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Risk, Insurance and Interconnectedness in Today’s

Global Insurance Industry Australia & US Markets

May 8, 2013

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

2

Presentation Outline

About the Insurance Information Institute

A Global View of Risk: Australia, U.S. & the World

Economic Risk

Catastrophe/Environmental Risk

Geopolitical Risk

Technological Risk

Societal Risk

Insurance: Global Risk Management Tool

Insurers Never Ending Quests: Australia, US

Growth

Performance

Distribution/Disintermediation

Q&A

The Insurance Information Institute

3

The Public Face of the Industry:

Explaining What Insurance Is and How

It Works Since 1960 3

4

What Does the Insurance Information Institute Do and Why?

Communications

Communicate what the insurance industry does and how insurance works to all stakeholders

Information Dissemination

Assemble and disseminate vast amounts of industry data and respond to thousands of data requests each year

Research & Analysis

Produce original research on topics of critical and timely importance

Industry Advocacy (non-lobbying)

Play a critical informational role in key legislative and public policy debates

5

Who Are Our Stakeholders/Consumers of Our Products and Services?

General Public (Consumers of Insurance)

Print, online, video, software (apps), partnerships

Media (Traditional & “New”)

Industry

Regulators, State and Federal Lawmakers & Other Public Policymakers

Investors

Academia

6

Television is a Principal Means by Which We Communicate to the Public

7

I.I.I. Congressional Testimony on the Future of the Terrorism Risk Insurance Program

Issue: Act expires 12/31/14. Insurers still generally regard large-scale terror attacks as fundamentally uninsurable

I.I.I. Input: Testified at first hearing on the issue in DC (on 9/11/12) on trends in terrorist activity in the US and abroad, difficulties in underwriting terror risk; Noted that bin Laden may be dead but war on terror is far from over

Status: New House FS Committee Chair Jeb Hensarling has opposed TRIA in the past; Obama Administration does not seem to support extension; Little institutional memory on insurance subcommittee

Media: Virtually no media coverage yet apart form trade press; WSJ will likely editorialize against it.

Objective: Work with trades, risk management community and others to help build support

Key Media Metrics

Conducted 120 television interviews in 2012.

Received an additional 2,600 mentions in print publications, wire services and prominent blogs.

Featured in more than 16,000 articles in Internet news publications.

I.I.I.’s main web site receives about 2 million page views per year

The I.I.I. is mentioned more than 100,000 times on any given day on the web

8

9

I.I.I.’s Web Site Is Extremely Popular

10

Year in Review - Top Issues, P/C, 2011 vs 2012 (1).I.I. Media Index, P/C, 2011 vs 2012 (1)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Mark

et

Conditio

ns

Hurr

icanes

Solv

ency

Asbesto

s

Auto

Work

ers

Com

p

Insura

nce F

raud

Hom

eow

ners

Investigations

Oil S

pill and

Insura

nce

Flo

od I

nsura

nce

Eart

hquakes

Torn

adoes

Terr

orism

Glo

bal

Warm

ing/C

lim

ate

Medic

al

Malp

ractice

Euro

pean

financia

l crisis

&

Wildfire

s

Tort

Cre

dit S

coring

No-f

ault F

raud

Lender

Pla

ced/F

orc

ed

Pay-A

s-Y

ou

Go/T

ele

matics

Syste

mic

Ris

k

Mold

2011

2012

(1) Based on a search of Lexis/Nexis.

The top three issues in the news media were market

conditions, hurricanes and solvency, not surprising given the

interest in the cost and availability of insurance combined

with questions regarding the industry’s ability to pay sizeable

Sandy-related claims

Total Pageviews and Visitors to iii.org April 2013

11

160,805

49,292

0

50,000

100,000

150,000

200,000

250,000

Nov-

11

Dec-

11

Jan-

12

Feb-

12

Mar-

12

Apr-

12

May-

12

Jun-

12

Jul-

12

Aug-

12

Sep-

12

Oct-

12

Nov-

12

Dec-

12

Jan-

13

Feb-

13

Mar-

13

Apr-

13

Pageviews Visitors

Source: Google Analytics.

I.I.I. Mobile Apps

12

We conceived our mobile outreach as a branded suite of apps to

provide guidance to consumers in making decisions about their

insurance and preparing for a disaster.

Know Your Stuff Home Inventory April 2013

13 Source: iTunes and Google Play.

77

617

1,629

595 557

356

494

677

531

389

1,830

493567

9091,006

1,426

3196

302427

710

109

1,286

347217

326431

166 142169

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Nov-

11

Dec-

11

Jan-

12

Feb-

12

Mar-

12

Apr-

12

May-

12

Jun-

12

Jul-

12

Aug-

12

Sep-

12

Oct-

12

Nov-

12

Dec-

12

Jan-

13

Feb-

13

Mar-

13

Apr-

13

iTunes downloads

Android downloads

Number of Downloads Overall Android Know Your Stuff downloads: 3,364

Overall iTunes Know Your Stuff downloads: 13,548

Jump likely due to article in Denver Post (4/29)

Social Media Stats

1,000+ likes

10,000 followers

600,000+ video views

128 users have us in their circle

~250,000 visitors

15

THE INSTITUTE’S EXPERTISE IS WIDE

RANGING AND ALWAYS EVOLVING

I.I.I. Is Involved in a Range of Important

Industry Issues Requiring a Wide Range of

Economic and Actuarial Expertise

16

I.I.I. Expertise on Key Issues: Terrorism

I.I.I. periodic report provides readers, including those with little or no understanding of the issue, with a detailed understanding of the Terrorism Risk Insurance Program in the US.

The report provides an update on recent terrorist threats in the US and internationally.

Recently expanded to include a discuss of cyber terrorism risk

Includes a FAQ section for issues of key interest

I.I.I. will update and expand this report in the run-up to TRIPRA expiration at year-end 2014.

First update scheduled for Q2 2013.

17

I.I.I.’s Global Perspective: Strong Demand for International Economic Expertise in an Age of Global Instability

I.I.I.’s membership is global, driving

our global outlook…

…All insurers are impacted by the global economy

18

I.I.I. Expertise on Key Issues: Energy

Energy sector in the U.S. is expanding

rapidly, especially with “fracking” activity.

Great deal of media interest.

…Sector will grow globally for

decades

I.I.I. Publications: Just a Few Examples

19

20

What in the World Is Going On: Australia, U.S.

and Everywhere Else? Is the World Becoming a

Riskier, More Uncertain Place? All Major Categories of Risk Influence

Economies and Insurance Industry on a Global Scale

21

Uncertainty, Risk and Fear Abound

Never Ending Echoes of the Financial Crisis

European Sovereign Debt & Eurozone Crises

The “Fiscal Cliff”: US Debt and Budget Crisis

Unintended Consequences of (Over)Regulation

“Hard Landing” in China

Housing Crisis

Political Gridlock: US, Europe

Political Upheaval in the Middle East

Resurgent Terrorism Risk

Diffusion of Weapons of Mass Destruction

Cyber Attacks

Record Natural Disaster Losses

Climate Change

Environmental Degradation

Income Inequality

Insomnia???

Are “Black Swans” everywhere or

does it just seem that way?

