COVID-19: Financial and Economic Impacts on the P&C

Insurance Industry

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

COVID-19 Webinar SeriesClaims and Litigation Management (CLM) Alliance

May 21, 2020

Coronavirus & the Recession of 2020: Outline

n P/C Insurers: Overcoming Uncertainty With Strengthw 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 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:Q1E

Sources: ISO, A.M .Best; 2020E from 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 $858.3

$775.0

$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

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 can easily withstand the estimated

~10% surplus decline

P/C Industry Net Income After Taxes, 1991–2019F*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 = 8.2%

*2019 estimate based on annualized actual Q3:19 figure of $48.075B. 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

$64,100

$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 finally returned to pre-financial crisis levels in 2019. COVID impacts will

likely have a major negative influence in 2020, but too

soon to determine magnitude

$ Millions

ROE: Property/Casualty Insurance by Major Event, 1987–2019E

6

*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 18 19E

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

2019E 8.2%

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

Net Premium Growth (All P/C Lines): Annual Change, 1971—2020F (Pre-COVID)

8

-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 19E

20F

(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%*2019E: 4.2%2018: 10.7%2017: 4.6%2016: 2.7%2015: 3.5%2014: 4.2

2013: 4.4%2012: +4.2%

2020 OutlookPre-COVID: 3.8%

Now: ???

Change in P/C Net Written Premium Growth During Past Economic Downturns: 1971 - Present

9Source: USC Center for Risk and Uncertainty Management.

Percentage Point Change in Growth Rate

-4.3%-3.5%

-2.0%

0.9%

2.9%3.4%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

1979-80 2007-09 1990-91 1981-82 1973-75 2000-01*

*2000-2001 decline impacted by 9/11 losses.

Change in P/C ROE During Past Economic Downturns

Avg.: -0.4%Median: -0.6%

Economic downturns have been associated with varied growth

experience. The COVID-19 pandemic will slow growth materially in 2020. Effects

could carry over into 2021.

2020 Pre- vs. Post-COVID Growth Expectations for P/C Insurance: From Modest to Miserly

10Source: 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

1.7%2.0%

1.5%

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 and assume that Q1 growth was

largely unaffected

Potential Impacts of COVID-19 on Written Premium in 2020, by Key Line

Line Estimated 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

General Liability* $1.5B to $6.3B reduction in premium

Personal Auto ~$10B in refunds, rebates (equates to ~4% of DWP)

Personal Travel Insurance 29% to 78% reduction in premium written

11

*Includes nursing home professional liability.Source: Derived from Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic (Fig.11), May 2020 and other sources; Risk and Uncertainty Management Center, University of South Carolina.

P/C Insurance Industry Combined Ratio, 2001–2019E*

12

* Excludes Mortgage & Financial Guaranty insurers 2008--2014. **Actual through Q3 2019 was 97.8Sources: A.M. Best, ISO (2014-2019).

95.7

99.3101.1

106.5

102.5

96.4 97.097.8

100.7 99.0

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**

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)

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

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*

$2 - $10B

$5 - $10B

$5 - $10B

$5 - $15B

$0 $2 $4 $6 $8 $10 $12 $14 $16

US

UK

Europe (Ex. UK)

All Other

Source: Dowling & Partners from Artemis.bm accessed at: https://www.artemis.bm/news/covid-19-pc-insurance-industry-loss-estimated-40bn-80bn-dowling/; Risk and Uncertainty Management Center, University of South Carolina.

Estimated COVID-19 Insured Property Losses by Region

Dowling estimates $17 -$45B in insured COVID

property losses globally. Tens of billions of

additional losses in liability and specialty lines

are anticipated as well

$ Billions

Viral Outbreaks Are Not An Insurable Risk

16*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

Private Insurance Cannot Close the Gap

1 Month 2 Months 3 Months

$1.1 Trillion

$2.2 Trillion

$3.3Trillion

17

Monthly cumulative estimated closure economic losses for all U.S. businesses

Source: APCIA estimates using publicly available data sources, including Bureau of Labor Statistics, Insurance Services Office (Verisk Analytics, Inc.), Houston Chronicle, S&P Global Market Intelligence, and other published reports.

$800 BP-C

IndustrySurplus

18

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 Decade18

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

2018 – Third worst year for U.S. Insured Catastrophe Losses. Average Insured Loss per Year for 1980-2019 is $19.8 B.

Harvey, Irma, Maria

36

19

Top 20 Most Costly Disastersin U.S. History—Katrina Still Ranks #1

20

(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

21

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%

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: 2000–2019E

$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$57.0

$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* 19F

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.

*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 3.1 3.2 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 19E 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 gains

Sources: 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 will push asset yield down

US Treasury Security Yields:A Long Downward Trend, 1990–2020*

*Monthly, constant maturity, nominal rates, through April 2020.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 '02'03'04'05'06'07'08'09'10'11'12'13'14'15'16'17'18'19'20

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 years to come.

