Insurance Market Insights: Emerging Trends to Watch

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Text, Wednesdays With Woodward (registered trademark) Webinar Series; Insurance Market Insights: Emerging Trends to Watch; Logos for the following: Young Risk Professionals, University of South Carolina Darla Moore School of Business, Travelers Institute, Travelers, Gamma Iota Sigma, American Property Casualty Insurance Association; Joan Woodward. 

(SPEECH) 
Good afternoon, and thank you so much for joining us. I'm Joan Woodward, and I'm honored to lead the Travelers Institute, which is our public policy and educational arm of Travelers. Today we have a really terrific program for you, and it's actually the last of the summer. We're going to resume our programming starting in September after 32 sessions of Wednesdays with Woodward. Since the pandemic hit, we're so glad you've been able to join us for all of these sessions, and we look forward to our fall programming after today's session. 

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Text, Connect: LinkedIn - Joan Kois Woodward; Give feedback on this program: Survey link in chat; Join our email list: institute @ travelers dot com; Watch past webinars: travelers institute dot org; Hashtag Wednesday with Woodward. 

(SPEECH) 
So you can join our mailing list or connect with me, but please stay engaged over the summer with us. We have lots of replays on TravelersInstitute.com. So check the chat feature there. There's ways to connect with us. You can also connect with me directly on LinkedIn and watch our replays at TravelersInstitute.org. 

So before we get started, I'd like to share our disclaimer about today's program. 

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Disclaimer: About Travelers Institute Webinars; The Wednesdays with Woodward educational webinar series is presented by the Travelers Institute, the public policy division of Travelers. This program is offered for informational and educational purposes only. You should consult with your financial, legal, insurance or other advisors about any practices suggested by this program. Please note that this session is being recorded and may be used as Travelers deems appropriate. 

(SPEECH) 
Also in the chat we put a survey. So please complete the survey to help us get better programming for the fall and winter series. Our special program today, we're going to have Dr. Bob Hartwig, and after his presentation, we are going to take your questions. So please put your questions in the Q&A feature. If you don't want me to read your name, send it anonymously and I will not. 

So we're thrilled to be joined by our partners today, including the American Property Casualty Insurance Association, Young Risk Professionals Association, Gamma Iota Sigma, and of course, the University of South Carolina's Darla Moore School of Business where our speaker Dr. Robert Hartwig teaches. 

So a huge thank to all of our partners for the work they've been doing with us to help put on these programs. We're excited to take a deep dive into emerging trends today and what they'll mean for the property casualty insurance industry. And that--who's going to help us with that is Dr. Bob Hartwig. 

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Speakers: Joan Woodward, Executive President, Public Policy; President, Travelers Institute, Travelers.; Robert P. Hartwig, PhD, Director, Risk and Uncertainty Management Center; Clinical Associate Professor; Darla Moore School of Business, University of Carolina. 

(SPEECH) 
Dr. Bob Hartwig is currently the Clinical Associate Professor of Finance and the Co-director of the Risk and Uncertainty Management Center at the University of South Carolina's Darla Moore School of Business. He is a leading authority, if not the leading authority on the P&C industry. His research focuses on insurance markets, structures, risk management, risk-bearing capital market instruments, and financing and technology risks, and of course, venture capital in the insurance markets, which is really heating up, and Bob will talk about that. 

So prior to joining the University of South Carolina, Bob was the President and Chief Economist for the Insurance Information Institute, which is an organization that empowers consumers by providing insights and information about insurance. He is a sought-after speaker in the insurance industry, regularly presenting at industry conferences, has testified before Congress over 10, 15 times already, including last week. 

So today he will explore the economic outlook, technology risks, CAT losses, and more to give us insights. Before I turn it over to Bob, however, I want to engage you. We have over 2,000 people today on this session, and thank you very much for joining us. And I want to get your thoughts on this industry. 

So, we're going to ask you a audience polling question. And here it is, in your opinion, the greatest challenge facing the property casualty industry moving forward is, the economic outlook, digitization trends, talent acquisition--this is a huge issue for our industry, attracting and retaining young talent--or older talent as a matter of fact, CAT losses, what is social inflation, et cetera. So what do you think is the most important for our industry? And that will help us inform the discussion we're going to talk about today. 

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Audience Responses appear: Talent retention slash acquisition, 31.9%; Catastrophe losses, 20.9%; Litigation climate - 19.6%; Keeping up with digitization trends, 11.4%; Technology risks, 9.9%; Economic outlook, 6.3% 

(SPEECH) 
So let's see the results. It looks like talent retention is certainly one of them. Cat losses is another big one out there. The litigation climate, of course, is always--people are not--doesn't seem to be worried about the economic outlook, and that's a really, really good thing. So Bob, what do you think of these results? And I know you're going to talk about the economy, but how does this strike you in terms of the most important challenge facing our industry now? 

Well, thank you, Joan, it's a pleasure to be here. And I have to admit, I'm very gratified to see that apparently I made a very good career choice by moving from the industry itself into educating the next generation of talent with about a third of the people indicating that is their--the concern that they have more than just about anything else. 

And I think with that, I should give a little shout out to my own Research Assistant, Elizabeth Wallace, who's an intern with Travelers right now out in your surety office in Pittsburgh, Pennsylvania. And so Travelers is certainly helping out in terms of bringing along that next generation of talent. And 

So I have to say that I am very glad to see this, and we'll talk a bit more of this during the course of the presentation and then some questions afterwards. But at the University of South Carolina, we do have the fourth largest program in the United States. And we do place students not just with insurers or brokers or agencies but in a risk management context, very broadly defined, whether that's in banking, in government, in international and domestic contexts. It's very interesting to go see what they can do. And when they're introduced to the concept of risk management insurance, really, a lot of light bulbs go off and they're very, very excited about that. 

So thank you very much, Joan, again. And I will begin here by sharing my screen. And hopefully everybody will be able to see this in a moment. 

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Insurance Market Insights; Emerging Trends in Insurance. Travelers Institute Webinar Series, July 28, 2021. Robert P. Hartwig, PhD, C.P.C.U, Email: Robert dot Hartwig @ Moore dot s.c dot e.d.u. -- Phone, 8 0 3 7 7 7 6 7 8 2. University of South Carolina Darla Moore School of Business. 

