The Economic State of theP/C Insurance Industry

Focus on Auto Insurance MarketsInsurance Auto Auctions

Industry Leadership SummitSea Island, GA

September 15, 2015Download at www.iii.org/presentations

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

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

3

Auto Insurance Growth Analysis

Growth Trajectories Differ Substantially by State and

Over Time

4

Distribution of Direct Premiums Written by Segment/Line, 2013

Sources: A.M. Best; Insurance Information Institute research.

Personal/Commercial lines split has been about 50/50 for many years

Pvt. Passenger Auto is by far the largest line of insurance and is currently the most important source of industry profits

Commercial Auto accounts for about 5% of overall industry premium vs. 34% for Pvt. Passenger Auto

Distribution Facts

Commercial Lines$242.5B/46%

2013

Pvt. Pass Auto$180.8B/34%

Homeowners$80.7B/15%

Commercial Auto

$26.7B/5%

5

$119

.7 $128

.0 $139

.7 $151

.2 $159

.6

$158

.5

$157

.2

$160

.1

$163

.3

$168

.1

$174

.6 $183

.5

$191

.2

$197

.7

$204

.0

$160

.3

$159

.6

$157

.3

$100

$120

$140

$160

$180

$200

$220

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15F 16F 17F

PP Auto premiums written continue to recover from a period of flat growth attributable to the weak economy impacting new vehicle sales, car choice, and increased

price sensitivity among consumers

Sources: A.M. Best (1990-2014); Conning (2015-17F); Insurance Information Institute.

Private Passenger Auto InsuranceNet Written Premium, 2000–2017F

$ Billion

PPA NWP volume in 2014 was up $26.3B or 16.7%

since the 2009 trough; By 2017 the gain is expected to

be $46.8B or 29.7%

8

Direct Premiums Written: PP AutoPercent Change by State, 2007-2014

44

.5

36

.0

33

.8

30

.9

26

.6

24

.4

24

.4

21

.1

20

.4

20

.3

19

.5

19

.4

19

.1

19

.0

18

.7

18

.7

18

.4

17

.9

17

.4

17

.2

16

.9

16

.4

15

.8

15

.7

15

.6

15

.4

0

5

10

15

20

25

30

35

40

45

50

ND

TX MI

OK

SD

CO

NE

TN

SC

UT

KS WI

NJ IA VA

LA

DE FL

GA

NY

KY

US

WY

MT

AR

AL

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

Growth Benchmarks: PPA

US: 16.4%

9

Direct Premiums Written: PP AutoPercent Change by State, 2007-2014

15

.0

14

.2

14

.2

13

.9

13

.9

13

.2

12

.9

12

.2

12

.1

11

.1

11

.0

10

.6

10

.5

10

.3

10

.3

10

.0

9.9

8.3

7.3

6.5

5.6

5.5

5.3

5.1

0.2

-0.2

-2

0

2

4

6

8

10

12

14

16

MO

NC

MN IN DC

OH

MD

MS

AK

MA

WA

CT

NM

WV RI

ID IL PA

CA

US

VT

NV

NH AZ

ME HI

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

Sources: SNL Financial LC.; Insurance Information Institute.

Pvt. Passenger Auto premium growth was negative in Hawaii

between 2007 and 2014

10

$19.5

$21.8

$24.6$25.4 $25.8

$23.8

$22.1$21.2 $21.2

$22.1

$24.0

$25.7

$28.0

$26.6 $26.7 $26.7

$15

$17

$19

$21

$23

$25

$27

$29

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

Sources: A.M. Best (2000-2014); Conning (2015F); Insurance Information Institute.

$ Billion

In contrast to positive PP Auto NPW growth, Commercial Auto premiums fell 21.3% between 2005 and 2011 due to soft market conditions in

commercial lines and negative exposure trends, though growth resumed in 2012

Commercial Auto InsuranceNet Written Premium, 2000–2015F

11

Direct Premiums Written: Comm. AutoPercent Change by State, 2007-2014

10

6.4

27

.1

18

.8

16

.9

12

.5

11

.5

11

.4

10

.2

9.3

6.0

5.9

5.2

4.9

4.8

4.6

3.7

2.7

2.5

1.3

1.1

1.1

0.7

0.7

-0.5

-0.9

-1.2

-20

0

20

40

60

80

100

120

ND

TX

NE

OK MI

MT

KS IA

WY

NY LA IL AR

MO

MN

KY WI

PA

MS IN TN

DC

US

NM

CO NJ

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

Growth Benchmarks: Comm. Auto

US: 0.7%

12

Direct Premiums Written: Comm. AutoPercent Change by State, 2007-2014

-1.2

-2.3

-3.2

-3.3

-4.6

-5.1

-5.3

-5.4

-6.0

-6.4

-7.3

-7.5

-8.2

-8.2

-8.4

-8.8

-9.0

-10

.3

-10

.3

-11

.0

-12

.0

-12

.8

-17

.0

-18

.9

-28

.6

-37

.1

-40

-35

-30

-25

-20

-15

-10

-5

0

5

OH

CT

ME

WA ID VA

VT

CA

GA

MA

OR

UT FL

MD

AK

NV

WV RI

NH

SC

NC AL HI

AZ

SD

DE

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

Sources: SNL Financial LC.; Insurance Information Institute.

Comm. Auto premium growth was negative in 29 states between 2007

and 2014

Vehicle and Driver Exposure Influences

13

Have We, Will We Hit “Peak Auto”?

14

16.9

16.5

16.1

13.2

10.4

11.6

12.7

14.4

15.5 16

.4 17.0

17.1

16.9

16.8

16.9

16.8

16.7

16.9

16.617

.117.5

17.8

17.4

9

10

11

12

13

14

15

16

17

18

19

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15F 16F 17F 18F 19F 20F 21F

(Millions of Units)

Auto/Light Truck Sales, 1999-2021F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (8/15 and 3/15); Insurance Information Institute.

