What’s Keeping Insurance CEOs
Awake at Night?
Trends, Challenges & Opportunities
Alabama I-Day
Tuscaloosa, AL
October 14, 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  bobh@iii.org  www.iii.org
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
P/C Insurance Industry
Combined Ratio, 2001–2015:H1*
As Recently as 2001,
Insurers Paid Out
Nearly $1.16 for Every
$1 in Earned
Premiums
Heavy Use of
Reinsurance
Lowered Net
Losses
Relatively
Low CAT
Losses,
Reserve
Releases
120
115.8
110
Best
Combined
Ratio Since
1949 (87.6)
107.5
Higher
CAT
Losses,
Shrinking
Reserve
Releases,
Toll of Soft
Market
Sandy
Impacts
Cyclical
Deterioration
Lower
CAT
Losses
106.3
99.3
98.4
100
Avg. CAT
Losses,
More
Reserve
Releases
101.0
100.8
100.1
Relatively
Low CAT
Losses,
Reserve
Releases
102.4
100.8
97.6
96.7 97.2
95.7
92.6
90
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15:H1
* Excludes Mortgage & Financial Guaranty insurers 2008--2014. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2;
2013: = 96.1; 2014: = 97.0.
Sources: A.M. Best, ISO.
7
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%
97.5
101.2
8.8%
15%
102.4
101.0
12%
96.7 97.2 97.6
95.7
95
99.5
7.4% 7.9%
9.6% 92.7
6.2% 9.8%
4.7%
90
9%
8.2%
9.2%
6%
Lower CATs
helped ROEs
in 2013-15:Q2
4.3%
85
18%
3%
0%
80
1978
1979
2003
2005
2006
2007
2008
Combined Ratio
2009
2010
2011
2012
2013
2014 2015:H1
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 combined ratio
including M&FG insurers is 97.0; 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 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
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.
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
-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
15
INVESTMENTS:
THE NEW REALITY
Investment Performance is a Key
Driver of Profitability
Depressed Yields Will Necessarily
Influence Underwriting & Pricing
17
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.
20
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.
23
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.
25
Profitability and Growth in
Alabama P/C Insurance
Markets
Analysis by Line and Nearby
State Comparisons
30
RNW All Lines: AL vs. U.S., 2004-2013
(Percent)
20%
15%
10%
5%
0%
-5%
P/C Insurer profitability in AL
is below that of the US
overall over the past decade
US: 7.9%
AL: 2.5%
-10%
2004/05
hurricanes
-15%
-20%
Tuscaloosa
tornado
-25%
04
05
06
US All Lines
Sources: NAIC.
07
08
09
10
11
12
13
AL All Lines
31
RNW PP Auto: AL vs. U.S., 2004-2013
Average 2004-2013
14%
US: 7.1%
12%
AL: 7.6%
10%
8%
6%
Katrina and
other storms
4%
Tuscaloosa
tornados
2%
0%
04
05
06
US PP Auto
Sources: NAIC.
07
08
09
10
11
12
13
AL PP Auto
32
RNW Comm. Auto: AL vs. U.S.,
2004-2013
(Percent)
Commercial Auto
profitability in AL is
generally below the
US average
20%
15%
10%
5%
Average 2004-2013
0%
US: 9.2%
Katrina and
other storms
-5%
AL: 3.7%
-10%
04
05
06
US Comm Auto
Sources: NAIC.
07
08
09
10
11
12
13
AL Comm Auto
33
RNW Comm. Multi-Peril: AL vs. U.S.,
2004-2013
(Percent)
30%
20%
10%
0%
-10%
-20%
Average 2004-2013
-30%
US: 8.9%
-40%
Katrina and
other storms
in 2004/05
-50%
Tuscaloosa
tornados
AL: -1.6%
-60%
-70%
04
05
06
US Comm M-P
Sources: NAIC.
07
08
09
10
11
12
13
AL Comm M-P
34
RNW Homeowners: AL vs. U.S.,
2004-2013
(Percent)
40%
20%
0%
-20%
-40%
Average 2004-2013
-60%
US: 6.6%
AL: -13.1%
Katrina and
other storms
in 2004/05
-80%
Tuscaloosa
tornados
-100%
04
05
06
US HO
Sources: NAIC.
