Economic Update & Emerging Industry TrendsPAMICPittsburgh, PA, August 6, 2019

Michel Leonard, PhD, CBEInsurance Information Institute w 110 William Street w New York, NY 10038 www.iii,org 1

A world with MORE insurance

I.I.I. Mission Statement

Improving public understanding of insurance...

…what it does and how it works

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Economic Outlook

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Balance of RisksPolitical RiskMonetary PolicyGrowth & Inflation

US: Q2 numbers weaker than expected confirm negative trend.

Global: GDP growth forecast for 2019 is up from 3.0% in January to 3.2%.

US: Unusually fast policy turnaround creating instability

Global: BoE, ECB signaling cuts. Russia, Turkey cutting. China on hold.

US: Electoral cycle will move center state.

Global: Brexit, Hong Kong protests, and Iran risk underpriced. U.S.

Industry Insight: Political risk underwriters view more risks in 2019 than 2018 but losses are stable

Political Risk

Q2 GDP Inflation

Q1 GDP Inflation

Interest Rates

Skewed to downside

Arrow length = impact on balance.

4

U.S. GDP Forecasts

Real GDP Growth Forecasts

0%

1%

2%

3%

19:Q3 19:Q4 20:Q1 20:Q2 20:Q3 20:Q4

Top 10 Avg Median Bottom 10 Avg

5

GDP Growth (%)

Years & Quarters

53 forecasts: consensus points to slow growth in the second half of 2019 and throughout 2020.

Treasury Yields: A Long Downward Trend, 2006–2019

3.58%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

Recession

10-Yr Yield

2.54%

50% of P/C investments in 5+ year bonds = low bond returns for years

6

Yield Rate (%)

Years & Quarters

Yield Forecasts 2019-2020

2.5 2.52.4 2.4 2.4

2.3 2.3

2.6 2.62.7 2.7

2.8 2.8 2.82.72.8

3.0 3.03.1

3.2 3.2

2

2.5

3

3.5

2019:Q2 2019:Q3 2019:Q4 2020:Q1 2020:Q2 2020:Q3 2020:Q4

10 Most Pessimistic Median 10 Most Optimistic

53 forecasts: No consensus on level or direction of interest rates in the next six quarters

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Yield Rate (%)

Years & Quarters

Economic Indicators for the P/C Insurance Industry

Economic Indicator Q1 2019 Q2 2019 Analysis

Change in real GDP 3.1% 1.3% Uncertainty rising

Housing Unit Starts (millions of units) Actual 2018. Forecast 2019 1.21 1.23

Q2 is Blue Chip median forecast for full year 2019: essentially flatThis is a weak indicator

Employment Changes (thousands) 521 512 +500K per quarter is relatively strong Especially at this stage of cycle

Nonresidential Fixed Investment Growth 6.9% N/A Businesses are still investing… but slowing due to increased uncertainty

Hospital Services Price Increases (y-o-y) 1.8% 1.2% Lowest level in last 20 years… helps constrain BI claim severity

10-Year Treasury Yield 2.7% 2.3% No relief for insurer investment income

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P&C Industry Performance

9

15.7%

5.0%

-5%

0%

5%

10%

15%

20%

07 08 09 10 11 12 13 14 15 16 17 18 19

NPW Growth Nominal GDP Growth

Net P/C Premium Written Growth vs. Nominal U.S. Economy

Through first quarter.SOURCES: A.M. Best (2007-2013), ISO (2014-present), Federal Reserve Bank of St. Louis (FRED), Insurance Information Institute.

Tax Reform Peak

-1.2%

*ISO/Verisk estimate

Premium Growth Falls Below GDP Growth For 1st Time in 10 Years

10

Years

Growth (%)

2017 Q1 – 2018 Q1 Ave: 6.9%

Key Sources of P/C Insurer Profits

Through first quarter. Data are before taxes and exclude extraordinary items. Source: NAIC data, sourced from S&P Global Market Intelligence.

$4.0

$14.6 $14.1 $14.6$20.2

$14.5$16.8

$13.6 $14.9 $15.3 $14.7

-$2.2 -$1.2-$4.2

$0.1

$5.0

$2.8

$4.6

$2.9 $0.0 $4.1 $5.3

-$10

$0

$10

$20

$30

09 10 11 12 13 14 15 16 17 18 19

Net investment gains Underwriting gains/lossesProfits ($ Billions)

Strong Capital Gains and Underwriting Result Lifted Profits.

11

Years

$8,300

$2,254

-$728

$4,170

$5,259

-$2,500

$0

$2,500

$5,000

$7,500

$10,000

07 08 09 10 11 12 13 14 15 16 17 18 19

P/C Underwriting Gains

Sources: NAIC data, sourced from S&P Global Market Intelligence, ISO/PCI. 2019 12

Gains & Losses ($ Billions)

Years

Third Year in a Row of Underwriting Gains Lead to Best Performance since 2007

P/C Sources of Investment Gains and Losses

Through First Quarter. Sources: NAIC data, sourced from S&P Global Market Intelligence; Insurance Information Institute.