New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2014-15 is

still below 1999-2007 average of 17 million units, but a robust recovery is well underway.

Job growth and improved credit market conditions will boost auto sales in

2014 and beyond

Truck, SUV purchases by

contractors are especially strong

Yearly car/light truck sales will likely continue at current levels, in part replacing cars that were held onto in 2008-12. New vehicles will generate more physical damage insurance coverage but will be more expensive to

repair. PP Auto premium might grow by 5% - 6%.

Sales have returned to pre-

crisis levels

16

210.

4

211.

6

215.

5 220.

5 225.

8 235.

3

234.

6

236.

8 243.

0

247.

4

250.

8

254.

4

255.

9

254.

2

250.

1

253.

2

253.

6

255.

9

205.

4

201.

8

198.

0

194.

4

192.

3

193.

1

180

200

220

240

260

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

(Millions)

Registered Passenger Vehicles,1990-2013

Sources: http://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/publications/national_transportation_statistics/html/table_01_11.html Insurance Information Institute.

The number of registered vehicles grew consistently (except following recessions) from 1990-2007. It has been flat (through 2013) since then.

Recession Recession

Number of Registered Passenger Vehicles in US, 1999 – 2015E

Sources: Bureau of Transportation Statistics; Barclays Capital estimates, August 2015. 17

Vehicle registrations are growing once

again and now finally exceed pre-crisis

peak

Vehicle registrations are expected to increase at an

annual rate of about 1.5% per year in 2015

and 2016

New Vehicle Registrations in the US, Dec. 2005 – Dec. 2014

Sources: Haver, CEIC; Barclays Capital. 18

New Vehicle registrations are

close to their pre-crisis peak

19

Number of Licensed Drivers, 1984-2013

150

160

170

180

190

200

210

220

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

Sources: 2015 Ward’s Motor Vehicle Facts & Figures, p. 53; l I.I.

# of Licensed Drivers (millions)

Since 2009, virtually no growth in the

number of licensed drivers (through 2013)

Average Vehicle Age, 2002 - 2014

Sources: HIS; Barclays Capital. 20

Average age is still increasing but at a slower pace as new

vehicles sales growth remains strong

21

4.26

4.18

4.07

3.98

3.76 3.90

3.87

3.83

3.88 4.

15 4.35 4.

90 5.00 5.

37 5.77 6.

23 6.68 7.

14 7.75 7.93 8.01 8.

44

8.45

8.40

0

2

4

6

8

10

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

(Millions)

Registered Motorcycles,1990-2013

Sources: http://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/publications/national_transportation_statistics/html/table_01_11.html Insurance Information Institute.

The number of registered motorcycles grew dramatically in the first decade of the 21st century. Baby boomers? Millennials?

No growth, 1990-1999

103.6% growth, 2000-2011

22

0.57

1.38

2.82

4.96

5.69 5.44

4.263.90

4.35

6.23

8.018.44 8.45

0

2

4

6

8

10

60 65 70 75 80 85 90 95 00 05 10 11 12

(Millions)

Registered Motorcycles,1960-2012:A Changing Exposure Base

Sources: http://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/publications/national_transportation_statistics/html/table_01_11.html Insurance Information Institute.

The number of registered motorcycles grew dramatically in the first decade of the 21st century. Baby boomers? Millennials?

Shrinkage, 1985-1990

Growth, 2000-2011

Growth, 1960-1980

23

Personal Auto Ad Spend Trends

Growth in Ad Spend Remains Robust Among Many Top

Auto Insurers

Advertising Expenditures by P/C Insurance Industry, 1999-2014E

$1.736$1.737$1.803$1.708

$3.426

$4.102$4.354

$4.103

$5.079

$5.883$6.088$6.186

$6.000

$2.975

$2.111$1.882

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

$5.0

$5.5

$6.0

$6.5

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14E

Source: Insurance Information Institute from consolidated P/C Annual Statement data, Insurance Expense Exhibit (Part I, Line 4).

$ BillionsP/C ad spend hit an all

time record high of $6.186 billion in 2013 up 1.6% over 2012 but fell about 3% in 2014 to an

estimated $6 billion

P/C ad spending more than tripled since 2002 (up

~251% from 2002-2014E)

Auto Insurance Macro Growth Drivers: The Economy Is

Supporting Growth in Personal and Commercial Auto

25

The Economy and Consumer Sentiment Remain Sufficient to Propel Auto Sales

into 2016

25

26

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 8/15; Insurance Information Institute.

2.7%

1.8%

-1.8

%1.

3%-3

.7%

-5.3

%-0

.3%

5.0%

2.3%

2.2% 2.6%

2.4%

0.1%

2.5%

1.3%

4.1%

2.0%

1.3%

3.1%

0.4%

2.7%

1.8%

3.5%

-0.9

%4.

6%4.

3%2.

1%0.

6%2.

3% 2.7%

2.8%

2.7%

2.7%

2.7%

2.6%

-8.9%

4.5%

1.4%

4.1%

1.1% 1.

8% 2.5% 3.

6%3.

