casualty market overview & outlook trends, challenges & opportunities insurance information...
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Casualty Market Overview & Outlook
Trends, Challenges & Opportunities
Insurance Information InstituteOctober 8, 2015
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
P/C Insurance Industry Financial Performance
2015 is Shaping Up to Be a Reasonably Good Year
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%
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
E
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2015E
*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, Conning
1977:19.0%1987:17.3%
1997:11.6% 2006:12.7%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years
10 Years
9 Years
History suggests next ROE peak will be in 2016-2017
ROE
1975: 2.4%
2013 9.8%
2014 8.2%
2015E: 8.8%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
Economic Shocks, Inflation:
1976: 22.2%Tort Crisis
1986: 30.5%
Post-9/112002: 22.4%
Great Recession:2009: -9.0%
ROE
2014 3.2%
Commercial Lines NPW Premium Growth:1975 – 2014
Recessions:1982: 1.1%
Commercial lines is prone to more cyclical volatility that personal
lines. Recently, growth has stabilized in the 4% to 5% range.
1988-2000: Period of
inter-cycle stability
2010-20XX? Post-
recession period of
stable growth?
Note: Data include state funds beginning in 1998.Source: A.M. Best; Insurance Information Institute.
Post-Hurricane Andrew Bump:
1993: 6.3%
Post Katrina Bump:
2006: 7.7%
7
P/C Insurance Industry Combined Ratio, 2001–2015:H1*
* Excludes Mortgage & Financial Guaranty insurers 2008--2014. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014: = 97.0. Sources: A.M. Best, ISO.
95.7
99.3100.8
106.3
102.4
96.7 97.2 97.6
101.0
92.6
100.898.4
100.1
107.5
115.8
90
100
110
120
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15:H1
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
A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs
Combined Ratio / ROE
* 2008 -2014 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2014 combined ratio including M&FG insurers is 97.0; 2013 = 96.1; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.
97.5
100.6 100.1 100.8
92.7
101.299.5
101.0
96.7 97.2 97.6
102.4
106.5
95.7
14.3%
15.9%
12.7%
10.9%
7.4% 7.9%
4.7%6.2% 9.2%
8.2%9.6%
8.8%
4.3%
9.8%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015:H10%
3%
6%
9%
12%
15%
18%
Combined Ratio ROE*
Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs
A combined ratio of about 100 generates an ROE of ~7.0% in 2012/13, ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Lower CATs helped ROEs in 2013-15:Q2
9
Return on Net Worth (RNW) All Lines:2004-2013 Average
25
.6
18
.4
13
.4
13
.2
9.2
8.9
7.9
7.8
7.1
7.1
6.6
4.9
-1.0
-5
0
5
10
15
20
25
30
Fire
Inla
nd Mar
ine
All O
ther
Med
ical
Pro
f Lia
bility
Comm
Auto
Tota
l
Comm
erci
al MP
All Lin
es
Oth
er L
iabili
ty
Work
ers
Comp
PP Auto
Tota
l
Homeow
ners
MP
Farmow
ners
MP
Allied L
ines
Source: NAIC; Insurance Information Institute.
Commercial lines have tended to be more profitable than
personal lines over the past decade
-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
Source: A.M. Best; Barclays research for estimates.
Reserve Change
P/C Insurance Loss Reserve Development, 1992 – 2016E*
Reserve releases are expected to gradually taper off, but will
continue to benefit the bottom line and combined ratio through
at least 2016
INVESTMENTS: THE NEW REALITY
16
Investment Performance is a Key Driver of Profitability
Depressed Yields Will Necessarily Influence Underwriting & Pricing
16
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
19
U.S. Treasury Security Yields:A Long Downward Trend, 1990–2015*
*Monthly, constant maturity, nominal rates, through September 2015.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
Recession2-Yr Yield10-Yr Yield
Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.
U.S. Treasury yields plunged to historic lows in 2013. Longer-
term yields rebounded then sank fell again.
19
24
-1.8
%
-1.8
%
-2.0
%
-3.6
%
-3.3
%
-3.3
%
-3.7
%
-4.3
%
-5.2
%
-5.7
%
-3.1
%-2.1
%
-1.9
%
-7.3%-8%-7%-6%-5%-4%-3%-2%-1%0%
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
24
CAPITAL/CAPACITY
29
Capital Accumulation Has Multiple Impacts
29
30
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.
US P/C Insurance Industry Excess Capital Position: 1994–2016E
Source: Barclays Research estimates.
Su
rplu
s R
edu
nd
ancy
(D
efic
ien
cy)
The Industry’s Strong Capital Position Suggests Insurers Are in a Good Position to Increase Risk Appetite, Repurchase Shares
and Pursue Acquisitions
Per
cen
t R
ed
un
dan
cy (
Def
icie
ncy
)
Barclay’s suggests that surplus is approximately
$200B (~30%)
35
Alternative Capital
35
New Investors Continue to Change the Reinsurance Landscape
Trickle Down Into Casualty Lines?
Global Reinsurance Capital (Traditional and Alternative), 2006 - 2014
2014 data is as of June 30, 2014.Source: Aon Benfield Analytics; Insurance Information Institute.
Total reinsurance capital reached a record $570B in 2013, up 68% from
2008.
But alternative capacity has grown 210% since 2008, to $50B. It has more than doubled in the past three years.
Alternative Capital as a Percentage of Traditional Global Reinsurance Capital
2014 data is as of June 30, 2014.Source: Aon Benfield Analytics; Insurance Information Institute.
2006 2007 2008 2009 2010 2011 2012 2013 2014
-2%
0%
2%
4%
6%
8%
10%
12%
4.6%5.7% 5.9% 5.8% 5.4%
6.5%
8.4%
10.2%
11.5%
Alternative Capital’s Share of Global Reinsurance Capital Has More Than Doubled Since 2010.
M&A UPDATE: A PATH TO GROWTH?
42
Are Capital Accumulation, Drive for Growth and Scale Stimulating
M&A Activity?
42
43
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
46
What’s Driving Global Insurance M&A Activity and Will It Continue? Excess Capital in Global Reinsurance and Primary Commercial
Insurance in US (Re)Insurers, like corporations in many industry, are sitting are large
amounts of cash accumulated since the Global Financial Crisis that earns very little
Alternative Capital
Slow Top Line (Premium) Growth
Slowdown in Pace of Earnings Growth/ROE
Low Interest Rates Make Debt Financing for Acquisitions Attractive Concern that interest rates in US may soon rise so best to act now
Desire to Achieve Economies of Scale
Peer Pressure/Momentum Management concerns about being “left out”
47
Performance by Segment
47
Key Casualty Lines
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
48
Commercial Property Combined Ratio: 2007–2016F
72.4
105.
