Briefing on the Property/Casualty Insurance Industry:

Function and Financial OverviewMaryland Economic Matters Committee

Maryland House of DelegatesAnnapolis, MD

January 29, 2015Robert P. Hartwig, Ph.D., CPCU, President & Economist

Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 bobh@iii.org www.iii.org

Presentation Outline

The Structure of the Property/Casualty Insurance IndustryOrganizational & Marketing Structure of Insurers

Facts about the P/C Insurance Industry

How Property/Casualty Insurance Works Insurance Cycles

Drivers of, and Importance of, Profits

P/C Insurance: Performance Overview

3

Structure Overview of the P/C Insurance Industry

Very Diverse, Competitive & Innovative Industry

3

How Many? What Types?

2,718 P/C insurance companies in US in 2013* These 2,718 companies consolidate to 1,266 groups Some larger insurance groups have dozens of subsidiaries Baltimore Equitable is the 3rd oldest insurer in the US, est. in 1794

(George Washington was its president!)

Most insurers are small, operate regionally

A highly competitive business in most areas and for most types of coverage

Lines of Business Personal, Commercial, Multi-Line Primary vs. Reinsurance

*Best’s Aggregates and Averages, Property/Casualty, 2014 Edition, p. 2.

Maryland in 2013

• 820 insurers wrote $9.95B in P/C premiums in MD

• 132 wrote pvt. pass. auto• 158 wrote homeowners• 284 wrote workers comp

What is Reinsurance?

Reinsurance is insurance for insurance companies

Essential to helping spread risk globallyVery important in CAT risk

Critical for liability coverages, especially when large awards or settlements are possible

Stabilizes results of, and expands capacity of primary insurers

Especially important to smaller companies but used by all

Supplemented by “alternative” market which includes structures such as Catastrophe Bonds

Organizational Structure of Insurers Shareholder-owned (Stock) insurers: 776 organizations

Policyholder-owned insurers Mutual companies: 397 organizations Reciprocals: 70 organizations

Business-owned insurers Captive: Insurance subsidiary wholly owned by a single company whose

primary business is not insurance Risk Retention Groups: Businesses (or other organizations) in same/similar

industry form and own an insurer Self-Insurance: assumption of its own risk by a business

Government-owned insurers: ~20 organizations

“Partner”-owned insurers: (Lloyds): 11 US organizations

Federal Government Insurance Programs Where Government Bears Risk

Flood: National Flood Insurance ProgramHO and most commercial policies exclude flood

Crop: National Crop Insurance ProgramAvailable for virtually all perils on most cropsBasically a federal subsidy to farmers

Nuclear: Price-Anderson Act Insures nuclear power facilities

Terrorism: Terrorism Risk Insurance Act (TRIA)Just reauthorized for 6 years through 12/31/20

Political Risk: Overseas Private Investment Corporation

Pensions: Pension Benefit Guarantee Corporation

Differences in Focus and StrategyAmong Insurers

Personal Lines (many also sell Life)Sells only/mostly auto and homeowners insuranceExamples: State Farm, Allstate, USAA

Commercial Lines (some sell Life)Sells only/mostly business insuranceExamples : AIG, CNA, ACE

Multi-Line (many also sell Life)Sells many different types of insuranceExamples : Hartford, Liberty Mutual, Travelers

Mono-LineSells only 1 type of insuranceExamples: GEICO, Progressive, Zenith

Why Do Strategies Differ?

Some insurers believe that specializing yields certain advantages: Underwriting edge/experience Price advantage since can keep expenses low Customer loyalty

Some emphasize wide range of products One brand for many customer needs Product/customer diversification as a business strategy

Some emphasize price

Some emphasize quality (e.g., service, claims approach) over price

Some emphasize long-term financial strength

Distribution strategies may vary

What Determines in Which Markets an Insurer Operates? Most insurers started as a regional/niche “player”

E.g., note “Farm” in many insurance company names Note geographic reference in many company names Note special nature of risk in name (Church Mutual)

Some have local reputations—and do little advertising

Risk Appetite Different insurers are willing/able to accept varying amounts of

CAT exposure (may depend on capitalization, expertise, etc.)

Some insurers specialize in certain industries E.g., Aviation, marine, energy, medical malpractice

What Determines in Which Markets an Insurer Operates? (cont’d)

Tort Environment

Regulatory EnvironmentIf viewed as onerous, rigid, capricious, unfair, hostile,

or confiscatory, fewer insurers participate

Size of Market

Growth Opportunities/Demographics

Synergies with Other Types of Products Offered

How Is Insurance Regulated?

