Top Challenges Confronting the Insurance Industry Today

Trends, Challenges & OpportunitiesWestchester CPCU Chapter Conferment Dinner

Elmsford, NYOctober 22, 2015

Download at www.iii.org/presentations

Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038

Tel: 212.346.5520 Cell: 917.453.1885 bobh@iii.org www.iii.org

2

1. Insurance Industry Financial Performance

2014 Was a Reasonably Good Year2015: A Repeat of 2014?

2

P/C Industry Net Income After Taxes1991–2015:H1 2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012 ROAS1 = 5.9% 2013 ROAS1 = 10.2% 2014 ROAS1 = 8.4% 2015:H1 ROAS = 9.2%

• ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.

Sources: A.M. Best, ISO; Insurance Information Institute

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $3

6,8

19

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$3

5,2

04

$1

9,4

56 $

33

,52

2

$6

3,7

84

$5

5,5

01

$3

0,9

72

$3

8,5

01

$2

0,5

59

$4

4,1

55

$6

5,7

77

-$6,970

$2

8,6

72

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

15:H

1

Net income fell modestly

(-12.5%) in 2014 vs. 2013

$ Millions

5

ROE: Property/Casualty Insurance by Major Event, 1987–2015E

* Excludes Mortgage & Financial Guarantee in 2008 – 2014. Sources: ISO, Fortune; Insurance Information Institute.

-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 15E

P/C Profitability Is Both by Cyclicality and Ordinary Volatility

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

Record Tornado Losses

Sandy

Low CATs

Modestly higher CATs

-5%

0%

5%

10%

15%

20%

25%

50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0%1987:17.3%

1997:11.6%

2006:12.7%

1984: 1.8%

1992: 4.5%

2001: -1.2%

ROE

1975: 2.4%

2013 9.8%

2015E 8.8%

Back to the Future: Profitability Peaks & Troughs in the P/C Insurance Industry, 1950 – 2015E*

1969: 3.9%

1965: 2.2%1957: 1.8%

1972:13.7%

1966-67: 5.5%1959:6.8%

1950:8.0%

1950-70: ROEs were lower in this period. Low interest rates,

low inflation, “Bureau” rate regulation all played a role

1970-90: Peak ROEs were much higher in this period while troughs

were comparable. High interest rates, rapid inflation, economic

volatility all played roles

1990-2010s: Déjà vu. Excluding mega-

CATs, this period is very similar to the 1950-1970 period

13

RNW All Lines by State, 2004-2013 Average:Highest 25 States

20

.5

18

.4

14

.6

14

.3

13

.4

13

.3

12

.3

12

.1

12

.0

12

.0

11

.7

11

.4

11

.1

11

.1

10

.9

10

.8

10

.7

10

.7

10

.5

10

.5

10

.3

9.9

9.8

9.8

9.6

9.5

02468

1012141618202224

HI AK VT ME WY ND VA ID NH UT WA SC MA NC OH DC CA OR RI WV CT IA NE SD MT MD

The most profitable states over the past decade are

widely distributed geographically, though none

are in the Gulf region

Source: NAIC; Insurance Information Institute.

Profitability Benchmark: All P/C

US: 7.9%

14

9.2

8.6

8.4

8.3

8.2

8.2

8.1

8.0

7.9

7.7

7.7

7.5

7.4

6.8

6.6

6.4

6.1

5.7

5.3

5.2

5.0

4.3

2.5

1.9

-6.9

-9.3

-14-12-10-8-6-4-202468

10

NM FL TX WI KS MN CO PA US AR IL IN AZ MO KY TN NV NJ GA NY DE MI AL OK MS LA

RNW All Lines by State, 2004-2013 Average: Lowest 25 States

Source: NAIC; Insurance Information Institute.

Some of the least profitable states over the past decade

were hit hard by catastrophes

Profitability & Politics

1616

How Is Profitability Affected by the President’s Political Party?