1%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

   2

00

0   

   2

00

1   

   2

00

2   

   2

00

3   

   2

00

4   

   2

00

5   

   2

00

6   

   2

00

7   

08

:1Q

08

:2Q

08

:3Q

08

:4Q

09

:1Q

09

:2Q

09

:3Q

09

:4Q

10

:1Q

10

:2Q

10

:3Q

10

:4Q

11

:1Q

11

:2Q

11

:3Q

11

:4Q

12

:1Q

12

:2Q

12

:3Q

12

:4Q

13

:1Q

13

:2Q

13

:3Q

13

:4Q

14

:1Q

14

:2Q

14

:3Q

14

:4Q

15

:1Q

15

:2Q

15

:3Q

15

:4Q

16

:1Q

16

:2Q

16

:3Q

16

:4Q

Demand for Insurance Should Increase in 2015 as GDP Growth Accelerates Modestly and Gradually Benefits the Economy Broadly

Real GDP Growth (%)

Recession began in in June

2009

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

Q1 2014/15 GDP data were hit hard by this

year’s “Polar Vortex” and harsh

winter

State Leading Economic Indicators through November 2015

Sources: Federal Reserve Bank of Philadelphia at http://www.philadelphiafed.org/index.cfm ;Insurance Information Institute. 27

Growth in the West is

finally beginning to pick up

The economic outlook for most of the US is generally

positive, though flat-to-negative for 10 states, several

of them energy dependent

28

Real GDP by State Percent Change, 2014*:Highest 25 States

6.3

5.2

5.1

5.1

4.7

3.6

3.1

3.0

2.8

2.8

2.7

2.7

2.5

2.3

2.3

2.3

2.2

2.2

2.1

1.9

1.9

1.9

1.8

1.8

1.8

1.7

0

1

2

3

4

5

6

7

ND TX WY WV CO OR UT WA OK CA ID FL NY GA NH MA US SC OH MI MN LA MT KS PA TN

Pe

rce

nt

Ch

an

ge

(%

)

*Advance statisticsSources: U.S. Bureau of Economic Analysis; Insurance Information Institute.

North Dakota was the economic growth juggernaut of the US

in 2014—by far

Only 7 states experienced growth in excess of 3% in 2014, which is a

growth rate we would see nationally in a more typical recovery

Growth Benchmarks: Real GDP

US: 2.2%

29

1.6

1.4

1.4

1.2

1.2

1.2

1.0

1.0

1.0

1.0

0.9

0.8

0.8

0.8

0.7

0.7

0.6

0.6

0.6

0.4

0.4

0.4

0.2

0.0

-1.2

-1.3-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

DC NC AZ IL RI DE WI KY NM NV MO AR HI MD NE AL SD VT CT IA IN NJ ME VA MS AK

Pe

rce

nt

Ch

an

ge

(%

)Real GDP by State Percent Change, 2014*: Lowest 25 States

*Advance statisticsSources: US Bureau of Economic Analysis; Insurance Information Institute.

Mississippi and Alaska were the

only states to shrink in 2014

Growth rates in 16 states were still below 1% in

2014

74.4

73.6

73.6

72.2 73.6 76

67.8

68.9

68.2

67.7 71

.6 74.5

74.2 77

.567

.5 69.8

74.3

71.5

63.7

55.7 59

.5 60.9 64

.169

.975

.075

.376

.276

.4 79.3

73.2

72.3 74

.382

.682

.774

.573

.8 77.6

78.6

84.5

84.1

85.1

82.1

77.5

73.2 75

.182

.581

.281

.680

.0 84.1

81.9

82.5

81.8

82.5 84

.6 86.9 88

.893

.698

.195

.493

.0 95.9

90.7

96.1

93.1

92.9

76.4

40

50

60

70

80

90

100

110

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0S

ep-1

0O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12F

eb-1

2M

ar-1

2A

pr-1

2M

ay-1

2Ju

n-12

Jul-1

2A

ug-1

2O

ct-1

2N

ov-1

2D

ec-1

2Ja

n-13

Feb

-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14F

eb-1

4M

ar-1

4A

pr-1

4M

ay-1

4Ju

n-14

Jul-1

4A

ug-1

4S

ep-1

4O

ct-1

4N

ov-1

4D

ec-1

4Ja

n-15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15Ju

l-15

Aug

-15

Consumer Sentiment Survey (1966 = 100)

January 2010 through August 2015

Consumer confidence has experienced a substantial recovery from its crisis and post-crisis lows, substantially contributing to increased

demand for vehicles and homes.

Source: University of Michigan; Insurance Information Institute

Optimism among consumers dropped in August fell but

remains fairly strong

30

Impact of 2011 budget impasse

31

Unemployment and Underemployment Rates: Still Too High, But Falling

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Jan12

Jan13

Jan14

Jan15

"Headline" Unemployment Rate U-3

Unemployment + Underemployment RateU-6

“Headline” unemployment

was 5.3% in July 2015. 4.5% to

5.5% is “normal.”

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

January 2000 through July 2015, Seasonally Adjusted (%)

Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is continuing to improve.

31

U-6 soared from 8.0% in March

2007 to 17.5% in October 2009; Stood at 10.4% in June 2015.8% to 10% is

“normal.”

23

15

21

70

52

12

65

73

-71

32 6

4 81

55

3-1

15

-10

6-2

21

-21

5-2

06

-26

1-2

58

-42

2-4

86

-77

6 -69

3-8

21

-69

8-8

10

-80

1-2

94

-42

6-2

72

-23

2 -14

1-2

71

-15

-23

22

0-3

81

92

94 11

01

20

11

71

07

19

91

49

94

72

22

32

31 3

20

16

61

86

21

91

25

26

81

77

19

12

22

36

42

28

24

61

02

13

17

51

72

13

61

59

25

52

11

21

52

19 26

31

64

18

8 22

22

01

17

01

80

15

32

47

27

28

61

83

17

5 22

33

13

23

8 27

22

43

20

92

35

21

84

14

31

92

02 2

61

11

7 18

9 25

22

27

21

0

11

3

(1,000)

(800)

(600)

(400)

(200)

