Economic Trends Affecting Automobile Insurance

Economic Trends AffectingAutomobile InsuranceAIPSO 10th Residual Market Planning ConferenceProvidence, RIApril 10, 2012Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038Office: 212.346.5540 Cell: (917) 494-5945 stevenw@iii.org www.iii.org

The Strength of the EconomyWill Affect P/C InsurerGrowth OpportunitiesGrowth Will Expand Insurable Exposuresand Help Absorb Excess Capital2

Real GDP Growth: Past Recessionsand Recoveries, Yearly, 1970-2012Real GDPGrowth (%)In the current recovery,real yearly GDP growthhas been 2.4% or lessBut, following the 1991 and 2001recessions, real yearly GDPgrowth was weaker than %-4%In most recoveries, realyearly GDP growth isoften 4% or moreSource: (GDP) U.S. Department of Commerce at http://www.bea.gov/national/xls/gdpchg.xls.3

March 2013 Forecasts of QuarterlyUS Real GDP for 2013-14Real GDP Growth 8%2.9%3.0%2.0%2.1%2.2%2% 2.0%1.6%1%1.7%1.7%10 Most Pessimistic1.1%Median10 Most Optimistic0%13:Q213:Q313:Q414:Q1Sources: Blue Chip Economic Indicators (3/13); Insurance Information Institute14:Q214:Q314:Q44

Personal Auto InsurancePremium GrowthDepends on Exposure Growth,Price Level Changes, and Other Factors5

PP Auto Liability: Loss LAE Ratio vs.Change in Net Premiums Written, 1990-2010100Loss & LAE Ratio12%NPW Growth10%8%906%854%80Change in 917590Loss LAE Ratio95Historically, loss trends are a main driver of premium volume changes.Sources: A.M. Best; Insurance Information Institute6

Monthly Change* in Auto InsurancePrices, 1991–201310%9%8%“Hard” marketstend to occurduring recessionsA pricingpeak, at a5.4% rate7%6%5%4%3%2%1%0%Latest(Jan 2013)at 4.9%-1%-2%'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13Cyclical peaks in PP Auto tend to occur approximately every 10 years(early 1990s, early 2000s, and possibly the early 2010s)*Percentage change from same month in prior year; through January 2013; seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.7

Auto Loans and other NonrevolvingCredit Outstanding, 1990–2013* Billions 2,000No growth in outstandingnonrevolving credit forthree years 1,750 1,500 1,250 1,000Spurtbegan inDec. 2010 750 500'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13Note: Recessions indicated by gray shaded columns. *Latest data is for January 2013, preliminarySources: Federal Reserve oad.aspx?rel G19&series 8ee7aa36107a130bcc862d44824a3b86&lastObs &from &to &filetype csv&label include&layout seriescolumn&type packageNational Bureau of Economic Research (recession dates); Insurance Information Institutes.8

Auto/Light Truck Exposure Changes,2000-2014FMillionsof Unitsnew vehicle 2008(5)-14.020In a “normal” 2-year span, new cars would replace about 25 millionold cars, but in 2009-10 only about 17 million old cars were replacedSources: NADA, State of the Industry Report 2012, p. 16, at www.nada.org/nadadata citing R. L. Polk; new vehicleestimate/forecasts from Blue Chip Economic Indicators, 3/2013 issue; scrappage estimates/forecasts from InsuranceInformation Institute.9

PP Auto NWP vs. # of Vehiclesin Operation, 2001–2011 BillionPrivate Passenger Auto PremiumNo. of Vehicles in Operation (millions) 165250245 155240235 145230225 135220 PP Auto premiums written are recovering from a period of no growthattributable to the weak economy affecting new vehicle sales, car choice,and increased price sensitivity among consumersSources: A.M. Best; NADA, State of the Industry Report 2012, p. 16, at www.nada.org/nadadata citing R. L. Polk;Insurance Information Institute.10

Something Unusual is Happening:Miles Driven*, ,5002,4002,3002,200Miles Driven Growth per 5-Yr Span1997 vs. 1992: 13.9%2002 vs. 1997: 11.5%2007 vs. 2002: 6.1%2012 vs. 2007: -3.0%Some of the growth inmiles driven is due topopulation growth:1997 vs. 1992: 5.1%2002 vs. 1997: 7.4%2007 vs. 2002: 4.7%2012 vs. 2007: 3.4%A record: miles drivenhas been below the priorpeak for 62 straightmonths. Previous recordwas in the early 1980s(39 months)Will the trend towardhybrid and non-gasolinepowered vehicles affectmiles driven? Whatabout the aging andretirement of the babyboomers?2,100'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13*Moving 12-month total. The latest data is for January 2013.Note: Recessions indicated by gray shaded columns.Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm );National Bureau of Economic Research (recession dates); Insurance Information Institute.11

Do Changes in Miles Driven AffectAuto Collision Claim Frequency?Paid Claim Frequency (# of paidclaims)/(Earned Car Years) x 10030506.913000Paid Claim Freq6.656.529506.322900Has the drop infrequency 50280027502001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*“Pay-As-You-Go” Auto Insurance: Fluctuations in miles driven will affect exposure*2012 collision claim frequency data is for twelve months ending September 2012.Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm; ISO Fast Track Monitoring System,Private Passenger Automobile Fast Track Data: 3rd Qtr. 2012, published January 8, 2013, and earlier reports.Billions of Miles Driven7.0Collision Claim FrequencyBillions of Vehicle Miles

