Economic Forces Shaping the Workers Compensation Insurance Industry of Today and TomorrowWorkers Compensation Educational Conference

Orlando, FLAugust 25, 2015

Download at www.iii.org/presentations

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

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

2

P/C Insurance Industry Financial Overview

Reasonably Strong PerformanceWorkers Comp Improvement

Helped Too

2

P/C Industry Net Income After Taxes1991–2015:Q1 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% 2015:Q1 ROAS = 10.8%

• 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 $3

6,8

19

$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 $

33

,52

2

$6

3,7

84

$5

5,5

01

$1

8,1

72

$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

15:Q

1

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

:Q1

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2015:Q1

*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%

10 Years

10 Years

9 Years

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

2013 9.8%

2014 8.2%

2015:Q1 10.8%

6

P/C Insurance Industry Combined Ratio, 2001–2015:Q1*

* 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 97.296.0

101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15:Q1

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned

Premiums Relatively Low CAT Losses, Reserve Releases

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Cyclical Deterioration

Sandy Impacts

Lower CAT

Losses

Best Combined

Ratio Since 1949 (87.6)

Avg. CAT Losses,

More Reserve Releases

8

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

25

.6

18

.4

13

.4

13

.2

9.2

8.9

7.9

7.8

7.1

7.1

6.6

4.9

-1.0

-5

0

5

10

15

20

25

30

Fire

Inla

nd Mar

ine

All O

ther

Med

ical

Pro

f Lia

bility

Comm

Auto

Tota

l

Comm

erci

al MP

All Lin

es

Oth

er L

iabili

ty

Work

ers

Comp

PP Auto

Tota

l

Homeow

ners

MP

Farmow

ners

MP

Allied L

ines

Source: NAIC; Insurance Information Institute.

Commercial lines have tended to be more profitable than

personal lines over the past decade

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

Economic Shocks, Inflation:

1976: 22.2%Tort Crisis

1986: 30.5%

Post-9/112002: 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%

12

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

80

.4

36

.8

33

.3

29

.4

24

.8

22

.5

21

.0

20

.6

15

.2

14

.6

13

.9

11

.8

10

.3

8.7

8.5

8.4

8.0

7.9

7.6

7.1

6.6

5.9

5.9

5.8

5.4

4.5

0

10

20

30

40

50

60

70

80

90

ND

SD VT

OK

NE IA KS

TX

WY

AK IN

MN WI

MA

AR

CT

NY

NJ

CO

NM

OH LA

US

MS

NH

MO

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LLC.; Insurance Information Institute.

Top 25 States

43 states showed commercial lines growth from 2007

through 2014

Growth Benchmarks: Commercial

US: 5.9%

13

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

4.5

4.4

4.2

4.1

3.9

3.8

3.7

3.3

3.3

3.2

3.1

2.8

2.8

2.2

2.1

1.4

0.9

-1.3

-3.2

-5.3

-6.5

-6.9

-9.2

-10

.7

-19

.9

-22

.2

-25

-20

-15

-10

-5

0

5

10

MI

TN

MD

MT

CA RI

WA

GA

PA

UT IL KY VA

NC

ME

SC ID AL

DC HI

FL

OR AZ

DE

NV

WV

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

14

Direct Premiums Written: Workers’ CompPercent Change by State, 2007-2014*

35

.1

27

.1

27

.1

24

.4

22

.3

20

.6

18

.7

14

.6

11

.7

9.4

7.5

7.1

6.7

4.2

3.9

3.8

2.7

1.7

0.5

0.1

0.1

0.0

-1.1

-1.1

-1.3

-5

0

5

10

15

20

25

30

35

40

IA CA

SD

NY

OK NJ

CT

KS

NE MI

MS IN

MN

US

NM TX WI

IL

CO

GA

VA

NH PA RI

MD

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 21 states have seen works comp premium volume

return to pre-crisis levels

15

Direct Premiums Written: Worker’s CompPercent Change by State, 2007-2014*

-2.6

-2.9

-3.6

-4.8

-6.0

-8.5

-9.1

-9.2

-9.2

-11

.7

-12

.2

-13

.5

-14

.4

-17

.1

-17

.9

-19

.4

-19

.5

-23

.4

-25

.2

-29

.5

-30

.3

-34

.9

-80-75-70-65-60-55-50-45-40-35-30-25-20-15-10-50

VT

DC

MA ID NC AZ

MO LA

TN AR

SC

ME

AK

AL

FL

KY

UT

MT HI

DE

OR

NV

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 7 years

INVESTMENTS: THE NEW REALITY

16

Investment Performance is a Key Driver of Profitability

Low Yields Have an Especially Large Influence on Profitability of

Long-Tailed Lines Like WC16

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

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.2

$48.0 $47.3$46.2 $46.7

$39.6

$49.5

$52.3

$30

$40

$50

$60

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

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

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

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

18

U.S. Treasury Security Yields:A Long Downward Trend, 1990–2015*

*Monthly, constant maturity, nominal rates, through July 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.

