MegaTrends and MicroTrends: The Past and Future

of P/C InsuranceMidwestern Actuarial Forum

Cincinnati, OHSeptember 14, 2012

Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038Office: 212.346.5540 Cell: 917.494.5945 stevenw@iii.org www.iii.org

2

P/C Insurance Industry Financial Overview

The Long-Term Past andShort-Term Future

of the P/C Insurance Industry

3

-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

Net Written Premiums: Soft Market Persisted into 2011 but Growth Returned; More in 2012?

1975-78 1984-87 2000-03

Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.

NWP rose

3.3% in 2011; best

growth since 2004

2012:Q1 growth:

3.1%

Net Written Premiums fell 0.7% in 2007 (1st year-over-year drop since 1943), fell2.0% in 2008, and 4.2% in 2009—the first 3-successive-year decline since 1930-33.

Underwriting Gain (Loss)1975–2011*

* Includes mortgage and financial guaranty insurers in all yearsSources: A.M. Best, ISO; Insurance Information Institute.

($4.

23)

($2.

19)

$1.1

1$1

.30

($1.

30)

($3.

33)

($6.

29)

($10

.29)

($13

.32)

($21

.62)

($25

.11)

($16

.57)

($10

.20)

($11

.81)

($20

.84)

($21

.65)

($20

.46)

($36

.26)

($18

.09)

($22

.08)

($17

.38)

($17

.16) ($

6.03

)($

17.6

7)($

24.7

5)($

32.1

4)($

52.6

9)($

32.3

5)($

5.22

)$1

.72

($5.

56)

$31.

12$1

9.02

($21

.17)

($2.

98)

($10

.43)

($36

.51)

-$70

-$60

-$50

-$40

-$30

-$20

-$10

$0

$10

$20

$30

$40

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 1011*

$ BillionsU/W

losses in 2011 at

$36.5B are the largest since 2001

5

P/C Insurance Industry Combined Ratio, 2001–2011*

* Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=106.4 Sources: A.M. Best, ISO.

95.7

99.3

100.9

106.4

101.0

92.6

100.8

98.4

100.1

107.5

115.8

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*

Best Combined

Ratio Since 1949 (87.6)

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned

Premiums

Relatively Low CAT Losses, Reserve Releases

Cyclical Deterioration

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

6

2

(2)

(8)

(3)

(7)(10) (10)

(4)

(0)

11

24

15

119

(5)

(9)

(14)

(10) (11)(7)

(5)(2)

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

$309

2

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

E

12

F

13

F

Pri

or

Yr.

Re

se

rve

Re

lea

se

($

B)

-6

-4

-2

0

2

4

6

8 Imp

ac

t on

Co

mb

ine

d R

atio

(Po

ints

)

Prior Yr. ReserveDevelopment ($B)

Impact onCombined Ratio(Points)

P/C Reserve Development,1992–2013F

Reserve Releases Remained Strong in 2010 But Tapered Off in 2011. Releases Are Expected to Further Diminish in 2012 and 2103

Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclays Capital; A.M. Best.

Prior year reserve releases totaled $8.8

billion in the first half of 2010, up from

$7.1 billion in the first half of 2009

7

A “Hard Market” in the Future?

Criteria Status Comments

Sustained Period of Large

Underwriting Losses

Somewhat in Place

•Overall p/c underwriting losses exceeded $10 billion in 3 of last 4 years•Combined ratios rising, masked by reserve releases(110+ at onset of last hard market)

Material Decline in Surplus/ Capacity

NotEvenClose

•Surplus hit a record $565B as of 3/31/11•Analysts est. excess surplus of $75-$100B•Some excess capacity may still remain in reinsurance markets

Tight Reinsurance

MarketSomewhat

in Place•Higher prices in Asia/Pacific•Modestly improved pricing for US risks

Renewed Underwriting &

Pricing Discipline

NotBroadly Evident

•Commercial lines pricing trends now modestly rising•Competition remains intense as many seek to maintain market share•Terms & conditions—no broad tightening

Sources: Barclays Capital; Insurance Information Institute.

