State of The Market September 21, 2016

Richard Terlecki, CPCU, ARM, Are

Area Senior Vice President

Guenter F. Kryszon

Senior Vice President

Regional Property Executive

The Single Most Important Factor Controlling an S.I.R. (Your) Program Premium is Your Own Loss Experience!!!!!!!

Two Ways To Control Your Own Loss Experience:

1) Loss Control and Safety including construction, inspections, contractual transfer of risk.

2) Departments, divisions, members, participants or whatever your State calls them must have some skin in the game. Their premiums must be directly tied to their loss control efforts but more importantly to their own losses. It is the 80/20 rule, 20% cause 80% of the losses.

Don’t Fool Yourself

Don’t fool yourself for a moment by reading all the periodicals and listening to

presentations. Most are talking about First Dollar programs, not S.I.R.

programs such as yours.

Private US property/casualty insurers saw their net income after taxes fall to

$13.3B in first-quarter 2016 from $18.1B in first-quarter 2015—a 26.6%

decline—and their annualized quarterly yield on investments drop to 2.9%—the

lowest this century—from 3.1% a year earlier, according to ISO and the

Property Casualty Insurers Association of America(PCI).

Insurers’ combined ratio deteriorated to 97.5 from 95.7, and net written

premium growth slowed to 3.2% from 3.8%. Net investment income dropped to

$10.9B from $11.7B, and realized capital gains decreased to $2.3B from $4.7B,

resulting in $13.2B in net investment gains, down $3.2B.

Direct insured property losses from catastrophes striking the US totaled $4.8B,

up from $3.6B and above the $3.1B average for 1st quarter direct catastrophe

losses for the past ten years.

U.S. P&C Insurers' Net Income Dips in 1st Quarter

Insured catastrophe losses up 51% YOY in H1 2016

18-08-2016

Earthquake in Japan, thunderstorms in the US and Europe, and wildfires in

Canada collectively caused $31 billion of insured losses in the first half of

2016, up 51 percent from the same period in 2015, according to estimates

made by Swiss Re ahead of its sigma report.

The insured losses represented 44 percent of the total losses of $71 billion from natural catastrophes and

man-made disasters in the first half of 2016, an increase of 38 percent from $52 billion for the same

period in 2015.

In particular, $68 billion of the total losses were related to natural catastrophes, and $3 billion were man-

made.

Of the insured losses, $28 billion were driven by natural catastrophes and $3 billion were man-made

losses. The natural catastrophe losses were slightly higher than the ten-year average of $26 billion.

As many as 6,000 lives were lost in disaster events in H1 2016, compared to 12,000 in the same period of

the previous year.

Among the costliest of events for the insurance sector were thunderstorms in the US and Europe, with

three separate weather events in the US causing combined insured losses of over $7 billion.

The most intense of these was a major convective storm in Texas in April 2016, resulting in insured losses

of $3.1 billion, as large hailstones caused widespread property damage.

Europe, which was also subject to severe weather events, faced insured losses of $2.8 billion caused by

thunderstorms, flash floods and river flooding from slow-moving, low-pressure systems Elvira and

Friederike.

The Kumamoto earthquake in Japan resulted in insured losses of $5.6 billion from the series of shocks

which caused extensive structural damage, fires, and collapsed buildings.

Wildfires in Canada had overall insured losses of $2.5 billion, making it the costliest wildfire event in

insurance industry history.

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009; 2015E is annualized figure based actual figure through Q3 of $44.0

Sources: A.M. Best, ISO; Insurance Information Institute

P&C Industry Net Income after Taxes 1991 – 2016:Q1

* 2007-2012 figures exclude mortgage and financial guaranty segments.

Source: A.M. Best (1990-2014); Conning (2015E-17F) Insurance Information Institute

Commercial Lines Combined Ratio 1990 – 2017F*

*Profitability = P&C insurer ROEs. 2011-15 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

Profitability Peaks & Troughs in the P&C Insurance Industry

1975 – 2015

* Excludes Mortgage & Financial Guaranty insurers 2008--2014. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014: = 97.0. Sources: A.M. Best, ISO (2014-2015); Figure for 2010-2013 is from A.M. Best P&C Review and Preview, Feb. 16, 2016

P&C Insurance Industry Combined Ratio

2001 – 2016: Q1*

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 .

