must be caused by direct physical loss of or damage to property…The loss or damage must be caused by or the result of a covered cause of loss.” [from ISO form: CP 00 30 04 02]
-
Update on Business Continuity Disputes
Large number of BI suits have been filed against insurersMost are still making their way through the court system…BUT
Since mid-2020 numerous courts have made decisions favoring insurers across a growing number of industries (not just restaurants)
Courts have generally found that: Virus exclusions found in many policies are unambiguous and are binding
That BI coverage is necessarily triggered only when there is actual physical loss or damage to property
Government mandated closures alone are insufficient to trigger BI coverage
-
Business Continuity Protection Program (BCPP) Purpose: The BCPP is designed to bolster the country’s economic resilience by
providing timely and efficient financial protection and payroll support to the private sector in the event of a future declared public health emergency. Has support of several industry group: APCIA, NAMIC, Big I No balance sheet risk to the insurance industry
Structure: Businesses purchase revenue replacement assistance from the BCPP – up to 80% of
payroll, employee benefits and operating expenses Provides 3 months of relief payments
Payouts based on prior year’s tax return
Relief is automatically triggered following a federally declared public health emergency
-
Why PRIA Is a Well-Intentioned but Bad Idea
Source: Risk and Uncertainty Management Center, University of South Carolina and Centers for Better Insurance, “Pandemic Risk Insurance Act of 2020: Summary and Key Risks,” June 2020.
Potentially $12B of liability for insurers
Up to $37.5B in liability for insurers
Total potential insurer liability under
PRIA is almost $50 billion—nearly
double the insured property losses from 9/11 and larger than
every disaster in history other than Hurricane Katrina
-
47
SUMMARYThe P/C Insurance Industry Remains Strong, Stable, Sound
and Secure
The Rapid Economic Slowdown Will Temper P/C Growth, Especially in Economically Sensitive Lines (especially Workers Comp)
Asset Price Volatility Will Persist and Low Interest Rates Will Pressure Investment Earnings for Years
COVID-19 Exposures Are Substantial but Manageable with Headline Risk on BI and WC Issues
-
Thank you for your timeand your attention!
Twitter: twitter.com/bob_hartwigFor a copy of this presentation, email
me at [email protected] or Download at www.uscriskcenter.com
48
mailto:[email protected]://www.uscriskcenter.com/
Pandemics, Politics & Economics:�P/C Insurance in an Era of UncertaintySlide Number 2Slide Number 3Policyholder Surplus (Capacity), �2006:Q4–2020:H1P/C Industry Net Income After Taxes, 1991–2020E*ROE: Property/Casualty Insurance by Major Event, 1987–2020:H1* (est.)Profitability & PoliticsSlide Number 8Net Premium Growth (All P/C Lines): Annual Change, 1971—2020:H1Potential Impacts of COVID-19 on Written Premium in 2020, by Key LinePotential Impacts of COVID-19 on LOSSES in 2020, by Key LineP/C Insurance Industry Combined Ratio, 2001–2020:H1*COVID-19 Announced Losses vs. Top-Down Industry Estimates (as of May 12, 2020)Estimated Monthly U.S. Business Interruption Coronavirus Losses for Small Business—Potential Range (