workers compensation and the new economy: trends ...the economy will impact workers compensation...
TRANSCRIPT
Workers Compensation and the New Economy:
Trends, Challenges and Opportunities
Insurance Information Institute
June 1, 2015
Download at www.iii.org/presentations
Robert P. Hartwig, Ph.D., CPCU, President & Economist
Insurance Information Institute 110 William Street New York, NY 10038
Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org
The Economy Will Impact Workers Compensation
Growth and Performance
2
Workers Comp Is Among the Fastest
Growing Major Commercial Lines
2
3
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.
Source: US Department of Commerce, Blue Economic Indicators 5/15; 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
%-2
.1%
4.6
%5.0
%2.2
%-0
.7%
2.9
%3.1
%3.0
%
2.8
%2.8
%2.7
%2.7
%
-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
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2
00
5
2
00
6
2
00
7
08
:1Q
08
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08
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08
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09
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09
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09
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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 2015 GDP data were hit hard by this
year’s and harsh winter, high dollar
State-by-State Leading Indicatorsthrough September 2015
Sources: Federal Reserve Bank of Philadelphia at http://www.philadelphiafed.org/index.cfm ;Insurance Information Institute.4
The economic outlook for most of the US is generally
positive, though flat-to-negative for
2 states
Growth in the West is
finally beginning to pick up
5
Real GDP by State Percent Change, 2013:Highest 25 States
9.7
7.6
5.1
4.2
4.1
3.8
3.8
3.7
3.1
3.0
3.0
2.9
2.8
2.7
2.7
2.4
2.3
2.2
2.1
2.0
2.0
1.9
1.9
1.9
1.8
1.8
0
1
2
3
4
5
6
7
8
9
10
ND WY WV OK ID CO UT TX SD NE MT IA MN OR WA AR NC FL IN MI CA VT KS HI GA US
Pe
rce
nt
Ch
an
ge
(%
)
Sources: U.S. Bureau of Economic Analysis; Insurance Information Institute.
North Dakota was the economic growth juggernaut of the US
in 2013—by far
Only 9 states experienced growth in excess of 3% in 2013, which is what we would see nationally in a
more typical recovery
Growth Benchmarks: Real GDP
US: 1.8%
6
1.8
1.7
1.6
1.6
1.6
1.6
1.5
1.4
1.3
1.2
1.1
1.1
1.0
0.9
0.9
0.9
0.9
0.8
0.8
0.8
0.7
0.7
0.1
0.0
-0.5
-2.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
OH WI MA DE KY MS NM RI LA SC NJ AZ NV CT ME NH IL MO AL TN NY PA VA MD DC AL
Pe
rce
nt
Ch
an
ge
(%
)Real GDP by State Percent Change, 2013:
Lowest 25 States
Sources: US Bureau of Economic Analysis; Insurance Information Institute.
DC and Alabama were the only
states to shrink in 2013
Growth rates in 11 states were still below 1% in
2013: Maryland had zero real growth in 2013
7
Percent Change in Real GDP by State, 2013
Sources: US Bureau of Economic Analysis; Insurance Information Institute.
NFIB Small Business Optimism Index
Source: National Federation of Independent Business at http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gif ; Insurance Information Institute. 8
January 1985 through April 2015
Small business optimism has dropped somewhat
since reaching post-crisis highs in late 2014
9
Business Bankruptcy Filings: Still Falling(1994:Q1 – 2014:Q4)
13.9
13.6
12.9
12.0
13.1
12.2 12.6
12.9 13.4 14.0
13.2
12.9 1
3.8
14.0
13.5
12.7
12.4
11.6
10.3
9.9
9.2
10.4
9.0
9.0 9
.59.2
8.2 8.4
10.0
10.3
9.5 1
0.0
9.8
9.7
9.4 9.5
8.8 9
.3
8.3
10.6
8.2
7.6 7.8 8.18.7
9.5
12.8
4.1
4.9 5
.3 5.66.3 6
.7 7.2
8.0
8.7
9.7
11.5
12.9
14.3
16.0
14.2 1
5.0
14.6
14.5
14.0
13.0
12.4
12.3
11.7
11.1
11.0
10.4
9.2 9.3
8.5 8.9
8.1
7.6
7.0 7.3
6.4
6.2
8.4
0
2
4
6
8
10
12
14
16
18
94
:Q1
94
:Q3
95
:Q1
95
:Q3
96
:Q1
96
:Q3
97
:Q1
97
:Q3
98
:Q1
98
:Q3
99
:Q1
99
:Q3
00
:Q1
00
:Q3
01
:Q1
01
:Q3
02
:Q1
02
:Q3
03
:Q1
03
:Q3
04
:Q1
04
:Q3
05
:Q1
05
:Q3
06
:Q1
06
:Q3
07
:Q1
07
:Q3
08
:Q1
08
:Q3
09
:Q1
09
:Q3
10
:Q1
10
:Q3
11
:Q1
11
:Q3
12
:Q1
12
:Q3
13
:Q1
13
:Q3
14
:Q1
14
:Q3
Business bankruptcies in 2014 were below both the Great Recession levels and the 2003:Q3-2005:Q1 period (the best five-quarter stretch in the last 20 years).
Bankruptcies restrict exposure growth in all commercial lines.
Sources: U.S. Courts at http://www.uscourts.gov/; Insurance Information Institute
(Thousands) New Bankruptcy Law Takes
EffectRecessions in orange
Below pre-recession
level
10
43
,69
44
8,1
25
69
,30
0
62
,43
66
4,0
04
71
,27
78
1,2
35
82
,44
6
63
,85
36
3,2
35
64
,85
3
71
,54
97
0,6
43
62
,30
45
2,3
74
51
,95
9
53
,54
95
4,0
27
44
,36
7
37
,88
43
5,4
72
40
,09
93
8,5
40
35
,03
7
34
,31
73
9,2
01
19
,69
5
28
,32
24
3,5
46
60
,83
75
6,2
82
47
,80
6
40
,07
53
3,2
12
26
,98
3
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
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
Business Bankruptcy Filings,1980-2014
Sources: American Bankruptcy Institute (1980-2012) at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; 2013-14 data from United States Courts at http://news.uscourts.gov; Insurance Information Institute.
Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline
2014 bankruptcies totaled 26,983, down 18.8% from 2013—the 5th
consecutive year of decline. Business bankruptcies more than tripled during
the financial crisis.
% Change Surrounding Recessions
1980-82 58.6%
1980-87 88.7%
1990-91 10.3%
2000-01 13.0%
2006-09 208.9%
10
11
Private Sector Business Starts:1993:Q2 – 2013:Q4* As Strong as Ever?
175
185
173
182 1
87
193
184 1
89
189
185 188
195
191
199 2
04
203
195
196
195
206
206
200
189
199
206
206
199
213
204 2
09
200
206
204
204
194
204 2
08
199
193
191
193
200
207
203
209
210
209
216 2
21
221
220
221
210
221
214
206
216
208
207
201
191
188
172 1
77
169
183
175 1
79
188
200
189 192
198 2
02
201
197 2
01
201
226
215
214
201
150
160
170
180
190
200
210
220
230
93
:Q2
94
:Q1
95
:Q1
96
:Q1
97
:Q1
98
:Q1
99
:Q1
00
:Q1
01
:Q1
02
:Q1
03
:Q1
04
:Q1
05
:Q1
06
:Q1
07
:Q1
08
:Q1
09
:Q1
10
:Q1
11
:Q1
12
:Q1
13
:Q1
*A classification change in 2013:Q1 resulted in a report of 578,000 businesses started in that quarter. Seasonally adjusted. **2014 number assumes 1st quarter equaled average of other three quarters
Sources: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm. NBER (recession dates)
Thousands
Business Starts2006: 861,0002007: 844,0002008: 787,0002009: 701,000 2010: 742,000 2011: 781,0002012: 800,0002013: 870,000**
11
Recessions in orange 2013:Q1 578,000
business starts*
12
Profitability and Growth in Maryland Overall P/C and
WC Insurance Markets
Maryland and Nearby State Comparisons
13
RNW All Lines: MD vs. U.S., 2004-2013
Source: NAIC, Insurance Information Institute
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
04 05 06 07 08 09 10 11 12 13
US All Lines MD All Lines
(Percent)
Average 2004-2013
US: 7.9%
MD: 9.5%
14
RNW Workers Comp: MD vs. U.S.,2004-2013
Source: NAIC, Insurance Information Institute
0%
2%
4%
6%
8%
10%
12%
04 05 06 07 08 09 10 11 12 13
US WComp MD Wcomp
(Percent)
Average 2004-2013
US: 7.1%
MD: 5.0%
All Lines: 10-Year Average RNW MD & Nearby States
7.9%
9.5%
10.5%
10.8%
12.3%
5.0%
8.0%
0% 2% 4% 6% 8% 10% 12% 14%
Virginia
DC
West Virginia
Maryland
Pennsylvania
U.S.
Delaware
2004-2013
Maryland All Lines profitability is above the
US and slightly above the regional average
Source: NAIC, Insurance Information Institute
Workers Comp: 10-Year Average RNW MD & Nearby States
1.9%
6.7%
7.1%
7.6%
11.4%
1.1%
5.0%
0% 2% 4% 6% 8% 10% 12%
DC
Virginia
U.S.
Pennsylvania
Maryland
Delaware
West Virginia
Source: NAIC, Insurance Information Institute
2004-2013Maryland Workers Comp profitability is
below the US average and regional
average
17
Workers Comp. DWP Growth: MD vs. U.S., 2004-2013
Source: SNL Financial.
36
.9%
3.2
%
-1.3
%
-3.7
%
-11
.6% -3
.4%
9.6
%
10
.7%
8.5
%
10
.2%
3.0
%
-5.2
%
-8.0
%
0.9
%
4.6
% 12
.6%
6.6
%
-12
.4%
-19
.0%
64
.8%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
04 05 06 07 08 09 10 11 12 13
US DWP: Workers Comp MD DWP: Workers Comp
(Percent)
Average 2004-2013
US: 3.7%
MD: 7.0%
18
Labor Markets Trends:
Recovery Continues in 2015
2014
Largest Increase in Jobs Since 1997
Unemployment Rate Fell to Lowest Level Since 2008
Payrolls Expanded to Record High18
19
Unemployment and Underemployment Rates: Still Too High, But Falling
2
4
6
8
10
12
14
16
18
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
Jan
11
Jan
12
Jan
13
Jan
14
Jan
15
"Headline" Unemployment Rate U-3
Unemployment + Underemployment RateU-6
“Headline” unemployment
was 5.4% in Apr. 2015. 4.5% to
5.5% is “normal.”
Source: US Bureau of Labor Statistics; Insurance Information Institute.
January 2000 through April 2015, Seasonally Adjusted (%)
Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is continuing to improve.
19
U-6 soared from 8.0% in March
2007 to 17.5% in October 2009; Stood at 10.8%
in Apr. 2015.8% to 10% is
“normal.”
20
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
%5
.0%
4.9
%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; = forecasts
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (5/15 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
21
Unemployment Rates by State, April 2015:Highest 25 States*
7.5
7.1
7.0
6.7
6.7
6.6
6.6
6.5
6.3
6.3
6.3
6.2
6.1
6.0
6.0
6.0
5.8
5.7
5.7
5.7
5.6
5.5
5.5
5.4
5.4
5.4
0
2
4
6
8
DC NV WV AK SC LA MS NJ CA CT GA NM RI AZ IL TN AL AR MO NY FL NC WA IN MI US
Un
em
plo
ym
en
t R
ate
(%
)
*Provisional figures for April 2015, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In April, 23 states and the District of Columbia had over-the-month unemployment rate decreases, 11 states had increases, and 16 states had no change.
Residual impacts of the housing collapse, weak economies are holding
back several states
22
5.3
5.3
5.2
5.2
5.0
4.8
4.7
4.7
4.5
4.4
4.3
4.2
4.2
4.1
4.1
4.1
4.0
3.8
3.8
3.8
3.7
3.6
3.6
3.4
3.1
2.5
0
1
2
3
4
5
6
MD PA OH OR KY VA MA ME DE WI KS CO TX HI OK WY MT IA ID NH MN SD VT UT ND NE
Un
em
plo
ym
en
t R
ate
(%
)
Unemployment Rates by State, April 2015:
Lowest 25 States*
*Provisional figures for April 2015, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In April, 23 states and the District of Columbia had over-the-month unemployment rate decreases, 11 states had increases, and 16 states had no change.