15.10%

9.00%

8.93%

8.65%

8.35%

8.33%

7.98%

7.68%

6.98%

6.97%

5.43%

5.03%

4.83%

4.68%

4.43%

3.55%

16.43%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Carter

Reagan II

Obama II

Nixon

Clinton I

G.H.W. Bush

G.W. Bush II

Clinton II

Reagan I

Nixon/Ford

Truman

Eisenhower I

Eisenhower II

G.W. Bush I

Obama I

Johnson

Kennedy/Johnson

*Truman administration ROE of 6.97% based on 3 years only, 1950-52;. Source: Insurance Information Institute

OVERALL RECORD: 1950-2014*

Democrats 7.72%Republicans 7.85%

Party of President has marginal bearing on profitability of P/C insurance industry

P/C Insurance Industry ROE by Presidential Administration, 1950-2014*

-5%

0%

5%

10%

15%

20%

25%

50

52

54

56

58

60

62

64

66

68

70

72

74

76

78

80

82

84

86

88

90

92

94

96

98

00

02

04

06

08

10

12

14

BLUE = Democratic President RED = Republican President

Tru

man Nixon/Ford

Ken

ned

y/

Joh

nso

n

Eis

enh

ow

er

Car

ter

Reagan/Bush I Clinton Bush II

P/C insurance Industry ROE by Presidential Party Affiliation, 1950- 2014

Obama

. Source: Insurance Information Institute

2. INVESTMENTS: THE NEW REALITY

19

Investment Performance is a Key Driver of Profitability

Depressed Yields Will Necessarily Influence Underwriting & Pricing

19

Property/Casualty Insurance Industry Investment Income: 2000–2015E1

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.2

$48.0 $47.3$46.2 $46.8

$39.6

$49.5

$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15E

Due to persistently low interest rates,investment income fell in 2012, 2013 and 2014.

1 Investment gains consist primarily of interest and stock dividends. *2015 figure is estimated based on annualized data through Q2.Sources: ISO; Insurance Information Institute.

($ Billions) Investment earnings are still below their 2007 pre-crisis peak

3. CAPITAL/CAPACITY

32

Capital Accumulation Has Multiple Impacts

Alternative Capital Impacts?

32

33

Policyholder Surplus, 2006:Q4–2015:Q2

Sources: ISO, A.M .Best.

($ Billions)

$487

.1

$496

.6

$512

.8

$521

.8

$478

.5

$455

.6

$437

.1 $463

.0 $490

.8 $511

.5 $540

.7

$530

.5

$544

.8

$559

.2

$559

.1

$538

.6

$550

.3

$567

.8

$583

.5

$586

.9 $607

.7

$614

.0

$624

.4 $653

.4

$671

.6

$673

.9

$674

.7

$672

.4

$662

.0

$570

.7

$566

.5

$505

.0

$515

.6

$517

.9

$400

$450

$500

$550

$600

$650

$700

06:Q

4

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

12:Q

1

12:Q

2

12:Q

3

12:Q

4

13:Q

1

13:Q

2

13:Q

3

13:Q

4

14:Q

1

14:Q

2

14:Q

3

14:Q

4

15:Q

2

2007:Q3Pre-Crisis Peak

Surplus as of 6/30/15 stood at a near-record high $672.4B

2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business .

The industry now has $1 of surplus for every $0.73 of NPW,close to the strongest claims-paying status in its history.

Drop due to near-record 2011 CAT losses

The P/C insurance industry entered 2015in very strong financial condition.

Catastrophe Bond Issuance and Outstanding: 1997-2015:Q2

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15*0

5,000

10,000

15,000

20,000

25,000

948.2

874.2

1,062.5

1,142.0

966.9

989.5

1,988.2

1,142.8

1,499.0

4,614.7

7,187.0

3,009.9

3,396.0

4,599.9

4,107.1

5,855.3

7,083.0

8,026.7

3,842.2

4289

5085

7677

13416.4

12538.6

12508.2

12195.7

12342.8

14839.3

18576.9

22867.8

21559.6

New Issuance Outstanding

42

Risk Capital Amount ($ Millions)

Cat Bond Issuance Appears to Be Slowing Down in 2015 from 2014’s Record Pace. Lower Yields on Bonds Explain Some of the Contraction.

Source: Guy Carpenter.

4. M&A UPDATE: A PATH TO GROWTH?

47

Are Capital Accumulation, Drive for Growth and Scale Stimulating

M&A Activity?

47

48

U.S. INSURANCE MERGERS AND ACQUISITIONS,P/C SECTOR, 1994-2014 (1)

$5,1

00

$11,

534

$8,0

59

$30,

873

$19,

118

$40,

032

$1,2

49

$486

$20,

353

$425

$9,2

64

$35,

221

$13,

615

$16,

294

$3,5

07 $6,4

19

$12,

458

$4,6

51

$4,3

97

$6,7

23

$55,825

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Tra

ns

ac

tio

n v

alu

es

0

20

40

60

80

100

120

140

Nu

mb

er o

f tran

sa

ctio

ns

($ Millions)

(1) Includes transactions where a U.S. company was the acquirer and/or the target.

Source: Conning proprietary database.

