The Property/Casualty Landscape Challenges and Disruptions?

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1 The Property/Casualty Landscape Challenges and Disruptions? October 6, 2016 Download at James Lynch, FCAS MAAA, Chief Actuary Insurance Information Institute 110 William Street New York, NY Tel:

2 Auto Insurance Rising Frequency, Severity Pinching the Largest P/C Line

3 Net Combined Ratio, % Commercial Personal 107.0% 106.9% 108.8% 105% 100% 95% 103.6% 103.4% 100.2% 101.3% 101.0% 102.0% 102.1% 102.5% 101.6% 99.5% 98.3% 98.1% 96.8% 95.1% 95.6% 94.3% 104.6% 90% 92.1% 92.5% Loss Ratios Have Been Rising for a Decade Return on Net Worth is Likely Close to Zero or Negative. Source: National Association of Insurance Commissioners data, sourced from S&P Global Market Intelligence; Insurance Information Institute. 3

4 Why Personal Auto Loss Ratios are Rising: Severity & Frequency by Coverage, 2016 vs Annual Change, 2016 Over 2015* 9.0% 8.0% 8.5% Severity Frequency 7.0% 6.8% 6.0% 5.6% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 4.3% Bodily Injury 2.2% 2.3% Property Damage Liability 4.6% 0.8% 0.0% 0.0% PIP Collision Comprehensive Across All Personal Coverage Types (Except Comprehensive) in 2015, Frequency and Severity Rose. This Pattern is Continuing in *Four quarters ending in March. Source: ISO, a Verisk Analytics company; Insurance Information Institute. 4

5 Claim Trends by Coverage Focus on Collision

6 Collision Claims: Frequency Trending Higher in 2015 Annual Change, 2005 through % 4.4% 4.0% 2.5% 2.4% 2.0% 0.9% 0.8% 0.0% -0.5% -2.0% -1.8% -2.4% -1.4% -1.8% -4.0% -3.6% For a Long Time, Claim Frequency Was Falling, But Since 2010 This Trend Seems to Have Reversed. Source: ISO, a Verisk Analytics company; Insurance Information Institute. 6

7 Collision Claims: Severity Trending Higher in Annual Change, 2005 through % 5.7% 4.0% 3.9% 3.1% 2.8% 4.1% 2.0% 0.0% 0.1% 0.5% -0.1% 1.3% 1.3% -2.0% -4.0% -2.3% The Great Recession and High Fuel Prices Helped to Temper Claim Severity, But These forces Have Clearly Reversed, Consistent with Experience from Past Recoveries. Source: ISO, a Verisk Analytics company; Insurance Information Institute. 7

8 What s Driving These Trends? Frequency; Severity

9 America is Driving More Again: Percent Change, Miles Driven* 3.5% 3.4% 3.1% 2.5% 2.5% 1.8% 2.1% 2.5% 1.5% 1.2% 1.3% 0.5% 0.8% 0.8% 0.6% 0.4% 0.6% 0.6% -0.5% -1.5% -2.5% -1.8% % -0.5% Fastest Growth Since 2000 Tremendous Growth In Miles Driven. The More People Drive, The More Frequently They Get Into Accidents. * : Moving 12-month total vs. prior year data through July 2016, the latest available, vs. July Sources: Federal Highway Administration; National Bureau of Economic Research (recession dates); Insurance Information Institute. 9

10 06:Q1 06:Q3 07:Q1 07:Q3 08:Q1 08:Q3 09:Q1 09:Q3 10:Q1 10:Q3 11:Q1 11:Q3 12:Q1 12:Q3 13:Q1 13:Q3 14:Q1 14:Q3 15:Q1 15:Q3 16:Q1 More Miles Driven => More Collisions, Billions of Miles Driven in Prior Year 3,200 Recession 3,150 3,100 3,050 Overall Collision Claims Per 100 Insured Vehicles 6.0 Miles Driven (left axis) Collision Claim Frequency (right axis) ,000 2,950 2,900 2,850 2, The More Miles People Drive, the More Likely They are to Get in an Accident, Helping Drive Claim Frequency Higher. Sources: Federal Highway Administration; Rolling four-quarter average frequency from ISO, a Verisk Analytics company; Insurance Institute for Highway Safety; Insurance Information Institute. 10

