Making Sense of the Headlines: Insurance Market Insights for 2023 with Dr. Robert Hartwig

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A title appears on a laptop: Wednesdays with Woodward (registered trademark) Webinar Series. To the right of the laptop, a red mug features a Travelers umbrella logo. 

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JOAN WOODWARD: Good afternoon. And thank you for joining us. I'm Joan Woodward, President of the Travelers Institute. And I'm delighted to welcome you back to our program this afternoon.

Before we get started, I'd like to share our disclaimer about today's webinar.

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Text, About Travelers Institute (registered trademark) Webinars. The Wednesdays with Woodward (registered trademark) 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. Wednesdays with Woodward (registered trademark) Webinar Series, Making Sense of the Headlines: Insurance Market Insights for 2023 with Doctor Robert Hartwig. Logos: Travelers Institute (registered trademark), American Property Casualty Insurance Association (service mark), Connecticut Business & Industry Association, Risk and Uncertainty Management Center at the University of South Carolina’s Darla Moore School of Business, MetroHartford Alliance.

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And also, I'd like to thank our partners for today's program: the MetroHartford Alliance, the American Property and Casualty Insurance Association, the Risk and Uncertainty Management Center at the University of South Carolina's Darla Moore School of Business, and the Connecticut Business & Industry Association. Welcome, all. 

We know that many of you joining us today think a lot about risk. Maybe you manage risk directly for your business or you're working in the insurance industry, helping others to manage their risk. Either way, I'm sure you'll agree, risk professionals from all sides of the business need to have a laser focus on the macroeconomic picture, everything from inflation, supply chain, interest rates and the red-hot job market.

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In photos, speakers smile. Text: Speakers. Joan Woodward, Executive Vice President, Public Policy, President, Travelers Institute, Travelers. Robert Hartwig, Ph.D., Director, Risk and Uncertainty Management Center; Clinical Associate Professor, Darla Moore School of Business, University of South Carolina.

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Today we're really thrilled to welcome back to our show Dr. Robert Hartwig for an hour of impactful business insights, bringing together the most pressing trends in the insurance industry today and helping us all to dig beyond the headlines and to really understand what's going on and the horizon in 2023. So, Dr. Hartwig is the Director of the Risk and Uncertainty Management Center at the University of South Carolina's Darla Moore School of Business. He also serves as a Clinical Associate Professor of Finance. He's also just joined the Federal Reserve Board's Insurance Policy Advisory Committee for a three-year term. And we're going to look forward to hearing about that new position later in our program.

Dr. Hartwig's research focuses on insurance markets and structures, risk management, risk-bearing capital market instruments, and the financing of technology risks and venture capital in the insurance markets. That's a lot, folks. Many of you may know his prior work as President and Chief Economist for the Insurance Information Institute, or the III, which is an organization that empowers consumers by providing insights and information about insurance. He's a hugely sought-after speaker in the insurance industry and has testified before a number of congressional as well as state legislative committees.

So we're really lucky to have him with us today.

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Making Sense of the Headlines: Insurance Market Insights for 2023. Wednesdays with Woodward Webinar, Travelers Institute, January 18, 2023. Robert P. Hartwig, Ph.D., C.P.C.U., Clinical Associate Professor of Finance, Risk Management & Insurance. Darla Moore School of Business, University of South Carolina. Robert dot Hartwig at moore dot sc dot edu. 8. 0. 3. 7. 7. 7. 6. 7. 8. 2. Logo: University of South Carolina Darla Moore School of Business. 

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We're going to open with Bob's signature 85 slides-- no, I'm just kidding, but about a 30-minute presentation for us from Bob. And then we're going to come back together for a discussion and questions. I know you're going to have plenty of questions for Bob. I do. And I promise to get to as many as I can. So drop those in the Q&A.

And, Bob, we're just thrilled to have you with us today. And, as always, really looking forward to hearing your insights.

ROBERT HARTWIG: Well, thank you very much, Joan. And my pleasure to be here, once again, on Wednesdays with Woodward and your second webinar of the 2023 season. And 2022 was an extraordinary year. 2023 is going to be another extraordinary year. We're only two weeks into it and I can already tell.

And that's kind of the subject of today's presentation. I mean, there are a lot of headlines out there that can often be confusing, contradictory to one another. And so I'm going to kind of give you a quick lay of the land of what's going on with the economy, with financial markets and so forth, and what that all means for the property casualty insurance industry.

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Text: P/C Insurance Overview & Outlook: Outline. Economic Overview & Outlook, Impacts for P/C Insurers. Growth, employment, inflation, recession. Inflation: Where it Is Headed & What It Means for P/C Insurers. Impacts on claim severities and loss ratios. Long-term inflation considerations. P/C Financial Overview & Outlook in the Post-COVID, High-Inflation Era. Premium growth, underwriting performance, investment performance. Legal System Abuse (Social Inflation) Overview. Summary and Q&A.

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So let's just kind of plow ahead and talk about where the economy is today and where it's likely headed. And, of course, there's been a lot of discussion over the past year or a year and a half about inflation, how much of a threat is that in the year ahead? And speaking of threats, the question of recession, is a recession looming? Is a recession inevitable? Or will the Fed successfully engineer a soft landing?

And then we'll drill back and take a look at what all this means for the property casualty insurance industry in terms of growth, underwriting performance, investment performance, and those other things that are very, very important to each and every insurer in this industry. And we'll talk about a couple of special issues that are really problematic right now, including legal system abuse and social inflation issues. And then we should have the time, again, as you mentioned, for some Q&A at the end.

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Economic Overview: Economic Optimism Plummeted in 2022, Inflation & Unemployment are Key in 2023. Inflation, geopolitical conflicts and rising interest rates are weighing heavily on business and consumer sentiment. Can the Fed "thread the needle" and achieve a "soft landing"? A bar graph titled U.S. Real GDP Growth charts years 2000 estimates/forecasts from Wells Fargo Securities through 24.4Q. The chart highlights the "Great Recession" beginning in December 2007 and the financial crisis of 2008 and 2009, followed by the COVID crash. Text: Q2 2020 plunged by 31.2%. 2021: Q4 hit 6.9% on strong consumer spending and inventory rebuilding. For all of 2021, growth was 5.7%, the strongest since 1984. Consensus building that aggressive Fed tightening will result in a mild recession by H2 2023. Demand for insurance increased materially in 2021/22, particularly in economically sensitive commercial lines such as workers compensation. Premium growth will likely slow in 2023 as economy slows. Source: U.S. Department of Commerce, Wells Fargo Securities (12/22); Center for Risk and Uncertainty Management, University of South Carolina.

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So, let's just quickly get right into it in terms of the economy. Where is that? Well, the most recent data suggests that we finished 2022 on a relatively strong note, even though we wound up in the first half of the year with two quarters in a row of negative economic growth. Many people thought that meant we were in a recession. We were not. The job market is just too strong to really suggest that at any point in 2022 we were at a recession. And we are absolutely positively not in a recession right now.

The question really is whether or not we will be in one later this year. By "later this year," I mean in the second half of this year. So the current forecast suggests we'll have a relatively shallow recession beginning sometime in the second half of 2023, perhaps spilling into early 2024.

The good news is, actually, that the decline in the economy, the shrinkage in the economy forecast for the second half of this year, has actually been taken down a little bit. And that's because of some positive news on a global scale, such as the reopening of China. Things aren't quite as bad in Europe as we anticipated. And all of that has positive spillover effects for the United States.

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A line graph titled GDP Growth: Advanced & Emerging Economies vs. World, 1970 to 2024F with GDP Growth Percent on the Y-axis and years 70 to 24F on the x-axis. A red line charts advanced economies, a blue line charts emerging and developing economies, and a green line charts world. Text: Global GDP increased by an estimated 2.3% in 2022 (after growing by 6.0% in 2021) but forecast to slow plus 1.7% in 2023 before rising to 2.6% in 2024. Advanced economies were estimated to grow by 2.7% in 2022 (after rising by 5.2% in 2021), but effectively stall with growth of just plus 0.2% in 2023, accelerating to 1.3% in 2024. Emerging economies (led by China and India) grew an estimated 2% in 2022 (following growth of 6.6% in 2021) accelerating to +2.8% in 2023 and 3.5% in 2024. Source: International Monetary Fund, World Economic Outlook (1970 to 2020); Wells Fargo Economics (2021 to 2024F) as of December 2022; University of South Carolina, Risk and Uncertainty Management Center.

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And, in fact, what's going on in the world today is a global phenomenon. Now, we've had a global slowdown over the past year or so. And that has been led by a slowdown in advanced economies, particularly the United States, but also places like the U.K. and in certain countries in the eurozone. 

