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

Policyholder Surplus (Capacity) 2006:Q4–2020:Q1E

Sources: ISO, A.M .Best; 2020E from Risk and Uncertainty Management Center, University of South Carolina.

($ Billions)

$487.1 $496.6 $512.8 $521.8 $478.5 $455.6 $437.1 $463.0 $490.8 $511.5 $540.7 $530.5 $544.8 $559.2 $559.1 $538.6 $550.3 $567.8 $583.5 $586.9 $607.7 $614.0 $624.4 $653.4 $671.6 $673.9 $675.2 $674.2 $673.7 $676.3 $700.9 $717.0 $750.7 $781.5 $742.1 $779.5 $802.2 $812.2 $858.3 $775.0 $662.0 $570.7 $566.5 $505.0 $515.6 $517.9

$400 $450 $500 $550 $600 $650 $700 $750 $800 $850 $900

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

Financial Crisis (-16.2%)

2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non- insurance business.

Drop due to near-record 2011 CAT losses (-4.9%)

Policyholder Surplus is the industry’s financial cushion against large insured events, periods of economic stress and financial market volatility. It is also a source of capital to underwrite new risks.

The P/C insurance industry entered the COVID-19 pandemic from a position strength and can easily withstand the estimated ~10% surplus decline

P/C Industry Net Income After Taxes, 1991–2019F*

 2005 ROE= 9.6%  2006 ROE = 12.7%  2007 ROE = 10.9%  2008 ROE = 0.1%  2009 ROE = 5.0%  2010 ROE = 6.6%  2011 ROAS1 = 3.5%  2012 ROAS1 = 5.9%  2013 ROAS1 = 10.2%  2014 ROAS1 = 8.4%  2015 ROAS = 8.4%  2016 ROAS = 6.2%  2017 ROAS =5.0%  2018 ROAS = 8.0%  2019: ROAS = 8.2% *2019 estimate based on annualized actual Q3:19 figure of $48.075B. ROE figures are GAAP; 1Return on avg. surplus. Excludes Mortgage & Financial Guaranty insurers for years (2009-2014). Sources: A.M. Best, ISO.

$14,178 $5,840 $19,316 $10,870 $20,598 $24,404 $36,819 $30,773 $21,865 $3,046 $30,029 $62,496 $3,043 $35,204 $19,456 $33,522 $63,784 $55,870 $56,826 $42,924 $36,813 $59,994 $64,100 $38,501 $20,559 $44,155 $65,777

• $6,970

$28,672

• $10,000

$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000

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* Net Income finally returned to pre-financial crisis levels in

• 2019. COVID impacts will

likely have a major negative influence in 2020, but too soon to determine magnitude

$ Millions

ROE: Property/Casualty Insurance by Major Event, 1987–2019E

*Excludes Mortgage & Financial Guarantee in 2008 – 2014. Sources: ISO, Fortune; A.M. Best (2018E-2019F); USC RUM Center.

• 5%

0% 5% 10% 15% 20%

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

P/C Profitability Is Influenced Both by Cyclicality and Volatility

Hugo Andrew, Iniki Northridge Lowest CAT Losses in 15 Years

• Sept. 11

Katrina, Rita, Wilma 4 Hurricanes

Financial Crisis* ROE fell by 8.3 pts from 12.7% to 4.4% (Percent)

Record Tornado Losses Sandy Low CATs Harvey, Irma, Maria, CA Wildfires

2019E 8.2%

Percentage Point Change in P/C ROEs During Past Economic Downturns: 1971 - Present

Source: USC Center for Risk and Uncertainty Management.

Percentage Point Change

• 8.3%
• 7.1%
• 7.0%
• 3.0%
• 2.4%

0.8%

• 10.0%
• 8.0%
• 6.0%
• 4.0%
• 2.0%

0.0% 2.0% 2007-08 2000-01* 1973-75 1981-82 1979-80 1990-91

*2000-2001 decline impacted by 9/11 losses.

Change in P/C ROE During Past Economic Downturns Avg.: -4.5% (-4.0% ex. 2000-01) Median: -5.0% (-3.0% ex. 2000-01) Although the COVID-19 economic downturn will be sharp, it’s expected to be brief with a rapid “V- Shaped” recovery

Net Premium Growth (All P/C Lines): Annual Change, 1971—2020F (Pre-COVID)

• 5%

0% 5% 10% 15% 20% 25%

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

(Percent)

1975-78 1984-87 2000-03

*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 .