M&A activity in the P/C sector was up

sharply in 2014 but remains well

below pre-crisis or late 1990s levels.

M&A activity in 2015 will likely

reach its highest level since 1998

52

5. Growth

Premium Growth Rates Vary Tremendously by State and

Over Time, But…

52

53

-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*

Net Premium Growth (All P/C Lines): Annual Change, 1971—2015:H1

(Percent)1975-78 1984-87 2000-03

Shaded areas denote “hard market” periodsSources: A.M. Best (1971-2013), ISO (2014-15).

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.

2015:H1: 4.1%

2014: 4.1%

2013: 4.4%

2012: +4.2%

55

Direct Premiums Written: Total P/CPercent Change by State, 2007-2014

70

.7

36

.7

36

.2

30

.3

29

.4

26

.8

24

.7

23

.7

21

.6

20

.7

19

.2

19

.2

18

.6

18

.1

18

.0

17

.0

15

.2

15

.1

15

.0

14

.9

14

.8

14

.7

14

.4

14

.2

13

.8

13

.5

0

10

20

30

40

50

60

70

80

ND

OK

SD

TX

NE

KS IA VT

WY

CO

MN IN MI

TN AR WI

GA

SC NJ

OH

AK

KY VA

LA

CT

MT

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 StatesNorth Dakota was the country’s growth leader over the past 7 years with premiums written

expanding by 70.7%, fueled by the state’s energy boom

Growth Benchmarks: Total P/C

US: 13.0%

56

Direct Premiums Written: Total P/CPercent Change by State, 2007-2014

13

.4

13

.1

13

.1

13

.0

13

.0

12

.9

12

.4

12

.2

11

.7

11

.0

10

.5

9.4

9.4

9.2

9.1

8.2

6.3

6.0

4.7

2.2

1.3

-0.8

-1.6

-4.3

-7.3

-12

.9

-15

-10

-5

0

5

10

15

MO

NY

UT

US

NM

MS

MA

AL

NC

MD

WA RI

NH IL PA ID ME

CA

OR FL AZ

DC HI

WV

NV

DE

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

Sources: SNL Financial LC.; Insurance Information Institute.

Growth was negative in 4 states and DC between

2007 and 2014

61

6. Pricing Trends

Survey Results Suggest Commercial Pricing Has

Flattened Out but Personal Lines Are Up

61

Commercial Lines Rate Change by Month (vs. Year Earlier), July 2001 – Sep. 2015

Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15-20%

-10%

0%

10%

20%

30%

40%Jul-02; 33%

Feb-05; 0%

Dec-07; -16%Oct-11; 0%

Sep-13; 5%

Dec-14; 0%

Jul-15; 1%

79 Months of Rates < 0%

62SOURCE: MarketScout, Insurance Information Institute.

Commercial Insurance Rate Changes Are Fairly Stable

Not Much of A Hard Market, By Historic Standards

Sept. 2015: -1.5%

63

CIAB: Average Commercial Rate Change, All Lines, (1Q:2004–2Q:2015)

-3.2

%-5

.9%

-7.0

%-9

.4%

-9.7

% -8.2

%-4

.6% -2

.7%

-3.0

%-5

.3%

-9.6

%-1

1.3

%-1

1.8

%-1

3.3

%-1

2.0

%-1

3.5

%-1

2.9

%-1

1.0

%-6

.4%

-5.1

%-4

.9%

-5.8

%-5

.6%

-5.3

%-6

.4%

-5.2

%-5

.4% -2

.9%

2.7

% 4.4

%4

.3%

3.9

% 5.0

%5

.2%

4.3

%3

.4%

2.1

%1

.5%

-0.5

%0

.1%

-0.7

%-1

.5%

-2.5

%

-0.1

%0

.9%

-0.1

%

-16%

-11%

-6%

-1%

4%

9%

1Q

04

2Q

04

3Q

04

4Q

04

1Q

05

2Q

05

3Q

05

4Q

05

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

1Q

15

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

Source: Council of Insurance Agents & Brokers; Insurance Information Institute

KRW Effect

Pricing as of Q2:2015 had remained (slightly) negative

(Percent)

Q2 2011 marked the last of 30th

consecutive quarter of price declines

67

Monthly Change in Auto Insurance Prices, 1991–2015*

*Percentage change from same month in prior year; through July 2015; seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

-2%

0%

2%

4%

6%

8%

10%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Cyclical peaks in PP Auto tend to occur roughly every 10 years (early

1990s, early 2000s and likely the early 2010s)

