Geopolitics & Insurance September 15, 2016

Sean Kevelighan, CEO

James Lynch, Chief Actuary

Insurance Information Institute 110 William Street New York, NY 10038 212.346.5520 seank@iii.org www.iii.org

212.346.5533 jamesl@iii.org www.iii.org

http://www.iii.org/http://www.iii.org/

2

Economic Uncertainty

1 The Peterson Institute for International Economics

...Monetary vs. Fiscal Policy

Monetary: Low interest rates mean insurers are struggling to meet interest rate guarantees for life insurance and annuities must diversify their investment portfolios

Fiscal: Supply-side debate heating up, i.e. Tax reform

Global Growth...

*Since 2008 we've had the longest

period of stagnation in trade

growth since World War II...

US Growth...

1.4GDP

InvestmentGrowth

3

TPP

China Rising

Globalization

Global Trends Impacting

Domestic Market

Geopolitical Polarization

RegionalTensions

Rise of theFar Right

Regulatory Trends

"Conduct of Business"

Capital/Solvency

Dodd-Frank

* Mainland purchases of insurance and related investment policies in the three months ended June 2016 vs. June 2015

HK$7.1B*HK$16.9B*

4

Geopolitics – US

5

Clinton vs. Trump:The Alternative Twitterverse*

The Economy

Will Congress pass tax plans?

Higher Deficits

Interest Rates Higher?

Trade

A little protectionist or a lot

Judges/Tort Reform

Court Relatively Friendly to Business

Could Appoint Four

* Where issues matter.

I’ll protect manufacturers. Build big walls! Get

tough on trade cheats!

Protectionist during campaign (down on TPP),

but generally a realist.

6

The Return of the ‘Bully Pulpit’

Next?

Bypassing the Media to Effect Policy

Profitability & Politics

How Is Profitability Affected bythe President’s Political Party?

8

P/C Insurance Industry ROEby Presidential Administration

3.55%

4.43%

4.68%

6.97%

7.98%

8.65%

8.80%

16.43%

4.83%

5.03%

5.43%

6.98%

7.68%

8.33%

8.35%

8.93%

15.10%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Kennedy/Johnson

Johnson

Obama I

G.W. Bush I

Eisenhower II

Eisenhower I

Truman

Nixon/Ford

Reagan I

Clinton II

G.W. Bush II

G.H.W. Bush

Clinton I

Obama II

Nixon

Reagan II

Carter

1950-2015*

*Truman administration ROE of 6.97% based on 3 years only, 1950-52;.

Source: Insurance Information Institute

Party of President Has Marginal Bearing on Profitability of P/C Insurance Industry

OVERALL RECORD:1950-2015*

Democrats 7.72%

Republicans 7.85%

9

-5%

0%

5%

10%

15%

20%

25%

50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 93 95 97 99 01 03 05 07 09 11 13 15

RO

E

BLUE = Democratic President RED = Republican President

P/C Insurance Industry ROE by Presidential Party Affiliation1950-2015*

.

*2015 data is through Q3.

Source: Insurance Information Institute

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Eis

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ho

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Ke

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Jo

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so

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Nix

on

/

Fo

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Cart

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Re

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/

Bu

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Cli

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10

But State Politics Drives InsuranceAnd Every State is Different

Source: R Street Insurance Regulation Report Card, December 2015

= A= B= C= D= F= NG

CWA

CAK

BOR

DCA

BID

B+NV

BAZ

BNM

BCO

B+WY

AUT

DMT

DTX

DLA

D+MS

DFL

DHI

B+SD

CND C+

MN

A-NE

C+KS

COK

AIA

BMO

BAR

BIL

BWI C

MI

C+IN

BOH

AKY

A TNA-SC

CAL

CGA

F NC

AVA

CWV

CPA

DNY

BME

NH B

VT AMA C-RI C+CT BNJ BDE CMD B

Not Graded: District of Columbia

11

Republicans Control Most States . . .. . . It is Likely to Remain That Way

* Nebraska: Unicameral, nonpartisan, Republican dominated. New York: Democratic-majority Senate controlled by Republicans.

Source: National Conference of State Legislatures, Ballotpedia, Insurance Information Institute.

Makeup Today

Control could change

11

30

72

All Dem All Rep

Split NE, NY*

20 Chambers Could Switch – Mainly in States With ‘Split’ Legislatures.

12

State Races

SOURCE: Ballotpedia, Insurance Information Institute.

Insurance Commissioner

Miscellaneous

Governorships

D-18; R-31; 1 Independent (AK)

12 States With Elections This Year; Democrats Defend 8

Five Tight Races

– Dem-held: NH, VT, WV

– Rep-held: IN, NC

11 Elected (D-5; R-6)

5 Elections (DE, MT, NC, ND, WA); Incumbent Party Favored

9 States Have Marijuana Referendums

(AR Has Two – One Would Let Patients Grow Their Own.)

13

State Issues

Source: Fast Track Monitoring System.

From early 2014 to early 2016, the cost of accidents has risen dramatically. By contrast, consumer prices overall

rose 1.7 percent during 2014 and 2015.

Increase in Loss Costs, 2014:Q1–2016:Q1

Bodily Injury

9.6%

Property

Damage

14.7%

Personal Injury

Protection

18.4%

Collision

11.1%

Comprehensive

11.0%

Auto Insurance

14

State IssuesWorkers Compensation

SOURCES: Department of Labor, “Does the Workers’ Compensation System Fulfill Its Obligations to Injured Workers?”; Centers for Disease Control and Prevention.

The Grand Bargain – Still? Opioids

Opt Out

Big Issue One Year Ago

Oklahoma Law Unconstitutional

Department of Labor/ Pro Publica: Benefit Cuts Shifted Injury Costs from Employer

Benefit Cuts?

Evidence-Based Guidelines

Outside Medical Reviewers

Nationwide Epidemic

¼ of Drug Costs in WC Claims

13 States Limiting WC Opioid Prescriptions

15

2014

2015

506

564+11.5%

$38B

$194B+517%

DEALS VALUE

Insurance-related Deals Involving U.S. Firms2

$6.3B

(JAPAN) (BERMUDA)

54pending or completed M&As involving U.S. insurance companies (2016 YTD)2

State of Insurance

1. PCS; 2. iii Fact Book.

AutonomousVehicles

P2P insurance

Cybersecurity

Sharing Economy

Workers CompRegulation

Politics

Overcapitalization(Reinsurance)

$75.7B

$15.0B

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16*

2005 vs. 2015:Loss Relatively Small Compared to Surplus

On Hand

U.S. Insured Cat Losses

P/C Payouts / Property Losses1

$15.5B

2014

$15.2B

2015

Consolidation/M&ACatastrophe Costs Top Issues

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