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Trends, Challenges and Opportunities in the P/C Insurance Industry in 2017 & Beyond The Institutes’ Management Development Program University of Wisconsin Madison, WI October 18, 2016 Robert P. Hartwig, Ph.D., CPCU, Special Consultant Insurance Info. Inst. Co-Director, Center for Risk and Uncertainty Mgmt. University of South Carolina Cell: 917.453.1885 [email protected] www.iii.org P/C (Re)Insurance Industry Financial Overview The Past Few Years Have Been Very Similar and Reasonably Good 2 $55,870 $56,622 14 15 $63,784 $21,685 $33,522 $19,456 $3,043 $28,672 Net income in Q2:2016 on an annualized basis was on track to fall short of full-year 2015 $35,204 $62,496 $44,155 $38,501 $30,029 $20,559 $21,865 $30,773 $36,819 $24,404 $20,598 $10,870 $3,046 $10,000 $19,316 $20,000 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:H1 ROAS = 6.4%* $5,840 $30,000 $14,178 $ Millions $80,000 $70,000 $60,000 $50,000 $40,000 $65,777 P/C Industry Net Income After Taxes 1991–2016:Q2 $0 16:Q1 13 12 11 10 09 08 07 06 05 04 03 02 01 99 98 97 96 95 94 93 92 91 00 -$6,970 -$10,000 •ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009; 2015E is annualized figure based actual figure through Q3 of $44.0 Sources: A.M. Best, ISO; Insurance Information Institute Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2016:H1 ROE 25% 1977:19.0% History suggests next ROE peak will be in 2016-2017 1987:17.3% 20% 1997:11.6% 15% 9 Years 2006:12.7% 2013 9.8% 2015: 8.4% 10% 5% 2016:H1 6.4% 0% 1975: 2.4% 1984: 1.8% 1992: 4.5% 2001: -1.2% 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 -5% *Profitability = P/C insurer ROEs. 2011-15 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers. Source: Insurance Information Institute; NAIC, ISO, A.M. Best, Conning ROE: Property/Casualty Insurance by Major Event, 1987–2016:H1 (Percent) P/C Profitability Is Both by Cyclicality and Ordinary Volatility 20% Modestly higher CATs Katrina, Rita, Wilma Low CATs 15% 10% Sept. 11 5% 0% Hugo Andrew, Iniki Lowest CAT Losses in 15 Years 4 Hurricanes Northridge Sandy Financial Crisis* Record Tornado Losses -5% 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* * Through 2016:H1. Excludes Mortgage & Financial Guarantee in 2008 – 2014. Sources: ISO, Fortune; Insurance Information Institute. 5 P/C Insurance Industry ROE: Magnitude of Cyclicality, Volatility Changes Over Time, 1950-2015 25% 20% 1950 - 1970 Low Volatility 1971 - 1992 Extreme Volatility 1993 - 2008 Moderate Volatility 2009 - Present Modest Volatility 15% 10% 5% 0% 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 -5% . Source: Insurance Information Institute P/C Insurance Industry Combined Ratio, 2001–2016:Q2* Heavy Use of Reinsurance Lowered Net Losses As Recently as 2001, Insurers Paid Out Nearly $1.16 for Every $1 in Earned Premiums Relatively Low CAT Losses, Reserve Releases 120 115.8 110 Best Combined Ratio Since 1949 (87.6) 107.5 Cyclical Deterioration Sandy Impacts 106.5 3 Consecutive Years of U/W Profits: First Time Since 1971-73 Elevated CATs Lower CAT Losses 102.5 101.1 99.8 99.3 98.4 100 Avg. CAT Losses, More Reserve Releases 101.0 100.8 100.1 Higher CAT Losses, Shrinking Reserve Releases, Toll of Soft Market Relatively Low CAT Losses, Reserve Releases 97.8 96.4 97.0 95.7 92.6 90 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16:Q2 * Excludes Mortgage & Financial Guaranty insurers 2008--2014. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014: = 97.0. Sources: A.M. Best, ISO (2014-2015); Figure for 2010-2013 is from A.M. Best P&C Review and Preview, Feb. 16, 2016. 7 Number of Years with Underwriting Profits by Decade, 1920s–2010s Number of Years with Underwriting Profits 12 10 10 8 8 7 6 6 5 4 4 3 3 2000s* 2010s** 2 0 0 1980s 1990s 0 1920s 1930s 1940s 1950s 1960s 1970s Underwriting Profits Were Common Before the 1980s (40 of the 60 Years Before 1980 Had Combined Ratios Below 100) – But Then They Vanished. Not a Single Underwriting Profit Was Recorded in the 25 Years from 1979 Through 2003 * 2009 combined ratio excl. mort. and finl. guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an u/w profit. **Data for the 2010s is for the period 2010 through 2015. Note: Data for 1920–1934 based on stock companies only. Sources: Insurance Information Institute research from A.M. Best Data. 8 P/C Insurance Loss Reserve Development, 1992 – 2017E* Reserve Change Source: A.M. Best; Barclays research for estimates. Reserve releases are expected to gradually taper off slowly, but will continue to benefit the bottom line and combined ratio through at least 2017 Policyholder Surplus, 2006:Q4–2016:Q2 $673.7 $676.3 $680.6 16:Q1 16:Q2 $672.4 $675.2 $673.9 $671.6 $662.0 15:Q4 $614.0 $586.9 $583.5 $567.8 $550.3 $570.7 $538.6 $559.1 $544.8 $530.5 $540.7 $511.5 $490.8 15:Q2 14:Q4 14:Q3 14:Q2 14:Q1 13:Q4 13:Q3 13:Q2 13:Q1 12:Q4 12:Q3 12:Q2 12:Q1 11:Q4 11:Q3 11:Q2 11:Q1 10:Q4 10:Q3 10:Q2 10:Q1 09:Q4 Surplus as of 6/30/16 stood at a record high $680.64B 09:Q3 $437.1 $463.0 09:Q2 08:Q4 08:Q3 08:Q2 08:Q1 07:Q4 07:Q3 07:Q2 07:Q1 $400 06:Q4 $450 09:Q1 $455.6 $478.5 $505.0 $515.6 $517.9 $521.8 $496.6 $500 $487.1 $550 $512.8 $600 $559.2 $566.5 $650 $607.7 Drop due to near-record 2011 CAT losses $653.4 2007:Q3 Pre-Crisis Peak $700 $624.4 ($ Billions) The industry now has $1 of surplus for every $0.76 of NPW, close to the strongest claims-paying status in its history. 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.M .Best. The P/C insurance industry entered 2016 in very strong financial condition. 