Download namic-030415 - Insurance Information Institute

Overview & Outlook for the
Commercial P/C
Insurance Industry:
Trends, Challenges & Opportunities
NAMIC Commercial Lines Seminar
Chicago, IL
March 4, 2015
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
Insurance Industry:
Financial Update & Outlook
2014 Was a Reasonably Good Year
2015: A Repeat of 2014?
2
Commercial Lines Outlook: 2015
 Flat to modest premium growth in 2015
 Rate environment suggests flat-to-slightly negative
renewals in late 2014/early 2015, but results vary
 Economic strengthening, stronger jobs market are pluses
and should drive new exposures
 Construction, manufacturing have been growth areas but
cooled in late 2014/early 2015; Public entities are now
growth sector for the first time since the Great Recession
 Loss costs driven by modest frequency and severity
trends, but helped by reserve releases, low cats, low infl.
 Property cat reinsurance costs continue to fall
 Investment income still under pressure from low yields
3
$50,203
$63,784
$33,522
$19,456
$3,043
$28,672
$35,204
$62,496
Net income rose
strongly (+81.9%)
in 2013 vs. 2012
on lower cats,
capital gains
$44,155
$38,501
$30,029
$20,559
$21,865
$30,773
$20,598
$10,870
$3,046
$10,000
$19,316
$20,000
$5,840
$30,000
$14,178
$40,000
$36,819
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 = 10.3%
2014 ROAS1 = 7.6%
$24,404

$ Millions 
$80,000 

$70,000 

$60,000 

$50,000 

$65,777
P/C Industry Net Income After Taxes
1991–2014E
$0
•ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.7% ROAS through
2014:Q2, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.
Sources: A.M. Best, ISO; Insurance Information Institute
14E
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
Profitability Peaks & Troughs in the P/C
Insurance Industry, 1975 – 2016F
ROE
25%
1977:19.0%
History suggests next ROE
peak will be in 2016-2017,
but that seems unlikely
1987:17.3%
20%
1997:11.6%
2006:12.7%
2013
10.4%
15%
9 Years
2015F=6.5%
2016F=6.3%
10%
5%
2014E
7.6%
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
15F
16F
-5%
*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude
mortgage and financial guaranty insurers.
Source: Insurance Information Institute; NAIC, ISO, A.M. Best, Conning
ROE: Property/Casualty Insurance by
Major Event, 1987–2014E
(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
Lowest CAT
Losses in
15 Years
Andrew
4 Hurricanes
Northridge
Financial
Crisis*
Sandy
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*
* Excludes Mortgage & Financial Guarantee in 2008 – 2014. 2014 figure is through Q3:2014.
Sources: ISO, Fortune; Insurance Information Institute.
7
Back to the Future: Profitability Peaks & Troughs
in the P/C Insurance Industry, 1950 – 2014*
1970-90: Peak ROEs were much
higher in this period while troughs
were comparable. High interest
rates, rapid inflation, economic
volatility all played roles
ROE
1950-70: ROEs were lower in
this period. Low interest rates,
low inflation, “Bureau” rate
regulation all played a role
25%
1990-2010s: Déjà vu.
Excluding megaCATs, this period is
very similar to the
1950-1970 period
1977:19.0%
20%
1987:17.3%
2006:12.7%
1972:13.7%
1997:11.6%
15%
2013
10.4%
1950:8.0%
10%
1959:6.8%
1966-67:
5.5%
5%
2014:H1
7.6%
1969: 3.9%
1992: 4.5%
*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. 2014 figure is through Q3.
Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
14E
12
10
08
06
04
02
00
98
96
94
2001: -1.2%
92
90
88
86
84
82
80
78
76
74
72
70
68
66
64
60
58
56
54
52
50
-5%
1984: 1.8%
1975: 2.4%
1965: 2.2%
1957: 1.8%
62
0%
NPW Premium Growth: Peaks & Troughs in the
P/C Insurance Industry, 1926 – 2014E
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%
2014E
4.0%
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.
Commercial Lines NPW Premium Growth:
1975 – 2014E
ROE
35%
Commercial lines is prone to more
cyclical volatility that personal
lines. Recently, growth has
stabilized in the 4% to 5% range.
Economic Shocks,
Inflation:
1976: 22.2%
30%
Tort Crisis
1986: 30.5%
25%
Post-9/11
2002: 22.4%
20%
1988-2000:
Period of
inter-cycle
stability
Post-Hurricane
Andrew Bump:
1993: 6.3%
15%
10%
Post Katrina
Bump:
2006: 7.7%
2014E
4.0%
5%
0%
Note: Data include state funds beginning in 1998.
Source: A.M. Best; Insurance Information Institute.
11
09
07
01
99
97
95
93
91
89
87
85
83
81
79
77
75
-15%
05
Great
Recession:
2009: -9.0%
-10%
13
Recessions:
1982: 1.1%
03
-5%
201020XX?
Postrecession
period of
stable
growth?
P/C Insurance Industry
Combined Ratio, 2001–2014:Q3*
As Recently as 2001,
Insurers Paid Out
Nearly $1.16 for Every
$1 in Earned
Premiums
Heavy Use of
Reinsurance
Lowered Net
Losses
120
Relatively
Low CAT
Losses,
Reserve
Releases
Relatively
Low CAT
Losses,
Reserve
Releases
Avg. CAT
Losses,
More
Reserve
Releases
115.8
110
Best
Combined
Ratio Since
1949 (87.6)
107.5
101.0
100.8
100.1
Cyclical
Deterioration
99.3
98.4
100
Higher
CAT
Losses,
Shrinking
Reserve
Releases,
Toll of Soft
Market
Sandy
Impacts
106.3
102.4
100.8
Lower
CAT
Losses
96.7
95.7
97.9
92.6
90
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
* 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; 2014:9M = 97.7.
Sources: A.M. Best, ISO.
11
A 100 Combined Ratio Isn’t What It
Once Was: Investment Impact on ROEs
Combined Ratio / ROE
15.9%
110
A combined ratio of about 100 generates an
ROE of ~7.0% in 2012/13, ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
106.5
14.3%
12.7%
105
100.6 100.1 100.8
100
10.9%
101.2
99.5
15%
102.4
101.0
97.5
96.7
95.7
95
8.8%
7.4% 7.9%
9.6% 92.7
6.2%
12%
9%
9.8%
Lower CATs
helped ROEs
in 2013
4.3%
85
97.9
7.4%
4.7%
90
18%
6%
3%
0%
80
1978
1979
2003
2005
2006
2007
2008
Combined Ratio
2009
2010
2011
2012
2013 2014:Q3
ROE*
Combined Ratios Must Be Lower in Today’s Depressed
Investment Environment to Generate Risk Appropriate ROEs
* 2008 -2014 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2014:9M combined ratio
including M&FG insurers is 97.7; 2013 = 96.1; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%.
Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.
Return on Net Worth (RNW) All Lines:
2004-2013 Average
25.6
30
Commercial lines have tended
to be more profitable than
personal lines over the past
decade
18.4
25
6.6
7.1
7.1
-1.0
0
4.9
5
7.8
7.9
10
8.9
9.2
15
13.2
13.4
20
in
es
th
er
Li
ab
ili
W
ty
or
ke
rs
C
om
PP
p
A
ut
o
H
To
om
ta
eo
l
w
ne
rs
Fa
M
rm
P
ow
ne
rs
M
P
A
lli
ed
Li
ne
s
O
A
ll
L
M
P
To
t
C
om
m
ut
o
A
er
ci
al
al
y
ia
bi
l it
om
m
C
ro
fL
th
er
ll
O
ed
ic
al
P
A
M
In
la
nd
M
Fi
re
ar
in
e
-5
Source: NAIC; Insurance Information Institute.
13
RNW All Lines by State, 2004-2013 Average:
Highest 25 States
18.4
20.5
Profitability Benchmark: All P/C
9.5
9.6
9.8
9.8
9.9
10.3
10.5
10.5
10.7
10.7
10.8
10.9
11.1
11.1
11.4
11.7
12.0
12.0
12.1
12.3
13.3
13.4
14.3
US: 7.9%
14.6
24
22
20
18
16
14
12
10
8
6
4
2
0
The most profitable states
over the past decade are
widely distributed
geographically, though none
are in the Gulf region
HI AK VT ME WY ND VA ID NH UT WA SC MA NC OH DC CA OR RI WV CT IA NE SD MT MD
Source: NAIC; Insurance Information Institute.
14
NM FL TX WI KS MN CO PA US AR IL
Source: NAIC; Insurance Information Institute.
-9.3
-6.9
Some of the least
profitable states over the
past decade were hit hard
by catastrophes
1.9
2.5
4.3
5.0
5.2
5.3
5.7
6.1
6.4
6.6
6.8
7.4
7.5
7.7
7.7
7.9
8.0
8.1
8.2
8.2
8.3
8.4
8.6
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
9.2
RNW All Lines by State, 2004-2013 Average:
Lowest 25 States
IN AZ MO KY TN NV NJ GA NY DE MI AL OK MS LA
15
P/C Insurance Loss Reserve Development,
1992 – 2016E*
Reserve Change
Source: A.M. Best; Barclays research for estimates.
Reserve releases are expected to
gradually taper off, but will
continue to benefit the bottom
line and combined ratio through
at least 2016
Top Insurance Issues:
What’s Hot, What’s Not
No Dominant Even in 2014, but
Some Key Commercial Lines
Issues Spiked
Terrorism, TRIA & Cyber
17
I.I.I. Media Index, P/C, 2014 vs 2013
-56%
No-fault Fraud
-50%
-39%
Wildfires
Hurricanes
-38%
Tornadoes
-11%
Insurance Fraud
-7%
-2%
Riots
Flood
-2%
Med Mal
Workers Comp
Solvency
Homeowners
Market Conditions
Tort
Pay-As-You-Go/Telematics
Auto
Climate Change
Investigations
Earthquakes
Credit Scoring
Aviation
-80%
Terrorism
-60%
Driverless Vehicles
-40%
Cyber Insurance
Coverage of Epidemics/Pandemics and insurance
increased 85,000% due the Ebola scare. I.I.I.
members uniformly directed media to us. WC was
the principal issue, along with business interruption.
