trends, challenges and opportunities in personal lines insurance … · trends, challenges and...
TRANSCRIPT
Trends, Challenges and Opportunities in Personal Lines
Insurance in 2016 & Beyond
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
Farm Bureau Managers Conference
New Orleans, LA
June 7, 2016
Download at www.iii.org/presentations
2
Distribution of Direct Premiums Written by Segment/Line, 2014
Sources: A.M. Best; Insurance Information Institute research.
Personal/Commercial lines split has been about 50/50 for many years
Pvt. Passenger Auto is by far the largest line of insurance and is currently the most important source of industry profits
Billions of additional dollars in homeowners insurance premiums are written by state-run residual market plans
Distribution Facts
Commercial Lines$282.5B/51%
2014
Pvt. Pass Auto$190.3B/34%
Homeowners$86.1B/15%
P/C Industry Net Income After Taxes1991–2015 2005 ROE*= 9.6%
2006 ROE = 12.7%
2007 ROE = 10.9%
2008 ROE = 0.1%
2009 ROE = 5.0%
2010 ROE = 6.6%
2011 ROAS1 = 3.5%
2012 ROAS1 = 5.9%
2013 ROAS1 = 10.2%
2014 ROAS1 = 8.4%
2015 ROAS = 8.4%
•ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009; 2015E is annualized figure based actual figure through Q3 of $44.0
Sources: A.M. Best, ISO; Insurance Information Institute
$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
$6
3,7
84
$5
5,8
70
$5
6,6
22
$3
8,5
01
$2
0,5
59
$4
4,1
55
$6
5,7
77
-$6,970
$2
8,6
72
-$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
13
14
15E
Net income in 2015 was on par with 2014; ROE unchanged at
8.4%
$ Millions
-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
14
15
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2015
*Profitability = P/C insurer ROEs. 2011-15 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude
mortgage and financial guaranty insurers.
Source: Insurance Information Institute; NAIC, ISO, A.M. Best, Conning
1977:19.0%1987:17.3%
1997:11.6% 2006:12.7%
1984: 1.8% 1992: 4.5% 2001: -1.2%
9 Years
History suggests next ROE
peak will be in 2016-2017
ROE
1975: 2.4%
2013 9.8%
2014 8.4%
2015: 8.4%
5
ROE: Property/Casualty Insurance by Major Event, 1987–2015
* Excludes Mortgage & Financial Guarantee in 2008 – 2014. Sources: ISO, Fortune; Insurance Information Institute.
-5%
0%
5%
10%
15%
20%
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
P/C Profitability Is Both by Cyclicality and Ordinary Volatility
Hugo
Andrew, Iniki
Northridge
Lowest CAT Losses in 15 Years
Sept. 11
Katrina, Rita, Wilma
4 Hurricanes
Financial Crisis*
(Percent)
Record Tornado Losses
Sandy
Low CATs
Modestly higher CATs
6
P/C Insurance Industry Combined Ratio, 2001–2015*
* Excludes Mortgage & Financial Guaranty insurers 2008--2014. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014: = 97.0.
Sources: A.M. Best, ISO (2014-2015); Figure for 2010-2013 is from A.M. Best P&C Review and Preview, Feb. 16, 2016.
95.7
99.3101.1
106.5
102.5
96.4 97.0 97.8
101.0
92.6
100.8
98.4100.1
107.5
115.8
90
100
110
120
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
As Recently as 2001, Insurers Paid Out
Nearly $1.16 for Every $1 in Earned Premiums Relatively
Low CAT Losses, Reserve Releases
Heavy Use of Reinsurance Lowered Net
Losses
Relatively Low CAT Losses, Reserve Releases
Higher CAT
Losses, Shrinking Reserve
Releases, Toll of Soft
Market
Cyclical Deterioration
Sandy Impacts
Lower CAT
Losses
Best Combined Ratio Since 1949 (87.6)
Avg. CAT Losses,
More Reserve Releases
3 Consecutive Years of U/W Profits: First Time Since
1971-73
7
Return on Equity by Financial Services Sector vs. Fortune 500, 2004-2014*
*GAAP basis. Sources: ISO, Fortune; Insurance Information Institute.
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
04 05 06 07 08 09 10 11 12 13 14
Fortune 500 P/C Insurers Life Insurers Commercial Banks(Percent)
Average: 2004 - 2014
Fortune 500: 13.9% Commercial Bank: 9.8%
Life: 8.2% P/C: 7.1%
Banks and Insurers Have Substantially Underperformed the Fortune 500 Since the Financial Crisis
Source: A.M. Best; Barclays research for estimates.
Reserve Change
P/C Insurance Loss Reserve Development, 1992 – 2017E*
Reserve releases are expected to gradually taper off slowly, but
will continue to benefit the bottom line and combined ratio
through at least 2017
9
Top Insurance Issues:
What’s Hot, What’s Not
Eclectic Mix of Issues Garnered Media Attention So Far in 2016
Interest in Tech Issues Remains High
9
Top Issues, P/C, First Five Months 2015 vs. First Five Months* 20161
*Through May 15. 1Based on a search of Meltwater News
Top Issues 2015 2016 % Increase/Decrease
1 Auto 12,506 15,872 27%
2 Solvency 5,944 13,174 122%
3 Driverless Cars 3,138 8,909 184%
4 Homeowners 5,755 8,113 41%
5 Cyber Insurance 4,048 7,489 85%
6 Wildfires 614 5,961 871%
7 Market Conditions 4,122 5,716 39%
8 Tort 2,536 5,081 100%
9 Earthquakes 3,502 4,854 39%
10 Insurance Fraud 4,582 4,764 4%
11 Terrorism 7,815 4,247 -46%
12 Climate Change 1,879 4,151 121%
13 Pay-As-You Go/Telematics 2,162 4,104 90%
14 Tornadoes 2,257 2,953 31%
15 Hurricanes 1,451 2,576 78%
16 Flood Insurance 2,223 2,437 10%
17 Workers Comp 1,350 1,843 37%
18 Sharing Economy 503 1,352 169%
19 Drones and Insurance 409 709 73%
20 Price Optimization 329 690 110%
21 Winter Storms & Insurance 522 666 28%
22 Aviation 241 416 73%
23 Gun Liability 98 314 220%
24 Systemic Risk 189 236 25%
25 Auto Affordability & CFA 247 155 -37%
26 Credit Scoring 84 152 81%
27 Riots 944 143 -85%
Total 69,041 106,368 54%
I.I.I. Media Index, P/C, First Five Months 2015 vs. First Five Months* 20161
Percent Increase/Decrease from Previous Year
*Through May 15. 1Based on a search of Meltwater News
-85%
-46%
-37%
4%
10%
25%
27%
28%
31%
37%
39%
39%
41%
73%
73%
78%
81%
85%
90%
100%
110%
121%
122%
169%
184%
220%
871%
-200% 0% 200% 400% 600% 800% 1000%
RiotsTerrorism
Auto Affordability & CFAInsurance FraudFlood Insurance
Systemic RiskAuto
Winter Storms & InsuranceTornadoes
Workers CompEarthquakes
Market ConditionsHomeowners
AviationDrones and Insurance
HurricanesCredit Scoring
Cyber InsurancePay-As-You Go/Telematics
TortPrice Optimization
Climate ChangeSolvency
Sharing EconomyDriverless Cars
Gun LiabilityWildfires
Interest in Technology issues impacting the
insurance industry are surging
12
Auto & Home Insurance:
State of the Personal Lines Market
Results Have Been Fairly Strong and Stable in Recent Years
Dearth of Major CATs, Pricing Discipline Has Helped
12
Personal Lines Profitability
1313
Profitability of Auto and Homeowners Lines Varies
Tremendously Over Time and Across States
14
Return on Net Worth (RNW) All Lines:2005-2014 Average
24
.1
17
.7
13
.5
13
.2
8.9
8.5
8.1
7.7
7.6
6.8
6.2
4.3
4.2
0.9
-5
0
5
10
15
20
25
30
Fire
Inla
nd Mar
ine
All
Oth
er
Med
ical
Pro
f Lia
bility
Com
m M
P
Oth
er L
iabili
ty
Com
m A
uto T
ota
l
All
Lin
es T
otal
Hom
eowner
s M
P
Work
ers
Com
p
Pvt
. Pas
s Auto
Tota
l
Farmow
ners
MP
PP A
uto T
otal
Alli
ed Lin
es
Source: NAIC; Insurance Information Institute.
Commercial lines have tended to be more profitable than personal lines
over the past decade, but Homeowners is on the rise due to the dearth of
major catastrophes in recent years
15
Return on Net Worth: All P-C Lines vs. Homeowners & Pvt. Pass. Auto, 1990-2014*
*Latest available.**If 1992, the year of Hurricane Andrew is excluded, the resulting homeowners RNW is 4.3%.Sources: NAIC; Insurance Information Institute.
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
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
US All Lines US Home US PP Auto(Percent)
Average RNW: 1990-2014*
All P-C Lines: 7.8% PP Auto: 8.1%
Homeowners: 1.9%**
Pvt.Pass. Auto Has Consistently Outperformed the P-C Industry as a Whole. Homeowners Volatility is Associated Primarily With Coastal Exposure Issues
Hurricane Andrew
16
Return on Net Worth: All P-C Lines vs. Homeowners & Pvt. Pass. Auto, 1990-2014*
*Latest available.**Excludes 1992, the year of Hurricane Andrew. If 1992 is included the resulting homeowners RNW is 1.9%Sources: NAIC; Insurance Information Institute.