Strength in Energy, Agricultural States-most also avoided
housing bust
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
8
19
29
4 11
01
20
11
71
07
19
91
49
94
72
22
32
313
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
82
22
20
11
70
18
01
53
24
72
72
86
18
31
75 22
33
13
23
82
72
24
32
09
23
52
18
41
43
19
20
2 26
19
42
13
11
3
(1,000)
(800)
(600)
(400)
(200)
0
200
400
600
Jan-0
7F
eb-0
7M
ar-
07
Apr-
07
May-0
7Jun-0
7Jul-07
Aug-0
7S
ep-0
7O
ct-
07
Nov-0
7D
ec-0
7Jan-0
8F
eb-0
8M
ar-
08
Apr-
08
May-0
8Jun-0
8Jul-08
Aug-0
8S
ep-0
8O
ct-
08
Nov-0
8D
ec-0
8Jan-0
9F
eb-0
9M
ar-
09
Apr-
09
May-0
9Jun-0
9Jul-09
Aug-0
9S
ep-0
9O
ct-
09
Nov-0
9D
ec-0
9Jan-1
0F
eb-1
0M
ar-
10
Apr-
10
May-1
0Jun-1
0Jul-10
Aug-1
0S
ep-1
0O
ct-
10
Nov-1
0D
ec-1
0Jan-1
1F
eb-1
1M
ar-
11
Apr-
11
May-1
1Jun-1
1Jul-11
Aug-1
1S
ep-1
1O
ct-
11
Nov-1
1D
ec-1
1Jan-1
2F
eb-1
2M
ar-
12
Apr-
12
May-1
2Jun-1
2Jul-12
Aug-1
2S
ep-1
2O
ct-
12
Nov-1
2D
ec-1
2Jan-1
3F
eb-1
3M
ar-
13
Apr-
13
May-1
3Jun-1
3Jul-13
Aug-1
3S
ep-1
3O
ct-
13
Nov-1
3D
ec-1
3Jan-1
4F
eb-1
4M
ar-
14
Apr-
14
May-1
4Jun-1
4Jul-14
Aug-1
4S
ep-1
4O
ct-
14
Nov-1
4D
ec-1
4Jan-1
5F
eb-1
5M
ar-
15
Apr-
15
Monthly Change in Private Employment
January 2007 through Apr. 2015 (000s, Seasonally Adj.)
Private Employers Added 11.97 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
213,000 private sector jobs were created in April.
23
Jobs Created
2014: 3.042 Mill
2013: 2.452 Mill
2012: 2.315 Mill
2011: 2.396 Mill
2010: 1.282 Mill
3,042,000 jobs were created in 2014, the most since 1997
24
2,542.3
2,573.9
2,596.1
2,619.6
2,643.9
2,555.4
2,588.9
2,607.42,598.4
2,522.2 2,516.8
2,450
2,500
2,550
2,600
2,650
2,700
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*
(Thousands)
Healthcare ending Peaked in 2009, Helped by Stimulus Spending, but Contracted As State/Local Governments Grappled with Deficits and
Federal Sequestration
Number of Employed Persons in Maryland (annual averages): 2005-2015*
*2015 figure is a seasonally adjusted annual rate as of April; http://www.census.gov/construction/c30/historical_data.html
Sources: US Bureau of Labor Statistsics; Insurance Information Institute.
Great Recession
Maryland lost 145,300 jobs (-5.6%) from pre-crisis peak of 2.6125
million in April 2008 to trough of 2.4672 million
in Feb. 2010
Maryland did not fully recoup job losses from the great Recession until April 2014
25
Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2015:Q1
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); Insurance Information Institute.
Billions
$5,500
$5,750
$6,000
$6,250
$6,500
$6,750
$7,000
$7,250
$7,500
$7,750
$8,0000
5:Q
1
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
Prior Peak was 2008:Q3 at $6.54 trillion
Recent trough (2009:Q1) was $6.23 trillion, down
5.3% from prior peak
Growth rates2011:Q4 over 2010:Q4: 2.6%2012:Q4 over 2011:Q4: 6.7%2013:Q4 over 2012:Q4: 1.7%2014:Q4 over 2013:Q4: 5.1%
25
Latest (2015:Q1) was $7.69 trillion, a new peak--$1.46 trillion above 2009 trough
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
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
$25
$30
$35
$40
$45
$50Wage & Salary DisbursementsWC NPW
26
Payroll Base* WC NWP
Payroll vs. Workers Comp Net Written Premiums, 1990-2014P
*Private employment; Shaded areas indicate recessions. WC premiums for 2014 are from NCCI.
Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.
Continued Payroll Growth and Rate Gains Suggest WC NWP Will Grow Again in 2015
7/90-3/91 3/01-11/0112/07-6/09
$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
CONSTRUCTION, MANUFACTURING & ENERGY
OUTLOOK
27
Key Sectors Critical to the Economy and the P/C
Insurance Industry
27
28
Value of New Private Construction: Residential & Nonresidential, 2003-2015*
Billions of Dollars
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
03 04 05 06 07 08 09 10 11 12 13 14 15*
Non Residential
Residential
Private Construction Activity Is Moving in a Positive Direction though Remains Well Below Pre-Crisis Peak; Residential Dominates
$298.1
$15.0
$613.7
New Construction peaks at $911.8. in 2006
Trough in 2010 at $500.6B,
after plunging 55.1% ($411.2B)
2015: Value of new pvt. construction hits $702.4B as of Mar. 2015, up 40%
from the 2010 trough but still 23%
below 2006 peak
28
$261.8
$238.8
$353.4
$349.0
*2015 figure is a seasonally adjusted annual rate as of March.
Sources: US Department of Commerce http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
29
Value of Construction Put in Place, March 2015 vs. March 2014*
-0.3%
16.5%
-0.6%
2.0%2.9%
-2.6%
9.0%
-5%
0%
5%
10%
15%
20%
Total
Construction
Total Private
Construction
Residential--
Private
Non-
Residential--
Private
Total Public
Construction
Residential-
Public
Non-
Residential--
Public
Overall Construction Activity is Up, But Growth In the Private Sector Slowed in Late 2014 While Picking Up in the State/Local Sector
Government Sector as Budget Woes Ease in Some Jurisdictions
Growth (%)
Private sector construction activity is up in the
nonresidential segment but residential growth is sluggish
*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
Private: +2.9% Public: -0.3%Public sector
construction activity is finally beginning to
create less drag up after years of decline
30
$314.9$304.0
$286.4$278.2
$269.0 $273.1 $267.6
$216.1 $220.2$234.2
$255.4
$289.1
$308.7
$0
$50
$100
$150
$200
$250
$300
$350
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*
($ Billions)
Government Construction Spending Peaked in 2009, Helped by Stimulus Spending, but Contracted As State/Local Governments Grappled with
Deficits and Federal Sequestration
Value of New Federal, State and Local Government Construction: 2003-2015*
*2015 figure is a seasonally adjusted annual rate as of March; http://www.census.gov/construction/c30/historical_data.html
Sources: US Department of Commerce; Insurance Information Institute.
Construction across all levels of government
peaked at $314.9B in 2009
Austerity Reigns
Govt. construction MAY be stabilizing; still down $47.3B or
15.0% since 2009 peak
31
(Millions of Units)
New Private Housing Starts, 1990-2021F
1.4
8
1.4
7 1.6
2
1.6
4
1.5
7
1.6
0 1.7
1 1.8
5 1.9
6 2.0
7
1.8
0
1.3
6
0.9
1
0.5
5
0.5
9
0.6
1 0.7
8 0.9
2
1.0
1 1.1
1 1.2
6 1.4
1
1.4
6
1.4
9
1.5
21
.52
1.3
51.4
6
1.2
9
1.2
0
1.0
11.1
9
0.3
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
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 15F 16F 17F 18F 19F20F 21F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (5/15 and 3/15); Insurance Information Institute.
Insurers Are Continue to See Meaningful Exposure Growth in the Wake of the “Great Recession” Associated with Home Construction: Construction Risk
Exposure, Surety, Commercial Auto; Potent Driver of Workers Comp Exposure
New home starts plunged 72% from 2005-2009; A net
annual decline of 1.49 million units, lowest since records began
in 1959
Job growth, low inventories of existing homes, low mortgage rates and demographics should continue to stimulate new home construction
for several more years
32
Construction Employment,Jan. 2010—April 2015*
*Seasonally adjusted.
Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
5,5
81
5,5
22
5,5
42
5,5
54
5,5
27
5,5
12
5,4
97
5,5
19
5,4
99
5,5
01
5,4
97
5,4
68
5,4
35
5,4
78
5,4
85
5,4
97
5,5
24
5,5
30
5,5
47
5,5
46
5,5
83
5,5
76
5,5
77
5,6
12
5,6
29
5,6
29
5,6
28
5,6
27
5,6
08
5,6
23
5,6
32
5,6
41
5,6
49
5,6
68
5,6
84
5,7
24
5,7
46
5,7
98
5,8
15
5,8
13
5,8
33
5,8
56
5,8
54
5,8
66
5,8
93
5,9
18
5,9
53
5,9
37 6,0
06
6,0
32
6,0
62
6,1
03
6,1
14
6,1
21
6,1
52
6,1
69
6,1
91
6,2
01
6,2
31
6,2
75
6,3
16
6,3
47
6,3
38
6,3
83
5,400
5,500
5,600
5,700
5,800
5,900
6,000
6,100
6,200
6,300
6,400
6,500
Jan-1
0F
eb-1
0M
ar-
10
Apr-
10
May-1
0Jun-1
0Jul-10
Aug-1
0S
ep-1
0O
ct-
10
Nov-1
0D
ec-1
0Jan-1
1F
eb-1
1M
ar-
11
Apr-
11
May-1
1Jun-1
1Jul-11
Aug-1
1S
ep-1
1O
ct-
11
Nov-1
1D
ec-1
1Jan-1
22/3
0/2
0M
ar-
12
Apr-
12
May-1
2Jun-1
2Jul-12
Aug-1
2S
ep-1
2O
ct-
12
Nov-1
2D
ec-1
2Jan-1
3F
eb-1
3M
ar-
13
Apr-
13
May-1
3Jun-1
3Jul-13
Aug-1
3S
ep-1
2O
ct-
13
Nov-1
3D
ec-1
3Jan-1
4F
eb-1
4M
ar-
14
Apr-
14
May-1
4Jun-1
4Jul-14
Aug-1
4S
ep-1
4O
ct-
14
Nov-1
4D
ec-1
4Jan-1
5F
eb-1
5M
ar-
15
Apr-
15
Construction employment is +948,000 above
Jan. 2011 (+17.4%) trough
(Thousands)
Construction and manufacturing employment constitute 1/3 of all WC payroll exposure.
33
Construction Employment, Jan. 2003–April 2015
Note: Recession indicated by gray shaded column.
Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute.
5,000
5,500
6,000
6,500
7,000
7,500
8,000
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15
The “Great Recession” and housing bust destroyed 2.3 million constructions jobs
The Construction Sector Was a Growth Leader in 2014 as the Housing Market, Private Investment and Govt. Spending Recover. WC Insurers Will Benefit.