-20%
-1%
0%
Systemic Risk
3%
4%
10%
15%
16%
20%
20%
22%
22%
23%
23%
40%
26%
27%
60%
Terrorism, Cyber, Autonomous/Driverless
Vehicles and Aviation insurance issues
experienced the sharpest increase in media
attention. Year-ago leaders included Flood
Insurance and Gun Liability; Hurricanes,
Tornadoes and Wildfires faded
51%
61%
80%
68%
Percent increase/decrease from previous year
Source: Insurance Information Institute based on a search of Lexis/Nexis.
18
Structure of Reauthorized TRIA
Program (as of 2020)
Major Changes
• 6-Year reauthorization
• Trigger rises in steps
from $100MM to
$200MM
Insurers
required to
assume
materially
more risk
• Industry aggregate
retention rises in steps
from $27.5B to $37.5B
• Industry co-share
above retained losses
rise in steps from 15%
to 20%
Source: Congressional Budget Office: http://www.cbo.gov/publication/49866; Insurance Information Institute research.
20
Industry Aggregate Retention Under
TRIA, from Inception through Extension
The Industry Aggregate
Retention Will Have Nearly
Quadrupled from $10 Billion at
Inception to $37.5 Billion in 2019
$ Billions
$40
Reauthorization
$37.5 $37.5
$35.5
$33.5
$35
$31.5
$29.5
$30
$27.5 $27.5 $27.5 $27.5 $27.5 $27.5 $27.5 $27.5
$25.0
$25
$20
$15.0
$15
Industry aggregate
retentions will rise by
$2B per year from 2015
through 2019
$12.5
$10.0
$10
$5
$0
03*
04
05
06
07
08
09
10
11
12
13
14
15
16
17
*First full year of program; TRIA was signed in to law on Nov. 26, 2002, with provisions identical to those in 2003.
Source: Insurance Information Institute research.
18
19
20
21
TRIA Program Trigger, from Inception
through Extension
The TRIA program trigger will
double between 2015 and 2020
$ Millions
Reauthorization
$200
$200
$180
$160
$150
$140
$120
$100 $100 $100 $100 $100 $100 $100 $100 $100
$100
Program trigger will rise
in steps beginning in
2016 from $100 million to
$200 million by 2020
$50
$50
$5
$5
$5
03*
04
05
$0
06
07
08
09
10
11
12
13
14
15
16
17
*First full year of program; TRIA was signed in to law on Nov. 26, 2002, with provisions identical to those in 2003.
Source: Insurance Information Institute research.
18
19
20
22
Industry Co-Pay Share in Excess of
Individual Retention
The industry co-pay share will
have double by 2020 from
program inception
Percent
25%
Reauthorization
20%
15% 15% 15% 15% 15% 15% 15% 15% 15%
16%
17%
18%
19%
20%
15%
10% 10% 10% 10%
Insurer co-payments in
excess of their individual
retentions will rise in
steps beginning in 2016
from 15% to 20%
10%
5%
0%
03*
04
05
06
07
08
09
10
11
12
13
14
15
16
17
*First full year of program; TRIA was signed in to law on Nov. 26, 2002, with provisions identical to those in 2003.
Source: Insurance Information Institute research.
18
19
20
23
INVESTMENTS:
THE NEW REALITY
Investment Performance is a Key
Driver of Profitability
Depressed Yields Will Necessarily
Influence Underwriting & Pricing
24
Property/Casualty Insurance Industry
Investment Income: 2000–20141
Investment earnings
are still below their
2007 pre-crisis peak
($ Billions)
$60
$54.6
$52.3
$50
$40
$51.2
$49.5
$49.2
$47.1 $47.6
$38.9
$38.7
$48.0 $47.4
$45.7
$39.6
$37.1 $36.7
$30
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14*
Due to persistently low interest rates,
investment income fell in 2012, 2013 and 2014.
1
Investment gains consist primarily of interest and stock dividends.
Sources: ISO; Insurance Information Institute.
*2014 figure is estimated based on annualized data through Q3.
Distribution of Invested Assets: P/C
Insurance Industry, 2013
$ Billions
All Other, 10%
Bonds, 62%
Cash, Cash Equiv. &
ST Investments, 6%
Stocks, 22%
Source: Insurance Information Institute Fact Book 2015, A.M. Best.
Total Invested
Assets = $1.5
Trillion
U.S. Treasury Security Yields:
A Long Downward Trend, 1990–2015*
9%
Yields on 10-Year U.S. Treasury
Notes have been essentially
below 5% for a full decade.
8%
7%
6%
U.S. Treasury
yields plunged to
historic lows in
2013. Longerterm yields
rebounded then
sank fell again.
5%
4%
3%
2%
1%
0%
Recession
2-Yr Yield
10-Yr Yield
'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
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 Jan. 2015.
Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research
(recession dates); Insurance Information Institute.
27
Book Yield on Property/Casualty
Insurance Invested Assets, 2007–2016F
(Percent)
4.6
Book yield in 2014 is
down 114 BP from
pre-crisis levels
4.42
4.4
4.19
4.2
3.95
4.0
3.71
3.8
3.74
3.52
3.6
3.38
3.4
3.28
3.20
3.2
3.13
3.0
07
08
09
10
11
12
13
14E
15F
16F
The yield on invested assets continues to decline as returns on
maturing bonds generally still exceed new money yields. The end
of the Fed’s QE program in Oct. 2014 should allow some increase
in longer maturities while short term interest rate increases are
unlikely until mid-to-late 2015
Sources: Conning.
Interest Rate Forecasts: 2015 – 2020
Yield (%)
3-Month Treasury
10-Year Treasury
5%
4.4%4.4%4.5%
4.2%
2.8%
2.6%
2.4%
2.4%
1.8%
1.6%
The end of the Fed’s QE
program in 2014 and a
stronger economy have
yet to push longer-term
yields higher
2%
1%
14
13
12
11
10
20F
19F
18F
17F
16F
0.4%
15F
14
13
12
11
10
1% 0.1%0.1%0.1%0.1%0.1%
0%
20F
2%
2.9%
3.2%
19F
3%
3.2%
18F
3%
3.4%3.4%3.4%
17F
4%
16F
4%
15F
The Fed is
expected to
begin raising
short-term rates
in mid-2015, but
this timeline
could easily slip
to late 2015 or
even 2016
5%
A Full Normalization of Interest Rates Is Unlikely Until 2018, More than a
Decade After the Onset of the Financial Crisis
Sources: Federal Reserve Board of Governors (historical); Blue Chip Economic Indicators (2/15 for 2015 and 2016; for 2017-2020
10/14 issue); Insurance Info. Institute.
29
Annual Inflation Rates, (CPI-U, %),
1990–2016F
Annual
Inflation
Rates (%)
6.0
5.0
4.9
5.1
3.8
4.0
3.0
3.0
2.0
Inflationary
expectations
have slipped
(due in part to
falling energy
costs) allowing
the Fed to
maintain low
interest rates
Inflation peaked at 5.6% in August 2008
on high energy and commodity crisis.
The recession and the collapse of the
commodity bubble reduced inflationary
pressures in 2009/10
3.3 3.4
3.2
2.9 2.8
2.4
3.0
2.6
2.5 2.3
3.8
3.2
2.8
1.5
2.3
2.1
1.9
1.6
1.3
1.0
1.5
1.7
0.4
0.0
-0.4
-1.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15F 16F
Slack in the U.S. economy and falling energy prices suggests that
inflationary pressures should remain subdued for an extended
period of times
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 2/15 (forecasts).
30
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%
ty
s
l
e
e
o
p
r
t
a
s
n
i
a
p
ro
l
Li
y
Su
rc
s
Au
o
t
P
C
/
a
al
r
s
e
l
s
n
y
n
t
a
t
P
u
M
i
m
m
m
m
o
di
pl
rra
el
d
rs
rs
r
tP
a
C
d
e
om
om
re
om
om
e
v
e
u
P
P
P
C
C
C
C
C
Fi
W
S
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.
31
$8.76
$11.43
$6.18
-$7.90
-$19.81
-$5
-$10
-$15
-$20
-$25
$7.04
$5.85
$8.92
$3.52
$9.70
$9.13
-$1.21
$6.63
$6.61
Realized capital gains rose
sharply as equity markets rallied
in 2013-14
$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, 1990-2014:Q3
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 1314:Q3
Insurers Posted Net Realized Capital Gains in 2010 - 2014 Following Two
Years of Realized Losses During the Financial Crisis. Realized Capital
Losses Were a Primary Cause of 2008/2009’s Large Drop in Profits and ROE
Sources: A.M. Best, ISO, Insurance Information Institute.
32
Property/Casualty Insurance Industry
Investment Gain: 1994–2014E1
$70
$60
$50
$64.0
$58.0
$56.9
$52.3
$51.9
$47.2
$44.4
$42.8
$40 $35.4
$59.4
$55.7
$58.8
$56.2
$54.2
$53.4
$57.4
($ Billions)
$48.9
$45.3
$39.2
$36.0
$31.7
$30
$20
$10
Investment gains in 2014
will rival the post-crisis
high reached in 2013
$0
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11 12 13 14E
Total Investment Gains Were Flat in 2014 as Low Interest Rates Pressured
Investment Income but Realized Capital Gains Remained Robust
1
Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.
* 2005 figure includes special one-time dividend of $3.2B;
Sources: ISO; Insurance Information Institute.
