2. The Reinsurance Marketplace
Where to Go!!
Professional Reinsurance Companies
Primary Insurance Companies With
Reinsurance Departments
Specialty Companies
6. The language of Reinsurance
Reinsurance :
A form of insurance whereby one insurer (the
reinsurer) indemnifies another insurer (the
reinsured) for losses under insurance policies
issued by the reinsured to the public.
Ceding Company:
A Primary Company, Direct Company, all known as
the “Reinsured”
Reinsurer: The Company to whom the risk is
transferred
7. More of The Language of
Reinsurance
Retrocession: Reinsurance of Reinsurance
Retrocessionaire and Retrocedent:
The parties to a Retrocession
Treaty: An automatic contract
Facultative: Risk reinsurance
8. And,More of the Language of
Reinsurance
Pro Rata Reinsurance: A term describing a form of
reinsurance whereby the reinsurer shares a pre-
determined, proportional share of the premiums
and losses of the reinsured.
Excess of Loss: A form of reinsurance whereby the
insurer retains all losses up to a predetermined
amount, and is then indemnified beyond that
amount, to a predetermined amount, by reinsurers.
Also known as “non-proportional”
Retention: The amount of risk not being reinsured
9. Function of Reinsurance
A Need Fulfilled
Financial
Stabilize Results
Capacity
Protection From the Almost
Immeasurable
Other, More Obscure Needs
11. Key Distinctions
TREATY
A Block or Class of Business
Usually Obligatory
Reinsurer Not Involved In
Risk Decisions
Long Term Relationship
FACULTATIVE
One Risk At a Time
Underwriter Can Accept or
Reject
Risk Underwriting
Short Run (Usually one Year)
17. Proper Identification of Reinsured Parties
All Companies in a Group
A Single Company
Only Named Companies in a Group
MGA-produced business for a Company
Includes Quota Share Reinsurers
18. Interest and Liabilities Contract
“ Such participation shall be several and not joint with the
participation of other subscribing reinsurers and the
Subscribing Reinsurer shall under no circumstances
participate in the interests, (if any) of the other reinsurers
in said instrument”
19. ARTICLE 1
Business Covered:
“A. The Company shall cede to the Reinsurer and the Reinsurer
shall accept from the Company ___% quota share participation
of the net retained insurance liability of the Company on each
risk insured under policies in force at ____, Standard Time,
_____, 20__ and new and renewal policies becoming effective
after (or on and after) said date, as respects losses occurring
after (or on and after) ___, Standard Time _____, 20__,
covering the Lines of Business set forth below, except as
excluded in the Exclusion Article, subject to the limits set forth in
the Limits of Cover Article.”
20. ARTICLE II
Term and Cancellation
“A. This Agreement will apply to losses occurring after (or
on and after) ___ ___ Local Time _____, 20 __ as
respects policies in force at said date and new and
renewal policies becoming effective after (or on and after)
said date and will be of unlimited duration. This
Agreement may be terminated as of _____ any , of
any year by either the Company or the Reinsurer giving
not less than __ days prior written notice by Certified Mail
to the other party.”
21. ARTICLE IV
Exclusions
The following risks and kinds of insurance are excluded from
coverage under this Agreement, and no loss or losses
thereon shall be recoverable hereunder:
1. All lines of Business not specifically covered hereunder
2. Reinsurance assumed, but not to exclude local Agency
reinsurance
3. Pools, Associations and Syndicates business as per
POOLS, ASSOCIATIONS AND SYNDICATES EXCLUSION
CLAUSE attached
4. Flood and Earthquake when written as such.
5. Hail on growing or standing crops or timber.
6. Nuclear Incident …..
7. War Risks ….. Etc.
22. ARTICLE IX
Reinsurance Premium
A. The Company shall pay promptly to the Reinsurer
_____% of the Company’s unearned premium on its net
retained insurance liability in force at _____, Standard
Time, _____, 20__ on the business covered hereunder.
23. ARTICLE XV
Access to Records
“The Company shall place at the disposal of the Reinsurer
at all reasonable times, and the Reinsurer shall have the
right to inspect, through its authorized representatives, all
books, records and papers of the Company in connection
with the reinsurance hereunder or the subject matter
thereof.”
24. ARTICLE XXIII
Arbitration
“A. Should an irreconcilable difference of opinion arise
between the parties to this Agreement, whether before or
after termination, as to the interpretation of this
Agreement or transaction with respect to this Agreement,
such difference will be submitted to arbitration upon the
written request of one of the parties. One arbiter to be
chosen by the Company and one by the Reinsurer. An
umpire will be chosen by the two arbiters before they
enter into arbitration…… etc.”
25. ARTICLE XXIV
Intermediary Clause
“…Reinsurance Intermediaries, … New York, New York,
10038 is hereby recognized as the Intermediary
negotiating this Agreement for all business hereunder. All
communications (……..) relating thereto will be
transmitted to the Company or the Reinsurer through the
office of…..Reinsurance Intermediaries. Payment by the
Company to the Intermediary will be deemed to constitute
payment to the Reinsurer. Payments by the Reinsurer to
the Intermediary will be deemed only to constitute
payment to the company to the extent that such
payments are actually received by the Company.”
26. Pricing of Prorata Reinsurance
Commission = Price
Alternatives – Flat, Profit and Sliding
Scale
27. ARTICLE XI
Commission
A. The Reinsurer shall make a commission allowance of
% to the Company on the premiums ceded under this
Agreement. On all return premiums the Company shall
return to the Reinsurer the commission allowance of %.
B. The commission allowance which the reinsurer makes
to the Company on the business transacted under this
Agreement includes provision for all taxes, assessments
and any other expenses whatsoever, except loss
adjustment expenses.
28. ARTICLE XII
Contingent Commission
A. The reinsurer shall make a contingent commission
allowance of % to the Company on the net profits
accruing to the Reinsurer under this Agreement.
B. The net profits under this Agreement shall be
calculated in accordance with the following formula:
INCOME
1. Premiums earned ….
OUTGO
2. Losses Incurred …
3. Commission allowance…
etc.
29. Profit Commission
Example:
(a) Ceded Premiums $1,000,000
(b) Commissions (25%) 250,000
(c) Incurred Losses 400,000
(d) Reinsurer Margin 50,000
(e) Net Profit $ 300,000
(f) Profit Commission (25%) 75,000
(g) Original Commission (b) 250,000
(h) Total Commission 325,000
being 32.5%
($325,000/$1,000,000)
Formula: 25% Ceding Commission subject to:
25% Profit Commission after: Incurred Losses,
Expenses and a 5% Reinsurer Margin
30. Sliding Scale Commission
Arrangement
• Provisional Commission 30% at a 65% Loss Ratio
• Sliding Upwards ½% for Each 1% Improvement in Loss
Ratio, To Maximum Commission of 40%
• Sliding Downwards 1% for Each 1% Deterioration in Loss
Ratio, To Minimum Commission of 25%
31. Sliding Scale (cont.)
Therefore;
• If Loss Ratio develops at 70%, Company returns 5% points of
commission to Reinsurer. Commission becomes 25% (1:1)
• If Loss Ratio develops at 60%, Reinsurer pays Company an
additional 2.5% points of Commission. Commission becomes
32.5%. (1/2:1)
32. Surplus Share Agreement
Company selects amount of liability retained on each risk.
Company transfers “surplus” amount in multiples of net,
known as “lines”.
Retention and amount ceded subject to treaty terms.
33. Surplus Share
500K
1M
2M
4M
Limit
0
Policy 1 -
$4M
Policy 2 -
$2M
Policy 3 -
$1M
$2M
Ceded
to
Surplus
Share
(50%)
NET
($2M)
$1.5M
Ceded
to
Surplus
Share
(75%)
NET
($500K)
$0
Ceded to
Surplus Share
NET
($1M)
Assume 3 Line Surplus, Min. Net 500K, $2M Limit to Treaty
34. Quota Share
Percentage ceded same on
every risk
Obligatory
Applies to all business subject
to Treaty
Percentage ceded varies at
risk level
Obligatory and non-
obligatory
Used mainly for larger risks
Surplus Share
38. An Example of Excess of Loss
Reinsurance
TREATY LIMIT: $150,000
EXCESS OF: $ 50,000 (Retention)
Loss A: $45,000 Loss B: $100,000
Reinsurer
Pays: -o- $50,000
39. Pricing Excess of Loss
A rate applied to a subject-premium base.
