Industry Update Yesterday Today and Tomorrow CPCU IDay

Industry Update: Yesterday, Today and Tomorrow CPCU I-Day Columbia, Missouri September 10, 2019 James Lynch, FCAS MAAA, Chief Actuary Insurance Information Institute 110 William Street New York, NY 10038 Tel: 212. 346. 5533 jamesl@iii. org www. iii. org

I. I. I. Mission Statement Improving public understanding of insurance. . . …what it does and how it works. 2

How Insurance Drives Economic Growth Safety/ Security Economic/ Financial Stability Development 1. Insurers are financial first responders 3. Insurers are capital protectors 4. Insurance is a partner in social policy 7. Insurers are community builders 8. Insurance enables infrastructure improvements 2. Insurers are risk mitigators 5. Insurance sustains the supply chain 6. Insurers are capital infusers 9. Insurers are innovation catalysts 10. Insurers are credit facilitators 3

Insurance and Agriculture Video: Insurance and Agriculture 4

Protecting America’s Farms Source: USDA, Aon (Steve Bowen). 5

Catastrophes Extreme Weather Threatens Union

A Small Town in Missouri 7

1982 Union, Missouri, Flood A Storm for the Ages Bourbeuse River Record Crest 33. 8 feet 12/5/1982 Source: Fox 2 News. com, @Boxx. Radio. 8

2015 Union, Missouri, Flood A Storm for the Ages Bourbeuse River Record Crest 34. 3 feet 12/29/2015 Sources: CBSnews. com; fox 2 news. com 9

2017 Union, Missouri, Flood “Unfortunately, it’s a river and Mother Nature. And we can’t control her. ” Source: e. Missourian. com, National Weather Service. Bourbeuse River Crest 29. 4 feet May 2 -3, 2017 Crest (feet) Year 1 34. 31 0. 40 2015 1936 2 33. 80 0. 40 1982 1948 3 29. 38 0. 40 2017 1948 4 28. 50 0. 50 1915 1976 5 27. 77 0. 55 1994 2014 6 26. 37 0. 64 1993 2012 7 25. 89 0. 68 2000 8 24. 53 0. 78 2000 2001 9 24. 44 0. 80 1957 1996 10 23. 89 1. 14 2005 2007 10

2019: Union, Missouri, Embraces Resilience Community Hardening Dickey Bub Berm Shopping on One Side Park on the Other 11

Extreme Events: A Troubling Trend Rank Date Event Cause Insured Loss (1) ($ millions) 1 Aug. 2005 Hurricane Katrina Hurricane $41, 100 2 Sep. 2017 Hurricane Maria (2) Hurricane 25, 000 -30, 000 3 Sep. 2017 Hurricane Irma (2) Hurricane 20, 000 -25, 000 4 Sep. 2001 September 11 Events Terrorism 18, 779 5 Oct. 2012 Hurricane Sandy Hurricane 18, 750 6 Aug. 2017 Hurricane Harvey (2) Hurricane 16, 000 -19, 000 7 Aug. 1992 Hurricane Andrew Hurricane 15, 500 8 Jan. 1994 Northridge, CA earthquake Earthquake 12, 500 9 Sep. 2008 Hurricane Ike Hurricane 12, 500 10 Oct. 2005 Hurricane Wilma Hurricane 10, 300 (1) Dollars when occurred. (2) Insurance Information Institute estimate based on data from catastrophe risk modelers, the Property Claims Services unit of Verisk Analytics, et al. Source: Insurance Information Institute, catastrophe risk modelers, The Property Claim Services® (PCS®) unit of ISO®, a Verisk Analytics® company, et al. 12

Insurance Leading Throughout History ? ? ? 1969 1870 1784 1648 Edward. Water, Steam, Division Electronics, Cyber-Physical Lloyd’s of Labor, IT, Mechanical Automated Systems Coffee Electricity, House Production Mass Production 13

Yesterday: Industry Results Higher Rates, Moderating Claim Rates Buoy Results

Are Insurers Making Money? $85 Billions, 2019 dollars $75 75. 4 Q 1 Full Year $65 60. 0 $55 $45 Great Recession $35 Hailstorms 23. 8 $25 20. 0 14. 7 $15 9. 5 $5 17. 8 18. 2 18 19 8. 6 4. 2 -$5 08 09 10 11 12 13 14 15 16 17 Through first quarter. Adjusted for inflation using the BLS CPI calculator. Sources: NAIC data, sourced from S&P Global Market Intelligence; Insurance Information Institute. 15

