Future Shock:Challenges and Opportunities for the

Global Insurance Industry in a Rapidly Changing World

Connecticut Insurance Market Forecast

Hartford, CT

November 20, 2014

Download at: www.iii.org/presentationsRobert P. Hartwig, Ph.D., CPCU, President & Economist

Insurance Information Institute 110 William Street New York, NY 10038

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

2

Presentation Outline

Insurance: A Global Force

The Impact of the “Insurance Economy” Dollars and Jobs

Public Perceptions of the Insurance Industry

The Importance of Insurance: P/C

Life

Health

The Insurance Equation: Challenge = Opportunity Old & New: Challenges and Insurance Solutions

An Industry Built of Strength & Experience

Q&A

INSURANCE:We Are a Global Force

3

Becoming More Global Is the Destiny of

the Insurance Industry

3

Life, $2.61 ,

56.2%

Non-Life,

$2.03 ,

43.8%

Life insurance accounted for 56.2% of global premium volume in 2013 vs. 43.8% for Non-Life

Distribution of Global Insurance Premiums, 2013 ($ Trillions)

4

Total Premium Volume = $4.641 Trillion*

Source: Swiss Re, sigma, No. 3/2014; Insurance Information Institute.

5

Distribution of Nonlife Premium: Industrialized vs. Emerging Markets, 2013

Sources: Swiss Re sigma No.4/2013; Insurance Information Institute research.

Emerging market’s share of nonlife premiums increased to 19.5% in 2013, up from 17.3% in 2012 and 14.3% in 2009. The share of premiums written in the $2 trillion global nonlife market remains much larger (80.5%) but continues to shrink.

The financial crisis and sluggish recovery in the major insurance markets will accelerate the expansion of the emerging market sector

Premium Growth Facts

19.5%80.5%

Industrialized Economies

$1, 653.0

Emerging Markets$399.8

2013, $Billions

Developing markets now account for about 40% of global GDP but just under 20% of nonlife premiums

Tope 15 Insurance Markets in 2013,Life and Property/Casualty

$1,259.3

$531.5

$329.6$278.0

$145.4 $125.3 $101.1 $90.0 $88.9 $78.3 $72.5 $65.6

$168.6$247.2

$254.8

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

US

Ja

pa

n

UK

Ch

ina

Fra

nc

e

Ge

rma

ny

Ita

ly

S. K

ore

a

Ca

na

da

Ne

the

rla

nd

s

Ta

iwa

n

Bra

zil

Au

str

alia

Sp

ain

Ind

ia

$ Billions

Countries in all parts of

the world except Africa

are now represented

among the world’s largest

insurance markets

Source: Swiss Re, sigma, No. 3/2014; Insurance Information Institute.

Global premium volume in 2013 =

$4.641 Trillion

7

Premium Growth by Region, 20130.7

%

-6.9

%

12.2

%

4.0

%

4.1

%

5.6

%

12.8

%

9.0

%

2.3

%

1.9

%

-0.3

%

2.6

%

1.7

%

13.4

%

1.7

%

2.1

% 5.1

%

1.4

%

-2.0

%

9.4

%

2.2

%

0.8

%

0.3

%

7.5

%

2.6

%

10

.2%

7.1

%

-3.2

%

-0.1

%

7.2

%

-10%

-5%

0%

5%

10%

15%

World N.

America

Latin

America

W.

Europe

Central &

E. Europe

Advanced

Asia

Emerging

Asia

Middle

East &

Central

Asia

Africa Oceania

Life Non-Life Total

Global Premium Volume Totaled $4.641 Trillion in 2013, up 1.4% from $4.599 Trillion in 2012. Global Growth Was Weighed Down by Slow Growth

in N. America and W. Europe and Partially Offset by Emerging Markets

Latin America growth was

the strongest in 2013

Growth in Advanced Asia (incl. China) markets decelerated in 2013

Source: Swiss Re, sigma, No. 3/2013.

Strength in Africa,

8

Non-Life Insurance: Global Real (Inflation Adjusted) Premium Growth, 2013

Source: Swiss Re, sigma, No. 3/2014.

Market Life Non-Life Total

Advanced -0.2 1.1 0.3

Emerging 6.4 8.3 7.4

World 0.7 2.3 1.4

Real growth in non-life insurance

premiums was faster in China and most of SE Asia than the US

Growth in Emerging markets is

much faster than in

Advanced markets

9

Global Real (Inflation Adjusted) Premium Growth: 1980-2013

Source: Swiss Re, sigma, No. 3/2014.

Emerging market growth has exceeded that of

industrialized countries in 30 of the past 34 years,

including the entirety of the global financial crisis and

subsequent recovery

Premium growth is very erratic in part to inflation volatility in emerging markets as well as a lack of

consistent cyclicality

(4.0)

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

70

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

F1

5F

Advanced economies Emerging and developing economies World

Source: International Monetary Fund, World Economic Outlook , October 2014; Insurance Information Institute.

Emerging economy growth rates are

expected to ease to 4.4% in 2014 and 5.0% in 2015

GDP Growth: Advanced & Emerging Economies vs. World, 1970-2015F

Advanced economies are expected to grow at a modest pace of 1.8% in

2014 and to 2.3% in 2015.

World output is forecast to grow by 3.3% in 2014 and 3.8% in 2015. The world economy shrank by 0.6% in

2009 amid the global financial crisis

GDP Growth (%)

11

Real GDP Growth Forecasts: Major Economies: 2011 – 2015F

Sources: Blue Chip Economic Indicators (10/2014 issue); IMF (10/2014); Insurance Information Institute.

1.6

%

1.5

%

0.9

%

2.3

%

2.2

%

0.8

%

3.2

%

1.3

% 2.3

%

7.4

%

3.1

%

1.3

%

2.7

%

2.2

%

2.4

%

7.1

%

9.3

%

2.6

%

4.6

%

-0.7

%

7.7

%

2.9

%

0.3

%

1.7

%

1.8

%

2.2

%

-0.5

%

2.0

%

2.6

%

7.7

%

-2%

0%

2%

4%

6%

8%

10%

US Euro Area UK Latin America Canada China

2011 2012 2013F 2014F 2015F

Growth Prospects Vary Widely by Region but the Outlook for 2015 Has Dimmed Except in the US and UK

The Eurozone remains weak

Growth in China has slowed but outpaces the US and Europe

US growth should

acceleratein 2015

Political turmoil in Latin America is hurting growth

12

Real GDP Growth Forecasts: Selected Economies: 2011 – 2015F

Sources: Blue Chip Economic Indicators (10/2014 issue); IMF (10/2104); Insurance Information Institute.

3.6

%

4.1

%

7.7

%

4.3

%

3.9

%

2.0

%

1.5

%

3.4

%

1.0

%

3.6

%

3.9

%

2.8

%

2.1

%

4.4

%

1.3

% 2.3

%

2.4

%

1.1

%

3.5

%

3.6

%

5.5

%

0.2

%

0.4

%

3.0

%

2.4

%

3.7

%

3.6

%

6.1

%

0.8

%

1.3

%

2.9

% 3.6

%

2.7

%

2.4

%

4.7

%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

S. Korea Taiwan India Russia Brazil Australia Mexico

2011 2012 2013 2014F 2015F

Growth Is Expected Accelerate Modestly in Most of the World in 2014 and 2015

Strong economies in smaller industrialized nations will bolster demand for products, services, international trade and insure

Growth in Russia is being hit hard by sanctions

1313Sources: Guy Carpenter, Swiss Re; Insurance Information Institute .

