P/C Insurance IndustryOverview & OutlookCasualty Actuaries of Greater New York

May 24, 2018

James Lynch, FCAS, MAAA, Chief Actuary and Vice President, Research and EducationInsurance Information Institute 110 William Street New York, NY 10038 jamesl@iii.org www.iii.org

2

Who We Are and What We Do

The mission of the Insurance Information Institute is to

improve public understanding of insurance—what it does and

how it works.

We Are…

A voice for the property/casualty insurance industry.

The go-to source for credible and unbiased insurance information

for the media, the industry and consumers.

Dedicated to ensuring the media covers our business fairly and

accurately.

Ready to assist our member companies with their

communications, research and planning needs.

We do not lobby.

2

P/C Financials, 2017 Q4

4

446.9 440.3

423.1 426.2

442.0

461.2

481.9

502.8

520.5

534.0

558.3

400

420

440

460

480

500

520

540

560

580

07 08 09 10 11 12 13 14 15 16 17

($ Billions)

Net Written Premium by Year

Sources: A.M. Best (2007-2013), ISO (2014-16), Federal Reserve Bank of St. Louis (FRED), Insurance Information Institute.

Steady Growth Since Last Recession – Following Overall Economic Trends.

5

3.9%

4.1%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

07 08 09 10 11 12 13 14 15 16 17

NPW Growth GDP Growth

Net Written Premium Growth

Sources: A.M. Best (2007-2013), ISO (2014-16), Federal Reserve Bank of St. Louis (FRED), Insurance Information Institute.

Premium Growth Continues to Follow Economic Growth and Inflation Trends.

6

P/C industry net income after taxes, 2007-2017

Through fourth quarter. Adjusted for inflation using the BLS CPI calculator, to 2017 dollars.Sources: NAIC data, sourced from S&P Global Market Intelligence; Insurance Information Institute.

75.2

4.2

36.8

41.8

21.9

41.0

75.4

67.1

60.3

45.2

40.3

$0

$10

$20

$30

$40

$50

$60

$70

$80

07 08 09 10 11 12 13 14 15 16 17

(Billions, 2017 dollars)

Catastrophes Drove Earnings Down in 2017, Continuing a Four-Year Slide in Inflation-Adjusted Profits.

7

P/C Insurance Industry Combined Ratio, 2000-2017*

*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, a Verisk Analytics company; I.I.I. estimate for 2017.

110.1

115.8

107.5

100.1

98.4

100.8

92.6

95.7

101

99.3

101.1

106.5

102.5

96.4 97.097.8

100.7

103.7

99.2 98.9

90

100

110

120

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

Hurricanes, Wildfires Drive CR Higher.

Heavy Use of Reinsurance Lowered Net

Losses.

Best Combined

Ratio Since 1949 (87.6)

Higher CAT Losses, Shrinking Reserve Releases, Toll of

Soft Market

Sandy

3 Consecutive Years of U/W Profits; 1st time

since 1971-73

8

U.S. Insured Catastrophe Losses

Sources: Property Claims Service, a Verisk Analytics business; Insurance Information Institute.

15

58

40

9

28

1312

4

15

12

6

36

8

17

35

77

118

31

1215

3537

13

1615

23

91

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

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

(Billions, 2016 dollars)

Harvey, Irma and Maria Losses Made 2017 a Record Cat Year.

9

4.85

4.44

4.03

4.59 4.50 4.49

4.20

3.933.73 3.83

3.683.43

3.65

3.183.04 3.02

0%

1%

2%

3%

4%

5%

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

P/C Insurer Portfolio Yields

Sources: NAIC data, sourced from S&P Global Market Intelligence.

Yields Have Been Falling for Over a Decade, Reflecting the Long Downward Trend in Prevailing Interest Rates.

10

Key sources of P/C insurer profits

Data are before taxes and exclude extraordinary items.

Source: NAIC data, sourced from S&P Global Market Intelligence.

-$19.7

$1.5

-$8.3

-$35.3

-$13.9

$17.5 $14.2 $11.2 -$2.4

-$20.6

$33.0$40.6

$55.9 $58.5 $58.9

$67.7$66.7

$58.8

$55.9$68.7

-$40

-$30

-$20

-$10

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

08 09 10 11 12 13 14 15 16 17

UW Gain/Loss Investment Gain

$ Billions

Worst Underwriting Result in Six Years – Best Investment Gain in Over a Decade.