Net Written Premiums Fell 0.7% in 2007 (First Decline Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3- Year Decline Since 1930-33. 2020F: 3.8%* 2019E: 4.2% 2018: 10.7% 2017: 4.6% 2016: 2.7% 2015: 3.5% 2014: 4.2 2013: 4.4% 2012: +4.2%

2020 Outlook Pre-COVID: 3.8% Now: ???

Change in P/C Net Written Premium Growth During Past Economic Downturns: 1971 - Present

Source: USC Center for Risk and Uncertainty Management.

Percentage Point Change in Growth Rate

• 4.3%
• 3.5%
• 2.0%

0.9% 2.9% 3.4%

• 5.0%
• 4.0%
• 3.0%
• 2.0%
• 1.0%

0.0% 1.0% 2.0% 3.0% 4.0% 1979-80 2007-09 1990-91 1981-82 1973-75 2000-01*

*2000-2001 decline impacted by 9/11 losses.

Change in P/C ROE During Past Economic Downturns Avg.: -0.4% Median: -0.6% Economic downturns have been associated with varied growth

• experience. The COVID-19 pandemic will

slow growth materially in 2020. Effects could carry over into 2021.

2020 Pre- vs. Post-COVID Growth Expectations for P/C Insurance: From Modest to Miserly

Source: 2020 Pre-COVID-19 figures from Best’s Review & Preview (Feb. 2020); Post-COVID estimates from USC Center for Risk and Uncertainty Management.

Percentage Change in Growth Rate

1.7% 2.0% 1.5% 3.8% 3.7% 4.0% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% All Lines Personal Commercial

2020: Pre-COVID 2020: Post-COVID

Note: 2020 expectations are based on a modestly optimistic scenario for recovery and assume that Q1 growth was largely unaffected

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 & Contingency

7% to 13% reduction in premium volume

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

• ther sources; Risk and Uncertainty Management Center, University of South Carolina.

P/C Insurance Industry Combined Ratio, 2001–2019E*

* Excludes Mortgage & Financial Guaranty insurers 2008--2014. **Actual through Q3 2019 was 97.8 Sources: A.M. Best, ISO (2014-2019).

95.7 99.3 101.1 106.5 102.5 96.4 97.0 97.8 100.7 99.0 103.7 99.2 101.0 92.6 100.8 98.4 100.1 107.5 115.8 90 100 110 120

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19**

As Recently as 2001, Insurers Paid Out Nearly $1.16 for Every $1 in Earned Premiums Relatively Low CAT Losses, Reserve Releases Heavy Use of Reinsurance Lowered Net Losses Relatively Low CAT Losses, Reserve Releases Higher CAT Losses, Shrinking Reserve Releases, Toll of Soft Market Sandy Impacts Lower CAT Losses Best Combined Ratio Since 1949 (87.6)

• Avg. CAT

Losses, More Reserve Releases Cyclical Deterioration Sharply higher CATs are driving large underwriting losses and pricing pressure

2019 Combined Ratio Est. 99.0

Potential Impact of COVID-19 on Insured Losses by Line

Source: Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic (Fig.10), May 2020; Risk and Uncertainty Management Center, University of South Carolina.

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 Business Interruption losses are potentially material even under the moderate severity scenario

Commercial Auto Claim Frequency and Severity: Estimated Impacts Due to COVID-19 Pandemic, by Event Scenario

0.0% 5.4% 13.6%

• 12.1%
• 22.8%
• 35.5%
• 40%
• 30%
• 20%
• 10%

0% 10% 20%

Optimistic Moderate Pessimistic

Frequency Severity

Source: Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic, May 2020; Risk and Uncertainty Management Center.

