Workers Compensation: Opportunities and Challenges in a Weak Exposure Environment Workers Compensation Educational Conference Orlando, FL August 22, 2011

Workers Compensation: Opportunities and Challenges in a

Weak Exposure EnvironmentWorkers Compensation Educational Conference

Orlando, FLAugust 22, 2011

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 [email protected] www.iii.org

3

Workers Compensation Exposure Summary

There Has Been Tremendous Erosion of Workers Comp

Exposure Over the Past Several Years

Workers Compensation Premium Continues Its Sharp DeclineNet Written Premium

$ Billions

Calendar Yearp Preliminary

Source: 1990–2009 Private Carriers, Best's Aggregates & Averages; 2010p, NCCI1996–2010p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements

State Funds available for 1996 and subsequent

Workers Comp Rate Changes,2008:Q4 – 2011:Q2

Source: Council of Insurance Agents and Brokers; Information Institute.

-5.5%

-4.6%-4.0%

-4.6%

-3.7% -3.9%

-5.4%

-3.7%-3.4%

-1.6%

2.6%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2

The Q2 2011 WC rate change was the first

increase in many years

(Percent Change)

6

Number of Workers Covered Under Workers’ Compensation Programs, 1989-2009

Source: National Academy of Social Insurance.

0

20,000

40,000

60,000

80,000

100,000

120,000

140,0008

9

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

To

tal

Wo

rke

rs

(00

0)

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

Pe

rce

nt C

ha

ng

e

Total Workers Percent change

7

Total Wages Covered Under Workers’ Compensation Programs, 1989-2009


$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

$5,500

$6,0008

9

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

To

tal W

ag

es

($

bill

ion

s)

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

Pe

rce

nt C

ha

ng

e

Total Wages Percent change

8

Private Industry Occupational Injuries and Illnesses, 1987-2009


0

1

2

3

4

5

6

7

8

9

10

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

All

ca

se

s (

mill

ion

s)

0

1

2

3

4

5

6

7

8

9

10

All c

as

es

(pe

rce

nt)

Number of Cases Incident Rate

9

Number of Workers Covered by Workers’ Compensation, By State, 2008-2009

State 2008-2009 Percent change



AL -5.8% LA -2.2% OK -8.0%AK -0.6% ME -3.6% OR -6.3%AZ -7.5% MD -3.4% PA -3.5%AR -3.5% MA -3.5% RI -4.6%CA -5.7% MI -7.6% SC -6.2%CO -4.9% MN -4.2% SD -2.2%CT -4.3% MS -4.7% TN -6.0%DE -4.9% MO -4.2% TX 2.2%DC -2.0% MT -3.9% UT -5.4%FL -6.8% NE -2.5% VT -3.6%GA -6.2% NV -9.3% VA -3.8%HI -4.9% NH -3.8% WA -4.3%ID -6.2% NJ -4.2% WV -2.8%IL -5.0% NM -4.2% WI -4.9%IN -6.0% NY -3.1% WY -4.3%IA -3.1% NC -5.7%KS -4.4% ND -0.3%KY -4.7% OH -5.7% Total -4.0%


10

Total Wages Covered by Workers’ Compensation, By State, 2008-2009




AL -4.4% LA -1.8% OK -4.1%AK 2.4% ME -2.8% OR -5.8%AZ -6.9% MD -1.8% PA -2.6%AR -1.4% MA -4.4% RI -3.9%CA -5.6% MI -8.9% SC -5.0%CO -4.5% MN -5.3% SD -0.7%CT -5.4% MS -3.9% TN -5.5%DE -4.6% MO -5.1% TX -3.6%DC -1.8% MT -2.7% UT -4.1%FL -6.0% NE -1.4% VT -2.5%GA -5.8% NV -10.0% VA -2.0%HI -3.7% NH -3.8% WA -2.5%ID -5.7% NJ -4.5% WV -0.4%IL -5.8% NM -2.8% WI -4.9%IN -6.4% NY -7.3% WY -6.2%IA -2.6% NC -5.6%KS -4.0% ND 2.3%KY -3.3% OH -5.5% Total -4.7%