07
08
09
10
11
12
13
AL HO
35
RNW Workers Comp: AL vs. U.S.,
2004-2013
(Percent)
Average 2004-2013
12%
US: 7.1%
10%
AL: 7.9%
8%
6%
4%
2%
0%
04
05
06
US WComp
Sources: NAIC.
07
08
09
10
11
12
13
AL Wcomp
36
All Lines: 10-Year Average RNW AL &
Nearby States
2004-2013
8.6%
7.9%
Alabama All Lines
profitability is below the
US and the regional
average
6.4%
Florida
U.S.
Tennessee
5.3%
Georgia
2.5%
Alabama
-6.9%
Mississippi
-10%
-5%
0%
Source: NAIC, Insurance Information Institute
5%
10%
PP Auto: 10-Year Average RNW AL &
Nearby States
2004-2013
7.6%
Alabama PP Auto
profitability is
above the US
and regional
average
7.1%
6.2%
Alabama
U.S.
Tennessee
5.8%
Georgia
4.5%
Mississippi
4.4%
Florida
0%
2%
4%
Source: NAIC, Insurance Information Institute
6%
8%
Comm. Auto: 10-Year Average RNW
AL & Nearby States
2004-2013
9.2%
9.0%
6.4%
U.S.
Tennessee
Georgia
5.7%
Mississippi
4.7%
Alabama Commercial
Auto profitability is
below the US and
regional average
3.7%
0%
2%
4%
6%
Source: NAIC, Insurance Information Institute
8%
10%
Florida
Alabama
Comm. M-P: 10-Year Average RNW
AL & Nearby States
2004-2013
8.9%
Alabama Commercial
Multi-Peril profitability
is below the US
average and below the
regional average
7.4%
U.S.
Florida
5.7%
Tennessee
5.0%
Georgia
-1.6%
Alabama
-6.4%
Mississippi
-10%
-5%
0%
Source: NAIC, Insurance Information Institute
5%
10%
Homeowners: 10-Year Average RNW
AL & Nearby States
2004-2013
Alabama Homeowners
profitability is below the
US average and below
the regional average
6.6%
-0.4%
U.S.
Florida
-8.2%
Georgia
-10.2%
Tennessee
-13.1%
Alabama
-25.8%
Mississippi
-30%
-20%
-10%
Source: NAIC, Insurance Information Institute
0%
10%
Top Ten Most Expensive And Least Expensive
States For Homeowners Insurance, 2012 (1)
Alabama ranked as the 6th most expensive state for homeowners
insurance in 2012, with an average expenditure of $1,248.
Rank
Most
expensive states
HO average
premium
Rank
Least
expensive states
HO average
premium
1
Florida
$2,084
1
Idaho
$538
2
Louisiana
1,742
2
Oregon
567
3
Texas
1,661
3
Utah
580
4
Oklahoma
1,501
4
Wisconsin
631
5
Mississippi
1,314
5
Washington
648
6
Alabama
1,248
6
Nevada
674
7
Rhode Island
1,233
7
Delaware
678
8
Kansas
1,213
8
Arizona
691
9
Connecticut
1,160
9
Ohio
721
10
New York
1,158
10
Maine
741
(1) Includes policies written by Citizens Property Insurance Corp. (Florida) and Citizens Property Insurance Corp. (Louisiana), Alabama Insurance
Underwriting Association, Mississippi Windstorm Underwriting Association, North Carolina Joint Underwriting Association and South Carolina
Wind and Hail Underwriting Association. Other southeastern states have wind pools in operation and their data may not be included in this chart.
Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides “all risks” coverage (except those
specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written.
(2) The Texas Department of Insurance developed home insurance policy forms that are similar but not identical to the standard forms. In addition,
due to the Texas Windstorm Association (which writes wind-only policies) classifying HO-1, 2 and 5 premiums as HO-3, the average premium for
homeowners insurance is artificially high.
Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days of insured coverage for a single dwelling. The NAIC
does not rank state average expenditures and does not endorse any conclusions drawn from this data.
Source: ©2014 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited
without written permission of NAIC.
43
Workers Comp: 10-Year Average RNW
AL & Nearby States
2004-2013
10.5%
7.9%
Alabama Workers
Comp profitability is
above the US average
and above the regional
average
Florida
Alabama
7.3%
Mississippi
7.3%
Tennessee
7.1%
U.S.