S&P 500 Index Returns, 1950 – 2015*
Annual Return
Volatility is endemic to stock markets—and
may be increasing—but there is no persistent
downward trend over long periods of time
60%
50%
40%
30%
20%
10%
0%
-10%
2014:
Fed Raises Rate
-30%
14
12
08
06
04
02
96
94
92
90
88
86
84
82
80
78
76
74
72
70
68
66
64
62
60
58
56
54
52
50
00
Financial
Crisis
Energy Crisis
98
-40%
-50%
13.5%
Tech Bubble
Implosion
10
-20%
*Through March 3, 2015.
Source: NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html Ins. Info. Inst.
Distribution of Bond Maturities,
P/C Insurance Industry, 2003-2013
2013
16.5%
2012
16.6%
2011
14.9%
41.2%
27.3%
10.4% 6.2%
2010
16.0%
39.5%
27.1%
11.2% 6.2%
2009
15.6%
2008
15.7%
2007
15.2%
30.0%
2006
16.0%
2005
38.8%
29.3%
9.8% 5.7%
27.6%
9.8% 5.7%
40.4%
36.4%
29.0%
12.7%
8.1%
33.8%
12.9%
8.1%
29.5%
34.1%
13.1%
7.4%
16.0%
28.8%
34.1%
13.6%
7.6%
2004
15.4%
29.2%
2003
14.4%
29.8%
32.4%
31.2%
11.9% 7.1%
Under 1 year
1-5 years
5-10 years
10-20 years
over 20 years
32.5%
31.3%
15.4%
15.4%
7.6%
9.2%
20% these years
40%has been 60%
80% longer maturities
100%
The0%
main shift over
from bonds with
to bonds
with shorter maturities. The industry first trimmed its holdings of over-10-year bonds
(from 24.6% in 2003 to 15.5% in 2012) and then trimmed bonds in the 5-10-year category
(from 31.3% in 2003 to 27.6% in 2012) . Falling average maturity of the P/C industry’s
bond portfolio is contributing to a drop in investment income along with lower yields.
Sources: SNL Financial; Insurance Information Institute.
35
CAPITAL/CAPACITY
Capital Accumulation Has
Multiple Impacts
36
$671.6
$673.9
14:Q3
$624.4
14:Q2
$586.9
$583.5
$567.8
$570.7
$550.3
$538.6
$559.1
$544.8
$530.5
$540.7
$511.5
$490.8
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 9/30/14 stood at
a record high $673.9B
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
$614.0
2007:Q3
Pre-Crisis Peak
$700
$607.7
Drop due to near-record
2011 CAT losses
$662.0
($ Billions)
$653.3
Policyholder Surplus,
2006:Q4–2014:Q3
The industry now has $1 of surplus for every $0.73 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 2015
in very strong financial condition.
37
US P/C Insurance Industry Excess
Capital Position: 1994–2016E
The Industry’s Strong Capital Position Suggests Insurers Are in
a Good Position to Increase Risk Appetite, Repurchase Shares
and Pursue Acquisitions
Source: Barclays Research estimates.
Percent Redundancy (Deficiency)
Surplus Redundancy (Deficiency)
Barclay’s suggests that
surplus is approximately
$200B (~30%)
Alternative Capital
New Investors Continue to Change
the Reinsurance Landscape
First I.I.I. White Paper on Issue Will Be
Released Q1 2015
42
Global Reinsurance Capital (Traditional
and Alternative), 2006 - 2014
Total reinsurance capital reached a
record $570B in 2013, up 68% from
2008.
But alternative capacity has grown 210% since 2008, to $50B. It has more
than doubled in the past three years.
2014 data is as of June 30, 2014.
Source: Aon Benfield Analytics; Insurance Information Institute.
Alternative Capital as a Percentage of
Traditional Global Reinsurance Capital
Alternative Capital’s Share of Global Reinsurance Capital Has More Than
Doubled Since 2010.
2014 data is as of June 30, 2014.
Source: Aon Benfield Analytics; Insurance Information Institute.
Catastrophe Bond Issuance and
Outstanding: 1997-2014
Risk Capital Amount ($ Millions)
2014 Has Seen the Largest Cat Bond Ever - $1.5 Billion (Florida Citizens).
Bond Issuance Set a Record.
Source: Guy Carpenter.
46
Reinsurance Pricing: Change in Rate on
Line for Cat Business
Alternative
Capital, Low
Levels of
Catastrophe
Drive Rates
Down.
76%
2006: Higher Rates
After Record
Hurricanes.
(Change from Previous Year)
40%
30%
2001-02: WTC
Losses, Falling
Stock, Bond Prices
Dry Up Capital.
20%
14%
Japan, NZ Quakes,
US Tornadoes.
14%
10%
10%
7%
0%
-6%
-10%
-11%
-20%
-3%
-9%
-7%
-12%
-11%
-16%
-17%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Catastrophe Prices Fell 11 Percent on January 1 Renewals, Driven by
Emergence of New Capital, Mild Catastrophe Losses.
2014 reflects change through June 30 from prior year end. 2015 is for January 1 renewals..
Source: Guy Carpenter; Insurance Information Institute.
I.I.I. Will Release its First Report on
Alternative Capital During Q1 2015
 Issue of alternative capital in
(re)insurance has received
increased attention in recent years
 Significant structural changes in
property catastrophe reinsurance
space
 Questions addressed include:
Forthcoming: Q1 2015
 Sources of new capital
 Reasons/Drivers of growth
 New structures
 Impact of major triggering
event(s)
 Impacts of higher interest rates
 Cat bond yield compression
51
Commercial Lines Pricing
Trends
Survey Results Suggest
Commercial Pricing Has
Flattened Out
53
Average Commercial Rate Change,
All Lines, (1Q:2004–4Q:2014)
-6%
-11%
-16%
0.1%
-0.7%
-3.2%
-5.9%
-7.0%
-9.4%
-9.7%
-8.2%
-4.6%
-2.7%
-3.0%
-5.3%
-9.6%
-11.3%
-11.8%
-13.3%
-12.0%
-13.5%
-12.9%
-11.0%
-6.4%
-5.1%
-4.9%
-5.8%
-5.6%
-5.3%
-6.4%
-5.2%
-5.4%
-2.9%
-0.1%
-1%
-0.1%
4%
Q2 2011 marked the
last of 30th
consecutive quarter
of price declines
-0.5%
9%
0.9%
2.7%
4.4%
4.3%
3.9%
5.0%
5.2%
4.3%
3.4%
2.1%
1.5%
(Percent)
Pricing as of Q4:2014 had
turned (slightly) negative for
only the 2nd time in 3 years
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
KRW Effect
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
54
Change in Commercial Rate Renewals,
by Account Size: 1999:Q4 to 2014:Q4
Percentage Change (%)
Peak = 2001:Q4
+28.5%
Pricing turned positive in
Q3:2011, the first increase in
nearly 8 years; Q1:2014
renewals were up 1.5%;
Some insurers posted
stronger numbers.
Pricing Turned
Negative in Early
2004 and
Remained that
way for 7 ½ years
KRW : No
Lasting
Impact
Trough = 2007:Q3
-13.6%
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 and Brokers; Barclay’s Capital; Insurance Information Institute.
55
Cumulative Qtrly. Commercial Rate Changes,
by Account Size: 1999:Q4 to 2014:Q4
1999:Q4 = 100
Despite several years of gains,
pricing today for midsized
accounts is where is was in late
2001 (around 9/11), suggesting
additional rate need going
forward, esp. in light of record
low interest rates
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 and Brokers; Barclay’s Capital; Insurance Information Institute.
56
Directional Pricing Trend in Large
Account P/C Renewals
Early 2009 through Early 2015
Source: Barclays’ Commercial Insurance Buyers Survey.
Few accounts are
seeing increases
57
4.0%
3.0%
2.8%
3.0%
Commercial
Auto
Commercial Auto rate
increases are large than
any other line, followed
by Employment
Practices
Percentage Change (%)
EPL
Change in Commercial Rate Renewals,
by Line: 2014:Q4
2.3%
2.0%
0.7%
0.0%
0.1%
Construction
Surety
1.0%
-0.3%
-1.3%
-2.0%
D&O
Workers
Comp
Business
Interruption
-2.2%
Commercial
Property
-3.0%
-0.4%
Umbrella
-1.0%
General
Liability
0.0%
Major Commercial Lines Renewals Were Mixed to Flat in Q4:2014;
Commercial Auto and EPL Led the Way
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 and Brokers; Insurance Information Institute.
58
Performance by Segment
59
Commercial Lines Combined Ratio,
1990-2015F*
122.3
91.1
95
98.9
99.9
93.6
100
98.3
98.9
102.4
103.4
107.9
105.4
104.2
102.0
105
102.5
110.2
111.1
112.3
109.7
104.1
107.6
110.2
112.5
118.8
109.5
110
110.2
115
109.4
Commercial Lines Combined Ratio
125
120
Commercial lines
underwriting
performance is expected
to improve as
improvement in pricing
environment persists
*2007-2012 figures exclude mortgage and financial guaranty segments.
Source: A.M. Best (1990-2014F); Conning (2015F) Insurance Information Institute.
15F
14F
13F
12
11
10
09
08
07
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
90
62
105.2
106.4
106.5
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:
1993–2015F
90
85
80
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14E 15F
Commercial Auto is Expected to Improve Only Slowly as Rate
Gains Barely Offset Adverse Frequency and Severity Trends
Sources: A.M. Best (1990-2014E);Conning (2015F); Insurance Information Institute.
63
105.8
110
106.5
105.8
Commercial Property Combined Ratio:
2007–2016F
11
12
105
75
85.4
90.1
80
15F
16F
72.4
85
82.7
83.3
90
86.5
95
89.4
100
70
07
08
09
10
13
14E
Commercial Property Underwriting Performance
Has Been Volatile in Recent Years, Largely Due to
Fluctuations in CAT Activity
Source: Conning Research and Consulting.