0

200

400

600

Jan-

07F

eb-0

7M

ar-0

7A

pr-0

7M

ay-

Jun-

07Ju

l-07

Aug

-S

ep-

Oct

-07

Nov

-D

ec-

Jan-

08F

eb-0

8M

ar-0

8A

pr-0

8M

ay-

Jun-

08Ju

l-08

Aug

-S

ep-

Oct

-08

Nov

-D

ec-

Jan-

09F

eb-0

9M

ar-0

9A

pr-0

9M

ay-

Jun-

09Ju

l-09

Aug

-S

ep-

Oct

-09

Nov

-D

ec-

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-

Jun-

10Ju

l-10

Aug

-S

ep-

Oct

-10

Nov

-D

ec-

Jan-

11F

eb-1

1M

ar-1

1A

pr-1

1M

ay-

Jun-

11Ju

l-11

Aug

-S

ep-

Oct

-11

Nov

-D

ec-

Jan-

12F

eb-1

2M

ar-1

2A

pr-1

2M

ay-

Jun-

12Ju

l-12

Aug

-S

ep-

Oct

-12

Nov

-D

ec-

Jan-

13F

eb-1

3M

ar-1

3A

pr-1

3M

ay-

Jun-

13Ju

l-13

Aug

-S

ep-

Oct

-13

Nov

-D

ec-

Jan-

14F

eb-1

4M

ar-1

4A

pr-1

4M

ay-

Jun-

14Ju

l-14

Aug

-S

ep-

Oct

-14

Nov

-D

ec-

Jan-

15F

eb-1

5M

ar-1

5A

pr-1

5M

ay-

Jun-

15Ju

l-15

Monthly Change in Private Employment

January 2007 through July 2015 (000s, Seasonally Adj.)

Private Employers Added 12.84 Million Jobs Since Jan. 2010 After Having Shed 5.01 Million Jobs in 2009 and 3.76 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

210,000 private sector jobs were created in July.

32

Jobs Created2014: 3.042 Mill2013: 2.452 Mill2012: 2.315 Mill2011: 2.396 Mill2010: 1.282 Mill

3,042,000 jobs were created in 2014, the most since 1997

33

US Unemployment Rate Forecast4

.5%

4.5

%4

.6%

4.8

%4

.9% 5.4

% 6.1

%6

.9%

8.1

%9

.3%

9.6

% 10

.0%

9.7

%9

.6%

9.6

%

8.9

%9

.1%

9.1

%8

.7%

8.3

%8

.2%

8.0

%7

.8%

7.7

%7

.6%

7.3

%7

.0%

6.6

%6

.2%

6.1

%5

.7%

5.6

%5

.4%

5.3

%5

.1%

5.0

%4

.9%

4.8

%4

.8%

9.6

%

4%

5%

6%

7%

8%

9%

10%

11%

07

:Q1

07

:Q2

07

:Q3

07

:Q4

08

:Q1

08

:Q2

08

:Q3

08

:Q4

09

:Q1

09

:Q2

09

:Q3

09

:Q4

10

:Q1

10

:Q2

10

:Q3

10

:Q4

11

:Q1

11

:Q2

11

:Q3

11

:Q4

12

:Q1

12

:Q2

12

:Q3

12

:Q4

13

:Q1

13

:Q2

13

:Q3

13

:Q4

14

:Q1

14

:Q2

14

:Q3

14

:Q4

15

:Q1

15

:Q2

15

:Q3

15

:Q4

16

:Q1

16

:Q2

16

:Q3

16

:Q4

Rising unemployment eroded payrolls

and WC’s exposure base.

Unemployment peaked at 10% in late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (8/15 edition); Insurance Information Institute.

2007:Q1 to 2016:Q4F*

Unemployment forecasts have been revised modestly

downwards. Optimistic scenarios put the

unemployment as low as 5.0% by Q4 of 2015.

Jobless figures have been revised

downwards for 2015/16

38

Household Balance Sheets Are Relatively Strong

Auto Loan Market is Strong: Default Rates Remain Low

$0

$10

$20

$30

$40

$50

$60

$70

$80

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Net Worth of Households*Recently Hit A Historic High

*and nonprofit organizations. Data are as of year-end, except in 2015:Q1 (data posted on June 11, 2015. Data not seasonally adjusted or inflation-adjusted; http://www.federalreserve.gov/releases/z1/Current/z1r-5.pdf Source: Federal Reserve Board at http://www.federalreserve.gov/releases/z1/Current/z1r-5.pdf

2008-09 Recession:

-15.7%

$ Trillions

2001 recession

1992 recession

1982 recession

Housing “bubble”Adjusted for

population growth, net worth is now

comparable to its pre-crisis peak

Rising net worth fuels a “wealth affect” that helps fuel consumer

spending, which accounts for 70% of spending in the U.S. economy

Auto Loans and Other Non-Housing Debt, 2004 – 2015:Q1

41

Banks are becoming increasingly aggressive in marketing auto loans

Source: Federal Reserve Bank of NY Consumer Credit Panel/Equifax; l. I.I.

Auto loan debt outstanding

reached $1T for the first time ever

in Q1 2015

Lenders are Issuing a Rising Number of New Auto Loans, Even for People with Poor Credit Scores

42

For the past several years, auto loans in nonaccrual status remained at roughly 0.25% of outstanding loans.

Auto loan originations reached a 10-year high in 2015:Q2

Auto Loan and Other Non-Housing Deliquencies, 2004 – 2015:Q1

43

So far, increasingly aggressive marketing of auto loans has not resulting in a surge in loan delinquencies and defaults

Source: Federal Reserve Bank of NY Consumer Credit Panel/Equifax; l. I.I.

Auto loan delinquencies have improved

dramatically since their crisis peak but remain above pre-crisis

levels

44

Rate and Exposure Trends for Private Passenger Auto

Rate and Exposure Are Both Important Drivers of Growth

45

Monthly Change in Auto Insurance Prices, 1991–2015*

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

-2%

0%

2%

4%

6%

8%

10%

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

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

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

“Hard” markets tend to occur

during recessionary

periods

Pricing peak occurred in late

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

July 2015 reading of 5.4% is up from 4.2%

a year earlier

47

Change in Commercial Rate Renewals, by Line: 2015:Q1

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

Major Commercial Lines Renewals Were Mixed to Flat in Q1:2015; EPL and Commercial Auto Led the Way

Percentage Change (%)

-0.2%

1.4% 1.5%

2.4%

-4.0%

-2.2% -2.2% -2.1%

-0.7% -0.4%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

Co

mm

erc

ial

Pro

pe

rty

Bu

sin

ess

Inte

rru

ptio

n

Ge

ne

ral

Lia

bili

ty

Um

bre

lla

Co

nst

ruct

ion

Wo

rke

rsC

om

p

Su

rety

D&

O

Co

mm

erc

ial

Au

to EP

L

Commercial Auto rate increases remain

positive

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

Auto Insurance Claim Cost Drivers Continue to Grow Faster than CPI

Sources: Bureau of Labor Statistics; Insurance Information Institute.