-10%
-5%
0%
5%
10%
15%
20%
25%
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
US All Lines
US Home
US PP Auto
(Percent)Average RNW: 1990-2013*
All P-C Lines: 7.8% PP Auto: 8.1%
Homeowners: 4.3%**
Pvt.Pass. Auto Has Consistently Outperformed the P-C Industry as a Whole. Homeowners Volatility is Associated Primarily With Coastal Exposure Issues
Excluding 1992’s Hurricane Andrew
17
18
.7
13
.3
13
.0
12
.8
12
.7
12
.7
11
.7
11
.5
10
.5
10
.1
10
.0
9.9
9.4
9.2
9.0
9.0
8.8
8.6
8.6
8.3
8.2
8.1
7.9
7.8
7.8
7.8
0
2
4
6
8
10
12
14
16
18
20
HI DC ME ID AK ND VT NH WV OH IA WY MN OR NM VA AZ CA RI CT WI MT UT IL KS WA
Sources: NAIC; Insurance Information Institute
Hawaii was the most profitable state for auto insurers from 2005-2014
RNW Pvt. Passenger Auto, 2005-2014
Average: Highest 25 States
(Percent)
18
7.7
7.7
7.5
7.5
7.0
6.9
6.9
6.9
6.7
6.6
6.4
6.4
6.2
5.8
5.8
5.8
5.5
5.5
5.0
4.7
4.5
4.0
3.9
3.6
2.2
-2.9-3
-1
1
3
5
7
9
IN
MD
CO
MA
PA
AR
MO
NY
AL
NE
NC
TX
US
DE
SC
TN
NJ
SD
KY
GA
OK
NV
FL
MS
LA MI
RNW Pvt. Passenger Auto,
2005-2014 Average: Lowest 25 States
Sources: NAIC; Insurance Information Institute
Michigan was the least profitable state for auto insurers from
2005-2014
(Percent)
19
41
.7
22
.2
21
.1
20
.9
19
.0
18
.4
18
.4
18
.2
18
.0
16
.9
15
.6
14
.7
14
.1
13
.9
13
.8
12
.7
12
.6
11
.5
11
.5
9.4
9.3
9.1
9.1
19
.0
18
.0
14
.00
5
10
15
20
25
30
35
40
45
HI DC RI FL NV DE AK SC VA CA MA OR NY UT ME VT WA CT NH MD ID NC PA NM AZ WV
Sources: NAIC; Insurance Information Institute
RNW Homeowners Insurance,
2005-2014 Average: Highest 25 States
Hawaii was the most profitable state for home insurers from 2005-2014 due to the absence
of hurricanes during this period
(Percent)
20
8.4
8.0
7.6
7.5
6.8
4.7
4.6
1.7
-1.7
8.0
6.0
-4.7
-4.8
-4.8
-5.8
-6.0
-7.5
-8.4
-11
.2
-13
.8
-20
.1
-26
.8
-4.0
-3.6
-2.6
-2.1
-30
-25
-20
-15
-10
-5
0
5
10
ND TX MI US NJ WY WI IA IL KS OH MT MO CO KY IN AL SD AR NE MN GA TN OK LA MS
RN
W H
O
Sources: NAIC; Insurance Information Institute
Hurricanes Katrina and Rita made Louisiana and Mississippi the least profitable states for home insurers
from 2005-2014
(Percent)
RNW Homeowners Insurance,
2005-2014 Average: Lowest 25 States
INVESTMENTS: THE NEW REALITY
21
Investment Performance is a Key Driver of Profitability
Depressed Yields Will Necessarily Influence Underwriting & Pricing
21
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
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
16*
*Through June 5, 2016.
Source: NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html Ins. Info. Inst.
Tech Bubble
Implosion
Financial
Crisis
Annual Return
Energy Crisis
2016*:
+2.7%
S&P 500 Index Returns, 1950 – 2016*
Fed Raises Rate
Stock market in 2016 got off to its worst start ever but has now improved. Volatility is endemic to stock markets—and may be increasing—but there is no
persistent downward trend over long periods of time
Property/Casualty Insurance Industry Investment Income: 2000–20151
$38.9$37.1 $36.7
$38.7
$54.6
$51.2
$47.1 $47.6$49.2
$48.0 $47.3$46.4
$47.2
$39.6
$49.5
$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Due to persistently low interest rates, investment income fell in 2012, 2013 and 2014 but showed a small (1.9%) increase in 2015—
a trend that may continue.
1 Investment gains consist primarily of interest and stock dividends. Sources: ISO; Insurance Information Institute.
($ Billions)Investment earnings are still below their 2007 pre-crisis peak
24
U.S. Treasury Security Yields:A Long Downward Trend, 1990–2016*
*Monthly, constant maturity, nominal rates, through May 20, 2016.
Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.
0%
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 '14 '15 '16
Recession2-Yr Yield10-Yr Yield
Yields on 10-Year U.S. Treasury Notes have been essentially
below 5% for more than a 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.
Despite the Fed’s December 2015 rate hike, yields
remain low though short-
term yields have seen some gains;
Yield curve is flattening.
24
25
Treasury Yield Curves: Pre-Crisis (July 2007) vs. May 2016*
0.24% 0.30% 0.42%0.62%
0.86%
1.63%1.82%
4.82%4.96% 5.04% 4.96%
4.82% 4.82% 4.88% 5.00% 4.93% 5.00%5.19%
1.34%1.02%
2.62%
2.22%
0%
1%
2%
3%
4%
5%
6%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
May 2016 Yield Curve
Pre-Crisis (July 2007)
Treasury yield curve remains near its most depressed level in at least 45
years. Investment income is depressed as a result. Fed began to raise rates
in Dec. 2015, but yields unlikely to return to pre-crisis levels anytime soon
The Fed Began to Raise Rates in Dec. 2015 but Market Volatility and Weakness Abroad Have Made Additional Hikes Difficult
*As of May 20, 2016.
Source: Federal Reserve Board of Governors: http://www.federalreserve.gov/releases/h15/data.htm; Insurance Information Institute.
26
Distribution of Bond Maturities,P/C Insurance Industry, 2003-2015
14.4%
15.4%
16.0%
16.0%
15.2%
15.7%
15.6%
16.0%
14.9%
16.6%
16.5%
16.8%
16.3%
29.8%
29.2%
28.8%
29.5%
30.0%
32.4%
36.4%
39.5%
41.2%
40.4%
38.8%
37.1%
35.8%
31.3%
32.5%
34.1%
34.1%
33.8%
31.2%
29.0%
27.1%
27.3%
27.6%
29.3%
30.8%
33.7%
15.4%
15.4%
13.6%
13.1%
12.9%
12.7%
11.9%
11.2%
10.4%
9.8%
9.8%
9.6%
9.0%
9.2%
7.6%
7.6%
7.4%
8.1%
8.1%
7.1%
6.2%
6.2%
5.7%
5.7%
5.7%
5.1%
0% 20% 40% 60% 80% 100%
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Under 1 year
1-5 years
5-10 years
10-20 years
over 20 years
Sources: SNL Financial; Insurance Information Institute.
Two main shifts over these years. From 2008 to 2011-12, from bonds with longer maturities to bonds with shorter maturities. But beginning in 2013, the reverse. Note,
however, that the percentages in bonds with maturities over 10 years continues to drop.
Distribution of Invested Assets: P/C Insurance Industry, 2014
Stocks, 23%
Bonds, 61%All Other, 10%
Cash, Cash Equiv. &
ST Investments, 6%
Source: Insurance Information Institute Fact Book 2016, A.M. Best.
Total Invested Assets =
$1.533 Trillion
$ Billions
Net Yield on Property/Casualty Insurance Invested Assets, 2007–2015*
4.38
4.17
4.02
3.87
3.63 3.61
3.743.82
3.44
3.0
3.2
3.4
3.6
3.8
4.0
4.2
4.4
4.6
07 08 09 10 11 12 13 14 15*
The yield on invested assets remains low relative to pre-crisis yields. The Fed’s plan to raise interest rates in late 2015 has already pushed up some yields, albeit quite modestly.
*2015 figure is the average of the four quarters ending in 2015:Q2.Sources: SNL Financial; Insurance Information Institute
(Percent) Book yield in 2015 is down 77 BP from pre-crisis levels
Net Investment Yield on Property/ Casualty Insurance Invested Assets, 2007–2016P*
4.5
4.2
4.0
3.8
3.4
3.6
3.1
3.73.8
3.6
3.0
3.2
3.4
3.6
3.8
4.0
4.2
4.4
4.6
07 08 09 10 11 12 13 14 15E 16P
The yield on invested assets remains low relative to pre-crisis yields. The Fed’s plan to raise interest rates in late 2015 has pushed up some yields, albeit quite modestly.
Sources: A.M. Best; 2015E-2016P figures from A.M. Best P/C Review and Preview, Feb. 2016; Insurance Information Institute
(Percent) Estimated book yield in 2016 is down about 140
BP from pre-crisis levels
30
P/C Insurer Portfolio Yields,2002-2015:Q3
4.2
0%
3.9
3%
3.7
3%
3.8
3%
3.6
8%
3.4
3%
3.6
5%
3.1
5%
4.4
9%
4.5
0%
4.5
9%
4.0
3%
4.4
4%
4.8
5%
0%
1%
2%
3%
4%
5%
6%
02 03 04 05 06 07 08 09 10 11 12 13 14 15:Q3
Sources: NAIC, via SNL Financial; Insurance Information Institute.
