The P&C Insurance Industry: A Review, Some Gloom & Doom, and A View of the New

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1 The P&C Insurance Industry: A Review, Some Gloom & Doom, and A View of the New Kevin C. Ahlgrim, A.S.A., M.A.A.A., Ph.D. Associate Professor, Finance, Insurance and Law Illinois State University kahlgrim@ilstu.edu

2 Where are we? Katie School of Insurance and Financial Services 2

3 Outline Review: Recent financial performance of the P&C Industry Gloom & Doom: Factors that may impede the future A View of the New: Where can the insurance industry look for growth? Katie School of Insurance and Financial Services 3

4 DISSECTING FINANCIAL PERFORMANCE Katie School of Insurance and Financial Services 4

5 In $Thousands P&C Industry Net Income 80,000,000 70,000,000 60,000,000 67,479,095 63,138,183 70,061,109 64,704,048 58,157,787 50,000,000 47,197,658 40,000,000 30,000,000 20,000,000 37,872,537 24,741,442 30,870,476 22,005,849 21,272,852 38,342,377 30,416,471 37,716,121 37,565,184 32,492,229 19,532,449 10,000,000 9,715,005 4,445,874 0 (10,000,000) (5,785,856) Source: SNL Financial Katie School of Insurance and Financial Services 5

6 How Do Insurers Make Money? GDP and market growth Product type Underwriting cycle Competition Regulation Distribution costs Underwriting costs Reinsurance costs Technology costs ( _ Premium Losses Expenses ) + Investment Income Inflation / medical inflation Loss Developments Catastrophic Losses Premiums vs. losses/expenses determine the combined ratio Interest Rates Investment Quality Regulation

7 P&C Industry Premium Split Personal Commercial A&H 100% 90% 80% 70% Source: SNL Financial % 50% 40% 30% 20% % 0% Source: SNL Financial Katie School of Insurance and Financial Services 7

8 P&C Personal Lines Premium Growth 10.4% 9.2% 7.3% Personal lines premiums have rebounded with the economy 5.7% 5.2% 5.1% 5.6% 3.5% 4.0% 3.9% 4.3% 2.1% 1.8% 2.6% 2.2% 0.3% 0.1% -0.5% -0.2% Source: SNL Financial Katie School of Insurance and Financial Services 8

9 Industry Personal Auto Premium Growth 9.5% 6.9% 7.8% 5.6% 5.1% 5.3% 4.1% 4.2% 2.6% 3.4% 3.1% 0.8% 0.8% 1.4% 1.7% -0.8% -0.7% -1.0% -1.0% Source: SNL Financial Katie School of Insurance and Financial Services 9

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11 Industry Homeowners Premium Growth 13.8% 14.0% 8.8% 8.8% 5.8% 7.3% 5.1% 6.3% 6.1% 5.2% 6.1% 5.8% 7.3% 7.1% 3.4% 2.3% 1.9% 1.9% 0.6% Source: SNL Financial Katie School of Insurance and Financial Services 11

12 Personal vs. Commercial Lines Growth 25% 20% 15% Commercial lines premiums have been more volatile than personal lines 10% 5% 0% -5% -10% Personal Commercial Source: SNL Financial Katie School of Insurance and Financial Services 12

13 P&C Industry Combined Ratio Source: SNL Financial Katie School of Insurance and Financial Services 13

14 Personal Lines Combined Ratios More volatility in homeowners due to catastrophe exposure Homeowners Personal Auto Source: SNL Financial Katie School of Insurance and Financial Services 14

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18 P&C Industry Combined Ratio by Line Personal Lines Workers Comp Source: SNL Financial Katie School of Insurance and Financial Services 18

19 In $Billions P&C Industry Reserve Development Source: SNL Financial (5) (10) (15) (20) When development is negative, reserves are released, which improves the combined ratio and net income Katie School of Insurance and Financial Services 19

20 Summary Premium growth has recovered strongly with economy Fewer catastrophes have improved recent combined ratio Can the positive trends continue? Katie School of Insurance and Financial Services 20

21 GLOOM AND DOOM: INVESTMENT PERFORMANCE Katie School of Insurance and Financial Services 21

22 In $Thousands P&C Industry Investment Income 60,000,000 55,000,000 50,000,000 45,000,000 40,000,000 35,000, Source: SNL Financial Katie School of Insurance and Financial Services 22

23 P&C Industry Net Yield on Assets Source: SNL Financial Katie School of Insurance and Financial Services 23

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25 P&C Industry Portfolio, 2015 Stocks 19.3% Mortgage 0.9% Bonds 68.1% Real Estate 0.9% Cash 6.4% Other 4.5% Source: SNL Financial Katie School of Insurance and Financial Services 25

26 Interest Rates are Low 9 1 Year Treasury Yield 10 Year Treasury Yield How quickly will Fed raise rates? Source: St. Louis Fed (FRED) Katie School of Insurance and Financial Services 26

