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The Great Tradeoff: Regulation, Strength & Solvency
vs. Profitability & GrowthCan They Co-Exist?
St. John’s UniversitySchool of Risk Management, Insurance & Actuarial Science
New York, NYOctober 15, 2014
Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: 212.346.5520 Cell: 917.453.1885 bobh@iii.org www.iii.org
2
Presentation Outline
PART I: PROFITABILITY A History of Insurance Industry Profitability
Can financial strength and robust profitability co-exist? Supply, Demand and Alternative “Capital”
When Profits Suffer, Who Is to Blame? 7 Leading Contenders: The “Fall Guys”
Is the Insurance Industry Becoming Less Risky? Since when? Why? Comparison with Banks
PART II: GROWTH A Global History & Overview of Growth
Pockets and Waves of Growth
Narrowing the “Underinsurance Gap” Growth through Consolidation? Q&A
PART I: PROFITABILITYHas Strength Come at the Expense of Performance?
3
What Can History Tell Us?
3
What Is Happening to Insurer Profitability?
4
What Can We Learn from History?Déjà Vu: Cycles or Super-Cycles?
4
P/C Industry Net Income After Taxes1991–2014* 2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012 ROAS1 = 5.9% 2013 ROAS1 = 10.3% 2014 ROAS1 = 7.8%*
• ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.7% ROAS through 2014:Q2, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009. 2014 is annualized H1 data.
Sources: A.M. Best, ISO; Insurance Information Institute
$1
4,1
78
$5
,84
0
$1
9,3
16
$1
0,8
70
$2
0,5
98
$2
4,4
04 $3
6,8
19
$3
0,7
73
$2
1,8
65
$3
,04
6
$3
0,0
29
$6
2,4
96
$3
,04
3
$3
5,2
04
$1
9,4
56 $
33
,52
2
$6
3,7
84
$5
1,9
60
$3
8,5
01
$2
0,5
59
$4
4,1
55
$6
5,7
77
-$6,970
$2
8,6
72
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*
Net income rose strongly (+81.9%) in 2013 vs. 2012 on lower cats, capital gains
$ Millions
2014 is off to a slower start
6
RNW All Lines by State, 2003-2012 Average:Highest 25 States
21
.0
17
.7
15
.1
14
.8
13
.4
13
.3
13
.1
12
.6
12
.0
11
.7
11
.4
11
.4
11
.4
11
.1
11
.0
11
.0
11
.0
10
.9
10
.9
10
.7
10
.7
10
.5
10
.3
10
.3
9.9
9.4
02468
1012141618202224
HI AK ND ME WY UT VT ID WA NH IA NE SC DC MA OR VA NC RI CA CT OH NM SD WV MT
The most profitable states over the past decade are
widely distributed geographically, though none
are in the Gulf region
Source: NAIC; Insurance Information Institute.
7
9.2
9.1
8.9
8.9
8.6
8.5
8.3
8.1
7.9
7.7
7.7
7.6
7.4
6.5
6.5
6.1
6.1
5.5
5.2
4.9
4.9
4.2
3.2
2.0
-6.5
-9.4
-14-12-10-8-6-4-202468
10
KS MD CO WI FL MN TX IN US AR PA IL AZ MO NV KY NJ GA NY MI TN DE OK AL MS LA
RNW All Lines by State, 2003-2012 Average: Lowest 25 States
Source: NAIC; Insurance Information Institute.
Some of the least profitable states over the past decade were hit hard
by catastrophes
8
P/C Insurance Industry Combined Ratio, 2001–2014:H1*
* Excludes Mortgage & Financial Guaranty insurers 2008--2014. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014:H1 = 98.9. Sources: A.M. Best, ISO.
95.7
99.3100.8
106.3
102.4
96.799.0
101.0
92.6
100.898.4
100.1
107.5
115.8
90
100
110
120
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
As Recently as 2001, Insurers Paid Out
Nearly $1.16 for Every $1 in Earned
PremiumsRelatively Low CAT Losses, Reserve Releases
Heavy Use of Reinsurance Lowered Net
Losses
Relatively Low CAT Losses, Reserve Releases
Avg. CAT Losses,
More Reserve Releases
Higher CAT
Losses, Shrinking Reserve
Releases, Toll of Soft
Market
Cyclical Deterioration
Sandy Impacts
Lower CAT
Losses
Best Combined
Ratio Since 1949 (87.6)
9
ROE: Property/Casualty Insurance by Major Event, 1987–2014:H1
* Excludes Mortgage & Financial Guarantee in 2008 – 2014. 2014 figure is through H1:2014. Sources: ISO, Fortune; Insurance Information Institute.
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*
P/C Profitability Is Both by Cyclicality and Ordinary Volatility
Hugo
Andrew
Northridge
Lowest CAT Losses in 15 Years
Sept. 11
Katrina, Rita, Wilma
4 Hurricanes
Financial Crisis*
(Percent)
Record Tornado Losses
Sandy
Low CATs
-5%
0%
5%
10%
15%
20%
25%
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2014:H1*
*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
1977:19.0%1987:17.3%
1997:11.6% 2006:12.7%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years
10 Years9 Years
History suggests next ROE peak will be in 2015-2016
ROE
1975: 2.4%
2013 10.4%
2014:H1 7.7%
11
P/C Insurance ROE as 5-Year Moving Average
Source: Jessica Weinkle, Insurance Journal, “An Average Perspective Based Insurance Profitability Cycles,” October 6, 2014, based om I.I.I. data, http://www.insurancejournal.com/magazines/closingquote/2014/10/06/342096.htm.
After smoothing, there is a more evident trend
toward lower profitability
The Tradeoff:
Industry impairment rates have plunged
12
P/C Insurance ROE Index(1974-2014:Q1 = 100)
Source: Jessica Weinkle, Insurance Journal, “An Average Perspective Based Insurance Profitability Cycles,” October 6, 2014, based om I.I.I. data, http://www.insurancejournal.com/magazines/closingquote/2014/10/06/342096.htm.
Lower profitability seems to be the norm after 1994. Is RBC a cause? Greater
use of modeling?
The Tradeoff:
Industry impairment rates have plunged
-5%
0%
5%
10%
15%
20%
25%
50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
14:H
1
*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers. 2014 figure is through Q2.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
1977:19.0%
1987:17.3%
1997:11.6%
2006:12.7%
1984: 1.8%
1992: 4.5%2001: -1.2%
ROE
1975: 2.4%
2013 10.4%
2014:H1 7.7%
Back to the Future: Profitability Peaks & Troughs in the P/C Insurance Industry, 1950 – 2014*
1969: 3.9%
1965: 2.2%1957: 1.8%
1972:13.7%
1966-67: 5.5%1959:6.8%
1950:8.0%
1950-70: ROEs were lower in this period. Low interest rates,
low inflation, “Bureau” rate regulation all played a role
1970-90: Peak ROEs were much higher in this period while troughs
were comparable. High interest rates, rapid inflation, economic
volatility all played roles
1990-2010s: Déjà vu. Excluding mega-
CATs, this period is very similar to the 1950-1970 period
14
7.3%7.0%8.4%
11.5%11.2%
4.2%5.7%
0%
2%
4%
6%
8%
10%
12%
14%
1950-59 1960-69 1970-79 1980-89 1990-99 2000-09 2010-14*
Average Annual Percent Change (%)
Profitability Has Declined since the highs of the 1970s and 1980s, but is above that of the 1950s and 1960s
14Sources: Insurance Information Institute research.
Average ROE for the P/C Insurance Industry by Decade, 1950s – 2010s
Profitability peaked in the 1970s and 1980s but has tapered off
since thenP/C profitability was much lower in the 1960s and
1970s
A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs
Combined Ratio / ROE
* 2008 -2014 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2014:H1 combined ratio including M&FG insurers is 98.9; 2013 = 96.1; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.
97.5
100.6 100.1 100.8
92.7
101.299.5
101.0
96.799.0
102.4
106.5
95.7
14.3%
15.9%
12.7%
10.9%
7.4% 7.9%
4.7%6.2%
7.7%
9.6%8.8%
4.3%
9.8%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014:H10%
3%
6%
9%
12%
15%
18%
Combined Ratio ROE*
Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs
A combined ratio of about 100 generates an ROE of ~7.0% in 2012/13, ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Lower CATs helped ROEs
in 2013
16
BANK LESSON: Profitability, Capital and Systemically Important Banks
Source: The Economist, “No Respite,” September 27, 2014.
Global Systemically Important bank Tier-1
capital ratios are up since the global financial crisis,
but ROEs are lower
The Message from Regulators:
Get used to it!
Who’s to Blame for the Decline in Peak P/C Profitability?
18
The 7 “Fall Guys”
18
#1 Mother Nature
1919
Profits in the Age of Mega CATs
Nu
mb
er
Geophysical (earthquake, tsunami, volcanic activity)
Climatological (temperature extremes, drought, wildfire)
Meteorological (storm)
Hydrological (flood, mass movement)
Natural Disasters in the United States, 1980 – 2013Number of Events (Annual Totals 1980 – 2013)
Source: MR NatCatSERVICE 21
22
19
81
6
50
100
150
200
250
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
There were 128 natural disaster events in 2013
22
Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2013*
*2010s represent 2010-2013.Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO (1960-2011); A.M. Best (2012E) Insurance Information Institute.
0.4
1.2
0.4 0.
8 1.3
0.3
0.4 0.
71.
51.
00.
40.
4 0.7
1.8
1.1
0.6
1.4 2.
01.