P/C Net Income After Taxes1991–2011

$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

9,1

50

$2

8,6

72

-$6,970

$6

5,7

77

$4

4,1

55

$2

0,5

59

$3

8,5

01

-$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

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 5.6% 2011:Q3 ROAS1 = 1.9%

P-C Industry 2011 profits were down 46% vs. 2010 to $19.2B,

mainly due to high catastrophe losses and deteriorating non-cat

underwriting results

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 3.0% ROAS for 2011:Q3, 7.5% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO, Insurance Information Institute 8

$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

*1

2:

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2012:Q1*

*Profitability = P/C insurer ROEs. 2011 figure is an estimate based on ROAS data. Note: Data for 2008-2012 exclude mortgage and financial guaranty insurers. 2012:Q1 ROAS = 7.2% including M&FG.Sources: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0% 1987:17.3%

1997:11.6%2006:12.7%

1984: 1.8% 1992: 4.5% 2001: -1.2%

10 Years

10 Years9 Years

2011:4.6%*

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

2012:Q18.2%

10

Policyholder Surplus, 2006:Q4–2012:Q1

Source: 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

$556

.9

$559

.1

$538

.6

$550

.3

$570

.6

$564

.7

$505

.0

$515

.6

$517

.9

$425

$450

$475

$500

$525

$550

$575

$600

$625

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

2011:Q1 = previous surplus peak

Quarterly Surplus Changes Since 2011:Q1 Peak11:Q2: -$5.6B (-1.0%)

11:Q3: -$26.1B (-4.6%)11:Q4: -$14.4B (-2.6%)

Note: Beginning in 2010:Q1 figures include $22.5B of paid-in capital from a holding company parent to a subsidiary insurer. It was a single investment in a non-insurance business.

2012:Q1 = new peak

Economic Drivers of P/C Insurance Exposures

11

Growth in the Wakeof the “Great Recession”

12

The Post-Recession US Economy is Forecast to Keep Growing*, but Slowly

* Forecasts from Blue Chip Economic IndicatorsSources: US Department of Commerce, http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm ;Blue Chip Economic Indicators 8/2012 issue (forecasts); Insurance Information Institute.

0.1%

2.5%

1.3%

4.1%

2.0%

1.5%1.7%

1.9%1.8%

2.4%2.7%

2.9%

1.4%

4.0%

2.3%2.2%2.6%

2.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

09:3

Q

09:4

Q

10:1

Q

10:2

Q

10:3

Q

10:4

Q

11:1

Q

11:2

Q

11:3

Q

11:4

Q

12:1

Q

12:2

Q

12:3

Q

12:4

Q

13:1

Q

13:2

Q

13:3

Q

13:4

Q

Some economists worry that as of Jan 1, 2013, planned federal spending cuts, the expiration of income tax rate reductions, and the end of some unemployment

benefits will sap growth and could trigger another recession in 2013.

Real GDP Growth at Annual Rate(%) We need sustained inflation-

adjusted growth rates over 3%to make significant progress

toward full employment

13

Housing Starts, Millions of Units

Construction of Private HousingIs Picking Up

1.481.47

1.621.641.571.60

1.711.85

1.962.07

1.80

1.36

0.90

0.550.590.610.75

0.89

1.351.46

1.291.20

1.01

1.19

0.0

0.3

0.6

0.9

1.2

1.5

1.8

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

F

13

F

Sources: U.S. Census Bureau and Department of Housing and Urban Development (history) at http://www.census.gov/const/newresconst.pdf ; Blue Chip Economic Indicators (8/2012), forecasts; Insurance Information Institute.

Weak home construction forecast implies little exposure growth likely for Homeowners insurers and insurers with a residential construction book of

business for the next few years.

Forecast range for

2012: 660,000 to

800,000

Forecast range for

2013: 730,000 to 1,200,000

But the Pickup is Mostlyin Multi-Family Housing Starts

100

150

200

250

300

350

400

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*400

600

800

1000

1200

1400

1600

1800

units in multi-family buildings single family units

*January-July 2012 data, annualized, seasonally-adjusted, preliminary (July)Source: US Census Bureau at http://www.census.gov/construction/nrc/pdf/newresconst.pdf

Thousands of Units, Multi-Family

Multi-unit starts, currently at a seasonally-adjusted annual rate of 215,000,are double the 2009 rate. Average annual rate for 2001-2006: 339,000.