Policyholder Surplus 2006: Q4 – 2016 Q4

The industry now has $1 of surplus for every $0.76 of NPW, close to the strongest claims-paying status in its history.

The P&C insurance industry entered 2016 in very strong financial condition.

* Through 6/12/16. 2016 figure stated in 2015 dollars.

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

U.S. Insured Catastrophe Losses

2013/14/15 were welcome respites from 2011/12, among the

costliest years for insured disaster losses in U.S. history.

2016 is off to a costlier start.

• Investment performance is a key driver of profitability.

• Depressed yields will necessarily influence underwriting

and pricing.

Investments The new reality

• Brexit is a net negative for the global (re)insurance

industry

• Fundamentally, Brexit is a protectionist measure

and antithetical to free trade; Economic negative

o Dollar appreciates

o Delays Fed rate hikes

• Free flow of financial capital, human capital and

coordinated regulatory policy across EU states is

on net good for Europe’s economy

• Concern that UK’s action could initiate a domino

effect

• Economic integration is the cornerstone of keeping

(most of) Europe free of war

• Does Brexit weaken Solvency II and efforts to

implement European-like regulations in the US?

BREXIT Potential Impacts on the Global (Re)Insurance Industry

Non-UK

companies

headquartered

in London

expect to relocate

if passporting

rights

are not granted

to operate

Across the EU.

Brexit – Passporting Rights

*Truman administration ROE of 6.97% based on 3 years only, 1950-52;.

Source: Insurance Information Institute

1950 – 2014*

P&C Insurance Industry ROE by Presidential Administration

Issue Trump Clinton

Economy

Supply Side-Like Philosophy

Lower taxesFaster real GDP growth;

Deficits likely grow as tax cuts are

combined with targeted increased spending

on Homeland Security, Defense, etc.

Keynesian Philosophy

More government spending on

infrastructure, education, social

services; Deficits likely increase as

tax increases likely difficult to pass

Interest Rates

May trend higher with larger deficits; Shift

from monetary policy to fiscal focus (tax

cuts, government spending)

Status quo at the Fed; Net impact on

interest rates unclear

Taxes

Favors lower tax rates for corporate and

personal income tax rates; Tax code

overhaul?

Unlikely to reduce taxes or embark

on major overhaul of tax code

International

Trade

Protectionist Tendencies (appeal primarily

to manufacturing sector)

Has criticized Trans-Pacific

Partnership but is a realist on

international matters

Tort System Doesn’t like trial lawyers but seems to like

filing lawsuits Status Quo

Health Care ACA should be repealed & replaced Incremental Change

Trump vs. Clinton Issues that Matter to P&C Insurers

* Not Graded: District of Columbia

Source: R Street Insurance Regulation Report Card, December 2015

2015 P&C Insurance Regulatory Report Card

*Through May 15 1Based on a search of Meltwater News

I.I.I. Media Index, P/C, First Five Months

2015 vs. First Five Months* 20161

Questions

• Are auto insurers monitoring

these trends?

• How are they reacting?

• Will Google take over the

industry?

• Will the number of auto

insurers shrink?

• How will liability shift?

Media is Obsessed with Driverless Vehicles

Often Predicting the Demise of Auto Insurance

Source: Boston Consulting Group.

*http://www.oliverwyman.com/insights/publications/2015/jul/the-true-value-of-autonomous-driving.html

Matrix of Players that Could Benefit from Autonomous Vehicles

Role of the Underwriter Video

Evolution of the Underwriter Role

Disruptors

Telematics

Internet of Things

Autonomous Vehicles

Technology

Drones

Internet of Things (IoT)

Dutch researchers have invented an internet-of-things sensor that powers

itself from router radio waves. The Chip is so small it could be mixed with paint

or building materials. Production cost per chip as low as 20 cents.

The connected car,

The connected home,

The connected business

and The connected self.

Source: http://www.theregister.co.uk/2015/12/08/iot_sensor_using_radio_waves

Ingestibles

• Body chemistry

• View malignancies

• Detect diseases

• Medication adherence

Implantables

Smart Fabrics

Virtual Reality

• Computer simulated reality

Augmented Reality

• Real world environment supplemented by computer generated inputs

Beyond Wearables: Ingestibles & Implantables

VR Could Have Big Impacts too

Internet of Things (IoT) – A New Economic Age

• The “Internet of Things” will create trillions in economic value throughout the global economy by 2025

• What opportunities, challenges will this create for insurers?