64
103.9
101.4
104.1
103.0
95
99.8
100
14F
15F
94.2
95.1
105
99.0
110
110.8
107.1
115
112.9
General Liability Combined Ratio:
2005–2015F
90
85
80
05
06
07
08
09
10
11
12
13F
Commercial General Liability Underwriting
Performance Has Been Volatile in Recent Years
Source: Conning Research and Consulting.
65
Commercial Multi-Peril Combined Ratio:
1995–2015F
101.4
98.9
93.4
111.9
103.8
94.1
94.2
98.7
96.1
102.5
102.1
108.4
120.1
CMP-Non-Liability
95.4
89.8
97.6
83.8
104.9
97.7
101.9
93.8
105.5
116.1
89.0
97.3
119.8
116.8
108.5
113.6
125.0
115.3
113.1
122.4
115.0
115.0
121.0
117.0
116.2
100.7
130
125
120
115
110
105
100
95
90
85
80
119.0
CMP-Liability
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14E 15F
Commercial Multi-Peril Underwriting Performance is Expected to
Improve in 2013 Assuming Normal Catastrophe Loss Activity
*2014E-2015F figures are Conning figures for the combined liability and non-liability components..
Sources: A.M. Best; Conning; Insurance Information Institute.
66
77.3
80
89.5
87.2
89.3
86.2
83.7
85
82.5
90
79.5
89.9
95
93.3
100
96.1
97.1
Inland Marine Combined Ratio:
2004–2015F
75
70
04
05
06
07
08
09
10
11
12
13
14E
15F
Inland Marine Underwriting Performance Has Been
Consistently Strong for Many Years
Source: A.M. Best (2004-2014E); Conning Research and Consulting (2015F).
67
Growth Analysis by State and
Business Segment
Post-Crisis Paradox?
Premium Growth Rates Vary
Tremendously by State
68
Net Premium Growth: Annual Change,
1971—2016F
(Percent)
1975-78
1984-87
25%
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.
20%
2015-16F:
4.0%
15%
2014E: 3.9%*
2013: 4.6%
10%
2012: +4.3%
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
15F
14F
-5%
*Actual figure based on data through Q3 2014.
Shaded areas denote “hard market” periods
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
69
Direct Premiums Written: Total P/C
Percent Change by State, 2007-2013
Top 25 States
74.6
80
North Dakota was the country’s
growth leader over the past 6
years with premiums written
expanding by 74.6%, fueled by
the state’s energy boom
60
50
16.6
15.9
15.7
14.5
14.5
14.3
12.6
11.9
11.8
11.2
10.5
10.3
9.9
9.8
9.3
9.1
9.0
8.6
TN
MN
AR
AK
IN
WI
CO
MI
KY
OH
NJ
LA
SC
VA
AL
MO
NM
22.2
TX
20
WY
22.5
24.9
IA
VT
25.2
KS
30
US: 7.9%
27.4
40
31.9
Growth Benchmarks: Total P/C
36.9
Pecent change (%)
70
NE
OK
SD
0
ND
10
Sources: SNL Financial LC.; Insurance Information Institute.
71
Direct Premiums Written: Total P/C
Percent Change by State, 2007-2013
Sources: SNL Financial LC.; Insurance Information Institute.
-15.3
DE
HI
WV
AZ
CA
ID
NH
RI
IL
PA
WA
UT
MA
MD
NY
GA
NC
US
CT
-20
MS
-15
NV
-12.6
-6.7
Growth was negative in 7
states and DC between
2007 and 2013
-10
-5.7
-4.1
-1.9
-0.7
DC
0.4
OR
-5
-1.7
1.0
ME
0
FL
1.6
4.1
4.2
3.5
MT
Pecent change (%)
5
5.3
5.6
5.9
6.2
6.9
7.0
7.3
7.6
7.8
7.9
8.2
10
8.5
Bottom 25 States
72
Advertising Expenditures by P/C
Insurance Industry, 1999-2013
$ Billions
$6.5
$6.0
$5.5
$5.0
$4.5
$4.0
$3.5
$3.0
$2.5
$2.0
$1.5
P/C ad spend hit an all time
record high of $6.175 billion
in 2013, up 1.5% over 2012.
The pace of growth has
slowed from 15.8% in 2011
and 23.8% in 2010
$6.088 $6.175
$5.883
P/C ad spending has more
than tripled since 2002
(up 256% from 2002-2013)
$5.079
$4.354
$4.102
$4.103
$3.426
$2.975
$1.882$2.111
$1.736 $1.737 $1.803 $1.708
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Source: Insurance Information Institute from consolidated P/C Annual Statement data, Insurance Expense Exhibit (Part I).
Direct Premiums Written: Comm. Lines
Percent Change by State, 2007-2013
3.2
3.1
3.0
2.7
2.2
2.0
1.7
1.3
0.6
CT
NM
LA
MS
NJ
NY
US
MO
6.5
WI
MA
6.7
TN
4.1
6.8
9.8
IN
AR
10.0
MN
US: 1.3%
11.3
14.0
TX
Growth Benchmarks: Commercial
WY
15.6
AK
19.1
ID
23.6
25.8
IA
KS
26.3
NE
33.7
41.4
SD
VT
42.1
OK
Only 30 states
showed any
commercial lines
growth from 2007
through 2013
OH
91.1
100
90
80
70
60
50
40
30
20
10
0
ND
Pecent change (%)
Top 25 States
Sources: SNL Financial LLC.; Insurance Information Institute.
79
Direct Premiums Written: Comm. Lines
Percent Change by State, 2007-2013
Bottom 25 States
-25.1
NV
WV
AZ
-22.4
-12.7
FL
-13.6
-12.6
DE
-11.7
HI
-4.9
DC
-11.4
-4.3
UT
MT
-3.7
CA
SC
MI
RI
ME
NC
KY
VA
WA
IL
-30
MD
-25
CO
-20
PA
States with the poorest
performing economies also
produced the most negative
net change in premiums of the
past 6 years
-15
-10.7
-3.3
GA
-10
OR
-2.7
-2.1
-2.0
-1.9
-1.1
-1.1
-1.0
-0.9
-0.8
-0.5
0.1
-5
NH
Pecent change (%)
0
0.2
0.4
0.5
5
AL
Nearly half the states have yet to
see commercial lines premium
volume return to pre-crisis levels
Sources: SNL Financial LLC.; Insurance Information Institute.
80
Direct Premiums Written: Workers’ Comp
Percent Change by State, 2007-2013*
Only 13 states have seen
works comp premium volume
return to pre-crisis levels
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.
Sources: SNL Financial LC.; Insurance Information Institute.
-8.0
AR
-4.1
VA
-5.8
-3.7
PA
TN
-3.0
TX
-5.7
-2.9
NM
MD
-2.4
US
-1.0
IL
-2.3
-0.6
WI
NH
-0.3
DC
1.5
MN
3.0
4.5
MI
VT
4.8
IN
10.6
KS
8.1
11.0
NJ
NE
11.5
CT
CA
NY
SD
IA
13.4
21.5
24.3
30.8
32.9
35
30
25
20
15
10
5
0
-5
-10
-15
OK
Pecent change (%)
Top 25 States
81
Direct Premiums Written: Worker’s Comp
Percent Change by State, 2007-2013*
-33.3
-33.5
DE
HI
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.
Sources: SNL Financial LC.; Insurance Information Institute.
MT -71.0
NV
-43.8
-32.5
-27.5
FL
SC
MO
AZ
ME
LA
CO
ID
AK
NC
GA
RI
MA
States with the poorest
performing economies also
produced some of the most
negative net change in
premiums of the past 6 years
OR
-26.5
-23.0
KY
UT
-22.1
AL
-17.1
-16.3
-16.0
-15.4
-15.3
-14.7
-12.0
-11.3
-11.1
-8.8
-8.7
-8.4
-8.1
0
-5
-10
-15
-20
-25
-30
-35
-40
-45
-50
-55
-60
-65
-70
-75
-80
MS
Pecent change (%)
Bottom 25 States
82
Percentage of Carriers Using Predictive
Analytics by Major P/C Line, 2013
Predictive analytics is
more like to be used
in personal lines, but
commercial lines use
is growing
60%
50%
82% of insurers report using
predicative analytics in at least
one line. 18% do not use it all.
Benefits Cited
Drive Profitability: 85%
49%
Reduce Risk: 55%
Grow Revenue: 52%
37%
40%
32%
Improve Op. Efficiency: 39%
30%
30%
25%
20%
9%
10%
5%
0%
Personal
Auto
Home
Comm. Auto
Comm.
Property
Source: ISO/Earnix Survey, September 2013; Insurance Information Institute.
Business
Owners
Workers
Comp
GL
83
Uses of Predictive Analytics by Function
Pricing and
Underwriting are the
leading uses for
predictive analytics
84
The Strength of the Economy
Will Influence P/C Insurer
Growth Opportunities
Growth Will Expand Insurer Exposure
Base Across Most Lines
85
US Real GDP Growth*
1%
-7%
-0.3%
Q1 2014 GDP data
were hit hard by this
year’s “Polar Vortex”
and harsh winter
2.2%
2.7%
2.9%
3.0%
2.9%
2.8%
2.8%
2.8%
2.7%
4.6%
5.0%
-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
-9%
-5.3%
-5%
Recession
began in
in June
2009
-3.7%
-3%
-1.8%
-1%
-2.1%
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%
The Q4:2008 decline was
the steepest since the
Q1:1982 drop of 6.8%
1.3%
5%
1.1%
1.8%
2.5%
3.6%
3.1%
2.7%
1.8%
7%
4.1%
Real GDP Growth (%)
Demand for Insurance Should Increase in 2015 as GDP Growth
Accelerates Modestly and Gradually Benefits the Economy Broadly
*
Estimates/Forecasts from Blue Chip Economic Indicators.
Source: US Department of Commerce, Blue Economic Indicators 2/15; Insurance Information Institute.