Normally, Deposit and Minimum premiums apply.
40. Per Risk Pricing Alternatives
Flat
Formula a/k/a “Burning Cost”
41. Formula Method for Excess of
Loss Rating
EXAMPLE:
Provisional Rate: 9.00%
Minimum Rate: 6.00%
Maximum Rate: 12.00%
Loading 100/75 (1.333%)
42. Result
Year Premium XS Losses Loss Cost Loading Rate
2000 $10,000,000 $750,000 7.5% 1.333 10.00
2001 $11,000,000 $550,000 5.0% 1.333 6.66
2002 $12,000,000 $1,020,000 8.5% 1.333 11.33
Total $33,000,000 $2,320,000 7.03% 1.333 9.37
FINAL RATE X PREMIUM = REINSURANCE PREMIUM
2000 10.00 $10,000,000 $1,000,000
2001 6.66 $11,000,000 $ 732,600
2002 11.33 $12,000,000 $1,359,600
CAN BE A ONE YR. PLAN OR IN 3-5 YEAR BLOCK
43. Important Points to be Considered
Treatment of Loss Adjustment Expenses
Excess Policy Limits (XPL)
Extra Contractual Obligations (ECO)
44. Catastrophe Reinsurance
Large Limit and Retention
Type of “event” limited by hours clause
Per Occurrence coverage rather than Per Risk
The Reinstatement issue
46. A Treaty Reinsurance Program
Property
Net Retention
Per Occurrence
$4M xs $2M
1st Layer Cat
Excess of Loss
$4M xs $6M
2nd Layer Cat
Excess of Loss
$
0
$2M
$6M
$10M
Per Risk Property Catastrophe
$2M
500k Net
$400K excess
of $100K
1st Excess of Loss
Per Risk SURPLUS SHARE
3 Lines
$1,500,000 Limit
$0
$100k
75% Quota Share
(Net $25K max.)
$500K
RISK SIZE
47. Balance Sheet at Dec. 31, Before Reinsurance
ASSETS
Cash and other assets $25,000,000
Total Assets $25,000,000
LIABILITIES
Unearned Premiums $10,000,000
Loss and Expense Reserve $10,000,000
Total Liabilities $20,000,000
Policyholders Surplus $ 5,000,000
48. Balance Sheet on Jan. 1, After Reinsurance
(Assume Company has arranged for a 75% quota share treaty
on in-force business, receiving a 30% ceding commission.)
ASSETS
Cash and Other Assets $19,750,000
Total Assets $19,750,000
(75% of $10,000,000 less 30% comm. Paid from assets)
LIABILITIES
Unearned Premiums $ 2,500,000
Loss and Expense Reserve $10,000,000
Total Liabilities $12,500,000
Policyholders Surplus $ 7,250,000
(Increase represents 75% of $10,000,000 less 30% commission)
49. Reinsurance is typically one of the most significant financial transactions for companies, and historically minimal
investment has been made to modernize reinsurance administration functions
Executive summary
Current reinsurance portfolios
are growing in complexity and
are—on average—being
administered leveraging a mix of
aging technology and manual
processing
The reinsurance market is
considered significant and is
being leveraged to assist
insurers and reinsurers
transfer risk, expand
capacity, and reduce
volatility
Investment and focus on
Reinsurance Administration is
critical to maximize profitability,
enhance analytics, strengthen
controls, and reduce leakage
The industry cedes billions
of dollars of premiums and
claims annually
50. Basic example
Reinsurance can be extremely complicated and involve a number of different parties within the same transaction
Insurers
Reinsurer 1
Insured Risks
Auto Home Life/Health Business Catastrophe Other Risks
Third-Party
Administrators
Brokers
Capital Markets
Other
Insurers Insurers
Reinsurer 2 Reinsurer 4
Reinsurer 3
Reinsurers
51. Types of reinsurance
There are two main types of reinsurance agreements—facultative and treaty—which can be administered in two main
ways: Pro rata (proportional reinsurance) and excess of loss (non-proportional reinsurance)
Facultative Treaty
• Individual risks
• Ability to accept/reject each risk
• Profit expected by reinsurer in both short/long term depending on risk
selection process
• Can reinsure risks typically excluded from a treaty
• Protects a treaty from adverse underwriting results
• No individual risk accepted by reinsurer
• Accepts all covered business within treaty
• Long-term relationship in which profitability is expected by reinsurer
but measured and adjusted over time
• Less costly than per risk reinsurance
Pro Rata Excess of Loss
• Easy to administer
• Good protection against frequency and severity potential
• Permits recovery on smaller losses
• Strong protection against frequency or severity potential depending
on retention levels
• Allows for greater net premium retention
• More economical in terms of reinsurance premiums and
administration costs
Reinsurance Agreement Characteristics
Advantages
Types and Benefits
Type Stabilize Losses Improve Capacity
Catastrophe
Protection
Surplus Relief Main Purpose
Pro Rata Quota Share No Yes No Yes Surplus relief
Pro Rata Surplus Share No Yes No Yes
Large-line capacity and surplus
relief
Excess of loss per
risk/policy
Yes Yes Yes No
Large-line capacity and stabilize
losses
Excess of loss per
occurrence
Yes No Yes No
Protect against single event
catastrophe loss
Excess of loss - aggregate Yes Yes Yes No Stabilize losses
52. Strategic use of reinsurance
• Risk
transference
and risk
limits
• Diversification
• Capacity
expansion
• Corporate
capital
management
There are varying strategic objectives that drive organizations to participate in the reinsurance market
Product exit
strategy
Insurance risk is
shared from the
reinsured to the
reinsurer
Allows the
reinsured to
increase the
volume of
written insurance
Use of financial
tools to
maximize
operating results
from year to year
Spreads loss
exposure over
diverse set of
products and/or
markets
Provides the
insurer a way to
reduce /
eliminate a
product while
potentially
earning a profit
Neither Life nor P&C insurance companies expect significant change in the foreseeable
future relating to their strategic uses of reinsurance, but both promote the importance of
the strategic use of reinsurance for catastrophe, corporate capital management,
reducing earnings volatility, and the need to manage risk limits
1
1. “Reinsurance and capital management: Emerging strategies and operating models.” 23 May 2017, Deloitte Dbriefs series
54. Deloitte Advisory’s reinsurance administration survey looked to gain a better understanding of the operational
effectiveness and efficiency of ceded reinsurance functions across four dimensional areas
Reinsurance administration survey
Governance / Organization
• How should my reinsurance
administration function be organized
and governed to achieve our full
potential?
People / Capabilities
• What resources and capabilities
do I need for my reinsurance
administration function to
efficiently and effectively
operate?
Process / Controls
• What changes/improvements could be
made to my processes and controls to
increase the efficiency of my
operations?
Technology
• What are the emerging trends/
technologies my company should
consider in the near term to address
my current technology gaps?
