Rising Frequency, Severity Pinching the Largest P/C Line Auto Insurance Rising Frequency, Severity Pinching the Largest P/C Line I.I.I. Auto Insurance Subcommittee August 10, 2016; Chevy Chase, Maryland & via WebEx James Lynch, chief actuary Insurance Information Institute  110 William Street  New York, NY 10038 212.346.5533  jamesl@iii.org  www.iii.org 1

Why Personal Auto Loss Ratios are Rising: Severity & Frequency by Coverage, 2016 vs. 2015 Annual Change, 2016 Over 2015* Across All Personal Coverage Types (Except Comprehensive) in 2015, Frequency and Severity Rose. This Pattern is Continuing in 2016. *Four quarters ending in March. Source: ISO, a Verisk Analytics company; Insurance Information Institute.

Claim Trends by Coverage Focus on Collision

Collision Claims: Frequency Trending Higher in 2015 Annual Change, 2005 through 2015 For a Long Time, Claim Frequency Was Falling, But Since 2010 This Trend Seems to Have Reversed. Source: ISO, a Verisk Analytics company; Insurance Information Institute.

Collision Claims: Severity Trending Higher in 2009-2015 Annual Change, 2005 through 2015 The Great Recession and High Fuel Prices Helped to Temper Claim Severity, But These forces Have Clearly Reversed, Consistent with Experience from Past Recoveries. Source: ISO, a Verisk Analytics company; Insurance Information Institute.

Over the Latest Four Years, the Collision Pure Premium Rose by 22.2%. Collision Claims: Pure Premium (Losses per Insured Unit), 2012:Q4 to 2016:Q1 Over the Latest Four Years, the Collision Pure Premium Rose by 22.2%. Note: Data is for four quarters ending in quarter shown. Source: ISO, a Verisk Analytics company; Insurance Information Institute.

What’s Driving These Trends? Frequency; Severity

America is Driving More Again: Total Miles Driven*, 1990-2016 Billions of Miles Driven Some of the 1990-2007 growth in miles driven (+43.9%) is due to population growth (+20.7%)… …but the population grew by 6.6% from 2007-2015 and miles driven didn’t grow at all. From November 2007 until January 2015, miles driven was below the prior peak for 87 straight months— over 7 years! Previous record was in the early 1980s (39 months) Records in 2015/6 *Moving 12-month total. Data through May 2016, the latest available. Note: Recessions indicated by shaded columns. Sources: Federal Highway Administration; National Bureau of Economic Research (recession dates); Insurance Information Institute. 12

America is Driving More Again: 2000-2016 Fastest Growth Since Late 1990s Percent Change, Miles Driven* Tremendous Growth In Miles Driven. The More People Drive, The More Frequently They Get Into Accidents. *2000-2015: Moving 12-month total vs. prior year. 2016 data is 12-mo. M.A. through May 2016, the latest available, vs. May 2015. Sources: Federal Highway Administration; National Bureau of Economic Research (recession dates); Insurance Information Institute. 13

More Miles Driven => More Collisions, 2006-2016 Billions of Miles Driven in Prior Year Overall Collision Claims Per 100 Insured Vehicles Recession The More Miles People Drive, the More Likely They are to Get in an Accident, Helping Drive Claim Frequency Higher. Sources: Federal Highway Administration; Rolling four-quarter average frequency from ISO, a Verisk Analytics company; Insurance Institute for Highway Safety; Insurance Information Institute. 14

Why Are People Driving More Miles? Cheap Gas? Billions of Miles Driven in Prior Year Average Price Per Gallon Recession Gas Prices Don’t Seem Correlated With Miles Driven. Sources: Federal Highway Administration; Energy Information Administration; Insurance Institute for Highway Safety; Insurance Information Institute. 15

Why Are People Driving More Miles? Jobs? Billions of Miles Driven in Prior Year Millions Employed Recession People Drive to and from Work and Drive to Entertainment. Out of Work, They Curtail Their Movement. Sources: Federal Highway Administration; Seasonally Adjusted Employed from Bureau of Labor Statistics; Insurance Institute for Highway Safety; Insurance Information Institute. 16

More People Working and Driving => More Collisions, 2006-2016 Number Employed, Millions Overall Collision Claims Per 100 Insured Vehicles Recession When People are Out of Work, They Drive Less. When They Get Jobs, They Drive to Work, Helping Drive Claim Frequency Higher. Sources: Seasonally Adjusted Employed from Bureau of Labor Statistics; Rolling four-quarter average frequency from ISO, a Verisk Analytics company; Insurance Information Institute. 18

Severity: Driving Fatalities are Rising Annual Change in Motor Vehicle Deaths Seatbelt Use Rose to 62% of Drivers, From 49% in ‘90 Big Drop-off Due to the Great Recession Driving Has Been Getting Safer for Decades, But Recent Trend is Discouraging—38,300 Deaths in 2015. Sources: National Safety Council, Insurance Information Institute.

Autonomous Vehicles Product Liability

I.I.I. Poll: Who Is Responsible? Q. Who should be responsible if an accident occurred involving a driverless car? Don’t Know Car’s Occupant Car’s Insurer Car’s Manufacturer Car’s Owner Half of Respondents Think a Driverless Car’s Manufacturer Should Bear Responsibility in Case of an Accident. Source: Insurance Information Institute Annual Pulse Survey. 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

I.I.I. Poll: Who Is Responsible? Q. Would you be willing to pay more for your car to cover the manufacturer’s liability in case of an accident? Don’t Know Yes No Only a Quarter of Americans Would Be Willing to Pay More for a Driverless Car to Cover the Manufacturer’s Liability in Case of an Accident. Source: Insurance Information Institute Annual Pulse Survey. 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

Tesla Anatomy of an AV Claim May 7, 2016 US 27A Williston, Florida Dry, Clear Weather Tesla Model S 74 mph In A 65 Zone Engaged Technology “Autopilot” Traffic-Aware Cruise Control Autosteer (Lane-keeping) Car Had Auto Emergency Braking Looking East (Tesla’s POV). SOURCES: National Transportation Safety Board; Florida Highway Patrol 12/01/09 - 9pm

Tesla Anatomy of an AV Claim What Happened? The Accident Truck Turned in Front of Car Tesla Has Two Theories Autopilot Thought Trailer Was Bridge Or Overhead Sign Autopilot Worked OK, Automatic Brakes Failed SOURCES: National Transportation Safety Board; Florida Highway Patrol

Product Claim? What They Say 60 Minutes: “Google and Mercedes told us, if their technology is at fault once it becomes commercially available, they’ll accept responsibility and liability.” Volvo Cars’ President and CEO: “Volvo will accept full liability whenever one of its cars is in autonomous mode.” SOURCES: “Mercedes, Google, Volvo To Accept Liability When Their Autonomous Cars Screw Up,” Jalopnik.com; Volvo Car Group.

Product Claim? The Fine Print “It is important to note that Tesla disables Autopilot by default and requires explicit acknowledgement that the system is new technology and still in a public beta phase before it can be enabled. When drivers activate Autopilot, the acknowledgment box explains, among other things, that Autopilot 'is an assist feature that requires you to keep your hands on the steering wheel at all times,' and that 'you need to maintain control and responsibility for your vehicle' while using it. Additionally, every time that Autopilot is engaged, the car reminds the driver to 'Always keep your hands on the wheel. Be prepared to take over at any time.’ ” (Emphasis Added) SOURCE: “A Tragic Loss,” Tesla Blog, June 30, 2016.

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