Pandemics, Politics & Economics:P/C Insurance in an Era of Uncertainty

Robert P. Hartwig, PhD, CPCUClinical Associate Professor of Finance, Risk Management & Insurance

Darla Moore School of Business ♦ University of South CarolinaRobert.Hartwig@moore.sc.edu ♦ 803.777.6782

Target Markets2020 Summit WeekOctober 19, 2020

mailto:Robert.Hartwig@moore.sc.edu

Pandemics & P/C Insurance: Outline P/C Insurers: Overcoming Uncertainty With Strength Financial Overview: The Industry’s Financial Position Amid the COVID-19 Pandemic

COVID-19: Potential Coronavirus Impacts on Key Lines

Investment Market Issues: Volatility Rules, Low Interest Rates are Back

The Economy and COVID-19: Overview & Outlook

Commercial Lines Rate Trends & Reinsurance Market Developments

Litigation/Tort Trends

Federal & State COVID-19 Initiatives Impacting Commercial Insurers

Summary, Conclusions and Q&A

3

P/C Insurance Industry: Financial Overview Amid the

COVID-19 PandemicThe P/C Insurance Industry Entered the COVID-19 Pandemic from a Position of

Financial Strength

Economic, Financial Market, Regulatory and Tort Risks Are Major

Challenges Going Forward3

4

Policyholder Surplus (Capacity), 2006:Q4–2020:H1

Sources: ISO, A.M .Best; Risk and Uncertainty Management Center, University of South Carolina.

($ Billions)

$487

.1$4

96.6

$512

.8$5

21.8

$478

.5$4

55.6

$437

.1$4

63.0 $490

.8$5

11.5 $540

.7$5

30.5

$544

.8$5

59.2

$559

.1$5

38.6

$550

.3

$567

.8$5

83.5

$586

.9$6

07.7

$614

.0$6

24.4 $653

.4

$671

.6$6

73.9

$675

.2$6

74.2

$673

.7$6

76.3

$700

.9$7

17.0 $7

50.7 $781

.5$7

42.1 $7

79.5

$802

.2$8

12.2 $8

47.8

$771

.9 $81

9.7

$662

.0

$570

.7

$566

.5

$505

.0$5

15.6

$517

.9

$400$450$500$550$600$650$700$750$800$850$900

06:Q

407

:Q1

07:Q

207

:Q3

07:Q

4

08:Q

108

:Q2

08:Q

308

:Q4

09:Q

109

:Q2

09:Q

309

:Q4

10:Q

1

10:Q

210

:Q3

10:Q

411

:Q1

11:Q

211

:Q3

11:Q

412

:Q1

12:Q

2

12:Q

312

:Q4

13:Q

113

:Q2

13:Q

313

:Q4

14:Q

114

:Q2

14:Q

314

:Q4

15:Q

215

:Q4

16:Q

116

:Q4

17:Q

217

:Q4

18:Q

318

:Q4

19:Q

1

19:Q

219

:Q3

19:Q

420

:Q1

20:Q

2

Financial Crisis

(-16.2%)

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.

Drop due to near-record 2011 CAT losses

(-4.9%)

Policyholder Surplus is the industry’s financial cushion against large insured events, periods of economic stress and

financial market volatility. It is also a source of capital to underwrite new risks.

The P/C insurance industry entered the COVID-19 pandemic

from a position strength and was able to withstand the 9.0% surplus decline in Q1 2020

P/C Industry Net Income After Taxes, 1991–2020E* 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% 2015 ROAS = 8.4% 2016 ROAS = 6.2% 2017 ROAS =5.0% 2018 ROAS = 8.0% 2019: ROAS = 7.7%

*2020 estimate based on annualized actual 1H:20 figure of $25.0B. ROE figures are GAAP; 1Return on avg. surplus. Excludes Mortgage & Financial Guaranty insurers for years (2009-2014). Sources: A.M. Best, ISO.

$14,

178

$5,8

40$1

9,31

6$1

0,87

0 $20,

598

$24,

404 $3

6,81

9$3

0,77

3$2

1,86

5

$3,0

46$3

0,02

9

$62,

496

$3,0

43

$35,

204

$19,

456 $

33,5

22$6

3,78

4$5

5,87

0$5

6,82

6$4

2,92

4$3

6,81

3$5

9,99

4$5

0,00

0

$38,

501

$20,

559

$44,

155

$65,

777

-$6,970

$28,

672

-$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 15 16 17 18 20E

COVID impacts will likely have a negative influence on Net Income in 2020, but too

soon to determine magnitude

$ Millions

ROE: Property/Casualty Insurance by Major Event, 1987–2020:H1* (est.)