3 2.0
0.5
0.5 0.7
3.0
1.2
2.1
8.8
2.3
5.9
3.3
2.8
1.0
3.6
2.9
1.6
5.4
1.6
3.3
3.3
8.1
2.7
1.6
5.0
2.6
3.4
8.7 8.9
3.43.6
0.9
0.1
1.1
1.1
0.8
0
1
2
3
4
5
6
7
8
9
10
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades
Avg. CAT Loss Component of the Combined Ratio
by Decade
1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 6.1E*
Combined Ratio Points Catastrophe losses as a share of all losses reached
a record high in 2012
23
Top 16 Most Costly Disastersin U.S. History
(Insured Losses, 2013 Dollars, $ Billions)
$7.9 $8.8 $9.3 $11.2$13.6
$19.0$24.2 $24.9$25.9
$49.4
$7.6$7.2$6.8$5.7$5.6$4.5
$0
$10
$20
$30
$40
$50
$60
Irene (2011) Jeanne(2004)
Frances(2004)
Rita (2005)
Tornadoes/T-Storms
(2011)
Tornadoes/T-Storms
(2011)
Hugo (1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Ike (2008)
Sandy*(2012)
Northridge(1994)
9/11 Attack(2001)
Andrew(1992)
Katrina(2005)
Superstorm Sandy in 2012 was the last
mega-CAT to hit the US
Includes Tuscaloosa, AL,
tornado
Includes Joplin, MO, tornado
12 of the 16 Most Expensive Events in US History Have Occurred Over the Past Decade (2004-2013)
Sources: PCS; Insurance Information Institute inflation adjustments to 2013 dollars using the CPI.
#2 Wall Street
2424
Crashes, Interest Rates & General Volatility
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14*
*Through Oct. 12, 2014.Source: NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html Ins. Info. Inst.
Tech Bubble Implosion
Financial Crisis
ROE
Energy Crisis
2014:H1 7.7%
S&P 500 Index Returns, 1950 – 2014*
Fed Raises Rate
Volatility is endemic to stock markets—and may be increasing—but there is no persistent
downward trend over long periods of time
26
P/C Insurer Net Realized Capital Gains/Losses, 1990-2013
Sources: A.M. Best, ISO, Insurance Information Institute.
$2.8
8
$4.8
1 $9.8
9
$9.8
2
$10.
81 $18.
02
$13.
02
$16.
21
$6.6
3
-$1.
21
$6.6
1
$9.1
3
$9.7
0
$3.5
2 $8.9
2
-$7.
90
$5.8
5
$7.0
4
$6.1
8 $11.
43
-$19
.81
$9.2
4
$6.0
0
$1.6
6
-$25
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Insurers Posted Net Realized Capital Gains in 2010 - 2013 Following Two Years of Realized Losses During the Financial Crisis. Realized Capital
Losses Were a Primary Cause of 2008/2009’s Large Drop in Profits and ROE
($ Billions)Realized capital gains rose
sharply as equity markets rallied
Property/Casualty Insurance Industry Investment Income: 2000–20141
$38.9$37.1 $36.7
$38.7
$54.6
$51.2
$47.1 $47.6$49.2
$48.0 $47.4$45.9
$39.6
$49.5
$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*
Due to persistently low interest rates,investment income fell in 2012 and in 2013
and is falling again in 2014.
1 Investment gains consist primarily of interest and stock dividends. *2014 figure is estimated based on annualized H1 data.Sources: ISO; Insurance Information Institute.
($ Billions) Investment earnings are still below their 2007 pre-crisis peak
Property/Casualty Insurance Industry Investment Gain: 1994–20131
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$64.0
$31.7
$39.2
$53.4$56.2$54.2
$58.8$58.0
$51.9$56.9
$0
$10
$20
$30
$40
$50
$60
$70
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11 12 13
Investment Income Continued to Fall in 2013 Due to Low Interest Rates but Realized Investment Gains Were Up Sharply; The Financial Crisis
Caused Investment Gains to Fall by 50% in 2008
1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B; Sources: ISO; Insurance Information Institute.
($ Billions)
Investment gains in 2013 were their highest in the
post-crisis era
#3 The Federal Reserve
2929
Do Fed Rates Actions Help or Hurt P/C Insurers?
30
U.S. Treasury Security Yields:A Long Downward Trend, 1990–2014*
*Monthly, constant maturity, nominal rates, through July 2014.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
Recession2-Yr Yield10-Yr Yield
Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.
U.S. Treasury yields plunged to historic lows in 2013. Longer-
term yields have rebounded a bit.
30
31
-1.8
%
-1.8
%
-2.0
%
-3.6
%
-3.3
%
-3.3
%
-3.7
%
-4.3
%
-5.2
%
-5.7
%
-7.3%
-1.9
%
-2.1
%
-3.1
%
-8%-7%-6%-5%-4%-3%-2%-1%0%
Perso
nal L
ines
Pvt Pass
Aut
o
Pers P
rop
Comm
ercia
l
Comm
l Auto
Credit
Comm
Pro
p
Comm
Cas
Fidelity
/Sure
ty
Warra
nty
Surplu
s Line
s
Med
Mal
WC
Reinsu
rance
**
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
31
#4 The Economy
3232
Do Variability and Volatility in the Economy Make Earning
Reasonable ROEs More Difficult?
33
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 9/14; Insurance Information Institute.
2.7%
0.5%
3.6%
3.0%
1.7%
-1.8
%1.
3%-3
.7%
-5.3
%-0
.3%
1.4%
5.0%
2.3%
2.2% 2.6%
2.4%
0.1%
2.5%
1.3%
4.1%
2.0%
1.3%
3.1%
2.7%
1.8%
4.5%
3.5%
-2.1
%4.
6%3.
0%3.
0%2.
9%2.
9%2.
9%2.
9%
0.4%
-8.9%
4.1%
1.1% 1.
8% 2.5% 3.
6%3.
1%
-9%
-7%
-5%
-3%
-1%
1%
3%
5%
7%
2
00
0
2
00
1
2
00
2
2
00
3
2
00
4
2
00
5
2
00
6
07
:1Q
07
:2Q
07
:3Q
07
:4Q
08
:1Q
08
:2Q
08
:3Q
08
:4Q
09
:1Q
09
:2Q
09
:3Q
09
:4Q
10
:1Q
10
:2Q
10
:3Q
10
:4Q
11
:1Q
11
:2Q
11
:3Q
11
:4Q
12
:1Q
12
:2Q
12
:3Q
12
:4Q
13
:1Q
13
:2Q
13
:3Q
13
:4Q
14
:1Q
14
:2Q
14
:3Q
14
:4Q
15
:1Q
15
:2Q
15
:3Q
15
:4Q
Demand for Insurance Should Increase in 2014/15 as GDP Growth Accelerates Modestly and Gradually Benefits the Economy Broadly
Real GDP Growth (%)
Recession began in Dec. 2007. Economic toll of credit crunch, housing slump, labor market contraction
was severe
The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%
Q1 2014 GDP data were hit hard by this
year’s “Polar Vortex” and harsh
winter
0
10
20
30
40
50
60
78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
-4%
-2%
0%
2%
4%
6%
8%No. of ImpairmentsReal GDP Growth
34
Impairments vs. Real GDP Growth, P/C & L/H, 1978-2013No. of Impairments
Today, impairment rates seem less
sensitive to economic downturns
Historically, there has been a lagged, inverse
relationship between GDP growth and impairments
Sources: A.M. Best: Best’s Impairment Rate and Rating Transition Study—1977-2013, March 31, 2014; Insurance Information Institute.
*US P/C and L/H companies, 1977-2013.
Very few impairments
Insurers are more resilient to economic volatility than in the past. That improvement began
well before Dodd-Frank Real GDP Growth
0
1
2
3
4
5
6
78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
-4%
-2%
0%
2%
4%
6%
8%Downgrade/Upgrade RatioReal GDP Growth
35
Downgrade/Upgrade Ratio vs. Real GDP Growth, P/C & L/H, 1978-2013
Ratio of Downgrades to Upgrades
Historically, there has been a lagged, inverse
relationship between GDP growth and impairments
Sources: A.M. Best: Best’s Impairment Rate and Rating Transition Study—1977-2013, March 31, 2014; Insurance Information Institute.
*US P/C and L/H companies, 1977-2013.
Increase in downgrade/upgrade ratio was smaller in
Great Recession than past recessions,
suggesting greater resilience
Downgrades tend to fall relative to upgrades as the economy improves
Real GDP Growth
36
Number of Recessions Endured by P/C Insurers, by Number of Years in Operation
32
27
20
13
8
0
5
10
15
20
25
30
35
1-50 51-75 76-100 101-125 126-150
Sources: Insurance Information Institute research from National Bureau of Economic Research data.
Number of Recessions Since 1860
Many US Insurers Are Close to a Century Old or Older
Number of Years in Operation
Insurers are true survivors—not just of natural catastrophes but also economic ones
36
#5 The President (of the United States)
3737
How Is Profitability Affected by the President’s Political Party?
15.10%
9.05%
8.93%
8.65%
8.35%
8.33%
7.98%
7.68%
6.98%
6.97%
5.43%
5.03%
4.83%
4.68%
4.43%
3.55%
16.43%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
Carter
Reagan II
Obama II
Nixon
Clinton I
G.H.W. Bush
G.W. Bush II
Clinton II
Reagan I
Nixon/Ford
Truman
Eisenhower I
Eisenhower II
G.W. Bush I
Obama I
Johnson
Kennedy/Johnson
*Truman administration ROE of 6.97% based on 3 years only, 1950-52; Estimated ROE for 2014 = 7.8% based on data through 2014:Q2. Source: Insurance Information Institute
OVERALL RECORD: 1950-2014*
Democrats 7.72%Republicans 7.85%
Party of President has marginal bearing on profitability of P/C insurance industry
P/C Insurance Industry ROE by Presidential Administration, 1950-2014*
-5%
0%
5%
10%
15%
20%
25%
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12
14
BLUE = Democratic President RED = Republican President
Tru
man Nixon/Ford
Ken
ned
y/
Joh
nso
n
Eis
enh
ow
er
Car
ter
Reagan/Bush I Clinton Bush II
P/C insurance Industry ROE by Presidential Party Affiliation, 1950- 2014*
Obama
Estimated ROE for 2014 = 7.8% based on data through 2014:Q2. Source: Insurance Information Institute
#6 Ratings Agencies
4040
Quasi-Regulators Must Have Some Impact
P/C Insurer Impairments, 1969–20137
07
17
27
37
47
57
67
77
87
98
08
18
28
38
48
58
68
78
88
99
09
19
29
39
49
59
69
79
89
90
00
10
20
30
40
50
60
70
80
91
01
11
21
3
0
10
20
30
40
50
60
70
15
12
71
19
34
91
31
21
99
16
14
13
36
49
31 3
45
04
85
56
05
84
12
91
61
23
11
8 19
49 50
47
35
18
14 15
51
6 19 2
13
42
51
4
Source: A.M. Best Special Report “U.S. P/C Impairments Down Sharply in 2013; Alternative Risk Players Faltered,” June 23, 2014; Insurance Information Institute.
The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets
41
Impairments among P/C insurers remain infrequent
42
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2013
90
95
100
105
110
115
1206
97
07
17
27
37
47
57
67
77
87
98
08
18
28
38
48
58
68
78
88
99
09
19
29
39
49
59
69
79
89
90
00
10
20
30
40
50
60
70
80
91
01
11
21
3
Co
mb
ine
d R
ati
o
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Imp
airm
en
t Ra
te
Combined Ratio after Div P/C Impairment Frequency
Source: A.M. Best; Insurance Information Institute
2013 impairment rate was 0.43%, down from 0.76% in 2012; the rate is lower than the 0.81% average since 1969
Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007; Recent Increase Was Associated
Primarily With Mortgage and Financial Guaranty Insurers and Not Representative of the Industry Overall
43
Reasons for US P/C Insurer Impairments, 1969–2013
44.3%
12.3%
7.1%
7.1%
7.8%
6.6%
8.4%
3.4%3.0%
Historically, Deficient Loss Reserves and Inadequate Pricing AreBy Far the Leading Cause of P-C Insurer Impairments.
Investment and Catastrophe Losses Play a Much Smaller Role
Deficient Loss Reserves/Inadequate Pricing
Reinsurance Failure
Rapid Growth
Alleged Fraud
Catastrophe Losses
Affiliate Impairment
Investment Problems (Overstatement of Assets)
Misc.
Sig. Change in Business
Source: A.M. Best Special Report “U.S. P/C Impairments Down Sharply in 2013; Alternative Risk Players Faltered,” June 23, 2014; Insurance Information Institute.
Leading causes of death (reserves and growth)
are generally under the control of insurers
44
2
(2)
(8)
(3)
(7)(10)(10)
(4)
(0)
11
24
1512
10
(4)
(9)
(13)(12)
(10)
(14)(11)(10)
(7) (7)
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
$25
$309
2
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
E
14
E
15
E
Pri
or
Yr.
Re
se
rve
Re
lea
se
($
B)
-6
-4
-2
0
2
4
6
8 Imp
ac
t on
Co
mb
ine
d R
atio
(Po
ints
)
Prior Yr. ReserveDevelopment ($B)
Impact onCombined Ratio(Points)
P/C Reserve Development, 1992–2015E
Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: A.M. Best, ISO, Barclays Research (estimates for 2013-2015).
P/C reserve development is clearly cyclical
Rapid Growth ‘A Leading Cause’ of Impairment’
“The leading causes of impairment are deficient loss reserves (inadequate pricing) and rapid growth, together comprising more than 50 percent of annual impairments.”
- A.M. Best, 2013To
wer In
sura
nce
(201
3)
Legion
(200
1)
Relianc
e Nat
iona
l (19
99)
0.0%5.0%
10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%
16.2%
27.7%
39.5%Annualized Growth in Final Years
45
Source: SNL Financial, Insurance Information Institute.
46
Top 10 Lines of Business for US P/C Impaired Insurers, 1969–2013
17.1%
26.4%
7.4%8.1%
8.1%
8.5%
4.8%
5.3%
4.0%
3.9%
6.4%
Workers Comp and Pvt. Passenger Auto Account for Nearly 45 Percent of the Impaired Insurers Since 1969
Workers Comp
Other
Pvt. Passenger Auto
HomeownersCommercial Multiperil
Commercial Auto Liability
Other Liability
Medical Prof. Liability
Surety
Title
Mortgage & Financial Guaranty
Source: A.M. Best Special Report “U.S. P/C Impairments Down Sharply in 2013; Alternative Risk Players Faltered,” June 23, 2014; Insurance Information Institute.
WC accounts for only about 9% of all premiums written
but 17% of premium of impaired insurers, whereas PPA accounts for 37% of all premiums but only 26% of impaired insurer premiums
Cumulative Average Impairment Rates by A.M. Best Financial Strength Rating*
0%
10%
20%
30%
40%
50%
60%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15Average Years to Impairment
D
C/C-
C++/C+
B/B-
B++/B+
A/A-
A++/A+
Sources: A.M. Best: Best’s Impairment Rate and Rating Transition Study—1977-2013, March 31, 2014; Insurance Information Institute.
*US P/C and L/H companies, 1977-2013.
Insurers with strong ratings are far less likely to become impaired (fail) over long periods of time.
Note: The cumulative likelihood of impairment has been falling uniformly across the 15-year time horizon for all but the riskiest (lowest rated)
riskiest insurers. This suggests that insurers have become less risky over the past several years.
#7 Regulators
4949
Is an Increased Regulatory Burden Reducing ROEs?
Is There Evidence that the (Re) Insurance Industry Is
Becoming Less Risky
50
Is Boring Better?
50
51
Policyholder Surplus, 2006:Q4–2014:H1
Sources: ISO, A.M .Best.
($ Billions)$4
87.1
$496
.6
$512
.8
$521
.8
$478
.5
$455
.6
$437
.1 $463
.0 $490
.8 $511
.5 $540
.7
$530
.5
$544
.8
$559
.2
$559
.1
$538
.6
$550
.3
$567
.8
$583
.5
$586
.9 $607
.7
$614
.0
$624
.4 $653
.3
$671
.6
$662
.0
$570
.7
$566
.5
$505
.0
$515
.6
$517
.9
$400
$450
$500
$550
$600
$650
$700
06:Q
4
07:Q
1
07:Q
2
07:Q
3
07:Q
4
08:Q
1
08:Q
2
08:Q
3
08:Q
4
09:Q
1
09:Q
2
09:Q
3
09:Q
4
10:Q
1
10:Q
2
10:Q
3
10:Q
4
11:Q
1
11:Q
2
11:Q
3
11:Q
4
12:Q
1
12:Q
2
12:Q
3
12:Q
4
13:Q
1
13:Q
2
13:Q
3
13:Q
4
14:Q
1
14:Q
2
2007:Q3Pre-Crisis Peak
Surplus as of 6/30/14 stood at a record high $671.6B
2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business .
The industry now has $1 of surplus for every $0.73 of NPW,close to the strongest claims-paying status in its history.
Drop due to near-record 2011 CAT losses
The P/C insurance industry entered 2014in very strong financial condition.
$0$50
$100$150$200$250$300$350$400$450$500$550$600$650$700$750
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
US Policyholder Surplus:1975–2014*
* As of 6/30/14.Source: A.M. Best, ISO, Insurance Information Institute.
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners
Equity” or “Net Worth” in non-insurance organizations
($ Billions)
The Premium-to-Surplus Ratio Stood at $0.73:$1 as of6/30/14, a Near Record Low (at Least in Recent History)
Surplus as of 6/30/14 was a record $671.6, up 2.8% from $653.3 of 12/31/13, and up 53.6% ($234.5B)
from the crisis trough of $437.1B at 3/31/09
$0.50
$0.60
$0.70
$0.80
$0.90
$1.00
$1.10
$1.20
$1.30
$1.40
$1.50
$1.60
$1.70
$1.80
$1.90
$2.00
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*
Premium-to-Surplus Ratio:1985–2014*
* As of 6/30/14.Source: A.M. Best, ISO, Insurance Information Institute.
The larger surplus is in relation to premiums—the lower the P:S ratio—
and the great the industry’s capacity to handle the risk it has accepted
(Ratio of NWP to PHS)
The Premium-to-Surplus Ratio Stood at $0.73:$1 as of6/30/14, a Record Low (at Least in Recent History)
Surplus as of 6/30/14 was $0.73:$1, a record low (at least in modern history)
9/11, Recession & Hard Market
P/C Industry:Loss Reserve-to-Surplus Ratio
Source: Calculations from A.M. Best data by Insurance Information Institute.
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0%
50%
100%
150%
200%
250%
1.3
1.2
1.1
1.4
2.1
2.0
1.9
1.9
1.9
1.9
1.8 1
.91
.91
.92
.12
.02
.0 2.1
2.0
2.0 2
.11
.9 2.0
1.8
1.8
1.6
1.4
1.2
1.1
1.1
1.1 1
.21
.41
.21
.21
.21
.11
.11
.31
.11
.0 1.1
1.0
0.9
RBC requirements took effect with 1994 Annual Statement.
The industry had be-come less leveraged
since 1994
The Property/Casualty Industry Adjusted Its Risk Portfolio in Response to Risk-Based Capital Requirements Implemented in 1994.
Inflation, Liability Crisis Increased Reserves, Plunging Stock Prices Depleted Surplus
P/C Industry:Capital Adequacy Is on the Rise
Source: Calculations from SNL Financial data by Insurance Information Institute.
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 130
2
4
6
8
10
12
7.3 7
.8 8.4 8.6 9
.0
8.8
8.2
8.1 8.3 8
.8
9.5 9
.8 9.9 1
0.4
10
.4
10
.3
10
.4
10
.7
For Every $1 of Capital Needed to Prevent Regulatory Capital, the Average Insurer Has More Than $10 – And the Cushion is Getting Larger.
Median Adjusted Capital/Authorized Control Level (ACL) Capital
Is There Any Parallel with the Banking World?
56
Have Banks Gotten Safer?
56
Commercial Banking:Loan/Deposit Ratio, 1973 – 2014
Source: Insurance Information Institute calculation from Board of Governors of the Federal Reserve System (FRED) data.
