economics of workers compensation...2020/10/21 · robert p. hartwig, phd, cpcu clinical associate...
Post on 26-Jan-2021
2 Views
Preview:
TRANSCRIPT
-
Pandemics, Politics and the Economics of
Workers Compensation:
Robert P. Hartwig, PhD, CPCUClinical Associate Professor of Finance, Risk Management & Insurance
Darla Moore School of Business ¨ University of South CarolinaRobert.Hartwig@moore.sc.edu ¨ 803.777.6782
October 21, 2020
mailto:Robert.Hartwig@moore.sc.edu
-
Pandemics & P/C Insurance: Outline n P/C Insurers: Overcoming Uncertainty With Strength
w Financial Overview: The Industry’s Financial Position Amid the COVID-19 Pandemic
n The Economy, Investment Markets and COVID-19: Overview & Outlook
n Workers Compensation Performance & Exposure Overview
n Federal & State COVID-19 Initiatives Impacting Commercial Insurers
n Summary and Conclusions
n Q&A
-
3
P/C Insurance Industry: Financial Overview Amid the
COVID-19 PandemicThe P/C Insurance Industry Entered the COVID-19 Pandemic from a Position of
Financial Strength
Economic, Financial Market, Regulatory and Tort Risks Are Major
Challenges Going Forward3
-
4
Policyholder Surplus (Capacity), 2006:Q4–2020:H1
Sources: ISO, A.M .Best; Risk and Uncertainty Management Center, University of South Carolina.
($ Billions)
$487.1
$496.6
$512.8
$521.8
$478.5
$455.6
$437.1
$463.0 $490.8
$511.5 $540.7
$530.5
$544.8
$559.2
$559.1
$538.6
$550.3
$567.8
$583.5
$586.9
$607.7
$614.0
$624.4 $653.4
$671.6
$673.9
$675.2
$674.2
$673.7
$676.3
$700.9
$717.0 $750.7 $781.5
$742.1 $779.5
$802.2
$812.2 $847.8
$771.9 $819.7
$662.0
$570.7
$566.5
$505.0
$515.6
$517.9
$400$450$500$550$600$650$700$750$800$850$900
06:Q4
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:Q2
15:Q4
16:Q1
16:Q4
17:Q2
17:Q4
18:Q3
18:Q4
19:Q1
19:Q2
19:Q3
19:Q4
20:Q1
20:Q2
Financial Crisis
(-16.2%)
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.
Drop due to near-record 2011 CAT losses
(-4.9%)
Policyholder Surplus is the industry’s financial cushion against large insured events, periods of economic stress and
financial market volatility. It is also a source of capital to underwrite new risks.
The P/C insurance industry entered the COVID-19 pandemic from a position strength and was
able to withstand the 9.0% surplus decline in Q1 2020
-
P/C Industry Net Income After Taxes, 1991–2020E*n 2005 ROE= 9.6%n 2006 ROE = 12.7%n 2007 ROE = 10.9%n 2008 ROE = 0.1%n 2009 ROE = 5.0%n 2010 ROE = 6.6%n 2011 ROAS1 = 3.5%n 2012 ROAS1 = 5.9%n 2013 ROAS1 = 10.2%n 2014 ROAS1 = 8.4%n 2015 ROAS = 8.4%n 2016 ROAS = 6.2%n 2017 ROAS =5.0%n 2018 ROAS = 8.0%n 2019: ROAS = 7.7%
*2020 estimate based on annualized actual 1H:20 figure of $25.0B. ROE figures are GAAP; 1Return on avg. surplus. Excludes Mortgage & Financial Guaranty insurers for years (2009-2014). Sources: A.M. Best, ISO.
$14,178
$5,840$19,316
$10,870 $20,598
$24,404 $36,819
$30,773
$21,865
$3,046
$30,029
$62,496
$3,043
$35,204
$19,456 $33,522
$63,784
$55,870
$56,826
$42,924
$36,813
$59,994
$50,000
$38,501
$20,559
$44,155
$65,777
-$6,970
$28,672
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 20E
COVID impacts will likely have a negative influence on Net Income in 2020, but too
soon to determine magnitude
$ Millions
-
ROE: Property/Casualty Insurance by Major Event, 1987–2020:H1* (est.)
6
*Excludes Mortgage & Financial Guarantee in 2008 – 2014. 2020:H1 estimate is based on actual Q1 2020 figure of 8.8%.
Sources: ISO, Fortune; USC RUM Center.
-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 15 16 17 18 19 20*
P/C Profitability Is Influenced Both by
Cyclicality and Volatility
Hugo
Andrew, Iniki
Northridge
Lowest CAT Losses in 15 Years
Sept. 11
Katrina, Rita, Wilma
4 Hurricanes
Financial Crisis* ROE fell by 8.3 pts from 12.7% to 4.4%
(Percent)
Record Tornado Losses
Sandy
Low CATs
Harvey, Irma, Maria,
CA Wildfires
2019 7.7%
2020:H1 8.8%
-
Profitability & Politics
7
How Is Profitability Affected by the President’s Political Party?