Of course, last year was a very difficult year with the Russian invasion of Ukraine driving up energy prices and inflation. So that's been a challenge. Now, as it turns out, many European countries have done better than expected. And again, a somewhat enhanced outlook for Europe. And with China reopening, we would expect a little boost from that as well. So the global picture, not quite reflected in these statistics here, is a little bit better for 2023 than we would have anticipated a little while ago.

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A bar graph titled U.S. Unemployment Rate Forecast: 2007 Q1 through 2024 Q4. Text: Great Recession: Rising unemployment eroded payrolls and workers compensation's exposure base. Unemployment peaked at 10% in late 2009. U.S. unemployment rate peaked at 14.7% in April 2020 (13.1% Q2 average). At 3.5%, the December 2022 unemployment rate was tied with pre-COVID lows and the lowest unemployment rate since 1969. The Fed considers "full employment" to be 4.1%. Unemployment rate returned to pre-COVID levels in early 2022 but will rise as inflation, Fed rate hikes slow the economy. Sources: U.S. Bureau of Labor Statistics; Wells Fargo Securities (12/22 and 10/22 editions); Risk and Uncertainty Management Center, University of South Carolina.

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The unemployment situation has actually been a very good one, and we think about exposure and workers compensation. The unemployment rate in December of 2022 was 3 1/2%. That was tied to the lowest since 1969. You can't argue with that.

Now, the question is, where is it headed from here? The consensus is that we will wind up with an unemployment rate that is above 4% and close to 5% by the end of 2023 and perhaps exceeding 5% by the first half of 2024. We'll see. I would expect this potentially to be dialed back a bit as well.

And the good news is that there is a possibility that we could avoid recession altogether. And I'll talk about what the probability of that is in a moment.

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A bar graph titled Auto/Light Truck Sales, 1999 through 2024F. Text: 2009: New auto/light truck sales fell to the lowest level since the late 1960s. Job growth and improved credit market conditions boosted auto sales to near record levels by 2015/2016. 2022E: New vehicle purchases remain constrained by manufacturer supply chain problems. Yearly car/light truck sales remain below pre-COVID levels. Auto manufacturer supply chain issues are expected to linger into early 2023. PP Auto premium might grow by 3.5% to 5%. Source: U.S. Department of Commerce; Wells Fargo Securities (12/22 for 2022 through 24F); University of South Carolina Center for Risk and Uncertainty Management. 

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Now, we look at major sectors of the economy that are important to insurers. We can look at new auto and light truck sales out there. Those look like bad numbers in 2022. But that's a result of supply chain issues, which are largely becoming unkinked. So expect more auto sales as a result of some solutions coming to the supply chain. And that's good news, and with ultimately reaching what we would expect a pre-COVID level of auto sales by 2024. Very important for personal auto line, which accounts for 38% of all written premiums in the property casualty insurance industry.

And differentiate this from the financial crisis, where you can see that auto sales fell off a cliff. That was due to weakness in household finances and a collapse in the overall economy. This time, again, it's a supply chain issue, something we can overcome.

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A bar chart titled New Private Housing Starts, 1990 through 2024 F. New home starts plunged 72% from 2005 to 2009, a net annual decline of 1.49 million units, lowest since records began in 1959. Job growth, low inventories of existing homes, low mortgage interest rates and demographics led new home construction to peak in 2021. - 17.5% from 2021 peak to 2023 estimate, high prices, rising mortgage rates, lingering supply chain issues will erode new home construction activity into 2023 but no repeat of the housing collapse that began in 2007. Insurers continue to see meaningful exposure growth in the homeowners line as well as lines associated with home construction: construction risk exposure, surety; commercial auto; potent driver of workers comp exposure. Source: U.S. Department of Commerce; Wells Fargo Securities (12/22 for 2022 through 23); University of South Carolina Center for Risk and Uncertainty Management.

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On the housing side, you can see-- you did see some of a sharp decline in terms of new home construction. By sharp, I mean about 17%. Now, that's nothing compared to the 70% or so we saw during the financial crisis. That is essentially being engineered by the Fed in higher interest rates. To the extent that the Fed perhaps can start to dial back rates a little sooner than we might be anticipating, perhaps late 2023 rather than 2024, we could see a little boost there because there is a lot of unsatisfied demand for housing in the United States today, whereas demand simply evaporated back in the financial crisis. 

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Text: Is a recession on the horizon... or has it already arrived? Deep uncertainty in terms of economic growth in 2023. P/C insurance industry's growth prospects are tied to the overall economy. 

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Moving on from there, the question about recession-- that's the R word. And this is the $100 trillion question for 2023, is will we have a recession? You can't get away from that question.

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A line graph titled Probability the U.S. is in a Recession Within Next 12 months, January 2017 through October 2022. Red circles highlight a near 100% probability in April 2020, a probability below 20% in July 2021, and a probability slightly above 60% in October 2022. October 2022 survey included the responses of 75 economists. Before COVID, economists typically assessed the risk of recession within the next 12 months at 15% to 18%. COVID: 96% chance of recession, July 2021 probability of recession falls to just 12%, October 2022 probability of recession increases to 63% from 49% in July. Recession is increasingly likely, but still not inevitable. Source: Wall Street Journal surveys of economists. https://www.wsj.com/articles/economists-now-expect-a-recession-job-losses-by-next-year-11665859869; Risk and Uncertainty Management Center, University of South Carolina

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And the most recent survey of a Wall Street economist by The Wall Street Journal, which just came out the other day, about 61%, actually, 61% of economists who were surveyed in January-- and I think, actually, there's been actually one data update since the number I'm showing you here. So number in January was 61%. And that's down slightly from 63%.

So what does this data mean? Roughly 60% of economists think that within the next 12 months we will have a recession. And about 40% think we will not. So there is a reasonably strong likelihood that we could avert recession. But perhaps the most likely scenario, again, is a relatively shallow recession.

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A line graph titled The Economy Drives P/C Insurance Industry Premiums: 2006: Q1 through 2022. Direct Premium Growth (All P/C lines) vs. Nominal GDP: Quarterly Year-over-Year Percent change. Premium growth slowed in 2020 due to the COVID recession and has rebounded strongly in 2021 and 2022 with the overall economy. Direct written premiums track nominal GDP fairly tightly over time, suggesting the P/C insurance industry's growth prospects inextricably linked to economic performance. 2020 through 2022 figures are annual; 2022 DWP figure is preliminary. Sources: SNL Financial; U.S. Commerce Department; Bureau of Economic Analysis, ISO, Triple I; Risk and Uncertainty Management Center; University of South Carolina.

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Now, this is important for the industry because this is an industry that is very much joined at the hip with respect to the overall economy. So here you see in blue direct written premium growth for the property casualty business. And you see year-over-year nominal, in other words, not inflation-adjusted GDP growth, in other words, the pace of growth of the overall economy. You can see those are pretty tightly correlated with one another.

So to the extent we see a deceleration in the economy in 2023, we would expect to see a deceleration in premium growth in 2023 as well and perhaps carrying a bit into 2024. So we're not talking about a plunge like we saw during the financial crisis. We are talking about a moderation in growth beginning really in the second half of this year.

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The U.S. Inflation Threat. Inflation is the #1 concern of U.S. consumers and corporations... It's also a major concern of insurers.

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Now, the inflation threat is still with us. It's real. It was a big problem in 2022. It was the number one concern of businesses, of consumers. And, obviously, therefore, it has implications for insurers.

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A bar graph titled U.S. Inflation Rate: 2009 through 2024F, Annual change in Consumer Price Index for All Urban Consumers (CPI-U). Text: There's a great deal of concern that trillions of dollars of stimulus plus the post-COVID recovery, supply chain disruptions and labor shortages are causing the economy to overheat, resulting in inflation. Inflation accelerated sharply in 2021 before peaking at 9.1% in June 2022. Inflation should moderate through 2023/24; Forecast is highly dependent of trajectory of energy prices and Fed rate hikes. Insurer concerns about inflation: rate inadequacy, reserve inadequacy, insurance to value. Source: U.S. Bureau of Labor Statistics; Wells Fargo Securities (12/22); USC Center for Risk and Uncertainty Management.

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We wound up 2022-- and that's no longer an estimate. The 8% is an official number. That's what it actually came out to. And what we see is an expectation that we'll see a fairly sharp decline in 2023.

And, again, I had to send in this presentation about a week or so ago. Since then, we've had an update. So the expectation would be in 2023, the inflation rate would actually be only about 3.4% and about 2.4% in 2024.