Reinsurance
Administration
By identifying activities that support
greater efficiency and potential cost
reduction, reinsurance function can
strengthen their organizations
Reducing and streamlining manual
processes (reinsurance administration
systems, robotics, cognitive technology,
etc.) is commonly an important step to
reduce costs and enhance controls
Recruiting new professionals and
developing succession planning
are typically critical to ensuring
new capabilities and historical
knowledge are maximized
New technology is emerging in the
marketplace to better administer,
report, and control your reinsurance
program
Governance /
Organization
Technology
People /
Capabilities
Process / Controls
55. Companies are facing similar issues relating to their reinsurance administration; and while they are aware of the
issues, many struggle to successfully address and fix the root cause
What we heard from the survey responses
Determining the best technology, that
will enable us to more efficiently and
effectively process our reinsurance
data, is the number one priority for our
organization
The complexity and
volume of our treaties
requires a more
sophisticated tool or
filing shelf than a
simple shared folder
Analytics are a key activity we perform,
but my leadership team and I often
wonder if we are performing the right
analytics to derive the most value out
of our reinsurance function and position
us for success
We have had numerous internal
discussions to determine if efficiencies can
be gained by solely reporting into the risk
function vs. finance function or if we
should identify an appropriate balance
between the two
Given our dependencies on other
functional areas and lack of ownership
for financials during the close process,
we struggle to determine how we can
more efficiently complete our close
process in order to meet leaderships
goals and expectations
Enhancing our reporting capabilities will not
only allow us to gain a better understanding of
our performance as a reinsurance function but
will also allow us to set the tone regarding
management reporting for the company
I have the right team in place;
however, due to significant manual
processes, my team can’t spend
time completing ‘value add’
activities
Improving our reinsurance technology
coupled with enhanced analytics will
provide us with the business insights
we need to be dangerous in the
marketplace
Given the pivotal role our underwriting team
plays in the placement of our reinsurance
business, we prefer the risk function to be
responsible for our reinsurance
administration function
Aggregating data
across multiple
systems and manual
data stores is a major
effort
We organized our
Reinsurance
Strategy/Pricing/Ac
quisition team and
our Reinsurance
Admin team under
one leader
56. A mix of Property and Casualty (P&C) and Life and Annuities (L&A) companies participated in the survey,
representing different backgrounds
Survey demographics
Both technology and
spreadsheets
42%
Only spreadsheets
8%
Only technology
50%
Technology
<$1.5B
$1.5-10B
>$10 B
57. Despite varying backgrounds, each responded with similar needs in terms of major pain points, including
technology and analytics
Key survey points
• Key takeaways:
• Manual processes and a lack of sufficient technology continue to challenge survey respondents in
their reinsurance function
• Insurers are lacking strong, quality and robust data, as well as fully integrated technology solutions
that can assist in processing as well as lead to potential cost reduction
• Data warehouse, technology implementation, and predictive analytics are potential future
enhancement opportunities that may support companies’ desires to have better information and
make more informed strategic decisions
• Surveyed companies believe they can significantly increase efficiency by automating the transaction
process and streamlining the preparation of their financial statements
• While a significant number of surveyed companies use some degree of automation, half of the
companies also rely on spreadsheets
• Spreadsheet reliance, while predominant across respondents, can increase operational cost and risk
of error. There is no single dominant software solution
• The use of third parties remains prevalent as surveyed companies continue to look for ways to gain
efficiencies while also reducing total cost
• Other potential future enhancements include alternative capital, blockchain, outsourcing, and
robotics in order to support the company’s goal of reducing operating cost
$1.5-10B
>$10 B
58. Respondents were asked to rate current and desired future state across several key areas of focus. Based on the
survey results, responding companies would like to—and are continuing to—improve and drive toward a more
efficient and effective operating model, with the largest gaps to close relating to technology, process, and data
Current and future state capabilities
59. Based on the results of the survey and multiple in-market conversations, organizations are consistently seeking
solutions to four main areas affecting their reinsurance business: technology, data, analytics and operations
Pain points
Data
Analytics
Technology
Operations
Inefficient data automation
prohibits effective data
management
Limited ability to utilize insightful
analytics and a reliance on standard
reports
Outdated technology and the
prevalence of manual spreadsheets
Manual processes can result in
error-prone and inefficient
operations
60. 2/3
of organizations
believe data
quality is a main
pain point
Many surveyed reinsurance functions find data to be problematic, whether not having enough of it, not having the
right kind, or not having the right tools to leverage it
Data
Many surveyed organizations have difficulty collecting complete and accurate data; once
obtained, they fail to realize the full range of insights driven by analytic capabilities
Managing large historical volumes of data
Manual integration and consolidation of data from multiple
systems
Insufficient granularity
Lack of data governance and structure across multiple sources
61. Many surveyed organizations view analytics as a top enhancement opportunity to unlock the value of reinsurance
data
Analytics
Lack of quality
data can prevent
the reinsurance
function from
taking advantage
of analytics
1
Unfamiliarity with
analytics and a
lack of proper
technology can
create barriers for
the reinsurance
function to rely on
analytics
Siloed functions
and processes can
limit the capacity
to explore and
develop insightful
analytics
2 3
Enhanced reinsurance analytics can help organizations to improve negotiations with
reinsurers and provides the business insights to preserve and improve margins
62. A lack of sufficient technology or a mismatch between a company’s needs and what it has in place for technology
can lead to inefficiencies and increased potential for error
Technology
Significant investment deficit
relating to reinsurance technology
spend
Integration of reinsurance data and
technology is difficult and
cumbersome
Heavy reliance on manual processes
given technology pitfalls
Inability to unlock full technology
capabilities given lack of
consistent/clean data
Dependence on tools and
spreadsheets given complexities of
reinsurance business
Volume of historical data and lack of
alignment within systems
Challenges with
Technology
63. A combination of manual processes and unclear governance can lead to difficulty in properly executing the
activities of the reinsurance function
Operations
Enhance hiring and
retaining practices
to keep and grow
the most value-add
team members
Reduce inefficiencies
by breaking down silos
and encouraging
increased transparency
Create clear policies
and procedures for
employees to follow
Establish an effective
governance program
that is accountable to
senior management
64. Companies can capitalize on multiple strategic enhancement areas with targeted investment
Opportunities for enhancement
Capital management
Improvements to capital
management can allow companies
to better balance profitability,
growth and liquidity
Business driver insights
Companies can better understand
the main drivers of the business
and focus more resources on the
underperforming areas Increased transparency
With greater transparency,
companies can gain better
insights into overall
performance
Improved decision-
making
Utilizing enhanced analytic
capabilities, companies will be
better positioned to make more
informed/improved decisions
regarding the direction and
performance of the business
Faster administration and
reconciliation
Through more efficient
administration and reconciliation,
companies can avoid unnecessary
lag times, improve capacity, and
increase overall customer
satisfaction
Enhanced reporting
Improved reporting can provide
the ability to analyze different
facets of the business to
determine overall success
66. Reinsurance value chain
There are a number of common activities/tasks associated with both ceded and assumed reinsurance functions,
often resulting in pain points/opportunities across each of the key activities
Activities
Sub-process
Key Tasks
• Identify reinsurance
needs
• Communicate
insurance needs to
various reinsurers (via
RFPs)
• Review options from
various reinsurers
• Obtain inputs from
various teams (UW,
Claims, Legal)
• Assess and
recommend the best
reinsurance option for
the company
• Make counteroffer to
reinsurer / revisions to
exposure if necessary
• Document formal
reinsurance contract
• Manage relationships
for new business
activities
• Manage relationships
for inforce activities
• Support business
development e.g. new
sales, process
improvement
• Review whether rates
and other variables are
input correctly
• Perform quality
assurance on existing
and new treaty
administration
• Identify and remediate
issues with
administration
• Review reinsurance
agreements and any
amendments
• Administer
reinsurance
agreements (Billing)
• Pay premiums to
reinsurers
• Administer
reinsurance
agreements
(Collections)
• Collect claim
reimbursements
• Manage disputes and
audits
• Cash application
• Perform
reconciliation (e.g.,
system recon)
• Review
reconciliations
• Remediate
reconciliation issues
• Record entries /
accruals in GL
• Prepare Financial
Reporting Schedules
(Sch. F, Sch. P, etc.)
and Footnotes
• Gather, validate and
manipulate the data
required for the
reports
• Produce and
assemble reports
• Perform analysis
and investigation
(Quarterly, mortality
analysis etc.)
• Data quality and
aggregation, analytics
• Manual process/ treaty
complexities, timeliness
• Manual process/ treaty
complexities, timeliness
• Manual process, data
aggregation, transaction
recording
• Manual process, data
aggregation, transaction
recording
• Data Quality and
Aggregation, analytics
• Manual process, data
aggregation,
transaction recording
• Data Quality and
Aggregation, analytics
• Manual process, data
aggregation,
transaction recording
• Data Quality and
Aggregation,
analytics
Reinsurance
Initiate Reinsurance Treaties
Perform Treaty
Governance
Perform
Reinsurance
Accounting
Negotiate
Reinsurance
Contracts
Perform
Reinsurance
Administration
Provide
Reinsurance
Reporting and
Analysis
Manage
Reinsurance
Relationships
Common
Pain Points
67. Pandemics & P/C Insurance: Outline
• P/C Financial Overview & Outlook Amid the COVID-19 Pandemic
• COVID-19: Actual vs. Expected Impacts on Key Lines
• Investment Market Issues: Volatility Rules, Low Interest Rates are Back
• The Economy and COVID-19: Overview & Outlook
• CAT Loss Update
• Commercial Lines Rate Trends
• COVID-19 Litigation Trends
• Summary and Q&A
68. 68
P/C Insurance Industry:
Financial Overview Amid the
COVID-19 Pandemic
The P/C Insurance Industry Entered the
COVID-19 Pandemic from a Position of
Financial Strength
Economic, Financial Market,
Regulatory and Tort Risks Are Major
Challenges Going Forward
12/01/09 - 9pm 68
69. 69
Policyholder Surplus (Capacity),
2006:Q4–2020:Q3
Sources: ISO, A.M .Best; Risk and Uncertainty
Management Center, University of South Carolina.
($ Billions)
$487.1
$496.6
$512.8
$521.8
$478.5
$455.6
$437.1
$463.0
$490.8
$511.5
$540.7
$530.5
$544.8
$559.2
$559.1
$538.6
$550.3
$567.8
$583.5
$586.9
$607.7
$614.0
$624.4
$653.4
$671.6
$673.9
$675.2
$674.2
$673.7
$676.3
$700.9
$717.0
$750.7
$781.5
$742.1
$779.5
$802.2
$812.2
$847.8
$771.9
$819.7
$865.1
$662.0
$570.7
$566.5
$505.0
$515.6
$517.9
$400
$450
$500
$550
$600
$650
$700
$750
$800
$850
$900
06:Q4
07:Q1
07:Q2
07:Q3
07:Q4
08:Q1
08:Q2
08:Q3
08:Q4
09:Q1
09:Q2
09:Q3
09:Q4
10:Q1
10:Q2
10:Q3
10:Q4
11:Q1
11:Q2
11:Q3
11:Q4
12:Q1
12:Q2
12:Q3
12:Q4
13:Q1
13:Q2
13:Q3
13:Q4
14:Q1
14:Q2
14:Q3
14:Q4
15:Q2
15:Q4
16:Q1
16:Q4
17:Q2
17:Q4
18:Q3
18:Q4
19:Q1
19:Q2
19:Q3
19:Q4
20:Q1
20:Q2
20:Q3
Financial
Crisis
(-16.2%)
2010:Q1 data includes $22.5B of paid-
in capital from a holding company
parent for one insurer’s investment in a
non-insurance business.
Drop due to near-
record 2011 CAT
losses (-4.9%)
Policyholder Surplus is the industry’s
financial cushion against large insured
events, periods of economic stress and
financial market volatility. It is also a
source of capital to underwrite new
risks.
The P/C insurance industry entered the
COVID-19 pandemic from a position
strength and was able to withstand the
9.0% surplus decline in Q1 2020 (far less
than during the Financial Crisis). 2020
ended with record surplus.
70. P/C Industry Net Income After Taxes, 1991–2020E*
2005 ROE= 9.6%
2006 ROE = 12.7%
2007 ROE = 10.9%
2008 ROE = 0.1%
2009 ROE = 5.0%
2010 ROE = 6.6%
2011 ROAS1 = 3.5%
2012 ROAS1 = 5.9%
2013 ROAS1 = 10.2%
2014 ROAS1 = 8.4%
2015 ROAS = 8.4%
2016 ROAS = 6.2%
2017 ROAS =5.0%
2018 ROAS = 8.0%
2019: ROAS = 7.7%
2020: ROAS = 4.1%**
*2020 estimate based on annualized actual Q3:20 figure of $35.5B. ROE figures are GAAP; 1Return on avg. surplus. Excludes Mortgage & Financial Guaranty insurers for years (2009-2014).
**Through Q3 2020. A,M, Best estimate for 2020 is $48.8B (as of 2/25/21).
Sources: A.M. Best, ISO.
$14,178
$5,840
$19,316
$10,870
$20,598
$24,404
$36,819
$30,773
$21,865
$3,046
$30,029
$62,496
$3,043
$35,204
$19,456
$33,522
$63,784
$55,870
$56,826
$42,924
$36,813
$59,994
$47,333
$38,501
$20,559
$44,155
$65,777
-$6,970
$28,672
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
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
20E
COVID’s impact on net income
is more modest than assumed
early in the pandemic. 21%
drop based on annualized Q3
data
$
Millions
71. ROE: Property/Casualty Insurance by Major
Event, 1987–2020:Q3*
12/01/09 - 9pm
eSlide – P6466 – The Financial Crisis and the Future of
the P/C
71
*Excludes Mortgage & Financial Guarantee in 2008 – 2014. 2020:H1 estimate is based on actual Q1 2020 figure of 8.8%.
Sources: ISO, Fortune; USC RUM Center.
-5%
0%
5%
10%
15%
20%
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 19 20*
P/C Profitability
Is Influenced
Both by
Cyclicality and
Volatility
Hugo
Andrew,
Iniki
Northridg
e
Lowest
CAT Losses
in
15 Years
Sept.
11
Katrina,
Rita,
Wilma
4
Hurricanes
Financial Crisis*
ROE fell by 8.3
pts from 12.7%
to 4.4%
(Percent)
Record
Tornado
Losses
Sand
y
Low
CATs
Harvey,
Irma,
Maria,
CA
Wildfire
s
2019
7.7%
2020:
Q3
4.1%
Covid-
19
72. Percentage Point Change in P/C
ROEs During Past Economic
Downturns: 1971 - Present
12/01/09 - 9pm 72
Source: USC Center for Risk and Uncertainty Management.
Percentage
Point Change
0.8%
-8.3%
-7.1% -7.0%
-3.6%
-3.0%
-2.4%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
2007-08 2000-01* 1973-75 2019-20** 1981-82 1979-80 1990-91
*2000-2001 decline impacted by 9/11 losses.
**As of Q3 2020 vs. annualized Q3 2019 figure
Change in P/C ROE
During Past Economic
Downturns (pre-Covid)
Avg.: -4.5% (-4.0% ex.
2000-01)
Median: -5.0% (-3.0%
ex. 2000-01)
COVID-19’s
economic and
financial market
impact helped drive
down industry ROEs
but well within the
range of
expectation based
on history
75. 15.10%
8.93%
8.65%
8.35%
8.33%
8.20%
7.98%
7.68%
6.98%
6.97%
6.25%
5.43%
5.03%
4.83%
4.68%
4.43%
3.55%
16.43%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
Carter
Reagan II
Nixon
Clinton I
G.H.W. Bush
G.W. Bush II
Obama II
Clinton II
Reagan I
Nixon/Ford
Truman
Trump
Eisenhower I
Eisenhower II
G.W. Bush I
Obama I
Johnson
Kennedy/Johnson
OVERALL RECORD:
1950-2020*
Democrats
8.1%
Republicans
7.8%
Party of President
has marginal bearing
on profitability of P/C
insurance industry
P/C Insurance Industry ROE by
Presidential Administration, 1950-
2020*
*Trump figure is 2017-2020:Q3 average. ROEs for the years 2008-2014 exclude mortgage and financial guaranty segments.
Source: Risk and Uncertainty Management Center, University of South Carolina.
78. Net Premium Growth (All P/C
Lines): Annual Change, 1971—
2020E
-5%
0%
5%
10%
15%
20%
25%
71
72
73
74
75
76
77
78
79
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
19
20
(Percent)
1975-78 1984-87 2000-03
* **Pre/Post-COVID-19 forecast from A.M. Best Review & Preview (Feb. 2020, 2021). NOTE: Shaded areas denote “hard market” periods
Sources: A.M. Best (1971-2013, 2020F), ISO (2014-19); Risk & Uncertainty Management Center, Univ. of South Carolina .
Net Written Premiums Fell
0.7% in 2007 (First Decline
Since 1943) by 2.0% in 2008,
and 4.2% in 2009, the First 3-
Year Decline Since 1930-33.
