Insurance 2020 Casualty Actuaries of the MidAtlantic Region

Insurance 2020 Casualty Actuaries of the Mid-Atlantic Region May 21, 2020 James Lynch, FCAS MAAA, Chief Actuary and Senior Vice President, Research and Education Insurance Information Institute 110 William Street New York, NY 10038 Tel: 212. 346. 5533 jamesl@iii. org www. iii. org

The Financial Picture 2019 Was A Good Year

U. S. Inflation-Adjusted Insured Cat Losses Harvey, Irma, Maria $110 $100 Billions, 2019 $ $90 $80 Hurricane Andrew $70 $60 $50 $40 $30 111 Katrina, Rita, Wilma Average for Decade 1990 s: $[VALUE] B 41 1980 s: $[VALUE ]B WTC 80 2000 s: $[VALUE] B 2010 s: $[VALUE] B 51 38 24 $20 8 $10 $0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20* 2019 was a relatively mild year; 2020 faces pandemic, aboveaverage hurricane forecast *Aon estimate through April. 2010 s is average of 2010 to 2019. All losses are Direct. Sources: Property Claims Service, a Verisk Analytics business; Aon; Insurance Information Institute. 3

P/C Insurance Industry Combined Ratio* Hurricanes Harvey, Irma, Maria 3 Consecutive Years of U/W Profits; 1 st time since 1971 -73 Joplin, Tuscaloosa Tornadoes Sandy 108 106. 5 103. 7 102. 5 101. 1 98 88 100. 7 99. 3 2009 2010 2011 2012 96. 4 97. 0 2013 2014 99. 2 98. 9 2018 2019 97. 8 2015 2016 2017 *Excludes Mortgage & Financial Guaranty insurers before 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® business; I. I. I. 4

Key sources of P/C insurer profits $ Billions Net investment gains $70 $11. 5 $50 $30 $41. 7 $10 Underwriting gains/losses $42. 5 $41. 4 $48. 7 $5. 3 $8. 4 $44. 7 $45. 0 $40. 5 $50. 2 $5. 6 $6. 4 $51. 5 $50. 7 18 19 $27. 0 -$2. 4 -$0. 4 -$5. 2 -$10 -$6. 1 -$19. 8 -$33. 7 -$30 -$50 09 10 11 12 13 14 15 16 17 Strong capital gains, underwriting results lifted profits Through third quarter. Data are before taxes and exclude extraordinary items. Source: NAIC data, sourced from S&P Global Market Intelligence. 5

P/C Industry Net Income After Taxes* 1997 -2019 $61, 445 19 $37, 420 $60, 000 $58, 171 $80, 000 $60, 608 $69, 239 $81, 962 $100, 000 18 $ Millions, 2019 dollars $40, 000 $3, 519 $4, 289 $20, 000 *Adjusted for inflation using the BLS CPI calculator, to 2019 dollars Sources: A. M. Best; ISO, a Verisk Analytics® business; Insurance Information Institute. 17 16 15 14 13 12 11 10 09 08 07 06 05 04 03 02 01 00 99 98 97 $0 6

The Personal Lines Picture 2020 Was Looking Good

Direct Written Premium Growth By Year 9% HO/FO Personal Auto 7. 8% 8% 7% 6. 6% 5. 9% 6% 4. 8% 5% 5. 2% 4% 2. 7% 3% 2% 1% 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 HO writings more stable than auto, which grew in response to rising costs till recently. Sources: NAIC data, sourced from S&P Global Market Intelligence. 8

Personal Lines Results 140% Homeowners Auto Combined Ratio 130% 122% 120% 110% 106% 107% 104% 98% 100% 98% 90% 2009 2010 2011 2012 91% 2013 2014 2015 2016 2017 2018 99% 2019 Personal auto has returned to underwriting profitability. Homeowners results depend on catastrophe season. Source: NAIC data, sourced from S&P Global Market Intelligence. 9

