Insurance 2020Casualty Actuaries of Greater New York

December 9, 2020

James Lynch, FCAS MAAA, Chief Actuary and Senior Vice President, Research and Education

Insurance Information Institute 110 William Street New York, NY 10038 Tel: 212.346.5533 jamesl@iii.org www.iii.org

mailto:jamesl@iii.org

The Financial Picture

2020: COVID and Cats

3

P/C Insurance Industry Combined Ratio*

*Excludes Mortgage & Financial Guaranty insurers before 2014.Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014: = 97.0.

Sources: A.M. Best; APCIA/ISO, a Verisk Analytics® business; I.I.I/Milliman.

101.1

106.5

102.5

96.4 97.097.8

100.7

103.7

99.2 98.997.5

102.0

90

100

110

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020:Q2 2020E

3 Consecutive Years of U/W Profits; 1st

time since 1971-73

Hurricanes Harvey,

Irma, Maria

97.3 97.5

90

95

100

2019 2020

First Half: Combined Ratio

6.2%

2.8%

0%

5%

10%

2019 2020

First Half: Premium Growth

4

$9

$4

$72

$61$63

$0

$10

$20

$30

$40

$50

$60

$70

$80

02

03

04

05

06

07

08

09

10

11

12

13

14

15

16

17

18

19

P/C Industry Net Income After Taxes2002-Present

Sources: NAIC data, sourced from S&P Global Market Intelligence.

$ Billions

32.8

24.9

0 20 40

2019

2020

$ billions

First Half: Net Income

5

Industry Outlook

99%102%

99% 99%

2%

6% 6%

0%

5%

10%

15%

92%

96%

100%

104%

108%

2015 2016 2017 2018 2019 2020E

2021F

2022F

Pre

miu

m G

row

th

Co

mb

ined

Rati

o

Combined Ratio DWP Growth NWP Growth

Commercial Lines Rate Change

Growth in Nominal GDP (Real GDP + Inflation)

Calendar Year Written PremiumNet Combined Ratio Projections

Data sources: NAIC data sourced through S&P Global Market Intelligence, MarketScout, Blue Chip Economic Indicators, Congressional Budget Office, PCS, Aon, Munich Re, Energy Information Agency, FRED (Federal Reserve Bank of St. Louis).

Analysis: Insurance Information Institute, Milliman.

6.3%

-20%

-10%

0%

10%

20%

20

04:Q

120

04:Q

420

05:Q

320

06:Q

220

07:Q

120

07:Q

420

08:Q

320

09:Q

220

10:Q

120

10:Q

420

11:Q

320

12:Q

220

13:Q

120

13:Q

420

14:Q

320

15:Q

220

16:Q

120

16:Q

420

17:Q

320

18:Q

220

19:Q

120

19:Q

420

20:Q

3% C

hg

fro

m Y

r P

rio

r

-3.7%

4.0% 4.6%

-6%

-3%

0%

3%

6%

20

16

20

17

20

18

20

19

20

20E

20

21F

20

22F

% C

hg

fro

m Y

r P

rio

r 2020 Commentary

Slight rise in premium. Underwriting result deteriorates.

• Pandemic and recession reduce exposure in personal auto,

several commercial lines.

• Rate increases make up for lower exposures somewhat.

• Tremendous uncertainty due to pandemic’s impact on several

lines.

• Above-average cat year.

The Personal Lines Picture

7

Direct Written Premium Growth By Year

• Through Q2. Personal auto liability only.

• Sources: NAIC data, sourced from S&P Global Market Intelligence.

3.1%

4.8%5.2% 5.1%

7.8%

6.6%

2.7%

-1.5%-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020*

HO/FO Personal Auto

HO growth more stable than auto, which grew in response to rising costs till recently.

8

Personal Lines Results

Source: NAIC data, sourced from S&P Global Market Intelligence.

Personal auto has returned to underwriting profitability. Homeowners results depend on catastrophe season.

122%

91%

107%

104%

98%

106%

98%99%

90%

95%

100%

105%

110%

115%

120%

125%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Co

mb

ine

d R

ati

o

Homeowners Auto

61%

66%

61%

57%

50%

55%

60%

65%

70%

Homeowners Auto Liability

Dir

ect

Lo

ss

Ra

tio

Th

ru Q

2

9

HO Trend: Catastrophe Losses

*Aon estimate through June. 2010s is average of 2010 to 2019. All losses are Direct.