2020F: 3.8%*
2020E: 1.8%**
2020:Q3:
3.1%
2019: 3.6%
2018: 10.8%
2017: 4.6%
2016: 2.7%
2015: 3.5%
2014: 4.2
2013: 4.4%
2012: +4.2%
2020 Outlook
Pre-COVID: 3.8%
Through Q3:
3.1%
Full-Year Est:
1.8**
79. P/C Insurance Industry Combined Ratio, 2001–
2020E**
*Excludes Mortgage & Financial Guaranty insurers 2008--2014.
**Estimate from A.M. Best Review and Preview (Feb. 2021). Actual though first 9 months 2020 was 98.7.
Sources: A.M. Best, ISO (2014-2019).
95.7
99.3
101.1
106.5
102.5
96.4 97.0 97.8
100.7
99.3
98.9
103.7
99.2
101.0
92.6
100.8
98.4
100.1
107.5
115.8
90
100
110
120
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20**
As Recently as 2001,
Insurers Paid Out
Nearly $1.16 for
Every $1 in Earned
Premiums Relatively
Low CAT
Losses,
Reserve
Releases
Heavy Use of
Reinsurance
Lowered Net
Losses
Relativel
y Low
CAT
Losses,
Reserve
Releases
Higher
CAT
Losses,
Shrinking
Reserve
Releases,
Toll of
Soft
Market
Sandy
Impact
s
Lower
CAT
Losses
Best
Combined
Ratio Since
1949
(87.6)
Avg.
CAT
Losses,
More
Reserve
Releases
Cyclical
Deteriorati
on
Sharply
higher
CATs are
driving
large
underwriti
ng losses
and pricing
pressure
Pre-COVID 2020
Combined Ratio
Est.
99.1 (A.M. Best)
COVID-19
has had no
discernable
net impact
on pre-
COVID
expectations
for the
combined
ratio though
Q3 2020;
~7.5 pts. due
to CATs vs.
4.1 in 2019
and about
twice avg.
80. How Have Actual Results Differed from
Reality?
A Review of Early Predictions of COVID’s
Impact on Insurers
80
US P/C Results Have
Generally Been Better than
Anticipated
81. Potential Impacts of COVID-19 on Written Premium
in 2020, by Key Line
Line Estimated Premium Impact
Workers Compensation 12.5% to 25% reduction in premium written in 2020
(equates to $5.9B to $11.75B DWP)
Business Interruption &
Contingency
7% to 13% reduction in premium volume (US &
UK)
General Liability* $1.5B to $6.3B premium reduction in US
Personal Auto ~$10B in refunds, rebates
(equates to ~4% of DWP)
Personal Travel Insurance 29% to 78% reduction in premium written (US & UK)
Personal/Comm. Motor ~10% reduction in US; 0% to 11% reduction in UK
Marine/Aviation/Transport $0.7B-$1.5B (US); $0.6 - $1.2B (UK)
12/01/09 - 9pm 81
*Includes nursing home professional liability.
Source: Derived from Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic (Fig.11, 14), May 2020.
and other sources; Risk and Uncertainty Management Center, University of South Carolina.
82. Potential Impacts of COVID-19 on LOSSES in 2020, by
Key Line
Line Estimated Loss Impact
Workers Compensation $0.2B - $92B (depends on severity of pandemic
and “presumption” determination)
Business Interruption &
Contingency
$2B - $22B (US); $1.1B - $13.9B (UK)
General Liability* $0.7B to $27B loss across US & Bermuda markets
Personal/Comm. Motor $26B - $57B reduction in personal auto and $4.2B
- $9.4B commercial (US); $1 - $7B overall
reduction in UK
Mortgage $0 - $1.7B loss across US & Bermuda markets
D&O $0.6 - $4.0 loss across US & Bermuda markets
Marine/Aviation/Transport $0.3B-$1.3B reduction (US); $0.6 - $1.1B (UK)
12/01/09 - 9pm 82
*Includes nursing home professional liability.
Source: Derived from Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic (Fig.11, 14), May 2020.
and other sources; Risk and Uncertainty Management Center, University of South Carolina.
83. COVID-19 Announced Losses vs. Top-Down Industry
Estimates (as of May 12, 2020)
12/01/09 - 9pm
*Lloyd’s CEO John Neil appearance on CNBC, May 14, 2020: https://www.cnbc.com/2020/05/14/lloyds-of-london-coronavirus-will-be-largest-loss-on-record-for-insurers.html
Sources: Company disclosures, Dowling & Partners, Barclays Research, Autonomous Research, BofA Global Research, UBS Securities, Willis Towers Watson from Artemis.bm accessed
at https://www.artemis.bm/news/consensus-emerging-on-30bn-to-100bn-covid-19-industry-loss-willis-re/; Risk and Uncertainty Management Center, University of South Carolina.
Global P/C COVID-19 loss
consensus $30B - $100B
(~$60B as midpoint)
UBS
30-
60bn
Q1 reported COVID claims totaled
$4.2B according to Willis, but Q2 will
be a truer reflection of actual loss
Lloyd’s: Says its own p/c
claims could reach $4.3B
by June 30. Estimates
global p/c losses at $107B;
Global investment losses =
$96B*
84. Reasons Why P/C Insurance Worst-Case COVID Scenarios Failed to
Materialize (So Far)
• Economic Recovery Proceeding More Quickly than Anticipated
• Rapid Financial Market Recovery (and then some…)
• Massive Government Stimulus and Accommodative Fed Policy
• Worst-Case Epidemiological Outcome Avoided
• Record Pace of Vaccine Development
• Employers Did a Reasonably Good Job Protecting Workers from Exposure
• Many States Did Not Repeat Spring 2020 Lockdowns
• Litigation Outcomes Generally Favor Insurers
• WC Presumption Expansions Did Not Lead to Explosion in Claims
• Offsetting Exposure Reductions in Many Lines
85. BUT…
There Is No Questions that the
Economic Consequences of COVID Are
Massive and Ongoing
85
The Economic Costs of COVID
Vastly Outstrip the Insured
Loss Component
86. Viral Outbreaks Are Not An Insurable Risk
86
*Sources: APCIA using published reports, including IMF, World Bank, Learnbonds.com; APCIA adjustment to 2020 USD
For Reference
2005 Katrina
$58 Billion
2001 9/11
$48 Billion
(insured losses)
Pandemics are
frequent, severe,
and widespread
(7 pandemics
with multi-
billion$ economic
losses in just the
last 18 years)
Economic Losses from
Pandemics
87. Estimated Monthly U.S. Business Interruption Coronavirus Losses for Small Business—
Potential Range (<100 Employees; $Bill)
Source: APCIA, April 2020.
$52
$223 $255
$431
$0
$100
$200
$300
$400
$500
Small Business w/ BI - Low Small Business w/ BI - High All Small Businesses - Low All Small Businesses - High
The potential for such losses for all
businesses of all sizes is currently
* Businesses impacted: Proportion of businesses completely or substantially closed related
to coronavirus
Assumptions: Losses if standard insurance policy exclusions for viruses/pandemics are
60% Businesses impacted*
10% of Payroll for additional
expenses
33.3% Have BI coverage
50% Have BI payroll/benefits
coverage
90% Businesses impacted*
30% of Payroll for additional
expenses
60% Have BI coverage
80% Have BI payroll/benefits
coverage
60% Businesses
Impacted*
10% of Payroll for
additional expenses
90% Businesses
impacted*
30% of Payroll for
additional expenses
Monthly BI losses for small
business vary widely
depending on underlying
assumptions but expansive
legislation would result in
higher estimates; For all
businesses <500
employees, BI losses range
between $393B - $668B
88. Paper on Insurability of
Pandemic Risk
Large scale business continuity risks
from pandemics are generally note
insurable in the private sector
Business continuity risks are largely
undiversifiable within private insurance
markets and are highly correlated with
other risks (e.g., investment risks)
Large scale business continuity losses
pose a potentially systemic risk to the
industry and overall economy
Import role for government Download at: https://www.uscriskcenter.com/wp-
content/uploads/2020/05/Uninsurability-of-Pandemic-Risk-White-
Paper-Hartwig-APCIA-FINAL-WORD.pdf
89. Government Mandated Business Closures Were the Real Black Swan,
Not the Coronavirus
Sources: CDC; Risk and Uncertainty Management Center, University of South Carolina
• The US (and world) has
endured several other major
infectious disease outbreaks
killing 100,000+ Americans
without shutting down the
economy
• Hong Kong Flu (1968-70)
• Asian Flu (1957-58)
• It is the reaction to the virus that is
unprecedented and represents the
true Black Swan event
• The ramifications of this decision
will be consequential for a
generation (e.g., $4 trill. in debt)
90. COVID’s Impact on DPW Growth for Largest
P/C Lines: First 9-Mos. 2020 and 2019 vs.