“Hard” markets tend to occur

during recessionary

periods

Pricing peak occurred in late

2010 at 5.3%, falling to 2.8% by Mar. 2012

July 2015 reading of 5.4% is up from 4.2%

a year earlier

68

7. Underwriting Performance

68

10

9.4

11

0.2

11

8.8

10

9.5 1

12

.5

11

0.2

10

7.6

10

4.1

10

9.7

11

0.2

10

2.5 1

05

.4

91

.1

93

.6

10

4.2

98

.9

10

2.4

10

7.9

10

3.5

94

.8

94

.3

98

.3 99

.210

2.0

11

1.1

11

2.3

12

2.3

90

95

100

105

110

115

120

125

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14

15

F

16

F

Co

mm

erc

ial L

ine

s C

om

bin

ed

Ra

tio

*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best (1990-2014); Conning (2015-16F) Insurance Information Institute.

Commercial Lines Combined Ratio, 1990-2016F*

Commercial lines underwriting performance improved in 2013/14 but higher cats, diminishing prior year reserves and rising loss cost trends in some lines could push

combined ratios higher

69

Private Passenger Auto Combined Ratio: 1993–2017F

10

1.7

10

1.3

10

1.3

10

1.0

10

9.5

10

7.9

10

4.2

98

.4

94

.3

95

.1

95

.5 98

.3 10

0.2

10

1.3

10

1.0

10

2.0

10

2.1

10

1.6

10

2.3

10

2.2

10

2.3

10

2.4

99

.5 10

1.1

10

3.5

80

85

90

95

100

105

110

115

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15F 16F 17F

Private Passenger Auto Underwriitng Performance Is Exhibiting Remarkable Stability

70Sources: A.M. Best (1990-2014); Conning (2015F – 2017F); Insurance Information Institute.

Homeowners Insurance Combined Ratio: 1990–2015F

11

3.0

11

7.7

15

8.4

11

3.6

10

1.0 10

9.4

10

8.2

11

1.4 1

21

.7

10

9.3

98

.2

91

.7 96

.4

85

.4 91

.7

11

4.5

10

3.1

10

3.8

11

9.4

10

1.4

87

.7 92

.4 96

.6

11

8.4

11

2.7 12

1.7

80

90

100

110

120

130

140

150

160

170

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14F 15F

1

Homeowners Performance in 2011/12 Impacted by Large Cat Losses. Extreme Regional Variation Can Be Expected Due to

Local Catastrophe Loss Activity

72

Hurricane Ike

Hurricane Sandy

Record tornado activity

Hurricane Andrew

Sources: A.M. Best (1990-2014F);Conning (2015F); Insurance Information Institute.

79

Insured Catastrophe Losses

2013/14 and YTD 2015 Experienced Below Average CAT Activity After Very High CAT

Losses in 2011/12Winter Storm Losses Far Above Average in

2014 and 201579

80

$1

3.0

$1

1.3

$3

.9

$1

4.8

$1

1.9

$6

.3

$3

5.8

$7

.8

$1

6.8

$3

4.7

$1

0.9

$7

.7

$3

0.1

$1

1.8

$1

4.9

$3

4.6

$3

6.1

$1

3.1

$1

5.5

$1

1.0

$75.7

$1

4.4

$5

.0 $8

.2

$3

8.9

$9

.1

$2

7.2

$0

$10

$20

$30

$40

$50

$60

$70

$80

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*

U.S. Insured Catastrophe Losses

*Through 9/30/15 in 2015 dollars.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.

2013/14 Were Welcome Respites from 2011/12, among the Costliest Years for Insured Disaster Losses in US History. Longer-term Trend is for

more—not fewer—Costly Events

2012 was the 3rd most expensive year ever for

insured CAT losses

$11.0B in insured CAT losses though

9/30/15

($ Billions, $ 2014)

80

87

Top 16 Most Costly Disastersin U.S. History—Katrina Still Ranks #1

(Insured Losses, 2014 Dollars, $ Billions)

$8.1 $9.0 $9.4 $11.4$13.8

$19.3$24.6 $25.3$26.4

$50.2

$7.7$7.3$6.9$5.8$5.7$4.6

$0

$10

$20

$30

$40

$50

$60

Irene (2011) Jeanne(2004)

Frances(2004)

Rita (2005)

Tornadoes/T-Storms

(2011)

Tornadoes/T-Storms

(2011)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Sandy*(2012)

Northridge(1994)

9/11 Attack(2001)

Andrew(1992)

Katrina(2005)

Storm Sandy in 2012 was the last mega-CAT

to hit the US

Includes Tuscaloosa, AL,

tornado

Includes Joplin, MO, tornado

12 of the 16 Most Expensive Events in US History Have Occurred Since 2004

Sources: PCS; Insurance Information Institute inflation adjustments to 2014 dollars using the CPI.