Sharp declines in commercial vehicle collisions could have major impacts on the WC line as well

Quarterly 2020 Commercial Auto Claim Frequency: Estimated Impacts Due to COVID-19 Pandemic, by Event Scenario

• 11.6%
• 29.5%
• 46.8%
• 3.0%
• 28.6%
• 5.0%
• 15.2%
• 40.0%
• 6.7%
• 50.0%
• 8.3%
• 37.0%
• 60%
• 50%
• 40%
• 30%
• 20%
• 10%

0% 20:Q1 20:Q2 20:Q3 20:Q4 Optimistic Moderate Pessimistic

The pace of nation’s recovery will profoundly impact commercial vehicle claim frequency and also WC Optimistic scenario predicts claim frequency is down only slightly by year end

Source: Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic, May 2020; Risk and Uncertainty Management Center.

INVESTMENTS: THE NEW REALITY

Investment Performance Is a Key Driver

• f Insurer Profitability

Aggressive Rate Cuts Will Adversely Impact Investment Earnings Financial Crisis Déjà Vu?

Property/Casualty Insurance Industry Investment Income: 2000–2019E

$38.9 $37.1$36.7 $38.7 $54.6 $51.2 $47.1$47.6 $49.2$48.0$47.3$46.4$47.2$46.6 $48.9 $55.3 $57.0 $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 15 16 17 18* 19F

Due to persistently low interest rates, investment income remained below pre-crisis levels for a decade. Lower interest rates post-COVID will drive investment income down once again.

*2018-19 figures are distorted by provisions of the TCJA of 2017. Increase reflects such items as dividends from foreign subsidiaries.

1 Investment gains consist primarily of interest and stock dividends. Sources: ISO; University of South Carolina, Center for Risk and Uncertainty Management.

($ Billions)

Investment income had just recovered from a decade-long slump. Aggressive Fed actions and recession are pushing interest rates lower and will adversely impact investment income for years to come

Net Investment Yield on Property/Casualty Insurance Invested Assets, 2007–2020F*

4.4 4.0 4.6 4.5 3.7 3.8 3.7 3.4 3.7 3.2 3.1 3.1 3.2 3.1 3.0 4.6 4.2 3.9

2.5 3.0 3.5 4.0 4.5 5.0 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19E 20F

The yield on invested assets remains low relative to pre-crisis yields. Fed rate increases beginning in late 2015 through 2018 halted the slide in yields, but rate cuts in 2019/2020 will preclude future gains

Sources: NAIC data, sourced from S&P Global Market Intelligence; 2017-19 figures are from ISO. 2020F is from the Risk and Uncertainty Management Center, Univ. of South Carolina.

(Percent)

Investment yields remained depressed—down about 150 BP from pre-crisis levels. COVID-19 Fed rate cuts will push asset yield down

US Treasury Security Yields: A Long Downward Trend, 1990–2020*

*Monthly, constant maturity, nominal rates, through April 2020. Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% '90'91'92'93'94'95'96'97'98'99'00'01'02'03'04'05'06'07'08'09'10'11'12'13'14'15'16'17'18'19'20

Recession 2-Yr Yield 10-Yr Yield

Yields on 10-Year US Treasury Notes have been essentially below 5% for more than a 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.

Fed emergency rate cuts and QE in response to the COVID-19 pandemic and market volatility have pushed rates to their lowest levels since the financial crisis

10-YR. TREASURY 5/2019: 2.21% 4/2020: 0.66%

• 50%
• 40%
• 30%
• 20%
• 10%

0% 10% 20% 30% 40% 50% 60%

50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20* *Through May 7, 2020. Source: NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html; Center for Risk and Uncertainty Management, University of South Carolina

Tech Bubble Implosion Financial Crisis

Annual Return

Energy Crisis

S&P 500 Index Returns, 1950–2020*

Fed Raises Rates

The S&P 500 was up 28.9% in 2019, the best year since 2013, following a decline

• f 6.2% in 2018. Gains are jeopardized by

sharp declines amid COVID-19 pandemic

2020 YTD

• 11.4%

2019: +28.9% 2018: -6.2% 2017: +19.4 2016: +9.5

Financial Markets Have Been Extremely Volatile

 April 2020: Largest monthly gain in S&P 500 since 1987 (+12.7%); Up 30% since its March 23 trough (2,192 @ close)  Has the market gotten ahead of itself given that GDP in Q2 will shrink by ~22% and unemployment will exceed 15%?  March 16: Largest DJIA point drop ever: -2,014 pts. (-7.79% drop largest in % terms since 10/15/08)

Source: CNBC.com; Center for Risk and Uncertainty Management, University of South Carolina

Coronavirus Comeback?