6

*Excludes Mortgage & Financial Guarantee in 2008 – 2014. 2020:H1 estimate is based on actual Q1 2020 figure of 8.8%.

Sources: ISO, Fortune; USC RUM Center.

-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 15 16 17 18 19 20*

P/C Profitability Is Influenced Both by

Cyclicality and Volatility

Hugo

Andrew, Iniki

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis* ROE fell by 8.3 pts from 12.7% to 4.4%

(Percent)

Record Tornado Losses

Sandy

Low CATs

Harvey, Irma, Maria,

CA Wildfires

2019 7.7%

2020:H1 7.0% (Est.)

Profitability & Politics

7

How Is Profitability Affected by the President’s Political Party?

15.10%8.93%

8.65%8.35%8.33%8.20%

7.98%7.68%

6.98%6.97%6.90%

5.43%5.03%

4.83%4.68%

4.43%3.55%

16.43%

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

CarterReagan II

NixonClinton I

G.H.W. BushG.W. Bush II

Obama IIClinton IIReagan I

Nixon/FordTruman

TrumpEisenhower IEisenhower II

G.W. Bush IObama I

JohnsonKennedy/Johnson

OVERALL RECORD: 1950-2019*

Democrats 8.1%Republicans 7.8%

Party of President has marginal bearing on profitability of P/C insurance industry

P/C Insurance Industry ROE by Presidential Administration, 1950-2019*

*Trump figure is 2017-2019 average. ROEs for the years 2008-2014 exclude mortgage and financial guaranty segments.Source: Risk and Uncertainty Management Center, University of South Carolina.

Net Premium Growth (All P/C Lines): Annual Change, 1971—2020:H1

-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 15 16 17 18 19 20

(Percent)1975-78 1984-87 2000-03

*Pre-COVID-19 forecast from A.M. Best Review & Preview (Feb. 2020). NOTE: Shaded areas denote “hard market” periodsSources: A.M. Best (1971-2013, 2020F), ISO (2014-19); Risk & Uncertainty Management Center, Univ. of South Carolina .

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.

2020F: 3.8%*2020:H1: 2.9%

2019: 3.6%2018: 10.8%2017: 4.6%2016: 2.7%2015: 3.5%2014: 4.2

2013: 4.4%2012: +4.2%

2020 OutlookPre-COVID: 3.8%Through H1: 2.9%

Potential Impacts of COVID-19 on Written Premium in 2020, by Key LineLine Estimated Premium ImpactWorkers Compensation 12.5% to 25% reduction in premium written in 2020

(equates to $5.9B to $11.75B DWP)Business Interruption & Contingency

7% to 13% reduction in premium volume (US & UK)

General Liability* $1.5B to $6.3B premium reduction in USPersonal Auto ~$10B in refunds, rebates

(equates to ~4% of DWP)Personal Travel Insurance 29% to 78% reduction in premium written (US & UK)Personal/Comm. Motor ~10% reduction in US; 0% to 11% reduction in UKMarine/Aviation/Transport $0.7B-$1.5B (US); $0.6 - $1.2B (UK)

10

*Includes nursing home professional liability.Source: Derived from Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic (Fig.11, 14), May 2020. and other sources; Risk and Uncertainty Management Center, University of South Carolina.

Potential Impacts of COVID-19 on LOSSES in 2020, by Key LineLine Estimated Loss ImpactWorkers Compensation $0.2B - $92B (depends on severity of pandemic

and “presumption” determination)Business Interruption & Contingency

$2B - $22B (US); $1.1B - $13.9B (UK)

General Liability* $0.7B to $27B loss across US & Bermuda marketsPersonal/Comm. Motor $26B - $57B reduction in personal auto and $4.2B

- $9.4B commercial (US); $1 - $7B overall reduction in UK

Mortgage $0 - $1.7B loss across US & Bermuda marketsD&O $0.6 - $4.0 loss across US & Bermuda marketsMarine/Aviation/Transport $0.3B-$1.3B reduction (US); $0.6 - $1.1B (UK)

11

*Includes nursing home professional liability.Source: Derived from Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic (Fig.11, 14), May 2020. and other sources; Risk and Uncertainty Management Center, University of South Carolina.

