economic and financial overview & outlook for the p/c ......jun 01, 2019 · outlook for the...
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Economic and Financial Overview & Outlook for the P/C Insurance Industry
Trends, Challenges and Opportunities
Robert P. Hartwig, Ph.D., CPCUClinical Associate Professor of Finance, Risk Management & Insurance
Darla Moore School of Business ¨ University of South [email protected] ¨ 803.777.6782
Providence Mutual Insurance CompanyPresident’s Club Meeting
Sea Island, GAJune 1, 2019
THE ECONOMY
The Strength of the Economy Has Always Influenced Growth in Insurers’ Exposure
Base Across Most Lines
The Links Between the Economy and the P/C Insurance Industry Are Strengthening
Today’s Top Economic Headlines…A Tale of Two Economiesn Unemployment Rate: 3.6%
w Best since 1969
n Job Growth: 218K Jobs Created on Average Over the Past 12 Months w Close to the best 12-month stretch in the post-crisis period
n GDP Growth: 3.2% in Q1 2019w Best start to the year since 2015
n Wage Gains: 3.2% in April 2019w Strongest in post-crisis era
But the Economic Outlook Is Getting Cloudy …n Trade War: Tariffs Increased to 25% on Most Chinese Imports (Mexico too!)
w China Retaliates with tariffs on $60B of US products
n Stock Markets: Dow Sheds 1,600 Points (6%+) in Mayw Expectations for Q2 GDP growth fall to < 1.5%
Length of US Business Cycles, 1929-Present*
43
13 8 11 10 8 10 1116
616
8 819
50
80
3745
39
24
106
36
58
12
92
120
73
120
0102030405060708090
100110120
Aug.1929
May1937
Feb.1945
Nov.1948
July1953
Aug.1957
Apr.1960
Dec.1969
Nov.1973
Jan.1980
Jul.1981
Jul.1990
Mar.2001
Dec.2007
ContractionExpansion Following
Duration (Months)
Month Recession Started
Average Duration*Recession = 13.4 MonthsExpansion = 63.6 Months
* As of June 2019, inclusiveSources: National Bureau of Economic Research; Risk and Uncertainty Management Center, University of South Carolina.
The current economic
expansion (as of June 2019) is now tied for the longest in
US history (began July
2009)
What a Difference a Decade Makes: Unemployment Timeline
4.4%
10.0%
4.4% 3.6%
0%
2%
4%
6%
8%
10%
12%
May 2007 Pre-Crisis Low
Oct. 2009 Crisis Peak
Feb. 2017 Apr. 2019Lowest Since
Dec. 1969Sources: Bureau of Labor Statistics; Risk and Uncertainty Management Center, University of South Carolina.
Unemployment Rate 1-of-10 people
in the labor force could not
find work
It took nearly a decade for the unemployment rate to return to its pre-crisis low
May 2009Unemployment hit 9% for the
first time since 1983
THE SLOW AWAKENING OF AMERICA’S
“ANIMAL SPIRITS”
Economic Policy and the Insurance Industry
Consumer and Business Confidence Remain Key but Are
Being Tested
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 5/19; Center for Risk and Uncertainty Management, University of South Carolina.
2.7%
1.8%
-1.3%
-2.8%
2.5%
2.2% 2.7%
4.5%
0.8% 1.4%3.5%
2.1%
1.2%3.1% 3.2%
2.9%
2.2%4.2%
3.4%
2.2% 3.1%
2.0%
2.0%
1.8%
1.8%
1.6% 1.7%1.6% 2.2%
1.8%
4.1%
1.1% 1.8% 2.5% 3.6%
3.1%
-9%
-7%
-5%
-3%
-1%
1%
3%
5%
7%
2000
2001
2002
2003
2004
2005
2006
2007
20
0820
0920
1020
1120
1220
1320
1420
1516
:1Q
16:2
Q16
:3Q
16:4
Q17
:1Q
17:2
Q17
:3Q
17:4
Q18
:1Q
18:2
Q18
:3Q
18:4
Q19
:1Q
19:2
Q19
:3Q
19:4
Q20
:1Q
20:2
Q20
:3Q
20:4
Q
Demand for Insurance Should Increase in 2019 as GDP Growth Continues at a Steady Pace and Gradually Benefits the Economy Broadly
Real GDP Growth (%)
“Great Recession”
began in Dec. 2007
Financial Crisis
2018 GDP forecasts were revised upward by ~0.4%
due to tax reform, but effects wane in 2019
Tax cuts help jolt growth in early 2018, but effects are waning, though Q1 2019
surprised to the upside. Trade war, weaker global growth are adversely affecting US GDP growth in 2019/20.
Sources: SNL Financial; U.S. Commerce Dept., Bureau of Economic Analysis; I.I.I.
-6%
-4%
-2%
0%
2%
4%
6%
8%
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
DWP y-o-y change y-o-y nominal GDP growth
Direct written premiums track nominal GDP fairly tightly over time, suggesting the P/C insurance industry’s growth prospects inextricably
linked to economic performance.
The Economy Drives P/C Insurance Industry Premiums:2006:Q1–2018:Q4
Direct Premium Growth (All P/C Lines) vs. Nominal GDP: Quarterly Y-o-Y Pct. Change
Consumer Confidence Index: Jan. 1987– May 2019
Source: The Conference Board; Wells Fargo Research.
Outlook: Consumer confidence was shaken by financial volatility in late 2018/early 2019—but confidence is rebounding. Consumers are optimistic about the future, which is consistent with expectations for stronger economic growth (consumers account for nearly 70% of all
spending in the economy). Should positively influence growth of insurable exposures.
The Conference Board’s Consumer
Confidence Index stood at 134.1 in May, down
from its post-recession high in Q3 2018 but is
rebounding from a drop in late 2019/early 2019
New Private Housing Starts, 1990-2025F
1.48
1.47 1.62 1.64
1.57 1.60 1.71 1.85 1.96 2.07
1.80
1.36
0.91
0.55 0.59 0.610.78 0.92 1.00 1.11 1.17 1.20 1.26
1.23 1.26 1.34 1.37 1.41 1.45
1.45
1.351.46
1.29
1.20
1.011.19
0.3
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19F20F21F22F23F24F25F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (5/19 for 2019-20; 3/19 for 2021-25F); University. of South Carolina, Center for Risk and Uncertainty Management..
Insurers 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, and demographics should continue to stimulate new
home construction, but higher mortgage rates and a slowing
economy will slow the pace of growth
(Millions of Units)
12
16.9
16.5
16.1
13.2
10.411.612.7
14.4 15
.5 16.4 17
.417.5
17.1
17.2
16.7
16.4
16.2
16.2
16.4
16.5
16.7
16.7
16.9
16.617.117.517.8
17.4
910111213141516171819
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19F20F 21F22F22F 23F24F25F
(Millions of Units)
Auto/Light Truck Sales, 1999-2023F
New auto/light truck sales fell to the
lowest level since the late 1960s.
Job growth and improved credit market conditions boosted auto
sales to near record levels by 2015/16
Truck, SUV purchases remain strong as smaller car sales slump
Yearly car/light truck sales are slowing slightly, as demand tapers. But shifting consumer preferences for more expensive trucks, SUVs and crossovers will
contirbue continued exposure growth. PP Auto premium might grow by 3.5% - 5%.
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (4/19 for 2019-20; 3/19 for 2021-25F); Univ. of South Carolina, Center for Risk and Uncertainty Management.
NFIB Small Business Optimism Index:Jan. 1988–April 2019
Source: National Federal of Independent Business; Wells Fargo Research.
Outlook: Small businesses increasingly concerned about the future
Small Business Optimism took a big hit in late 2018/early 2019 on fears of a greater
economic uncertainty (esp. trade war fears and concerns over
rising interest rates). Tax reform, reduced
regulations and strong sales have driven
investment, hiring and exposures.
Trade wars (actual and threatened actions)
are introducing massive uncertainty in
to the markets
14
Number of Recessions Endured by P/C Insurers, by Number of Years in Operation
32
27
20
13
8
0
5
10
15
20
25
30
35
1-50 51-75 76-100 101-125 126-150
Sources: Univ. of South Carolina Risk and Uncertainty Management Center research from National Bureau of Economic Research data.
Number of Recessions Since 1860
Longevity Requires an Insurer to Overcome Extreme Economic Adversity of Every Sort
Number of Years in Operation
Insurers that have made it to the age of 150 have endured 32 recessions over the years
14
15
100-year-old Insurers: Mutual vs. Stock vs. Reciprocal
62.4%
35.9%
1.4%0.3%
Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC.
The vast majority (62.4%) of 100-year-old insurers are mutual insurers, while stock insurers account for 35.9% of the total.