27 Inflation Rate 13.9% 11.8% Two big factors that drive interest rates: 1. Demand for money / economy 2. Inflation 9.3% 8.4% 3.7% 4.2% 3.5% 3.9% 1.5% 4.0% 5.2% 4.7% 5.7% 2.8% 3.0% 3.3% 2.6% 2.5% 2.7% 1.6% 3.7% 4.0% 4.3% 2.7% 3.0% 2.6% 1.7% 1.9% 2.1% 1.1% 0.0% 2.9% 2.6% 1.6% 1.6% 1.6% -0.1% 1.4% Source: US Bureau of Labor Statistics Katie School of Insurance and Financial Services 27

28 P&C Industry Investments in Stocks Response to lower yields #1: Increasing investment in stocks? Source: SNL Financial Katie School of Insurance and Financial Services 28

29 P&C Industry Investment in Cash Response to lower yields #2: Reduced liquidity positions Source: SNL Financial Katie School of Insurance and Financial Services 29

30 P&C Investment in Bonds 5.00 NAIC CATEGORIES 3-6 Source: SNL Financial Response to lower yields #3: Increase in high yield bonds Source: SNL Financial Katie School of Insurance and Financial Services 30

31 Comments Will interest rates remain low? For how much longer? Thank goodness for lower combined ratios to help offset lower investment returns But how long can this last? Are insurers increasing risks to offset lower investment income? Katie School of Insurance and Financial Services 31

32 Moving Forward INDUSTRY CHALLENGES Katie School of Insurance and Financial Services 32

33 The P&C Industry: Looking Forward AM Best Survey lists disruptive forces / industry concerns 1. Strong capital position / Alternative capital 2. Impact of technology > Big data > Auto technology > Internet of Things 3. Need for product innovation Katie School of Insurance and Financial Services 33

34 In $Billions P&C Industry Surplus Industry surplus has increased significantly over the last 20 years having a huge impact on capacity Source: SNL Financial Katie School of Insurance and Financial Services 34

35 Insurer Capacity and Premium Growth Lower premium-to-surplus means more capacity and may constrain premium growth 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% Premium / Surplus (Left) Premium Growth (Right) Source: SNL Financial Katie School of Insurance and Financial Services 35

36 Increasing Alternative Capital Growth in insurance linked securities (ILS) Securitize insurance risk esp. for cats Interest by money managers Higher yields Diversification Deep pockets Approx. $101 Trillion of Invested Securities Global Fin. Markets US Insurers US Equity Non-US Equity US Bonds (I.G.) Non-US Bonds Other $690 Billion in PHS Sources: Hewitt EnnisKnupp and SNL Financial Katie School of Insurance and Financial Services 36

37 Cat Bond / ILS Market is Growing Source: Artemis Q Market Report $26B of outstanding capital represents just over 4% of P&C Industry surplus Katie School of Insurance and Financial Services 37

38 Reinsurance Prices are Falling Source: Guy Carpenter (gccapitalideas.com) Influx of cheap capital may further hinder premium growth Katie School of Insurance and Financial Services 38

39 Impact of Increasing Capital Historically, as capital / capacity increases, premiums fall Lower premiums will impact Investment income (already falling) Combined ratio (only direction is up anyway) Investment in technology Katie School of Insurance and Financial Services 39

40 Technology is Changing the Business Big data / predictive analytics Marketing Risk analysis / underwriting Claims management / reserving Pricing / rating Reserving Katie School of Insurance and Financial Services 40

41 Impact of Technology Personal Auto Does technology help the industry? As technology improves, will losses decrease? Katie School of Insurance and Financial Services 41

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44 Tech Increases Consumer Information Telematics feedback Wearables monitor Heart rate Temperature Sleep Blood chemistry? Ingestibles Diagnosis Medication Will technology yield information to help reduce losses and impede growth in future premiums? Katie School of Insurance and Financial Services 44

45 Internet of Things: Connected Devices Katie School of Insurance and Financial Services 45

46 Impact on Insurance Historically, insurers are the keepers / experts on risk information Consumers may demand sharing of risk information Is this a new market for future revenue growth ( personal risk consulting )? Insurers may partner with manufacturers Katie School of Insurance and Financial Services 46

47 Need for Innovation in Insurance Traditional products have not changed in many years Surplus lines covers risks outside the standard market and can give glimpse into innovation Increase from 3.3% to 7.1% of P&C Industry premium over last 20 years (A.M. Best) Recent growth in Transportation network companies (TNCs) Drones Cyber On demand / sharing Katie School of Insurance and Financial Services 47

48 On-Demand / Sharing Economy Risks Katie School of Insurance and Financial Services 48

49 Today s Speakers New / emerging risks Medical marijuana risks for dispensaries Renewable energy exposures New products Cyber liability Pet insurance Katie School of Insurance and Financial Services 49

50 Summary Recent financial performance for the industry is good Challenges exist in several dimensions Low interest rates Uncertain impact of technology on future growth and/or loss exposures New Insurance for New Exposures Katie School of Insurance and Financial Services 50

51 THANK YOU!! Kevin C. Ahlgrim, A.S.A., M.A.A.A., Ph.D. Associate Professor, Finance, Insurance and Law Illinois State University