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Insurance 2020Casualty Actuaries of the Mid-Atlantic Region
May 21, 2020
James Lynch, FCAS MAAA, Chief Actuary and Senior Vice President, Research and Education
Insurance Information Institute 110 William Street New York, NY 10038 Tel: 212.346.5533 [email protected] www.iii.org
The Financial Picture
2019 Was A Good Year
3
U.S. Inflation-Adjusted Insured Cat Losses
*Aon estimate through April. 2010s is average of 2010 to 2019. All losses are Direct.
Sources: Property Claims Service, a Verisk Analytics business; Aon; Insurance Information Institute.
4138
80
111
51
24
8
1980s:$5 B
1990s: $15 B2000s: $25 B
2010s: $35 B
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
$110
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20*
Bil
lio
ns
, 2
01
9 $
Average forDecade
Hurricane Andrew
WTC
Katrina, Rita, Wilma
2019 was a relatively mild year; 2020 faces pandemic, above-average hurricane forecast
Harvey, Irma, Maria
4
P/C Insurance Industry Combined Ratio*
*Excludes Mortgage & Financial Guaranty insurers before 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® business; I.I.I.
99.3
101.1
106.5
102.5
96.497.0
97.8
100.7
103.7
99.2 98.9
90
100
110
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Joplin, Tuscaloosa Tornadoes
Sandy
3 Consecutive Years of U/W Profits; 1st
time since 1971-73
Hurricanes Harvey,
Irma, Maria
5
Key sources of P/C insurer profits
Through third quarter.
Data are before taxes and exclude extraordinary items.
Source: NAIC data, sourced from S&P Global Market Intelligence.
$27.0
$41.7 $42.5 $41.4$48.7 $44.7 $45.0 $40.5
$50.2 $51.5 $50.7
-$2.4 -$5.2
-$33.7
-$6.1
$11.5$5.3 $8.4
-$0.4
-$19.8
$5.6 $6.4
-$50
-$30
-$10
$10
$30
$50
$70
09 10 11 12 13 14 15 16 17 18 19
Net investment gains Underwriting gains/losses
$ Billions
Strong capital gains, underwriting results lifted profits
6
$5
8,1
71
$4
,28
9
$8
1,9
62
$3
,51
9
$6
9,2
39
$3
7,4
20
$6
0,6
08
$6
1,4
45
$0
$20,000
$40,000
$60,000
$80,000
$100,000
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
19
P/C Industry Net Income After Taxes*1997-2019
*Adjusted for inflation using the BLS CPI calculator, to 2019 dollarsSources: A.M. Best; ISO, a Verisk Analytics® business; Insurance Information Institute.
$ Millions, 2019 dollars
The Personal Lines Picture
2020 Was Looking Good
8
Direct Written Premium Growth By Year
Sources: NAIC data, sourced from S&P Global Market Intelligence.
5.9%
4.8%5.2%
7.8%
6.6%
2.7%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
HO/FO Personal Auto
HO writings more stable than auto, which grew in response to rising costs till recently.
9
Personal Lines Results
Source: NAIC data, sourced from S&P Global Market Intelligence.
Personal auto has returned to underwriting profitability. Homeowners results depend on catastrophe season.
122%
91%
107%
104%
98%
106%
98%99%
90%
95%
100%
105%
110%
115%
120%
125%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Co
mb
ined
Rati
o
Homeowners Auto
10
Loss Costs Have Tapered Off the Past 2 Years
Source: Fast Track Monitoring System.
The cost of accidents has tapered off in recent years
11.2%9.5%
2.9%
6.1%6.2%
1.6%
5.9% 6.5%
-7.9%-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
Bodily Injury Property DamageLiability
PIP Collision Comprehensive
2015 to 2017 2017 to 2019
2 year change
36.0%
11
Electronics: 40-50% of cost of vehicle
Pre-repair scan: $63
Post-repair scan: $93
Calibration labor: sublet at $150
OEM: 98% of camera/sensors
Auto Repair: Complexity GrowsMore Cool Stuff to Fix
* Property Damage Only.