10 RNW All Lines, 2005-2014 Average: Highest 25 States The most profitable states over the past decade are widely distributed geographically, though none are in the Gulf region 19.0 Profitability Benchmark: All P/C 8.3 8.8 8.9 8.9 9.6 9.9 10.0 10.3 10.5 10.6 10.6 10.8 10.9 11.0 11.1 11.3 11.5 11.7 11.7 11.9 13.0 13.2 13.3 US: 7.7% 14.0 22 20 18 16 14 12 10 8 6 4 2 0 19.9 (Percent) 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 Source: NAIC; Insurance Information Institute. 12 RNW All Lines, 2005-2014 Average: Lowest 25 States -9.4 Some of the least profitable states over the past decade were hit hard by catastrophes -7.4 1.7 3.4 4.1 4.7 5.1 5.1 5.5 6.1 6.2 6.3 6.5 6.8 6.9 7.0 7.1 7.1 7.3 7.3 7.4 7.5 7.5 7.7 7.8 9 7 5 3 1 -1 -3 -5 -7 -9 -11 7.8 (Percent) 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 Source: NAIC; Insurance Information Institute. 13 Net Premium Growth (All P/C Lines): Annual Change, 1971—2016:Q2 (Percent) 1975-78 1984-87 2000-03 Net Written Premiums Fell 0.7% in 2007 (First Decline Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3Year Decline Since 1930-33. 25% 20% 15% Outlook 2015: 3.4% 2016F: 3.0% 2014: 4.2 2017F: 2.9% 10% 2016 Q2: 3.0% 2013: 4.4% 2012: +4.2% 5% 0% 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 -5% Shaded areas denote “hard market” periods Sources: A.M. Best (1971-2013), ISO (2014-16). 14 NPW Premium Growth: Peaks & Troughs in the P/C Insurance Industry, 1926 – 2015 ROE Post WW II Peak: 1947: 26.2% 30% 25% 20% Start of WW II 1941: 15.8% 1970-90: Peak premium growth was much higher in this period while troughs were comparable. Rapid inflation, economic volatility, high interest rates, tort environment all played roles Economic Shocks, Inflation: 1976: 22.0% Tort Crisis 1985/86: 22.2% 1988-2000: Period of inter-cycle stability 15% 10% Post-9/11 2002:15.3% 2015 3.4% 5% -5% -10% -15% -20% 1950-70: Extended period of stability in growth and profitability. Low interest rates, low inflation, “Bureau” rate regulation all played a role Twin Recessions; Interest Rate Hikes 1987: 3.7% Great Depression 1932: -15.9% max drop 201020XX? Postrecession period of stable growth? Great Recession: 2010: -4.9% 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 0% Note: Data through 1934 are based on stock companies only. Data include state funds beginning in 1998. Source: A.M. Best; Insurance Information Institute. U.S. INSURANCE MERGERS AND ACQUISITIONS, P/C SECTOR, 1994-2015 (1) ($ Millions) $35,221 $40,032 $30,873 $12,458 $6,723 $4,397 40 $4,651 $6,419 $9,264 $425 $486 $1,249 60 $3,507 $20,353 $19,118 $8,059 $5,100 $10,000 $11,534 $30,000 $20,000 100 80 $16,294 $40,000 120 $0 Number of transactions Transaction values $50,000 140 $39,607 $55,825 $13,615 $60,000 M&A activity in the P/C sector in 2015 totaled $39.6B, its highest level since 2000 20 0 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 (1) Includes transactions where a U.S. company was the acquirer and/or the target. Source: Conning proprietary database. 17 Non-Life Insurance: Global Real (Inflation Adjusted) Premium Growth, 2015 Real non-life premium growth was stronger in the US in 2015 than in most of Europe Market Life Non-Life Total Advanced 2.5 2.6 2.5 Emerging 12.0 7.8 9.8 4.0 3.6 3.8 World Source: Swiss Re, sigma, No. 3/2016. 18 INVESTMENTS: THE NEW REALITY Investment Performance is a Key Driver of Profitability Depressed Yields Will Necessarily Influence Underwriting & Pricing 19 Property/Casualty Insurance Industry Investment Income: 2000–2016:Q21 Investment earnings are still 19% below their 2007 pre-crisis peak ($ Billions) $60 $54.6 $52.3 $51.2 $49.5 $50 $49.2 $47.1 $47.6 $48.0 $47.3 $46.4 $47.1 $44.1 $40 $38.9 $38.7 $39.6 $37.1 $36.7 $30 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16* Due to persistently low interest rates, investment income fell in 2012, 2013 and 2014 but showed a small (1.9%) increase in 2015— another drop in 2016 seems likely. 1 *Annualized figure based on actual Q2:2016 net investment income earned of $22.067B. Investment gains consist primarily of interest and stock dividends. Sources: ISO; Insurance Information Institute. U.S. Treasury Security Yields: A Long Downward Trend, 1990–2016* 9% Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for more than a decade. 8% 7% 6% 5% Despite the Fed’s December 2015 rate hike, yields remain low though shortterm yields have seen some gains; Yield curve is flattening. 4% 3% 2% 1% Recession 2-Yr Yield 10-Yr Yield 0% '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come. *Monthly, constant maturity, nominal rates, through August 2016. Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute. 22 Net Investment Yield on Property/ Casualty Insurance Invested Assets, 2007–2016P* (Percent) 4.6 Estimated book yield in 2016 is down about 140 BP from pre-crisis levels 4.5 4.4 4.2 4.2 4.0 4.0 3.8 3.8 3.7 3.8 3.6 3.6 3.6 3.4 3.4 3.1 3.2 3.0 07 08 09 10 11 12 13 14 15E 16P The yield on invested assets remains low relative to pre-crisis yields. The Fed’s plan to raise interest rates in late 2015 has pushed up some yields, albeit quite modestly. Sources: A.M. Best; 2015E-2016P figures from A.M. Best P/C Review and Preview, Feb. 2016; Insurance Information Institute Interest Rate Forecasts: 2016 – 2021F Yield (%) 3-Month Treasury 10-Year Treasury 4% 3.6% 3.4% 3.5% 3.1% 3% 2.8% 2.7% 2.7% 2.5% 2.2% 2% 2.2% 1.7% 2.1% 1.7% 10-year yields are actually down in 2016 0.8% 1% 0.3% 0.1% 0% 15 16F 17F 18F 19F 20F 21F 22F 15 16F 17F 18F 19F 20F 21F 22F A full normalization of interest rates is unlikely until 2019, more than a decade after the onset of the financial crisis. Sources: Blue Chip Economic Indicators (10/16 for 2016 and 2017; for 2018-2021 10/16 issue); Insurance Info. Institute. 