-
-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 16 18 20
BLUE = Democratic President RED = Republican PresidentTr
uman
Nix
on/F
ord
Ken
nedy
/ Jo
hnso
n
Eise
nhow
er
Car
ter Reagan/Bush I Clinton Bush II
P/C insurance Industry ROE by Presidential Party Affiliation, 1950- 2020*
*2020 figure is for Q1 only. ROEs for the years 2008-2014 exclude mortgage and financial guaranty segments.Source: Risk and Uncertainty Management Center, University of South Carolina.
Obama
Trum
p
-
15.10%8.93%
8.65%8.35%8.33%
8.20%7.98%
7.68%6.98%6.97%6.90%
5.43%5.03%
4.83%4.68%
4.43%3.55%
16.43%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
CarterReagan II
NixonClinton I
G.H.W. BushG.W. Bush II
Obama IIClinton IIReagan I
Nixon/FordTruman
TrumpEisenhower IEisenhower II
G.W. Bush IObama I
JohnsonKennedy/Johnson
OVERALL RECORD: 1950-2019*
Democrats 8.1%Republicans 7.8%
Party of President has marginal bearing on profitability of P/C insurance industry
P/C Insurance Industry ROE by Presidential Administration, 1950-2019*
*Trump figure is 2017-2019 average. ROEs for the years 2008-2014 exclude mortgage and financial guaranty segments.Source: Risk and Uncertainty Management Center, University of South Carolina.
-
Net Premium Growth (All P/C Lines): Annual Change, 1971—2020:H1
-5%
0%
5%
10%
15%
20%
25%71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
(Percent)1975-78 1984-87 2000-03
*Pre-COVID-19 forecast from A.M. Best Review & Preview (Feb. 2020). NOTE: Shaded areas denote “hard market” periodsSources: A.M. Best (1971-2013, 2020F), ISO (2014-19); Risk & Uncertainty Management Center, Univ. of South Carolina .
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.
2020F: 3.8%*2020:H1: 2.9%
2019: 3.6%2018: 10.8%2017: 4.6%2016: 2.7%2015: 3.5%2014: 4.2
2013: 4.4%2012: +4.2%
2020 OutlookPre-COVID: 3.8%Through H1: 2.9%
-
Potential Impacts of COVID-19 on Written Premium in 2020, by Key LineLine Estimated Premium ImpactWorkers Compensation 12.5% to 25% reduction in premium written in 2020
(equates to $5.9B to $11.75B DWP)Business Interruption & Contingency
7% to 13% reduction in premium volume (US & UK)
General Liability* $1.5B to $6.3B premium reduction in USPersonal Auto ~$10B in refunds, rebates
(equates to ~4% of DWP)Personal Travel Insurance 29% to 78% reduction in premium written (US & UK)Personal/Comm. Motor ~10% reduction in US; 0% to 11% reduction in UKMarine/Aviation/Transport $0.7B-$1.5B (US); $0.6 - $1.2B (UK)
11
*Includes nursing home professional liability.Source: Derived from Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic (Fig.11, 14), May 2020. and other sources; Risk and Uncertainty Management Center, University of South Carolina.
-
Potential Impacts of COVID-19 on LOSSES in 2020, by Key LineLine Estimated Loss ImpactWorkers Compensation $0.2B - $92B (depends on severity of pandemic
and “presumption” determination)Business Interruption & Contingency
$2B - $22B (US); $1.1B - $13.9B (UK)
General Liability* $0.7B to $27B loss across US & Bermuda marketsPersonal/Comm. Motor $26B - $57B reduction in personal auto and $4.2B
- $9.4B commercial (US); $1 - $7B overall reduction in UK
Mortgage $0 - $1.7B loss across US & Bermuda marketsD&O $0.6 - $4.0 loss across US & Bermuda marketsMarine/Aviation/Transport $0.3B-$1.3B reduction (US); $0.6 - $1.1B (UK)
12
*Includes nursing home professional liability.Source: Derived from Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic (Fig.11, 14), May 2020. and other sources; Risk and Uncertainty Management Center, University of South Carolina.
-
P/C Insurance Industry Combined Ratio, 2001–2020:H1*
*Excludes Mortgage & Financial Guaranty insurers 2008--2014.*First Half 2020.Sources: A.M. Best, ISO (2014-2019).
95.7
99.3101.1
106.5
102.5
96.4 97.097.8
100.799.298.9
103.7
99.2101.0
92.6
100.898.4
100.1
107.5
115.8
90
100
110
120
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20**
As Recently as 2001, Insurers Paid Out
Nearly $1.16 for Every $1 in Earned Premiums Relatively
Low CAT Losses, Reserve Releases
Heavy Use of Reinsurance Lowered Net
Losses
Relatively Low CAT Losses, Reserve Releases
Higher CAT
Losses, Shrinking Reserve
Releases, Toll of Soft
Market
Sandy Impacts
Lower CAT
Losses
Best Combined Ratio Since 1949 (87.6)
Avg. CAT Losses,
More Reserve Releases
Cyclical Deterioration
Sharply higher CATs are driving
large underwriting losses and
pricing pressure
Pre-COVID 2020 Combined Ratio Est.