SOURCES: “2019 Crash Course,” CCC Information Services; Ford Motor Co.;
More Parts, More Labor: Higher Costs
Electronics Add to Cost, Complexity
10.9 11.9
15.2
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
2001 2009 2018
Parts/Collision Claim on Current Year Car
28% Increase!
7
60
0 10 20 30 40 50 60
Boeing 787
Ford F150
Millions of Lines of Code
150
The Commercial Lines Picture
2020 Was Looking Good
13
Commercial Lines Results
Source: NAIC data, sourced from S&P Global Market Intelligence.
Excellent workers comp results have more than made up for problems in auto, general liability.
108%
93%
103%
98% 98%
90%
92%
94%
96%
98%
100%
102%
104%
106%
108%
110%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Co
mb
ined
Rati
o
14
Commercial Lines Rate Changes
Sources: Willis Towers Watson, MarketScout, Marsh.
Rates have been rising. Is it a hard market?
MarketScout
4.5%Willis
6%
Marsh
14%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2013:Q
1
201
3:Q
2
201
3:Q
3
2013:Q
4
201
4:Q
1
201
4:Q
2
2014:Q
3
201
4:Q
4
201
5:Q
1
201
5:Q
2
201
5:Q
3
201
5:Q
4
201
6:Q
1
201
6:Q
2
201
6:Q
3
201
6:Q
4
201
7:Q
1
201
7:Q
2
201
7:Q
3
201
7:Q
4
201
8:Q
1
201
8:Q
2
201
8:Q
3
201
8:Q
4
201
9:Q
1
201
9:Q
2
201
9:Q
3
201
9:Q
4
202
0:Q
1
15
Commercial Rate ChangesBy Line, 2020:Q1
Source: MarketScout.
4.5%4.0% 4.0% 4.0% 4.3% 4.5%
7.0%
-1.3%
6.3%
7.5%
4.5%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
16
Key Trends(at Year-End)
Loss Development What’s Happening
2.6
0.6 0.1
(0.5)
3.5
(0.4)(0.3)
(7.3)
(4.5)
0.3
(8.0)
(6.0)
(4.0)
(2.0)
-
2.0
4.0
6.0
Industrywide Loss Development: $6 billion favorable
PA: Moderating frequency, some severity movement
WC: Frequency plunging
D&O: Securities litigation explosion (event driven)
EPLI: #Metoo
GL: Social inflation
CA: Social Inflation
Social Inflation
An Actuarial Examination
18
Social Inflation
A Good Definition
“a fancy term to describe rising litigation costs and their impact on insurers’ claim payouts, loss ratios, and, ultimately, how much policyholders pay for coverage.”
Actuarial Interpretation
“Excessive inflation in claims.”
Occurs when development defies key assumption: Loss Development is RV about stable mean
Coming to Terms
19
Triple-I Analysis
Hypothesis: Rising LDFs → Social Inflation
Method:
Focus on Long-Tailed Liability Lines
– Minimizes Catastrophe’s Impact
– 12:120 LDF > 1.8 (Workers Comp)
– Included: Comm Auto Liability, MedMal, Other Liability, Product Liability
– Excluded: Personal Auto Liability, Workers Comp, Special Liability
Look for Rising LDFs
What We Studied and Why
20
Upward Creep in Loss DevelopmentKey Assumption: LDF is RV about mean + inflation
Source: NAIC data, sourced from S&P Global Intelligence; Insurance Information Institute. Expected: 3-yr Straight Average.
Comm Auto LDFs 2-Year Expected vs. Actual
12 24 36 48
2009 1.34 1.14 1.08 1.03
2010 1.36 1.16 1.08 1.04
2011 1.40 1.16 1.08 1.04
2012 1.40 1.16 1.09 1.04
2013 1.41 1.18 1.10 1.04
2014 1.42 1.19 1.10 1.05
2015 1.45 1.18 1.11
2016 1.43 1.20
2017 1.44
1,1
10
1,3
18
1,5
46
1,5
96
2,1
36
1,4
55
1,6
67
1,9
28
2,0
12
2,2
81
-
500
1,000
1,500
2,000
2,500
2012 2013 2014 2015 2016
Accident Year
Expected Actual
12-36 Development ($ Millions)
21
Social Inflation: The Toll
Sources: NAIC data sourced from S&P Market Intelligence; Insurance Information Institute.
-827
1,6561,852
1,6341,843
2,572
-$1,000
$0
$1,000
$2,000
$3,000
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
MillionsAdditions to Claim Reserves
Reductions from Claim Reserves
Reserve Development, Commercial Auto Liability
22
It’s Not Just Auto12:36 Loss Development Factors by Year, Long-Tailed Lines
• Medical Malpractice Occurrence, Other Liability Claims-Made, Products Liability Occurrence, Products Liability Claims-Made.
Estimate assumes 24:36 Factor is straight average of previous three years.
Source: NAIC data, sourced from S&P Global Market Intelligence; Insurance Information Institute.
Commercial Auto MedMal Claims-Made
Other Liability Occurrence Other Long-Tailed Lines*
1.53
1.71
1.40
1.60
1.80
1.75
2.28
1.50
2.00
2.50
2.22 3.00
2.00
2.50
3.00 3.45
2.96
2.75
3.25
3.75
23
Why Is It Happening?The Changing Legal Environment
Sources: Swiss Re Economic Insights, Burford Capital.
“Jackpot Justice” Litigation Financing
27.7030.74
41.75
54.33
0
10
20
30
40
50
60
2014 2015 2016 2017
$ m
illio
ns
Median, 50 Largest Jury Verdicts
7%
36%
0%
10%
20%
30%
40%
2013 2017
% of US Law Firms Using Litigation Financing
Litigation is a
financeable asset.- 68% of US Law Firms
24
Why It Is HappeningWhy Social Inflation Hits Insurance
Sources: Bureau of Labor Statistics (via FRED), Gallup.
Overall Inflation Remains Steady
Who Solves Problems?
-0.3
3.1
2.4
1.8
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2009 2011 2013 2015 2017 2019
% C
ha
ng
e
CPI Change vs Year Earlier
30
Congress
11
24
Big Business
23
5
10
15
20
25
30
35
2004 2007 2010 2013 2016 2019
Confidence in Institutions
% Saying Great Deal/Quite a Lot
25
Why Is It Happening?Social Trends Set the Stage
Sources: Wikipedia, Economic Policy Institute, Centers for Disease Control, Google Trends.
Big Payout Expectations
Dystopian Days
3
8
5
0
2
4
6
8
10
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
No. of $300M Lottery Jackpots22%
157%
343%
0%
100%
200%
300%
400%
1979 1989 1999 2009
% Chg, Real Income Since 79
Bottom 90% Top 1% Top 0.1%
78.2
78.978.7
78
78.5
79
2008 2014 2018
Life Expectancy at Birth
Dystopia
Utopia
5
35
65
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Inte
rest O
ve
r T
ime (
12-M
o
Mov.
Avg)
Search Topic: Utopia vs Dystopia
26
Summary
Healthy economy grew exposures
Falling frequency helped personal auto, workers comp
Low cat losses helped property lines
Social inflation a growing concern
2019 was a solid year for property/casualty insurers
The Global Pandemic
An Unprecedented P/C Insurance Toll
28
Direct Written Premium Growth By Year
Sources: NAIC data, sourced through S&P Global Market Intelligence; Blue Chip Economic Forecasts, May 2020.
All Lines
4.2%
Nominal GDP
4.0%
-4.6%
5.4%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Normally premium grows at about the same rate as the economy, which bodes ill for insurers this year.
29
Quarterly* U.S. Real GDP Growth
*at an annual rateSources: Blue Chip Economic Indicators, May 2020.
-40.3%
-4.7%
2.1% 1.7%
-32.1%
11.6%8.8%
3.4%
-23.1%
26.6%
16.8%
6.1%
-45%
-30%
-15%
0%
15%
30%
2020:Q2 2020:Q3 2020:Q4 2021:Q1 2021:Q2 2021:Q3 2021:Q4
Bottom 10 Avg Median Top 10 Avg
Most economists predict a quick bounceback but GDP won’t reach a new high until 2022.
30
COVID-19’s ImpactUnprecedented Spread of Loss, Deterioration of Exposure
Source: Willis Towers Watson, Insurance Information Institute..
Exposure Impact
Investment
Potential Loss Impact
2.0
0.6
0.3
0.7
0
0
0.2
22.7
4
2.6
27
1.7
0.8
92
0 50 100
BI
D&O
EPLI
GL
Mortgage
Political risk,credit, surety
WorkersCompensation
Billions of US$
Loss estimates range from $30B (≈ bad hurricane) to $140B (2-3 Katrinas)
$10.5B auto premium
Employment related exposures (GL, WC)
Stock prices, bond yields plunging
Lloyd’s estimate: $96B in investment losses
31
Moody’s Seasoned AAA Corporate Bond Yields, Monthly
Sources: FRED, St. Louis Federal Reserve Bank https://fred.stlouisfed.org/series/AAA/119
3.9%
3.0%
2.4%
2.0%
2.2%
2.4%
2.6%
2.8%
3.0%
3.2%
3.4%
3.6%
3.8%
4.0%
4.2%
Jan-19 Mar May Jul Sep Nov Jan-20 Mar
Yield
Interest rates continue to decline, making the insurance ‘float’ less lucrative.
32
Insurance Issues by Line of BusinessBefore the Pandemic and Now
2020 Forecast and Reforecast
Line Before the Pandemic Now
Property Trapped capital, rates Business interruption
Personal Auto Lower frequency, rates Less driving (but faster),
premium givebacks
D&O Event-driven securities class
actions, rates
Hindsight litigation of
securities filings
Cyber Public sector ransomware Hospital ransomware,
phishing
Commercial Auto Continuing deterioration Less driving, HOS rules
suspended
Workers Comp Falling frequency, solid profits Fewer exposures, first
responders
3333
Policyholder Surplus
Sources: ISO, Insurance Information Institute.
($ Billions)
487
456
742
848
770
$400
$500
$600
$700
$800
$900
2006 2008 2010 2012 2014 2016 2018 2020-Q1
At year-end the industry had $1 of surplus for every $0.75 of NPW,the strongest claims-paying status in its history.
The P/C insurance industry entered 2020in exceptionally strong financial condition.
Retroactive Business Interruption
An Existential Threat
35
Stress Testing P/C Insurers
How Resilient Is the Industry?
Sources: NAIC data sourced from S&P Global Market Intelligence; Insurance Information Institute.
Billions of dollars
Critical LevelBelow This Amount, Industry Imperiled
36
The Biggest Threat: Retroactive BI
51 51
102
153128
255
383
0
50
100
150
200
250
300
350
400
Katrina 2020BlackSwan
Low MidpointMonthlyRetro BI
High Low MidpointMonthly
BI AllFirms
High
Billions of dollars
94
Two Katrinas
per Month
Estimates dwarf other black swan scenarios
Source: Insurance Information Institute.
Five Katrinas
per Month
37
Stress Testing P/C Insurers
How Resilient Is the Industry?
Sources: NAIC data sourced from S&P Global Market Intelligence; Insurance Information Institute.
Billions of dollars
Critical LevelBelow This Amount, Industry Imperiled
38
Summary: COVID-19 Edition
Virtually all lines will be affected
Recession will dramatically decrease exposures and losses in several lines
Workers comp, D&O, GL and business interruption could face significant increases in claims
Retroactive BI would be an existential threat
Unprecedented
Thank you for your timeand your attention!