P/C Insurance Industry Combined Ratio, 2001–2020:H1*

*Excludes Mortgage & Financial Guaranty insurers 2008--2014.*First Half 2020.Sources: A.M. Best, ISO (2014-2019).

95.7

99.3101.1

106.5

102.5

96.4 97.097.8

100.799.298.9

103.7

99.2101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20**

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned Premiums Relatively

Low CAT Losses, Reserve Releases

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Sandy Impacts

Lower CAT

Losses

Best Combined Ratio Since 1949 (87.6)

Avg. CAT Losses,

More Reserve Releases

Cyclical Deterioration

Sharply higher CATs are driving

large underwriting losses and

pricing pressure

Pre-COVID 2020 Combined Ratio Est.

99.1 (A.M. Best)

COVID-19 has had no

discernable net impact on

pre-COVID expectations for under the

combined ratio though

Q2 2020

COVID-19 Announced Losses vs. Top-Down Industry Estimates (as of May 12, 2020)

*Lloyd’s CEO John Neil appearance on CNBC, May 14, 2020: https://www.cnbc.com/2020/05/14/lloyds-of-london-coronavirus-will-be-largest-loss-on-record-for-insurers.htmlSources: Company disclosures, Dowling & Partners, Barclays Research, Autonomous Research, BofA Global Research, UBS Securities, Willis Towers Watson from Artemis.bm accessed at https://www.artemis.bm/news/consensus-emerging-on-30bn-to-100bn-covid-19-industry-loss-willis-re/; Risk and Uncertainty Management Center, University of South Carolina.

Global P/C COVID-19 loss consensus $30B - $100B

(~$60B as midpoint)

UBS

30-60bn

Q1 reported COVID claims totaled $4.2B according to Willis, but Q2 will be a truer

reflection of actual loss

Lloyd’s: Says its own p/c claims could reach $4.3B by June 30. Estimates global p/c losses at $107B; Global investment losses = $96B*

https://www.cnbc.com/2020/05/14/lloyds-of-london-coronavirus-will-be-largest-loss-on-record-for-insurers.htmlhttps://www.artemis.bm/news/consensus-emerging-on-30bn-to-100bn-covid-19-industry-loss-willis-re/

Estimated Monthly U.S. Business Interruption Coronavirus Losses for Small Business—Potential Range (

Paper on Insurability of Pandemic Risk

Large scale business continuity risks from pandemics are generally note insurable in the private sector

Business continuity risks are largely undiversifiable within private insurance markets and are highly correlated with other risks (e.g., investment risks)

Large scale business continuity losses pose a potentially systemic risk to the industry and overall economy

Import role for government Download at: https://www.uscriskcenter.com/wp-content/uploads/2020/05/Uninsurability-of-Pandemic-Risk-White-Paper-Hartwig-APCIA-FINAL-WORD.pdf

https://www.uscriskcenter.com/wp-content/uploads/2020/05/Uninsurability-of-Pandemic-Risk-White-Paper-Hartwig-APCIA-FINAL-WORD.pdf

16

Catastrophe Loss Update: Major Driver of Rate Pressure

CAT Losses for the Decade Just Ended Were Up Materially—Costliest Ever

Primary, Reinsurance and Retro MarketsAll Impacted and Are Pressuring Rates

COVID Pressure Kicks Off the New Decade16

U.S. Inflation-Adjusted Cat Losses

Sources: Property Claims Service, a Verisk Analytics business; Insurance Information Institute.

4037

79

104

53

1980s:$5 B

1990s: $15 B

2000s: $25 B2010s: $35 B

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

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 16 17 18

Bill

ion

s, 2

01

8 $

Average forDecade Hurricane

Andrew WTC

Katrina, Rita, Wilma

Average Insured Loss per Year for 1980-2019 is $19.8 Billion

Harvey, Irma, Maria

36

2020:H1 CAT losses in the US totaled ~$20B (not including COVID-

related losses)

As of Oct. 4, 2020, more

than 4 million acres of

woodland had been

destroyed by wildfire in CA

alone this year

Top 20 Most Costly Disastersin U.S. History—Katrina Still Ranks #1

18

(Insured Losses, 2017 Dollars, $ Billions)*

$9.3 $9.7 $10.0$11.7$14.2$14.2$15.9

$18.0$19.8$21.9

$25.3$26.0$27.1

$51.6

$5.9 $6.0 $7.1 $7.5 $7.9 $8.3

$0

$10

$20

$30

$40

$50

$60

Jeanne(2004)

Frances(2004)

Rita (2005)

Torn./T-Storms (2011)

Torn./T-Storms (2011)

Hugo (1989)

Ivan (2004)

Charley(2004)

Michael(2018)

Wilma(2005)

Camp Fire(2018)

Ike (2008)

Harvey (2017)

Irma (2017)

Sandy(2012)

Maria (2017)

Northridge(1994)

9/11 (2001)

Andrew(1992)

Katrina(2005)

8 of the top 20 mostly costly insured events in US history occurred during the 2010s

17 of the 20 Most Expensive Insurance Events in US History Have Occurred Since 2004

*Estimated.Sources: PCS, RMS, Karen Clark & Co; USC Center for Risk and Uncertainty Management adjustments to 2017 dollars using the CPI.

COVID-19 insured property losses remain highly

uncertain, but could easily make the top 10

19

0

50

100

150

200

250

300

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 16 17 18 19 20

(Percent)

US Reinsurance Pricing Is Sensitive to CAT Activity and Ultimately Impacts Primary Insurance Pricing, Terms and Conditions. COVID Will Pressure RoL into 2021

Post-Andrew surge

US Property Catastrophe Rate-on-Line Index: 1990 – 2020*

*As of January 1 each year.Source: Guy Carpenter; Artimes.bm accessed at: http://www.artemis.bm/us-property-cat-rate-on-line-index

Post-9/11 Adjustment

Post Katrina, Rita, Wilma

period

Post-Ike adjustment Adjustment

following record tornado losses in 2011 and Sandy in

2012

Record CATs in 2017 and high CAT losses in 2018/19 pressured US

reinsurance prices in recent years (+9.0% in 2020, +2.6% in 2019,

+7.5% in 2018)

2020 Global RoL+5%

http://www.artemis.bm/us-property-cat-rate-on-line-index

INVESTMENTS: THE NEW REALITY

Investment Performance Is a Key Driver of Insurer Profitability

Aggressive Rate Cuts Will Adversely Impact Invest Earnings

Financial Crisis Déjà Vu?

Property/Casualty Insurance Industry Investment Income: 2000–2020E

$38.9$37.1$36.7

$38.7

$54.6

$51.2

$47.1$47.6$49.2$48.0$47.3$46.4$47.2$46.6

$48.9

$59.6$61.4

$52.8

$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 15 16 17 18* 19 20

Due to persistently low interest rates, investment income remained below pre-crisis levels for a decade. Lower interest rates post-COVID will drive investment income down once again.

*2020 figure is annualized based on H1 actual of $26.4B. 2018-19 figures are distorted by provisions of the TCJA of 2017. Increase reflects such items as dividends from foreign subsidiaries.

1 Investment gains consist primarily of interest and stock dividends. Sources: ISO; University of South Carolina, Center for Risk and Uncertainty Management.

($ Billions)

Investment income had just recovered from a decade-long slump. Aggressive Fed

actions and recession are pushing interest rates lower and will adversely impact investment income for years to come.

Net Investment Yield on Property/Casualty Insurance Invested Assets, 2007–2020F*

4.4

4.0

4.6 4.5

3.7 3.8 3.73.4

3.7

3.2 3.1 3.13.4

3.1 3.0

4.6

4.23.9

2.5

3.0

3.5

4.0

4.5

5.0

03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20F

The yield on invested assets remains low relative to pre-crisis yields. Fed rate increases beginning in late 2015 through 2018 halted the slide in yields, but rate cuts in

2019/2020 will preclude future gains

Sources: NAIC data, sourced from S&P Global Market Intelligence; 2017-19 figures are from ISO. 2020F is from the Risk and Uncertainty Management Center, Univ. of South Carolina.

(Percent) Investment yields remained depressed--down about 150 BP from pre-crisis

levels. COVID-19 Fed rate cuts, bond purchases will push asset yield down

Average: 1960-2019 = 4.9%Low: 2.8% (1961)

High: 8.2% (1984/85)

-50%

-40%

-30%

-20%

-10%

0%10%

20%

30%

40%

50%

60%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 16 18 20

*

,*Through Oct. 14, 2020.Source: NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html; Center for Risk and Uncertainty Management, University of South Carolina

Tech Bubble Implosion

Financial Crisis

Annual Return

Energy Crisis

S&P 500 Index Returns, 1950–2020*

Fed Raises Rates

The S&P 500 was up 28.9% in 2019, the best year since 2013, following a decline

of 6.2% in 2018. 2020 has seen extraordinary volatility but the S&P 500 is

actually up for the year*

2020 YTD+7.98%

2019: +28.9%2018: -6.2%2017: +19.42016: +9.5

http://pages.stern.nyu.edu/%7Eadamodar/New_Home_Page/datafile/histretSP.html

THE ECONOMY

COVID-19 Pandemic Will Directly and Severely Impact Growth As Exposure Growth Rapidly Shrinks

The Strength of the Economy Has Always Influenced Growth in Insurers’ Exposure Base Across Most Lines

The Links Between the Economy and the P/C Insurance Industry Are Strengthening

US Real GDP Growth*

* Estimates/Forecasts from Wells Fargo Securities.Source: US Department of Commerce, Wells Fargo Securities 10/20; Center for Risk and Uncertainty Management, University of South Carolina.

2.7%

1.8%

-1.3

%-2

.8%

2.5%

2.2% 2.7% 4.5%

0.8% 1.4% 3.5%

2.1%

1.2% 3.1% 3.2%

2.9%

2.5% 3.5%

2.9%

1.1% 3.1%

2.0%

2.1%

-5.0

%

28.6

%6.

1%5.

2%3.

9%2.

9%2.

3%

-31.4%

3.1%3.6%

2.5%

1.8%

1.1%4.

1%

1.8% 2.1%

1.6%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

2008

2009

2010

2011

2012

2013

2014

2015

16:1

Q16

:2Q

16:3

Q16

:4Q

17:1

Q17

:2Q

17:3

Q17

:4Q

18:1

Q18

:2Q

18:3

Q18

:4Q

19:1

Q19

:2Q

19:3

Q19

:4Q

20:1

Q20

:2Q

20:3

Q20

:4Q

21:1

Q21

:2Q

21:3

Q21

:4Q

Demand for Insurance Will Be Severely Impacted As the Economy Slows but Is Expected to Improve by Late Q3 and into Q4

Real GDP Growth (%)

“Great Recession”

began in Dec. 2007

Financial Crisis

Economic recovery from COVID is strong, but

economic losses likely not recovered before late 2021.

COVID CRASHQ2 2020

plunged by 31.4%

The Economy Drives P/C Insurance Industry Premiums:2006:Q1–2020:Q2*

Direct Premium Growth (All P/C Lines) vs. Nominal GDP: Quarterly Y-o-Y Pct. Change

Sources: SNL Financial; U.S. Commerce Dept., Bureau of Economic Analysis; ISO; I.I.I.; Risk and Uncertainty Management Center, University of South Carolina.

-6%

-4%

-2%

0%

2%

4%

6%

8%

2008:Q1

2008:Q3

2009:Q1

2009:Q3

2010:Q1

2010:Q3

2011:Q1

2011:Q3

2012:Q1

2012:Q3

2013:Q1

2013:Q3

2014:Q1

2014:Q3

2015:Q1

2015:Q3

2016:Q1

2016:Q3

2017:Q1

2017:Q3

2018:Q1

2018:Q3

2019:Q1

2019:Q3

2020:Q1

DWP y-o-y change y-o-y nominal GDP growth

Negative GDP growth in the first half of 2020, will cause DWP to decelerate sharply but with a lag and likely turn

negative in some lines. Rebates, discounts and rate decreases will amplify the deceleration.

Direct written premiums track nominal GDP fairly tightly over time, suggesting the P/C insurance industry’s growth prospects inextricably linked to economic performance.

Unemployment Rate: Jan. 2019 – Sept. 2020

Source: US Bureau of Labor Statistics; Risk and Uncertainty Management Center, University of South Carolina.

Unemployment Rate

3.7%3.7%3.5%3.6%3.5%3.5%3.6%3.5%4.4%

14.7%13.3%

11.1%10.2%

8.4%7.9%

3.7%3.6%3.6%3.8%3.8%4.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Jan-19

Feb-19

Mar-19

Apr-19

May-19

Jun-19

Jul-19

Aug-19

Sep-19

Oct-19

Nov-19

Dec-19

Jan-20

Feb-20

Mar-20

Apr-20

May-20

Jun-20

Jul-20

Aug-20

Sep-20

COVID-19 shutdowns pushed the unemployment rate up to a shocking 14.7% in April before

improving beginning in May

11.4M jobs were created from May through Sept. (after a loss of 22.2M in March/April)

helping bring down the unemployment rate to 7.9% from its April peak of 14.7%. So far,

~50% of jobs lost have been recovered.