Mutual, 62.4%,(179)
Stock, 35.9%,(103)
Reciprocal, 1.4%,(4)
Other, 0.3%,(1)
US Unemployment Rate Forecast: 2007:Q1–2020:Q4
4.5%
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%
4.9%
4.9%
4.7%
4.7%
4.4%
4.3%
4.1%
4.1%
3.9%
3.8%
3.8% 3.9%
3.7%
3.6%
3.6%
3.6%
3.6% 3.7% 3.8%
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
17:Q1
17:Q2
17:Q3
17:Q4
18:Q1
18:Q2
18:Q3
18:Q4
19:Q1
19:Q2
19:Q3
19:Q4
20:Q1
20:Q2
20:Q3
20: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 (5/19 edition); Risk and Uncertainty Management Center, University of South Carolina.
Optimistic scenarios put unemployment as low as 3.4% by Q4 2019 and 3.2% in Q4 2020, whereas pessimistic scenarios put it as high
as 4.4%, reflecting increased economic uncertainty ahead.
The unemployment rate is expected to remain below 4%
through 2020.
At 3.6%, the unemployment
rate is at its lowest reading
in 50 years.
Private Sector Employment, 2000-2019*
111.2
111.0
109.1
108.8
115.8
114.7
108.7
107.9
109.8
112.3
114.5
117.1
119.8
122.1
124.3
126.6
128.3
110.2
112.2
114.5
100
105
110
115
120
125
130
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19*
Private sector employment is now 18.9% (20.4 million) above the crisis trough and 10.8% (12.5 million) above
its pre-crisis peak
*Annual averages of monthly data. 2019 figure is annualized based on data through April.Sources: US Bureau of Labor Statistics; Risk and Uncertainty Management Center, University of South Carolina.
Millions of Workers
Unemployment Rates by State, March 2019:Highest 25 States* (Latest Available)
6.5
5.6
5.1
5.1
5.0
4.9
4.7
4.6
4.4
4.4
4.4
4.3
4.2
4.1
4.0
4.0
4.0
4.0
3.9
3.9
3.9
3.8
3.8
3.8
3.8
0
1
2
3
4
5
6
7
AK DC WV NM AZ MS LA WA OR OH IL CA NV NJ NC NY MI KY PA GA CT US TX RI MD
Une
mpl
oym
ent R
ate
(%)
*Provisional figures for March 2019, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In March 2019, all but 4 states and the District of Columbia had
unemployment rates below 5%
In March 2019, the US unemployment rate of 3.8% was the lowest in
14 years
3.7
3.7
3.7
3.7
3.6
3.5
3.5
3.5
3.4
3.3
3.3
3.3
3.2
3.2
3.2
3.0
3.0
2.9
2.9
2.9
2.8
2.8
2.8
2.4
2.4
2.3
2.3
0
1
2
3
4
5
WY MT AR AL IN KS FL CO ME OK MO DE TN SC MN UT MA WI VA ID SD NE HI NH IA VT ND
Une
mpl
oym
ent R
ate
(%)
Unemployment Rates by State, March 2019: Lowest 25 States*
*Provisional figures for March 2019, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In March 2019, 12 states had unemployment rates of 3% or less
Smaller, more rural states have the lowest
unemployment rates in the US
Take This Job And … Quit It!Quit Rate, 2005–2019*
2.1% 2.2% 2.1%1.9%
1.6% 1.7%1.8% 1.9%
2.1% 2.2% 2.2% 2.3%
1.4% 1.4% 1.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19*
Improving labor market conditions are emboldening workers
to quit their jobs—presumably for higher wages
*Annual figures calculated from month seasonally adjusted data. 2019 figure through February.Sources: US Bureau of Labor Statistics JOLTS Survey at https://www.bls.gov/jlt/ ; Risk and Uncertainty Management Center, University of South Carolina.
Quit Rate
Approximately 2.3% of workers have or
will quit their jobs in 2019—the highest proportion in the
post-crisis era
Long-Term Unemployed (27+ Weeks), Jan. 2003—Apr. 2019*
*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19
The number of long-term
unemployed soared by 5.7 mill to 6.8 million in
2010 (520%), from 1.1 mill in 2006
Today, there are 1.2 million long-term
unemployed, down 82% since 2010
(000)
+520
% -82%
The ranks of the long-term unemployed remained near
the recession peak for 3 years after the recovery began
Number of Unemployed Persons per Job Opening, Feb. 2003—Feb. 2019*
*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics JOLTS survey: at http://www.bls.gov/jlt/; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.
0
1
2
3
4
5
6
7
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19
At the height of the recession,
there were nearly 7 job seekers for
every one opening
Today, there are just 0.9 job
seekers for every one opening,
down from 1.1 a year ago
Unemployed Persons per Job Opening
INVESTMENTS: THE NEW REALITY
Investment Performance Is a Key Driver of Insurer Profitability
The Fed’s New Dovish Turn, Oval Office Pressure Don’t Bode Well for Insurers
Obstacles to Growing Investment Earnings Are Mounting
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
,*Through May 29, 2019.Source: NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html; Center for Risk and Uncertainty Management, University of South Carolina
Tech Bubble Implosion
Financial Crisis
Annual Return
Energy Crisis
2019: +11.0%*2018: -6.2%
S&P 500 Index Returns, 1950–2019*
Fed Raises Rate
Stock markets rose sharply following the 2016 election and continued to rise
throughout 2017, but trade, growth concerns and rising interest rates took a toll in late 201
and in April/May 2019 as well
Property/Casualty Insurance Industry Investment Income: 2000–2018
$38.9$37.1$36.7
$38.7
$54.6
$51.2
$47.1$47.6$49.2
$48.0$47.3$46.4$47.2$46.6$48.9
$55.3
$39.6
$49.5$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18*
Due to persistently low interest rates, investment income fell in 2012, 2013 and 2014 but showed a small (1.7%) increase in 2015—though 2016 experienced
another decline. Up 5.1% in 2017 and 13.1% in 2018
*2018 figure is distorted by provisions of the TCJA of 2017.1 Investment gains consist primarily of interest and stock dividends. Sources: ISO; University of South Carolina, Center for Risk and Uncertainty Management.
($ Billions)Investment income is slowly
recovering. 2018 figure overstates improvement due to
provision of the TCJA 2017
Net Investment Yield on Property/Casualty Insurance Invested Assets, 2007–2018*
4.4
4.0
4.6 4.5
3.7 3.83.7
3.43.7
3.2 3.1 3.13.3
4.6
4.23.9
2.5
3.0
3.5
4.0
4.5
5.0
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
The yield on invested assets remains low relative to pre-crisis yields. Fed rate increases beginning in late 2015 have pushed up some yields, albeit
quite modestly. Shrinking of Fed’s balance sheet should help too.
Sources: NAIC data, sourced from S&P Global Market Intelligence; 2017 figure is from ISO.
(Percent)
Investment yield in 2017 was down about 150 BP
from pre-crisis levels
P/C Industry Net Income After Taxes,1991–2019Fn 2005 ROE= 9.6%n 2006 ROE = 12.7%n 2007 ROE = 10.9%n 2008 ROE = 0.1%n 2009 ROE = 5.0%n 2010 ROE = 6.6%n 2011 ROAS1 = 3.5%n 2012 ROAS1 = 5.9%n 2013 ROAS1 = 10.2%n 2014 ROAS1 = 8.4%n 2015 ROAS = 8.4%n 2016 ROAS = 6.2%n 2017 ROAS =5.0%n 2018 ROAS = 8.0%
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.
$14,178
$5,840
$19,316
$10,870 $20,598
$24,404 $36,819
$30,773
$21,865
$3,046
$30,029
$62,496
$3,043
$35,204
$19,456 $3
3,522
$63,784
$55,870
$56,826
$42,924
$36,813
$59,994
$36,600
$38,501
$20,559
$44,155
$65,777
-$6,970
$28,672
-$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 16 17 18 19
Net income is up sharply in 2018 due to lower CATs
and the TCJA
$ Millions
INTEREST RATE ANDINFLATION TRENDS
Federal Reserve Policy, Economic Strength, Trade Policy and
Deficits Will Drive Interest Rates and Inflation
2020 Election Politics Will Have an Increasing Impact Too!
US Treasury Security Yields:A Long Downward Trend, 1990–2019*
*Monthly, constant maturity, nominal rates, through Apr. 2019; May 2019 observation is for week of May 24.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
'90 '91 '92 '93 '94 '95'96 '97 '98 '99 '00 '01 '02 '03'04 '05 '06 '07 '08 '09 '10 '11'12 '13 '14 '15 '16 '17 '18 '19
Recession2-Yr Yield10-Yr Yield
Yields on 10-Year US Treasury Notes have been essentially
below 5% for more than a decade
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.
