The Workplace of Tomorrow The “On-Demand” Economy and

Implications for Workers CompensationNCCI Annual Issues Symposium

Orlando, FL May 14, 2015

Download at www.iii.org/presentationsRobert P. Hartwig, Ph.D., CPCU, President & Economist

Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 bobh@iii.org www.iii.org

2

P/C Insurance Industry Financial Overview

2014: Second-Best Year in the Post-Crisis Era

Modest CATs, Strong MarketsWorkers Comp Improvement

Helped Too2

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 $

33

,52

2

$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%

10 Years

10 Years

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%

6

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

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

8

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.

9

-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 Crisis1985/86: 22.2%

Post-9/112002:15.3%

Twin Recessions; Interest Rate

Hikes1987: 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 Depression1932: -15.9% max drop

Post WW II Peak:1947: 26.2%

Start of WW II1941: 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-9/112002: 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, 2007-2013

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%

13

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

14

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

15

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

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: 2000–20141

$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

19

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.

19

20

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 CurvePre-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

3.523.38

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

24

P/C Insurer Net Realized Capital Gains/Losses, 1990-2014

Sources: A.M. Best, ISO, Insurance Information Institute.

$2.8

8

$4.8

1 $9.8

9

$9.8

2

$10.

81 $18.

02

$13.

02

$16.

21

$6.6

3

-$1.

21

$6.6

1

$9.1

3

$9.7

0

$3.5

2 $8.9

2

-$7.

90

$5.8

5

$7.0

4

$6.1

8 $11.

37

$10.

06

-$19

.81

$9.2

4

$6.0

0

$1.6

6

-$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

27

2015 Non-Financial Challenges and

Criticisms of Workers Comp

A Number of Issues Have Stirred Interest in Workers Compensation in

the First Part of 2015

27

28

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

29

Recent Challenges Raised in theWorkers Comp Line

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

30

ProPublica/NPR Attack on Workers Compensation In March 2015, ProPublica/NPR published a series

entitled “The Demolition of Workers Comp”

Thesis: WC benefits have been hollowed out and that workers were often no longer well served by the system

Series relied on a number of anecdotal cases of claimants who believed they were adversely impacted

Claims 33 states have watered down benefits under the guise of “reform”

I.I.I. made forceful rebuttal, demonstrating that: Insurers spend $40B+ each year treating injured workers Workplace is materially safer, in part due to WC incentives Application of managed care to WC reduces cost with no

adverse impact on outcome (“blank check” unsustainable)

31

INSERT WNBC PROPUBLICA VIDEO HERE

31

32

Labor Markets Trends: Recovery Continues in 2015

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

Level Since 2008Payrolls Expanded to Record High

32

33

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 5.4% 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.

33

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.”

34

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; = forecastsSources: 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

35

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

7.7

7.1

6.8

6.7

6.6

6.6

6.5

6.5

6.5

6.4

6.3

6.3

6.3

6.2

6.1

6.0

5.9

5.8

5.7

5.7

5.7

5.6

5.6

5.6

5.5

5.4

5.4

0

2

4

6

8

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

Un

em

plo

ym

en

t R

ate

(%

)

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

In March, 23 states and the District of Columbia had over-the-month unemployment rate decreases, 12 states had increases, and 15 states had no change. 

Residual impacts of the housing collapse, weak economies are holding

back several states

36

5.4

5.3

5.1

5.1

4.8

4.8

4.8

4.6

4.6

4.2

4.2

4.2

4.1

4.1

4.1

4.0

3.9

3.9

3.8

3.8

3.7

3.5

3.4

3.1

2.6

0

1

2

3

4

5

6

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

Un

em

plo

ym

en

t R

ate

(%

)

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

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

In March, 23 states and the District of Columbia had over-the-month

unemployment rate decreases, 12 states had increases, and 15 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

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

82

22

20

11

70

18

01

53

24

72

72

86

18

31

75 22

33

13

23

8 27

22

43

20

92

35

21

84

14

31

92

02 26

19

42

13

11

3

(1,000)

(800)

(600)

(400)

(200)

0

200

400

600

Jan-

07F

eb-0

7M

ar-0

7A

pr-0

7M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7S

ep-0

7O

ct-0

7N

ov-0

7D

ec-0

7Ja

n-08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08Ju

l-08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09F

eb-0

9M

ar-0

9A

pr-0

9M

ay-0

9Ju

n-09

Jul-0

9A

ug-0

9S

ep-0

9O

ct-0

9N

ov-0

9D

ec-0

9Ja

n-10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11F

eb-1

1M

ar-1

1A

pr-1

1M

ay-1

1Ju

n-11

Jul-1

1A

ug-1

1S

ep-1

1O

ct-1

1N

ov-1

1D

ec-1

1Ja

n-12

Feb

-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13F

eb-1

3M

ar-1

3A

pr-1

3M

ay-1

3Ju

n-13

Jul-1

3A

ug-1

3S

ep-1

3O

ct-1

3N

ov-1

3D

ec-1

3Ja

n-14

Feb

-14

Mar

-14

Apr

-14

May

-14

Jun-

14Ju

l-14

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15F

eb-1

5M

ar-1

5A

pr-1

5

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.

37

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

38

Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2014:Q4

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

$7,75005

:Q1

05:Q

205

:Q3

05:Q

406

:Q1

06:Q

206

:Q3

06:Q

407

:Q1

07:Q

207

:Q3

07:Q

408

:Q1

08:Q

208

:Q3

08:Q

409

:Q1

09:Q

209

:Q3

09:Q

410

:Q1

10:Q

210

:Q3

10:Q

411

:Q1

11:Q

211

:Q3

11:Q

412

:Q1

12:Q

212

:Q3

12:Q

413

:Q1

13:Q

213

:Q3

13:Q

414

:Q1

14:Q

214

:Q3

14:Q

4

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%

38

Latest (2014:Q4) was $7.57 trillion, a new peak--$1.34 trillion above 2009 trough

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

39

Payroll Base* WC NWP

Payroll vs. Workers Comp Net Written Premiums, 1990-2014P

*Private employment; Shaded areas indicate recessions. WC premiums for 2014 are I.I.I. estimates..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

40

Key Sectors Critical to the Economy and the P/C

Insurance Industry

40

41

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 ResidentialResidential

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

41

$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.

42

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%

TotalConstruction

Total PrivateConstruction

Residential--Private

Non-Residential--

Private

Total PublicConstruction

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

43

$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

44

(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

21

.01 1.1

1 1.2

6 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 (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

45

Construction Employment,Jan. 2010—April 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

86,

383

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

ov-1

4D

ec-1

4Ja

n-15

Feb

-15

Mar

-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.

46

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

46

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

47

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 Prices47

48

Manufacturing Employment,Jan. 2010—April 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

2112

,322

11,250

11,500

11,750

12,000

12,250

12,500Ja

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-1

0N

ov-

10

De

c-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-1

1N

ov-

11

De

c-1

1Ja

n-1

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

5

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.

49

$200,000

$300,000

$400,000

$500,000

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

49

The value of Manufacturing Shipments in March 2015 was $482.2B—down 5.1% since the

July 2014 record high of $508.1B

50

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

fact

uri

ng

Du

rab

le M

fg.

Wo

od

Pro

du

cts

Pri

ma

ryM

eta

ls

Fa

bri

cate

dM

eta

ls

Ma

chin

ery

Ele

ctri

cal

Eq

uip

.

Co

mp

ute

rs &

Ele

ctro

nic

s

Tra

nsp

ort

atio

nE

qu

ip.

No

n-D

ura

ble

Mfg

.

Fo

od

Pro

du

cts

Pe

tro

leu

m &

Co

al

Ch

em

ica

l

Pla

stic

s &

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

52

ENERGY SECTOR

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

but Prices Are FallingWorkers Comp Have Benefited from the Energy Boom, But Exposures Will Suffer

as Energy Prices Swoon52

$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

54

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

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

156.

415

6.4

156.

715

7.6

158.

715

7.8

158.

015

9.5

160.

016

1.5

161.

216

1.2

163.

116

4.4

166.

6 169.

317

0.1

171.

017

2.5

173.

6 176.

317

8.2

178.

518

0.9

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

150

160

170

180

190

200

210

Jan-

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Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

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-11

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-11

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-11

Nov

-11

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-11

Jan-

122/

30/2

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Feb

-13

Mar

-13

Apr

-13

May

-13

Jun-

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Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

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Feb

-15

Mar

-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

56

POSITIVE LABOR MARKET DEVELOPMENTS

Key Factors Driving Workers Compensation Exposure

56

57

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)

58

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)

59

ADVERSE LONG-TERMLABOR MARKET DEVELOPMENTS

Key Factors Harming Workers Compensation Exposure and the

Overall Economy

59

60

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

61

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

The “On-Demand” (Sharing) Economy

The On-Demand Economy Will Transform the American

Workforce and the P/C Insurance Industry Too

62

63

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

Will YOUR job be reduced to an app?

64

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!

65

…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”…

66

You Can Live Your Life with the Swipeof a Finger…

Get married…

…Move

…And if it doesn’t work out…

67

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…

68

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

69

INSERT AMAZON VIDEO HERE

69

Technology and Employment

What Makes the On-Demand Economy Possible?

Why Does It Matter for Insurers?

70

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

74

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

75

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.

76

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 Coverage

Sources: Wall Street Journal; The Economist; Fortune; Insurance Information Institute research.

77

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

78

On-Demand Workers

Who Are They?

And Who’s Driving Demand for Them?

78

79

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

80

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.

81

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

82

84

An UBER Case Study

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

Vested Interests Hate Uber

84

Looking Ahead: Disruptive Forces Rule

Technology’s Impacts on the Economy, the Workforce and the

Insurance Industry Will Be Significant

88

89

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

90

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

www.iii.org

Thank you for your timeand your attention!

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

Insurance Information Institute Online:

93