Construction employment troughed at 5.435 million in
Jan. 2011, after a loss of 2.291 million jobs, a 29.7% plunge
from the April 2006 peak
33
Construction employment
peaked at 7.726 million in April 2006
(Thousands)Construction
employment as of Apr. 2015 totaled 6.383 million, an
increase of 948,000 jobs or 17.4% from
the Jan. 2011 trough
Gap between pre-recession
construction peak and today: 1.34 million jobs
34
MANUFACTURING SECTOR
A Potent Driver of Jobs, Workers Comp
Payroll Exposure
America’s Manufacturing Renaissance
Has Hit a Rough Patch with the High
Dollar and Collapse in Oil Prices
34
35
Manufacturing Employment,Jan. 2010—April 2015*
11,4
60
11,4
60
11,4
66
11,4
97
11,5
31
11,5
39
11,5
58
11,5
48
11,5
54
11,5
55
11,5
77
11,5
90
11,6
24
11,6
62
11,6
82
11,7
07
11,7
15
11,7
24
11,7
47
11,7
60
11,7
62
11,7
70
11,7
69
11,7
97
11,8
34
11,8
57
11,8
99
11,9
16
11,9
30
11,9
41
11,9
65
11,9
61
11,9
48
11,9
51
11,9
47
11,9
61
11,9
80
12,0
02
12,0
06
12,0
06
12,0
07
12,0
05
11,9
83
12,0
11
12,0
22
12,0
40
12,0
72
12,0
86
12,1
02
12,1
22
12,1
31
12,1
42
12,1
54
12,1
77
12,1
91
12,2
05
12,2
14
12,2
37
12,2
82
12,3
01
12,3
18
12,3
21
12,3
21
12,3
22
11,250
11,500
11,750
12,000
12,250
12,500
Ja
n-1
0F
eb
-10
Ma
r-1
0A
pr-
10
Ma
y-1
0Ju
n-1
0Ju
l-1
0A
ug
-10
Se
p-1
0O
ct-
10
No
v-1
0D
ec-1
0Ja
n-1
1F
eb
-11
Ma
r-1
1A
pr-
11
Ma
y-1
1Ju
n-1
1Ju
l-1
1A
ug
-11
Se
p-1
1O
ct-
11
No
v-1
1D
ec-1
1Ja
n-1
22
/30
/2M
ar-
12
Ap
r-1
2M
ay-1
2Ju
n-1
2Ju
l-1
2A
ug
-12
Se
p-1
2O
ct-
12
No
v-1
2D
ec-1
2Ja
n-1
3F
eb
-13
Ma
r-1
3A
pr-
13
Ma
y-1
3Ju
n-1
3Ju
l-1
3A
ug
-13
Se
p-1
3O
ct-
13
No
v-1
3D
ec-1
3Ja
n-1
4F
eb
-14
Ma
r-1
4A
pr-
14
Ma
y-1
4Ju
n-1
4Ju
l-1
4A
ug
-14
Se
p-1
4O
ct-
14
No
v-1
4D
ec-1
4Ja
n-1
5F
eb
-15
Ma
r-1
5A
pr-
15
Manufacturing employment is a surprising source of strength in the economy. Employment in the sector is at a multi-year high.
*Seasonally adjusted.
Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
(Thousands)Since Jan 2010, manufacturing
employment is up (+862,000 or +7.5%)and still growing.
36
16
.9
16
.5
16
.1
13
.2
10
.4
11
.6
12
.7
14
.4
15
.5 16
.4
16
.8
17
.1
16
.9
16
.8
16
.9
16
.8
16
.7
16
.9
16
.617
.1
17
.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 (5/15 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 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
58
.35
7.1
60
.45
9.6
57
.85
5.3
55
.15
5.2
55
.3 56
.9 58
.25
8.5
60
.86
1.4
59
.75
9.7
54
.2 55
.85
1.4 52
.55
2.5
51
.85
2.2 53
.1 54
.15
1.9 5
3.3 54
.15
2.5
50
.25
0.5
50
.7 51
.65
1.7
49
.95
0.2
53
.1 54
.2
50
.74
9.0
50
.95
5.4
55
.75
6.2
56
.45
7.0
56
.55
1.35
3.2
53
.7 54
.95
5.4
55
.3 57
.15
9.0
56
.65
9.0
58
.75
3.5
52
.95
1.5
51
.5
51
.3
40
45
50
55
60
65
Jan-1
0F
eb-1
0M
ar-
10
Apr-
10
May-1
0Jun-1
0Jul-10
Aug-1
0S
ep-1
0O
ct-
10
Nov-1
0D
ec-
Jan-1
1F
eb-1
1M
ar-
11
Apr-
11
May-1
1Jun-1
1Jul-11
Aug-1
1S
ep-1
1O
ct-
11
Nov-1
1D
ec-
Jan-1
2F
eb-1
2M
ar-
12
Apr-
12
May-1
2Jun-1
2Jul-12
Aug-1
2S
ep-1
2O
ct-
12
Nov-1
2D
ec-
Jan-1
3F
eb-1
3M
ar-
13
Apr-
13
May-1
3Jun-1
3Jul-13
Aug-1
3S
ep-1
3O
ct-
13
Nov-1
3D
ec-
Jan-1
4F
eb-1
4M
ar-
14
Apr-
14
May-1
4Jun-1
4Jul-14
Aug-1
4S
ep-1
4O
ct-
14
Nov-1
4Jan-1
5F
eb-1
5M
ar-
15
Apr-
15
ISM Manufacturing Index(Values > 50 Indicate Expansion)
January 2010 through April 2015
The manufacturing sector expanded for 62 of the 64 months from Jan. 2010 through Apr. 2015. Pace of recovery has been uneven due to
economic turbulence in the U.S., Europe and China and the high dollar.
Source: Institute for Supply Management at http://www.ism.ws/ismreport/mfgrob.cfm; Insurance Information Institute.
Manufacturing continues to expand in 2015
37
38
$200,000
$300,000
$400,000
$500,000
Jan-
92
Jan-
93
Jan-
94
Jan-
95
Jan-
96
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan 01
Jan 02
Jan 03
Jan 04
Jan 05
Jan 06
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
12-Jan
13-Jan
14-Jan
14-Jan
Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—March 2015
* Seasonally adjusted; Data published May 4, 2015.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/
Monthly shipments in March 2015 are similar to pre-crisis (July 2008) peak but has declined in recent months due to the strong US dollar and weakness abroad.
Manufacturing is energy-intensive and growth leads to gains in many commercial exposures: WC, Commercial Auto, Marine, Property, and various Liability Coverages.
$ Millions
38
The value of Manufacturing Shipments in March 2015 was $482.2B—down 5.1% since the
July 2014 record high of $508.1B
39
Manufacturing Growth for Selected Sectors, 2015 vs. 2014*
-2.2%
1.3%
-0.9%
9.3%
-9.4%
1.2%
-32.5%-38.0%
-2.5%
2.7%
-3.2%
3.6%8.0%
-0.4%
3.2%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
All
Ma
nu
factu
rin
g
Du
rab
le M
fg.
Wo
od
Pro
du
cts
Pri
ma
ry
Me
tals
Fa
bri
ca
ted
Me
tals
Ma
ch
ine
ry
Ele
ctr
ica
l
Eq
uip
.
Co
mp
ute
rs &
Ele
ctr
on
ics
Tra
nsp
ort
atio
n
Eq
uip
.
No
n-D
ura
ble
Mfg
.
Fo
od
Pro
du
cts
Pe
tro
leu
m &
Co
al
Ch
em
ica
l
Pla
stics &
Ru
bb
er
Te
xtile
Pro
du
cts
Manufacturing Is Expanding in Many Sectors But Declining Energy Prices Are Dragging Down Industry Figures. Continued Gortwh Across a Number of
Sectors that Will Contribute to Growth in Insurable Exposures Including: WC, Commercial Property, Commercial Auto and Many Liability Coverages
Growth (%)
Manufacturing of durable goods is stronger than
nondurables in 2015
*Seasonally adjusted; Date are YTD comparing data through March 2015 to the same period in 2014.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/
Durables: +3.6% Non-Durables: -9.4%
Impact of falling energy prices
66%
68%
70%
72%
74%
76%
78%
80%
82%
Mar
01
Jun 0
1
Sep
Dec
Mar
02
Jun 0
2
Sep
Dec
Mar
03
Jun 0
3
Sep
Dec
Mar
04
Jun 0
4
Sep
Dec
Mar
05
Jun 0
5
Sep
Dec
Mar
06
Jun 0
6
Sep
Dec
Mar
07
Jun 0
7
Sep
Dec
Mar
08
Jun 0
8
Sep
Dec
Mar
09
Jun 0
9
Sep
Dec
Mar
10
Jun 1
0
Sep
Dec
Mar
11
Jun 1
1
Sep
Dec
Mar
12
Jun 1
2
Sep
Dec
Mar
13
Jun 1
3
Sep
Dec
Mar
14
Jun 1
4
Sep
Dec
Mar
15
Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures
Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 40
Percent of Industrial Capacity
Hurricane Katrina
March 2001-November 2001
recession
Capacityutilization is falling due to strong dollar
and falling energy prices
The US operated at 78.4% of industrial capacity in Feb. 2015, well above the June
2009 low of 66.9% but is still below pre-recession levels.
March 2001 through March 2015
40
December 2007-June 2009 Recession
The closer the economy is to operating at “full
capacity,” the greater the inflationary pressure
41
States with Lowest Average Manufacturing Payroll Distribution
4.5%4.2%
2.9%2.7%
0.2%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
FL MD HI AK DC
Payroll Share (%)
MD has among the lowest
manufacturing payrolls shares in
the US
Source: NCCI (2015 Regulatory and Legislative Trends Workshop, May 14, 2015); Insurance Information Institute.
42
States with Highest Office and Clerical Payroll Distribution
84.8%
69.9% 69.4% 68.0% 66.3%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
DC CT VA MD IL
Payroll Share (%)
MD has among the highest office and
payroll shares in the US
Source: NCCI (2015 Regulatory and Legislative Trends Workshop, May 14, 2015); Insurance Information Institute.
43
ENERGY SECTOR
America’s Energy Boom Has Been a
Strong Driver of the Economic Recovery,
but Prices Are Falling
Workers Comp Have Benefited from the
Energy Boom, But Exposures Will Suffer
as Energy Prices Swoon43
$3
0.3
8
$2
6.1
8
$3
1.0
8 $4
1.5
1
$5
6.6
4 $6
6.0
8
$7
2.3
4
$9
9.6
0
$6
1.9
5
$7
9.4
8
$9
4.8
8
$9
4.0
5
$9
7.9
8
$9
3.2
3
$4
8.5
4
$2
5.9
8
$0
$20
$40
$60
$80
$100
$120
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Price of Crude Oil (West Texas Intermediate), 2000 – 2015*
*Through March 2015.
Source: Energy Information Administration; Insurance Information Institute.
Dollars per Barrel
Crude oil prices have fallen by nearly half
from their levels just a year ago, adversely impact oil and gas
industry employment
45
Oil & Gas Extraction Employment,Jan. 2010—April 2015*
*Seasonally adjusted
Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
156.4
156.4
156.7
157.6
158.7
157.8
158.0
159.5
160.0
161.5
161.2
161.2
163.1
164.4
166.6 169.3
170.1
171.0
172.5
173.6 176.3
178.2
178.5
180.9
181.3
182.3
184.7
185.2
186.2
187.8
188.6
189.3
189.4
189.4
190.5
192.2
193.1
194.6
194.0
193.8
193.1
192.5
193.0
193.4
193.3
193.1
194.0
194.0
194.0
195.4
193.7
194.6
196.4
197.6
198.6
198.4
199.4
201.5
201.0
201.2
199.4
197.6
197.7
194.4
150
160
170
180
190
200
210
Jan-1
0F
eb-1
0M
ar-
10
Apr-
10
May-1
0Jun-1
0Jul-10
Aug-1
0S
ep-1
0O
ct-
10
Nov-1
0D
ec-1
0Jan-1
1F
eb-1
1M
ar-
11
Apr-
11
May-1
1Jun-1
1Jul-11
Aug-1
1S
ep-1
1O
ct-
11
Nov-1
1D
ec-1
1Jan-1
22/3
0/2
1M
ar-
12
Apr-
12
May-1
2Jun-1
2Jul-12
Aug-1
2S
ep-1
2O
ct-
12
Nov-1
2D
ec-1
2Jan-1
3F
eb-1
3M
ar-
13
Apr-
13
May-1
3Jun-1
3Jul-13
Aug-1
3S
ep-1
3O
ct-
13
Nov-1
3D
ec-1
3Jan-1
4F
eb-1
4M
ar-
14
Apr-
14
May-1
4Jun-1
4Jul-14
Aug-1
4S
ep-1
4O
ct-
14
Nov-1
4D
ec-1
4Jan-1
5F
eb-1
5M
ar-
15
Apr-
15
Despite recent declines, Oil and gas extraction employment is
still up 24.3% since Jan. 2010 as the energy sector booms.
Domestic energy production is essential to any robust
economic recovery in the US.
