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Pandemics, Politics & Economics:P/C Insurance in an Era of Uncertainty
Robert P. Hartwig, PhD, CPCUClinical Associate Professor of Finance, Risk Management & Insurance
Darla Moore School of Business ¨ University of South CarolinaRobert.Hartwig@moore.sc.edu ¨ 803.777.6782
October 14, 2020
Pandemics & P/C Insurance: Outline n P/C Insurers: Overcoming Uncertainty With Strength
w Financial Overview: The Industry’s Financial Position Amid the COVID-19 Pandemic
n COVID-19: Potential Coronavirus Impacts on Key Lines
n Investment Market Issues: Volatility Rules, Low Interest Rates are Back
n The Economy and COVID-19: Overview & Outlook
n Commercial Lines Rate Trends & Reinsurance Market Developments
n Litigation/Tort Trends
n Federal & State COVID-19 Initiatives Impacting Commercial Insurers
n Summary and Conclusions
3
P/C Insurance Industry: Financial Overview Amid the
COVID-19 PandemicThe P/C Insurance Industry Entered the COVID-19 Pandemic from a Position of
Financial Strength
Economic, Financial Market, Regulatory and Tort Risks Are Major
Challenges Going Forward3
4
Policyholder Surplus (Capacity), 2006:Q4–2020:H1
Sources: ISO, A.M .Best; Risk and Uncertainty Management Center, 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
$742.1 $779.5
$802.2
$812.2 $847.8
$771.9 $819.7
$662.0
$570.7
$566.5
$505.0
$515.6
$517.9
$400$450$500$550$600$650$700$750$800$850$900
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
19:Q1
19:Q2
19:Q3
19:Q4
20:Q1
20:Q2
Financial Crisis
(-16.2%)
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
(-4.9%)
Policyholder Surplus is the industry’s financial cushion against large insured events, periods of economic stress and
financial market volatility. It is also a source of capital to underwrite new risks.
The P/C insurance industry entered the COVID-19 pandemic from a position strength and was
able to withstand the 9.0% surplus decline in Q1 2020
P/C Industry Net Income After Taxes, 1991–2020E*n 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%n 2019: ROAS = 7.7%
*2020 estimate based on annualized actual 1H:20 figure of $25.0B. ROE figures are GAAP; 1Return on avg. surplus. Excludes Mortgage & Financial Guaranty insurers for years (2009-2014). 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
$50,000
$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 20E
COVID impacts will likely have a negative influence on Net Income in 2020, but too
soon to determine magnitude
$ Millions
ROE: Property/Casualty Insurance by Major Event, 1987–2020:H1* (est.)
6
*Excludes Mortgage & Financial Guarantee in 2008 – 2014. 2020:H1 estimate is based on actual Q1 2020 figure of 8.8%.
Sources: ISO, Fortune; 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 18 19 20*
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* ROE fell by 8.3 pts from 12.7% to 4.4%
(Percent)
Record Tornado Losses
Sandy
Low CATs
Harvey, Irma, Maria,
CA Wildfires
2019 7.7%
2020:H1 8.8%
Percentage Point Change in P/C ROEs During Past Economic Downturns: 1971 - Present
7Source: USC Center for Risk and Uncertainty Management.
Percentage Point Change
-8.3%-7.1% -7.0%
-3.0%-2.4%
0.8%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
2007-08 2000-01* 1973-75 1981-82 1979-80 1990-91
*2000-2001 decline impacted by 9/11 losses.
Change in P/C ROE During Past Economic Downturns
Avg.: -4.5% (-4.0% ex. 2000-01)Median: -5.0% (-3.0% ex. 2000-01)
Although the COVID-19 economic downturn will
be sharp, it’s expected to be brief with a rapid “V-
Shaped” recovery
Profitability & Politics
8
How Is Profitability Affected by the President’s Political Party?
QUIZ 1: Politics, Presidents, Pandemics & P/C Insurance
n Using data going back to 1950, is the P/C insurance industry more profitable, on average, (as measured by ROE) when the President of the United States is a Republican or a Democrat?A. Republican
B. Democrat
QUIZ 2: Politics, Presidents, Pandemics & P/C Insurance
n Under which presidential administration was the P/C insurance industry most profitable, as measured by ROE, going back to 1950?A. Trump
B. Clinton
C. Bush II
D. Reagan
E. Carter
F. Nixon
G. Johnson
H. Kennedy
I. Truman
-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 16 18 20
BLUE = Democratic President RED = Republican PresidentTr
uman
Nix
on/F
ord
Ken
nedy
/ Jo
hnso
n
Eise
nhow
er
Car
ter Reagan/Bush I Clinton Bush II
P/C insurance Industry ROE by Presidential Party Affiliation, 1950- 2020*
*2020 figure is for Q1 only. ROEs for the years 2008-2014 exclude mortgage and financial guaranty segments.Source: Risk and Uncertainty Management Center, University of South Carolina.
Obama
Trum
p
15.10%8.93%
8.65%8.35%8.33%
8.20%7.98%
7.68%6.98%6.97%6.90%
5.43%5.03%
4.83%4.68%
4.43%3.55%
16.43%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
CarterReagan II
NixonClinton I
G.H.W. BushG.W. Bush II
Obama IIClinton IIReagan I
Nixon/FordTruman
TrumpEisenhower IEisenhower II
G.W. Bush IObama I
JohnsonKennedy/Johnson
OVERALL RECORD: 1950-2019*
Democrats 8.1%Republicans 7.8%
Party of President has marginal bearing on profitability of P/C insurance industry
P/C Insurance Industry ROE by Presidential Administration, 1950-2019*
*Trump figure is 2017-2019 average. ROEs for the years 2008-2014 exclude mortgage and financial guaranty segments.Source: Risk and Uncertainty Management Center, University of South Carolina.