25 $8.88 $9.41 $10.28 $11.37 $6.18 -$7.90 -$19.81 -$5 -$10 -$15 -$20 -$25 $7.04 $5.85 $8.92 $3.52 $9.70 $6.61 -$1.21 $6.63 $9.13 Realized capital gains are down from their 2013 peak $16.21 $13.02 $10.81 $9.24 $6.00 $1.66 $9.82 $9.89 $4.81 $20 $15 $10 $5 $0 $2.88 ($ Billions) $18.02 P/C Insurer Net Realized Capital Gains/Losses, 1990-2016:Q2 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* Insurers Posted Net Realized Capital Gains in 2010 - 2015 Following Two Years of Realized Losses During the Financial Crisis. Realized Capital Losses Were a Primary Cause of 2008/2009’s Large Drop in Profits and ROE. *Annualized based on actual of $4.438B through Q2 2016 Sources: A.M. Best, ISO; Insurance Information Institute. 27 Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line* s ne i L -5.7% -5.2% -4.3% -3.7% -3.3% -3.3% -3.1% -2.1% -1.9% -3.6% -2.0% -1.8% 0% -1% -2% -3% -4% -5% -6% -7% -8% -1.8% s ty l e e o p t r a s n i a ro p l Li y rc Su Au s o t P C a / al r e l s s n y n t a t P u M m m m m li P di so s pl rra d e m m m m r r r t e C a e d o o r o o Pe Pv Pe C C C C C Fi W Su M W to u A R a ur s n ei ** e nc -7.3% Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline *Based on 2008 Invested Assets and Earned Premiums **US domestic reinsurance only Source: A.M. Best; Insurance Information Institute. 29 THE ECONOMY The Strength of the Economy Will Greatly Influence Insurer Exposure Base Across Most Lines 30 US Real GDP Growth* Q4:2008 decline was Real GDP Growth (%) The the steepest since the -7% -0.3% Q1 2014/15 GDP data were hit hard by this year’s “Polar Vortex” and harsh winter -8.9% 2000 2001 2002 2003 2004 2005 2006 2007 08:1Q 08:2Q 08:3Q 08:4Q 09:1Q 09:2Q 09:3Q 09:4Q 10:1Q 10:2Q 10:3Q 10:4Q 11:1Q 11:2Q 11:3Q 11:4Q 12:1Q 12:2Q 12:3Q 12:4Q 13:1Q 13:2Q 13:3Q 13:4Q 14:1Q 14:2Q 14:3Q 14:4Q 15:1Q 15:2Q 15:3Q 15:4Q 16:1Q 16:2Q 16:3Q 16:4Q 17:1Q 17:2Q 17:3Q 17:4Q -9% -5.3% -5% Recession began in Dec, 2007 -3.7% -3% -1.8% -1% 4.6% 4.3% 2.1% 2.0% 2.6% 2.0% 0.9% 0.8% 1.4% 2.7% 2.3% 2.2% 2.0% 2.1% 2.1% 1% -0.9% 5.0% 1.4% 2.3% 2.2% 2.6% 2.4% 0.1% 2.5% 1.3% 4.1% 2.0% 1.3% 3.1% 0.4% 2.7% 1.8% 4.5% 3.5% 3% 1.3% 5% 1.1% 1.8% 2.5% 3.6% 3.1% 2.7% 1.8% 7% 4.1% Q1:1982 drop of 6.8% Demand for Insurance Should Increase in 2016 as GDP Growth Continues at a Steady, Albeit Moderate Pace and Gradually Benefits the Economy Broadly * Estimates/Forecasts from Blue Chip Economic Indicators. Source: US Department of Commerce, Blue Economic Indicators 10/16; Insurance Information Institute. 31 US Unemployment Rate Forecast Rising unemployment eroded payrolls and WC’s exposure base. 11% Unemployment peaked at 10% in late 2009. 10% 6% 5% 4.5% 4.5% 4.6% 4.8% 4.9% 5.4% 6.1% 6.9% 7% 8.1% 9% 8% 9.3% 9.6% 10.0% 9.7% 9.6% 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% 4.8% 4.7% 4.6% 4.6% 4.5% 2007:Q1 to 2017:Q4F* Jobless figures have been revised downwards for 2016 Unemployment forecasts have been revised modestly downwards. Optimistic scenarios put the unemployment as low as 4.3% by Q4 of 2017. 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4 12:Q1 12:Q2 12:Q3 12:Q4 13:Q1 13:Q2 13:Q3 13:Q4 14:Q1 14:Q2 14:Q3 14:Q4 15:Q1 15:Q2 15:Q3 15:Q4 16:Q1 16:Q2 16:Q3 16:Q4 17:Q1 17:Q2 17:Q3 17:Q4 4% * = actual; = forecasts Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (10/16 edition); Insurance Information Institute. 32 Continued Business Investment Will Spur Modest Commercial Exposure Growth 10% 9.0% The level and direction of interest rates is likely to affect these growth rates. 8% 6.0% 6% 3.5% 4% 3.4% 3.4% 3.2% 3.1% 3.1% 2018F 2019F 2020F 2021F 2022F 2.7% 2.1% 2% 0% -0.5% -2% 2012 2013 2014 2015 2016F 2017F Business investment was a major drag on the economy in 2016 and adversely impacts commercial property and liability insurance exposures. Growth should begin a modest recovery in 2017. Sources: Blue Chip Economic Indicators, 10/2016 (history and forecasts for 2016 and 2017, 10/2016 for forecasts for 2018-2022; Insurance Information Institute. 33 Profitability & Politics How Is Profitability Affected by the President’s Political Party? 34 P/C Insurance Industry ROE by Presidential Administration, 1950-2015* 16.43% Carter Reagan II Obama II Nixon Clinton I G.H.W. Bush G.W. Bush II Clinton II Reagan I Nixon/Ford Truman Eisenhower I Eisenhower II G.W. Bush I Obama I Johnson Kennedy/Johnson 15.10% 8.93% 8.93% 8.65% OVERALL RECORD: 1950-2015* Democrats 7.72% Republicans 7.85% 8.35% 8.33% 7.98% 7.68% 6.98% 6.97% 5.43% 5.03% 4.83% 4.68% 4.43% 3.55% 0% 2% 4% 6% *Truman administration ROE of 6.97% based on 3 years only, 1950-52;. Source: Insurance Information Institute 8% Party of President has marginal bearing on profitability of P/C insurance industry 10% 12% 14% 16% 18% Trump vs. Clinton: Issues that Matter to P/C Insurers Issue Trump Clinton Economy Supply Side-Like Philosophy: Lower taxesFaster real GDP growth; Deficits likely grow as tax cuts are combined with targeted increased spending on Homeland Security, Defense, etc. Keynesian Philosophy: More government spending on infrastructure, education, social services; Deficits likely increase as tax increases likely difficult to pass Interest Rates May trend higher with larger deficits; Shift from monetary policy to fiscal focus (tax cuts, government spending) Status quo at the Fed; Net impact on interest rates unclear Taxes Favors lower tax rates for corporate and personal income tax rates; Tax code overhaul? Unlikely to reduce taxes or embark on major overhaul of tax code International Trade Protectionist Tendencies (appeal primarily to manufacturing sector) Has criticized Trans-Pacific Partnership but is a realist on international matters Tort System Doesn’t like trial lawyers but seems to like filing lawsuits Status Quo Health Care ACA should be repealed & replaced Incremental Change 36 Auto & Home Insurance: State of the Personal Lines Market Auto Frequency and Severity Are an Immediate Challenge Dearth of Major CATs (Until Recently), Pricing Discipline Has Helped Home 37 Return on Net Worth: All P-C Lines vs. Homeowners & Pvt. Pass. Auto, 1990-2014* (Percent) 25% 20% Average RNW: 1990-2013* All P-C Lines: 7.8% PP Auto: 8.1% Homeowners: 4.3%** US All Lines US Home US PP Auto 15% 10% 5% 0% -5% Excluding 1992’s Hurricane Andrew -10% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Pvt.Pass. Auto Has Consistently Outperformed the P-C Industry as a Whole. Homeowners Volatility is Associated Primarily With Coastal Exposure Issues *Latest available. **Excludes 1992, the year of Hurricane Andrew. If 1992 is included the resulting homeowners RNW is 1.9% Sources: NAIC; Insurance Information Institute. 