Sources: Property Claims Service, a Verisk Analytics business; Aon; Insurance Information Institute.

4138

80

111

51

2421

1980s:$5 B

1990s: $15 B2000s: $25 B

2010s: $35 B

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

$110

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20*

Bil

lio

ns

, 2

01

9 $

Average forDecade

Hurricane Andrew

WTC

Katrina, Rita, Wilma

2019 was a relatively mild year; 2020 hit by multiple hurricanes, widespread wildfires – mostly in second half

Harvey, Irma, Maria

10

Americans stopped driving Frequency, severity trends

Source: Federal Highway Administration, Fast Track Monitoring System.

-17.6%

-37.5%

18.8%

-33.6%-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

% C

hg

Fro

m Y

rP

rio

r

Average loss, collisionPaid claim frequency, collisionAverage loss, property damagePaid claim frequency, property damage

Auto Trends

2,952 3,034

2,952

3,261

2,912

2,000

2,200

2,400

2,600

2,800

3,000

3,200

3,400

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Billions of Miles in Prev. 12 Mos. (thru Sept.)

The Commercial Lines Picture

2020 Was Looking Good

12

Commercial Lines Results

Source: NAIC data, sourced from S&P Global Market Intelligence.

Excellent workers comp results have more than made up for problems in auto, general liability.

108%

93%

103%

98% 98%

90%

92%

94%

96%

98%

100%

102%

104%

106%

108%

110%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Co

mb

ined

Rati

o

13

Commercial Direct Loss Ratios by Line

Through Q2.

Source: NAIC data, sourced from S&P Global Market Intelligence.

58%

7%

49%

67%

47%

73%

0%

10%

20%

30%

40%

50%

60%

70%

80%F

ire&

Alli

ed

CM

P

Me

dM

al

WC

OL

Pro

du

cts

CA

L

Mo

rtg

ag

e

Ocea

n M

ari

ne

Inla

nd

Mari

ne

Aircra

ft

2019 2020

Allied Lines, Mortgage and Inland Marine results deteriorated in first half; note Auto, GL deteriorated (slightly), even in hard market.

14

Commercial Lines Rate Changes

Sources: Willis Towers Watson, MarketScout, Marsh.

Fastest rate increases in almost 20 years.

MarketScout6%

Willis

10%

Marsh

18%

-10%

-5%

0%

5%

10%

15%

20%

201

3:Q

1

201

3:Q

2

201

3:Q

3

201

3:Q

4

201

4:Q

1

201

4:Q

2

201

4:Q

3

201

4:Q

4

201

5:Q

1

201

5:Q

2

201

5:Q

3

201

5:Q

4

201

6:Q

1

201

6:Q

2

201

6:Q

3

201

6:Q

4

201

7:Q

1

201

7:Q

2

201

7:Q

3

201

7:Q

4

2018:Q

1

201

8:Q

2

201

8:Q

3

201

8:Q

4

201

9:Q

1

201

9:Q

2

201

9:Q

3

201

9:Q

4

202

0:Q

1

202

0:Q

2

202

0:Q

3

15

Commercial Rate ChangesBy Line, 2020:Q3

Source: MarketScout.

5.0%5.5%

5.0% 5.0%5.5%

8.5%8.0%

0.5%

7.5%

11.5%

6.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

All of these are larger than previous quarter. Overall, largest rate increases in almost 20 years.

16

Reserving TrendsIs the cupboard getting bare?

* Older claims are more than 42 months old, e.g. 2017 and prior as of Q22020.

Source: NAIC data, sourced from S&P Global Market Intelligence.

CY2019 Loss DevelopmentCY Development on Older*

Claims as of Mid-Year

2.6

0.6 0.1

(0.5)

3.5

(0.4)(0.3)

(7.3)

(4.5)

0.3

(8.0)

(6.0)

(4.0)

(2.0)

-

2.0

4.0

6.0

Billi

on

s

Industrywide Loss Development: $6 billion favorable

8.2

-0.8 -0.7

-8

-6

-4

-2

0

2

4

6

8

10

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

Billi

on

s

17

2021 ForecastSocial inflation, uncertainty drive the hard market

Source: Willis Insurance Marketplace Realities, November 2020.

