the financial crisis and the future of the p/c insurance industry impact & implications...
TRANSCRIPT
The Financial Crisis and the Future of the P/C
Insurance IndustryImpact & Implications
Southwest Actuarial ForumSan Antonio, TX
November 30, 2009
Download at: www.iii.org/Presentations/
Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org
THE ECONOMIC STORM
What the Financial Crisis and Recession Mean for the Industry’s
Exposure Base, Growth, Profitability and Investments
4
3.7
%
0.8
% 1.6
% 2.5
% 3.6
%
3.1
%
2.9
%
0.1
%
4.8
%
4.8
%
-0.7
%
1.5
%
-2.7
%
2.8
%
2.8
%
2.7
%
2.9
%
2.8
%
3.0
%
-0.7
%
-6.4%
-5.4%
-0.2%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
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
Real GDP Growth*
*Blue bars are Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 11/09; Insurance Information Institute.
Recession began in December 2007. Economic toll of credit crunch, housing slump, labor market contraction has been severe but recovery is in sight
The Q1:2009 decline was the steepest since the
Q1:1982 drop of 6.4%
Personal and commercial lines
exposure base have been hit
hard and will be slow to come
back
5
Length of U.S. Business Cycles, 1929-Present*
43
138 11 10 8 10 11
166
168 8
19
50
80
3745
39
24
106
36
58
12
92
120
73
0
10
20
30
40
50
60
70
80
90
100
110
120
Aug.1929
May1937
Feb.1945
Nov.1948
July1953
Aug.1957
Apr.1960
Dec.1969
Nov.1973
Jan.1980
Jul.1981
Jul.1990
Mar.2001
Dec.2007
Contraction Expansion Following
* Through June 2009 (likely the “official end” of recession) **Post-WW II period through end of most recent expansion.
Sources: National Bureau of Economic Research; Insurance Information Institute.
Duration (Months)
Month Recession Started
Average Duration** Recession = 10.4 MonthsExpansion = 60.5 Months
Length of expansions
greatly exceeds
contractions
6
5.2%
-0.9
%-7
.4%
-6.5
%-1
.5%
1.8%
4.3%
18.6
%20
.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%
13.7
%7.
7%1.
2%-2
.9% -0
.5%
-3.8
%-4
.4%
-4.4
%
-10%
-5%
0%
5%
10%
15%
20%
25%7
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
9
Rea
l N
WP
Gro
wth
-4%
-2%
0%
2%
4%
6%
8%
Rea
l G
DP
Gro
wth
Real NWP Growth Real GDP
Real GDP Growth vs. Real P/C Premium Growth: Modest Association
P/C insurance industry’s growth is influenced modestly by growth
in the overall economy
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 11/09; Insurance Information Inst.
Regional Differences Will Significantly
Impact P/C Markets Recovery in Some Areas Will Begin Years Ahead of Others & Speed of Recovery Will Differ By Orders of
Magnitude
8
State Economic Growth Varied Tremendously in 2008
Eastern US growing more slowly than Plains,
Mountains
9
Fastest Growing States in 2008: Plains, Mountain States Lead
7.3%
4.4%
3.5%2.9%
2.0%2.1%2.5%
2.7%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
ND WY SD CO OK WV IA TX, MN,NM, WA
Natural resource and agricultural states have done
better than most others recently, helping insurance
exposure in those areas
Source: US Bureau of Economic Analysis; Insurance Information Institute.
PercentReal State GDP Growth
10
Slowest Growing States in 2008: Diversity of States Suffering
-0.1%
-0.4%-0.6%-0.6%
-1.5%-1.6%-1.6%
-1.7%
-2.0%
-0.9%
-0.6%-0.6%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%KY CT AZ GA IN NV RI MI DE FL OH AK
States in the North, South, East and West all represented among
hardest hit but for differing reasons
Source: US Bureau of Economic Analysis; Insurance Information Institute.
PercentReal State GDP Growth
Labor Market Trends
Fast & Furious: Massive Job Losses Sap the Economy and Personal &
Commercial Lines Exposure
12
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
Ja
n-0
0
Ja
n-0
1
Ja
n-0
2
Ja
n-0
3
Ja
n-0
4
Ja
n-0
5
Ja
n-0
6
Ja
n-0
7
Ja
n-0
8
Ja
n-0
9
January 2000 through October 2009*
Unemployment will likely peak near 10.5 % during this cycle, impacting payroll
sensitive p/c and l/h exposures
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Oct. 2009 unemployment was 10.2%, up 0.4% from Sept. and nearing its
highest level since April 1983 (10.8%)
Unemployment Rate:On the Rise
Average unemployment rate 2000-07 was 5.0%
Previous Peak: 6.3% in June 2003
Trough: 4.4% in March 2007
Oct
-09
Unemployment Rates by State, September 2009: Highest 25 States*
10.5
9.8
9.610
.1
10.1
10.5
9.3
9.1
9.2
8.89.
3
8.9
8.99.
5
11.4
11.6
10.7
10.8
10.9
11.011
.5
13.3
13.0
12.2
15.3
0
2
4
6
8
10
12
14
16
MI NV RI CA SC OR DC FL KY NC AL IL TN OH GA NJ IN MO WA MA MS AZ NY WV ID
Une
mpl
oym
ent R
ate
(%)
*Provisional figures for September 2009, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
The unemployment rate has been rising across the country, but some states are doing much
better than others.
Insurers with heavy footprints in these states will lag behind
6.8
6.7
6.7
6.7
6.76.97.
27.
2
4.8
4.9
6.2
7.07.1
4.2
6.7
8.2
8.3
7.27.3
7.47.
78.38.
5
8.4
8.48.
8
0
2
4
6
8
10
PA ME AK CT WI DE TX NM LA MN HI MD NH AR CO KS WY IA OK VT MT VA UT NE SD ND
Une
mpl
oym
ent R
ate
(%)
Unemployment Rates By State, September 2009: Lowest 25 States*
The unemployment rate has been rising across the country, but some states are doing much
better than others.
*Provisional figures for September 2009, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
15
U.S. Unemployment Rate,(2007:Q1 to 2010:Q4F)*
4.5%
4.5% 4.6% 4.
8% 4.9%
5.4%
6.1%
6.9%
8.1%
9.3% 9.
6% 9.9% 10
.1%
10.0
%
9.8%
9.6%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
10.5%
11.0%
07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4
* Blue bars are actual; Yellow bars are forecasts
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (11/09); Insurance Info. Inst.
Rising unemployment is eroding payrolls and
workers comp’s exposure base.