8
83.3 86
.5
85.8 90
.1
90.7
106.
5
105.
8
82.7
70
75
80
85
90
95
100
105
110
07 08 09 10 11 12 13 14 15F 16F
Commercial Property Underwriting Performance Has Been Volatile in Recent Years, Largely Due to
Fluctuations in CAT Activity
Source: Conning Research and Consulting. 49
50
Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2014
80
.4
36
.8
33
.3
29
.4
24
.8
22
.5
21
.0
20
.6
15
.2
14
.6
13
.9
11
.8
10
.3
8.7
8.5
8.4
8.0
7.9
7.6
7.1
6.6
5.9
5.9
5.8
5.4
4.5
0
10
20
30
40
50
60
70
80
90
ND
SD VT
OK
NE IA KS
TX
WY
AK IN
MN WI
MA
AR
CT
NY
NJ
CO
NM
OH LA
US
MS
NH
MO
Pe
ce
nt
ch
an
ge
(%
)
Sources: SNL Financial LLC.; Insurance Information Institute.
Top 25 States
43 states showed commercial lines growth from 2007
through 2014
Growth Benchmarks: Commercial
US: 5.9%
51
Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2014
4.5
4.4
4.2
4.1
3.9
3.8
3.7
3.3
3.3
3.2
3.1
2.8
2.8
2.2
2.1
1.4
0.9
-1.3
-3.2
-5.3
-6.5
-6.9
-9.2
-10
.7
-19
.9
-22
.2
-25
-20
-15
-10
-5
0
5
10
MI
TN
MD
MT
CA RI
WA
GA
PA
UT IL KY VA
NC
ME
SC ID AL
DC HI
FL
OR AZ
DE
NV
WV
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
Sources: SNL Financial LLC.; Insurance Information Institute.
States with the poorest performing economies also produced the most negative
net change in premiums of the past 6 years
Nearly half the states have yet to see commercial lines premium
volume return to pre-crisis levels
52
How the Risk Dollar is Spent (U.S. Firms with Revenues Under $1 Bill)
Total Property Premiums; 21%
Property Retained Losses; 1%
Total Liability Premium; 19%
Liability Retained Losses; 4%
Total Management Liability Costs; 6%Total Workers Comp. Premiums; 10%
Workers Comp Retained Losses; 9%
Total Professional Liability Costs; 9%
Total Med. Mal. Costs; 10%
Total Marine and Aviation Costs; 4%
Total Administrative Costs; 6%Total Fidelity, Surety & Crime Costs; 1%
Source: 2015 RIMS Benchmark Survey; Insurance Information Institute.
53
Total Property Premiums; 11%
Property Retained Losses; 9%
Total Liability Premium; 8%
Liability Retained Losses; 14%
Total Management Liability Costs; 4%
Total Workers Comp. Premiums; 4%
Workers Comp Retained Losses; 17%
Total Professional Liability Costs; 3%
Total Med. Mal. Costs; 20%
Total Marine and Aviation Costs; 20%
Total Administrative Costs; 8%
How the Risk Dollar is Spent (U.S. Firms with Revenues Over $1 Bill)
Source: 2015 RIMS Benchmark Survey; Insurance Information Institute.
General Liability Operating Environment
54
General Liability Results Are Mixed
54
General Liability Combined Ratio: 2005–2017F
11
2.9
95
.1 99
.0
94
.2
10
4.1
99
.7 10
1.6
10
2.8
10
3.1
10
3.610
7.1 11
0.8
99
.680
85
90
95
100
105
110
115
05 06 07 08 09 10 11 12 13 14 15F 16F 17F
Commercial General Liability Underwriting Performance Was Volatile but May Be Stabilizing
Source: Conning Research and Consulting. 55
General Liability: DWP Volume and Growth, 2008 – 2017F
DPW ($ Bill)
% Change
Source: Conning Research & Consulting; Insurance Information Institute.
$52.1
$48.9 $47.9$49.4
$53.8
$62.9$65.1
$66.2$67.6
$57.9
-10.2%
-6.1%
9.0% 7.5%
1.6% 2.2%
3.6%3.1%
-2.0%
8.6%
$40
$45
$50
$55
$60
$65
$70
2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E-15%
-10%
-5%
0%
5%
10%
Direct Premiums Written % Change
GL Premium Volumes Continue to Grow Albeit at a Slower Pace
GL DPW is up an estimated 35.9% ($17.2B) from its
crisis low
General Liability: Return on GAAP Equity: 2008–2017F
7.3%
5.1%5.9%
8.8%
6.9% 6.7% 6.7%7.6% 8.0%
7.3%
0%
1%
2%3%
4%
5%
6%
7%8%
9%
10%
08 09 10 11 12 13 14 15F 16F 17F
General Liability Profitability Is Stable but Below Its 2011 Peak
Source: Conning Research and Consulting. 57
58
General Liability: Incurred Loss Trends and Outlook
FREQUENCY Decreasing low single digit in 2015-2017
Reported occurrence form other liability claim counts down by 11.8% and up 10.0% for claims-made form
Some reports of rising loss frequency, esp. EPLI and non-profit D&O
SEVERITY Up low-to-mid single digits in 2015-2017 Analysis of paid losses to claim counts suggests trend of rising
average loss severity Inflation in hospital and medical costs continues to outpace
overall CPI, contributing to loss severity
Source: Conning Research and Consulting.
Commercial Auto Operating Environment
59
Commercial Auto Outlook Is Cloudy
59
60
Commercial Auto: Outlook
EXPOSURE Heavy and light truck sales expected to rise 4% - 5% in 2015
Truck tonnage (ATA) is up 3.3% YTD (August)
Transportation Network Companies (TNCs)– TNCs such as Uber, Lyft will need to seek solutions
– Regulatory environment for TNCs uncertain
FREQUENCY Overall frequency flat to +1% for 2015-2017 (Conning)
Miles driven is up in commercial fleets
Non-fatal injuries for truck drivers appears to be increasing
ATA: Trucker shortage; Need 89,000 new trucks each year for next decade (10% of current 890,000 employed truckers)
Sources: Conning Research and Consulting; American Trucking Association (ATA); Insurance Information Institute.