Rate Projections Market Influences

Line 2021 Forecast

Property Up 15 to 25%

GL Up 7.5% to 15%

Umbrella/XS Up 30% to 150%

WC Flat

Comm Auto Up 8% to 15%

D&O Up to 70%

Cyber Up 10% to 30%

Line Trend

Property Cats, COVID

GL Social inflation

Umbrella/XS Social inflation

WC COVID

Comm Auto Social inflation

D&O COVID, IE&D

Cyber COVID

These are all higher than spring projections.

Social Inflation

An Actuarial Examination

19

Social Inflation

A Good Definition

“a fancy term to describe rising litigation costs and their impact on insurers’ claim payouts, loss ratios, and, ultimately, how much policyholders pay for coverage.”

Actuarial Interpretation

“Excessive inflation in claims.”

Occurs when development defies key assumption: Loss Development is RV about stable mean

Coming to Terms

20

Triple-I Analysis

Hypothesis: Rising LDFs → Social Inflation

Method:

Focus on Long-Tailed Liability Lines

– Minimizes Catastrophe’s Impact

– 12:120 LDF > 1.8 (Workers Comp)

– Included: Comm Auto Liability, MedMal, Other Liability, Product Liability

– Excluded: Personal Auto Liability, Workers Comp, Special Liability

Look for Rising LDFs

What We Studied and Why

21

Upward Creep in Loss DevelopmentKey Assumption: LDF is RV about mean + inflation

Source: NAIC data, sourced from S&P Global Intelligence; Insurance Information Institute. Expected: 3-yr Straight Average.

Comm Auto LDFs 2-Year Expected vs. Actual

12 24 36 48

2009 1.34 1.14 1.08 1.03

2010 1.36 1.16 1.08 1.04

2011 1.40 1.16 1.08 1.04

2012 1.40 1.16 1.09 1.04

2013 1.41 1.18 1.10 1.04

2014 1.42 1.19 1.10 1.05

2015 1.45 1.18 1.11

2016 1.43 1.20

2017 1.44

1,1

10

1,3

18

1,5

46

1,5

96

2,1

36

1,4

55

1,6

67

1,9

28

2,0

12

2,2

81

-

500

1,000

1,500

2,000

2,500

2012 2013 2014 2015 2016

Accident Year

Expected Actual

12-36 Development ($ Millions)

22

Social Inflation: The Toll

Sources: NAIC data sourced from S&P Market Intelligence; Insurance Information Institute.

-827

1,6561,852

1,6341,843

2,572

-$1,000

$0

$1,000

$2,000

$3,000

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

MillionsAdditions to Claim Reserves

Reductions from Claim Reserves

Reserve Development, Commercial Auto Liability

23

It’s Not Just Auto12:36 Loss Development Factors by Year, Long-Tailed Lines

• Medical Malpractice Occurrence, Other Liability Claims-Made, Products Liability Occurrence, Products Liability Claims-Made.

Estimate assumes 24:36 Factor is straight average of previous three years.

Source: NAIC data, sourced from S&P Global Market Intelligence; Insurance Information Institute.

Commercial Auto MedMal Claims-Made

Other Liability Occurrence Other Long-Tailed Lines*

1.53

1.71

1.40

1.60

1.80

1.75

2.28

1.50

2.00

2.50

2.22 3.00

2.00

2.50

3.00 3.45

2.96

2.75

3.25

3.75

24

Why It Is HappeningWhy Social Inflation Hits Insurance

Sources: Bureau of Labor Statistics (via FRED), Gallup.

Overall Inflation Remains Steady

Who Solves Problems?

-0.3

3.1

2.4

1.8

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2009 2011 2013 2015 2017 2019

% C

ha

ng

e

CPI Change vs Year Earlier

30

Congress

11

24

Big Business

23

5

10

15

20

25

30

35

2004 2007 2010 2013 2016 2019

Confidence in Institutions

% Saying Great Deal/Quite a Lot

25

Why Is It Happening?Social Trends Set the Stage

Sources: Wikipedia, Economic Policy Institute, Centers for Disease Control, Google Trends.

Big Payout Expectations

Dystopian Days

3

8

5

0

2

4

6

8

10

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

No. of $300M Lottery Jackpots22%

157%

343%

0%

100%

200%

300%

400%

1979 1989 1999 2009

% Chg, Real Income Since 79

Bottom 90% Top 1% Top 0.1%

78.2

78.978.7

78

78.5

79

2008 2014 2018

Life Expectancy at Birth

Dystopia

Utopia

5

35

65

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Inte

rest O

ver

Tim

e (

12

-Mo

Mov.