Gap Between Economic and Insured Losses: 1980—2013

The gap between economic and insured losses is

growing—suggesting both a problem and an opportunity

Globalization:The Global Economy Creates

Opportunities & Risks

14

Globalization Is a Double Edged Sword—

Creating Opportunity and Wealth But

Potentially Creating and Amplifying Risk

14

Greater Reward Greater Risk

15

5 Major Categories for External Global Risks, Uncertainties and Fears: Insurance Solutions

1. Economic Risks

2. Geopolitical Risks

3. Environmental Risks

4. Technological Risks

5. Societal Risks

Source: Adapted from World Economic Forum, Global Risks 2014; Insurance Information Institute.

While risks can

be broadly

categorized,

none are

mutually

exclusive

16

Multitude of Exogenous Factors Influence Insurer Growth, Performance & Cyclicality

Economic Issues in US, Europe

Weakness in China/Emerging Economies

Political Upheaval in the Ukraine, Middle East

Syria, Iraq, Thailand, Argentina, Venezuela

Trade sanctions (e.g., Iran, Russia)

Political Gridlock in the US, Europe, Japan

Fiscal/Monetary Imbalances/Low Interest Rates

Unemployment

Resurgent Terrorism Risk: ISIS & Other Groups

Cyber Attacks (theft, espionage, terrorism)

Ebola Crisis

Sabre Rattling (e.g., US-China, Russia-Ukraine)

Separatist Fever (UK/Scotland, Spain)

Severe Natural Disaster Losses

Climate Change/Sea Level Rise

Environmental Degradation

(Over)Regulation: Systemic Risk?

Are “Black Swans” everywhere or

does it just seem that way?

The Economics of Connecticut’s Insurance

Industry

1717

Insurance Remains Key to

Connecticut’s Economy

18

US Insurance and Related Activitiesas a Percent of US GDP, 1997-2012

2.45%

2.62%2.64%2.64%

2.73%

2.32%

2.50%2.45%2.45%

2.56%

2.31%

2.49%

2.70%

2.45%

2.63%

2.53%

2.0%

2.2%

2.4%

2.6%

2.8%

3.0%

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Sources: U.S. Department of Commerce, Bureau of Economic Analysis; Insurance Information Institute.

Recessions and investment reverses (in 2001 and 2008) cut into the contribution of the Insurance Industry to U.S. GDP. In times of healthier economic growth, the

industry contributes between 2.5% and 2.75% of U.S. GDP

Insurance activity accounts for about 2.5% of US GDP annually

19

Insurance and Related Activities in CT as a Percent of CT GDP, 1997-2012

7.01%

8.53%

7.59% 7.76%

8.94%

7.58%

8.91%8.30%

7.74%7.41%

6.61%

8.34%

10.66%

8.26%

9.49%

8.74%

0.0%

4.0%

8.0%

12.0%

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Sources: U.S. Department of Commerce, Bureau of Economic Analysis; Insurance Information Institute.

Recessions and investment reverses (in 2001 and 2008) cut into the contribution of the Insurance Industry to CT GDP. In times of healthier economic growth, the industry contributes between 7% and 9% (and

sometimes more) of Connecticut’s state GDP

Insurance activity accounts for 7% - 8% of Connecticut’s economy, three times

that of the US overall

20

Insurance and Related Activities as a Percent of GDP, US vs. CT, 1997-2012

7.0

1%

8.5

3%

7.5

9%

7.7

6% 8

.94%

7.5

8% 8

.91%

8.3

0%

7.7

4%

7.4

1%

2.5

3%

2.6

3%

2.4

5%

2.7

0%

2.4

9%

2.3

1%

2.4

5%

2.6

2%

2.6

4%

2.6

4%

2.7

3%

2.3

2%

2.5

0%

2.4

5%

2.4

5%

2.5

6%

6.6

1%

8.3

4%

10.6

6%

8.2

6%9

.49%

8.7

4%

0.0%

4.0%

8.0%

12.0%

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

CT US

Sources: U.S. Department of Commerce, Bureau of Economic Analysis; Insurance Information Institute.

Recessions and investment reverses (in 2001 and 2008) cut into the contribution of the Insurance Industry to GDP. In times of healthier

economic growth, the industry contributes between 7% and 9% (and sometimes more) of Connecticut’s state GDP

Insurance activity in CT is three times that of the US

overall

INSURANCE INDUSTRY EMPLOYMENT TRENDS

2121

A Big, Important Industry With Many

Employment Crosscurrents

Insurance Industry Employment* 2000-2014F

2,2

20

.6

2,2

33

.7

2,2

33

.2

2,2

66

.0

2,3

91

.6

2,4

05

.1

2,3

70

.6

2,3

40

.6

2,3

36

.4

2,3

68

.3

2,3

79

.4

2,4

00

.0

2,3

67

.5

2,3

38

.9

2,3

79

.1

2,100

2,150

2,200

2,250

2,300

2,350

2,400

2,450

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

*Includes direct writers, claims adjusters, third-party administrators of insurance funds and other service personnel such as advisory and insurance ratemaking services.

Sources: U.S. Department of Labor, Bureau of Labor Statistics; Insurance Information Institute (2014 forecast).22

Annual Average, in Thousands

Insurance industry employment added nearly 185,000 jobs from 2000 to 2008, an increase 8.3%

Insurance industry employment fell by 2.9% during Great Recession

Insurance industry employment is recovering and will likely reach a new record level of employment in early 2015

23

Overview of Insurance Sector Employment Changes*

*Data are through September 2014 and are preliminary (i.e., subject to later revision); seasonally adjusted.

Insurance Subsector

August 2014

Employment

September 2014

EmploymentChange

CARRIERS

P-C Direct 534,300 535,000 +700

Life Direct 341,900 343,500 +1,600

Health/Medical Direct 496,200 498,300 +2,100

Title & Other Direct 73,500 73,100 -400

Reinsurers 27,400 27,400 0

OTHERS

Agents/Brokers 689,800 692,000 +2,200

3rd-Party Administration 164,500 166,500 +2,000

Claims Adjusters 50,600 50,000 -600

24

Insurance Industry Employment Trends

Over the Past 25 Years, Each Industry Segment Has Had

Different Employment Experiences

25

U.S. Employment in the DirectP/C Insurance Industry: 1990–2014*

*As of September 2014; not seasonally adjusted; Does not including agents & brokers.

Note: Recessions indicated by gray shaded columns.

Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

Thousands

460

480

500

520

540

560

'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

The BLS occasionally reclassifies employment within industries. When this happens, the change is spread evenly over a 12-month period (in this case March 2010-March 2011.

P/C employment is

recovering

26

U.S. Employment in the DirectLife Insurance Industry: 1990–2014*

*As of September 2014; not seasonally adjusted; Does not including agents & brokers.

Note: Recessions indicated by gray shaded columns.

Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

Thousands

300

325

350

375

400

425

450

475

500

525

550

575

600

'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

Every 4-5 years BLS reconciles its data with census data; sometimes this

reclassifies employment within industries. This drop, spread over March

2004-March 2005, moved some people to the Health/Medical Expense sector.

Life employment is basically flat

27

U.S. Employment in the Direct Health-Medical Insurance Industry: 1990–2014*

*As of September 2014; not seasonally adjusted; Does not including agents & brokers.

Note: Recessions indicated by gray shaded columns.

Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

Thousands

175

200

225

250

275

300

325

350

375

400

425

450

475

500

'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

Employment in the Health-Medical insurance segment is

seeing strong growth, as it has for most of the past 25 years.

28

U.S. Employment in the Reinsurance Industry: 1990–2014*

Thousands

24

28

32

36

40

44

48

'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

*As of September 2014; not seasonally adjusted; Does not including agents & brokers.

Note: Recessions indicated by gray shaded columns.

Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

After a multi-decade decline, Reinsurance

employment has shown some recent growth

29

U.S. Employment in Insurance Agencies & Brokerages: 1990–2014*

Thousands

500

525

550

575

600

625

650

675

700

'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

*As of September 2014; not seasonally adjusted. Includes all types of insurance.

Note: Recessions indicated by gray shaded columns.

Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

Agency/Brokerage employment is

recovering despite consolidation

30

U.S. Employment in Insurance Claims Adjusting: 1990–2014*

Thousands

40

45

50

55

60

'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

*As of September 2014; not seasonally adjusted.

Note: Recessions indicated by gray shaded columns.

Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

Claims adjusting is a profession in

transition

31

U.S. Employment in Third-Party Administration of Insurance Funds: 1990–2014*

Thousands

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 '14

*As of September 2014; not seasonally adjusted. Includes all types of insurance.

Note: Recessions indicated by gray shaded columns.

Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

More work is being done by

TPAs

How Does the Public (and Prospective Employees)

View the Industry?

32

I.I.I. Survey: Insurance Favorability Ratings Are Fairly Strong

33

I.I.I. Poll: Favorability

Source: Insurance Information Institute Annual Pulse Survey.

36%

60% 59%

53%

44%

35% 33%28%

32%

61%

53%56%

47%51%

36% 36%

62%

50%

10%

20%

30%

40%

50%

60%

70%

Auto and home

insurance

Banking Life insurance Health

insurance

Electric utility

companies

Mutual fundsPharmaceutical

companies

Financial

services

companies

Oil and gas

companies

2013 2014

Percent of Public Rating Industry as Very or Mostly Favorable, 2013-2014

Auto/Home Insurers Ranked Highest of Industries Surveyed.

Auto/Home Insurers Achieved Their Highest Ranking in the 47-Year

History of the Pulse Survey. Life insurers rank high as well.

34

I.I.I. Poll: Favorability

Source: Insurance Information Institute Annual Pulse Survey.

44%

36% 35%33%

65%62% 60% 59%

53%50%

10%

20%

30%

40%

50%

60%

70%

Auto insurance Home

insurance

Banking Life insurance Health

insurance

Electric utility

companies

Mutual fundsPharmaceutical

companies

Financial

services

companies

Oil and gas

companies

Percent of Public Rating Industry as Very or Mostly Favorable, 2014

Auto/Home Favorability outranks other key industries

35

I.I.I. Poll: Favorability

Source: Insurance Information Institute Annual Pulse Survey.

10%

20%

30%

40%

50%

60%

70%

80%

90%

Auto and home insurance

Banking

Mutual funds

Percent of Public Rating Industry as Very or Mostly Favorable, 1968-2014

Auto/Home Insurers Continue to Rank Higher Than Banking, Mutual Funds.

Auto/Home Favorability Has Outranked Banking Four

Years in a Row.

Insurance Market Overview:A Segmented Industry

3636

Property/Casualty

Life/Annuity

Health

Property/Casualty InsuranceIndustry Trends

3737

Rich History, Poised to Manage the Risks

and Seize the Opportunities of the Future

38

Cumulative Value of Inflation-Adjusted Claims Paid by P/C Insurers, 1925–2010E*

*1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006.

Sources: Insurance Information Institute research and calculations from A.M. Best data.

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

$11,000

$12,000

$13,000

$14,000

19

25

19

30

19

35

19

40

19

45

19

50

19

55

19

60

19

65

19

70

19

75

19

80

19

85

19

90

19

95

*20

00

*20

05

20

10

E

Adjusted for inflation, it took 36 years for the

industry to pay its first $1 trillion in claims in the years since 1925. Today, the industry

pays $1 trillion in claims every 2 to 3 years after adjusting for inflation.

36 years (1925 – 1961)

$ Billions

9 years (1970)

7 years (1977)

5 years (1982)

4 years (1986)

4 years (1990)

3 years (1993)

3 years (1996)

4 years (2000)

2 years (2002)

3 years (2005)

3 years (2008)

P/C Industry Net Income After Taxes1991–2014: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 = 10.3%

2014 ROAS1 = 7.8%

•ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.7% ROAS through 2014:Q2, 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

$2

5,9

80$

38

,50

1

$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:H

1

Net income rose strongly (+81.9%) in 2013 vs. 2012 on lower cats, capital gains

$ Millions

2014 is off to a slower start

-5%

0%

5%

10%

15%

20%

25%

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

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2014:H1*

*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%

9 Years

History suggests next ROE

peak will be in 2016-2017

ROE

1975: 2.4%

2013 10.4%

2014:H1 7.7%

-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:H

1

*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. 2014 figure is through Q2.

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 10.4%

2014:H1 7.7%

Back to the Future: Profitability Peaks & Troughs in the P/C Insurance Industry, 1950 – 2014*

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

42

ROE: Property/Casualty Insurance by Major Event, 1987–2014:H1

* Excludes Mortgage & Financial Guarantee in 2008 – 2014. 2014 figure is through H1:2014. 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*

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

43

Policyholder Surplus, 2006:Q4–2014:H1

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 $

653.3

$671.6

$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

2007:Q3Pre-Crisis Peak

Surplus as of 6/30/14 stood at a record high $671.6B

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 2014in very strong financial condition.

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

$600

$650

$700

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

US Policyholder Surplus:1975–2014*

* As of 6/30/14.

Source: A.M. Best, ISO, Insurance Information Institute.

“Surplus” is a measure of underwriting capacity. It is

analogous to “Owners Equity” or “Net Worth” in non-

insurance organizations

($ Billions)

The Premium-to-Surplus Ratio Stood at $0.73:$1 as of6/30/14, a Near Record Low (at Least in Recent History)

Surplus as of 3/30/14 was a record $671.6, up 2.8% from $653.3 of 12/31/13, and up 53.6% ($234.5B)

from the crisis trough of $437.1B at 3/31/09

45

-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

P/C Net Premium Growth: Annual Change, 1971—2014F

(Percent)

1975-78 1984-87 2000-03

Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.

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.