99.1 (A.M. Best)
COVID-19 has had no
discernable net impact on
pre-COVID expectations for under the
combined ratio though
Q2 2020
-
COVID-19 Announced Losses vs. Top-Down Industry Estimates (as of May 12, 2020)
*Lloyd’s CEO John Neil appearance on CNBC, May 14, 2020: https://www.cnbc.com/2020/05/14/lloyds-of-london-coronavirus-will-be-largest-loss-on-record-for-insurers.htmlSources: Company disclosures, Dowling & Partners, Barclays Research, Autonomous Research, BofA Global Research, UBS Securities, Willis Towers Watson from Artemis.bm accessed at https://www.artemis.bm/news/consensus-emerging-on-30bn-to-100bn-covid-19-industry-loss-willis-re/; Risk and Uncertainty Management Center, University of South Carolina.
Global P/C COVID-19 loss consensus $30B - $100B
(~$60B as midpoint)
UBS
30-60bn
Q1 reported COVID claims totaled $4.2B according to Willis, but Q2 will be a truer
reflection of actual loss
Lloyd’s: Says its own p/c claims could reach $4.3B by June 30. Estimates global p/c losses at $107B; Global investment losses = $96B*
https://www.cnbc.com/2020/05/14/lloyds-of-london-coronavirus-will-be-largest-loss-on-record-for-insurers.htmlhttps://www.artemis.bm/news/consensus-emerging-on-30bn-to-100bn-covid-19-industry-loss-willis-re/
-
Potential Impact of COVID-19 on Insured Losses by Line
Source: Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic (Fig.10), May 2020; Risk and Uncertainty Management Center, University of South Carolina.
Loss impacts of COVID-19 on the WC line are potentially severe but
depend not only on the course of the disease but state decisions on
presumption
Business Interruption losses
are potentially material even under
the moderate severity scenario
-
Viral Outbreaks Are Not An Insurable Risk
16*Sources: APCIA using published reports, including IMF, World Bank, Learnbonds.com; APCIA adjustment to 2020 USD
For Reference
2005 Katrina$58 Billion
2001 9/11$48 Billion
(insured losses)
Pandemics are frequent, severe, and widespread
(7 pandemics with multi-
billion$ economic
losses in just the last 18
years)
Economic Losses from Pandemics
-
Estimated Monthly U.S. Business Interruption Coronavirus Losses for Small Business—Potential Range (
-
June Paper on Insurability of Pandemic Risk
n Large scale business continuity risks from pandemics are generally note insurable in the private sector
n Business continuity risks are largely undiversifiable within private insurance markets and are highly correlated with other risks (e.g., investment risks)
n Large scale business continuity losses pose a potentially systemic risk to the industry and overall economy
n Import role for government Download at: https://www.uscriskcenter.com/wp-content/uploads/2020/05/Uninsurability-of-Pandemic-Risk-White-Paper-Hartwig-APCIA-FINAL-WORD.pdf
https://www.uscriskcenter.com/wp-content/uploads/2020/05/Uninsurability-of-Pandemic-Risk-White-Paper-Hartwig-APCIA-FINAL-WORD.pdf
-
INVESTMENTS: THE NEW REALITY
Investment Performance Is a Key Driver of Insurer Profitability
Aggressive Rate Cuts Will Adversely Impact Invest Earnings
Financial Crisis Déjà Vu?
-
Property/Casualty Insurance Industry Investment Income: 2000–2020E
$38.9$37.1$36.7
$38.7
$54.6
$51.2
$47.1$47.6$49.2$48.0$47.3$46.4$47.2$46.6
$48.9
$59.6$61.4
$52.8
$39.6
$49.5$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18* 19 20
Due to persistently low interest rates, investment income remained below pre-crisis levels for a decade. Lower interest rates post-COVID will drive investment income down once again.
*2020 figure is annualized based on H1 actual of $26.4B. 2018-19 figures are distorted by provisions of the TCJA of 2017. Increase reflects such items as dividends from foreign subsidiaries.
1 Investment gains consist primarily of interest and stock dividends. Sources: ISO; University of South Carolina, Center for Risk and Uncertainty Management.
($ Billions)
Investment income had just recovered from a decade-long slump. Aggressive Fed
actions and recession are pushing interest rates lower and will adversely impact investment income for years to come.
-
Net Investment Yield on Property/Casualty Insurance Invested Assets, 2007–2020F*
4.4
4.0
4.6 4.5
3.7 3.8 3.73.4
3.7
3.2 3.1 3.13.4
3.1 3.0
4.6
4.23.9
2.5
3.0
3.5
4.0
4.5
5.0
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20F
The yield on invested assets remains low relative to pre-crisis yields. Fed rate increases beginning in late 2015 through 2018 halted the slide in yields, but rate cuts in
2019/2020 will preclude future gainsSources: NAIC data, sourced from S&P Global Market Intelligence; 2017-19 figures are from ISO. 2020F is from the Risk and Uncertainty Management Center, Univ. of South Carolina.
(Percent) Investment yields remained depressed--down about 150 BP from pre-crisis
levels. COVID-19 Fed rate cuts, bond purchases will push asset yield down
Average: 1960-2019 = 4.9%Low: 2.8% (1961)
High: 8.2% (1984/85)
-
US Treasury Security Yields:A Long Downward Trend, 1990–2020*
*Monthly, constant maturity, nominal rates, through Sept. 2020. Sept. 2020 figure is as of 9/13/20.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Risk and Uncertainty Management Center, University of South Carolina.