18

-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 August 24, 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

2015 YTD:

-8.1%

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

25

Labor Markets Trends: Recovery Continues in 2015

In 2014…Largest Increase in Jobs Since 1997Unemployment Rate Fell to Lowest

Level Since 2008Payrolls Expanded to Record High

25

26

Unemployment and Underemployment Rates: Still Too High, But Falling

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Jan12

Jan13

Jan14

Jan15

"Headline" Unemployment Rate U-3

Unemployment + Underemployment RateU-6

“Headline” unemployment

was 5.3% in July 2015. 4.5% to

5.5% is “normal.”

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

January 2000 through July 2015, Seasonally Adjusted (%)

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

26

U-6 soared from 8.0% in March

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

“normal.”

23

15

21

70

52

12

65

73

-71

32 6

4 81

55

3-1

15

-10

6-2

21

-21

5-2

06

-26

1-2

58

-42

2-4

86

-77

6 -69

3-8

21

-69

8-8

10

-80

1-2

94

-42

6-2

72

-23

2 -14

1-2

71

-15

-23

22

0-3

81

92

94 11

01

20

11

71

07

19

91

49

94

72

22

32

31 3

20

16

61

86

21

91

25

26

81

77

19

12

22

36

42

28

24

61

02

13

17

51

72

13

61

59

25

52

11

21

52

19 26

31

64

18

8 22

22

01

17

01

80

15

32

47

27

28

61

83

17

5 22

33

13

23

8 27

22

43

20

92

35

21

84

14

31

92

02 2

61

11

7 18

9 25

22

27

21

0

11

3

(1,000)

(800)

(600)

(400)

(200)

0

200

400

600

Jan-

07F

eb-0

7M

ar-0

7A

pr-0

7M

ay-

Jun-

07Ju

l-07

Aug

-S

ep-

Oct

-07

Nov

-D

ec-

Jan-

08F

eb-0

8M

ar-0

8A

pr-0

8M

ay-

Jun-

08Ju

l-08

Aug

-S

ep-

Oct

-08

Nov

-D

ec-

Jan-

09F

eb-0

9M

ar-0

9A

pr-0

9M

ay-

Jun-

09Ju

l-09

Aug

-S

ep-

Oct

-09

Nov

-D

ec-

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-

Jun-

10Ju

l-10

Aug

-S

ep-

Oct

-10

Nov

-D

ec-

Jan-

11F

eb-1

1M

ar-1

1A

pr-1

1M

ay-

Jun-

11Ju

l-11

Aug

-S

ep-

Oct

-11

Nov

-D

ec-

Jan-

12F

eb-1

2M

ar-1

2A

pr-1

2M

ay-

Jun-

12Ju

l-12

Aug

-S

ep-

Oct

-12

Nov

-D

ec-

Jan-

13F

eb-1

3M

ar-1

3A

pr-1

3M

ay-

Jun-

13Ju

l-13

Aug

-S

ep-

Oct

-13

Nov

-D

ec-

Jan-

14F

eb-1

4M

ar-1

4A

pr-1

4M

ay-

Jun-

14Ju

l-14

Aug

-S

ep-

Oct

-14

Nov

-D

ec-

Jan-

15F

eb-1

5M

ar-1

5A

pr-1

5M

ay-

Jun-

15Ju

l-15

Monthly Change in Private Employment

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

Private Employers Added 12.84 Million Jobs Since Jan. 2010 After Having Shed 5.01 Million Jobs in 2009 and 3.76 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)

Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute

Monthly losses in Dec. 08–Mar.

09 were the largest in the

post-WW II period

210,000 private sector jobs were created in July.

27

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

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

28

US Unemployment Rate Forecast4

.5%

4.5

%4

.6%

4.8

%4

.9% 5.4

% 6.1

%6

.9%

8.1

%9

.3%

9.6

% 10

.0%

9.7

%9

.6%

9.6

%

8.9

%9

.1%

9.1

%8

.7%

8.3

%8

.2%

8.0

%7

.8%

7.7

%7

.6%

7.3

%7

.0%

6.6

%6

.2%

6.1

%5

.7%

5.6

%5

.4%

5.3

%5

.1%

5.0

%4

.9%

4.8

%4

.8%

9.6

%

4%

5%

6%

7%

8%

9%

10%

11%

07

:Q1

07

:Q2

07

:Q3

07

:Q4

08

:Q1

08

:Q2

08

:Q3

08

:Q4

09

:Q1

09

:Q2

09

:Q3

09

:Q4

10

:Q1

10

:Q2

10

:Q3

10

:Q4

11

:Q1

11

:Q2

11

:Q3

11

:Q4

12

:Q1

12

:Q2

12

:Q3

12

:Q4

13

:Q1

13

:Q2

13

:Q3

13

:Q4

14

:Q1

14

:Q2

14

:Q3

14

:Q4

15

:Q1

15

:Q2

15

:Q3

15

:Q4

16

:Q1

16

:Q2

16

:Q3

16

:Q4

Rising unemployment eroded payrolls

and WC’s exposure base.