Same Period Previous Year
12/01/09 - 9pm
eSlide – P6466 – The Financial Crisis and the Future of
the P/C
90
7.9%
8.9%
14.5%
-2.9%
7.7%
2.3%
8.1%
-8.5%
-2.2% -1.6%
0.2% 1.0%
5.5%
4.3%
11.4%
5.3%
12.5% 12.3%
-10%
-5%
0%
5%
10%
15%
20%
Workers
Comp*
Inland Marine Pvt. Pass.
Auto Liab
Auto Phys.
Damage
Commercial
Auto Liab.
Homeowners Other Liab. Allied Fire
2020 vs. 2019 2019 vs. 2018
Percent Change: First 9-Most
2020 vs. First 9-Mos. 2019
Source: A.M. Best, First Look: 9-Month 2020 P/C Financial Results; Risk and Uncertainty Management Center, Univ. of South Carolina.
Workers Comp,
Inland Marine and
PP Auto Liability
have experience the
largest decline in
DPW
Down $3.5B
Personal Auto
insurers
returned $8B to
policyholders in
2020
91. Personal Auto Claim Frequency Trends
Significantly Impacted by COVID: Q2 and Q3
2020 vs. Q2 and Q3 2019
12/01/09 - 9pm
eSlide – P6466 – The Financial Crisis and the Future of
the P/C
91
-22.8%
-32.6% -31.3%
-37.5%
-33.6%
-21.1%
-13.6%
-24.6%
-23.3%
-10.1%
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
Collision Prop. Damage
Liability
PIP Bodily Injury
Liability
Comprehensive
Q2 Q3
Year-over-Year Change
Auto Claims Fell Sharply at the Height of the
Pandemic, at least through Q3 2020
Collision and PD Liability
claims plunged by more
than 1/3
Source: ISO/PCI Fast Track data for Q3 2020; Risk and Uncertainty Management Center, Univ. of South Carolina.
92. 92
Catastrophe Loss Update:
Major Driver of Rate
Pressure
The 2020s Got Off to an Ominous Start
CAT Losses for the 2010s Were Up
Materially—Costliest Ever
Primary, Reinsurance and Retro Markets
All Impacted and Are Pressuring Rates
12/01/09 - 9pm 92
93. 2020 U.S. Insured Catastrophe Highlights
• $67B in insured nat CAT losses—(3rd costliest year ever behind 2017, 2005)
• 71 designated PCS CATs, the most in PCS’s 72-year history
• 10 declared hurricane/TS events, a PCS record (30 named storms in 2020)
• ~$26B insured losses in North America
• 17 declared wildfire events, a new record (6 events in 2017 = previous record)
• ~$11B insured
• ~5 million CAT claims
• 18 PCS events with insured losses > $1B, a new record
• ~$1.5B in insured riot losses + other unusual manmade events (Nashville)
February 2021
winter storm and
extreme cold in
the south caused
an estimated $10B
- $20B in insured
losses
94. U.S. Inflation-Adjusted Insured Cat
Losses
Sources: Property Claims Service, a Verisk Analytics business (1980-2019); 2020 figure from Munich Re;
Insurance Information Institute; University of South Carolina, Risk & Uncertainty Management Center.
Average Insured Loss per Year for 1980-2020 is $22.2 Billion
Harvey, Irma,
Maria
36
19
2020 CAT
losses in
the US
totaled
$67B (not
including
COVID-
related
losses)
from a
record 71
PCS events
20
67
30 named
storms,
wildfires, riots
2021 is off to an
ominous start
with ~$18B in
estimated
insured losses
from Winter
Storm Uri
95. Top 20 Most Costly Disasters
in U.S. History—Katrina Still Ranks
#1
12/01/09 - 9pm 95
(Insured Losses, 2020 Dollars, $ Billions)*
$10.0
$10.6
$12.4
$15.0
$15.0
$16.8
$18.0
$19.0
$21.0
$23.1
$26.7
$27.5
$28.7
$54.5
$7.5
$7.9
$8.4
$8.8
$9.8
$10.2
$0
$10
$20
$30
$40
$50
$60
Rita
(2005)
Torn./T-
Storms
(2011)
Torn./T-
Storms
(2011)
Hugo
(1989)
Ivan
(2004)
Charley
(2004)
Laura
(2020)
Michael
(2018)
Wilma
(2005)
Camp Fire
(2018)
Ike
(2008)
Harvey
(2017)
Winter
Storm Uri
(2021)*
Irma
(2017)
Sandy
(2012)
Maria
(2017)
Northridge
(1994)
9/11
(2001)
Andrew
(1992)
Katrina
(2005)
10 of the top 20 mostly costly
insured events in US history
occurred between 2010 and
2021 (inclusive)
17 of the 20 Most Expensive Insurance Events in US
History Have Occurred Since 2004
*Estimated (in 2021 dollars)
Sources: PCS, RMS, Karen Clark & Co; USC Center for Risk and Uncertainty Management adjustments to 2020 dollars using the CPI.
96. 96
0
50
100
150
200
250
300
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 19 20
(Percent)
US Reinsurance Pricing Is Sensitive to CAT Activity and
Ultimately Impacts Primary Insurance Pricing, Terms and
Conditions.
Post-
Andrew
surge
US Property Catastrophe Rate-on-Line Index: 1990 – 2020*
*As of January 1 each year.
Source: Guy Carpenter; Artimes.bm accessed at: http://www.artemis.bm/us-property-cat-rate-on-line-index
Post-9/11
Adjustment
Post
Katrina,
Rita, Wilma
period
Post-Ike
adjustment Adjustment
following
record tornado
losses in 2011
and Sandy in
2012
Record CATs in 2017 and high
CAT losses in 2018/19 pressured
US reinsurance prices in recent
years (+9.0% in 2020, +2.6% in
2019, +7.5% in 2018)
2021 Global
RoL +4.5%
97. Paper on Communicable
Disease Exclusions and Market
Stability
CD exclusions are becoming more
commonplace in reinsurance treaties
Regulators are generally not approving
primary insurers filings for exclusions
in underlying primary policies
Paper addresses the global factors
(e.g., accumulation risk, risk aversion,
uninsurability) driving the exclusions
Also addresses market consequences if
misalignment persists Download at: https://www.uscriskcenter.com/wp-
content/uploads/2020/08/CD_Exclusion_Whitepaper-Aug-2020-No-
Typo.pdf
98. 12/01/09 - 9pm
INVESTMENTS:
THE NEW REALITY
Investment Performance Is a Key
Driver of Insurer Profitability
Aggressive Rate Cuts Will Adversely
Impact Invest Insurer Earnings
Financial Crisis Déjà Vu?
99. Property/Casualty Insurance Industry Investment
Income: 2000–2020E
$38.9
$37.1$36.7
$38.7
$54.6
$51.2
$47.1$47.6
$49.2
$48.0$47.3
$46.4$47.2$46.6
$48.9
$59.6
$61.4
$50.3
$39.6
$49.5
$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18* 19 20
Due to persistently low interest rates, investment income
remained below pre-crisis levels for a decade. Lower interest
rates post-COVID will drive investment income down once again.
*2020 figure is annualized based on YTD Q3 actual of $37.7B. 2018-19 figures are distorted by provisions of the TCJA of 2017. Increase reflects such items as
dividends from foreign subsidiaries.
1 Investment gains consist primarily of interest and stock dividends. Sources: ISO; University of South Carolina, Center for Risk and Uncertainty Management.
($ Billions)
Investment income had just
recovered from a decade-long
slump. Aggressive Fed actions
and recession are pushing
interest rates lower and will
adversely impact investment
income for years to come.
