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Top 10 Challenges Confronting the Insurance Industry Today? Trends, Challenges & Opportunities Federation of Defense and Corporate Counsel New York, AL October 22, 2015 Download at www.iii.org/presentations 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 1. Insurance Industry Financial Performance 2014 Was a Reasonably Good Year 2015: A Repeat of 2014? 2 $55,501 $63,784 $30,972 $33,522 $19,456 $3,043 $28,672 $35,204 $62,496 Net income fell modestly (-12.5%) in 2014 vs. 2013 $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 = 10.2% 2014 ROAS1 = 8.4% 2015:H1 ROAS = 9.2% $24,404 $ Millions $80,000 $70,000 $60,000 $50,000 $65,777 P/C Industry Net Income After Taxes 1991–2015:H1 $0 •ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009. Sources: A.M. Best, ISO; Insurance Information Institute 15:H1 14 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: Property/Casualty Insurance by Major Event, 1987–2015E (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 Northridge 4 Hurricanes 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 15E * Excludes Mortgage & Financial Guarantee in 2008 – 2014. Sources: ISO, Fortune; Insurance Information Institute. 5 Return on Equity by Financial Services Sector vs. Fortune 500, 2004-2014* (Percent) Fortune 500 P/C Insurers Life Insurers Commercial Banks 18% 16% 14% 12% 10% 8% 6% Average: 2004 - 2014 4% Fortune 500: 13.9% Commercial Banks: 9.8% Life: 8.2% P/C: 7.1% 2% 0% -2% 04 05 06 07 08 09 10 11 12 13 14 Banks and Insurers Have Substantially Underperformed the Fortune 500 Since the Financial Crisis *GAAP basis. Sources: ISO, Fortune; Insurance Information Institute. 9 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. 13 -9.3 -6.9 Some of the least profitable states over the past decade were hit hard by catastrophes, including Alabama 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 NM FL TX WI KS MN CO PA US AR IL Source: NAIC; Insurance Information Institute. IN AZ MO KY TN NV NJ GA NY DE MI AL OK MS LA 14 Profitability & Politics How Is Profitability Affected by the President’s Political Party? 16 P/C Insurance Industry ROE by Presidential Administration, 1950-2014* 16.43% 15.10% 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 9.00% 8.93% 8.65% OVERALL RECORD: 1950-2014* 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% Party of President has marginal bearing on profitability of P/C insurance industry 3.55% 0% 2% 4% 6% *Truman administration ROE of 6.97% based on 3 years only, 1950-52;. Source: Insurance Information Institute 8% 10% 12% 14% 16% 18% P/C insurance Industry ROE by Presidential Party Affiliation, 1950- 2014 Nixon/Ford Carter Kennedy/ Johnson 20% Truman 25% Eisenhower BLUE = Democratic President RED = Republican President Reagan/Bush I Clinton Bush II Obama 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 2. 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: 2000–2015E1 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 $47.3 $46.2 $46.8 $39.6 $37.1 $36.7 $30 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15E 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. *2015 figure is estimated based on annualized data through Q2. 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% 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 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 2015. Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute. 22 Interest Rate Forecasts: 2015 – 2021 Yield (%) 3-Month Treasury 10-Year Treasury 5% 3.8% 4% 4.0% 4.0% 4.0% 3.4% 3.1% 3.1% 3.1% 2.8% 3% 2.7% 2.2% 2.0% 2% The end of the Fed’s QE program in 2014 and a stronger economy have yet to push longer-term yields much higher 0.8% 1% 0.1% 0% 15F 16F 17F 18F 19F 20F 21F 15F 16F 17F 18F 19F 20F 21F A full normalization of interest rates is unlikely until the 2020s, more than a decade after the onset of the financial crisis. Sources: Blue Chip Economic Indicators (10/15 for 2015 and 2016; for 2017-2021 10/15 issue); Insurance Info. Institute. 