(SPEECH) 
So again, thank you all for being here as we kind of take a whirlwind tour through some emerging issues in the insurance world, focusing on the property casualty world, but what a year it's been. What an extraordinary series Joan has had over the last 30-something Wednesdays during the bulk of the COVID pandemic. 

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Emerging & Key Issues in Insurance. 

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What we're going to talk about today, as Joan mentioned, we'll be talking about the US and global economic overview and a bit of an outlook, too, for the remainder of this year and 2022. A little bit of a Capitol Hill update. Joan had already mentioned that I regularly testify in front of various regulatory and legislative bodies, and the most recent was last week on pandemic risk insurance program. So I will go through that a bit. 

We'll do a quick overview and outlook for the P&C world. And then we'll focus on some things that are very much in the news every single day. Catastrophe, loss trends, technology, particularly as it applies to insurers, social inflation litigation trends, and then we'll have some time for your questions at the end. 

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Text, The Economy; COVID-19 Pandemic impacted but far less than anticipated, 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. 

(SPEECH) 
So without any further ado, let's talk about the economy, because beyond the pandemic, that has been first and foremost in the minds of just about everybody, and the pandemic and the economy, of course, are almost one and the same in the sense that the pandemic has been the greatest influencing factor on the economy over the past 18 months or so. 

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US Real GDP Growth chart, GDP Growth percentage for 2016 to '22, each with four quarters. 

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And that's most obvious, I think--and the highest-level statistic you can look at, which is the change in GDP in this country on a quarterly basis. We've seen numbers that we haven't seen the likes of since the Great Depression, when literally about five quarters ago, the second quarter of 2020, we saw the economy shrink by about a third. And we saw it grow by about a third in the third quarter of last year. 

So where we are right now is what I've highlighted in green. We're doing we're in a period of very robust growth, which is expected to return back to a more normal level of growth by the time we get to 2022. And that's what you would expect. But we're looking at about 9% annualized growth at this point during the middle part of 2021. Very, very strong growth indeed. That's influencing many other things, such as the course of interest rates, which the 10-year was closer to 2% prior to COVID. It descended to as low as about 62 basis points in July of last year, and it's about 1 and 1/4 today. 

That will get into something else I'm going to talk about, and I know something that number of you have already written questions about to me, about inflation and inflationary expectations, which has also been very much in the news. That very much influences the P&C insurance industry in a variety of ways that we'll discuss momentarily. 

Now of course, the economic climate and the changes in the economy are not isolated to the United States. What we saw was a worldwide recession. In fact, what we saw is global economic growth shrink. 

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Line chart titled GDP Growth: Advanced & Emerging Economies vs. World, 1970 to 2022 F. 

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Real GDP across the world shrank by about 3 and 1/2 percent last year. Coming back nicely this year, and it's actually the case that emerging and developing economies are showing stronger growth than we are seeing, say, in the United States, Western Europe, and Japan, although there's nothing unusual about that pattern today. 

Of course, these numbers could be revised down a bit, particularly abroad given the ferocity of the Delta variant in COVID and the fact that this is causing significant problems in some of the world's largest economies such as India, Indonesia, and places like that. 

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Text, The economy drives P/C insurance industry premiums: 2006 Q1 to 2021 Q1. Line chart titled Direct Premium Growth (All P/C Lines) vs. Nominal GDP: Quarterly Y.o.Y Percentage Change. 

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But it's important to understand how closely linked the P&C insurance industry is to overall growth of the economy. 

So here you see--going all the way back to the beginning of the financial crisis in early 2008, what you see is year-over-year change in GDP in orange, and you see the direct written premium change in blue. And you could see, they're pretty closely associated with one another even during the economic downturn. 

Now during the downturn last year in 2020, I had to smooth this out by looking at the average for all of 2020 because of the oscillations from quarter to quarter that we saw. But once you do that smoothing, you actually see that, in fact, what happened last year is GDP growth fell fairly sharply, of course. We saw direct written premium growth decelerate, but it was still positive, it was still about 2.5% last year or so. And before moving upward again in 2021. 

So as anomalous as last year was, the historical association between premium growth in this industry and overall economic growth held pretty firmly. 

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Bar chart, U.S. Unemployment Rate Forecast: 2007 Q1 to 2022 Q4. 

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We've also heard a lot about the unemployment rate. Just before COVID, the unemployment rate was 3 and 1/2 percent in February of 2020. It's hard to believe, that was the lowest number in about 50 years. Now we're at 5.9% in June of 2021. 

And these are quarterly numbers, but we did peak at almost 15% in April of last year, 14.8%. That's come down, as I mentioned, to 5.9% now. And we're expecting, by the time we get to late 2022, we'll be back to what the Fed considers full employment, which is about 4% or 4.1% or so. So these are good strong numbers. We're on a good trajectory to continue economic growth to bring the unemployment rate down. And there are a lot of details behind that unemployment rate, of course, in terms of the fact that, for instance, there are 22.2 million jobs were lost between February and April of last year. 

We've gained most of them back, but still, there are 6.8 million fewer jobs in the economy today than there were prior to COVID. And that's in large part because many people are still staying out of the labor force. So labor force participation remains depressed. So when I talk about workers' comp, for instance, in more detail, we spend far more time on those sorts of things, because workers' comp, obviously a major P&C line affected by payroll as its exposure base. 

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U.S. Inflation Rate: 2009 to 2022 F; Bar chart shows Percentage Change. 

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Now as I mentioned, huge amount of discussion in the media recently and on the part of Fed about where is inflation headed in the United States? You hear all kinds of doom and gloom prognostications that we're headed for inflation that's going to be high for the indefinite future. I don't agree with that assessment at all. In fact, I agree almost entirely with the Fed's assessment that inflation is transient. By transient, I mean it's going to last a number of quarters or a year, and even to the end of 2022 to some extent. 

And so where are we seeing that? We've heard it very famously. We've heard it in lumber prices. We've seen it at the gas pump. We've seen it with respect to food prices. And so a lot of this has to do with the supply chain uncertainty that's out there, supply chain disruptions, and the fact that people have a lot of money in the bank. You have to understand, people have been given trillions and trillions of dollars. Their personal savings are up, and they're willing to tolerate these sorts of price increases. They are willing to pay for it. Not that there aren't complaints, but they are willing to pay for it. 