100. Net Investment Yield on
Property/Casualty Insurance Invested
Assets, 2007–2020F*
4.4
4.0
4.6
4.5
3.7
3.8
3.7
3.4
3.7
3.2 3.1 3.1
3.4
3.1
3.0
4.6
4.2
3.9
2.5
3.0
3.5
4.0
4.5
5.0
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20F
The yield on invested assets remains low
relative to pre-crisis yields. Fed rate
increases beginning in late 2015 through
2018 halted the slide in yields, but rate
cuts in 2019/2020 will preclude future
gains
Sources: NAIC data, sourced from S&P Global Market Intelligence; 2017-19 figures are from ISO. 2020F is from the Risk and Uncertainty Management Center, Univ. of South Carolina.
(Percent) Investment yields remained depressed--
down about 150 BP from pre-crisis
levels. COVID-19 Fed rate cuts, bond
purchases will push asset yield down
Average: 1960-2019 =
4.9%
Low: 2.8% (1961)
High: 8.2% (1984/85)
101. US Treasury Security Yields:
A Long Downward Trend,
1990–2021*
*Monthly, constant maturity, nominal rates, through Feb. 2021.
Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research
(recession dates); Risk and Uncertainty Management Center, University of South Carolina.
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
'90'91'92'93'94'95'96'97'98'99'00'01'02'03'04'05'06'07'08'09'10'11'12'13'14'15'16'17'18'19'20'21
Recession
2-Yr Yield
10-Yr Yield
Yields on 10-Year US
Treasury Notes have been
essentially below 5% for
more than a decade
Since roughly 80% of P/C bond/cash investments are in 10-
year or shorter durations, most P/C insurer portfolios will
have low-yielding bonds for many years to come.
Fed emergency rate cuts
and QE in response to
the COVID-19 pandemic
and market volatility
have pushed rates to
their levels below those
in the financial crisis
10-YR.
TREASURY
Jan. 2020:
1.76%
Jul. 2020: 0.62%
Feb. 2021:
1.25%
102. -50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12
14
16
18
20
,
*Through Dec. 31, 2020.
Source: NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html; Center for
Risk and Uncertainty Management, University of South Carolina
Tech Bubble
Implosion
Financial
Crisis
Annual Return
Energy Crisis
S&P 500 Index Returns, 1950–2020*
Fed Raises
Rates
The S&P 500 was up 28.9% in 2019,
the best year since 2013, following a
decline of 6.2% in 2018. The S&P
plunged as the economy dove into
recession, falling 34% by March 23rd
2020
YTD
+16.3
%
2019:
+28.9%
2018: -6.2%
2017: +19.4
2016: +9.5
103. 12/01/09 - 9pm
THE ECONOMY
COVID-19 Pandemic Will Directly and Severely
Impact Growth As Exposure Growth Rapidly Shrinks
The Strength of the Economy Has Always Influenced
Growth in Insurers’ Exposure Base Across Most Lines
The Links Between the Economy and the P/C
Insurance Industry Are Strengthening
104. Length of US Business Cycles, 1929-Present*
43
13
8 11 10 8 10 11
16
6
16
8 8
19
13
50
80
37
45
39
24
106
36
58
12
92
120
73
128
0
10
20
30
40
50
60
70
80
90
100
110
120
130
Aug.
1929
May
1937
Feb.
1945
Nov.
1948
July
1953
Aug.
1957
Apr.
1960
Dec.
1969
Nov.
1973
Jan.
1980
Jul.
1981
Jul.
1990
Mar.
2001
Dec.
2007
Feb.
2020
Contraction
Expansion Following
Duration (Months)
Month
Recession
Started
Average Duration*
Recession = 13.4 Months
Expansion = 63.8 Months
* Excludes current COVID-19 recession which began in Feb. 2020 but with an indeterminate end.
Sources: National Bureau of Economic Research; Risk and Uncertainty Management Center, University of South Carolina.
The most
recent
economic
expansion
ended in Feb.
2020 and was
the longest in
US history
(began July
2009)
Will likely take
2+ years to
recover lost
growth
?
105. US Real GDP Growth*
* Estimates/Forecasts from Wells Fargo Securities.
Source: US Department of Commerce, Wells Fargo Securities 3/21; Center for Risk and Uncertainty Management, University of South Carolina.
2.7%
1.8%
-1.3%
-2.8%
2.5%
2.2%
2.7%
4.5%
0.8%
1.4%
3.5%
2.1%
1.2%
3.1%
3.2%
2.9%
2.5%
3.5%
2.9%
1.1%
3.1%
2.0%
2.1%
-5.0%
33.4%
4.1%
4.3%
9.0%
9.2%
7.8%
5.4%
3.5%
2.8%
2.6%
-31.4%
3.1%
3.6%
2.5%
1.8%
1.1%
4.1%
1.8%
2.1%
1.6%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
16:1Q
16:2Q
16:3Q
16:4Q
17:1Q
17:2Q
17:3Q
17:4Q
18:1Q
18:2Q
18:3Q
18:4Q
19:1Q
19:2Q
19:3Q
19:4Q
20:1Q
20:2Q
20:3Q
20:4Q
21:1Q
21:2Q
21:3Q
21:4Q
22:1Q
22:2Q
22:3Q
22:4Q
Demand for Insurance Will Increase Materially in
H2 2021—Particularly in Economically Sensitive
Commercially Lines Such as WC
Real GDP
Growth (%)
“Great
Recession
” began in
Dec. 2007
Financi
al Crisis
Strong 2nd
half 2021
growth
expected
COVID
CRASH
Q2 2020
plunged
by 31.4%
106. The Economy Drives P/C Insurance Industry Premiums:
2006:Q1–2020:Q3*
Direct Premium
Growth (All P/C Lines) vs. Nominal GDP: Quarterly Y-o-Y Pct. Change
Sources: SNL Financial; U.S. Commerce Dept., Bureau of Economic Analysis; ISO; I.I.I.; Risk and Uncertainty Management Center, University of South Carolina.
Direct written premiums track nominal GDP fairly tightly over
time, suggesting the P/C insurance industry’s growth
prospects inextricably linked to economic performance.
107. US Unemployment Rate Forecast: 2007:Q1–
2022:Q4
4.5%
4.5%
4.6%
4.8%
4.9%
5.4%
6.1%
6.9%
8.1%
9.3%
9.6%
10.0%
9.7%
9.6%
9.6%
8.9%
9.1%
9.1%
8.7%
8.3%
8.2%
8.0%
7.8%
7.7%
7.6%
7.3%
7.0%
6.6%
6.2%
6.1%
5.7%
5.6%
5.4%
5.2%
5.0%
4.9%
4.9%
4.9%
4.7%
4.7%
4.4%
4.3%
4.1%
4.1%
3.9%
3.8%
3.8%
3.9%
3.6%
3.6%
3.5%
3.8%
13.1%
8.8%
6.8%
6.2%
5.8%
5.0%
4.5%
4.4%
4.3%
4.2%
4.7%
9.6%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
07:Q1
07:Q2
07:Q3
07:Q4
08:Q1
08:Q2
08:Q3
08:Q4
09:Q1
09:Q2
09:Q3
09:Q4
10:Q1
10:Q2
10:Q3
10:Q4
11:Q1
11:Q2
11:Q3
11:Q4
12:Q1
12:Q2
12:Q3
12:Q4
13:Q1
13:Q2
13:Q3
13:Q4
14:Q1
14:Q2
14:Q3
14:Q4
15:Q1
15:Q2
15:Q3
15:Q4
16:Q1
16:Q2
16:Q3
16:Q4
17:Q1
17:Q2
17:Q3
17:Q4
18:Q1
18:Q2
18:Q3
18:Q4
19:Q1
19:Q2
19:Q3
19:Q4
20:Q1
20:Q2
20:Q3
20:Q4
21:Q1
21:Q2
21:Q3
21:Q4
22:Q1
22:Q2
22:Q3
22:Q4
Great Recession
Rising unemployment
eroded payrolls and
WC’s exposure base.
Unemployment peaked
at 10% in late 2009.
= forecasts ; = actuals
Sources: US Bureau of Labor Statistics; Wells Fargo Securities (3/21 edition); Risk and Uncertainty Management Center, University of South Carolina.
The unemployment
rate peaked at 14.7%
in April (13.1% Q2
avg.)
At 3.5%, the
unemployment
rate in Feb. 2020
WAS at its lowest
point in 50 years.