So the updates that we've been receiving based on the most recent information and trends on inflation, which came out late last week, suggest that inflation is taking a bit of a softer turn. In other words, the inflationary trends are moderating a bit more quickly than we had originally anticipated. And that's unambiguously a good thing.

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A graph titled Contribution to CPI by Category: November 2022. Text: Prices were up 7.1% in November 2022 vs. a year ago, down from the June 2022 peak of 9.1%. Energy and vehicles pulled CPI down in November, but increases in housing, food, and other services prevented a larger drop. Source: U.S. Department of Commerce and Wells Fargo Economics.

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These are the November numbers showing the individual components of the Consumer Price Index. The December numbers came out, were similar in that they showed the gray part of the bar, meaning energy, pulling down the overall pace of inflation, whereas before you could see the gray bar was on top. It was dramatically pulling up the pace of inflation.

Also pulling down inflation is such things as vehicle prices, very, very important to auto insurers and commercial auto insurers, of course. But what's keeping inflation elevated is the cost of housing, shelter. That's a big issue right now, although even there, there are signs of some moderation, which is good news.

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A bar graph titled Inflation: Large, Immediate Impacts for Insurers. Lumber/Wood Products shows the largest percentage of 120.0% in May 2021. Source: Bureau of Labor Statistics, ISO Fast Track data, University of South Carolina, Risk and Uncertainty Management Center.

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But no question that there have been big impacts in terms of the surge in inflation for insurers. Claim severities across property lines, auto lines, both personal and commercial, have been increasing. Medical inflation, with some lag, has actually been coming up or accelerating, although it's beginning to decelerate a little bit right now, which is actually good news in the most recent data.

And, of course, this means that insurers have their work cut out for them in the sense that they have to embed these new trends in the rates. And that takes some period of time. And if inflation were to persist, you could ask questions whether or not there would be issues with respect to rate adequacy and reserve adequacy. Those were big issues back in the '70s and '80s when we had inflation that was much higher than we see today. And insurance-to-value is a concern as well. With inflation rising at a fairly rapid clip, many risks may actually find out that they're insufficiently covered in the event that they have a total loss.

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A bar graph titled Inflation: A Global Phenomenon, Outlook through 2024F. The y-axis includes percentages of -2% to 10%. The x-axis includes bars for 2019 through 2024F, for World, Advanced Economies, Eurozone, U.S., U.K., Japan, Developing Economies, and China. Source: IMF and Wells Fargo Securities December 2022; University of South Carolina, Risk and Uncertainty Management Center.

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Now, again, inflation, just like slow GDP growth, is a global phenomenon, 8% here in the U.S. But you can see in the U.K. and in the EU, for instance, it's been worse than here. Of course, that's largely due to the more substantial impact that they've taken associated with higher energy prices.

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A line graph titled U.S. Consumer Inflation Expectations: 1, 3 and Five Years Ahead, Survey data for 5-year ahead series begin in January 2022. Text: Prior to COVID in 2019, consumer inflation expectations were very stable, rising sharply beginning in May 2021. Inflation expectations are once again receding. Sources: Federal Reserve Bank of New York, accessed at https://www.new york fed.org/microeconomics/sce pound sign slash inflex p dash 1; Risk and Uncertainty Management Center, University of South Carolina.

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The good news, other good news, is that consumer expectations for inflation are not spiraling upward. In fact, they're moving downward. So whether we're looking one year ahead or three years ahead or five years ahead, universally, consumers are expecting the pace of inflation to moderate. And that's very important for the Federal Reserve to see this because it makes-- it helps the Fed understand that consumers are not anchoring their inflationary expectations on some ever-rising number.

That's exactly what happened in the '70s. You wind up with these wage and price spirals that are very difficult to break. So the latest evidence suggests that we are not in a wage-price spiral and that the Federal Reserve ultimately will likely be successful in terms of getting inflation under control without driving the economy into one or more very deep recessions. That's what happened in the 1980s.

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A bar graph titled Annual Change in Average Hourly Wage, 2007 through 2022, Figure is year-over-year change from December 2021 to December 2022. Text: Acceleration of wage growth in 2020 reflected disproportionate loss of low wage jobs and continued gains among higher-wage earners. Wage growth fell sharply during the Great Recession. Wage growth acceleration obscured the massive loss in payroll exposures in 2020. Very tight labor market drove wage gains in 2022 (Peak was 5.6% in March). Are current wage gains fueling a wage-price spiral? Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/ pound sign employment; National Bureau of Economic Research (recession dates); Risk and Uncertainty Management Center; University of South Carolina.

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Other bit of good news is that we've heard a lot about wage inflation recently. However, that is even slowing. In the December numbers, we saw it slow to 4.6% from the full-year 2022 number, which is 5.2%. And in the fourth quarter 2022, it's 4.1%.

So, again, no evidence here of a wage-price spiral. Wages are beginning to moderate. And I expect that we're going to begin to see a rebalancing of the relationship that we've seen over the past couple of years between employers and employees, where they're going to work, and a variety of other things. It's been very much tipped in favor of employees over the past 2 1/2 years or so. That's likely to shift back somewhat.

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A line graph titled: Inflation (CPI) vs. Hourly Earnings Growth, January 2019 through November 2022. Before and during the pandemic, private sector workers experienced strong real wage growth. Real wage growth turns negative beginning in April 2021. Wages rose at a 4.8% annual pace in November 2022, but with inflation at 7.1%, purchasing power slipped, fueling consumer angst and anger but the gap is narrowing. Sources: U.S. Bureau of Labor Statistics; Risk and Uncertainty Management Center, University of South Carolina.

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We also had an update in terms of these figures shown here. In the December figures, we had the CPI was up 6 1/2%. And wage inflation was up about 4.1%. So we are seeing both move in the right direction. But we're also seeing the gap between wages and inflation narrow. And what that means is that hopefully sometime in 2023, workers will once again enjoy real wage gains rather than seeing the real value of their wages actually fall because of inflation.

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A line graph titled Labor Force Participation Rate January 2002 to December 2022, Defined as the percentage of working age persons in the population who are employed or actively seeking work. Text: Large numbers of people exited during the Great Recession, a trend that continued for years afterward. Even pre-COVID, labor force participation rates were stubbornly low, far below pre-Great Recession levels and one of the country's most vexing labor market problems. COVID-19 has intensified this problem. April 2020 rate fell to 60.2%, its lowest level since 1971. As of July 2022, the 22 million jobs lost in the pandemic had been fully recovered. December 2022, 62.3%. Sources: U.S. 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.

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Now, one very stubborn issue we have is the fact that a lot of people have decided, apparently, they aren't going to work again. And you can see this through the labor force participation rate is much lower than it was prior to the pandemic. And it's really difficult to know what is going to get this back.

And many people have decided that they are simply dropping out of the labor force and aren't coming back in. And that can be an acceleration of baby boomers moving into the retired category. Other people even younger than that have decided that they're simply not going to work for a variety of reasons. So that's helping keep the labor markets a bit tighter than they otherwise would be.

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A line graph titled Medical Cost Inflation vs. Overall CPI During COVID, January 2020 to November 2022 (Percentage Change from Year Ago). Text: COVID has completely flipped the historical relationship between overall and medical inflation. January 2020 to February 2021 Healthcare 3.8%, Overall 1.3%, January 2020 to November 2022: Healthcare 3.1%, Overall 4.6%. March 2021 to November 2022: Healthcare: 2.6%, Overall 6.8%, All items CPI, November 2022 7.1%, Medical inflation: November 2022: 4.2%. Sources: U.S. Bureau of Labor Statistics; Risk and Uncertainty Management Center, University of South Carolina. 

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Here you can also see that-- you can see the consumer price index in red and the pace of medical inflation in blue. And updates for December, which have come in since I submitted this presentation, show both of these declining. And that's good news.

And so while I was a bit concerned that medical inflation with a lag was actually going to take off like a rocket, like some other service sectors, in fact, that doesn't seem to be the case. So that's excellent news for workers comp and lost time medical claims severities, for instance, which are $25,000 range frequently, and when you think about bodily injury claims and personal and commercial auto, these sorts of things. So this trend is headed in the right direction. And I'm encouraged by that going into 2023.

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Text: Are things as bad as many believe them to be? A quick review of economic history is helpful. 

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Now, are things as bad as many people believe them to be? We have heard never-ending stories last year about how bad the economy is. It's never been worse.