22

5 Major Categories for Global Risks, Uncertainties and Fears

1. Economic Risks

2. Geopolitical Risks

3. Environmental Risks

4. Technological Risks

5. Societal Risks

Source: World Economic Forum, Global Risks 2012; Insurance Information Institute.

While risks can

be broadly

categorized,

none are

mutually

exclusive

23

Top 5 Global Risks in Terms of Likelihood, 2007—2012: Insurance Can Help With Most


In 2012, concerns

over income

disparity and fiscal

imbalances displaced weather

and water concerns, as ranked

by likelihood

Concerns Shift Considerably Over Short Spans of Time. Shift in 2012 to Economic Risks and Away from Environmental Risks

24

Top 5 Global Risks in Terms of Impact, 2007—2012: Insurance Can Help With Most


Concerns Over the Impacts of Economics Risks Remained High in 2012, but Societal Risks Displaced Environmental Risks

Impacts from

economic and

societal risks were

of the greatest

concern in 2012

25

Economic Risk: Foremost on the Minds in “Advanced” Economies

Economic Risks

Chronic fiscal imbalances

Severe income disparity

Extreme volatility in energy

and food prices

Recurring liquidity crises

Major systemic failure

Adverse unintended

consequences of regulation

Unmanageable in/deflation

Chronic labor mkt. imbalances

Hard landing of emerging economy


Economic Risk Landscape

26

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.

Source: US Department of Commerce, Blue Economic Indicators 4/13; Insurance Information Institute.

2.7

%0

.5%

3.6

%3

.0%

1.7

%-1

.8%

1.3

%-3

.7%

-5.3

%-0

.3%

1.4

%5

.0%

2.3

%2

.2%

2.6

%2

.4%

0.1

%2

.5%

1.3

%4

.1%

2.0

%1

.3% 3

.1%

2.5

%1

.8%

2.4

%2

.6%

2.7

%2

.8%

2.9

%3

.0%

0.4

%

-8.9%

4.1

%1

.1%

1.8

%2

.5% 3.6

%3

.1%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

2

00

0

2

00

1

2

00

2

2

00

3

2

00

4

2

00

5

2

00

6

07

:1Q

07

:2Q

07

:3Q

07

:4Q

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

Demand for Insurance Continues To Be Impacted by Sluggish Economic Conditions, but the Benefits of Even Slow Growth Will Compound and

Gradually Benefit the Economy Broadly

Real GDP Growth (%)

Recession began in Dec. 2007. Economic toll of credit crunch, housing slump, labor market contraction

was severe

The Q4:2008 decline was the steepest since the Q1:1982

drop of 6.8%

2013 is expected to see uneven growth, then gradually accelerate throughout the year

and into 2014

Federal Spending as a Share of State GDP: Vulnerability to Sequestration Varies

Sources: Pew Center on the States (2012) Impact of the Fiscal Cliff on the States; Wells Fargo; Insurance Information Institute. 27

Austerity will hurt some states more

than others

(4.0)

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

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

E1

3F

13

F

Advanced economies Emerging and developing economies World

Source: International Monetary Fund, World Economic Outlook , Oct. 2012 and Jan. 2013 WEO Update; Ins. Info. Institute.

Emerging economies (led by China) are expected to grow by 5.5% in 2013 and

5.9% in 2014.

GDP Growth: Advanced & Emerging Economies vs. World, 1970-2014F

Advanced economies are expected to grow at a sluggish pace of 1.4% in 2013 but accelerate to 2.2% in 2014.

World output is forecast to grow by 3.5% in 2013 and 4.1% in 2014. The world economy shrank by 0.6% in

2009 amid the global financial crisis

GDP Growth (%)

29

Real GDP Growth Forecasts: Major Economies: 2011 – 2014F

Sources: Blue Chip Economic Indicators (4/2013 issue); Insurance Information Institute.

1.8

%

0.9

%

1.5

%

3.1

%

2.2

%

-0.1

%

0.9

%

7.7

%

1.7

%

2.1

%

0.8

%

-0.4

%

0.8

%

8.0

%

1.1

%

2.7

%

1.5

%

0.9

%

1.5

%

8.0

%

1.7

%

9.3%

-0.7%

-0.4

%

-2%

0%

2%

4%

6%

8%

10%

US UK Euro Area Germany China Japan

2011 2012 2013F 2014F

Growth Prospects Vary Widely by Region: Growth Returning in the US, Mild Recession in the Eurozone, A “Soft Landing” in China, Sluggish

Growth in Japan and Modest Growth in America’s Largest Trading Partners—Canada and Mexico.

The Eurozone is in

recession, UK weak. Both

should end by late 2013

China growth has slowed, but remains strong in an expected “soft landing”

scenario

Tepid US recovery

continues

Rebuilding acts as a

stimulus to Japanese economy

30

Real GDP Growth Forecasts: Selected Economies: 2011 – 2014F

Sources: Blue Chip Economic Indicators (4/2013 issue); Insurance Information Institute.

3.6

%

4.0

%

6.5

%

4.3

%

3.7

%

2.3

%

1.3

%

3.5

%

1.1

%

3.5

%

3.7

%

2.8

% 3.5

%

5.9

%

3.2

%

3.3

%

2.6

% 3.4

%4.0

%

4.1

%

6.9

%

3.9

%

4.1

%

3.0

%

4.2

%

2.7

%

2.1

%

5.5

%

0%

1%

2%

3%

4%

5%

6%

7%

8%

S. Korea Taiwan India Russia Brazil Australia Mexico

2011 2012 2013F 2014F

Growth Outside the US, Europe and Japan is Relatively Strong

Strong economies in smaller industrialized nations will

bolster demand for commodities, energy

31

World Trade Volume: 2010—2014F

Growth in World Trade Volume (Imports + Exports) Has Slowed But Continues to Grow

Percentage Change (%)

12.9%

5.9%

2.8%3.8%

5.5%

0%

2%

4%

6%

8%

10%

12%

14%

2010 2011 2012 2013F 2014F

After decelerating in 2011 and 2012, global trade

growth is expected accelerate in 2013 and 2014

Sources: IMF World Economic Outlook Update (Jan. 2013 ); Insurance Information Institute.

32

World Trade Volume: IMPORTS 2010 – 2014F

15.3%

8.4%

6.1% 6.5%7.8%

11.5%

4.6%

1.2%2.2%

4.1%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2010 2011 2012 2013F 2014F 2010 2011 2012 2013F 2014F

Growth (%)

Import growth in emerging economies outpaces

Advanced Economies by a wide margin.

Advanced Economies Emerging Economies


33

World Trade Volume: EXPORTS 2010 – 2013F

6.7% 6.6%7.2%

12.2%

5.3%

2.3%

4.7%

14.7%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2010 2011 2012F 2013F 2010 2011 2012F 2013F

Growth (%)

Export growth in emerging economies outpaces Advanced Economies by a much narrower

margin than imports.