2014F: 4.0%

2013: 4.6%

2012: +4.3%

46

Direct Premiums Written: Total P/CPercent Change by State, 2007-2013

74

.6

36

.9

31

.9

27

.4

25

.2

24

.9

22

.5

22

.2

16

.6

15

.9

15

.7

14

.5

14

.5

14

.3

12

.6

11

.9

11

.8

11

.2

10

.5

10

.3

9.9

9.8

9.3

9.1

9.0

8.6

0

10

20

30

40

50

60

70

80

ND

SD

OK

NE

KS IA VT

TX

WY

TN

MN

AR

AK IN WI

CO MI

KY

OH

NJ

LA

SC VA

AL

MO

NM

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

North Dakota was the country’s growth leader over the past 6 years with premiums written

expanding by 74.6%

47

Direct Premiums Written: Total P/CPercent Change by State, 2007-2013

8.5

8.2

7.9

7.8

7.6

7.3

7.0

6.9

6.2

5.9

5.6

5.3

4.2

4.1

3.5

1.6

1.0

0.4

-0.7

-1.7

-1.9

-4.1

-5.7

-6.7

-12

.6

-15

.3

-20

-15

-10

-5

0

5

10

MS

CT

US

NC

GA

NY

MD

MA

UT

WA

PA IL RI

NH ID

MT

ME

OR

CA

FL

DC AZ

WV HI

NV

DE

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

Sources: SNL Financial LC.; Insurance Information Institute.

Growth was negative in 7 states and DC between

2007 and 2013

Life Insurance Trends

4848

Critical Sector, Key Products

What Don’t Millennials Understand?

49

Millions

Amount of Life Insurance Death Benefits Paid, 2005-2013

$104.3

$112.3$116.6

$100.9$95.3

$89.0$83.7

$79.3$75.9

$0

$20

$40

$60

$80

$100

$120

2005 2006 2007 2008 2009 2010 2011 2012 2013

Sources: NAIC, via SNL Financial; Insurance Information Institute.

The amount of death benefits life insurers paid grew by 53.6%in the 8 years since 2005 (averaging 5.5% growth per year).

50

Billions

Amount of Individual Life Insurance (Death Benefits) Issued, by Type of Policy, 2005-2013

$1

.09

$1

.09

$1

.05

$0

.51

$0

.51

$0

.52

$0

.49

$0

.44

$0

.52

$0

.55

$0

.56

$0

.56

$1

.12$1

.27

$1

.35

$1

.34

$1

.27

$1

.26

$0.00

$0.25

$0.50

$0.75

$1.00

$1.25

$1.50

$1.75

2005 2006 2007 2008 2009 2010 2011 2012 2013

Term Insurance Permanent Insurance

Sources: NAIC, via SNL Financial; Insurance Information Institute.

The amount of term life insurance (measured by death benefit amounts) issued yearly has slipped since 2008, from $1.35 billion to $1.05 billion,

while the amount of permanent life insurance grew slightly.

The Great Recession negatively impacted life

insurance sales

Group Insurance Premiums (line)Track Nonfarm Employment (bars)

13

1.9

13

0.5

13

0.1

13

1.5 1

33

.7 13

6.1 13

7.6

13

6.9

13

0.9

12

9.9 13

1.5 1

33

.7

13

6.4

$150

$175

$200

$225

$250

$275

$300

125

130

135

140

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Group Premiums

…

No

nfa

rm E

mplo

ym

ent

(mill

ions)

Nonfarm employment*

Group Ins Premiums

*Not seasonally adjusted. Group premiums = group life, group annuities, and group a&h

Sources: Bureau of Labor Statistics; NAIC Annual Statements, via SNL Financial; http://www.bls.gov/ces/; I.I.I.

The spike is mainly in Group Annuity premiums;

it represents “de-risking”by a few giant DB plans

Distribution of Premiums byMajor Line of Business, 1996-2013

48

.8%

50

.0%

52

.3%

56

.7%

57

.7%

54

.5%

54

.8%

55

.0%

53

.5%

52

.4%

51

.9%

50

.9%

53

.1%

45

.7%

50

.9%

54

.1%

54

.3%

49

.7%

28

.6%

28

.6%

28

.3%

24

.9%

24

.7%

26

.9%

27

.2%

25

.7%

26

.6%

26

.5%

25

.2%

22

.7%

23

.5%

24

.4%

17

.8%

20

.3%

20

.9%

22

.4%

21

.3%

19

.8%

17

.4%

16

.6%

15

.7%

17

.7%

17

.9%

19

.2%

23

.0%

20

.9%

22

.7%

23

.3%

23.0

%

29.4

%

26.9

%

25.0

%

24.2

%

27.3

%

1.4%1.9%2.2%1.8%1.9%0.8%0.1% 0.1%0.3%0.2%3.1%0.5%0.4%4.4%0.6%0.6%0.7%

0%

25%

50%

75%

100%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Credit/Other

A&H

Life

Annuities

Source: NAIC, via SNL Financial; I.I.I.

Annuities have been the main premium source for decades. Variable annuity premiums generally rise and fall with the stock market.

Insurance

53

Trillions

Amount of Individual Life Insurance (DeathBenefits) & Number of Policies Issued, 2005-2013

$1.45

$1.50

$1.55

$1.60

$1.65

$1.70

$1.75

$1.80

$1.85

$1.90

2005 2006 2007 2008 2009 2010 2011 2012 20138.5

9

9.5

10

10.5

11

11.5

Death Benefit Amounts

Number of Policies

Sources: NAIC, via SNL Financial; Insurance Information Institute.

The Great Recession cut sharply into the number of policies and the amount of

life insurance bought in subsequent years

Millions

54

Billions

Amount of Individual Life Insurance (Death Benefits) Issued, 2005-2013

$1.64 $1.65

$1.61

$1.64

$1.71

$1.84

$1.86

$1.79$1.77

$1.5

$1.6

$1.7

$1.8

$1.9

2005 2006 2007 2008 2009 2010 2011 2012 2013

Sources: NAIC, via SNL Financial; Insurance Information Institute.

The Life/Annuity industry has produced steady (if unspectacular) profits,except for years in which the industry’s investment results produced

significant realized capital losses.

The Great Recession cut sharply into the amount of

life insurance bought in subsequent years

Healthcare Cost Trends

5555

Healthcare Cost Will Move Up for the

Indefinite Future

Health Insurers Will Grow and Adapt

U.S. Health Care Expenditures,1965–2022F

$42

.0$

46

.3$

51

.8$

58

.8$

66

.2$

74

.9$83.2

$93

.1$

10

3.4

$11

7.2

$13

3.6

$15

3.0

$1

74

.0$

19

5.5

$22

1.7

$25

5.8

$2

96

.7$

33

4.7

$36

9.0

$40

6.5

$44

4.6

$47

6.9

$51

9.1

$58

1.7

$64

7.5

$72

4.3

$79

1.5

$85

7.9

$92

1.5

$97

2.7

$1,0

27

.4$

1,0

81

.8$

1,1

42

.6$

1,2

08

.9$

1,2

86

.5$

1,3

77

.2$

1,4

93

.3$

1,6

38

.0$

1,7

75

.4$

1,9

01

.6$

2,0

30

.5$

2,1

63

.3$

2,2

98

.3$

2,4

06

.6$

2,5

01

.2$

2,6

00

.0$

2,7

00

.7$

2,8

06

.6$

2,9

14

.7$

3,0

93

.2$

3,2

73

.4$

3,4

58

.3$

3,6

60

.4$

3,8

89

.1$

4,1

42

.4$

4,4

16

.2$

4,7

02

.0$

5,0

08

.8

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

65

66

67

68

69

70

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

21

22

U.S. health care expenditures have been on a relentless climb for most of the past half century, far outstripping population growth,

inflation of GDP growth

56

From 1965 through 2013, US health care expenditures had

increased by 69 fold. Population growth over the same period increased by a factor of just 1.6. By 2022, health spending will have

increased 119 fold.