California:Feb. 2020: 3.9% (record low)

Peak: 16.4% (Apr./May)Aug. 2020: 11.4%

US Unemployment Rate Forecast: 2007:Q1–2021:Q4

4.5%

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

%5.2

%5.0

%4.9

%4.9

%4.9

%4.7

%4.7

%4.4

%4.3

%4.1

%4.1

%3.9

%3.8

%3.8

%3.9

%3.6

%3.6

%3.5

% 3.8%

13.0%

8.8%

7.6%

7.1%

6.8%

6.3%

5.9%

9.6%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%07

: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

415

:Q1

15:Q

215

:Q3

15:Q

416

:Q1

16:Q

216

:Q3

16:Q

417

:Q1

17:Q

217

:Q3

17:Q

418

:Q1

18:Q

218

:Q3

18:Q

419

:Q1

19:Q

219

:Q3

19:Q

420

:Q1

20:Q

220

:Q3

20:Q

421

:Q1

21:Q

221

:Q3

21:Q

4

Great RecessionRising unemployment eroded payrolls and

WC’s exposure base.Unemployment peaked at 10% in late 2009.

= actual; = forecastsSources: US Bureau of Labor Statistics; Wells Fargo Securities (10/20 edition); Risk and Uncertainty Management Center, University of South Carolina.

The unemployment rate peaked at 14.7% in April

(13.0% Q2 avg.)

At 3.5%, the unemployment rate in Feb. 2020 WASat its lowest point

in 50 years.

Government Mandated Business Closures Were the Real Black Swan, Not the Coronavirus

Sources: CDC; Risk and Uncertainty Management Center, University of South Carolina

• The US (and world) has endured several other major infectious disease outbreaks killing 100,000+ Americans without shutting down the economy

• Hong Kong Flu (1968-70)• Asian Flu (1957-58)

• It is the reaction to the virus that is unprecedented and represents the true Black Swan event

• The ramifications of this decision will be consequential for a generation (e.g., $3 trill. in debt)

30

Commercial Lines Growth, Underwriting Performance

& Pricing Cyclicality

Pricing Pressures Are Intensifying

30

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19

Economic Shocks, Inflation:

1976: 22.2%Tort Crisis

1986: 30.5%Post-9/11

2002: 22.4%

Great Recession:2009: -9.0%

ROE

2019: +6.7%

Commercial Lines NPW Premium Growth:1975 – 2019

Recessions:1982: 1.1%

Commercial lines is prone to far more cyclical volatility that

personal lines.

1988-2000: Period of

inter-cycle stability

Commercial lines premium

growth has been sluggish

for years, reflecting weak

pricing environment.

Note: Data include state funds beginning in 1998. Source: A.M. Best; Insurance Information Institute; Univ. of South Carolina Center for Risk and Uncertainty Management, ISO.

Post-Hurricane Andrew Bump:

1993: 6.3%

Post Katrina Bump:

2006: 7.7%

2016: -1.1%

2018: +14.4%

CIAB: Average Commercial Rate Change, All Lines, 2011:Q1–2020:Q2*

-0.1% 0.9

% 2.7% 4.4

%4.3

%3.9

% 5.0%

5.2%

4.3%

3.4%

2.1%

1.5%

-0.5%

0.1%

-0.7%

-2.3%

-3.3%

-3.1%

-2.8%

-3.7%

-3.9% -3.2%

-3.3% -2.

5%-2.

8% -1.3%

0.3% 1.7

% 2.4% 3.5

% 5.2% 6.2

% 7.5% 9.3

% 10.8%

-2.9%

1.6%

1.5%

-16%

-11%

-6%

-1%

4%

9%

14%

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17

1Q18

2Q18

3Q18

4Q18

1Q19

2Q19

3Q19

4Q19

1Q20

2Q20

*Latest available.Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.Source: Council of Insurance Agents & Brokers; Center for Risk and Uncertainty Management, Univ. of South Carolina.

