1. Emerging Issues and Trends Affecting Commercial P/C Insurance Seminar for State Committee Chairs & Legislators Griffith Foundation Columbus, OH August 21, 2011 Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY 10038 Tel: 212.346.5540  Cell: 917.494.5945  stevenw@iii.org  www.iii.org

2. 2 Profitability How Can Commercial Insurers be Profitable When… Premiums/Rates are Flat or Declining, Investment Income is Low and Declining Losses (especially from CATs) are Increasing

3. Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2011* *Profitability = P/C insurer ROEs are I.I.I. estimates. 2011 figure is an estimate based on annualized ROAS for Q1 data. Note: Data for 2008-2011 exclude mortgage and financial guaranty insurers. Source: Insurance Information Institute; NAIC, ISO, A.M. Best. 1977:19.0% 1987:17.3% 1997:11.6% 2007:12.3% 1984: 1.8% 1992: 4.5% 2001: -1.2% 10 Years 2011: 6.1%* History suggests next ROE peak will be in 2016-2017 ROE 1975: 2.4%

4. P/C Commercial Insurance Direct Premiums Written by Line, 2009 *Includes General Liability, Products Liability, D&O, Professional Malpractice (except Medical) etc. Sources: SNL Financial, Insurance Information Institute $ Billions 2009 Total: $467.8 billion

5. P/C Commercial Insurance Market Shares by Direct Premiums Written, 2009 Sources: SNL Financial, Insurance Information Institute Top Ten Insurance Groups Combined, the top 10 have less than 45% market share

6. 6 Growth of Commercial Lines Direct Written Premium vs. GDP, U.S., 2001-2010 Sources: SNL Financial; I.I.I. From 2004 on, the economy grew faster than commercial insurance premium volume

7. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 7 Calendar Year Combined Ratio, Commercial Insurance, 2008-2011F Sources: A.M. Best. Insurance Information Institute. Overall deterioration in 2011 underwriting performance is due to expected return to normal catastrophe activity plus deteriorating underwriting performance related to the prolonged commercial soft market In the last dozen years, the only profitable years were years of very low CATs

8. P/C Combined Ratios, Selected Commercial Lines, 2008-2010P Line of Business 200820092010P Other Liability (incl. Prod Liab)95105110 Workers Compensation101110.5115 Commercial Multi Peril10497101 Commercial Auto96.899.598 Fire & Allied Lines (incl. EQ)998083 All Other Lines11396101 Sources: All lines except WC for 2008-09, A.M. Best; Worker Comp., NCCI; 2010P data, ISO. Private carriers only.

9. Commercial Multi-Peril Combined Ratio: 1995–2011P Commercial Multi-Peril Underwriting Performance is Expected to Deteriorate Modestly *2010Eand 2011P figures are for the combined liability and non-liability components. Sources: A.M. Best; Insurance Information Institute.

10. Commercial Auto Combined Ratio: 1993–2011P Sources: A.M. Best; Insurance Information Institute. Commercial Auto Underwriting Performance is Expected to Deteriorate Modestly

11. Inland Marine Combined Ratio: 1999–2011P Inland Marine is Expected to Remain Among the Most Profitable of All Lines Sources: A.M. Best; Insurance Information Institute.

12. Workers Compensation Combined Ratio: 1994–2011P Workers Comp underwriting results are deteriorating markedly and are the worst they have been in a decade Sources: A.M. Best (1994-2009); NCCI (2010E); Insurance Information Institute (2011P).

13. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 13 P/C Reserve Development, 1992–2011E Reserve releases remained strong in 2010 but should taper off in 2011 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: Barclay’s 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

14. A 100 Combined Ratio Isn’t What It Once Was: Investment Impact on ROEs Combined Ratio / ROE * 2009 and 2010 figures are return on average statutory surplus. 2008 -2011 figures exclude mortgage and financial guaranty insurers Source: Insurance Information Institute from A.M. Best and ISO data. Combined Ratios Must Be Lower in Today’s Depressed Investment Environment to Generate Risk Appropriate ROEs A combined ratio of about 100 generated ~7.5% ROE in 2009/10, 10% in 2005 and 16% in 1979

15. Catastrophe Loss Developments and Trends 15 2011 and 2010 Are Rewriting Catastrophe Loss and Insurance History

16. Number of Federal Disaster Declarations, 1953-2011* *Through August 12, 2011. Sources: Federal Emergency Management Administration at http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute. http://www.fema.gov/news/disaster_totals_annual.fema There have been 2,013* federal disaster declarations since 1953. Note that 2005 was a relatively low year for number of disaster declarations in the 1996-2010 period, but that year included Hurricanes Katrina, Rita, and Wilma. The number of federal disaster declarations could 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.

17. Worldwide Natural Disasters, 1980 – 2011* Number of Events *2011 figure is through June 30. Source: MR NatCatSERVICE 17 Meteorological events (Storm) Hydrological events (Flood, mass movement) Climatological events (Extreme temperature, drought, forest fire) Geophysical events (Earthquake, tsunami, volcanic eruption) Already 355 events through the first 6 months of 2011

18. US$bn Worldwide Natural Disasters 1980–2011, Overall and Insured Losses* 18 Overall losses (in 2011 values) Insured losses (in 2011 values) *2011 figure is through June 30. Source: MR NatCatSERVICE © 2011 Munich Re First Half 2011 Overall Losses: $265 Bill Insured Losses: $60 Bill

19. 19 Residual Markets

20. 20 U.S. Residual Market Exposure to Loss ($ Billions) Source: PIPSO; Insurance Information Institute (I.I.I.); http://www.iii.org/pr/last-resort-2010.http://www.iii.org/pr/last-resort-2010 ($ Billions) In the 21-year period between 1990 and 2010, total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54.7 billion in 1990 to $757.9 billion in 2010. Hurricane Andrew 4 Florida Hurricanes Katrina, Rita and Wilma

21. U.S. Residual Market: Policies In-Force, 2000-2010 Source: PIPSO; Insurance Information Institute; http://www.iii.org/pr/last-resort-2010.http://www.iii.org/pr/last-resort-2010 (000) Hurricane Andrew 4 Florida Hurricanes Katrina, Rita, and Wilma In the 21-year period between 1990 and 2010, the total number of policies in-force in the residual market (FAIR & Beach/Windstorm) Plans has more than tripled. 21

22. U.S. Residual Market: Policies In-Force as Percent of Housing Units, 2000-2009 Sources: U.S. Census Bureau at http://www.census.gov/popest/housing/HU-EST2009.html PIPSO; Insurance Information Institute; http://www.iii.org/pr/last-resort-2010.http://www.census.gov/popest/housing/HU-EST2009.htmlhttp://www.iii.org/pr/last-resort-2010 Katrina, Rita, and Wilma Between 2000 and 2009, the number of housing units in the U.S. grew by 13.7 million (up 12%) but policies in-force in the residual market (FAIR & Beach/Windstorm Plans) grew by 70%. 22

23. Pricing 23 Is There Evidence of a Broad and Sustained Shift in Pricing?

24. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 24 Soft Market Persisted in 2010 but Growth Returned: More in 2011? (Percent) 1975-781984-872000-03 *2011 figure is an estimate based on Q1 data. Shaded areas denote “hard market” periods Sources: A.M. Best (historical and forecast), ISO, 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. NWP was up 0.9% in 2010 2011:Q1 growth was +3.5%; First Q1 growth since 2007

25. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 25 P/C Net Premiums Written: % Change, Quarter vs. Year-Prior Quarter Sources: ISO, Insurance Information Institute. Finally! Back-to-back quarters of net written premium growth (vs. the same quarter, prior year) The long-awaited uptick. In 2011:Q1 occurring in personal lines predominating cos. (+3.8%) and commercial lines predominating cos. (+3.5%)

26. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 26 Average Commercial Rate Change, All Lines, (1Q:2004–2Q:2011) Source: Council of Insurance Agents & Brokers; Insurance Information Institute KRW Effect Pricing is flat for the first time in more than 7 years (Percent) Q2 2011 decreases were the smallest since 2004, perhaps signaling a market firming

27. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 27 Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2011:Q2 Source: Council of Insurance Agents and Brokers; Insurance Information Institute. 1999:Q4 = 100 Pricing today is where is was in Q3:2000 (pre-9/11) Downward pricing pressure is most pronounced for larger risks

28. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 28 Price Index for Premiums for Commercial Multiple Peril Insurance, 1998–2011* Index June 1998 = 100 *As of July 2011; Not seasonally adjusted. Note: Recessions indicated by gray shaded columns. Sources: U.S. Bureau of Labor Statistics, Producer Price Index database; National Bureau of Economic Research (recession dates); Insurance Information Institute.

29. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 29 Price Index for Premiums for Non-auto Liability Insurance, 1998–2011* Index June 1998 = 100 *As of July 2011; Not seasonally adjusted. Note: Recessions indicated by gray shaded columns. Sources: U.S. Bureau of Labor Statistics, Producer Price Index database; National Bureau of Economic Research (recession dates); Insurance Information Institute.

30. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 30 Price Index for Premiums for Commercial Auto Insurance, 1998–2011* Index June 1998 = 100 *As of July 2011; Not seasonally adjusted. Note: Recessions indicated by gray shaded columns. Sources: U.S. Bureau of Labor Statistics, Producer Price Index database; National Bureau of Economic Research (recession dates); Insurance Information Institute.

31. INVESTMENTS: THE NEW REALITY 31 Investment Performance is a Key Driver of Profitability Does It Influence Underwriting or Cyclicality?

32. Property/Casualty Insurance Industry Investment Gain: 1994–2011:Q1 1 Investment Gains Recovered Significantly in 2010 Due to Realized Investment Gains; The Financial Crisis Caused Investment Gains to Fall by 50% in 2008 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 2010 were the best since 2007

33. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 33 Treasury Yield Curves Before and After S&P Downgrade Treasury actually fell in the wake of the S&P downgrade, despite (theoretically) higher risk The End of the Fed’s Quantitative Easing Is Unlikely to Push Interest Rates Up Substantially Given Ongoing Economic Weakness *Average of daily rates. Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.

34. Inflation 34 Is it a Threat to Claim Cost Severities?

35. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 35 Annual Inflation Rates, (CPI-U, %), 1990–2014F Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 3/11 and 8/11 (forecasts). The slack in the U.S. economy suggests that inflation should not heat up before 2012, but other forces (commodity prices, inflation in countries from which we import, etc.), plus U.S. debt burden, remain longer-run concerns Annual Inflation Rates (%) The recession and the collapse of the commodity bubble reduced inflationary pressures in 2009/10

36. P/C Personal Insurance Claim Cost Drivers Grow Faster than the Overall CPI Suggests Source: Bureau of Labor Statistics; Insurance Information Institute. Price Changes in 2010 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 36 Excludes Food and Energy

37. WC Medical Severity Rising at Twice the Medical CPI Rate Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states. The average annual increase in WC medical severity from 1995 through 2009 was nearly twice the medical CPI (7.6% vs. 3.9%). Will healthcare reform affect this gap?

38. P/C Commercial Property Insurance Claim Cost Drivers Grow Faster than the Overall CPI Suggests Source: Bureau of Labor Statistics; Insurance Information Institute. Price Changes in 2010 Commercial liability and workers comp costs are also affected by the exploding cost of health care. 38 Excludes Food and Energy An oil price spike in early 2011 will likely be reflected in higher prices for construction products that are based on oil, like asphalt and plastic pipe.

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