25 3. CAPITAL/CAPACITY Capital Accumulation Has Multiple Impacts Alternative Capital Impacts? 32 $673.9 $674.7 $672.4 14:Q4 15:Q2 $671.6 14:Q3 $624.4 $614.0 $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:Q2 14:Q1 13:Q4 13:Q3 13:Q2 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 6/30/15 stood at a near-record high $672.4B 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 13:Q1 $700 $607.7 Drop due to near-record 2011 CAT losses 2007:Q3 Pre-Crisis Peak $662.0 ($ Billions) $653.4 Policyholder Surplus, 2006:Q4–2015:Q2 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. 33 Alternative Capital New Investors Continue to Change the Reinsurance Landscape First I.I.I. White Paper on Issue Was Released in March 2015 38 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 $50B. It has more than doubled in the past three years. 2014 data is as of June 30, 2014. Source: Aon Benfield Analytics; Insurance Information Institute. Alternative Capital as a Percentage of Traditional Global Reinsurance Capital 11.5% 12% 10.2% 10% 8.4% 8% 6% 6.5% 5.7% 5.9% 5.8% 2007 2008 2009 5.4% 4.6% 4% 2% 0% 2006 2010 2011 2012 2013 2014 Alternative Capital’s Share of Global Reinsurance Capital Has More Than Doubled Since 2010. 2014 data is as of June 30, 2014. Source: Aon Benfield Analytics; Insurance Information Institute. Catastrophe Bond Issuance and Outstanding: 1997-2015:Q2 Risk Capital Amount ($ Millions) 21,559.6 22,867.8 3,842.2 8,026.7 7,083.0 11 5,855.3 10 14,839.3 4,107.1 09 12,342.8 08 4,599.9 05 12,195.7 04 3,396.0 03 12,508.2 02 3,009.9 989.5 01 12,538.6 966.9 00 13,416.4 7,187.0 1,142.0 99 1,499.0 1,062.5 98 1,142.8 874.2 97 1,988.2 948.2 5,000 4,614.7 10,000 5,085.0 4,289.0 15,000 7,677.0 20,000 18,576.9 25,000 0 New Issuance 06 07 12 13 14 15* Outstanding Cat Bond Issuance Appears to Be Slowing Down in 2015 from 2014’s Record Pace. Lower Yields on Bonds Explain Some of the Contraction. Source: Guy Carpenter. 42 Questions Arising from Influence of Alternative Capital What Will Happen When Investors Face Large-Scale Losses? What Happens When Interest Rates Rise? Does ILS Have a Higher Propensity to Litigate? How Much Lower Will Risk Premiums Shrink/ROLs Fall? Will There Be Spillover Into Casualty Reinsurance? Will Alternative Capital Drive Consolidation? 46 4. M&A UPDATE: A PATH TO GROWTH? Are Capital Accumulation, Drive for Growth and Scale Stimulating M&A Activity? 47 U.S. INSURANCE MERGERS AND ACQUISITIONS, P/C SECTOR, 1994-2014 (1) M&A activity in 2015 will likely reach its highest level since 1998 ($ Millions) $55,825 $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 $11,534 $5,100 $10,000 $13,615 80 $30,000 $20,000 120 100 $35,221 $40,032 $30,873 $40,000 140 $0 Number of transactions Transaction values $50,000 $16,294 $60,000 M&A activity in the P/C sector was up sharply in 2014 but remains well below pre-crisis or late 1990s levels. 20 0 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 (1) Includes transactions where a U.S. company was the acquirer and/or the target. Source: Conning proprietary database. 48 5. Growth Premium Growth Rates Vary Tremendously by State and Over Time, But… 52 Net Premium Growth (All P/C Lines): Annual Change, 1971—2015:H1 (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% 2015:H1: 4.1% 15% 2014: 4.1% 2013: 4.4% 10% 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* -5% Shaded areas denote “hard market” periods Sources: A.M. Best (1971-2013), ISO (2014-15). 