P/C carrier yields have been falling for over a decade, reflecting the long downtrend in prevailing interest rates. Even as prevailing rates rise in the
next few years, portfolio yields are unlikely to rise quickly, since low yields of recent years are “baked in” to future returns.
31
Interest Rate Forecasts: 2016 – 2021
3.0%
2.2% 2.1%
2.8%
3.4%
3.7% 3.8% 3.9%
0.1%
0.5%
1.3%
2.3%
2.7%2.9%
0%
1%
2%
3%
4%
5%
15F 16F 17F 18F 19F 20F 21F 15F 16F 17F 18F 19F 20F 21F
A full normalization of interest rates is unlikely until 2019, more than a decade after the onset of the financial crisis.
Yield (%)
Sources: Blue Chip Economic Indicators (4/16 for 2016 and 2017; for 2018-2021 3/16 issue); Insurance Info. Institute.
3-Month Treasury 10-Year Treasury
The end of the Fed’s QE program in 2014 and a
stronger economy have yet to push longer-term
yields much higher
32
Annual Inflation Rates, (CPI-U, %),1990–2017F
2.82.6
1.51.9
3.3 3.4
1.3
2.52.3
3.0
3.8
2.8
3.8
-0.4
1.6
3.2
2.1
1.5 1.6
0.1
1.3
2.3
2.9
2.4
3.23.0
5.14.9
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
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 16F17F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 4/16 (forecasts).
Slack in the U.S. economy and falling energy prices suggests that inflationary pressures should remain subdued for an extended
period of times
Annual Inflation Rates (%)
Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the
commodity bubble reduced inflationary pressures in 2009/10
Inflationary expectations have slipped
(due in part to falling energy
costs) allowing the Fed to
maintain low interest rates
33
P/C Insurer Net Realized Capital Gains/Losses, 1990-2015:Q3*
*Through Q3 2015.Sources: A.M. Best, ISO, SNL, Insurance Information Institute.
$2
.88
$4
.81
$9
.89
$9
.82
$1
0.8
1 $1
8.0
2
$1
3.0
2
$1
6.2
1
$6
.63
-$1
.21
$6
.61
$9
.13
$9
.70
$3
.52 $8
.92
-$7
.90
$5
.85
$7
.04
$6
.18
$1
1.3
7
$1
0.0
6
$8
.87
-$1
9.8
1
$9
.24
$6
.00
$1
.66
-$25
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15*
Insurers Posted Net Realized Capital Gains in 2010 - 2014 Following Two Years of Realized Losses During the Financial Crisis. Realized Capital
Losses Were a Primary Cause of 2008/2009’s Large Drop in Profits and ROE.
($ Billions) Realized capital gains rose sharply as equity markets
rallied in 2013-14
Property/Casualty Insurance Industry Investment Gain: 1994–2015:Q31
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$64.0
$31.7
$39.2
$53.4$56.2
$54.2
$58.7
$43.7
$56.2
$58.0
$51.9
$56.9
$0
$10
$20
$30
$40
$50
$60
$70
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11 12 13 14 15*
Total Investment Gains Were Down Slightly in 2014 as Low Interest Rates Pressured Investment Income but Realized Capital Gains Remained
Robust
1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B; 2015 figure is through Q3 2015.Sources: ISO, SNL; Insurance Information Institute.
($ Billions)
Investment gains in 2015 will be similar to those earned in 2014 but still well below the
pre-crisis highs
35
-1.8
%
-1.8
%
-2.0
%
-3.6
%
-3.3
%
-3.3
%
-3.7
%
-4.3
%
-5.2
%
-5.7
%
-7.3%
-1.9
%
-2.1
%
-3.1
%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
Per
sona
l Lin
es
Pvt P
ass
Aut
o
Per
s Pro
p
Com
mer
cial
Com
ml A
uto
Cre
dit
Com
m P
rop
Com
m C
as
Fidel
ity/S
uret
y
War
rant
y
Sur
plus
Lin
es
Med
Mal
WC
Rei
nsur
ance
**
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.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
35
Profitability & Politics
3636
How Is Profitability Affected by the President’s Political Party?
15.10%
8.93%
8.93%
8.65%
8.35%
8.33%
7.98%
7.68%
6.98%
6.97%
5.43%
5.03%
4.83%
4.68%
4.43%
3.55%
16.43%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
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
*Truman administration ROE of 6.97% based on 3 years only, 1950-52;.
Source: Insurance Information Institute
OVERALL RECORD: 1950-2015*
Democrats 7.72%Republicans 7.85%
Party of President has marginal bearing on profitability of P/C insurance industry
P/C Insurance Industry ROE by Presidential Administration, 1950-2014*
-5%
0%
5%
10%
15%
20%
25%
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
BLUE = Democratic President RED = Republican President
Tru
ma
n Nixon/Ford
Ke
nn
ed
y/
Jo
hn
so
n
Eis
en
ho
wer
Ca
rte
r
Reagan/Bush I Clinton Bush II
P/C insurance Industry ROE by Presidential Party Affiliation, 1950- 2015*
Obama
.
*2015 data is through Q3.
Source: Insurance Information Institute
39
Trump vs. Clinton:Issues that Matter to P/C Insurers
Issue Trump Clinton
Economy Supply Side-Like Philosophy:Lower taxesFaster real GDP
growth; Deficits likely grow as tax cuts are combined with targeted increased spending on Homeland Security, Defense, etc.
Keynesian Philosophy: More government spending on infrastructure, education, social services; Deficits likely increase as tax increases likely difficult to pass
Interest Rates May trend higher with larger deficits; Shift from monetary policy to fiscal focus (tax cuts, government spending)
Status quo at the Fed; Net impact on interest rates unclear
Taxes Favors lower tax rates for corporate and personal income tax rates; Tax code overhaul?
Unlikely to reduce taxes or embark on major overhaul of tax code
International Trade
Protectionist Tendencies (appeal primarily to manufacturing sector)
Has criticized Trans-PacificPartnership but is a realist on international matters
Tort System Doesn’t like trial lawyers butseems to like filing lawsuits
Status Quo
Health Care ACA should be repealed & replaced Incremental Change
Source: James Madison Institute, February 2008.
ME
NH
MA
CT
PA
WV
VA
NC
LA
TX
OK
NE
ND
MN
MI
IL
IA
ID
WA
OR
AZ
HI
NJ
RI C+
DE
AL
VT
NY
MD
SC
GA
TN
AL
FL
MS
ARNM
KYMOKS
SDWI
IN
OH
MT
CA
NV
UT
WY
CO
AK
= A= B= C= D= F= NG
Source: R Street Insurance Regulation Report Card, December 2015
B+ A
B
A-
B+
B
A
A-
C
C
BB
D
F
C
C+
A C-
B
D
C
C
BC
A
B
B
A
B
B
C+
B
B
B+
C
B
B
A-
C+
C
C
CD
B
D+
D
D D
D
2015 Property and Casualty InsuranceRegulatory Report Card
Not Graded: District of Columbia
Personal Lines Underwriting Performance
4141
Auto, Home Underwriting Performance Exhibit Periods of
Both Stability and Volatility
Private Passenger Auto Combined Ratio: 1993–2017F
10
1.7
10
1.3
10
1.3
10
1.0
10
9.5
10
7.9
10
4.2
98
.4
94
.3
95
.1
95
.5 98
.3 10
0.2
10
1.3
10
1.0
10
2.0
10
2.1
10
1.6
10
2.3 10
4.9
10
5.3
10
5.4
99
.5 10
1.1
10
3.5
80
85
90
95
100
105
110
115
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15E 16F 17F
Private Passenger Auto Underwriting Performance Is Showing the Strains of Rising Frequency (and Severity) Trends in Many States
42Sources: A.M. Best (1990-2014); Conning (2015E-17F); Insurance Information Institute.
Homeowners Insurance Combined Ratio: 1990–2017F
11
3.0
11
7.7
15
8.4
11
3.6
10
1.0 10
9.4
10
8.2
11
1.4 1
21
.7
10
9.3
98
.2
94
.4 10
0.3
89
.0 95
.6
11
6.6
10
5.8
10
6.9
12
2.1
10
3.9
90
.5
92
.7
91
.5 95
.3
95
.5
11
8.4
11
2.7 12
1.7
80
90
100
110
120
130
140
150
160
170
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15E16F17F
1
Homeowners Performance Has Improved Markedly Since the 2011/12’s Large Cat Losses. Extreme Regional Variation Can Be Expected Due to Local Catastrophe Loss Activity. Results
in 2016 Will Be Impacted by Severe Spring Weather
43
Hurricane Ike
Hurricane Sandy
Record tornado activity
Hurricane Andrew
Sources: A.M. Best (1990-2014); Insurance Information Institute (2015E-17F).
44
Homeowners Multi-Peril Loss & ALAE Ratio, 2014:Highest 25 States
14
2.8
13
2.6
11
6.0
10
2.5
80
.4
80
.2
74
.6
69
.2
66
.8
66
.8
65
.8
62
.4
60
.7
59
.3
59
.2
58
.7
58
.2
58
.0
56
.4
55
.5
54
.1
52
.4
51
.7
51
.2
51
.1
50
.3
0
20
40
60
80
100
120
140
160
MT NE SD CO IA MI IL VT PA ID WY GA DE MD AR WV WA MO MS WI IN SC OR TN US AZ
Lo
ss &
AL
AE
Rati
o
(%)
Sources: SNL Financial; Insurance Information Institute.