Commercial Auto Combined Ratio: 1993–2017F
11
2.1
11
2.0
11
3.0
11
5.9
10
2.7
95
.2
92
.9
92
.1
92
.4
94
.1 96
.8 99
.1
97
.8
10
3.4 10
6.8
10
6.7
10
3.4
10
5.2
10
6.7
10
9.5
11
8.1
11
5.7
11
6.2
80
85
90
95
100
105
110
115
120
125
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15F16F17F
Commercial Auto is Expected to Improve Only Slowly as Rate Gains Barely Offset Adverse Frequency and Severity Trends
61Sources: A.M. Best (1990-2014);Conning (2015F); Insurance Information Institute.
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
62Sources: A.M. Best (1990-2014); Conning (2015F – 2017F); Insurance Information Institute.
Commercial Auto: Return on GAAP Equity: 2008–2017F
6.0%
7.7%
9.0%
6.1%
3.9%
2.9%
1.0%
3.2% 3.2%
5.1%
0%
1%
2%3%
4%
5%
6%
7%8%
9%
10%
08 09 10 11 12 13 14 15F 16F 17F
Commercial Auto Margins Could Shrink if Underwriting Deteriorates
Source: Conning Research and Consulting. 63
Commercial Auto: DWP Volume and Growth, 2008 – 2017F
DPW ($ Bill)
% Change
Source: Conning Research & Consulting; Insurance Information Institute.
$26.9
$24.5 $24.1$25.1
$29.3
$31.7
$34.0
$23.5
$35.9
$26.7
-7.4%-9.0%
4.0%
6.5%5.6%
7.2%
8.3%
2.4%-3.8%
9.8%
$20
$25
$30
$35
$40
2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E-10%
-5%
0%
5%
10%
15%
Direct Premiums Written % Change
Commercial Auto Premium Volumes Continue to Grow Albeit at a Slower but Still-Healthy Pace
Commercial Auto DPW is up an estimated
34.9% ($8.2B) from its crisis low
65
Collision Coverage: Severity & Frequency Trends Are Both Higher in 2015*
2.8%
1.3%
4.2%
1.6%
3.0%
-1.8%
-3.6%
2.5%
-2.4%
-1.4%
4.2%
1.7%
3.9%3.1%
0.1%0.5%
-2.3%
-0.1%
-1.4%-0.5%
0.9%
2.3%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
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 Will Likely Be Reversed Based on
Evidence from Past Recoveries*2015 figure is for the 4 quarters ending with 2015:Q1.Source: ISO/PCI Fast Track data; Insurance Information Institute
66
Bodily Injury: Severity Trend Is Up, Frequency Decline Has Ended—Rising?
2.1% 1.7%
3.8%
2.0%
4.2%
-5.4%
-3.8% -4.0% -4.2%
-2.2%
0.0%
-1.1%
3.4%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
*2015 figure is for Q1 2015 over Q1 2014.Source: ISO/PCI Fast Track data; Insurance Information Institute
Annual Change, 2005 through 2015:Q1*
Cost Pressures Will Increase if BI Frequency and Severity Trends Persist
67
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
68
Driving Trends, Gas Prices
Back Behind the Wheel…
69
America is Driving More Again:Total Miles Driven*, 1990–2015
*Moving 12-month total. The 2015 data are through May 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
…but the population grew by 6.6% from 2007-2015 and miles driven didn’t grow at all.
Do Changes in Miles Driven AffectAuto Collision Claim Frequency?
7.00
6.81
6.59
6.80 6.78
6.91
6.65
6.32
6.025.94
5.71
5.85
5.705.62 5.60
5.655.57
5.70
5.94 5.92
5.5
6.0
6.5
7.0
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15*
Pa
id C
laim
Fre
q
2400
2500
2600
2700
2800
2900
3000
3100
Bil
lio
ns
of
Mil
es D
rive
n
Collision Claim FrequencyBillions of Vehicle Miles
Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm; ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: 1st Qtr. 2015 and earlier reports. *2015 ISO figure is for 12 months ending 2015 Q1. FHA data for 2015 is 12-month moving average ending May 2015.
Paid Claim Frequency = (No. of paid claims)/(Earned Car Years) x 100
People drove 2.8% more miles through
May 2015 than through May 2014.
71
% Change in Real US GDPvs. % Change in Total Miles Driven
-2%
-1%
0%
1%
2%
3%
4%
5%
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
% change in total miles driven % change in real US GDP
The percent change in miles driven tracked the growth of the national economy fairly well. If this holds, miles driven will continue to rise.
*Data are annual ratesSources: Federal Highway Administration (http://www.fhwa.dot.gov/policyinformation/travel_monitoring/tvt.cfm );
www.bea.gov (real GDP); l I.I.
Percent Change in Total Miles Driven
% Change in Real US GDP*
1/6/
...
2/3/
...
3/3/
...
4/7/
...
5/5/
...
6/2/
...
7/7/
...
8/4/
...
9/1/
...
10/6
...
11/3
...
12/1
...
1/5/
...
2/2/
...
3/2/
...
4/6/
...
5/4/
...
6/1/
...
7/6/
...
8/3/
...$2.00
$2.25
$2.50
$2.75
$3.00
$3.25
$3.50
$3.75
$4.00
72
Avg. Price /Gallon
The Price of Gas, Weekly, 2014-2015
Price is U.S. All Grades All Formulations Retail Gasoline Prices, through August 10, 2015Sources: Federal Energy Administration (http://www.eia.gov/petroleum/gasdiesel/ ); I.I.I.
Gas Prices Fell 34% Over the Second Half of the 2014
From July through December, gas prices
fell virtually every week
Even after the rebound, prices remain 30% below
the July 2014 peak.
Until July 2014, gas prices were persistently high
Workers Compensation Operating Environment
73
Workers Comp Results Have Improved Substantially in Recent Years
73
Workers Compensation Combined Ratio: 1994–2014P
102.
0
97.0 10
0.0
101.
0
112.
6
108.
6
105.
1
102.
7
98.5
103.
5
104.
5 110.
6 115.
0
115.
0
108.
0
101.
0
98.0
121.
7
107.
0
115.
3
118.
2
80
85
90
95
100
105
110
115
120
125
130
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14P
Workers Comp Results Began to Improve in 2012. Underwriting Results Deteriorated Markedly from 2007-
2010/11 and Were the Worst They Had Been in a Decade. Sources: A.M. Best (1994-2009); NCCI (2010-2014P) and are for private carriers only; Insurance Information Institute. 74
WC results have improved markedly
since 2011
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
$25
$30
$35
$40
$45
$50Wage & Salary DisbursementsWC NPW
76
Payroll Base* WC NWP
Payroll vs. Workers Comp Net Written Premiums, 1990-2014P
*Private employment; Shaded areas indicate recessions. WC premiums for 2014 are from NCCI.Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.