So all of this and more is producing a situation in which we've got the highest inflation rate in quite a few years in 2021. Still elevated in 2022, but similar to what it was in 2011. The concerns on the insurance side, of course, are whether or not rate inadequacy will develop as a result of this, and reserve inadequacy potentially if we wind up with a sustained upward trend in inflation. 

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Change in used car and truck prices: January 1954 to June 2021 (Monthly data, annual change from year ago). Percentage Change line chart. 

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So I think that's a temporary issue. I think that insurers can appropriately price, for instance for shorter-term situations. So very famously we heard about, for example, the change in used car prices. One-third of the entire increase in the CPI in June was due to a record increase in used car and truck prices. So we saw those rise by about 45% in June. That was the highest number in the entire series associated with used car and truck prices, which go all the way back to 1954. 

But this number is not sustainable. It is not going to be the fact that we are going to see a nearly 50% increase in used car prices, which of course, when you look at that, that's going to have an impact on personal auto and commercial auto. But this will not be sustained. This will come back down to Earth as it always has in the past. 

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Text, What role should private insurers play during a pandemic? 

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Again, just as lumber prices have already come back down to Earth, for instance, and so that should help insurers with respect to repair costs, particularly important as we get into the peak of hurricane season and potentially mega-caps going forward. We'll talk about that in a moment. Now as John mentioned, hot off the presses, what's going on with pandemic risk insurance programs in the United States? The Subcommittee of the US Senate Banking Committee held a hearing last week at which I was one of several witnesses. 

And the major questions to be asked--or to be addressed in this hearing were, how much risk should the private sector bear, if any? How much protection should the program provide to businesses? And here, we're largely focused on business interruption. 99% of the focus is on business interruption here. 

Should the government charge a premium for the risk that it bears? Should businesses be compelled to purchase coverage? Should insurers be compelled to offer the coverage? Should there be some kind of bifurcation--in other words, one plan for smaller firms, one for larger firms? Should we include workers' comp and GL here? Right now we're largely focused on business interruption. 

So you can download the entirety of my 19-page written testimony from the link that you see here. If you go to riskcenter.com, you'll find that as well as the PowerPoint slides that go with it. But the hearing did present a variety of views, ranging from the view that insurers should participate or could reasonably participate but should bear no actual risk. That just the plumbing of the industry should be used to transmit funds to businesses in a program that could be designed. Or that insurers should participate with material risk under the Pandemic Risk Insurance Act. That would involve as much as $50 billion of insurer participation, risk-bearing. 

And then my actual view on this is that no program is needed. 

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COVID-19 Stimulus Plans: $8.3 Billion, Coronavirus Preparedness and Response Supplemental Appropriations Act; $225 Billion, Families First Coronavirus Response Act; $2.2 Trillion, CARES Act; $483 Billion, Paycheck Protection and Health Care Enhancement Act; $920 Billion, Consolidated Appropriations Act; $1.9 Trillion, American Rescue Plan Act. 

(SPEECH) 
So I did predicate that on some analysis of how well the sixth COVID-19 relief bills have done so far, providing nearly $6 million in assistance to businesses and individuals across the country. And again, when you look at the improvement in the economy, you look at the improvement in the unemployment rate and many, many, many other measures, my assessment is that we're better off not creating a new program. 

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Text, Where are these proposals going? My View: Likely these proposals will go nowhere; No industrywide unifying commitment such as for TRIA. 

(SPEECH) 
And that's what I'm asserting here, just basically summarizing. 

And also, my sense that within the industry itself--not the entire industry, but some carriers in particular that there's generally been this view that pandemics are fundamentally uninsurable in nature. And that they can only be addressed by a massive government intervention in that what we have here is that there are trillions of fiscal and monetary stimulus at play. No amount of private insurance funds are going to have any meaningful impact on the outcome here. 

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Estimated Monthly U.S. Business Interruption Coronavirus for Small Business - Potential Range (Less than 100 Employees). 

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So it would best serve the interests of the country if the insurers continue to focus on those risks that they can manage best and preserve their financial strength. And to give you a sense of the magnitude here, some estimates were made that total business interruption losses across the country on a monthly basis at the height of the pandemic were about $1 trillion a month. That's balanced against about $800 billion in P&C surplus across the entire industry at the start of the pandemic. For small businesses, it ranges to as much as $400 billion or so a month. 

So we're talking about sums of money that basically are so large as to make only the United States government capable of protecting small businesses against business income interruption losses in light of future pandemics. 

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Uninsurability of Mass Market Business Continuity Risks From Viral Pandemics. Co-authored by Dr. Robert Hartwig and A.P.C.I.A. – Paper on Insurability of Pandemic Risk.  Large scale business continuity risks from pandemics are generally not 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, Important role for government. 

(SPEECH) 
And so I have written about this on a number of occasions, and I won't go through this, but a paper you can download also from the USC Risk Center website, a series of three papers, and a fourth will be coming out soon. 

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Text, Figure 6: Pandemic - An insurable risk? Table shows six requirements of an insurable risk and a column titled Requirement met, yes or no? 

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But this is essentially an adaptation of a slide that I literally use in my introductory risk management and insurance class about what types of risks are insurable or not, and in this particular context, I use pandemic risk as the example. And if you look at the six traditional criteria for insurability, on the left-hand side--again, not going to read all of these, but many people do like to have this slide, they find it very useful. You'll find that pandemic really doesn't meet any of them. 

And the one I focus on is the one that most people to understand most readily, is the fact of the matter is, when we're talking about trillions of potential, say, business interruption losses, this is just out of the league of anything that the private property casualty insurance or reinsurance industry can really have any meaningful impact on. 

And as a segue into a discussion about the economy--or follow-up to that is all this government spending, of course, has had real fiscal impact. So the US national debt now is up to nearly $28 trillion, and you could see how in just the past year or so, it's increased very, very rapidly indeed. 

So this has brought us to an all-time record high debt-to-GDP ratio. We're now exceeding what it was during World War II. So that's a whole other can of worms. It's going to be beyond any of our pay grades to solve, although we will all eventually be taxed to pay for it. 

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Text, 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. 

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Now, in terms of the industry overall, how it's doing, let's get a sense of how we perform during COVID and then where we're headed. 