MT had the worst loss ratio in 2014, followed by
NE and SD…
45
Homeowners Multi-Peril Loss & ALAE Ratio, 2014:Lowest 25 States and DC
50
.1
49
.3
48
.9
48
.3
48
.1
47
.7
47
.3
46
.0
45
.8
45
.6
45
.2
44
.1
43
.2
42
.0
41
.0
40
.8
40
.2
37
.7
37
.5
37
.1
36
.2
32
.8
32
.3
28
.0
27
.3
25
.7
0
10
20
30
40
50
60
CA NJ OH TX AL ME KY NC NM NH NY NV UT MN KS DC CT VA AK RI MA ND LA HI FL OK
Lo
ss &
AL
AE
Rati
o (
%)
Sources: SNL Financial; Insurance Information Institute.
OK and FL had the best performances in 2014! Traditionally high cat-loss states did well last year
due to unusually low cat activity
46
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 201546
47
$1
3.0
$1
1.3
$3
.9
$1
4.8
$1
1.9
$6
.3
$3
5.8
$7
.8
$1
6.8
$3
4.7
$1
0.9
$7
.7
$3
0.1
$1
1.8
$1
4.9
$3
4.6
$3
6.1
$1
3.1
$1
5.5
$1
5.2
$75.7
$1
4.4
$5
.0 $8
.2
$3
8.9
$9
.1
$2
7.2
$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 13 14 15
U.S. 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.
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
2012 was the 3rd most expensive year ever for
insured CAT losses
$15.2B in insured CAT losses though
12/31/15
($ Billions, $ 2015)
47
48
Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2015E*
*2010s represent 2010-2015E.
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 (1960-2009); A.M. Best (2010-15E) 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
1.4 2
.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
4.6
9.6
8.0
3.5 4
.03
.13.6
0.9
0.1
1.1
1.1
0.8
0
2
4
6
8
10
12
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
20
14
The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades
Avg. CAT Loss Component of theCombined Ratio
by Decade
1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 5.46*
Combined Ratio Points Catastrophe losses as a share of all
losses reached a record high in 2011
49
Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1995–20141
0.1%
1.5%5.4%
0.1%
6.2%
6.8%
39.2%
40.7%
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.
Hurricanes & Tropical Storms, $161.2
Fires (4), $6.0
Events Involving Tornadoes (2), $154.9
Winter Storms, $26.9
Terrorism, $24.5
Geological Events, $0.5
Wind/Hail/Flood (3), $21.4
Other (5), $0.2
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 1995-2014
totaled $395.6B, an average of $19.8B per year or $1.65B
per month
Winter storm losses were much above average in 2014/15 are
will push this share up
50
Top 16 Most Costly Disastersin U.S. History—Katrina Still Ranks #1
(Insured Losses, 2014 Dollars, $ Billions)
$8.1 $9.0 $9.4 $11.4$13.8
$19.3
$24.6 $25.3$26.4
$50.2
$7.7$7.3$6.9$5.8$5.7$4.6
$0
$10
$20
$30
$40
$50
$60
Irene (2011) Jeanne
(2004)
Frances
(2004)
Rita
(2005)
Tornadoes/
T-Storms
(2011)
Tornadoes/
T-Storms
(2011)
Hugo
(1989)
Ivan
(2004)
Charley
(2004)
Wilma
(2005)
Ike
(2008)
Sandy*
(2012)
Northridge
(1994)
9/11 Attack
(2001)
Andrew
(1992)
Katrina
(2005)
Storm Sandy in 2012 was the last mega-CAT
to hit the US
Includes Tuscaloosa, AL,
tornado
Includes Joplin, MO, tornado
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.
Winter Storm Losses in the US1980 – 2015 (Overall and Insured Losses)*
51
Overall losses
(in 2015 values)*
Insured losses
(in 2015 values)*
*Losses adjusted to
inflation based on CPI.Source: Property Claim Services, MR NatCatSERVICE.
$ Billions
Winter storm losses have been increasing rapidly in recent years
*Winter storms
include also winter
damages, blizzards
and cold waves
Loss Events in the US, 1980 – 2014Overall and Insured Losses
52
Overall losses
(in 2013 values)*
Insured losses
(in 2013 values)*
*Losses adjusted
to inflation based
on CPI.
Overall losses totaled $25bn; Insured losses totaled $15.3bn
50
100
150
200
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Source: Property Claim Services, MR NatCatSERVICE.
$ BillionsUninsured loss component is
large and could get larger. Vast majority of economic
loss from SC floods is uninsured
Convective Loss Events in the USOverall and insured losses, 1980 – 2014
53
$ Billions
Analysis contains:
severe storm, tornado, hail, flash
flood and lightning
10
20
30
40
50
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
*Losses adjusted to inflation based on CPI
Source: Geo Risks Research, NatCatSERVICE
Overall losses
(in 2014 values)*
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)
Convective Loss Events in the USOverall and insured losses, 1980 – 2015
54
$ Billions
Analysis contains:
severe storm, tornado, hail, flash
flood and lightning
*Losses adjusted to inflation based on CPI
Source: Geo Risks Research, NatCatSERVICE
Overall losses
(in 2015 values)*
Insured losses
(in 2015 values)* The period from 2008-2015 has
been the most expensive on record for insured losses from “Convective Events” (severe thunderstorms, tornado, hail,
lightning and flash flood)
NatCatSERVICE
Loss events in the U.S. 1980 – 2015Insured losses of winter storms*
Insured losses
(in 2015 values)**
© 2016 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research – As at January 2016
US$bn
5 year Mean
*Winter storms
include also winter
damages, blizzards
and cold waves
**Losses adjusted
to inflation based
on country CPI
Source: Munich Re NatCatSERVICE, Property Claim Services, PCS
NatCatSERVICE
Loss events in the U.S. 1980 – 2015Insured losses of convective events*
Insured losses
(in 2015 values)**
© 2016 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research – As at January 2016
US$bn
5 year Mean
Source: Munich Re NatCatSERVICE, Property Claim Services, PCS
**Losses adjusted
to inflation based
on country CPI
*Convective events
include severe storm,
hail, tornado, flash
flood, lightning
***2015 figures
without the
Christmas events
***
57
Number of National Flood Insurance Program
Policies in Force at Year-End, 1980-2015*
Source: National Flood Insurance Program.
* As of July, 2015
2.1
04
2.0
17 2.4
78
3.4
77
4.3
69 4
.96
2
5.6
56
5.6
84
5.7
00
5.6
45
5.6
46
5.6
20
5.5
69
5.3
51
5.1
51
0
1
2
3
4
5
6
1980 1985 1990 1995 2000 2005 2007 2008 2009 2010 2011 2012 2013 2014 2015*
(milli
on
s)
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
Catastrophe Bond Issuance and Outstanding: 1997-2015
948.2
874.2
1,062.5
1,142.0
966.9
989.5
1,988.2
1,142.8
1,499.0
4,614.7
7,187.0
3,009.9
3,396.0
4,599.9
4,107.1
5,855.3
7,083.0
8,026.7
7,898.2
4,289.0
5,085.0
7,677.0
13,416.4
12,538.6
12,508.2
12,195.7
12,342.8
14,839.3
18,576.9
22,867.8
25,960.5
0
5,000
10,000
15,000
20,000
25,000
30,000
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
New Issuance Outstanding
58
Risk Capital Amount ($ Millions)
Cat Bond Issuance Declined Slightly in 2015 from 2014’s Record Pace. Lower Yields on Bonds Explain Some of the Contraction.
Source: Guy Carpenter, Artemis accessed at http://www.artemis.bm/deal_directory/cat_bonds_ils_issued_outstanding.html .
US Property CAT Rate on Line Index & Global Reinsurance ROE
59
Record traditional capacity, alternative capital and low CAT activity have pressured reinsurance prices; ROEs are own only very modestly
Source: Barclays PLC from Guy Carpenter; Insurance Information Institute.
US Property CAT ROL Global Reinsurance ROE
60
Sources: http://www.usgs.gov/blogs/features/usgs_top_story/induced-earthquakes-raise-chances-of-damaging-shaking-in-2016/?from=title; Insurance Information Institute.
Commercial Lines$282.5B/51%
Pvt. Pass Auto$190.3B/34%
Homeowners$86.1B/15%
Earthquakes Since 1980 and Recent Area Impacted by Induced Seismicity
61
2016 Natural and Induced Earthquake Damage Forecast
Sources: USGS at http://www.usgs.gov/blogs/features/usgs_top_story/induced-earthquakes-raise-chances-of-damaging-shaking-in-2016/?from=title; Insurance Information Institute.
Commercial Lines$282.5B/51%
Pvt. Pass Auto$190.3B/34%
Homeowners$86.1B/15%
62
Effective Use of Data, Infographics to Get Out a Key Message
Sources: Travelers; Infographic accessed at: http://mms.businesswire.com/media/20160406005833/en/517883/5/Home_Dangers_Infographic_Final.jpg?download=1
Commercial Lines$282.5B/51%
Pvt. Pass Auto$190.3B/34%
Homeowners$86.1B/15%
Top 5 Most Common Causes of Homeowners Insurance Claims
Exterior wind damage – 25 percent of all
losses. Non-weather-related water damage (e.g.,
plumbing or appliance issues) – 19 percent.