(Thousands) After peaking at its highest level since 1986, O&G employment is
falling as oil and gas prices decline
20.2 19.9 20.019.5
18.919.4
20.221.1
21.622.4
24.0 24.1 24.4
20.6
10
12
14
16
18
20
22
24
26
00 01 02 03 04 05 06 07 08 09 10 11 12 13
U.S. Natural Gas Production, 2000-2013
Source: Energy Information Administration, Short-Term Energy Outlook (April 2015) , Insurance Information Institute.
Trillions of Cubic Ft. per Year
The U.S. is already the world’s largest natural gas producer—
recently overtaking Russia. This is a potent driver of commercial
insurance exposures
47
POSITIVE LABOR MARKET DEVELOPMENTS
Key Factors Driving Workers
Compensation Exposure
47
48
Average Weekly Hours of All Private Workers, Mar. 2006—April 2015
*Seasonally adjusted
Note: 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); Insurance Information Institute.
33.5
33.6
33.7
33.8
33.9
34.0
34.1
34.2
34.3
34.4
34.5
34.6
34.7
34.8
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15
Hours worked totaled 34.5 per week in April,
just shy of the 34.6 hours typically worked
before the “Great Recession”
Hours worked plunged during the recession,
impacting payroll
exposures
(Hours Worked)
49
Average Hourly Wage of All Private Workers, Mar. 2006—April 2015
*Seasonally adjusted
Note: 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); Insurance Information Institute.
$0.00
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15
The average hourly wage was $24.87 in April 2015,
up 17.2% from $21.22 when the recession began in Dec. 2007
Wage gains continued during the
recession, despite massive job losses
(Hourly Wage)
50
ADVERSE LONG-TERM
LABOR MARKET DEVELOPMENTS
Key Factors Harming Workers
Compensation Exposure and the
Overall Economy
50
51
Labor Force Participation Rate,Jan. 2002—April 2015*
*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); Insurance Information Institute.
62
63
64
65
66
67
68
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15
Large numbers of people are exiting (or not returning to the
labor force)
Labor force participation
continues to shrink despite a falling
unemployment rate
Labor Force Participation as a % of Population
52
Notes: Recessions indicated by gray shaded columns. Data are seasonally adjusted.
Sources: Bureau of Labor Statistics http://www.bls.gov/news.release/empsit.a.htm ; NBER (recession dates); Ins. Info. Inst.
0
100
200
300
400
500
600
700
800
900
1,000
1,100
1,200
1,300
1,400
'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15
In recent good times, the number of discouraged workers ranged from 200,000-400,000 (1995-2000) or from 300,000-500,000 (2002-2007).
There were 756,000
discouraged workers in March 2015
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. 2002—April 2015
Large numbers of people are exiting
(or not returning to) the labor force
0.8%1.7% 1.8%
2.3% 2.3%
18.6%
6.6%6.2%
5.7%6.5%
5.3%
1.6%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
2010 2011 2012 2013 2014 2015*
Growth in Temporary Workers vs. All Nonfarm Employment, 2010-2015*
*Through March 2015.
Source: US Bureau of Labor Statistics , Insurance Information Institute.
Annual Percent Change
Demand for temporary workers has increased 2 to 3 times faster than for workers
overall in recent years
54
Labor on Demand: Huge Implications for the US Economy, Workers & Insurers
The “On-Demand” (Sharing) Economy
The On-Demand Economy Will Transform the American
Workforce and the P/C Insurance Industry Too,
Including Workers Comp 55
56
On-Demand/Sharing/Peer-to-Peer Economy Impacts Many Lines of Insurance
The “On-Demand” Economy is or will impact many segments of the economy important to P/C insurers
Auto (personal and commercial)
Homeowners/Renters
Many Liability Coverages
Professional Liability
Workers Comp
Many unanswered insurance questions
Insurance solutions are increasingly available to fill the many insurance gaps that arise
57
The On-Demand Economy and American Workers: What Is Happening? Technology is Fundamentally Transforming How Resources are
Allocated and Used in the Economy
Labor is No Exception to this Transformation
Technology Offers New Opportunities to Match Labor to Jobs
Owners of spare capacity (workers with time and skill) can be paired
at low cost with those with a demand for that time and skill
Bringing together labor and those who employ labor is not new
BUT: Pairing occurs with a speed and breadth never before possible
Witnessing the Demise of the Traditional Understanding of What is Meant by a “Good” Job
Concept born in the Industrial Age (1880-1980), is eroding
Disintermediation of the firm as the place where labor, jobs matched
Accelerating Trends that Started with Labor Strife, Globalization and Automation that Began in the 1970s and 1980s
58
What’s In Store for the American Worker, Labor Force and Workers Comp
THE NEW AMERICAN WORKER: Two Schools of Thought
OPTIMISTIC OUTLOOK
Technology frees workers from the bonds of centralized, hierarchical
institutions (the firm)
Enhanced coordination of “haves” with “needs” that bypass firms as
intermediaries
Who Benefits?
“Flexers”: People who value or require flexibility in work
arrangements (stay-at-home parents, retirees, students, disabled)
Professionals: People with portable skills that can be offered through
online platforms (semi and high-skilled trades, professional services)
Unemployed/Underemployed: Offers at least some opportunity to
offer and utilize skills and generate income
Sources: Wall Street Journal; The Economist; Insurance Information Institute research.
59
What’s In Store for the American Worker, Labor Force and Workers Comp PESSIMISTIC OUTLOOK
On-Demand companies are software-driven marketplaces and position themselves as “platforms” rather than “employers”
Enormous valuations (e.g., $40B for Uber on $2B in earnings) reflect the extraction of resources that otherwise would go to benefits, investments in safety, training, etc.
– Uber’s valuation was greater than that of 72% of the S&P500 at YE 2014
– Valued more than Delta Airlines, Kraft Foods, CBS, Macy’s, Hilton, Aflac…
Jobs reduced to freelanced, temporary “gigs”
Low skill workers and those who lack flexibility are left further behind
Workers treated as independent contractors without intrinsic or basic economic rights
What Is Potentially Lost or Compromised?
Stability, Retirement Benefits, Sick Pay, Maternity Leave, Overtime
Health Insurance, Liability Coverage, Workers Comp CoverageSources: Wall Street Journal; The Economist; Fortune; Insurance Information Institute research.
60
Potential Consequences for Insurers
On-Demand Platforms Have Struggled with Concepts of Liability
There Has Been a General Resistance to Assuming Liability or Responsibility Unless Compelled to Do So
Companies Have Sought to Keep as Much Liability as Possible on the Individual Offering their (Contracted) Labor or Resources
Minding the Gap
Traditional insurance will often not cover a worker engaged in offering labor or resources through these platforms
E.g., Auto ins. generally won’t cover you if you while driving for Uber
Home ins. won’t cover for other than occasional rentals of property
Unless self-procured, on-demand worker (independent contactors) will generally have no workers comp recourse if injured on the job
Long Legislative and Court Battles Lie Ahead
Insurance Solutions Becoming More Common
61
P/C Insurance Industry Financial Overview
2014: Second-Best Year in the Post-Crisis Era
Modest CATs, Strong Markets
Workers Comp Improvement Helped Too
61
P/C Industry Net Income After Taxes1991–2014 2005 ROE*= 9.6%
2006 ROE = 12.7%
2007 ROE = 10.9%
2008 ROE = 0.1%
2009 ROE = 5.0%
2010 ROE = 6.6%
2011 ROAS1 = 3.5%
2012 ROAS1 = 5.9%
2013 ROAS1 = 10.2%
2014 ROAS1 = 8.4%
•ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.
Sources: A.M. Best, ISO; Insurance Information Institute
$1
4,1
78
$5
,84
0
$1
9,3
16
$1
0,8
70
$2
0,5
98
$2
4,4
04 $
36
,81
9
$3
0,7
73
$2
1,8
65
$3
,04
6
$3
0,0
29
$6
2,4
96
$3
,04
3
$3
5,2
04
$1
9,4
56
$3
3,5
22
$6
3,7
84
$5
5,5
01
$3
8,5
01
$2
0,5
59
$4
4,1
55
$6
5,7
77
-$6,970
$2
8,6
72
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
Net income fell modestly
(-12.5%) in 2014 vs. 2013
$ Millions
-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
F1
6F
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2016F
*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude
mortgage and financial guaranty insurers.
Source: Insurance Information Institute; NAIC, ISO, A.M. Best, Conning
1977:19.0%1987:17.3%
1997:11.6% 2006:12.7%
1984: 1.8% 1992: 4.5% 2001: -1.2%
9 Years
History suggests next ROE
peak will be in 2016-2017,
but that seems unlikely
ROE
1975: 2.4%
2013 9.8%
2014 8.2%
2015F=7.0%
2016F=6.8%
64
ROE: Property/Casualty Insurance by Major Event, 1987–2014
* Excludes Mortgage & Financial Guarantee in 2008 – 2014. Sources: ISO, Fortune; Insurance Information Institute.
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*
P/C Profitability Is Both by Cyclicality and Ordinary Volatility
Hugo
Andrew
Northridge
Lowest CAT Losses in 15 Years
Sept. 11
Katrina, Rita, Wilma
4 Hurricanes
Financial Crisis*
(Percent)
Record Tornado Losses
Sandy
Low CATs
Modestly higher CATs
65
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
Oth
er
Med
ical
Pro
f Lia
bility
Com
m A
uto T
ota
l
Com
mer
cial M
P
All
Lin
es
Oth
er L
iabili
ty
Work
ers
Com
p
PP A
uto T
otal
Hom
eowner
s M
P
Farmow
ners
MP
Alli
ed Lin
es
Source: NAIC; Insurance Information Institute.
Commercial lines have tended to be more profitable than
personal lines over the past decade
66
P/C Insurance Industry Combined Ratio, 2001–2014*
* Excludes Mortgage & Financial Guaranty insurers 2008--2014. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014: = 97.0.
Sources: A.M. Best, ISO.
95.7
99.3100.8
106.3
102.4
96.7 97.2
101.0
92.6
100.8
98.4100.1
107.5
115.8
90
100
110
120
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
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
Avg. CAT Losses,
More Reserve Releases
Higher CAT
Losses, Shrinking Reserve
Releases, Toll of Soft
Market
Cyclical Deterioration
Sandy Impacts
Lower CAT
Losses
Best Combined Ratio Since 1949 (87.6)
A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs
Combined Ratio / ROE
* 2008 -2014 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2014 combined ratio including M&FG insurers is 97.0; 2013 = 96.1; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%.
Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.
97.5
100.6 100.1 100.8
92.7
101.299.5
101.0
96.7 97.2
102.4
106.5
95.7
14.3%
15.9%
12.7%
10.9%
7.4%7.9%
4.7%
6.2%8.2%
9.6%8.8%
4.3%
9.8%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014:Q3
0%
3%
6%
9%
12%
15%
18%
Combined Ratio ROE*
Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs
A combined ratio of about 100 generates an ROE of ~7.0% in 2012/13, ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Lower CATs helped ROEs
in 2013
Underwriting Gain (Loss)1975–2014*
* Includes mortgage and financial guaranty insurers in all years.
Sources: A.M. Best, ISO; Insurance Information Institute.
Large Underwriting Losses Are NOT Sustainable in Current Investment Environment
-$55
-$45
-$35
-$25
-$15
-$5
$5
$15
$25
$35
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
Cumulative underwriting deficit from 1975 through
2013 was $493B
($ Billions) Underwriting profit in 2014
totaled $12.3B
High cat losses in 2011 led to the highest
underwriting loss since 2002
Source: A.M. Best; Barclays research for estimates.
Reserve Change
P/C Insurance Loss Reserve Development, 1992 – 2016E*
Reserve releases are expected to gradually taper off, but will
continue to benefit the bottom line and combined ratio through
at least 2016
70
Policyholder Surplus, 2006:Q4–2014:Q4
Sources: ISO, A.M .Best.