Unemployment is expected to peak above
10% in early 2010.
17
Labor Underutilization: Broader than Just
Unemployment
11.2%
16.4% 16.5% 16.3%
17.5%17.0%16.8%
10%
11%
12%
13%
14%
15%
16%
17%
18%
Sep-08 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09
Marginally attached and unemployed persons account for 17.5% of the labor
force in Oct. 2009 (1 out every 5.7 people). Unemployment rate alone was 10.2%.
Underutilization shows a broader impact on WC and other commercial exposures.
NOTE: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are availableFor a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-marketrelated reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Percent % of Labor Force
19
Monthly Change Employment*(Thousands)
-72
-144-122-160-137-161
-128-175
-321-380
-597
-681-741
-681-652
-519
-303
-463
-304
-154-219
-190
-800
-700
-600
-500
-400
-300
-200
-100
0
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Job losses since the recession began in Dec. 2007 total 8.2 mill; 15.7 million people are now
defined as unemployed.
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Info. Institute
Monthly losses in Dec. – May were the largest in the post-WW II period
but pace of loss is diminishing
January 2008 through October 2009
Will the “Job Recession” End Soon?Feb.-Nov. 2009 Initial Jobless Claims*
620
640
643
647
650
650 65
865
965
164
863
862
5 632
630
627 63
262
361
761
861
660
758
556
756
055
7 566 57
156
7 573
570
564
554
549
541
533
532
527
524
520
500
520
540
560
580
600
620
640
660
Feb
14
Feb
21
Feb
28
Mar
7M
ar 1
4M
ar 2
1M
ar 2
8A
pr
4A
pr
11A
pr
18A
pr
25M
ay 2
May
9M
ay 1
6M
ay 2
3M
ay 3
0Ju
n 6
Jun
13
Jun
20
Jun
27
Jul 4
Jul 1
1Ju
l 18
Jul 2
5A
ug
1A
ug
8A
ug
15A
ug
22A
ug
29S
ep 5
Sep
12
Sep
19
Sep
26
Oct
3O
ct 1
0O
ct 1
7O
ct 2
4O
ct 3
1N
ov 7
4-week moving avg (000)
*seasonally adjusted; state programs only Source: http://www.dol.gov/opa/media/press/eta/ui/current.htm
Continued drop in initial unemployment claims is a good news.
Portends gradual slowdown in the loss of worker comp exposure
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45Wage & SalaryDisbursementsWC NPW
*Average Wage and Salary data as of 7/1/2009.Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at
http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books
Wage & Salary Disbursements (Payroll Base) vs. Workers Comp
Net Written Premiums
7/90-3/91
Shaded areas indicate recessions
3/01-11/01
Wage & Salary Disbursement (Private Employment) vs. WC NWP$ Billions $ Billions
12/07-?
Weakening payrolls have
eroded $2B+ in workers comp
premiums
0
5
10
15
20
25
30
'26
'28
'30
'32
'34
'36
'39
'41
'43
'45
'47
'49
'52
'54
'56
'58
'60
'62
'65
'67
'69
'71
'73
'75
'78
'80
'82
'84
'86
'88
'91
'93
'95
'97
'99
'01
'04
'06
Frequency: 1926-2008A Long-Term Drift Downward
Manufacturing—Total Recordable CasesRate of Injury and Illness Cases per 100 Full-Time Workers
Note: Recessions indicated by gray bar
Note: Recessions indicated by gray bar.
Sources: NCCI from U.S. Bureau of Labor Statistics; National Bureau of Economic Research
Crisis-Driven Exposure
DriversEconomic Obstacles
to Growth in P/C Insurance
26
New Private Housing Starts,1990-2010F (Millions of Units)
2.07
1.80
1.36
0.90
0.57
0.79
1.48
1.351.
46
1.29
1.20
1.01
1.19
1.47
1.62 1.64
1.57 1.60 1.
71
1.85 1.
960.50.60.70.80.91.01.11.21.31.41.51.61.71.81.92.02.1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F 10F
Exposure growth due to home construction forecast for HO insurers is dim for 2009
with some improvement in 2010.
Impacts also for comml. insurers with construction risk exposure
New home starts plunged 34%
from 2005-2007; Drop through 2009 is 72% (est.)—a net
annual decline of 1.5 million units,
lowest since record began in
1959
I.I.I. estimates that each incremental 100,000 decline in housing starts costs
home insurers $87.5 million in new exposure (gross premium). The net
exposure loss in 2009 vs. 2005 is estimated at about $1.3 billion.
Source: US Department of Commerce; Blue Chip Economic Indicators (11/09); Insurance Information Inst.
27
16.916.916.6
17.117.5
17.817.4
16.516.1
13.1
10.3
11.7
9
10
11
12
13
14
15
16
17
18
19
99 00 01 02 03 04 05 06 07 08 09F 10F
Weak economy, credit crunch are hurting auto sales; Gas prices
have been a factor too.
New auto/light truck sales are expected to experience a net drop of 6.6 million units annually by 2009 compared with 2005, a decline of 39%
and the lowest level since the late 1960s
Impacts of falling auto sales will have a less pronounced effect on auto insurance exposure growth
than problems in the housing market will on home insurers
Auto/Light Truck Sales,1999-2010F (Millions of Units)
Source: US Department of Commerce; Blue Chip Economic Indicators (11/09); Insurance Information Inst.
“Cash for Clunkers” netted about $300M in net new personal auto
premiums
28
Total Industrial Production,(2007:Q1 to 2010:Q4F)
1.5%3.2% 3.6%
0.3% 0.2%
-4.6%
-9.0%
-13.0%
-19.0%
-10.3%
4.5%4.3%4.3%4.5%5.2%5.5%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
07
:Q1
07
:Q2
07
:Q3
07
:Q4
08
:Q1
08
:Q2
08
:Q3
08
:Q4
09
:Q1
09
:Q2
09
:Q3
09
:Q4
10
:Q1
10
:Q2
10
:Q3
10
:Q4
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (1109); Insurance Info. Inst.