11

$53.1 $48.4 $48.1 $50.9 $50.3 $49.3

$54.9 $48.8 $47.5 $49.3

$(20.1)

$(7.8)

$7.8 $7.6 $8.7

$18.4 $11.8

$10.1 $8.5

$19.4

-$20

-$10

$0

$10

$20

$30

$40

$50

$60

$70

08 09 10 11 12 13 14 15 16 17

Net Inv. Income Realized Cap Gains

Sources of Investment Gains

Source: NAIC data, sourced from S&P Global Market Intelligence.

$ Billions

Investment Income Holds Steady – But a Great Year for Capital Gains.

1212

Policyholder Surplus

Sources: ISO, A.M .Best.

($ Billions)

$487.1$437.1

$752.5

$400

$450

$500

$550

$600

$650

$700

$750

$800

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

15:Q

1

15:Q

2

15:Q

3

15:Q

4

16:Q

1

16:Q

2

16:Q

3

16:Q

4

17:Q

1

17:Q

2

17:Q

3

17:Q

4

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 $0.73 of NPW,the strongest claims-paying status in its history.

The P/C insurance industry is, in 2017,in very strong financial condition.

Cap Gains, Tax Reform

Drove Surplus Up $33B in Q4

Commercial Rates

14

Rate Changes Worldwide

Sources: Marsh Insurance Market Index, JLT Re.

Global Insurance RatesGlobal Reinsurance January Renewals

-12.0%-11.0%

-8.2%

-5.7%

4.8%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

2014 2015 2016 2017 2018

1.2%

-5.0%

0.9%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

20

13

:Q1

20

14

:Q1

2015:Q

1

20

16

:Q1

20

17

:Q1

20

18

:Q1

Rates Worldwide Increasing a Bit (Australia)

Rates Soft/Flat, Especially in Reinsurance

15

Commercial Lines Rate Change

Sources: Willis Towers Watson, MarketScout.

We’re in a Long Period of Flat Rates Overall.

12%

-16%

5%

MarketScout

-4%

2%

9%

-6%

7%

Willis

1%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

16

Liability Rate ChangesSlight Softening, Though Local Markets Vary

SOURCE: Marsh Insurance Market Index.

U.S. Casualty U.S. Financial and Prof Liab

2.6%

-3.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0% 2.7%

0.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

17

Property/Cyber Rate ChangesSlight Softening, Though Local Markets Vary

SOURCE: Marsh Insurance Market Index.

U.S. Property U.S. Cyber

2.9%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

20.0%

-1.7%-5.0%

5.0%

15.0%

25.0%

18

General Liability Rate Change (vs. Year Earlier)

-6

-5 -5 -5

-4

-5

-6

-5

-3

-2

2 2

4

6

5

4

5

6

3

2

3

2

1

0 0 0

-2

-1

0 0

-2

0

1 1 1

2

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Ju

n-0

9

Se

p-0

9

De

c-0

9

Ma

r-1

0

Ju

n-1

0

Se

p-1

0

De

c-1

0

Ma

r-1

1

Jun-1

1

Se

p-1

1

De

c-1

1

Ma

r-1

2

Ju

n-1

2

Se

p-1

2

De

c-1

2

Ma

r-1

3

Ju

n-1

3

Se

p-1

3

De

c-1

3

Ma

r-1

4

Ju

n-1

4

Se

p-1

4

De

c-1

4

Ma

r-1

5

Ju

n-1

5

Se

p-1

5

15-D

ec

16

-Ma

r

16-J

un

16-S

ep

16-D

ec

17

-Ma

r

17-J

un

17-S

ep

17-D

ec

18

-Ma

r

19

Umbrella/Excess Rate Change (vs. Year Earlier)

-5

-3 -3 -3

-2

0 0

-3

-2 -2

0

2

3

4 4

5

4 4

3 3

1

2

1

0 0 0

-4

-2

-1 -1 -1

1 1 1 1

2

-6%

-4%

-2%

0%

2%

4%

6%

Ju

n-0

9

Se

p-0

9

De

c-0

9

Ma

r-1

0

Ju

n-1

0

Se

p-1

0

De

c-1

0

Ma

r-1

1

Ju

n-1

1

Se

p-1

1

Dec-1

1

Ma

r-1

2

Ju

n-1

2

Se

p-1

2

De

c-1

2

Ma

r-1

3

Ju

n-1

3

Se

p-1

3

De

c-1

3

Ma

r-1

4

Ju

n-1

4

Se

p-1

4

De

c-1

4

Mar-

15

Ju

n-1

5

Se

p-1

5

15-D

ec

16

-Ma

r

16-J

un

16-S

ep

16-D

ec

17

-Ma

r

17-J

un

17-S

ep

17-D

ec

18

-Ma

r

20

Commercial Auto Rate Change (vs. Year Earlier)