Hail – 15 percent. Weather-related water damage (e.g., rain,
melting ice, snow) – 11 percent.
Theft – 6 percent.
63
A Few Factors Driving Adverse Private Passenger Auto Loss Trends
More People Driving, Lower Gas Prices, Higher Speed Limits…
64
More Miles Driven=> More Collisions, 2006–2015:Q4
Sources: Federal Highway Administration (http://www.fhwa.dot.gov/policyinformation/travel_monitoring/tvt.cfm ); Rolling Four-Qtr Avg. Frequency from Insurance Services Office; Insurance Institute for Highway Safety; Insurance Information Institute.
Billions of Miles Driven in Prior Year
5.5
5.6
5.7
5.8
5.9
6.0
2850
2900
2950
3000
3050
3100
3150
06:Q
1
06:Q
3
07:Q
1
07
:Q3
08:Q
1
08:Q
3
09:Q
1
09:Q
3
10:Q
1
10:Q
3
11:Q
1
11:Q
3
12:Q
1
12
:Q3
13:Q
1
13:Q
3
14:Q
1
14:Q
3
15:Q
1
15:Q
3
Miles Driven (left axis) Collision Claim Frequency (right axis)
Overall Collision Claims Per 100 Insured Vehicles
The more miles people drive, the more likely they are to get in an accident, helping drive claim frequency higher.
Recession
65
More People Working and Driving=> More Collisions, 2006-2016
Sources: Seasonally Adjusted Employed from Bureau of Labor Statistics; Rolling Four-Qtr Avg. Frequency from Insurance Services Office; Insurance Information Institute.
Number Employed,Millions
138
140
142
144
146
148
150
152
06
:Q1
06
:Q3
07
:Q1
07
:Q3
08
:Q1
08
:Q3
09
:Q1
09
:Q3
10
:Q1
10
:Q3
11
:Q1
11
:Q3
12
:Q1
12
:Q3
13
:Q1
13
:Q3
14
:Q1
14
:Q3
15
:Q1
15
:Q3
16
:Q1
5.5
5.6
5.7
5.8
5.9
6.0
Number Employed (left scale) Collision Claim Frequency (right scale)
Overall Collision Claims Per 100 Insured
Vehicles
When people are out of work, they drive less. When they get jobs,they drive to work, helping drive claim frequency higher.
Recession
66
Why Are PeopleDriving More Miles? Cheap Gas?
Sources: Federal Highway Administration (http://www.fhwa.dot.gov/policyinformation/travel_monitoring/tvt.cfm ); Energy Information Administration; Insurance Institute for Highway Safety; Insurance Information Institute.
Billions of Miles Driven in Prior Year
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
2850
2900
2950
3000
3050
3100
3150
06:Q
1
06:Q
3
07:Q
1
07:Q
3
08:Q
1
08:Q
3
09
:Q1
09:Q
3
10:Q
1
10:Q
3
11:Q
1
11:Q
3
12:Q
1
12:Q
3
13:Q
1
13:Q
3
14:Q
1
14:Q
3
15:Q
1
15:Q
3
Miles Driven (left axis) Gas PricesAvg. Price Per Gallon
Gas Prices Don’t Seem Correlated With Miles Driven.
Recession
67
Why Are PeopleDriving More Miles? Jobs?
Sources: Federal Highway Administration (http://www.fhwa.dot.gov/policyinformation/travel_monitoring/tvt.cfm ); Seasonally Adjusted Employed from Bureau of Labor Statistics; Insurance Institute for Highway Safety; Insurance Information Institute.
Billions of Miles Driven in Prior Year
132
134
136
138
140
142
144
146
148
150
152
2850
2900
2950
3000
3050
3100
3150
06:Q
1
06:Q
3
07:Q
1
07:Q
3
08:Q
1
08:Q
3
09
:Q1
09:Q
3
10:Q
1
10:Q
3
11:Q
1
11:Q
3
12:Q
1
12:Q
3
13:Q
1
13:Q
3
14
:Q1
14:Q
3
15:Q
1
15:Q
3
Miles Driven (left axis) # EmployedMillions Employed
People Drive To and From Work and Drive to Entertainment. Out of Work, They Curtail Their Movement.
Recession
Change in Auto Fatalities by State: Especially Severe in Georgia
7%
11%
12%
16%
22%
-1%
8%
-5% 0% 5% 10% 15% 20% 25%
GA (1,394)
SC (954)
KY (748)
NC (1,396)
USA (38,300)
VA (755)
TN (961)
SOURCE: Estimates from National Safety Council.
2015 vs. 2014
Fatalities in Southeast Rising Faster Than USA
as a Whole
GA’s auto fatality rate has increased at a pace nearly 3 times that of the US overall
and far in excess of any other state in the region
Comparing Gas Prices, Employment on Collision Frequency
5.5
5.55
5.6
5.65
5.7
5.75
5.8
5.85
5.9
5.95
6
- 1.00 2.00 3.00 4.00 5.00
Gas price vs. Collision FrequencyFreq.
5.5
5.55
5.6
5.65
5.7
5.75
5.8
5.85
5.9
5.95
6
135 140 145 150 155
Number Employed vs. Collision FrequencyFreq.
69
Sources: Seasonally Adjusted Employed from Bureau of Labor Statistics; Energy Information Administration; Rolling Four-Qtr Avg. Frequency from Insurance Services Office; Insurance Information Institute.
Gas Price/Gal. Employment Level
Return on Net Worth: Personal Auto, 2005-2014
4.3%
14.3%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Personal Fortune 500
70
Auto Insurance Profitability Has Been Falling for A Decade.
SOURCE: National Association of Insurance Commissioners.
Net Combined Ratio, 2005-2015
95
.1%
95
.6%
98
.3%
10
0.2
%
10
1.3
%
10
1.0
%
10
2.0
%
10
2.1
%
10
1.6
%
10
2.5
%
10
4.6
%
85%
90%
95%
100%
105%
110%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
71
Loss Ratios Have Been Rising for A Decade. 2015 Return on Net Worth Is Likely Close to Zero or Negative.
SOURCE: National Association of Insurance Commissioners data, sourced from S&P Global Market Intelligence; Insurance
Information Institute.
72
Claim Trends in Private Passenger Auto Insurance
Rising Frequencies and Severities in Many Coverages
Will that Pattern Be Sustained?
73
Auto Severity & Frequency by Coverage: Trending Up in 2015
2.2%1.1%
10.2%
0.8%
4.1%
6.4%
3.5%
5.7%
-1.7%-2.5%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
Bodily Injury Property Damage
Liability
PIP Collision Comprehensive
Severity Frequency
Annual Change, 2015 Over 2014
Frequency and Severity Were Up Across Most Coverage Types in 2015; A Trend Likely to Continue in 2016
Source: ISO/PCI Fast Track data; Insurance Information Institute
74
Collision Coverage: Severity & Frequency Trends Are Both Higher in 2015
2.8%
1.3%
4.1%
1.3%
5.7%
-1.8%
-3.6%
2.5%
-2.4%-1.8%
4.4%
0.8%
3.9%3.1%
0.1% 0.5%
-2.3%
-0.1%-1.4%
-0.5%
0.9%
2.4%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Severity Frequency
Annual Change, 2005 through 2015
The Recession, High Fuel Prices Helped Temper Frequency and Severity, But this Trend Has Clearly Reversed, Consistent with
Experience from Past Recoveries
Source: ISO/PCI Fast Track data; Insurance Information Institute
75
Collision Loss Ratio Trending Upward:Private Passenger Auto, 2010 – 2015
67.7%
71.5% 71.5%
75.7%77.1%
78.9%
62%
64%
66%
68%
70%
72%
74%
76%
78%
80%
2010 2011 2012 2013 2014 2015
Loss Ratio
Collision Loss Ratios are Trending Steadily Upward
Source: ISO/PCI Fast Track data; Insurance Information Institute
76
Bodily Injury: Severity Trend Is Up, Frequency Decline Has Ended—Rising?
2.1%1.7%
3.7%
1.8%
4.1%
-5.4%
-3.8% -4.0% -4.2%
-2.2%
0.0%
-1.1%
2.2%3.0%
2.0%
5.9%5.7%4.7%
2.9%
1.1%
0.0% 0.0%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Severity Frequency
Source: ISO/PCI Fast Track data; Insurance Information Institute
Annual Change, 2005 through 2015
Cost Pressures Will Increase if BI Frequency and Severity Trends Persist
77
Property Damage Liability: Severity and Frequency Are Up
1.8% 1.9%
4.0%3.4%
6.4%
-1.6%
-3.5% -3.4%
0.6% 0.6%0.0%
1.4% 1.1%
2.9%3.6%
2.0% 2.0%
-0.4%
0.4%0.9% 1.2%0.3%
-4%
-2%
0%
2%
4%
6%
8%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Severity Frequency
Annual Change, 2005 through 2015
Severity/Frequency Trends Have Been Volatile, But Rising Severity since 2011 Is a Concern
Source: ISO/PCI Fast Track data; Insurance Information Institute
78
No-Fault (PIP) Liability: Severity is Up, Frequency Relatively Flat*
3.2% 2.9% 3.2% 3.5%
-4.8%-5.7%
-4.1%
-6.4%
6.6%
-3.4%-2.1%
-5.8%
-0.8%
10.2%
-1.3%
4.7%
2.4%
6.4% 6.5% 6.8%
5.2%5.4%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015**
Severity Frequency
*No-fault states included are: FL, HI, KS, KY, MA, MI, MN, NY, ND and UT.
