COVID19 Economic Impacts on the PC Insurance Industry

COVID-19: Economic Impacts on the P&C Insurance Industry Overview and Outlook Verisk Real Talk Webinar April 29, 2020 Robert P. Hartwig, Ph. D, CPCU Clinical Associate Professor of Finance, Risk Management & Insurance Darla Moore School of Business University of South Carolina Robert. Hartwig@moore. sc. edu 803. 777. 6782

P/C Insurance & COVID-19: Outline n P/C Insurers: Overcoming Uncertainty With Strength w Financial Overview: The Industry’s Financial Position Entering the COVID-19 Pandemic n Investment Market Issues: Volatility Rules n The Economy, P/C Insurance and COVID-19: Overview & Outlook n Federal & State COVID-19 Initiatives Impacting Insurers n COVID-19: Coronavirus Impacts on Key Lines n Q&A

P/C Insurance Industry: Financial Overview Amid the COVID-19 Pandemic The P/C Insurance Industry Entered the COVID-19 Pandemic from a Position of Financial Strength Asset Value Volatility is High but Manageable—Greatest Threat Comes from State Legislatures 3 3

Policyholder Surplus (Capacity), 2006: Q 4– 2019: Q 3 The P/C insurance industry entered the COVID-19 pandemic from a position strength ($ Billions) Drop due to near-record 2011 CAT losses Financial Crisis 2010: Q 1 data includes $22. 5 B of paid-in capital from a holding company parent for one insurer’s investment in a noninsurance business. Sources: ISO, A. M. Best; 2019 E from Center for Risk and Uncertainty Management, University of South Carolina, based on actual $812. 2 B through 9/30/2019. 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. 4

ROE: Property/Casualty Insurance by Major Event, 1987– 2019 E (Percent) P/C Profitability Is Influenced Both by Cyclicality and Volatility Katrina, Rita, Wilma Low CATs Harvey, Irma, Maria, CA Wildfires Sept. 11 Hugo Andrew, Iniki Lowest CAT Losses in 15 Years Northridge *Excludes Mortgage & Financial Guarantee in 2008 – 2014. Sources: ISO, Fortune; A. M. Best (2018 E-2019 F); USC RUM Center. 4 Hurricanes Financial Crisis* ROE fell by 8. 3 pts from 12. 7% to 4. 4% Sandy 2019 E 8. 2% Record Tornado Losses 5

Percentage Point Change in P/C ROEs During Past Economic Downturns: 1971 - Present Percentage Point Change in P/C ROE During Past Economic Downturns Avg. : -4. 5% (-4. 0% ex. 2000 -01) Median: -5. 0% (-3. 0% ex. 2000 -01) Although the COVID-19 economic downturn will be sharp, it’s expected to be brief with a rapid “VShaped” recovery *2000 -2001 decline impacted by 9/11 losses. Source: USC Center for Risk and Uncertainty Management. 6

P/C Industry Net Income After Taxes, 1991– 2019 F* $ Millions n n n n 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 ROAS 1 = 3. 5% 2012 ROAS 1 = 5. 9% 2013 ROAS 1 = 10. 2% 2014 ROAS 1 = 8. 4% 2015 ROAS = 8. 4% 2016 ROAS = 6. 2% 2017 ROAS =5. 0% 2018 ROAS = 8. 0% 2019: ROAS = 8. 2% Net Income finally returned to pre-financial crisis levels in 2019. All else equal, COVID impacts will likely have a tempering influence in 2020, but far too soon to tell. *2019 estimate based on annualized actual Q 3: 19 figure of $48. 075 B. ROE figures are GAAP; 1 Return on avg. surplus. Excludes Mortgage & Financial Guaranty insurers for years (2009 -2014). Sources: A. M. Best, ISO.