Advanced Economies Emerging Economies


34

THE INSURANCE INDUSTRY CAN

BENEFIT FROM AND ENERGY AND

COMMODITIES BOOM, EVEN

AMID SLOWDOWN

Insurers in Australia and the U.S. Need to

Provide Insurance Solutions Associated

with a Rising Global Commodities Demand

and Surging Energy Demand

35

0

50

100

150

200

250

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

13F

Commodity Metals Global Price Index, 1980—2013F* (2005 =100)

Index Value

* Includes: Copper, Aluminum, Iron Ore, Tin, Nickel, Zinc, Lead and Uranium. Sources: International Monetary Fund; Insurance Information Institute.

Though down from their 2011 peak, metals/ore prices

remain more than 3 times their levels in 2002

Metal/ore price moved rapidly higher after the 2001 recession

The global financial crisis had only a temporary

impact on metal/ore prices

36

0

100

200

300

400

500

600

700

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

13F

Metals Index

Copper

Aluminum

Iron Ore

Global Price Index: Copper, Aluminum & Iron Ore vs. Full Metals Index,1980—2013F*

Index Value (2005 = 100)

* Full Metals Index Includes: Copper, Aluminum, Iron Ore, Tin, Nickel, Zinc, Lead and Uranium. Sources: International Monetary Fund; Insurance Information Institute.

Metals prices soared in the aftermath of the global

financial crisis, especially for iron ore, which by 2011 was up nearly 500% from

pre-crisis levels

Copper prices rose nearly six fold from 2003 through 2011

37

0

50

100

150

200

250

300

350

400

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

13F

Metals IndexTinNickelZincLeadUranium

Global Price Index: Tin, Nickel, Zinc, Lead & Uranium vs. Full Metals Index,1980—2013F*

Index Value (2005 = 100)

* Full Metals Index Includes: Copper, Aluminum, Iron Ore, Tin, Nickel, Zinc, Lead and Uranium. Sources: International Monetary Fund; Insurance Information Institute.

Uranium and tin prices have seen significant

volatility in recent years. The uncertain future of

nuclear power weighs on the price of uranium.

Prices for nickel and zinc

have moderated

347.7

472.4508.3

551.5595.7

637.3678.3

462.1

0

100

200

300

400

500

600

700

800

1990 2005 2006 2010P 2015P 2020P 2025P 2030P

World Primary Energy Consumption, 1990-2030P

Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.

Between 2006 and 2030, energy consumption in projected to increase

annually by 1.5% worldwide but only 0.5% in the US

Quadrillion BTUs

Global energy consumption is

expected to increase by 33.4% between 2010 and 2030 but by only 12% in

the US

39

World Energy Consumption by Fuel, 1990—2035F

Source: US Energy Information Administration, International Energy Outlook 2011; Insurance Information Institute.

Renewables will account for 14% of global energy consumption by

2035, up from 20% in 2008

40

Distribution of Major Shale Deposits: 5.76 Tr. Cu. Ft. in 48 Shale Basins in 32 Countries

Source: US Energy Information Administration; Insurance Information Institute.

Europe and S. America also have large deposits

Initial assessments reveal 5.76 trillion cu. ft. of shale gas

worldwide, including 1.069 trillion cu. Ft. in North America

Australia has some promising

shale deposits

396

1,042 1,069

1,225

1,404

624

0

200

400

600

800

1,000

1,200

1,400

1,600

Australia Europe Africa N.

America

S.

America

Asia

Technically Recoverable Shale Gas Deposits, by Region

Trillion Cubic Ft.tts North America has 1,069

trillion cu. ft. of technically recoverable shale gas

recources—18.6% of the global total

Source: US Energy Information Administration; Insurance Information Institute.

Australia’s gas deposits are

commercially viable and could expand

insurance exposures

42

Global Real (Inflation Adjusted) Nonlife Premium Growth: 1980-2010

Source: Swiss Re, sigma, No. 2/2010.

-10%

-5%

0%

5%

10%

15%

20%

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Real growth rates

Total Industrialised countries Emerging markets

Nonlife premium growth in emerging markets has

exceeded that of industrialized countries in

27 of the past 31 years, including the entirety of the

global financial crisis..

Real nonlife premium growth is very erratic in part to inflation volatility in emerging markets as

well as a lack of consistent cyclicality

Average: 1980-2010

Industrialized Countries: 3.8%

Emerging Markets: 9.2%

Overall Total: 4.2%

43

Regulatory Risk: Financial Sector in Consumed with Post-Crisis Concerns

Source: Insurance Information Institute.

Capital Adequacy, Quality, Liquidity,

Leverage, Prudential Oversight

Dodd-Frank

Basel III

Solvency II

ComFrame

ORSA

Systemic Importance

US

Global

44

Geopolitical Risk: Foremost on the Minds in “Emerging” Economies

Geopolitical Risks

Pervasive entrenched corruption

Critical fragile states

Terrorism

Failure of diplomatic conflict

resolution

Global governance failure

Entrenched organized crime

Widespread illicit trade

Diffusion of WMD

Unilateral resource

nationalization

Militarization of space Source: World Economic Forum, Global Risks 2012; Insurance Information Institute.

Geopolitical Risk Landscape

45

Political Risk in 2011/12: Greatest Business Opportunities Are Often in Risky Nations

Source: Maplecroft

The fastest growing markets are generally

also among the politically riskiest, including East

and South Asia

Heightened risk has economic and insurance implications

Australia and NZ rate well but most neighbors do not

46

Terrorist Risk Index

Sources: Maplecroft Terrorism Risk Index; (2011); Guy Carpenter; Insurance Information Institute.

The threat of terrorism is highest in

South Asia, Russia, the Middle East and Central

and East Africa

The US is still

considered to be at

“Medium Risk” for a

terrorist attack

Australia and NZ are

considered to be at low risk

47

Global Terrorist Attacks and Deaths, 2004-2011

Sources: National Counterterrorism Center, 2011 Report on Terrorism; Guy Carpenter; Insurance Information Institute.

The number of terrorist attacks

globally fell by 11.7% in 2011 while the number of deaths dropped by 5.0%

2011

10

,28

3

12

,53

3

11

,641

13

,19

3

48

Frequent Reminders of Terrorist Threat: New and Old

Sources: Insurance Information Institute.

Freedom Tower under construction. Insurance money is the primary source

of funds for rebuilding the WTC

site

Bombings at the Boston

Marathon on April 15, 2013

Life

$1.2 (3%)

Aviation

Liability

$4.3 (11%)

Other

Liability

$4.9 (12%)

Biz

Interruption

$13.5 (33%)

Property -

WTC 1 & 2*

$4.4 (11%) Property -

Other

$7.4 (19%)

Aviation Hull

$0.6 (2%)

Event

Cancellation

$1.2 (3%)

Workers

Comp

$2.2 (6%)

Total Insured Losses Estimate: $40.0B** *Loss total does not include March 2010 New York City settlement of up to $657.5 million to compensate approximately 10,000 Ground Zero workers or any subsequent settlements.

**$32.5 billion in 2001 dollars.

Source: Insurance Information Institute.