Fed emergency rate cuts and QE in response to the COVID-19 pandemic and

market volatility have pushed rates to their

lowest levels since the financial crisis

10-YR. TREASURY5/2019: 2.21%4/2020: 0.66%

-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 May 19, 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. Gains are jeopardized by sharp declines amid COVID-19 pandemic

2020 YTD-9.5%

2019: +28.9%2018: -6.2%2017: +19.42016: +9.5

Financial Markets Have Been Extremely Volatile

n April 2020: Largest monthly gain in S&P 500 since 1987 (+12.7%); Up 33% since its March 23 trough (2,192 @ close)

n Has the market gotten ahead of itself given the that GDP in Q2 will shrink by 38% (CBO) and unemployment approaches 20%?

n March 9: Largest DJIA point drop ever: -2,014 pts. (-7.79% drop largest % terms since 10/15/08)

,

Source: CNBC.com; Center for Risk and Uncertainty Management, University of South Carolina

Coronavirus Comeback?

n Is market anticipating a “V-shaped” recovery, more stimulus, expedited vaccine…?

S&P is down just 9.5% for the year and 11.6% from its record high of 3386 on Feb. 19

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

19

3

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

Mar.2020

ContractionExpansion Following

Duration (Months)

Month Recession Started

Average Duration*Recession = 13.4 MonthsExpansion = 63.8 Months

* As of May 2020 but excluding current COVID-19 recession which began in March/April 2020 and is ongoing.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 5-7 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 5/13/20; 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%

-4.8%

6.7%

4.4%

2.0% 2.3%

2.3% 2.5%

-24.7%

3.1%3.6%

2.5%

1.8%

1.1%4.1%

1.8% 2.1%

1.6%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

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 Should Improve by Late Q3 and into Q4

Real GDP Growth (%)

“Great Recession”

began in Dec. 2007

Financial Crisis

COVID-19 pandemic is expected to result in 2 quarters of economic

contraction before recovery later in the year

Q2 2020 GDP

expected to shrink by

24.7%

Q1 2020 GDP Report: Unmitigated Disaster—Worse Yet to Come

31Source: US Bureau of Economic Analysis; Risk and Uncertainty Management Center, University of South Carolina.

-8.7%-15.3%

0.7%

-16.1%

6.9%

-10.2% -8.6%-15.2%

21.0%

-20%-15%-10%-5%0%5%10%15%20%25%

Durables

Nondurables

Services

Nonresidential

Structures

Equipment

Residential

Structures

Exports

Imports

Government

State govt. spending may

collapse w/o relief while federal

spending rises

PCE: Largest drop in 40 years; (Services

largest since 1953:Q4 decline of 3.0%)

Business investment has

collapsed

Personal Consumption Expenditures (PCE)

[-7.6%]

Private Domestic Investment

[-5.6%]

Exports/ Imports [-8.7%]

Govt.

Exports/ Imports [-8.7%]

The Economy Drives P/C Insurance Industry Premiums:2006:Q1–2020:Q1*

Direct Premium Growth (All P/C Lines) vs. Nominal GDP: Quarterly Y-o-Y Pct. Change

*2020:Q1 GDP figure is actual. DWP is estimate from Risk and Uncertainty Management Center, University of South Carrolina.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

As GDP growth turns negative in 2020, DWP will decelerate sharply 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.

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)

Initial Claims for Unemployment: COVID Surge Shatters Records

34Source: US Bureau of Labor Statistics; Risk and Uncertainty Management Center, University of South Carolina.

(Thousands)

5,2374,442

3,8673,176 2,981

695 665 219

3,307

6,867 6,615

01,0002,0003,0004,0005,0006,0007,0008,000

Oct. 2,1982

(PreviousRecordHigh)

Jan. 1 -Mar. 14(Avg.)

Mar. 28 Apr. 11 Apr. 25 May 9

Payroll exposures are taking a huge hit leading to a large impact on

workers comp premiums written

Since mid-March a record 36.5 million people have filed

for unemployment (= 20% of pre-

COVID labor force)

Week Ending

Previous Records

All the jobs created since the Great Recession were wiped

out—in a single month!

Unemployment Rate: Jan. 2019 – April 2020

35Source: 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%

4.0% 3.8% 3.8% 3.6% 3.6% 3.7%

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

Unemployment will likely peak close to 20% in June and will fall slowly as the

economy gradually reopens

COVID-19 shutdowns pushed the

unemployment rate up to a shocking 14.7% in April

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%

17.6%

12.1%

8.1%

7.1%

6.6%

6.4%

6.3%

9.6%

3%4%5%6%7%8%9%10%11%12%13%14%15%16%17%18%19%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 (5/20 edition); Risk and Uncertainty Management Center, University of South Carolina.