Industrial production began
to contracted sharply in late
2008 and plunged in Q1 2009
End of recession in mid-2009, Obama stimulus program are benefiting industrial production, but insurance exposure lags as most gains are productivity driven
Figures for H2 2009 and 2010 revised
upwards to reflect expected impact of Obama stimulus
program and a gradual economic recovery
29
Private Sector Business Starts,1993:Q2-2008:Q4*
175
186
174
180
186
192
188
187 18
918
6 190 19
419
119
9 204
202
195
196
196
206
206
201
192
198
206
206
203
211
205
212
200 20
520
420
419
720
320
9
203
192
192
193
201 20
420
221
0 212
209
216 22
0 223
220
220
210
221
212
204
218
210
209
195
187 18
9
201
150
160
170
180
190
200
210
220
230
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Business starts are down 15% in the current downturn, holding back most types of commercial
insurance exposure
*Latest available as of Oct. 2009.Source: Bureau of Labor Statistics: http://www.bls.gov/news.release/cewbd.t07.htm
Thousands189,000 business starts
were recorded 2008:Q4, the lowest
level since 1995
30
Business Bankruptcy Filings,1980-2009*
43
,69
44
8,1
25
69
,30
06
2,4
36
64
,00
47
1,2
77
81
,23
58
2,4
46
63
,85
36
3,2
35
64
,85
37
1,5
49
70
,64
36
2,3
04
52
,37
45
1,9
59
53
,54
95
4,0
27
44
,36
73
7,8
84
35
,47
24
0,0
99
38
,54
03
5,0
37
34
,31
73
9,2
01
19
,69
52
8,3
22 4
3,5
46
60
,00
0
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
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
% Change Surrounding Recessions
1980-82: 58.6%1980-87: 88.7%1990-91: 10.3%2000-01: 13.0%
2006-09: 204.6%*
*Based estimate of 60,000 business bankruptcies in 2009; actual first half total was 30,333.Source: American Bankruptcy Institute; Insurance Information Institute
There were 30,333 business bankruptcies during the first half of 2009, up 64% from 2008: H1 and on track for about 60,000 for all of 2009, the most since 1993. Current
recession will generate 200%+ surge.
Business bankruptcies contribute to litigation
Year-Over-Year Change in Quarterly U.S. State Tax Revenues, Inflation Adjusted
2.4% 4.
7% 5.6%
9.9%
9.5%
4.4%
1.8%
0.4%
-1.3
%-1
.7%
-3.0
%-7
.6%
-10.
7%0.
0% 1.6%
-0.6
%0.
1%4.
0% 4.7% 5.
7%8.
2%3.
4%6.
0% 7.0%
12.4
%6.
6%4.
2%3.
7%6.
3%2.
6%1.
3% 1.9%
2.3%
0.4% 0.8%
0.4%
3.0%
0.2%
-5.8
%
-17.
8%-1
3.4%
2.4%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
1Q99
2Q99
3Q99
4Q99
1Q00
2Q00
3Q00
4Q00
1Q01
2Q01
3Q01
4Q01
1Q02
2Q02
3Q02
4Q02
1Q03
2Q03
3Q03
4Q03
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
Source: U.S. Census Bureau; Nelson A. Rockefeller Institute of Government: http://www.rockinst.org/pdf/government_finance/state_revenue_report/2009-10-15-SRR_77.pdf
Nationwide, state-tax collections for fiscal year 2009 declined by a record $63 billion, or 8.2 percent from the previous year. That loss
is roughly twice the amount states gained in fiscal relief from
the federal stimulus package.
States revenues were down 17.8% in Q2 2009, the second consecutive quarter of record revenue decline. This will impact public infrastructure spending significantly.
GREEN SHOOTS
Is the Recession Nearing an End?
48
Hopeful Signs that theEconomic Recovery Is Underway
• Recession Appears to be Bottoming Out, Freefall Has Ended• GDP shrinkage has ended; Economy is expanding
• Pace of job losses is slowing
• Major stock market indices well off record lows, anticipating recovery
• Some signs of retail sales stabilization are evident
• Financial Sector is Stabilizing• Banks are reporting quarterly profits
• Many banks expanding lending to very credit worthy people & businesses
• Housing Sector Seems To Be Bottoming Out• Home are much more affordable (attracting buyers)
• Mortgage rates are still low relative to pre-crisis levels (attracting buyers)
• Freefall in housing starts and existing home sales is ending in many areas
• Inflation & Energy Prices Are Under Control
• Consumer & Business Debt Loads Are Shrinking
Source: Ins. Info. Inst.
49
11 Industries for the Next 10 Years: Insurance Solutions Needed
GovernmentEducation
Health CareEnergy (Traditional)Alternative Energy
AgricultureNatural Resources
EnvironmentalTechnology
Light ManufacturingExport Oriented Industries
Inflation Trends: Concerns Over
Stimulus Spending and Monetary Policy
Mounting Pressure on Claim Cost Severities?
51
Annual Inflation Rates(CPI-U, %), 1990-2010F
4.9 5.1
3.0 3.2
2.6
1.51.9
3.3 3.4
1.3
2.5 2.3
3.0
3.8
2.8
3.8
(0.4)
2.0
2.82.92.4
(1.0)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F10F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 11/09.
Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The
recession and the collapse of the commodity bubble have produced temporary deflation.
There is so much slack in the US economy that inflation should not be a concern through 2011, but depreciation of dollar is concern longer run.
54
Top Concerns/Risks for Insurers if Inflation is Reignited
CONCERNS: The Federal Reserve Has Flooded Financial System with Cash (Turned on the Printing Presses), the Federal Govt. Has Approved a $787B Stimulus and the Deficit is Expected to Mushroom to $1.8 Trillion. All Are Potentially Inflationary. What are the potential impacts for insurers? What can/should insurers do to protect themselves from the risks of inflation?
KEY RISKS FROM SUSTAINED/ACCELERATING INFLATION• Rising Claim Severities
Cost of claims settlement rises across the board (property and liability)• Rate Inadequacy
Rates inadequate due to low trend assumptions arising from use of historical data • Reserve Inadequacy
Reserves may develop adversely and become inadequate (deficient)• Burn Through on Retentions
Retentions, deductibles burned through more quickly• Reinsurance Penetration/Exhaustion
Higher costsrisks burn through their retentions more quickly, tapping into re-insurance more quickly and potential exhausting their reinsurance more quickly
Source: Ins. Info. Inst.
Key Threats Facing Insurers Amid
Financial Crisis
Challenges for theNext 5-8 Years
56
Important Issues & Threats Facing Insurers: 2009 - 2015
Source: Insurance Information Inst.
1. Erosion of Capital Losses were larger and occurred more rapidly than is commonly
understood or presumed Max surplus loss at 3/31/09 was 16%=$85B from 9/30/07 peak P/C policyholder surplus loss could have been much larger Decline in PHS of 1999-2002 was 15% over 3 years and was
entirely made up and them some in 2003. Current decline was ~16% in 5 qtrs.