38 RNW Homeowners Insurance, 2005-2014 Average: Highest 25 States (Percent) 41.7 45 Hawaii was the most profitable state for home insurers from 2005-2014 due to the absence of hurricanes during this period 40 35 9.1 9.1 9.3 11.5 11.5 12.6 13.8 13.9 14.0 14.1 15.6 18.0 18.2 18.0 16.9 12.7 9.4 10 14.7 15 18.4 18.4 19.0 20.9 19.0 20 21.1 25 22.2 30 5 0 HI DC RI FL NV DE AK SC VA CA MA OR NY UT ME VT WA CT NH MD ID NC PA NM AZ WV Sources: NAIC; Insurance Information Institute 41 RNW Homeowners Insurance, 2005-2014 Average: Lowest 25 States -6.0 -7.5 -4.8 -5.8 -30 ND TX MI US NJ WY WI IA IL KS OH MT MO CO KY IN AL SD AR NE MN GA TN OK LA MS -26.8 -20.1 -25 -13.8 -20 Hurricanes Katrina and Rita made Louisiana and Mississippi the least profitable states for home insurers from 2005-2014 -8.4 -11.2 -15 -4.7 -4.8 -10 -3.6 -4.0 -5 -2.1 -2.6 6.0 -1.7 RNW HO 0 4.6 1.7 7.6 7.5 6.8 4.7 5 8.0 8.0 10 8.4 (Percent) Sources: NAIC; Insurance Information Institute 42 Personal Lines Underwriting Performance Auto, Home Underwriting Performance Exhibit Periods of Both Stability and Volatility 43 105.4 105.3 104.9 102.3 101.6 102.1 102.0 101.0 101.3 100.2 98.3 95.5 95.1 98.4 101.1 101.0 101.3 104.2 94.3 95 99.5 100 101.3 105 101.7 110 103.5 109.5 115 107.9 Private Passenger Auto Combined Ratio: 1993–2017F 90 85 80 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15E 16F 17F Private Passenger Auto Underwriting Performance Is Showing the Strains of Rising Frequency (and Severity) Trends in Many States Sources: A.M. Best (1990-2014); Conning (2015E-17F); Insurance Information Institute. 44 Homeowners Insurance Combined Ratio: 1990–2017F 91.5 92.7 90.5 95.3 95.5 Hurricane Sandy 122.1 106.9 105.8 95.6 89.0 90 100.3 109.3 121.7 111.4 108.2 109.4 121.7 112.7 118.4 113.6 1 94.4 100 101.0 110 117.7 120 113.0 130 116.6 Hurricane Ike 140 103.9 150 98.2 160 Record tornado activity Hurricane Andrew 158.4 170 80 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 15E16F17F Homeowners Performance Has Improved Markedly Since the 2011/12’s Large Cat Losses. Extreme Regional Variation Can Be Expected Due to Local Catastrophe Loss Activity. Results in 2016 Will Be Impacted by Severe Spring Weather Sources: A.M. Best (1990-2014); Insurance Information Institute (2015E-17F). 45 Claim Trends in Private Passenger Auto Insurance Rising Frequencies and Severities in Many Coverages Will that Pattern Be Sustained? 47 A Half Century of Auto Insurance: Frequency vs. Severity In the Long Run, Frequency Falls. Severity Increases. Frequency Severity 18,000 8.0 7.92 14,000 7.0 12,000 6.0 5.0 4.0 $15,443 16,000 Claim Severity Claims per 100 Insured Vehicles 9.0 10,000 4.22 3.55 3.0 2.61 2.0 1.23 1.0 6,000 4,000 0.95 2,000 0.0 0 Property Damage Bodily Injury 1963 $7,553 8,000 $3,231 $1,288 $183 Property Damage 1988 $1,143 Bodily Injury 2013 Sources: Insurance Institute for Highway Safety, Insurance Services Office, Insurance Information Institute. Collision Coverage: Severity & Frequency Trends Are Both Higher in 2016 Annual Change, 2005 through 2016* Severity Frequency 8% 5.7% 6% 4% 3.9% 4.1% 3.1% 2.8% 2.5% 2% 0.1% 0.9%1.3% 0.5% 5.6% 4.4% 2.4% 1.3% 0.8% 0.8% 0% -2% -0.1% -0.5% -1.4% -2.4%-2.3% -1.8% -4% -1.8% -3.6% -6% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016* The Recession, High Fuel Prices Helped Temper Frequency and Severity, But this Trend Has Clearly Reversed, Consistent with Experience from Past Recoveries *Four quarters ending with 2016 Q1. Source: ISO/PCI Fast Track data; Insurance Information Institute 52 Collision Loss Ratio Trending Upward: Private Passenger Auto, 2010 – 2016* Loss Ratio 79.1% 80% 78% 76.6% 76% 74.8% 73.4% 74% 72% 70% 68% 69.3% 69.4% 2011 2012 67.7% 66% 64% 62% 2010 2013 2014 2015 2016* Collision Loss Ratios are Trending Steadily Upward *2016 figure is for Q1. Source: ISO/PCI Fast Track data; Insurance Information Institute 53 Bodily Injury: Severity Trend Is Up, Frequency Decline Has Ended—Rising? Annual Change, 2005 through 2016* Severity Frequency 8% 5.7% 6% 5.9% 4.7% 4% 2.9% 3.0% 2.1% 1.7% 1.1% 0.0% 0.0% 2.0% 2% 4.1% 3.7% 1.8% 2.2% 4.3% 2.2% 0.0% 0% -1.1% -2% -2.2% -4% -6% -3.8% -4.0% -5.4% 2005 2006 2007 -4.2% 2008 2009 2010 2011 2012 2013 2014 2015 2016* Cost Pressures Will Increase if BI Frequency and Severity Trends Persist *2016 figure is for Q1. Source: ISO/PCI Fast Track data; Insurance Information Institute 54 Property Damage Liability: Severity and Frequency Are Up Annual Change, 2005 through 2016* Severity Frequency 8% 6.4% 6.8% 6% 4.0% 3.6% 4% 2.9% 2.0% 2.0% 0.9% 2% 1.8% 1.9% 1.2% 0.6%0.4%0.3% 0.6% 3.4% 2.3% 1.4% 1.1% 0.0% 0% -2% -0.4% -1.6% -4% -3.4% -3.5% -6% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016* Severity/Frequency Trends Have Been Volatile, But Rising Severity since 2011 Is a Concern *2016 figure is for Q1. Source: ISO/PCI Fast Track data; Insurance Information Institute 55 A Few Factors Driving Adverse Private Passenger Auto Loss Trends More People Driving, Lower Gas Prices, Higher Speed Limits… 57 More People Working and Driving => More Collisions, 2006-2016 Number Employed, Millions 152 Number Employed (left scale) Collision Claim Frequency (right scale) Overall Collision Claims Per 100 Insured Vehicles 6.0 Recession 150 5.9 148 146 5.8 144 5.7 142 5.6 140 138 16:Q1 15:Q3 15:Q1 14:Q3 14:Q1 13:Q3 13:Q1 12:Q3 12:Q1 11:Q3 11:Q1 10:Q3 10:Q1 09:Q3 09:Q1 08:Q3 08:Q1 07:Q3 07:Q1 06:Q3 06:Q1 5.5 When people are out of work, they drive less. When they get jobs, they drive to work, helping drive claim frequency higher. Sources: Seasonally Adjusted Employed from Bureau of Labor Statistics; Rolling Four-Qtr Avg. Frequency from Insurance Services Office; Insurance Information Institute. 