• What are the impact on the insurance industry “value chain”?

The Internet of Things & the Insurance Industry

Sources: McKinsey Global Institute, The Internet of Things: Mapping the Value Beyond the Hype, June 2015; Insurance Information Institute.

Wearables Today Can Monitor

• Location

• Heart rate

• Temperature

• Steps/Exertion

• Sweat

• Sleep

In the Near Future, Wearables Could Monitor

• Glucose level

• Oxygen levels

• Pain

• Nausea

Wearables Show Significant Potential to Reduce

Workplace Injury

Lemonade Peer-to-Peer (P2P) Insurance

Daniel Schreiber here, with updates from Lemonade.

I’m thrilled to report that a few days ago, by unanimous vote of our board and shareholders, Lemonade became a Public Benefit Corporation, and was also awarded provisional ‘B-Corp’ certification. Both are firsts for an insurance carrier, and are points of tremendous pride for our team.

Rebuilding insurance as a social good, rather than a necessary evil, is now part of our legal mission. Our Chief Behavioral Officer, Professor Dan Ariely, says that “If you tried to create a system to bring out the worst in humans, it would look a lot like the insurance of today.” Working in partnership with nonprofits, and baking giving-back into our business model, holds the promise of a better insurance experience, and a more valuable insurance company.

In other news, I’m happy to say that we’re putting finishing touches on our product and will be ready to launch in New York within weeks. The final step is for us to get our license, and if all goes to plan, we’ll have that shortly.

Be sure to follow us on Twitter, Facebook, and LinkedIn to stay in the know.

Until next time,

Daniel @daschreiber

Lemonade

Sour Words about Insurance

Source: “This Year Millennials Will Overtake Baby Boomers,” Pew Research Center, January 15, 2015 accessed at http://www.pewresearch.org/fact-tank/2015/01/16/this-year-millennials-will-overtake-baby-boomers/

The Generations Defined

The Millennial Generation Born: 1981 – 1997

Age of Adults in 2015: 18-34*

Generation X Born: 1965 – 1980

Age of Adults in 2015: 35-50

The Baby Boomer Generation Born: 1946 – 1964

Age of Adults in 2015: 51-69

The Silent Generation Born: 1928 – 1945

Age of Adults in 2015: 70-87

The Greatest Generation Born: Before 1928

Age of Adults in 2015: 88-100

* No chronological end point has been set for this group. For the purpose of following

a cleanly defined group, Millennials are defined as those ages 18 to 34 in 2015.

PEW RESEARCH CENTER

In 2015, Millennials Overtook Baby Boomers as the

Largest Generation

*Figures as of June 30, 2015, from the Identity Theft Resource Center,

http://www.idtheftcenter.org/images/breach/ITRCBreachReport2015.pdf

Data Breaches 2005-2015

By Number of Breaches (Millions) and Records Exposed

The total number of data breaches (+27.5%) hit a record high of 783 in 2014, exposing 85.6 million records. Through June 30, this year has seen 117.6 million records exposed in 400 breaches.*

Blockchain Technology

THE BLOCKCHAIN is a shared, trusted, public or private ledger

that participants can inspect,

but which no single user controls.

How Blockchain Works

Participants confirm transactions without the need of a central certifying authority

(i.e. banks, clearing houses and government authorities)

making transactions transparent and trustworthy.

Blockchain Adoption Projection

VENTURE CAPITAL FUNDING

IN BITCOIN/BLOCKCHAIN

TECHNOLOGIES ($M)

PUBLIC ENTITIES ARE FACING

• Aggregation Analysis

• Crisis Management

• Cyber

• Terrorism

Evolving Risk Exposure

Underwriting Variables

Capital Costs

Reinsurance /

Treaty Costs

Limits /

Deductibles

Financial Risk

Industry Risk

Loss Costs

Expenses

Risk Quality

Return

on Equity

Methods to Access Risk

Insured Financials

COPE

Information Catastrophe Modeling

An

alytic

s

En

gin

ee

rin

g

Role of Catastrophe Modeler

Guenter Kryszon

AIG

Senior Vice President,

Property and Special Risks Executive

(770) 671-2506

Guenter.Kryszon@aig.com

Thank You. Any Questions?

Richard Terlecki, CPCU, ARM, Are

Arthur J. Gallagher & Co.

Area Senior Vice President

407.563.3512 (direct)

Richard_Terlecki@ajg.com