Economic Forces Shaping the Workers Compensation Insurance Industry of Today and Tomorrow Workers Compensation Educational Conference Orlando, FL August 25, 2015 Download at www.iii.org/presentations Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: 212.346.5520 Cell: 917.453.1885 [email protected]
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Economic Forces Shaping the Workers Compensation Insurance Industry of Today and TomorrowWorkers Compensation Educational Conference
Orlando, FLAugust 25, 2015
Download at www.iii.org/presentations
Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038
• ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.
Sources: A.M. Best, ISO; Insurance Information Institute
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2015:Q1
*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best, Conning
1977:19.0%1987:17.3%
1997:11.6% 2006:12.7%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years
10 Years
9 Years
History suggests next ROE peak will be in 2016-2017
ROE
1975: 2.4%
2013 9.8%
2014 8.2%
2015:Q1 10.8%
6
P/C Insurance Industry Combined Ratio, 2001–2015:Q1*
Commercial lines is prone to more cyclical volatility that personal
lines. Recently, growth has stabilized in the 4% to 5% range.
1988-2000: Period of
inter-cycle stability
2010-20XX? Post-
recession period of
stable growth?
Note: Data include state funds beginning in 1998.Source: A.M. Best; Insurance Information Institute.
Post-Hurricane Andrew Bump:
1993: 6.3%
Post Katrina Bump:
2006: 7.7%
12
Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2014
80
.4
36
.8
33
.3
29
.4
24
.8
22
.5
21
.0
20
.6
15
.2
14
.6
13
.9
11
.8
10
.3
8.7
8.5
8.4
8.0
7.9
7.6
7.1
6.6
5.9
5.9
5.8
5.4
4.5
0
10
20
30
40
50
60
70
80
90
ND
SD VT
OK
NE IA KS
TX
WY
AK IN
MN WI
MA
AR
CT
NY
NJ
CO
NM
OH LA
US
MS
NH
MO
Pe
ce
nt
ch
an
ge
(%
)
Sources: SNL Financial LLC.; Insurance Information Institute.
Top 25 States
43 states showed commercial lines growth from 2007
through 2014
Growth Benchmarks: Commercial
US: 5.9%
13
Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2014
4.5
4.4
4.2
4.1
3.9
3.8
3.7
3.3
3.3
3.2
3.1
2.8
2.8
2.2
2.1
1.4
0.9
-1.3
-3.2
-5.3
-6.5
-6.9
-9.2
-10
.7
-19
.9
-22
.2
-25
-20
-15
-10
-5
0
5
10
MI
TN
MD
MT
CA RI
WA
GA
PA
UT IL KY VA
NC
ME
SC ID AL
DC HI
FL
OR AZ
DE
NV
WV
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
Sources: SNL Financial LLC.; Insurance Information Institute.
States with the poorest performing economies also produced the most negative
net change in premiums of the past 6 years
Nearly half the states have yet to see commercial lines premium
volume return to pre-crisis levels
14
Direct Premiums Written: Workers’ CompPercent Change by State, 2007-2014*
35
.1
27
.1
27
.1
24
.4
22
.3
20
.6
18
.7
14
.6
11
.7
9.4
7.5
7.1
6.7
4.2
3.9
3.8
2.7
1.7
0.5
0.1
0.1
0.0
-1.1
-1.1
-1.3
-5
0
5
10
15
20
25
30
35
40
IA CA
SD
NY
OK NJ
CT
KS
NE MI
MS IN
MN
US
NM TX WI
IL
CO
GA
VA
NH PA RI
MD
Pe
ce
nt
ch
an
ge
(%
)
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 States
Only 21 states have seen works comp premium volume
return to pre-crisis levels
15
Direct Premiums Written: Worker’s CompPercent Change by State, 2007-2014*
-2.6
-2.9
-3.6
-4.8
-6.0
-8.5
-9.1
-9.2
-9.2
-11
.7
-12
.2
-13
.5
-14
.4
-17
.1
-17
.9
-19
.4
-19
.5
-23
.4
-25
.2
-29
.5
-30
.3
-34
.9
-80-75-70-65-60-55-50-45-40-35-30-25-20-15-10-50
VT
DC
MA ID NC AZ
MO LA
TN AR
SC
ME
AK
AL
FL
KY
UT
MT HI
DE
OR
NV
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.Sources: SNL Financial LC.; Insurance Information Institute.