86
State-by-State Leading Indicators
through 2015:Q2
Growth in
the West is
finally
beginning
to pick up
The economic
outlook for most of
the US is generally
positive, though
flat-to-negative for
2 states
Sources: Federal Reserve Bank of Philadelphia at http://www.philadelphiafed.org/index.cfm ;Insurance Information Institute.
87
Real GDP by State Percent Change, 2013:
Highest 25 States
9.7
Only 9 states experienced growth
in excess of 3% in 2013, which is
what we would see nationally in a
more typical recovery
7
Growth Benchmarks: Real GDP
6
US: 1.8%
1.8
1.9
1.9
1.9
2.0
2.0
2.2
2.3
2.7
2.4
2.1
2
2.7
2.8
2.9
3.0
3.0
3.7
3.8
3.8
4.1
3.1
3
4.2
5
4
5.1
Percent Change (%)
8
7.6
9
1.8
10
North Dakota was
the economic growth
juggernaut of the US
in 2013—by far
1
0
ND WY WV OK ID CO UT TX SD NE MT IA MN OR WA AR NC FL IN MI CA VT KS HI GA US
Sources: U.S. Bureau of Economic Analysis; Insurance Information Institute.
88
Real GDP by State Percent Change, 2013:
Lowest 25 States
-2.5
-0.5
DC and Alabama
were the only
states to shrink in
2013
0.0
0.1
0.7
0.7
0.8
0.8
0.8
0.9
0.9
0.9
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.6
1.6
1.6
1.7
1.8
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
1.1
Percent Change (%)
Growth rates in 11 states
were still below 1% in
2013
OH WI MA DE KY MS NM RI LA SC NJ AZ NV CT ME NH IL MO AL TN NY PA VA MD DC AL
Sources: US Bureau of Economic Analysis; Insurance Information Institute.
89
60
50
40
Impact of
2011 budget
impasse
55.7
59.5
60.9
64.1
90
75.0
75.3
76.2
76.4
79.3
73.2
72.3
74.3
82.6
82.7
74.5
73.8
77.6
78.6
76.4
84.5
84.1
85.1
82.1
77.5
73.2
75.1
82.5
81.2
81.6
80.0
84.1
81.9
82.5
81.8
82.5
84.6
86.4
88.8
69.9
67.8
68.9
68.2
67.7
71.6
74.5
74.2
77.5
67.5
69.8
74.3
71.5
63.7
70
74.4
73.6
73.6
72.2
73.6
76
80
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
100
93.6
98.1
95.4
Consumer Sentiment Survey (1966 = 100)
January 2010 through February 2015
Source: University of Michigan; Insurance Information Institute
Optimism among
consumers soared in late in
2014 and into early 2015 to
its highest level in 11 years
in January. Job gains,
falling gas prices help.
Consumer confidence had been low for years amid high
unemployment, falling home prices and other factors adversely impact
consumers, but improved substantially over the past 2+ years, as job
growth and falling energy prices aid consumers
91
Auto/Light Truck Sales, 1999-2020F
14.4
16
12
11
10
16.8
16.9
16.8
16.9
17.1
16.9
16.4
Sales have
returned to precrisis levels
12.7
11.6
13
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.
10.4
14
13.2
15
15.5
16.5
16.9
16.9
17.1
17.5
16.6
17
17.8
18
17.4
19
16.1
Job growth and improved
credit market conditions
will boost auto sales in
2014 and beyond
(Millions of Units)
Truck purchases by
contractors are
especially strong
9
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15F 16F 17F 18F 19F 20F
Yearly car/light truck sales will likely continue at current levels, in part
replacing cars that were held onto in 2008-12. New vehicles will generate
more physical damage insurance coverage but will be more expensive to
repair. PP Auto premium might grow by 5% - 6%.
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (2/15 and 10/14); Insurance Information Institute.
92
Monthly Change in Auto Insurance
Prices, 1991–2015*
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
The Jan. 2015
reading of 5.0% is
up from 3.4%
a year earlier
-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 '14
*Percentage change from same month in prior year; through January 2015; seasonally adjusted
Note: Recessions indicated by gray shaded columns.
Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
93
New Private Housing Starts, 1990-2020F
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
1.01
1.16
1.30
1.42
1.46
1.48
1.50
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, 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 15F16F17F18F19F20F
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 (2/15 and 10/14); Insurance Information Institute.
95
NFIB Small Business Optimism Index
January 1985 through December 2014
Small business optimism
remains near its postcrisis highs
Source: National Federation of Independent Business at http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIBoptimism-index.gif ; Insurance Information Institute.
98
Business Bankruptcy Filings,
1980-2014
1980-82
1980-87
1990-91
2000-01
2006-09
90,000
80,000
40,000
30,000
20,000
10,000
0
58.6%
88.7%
10.3%
13.0%
208.9%
2014 bankruptcies totaled 26,983,
down 18.8% from 2013—the 5th
consecutive year of decline. Business
bankruptcies more than tripled during
the financial crisis.
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
50,000
43,694
48,125
70,000
60,000
69,300
62,436
64,004
71,277
81,235
82,446
63,853
63,235
64,853
71,549
70,643
62,304
52,374
51,959
53,549
54,027
44,367
37,884
35,472
40,099
38,540
35,037
34,317
39,201
19,695
28,322
43,546
60,837
56,282
47,806
40,075
33,212
26,983
% Change Surrounding
Recessions
Significant Exposure Implications for All Commercial Lines as
Business Bankruptcies Begin to Decline
Sources: American Bankruptcy Institute (1980-2012) at
http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; 2013-14
data from United States Courts at http://news.uscourts.gov; Insurance Information Institute.
100
12 Industries for the Next 10 Years:
Insurance Solutions Needed
Health Care
Health Sciences
Energy (Traditional)
Alternative Energy
Petrochemical
Agriculture
Natural Resources
Technology (incl. Biotechnology)
Many
industries are
poised for
growth,
though
insurers’
ability to
capitalize on
these
industries
varies widely
Light Manufacturing
Insourced Manufacturing
Export-Oriented Industries
Shipping (Rail, Marine, Trucking, Pipelines)
103
CONSTRUCTION INDUSTRY
OVERVIEW & OUTLOOK
The Construction Sector Is
Critical to the Economy and
the P/C Insurance Industry
104
Value of New Private Construction:
Residential & Nonresidential, 2003-2014*
Billions of Dollars
New Construction peaks
at $911.8. in 2006
Trough in 2010
at $500.6B,
after plunging
55.1% ($411.2B)
$1,000
$900
$800
$15.0
2014: Value of new
pvt. construction
hits $698.6B as of
Nov. 2014, up 40%
from the 2010
trough but still 23%
below 2006 peak
$613.7
$700
$600
$349.6
$500
$298.1
$400
$300
$261.8
Non Residential
Residential
$200
$100
$349.0
$238.8
$0
03
04
05
06
07
08
09
10
11
12
13
14*
Private Construction Activity Is Moving in a Positive Direction though
Remains Well Below Pre-Crisis Peak; Residential Dominates
*2014 figure is a seasonally adjusted annual rate as of December.
Sources: US Department of Commerce http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
105
Value of Construction Put in Place,
Dec. 2014 vs. Dec. 2013*
Growth (%)
Private: +0.4%
8%
6%
4%
2%
Public: +6.7%
6.8%
6.7%
5.3%
Public sector
construction activity
is finally beginning to
pick up after years of
decline
Private sector construction
activity is up in the
residential and
2.2%
nonresidential segments but
growth is sluggish
0.4%
3.2%
0%
-2%
-4%
-4.0%
-6%
Total
Construction
Total Private
Construction
Residential-Private
NonResidential-Private
Total Public
Construction
ResidentialPublic
NonResidential-Public
Overall Construction Activity is Up, But Growth In the Private Sector
Slowed in Late 2014 While Picking in the State/Local Sector Government
Sector as Budget Woes Ease in Some Jurisdictions
*seasonally adjusted
Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
106
Value of Private Construction Put in Place,
by Segment, Dec. 2014 vs. Dec. 2013*
Led by the Manufacturing, Office and
Lodging segments, Private
nonresidential sector construction
activity continues to rising after
plunging during the “Great
Recession.” Residential weakened.
Growth (%)
25%
18.3%18.8%
20%
15%
5%
12.1%
11.2%
10%
18.3%
6.3%
5.3%
0.4%
0%
-0.8% -0.6% -0.9%
-5%
-4.0%
-7.6%
Manufacturing
Transportation
Amusement &
Rec.
Religious
Educational
Health Care
Commercial
Office
Lodging
Total
Nonresidential
Residential
Total Private
Construction
-15%
Communication
-9.7%
Power/Utility
-10%
Private Construction Activity is Up in Many Segments, though the Key
Residential Construction Sector Weakened in Late 2014; Mixed Outlook
for 2015, though Expansion Should Continue
*seasonally adjusted
Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
107
Value of Public Construction Put in Place,
by Segment, Dec. 2014 vs. Dec. 2013*
26.6%
14.1%
9.1%
3.4% 2.4%
5.5%
4.9%
2.3%
-1.6%
-2.6%
-5.4%
-6.8%
-10.0%
Conservation &
Develop.
Water Supply
Sewage &
Waste Disposal
Highway &
Street
Power
Transportation
Amusement &
Rec.
Public Safety
Educational
Health Care
Commercial
Office
-15.0%
Total
Nonresidential
Total Public
Construction
30%
25%
20%
15%
10%
5% 3.2%
0%
-5%
-10%
-15%
-20%
Amusement & Recreation, Sewage
& Waste Disposal and
Conservation projects lead public
sector construction
Public sector construction activity is
down substantially in many segments, a
situation that will likely persist, dragging
on public entity risk exposures
Residential
Growth (%)
Public Construction Activity is Beginning to Recover from its Long
Contraction which Will Drive Demand in Many Commercial Insurance Lines
*seasonally adjusted
Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
108
Real (Inflation-Adjusted)
Nonresidential Construction, 2000-2014*
(Bar = CAGR; Line = Y/Y Growth Rate)
Construction activity
has generally been
positive since late
2010 but has
occasionally be
erratic. Forecast is
for slowing
improving growth
*Through Q1 2014.