59 Change in Auto Fatalities by State: Especially Severe in Georgia 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 2015 vs. 2014 22% 16% SC (954) 12% KY (748) 11% NC (1,396) 8% -1% -5% 0% 5% USA (38,300) Fatalities in Southeast Rising Faster Than USA as a Whole 7% 10% SOURCE: Estimates from National Safety Council. GA (1,394) 15% 20% VA (755) TN (961) 25% Personal Lines Growth Drivers Rate and Exposure are Both Presently Important Growth Drivers 61 Monthly Change in Auto Insurance Prices, 1991–2016* 10% 8% Cyclical peaks in PP Auto tend to occur roughly every 10 years (early 1990s, early 2000s and likely the early 2010s) Pricing peak occurred in late 2010 at 5.3%, falling to 2.8% by Mar. 2012 6% 4% 2% 0% “Hard” markets tend to occur during recessionary periods Jul. 2016 reading of 6.3% is up from 5.4% a year earlier. Current rate trend is strongest since 2002-03. -2% '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 *Percentage change from same month in prior year; through July 2016; seasonally adjusted Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes. 62 $787 $792 $797 09 10 11 $870 $841 $791 08 $815 $799 07 $816 $831 $842 $830 $786 $690 00 $726 $685 99 $668 $703 $650 $651 $750 98 $800 $705 $850 97 $900 $691 $950 $700 The average expenditure on auto insurance now finally exceeds the pre-crisis high of $842 recorded in 2004, taking a full decade to recover, but on an inflation-adjusted basis premiums are still below 2004 levels Annual Pct Changes 2001: 5.2% 2002: 8.6% 2003: 5.6% 2004: 1.5% 2005: -1.3% 2006: -1.8% 2007: -2.1% 2008: -1.0% 2009: -0.5% 2010: 0.6% 2011: 0.6% 2012: 2.3% 2013: 3.3% $899 Average Expenditures* on Auto Insurance, 1994-2015E 15E 14E 13 12 06 05 04 03 02 01 96 95 94 $600 Across the U.S., auto insurance expenditures fell by 0.8% in 2008 and 0.5% in 2009 but rose 0.5% in 2010, 0.8% in 2011, 2.3% in 2012 and 3.3% in 2013; I.I.I. estimate is for +3.4% in 2014 and 2015. * The NAIC data are per-vehicle (actually, per insured car-year) Sources: NAIC for 1994-2013; Insurance Information Institute estimates for 2014-2015 based on CPI and other data. 63 $120 $128.0 $140 $119.7 $197.7 $191.2 $183.5 $174.6 $168.1 $163.3 $160.1 $157.2 $159.6 $157.3 $151.2 $160 $139.7 $180 $158.5 $200 $159.6 $220 PP Auto premiums written continue to recover from a period of flat growth attributable to the weak economy impacting new vehicle sales, car choice, and increased price sensitivity among consumers $160.3 $ Billion PPA will generate $6B - $8B in new premiums annually through 2017 $204.0 Private Passenger Auto Insurance Net Written Premium, 2000–2017F PPA NWP volume in 2014 was up $26.3B or 16.7% since the 2009 trough; By 2017 the gain is expected to be $46.8B or 29.7% $100 00 01 02 03 04 05 06 07 08 09 10 Sources: A.M. Best (1990-2014); Conning (2015-17F); Insurance Information Institute. 11 12 13 14 15F 16F 17F 64 Homeowners Insurance Net Written Premium, 2000–2016F $ Billions $100 $95 $90 $85 $80 $75 $70 $65 $60 $55 $50 $45 $40 $35 $30 Homeowners insurance NWP continues to rise (up 150% 2000-2015F) despite very little unit growth during the real estate crash. Reasons include rate increases, especially in coastal zones, ITV endorsements (e.g., “inflation guards”), compulsory for mortgaged properties and resumption of home building activity $84.9 $80.9 $77.0 $71.9 $66.9 $61.1 $49.5 $40.0 $32.4 00 $52.2 $54.8 $55.2 $56.2 02 03 04 05 Sources: A.M. Best; Insurance Information Institute. $57.5 The Homeowners line will generate about $4B in new premiums annually through 2016 $45.8 $35.2 01 $63.5 06 07 08 09 10 11 12 13 14 15F 16F 65 Personal Lines: Economic and Demographic Considerations Auto, Home Are Sensitive to Underlying Economic Conditions 66 New Private Housing Starts, 1990-2022F 2.1 1.9 1.7 1.5 1.3 1.1 0.9 0.7 0.5 New home starts plunged 72% from 2005-2009; A net annual decline of 1.49 million units, lowest since records began in 1959 0.55 0.59 0.61 0.78 0.92 1.00 1.11 1.18 1.28 1.37 1.43 1.47 1.48 1.48 1.19 1.01 1.20 1.29 1.46 1.35 1.48 1.47 1.62 1.64 1.57 1.60 1.71 1.85 1.96 2.07 1.80 1.36 0.91 Job growth, low inventories of existing homes, still-low mortgage rates and demographics should continue to stimulate new home construction for several more years (Millions of Units) 0.3 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 16F17F18F19F20F21F22F Insurers Are Continue to See Meaningful Exposure Growth in the Wake of the “Great Recession” Associated with Home Construction: Construction Risk Exposure, Surety, Commercial Auto; Potent Driver of Workers Comp Exposure Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/16 for 2016-17; 10/16 for 2018-22F; Insurance Information Institute. 67 Auto/Light Truck Sales, 1999-2022F 14.4 16 12 11 10 16.7 16.7 16.7 16.8 16.8 17.1 17.2 17.4 16.4 12.7 New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2014-15 is still below 1999-2007 average of 17 million units, but a robust recovery is well underway. 11.6 13 10.4 14 13.2 15 15.5 16.1 16.5 16.9 16.9 17.1 16.6 17 17.5 18 17.8 19 17.4 (Millions of Units) Sales have returned to precrisis levels Job growth and improved credit market conditions will boost auto sales in 2015 and beyond Truck, SUV purchases are especially strong 9 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16F 17F 18F 19F 20F 21F 22F Yearly car/light truck sales will likely continue at current levels, in part replacing cars that were held onto in 2008-12. PP Auto premium might grow by 3.5% - 5%. Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/16 for 2016-17; 10/16 for 2018-21F; Insurance Information Institute. 68 Number of Registered Passenger Vehicles in US, 1999 – 2015E Vehicle registrations are growing once again and now finally exceed pre-crisis peak Vehicle registrations are expected to increase at an annual rate of about 1.5% per year in 2015 and 2016 Sources: Bureau of Transportation Statistics; Barclays Capital estimates, August 2015. 69 Commercial Lines Underwriting Performance 71 Commercial Lines Combined Ratio, 1990-2017F* 107.9 94.3 14 98.1 93.6 94.8 13 91.1 95 93.6 100 97.3 98.9 102.4 104.2 105.4 102.5 102.0 105 103.5 122.3 110.2 111.1 112.3 109.7 104.1 107.6 110.2 109.5 112.5 118.8 115 110.2 120 109.4 Commercial Lines Combined Ratio 125 110 Commercial lines underwriting performance improved in 2013/14 but higher cats, diminishing prior year reserves and rising loss cost trends in some lines could push combined ratios higher *2007-2012 figures exclude mortgage and financial guaranty segments. Source: A.M. Best (1990-2014); Conning (2015E-17F) Insurance Information Institute. 17F 16F 15E 12 11 10 09 08 07 06 05 04 03 02 01 00 99 98 97 96 95 94 93 92 91 90 90 72 105.8 110 106.5 105.8 Commercial Property Combined Ratio: 2007–2017F 11 12 105 14 15F 90.6 86.3 75 85.8 80 16F 17F 72.4 85 82.7 83.3 90 86.5 95 90.6 100 70 07 08 09 10 13 Commercial Property Underwriting Performance Has Improved in Recent Years, Largely Due to Diminished CAT Activity Source: Conning Research and Consulting. 73 108.8 108.2 106.6 103.4 106.7 106.8 103.4 97.8 96.8 94.1 92.4 99.1 115.7 118.1 116.2 92.1 95 92.9 100 95.2 105 102.7 110 113.0 115 112.0 120 112.1 125 115.9 Commercial Auto Combined Ratio: 1993–2017F 90 85 80 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15E16F17F Commercial Auto Results Are Challenged as Rate Gains Barely Have Yet to Offset Adverse Frequency and Severity Trends Sources: A.M. Best (1990-2014);Conning (2015E-2017F); Insurance Information Institute. 75 Workers Compensation Combined Ratio: 1994–2015P 100.0 94.0 95 102.0 109.0 115.0 115.0 110.6 104.5 103.5 102.7 105.1 112.6 108.6 101.0 98.5 100 100.0 105 97.0 110 102.0 115 107.0 120 121.7 115.3 125 118.2 130 WC results have improved markedly since 2011 90 85 80 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15P Workers Comp Results Began to Improve in 2012. Underwriting Results Deteriorated Markedly from 20072010/11 and Were the Worst They Had Been in a Decade. Sources: A.M. Best (1994-2009); NCCI (2010-2015P) and are for private carriers only; Insurance Information Institute. 76 Workers Compensation Premium: Fifth Consecutive Year of Increase Net Written Premium $ Billions 50 46.5 State Funds ($ B) 46.5 44.3 Private Carriers ($ B) 40 47.8 42.3 33.6 30 28.5 26.9 25.9 34.6 33.8 10 36.4 28.6 25.0 20 31.0 31.3 29.8 30.5 29.1 39.5 39.3 32.1 30.1 45.5 41.8 37.7 35.3 35.7 34.3 35.4 44.2 34.7 26.3 25.2 25.0 26.1 24.2 23.3 22.3 29.2 37.8 38.6 37.6 33.8 31.1 30.3 29.9 32.3 38.5 39.7 36.9 35.1 Pvt. Carrier NWP growth was +2.9% in 2015, +4.3% in 2014, +5.1% in 2013 and 8.7% in 2012 0 90 91 p Preliminary 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Calendar Year 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. 14 15p Workers Compensation Lost-Time Claim Frequency Declined in 2015 Percent 12 10.6 Average Annual Change = –3.6% (1994–2014) 10 Indicated Adjusted* 8 6 4 2 3.6 0.5 0.3 0 -0.9 -2 -4 -4.5 -6 -9.2 93 94 95 -3.7 -4.5 -4.1 -4.5 -6.5 -8 -10 -3.9 97 98 99 00 01 -4.3 -4.5 -3.9 -4.9 -3 -3.0 13 14 15p -5.4 -6.6 -6.9 96 -1.7 -2.2 -2.3 02 03 04 05 06 07 08 09 10 11 12 Accident Year *Adjustments primarily due to significant audit activity. 2015p: Preliminary based on data valued as of 12/31/2015. Source: NCCI Financial Call data, developed to ultimate and adjusted to current wage an voluntary loss cost level; Excludes high deductible policies; 1994-2014: Based on data through 12/31/14. Data for all states where NCCI provides ratemaking services, excluding WV. Frequency is the number of lost-time claims per $1M pure premium at current wage and voluntary loss cost level 78 Workers Compensation Medical Severity: Small Decrease in 2015 Medical Claim Cost ($000s) 30 25 Average Medical Cost per Lost-Time Claim Medical severity for lost time claims was down 1% Annual Change 1991–1993: +1.9% in 2015, the first decline in Annual Change 1994–2001: +8.9% at least 20 years Annual Change 2002–2010: +6.0% Cumulative Change = 252% (1991-2015p) 20 +3.0%-1% +2.3% +2.0% +2.2% +4.5%+0.4% +7.0% +5.9% +5.8% +7.8% +5.4% +7.7% $26.3 $26.8 $27.3 $28.0 $28.8 $11.7 96 97 98 99 00 Accident 01 02 03Year 04 05 $23.4 $10.8 95 $22.1 $9.8 94 $18.4 $9.1 93 $17.1 $8.8 92 $13.9 $8.1 91 +1.3% +6.8% -2.1% $12.9 $8.2 +7.4% +5.1% +9.0% $8.1 10 $15.7 +8.3% +10.1% $19.4 +7.3% +10.6% $20.9 15 $25.0 +13.5% 10 11 12 13 14 15p $28.5 $26.2 09 +8.8% 5 Accident Year 06 07 08 2015p: Preliminary based on data valued as of 12/31/2015. 1991-2013: Based on data through 12/31/2014, developed to ultimate Based on the states where NCCI provides ratemaking services including state 79 funds, excluding WV; Excludes high deductible policies. Insured Catastrophe Losses 2013/14 and YTD 2015 Experienced Below Average CAT Activity After Very High CAT Losses in 2011/12 Winter Storm Losses Far Above Average in 2014 and 2015 80 U.S. Insured Catastrophe Losses ($ Billions, $ 2015) $80 $75.7 $70 2012 was the 3rd most expensive year ever for insured CAT losses $11.0 $15.2 $15.5 $13.1 $36.1 $34.6 $14.9 $11.8 $30.1 $7.7 $10.9 $16.8 $7.8 $34.7 $35.8 $6.3 $11.9 $14.8 $11.3 $13.0 $3.9 $10 $8.2 $20 $5.0 $30 $14.4 $40 $9.1 $50 $27.2 $38.9 $60 $0 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* 2013/14/15 Were Welcome Respites from 2011/12, among the Costliest Years for Insured Disaster Losses in US History. 