Quarterly P/C Industry Snapshot July 15, 2019

1. Quarterly P/C Industry SnapshotJuly 15, 2019 Information and analysis provided by the Insurance Information Institute Steven Weisbart, Ph.D., Chief Economist stevenw@iii.org | T 212.346.5540 | M 917.494.5945

2. Key Insurance Economic Indicators

3. The U.S. economy, pertinent to the P/C insurance industry Most of the 53 forecasts underlying this chart see slow growth in the economy in the second half of 2019 and throughout 2020. Premium growth usually follows nominal GDP. Real GDP Forecasts, Annual Rates Source: Blue Chip

4. P/C insurance industry In the last two years, P/C and life carrier employment is falling slowly, health carrier employment is growing strongly, and agent employment is rising steadily. Employment in Thousands, Major Insurance Industry Sectors

5. A Deeper Dive: Personal Auto • Rising severity pinching claims in this line • The exposure base is likely to grow more slowly

6. Personal auto combined ratios Source: National Association of Insurance Commissioners data, sourced from S&P Global Market Intelligence; 2018 is I.I.I. estimate. Personal auto rates rose rapidly to catch up with expected losses.It seems to be paying off in more recent years.

7. Rising auto loss costs Increase in Loss Costs, 2016–2018 Source: Fast Track Monitoring System. Bodily Injury 6.9% Property Damage 3.2% Personal Injury Protection 6.5% Collision 4.2% Comprehensive -3.2% From 2016 to 2018, the cost of claims for auto injuries (BI and PIP) rose faster than the consumer price index,which rose by 4.6 percent during that period. • In 2018, the spike in frequency of crashes ended and the rise in health care costs moderated, so the percentage changes shown here are smaller than in the two-year period ending a year ago.

8. Personal auto claim frequency and severityby coverage, 2019 vs. 2018 *Four quarters ending in March 2019. Source: Fast Track Monitoring System. Y-o-Y Change, 2019 Over 2018* The frequency spike has lessened. Severity is now the problem.

9. Collision claims: Frequency trending higher in 2010s but reversing now Annual % Change *Four quarters ending in March 2019. Source: Fast Track Monitoring System. For a long time claim frequency was falling, but since 2010 this trend seems to have reversed.

10. Collision claims: Severity still trending higher Annual % Change *Four quarters ending in March 2019. Source: Fast Track Monitoring System. The Great Recession helped to temper claim severity,but these forces have clearly reversed, consistent with experience from past recoveries.

11. New vehicle sales are trending lower.This will slow PP premium growth. Sources: Blue Chip Economic Indicators; Wall Street Journal (July 8, 2019); Insurance Information Institute. Millions of Units Wall Street Journal, July 8, 2019 The Great Recession and high fuel prices helped to temper sales,but by 2016 we returned to prior sales peaks.The forecast for 2020 is for a million fewer vehicles sold vs. 2016.

12. Might higher auto loan delinquencies take some cars off the road (lowering frequency)? Or will they cause stressed drivers to have more crashes (raising frequency)? Auto loan serious delinquencies are nearingthe highest rate in the past 15 years. Percent of balance 90+ days delinquent by loan type Source: New York Fed Consumer Credit Panel/Equifax.

13. Special Topic: Political Risk Insurance This is protection against financial losses that result from political events. Historically, these risks arose mainly in emerging markets. Lately, this risk seems to be growing, even in the U.S.

14. What does political risk insurance cover?

15. What does political risk insurance cover? • Using an example from the U.S. “trade war,” would the administration’s trade restrictions on steel fall within one of definitions above? • Legal & Regulatory Risk: Yes • Trade restrictions, including restrictions on imports, fit within this definition. • Expropriation: No • Only if resulting in a permanent, full or partial, loss of an investment’s value, which has not been proven yet.

16. Political risk claims administration Besides the defined categories mentioned previously, political risk claims must satisfy other criteria to be valid. To help clarify, we can continue with the prior example of the administration’s trade restrictions on steel: Quantifiable loss: Did the insured experience a quantifiable business loss, immediate or ongoing, as a direct or indirect result of the event? • Steel exports declined but production increased by +7%. • Verdict: No Due process: Did the government or regulators act capriciously or arbitrarily? • The U.S. Court For International Trade ruled in March that trade restrictions on steel were within the administration’s authority. The plaintiffs representing the steel industry, including the American Institute for International Steel, appealed to the Supreme Court but did not claim failure to receive due process. • Verdict: No Recourse: Have all domestic and international recourses been exhausted? • The Supreme Court affirmed in June the lower court’s steel decision. Although this closed domestic recourse for now, plaintiffs with standing still could pursue arbitration in international trade bodies. • Verdict: No

17. Political risk claims administration Proof of loss for political risk insurance normally requires the insured to submit documentation showing loss in revenues, reduced margins, or lower estimates of asset values. Such changes need to be related, in time and logic, to the insured event. Specific documentation varies based on policy wording. • Would losses suffered by companies due to the trade restrictions on steel meet the criteria above? • Legal and regulatory risk: No • Insured have not incurred losses, been denied due process, or exhausted all legal recourses. • Expropriation: No • Insureds cannot yet demonstrate a permanent loss in the value of their investments.

18. Has political risk spread to the U.S.? The trade restrictions on steel would not qualify as an insurable political risk event. What about other trade war actions? *Definitions: LRL = legal and regulatory risk, EXP = expropriation. Conclusion Have trade restrictions raised political risk in the United States? Yes, but… Some government actions fall within PRI political risk definitions. Some sectors are experiencing losses but others are seeing increased revenues. Companies can rely on the courts for due process.