4.6%
Georgia
0%
2%
4%
6%
Source: NAIC, Insurance Information Institute
8%
10%
12%
All Lines DWP Growth: AL vs. U.S.,
2005-2014
(Percent)
-4%
2.7%
-0.2%
-3.3%
-3.6%
-2.1%
-0.3%
0%
-2%
4.6%
4.0%
3.7%
3.1%
0.0%
0.5%
1.5%
2%
4.4%
5.8%
4.5%
AL: 2.4%
3.4%
4%
2.3%
6%
US: 1.9%
5.5%
6.2%
Average 2005-2014
8%
-6%
05
06
07
US DWP: All Lines
Source: SNL Financial.
08
09
10
11
12
13
14
AL DWP: All Lines
45
Comm. Lines DWP Growth:
AL vs. U.S., 2005-2014
(Percent)
-4%
6.1%
5.2%
-7.3%
-7.4%
-6%
4.3%
2.3%
-4.0%
-3.0%
-2%
-2.5%
-3.3%
-0.3%
0%
1.2%
2%
5.1%
4.2%
5.1%
AL: 1.2%
-0.1%
2.6%
6%
US: 1.4%
4.6%
5.0%
8%
4%
Average 2005-2014
8.0%
10%
-8%
-10%
05
06
07
US DWP: Comm. Lines
Source: SNL Financial.
08
09
10
11
12
13
14
AL DWP: Comm. Lines
46
Personal Lines DWP Growth:
AL vs. U.S., 2005-2014
6%
AL: 3.3%
2.2%
2.6%
10
11
1.1%
2%
2.5%
2.6%
2.2%
3.1%
1.2%
3%
2.2%
4%
2.3%
4.0%
5%
4.8%
4.1%
US: 2.6%
5.1%
7%
4.2%
4.0%
Average 2005-2014
4.2%
8%
6.8%
(Percent)
-0.1%
0%
-1%
05
06
07
US DWP: Pers. Lines
Source: SNL Financial.
08
-0.2%
1%
09
12
13
14
AL DWP: Pers. Lines
47
Private Passenger Auto DWP Growth:
AL vs. U.S., 2005-2014
(Percent)
10%
-4%
05
06
07
US DWP: PP Auto
Source: SNL Financial.
08
10
11
3.5%
2.6%
1.5%
0.8%
-2%
-0.1%
-1.8%
0.1%
-0.3%
0.0%
0%
1.6%
2.6%
0.4%
2%
0.5%
1.6%
4%
1.5%
0.9%
AL: 2.1%
6%
4.6%
US: 1.6%
4.9%
4.5%
8%
7.6%
Average 2005-2014
09
12
13
14
AL DWP: PP Auto
48
Homeowner’s MP DWP Growth: AL vs.
U.S., 2005-2014
(Percent)
12%
9.6%
Average 2005-2014
US: 4.8%
6.2%
5.8%
13
4.4%
3.6%
5.7%
5.8%
5.5%
12
0.5%
2%
3.8%
3.8%
2.9%
4%
4.9%
5.3%
6.2%
4.2%
6%
6.4%
AL: 5.9%
7.4%
7.4%
8%
7.4%
10%
0%
05
06
07
US DWP: HO Lines
Source: SNL Financial.
08
09
10
11
14
AL DWP: HO Lines
49
CAPITAL/CAPACITY
Capital Accumulation Has
Multiple Impacts
50
$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.
51
Alternative Capital
New Investors Continue to Change
the Reinsurance Landscape
First I.I.I. White Paper on Issue Was
Released in March 2015
56
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.
60
Performance by Segment
65
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.
66
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.
67
Collision Coverage: Severity & Frequency
Trends Are Both Higher in 2015*
Annual Change, 2005 through 2015*
Severity
5%
4%
Frequency
4.2%
3.9%
3.1%
2%
1%
0.1%
3.0%
2.8%
2.5%
3%
1.3%
0.9%
0.5%
4.2%
2.3%
1.6%
1.7%
0%
-0.1%
-0.5%
-1.4%
-1%
-2%
-1.8%
-2.4%-2.3%
-3%
-4%
2005
-1.4%
-3.6%
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:Q1.
Source: ISO/PCI Fast Track data; Insurance Information Institute
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
Growth Analysis by State and
Business Segment
Post-Crisis Paradox?
Premium Growth Rates Vary
Tremendously by State
98
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).
99
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.
100
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
101
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.
102
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.
103
Pricing Trends
Survey Results Suggest
Commercial Pricing Has
Flattened Out but Personal
Lines Are Up
106
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.