89

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1995–20141

0.1%

1.5%5.4%

0.1%

6.2%

6.8%

39.2%

40.7%

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2014 dollars.2. Excludes snow.3. Does not include NFIP flood losses4. Includes wildland fires5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.Source: ISO’s Property Claim Services Unit.

Hurricanes & Tropical Storms, $161.2

Fires (4), $6.0

Events Involving Tornadoes (2), $154.9

Winter Storms, $26.9

Terrorism, $24.5

Geological Events, $0.5

Wind/Hail/Flood (3), $21.4

Other (5), $0.2

Wind losses are by far cause the most catastrophe losses,

even if hurricanes/TS are excluded.

Tornado share of CAT losses is

rising

Insured cat losses from 1995-2014

totaled $395.6B, an average of $19.8B per year or $1.65B

per month

Winter storm losses were much above average in 2014/15 are

will push this share up

Convective Loss Events in the USOverall and insured losses, 1980 – 2014

98

$ Billions

Analysis contains: severe storm, tornado, hail, flash flood and lightning

10

20

30

40

50

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

*Losses adjusted to inflation based on CPI

Source: Geo Risks Research, NatCatSERVICE

Overall losses (in 2014 values)*

Insured losses (in 2014 values)* The period from 2008-2014 has

been the most expensive on record for insured losses from “Convective Events” (severe thunderstorms, tornado, hail,

lightning and flash flood)

2015 First Half:$5.1 Billion Insured Losses

$7.0 Overall Losses

8. THE ECONOMY

127

The Strength of the Economy Will Greatly Influence Insurer Exposure Base

Across Most Lines

127

128

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 10/15; Insurance Information Institute.

2.7%

1.8%

-1.8

%1.

3%-3

.7%

-5.3

%-0

.3%

5.0%

2.3%

2.2% 2.6%

2.4%

0.1%

2.5%

1.3%

4.1%

2.0%

1.3%

3.1%

0.4%

2.7%

1.8%

3.5%

-0.9

%4.

6%4.

3%2.

1%0.

6%3.

9%2.

1% 2.7%

2.6%

2.7%

2.6%

2.6%

-8.9%

4.5%

1.4%

4.1%

1.1% 1.

8% 2.5% 3.

6%3.

1%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

   2

00

0   

   2

00

1   

   2

00

2   

   2

00

3   

   2

00

4   

   2

00

5   

   2

00

6   

   2

00

7   

08

:1Q

08

:2Q

08

:3Q

08

:4Q

09

:1Q

09

:2Q

09

:3Q

09

:4Q

10

:1Q

10

:2Q

10

:3Q

10

:4Q

11

:1Q

11

:2Q

11

:3Q

11

:4Q

12

:1Q

12

:2Q

12

:3Q

12

:4Q

13

:1Q

13

:2Q

13

:3Q

13

:4Q

14

:1Q

14

:2Q

14

:3Q

14

:4Q

15

:1Q

15

:2Q

15

:3Q

15

:4Q

16

:1Q

16

:2Q

16

:3Q

16

:4Q

Demand for Insurance Should Increase in 2016 as GDP Growth Continues at a Steady, Albeit Moderate Pace and Gradually Benefits the Economy Broadly

Real GDP Growth (%)

Recession began in in June

2009

The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%

Q1 2014/15 GDP data were hit hard by this

year’s “Polar Vortex” and harsh

winter

136

US Unemployment Rate Forecast4

.5%

4.5

%4

.6%

4.8

%4

.9% 5.4

% 6.1

%6

.9%

8.1

%9

.3%

9.6

% 10

.0%

9.7

%9

.6%

9.6

%

8.9

%9

.1%

9.1

%8

.7%

8.3

%8

.2%

8.0

%7

.8%

7.7

%7

.6%

7.3

%7

.0%

6.6

%6

.2%

6.1

%5

.7%

5.6

%5

.4%

5.2

%5

.0%

4.9

%4

.8%

4.8

%4

.7%

9.6

%

4%

5%

6%

7%

8%

9%

10%

11%

07

:Q1

07

:Q2

07

:Q3

07

:Q4

08

:Q1

08

:Q2

08

:Q3

08

:Q4

09

:Q1

09

:Q2

09

:Q3

09

:Q4

10

:Q1

10

:Q2

10

:Q3

10

:Q4

11

:Q1

11

:Q2

11

:Q3

11

:Q4

12

:Q1

12

:Q2

12

:Q3

12

:Q4

13

:Q1

13

:Q2

13

:Q3

13

:Q4

14

:Q1

14

:Q2

14

:Q3

14

:Q4

15

:Q1

15

:Q2

15

:Q3

15

:Q4

16

:Q1

16

:Q2

16

:Q3

16

:Q4

Rising unemployment eroded payrolls

and WC’s exposure base.