Loss Costs Have Tapered Off the Past 2 Years 36. 0% 2 year change 15. 0% 2015 to 2017 to 2019 11. 2% 36. 0% 9. 5% 10. 0% 6. 2% 5. 9% 5. 0% 1. 6% 6. 1% 6. 5% 2. 9% 0. 0% -5. 0% -10. 0% Bodily Injury Property Damage Liability PIP Collision -7. 9% Comprehensive The cost of accidents has tapered off in recent years Source: Fast Track Monitoring System. 10

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. ; 11

The Commercial Lines Picture 2020 Was Looking Good

Commercial Lines Results Combined Ratio 120% 110% 108% 103% 100% 98% 93% 90% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Excellent workers comp results have more than made up for problems in auto, general liability. Source: NAIC data, sourced from S&P Global Market Intelligence. 13

Sources: Willis Towers Watson, Market. Scout, Marsh. 16% 6% Willis 2020: Q 1 2019: Q 4 2019: Q 3 2019: Q 2 2019: Q 1 2018: Q 4 2018: Q 3 2018: Q 2 2018: Q 1 2017: Q 4 2017: Q 3 2017: Q 2 2017: Q 1 2016: Q 4 2016: Q 3 2016: Q 2 2016: Q 1 2015: Q 4 2015: Q 3 -2% 2015: Q 2 2% 2015: Q 1 4% 2014: Q 4 -4% 2014: Q 3 2014: Q 2 2014: Q 1 2013: Q 4 2013: Q 3 2013: Q 2 2013: Q 1 Commercial Lines Rate Changes 14% 12% 10% 8% 6% 5% 0% Market. Scout Marsh -6% Rates have been rising. Is it a hard market? 14

Commercial Rate Changes By Line, 2020: Q 1 8. 0% 7. 5% 7. 0% 6. 3% 6. 0% 4. 5% 4. 3% 4. 5% 2. 0% 0. 0% LI EP &O D b ia to W L of Pr Ex b/ Au ce ss L U m M nd la G e ar in P In rru te In es s Bu si n BO pt ty er Pr op C -1. 3% -2. 0% Source: Market. Scout. 15

Key Trends (at Year-End) Loss Development What’s Happening 6. 0 4. 0 2. 0 PA: Moderating frequency, some severity movement WC: Frequency plunging D&O: Securities litigation explosion (event driven) EPLI: #Metoo GL: Social inflation CA: Social Inflation 3. 5 2. 6 0. 1 0. 3 - (4. 0) (6. 0) A C (0. 4)(0. 3) Industrywide Loss Development: $6 billion favorable (4. 5) (7. 3) Li ab C M H P O / M FO ed M al O R PA L ei L ns ia ur b an ce 2 - W Yr C L in e O s th er (8. 0) (0. 5) (2. 0) 16

Social Inflation An Actuarial Examination

Social Inflation Coming to Terms A Good Definition “a fancy term to describe rising litigation costs and their impact on insurers’ claim payouts, loss ratios, and, ultimately, how much policyholders pay for coverage. ” Actuarial Interpretation “Excessive inflation in claims. ” Occurs when development defies key assumption: Loss Development is RV about stable mean 18

Triple-I Analysis What We Studied and Why 19

Upward Creep in Loss Development Key Assumption: LDF is RV about mean + inflation 1. 14 1. 08 1. 03 2010 1. 36 1. 16 1. 08 1. 04 2011 1. 40 1. 16 1. 08 1. 04 2012 1. 40 1. 16 1. 09 1. 04 2013 1. 41 1. 18 1. 10 1. 04 2014 1. 42 1. 19 1. 10 1. 05 2015 1. 45 1. 18 1. 11 2016 1. 43 1. 20 2017 1. 44 2, 500 2, 000 1, 500 Expected Actual 2013 2014 2015 2, 136 2, 281 1. 34 2, 012 2009 12 -36 Development ($ Millions) 1, 596 48 1, 928 36 1, 546 24 1, 318 1, 667 12 2 -Year Expected vs. Actual 1, 110 1, 455 Comm Auto LDFs 1, 000 500 2012 2016 Accident Year Source: NAIC data, sourced from S&P Global Intelligence; Insurance Information Institute. Expected: 3 -yr Straight Average. 20