Loss Distribution by Type of Insurance from Sept. 11 Terrorist Attack ($ 2011)

($ Billions)

50

Environmental Risk: Vulnerability and Susceptibility Vary Across Globe

Environmental Risks

Rising greenhouse gas emissions

Failure of climate change

adaptation

Land/water use mismanagement

Mismanaged urbanization

Antibiotic-resistant bacteria

Persistent extreme weather

Species overexploitation

Irremediable pollution

Vulnerability to geomagnetic storms


Environmental Risk Landscape

Catastrophe Risk: A Global Concern

51

The U.S. and Australia Face Many of the

Same Catastrophe Risks

51

Earthquake

Mexico, 20 March

Earthquake

Italy,

29 May/3 June Earthquake

Iran, 11 August

Severe Storms, tornadoes

USA, 2–4 March

Severe Weather

USA, 28–29 April

Severe storms

USA, 28 June –2 July

Hurricane Isaac

USA, Caribbean

24–31 August

Hurricane Sandy

USA, Caribbean

24–31 October

Floods, flash floods

Australia, Jan – Feb

Flash Floods

Russia, 6–8 July

Floods

China, 21–24 July

Drought

USA, Summer

Cold Wave

Eastern Europe, Jan – Feb

Cold Wave

Afghanistan, Jan – Mar

Floods

United Kingdom,

21–27 November

Typhoon Bopha

Philippines,

4–5 December

Floods. flash floods

Australia, Feb – Mar

Typhoon Haikui

China,

8–9 August

Floods

Nigeria, Jul – Oct

Floods, hailstorms

South Africa, 20 –21 October

Floods

Pakistan, 3 –27 September

Floods

Columbia, Mar – Jun

Hailstorms, severe weather

Canada, 12–14 August

Number of events: 905

Geophysical events

(earthquake, tsunami, volcanic activity)

Meteorological events

(storm)

Selection of significant

Natural catastrophes

Natural catastrophes Hydrological events

(flood, mass movement)

Climatological events

(extreme temperature, drought, wildfire)

Winter Storm Andrea

Europe, 5–6 January

52 Source: Munich Re Geo Risks Research, NatCatSERVICE – As at January 2013.

Natural Loss Events: Full Year 2012 World Map

Geophysical events

(earthquake, tsunami, volcanic activity)

Meteorological events

(storm)

Hydrological events

(flood, mass movement)

Selection of significant

loss events (see table)

Natural catastrophes

Earthquake, tsunami

Japan, 11 March

Earthquake

New Zealand, 22 Feb.

Cyclone Yasi

Australia, 2–7 Feb.

Landslides, flash floods

Brazil, 12/16 Jan.

Floods, flash floods

Australia,

Dec. 2010–Jan. 2011

Severe storms, tornadoes

USA, 22–28 April

Severe storms, tornadoes

USA, 20–27 May

Wildfires

USA, April/Sept.

Earthquake

New Zealand, 13 June

Floods

USA, April–May

Climatological events

(extreme temperature, drought, wildfire)

Number of Events: 820

Drought

USA, Oct. 2010–

ongoing

Hurricane Irene

USA, Caribbean

22 Aug.–2 Sept.

Wildfires

Canada, 14–22 May

Drought

Somalia

Oct. 2010–Sept. 2011

Floods

Pakistan

Aug.–Sept.

Floods

Thailand

Aug.–Nov.

Earthquake

Turkey

23 Oct.

Flash floods, floods

Italy, France, Spain

4–9 Nov.

Floods, landslides

Guatemala, El Salvador

11–19 Oct.

Tropical Storm Washi

Philippines, 16–18 Dec.

Winter Storm Joachim

France, Switzerland,

Germany, 15–17 Dec.

53 Source: MR NatCatSERVICE

Natural Loss Events, 2011 World Map

My One Trip to Australia: Disaster Strikes

54

Huge dust storm

blankets the Gold Coast in

Sept. 2009

Natural Catastrophes Worldwide 2011 Insured losses US$ 105bn - Percentage distribution per continent

Continent Insured losses US$ m

America (North and South

America) 40,000

Europe 2,000

Africa Minor damages

Asia 45,000

Australia/Oceania 18,000

37%

2%

44%

17%

<1%

55 Source: MR NatCatSERVICE

In 2011, 61% of insured natural catastrophe losses

were in the Asia/Pacific region, nearly 3.5 times the

average of 13% over the prior 30 years (1981-2010)

In 2011, just 37% of insured natural

catastrophe losses were in the

Americas, barely half the average of 66%

over the prior 30 years (1981-2010)

55

56

Top 16 Most Costly World Insurance Losses, 1970-2012*

(Insured Losses, 2012 Dollars, $ Billions)

*Figures do not include federally insured flood losses.

**Estimate based on PCS value of $18.75B as of 4/12/13.

Sources: Munich Re; Swiss Re; Insurance Information Institute research.

$11.1$13.4 $13.4$13.4

$18.8$23.9 $24.6$25.6

$38.6

$48.7

$7.8 $8.1 $8.5 $8.7 $9.2 $9.6

$0

$10

$20

$30

$40

$50

$60

Hugo

(1989)

Winter

Storm

Daria

(1991)

Chile

Quake

(2010)

Ivan

(2004)

Charley

(2004)

Typhoon

Mirielle

(1991)

Wilma

(2005)

Thailand

Floods

(2011)

New

Zealand

Quake

(2011)

Ike

(2008)

Sandy

(2012)**

Northridge

(1994)

WTC

Terror

Attack

(2001)

Andrew

(1992)

Japan

Quake,

Tsunami

(2011)**

Katrina

(2005)

5 of the top 14 most expensive catastrophes in

world history have occurred within the past 3 years

(2010-2012)

Hurricane Sandy is now the 6th costliest event in global

insurance history

2012 insured CAT Losses totaled $60B; Economic losses totaled $140B, according to Swiss Re

57

$1

2.6

$1

1.0

$3

.8

$1

4.3

$1

1.6

$6

.1

$3

4.7

$7

.6

$1

6.3

$3

3.7

$7

3.4

$1

0.5

$7

.5

$2

9.2

$1

1.5

$1

4.4

$3

3.6

$3

5.0

$1

4.0

$4

.8

$8

.0

$3

7.8

$8

.8

$2

6.4

$0

$10

$20

$30

$40

$50

$60

$70

$80

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

US Insured Catastrophe Losses

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.

2012 Was the 3rd Highest Year on Record for Insured Losses in US History on An Inflation-Adjusted Basis.

2011 Losses Were the 6th Highest.

2012 was likely the third most expensive year ever for insured

CAT losses

Record Tornado Losses Caused

2011 CAT Losses to Surge

($ Billions, 2012 Dollars)

57

58

Most Costly Natural Disasters in Australia by Type, 1967-2011

$22,495

$16,173

$5,493 $5,362$3,450

$0

$5,000

$10,000

$15,000

$20,000

$25,000

Storm Hail Bushfire Flood Earthquake

$ AUD millions

Note: Expressed in December 2011 Australian dollars.

Source: AXCO.

Total Losses: $52,973

59

Insured Losses From Natural Disasters in Australia by State, 1967-2011

$20,427

$17,284

$6,369$4,394

$2,896$804 $799

$0

$5,000

$10,000

$15,000

$20,000

$25,000

NSW/ACT QLD VIC NT WA SA TAS

$ AUD millions

Note: Expressed in December 2011 Australian dollars.

Source: AXCO.