107
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.
109
M&A UPDATE:
A PATH TO GROWTH?
Are Capital Accumulation, Drive
for Growth and Scale Stimulating
M&A Activity?
112
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
$60,000
M&A activity in
the P/C sector was
up sharply in 2014
but remains well
below pre-crisis or
late 1990s levels.
20
0
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
(1) Includes transactions where a U.S. company was the acquirer and/or the target.
Source: Conning proprietary database.
113
Insured Catastrophe Losses
2013/14 and YTD 2015 Experienced Below
Average CAT Activity After Very High CAT
Losses in 2011/12
Winter Storm Losses Far Above Average in
2014 and 2015
117
U.S. Insured Catastrophe Losses
($ 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.
118
118
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.
122
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
123
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.
124
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.
125
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.
127
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
136
Federal Disaster
Declarations Patterns:
1953-2015
Disaster Declarations Set New
Records in Recent Years
137
Number of Federal Major Disaster
Declarations, 1953-2015*
99
81
75
62
36
45
47
59
63
48
52
56
44
32
36
32
38
43
45
11
31
34
24
21
15
23
22
25
27
28
23
38
30
29
17
17
19
11
11
22
20
25
25
12
12
36 federal disasters have
declared so far in 2015*
53
54
55
56
57
58
59
60
61
62
63
64
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*
7
7
13
17
18
16
16
40
0
42
48
46
46
60
20
69
65
80
The number of federal disaster
declarations set a new record in
2011, with 99, shattering 2010’s
record 81 declarations.
50
45
45
49
100
There have been 2,239
federal disaster
declarations since
1953. The average
number of declarations
per year is 36 from
1953-2014, though there
haven’t been that few
recorded since 1995.
75
120
The Number of Federal Disaster Declarations Is Generally Rising and Set
New Records in 2010 and 2011 Before Dropping in 2012-2014
*Through October 3, 2015.
Source: Federal Emergency Management Administration; http://www.fema.gov/disasters; Insurance Information Institute.
138
Federal Disasters Declarations by State,
1953 – 2015: Highest 25 States*
Over the past 60 years,
Alabama has had the 8th
highest number of Federal
Disaster Declarations
76
41
44
45
47
47
49
50
50
51
51
52
53
54
54
56
56
56
57
61
61
58
60
67
70
69
Disaster Declarations
80
81
90
89
100
40
30
20
10
0
TX CA OK NY FL KY LA AL AR MO IA WV MS TN IL NE MN KS PA WA OH VA ND SD ME
*Through Oct. 3, 2015. Includes Puerto Rico and the District of Columbia.
Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.
139
Federal Disasters Declarations by State,
1953 – 2015: Lowest 25 States*
Over the past 60 years,
Wyoming and Utah had
the fewest number of
Federal Disaster
Declarations
23
23
24
25
25
26
27
28
28
29
34
36
39
39
40
11
15
13
12
10
10
17
17
20
20
30
30
37
Disaster Declarations
40
40
43
50
0
NC AK IN GA VT WI NJ NH MA OR HI NM MI PR MD MT AZ ID CO CT NV SC DE DC RI UT WY
*Through Oct. 3, 2015. Includes Puerto Rico and the District of Columbia.
Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.
140
The Strength of the Economy
Will Influence P/C Insurer
Growth Opportunities
Growth Will Expand Insurer Exposure
Base Across Most Lines
143
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.
144
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.
146
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.
147
Labor Market Trends
Massive Job Losses Sapped the
Economy and Commercial/Personal
Lines Exposure, But Trend Has
Greatly Improved
149
Unemployment and Underemployment
Rates: Still Too High, But Falling
January 2000 through September 2015,
Seasonally Adjusted (%)
18
"Headline" Unemployment Rate U-3
16
Unemployment + Underemployment Rate
U-6
14
12
U-6 soared from
8.0% in March
2007 to 17.5% in
October 2009;
Stood at 10.0%
in Sept. 2015.
8% to 10% is
“normal.”
10
8
“Headline”
unemployment
was 5.1% in Sep.
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 15
Stubbornly high unemployment and underemployment constrain overall
economic growth, but the job market is continuing to improve.
Source: US Bureau of Labor Statistics; Insurance Information Institute.
150
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.