Do Changes in Miles Driven AffectAuto Claims Payments (BI PhysDam)?Incurred Losses( Billions)Incurred LossesBillions of Vehicle Miles3050 80.91 80.23 80 76.98 77.233000 74.92 753025 72.892975 70.36 70 68.982950 67.14 652925200420052006200720082009201020112012*The sharp drop in miles driven in 2008 and the smaller drop in 2011didn’t slow the growth of auto insurance incurred losses*2012 claims data is for twelve months ending September 2012.Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm; ISO Fast Track Monitoring System,Private Passenger Automobile Fast Track Data: 3rd Qtr. 2011, published January 8, 2013, and earlier reports.Billions of Miles Driven 85

Inflation and Claims Trends14

Prices for Hospital Services:12-Month Change,* 1998–2013RecessionOutpatient ServicesInpatient 5'06'07'08'09'10'11'12'13Cyclical peaks in PP Auto tend to occur approximately every 10 years(early 1990s, early 2000s, and possibly the early 2010s)*Percentage change from same month in prior year; through January 2013; seasonally adjustedSources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.15

Forces that Drive Car Repair Costs:12-Month Change,* 2001–2013RecessionAuto repairAuto body '10'11'12'13Cyclical peaks in PP Auto tend to occur approximately every 10 years(early 1990s, early 2000s, and possibly the early 2010s)*Percentage change from same month in prior year; through January 2013; seasonally adjustedSources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.16

PP Auto BI Liability Paid ClaimFrequency*, 2004:Q1-2012:Q3% Change from samequarter, prior Q22012:Q3-9%The frequency of PP Auto BI paid claims (paid claims as a percent of earnedcar-years) fell (at a slowing rate) from 2004-2010, rose in 2011, fell again.*measured as % change from same quarter, prior yearSource: ISO Fast Track data.

Trend in PP Auto BI Liability AverageLoss* 2008:Q4-2012:Q3% Change from samequarter, prior yearBI liability average lossseems to be moderating.7%6%5%4%3%2%1%*measured as % change from same quarter, prior yearSource: ISO Fast Track :Q22009:Q12008:Q40%

PP Auto PD Liability Paid ClaimFrequency*, 2008:Q4-2012:Q3% Change from samequarter, prior year3%2%1%0%-1%-2%-3%-4%The frequency of PP Auto PD liability paid claims fell in 2008-09but has been essentially flat 10 the last 12 quarters.*measured as % change from same quarter, prior yearSource: ISO Fast Track :Q22009:Q12008:Q4-5%

Trend in PP Auto PD LiabilityAverage Loss 2008:Q4-2012:Q3% Change from samequarter, prior year3.0%2.5%PD growth in averageloss trending downuntil 2010:Q3 2.0%1.5%Then risingfairly steadilyuntil 2012:Q21.0%0.5%0.0%-0.5%*measured as % change from same quarter, prior yearSource: ISO Fast Track :Q22009:Q12008:Q4-1.0%

CDC Report: Cell Phone Use WhileDriving, US and Europe, Fall 2011Percentsaying“regularly” or“fairly often”30%“In the past 30 days, howoften have you talked onthe phone while you weredriving?”27.5%“In the past 30 days, how oftenhave you sent a text message ore-mail while you were driving?”19.5% 5.2%5.9% 6.5%2.8%0%Talked on mNetherlandsPortugalSources: “Mobile Device Use While Driving—United States and Seven European Countries, 2011,” in Morbidity and Mortality WeeklyReport, Centers for Disease Control and Prevention, Vol. 62, No. 10, (March 15, 2013) available 1.ht5m?s cid 6210a1 e ;Insurance Information Institute21

Investments22

U.S. Treasury Security Yields*:A Long Downward Trend, 1990–20139%Yields on 10-Year U.S. TreasuryNotes have been essentiallybelow 5% for a full decade.8%7%U.S. Treasurysecurity yieldsrecently plungedto record lows6%5%4%3%2%1%0%Recession2-Yr Yield10-Yr Yield'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13Since 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.*Monthly, constant maturity, nominal rates, through Feb 2013.Sources: Federal Reserve Bank at m.National Bureau of Economic Research (recession dates); Insurance Information Institutes.23

Distribution of Bond Maturities,P/C Insurance Industry, 15.7%200715.2%30.0%200616.0%200536.2%10.3% 6.3%26.7%28.7%11.7% %11.1% Under 1 year1-5 years5-10 years10-20 yearsover 20 years7.6%9.2%100%The main shift over these years has been from bonds with longer maturities to bondswith shorter maturities. The industry first trimmed its holdings of over-10-year bonds(from 24.6% in 2003 to 16.9% in 2011) and then trimmed bonds in the 5-10-year category.Falling average maturity of the P/C industry’s bond portfolio is contributing to a drop ininvestment income along with lower yields.Sources: A.M. Best; Insurance Information Institute.24

Insurance Information Institute Online:www.iii.orgThank you for your timeand your attention!

Economic Trends Affecting Automobile Insurance AIPSO 10th Residual Market Planning Conference Providence, RI April 10, 2012 Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist