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Top Challenges Confronting the Insurance Industry Today
Trends, Challenges & OpportunitiesWestchester CPCU Chapter Conferment Dinner
Elmsford, NYOctober 22, 2015
Download at www.iii.org/presentations
Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org
2
1. Insurance Industry Financial Performance
2014 Was a Reasonably Good Year2015: A Repeat of 2014?
2
P/C Industry Net Income After Taxes1991–2015:H1 2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012 ROAS1 = 5.9% 2013 ROAS1 = 10.2% 2014 ROAS1 = 8.4% 2015:H1 ROAS = 9.2%
• ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.
Sources: A.M. Best, ISO; Insurance Information Institute
$1
4,1
78
$5
,84
0
$1
9,3
16
$1
0,8
70
$2
0,5
98
$2
4,4
04 $3
6,8
19
$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
5,5
01
$3
0,9
72
$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
15:H
1
Net income fell modestly
(-12.5%) in 2014 vs. 2013
$ Millions
5
ROE: Property/Casualty Insurance by Major Event, 1987–2015E
* 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 15E
P/C Profitability Is Both by Cyclicality and Ordinary Volatility
Hugo
Andrew
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
-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
*Profitability = P/C insurer ROEs. 2011-14 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.
1977:19.0%1987:17.3%
1997:11.6%
2006:12.7%
1984: 1.8%
1992: 4.5%
2001: -1.2%
ROE
1975: 2.4%
2013 9.8%
2015E 8.8%
Back to the Future: Profitability Peaks & Troughs in the P/C Insurance Industry, 1950 – 2015E*
1969: 3.9%
1965: 2.2%1957: 1.8%
1972:13.7%
1966-67: 5.5%1959:6.8%
1950:8.0%
1950-70: ROEs were lower in this period. Low interest rates,
low inflation, “Bureau” rate regulation all played a role
1970-90: Peak ROEs were much higher in this period while troughs
were comparable. High interest rates, rapid inflation, economic
volatility all played roles
1990-2010s: Déjà vu. Excluding mega-
CATs, this period is very similar to the 1950-1970 period
13
RNW All Lines by State, 2004-2013 Average:Highest 25 States
20
.5
18
.4
14
.6
14
.3
13
.4
13
.3
12
.3
12
.1
12
.0
12
.0
11
.7
11
.4
11
.1
11
.1
10
.9
10
.8
10
.7
10
.7
10
.5
10
.5
10
.3
9.9
9.8
9.8
9.6
9.5
02468
1012141618202224
HI AK VT ME WY ND VA ID NH UT WA SC MA NC OH DC CA OR RI WV CT IA NE SD MT MD
The most profitable states over the past decade are
widely distributed geographically, though none
are in the Gulf region
Source: NAIC; Insurance Information Institute.
Profitability Benchmark: All P/C
US: 7.9%
14
9.2
8.6
8.4
8.3
8.2
8.2
8.1
8.0
7.9
7.7
7.7
7.5
7.4
6.8
6.6
6.4
6.1
5.7
5.3
5.2
5.0
4.3
2.5
1.9
-6.9
-9.3
-14-12-10-8-6-4-202468
10
NM FL TX WI KS MN CO PA US AR IL IN AZ MO KY TN NV NJ GA NY DE MI AL OK MS LA
RNW All Lines by State, 2004-2013 Average: Lowest 25 States
Source: NAIC; Insurance Information Institute.
Some of the least profitable states over the past decade
were hit hard by catastrophes
Profitability & Politics
1616
How Is Profitability Affected by the President’s Political Party?
15.10%
9.00%
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: 1950-2014*
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
man Nixon/Ford
Ken
ned
y/
Joh
nso
n
Eis
enh
ow
er
Car
ter
Reagan/Bush I Clinton Bush II
P/C insurance Industry ROE by Presidential Party Affiliation, 1950- 2014
Obama
. Source: Insurance Information Institute
2. INVESTMENTS: THE NEW REALITY
19
Investment Performance is a Key Driver of Profitability
Depressed Yields Will Necessarily Influence Underwriting & Pricing
19
Property/Casualty Insurance Industry Investment Income: 2000–2015E1
$38.9$37.1 $36.7
$38.7
$54.6
$51.2
$47.1 $47.6$49.2
$48.0 $47.3$46.2 $46.8
$39.6
$49.5
$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15E
Due to persistently low interest rates,investment income fell in 2012, 2013 and 2014.