Source: US Dept. of Commerce; Wells Fargo Securities (June 6, 2014 research report).
109
Value of New Federal, State and Local
Government Construction: 2003-2014*
($ Billions)
$350
Austerity Reigns
Construction
across all levels
of government
peaked at $314.9B
in 2009
Govt. construction MAY be
turning a corner; still down
$33.8B or 10.7% since 2009 peak
$308.7
$314.9
$289.1
$300
$304.0
$286.4
$279.0
$271.4
$281.1
$255.4
$250
$216.1
$220.2
2003
2004
$234.2
$200
$150
$100
$50
$0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014*
Government Construction Spending Peaked in 2009, Helped by Stimulus
Spending, but Contracted As State/Local Governments Grappled with
Deficits and Federal Sequestration
*2014 figure is a seasonally adjusted annual rate as of December; http://www.census.gov/construction/c30/historical_data.html
Sources: US Department of Commerce; Insurance Information Institute.
110
New Private Housing Starts, 1990-2020F
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
1.01
1.16
1.30
1.42
1.46
1.48
1.50
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, 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 15F16F17F18F19F20F
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 (2/15 and 10/14); Insurance Information Institute.
111
6,100
6,000
5,900
5,800
5,700
5,600
5,500
5,400
5,581
5,522
5,542
5,554
5,527
5,512
5,497
5,519
5,499
5,501
5,497
5,468
5,435
5,478
5,485
5,497
5,524
5,530
5,547
5,546
5,583
5,576
5,577
5,612
5,629
5,644
5,640
5,636
5,615
5,622
5,627
5,630
5,633
5,649
5,673
5,711
5,735
5,783
5,799
5,792
5,791
5,801
5,804
5,805
5,822
5,830
5,849
5,876
5,927
5,927
5,964
6,000
6,009
6,017
6,047
6,064
6,082
6,098
6,118
6,166
6,200
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
2/30/2
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-12
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Construction Employment,
Jan. 2010—December 2014*
(Thousands)
6,300
Construction employment
is +731,000 above
Jan. 2011 (+13.4%) trough
Construction and manufacturing employment constitute 1/3 of all WC payroll exposure.
*Seasonally adjusted.
Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
112
Construction Employment,
Jan. 2003–December 2014
(Thousands)
Construction
employment as of
Dec. 2014 totaled
6.166 million, an
increase of 731,000
jobs or 13.4% from
the Jan. 2011 trough
Construction
employment
peaked at
7.726 million
in April 2006
8,000
7,500
Gap between prerecession
construction
peak and today:
1.56 million jobs
7,000
The “Great Recession” and
housing bust destroyed 2.3
million constructions jobs
6,500
6,000
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
5,500
5,000
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
The Construction Sector Could Be a Growth Leader in 2014 as the Housing Market,
Private Investment and Govt. Spending Recover. WC Insurers Will Benefit.
Note: Recession indicated by gray shaded column.
Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute.
113
ENERGY SECTOR: OIL & GAS
INDUSTRY FUTURE IS BRIGHT
BUT VOLATILE
US Is Becoming an Energy
Powerhouse but Fall in Prices
Will Have Negative Impact
114
U.S. Crude Oil Production, 2005-2016P
Millions of Barrels per Day
12
Crude oil production in the
U.S. is expected to increase
by 90.6% from 2008 through
2016—and could overtake
Saudi Arabia as the world’s
largest oil producer
10
8
9.31
9.53
8.67
7.44
6.49
6
5.19
5.09
5.08
5.00
5.35
5.47
5.65
4
2
F
20
16
F
20
15
20
14
20
13
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
0
Source: Energy Information Administration, Short-Term Energy Outlook (January 15, 2015) , Insurance Information Institute.
150
*Seasonally adjusted
Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
Aug-13
Jun-13
Apr-13
Feb-13
Oil and gas extraction
employment is up 37.7% since
Jan. 2010 as the energy sector
booms. (Previous boom in
1979-81, employment peak at
267,000 in March 1982.)
Dec-12
Oct-12
Aug-12
Jun-12
Apr-12
Feb-12
Dec-11
Oct-11
Aug-11
Jun-11
Apr-11
160
Feb-11
170
Dec-10
180
Oct-10
(000)
Aug-10
190
Jun-10
200
Apr-10
210
156.6
156.9
157.5
158.7
158.2
158.3
159.7
160.1
161.2
161.4
160.8
162.8
164.4
166.8
169.2
170.1
171.1
172.6
173.9
176.4
177.9
178.6
180.4
181.4
182.4
184.9
185.2
186.2
187.8
188.6
189.0
189.2
189.0
190.6
192.4
193.2
194.8
194.2
194.9
195.7
196.0
197.5
198.7
199.7
200.6
203.1
204.3
205.3
207.8
207.5
207.9
210.1
211.3
212.2
212.2
213.1
215.1
215.7
216.1
220
Feb-10
Employment in Oil & Gas Extraction,
Jan. 2010—Dec. 2014*
Highest employment in this
sector since July 1986.
117
MANUFACTURING SECTOR
OVERVIEW & OUTLOOK
The U.S. Is Experiencing a Mini
Manufacturing Renaissance but
Headwinds from Weak Export
Markets and Strong Dollar
118
Dollar Value* of Manufacturers’
Shipments Monthly, Jan. 1992—November 2014
$ Millions
$500,000
The value of Manufacturing
Shipments in Nov. 2014 was
$495.7B—down slightly since the
July 2014 record high of $508.1B
$400,000
$300,000
Ja
n9
Ja 2
n9
Ja 3
n9
Ja 4
n9
Ja 5
n9
Ja 6
n9
Ja 7
n9
Ja 8
n9
Ja 9
n0
Ja 0
n
0
Ja 1
n
0
Ja 2
n
0
Ja 3
n
0
Ja 4
n
0
Ja 5
n
0
Ja 6
n
0
Ja 7
n
0
Ja 8
n
0
Ja 9
n
1
Ja 0
n
1
12 1
-J
a
13 n
-J
a
14 n
-J
an
$200,000
Monthly shipments in Nov. 2014 exceeded the pre-crisis (July 2008) peak but has
declined in recent months. Manufacturing is energy-intensive and growth leads to
gains in many commercial exposures: WC, Commercial Auto, Marine, Property, and
various Liability Coverages.
* Seasonally adjusted; Data published Jan. 6, 2015.
Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/ 119
Manufacturing Growth for Selected
Sectors, 2014 vs. 2013*
Growth (%)
Non-Durables: +0.5%
Durables: +4.8%
11.7%
6.7%
6.1%
4.6%
3.4% 3.4%
3.7%
2.2%
1.4%
0.5%
-0.7%
Plastics &
Rubber
Chemical
Petroleum &
Coal
Food
Products
Non-Durable
Mfg.
Transportation
Equip.
Computers &
Electronics
Electrical
Equip.
-1.5%
-3.1%
Machinery
Fabricated
Metals
Primary
Metals
Wood
Products
Manufacturing of durable
goods is stronger than
nondurables in 2014
Textile
Products
4.8%
Durable Mfg.
All
Manufacturing
14%
12%
10%
8%
6%
4% 2.5%
2%
0%
-2%
-4%
Manufacturing Is Expanding—Albeit Slowly—Across a Number of Sectors that
Will Contribute to Growth in Insurable Exposures Including: WC, Commercial
Property, Commercial Auto and Many Liability Coverages
*Seasonally adjusted; Date are YTD comparing data through November 2014 to the same period in 2013.
Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/ 120
12,250
12,000
11,750
11,500
11,250
11,460
11,460
11,466
11,497
11,531
11,539
11,558
11,548
11,554
11,555
11,577
11,590
11,624
11,662
11,682
11,707
11,715
11,724
11,747
11,760
11,762
11,770
11,769
11,797
11,841
11,870
11,910
11,920
11,926
11,935
11,957
11,943
11,925
11,931
11,938
11,951
11,965
11,988
11,984
11,977
11,972
11,965
11,948
11,963
11,993
12,011
12,046
12,053
12,061
12,081
12,085
12,094
12,109
12,130
12,154
12,157
12,169
12,193
12,222
12,239
12,500
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
DecJan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
DecJan-12
2/30/2
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
DecJan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
DecJan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-
Manufacturing Employment,
Jan. 2010—December 2014*
(Thousands)
Since Jan 2010,
manufacturing
employment is up
(+877,000 or +7.7%)
and still growing.
Manufacturing employment is a surprising source of strength in the
economy. Employment in the sector is at a multi-year high.
*Seasonally adjusted.
Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
121
55
45
40
51.4
52.5
52.5
51.8
52.2
53.1
54.1
51.9
53.3
54.1
52.5
50.2
50.5
50.7
51.6
51.7
49.9
50.2
53.1
54.2
51.3
50.7
49.0
50.9
55.4
55.7
56.2
56.4
57.0
56.5
51.3
53.2
53.7
54.9
55.4
55.3
57.1
59.0
56.6
59.0
58.7
53.5
52.9
50
58.3
57.1
60.4
59.6
57.8
55.3
55.1
55.2
55.3
56.9
58.2
58.5
60.8
61.4
59.7
59.7
54.2
55.8
60
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
DecJan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
DecJan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
DecJan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
DecJan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Jan-15
Feb-15
ISM Manufacturing Index
(Values > 50 Indicate Expansion)
January 2010 through February 2015
65
Manufacturing continued to
expand throughout 2014
The manufacturing sector expanded for 60 of the 62 months from Jan.