Total Losses: $52,973

60

Top Five Natural Disasters in Australia by Insured Losses, 1967-2011

$4,475 $4,260

$3,375

$2,755

$1,551

$0$500

$1,000$1,500$2,000$2,500$3,000$3,500$4,000$4,500$5,000

Hailstorm

(Sydney, NSW)

Cyclone Tracey

(Darwin, NT)

Earthquake

(Newcastle,

NSW)

Cyclone Wanda

(Brisbane, QLD)

Bushfire (VIC)

$ USD millions

Note: Expressed in December 2011 U.S. dollars.

Source: AXCO.

61

Tropical Cyclone Risk in Australia: A Shared Risk with the US

Source: The Weather Doctor http://www.islandnet.com/~see/weather/almanac/arc2013/alm13mar.htm; Red Cross,Ins. Info. Inst.

Australia’s tropical cyclones often follow erratic

paths

US hurricane risk is concentrated on the Gulf

and Southeast Coast and HI

http://www.google.com/url?sa=i&source=images&cd=&cad=rja&docid=c5lzQC3DRKFouM&tbnid=TbGaeg-rc32qHM:&ved=0CAgQjRwwAA&url=http://maps.redcross.org/website/maps/ARC_Map_Links.html&ei=EmuFUYnUD6LI0wGp-IG4CQ&psig=AFQjCNEwhh7TNn5NDk5ykGDu4P8lW2Iw_A&ust=1367784594290199

Outlook for 2013 Hurricane Season: 75% Worse Than Average

Forecast Parameter Median (1981-2010)

2013F

Named Storms 12.0 18

Named Storm Days 60.1 95

Hurricanes 6.5 9

Hurricane Days 21.3 40

Major Hurricanes 2.0 4

Major Hurricane Days 3.9 9

Accumulated Cyclone Energy 92.0 165

Net Tropical Cyclone Activity 103% 175%

Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 10, 2013, accessed at

http://tropical.atmos.colostate.edu/forecasts/2013/apr2013/apr2013.pdf ; Insurance Information Institute..

http://tropical.atmos.colostate.edu/forecasts/2013/apr2013/apr2013.pdf

63

Flood Risk in Australia: Another Shared Risk with the US

Source: Insurance Information Institute research.

Australia has been hot by severe floods in recent years in areas such as the Gold Coast

US flooding is most commonly associated with

rivers, though coastal inundation from tropical events is not uncommon

http://www.google.com/url?sa=i&source=images&cd=&cad=rja&docid=JNQ8hoBe2L9BsM&tbnid=iro4XHt27AgkmM:&ved=0CAgQjRwwAA&url=http://www.globaldatavault.com/natural-disaster-threat-maps.htm&ei=bGOFUd_LOeXG0gG1yoG4DA&psig=AFQjCNF0wRCPDkvOWz6psVu5U5KAyQOFug&ust=1367782637012614

http://www.google.com/url?sa=i&source=images&cd=&cad=rja&docid=3ZzudlLGPvxe0M&tbnid=ISRAJj7IZlc4nM:&ved=0CAgQjRwwAA&url=http://floodingaroundaustralia.blogspot.com/p/areas-most-affected-by-floods.html&ei=Y3WFUcTGLMS30AHF74DIBA&psig=AFQjCNE6afg_ML8IMnKOEY3e_pPMpjndsQ&ust=1367787235763411

Source: Wharton Center for Risk Management and Decision Processes, Issue Brief, Nov. 2012; Insurance Information Institute.

Residential NFIP Flood Take-Up Rates in NY, CT (2010) & Sandy Storm Surge

64

Flood coverage

penetration rates were

extremely low in many very vulnerable

areas of NY and CT, with take-up rates far below 50% in many areas

65

Wildfire Risk: Australia and America—Heating Up & Drying Out?

Source: Insurance Information Institute research.

Australia has been hit by drought, extreme temperatures

and wildfires

Acres burned remain high in

the US

US Acres

Burned

Record temps in Australia

http://www.google.com/url?sa=i&source=images&cd=&cad=rja&docid=XZymrCaz0m4O7M&tbnid=eh11qxWMQYtasM:&ved=0CAgQjRwwAA&url=http://www.nrc.nl/nieuws/2013/01/08/australie-wordt-geteisterd-door-bosbranden-catastrofale-omstandigheden/&ei=nXiFUcmVHq7H4APUnIGIAw&psig=AFQjCNG-b71Gkx_-QTom-18ygh-SLTDVnQ&ust=1367788061518759

http://www.guardian.co.uk/environment/damian-carrington-blog/2013/jan/08/australia-bush-fires-heatwave-temperature-scale

66

Earthquake Risk in Australia: Living in a Dangerous Neighborhood

Source: Axco from Swiss Re; US Geological Survey; Insurance Information Institute.

US earthquake risk is concentrated on the West Coast

and AK, HI

Australia’s earthquake risk is modest, especially

relative to NZ and points north and east

U.S. Thunderstorm Loss Trends, 1980 – 2012

67

Source: Property Claims Service, MR NatCatSERVICE

Average

thunderstorm

losses are up 7 fold

since the early

1980s. The 5- year

running average

loss is up sharply.

Hurricanes get all the headlines,

but thunderstorms are consistent

producers of large scale loss.

2008-2012 are the most expensive

years on record.

Thunderstorm losses in 2012 totaled $14.9 billion, the 2nd

highest on record

68

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1992–20111

0.4%

1.6%

3.8%4.7%

6.3%

7.3%

33.9%

42.0%

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2009 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.

Hurricanes & Tropical Storms, $161.3

Fires (4), $6.0

Tornadoes (2), $130.2

Winter Storms, $28.2

Terrorism, $24.4

Geological Events, $18.2

Wind/Hail/Flood (3), $14.8

Other (5), $1.4

Wind losses are by far cause the most catastrophe losses,

even if hurricanes/TS are excluded.

Tornado share of CAT losses is

rising

Insured cat losses from 1992-2011

totaled $384.3B, an average of $19.2B per year or $1.6B

per month

69

GLOBAL REINSURANCE MARKET IMPACTS

Global Reinsurance Markets Proved Resilient Despite

Record Catastrophe Losses Worldwide

69

70

Reinsurer Share of Recent Significant Market Losses

Source: Insurance Information Institute from reinsurance share percentages provided in RAA, ABIR and CEA press release, Jan. 13, 2011.

Billions of 2011 Dollars

$0

$5

$10

$15

$20

$25

$30

$35

$40

Japan

Earthquake/

Tsunami (Mar

2011)

New Zealand

Earthquake (Feb

2011)

Thailand Floods

(Aug - Nov 2011)

Chile Earthquake

(Feb. 2010)

Australia

Cyclone/ Floods

(Jan-Feb 2011)

Reinsurer Share

Primary Insurer Share

40% Reinsurance share of total insured loss

Reinsurers Paid a High Proportion of Insured Losses Arising from Major Catastrophic Events Around the World in Recent Years

$0.4 $4.0

$22.5 $9.5

$15.0

$3.5

$37.5

$13.0

$6.0

$10.0

$7.9

$8.3

$2.2 $2.8

$5.0

73% 60%

95% 44%

70

71

Technological Risks: Vulnerability and Susceptibility Vary Across the Globe

Technological Risks

Cyber attacks

Massive data fraud/theft

Mineral resource supply

vulnerability

Massive digital misinformation

Unintended consequences of

new life sciences technologies


climate change mitigation


nanotechnology Source: World Economic Forum, Global Risks 2012; Insurance Information Institute.