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A line graph titled Inflation and Unemployment Rate, 1948 through 2022F, 2022 forecast based on Wells Fargo Securities forecasts (12/22). Source: U.S. Bureau of Labor Statistics; Center for Risk and Uncertainty Management, University of South Carolina.

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And I can test that hypothesis by taking a look at two things that people really focus on. People don't like being unemployed. We can take that as a given. And they don't like paying higher prices.

And so if we take those two and measure the-- take a look at the inflation rate and the unemployment rate on the same chart going all the way back to 1948, what we can see is I've highlighted some of the peaks here to show you that things, you can kind of tell, were a lot worse in the early 1980s, maybe late 1970s.

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A line graph titled "Misery Index": 1948 through 2024, Estimated based on Wells Fargo Securities forecasts (12/22), as of 10/20/22 based on Freddie Mac data. Source: U.S. Bureau of Labor Statistics; Center for Risk and Uncertainty Management, University of South Carolina.

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And if I add the unemployment rate to the inflation rate, we get what economists call the Misery Index. And the Misery Index last year was 11.6. That's a bit below what it was during the financial crisis, but it's far below what it was, say, in 1980 or back in 1975.

And in reality, the decade from 1974 to 1983 in terms of misery, meaning the double whammy of inflation and unemployment, is far worse than it is today. You look at 1980, employment was double what it is today. And the inflation rate was not 8%. It was 13 1/2%.

And, by the way, if you wanted a mortgage in 1980, you were going to pay through the nose. You were going to pay 18% for that versus maybe just under 7% in late 2022. So a big, big difference there.

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Text: Misery Loves Company.

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Now, and we expect that Misery Index to actually improve over the next two years.

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P/C Insurance Industry Financial Overview & Outlook: Challenges Amid Rising Inflation and Higher Interest Rates: The Current Economic Environment Presents Many Challenges for P/C Insurers, Industry Remains Strong. A bar graph titled P/C Insurance Industry Combined Ratio, 2001 through 2022F, Excludes Mortgage and Financial Guaranty insurers 2008 through 2014, 2022 figure is forecast. Text: As recently as 2001, Insurers Paid Out Nearly $1.16 for every dollar in earned premiums. Pre-COVID 2020 Combined ratio estimate 99.1 (A.M. Best) Actual equals 98.6. COVID-19 has had no discernable net impact on pre-COVID expectations for the combined ratio in 2020; -7.5 points due to CATS vs. 4.1. in 2019 (about twice average). Sources: A.M. Best, ISO 2014 through 2022F.

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Looking at the P&C insurance industry directly and specifically, well, I had, prior to Hurricane Ian in late September, I was hopeful for a year with a combined ratio of around 100. But with Ian and a few other late-in-the-year events, probably looking around 104, 105 combined. 

So probably the worst year since 2017. But bad for the same reason, very, very high CAT losses. That's pretty much the norm.

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A bar graph titled P/C Industry Net Income After Taxes, 1991 through 2022: H1. ROE figures are GAAP. Return on average surplus. Excludes Mortgage and Financial Guaranty insurers for years 2009 through 2014. Text: COVID's impact on net income in 2020 through 2021 were relatively modest. Sources: A.M. Best, ISO, A.P.C.I.A.

(SPEECH)
We don't have final 2022 numbers yet. So this is the net income or profits aftertax for the industry through the first six months of the year. So you might say, well, I'll double that number, and it looks like a really good year. But the majority of the CAT losses were the second part of the year, continued financial market losses. So that's going to really eat into net income. 

So I expect net income to fall back considerably from the last four years. It's a little hard to say at this point because I don't have much information on what kind of realized losses there were on the industry's investment portfolio. But no doubt they were consequential, given we had a 19% decline in the equity market and the worst year in the bond markets for quite a few years.

(DESCRIPTION)
A bar graph titled C.I.A.B: Average Commercial Rate Change, All Lines 2011 Q1 through 2022 Q3. Note: C.I.A.B data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially. Renewals turned positive in late 2011 in the wake of record tornado losses and Superstorm Sandy. High CAT losses and poor underwriting results in recent years combined with inflation, litigation, reduced capacity, higher reinsurance costs, lower interest rates and increased uncertainty have exerted significant pressure on markets with overall rates up materially. Rate increases peaked in 2020 but continued throughout 2021 and 2022. Source: Council of Insurance Agents and Brokers; Center for Risk and Uncertainty Management Center, University of South Carolina.

(SPEECH)
Now, but on the positive side, at least for commercial insurers, we can see that the hard market or at least a modest hard market continues, with renewals in the high single digits, according to recent broker surveys. 

(DESCRIPTION)
A bar graph titled Change in Commercial Rate Renewals, by Line: 2022 Q3. Note: C.I.A.B. data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially. Workers compensation rates have been basically flat or slightly down for several years, due to strong underwriting results. All major commercial lines except workers compensation experienced increases in Q3 2022. Cyber is seeing record increase, in response to major breaches in 2020 and 2021, overtaking commercial umbrella. Source: Council of Insurance Agents and Brokers; USC Center for Risk and Uncertainty Management. 

(SPEECH)
And what's leading the way is perhaps not a surprise here when you look by line, cyber. Cyber is not a big line, maybe $4 or $5 billion. But there's no shortage of major events that we've seen in terms of attacks and hacks and ransomware on major corporations and many that you never hear about, small and medium-sized corporations, governments, and so on. So that's driving up the cost of cyber coverage. 

Commercial umbrella really being impacted by abuse of the loss to the legal system in the United States. And commercial property making its way up, of course, because of the record or near-record-high CAT losses. The only line showing a consistent decline is workers comp, which still continues to show best combined ratios that we've seen going back at least as far as we can go with workers comp, which is somewhere into the 1920s and 1930s. So really strong results there.

(DESCRIPTION)
A bar graph titled Property/Casualty Insurance Industry Investment Income, 2000 through 2022E. 2021 figure is actual as of 12/31/21. 2018 through 2019 figures are distorted by provisions of the TCJA of 2017. Increase reflects such items as dividends from foreign subsidiaries. Investment gains consist primarily of interest and stock dividends. Aggressive Fed actions in response to COVID and recession pushed interest rates lower in 2020, adversely impacting investment income. Due to persistently low interest rates, investment income remained below pre-crisis levels for a decade. Lower interest rates during COVID drove investment income down once again. Fed rate hikes in 2022 could reverse this trend. Higher interest rates should accelerate investment income growth in 2022/23. Sources: ISO, University of South Carolina, Center for Risk and Uncertainty Management.

(SPEECH)
But when we look at investment income, again, it looked like a pretty good year through the first half of 2022. And it probably will be a pretty good year for investment income. And so one silver lining of higher interest rates for large institutional investors, like insurers, is our investment income will rise. 

(DESCRIPTION)
A bar graph titled Net Investment Yield on Property/Casualty Insurance Invested Assets, 2007 to 2022: H1. Sources: NAIC data, sourced from S&P Global Market Intelligence; 2017 through 2019 figures are from ISO. 2020 through 2021 data from the A.P.C.I.A. Risk and Uncertainty Management Center, University of South Carolina. 

(SPEECH)
And the investment yield on the portfolio is already up for the first half of 2022. That's great news. So a little bit of a tailwind for insurers here to help offset some of the poor underwriting results and some of the poor results in terms of the fact that some losses will have to be realized on the investment portfolio.

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A line graph titled Federal Funds Target Rate: Up, up, and away! Upper-bound, quarter-end. Text:The Fed is expected to continue its rate hikes to a peak of 3.75% to 4% at year end 2022. If the objective of lower inflation is met or in sight, the Fed will likely lower rates in late 2023 to keep unemployment low. The Fed hiked short-term rates in December 2022 by 50 basis points to a target range of between 4.25% and 4.5%. Source: Federal Reserve Board and Wells Fargo Economics (12/22); Risk and Uncertainty Management Center, University of South Carolina. 

(SPEECH)
The hikes in interest rates are not over. The Federal Reserve is-- seems destined to continue or determined to continue its rate hikes probably into the early part of the summer, perhaps the last hike occurring around June if all goes well and then holding steady for a while. And it may be beginning to bring rates down to the very end of 2023, maybe the Fed's last meeting of the year in December. It could be early 2024. But right now, I might put a little bet on December. So that would help us help stimulate the economy, get us back on a solid growth trajectory, and help stave off that potential for even shallow recession. 

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A line graph titled U.S. Treasury Security Yields: A Long Downward Trend, 1990 through 2022. Monthly, constant maturity, nominal rates, through December 2022. Text: Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, Fed rate hikes should over time provide a modest boost to P/C insurer portfolio yields. Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Risk and Uncertainty Management Center, University of South Carolina.