11

Workers’ Compensation Benefits and Costs Per $100 of Covered Wages, 1980-2009

1.761.67

1.50 1.49

1.64

1.791.86

1.942.04

2.18 2.16 2.13 2.172.05

1.83

1.66

1.491.38 1.35 1.34

1.43

1.57

1.71 1.70 1.71

1.571.46

1.34 1.30

0.96 0.971.04 1.05 1.09

1.171.23

1.29 1.341.46

1.571.65 1.65

1.531.47

1.351.26

1.17 1.13 1.121.06 1.10 1.13 1.16 1.13 1.09

0.99 0.96 0.98 1.03

1.58

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

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

Employer Costs Benefits


12

Workers’ Compensation Medical and Cash Benefits Per $100 of Covered Wages, 1980-2009

0.28 0.290.34 0.34 0.36

0.390.43

0.470.50

0.570.62

0.660.69

0.66

0.580.54

0.50 0.48 0.48 0.48 0.470.50 0.52

0.55 0.53 0.510.47 0.46

0.49 0.51

0.68 0.68 0.70 0.71 0.730.78 0.80 0.82 0.84

0.890.94

0.990.96

0.87 0.89

0.810.76

0.680.65 0.63

0.60 0.60 0.61 0.61 0.61 0.59

0.520.49 0.48

0.52

$0.0

$0.2

$0.4

$0.6

$0.8

$1.0

$1.2

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

Medical Benefits Cash Benefits


13

Labor Market Trends

Massive Job Losses Sapped the Economy and WC Exposure;

Trend Improved in Early 2011 but Is Now Weak

14

Unemployment and Underemployment Rates: Stubbornly High in 2011

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Unemployment fell to 9.1% in

June

Unemployment peaked at 10.1% in October 2009, highest monthly rate since 1983.

Peak rate in the last 30 years:

10.8% in November -

December 1982

Source: US Bureau of Labor Statistics; Insurance Information Institute.

U-6 went from 8.0% in March

2007 to 17.5% in October 2009; Stood at 16.1%

in July 2011

January 2000 through July 2011, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

Stubbornly high unemployment and underemploymentwill constrain payroll growth, which directly affects WC exposure

Jul 11

18

67

92

13

65 1

27

42

15

-10

9-1

46

5 97

23

-12

-85 -58

-16

1-2

53

-23

0-2

57

-34

7-4

56

-54

7-7

34 -66

7-8

06 -7

07

-74

4 -64

9-3

34

-45

2-2

97 -2

15

-18

6-2

62

75

-83

16 6

2

22

95

1 61 1

17

14

31

12 1

93

12

8 16

79

42

61

21

92

41

99

80 1

54

14

4

(1,000)

(800)

(600)

(400)

(200)

0

200

400

Jan

-07

Fe

b-0

7M

ar-

07

Ap

r-0

7M

ay-

07

Jun

-07

Jul-

07

Au

g-0

7S

ep

-07

Oct

-07

No

v-0

7D

ec-

07

Jan

-08

Fe

b-0

8M

ar-

08

Ap

r-0

8M

ay-

08

Jun

-08

Jul-

08

Au

g-0

8S

ep

-08

Oct

-08

No

v-0

8D

ec-

08

Jan

-09

Fe

b-0

9M

ar-

09

Ap

r-0

9M

ay-

09

Jun

-09

Jul-

09

Au

g-0

9S

ep

-09

Oct

-09

No

v-0

9D

ec-

09

Jan

-10

Fe

b-1

0M

ar-

10

Ap

r-1

0M

ay-

10

Jun

-10

Jul-

10

Au

g-1

0S

ep

-10

Oct

-10

No

v-1

0D

ec-

10

Jan

-11

Fe

b-1

1M

ar-

11

Ap

r-1

1M

ay-

11

Jun

-11

Jul-

11

Monthly Change in Private Employment

January 2008 through July 2011* (Thousands)