The unemployment rate could peak

around 20% by June (17.6% Q2 avg.)

At 3.5%, the unemployment rate in Feb. 2020 WASat its lowest point

in 50 years.

GLOBAL ECONOMIC REVIEW AND OUTLOOK

37

All Regions Impacted, bur Advanced Economies Are the Hardest Hit and Will Be

the Slowest to Recover

37

(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 (%)

39

Real GDP Growth Forecasts: “Advanced Economies”: 2019 – 2021F

2.3%

1.4%

1.2%

0.6%

-5.9

%

-6.5

%

-7.0

%

1.2%

-5.2

%

4.7%

4.0% 4.7% 5.2%

9.2%

3.0%

6.1%

0.7%

-7.5

%

-10%-8%-6%-4%-2%0%2%4%6%8%

10%12%

US UK Euro Area Germany China Japan

2019 2020F 2021F

COVID-19 Destroyed Global Growth Prospects for 2020. Recovery Period Will Extend Through 2021

China is the only major economy to potentially avoid

contraction in 2020

Source: International Monetary Fund, World Economic Outlook, Apr. 2020, Table A4; Univ. of South Carolina, Risk and Uncertainty Management Center.

P/C Insurance Issues in the Era of COVID-19

Business Interruption

Workers Compensation

P/C Insurance Coverage & COVID-19

n Insurers have received tens of thousands of claims related to COVID-19 lossesw Workers comp Event Cancellation

w Business Interruption Travel Insurance

w GL D&O

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

42 42

Efforts to Create Coverage Where None Exists

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]

Business Interruption Coverage & COVID-19: STATES

n Several states are attempting to override/invalidate/abrogate the longstanding, unambiguous language in commercial property and BIC contracts that makes it clear no coverage exists

n At least 7 states: NJ, OH, LA, MA, PA, NY and SC plus DC have introduced legislation that would oblige insurers to provide BIC to policyholders who purchased such coverage, irrespective of the “direct physical loss or damage” requirement and virus exclusion.

n From Massachusetts S. 2888 (as of 3/25/20)w “…no insurer in [Massachusetts] may deny a claim for the loss of use and

occupancy and business interruption on account of (i) COVID-19 being a virus (even if the relevant insurance policy excludes losses resulting from viruses); or (ii) there being no physical damage to the property of the insured or to any other relevant property

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

Legislation in several states would trample over contracts

and destroy the state’s insurance markets

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

100

200

300

400

500

600

700

Small Businesses(Fewer Than 100 Employees)

$431B

Potential Monthly Business Interruption Losses for Small and Small-to-Medium-Size Enterprises

Sources: APCIA using publicly available data sources including Bureau of Labor Statistics, Insurance Services (Verisk Analytics, Inc.), Houston Chronicle, S&P Global Market Intelligence, and other published reports.

Estimated closure losses for small businesses with fewer than 100 employees: $255 billion to $431 billion per month.

Estimated closure losses for small-to-medium size businesses with fewer than 500 employees: $393 billion to

$668 billion per month

100

200

300

400

500

600

700

Small-to-Medium-Size Businesses(Fewer Than 500 Employees)

$393B

$668B

$ Bill $ Bill

$255B

The potential for such losses for all businesses of all sizes is currently estimated at $1 - $1.1 trillion per month.

Business Interruption Coverage & COVID-19: FEDERALn Federal legislation is pending too

n “Business Interruption Insurance Act of 2020” has been proposed

n The Act would (as of 4/15/20):

“…make available insurance coverage for business interruption losses due to viral pandemics, forced closures of businesses, mandatory evacuations, and public safety power shut-offs, and for other purposes.”

n Act goes WELL beyond pandemics (e.g., compel BI payment due to evacuation ahead of a hurricane—even if hurricane actually causes $0 in damage

Business Interruption Coverage & COVID-19: FEDERALn But that’s not all…

n The “Business Interruption Insurance Act of 2020” would also nullify pre-existing exclusions

n Section 3 “Preemption and Nullification of Pre-Existing Exclusions” states:

(a) General Nullification: “Any exclusion in a contract for business interruption insurance that is in force on the date of the contract for business interruption insurance shall be void…”

(b) General Preemption: “Any State approval of any exclusion of losses from a contract for business interruption insurance that is in force on the date of the enactment of this Act shall be void…”

n In other words, your legal contract is void and the federal government will trample over state regulatory authority and the U.S. Constitution to achieve this end

States to Insurers: We’re Fine with the Obliteration of the Obligations of Contracts Clause

n State actions to override and ignore legal, longstanding and regulator approved contract language is a clear violation of the Constitution

n The Obligation of Contracts Clause (aka “Contracts Clause”) is found in Article I of the United States Constitution

n Generally speaking, this clause was added to the Constitution in order to prohibit states from interfering with private contracts.