Fed tightening has pushed ST rates higher in late 2018, but fears of a
weakening economy have narrowed the 2-10 yield
spread substantially
Annual Inflation Rates, (CPI-U, %),1990–2020F
2.8 2.6
1.51.9
3.33.4
1.3
2.52.3
3.0
3.8
2.8
3.8
-0.4
1.6
3.2
2.11.51.6
0.1
1.3
2.12.4
1.92.1
2.92.4
3.23.0
5.14.9
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19F20F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 5/19 (forecasts).
Inflation remains remarkably tame despite a tight US labor market, modest economic growth, rising energy prices, tariff-induced price increases and a
rapidly rising federal budget deficit.
Annual Inflation Rates (%)
Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the
commodity bubble reduced inflationary pressures in 2009/10
Inflationary expectations are
consistent with the Fed’s 2% target,
but trade war could increase
inflationary pressure
Trade War Alert
A sustained trade war with China could
increase inflation by 0.1 to 0.4 points.
Mexico tariffs will intensify inflationary pressures
-1%
0%
1%
2%
3%
4%
5%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Change in Medical CPI CPI-All Items
Medical Cost Inflation vs. Overall CPI, 1995–2018
Sources: US Bureau of Labor Statistics.
Average Annual Growth Average1995 – 2018
Healthcare: 3.4%Overall: 2.2%
Medical inflation typically exceeds inflation in the
overall economy, though not in 2018
US TRADE POLICY
How Will the P/C Insurance Industry Be Impacted by
Escalating Trade Disputes?
Trade Actions and Workers CompensationnMajor Trade Actions Announced So Far
wMarch 2018: Steel and Aluminum– 25% tariff on foreign steel, 10% tariff on imported aluminum
wApril 2018: $50B in tariffs announced on some 1,300 Chinese products wSept. 2018: 10% tariffs on $200B worth of Chinese products
– China retaliates immediate with highly targeted tariffs on American productswMay 10, 2019: 10% tariffs à 25% on $200B on Chinese products
– Threat to implement 25% on remaining $325B not currently subject to tariff– China retaliates with $60B in tariffs on US goods
w May 31: Tariffs of Up to 25% Threatened Against all $370B in Mexican Imports
nPotential Impacts: Job and Income Losses Could Be Severe if Targeted Countries Retaliatew Hundreds of thousands of jobs would be lost across many industriesw P/C premium shrinkage would be measured in the billions as hundreds
of billions as exposure growth slows or shrinks in key lines
42
Trade Actions and P/C InsurancenPotential Impacts on P/C Insurance
w Personal Auto repair costs likely to rise by 2.7% or about $3.4B annually, assuming 25% tariffs on imported parts
w Analogous impacts in Commercial Autow Tariffs on Canadian lumber is raising construction costs
Tariffs will increase claims costs by billions
of dollars—impact personal auto more than any other line
Source: Available at: http://news.ambest.com/articlecontent.aspx?refnum=276836&altsrc=43
Economic Factor ImpactReal US GDP (annual change) -1.04%Real US National Income (annual change) -193.8 Bill
US Exports to Rest of World (annual change) -8.7%
US Imports From Rest of World (annual change) -11.5%
Annual Cost per US Family of 4 $2,389Net Impact on US Jobs (one-time change) -2.235 MillCost to Save 1 US Job $583,683
Trade War: Summary of Potential Economic Impacts(1-3 Years After Tariffs Imposed, Full Chinese Retaliation)
Source: Trade Partnerships Worldwide LLC, Estimated Impacts of Tariffs on the US Economy and Workers, February 2019, accessed at: https://tradepartnership.com/wp-content/uploads/2019/02/All-Tariffs-Study-FINAL.pdf.
Job Impact Distribution by Sector: 25% US Tariff Scenario With Full Chinese Relation (1-3 Years After Imposed)
236.4
-2,383.7 -2,235.4-3,000
-2,500
-2,000
-1,500
-1,000
-500
0
500
Manufacturing Services Net Job Change
Job Gain/Loss(Thousands)
A small number of protected US
industries benefit from tariffs—but at a
cost of 10 jobs lost for every 1 job created
An estimated 2.235 million jobs would be lost under a
sustained trade war scenario
Source: Trade Partnerships Worldwide LLC, Estimated Impacts of Tariffs on the US Economy and Workers, February 2019, accessed at: https://tradepartnership.com/wp-content/uploads/2019/02/All-Tariffs-Study-FINAL.pdf.
199,388145,251143,888
85,12084,789
76,44171,170
64,46763,47961,72761,694
50,50246,46044,590
248,399
0 50,000 100,000 150,000 200,000 250,000 300,000
CaliforniaTexas
FloridaNew York
IllinoisPennsylvania
OhioGeorgiaVirginia
North CarolinaMichigan
New JerseyMassachusetts
TennesseeColorado
Source: Trade Partnerships Worldwide LLC, Estimated Impacts of Tariffs on the US Economy and Workers, February 2019, accessed at: https://tradepartnership.com/wp-content/uploads/2019/02/All-Tariffs-Study-FINAL.pdf.
Total Net Job Loss = 2.235 million (est.)
Under the 25% US tariff scenario with full
Chinese retaliation, net job losses occur in all
50 states
States With Largest Net Job Losses Under 25% Tariff Scenario (Assuming Full Chinese Retaliation)
Who Bears the Cost of Tariffs on Chinese Goods?5 Possibilities1. Importer Gets Chinese Firms to Agree to Pay Tariffs
w Chinese firm absorbs full cost of tariff and makes due with lower profits
2. Chinese Firms Cut Costs to Partially Offset Impact of Tariffsw Reducing costs will allow the importer to moderate price increase to consumer
3. Importer Negotiates Discount on Chinese Productsw Results in only part of price increase being passed along to consumer
4. Importer Finds Alternatives to Chinese Productionw Benefits exporters in other countries; Helps limit domestic price increase
5. Pass Costs Through Cost of Tariff to Consumerw Buyer of product bears the full price increase due to the tariff
Note: As a practical matter, some combination of all 5 take place
48
P/C Insurance Industry Financial Overview
CATS, Non-CAT Underwriting Losses Impacted Insurer Balance Sheets
Industry Remains Strong
48
P/C Industry Net Income After Taxes, 1991–2019Fn 2005 ROE= 9.6%n 2006 ROE = 12.7%n 2007 ROE = 10.9%n 2008 ROE = 0.1%n 2009 ROE = 5.0%n 2010 ROE = 6.6%n 2011 ROAS1 = 3.5%n 2012 ROAS1 = 5.9%n 2013 ROAS1 = 10.2%n 2014 ROAS1 = 8.4%n 2015 ROAS = 8.4%n 2016 ROAS = 6.2%n 2017 ROAS =5.0%n 2018 ROAS = 8.0%
•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.
$14,178
$5,840
$19,316
$10,870 $20,598
$24,404 $36,819
$30,773
$21,865
$3,046
$30,029
$62,496
$3,043
$35,204
$19,456 $3
3,522
$63,784
$55,870
$56,826
$42,924
$36,813
$59,994
$36,600
$38,501
$20,559
$44,155
$65,777
-$6,970
$28,672
-$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 16 17 18 19
Net income is up sharply in 2018 due to lower CATs
and the TCJA
$ 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 16 17 18 19F
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2019F
Profitability = P/C insurer ROEs. 2011-18 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.Source: NAIC, ISO, A.M. Best, USC RUM Center.
1977:19.0% 1987:17.3%
1997:11.6% 2006:12.7%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years10 Years
9 Years
ROEs in 2017 plunged to their lowest levels since 2008 but
rebounded in 2018 due to lower CATs and the TCJA.
ROE
1975: 2.4%
2013 9.8%
2017 5.0%
2015: 8.4%
2019F 4.8%
2018 8.0%
51
ROE: Property/Casualty Insurance by Major Event, 1987–2019F
*Excludes Mortgage & Financial Guarantee in 2008 – 2014. Sources: ISO, Fortune; A.M. Best (2018E-2019F); USC RUM Center.
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 1819F
P/C Profitability Is Influenced Both by
Cyclicality and Volatility
Hugo
Andrew, Iniki
Northridge
Lowest CAT Losses in 15 Years
Sept. 11
Katrina, Rita, Wilma
4 Hurricanes
Financial Crisis*
(Percent)
Record Tornado Losses
Sandy
Low CATs
Harvey, Irma, Maria,
CA Wildfires
-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 16 17 18
P/C Insurance ROE vs. Fortune 500, 1975–2018*
*2018 Fortune 500 figure is an estimate.Profitability = P/C insurer ROEs. 2011-18 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.Source: NAIC, ISO, Fortune.