11 06:Q1 06:Q3 07:Q1 07:Q3 08:Q1 08:Q3 09:Q1 09:Q3 10:Q1 10:Q3 11:Q1 11:Q3 12:Q1 12:Q3 13:Q1 13:Q3 14:Q1 14:Q3 15:Q1 15:Q3 16:Q1 Why Are People Driving More Miles? Cheap Gas? Billions of Miles Driven in Prior Year 3,200 Recession 3,150 3,100 3,050 3,000 2,950 2,900 2,850 Miles Driven (left axis) Average Price Per Gallon $4.5 Gas Prices (right axis) $4.0 $3.5 $3.0 $2.5 $2.0 2,800 $1.5 Gas Prices Don t Seem Correlated With Miles Driven. Sources: Federal Highway Administration; Energy Information Administration (All Grades All Formulations Retail Gasoline Pricesquarterly average); Insurance Institute for Highway Safety; Insurance Information Institute. 11

12 06:Q1 06:Q3 07:Q1 07:Q3 08:Q1 08:Q3 09:Q1 09:Q3 10:Q1 10:Q3 11:Q1 11:Q3 12:Q1 12:Q3 13:Q1 13:Q3 14:Q1 14:Q3 15:Q1 15:Q3 16:Q1 Why Are People Driving More Miles? Jobs? Billions of Miles Driven in Prior Year 3,200 Recession 3,150 3,100 3,050 3,000 2,950 2,900 2,850 Miles Driven (left axis) Millions Employed 150 # Employed (right axis) , People Drive to and from Work and Drive to Entertainment. Out of Work, They Curtail Their Movement. Sources: Federal Highway Administration; Seasonally Adjusted Employed from Bureau of Labor Statistics (Series ID CES ); Insurance Institute for Highway Safety; Insurance Information Institute. 12

13 Collision Frequency Collison Frequency Comparing Gas Prices, Employment on Collision Frequency Through Gas Price vs. Collision Frequency Gasoline Price per Gallon Number Employed vs. Collision Frequency Millions Employed Sources: Seasonally Adjusted Employed from Bureau of Labor Statistics; Energy Information Administration; Rolling Four-Qtr Avg. Frequency from Insurance Services Office; Insurance Information Institute. 13

14 06:Q1 06:Q3 07:Q1 07:Q3 08:Q1 08:Q3 09:Q1 09:Q3 10:Q1 10:Q3 11:Q1 11:Q3 12:Q1 12:Q3 13:Q1 13:Q3 14:Q1 14:Q3 15:Q1 15:Q3 16:Q1 More People Working and Driving => More Collisions, Number Employed, Millions 145 Recession 140 Overall Collision Claims Per 100 Insured Vehicles Number Employed (left axis) 6.0 Collision Claim Frequency (right axis) When People are Out of Work, They Drive Less. When They Get Jobs, They Drive to Work, Helping Drive Claim Frequency Higher. Sources: Seasonally Adjusted Employed from Bureau of Labor Statistics; Rolling four-quarter average frequency from ISO, a Verisk Analytics company; Insurance Information Institute. 14

15 Severity: Driving Fatalities are Rising Annual Change in Motor Vehicle Deaths 10% 8% 6% 4% 2% 0% -2% -4% Seatbelt Use Rose to 62% of Drivers, From 49% in % 1.5% 2.0% 0.7% -0.4% 0.1% -2.5% 2.2% 1.0% 3.6% -1.4% 0.4% 0.9% Big Drop-off Due to the Great Recession -0.1% -3.0% -2.4% -0.1% 3.1% On Track for 18% Increase in Two Years -2.9% 0.1% 9.0% 8.0% -6% -8% -5.9% -7.0% -10% -9.5% -9.0% Driving Has Been Getting Safer for Decades, But Recent Trend is Discouraging 38,300 Deaths in Sources: National Safety Council, Insurance Information Institute. 15

16 What About Distractions? It s A Problem. Is It Growing? What We Do Behind The Wheel But Impact Is Not Clear Percentage of Drivers Who.. 70% 60% 50% 65% Talking Less... 51%...Typing More Percentage of Crashes Involving Distraction 20% 15% 40% 30% 31% 36% 29% 10% 20% 10% 0% 13% Talk on Phone Text Surf the Net % 0% Total Crash Fatal Crash Injury Crash PDO* Crash * Property Damage Only. SOURCES: State Farm, National Highway Transportation Safety Administration (distraction.gov) Most Recent Year 16

17 On the Horizon Sharing Economy and Disruption

18 What Is A Value Chain? Example: Local Newspapers Provide Information to Local Audience Printing Press Gather Information (News, Ads) Create Product (Publish the Newspaper) Distribute Product (Deliver the Newspaper) Improve World This Industry Was Radically Disrupted by the Internet. Its Barriers to Entry Were Destroyed. Is Insurance Next? 18

19 12/01/09 eslide P6466-9pm The Financial Crisis and the Future of the P/C Insurance Technology Financing Change Is Coming Investment ($ Millions) Deals Investment Deals Investment In Insurance Tech Is Rising. Number of Deals Reached A Record in First Quarter. SOURCES: CB Insights, Insurance Information Institute. 19