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
'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
Recession2-Yr Yield10-Yr Yield
Yields on 10-Year US Treasury Notes have been essentially
below 5% for more than a decade
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for many years to come.
Fed emergency rate cuts and QE in response to the COVID-19 pandemic and
market volatility have pushed rates to their levels
below those in the financial crisis
10-YR. TREASURYJan. 2020: 1.76%
Sept. 2020: 0.69%*
http://www.federalreserve.gov/releases/h15/data.htm
-
THE ECONOMY
COVID-19 Pandemic Will Directly and Severely Impact Growth As Exposure Growth Rapidly Shrinks
The Strength of the Economy Has Always Influenced Growth in Insurers’ Exposure Base Across Most Lines
The Links Between the Economy and the P/C Insurance Industry Are Strengthening
-
US Real GDP Growth*
* Estimates/Forecasts from Wells Fargo Securities.Source: US Department of Commerce, Wells Fargo Securities 10/20; Center for Risk and Uncertainty Management, University of South Carolina.
2.7%
1.8%
-1.3%
-2.8%
2.5%
2.2% 2.7% 4.5%
0.8% 1.4% 3.5%
2.1%
1.2% 3.1% 3.2%
2.9%
2.5% 3.5%
2.9%
1.1% 3.1%
2.0%
2.1%
-5.0%
28.6%
6.1%
5.2%
3.9%
2.9%
2.3%
-31.4%
3.1%3.6%
2.5%
1.8%
1.1%4.1%
1.8% 2.1%
1.6%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
2008
2009
2010
2011
2012
2013
2014
2015
16:1
Q16
:2Q
16:3
Q16
:4Q
17:1
Q17
:2Q
17:3
Q17
:4Q
18:1
Q18
:2Q
18:3
Q18
:4Q
19:1
Q19
:2Q
19:3
Q19
:4Q
20:1
Q20
:2Q
20:3
Q20
:4Q
21:1
Q21
:2Q
21:3
Q21
:4Q
Demand for Insurance Will Be Severely Impacted As the Economy Slows but Is Expected to Improve by Late Q3 and into Q4
Real GDP Growth (%)
“Great Recession”
began in Dec. 2007
Financial Crisis
Economic recovery from COVID is strong, but
economic losses likely not recovered before late 2021.
COVID CRASHQ2 2020
plunged by 31.4%
-
The Economy Drives P/C Insurance Industry Premiums:2006:Q1–2020:Q2*
Direct Premium Growth (All P/C Lines) vs. Nominal GDP: Quarterly Y-o-Y Pct. Change
Sources: SNL Financial; U.S. Commerce Dept., Bureau of Economic Analysis; ISO; I.I.I.; Risk and Uncertainty Management Center, University of South Carolina.
-6%
-4%
-2%
0%
2%
4%
6%
8%
2008:Q1
2008:Q3
2009:Q1
2009:Q3
2010:Q1
2010:Q3
2011:Q1
2011:Q3
2012:Q1
2012:Q3
2013:Q1
2013:Q3
2014:Q1
2014:Q3
2015:Q1
2015:Q3
2016:Q1
2016:Q3
2017:Q1
2017:Q3
2018:Q1
2018:Q3
2019:Q1
2019:Q3
2020:Q1
DWP y-o-y change y-o-y nominal GDP growth
Negative GDP growth in the first half of 2020, will cause DWP to decelerate sharply but with a lag and likely turn
negative in some lines. Rebates, discounts and rate decreases will amplify the deceleration.
Direct written premiums track nominal GDP fairly tightly over time, suggesting the P/C insurance industry’s growth prospects inextricably linked to economic performance.
-
Unemployment Rate: Jan. 2019 – Sept. 2020
Source: US Bureau of Labor Statistics; Risk and Uncertainty Management Center, University of South Carolina.
Unemployment Rate
3.7%3.7%3.5%3.6%3.5%3.5%3.6%3.5%4.4%
14.7%13.3%
11.1%10.2%
8.4%7.9%
3.7%3.6%3.6%3.8%3.8%4.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Jan-19
Feb-19
Mar-19
Apr-19
May-19
Jun-19
Jul-19
Aug-19
Sep-19
Oct-19
Nov-19
Dec-19
Jan-20
Feb-20
Mar-20
Apr-20
May-20
Jun-20
Jul-20
Aug-20
Sep-20
COVID-19 shutdowns pushed the unemployment rate up to a shocking 14.7% in April before
improving beginning in May
11.4M jobs were created from May through Sept. (after a loss of 22.2M in March/April)
helping bring down the unemployment rate to 7.9% from its April peak of 14.7%. So far,
~50% of jobs lost have been recovered.