Net Premium Growth (All P/C Lines): Annual Change, 1971— 2019 F (Percent) 2019 F: 3. 0% 2018 E: 10. 8% 1975 -78 1984 -87 2000 -03 2017: 4. 6% 2016: 2. 7% 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. 2015: 3. 5% 2014: 4. 2 2013: 4. 4% 2012: +4. 2% Outlook 2019 F: 3. 0% 2020 F: 3. 8% *Figure is actual 2018: 9 M vs. 2017: 9 M change adjusted for affects of the TCJA of 2017. Shaded areas denote “hard market” periods Sources: A. M. Best (1971 -2013, 2020 F), ISO (2014 -19); Risk & Uncertainty Management Center, Univ. of South Carolina estimate for 2019. 8

Change in P/C Net Written Premium Growth During Past Economic Downturns: 1971 - Present Percentage Point Change in Growth Rate Change in P/C ROE During Past Economic Downturns Avg. : -0. 4% Median: -0. 6% Economic downturns have been associated with varied growth experience. The COVID-19 pandemic will likely slow growth materially in 2020, but should remain slightly positive overall. Effects could carry over into 2021. *2000 -2001 decline impacted by 9/11 losses. Source: USC Center for Risk and Uncertainty Management. 9

P/C Insurance Industry Combined Ratio, 2001– 2019 E* As Recently as 2001, Insurers Paid Out Nearly $1. 16 for Every $1 in Earned Premiums Heavy Use of Reinsurance Lowered Net Losses Relatively Low CAT Losses, Reserve Releases Best Combined Ratio Since 1949 (87. 6) * Excludes Mortgage & Financial Guaranty insurers 2008 --2014. **Actual through Q 3 2019 was 97. 8 Sources: A. M. Best, ISO (2014 -2019). Relatively Low CAT Losses, Reserve Releases Cyclical Deterioration Avg. CAT Losses, More Reserve Releases Higher CAT Losses, Shrinking Reserve Releases, Toll of Soft Market 2019 Combined Ratio Est. 98. 0 Sharply higher CATs are driving large underwriting losses and pricing pressure Sandy Impacts Lower CAT Losses 10

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 – 2019 E Investment income is slowly ($ Billions) recovering. 2018/19 figures overstate improvement due to provision of the TCJA 2017 Due to persistently low interest rates, investment income fell in 2012, 2013 and 2014 but showed a small (1. 7%) increase in 2015—though 2016 experienced another decline. Gains in 2018 -19 are overstated due to the TCJA 2017. *2018 -19 figures are distorted by provisions of the TCJA of 2017. Increase reflects such items as dividends from foreign subsidiaries. **Estimate based on annualized H 1 actual figure of $13. 158 B. Figure is likely also distorted by the TCJA of 2017. 1 Investment gains consist primarily of interest and stock dividends. Sources: ISO; University of South Carolina, Center for Risk and Uncertainty Management.

Net Investment Yield on Property/Casualty Insurance Invested Assets, 2007– 2020 F* (Percent) Investment yields remained depressed--down about 150 BP from pre-crisis levels. COVID-19 Fed rate cuts will push asset yield down 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. 2020 F is from the Risk and Uncertainty Management Center, Univ. of South Carolina.

US Treasury Security Yields: A Long Downward Trend, 1990– 2020* Yields on 10 -Year US Treasury Notes have been essentially below 5% for more than a decade Fed emergency rate cuts and QE in response to the COVID-19 pandemic and market volatility have pushed rates to their lowest levels since the financial crisis 10 -YR. TREASURY 3/2019: 2. 57% 3/24/20: 0. 84% 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. *Monthly, constant maturity, nominal rates, through March 2020. Sources: Federal Reserve Bank at http: //www. federalreserve. gov/releases/h 15/data. htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.

S&P 500 Index Returns, 1950– 2020* The S&P 500 was up 28. 9% in 2019, the best year since 2013, following a decline of 6. 2% in 2018. Gains are jeopardized by sharp declines amid COVID-19 pandemic Annual Return 2019: +28. 9% 2018: -6. 2% 2017: +19. 4 2016: +9. 5 Fed Raises Rates Energy Crisis Tech Bubble Implosion Financial Crisis , *Through April 28, 2020. Source: NYU Stern School of Business: http: //pages. stern. nyu. edu/~adamodar/New_Home_Page/datafile/histret. SP. html; Center for Risk and Uncertainty Management, University of South Carolina 2020 YTD -11. 4%

Financial Markets Have Been Extremely Volatile Volatility Will Remain the Norm n April 28: S&P is up 30% since its March 23 trough (2, 192 @ close) n April 9: DJIA had its best weekly % gain since 1974 (+12. 1%) n March 23: S&P at its lowest level since late 2016 n March 9: Largest DJIA point drop ever: -2, 014 pts. (-7. 79% drop largest % terms since 10/15/08) , Source: CNBC. com; Center for Risk and Uncertainty Management, University of South Carolina Week ending April 9 was the best since 1974 (+12. 1%)