Net Premium Growth (All P/C Lines): Annual Change, 1971—2020:H1
-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 19 20
(Percent)1975-78 1984-87 2000-03
*Pre-COVID-19 forecast from A.M. Best Review & Preview (Feb. 2020). NOTE: Shaded areas denote “hard market” periodsSources: A.M. Best (1971-2013, 2020F), ISO (2014-19); Risk & Uncertainty Management Center, Univ. of South Carolina .
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.
2020F: 3.8%*2020:H1: 2.9%
2019: 3.6%2018: 10.8%2017: 4.6%2016: 2.7%2015: 3.5%2014: 4.2
2013: 4.4%2012: +4.2%
2020 OutlookPre-COVID: 3.8%Through H1: 2.9%
2020 Pre- vs. Post-COVID Growth Expectations for P/C Insurance: From Modest to Miserly
Source: 2020 Pre-COVID-19 figures from Best’s Review & Preview (Feb. 2020); Post-COVID estimates from USC Center for Risk and Uncertainty Management.
Percentage Change in Growth Rate
2.5%2.8%
2.3%
3.8% 3.7%4.0%
0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%
All Lines Personal Commercial
2020: Pre-COVID 2020: Post-COVID
Note: 2020 expectations are based on a modestly optimistic scenario for recovery in Q3 and Q4 and that premium volume in
Q1 was largely unaffected
Potential Impacts of COVID-19 on Written Premium in 2020, by Key LineLine Estimated Premium ImpactWorkers Compensation 12.5% to 25% reduction in premium written in 2020
(equates to $5.9B to $11.75B DWP)Business Interruption & Contingency
7% to 13% reduction in premium volume (US & UK)
General Liability* $1.5B to $6.3B premium reduction in US
Personal Auto ~$10B in refunds, rebates (equates to ~4% of DWP)
Personal Travel Insurance 29% to 78% reduction in premium written (US & UK)
Personal/Comm. Motor ~10% reduction in US; 0% to 11% reduction in UK
Marine/Aviation/Transport $0.7B-$1.5B (US); $0.6 - $1.2B (UK)
15
*Includes nursing home professional liability.Source: Derived from Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic (Fig.11, 14), May 2020. and other sources; Risk and Uncertainty Management Center, University of South Carolina.
Potential Impacts of COVID-19 on LOSSES in 2020, by Key LineLine Estimated Loss ImpactWorkers Compensation $0.2B - $92B (depends on severity of pandemic
and “presumption” determination)Business Interruption & Contingency
$2B - $22B (US); $1.1B - $13.9B (UK)
General Liability* $0.7B to $27B loss across US & Bermuda markets
Personal/Comm. Motor $26B - $57B reduction in personal auto and $4.2B - $9.4B commercial (US); $1 - $7B overall reduction in UK
Mortgage $0 - $1.7B loss across US & Bermuda markets
D&O $0.6 - $4.0 loss across US & Bermuda markets
Marine/Aviation/Transport $0.3B-$1.3B reduction (US); $0.6 - $1.1B (UK)
16
*Includes nursing home professional liability.Source: Derived from Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic (Fig.11, 14), May 2020. and other sources; Risk and Uncertainty Management Center, University of South Carolina.
P/C Insurance Industry Combined Ratio, 2001–2020:H1*
*Excludes Mortgage & Financial Guaranty insurers 2008--2014.*First Half 2020.Sources: A.M. Best, ISO (2014-2019).
95.7
99.3101.1
106.5
102.5
96.4 97.097.8
100.799.298.9
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 19 20**
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
Pre-COVID 2020 Combined Ratio Est.
99.1 (A.M. Best)
COVID-19 has had no
discernable net impact on
pre-COVID expectations for under the
combined ratio though
Q2 2020
COVID-19 Announced Losses vs. Top-Down Industry Estimates (as of May 12, 2020)
*Lloyd’s CEO John Neil appearance on CNBC, May 14, 2020: https://www.cnbc.com/2020/05/14/lloyds-of-london-coronavirus-will-be-largest-loss-on-record-for-insurers.htmlSources: Company disclosures, Dowling & Partners, Barclays Research, Autonomous Research, BofA Global Research, UBS Securities, Willis Towers Watson from Artemis.bm accessed at https://www.artemis.bm/news/consensus-emerging-on-30bn-to-100bn-covid-19-industry-loss-willis-re/; Risk and Uncertainty Management Center, University of South Carolina.
Global P/C COVID-19 loss consensus $30B - $100B
(~$60B as midpoint)
UBS
30-60bn
Q1 reported COVID claims totaled $4.2B according to Willis, but Q2 will be a truer
reflection of actual loss
Lloyd’s: Says its own p/c claims could reach $4.3B by June 30. Estimates global p/c losses at $107B; Global investment losses = $96B*
Potential Impact of COVID-19 on Insured Losses by Line
Source: Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic (Fig.10), May 2020; Risk and Uncertainty Management Center, University of South Carolina.
Loss impacts of COVID-19 on the WC line are potentially severe but
depend not only on the course of the disease but state decisions on
presumption
Business Interruption losses
are potentially material even under
the moderate severity scenario
Market Survey: COVID-19 Claims
20Source: Artemis COVID-19 Market Survey (June 2020) accessed at: https://www.artemis.bm/coronavirus-survey-update/
Nearly 40% of market participants believe Q3 2020 will see the most severe for reporting COVID
claims Over 60% of market participants believe it
will take 2-5 years before COVID’s impacts on the industry are fully
understood.
Viral Outbreaks Are Not An Insurable Risk
21*Sources: APCIA using published reports, including IMF, World Bank, Learnbonds.com; APCIA adjustment to 2020 USD
For Reference
2005 Katrina$58 Billion
2001 9/11$48 Billion
(insured losses)
Pandemics are frequent, severe, and widespread
(7 pandemics with multi-
billion$ economic
losses in just the last 18
years)
Economic Losses from Pandemics
Estimated Monthly U.S. Business Interruption Coronavirus Losses for Small Business—Potential Range (<100 Employees; $Bill)
Source: APCIA, April 2020.