During the opening years of the Great Depression (1929-1933) PHS fell 37%, Assets fell 28% and Net Written Premiums fell by 35%. It took until 1939-40 before these key measures returned to their 1929 peaks.
BOTTOM LINE: Capital and assets fell farther and faster than many believed possible. It will take years to return to the 2007 peaks—likely 2011 (without market relapse).
57
Important Issues & Threats Facing Insurers: 2009 - 2015
Source: Insurance Information Inst.
2. Reloading Capital After “Capital Event” Continued asset price erosion coupled with major “capital
event” would have led to shortage of capital among some companies
Possible Consequences: Insolvencies, forced mergers, calls for govt. aid, requests to relax capital requirements
P/C insurers have come to assume that large amounts of capital can be raised quickly and cheaply after major events (post-9/11, Katrina). This assumption may be incorrect in the current environment
Cost of capital is much higher today (relative “risk-free” rates), reflecting both scarcity & risk
Implications: P/C (re)insurers need to protect capital today and develop detailed contingency plans to raise fresh capital & generate internally. Already a reality for some life insurers.
58
Important Issues & Threats Facing Insurers: 2009 - 2015
Source: Insurance Information Inst.
3. Long-Term Reduction in Investment Earnings Low interest rates, risk aversion toward equities and many
categories of fixed income securities lock in a multi-year trajectory toward ever lower investment gains
Fed actions in Treasury markets keep yields low Many insurers have not adjusted to this new investment
paradigm of a sustained period of low investment gains Regulators will not readily accept it; Many will reject it Implication 1: Industry must be prepared to operate in
environment with investment earnings accounting for a smaller fraction of profits
Implication 2: Implies underwriting discipline of a magnitude not witnessed in this industry in more than 30 years. Yet to manifest itself.
Lessons from the period 1920-1975 need to be relearned
59Source: Insurance Information Inst.
4. Regulatory Overreach Principle danger is that P/C insurers get swept into vast
federal regulatory overhaul and subjected to inappropriate, duplicative and costly regulation (Dual Regulation)
Strong arguments for Optional Federal Charter, but… Pushing for major change is not without risk in the
current highly charged political environment Dangers exist if feds get their nose under the tent Status Quo is viewed as unacceptable by all Disunity within the insurance industry Insurance & systemic risk—Who is important? Other: Less Independent Fed = Less Credible Fed Impact of regulatory changes will be felt for decades Bottom Line: Regulatory outcome is uncertain and risk
of adverse outcome exists
Important Issues & Threats Facing Insurers: 2009 – 2???
60
Health Insurance Reform Debate—Potential Spillover Impacts on P/C Insurers
• 24-Hour Coverage Proposal Would roll WC and med components of auto into natl. health care plan
• Rollback of McCarran-Ferguson Act Would repeal or restrict for health and medical malpractice insurers Slippery slope—Med Mal is a p/c line; Congress will not hesitate to breach M-F for other p/c lines in the
future to show its ire over an issue (e.g., after major cat)
• Exclusion of Med Mal Reform from Health Care Bill Shows powerful influence of trial bar with Congress/Administration
• FTC granted authority to conduct studies “related to insurance” –All Lines!• Reporting of Claims• Adjustments to Medicare Fee Schedules• Patient “Bill of Rights” or Vague Standards of Care• Cost Shifting into WC, Auto from Health System
WC/Auto Medical: more lucrative from provider perspective
• “Windfall” Profit Taxes? Additional Premium Taxes?• Executive Compensation Restrictions?• Public “Option” in P/C Lines—Nat Cat/Wind?• Perception that Feds Regulate Insurance Industry Taking Root
The Affordable Health Care for America Act (H.R. 3962) includes the following benefit to the trial bar:
Section 2531, entitled “Medical Liability Alternatives,” establishes an incentive program for states to adopt and implement alternatives to medical liability litigation. [BUT]…… “a state is not eligible for the incentive payments if that state puts a law on the books that limits attorneys’ fees or imposes caps on damages.”
Jeopardizes some $54 billion in savings in medical care costs that Congressional Budget Office (CBO) says litigation reform would bring.
Source: Andrew Breitbart, http://biggovernment.com; Congressional Budget Office (CBO)
Healthcare Reform Bill is a Trial Lawyer Dream Come True
62Source: Insurance Information Inst.
Creeping Restrictions on Underwriting Attacks on underwriting criteria such as credit,
education, occupation, territory increasing View that use of numerous criteria are discriminatory
and create an adverse impact on certain populations Impact will be to degrade the accuracy of rating systems
to increase subsidies Catastrophe and Predictive modeling also at risk Current social and economic environment could
accelerate these efforts Danger that bans could be codified at federal level
during regulatory overhaul Bottom Line: Industry must be prepared to defend
existing and new criteria indefinitely
Important Issues & Threats Facing Insurers: 2010 - 2015
Source: Insurance Information Inst.
Creeping Socialization and Partial Nationalization of Insurance System
CAT risk is, on net, being socialized directly via state-run insurance and reinsurance mechanisms or via elaborate subsidy schemes involving assessments, premium tax credits, etc.
Some insurers sought/received TARP money Efforts to expand flood program to include wind Health insurance may be substantively socialized Terrorism risk—already a major federal role backed by insurers Eventually impacts for other lines such as personal auto, WC? Feds, states may open to more socialization of private insurance risk Ownership stakes in some insurers could be a slippery slope States like FL will lean heavily on Washington in the event of a mega-
cat that threatens state finance Bottom Line: Additional socialization likely. Can insurers/will
insurers draw the line—and where?
Important Issues & Threats Facing Insurers: 2009 -2015
Source: Insurance Information Inst.
Exploitation of Insurance as a Wealth Redistribution Mechanism
There is a longstanding history of attempts to use insurance to advance wealth redistribution/economic agendas
Urban subsidies; Coastal subsidies are old; Could be extended to workers comp in variety of ways
Insurer focus on underwriting profitability (resulting in higher rates) coupled with poor economic conditions could raise profile of affordability issue
Calls for “excess profits tax” on insurers Increased government involvement in insurance (including
ownership stakes) make this more likely Federal regulation could impose such redistribution schemes Bottom Line: Expect efforts to address social and economic
inequities through insurance
Important Issues & Threats Facing Insurers: 2009 - 2015
65Source: Insurance Information Inst.
