Coronavirus and the Recession of 2020 What It Means for Workers - PowerPoint PPT Presentation

Coronavirus and the Recession of 2020— What It Means for Workers Compensation Robert P. Hartwig, PhD, CPCU Clinical Associate Professor of Finance Darla Moore School of Business University of South Carolina

Coronavirus & the Recession of 2020: Outline  P/C Insurers: Overcoming Uncertainty With Strength  Financial Overview: The Industry’s Financial Position Entering the COVID-19 Pandemic  COVID-19: Potential Coronavirus Impacts on Key Lines  Investment Market Issues: Volatility Rules, Low Interest Rates Are Back  The Economy, Labor Markets and COVID-19: Overview & Outlook  Federal & State COVID-19 Initiatives Impacting Commercial Insurers  Summary and Conclusions

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

The P/C insurance industry Policyholder Surplus (Capacity) entered the COVID-19 pandemic from a position strength and can 2006:Q4–2020:Q1E easily withstand the estimated ~10% surplus decline ($ Billions) $858.3 $900 Drop due to near-record Financial $812.2 $850 $802.2 2011 CAT losses Crisis $781.5 $779.5 $775.0 (-4.9%) $800 $750.7 (-16.2%) $742.1 $717.0 $750 $700.9 $676.3 $675.2 $674.2 $662.0 $673.9 $673.7 $671.6 $653.4 $700 $624.4 $614.0 $607.7 $650 $586.9 $583.5 $566.5 $570.7 $567.8 $559.2 $559.1 $600 $550.3 $544.8 $540.7 $538.6 $530.5 $521.8 $517.9 $512.8 $515.6 $511.5 $505.0 $550 $496.6 $490.8 $487.1 $478.5 $463.0 $455.6 $500 $437.1 $450 $400 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 Policyholder Surplus is the industry’s 2010:Q1 data includes $22.5B of paid-in financial cushion against large insured capital from a holding company parent events, periods of economic stress and for one insurer’s investment in a non- insurance business. financial market volatility. It is also a source of capital to underwrite new risks. Sources: ISO, A.M .Best; 2020E from Risk and Uncertainty Management Center, University of South Carolina.

P/C Industry Net Income After Taxes, 1991–2019F*  2005 ROE= 9.6% $ Millions  2006 ROE = 12.7%  2007 ROE = 10.9% $80,000 $65,777  2008 ROE = 0.1% $64,100 $63,784 $62,496  2009 ROE = 5.0% $59,994  2010 ROE = 6.6% $56,826 $70,000 $55,870  2011 ROAS 1 = 3.5%  2012 ROAS 1 = 5.9%  2013 ROAS 1 = 10.2% $60,000  2014 ROAS 1 = 8.4% $44,155 $42,924  2015 ROAS = 8.4% $38,501  2016 ROAS = 6.2% $36,819 $36,813 $50,000 $35,204  2017 ROAS =5.0% $33,522 $30,773  2018 ROAS = 8.0% $30,029 $28,672  2019: ROAS = 8.2% $40,000 $24,404 $21,865 $20,598 $20,559 $19,456 $19,316 $30,000 $14,178 $10,870 $20,000 $5,840 $3,046 $3,043 Net Income finally returned to $10,000 pre-financial crisis levels in 2019. COVID impacts will likely have a major negative $0 influence in 2020, but too soon to determine magnitude -$6,970 -$10,000 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 19* *2019 estimate based on annualized actual Q3:19 figure of $48.075B. ROE figures are GAAP; 1 Return on avg. surplus. Excludes Mortgage & Financial Guaranty insurers for years (2009-2014). Sources: A.M. Best, ISO.

ROE: Property/Casualty Insurance by Major Event, 1987–2019E (Percent) P/C Profitability Is 20% Katrina, Influenced Both by Harvey, Rita, Wilma Irma, Cyclicality and Volatility Maria, Low 15% CA CATs Wildfires 10% Sept. 11 5% Hugo 2019E Lowest CAT Sandy Losses in 8.2% 4 Hurricanes 15 Years Andrew, Financial Crisis* 0% Record Iniki ROE fell by 8.3 pts Tornado Northridge Losses from 12.7% to 4.4% -5% 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 19E *Excludes Mortgage & Financial Guarantee in 2008 – 2014. Sources: ISO, Fortune ; A.M. Best (2018E-2019F); USC RUM Center.

Percentage Point Change in P/C ROEs During Past Economic Downturns: 1971 - Present Change in P/C ROE During Past Economic Downturns Avg.: -4.5% (-4.0% ex. 2000-01) Percentage Point Median: -5.0% (-3.0% ex. 2000-01) Change 2.0% 0.8% 0.0% -2.0% -2.4% Although the COVID-19 -3.0% -4.0% economic downturn will be sharp, it’s expected to -6.0% be brief with a rapid “V- Shaped” recovery -7.0% -7.1% -8.0% -8.3% -10.0% 2007-08 2000-01* 1973-75 1981-82 1979-80 1990-91 *2000-2001 decline impacted by 9/11 losses. Source: USC Center for Risk and Uncertainty Management.