1.8%

5.4%

2.5%

3.3%

1.0%

0.0%0.2%

1.5%

2.5%

-2%

0%

2%

3%

5%

6%

Overall CPI "Core" CPI MotorVehicle

Insurance

TotalMedical

Care

Physicians'Services

HospitalServices

MotorVehicle

Body Work

New Cars NewTrucks

Healthcare costs are a major cost driver and are expected to accelerate in the years ahead

50

Excludes Food and Energy

Price Level Change: July 2015 vs. July 2014

50

Private Passenger Auto: Premium Growth vs. Loss Cost Spread

Sources: Barclays Capital, August 2015. 51

Pure Premium Spread in 2015 Q1 was 0.0%

meaning that rate gains were exactly offset by

loss cost inflation

The Pure Premium Spread is the difference between price increases and loss

cost inflation adjusted for frequency trends

52

Average Expenditures* on Auto Insurance, 1994-2014E

$651 $6

68 $691 $7

05 $726

$786

$830 $8

42

$831

$816

$799

$791

$787

$792

$797 $8

15 $836 $8

60

$690

$685$7

03

$600

$650

$700

$750

$800

$850

$900

$950

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

13E

14E

Across the U.S., auto insurance expenditures fell by 0.8% in 2008and 0.5% in 2009 but rose 0.5% in 2010, 0.8% in 2011 and 2.3% in 2012

I.I.I. estimate for 2013 is +2.6% and +2.9 in 2014%.* The NAIC data are per-vehicle (actually, per car-year)

Sources: NAIC for 1994-2012; Insurance Information Institute estimates for 2013-2014 based on CPI and other data.

The average expenditure on auto insurance in 2014 likely finally

exceeded the pre-crisis high of $842 recorded in 2004—a full decade earlier

Annual Pct Changes 2001: 5.2%2002: 8.6%2003: 5.6%2004: 1.5%2005: -1.3%2006: -1.8%2007: -2.1%2008: -1.0%2009: -0.5%2010: 0.6%2011: 0.6%2012: 2.3%

53

Average Expenditures for Auto Insurance By State, 2012*

1,2

20

1,1

55

1,1

52

1,1

28

1,1

13

1,0

65

1,0

49

1,0

35

98

7

97

7

96

6

90

6

87

3

85

9

84

7

82

8

81

5

81

0

78

2

77

2

76

8

76

0

75

0

74

8

74

2

73

8

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

NJ

DC

NY FL

LA

DE MI

RI

CT

MA

MD

NV

AK

TX

WV

PA

US

WA

AZ

SC

GA

KY

CA

*

MS

OR

CO

Av

era

ge

Ex

pe

nd

itu

re $

*Latest available.Sources: NAIC; Insurance Information Institute.

Note: * California’s figure is preliminary

Top 25 States US Average:

$814.99

54

Average Expenditures for Auto Insurance By State, 2012*

73

7

73

5

73

1

71

9

71

7

71

3

69

5

69

2

68

4

67

9

67

4

65

9

65

8

64

2

63

7

63

5

63

2

61

9

61

7

61

1

59

9

58

2

57

6

56

1

55

7

53

5

$0

$100

$200

$300

$400

$500

$600

$700

$800

OK HI

IL

MN

NH

UT

NM V

I

MO AR

TN AL

MT

VT IN OH

KS

WY

NE

NC WI

ME

ND IA SD ID

Av

era

ge

Ex

pe

nd

itu

re $

*Latest available.Sources: NAIC; Insurance Information Institute.

Bottom 25 States

55

Annual Pct. Change in Avg. Expenditures on Auto Insurance, vs. Auto Insurance Prices, 1995-2015E

2.6%3.4%

2.0%

-0.3%

-2.6%

0.7%

5.2%

8.3%

5.6%

1.5%

-1.3%-1.8%-2.1%

-1.0%-0.5%

0.6% 0.6%

2.3%2.9%

4.2% 4.1%

3.2%

1.1%

-0.2%

1.1%

4.4%

8.8%

7.8%

2.8%2.1%

0.6% 0.4%

2.5%

4.5%5.1%

3.6% 3.6%

4.9%

2.6%

3.3%

-3%

0%

3%

6%

9%

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

Avg. Exp Prices

The gap since 2005 between price changes and expenditures on auto insurance might be due to buyers increasing deductibles,

obtaining discounts, and other premium-reducing behavior.Sources: NAIC for 1994-2012; BLS for auto price changes; I.I.I.

Since 2005 the gap between annual auto insurance price changes as measured by the

BLS has increased, suggesting increased consumer price

sensitivity

Annual auto insurance price changes, as measured by the BLS, roughly matched

NAIC expenditure data from 1995-2004

56

Underwriting and Profitability Performance

in Auto Insurance

Significant Variability and Volatility Over Time and

Across States

Private Passenger Auto Combined Ratio: 1993–2017F

10

1.7

10

1.3

10

1.3

10

1.0

10

9.5

10

7.9

10

4.2

98

.4

94

.3

95

.1

95

.5 98

.3 10

0.2

10

1.3

10

1.0

10

2.0

10

2.1

10

1.6

10

2.4

10

2.2

10

2.3

10

2.4

99

.5 10

1.1

10

3.5

80

85

90

95

100

105

110

115

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

Private Passenger Auto Underwriitng Performance Is Exhibiting Remarkable Stability

57Sources: A.M. Best (1990-2013); Conning (2014P – 2017F); Insurance Information Institute.