States Remain the Principal Regulator of Insurers in the Wake of Dodd-FrankSolvency, rate & form approval, licensing, product

approval, consumer protection and education

A Small Number of Insurers Have Received “Systemically Important Financial Institution” (SIFI) DesignationsTheir ultimate regulator is the Federal Reserve and

are subject to more stringent capital requirements

Federal Insurance Office (FIO) Is Not a Regulatory Agency

The P/C Insurance Industry(as of year-end 2013)

$467.9 billion in Earned PremiumsAbout 51% personal lines, 49% commercialAn “earned premium” is a premium dollar for which

insurance coverage has already been provided

$1.5 trillion in assets (compared to $3.5 trillion for life insurers)

$663.3 billion in Policyholder Surplus (in other industries, this would be called “Net Worth”) Surplus is a primary measure of claims-paying ability

because it is assets in excess of known obligations

Economic Facts About the Insurance Industry in Maryland

Employment Insurers employed 47,930 people in Maryland in 2013

Generated $3.7 billion in payroll

Gross State Product Insurers contributed $7.2 billion to Maryland GSP in 2012, accounting

for 2.15% of total state GSP

TaxesPremium taxes alone totaled $429.4 million in 2013

Claims PayoutsP/C insurers paid (or incurred) claims totaling $5.6 billion in 2

L/H claims and benefits paid totaled $8.7

15

Characteristics of the P/C Insurance Industry

Cyclical and Sometimes Volatile, but Financially Conservative & Strong

15

-5%

0%

5%

10%

15%

20%

25%

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

F1

6F

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2016F

*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best, Conning

1977:19.0%1987:17.3%

1997:11.6% 2006:12.7%

1984: 1.8% 1992: 4.5% 2001: -1.2%

10 Years

10 Years

9 Years

ROE

1975: 2.4%

2013 10.4%

2014E 7.6%

2015F=6.5%

2016F=6.3%

17

ROE: Property/Casualty Insurance by Major Event, 1987–2014E

* Excludes Mortgage & Financial Guarantee in 2008 – 2014. 2014 figure is through Q3:2014. Sources: ISO, Fortune; Insurance Information Institute.

-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*

P/C Profitability Is Impacted by Both

Cyclicality and Ordinary Volatility

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

Record Tornado Losses

Sandy

Low CATs

Modestly higher CATs

-5%

0%

5%

10%

15%

20%

25%

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

14E

*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers. 2014 figure is through Q3.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0%

1987:17.3%

1997:11.6%

2006:12.7%

1984: 1.8%

1992: 4.5%2001: -1.2%

ROE

1975: 2.4%

2013 10.4%

2014:H1 7.6%

Back to the Future: Profitability Peaks & Troughs in the P/C Insurance Industry, 1950 – 2014*

1969: 3.9%

1965: 2.2%1957: 1.8%

1972:13.7%

1966-67: 5.5%1959:6.8%

1950:8.0%

1950-70: ROEs were lower in this period. Low interest rates,

low inflation, “Bureau” rate regulation all played a role

1970-90: Peak ROEs were much higher in this period while troughs

were comparable. High interest rates, rapid inflation, economic

volatility all played roles

1990-2010s: Déjà vu. Excluding mega-

CATs, this period is very similar to the 1950-1970 period

19

RNW All Lines by State, 2004-2013 Average:Highest 25 States

20

.5

18

.4

14

.6

14

.3

13

.4

13

.3

12

.3

12

.1

12

.0

12

.0

11

.7

11

.4

11

.1

11

.1

10

.9

10

.8

10

.7

10

.7

10

.5

10

.5

10

.3

9.9

9.8

9.8

9.6

9.5

02468

1012141618202224

HI AK VT ME WY ND VA ID NH UT WA SC MA NC OH DC CA OR RI WV CT IA NE SD MT MD

The most profitable states over the past decade are

widely distributed geographically, though none

are in the Gulf region

Source: NAIC; Insurance Information Institute.

20

9.2

8.6

8.4

8.3

8.2

8.2

8.1

8.0

7.7

7.7

7.5

7.4

6.8

6.6

6.4

6.1

5.7

5.3

5.2

5.0

4.3

2.5

1.9

-6.9

-9.3

-14-12-10-8-6-4-202468

10

NM FL TX WI KS MN CO PA AR IL IN AZ MO KY TN NV NJ GA NY DE MI AL OK MS LA

RNW All Lines by State, 2004-2013 Average: Lowest 25 States

Source: NAIC; Insurance Information Institute.