Unemployment peaked at 10% in late 2009.

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

2007:Q1 to 2016:Q4F*

Unemployment forecasts have been revised modestly

downwards. Optimistic scenarios put the

unemployment as low as 5.0% by Q4 of 2015.

Jobless figures have been revised

downwards for 2015/16

29

Unemployment Rates by State, June 2015:Highest 25 States*

7.4

7.0

6.9

6.8

6.6

6.6

6.4

6.4

6.3

6.1

6.1

6.1

5.9

5.9

5.9

5.8

5.8

5.7

5.7

5.7

5.5

5.5

5.5

5.5

5.4

5.3

0

2

4

6

8

WV DC NV AK MS SC LA NM CA AL GA NJ AZ IL RI MO NC AR CT TN FL MI NY OR PA US

Un

em

plo

ym

en

t R

ate

(%

)

*Provisional figures for June 2015, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In June, 21 states and the District of Columbia had over-the-month unemployment rate decreases, 12 states had increases, and 17 states had no change.

30

5.3

5.2

5.2

5.1

4.9

4.9

4.7

4.7

4.6

4.6

4.5

4.5

4.4

4.2

4.1

4.0

4.0

3.9

3.9

3.8

3.8

3.7

3.6

3.5

3.1

2.6

0

1

2

3

4

5

6

WA MD OH KY IN VA DE ME MA WI KS OK CO TX WY HI ID MN MT NH SD IA VT UT ND NE

Un

em

plo

ym

en

t R

ate

(%

)

Unemployment Rates by State, June 2015: Lowest 25 States*

*Provisional figures for June 2015, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In June, 21 states and the District of Columbia had over-the-month unemployment rate decreases, 12 states had increases, and 17 states had no change.

32

Average Weekly Hours of All Private Workers, Mar. 2006—April 2015

*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates); 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)

33

Average Hourly Wage of All Private Workers, Mar. 2006—April 2015

*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates); 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)

CONSTRUCTION INDUSTRY OVERVIEW & OUTLOOK

37

The Construction Sector Is Critical to the Economy and the P/C Insurance Industry

37

43

(Millions of Units)

New Private Housing Starts, 1990-2021F

1.4

81

.47 1

.62

1.6

41

.57

1.6

0 1.7

1 1.8

5 1.9

6 2.0

71

.80

1.3

60

.91

0.5

50

.59

0.6

1 0.7

8 0.9

2 1.1

01

.12 1

.27 1.4

11

.46

1.4

91

.52

1.5

2

1.3

51.4

61

.29

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 (8/15); 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

47

Construction Employment,Jan. 2010—July 2015*

*Seasonally adjusted.Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

5,58

15,

522

5,54

25,

554

5,52

75,

512

5,49

75,

519

5,49

95,

501

5,49

75,

468

5,43

55,

478

5,48

55,

497

5,52

45,

530

5,54

75,

546

5,58

35,

576

5,57

75,

612

5,62

95,

629

5,62

85,

627

5,60

85,

623

5,63

25,

641

5,64

95,

668

5,68

45,

724

5,74

6 5,79

85,

815

5,81

35,

833

5,85

65,

854

5,86

65,

893

5,91

85,

953

5,93

7 6,00

66,

032

6,06

26,

103

6,11

46,

121

6,15

26,

169

6,19

16,

201

6,23

16,

275

6,31

66,

347

6,33

56,

365

6,37

76,

377

6,38

3

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-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0S

ep-1

0O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

0M

ar-1

2A

pr-1

2M

ay-1

2Ju

n-12

Jul-1

2A

ug-1

2S

ep-1

2O

ct-1

2N

ov-1

2D

ec-1

2Ja

n-13

Feb

-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-12

Oct

-13

Nov

-13

Dec

-13

Jan-

14F

eb-1

4M

ar-1

4A

pr-1

4M

ay-1

4Ju

n-14

Jul-1

4A

ug-1

4S

ep-1

4O

ct-1

4N

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4D

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4Ja

n-15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15Ju

l-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.