Private Employers Added 2.368 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs

Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

Private employers added jobs in every month in 2010 for a total of

1.435 million for the year

154,000 private sector jobs were created in July

http://www.bls.gov/ces/home.htm

16

Change in Number Employedin Select Industries, June 2011 vs. June 2010

-27 -61-190

-382

-666

7799223257

343396

-800

-600

-400

-200

0

200

400

600

Pro

f.B

usin

ess

Ser

v.

Hea

lth C

are

&S

ocia

l Ass

ist.

Trad

e,Tr

ansp

ort.

&U

tiliti

es

Edu

catio

n

Man

ufac

turin

g

Min

ing

&Lo

ggin

g

Info

rmat

ion

Fina

ncia

lA

ctiv

ities

Con

stru

ctio

n

Leis

ure

&H

ospi

tality

Gov

ernm

ent

Sources: US Bureau of Labor Statistics “Employment Situation, June 2011”; Insurance Information Institute.

There is a great deal of variation in employment growth by industry, indicating a very uneven and slow recovery

Thousands Professional Business Services, Health Care, and Trade, Transportation &

Utilities) were the job growth leaders in the past year.

17

Monthly Change Employment*-7

2-1

44

-12

2-1

60

-13

7-1

61

-12

8-1

75

-32

1-3

80

-59

7-6

81

-77

9-7

26

-75

3-5

28 -3

87

-51

5 -34

6 -21

2-2

25

-22

46

4-1

09

14 39

20

8 31

3 43

2-1

75 -6

6-1

-41

21

09

3 15

26

82

35

22

12

17

53

46 1

17

-1,000

-800

-600

-400

-200

0

200

400

600

Ja

n 0

8F

eb

08

Ma

r 0

8A

pr

08

Ma

y 0

8Ju

n 0

8Ju

l 08

Au

g 0

8S

ep

08

Oct 0

8N

ov 0

8D

ec 0

8Ja

n 0

9F

eb

09

Ma

r 0

9A

pr

09

Ma

y 0

9Ju

n 0

9Ju

l 09

Au

g 0

9S

ep

09

Oct 0

9N

ov 0

9D

ec 0

9Ja

n 1

0F

eb

10

Ma

r 1

0A

pr

10

Ma

y 1

0Ju

n 1

0Ju

l 10

Au

g 1

0S

ep

10

Oct 1

0N

ov 1

0D

ec 1

0Ja

n 1

1F

eb

11

Ma

r 1

1A

pr

11

Ma

y 1

1Ju

n 1

1Ju

l 11

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

*Estimate based on Reuters poll of economists.Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute

Job Losses Since the Recession Began in Dec. 2007 Peaked at 8.4 Mill in Dec. 09; Stands at 6.2 Million Through March 2011;

13.5 Million People are Now Defined as Unemployed

January 2008 through July 2011* (Thousands)

The job gain and loss figures in 2010 were severely distorted by the hiring and termination of temporary Census workers. In 2010, 1.178 million

nonfarm jobs were created.

117,000 nonfarm jobs were created

in July

http://www.bls.gov/ces/home.htm

18

Unemployment Rates by State, June 2011:Highest 25 States*

12.4

11.8

10.8

10.6

10.5

10.5

10.4

10.3

9.9

9.9

9.9

9.8

9.6

9.5

9.4

9.4

9.3

9.2

9.2

9.2

9.1

8.8

8.8

8.5

8.5

8.3

0

2

4

6

8

10

12

14

NV CA RI FL MI SC DC MS AL GA NC TN KY NJ ID OR AZ IL WA US CT MO OH CO WV IN

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for June 2011, seasonally adjusted.

Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In June, 28 states and the District of Columbia reported over-the-month

unemployment rate increases, 8 had decreases, and 14 had no change.

The unemployment rate in the US was 9.2% in June

19

8.2

8.1

8.0

8.0

7.8

7.8

7.6

7.6

7.6

7.5

7.5

7.4

7.0

6.8

6.7

6.6

6.0

6.0

6.0

5.9

5.5

5.3

4.9

4.8

4.1

3.2

0

2

4

6

8

10

TX AR DE NY LA ME MA PA WI AK MT UT MD NM MN KS HI IA VA WY VT OK NH SD NE ND

Une

mpl

oym

ent R

ate

(%)

Unemployment Rates By State, June 2011: Lowest 25 States*

*Provisional figures for June 2011, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In June, 28 states and the District of Columbia reported over-the-month

unemployment rate increases, 8 had decreases, and 14 had no change.

20

Labor Underutilization: Broader than Just Unemployment

11

.2%

16

.4%

16

.5%

16

.3%

16

.8%

17

.0%

17

.5%

17

.2%

17

.3%

16

.5%

16

.8%

16

.9%

17

.1%

16

.6%

16

.5%

16

.5%

16

.7%

17

.1%

17

.0%

17

.0%

16

.7%

16

.1%

15

.9%

15

.7%

15

.9%

16

.0%

16

.2%

16

.1%

10%

11%

12%

13%

14%

15%

16%

17%

18%

% of Labor Force

Marginally Attached and Unemployed Persons Account for 16.1% of the Labor Force in July 2011 (1 Out Every 6.2 People). Unemployment Rate Alone was 9.2%. Underutilization Shows a Broader Impact on WC and

Other Commercial ExposuresNOTE: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule. Source: US Bureau of Labor Statistics; Insurance Information Institute.

21

US Unemployment Rate

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

%

9.0

%

8.9

%

8.8

%

8.7

%

8.5

%

9.6

%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

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

Rising unemployment eroded payrolls

and workers comp’s

exposure base.

Unemployment peaked at 10% in

late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (8/11); Insurance Information Institute

2007:Q1 to 2012:Q4F*

Unemployment forecasts remain stubbornly high

through 2011, but still imply millions of new

jobs will created.

Jobless figures have been revised

upwards for 2011/12

22

Workers Compensation and the Economy

Workers Comp Exposure and Performance is Intimately Linked to

the Economy and Labor Market

23

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 8/11; Insurance Information Institute.

2.7

%

0.9

%

3.2

%

2.3

%

2.9

%

-0.7

%

0.6

%

-4.0

%

-6.8

% -4.9

%

-0.7

%

1.6

%

5.0

%

3.9

%

3.8

%

2.5

%

2.3

%

0.4

%

1.3

%

2.2

%

2.5

%

2.4

%

2.6

%

2.8

%2

.9%4.1

%

1.1

%

1.8

%

2.5

% 3.6

%

3.1

%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

2

00

0

2

00

1

2

00

2

2

00

3

2

00

4

2

00

5

2

00

6

07

:1Q

07

:2Q

07

:3Q

07

:4Q

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

Demand for Insurance Continues To Be Impacted by Sluggish Economic Conditions, but the Benefits of Even Slow Growth Will Compound and

Gradually Benefit the Economy Broadly

Real GDP Growth (%)

Recession began in Dec. 2007. Economic toll of credit

crunch, housing slump, labor market contraction has

been severe but modest recovery is underway

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

2011 got off to a sluggish start, but growth is expected

to accelerate in the remainder of the year. This is a major

positive for insurance demand and exposure growth.

24

Length of US Business Cycles,1929–Present*

10 1116

6

168 8

19

50

80

3745

39

24

106

36

58

12

92

120

73

26

43

138 11 10 8

0

10

20

30

40

50

60

70

80

90

100

110

120

Aug1929

May1937

Feb1945

Nov1948

Jul1953

Aug1957

Apr1960

Dec1969

Nov1973

Jan1980

Jul1981

Jul1990

Mar2001

Dec2007

Month Recession Started

Contraction Expansion Following

*Through July 2011. Most recent recession began Dec. 2007 and ended June 2009. ** Post-WW II period through end of most recent expansion. Sources: National Bureau of Economic Research; Insurance Information Institute.

Average Duration**Recession = 10.4 MosExpansion = 60.5 Mos

Length of Expansions Greatly Exceeds

Contractions

Duration (Months) The “Great Recession”

lasted 19 months, longest

since Great Depression

2011 Financial Overview State Economic Growth Varied in 2010

25

Texas had one of the stronger economies in 2010 and has

generally outperformed during the economic

downturn

Hard hit Midwest and Northeast states finally

entering recovery in 2010

27

Direct Premiums Written: All P/C Lines Percent Change by State, 2005-2010

44

.8

25

.4

19

.8

17

.3

16

.6

14

.2

13

.9

12

.4

12

.3

11

.9

9.1

8.1

8.1

7.1

6.8

5.4

5.2

4.7

3.8

3.7

3.1

3.0

1.5

1.2

1.1

0

5

10

15

20

25

30

35

40

45

ND

SD LA

WY

OK

WV

KS IA TX

MT

NE

DE

MS

NM SC

DC

UT

AR

NC ID WA

AL

WI

AK

TN

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

North Dakota is the growth juggernaut of the P/C

insurance industry—too bad nobody lives there…

28

0.7

0.6

0.1

-0.1

-0.3

-0.5

-0.8

-1.4

-1.6

-1.7

-2.5

-2.8

-2.9

-3.4

-3.6

-4.1

-4.5

-4.7

-4.8

-5.7

-5.8

-8

-8.2

-8.3

-13

.5

-14

.2

-15

.5

-20

-15

-10

-5

0

5M

D

MO

KY IN NY

GA

MN

VA

US

PA

OR FL IL CT

VT

OH RI

CO

NJ HI

ME

NH

MA

AZ

NV MI

CA

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC; Insurance Information Institute.

Bottom 25 States

States with the poorest performing economies also produced the most negative net change in premiums of

the past 5 years

Direct Premiums Written: All P/C Lines Percent Change by State, 2005-2010

US Direct Premiums Written declined by 1.6% between 2005

and 2010

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

29

Payroll Base* WC NWP

Wage and Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums

*Private employment; Shaded areas indicate recessions. Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.

29% of NPW has been eroded away by the soft market and weak economy

7/90-3/91 3/01-11/0112/07-6/09

$Billions $Billions

WC premium volume dropped two years before

the recession began

WC net premiums written were down $14B or 29.3% to

$33.8B in 2010 after peaking at $47.8B

in 2005

http://research.stlouisfed.org/fred2/series/WASCUR

30

Direct Premiums Written: Worker’s CompPercent Change by State, 2005-2010*

34

.4

23

.1

14

.2

10

.2

9.0

4.6

1.4

-3.7

-7.3

-9.3

-10

.0

-10

.3

-10

.9

-10

.9

-13

.0

-14

.7

-15

.3

-15

.9

-16

.9

-17

.8

-19

.8

-21

.4

-21

.7

-35-30-25-20-15-10-505

10152025303540

OK

MT ID LA

SD IA KS

NY WI

PA

MS IL

NM NJ

NE

MD

NC AL

CT VA

SC

AR

MN

Pe

ce

nt

ch

an

ge

(%

)

*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.


Top 25 States5

,80

7.1

Only 7 (small) states showed growth in workers

comp premium volume between 2005 and 2010

31

Direct Premiums Written: Worker’s CompPercent Change by State, 2005-2010*

-22

.6

-23

.7

-24

.2

-25

.0

-25

.2

-25

.2

-25

.3

-26

.8

-26

.9

-28

.1

-28

.3

-28

.7

-29

.0

-30

.1

-32

.5

-32

.6

-33

.8

-34

.7

-36

.1

-42

.7

-45

.4

-50

.7

-51

.2

-57

.7

-70

-60

-50

-40

-30

-20

-10

0

AZ

ME

GA

KY IN NH

OR

DC

MA

TN VT

US

TX

AK

MO MI

UT RI

CO

DE

NV HI

CA

FL

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

States with the poorest performing economies also produced the most negative net change in premiums of

the past 5 years

*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.


Workers Comp DPW plunged 28.7% from

between 2005 and 2010

Crisis-Driven Exposure Drivers in Workers Comp

34

Economic Obstacles and Opportunities to Growth

35

(Millions of Units)

New Private Housing Starts, 1990-2016F

1.4

8

1.4

7 1.6

2

1.6

4

1.5

7

1.6

0 1.7

1 1.8

5 1.9

6 2.0

7

1.8

0

1.3

6

0.9

1

0.5

5

0.5

9

0.5

9 0.7

6

1.2

0 1.3

3 1.4

3

1.5

0

1.3

51.4

6

1.2

9

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 11F12F13F14F15F16F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10 and 7/11); Insurance Information Institute.

Little Exposure Growth Likely for Homeowners Insurers Until 2013. Also Affects Commercial Insurers with Construction Risk Exposure, Surety

New home starts plunged

72% from 2005-2009; A

net annual decline of 1.49 million units, lowest since

records began in 1959

The plunge and lack of recovery in homebuilding and in construction in general is

holding back payroll exposure growth

Job growth, improved credit

market conditions and demographics

will eventually boost home construction

66%

68%

70%

72%

74%

76%

78%

80%

82%

Ma

r 0

1

Ju

n 0

1

Se

p 0

1

De

c 0

1

Ma

r 0

2

Ju

n 0

2

Se

p 0

2

De

c 0

2

Ma

r 0

3

Ju

n 0

3

Se

p 0

3

De

c 0

3

Ma

r 0

4

Ju

n 0

4

Se

p 0

4

De

c 0

4

Ma

r 0

5

Ju

n 0

5

Se

p 0

5

De

c 0

5

Ma

r 0

6

Ju

n 0

6

Se

p 0

6

De

c 0

6

Ma

r 0

7

Ju

n 0

7

Se

p 0

7

De

c 0

7

Ma

r 0

8

Ju

n 0

8

Se

p 0

8

De

c 0

8

Ma

r 0

9

Ju

n 0

9

Se

p 0

9

De

c 0

9

Ma

r 1

0

Ju

n 1

0

Se

p 1

0

De

c 1

0

Ma

r 1

1

Ju

n 1

1

Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures

Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 37

Percent of Industrial Capacity

Hurricane Katrina

March 2001-November 2001

recession

“Full Capacity”

The closer the economy is to operating at “full

capacity,” the greater the inflationary pressure

The US operated at 76.7% of industrial

capacity in Jun. 2011, above the June 2009

low of 68.3%

December 2007-June 2009 Recession

http://www.federalreserve.gov/releases/g17/Current/default.htm

39

43,6

9448

,125

69,3

0062

,436

64,0

04 71,2

77 81,2

3582

,446

63,8

5363

,235

64,8

53 71,5

4970

,643

62,3

0452

,374

51,9

5953

,549

54,0

2744

,367

37,8

8435

,472

40,0

9938

,540

35,0

3734

,317

39,2

0119

,695 28

,322

43,5

4660

,837

56,2

8212

,376

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

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

Business Bankruptcy Filings,1980-2011:Q1

Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633 ; Insurance Information Institute

Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline

2010 bankruptcies totaled 56,282, down 7.5% from 60,837 in 2009—which were up 40%

from 2008 and the most since 1993. 2011:Q1 filings are down 14.4% from 2010:Q1.