$52
$223 $255
$431
$0
$100
$200
$300
$400
$500
Small Business w/ BI - Low Small Business w/ BI - High All Small Businesses - Low All Small Businesses - High
The potential for such losses for all businesses of all sizes is currently
estimated at $1 - $1.1 trillion per month.
* Businesses impacted: Proportion of businesses completely or substantially closed related to coronavirusAssumptions: Losses if standard insurance policy exclusions for viruses/pandemics are voided and physical loss/damage requirement is stricken; three main coverages - profit lost, payroll/benefits, additional expenses; average annual $2m revenue and 7% profit margin; non-wage benefits of small businesses are 25% less than that for average US businesses
60% Businesses impacted*10% of Payroll for additional expenses
33.3% Have BI coverage50% Have BI payroll/benefits coverage
90% Businesses impacted*30% of Payroll for additional expenses
60% Have BI coverage80% Have BI payroll/benefits coverage
60% Businesses Impacted*10% of Payroll for additional
expenses
90% Businesses impacted*30% of Payroll for additional
expenses
Monthly BI losses for small business vary widely depending on underlying
assumptions but expansive legislation would result in higher estimates; For
all businesses <500 employees, BI losses range between $393B - $668B
June Paper on Insurability of Pandemic Risk
n Large scale business continuity risks from pandemics are generally note insurable in the private sector
n Business continuity risks are largely undiversifiable within private insurance markets and are highly correlated with other risks (e.g., investment risks)
n Large scale business continuity losses pose a potentially systemic risk to the industry and overall economy
n Import role for government Download at: https://www.uscriskcenter.com/wp-content/uploads/2020/05/Uninsurability-of-Pandemic-Risk-White-Paper-Hartwig-APCIA-FINAL-WORD.pdf
New Paper on Communicable Disease Exclusions and Market Stability
n CD exclusions are becoming more commonplace in reinsurance treaties
n Regulators are generally not approving primary insurers filings for exclusions in underlying primary policies
n Paper addresses the global factors (e.g., accumulation risk, risk aversion, uninsurability) driving the exclusions
n Also addresses market consequences if misalignment persists Download at: https://www.uscriskcenter.com/wp-
content/uploads/2020/08/CD_Exclusion_Whitepaper-Aug-2020-No-Typo.pdf
Figure 1. Pandemic - An Insurable Risk?Requirements of an
Insurable RiskRequirement Met? Yes/No
1. Large number of exposure units
No. While millions of individual businesses suffered business continuity losses arising from the COVID-19 pandemic, the pandemic’s effects were global in scale and nearly simultaneous in scope, effectively reducing the number of exposure units to one—the business sector collectively.
2. Accidental/Random and unintentional loss
No. Pandemics are natural phenomena but the decisions by thousands of policymakers at all levels of government to close millions of businesses and restrict the movement of people was intentional.
3. Determinable and measurable loss
No. For insurers to determine losses, the scale and scope of losses for any given risk must be estimable. Business continuity losses from COVID-19, estimates for which remain highly uncertain and range into the trillions of dollars, are indeterminable due to their dependence on decisions made by thousands of policymakers at all levels of government, the pace at which consumers and businesses reengage in the economy and epidemiological developments.
4. No (ruinous) catastrophic loss
No. Unlike traditional catastrophe risks, pandemics by definition threaten all or most or the members of the risk pool simultaneously. The rapid aggregation of losses is destabilizing and potentially ruinous, threatening the solvency of individual insurers and the industry as a whole.
5. Calculable chance of loss
No. Pandemics have occurred throughout history but the policy response to COVID-19 is without precedent. Insurers traditionally rely on historical loss information and trends to estimate the frequency and severity (cost) for risks they insure. No such historical data exists for the policy response associated with the COVID-19 pandemic, hence premiums cannot be determined.
6. Economically feasible premium
No. Because pandemics by definition threaten all or most or the members of the risk pool simultaneously, the probability of loss is close to certainty. The high probability of loss combined with high claim severities necessarily lead to premiums that can approach or even exceed the cost of the claim itself.
26
Catastrophe Loss Update: Major Driver of Rate Pressure
CAT Losses for the Decade Just Ended Were Up Materially—Costliest Ever
Primary, Reinsurance and Retro MarketsAll Impacted and Are Pressuring Rates
COVID Pressure Kicks Off the New Decade26
U.S. Inflation-Adjusted Cat Losses
Sources: Property Claims Service, a Verisk Analytics business; Insurance Information Institute.
4037
79
104
53
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
Average Insured Loss per Year for 1980-2019 is $19.8 Billion
Harvey, Irma, Maria
36
19
2020:H1 CAT losses in the US totaled ~$20B (not including COVID-
related losses)
As of Oct. 4, 2020, more
than 4 million acres of
woodland had been
destroyed by wildfire in CA
alone this year
Top 20 Most Costly Disastersin U.S. History—Katrina Still Ranks #1
28
(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)
8 of the top 20 mostly costly insured events in US history occurred during the 2010s
17 of the 20 Most Expensive Insurance Events in US History Have Occurred Since 2004
*Estimated.Sources: PCS, RMS, Karen Clark & Co; USC Center for Risk and Uncertainty Management adjustments to 2017 dollars using the CPI.