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
0.0
0.2
0.4
0.6
0.8
1.0
1.2
0.7
20
.74
0.6
90
.69
0.7
20
.76
0.8
00
.78
0.7
90
.78
0.7
80
.82
0.8
20
.82
0.8
60
.88
0.8
90
.89
0.8
40
.83
0.8
5 0.9
30
.97
0.9
70
.97
0.9
91
.00
1.0
40
.96
0.9
50
.95
0.9
40
.98
1.0
01
.02
1.0
10
.87
0.8
60
.82
0.7
80
.75
0.7
6
(Loans and Leases in Bank Credit, All Commercial Banks/Deposits, All Commercial Banks)
Lending Has Become a Smaller Part of Commercial Banking Activity Since the Financial Crisis.
Gramm-Leach-Bliley Act became effective
November 1999.
Commercial Banking:Leverage Ratio, 1991 – 2014
Source: SNL Financial LC, Insurance Information Institute.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
15
.06
13
.79
12
.94
13
.09
13
.11
13
.11
13
.30
13
.30
12
.87
13
.04
12
.82
12
.76
12
.74
12
.77
12
.63
12
.72
13
.11
13
.51
11
.75
11
.45
11
.21
11
.10
10
.75
10
.56
Investments in Risk-Free Treasuries Have Helped Strengthened Banks’ Financial Status.
Financial Crisis
Adjusted Average Assets/Tier 1 Capital
Is Boring Better for Insurers?
59
Peak P/C ROEs Are Down, But Impairment Rates Appear to Be
Lower As Well
59
P/C Insurer Impairments, 1969–20137
07
17
27
37
47
57
67
77
87
98
08
18
28
38
48
58
68
78
88
99
09
19
29
39
49
59
69
79
89
90
00
10
20
30
40
50
60
70
80
91
01
11
21
3
0
10
20
30
40
50
60
70
15
12
71
19
34
91
31
21
99
16
14
13
36
49
31 3
45
04
85
56
05
84
12
91
61
23
11
8 19
49 50
47
35
18
14 15
51
6 19 2
13
42
51
4
Source: A.M. Best Special Report “U.S. P/C Impairments Down Sharply in 2013; Alternative Risk Players Faltered,” June 23, 2014; Insurance Information Institute.
The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets
60
Impairments among P/C insurers remain infrequent
61
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2013
90
95
100
105
110
115
1206
97
07
17
27
37
47
57
67
77
87
98
08
18
28
38
48
58
68
78
88
99
09
19
29
39
49
59
69
79
89
90
00
10
20
30
40
50
60
70
80
91
01
11
21
3
Co
mb
ine
d R
ati
o
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Imp
airm
en
t Ra
te
Combined Ratio after Div P/C Impairment Frequency
Source: A.M. Best; Insurance Information Institute
Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007; Recent Increase Was Associated
Primarily With Mortgage and Financial Guaranty Insurers and Not Representative of the Industry Overall
2013 impairment rate was 0.43%, down from 0.76% in 2012; the rate is lower than the 0.81% average since 1969
Secrets of the AncientsThe Centenarians: Who Lives to Be 100+ in the P/C Insurance World?
6262
The Ultimate Test of Time
SIDEBAR
63
100+ Year Old Insurers as a Share of All P/C Insurers
87.7%
12.3%
Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC; CDC
About 12% of P/C insurance companies (fewer than 1-in-8) today (2013) are 100+ years old. This is a surprisingly high percentage.
Insurers at Least 100 Years Old, 12.3%(287)
Insurers Less than 100 Years Old,
87.7%(1,979)
Odds of a Human Living to 100Born 1900: ~0.25% (1-in-400)
Born Today: ~2% (1-in-50)
64
Decade of Formation for P/C Insurers at Least 100 Years Old in 2014
39 10
22 2016
60
37
65
38
77
1 0 0 04 2
0
10
20
30
40
50
60
70
80
90
100
110
1750-59
1760-69
1770-79
1780-89
1790-99
1800-09
1810-19
1820-29
1830-39
1840-49
1850-59
1860-69
1870-79
1880-89
1890-99
1900-09
1910-19
Decade Of Formation
Source: insurance Information Institute analysis of National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC.
Of the Centenarian p/c insurers in existence today, 64% were formed since 1870. There was a post-Civil
war spike in formations in the 1870s and another in the 1890s. Another spike occurred in the 1910s after the financial crises of the 1900-1909 era and as workers
compensation systems were adopted.
As of Jan. 1, 2014 there were 296 P/C that were at least 100 years old.
77 insurers formed in the decade 1910-
1919 are still in existence; 32 were
formed between 1910 and 1914
65
100-Year-Old Insurers: Independent vs. Part of Group/Holding Company*
51.2% 48.8%
*As of 2010.Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC.
The number of 100-year-old insurers that are independent vs. part of a more diversified group structure is split almost evenly.
Independent, 48.8%(140)
Part of Holding Company, 51.2%
(147)
66
100-year-old Insurers: Mutual vs. Stock vs. Reciprocal
62.4%
35.9%
1.4%0.3%
*As of 2010.Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC.
The vast majority (62.4%) of 100-year-old insurers are mutual insurers, while stock insurers account for 35.9% of the total.
Mutual, 62.4%,(179)
Stock, 35.9%,(103)
Reciprocal, 1.4%,(4)
Other, 0.3%,(1)
67
Premium to Surplus Ratios, “Centenarians” vs. Overall P-C Industry, 1998, 2008 and 2013
$0.85
$0.95
$0.73$0.72 $0.69
$0.51
$0.00
$0.10
$0.20
$0.30
$0.40
$0.50
$0.60
$0.70
$0.80
$0.90
$1.00
1998 2008 2013
"Centenarians" Overall P-C Industry
“Centenarians” are companies at least 100 years old with positive NWP in 2013. Sources: National Association of Insurance Commissioners’ Annual Statements, via Highline; I.I.I. calculations
NWP/Surplus
Premiums are a rough measure of risk accepted; surplus is funds beyond reserves to pay unexpected losses. The larger surplus is in relation to premiums—the lower the ratio of premiums to surplus—the greater the
capacity to handle the risk it has accepted.
Insurers that are 100+ years old hold nearly $2 in
surplus for every $1 dollar in premium they write
Is There Evidence that the (Re) Insurance Industry Is
Becoming More Risky
68
Is Boring Better?
68
69
Mentions of the Term “Alternative Capital” with “Insurance” or “Reinsurance”
* Estimate is annualized figure based on actual data through September 30, 2014.Source: Insurance Information Institute search of Factiva database.
11 9 20 21 35 52 29 4379 83
55 59116
409
712
0
100
200
300
400
500
600
700
800
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*
Should the Increased Use of Terms Such as “Alternative Capital,” “Hedge Fund” and “Pension Fund” in Conjunction with a (Re)Insurance Be a Concern
70
Mentions of the Term “Private Equity”with “Insurance” or “Reinsurance”
* Estimate is annualized figure based on actual data through September 30, 2014.Source: Insurance Information Institute search of Factiva database.
1,081 1,3532,004
2,5693,609
4,995
6,595
11,772 11,859
15,343
11,395
13,547
15,103 15,27015,525
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*
Should the Increased Use of Terms Such as “Alternative Capital,” “Hedge Fund” and “Pension Fund” in Conjunction with a (Re)Insurance Be a Concern
Does Deluge of “Alternative” Capital Suggest the Industry
is Riskier?
72
Or Has Capital Always Flowed in and Out of this Business?
72
Global Reinsurance Capital (Traditional and Alternative), 2007 - 2013
Source: Aon Benfield Reinsurance Market Outlook, April 1, 2014; Insurance Information Institute.
Total reinsurance capital reached a record $540B in 2013, up 58.8%
from 2008.
2007 2008 2009 2010 2011 2012 2013$0
$100
$200
$300
$400
$500
$600
410
340400
470 455505
540
22 19 22 24 28 39 50
Global Re Capital (Traditional & Alternative) Alternative Capital Only
(Billions)
Alternative capital constantly growing, even in 2011, when cat losses reduced total reinsurance
capital.
But alternative capacity has grown 163% since 2008, to $50B. It has grown 79% in the past two years.
Investor by Category
Years ended June 30.Source: Aon Benfield Securities; Insurance Information Institute.
Catas-trophe Fund43%
Insti-tu-
tional41%
Mutual Fund12%
Hedge Fund2%
Reinsurer2%
2013
Institutional investors are accounting for a larger
share of alternative reinsurance investors
Catas-trophe Fund51%
Insti-tu-
tional34%
Mutual Fund5%
Hedge Fund5%
Reinsurer5%
2012
Catastrophe Bonds: Issuance and Outstanding, 1997- 2014:Q2Risk Capital Amount ($ Millions)
Sources: Guy Carpenter; Insurance Information Institute.
63
3.0
84
6.1
98
4.8
1,1
30
.0
96
6.9 2,7
29
.2
3,3
91
.7
4,6
00
.3
4,1
08
.8
5,8
52
.9
7,0
83
.0
5,7
01
.7
1,991.11,142.8
1,729.8
6,9
96
.3
4,6
93
.4
1,219.5
$3
,45
0.0
$4
,04
0.4
$4
,90
4.2 $8
,54
1.6
$1
4,0
24
.2
$1
2,0
43
.6
$1
2,5
08
.8
$1
2,1
85
.0
$1
2,1
39
.1
$2
0,5
42
.8
$1
4,8
35
.7
$1
8,5
16
.7
$2
,95
0.0
$0
$4,000
$8,000
$12,000
$16,000
$20,000
$24,000
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14:Q2Risk Capital IssuedRisk Capital Outstandng at Year End
2014 Issuance Slowed Down Substantially; May Not Surpass 2013 Record
CAT bond issuance reached a record high
in 2013.
Risk capital outstanding
reached a record high in 2014
Financial crisis depressed issuance
U.S. Wind-Exposed Risk Premium* 2010:Q1 to 2014: Q1
Q1-10
Q2-10
Q3-10
Q4-10
Q1-11
Q2-11
Q3-11
Q4-11
Q1-12
Q2-12
Q3-12
Q4-12
Q1-13
Q2-13
Q3-13
Q4-13
Q1-14
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
10.9%
8.2% 8.0%
8.0%
7.9%8.2%
8.2%
10.1%
10.9%
12.0%
12.0%
11.6%
11.0%
7.6%
7.4%7.2%
6.4%Wtd. Avg. Risk Spread
Ris
k S
pre
ad
(c
ou
po
n –
ris
k-f
ree
ra
te) Risk spreads
rose in 2011-2012 from cat activity and changes to catastrophe
models
78
* Trailing 12-month averageSOURCE: Willis Capital Markets, Insurance Information Institute.