2016 Is Off to a Costlier Start. $11.0B in insured CAT losses though 6/30/16 *Through 6/30/16. 2016 figure stated in 2016 dollars. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute. 81 81 Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1996–20151 Other Wind/Hail/Flood (3), $19.9 Winter storm losses were much above average in 2014/15 pushing this share up Fires (4), $7.3 Other (5), $0.8 Terrorism, $24.6 Winter Storms, $30.4 4.9% 0.2% 1.8% 6.1% 7.5% Insured cat losses from 1996-2015 totaled $404.1B, an average of $20.2B per year or $1.68B per month 39.2% Tornado share of CAT losses is rising Events Involving Tornadoes (2), $158.6 Hurricanes & Tropical Storms, $158.6 40.2% Wind losses are by far cause the most catastrophe losses, even if hurricanes/TS are excluded. 1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2015 dollars. 2. Excludes snow. 3. Does not include NFIP flood losses 4. Includes wildland fires 5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation. Source: ISO’s Property Claim Services Unit. 82 Top 16 Most Costly Disasters in U.S. History—Katrina Still Ranks #1 (Insured Losses, 2014 Dollars, $ Billions) Storm Sandy in 2012 was the last mega-CAT to hit the US $60 $50 $50.2 $40 $30 Includes Tuscaloosa, AL, tornado Includes Joplin, MO, tornado $24.6 $25.3 $26.4 $19.3 $20 $10 $0 $9.4 $11.4 $9.0 $8.1 $7.7 $7.3 $6.9 $4.6 $5.7 $5.8 Irene (2011) Jeanne (2004) Frances (2004) Rita Tornadoes/Tornadoes/ Hugo (2005) T-Storms T-Storms (1989) (2011) (2011) Ivan (2004) Charley (2004) Wilma (2005) $13.8 Ike (2008) Sandy* Northridge9/11 Attack Andrew (2012) (1994) (2001) (1992) Katrina (2005) 12 of the 16 Most Expensive Events in US History Have Occurred Since 2004 Sources: PCS; Insurance Information Institute inflation adjustments to 2014 dollars using the CPI. 84 Convective Loss Events in the US Overall and insured losses, 1980 – 2015 Overall losses (in 2015 values)* $ Billions The period from 2008-2015 has been the most expensive on record for insured losses from “Convective Events” (severe thunderstorms, tornado, hail, lightning and flash flood) *Losses adjusted to inflation based on CPI Source: Geo Risks Research, NatCatSERVICE Insured losses (in 2015 values)* Analysis contains: severe storm, tornado, hail, flash flood and lightning 85 Regional Property Catastrophe ROL Index: 1990 – 2016 Record traditional capacity, alternative capital and low CAT activity have pressured reinsurance prices; ROEs are down only very modestly Source: Guy Carpenter; Insurance Information Institute. 87 Alternative Capital as a Percentage of Traditional Global Reinsurance Capital 11.5% 12% 10.2% 10% 8.4% 8% 6% 6.5% 5.7% 5.9% 5.8% 2007 2008 2009 5.4% 4.6% 4% 2% 0% 2006 2010 2011 2012 2013 2014 Alternative Capital’s Share of Global Reinsurance Capital Has More Than Doubled Since 2010. 2014 data is as of June 30, 2014. Source: Aon Benfield Analytics; Insurance Information Institute. INDUSTRY DISRUPTORS Technology, Society and the Economy Are All Changing at a Rapid Pace Thoughts on the Future 89 Media is Obsessed with Driverless Vehicles: Often Predicting the Demise of Auto Insurance By 2035, it is estimated that 25% of new vehicle sales could be fully autonomous models 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? Source: Boston Consulting Group. 90 On-Demand/Sharing/Peer-to-Peer Economy Impacts Many Lines of Insurance The “On-Demand” Economy is or will impact many segments of the economy important to P/C insurers Auto (personal and commercial) Homeowners/Renters Many Liability Coverages Professional Liability Workers Comp Many unanswered insurance questions Insurance solutions are increasingly available to fill the many insurance gaps that arise 91 Americans Who Offer Services in the Sharing/Gig Economy Are Statistically More Prone to Workplace Injury Young, urban minority males are the most likely to offer their services in the sharing economy. Sources: The SelfEmployed.com accessed at https://www.theselfemployed.com/gig-economy/infographic-inside-the-neweconomy/ based on a poll by Time magazine, Bursten-Marsteller and The Aspen Institute; Insurance Information Institute. 95 Data Breaches 2005-2015, by Number of Breaches and Records Exposed # Data Breaches/Millions of Records Exposed 222.5 800 700 783 220 200 662 656 Millions 614 180 600 160 498 500 117.6 470 127.7 446 419 92.0 400 66.9 120 85.6 400 321 35.7 157 100 80 300 200 140 60 16.2 22.9 19.1 40 17.5 20 100 0 2005 2006 2007 2008 2009 2010 # Data Breaches 2011 2012 2013 2014 *2015 # Records Exposed (Millions) The total number of data breaches (+27.5%) hit a record high of 783 in 2014, exposing 85.6 million records. Through June 30, this year has seen 117.6 million records exposed in 400 breaches.* *Figures as of June 30, 2015, from the Identity Theft Resource Center, http://www.idtheftcenter.org/images/breach/ITRCBreachReport2015.pdf AUTO TECHNOLOGY & THE FUTURE OF AUTO INSURANCE The Road to Fully Autonomous Vehicles: Long, Dark and Full of Potholes Tales of the Death of Auto Insurance Are Greatly Exaggerated 97 Media is Obsessed with Driverless Vehicles: Often Predicting the Demise of Auto Insurance By 2035, it is estimated that 25% of new vehicle sales could be fully autonomous models 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? Source: Boston Consulting Group. 98 Media is Obsessed with Driverless Vehicles: Often Predicting the Demise of Auto Insurance Some are predicting that the rise of autonomous vehicles will reduce claim frequency by 75% or more… ,,,and that this technology will cause average auto insurance premiums to plunge Source: Autonomous Consulting as cited in the Financial Times: “Cost of Car Insurance to Plunge With Rise of Driverless Vehicles, June 28, 2016. 