Largest increase since 2003 for some accounts

(Percent)

Renewals turned positive in late 2011

in the wake of record tornado

losses and Hurricane Sandy

High CAT losses and poor underwriting results in recent years combined with COVID pressures, reduced capacity,

lower interest rates and increased uncertainty are exerting significant pressure on markets with overall

rates up by +9.3% as of Q1 2020

Change in Commercial Rate Renewals, by Line: 2020:Q2

Source: Council of Insurance Agents and Brokers; USC Center for Risk and Uncertainty Management.

Percentage Change (%)

3.5%6.5% 6.8% 6.8%

9.4% 9.6% 9.7%

13.3%

16.8%20.0%

0.7% 1.4% 1.6%2.3% 3.1% 3.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Wor

kers

Com

p

Terro

ris,

Sur

ety

Bro

ker E

&O

Floo

d

Mar

ine

Bro

ker E

&O

Cyb

er

Gen

eral

Liab

ility

Con

stru

ctio

n

EP

L

Com

mer

cial

Aut

o

Bus

ines

sIn

terru

ptio

n

Com

mer

cial

Pro

perty D&

O

Um

brel

la

All major commercial lines experienced

increases in Q2 2020

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

Umbrella now leads all major commercial lines in terms of rate gains,

exceeding D&O and CP

78%

66%

62%

50%

35%

10%

80%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Availability ofCoverage

Pricing

Renewals

Underwriting Trends

Carrier Ability toCollect Premium

Accuracy of ExposureData

Other

COVID-19’s largest impacts on producers

relate to coverage availability and price

COVID-19 Issues Impacting Producers, 2020:Q2*

Note: CIAB, Q2 2020 COVID-19 Supplement accessed at: https://www.ciab.com/download/25840/; Risk and Uncertainty Management Center, University of South Carolina.

https://www.ciab.com/download/25840/

Weekly Number of COVID-Related Lawsuits Filed:(Weeks Ending Mar. 16, 2020 to Sept. 21, 2020)

35Source: Covid Coverage Litigation Tracker, University of Pennsylvania School of Law. Accessed 10/10/20 at: https://cclt.law.upenn.edu

The number of new cases filed is declining with just 16 filed

the week ending Sept. 21.

16

79

https://cclt.law.upenn.edu/

36

Tort Environment: The Return of Social Inflation?

36

Tort Costs Are Under Pressure from a Variety of Different Factors

Average Jury Awards, 1999 – 2017 (latest available)

$725 $747 $756$800 $799

$1,018$1,022$950

$1,077$1,046

$654

$806

$1,098$1,010$1,042

$1,132

$1,355

$1,847

$500

$700

$900

$1,100

$1,300

$1,500

$1,700

$1,900

$2,100

1999 2001 2003 2005 2007 2010 2012 2014 2016

Source: Jury Verdict Research; Current Award Trends in Personal Injury (58th Edition), Thomson Reuters; Risk and Uncertainty Management Center, Univ. of South Carolina.

The average jury award reached an all-time record high in 2017.

Median Award = $50,000 (also a record)

The Nation’s Judicial Hellholes: 2019 – 2020

38Source: American Tort Reform Association; Risk and Uncertainty Management Center, Univ. of South Carolina.

Florida

IllinoisCook, Madison

& St. Clair Counties

Louisiana

Watch List CO Supreme Court Florida MD General Assem. MT Supreme Court PA Supreme Court WV Supreme Ct.

Dishonorable Mention

AK Supreme Court KS Supreme Court OR Supreme Court

Minnesota Supreme Ct./Twin

Cities

NYC

St. LouisPhiladelphia

Court of Common Pleas

New Jersey Legislature

Oklahoma

California

Shareholder Class Action Lawsuits*

*As of Oct. 9, 2020.Source: Stanford University School of Law (securities.stanford.edu); Risk and Uncertainty Management Center, Univ. of South Carolina.

164 20

216

323

118

811

117

324

120

9 216

498

266

227 238

182

119 1

7622

216

817

5 188

151 165

168 20

827

141

240

240

427

8

0

100

200

300

400

500

600

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 16 17 18 19 20

Shareholder litigation is surging, in part due to suits associated with M&A activity. Major

implications for D&O coverage.

Late 1990s: Tech IPO Flops

Y2KIncrease in M&A

RecentCOVID-19CannabisOpioids

Data Breach Cryptocurrency

MeToo

Data Breaches 2005-2019, by Number of Breaches and Records Exposed

# Data Breaches

Source: Identity Theft Resource Center.