1 Investment gains consist primarily of interest and stock dividends. *2015 figure is estimated based on annualized data through Q2.Sources: ISO; Insurance Information Institute.
($ Billions) Investment earnings are still below their 2007 pre-crisis peak
3. CAPITAL/CAPACITY
32
Capital Accumulation Has Multiple Impacts
Alternative Capital Impacts?
32
33
Policyholder Surplus, 2006:Q4–2015:Q2
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 $607
.7
$614
.0
$624
.4 $653
.4
$671
.6
$673
.9
$674
.7
$672
.4
$662
.0
$570
.7
$566
.5
$505
.0
$515
.6
$517
.9
$400
$450
$500
$550
$600
$650
$700
06:Q
4
07:Q
1
07:Q
2
07:Q
3
07:Q
4
08:Q
1
08:Q
2
08:Q
3
08:Q
4
09:Q
1
09:Q
2
09:Q
3
09:Q
4
10:Q
1
10:Q
2
10:Q
3
10:Q
4
11:Q
1
11:Q
2
11:Q
3
11:Q
4
12:Q
1
12:Q
2
12:Q
3
12:Q
4
13:Q
1
13:Q
2
13:Q
3
13:Q
4
14:Q
1
14:Q
2
14:Q
3
14:Q
4
15:Q
2
2007:Q3Pre-Crisis Peak
Surplus as of 6/30/15 stood at a near-record high $672.4B
2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business .
The industry now has $1 of surplus for every $0.73 of NPW,close to the strongest claims-paying status in its history.
Drop due to near-record 2011 CAT losses
The P/C insurance industry entered 2015in very strong financial condition.
Catastrophe Bond Issuance and Outstanding: 1997-2015:Q2
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15*0
5,000
10,000
15,000
20,000
25,000
948.2
874.2
1,062.5
1,142.0
966.9
989.5
1,988.2
1,142.8
1,499.0
4,614.7
7,187.0
3,009.9
3,396.0
4,599.9
4,107.1
5,855.3
7,083.0
8,026.7
3,842.2
4289
5085
7677
13416.4
12538.6
12508.2
12195.7
12342.8
14839.3
18576.9
22867.8
21559.6
New Issuance Outstanding
42
Risk Capital Amount ($ Millions)
Cat Bond Issuance Appears to Be Slowing Down in 2015 from 2014’s Record Pace. Lower Yields on Bonds Explain Some of the Contraction.
Source: Guy Carpenter.
4. M&A UPDATE: A PATH TO GROWTH?
47
Are Capital Accumulation, Drive for Growth and Scale Stimulating
M&A Activity?
47
48
U.S. INSURANCE MERGERS AND ACQUISITIONS,P/C SECTOR, 1994-2014 (1)
$5,1
00
$11,
534
$8,0
59
$30,
873
$19,
118
$40,
032
$1,2
49
$486
$20,
353
$425
$9,2
64
$35,
221
$13,
615
$16,
294
$3,5
07 $6,4
19
$12,
458
$4,6
51
$4,3
97
$6,7
23
$55,825
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Tra
ns
ac
tio
n v
alu
es
0
20
40
60
80
100
120
140
Nu
mb
er o
f tran
sa
ctio
ns
($ Millions)
(1) Includes transactions where a U.S. company was the acquirer and/or the target.
Source: Conning proprietary database.
M&A activity in the P/C sector was up
sharply in 2014 but remains well
below pre-crisis or late 1990s levels.