Multi-family-unit starts rose in 2011, and more in 2012.

Thousands of Units, Single Family

Multi-family plunge didn’t begin until 2009

Single family plunge began

in 2006

15

The Auto Insurance Picture

A “New Normal”:More Old Cars on the Road

16

16.9

16.5

16.1

13.2

10.4

11.6

12.7

14.4 14

.8

16.9

16.617

.117.5

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 12F 13F

(Millions of Units)

The Car-Buying Slump Is Creating Pressure to Replace Aging Vehicles

Sources: history--U.S. Department of Commerce; forecasts (including 2011 preliminary--Blue Chip Economic Indicators (7/2012); Insurance Information Institute; USA Today 8/10/2011 edition (AAA Survey).

Many more older cars are on the road today than In “normal” times. Previously in a 3-year span, new cars would replace about 35 million old cars, but in 2008-10 only about 27 million old cars were replaced.

2011 AAA Survey: 1 in 4 drivers have neglected repairs and maintenance because of the

economyForecast range for

2012: 13.7 to

15.1

Forecast range for

2013: 13.7 to

16.7

17

But People Are Not Driving More:Miles Driven*, 1990–2012

*Moving 12-month total. The latest data is for June 2012. Note: Recessions indicated by gray shaded columns..Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm ); National Bureau of Economic Research (recession dates); Insurance Information Institute.

Billions

2,100

2,200

2,300

2,400

2,500

2,600

2,700

2,800

2,900

3,000

3,100

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

A record: miles driven has been below the prior

peak for 52 straight months. Previous record

was in the early 1980s (39 months)

Will the trend toward hybrid and non-gasoline-powered vehicles affect

miles driven? What about the aging and

retirement of the baby boomers?

Growth per Decade1999 vs. 1989: 27.2%2009 vs. 1999: 9.4%

Some of the prior growth in miles driven is due to population growth: 1999 vs. 1989: 10.5%2009 vs. 1999: 12.6%

Do Changes in Miles Driven AffectAuto Collision Claim Frequency?

6.91

6.65

6.32

6.025.94

5.71

5.85

5.705.62 5.60

5.66

5.5

6.0

6.5

7.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Pa

id C

laim

Fre

q

2750

2800

2850

2900

2950

3000

3050

Bil

lio

ns

of

Mil

es D

rive

n

Collision Claim FrequencyBillions of Vehicle Miles

Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm; ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: 4th Qtr. 2011, published April 5, 2012, and earlier reports.

Paid Claim Frequency = (# of paid claims)/(Earned Car Years) x 100

“Pay-As-You-Go” Auto Insurance: Fluctuations in miles driven will affect exposure

The frequency drop is slowing

19

The Commercial Insurance Picture

The Near-Term Outlookfor Small Business

is Getting Better but isn’t Bright

66%

68%

70%

72%

74%

76%

78%

80%

82%

Mar

01

Sep

Mar

02

Sep

Mar

03

Sep

Mar

04

Sep

Mar

05

Sep

Mar

06

Sep

Mar

07

Sep

Mar

08

Sep

Mar

09

Sep

Mar

10

Sep

Mar

11

Sep

Mar

12

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. 20

Percent of Industrial Capacity

Hurricane Katrina

March 2001-November 2001

recession

“Full Capacity”

The closer the economy is to operating at “full

capacity,” the greater the inflationary pressure

The US operated at 79.3% of industrial capacity in May 2012, above the June 2009

low of 68.3% and close to its post-crisis peak

December 2007-June 2009 Recession

March 2001 through July 2012

20

21

Business Bankruptcy Filings: Fallingbut Still High in 2012 (1994:Q1 – 2012:Q1)

13.9

13.6

12.9

12.0 13

.112

.2 12.6

12.9 13

.4 14.0

13.2

12.9 13

.814

.013

.512

.712

.411

.610

.39.

99.

210

.49.

09.

0 9.5

9.2

8.2 8.4

10.0

10.3

9.5 10

.09.

89.

79.

49.

58.