$ Billions

Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-

Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

65

66

67

68

69

70

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

21

22

National Health Care Expenditures as a Share of GDP, 1965 – 2022F*

Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-

Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.

1965

5.8%

Health care expenditures as a share

of GDP rose from 5.8% in 1965 to

18.0% in 2013 and are expected to

reach 19.9% of GDP by 2022

% of GDP

2022 19.9%

1980:

9.2%

1990:

12.5%

2000:

13.8%

2010:

17.9%

Since 2009, heath expenditures as a %

of GDP have flattened out at about 18%--the

question is why and will it last?

-1%

0%

1%

2%

3%

4%

5%

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

Change in Medical CPI CPI-All Items

Medical Cost Inflation vs. Overall CPI, 1995 – 2014*

*July 2014 compared to July 2013.

Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.

Average Annual Growth Average

1995 – 2013

Healthcare: 3.8%

Total Nonfarm: 2.4%

Though moderating, medical inflation will continue to exceed inflation in the overall economy

59

63.1%650.7%

2235.9%

6839.8%

0%

1000%

2000%

3000%

4000%

5000%

6000%

7000%

8000%

Population CPI GDP Health Care

Expenditures

Rate of Health Care Expenditure Increase Compared to Population, CPI and GDP

Accelerating business investment will be a potent driver of

commercial property and liability insurance exposures and should drive employment and WC payroll

exposures as well (with a lag)

Source: Insurance Information Institute research.

1965: 194.3 Mill

2013: 317.0 Mill

1965: $719.1 Bill

2013: $16,797.5 Bill

1965: $42.0 Bill

2013: $2,914.7 Bill

Reshaping the Insurance Industry:

Consolidation Trends

60

Merger & Acquisition Activity:

Will Slow Growth, Rising Capacity in

Some Segments Lead to Consolidation?

60

61

U.S. INSURANCE MERGERS AND ACQUISITIONS, All Sectors, 1989-2013 (1)

$7.1$6.9$8.6$5.0

$8.5$12.5

$27.0

$40.8

$56.2

$41.7

$55.7

$41.5

$9.7

$59.9

$14.9

$50.8

$43.0

$50.4

$31.4

$14.4

$46.5

$54.7

$43.2

$19.3

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

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

Tra

ns

ac

tio

n v

alu

es

0

100

200

300

400

500

600

Nu

mb

er o

f tran

sa

ctio

ns

($ Billions)

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

Source: Conning proprietary database.

M&A activity recovered to pre-crisis levels but deal values dropped

sharply in 2013

$165.4

62

U.S. INSURANCE MERGERS AND ACQUISITIONS,P/C SECTOR, 2002-2013 (1)

$486

$20,353

$425

$9,264

$35,221

$13,615

$16,294

$3,507

$6,419

$12,458

$4,651 $4,397

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2012

Tra

ns

ac

tio

n v

alu

es

0

10

20

30

40

50

60

70

80

90

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 remains below

pre-crisis levels.

63

U.S. INSURANCE MERGERS AND ACQUISITIONS,LIFE/ANNUITY SECTOR, 2002-2013 (1)

$2,796

$18,533

$3,817

$21,865

$5,055$5,849

$382 $840

$23,848

$3,063

$6,083

$3,299

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Tra

ns

ac

tio

n v

alu

es

0

5

10

15

20

25

30

35

40

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.

Life/Annuity sector M&A activity is highly volatile

188 189 182

224 216

264279

297

184204

289

321

267

314

177

10

60

110

160

210

260

310

360

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14:6M

Agent/Broker M&A Deals, 2000-2014:6M

Source: Optis Partners, “Agent-Broker Merger & Acquisition Statistics: The New Normal?”, August 2014; Insurance Information Institute.

Number of Deals

Agent/Broker activity is running at a record pace in 2014 with 314

deals announced through June 30.

Privately

Owned, 332

, 32%

Bank, 97 ,

9%

Other, 53 ,

5%

Public

Broker, 184

, 18%

Private

Equity, 376 ,

36%

Private Equity and Privately Owned agencies/brokers

accounted for 68% of the 1,042 transactions from 2011 through mid-2014

Agent/Broker Consolidators by Type, 2011 – 2014:6M

Source: Optis Partners, “Agent-Broker Merger & Acquisition Statistics: The New Normal?”, August 2014, Insurance Information Institute.

Private Equity money flows in to finance deals, but

also exits as ownership stakes

are sold

Insurance EquationChallenge = Opportunity

66

We Solve Problems: Old and New

66

67

Insurance in the Age of Mega-Disasters

Insurers and Reinsurers Worldwide Have

Risen to the Challenge and Are Prepared

for Increasing Variability and Volatility in

the Climate

67

68

$1

2.8

$1

1.1

$3

.8

$1

4.5

$1

1.7

$6

.2

$3

5.2

$7

.7

$1

6.5

$3

4.2

$7

4.5

$1

0.7

$7

.6

$2

9.6

$1

1.6

$1

4.6

$3

4.1

$3

5.5

$1

2.9

$1

4.5

$1

4.2

$4

.9

$8

.1

$3

8.3

$8

.9

$2

6.8

$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 14E

U.S. Insured Catastrophe Losses,1989 – 2014E

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

The majority of the costliest disasters

events have occurred over the past decade

($ Billions, $ 2013)

68

69

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1994–20131

0.1%

1.4%

3.8%4.8%

6.4%

6.4%

36.0%

41.1%

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2013 dollars.

2. Excludes snow.

3. Does not include NFIP flood losses

4. Includes wildland fires

5. 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, $159.1

Fires (4), $5.5

Events Involving Tornadoes (2), $139.3

Winter Storms, $24.7

Terrorism, $24.8

Geological Events, $18.4

Wind/Hail/Flood (3), $14.6

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 1993-2012

totaled $386.7B, an average of $19.3B per year or $1.6B

per month

70

Top 16 Most Costly Disastersin U.S. History

(Insured Losses, 2013 Dollars, $ Billions)

$7.9 $8.8 $9.3 $11.2$13.6

$19.0$24.2 $24.9$25.9

$49.4

$7.6$7.2$6.8$5.7$5.6$4.5

$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)

Superstorm 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 Over the Past Decade

Sources: PCS; Insurance Information Institute inflation adjustments to 2013 dollars using the CPI.