Financial Markets Have Been Extremely Volatile Coronavirus Comeback? n April 28: S&P is up 30% since its March 23 trough (2, 192 @ close) n Has the market gotten ahead of itself given the that GDP in Q 2 will shrink by ~22% and unemployment will exceed 15%? n Is the market anticipating a “Vshaped” recovery, or driven up by stimulative fiscal and monetary policy, expectations of an expedited vaccine…? , Source: CNBC. com; Center for Risk and Uncertainty Management, University of South Carolina S&P is down just 11. 4% for the year and 15. 4% from its record high of 3386 on Feb. 19

P/C Insurance Industry Investment Portfolio, 2018 Preferred Stock 0, 3% Real Estate 1, 9% Cash & ST Inv. 6, 0% 60% of the industry’s $1. 69 trillion investment portfolio is held in bonds Other 8, 4% Common Stock 23, 1% Bonds 60, 2% Source: S&P Global Market Intelligence; Risk and Uncertainty Management Center, University of South Carolina. Amid the aggressive Fed response to the COVID crisis, insurer investment income will once again come under pressure as rates are expected to be kept low through 2021—at least 18

Q 1 2020 Earnings Impacts for Public Companies (as of 4/27/20) For 11 P/C Insurers, Reinsurers and UK Insurers w/ Major US Operations n Estimated COVID-19 Impacts ($ Terms and % Q 1 Income) w Avg. = $124 M (3. 5% of Q 1 income) Median: ~$150 M n Q 1 Investment Impacts w Avg. Loss: $960 M Median: ~$318 M Large share of Q 1 income n Most companies signaled that more impacts are forthcoming n Many large companies have yet to report

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

Length of US Business Cycles, 1929 -Present* Duration (Months) Average Duration* Recession = 13. 4 Months Expansion = 63. 8 Months The most recent economic expansion (as of Feb. 2020) was the longest in US history (began July 2009) It has abruptly ended—but perhaps only interrupted. Month Recession Started * As of April 2020 but excluding current COVID-19 recession which began in March/April 2020 and is ongoing. Sources: National Bureau of Economic Research; Risk and Uncertainty Management Center, University of South Carolina. Recession may officially last only 5 -7 months

US Real GDP Growth* Real GDP Growth (%) “Great Recession” began in Dec. 2007 Financial Crisis COVID-19 pandemic is expected to result in 2 quarters of economic contraction before recovery later in the year Q 2 2020 GDP expected to shrink by 22. 3% Demand for Insurance Will Be Severely Impacted As the Economy Slows but Should Improve by Late Q 3 and into Q 4 * Estimates/Forecasts from Wells Fargo Securities. Source: US Department of Commerce, Wells Fargo Securities 4/8/20; Center for Risk and Uncertainty Management, University of South Carolina.

Q 1 2020 GDP Report: Unmitigated Disaster—Worse Yet to Come PCE: Largest drop in 40 years; (Services largest since 1953: Q 4 decline of 3. 0%) Personal Consumption Expenditures (PCE) [-7. 6%] Business investment has collapsed Private Domestic Investment [-5. 6%] Source: US Bureau of Economic Analysis; Risk and Uncertainty Management Center, University of South Carolina. Exports/ Imports [ -8. 7%] State govt. spending may collapse w/o relief while federal spending rises Exports/ Imports [ -8. 7%] Govt. 23

The Economy Drives P/C Insurance Industry Premiums: 2006: Q 1– 2019: Q 3 Direct Premium Growth (All P/C Lines) vs. Nominal GDP: Quarterly Y-o-Y Pct. Change y-o-y nominal GDP growth DWP y-o-y change 8% 6% 4% 2% 0% As GDP growth turns negative in 2020, DWP will decelerate sharply and likely turn negative in some lines. Rebates, discounts and rate decreases will amplify the deceleration. -2% -4% -6% Sources: SNL Financial; U. S. Commerce Dept. , Bureau of Economic Analysis; ISO; I. I. I. ; Risk and Uncertainty Management Center, University of South Carolina. 2019: Q 3 2019: Q 1 2018: Q 3 2018: Q 1 2017: Q 3 2017: Q 1 2016: Q 3 2016: Q 1 2015: Q 3 2015: Q 1 2014: Q 3 2014: Q 1 2013: Q 3 2013: Q 1 2012: Q 3 2012: Q 1 2011: Q 3 2011: Q 1 2010: Q 3 2010: Q 1 2009: Q 3 2009: Q 1 2008: Q 3 2008: Q 1 Direct written premiums track nominal GDP fairly tightly over time, suggesting the P/C insurance industry’s growth prospects inextricably linked to economic performance.

Consumer Confidence Index: Jan. 2000– Apr. 2020 Consumer Confidence plunged 45 points over the past two months (March/April) but would have fallen faster were it not for the fact that consumers expect a relatively rapid recovery Outlook: Consumer confidence is being severely tested by the COVID-19 economic shutdown. The longer the shutdown persists, the deeper the actual economic damage and further shattering of consumer confidence Source: University of Michigan; Wells Fargo Research.

NFIB Small Business Optimism Index: Jan. 1988–March 2020 (Survey taken first half of March) Outlook: Small business sentiment will continue to fall sharply with significant negative repercussions for p/c insurers Source: National Federal of Independent Business; Wells Fargo Research. Small Business Optimism weakened sharply (-8. 1 pts. ) in March 2020 as fears of COVID-19 disruptions took hold. April will see a larger impact. The economic fallout from COVID-19 will cause small business sentiment to plunge causing hiring and investment to move sharply negative

Retail Sales: 2019 – 2021 F Percentage Point Change Retail sales will decline sharply though 2020 before beginning to recover in 2021 Insurers of small/midsize businesses will see material top line deceleration/contraction Source: US Dept. of Commerce; Well Fargo Securities (4/20); Risk and Uncertainty Management Center, University of South Carolina. 27

Initial Claims for Unemployment: COVID Surge Shatters Records Virtually all the jobs created since the Great Recession have been lost—in a single month! (Thousands) Since mid-March a record 26. 46 million people have filed for unemployment Previous Records Week Ending Source: US Bureau of Labor Statistics; Risk and Uncertainty Management Center, University of South Carolina. Payroll exposures are taking a huge hit leading to a large impact on workers comp premiums written 28

US Unemployment Rate Forecast: 2007: Q 1– 2021: Q 4 Great Recession Rising unemployment eroded payrolls and WC’s exposure base. Unemployment peaked at 10% in late 2009. The unemployment rate will peak around 20% by June (15. 1% Q 2 avg. ) At 3. 5%, the unemployment rate in Feb. 2020 WAS at its lowest point in 50 years. = actual; = forecasts Sources: US Bureau of Labor Statistics; Wells Fargo Securities (4/20 edition); Risk and Uncertainty Management Center, University of South Carolina.

COVID-19 Job Losses vs. Great Recession Gains/Losses (Millions) Business closures and recession fears have wiped out all the job gains since the end of the Great Recession. Job losses to-date more than triple those in the Great Recession. Source: US Department of Labor; CNBC. com; University of South Carolina, Risk and Uncertainty Management Center.

New Private Housing Starts, 1990 -2025 F COVID-19 will slow new homebuilding, though activity could remain resilient with low interest rates and low inventories in South, West (Millions of Units) New home starts plunged 72% from 2005 -2009; a net annual decline of 1. 49 million units, lowest since records began in 1959 Pre-COVID 1 -9, Insurers Had Been Seeing 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 Source: U. S. Department of Commerce; Wells Fargo Securities (4/20 for 2020 -21 F); University. of South Carolina, Center for Risk and Uncertainty Management. .