Risk spreads dropped –
equivalent to lower rates –
low cat losses, capital entering
market.
U.S. Wind and Quake31%
U.S. Wind24%
Other (incl. U.S. Wind)13%
Euro Wind11%
U.S. Quake8%
Other (ex. U.S. Wind)
8%
Japanese Perils6%
80
Catastrophe Bonds Outstanding, Q1 2014
Source: Willis Capital Markets.
Catastrophe bonds are heavily
concentrated in U.S. hurricane
exposures. Two-thirds of
catastrophe risks outstanding cover
U.S. wind risks.
Reinsurance Pricing: Rate-on-Line Index by Region, 1990 – 2014*
*As of Jan. 1.Source: Guy Carpenter
Lower CATs and a flood of new
capital has pushed reinsurance pricing
down in most regions, including
the U.S.
83
Questions Arising from Influence of Alternative Capital What Will Happen When Investors Face Large-Scale
Losses?
What Happens When Interest Rates Rise?
Does ILS Have a Higher Propensity to Litigate?
How Much Lower Will Risk Premiums Shrink/ROLs Fall?
Will There Be Spillover Into Casualty Reinsurance?
Does the New Interconnectedness with Capital Markets Lend Credence to the Suggestion that Reinsurance Is a Systemic Risky Business?
Will Alternative Capital Drive Consolidation?
PART II: GROWTHHas Strength Come at the
Expense of Growth?
84
Obstacles and Opportunities
84
Will We Ever See Vigorous Growth Again?
85
Who and What Are to Blame?Soft Markets?
“Great Recession”?Regulation?
85
86
-5%
0%
5%
10%
15%
20%
25%
71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Net Premium Growth: Annual Change, 1971—2014F
(Percent)1975-78 1984-87 2000-03
Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
Net Written Premiums Fell 0.7% in 2007 (First Decline
Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.
2014F: 4.0%
2013: 4.6%
2012: +4.3%
87
Real GDP Growth vs. Real P/CPremium Growth: Modest Association
*Through Q2 2014.Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 10/14; Insurance Information Institute
4.3
%1
8.6
%2
0.3
%5
.8%
0.3
%-1
.6%
-1.0
%-1
.8%
-1.0
%3
.1%
1.1
%0
.8%
0.4
%0
.6%
-0.4
%-0
.3%
1.6
% 5.6
%1
3.7
%7
.7%
1.2
%-2
.9%
-0.5
%-3
.8%
-4.4
%-3
.3%
-0.7
%0
.1% 2.1
%2
.8%
2.2
%5.2
%-0
.9%
-7.4
%-6
.5% -1
.5%
1.8
%
-10%
-5%
0%
5%
10%
15%
20%
25%
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
*
Re
al N
WP
Gro
wth
-4%
-2%
0%
2%
4%
6%
8%
Re
al G
DP
Gro
wth
Real NWP Growth
Real GDP
P/C Insurance Industry’s Growth is Influenced Modestlyby Growth in the Overall Economy
Real GDP Growth vs. Real P/C (%) Inflation-adjusted premium growth
was negative for 6 years in a row
before and during the Great
Recession
88
Direct Premiums Written: Total P/CPercent Change by State, 2007-2013
74
.6
36
.9
31
.9
27
.4
25
.2
24
.9
22
.5
22
.2
16
.6
15
.9
15
.7
14
.5
14
.5
14
.3
12
.6
11
.9
11
.8
11
.2
10
.5
10
.3
9.9
9.8
9.3
9.1
9.0
8.6
0
10
20
30
40
50
60
70
80
ND
SD
OK
NE
KS IA VT
TX
WY
TN
MN
AR
AK IN WI
CO MI
KY
OH NJ
LA
SC VA
AL
MO
NM
Pe
ce
nt
ch
an
ge
(%
)
Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 States
North Dakota was the country’s growth leader over the past 6 years with premiums written
expanding by 74.6%
89
Direct Premiums Written: Total P/CPercent Change by State, 2007-2013
8.5
8.2
7.9
7.8
7.6
7.3
7.0
6.9
6.2
5.9
5.6
5.3
4.2
4.1
3.5
1.6
1.0
0.4
-0.7
-1.7
-1.9
-4.1
-5.7
-6.7
-12
.6
-15
.3
-20
-15
-10
-5
0
5
10
MS
CT
US
NC
GA
NY
MD
MA
UT
WA
PA IL RI
NH ID MT
ME
OR
CA
FL
DC AZ
WV HI
NV
DE
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
Sources: SNL Financial LC.; Insurance Information Institute.
Growth was negative in 7 states and DC between
2007 and 2013
90
Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2013
91
.1
42
.1
41
.4
33
.7
26
.3
25
.8
23
.6
19
.1
15
.6
14
.0
11
.3
10
.0
9.8
6.8
6.7
6.5
4.1
3.2
3.1
3.0
2.7
2.2
2.0
1.7
1.3
0.6
0
10
20
30
40
50
60
70
80
90
100
ND
OK
SD VT
NE IA KS ID AK
TX
WY
MN IN AR
TN W
I
OH
MA
CT
NM LA
MS
NJ
NY
US
MO
Pe
ce
nt
ch
an
ge
(%
)
Sources: SNL Financial LLC.; Insurance Information Institute.
Top 25 States
Only 30 states showed any commercial lines growth from 2007 through 2013
91
Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2013
0.5
0.4
0.2
0.1
-0.5
-0.8
-0.9
-1.0
-1.1
-1.1
-1.9
-2.0
-2.1
-2.7
-3.3
-3.7
-4.3
-4.9
-10
.7
-11
.4
-11
.7
-12
.6
-12
.7
-13
.6
-22
.4
-25
.1
-30
-25
-20
-15
-10
-5
0
5
MD
NH PA
CO IL
WA
VA
KY
NC
ME RI
MI
SC AL
GA
CA
UT
DC
OR
MT HI
DE FL AZ
WV
NV
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
Sources: SNL Financial LLC.; Insurance Information Institute.
States with the poorest performing economies also produced the most negative net change in premiums of
the past 6 years
Nearly half the states have yet to see commercial lines premium
volume return to pre-crisis levels
92
Direct Premiums Written: Workers’ CompPercent Change by State, 2007-2013*
32
.9
30
.8
24
.3
21
.5
13
.4
11
.5
11
.0
10
.6
8.1
4.8
4.5
3.0
1.5
-0.3
-0.6
-1.0
-2.3
-2.4
-2.9
-3.0
-3.7
-4.1
-5.7
-5.8
-8.0
-15
-10
-5
0
5
10
15
20
25
30
35
OK IA SD
NY
CA
CT
NJ
KS
NE IN MI
VT
MN
DC WI
IL
NH
US
NM TX PA
VA
MD
TN AR
Pe
ce
nt
ch
an
ge
(%
)
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 States
Only 13 states have seen works comp premium volume
return to pre-crisis levels
93
Direct Premiums Written: Worker’s CompPercent Change by State, 2007-2013*
-8.1
-8.4
-8.7
-8.8
-11
.1
-11
.3
-12
.0
-14
.7
-15
.3
-15
.4
-16
.0
-16
.3
-17
.1
-22
.1
-23
.0
-26
.5
-27
.5
-32
.5
-33
.3
-33
.5
-43
.8
-71
.0
-80-75-70-65-60-55-50-45-40-35-30-25-20-15-10-50
MS
MA RI
GA
NC
AK ID CO LA
ME AZ
MO
SC AL
KY
UT FL
OR
DE HI
NV
MT
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.Sources: SNL Financial LC.; Insurance Information Institute.
States with the poorest performing economies also produced some of the most
negative net change in premiums of the past 6 years
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
$25
$30
$35
$40
$45
$50Wage & Salary DisbursementsWC NPW
94
Payroll Base* WC NWP
Payroll vs. Workers Comp Net Written Premiums, 1990-2013P
*Private employment; Shaded areas indicate recessions. WC premiums for 2012 are I.I.I. estimate based YTD 2013 actuals.Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.
Continued Payroll Growth and Rate Gains Suggest WC NWP Will Grow Again in 2014; +8.6% Growth Estimated for 2013
7/90-3/91 3/01-11/0112/07-6/09
$Billions $Billions
WC premium volume dropped two years before
the recession began
WC net premiums written were down $14B or 29.3% to
$33.8B in 2010 after peaking at $47.8B
in 2005
95
Average Commercial Rate Change,All Lines, (1Q:2004–2Q:2014)
-3.2
%-5
.9%
-7.0
%-9
.4%
-9.7
%-8
.2%
-4.6
% -2.7
%-3
.0%
-5.3
%-9
.6%
-11
.3%
-11
.8%
-13
.3%
-12
.0%
-13
.5%
-12
.9%
-11
.0%
-6.4
%-5
.1%
-4.9
%-5
.8%
-5.6
%-5
.3%
-6.4
%-5
.2%
-5.4
% -2.9
%
2.7
% 4.4
%4
.3%
3.9
%5
.0%
5.2
%4
.3%
3.4
%2
.1%
1.5
%-0
.5%
-0.1
% 0.9
%
-0.1
%
-16%
-11%
-6%
-1%
4%
9%
1Q
04
2Q
04
3Q
04
4Q
04
1Q
05
2Q
05
3Q
05
4Q
05
1Q
06
2Q
06
3Q
06
4Q
06
1Q
07
2Q
07
3Q
07
4Q
07
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
KRW Effect
Pricing as of Q2:2014 had turned (slightly) negative for
the first time in 3 years
(Percent)
Q2 2011 marked the last of 30th
consecutive quarter of price declines
SIDEBARAdvertising in P/C Insurance
9797
Growth in Capacity Spurs Competition
Advertising Expenditures by P/C Insurance Industry, 1999-2013
$1.736 $1.737 $1.803 $1.708
$3.426
$4.102$4.354
$4.103
$5.079
$5.883$6.088 $6.175
$2.975
$2.111$1.882
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
$5.0
$5.5
$6.0
$6.5
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Source: Insurance Information Institute from consolidated P/C Annual Statement data, Insurance Expense Exhibit (Part I).