Continued Payroll Growth and Rate Gains Suggest WC NWP Will Grow Again in 2015
7/90-3/91 3/01-11/0112/07-6/09
$Billions $Billions
WC premium volume dropped two years before
the recession began
WC net premiums written were down $14B or 29.3% to
$33.8B in 2010 after peaking at $47.8B
in 2005
Workers Compensation Premium: Fourth Consecutive Year of IncreaseNet Written Premium
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14P0
10
20
30
40
50
31.0 31.3 29.8 30.5 29.126.3 25.2 24.2 23.3 22.3
25.0 26.129.2 31.1
34.737.8 38.6 37.6
33.830.3 29.9
32.335.1 36.9 38.5
35.3 35.734.3 35.4
33.6
30.128.5
26.9 25.9 25.0
28.6
32.1
37.7
42.3
46.547.8
46.544.3
39.3
34.6 33.836.4
39.541.8
44.2
State Funds ($ B)
Private Carriers ($ B)
Pvt. Carrier NWP growth was +4.3% in 2014, +5.1% in 2013 and 8.7% in 2012
$ Billions
Calendar Yearp Preliminary
Source: NCCI from Annual Statement Data.Includes state insurance fund data for the following states: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT.Each calendar year total for State Funds includes all funds operating as a state fund that year.
78
Direct Premiums Written: Workers’ CompPercent Change by State, 2007-2014*
35
.1
27
.1
27
.1
24
.4
22
.3
20
.6
18
.7
14
.6
11
.7
9.4
7.5
7.1
6.7
4.2
3.9
3.8
2.7
1.7
0.5
0.1
0.1
0.0
-1.1
-1.1
-1.3
-5
0
5
10
15
20
25
30
35
40
IA CA
SD
NY
OK NJ
CT
KS
NE MI
MS IN
MN
US
NM TX WI
IL
CO
GA
VA
NH PA RI
MD
Pe
ce
nt
ch
an
ge
(%
)
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 States
Only 21 states have seen works comp premium volume
return to pre-crisis levels
79
Direct Premiums Written: Worker’s CompPercent Change by State, 2007-2014*
-2.6
-2.9
-3.6
-4.8
-6.0
-8.5
-9.1
-9.2
-9.2
-11
.7
-12
.2
-13
.5
-14
.4
-17
.1
-17
.9
-19
.4
-19
.5
-23
.4
-25
.2
-29
.5
-30
.3
-34
.9
-80-75-70-65-60-55-50-45-40-35-30-25-20-15-10-50
VT
DC
MA ID NC AZ
MO LA
TN AR
SC
ME
AK
AL
FL
KY
UT
MT HI
DE
OR
NV
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.Sources: SNL Financial LC.; Insurance Information Institute.
States with the poorest performing economies also produced some of the most
negative net change in premiums of the past 7 years
80
2014 Workers Compensation Direct Written Premium Growth, by State*
PRIVATE CARRIERS: Overall 2014 Growth = +4.6%
*Excludes monopolistic fund states (in gray): OH, ND, WA and WY.Source: NCCI.
While growth rates varied widely, most states experienced positive growth in
2014
81
Workers Compensation Components of Written Premium Change, 2013 to 2014
Written Premium Change from 2013 to 2014
Net Written Premium—Countrywide +4.6%
Direct Written Premium—Countrywide +4.6%
Direct Written Premium—NCCI States +4.5%
Components of DWP Change for NCCI States
Change in Carrier Estimated Payroll +4.7%
Change in Bureau Loss Costs and Mix -1.4%
Change in Carrier Discounting +0.4%
Change in Other Factors +0.8%
Combined Effect +4.5%
Sources: Countrywide: Annual Statement data.NCCI States: Annual Statement Statutory Page 14 for all states where NCCI provides ratemaking services.Components: NCCI Policy data.
Growth is now almost entirely payroll driven
23
15
21
70
52
12
65
73
-71
32 6
4 81
55
3-1
15
-10
6-2
21
-21
5-2
06
-26
1-2
58
-42
2-4
86
-77
6 -69
3-8
21
-69
8-8
10
-80
1-2
94
-42
6-2
72
-23
2 -14
1-2
71
-15
-23
22
0-3
81
92
94 11
01
20
11
71
07
19
91
49
94
72
22
32
31 3
20
16
61
86
21
91
25
26
81
77
19
12
22
36
42
28
24
61
02
13
17
51
72
13
61
59
25
52
11
21
52
19 26
31
64
18
8 22
22
01
17
01
80
15
32
47
27
28
61
83
17
5 22
33
13
23
8 27
22
43
20
92
35
21
84
14
31
92
02 2
61
11
7 18
9 25
22
18
19
51
00
11
8
11
3
(1,000)
(800)
(600)
(400)
(200)
0
200
400
600
Jan-
07F
eb-0
7M
ar-0
7A
pr-0
7M
ay-
Jun-
07Ju
l-07
Aug
-S
ep-
Oct
-07
Nov
-D
ec-
Jan-
08F
eb-0
8M
ar-0
8A
pr-0
8M
ay-
Jun-
08Ju
l-08
Aug
-S
ep-
Oct
-08
Nov
-D
ec-
Jan-
09F
eb-0
9M
ar-0
9A
pr-0
9M
ay-
Jun-
09Ju
l-09
Aug
-S
ep-
Oct
-09
Nov
-D
ec-
Jan-
10F
eb-1
0M
ar-1
0A
pr-1
0M
ay-
Jun-
10Ju
l-10
Aug
-S
ep-
Oct
-10
Nov
-D
ec-
Jan-
11F
eb-1
1M
ar-1
1A
pr-1
1M
ay-
Jun-
11Ju
l-11
Aug
-S
ep-
Oct
-11
Nov
-D
ec-
Jan-
12F
eb-1
2M
ar-1
2A
pr-1
2M
ay-
Jun-
12Ju
l-12
Aug
-S
ep-
Oct
-12
Nov
-D
ec-
Jan-
13F
eb-1
3M
ar-1
3A
pr-1
3M
ay-
Jun-
13Ju
l-13
Aug
-S
ep-
Oct
-13
Nov
-D
ec-
Jan-
14F
eb-1
4M
ar-1
4A
pr-1
4M
ay-
Jun-
14Ju
l-14
Aug
-S
ep-
Oct
-14
Nov
-D
ec-
Jan-
15F
eb-1
5M
ar-1
5A
pr-1
5M
ay-
Jun-
15Ju
l-15
Aug
-S
ep-
Monthly Change in Private Employment
January 2007 through Sept. 2015 (000s, Seasonally Adj.)
Private Employers Added 13.03 Million Jobs Since Jan. 2010 After Having Shed 5.01 Million Jobs in 2009 and 3.76 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Monthly losses in Dec. 08–Mar.
09 were the largest in the
post-WW II period
118,000 private sector jobs were created in Sept.
82
Jobs Created2014: 3.042 Mill2013: 2.452 Mill2012: 2.315 Mill2011: 2.396 Mill2010: 1.282 Mill
3,042,000 jobs were created in 2014, the most since 1997
83
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
.1%
5.0
%4
.9%
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
WC Approved Changes in Bureau Premium Level (Rates/Loss Costs)
12.1
7.4
10.0
2.9
-6.4
-3.2
-6.0
-8.0
-5.4
-2.6
3.5
1.2
4.9
6.6
-6.0 -6.5
-8.8-7.8
-3.2-2.1
-1.2
0.4
8.4
2.2
0.5
-2.2
-10
-5
0
5
10
15
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 15p
Percent
Calendar Year
Cumulative1990–1993
+36.3%
Cumulative 2000–2003
+17.1%
Cumulative 2004–2011
-30.8%
Cumulative 1994–1999
-27.8%
*States approved through 4/24/15.Note: Bureau premium level changes are countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by applicable rating organization, relative to those previously approved.Source: NCCI.
By Effective Date for Total Market
Approved rates/loss costs are down for the first time since 2010
Cumulative 2011–2014
+11.8%
Workers Compensation Lost-Time Claim Frequency Declined in 2014
90
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14p-10
-8
-6
-4
-2
0
2
4
6
8
10
12
-4.4
-9.2
0.3
-6.5
-4.5
0.5
-3.9
-2.3
-4.5
-6.9
-4.5 -4.1 -3.7
-6.6
-4.5
-2.2
-4.3-4.9
10.6
-3.8
-6
-2.9-2.0
3.6
-0.8
Adjusted*Indicated
Frequency Change: 2007—2012
Contracting: 7.97.1 -9.3%
Manufacturing: 13.612.0 -11.8%
Percent
Accident Year*Adjustments primarily due to significant audit activity.2014p: Preliminary based on data valued as of 12/31/2014.Source: NCCI Financial Call data, developed to ultimate and adjusted to current wage an voluntary loss cost level; Excludes high deductible policies; 1994-2013: Based on data through 12/31/13. Data for all states where NCCI provides ratemaking services, excluding WV.Frequency is the number of lost-time claims per $1M pure premium at current wage and voluntary loss cost level
Cumulative Change of –51.1%(1994–2013 adj.)
$9
.8
$9
.5
$9
.2
$9
.7
$9
.8
$1
0.4
$1
1.2
$1
2.2
$1
3.5
$1
4.8
$1
6.1
$1
6.6
$1
7.4
$2
2.3
$2
2.5
$2
2.2
$2
2.2
$2
2.6
$2
3.6
$1
8.1
$1
7.5
$1
9.2
$2
0.8
$2
1.9
+0.0%-2.5%
+1.0%+9.1% +1.3%
+5.9%+3.1%
+1.0%+4.6%+3.1%+9.2%
+10.1%
+10.1%
+9.0%+7.7%
+5.9%+1.7%+4.9%
-2.8%-3.1%+1.0%
+6.6%
5
7
9
11
13
15
17
19
21
23
25
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14p
IndemnityClaim Cost ($ 000s)
Accident Year
Workers Comp Indemnity Claim Costs: Modest Increase in 2014
Average indemnity costs per claim were up 4% in
2014 to $23,600, the largest increase since 2008
Average Indemnity Cost per Lost-Time Claim
+4%+1.9%
Cumulative Change = 141%(1991-2014p)
2014p: Preliminary based on data valued as of 12/31/2014.1991-2013: Based on data through 12/31/2013, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.
Workers Compensation Medical Severity:Moderate Increase in 2014
93
Accident Year
Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002–2010: +6.0%
Average Medical Cost per Lost-Time ClaimMedical
Claim Cost ($000s)
$8
.1
$8
.2
$8
.1
$8
.8
$9
.1
$9
.8
$1
0.8
$11
.7
$1
2.9
$1
3.9
$1
5.7
$1
7.1
$1
8.4
$1
9.4
$2
0.9
$2
2.1
$2
3.4
$2
5.0
$2
6.0
$2
6.1
$2
6.8
$2
7.4
$2
8.3
$2
9.4
+6.8%+1.3%-2.1%+9.0%+5.1%
+7.4%+10.1%
+8.3%+10.6%
+7.3%
+13.5%
+8.8%+7.7%
+5.4%
+7.8%+5.8%
+5.9%
+6.9%+4.0%+0.5%
+2.4%+2.4%
+3.2%+4%
5
10
15
20
25
30
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14p
2014p: Preliminary based on data valued as of 12/31/2014.1991-2013: Based on data through 12/31/2013, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.
Cumulative Change = 263%(1991-2014p)
Accident Year
Medical severity for lost time claims was up 4% in 2014, the
largest increase since 2009
Workers CompensationChange in Medical Severity Comparison to Change in Medical Consumer Price Index (CPI)
96
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14p0
2
4
6
8
10
12
14
16
5.1
7.4
10.1
8.3
10.6
7.3
13.5
8.8
7.7
5.4
7.8
5.8 5.9
6.9
4.0
0.5
2.4 2.4
34.0
4.5
3.52.8
3.2 3.54.1
4.6 4.74.0
4.4 4.2 4.04.4
3.73.2 3.4
3.03.7
3 2.4
Change in Lost-Time Medical Claim Severity
Change in US Medical CPI
Percent Change
Year
Average Annual Change: 1994—2014
Lost-Time Medical Severity: +6.4%
US Medical CPI: +3.7%
2014p: Preliminary based on data valued as of 12/31/2014.Sources: Severity: 995-2013: Based on data through 12/31/2013, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.US Medical CPI: US Bureau of Labor Statistics.
U.S. Health Care Expenditures,1965–2022F
65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$42.
0$4
6.3
$51.
8$5
8.8
$66.
2$7
4.9
$83.
2$9
3.1
$103
.4$1
17.2
$133
.6$1
53.0
$174
.0$1
95.5
$221
.7$2
55.8
$296
.7$3
34.7
$369
.0$4
06.5
$444
.6$4
76.9
$519
.1$5
81.7
$647
.5$7
24.3
$791
.5$8
57.9
$921
.5$9
72.7
$1,0
27.4
$1,0
81.8
$1,1
42.6
$1,2
08.9
$1,2
86.5
$1,3
77.2
$1,4
93.3
$1,6
38.0
$1,7
75.4
$1,9
01.6
$2,0
30.5
$2,1
63.3
$2,2
98.3
$2,4
06.6
$2,5
01.2
$2,6
00.0
$2,7
00.7
$2,8
06.6
$2,9
14.7
$3,0
93.2
$3,2
73.4
$3,4
58.3
$3,6
60.4
$3,8
89.1
$4,1
42.4
$4,4
16.2
$4,7
02.0
$5,0
08.8
U.S. health care expenditures have been on a relentless climb for most of the past half century, far outstripping population growth,
inflation of GDP growth
99
From 1965 through 2013, US health care expenditures had
increased by 69 fold. Population growth over the same period increased by a factor of just 1.6. By 2022, health spending will have
increased 119 fold.
$ Billions
Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.
Umbrella/Excess
102
Are Risks Purchasing Enough Coverage?
102
104
$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.
105
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.
106
$1,476
$1,137$1,002
$918$836 $808 $769 $732
$518$431
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
Antitrust NursingHomes
DefamationToxic Torts MotorVehicle
IntellectualProp
ProductsLiability
Worker/Negligence
Med Mal Breach ofContract
Dollar Value of Top 100 Verdicts in 2013 by Cause of Action, 2013
Many causes of action can give rise to
catastrophic casualty claims
Source: VerdictSearch as cited in Reevaluating Excess Casualty Protection as Liability Losses Increase, Marsh Risk Management Research Briefing, Oct. 2014.
($ Millions)
107
$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 BusinessNegligence
MedicalMalpractice
Premises Liability PersonalNegligence
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.
108
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
have edged up slightly in recent years
109
Average Total Excess/Umbrella Limits Purchased, By Revenue Size
Source: Reevaluating Excess Casualty Protection as Liability Losses Increase, Marsh Risk Management Research Briefing, Oct. 2014.
$31
$47
$150
$32
$48
$151
$32
$48
$136
$48
$31
$144
Revenue > $1B Revenue <= $1B All Revenues
2011Q2 - 2010Q3 2012Q2 - 2011Q3 2013Q2 - 2012Q3 2014Q2 - 2013Q3
Average excess/umbrella limits purchased are flat
($ Millions)
Business Leaders Ranking of Liability Systems in 2015
Best States
1. Delaware
2. Vermont
3. Nebraska
4. Iowa
5. New Hampshire
6. Idaho
7. North Carolina
8. Wyoming
9. South Dakota
10. Utah
Worst States
41. Arkansas
42. Missouri
43. Mississippi
44. Florida
45. New Mexico
46. Alabama
47. California
48. Illinois
49. Louisiana
50. West Virginia
Source: US Chamber of Commerce 2015 State Liability Systems Ranking Study; Insurance Info. Institute.
New in 2015
Vermont New Hampshire North Carolina South Dakota
Drop-offs
Minnesota Kansas Virginia North Dakota
Newly Notorious
Arkansas Missouri
Rising Above
Oklahoma Montana
112
113
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.
114
Pricing Trends
Survey Results Suggest Commercial Pricing Has
Flattened
114
115
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
117
Change in Commercial Rate Renewals, by Line: 2015:Q2
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Major Commercial Lines Renewals Were Mixed to Flat in Q2:2015; EPL, D&O and Commercial Auto Led the Way
Percentage Change (%)
-0.2%
0.5% 0.7%1.5%
-5.4%
-3.0% -2.7% -2.6%-2.0% -1.9%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
Co
mm
erc
ial
Pro
pe
rty
Ge
ne
ral
Lia
bili
ty
Um
bre
lla
Bu
sin
ess
Inte
rru
ptio
n
Co
nst
ruct
ion
Wo
rke
rsC
om
p
Su
rety
Co
mm
erc
ial
Au
to D&
O
EP
L
Employment Practices rate increases are large
than any other line, followed by D&O and
Commercial Auto
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
118
Towers Watson: Commercial Lines Rate Change by Qtr (vs. Year Earlier)
Sources: Towers Watson Commercial Lines Insurance Pricing Survey, Insurance Information Institute.
Hard Market (Such As It Is) Appears to Have Passed Its Peak.
20
03
:Q2
20
03
:Q3
20
03
:Q4
20
04
:Q1
20
04
:Q2
20
04
:Q3
20
04
:Q4
20
05
:Q1
20
05
:Q2
20
05
:Q3
20
05
:Q4
20
06
:Q1
20
06
:Q2
20
06
:Q3
20
06
:Q4
20
07
:Q1
20
07
:Q2
20
07
:Q3
20
07
:Q4
20
08
:Q1
20
08
:Q2
20
08
:Q3
20
08
:Q4
20
09
:Q1
20
09
:Q2
20
09
:Q3
20
09
:Q4
20
10
:Q1
20
10
:Q2
20
10
:Q3
20
10
:Q4
20
11
:Q1
20
11
:Q2
20
11
:Q3
20
11
:Q4
20
12
:Q1
20
12
:Q2
20
12
:Q3
20
12
:Q4
20
13
:Q1
20
13
:Q1
20
13
:Q3
20
13
:Q4
20
14
:Q1
20
14
:Q2
20
14
:Q3
20
14
:Q4
20
15
:Q1
20
15
:Q2
-10%
-5%
0%
5%
10%
15%
20%
13.0
%12
.0%
9.0%
5.0%
3.0%
0.0%
-1.0
%-1
.0%
-2.0
%-2
.0%
-2.0
%-2
.0%
-1.0
%-1
.0%
-3.0
%-4
.0%
-5.0
%-5
.0%
-6.0
%-6
.0%
-5.0
%-4
.0%
-3.0
% -1.0
%1.
0%0.
0%0.
0%-1
.0%
-1.0
%-1
.0%
-1.0
%1.
0% 2.0%
2.0% 3.
0%5.
0% 6.0%
6.0% 7.
0%7.
0%6.
0%6.
0%5.
0%4.
0%3.
0%3.
0%2.
0%2.
0%1.