Auto/Light Truck Sales, 1999 -2023 F (Millions of Units) Job growth and improved credit market conditions boosted auto sales to near record levels by 2015/16 COVID-19, weakening labor market will cause consumers to pull back from large purchases, including auto New auto/light truck sales fell 35% to the lowest level since the late 1960 s. 18. 4% drop in car sales expected in 2020 before recovering in 2021 (about half the 35% drop during Great Recession) Yearly car/light truck sales are slowing slightly as demand tapers—and COVID-19 will accelerate that decline Source: U. S. Department of Commerce; Well Fargo Securities (4/20 for 2020 -21 F); Blue Chip Economic Indicators (3/19 for 2022 -25 F); Univ. of South Carolina, Center for Risk and Uncertainty Management. 32

Breakdown of $1. 76 Trillion Emergency Aid/Stimulus Bill (CARES Act) The COVID-19 emergency stimulus package will benefit many segments of the economy as well as individuals. For P/C insurers, aid to small businesses and incentives to keep employees on payrolls may have some of the largest indirect benefits because both preserve insurable exposures Source: Wall Street Journal, 3/26/20; University of South Carolina, Risk and Uncertainty Management Center.

Breakdown of Most Recent COVID-19 Aid Package (PPP and Healthcare Enhancement Program Act, (4/24/20)) Total = $484 Billion The most recent COVID-19 federal relief package totaled $484 B, most of which went to replenish the PPP program and to hospitals Source: The Hill, 4/21/20; University of South Carolina, Risk and Uncertainty Management Center.

U. S. National Debt, 1966 – 2021 F ($ Trillions) Inflation Alert Large deficits that increase as a share of GDP are, at some point, unsustainable and inflationary $28. 2 Trillion The national debt is expected to hit $28. 2 T in FY 21, up $5. 8 T or 25. 8% since FY 19 Debt/GDP Ratio will soar to 108% (Highest Since WW II) COVID-19 related expenditures are shattered America’s finances 21 *CBO estimates as of April 2020. Source: Congressional Budget Office; Federal Reserve Bank of St. Louis: https: //fred. stlouisfed. org/series/GFDEGDQ 188 S

P/C Insurance Issues in the Era of COVID-19 Business Interruption Personal Auto Workers Compensation

P/C Insurance Coverage & COVID-19 n Insurers have received tens of thousands of claims related to COVID-19 losses w Business interruption Event Cancellation w Workers comp Travel Insurance w GL D&O n Crises tend to precipitate efforts to stretch contract language in an effort to: w Find coverage where none exists w Find coverage where none was intended w Find coverage for which no premium was paid n Politicians frequently pile on: Zero political risk

Business Interruption Efforts to Create Coverage Where None Exists 38 38

Business Interruption Coverage (BIC) & COVID-19 n Business interruption policies clearly exclude COVID-19 claims n The ISO Business Income form contains the following language: w “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]

Exclusion of Loss Due to Virus or Bacteria n Business property and hence business interruption coverage also clearly excludes loss or damage due to viruses via exclusion n The ISO “Exclusion of Loss Due to Virus or Bacteria” contains the following language: w “We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease. ” [from ISO form: CP 01 40 07 06]

Business Interruption Coverage & COVID-19: STATES n Several states are attempting to override/invalidate/abrogate the longstanding, unambiguous language in commercial property and BIC contracts that makes it clear no coverage exists n As of March 15: NJ, OH, LA, MA, PA, NY and SC have introduced legislation that would oblige insurers to provide BIC to policyholders who purchased such coverage, irrespective of the “direct physical loss or damage” requirement and virus exclusion. n From Massachusetts S. 2888 (as of 3/25/20) w “…no insurer in [Massachusetts] may deny a claim for the loss of use and occupancy and business interruption on account of (i) COVID-19 being a virus (even if the relevant insurance policy excludes losses resulting from viruses); or (ii) there being no physical damage to the property of the insured or to any other relevant property

Estimated Monthly U. S. Business Interruption Coronavirus Losses for Small Business—Potential Range (<100 Employees; $Bill) $500 $400 The potential for such losses for all businesses of all sizes is currently estimated at $1 - $1. 1 trillion per month. Monthly BI losses for small business vary widely depending on underlying assumptions but expansive legislation would result in higher estimates; For all businesses <500 employees, BI losses range between $393 B - $668 B $223 $300 $431 $255 $200 $52 $100 $0 Small Business w/ BI - Low 60% Businesses impacted* 10% of Payroll for additional expenses 33. 3% Have BI coverage 50% Have BI payroll/benefits coverage Small Business w/ BI - High 90% Businesses impacted* 30% of Payroll for additional expenses 60% Have BI coverage 80% Have BI payroll/benefits coverage All Small Businesses - Low 60% Businesses Impacted* 10% of Payroll for additional expenses * Businesses impacted: Proportion of businesses completely or substantially closed related to coronavirus Assumptions: Losses if standard insurance policy exclusions for viruses/pandemics are voided and physical loss/damage requirement is stricken; three main coverages - profit lost, payroll/benefits, additional expenses; average annual $2 m revenue and 7% profit margin; non-wage benefits of small businesses are 25% less than that for average US businesses Source: APCIA, April 2020. All Small Businesses - High 90% Businesses impacted* 30% of Payroll for additional expenses Legislation in several states would trample over contracts and destroy the state’s insurance markets