South Carolina:Feb. 2020: 2.5%
Peak: 12.8% (Apr.)Aug. 2020: 6.3%
-
US Unemployment Rate Forecast: 2007:Q1–2021:Q4
4.5%
4.5%
4.6% 4.8%
4.9% 5.4%6.1%6.9%
8.1%
9.3% 9.6% 10.0%
9.7%
9.6%
9.6%
8.9% 9.1%
9.1%
8.7%
8.3%
8.2%
8.0%
7.8%
7.7%
7.6%
7.3%
7.0%
6.6%
6.2%
6.1%
5.7%
5.6%
5.4%
5.2%
5.0%
4.9%
4.9%
4.9%
4.7%
4.7%
4.4%
4.3%
4.1%
4.1%
3.9%
3.8%
3.8%
3.9%
3.6%
3.6%
3.5% 3.8%
13.0%
8.8%
7.6%
7.1%
6.8%
6.3%
5.9%
9.6%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%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
17:Q1
17:Q2
17:Q3
17:Q4
18:Q1
18:Q2
18:Q3
18:Q4
19:Q1
19:Q2
19:Q3
19:Q4
20:Q1
20:Q2
20:Q3
20:Q4
21:Q1
21:Q2
21:Q3
21:Q4
Great RecessionRising unemployment eroded payrolls and
WC’s exposure base.Unemployment peaked at 10% in late 2009.
= actual; = forecastsSources: US Bureau of Labor Statistics; Wells Fargo Securities (10/20 edition); Risk and Uncertainty Management Center, University of South Carolina.
The unemployment rate peaked at 14.7% in April
(13.0% Q2 avg.)
At 3.5%, the unemployment rate in Feb. 2020 WASat its lowest point
in 50 years.
-
Government Mandated Business Closures Were the Real Black Swan, Not the Coronavirus
Sources: CDC; Risk and Uncertainty Management Center, University of South Carolina
• The US (and world) has endured several other major infectious disease outbreaks killing 100,000+ Americans without shutting down the economy• Hong Kong Flu (1968-70)• Asian Flu (1957-58)
• It is the reaction to the virus that is unprecedented and represents the true Black Swan event
• The ramifications of this decision will be consequential for a generation (e.g., $3 trill. in debt)
-
ADDITIONAL LABOR MARKET IMPACTS
Key Factors Driving Workers Compensation Exposure
-
30
Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2020:Q2
Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates).
Billions
$5,500$5,750$6,000$6,250$6,500$6,750$7,000$7,250$7,500$7,750$8,000$8,250$8,500$8,750$9,000$9,250$9,500$9,750
05:Q1
05:Q2
05:Q3
05:Q4
06:Q1
06:Q2
06:Q3
06:Q4
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
17:Q1
17:Q2
17:Q3
17:Q4
18:Q1
18:Q2
18:Q3
18:Q4
19:Q1
19:Q2
19:Q3
19:Q4
20:Q1
20:Q2
Prior Peak was 2008:Q3
at $6.54 trillion
Financial crisis trough (2009:Q1) was $6.23 trillion, down 5.3% from
prior peak Growth rates 2019: 4.9% 2018: 4.6% 2017: 4.5%2016: 3.4%2015: 3.2%2014: 4.9% 2013: 5.2%2012: 2.3% 2011: 3.9% 2010: 5.5%
30
Latest (2020:Q2) was $8.84 trillion—a $682 billion (7.2%) plunge
from its Q1 pre-COVID peak
http://research.stlouisfed.org/fred2/series/WASCUR
-
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
$10,000
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20*$25
$30
$35
$40
$45
$50Wage & Salary DisbursementsWC NPW
31
Payroll Base* WC NWP
Payroll vs. Workers Comp Net Written Premiums, 1990-2020*
*Private employment as of Aug. 2020; Shaded areas indicate recessions. WC premiums are from NCCI through 2018.Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR.
Continued payroll growth will benefit WC exposure growth, but falling rates will adversely impact growth in Net Written Premiums
7/90-3/91 3/01-11/01 12/07-6/09
$Billions $Billions
WC premium volume dropped two
years before the recession began
WC net premiums written were down $14B or 29.3%
to $33.8B in 2010 after peaking at $47.8B in 2005
Recent divergence in
NWP and payroll exposure is the
result of WC rate decreases.
Payrolls and WC NWP will both
post sharp declines in 2020
Payrolls in 2020 YTD show zero growth vs.
+4.7% ($415.1B) in
2019 vs. 2018
http://research.stlouisfed.org/fred2/series/WASCUR
-
Average Weekly Hours of All Private Workers, March 2006—Sept. 2020*
*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.
33.533.633.733.833.934.034.134.234.334.434.534.634.734.8
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
Hours worked bottomed out at 34.1 per week in March 2020, but have
since recovered stronger than expected
Hours worked plunged
during the recession, impacting
payroll exposures
(Hours Worked)
http://www.bls.gov/data/
-
Average Hourly Wage of All Private Workers, March 2006—Sept. 2020*
*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates);
$15
$17
$19
$21
$23
$25
$27
$29
$31
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
The average hourly wage was $29.47 in March 2020,
up 3.3% from $28.52 in February, before COVID-19
lockdowns
Wage gains continued during the
recession, despite massive job losses
(Hourly Wage)
Ironically, COVID-19 has actually driven up the average hourly wage up because the
majority of early jobs losses were and remain in the low wage service sector
Sept. 2020$29.47
Dec. 2007$21.22
http://www.bls.gov/data/
-
Annual Change in Average Hourly Wage, 2007–2020*
3.0% 3.1% 2.8%
1.9% 2.1%2.3%
2.6% 2.5%3.0% 3.1%
4.7%
2.1%1.9%2.0%
0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%
07 08 09 10 11 12 13 14 15 16 17 18 19 20*
Acceleration of wage growth in 2020 reflects disproportionate loss of low
wage jobs and continued gains among higher-wage earners
*2020 figure year-over-year increase for Sept. 2020 vs Sept. 2019.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates); Risk and Uncertainty Management Center, Univ. of South Carolina.