Unemployment peaked at 10% in late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (9/15 edition); Insurance Information Institute.

2007:Q1 to 2016:Q4F*

Unemployment forecasts have been revised modestly

downwards. Optimistic scenarios put the

unemployment as low as 5.0% by Q4 of 2015.

Jobless figures have been revised

downwards for 2015/16

140

Value of New Private Construction: Residential & Nonresidential, 2003-2015*

Billions of Dollars

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

03 04 05 06 07 08 09 10 11 12 13 14 15*

Non ResidentialResidential

Private Construction Activity Is Moving in a Positive Direction though Remains Well Below Pre-Crisis Peak; Residential Dominates

$298.1

$15.0

$613.7

New Construction peaks at $911.8. in 2006

Trough in 2010 at $500.6B,

after plunging 55.1% ($411.2B)

2015: Value of new pvt. construction hits

$787.8B as of July 2015, up 57.4% from the 2010 trough but

still 13.6% below 2006 peak

140

$261.8

$238.8

$407.0

$380.8

*2015 figure is a seasonally adjusted annual rate as of July.Sources: US Department of Commerce http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

145

Construction Employment,Jan. 2010—Sept. 2015*

*Seasonally adjusted.Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

5,58

15,

522

5,54

25,

554

5,52

75,

512

5,49

75,

519

5,49

95,

501

5,49

75,

468

5,43

55,

478

5,48

55,

497

5,52

45,

530

5,54

75,

546

5,58

35,

576

5,57

75,

612

5,62

95,

629

5,62

85,

627

5,60

85,

623

5,63

25,

641

5,64

95,

668

5,68

45,

724

5,74

6 5,79

85,

815

5,81

35,

833

5,85

65,

854

5,86

65,

893

5,91

85,

953

5,93

7 6,00

66,

032

6,06

26,

103

6,11

46,

121

6,15

26,

169

6,19

16,

201

6,23

16,

275

6,31

66,

347

6,33

56,

365

6,37

76,

378

6,38

36,

388

6,39

6

5,400

5,500

5,600

5,700

5,800

5,900

6,000

6,100

6,200

6,300

6,400

6,500

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0S

ep-1

0O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

0M

ar-1

2A

pr-1

2M

ay-1

2Ju

n-12

Jul-1

2A

ug-1

2S

ep-1

2O

ct-1

2N

ov-1

2D

ec-1

2Ja

n-13

Feb

-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-12

Oct

-13

Nov

-13

Dec

-13

Jan-

14F

eb-1

4M

ar-1

4A

pr-1

4M

ay-1

4Ju

n-14

Jul-1

4A

ug-1

4S

ep-1

4O

ct-1

4N

ov-1

4D

ec-1

4Ja

n-15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15Ju

l-15

Aug

-15

Sep

-15

Construction employment is +948,000 above

Jan. 2011 (+17.4%) trough

(Thousands)

Construction and manufacturing employment constitute 1/3 of all WC payroll exposure.

146

(Millions of Units)

New Private Housing Starts, 1990-2021F

1.4

81

.47 1

.62

1.6

41

.57

1.6

0 1.7

1 1.8

5 1.9

6 2.0

71

.80

1.3

60

.91

0.5

50

.59

0.6

1 0.7

8 0.9

2 1.1

01

.13 1

.28 1.4

21

.47

1.4

71

.50

1.5

0

1.3

51.4

61

.29

1.2

0

1.0

11.1

9

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15F 16F 17F 18F 19F20F 21F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/15); Insurance Information Institute.