Millions of Records Exposed

40

The number of data breaches and

records exposed is generally rising

157321

446

656498

419 447

1091

1632

1244

1473

662783 780

619

197.6164.7

127.7

16.2

222.5

66.9

19.135.7

22.9 17.3

87.9 85.6

177.9

366

446.5

100

300

500

700

900

1100

1300

1500

1700

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019*0

50

100

150

200

250

300

350

400

450

# Data Breaches # Records Exposed (Millions)

41

Federal and State COVID-19 Initiatives Impacting Commercial Insurers

P/C Insurance Coverage & COVID-19

Insurers have received tens of thousands of claims related to COVID-19 lossesWorkers comp Event Cancellation Trade Credit

Business Interruption Travel Insurance Mortgage

GL D&O EPL

Crises tend to precipitate efforts to stretch contract language in an effort to: Find coverage where none exists

Find coverage where none was intended

Find coverage for which no premium was paid

Politicians frequently pile on: Zero political risk

Business Interruption Coverage (BIC) & COVID-19

Business interruption policies clearly exclude COVID-19 claims

The ISO Business Income form contains the following language: “We will pay for the actual loss of Business

Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration”. The “suspension” must be caused by direct physical loss of or damage to property…The loss or damage must be caused by or the result of a covered cause of loss.” [from ISO form: CP 00 30 04 02]

Update on Business Continuity Disputes

Large number of BI suits have been filed against insurersMost are still making their way through the court system…BUT

Since mid-2020 numerous courts have made decisions favoring insurers across a growing number of industries (not just restaurants)

Courts have generally found that: Virus exclusions found in many policies are unambiguous and are binding

That BI coverage is necessarily triggered only when there is actual physical loss or damage to property

Government mandated closures alone are insufficient to trigger BI coverage

Business Continuity Protection Program (BCPP) Purpose: The BCPP is designed to bolster the country’s economic resilience by

providing timely and efficient financial protection and payroll support to the private sector in the event of a future declared public health emergency. Has support of several industry group: APCIA, NAMIC, Big I No balance sheet risk to the insurance industry

Structure: Businesses purchase revenue replacement assistance from the BCPP – up to 80% of

payroll, employee benefits and operating expenses Provides 3 months of relief payments

Payouts based on prior year’s tax return

Relief is automatically triggered following a federally declared public health emergency

Why PRIA Is a Well-Intentioned but Bad Idea

Source: Risk and Uncertainty Management Center, University of South Carolina and Centers for Better Insurance, “Pandemic Risk Insurance Act of 2020: Summary and Key Risks,” June 2020.

Potentially $12B of liability for insurers

Up to $37.5B in liability for insurers

Total potential insurer liability under

PRIA is almost $50 billion—nearly

double the insured property losses from 9/11 and larger than

every disaster in history other than Hurricane Katrina

47

SUMMARYThe P/C Insurance Industry Remains Strong, Stable, Sound

and Secure

The Rapid Economic Slowdown Will Temper P/C Growth, Especially in Economically Sensitive Lines (especially Workers Comp)

Asset Price Volatility Will Persist and Low Interest Rates Will Pressure Investment Earnings for Years

COVID-19 Exposures Are Substantial but Manageable with Headline Risk on BI and WC Issues

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwigFor a copy of this presentation, email

me at robert.hartwig@moore.sc.edu or Download at www.uscriskcenter.com

48

mailto:robert.hartwig@moore.sc.eduhttp://www.uscriskcenter.com/

Pandemics, Politics & Economics:�P/C Insurance in an Era of UncertaintySlide Number 2Slide Number 3Policyholder Surplus (Capacity), �2006:Q4–2020:H1P/C Industry Net Income After Taxes, 1991–2020E*ROE: Property/Casualty Insurance by Major Event, 1987–2020:H1* (est.)Profitability & PoliticsSlide Number 8Net Premium Growth (All P/C Lines): Annual Change, 1971—2020:H1Potential Impacts of COVID-19 on Written Premium in 2020, by Key LinePotential Impacts of COVID-19 on LOSSES in 2020, by Key LineP/C Insurance Industry Combined Ratio, 2001–2020:H1*COVID-19 Announced Losses vs. Top-Down Industry Estimates (as of May 12, 2020)Estimated Monthly U.S. Business Interruption Coronavirus Losses for Small Business—Potential Range (