Technological Risk Landscape

U.S. Data Breaches 2005-2013, By Number of Breaches and Records Exposed

# Data Breaches/Millions of Records Exposed

* 2013 figures as of March 19, 2013. Source: Identity Theft Resource Center

157

321

446

656

498

419447

662

17.322.9

35.7

19.1

66.9

222.5

16.2

127.7

100

200

300

400

500

600

700

2005 2006 2007 2008 2009 2010 2011 2012

0

20

40

60

80

100

120

140

160

180

200

220

# Data Breaches # Records Exposed (Millions)

The total number of data breaches and number of records exposed fluctuates from year to year and over time.

Millions

73

Societal Risks: Vulnerability and Susceptibility Vary Across the Globe

Societal Risks

Water supply crisis

Food shortage crisis

Rising religious fanaticism

Vulnerability to pandemics

Unmanaged migration

Mismanagement of

population aging

Unsustainable population

growth

Backlash against globalization

Ineffective drug policies Source: World Economic Forum, Global Risks 2012; Insurance Information Institute.

Societal Risk Landscape

74

Liability Costs as a Fraction of GDP, 2011*

1.6

6

1.1

9

1.0

5

0.7

8

0.7

7

0.6

8

0.6

7

0.6

3

0.5

6

0.4

6

0.4

3

0.4

2

0.4

0

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

US

Can

ad

a

UK

Irela

nd

Italy

Germ

an

y

Sp

ain

Eu

rozo

ne

Fra

nce

Den

mark

Po

rtu

gal

Belg

ium

Neth

erl

an

ds

Fra

cti

on

of

GD

P (

%)

*Provisional figures for March 2013, seasonally adjusted.

Sources: US Chamber of Commerce; Insurance Information Institute.

In March, 26 states and the District of Columbia had over-the-month

unemployment rate decreases, 7 states had increases, and 17 states had no

change.

THE NEVER ENDING QUEST FOR GROWTH AND PERFORMANCE

75

Insurers, Brokers Around the World Share Many Concerns

75

76

Growth: Always a Challenge— U.S. More So in Recent Years

*2012 figure for Australia is through Q2 only.

Source: A.M. Best (U.S.); Australian Prudential Regulatory Authority; Insurance Information Institute.

-0.7%

-2.0%

-4.2%

0.9%

3.3%4.3%

3.2%3.8%

7.8%

2.9%

7.1% 6.9%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2007 2008 2009 2010 2011 2012*

US Australia

(Percent) Premium growth in Australia has greatly outpaced the US

in recent years.

77

-5%

0%

5%

10%

15%

20%

25%

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

Net Premium Growth: Annual Change, 1971—2012

(Percent)

1975-78 1984-87 2000-03

Shaded areas denote “hard market” periods Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.

Net Written Premiums Fell 0.7% in 2007 (First Decline

Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.

2012 growth

was +4.3%

78

Average Commercial Rate Change, All Lines, (1Q:2004–1Q:2013)

-3.2

%-5

.9%

-7.0

%-9

.4%

-9.7

%-8

.2%

-4.6

% -2.7

%-3

.0%

-5.3

%-9

.6%

-11

.3%

-11

.8%

-13

.3%

-12

.0%

-13

.5%

-12

.9%

-11

.0%

-6.4

%-5

.1%

-4.9

%-5

.8%

-5.6

%-5

.3%

-6.4

%-5

.2%

-5.4

% -2.9

%

2.7

% 4.4

%4

.3%

3.9

%5

.0%

5.2

%

-0.1

% 0.9

%

-0.1

%

-16%

-11%

-6%

-1%

4%

9%

1Q

04

2Q

04

3Q

04

4Q

04

1Q

05

2Q

05

3Q

05

4Q

05

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially. Source: Council of Insurance Agents & Brokers; Insurance Information Institute

KRW Effect

Pricing as of Q1:2013 was positive for the 8th consecutive

quarter. Gains are likely to continue through 2013.

(Percent)

Q2 2011 marked the last of 30th

consecutive quarter of price declines

79

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2013:Q1

Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute. Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.


Pricing turned positive in Q3:2011, the first increase in

nearly 8 years; Q1:2013 renewals were up 5.2%, the largest increase since late

2003; Some insurers posted stronger numbers.

KRW : No Lasting Impact

Pricing Turned Negative in Early

2004 and Remained that

way for 7 ½ years

Peak = 2001:Q4 +28.5%

Trough = 2007:Q3 -13.6%

80

Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2013:Q1

Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute. Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

Despite 8 consecutive quarters of gains (Q4:2012 = 5.0%),

pricing today is where is was in mid-2001 (pre-9/11), suggesting

additional rate need going forward, esp. in light of record

low interest rates

1999:Q4 = 100

81

Change in Commercial Rate Renewals, by Line: 2013:Q1

Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

Major Commercial Lines Renewed Uniformly Upward in Q1:2013 for the 8th Consecutive Quarter; Property Lines & Workers Comp Leading the Way; Cat

Losses and Low Interest Rates Provide Momentum Going Forward


5.5% 5.8%6.8%

9.8%

1.3%

4.1% 4.3% 4.6% 4.6%5.4%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Su

rety

Bu

sin

ess

Inte

rru

ptio

n

Ge

ne

ral

Lia

bili

ty

Um

bre

lla

Co

mm

erc

ial

Au

to

Co

nstr

uctio

n

D&

O

EP

L

Co

mm

erc

ial

Pro

pe

rty

Wo

rke

rs

Co

mp

Workers Comp rate increases are large than any other line, followed

by Property lines

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

82

Monthly Change* in Auto Insurance Prices, 1991–2013*

*Percentage change from same month in prior year; through Mar. 2013; 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.

-2%

0%

2%

4%

6%

8%

10%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Cyclical peaks in PP Auto tend to occur

approximately every 10 years (early 1990s, early

2000s and likely the early 2010s)

“Hard” markets tend to occur

during recessionary

periods

Pricing peak occurred in late

2010 at 5.3%, falling to 2.8% by Mar. 2012

The Mar. 2013 reading of 4.8% is

up from 2.8% a year earlier

83

16

.9

16

.5

16

.1

13

.2

10

.4

11

.6

12

.7

14

.4 15

.4 15

.9

16

.0

16

.2

16

.2

16

.2

16

.216

.9

16

.617

.1

17

.5

17

.8

17

.4

9

10

11

12

13

14

15

16

17

18

19

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F 14F15F 16F17F18F 19F

(Millions of Units)

Auto/Light Truck Sales, 1999-2019F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (4/13 and 3/13); Insurance Information Institute.

Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point, Bolstering the Auto Insurer Growth and the Manufacturing Sector.

New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2013-14 is

still below 1999-2007 average of 17 million units, but a robust recovery is well underway.

