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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