the state of the p/c insurance industry: emerging from the ......2021/02/09 · 2011 cat losses...
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The State of the P/C Insurance Industry:
Emerging from the COVID Era
Robert P. Hartwig, PhD, CPCUClinical Associate Professor of Finance, Risk Management & Insurance
Darla Moore School of Business ¨ University of South [email protected] ¨ 803.777.6782
Verisk Elevate ConferenceFebruary 9, 2021
Pandemics & P/C Insurance: Outline n P/C Financial Overview & Outlook Amid the COVID-19 Pandemic
n COVID-19: Actual vs. Expected Impacts on Key Lines
n Investment Market Issues: Volatility Rules, Low Interest Rates are Back
n The Economy and COVID-19: Overview & Outlook
n CAT Loss Update
n Commercial Lines Rate Trends & Reinsurance Market Developments
n COVID-19 Litigation Trends
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:Q3
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 $865.1
$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
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 (far less than during the Financial Crisis). 2020 ended with record surplus.
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%n 2020: ROAS = 4.1%**
*2020 estimate based on annualized actual Q3:20 figure of $35.5B. ROE figures are GAAP; 1Return on avg. surplus. Excludes Mortgage & Financial Guaranty insurers for years (2009-2014).**Through Q3 2020. 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 $3
3,522
$63,784
$55,870
$56,826
$42,924
$36,813
$59,994
$47,333
$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’s impact on net income is more modest than assumed
early in the pandemic. 21% drop based on annualized Q3 data
$ Millions
ROE: Property/Casualty Insurance by Major Event, 1987–2020:Q3*
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:Q3 4.1%
Covid-19
Percentage Point Change in P/C ROEs During Past Economic Downturns: 1971 - Present
7Source: USC Center for Risk and Uncertainty Management.
Percentage Point Change
0.8%
-8.3%-7.1% -7.0%
-3.6%-3.0%
-2.4%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
2007-08 2000-01* 1973-75 2019-20** 1981-82 1979-80 1990-91*2000-2001 decline impacted by 9/11 losses.**As of Q3 2020 vs. annualized Q3 2019 figure
Change in P/C ROE During Past Economic Downturns (pre-Covid)
Avg.: -4.5% (-4.0% ex. 2000-01)Median: -5.0% (-3.0% ex. 2000-01)
COVID-19’s economic and financial market impact
helped drive down industry ROEs but well within the
range of expectation based on history
-5%
0%
5%
10%
15%
20%
25%
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
P/C Insurance ROE vs. Fortune 500, 1975–2020E*
*2020 Fortune 500 figure is an estimate. P/C figure is actual through Q3 2020.Profitability = P/C insurer ROEs. 2011-20 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.Source: NAIC, ISO, Fortune.
1977:19.0% 1987:17.3%
1997:11.6% 2006:12.7%
1984: 1.8% 1992: 4.5% 2001: -1.2%
ROE
1975: 2.4%
2013 9.8%
2017 5.0%
2020E 4.1%
Average: 1975-2019 Fortune 500: 13.3%P/C Insurance: 9.0%
2020E* 13.0%
Profitability & Politics
9
How Is Profitability Affected by the President’s Political Party?
15.10%8.93%
8.65%8.35%8.33%
8.20%7.98%
7.68%6.98%6.97%
6.25%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: 1950-2020*
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, 1950-2020*
*Trump figure is 2017-2020:Q3 average. ROEs for the years 2008-2014 exclude mortgage and financial guaranty segments.Source: Risk and Uncertainty Management Center, University of South Carolina.
11
Growth and Underwriting Performance
COVID-19 Has Had a Mixed Impact on the P/C Insurance Industry
11
Net Premium Growth (All P/C Lines): Annual Change, 1971—2020:Q3
-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:Q3: 3.1%
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 Q3: 3.1%
2020 Pre- vs. Post-COVID Growth Expectations for P/C Insurance: From Modest to Miserly
Source: 2020 Pre-COVID-19 figures from Best’s Review & Preview (Feb. 2020); Post-COVID estimates from USC Center for Risk and Uncertainty Management.
Percentage Change in Net Premiums Written
3.1% 3.0%3.3%
3.8% 3.7%4.0%
0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%
All Lines Personal Commercial
2020: Pre-COVID 2020: Post-COVID
Note: 2020 expectations are based on a modestly optimistic scenario for recovery in Q3 and Q4 and that premium volume in
Q1 was largely unaffected
P/C Insurance Industry Combined Ratio, 2001–2020:Q3*
*Excludes Mortgage & Financial Guaranty insurers 2008--2014.*First 9 months 2020.Sources: A.M. Best, ISO (2014-2019).