Source: ISO/PCI Fast Track data; Insurance Information Institute
Annual Change, 2005 through 2015
No-Fault Systems Are Less Problematic in Some States but Still of Concern in Some, Such as MI
79
Comprehensive Coverage: Frequency and Severity Trends Are Volatile
15.4% 15.3%
-14.5%
7.3%
-1.7%
-9.8%
-6.3%
1.3%
5.8%
-8.9%-7.0%
2.6%
-2.5%
15.5%
-1.4% -1.5%
12.6%
-8.1%-5.9%
-3.1%
1.8%
6.2%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Severity Frequency
Annual Change, 2005 through 2015
Weather Creates Volatility for Comprehensive Coverage
Severe weather is a principal cause of the spikes in both
frequency and severity
Source: ISO/PCI Fast Track data; Insurance Information Institute
80
Death Rates per 100,000,000 Vehicle miles, 1990-2015*
*Projected rate for 2015 based on date through June 2015.Source: National Safety Council; Insurance Information Institute.
2
1.8
3
1.8
2
1.8
1.7
9
1.7
6
1.7
1.6
5
1.5
8
1.5
8
1.5
7
1.5
9
1.5
5
1.5
2
1.5
2
1.5
1.4
5
1.3
4
1.2
2
1.1
9
1.2
0 1.3
5
1.2
0
1.2
0
1.3
0
2.1
8
0.00
0.50
1.00
1.50
2.00
2.50
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
*
death rates per 100,000,000 vehicle miles
The recession and high gas prices reduced
miles driven, accelerating the drop in
death rates
Motor vehicle fatality rates appear to be ticking up in 2015
Vehicle death rates fell by nearly half between 1990 and 2010
Auto Insurance: Claim Frequency Impacts of Energy Crisis of 1973/4
Source: ISO, US DOT.
Oct. 17, 1973: Arab oil embargo
begins
Frequency Impacts
Collision: -7.7%PD: -9.5%BI: -13.3%
March 17, 1974: Arab
oil states announce
end to embargo
Driving StatsGas prices rose
35-40%Miles driven fell 6.7% in
1974
Frequency began to rebound almost
immediately after the embargo
ended
Auto Insurance: Claim Severity Impacts of Energy Crisis of 1973/4
Source: ISO.
Severity Impacts
Collision: -7.5%
PD: +15.9%BI: N/A*
Driving StatsGas prices rose 35-40%Miles driven fell 6.7% in
1974
Oct. 17, 1973: Arab
oil embargo begins
March 17, 1974: Arab oil states announce
end to embargo
Collision severity began to rebound almost
immediately after the embargo
ended; PD accelerated as inflation
rose; No discernable
trend change in BI.
Auto Insurance Claim Cost Drivers Continue to Grow Faster than CPI
Sources: Bureau of Labor Statistics; Insurance Information Institute.
0.1%
5.7%
2.6%
4.2%
1.5%
-0.4%
0.4%
0.7%0.7%
2.4%
-2%
0%
2%
3%
5%
6%
Overall CPI"Core" CPI Motor
Vehicle
Insurance
Total
Medical
Care
Physicians'
Services
Hospital
Services
Motor
Vehicle
Body Work
New Cars New
Trucks
Used Cars
and Trucks
Healthcare costs are a major cost driver and are expected to accelerate in the years ahead
83
Excludes Food and
Energy
Price Level Change: December 2015 vs. December 2014
83
84
Defense Costs and Cost Containment Expenses as a Percent of Incurred Losses, 2011 – 2013*
*Latest available.
Source: SNL Financial; Insurance Information Institute.
Defense and Cost Containment expenses in
Pvt. Passenger Auto Liability have edged up slightly in recent years, from 6.2% of incurred
losses to 6.8%
85
$3
,12
3,9
50
$1
39
,76
8
$5
2,6
80
$6
8,2
18
$3
4,8
77
$7
45
,00
0
$1
21
,89
4
$3
,48
6,9
00
$5
87
,00
0
$1
61
,18
7
$3
51
,82
9
$1
,27
3,1
39
$6,392,270
$1
,00
9,7
88
All Liabilities Product Liabilities Business
Negligence
Medical
Malpractice
Premises Liability Personal
Negligence
Vehicular Liability
2013 Median 2013 Average
Porducts Liability and Medical Malpractice cases tend to have among the highest jury awards
Median and Average Personal Injury Jury Award by Type of Liability, 2013
Source: Current Award Trends in Personal Injury, 54th Edition; Insurance Information Institute.
86
Personal Lines Growth Analysis
Growth Trajectories Differ Substantially by State and
Over Time
87
Auto & Home vs. All Lines, Net WrittenPremium Growth, 2000–2018F
-5%
-3%
-1%
1%
3%
5%
7%
9%
11%
13%
15%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15F 16F 17F 18F
Private Passenger Auto
Homeowners
All Lines
Sources: A.M. Best (2000-2014); Conning/Insurance Information Institute (2015F-2018F); Insurance Information Institute.
Average 2000-2014
Auto = 3.0%
Home = 6.4%
All Lines = 3.8%
While homeowners insurance has grown faster than auto for many years, auto is
generally more profitable, though not recently
88
$119.7
$128.0 $
139.7 $
151.2
$159.6
$158.5
$157.2
$160.1
$163.3
$168.1
$174.6 $183.5
$191.2
$197.7
$204.0
$160.3
$159.6
$157.3
$100
$120
$140
$160
$180
$200
$220
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15F 16F 17F
PP Auto premiums written continue to recover from a period of flat growth attributable to the weak economy impacting new vehicle sales, car choice, and increased
price sensitivity among consumers
Sources: A.M. Best (1990-2014); Conning (2015-17F); Insurance Information Institute.
Private Passenger Auto InsuranceNet Written Premium, 2000–2017F
$ Billion
PPA NWP volume in 2014 was up $26.3B or 16.7%
since the 2009 trough; By 2017 the gain is expected to
be $46.8B or 29.7%
PPA will generate $6B - $8B in new
premiums annually through 2017
89
$19.5
$21.8
$24.6$25.4 $25.8
$23.8
$22.1$21.2 $21.2
$22.1
$24.0
$25.7
$28.0
$26.6 $26.7 $26.7
$15
$17
$19
$21
$23
$25
$27
$29
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15E
Sources: A.M. Best (2000-2014); Conning (2015F); Insurance Information Institute.
$ Billion
In contrast to positive PP Auto NPW growth, Commercial Auto premiums fell 21.3% between 2005 and 2011 due to soft market conditions in
commercial lines and negative exposure trends, though growth resumed in 2012
Commercial Auto InsuranceNet Written Premium, 2000–2015F
90
Direct Premiums Written: PP AutoPercent Change by State, 2007-2014
44
.5
36
.0
33
.8
30
.9
26
.6
24
.4
24
.4
21
.1
20
.4
20
.3
19
.5
19
.4
19
.1
19
.0
18
.7
18
.7
18
.4
17
.9
17
.4
17
.2
16
.9
16
.4
15
.8
15
.7
15
.6
15
.4
0
5
10
15
20
25
30
35
40
45
50
ND
TX MI
OK
SD
CO
NE
TN
SC
UT
KS WI
NJ IA VA
LA
DE
FL
GA
NY
KY
US
WY
MT
AR
AL
Pe
ce
nt
ch
an
ge
(%
)
Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 States
Growth Benchmarks: PPA
US: 16.4%
91
Direct Premiums Written: PP AutoPercent Change by State, 2007-2014
15
.0
14
.2
14
.2
13
.9
13
.9
13
.2
12
.9
12
.2
12
.1
11
.1
11
.0
10
.6
10
.5
10
.3
10
.3
10
.0
9.9
8.3
7.3
6.5
5.6
5.5
5.3
5.1
0.2
-0.2
-2
0
2
4
6
8
10
12
14
16
MO
NC
MN IN DC
OH
MD
MS
AK
MA
WA
CT
NM
WV RI
ID IL PA
CA
US
VT
NV
NH AZ
ME HI
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
Sources: SNL Financial LC.; Insurance Information Institute.
Pvt. Passenger Auto premium growth was
negative in Hawaii between 2007 and 2014
92
Homeowners InsuranceNet Written Premium, 2000–2016F
$45.8
$49.5$52.2
$54.8 $55.2
$61.1$63.5
$66.9
$71.9
$77.0
$80.9
$84.9
$57.5$56.2
$32.4
$40.0
$35.2
$30
$35
$40
$45
$50
$55
$60
$65
$70
$75
$80
$85
$90
$95
$100
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15F 16F
Sources: A.M. Best; Insurance Information Institute.
$ Billions Homeowners insurance NWP continues to rise (up 150% 2000-2015F) despite very little unit
growth during the real estate crash. Reasons include rate increases, especially in coastal
zones, ITV endorsements (e.g., “inflation guards”), compulsory for mortgaged properties
and resumption of home building activity
The Homeowners line will generate about
$4B in new premiums annually through 2016
93
Personal Lines Growth Drivers
Rate and Exposure are Both Presently Important
Growth Drivers
94
Monthly Change in Auto Insurance Prices, 1991–2015*
*Percentage change from same month in prior year; through Dec. 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.