Wage growth acceleration obscures the massive loss
in payroll exposures
Wage growth fell sharply during the Great Recession
http://www.bls.gov/data/
-
35
Notes: Recessions indicated by gray shaded columns. Data are not seasonally adjusted.Sources: Bureau of Labor Statistics http://www.bls.gov/news.release/empsit.a.htm ; NBER (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.
0100200300400500600700800900
1,0001,1001,2001,3001,400
'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
Diminishing federal aid for worker could increase the number of discouraged workers as they conclude no positions are available
There were 581,000 discouraged workers in Sept. 2020, down 15% from the COVID
peak in July of 681,000, but up 101%
from the Dec. 2019 trough of 289,000
Thousands
“Discouraged Workers” are people who have searched for work for so long in vain
that they actually stop searching and drop out of
the labor force
Number of “Discouraged Workers,”: Jan. 1994—Sept. 2020
More than 1.3 million people exited the labor force during
the Great Recession and were slow to return
http://www.bls.gov/news.release/empsit.a.htm
-
Labor Force Participation Rate,Jan. 2002—Sept. 2020*
*Defined as the percentage of working age persons in the population who are employed or actively seeking work.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.
60
61
62
63
64
65
66
67
68
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
Large numbers of people exited during
the recession—a trend that continued for years afterward
Even pre-COVID, labor force participation rates were
stubbornly low—far below pre-Great Recession levels
and one of the country’s most vexing labor market
problems. COVID-19 layoffs have intensified this problem
Labor Force Participation as a % of Population
April 2020 rate fell to 60.2%, its
lowest level since 1971
Sept. 202061.4%
http://www.bls.gov/data/
-
You’re (NOT) Hired!Number of Hires, Jan. 2003—Aug. 2020*
2,000
3,000
4,000
5,000
6,000
7,000
8,000
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
Hirings plunged to 3.6 million
during the recession, down
30%, from 5.5 mill in 2006
COVID-19 caused a catastrophic 31.7% plunge in hiring, resulting in 1.9 million fewer hires in April 2020 compared to January. Hiring has bounced back, but only about half
of the 22M jobs lost in March and April have been regained
(000)
-30%
*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics JOLTS survey: at http://www.bls.gov/jlt/; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.
-32%+63%
http://www.bls.gov/jlt/
-
Number of Unemployed Persons per Job Opening, Feb. 2003—Aug. 2020* (Most Recent Available)
*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics JOLTS survey: at http://www.bls.gov/jlt/; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.
0
1
2
3
4
5
6
7
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
At the height of the Great
Recession, there were nearly 7 job seekers for every
one opening
In Feb. 2020, there were just 0.8 job seekers for every one opening. By
April there 4.6 jobs seekers per available
position.
Unemployed Persons per Job Opening
Aug. 2020 = 2.1
http://www.bls.gov/jlt/
-
39
Commercial Lines Growth, Underwriting Performance
& Pricing Cyclicality
Pricing Pressures Are Intensifying
39
-
CIAB: Average Commercial Rate Change, All Lines, 2011:Q1–2020:Q2*
-0.1% 0.9% 2.7% 4.4%
4.3%
3.9% 5.0%
5.2%
4.3%
3.4%
2.1%
1.5%
-0.5%
0.1%
-0.7%
-2.3%
-3.3%
-3.1%
-2.8%
-3.7%
-3.9% -3.2%
-3.3% -2.5%
-2.8% -1.3%
0.3% 1.7% 2.4% 3.5% 5.2% 6.2% 7.5% 9.3% 10.8%
-2.9%
1.6%
1.5%
-16%
-11%
-6%
-1%
4%
9%
14%
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
3Q19
4Q19
1Q20
2Q20
*Latest available.Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.Source: Council of Insurance Agents & Brokers; Center for Risk and Uncertainty Management, Univ. of South Carolina.
Largest increase since 2003 for some accounts
(Percent)
Renewals turned positive in late 2011
in the wake of record tornado
losses and Hurricane Sandy
High CAT losses and poor underwriting results in recent years combined with COVID pressures, reduced capacity,
lower interest rates and increased uncertainty are exerting significant pressure on markets with overall
rates up by +9.3% as of Q1 2020
-
Change in Commercial Rate Renewals, by Line: 2020:Q2
Source: Council of Insurance Agents and Brokers; USC Center for Risk and Uncertainty Management.