S&P is down just 11.4% for the year and 15.4% from its record high of 3,386 on Feb. 19

 Is market anticipating a “V-shaped” recovery, more stimulus, expedited vaccine?

Q1 2020 COVID-19 Earnings Impacts for Public Companies (as of 5/6/20)

 At least 20 Major P/C Insurers, Reinsurers and Foreign Insurers w/ Major US Operations Have Released Q1 2020 Results  Charges attributed to COVID-19 range to $270+ million for US-domiciled insurers and $450+ million for global insurer COVID exposure  Largest charges associated with major commercial P/C insurers and global reinsurers  Additional large Q1 charges associated with realized investment losses  Some companies signaled that more impacts are forthcoming

THE ECONOMY

COVID-19 Pandemic Will Directly and Severely Impact Growth As Exposure Growth Rapidly Shrinks 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

Length of US Business Cycles, 1929-Present*

43 13 8 11 10 8 10 11 16 6 16 8 8 19 3 50 80 37 45 39 24 106 36 58 12 92 120 73 128

10 20 30 40 50 60 70 80 90 100 110 120 130

Aug. 1929 May 1937 Feb. 1945 Nov. 1948 July 1953 Aug. 1957 Apr. 1960 Dec. 1969 Nov. 1973 Jan. 1980 Jul. 1981 Jul. 1990 Mar. 2001 Dec. 2007 Mar. 2020

Contraction Expansion Following

Duration (Months)

Month Recession Started

Average Duration* Recession = 13.4 Months Expansion = 63.8 Months

* As of May 2020 but excluding current COVID-19 recession which began in March/April 2020 and is ongoing. Sources: National Bureau of Economic Research; Risk and Uncertainty Management Center, University of South Carolina.

The most recent economic expansion ended in Feb. 2020 and was the longest in US history (began July 2009) Recession may

• fficially last only

5-7 months Will likely take 2+ years to recover lost growth

US Real GDP Growth*

* Estimates/Forecasts from Wells Fargo Securities. Source: US Department of Commerce, Wells Fargo Securities 4/8/20; Center for Risk and Uncertainty Management, University of South Carolina.

2.7% 1.8%

• 1.3%
• 2.8%

2.5% 2.2% 2.7% 4.5% 0.8% 1.4% 3.5% 2.1% 1.2% 3.1% 3.2% 2.9% 2.5% 3.5% 2.9% 1.1% 3.1% 2.0% 2.1%

• 4.8%

7.2% 4.8% 2.8% 2.5% 2.2% 2.4%

• 22.3%

3.1% 3.6% 2.5% 1.8% 1.1% 4.1% 1.8% 2.1% 1.6%

• 25%
• 20%
• 15%
• 10%
• 5%

0% 5% 10%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 16:1Q 16:2Q 16:3Q 16:4Q 17:1Q 17:2Q 17:3Q 17:4Q 18:1Q 18:2Q 18:3Q 18:4Q 19:1Q 19:2Q 19:3Q 19:4Q 20:1Q 20:2Q 20:3Q 20:4Q 21:1Q 21:2Q 21:3Q 21:4Q

Demand for Insurance Will Be Severely Impacted As the Economy Slows but Should Improve by Late Q3 and into Q4

Real GDP Growth (%)

“Great Recession” began in

• Dec. 2007

Financial Crisis

COVID-19 pandemic is expected to result in 2 quarters of economic contraction before recovery later in the year

Q2 2020 GDP expected to shrink by 22.3%

Q1 2020 GDP Report: Unmitigated Disaster—Worse Yet to Come

Source: US Bureau of Economic Analysis; Risk and Uncertainty Management Center, University of South Carolina.