Avg)

Search Topic: Utopia vs Dystopia

26

Why Is It Happening?The Changing Legal Environment

Sources: Swiss Re Economic Insights, Burford Capital.

“Jackpot Justice” Litigation Financing

27.7030.74

41.75

54.33

0

10

20

30

40

50

60

2014 2015 2016 2017

$ m

illio

ns

Median, 50 Largest Jury Verdicts

7%

36%

0%

10%

20%

30%

40%

2013 2017

% of US Law Firms Using Litigation Financing

Litigation is a

financeable asset.- 68% of US Law Firms

COVID-19 and Insurance

28

The insurance value chainHow insurance contributes to society

How did the value chain weather the pandemic?

Protecting People & Organizations

Brains + Bank

Account

Create Policy/ Treaty

Market Policy/ Treaty

Write Risk Price RiskPerform

Loss Control

Settle Claims

Improve World

29

Brains: Industry is preserving its human capital

0.3%

-9.1%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

Insurance-Related

Other

Steady employment among all four insurance sectors despite the recession

Data are seasonally adjusted.

Sources: BLS; Insurance Information Institute.

535.0

553.8

561.1

344.3

349.3

352.9

535.3

579.2

582.3

825.0

837.2

844.5

0 500 1,000 1,500 2,000 2,500

Endof

201…

Endof

201…

Endof

202…

P/C Carriers Life Carriers Health Carriers Agents/Brokers

2,34

2,319.5

2,238.9

Thousands 2020 Employment Change

(Through August)

30

463

848

772

826

$400

$500

$600

$700

$800

$900

09:…

10:…

10:…

11:…

12:…

13:…

13:…

14:…

15:…

16:…

16:…

17:…

18:…

19:…

19:…

The bank account – Damage, then recovery

Sources: ISO, AM Best, Insurance Information Institute.

4%

-9%

7%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

16:Q

1

16:Q

2

16:Q

3

16:Q

4

17:Q

1

17:Q

2

17:Q

3

17:Q

4

18:Q

1

18:Q

2

18:Q

3

18:Q

4

19:Q

1

19:Q

2

19:Q

3

19:Q

4

20:Q

1

20:Q

2

Surplus has rebounded from Q1 decline caused by unrealized capital losses (stock declines).

Change from Prior QuarterAmount of Surplus ($ Billions)

31

Regardless of scenario, retroactive attempts to include pandemics in BI causes bankruptcy

Monthly costs of retroactive changes to SME BI policies

Median estimates are model-driven. The higher and lower estimates assume a standard distribution for BI losses anchored in the mode-driven median loss estimates.

Source: Insurance Information Institute.

Key Assumptions

Scenario 1: 40% take-up rate

Scenario 2: 100% take-up rate

Loss basis: Compensation, profits, adjustment costs 7 days waiting period

Retained loss of 10% of total loss

125

250

380

50

100

150

0 50 100 150 200 250 300 350 400Monthly Range ($B)

Higher

Median

Lower

Higher

Median

Lower

Virus / Bacteria Exclusion Removal

Expanded BI toAll SMEs

1

2

Retroactive BI Scenarios

32

Policy wording: Insurers minimized riskInsurers understood threat of pandemics well before most

Source: COVID Coverage Litigation Tracker, cclt.law.upenn.edu

Insurer Defenses

Who Is Suing?Cumulative Filings

1,302

0

200

400

600

800

1,000

1,200

1,400

16

-Ma

r

30

-Ma

r

13

-Apr

27

-Apr

11

-Ma

y

25

-Ma

y

8-J

un

22

-Jun

6-J

ul

20

-Jul

3-A

ug

17

-Aug

31

-Aug

14

-Sep

28

-Sep

24

75

174

471

0 100 200 300 400 500

Performing Arts, Sports

Personal & Laundry

Ambulatory Health Care

Food & Drinking Places

No physical damage

Exclusion for loss due to virus or bacteria (2006)

33

Pricing: Adjusting on the flyInsurers reacted nimbly to fulfill regulatory needs

$14B in Personal Auto Givebacks

Consumer Price Index –Personal Auto

Premium Credits$8,724

Dividends$3,636

UW Expense

$1,639

In Millions

Sources: Insurance Information Institute, Bureau of Labor Statistics.