COVID-19 insured property losses remain highly
uncertain, but could easily make the top 10
29
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 20
(Percent)
US Reinsurance Pricing Is Sensitive to CAT Activity and Ultimately Impacts Primary Insurance Pricing, Terms and Conditions. COVID Will Pressure RoL into 2021
Post-Andrew surge
US Property Catastrophe Rate-on-Line Index: 1990 – 2020*
*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 2018/19 pressured US
reinsurance prices in recent years (+9.0% in 2020, +2.6% in 2019,
+7.5% in 2018)
2020 Global RoL+5%
Major and Rapid Changes in the Reinsurance Markets
n Property: COVID-19 and Concerns Over BI Are Driving Reinsurers to Exclude Communicable Disease (CD) Globally in Virtually All Property Treatiesw Primary insurers are running into DOI resistance to gain approvals for exclusions
w Commercial and personal lines
w Exclusion is all CDs, not just pandemic or epidemic
n Casualty: Some Reinsurers Starting to Exclude CDw Exclusions being driven by London market
– GL, WC (esp. WC CAT)
w No universal exclusion push in non-London markets (yet)
w Not affecting financial lines yet (D&O, E&O, Fiduciary, Fidelity) or Cyber
n Reinsurers Try to Manage Global Aggregation Risk
These same factors are
contributing to capacity issues in the retrocessional
market
Major and Rapid Changes in the Reinsurance Markets
n Exclusionary Language in Reinsurance Treaties: Based on London Market Association (LMA) Languagew LMA5394: is a broad communicable disease exclusion for use with property treaty
reinsurance contracts that excludes “any loss, damage, liability, claim, cost or expense of whatsoever nature, directly or indirectly caused by, contributed to by, resulting from, arising out of, or in connection with a Communicable Disease or the fear or threat (whether actual or perceived) of a Communicable Disease regardless of any other cause or event contributing concurrently or in any other sequence thereto.”
w LMA5399: is a broad communicable disease exclusion for use with casualty treaty reinsurance contracts that excludes “all actual or alleged loss, liability, damage, compensation, injury, sickness, disease, death, medical payment, defen[s]e cost, cost, expense or any other amount incurred by or accruing to the reinsured, directly or indirectly and regardless of any other cause contributing concurrently or in any sequence, originating from, caused by, arising out of, contributed to by, resulting from, or otherwise in connection with a Communicable Disease or the fear or threat (whether actual or perceived) of a Communicable Disease.”
INVESTMENTS: THE NEW REALITY
Investment Performance Is a Key Driver of Insurer Profitability
Aggressive Rate Cuts Will Adversely Impact Invest Earnings
Financial Crisis Déjà Vu?
Property/Casualty Insurance Industry Investment Income: 2000–2020E
$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
$59.6$61.4
$52.8
$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 15 16 17 18* 19 20
Due to persistently low interest rates, investment income remained below pre-crisis levels for a decade. Lower interest rates post-COVID will drive investment income down once again.
*2020 figure is annualized based on H1 actual of $26.4B. 2018-19 figures are distorted by provisions of the TCJA of 2017. Increase reflects such items as dividends from foreign subsidiaries.
1 Investment gains consist primarily of interest and stock dividends. Sources: ISO; University of South Carolina, Center for Risk and Uncertainty Management.
($ Billions)
Investment income had just recovered from a decade-long slump. Aggressive Fed
actions and recession are pushing interest rates lower and will adversely impact investment income for years to come.
Net Investment Yield on Property/Casualty Insurance Invested Assets, 2007–2020F*
4.4
4.0
4.6 4.5
3.7 3.83.7
3.43.7
3.2 3.1 3.13.4
3.1 3.0
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 19 20F
The yield on invested assets remains low relative to pre-crisis yields. Fed rate increases beginning in late 2015 through 2018 halted the slide in yields, but rate cuts in
2019/2020 will preclude future gainsSources: NAIC data, sourced from S&P Global Market Intelligence; 2017-19 figures are from ISO. 2020F is from the Risk and Uncertainty Management Center, Univ. of South Carolina.
(Percent) Investment yields remained depressed--down about 150 BP from pre-crisis
levels. COVID-19 Fed rate cuts, bond purchases will push asset yield down
Average: 1960-2019 = 4.9%Low: 2.8% (1961)
High: 8.2% (1984/85)
US Treasury Security Yields:A Long Downward Trend, 1990–2020*
*Monthly, constant maturity, nominal rates, through Sept. 2020. Sept. 2020 figure is as of 9/13/20.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Risk and Uncertainty Management Center, University of South Carolina.
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
'90'91'92'93'94'95'96'97'98'99'00'01'02'03'04'05'06'07'08'09'10'11'12'13'14'15'16'17'18'19'20
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 many years to come.
Fed emergency rate cuts and QE in response to the COVID-19 pandemic and
market volatility have pushed rates to their levels
below those in the financial crisis
10-YR. TREASURYJan. 2020: 1.76%
Sept. 2020: 0.69%*
Investments: Property/Casualty Insurers, 2018
Sources: NAIC from Insurance Information Institute 2020 Fact Book.
-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 20*
,*Through Oct. 9, 2020.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
S&P 500 Index Returns, 1950–2020*
Fed Raises Rates
The S&P 500 was up 28.9% in 2019, the best year since 2013, following a decline
of 6.2% in 2018. 2020 has seen extraordinary volatility but the S&P 500 is
actually up for the year*
2020 YTD+7.63%
2019: +28.9%2018: -6.2%2017: +19.42016: +9.5
Top 10 Largest Daily Point Drops in S&P 500 History*
Source: Standard & Poor’s; USC Center for Risk and Uncertainty Management.
Point Change
-131.1-113.2 -111.9 -109.7
-137.6-140.9
-188.0-225.8
-260.7
-324.9-350
-300
-250
-200
-150
-100
-50
0
3/16/2020
3/12/2020
3/9/2020
6/11/2020
3/11/2020
2/27/2020
3/18/2020
2/5/2008
2/24/2020
9/3/2020
*Index began in 1923.