• 8.7%
• 15.3%

0.7%

• 16.1%

6.9%

• 10.2%
• 8.6%
• 15.2%

21.0%

• 20%
• 15%
• 10%
• 5%

0% 5% 10% 15% 20% 25% Durables Nondurables Services Nonresidential Structures Equipment Residential Structures Exports Imports Government

State govt. spending may collapse w/o relief while federal spending rises PCE: Largest drop in 40 years; (Services largest since 1953:Q4 decline of 3.0% ) Business investment has collapsed

Personal Consumption Expenditures (PCE) [-7.6%] Private Domestic Investment [-5.6%] Exports/ Imports [-8.7%] Govt. Exports/ Imports [-8.7%]

The Economy Drives P/C Insurance Industry Premiums: 2006:Q1–2020:Q1*

Direct Premium Growth (All P/C Lines) vs. Nominal GDP: Quarterly Y-o-Y Pct. Change

*2020:Q1 GDP figure is actual. DWP is estimate from Risk and Uncertainty Management Center, University of South Carrolina. Sources: SNL Financial; U.S. Commerce Dept., Bureau of Economic Analysis; ISO; I.I.I.; Risk and Uncertainty Management Center, University of South Carolina.

• 6%
• 4%
• 2%

0% 2% 4% 6% 8% 2008:Q1 2008:Q3 2009:Q1 2009:Q3 2010:Q1 2010:Q3 2011:Q1 2011:Q3 2012:Q1 2012:Q3 2013:Q1 2013:Q3 2014:Q1 2014:Q3 2015:Q1 2015:Q3 2016:Q1 2016:Q3 2017:Q1 2017:Q3 2018:Q1 2018:Q3 2019:Q1 2019:Q3 2020:Q1

DWP y-o-y change

y-o-y nominal GDP growth As GDP growth turns negative in 2020, DWP will decelerate sharply and likely turn negative in some

• lines. Rebates, discounts and rate decreases will

amplify the deceleration. Direct written premiums track nominal GDP fairly tightly over time, suggesting the P/C insurance industry’s growth prospects inextricably linked to economic performance.

$2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 $10,000

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 19

$25 $30 $35 $40 $45 $50 Wage & Salary Disbursements WC NPW Payroll Base* WC NWP

Payroll vs. Workers Comp Net Written Premiums, 1990-2019

*Private employment; Shaded areas indicate recessions. WC premiums are from NCCI through 2018. Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR.

Continued payroll growth will benefit WC exposure growth, but falling rates will adversely impact growth in Net Written Premiums

7/90-3/91 3/01-11/01 12/07-6/09

$Billions $Billions WC premium volume dropped two years before the recession began WC net premiums written were down $14B or 29.3% to $33.8B in 2010 after peaking at $47.8B in 2005

Recent divergence in NWP and payroll exposure is the result of WC rate decreases. Payrolls and WC NWP will both post sharp declines in 2020

Government Mandated Business Closures Were the Real Black Swan, Not the Coronavirus

Sources: CDC; Risk and Uncertainty Management Center, University of South Carolina

• The US (and world) has endured several
• ther major infectious disease outbreaks

killing 100,000+ Americans without shutting down the economy

• Hong Kong Flu (1968-70)
• Asian Flu (1957-58)
• It is the reaction to the virus that is unprecedented

and represents the true Black Swan event

• The ramifications of this decision will be

consequential for a generation (e.g., $3 trill. in debt)

COVID-19 AND IMPACTS ON LABOR MARKETS

COVID-19’s Overall Impact on Labor Markets Is the Largest Since the Great Depression How Long the Scars Last is Dependent on the Pace of Reopening as Well as the Legislative/Regulatory and Tort Environment

Initial Claims for Unemployment: COVID Surge Shatters Records

Source: US Bureau of Labor Statistics; Risk and Uncertainty Management Center, University of South Carolina.

(Thousands)

5,245 4,427 3,846 3,169 695 665 219 3,307 6,867 6,606

1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000

• Oct. 2,

1982 (Previous Record High)

• Mar. 28,

2009 (Financial Crisis Peak)

• Jan. 1 -
• Mar. 14

(Avg.)

• Mar. 21
• Mar. 28
• Apr. 4
• Apr. 11
• Apr. 18
• Apr. 25

May 2

Payroll exposures are taking a huge hit leading to a large impact on workers comp premiums written Since mid-March a record 33.5 million people have filed for unemployment (= 18% of pre- COVID labor force)

Week Ending

Previous Records All the jobs created since the Great Recession were wiped

• ut—in a single month!

Unemployment Rate: Jan. 2019 – April 2020

Source: US Bureau of Labor Statistics; Risk and Uncertainty Management Center, University of South Carolina.