M&A activity in 2015 will likely
reach its highest level since 1998
52
5. Growth
Premium Growth Rates Vary Tremendously by State and
Over Time, But…
52
53
-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 13 14 15*
Net Premium Growth (All P/C Lines): Annual Change, 1971—2015:H1
(Percent)1975-78 1984-87 2000-03
Shaded areas denote “hard market” periodsSources: A.M. Best (1971-2013), ISO (2014-15).
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.
2015:H1: 4.1%
2014: 4.1%
2013: 4.4%
2012: +4.2%
55
Direct Premiums Written: Total P/CPercent Change by State, 2007-2014
70
.7
36
.7
36
.2
30
.3
29
.4
26
.8
24
.7
23
.7
21
.6
20
.7
19
.2
19
.2
18
.6
18
.1
18
.0
17
.0
15
.2
15
.1
15
.0
14
.9
14
.8
14
.7
14
.4
14
.2
13
.8
13
.5
0
10
20
30
40
50
60
70
80
ND
OK
SD
TX
NE
KS IA VT
WY
CO
MN IN MI
TN AR WI
GA
SC NJ
OH
AK
KY VA
LA
CT
MT
Pe
ce
nt
ch
an
ge
(%
)
Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 StatesNorth Dakota was the country’s growth leader over the past 7 years with premiums written
expanding by 70.7%, fueled by the state’s energy boom
Growth Benchmarks: Total P/C
US: 13.0%
56
Direct Premiums Written: Total P/CPercent Change by State, 2007-2014
13
.4
13
.1
13
.1
13
.0
13
.0
12
.9
12
.4
12
.2
11
.7
11
.0
10
.5
9.4
9.4
9.2
9.1
8.2
6.3
6.0
4.7
2.2
1.3
-0.8
-1.6
-4.3
-7.3
-12
.9
-15
-10
-5
0
5
10
15
MO
NY
UT
US
NM
MS
MA
AL
NC
MD
WA RI
NH IL PA ID ME
CA
OR FL AZ
DC HI
WV
NV
DE
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
Sources: SNL Financial LC.; Insurance Information Institute.
Growth was negative in 4 states and DC between
2007 and 2014
61
6. Pricing Trends
Survey Results Suggest Commercial Pricing Has
Flattened Out but Personal Lines Are Up
61
Commercial Lines Rate Change by Month (vs. Year Earlier), July 2001 – Sep. 2015
Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15-20%
-10%
0%
10%
20%
30%
40%Jul-02; 33%
Feb-05; 0%
Dec-07; -16%Oct-11; 0%
Sep-13; 5%
Dec-14; 0%
Jul-15; 1%
79 Months of Rates < 0%
62SOURCE: MarketScout, Insurance Information Institute.
Commercial Insurance Rate Changes Are Fairly Stable
Not Much of A Hard Market, By Historic Standards
Sept. 2015: -1.5%
63
CIAB: Average Commercial Rate Change, All Lines, (1Q:2004–2Q:2015)
-3.2
%-5
.9%
-7.0
%-9
.4%
-9.7
% -8.2
%-4
.6% -2
.7%
-3.0
%-5
.3%
-9.6
%-1
1.3
%-1
1.8
%-1
3.3
%-1
2.0
%-1
3.5
%-1
2.9
%-1
1.0
%-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%
4.3
%3
.4%
2.1
%1
.5%
-0.5
%0
.1%
-0.7
%-1
.5%
-2.5
%
-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
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
1Q
15
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 Q2:2015 had remained (slightly) negative
(Percent)
Q2 2011 marked the last of 30th
consecutive quarter of price declines
67
Monthly Change in Auto Insurance Prices, 1991–2015*
*Percentage change from same month in prior year; through July 2015; seasonally adjustedNote: 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
July 2015 reading of 5.4% is up from 4.2%
a year earlier
68
7. Underwriting Performance
68
10
9.4
11
0.2
11
8.8
10
9.5 1
12
.5
11
0.2
10
7.6
10
4.1
10
9.7
11
0.2
10
2.5 1
05
.4
91
.1
93
.6
10
4.2
98
.9
10
2.4
10
7.9
10
3.5
94
.8
94
.3
98
.3 99
.210
2.0
11
1.1
11
2.3
12
2.3
90
95
100
105
110
115
120
125
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
F
16
F
Co
mm
erc
ial L
ine
s C
om
bin
ed
Ra
tio
*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best (1990-2014); Conning (2015-16F) Insurance Information Institute.