53 NPW Premium Growth: Peaks & Troughs in the P/C Insurance Industry, 1926 – 2015E 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% 2015E 4.1% 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. Direct Premiums Written: Total P/C Percent Change by State, 2007-2014 Top 25 States 60 Growth Benchmarks: Total P/C 14.9 14.8 14.7 14.4 14.2 13.8 13.5 AK KY VA LA CT MT 17.0 WI OH 18.0 AR 15.0 18.1 TN NJ 18.6 MI 15.1 19.2 IN SC 19.2 MN 15.2 20.7 CO 20 GA 21.6 23.7 VT WY 24.7 IA 29.4 NE 26.8 30.3 30 US: 13.0% TX 36.2 SD 40 36.7 50 OK Pecent change (%) 70 70.7 80 North Dakota was the country’s growth leader over the past 7 years with premiums written expanding by 70.7%, fueled by the state’s energy boom KS 0 ND 10 Sources: SNL Financial LC.; Insurance Information Institute. 55 Direct Premiums Written: Total P/C Percent Change by State, 2007-2014 2.2 1.3 6.0 CA 4.7 6.3 ME 8.2 9.1 9.2 9.4 5 DE NV WV HI DC AZ FL OR ID PA IL NH RI -12.9 Sources: SNL Financial LC.; Insurance Information Institute. WA MD NC AL MS NM US UT NY MO -15 -7.3 -10 -4.3 Growth was negative in 4 states and DC between 2007 and 2014 -5 -1.6 -0.8 0 MA Pecent change (%) 10 9.4 10.5 11.0 11.7 12.2 12.4 12.9 13.0 13.0 13.1 13.1 15 13.4 Bottom 25 States 56 Direct Premiums Written: Comm. Lines Percent Change by State, 2007-2014 90 Growth Benchmarks: Commercial 43 states showed commercial lines growth from 2007 through 2014 70 60 US: 5.9% 11.8 10.3 8.7 8.5 8.4 8.0 7.9 7.6 7.1 6.6 5.9 5.9 5.8 5.4 4.5 WI MA AR CT NY NJ CO NM OH LA US MS NH MO 13.9 IN MN 14.6 AK 20.6 TX 15.2 21.0 KS 20 WY 22.5 IA 24.8 30 29.4 40 33.3 50 36.8 Pecent change (%) 80 80.4 Top 25 States NE OK VT SD 0 ND 10 Sources: SNL Financial LLC.; Insurance Information Institute. 57 Direct Premiums Written: Comm. Lines Percent Change by State, 2007-2014 Bottom 25 States 2.1 1.4 0.9 SC ID 2.8 2.8 3.1 3.2 3.3 3.3 3.7 3.8 3.9 4.1 4.4 4.2 ME -15 -10.7 -6.9 OR Alabama DPW growth has been sluggish -9.2 -6.5 FL -10 -5.3 -5 -3.2 0 -1.3 -22.2 WV DE AZ HI DC AL NC VA KY IL UT PA GA WA RI CA MT MD TN MI -25 -19.9 -20 NV Pecent change (%) 5 4.5 10 2.2 Nearly half the states have yet to see commercial lines premium volume return to pre-crisis levels Sources: SNL Financial LLC.; Insurance Information Institute. 58 6. Pricing Trends Survey Results Suggest Commercial Pricing Has Flattened Out but Personal Lines Are Up 61 Commercial Lines Rate Change by Month (vs. Year Earlier), July 2001 – Sep. 2015 40% Jul-02, 33% Not Much of A Hard Market, By Historic Standards 30% Sept. 2015: -1.5% 20% 10% Sep-13, 5% Jul-15, 1% Feb-05, 0% 0% 79 Months of Rates < 0% Dec-14, 0% -10% Oct-11, 0% Dec-07, -16% Jul-01 Dec-01 May-02 Oct-02 Mar-03 Aug-03 Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 -20% Commercial Insurance Rate Changes Are Fairly Stable SOURCE: MarketScout, Insurance Information Institute. 62 Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2015:Q1 Percentage Change (%) Peak = 2001:Q4 +28.5% Pricing turned positive in Q3:2011, the first increase in nearly 8 years Pricing Turned Negative in Early 2004 and Remained that way for 7 ½ years KRW : No Lasting Impact Trough = 2007:Q3 -13.6% Rate trends are roughly flat, some carriers reporting small gains, others flat, others small declines 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. 64 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 July 2015 reading of 5.4% is up from 4.2% 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 '15 *Percentage change from same month in prior year; through July 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. 67 7. Underwriting Performance 68 Commercial Lines Combined Ratio, 1990-2016F* 107.9 94.8 94.3 13 14 91.1 95 93.6 99.2 100 98.3 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 (2015-16F) Insurance Information Institute. 16F 15F 12 11 10 09 08 07 06 05 04 03 02 01 00 99 98 97 96 95 94 93 92 91 90 90 69 102.4 102.3 102.2 102.3 101.6 102.1 102.0 101.0 101.3 100.2 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 15F 16F 17F Private Passenger Auto Underwriitng Performance Is Exhibiting Remarkable Stability Sources: A.M. Best (1990-2014); Conning (2015F – 2017F); Insurance Information Institute. 