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Bar chart titled Policyholder Surplus (Capacity), 2006 Q4 to 2021 Q1. 

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Here's policyholder surplus in the business. And you could see how in the first quarter of last year, it fell fairly sharply, 9% as we saw a lot of financial market upset forcing asset values downward. But maybe to the surprise of many, and I think even including myself, we wound up at the end of 2020 with record policyholder surplus, $910 billion. And as of the end of the first quarter of this year, that's up to about $935 billion. 

So very likely there's nothing in the way of stopping new records from occurring through the remainder of this year and, in fact, ending 2021 with a new record high in terms of overall industry capacity. So the good news is that the industry entered COVID financially stable, strong, and secure, and it exited COVID financially stable, strong, and secure. And that's exactly how we want this industry to perform. In terms of growth, we did see an impact from COVID. 

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Net Premium Growth (All P/C Lines): Annual Change, 1971 to 2021 F. 

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We did see we did see actual premium growth drop by about half from what it was expected. We were expecting growth pre-COVID for 2020 to be about 3.8%, it was actually closer to 2%. This year we're expecting growth of about 4.6%. 

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P/C Insurance Industry Combined Ratio, 2001 to 2021 F. 

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Now in terms of the underwriting performance, again, you look at the numbers here for 2020 with a combined ratio of about 98, which is actually better than what AM Best had expected ahead of time, which was before COVID, which was 99. So students of the industry and historians will look at these numbers in the future and they won't be able to make--they won't be able to discern any COVID-related impact. 

And the reason for that was is because, well, there were some impacts associated with COVID, which actually, to some degree, were favorable in terms of fewer claims occurring. We actually saw pretty significant CAT losses. So net-net of that, we saw a combined ratio that was not much different than what was anticipated. And you can see, from 2018 to the current year, combined ratio of 98 to 99. This is almost an unprecedented level of underwriting stability in the industry. 

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Personal Auto Claim Frequency Trends Significantly Impacted by COVID but Severities Rise: 12 Months ending Q1 2021 vs. 12 Months ending Q1 2020. 

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Now I thought you'd find it interesting as these numbers continue to roll in, we get a good sense of how-- we take the largest of all lines, which is private passenger auto, when we look at how that affected claim frequency. So here, I'm looking at the 12 months ending as of March 31, 2021, which is the latest data we have, and compare that to the 12 months ended March 31, 2020. So just at the very early stages of the pandemic. 

So what we see is that essentially this is the toll that the pandemic took. Claim frequency for property damage liability was down by about a third. Personal injury protection or no-fall down by a quarter. Similar for collision. Bodily injury liability down about 20%. And comprehensive, which is mostly weather-related, down about 12%. 

But what you do see is that severity went up. So even though there were fewer claims, and that's why many insurers offer rebates or refunds, sent a check to their private passenger auto customers last year, severity continued to rise, and materially offsetting the declines that we saw in frequency. 

And so we would expect to see a bit more of this continue into 2021, at least through the first half. We don't have data through that far yet. But right now in many states, miles driven are actually at or where they were prior to the recession, and I expect that once many businesses go back to offices and everybody goes back to school beginning in the third quarter--sorry, the fourth quarter, we'll start to see numbers exceed what they were prior to the pandemic's onset. 

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P/C industry net income after taxes, 1991 to 2021: Q1. 

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In terms of the industry's net income, its profits, you could see they were down a bit in 2020. Again, not the collapse that many people had been predicting. And we were at about $20 billion in the first quarter of this year. So very difficult to say where that's going to wind up, of course, because we are not at the height of hurricane season at this point. 

So all in all, in terms of the profits of the industry and the underwriting performance, the numbers were relatively good. 

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R.O.E: Property slash casualty insurance by major event, 1987 to 2021: Q1. 

(SPEECH) 
The ROE last year, however, was only 6.8%, so that was down a bit from 2019. But through the first quarter of this year, it's up again, but again, very difficult to make any assessment about where we'll be at the end of the year. 

But the bottom line is this. Is that the industry held strong--was stable, strong, and secure during the industry--during the pandemic. When you look at underwriting performance, when you look at premium growth, not as deeply as affected as originally would have been impacted, and remained profitable during that pandemic. 

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Pie chart, COVID-19 insured losses: By country slash region 

(SPEECH) 
One of the reasons why the pandemic losses perhaps is not as great as many people would have anticipated is the fact that many of the losses are actually being shouldered by foreign insurers, in part because the losses are occurring abroad. So you see Europe, including the UK, accounts for the vast majority of the losses, about two-thirds of the losses. The US is only about 20%, from what I could assess, of global COVID-19 property casualty losses. So again, less, I think, than many people would have anticipated. 

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Text, Reasons why P/C insurance worst-case COVID scenario failed to materialize (so far). 

(SPEECH) 
Now, why isn't it the case that the doom and gloom scenarios we heard about a year ago, why is it they did not materialize for the P&C insurance industry? Well, part of it was the economic recovery is proceeding more quickly than anticipated. So more exposure got back on the books. Rapid financial market recovery. That's what helped propelled--helps propel not only investment income, but also helped propel policyholder surplus back up to record levels. 

Massive monetary and fiscal stimulus. The worst case outcomes for COVID itself from an epidemiological standpoint were avoided. Record pace of vaccine development. Getting the economy back on track, people back to work. Employers did a reasonably good job of risk management in terms of protecting workers from exposure. Many states did not repeat their spring 2020 lockdowns. Litigation outcomes were generally favorable for insurers in terms of BI litigation. 

And the workers' comp resumption expansions did not lead to an explosion of claims that many people thought they would. There also offsetting exposure reductions in many lines. So whereas we may have seen some exposures in workers' comp, for instance, we also saw a lot less in the way of claims overall simply because many workers simply weren't on the job for a period of time. 

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Investments: The new reality. Investment performance is a key driver of insurer profitability. Aggressive rate cuts will adversely impact invest insurer earnings. Financial crisis deja vu? Bar chart, Property slash Casualty insurance industry investment 2000 to 2021 F. 

(SPEECH) 
Now let's talk about investments a little bit. Very important to insurers. This is the second largest source of revenue. We could see that number trending downward in 2020. That is--and it looks like it's going to trend downward in 2021. That is essentially a response to the fact that interest rates are trending down once again. 