Emerging Tort Threat No tort reform (or protection of recent reforms) is
forthcoming from the current Congress or Administration
Erosion of recent reforms is a certainty (already happening)
Innumerable legislative initiatives will create opportunities to undermine existing reforms and develop new theories and channels of liability
Torts twice the overall rate of inflation Influence personal and commercial lines, esp. auto liab. Historically extremely costly to p/c insurance industry Leads to reserve deficiency, rate pressure Bottom Line: Tort “crisis” is on the horizon and will be
recognized as such by 2012-2014
Important Issues & Threats Facing Insurers: 2009 -2015
Over the Last Three Decades, Total Tort Costs* as a % of GDP Appear Somewhat Cyclical
$0
$50
$100
$150
$200
$250
$300
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
E
20
10
E
Tor
t S
yste
m C
osts
1.50%
1.75%
2.00%
2.25%
2.50%
Tor
t C
osts
as
% o
f G
DP
Tort Sytem Costs Tort Costs as % of GDP
Sources: Tillinghast-Towers Perrin, 2008 Update on US Tort Cost Trends, Appendix 1A; I.I.I. calculations/estimates for 2009 and 2010
Billions
*Excludes the tobacco settlement, medical malpractice
2009-2010 Growth in Tort Costs as % of GDP is due in part to shrinking GDP
FINANCIAL STRENGTH &
RATINGS Industry Has Weathered
the Storms Well
70
P/C Insurer Impairments,1969-2008
815
12
711
934
913
12
19
916
14
13
36
49
31 3
450
48
55
60
58
41
29
16
12
31
18 19
49 50
47
35
18
14 15
75
0
10
20
30
40
50
60
70
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
The number of impairments varies significantly over the p/c insurance cycle,
with peaks occurring well into hard markets
Source: A.M. Best; Insurance Information Institute
71
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2008
90
95
100
105
110
115
120
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
Co
mb
ined
Rat
io
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Imp
airm
ent R
ate
Combined Ratio after DivP/C Impairment Frequency
Impairment rates are highly
correlated with underwriting
performance and reached record lows in 2007/08
Source: A.M. Best; Insurance Information Institute
2008 impairment rate was a record low 0.23%, second only to the 0.17% record low in 2007 and barely one-fourth the 0.82% average since 1969
P/C Impairment Frequency vs. Catastrophe Points in Combined Ratio, 1977-2008
0
2
4
6
8
10
12
14
16
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
Cat
astr
op
he
Po
ints
on
Co
mb
ined
Rat
io
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Imp
airm
ent R
ate
Catastrophe Points in Combined RatioP/C Impairment Frequency
Impairment rates are highly
correlated with underwriting
performance and reached record lows in 2007/08
Source: A.M. Best, PCS; Insurance Information Institute
2008 impairment rate was a record low 0.23%, second only to the 0.17% record low in 2007 and barely one-fourth the 0.82% average since 1969
Number of Impairments by State, 1969-2008
22 22 21 20 17 15 15 15 15 14 14 13 11 10 9 9 8 8 6 6 6 6 6 5 5 5 5 5 5 5 4 4 4 3 3 3 2 2 2 2 1 1 0
4166
22242533
63
9691
73
140
0
20
40
60
80
100
120
140
160
TX FL CA IL NY
PA LA MO
OK
OH AZ IN NJ
GA NE
WI
DE
MA
MD
SC
CO TN PR RI
HI
KY MI
NC
WV AL
DC UT
VA
WA IA KS
MN
MS
MT
NM OR
SD VI
WY
AR CT
VT
AK
ME
NH
NV
GU ID ND
No.
of I
mpa
irmen
ts
TX, FL and CA have the largest number of impairments.
Catastrophe risk plays a big role. Other factors influencing
impairments include the political environment and business mix
Source: A.M. Best; Insurance Information Institute
More TX insurers have become impaired over the past 40 years
than in any other state
17 insurers impaired
insurers in WI since
1969
74
Summary of A.M. Best’s P/C Insurer Ratings Actions in 2008*
Under Review, 63 , 4.3%
Upgraded, 59 , 4.0%
Initial, 41 , 2.8%
Other, 59 , 4.0%
Affirm, 1,183 , 81.0%
Downgraded, 55 , 3.8%
*Through December 19.Source: A.M. Best.
74
Despite financial market turmoil, high cat losses and a soft market in 2008, 81% of ratings actions by A.M. Best
were affirmations; just 3.8% were downgrades
and 4.0% upgrades
P/C insurance is by design a resilient in business. The dual threat of financial
disasters and catastrophic losses are
anticipated in the industry’s risk
management strategy.
76
Reasons for US P/C Insurer Impairments, 1969-2008
Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008
Deficient loss reserves and inadequate
pricing are the leading cause of
insurer impairments,
underscoring the importance of
discipline. Investment
catastrophe losses play a much smaller role.
Reinsurance Failure3.7%
Rapid Growth14.3%
Misc.9.1%
Affiliate Impairment
7.9%
Sig. Change in Business
4.2%
Deficient Loss
Reserves/In-adequate Pricing38.1%
Investment Problems
7.0%
Alleged Fraud8.1%
Catastrophe Losses7.6%
Critical Differences Between P/C
Insurers and BanksSuperior Risk Management Model
& Low Leverage Makea Big Difference
78
How Insurance Industry Stability Has Benefitted Consumers
BOTTOM LINE:• Insurance Markets—Unlike Banking—Are Operating
Normally• The Basic Function of Insurance—the Orderly Transfer
of Risk from Client to Insurer—Continues Uninterrupted• This Means that Insurers Continue to:
Pay claims (whereas 146 banks have gone under as of 11/20/09) The Promise is Being Fulfilled
Renew existing policies (banks are reducing and eliminating lines of credit) Write new policies (banks are turning away people and businesses who
want or need to borrow) Develop new products (banks are scaling back the products they offer) Compete Intensively (banks are consolidating, reducing consumer choice)
Source: Insurance Information Institute78
79
• Emphasis on Underwriting Matching of risk to price (via experience and modeling) Limiting of potential loss exposure Some banks sought to maximize volume and fees and disregarded risk
• Strong Relationship Between Underwriting and Risk Bearing Insurers always maintain a stake in the business they underwrite, keeping “skin in the game”
at all times Banks and investment banks package up and securitize, severing the link between risk
underwriting and risk bearing, with (predictably) disastrous consequences—straightforward moral hazard problem from Econ 101
• Low Leverage Insurers do not rely on borrowed money to underwrite insurance or pay claimsThere is no
credit or liquidity crisis in the insurance industry• Conservative Investment Philosophy
High quality portfolio that is relatively less volatile and more liquid• Comprehensive Regulation of Insurance Operations
The business of insurance remained comprehensively regulated whereas a separate banking system had evolved largely outside the auspices and understanding of regulators (e.g., hedge funds, private equity, complex securitized instruments, credit derivatives—CDS’s)
• Greater Transparency Insurance companies are an open book to regulators and the public
Source: Insurance Information Institute79
Reasons Why P/C Insurers Have Fewer Problems Than Banks:
A Superior Risk Management Model
P/C INSURANCE FINANCIAL
PERFORMANCE
A Resilient Industry in Challenging Times
Profitability
Historically Volatile
85
P/C Net Income After Taxes1991-2009:H1 ($ Millions)*
$14,
178
$5,8
40
$19,
316
$10,
870
$20,
598
$24,
404 $3
6,81
9
$30,
773
$21,
865
$3,0
46
$30,
029
$62,
496
$2,3
79
$5,7
57
-$6,970
$65,
777
$44,
155
$20,
559 $3
8,50
1
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,00091 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
09:H
1
*ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields an 4.5% ROAS for 2008 and 2.2%. 2009:Q1 net income was $10.0 billion excl. M&FG.Sources: A.M. Best, ISO, Insurance Information Inst.