$11.9 $11.7 $13.1 $11.9 $12.1 $11.5 $12.0 $11.2 $12.2 $12.3 $13.7

-$7.9

$2.9 $1.1 $2.7

$8.1

$3.1$4.9

$2.4$2.7 $3.6 $1.7

-$10

-$5

$0

$5

$10

$15

$20

$25

09 10 11 12 13 14 15 16 17 18 19

Net investment income Realized capital gains/losses

Steady investment income - but smaller Q1 realized capital gains

13

Years

Gains & Losses ($ Billions)

P/C Insurer Portfolio Yields

Sources: NAIC data, sourced from S&P Global Market Intelligence, ISO/PCI. 2019 projected with Q1 data

Insurers facing yields below 4% since 2009

14

4.9

3.83.7

3.43.7

3.23.0 3.0

3.43.2

0%

1%

2%

3%

4%

5%

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19P

Yield (%)

Years

P/C Industry Combined Ratio

*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, a Verisk Analytics company; 2019 based on Q1 data

110.1

115.8

107.5

100.1

98.4

100.8

92.6

95.7

101

99.3

101.1

106.5

102.5

96.497.4 98.3

100.9

104.0

101.5 101.2

90

100

110

120

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18E 19P

Hurricanes, Wildfires Drive CR Higher.

Best Since 1949’a 87.6

Higher CAT Losses, Shrinking

Reserve Releases, Toll of

Soft Market

Sandy

3 Years in a Row U/W Profits1st time since 1971-73

15

Combined Ratio

Years

P/C Industry Net Income After Taxes

Through first quarter. Adjusted for inflation using the BLS CPI calculator.Sources: NAIC data, sourced from S&P Global Market Intelligence; Insurance Information Institute.

10.2

-1.2

12.9

9.5

13.6

23.8

15.2

20.0

14.7

8.6

17.1 17.9

-$5

$5

$15

$25

$35

08 09 10 11 12 13 14 15 16 17 18 19

Net Income ($ Billions)

16

Years

All Leading to Rising Net Income After Taxes

Commercial Rates

17

All Commercial Lines Rate Changes

Sources: Willis Towers Watson, MarketScout.

Rates creeping higher but that masks differences by line of business

-16%

5%2%

-6%

7%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2003

:Q3

2004

:Q1

2004

:Q3

2005

:Q1

2005

:Q3

2006

:Q1

2006

:Q3

2007

:Q1

2007

:Q3

2008

:Q1

2008

:Q3

2009

:Q1

2009

:Q3

2010

:Q1

2010

:Q3

2011

:Q1

2011

:Q3

2012

:Q1

2012

:Q3

2013

:Q1

2013

:Q3

2014

:Q1

2014

:Q3

2015

:Q1

2015

:Q3

2016

:Q1

2016

:Q3

2017

:Q1

2017

:Q3

2018

:Q1

2018

:Q3

2019

: Q1

MarketScout Willis

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Quarters & Years

Rates Growth (%)

Liability Rate Changes

SOURCE: Marsh Insurance Market Index.

U.S. Casualty U.S. Financial and Prof Liab

1.9%

-2.1%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

Q2

2012

Q4

2012

Q2

2013

Q4

2013

Q2

2014

Q4

2014

Q2

2015

Q4

2015

Q2

2016

Q4

2016

Q2

2017

Q4

2017

Q2

2018

Q4

2018

2.1% 1.5%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

Q2

2012

Q4

2012

Q2

2013

Q4

2013

Q2

2014

Q4

2014

Q2

2015

Q4

2015

Q2

2016

Q4

2016

Q2

2017

Q4

2017

Q2

2018

Q4

2018

19

Years & Quarters

Rates Growth (%)

Years & Quarters

Rates Growth (%)

Slight Softening, Though Local Markets Vary

Property/Cyber Rate Changes

SOURCE: Marsh Insurance Market Index.

U.S. Property U.S. Cyber

3.8%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Q2

2012

Q4

2012

Q2

2013

Q4

2013

Q2

2014

Q4

2014

Q2

2015

Q4

2015

Q2

2016

Q4

2016

Q2

2017

Q4

2017

Q2

2018

Q4

2018

19.1%

-0.6%

-5.0%

5.0%

15.0%

25.0%

Q2

2012

Q4

2012

Q2

2013

Q4

2013

Q2

2014

Q4

2014

Q2

2015

Q4

2015

Q2

2016

Q4

2016

Q2

2017

Q4

2017

Q2

2018

Q4

2018

20

Years & Quarters

Rates Growth (%)

Years & Quarters

Rates Growth (%)

Also Slight Softening, Though Local Markets Vary

Industry Trends

21

Personal Auto: Combined Ratios

Source: National Association of Insurance Commissioners data, sourced from S&P Global Market Intelligence; 2018 is I.I.I. estimate.