(SPEECH)
But, as you can see in this chart the interest rates have shot up recently. Ten-year Treasuries in blue and two-year Treasury in orange, and you see the two-year yield ahead of the 10-year yield. And what that suggests, some people believe that means it's suggestive of a recession. But another way to look at it is the investors who are looking out over 10 years are not expecting inflation. And that's how exactly I read this. Bond markets in particular are not buying into the narrative that inflation is here to stay.

(DESCRIPTION)
A line graph titled S&P 500 Index Returns, 1950 through 2023, Through January 6, 2022. Text: Inflation is forcing the Fed to tighten, sending the stock market into correction territory. Geopolitical tensions are exacerbating Wall Street's worries. Source: NYU Stern School of Business. Center for Risk and Uncertainty Management, University of South Carolina. 

(SPEECH)
And, as I mentioned, we did have a, last year, a pretty substantial decline. Certainly we had a bear market. We were down about 19 1/2%, although as of the end of last week, we're actually up about 4 1/2%. But it looks like this week we're giving some of that back. 

But the year is still young. So there's going to be a lot of volatility on Wall Street. And that's something you can take for a given.

(DESCRIPTION)
Text: Capital and Capacity. P/C Insurance: Over or Under Capitalized? Plunge in Asset Prices, High CAT Losses Took a Toll in 2022. 

(SPEECH)
But the industry is very, very well prepared for that kind of volatility. There was far more volatility right around the beginning of COVID, during the financial crisis. So I think the industry is very well positioned to manage any volatility that we see in 2023.

(DESCRIPTION)
A bar graph titled Policyholder Surplus (Capacity) 2006 Q4 through 2022 H1, 2022 figure is actual through Q2. Text: The P/C insurance industry entered the COVID-19 pandemic from a position of strength and was able to withstand the 9% surplus decline in Q1 2020 (far less than during the financial crisis). 2020 ended with record surplus. 2021 set another new record, exceeding $1 trillion for the first time. Unrealized losses caused surplus to drop sharply in 2022. 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. Sources: ISO, A.M. Best, NAIC, Risk and Uncertainty Management Center, University of South Carolina. 

(SPEECH)
Now, of course, it is the case that the declining value of stock market equities and rising interest rates, which led to lower prices for bonds, has caused an overall reduction or deflation in the price of assets held in the industry's investment portfolio. And so that is what is responsible for about an 8% decline in the industry's policyholder surplus, its capacity through the first half of 2022 down from a record 1.1 trillion at the end of 2021. And this has further to go. So when we get the final 2022 results, we're probably going to be down a total of more than 10%, probably I'd say 10% to 14%, and which isn't too far away, at least at the higher end of that estimate, of what we saw in the financial crisis, which is when we saw capacity fall by about 16%. It fell about 9% in the early days of COVID, but we came back quickly and set the record very shortly after that.

But again, the industry is prepared for this. But it does, it does speak to the fact that there's a bit less capital in the industry, and not just here in the United States, but globally.

(DESCRIPTION)
A line graph titled U.S. Property Catastrophe Rate-on-Line Index: 1990 through 2022, as of January 1 each year. Text: U.S. Reinsurance Pricing is sensitive to CAT activity and ultimately impacts primary insurance pricing, terms and conditions. Record CAT activity in the U.S. pressured U.S. reinsurance prices in recent years (+14.8% in 2022, +6.4% in 2021, +9% in 2020, +2.6% in 2019, +7.5% in 2018). 2022 Global R.o.L plus 10.8%. Source: Guy Carpenter, Artemis dot bm accessed at http://www.artemis.bm/us-property-cat-rate-on-line-index.

(SPEECH)
So this is something that is impacting, for instance, reinsurance markets. The vast majority of reinsurance capital comes from abroad. Reinsurers have a tough time of it recently, with very high CAT losses around the world, not just here in the U.S., pushing up reinsurance prices.

(DESCRIPTION)
Text: Catastrophe Loss Trends. The Rise in CAT Losses Shows No Signs of Easing. The 2020s are off to an ominous beginning. A bar graph titled U.S. Inflation-Adjusted Insurance CAT Losses: 1980 through 2022 Q3, stated in 2021 dollars except 2022 Q3, 2022 dollars. Text: Average Insured Loss Per Year: 1980 through 2021: $23.8 billion. 2012 through 2021: $44.1 billion. Sources: Property Claims Service, a Verisk Analytics business (1980 through 2019), 2020 through 2021 figures from Munich re: 2023 YTD data from Aon; Insurance Information Institute, University of South Carolina, Risk and Uncertainty Management Center.

(SPEECH)
What's happened in the investment side is decreased capacity. And talking about the CAT situation, through the third quarter of last year about 70 billion in insured CAT losses. There's still not a final number for Hurricane Ian at this point. So we can't quite say with certainty where we wound up. But altogether, we're probably somewhere between $75 and $80 billion in total insured CAT losses for 2022.

And what you can see is the insured losses step up by about $5 billion a year every decade. And there's nothing about that that's going to change. The demographics of the country are such that more and more people, more and more businesses are moving into areas that are more and more prone to a wide variety of natural disasters, whether it's in the Southeast, whether it's wildfires out West or the Mountain States, you name it.

(DESCRIPTION)
A bar graph titled Top 22 Most Costly Disasters in U.S. History, Hurricane Ian Overtakes Katrina? Text: 12 of the top 22 most costly insured events in U.S. history occurred between 2010 and 2022 (inclusive). 18 of the 22 most expensive insurance events in U.S. history have occurred since 2004. Hurricane Ian could become the costliest insured CAT loss ever. Insured loss ranges from $50 billion to $67 billion. 2021 dollars, 2022 dollars (RMS private insurer estimate as of 10/10/22). Sources: P.C.S., RMS, Aon, Karen Clark & Co, USC Center for Risk and Uncertainty Management adjustments to 2020 dollars using the CPI.

(SPEECH)
And so in terms of the top 22 insured CAT losses of all time, Ian could surpass Katrina. I'm very interested to see when we get a final number for that. Right now, I have it surpassing it by a decent margin. But there are actually some estimates out there that put it somewhat below. So we'll have to see it. It might be a couple more months before we actually get a final number on that one. 

(DESCRIPTION)
Logo: University of South Carolina Darla Moore School of Business. Private Passenger Auto Frequency & Severity Trends. Frequency, Severity and Loss Ratio Trends are Adverse. Inflation is a major driver. A bar graph titled At the Peak of the Pandemic, Frequencies Across All Coverages Plummeted But Severities Rose: 4 Quarters Ending Q1 2021. Text: The COVID-19 pandemic introduced unparalleled volatility in the Personal Auto Line. Source: ISO/PCI Fast Track data for 4 quarters ending in Q1 2021; Risk and Uncertainty Management Center, University of South Carolina.

(SPEECH)
On the private passenger auto side, this is very interesting because I thought you might like to see what happens-- what's happened to frequency and severity during COVID and afterwards. You can see that during COVID, this is for the four quarters ending the first quarter of 2001. So this is the worst effects of COVID. And you can see frequency dropping across all the major coverages, although severity continued to increase.

(DESCRIPTION)
A bar graph titled Bodily Injury: Severity Trend is Up, Frequency Plunge Due to COVID has ended and is reversing. Annual Change, 2005 through 2022. 2022 figure is for the 4 quarters ending 2022 Q3. Text: COVID push frequency down sharply, but severity increased. Frequency decline has ended and severity increases continue. Source: ISO/PCI Fast Track data; Center for Risk and Uncertainty Management University of South Carolina. 

(SPEECH)
And looking at the broader, the picture over the longer period of time, something like bodily injury frequency and severity, in gold you could see that the frequency fell off a cliff during COVID, a bit in 2021 as well. But severity continued to rise, in fact, to record levels in terms of increase and continues in 2022.

(DESCRIPTION)
A bar graph titled Collision Claim Severity: Rising to New Record Highs, Average Loss, 2018 Q1 through 2022 Q2. Text: Severities are up sharply, inflation is a major factor. Collision claim severity reached a record high in 2022: Q1 up 36.5% from 2020 Q1. Source: ISO/PCI Fast Track data; Center for Risk and Uncertainty Management, University of South Carolina.

(SPEECH)
And the same for something like collision claim severity, which reached a record high early in 2021 and isn't far off of that. In fact, we have a third-quarter number for 2022. It's not different-- too much different from the second quarter. So we're a bit off the highs, but severities are very much elevated. 