($ Billions)
$487.1
$496.6
$512.8
$521.8
$478.5
$455.6
$437.1 $463.0 $
490.8 $511.5 $
540.7
$530.5
$544.8
$559.2
$559.1
$538.6
$550.3
$567.8
$583.5
$586.9 $607.7
$614.0
$624.4 $
653.3
$671.6
$673.9
$674.7
$662.0
$570.7
$566.5
$505.0
$515.6
$517.9
$400
$450
$500
$550
$600
$650
$700
06:Q
4
07:Q
1
07:Q
2
07:Q
3
07:Q
4
08:Q
1
08:Q
2
08:Q
3
08:Q
4
09:Q
1
09:Q
2
09:Q
3
09:Q
4
10:Q
1
10:Q
2
10:Q
3
10:Q
4
11:Q
1
11:Q
2
11:Q
3
11:Q
4
12:Q
1
12:Q
2
12:Q
3
12:Q
4
13:Q
1
13:Q
2
13:Q
3
13:Q
4
14:Q
1
14:Q
2
14:Q
3
14:Q
4
2007:Q3Pre-Crisis Peak
Surplus as of 12/31/14 stood at a record high $674.7B
2010:Q1 data includes $22.5B of
paid-in capital from a holding
company parent for one insurer’s
investment in a non-insurance
business .
The industry now has $1 of surplus for every $0.74 of NPW,close to the strongest claims-paying status in its history.
Drop due to near-record 2011 CAT losses
The P/C insurance industry entered 2015in very strong financial condition.
US P/C Insurance Industry Excess Capital Position: 1994–2016E
Source: Barclays Research estimates.
Su
rplu
s R
ed
un
dan
cy (
Defi
cie
ncy)
The Industry’s Strong Capital Position Suggests Insurers Are in a Good Position to Increase Risk Appetite, Repurchase Shares
and Pursue Acquisitions
Perc
en
t R
ed
un
dan
cy (
Defi
cie
ncy)
Barclay’s suggests that surplus is approximately
$200B (~30%)
72
-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
Net Premium Growth (All P/C Lines): Annual Change, 1971—2014
(Percent)
1975-78 1984-87 2000-03
Shaded areas denote “hard market” periodsSources: A.M. Best (1971-2013), ISO (2014), Insurance Information Institute.
Net Written Premiums Fell 0.7% in 2007 (First Decline
Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.
2014: 4.1%
2013: 4.4%
2012: +4.2%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
26
28
30
32
34
36
38
40
42
44
46
48
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
Note: Data through 1934 are based on stock companies only. Data include state funds beginning in 1998.
Source: A.M. Best; Insurance Information Institute.
Economic Shocks,
Inflation:
1976: 22.0%
Tort Crisis
1985/86: 22.2%
Post-9/11
2002:15.3%
Twin
Recessions;
Interest Rate
Hikes
1987: 3.7% Great
Recession:
2010: -4.9%
ROE
2014 4.1%
NPW Premium Growth: Peaks & Troughs in the P/C Insurance Industry, 1926 – 2014
Great Depression
1932: -15.9% max drop
Post WW II Peak:
1947: 26.2%
Start of WW II
1941: 15.8%
1950-70: Extended period of stability in growth and
profitability. Low interest rates, low inflation, “Bureau” rate regulation all played a role
1970-90: Peak premium growth was much higher in this period while troughs were comparable. Rapid inflation, economic
volatility, high interest rates, tort environment all played roles
1988-2000: Period of
inter-cycle stability
2010-20XX? Post-
recession period of
stable growth?
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
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
14E
Economic Shocks,
Inflation:
1976: 22.2%Tort Crisis
1986: 30.5%
Post-9/11
2002: 22.4%
Great
Recession:
2009: -9.0%
ROE
2014E 4.0%
Commercial Lines NPW Premium Growth:1975 – 2014E
Recessions:
1982: 1.1%
Commercial lines is prone to more cyclical volatility that personal
lines. Recently, growth has stabilized in the 4% to 5% range.
1988-2000: Period of
inter-cycle stability
2010-20XX? Post-
recession period of
stable growth?
Note: Data include state funds beginning in 1998.
Source: A.M. Best; Insurance Information Institute.
Post-Hurricane
Andrew Bump:
1993: 6.3%
Post Katrina
Bump:
2006: 7.7%
75
Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2013
91
.1
42
.1
41
.4
33
.7
26
.3
25
.8
23
.6
19
.1
15
.6
14
.0
11
.3
10
.0
9.8
6.8
6.7
6.5
4.1
3.2
3.1
3.0
2.7
2.2
2.0
1.7
1.3
0.6
0
10
20
30
40
50
60
70
80
90
100
ND
OK
SD
VT
NE IA
KS ID AK
TX
WY
MN IN AR
TN W
I
OH
MA
CT
NM LA
MS
NJ
NY
US
MO
Pe
ce
nt
ch
an
ge
(%
)
Sources: SNL Financial LLC.; Insurance Information Institute.
Top 25 States
Only 30 states showed any
commercial lines growth from 2007
through 2013
Growth Benchmarks: Commercial
US: 1.3%
76
Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2013
0.5
0.4
0.2
0.1
-0.5
-0.8
-0.9
-1.0
-1.1
-1.1
-1.9
-2.0
-2.1
-2.7
-3.3
-3.7
-4.3
-4.9
-10
.7
-11
.4
-11
.7
-12
.6
-12
.7
-13
.6
-22
.4
-25
.1
-30
-25
-20
-15
-10
-5
0
5
MD
NH
PA
CO IL
WA
VA
KY
NC
ME RI
MI
SC AL
GA
CA
UT
DC
OR
MT HI
DE
FL
AZ
WV
NV
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
Sources: SNL Financial LLC.; Insurance Information Institute.
States with the poorest performing economies also produced the most negative
net change in premiums of the past 6 years
Nearly half the states have yet to see commercial lines premium
volume return to pre-crisis levels
77
Direct Premiums Written: Workers’ CompPercent Change by State, 2007-2013*
32
.9
30
.8
24
.3
21
.5
13
.4
11
.5
11
.0
10
.6
8.1
4.8
4.5
3.0
1.5
-0.3
-0.6
-1.0
-2.3
-2.4
-2.9
-3.0
-3.7
-4.1
-5.7
-5.8
-8.0
-15
-10
-5
0
5
10
15
20
25
30
35
OK IA
SD
NY
CA
CT
NJ
KS
NE IN MI
VT
MN
DC WI
IL
NH
US
NM TX
PA
VA
MD
TN
AR
Pe
ce
nt
ch
an
ge
(%
)
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.
Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 States
Only 13 states showed positive growth in the workers comp line from 2007 – 2013 (up from just 5 through 2012), the result of large job and payroll losses and a soft
market. Even through 2014, fewer than half the states will have recouped DPW losses
78
Direct Premiums Written: Worker’s CompPercent Change by State, 2007-2013*
-8.1
-8.4
-8.7
-8.8
-11
.1
-11
.3
-12
.0
-14
.7
-15
.3
-15
.4
-16
.0
-16
.3
-17
.1
-22
.1
-23
.0
-26
.5
-27
.5
-32
.5
-33
.3
-33
.5
-43
.8
-71
.0
-80-75-70-65-60-55-50-45-40-35-30-25-20-15-10-50
MS
MA RI
GA
NC
AK ID
CO LA
ME AZ
MO
SC AL
KY
UT
FL
OR
DE HI
NV
MT
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.
Sources: SNL Financial LC.; Insurance Information Institute.
States with the poorest performing economies also produced some of the most
negative net change in premiums of the past 6 years
INVESTMENTS: THE NEW REALITY
79
Investment Performance is a Key Driver of Profitability
Low Yields Have an Especially Large Influence on Profitability of
Long-Tailed Lines Like WC79
Property/Casualty Insurance Industry Investment Income: 2000–20141
$38.9$37.1 $36.7
$38.7
$54.6
$51.2
$47.1 $47.6$49.2
$48.0 $47.3$46.2
$39.6
$49.5
$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Due to persistently low interest rates,investment income fell in 2012, 2013 and 2014.
1 Investment gains consist primarily of interest and stock dividends. *Sources: ISO; Insurance Information Institute.
($ Billions)Investment earnings are still below their 2007 pre-crisis peak
Distribution of Invested Assets: P/C Insurance Industry, 2013
Stocks, 22%
Bonds, 62%All Other, 10%
Cash, Cash Equiv. &
ST Investments, 6%
Source: Insurance Information Institute Fact Book 2015, A.M. Best.
Total Invested Assets =
$1.5 Trillion
$ Billions
82
U.S. Treasury Security Yields:A Long Downward Trend, 1990–2015*
*Monthly, constant maturity, nominal rates, through April 2015.
Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.
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
Recession2-Yr Yield10-Yr Yield
Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full 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 years to come.
U.S. Treasury yields plunged to historic lows in 2013. Longer-
term yields rebounded then sank fell again.
82
83
Treasury Yield Curves: Pre-Crisis (July 2007) vs. April 2015
0.02% 0.02% 0.09%0.23%
0.54%
1.69%1.94%
4.82%4.96% 5.04% 4.96%
4.82% 4.82% 4.88% 5.00% 4.93% 5.00%5.19%
1.35%
0.87%
2.59%2.33%
0%
1%
2%
3%
4%
5%
6%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
April 2015 Yield Curve
Pre-Crisis (July 2007)
Treasury yield curve remains near its most depressed level
in at least 45 years. Investment income is falling as a result. Even when the Fed begins to raise rates, yields unlikely to return to
pre-crisis levels anytime soon
The Fed Is Actively is Signaling that it Is Like to Begin to Raise Rates But No Sooner than June and Probably Later
Source: Federal Reserve Board of Governors; Insurance Information Institute.
Book Yield on Property/Casualty Insurance Invested Assets, 2007–2016F
4.42
4.19
3.95
3.71
3.283.20
3.13
3.74
3.52
3.38
3.0
3.2
3.4
3.6
3.8
4.0
4.2
4.4
4.6
07 08 09 10 11 12 13 14E 15F 16F
The yield on invested assets continues to decline as returns on maturing bonds generally still exceed new money yields. The end of the Fed’s QE program in Oct. 2014 should allow some increase
in longer maturities while short term interest rate increases are unlikely until mid-to-late 2015
Sources: Conning.
(Percent)
Book yield in 2014 is down 114 BP from pre-crisis levels
85
-1.8
%
-1.8
%
-2.0
%
-3.6
%
-3.3
%
-3.3
%
-3.7
%
-4.3
%
-5.2
%
-5.7
%
-7.3%
-1.9
%
-2.1
%
-3.1
%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
Per
sona
l Lin
es
Pvt P
ass
Aut
o
Per
s Pro
p
Com
mer
cial
Com
ml A
uto
Cre
dit
Com
m P
rop
Com
m C
as
Fidel
ity/S
uret
y
War
rant
y
Sur
plus
Lin
es
Med
Mal
WC
Rei
nsur
ance
**
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
*Based on 2008 Invested Assets and Earned Premiums
**US domestic reinsurance only
Source: A.M. Best; Insurance Information Institute.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
85
86
Interest Rate Forecasts: 2015 – 2021
1.4
%
2.7
%
3.2
%
3.3
%
3.4
%
3.4
%
3.2
%
2.8
%
1.8
%
2.4
%
2.6
%
2.3
%
3.1
%
3.9
% 4.2
%
4.3
%
4.3
%
4.3
%
0.1
%
0.1
%
0.1
%
0.1
%
0.1
%
0.3
%
0%
1%
1%
2%
2%
3%
3%
4%
4%
5%
5%
10
11
12
13
14
15
F
16
F
17
F
18
F
19
F
20
F
21
F
10
11
12
13
14
15
F
16
F
17
F
18
F
19
F
20
F
21
F
A Full Normalization of Interest Rates Is Unlikely Until 2018 or Later, More than a Decade After the Onset of the Financial Crisis
Yield (%)
Sources: Federal Reserve Board of Governors (historical); Blue Chip Economic Indicators (4/15 for 2015 and 2016; for 2017-2021 3/15 issue); Insurance Info. Institute.
3-Month Treasury 10-Year Treasury
The Fed is expected to
begin raising short-term rates in mid-2015, but
this timeline could easily slip to late 2015 or
even 2016The end of the Fed’s QE program in 2014 and a
stronger economy have yet to push longer-term
yields higher
87
P/C Insurer Net Realized Capital Gains/Losses, 1990-2014
Sources: A.M. Best, ISO, Insurance Information Institute.