The Contracts Clause states: “No State shall...pass any...Law

impairing the Obligation of Contracts...”

Is a Pandemic Risk Insurance Act (PRIA) Really Needed?

Source: Risk and Uncertainty Management Center.

n 9/11 produced widespread disruption through global (re)insurance markets and threatened the ability of the nation to recover from an unprecedented disaster

n The COVID-19 pandemic creates few meaningful disruptions in p/c (re)insurance markets

n TRIA was a very targeted, efficient solution that has brought nearly two decades of stability to the market

n Commercial insurers are not an appropriate or efficient means for the delivery of aid for viral outbreaks

n The $2.5+ trillion in federal emergency relief packages (as of 4/20) will use existing, efficient channels (e.g.,SBA,) for the delivery of targeted assistance to millions of businesses, individuals (direct payments, unemployment insurance) and other entities

Total federal stimulus including Federal Reserve bond

purchases totals ~$6T - $8T or approximately 30% of GDP

Why PRIA Is a Well-Intentioned but Bad Idea

Source: Risk and Uncertainty Management Center.

n Unlike TRIA, PRIA would create a large potential balance sheet liability for insurers

n This is because PRIA would impose a 5% coinsurance provision for industrywide BI losses exceeding a $250 million industrywide and a 5% individual company deductible equal to 5% DPEw This is distinct from TRIA where the “reinsurance” is

effectively “free”

n Program is capped at $500 billion so a 5% co-insurance requirement implies a potential industry liability of up to $25 billion

n These deductibles and coinsurance requirements would have potentially material implications for:w (Re)insurance balance sheetsw RBC ratiosw Surplus

PPP program blew though $700B in only a few weeks

Why PRIA Is a Well-Intentioned but Bad Idea

Source: Centers for Better Insurance, Insurance Programs for Pandemic Events, (4/20); Risk and Uncertainty Management Center.

The insurance claims administration capabilities necessary to investigate, document and payout an amount of insurance claims equivalent to the just the initial $349B in funding for the Paycheck

Protection Program funding would be the same as if the top 10 US insurance catastrophes occurred in the same month PLUS 10 years of NFIP claim PLUS 10 years of federal Crop Insurance claims

Total PPP funding (now $700B) is 7x TRIA claims capacity)

Total PPP funding now expanded to

$700B

Workers Compensation

54 54

Some Pressure Points

Payroll Exposure Is Contracting RapidlyCOVID-19: Efforts to Expand

Presumption Continue

Workers Compensation & COVID-19

n Workers compensation written for COVID-19 exposed risks (e.g., hospitals, first responders, etc.) will likely see a spike in both severity and frequency

n Some states will require costs associated with precautionary quarantines of COVID-19 exposed workers

n Impact arising from “Essential Industries” unclear (e.g., grocery stores)

n Outside COVID-19 exposed segments—Large, Swift Drop in Payroll Exposurew Drop in WC payroll exposure base could be the fastest and largest in history given

the record 33.5 million initial unemployment claims data (week ending May 2nd) with much more to come

w Wage growth, which had been making gains, will also slow

w Overall likely net reduction in claim frequency

-28.1%

-24.6%

-20.2%

-12.2%

-11.9%

-8.1%

-6.7%

-6.7%

-2.4%

-58.6%Accomodation & Food Service

Retail

Professional/Technical

Transportation

Manufacturing

Wholesale Trade

Admin. Support

Construction

Healthcare/Social Assistance

Information

Source: Assured Research, May 2020 Briefing.

Estimated ANNUALIZED WC Premium Impact from March/April 2020 Job Losses

Hotels and restaurants saw the steepest losses in percent and dollar

($1.78B) terms

Overall annualized WC premium losses are estimated

at 11.7% or $7.3B of total premiums should March/April

job losses persist

Workers Compensation & COVID-19

n Example of presumption expansion beyond “front-line” workers: Californiaw On May 6, California Gov. Gavin Newsom signed an executive order allowing

employees across California’s economy to apply for worker’s compensation if they contract the coronavirus, with a presumption that it was work-related unless employers can prove otherwise.

w The presumption applies for the next 60 days and is retroactive to March 19w Newsom says the change is needed now as California prepares to reopen it economyw Employees will be eligible if they tested positive for the coronavirus within 14 days after

being at work (max known incubation period) and have exhausted other state and federal benefits.

w Order flips burden of proof by creating the legal presumption that the infection was job-related unless employers can show otherwise by meeting “strict criteria.”

w WCRIB: Cost could range from $2.2B to $33.6B annually– $11B midpoint estimate equals 60% of total pre-COVID CA WC system costs

58

SUMMARY

nThe P/C Insurance Industry Remains Strong, Stable, Sound and Secure

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

59