Commercial Auto Combined Ratio: 1993–2015F

11

2.1

11

2.0

11

3.0

11

5.9

10

2.7

95

.2

92

.9

92

.1

92

.4

94

.1 96

.8 99

.1

97

.8

10

3.4 10

6.8

10

6.5

10

3.0

10

5.2

11

8.1

11

5.7

11

6.2

80

85

90

95

100

105

110

115

120

125

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

Commercial Auto is Expected to Improve Only Slowly as Rate Gains Barely Offset Adverse Frequency and Severity Trends

58Sources: A.M. Best (1990-2014E);Conning (2015F); Insurance Information Institute.

60

Return on Net Worth: All P-C Lines vs. Pvt. Pass. Auto, 1990-2013*

*Latest available. Sources: NAIC.

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

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

US All Lines US PP Auto(Percent)

Average RNW: 1990-2013*

All P-C Lines: 7.8% PP Auto: 8.3%

Pvt.Pass. Auto Profitability Has Exceeded the P-C Industry as a Whole in 13 of the 24 Years from 1990-2013 (Inclusive)

61

Return on Net Worth: All P-C Lines vs. Homeowners & Pvt. Pass. Auto, 1990-2013*

*Latest available.**Excludes 1992, the year of Hurricane Andrew. If 1992 is included the resulting homeowners RNW is 1.5%Sources: NAIC; Insurance Information Institute.

-10%

-5%

0%

5%

10%

15%

20%

25%

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

US All LinesUS HomeUS PP Auto

(Percent)Average RNW: 1990-2013*

All P-C Lines: 7.8% PP Auto: 8.3% Homeowners: 3.9%**

Pvt.Pass. Auto Has Consistently Outperformed the P-C Industry as a Whole. Homeowners Volatility is Associated Primarily With Coastal Exposure Issues

Excluding 1992’s Hurricane Andrew

62

19

.0

14

.3

14

.2

13

.9

13

.7

13

.5

12

.4

12

.1

11

.3

11

.3

10

.8

10

.7

10

.5

9.9

9.9

9.9

9.7

9.6

9.5

9.3

9.2

9.2

9.1

9.0

8.9

8.8

02468

10121416182022

HI ME DC ID VT ND AK NH IA WY OH MN WV AZ OR VA CA RI CO KS CT WI NM MT UT IN

RN

W P

PA

*Latest available.Sources: NAIC.

Hawaii was the most profitable state for auto insurers from 2004-2013

Return on Net Worth: Pvt. Passenger Auto, 10-Year Average (2004-2013*)

Top 25 States(Percent)

63

8.8

8.6

8.6

8.6

8.5

8.3

8.1

7.8

7.7

7.6

7.5

7.5

7.4

7.1

6.3

6.2

6.1

5.9

5.8

5.6

5.0

4.5

4.4

3.8

3.3

-2.5

-3

-1

1

3

5

7

9

NE

MD

SD

WA IL NY

MA

TX

PA

AL

AR

MO

SC

US

NC

TN NJ

DE

GA

KY

OK

MS FL

NV

LA MI

RN

W A

uto

Return on Net Worth: Pvt. Passenger Auto, 10-Year Average (2004-2013*)

*Latest available.Sources: NAIC

Michigan was the least profitable state for auto insurers from

2004-2013

(Percent) Bottom 25 States

64

Return on Net Worth (RNW) All Lines:2004-2013 Average

25

.6

18

.4

13

.4

13

.2

9.2

8.9

7.9

7.8

7.1

7.1

6.6

4.9

-1.0

-5

0

5

10

15

20

25

30

Fire

Inla

nd Mar

ine

All O

ther

Med

ical

Pro

f Lia

bility

Comm

Auto

Tota

l

Comm

erci

al MP

All Lin

es

Oth

er L

iabili

ty

Work

ers

Comp

PP Auto

Tota

l

Homeow

ners

MP

Farmow

ners

MP

Allied L

ines

Source: NAIC; Insurance Information Institute.

Commercial auto has tended to be more profitable than

personal auto over the past decade

INVESTMENTS: LOW YIELDS EXERT RATE PRESSURE

65

Investment Performance is a Key Driver of Profitability

Depressed Yields Will Necessarily Influence Underwriting & Pricing

65

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

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.2

$48.0 $47.3$46.2 $46.7

$39.6

$49.5

$52.3

$30

$40

$50

$60

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

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

1 Investment gains consist primarily of interest and stock dividends. *2015 figure is estimated based on annualized data through Q1.Sources: ISO; Insurance Information Institute.

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

67

Claim Trends in Private Passenger Auto Insurance

Rising Frequencies and Severities in Many Coverages

Will that Pattern Be Sustained?

68

Number of Motor Vehicle Deaths,1990- First Half 2015

Source: National Safety Council; Insurance Information Institute.

46,8

14

43,5

36

40,9

82

41,8

93

42,5

24

43,3

63

43,6

49

43,4

58

43,5

01

42,4

01

43,3

54

43,7

88

45,3

80

44,7

57

44,9

33

45,3

43

45,3

16

43,9

45

39,7

90

36,2

16

35,3

32

35,3

03

36,4

15

35,3

69

35,4

00

18,6

30

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Total motor-vehicle fatalities in 2015 could possibly exceed 40,000

for the first time in eight years according

to the NSC.

NSC counts both traffic and nontraffic deaths that occur within a year of the accident.

The recession and high gas prices reduced

miles driven, leading to fewer vehicle deaths

69

Death Rates per 100,000,000 Vehicle miles, 1990-2015*

*Projected rate for 2015 based on date through June 2015.Source: National Safety Council; Insurance Information Institute.