$2
.88
$4
.81
$9
.89
$9
.82
$1
0.8
1 $1
8.0
2
$1
3.0
2
$1
6.2
1
$6
.63
-$1
.21
$6
.61
$9
.13
$9
.70
$3
.52 $8
.92
-$7
.90
$5
.85
$7
.04
$6
.18
$1
1.3
7
$1
0.0
6
-$1
9.8
1
$9
.24
$6
.00
$1
.66
-$25
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Insurers Posted Net Realized Capital Gains in 2010 - 2014 Following Two Years of Realized Losses During the Financial Crisis. Realized Capital
Losses Were a Primary Cause of 2008/2009’s Large Drop in Profits and ROE
($ Billions)Realized capital gains rose
sharply as equity markets rallied in 2013-14
Property/Casualty Insurance Industry Investment Gain: 1994–20141
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$64.0
$31.7
$39.2
$53.4$56.2
$54.2
$58.7
$56.2
$58.0
$51.9
$56.9
$0
$10
$20
$30
$40
$50
$60
$70
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11 12 13 14
Total Investment Gains Were Relatively Flat in 2014 as Low Interest Rates Pressured Investment Income but Realized Capital Gains Remained Robust
1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B; Sources: ISO; Insurance Information Institute.
($ Billions)
Investment gains in 2014 dropped slightly (-4.3%) from the post-crisis high
reached in 2013
-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
*Through May 28, 2015.
Source: NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html Ins. Info. Inst.
Tech Bubble
Implosion
Financial
Crisis
Annual Return
Energy Crisis
2014:
13.5%
S&P 500 Index Returns, 1950 – 2015*
Fed Raises Rate
Volatility is endemic to stock markets—and may be increasing—but there is no persistent
downward trend over long periods of time
Workers Compensation Operating Environment
90
Workers Comp Results Have Improved Substantially in Recent Years
Can Gains Be Maintained?
90
Workers Compensation Combined Ratio: 1994–2014P
10
2.0
97
.0 10
0.0
10
1.0
11
2.6
10
8.6
10
5.1
10
2.7
98
.5
10
3.5
10
4.5 1
10
.6 11
5.0
11
5.0
10
8.0
10
1.0
98
.0
12
1.7
10
7.0
11
5.3
11
8.2
80
85
90
95
100
105
110
115
120
125
130
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14P
Workers Comp Results Began to Improve in 2012. Underwriting Results Deteriorated Markedly from 2007-2010/11 and Were the Worst They Had Been in a Decade.
Sources: A.M. Best (1994-2009); NCCI (2010-2014P) and are for private carriers only; Insurance Information Institute.91
WC results have improved markedly
since 2011
10
9.4
11
0.2
11
8.8
10
9.5
11
2.5
11
0.2
10
7.6
10
4.1
10
9.7
11
0.2
10
2.5 1
05
.4
91
.1
93
.6
10
4.2
98
.9
10
2.4
10
7.9
10
3.5
94
.7
95
.5
98
.1
10
2.0
11
1.1
11
2.3
12
2.3
90
95
100
105
110
115
120
125
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
E
15
F
Co
mm
erc
ial L
ine
s C
om
bin
ed
Ra
tio
Source: A.M. Best (1990-2013); Conning (2014E-2015F) Insurance Information Institute.
Commercial Lines Combined Ratio, 1990-2015F*
Commercial lines underwriting
performance in 2013-14 benefited from favorable
rate environment, low cats, modest loss cost trends and prior year
reserve releases
92
93
States with Highest and Lowest WC Combined Ratios for AY 2013
113
90 89 8985 84
95
132122
116 113
0
20
40
60
80
100
120
140
US OR ME MD RI CO AK AR OK TX WV
There is Enormous Variation in Accident Year Combined Ratios Across States
Growth (%)
MD had the 3rd
highest AY combined ratio
in the US in 2013
Source: NCCI (2015 Regulatory and Legislative Trends Workshop, May 14, 2015); Insurance Information Institute.
5 Highest 5 Lowest
118
111
93
101
110
115 115
109
102
137
116
106
129
138
98
101
103
107110
122
115115
124
102
117
103102
121
115
133
80
90
100
110
120
130
140
150
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14p
Private Carriers State Funds
WC Net Combined Ratios: Private Carriers vs. State Funds, 2000 – 2014p
Average: 2000-2014p
Private Carriers: 107.7
State Funds: 118.2
Source: NCCI (2015 Regulatory and Legislative Trends Workshop, May 14, 2015); Insurance Information Institute.
15
.2 16
.0 16
.7
16
.9
16
.5 17
.3
17
.6
16
.5
15
.6
11
.6
10
.7
10
.9
11
.2 12
.2
12
.5 13
.8
14
.1
11
.0
13
.0
14
.7
11
.9
0
2
4
6
8
10
12
14
16
18
20
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
p
Source: NCCI analysis based on Annual Statement data.
Investment Gain on Insurance Transactions Includes Other Income.
Averages reflect the following adjustments: 1990-91: adjusted to include realized capital gains to be consistent with 1992 and
subsequent years; 2013: adjusted to exclude a material realized gain resulting from a single company transaction that involved
corporate restructuring.
Average (1994-2014): 14.1%
95
WC Investment Gain on Insurance Transactions: 5-Year Moving Average
PRIVATE CARRIERSPERCENT
-4.2
-8.6
-3.2
7.5
12
.7
19
.9
17
.5
18
.5
7.5
4.1
3.2
10
.3
16
.7
11
.3
8.1
0.5
-0.2
-0.1
5.1
13
.5
14
.0
0.7
0.1
3.2
-10
.0
-15
-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
**
14
p
Source: NCCI analysis based on Annual Statement data.
Investment Gain Equals 1.00 minus (Combined Ratio less Investment Gains on Insurance Transactions and Other Income).
Averages reflect the following adjustments: 1990-91: adjusted to include realized capital gains to be consistent with 1992 and
subsequent years; **2013: adjusted to exclude a material realized gain resulting from a single company transaction that involved
corporate restructuring. Excluding the adjustment the operating gain is 17.7%.
Average (1994-2014p):
5.9%
96
WC Pretax Operating Gain
PRIVATE CARRIERSPERCENT
2
5
10
15
18
20 2
1
18
15
2
9
10 1
1
13
11
10
6
9
12
4
0
5
10
15
20
25
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
Source: NCCI analysis based on Annual Statement data.
Considers all reserve discounts as deficiencies.
2014 Tabular Discount Is $4.6 Billion
97
Workers Compensation Loss and LAE Net Reserve Deficiencies, 1995 - 2014
PRIVATE CARRIERS
33%
8%
Percent of CY
Total Reserves
As Reported
$ Billions
Workers Compensation Premium: Fourth Consecutive Year of IncreaseNet Written Premium
31.0 31.3 29.8 30.5 29.126.3 25.2 24.2 23.3 22.3
25.0 26.129.2
31.134.7
37.8 38.6 37.633.8
30.3 29.932.3
35.136.9 38.5
35.3 35.734.3
35.433.6
30.128.5
26.9 25.9 25.0
28.6
32.1
37.7
42.3
46.547.8
46.544.3
39.3
34.6 33.8
36.4
39.541.8
44.2
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 14P
State Funds ($ B)
Private Carriers ($ B)
Pvt. Carrier NWP growth was +4.3% in 2014, +5.1% in 2013 and 8.7% in 2012
$ 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.
99
2014 Workers Compensation Direct Written Premium Growth, by State*
PRIVATE CARRIERS: Overall 2014 Growth = +4.6%
*Excludes monopolistic fund states (in gray): OH, ND, WA and WY.
Source: NCCI.
While growth rates
varied widely, most
states experienced
positive growth in
2014
100
2013 Workers Compensation Direct Written Premium Growth, by State*
PRIVATE CARRIERS: Overall 2013 Growth = +5.4%
*Excludes monopolistic fund states (in white): OH, ND, WA and WY.
Source: NCCI.
While growth rates varied widely, all states
experienced positive growth in 2013
101
Workers Compensation Components of Written Premium Change, 2013 to 2014
Written Premium Change from 2013 to 2014
Net Written Premium—Countrywide +4.6%
Direct Written Premium—Countrywide +4.6%
Direct Written Premium—NCCI States +4.5%
Components of DWP Change for NCCI States
Change in Carrier Estimated Payroll +4.7%
Change in Bureau Loss Costs and Mix -1.4%
Change in Carrier Discounting +0.4%
Change in Other Factors +0.8%
Combined Effect +4.5%
Sources: Countrywide: Annual Statement data.
NCCI States: Annual Statement Statutory Page 14 for all states where NCCI provides ratemaking services.
Components: NCCI Policy data.
Growth is now almost entirely payroll driven
102
WC Approved or Filed and Pending Change in NCCI Premium Level by State
Latest Change for Voluntary Market
*Excludes monopolistic fund states (in gray): OH, ND, WA and WY.
Source: NCCI.
While growth rates
varied widely, most
states experienced
positive growth in
2014
103
WC Approved or Filed and Pending Change in NCCI Premium Level by State
Note: Premium level changes are approved changes are approved or filed and pending changes in advisory rates, loss costs and rating values as of
4/24/15 as filed by applicable rating organization, relative to those previously approved. SC is filed and pending. IN and NC are in cooperation with
state rating bureaus.
Source: NCCI.
Latest Change for Voluntary Market
Excludes Law-Only Filings
The majority of states experienced decreases in
rates/loss costs over
WC Approved Changes in Bureau Premium Level (Rates/Loss Costs)
12.1
7.4
10.0
2.9
-6.4
-3.2
-6.0
-8.0
-5.4
-2.6
3.5
1.2
4.9
6.6
-6.0-6.5
-8.8-7.8
-3.2-2.1
-1.2
0.4
8.4
2.2
0.5
-2.2
-10
-5
0
5
10
15
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 15p
Percent
Calendar Year
Cumulative
1990–1993
+36.3%
Cumulative 2000–2003
+17.1%
Cumulative 2004–2011
-30.8%
Cumulative 1994–1999
-27.8%
*States approved through 4/24/15.
Note: Bureau premium level changes are countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by applicable
rating organization, relative to those previously approved.
Source: NCCI.
By Effective Date for Total Market
Approved rates/loss costs are down for the first time since 2010
Cumulative 2011–2014
+11.8%
105
WC COST DRIVERS
Medical and Indemnity Factors
105
Workers Compensation Lost-Time Claim Frequency Declined in 2014
106
-4.4
-9.2
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
-3.8
-6
-2.9-2.0
3.6
-0.8
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14p
Indicated
Adjusted*
Frequency Change: 2007—2012
Contracting: 7.97.1 -9.3%
Manufacturing: 13.612.0 -11.8%
Percent
Accident Year*Adjustments primarily due to significant audit activity.
2014p: Preliminary based on data valued as of 12/31/2014.
Source: NCCI Financial Call data, developed to ultimate and adjusted to current wage an voluntary loss cost level; Excludes high deductible
policies; 1994-2013: Based on data through 12/31/13. Data for all states where NCCI provides ratemaking services, excluding WV.
Frequency is the number of lost-time claims per $1M pure premium at current wage and voluntary loss cost level
Cumulative Change of –51.1%
(1994–2013 adj.)
$9
.8
$9
.5
$9
.2
$9
.7
$9
.8
$1
0.4
$1
1.2
$1
2.2
$1
3.5
$1
4.8
$1
6.1
$1
6.6
$1
7.4
$2
2.3
$2
2.5
$2
2.2
$2
2.2
$2
2.6
$2
3.6
$1
8.1
$1
7.5
$1
9.2
$2
0.8
$2
1.9
+0.0%
-2.5%+1.0%+9.1% +1.3%
+5.9%+3.1%
+1.0%+4.6%+3.1%
+9.2%
+10.1%
+10.1%
+9.0%
+7.7%+5.9%
+1.7%+4.9%-2.8%-3.1%+1.0%
+6.6%
5
7
9
11
13
15
17
19
21
23
25
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14p
Indemnity
Claim Cost ($ 000s)
Accident Year
Workers Comp Indemnity Claim Costs: Modest Increase in 2014
Average indemnity costs per claim were up 4% in
2014 to $23,600, the largest increase since 2008
Average Indemnity Cost per Lost-Time Claim
+4%+1.9%
Cumulative Change = 141%
(1991-2014p)
2014p: Preliminary based on data valued as of 12/31/2014.