Some of the least profitable states over the past decade were hit hard

by catastrophes

Three Key Drivers of Profits

Underwriting Results – Insurance operations Companies sometimes lose money on insurance

operations, especially from catastrophic losses

Investment Results – Earned on money held until needed for claims or expenses

Adequacy of Reserves and Capital/Surplus – Reserves -- assets dedicated to known/expected claims

Capital/surplus -- assets dedicated to unknown/unexpected claims

Insurers may need to use profits to strengthen reserves and/or build surplus

22

U.S. Insured Catastrophe Loss Update

2014 Experiencing Below Average CAT Activity Following a Welcome Respite in

2013 from Very High CAT Losses in 2011/12

22

23

$1

2.8

$1

1.1

$3

.8

$1

4.5

$1

1.7

$6

.2

$3

5.2

$7

.7

$1

6.5

$3

4.2

$7

4.5

$1

0.7

$7

.6

$2

9.6

$1

1.6

$1

4.6

$3

4.1

$3

5.5

$1

2.9

$1

5.3

$1

4.2

$4

.9 $8

.1

$3

8.3

$8

.9

$2

6.8

$0

$10

$20

$30

$40

$50

$60

$70

$80

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 14E

U.S. Insured Catastrophe Losses

*Through 12/31/14.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.

2013 Was a Welcome Respite from 2012, the 3rd Costliest Year for Insured Disaster Losses in US

History. Longer-term Trend is for more—not fewer—Costly Events

2012 was the 3rd most expensive year ever for

insured CAT losses

$15.3 billion in insured CAT

losses estimated for 2014

($ Billions, $ 2013)

23

24

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1994–20131

0.1%

1.4%

3.8%4.8%

6.4%

6.4%

36.0%

41.1%

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2013 dollars.2. Excludes snow.3. Does not include NFIP flood losses4. Includes wildland fires5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.Source: ISO’s Property Claim Services Unit.

Hurricanes & Tropical Storms, $159.1

Fires (4), $5.5

Events Involving Tornadoes (2), $139.3

Winter Storms, $24.7

Terrorism, $24.8

Geological Events, $18.4

Wind/Hail/Flood (3), $14.6

Other (5), $0.2

Wind losses are by far cause the most catastrophe losses,

even if hurricanes/TS are excluded.

Tornado share of CAT losses is

rising

Insured cat losses from 1993-2012

totaled $386.7B, an average of $19.3B per year or $1.6B

per month

25

Top 16 Most Costly Disastersin U.S. History

(Insured Losses, 2013 Dollars, $ Billions)

$7.9 $8.8 $9.3 $11.2$13.6

$19.0$24.2 $24.9$25.9

$49.4

$7.6$7.2$6.8$5.7$5.6$4.5

$0

$10

$20

$30

$40

$50

$60

Irene (2011) Jeanne(2004)

Frances(2004)

Rita (2005)

Tornadoes/T-Storms

(2011)

Tornadoes/T-Storms

(2011)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Sandy*(2012)

Northridge(1994)

9/11 Attack(2001)

Andrew(1992)

Katrina(2005)

Superstorm Sandy in 2012 was the last

mega-CAT to hit the US

Includes Tuscaloosa, AL,

tornado

Includes Joplin, MO, tornado

12 of the 16 Most Expensive Events in US History Have

Occurred Over the Past Decade

Sources: PCS; Insurance Information Institute inflation adjustments to 2013 dollars using the CPI.

26

Total Value of Insured Coastal Exposure in 2012

(2012, $ Billions)

Source: AIR Worldwide

$293.5$239.3

$182.3$164.6$163.5

$118.2$106.7$81.9$64.0$60.6$58.3

$17.3

$567.8$713.9

$849.6$1,175.3

$2,862.3$2,923.1

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500

New YorkFloridaTexas

MassachusettsNew JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

In 2012, New York Ranked as the #1 Most Exposed State to Hurricane Loss, Overtaking Florida with $2.862 Trillion. Texas is very exposed too, and

ranked #3 with $1.175 Trillionin insured coastal exposure

The Insured Value of All Coastal Property Was $10.6 Trillion in 2012 , Up 20% from $8.9 Trillion in 2007 and

Up 48% from $7.2 Trillion in 2004

MD = $17.3B

27

I.I.I. Poll: Homes Near Hazards

Q. If you were to purchase a home today, which of the following summarizes your views on that home’s risk of damage from natural disasters . . . and your decision to purchase that home?

Source: Insurance Information Institute Annual Pulse Survey.

More Than Half of the Public Would Be Significantly Influenced by Risk of Damage from Natural Disasters. Close to a Third Do Not

Regard Such a Risk To Be a Major Consideration.

3%

17%

53%28%

Risk a Significant Influence

on Purchase

Willing to Accept Risk

Risk Not a Major Consideration

Don’t Know

Number of Federal Major Disaster Declarations, 1953-2014*

13 1

7 18

16

16

7 71

21

22

22

0 25

25

11

11

19

29

17

17

48

46

46

38

30

22 2

54

22

31

52

42

13

42

7 28

23

11

31

38

45

32 3

63

27

54

46

55

04

54

5 49

56

69

48 5

26

37

55

98

19

94

75

55

4

43

0

20

40

60

80

100

120

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

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

*Through December 31, 2014.Source: Federal Emergency Management Administration; http://www.fema.gov/disasters; Insurance Information Institute.

The Number of Federal Disaster Declarations Is Rising and Set New Records in 2010 and 2011 Before Dropping in 2012-2014

The number of federal disaster declarations set a new record in 2011, with 99, shattering 2010’s

record 81 declarations.

There have been 2,180 federal disaster

declarations since 1953. The average

number of declarations per year is 35 from 1953-2013, though

there few haven’t been recorded since 1995.

54 federal disasters were declared in 2014*

29

30

Federal Disasters Declarations by State, 1953 – 2014: Highest 25 States*

88

80

75

69

67

60

58

57

56

56

55

53

53

53

51

51

51

50

50

49

47

47

45

43

40

0

10

20

30

40

50

60

70

80

90

100

TX CA OK NY FL LA AL KY AR MO IA IL MS TN WV MN NE KS PA WA OH VA ND SD ME

Dis

as

ter

De

cla

rati

on

s

Over the past 60 years, Texas has had the highest number of Federal Disaster

Declarations

*Through December 31, 2014. Includes Puerto Rico and the District of Columbia.Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.

31

Federal Disasters Declarations by State, 1953 – 2014: Lowest 25 States*

43

40

40

38

38

37

35

33

29

29

28

28

27

26

25

25

24

23

22

19

17

17

15

13

11

11

9

0

10

20

30

40

50

NC AK IN GA VT WI NJ NH MA OR HI NM MI PR MD MT AZ ID CO CT NV SC DE DC UT RI WY

Dis

as

ter

De

cla

rati

on

s

Over the past 60 years, Wyoming and Rhode Island had the fewest

number of Federal Disaster Declarations

*Through December 31, 2014. Includes Puerto Rico and the District of Columbia.Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.

GROWTH & CAPACITY

32

P/C Insurance Industry Is Growing Modestly and Capacity Is

Increasing

32

33

-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 1415

F14

F

Net Premium Growth: Annual Change, 1971—2016F

(Percent)1975-78 1984-87 2000-03

*Actual figure based on data through Q3 2014.Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.

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.

2015-16F: 4.0%

2014E: 3.9%*

2013: 4.6%

2012: +4.3%

34

Direct Premiums Written: Total P/CPercent Change by State, 2007-2013

74

.6

36

.9

31

.9

27

.4

25

.2

24

.9

22

.5

22

.2

16

.6

15

.9

15

.7

14

.5

14

.5

14

.3

12

.6

11

.9

11

.8

11

.2

10

.5

10

.3

9.9

9.8

9.3

9.1

9.0

8.6

0

10

20

30

40

50

60

70

80

ND

SD

OK

NE

KS IA VT

TX

WY

TN

MN

AR

AK IN WI

CO MI

KY

OH NJ

LA

SC VA

AL

MO

NM

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 StatesNorth Dakota was the country’s growth leader over the past 6 years with premiums written

expanding by 74.6%, fueled by the state’s energy boom

35

Direct Premiums Written: Total P/CPercent Change by State, 2007-2013

8.5

8.2

7.9

7.8

7.6

7.3

7.0

6.9

6.2

5.9

5.6

5.3

4.2

4.1

3.5

1.6

1.0

0.4

-0.7

-1.7

-1.9

-4.1

-5.7

-6.7

-12

.6

-15

.3

-20

-15

-10

-5

0

5

10

MS

CT

US

NC

GA

NY

MD

MA

UT

WA

PA IL RI

NH ID MT

ME

OR

CA

FL

DC AZ

WV HI

NV

DE

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

Sources: SNL Financial LC.; Insurance Information Institute.

Growth was negative in 7 states and DC between

2007 and 2013

$0$50

$100$150$200$250$300$350$400$450$500$550$600$650$700$750

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

US Policyholder Surplus:1975–2014*

* As of 9/30/14.Source: A.M. Best, ISO, Insurance Information Institute.

“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in

non-insurance organizations

($ Billions)

The Premium-to-Surplus Ratio Stood at $0.73:$1 as of9/30/14, a Near Record Low (at Least in Recent History)

Surplus as of 9/30/14 was a record $673.9, up 3.2% from $653.3 of 12/31/13, and up 53.6% ($234.5B)

from the crisis trough of $437.1B at 3/31/09

Catastrophe Bond Issuance and Outstanding: 1997-2014

37

Risk Capital Amount ($ Millions)

2014 Has Seen the Largest Cat Bond Ever - $1.5 Billion (Florida Citizens). Bond Issuance Set a Record.

Source: Guy Carpenter.

INVESTMENTS: THE NEW REALITY

38

Investment Performance is a Key Driver of Profitability

Depressed Yields Will Necessarily Influence Underwriting & Pricing

38

Distribution of Invested Assets: P/C Insurance Industry, 2013

Stocks, 22%

Bonds, 62%All Other, 10%

Cash, Cash Equiv. & ST Investments, 6%

Source: Insurance Information Institute Fact Book 2015, A.M. Best.

Total Invested Assets = $1.5

Trillion

$ Billions

Property/Casualty Insurance Industry Investment Income: 2000–20141

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.2

$48.0 $47.4$45.7

$39.6

$49.5

$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*

Due to persistently low interest rates,investment income fell in 2012, 2013 and 2014.

1 Investment gains consist primarily of interest and stock dividends. *2014 figure is estimated based on annualized data through Q3.Sources: ISO; Insurance Information Institute.

($ Billions) Investment earnings are still below their 2007 pre-crisis peak

41

U.S. Treasury Security Yields:A Long Downward Trend, 1990–2014*

*Monthly, constant maturity, nominal rates, through Dec. 2014.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

Recession2-Yr Yield10-Yr Yield

Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.

Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.

U.S. Treasury yields plunged to historic lows in 2013. Longer-

term yields have rebounded a bit.

41

Book Yield on Property/Casualty Insurance Invested Assets, 2007–2016F

4.42

4.19

3.95

3.71

3.283.20

3.13

3.74

3.523.38

3.0

3.2

3.4

3.6

3.8

4.0

4.2

4.4

4.6

07 08 09 10 11 12 13 14E 15F 16F

The yield on invested assets continues to decline as returns on maturing bonds generally still exceed new money yields. The end of the Fed’s QE program in Oct. 2014 should allow some increase

in longer maturities while short term interest rate increases are unlikely until mid-to-late 2015

Sources: Conning.

(Percent)

Book yield in 2014 is down 114 BP from pre-crisis levels

CYBER RISK & CYBER INSURANCE

43

P/C Insurance Is an Innovative IndustryCyber Insurance Is a Recent Example

43

Data Breaches 2005-2014, by Number of Breaches and Records Exposed# Data Breaches/Millions of Records Exposed

* 2014 figures as of Jan. 12, 2014 from the ITRC.Source: Identity Theft Resource Center.

157

321

446

656

498

419447

619

783

662

85.687.9

17.322.9

35.7

19.1

66.9

222.5

16.2

127.7

100

200

300

400

500

600

700

800

2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

20

40

60

80

100

120

140

160

180

200

220

# Data Breaches # Records Exposed (Millions)

The Total Number of Data Breaches Rose 28% While the Number of Records Exposed Was Relatively Flat (-2.6%)

Millions

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Data/Privacy Breach:Many Potential Costs Can Be Insured

Source: Zurich Insurance; Insurance Information Institute

Forensic costs to discover

cause

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Source: Insurance Information Institute research.

The Three Basic Elements of Cyber Coverage: Prevention, Transfer, Response

Loss Prevention

Post-Breach Response(Insurable)

Loss Transfer (Insurance)

Cyber risk management today involves three essential components, each designed

to reduce, mitigate or avoid loss. An increasing number of cyber risk products

offered by insurers today provide all three.

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I.I.I. Released its Second Cyber Report in 2014: Cyber Risk: The Growing Threat

I.I.I.’s 2nd report on cyber risk released June 2014

Provides information on cyber threats and insurance market solutions

Global cyber risk overview

Quantification of threats by type and industry

Cyber security and cost of attacks

Cyber terrorism

Cyber liability

Insurance market for cyber risk

3rd Report in Q2 2015

Conclusion

The P/C insurance industry is highly competitive

It’s a highly cyclical/volatile business

The industry is financially very strong

Profitability depends not only on claims activity

but also investment returns and other factors

Many factors influence price (rate) and availability

General & individual risk rating factors

Nature of regulation has significant impact on

competition, consumer choice, and price

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Q & A

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Thank you for your timeand your attention!

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