9 of the 10 largest point declines ever on the S&P 500 have occurred
since the start of the pandemic; Period includes 3 of the top 20
declines in percent terms-11.98%
decline à 3rd
largest ever
-9.51% decline à 6th
largest ever
-7.60% decline à19th
largest ever
The S&P 500 plunged 34% from its Feb. 19 peak
and March 23 trough
THE ECONOMY
COVID-19 Pandemic Will Directly and Severely Impact Growth As Exposure Growth Rapidly Shrinks
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
Length of US Business Cycles, 1929-Present*
43
13 8 11 10 8 10 11 166
168 8
197
50
80
3745
39
24
106
36
58
12
92
120
73
128
0102030405060708090
100110120130
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
Feb.2020
ContractionExpansion Following
Duration (Months)
Month Recession Started
Average Duration*Recession = 13.4 MonthsExpansion = 63.8 Months
* As of August 2020 but excluding current COVID-19 recession which began in Feb. 2020 but with an indeterminabt end.Sources: National Bureau of Economic Research; Risk and Uncertainty Management Center, University of South Carolina.
The most recent
economic expansion
ended in Feb. 2020 and was the longest in
US history (began July
2009)Recession may
officially last only 5-8 monthsWill likely take
2+ years to recover lost
growth
?
US Real GDP Growth*
* Estimates/Forecasts from Wells Fargo Securities.Source: US Department of Commerce, Wells Fargo Securities 10/20; 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%
2.5% 3.5%
2.9%
1.1% 3.1%
2.0%
2.1%
-5.0%
28.6%
6.1%
5.2%
3.9%
2.9%
2.3%
-31.4%
3.1%3.6%
2.5%
1.8%
1.1%4.1%
1.8% 2.1%
1.6%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
2008
2009
2010
2011
2012
2013
2014
2015
16:1
Q16
:2Q
16:3
Q16
:4Q
17:1
Q17
:2Q
17:3
Q17
:4Q
18:1
Q18
:2Q
18:3
Q18
:4Q
19:1
Q19
:2Q
19:3
Q19
:4Q
20:1
Q20
:2Q
20:3
Q20
:4Q
21:1
Q21
:2Q
21:3
Q21
:4Q
Demand for Insurance Will Be Severely Impacted As the Economy Slows but Is Expected to Improve by Late Q3 and into Q4
Real GDP Growth (%)
“Great Recession”
began in Dec. 2007
Financial Crisis
Economic recovery from COVID is strong, but
economic losses likely not recovered before late 2021.
COVID CRASHQ2 2020
plunged by 31.4%
(8.0)(6.0)(4.0)(2.0)0.02.04.06.08.0
10.070 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 19 20F
21F
Advanced economies Emerging and developing economies World
Source: International Monetary Fund, World Economic Outlook, Apr. 2020; Univ. of South Carolina, Risk and Uncertainty Management Center.
Emerging economies (led by China and India) are expected to contract by
1.0% in 2020 before resuming growth forecast
at 6.6% in 2021
GDP Growth: Advanced & Emerging Economies vs. World, 1970-2021F
Advanced economies are expected to contract by 6.1% in 2020 (down from growth of 1.7% in 2019),
with growth of +4.5% forecast for 2021
Global GDP is forecast to shrink by 3.3% in 2020 from
+2.9% in 2019, before recovering to +5.8% in 2021
GDP Growth (%)
Surging Trade Deficit as Trade Flows Begin Slow Recovery
Sources: Wells Fargo Securities, US Commerce Dept.; Risk and Uncertainty Management Center, University of South Carolina
• Current and looming trade wars are negatives for ocean and inland marine lines (and many others)
• The outcome of the election will determine whether the US continues down a path of increasing isolationism or re-engages with a more globalist strategy
Imports are rising faster than exports,
leading to the widest trade deficit
since 2008
Trade Balance in Goods & Services US Exports and Imports
44
Real GDP Growth Forecasts, Select Major Economies: 2019 – 2022F
2.9%
2.3%
1.4%
1.3% 1.7%
-0.3
%
6.1%
0.7%
-4.3
%
-4.2
%
-10.
6% -8.2
%
2.4%
-6.2
%
6.0%
4.6% 5.3% 5.6%
-1.6
%
9.9%
1.9%3.
6%
2.2% 2.9%
2.4%
2.5% 3.2% 5.
8%
2.0%
-13.5%
-5.9
%
5.5%
-15%
-10%
-5%
0%
5%
10%
15%
World US UK Eurozone Canada Mexico China Japan
2019 2020F 2021F 2022F
The coronavirus recession of 2020 will be followed by a robust period of growth in most countries in 2021, led by China but with Latin America
lagging. Growth rates should approach pre-COVID trends in 2022
China’s GDP growth leads
the world
Global growth to bounce
back in 2021
Source: Wells Fargo Securities (Oct. 2020); Univ. of South Carolina, Risk and Uncertainty Management Center.
Brexit uncertainty is compounding the UK’s woes
Low oil prices, slowdown in US trade, tourism hurting Mexico
The Economy Drives P/C Insurance Industry Premiums:2006:Q1–2020:Q2*
Direct Premium Growth (All P/C Lines) vs. Nominal GDP: Quarterly Y-o-Y Pct. Change
Sources: SNL Financial; U.S. Commerce Dept., Bureau of Economic Analysis; ISO; I.I.I.; Risk and Uncertainty Management Center, University of South Carolina.
-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
2019:Q1
2019:Q3
2020:Q1
DWP y-o-y change y-o-y nominal GDP growth
Negative GDP growth in the first half of 2020, will cause DWP to decelerate sharply but with a lag and likely turn
negative in some lines. Rebates, discounts and rate decreases will amplify the deceleration.
Direct written premiums track nominal GDP fairly tightly over time, suggesting the P/C insurance industry’s growth prospects inextricably linked to economic performance.
Unemployment Rate: Jan. 2019 – Sept. 2020
Source: US Bureau of Labor Statistics; Risk and Uncertainty Management Center, University of South Carolina.
