Insurance: Vanguard of the Resilient Elevate Conference Salt Lake City, Utah February 12, 2019 James Lynch, Chief Actuary and Vice President of Research and Education Insurance Information Institute Washington, DC New York, NY 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
An Age of Disruption
Economics Strengthening Fundamentals: All OECD economies growing 1 st in 10 yrs. Tepid monetary policies; keeping interest rates at historical lows moving slow... Fiscal policies, i.e. tax reform and deregulation surfacing. 5
Geopolitical Rise in Nationalism: Brexit, U.S. Populist vote in Europe tripled since 2000*. Political gridlock in Congress, with 2018 election lurking. Major conflict threat greatest since WWII US Intelligence Report to Congress * Source: Harvard University, Tony Blair Institute 6
Technology Robotics Artificial Intelligence The Fourth Industrial Revolution Cyber meets Physical Big Data Internet of Things Social Economy 7
Catastrophes Extreme Weather Threatens Union
1982 Union, Missouri, Flood A Storm for the Ages Bourbeuse River Record Crest 33.8 feet 12/5/1982 Source: Fox2News.com, @BoxxRadio. 9
2015 Union, Missouri, Flood A Storm for the Ages Bourbeuse River Record Crest 34.3 feet 12/29/2015 Sources: CBSnews.com; fox2news.com 10
2017 Union, Missouri, Flood Unfortunately, it s a river and Mother Nature. And we can t control her. Bourbeuse River Crest 30.1 feet May 2-3, 2017 Source: emissourian.com 11
Extreme Events: A Troubling Trend Rank Date Event Cause 1 Aug. 2005 Hurricane Katrina Hurricane 2 Sep. 2017 Hurricane Maria Hurricane 3 Sep. 2017 Hurricane Irma Hurricane 4 Sep. 2001 September 11 Events Terrorism 5 Oct. 2012 Hurricane Sandy Hurricane 6 Aug. 2017 Hurricane Harvey Hurricane 7 Aug. 1992 Hurricane Andrew Hurricane 8 Jan. 1994 Northridge, CA earthquake Earthquake 9 Sep. 2008 Hurricane Ike Hurricane 10 Oct. 2005 Hurricane Wilma Hurricane Three of 10 Worst US Catastrophes Occurred in 2017. Source: The Property Claim Services (PCS ) unit of ISO, a Verisk Analytics company. 12
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 $ U.S. Inflation-Adjusted Cat Losses Harvey, Irma, Maria $100 $90 $80 Average for Decade Hurricane Andrew WTC Katrina, Rita, Wilma 79 104 79 $70 $60 $50 $40 $30 1980s: 5 1990s: 15 40 2000s: 25 2010s: 38 37 $20 $10 $0 2018 Second worst year for U.S. Insured Catastrophe Losses. Average Insured Loss per Year for 1980-2018 is $18.5 B. *2018: Inflation-adjusted PCS estimate, subject to change. 2010s is average of 2010 to 2018. Sources: Property Claims Service, a Verisk Analytics business; Swiss Re; Insurance Information Institute. 13
Disruptive Forces in the World The New Norm Catastrophes Economics Geopolitical Technology 14
Insurance Leading Throughout History??? 1969 1870 1784 1648 Edward Steam, Division Electronics, Cyber-Physical Water, Lloyd s of Labor, IT, Mechanical Automated Systems Coffee Electricity, House Production Mass Production 15
Insurance: Leading the Way
Education & Analysis Closing the Coverage Gap 2005-2015: $1.3 Trillion in Uninsured Losses 70 Percent of Catastrophe Losses Are Uninsured Source: Swiss Re; Wikimedia Commons; DOD 17
Extreme weather Insurance industry initiatives I.I.I. white paper The Actuaries Climate Index: USA and Canada by Region, 2018 Winter IBHS resources Source: Insurance Information Institute, Actuaries Climate Index, Insurance Institute for Business & Home Safety. 18
Std. Deviation from Mean Education & Analysis Actuaries Climate Index Measuring Weather Extremes Seasonal Five-Year Moving Average, United States 1.00 0.92 0.80 0.60 0.40 1961-1990: Index Average is 0.00 0.20 0.00-0.20-0.40 1961:Q3 1967:Q4 1974:Q1 1980:Q2 1986:Q3 1992:Q4 1999:Q1 2005:Q2 2011:Q3 2017:Q4 Index Measures Frequency of Extreme Events (Heat, Cold, Drought, Wind, Rain, Sea Level) Vs. 1961-1990 Average Source: Actuaries Climate Index, http://actuariesclimateindex.org/home/ 19
Future Cities Lloyd s Initiative To Improve Resilience Prevent Failure Expedite Recovery Transform Performance Source: Lloyd s/arup, Future Cities: Building Infrastructure Resilience 20