70 Collision Coverage: Severity & Frequency Trends Are Both Higher in 2015* Annual Change, 2005 through 2015* Severity Frequency 6% 4.7% 5% 4.2% 4.2% 3.9% 4% 3.1% 2.8% 2.5% 3% 2.3% 1.6% 1.4% 2% 1.3% 0.9% 0.5% 1% 0.1% 0% -0.1% -1% -0.5% -2% -1.4% -1.4% -1.8% -3% -2.4%-2.3% -4% -3.6% -5% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* The Recession, High Fuel Prices Helped Temper Frequency and Severity, But this Trend Will Likely Be Reversed Based on Evidence from Past Recoveries *2015 figure is for the 4 quarters ending with 2015:Q2. Source: ISO/PCI Fast Track data; Insurance Information Institute 71 Homeowners Insurance Combined Ratio: 1990–2015F Hurricane Sandy 150 119.4 103.8 101.4 91.7 85.4 96.4 91.7 90 103.1 109.3 121.7 111.4 108.2 109.4 121.7 112.7 118.4 113.6 1 98.2 100 101.0 110 117.7 120 113.0 130 114.5 Hurricane Ike 140 96.6 160 Record tornado activity 92.4 170 87.7 158.4 Hurricane Andrew 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 14F 15F Homeowners Performance in 2011/12 Impacted by Large Cat Losses. Extreme Regional Variation Can Be Expected Due to Local Catastrophe Loss Activity Sources: A.M. Best (1990-2014F);Conning (2015F); Insurance Information Institute. 72 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 79 U.S. Insured Catastrophe Losses ($ Billions, $ 2014) $80 $75.7 2012 was the 3rd most expensive year ever for insured CAT losses $70 $11.0 $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* 2013/14 Were Welcome Respites from 2011/12, among the Costliest Years for Insured Disaster Losses in US History. Longer-term Trend is for more—not fewer—Costly Events $11.0B in insured CAT losses though 9/30/15 *Through 9/30/15 in 2015 dollars. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute. 80 80 US Insured CAT Losses Through Q3to Date: 30 Events =$11 Billion in Claims Source: PCS; Insurance information Institute. Top 10 Insured CAT Losses Through 2015 Q3: 30 Events = $11 Bill. in Claims Source: PCS; Insurance information Institute. Loss Events in the US, 1980 – 2014 Overall and Insured Losses Overall losses totaled $25bn; Insured losses totaled $15.3bn $ Billions 2015 First Half: $8.2 Billion Insured Losses $12.0 Overall Losses 200 150 100 Overall losses (in 2013 values)* 50 Insured losses (in 2013 values)* 1980 1982 1984 1986 1988 1990 1992 Source: Property Claim Services, MR NatCatSERVICE. 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 *Losses adjusted to inflation based on CPI. 84 3.477 5 2.017 1980 1985 2 5.151 5.351 5.569 5.620 5.646 5.645 5.700 The number of NFIP policies in force has plunged by 549,000 or 9.6% since 2009, even as coastal development surges and sea levels rise 2.478 2.104 (millions) 4 3 4.962 4.369 6 5.684 5.656 Number of National Flood Insurance Program Policies in Force at Year-End, 1980-2015* 1 0 1990 1995 2000 2005 2007 2008 2009 2010 2011 2012 2013 2014 2015* Source: National Flood Insurance Program. * As of July, 2015 85 Take-Up Rates for Various Types of Insurance in the U.S. Take-Up Rate 100% 90% 80% 87% Take-up rates vary widely by type of coverage 95% 99% Home Workers Comp 62% 70% 52% 60% 50% 40% 40% 30% 20% 10% 14% 10% 0% CA Earthquake Flood Renters Cyber Terrorism Pvt. Passenger Auto Sources: CA Earthquake (WSJ, http://www.wsj.com/articles/california-pushes-homeowners-to-insure-against-earthquakes-1440980138 ); Flood and Renters (I.I.I. June 2015 Pulse Survey); Cyber (Advisen, 2015); Terrorism (Marsh Global Analytics, 2014 Terrorism Risk Insurance Report, April 2014; data for 2013); Pvt. Passenger Auto (Insurance Research Council, Uninsured Motorists, 2014 Edition, data for 2012); Home and Workers Comp (I.I.I. estimates); Insurance Information Institute research. 86 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. 