(DESCRIPTION)
Text: Legal System Abuse (Social Inflation) & Litigation Trends. Rising litigation costs are a concern for businesses large and small and their insurers. Major driver of rate across multiple lines.

(SPEECH)
The last topic before we open it up for questions is legal system abuse, sometimes referred to as social inflation. This rising litigation costs that we are seeing are very problematic. And it's not something that the industry can manage on its own. It's a problem that we see entrenched in, for instance, many state legislatures, where we have very, very powerful trial bars essentially making rules for their own benefits. 

(DESCRIPTION)
Text, Social Inflation: Many interrelated causes, Difficult to Manage Insurance claim costs. Upward-pointing arrows read: increasing propensity to sue, size of jury awards, courts/juries favoring plaintiffs, growing distrust of large corporations, litigation financing, aggressive plaintiff bar ads, changes in regulatory and legal environment bar ads. Applied to a seemingly limitless number of issues, these drivers are pushing tort costs (and therefore claim costs upward). Source: Risk and Uncertainty Management Center, University of South Carolina, adapted from Verisk "Social Inflation" presentation. (2020) 

(SPEECH)
You have very, very-- you have increased propensity to sue. Jury awards, the size of jury awards is rising. Courts more favorable to plaintiffs and distrust of larger corporations, litigation financing, and many other things. And again, a very, very aggressive plaintiffs' bar that's out there today. So getting the necessary regulatory changes to getting the cooperation among many different industry groups is going to be a huge challenge for this industry that's going to stretch far beyond 2023.

(DESCRIPTION)
A bar graph titled Average Jury Awards, 1999 through 2020 (latest available). Text: The average jury award reached an all-time record high of $2.5 million in 2020, up 39% from 2019 and 274% since 2010. Median award in 2020 equals $125,366 (a record). Source: Jury Verdict Research, Current Award Trends in Personal Injury (61st Edition), Thomson Reuters; Risk and Uncertainty Management Center, University of South Carolina. 

(SPEECH)
And so you can see this multiyear trend of rising average jury awards. 

(DESCRIPTION)
Text: Summary. 

(SPEECH)
But, that aside, that's a big long-term issue for the industry. The good news is the industry does remain strong, stable, sound and secure in 2022, as we enter 2023, and just as it was in 2020 or in the financial crisis. 

A shallow recession seems likely later in the year, though it's not a done deal. Asset price volatility absolutely going to continue. But higher interest rates are providing a modest tailwind for the industry. Inflationary pressures are beginning to subside, though they do persist to some extent and are going to be more pronounced on the service side versus the goods side, which is a reverse of what we've seen in the last couple of years. 

Yes, we do have some lingering supply chain issues. But those are diminishing in number and intensity. So that's good news as well. And so immediate concern for insurers is beyond the present threat of escalating CATs, the lingering effects of inflation, and making sure the industry is able to achieve rate and reserve adequacy, making sure our clients are properly insured to value, ITV. 

(DESCRIPTION)
Logo: University of South Carolina Darla Moore School of Business. Text: Thank you for your time and your attention! Twitter: twitter.com/bob_ hartwig. For a copy of this presentation, email me at robert dot Hartwig at moore dot sc dot edu or download www. USC riskcenter.com.

(SPEECH)
OK, so, Joan, that just about ends the presentation. So I think I'll hand it back to you. And hopefully people can see us on the screen. And then I guess we can move to the Q&A portion here. 

JOAN WOODWARD: Well, Bob, that was just fantastic, I mean, a whirlwind of information. And we got lots of questions in the Q&A coming at you. 

So, Bob, you mentioned you just went through everything, I think, that's on our listeners' minds right now. And it's just great to hear you in the beginning of the year because your outlook usually holds. And so talking about a recession, we may be able to even avoid; that was actually really good to hear, and also you saying it would be possibly short and shallow, and the Fed looks like they're doing the right thing for now. It looks like inflation is starting to come under control. So I really appreciate those comments. 

What we like to do on our program is we like to turn the tables on our audience. And we'd like to ask an audience question to get a sense of how they're thinking. So let's pull up that question for the audience. In your opinion, the greatest challenge facing the P&C industry in 2023 is, is what?

And we asked this question back in 2021, same question, Bob, when we had you on last time to accolades, as we always hear after your sessions. And so we're going to look at some of those numbers, too, that we saw in 2021. So what are you most concerned about? And, of course, CATs are on everyone's mind. The economy you just talked about.

Let's see. So looks like about half the audience is worried about CATs and volatile weather. And you see this all over the place, certainly in California in the last few days.

We only have about 18% of us worried about the economy. So that actually is good. Maybe you have assuaged them that it might not be so bad. Litigation climate is certainly-- it looks like to be number two right now.

Talent and acquisition, we want to talk about this with you, Bob, because I know you're educating all those young, bright insurance students in your program. And we certainly want access to them. And I know a lot of folks on the line want to hear about how we get in touch with you, too, on getting your talent into our agencies and carriers.

So do you want to comment on this, Bob? The only thing I'll say, I think back in 2021, only 6% of the group was worried about the economy. So this actually is pretty encouraging, I think, in terms of people worried about the economy for the business because it's consumer confidence, right? If you're not terribly concerned about the economy, you're confident things will get better, and that is a spiral upward, right?

ROBERT HARTWIG: Right. So I think that actually the mood of your typical consumer and the typical small and medium-sized business person will probably improve a bit as we move through the first part of the year. It doesn't mean that there aren't challenges out there. But the number-one concern by far of businesses and consumers in 2022 was inflation. So to the extent that that subsides, it's hard to overstate the psychological effect that very high-frequency pieces of information, in other words, driving past your favorite gas station two or three times a day or every time you go to the grocery store and you think the price of something went up, that really infiltrates people's psyche. It can also work in reverse.

Now, now, obviously, we don't want a situation in which unemployment begins to overtake concerns about inflation. And that is a consideration for the second half of the year. But all in all, the economic situation right now is not bad in the sense that what we are doing is we have, again, the lowest unemployment rate, essentially, we've had since the late 1960s. We have economic growth that is certainly going to slow.

But the picture is by no means anywhere analogous to what we saw during the financial crisis. And so you can think about this year as sort of a rebalancing year, the year when we finally move away from that kind of pandemic-related economy, and by 2024 hopefully getting back on a more normalized track to the U.S. and to the global economy.

JOAN WOODWARD: Great. Excellent. So, Bob, I want to ask you about your recent election to the Federal Reserve Board Insurance Policy Advisory Committee. Tell us about, first of all, what is that? What do they do? They're advising the Fed, I guess, on insurance-related issues.

But do you have impact in terms of monetary policy? Or you're just helping them understand? And when was this body created? Is this a new thing?

ROBERT HARTWIG: Right. So, well, I would like to say I have inputs in terms of monetary policy, but Jay Powell has yet to call me. So no, the Insurance Policy Advisory Committee doesn't have any role in monetary policy. It exists for a specific purpose. And it comes out of a piece of legislation, I think, that was approved by Congress about 10 or 11 years ago.

And it's a recognition that the insurance industry is an employer-- an important player in the overall financial services industry in the United States. So historically, we think about the Fed only paying attention to banks, for instance. And that's where most of its attention is. But it's become increasingly clear to the Fed that the insurance industry is a very, very important component of the overall financial services industry.

And it's essential in order to help maintain stability for growth in the United States, that really nothing gets done unless you have insurance sitting behind it. For instance, you can't build buildings, you can't hire workers, you can't lay a railroad, you can't build infrastructure. All of these things require a strong, stable, sound insurance industry sitting behind the financial markets that finance much of this.

And so, but the role of the IPAC, the Insurance Policy Advisory Committee, is to provide input to the Fed and to the staff in terms of helping them understand some of the important issues going on in the industry. So, for instance, capital standards, international capital standards, so much of capital in the United States insurance markets comes from abroad, both through primary markets and especially through reinsurance. The securitization of risk is an overlap between finance and insurance. That's an increasingly important dimension.

There are some other issues, of course. I think, although we're just developing our agenda, and it's my first time on this committee, issues potentially related to climate are important as well. And we'll have to see.

So the committee's reports are public information. And from what I can see, they get posted to the IPAC's part of the website on the Federal Reserve's website. So I encourage everybody to check those out over time. But I'm very much looking forward to working with colleagues in the property casualty insurance industry, the reinsurance industry, and the life insurance industry. No health insurers.

JOAN WOODWARD: OK, and those are all at the Federal Reserve Advisory Committee. That's really interesting. Do you think maybe it was set up 10 years ago because there was a time where people were talking and had federal regulation of insurance and getting away from the 50 state bodies? But this might be a way for them to get federal input, right, in terms of what the market is doing.