Commercial Lines Combined Ratio, 1990-2016F*
Commercial lines underwriting performance improved in 2013/14 but higher cats, diminishing prior year reserves and rising loss cost trends in some lines could push
combined ratios higher
69
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
2.2
10
2.3
10
2.4
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 15F 16F 17F
Private Passenger Auto Underwriitng Performance Is Exhibiting Remarkable Stability
70Sources: A.M. Best (1990-2014); Conning (2015F – 2017F); Insurance Information Institute.
Homeowners Insurance Combined Ratio: 1990–2015F
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
91
.7 96
.4
85
.4 91
.7
11
4.5
10
3.1
10
3.8
11
9.4
10
1.4
87
.7 92
.4 96
.6
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 14F 15F
1
Homeowners Performance in 2011/12 Impacted by Large Cat Losses. Extreme Regional Variation Can Be Expected Due to
Local Catastrophe Loss Activity
72
Hurricane Ike
Hurricane Sandy
Record tornado activity
Hurricane Andrew
Sources: A.M. Best (1990-2014F);Conning (2015F); Insurance Information Institute.
79
Insured Catastrophe Losses
2013/14 and YTD 2015 Experienced Below Average CAT Activity After Very High CAT
Losses in 2011/12Winter Storm Losses Far Above Average in
2014 and 201579
80
$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
1.0
$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
*Through 9/30/15 in 2015 dollars.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.
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
$11.0B in insured CAT losses though
9/30/15
($ Billions, $ 2014)
80
87
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.
89
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 losses4. Includes wildland fires5. 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
Convective Loss Events in the USOverall and insured losses, 1980 – 2014
98
$ 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)
2015 First Half:$5.1 Billion Insured Losses
$7.0 Overall Losses
8. THE ECONOMY
127
The Strength of the Economy Will Greatly Influence Insurer Exposure Base
Across Most Lines
127
128
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 10/15; Insurance Information Institute.
2.7%
1.8%
-1.8
%1.
3%-3
.7%
-5.3
%-0
.3%
5.0%
2.3%
2.2% 2.6%
2.4%
0.1%
2.5%
1.3%
4.1%
2.0%
1.3%
3.1%
0.4%
2.7%
1.8%
3.5%
-0.9
%4.
6%4.
3%2.
1%0.
6%3.
9%2.
1% 2.7%
2.6%
2.7%
2.6%
2.6%
-8.9%
4.5%
1.4%
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
2
00
7
08
:1Q
08
:2Q
08
:3Q
08
:4Q
09
:1Q
09
:2Q
09
:3Q
09
:4Q
10
:1Q
10
:2Q
10
:3Q
10
:4Q
11
:1Q
11
:2Q
11
:3Q
11
:4Q
12
:1Q
12
:2Q
12
:3Q
12
:4Q
13
:1Q
13
:2Q
13
:3Q
13
:4Q
14
:1Q
14
:2Q
14
:3Q
14
:4Q
15
:1Q
15
:2Q
15
:3Q
15
:4Q
16
:1Q
16
:2Q
16
:3Q
16
:4Q
Demand for Insurance Should Increase in 2016 as GDP Growth Continues at a Steady, Albeit Moderate Pace and Gradually Benefits the Economy Broadly
Real GDP Growth (%)
Recession began in in June
2009
The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%
Q1 2014/15 GDP data were hit hard by this
year’s “Polar Vortex” and harsh
winter
136
US Unemployment Rate Forecast4
.5%
4.5
%4
.6%
4.8
%4
.9% 5.4
% 6.1
%6
.9%
8.1
%9
.3%
9.6
% 10
.0%
9.7
%9
.6%
9.6
%
8.9
%9
.1%
9.1
%8
.7%
8.3
%8
.2%
8.0
%7
.8%
7.7
%7
.6%
7.3
%7
.0%
6.6
%6
.2%
6.1
%5
.7%
5.6
%5
.4%
5.2
%5
.0%
4.9
%4
.8%
4.8
%4
.7%
9.6
%
4%
5%
6%
7%
8%
9%
10%
11%
07
:Q1
07
:Q2
07
:Q3
07
:Q4
08
:Q1
08
:Q2
08
:Q3
08
:Q4
09
:Q1
09
:Q2
09
:Q3
09
:Q4
10
:Q1
10
:Q2
10
:Q3
10
:Q4
11
:Q1
11
:Q2
11
:Q3
11
:Q4
12
:Q1
12
:Q2
12
:Q3
12
:Q4
13
:Q1
13
:Q2
13
:Q3
13
:Q4
14
:Q1
14
:Q2
14
:Q3
14
:Q4
15
:Q1
15
:Q2
15
:Q3
15
:Q4
16
:Q1
16
:Q2
16
:Q3
16
:Q4
Rising unemployment eroded payrolls
and WC’s exposure base.