48

Construction Employment, Jan. 2003–July 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

48

Construction employment

peaked at 7.726 million in April 2006

(Thousands) Construction employment as of July 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

49

ENERGY SECTOR

America’s Energy Boom Has Been a Strong Driver of the Economic Recovery,

but Prices Are FallingWorkers Comp Has Benefited from the

Energy Boom, But Exposures Will Suffer as Energy Prices Swoon

49

52

Employment in Oil & Gas Extraction,Jan. 2010—July 2015*

*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep

-10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep

-11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep

-13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep

-14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

150

160

170

180

190

200

210

156.

515

6.4

156.

715

7.6

158.

715

8.1

158.

415

9.7

160.

216

1.5

161.

416

1.0

162.

716

4.3

166.

616

9.2

170.

117

1.2

172.

617

4.0

176.

617

8.2

178.

718

0.6

181.

318

2.3

184.

718

5.2

186.

218

7.8

188.

618

9.3

189.

418

9.4

190.

519

2.2

193.

119

4.6

194.

019

3.8

193.

119

2.5

193.

019

3.4

193.

319

3.1

194.

019

4.0

194.

019

5.4

193.

719

4.6

196.

419

7.6

198.

619

8.4

199.

420

1.5

201.

020

1.2

199.

419

7.6

197.

719

4.4

194.

219

3.3

193.

8

Oil and gas extraction employment was up

28.8% by Oct. 2014 but falling energy prices have taken their toll

(000)

Employment in the O&G segment is down 3.8%

since its Oct. 2014 peak

53

MANUFACTURING SECTOR

A Potent Driver of Jobs, Workers Comp Payroll Exposure

America’s Manufacturing Renaissance Has Hit a Rough Patch with the High Dollar/Chinese Devaluation,

Weak Export Markets53

57

Manufacturing Employment,Jan. 2010—July 2015*

11,4

6011

,460

11,4

6611

,497

11,5

3111

,539

11,5

5811

,548

11,5

5411

,555

11,5

7711

,590

11,6

2411

,662

11,6

8211

,707

11,7

1511

,724

11,7

4711

,760

11,7

6211

,770

11,7

6911

,797

11,8

3411

,857

11,8

9911

,916

11,9

3011

,941

11,9

6511

,961

11,9

4811

,951

11,9

4711

,961

11,9

8012

,002

12,0

0612

,006

12,0

0712

,005

11,9

8312

,011

12,0

2212

,040

12,0

7212

,086

12,1

0212

,122

12,1

3112

,142

12,1

5412

,177

12,1

9112

,205

12,2

1412

,237

12,2

8212

,301

12,3

1812

,321

12,3

2712

,327

12,3

3312

,335

12,3

50

11,250

11,500

11,750

12,000

12,250

12,500Ja

n-1

0F

eb

-10

Ma

r-1

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10

Ma

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c-1

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Ma

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Ma

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1Ju

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22

/30

/2M

ar-

12

Ap

r-1

2M

ay-

12

Jun

-12

Jul-

12

Au

g-1

2S

ep

-12

Oct

-12

No

v-1

2D

ec-

12

Jan

-13

Fe

b-1

3M

ar-

13

Ap

r-1

3M

ay-

13

Jun

-13

Jul-

13

Au

g-1

3S

ep

-13

Oct

-13

No

v-1

3D

ec-

13

Jan

-14

Fe

b-1

4M

ar-

14

Ap

r-1

4M

ay-

14

Jun

-14

Jul-

14

Au

g-1

4S

ep

-14

Oct

-14

No

v-1

4D

ec-

14

Jan

-15

Fe

b-1

5M

ar-

15

Ap

r-1

5M

ay-

15

Jun

-15

Jul-

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 (+890,000 or +7.8%)and still growing.

The “On-Demand” (Sharing) Economy

The On-Demand Economy Will Transform the American

Workforce and the P/C Insurance Industry Too

58

59

Labor on Demand: Huge Implications for the US Economy, Workers & Insurers

Will YOUR job be reduced to an app?

64

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

Technology and Employment

What Makes the On-Demand Economy Possible?

Why Does It Matter for Insurers?

65

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

69

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

72

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

73

On-Demand Workers

Who Are They?

And Who’s Driving Demand for Them?

73

74

19%

9%8%

6%

2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Tried It--AnySector

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

75

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 2414%

25 to 3424%

35 to 4424%

45 to 5414%

55 to 648%

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.

76

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

77

79

An UBER Case Study

Uber is the Best Known of the On-Demand CompaniesWall Street Loves Uber

Vested Interests Hate Uber

79

Uber says drivers are independent

contractors. State of California says they’re

employees. Big impacts for several lines of insurance

including WC!

www.iii.org

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwigDownload at www.iii.org/presentations

Insurance Information Institute Online:

85