Unemployment Rate 3.7% 3.7% 3.5% 3.6% 3.5% 3.5% 3.6% 3.5% 4.4% 16.0% 4.0% 3.8% 3.8% 3.6% 3.6% 3.7%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% Jan- 19 Feb- 19 Mar- 19 Apr- 19 May- 19 Jun- 19 Jul- 19 Aug- 19 Sep- 19 Oct- 19 Nov- 19 Dec- 19 Jan- 20 Feb- 20 Mar- 20 Apr- 20

Unemployment will likely peak at 16%+ in June and will fall slowly as the economy gradually reopens COVID-19 shutdowns pushed the unemployment rate up to a shocking XX.X% in April

US Unemployment Rate Forecast: 2007:Q1–2021:Q4

4.5% 4.5% 4.6% 4.8% 4.9% 5.4% 6.1% 6.9% 8.1% 9.3% 9.6% 10.0% 9.7% 9.6% 9.6% 8.9% 9.1% 9.1% 8.7% 8.3% 8.2% 8.0% 7.8% 7.7% 7.6% 7.3% 7.0% 6.6% 6.2% 6.1% 5.7% 5.6% 5.4% 5.2% 5.0% 4.9% 4.9% 4.9% 4.7% 4.7% 4.4% 4.3% 4.1% 4.1% 3.9% 3.8% 3.8% 3.9% 3.6% 3.6% 3.5% 3.8% 15.1% 11.7% 8.3% 7.3% 6.9% 6.6% 6.5% 9.6%

3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16%

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:Q1 15:Q2 15:Q3 15:Q4 16:Q1 16:Q2 16:Q3 16:Q4 17:Q1 17:Q2 17:Q3 17:Q4 18:Q1 18:Q2 18:Q3 18:Q4 19:Q1 19:Q2 19:Q3 19:Q4 20:Q1 20:Q2 20:Q3 20:Q4 21:Q1 21:Q2 21:Q3 21:Q4

Great Recession Rising unemployment eroded payrolls and WC exposure base. Unemployment peaked at 10% in late 2009.

= actual; = forecasts Sources: US Bureau of Labor Statistics; Wells Fargo Securities (4/20 edition); Risk and Uncertainty Management Center, University of South Carolina.

The unemployment rate could peak around 20% by June (15.1% Q2 avg.).

At 3.5% , the unemployment rate in Feb. 2020 WAS at its lowest point in 50 years.

24.4 8.7 33.5

5 10 15 20 25 30 35 40

Unemployment Insurance Claims (4 weeks ending May 2) Jobs Created Since Great Recession Jobs Lost in Great Recession (peak to trough)

Source: US Department of Labor; CNBC.com; University of South Carolina, Risk and Uncertainty Management Center.

COVID-19 Job Losses vs. Great Recession Gains/Losses (Millions)

Business closures and recession fears have wiped out all the job gains since the end of the Great Recession. Job losses to-date nearly quadruple those in the Great Recession.

ADDITIONAL LABOR MARKET IMPACTS

Key Factors Driving Workers Compensation Exposure

Average Weekly Hours of All Private Workers, March 2006—March 2020*

*Seasonally adjusted Note: 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); Center for Risk and Uncertainty Management, University of South Carolina.

33.5 33.6 33.7 33.8 33.9 34.0 34.1 34.2 34.3 34.4 34.5 34.6 34.7 34.8 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Hours worked totaled 34.2 per week in March 2020, beginning a descent that will likely mirror that of the Financial Crisis—but faster Hours worked plunged during the recession, impacting payroll exposures

(Hours Worked)

Average Hourly Wage of All Private Workers, March 2006—March 2020*

*Seasonally adjusted Note: 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);

$15 $17 $19 $21 $23 $25 $27 $29 $31

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

The average hourly wage was $28.62 in March 2020, up 34.9% from $21.22 when the Great Recession began in Dec. 2007

Wage gains continued during the recession, despite massive job losses

(Hourly Wage)

Ironically, COVID-19 could initially drive the average hourly wage up because the majority of early jobs losses were in the low wage service sector

• Mar. 2020

$28.62

• Dec. 2007

$21.22

Annual Change in Average Hourly Wage, 2007–2020*

3.0% 3.1% 2.8% 1.9% 2.1% 2.3% 2.6% 2.5% 3.0% 3.1% 3.3% 2.1% 1.9% 2.0% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5%

07 08 09 10 11 12 13 14 15 16 17 18 19 20*

Pace of wage gains is extremely threatened by sudden and massive increase in unemployment

*2019 figure year-over-year increase for March 2020 vs March 2019. Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates); Risk and Uncertainty Management Center, Univ. of South Carolina.