$ Billions P/C ad spend hit an all time record high of $6.175 billion in 2013, up 1.5% over 2012.
The pace of growth has slowed from 15.8% in 2011
and 23.8% in 2010
P/C ad spending has more than tripled since 2002 (up 256% from 2002-2013)Over the same period Net
Premiums Written rose ~45%
-20%
-10%
0%
10%
20%
30%
40%
50%
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Ad SpendingNet Written Premium GrowthPolicyholder Surplus
Growth in Premiums & Surplus vs. Growth in Advertising Expenditures, 2000 – 2013
Sources: Insurance Information Institute analysis from A.M. Best data.
Average Annual Growth Rates 2000 – 2013
Ad Spending: 10.1%Policyholder Surplus: 5.3%Net Written Premiums: 3.7%
Since 2000, Ad Spending has been increasing at nearly twice the pace of NWP and nearly double
the of PHS
100
3.7%
5.3%
10.1%
0%
2%
4%
6%
8%
10%
12%
Ad Spending Policyholder Surplus Net Written Premiums
Average Annual Percent Change (%)
Overall Growth in Ad Spending has greatly exceeded growth in capacity (policyholder surplus) or premium growth. This suggests that there are diminishing returns to advertising.
100Sources: Insurance Information Institute analysis from A.M. Best data.
Growth in Premiums, Capacity vs. Growth in Advertising Expenditures, 2000 – 2013
Growth in the “Supply” of insurance
has exceeded “Demand” Efforts to sell have intensified
101
I.I.I. Poll: Ads Are Everywhere
Q. How long has it been since you have seen or heard an advertisement for auto insurance?
Source: Insurance Information Institute Annual Pulse Survey, May 2014.
Four Out of Five Respondents Have Seen An Auto Insurance Ad in the Past Week.
2%3%5%
80%
9%
Less Than a Week
1 week to 1 month
Never Seen Or Heard AdMore Than 6 Months
1 to 6 months
Global Insurance Premium Growth Trends
102
Growth Is Uneven Across Regions and Market Segments
102
Life, $2.61 , 56.2%
Non-Life, $2.03 , 43.8%
Life insurance accounted for 56.2% of global premium volume in 2013 vs. 43.8% for Non-Life
Distribution of Global Insurance Premiums, 2013 ($ Trillions)
103
Total Premium Volume = $4.641 Trillion*
Source: Swiss Re, sigma, No. 3/2014; Insurance Information Institute.
104
Distribution of Nonlife Premium: Industrialized vs. Emerging Markets, 2013
Sources: Swiss Re sigma No.4/2013; Insurance Information Institute research.
Emerging market’s share of nonlife premiums increased to 19.5% in 2013, up from 17.3% in 2012 and 14.3% in 2009. The share of premiums written in the $2 trillion global nonlife market remains much larger (80.5%) but continues to shrink.
The financial crisis and sluggish recovery in the major insurance markets will accelerate the expansion of the emerging market sector
Premium Growth Facts
19.5%80.5%
Industrialized Economies
$1, 653.0
Emerging Markets$399.8
2013, $Billions
Developing markets now account for about 40% of global GDP but just under 20% of nonlife premiums
105
Premium Growth by Region, 20130.
7%
-6.9
%
12.2
%
4.0%
4.1% 5.
6%
12.8
%
9.0%
2.3%
1.9%
-0.3
%
2.6%
1.7%
13.4
%
1.7% 2.1%
5.1%
1.4%
-2.0
%
9.4%
2.2%
0.8%
0.3%
7.5%
2.6%
10.2
%
7.1%
-3.2
%
-0.1
%
7.2%
-10%
-5%
0%
5%
10%
15%
World N.America
LatinAmerica
W.Europe
Central &E. Europe
AdvancedAsia
EmergingAsia
MiddleEast &Central
Asia
Africa Oceania
Life Non-Life Total
Global Premium Volume Totaled $4.641 Trillion in 2013, up 1.4% from $4.599 Trillion in 2012. Global Growth Was Weighed Down by Slow Growth
in N. America and W. Europe and Partially Offset by Emerging Markets
Latin America growth was
the strongest in 2013
Growth in Advanced Asia (incl. China) markets decelerated in 2013
Source: Swiss Re, sigma, No. 3/2013.
Strength in Africa,
107
Non-Life Insurance: Global Real (Inflation Adjusted) Premium Growth, 2013
Source: Swiss Re, sigma, No. 3/2014.
Market Life Non-Life Total
Advanced -0.2 1.1 0.3
Emerging 6.4 8.3 7.4
World 0.7 2.3 1.4
Real growth in non-life insurance
premiums was faster in China and most of SE Asia than the US
108
Global Real (Inflation Adjusted) Premium Growth: 1980-2013
Source: Swiss Re, sigma, No. 3/2014.
Emerging market growth has exceeded that of
industrialized countries in 30 of the past 34 years,
including the entirety of the global financial crisis and
subsequent recovery
Premium growth is very erratic in part to inflation volatility in emerging markets as well as a lack of
consistent cyclicality
Globalization:The Global Economy Creates and Transmits Cycles & Risks
109
Globalization Is a Double Edged Sword—Creating Opportunity and Wealth But
Potentially Creating and Amplifying Risk
109
Emerging vs. “Advanced” Economies
(4.0)
(2.0)
0.0
2.0
4.0
6.0
8.0
10.0
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
F1
5F
Advanced economies Emerging and developing economies World
Source: International Monetary Fund, World Economic Outlook , October 2014; Insurance Information Institute.
Emerging economy growth rates are
expected to ease to 4.4% in 2014 and 5.0% in 2015
GDP Growth: Advanced & Emerging Economies vs. World, 1970-2015F
Advanced economies are expected to grow at a modest pace of 1.8% in
2014 and to 2.3% in 2015.
World output is forecast to grow by 3.3% in 2014 and 3.8% in 2015. The world economy shrank by 0.6% in
2009 amid the global financial crisis
GDP Growth (%)
111
Real GDP Growth Forecasts: Major Economies: 2011 – 2015F
Sources: Blue Chip Economic Indicators (10/2014 issue); IMF (10/2014); Insurance Information Institute.
1.6%
1.5%
0.9%
2.3%
2.2%
0.8%
3.2%
1.3%
2.3%
7.4%
3.1%
1.3%
2.7%
2.2% 2.4%
7.1%
9.3%
2.6%
4.6%
-0.7
%
7.7%
2.9%
0.3%
1.7%1.8%2.
2%
-0.5
%
2.0%2.
6%
7.7%
-2%
0%
2%
4%
6%
8%
10%
US Euro Area UK Latin America Canada China
2011 2012 2013F 2014F 2015F
Growth Prospects Vary Widely by Region but the Outlook for 2015 Has Dimmed Except in the US and UK
The Eurozone remains weak
Growth in China has slowed but outpaces the US and Europe
US growth should
acceleratein 2015
Political turmoil in Latin America is hurting growth
112
Real GDP Growth Forecasts: Selected Economies: 2011 – 2015F
Sources: Blue Chip Economic Indicators (10/2014 issue); IMF (10/2104); Insurance Information Institute.
3.6% 4.
1%
7.7%
4.3%
3.9%
2.0%
1.5%
3.4%
1.0%
3.6% 3.
9%
2.8%
2.1%
4.4%
1.3%
2.3% 2.4%
1.1%
3.5% 3.6%
5.5%
0.2% 0.4%
3.0%
2.4%
3.7%
3.6%
6.1%
0.8% 1.
3%
2.9%
3.6%
2.7%
2.4%
4.7%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
S. Korea Taiwan India Russia Brazil Australia Mexico
2011 2012 2013 2014F 2015F
Growth Is Expected Accelerate Modestly in Most of the World in 2014 and 2015
Strong economies in smaller industrialized nations will bolster demand for products, services, international trade and insure
Growth in Russia is being hit hard by sanctions
117
World Trade Volume: EXPORTS2010 – 2015F
14.7%
6.7%
4.6% 4.4% 3.9%
5.8%
12.2%
5.3%
2.0% 2.4%3.6%
4.5%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2010 2011 2012 2013 2014F 2015F 2010 2011 2012 2013 2014F 2015F
Growth (%)
Export growth in emerging economies has
decelerated sharply
Advanced Economies Emerging Economies
Sources: IMF World Economic Outlook (October 2014); Insurance Information Institute.