Unemployment peaked at 10% in late 2009.
* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (9/15 edition); Insurance Information Institute.
2007:Q1 to 2016:Q4F*
Unemployment forecasts have been revised modestly
downwards. Optimistic scenarios put the
unemployment as low as 5.0% by Q4 of 2015.
Jobless figures have been revised
downwards for 2015/16
140
Value of New Private Construction: Residential & Nonresidential, 2003-2015*
Billions of Dollars
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
03 04 05 06 07 08 09 10 11 12 13 14 15*
Non ResidentialResidential
Private Construction Activity Is Moving in a Positive Direction though Remains Well Below Pre-Crisis Peak; Residential Dominates
$298.1
$15.0
$613.7
New Construction peaks at $911.8. in 2006
Trough in 2010 at $500.6B,
after plunging 55.1% ($411.2B)
2015: Value of new pvt. construction hits
$787.8B as of July 2015, up 57.4% from the 2010 trough but
still 13.6% below 2006 peak
140
$261.8
$238.8
$407.0
$380.8
*2015 figure is a seasonally adjusted annual rate as of July.Sources: US Department of Commerce http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
145
Construction Employment,Jan. 2010—Sept. 2015*
*Seasonally adjusted.Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
5,58
15,
522
5,54
25,
554
5,52
75,
512
5,49
75,
519
5,49
95,
501
5,49
75,
468
5,43
55,
478
5,48
55,
497
5,52
45,
530
5,54
75,
546
5,58
35,
576
5,57
75,
612
5,62
95,
629
5,62
85,
627
5,60
85,
623
5,63
25,
641
5,64
95,
668
5,68
45,
724
5,74
6 5,79
85,
815
5,81
35,
833
5,85
65,
854
5,86
65,
893
5,91
85,
953
5,93
7 6,00
66,
032
6,06
26,
103
6,11
46,
121
6,15
26,
169
6,19
16,
201
6,23
16,
275
6,31
66,
347
6,33
56,
365
6,37
76,
378
6,38
36,
388
6,39
6
5,400
5,500
5,600
5,700
5,800
5,900
6,000
6,100
6,200
6,300
6,400
6,500
Jan-
10F
eb-1
0M
ar-1
0A
pr-1
0M
ay-1
0Ju
n-10
Jul-1
0A
ug-1
0S
ep-1
0O
ct-1
0N
ov-1
0D
ec-1
0Ja
n-11
Feb
-11
Mar
-11
Apr
-11
May
-11
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
122/
30/2
0M
ar-1
2A
pr-1
2M
ay-1
2Ju
n-12
Jul-1
2A
ug-1
2S
ep-1
2O
ct-1
2N
ov-1
2D
ec-1
2Ja
n-13
Feb
-13
Mar
-13
Apr
-13
May
-13
Jun-
13Ju
l-13
Aug
-13
Sep
-12
Oct
-13
Nov
-13
Dec
-13
Jan-
14F
eb-1
4M
ar-1
4A
pr-1
4M
ay-1
4Ju
n-14
Jul-1
4A
ug-1
4S
ep-1
4O
ct-1
4N
ov-1
4D
ec-1
4Ja
n-15
Feb
-15
Mar
-15
Apr
-15
May
-15
Jun-
15Ju
l-15
Aug
-15
Sep
-15
Construction employment is +948,000 above
Jan. 2011 (+17.4%) trough
(Thousands)
Construction and manufacturing employment constitute 1/3 of all WC payroll exposure.