2

1.8

3

1.8

2

1.8

1.7

9

1.7

6

1.7

1.6

5

1.5

8

1.5

8

1.5

7

1.5

9

1.5

5

1.5

2

1.5

2

1.5

1.4

5

1.3

4

1.2

2

1.1

9

1.2

0 1.3

5

1.2

0

1.2

0

1.3

0

2.1

8

0.00

0.50

1.00

1.50

2.00

2.50

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

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

*

death rates per 100,000,000 vehicle miles

The recession and high gas prices reduced

miles driven, accelerating the drop in

death rates

Motor vehicle fatality rates appear to be ticking up in 2015

Vehicle death rates fell by nearly half between 1990 and 2010

70

Bodily Injury: Severity Trend Is Up, Frequency Decline Has Ended—Rising?

2.1% 1.7%

3.8%

2.0%

4.2%

-5.4%

-3.8% -4.0% -4.2%

-2.2%

0.0%

-1.1%

3.4%3.0%2.0%

5.9%5.7%4.7%

2.9%

1.1%0.0% 0.0%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*

Severity Frequency

*2015 figure is for Q1 2015 over Q1 2014.Source: ISO/PCI Fast Track data; Insurance Information Institute

Annual Change, 2005 through 2015:Q1*

Cost Pressures Will Increase if BI Frequency and Severity Trends Persist

71

Property Damage Liability: Severity and Frequency Are Up

1.8% 1.8%

4.2%3.5%

4.6%

-1.6%

-3.5% -3.4%

0.6% 0.6%

-0.6%

1.7%0.9%

2.9%3.6%

2.0% 2.0%

-0.4%

0.4%0.9%1.5%

0.3%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*

Severity Frequency

Annual Change, 2005 through 2015*

Severity/Frequency Trends Have Been Volatile, But Rising Severity since 2011 Is a Concern

*2015 figure is for the four quarters ending in 2015:Q1.Source: ISO/PCI Fast Track data; Insurance Information Institute

72

No-Fault (PIP) Liability: Severity is Up, Frequency Relatively Flat*

3.2% 2.8% 3.4% 3.1%

-4.8%-5.7%

-4.1%

-6.4%

6.6%

-3.4%-2.1%

-5.8%

-0.8%

1.6%

-0.9%

4.7%

2.4%

6.4% 6.5% 6.8%

5.2%5.4%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015**

Severity Frequency

*No-fault states included are: FL, HI, KS, KY, MA, MI, MN, NY, ND and UT.**2015 figure is for the 4 quarters ending in 2015:Q1.Source: ISO/PCI Fast Track data; Insurance Information Institute

Annual Change, 2005 through 2015**

No-Fault Systems Are Less Problematic in Some States but Still of Concern in Some, Such as MI

73

Collision Coverage: Severity & Frequency Trends Are Both Higher in 2015*

2.8%

1.3%

4.2%

1.6%

3.0%

-1.8%

-3.6%

2.5%

-2.4%

-1.4%

4.2%

1.7%

3.9%3.1%

0.1%0.5%

-2.3%

-0.1%

-1.4%-0.5%

0.9%

2.3%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*

Severity Frequency

Annual Change, 2005 through 2015*

The Recession, High Fuel Prices Helped Temper Frequency and Severity, But this Trend Will Likely Be Reversed Based on

Evidence from Past Recoveries*2015 figure is for the 4 quarters ending with 2015:Q1.Source: ISO/PCI Fast Track data; Insurance Information Institute

74

Comprehensive Coverage: Severity Trends Are Unfavorable

15.4% 15.0%

-13.9%

7.2% 8.4%

-9.8%-6.3%

1.3%

5.8%

-8.6%-5.8%

2.3% 2.3%

15.5%

-1.4% -1.5%

12.6%

-8.1%-5.9%

-3.1%

1.8%

6.2%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*

Severity Frequency

Annual Change, 2005 through 2015*

Weather Creates Volatility for Comprehensive Coverage

Severe weather is a principal cause of the spikes in both

frequency and severity

*2015 figure is for the 4 quarters ending with 2015:Q1.Source: ISO/PCI Fast Track data; Insurance Information Institute

75

Driving Trends, Gas Prices

America’s Love Affair with their Cars Is Far from Over

76

America is Driving More Again:Total Miles Driven*, 1990–2015

*Moving 12-month total. The 2015 data are through May 2015, the latest available.Note: Recessions indicated by gray shaded columns.Sources: Federal Highway Administration (http://www.fhwa.dot.gov/policyinformation/travel_monitoring/tvt.cfm ); National Bureau of Economic Research (recession dates); Insurance Information Institute.

Billions

2,100

2,200

2,300

2,400

2,500

2,600

2,700

2,800

2,900

3,000

3,100

'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

From November 2007 until January 2015, miles driven was

below the prior peak for 87 straight months—

over 7 years! Previous record was in the early 1980s (39 months).

Some of the 1990-2007 growth in miles driven (+43.9%) is due to population growth (+20.7%)…

New records in 2015

…but the population grew by 6.6% from 2007-2015 and miles driven didn’t grow at all.

Do Changes in Miles Driven AffectAuto Collision Claim Frequency?

7.00

6.81

6.59

6.80 6.78

6.91

6.65

6.32

6.025.94

5.71

5.85

5.705.62 5.60

5.655.57

5.70

5.94 5.92

5.5

6.0

6.5

7.0

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15*

Pa

id C

laim

Fre

q

2400

2500

2600

2700

2800

2900

3000

3100

Bil

lio

ns

of

Mil

es D

rive

n

Collision Claim FrequencyBillions of Vehicle Miles

Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm; ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: 1st Qtr. 2015 and earlier reports. *2015 ISO figure is for 12 months ending 2015 Q1. FHA data for 2015 is 12-month moving average ending May 2015.

Paid Claim Frequency = (No. of paid claims)/(Earned Car Years) x 100

People drove 2.8% more miles through

May 2015 than through May 2014.