2005 ROE= 9.4%2006 ROE = 12.2%2007 ROAS1 = 12.4%2008 ROAS = 0.5%*2009:H1 ROAS = 2.5%*
Insurer profits peaked in 2006 and 2007, but fell 96.2% during the economic
crisis in 2008
85
86
-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 0809:H1
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2009: H1*
*Excludes Mortgage & Financial Guarantee in 2008 and 2009Sources: ISO, Fortune; Insurance Information Institute.
Andrew Northridge
Hugo Lowest CAT losses in 15 years
Sept. 11
4 Hurricanes
Katrina, Rita, Wilma
P/C profitability is cyclical and volatile
Financial Crisis*
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 09Q1*
ROE Cost of Capital
ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2009:H1*
*Excludes mortgage and financial guarantee insurers.Source: The Geneva Association, Ins. Information Inst.
The p/c insurance industry fell well short of is cost of capital in 2008
-13.
2 p
ts
US P/C insurers missed their cost of capital by an average 6.7 points from
1991 to 2002, but on target or better 2003-07, but
falling well short in 2008/09
-1.7
pts
+2.
3 p
ts
-9.0
pts
The cost of capital is the rate of return
insurers need to attract and retain
capital to the business
-7.1
pts
87
-6.0
pts
88
97.5
100.6 100.1 100.7
92.6
99.5101.0
8.9%4.2%
12.7%
14.3% 15.9%
9.6%
4.5%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2008* 2009:H1*
Co
mb
ined
Ratio
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Retr
un
on
Eq
uity*
Combined Ratio ROE*
* 2008/9 figures are return on average statutory surplus. Excludes mortgage and financial guarantee insurers.Source: Insurance Information Institute from A.M. Best and ISO data.
A 100 Combined Ratio Isn’t What it Used to Be: 95 is Where It’s At
Combined ratios must me must lower in today’s depressed
investment environment to generate risk
appropriate ROEs
Underwriting Trends
Financial Crisis Does Not Directly Impact Underwriting
Performance: Cycle, Catastrophes Were 2008’s Drivers
90
115.8
107.5
100.198.4
100.8
92.6
99.5101.0
95.7
90
100
110
120
2001 2002 2003 2004 2005 2006 2007 2008 2009:H1*
P/C Insurance Industry Combined Ratio, 2001-2009:H1*
*Excludes Mortgage & Financial Guaranty insurers in 2008. Including M&FG, 2008=105.1, 2009=100.9 Sources: A.M. Best, ISO.
Best combined ratio since 1949
(87.6)
As recently as 2001, insurers paid out nearly $1.16 for every
$1 in earned premiums
Relatively low CAT
losses, reserve releases
Cyclical Deterioration
90
2005 ratio benefited from heavy use of reinsurance which lowered net losses
91
P/C Reserve Development, 1992-2011E
-6.6
-9.8
13.7
9.9
7.3
-6.7
-9.5
-14.
6
-16 -15
-5
23.2
11.7
1
-4.1
-9.9
-2.1
-8.3
-2.6
2.3
($20)
($15)
($10)
($5)
$0
$5
$10
$15
$20
$25
$30
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E 11E
Pri
or Y
r. R
eser
ve R
elea
se ($
Bill
)
(6)
(4)
(2)
0
2
4
6
8
Impa
ct o
n C
ombi
ned
Rat
io (P
oint
s)
Prior Yr Reserve Development ($ Bill) Impact on Combined Ratio (Points)
.
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. Source: Barclay’s Capital; A.M. Best.
2009 off to a stronger start with AIG unit sales and
Bermuda consolidation
$ Value of deal up 20% in 2009,
volume down 12%
92
Calendar Year vs. Accident Year P/C Combined Ratio:1992- 2010E1
115.
7
106.
9
108.
4
106.
4
107.
8 110.
1
115.
9
107.
3
100.
1
98.3 10
0.9
92.4
95.5
105.
1
101.
9
105.
9
115.
7
106.
9
108.
4
106.
4
105.
8
101.
6
105.
6 107.
8 110.
0 112.
3
100.
8
96.6
96.0
100.
6
93.9
97.4
105.
5
105.
7 109.
4
105.
6
101.
6
105.
8
80
85
90
95
100
105
110
115
120
92 93 94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09E 10E
Calendar Year Accident YearAccident year results show a
more significant deterioration in underwriting performance.
Calendar year results are helped by reserve releases
92
.
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. Source: Barclay’s Capital; A.M. Best.
93
-55-50-45-40-35-30-25-20-15-10-505
101520253035
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:Q
1
Source: A.M. Best, ISO; Insurance Information Institute * Includes mortgage & finl. guarantee insurers
$ B
illi
ons
Insurers earned a record underwriting profit of $31.7B in 2006 and $19.3B in 2007, the largest ever but only the 2nd and 3rd since 1978. Cumulative underwriting deficit from
1975 through 2008 is $442B.
Underwriting Gain (Loss)1975-2009:H1*
$19.8 Bill underwriting loss in 2008
incl. mort. & FG insurers, -$2.2B in H1:09
93
Large underwriting losses are NOT
sustainable in current investment environment
94
Number of Years With Underwriting Profits by Decade, 1920s –2000s
67
10
8
45
0 0
3
0
2
4
6
8
10
1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*
Note: Data for 1920 – 1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data. *2000 through 2008.