-4 -4

-3 -3

-2

-3

-1

-2

-1 -1

0

1

4

5

6

5

6

5

4 4

3

2

1 1

2 2

0

-1

2

3 3 3

4

5 5 5

-6%

-4%

-2%

0%

2%

4%

6%

8%

Ju

n-0

9

Se

p-0

9

De

c-0

9

Ma

r-1

0

Ju

n-1

0

Se

p-1

0

De

c-1

0

Ma

r-1

1

Ju

n-1

1

Se

p-1

1

Dec-1

1

Ma

r-1

2

Ju

n-1

2

Se

p-1

2

De

c-1

2

Ma

r-1

3

Ju

n-1

3

Se

p-1

3

De

c-1

3

Ma

r-1

4

Ju

n-1

4

Se

p-1

4

De

c-1

4

Mar-

15

Ju

n-1

5

Se

p-1

5

15-D

ec

16

-Ma

r

16-J

un

16-S

ep

16-D

ec

17

-Ma

r

17-J

un

17-S

ep

17-D

ec

18

-Ma

r

Sources: MarketScout, Insurance Information Institute.

21

Workers Comp Rate Change (vs. Year Earlier)

Sources: MarketScout, Insurance Information Institute.

-9

-7

-9

-6

-7

-4 -4

-3 -3

-2

-3

-1

-2

-1 -1

0

1

4

5

6

5

6

5

4 4

3

2

0 0

1

0

-4

-2

-1 -1

-2 -2 -2 -2 -2 -2

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Mar-08 Dec-08 Sep-09 Jun-10 Mar-11 Dec-11 Sep-12 Jun-13 Mar-14 Dec-14 Sep-15 Jun-16 17-Mar 17-Dec

Workers Comp Rates Often Have Their Own Dynamic Apart from Market

22

D&O Liability Rate Change (vs. Year Earlier)

-3

0 0 0

-1

0 0

-1

0 0 0

1

2

4 4

3

5

4

2

3

1

2

1 1 1

0 0

-2

-1

0

1

2 2

1 1 1

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

Ju

n-0

9

Se

p-0

9

De

c-0

9

Ma

r-1

0

Ju

n-1

0

Se

p-1

0

De

c-1

0

Ma

r-1

1

Ju

n-1

1

Se

p-1

1

Dec-1

1

Ma

r-1

2

Ju

n-1

2

Se

p-1

2

De

c-1

2

Ma

r-1

3

Ju

n-1

3

Se

p-1

3

De

c-1

3

Ma

r-1

4

Ju

n-1

4

Se

p-1

4

De

c-1

4

Mar-

15

Ju

n-1

5

Se

p-1

5

15-D

ec

16

-Ma

r

16-J

un

16-S

ep

16-D

ec

17

-Ma

r

17-J

un

17-S

ep

17-D

ec

18

-Ma

r

Sources: MarketScout, Insurance Information Institute.

Hard Market/Soft Market

24

Three “Hard Markets” in the Last 45 YearsNet Premium Growth (All P/C Lines) vs. Nominal GDP: Annual Change, 1971-2016

Sources: A.M. Best (1971-2013), ISO (2014-16); U.S. Commerce Dept., Bureau of Economic Analysis; I.I.I.

-4%

0%

4%

8%

12%

16%

20%

24%

71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

NWP GDP

The three “hard markets” in this 45-year span were in 1976–77, 1985–86, and 2001–03.

25

Three Hard Markets in the Last 45 Years

Sources: A.M. Best (1971-2017), ISO (2014-16), A.M. Best, Insurance Information Institute (1986-1994); U.S. Commerce Dept., Bureau of Economic Analysis; Insurance Information Institute calculations.

14.6%

5.1%

12.0%

5.1%

-10%

-5%

0%

5%

10%

15%

20%

71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

10.7%

16.6%

Net Premium Growth (All P/C Lines) Minus Nominal GDP, Annual Change

The three “hard markets” in this 45-year span were in 1976–77, 1985–86, and 2001–03.

Is 5% a Hard

Market?

27

I.I.I. Hypothesis What causes a hard market?

Return on equity falls to 4% or below?

Surplus drops due to financial market declines and/or significant underwriting losses?

Unusually large losses due to catastrophes?

28

P/C Industry ROE and Hard Markets

Year ROENWP-GDP Growth in

Following YearHard

Market?

1975 2.4% 10.7% Yes

1984 1.8% 14.6% Yes

2001 -1.2% 12.0% Yes

2002 2.1% 5.1% Yes

2017 5.0% ? ?

29

Policyholder Surplus and Hard Markets

YearSurplus Decline

NWP-GDP Growth in Following Year

Hard Market?

1984 -2.7% 14.6% Yes

1999 -0.9% -1.5% No

2000 -4.7% 5.1% Yes

2001 -8.0% 12.0% Yes

2008 -12.5% -2.2% No

2011 -0.8% 0.2% No

2017 +7.4% ? ?

30

CAT Claims and Hard Markets

YearCAT Claims Over

$25 billion (2016 Adjusted)

NWP-GDP Growth in Following Year

Hard Market?

1992 $39.6 0.9% No

1994 $27.7 -1.2% No

2001 $36.4 12.0% Yes

2004 $36.4 -6.2% No

2005 $77.1 -3.1% No

2008 $30.7 -2.2% No

2011 $35.2 0.2% No

2012 $36.8 1.3% No

2017 $90.5 ? ?

31

Hard Market in 2017?

Strong indicator: ≤ 4% ROE

Consistent hard markets in years comparisons.

Indifferent indicator: Surplus Increase/Decrease

Inconsistent hard/soft markets in years comparisons.

Weak indicator: Large Cat Losses

Consistent non-movement; even with 2017 potentially being one of the worst years on record.

Marijuana and Auto Insurance

33

1969, 12

1977, 28

1995, 23

2009, 44

2017, 64

0

10

20

30

40

50

60

70

19

69

19

73

19

77

19

81

19

85

19

89

19

93

19

97

20

01

20

05

20

09

20

13

20

17

12/01/09 - 9pm

% Saying Yes

No survey in years where no data appears.

SOURCES: Gallup Poll Social Series, http://news.gallup.com/file/poll/221027/171025Marijuana.pdf.

Support for Legalization Grows

“Do You Think the Use of Marijuana Should Be Made Legal, Or Not?”

34

54

Democrats 72

49Independents

67

28

Republicans

51

20

30

40

50

60

70

80

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

Democrats Independents Republicans

12/01/09 - 9pm

% Saying Yes

SOURCES: Gallup Poll Social Series, http://news.gallup.com/poll/221018/record-high-support-legalizing-marijuana.aspx

Support for Legalization Grows

“Do You Think the Use of Marijuana Should Be Made Legal, Or Not?”

35

Cannabis in the USALegalization is Accelerating

SOURCE: National Journal.

Congressional Cannabis Caucus

Rohrbacher(CA)

Bluemenauer(OR)

Young (AK)

Polis (CO)

36

Driving While High – the Legal FrameworkIllegal Everywhere, but What Makes You High?

SOURCE: National Conference of State Legislators, National Organization for Reform of Marijuana Laws (NORML),

● Under the Influence

● Per Se

● Incapacitated

RI: ‘Zero Tolerance (Medical Exception).’ Rest of NE: ‘Incapable of Driving Safely.’

37

Blood Levels vs. Intoxication

BAC and ‘feeling drunk’ rise and fall in lockstep

SOURCE: Sewell, Poling, Sofuoglu, “The Effect of Cannabis Compared with Alcohol on Driving,” American Journal on Addictions, 2009.

THC levels in blood and ‘feeling high’ rise and fall at different rates

It Is Difficult to Use Blood Test to Measure Whether Someone is High.

38

14.6

19.4

21.4

17.5

19.8

22.2

7.8

18.4 18.9

0

5

10

15

20

25

BeforeLegal Sales

After 6Months

After 1 Year BeforeLegal Sales

After 6Months

After 1 Year BeforeLegal Sales

After 6Months

After 1 Year

Any Time of Day Nighttime Daytime

12/01/09 - 9pm

% THC-Positive Drivers (WA)

SOURCE: National Highway Traffic Safety Administration.

THC on the Road

Legalization Put More Drivers With THC in Their System on the Road.

39

Driving While HighThe Science

Review of Literature

SOURCE: National Academy of Sciences, https://www.nap.edu/catalog/24625/the-health-effects-of-cannabis-and-cannabinoids-the-current-state

Conclusive evidence

Improves the lot of adults in chronic pain.

Substantial evidence

Increases the risk of motor vehicle crashes.

40

Marijuana and Driving SkillsWhat the Studies Say

Cognitive Studies Culpability Studies

Experimental Research Case Control Studies

‘Impairment in every performance area that can reasonably be connected with safe driving’

Suffer from

Sampling delay

Reliance on carboxy-THC

‘Marijuana users tend to overestimate their impairment, and consequently employ compensatory strategies.’

Hard to create a good control group (accidents that didn’t happen)

SOURCE: Sewell, Poling, Sofuoglu, “The Effect of Cannabis Compared with Alcohol on Driving,” American Journal on Addictions, 2009.

41

Accident Probability

SOURCE: Sewell, Poling, Sofuoglu, “The Effect of Cannabis Compared with Alcohol on Driving,” American Journal on Addictions, 2009.

WA ‘per se’ limit

Chance of Accident Rises Sharply As Consumption Rises.

42

But Blood Tests Aren’t Perfect

THC Concentration

(ng/mL)

Sensitivity

(“Catches the Bad

Guys”)

Specificity

(“Frees the Good

Guys”)

Overall Accuracy

(“Gets It Right”)

1 80.4% 70.2% 77.0%

2 72.3 75.2 73.3

3 60.1 78.0 66.1

5 39.7 84.2 54.8

7 29.7 89.9 50.0

10 14.1 95.0 41.5

Blood Test vs. Drug Recognition Experts (DREs)

SOURCE: AAA Foundation, An Evaluation of Data from Drivers Arrested for Driving Under the Influence in Relation to Per se Limits for Cannabis, March 2016.

43

Marijuana + AlcoholA Killer Combination

SOURCES: Colorado Department of Revenue. (Data for first 10 months of year to allow like-to-like comparisons.)

Studies AgreeCannabis Doesn’t Supplant

Drinking

Cannabis Hurts Automatic Functions (Lane Usage) More Than Complex Tasks

Alcohol Does the Opposite

Cannabis Users Become Less Daring

Alcohol Users Become More Daring

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2010 2011 2012 2013 2014 2015 2016 2017

Liquor Tax Collection, % Change from Year Earlier

44

Legal Sales Lead to More Accidents

SOURCE: Highway Loss Data Institute.

14.0

6.2

4.5

3.0

0

4

8

12

16

CO WA OR Overall

Percent Change in Collision Frequency, 2012-2016*

* Vs. Neighboring States.

Look at ‘Real World’ Crashes

All Measures Statistically Significant

‘Overall’ Measure a Good Proxy for What Will Happen in Any State

45

Pedestrian Deaths and CannabisWalking While High?

First six months of year.

SOURCE: Governors State Highway Association

From Date of Legalization From Date of Legal Sale

CO, WA

127

100

Rest of US

121

80

85

90

95

100

105

110

115

120

125

130

2012 2013 2014 2015 2016 2017

Pedestrian Deaths (2012 = 100)

CO, WA

147

100

117

80

90

100

110

120

130

140

150

160

2014 2015 2016 2017

Pedestrian Deaths (2014 = 100)

46

Yes3%

No97%

I.I.I. Survey: Cannabis vs. Alcohol

Would You Ride With a Driver Who Drank Too Much?

Would You Ride With a Driver Who Was High?

Respondents Seem Much More Tolerant of High Driver, Even Though They

Understand the Risk.

SOURCE: Insurance Information Institute Pulse survey, November 2017.

Yes27%

No73%

47

Summary

Catastrophes Led to a Weak Underwriting Result in 2017 – but Capital Gains Helped Overall Results.

Rates Are Flat Overall, With Variability by Line of Business.

Evidence is Weak That Hard Market Will Emerge This Year.

With Marijuana and Driving, We Need

Greater Awareness

More Research

Understanding of Greater Costs (Training and Testing)

48

The Insurance Information Institute

Improving public understanding of insurance...

…what it does and how it works

48

Thank you for your timeand your attention!www.iii.org