87 Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1995–20141 Wind/Hail/Flood (3), $21.4 Winter storm losses were much above average in 2014/15 are will push this share up Fires (4), $6.0 Other (5), $0.2 Geological Events, $0.5 Terrorism, $24.5 1.5% 5.4% 0.1% 0.1% 6.2% Winter Storms, $26.9 6.8% Insured cat losses from 1995-2014 totaled $395.6B, an average of $19.8B per year or $1.65B per month 40.7% Tornado share of CAT losses is rising Events Involving Tornadoes (2), $154.9 Hurricanes & Tropical Storms, $161.2 39.2% 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 2014 dollars. 2. Excludes snow. 3. Does not include NFIP flood losses 4. Includes wildland fires 5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation. Source: ISO’s Property Claim Services Unit. 89 Convective Loss Events in the US Overall and insured losses, 1980 – 2014 Overall losses (in 2014 values)* $ Billions 50 40 30 Insured losses (in 2014 values)* The period from 2008-2014 has been the most expensive on record for insured losses from “Convective Events” (severe thunderstorms, tornado, hail, lightning and flash flood) 2015 First Half: $5.1 Billion Insured Losses $7.0 Overall Losses 20 10 1980 1982 1984 1986 1988 *Losses adjusted to inflation based on CPI Source: Geo Risks Research, NatCatSERVICE 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Analysis contains: severe storm, tornado, hail, flash flood and lightning 98 8. THE ECONOMY The Strength of the Economy Will Greatly Influence Insurer Exposure Base Across Most Lines 127 US Real GDP Growth* -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 -9% -5.3% -5% Recession began in in June 2009 -3.7% -3% -1.8% -1% 4.6% 4.3% 2.1% 0.6% 3.9% 2.1% 2.7% 2.6% 2.7% 2.6% 2.6% 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% 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 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 10/15; Insurance Information Institute. 128 Real GDP by State Percent Change, 2014*: Highest 25 States 6.3 Only 7 states experienced growth in excess of 3% in 2014, which is a growth rate we would see nationally in a more typical recovery 5.1 Growth Benchmarks: Real GDP 1.7 1.8 1.8 1.8 1.9 1.9 2.2 2.2 2.3 2.3 1.9 2 2.3 2.7 2.7 2.8 2.8 3.0 3.1 3 2.1 US: 2.2% 3.6 4 4.7 5 5.1 Percent Change (%) 5.2 6 2.5 7 North Dakota was the economic growth juggernaut of the US in 2014—by far 1 0 ND TX WY WV CO OR UT WA OK CA ID FL NY GA NH MA US SC OH MI MN LA MT KS PA TN *Advance statistics Sources: U.S. Bureau of Economic Analysis; Insurance Information Institute. 130 Real GDP by State Percent Change, 2014*: Lowest 25 States 0.0 0.0 0.2 0.4 0.4 0.6 0.6 0.7 0.7 0.6 0.4 0.5 0.8 0.8 0.8 0.9 1.0 1.0 1.2 1.2 1.4 1.2 1.0 Mississippi and Alaska were the only states to shrink in 2014 -0.5 -1.2 -1.0 -1.5 -1.3 1.0 1.0 Percent Change (%) 1.5 1.4 2.0 1.6 Growth rates in 16 states were still below 1% in 2014, including in AL DC NC AZ IL RI DE WI KY NM NV MO AR HI MD NE AL SD VT CT IA IN NJ ME VA MS AK *Advance statistics Sources: US Bureau of Economic Analysis; Insurance Information Institute. 131 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% 4.8% 4.8% 4.7% 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 (9/15 edition); Insurance Information Institute. 136 CONSTRUCTION INDUSTRY OVERVIEW & OUTLOOK The Construction Sector Is Critical to the Economy and the P/C Insurance Industry 139 Value of New Private Construction: Residential & Nonresidential, 2003-2015* 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 2015: Value of new pvt. construction hits $787.8B as of July 2015, up 57.4% from the 2010 trough but still 13.6% below 2006 peak $15.0 $613.7 $700 $600 $407.0 $500 $298.1 $400 $300 $261.8 Non Residential Residential $200 $100 $380.8 $238.8 $0 03 04 05 06 07 08 09 10 11 12 13 14 15* Private Construction Activity Is Moving in a Positive Direction though Remains Well Below Pre-Crisis Peak; Residential Dominates *2015 figure is a seasonally adjusted