Nu

mb

er

Geophysical

(earthquake, tsunami,

volcanic activity)

Climatological

(temperature extremes,

drought, wildfire)

Meteorological (storm)

Hydrological

(flood, mass movement)

Natural Disasters in the United States, 1980 – 2013Number of Events (Annual Totals 1980 – 2013)

Source: MR NatCatSERVICE 71

22

19

81

6

50

100

150

200

250

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

There were 128 natural disaster events in 2013

Losses Due to Natural Disasters in the US, 1980–2013

72

Overall losses (in 2012 values) Insured losses (in 2013 values)

Source: MR NatCatSERVICE

(2013 Dollars, $ Billions) (Overall and Insured Losses)

50

100

150

200

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

2013 CAT Losses

Overall : $21.8B

Insured: $12.8B

Indicates a great deal of losses are uninsured (~40%-50% in the US) =

Growth Opportunity

73

Total Value of Insured Coastal Exposure in 2012

(2012, $ Billions)

Source: AIR Worldwide

$293.5

$239.3

$182.3

$164.6

$163.5

$118.2

$106.7

$81.9

$64.0

$60.6

$58.3

$17.3

$567.8

$713.9

$849.6

$1,175.3

$2,862.3

$2,923.1

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500

New York

Florida

Texas

Massachusetts

New Jersey

Connecticut

Louisiana

S. Carolina

Virginia

Maine

North Carolina

Alabama

Georgia

Delaware

New Hampshire

Mississippi

Rhode Island

Maryland

In 2012, New York Ranked as the #1 Most Exposed State to Hurricane Loss, Overtaking Florida with $2.862 Trillion. Texas is very exposed too, and

ranked #3 with $1.175 Trillionin insured coastal exposure

The Insured Value of All Coastal Property Was $10.6 Trillion in 2012 , Up 20% from $8.9 Trillion in 2007 and

Up 48% from $7.2 Trillion in 2004

The value of insured coastal exposures in NY

and FL lead the US.

74

I.I.I. Poll: Homes Near Hazards

Q. If you were to purchase a home today, which of the following summarizes your views on that home’s risk of damage from natural disasters . . . and your decision to purchase that home?

Source: Insurance Information Institute Annual Pulse Survey.

More Than Half of the Public Would Be Significantly Influenced by Risk of Damage from Natural Disasters. Close to a Third Do Not

Regard Such a Risk To Be a Major Consideration.

3%

17%

53%28%

Risk a Significant Influence

on Purchase

Willing to Accept Risk

Risk Not a Major Consideration

Don’t Know

75

Top 16 Most Costly World Insurance Losses, 1970-2014*

(Insured Losses, 2013 Dollars, $ Billions)

*Figures do not include federally insured flood losses.

Sources: Munich Re; Swiss Re; Insurance Information Institute research.

$11.2$13.6$13.6$13.6

$19.0$24.2 $24.9$25.9

$39.1

$49.4

$7.9 $8.2 $8.7 $8.8 $9.3 $9.7

$0

$10

$20

$30

$40

$50

$60

Hugo

(1989)

Winter

Storm

Daria

(1991)

Chile

Quake

(2010)

Ivan

(2004)

Charley

(2004)

Typhoon

Mirielle

(1991)

Wilma

(2005)

Thailand

Floods

(2011)

New

Zealand

Quake

(2011)

Ike

(2008)

Sandy

(2012)

Northridge

(1994)

WTC

Terror

Attack

(2001)

Andrew

(1992)

Japan

Quake,

Tsunami

(2011)**

Katrina

(2005)

5 of the top 14 most expensive catastrophes in

world history have occurred within the most recent 4

years (2010-2014)

Hurricane Sandy became the 6th costliest event in global

insurance history

Source: Munich Re Geo Risks Research, NatCatSERVICE – as of January 2014. 76

Geophysical events

(earthquake, tsunami, volcanic activity)

Meteorological events

(storm)

Hydrological events

(flood, mass movement)

Climatological events

(extreme temperature, drought, wildfire)

Extraterrestrial events

(Meteorite impact)

880

Loss events

EarthquakeChina, 20 April

Severe storms,

tornadoesUSA, 18–22 May

FloodsIndia, 14–30 June

HailstormsGermany,

27–28 July

Winter Storm Christian (St. Jude)Europe, 27–30 October

Typhoon HaiyanPhilippines,

8–12 NovemberSevere storms, tornadoesUSA, 28–31 May

Hurricanes Ingrid &

ManuelMexico, 12–19 September

FloodsCanada, 19–24 June

FloodsEurope,

30 May–19 June

Heat waveIndia, April–June

Typhoon FitowChina, Japan,

5–9 October

Earthquake (series)Pakistan, 24–28 September

FloodsAustralia,

21–31 January

Meteorite impactRussian Federation, 15

FebruaryFlash floodsCanada, 8–9 July

FloodsUSA, 9–16 September

Geophysical events

(earthquake, tsunami, volcanic activity)

Meteorological events

(storm)

Selection of significant

Natural catastrophes

Natural catastrophes Hydrological events

(flood, mass movement)

Climatological events

(extreme temperature, drought, wildfire)

Natural Loss Events:Full Year 2013

World Map

Geophysical

(earthquake, tsunami,

volcanic activity)

Climatological

(temperature extremes,

drought, wildfire)

Meteorological (storm)

Hydrological

(flood, mass movement)

Natural Disasters Worldwide,1980 – 2013 (Number of Events)

Source: MR NatCatSERVICE77

Nu

mb

er

200

400

600

800

1 000

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

There were 880 natural disaster events globally in

2013 compared to 905 in 2012

Losses Due to Natural Disasters Worldwide, 1980–2013 (Overall & Insured Losses)

78

Overall losses (in 2013 values) Insured losses (in 2013 values)

Source: MR NatCatSERVICE

(2013 Dollars, $ Billions)(Overall and Insured Losses)

100

200

300

400

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

US$ bn

2013 Losses

Overall : $125B

Insured: $34B

There is a clear upward trend in both insured and overall losses over the past

30+ years

10-Yr. Avg. Losses

Overall : $184B

Insured: $56B

79

The “Underinsurance” Gap

79

Why is So Much Loss Uninsured and How to Close the Gap

Even as Insurance Coverage Expands, the Insured Share of Losses Is Falling

80Source: Swiss Re Economic Research & Consulting; Geneva Association; Insurance Information Institute.

Total and insured losses as a share of

global GDP have both increased over the past

40 years, but insured losses as a share of

total losses has shrunk

Many emerging market nations have very large insurance gaps. In the US, the

gap is about 50%.

Natural Catastrophe Protection Gap (1974 – 2013)

Total Global vs. Insured Losses as % GDP (1974 – 2013)

Insurance Density and Penetration in Advanced Markets, 2013

81Source: Swiss Re, sigma no. 3, 2014; Insurance Information Institute.

(Premiums per Capita in US $)

(Premiums as % of GDP)

Western/Northern Europe, the US and Advanced Asia are

relatively well insured, but many “Advanced”

economies are not, especially Southern

Europe

Spending on insurance fell 1% to $3,621 per

capita in 2013. Penetration decreased too. Nonlife penetration is down from its from a high of 5.7% of GDP in 2000 to 4.7% in 2013.

Density = Premiums per capita

Penetration = Premiums as % of GDP

Insurance Density and Penetration in Emerging Markets, 2013

82

(Premiums per Capita in US $)

Density = Premiums per capita

Penetration = Premiums as % of GDP

Source: Swiss Re, sigma no. 3, 2014; Insurance Information Institute.