Social Inflation: The Toll Reserve Development, Commercial Auto Liability Millions Additions to Claim Reserves $3, 000 2, 572 $2, 000 1, 656 1, 852 1, 634 1, 843 $1, 000 $0 Sources: NAIC data sourced from S&P Market Intelligence; Insurance Information Institute. 2019 2018 2017 2016 2015 2014 2013 Reductions from Claim Reserves 2012 2010 2009 2008 -827 2011 -$1, 000 21

It’s Not Just Auto 12: 36 Loss Development Factors by Year, Long-Tailed Lines Commercial Auto 1. 75 Med. Mal Claims-Made 1. 71 1. 53 1. 55 2. 28 2. 50 1. 75 2. 00 . . . 20 1 16 20 15 20 14 20 13 20 12 20 11 20 . . . 20 1 16 20 15 20 14 20 13 20 2 20 1 11 20 . . . 20 1 16 5 20 20 1 14 20 13 20 12 20 11 20 10 20 20 09 2. 00 2. 96 20 2. 22 3. 45 3. 75 3. 25 2. 75 09 3. 00 20 3. 00 2. 50 10 Other Long-Tailed Lines* 10 Other Liability Occurrence 20 20 09 . . . 20 1 16 5 20 20 1 14 20 13 20 12 20 11 20 20 20 10 1. 50 09 1. 35 Medical Malpractice Occurrence, Other Liability Claims-Made, Products Liability Occurrence, Products Liability Claims-Made. Estimate assumes 24: 36 Factor is straight average of previous three years. Source: NAIC data, sourced from S&P Global Market Intelligence; Insurance Information Institute. • 22

Why Is It Happening? The Changing Legal Environment “Jackpot Justice” Litigation Financing Litigation is a financeable asset. Median, 50 Largest Jury Verdicts 60 - 68% of US Law Firms 54. 33 % of US Law Firms Using Litigation Financing 50 $ millions 41. 75 40 30 27. 70 36% 40% 30. 74 30% 20 20% 10 10% 0 0% 2014 2015 2016 2017 Sources: Swiss Re Economic Insights, Burford Capital. 7% 2013 2017 23

Why It Is Happening Why Social Inflation Hits Insurance Overall Inflation Remains Steady Who Solves Problems? CPI Change vs Year Earlier Confidence in Institutions 3. 5 % Saying Great Deal/Quite a Lot 35 30 30 3. 1 3. 0 % Change 2. 5 2. 0 2. 4 1. 8 25 1. 5 20 24 1. 0 15 0. 5 10 0. 0 5 -0. 3 2009 2011 2013 2015 2017 2019 Sources: Bureau of Labor Statistics (via FRED), Gallup. [SERIES NAME] 23 Congress 11 2004 2007 2010 2013 2016 2019 24

Dystopian Days Why Is It Happening? % Chg, Real Income Since 79 Social Trends Set the Stage 300% Big Payout Expectations No. of $300 M Lottery Jackpots 10 157% 100% 22% 0% 1979 Interest Over Time (12 -Mo Mov. Avg) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 78. 5 Utopia 65 35 Top 1% 78. 9 79 2 1999 2009 Top 0. 1% Life Expectancy at Birth 3 4 1989 Bottom 90% 5 6 0 200% 8 8 343% 400% 78. 7 78. 2 78 2008 2014 2018 Search Topic: Utopia vs Dystopia 5 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Sources: Wikipedia, Economic Policy Institute, Centers for Disease Control, Google Trends. 25

Summary 2019 was a solid year for property/casualty insurers Healthy economy grew exposures Falling frequency helped personal auto, workers comp Low cat losses helped property lines Social inflation a growing concern 26

The Global Pandemic An Unprecedented P/C Insurance Toll

Direct Written Premium Growth By Year 7% All Lines 6% 5% 5. 4% 4. 2% 4% 4. 0% 3% Nominal GDP 2% 1% 0% -1% -2% -3% -4. 6% -5% -6% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Normally premium grows at about the same rate as the economy, which bodes ill for insurers this year. Sources: NAIC data, sourced through S&P Global Market Intelligence; Blue Chip Economic Forecasts, May 2020. 28