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Net investment yield on property slash casualty insurance invested assets, 2007 to 2020 F. 

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This is pushing down the yield on invested assets for P&C insurers. 

These numbers that we see for 2020, about 3%, of the lowest numbers that we've seen since the 1960s. So all else equal, this places a greater onus on underwriting and pricing discipline on the part of insurers. 

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Line chart, U.S. treasury security yields: A long downward trend, 1990 to 2021. 

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And here, you can see what's happened to short and longer-term interest rates. Shorter-term interest rates in particular remain pretty much in the cellar as the Fed aggressively cut during the pandemic. 10-year note has gone up a bit, but it's nowhere near as high as, of course, has been by historical standards. 

So this is a pressure point for insurers, and this is simply the new normal. Insurers simply have to price to this and underwrite to this for the indefinite future. 

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Text, The 2020s got off to an ominous start. Catastrophe loss update: Major driver of rate pressure. 

(SPEECH) 
Now let's talk about another major issue, catastrophe losses. 

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U.S. inflation-adjusted insured cat losses bar chart. 

(SPEECH) 
Catastrophe losses, we certainly started the decade off in an unfortunate manner with $67 billion in terms of insured CAT losses. 

But on an inflation-adjusted basis in red here, what you see is that average annual CAT losses decade by decade have been going up about $10 billion a decade, from $5 billion in the '80s to $35 billion in the prior decade. There's no reason to believe we wouldn't get to $45 billion on average in the 2020s given we started off with $67 billion last year. So this is a very challenging issue. This is an emerging issue, but it's been an emerging issue for a very long period of time. 

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2020 U.S. insured catastrophe highlights. 

(SPEECH) 
So, we had last year--just was a year of superlatives. In the interest of time, I won't go through all of these, but we had a record number of PCS designations, a record number of designations for hurricane and tropical storm-related events, record number for wildfire events. And we're seeing a continuation of those this year with extreme wildfire activity in the West already this year, and an expectation for above-average year in terms of hurricanes. 

Last year it was unusual in the sense that we had $1 and 1/2 billion of insured riots and unusual made events like the Nashville bombing on Christmas day. Hopefully those will not be repeated. Those are the largest numbers we had seen since the 1990s. But this year didn't start off very well with--it wasn't a hurricane; it wasn't a flood. It was, in fact, an extreme freeze, particularly in Texas. And this event produced somewhere in the neighborhood of $15 billion in insured losses. 

So while some parts of the nation baked, others have been frozen. 

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Bar chart, Top 20 most costly disasters in U.S. history -- Katrina still ranks #1 at $54.5 Billion. 

(SPEECH)
And last year we could see two significant events--sorry, Laura was the largest event of last year, Hurricane Laura, about $10 billion. But this list you see at the top, 20 most costly insurance disasters of all time, and Katrina by far and away still leads that list.

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CAT bond issuance and risk capital outstanding, 2010 to 2020.

(SPEECH)
Now, the good news is, is not only is the P&C industry overall well-capitalized, so was the global reinsurance world. And in addition, we've got an enormous amount of capital available through the capital markets. We've had record CAT bond issuance last year. And I have no reason to believe that would not continue into 2021. So a lot of capital to handle those issues.

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Text, Technology: Risk and Opportunity. For insurers, technology and progress create both risk and rewards. Primary, reinsurance and retro markets all impacted and are pressuring rates.

(SPEECH)
Now technology, something that we're all concerned about, of course.

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Data breaches 2005 to 2020, by number of breaches and records exposed.

(SPEECH)
We can think about it two ways. There's the threat of technology, and we could think about cyber risk, and when we see data breaches out there, not a day goes by when we don't hear about another company, major company that is suffering a breach. Just about any company you can think about, including insurers, have suffered breaches. And hundreds of millions of records are exposed on an annual basis. And quite frankly, this is a gross undercount, because many of these breaches are never reported.

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Number of ransomware attacks worldwide: 2016 to 2020 (millions).

(SPEECH)
Of course, we're very concerned about ransomware attacks nowadays. There are literally hundreds of millions of devices that are attacked on an annual basis here also. So estimated somewhere around 300 million last year. Again, this is probably an underestimate because a lot of them simply go unreported.

But of course, we saw the Colonial Gas Pipeline last year. Colonial paid a $5 million payment. JBS is a meat processor, paid $11 million. And even one insurer paid a $40 million ransom to unlock their system.

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Text, InsurTech funding and deal count.

(SPEECH)
So, there's the risk--there's the issue of cyber threats and cyber risk, a large and growing market for insurers who I think are stepping back a bit and reassessing but remain committed to this risk. But really, we're just getting our toes wet. When you think about it, this risk is really only 20 years old.

But on the other side of technology is the use of technology by the industry itself, and we could see global InsurTech funding reached a record about $2 and 1/2 billion in the first quarter of this year. Although in about 75% of that is associated with property casualty funding, but a small number of deals account for the majority of this. Just 44--account for eight deals for 44%.

But nevertheless, last year, despite COVID, 2020 was a record year for InsurTech funding, and we're seeing more and more InsurTech start up outside the United States and Western Europe in areas such as the Middle East, even Africa, South America, and Eastern Europe.

(DESCRIPTION)
Text, InsurTech is a great thing. How to value an InsurTech, Carrier management: June 21, 2021.

(SPEECH)
A lot of issues associated with InsurTechs. With literally thousands of InsurTechs out there nowadays and billions of dollars flowing into the business, quite frankly, they can't all be innovative, they can't all be disruptors as they claim to be.

And a number have gone public only to see their share price pop, then crash. Sometimes they've been sued as a result of that. And my assessment on this is that--I don't want to sound like a negative person here, but virtually all the InsurTechs out there today will fail. And it's partly because they operate within the kill zone of the major insurers, meaning that whatever modest innovation they develop can be relatively easily duplicated by incumbent insurers.

And as I say in a recent article that appeared in Carrier Management, that many investments in InsurTechs have about the same appeal as an investment in Dogecoin, quite frankly. And that is because far too many InsurTechs are being valued because they have the suffix "tech," and are not being valued in what would be more of a typical insurance-type valuation process. So there's a lot of froth out there on Wall Street and in Silicon Valley.

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Text, Technology: Sales & Distribution.

(SPEECH)
But in terms of technology in the use and sales and distribution, a lot of promise out there to make the industry more efficient. And you can see that most people do, in fact do some kind of online search, typically on a phone, before they actually make an insurance purchase. But the good news here out there for independent agents and brokers and so on is that, as I scroll through these a little bit quickly, is that the vast majority of individuals actually don't make their purchase online, they're going to make a phone call. They're going to talk to an agent, they're going to talk to a broker, they're going to talk to a CSR, and that's how they're going to conclude the transaction.

So it is still the case that agents and brokers--a human--are viewed as the ultimate power broker in terms of knowledge and information with respect to all things insurance. And particularly I think it doesn't take much beyond the very basic type of auto and home insurance before people have a distinct preference for--at least having the opportunity to speak to an individual to talk about that decision.

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Text, Social inflation & litigation trends. Court decisions have largely favored insurers, but concerns remain.

(SPEECH)
So I want to conclude with a discussion related to social inflation, and then we'll go into the Q&A with Joan in a moment.

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Bar chart, Average jury awards, 1999 to 2018 (latest available).

(SPEECH)
But unfortunately this is a data with respect to what goes on in the court system have a significant lag on them. But what you see over a long period of time here is unmistakable, is a sustained upward trend for the last 20 years in terms of average jury awards. The median award is much smaller. This is pushed up by some gigantic jackpot jury award types of verdicts.

But the reality of it is this. Is every day you can listen to the news, and quite frankly right now we're talking about one of the largest settlements in all of history. We're talking about opioid manufacturers where there's a $26 billion settlement on the table in West Virginia, and some people say that's not enough.

So we're talking about tobacco-style litigation. So it's very, very difficult situation to control out there. We could talk a bit about that in the Q&A about some solutions to that, but let me just conclude here before we turn it back to some questions so we can stay on track.

(DESCRIPTION) 
Text, Summary.

(SPEECH) 
As I mentioned several times, the industry remains strong, stable, sound, and secure. That's a good thing.

Some people actually expressed at the hearing I was at last week, questioned why the industry didn't suffer more than it did during COVID. And in fact, I've been asked the same question after major catastrophes. You don't want the insurance industry to become financially weak or unstable or unsound or insecure. You want it to be strong, stable, sound, secure, irrespective of the state of the economy, irrespective of what is going on.

The worst case scenario, as I mentioned for COVID, have been averted, which explains much of the stronger-than-expected performance last year and gives us a good springboard for 2021. I expect growth to accelerate this year as we see the economic recovery power a faster-than-expected restoration of exposures, particularly in very economically-sensitive lines such as workers compensation.

Asset volatility, I think that's going to be with us. We saw the market crater just last week on Monday, and then rise to a new record high by Friday. On Monday it was worried about the Delta variant, on Friday it was good earnings that were powering things upward. CAT losses. Unfortunately all I can tell you here is that because of the demographics in the United States and rising property values, this will go up indefinitely. And so we, along with public policymakers, are going to have to devise solutions to this.

Cyber and tort risks absolutely loom large, but they do create some of the greatest opportunities for the industry. And the industry has a large number of opportunities going forward. Not all of them are involving bricks and mortar. A lot of them are in the casualty space, in the cyber space. And we're just going to have to get smarter in terms of underwriting those. And I think that we are. If you look at every new risk, it always takes us a while to get our arms around it, and I think ultimately we do prevail.

So that does conclude my presentation. So I'll conclude the sharing right here. And hopefully you're seeing both Joan and I on the screen.

Yes, I think so. Bob, that was amazing, that was fantastic, that was just a whirlwind of information. And we've had a ton of people ask, are your slides going to be available? Yes, the answer is there'll be a replay of this entire webinar on the Travelers Institute website. So again, TravelersInstitute.org. We'd love to have you come back and watch the replay or share the replay link. It'll be sent out to you in a few days.

So, let's get to a bunch of these questions for you, Bob, that have come in. But first, I really want to get back to this new talent. It's such an important factor and focus of our industry. As you know, there's for hire signs everywhere. Every store, every restaurant, and that's true, too, for our agents.

So how is it that young people that you see every single day at the university and your risk management program, what are they looking for fresh out of college? And what do you tell them? What drives them? How do we attract them to the insurance industry and to mom-and-pop brokerages or the large brokerage houses or carriers? What is your advice for someone trying to hire new talent?

Right. Well, the number one advice in terms of if you want to ensure getting new talent in the door, this is very, very concrete--create internships. The reality of it is that the strong students will wind up with good internships, the good companies will make them offers very early in their senior year, and more often than not, they will join you.

Now that's sort of a very concrete sort of thing. Stay engaged with universities that have RMI program like our own, or even universities that do not. Make sure that you have a presence at those universities and articulate what your company does. Have people come into the classroom--I invite a number of people every year to come and talk to students. Not just to talk about what careers are available, but also, what are you going to do on a day-to-day basis? Bringing in people who maybe joined you just two or three or four years ago and maybe someone who joined you 20 years ago. They can talk about all the exciting things.

The students today, the best students, they want to be able to bring to bear their analytical skills, they want to know that their mind is going to be used, they want to know that they are going to be trained and not just left at a desk to do cold calling, those kinds of--that is actually a great fear that many students have of the insurance world. Their view of it is that if they join, they're going to be sat in a cube with a list of phone numbers to call all day long, and that's what they're going to do.

Instead, most students actually have no understanding until I speak to them or people like you speak to them about the sorts of risks that this industry analyzes and attempts to [AUDIO OUT], attempts to price. And that it's an exercise in objective risk. And because so much out there today, it's subjective risk. And asking you to focus on objective risks only.

So that is--I would also say that there are certain areas that insurers are particularly attracted to. Very often today I see students very interested in the specialty space. They find that to be very, very exciting. And I would include in that things like cyber. They like anything that is related to technology nowadays, to the extent that you give them some responsibility for that.

Now in terms of-- now I will admit to you, while I can place quite readily people into carriers, into reinsurers, into large brokers and so forth, where--into government, into private sector, my number one challenge is into the independent agency ranks. OK, and so I would say there, that's where we in the university world need more--to build more relationships with independent agents around the country, because there are certainly--I'll be quite candid.