Business Interruption Coverage & COVID-19: FEDERAL n Federal legislation is pending too n “Business Interruption Insurance Act of 2020” has been proposed n The Act would (as of 4/15/20): “…make available insurance coverage for business interruption losses due to viral pandemics, forced closures of businesses, mandatory evacuations, and public safety power shut-offs, and for other purposes. ” n Act goes WELL beyond pandemics (e. g. , compel BI payment due to evacuation ahead of a hurricane—even if hurricane actually causes $0 in damage

Business Interruption Coverage & COVID-19: FEDERAL n But that’s not all… n The “Business Interruption Insurance Act of 2020” would also nullify pre-existing exclusions n Section 3 “Preemption and Nullification of Pre-Existing Exclusions” states: (a) General Nullification: “Any exclusion in a contract for business interruption insurance that is in force on the date of the contract for business interruption insurance shall be void…” (b) General Preemption: “Any State approval of any exclusion of losses from a contract for business interruption insurance that is in force on the date of the enactment of this Act shall be void…” n In other words, your legal contract is void and the federal government will trample over state regulatory authority and the U. S. Constitution to achieve this end

States to Insurers: We’re Fine with the Obliteration of the Obligations of Contracts Clause n State actions to override and ignore legal, longstanding and regulator approved contract language is a clear violation of the Constitution n The Obligation of Contracts Clause (aka “Contracts Clause”) is found in Article I of the United States Constitution n Generally speaking, this clause was added to the Constitution in order to prohibit states from interfering with private contracts. The Contracts Clause states: “No State shall. . . pass any. . . Law impairing the Obligation of Contracts. . . ”

Is a Pandemic Risk Insurance Act (PRIA) Really Needed? n 9/11 produced widespread disruption through global (re)insurance markets and threatened the ability of the nation to recover from an unprecedented disaster n The COVID-19 pandemic creates few meaningful disruptions in p/c (re)insurance markets n TRIA was a very targeted, efficient solution that has brought nearly two decades of stability to the market n Commercial insurers are not an appropriate or efficient means for the delivery of aid for viral outbreaks n The $2. 5+ trillion in federal emergency relief packages (as of 4/20) will use existing, efficient channels (e. g. , SBA, ) for the delivery of targeted assistance to millions of businesses, individuals (direct payments, unemployment insurance) and other entities Total federal stimulus including Federal Reserve bond purchases totals ~$6 T - $8 T or approximately 30% of GDP Source: Risk and Uncertainty Management Center.

Why PRIA Is a Well-Intentioned but Bad Idea n Unlike TRIA, PRIA would create a large potential balance sheet liability for insurers n This is because PRIA would impose a 5% coinsurance provision for industrywide BI losses exceeding a $250 million industrywide and a 5% individual company deductible equal to 5% DPE w This is distinct from TRIA where the “reinsurance” is effectively “free” n Program is capped at $500 billion so a 5% coinsurance requirement implies a potential industry liability of up to $25 billion n These deductibles and coinsurance requirements would have potentially material implications for: w (Re)insurance balance sheets w RBC ratios w Surplus PPP program blew though $700 B in only a few weeks Source: Risk and Uncertainty Management Center.

Why PRIA Is a Well-Intentioned but Bad Idea Total PPP funding now expanded to $700 B Total PPP funding (now $700 B) is 7 x TRIA claims capacity) The insurance claims administration capabilities necessary to investigate, document and payout an amount of insurance claims equivalent to the just the initial $349 B in funding for the Paycheck Protection Program funding would be the same as if the top 10 US insurance catastrophes occurred in the same month PLUS 10 years of NFIP claim PLUS 10 years of federal Crop Insurance claims Source: Centers for Better Insurance, Insurance Programs for Pandemic Events, (4/20); Risk and Uncertainty Management Center.