Percentage Change (%)
3.5%6.5% 6.8% 6.8%
9.4% 9.6% 9.7%
13.3%
16.8%20.0%
0.7% 1.4% 1.6%2.3% 3.1% 3.4%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Wor
kers
Com
p
Terro
ris,
Sur
ety
Bro
ker E
&O
Floo
d
Mar
ine
Bro
ker E
&O
Cyb
er
Gen
eral
Liab
ility
Con
stru
ctio
n
EP
L
Com
mer
cial
Aut
o
Bus
ines
sIn
terru
ptio
n
Com
mer
cial
Pro
perty D&
O
Um
brel
la
All major commercial lines experienced
increases in Q2 2020
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Umbrella now leads all major commercial lines in terms of rate gains,
exceeding D&O and CP
-
42
Workers Compensation Performance Overview
COVID-19 Will Radically Change the WC Line’s Financials in 2020
42
-
Workers Compensation Combined Ratio: 1994–2019P
102.0
97.0 100.0
101.0
112.6
108.6
105.1
102.7
98.5 103.5
104.5 110.6 115.0
115.0
109.0
102.0
100.0
94.0
94.0
89.0
83.2 85.0
121.7
107.0115.3
118.2
80859095100105110115120125130
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 19p
Workers Comp Is an Example of a Line that Was Recently Restored to Health Through the Return of Rate Adequacy as
Well as Declining Claim FrequencySources: A.M. Best (1994-2009); NCCI (2010-2019P) and are for private carriers only.. 43
WC results have improved markedly since
2011. The 2018/2019 combined ratios were the best in at least 80 years
-
WC Net Combined Ratio: Calendar vs. Accident Year
* AY data reported as of 12/31/19.2020. Includes policyholder dividends.Source: NCCI from NAIC Annual Statement data; USC Center for Risk and Uncertainty Management.
Combined Ratio
95
99
8385
75
80
85
90
95
100
105
2018 2019p
Calendar Year Accident Year
WC AY results suggest CY figures
benefit from material ongoing reserve
releases
-
Workers Compensation Premium: Down in 2017 After 6 Years of IncreaseNet Written Premium
31.0
31.3
29.8
30.5
29.1
26.3
25.2
24.2
23.3
22.3 25.0
26.1 29.2 31.1 34.7 37.8
38.6
37.6
33.8
30.3
29.9 32.3 35.1 36.9 38.5
39.7
40.1
39.8 43.3
42.0
35.3
35.7
34.3 35.4
33.6
30.1
28.5
26.9
25.9
25.0 2
8.6 3
2.1
37.7
42.3
46.5
47.8
46.5
44.3
39.3
34.6
33.8 3
6.4 39
.5 41.8 44
.2 45.5
45.6
45.0 48.6
47.0
0
10
20
30
40
50
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 19p
State Funds ($ B)Private Carriers ($ B)
Pvt. Carrier NWP growth was -3.0% in 2019 vs. -5.7% for state funds
$ Billions
Calendar Yearp Preliminary
Source: NCCI from Annual Statement Data.Includes state insurance fund data for the following states: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT.Each calendar year total for State Funds includes all funds operating as a state fund that year.
-
WC Direct Written Premium, 2019Private Carriers
46
Source: NCCI from 2018 and 2019 NAIC Annual Statement Statutory Page 14.; Risk and Uncertainty Management Center, University of South Carolina.
Overall Change-2.6%
-
WC Direct Written Premium Change by Component: 2018 vs. 2019
47Source: DWP Change: NAIC Annual Statement Statutory Page 14 for all NCCI states. Components: NCCI Policy data.; USC Center for Risk and Uncertainty Management.
Percentage Change
5.5%
-9.3%
-0.1%
3.3%
-1.3%
-12.0%-10.0%
-8.0%-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%
Payroll Loss Cost andMix
CarrierDiscounting
Other Factors Change inDWP
Payroll will drive the vast
majority of premium loss
in 2020, partially offset by
small loss cost impacts
-
Workers Compensation Lost-Time Claim Frequency Declined Again in 2019
48
0.3
-6.5
-4.5
0.5
-3.9-2.3
-4.5
-6.9
-4.5 -4.1-3.7
-6.6
-4.5
-2.2
-4.3 -4.9
10.6
-3.9
-5.8
-4.0-3
-5.1-6.2
-4.8
-1.4
-4.0
3.6
-0.9
-10-8-6-4-202468
1012
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
IndicatedAdjusted*
Percent
Accident Year*Adjustments primarily due to significant audit activity.2019p: Preliminary based on data valued as of 12/31/2019.Source: NCCI Financial Call data, developed to ultimate and adjusted to current wage an voluntary loss cost level; Excludes high deductible policies; 1994-2018: Based on data through 12/31/18. Data for all states where NCCI provides ratemaking services; Excludes WV prior to 2012, TX prior to 2007 and NV prior to 2002.Frequency is the number of lost-time claims per $1M pure premium at current wage and voluntary loss cost level
Average Annual Change = –3.6%(1994–2019p)
-
$9.8$9.5$9.2$9.7$9.7$10.3$11.5$12.5$13.6$14.9$16.4$16.9$17.5
$22.1$22.2
$21.8$21.6
$22.6$22.8$22.9$23.9$24.3$25.3$22.3$18.1
$17.6
$19.1$20.8
$21.6
-0.9%
-2.7%
+0.5%
+8.3%
+0.9%
+5.5%
+2.8%
+0.6%
+3.6%
+3.0%
+10.1%
+9.6%
+8.8%
+8.7%
+11.7%
+5.9%
+1.7%
+4.9%
-2.8%
-3.1%
+1.0%
+6.8%
5
7
9
11
13
15
17
19
21
23
25
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19p
IndemnityClaim Cost ($ 000s)
Accident Year
Workers Comp Indemnity Claim Costs: Sharper Increase in 2019
Average indemnity costs per claim were up 4% in
2019 to $25,300
Average Indemnity Cost per Lost-Time Claim
+3.0
%
+4.4
%
Cumulative Change = 158% (1991-2019p)
2019p: Preliminary based on data valued as of 12/31/2019.1991-2018: Based on data through 12/31/2018, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.