Wage growth deceleration will lead directly to slower WC payroll exposure growth Wage growth fell sharply during the Great Recession

You’re (NOT) Hired! Number of Hires, Jan. 2003—Feb. 2020*

2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000 6,500 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Hirings plunged to 3.6 million during the recession, down 30% , from 5.5 mill in 2006 Some 5.8 million workers were hired in 2019, up 50% since 2009. COVID-19 layoffs and shutdowns will result in a catastrophic plunge in hiring

(000)

*Seasonally adjusted Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics JOLTS survey: at http://www.bls.gov/jlt/; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.

Labor Force Participation Rate,

• Jan. 2002—March 2020*

*Defined as the percentage of working age persons in the population who are employed or actively seeking work. Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.

62 63 64 65 66 67 68 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Large numbers of people exited during the recession—a trend that continued for years afterward Labor force participation remains stubbornly low—far below pre-recession levels and remains one of the country’s most vexing labor market

• problems. COVID-19 layoffs will

exacerbate this problem

Labor Force Participation as a % of Population

March 2020: 62.7% (down from 63.4% peak in Feb. 2020) Participation rate will likely fall to 62%

• r below, its lowest

level since 1977

Number of Unemployed Persons per Job Opening,

• Feb. 2003—Feb. 2020* (Most Recent Available)

*Seasonally adjusted Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics JOLTS survey: at http://www.bls.gov/jlt/; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.

1 2 3 4 5 6 7

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

At the height of the recession, there were nearly 7 job seekers for every one

• pening

In Feb. 2020, there were just 0.8 job seekers for every one opening, down from 0.9 a year ago. COVID-19 shutdowns will make this figure soar

Unemployed Persons per Job Opening

P/C Insurance Issues in the Era of COVID-19

Business Interruption Workers Compensation

P/C Insurance Coverage & COVID-19

 Insurers have received tens of thousands of claims related to COVID-19 losses

• Workers comp



Event Cancellation

• Business Interruption



Travel Insurance

• GL



D&O

 Crises tend to precipitate efforts to stretch contract language in an effort to:

• Find coverage where none exists
• Find coverage where none was intended
• Find coverage for which no premium was paid

 Politicians frequently pile on: Zero political risk

Business Interruption

Efforts to Create Coverage Where None Exists

Business Interruption Coverage (BIC) & COVID-19

 Business interruption policies clearly exclude COVID-19 claims  The ISO Business Income form contains the following language:

 “We will pay for the actual loss of Business Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration.” The “suspension” must be caused by direct physical loss of or damage to property…The loss or damage must be caused by or the result of a covered cause of loss.” [from ISO form: CP 00 30 04 02]

Exclusion of Loss Due to Virus or Bacteria

 Business property and hence business interruption coverage also clearly excludes loss or damage due to viruses via exclusion  The ISO “Exclusion of Loss Due to Virus

• r Bacteria” contains the following

language:

 “We will not pay for loss or damage caused by or resulting from any virus, bacterium

• r other microorganism that induces or is

capable of inducing physical distress, illness or disease.” [from ISO form: CP 01 40 07 06]

The Constitution’s Contracts Clause states: “No State shall...pass any...Law impairing the Obligation

• f Contracts...”

100 200 300 400 500 600 700

Small Businesses (Fewer Than 100 Employees)

$431B

Potential Monthly Business Interruption Losses for Small and Small-to-Medium-Size Enterprises

Sources: APCIA using publicly available data sources including Bureau of Labor Statistics, Insurance Services (Verisk Analytics, Inc.), Houston Chronicle, S&P Global Market Intelligence, and other published reports.