(Premiums as % of GDP)

Spending on insurance in emerging markets increased to $129 per

capita in 2013 from $121 in 2012. Penetration

decreased was flat art 2.7% of GDP

Although emerging markets posted growth of 7.4% in

2013 (Life: +6.4%; Nonlife: +8.3%), most emerging economies are poorly

insured, representing growth opportunities for the insurance industry.

Causes of the Underinsurance Gap and Ways to Narrow/Close It

Affordability

Lack of Awareness

Limits to Insurability

Regulatory Deficiencies

Compulsory Insurance

Create a Conducive Regulatory, Legal and Tax Environment

Build Public-Private Partnerships

Develop New Products

Microinsurance

Enhance Data Collection/Sharing

Foster a More Strategic Approach to Risk Among Businesses

Contributing Factors to the

Underinsurance GapSolutions that Will Help

Close the Underinsurance Gap

Source: Geneva Association; Insurance Information Institute.

CYBER RISK

Cyber Risk is a Rapidly Emerging Exposure for Businesses Large

and Small in Every Industry

84

Data Breaches 2005-2013, by Number of Breaches and Records Exposed

# Data Breaches/Millions of Records Exposed

* 2013 figures as of Jan. 1, 2014 from the ITRC updated to an additional 30 million records breached (Target) as disclosed in Jan. 2014.Source: Identity Theft Resource Center.

157

321

446

656

498

419447

619662

87.9

17.322.9

35.7

19.1

66.9

222.5

16.2

127.7

100

200

300

400

500

600

700

2005 2006 2007 2008 2009 2010 2011 2012 2013*

0

20

40

60

80

100

120

140

160

180

200

220

# Data Breaches # Records Exposed (Millions)

The Total Number of Data Breaches (+38%) and Number of Records Exposed (+408%) in 2013 Soared

Millions

85

Evolving Cyber Threats in Need of Insurance Solutions

• Foreign government sponsored

• Sophisticated and well-funded

State Sponsored Groups

• Traditional organized crime groups

• Loosely organized global hacker crews

Organized Cyber Criminals

•Politically-motivated hackers

• Increasing capabilitiesHacktivists

• Easy access to sensitive information

•Difficult to detectInsiders

•Destruction of physical and digital assetsTerrorists

86

Source: Price Waterhouse Cooper (PwC).

Worldwide Cybersecurity Spending, 2011- 2016F

($ Billions)

$55.0

$60.0

$65.9

$71.1

$76.9

$83.2

7.9%8.4%8.2%

8.2%

9.8%

$50

$55

$60

$65

$70

$75

$80

$85

2011 2012 2013 2014F 2015F 2016F

0%

2%

4%

6%

8%

10%

12%

Worldwide Cybersecurity Spending % Change from Previous Year

Cybersecurity Spending Is Rising Sharply, Up by About 8%+ Annually through 2016—a Projected Increase of $12.1 Billion from 2014 to 2016

Cybersecurity spending is expected to increase by $5.2B in 2014, $5.8B

in 2015 and $6.3B in 2016

Source: Gartner Group; Insurance Information Institute; Adapted from Wall Street Journal: “Financial Firms Boost Cybersecurity Funds,” Nov. 17, 2014.

87

Worldwide Information Security Spending per Employee, by Industry, 2013

$376

$169

$326

$684

$651

$553

$0 $100 $200 $300 $400 $500 $600 $700 $800

Retail and Wholesale

Industrial Manufacturing

Professional Services

Banking

Utilities

Insurance

(Dollars per Employee)

Information Security Spending by Financial Services and Critical Infrastructure Industries (e.g., Utilities) Outpaces that of Other Industries

Source: Gartner Group; Insurance Information Institute; Adapted from Wall Street Journal: “Financial Firms Boost Cybersecurity Funds,” Nov. 17, 2014.

88

2013 Data Breaches By Business Category, By Number of Breaches

3.7%

9.1%

9.0%

43.8%

34.4%

Source: Identity Theft Resource Center, http://www.idtheftcenter.org/images/breach/2013/UpdatedITRCBreachStatsReport.pdf

The majority of the 614 data breaches in 2013 affected business and medical/healthcare organizations, according to the Identity Theft Resource Center.

Business, 211 (34.4%)Govt/Military, 56 (9.1%)

Banking/Credit/Financial, 23 (3.7%)

Educational, 55 (9.0%)

Medical/Healthcare, 269 (43.8%)

89

External Cyber Crime Costs: Fiscal Year 2013

4%

17%

36%

43%

* Other costs include direct and indirect costs that could not be allocated to a main external cost category

Source: 2013 Cost of Cyber Crime: United States, Ponemon Institute.

Information loss (43%) and business disruption or lost productivity (36%) account for the majority of external costs due to cyber crime.

Information loss

Equipment damages

Other costs* 0%

Revenue loss

Business disruption

90

TYPICAL STRUCTURE OF INSURER CYBER RISK PRODUCTS

Insurers’ Product Offerings Are Increasingly Designed to Provide

End-to-End Cyber Risk Management Solutions

91

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.

92

Data/Privacy Breach:Many Potential Costs Can Be Insured

Source: Zurich Insurance; Insurance Information Institute

Data Breach Event

Costs of notifying affecting

individuals Defense and settlement

costs

Lost customers and damaged

reputation

Cyber extortion payments

Business Income Loss

Regulatory fines at home & abroad

Costs of notifying

regulatory authorities

Forensic costs to discover

cause

93

Big Data and the Era of Predictive Analytics & Modelling

For Insurers, It’s Always Been About the Data

94

95

49%

37%32% 30%

25%

9%5%

0%

10%

20%

30%

40%

50%

60%

Personal

Auto

Home Comm. Auto Comm.

Property

Business

Owners

Workers

Comp

GL

Percentage of Carriers Using Predictive Analytics by Major P/C Line, 2013

Predictive analytics is more like to be used in personal lines, but commercial lines use

is growing

Source: ISO/Earnix Survey, September 2013; Insurance Information Institute.

82% of insurers report using

predicative analytics in at least

one line. 18% do not use it all.

Benefits Cited

Drive Profitability: 85%

Reduce Risk: 55%

Grow Revenue: 52%

Improve Op. Efficiency: 39%

Uses of Predictive Analytics by Function

96

Pricing and Underwriting are the

leading uses for predictive analytics

97

ALTERNATIVE CAPITAL & REINSURANCE MARKETS

Ample Capacity as Alternative Capital is

Transforming Reinsurance Markets

97

Alternative Capacity as a Percentage of Global Reinsurance Capital

(As of Year End)*

Alternative Capacity accounted for approximately

11.5% or $59 billion of the $511 in global reinsurance

capital as of mid-2014

*As of June 30.

Source: Aon Benfield Analytics.

Investor by Category

Years ended June 30.

Source: Aon Benfield Securities; Insurance Information Institute.