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%
2017 5.0%
2018 8.0%
AverageFortune 500: 13.3%P/C Insurance: 9.0%
2018* 14.5%
53
P/C Insurance Industry Combined Ratio, 2001–2019E
* 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.; 2017 (est.) based on actual 104.1 through Q3 (Q3 combined ratio alone was 110.7). Sources: A.M. Best, ISO (2014-2016); Figure for 2017 from ISO.
95.7
99.3101.1
106.5
102.5
96.4 97.097.8
100.7101.2
103.7
99.2101.0
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 16 17 18 19F
As Recently as 2001, Insurers Paid Out
Nearly $1.16 for Every $1 in Earned Premiums Relatively
Low CAT Losses, Reserve Releases
Heavy Use of Reinsurance Lowered Net
Losses
Relatively Low CAT Losses, Reserve Releases
Higher CAT
Losses, Shrinking Reserve
Releases, Toll of Soft
Market
Sandy Impacts
Lower CAT
Losses
Best Combined Ratio Since 1949 (87.6)
Avg. CAT Losses,
More Reserve Releases
Cyclical Deterioration
Sharply higher CATs are driving
large underwriting losses and
pricing pressure
2019 Combined Ratio Est.101.2
54
Policyholder Surplus (Capacity), 2006:Q4–2018:Q4
Sources: ISO, A.M .Best; Center for Risk and Uncertainty Management, University of South Carolina.
($ 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
$675.2
$674.2
$673.7
$676.3
$700.9
$717.0 $750.7 $781.5
$742.2
$662.0
$570.7
$566.5
$505.0
$515.6
$517.9
$400$450$500$550$600$650$700$750$800$850
06:Q4
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:Q2
15:Q4
16:Q1
16:Q4
17:Q2
17:Q4
18:Q3
18:Q4
Financial Crisis
Surplus (Capacity) as of 12/31/18 at $742.7B was still close to its
all-time record high
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 .
Drop due to near-record 2011 CAT losses
Capacity/Capital “shocks” typically do not on their own drive a sustained firming of
the pricing environment
Surplus dropped by $8.5B or 1.1%
in 2018
56
-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 16 17 18 19F
Net Premium Growth (All P/C Lines): Annual Change, 1971—2019F
(Percent)1975-78 1984-87 2000-03
*Figure is actual 2018:9M vs. 2017:9M change adjusted for affects of the TCJA of 2017. Shaded areas denote “hard market” periodsSources: A.M. Best (1971-2013, 18E, 19F), ISO (2014-17).
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.
2019F:3.6%2018E: 10.8%
2017: 4.6%2016: 2.7%2015: 3.5%2014: 4.2
2013: 4.4%2012: +4.2%
Outlook2019F: 3.6%2020F: 3.8%
58
Growth in Net Written Premium: Personal vs. Commercial, 2015 – 2018*
5.7%
3.1%
-1.4%
2.7%
6.6%
2.7%1.8%
4.1%
6.7%5.8%
4.8%5.8%
3.5%
1.5%
3.3%
5.3%
-2%-1%0%1%2%3%4%5%6%7%8%
Personal Lines Predominating
Diversified Commercial LinesPredominating**
All Insurers
2015 2016 2017 2018*
Annual Change in NWP
The divergence in growth between personal and commercial lines is large but may be narrowing
*2018 is an estimate based on actual data through Q4:2018. Commercial lines figure has been adjusted from actual value of 19.3% to account for distortionary affects from the TCJA 2017, which impacted reinsurance utilization, largely in the commercial segment.
Source: ISO. University of South Carolina Risk and Uncertainty Management Center.
Personal lines growth has been
much stronger than commercial lines
96.4
91.1
97.6
104.
5
102.
5
102.
6
107.
7
102.
7
98.4
103.
9
101.
0
103.
5
100.
9
99.5
102.
6
90
95
100
105
110
05 06 07 08 09 10 11 12 13 14 15 16 17
18E
19F
Com
mer
cial
Lin
es C
ombi
ned
Rat
io
*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best (1990-2017F). Risk and Uncertainty Management Center, Univ. of South Carolina (2018E – 2019F).
Personal Lines Combined Ratio, 2005-2019F*Personal lines underwriting performance
deteriorated from 2014-2017 as record CATs and rising loss cost trends took their toll. Little improvement in 2018, but more
in 2019 assuming “normal” cat activity
59
109.
411
0.2
118.
810
9.5 11
2.5
110.
210
7.6
104.
110
9.7
110.
2
102.
5 105.
491
.194
.510
4.4
100.
7 103.
8 107.
310
5.4
96.3
96.0
95.2
99.0
102.
110
2.0
102.
7
102.
0
111.
1
112.
3
122.
3
90
95
100
105
110
115
120
125
90 92 94 96 98 00 02 04 06 08 10 12 14 16
18E
Com
mer
cial
Lin
es C
ombi
ned
Rat
io
*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best (1990-2019F).
Commercial Lines Combined Ratio, 1990-2019F*Commercial lines underwriting
performance deteriorated materially in 2017 as record CATs and rising loss cost trends took there toll. Little improvement is
expected in 2018 or 2019
60
61
Merger & Acquisition Activity
M&A Activity Picked Accelerated in 2018
Many Carriers Remain Unsatisfied with Organic Growth Opportunities
61
62
U.S. INSURANCE MERGERS AND ACQUISITIONS,P/C SECTOR, 1994-2018 (1)
$5,100
$11,534
$8,059
$30,873
$19,118
$40,032
$1,249
$486
$20,353
$425
$9,264
$35,221
$13,615
$16,294
$3,507 $6,419
$12,458
$4,685
$4,393
$6,723
$39,970
$10,665
$7,404
$17,068
$55,825
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 17
Tran
sact
ion
valu
es
0
20
40
60
80
100
120
140
Num
ber of transactions
($ 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 in 2015 totaled $40B, its highest level
since 2000, but fell sharply in 2016/17 in
dollar terms
Major 2018 Deals:AIG/Validus: $5.56B
Axa/XL: $15.3BApollo/Aspen: $2.6B
63
U.S. INSURANCE MERGERS AND ACQUISITIONS:DISTRIBUTION, 1996-2018 (1)
$1,934
$2,720
$55,903
$1,633
$542
$689
$446
$60
$212
$944
$15,205
$5,812
$615 $1,727
$2,271
$4,225 $8,246
$2,581
$18,695
$4,204
$6,594
$7,085
$7$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Tran
sact
ion
valu
es
0
100
200
300
400
500
600
700
Number of transactions
($ 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 Distribution sector in 2018 totaled $7.1B, up (7.4%) from $6.6B in 2017; The number of
deals hit a record high 614 in 2018
Major 2018 Deals:Marsh/JLT: $5.62B
(4.3B Sterling)
Profitability and Growth in the Providence Mutual Footprint
64
Comparison Over the Period 2009 - 2018
64
All Lines: 10-Year Average RNW, 2009–2018
Sources: NAIC, Insurance Information Institute.
3.6%
4.5%
6.2%
7.9%
8.5%
9.3%
10.7%
11.7%
0% 2% 4% 6% 8% 10% 12% 14%
New York
New Jersey
U.S.
Rhode Island
Connecticut
Massachusetts
New Hampshire
Maine
Private Passenger Auto: 10-Year Average RNW, 2009–2018
Sources: NAIC, Insurance Information Institute.
3.1%
3.7%
4.3%
4.3%
4.9%
5.9%
9.7%
10.3%
0% 2% 4% 6% 8% 10% 12%
New York
U.S.
Rhode Island
New Jersey
Massachusetts
Connecticut
New Hampshire
Maine
Commercial Auto: 10-Year Average RNW, 2009–2018
Sources: NAIC, Insurance Information Institute.
0.4%
2.3%
4.5%
7.0%
9.5%
10.5%
10.5%
11.5%
0% 2% 4% 6% 8% 10% 12% 14%
New Jersey
New York
U.S.
Connecticut
Massachusetts
Maine
Rhode Island
New Hampshire
Commercial MP: 10-Year Average RNW, 2009–2018
Sources: NAIC, Insurance Information Institute.
3.7%
6.7%
7.0%
7.3%
11.2%
12.1%
12.7%
12.9%
0% 2% 4% 6% 8% 10% 12% 14%
New Jersey
New York
U.S.
Connecticut
Rhode Island
New Hampshire
Massachusetts
Maine
Homeowners: 10-Year Average RNW, 2009–2018
Sources: NAIC, Insurance Information Institute.
6.6%
8.2%
12.1%
12.4%
12.8%
13.7%
14.2%
15.7%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
U.S.
New Jersey
New Hampshire
Massachusetts
Connecticut
New York
Maine
Rhode Island
Direct Premiums Written: All Lines, Percent Change by State, 2009-2018
Sources: S&P Global, Insurance Information Institute.