8 9.3

8.3

10.6

8.2

7.6 7.8 8.1 8.

7 9.5

12.8

4.1 4.

9 5.3 5.6 6.

3 6.7 7.

2 8.0 8.

79.

711

.512

.914

.316

.014

.2 15.0

14.6

14.5

14.0

13.0

12.4

12.3

11.7

11.1

11.0

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

Business bankruptcies were down 46.5% in 2012:Q1 vs. recent peak in 2009:Q2 but were still higher than 2008:Q2, early in the Great Recession.

Bankruptcies restrict exposure growth in all commercial lines.

Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633 ; Insurance Information Institute

(Thousands) New Bankruptcy Law Takes

Effect

Recessions in orange

22

Private Sector Business Starts, 1993:Q2 – 2011:Q4*

175

186

174

180

186

192

188

187 18

918

6 190 19

419

119

9 204

202

195

196

196

206

206

201

192

198

206

206

203

211

205

212

200 20

520

620

420

419

420

4 208

201

193

191 19

320

020

720

320

921

020

921

6 221

221

220

221

210

221

214

206

216

208

207

200

191

188

172 17

716

918

217

5 179

188

200

183 18

7 191

19719

9

150

160

170

180

190

200

210

220

230

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Business starts were down nearly 20% in the Great Recession, holding back most types of commercial insurance exposure,

but now are recovering.* Data through Dec 31, 2011 are the latest available as of August 2, 2012; Seasonally adjusted.Sources: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm. NBER (recession dates)

(Thousands) Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010: 722,000 2011: 758,000

22

Recessions in orange

Catastrophe Loss Developments and Trends

23

2011 Rewrote Catastrophe Loss and Insurance History

Number of Federal Major Disaster Declarations, Yearly, 1953-2012*

13 1

7 18

16

16

7 71

21

22

22

02

52

51

11

11

92

91

71

74

84

64

63

83

02

2 25

42

23

15

24

21

34

27 28

23

11

31

38

45

32 3

63

27

54

46

55

04

54

5 49

56

69

48 5

26

37

55

98

19

94

243

0

10

20

30

40

50

60

70

80

90

100

53

55

57

59

61

63

65

67

69

71

73

75

77

79

81

83

85

87

89

91

93

95

97

99

01

03

05

07

09

11

*Through July 27, 2012. Sources: Federal Emergency Management Administration at http://www.fema.gov/disasters?field_state_tid=All&field_disaster_type_term_tid=All&field_disaster_declaration_type_value=All&items_per_page=60&=GO ; Insurance Information Institute.

The number of federal disaster declarations set

a new record in 2011.

From 1953-71, the average number of declarations

per year was 16.5.

The average number from

1996-2010 was 58.4.

The average number from

1972-1995 was 31.7.

Of the 42 federal major disaster declarations in 2012 so far, 23 were for wildfires, 16 were windstorms, 2 winter storms, 1 tropical storm.

25

$12.

3

$10.

7

$3.7

$14.

0

$11.

3

$6.0

$33.

9

$7.4 $1

5.9

$32.

9

$71.

7

$10.

3

$7.3

$28.

5

$11.

2

$14.

3

$32.

3

$13.

7

$4.7 $7

.8

$36.

9

$8.6

$25.

8

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*

US Insured Catastrophe Losses, Yearly, 1989-2011*

*ISO estimate.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.

US insured CAT losses do not include amounts paidby the National Flood Insurance Program.

CAT Losses Surged on

Record Tornado Activity

$ Billions of 2011 dollars

2000s: A Decade of Disaster

2001-2010: $202B (up 122%)

1991-2000: $91B

26

Inflation & Price Driversof P/C Insurance Claims

P-C Claim Severity GenerallyHas Risen Faster than the CPI

27

The Bond Market’s Recent* Expectationof U.S. Inflation in the Next Two Years

*Daily, from 8/17/2010 through 9/6/2012Source: http://www.bloomberg.com/apps/quote?ticker=USGGBE02:IND

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%08

/16/

10

09/1

5/10

10/1

5/10

11/1

4/10

12/1

4/10

01/1

3/11

02/1

2/11

03/1

4/11

04/1

3/11

05/1

3/11

06/1

2/11

07/1

2/11

08/1

1/11

09/1

0/11

10/1

0/11

11/0

9/11

12/0

9/11

01/0

8/12

02/0

7/12

03/0

8/12

04/0

7/12

05/0

7/12

06/0

6/12

07/0

6/12

08/0

5/12

09/0

4/12

The rate is calculated by subtracting the real yield of the 2-year TIPS bond from the yield of the 2-year Treasury note.