20 Insurance Tech Activity by Area of Interest, :Q1 (Percent) With the ACA in the rear view window, non-health insurance tech accounts for the majority of investment :Q1 Non-Health Insurance Tech Health Insurance Tech Silicon Valley, Venture Capitalists Have Insurance Industry in Their Sights. Most Will Fail. Some Will Succeed. Source: CB Insights at Insurance Information Institute. 20

21 The (Re)Insurance Value Chain Where Could Disruption Lie? Protecting People & Organizations Brains + Bank Account Create Policy/ Treaty Market Policy/ Treaty Underwrite, Price Risk Perform Loss Control Settle Claims Improve World Most Links in the Value Chain Have the Potential to Be Disrupted in Next 10 Years. 21

22 Global Reinsurance Capital Alternative Capital Potentially Disrupting the Bank Account (Billions of USD) Q2:16 Alternative Capital Traditional Capital Alternative capacity has grown 263% since It has more than tripled in the past six years. Source: Aon Benfield Analytics; Insurance Information Institute. 22

23 Alternative Capital Potentially Disrupting the Bank Account (Billions of USD) Q1-16 Cat Bonds Sidecars ILWs Collateralized Re Collateralized Reinsurance and Catastrophe Bonds Currently Dominate the Alternative Capital Market. Source: Aon Benfield Analytics; Insurance Information Institute. 23

24 The Internet Will It Disrupt Marketing? Lead Generators InsWeb, NetQuote, Insurance.com Site allows comparison shopping, sells lead to insurer Call Center Agencies SelectQuote, Goji Call center employs agents Digital agencies Esurance, Policy Genius Quote and buy online But Customers Still Like Agents Did You Compare Prices When Your Auto Policy Was Up for Renewal? Don't Know None of These Any Method By Phone Online Talk to Agent 1% 29% 37% 39% 50% 69% 0% 10% 20% 30% 40% 50% 60% 70% 80% SOURCES: The New Age of Insurance Aggregators, Insurance Information Institute November 2015 Pulse Survey. 24

25 Pricing Disruptor: The Fragmented Risk The Insurance Contract Is Being Split into Tiny Pieces. By-peril HO insurance Rate Water, Theft, Liability Risk Separately The Sharing/ On-Demand Economy Personal Exposures Become Commercial Exposures, Then Switch Back Pay By Mile Insurance Exposure Basis for Auto Vehicle-Mile Replaces Vehicle- Year Expect More As Computers Get Stronger Data Storage Gets Cheaper Information Collection Grows 25

26 The Internet of Things Gathering Big Data Affects Underwriting Pricing Monitoring Could Affect Loss Control Pricing? SOURCE: F6S.com, CB Insights. 26

27 As For The Future IoT Could Disrupt UW, Claims, Loss Control Image sources, clockwise: Nest, Jawbone, Automatic, Lumo, Apple, PSFK 27

28 Peer-to-Peer (P2P) Insurance Taking on the Entire Value Chain The Business Model Resembles Mutuals/ Reciprocals 20% of Premium to Expenses, 80% to Cover Risk. Risk Pool for Each Charity Leftover Pool Money Goes to Charity. May Deter Fraud You Wouldn t Cheat Your Favorite Charity! Chief Behavioral Officer Dan Ariely: If you tried to create a system to bring out the worst in humans, it would look a lot like the insurance of today. Source: UberX-ing Insurance : Is Peer-to-Peer Insurance Viable?, presentation by Jay Sarzen, Aite Group at Drinker Biddle Insurance Conference, June 21, 2016; Financial Times; 28

29 Lemonade s P2P Model Example: Renters Insurance (HO-4) Attractive Graphics, Simple Explanations of a Basic ISO Form SOURCE: Lemonade.com, Insurance Information Institute. 29

30 Lemonade s P2P Model Questions Who Holds the Risk? Other Questions How Are Charitable Pools Separated? Expenses 20% Who Gets the Float? Subject to Giveback 40% 'Rainy Day Fund' 20% Reinsuran ce 20% Insurer, Reinsurer or Charity? Who Gets the Tax Deduction (Worth More Than the Float)? The Giveback Occurs on June 20 4 Equal Payments Over 4 Years (Active Policies Only) SOURCE: Lemonade.com, Insurance Information Institute. 30

31 Summary Auto costs are rising (both frequency and severity) People Are Driving More: Improving employment picture driving frequency higher People Are Driving Faster: Fatalities have risen 16 percent in two years Disruption provides opportunities and challenges throughout the value chain 31

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