99 I.I.I. Poll: Driverless Cars Q. Would you be willing to ride in a driverless car? Yes 70% 59% 60% No 58% 56% 50% 40% Don't Know 40% 55% 43% 40% 43% 30% 20% 10% 2% 1% 0% May 2014 May 2015 2% November 2015 2% May 2016 The Percentage Willing to Ride in a Driverless Car Remains at 43%; 71% of People Over 64 Were Unwilling to Ride. Source: Insurance Information Institute Annual Pulse Survey. I.I.I. Poll: Driverless Cars Why Americans Would Not Want to Ride in a Driverless Car, May 20161 100% 84% 90% 80% 74% 70% 72% 62% 60% 59% 50% 42% 36% 40% 30% 20% 10% 0% Would Not Don't Want Computer Cars Would Would Be Feel Safe to Give Up Could Be Be Too Liable for Control Hacked Expensive Any Accident Would Collect Personal Data Would Be Boring 1% 1% None of These Don’t Know Safety Concerns Are Paramount Among Those Who Would Avoid Driverless Cars. Based on those who would not ride in a driverless car. Respondents could give more than one answer. Source: Insurance Information Institute Annual Pulse Survey. 1 I.I.I. Poll: Telematics— Consumers Still Hesitant Q Would you allow your auto insurer to collect information about how and when you drive in order to set your auto insurance premium? Don’t Know 1% Allow if Premium 39% Went Down Not 42% Allow 18% Allow Whether or Not Premium Went Down More Than Half of Auto Policyholders Would Allow Their Insurer to Collect Their Driving Information in Order to Set Premiums. 1Asked of those who have auto insurance. Source: Insurance Information Institute Annual Pulse Survey. Telematics for Your Home: The Internet of Things The home is the next frontier for telematics Rapidly becoming a crowded space How and with whom will insurers partner? Can control increasing array of household systems remotely Heat, A/C Fire, CO detection Security Systems Cameras/Monitors Appliances Lighting Technology is adaptive Uses sensors and algorithms to learn about you 105 THE ‘INTERNET OF THINGS’ Capturing Economic Value Amid a Shifting Insurer Value Chain 106 The Internet of Things and the Insurance Industry The “Internet of Things” will create trillions in economic value throughout the global economy by 2025 What opportunities, challenges will this create for insurers? What are the impact on the insurance industry “value Sources: McKinsey Global Institute, The Internet of Things: Mapping the Value Beyond the Hype, chain”? June 2015; Insurance Information Institute. 107 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 108 The Internet of Things and the Insurance Industry Value Chain Who owns the data? Where does It flow? Who does the analytics? Who is the capital provider? Source: Willis Capital Markets & Advisory; Insurance Information Institute. 110 INSURANCE TECHNOLOGY: FIN TECH ZEROES IN Number and Value of Deals Is Increasing In Search of the Elusive Insurance ‘Unicorn’ 111 Insurance Technology Financing Trend: Change Is Coming ($ Millions) Insurance tech deals reached a new record in 2016:Q1 $2,000 $1,800 $1,600 Investment $1,000 45 34 35 30 27 30 27 25 22 20 20 18 $800 19 18 $650 13 $600 10 $400 6 $200 13 10 11 5 4 $62 $29 $22 $18 $32 20 15 11 9 $415 $369 $272 $240 $133 $71 $37 $107 $44 $31 $29 $148 $171 $82 10 5 :Q 11 :Q 11 11 2 :Q 11 3 :Q 4 12 :Q 12 1 :Q 12 2 :Q 3 12 :Q 13 4 :Q 1 13 :Q 13 2 :Q 13 3 :Q 4 14 :Q 14 1 :Q 2 14 :Q 14 3 :Q 15 4 :Q 1 15 :Q 15 2 :Q 15 3 :Q 4 16 :Q 1 0 1 $0 Number of Deals $1,200 50 40 Investment in insurance tech is rising $1,400 47 $1,848 Source: CB Insights at https://www.cbinsights.com/blog/insurance-tech-overview-q1-2016/; Insurance Information Institute. 112 Lemonade: Peer-to-Peer (P2P) Insurance 113 Source: Lemonade.com accessed June 24, 2016. Lemonade: Sour Words About Insurance Daniel Schreiber here, with updates from Lemonade. I’m thrilled to report that a few days ago, by unanimous vote of our board and shareholders, Lemonade became a Public Benefit Corporation, and was also awarded provisional ‘B-Corp’ certification. Both are firsts for an insurance carrier, and are points of tremendous pride for our team. Rebuilding insurance as a social good, rather than a necessary evil, is now part of our legal mission. Our Chief Behavioral Officer, Professor Dan Ariely, says that “If you tried to create a system to bring out the worst in humans, it would look a lot like the insurance of today.” Working in partnership with nonprofits, and baking giving-back into our business model, holds the promise of a better insurance experience, and a more valuable insurance company. In other news, I’m happy to say that we’re putting finishing touches on our product and will be ready to launch in New York within weeks. The final step is for us to get our license, and if all goes to plan, we’ll have that shortly. Be sure to follow us on Twitter, Facebook, and LinkedIn to stay in the know. Until next time, Daniel @daschreiber 114 Source: Email from Lemonade CEO Danieal Schreibeir, May 17, 2016. Distribution Trends Distribution by Channel Type Continues to Evolve Around the World 115 Personal Lines Distribution Channels, Direct vs. Independent Agents, 1972-2014 80% 70% 60% 50% 40% 30% 20% 10% Independent agents have lost significant personal lines market share since the early 1970s. Although the trend slowed from 2000-2007, it may be accelerating again. 0% 72 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 Direct Independent Agents Source: Insurance Information Institute; based on data from Conning and A.M. Best. 117 Insurance Information Institute Online: www.iii.org Thank you for your time and your attention! Twitter: twitter.com/bob_Hartwig Download at www.iii.org/presentations 118