-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 '14 '15
Cyclical peaks in PP Auto tend to occur roughly 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
Dec. 2015 reading of 5.5% is up from 4.7%
a year earlier
Private Passenger Auto: Premium Growth vs. Loss Cost Spread
Sources: Barclays Capital, August 2015.95
Pure Premium Spread in 2015 Q1 was 0.0%
meaning that rate gains were exactly offset by
loss cost inflation
The Pure Premium Spreadis the difference between price increases and loss
cost inflation adjusted for frequency trends
96
Average Expenditures* on Auto Insurance, 1994-2015E
$6
51
$6
68
$6
91
$7
05
$7
26
$7
86
$8
30
$8
42
$8
31
$8
16
$7
99
$7
91
$7
87
$7
92
$7
97
$8
15 $8
41 $8
70 $8
99
$6
90
$6
85
$7
03
$600
$650
$700
$750
$800
$850
$900
$950
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
E
15
E
Across the U.S., auto insurance expenditures fell by 0.8% in 2008and 0.5% in 2009 but rose 0.5% in 2010, 0.8% in 2011, 2.3% in 2012 and 3.3% in 2013; I.I.I.
estimate is for +3.4% in 2014 and 2015.* The NAIC data are per-vehicle (actually, per insured car-year)Sources: NAIC for 1994-2013; Insurance Information Institute estimates for 2014-2015 based on CPI and other data.
The average expenditure on auto insurance now finally exceeds the pre-crisis high of
$842 recorded in 2004, taking a full decade to recover, but on an inflation-adjusted
basis premiums are still below 2004 levels
Annual Pct Changes
2001: 5.2%
2002: 8.6%
2003: 5.6%
2004: 1.5%
2005: -1.3%
2006: -1.8%
2007: -2.1%
2008: -1.0%
2009: -0.5%
2010: 0.6%
2011: 0.6%
2012: 2.3%
2013: 3.3%
M&A UPDATE:A PATH TO GROWTH?
97
Are Capital Accumulation, Drive for Growth and Scale
Stimulating M&A Activity?
Not Currently Focused on Personal Lines
97
98
U.S. INSURANCE MERGERS AND ACQUISITIONS,P/C SECTOR, 1994-2015E (1)
$5,1
00
$11,5
34
$8,0
59
$30,8
73
$19,1
18
$40,0
32
$1,2
49
$486
$20,3
53
$425
$9,2
64
$35,2
21
$13,6
15
$16,2
94
$3,5
07
$6,4
19 $
12,4
58
$4,6
51
$4,3
97
$6,7
23
$32,0
00
$55,825
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 1415E
Tra
ns
ac
tio
n v
alu
es
0
20
40
60
80
100
120
140
Nu
mb
er o
f tran
sa
ctio
ns
($ Millions)
(1) Includes transactions where a U.S. company was the acquirer and/or the target.
Source: Conning proprietary database; 2015 I.I.I. estimate.
M&A activity in the P/C sector was up sharply in 2015
M&A activity in 2015 will
likely reach its highest level since 1998
Newsflash: WR Berkley to enter high net worth personal
lines market!
Personal Lines: Economic and Demographic Considerations
9999
Auto, Home Are Sensitive to Underlying Economic
Conditions
100
(Millions of Units)
New Private Housing Starts, 1990-2021F
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 0.9
2
1.0
0 1.1
1 1.2
1 1.3
4
1.4
3
1.4
6
1.4
71
.49
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 13 14 15 16F 17F 18F 19F20F 21F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (5/16 for 2016-17; 3/16 for 2018-21F; Insurance Information Institute.
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
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, still-low mortgage
rates and demographics should continue to stimulate new home
construction for several more years
101
Rental-Occupied Housing Units as % of Total Occupied Units, Quarterly, 1990:Q1-2015*
30%
31%
32%
33%
34%
35%
36%
37%
90
:Q1
91
:Q1
92
:Q1
93
:Q1
94
:Q1
95
:Q1
96
:Q1
97
:Q1
98
:Q1
99
:Q1
00
:Q1
01
:Q1
02
:Q1
03
:Q1
04
:Q1
05
:Q1
06
:Q1
07
:Q1
08
:Q1
09
:Q1
10
:Q1
11
:Q1
12
:Q1
13
:Q1
14
:Q1
15
:Q1
Sources: US Census Bureau, Residential Vacancies & Home Ownership in the First Quarter of 2015 (released April 28, 2015) and earlier issues; Insurance Information Institute. Next Census Bureau report to be released on July 28, 2015. *As of Q1.
Trough in 2004:Q2 and Q4 at 30.8%
Since the Great Recession ended in June 2009, renters occupied 5.7 million more units (+15.6%).
101
Latest was 36.3% in
2015
Trend down began in 1994:Q3 from
36.2% in Q2
Increasing percent of
owners
Increasing percent of
renters
102
I.I.I. Poll: Renter’s Insurance
Source: Insurance Information Institute Annual Pulse Survey.
29%31%
35%37%
40%43%
10%
20%
30%
40%
50%
60%
70%
2011 2012 2013 2014 May 2015 Nov. 2015
The Percentage of Renters Who Have Renters Insurance Has Been Rising Since 2011.
Q. Do you have renters insurance? 1
1Asked of those who rent their home.
Americans are increasingly choosing to rent, but are slow to understand the
need to insure, exacerbating the underinsurance gap
103
16
.9
16
.5
16
.1
13
.2
10
.4
11
.6
12
.7
14
.4
15
.5 16
.4 17
.3
17
.3
17
.2
17
.2
17
.1
17
.1
17
.0
16
.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 13 14 15 16F 17F 18F 19F 20F 21F
(Millions of Units)
Auto/Light Truck Sales, 1999-2021F
New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2014-15 is
still below 1999-2007 average of 17 million units, but a robust recovery is well underway.
Job growth and improved credit market conditions will boost auto sales in
2015 and beyond
Truck, SUV purchases by
contractors are especially strong
Yearly car/light truck sales will likely continue at current levels, in part replacing cars that were held onto in 2008-12. PP Auto premium
might grow by 3.5% - 5%.
Sales have returned to pre-
crisis levels
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (5/16 for 2016-17; 3/16 for 2018-21F; Insurance Information Institute.
Number of Registered Passenger Vehicles in US, 1999 – 2015E
Sources: Bureau of Transportation Statistics; Barclays Capital estimates, August 2015.104
Vehicle registrations are growing once
again and now finally exceed pre-crisis
peak
Vehicle registrations are expected to increase at an
annual rate of about 1.5% per year in 2015 and 2016
Licensed Drivers, Vehicle Registrations and Resident Population: All UP!
105
Source: Federal Highway Administration: http://www.fhwa.dot.gov/policyinformation/statistics/2014/dv1c.cfmaccessed 2/1/16; Insurance Information Institute.
The recession temporarily interrupted growth, but the number
of drivers and registered is rising!
106
America is Driving More Again (Finally!): Total Miles Driven*, 1990–2015*
*Moving 12-month total. The 2015 data are through November 2015, the latest available.Note: Recessions indicated by gray shaded columns.
Sources: Federal Highway Administration (http://www.fhwa.dot.gov/policyinformation/travel_monitoring/tvt.cfm ); National Bureau of Economic Research (recession dates); Insurance Information Institute.
Billions
2,100
2,200
2,300
2,400
2,500
2,600
2,700
2,800
2,900
3,000
3,100
'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
From November 2007 until January
2015, miles driven was below the
prior peak for 87 straight months—
over 7 years! Previous record was
in the early 1980s (39 months).
Some of the 1990-
2007 growth in miles
driven (+43.9%) is
due to population
growth (+20.7%)…
New records
in 2015 =
3.14 billion
miles; Up
6.7% from
Feb. 2012
trough
…but the population
grew by 6.6% from
2007-2015 and miles
driven didn’t grow at
all until 2015 itself.
Change in Proportion of Persons with Driver Licenses in the US, by Age, 1983-2014
107
Source: University of Michigan Transportation Research Institute, “Recent Decreases in the Proportion of Persons with a Driver’sLicense Across All Age Groups,” M. Sivak and B. Schoettle., Jan. 2016; Insurance Information Institute.
Smaller proportions of younger drivers
have licenses but not because they’re all
taking Uber.
The AARP crowd can’t be pried away
from the cars
Girl Power: Females with a Driver’s License as a % of All Licensed Drivers
108
Boys with No Toys
Women now account for the majority of licensed drivers
Frequency/Severity Impacts:
Woman are more likely to
drive less, buy smaller cars,
buy safer cars and less
likely to be involved in
accidents
Source: University of Michigan Transportation Research Institute, “Female Drivers in the United States: From Minority to Majority?” by M. Sivak,, UMTRI-2016-16, May 2015; Insurance Information Institute.
Auto Loans and Other Non-Housing Debt, 2004 – 2015*
109
Banks are becoming increasingly aggressive in marketing auto loans
*As of Q1 2015.Source: Federal Reserve Bank of NY Consumer Credit Panel/Equifax; l. I.I.
Auto loan debt outstanding
reached $1T for the first time ever
in Q1 2015
110
INDUSTRY DISRUPTORS
Technology, Society and the Economy Are All
Changing at a Rapid Pace
Thoughts on the Future
110
111
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
Source: Boston Consulting Group.