The Fed
considers
“Full
Employment
” to be 4.1%
108. $0
$5
$10
$15
$20
$25
$30
66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11 14 17 20
U.S. National Debt, 1966 – 2020:Q3
Source: Congressional Budget Office; Federal Reserve Bank of St. Louis: https://fred.stlouisfed.org/series/GFDEGDQ188S
The national debt hit
$26.95 Trillion in Q3 2020
and will continue to grow
rapidly for the foreseeable
future.
Debt/GDP Ratio =100.1%
(Highest Since WW II)
$27 Trillion
($ Trillions)
18
Inflation
Alert
Large
deficits that
increase as a
share of GDP
are, at some
point,
unsustainabl
e and
inflationary
109. U.S. Inflation Rate: 2009-2022F*
Source: U.S. Bureau of Labor Statistics; Wells Fargo Securities (3/21); USC Center for Risk and Uncertainty Management.
Percentage Change (%)
0.1%
1.3%
2.1%
2.4%
1.8%
1.2%
2.7%
2.4%
-0.4%
1.6%
3.2%
2.1%
1.5% 1.6%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
09 10 11 12 13 14 15 16 17 18 19 20 21F 22F
There’s a great deal of concern
that trillions of dollars of stimulus
plus the post-COVID recovery
could cause the economy to
overheat, resulting in inflation
*Annual change in Consumer Price Index for All Urban Consumers (CPI-U).
Inflation is expected to accelerate
sharply in 2021—though diminish
thereafter—making the case for a
Fed rate hike more remote (Fed is
looking to keep long-run inflation
rate ~2%)
Insurer Concerns
About Inflation
Rate Inadequacy
Reserve
Inadequacy
110. Debt Held by the Public as a Percent of GDP: 1790 –
2020
12/01/09 - 9pm 110
Source: Congressional Budget Office; Wells Fargo Securities (3/21); Risk and Uncertainty Management Center, University of South Carolina.
Debt/GDP ratio
is at its highest
level since WW
II
2020
100.9%
1945
112.7%
111. Debt Held by the Public as a Percentage
of GDP: 2015-2031F*
Source: Congressional Budget Office (Feb. 2021); USC Center for Risk and Uncertainty Management.
(Debt-to-GDP
%)
102.2 102.0 102.0 101.4 101.2 100.9 101.0 102.2 103.2 105.0 107.2
72.6 75.3 74.5 76.2 77.5
100.1
0
20
40
60
80
100
120
15 16 17 18 19 20 21F 22F 23F 24F 25F 26F 27F 28F 29F 30F 31F
US Debt-to-GDP ratio—already at their highest
level since WW II—will remain high and even
grow due to increasing entitlement
obligations (Social Security, Medicare, etc.)
Note: Does not reflect $1.9T
Covid relief bill signed by
President Biden on March 11,
2021
112. 112
Global Economic Outlook
12/01/09 - 9pm 112
Geopolitical Instability, Trade Disputes
and Fragile Supply Chains Will Present
Additional Challenges
114. Surging Trade Deficit as Trade Flows Begin Slow Recovery
Sources: Wells Fargo Securities (2/21), US Commerce Dept.; Risk and Uncertainty Management Center, University of South Carolina
Imports are booming while exports are lagging resulting
in a massive expansion of the US trade deficit. US multi-
nationals are hurt by relatively weak recoveries with
many major trading partners as well as still-simmering
trade disputes
Trade Balance in Goods &
Services
US Exports
Imports are
rising faster than
exports, leading
to the widest
trade deficit
since 2008
116. -15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
11
13
15
17
19
Economic Shocks,
Inflation:
1976: 22.2%
Tort Crisis
1986: 30.5%
Post-9/11
2002: 22.4%
Great
Recession:
2009: -9.0%
ROE
2019:
+6.7
%
Commercial Lines NPW Premium Growth:
1975 – 2020E
Recessions:
1982: 1.1%
Commercial lines is prone
to far more cyclical
volatility that personal
lines.
1988-
2000:
Period of
inter-cycle
stability
Commercial
lines premium
growth has
been sluggish
for years,
reflecting
weak pricing
environment.
Note: Data include state funds beginning in 1998.
Source: A.M. Best; Insurance Information Institute; Univ. of South Carolina Center for Risk and Uncertainty Management, ISO.
Post-Hurricane
Andrew Bump:
1993: 6.3%
Post Katrina
Bump:
2006: 7.7%
2016:
-
1.1%
2018:
+14.4
%
2020:
+3.2
%
117. CIAB: Average Commercial Rate
Change, All Lines, 2011:Q1–
2020:Q4*
-0.1%
0.9%
2.7%
4.4%
4.3%
3.9%
5.0%
5.2%
4.3%
3.4%
2.1%
1.5%
-0.5%
0.1%
-0.7%
-2.3%
-3.3%
-3.1%
-2.8%
-3.7%
-3.9%
-3.2%
-3.3%
-2.5%
-2.8%
-1.3%
0.3%
1.7%
2.4%
3.5%
5.2%
6.2%
7.5%
9.3%
10.8%
11.7%
10.7%
-2.9%
1.6%
1.5%
-16%
-11%
-6%
-1%
4%
9%
14%
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
3Q19
4Q19
1Q20
2Q20
3Q20
4Q20
*Latest available.
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially
substantially.
Source: Council of Insurance Agents & Brokers; Center for Risk and Uncertainty Management, Univ. of South Carolina.
Largest increases
since 2003 for some
accounts
(Percent)
Renewals turned
positive in late
2011 in the wake
of record tornado
losses and
Hurricane Sandy
High CAT losses and poor underwriting results in
recent years combined with COVID pressures,
reduced capacity, lower interest rates and increased
uncertainty are exerting significant pressure on
markets with overall rates up by +10.7% as of Q4
2020
118. Change in Commercial Rate Renewals, by
Line: 2020:Q4
Source: Council of Insurance Agents and Brokers; USC Center for Risk and Uncertainty Management.
Percentage Change (%)
4.3%
6.4% 7.3% 7.8%
9.1% 9.7%
11.1%
12.9%
14.7%
21.3%
0.4% 1.3% 1.5%
3.1% 3.3% 3.5%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Workers
Comp
Terrorism
Surety
Flood
Broker
E&O
Marine
Med
Mal
Construction
General
Liability
Business
Interruption
Commercial
Auto
EPL
Cyber
Commercial
Property
D&O
Umbrella
All major commercial
lines experienced
increases in Q4 2020
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially
substantially.
Umbrella now leads all major
commercial lines in terms of rate
gains, exceeding D&O and CP
120. Weekly Number of COVID-Related Lawsuits
Filed:
(Weeks Ending Mar. 16, 2020 to Feb. 1, 2021) [Latest Available]
12/01/09 - 9pm 120
Source: Covid Coverage Litigation Tracker, University of Pennsylvania School of Law. Accessed 3/11/21 at: https://cclt.law.upenn.edu
The number of new cases
remains far below 2020 highs
with just 11 filed the week
ending Dec. 7, 2020.
Cumulative Total = 1,501
1
1
7
9
121. COVID Litigation: Merits Rulings on Motions to
Dismiss: Federal vs. State Courts (Total through Feb. 1, 2021) [Latest
Available]
12/01/09 - 9pm 121
Source: Covid Coverage Litigation Tracker, University of Pennsylvania School of Law. Accessed 3/11/21 at: https://cclt.law.upenn.edu
Federal Courts State Courts
Insurers have won
dismissals in 91% of
federal court cases
involving Covid
Insurers have won
dismissals in 52% of
state court cases
involving Covid
122. 122
SUMMARY
• The P/C Insurance Industry Remains Strong, Stable, Sound and Secure
• Worst-Case Scenarios Have, So Far, Been Averted
• An Anticipated Acceleration in the Economic Recovery in the Second Half
of 2021 Should Help Restore Most P/C Exposures to Pre-Pandemic Levels
by early-2022 or sooner
• Asset Price Volatility Will Persist and Low Interest Rates Will Pressure
Investment Earnings for Years
• COVID-19 Exposures Are Manageable with Headline Risk on BI and WC
Issues; Overall tort environment remains challenging