Quarterly* U. S. Real GDP Growth 26. 6% 30% 16. 8% 11. 6% 15% 8. 8% 6. 1% 3. 4% 0% 2. 1% 1. 7% -4. 7% -15% -30% -45% -23. 1% Bottom 10 Avg -32. 1% -40. 3% 2020: Q 2 2020: Q 3 2020: Q 4 2021: Q 1 Median 2021: Q 2 Top 10 Avg 2021: Q 3 2021: Q 4 Most economists predict a quick bounceback but GDP won’t reach a new high until 2022. *at an annual rate Sources: Blue Chip Economic Indicators, May 2020. 29

COVID-19’s Impact Unprecedented Spread of Loss, Deterioration of Exposure Potential Loss Impact Workers Compensation Political risk, credit, surety 0. 2 92 00. 8 $10. 5 B auto premium Employment related exposures (GL, WC) 01. 7 GL 0. 7 EPLI 0. 3 2. 6 D&O 0. 6 4 BI 2. 0 0 27 Loss estimates range from $30 B (≈ bad hurricane) to $140 B (23 Katrinas) 22. 7 50 Billions of US$ Investment Mortgage Exposure Impact 100 Stock prices, bond yields plunging Lloyd’s estimate: $96 B in investment losses 30

Moody’s Seasoned AAA Corporate Bond Yields, Monthly Yield 4. 2% 4. 0% 3. 9% 3. 8% 3. 6% 3. 4% 3. 2% 3. 0% 2. 8% 2. 6% 2. 4% 2. 2% 2. 0% Jan-19 Mar May Jul Sep Nov Jan-20 Mar Interest rates continue to decline, making the insurance ‘float’ less lucrative. Sources: FRED, St. Louis Federal Reserve Bank https: //fred. stlouisfed. org/series/AAA/119 31

Insurance Issues by Line of Business Before the Pandemic and Now 2020 Forecast and Reforecast Line Before the Pandemic Now Property Trapped capital, rates Business interruption Personal Auto Lower frequency, rates Less driving (but faster), premium givebacks D&O Event-driven securities class actions, rates Hindsight litigation of securities filings Cyber Public sector ransomware Hospital ransomware, phishing Commercial Auto Continuing deterioration Less driving, HOS rules suspended Workers Comp Falling frequency, solid profits Fewer exposures, first responders 32

Policyholder Surplus ($ Billions) $900 848 $800 742 770 $700 $600 $500 $400 487 456 2008 2010 2012 2014 2016 2018 2020 -Q 1 At year-end the industry had $1 of surplus for every $0. 75 of NPW, the strongest claims-paying status in its history. The P/C insurance industry entered 2020 in exceptionally strong financial condition. Sources: ISO, Insurance Information Institute. 33

Retroactive Business Interruption An Existential Threat

Stress Testing P/C Insurers How Resilient Is the Industry? Billions of dollars Critical Level Below This Amount, Industry Imperiled Sources: NAIC data sourced from S&P Global Market Intelligence; Insurance Information Institute. 35

The Biggest Threat: Retroactive BI Estimates dwarf other black swan scenarios Five Katrinas per Month Billions of dollars 400 350 Two Katrinas per Month 300 250 200 150 50 255 153 100 102 51 94 383 128 51 0 Katrina 2020 Black Swan Low Midpoint Monthly Retro BI High Low Midpoint Monthly BI All Firms High Source: Insurance Information Institute. 36

Stress Testing P/C Insurers How Resilient Is the Industry? Billions of dollars Critical Level Below This Amount, Industry Imperiled Sources: NAIC data sourced from S&P Global Market Intelligence; Insurance Information Institute. 37

Summary: COVID-19 Edition Unprecedented Virtually all lines will be affected Recession will dramatically decrease exposures and losses in several lines Workers comp, D&O, GL and business interruption could face significant increases in claims Retroactive BI would be an existential threat 38

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