Catastrophe

Fund43%

Instituti

onal41%

Mutual

Fund12%

Hedge

Fund2%

Reinsurer

2% 2013

Institutional investors are accounting for a larger

share of alternative reinsurance investors

Catastrophe

Fund51%

Institutional

34%

Mutual

Fund5%

Hedge

Fund5%

Reinsurer

5%2012

Catastrophe Bonds: Issuance and Outstanding, 1997- 2014:Q2

Risk Capital Amount ($ Millions)

Sources: Guy Carpenter; Insurance Information Institute.

63

3.0

84

6.1

98

4.8

1,1

30

.0

96

6.9 2,7

29

.2

3,3

91

.7

4,6

00

.3

4,1

08

.8

5,8

52

.9

7,0

83

.0

5,7

01

.7

1,991.11,142.8

1,729.8

6,9

96

.3

4,6

93

.4

1,219.5

$3

,45

0.0

$4

,04

0.4

$4

,90

4.2 $8

,54

1.6

$1

4,0

24

.2

$1

2,0

43

.6

$1

2,5

08

.8

$1

2,1

85

.0

$1

2,1

39

.1

$2

0,5

42

.8

$1

4,8

35

.7

$1

8,5

16

.7

$2

,95

0.0

$0

$4,000

$8,000

$12,000

$16,000

$20,000

$24,000

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14:Q2

Risk Capital IssuedRisk Capital Outstandng at Year End

2014 Issuance Slowed Down Substantially; May Not Surpass 2013 Record

CAT bond issuance reached a record high

in 2013.

Risk capital outstanding

reached a record high in 2014

Financial crisis depressed issuance

Terrorism Risk

101

Insurers Met the Challenge

But Politics Threaten to End a Successful Public/Private Partnership

101

Life

$1.2 (3%)

Aviation

Liability

$4.3 (11%)

Other

Liability

$4.9 (12%)

Biz

Interruption

$13.5 (33%)

Property -

WTC 1 & 2*

$4.4 (11%) Property -

Other

$7.4 (19%)

Aviation Hull

$0.6 (2%)

Event

Cancellation

$1.2 (3%)

Workers

Comp

$2.2 (6%)

Total Insured Losses Estimate: $42.9B***Loss total does not include March 2010 New York City settlement of up to $657.5 million to compensate approximately 10,000 Ground Zero workers or any subsequent settlements.

**$32.5 billion in 2001 dollars.

Source: Insurance Information Institute.

Loss Distribution by Type of Insurancefrom Sept. 11 Terrorist Attack ($ 2013)

($ Billions)

103

Terrorism Insurance Take-up Rates,By Year, 2003-2013

Source: Marsh Global Analytics, 2014 Terrorism Risk Insurance Report, April 2014 and earlier editions.

27%

49%

58% 59% 59%57%

61% 62%64%

62% 62%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

In 2003, the first year TRIA was in effect, the terrorism take-up rate was 27 percent. Since then, it has increased steadily, remaining in the

low 60 percent range since 2009.

TRIA’s high take-up rates, availability and affordability have benefitted businesses,

workers and the entire US economy since the program’s enactment

Insurance:A Financially Stable, Sound &

Secure Industry

104

Very Different from Banks

Industry Impairment Rates Are Near

Record Lows

104

P/C Insurer Impairments, 1969–20131

51

27

11

93

49

13

12

19

91

61

41

33

64

93

1 34

50

48

55

60

58

41

29

16

12

31

18 19

49 50

47

35

18

14 15

51

6 19 2

13

42

51

4

0

10

20

30

40

50

60

70

70

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

Source: A.M. Best Special Report “U.S. P/C Impairments Down Sharply in 2013; Alternative Risk Players Faltered,” June 23, 2014; Insurance Information Institute.

The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets

105

Impairments among P/C insurers remain infrequent

106

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2013

90

95

100

105

110

115

1206

97

07

17

27

37

47

57

67

77

87

98

08

18

28

38

48

58

68

78

88

99

09

19

29

39

49

59

69

79

89

90

00

10

20

30

40

50

60

70

80

91

01

11

21

3

Co

mb

ine

d R

ati

o

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Imp

airm

en

t Ra

te

Combined Ratio after Div P/C Impairment Frequency

Source: A.M. Best; Insurance Information Institute

Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007; Recent Increase Was Associated

Primarily With Mortgage and Financial Guaranty Insurers and Not Representative of the Industry Overall

2013 impairment rate was 0.43%, down from 0.76% in 2012; the rate is lower than the 0.81% average since 1969

107

100+ Year Old Insurers as a Share of All P/C Insurers

87.7%

12.3%

Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC; CDC

About 12% of P/C insurance companies (fewer than 1-in-8) today (2013) are 100+ years old. This is a surprisingly high percentage.

Insurers at Least 100 Years Old, 12.3%(287)

Insurers Less than 100 Years Old,

87.7%(1,979)

Odds of a Human Living to 100

Born 1900: ~0.25% (1-in-400)

Born Today: ~2% (1-in-50)

108

Number of Recessions Endured by P/C Insurers, by Number of Years in Operation

32

27

20

13

8

0

5

10

15

20

25

30

35

1-50 51-75 76-100 101-125 126-150

Sources: Insurance Information Institute research from National Bureau of Economic Research data.

Number of Recessions Since 1860

Longevity Requires an Insurer to Overcome Extreme Economic Adversity of Every Sort

Number of Years in Operation

Insurers that have made it to the age of 150 have endured 32 recessions over the years

108

109

The Global Financial Crisis: The Pendulum Swings: Dodd-Frank & Systemic Risk

Dodd-Frank Act of 2010: The implosion of the housing bubble and virtual collapse of the US banking system, the seizure of credit markets and massive government bailouts of US financial institutions led to calls for sweeping regulatory reforms of the financial industry

Limiting Systemic Risk is at the Core of Dodd-Frank

Designation as a Systemically Important Financial Institutional (SIFI) Will Result in Greater Regulatory Scrutiny and Heightened Capital Requirements

Dodd-Frank Established Several Entities Impacting Insurers

Federal Insurance Office

Financial Stability Oversight Council

Office of Financial Research

Consumer Financial Protection Bureau

110

Global Financial Crises & Global Systemic Risk

The Global Financial Crisis Prompted the G-20 Leaders to Request that the Financial Stability Board (FSB) Assess the Systemic Risks Associated with SIFIs, Global-SIFIs in Particular

In July 2013, the FSB Endorsed the International Association of Insurance Supervisors Methodology for Identifying Globally Systemically Important Insurers (G-SIIs)

For Each G-SII, the Following Will Be Required:

(i) Recovery and resolution plans

(ii) Enhanced group-wide supervision

(iii) Higher loss absorbency (HLA) requirements

G-SIIs as Designated by the FSB as of July 2013:

Allianz SE AIG Assicurazioni Generali

Aviva Axa MetLife

Ping An Prudential Financial Prudential plc

111

Summary

Insurance Remains an Essential Tool for Reducing Risk

The Industry’s Future Is Increasingly Global

Future Growth Will Incur More Risk

New Challenges Abound, But So Do Opportunities

Insurers Have Centuries of History Demonstrating their Ability to Major Through Era of Disruptive Risks

Operational

Economic

Regulatory

Insurers Will Manage through Quantum Shifts and “Disruptor” Forces in the Decades Ahead

www.iii.org

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwig

Download at www.iii.org/presentations

Insurance Information Institute Online:

112