Personal auto rates rose rapidly to catch up with expected losses

106103

98

94% 96% 98% 100% 102% 104% 106% 108%

2006200720082009201020112012201320142015201620172018

22

Years

Combined Ratios

94 96 98 100 102 104. 106 108

-9.0%

8.7%9.1%

-0.1%

4.9%

8.0%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Commercial Auto

Private Passenger Auto

Auto Direct Written Premium Growth: Commercial vs. Private Passenger, 2008-2017

Source: NAIC data, sourced from S&P Global Market Intelligence, Insurance Information Institute.23

Years

Premium Growth (%)

Commercial Premium Growth Stronger than Private But Both Rising

Personal Auto: Road Safety

Source: Insurance Information Institute research.

Distracted driving

Faster driving

Economic well-being

Legalized marijuana

Expensive auto parts

Safety Devices Can Be Expensive

Better Economy = More Drivers = More Accidents

14 Percent of Injury Crashes

SpeedStillKills

It’s Not Funny

Why rates go up

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Personal Auto: Marijuana Laws by State

*CBD/Low THC medical program.Source: National Journal; Ballotpedia, 2019.

13.0

10.0

1.0

6.0

0

4

8

12

16

CO WA OR Overall

Change in Collision Frequency vs.

neighboring states2012-2017

Percent

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Health: Medical Inflation Moderating

Annual Change (%), CPI - Medical

Sources: St. Louis Federal Reserve (FRED), Bureau of Labor Statistics Series ID CUUR0000SAM; Insurance Information Institute.

4.6% 4.7%

4.0%

4.4%4.2%

4.0%

4.4%

3.7%

3.2%3.4%

3.0%

3.7%

2.5% 2.4%2.6%

3.8%

2.5%

2.0%

2001 2003 2005 2007 2009 2011 2013 2015 20170.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Fastest Growth in More Than a

Decade

Injury Severity Typically Exceeds Medical CPI.

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-11.6% -12.4%

-3.4%

9.6%10.7%

8.5%

5.8%4.0%

1.4%

-0.5%

-15%

-10%

-5%

0%

5%

10%

15%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

US Workers Comp DWP Growth

Source: NAIC data, sourced from S&P Global Market Intelligence, Insurance Information Institute.27

Growth (%)

Years

Multi Year Downward Trend Now Crossed Negative

Key I.I.I. Initiatives

28

Insurance Industry News Cycle

Nat cats, auto, tech/innovation continue as biggest P/C drivers

U.S. Media Coverage On Insurance Topics In 2018 and 2019

2018

Homeowner Insurance

2019

3%

Insurtech

Mortgage & Title InsuranceTravel & Pet Insurance

Crop Insurance

Life Insurance & Long Term Care

Auto Insurance

Wildfires

Flood & Storms

NFIP

Cyber Insurance

41% on other P/C and life products

23% on Nat Cat risks

16% on cyber insurance and digital trends11% 9%

7% 7%

8%4%

6%

10%7%

6%

7%

12%17%

18% 18%

4% 9%4%

6%6%8%10%Insurance Lawsuits2%

*Source: Quid, HPS Analysis

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Our priorities in 2019 continue to reflect industry and customer conversations focus

Political Risk

Audiences

B2G

B2C

B2B

Inform Own

Manage Elevate

High

I.I.I. Opp/Risk

Publ

ic D

iscu

ssio

n

HighLow

Low

Nat Cat Resilience

Terror

Fraud

Home/Rental

Industry Talent

Auto

Cyber Risk

Insurance As Economic Capital

Innovation

Life

Strategic Initiative

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T r a c k , q u a n t i t y a n d b e n c h m a r k progress towards these goals through theI.I.I.’s insurance and resilience m o d e l s & i n d i c e s

Promote resiliency through insurance by empowering individuals, small businesses, andcommunities to develop a holistic approach to managing extreme weather events

Insurance For Resilience Coalition

Help us identify the best aspirational + realistic goals

y Directly contribute to hardening, retrofitting, and implementation of preemptive risk reduction strategies for 100,000 Households

y Directly contribute to decreasing the protection gap for extreme weather events by $10 Billion

y Support vulnerable households by ensuring that at least 20% of impact focuses on low-income communities

Extreme Weather Events Defined AsFLOODS ● HURRICANES ● TORNADOES ● WILDFIRES ● EARTHQUAKES

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Conclusion: Key Points

• GDP is slowing and rates are going down

• Manufacturing may be running out of steam

• Services are doing well• Wages are finally beating inflation

• P/C industry follows economic growth cycles

• Falling interest rates hurts investment income• Catastrophes drive results – and losses are up

• Rates are drifting higher – but it’s not a hard market

Economic growth likely to slow – but when?

P/C Industry will continues to follow economic cycle

Michel Leonard, PhD, CBESenior Economist & Vice President110 William St, 18th FloorNew York, NY 10038212.346.5518 w michell@iii.org w www.iii.org

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