Is the Industry Strong? Amount of Surplus Change from Prior Quarter ($ Billions) 6% $900 780 $800 5% 4% 2% $700 742 $600 0% -2% $500 -4% 1% 1% -5% -6% 15: Q 1 15: Q 2 15: Q 3 15: Q 4 16: Q 1 16: Q 2 16: Q 3 16: Q 4 17: Q 1 17: Q 2 17: Q 3 17: Q 4 18: Q 1 18: Q 2 18: Q 3 18: Q 4 19: Q 1 09: Q 4 10: Q 3 11: Q 2 12: Q 1 12: Q 4 13: Q 3 14: Q 2 15: Q 1 15: Q 4 16: Q 3 17: Q 2 18: Q 1 18: Q 4 $400 Stock Market Dip Explains Q 4 2018 Drop. Q 1 Recovery Explains Increase $0. 78 Premium per $1 Surplus. 16 Sources: ISO, A. M. Best. 16

P/C Insurance Industry Combined Ratio* 3 Consecutive Years of U/W Profits; 1 st time since 1971 -73 Higher CAT Losses, Shrinking Reserve Releases, Toll of Soft Market Hurricanes, Wildfires Drive CR Higher. Best Combined Ratio Since 1949 (87. 6) 120 115. 8 Sandy 110. 1 110 107. 5 106. 5 101. 1 100. 8 100. 1 104. 0 102. 5 100. 9 100 99. 3 98. 4 96. 4 95. 7 90 97. 4 99. 2 98. 3 95. 6 96. 6 92. 6 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 to 19 P date *Excludes Mortgage & Financial Guaranty insurers 2008 -2014. Including M&FG, 2008=105. 1, 2009=100. 7, 2010=102. 4, 2011=108. 1; 2012: =103. 2; 2013: = 96. 1; 2014: = 97. 0. Sources: A. M. Best; ISO, a Verisk Analytics company; 2019 based on Q 1 data; 2019 projection: Insurance Information Institute. 17

U. S. Inflation-Adjusted Cat Losses $100 $90 Katrina, Rita, Wilma Average for Decade Hurricane Andrew WTC 104 79 $70 $60 $50 $40 2000 s: 1990 s: $[VALUE] B 40 2010 s: $[VALUE] B 48 37 1980 s: $[VALUE] B $30 $20 $10 $0 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* Billions, 2018 $ $80 Harvey, Irma, Maria 2018 – Third worst year for U. S. Insured Catastrophe Losses. Average Insured Loss per Year for 1980 -2018 is $19. 3 B. *2018: Inflation-adjusted estimate, subject to change. 2010 s is average of 2010 to 2018. All losses are Direct. Sources: Property Claims Service, a Verisk Analytics business; Insurance Information Institute. 18

Catastrophe Claims, by Season Catastrophe Claims as % of Total Claims 20% 15. 9% 14. 9% 16. 9% 20. 1% 24% 1 st Quarter 3 rd Quarter 2. 8% 4. 5% 1. 6% 5. 5% 2011 2012 2013 2014 2015 2016 2017 2018 8. 4% 3. 4% 4. 4% 8. 5% 9. 9% 10. 3% 7. 3% 2 nd Quarter 2011 2012 2013 2014 2015 2016 2017 2018 0% 2011 2012 2013 2014 2015 2016 2017 2018 2019 4% 2. 4% 8% 2011 2012 2013 2014 2015 2016 2017 2018 5. 2% 4. 6% 8. 3% 12% 9. 1% 16% 4 th Quarter Catastrophe Claims Hit Hardest in Second and Third Quarters. * Preliminary, much of Q 4 may be re-estimation of Harvey, Irma, Maria claims. Losses are net of reinsurance but include Loss Adjustment Expenses Sources: ISO PCS; Insurance Information Institute calculations. 19