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?
112
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
*From publically available sources as of June 2, 2015.
Source: ISO/Verisk.
TNC Ridesharing Arrangements: Insurance Applicability
113
The concern was that TNCs were seeking to offload risk on to personal auto insurers. An increasing number of
personal auto insurers have developed solutions to ensure that coverage gaps are minimized
Source: ISO.
Ridesharing Regulation/Legislation and Status of ISO Filings as of 9/30/15
114
Status of ISO FilingsStatus Ride Sharing
Legislation/Regulation
Source: ISO/Verisk.
Homesharing Arrangements: Potential Host Exposure Concerns (Receives Rental Income)
115
.
Source: ISO/Verisk.
Homesharing Arrangements: Potential Traveler Exposure Concerns
116
.
*As of Oct. 6, 2015.
Source: ISO/Verisk.
Homesharing: ISO’s Proposed Changes*
117
118
Send in the Drones: Potential Rapid Adoption in Industry; Media Loves It
Drones or Unmanned Aerial Vehicle (UAV)
technology is seeing rapid adoption rate in
many industries, including insurance
~700,000 drones in US by year-end
FAA granting Section 333 exemptions for
commercial use and testing of UAS
FAA will require most drones to be
registered by year-end 2015.
At least 5 insurers have received
permission to test
Wide variety of applications: claims, 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
Data Breaches 2005-2015, by Number of Breaches and Records Exposed
# Data Breaches/Millions of Records Exposed
*Figures as of June 30, 2015, from the Identity Theft Resource Center,http://www.idtheftcenter.org/images/breach/ITRCBreachReport2015.pdf
157
321
446
656
498
419
470
614
400
783
662
117.6
85.692.0
17.522.9
35.7
19.1
66.9
222.5
16.2
127.7
100
200
300
400
500
600
700
800
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 *2015
0
20
40
60
80
100
120
140
160
180
200
220
# Data Breaches # 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.*
Millions
Source: Insurance Information Institute research.
The Three Basic Elements of Cyber Coverage: Prevention, Transfer, Response
Loss Prevention
Post-Breach Response
(Insurable)
Loss Transfer
(Insurance)
Cyber risk management today involves
three essential components, each designed
to reduce, mitigate or avoid loss. An
increasing number of cyber risk products
offered by insurers today provide all three.
120
121
AUTO TECHNOLOGY &
THE FUTURE OF AUTO INSURANCE
Technology Promises Safer Cars and Highways, BUT Some Analysts, Media
and Many in Silicon Valley Are Predicting Doom for Auto Insurers
122
THE ‘INTERNET OF THINGS’
Capturing Economic Value Amid a
Shifting Insurer Value Chain
123
The Internet of Things and the Insurance Industry
The “Internet of Things” will create trillions in economic value throughout the global economy by 2025
What opportunities, challenges will this create for insurers?
What are the impact on the insurance industry “value chain”?Sources: McKinsey Global Institute, The Internet of Things: Mapping the Value Beyond the Hype,
June 2015; Insurance Information Institute.
124
The Internet of Things and the Insurance Industry Value Chain
Source: Willis Capital Markets & Advisory; Insurance Information Institute.
The Insurance Industry Value Chain Is Changing for Many Reasons
125
The Internet of Things and the Insurance Industry Value Chain
Source: Willis Capital Markets & Advisory; Insurance Information Institute.
Who owns the data? Where does It flow? Who does the analytics? Who is the capital provider?
126
A NEST Case Study
Nest: A Leader in the “Internet of Things”
Collision Course or Cooperation with the
Insurance Industry?
126
127
Telematics for Your Home:The Internet of Things
The home is the next frontier for telematics
Rapidly becoming a crowded space
How and with whom will insurers partner?
Can control increasing array of household systems remotely
Heat, A/C
Fire, CO detection
Security Systems
Cameras/Monitors
Appliances
Lighting
Technology is adaptive
Uses sensors and algorithms to learn about you
128
Partnerships with Insurers: Selling Safety and Savings Simultaneously
Source: https://nest.com/insurance-partners/ accessed 1/10/16; Insurance Information Institute research.
Nest is actively seeking to partner with insurers. As of Jan. 10, 2016, Nest listed 2 insurance partners offering discounts in a number of states
129
Recent Attacks on the Insurance Industry
Why Are Critics Suddenly More Aggressive?
130
What’s Driving Attacks on the Insurance Industry?
Recent Surge in Attacks is Associated with Income Inequality Debate in the
United States
Attacks not confined to auto insurance (e.g., Workers Comp, Health)
Not confined to insurance (banks, lending in general, student loans)
Politics, Economics, Regulation & Demographics Are Principal Drivers
CFA/CR and others (ProPublica) emboldened in current environment
Dodd-Frank Act stuffed with income inequality mandates and studies
FIO now studying auto insurance affordability; Wants to create index.
Definition of “fairness” is shifting
CFA Has Been Able to Attack Certain Rating Factors Based on New Perception
of Fairness (which is independent of actual risk)
Education Occupation Marital Status Gender
Age Credit Profile Location “Price Optimization”
All of These Are Vulnerable to Attack in the Current Environment
Infinite Number of Quotes OnlineCFA Uses to Highlight Perceived Inequities
Handout for Government Affairs Staff Attending NAIC Meeting
131
132
PRICE OPTIMIZATION
Price Optimization Was the Sharpest Area of
Attack the Industry Faced in 2015
Price Optimization: What Is It?
133
5.9 Cents Per Ounce ($23.76 for 24 Bottles)
1.4 Cents Per Ounce ($5.49 for
24 Bottles)
320% Price Difference! Does It Cost $18.25 to Unpack the Bottles and Keep Them Cold?
U.S. Insurers Don’t Do This!!!
Who Knows?
No One Has Successfully Defined It
At Least Seven Definitions From States, Vendors, NAIC, Others
Some Have Talked About
– Price Elasticity of Demand
– ‘Loyalty Penalty’
Use of ‘Sophisticated Tools and Models to Quantify Other Business Considerations’ (profitability/retention) (NAIC/I.I.I.)
Price Optimization: What Is It?
134
What Is the Objection? Detractors Say . . . .
‘Systematic Component to Rate Setting Unrelated to Expected Losses or Expenses’ (It’s a Rating Variable, and It’s Not Based on Likelihood of Loss, So It’s Illegal.)
‘Price Gouging’
– Poor Get Overcharged
– Most Loyal Customers Get Mistreated
Price Optimization: What Is The Objection?
135
136
FOUR FACTS ABOUT PRICE OPTIMIZATION
1. Insurers Have Always ‘Optimized’ –With Regulator Knowledge & Approval
137
Other Examples: Rate Capping, Teen Drivers
Companies Temper
Increases Based on ‘Market
Judgment’
Sources: System for Electronic Rate and Form Filing (SERFF) via SNL Financial; Insurance Information Institute.
Regulators Have
Approved of the
Practice for
Decades
2. Optimization Is Not Price Gouging
Traditional Practice
Used ‘Seat-of-the-Pants’ Judgment to Discount Off Indication
What’s New
Software Informs the Judgment
Never Exceeds Actuarial Indication
$100
$101
$102
$103
$104
$105
$106
$98 $100 $102 $104 $106
Today's Rate
ActuarialIndication
An Example
138
Selected: +3%
Indicated: +6%
3. Optimization Doesn’t Raise Rates; It Distributes the Rate Change
As Practiced in U.S.
Remains True to Cost-Based Price
Applied to Classes, Not Individuals
Rates Don’t Exceed Actuarial Indication
6%
9%
5%
8%
2%
3%
6%
2%
4%
0%
3%
8%
0%
3%
1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Overall Class 1 Class 2 Class 3 Class 4
Indication Judgment Optimized
139
Example (cont’d): There Are Many Reasonable Ways to Achieve
Reasonable Rates.
The Latest
140
NAIC Task Force Concluded (November)
Restrictions/bans in 16+ States, D.C.
Illinois Declined to Issue Regulation‘Illinois has a highly competitive auto and homeowners’ insurance market … I would be delighted to host any members of … consumer organizations to visit with me, in person, to share the data they cite as it is inconsistent with what I have reviewed.’
- Acting Insurance Director Anne Melissa DowlingJanuary 2016
Focus Appears to Be On
Potential Use of Tool on
Individuals
141
4. Low Income Drivers Are Just as Likely to Shop As Anyone Else
Source: Insurance Information Institute Annual Pulse Survey.
68%63% 63% 63% 61%
74%69%
73% 72%
61%
0%
10%
20%
30%
40%
50%
60%
70%
80%
<$35K $35K to <$50K $50K to <$75K $75K to <$100K $100K +
2014 2015
Percent of Those With Auto Insurance Who Said They Compared Prices on Renewal, by Income, 2014-2015
Low- to Moderate-Income Respondents Were More Likely to Say They Compare Prices.
What Has I.I.I. Done?
142
Media
Industry
Policymakers
The Message:
‘the optimal way … is not through prohibitions but through observation, learning and studying the impacts on insurance markets and consumers and only then making recommendations as necessary.’- Robert Hartwig,NCOIL, July 17, 2015
www.iii.org
Thank you for your timeand your attention!
Twitter: twitter.com/bob_Hartwig
Insurance Information Institute Online:
143