95.7
99.3101.1
106.5
102.5
96.4 97.097.8
100.798.798.9
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 the combined
ratio though Q3 2020;
8.3 pts. due to CATs, about twice avg.
How Have Actual Results Differed from Reality?
A Review of Early Predictions of COVID’s Impact on Insurers
15
US P/C Results Have Generally Been Better than Anticipated
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 US
Personal 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 UK
Marine/Aviation/Transport $0.7B-$1.5B (US); $0.6 - $1.2B (UK)
16
*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 markets
Personal/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 markets
D&O $0.6 - $4.0 loss across US & Bermuda markets
Marine/Aviation/Transport $0.3B-$1.3B reduction (US); $0.6 - $1.1B (UK)
17
*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.
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*
Reasons Why P/C Insurance Worst-Case COVID Scenarios Failed to Materialize (So Far)n Economic Recovery Proceeding More Quickly than Anticipated
n Rapid Financial Market Recovery (and then some…)
n Massive Government Stimulus and Accommodative Fed Policy
n Worst-Case Epidemiological Outcome Avoided
n Record Pace of Vaccine Development
n Employers Did a Reasonably Good Job Protecting Workers from Exposure
n Many States Did Not Repeat Spring Lockdowns
n Litigation Outcomes Generally Favor Insurers
n WC Presumption Expansions Did Not Lead to Explosion in Claims
n Offsetting Exposure Reductions in Many Lines
BUT…There Is No Questions that the Economic Consequences of
COVID Are Massive and Ongoing
20
The Economic Costs of COVID Vastly Outstrip the Insured
Loss Component
Viral Outbreaks Are Not An Insurable Risk
21*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 (<100 Employees; $Bill)
Source: APCIA, April 2020.
$52
$223 $255
$431
$0
$100
$200
$300
$400
$500
Small Business w/ BI - Low Small Business w/ BI - High All Small Businesses - Low All Small Businesses - High
The potential for such losses for all businesses of all sizes is currently
estimated at $1 - $1.1 trillion per month.
* Businesses impacted: Proportion of businesses completely or substantially closed related to coronavirusAssumptions: Losses if standard insurance policy exclusions for viruses/pandemics are voided and physical loss/damage requirement is stricken; three main coverages - profit lost, payroll/benefits, additional expenses; average annual $2m revenue and 7% profit margin; non-wage benefits of small businesses are 25% less than that for average US businesses
60% Businesses impacted*10% of Payroll for additional expenses
33.3% Have BI coverage50% Have BI payroll/benefits coverage
90% Businesses impacted*30% of Payroll for additional expenses
60% Have BI coverage80% Have BI payroll/benefits coverage
60% Businesses Impacted*10% of Payroll for additional
expenses
90% Businesses impacted*30% of Payroll for additional
expenses
Monthly BI losses for small business vary widely depending on underlying
assumptions but expansive legislation would result in higher estimates; For
all businesses <500 employees, BI losses range between $393B - $668B
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
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)
25
COVID-19: Impacts on Premiums and Claims
Economically Sensitive Commercial Lines Were Most Impacted in Terms of GrowthAuto Claims Plunged During the Early Stage of COVID—Will Claims Spike as
the Economy Recovers?
26
COVID’s Impact on DPW Growth for Largest P/C Lines: First 9-Mos. 2020 and 2019 vs. Same Period Previous Year
7.9% 8.9%
14.5%
-2.9%
7.7%
2.3%
8.1%
-8.5%
-2.2% -1.6%
0.2% 1.0%
5.5%4.3%
11.4%
5.3%
12.5% 12.3%
-10%
-5%
0%
5%
10%
15%
20%
WorkersComp*
Inland Marine Pvt. Pass.Auto Liab
Auto Phys.Damage
CommercialAuto Liab.
Homeowners Other Liab. Allied Fire
2020 vs. 2019 2019 vs. 2018
Percent Change: First 9-Most 2020 vs. First 9-Mos. 2019
Source: A.M. Best, First Look: 9-Month 2020 P/C Financial Results; Risk and Uncertainty Management Center, Univ. of South Carolina.