% Change Surrounding Recessions

1980-82 58.6%1980-87 88.7%1990-91 10.3%2000-01 13.0%2006-09 208.9%*

http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633

40

Private Sector Business Starts, 1993:Q2 – 2010:Q3*

175

186

174

180

186

192

188

187 18

918

6 190 19

419

119

9 204

202

195

196

196

206

206

201

192

198

206

206

203

211

205

212

200 20

520

420

419

720

320

920

1

192

192

193

201 20

420

221

0 212

209

216 22

0 223

220

220

210

221

212

204

218

209

207

207

199

191 19

317

2 176

169

184

172

172

182

203

150

160

170

180

190

200

210

220

230

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure

* Data through September 30, 2010 are the latest available as of July 25, 2011; Seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.

(Thousands)

344,000 new business starts were recorded through the first half of 2010, which was likely the slowest year for

new business starts since 1993.

Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010:Q3 526,000

http://www.bls.gov/news.release/cewbd.t08.htm

41

11 Industries for the Next 10 Years: Insurance Solutions Needed

Shipping (Rail, Marine, Trucking)

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Agriculture/Agribusiness

Natural Resources

Environmental

Technology (incl. Biotechnology)

Light Manufacturing

Export-Oriented Industries

Many industries are

poised for growth, but

many insurers do not write in

these economic segments

42

Percentage Change in Employment in Select Industries, June 2011 vs. June 2010

-0.8% -1.0%-2.8% -2.9% -3.3%

0.9%1.0%2.1%2.4%

7.6%

10.9%

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

10%12%

Min

ing

&Lo

ggin

g

Edu

catio

n

Pro

f. &

Bus

ines

sS

erv.

Hea

lth &

Soc

ial A

ssis

t.

Trad

e,Tr

ansp

ort.

&U

til

Man

ufac

turin

g

Fina

naci

alA

ctiv

ities

Info

rmat

ion

Leis

ure

&H

ospi

talit

y

Gov

ernm

ent

Con

stru

ctio

n



Percentage Change

Mining and Logging activities were the job growth leaders over the past

year, in percentage terms

43

Change in Number Employedin Select Industries, June 2011 vs. June 2010

-27 -61-190

-382

-666

7799223257

343396

-800

-600

-400

-200

0

200

400

600

Pro

f.B

usin

ess

Ser

v.

Hea

lth C

are

&S

ocia

l Ass

ist.

Trad

e,Tr

ansp

ort.

&U

tiliti

es

Edu

catio

n

Man

ufac

turin

g

Min

ing

&Lo

ggin

g

Info

rmat

ion

Fina

ncia

lA

ctiv

ities

Con

stru

ctio

n

Leis

ure

&H

ospi

talit

y

Gov

ernm

ent



Thousands Professional Business Services, Health Care, and Trade, Transportation &

Utilities) were the job growth leaders in the past year.

44

Percentage Change in Employment in Select Sub-Industries, June 2011 vs. June 2010

-6.2%

2.2%

-2.9%

1.9% 1.7%

6.1%6.0%

-2.9%-3.9%

-7.2%

7.8%

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

10%O

il &

Gas

Ext

ract

ion

Logg

ing

Con

stru

ctio

nof

Bui

ldin

gs

Con

str

uctio

n--

Hea

vy &

Mfg

--P

rimar

yM

etal

sM

fg--

Fabr

icat

edM

etal

s

Mfg

--Woo

dP

rodu

cts\

Tran

spor

t--Tr

uck

Tran

spor

t--W

ater

Hea

lth C

are

Hea

lth C

are-

-Nur

sing

&R

esid

entia

l



% ChangeOil and Gas

Extraction was among the fastest growing industry

sub-segments over the past

year, in % terms

45

Change in Number Employed in Select Sub-Industries, June 2011 vs. June 2010

-22

27

-2

162

5479

22

-26-49

-4

12

(100)

(50)

0

50

100

150

200O

il &

Gas

Ext

ract

ion

Logg

ing

Con

stru

ctio

nof

Bui

ldin

gs

Con

str

uctio

n--

Hea

vy &

Mfg

--P

rimar

yM

etal

sM

fg--

Fabr

icat

edM

etal

s

Mfg

--Woo

dP

rodu

cts\

Tran

spor

t--Tr

uck

Tran

spor

t--W

ater

Hea

lth C

are:

Abu

lato

ryS

erv.