Unemployment Rate
3.7%3.7%3.5%3.6%3.5%3.5%3.6%3.5%4.4%
14.7%13.3%
11.1%10.2%
8.4%7.9%
3.7%3.6%3.6%3.8%3.8%4.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Jan-19
Feb-19
Mar-19
Apr-19
May-19
Jun-19
Jul-19
Aug-19
Sep-19
Oct-19
Nov-19
Dec-19
Jan-20
Feb-20
Mar-20
Apr-20
May-20
Jun-20
Jul-20
Aug-20
Sep-20
COVID-19 shutdowns pushed the unemployment rate up to a shocking 14.7% in April before
improving beginning in May
11.4M jobs were created from May through Sept. (after a loss of 22.2M in March/April)
helping bring down the unemployment rate to 7.9% from its April peak of 14.7%. So far,
~50% of jobs lost have been recovered.
California:Feb. 2020: 3.9% (record low)
Peak: 16.4% (Apr./May)Aug. 2020: 11.4%
US Unemployment Rate Forecast: 2007:Q1–2021: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%
3.6%
3.6%
3.5% 3.8%
13.0%
8.8%
7.6%
7.1%
6.8%
6.3%
5.9%
9.6%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%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
21:Q1
21:Q2
21:Q3
21:Q4
Great RecessionRising unemployment eroded payrolls and
WC’s exposure base.Unemployment peaked at 10% in late 2009.
= actual; = forecastsSources: US Bureau of Labor Statistics; Wells Fargo Securities (10/20 edition); Risk and Uncertainty Management Center, University of South Carolina.
The unemployment rate peaked at 14.7% in April
(13.0% Q2 avg.)
At 3.5%, the unemployment rate in Feb. 2020 WASat its lowest point
in 50 years.
Government Mandated Business Closures Were the Real Black Swan, Not the Coronavirus
Sources: CDC; Risk and Uncertainty Management Center, University of South Carolina
• The US (and world) has endured several other major infectious disease outbreaks killing 100,000+ Americans without shutting down the economy• Hong Kong Flu (1968-70)• Asian Flu (1957-58)
• It is the reaction to the virus that is unprecedented and represents the true Black Swan event
• The ramifications of this decision will be consequential for a generation (e.g., $3 trill. in debt)
49
Supply Chain Risks
COVID-19 Exposed Many Weaknesses in Global Supply Chains
49
COVID-19 Impacts on Supply Chains
97%
75%
55%
0%
20%
40%
60%
80%
100%
% of Supply Chains Disrupted byCOVID
% of Companies with "Negative" or"Strongly Negative" Impacts on
Business
% of Companies that Have or Planto Downgrade Growth Expectations
COVID-19 and global economic shutdowns
wreaked havoc on supply chains around the world
Source: Procurious, How Now? Supply Chain Confidence Index. Survey of 605 procurement, supply chain and business leaders, taken April 28 – May 12, 2020; Accessed at: https://www.procurious.com/how-now
Top Responses by Organizations to COVID-19 Supply Chains Disruptions
73%
38% 34%21%
0%
20%
40%
60%
80%
100%
% Organizations PlanningMajor Changes in SupplyChain and Procurement
Strategy Post-Pandemic
% Planning Supply ChainExpansion
% Planning Reduction inSupply Chain Globalization
% Planning Increases inInventory Levels
Most organizations are planning post-pandemic
shifts in supply chain and procurement strategy
Source: Procurious, How Now? Supply Chain Confidence Index. Survey of 605 procurement, supply chain and business leaders, taken April 28 – May 12, 2020; Accessed at: https://www.procurious.com/how-now
52
Commercial Lines Growth, Underwriting Performance
& Pricing Cyclicality
Pricing Pressures Are Intensifying
52
-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 15 17 19
Economic Shocks, Inflation:
1976: 22.2%Tort Crisis
1986: 30.5%
Post-9/112002: 22.4%
Great Recession:2009: -9.0%
ROE
2019: +6.7%
Commercial Lines NPW Premium Growth:1975 – 2019
Recessions:1982: 1.1%
Commercial lines is prone to far more cyclical volatility that
personal lines.
1988-2000: Period of
inter-cycle stability
Commercial lines premium
growth has been sluggish
for years, reflecting weak
pricing environment.
Note: Data include state funds beginning in 1998. Source: A.M. Best; Insurance Information Institute; Univ. of South Carolina Center for Risk and Uncertainty Management, ISO.
Post-Hurricane Andrew Bump:
1993: 6.3%
Post Katrina Bump:
2006: 7.7%
2016: -1.1%
2018: +14.4%
CIAB: Average Commercial Rate Change, All Lines, 2011:Q1–2020:Q2*
-0.1% 0.9% 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%
-2.3%
-3.3%
-3.1%
-2.8%
-3.7%
-3.9% -3.2%
-3.3% -2.5%
-2.8% -1.3%
0.3% 1.7% 2.4% 3.5% 5.2% 6.2% 7.5% 9.3% 10.8%
-2.9%
1.6%
1.5%
-16%
-11%
-6%
-1%
4%
9%
14%
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
3Q19
4Q19
1Q20
2Q20
*Latest available.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; Center for Risk and Uncertainty Management, Univ. of South Carolina.
Largest increase since 2003 for some accounts
(Percent)
Renewals turned positive in late 2011
in the wake of record tornado
losses and Hurricane Sandy
High CAT losses and poor underwriting results in recent years combined with COVID pressures, reduced capacity,
lower interest rates and increased uncertainty are exerting significant pressure on markets with overall
rates up by +9.3% as of Q1 2020
Change in Commercial Rate Renewals, by Line: 2020:Q2
Source: Council of Insurance Agents and Brokers; USC Center for Risk and Uncertainty Management.