The result is the implied inflation rate for the next 2 years.

In early 2011, the bond market

thought near-term inflation

would rise above 2%.

But by Summer 2011 the bond

market thought near-term inflation

was likely to fall below 1.5%.

Lately the bond market expects inflation over the

next two years near 1.5% per year.

28

Auto Liability Claims Severity Trends, 2005-2010

2.9%

3.6%

2.1% 1.9%

-0.3%

0.8%

4.7%

2.4%

6.5% 6.5%6.2%

5.4%

2.9%

4.7%

6.0% 6.1%

2.2%

3.3%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

2005 2006 2007 2008 2009 2010

BI Severity PD Severity PIP Severity

Sources: ISO/PCI Fast Track data; Bureau of Labor Statistics (CPI); Insurance Information Institute

The average severity of auto property damage liability claims has grown slightly more slowly than overall inflation. Beginning

in 2006, average severity for BI and PIP grew much faster.

Change from prior year

P/C Insurance Claim Cost Drivers Grow Faster than even the Medical CPI Suggests

Source: Bureau of Labor Statistics; Insurance Information Institute.

2.7%2.3%

3.5%

5.3%4.9%

1.3%

4.2%

3.3%

0%

2%

4%

6%

Overall CPI "Core" CPI Medical CPI InpatientHospitalServices

OutpatientHospitalServices

Physicians'Services

PrescriptionDrugs

Medical CareCommodities

Mar 2012 Y-o-Y Price Changes

Healthcare costs are a major liability, med pay, and PIP claim cost driver. They are likely to grow faster than the CPI for the next few years, at least

29

Excludes Food and Energy

P/C Commercial Property Insurance Claim Cost Drivers Grow Faster than the Overall CPI Suggests

Sources: Bureau of Labor Statistics; Insurance Information Institute.

2.7%

3.8%

2.7%

8.7%

3.9% 3.9%

7.6%

2.3%

1%

3%

5%

7%

9%

Overall CPI "Core" CPI Inputs toConstruction

Industries

Non-residentialmaintenance &

repair

Asphalt Paving& RoofingMaterials

HVAC &Commercialrefrigeration

PlumbingFixtures &

Fittings

Paint, coating& adhesive

mfg.

Copper prices spiked and retreated in 2011. In July its price was 33% higher than a year earlier; by November it cost 8% less than in November 2010.

30

Excludes Food and Energy

Price Level Change: 2011 vs. 2010

30

31

What’s a “MegaTrend? What’s a “MicroTrend?

What are the implications for Insurance and Risk Management?

Looking beyond day-to-day developments

32

A MegaTrend is…

• Something…

• Generally changing the way things get done

• Happening on an enormous scale

• Growing rapidly

Books and WebsitesProclaim Various MegaTrends

33

34

3 MegaTrends to Watch

There are many proclaimed MegaTrends. These three come from Forbes.com

http://www.forbes.com/sites/haydnshaughnessy/2011/12/28/3-megatrends-for-2012-or-why-shared-value-is-indeed-an-answer/

35

1. The Global Growth and Transformation of the Middle Class

• A huge market for personal insurance (possibly 1 billion people) is emerging in developing countries

• At the same time, the middle class in “advanced economies” is shrinking

• Selling insurance to the new global middle class will require teaching whole populations

• what insurance is, • how it works, and • why one would choose one “brand” over another

Non-life Premium* per capita (Density) for Selected Economies, 2010

$2,127

$1,887

$1,502

$1,311$1,249

$1,060$917

$290$200 $158

$53 $9$0

$400

$800

$1,200

$1,600

$2,000

$2,400

U.S. Canada Germany Australia France U.K. Japan Russia SouthAfrica

Brazil China India

* premiums measured in U.S. dollars, exclude cross-border business Source: Swiss Re Sigma, various volumes

From 2002-2010, Insurance Density in India tripled, and in China it grew 5-fold.But the most spectacular Density growth in these years belongs to Russia:

in 2010 Insurance Density in Russia was 7 times what it was in 2002!