Hea

lth C

are-

-Nur

sing

&R

esid

entia

l



ThousandsIndustries related to

natural resource extraction,

processing and manufacturing are doing well, along with health care

Where Will the Growth in WC Exposure Come From?

46

Industry and Occupation Growth Analysis

48

Occupations with Largest Numerical Growth, 2008–2018: Health, Services Dominate

Sources: US Bureau of Labor Statistics: Occupational Outlook Handbook, 2010-2011 Edition; Insurance Information Institute

Dollar growth in WC exposures should grow the most (at current rate levels) in the health and services industries

Occupations

Number of

new jobs(in thousands) Percent change

Wages (May 2008 median) Education/training category

Registered nurses 581.5 22 $ 62,450 Associate degree

Home health aides 460.9 50 20,460 Short-term on-the-job training

Customer service representatives 399.5 18 29,860 Moderate-term on-the-job training

Combined food preparation and serving workers, including fast food

394.3 15 16,430 Short-term on-the-job training

Personal and home care aides 375.8 46 19,180 Short-term on-the-job training

Retail salespersons 374.7 8 20,510 Short-term on-the-job training

Office clerks, general 358.7 12 25,320 Short-term on-the-job training

Accountants and auditors 279.4 22 59,430 Bachelor's degree

Nursing aides, orderlies, and attendants

276.0 19 23,850 Postsecondary vocational award

Postsecondary teachers 256.9 15 58,830 Doctoral degree

Construction laborers 255.9 20 28,520 Moderate-term on-the-job training

Elementary school teachers, except special education

244.2 16 49,330 Bachelor's degree

Truck drivers, heavy and tractor-trailer


Landscaping and groundskeeping workers


Bookkeeping, accounting, and auditing clerks

212.4 10 32,510 Moderate-term on-the-job training

Executive secretaries and administrative assistants

204.4 13 40,030 Work experience in a related occupation

Management analysts 178.3 24 73,570 Bachelor's or higher degree, plus work experience

Computer software engineers, applications

175.1 34 85,430 Bachelor's degree

Receptionists and information clerks


Carpenters 165.4 13 38,940 Long-term on-the-job trainingSOURCE: BLS Occupational Employment Statistics and Division of Occupational Outlook

50

(Thousands)

704

654

446

322

304

256

236

118

102

788

838

1,431

1,683

2,657

4,017

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

Health Care and Social Assistance

Professional, Scientific, Tech. Srvs.

Education Services

Administration, Support, Waste Mgmt & Removal

Accomodation & Food Services

Government

Other Services (excl. Govt.)

Retail Trade

Transportation and Warehousing

Finance & Insurance

Arts, Entertainment & Recreation

Wholesale Trade

Real Estate, Rental & Leasing

Information

Mgmt. of Companies & Enterprises

Health, Science and Education will be

important sources of exposure growth for WC

insurers this decade

Sources: US Bureau of Labor Statistics: Occupational Outlook Handbook, 2010-2011 Edition; Insurance Information Institute

Numeric Change in Wage and Salary Employment in Service-Providing Industries: 2008-2018P

www.iii.org

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwig

Insurance Information Institute Online:

Documents

Workers Compensation: Opportunities and Challenges in a Weak Exposure Environment Workers Compensation Educational Conference Orlando, FL August 22, 2011