Export growth in advanced economies
should accelerate in 2014
120
The “Underinsurance” Gap
120
Why is So Much Loss Uninsured and How to Close the Gap
Losses Due to Natural Disasters in the US, 1980–2013
121
Overall losses (in 2012 values) Insured losses (in 2013 values)
Source: MR NatCatSERVICE
(2013 Dollars, $ Billions) (Overall and Insured Losses)
50
100
150
200
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
2013 CAT Losses
Overall : $21.8B
Insured: $12.8B
Indicates a great deal of losses are uninsured (~40%-50% in the US) =
Growth Opportunity
2013 losses were far below 2011 and 2012 and were 44% lower
than the average from 2000-2012
Losses Due to Natural Disasters Worldwide, 1980–2013 (Overall & Insured Losses)
122
Overall losses (in 2013 values) Insured losses (in 2013 values)
Source: MR NatCatSERVICE
(2013 Dollars, $ Billions)(Overall and Insured Losses)
100
200
300
400
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
US$ bn
2013 Losses
Overall : $125B
Insured: $34B
There is a clear upward trend in both insured and overall losses over the past
30+ years
10-Yr. Avg. Losses
Overall : $184B
Insured: $56B
Source: Munich Re Geo Risks Research, NatCatSERVICE – as of January 2014. 123
Geophysical events(earthquake, tsunami, volcanic activity)
Meteorological events (storm)
Hydrological events(flood, mass movement)
Climatological events(extreme temperature, drought, wildfire)
Extraterrestrial events(Meteorite impact)
880Loss events
EarthquakeChina, 20 April
Severe storms, tornadoesUSA, 18–22 May
FloodsIndia, 14–30 June
HailstormsGermany, 27–28 July
Winter Storm Christian (St. Jude)Europe, 27–30 October
Typhoon HaiyanPhilippines, 8–12 NovemberSevere storms, tornadoes
USA, 28–31 May
Hurricanes Ingrid & ManuelMexico, 12–19 September
FloodsCanada, 19–24 June
FloodsEurope, 30 May–19 June
Heat waveIndia, April–June
Typhoon FitowChina, Japan, 5–9 October
Earthquake (series)Pakistan, 24–28 September
FloodsAustralia, 21–31 January
Meteorite impactRussian Federation, 15 February
Flash floodsCanada, 8–9 July
FloodsUSA, 9–16 September
Geophysical events(earthquake, tsunami, volcanic activity)
Meteorological events (storm)
Selection of significant Natural catastrophes
Natural catastrophes Hydrological events(flood, mass movement)
Climatological events(extreme temperature, drought, wildfire)
Natural Loss Events:Full Year 2013
World Map
Even as Insurance Coverage Expands, the Insured Share of Losses Is Falling
124Source: Swiss Re Economic Research & Consulting; Geneva Association; Insurance Information Institute.
Total and insured losses as a share of
global GDP have both increased over the past
40 years, but insured losses as a share of
total losses has shrunk
Many emerging market nations have very large insurance gaps. In the US, the
gap is about 50%.
Natural Catastrophe Protection Gap (1974 – 2013)
Total Global vs. Insured Losses as % GDP (1974 – 2013)
125125Sources: Guy Carpenter, World Bank, IMF; Insurance Information Institute.
Gap Between GDP Growth and Reinsurance Limit in Asia-Pacific Region: 2004—2013
The gap between GDP and reinsurance limit in Asia is growing—suggesting the
region is “under-reinsured”
126
I.I.I. Poll: Homes Near Hazards
Q. If you were to purchase a home today, which of the following summarizes your views on that home’s risk of damage from natural disasters . . . and your decision to purchase that home?
Source: Insurance Information Institute Annual Pulse Survey.
More Than Half of the Public Would Be Significantly Influenced by Risk of Damage from Natural Disasters. Close to a Third Do Not
Regard Such a Risk To Be a Major Consideration.
3%
17%
53%28%
Risk a Significant Influence
on Purchase
Willing to Accept Risk
Risk Not a Major Consideration
Don’t Know
Causes of the Underinsurance Gap and Ways to Narrow/Close It
Affordability
Lack of Awareness
Limits to Insurability
Regulatory Deficiencies
Compulsory Insurance
Create a Conducive Regulatory, Legal and Tax Environment
Build Public-Private Partnerships
Develop New Products
Microinsurance
Enhance Data Collection/Sharing
Foster a More Strategic Approach to Risk Among Businesses
Contributing Factors to theUnderinsurance Gap
Solutions that Will Help Close the Underinsurance Gap
Source: Geneva Association; Insurance Information Institute.
Growth Through M&AMerger and Acquisition Activity
131
Will Slow Growth, Excess Capacity Lead to Consolidation?Hasn’t Happened—YET
131
132
U.S. INSURANCE MERGERS AND ACQUISITIONS, All Sectors, 1989-2013 (1)
$7.1$6.9$8.6$5.0
$8.5$12.5
$27.0
$40.8
$56.2
$41.7
$55.7
$41.5
$9.7
$59.9
$14.9
$50.8
$43.0
$50.4
$31.4
$14.4
$46.5
$54.7
$43.2
$19.3
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Tra
ns
ac
tio
n v
alu
es
0
100
200
300
400
500
600
Nu
mb
er o
f tran
sa
ctio
ns
($ Billions)
(1) Includes transactions where a U.S. company was the acquirer and/or the target.
Source: Conning proprietary database.
M&A activity recovered to pre-crisis levels but deal values dropped sharply
in 2013
$165.4
133
U.S. INSURANCE MERGERS AND ACQUISITIONS,P/C SECTOR, 2002-2013 (1)
$486
$20,353
$425
$9,264
$35,221
$13,615
$16,294
$3,507
$6,419
$12,458
$4,651 $4,397
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2012
Tra
ns
ac
tio
n v
alu
es
0
10
20
30
40
50
60
70
80
90
Nu
mb
er o
f tran
sa
ctio
ns
($ Millions)
(1) Includes transactions where a U.S. company was the acquirer and/or the target.
Source: Conning proprietary database.
M&A activity in the P/C sector remains below
pre-crisis levels.
134
U.S. INSURANCE MERGERS AND ACQUISITIONS,LIFE/ANNUITY SECTOR, 2002-2013 (1)
$2,796
$18,533
$3,817
$21,865
$5,055$5,849
$382 $840
$23,848
$3,063
$6,083
$3,299
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Tra
ns
ac
tio
n v
alu
es
0
5
10
15
20
25
30
35
40
Nu
mb
er o
f tran
sa
ctio
ns
($ Millions)
(1) Includes transactions where a U.S. company was the acquirer and/or the target.
Source: Conning proprietary database.
Life/Annuity sector M&A activity is highly volatile
188 189 182
224 216
264279
297
184204
289
321
267
314
177
10
60
110
160
210
260
310
360
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14:6M
Agent/Broker M&A Deals, 2000-2014:6M
Source: Optis Partners, “Agent-Broker Merger & Acquisition Statistics: The New Normal?”, August 2014; Insurance Information Institute.
Number of Deals
Agent/Broker activity is running at a record pace in 2014 with 314
deals announced through June 30.
Shifting Legal Liability & Tort Environment
137
(Temporary) “Taming” of the Tort System and Better Risk
Management Lack of Recent Liability Crises Removes Hard Market Catalyst
137
138
Over the Last Three Decades, Total Tort Costs as a % of GDP Appear Somewhat Cyclical, 1980-2013E
$0
$50
$100
$150
$200
$250
$300
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12E
To
rt S
ys
tem
Co
sts
1.50%
1.75%
2.00%
2.25%
2.50%
To
rt Co
sts
as
% o
f GD
P
Tort Sytem Costs Tort Costs as % of GDP
($ Billions)
Sources: Towers Watson, 2011 Update on US Tort Cost Trends, Appendix 1A
Tort costs in dollar terms have remained high but relatively stable
since the mid-2000s., but are down substantially as a share of GDP
Deepwater Horizon Spike
in 2010
1.68% of GDP in 2013
2.21% of GDP in 2003
= pre-tort reform peak
139
Commercial Lines Tort Costs: Insured vs. Self-(Un)Insured Shares, 1973-2010
Billions of Dollars
$0
$20
$40
$60
$80
$100
$120
$140
$160
73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Self (Un) Insured ShareInsurer Share
Tort Costs and the Share Retained by Risks Both Grew Rapidly from the mid-1970s to mid-2000s, When Tort Costs Began to Fall But Self-
Insurance Shares Continued to Rise
$9.5
$15.0
$6.0
1973: Commercial Tort Costs
Totaled $6.49B, 94% was insured,
6% self-(un)insured
1985: $46.6B 74.5% insured,
25.5% self-(un)insured
1995: $83.6B 69.5% insured,
30.5% self-(un)insured
2005: $143.5B 66.4% insured,
33.6% self-(un)insured
2009: $126.5B 64.4% insured,
35.6% self-(un)insured
Sources: Towers Watson, 2011 Update on US Tort Cost Trends, III Calculations based on data from Appendix 4. 139
141
Where the Growth Is
141
Growth Is Uneven Across Geographies, Industries
142
12 Industries for the Next 10 Years: Insurance Solutions Needed
Export-Oriented Industries
Health Sciences
Health Care
Energy (Traditional)
Alternative Energy
Petrochemical
Agriculture
Natural Resources
Technology (incl. Biotechnology)
Light Manufacturing
Insourced Manufacturing
Many industries are
poised for growth, though
insurers’ ability to
capitalize on these
industries varies widely
Shipping (Rail, Marine, Trucking, Pipelines)
ENERGY SECTOR: OIL & GAS INDUSTRY FUTURE IS BRIGHT
143
US Is Becoming an Energy Powerhouse; Domestic Demand
and Exports Are KeyNeed Infrastructure Investment
143
20.2 19.9 20.0 19.518.9 19.4
20.221.1
21.622.4
24.0
25.3 25.6
20.6
10
12
14
16
18
20
22
24
26
28
00 01 02 03 04 05 06 07 08 09 10 11 12 13
U.S. Natural Gas Production, 2000-2013
Source: Energy Information Administration, Short-Term Energy Outlook (April 8, 2014) , Insurance Information Institute.
Trillions of Cubic Ft. per Year
The U.S. is already the world’s largest natural gas producer—
recently overtaking Russia. This is a potent driver of commercial
insurance exposures
5.19 5.08 5.005.35 5.47 5.65
6.49
7.44
8.37
9.13
5.09
0
1
2
3
4
5
6
7
8
9
10
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F
U.S. Crude Oil Production, 2005-2015P
Source: Energy Information Administration, Short-Term Energy Outlook (April 8, 2014) , Insurance Information Institute.
Millions of Barrels per Day
Crude oil production in the U.S. is expected to increase by 82.6% from 2008 through 2015—and could overtake
Saudi Arabia as the world’s largest oil producer
146
Oil & Gas Extraction Employment,Jan. 2010—August 2014*
*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
156.
415
6.4
156.
715
7.6
158.
715
7.8
158.
015
9.5
160.
016
1.5
161.
216
1.2
163.
116
4.4
166.
616
9.3
170.
117
1.0
172.
517
3.6
176.
317
8.2
178.
518
0.9
181.
918
3.1
184.
818
5.2
185.
718
6.8
187.
618
8.0
188.