Imagine the amount of P/C premium that would be

generated if the density in China or India matched the current density in the major

European countries

37

2. The Growth ofa More Individualistic Capitalism

Mass marketing is giving way to…

•Online services—retailers and special-interest community/peer sites—are giving customers/ users more control, making the shopping/info-gathering experience more personalized

•The younger generations are leading the way to managing their lives as unique individuals, sharing with friends/peers but not strangers

•Implications for P/C insurance• Follow the microtrends?

38

3. The Rise ofthe New Business Ecosystem

• The new ecosystem is technology-enabled and works with potentially hundreds of sub-vendors• the Apple App store or Itunes• Amazon marketplace

• It marries small-firm innovation with large-firm financial muscle

• Implications for P/C insurance?• A radically different “distribution” system?

• Will Amazon.com develop a “virtual Lloyd’s”?

• A radically different claims apparatus?

An Insightful BookPublished About 5 Years Ago

39

40

A MicroTrend is…

• An intense identity group, growing rapidly

• With needs and wants unmet by the current crop of companies, policymakers, and others who would influence society’s behavior

• Typical size: ± 1% of the population

41

7 MicroTrends to Watch

There’s More: Mark Penn’s bookcites 68 other MicroTrends

42

1. Sex-Ratio Singles (Single Women)

• For the first time in America, there are more single women than ever who are likely to stay that way.

• From shortly after birth, women outnumber men, and men are more likely to be homosexual than women are• In 2005, single women were the 2nd largest group of

home buyers, just behind married couples.• They bought 1.5 million homes, more than twice

as many as single men.• The number of single women bearing/adopting

children in 2005 tripled since the early 1990s

43

2. Commuter Couples

• Dual-career couples who maintain two households

• In 1990: 1.7 million peopleIn 2005: 3.5 million

• All ages – the number of married people over 50 who live separately tripled between 2001 and 2005

44

3. 30-Winkers

• The number of people who sleep fewer than 6 hours/night is rising fast• 1998: 12%• 2005: 16% (34 million people)

• In the 2005 “Sleep in America” poll,• 37% said they’ve nodded off or fallen asleep while

driving

• Less sleep leads to• Less productivity• Increased obesity• New businesses to help people get more sleep

• Should sleep be an underwriting factor?

45

4. Hard-of-Hearers

• Roughly 1/3 of people over 65 (about 35 million) are hard-of-hearing• But many with hearing loss are under 65• Hearing loss varies by race, geography, gender

• Occupational/Business Impact: Overcoming hearing loss will be a hot industry in the next few decades• New technology (who will lead this? Apple? Bose?

Sony? Ford? New entrepreneurs?)

• Public policy/Insurance impact• An anti-noise campaign similar to anti-smoking?• Do the hard-of-hearing cause more accidents?

46

5. Old New Dads

• Births to men aged 50 or older• In 1980: 1 in 23• In 2002: 1 in 18

• Births to men age 40-44: up 32%• Births to men age 45-49: up 21%

• Old dads will likely• Work longer• Retire later• Drive at older ages

47

6. Newly Released Ex-Cons

• 650,000 people (90% men, avg. age 34) released from prison of jail each year

• These people generally have little connection with economic society:• Little education• Few job prospects

• Many employers won’t hire them

• Likely results:• Increasing crime• Worsening public cost of family support “financial

safety net”

• Are these people insurable in the voluntary market?

48

7. High School Moguls

• A dozen years ago 8% of all teens (1.6 million) were making money on the internet

• The top 100 entrepreneurs aged 8-18 in 2001 earned total profits of $7 million

• In 2006 the U.S. Small Business Administration launched “Mind Your Own Business,” an online resource to help teenagers develop their start-ups

• How much do teen business owners know about insurance? How well are we reaching them?

www.iii.org

Thank you for your timeand your attention!

Insurance Information Institute Online: