Inflation and the Insurance Industry David Berson, SVP & Chief Economist Nationwide Economics May 29, 2014

The insurance burden has fallen (mostly due to the auto component) Combined auto & homeowners insurance costs as a percent of personal disposable income Percent, as of 2013 Sources: BEA, Haver Analytics

Insurance spending is a smaller share of total consumer expenditures Combined auto & homeowners insurance costs as a percent of personal consumption expenditures Percent, as of 2013 Sources: BEA, Haver Analytics

Inflation and Auto Insurance

The auto insurance burden is highest along the Gulf of Mexico, as well as in Michigan and West Virginia Average auto insurance expenditure as a percent of average family income Percent, as of 2011 National Average = 1.2% Source: Auto Insurance Report

Autos per household are declining Auto stock relative to households As of 2011 Sources: BEA, Haver Analytics

Fewer young people are getting driver licenses Percent of population with driver licenses by age group As of 2011 Sources: Federal Highway Administration, Census Bureau, Haver Analytics

Car-sharing has grown rapidly over the past decade Number of car-sharing members in the United States Thousands, as of 2013 10 Year CAGR = 37% Car sharing is expected to reduce miles driven by 1.1 billion in 2013 Sources: Transportation Sustainability Research Center, University of California - Berkeley

Average miles driven per year has stabilized Miles driven per year per passenger car (excluding motorcycles) Thousands, as of 2011 Sources: Federal Highway Administration, Transportation Sustainability Research Center, Haver Analytics

Auto Insurance Costs Continue to Trend Downward Safer cars Increased application of technology for application/underwriting Miles driven per year not increasing Fewer young drivers (less experience = higher risk) More car sharing Driverless cars: impact on accident frequency and severity? Medical costs: faster or slower than general inflation? But…how much of the slower gain in rates (relative to incomes) comes from a shift toward higher deductibles? Does this mean that auto insurance inflation (properly measured) isn’t slowing?

Inflation and Homeowners Insurance

The homeowners insurance burden tends to be highest in catastrophe-prone states Average homeowners insurance costs as a percent of average family income Percent, as of 2011 National Average = 1.4% Source: Property Insurance Report

Homeowners Insurance Costs Variable – Impact of Storms, etc. Costs have been rising fastest in areas most susceptible to natural disasters (hurricanes, tornadoes, etc.) Tarps (petrochemical prices), wood, cement, and other building costs Impact of mitigation Impact of climate change? Medical costs: faster or slower than general inflation? Impact of shift toward renting and away from homeownership – only about 30 percent of renters have insurance versus about 97 percent of homeowners

Inflation and Financial Products

Low interest rates put upward pressure on financial products prices Federal Funds Target Rate Percent, as of April 2014 Sources: Federal Reserve Board, Haver Analytics

Low Interest Rates Add to Financial Product Inflation Low interest rates make it difficult for newly originated products to meet the guaranty promises of older products offered during a higher interest rate period Higher fees Reduced guarantees