67.9
62.6
59.4
56.0
51.1
50.7
48.9
47.8
47.5
46.9
46.2
45.1
44.9
44.9
44.8
44.5
44.4
42.9
42.2
40.8
40.1
39.0
38.9
38.8
38.8
38.6
0
10
20
30
40
50
60
70
80
CO GA TX SC UT FL ND ID NV AZ TN CA WA MI NE OR MA OK U.S. AR MD AL IN NC SD KY
Top 25 States
Perc
ent
Cha
nge
(%)
Direct Premiums Written: All Lines, Percent Change by State, 2009-2018
Sources: S&P Global, Insurance Information Institute.
38.5
38.3
37.9
36.8
36.0
35.9
35.1
34.7
34.5
34.4
33.8
32.8
31.7
31.5
31.0
30.8
29.5
29.5
27.3
27.1
24.9
24.5
22.0
16.9
16.3
9.4
0
5
10
15
20
25
30
35
40
NY VA MN MT WI MO KS NM NJ RI WY OH MS CT PA IA NH ME LA IL HI DC VT DE WV AK
Bottom 25 States
Perc
ent
Cha
nge
(%)
Direct Premiums Written: Personal Lines Percent Changeby State, 2009-2018
Sources: S&P Global, Insurance Information Institute.
84.6
77.6
71.0
66.7
66.4
65.9
64.3
61.4
59.3
58.8
58.2
57.7
56.4
55.8
54.6
51.3
50.9
50.5
50.3
50.2
50.1
49.2
49.2
49.0
48.8
48.6
0
10
20
30
40
50
60
70
80
90
CO GA TX SC SD NE ND UT FL TN MI OK NV ID MT AL OR U.S. KY AZ MA AR MO CA IA DE
Top 25 States
Perc
ent
Cha
nge
(%)
Direct Premiums Written: Personal Lines, Percent Changeby State, 2009-2018
Sources: S&P Global, Insurance Information Institute.
47.9
47.8
47.7
46.8
46.3
44.4
44.3
44.2
43.2
43.0
41.9
41.5
40.9
40.1
39.4
37.4
36.8
36.0
35.9
34.2
33.0
32.2
28.6
24.2
21.9
20.5
0
5
10
15
20
25
30
35
40
45
50
MN KS WI RI WA NC IN MD LA VA DC WY OH MS NM NJ NY IL CT NH PA ME VT WV AK HI
Bottom 25 States
Perc
ent
Cha
nge
(%)
Direct Premiums Written: Commercial Lines, Percent Change by State, 2009-2018
Sources: S&P Global, Insurance Information Institute.
49.7
47.5
45.3
43.3
43.3
41.9
41.6
41.4
41.4
41.1
40.7
38.8
38.6
37.3
37.1
35.9
34.8
34.3
33.1
32.7
32.6
31.9
30.9
30.9
30.5
29.6
0
10
20
30
40
50
60
CO TX GA WA ND ID CA FL AZ SC UT MA NY OR DE NV MD U.S. NC IN TN VA NJ MN AR HI
Top 25 States
Perc
ent
Cha
nge
(%)
Direct Premiums Written: Commercial Lines Change by State, 2009-2018
Sources: S&P Global, Insurance Information Institute.
29.3
28.9
28.4
28.1
28.0
27.2
27.1
26.6
26.2
26.0
25.6
25.2
24.7
24.4
24.2
22.8
22.4
22.0
22.0
21.1
20.6
19.4
15.0
11.2
7.2
1.4
0
5
10
15
20
25
30
35
PA NM OK WI NE MI SD ME CT MO RI KY WY KS NH OH AL MT MS IA IL DC VT LA WV AK
Bottom 25 States
Perc
ent
Cha
nge
(%)
Direct Premiums Written: Personal Auto, Percent Changeby State, 2009-2018
Sources: S&P Global, Insurance Information Institute.
82.3
79.5
76.5
71.9
71.3
68.7
63.8
63.8
58.3
57.5
56.7
54.9
54.8
54.6
54.2
52.2
53.1
52.2
51.9
51.4
49.2
48.3
46.9
46.9
46.7
46.3
0
10
20
30
40
50
60
70
80
90
CO GA SC TX FL MI UT NV AL TN CA ID SD ND OR U.S. AZ NE MA LA KY OK RI MT WA AR
Top 25 States
Perc
ent
Cha
nge
(%)
Direct Premiums Written: Personal Auto, Percent Changeby State, 2009-2018
Sources: S&P Global, Insurance Information Institute.
46.1
46.1
45.3
44.3
43.7
43.6
43.0
42.5
42.5
41.7
41.0
40.6
39.1
39.0
37.6
36.1
33.1
32.5
32.2
32.1
30.7
28.3
27.3
22.5
19.3
18.9
0
5
10
15
20
25
30
35
40
45
50
MO DE DC MS IN WI MD NC MN VA IA NY OH KS NM NJ NH CT IL WY PA VT ME HI AK WV
Bottom 25 States
Perc
ent
Cha
nge
(%)
Direct Premiums Written: Commercial Auto, Percent Change by State, 2009-2018
Sources: S&P Global, Insurance Information Institute.
111.
6
110.
8
109.
0
97.6
85.3
84.5
79.2
77.5
75.2
66.9
66.4
66.1
64.2
61.8
61.2
61.2
59.7
59.4
58.7
58.0
57.0
56.8
55.8
54.6
54.5
53.7
0
20
40
60
80
100
120
FL TX ND GA IL CO MI CA NV U.S. SC AZ IA NE WA OR OK TN IN NJ AR NC OH ID WV AL
Top 25 States
Perc
ent
Cha
nge
(%)
Direct Premiums Written: Commercial Auto, Percent Change by State, 2009-2018
Sources: S&P Global, Insurance Information Institute.
53.4
52.9
52.3
52.0
50.9
50.5
50.2
49.4
48.1
47.7
46.1
45.1
44.1
43.9
40.0
38.1
37.0
36.9
35.9
34.0
29.5
26.6
25.0
23.9
15.7
0.3
0
10
20
30
40
50
60
MO VA DE PA MN MS KS KY NY MT MD NM MA UT LA WI ME RI CT NH DC WY VT SD HI AK
Bottom 25 States
Perc
ent
Cha
nge
(%)
Direct Premiums Written: Homeowners, Percent Change by State, 2009-2018
Sources: S&P Global, Insurance Information Institute.
91.1
90.6
85.8
75.8
74.0
72.6
71.4
67.0
66.8
62.7
59.2
59.1
58.7
57.1
56.2
55.9
55.2
54.3
53.7
52.4
49.2
47.6
46.5
46.4
46.3
46.1
0
10
20
30
40
50
60
70
80
90
100
CO SD NE OK GA MT ND TX WY TN IA ID KS MN WI KY DE MO AR UT NC MD RI MA SC VA
Top 25 States
Perc
ent
Cha
nge
(%)
Direct Premiums Written: Homeowners Change by State, 2009-2018
Sources: S&P Global, Insurance Information Institute.
46.0
46.0
45.7
45.7
44.4
43.2
43.2
42.2
41.9
41.4
41.1
40.8
39.4
39.0
38.7
36.3
34.9
32.0
31.9
31.0
29.8
28.5
28.0
28.0
25.9
17.0
0
5
10
15
20
25
30
35
40
45
50
U.S. NM WA IN OH IL CT AZ OR NJ ME WV PA FL AL NH DC MI MS NV AK VT NY CA LA HI
Bottom 25 States
Perc
ent
Cha
nge
(%)
82
Catastrophe Loss Update: Major Driver of Rate Pressure
2018 CAT Losses Were Down from 2017, One of the Costliest Years Ever for US
Insurers
Hurricanes Harvey, Irma and Maria, California Wildfires Exact a Huge Toll
82
U.S. Inflation-Adjusted Cat Losses
*2018: Inflation-adjusted estimate, subject to change. 2010s is average of 2010 to 2018.Sources: Property Claims Service, a Verisk Analytics business; Insurance Information Institute.
4037
79
104
50
1980s:$5 B
1990s: $15 B
2000s: $25 B2010s: $35 B
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
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 16 17 18*
Bill
ion
s, 2
01
8 $
Average forDecade Hurricane
Andrew WTC
Katrina, Rita, Wilma
2018 – Third worst year for U.S. Insured Catastrophe Losses. Average Insured Loss per Year for 1980-2018 is $19.3 B.
Harvey, Irma, Maria
84
US Insured Catastrophe Losses by Decade: 1980s – 2010s*
$15
$25
$35
$5
$33
$19
$9
$2$0
$5
$10
$15
$20
$25
$30
$35
$40
1980s 1990s 2000s 2010s 1980s 1990s 2000s 2010s
Serious efforts to mitigate against climate risk must be led by government at all levels. Requires enormous long-term infrastructure
investments that funded primarily through debt
($ Bill)
*2010s figures is the average of the years 2010-2018.Sources: Property Claims Service, a Verisk Analytics business; Insurance Information Institute.
Not Inflation Adjusted Inflation-Adjusted
Inflation-adjusted
insured CAT losses are
rising by $10 billion each
decade
85
Top 8 US Catastrophe Losses of 2018, by Insured Loss
(Insured Losses, 2018 Dollars, $ Billions)*
$10.0
$12.5
$5.0$4.0
$2.0$1.6$1.6$1.0
$0
$2
$4
$6
$8
$10
$12
$14
Colorado Hail ConvectiveStorms (March)
Winter Storms(March)
ConvectiveStorms (May)
Woolsey Wildfire HurricaneFlorence
HurricaneMichael
Camp Wildfire
Insured CAT losses in the US totaled ~$40 billion in 2018
.Sources: PCS; Munich Re; Reinsurance News: https://www.reinsurancene.ws/insurance-industry-losses-events-data/
86
Top 20 Most Costly Disastersin U.S. History—Katrina Still Ranks #1
(Insured Losses, 2017 Dollars, $ Billions)*
$9.3 $9.7 $10.0$11.7$14.2$14.2$15.9
$18.0$19.8$21.9
$25.3$26.0$27.1
$51.6
$5.9 $6.0 $7.1 $7.5 $7.9 $8.3
$0
$10
$20
$30
$40
$50
$60
Jeanne(2004)
Frances(2004)
Rita (2005)
Torn./T-Storms (2011)
Torn./T-Storms (2011)
Hugo (1989)
Ivan (2004)
Charley(2004)
Michael(2018)
Wilma(2005)
Camp Fire(2018)
Ike (2008)
Harvey (2017)
Irma (2017)
Sandy(2012)
Maria (2017)
Northridge(1994)
9/11 (2001)
Andrew(1992)
Katrina(2005)
Harvey, Irma and Maria combined caused an
estimated $55B in privately insured losses in the US
Includes Tuscaloosa, AL,
tornado
Includes Joplin, MO, tornado
17 of the 20 Most Expensive Insurance Events in US History Have Occurred Since 2004—5 of those in 2017/18
*Estimated.Sources: PCS, RMS, Karen Clark & Co; USC Center for Risk and Uncertainty Management adjustments to 2017 dollars using the CPI.
87
Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1997–20161
0.2%2.0%7.0%
5.9%
6.7%
39.9%
38.2%
1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2016 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, $161.1
Fires (4), $8.4
Events Involving Tornadoes (2), $168.1
Winter Storms, $28.2
Terrorism, $25.0
Other Wind/Hail/Flood (3), $29.7
Other (5), $0.8
Wind losses, by far, cause the most
catastrophe losses, even if hurricanes/TS
are excluded.
Tornado share of CAT losses is
rising
Insured cat losses from 1997-2016
totaled $421.2B, an average of $21.1B per year or $1.76B
per month
Winter storm losses were much above average in 2014/15 pushing
this share up
88
0
50
100
150
200
250
300
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
(Percent)
US Reinsurance Pricing Is Sensitive to CAT Activity and Ultimately Impacts Primary Insurance Pricing, Terms and Conditions
Post-Andrew surge
US Property Catastrophe Rate-on-Line Index: 1990 – 2019*
*As of January 1 each year.Source: Guy Carpenter; Artimes.bm accessed at: http://www.artemis.bm/us-property-cat-rate-on-line-index
Post-9/11 Adjustment
Post Katrina, Rita, Wilma
period
Post-Ike adjustment Adjustment
following record tornado losses in 2011 and Sandy in
2012
Record CATs in 2017 and high CAT losses in 2018
pressured US reinsurance prices in recent years (+8%
in 2018, +2.6% in 2019)
89
Personal Lines Growth Drivers
Rate and Exposure are Both Presently Important
Growth Drivers
90
Monthly Change in Auto Insurance Prices, 1991–2019*
*Percentage change from same month in prior year; through Apr. 2019; 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 '15'16 '17'18 '19
Cyclical peaks in PP Auto tend to occur roughly every 7-10 years (early 1990s,
early 2000s, early and late 2010s)
“Hard” markets often tend to occur during recessionary
periods
Previous pricing peak occurred in late 2010
at 5.3%, falling to 2.8% by Mar. 2012
Apr. 2019 reading of 1.4% is down from 9.7% peak in
February 2018 and the lowest since late Apr. 2008
Peak: 9.7% (Feb. 2018)
Sharpest deceleration
since 2003-04
92
$119.7
$128.0 $139.7 $151.2
$159.6
$158.5
$157.2
$160.1
$163.3
$168.1
$174.9
$183.5
$192.8 $207.4 $222.2 $237.7
$247.3
$160.3
$159.6
$157.3
$100
$120
$140
$160
$180
$200
$220
$240
$260
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18E 19F
PP Auto premiums written continue to recover from a period of flat growth attributable to the weak economy impacting new vehicle sales, car choice, and increased
price sensitivity among consumers
Sources: A.M. Best (1990-2017); USC RUM (2018E-2019F).
Private Passenger Auto Insurance Net Written Premium, 2000–2019F
$ Billion
PPA NWP volume in 2018 was up an estimated $80.5B or
51.2% since the 2009 trough
PPA will generate $10B - $14B in new premiums annually
through 2019
93
Homeowners InsuranceNet Written Premium, 2000–2019F
$45.8$49.5
$52.2$54.8$55.2
$61.1$63.5
$66.9$71.9
$77.0$79.9$81.2
$82.8$84.3$86.0
$57.5$56.2
$32.4
$40.0
$35.2
$30$35$40$45$50$55$60$65$70$75$80$85$90$95$100
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18E 19F
Sources: A.M. Best; USC RUM Center.
$ Billions Homeowners insurance NWP continues to rise (up 165% 2000-2018E) despite very little unit
growth during the real estate crash. Reasons include rate increases, especially in coastal
zones, ITV endorsements (e.g., “inflation guards”), compulsory for mortgaged properties
and resumption of home building activity
The Homeowners line will generate about
$1.5B in new premiums annually through 2019
94
State of the Personal Lines Market
Auto Frequency and Severity Are an Immediate Challenge
Homeowners Majorly Impacted by CATs in 2017/18
94
95
Return on Net Worth: All P-C Lines vs. Homeowners & Pvt. Pass. Auto, 1990-2017*
*Latest available.**Excludes 1992, the year of Hurricane Andrew. If 1992 is included the resulting homeowners RNW is 2.1%Sources: NAIC; Insurance Information Institute.
-10%
-5%
0%
5%
10%
15%
20%
25%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
US All LinesUS HomeUS PP Auto
(Percent)Average RNW: 1990-2017*
All P-C Lines: 7.5% PP Auto: 7.5%
Homeowners: 4.6%**
Homeowners is Had Been Outperforming Pvt.Pass. Auto and P-C Industry as a Whole. Heavy CATs in 2017 Caused Profiability to Plunge
Excluding 1992’s Hurricane Andrew
Harvey, Irma, Maria…
Private Passenger Auto Combined Ratio: 1993–2019F
101.7
101.3
101.3
101.0
109.5
107.9
104.2
98.4
94.3
95.1
95.5 98.3 100.2
101.3
101.0
102.0
102.1
101.6
102.3
104.6
106.3
102.6
102.9
102.2
99.5 101.1
103.5
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 15 16 17 18E19F
Private Passenger Auto Underwriting Performance Is Showing the Strains of Rising Frequency (and Severity) Trends in Many States
96Sources: A.M. Best (1990-2019F); USC RUM Center.
Commercial Auto Combined Ratio: 1993–2019F
112.1
112.0
113.0
115.9
102.7
95.2
92.9
92.1
92.4 94.1 96.8 99.1
97.8103.4 106.8
106.7
103.3 108.8
110.5
111.1
112.9
113.3118.1
115.7
116.2
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 15 16 17 18E19F
Commercial Auto Results Are Challenged as Rate Gains Have Yet to Fully Offset Adverse Frequency and Severity Trends
97Sources: A.M. Best (1990-2019F); Center for Risk and Uncertainty Management, University of South Carolina.
Homeowners Insurance Combined Ratio: 1990–2019F
113.0
117.7
158.4
113.6
101.0 109.4
108.2
111.4 121.7
109.3
98.2
94.4 100.3
89.0 95.6
116.6
105.8
106.9122.3
104.1
90.4
92.4
91.8
93.1
107.1
105.5
98.0
118.4
112.7 121.7
80
90
100
110
120
130
140
150
160
170
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18E19F
1
Homeowners Performance Had Improved Markedly Since 2011/12’s Large Cat Losses…until 2017’s Record Catastrophe Loss Activity.
98
Hurricane Ike
Hurricane SandyRecord
tornado activity
Hurricane Andrew
Sources: A.M. Best (1990-2019F); USC RUM Center.
Hurricanes Harvey,
Irma, Maria, CA Wildfires
CA Wildfires,
Hurricanes Michael, Florence
99
Change in Commercial Rate Renewals, by Line: 2018:Q4
Source: Council of Insurance Agents and Brokers; USC Center for Risk and Uncertainty Management.
Percentage Change (%)
1.4% 1.5% 1.8% 2.2% 2.3% 2.4% 2.9%
7.0%
-3.3%
-0.2% -0.2%
0.0% 0.2%1.2%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
Workers
Comp
Cyber
Terrorism
Surety
Marine
Business
Interruption
General
Liability
D&O EPL
Flood
Umbrella
Construction
Commercial
Property
Commercial
Auto
Commercial Property, Business Interruption
are reflecting record CAT losses and pressure
from reinsurance markets
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Commercial Auto was only major line with materially positive
renewals in 2018-19
100
Private Passenger Auto Frequency & Severity Trends
Frequency, Severity and Loss Ratio Trends Are Mixed
102
Bodily Injury: Severity Trend Is Up, Frequency Decline Returning?
2.1% 1.7%3.6%
1.8%
4.4%5.6%
7.7%
3.0%
-5.4%-3.8% -4.0% -4.2%
-2.2%
0.0%
-1.1%
3.4%
0.0%
-2.2% -2.2%
3.0%2.0%
5.9%5.7%4.7%
2.9%1.1%
0.0% 0.0%
-8%-6%-4%-2%0%
2%4%6%8%10%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*
Severity Frequency
Annual Change, 2005 through 2018*
BI Severity Trend is a Major Cost Driver
*2018 figure is for the 4 quarters ending 2018:Q4.Source: ISO/PCI Fast Track data; Center for Risk and Uncertainty Management, Univ. of South Carolina.
103
Property Damage Liability: Severity Up and Frequency Down
1.8% 1.9%
4.1% 3.5%
6.3% 6.0%
3.9%4.6%
-1.6%
-3.5% -3.4%
0.6% 0.6%
-0.3%
1.4% 1.4% 1.1%
-1.7%
-3.9%
2.9%3.6%
2.0% 2.0%
-0.4%
0.4%0.9% 1.2%0.3%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*
Severity Frequency
Annual Change, 2005 through 2018*
Severity/Frequency Trends Have Been Volatile, But Rising Severity since 2011 Is a Concern
*2018 figure is for the 4 quarters ending 2018:Q4.Source: ISO/PCI Fast Track data; Center for Risk and Uncertainty Management, Univ. of South Carolina.
104
Comprehensive Coverage: Frequency and Severity Trends Are Volatile
15.4%15.3%
-14.6%
6.5%
-1.3%
21.3%
8.6%
-9.4%-9.8%-6.3%
1.3%5.8%
-8.9%-5.6%
2.1%
-0.6% -2.3%
15.5%
-1.4% -1.5%
12.6%
-8.1%-5.9% -2.1%
3.5%
-3.1%
1.8%6.2%
-20%-15%-10%
-5%0%5%10%
15%20%25%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*
Severity Frequency
Annual Change, 2005 through 2018*
Weather Creates Volatility for Comprehensive Coverage. Comprehensive Losses Were Down in 2018 Following Severe
Losses Due Largely to Hurricanes Harvey, Irma and Maria in 2017
Severe weather is a principal cause of the spikes in both
frequency and severity
*2018 figure is for the 4 quarters ending 2018:Q4.Source: ISO/PCI Fast Track data; Center for Risk and Uncertainty Management, Univ. of South Carolina.
105
Collision Coverage: Severity Trends Are a Concern*
2.8%1.3%
4.2%
1.4%
5.7% 5.2%
-0.1%
4.8%
-1.8%
-3.6%
2.5%
-2.4% -1.8%
4.4%
1.4% 1.0%
-1.5%
3.9%3.1%
0.1% 0.5%
-2.3%
-0.1%
0.0%
-1.4%-0.5%
0.9%2.3%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*
Severity Frequency
Annual Change, 2005 through 2018*
The Recession, High Fuel Prices Helped Temper Frequency and Severity, But that Trend Clearly Reversed, Consistent with
Experience from Past Recoveries, though Frequency is Subdued*2018 figure is for the 4 quarters ending 2018:Q4.Source: ISO/PCI Fast Track data; Center for Risk and Uncertainty Management, Univ. of South Carolina.
108
Collision Loss Ratio Trending Downward: Pvt. Passenger Auto, 2010 – 2018*
77.4%
70.7%68.9%67.7%
69.3% 69.4%
73.8% 75.2%77.0%
50%
55%
60%
65%
70%
75%
80%
2010 2011 2012 2013 2014 2015 2016 2017 2018*
Loss Ratio
Collision Loss Ratios Fell for the Second Straight Year in 2018
The Collision loss ratio is down 8.5 points since 2016
*2018 data are for the 4 quarters ending Dec. 31, 2018.Source: ISO/PCI Fast Track data; Insurance Information Institute
110
The Future of the Insurance Industry
Looking Into the Crystal BallFrom Technology to Talent
111
A Few Factors Driving Adverse Private Passenger Auto Loss Trends
More Jobs, Better Economy, More People Driving, More Expensive
Cars, Higher Speed Limits…
America is Driving More Again: 2000-2018*Percent Change, Miles Driven*
*Moving 12-month total vs. prior year through December. Sources: Federal Highway Administration; Insurance Information Institute.
1.7%2.1%
1.5%
2.2%1.9%
1.0%0.4% 0.3%
-2.1%
-0.3%
0.8%
-0.3%
0.1%0.6%
1.9%
2.7%
1.2%
0.4%
01 03 05 07 09 11 13 15 16 17 18*-2.5%
-1.5%
-0.5%
0.5%
1.5%
2.5%
3.5%
Fastest Growth in More Than a
Decade
Tremendous Growth In Miles Driven. The More People Drive, the More Frequently They Get Into Accidents.
113
12,831
12,852
12,938 13,054
13,099
12,995
12,651
12,480
12,421
12,264
12,149
12,111
12,150 12,267 12,461
12,544
12,456
13,145
13,198
12,989
11,400
11,600
11,800
12,000
12,200
12,400
12,600
12,800
13,000
13,200
13,400
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Some Reasons for DeclineDrop in % of young licensed drivers
Smartphone access to ride hailing, delivery, shopping ad video chat apps
Rising cost of driving (vehicles, insurance)
Sources: Federal Reserve Bank of St. Louis; Federal Highway Administration, BLS;; Univ, of South Carolina RUM Center.
Total Vehicle Miles Traveled per Person per Year, 1999–2018
Miles Traveled
Vehicle miles traveled per person
never fully recovered from
recession and is down 5.6% from the
2004 peak
114
Share of Young People Obtaining Drivers License Has Tumbled over the Past 30 Years
n Is This Bad? 16-17 year olds have crash rates twice that of 18-19 years olds and 4.5 times that of 30-59 year olds
n But Is the Pool Shrinking?Anything that reduces the pool of potential drivers is a negative for auto insurers
n Auto Makers View: They’ll get licensed but will opt for safer, small, entry-level SUVs
Sources: CB Inssights
115
INDUSTRY DISRUPTORS
Technology, Society and the Economy Are All
Changing at a Rapid PaceReality vs. Drinking the Silicon Valley Kool Aid
115
116
The Internet of Things and the Insurance Industry Value Chain
Source: Willis Capital Markets & Advisory; Insurance Information Institute.
Who owns the data? Where does It flow? Who does the analytics? Who is the capital provider?
117
Technology Hype Curve: Many Technologies Potentially Impacting the P/C Insurance Industry Have Been Heavily Hyped
And so far, there’s no question that the hype
around autonomous vehicles far exceeds the reality
Source: Gartner (Aug. 2018) accessed at: https://www.gartner.com/smarterwithgartner/5-trends-emerge-in-gartner-hype-cycle-for-emerging-technologies-2018/
According to the IIHS, the Level 2 vehicles available today are
not capable of driving safely on their own—and such capability
is years away
118
Autonomous Vehicle Adoption Rates, by Degree of Autonomy: 2000 – 2050F
Source: Accenture and Stevens Institute of Technology (2017), Insuring Autonomous Vehicles.
Adoption rates of fully autonomous vehicles are not significant until the
late 2020s or early 2030s
119
Premium Shifts and Opportunities for P/C Insurers: 2020 – 2050F
Source: Accenture and Stevens Institute of Technology (2017), Insuring Autonomous Vehicles.
Traditional auto insurance premiums start to decline in 2026, partially replaced by
new product lines
120
Opportunities for P/C InsurersProduct Line Possible Insured RisksCyber Security Vehicle theft, unauthorized entry,
ransomware, hijacking of controls (via hacking event), privacy (theft/misuse of personal information)
Product Liability
Communication/internet failure, software bugs, memory overflow/loss, algorithm defects, sensory equipment failure
Infrastructure Liability
Failure of cloud server systems, system communications failures
Source: Accenture and Stevens Institute of Technology (2017), Insuring Autonomous Vehicles.
121
Car Subscription Services: A Threat to Personal Auto?
n Liberty Mutual, Assurant, Chubb have struck multiple deals
n Volvo, Ford, Cadillac, Porsche, BMW and Mercedes-Benz have either launched or announced plans to launch car subscription models
Source: CB Insights accessed 3/14/18 at: https://www.cbinsights.com/research/insurance-car-subscription-partnerships/
122
Car Subscription Services: A Threat to Personal Auto?
n Ford’s Canvas programs states that it provides: BI & PD Liability $300K combined single limit), PIP, Med Pay, UI/UIM, Collision & Comprehensive ($500 deductible), Roadside Assistance, Rental Reimbursement
n No flexibility in coverage but can use own auto insurance as primary and Canvas as excess
Source: www.drivecanvas.com accessed 3/14/18.
123
Car Subscription Services: Insurers Partnering with US Car Subscription and Sharing Programs
Source: CB Insights accessed 3/14/18 at: https://www.cbinsights.com/research/insurance-car-subscription-partnerships/
The car subscription
service is tiny—and how much it
will grow is uncertain;For auto
manufacturers car subscriptions are
a variation on leasing. For auto
insurers, there is a more meaningful distinction (e.g.,
personal or commercial exposure)
124
Distribution Trends
Distribution by Channel Type Continues to Evolve Around
the World
125
Personal Lines Distribution Channels, Direct vs. Independent Agents, 1972-2017
Source: Univ, of South Carolina, Risk and Uncertainty Management Center based on data from Conning and A.M. Best.
0%
10%
20%
30%
40%
50%
60%
70%
80%72 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Direct Independent Agents
Independent agents have lost significant personal lines market share since the early 1970s. That
trend trend slowed from 2000-2007, but accelerated during the financial crisis, though it
may be slowing again.
126
InsurTech Investors
Who Invests in What—and Why
126
127
P/C InsurTech Transactions by Subsector
Source: CB Insights,Quarterly InsurTech Briefing,, Q1 2018.
Distribution consistently
accounts for the majority of P/C transactionsB2B share is
growingActual carrier start-ups are quite rare
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Who Are the Most Successful InsurTechInvestors To Date—and for the Future?
Source: CB Insights,Quarterly InsurTech Briefing,, Q1 2018. Drawn from InsurTech Investor Survey.
Traditional (Independent) VCs are viewed as the
most successful to date, but Corporate/
Incumbents are viewed as the
favorites over the long run
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Which InsurTech Segments Are the Most Attractive to VCs?
Source: CB Insights,Quarterly InsurTech Briefing,, Q1 2018. Drawn from InsurTech Investor Survey.
VCs believe that Data & Analytics
followed by Product &
Distribution and Business
Process Enhancement are the most
attractive subsectors for
investment
6 Observations on Venture Capital Investment Patterns, Practices and Preferences1. Actual Risk-Bearing Insurer Start-Ups Are Rare and
Nobody Including VCs Is Clamoring for this to Changew Implication: The near-term likelihood of a major tech usurper
invading the traditional P/C or Life insurance industry and bearing actual insurance risk is remote– The economics of such a transaction would likely destroy shareholder
value in the tech firm– Such a transaction would likely be rejected using traditional NPV or
IRR methods
2. Nature of InsurTech Investment Is Far More Complimentary to Insurer Operations than it Is Disruptivew Implication: Much of what InsurTechs are doing can viewed as
an outsourcing of tech R&D. Insurers will adopt (acquire) or copy these technology if NPV is positive. – This is a very efficient way to manage tech investments– Options increase, less likely to be stuck with in a tech dead-end
Observation on Venture Capital Investment Patterns, Practices and Preferences
3. InsurTechs Prefer to Partner with “Smart Money” Investorsw Implication: Over the longer run, (re)insurers/large brokers could
account for the majority of InsurTech deals, along with some of the largest VCs with in-house insurance industry expertise– Increased presence of incumbents suggests a widening “Kill Zone” for
insurance startups
4. InsurTech Start-Ups Go Where (They Think) the Money Isw Implication: With ~40% of premium dollar going to something
other than pure losses, it’s easy to see how InsurTechs would be drawn to areas such as Distribution – But these solutions are easily replicated or acquired– Data Analytics, Business Process Enhancement offer ongoing
opportunities to gain competitive and efficiency enhancements
Source: University of South Carolina, Center for Risk and Uncertain Management.
Observation on Venture Capital Investment Patterns, Practices and Preferences5. Valuations Are Likely Inflated: Pain to Come
w Implication: Over the longer run, (re)insurers/large brokers could account for the majority of InsurTech deals, along with some of the largest VCs with in-house insurance industry expertise– Increased presence of incumbents suggests a widening “Kill Zone”
for insurance startups
6. “Cool” Ideas Aren’t Enough*w Implication: Shift toward practical applications with an
emphasis on measurable results (ROI)– Neither InsurTech firms nor investors have endless time or money
for experimentation
*This point adapted from: PropertyCasualty360.com, InsurTech starups wane, but funds still pour into maturing market, Sam Friedman, April 10, 2018.
Source: University of South Carolina, Center for Risk and Uncertain Management.
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INSURANCE TECHNOLOGY:FIN TECH ZEROES IN
Number and Value of Deals Is Increasing
An Industry that Has Always Been Accepting of Change and Innovation
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Talent Wars
Can the Insurance Industry Win the War for Talent?
Insurance is Not the Only Industry that is Interested in Hiring New Talent, Especially those with
Data/Analytics Skills
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Can Insurers Win the War for Talent?
Source: Business Insurance, 2017 Risk Management and Insurance Schools Ranking and Directory,
The number of RMI
majors is up sharply
Overall employment
is up too
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Number of RMI Majors at USC, by Academic Year
366350
292
0
50
100
150
200
250
300
350
400
2016-17 2017-18 2018-19
USC’s RMI program has experienced significant growth in recent years,
becoming the 3rd largest program in the US, according to Business Insurance
Academic Year
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Enrollment in FINANCE 341 (USC’s Introduction to RMI Course)
405350
282258
050100150200
250300350400450
2015-16 2016-17 2017-18 2018-19
Enrollment in USC’s Introduction to Risk Management & Insurance course is at a record
high—up 57% over the past 3 years. This reflects growth in the number of RMI majors, increased awareness of the importance of RM across all
business disciplines and increased employment, internship and scholarship opportunities
Academic Year
Can Insurers “Win” the War on Talent?n Hiring Needs: The industry has a stated need of hiring some
400,000 people over the next several years
n Inclusive Approach: The industry’s approach has been to suggest that virtually everyone, from any background can build a rewarding career in the insurance industry
n So Far, So Good: To date, the industry’s diligence and efforts seems to be meeting with successw Insurers seem generally to be successful in their overall recruiting efforts
n Some Companies Do an Especially Job:w Good job articulating career path, uniqueness of their company; Strong
campus presence
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Comments from the Ivory Tower
nJob market is strong for new college grads (B-School and STEM majors); Unemployment rate for Americans with 4-year degrees is about 2%
nMany/most students have multiple offers which usually pits insurers against other insurers for talent or with equal frequency, non-insurersØ 75% of USC RMI students double major (e.g., Finance, Acct., Supply
Chain/Logistics)
nCompetitors for Talent: L/H Insurers, brokers, banks (include digital banks), consulting firms, financial advisory firms, healthcare services, manufacturers, technology/software, construction firms, transportation and logistics (e.g., Amazon); Law School
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What Are Students Looking For?n Clear career path with opportunities for growth and
advancement (don’t want to be permanently pigeon-holed into claims or underwriting
n Emerging Leaders Programs are successful
n Providing internship opportunities gives you a huge advantage
n Companies that commit to a campus visit each year, visit classrooms, Gamma Iota Sigma presentation
n Job Shadowing/Part-Time Jobs
n Top students want to nail down their job very early in their senior year (e.g., September)
Thank you for your timeand your attention!
Twitter: twitter.com/bob_hartwigFor a copy of this presentation, email me at [email protected]
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