Percentage Change (%)
3.5%6.5% 6.8% 6.8%
9.4% 9.6% 9.7%
13.3%
16.8%20.0%
0.7% 1.4% 1.6% 2.3% 3.1% 3.4%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Wor
kers
Com
p
Terro
ris,
Sur
ety
Bro
ker E
&O
Floo
d
Mar
ine
Bro
ker E
&O
Cyb
er
Gen
eral
Liab
ility
Con
stru
ctio
n
EP
L
Com
mer
cial
Aut
o
Bus
ines
sIn
terru
ptio
n
Com
mer
cial
Pro
perty D&
O
Um
brel
la
All major commercial lines experienced
increases in Q2 2020
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Umbrella now leads all major commercial lines in terms of rate gains,
exceeding D&O and CP
Change in Commercial Umbrella Renewals:2011:Q1 to 2020:Q2
56Source: Council of Insurance Agents and Brokers.Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Perc
enta
ge C
hang
e (%
)
Commercial Umbrella rate gains continued to accelerate in through
mid- 2020
Change in Commercial Property Rate Renewals:2011:Q1 to 2020:Q2
57Source: Council of Insurance Agents and Brokers.Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Perc
enta
ge C
hang
e (%
)
Commercial Property rate gains continued to accelerate through mid-2020 amid COVID
BI issues, CATs and riots
Change in D&O Rate Renewals:2017:Q1 to 2020:Q2
58Source: Council of Insurance Agents and Brokers.Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Perc
enta
ge C
hang
e (%
)
D&O rate gains have accelerated rapidly
since early 2019
78%
66%
62%
50%
35%
10%
80%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Availability ofCoverage
Pricing
Renewals
Underwriting Trends
Carrier Ability toCollect Premium
Accuracy of ExposureData
Other
COVID-19’s largest impacts on producers
relate to coverage availability and price
COVID-19 Issues Impacting Producers, 2020:Q2*
Note: CIAB, Q2 2020 COVID-19 Supplement accessed at: https://www.ciab.com/download/25840/; Risk and Uncertainty Management Center, University of South Carolina.
Weekly Number of COVID-Related Lawsuits Filed:(Weeks Ending Mar. 16, 2020 to Sept. 21, 2020)
60Source: Covid Coverage Litigation Tracker, University of Pennsylvania School of Law. Accessed 10/10/20 at: https://cclt.law.upenn.edu
The number of new cases filed is declining with just 16 filed
the week ending Sept. 21.
16
79
Cumulative COVID-Related Lawsuits Filed:(Weeks Ending Mar. 16, 2020 to Sept. 21, 2020)
61Source: Covid Coverage Litigation Tracker, University of Pennsylvania School of Law. Accessed 10/10/20 at: https://cclt.law.upenn.edu
The pace of new cases filed is slowing. Total cases filed as of the
week ending Sept. 21 was 1,249
Coverage Sought in COVID-Related Lawsuits:(Total through Sept. 21, 2020)
62Source: Covid Coverage Litigation Tracker, University of Pennsylvania School of Law. Accessed 10/10/20 at: https://cclt.law.upenn.edu
BI, Extra Expense and Civil Authority coverage
account for the vast majority of cases
63
Tort Environment: The Return of Social Inflation?
63
Tort Costs Are Under Pressure from a Variety of Different Factors
D&O Line Impacted
Average Jury Awards, 1999 – 2017 (latest available)
$725 $747 $756$800 $799
$1,018$1,022$950
$1,077$1,046
$654
$806
$1,098$1,010$1,042
$1,132
$1,355
$1,847
$500
$700
$900
$1,100
$1,300
$1,500
$1,700
$1,900
$2,100
1999 2001 2003 2005 2007 2010 2012 2014 2016
Source: Jury Verdict Research; Current Award Trends in Personal Injury (58th Edition), Thomson Reuters; Risk and Uncertainty Management Center, Univ. of South Carolina.
The average jury award reached an all-time record high in 2017.
Median Award = $50,000 (also a record)
Average and Median Jury Awards, 2017 (latest available)
Source: Thompson Reuters, Current Award Trends in Personal Injury (58th ed.); Ins. Info, Inst.; Risk and Uncertainty Management Center, Univ. of South Carolina.
Products Liability, Business Negligence and Med Mal generate
the largest awards
The Nation’s Judicial Hellholes: 2019 – 2020
66Source: American Tort Reform Association; Risk and Uncertainty Management Center, Univ. of South Carolina.
Florida
IllinoisCook, Madison
& St. Clair Counties
Louisiana
Watch Listn CO Supreme Courtn Floridan MD General Assem.n MT Supreme Courtn PA Supreme Courtn WV Supreme Ct.
Dishonorable Mention
n AK Supreme Courtn KS Supreme Courtn OR Supreme Court
Minnesota Supreme Ct./Twin
Cities
NYC
St. LouisPhiladelphia
Court of Common Pleas
New Jersey Legislature
Oklahoma
California
Multi-District Litigation (MDL), Current Cases, as of Year-End 2019
Source: Judicial Panel on Multidistrict Litigation accesses at https://www.jpml.uscourts.gov/sites/jpml/files/JPML_Calendar_Year_Statistics-2019_1.pdf; Risk and Uncertainty Management Center, Univ. of South Carolina.
65 out of the 190 current MDL are
related to Products Liability, with
antitrust coming second at 47 (25%)
ExamplesRoundup (Monsanto)Talcum Powder (J&J)Opiates (Purdue, etc.)
Deepwater Horizon (BP)Diesel Deception (VW)
20,
34,
47,
1,
5,
Defense Costs and Cost Containment Expense as a Percent of Incurred Losses ($000), 2016 - 2018
Note: Figures are net of reinsurance and exclude state funds.Source: NAIC sourced from S&P Global Markets; Ins. Info, Inst.; Risk and Uncertainty Management Center, Univ. of South Carolina.
Products and MPL lead the way in
defense costs as a percent of incurred
losses
Shareholder Class Action Lawsuits*
*As of Oct. 9, 2020.Source: Stanford University School of Law (securities.stanford.edu); Risk and Uncertainty Management Center, Univ. of South Carolina.
164 202
163231
188
111173241
209 216
498
266
227 238
182
119 17
6 222
168
175 188
151 165
168 208271
412
402
404
278
0
100
200
300
400
500
600
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 20
Shareholder litigation is surging, in part due to suits associated with M&A activity. Major
implications for D&O coverage.