annual rate as of July. Sources: US Department of Commerce http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute. 140 (Thousands) 6,500 6,300 6,200 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 5,629 5,628 5,627 5,608 5,623 5,632 5,641 5,649 5,668 5,684 5,724 5,746 5,798 5,815 5,813 5,833 5,856 5,854 5,866 5,893 5,918 5,953 5,937 6,006 6,032 6,062 6,103 6,114 6,121 6,152 6,169 6,191 6,201 6,231 6,275 6,316 6,347 6,335 6,365 6,377 6,378 6,383 6,388 6,396 6,400 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 2/30/20 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 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Construction Employment, Jan. 2010—Sept. 2015* Construction employment is +948,000 above Jan. 2011 (+17.4%) 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. 145 New Private Housing Starts, 1990-2021F 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 1.10 1.13 1.28 1.42 1.47 1.47 1.50 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 15F 16F 17F 18F 19F20F 21F 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 (10/15); Insurance Information Institute. 146 ENERGY SECTOR: OIL & GAS INDUSTRY FUTURE IS BRIGHT BUT VOLATILE US Is Becoming an Energy Powerhouse but Fall in Prices Will Have Negative Impact 152 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. Sep-15 Jul-15 May-15 Mar-15 Jan-15 Nov-14 Sep-14 Jul-14 May-14 Mar-14 Jan-14 Nov-13 Sep-13 Jul-13 May-13 Mar-13 Jan-13 Nov-12 Sep-12 Jul-12 May-12 Mar-12 Jan-12 Nov-11 Sep-11 Jul-11 May-11 Mar-11 160 Jan-11 170 Nov-10 210 Sep-10 (000) Jul-10 180 May-10 190 156.7 157.6 158.7 158.1 158.4 159.7 160.2 161.5 161.4 161.0 162.7 164.3 166.6 169.2 170.1 171.2 172.6 174.0 176.6 178.2 178.7 180.6 181.3 182.3 184.7 185.2 186.2 187.8 188.6 189.3 189.4 189.4 190.5 192.2 193.1 194.6 194.0 193.8 193.1 192.5 193.0 193.4 193.3 193.1 194.0 194.0 194.0 195.4 193.7 194.6 196.4 197.6 198.6 198.4 199.4 201.5 201.0 201.2 199.4 197.6 197.7 194.4 194.2 193.2 193.6 192.1 191.0 200 Mar-10 Employment in Oil & Gas Extraction, Jan. 2010—Sept. 2015* Oil and gas extraction employment was up 28.8% by Oct. 2014 but falling energy prices have taken their toll Employment in the O&G segment is down 5.2% since its Oct. 2014 peak 155 MANUFACTURING SECTOR OVERVIEW & OUTLOOK The U.S. Was Experiencing a Mini Manufacturing Renaissance but Headwinds from Weak Export Markets and Strong Dollar Hurt 156 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 11,834 11,857 11,899 11,916 11,930 11,941 11,965 11,961 11,948 11,951 11,947 11,961 11,980 12,002 12,006 12,006 12,007 12,005 11,983 12,011 12,022 12,040 12,072 12,086 12,102 12,122 12,131 12,142 12,154 12,177 12,191 12,205 12,214 12,237 12,282 12,301 12,318 12,321 12,327 12,327 12,333 12,334 12,345 12,327 12,318 12,500 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-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 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Manufacturing Employment, Jan. 2010—Sept. 2015* (Thousands) Since Jan 2010, manufacturing employment is up (+858,000 or +7.5%) but has slipped in recent months as economies abroad weaken, hurting exports of manufactured goods Manufacturing employment has been a surprising source of strength in the economy. Employment was at a multi-year high until recently. *Seasonally adjusted. Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute. 160 9. CYBER RISK & CYBER INSURANCE Cyber Risk is a Rapidly Emerging Exposure for Businesses Large and Small in Every Industry 165 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 2014 Data Breaches By Business Category, By Number of Breaches The majority of the 783 data breaches in 2014 affected business and medical/healthcare organizations, according to the Identity Theft Resource Center. Banking/Credit/Financial, 43 (5.5%) Govt/Military, 92 (11.7%) Business, 258 (33.3%) 5.5% 11.7% Educational, 57 (7.3%) 33.3% 7.3% Medical/Healthcare, 333 (42.5%) 42.5% Source: Identity Theft Resource Center, http://www.idtheftcenter.org/ITRC-Surveys-Studies/2014databreaches.html 170 Evolving Threats: Cyber Crime and Cyber Terrorism State sponsored groups: Foreign government sponsored Sophisticated and well-funded Organized cyber criminals: Traditional organized crime groups Loosely organized global hacker crews Hacktivists: Politically-motivated hackers Increasing capabilities Insiders: Easy access to sensitive information Difficult to detect Terrorists: Destruction of physical and digital assets Source: Lewis Brisbois, Practical Strategies to Address Cyber Risk in Your Business, November 2014 171 Main Causes of Data Breach Globally Malicious or criminal attacks are most often the cause of data breach globally. Some 42 percent of incidents concern a malicious or criminal attack, while 30 percent concern a negligent employee or contractor (human factor). Malicious or criminal attack* Human error 30% 42% System glitch 29% *The most common types of malicious or criminal attacks include malware infections, criminal insiders, phishing/social engineering and SQL injection. Source: 2014 Cost of a Data Breach Study: Global Analysis, the Ponemon Institute, sponsored by IBM, May 2014 172 US: External Cyber Crime Costs: Fiscal Year 2014 Information theft (40%) and business disruption or lost productivity (38%) account for the majority of external costs due to cyber crime. Equipment damages Other costs* 2% Revenue loss Information theft 2% 18% 40% Business disruption 38% * Other costs include direct and indirect costs that could not be allocated to a main external cost category Source: 2014 Cost of Cyber Crime: United States, Ponemon Institute. 174 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 175 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. 176 I.I.I.’s New Cyber Risk Report (Oct. 2015): Cyber Risks Threat and Opportunity I.I.I.’s 3rd report on cyber risk: Cyber Risk: Threat and Opportunity 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 http://www.iii.org/white-paper/cyber-risksthreat-and-opportunities-100715 Insurance market for cyber risk 177 Marsh: Percentage of U.S. Companies Purchasing Cyber Insurance Increased in 2014 Take-up rate 2014* All Industries Take-up rate 2013 13% 16% 45% 50% Health Care Education Hospitality and Gaming Services Financial Institutions Power and Utilities Retail/Wholesale Communications, Media and Tech Manufacturing 22% 32% 16% 26% 17% 22% 17% 21% 14% 21% 13% 18% 11% 12% 6% 8% Ever larger numbers of insureds seek financial protection via cyber insurance. The percentage of U.S. companies buying cyber insurance rose to 16 percent in 2014. *Take-up rate refers to the overall percentage of clients that purchased standalone cyber insurance. Source: Benchmarking Trends: As Cyber Concerns Broaden, Insurance Purchases Rise, Marsh Risk Management Research Briefing, March 2015 179 Marsh: Total Limits Purchased, By Industry – Cyber Liability, All Revenue Size Average limits purchased for cyber risk rose to $12.8 million for all industries and all company sizes in 2014. Power and utility companies witnessed the sharpest percentage increase in average limits, at 59 percent. ($ Millions) Avg. 2013 Limits $23.5 Avg. 2014 Limits $22.0 $22.2 $21.0 $19.7 $13.2 $12.8 $11.1 $14.9 $12.0 $10.5 $9.9 $10.2 $10.5 $9.5 $6.7 $4.2 $4.4 All Industries Comms, Media & Technology Education Financial Institutions Health Care Manufacturing Power and Retail/Wholesale Utilities Services Source: Benchmarking Trends: As Cyber Concerns Broaden, Insurance Purchases Rise, Marsh Risk Management Research Briefing, March 2015 180 10. INDUSTRY DISRUPTORS Technology, Society and the Economy Are All Changing at a Rapid Pace Will Insurers Keep Pace? 183 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. 