States with the poorest performing economies also produced some of the most
negative net change in premiums of the past 7 years
INVESTMENTS: THE NEW REALITY
16
Investment Performance is a Key Driver of Profitability
Low Yields Have an Especially Large Influence on Profitability of
Long-Tailed Lines Like WC16
Property/Casualty Insurance Industry Investment Income: 2000–2015E1
$38.9$37.1 $36.7
$38.7
$54.6
$51.2
$47.1 $47.6$49.2
$48.0 $47.3$46.2 $46.7
$39.6
$49.5
$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15E
Due to persistently low interest rates,investment income fell in 2012, 2013 and 2014.
1 Investment gains consist primarily of interest and stock dividends. *2015 figure is estimated based on annualized data through Q1.Sources: ISO; Insurance Information Institute.
($ Billions) Investment earnings are still below their 2007 pre-crisis peak
18
U.S. Treasury Security Yields:A Long Downward Trend, 1990–2015*
*Monthly, constant maturity, nominal rates, through July 2015.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.
Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full 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 years to come.
U.S. Treasury yields plunged to historic lows in 2013. Longer-
*Through August 24, 2015.Source: NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html Ins. Info. Inst.
Tech Bubble Implosion
Financial Crisis
Annual Return
Energy Crisis
2015 YTD:
-8.1%
S&P 500 Index Returns, 1950 – 2015*
Fed Raises Rate
Volatility is endemic to stock markets—and may be increasing—but there is no persistent
In 2014…Largest Increase in Jobs Since 1997Unemployment Rate Fell to Lowest
Level Since 2008Payrolls Expanded to Record High
25
26
Unemployment and Underemployment Rates: Still Too High, But Falling
2
4
6
8
10
12
14
16
18
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Jan11
Jan12
Jan13
Jan14
Jan15
"Headline" Unemployment Rate U-3
Unemployment + Underemployment RateU-6
“Headline” unemployment
was 5.3% in July 2015. 4.5% to
5.5% is “normal.”
Source: US Bureau of Labor Statistics; Insurance Information Institute.
January 2000 through July 2015, Seasonally Adjusted (%)
Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is continuing to improve.
26
U-6 soared from 8.0% in March
2007 to 17.5% in October 2009; Stood at 10.4% in June 2015.8% to 10% is
“normal.”