1991-2013: Based on data through 12/31/2013, developed to ultimate
Based on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.
4.2%
5.2%5.6%
4.7%
6.3%
2.3%
1.1%
4.7% 4.6%
2.7%
1.1%
5.9%
7.7%
9.0%
10.1%
4.6%
5.9%
6.6%
9.1%
1.9%4.3%
2.7%
3.0%3%2.9%
2.3%
1.1%3.5%
3.6% 3.1%
1.0%
0%
1.3%1.0%
-2.5%
1.0%
1.7%
10.1%
9.2%
3.1%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
95 97 99 01 03 05 07 09 11 13
Change in CPS Wage Change in Indemnity Cost per Lost-Time Claim
WC Indemnity Severity vs. Wage Inflation, 1995 -2014p
2014p: Preliminary based on data valued as of 12/31/2014; 1991-2010: Based on data through 12/31/2010, developed to ultimate. Based on the states
where NCCI provides ratemaking services. Excludes the effects of deductible policies. CPS = Current Population Survey.
Source: NCCI
Annual Change 1994–2014
Indemnity Claim Sev.: +4.6
US Avg. Weekly Wage: +3.4%
Indemnity severities usually
outpace wage gains
WC indemnity severity turned
positive again in 2011
109
States with Top 5 Highest Approved Indemnity Loss Ratio Trend*
0.0%
-0.5%
-1.0%
-1.5%
-2.0%
-3%
-2%
-2%
-1%
-1%
0%
IA CT, IN, NH GA, LA, NC DC, MD, MI, OR,
VT
FL, ME, NE, SC**
Indemnity Trend (%)
MD has among the “highest”
indemnity loss ratio trends,
though the figure is still negative
*NCCI states only. Filings with effective dates between 10/1/14 and 9/1/15.
Source: NCCI (2015 Regulatory and Legislative Trends Workshop, May 14, 2015); Insurance Information Institute.
2014-2015 Rate Filing Season*
Workers Compensation Medical Severity:Moderate Increase in 2014
110
Accident Year
Annual Change 1991–1993: +1.9%
Annual Change 1994–2001: +8.9%
Annual Change 2002–2010: +6.0%
Average Medical Cost per Lost-Time ClaimMedical
Claim Cost ($000s)
$8
.1
$8
.2
$8
.1
$8
.8
$9
.1
$9
.8
$1
0.8
$11
.7
$1
2.9
$1
3.9
$1
5.7
$1
7.1
$1
8.4
$1
9.4
$2
0.9
$2
2.1
$2
3.4
$2
5.0
$2
6.0
$2
6.1
$2
6.8
$2
7.4
$2
8.3
$2
9.4
+6.8%+1.3%-2.1%+9.0%+5.1%
+7.4%+10.1%
+8.3%
+10.6%+7.3%
+13.5%
+8.8%
+7.7%+5.4%
+7.8%
+5.8%
+5.9%
+6.9%+4.0%+0.5%
+2.4%+2.4%
+3.2%+4%
5
10
15
20
25
30
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14p
2014p: Preliminary based on data valued as of 12/31/2014.
1991-2013: Based on data through 12/31/2013, developed to ultimate
Based on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.
Cumulative Change = 263%
(1991-2014p)
Accident Year
Medical severity for lost time claims was up 4% in 2014, the
largest increase since 2009
111
Workers Comp Change in Medical Severity by State, Avg. Annual Change, 2009-2013
Percent
Source: NCCI’s Analysis of Frequency and Severity of Claims Across the Country as of 12/31/13 on ncci.com.
Values reflect methodology and state data underlying the most recent rate/lost cost filing.
TX changes are for the years 2010-2013.
While growth rates
varied widely, most
states experienced
positive growth in
2014
The change in lost-time medical severities from 2009-2013 ranged from a low of -6% to a high of 9%
112
States with Top 5 Lowest Approved Medical Loss Ratio Trend*
-0.5%
-1.0%
-1.5%
-3.0%
-3.5%-4%
-4%
-3%
-3%
-2%
-2%
-1%
-1%
0%
GA, KS, MD, NM,
VT
AR, MS, NV, OK,
OK, SC**, UT
AL, DC, ME KY TX
Indemnity Trend (%)
MD has among the lowest
indemnity loss ratio trends
*NCCI states only. Filings with effective dates between 10/1/14 and 9/1/15.
Source: NCCI (2015 Regulatory and Legislative Trends Workshop, May 14, 2015); Insurance Information Institute.
2014-2015 Rate Filing Season*
113
Annual Inflation Rates, (CPI-U, %),1990–2016F
2.82.6
1.51.9
3.3 3.4
1.3
2.52.3
3.0
3.8
2.8
3.8
-0.4
1.6
3.2
2.1
1.51.7
0.2
2.2
2.9
2.4
3.23.0
5.14.9
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
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 15F 16F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 5/15 (forecasts).
Slack in the U.S. economy and falling energy prices suggests that inflationary pressures should remain subdued for an extended
period of times
Annual Inflation Rates (%)
Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the
commodity bubble reduced inflationary pressures in 2009/10
Inflationary expectations have slipped
(due in part to falling energy
costs) allowing the Fed to
maintain low interest rates
Workers CompensationChange in Medical Severity Comparison to Change in Medical Consumer Price Index (CPI)
5.1
7.4
10.1
8.3
10.6
7.3
13.5
8.8
7.7
5.4
7.8
5.8 5.9
6.9
4.0
0.5
2.4 2.4
34.0
4.5
3.5
2.83.2
3.54.1
4.6 4.7
4.04.4 4.2 4.0
4.4
3.73.2 3.4
3.03.7
3 2.4
0
2
4
6
8
10
12
14
16
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14p
Change in Lost-Time Medical Claim Severity
Change in US Medical CPI
Percent Change
Year
Average Annual Change: 1994—2014
Lost-Time Medical Severity: +6.4%
US Medical CPI: +3.7%
2014p: Preliminary based on data valued as of 12/31/2014.
Sources: Severity: 995-2013: Based on data through 12/31/2013, developed to ultimate
Based on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.
US Medical CPI: US Bureau of Labor Statistics.
4.5%
3.5%
2.8%3.2%
3.5%4.1%
4.6% 4.7%
4.0%4.4% 4.2% 4.0%
4.4%
3.7%3.2% 3.4%
2.5% 2.4%
5.1%
7.4%
10.1%10.6%
13.5%
5.4%
7.8%
5.9%
6.8%
4.0% 4.0%
3.0%3.7%
3.2%
2.4%2.4%
0.5%
5.8%
8.8%
7.7%
7.3%
8.3%
0%
2%
4%
6%
8%
10%
12%
14%
16%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14p
Change in Medical CPI
Change Med Cost per Lost Time Claim
WC Medical Severity Generally Outpaces the Medical CPI Rate
Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
Average annual increase in WC medical severity from 1995 through 2014 was well above the medical CPI (6.4% vs. 3.7%), but the gap has narrowing. Lost-time medical
severities appear to on the rise again.
-1%
0%
1%
2%
3%
4%
5%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*
Change in Medical CPI CPI-All Items
Medical Cost Inflation vs. Overall CPI, 1995 – 2014*
*July 2014 compared to July 2013.
Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
Average Annual Growth Average
1995 – 2013
Healthcare: 3.8%
Total Nonfarm: 2.4%
Though moderating, medical inflation will continue to exceed inflation in the overall economy
U.S. Health Care Expenditures,1965–2022F
$42
.0$
46
.3$
51
.8$
58
.8$
66
.2$
74
.9$83.2
$93
.1$
10
3.4
$11
7.2
$13
3.6
$15
3.0
$17
4.0
$195.5
$22
1.7
$25
5.8
$29
6.7
$33
4.7
$36
9.0
$40
6.5
$444.6
$47
6.9
$51
9.1
$58
1.7
$64
7.5
$72
4.3
$79
1.5
$857.9
$92
1.5
$97
2.7
$1,0
27
.4$
1,0
81
.8$
1,1
42
.6$
1,2
08
.9$1,2
86.5
$1,3
77
.2$
1,4
93
.3$
1,6
38
.0$
1,7
75
.4$
1,9
01
.6$
2,0
30
.5$2,1
63.3
$2,2
98
.3$
2,4
06
.6$
2,5
01
.2$
2,6
00
.0$
2,7
00
.7$
2,8
06
.6$2,9
14.7
$3,0
93
.2$
3,2
73
.4$
3,4
58
.3$
3,6
60
.4$
3,8
89
.1$
4,1
42
.4$
4,4
16
.2$
4,7
02
.0$
5,0
08
.8
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
19
20
21
22
U.S. health care expenditures have been on a relentless climb for most of the past half century, far outstripping population growth,
inflation of GDP growth
117
From 1965 through 2013, US health care expenditures had
increased by 69 fold. Population growth over the same period increased by a factor of just 1.6. By 2022, health spending will have
increased 119 fold.
$ Billions
Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-
Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
19
20
21
22
National Health Care Expenditures as a Share of GDP, 1965 – 2022F*
Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-
Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.
1965
5.8%
Health care expenditures as a share
of GDP rose from 5.8% in 1965 to
18.0% in 2013 and are expected to
reach 19.9% of GDP by 2022
% of GDP
2022 19.9%
1980:
9.2%
1990:
12.5%
2000:
13.8%
2010:
17.9%
Since 2009, heath expenditures as a %
of GDP have flattened out at about 18%--the
question is why and will it last?
119
WC RESIDUAL MARKETS
WC Residual Markets Remain
Fairly Stable
119
9
16
1817
22
24
26
2928
8
3 3
5
11
13 1312
10
87
5 5 5
78 8
4
17
24
11
0
5
10
15
20
25
30
35
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
p
Includes pool and direct assignment data for all NCCI-serviced WC residual market pool states.
Source: NCCI, Residual Market Management Summary.
WC Residual Market Share, 1985-2014p
Residual market share is up slightly over the past
few years
120
Percent NCCI-Serviced WC Residual Market Pools
Calendar Year
17
8
16
6 17
0
16
8
15
9
14
3
12
8
11
2
10
3
10
4
11
7
11
7
11
2
11
4
10
9
10
6
10
5
10
6 11
1
11
4
10
9 11
4
11
4
10
8
10
6
10
611
6
9697 1
00
80
100
120
140
160
180
200
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
p
Includes pool and direct assignment data for all NCCI-serviced WC residual market pool states.
Source: NCCI, Residual Market Management Summary.
WC Residual Market Combined Ratio, 1985-2014p
Residual market combined ratios have
fallen along with voluntary market
combineds
121
Percent NCCI-Serviced WC Residual Market Pools
Calendar Year
122
Commercial Lines Pricing Trends
Survey Results Suggest Commercial Pricing Has
Flattened Out
122
123
Average Commercial Rate Change,All Lines, (1Q:2004–1Q:2015)
-3.2
%-5
.9%
-7.0
%-9
.4%
-9.7
% -8.2
%-4
.6% -2
.7%
-3.0
%-5
.3%
-9.6
%
-11
.3%
-11
.8%
-13
.3%
-12
.0%
-13
.5%
-12
.9%
-11
.0%
-6.4
%-5
.1%
-4.9
%-5
.8%
-5.6
%-5
.3%
-6.4
%-5
.2%
-5.4
% -2.9
%
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
%-1
.5%-0
.1%
0.9
%
-0.1
%
-16%
-11%
-6%
-1%
4%
9%
1Q
04
2Q
04
3Q
04
4Q
04
1Q
05
2Q
05
3Q
05
4Q
05
1Q
06
2Q
06
3Q
06
4Q
06
1Q
07
2Q
07
3Q
07
4Q
07
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
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; Insurance Information Institute
KRW Effect
Pricing as of Q1:2015 had turned (slightly) negative for only the 3rd time in 3 years
(Percent)
Q2 2011 marked the last of 30th
consecutive quarter of price declines
124
Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2015:Q1
Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Percentage Change (%)
Peak = 2001:Q4 +28.5%
KRW : No Lasting Impact
Pricing turned positive in
Q3:2011, the first increase in nearly 8 years
Trough = 2007:Q3 -13.6%
Pricing Turned Negative in Early
2004 and Remained that
way for 7 ½ years
Rate trends are roughly flat, some carriers
reporting small gains, others flat, others small
declines
125
Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2015:Q1
Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
1999:Q4 = 100Despite several years of gains,
pricing today for midsized accounts is where is was in late 2001 (around 9/11), suggesting
additional rate need going forward, esp. in light of record
low interest rates
Directional Pricing Trend in Large Account P/C Renewals
Early 2009 through Early 2015
Source: Barclays’ Commercial Insurance Buyers Survey. 126
Few accounts are seeing increases
127
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
nstr
uctio
n
Wo
rke
rs
Co
mp
Su
rety
D&
O
Co
mm
erc
ial
Au
to
EP
L
Employment Practices rate increases are large
than any other line, followed by Commercial
Auto and D&O
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Workers Comp Rate Changes,2008:Q4 – 2015:Q1
Source: Council of Insurance Agents and Brokers; Information Institute.