185 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 186 Labor on Demand: Huge Implications for the US Economy, Workers & Insurers 188 TNC Ridesharing Arrangements: Insurance Applicability The concern was that TNCs were seeking to offload risk on to personal auto insurers. An increasing number of personal auto insurers have developed solutions to ensure that coverage gaps are minimized *From publically available sources as of June 2, 2015. Source: ISO/Verisk. 189 Ridesharing Regulation/Legislation and Status of ISO Filings as of 9/30/15 Status Ride Sharing Legislation/Regulation Status of ISO Filings 190 Source: ISO. Send in the Drones: Potential Rapid Adoption in Industry; Media Loves It Drones or Unmanned Aerial Vehicle (UAV) technology is seeing rapid adoption rate in many industries, including insurance ~700,000 drones in US by year-end FAA granting Section 333 exemptions for commercial use and testing of UAS FAA will require most drones to be registered by year-end 2015. At least 5 insurers have received permission to test Wide variety of applications: claims, preevent property inspections… Insurers partnering with construction industry to guide R&D and regulation of UAV use via Property Drone Consortium: www.propertydrone.org 191 11. Shifting Legal Liability & Tort Environment Will the Tort Pendulum Swing Against Insurers? 192 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 193 Average Personal Injury Jury Award, 2009 – 2013 Average awards in Personal Injury cases have increased by more than 1/3 in recent years $1,200,000 $1,045,048 $1,009,788 $1,000,000 $800,000 $782,657 $750,392 $653,898 $600,000 $400,000 $200,000 $0 2009 2010 2011 2012 2013 Source: Current Award Trends in Personal Injury, 54th Edition; Insurance Information Institute. 196 Median and Average Personal Injury Jury Award by Type of Liability, 2013 Porducts Liability and Medical Malpractice cases tend to have among the highest jury awards 2013 Median 2013 Average All Liabilities Product Liabilities Business Negligence Medical Malpractice Premises Liability Personal Negligence $351,829 $34,877 $161,187 $52,680 $587,000 $121,894 $745,000 $1,273,139 $139,768 $1,009,788 $68,218 $3,123,950 $3,486,900 $6,392,270 Vehicular Liability Source: Current Award Trends in Personal Injury, 54th Edition; Insurance Information Institute. 197 Percent of Personal Injury Jury Awards Over $1 Million, 2003 – 2013* The share of $1MM+ jury awards has returned ot its pre-crisis high 17% 16% 16% 16% 16% 15% 15% 14% 14% 14% 2007-09 2010-11 14% 14% 13% 2003-04 2005-06 *Latest available. Source: Current Award Trends in Personal Injury, 53rd and 54th Editions; Insurance Information Institute. 2012-13 198 Business Leaders Ranking of Liability Systems in 2015 Best States 1. Delaware 2. Vermont 3. Nebraska 4. Iowa 5. New Hampshire 6. Idaho 7. North Carolina 8. New in 2015 Vermont New Hampshire North Carolina South Dakota Drop-offs Minnesota Kansas Virginia North Dakota Worst States 41. Arkansas 42. Missouri 43. Mississippi 44. Florida 45. New Mexico 46. Alabama 47. California Wyoming 48. Illinois 9. South Dakota 49. Louisiana 10. Utah 50. West Virginia Source: US Chamber of Commerce 2015 State Liability Systems Ranking Study; Insurance Info. Institute. Newly Notorious Arkansas Missouri Rising Above Oklahoma Montana 200 The Nation’s Judicial “Hellholes”: 2014/2015 Illinois Watch List Atlantic County, New Jersey Mississippi Delta Montana Nevada Newport News, Virginia Philadelphia, Pennsylvania West Virginia Madison County California Dishonorable Mention New York City Asbestos Litigation AL Supreme Court PA Supreme Court Volkswagen: Massive tort actions, fines, penalties certain. Are others vulnerable? Issue of cheating on environmental standards and liability looms large. Source: American Tort Reform Association; Insurance Information Institute Florida 201 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 202