ROBERT HARTWIG: In the wake of the financial crisis, and we had the Dodd-Frank Act and so on, we had a number of insurers that were named systemically important financial institutions, so-called SIFIs. And certainly that raised the profile of the insurance industry with the Federal Reserve. And so, since that time, I think the Fed has recognized that it's important to pay attention to the industry.

The industry will state unequivocally that they don't believe that they rise to the level of needing an additional level, an additional layer of regulation. But, nevertheless, making sure that the Fed is adequately informed about the industry is still important, even if the Fed is not engaged in day-to-day regulation of the industry. That still remains the purview of the states.

JOAN WOODWARD: Great. Well, we wish you luck in the new role. And they're lucky to have you, obviously, with all of your insights in the real world.

I want to shift a little bit because we just had an election. We have a new Congress. It was just installed. Obviously, the Republicans are now in firm control of the House and the Democrats in the Senate still.

Do you think there's going to be any meaningful impacts to the P&C industry from any legislation coming out of this new Congress? And if so, what would those impacts be?

ROBERT HARTWIG: Yeah, I guess with a narrowly divided Congress, what you expect is gridlock in general. And some people believe that that is a good thing, that not too much will change.

There are a few things that are out there. For instance, it has been the case that the feds do seem interested in trying to get information from the industry related to climate-related disclosures, potentially on issues related to race that could affect the various arguments related to disparate impact and these kinds of things. How much traction these things will get is unclear in this very narrowly divided Congress that we have. I'm not expecting a lot of landmark legislation that is going to have direct bearing on the property casualty insurance industry.

Congress has some work cut out for it in the sense that, for instance, we have a looming debt ceiling that's in front of us. We're already beginning to hear about that. So the worst thing that Congress could possibly do to upset large institutional investors, like the insurance industry, would be to wait until the midnight hour is upon us before, for instance, addressing issues related to the debt ceiling. We don't need that kind of turmoil and turbulence in the marketplace.

I think a lot of the action is probably at the state level nowadays, where we have numerous states attempting, as they always do, to try to narrow or reduce or entirely eliminate certain categories of underwriting criteria that are used, for instance, in auto insurance. This is a never-ending battle for the insurance industry, who is simply trying to adopt and implement and use rating models that are accurate and provide for a competitive markets. Insurers would like to be able to use models that formally incorporate impacts of climate change looking forward. But in general, they're not allowed to do that at the state level, even in states that claim to be very proactive on the climate-related issue and states that are literally on a daily basis on television with floods or wildfires or what have you.

So I think that looking ahead also, there's a lot of work to do. And I hinted at this in the presentation. I mean, ideally we would love to have some kind of national tort reform. But I don't hear that being discussed anywhere.

And so perhaps there’s some federal dimensions to this. But historically, there's been a large, grassroots, state-by-state operation that has to occur, with a triaging about what some of these issues are, such as litigation financing. When a jury hears that someone else is funding the lawsuit against the defendant, they begin to think that that's not maybe-- that's not a good idea. So perhaps some sort of mandatory disclosure or something like that.

So I hope we can take a few incremental steps here. But the prescription generally in a divided Congress is for gridlock.

JOAN WOODWARD: OK, well, you answered a number of questions that came in from the audience, especially around the debt ceiling and raising it with regard to this Congress. So let's hope that they do it expeditiously. And it won't be holding everyone, as you say, in the midnight hour up at night.

I want to switch a little bit to talent acquisition because we get a lot of questions from our audience members about this. And we had a number of webinars around Gen Z and how to work with our incoming young folks to our offices. So with an extremely tight labor market, you're working with students every day, Bob.

And all the hiring managers dialing in today, they really want to know what Gen Z is looking for in an employer. What's important to them as they decide to take a job or not take a job? What are you hearing or seeing from your students?

ROBERT HARTWIG: Well, first of all, just to-- I will say that we've had great success placing our students. The job market's quite good. In fact, my top student last year and our student of the year and my research assistant went to Travelers, Joan, by the way. So a shout-out to Elizabeth out in Pittsburgh with Travelers right now. You are absolutely wonderful.

But the Gen Z, so it's very interesting. So I do a lot of not just teaching classes. I do a lot of mentoring and career coaching and these sorts of things for students. And I very much enjoy that.

And for top students out there and students that are very motivated-- and, by the way, if you think that Gen Z and millennials are a bunch of lazy types, I mean, that's kind of an overgeneralization. I'm a baby boomer. And I can tell you there were lazy baby boomers, too. But the reality is a lot of really hard-working, motivated individuals out there.

But what I do notice in the post-pandemic environment is I get some questions when it comes to evaluating job offers that I've never gotten before. Historically it's been related to things like, well, what do you think about this offer in terms of salary and benefits? And what do you think about this location and opportunities for upward mobility in the organization?

I do get more questions now about what do you think about company A versus company B in terms of the work-life balance. OK, so you think that might be something that the parents of these individuals, of these students might be thinking about. But this has percolated down right to the new college graduate level, where they're hearing this all the time, too, about work-life balance.

And so that gets into a wide variety of issues, of, for instance, are you going to be in a remote environment? Are you going to be in a hybrid environment? We hear increasingly about companies saying they're going to bring more people back into the office and require them. A lot of big companies, like tech companies, Disney, financial companies, banks are requiring people to spend more time in the office because they believe there has been a fundamental loss of creativity and spontaneity and these sorts of things.

And to be honest with you, I agree to a very real extent with that. People like Bob Iger, the CEO of Disney, is a much smarter guy than I am when it comes to running a company. And he knows about those things.

And so I do think that to some extent, Gen Z, those who are graduating college right now, their view of the labor market is formed by what they've observed over the past two years, where the labor market has been very tight, where workers have had the upper hand. There's two empty jobs for every one job seeker that's out there. You can hop jobs with a big increase very quickly. And guess what? You might even be able to work remotely or work remotely part time.

There's going to be a rebalancing, I think, in the year ahead. So that's something I have to try to make sure I can manage, their expectations. But it's absolutely true that while there are many very, very hard-working, well-qualified individuals, they are taking into consideration more of this work-life balance than they did in the past.

And again, they're digesting that from social media. They're digesting that from parents, from friends and family members who graduated from college a couple of years earlier. And so it will be interesting to see where we go.

JOAN WOODWARD: What is a piece of advice for me, one piece of advice that you can help some of the companies listening in today to try to hire some of these new students in 2023? Do you have a website that you prefer? Or is there someplace the insurance industry does a good job of posting all of their available--

ROBERT HARTWIG: Yeah, the piece of advice that I would give is-- great companies like Travelers do this-- that the most effective way to ensure that you're going to get the best talent in the door is to maintain a continuous relationship with the schools, colleges and universities where you are recruiting. Just don't show up at the job fair one day, set up your tent, set up your desk, and then the kiosk and then leave.

Companies that in particular, I would-- and if I had to zero down to one particular determinant of landing the top talent is going to be internships. OK, that was the case with Elizabeth. OK, she interned twice with Travelers. And I find that top students who have a good internship experience are overwhelmingly likely to go with that company upon graduation.

And so you're able to make that individual an offer literally in the first weeks of their senior year. And that's something that, then, that's helping nail down your talent needs for the year ahead. Students certainly like nailing that down ahead of time. And this way, they're less likely to be pilfered by some other company because the market is still pretty active, still pretty tight right now.

And we filled up the entire, just the business school, we filled up the entire county convention center and had a waiting list for companies looking to recruit students this past fall. And we're doing the same thing in February of this year. So we're excited about that. But the competition is-- remains strong.

And also, if you can, people like me will help you work with or identify individual students where there might be a really good match for you. And again, that can happen at the internship phase, but also in terms of the full-time position.

JOAN WOODWARD: Great. Terrific. Thank you for that advice. We're going to shift again and we're going to talk about cyber insurance because it's such an important thing for our business community today. And the market is just constantly evolving, as you know.

Where do you see the future of cyber insurance for businesses? Where do you see this heading, Bob? As you talked about, the ransomware hacks were up dramatically during the pandemic. And what are your thoughts on this cyber product?

ROBERT HARTWIG: There are two views, I'd say, in the industry about cyber right now. One is that it's a $4 or $5 billion line in its infancy. And we need to learn a lot more about how to underwrite better and price better in this line. But the general trend is upward and onward in terms of growth for this line.