Number of Years with Underwriting ProfitsUnderwriting profits were common before the 1980s (40 of the 60 years
before 1980 had combined ratios below 100)—but then they vanished. Not a single underwriting profit was recorded in the 25 years from 1979
through 2003.
94
P/C Premium Growth
Primarily Driven by the Industry’s Underwriting Cycle, Not the Economy
96
-6%
-4%-2%
0%
2%4%
6%
8%10%
12%
14%16%
18%
20%22%
24%
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
09:H
1
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute
Strength of Recent Hard Marketsby NWP Growth
1975-78 1984-87 2000-03
96
Net written premiums fell 1.0%
in 2007 (first decline since 1943)
by 1.4% in 2008, and 4.2% in H1 2009, the first 3-
year decline since 1930-33
Shaded areas denote “hard
market” periods
100
0.8
%0
.8%
0.5
%0
.4%
0.3
%0
.3%
0.5
%0
.6%
0.5
%0
.1% 0.5
% 0.9
%1
.1%
1.3
% 1.7
%2
.6%
2.6
%2
.7% 3.0
%3
.1% 3.4
% 3.7
% 4.0
%4
.0% 4.3
%4
.4% 4.7
%4
.4% 4.7
%4
.6%
4.7
%4
.5%
0.2
%
0%
1%
2%
3%
4%
5%
6%
Ja
n-0
7F
eb
-07
Ma
r-0
7A
pr-
07
Ma
y-0
7J
un
-07
Ju
l-0
7A
ug
-S
ep
-07
Oc
t-0
7N
ov
-07
De
c-0
7J
an
-08
Fe
b-0
8M
ar-
08
Ap
r-0
8M
ay
-08
Ju
n-0
8J
ul-
08
Au
g-
Se
p-0
8O
ct-
08
No
v-0
8D
ec
-08
Ja
n-0
9F
eb
-09
Ma
r-0
9A
pr-
09
Ma
y-0
9J
un
-09
Ju
l-0
9A
ug
-S
ep
-09
Monthly Change in Auto Insurance Prices*
*Percentage change from same month in prior year.Source: US Bureau of Labor Statistics
Auto insurance price increases seem to have leveled off
in recent months at about +4.5%
102
Average Commercial Rate Change,All Lines, (1Q:2004 – 3Q:2009)
-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%
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
KRW Effect
-0.1
% Magnitude of price declines is now
shrinking. Reflects shrinking capital,
reduced investment gains, deteriorating
underwriting performance, higher cat losses and costlier
reinsurance
Capital/Policyholder Surplus (US)
Shrinkage, but Not Enough to
Trigger Hard Market
106
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
$550
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 0809*
U.S. Policyholder Surplus: 1975-2009:H1*
Source: A.M. Best, ISO, Insurance Information Institute. *As of 6/30/09
$ B
illi
ons
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
Actual capacity as of 6/30/09 was $463.0B, up from $437.1B as of 3/31/09 Recent peak was $521.8 as of
9/30/07. Surplus as of 6/30/09 is 11.2% below 2007 peak; Crisis trough was as of 3/31/0916.2% below 2007 peak
The premium-to-surplus ratio stood at $0.92:$1 as of
6/30/09, up from near record low of $0.85:$1 at
year-end 2007
106
Global Reinsurance Capacity Shrank in 2008, Mostly Due to Investments
$360
$300
$270
$280
$290
$300
$310
$320
$330
$340
$350
$360
$370
2007 2008
Global Reinsurance Capacity
Global reinsurance
capacity fell by an estimated 17% in 2008
107
Hurricanes14%
Change in Unrealized
Capital Losses55%
Realized Capital Losses31%
Source of Decline
Source: AonBenfield Reinsurance Market Outlook 2009; Insurance Information Institute.
109
Policyholder Surplus, 2006:Q4 – 2009:H1
$ Billions
$487.1$496.6
$512.8$521.8
$478.5
$455.6
$437.1
$463.0
$505.0$515.6
$517.9
$380
$400
$420
$440
$460
$480
$500
$520
$540
06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2
Source: ISO, AM Best.
Declines Since 2007:Q3 Peak
08:Q2: -$16.6B (-3.2%) 08:Q3: -$43.3B (-8.3%) 08:Q4: -$66.2B (-12.9%) 09:Q1: -$84.7B (-16.2%)
09:Q2: -$58.8B (-11.2%)
Capacity peaked at $521.8 as of 9/30/07
109
110
Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*
3.3%
9.6%
6.9%
10.9%
16.2%
13.8%
6.2%
0%2%4%6%8%
10%12%14%16%18%
6/3
0/1
98
9H
urr
ica
ne
Hu
go
6/3
0/1
99
2H
urr
ica
ne
An
dre
w
12
/31
/93
No
rth
rid
ge
Ea
rth
qu
ak
e
6/3
0/0
1S
ep
t. 1
1A
tta
ck
s
6/3
0/0
4F
lori
da
Hu
rric
an
es
6/3
0/0
5H
urr
ica
ne
Ka
trin
a
Fin
an
cia
lC
ris
is a
s o
f3
/31
/09
**
*Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event. **Date of maximum capital erosion; As of 6/30/09 (latest available) ratio = 11.2%.Source: PCS; Insurance Information Institute.
The financial crisis now ranks as the largest
“capital event” over the past 20+ years
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
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
NWP % changeSurplus % change
*2009 NWP and Surplus figures are % changes for H1:09 vs H1:08Sources: A.M. Best, ISO, Insurance Information Institute
Historically, Hard Markets Follow When Surplus “Growth” is Negative*
Sharp decline in capacity is a necessary but not sufficient
condition for a true hard market
Investment Performance
Investments are a Principle Source of Declining
Profitability
113
Property/Casualty Insurance Industry Investment Gain:1994- 2009:H11
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$64.0
$31.4
$12.4
$56.9$51.9
$57.9
$0
$10
$20
$30
$40
$50
$60
1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain. *2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.
Investment gains fell by 51% in 2008 due to lower yields, poor equity market
conditions. Falling again in 2009.
113
114
P/C Insurer Net Realized Capital Gains, 1990-2009:H1
$2.88$4.81
$9.89
$1.66
$6.00
$9.24$10.81
$13.02
$16.21
$6.63
-$1.21
$6.61$8.92
-$11.17
-$19.80
$18.02
$3.52
$9.70$9.13$9.82
-$20-$18-$16-$14-$12-$10-$8-$6-$4-$2$0$2$4$6$8
$10$12$14$16$18$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
09H
1
Sources: A.M. Best, ISO, Insurance Information Institute.