Mar-201.1

May-20-14.3

Sep-20-5.0

-15%

-10%

-5%

0%

5%

Oct-

19

No

v-1

9

Dec-1

9

Jan-2

0

Feb

-20

Ma

r-2

0

Ap

r-2

0

Ma

y-2

0

Ju

n-2

0

Ju

l-2

0

Au

g-2

0

Se

p-2

0

Percentage change from year earlier

$9,610

$4,390

First Half Second Half

34

Marketing opportunitiesToo few knew industry gave back billions, but telematics shone

Did you receive either refund or credit?

Did insurer tell you it…

Growing embrace of telematics

85%

60%

100%

0% 50% 100% 150% 200%

Actual

% Saying Yes

21%

24%

27%

0% 10% 20% 30%

…wouldn't cancel?

…would allow installment pmt?

…wouldn't charge late fee?

Miles Driven,

41%

54%

Where You Drive,

32%

49%

Speed, 35%

47%

Distracted Driving,

39%

58%

30%

35%

40%

45%

50%

55%

60%

2019 2020

Source: Insurance Information Institute, Arity.com

Percent comfortable with use in pricing

35

Market challenge: A surge in business interruption media coverage

Source: Meltwater.

Count of Stories Mentioning Business Interruption Insurance & COVID-19

834

7,730 7,6106,910

3,180

5,000

4,210

1,130

February March April May June July August September

36

Market challenge: An industry campaign

The Future of American Insurance & Reinsurance (FAIR) campaign launched in May and has served as a source of education surrounding pivotal industry activity, including Congressional hearings, White House roundtables, state legislation, and media stories.

With a separate website, valuable explanatory assets, stakeholder outreach, and digital promotions, this integrated campaign provides the Triple-I with a separate platform and voice to present information in a digestible, influential manner to key audiences.

The campaign takes on overarching industry issues (i.e. business interruption) and emphasizes its essential role in supporting and rebuilding communities in these uncertain times.

www.fairinsure.org

37

Communications: Global pandemics are uninsurable

Economic Impact of 9/11

38

Communications: Global pandemics are uninsurable

Economic Impact of Coronavirus

39

Settling claims: COVID-19’s claims impactLosses spread across many lines, but amount is uncertain

Potential Loss Impact Industrywide Toll

Lloyd’s estimate (May, worldwide) $107B

Reported (through September 12, worldwide): $22.4B

Triple-I estimate: equivalent in US to a significant hurricane ($10B - $50B)

Source: Willis Towers Watson, www.Lloyds.com, Reinsurance News, Insurance Information Institute.

2.0

0.6

0.3

0.7

0.2

22.7

4.0

2.6

27.0

1.7

0.8

92.0

0 20 40 60 80 100

BI

D&O

EPLI

GL

Mortgage

Political risk,credit, surety

WorkersCompensation

Billions of US$

Loss estimates range from $30B(≈ bad hurricane) to $140B (2-3 Katrinas)

http://www.lloyds.com/

40

A better place: Six months into COVID-19, news coverage discusses federal policy solution

Number of Stories

Source: Meltwater.

0

200

400

600

800

1,000

1,200

1,400

1,600

BI & Lawsuits BI & Federal Action

41

A better place: FAIR guiding principles:A defined perspective on potential policy solutions

Given their universal scope, pandemics are largely uninsurable. Therefore, only the government has the financial capacity to provide the relief small and large businesses need to weather this crisis.

Proposed solutions must:

Maintain the federal government as a primary provider of relief, reflecting the reality that pandemic risks are not privately insurable.

Provide widely accessible relief payments to businesses in a fast and efficient manner once a pandemic is declared by the government, with minimal chance of abuse.

Protect businesses from losses, and incentivize businesses to retain employees, without jeopardizing insurers' existing commitments.

42

Stepping Up

Customers Community Employees Industry

Auto insurers have returned $14 billion so

far to customers' pockets around the

country through premium relief

Insurers have pledged more than an estimated $280 million (according to

III/Insurance Industry Charitable Foundation) in donations to the national and local organizations

fighting this pandemic on the frontlines

Employing more than 2.8 million Americans, Insurers are taking care

of their employees–many pledging no layoffs during the

ongoing crisis

Insurers are implementing

innovative solutions to carrying out daily

operations while respecting social

distancing

America's Insurers:

for Customers, Communities, and Employees

The insurance industry is applying forward-thinking solutions to take care of its customers, communities, and employees during the COVID-19 crisis

Thank you for your timeand your attention!