1, 422 Tornadoes by Quarter 1600 1, 065 1400 1200 2 nd Quarter 3 rd Quarter 116 222 88 129 271 125 2011 2012 2013 2014 2015 2016 2017 2018* 114 158 177 235 251 280 2011 2012 2013 2014 2015 2016 2017 2018 248 443 118 189 1 st Quarter 2011 2012 2013 2014 2015 2016 2017 2018 2019** 0 166 200 2011 2012 2013 2014 2015 2016 2017 2018 2019* 400 398 600 475 800 651 736 1000 4 th Quarter 2019 Second Quarter: Tornado Season – Anticipated Second Most In Past Nine Years * Preliminary Version of Final Counts. ** Incomplete June Data Source: http: //www. spc. noaa. gov/climo/online/monthly/newm. html. 20

Auto Net Combined Ratio 115% Commercial Personal 110% 111% 110% 108% 106% 105% 103% 100% 97% 95% 94% 90% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Personal Auto Has Returned to Underwriting Profitability. In Commercial Auto the Fever May Have Broken. Source: National Association of Insurance Commissioners data, sourced from S&P Global Market Intelligence; Insurance Information Institute. 21

Loss Costs Have Tapered Off the Past 2 Years 2 year change 25. 0% 2015 to 2017 to 2019 21. 9% 20. 0% 15. 2% 15. 0% 14. 3% 10. 0% 5. 0% 13. 4% 5. 6% 4. 6% 3. 0% 1. 9% 0. 0% -5. 0% -10. 0% -3. 9% Bodily Injury Property Damage Liability PIP Collision Comprehensive After Several Years of Steep Increases the Cost of Accidents has Tapered Off. Consumer Prices Overall Rose 6. 6 Percent from 2016 to 2018. Source: Fast Track Monitoring System. 22

Workers Comp: Soft Market Offsetting Exposure Growth 60 NPW (billions) 20% 15% 50 5. 8 5. 4 5. 2 40 5. 3 9% 10% 5% 0% 43. 2 39. 8 29. 9 20 40. 1 3. 9 39. 7 30 NPW, Annual Change 1. 9% -5% -10% -15% 10 -20% 0 10 11 12 13 14 Private Carriers 15 16 State Funds 17 18 -25% 07 08 09 10 11 12 13 14 15 16 17 18 Private Carriers State Funds Private Carriers: Tax Law Changes Boosted Net Premiums. Source: NCCI. 23

Workers Comp Net Combined Ratio 120% 110% NCCI State Funds (PY) Private Carriers 109% 107% 104% 101% 100% 90% 89% 83% 80% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Favorable Loss Trends Let Private Carriers Post Lowest C. R. Since 1930 s. Source: NCCI. . 24

Focus on Missouri Growth and Profitability

Return on Net Worth and Direct Premiums Written All Lines Missouri vs. USA Premium Growth 6% Return on Net Worth Missouri USA Annual % change 5% Missouri 15% USA 10% 4% 3% 5% 2% 1% 0% 0% -5% -1% -2% -10% -3% -4% -15% 2008 2010 2012 2014 2016 2018 2008 Sources: NAIC data sourced from S&P Market Intelligence; NAIC Profitability Report. 2011 2014 2017 26

All Lines: 10 -Year Average DPW Growth and Return on Net Worth Sources: NAIC data sourced from S&P Market Intelligence; NAIC Profitability Report 27

Return on Net Worth and Direct Premiums Written PP Auto Missouri vs. USA Premium Growth 9% Return on Net Worth Missouri USA Annual % change 8% Missouri 12% USA 10% 7% 6% 8% 5% 4% 6% 3% 4% 2% 1% 2% 0% -1% 0% 2008 2010 2012 2014 2016 2018 2008 Sources: NAIC data sourced from S&P Market Intelligence; NAIC Profitability Report. 2011 2014 2017 28

PP Auto: 10 -Year Average DPW Growth and Return on Net Worth Sources: NAIC data sourced from S&P Market Intelligence; NAIC Profitability Report 29

Return on Net Worth and Direct Premiums Written Commercial Auto Missouri vs. USA Premium Growth 15% Missouri Return on Net Worth USA Annual % change Missouri 16% USA 14% 10% 12% 10% 5% 8% 0% 6% 4% -5% 2% -10% 0% -2% -15% 2008 2010 2012 2014 2016 2018 2008 Sources: NAIC data sourced from S&P Market Intelligence; NAIC Profitability Report. 2011 2014 2017 30

Comm. Auto: 10 -Year Average DPW Growth and Return on Net Worth Sources: NAIC data sourced from S&P Market Intelligence; NAIC Profitability Report 31