+0.4
%
+1.3
%
+3.2
% +3.
4%
+4.0
%
-
$8.1$8.2$8.1$8.8$8.9$9.6$10.9$11.8$13.0$13.9$15.7$17.0$18.3
$24.2$25.2
$25.8$26.0
$27.4$27.2$27.6$28.7$28.6$29.5
$26.5
$20.5$19.2
$21.7$22.9
$25.2
0.04
0.04
+3.7
+1.9
+0.8%
-0.2%
+4.2%
+5.6% +2.4%
+5.5%
+7.0%
+4.7%
+8.1%
+7.9%
+13.6%
+6.7%
+10.2%
+8.3%
+10.1%
+7.4%
+5.1%
+9.0%
+2.1%
+1.3%
+6.8%
+5.8%
0
5
10
15
20
25
30
35
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19p
MedicalClaim Cost ($ 000s)
Accident Year
Workers Comp Medical Claim Costs: Pace of Increase Decelerated in 2019
Average indemnity costs per claim were up 3.0% in 2019 to $29.500, following a modest
2.5% increase in 2018
Average Medical Cost per Lost-Time Claim
+2.5
%
+4.0
%
Cumulative Change = 264%(1991-2019p)
2019p: Preliminary based on data valued as of 12/31/2019.1991-2018: Based on data through 12/31/2018, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.
-1.0
%
+1.5
% +3.0
%
-
51
Federal and State COVID-19 Initiatives Impacting Commercial Insurers
-
P/C Insurance Coverage & COVID-19
n Insurers have received tens of thousands of claims related to COVID-19 lossesw Workers comp Event Cancellation Trade Credit
w Business Interruption Travel Insurance Mortgage
w GL D&O EPL
n Crises tend to precipitate efforts to stretch contract language in an effort to:w Find coverage where none existsw Find coverage where none was intended
w Find coverage for which no premium was paid
n Politicians frequently pile on: Zero political risk
-
Update on Business Continuity Disputes
n Large number of BI suits have been filed against insurersw Most are still making their way through the court system…BUT
n Since mid-2020 numerous courts have made decisions favoring insurers across a growing number of industries (not just restaurants)
n Courts have generally found that:w Virus exclusions found in many policies are unambiguous and are binding
w That BI coverage is necessarily triggered only when there is actual physical loss or damage to property
w Government mandated closures alone are insufficient to trigger BI coverage
-
Workers Compensation
54 54
Some Pressure Points
Payroll Exposure Is Contracting RapidlyCOVID-19: Efforts to Expand
Presumption Continue
-
Workers Compensation & COVID-19
n Workers compensation written for COVID-19 exposed risks (e.g., hospitals, first responders, etc.) will likely see a spike in both severity and frequency
n Some states will require costs associated with precautionary quarantines of COVID-19 exposed workers
n Impact arising from “Essential Industries” unclear (e.g., grocery stores)
n Outside COVID-19 exposed segments—Large, Swift Drop in Payroll Exposurew Drop in WC payroll exposure base could be the fastest and largest in history
w Wage growth, which had been making gains, will also slow
w Overall likely net reduction in claim frequency
-
Workers Compensation & COVID-19
n At least 35 states have expanded or proposed expanding WC presumptions for COVID-19—including SC. Most restrict the assumption to “front-line” workers (e.g., health, 1st responders)
n Examples of presumption expansion beyond “front-line” workers: KY and ILw On April 10, KY extended WC presumption to day care, grocery store and postal
worker
w June 5, IL Gov. Pritzker signed HB 2455 for extended to a very large number of occupations, including:
w Individuals employed by grocery stores, pharmacies, convenience stores, food banks, media outlets, gas stations, banks, hardware stores, educational institutions, transportation providers, manufacturing facilities and restaurants, as long as individuals employed by essential businesses and operations are required by their employment to encounter members of the general public or to work in employment locations of more than 15 employees.
-
57
SUMMARYnThe P/C Insurance Industry Remains Strong, Stable, Sound
and Secure
nWC Has Avoided the Worst-Case COVID Scenario
nThe Rapid Economic Slowdown Will Temper P/C Growth, Especially in Economically Sensitive Lines (esp. WC)
nAsset Price Volatility Will Persist and Low Interest Rates Will Pressure Investment Earnings for Years
nCOVID-19 Exposures Are Substantial but Manageable with Headline Risk on BI and WC Issues
-
Thank you for your timeand your attention!
Twitter: twitter.com/bob_hartwigFor a copy of this presentation, email
me at robert.hartwig@moore.sc.edu or Download at www.uscriskcenter.com
58
mailto:robert.hartwig@moore.sc.eduhttp://www.uscriskcenter.com/
top related