0%
18 consecutive quarters of rate increases
MarketScout: Commercial Lines Rate Change by Month (vs. Yr. Earlier) Since 6/09
Jun-
09
Sep-0
9
Dec-0
9
Mar
-10
Jun-
10
Sep-1
0
Dec-1
0
Mar
-11
Jun-
11
Sep-1
1
Dec-1
1
Mar
-12
Jun-
12
Sep-1
2
Dec-1
2
Mar
-13
Jun-
13
Sep-1
3
Dec-1
3
Mar
-14
Jun-
14
Sep-1
4
Dec-1
4
Mar
-15
15-J
un
15-S
ep-8%
-6%
-4%
-2%
0%
2%
4%
6%
-6%
-6%
-5%
-4%
-5%
-5%
-4%
-4%
-5%
-4%
-4%
-3%
-3%
-3%
-4%
-4%
-4%
-5%
-5%
-5%
-5%
-4%
-4%
-4%
-3%
-2%
-2%
0% 0%1% 1% 1%
2%3% 3%
4% 4% 4%5% 5%
4%5% 5% 5%
4%5% 5% 5% 5%
4% 4%5%
4% 4%3% 3%
2%3%
2%3%
2% 2% 2% 2%1% 1%
0% 0%1%
0% 0%1%
0%-1
%
September 2015: First Overall Decrease Since
August 2011.
119SOURCE: MarketScout, Insurance Information Institute.
Rate Change Has Been 0% or 1% Since October 2014.
Commercial Lines Rate Change by Month (vs. Year Earlier)
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%
120SOURCE: MarketScout, Insurance Information Institute.
Rates Are As Stable As They’ve Been in 15 Years.
Not Much of A Hard Market, By Historic Standards
Sept. 2015: -1.5%
General Liability Rate Change by Month (vs. Year Earlier)
124
Jun-
09
Sep-0
9
Dec-0
9
Mar
-10
Jun-
10
Sep-1
0
Dec-1
0
Mar
-11
Jun-
11
Sep-1
1
Dec-1
1
Mar
-12
Jun-
12
Sep-1
2
Dec-1
2
Mar
-13
Jun-
13
Sep-1
3
Dec-1
3
Mar
-14
Jun-
14
Sep-1
4
Dec-1
4
Mar
-15
Jun-
15
Sep-1
5-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
-6%
-7%
-7%
-5%
-6%
-6%
-5%
-4%
-5%
-5%
-4%
-5%
-4%
-5%
-5%
-5%
-6%
-6%
-5%
-6%
-5%
-4%
-4%
-3%
-2%
-2%
-2%
0%1%
2% 2% 2% 2%3% 3%
4% 4%6% 6%
5% 5% 5%6%
4% 4% 4%6%
5% 5%6% 6%
5%4%
3% 3%2% 2% 2%
3% 3%2% 2% 2% 2% 2%
1% 1% 1%
0% 0% 0%1%
0% 0%
Commercial Auto Rate Change by Month (vs. Year Earlier)
125
Jun-
09
Sep-0
9
Dec-0
9
Mar
-10
Jun-
10
Sep-1
0
Dec-1
0
Mar
-11
Jun-
11
Sep-1
1
Dec-1
1
Mar
-12
Jun-
12
Sep-1
2
Dec-1
2
Mar
-13
Jun-
13
Sep-1
3
Dec-1
3
Mar
-14
Jun-
14
Sep-1
4
Dec-1
4
Mar
-15
Jun-
15
Sep-1
5-6%
-4%
-2%
0%
2%
4%
6%
8%
-4%
-5%
-5%
-4%
-4%
-4%
-3%
-4%
-4%
-3%
-3%
-3%
-2%
-3%
-3%
-3%
-3%
-2%
-1%
-3%
-3%
-2%
-3%
-1%
-2%
-1%
-1%
0%1%
0%1% 1% 1%
2%3%
4%5%
4%5% 5% 5%
6%5% 5% 5% 5% 5%
6%5%
4%5% 5% 5%
4% 4% 4% 4%3% 3% 3% 3%
2% 2%3% 3%
1% 1%2% 2% 2% 2% 2% 2% 2%
Umbrella/Excess Rate Change by Month
(vs. Year Earlier)
126
Jun-
09
Sep-0
9
Dec-0
9
Mar
-10
Jun-
10
Sep-1
0
Dec-1
0
Mar
-11
Jun-
11
Sep-1
1
Dec-1
1
Mar
-12
Jun-
12
Sep-1
2
Dec-1
2
Mar
-13
Jun-
13
Sep-1
3
Dec-1
3
Mar
-14
Jun-
14
Sep-1
4
Dec-1
4
Mar
-15
Jun-
15
Sep-1
5-6%
-4%
-2%
0%
2%
4%
6%
-5%
-4%
-4%
-3%
-5%
-4%
-3%
-4%
-4%
-3%
-4%
-2%
-2%
-3%
-3%
-3%
-3%
-3%
-4%
-4%
-2%
-2%
-3%
-2%
-1%
0% 0%1%
2% 2%3% 3% 3%
4%3%
4% 4%5%
4%3%
5% 5% 5% 5%4% 4% 4% 4% 4%
3% 3% 3%2%
3%2% 2%
1%2%
1%2% 2% 2%
1% 1% 1%
0% 0% 0%1%
0% 0%
Workers Comp Rate Change by Month (vs. Year Earlier)
Jan
-08
Ap
r-0
8
Jul-
08
Oct
-08
Jan
-09
Ap
r-0
9
Jul-
09
Oct
-09
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
Ap
r-1
3
Jul-
13
Oct
-13
Jan
-14
Ap
r-1
4
Jul-
14
Oct
-14
Jan
-15
Ap
r-1
5
Jul-
15
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%-1
4%
-12
%-9
%-7
% -6%
-7%
-9%
-9%
-9% -8
% -7% -6
%-8
% -7%
-7% -6
%-4
%-4
%-5
%-5
% -4%
-4%
-4% -3
%-4
%-4
% -3%
-3%
-3% -2
%-3
%-3
%-3
%-3
% -2% -1
%-3
%-3
% -2%
-3%
-1%
-2% -1
%-1
%0
%1
%0
%1
%1
%1
%2
%3
%4
%5
%4
%5
%5
%5
%6
%5
%5
%5
%5
%5
%6
%5
%4
%5
%5
%5
%4
%4
%4
%3
%3
%3
%3
%2
%2
%3
%3
%0
%0
%0
%0
%0
%0
%1
%1
%0
%0
%
127
Sources: MarketScout, Insurance Information Institute.