Return on Net Worth and Direct Premiums Written Workers Comp Missouri vs. USA Premium Growth 15% Missouri Return on Net Worth USA Annual % change 10% Missouri 12% USA 10% 5% 8% 0% 6% -5% 4% -10% -15% 2% -20% 0% 2008 2010 2012 2014 2016 2018 2008 Sources: NAIC data sourced from S&P Market Intelligence; NAIC Profitability Report. 2011 2014 2017 32

Workers Comp: 10 -Year Average DPW Growth and Return on Net Worth Sources: NAIC data sourced from S&P Market Intelligence; NAIC Profitability Report 33

Today: Emerging Issues

Auto Repair: Complexity Grows More Cool Stuff to Fix More Parts, More Labor: Higher Costs Electronics Add to Cost, Complexity Parts/Collision Claim on Current Year Car 15. 2 16. 0 14. 0 12. 0 10. 9 11. 9 150 Ford F 150 Facebook Boeing 787 8. 0 4. 0 10 20 30 40 50 60 Millions of Lines of Code 6. 0 7 0 28% Increase! 10. 0 60 Electronics: 40 -50% of cost of vehicle Pre-repair scan: $63 2. 0 Post-repair scan: $93 2001 2009 2018 Calibration labor: sublet at $150 OEM: 98% of camera/sensors * Property Damage Only. SOURCES: “ 2019 Crash Course, ” CCC Information Services; Ford Motor Co. ; 35

Cannabis & Insurance The Science Review of Literature Conclusive evidence Improves the lot of adults in chronic pain. Substantial evidence Increases the risk of motor vehicle crashes. SOURCE: National Academy of Sciences, https: //www. nap. edu/catalog/24625/thehealth-effects-of-cannabis-and-cannabinoids-the-current-state 36

Current marijuana laws by state Change in Collision Frequency, 20122017* Percent 16 13. 0 12 10. 0 8 6. 0 4 1. 0 ve ra ll R O A O *CBD/Low THC medical program. Source: National Journal; Ballotpedia, 2019. W C O 0 * Vs. Neighboring States. 37

Workers Comp Issues: Can You Get Fired? Only 13 states have antidiscrimination/reasonable accommodation for offduty marijuana use *CBD/Low THC medical program. †Oklahoma has not yet released its final medical marijuana rules. ‡Provides limited protections to state employees. Source: Insurance Information Institute, 2019. 38

Is Medical Marijuana Covered by Comp? • Reimbursable in a handful of states • Unclear whether reimbursable in many states • Reimbursement not required • Reimbursement prohibited or ineligible 39

New Mexico is the Only State That Provides a Fee Schedule for Medical Marijuana 1 Maximum reimbursable amount 1“Healthcare In context Provider Fee Schedule and Billing Instructions, ” State of New Mexico Workers’ Compensation Administration. 40

Reimbursement Complications • Cash-only business • Proper dosages poorly understood, nonstandardized • No standardized “serving” of marijuana. Potency levels non-standardized • Expenses can vary widely 41

Tomorrow Is Recession Lurking?

Outlook: The Economy Real GDP Growth Forecasts 3. 0% Median Top 10 Avg Bottom 10 Avg 2. 5% 2. 0% 1. 9% 1. 8% 1. 7% 20: Q 2 20: Q 3 20: Q 4 1. 5% 1. 0% 0. 5% 0. 0% 19: Q 3 19: Q 4 20: Q 1 Most Forecasters Predict Slow Growth Through 2020. 43 Source: Blue Chip Economic Indicators. 43

A Cloud: Interest Rates 5. 5% 5. 0% 4. 5% 4. 0% 3. 5% '18, 3. 11% '11, 3. 17% 3. 0% 2. 5% 2. 0% Recession 1. 5% 1. 73% '16, 1. 49% 10 -Yr Yield 1. 0% '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 Worries About Economy Have Sent Investors Into Treasuries. Source: Federal Reserve Bank of St. Louis (FRED) 44

Summary Insurance Missouri Industry Leads Through Disruption Results Resemble the Rest of USA 2019 Results Promising, With Long-Awaited Improvement in Auto Lines and Workers Comp Setting Records Emerging Issues: Marijuana, Auto Repair Costs Economic Growth Steady – How Long Will it Last? 45

Thank you for your time and your attention!