The other view is that cyber is ultimately likely to become an uninsurable risk. So these are kind of polar extremes, that some believe that, for a variety of reasons, for instance, the magnitude of cyber events will be such that we cannot possibly accept this risk on our books, that the aggregation risk, when you think about a major cyberattack impacting much of the United States, many industries, or if not around the world, you think about the way those losses can aggregate up to insurers and to reinsurers. They can be catastrophically large, exceeding even the largest natural disasters that we've ever seen in time if this market continues to grow the way that we've seen it grow and if we don't do a better job of underwriting and pricing it.

That's kind of a very pessimistic point of view. I could easily see if you went back 100 years or so and you said, we're just starting to underwrite these airplanes. And they seem to fall out of the sky a lot back in the 1920s. And it's true that they did. But there were a lot of improvements in the technology and a lot of improvements in the underwriting that went along the way.

I do think that cyber is a line that is here to stay. But I think that the degree to which we who can think that we understand where technology is headed 10 years down the road, for instance, where 10 years down the road, the dominant technology will likely be things like AI, for instance, I don't think we are even scraping the top of the iceberg here in terms of being able to understand those types of risks. So to that extent, you could argue that cyber is the line that's likely to continue to persist and is going to grow. But its growth could be thwarted in some sense by the very rapid evolution in terms of changing technologies that make it very difficult for us as an industry to get our arms around it because we don't-- to the extent we might be rolling out AI technologies, we don't have any losses related to it.

As soon as we develop some sort of a loss history on ransomware attacks, it turns out ransomware attacks are now diminishing in frequency. So we're on to the next thing. And so we have these enormous technological leaps, which it's very hard for us as an industry to get our arms around in a way that we get our arms around, say, property-related risks or auto-related risks.

JOAN WOODWARD: OK, good. A lot of questions coming in from the audience, this one from Jessica DeFelice from Simpson McCrady. How long do you estimate that this hard market will last, specifically maybe in California and Florida?

ROBERT HARTWIG: OK, so how long will the hard market last, it's lasted about, oh, about four years now, I would say. I'd say it's got another good two years in it and with the exception of, say, workmens comp. And then somewhere like, I think you asked California and Florida, well, you would expect those markets and maybe a couple of other hard-hit markets, like Texas, to have additional staying power, obviously, in the property lines in particular.

But you've got, again, problems in the tort environment, as I mentioned earlier. And that affects quite a few lines as well-- GL, products liability. Commercial auto is being hit hard by that. So I'd say the hard market has some legs. And I'd say at least through 2024 and potentially beyond.

JOAN WOODWARD: OK, good news. All right. Coming in from Mark Bolton, Mark wants to know, talking about the unemployment rate and the hot job market, "What about the people who stopped working during the pandemic? How are people that don't, quote, ‘don't want to work again’ living? Where are they getting their income? And when do you expect that to stop? It's unsustainable, people who have stopped working in the pandemic. And they don't want to go back in the labor force." What do you think of that, Bob?

ROBERT HARTWIG: Yeah, so there are very-- there's still approximately $1.2 trillion with a T in excess savings out there in households. And what that means is this is the accumulated savings from the inability to spend, as well as COVID-related relief funds that are sitting in people's bank accounts. So they are draining those.

There were supplemental forms of relief as well that you're well aware of. Most of these have ended, but helped people stay out for longer and preserve their savings, extended unemployment benefits and a variety of other things that were out there also. But what some people simply have decided to do-- and I can almost hear the frustration or the inability to kind of comprehend because I share this with you, how it is that people can look at what's going on out there, complain about inflation, yet not step back into the labor force?

JOAN WOODWARD: Right, right.

ROBERT HARTWIG: And, I think, in not understanding that everything they consume has to be produced by someone else out there. And they are contributing nothing to the gross domestic product of the country. Unfortunately, what it seems to be is that quite a few people are willing to live in a way that will probably provide for them a standard of living in their retirement less than they would have anticipated, but they're just not going to-- they just can't see themselves going back into the labor force.

But we also see, unfortunately, if we look at prime-age workers, around the ages of 20 to 54, we see them not returning to the labor force the way that we would expect them to as well. Now, the best explanation I heard for some of this is that some of these people are probably engaged in, and maybe significant numbers, in kind of under-the-table, gig economy-type work. So they're not being picked up by the official labor market or Labor Department statistics. I think there is probably something to that.

But it's also the case that people are looking at the value of their homes, which have appreciated rapidly in recent years. So they look at their net worth. And they say, well, you know, my net worth is up as a result of my most valuable asset, my home. If I need to, I'll sell that. I'll trade down. I'll do something. So despite the rout in markets last year, people are feeling relatively comfortable about their household finances.

And most people fantasize about retiring. I will tell you, Joan, I have a class that I teach where we also talk about personal financial management. And, of course, I poll my 21-year-olds in the class at the beginning of every semester, when do you want to retire? Mind you, they're 21. The vast majority want to retire before the age of 60. Those are Gen Z.

JOAN WOODWARD: OK. We'll see how that turns out for them.

ROBERT HARTWIG: We'll see.

JOAN WOODWARD: A couple more questions here, Bob, before we let you go. Lonald Robinson asked, "Is there enough claim history data to determine how the cost of electric vehicles is affecting the underwriting profit and loss for auto insurers?" So let's talk about electric vehicles. What are you seeing, if anything, their impact?

ROBERT HARTWIG: That's a very good question. So the good news is in 2022, we had the highest proportion of auto sales ever were EVs being sold. Now, so it was about 10%. Unfortunately, the vast majority of those were sold in China, in other countries, and a relatively small amount sold in the U.S. So the vast majority of EV sales are not in the United States, predominantly in Asia and in Europe in the current point in time.

Are we getting there in terms of ascertaining loss history, an appropriate rating for EV? I think we are getting there. And I think on net, it's likely to be favorable in the sense that EVs, once they are fully-- we have a fully built-out network of EVs and charging stations and so forth, from what I can see so far, there is a small increment, in other words, a relatively small higher expected loss and then, therefore, associated pure premium on electric vehicles relative to internal combustion engine vehicles.

We tend to conflate EVs with technology. What's really going to be the big driver here is, are these technologies level one, two, three, four, and five in terms of autonomous driving, which will ultimately come along with more advanced EVs? That's where we actually should expect to see declining client frequency and, although, perhaps not driving down claims severity. Now, we could wind up in a situation certainly where we have declining claim frequency overall severity continues to rise.

But what we are going to do as a country is we are going to make vehicles safer and safer. The odds of dying in an automobile accident should hopefully fall, although, again, there can still be some severe accidents out there. But right now, from what I could see, incrementally higher costs for insuring EVs.

JOAN WOODWARD: OK. Well, Bob, the hour has just flown by. It really has. Your wealth of information for all of us and the way you present it is just fantastic. We like the fast pace here, for sure.

So, listen, thank you so much. Please, we'd love to have you back again because you're just in demand. And I know you're a busy guy. But we appreciate what you're doing for the industry, specifically raising all our young folks and educating them so well for us to hire. So we appreciate you very much.

ROBERT HARTWIG: My pleasure. Any time, Joan.

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Wednesdays with Woodward (registered trademark) Webinar Series. Upcoming Webinars: January 25: Healthy New Year: Transformative Food Habits for 2023. February 1: Understanding Insurance Regulations: A Conversation with N.A.I.C CEO Michael Consedine. February 15: Economic Outlook 2023 with Former White House Senior Economist Dr. LaVaughn Henry. Register: travelersinstitute.org.

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JOAN WOODWARD: So then I want to just chat about our next upcoming programs. On January 25, everyone, we're going to get some insights on how to kick-start your healthy habits of eating, nutrition, exercise. We have terrific guest Matt Rees, former White House Speechwriter and Food and Health Facts Newsletter Founder, Kristen Coffield, Founder of The Culinary Cure. They're a terrific pair, talking about the steps we just can take every single day and make it easy on ourselves to get healthier.

Then back to insurance, on February the 1st, we're going to speak to the CEO of the National Association of Insurance Commissioners and find out what's going on in the states with regulation there.

And then we're back to the economy on February 15, I'm going to hear from-- we'll hear from my friend, longtime friend Dr. LaVaughn Henry, a Former Senior Economist at the White House Council of Economic Advisors to talk about the economic outlook again.

So please do fill out our surveys. We read every single comment. So if you have an idea for our next topic for us, please put that in your survey results.

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Wednesdays with Woodward (registered trademark) Webinar Series. Watch replays: travelersinstitute.org. Linked In logo. Text: Connect: Joan Kois Woodward. Take our survey: link in chat. HashtagWednesdaysWithWoodward.

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So thanks for joining us, folks. We're going to see you next week. Bye.

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