23
15
21
70
52
12
65
73
-71
32 6
4 81
55
3-1
15
-10
6-2
21
-21
5-2
06
-26
1-2
58
-42
2-4
86
-77
6 -69
3-8
21
-69
8-8
10
-80
1-2
94
-42
6-2
72
-23
2 -14
1-2
71
-15
-23
22
0-3
81
92
94 11
01
20
11
71
07
19
91
49
94
72
22
32
31 3
20
16
61
86
21
91
25
26
81
77
19
12
22
36
42
28
24
61
02
13
17
51
72
13
61
59
25
52
11
21
52
19 26
31
64
18
8 22
22
01
17
01
80
15
32
47
27
28
61
83
17
5 22
33
13
23
8 27
22
43
20
92
35
21
84
14
31
92
02 2
61
11
7 18
9 25
22
27
21
0
11
3
(1,000)
(800)
(600)
(400)
(200)
0
200
400
600
Jan-
07F
eb-0
7M
ar-0
7A
pr-0
7M
ay-
Jun-
07Ju
l-07
Aug
-S
ep-
Oct
-07
Nov
-D
ec-
Jan-
08F
eb-0
8M
ar-0
8A
pr-0
8M
ay-
Jun-
08Ju
l-08
Aug
-S
ep-
Oct
-08
Nov
-D
ec-
Jan-
09F
eb-0
9M
ar-0
9A
pr-0
9M
ay-
Jun-
09Ju
l-09
Aug
-S
ep-
Oct
-09
Nov
-D
ec-
Jan-
10F
eb-1
0M
ar-1
0A
pr-1
0M
ay-
Jun-
10Ju
l-10
Aug
-S
ep-
Oct
-10
Nov
-D
ec-
Jan-
11F
eb-1
1M
ar-1
1A
pr-1
1M
ay-
Jun-
11Ju
l-11
Aug
-S
ep-
Oct
-11
Nov
-D
ec-
Jan-
12F
eb-1
2M
ar-1
2A
pr-1
2M
ay-
Jun-
12Ju
l-12
Aug
-S
ep-
Oct
-12
Nov
-D
ec-
Jan-
13F
eb-1
3M
ar-1
3A
pr-1
3M
ay-
Jun-
13Ju
l-13
Aug
-S
ep-
Oct
-13
Nov
-D
ec-
Jan-
14F
eb-1
4M
ar-1
4A
pr-1
4M
ay-
Jun-
14Ju
l-14
Aug
-S
ep-
Oct
-14
Nov
-D
ec-
Jan-
15F
eb-1
5M
ar-1
5A
pr-1
5M
ay-
Jun-
15Ju
l-15
Monthly Change in Private Employment
January 2007 through July 2015 (000s, Seasonally Adj.)
Private Employers Added 12.84 Million Jobs Since Jan. 2010 After Having Shed 5.01 Million Jobs in 2009 and 3.76 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (8/15 edition); Insurance Information Institute.
2007:Q1 to 2016:Q4F*
Unemployment forecasts have been revised modestly
downwards. Optimistic scenarios put the
unemployment as low as 5.0% by Q4 of 2015.
Jobless figures have been revised
downwards for 2015/16
29
Unemployment Rates by State, June 2015:Highest 25 States*
7.4
7.0
6.9
6.8
6.6
6.6
6.4
6.4
6.3
6.1
6.1
6.1
5.9
5.9
5.9
5.8
5.8
5.7
5.7
5.7
5.5
5.5
5.5
5.5
5.4
5.3
0
2
4
6
8
WV DC NV AK MS SC LA NM CA AL GA NJ AZ IL RI MO NC AR CT TN FL MI NY OR PA US
Un
em
plo
ym
en
t R
ate
(%
)
*Provisional figures for June 2015, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In June, 21 states and the District of Columbia had over-the-month unemployment rate decreases, 12 states had increases, and 17 states had no change.
30
5.3
5.2
5.2
5.1
4.9
4.9
4.7
4.7
4.6
4.6
4.5
4.5
4.4
4.2
4.1
4.0
4.0
3.9
3.9
3.8
3.8
3.7
3.6
3.5
3.1
2.6
0
1
2
3
4
5
6
WA MD OH KY IN VA DE ME MA WI KS OK CO TX WY HI ID MN MT NH SD IA VT UT ND NE
Un
em
plo
ym
en
t R
ate
(%
)
Unemployment Rates by State, June 2015: Lowest 25 States*
*Provisional figures for June 2015, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In June, 21 states and the District of Columbia had over-the-month unemployment rate decreases, 12 states had increases, and 17 states had no change.
32
Average Weekly Hours of All Private Workers, Mar. 2006—April 2015
*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates); Insurance Information Institute.
Average Hourly Wage of All Private Workers, Mar. 2006—April 2015
*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates); Insurance Information Institute.
$0.00
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15
The average hourly wage was $24.87 in April 2015,
up 17.2% from $21.22 when the recession began in Dec. 2007