152
Unemployment Rates by State, August 2015:
Highest 25 States*
5.2
5.2
5.3
5.3
5.3
5.4
5.4
5.6
5.6
5.6
5.7
5.7
5.9
5.9
6.0
6.1
6.1
6.2
6.6
6.8
6.7
6.3
6.0
6
6.3
Unemployment Rate (%)
6.8
7.6
8
In August, 29 states had over-themonth unemployment rate decreases,
10 states had increases, and 11 states
and the District of Columbia had no
change.
4
2
0
WV DC NV NM AK AZ MS AL CA OR LA SC GA NC NJ TN IL MO RI AR PA CT FL WA KY NY
*Provisional figures for August 2015, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
153
Unemployment Rates by State, August 2015:
Lowest 25 States*
3
2.8
2.9
3.5
3.6
3.6
3.7
3.7
3.7
4.0
4.1
4.1
4.2
4.0
4
4.2
4.5
4.5
4.6
4.6
4.6
4.7
5.1
5.1
4.9
5
4.7
Unemployment Rate (%)
5.1
6
4.5
In August, 29 states had over-themonth unemployment rate decreases,
10 states had increases, and 11 states
and the District of Columbia had no
change.
2
1
0
MD MI US DE MA OH IN KS OK ME VA WI CO ID MT TX MN WY IA SD UT NH VT HI ND NE
*Provisional figures for August 2015, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
154
CONSTRUCTION INDUSTRY
OVERVIEW & OUTLOOK
The Construction Sector Is
Critical to the Economy and
the P/C Insurance Industry
155
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.
156
(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.
161
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.
162
I.I.I. Poll: Renter’s Insurance
Q. Do you have renters insurance? 1
Americans are increasingly choosing
to rent, but are slow to understand the
need to insure, exacerbating the
underinsurance gap
70%
60%
50%
40%
35%
29%
31%
2011
2012
37%
40%
30%
20%
10%
2013
2014
2015
The Percentage of Renters Who Have Renters Insurance Has Been Rising
Since 2011.
1Asked
of those who rent their home.
Source: Insurance Information Institute Annual Pulse Survey.
165
ENERGY SECTOR: OIL & GAS
INDUSTRY FUTURE IS BRIGHT
BUT VOLATILE
US Is Becoming an Energy
Powerhouse but Fall in Prices
Will Have Negative Impact
168
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
171
MANUFACTURING SECTOR
OVERVIEW & OUTLOOK
The U.S. Was Experiencing a Mini
Manufacturing Renaissance but
Headwinds from Weak Export
Markets and Strong Dollar Hurt
172
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.
176
Profitability & Politics
How Is Profitability Affected by
the President’s Political Party?
181
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
CYBER RISK &
CYBER INSURANCE
Cyber Risk is a Rapidly Emerging
Exposure for Businesses Large and
Small in Every Industry
184
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
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
191
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.
193
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
194
I.I.I. Will Release its Third Cyber Report in
2015: Cyber Risks Threat and Opportunity
 I.I.I.’s 3rd report on cyber risk
scheduled for Q4 2015
 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
196
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
198
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
199
INDUSTRY DISRUPTORS
Technology, Society and
the Economy Are All
Changing at a Rapid Pace
Thoughts on the Future
202
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.
204
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
205
A Few Thoughts on the Future of Auto
Insurance
 Global auto insurance premiums written total about $600B
 ~80% personal, 20% commercial
 US accounts for more than 1/3 of this total (about $210B in 2014)
 Innovations in automobile safety will, over time, reduced claim
frequency but severities could still rise as repair costs escalate
 Claim activity clearly not immune to economy
 Frequency declines could lead price declines, aiding profitability
 More cars, not fewer will be on highways in the US, world
 Exposure (insured car years) grows even as frequency declines
 Timeline for large numbers of mass produced autonomous vehicles
on American highways is wildly optimistic
 Mid-2030s is more likely timeframe; Transition occurring through mid-century
 Tech media is enamored with anything involving Google, Apple
 Auto insurance will be the largest, most important of all P/C lines for
many years to come
206
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
 FAA granting Section 333
exemptions for commercial use and
testing of UAS
 At least 5 insurers have received
permission to test
 Wide variety of applications: claims,
pre-event property inspections…
 Insurers partnering with construction
industry to guide R&D and regulation
of UAV use via Property Drone
Consortium: www.propertydrone.org
208
Shifting Legal Liability &
Tort Environment
Will the Tort Pendulum
Swing Against Insurers?
210
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
214
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.
215
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
216
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
219
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
220