2010 through Feb. 2015. Pace of recovery has been uneven due to
economic turbulence in the U.S., Europe and China.
Source: Institute for Supply Management at http://www.ism.ws/ismreport/mfgrob.cfm; Insurance Information Institute.
122
Recovery in Capacity Utilization is a
Positive Sign for Commercial Exposures
March 2001 through Dec. 2014
“Full Capacity”
Percent of Industrial Capacity
82%
80%
The US operated at 79.7% of
industrial capacity in Dec.
2014, well above the June
2009 low of 66.9% but is still
below pre-recession levels.
Hurricane
Katrina
78%
76%
70%
68%
66%
March 2001November 2001
recession
December 2007June 2009 Recession
Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm.
Mar 14
Jun 14
Sep
Dec
72%
The closer the economy is
to operating at “full
capacity,” the greater the
inflationary pressure
Mar 01
Jun 01
Sep
Dec
Mar 02
Jun 02
Sep
Dec
Mar 03
Jun 03
Sep
Dec
Mar 04
Jun 04
Sep
Dec
Mar 05
Jun 05
Sep
Dec
Mar 06
Jun 06
Sep
Dec
Mar 07
Jun 07
Sep
Dec
Mar 08
Jun 08
Sep
Dec
Mar 09
Jun 09
Sep
Dec
Mar 10
Jun 10
Sep
Dec
Mar 11
Jun 11
Sep
Dec
Mar 12
Jun 12
Sep
Dec
Mar 13
Jun 13
Sep
Dec
74%
124
124
Business Fixed Investment is Forecast to Grow Steadily
in 2015-16, Fueling Commercial Exposure Growth
Business investment will drive
commercial property and liability
insurance exposures and should
drive employment and WC payroll
exposures as well (with a lag)
Growth
Rate
8%
7.2%
7%
6%
5.9%
5.7%
2014E
2015F
6.2%
5%
4%
3.0%
3%
2%
1%
0%
2012
2013
2016F
Sources: Wells Fargo Economic Group; Insurance Information Institute.
125
Labor Market Trends
Massive Job Losses Sapped the
Economy and Commercial/Personal
Lines Exposure, But Trend Has
Greatly Improved
126
Unemployment and Underemployment
Rates: Still Too High, But Falling
January 2000 through January 2015,
Seasonally Adjusted (%)
18
"Headline" Unemployment Rate U-3
16
Unemployment + Underemployment Rate
U-6
14
12
U-6 went from
8.0% in March
2007 to 17.5% in
October 2009;
Stood at 11.3%
in Jan. 2015.
8% to 10% is
“normal.”
10
8
“Headline”
unemployment
was 5.7% in Jan.
2015. 4.5% to
5.5% is “normal.”
6
4
2
Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 14
Stubbornly high unemployment and underemployment constrain overall
economic growth, but the job market is now clearly improving.
Source: US Bureau of Labor Statistics; Insurance Information Institute.
127
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%
5.3%
5.2%
5.2%
5.1%
5.0%
5.0%
2007:Q1 to 2016:Q4F*
Jobless figures
have been revised
downwards for
2015/16
Unemployment forecasts
have been revised modestly
downwards. Optimistic
scenarios put the
unemployment as low as
5.0% by Q4 of 2015.
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
4%
*
= actual;
= forecasts
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (2/15 edition); Insurance Information Institute.
128
(600)
Monthly losses in
Dec. 08–Mar. 09 were
the largest in the
(800)
post-WW II period
(1,000)
-426
-422
-486
(400)
-776
-693
-821
-698
-810
-801
(200)
-294
-272
-232
-141
-271
-15
-232
-38
-115
-106
-221
-215
-206
-261
-258
-71
January 2007 through Jan. 2015 (Thousands, Seasonally Adjusted) 2,723,000 jobs
were created
600
in 2014
400
113
192
94
110
120
117
107
199
149
94
72
223
231
320
166
186
219
125
268
177
191
222
364
228
246
102
131
75
172
136
159
255
211
215
219
263
164
188
222
201
170
180
153
247
272
86
183
175
223
313
238
272
243
209
235
218
414
320
267
20
3
32
64
81
55
3
0
231
52
170
52
126
57
200
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Monthly Change in Private Employment
Jobs Created
2014: 2.723 Mill
2013: 2.368 Mill
2012: 2.294 Mill
2011: 2.400 Mill
2010: 1.277 Mill
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
320,000 private
sector jobs were
created in Jan. In
March 2014, the last
of the private jobs
lost in the Great
Recession were
recovered
Private Employers Added 11.20 million Jobs Since Jan. 2010 After
Having Shed 5.01 Million Jobs in 2009 and 3.76 Million in 2008 (State
and Local Governments Have Shed Hundreds of Thousands of Jobs)
129
Nonfarm Payroll (Wages and Salaries):
Quarterly, 2005–2014:Q3
Billions
$7,750
$7,500
$7,250
Prior Peak was
2008:Q3 at $6.54 trillion
Latest (2014:Q3) was
$7.46 trillion, a new
peak--$1.21 trillion
above 2009 trough
$7,000
$6,750
$6,500
$6,250
$6,000
$5,750
Recent trough (2009:Q1)
was $6.23 trillion, down
5.3% from prior peak
Growth rates
2011:Q3 over 2010:Q3: 4.1%
2012:Q3 over 2011:Q3: 3.2%
2013:Q3 over 2012:Q3: 3.6%
2014:Q3 over 2013:Q3: 4.4%
05:Q1
05:Q2
05:Q3
05:Q4
06:Q1
06:Q2
06:Q3
06:Q4
07:Q1
07:Q2
07:Q3
07:Q4
08:Q1
08:Q2
08:Q3
08:Q4
09:Q1
09:Q2
09:Q3
09:Q4
10:Q1
10:Q2
10:Q3
10:Q4
11:Q1
11:Q2
11:Q3
11:Q4
12:Q1
12:Q2
12:Q3
12:Q4
13:Q1
13:Q2
13:Q3
13:Q4
14:Q1
14:Q2
14:Q3
$5,500
Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.
Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates); Insurance
Information Institute.
130
Payroll vs. Workers Comp Net Written
Premiums, 1990-2014P
Payroll Base*
$Billions
$7,000
WC NWP
$Billions
Wage & Salary Disbursements
3/01-11/01
WC NPW
7/90-3/91
$50
12/07-6/09
$45
WC premium
volume dropped
two years before
the recession began
$6,000
$5,000
$40
$35
WC net premiums
written were down
$14B or 29.3% to
$33.8B in 2010 after
peaking at $47.8B
in 2005
$4,000
$3,000
$30
E
14
13
12
11
10
09
08
07
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
$25
90
$2,000
Continued Payroll Growth and Rate Gains Suggest WC NWP Will Grow
Again in 2015
*Private employment; Shaded areas indicate recessions. WC premiums for 2014 are I.I.I. estimates..
Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.
131
Workers Compensation
Operating Environment
Workers Comp Results Have Improved
Substantially in Recent Years
136
Workers Compensation Combined
Ratio: 1994–2014E
96.0
101.0
108.0
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
95
90
85
80
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14F
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 (2010-2014F) and are for private carriers only; Insurance Information Institute.
137
Workers Compensation Premium:
Third 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
41.9
39.3
37.7
35.3 35.7 34.3 35.4
33.6
34.6 33.8
32.1
30.1
30
28.5
26.9 25.9
25.0
10
36.4
28.6
20
31.0 31.3 29.8 30.5
29.1
39.6
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
35.1
37.0
Pvt. Carrier NWP growth
was +5.4% 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
Calendar Year
Source: 1990–2013p Private Carriers, Annual Statement Data, NCCI.
1996–2013p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements
State Funds available for 1996 and subsequent
10
11
12
13
Workers Compensation Lost-Time
Claim Frequency Declined in 2013
Lost-Time Claims
Percent
12
Cumulative Change of –55.4%
(1991–2011 adj.)
10
8
Frequency Change: 2007—2012
6
Contracting: 7.97.1
-9.3%
4
Manufacturing: 13.612.0
-11.8%
2
11
Indicated
Adjusted
3.5
0.5
0.3
0
-1.0
-2
-4
-6
-4.2 -4.4
-3.9
-4.5
-10
91
-9.2
92 93 94
95
-3.7
-4.5 -4.1
-4.5
-4
-4.3
-4.5
-5.7
-6.5
-8
-2.0
-2.2
-2.3
-6.9
96
97
98
99
00
01
-6.1
-6.6
02
03
04
05
06
07
08
09
10
11
12 13P
Accident Year
*Adjustments primarily due to significant audit activity.
2013p: Preliminary based on data valued as of 12/31/2013
1991–2012: Based on data through 12/31/2012, developed to ultimate
Based on the states where NCCI provides ratemaking services, including state funds; excludes high deductible policies
Frequency is the number of lost-time claims per $1M pure premium at current wage and voluntary loss cost level
Source: NCCI.
140
Workers Compensation Medical Severity
Moderate Increase in 2013
Medical
Claim Cost ($000s)
30
25
20
Average Medical Cost per Lost-Time Claim
+3%
AnnualChange
Change1991–1993:
1991–1993: +1.9%
+1.9%
Annual
AnnualChange
Change1994–2001:
1994–2001: +8.9%
+8.9%
Annual
AnnualChange
Change2002–2013:
2002–2010: +5.2%
+6.0%
Annual
+3.0%
+2.6%
+4.0%+1.2%
+6.8%
+6.1%
+5.8%
+7.8%
Cumulative Change = 256%
(1991-2013p)
+5.4%
+7.7%
Accident
Year
01 02 03
00
Accident Year
04
05
06
07
08
$28.8
99
$27.9
98
$27.1
97
$26.4
$11.7
96
$23.5
$10.8
95
$22.2
$9.8
94
$18.4
$9.1
93
$17.1
$8.8
92
5
$13.9
$8.1
91
+1.3%-2.1%
+6.8%
$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%
$21.0
15
$25.1
+13.5%
$26.1
+8.8%
09
10
11
12 13p
2013p: Preliminary based on data valued as of 12/31/2013.