Insurers Are Continue to See Meaningful Exposure Growth in the Wake of the “Great Recession” Associated with Home Construction: Construction Risk

Exposure, Surety, Commercial Auto; Potent Driver of Workers Comp Exposure

New home starts plunged 72% from 2005-2009; A net

annual decline of 1.49 million units, lowest since records began

in 1959

Job growth, low inventories of existing homes, low mortgage rates and demographics should continue to stimulate new home construction

for several more years

9. CYBER RISK & CYBER INSURANCE

165

Cyber Risk is a Rapidly Emerging Exposure for Businesses Large and

Small in Every Industry

165

Data Breaches 2005-2015, by Number of Breaches and Records Exposed# Data Breaches/Millions of Records Exposed

*Figures as of June 30, 2015, from the Identity Theft Resource Center,http://www.idtheftcenter.org/images/breach/ITRCBreachReport2015.pdf

157

321

446

656

498

419470

614

400

783

662

117.6

85.692.0

17.522.9

35.7

19.1

66.9

222.5

16.2

127.7

100

200

300

400

500

600

700

800

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 *20150

20

40

60

80

100

120

140

160

180

200

220

# Data Breaches # Records Exposed (Millions)

The total number of data breaches (+27.5%) hit a record high of 783 in 2014, exposing 85.6 million records. Through June 30, this year has

seen 117.6 million records exposed in 400 breaches.*

Millions

170

2014 Data Breaches By Business Category, By Number of Breaches

5.5%

11.7%

7.3%

42.5%

33.3%

Source: Identity Theft Resource Center, http://www.idtheftcenter.org/ITRC-Surveys-Studies/2014databreaches.html

The majority of the 783 data breaches in 2014 affected business and medical/healthcare organizations, according to the Identity Theft Resource Center.

Business, 258 (33.3%)Govt/Military, 92 (11.7%)

Banking/Credit/Financial, 43 (5.5%)

Educational, 57 (7.3%)

Medical/Healthcare, 333 (42.5%)

171

State sponsored groups: Foreign government sponsored Sophisticated and well-funded

Organized cyber criminals: Traditional organized crime groups Loosely organized global hacker crews

Hacktivists: Politically-motivated hackers Increasing capabilities

Insiders: Easy access to sensitive information Difficult to detect

Terrorists: Destruction of physical and digital assets

Evolving Threats: Cyber Crime and Cyber Terrorism

Source: Lewis Brisbois, Practical Strategies to Address Cyber Risk in Your Business, November 2014

172

Main Causes of Data Breach Globally

30%

29%

42%

*The most common types of malicious or criminal attacks include malware infections, criminal insiders, phishing/social engineering and SQL injection.Source: 2014 Cost of a Data Breach Study: Global Analysis, the Ponemon Institute, sponsored by IBM, May 2014

Malicious or criminal attacks are most often the cause of data breach globally. Some 42 percent of incidents concern a malicious or criminal attack, while 30

percent concern a negligent employee or contractor (human factor).

Malicious or criminal attack*

Human error

System glitch

174

US: External Cyber Crime Costs: Fiscal Year 2014

2%2%

18%

38%

40%

* Other costs include direct and indirect costs that could not be allocated to a main external cost categorySource: 2014 Cost of Cyber Crime: United States, Ponemon Institute.

Information theft (40%) and business disruption or lost productivity (38%) account for the majority of external costs due to cyber crime.

Information theft

Equipment damagesOther costs*

Revenue loss

Business disruption

Data/Privacy Breach:Many Potential Costs Can Be Insured

Source: Zurich Insurance; Insurance Information Institute

Forensic costs to discover

cause

175

Source: Insurance Information Institute research.

The Three Basic Elements of Cyber Coverage: Prevention, Transfer, Response

Loss Prevention

Post-Breach Response(Insurable)

Loss Transfer (Insurance)

Cyber risk management today involves three essential components, each designed

to reduce, mitigate or avoid loss. An increasing number of cyber risk products

offered by insurers today provide all three.

176

177

I.I.I.’s New Cyber Risk Report (Oct. 2015): Cyber Risks Threat and Opportunity

I.I.I.’s 3rd report on cyber risk: Cyber Risk: Threat and Opportunity

Provides information on cyber threats and insurance market solutions

Global cyber risk overview

Quantification of threats by type and industry

Cyber security and cost of attacks

Cyber terrorism

Cyber liability

Insurance market for cyber riskhttp://www.iii.org/white-paper/cyber-risks-threat-and-opportunities-100715

179

Marsh: Percentage of U.S. Companies Purchasing Cyber Insurance Increased in 2014

*Take-up rate refers to the overall percentage of clients that purchased standalone cyber insurance.Source: Benchmarking Trends: As Cyber Concerns Broaden, Insurance Purchases Rise, Marsh Risk Management Research Briefing, March 2015

8%

12%

18%

21%

21%

22%

26%

32%

50%

16%

11%

13%

14%

17%

17%

16%

22%

45%

13%

6%Manufacturing

Communications, Media and Tech

Retail/Wholesale

Power and Utilities

Financial Institutions

Services

Hospitality and Gaming

Education

Health Care

All Industries

Take-up rate 2014* Take-up rate 2013

Ever larger numbers of insureds seek financial

protection via cyber insurance. The

percentage of U.S. companies buying cyber

insurance rose to 16 percent in 2014.