Estimated closure losses for small businesses with fewer than 100 employees: $255 billion to $431 billion per month. Estimated closure losses for small-to-medium size businesses with fewer than 500 employees: $393 billion to $668 billion per month

100 200 300 400 500 600 700

Small-to-Medium-Size Businesses (Fewer Than 500 Employees)

$393B $668B

$ Bill $ Bill

$255B

The potential for such losses for all businesses of all sizes is currently estimated at $1 - $1.1 trillion per month.

Workers Compensation

Some Pressure Points Payroll Exposure Is Contracting Rapidly COVID-19: Efforts to Expand Presumption Continue

Workers Compensation & COVID-19

 Workers compensation written for COVID-19 exposed risks (e.g., hospitals, first responders, etc.) will likely see a spike in both severity and frequency  Some states will require costs associated with precautionary quarantines of COVID-19 exposed workers  Impact arising from “Essential Industries” unclear (e.g., grocery stores)  Outside COVID-19 exposed segments—Large, Swift Drop in Payroll Exposure

 Drop in WC payroll exposure base could be the fastest and largest in history given the record 33.5 million initial unemployment claims data (week ending May 2nd) with much more to come  Wage growth, which had been making gains, will also slow  Overall likely net reduction in claim frequency

• 28.1%
• 24.6%
• 20.2%
• 12.2%
• 11.9%
• 8.1%
• 6.7%
• 6.7%
• 2.4%
• 58.6%

Accomodation & Food Service Retail Professional/Technical Transportation Manufacturing Wholesale Trade

• Admin. Support

Construction Healthcare/Social Assistance Information

Source: Assured Research, May 2020 Briefing.

Estimated ANNUALIZED WC Premium Impact From March/April 2020 Job Losses

Hotels and restaurants saw the steepest losses in percent and dollar ($1.78B) terms Overall annualized WC premium losses are estimated at 11.7%

• r $7.3B of total

premiums should March/April job losses persist

Workers Compensation & COVID-19

 Examples of presumption expansion beyond “front-line” workers: KY and IL

 On April 10, KY extended WC presumption to day care, grocery store and postal workers  On April 13, IL extended to a very large number of occupations:

 Grocery and pharmacy; food, beverage and cannabis production; charitable and social service

• rganizations; gas stations and businesses needed for transportation; financial institutions;

hardware and supply stores; critical trades; mail, post, shipping, logistics, delivery and pick-up services; educational institutions; laundry services; restaurants for consumption off-premises; essential business and work-from-home suppliers; home-based care and services; residential facilities and shelters; professional services; daycare centers for children of essential workers; manufacture, distribution and supply chain for critical products and industries; critical labor union functions; hotels and motels; and funeral services.

 UPDATE: IL WCC was sued by the Illinois Retail Merchants Association and the Illinois

Manufacturers’ Association and a judge on 4/21 issued a restraining order against the

• Commission. On 4/24, the WCC withdrew its rule. Gov. J.B. Pritzker will likely pressure

WCC to institute a new rule able to withstand judicial scrutiny.

Workers Compensation & COVID-19

 Example of presumption expansion beyond “front-line” workers: California

 On May 6, California Gov. Gavin Newsom signed an executive order allowing employees across California’s economy to apply for workers compensation if they contract the coronavirus, with a presumption that it was work-related unless employers can prove otherwise.  The presumption applies for the next 60 days and is retroactive to March 19  Newsom says the change is needed now as California prepares to reopen its economy  Employees will be eligible if they tested positive for the coronavirus within 14 days after being at work (max known incubation period) and have exhausted other state and federal benefits.  Order flips burden of proof by creating the legal presumption that the infection was job- related unless employers can show otherwise by meeting “strict criteria.”  WCRIB: Cost could range from $2.2B to $33.6B annually

– $11B midpoint estimate equals 60%

• f total pre-COVID CA WC system costs

SUMMARY

The P/C Insurance Industry Remains Strong, Stable, Sound and Secure The Rapid Economic Slowdown Will Temper P/C Growth, Especially in Economically Sensitive Lines (Especially Workers Comp) Asset Price Volatility Will Persist and Low Interest Rates Will Pressure Investment Earnings for Years COVID-19 Exposures Are Substantial but Manageable With Headline Risk on BI and WC Issues

Thank you for your time and your attention! Twitter: twitter.com/bob_hartwig For a copy of this presentation, email me at robert.hartwig@moore.sc.edu or download at www.uscriskcenter.com