018
8.2
190.
019
1.7
191.
919
3.4
192.
419
2.6
193.
119
3.3
195.
019
6.5 19
9.7
200.
620
3.0
204.
120
5.3
207.
820
7.5
207.
921
0.1
211.
321
2.1
211.
7
150
160
170
180
190
200
210
220
Jan-
10F
eb-1
0M
ar-1
0A
pr-1
0M
ay-1
0Ju
n-10
Jul-1
0A
ug-1
0S
ep-1
0O
ct-1
0N
ov-1
0D
ec-1
0Ja
n-11
Feb
-11
Mar
-11
Apr
-11
May
-11
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
122/
30/2
Mar
-12
Apr
-12
May
-12
Jun-
12Ju
l-12
Aug
-12
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Jan-
13F
eb-1
3M
ar-1
3A
pr-1
3M
ay-1
3Ju
n-13
Jul-1
3A
ug-1
3S
ep-1
3O
ct-1
3N
ov-1
3D
ec-1
3Ja
n-14
Feb
-14
Mar
-14
Apr
-14
May
-14
Jun-
14Ju
l-14
Aug
-14
Oil and gas extraction employment is up 35.4% since Jan. 2010 as the energy sector booms. Domestic energy production is essential to any robust economic recovery in
the US.
(Thousands) Highest since mid-1986
354.8
523.9
629.8
729.2
819.6
406.0
0
100
200
300
400
500
600
700
800
900
1990 2000 2010 2020P 2030P 2040P
World Primary Energy Consumption, 1990-2040P
Source: Energy Information Administration, 2013 International Energy Outlook, Insurance Information Institute.
Between 2010 and 2040, energy consumption in projected to increase by
56.4% worldwide
Quadrillion BTUsGrowth in worldwide
energy consumption will create more risk and
vulnerabilities (natural and manmade); Innovations in
risk management and insurance are needed.
Biofuels, $0.3 , 1%
Oil, $10.1 , 27%
Natural Gas, $9.5 ,
25%
Power, $16.9 , 44%
Coal, $1.1 , 3%
Projected energy infrastructure investment
through 2035 total $38 trillion; Implies substantial
incurrence of risk.
Cumulative Projected Investment in Global Energy Infrastructure, 2011-2035 ($ Trill.)
Source: International Energy Agency, World Energy Outlook 2011.
CONSTRUCTION INDUSTRY OVERVIEW & OUTLOOK
149
The Construction Sector Is Critical to the Economy and the P/C Insurance Industry
149
150
Value of New Private Construction: Residential & Nonresidential, 2003-2014*
Billions of Dollars
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
03 04 05 06 07 08 09 10 11 12 13 14*
Non ResidentialResidential
Private Construction Activity Is Moving in a Positive Direction though Remains Well Below Pre-Crisis Peak; Residential Dominates
$298.1
$15.0
$613.7
New Construction peaks at $911.8. in 2006
Trough in 2010 at $500.6B,
after plunging 55.1% ($411.2B)
2014: Value of new pvt. construction hits $685.5B as of June 2014, up 37%
from the 2010 trough but still 25% below 2006 peak
150
$261.8
$238.8
$329.5
$355.9
*2014 figure is a seasonally adjusted annual rate as of June.Sources: US Department of Commerce; Insurance Information Institute.
151
Value of Construction Put in Place, June 2014 vs. June 2013*
-2.9%
-12.3%
-2.7%
5.5%
9.2%7.4%
11.2%
-15%
-10%
-5%
0%
5%
10%
15%
TotalConstruction
Total PrivateConstruction
Residential--Private
Non-Residential--
Private
Total PublicConstruction
Residential-Public
Non-Residential--
Public
Overall Construction Activity is Up, But Growth Is Almost Entirely in the Private Sector as State/Local Government Budget Woes Continue
Growth (%)
Private sector construction activity is up in the
residential and nonresidential segments
*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
Private: +9.2% Public: -2.9%
Public sector construction activity remains depressed
MANUFACTURING SECTOR OVERVIEW & OUTLOOK
152
The U.S. Is Experiencing a Mini Manufacturing Renaissance That Is Benefitting the US Economy and the P/C Insurance Industry
152
154
$200,000
$300,000
$400,000
$500,000
Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—July 2014
* Seasonally adjusted; Data published Sept. 4, 2014.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/
Monthly shipments in July 2014 exceeded the pre-crisis (July 2008) peak. Manufacturing is energy-intensive and growth leads to gains in many commercial
exposures: WC, Commercial Auto, Marine, Property, and various Liability Coverages.
$ Millions
154
The value of Manufacturing Shipments in July 2014 was
$507.4.B—a new record high.
HEALTHCARE
156
Healthcare Will Consume Ever More of US GDP & Demand More
Insurance Solutions
156
U.S. Health Care Expenditures,1965–2022F
65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$42.
0$4
6.3
$51.
8$5
8.8
$66.
2$7
4.9
$83.
2$9
3.1
$103
.4$1
17.2
$133
.6$1
53.0
$174
.0$1
95.5
$221
.7$2
55.8
$296
.7$3
34.7
$369
.0$4
06.5
$444
.6$4
76.9
$519
.1$5
81.7
$647
.5$7
24.3
$791
.5$8
57.9
$921
.5$9
72.7
$1,0
27.4
$1,0
81.8
$1,1
42.6
$1,2
08.9
$1,2
86.5
$1,3
77.2
$1,4
93.3
$1,6
38.0
$1,7
75.4
$1,9
01.6
$2,0
30.5
$2,1
63.3
$2,2
98.3
$2,4
06.6
$2,5
01.2
$2,6
00.0
$2,7
00.7
$2,8
06.6
$2,9
14.7
$3,0
93.2
$3,2
73.4
$3,4
58.3
$3,6
60.4
$3,8
89.1
$4,1
42.4
$4,4
16.2
$4,7
02.0
$5,0
08.8
U.S. health care expenditures have been on a relentless climb for most of the past half century, far outstripping population growth,
inflation of GDP growth
157
From 1965 through 2013, US health care expenditures had
increased by 69 fold. Population growth over the same period increased by a factor of just 1.6. By 2022, health spending will have
increased 119 fold.
$ Billions
Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22
National Health Care Expenditures as a Share of GDP, 1965 – 2022F*
Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.
1965 5.8%
Health care expenditures as a share of GDP rose from 5.8% in 1965 to 18.0% in 2013 and are expected to
reach 19.9% of GDP by 2022
% of GDP
2022 19.9%
1980: 9.2%
1990: 12.5%
2000: 13.8%
2010: 17.9%
Since 2009, heath expenditures as a %
of GDP have flattened out at about 18%--the
question is why and will it last?
CAT OF THE FUTURE?CYBER RISK
159
Cyber Risk is a Rapidly Emerging Exposure for Businesses Large
and Small in Every IndustryNEW III White Paper:
http://www.iii.org/assets/docs/pdf/paper_CyberRisk_2014.pdf
159
Data Breaches 2005-2013, by Number of Breaches and Records Exposed# Data Breaches/Millions of Records Exposed
* 2013 figures as of Jan. 1, 2014 from the ITRC updated to an additional 30 million records breached (Target) as disclosed in Jan. 2014.Source: Identity Theft Resource Center.
157
321
446
656
498
419447
619662
87.9
17.322.9
35.7
19.1
66.9
222.5
16.2
127.7
100
200
300
400
500
600
700
2005 2006 2007 2008 2009 2010 2011 2012 2013*0
20
40
60
80
100
120
140
160
180
200
220
# Data Breaches # Records Exposed (Millions)
The Total Number of Data Breaches (+38%) and Number of Records Exposed (+408%) in 2013 Soared
Millions
161
2013 Data Breaches By Business Category, By Number of Breaches
3.7%9.1%
9.0%
43.8%
34.4%
Source: Identity Theft Resource Center, http://www.idtheftcenter.org/images/breach/2013/UpdatedITRCBreachStatsReport.pdf
The majority of the 614 data breaches in 2013 affected business and medical/healthcare organizations, according to the Identity Theft Resource Center.
Business, 211 (34.4%)Govt/Military, 56 (9.1%)
Banking/Credit/Financial, 23 (3.7%)
Educational, 55 (9.0%)
Medical/Healthcare, 269 (43.8%)
162
External Cyber Crime Costs: Fiscal Year 2013
4%
17%
36%
43%
* Other costs include direct and indirect costs that could not be allocated to a main external cost categorySource: 2013 Cost of Cyber Crime: United States, Ponemon Institute.
Information loss (43%) and business disruption or lost productivity (36%) account for the majority of external costs due to cyber crime.
Information loss
Equipment damages
Other costs* 0%
Revenue loss
Business disruption
Terrorism Risk Insurance
163
Risk Is RisingTRIA’s Future Is Uncertain
163
164
Terrorism Insurance Take-up Rates,By Year, 2003-2013
Source: Marsh Global Analytics, 2014 Terrorism Risk Insurance Report, April 2014 and earlier editions.
27%
49%
58% 59% 59% 57%61% 62% 64% 62% 62%
0%
10%
20%
30%
40%
50%
60%
70%
80%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
In 2003, the first year TRIA was in effect, the terrorism take-up rate was 27 percent. Since then, it has increased steadily, remaining in the
low 60 percent range since 2009.
TRIA’s high take-up rates, availability and affordability have benefitted businesses,
workers and the entire US economy since the program’s enactment
165
Summary
P/C Insurance Markets Remain Profitable Peak profitability has declined over the past several cycles
Lower bound profitability has remained virtually unchanged
Many factors: economic, market & institutional at work
Quantum Shift or Evidence of a Super-Cycle? Profitability patterns today more reminiscent of the
pre-1970 era (and back to WW II and even pre-war)
Growth Concerns Are Valid Apart from international trade barriers, sound regulation is
not a leading driver or impediment to growth
Economics are a major driver
Innovative insurance solutions needed for old & new risks
www.iii.org
Thank you for your timeand your attention!
Twitter: twitter.com/bob_hartwigDownload at www.iii.org/presentations
Insurance Information Institute Online:
166
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