180

Marsh: Total Limits Purchased, By Industry – Cyber Liability, All Revenue Size

Source: Benchmarking Trends: As Cyber Concerns Broaden, Insurance Purchases Rise, Marsh Risk Management Research Briefing, March 2015

$22.0

$4.2

$9.9 $10.5$9.5

$11.1$10.2

$13.2

$19.7

$6.7

$23.5

$10.5$12.0

$14.9

$21.0

$4.4

$22.2

$12.8

All Industries Comms, Media& Technology

Education FinancialInstitutions

Health Care Manufacturing Power andUtilities

Retail/Wholesale Services

Avg. 2013 Limits Avg. 2014 Limits

Average limits purchased for cyber risk rose to $12.8 million for all industries and all company sizes in 2014. Power and utility companies witnessed the sharpest

percentage increase in average limits, at 59 percent.

($ Millions)

183

10. INDUSTRY DISRUPTORS

Technology, Society and the Economy Are All

Changing at a Rapid PaceWill Insurers Keep Pace?

183

185

Media is Obsessed with Driverless Vehicles: Often Predicting the Demise of Auto Insurance

By 2035, it is estimated that 25% of new vehicle

sales could be fully autonomous models

Source: Boston Consulting Group.

Questions

Are auto insurers monitoring these trends?

How are they reacting?

Will Google take over the industry?

Will the number of auto insurers shrink?

How will liability shift?

186

On-Demand/Sharing/Peer-to-Peer Economy Impacts Many Lines of Insurance The “On-Demand” Economy is or

will impact many segments of the economy important to P/C insurers

Auto (personal and commercial)

Homeowners/Renters

Many Liability Coverages

Professional Liability

Workers Comp Many unanswered insurance

questions

Insurance solutions are increasingly available to fill the many insurance gaps that arise

Source: ISO.

Ridesharing Regulation/Legislation and Status of ISO Filings as of 9/30/15

190

Status of ISO FilingsStatus Ride Sharing

Legislation/Regulation

191

Send in the Drones: Potential Rapid Adoption in Industry; Media Loves It

Drones or Unmanned Aerial Vehicle (UAV) technology is seeing rapid adoption rate in many industries, including insurance

~700,000 drones in US by year-end

FAA granting Section 333 exemptions for commercial use and testing of UAS

FAA will require most drones to be registered by year-end 2015.

At least 5 insurers have received permission to test

Wide variety of applications: claims, pre-event property inspections…

Insurers partnering with construction industry to guide R&D and regulation of UAV use via Property Drone Consortium: www.propertydrone.org

11. Shifting Legal Liability & Tort Environment

192

Will the Tort PendulumSwing Against Insurers?

192

196

$750,392$653,898

$782,657

$1,045,048 $1,009,788

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

2009 2010 2011 2012 2013

Average Personal Injury Jury Award,2009 – 2013

Average awards in Personal Injury cases

have increased by more than 1/3 in recent years

Source: Current Award Trends in Personal Injury, 54th Edition; Insurance Information Institute.

198

14%

16%

14% 14%

16%

13%

14%

14%

15%

15%

16%

16%

17%

2003-04 2005-06 2007-09 2010-11 2012-13

Percent of Personal Injury Jury Awards Over $1 Million, 2003 – 2013*

The share of $1MM+ jury awards has returned ot

its pre-crisis high

*Latest available.Source: Current Award Trends in Personal Injury, 53rd and 54th Editions; Insurance Information Institute.

201

The Nation’s Judicial “Hellholes”: 2014/2015

Source: American Tort Reform Association; Insurance Information Institute

West VirginiaIllinoisMadison County

New York City Asbestos Litigation

Watch List

Atlantic County, New Jersey

Mississippi Delta Montana Nevada Newport News, Virginia Philadelphia,

Pennsylvania

Dishonorable Mention

AL Supreme Court PA Supreme Court

California

Florida

Volkswagen: Massive tort actions, fines, penalties certain. Are others vulnerable? Issue of cheating on

environmental standards and liability looms large.

www.iii.org

Thank you for your timeand your attention!

Twitter: twitter.com/bob_HartwigDownload at www.iii.org/presentations

Insurance Information Institute Online:

202