One of the number one reasons that insurers will--that students will cite a hesitance to get involved in an independent agency right off the bat is, they're looking at very often a large starting salary differential that potentially makes it difficult for them to pay back student loans in their early years, for instance. So I'm just being very, very candid with respect to that.

It may be shortsighted in the sense that they can make more as a producer in the long-run, but when you're looking at literally six months down the road having a $500 student loan payment come due, that's what's really going to drive your decision to some extent. But again, willing to work with the many fantastic independent agencies out there that have wonderful opportunities.

Do you have--at the university, do you have kind of a job bank? So if someone's listening in today, an independent agent would love to hire interns kind of next summer in fall or spring, either remotely or in-person. Do you have a job bank or are you looking for agents to send you more availability of jobs?

Absolutely. We have a job bank--we have two job fairs, one virtual one in-person in September and October of this year. We have a system that's available to any employer in the world called Handshake here at the University of South Carolina--I think other universities use the same system--whereby an employer can register, can essentially upload their job description or descriptions that they might have, on a contact, all of those sorts of things.

So one thing that the pandemic has done is it's essentially probably accelerated this digital job searches of students. So last year we had to do it entirely remotely. This year it'll be a hybrid format in-person recruiting at an in-person job fair at our convention center that we have in the city, and then also we'll be doing it digitally.

So it doesn't matter where you are. You may have never set foot in South Carolina, but we send students all over the country. And so we're sending students to carriers that don't operate in this part of the country, even to places like Europe or out in the West Coast. They don't operate here either, because now they have a greater capability to hook up with our students and to see what talent we have to offer.

OK. I'm going to stay on this topic for just one more question. We have an agent, Jim Poindexter, upstate New York. His question is kind of about the wage inflation and the war on talent. So upstate New York has his employees in place, and all of a sudden maybe someone in the city has offered that person a job with a city salary, and the person can stay at home and work remotely now, but working for a New York City-based agent or broker. How does he compete with that?

And this is a more general question for small businesses and all employers, that the war for talent--and you're going to have this remote workforce--that may save more money and you're getting paid the same amount of money to stay home. What about the unemployment checks that are out there now, giving people another $300 to basically sit on the couch and not look for that job? So the job market right now just feels messy. How are you thinking about it?

So, right. This is not a problem that's unique to the insurance world, of course. And now in terms of people not going back to work, eventually those subsidies are going to run out and people will have more and more of an incentive to return to work. And we've already seen in places like New York City. A lot of the big banks, for instance, they're telling people, you've got to get back into the office. And that is true for-- and I think we'll see more and more of that in the latter part of 2021 barring a huge resurgence of COVID.

So, but there will be some employers that believe that they found a model for allowing their workforce to work largely remotely. And so I think that whether you're in upstate New York or whether you're in North Dakota or whether you're in San Francisco, it doesn't matter, you are going to be competing with this.

This is a new type of competition that insurers in every industry faces. There are surveys out there, for instance, that show about 45% of all employees have considered quitting their jobs over the past several months. There are far more jobs available than there are employees to fill them. So it is a seller's market in the sense that if you're selling your labor, it's very much in favor of labor right now. It will not always be that way. The market for labor will tighten up at some point, though probably not until well into 2022.

So apart from the obvious of offering higher wages, I think what you're going to need to do no matter where you're located is look at what your industry is doing. What are the best practices? One or two days a week working remotely, that might go a long way to securing a labor force. I would say that--but of new students, I will say that new students in particular might look at this, but those who are graduating just last year or this year or in the year ahead, they don't have the expectation that they are going to be working remotely forever. I think that would be a naive expectation. And certainly if they've had me in class, I tell them that's not likely to occur.

I also tell them that this is a relationship business. And many industries are actually a relationship business. Whether you're in banking, whether you're in insurance, or whether you're in real estate, it doesn't matter what you're in. If you think you're going to be able to get away the rest of your life without connecting firsthand with your customers and your colleagues, you're fooling yourself. And any company that believes it can exist in perpetuity with that kind of arrangement is going to watch over time as their customer base is eroded away.

OK. All right, we're going to do rapid-fire questions for you, Bob, because we have so many. This is from Mike Barbara, my friend, an independent agent in New Jersey. And I'm going to combine two questions here. What is the biggest threat to the independent agency model? That's kind of part number one. And then Nicholas Spencer has asked this question. What knowledge and skills can agents and risk professionals develop now to remain relevant in 10 years from now?

Yeah. So I suppose both of these revolve--well, to some degree revolve around technology. So having the state-of-the-art technology to interface with carriers, to interface with the customers is going to be very, very important. And some of the survey numbers that I showed earlier on is that the vast majority of people begin a search online, many of them do it with mobile devices.

The good news there is that when you have a mobile device in your hand, the easiest thing to do after you have a quote is to click on the telephone number that's there. And that means that somewhere along the line, a licensed agent or broker is going to become part of the transaction. So make sure that you are somewhere in that value chain. 

The other thing is--and I'm sure everyone listening today fits into this category. But you have to ensure that your staff is extremely well-versed in the products that they are offering irrespective of the carrier with whom they have appointments, or maybe they're a captive carrier in some cases.

There are many opportunities, particularly in the commercial side, but also in the personal line side where the sale is never made, because it never was attempted to be made. But how many businesses out there today could benefit from having cyber coverage or employment practices liability, or D&O if they're a smaller firm? These sorts of things that actually don't have these types of covers that are in place.

Providing risk management services to the extent possible is extremely important, because as we move more and more away from the lion's share of the risks being brick-and-mortar-oriented, many of them are going to be for risks that are far less tangible to the average client out there. So I mentioned employment practices liability. Your typical midsized business is going to say, why do I need that? And you need not go very far to be able to uncover statistics as to show them why that is the case.

But in terms of--so the knowledge end of it. You know.  And this is--myself, I found myself--I find myself constantly challenged as I'm bombarded about information related to this industry and the innovations that insurers are making, say, in a specialty line space in terms of new covers or tweaks to existing coverages that are out there.

So being able to speak enthusiastically to your clients about the risk management opportunities that are available to them, either in terms of services or products, is something that's--again, it's not going to solve all the problems, but I think it does get you part of the way there. Joan, I think we could have an entire presentation on that particular topic.

OK, we're going to move on. Teresa Long from McGriff Insurance has a question. You spoke earlier about social inflation. Do you see any relief in the near future with respect to umbrella pricing? And how do we get the social inflation under control? What is your outlook for the next couple of years?