146
(Millions of Units)
New Private Housing Starts, 1990-2021F
1.4
81
.47 1
.62
1.6
41
.57
1.6
0 1.7
1 1.8
5 1.9
6 2.0
71
.80
1.3
60
.91
0.5
50
.59
0.6
1 0.7
8 0.9
2 1.1
01
.13 1
.28 1.4
21
.47
1.4
71
.50
1.5
0
1.3
51.4
61
.29
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 15F 16F 17F 18F 19F20F 21F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/15); 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, low mortgage rates and demographics should continue to stimulate new home construction
for several more years
9. CYBER RISK & CYBER INSURANCE
165
Cyber Risk is a Rapidly Emerging Exposure for Businesses Large and
Small in Every Industry
165
Data Breaches 2005-2015, by Number of Breaches and Records Exposed# Data Breaches/Millions of Records Exposed
*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
419470
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 *20150
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
170
2014 Data Breaches By Business Category, By Number of Breaches
5.5%
11.7%
7.3%
42.5%
33.3%
Source: Identity Theft Resource Center, http://www.idtheftcenter.org/ITRC-Surveys-Studies/2014databreaches.html
The majority of the 783 data breaches in 2014 affected business and medical/healthcare organizations, according to the Identity Theft Resource Center.
Business, 258 (33.3%)Govt/Military, 92 (11.7%)
Banking/Credit/Financial, 43 (5.5%)
Educational, 57 (7.3%)
Medical/Healthcare, 333 (42.5%)
171
State sponsored groups: Foreign government sponsored Sophisticated and well-funded
Organized cyber criminals: Traditional organized crime groups Loosely organized global hacker crews
Hacktivists: Politically-motivated hackers Increasing capabilities
Insiders: Easy access to sensitive information Difficult to detect
Terrorists: Destruction of physical and digital assets
Evolving Threats: Cyber Crime and Cyber Terrorism
Source: Lewis Brisbois, Practical Strategies to Address Cyber Risk in Your Business, November 2014
172
Main Causes of Data Breach Globally
30%
29%
42%
*The most common types of malicious or criminal attacks include malware infections, criminal insiders, phishing/social engineering and SQL injection.Source: 2014 Cost of a Data Breach Study: Global Analysis, the Ponemon Institute, sponsored by IBM, May 2014
Malicious or criminal attacks are most often the cause of data breach globally. Some 42 percent of incidents concern a malicious or criminal attack, while 30
percent concern a negligent employee or contractor (human factor).
Malicious or criminal attack*
Human error
System glitch
174
US: External Cyber Crime Costs: Fiscal Year 2014
2%2%
18%
38%
40%
* Other costs include direct and indirect costs that could not be allocated to a main external cost categorySource: 2014 Cost of Cyber Crime: United States, Ponemon Institute.
Information theft (40%) and business disruption or lost productivity (38%) account for the majority of external costs due to cyber crime.
Information theft
Equipment damagesOther costs*
Revenue loss
Business disruption
Data/Privacy Breach:Many Potential Costs Can Be Insured
Source: Zurich Insurance; Insurance Information Institute
Forensic costs to discover
cause
175
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.
176
177
I.I.I.’s New Cyber Risk Report (Oct. 2015): Cyber Risks Threat and Opportunity
I.I.I.’s 3rd report on cyber risk: Cyber Risk: Threat and Opportunity
Provides information on cyber threats and insurance market solutions
Global cyber risk overview
Quantification of threats by type and industry
Cyber security and cost of attacks
Cyber terrorism
Cyber liability
Insurance market for cyber riskhttp://www.iii.org/white-paper/cyber-risks-threat-and-opportunities-100715
179
Marsh: Percentage of U.S. Companies Purchasing Cyber Insurance Increased in 2014
*Take-up rate refers to the overall percentage of clients that purchased standalone cyber insurance.Source: Benchmarking Trends: As Cyber Concerns Broaden, Insurance Purchases Rise, Marsh Risk Management Research Briefing, March 2015
8%
12%
18%
21%
21%
22%
26%
32%
50%
16%
11%
13%
14%
17%
17%
16%
22%
45%
13%
6%Manufacturing
Communications, Media and Tech
Retail/Wholesale
Power and Utilities
Financial Institutions
Services
Hospitality and Gaming
Education
Health Care
All Industries
Take-up rate 2014* Take-up rate 2013
Ever larger numbers of insureds seek financial
protection via cyber insurance. The
percentage of U.S. companies buying cyber
insurance rose to 16 percent in 2014.
180
Marsh: Total Limits Purchased, By Industry – Cyber Liability, All Revenue Size
Source: Benchmarking Trends: As Cyber Concerns Broaden, Insurance Purchases Rise, Marsh Risk Management Research Briefing, March 2015
$22.0
$4.2
$9.9 $10.5$9.5
$11.1$10.2
$13.2
$19.7
$6.7
$23.5
$10.5$12.0
$14.9
$21.0
$4.4
$22.2
$12.8
All Industries Comms, Media& Technology
Education FinancialInstitutions
Health Care Manufacturing Power andUtilities
Retail/Wholesale Services
Avg. 2013 Limits Avg. 2014 Limits
Average limits purchased for cyber risk rose to $12.8 million for all industries and all company sizes in 2014. Power and utility companies witnessed the sharpest
percentage increase in average limits, at 59 percent.
($ Millions)
183
10. INDUSTRY DISRUPTORS
Technology, Society and the Economy Are All
Changing at a Rapid PaceWill Insurers Keep Pace?
183
185
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?
186
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
Source: ISO.
Ridesharing Regulation/Legislation and Status of ISO Filings as of 9/30/15
190
Status of ISO FilingsStatus Ride Sharing
Legislation/Regulation
191
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
11. Shifting Legal Liability & Tort Environment
192
Will the Tort PendulumSwing Against Insurers?
192
196
$750,392$653,898
$782,657
$1,045,048 $1,009,788
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
2009 2010 2011 2012 2013
Average Personal Injury Jury Award,2009 – 2013
Average awards in Personal Injury cases
have increased by more than 1/3 in recent years
Source: Current Award Trends in Personal Injury, 54th Edition; Insurance Information Institute.
198
14%
16%
14% 14%
16%
13%
14%
14%
15%
15%
16%
16%
17%
2003-04 2005-06 2007-09 2010-11 2012-13
Percent of Personal Injury Jury Awards Over $1 Million, 2003 – 2013*
The share of $1MM+ jury awards has returned ot
its pre-crisis high
*Latest available.Source: Current Award Trends in Personal Injury, 53rd and 54th Editions; Insurance Information Institute.
201
The Nation’s Judicial “Hellholes”: 2014/2015
Source: American Tort Reform Association; Insurance Information Institute
West VirginiaIllinoisMadison County
New York City Asbestos Litigation
Watch List
Atlantic County, New Jersey
Mississippi Delta Montana Nevada Newport News, Virginia Philadelphia,
Pennsylvania
Dishonorable Mention
AL Supreme Court PA Supreme Court
California
Florida
Volkswagen: Massive tort actions, fines, penalties certain. Are others vulnerable? Issue of cheating on
environmental standards and liability looms large.
www.iii.org
Thank you for your timeand your attention!
Twitter: twitter.com/bob_HartwigDownload at www.iii.org/presentations
Insurance Information Institute Online:
202