Net Premium Growth (All P/C Lines): 2020F: 3.8%* Annual Change, 1971—2020F (Pre-COVID) 2019E: 4.2% 2018: 10.7% (Percent) 2017: 4.6% 1984-87 2000-03 1975-78 2016: 2.7% 25% 2015: 3.5% Net Written Premiums Fell 0.7% in 2007 (First Decline 2014: 4.2 Since 1943) by 2.0% in 2008, 2013: 4.4% and 4.2% in 2009, the First 3- 20% Year Decline Since 1930-33. 2012: +4.2% 15% 2020 Outlook Pre-COVID: 3.8% 10% Now: ??? 5% 0% -5% 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 19E 20F *Pre-COVID-19 forecast from A.M. Best Review & Preview (Feb. 2020). 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 .

Change in P/C Net Written Premium Growth During Past Economic Downturns: 1971 - Present Change in P/C ROE During Past Percentage Point Change Economic Downturns in Growth Rate Avg.: -0.4% 4.0% 3.4% Median: -0.6% 2.9% 3.0% 2.0% 0.9% 1.0% 0.0% -1.0% Economic downturns have been associated with varied growth -2.0% -2.0% experience. The COVID-19 pandemic will -3.0% slow growth materially in 2020. Effects -4.0% -3.5% could carry over into 2021. -4.3% -5.0% 1979-80 2007-09 1990-91 1981-82 1973-75 2000-01* *2000-2001 decline impacted by 9/11 losses. Source: USC Center for Risk and Uncertainty Management.

2020 Pre- vs. Post-COVID Growth Expectations for P/C Insurance: From Modest to Miserly Note: 2020 expectations are based on a modestly optimistic scenario for recovery and Percentage Change in assume that Q1 growth was Growth Rate 2020: Pre-COVID 2020: Post-COVID largely unaffected 4.5% 4.0% 3.8% 3.7% 4.0% 3.5% 3.0% 2.5% 2.0% 1.7% 2.0% 1.5% 1.5% 1.0% 0.5% 0.0% All Lines Personal Commercial Source: 2020 Pre-COVID-19 figures from Best’s Review & Preview (Feb. 2020); Post-COVID estimates from USC Center for Risk and Uncertainty Management.

Potential Impacts of COVID-19 on Written Premium in 2020 by Key Line Line Estimated Impact Workers Compensation 12.5% to 25% reduction in premium written in 2020 (equates to $5.9B to $11.75B DWP) Business Interruption & 7% to 13% reduction in premium volume Contingency General Liability* $1.5B to $6.3B reduction in premium Personal Auto ~$10B in refunds, rebates (equates to ~4% of DWP) Personal Travel Insurance 29% to 78% reduction in premium written *Includes nursing home professional liability. Source: Derived from Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic (Fig.11), May 2020 and other sources; Risk and Uncertainty Management Center, University of South Carolina.

P/C Insurance Industry Combined Ratio, 2001–2019E* 2019 Combined Ratio Est. Higher 99.0 Relatively As Recently as 2001, CAT Low CAT Insurers Paid Out Losses, Losses, Nearly $1.16 for Every Shrinking Reserve $1 in Earned Sharply Reserve Releases Premiums Relatively higher CATs Releases, Low CAT Toll of Soft are driving Avg. CAT Heavy Use of Losses, large Market Losses, Reinsurance Reserve underwriting 120 More Lowered Net losses and Releases Reserve 115.8 Losses pricing Releases pressure Cyclical Best Deterioration Sandy Combined Impacts 110 107.5 Ratio Since 106.5 1949 (87.6) Lower 103.7 CAT 102.5 Losses 101.0 101.1 100.8 100.7 99.2 100.1 99.0 99.3 100 98.4 96.4 97.0 97.8 95.7 92.6 90 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19** * Excludes Mortgage & Financial Guaranty insurers 2008--2014. **Actual through Q3 2019 was 97.8 Sources: A.M. Best, ISO (2014-2019).

Potential Impact of COVID-19 on Insured Losses by Line Business Interruption losses are potentially material even under the moderate severity scenario Loss impacts of COVID- 19 on the WC line are potentially severe but depend not only on the course of the disease but state decisions on presumption Source: Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic (Fig.10), May 2020; Risk and Uncertainty Management Center, University of South Carolina.

Commercial Auto Claim Frequency and Severity: Estimated Impacts Due to COVID-19 Pandemic, by Event Scenario Sharp declines in commercial Frequency Severity vehicle collisions could have major 20% impacts on the WC line as well 13.6% 5.4% 10% 0.0% 0% -10% -12.1% -20% -22.8% -30% -40% -35.5% Optimistic Moderate Pessimistic Source: Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic , May 2020; Risk and Uncertainty Management Center.