78

% Change in Real US GDPvs. % Change in Total Miles Driven

-2%

-1%

0%

1%

2%

3%

4%

5%

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

% change in total miles driven % change in real US GDP

The percent change in miles driven tracked the growth of the national economy fairly well. If this holds, miles driven will continue to rise.

*Data are annual ratesSources: Federal Highway Administration (http://www.fhwa.dot.gov/policyinformation/travel_monitoring/tvt.cfm );

www.bea.gov (real GDP); l I.I.

Percent Change in Total Miles Driven

% Change in Real US GDP*

1/6/

...

2/3/

...

3/3/

...

4/7/

...

5/5/

...

6/2/

...

7/7/

...

8/4/

...

9/1/

...

10/6

...

11/3

...

12/1

...

1/5/

...

2/2/

...

3/2/

...

4/6/

...

5/4/

...

6/1/

...

7/6/

...

8/3/

...$2.00

$2.25

$2.50

$2.75

$3.00

$3.25

$3.50

$3.75

$4.00

80

Avg. Price /Gallon

The Price of Gas, Weekly, 2014-2015

Price is U.S. All Grades All Formulations Retail Gasoline Prices, through August 10, 2015Sources: Federal Energy Administration (http://www.eia.gov/petroleum/gasdiesel/ ); I.I.I.

Gas Prices Fell 34% Over the Second Half of the 2014

From July through December, gas prices

fell virtually every week

Even after the rebound, prices remain 30% below

the July 2014 peak.

Until July 2014, gas prices were persistently high

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec$2.50

$2.75

$3.00

$3.25

$3.50

$3.75

$4.00

0.0%

0.5%

1.0%

1.5%

2.0%

Monthly Avg Gas Price

Chg in 12-mo Avg. Miles Driven Vs. 2013

82

Avg. Price

Did Changes in Gas Prices Affect Miles Driven? A Closer Look at 2014

Sources: Federal Energy Administration (http://www.eia.gov/petroleum/gasdiesel/ ); *gas prices and miles driven through DecemberFederal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm ); I.I.I.

Prior research on the relationship between gas prices and miles driven says that, in the short run, an increase in gas prices produces little change

in miles driven. No recent research on the effect of price drops.

/Gallon% Chg. in

Miles Driven… Four

Months Later, Mileage Starts

to Surge.

June-July: Gas Prices Peak …

Still Lower Gas Prices Imply Surge Will Continue.

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul$2.00

$2.25

$2.50

$2.75

$3.00

$3.25

$3.50

$3.75

$4.00

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Monthly Avg Gas Price Monthly Y-o-Y Change in Miles Driven

83

Avg. Price

Do Changes in Gas Prices Affect Miles Driven? A Closer Look at 2014-15

Sources: Federal Energy Administration (http://www.eia.gov/petroleum/gasdiesel/ ); *gas prices through July 2015Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm ) miles driven through May 2015; I.I.I.

Research on the relationship between gas prices and miles driven says that, in the short run, an increase in gas prices produces little change in

miles driven. No recent research on the effect of price drops.

/Gallon% Chg. in

Miles Driven

… Four Months Later, Miles Driven Starts to Surge.

June-July 2014: Gas Prices Peak …

The Surge Continues Despite a

Modest Gas Price Rebound

85

The Future of Auto Insurance?

Some Analysts and Many in Silicon Valley Are Predicting

Doom for Auto InsurersNot So Fast!

Impact of Forward Collision Warning With and Without Auto Brake

86Source: Highway Loss Data Institute and Insurance Institute for Highway Safety presentation by Matthew Moore, Measuring Crash Avoidance System Effectiveness with Insurance Data,” January 30 2013; Insurance Information Institute.

Property Damage

Liability Claim Frequency by Manufacturer

Collision Claim

Frequency by Manufacturer

Forward collision warning systems have a material

impact on PD liability claim frequency, especially when paired with auto braking

Collision frequency

falls as well

87

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

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

sales could be fully autonomous models

Source: Boston Consulting Group; Insurance Information Institute.

Questions

Are auto insurers monitoring these trends?

How are they reacting?

Will take over the industry? (cars/sales)

Will the number of auto insurers shrink?

How will liability shift?

88

A Few Thoughts on the Future of Auto Insurance Global auto insurance premiums written total about $600B

~80% personal, 20% commercial

US accounts for more than 1/3 of this total (about $210B in 2014)

Innovations in automobile safety will, over time, reduced claim frequency but severities could still rise as repair costs escalate Claim activity clearly not immune to economy

Frequency declines could lead price declines, aiding profitability More cars, not fewer will be on highways in the US, world

Exposure (insured car years) grows even as frequency declines

Timeline for large numbers of mass produced autonomous vehicles on American highways is wildly optimistic Mid-2030s is more likely timeframe; Transition occurring through mid-century

Tech media is enamored with anything involving Google, Apple

Auto insurance will be the largest, most important of all P/C lines for many years to come

89

Cyber Threats, Motor Vehicles and Auto Insurance

Who Bears Liability for the Costs of Fixing Defects,

Resulting Damage?Auto Claims:

The Next Generation?

90

Hackers’ on the Highway: The ‘Internet of Things’ Now Includes Motor Vehicles An increasing number of passenger and commercial vehicles now

have Internet connectivity

In July 2015, researchers successfully took control of the engine and braking functions of a Jeep Cherokee

Regulators request recall

Chrysler recalls 1.4 Jeeps and similarly vulnerable vehicles Fix is software driven

In recall notice, Chrysler asserts cyber risk is not a safety defect

NHSTA disagrees with Chrysler disclaimer

Debate is ongoing

“A cybersecurity vulnerability is a safety defect in the same way an exploding airbag or malfunction ignition is a safety defect.,,,Auto makers cannot ignore their responsibility to ensure the cars they sell are safe from hacking” [Sen. Edward Markey, D-MA]

Auto manufacturers disagree…

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