Late 1990s: Tech IPO Flops
Y2KIncrease in M&A
RecentCOVID-19CannabisOpioids
Data Breach Cryptocurrency
MeToo
Nuisance to Menace: Securities Class Action à D&O Pressure
Source: Chubb: “From Nuisance to Menace: The Rising Tide of Security Class Action Litigation,” June 2019.
Total Direct Cost of Settled Merger Claims, 2012 - 2017
Source: Chubb: “From Nuisance to Menace: The Rising Tide of Security Class Action Litigation,” June 2019.
Just 39% of the cost to settle merger-objection
lawsuits goes to shareholders
38% of the cost to settle merger-objection lawsuits goes to plaintiff attorney
fees and expense while 23% goes toward defense costs
Merger & Acquisition Activity in the US, 1985 - 2019
*Risk adjusted.Source: Institute for Mergers, Acquisitions and Alliances (IMAA) accessed 1/19/20 at: https://imaa-institute.org/m-and-a-statistics-countries/.
Index: 1992 = 100
US M&A activity has been at or close to record levels in recent years both
in terms of total deal value and number of deals. The result: More
securities class action litigation and more D&O claimsD&O market was
impacted adversely by bursting of Tech Bubble in 2001, IPO
laddering claims
Financial crisis caused more pain
for the D&O market
Number of IPOs in the US, 1999 – 2020*
*As of Aug. 31.Source: Renaissance Capital; Risk and Uncertainty Management Center, Univ. of South Carolina.
486
406
84 70 71226
206
199 213
3163
154
125
128
222 27
5170
105 16
0 192
159
111
0
100
200
300
400
500
600
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20*
Some recent IPOs have been troubled as have some that have been scuttled (e.g.,
WeWork)—but so far 2020 is on pace to
exceed 2019—despite COVID
Data Breaches 2005-2019, by Number of Breaches and Records Exposed
# Data Breaches
Source: Identity Theft Resource Center.
Millions of Records Exposed
74
The number of data breaches and
records exposed is generally rising
157321
446
656498
419 447
1091
1632
1244
1473
662783 780
619
197.6164.7
127.7
16.2
222.5
66.9
19.135.7
22.9 17.3
87.9 85.6
177.9
366
446.5
100
300
500
700
900
1100
1300
1500
1700
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019*0
50
100
150
200
250
300
350
400
450
# Data Breaches # Records Exposed (Millions)
75
Federal and State COVID-19 Initiatives Impacting Commercial Insurers
P/C Insurance Coverage & COVID-19
n Insurers have received tens of thousands of claims related to COVID-19 lossesw Workers comp Event Cancellation Trade Credit
w Business Interruption Travel Insurance Mortgage
w GL D&O EPL
n Crises tend to precipitate efforts to stretch contract language in an effort to:w Find coverage where none existsw Find coverage where none was intended
w Find coverage for which no premium was paid
n Politicians frequently pile on: Zero political risk
Business Interruption Coverage (BIC) & COVID-19
n Business interruption policies clearly exclude COVID-19 claims
n The ISO Business Income form contains the following language:w “We will pay for the actual loss of Business
Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration”. The “suspension” must be caused by direct physical loss of or damage to property…The loss or damage must be caused by or the result of a covered cause of loss.” [from ISO form: CP 00 30 04 02]
Exclusion of Loss Due to Virus or Bacteria
n Business property and hence business interruption coverage also clearly excludes loss or damage due to viruses via exclusion
n The ISO “Exclusion of Loss Due to Virus or Bacteria” contains the following language:w “We will not pay for loss or damage caused
by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” [from ISO form: CP 01 40 07 06]
Update on Business Continuity Disputes
n Large number of BI suits have been filed against insurersw Most are still making their way through the court system…BUT
n Since mid-2020 numerous courts have made decisions favoring insurers across a growing number of industries (not just restaurants)
n Courts have generally found that:w Virus exclusions found in many policies are unambiguous and are binding
w That BI coverage is necessarily triggered only when there is actual physical loss or damage to property
w Government mandated closures alone are insufficient to trigger BI coverage
Business Continuity Protection Program (BCPP) n Purpose: The BCPP is designed to bolster the country’s economic resilience by
providing timely and efficient financial protection and payroll support to the private sector in the event of a future declared public health emergency. w Has support of several industry group: APCIA, NAMIC, Big Iw No balance sheet risk to the insurance industry
n Structure:w Businesses purchase revenue replacement assistance from the BCPP – up to 80% of
payroll, employee benefits and operating expensesw Provides 3 months of relief payments
w Payouts based on prior year’s tax return
w Relief is automatically triggered following a federally declared public health emergency
Source: APCIA
Why PRIA Is a Well-Intentioned but Bad Idea
Source: Risk and Uncertainty Management Center, University of South Carolina and Centers for Better Insurance, “Pandemic Risk Insurance Act of 2020: Summary and Key Risks,” June 2020.
Potentially $12B of liability for insurers
Up to $37.5B in liability for insurers
Total potential insurer liability under
PRIA is almost $50 billion—nearly
double the insured property losses from 9/11 and larger than
every disaster in history other than Hurricane Katrina
82
SUMMARYnThe P/C Insurance Industry Remains Strong, Stable, Sound
and Secure
nCommunicable Disease Exclusion Spreading
nThe Rapid Economic Slowdown Will Temper P/C Growth, Especially in Economically Sensitive Lines (especially Workers Comp)
nAsset Price Volatility Will Persist and Low Interest Rates Will Pressure Investment Earnings for Years
nCOVID-19 Exposures Are Substantial but Manageable with Headline Risk on BI and WC Issues
Thank you for your timeand your attention!
Twitter: twitter.com/bob_hartwigFor a copy of this presentation, email
me at robert.hartwig@moore.sc.edu or Download at www.uscriskcenter.com
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