Job growth and improved credit market conditions will boost auto sales in

2013 and beyond

84

(Millions of Units)

New Private Housing Starts, 1990-2019F

1.4

8

1.4

7 1.6

2

1.6

4

1.5

7

1.6

0 1.7

1 1.8

5 1.9

6 2.0

7

1.8

0

1.3

6

0.9

1

0.5

5

0.5

9

0.6

1 0.7

8

1.0

0

1.2

1 1.3

5

1.4

4

1.5

0

1.5

1

1.5

0

1.3

51.4

6

1.2

9

1.2

0

1.0

11.1

9

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F14F15F16F17F18F19F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (4/13 and 3/13); Insurance Information Institute.

Homeowners Insurers Are Starting to See Meaningful Exposure Growth for the First Time Since 2005. Commercial Insurers with Construction Risk

Exposure, Surety, Workers Comp Also Benefit

New home starts plunged 72% from 2005-2009; A net

annual decline of 1.49 million units, lowest since records began

in 1959

Job growth, low inventories of existing homes, low mortgage

rates and demographics are stimulating new home construction

for the first time in years

85

Construction Employment, Jan. 2010—March 2013*

*Seasonally adjusted

Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

5,5

81

5,5

22

5,5

42

5,5

54

5,5

27

5,5

12

5,4

97

5,5

19

5,4

99

5,5

01

5,4

97

5,4

68

5,4

35 5

,47

8

5,4

85

5,4

97

5,5

24

5,5

30

5,5

47

5,5

46 5,5

83

5,5

76

5,5

77 5,6

12

5,6

29

5,6

44

5,6

40

5,6

36

5,6

15

5,6

22

5,6

27

5,6

30

5,6

33

5,6

49

5,6

73 5,7

11

5,7

35 5

,78

4

5,8

02

5,400

5,450

5,500

5,550

5,600

5,650

5,700

5,750

5,800

5,850

5,900

Ja

n-1

0

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Ju

n-1

0

Ju

l-1

0

Au

g-1

0

Se

p-1

0

Oct-

10

No

v-1

0

De

c-1

0

Ja

n-1

1

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Ju

n-1

1

Ju

l-1

1

Au

g-1

1

Se

p-1

1

Oct-

11

No

v-1

1

De

c-1

1

Ja

n-1

2

2/3

0/2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Ju

n-1

2

Ju

l-1

2

Au

g-1

2

Se

p-1

2

Oct-

12

No

v-1

2

De

c-1

2

Ja

n-1

3

2/3

0/2

Ma

r-1

3

Construction employment growth accelerated in the second half of 2012. Stronger growth in this key

sector is possible in 2013.

(Thousands)

http://data.bls.gov/

86

Unemployment and Underemployment Rates: Stubbornly High in 2012, But Falling

2

4

6

8

10

12

14

16

18

Jan

00

Jan

01

Jan

02

Jan

03

Jan

04

Jan

05

Jan

06

Jan

07

Jan

08

Jan

09

Jan

10

Jan

11

Jan

12

Jan

13

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Unemployment stood at 7.5% in

Apr. 2013—lowest in 4 years.

Unemployment peaked at 10.1% in October 2009, highest monthly rate since 1983.

Peak rate in the last 30 years:

10.8% in November -

December 1982

Source: US Bureau of Labor Statistics; Insurance Information Institute.

U-6 went from 8.0% in March

2007 to 17.5% in October 2009; Stood at 13.7%

in Apr. 2013

January 2000 through Apr. 2013, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving

86

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

87

Payroll Base* WC NWP

Payroll vs. Workers Comp Net Written Premiums, 1990-2012E

*Private employment; Shaded areas indicate recessions. WC premiums for 2012 are I.I.I. estimate based YTD 2012 actuals.

Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.

Continued Payroll Growth and Rate Increases Suggest WC NWP Will Grow Again in 2012; +7.9% Growth in 2011 Was the First Gain Since 2005

7/90-3/91 3/01-11/01 12/07-6/09

$Billions $Billions

WC premium volume dropped two years before

the recession began

WC net premiums written were down $14B or 29.3% to

$33.8B in 2010 after peaking at $47.8B

in 2005

+9% in 2012E

http://research.stlouisfed.org/fred2/series/WASCUR

88

12 Industries for the Next 10 Years: Insurance Solutions Needed

Export-Oriented Industries

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Petrochemical

Agriculture

Natural Resources

Technology (incl. Biotechnology)

Light Manufacturing

Insourced Manufacturing

Many industries are

poised for growth, though

insurers’ ability to

capitalize on these

industries varies widely

Shipping (Rail, Marine, Trucking, Pipelines)

89

Growth Analysis by State and Business Segment

Premium Growth Rates Vary Tremendously by State

89

90

Direct Premiums Written: Total P/C Percent Change by State, 2007-2012*

58

.4

25

.4

24

.5

21

.0

19

.2

17

.6

16

.3

13

.2

13

.2

12

.4

9.9

9.2

9.2

8.5

8.0

6.2

5.8

5.2

4.5

4.4

4.3

4.3

4.2

4.0

3.8

3.6

0

10

20

30

40

50

60

70

ND

SD

OK

NE IA

KS

VT

AK

TX

WY

MN

AR

TN IN W

I

KY

MT

OH LA

VA

NJ

MI

SC

CO

MO

NM

Pe

ce

nt

ch

an

ge

(%

)

*Data are preliminary as of 5/1/13 and do not yet fully reflect the impact of state-run pools and plans.

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

91

Direct Premiums Written: Total P/C Percent Change by State, 2007-2012*

3.6

3.1

3.0

2.9

2.7

2.2

2.1

2.1

2.0

1.8

1.1

0.0

-0.1

-0.3

-0.7

-0.9

-2.8

-5.6

-6.0

-7.2

-7.2

-9.3

-10

.1

-11

.2

-12

.5

-17

.3

-20

-15

-10

-5

0

5

CT

MS

NC AL

MD

PA

U.S

.

MA IL

WA

GA

UT

NH RI

ID

ME

NY

FL

CA

DC

WV HI

AZ

OR

DE

NV

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

*Data are preliminary as of 5/1/13 and do not yet fully reflect the impact of state-run pools and plans.

Sources: SNL Financial LC.; Insurance Information Institute.

92

UNDERWRITING PERFORMANCE MUST

IMPROVE IN CURRENT LOW INTEREST

RATE ENVIRONMENT

Australia and U.S. Underwriting

Performance/Trends Are More Similar than

Might Be Expected

93

Loss Ratios: Homeowners (U.S.) & Property (Australia)

*U.S., loss ratios include loss adjustment expense.

Source: A.M. Best (U.S.), Australian Prudential Regulation Authority; Insurance Information Institute

64.6

85.8

75.4 76.3

92.1

75.479.0

69.1

59.4

116.7

50

60

70

80

90

100

110

120

130

2007 2008 2009 2010 2011

US Australia

(Percent)

Loss ratios for property risks seem oddly in sync in the U.S. and Australia.

Both reflect volatility.

94

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2012*

Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.

Source: ISO (1960-2011); A.M. Best (2012E) Insurance Information Institute.