1991-2012: Based on data through 12/31/2012, developed to ultimate
Based on the states where NCCI provides ratemaking services including state
141funds, excluding WV; Excludes high deductible policies.
WC Medical Severity Generally Outpaces
the Medical CPI Rate
16%
13.5%
14%
12%
10.1%
10%
8%
Average annual increase in WC medical
severity form 1995 through 2011 was well
above the medical CPI (6.8% vs. 3.8%), but
the gap is narrowing.
10.6%
8.8%
8.3%
7.7%
7.4%
7.8%
6.8%
6.1%
7.3%
6% 5.1%
5.4% 5.8%
4.0%
4%
3.0%
4.7%
4.6%
4.5%
4.4%4.2%
4.4%
4.1%
4.0%
4.0%
2.0%
3.7%
3.5%
3.5%
3.4%
3.2%
3.2%
3.0% 3%3.0%
2%
2.8%
Change in Medical CPI
1.2%
Change Med Cost per Lost Time Claim
0%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13p
4%
Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
U.S. Health Care Expenditures,
1965–2022F
$ Billions
$5,000
$4,000
$3,000
$2,000
$1,000
$0
65 $42.0
66 $46.3
67 $51.8
68 $58.8
69 $66.2
70 $74.9
71 $83.2
72 $93.1
73 $103.4
74 $117.2
75 $133.6
76 $153.0
77 $174.0
$195.5
78
$221.7
79
$255.8
80
$296.7
81
$334.7
82
$369.0
83
$406.5
84
$444.6
85
$476.9
86
$519.1
87
$581.7
88
$647.5
89
$724.3
90
$791.5
91
$857.9
92
$921.5
93
$972.7
94
$1,027.4
95
$1,081.8
96
$1,142.6
97
$1,208.9
98
$1,286.5
99
$1,377.2
00
$1,493.3
01
$1,638.0
02
$1,775.4
03
$1,901.6
04
$2,030.5
05
$2,163.3
06
$2,298.3
07
$2,406.6
08
$2,501.2
09
$2,600.0
10
$2,700.7
11
$2,806.6
12
$2,914.7
13
$3,093.2
14
$3,273.4
15
$3,458.3
16
$3,660.4
17
$3,889.1
18
$4,142.4
19
$4,416.2
20
$4,702.0
21
$5,008.8
22
$6,000
From 1965 through 2013, US
health care expenditures had
increased by 69 fold.
Population growth over the
same period increased by a
factor of just 1.6. By 2022,
health spending will have
increased 119 fold.
U.S. health care expenditures have been on a relentless climb for
most of the past half century, far outstripping population growth,
inflation of GDP growth
Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/StatisticsTrends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.
144
National Health Care Expenditures as a
Share of GDP, 1965 – 2022F*
% of GDP
20%
18%
16%
Health care expenditures as a share
of GDP rose from 5.8% in 1965 to
18.0% in 2013 and are expected to
reach 19.9% of GDP by 2022
2022
19.9%
2010:
17.9%
14%
12%
10%
1990:
12.5%
8%
6%
2%
0%
1965
5.8%
Since 2009, heath
expenditures as a %
of GDP have
flattened out at
about 18%--the
question is why and
will it last?
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
19
20
21
22
4%
1980:
9.2%
2000:
13.8%
Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/StatisticsTrends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.
A Few Potential Impacts of the ACA on
Workers Compensation
Issue
Surge in People
Covered by Health
Insurance
Electronic Health
Records
Concern
Contravening Argument
•
System is
overwhelmed
•
•
MD shortage
•
Patient care
adversely impacted
Over time, people will have
access to preventative care,
improving the general health of
the population
•
Greater use of PA’s, etc.
•
Computerization of patient data
could help flag issues and
improve risk management and
improve patient outcomes
•
Reduction in uninsured
population reduces shifting
•
Impact would be short-lived. All
MC-linked states already boost
WC reimbursements
•
Cost
•
Provider/patient may
prefer claim handled
via WC system
•
Cuts in MC
reimbursement rates
could makes docs
less willing to take
WC claims
Claim Shifting
Reimbursement Rates
Source: Insurance Information Institute research; WCRI.
148
U.S. Insured Catastrophe
Loss Update
2014 Experiencing Below Average CAT
Activity Following a Welcome Respite in
2013 from Very High CAT Losses in 2011/12
153
U.S. Insured Catastrophe Losses
$74.5
($ Billions, $ 2013)
$80
$70
2012 was the 3rd most
expensive year ever for
insured CAT losses
$15.3
$12.9
$35.5
$34.1
$14.6
$11.6
$29.6
$7.6
$10.7
$16.5
$7.7
$34.2
$35.2
$6.2
$11.7
$14.5
$11.1
$12.8
$3.8
$10
$8.1
$20
$4.9
$30
$14.2
$40
$8.9
$50
$26.8
$38.3
$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
2013 Was a Welcome Respite from 2012, the 3rd
Costliest Year for Insured Disaster Losses in US
History. Longer-term Trend is for more—not
fewer—Costly Events
$15.3 billion in
insured CAT
losses estimated
for 2014
*Through 12/31/14.
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.
154
154
Inflation Adjusted U.S. Catastrophe
Losses by Cause of Loss, 1994–20131
Wind/Hail/Flood (3), $14.6
Fires (4), $5.5
Other (5), $0.2
1.4%
Geological Events, $18.4
4.8% 3.8%0.1%
Terrorism, $24.8
6.4%
Winter Storms, $24.7
6.4%
Tornado share of
CAT losses is
rising
Events Involving
Tornadoes (2), $139.3
Insured cat losses
from 1993-2012
totaled $386.7B, an
average of $19.3B
per year or $1.6B
per month
41.1%
Hurricanes & Tropical Storms,
$159.1
36.0%
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 2013 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.
158
Top 16 Most Costly Disasters
in U.S. History
(Insured Losses, 2013 Dollars, $ Billions)
Superstorm Sandy in
2012 was the last
mega-CAT to hit the
US
$60
$50
$49.4
$40
$30
Includes
Tuscaloosa, AL,
tornado
Includes
Joplin, MO,
tornado
$24.2 $24.9 $25.9
$19.0
$20
$10
$0
$9.3 $11.2
$8.8
$7.9
$7.6
$7.2
$6.8
$4.5 $5.6 $5.7
Irene (2011) Jeanne
(2004)
Frances
(2004)
Rita
Tornadoes/Tornadoes/ Hugo
(2005) T-Storms T-Storms
(1989)
(2011)
(2011)
Ivan
(2004)
Charley
(2004)
Wilma
(2005)
$13.6
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 Over the Past Decade
Sources: PCS; Insurance Information Institute inflation adjustments to 2013 dollars using the CPI.
159
CYBER RISK &
CYBER INSURANCE
Cyber Risk is a Rapidly Emerging
Exposure for Businesses Large and
Small in Every Industry
Rapidly Increasing Interest from
Businesses, Media & Public Policymakers
166
Data Breaches 2005-2014, by Number of
Breaches and Records Exposed
# Data Breaches/Millions of Records Exposed
Millions
222.5
800
700
783
200
662
656
619
180
600
160
498
500
140
446127.7
419
447
87.9
400
66.9
120
85.6
321
35.7
157
100
80
300
200
220
60
16.2
19.1
22.9
40
17.3
20
100
0
2005
2006
2007
2008
2009
# Data Breaches
2010
2011
2012
2013
2014
# Records Exposed (Millions)
The Total Number of Data Breaches Rose 28% While the Number of
Records Exposed Was Relatively Flat (-2.6%)
167
* 2014 figures as of Jan. 12, 2014 from the ITRC.
Source: Identity Theft Resource Center.
Data/Privacy Breach:
Many Potential Costs Can Be Insured
Costs of
notifying
regulatory
authorities
Regulatory
fines at
home &
abroad
Costs of
notifying
affecting
individuals
Data
Breach
Event
Forensic costs
to discover
cause
Defense and
settlement
costs
Lost customers
and damaged
reputation
Cyber extortion
payments
Business
Income Loss
Source: Zurich Insurance; Insurance Information Institute
169
The Three Basic Elements of Cyber
Coverage: Prevention, Transfer, Response
Loss
Prevention
Loss
Transfer
(Insurance)
Post-Breach
Response
(Insurable)
Cyber risk management today involves
three essential components, each designed
to reduce, mitigate or avoid loss. An
increasing number of cyber risk products
offered by insurers today provide all three.
Source: Insurance Information Institute research.
170
I.I.I. Released its Second Cyber Report in
2014: Cyber Risk: The Growing Threat
 I.I.I.’s 2nd report on cyber risk
released June 2014
 Provides information on cyber
threats and insurance market
solutions
 Global cyber risk overview
 Quantification of threats by
type and industry
 Cyber security and cost of attacks
 Cyber terrorism
 Cyber liability
 Insurance market for cyber risk
 3rd Report in Q2 2015
171
Over the Last Three Decades, Total Tort Costs as a
% of GDP Appear Somewhat Cyclical, 1980-2013E
($ Billions)
$300
2.25%
Deepwater
Horizon Spike
in 2010
$200
2.00%
$150
$100
1.75%
Tort costs in dollar terms have
remained high but relatively stable
since the mid-2000s., but are down
substantially as a share of GDP
$50
Tort Costs as % of GDP
2.21% of
GDP in 2003
= pre-tort
reform peak
$250
Tort System Costs
2.50%
Tort Costs as % of GDP
Tort Sytem Costs
1.68% of
GDP in
2013
1.50%
$0
80
82
84
86
88
90
92
94
96
98
00
Sources: Towers Watson, 2011 Update on US Tort Cost Trends, Appendix 1A
02
04
06
08
10
12E
173
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
178