Professional Liability Rate Change by Month (vs. Year Earlier)
128
Jun-
09
Sep-0
9
Dec-0
9
Mar
-10
Jun-
10
Sep-1
0
Dec-1
0
Mar
-11
Jun-
11
Sep-1
1
Dec-1
1
Mar
-12
Jun-
12
Sep-1
2
Dec-1
2
Mar
-13
Jun-
13
Sep-1
3
Dec-1
3
Mar
-14
Jun-
14
Sep-1
4
Dec-1
4
Mar
-15
Jun-
15
Sep-1
5-8%
-6%
-4%
-2%
0%
2%
4%
6%
-5%
-6%
-5%
-4%
-3%
-3%
-2%
-1%
-2%
-3%
0%
-2%
-1%
-2%
-1%
-1%
-1%
-1%
-1%
0% 0% 0%2%
1%0% 0% 0% 0% 0%
1%2% 2% 2%
1%2%
3% 3% 3%4% 4% 4% 4%
3% 3% 3% 3% 3% 3% 3% 3% 3%2% 2% 2% 2% 2% 2% 2% 2% 2%
1%2% 2%
1% 1%2%
0% 0% 0%1%
0% 0%
D&O Liability Rate Change by Month (vs. Year Earlier)
129
Jun-
09
Sep-0
9
Dec-0
9
Mar
-10
Jun-
10
Sep-1
0
Dec-1
0
Mar
-11
Jun-
11
Sep-1
1
Dec-1
1
Mar
-12
Jun-
12
Sep-1
2
Dec-1
2
Mar
-13
Jun-
13
Sep-1
3
Dec-1
3
Mar
-14
Jun-
14
Sep-1
4
Dec-1
4
Mar
-15
Jun-
15
Sep-1
5-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
-3%
-2%
0% 0% 0% 0% 0%-2
%-1
%0% 0%
-1%
-1%
-2%
-1%
-1%
-1%
-1%
0% 0% 0%2%
1%0% 0% 0% 0%
1% 1% 1%2% 2% 2%
3%4% 4% 4% 4% 4% 4% 4%
3% 3%4%
5%4%
3%4%
3%2% 2% 2% 2%
3%2% 2%
1% 1% 1%2% 2% 2%
1% 1% 1%
0% 0%1% 1%
0% 0%
EPLI Rate Change by Month (vs. Year Earlier)
130
Jun-
09
Sep-0
9
Dec-0
9
Mar
-10
Jun-
10
Sep-1
0
Dec-1
0
Mar
-11
Jun-
11
Sep-1
1
Dec-1
1
Mar
-12
Jun-
12
Sep-1
2
Dec-1
2
Mar
-13
Jun-
13
Sep-1
3
Dec-1
3
Mar
-14
Jun-
14
Sep-1
4
Dec-1
4
Mar
-15
Jun-
15
Sep-1
5-6%
-4%
-2%
0%
2%
4%
6%
-4%
-3%
-3%
-2%
-3%
-2%
-2%
-1%
-1%
-1%
0%
-1%
-1%
-2%
-2%
-1%
-1%
-1%
0% 0% 0% 0%1% 1% 1% 1% 1% 1% 1% 1%
2% 2% 2%3%
3% 3% 3%4%
3% 3% 3%2% 2%
4%5%
4% 4% 4%3%
2% 2%1%
2%3% 3%
2%1% 1% 1%
2% 2% 2% 2%1%
2%
1%0%
1% 1%0% 0%
Fiduciary Liability Rate Change by Month (vs. Year Earlier)
131
Jun-
09
Sep-0
9
Dec-0
9
Mar
-10
Jun-
10
Sep-1
0
Dec-1
0
Mar
-11
Jun-
11
Sep-1
1
Dec-1
1
Mar
-12
Jun-
12
Sep-1
2
Dec-1
2
Mar
-13
Jun-
13
Sep-1
3
Dec-1
3
Mar
-14
Jun-
14
Sep-1
4
Dec-1
4
Mar
-15
Jun-
15
Sep-1
5-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
-3%
-2%
-2%
-3%
-2%
-1%
-1%
-1%
-1%
-1%
0%
-1%
-2%
-2%
-1%
0%-1
%-1
%-1
%0%
-1%
0% 0% 0% 0% 0% 0% 0% 0% 0% 0%1% 1% 1% 1% 1% 1%
2% 2% 2% 2%3% 3%
2% 2%3% 3% 3% 3% 3%
1% 1% 1% 1% 1% 1% 1% 1%0%
1% 1% 1%0% 0% 0% 0% 0% 0% 0% 0% 0%
Profitability & Politics
136136
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
CYBER RISK & CYBER INSURANCE
139
Cyber Risk is a Rapidly Emerging Exposure for Businesses Large and
Small in Every IndustryNonprofits Including Religious
Institutions Are Vulnerable139
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
Worldwide Cybersecurity Spending, 2011- 2016F ($ Billions)
$55.0
$60.0
$65.9
$71.1
$76.9
$83.2
7.9%8.4%8.2%
8.2%9.8%
$50
$55
$60
$65
$70
$75
$80
$85
2011 2012 2013 2014F 2015F 2016F0%
2%
4%
6%
8%
10%
12%
Worldwide Cybersecurity Spending % Change from Previous Year
Cybersecurity Spending Is Rising Sharply, Up by About 8%+ Annually through 2016—a Projected Increase of $12.1 Billion from 2014 to 2016
Cybersecurity spending increased by an estimated $5.2B in 2014, $5.8B
in 2015 and $6.3B in 2016
Source: Gartner Group; Insurance Information Institute; Adapted from Wall Street Journal: “Financial Firms Boost Cybersecurity Funds,” Nov. 17, 2014.
142
145
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
146
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
148
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
150
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.
151
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)
Data/Privacy Breach:Many Potential Costs Can Be Insured
Source: Zurich Insurance; Insurance Information Institute
Forensic costs to discover
cause
154
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.
155
157
INDUSTRY DISRUPTORS
Technology, Society and the Economy Are All
Changing at a Rapid PaceThoughts on the Future
157
159
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?
160
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
163
Send in the Drones: Potential Rapid Adoption in Industry; Media Loves It
Drones or Unmanned Aerial Vehicle (UAV) technology is seeing rapid adoption rate in many industries, including insurance
FAA granting Section 333 exemptions for commercial use and testing of UAS
At least 5 insurers have received permission to test
Wide variety of applications: claims, pre-event property inspections…
Insurers partnering with construction industry to guide R&D and regulation of UAV use via Property Drone Consortium: www.propertydrone.org
www.iii.org
Thank you for your timeand your attention!
Twitter: twitter.com/bob_HartwigDownload at www.iii.org/presentations
Insurance Information Institute Online:
164