Workers Comp, Inland Marine and PP Auto Liability have experience the largest
decline in DPW
Down $3.5B
27
Personal Auto Claim Frequency Trends Significantly Impacted by COVID: Q2 and Q3 2020 vs. Q2 and Q3 2019
-22.8%
-32.6% -31.3%
-37.5%-33.6%
-21.1%
-13.6%
-24.6%-23.3%
-10.1%
-40%-35%-30%-25%-20%-15%-10%
-5%0%
Collision Prop. DamageLiability
PIP Bodily InjuryLiability
Comprehensive
Q2 Q3Year-over-Year Change
Auto Claims Fell Sharply at the Height of the Pandemic, at least through Q3 2020
Collision and PD Liability claims plunged by more
than 1/3
Source: ISO/PCI Fast Track data for Q3 2020; Risk and Uncertainty Management Center, Univ. of South Carolina.
28
Personal Auto Claim Frequency Trends Significantly Impacted by COVID, Q2 vs. Q2 2020 (latest available)
-37.5%-33.6%
-21.1%
-13.6%
-6.9%
-40%-35%-30%-25%-20%-15%-10%
-5%0%
Collision Prop. DamageLiability
PIP Bodily Injury Liability Comprehensive
Change in Q2 2020 from Q1 2020
Auto Claims Fell Sharply at the Height of the Pandemic. Anecdotal Evidence Suggests Claiming
Behavior Has Come Close to Normalizing
Collision and PD Liability claims plunged by more
than 1/3
Source: ISO/PCI Fast Track data for Q2 2020; Risk and Uncertainty Management Center, Univ. of South Carolina.
29
6.145.66 5.80 5.81 5.68
3.54
4.48
3.41 3.24 3.28 3.23 3.25
2.15 2.21
0
1
2
3
4
5
6
7
19:Q1 19:Q2 19:Q3 19:Q4 20:Q1 20:Q2 20:Q3
Collision PD Liability
(Number of Claims per 100 Earned Car Years)
Personal Auto BI Collision and Property Damage Liability Claim Frequency: 2019:Q1 – 2020:Q3
Down 37.5% from
2019:Q2
Claim frequencies fell s in sharply during the pandemic, but are beginning to rebound
Source: ISO/PCI Fast Track data for Q2 2020; Risk and Uncertainty Management Center, Univ. of South Carolina.
Down 33.6% from
2019:Q2
30
-0.1%
-1.2%
0.5%0.6%
0.6% 1.9%
-0.3%
-0.1%
1.6%
-1.8%
-3.4%
-9.3%
-9.5%
-2.6%
-1.6%
4.0%
-2.6% -0.5%
8.4%
6.5%
-1.8%
-1.7%
-2.0%
-3.3%
-6.9%
-5.44%
2.3%
1.4% 2.7%
0.6%
-12%-10%-8%-6%-4%-2%0%2%4%6%8%10%
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*
Annual Change (%)
Source: Insurance Institute for Highway Safety and Highway Loss Data Institute: https://www.iihs.org/iihs/topics/t/general-statistics/fatalityfacts/overview-of-fatality-facts; NHTSA: https://www.nhtsa.gov/press-releases/2019-fatality-data-traffic-deaths-2020-q2-projections#:~:text=The%20FARS%20data%20indicate%20that,the%20same%20period%20in%202019; Risk and Uncertainty Management Center, University of South Carolina.
Motor vehicle deaths saw their
largest increase in 50 years in 2016
U.S. Annual Change in Automobile Deaths, 1991- 2020*
Driving Has Been Getting Safer For Decades, A Trend that Is Likely to Continue, though a Post-COVID Spike Is Likely
Sharp increase in
use of seatbelts
Steep drop due to less
driving during the Great
Recession
Q2 2020 vs. Q2 2019 drop in auto deaths is more modest than expected. Drop was much steeper during
Great Recession
31
Catastrophe Loss Update: Major Driver of Rate Pressure
The 2020s Got Off to an Ominous Start
CAT Losses for the 2010s Were Up Materially—Costliest Ever
Primary, Reinsurance and Retro MarketsAll Impacted and Are Pressuring Rates
31
2020 U.S. Insured Catastrophe Highlights
n $67B in insured nat CAT losses—(3rd costliest year ever behind 2017, 2005)
n 71 designated PCS CATs, the most in PCS’s 72-year history
n 10 declared hurricane/TS events, a PCS record (30 named storms in 2020)w ~$26B insured losses in North America
n 17 declared wildfire events, a new record (6 events in 2017 = previous record)w ~$11B insured
n ~5 million CAT claims
n 18 PCS events with insured losses > $1B, a new record
n ~$1.5B in insured riot losses + other unusual manmade events (Nashville)
U.S. Inflation-Adjusted Insured Cat Losses
Sources: Property Claims Service, a Verisk Analytics business (1980-2019); 2020 figure from Munich Re; Insurance Information Institute; University of South Carolina, Risk & Uncertainty Management Center.