-5.5
%
-4.6
%
-4.0
%
-4.6
%
-3.7
%
-3.9
%
-5.4
% -3.7
%
-3.4
% -1.6
%
2.6
% 4.1
%
7.5
%
7.4
%
8.3
%
8.1
%
9.0
%
9.8
%
8.3
%
5.8
%
4.9
%
4.1
%
3.1
%
2.3
%
0.7
%
-0.4
%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
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
WC rate changes were positive for 15 consecutive quarters, before turning slightly
negative in early 2015
(Percent Change)
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
129
Most accounts are renewing flat or slightly down
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; Insurance Information Institute
Workers Comp. Quarterly Rate Changes, by Line: 2000:Q1 to 2015:Q1
1999:Q4 = 100
130
Selected Challenges in the Workers Comp Market
130
A Number of Issues Have Stirred Interest in Workers Compensation in
the First Part of 2015
131
Challenges Raised in the Workers Comp Line
Opt Out Legislation: Coalition of large employers is
aggressively pushing for legislation that would allow
them to forego purchasing WC coverage in favor of
creating their own programs while also seeking to specify
the criteria for claiming and the size of benefits
Allowed in TX for many years and passed in OK in 2014
Failed in TN in 2015; Lobbying in AL, FL, GA, NC, SC
Challenges to Exclusive Remedy: Assertion that after
reforms in several states the WC “Grand Bargain” has
been breached and that benefits are now insufficient
Objective of trial lawyers is to tap into the tort system
132
Recent Challenges Raised in theWorkers Comp Line (continued)
ProPublica/NPR Attack Series: “The Demolition of Workers Comp”
(Published in March 2015)
Thesis: WC benefits have been hollowed out and that workers were
often no longer well served by the system
Claims 33 states watered down benefits under the guise of reform
Series relied on a number of anecdotal cases of claimants who
believed they were adversely impacted
I.I.I. made forceful rebuttal focusing on:
Magnitude of insurer payouts to injured workers
Material improvements in workplace safety, in part due to WC
incentives
Benefits of cost controls without compromising outcomes
http://www.iii.org/article/a-letter-to-the-editor-about-workers-compensation
133
Five Leading WC Proposal Categories to Watch in 2015
Drug Formularies: A few states have formularies and interested is
increasing as studies show formularies can save money
Medical Marijuana: Not priceable (no data). Some states take position
that medical marijuana is not reimbursable (even if legal in state).
Impact on drug-free workplace credit?
Fee Schedules: Most states have fee schedules but 9 still do not. CT,
NC added schedules in 2015, AK expected soon. Failed to introduce
in NH and VA. Cost savings are often significant.
Attorney Fees: Fee caps being challenged. Moving from a fee
schedule to an uncapped “reasonable” fee standard is expected
result in a significant increase in costs. Should fee be paid out of the
award or by insurer/employer?
Opt Out: Effort by some large corporations to restructure WC system
www.iii.org
Thank you for your timeand your attention!
Twitter: twitter.com/bob_hartwig
Download at www.iii.org/presentations
Insurance Information Institute Online:
134
APPENDIX:The “On-Demand” Economy
135
136
The “On-Demand” World is Not New…
Source: Insurance Information Institute.
Companies like Angie’s List
(established in 1995 and going online in 1999)
have been around for decades
The Geek Squad has been
around since 1994…
Peapod sprouted way back in 1989!
137
…But the “On-Demand” World is Exploding as Is the Demand for “On-Tap” Workers
Source: Insurance Information Institute.
Need something done around the house…Click on
Handy
Hate doing laundry?
Washio will do it for you…
Hate doing just about everything?
Taskrabbit will take on virtually
all your “tasks”…
138
You Can Live Your Life with the Swipeof a Finger…
Get married…
…Move
…And if it doesn’t work out…
139
Some Players in the On-Demand Economy Have Become Household Names
…Need a Lyft?
…This ride has taken Wall Street to the
stratosphere
Rent a place…
Technology and Employment
What Makes the On-Demand Economy Possible?
Why Does It Matter for Insurers?
140
GLOBAL SHIPMENTS OF SMARTPHONES (MILLIONS)
Smartphones are the
breakthrough technology behind
the on-demand economy
2015: ~50% of adults globally
have a smartphone
2020: About 80% will own one
0.8%1.7% 1.8%
2.3% 2.3%
18.6%
6.6%6.2%
5.7%6.5%
5.3%
1.6%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
2010 2011 2012 2013 2014 2015*
Growth in Temporary Workers vs. All Nonfarm Employment, 2010-2015*
*Through March 2015.
Source: US Bureau of Labor Statistics , Insurance Information Institute.
Annual Percent Change
Demand for temporary workers has increased 2 to 3 times faster than for workers
overall in recent years
The “On-Demand” (Sharing) Economy
The On-Demand Economy Will Transform the American
Workforce and the P/C Insurance Industry Too
144
145
On-Demand/Sharing/Peer-to-Peer Economy Impacts Many Lines of Insurance
The “On-Demand” Economy is or will impact many segments of the economy important to P/C insurers
Auto (personal and commercial)
Homeowners/Renters
Many Liability Coverages
Professional Liability
Workers Comp
Many unanswered insurance questions
Insurance solutions are increasingly available to fill the many insurance gaps that arise
146
The On-Demand Economy and American Workers: What Is Happening? Technology is Fundamentally Transforming How Resources are
Allocated and Used in the Economy
Labor is No Exception to this Transformation
Technology Offers New Opportunities to Match Labor to Jobs
Owners of spare capacity (workers with time and skill) can be paired
at low cost with those with a demand for that time and skill
Bringing together labor and those who employ labor is not new
BUT: Pairing occurs with a speed and breadth never before possible
Witnessing the Demise of the Traditional Understanding of What is Meant by a “Good” Job
Concept born in the Industrial Age (1880-1980), is eroding
Disintermediation of the firm as the place where labor, jobs matched
Accelerating Trends that Started with Labor Strife, Globalization and Automation that Began in the 1970s and 1980s
147
What’s In Store for the American Worker, Labor Force and Workers Comp
THE NEW AMERICAN WORKER: Two Schools of Thought
OPTIMISTIC OUTLOOK
Technology frees workers from the bonds of centralized, hierarchical
institutions (the firm)
Enhanced coordination of “haves” with “needs” that bypass firms as
intermediaries
Who Benefits?
“Flexers”: People who value or require flexibility in work
arrangements (stay-at-home parents, retirees, students, disabled)
Professionals: People with portable skills that can be offered through
online platforms (semi and high-skilled trades, professional services)
Unemployed/Underemployed: Offers at least some opportunity to
offer and utilize skills and generate income
Sources: Wall Street Journal; The Economist; Insurance Information Institute research.
148
What’s In Store for the American Worker, Labor Force and Workers Comp PESSIMISTIC OUTLOOK
On-Demand companies are software-driven marketplaces and position themselves as “platforms” rather than “employers”
Enormous valuations (e.g., $40B for Uber on $2B in earnings) reflect the extraction of resources that otherwise would go to benefits, investments in safety, training, etc.
– Uber’s valuation was greater than that of 72% of the S&P500 at YE 2014
– Valued more than Delta Airlines, Kraft Foods, CBS, Macy’s, Hilton, Aflac…
Jobs reduced to freelanced, temporary “gigs”
Low skill workers and those who lack flexibility are left further behind
Workers treated as independent contractors without intrinsic or basic economic rights
What Is Potentially Lost or Compromised?
Stability, Retirement Benefits, Sick Pay, Maternity Leave, Overtime
Health Insurance, Liability Coverage, Workers Comp CoverageSources: Wall Street Journal; The Economist; Fortune; Insurance Information Institute research.
149
Potential Consequences for Insurers
On-Demand Platforms Have Struggled with Concepts of Liability
There Has Been a General Resistance to Assuming Liability or Responsibility Unless Compelled to Do So
Companies Have Sought to Keep as Much Liability as Possible on the Individual Offering their (Contracted) Labor or Resources
Minding the Gap
Traditional insurance will often not cover a worker engaged in offering labor or resources through these platforms
E.g., Auto ins. generally won’t cover you if you while driving for Uber
Home ins. won’t cover for other than occasional rentals of property
Unless self-procured, on-demand worker (independent contactors) will generally have no workers comp recourse if injured on the job
Long Legislative and Court Battles Lie Ahead
Insurance Solutions Becoming More Common
150
On-Demand Workers
Who Are They?
And Who’s Driving Demand for Them?
150
151
19%
9%8%
6%
2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Tried It--Any
Sector
Entertainment &
Media
Automotive &
Transportation
Hospitality &
Dining
Retail
Percent of People Who Have Engaged in an “On Demand/Sharing Economy” Transaction
The majority of the US population has yet to engage in the “On
Demand” economy
Sources: PwC survey of 1,000 adults in the U.S., conducted online, December 2014; Insurance Information Institute.
Percent
About 19% of the US population has engaged in an “On Demand/Sharing Economy” Transaction
152
Age of People Who are Providing the Sharing/On-Demand Economy
Sources: PwC survey of 1,000 adults in the U.S., conducted online, December 2014; Insurance Information Institute.
18 to 24
14%
25 to 34
24%
35 to 44
24%
45 to 54
14%
55 to 64
8%
65+
16%
Being a provider of services in the
Sharing/On-Demand Economy is
attractive to workers in the 25-44 age range (who want
flexibility in raising families) as well as
seniors age 65+ who see the offering their services on-demand as a way to augment retirement income
About 7% of US population are providers in the Sharing Economy, cutting across age and incomes;
51% of those familiar with the concept could see them selves as providers within the next two years.
153
Household Income: Providers of the Sharing/On-Demand Economy
Sources: PwC survey of 1,000 adults in the U.S., conducted online, December 2014; Insurance Information Institute.
Less than
$25,000
19%
$25,000 -
$49,999
24%
$50,000 -
$74,999
16%
$75,000 -
$99,999
16%
$100,000 -
$149,999
11%
$150,000 -
$149,999
3%
$200,000+
11%
Being a provider of services in the
Sharing/On-Demand Economy is particularly
attractive to workers with household incomes under
$50,000
About 7% of US population are providers in the Sharing Economy, cutting across age and incomes;
51% of those familiar with the concept could see them selves as providers within the next two years.
The On-Demand Economy andWall Street
Wall Street Loves the On-Demand Economy
Labor Markets, Insurance Markets Will Be Impacted
154
156
An UBER Case Study
Uber is the Best Known of the
On-Demand Companies
Wall Street Loves Uber
Vested Interests Hate Uber
156
Looking Ahead: Disruptive Forces Rule
Technology’s Impacts on the Economy, the Workforce and the
Insurance Industry Will Be Significant
159
160
Worldwide Industrial Robot Installations,1992-2017F
*Estimate.
Sources: Outlook on World Robotics 2014, International Federation of Robotics; Insurance Information Institute.
Worldwide installations of industrial robots exceeded
200,000 in 2014—a new record and will approach
300,000 by 2017
36,000 installations are expected in North America
by 2017
161
Future Shock: Many More Transformative Technologies Are Around the Corner
By 2035, it is estimated that 25% of new vehicle
sales could be fully autonomous models (more than 4 million people work
in transportation occupations today)
Source: Boston Consulting Group.
Up Next
Driverless cars
Driverless trucks, trains, planes and ships
Wearable devices
Implantable devices
Artificial intelligence
Advanced robotics