Right. So in terms of umbrella specifically, that is where we are seeing when you look at the broker of price--rate surveys that are out there for renewals. That's where we're seeing the sharpest increases, and it's been the case for the past several quarters. Before that, it was actually commercial auto, and before that, it was commercial property. So these things tend to rotate out.

My experience is that with respect to social inflation and tort costs in general, these things need to reach a breaking point. And the breaking point last time around in the early '90s, early 2000s was actually when insurers along with a very broad coalition of business partners recognized that the out-of-control tort trends in the United States towards larger and larger jury awards, kind of expansions of findings and so forth, wound up being not only--were clearly a detriment to the United States economy, putting us at a competitive disadvantage relative to all of Europe and of Asia.

And so it's only with that kind of concerted effort that insurers team up with manufacturers, for instance, technology firms, and others that, quite frankly, through a joint lobbying effort in Washington and in the states that we can at least bring this to heal. In the late '90s, early 2000s, we were actually successful as part of that broad coalition. Not at reversing a social inflation, but causing it to plateau. That began to take off again after the financial crisis. And so without that kind of pan industry effort, I think we're unfortunately going to be at the whim of the plaintiff's bar to a very real extent.

Right. OK. Excellent. So Bob, what about--let's talk again about inflation. Let's talk about your outlook. You seem very rosy on the GDP outlook. We still have the Delta variant floating. A lot of school systems are now announcing they're going to have mask mandates for kids and teachers. On a scale of 1 to 10--I hate to back you in a corner--on a scale of 1 to 10, 10 being the most optimistic for the economy once we get through this pandemic--this Delta variant and you have more people getting vaccinated, what is the upside prediction for you on GDP in the next couple of years? Because we're a GDP-driven industry where we want more trucks on the road, we want more people working to write more workers' comp.

Well, we absolutely are. And the numbers that I gave with growth of about 9% in the middle of part of this year falling back to 4% or so by early next year, and 2 and 1/2% by late next year. I would say that the odds of that on a scale of 1 to 10, we're about a 9 or 90% odds. Part of that is predicated on the fact that yes, maybe there'll be mask mandates thrown into place. But the reality of it is, is that there is no stomach for going back to the lockdowns of 2020.

Even in the most lockdown-friendly states we're simply not going to go there. I think politically it's impossible to go back. As you mentioned, while the number of vaccinations being administered in the country has slowed, the vaccination rate is not as where it would be, at least a good part of the population is, in fact, vaccinated or now has natural immunity.

So, there's no going back. COVID's going to be with us for, quite frankly, probably decades in one way, shape, or form, and it will become endemic as the flu is. So we have to move beyond this. And I think that by the time we get to 2022, as we continue to see the hot air come out of inflation, for instance, and we see the economy normalize, we'll begin to think things are somewhat back to normal with hopefully an unemployment rate--what that means is inflation roughly around 3%, with unemployment in the middle of next year around 4 and 1/2%. And I think that'll feel pretty comfortable to businesses and to consumers alike.

That sounds that sounds good to me, Bob. Quick question on medical cost inflation. How does it relate to-- when you're talking about inflation, are we going to see more medical cost inflation come about?

Yeah. So medical cost inflation always tends to run a little above the overall consumer price index. There's nothing that is going to prevent that in the future. I teach a course on health and life insurance and the fall each year, and we talk about what are the drivers behind higher health care prices.

And it is such things as technology, it is such things as defensive testing on the part of doctors. It is the fact that we still inappropriately use--there's too much utilization of expensive technology like MRIs when an X-ray will do. So very difficult to root this out of the system. And unfortunately, we're along for that ride in the P&C insurance world, particularly through workers' comp, but also through bodily injury claims, severities, and auto insurance and GL and things like that.

So the question of how to remove the--how to slow the acceleration in health care costs, that is a very, very difficult issue that goes far beyond the property casualty insurance world.

Yeah, yeah. Listen, we have come to the end of our program, Bob. We have so many more questions. But everyone can use this survey in the chat feature there. If you link to the survey, please let us know your thoughts on today's program. Bob, I cannot thank you enough. And if you have questions, you can put that in the survey, too, for our audience members.

(DESCRIPTION)
Text, The Travelers Institute will resume live programming after Labor Day. Until then, head to our website and enjoy our past webinar replays, including: June 16 -- Behind the Scenes at the N.Y.S.E: Everything You Want to Know About S.P.A.C's, I.P.O's, and Direct Listings, N.Y.S.E Global Head of Capital Markets Amanda Hindlian. June 20 -- Built to Last: The Connection Between E.S.G Issues and a Company's Long-Term Success, Former S.E.C Commissioner Paul Atkins and Travelers' Chief Sustainability Officer Yafit Cohn. Travelers Institute dot org.

(SPEECH)
So that is a wrap for our first season of Wednesdays with Woodward. We've had 32 programs in the books. I've talked to 52 thought leaders on different topics, not just insurance. So I hope you've had a chance to look at some of the replays, again, on our website. We're grateful for the time you spent with us today, Bob. Thank you again. 

Thank you.

And we really look forward to seeing everyone in September. But do take some time to put your toes in the sand in August, my friends. We have--we're going to talk about opioids, the opioid crisis. We're going to talk about demographic changes and the Census trends. We're going to always talk about politics, so come back. We're going to talk about geopolitical, what's happening in the world around us. We're going to talk about marijuana and what's going on with roadway safety in the states that have legalized marijuana. That is a very, very interesting topic.

So that's all in September. In the meantime, catch up on the programs as you're laying around the pool or on the beach. You can always listen in to them. And connect with me on LinkedIn. You can connect with Bob on LinkedIn. I'm sure Bob would love that. And a lot of the replays we have, again, will have Bob slides, and we'll send that around to everyone who's been on the program today.

So again, Bob, enjoy August. We'll see you in September.

You, too. Thank you, Joan.

Take care, all.

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Text, Wednesdays With Woodward Webinar Series; Insurance Market Insights: Emerging Trends to Watch; Logos for the following: Young Risk Professionals, University of South Carolina Darla Moore School of Business, Travelers Institute, Travelers, Gamma Iota Sigma, American Property Casualty Insurance Association.