4037
79
104
53
1980s:$5 B
1990s: $15 B
2000s: $25 B2010s: $35 B
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
808182838485868788899091929394959697989900010203040506070809101112131415161718
Bill
ion
s, 2
01
8 $
Average for Decade
Hurricane Andrew WTC
Katrina, Rita, Wilma
Average Insured Loss per Year for 1980-2020 is $22.2 Billion
Harvey, Irma, Maria
36
19
2020 CAT losses in the
US totaled $67B (not including COVID-related
losses) from a record 71 PCS events20
67
30 named storms,
wildfires, riots
Top 20 Most Costly Disastersin U.S. History—Katrina Still Ranks #1
34
(Insured Losses, 2017 Dollars, $ Billions)*
$9.7 $10.0$10.0$11.7$14.2$14.2$15.9
$18.0$19.8$21.9
$25.3$26.0$27.1
$51.6
$6.0 $7.1 $7.5 $7.9 $8.3 $9.3
$0
$10
$20
$30
$40
$50
$60
Frances(2004)
Rita (2005)
Torn./T-Storms (2011)
Torn./T-Storms (2011)
Hugo (1989)
Ivan (2004)
Charley(2004)
Laura(2020)
Michael(2018)
Wilma(2005)
Camp Fire(2018)
Ike (2008)
Harvey (2017)
Irma (2017)
Sandy(2012)
Maria (2017)
Northridge(1994)
9/11 (2001)
Andrew(1992)
Katrina(2005)
9 of the top 20 mostly costly insured events in US history
occurred between 2010 and 2020 (inclusive)
17 of the 20 Most Expensive Insurance Events in US History Have Occurred Since 2004
*Estimated.Sources: PCS, RMS, Karen Clark & Co; USC Center for Risk and Uncertainty Management adjustments to 2017 dollars using the CPI.
35
0
50
100
150
200
250
300
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)
US Reinsurance Pricing Is Sensitive to CAT Activity and Ultimately Impacts Primary Insurance Pricing, Terms and Conditions.
Post-Andrew surge
US Property Catastrophe Rate-on-Line Index: 1990 – 2020*
*As of January 1 each year.Source: Guy Carpenter; Artimes.bm accessed at: http://www.artemis.bm/us-property-cat-rate-on-line-index
Post-9/11 Adjustment
Post Katrina, Rita, Wilma
period
Post-Ike adjustment Adjustment
following record tornado losses in 2011 and Sandy in
2012
Record CATs in 2017 and high CAT losses in 2018/19 pressured US
reinsurance prices in recent years (+9.0% in 2020, +2.6% in 2019,
+7.5% in 2018)
2020 Global RoL+5%
CAT Bond Issuance and Risk Capital Outstanding, 2010 – 2020
36Source: Guy Carpenter Securities, January 2021 Renewal Report; Risk and Uncertainty Management Center, University of South Carolina.
Despite COVID, both CAT bond issuance and Risk Capital Outstanding
reached new record highs in 2020
Major and Rapid Changes in the Reinsurance Markets: C-19
n Property: COVID-19 and Concerns Over BI Are Driving Reinsurers to Exclude Communicable Disease (CD) Globally in Virtually All Property Treatiesw Primary insurers are running into DOI resistance to gain approvals for exclusions
w Commercial and personal lines
w Exclusion is all CDs, not just pandemic or epidemic
n Casualty: Some Reinsurers Starting to Exclude CDw Exclusions being driven by London market
– GL, WC (esp. WC CAT)
w No universal exclusion push in non-London markets (yet)
w Not affecting financial lines yet (D&O, E&O, Fiduciary, Fidelity) or Cyber
n Reinsurers Try to Manage Global Aggregation Risk
These same factors are
contributing to capacity issues in the retrocessional
market
Paper on Communicable Disease Exclusions and Market Stability
n CD exclusions are becoming more commonplace in reinsurance treaties
n Regulators are generally not approving primary insurers filings for exclusions in underlying primary policies
n Paper addresses the global factors (e.g., accumulation risk, risk aversion, uninsurability) driving the exclusions
n Also addresses market consequences if misalignment persists Download at: https://www.uscriskcenter.com/wp-
content/uploads/2020/08/CD_Exclusion_Whitepaper-Aug-2020-No-Typo.pdf
INVESTMENTS: THE NEW REALITY
Investment Performance Is a Key Driver of Insurer Profitability
Aggressive Rate Cuts Will Adversely Impact Invest Insurer 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
$50.3
$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 YTD Q3 actual of $37.7B. 2018-19 figures are distorted by provisions of the TCJA of 2017. Increase reflects such items as dividends from foreign subsidiaries.
1 Investment gains consist primarily of interest and stock dividends. Sources: ISO; University of South Carolina, Center for Risk and Uncertainty Management.
($ 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 3.83.7
3.43.7
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 Dec. 2020.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%Dec. 2020: 0.93%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%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
,*Through Dec. 31, 2020.Source: NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html; Center for Risk and Uncertainty Management, University of South Carolina
Tech Bubble Implosion
Financial Crisis
Annual Return
Energy Crisis
S&P 500 Index Returns, 1950–2020*
Fed Raises Rates
The S&P 500 was up 28.9% in 2019, the best year since 2013, following a decline of 6.2% in 2018. The S&P plunged as the
economy dove into recession, falling 34% by March 23rd
2020 YTD+16.3%
2019: +28.9%2018: -6.2%2017: +19.42016: +9.5
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
Length of US Business Cycles, 1929-Present*
43
13 8 11 10 8 10 11 166
168 8
1912
50
80
3745
39
24
106
36
58
12
92
120
73
128
0102030405060708090
100110120130
Aug.1929
May1937
Feb.1945
Nov.1948
July1953
Aug.1957
Apr.1960
Dec.1969
Nov.1973
Jan.1980
Jul.1981
Jul.1990
Mar.2001
Dec.2007
Feb.2020
ContractionExpansion Following
Duration (Months)
Month Recession Started
Average Duration*Recession = 13.4 MonthsExpansion = 63.8 Months
* As of August 2020 but excluding current COVID-19 recession which began in Feb. 2020 but with an indeterminate end.Sources: National Bureau of Economic Research; Risk and Uncertainty Management Center, University of South Carolina.
The most recent
economic expansion
ended in Feb. 2020 and was the longest in
US history (began July
2009)Will likely take
2+ years to recover lost
growth
?
US Real GDP Growth*
* Estimates/Forecasts from Wells Fargo Securities.Source: US Department of Commerce, Wells Fargo Securities 1/21; 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%
33.4%
4.0%
1.3% 4.0% 9.1%
6.6%
3.8%
3.5%
3.2%
3.0%
-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
21:1
Q21
:2Q
21:3
Q21
:4Q
Demand for Insurance Will Be Severely Impacted As the Economy Slows but Is Improving
Real GDP Growth (%)
“Great Recession”
began in Dec. 2007
Financial Crisis
Strong 2nd half 2021 growth
expected
COVID CRASHQ2 2020
plunged by 31.4%
Full Year 2020 was -3.5%, the worst since the end of WW II
The Economy Drives P/C Insurance Industry Premiums:2006:Q1–2020:Q3*
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
2020:Q3
DWP y-o-y change y-o-y nominal GDP growth
Negative GDP growth in the first half of 2020 and loss of exposures caused DWP to decelerate overall and
turning 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 – Dec. 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%
7.8%
6.9%
6.7%
6.7%
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
Oct-20
Nov-20
Dec-20
COVID-19 shutdowns pushed the unemployment rate up to a shocking 14.7% in April before
improving beginning in May
12.4M jobs were created from May through Sept. (after a loss of 22.2M in March/April) helping bring down the
unemployment rate to 6.7% from its April peak of 14.7%. So far, ~56% of jobs lost have been recovered. Employment in Dec. 2020 was 6.5% below Feb. 2020.
US Unemployment Rate Forecast: 2007:Q1–2022:Q44.5%
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%
13.1%
8.8%
6.8%
6.6%
6.4%
6.0%
5.4%
5.1%
4.8%
4.5%
5.7%
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
22:Q1
22:Q2
22:Q3
22:Q4
Great RecessionRising unemployment eroded
payrolls and WC’s exposure base.Unemployment peaked at 10% in
late 2009.
= forecasts ; = actualsSources: US Bureau of Labor Statistics; Wells Fargo Securities (1/21 edition); Risk and Uncertainty Management Center, University of South Carolina.
The unemployment rate peaked at 14.7% in April
(13.1% Q2 avg.)
At 3.5%, the unemployment rate in Feb. 2020 WASat its lowest point
in 50 years.
$0
$5
$10
$15
$20
$25
$30
66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11 14 17 20
U.S. National Debt, 1966 – 2020:Q3
Source: Congressional Budget Office; Federal Reserve Bank of St. Louis: https://fred.stlouisfed.org/series/GFDEGDQ188S
The national debt hit $26.95 Trillion in Q3 2020 and will
continue to grow rapidly for the foreseeable future.
Debt/GDP Ratio =127%+ (Great exceeding the
previous record of 106% during WW II)
$27 Trillion($ Trillions)
18
Inflation AlertLarge deficits that increase as a share of GDP are, at some point,
unsustainable and
inflationary
51
Commercial Lines Growth, Underwriting Performance
& Pricing Cyclicality
Pricing Pressures Are Intensifying
51
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19
Economic Shocks, Inflation:
1976: 22.2%Tort Crisis
1986: 30.5%
Post-9/112002: 22.4%
Great Recession:2009: -9.0%
ROE
2019: +6.7%
Commercial Lines NPW Premium Growth: 1975 – 2020E
Recessions:1982: 1.1%
Commercial lines is prone to far more cyclical volatility that
personal lines.
1988-2000: Period of
inter-cycle stability
Commercial lines premium
growth has been sluggish
for years, reflecting weak
pricing environment.
Note: Data include state funds beginning in 1998. Source: A.M. Best; Insurance Information Institute; Univ. of South Carolina Center for Risk and Uncertainty Management, ISO.
Post-Hurricane Andrew Bump:
1993: 6.3%
Post Katrina Bump:
2006: 7.7%
2016: -1.1%
2018: +14.4%
2020: +3.2%
CIAB: Average Commercial Rate Change, All Lines, 2011:Q1–2020:Q3*
-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%
11.7%
-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
3Q20
*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 +11.7% as of Q3 2020
Change in Commercial Rate Renewals, by Line: 2020:Q3
Source: Council of Insurance Agents and Brokers; USC Center for Risk and Uncertainty Management.
Percentage Change (%)
6.0% 6.7% 7.7% 7.9%9.6% 10.1%11.0%
14.2%16.1%
22.9%
1.5% 2.1% 2.6% 3.6% 4.4% 4.5%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Wor
kers
Com
p
Terro
ris,
Sur
ety
Floo
d
Bro
ker E
&O
Mar
ine
Med
Mal
Gen
eral
Liab
ility
Cyb
er
Con
stru
ctio
n
Bus
ines
sIn
terru
ptio
n
EP
L
Com
mer
cial
Aut
o
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
55
COVID-19 Litigation Trends
Court Decisions Have Largely Favored Insurers, but Concerns Remain
55
Weekly Number of COVID-Related Lawsuits Filed:(Weeks Ending Mar. 16, 2020 to Dec. 7, 2020) [Latest Available]
56Source: Covid Coverage Litigation Tracker, University of Pennsylvania School of Law. Accessed 1/21/21 at: https://cclt.law.upenn.edu
The number of new cases filed is declining with just 7 filed the
week ending Dec. 7, 2020. Cumulative Total = 1,430
7
79
Coverage Sought in COVID-Related Lawsuits:(Total through Dec. 7, 2020) [Latest Available]
57Source: Covid Coverage Litigation Tracker, University of Pennsylvania School of Law. Accessed 1/21/21 at: https://cclt.law.upenn.edu
BI, Extra Expense and Civil Authority coverage
account for the vast majority of cases
Industry is Still at Risk• Jan. 19th the US District Court in Cleveland refused to
dismiss a case: Henderson Road Restaurant Systems Inc. Zurich American Insurance Co. Judge claimed that the policy language was ambiguous and that the “microorganism” exclusion was in applicable
• On Jan. 14th an OK state judge refused to dismiss a case filed by the Cherokee Nation against AIG’s Lexington unit
58
SUMMARYnThe P/C Insurance Industry Remains Strong, Stable, Sound
and Secure
nWorst-Case Scenarios Have, So Far, Been Averted
nAn Anticipated Acceleration in the Economic Recovery in the Second Half of 2021 Should Help Restore Most P/C Exposures to Pre-Pandemic Levels by mid-2022
nAsset Price Volatility Will Persist and Low Interest Rates Will Pressure Investment Earnings for Years
nCOVID-19 Exposures Are 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 [email protected] or Download at www.uscriskcenter.com
59