Forced Rebating and Discounting Consumer Groups Want Rates Lowered Immediately… …But Regulator Approved Rating Methodologies Are Already Sensitive to Changes in Claim Activity 49 49

Personal Auto Premium Returns & COVID-19 n The Consumer Federal of America (CFA) and Center for Economic Justice on March 18 wrote a letter to state insurance commissioners urging them to: “…direct auto insurers in your state to provide premium offset payments to policyholders whose driving has been affected by COVID-19…” n Is such an action necessary? No, because rates are already sensitive to changes in claim frequency and severity w Potential increase in very severe/fatal crashes n That said, numerous personal auto insurers have announced premium returns to policyholders that will likely be worth $6 B - $10 B in aggregate, assuming no additional returns beyond April 2020

COVID-19: Premium Return Mandates in Other Lines n On April 13, CA Insurance Commissioner Ricardo Lara issued a bulletin titled: “Premium Refunds, Credits, and Reductions in Response to COVID-19 Pandemic” n The bulletin… “…hereby orders insurers to make an initial premium refund for the months of March and April to all adversely impacted California policyholders in the following lines of insurance, as quickly as practicable, but in any event no later than 120 days after the date of this Bulletin: ” • Private passenger auto Commercial multiperil Commercial automobile Commercial liability Workers’ comp Medical malpractice And “Any other line of coverage where the measures of risk have become substantially overstated as a result of the pandemic. ” n Approach could be adopted elsewhere

Workers Compensation Some Pressure Points Payroll Exposure Likely to Fall Materially 52 52

Workers Compensation & COVID-19 n Workers compensation written for COVID-19 exposed risks (e. g. , hospitals, first responders, etc. ) will likely see a spike in both severity and frequency n Some states will require costs associated with precautionary quarantines of COVID-19 exposed workers n Impact arising from “Essential Industries” unclear (e. g. , grocery stores) n Outside COVID-19 exposed segments—Large, Swift Drop in Payroll Exposure w Drop in WC payroll exposure base could be the fastest and largest in history given the record 26. 5 million initial unemployment claims data (week ending April 18) with much more to come w Wage growth, which had been making gains, will also slow w Overall likely net reduction in claim frequency

Workers Compensation & COVID-19 n Example of presumption expansion beyond “front-line” workers w On April 10, KY extended WC presumption to day care, grocery store and postal worker w April 13, IL extended to a very large number of occupations: w Grocery and pharmacy; food, beverage and cannabis production; charitable and social service organizations; gas stations and businesses needed for transportation; financial institutions; hardware and supply stores; critical trades; mail, post, shipping, logistics, delivery and pick-up services; educational institutions; laundry services; restaurants for consumption off-premises; essential business and work-from-home suppliers; home-based care and services; residential facilities and shelters; professional services; day-care centers for children of essential workers; manufacture, distribution and supply chain for critical products and industries; critical labor union functions; hotels and motels; and funeral services. w UPDATE: IL WCC was sued by the Illinois Retail Merchants Association and the Illinois Manufacturers’ Association and a judge on 4/21 issued a restraining order against the Commission. On 4/24, the WCC dropped withdrew its rule. Gov. Pritzger will likely pressure WCC to institute a new rule able to withstand judicial scrutiny.

Estimated ANNUALIZED WC Premium Impact from March/April 2020 Job Losses Hotels and restaurants saw the steepest losses in percent and dollar ($1. 78 B) terms Overall annualized WC premium losses are estimated at 11. 7% or $7. 3 B of total premiums should March/April job losses persist Source: Assured Research, May 2020 Briefing.

SUMMARY n. The P/C Insurance Industry Remains Strong, Stable, Sound and Secure n. The Rapid Economic Slowdown Will Temper P/C Growth, Especially in Economically Sensitive Lines n. Decline in Asset Prices, Interest Rates Will Pressure Investment Earnings for the Foreseeable Future n. COVID-19 Exposures Are Manageable but Industry Has Some Headline Risk on Business Interruption Issue 56

Questions? 57

Thank you for your time and your attention! Twitter: twitter. com/bob_hartwig For a copy of this presentation, email me at robert. hartwig@moore. sc. edu or Download at www. uscriskcenter. com 58