(Re)insurance Products Private Industry Case Studies FEMA Reinsurance NFIP NatCat Bonds Through a $150 million purchase of private reinsurance products, FEMA was able to recover approximately $1 billion, or an eighth of its total 2017 loses. By issuing new natural catastrophe bonds geared towards institutional investors, the NFIP can bring an estimated $500 million of additional reinsurance coverage. 40% 2018 FEMA Reinsurance Private Market Flood Products During 2017, the private flood insurance market added 50 new carriers. Direct private flood insurance premiums written reached $630 million, an increase of $217 million over 2016. Source: Insurance Journal; Houston Chronicle; Insurance Journal. 21
Insurance Industry Economic Trends
Direct Premium Growth, Annual Change 6% 5.8% 5.5% 4% 2% 0% -2% -4% 08 09 10 11 12 13 14 15 16 17 18 DPW Growth GDP Growth Direct Premiums Continue to Track Economic Growth All data through second quarter. SOURCES:NAIC data sourced through S&P Global Intelligence, Bureau of Economic Affairs, Insurance Information Institute. 23
P/C industry net income after taxes Billions, 2018 dollars $70 $60 $50 $40 $30 $20 $10 $0 $59.2 $5.3 $19.5 $33.1 $9.1 $32.5 $54.9 $41.0 $47.7 $34.7 $22.9 07 08 09 10 11 12 13 14 15 16 17 18 Catastrophes Drove Earnings Down in 2017, Continuing a Four-Year Slide in Inflation-Adjusted Profits. $49.5 Through third quarter. Adjusted for inflation using the BLS CPI calculator, to 2018 dollars. Sources: NAIC data, sourced from S&P Global Market Intelligence; Insurance Information Institute. 24
P/C Insurance Industry Combined Ratio, 2000-2018* 3 Consecutive Years of U/W Profits; 1 st time since 1971-73 Heavy Use of Reinsurance Lowered Net Losses. Higher CAT Losses, Shrinking Reserve Releases, Toll of Soft Market Hurricanes, Wildfires Drive CR Higher. 120 115.8 Best Combined Ratio Since 1949 (87.6) Sandy 110 100 110.1 107.5 100.1 98.4 100.8 95.7 101 99.3 101.1 106.5 102.5 96.4 97.0 97.8 100.7 104.1 97.3 90 92.6 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 *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; I.I.I. estimate for 2018. 25
Key sources of P/C insurer profits $ Billions $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 -$10 -$20 -$30 -$40 net investment gains (q3) underwriting gains/losses (q3) $11.5 $5.3 $8.4 $4.7 $48.7 $41.7 $42.5 $41.3 $44.7 $45.0 $48.8 $50.2 $40.5 $29.8 $27.0 -$2.4 -$5.2 -$6.1 -$0.4 -$19.7 -$21.0 -$33.7 08 09 10 11 12 13 14 15 16 17 18 Data are before taxes and exclude extraordinary items. Sources: NAIC data, sourced from S&P Global Market Intelligence; Insurance Information Institute. 26
P/C Insurer Portfolio Yields 5% 4.85 4% 3% 3.68 3.43 3.65 3.18 3.04 3.02 3.30 2% 1% 0% 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Yields Have Been Falling for Over a Decade, Reflecting the Long Downward Trend in Prevailing Interest Rates. Sources: NAIC data, sourced from S&P Global Market Intelligence; Insurance Information Institute. 27
Insurance: Disruption or Transformation?
The (Re)Insurance Value Chain Where Could Disruption/Transformation Lie? Protecting People & Organizations Brains + Bank Account Create Policy/ Treaty Market Policy/ Treaty Write Risk Price Risk Perform Loss Control Settle Claims Improve World These Disruptions Usually Start in Personal Insurance, Will Move to Commercial Insurance. 29
Global Reinsurance Capital Alternative Capital Potentially Disrupting the Bank Account (Billions of USD) 700 595 605 595 600 575 565 540 505 500 470 455 410 385 400 400 340 511 514 516 496 300 493 490 466 447 428 200 368 388 378 321 100 0 17 22 19 22 24 28 39 50 64 72 81 89 99 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 18-Q3 Alternative Capital Traditional Capital Alternative Capacity Has Grown 480% Since 2006. It Has More Than Quadrupled in the Past Six Years. Source: Aon Benfield Analytics; Insurance Information Institute. 30
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% 20% 40% 60% 80% SOURCES: The New Age of Insurance Aggregators, http://insurancethoughtleadership.com/the-new-age-of-insuranceaggregators/; Insurance Information Institute November 2015 Pulse Survey. 31
Pricing Disruptor: The Fragmented Risk 32
Loss Control Disruptor The Internet of Things Telematics Today Telematics Tomorrow 33
Claims Disruptor Artificial Intelligence + Behavioral Economics 34
InsurTech Startups Have Broad Range BUT Risk Insurance Marketplace Health Digital Brokers Peer to Peer Health Navigators Micro-duration Coverage Telematics Source: Aon. 35
With Broad Incumbent Support $205M $57M $37M $21M $4M Note: Total funding. Source: Aon. 36
Thank you! www.iii.org