0.4

1.2

0.4 0

.8 1.3

0.3 0.4 0.7

1.5

1.0

0.4

0.4 0.7

1.8

1.1

0.6

1.42

.01

.32

.00

.50

.5 0.7

3.0

1.2

2.1

8.8

2.3

5.9

3.3

2.8

1.0

3.6

2.9

1.6

5.4

1.6

3.3

3.3

8.1

2.7

1.6

5.0

2.6

3.4

8.7

9.4

3.6

0.9

0.1

1.1

1.1

0.8

0

1

2

3

4

5

6

7

8

9

10

19

60

19

62

19

64

19

66

19

68

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

E

The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades

Avg. CAT Loss Component of the Combined Ratio

by Decade

1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 7.20*

Combined Ratio Points Catastrophe losses as a share of all losses reached

a record high in 2012

95

Loss Ratios: Motor/Auto



73.074.8 75.8 75.6 76.8

92.3

102.0

90.4

98.2

82.0

50

60

70

80

90

100

110

2007 2008 2009 2010 2011

US Australia

(Percent)

Loss ratios for motor insurance have been

more stable in the U.S. than in U.S. and Australia.

96

Loss Ratios: Workers Compensation



76.8 76.9

84.387.2 88.1

65.5

86.9

74.0

56.1

99.8

50

60

70

80

90

100

110

2007 2008 2009 2010 2011

US Australia

(Percent)

Loss ratios for workers comp have generally

deteriorated in both the U.S. and Australia.

97

Loss Ratios: Liability



60.862.5

64.862.0

66.7

35.2

60.2

73.8

60.8

64.9

30

35

40

45

50

55

60

65

70

75

80

2007 2008 2009 2010 2011

US Australia

(Percent)

In recent years, loss ratios for Liability coverage have been

similar in the U.S. and Australia.

98

U.S. Insurance Industry Employment Trends

Soft Market, Difficult Economy, Outsourcing, Productivity

Enhancements and Consolidation Contributed to

Industry’s Job Losses

99

U.S. Employment in the Direct P/C Insurance Industry: 1990–2013*

*As of March 2013; Seasonally adjusted; Does not including agents & brokers.


Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

Thousands

480

500

520

540

560

580

600

620

640

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

100

U.S. Employment in Insurance Agencies & Brokerages: 1990–2013*

Thousands

500

550

600

650

700

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

*As of March 2013; Seasonally adjusted. Includes all types of insurance.



As of March 2013, employment at insurance agencies and brokerages

was down by 16,300 or 2.4% to 661,400 since the recession began in

Dec. 2007 (vs. overall US employment decline of 2.0%).

101

U.S. Employment in the Reinsurance Industry: 1990–2013*

Thousands

24

28

32

36

40

44

48

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

*As of March 2013; Seasonally adjusted; Does not including agents & brokers.



As of March 2013, US employment in the reinsurance industry was down by 1,000 or 3.8% to 25,600

since the recession began in Dec. 2007 (vs. overall US employment

decline of 2.0%).

102

Distribution Trends

Distribution by Channel Type Continues to Evolve Around

the World

103

All P/C Lines Distribution Channels, Direct vs. Independent Agents

Source: Insurance Information Institute; based on data from Conning and A.M. Best.

0%

10%

20%

30%

40%

50%

60%

70%

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

Direct Independent Agents

Independent agents steadily lost market share from the early 1980s through the early 2000s across all P/C lines, but have gained or held

generally steady in recent years. Direct channels include exclusive agency companies, direct

marketers and direct sales (e.g., internet)

104

Commercial P/C Distribution Channels, Direct vs. Independent Agents


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

72 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11


Independent agents have seen only modest erosion in commercial lines market share

in recent decades

105

Personal Lines Distribution Channels, Direct vs. Independent Agents


0%

10%

20%

30%

40%

50%

60%

70%

80%

72 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11


Independent agents have lost significant personal lines market share since the early 1970s. Although the trend has slowed, it may be

accelerating again.

106

P/C Insurance Industry Financial Overview

Profit Recovery in 2012 After High CAT Losses; Ultimate

Impact of Sandy Still Unclear

106

P/C Net Income After Taxes 1991–2012 ($ Millions)

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $

36

,81

9

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$3

5,2

04

$1

9,4

56 $

33

,52

2

$2

8,6

72

-$6,970

$6

5,7

77

$4

4,1

55

$2

0,5

59

$3

8,5

01

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

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%

P-C Industry 2012:Q3 profits were up 222% from 2011:Q3, due primarily to lower catastrophe losses

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 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

-5%

0%

5%

10%

15%

20%

25%

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

F

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2013F*

*Profitability = P/C insurer ROEs. 2011 figure is an estimate based on ROAS data. Note: Data for 2008-2013 exclude

mortgage and financial guaranty insurers. 2012:Q3 ROAS = 6.2% including M&FG.

Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0% 1987:17.3%

1997:11.6%

2006:12.7%

1984: 1.8% 1992: 4.5% 2001: -1.2%

9 Years

2012:

5.9%

History suggests next ROE

peak will be in 2016-2017

ROE

1975: 2.4%

2013F: 6.2%

109

Policyholder Surplus, 2006:Q4–2012:Q4

Sources: ISO, A.M .Best.

($ Billions)

$487.1

$496.6

$512.8

$521.8

$478.5

$455.6

$437.1

$463.0

$490.8

$511.5

$540.7

$530.5

$544.8

$559.2 $559.1

$538.6

$550.3

$567.8

$583.5$586.9

$570.7$566.5

$505.0

$515.6$517.9

$420

$440

$460

$480

$500

$520

$540

$560

$580

06:Q407:Q107:Q207:Q307:Q408:Q108:Q208:Q308:Q409:Q109:Q209:Q309:Q410:Q110:Q210:Q310:Q411:Q111:Q211:Q311:Q412:Q112:Q212:Q312:Q4

2007:Q3 Pre-Crisis Peak

Surplus as of 12/31/12 was up $16.2B or 2.8% from the

previous record high of $570.7B set as of 3/31/12.

*Includes $22.5B of paid-in capital

from a holding company parent for

one insurer’s investment in a non-

insurance business in early 2010.

The Industry now has $1 of surplus for every $0.80

of NPW, close to the strongest claims-paying

status in its history.

Drop due to near-record 2011 CAT losses

The P/C Insurance Industry Both Entered and Emerged from the 2012 Hurricane

Season Very Strong Financially.

INVESTMENTS: THE NEW REALITY

110

Investment Performance is a Key Driver of Profitability

Depressed Yields Will Necessarily Influence Underwriting & Pricing

110

111

U.S. 10-Year Treasury Note Yields: A Long Downward Trend, 1990–2013*

*Monthly, through Mar. 2013. Note: Recessions indicated by gray shaded columns.

Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.

1%

2%

3%

4%

5%

6%

7%

8%

9%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.

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.

Yields on 10-Year U.S. Treasury Notes recently

rose 53bp from its all time record lows to 1.96% in Mar. 2013

111

http://www.federalreserve.gov/releases/h15/data.htm

Property/Casualty Insurance Industry Investment Income: 2000–20121

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.2

$47.7

$39.6

$49.5

$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12

Investment Income Fell in 2012 Due to Persistently Low Interest Rates, Putting Additional Pressure on (Re) Insurance Pricing

1 Investment gains consist primarily of interest and stock dividends.. Sources: ISO; Insurance Information Institute.

($ Billions)

Investment earnings in 2012 were running 13% below their 2007 pre-crisis peak

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Thank you for your time and your attention!

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Insurance Information Institute Online:

113

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