Realized capital losses hit a record $19.8 billion in 2008 due to financial market turmoil, a $27.7 billion swing from 2007, followed by an $11.2B
drop in H1 2009. This is a primary cause of 2008/2009’s large drop in profits and ROE.
$ Billions
114
115
0.06% 0.12% 0.21%0.40%
0.96%
1.48%
2.37%
3.02%3.40%
4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00% 5.19%
4.19%4.14%
0%
1%
2%
3%
4%
5%
6%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
September 2009 Yield CurvePre-Crisis (July 2007)
Treasury Yield Curves: Pre-Crisis (July 2007) vs. Sept. 2009
Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
Stock dividend cuts will further pressure investment income
Treasury Yield Curve is at its most depressed level in at least 45 years. Investment
income is falling as a result.
Scale and Scope of the Financial Crisis on
Global (Re) Insurance Markets
Significant but Manageable Impacts
Potential Writedowns by Segmentand Region: 2007-2010*
$1,604
$737
$2,470
$218
$75
$301
$890
$381
$1,283
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
US Europe JapanBanks Insurers Other
Insurers account for 7.5% of potential
securities writedowns globally (8.0% in US,
6.3% in US and 7.4% in Japan)
Billions of US Dollars
$2,712
$1,193
$4,054
* Includes loans and securities. Europe includes euro countries plus United Kingdom. Insurance category includes life and non-life insurers.Source: IMF Global Financial Stability Report, April 2009.
$1,604
$218
$890
$0
$250
$500
$750
$1,000
$1,250
$1,500
$1,750
Banks Insurers Others
US Financial Institutions FacingHuge Losses from the Credit Crunch*
*Estimate of financial sector writedowns, 2007-2010, as of April 2009. Includes loans and securities.Source: IMF Global Financial Stability Report, April 2009.
$ BillionsThe IMF estimates total US financial sector writedowns from soured assets will reach
$2.712 trillion, up 93% from $1.405 trillion from its Sept. 2008 estimate. Insurer losses
account for just 8% of the total.
$218B or 8% of estimated total (bank+insurer) losses will be
sustained by insurers
121
Catastrophic Loss
Catastrophe Losses Trends Are Trending Adversely
123
U.S. Insured Catastrophe Losses$7
.5$2
.7$4
.7$2
2.9
$5.5 $1
6.9
$8.3
$7.4
$2.6 $1
0.1
$8.3
$4.6
$26.
5$5
.9 $12.
9 $27.
5
$6.7
$26.
0$7
.5$1
00.0
$61.
9
$9.2
$0
$20
$40
$60
$80
$100
$120
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*
20??
*Based on PCS data through June 30 = $7.5 billion.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Source: Property Claims Service/ISO; Insurance Information Institute
$ Billions2008 CAT losses exceeded
2006/07 combined. 2005 was by far the worst year ever for
insured catastrophe losses in the US, but the worst has yet to come.
$100 Billion CAT year is coming
eventually
123
2009 cat losses were down 29% in H1 from $10.6B in H1 2008
Top 12 Most Costly Disasters in US History, (Insured Losses, $2008)
$4.2 $5.2 $6.2 $7.3 $8.1 $8.5$11.3 $11.3 $12.5
$22.8 $23.8
$45.3
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo(1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Northridge(1994)
Ike(2008)*
9/11Attacks(2001)
Andrew(1992)
Katrina(2005)
$ B
illi
ons
*PCS estimate as of August 1, 2009.Sources: PCS; Insurance Information Institute inflation adjustments.
8 of the 12 most expensive disasters in US history have occurred since 2004;
8 of the top 12 disasters affected FL
In 2008, Ike became the 4th most expensive insurance event and 3rd most
expensive hurricane in US history arising from about 1.35 mill claims
124
Distribution of US Insured CAT Losses: TX, FL, LA vs US, 1980-2008*
Rest of US, $176, 60%
Louisiana, $33.6, 11%
Texas, $31.2,10%
Florida, $57.1,19%
Florida accounted for 19% of all US insured CAT losses from 1980-2008:
$57.1B out of $297.9B
*All figures (except 2006-2008 loss) have been adjusted to 2005 dollars.Source: PCS division of ISO.
$ Billions of Dollars
126
States With Highest Insured Catastrophe Losses in 2008
$ Billions
$10.2
$2.2$1.6 $1.3 $1.0
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
Texas California Minnesota Ohio Georgia
Source: PCS; Insurance Information Institute.
In 2008, insurers paid $26 billion to 3.9 million victims of 37 major
natural catastrophes across 40 states. 64% of the payouts (in $ terms) went
to homeowners, 27% to business owners and 9% to vehicle owners
Total Value of Insured Coastal Exposure (2007, $ Billions)
$2,378.9$895.1
$772.8$635.5
$479.9$224.4
$191.9$158.8$146.9$132.8
$92.5$85.6
$60.6$55.7$51.8$54.1
$14.9
$2,458.6
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000
FloridaNew York
TexasMassachusetts
New JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaAlabamaGeorgia
DelawareNew Hampshire
MississippiRhode Island
Maryland
Source: AIR Worldwide
In 2007, Florida still ranked as the #1 most exposed state to hurricane loss,
with $2.459 trillion exposure, an increase of $522B or 27% from $1.937
trillion in 2004.
The insured value of all coastal property was $8.9 trillion in 2007, up
24% from $7.2 trillion in 2004.
$522B increase since 2004, up 27%
127
U.S. Residual Market Property Policies In-ForceExposure
Source: PIPSO; Insurance Information Institute
931.6
1,319.7
1,785.0
1,196.5
1,642.31,741.7
2,209.3
2,840.42,621.32,780.6
1,458.1
2,203.9
0
500
1,000
1,500
2,000
2,500
3,000
1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
In the 19-year period between 1990 and 2008, total residual market policy count (FAIR & Beach/Windstorm Plans) has nearly tripled to more than 2.6
million policies
Katrina, Rita and Wilma
4 Florida Hurricanes
U.S. Residual Market Exposure to Loss (Billions of Dollars)
Source: PIPSO; Insurance Information Institute
$54.7
$150.0
$281.8$244.2
$292.0
$372.3$430.5
$771.9
$696.4$656.7
$221.3
$419.5
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
In the 19-year period between 1990 and 2008, total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54.7bn in 1990 to $696.4bn in 2008.
Katrina, Rita and Wilma
4 Florida Hurricanes
Hurricane Andrew
130
Insurance Information Institute On-Line
THANK YOU FOR YOUR TIME AND
YOUR ATTENTION!
Download at www.iii.org/presentations/
130