overview & outlook for the p/c insurance industry an industry at the crossroads
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Overview & Outlook for the P/C Insurance Industry An Industry at the Crossroads. Insurance Information Institute April 23, 2007. Robert P. Hartwig, Ph.D., CPCU, President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038 - PowerPoint PPT PresentationTRANSCRIPT
Overview & Outlook for the P/C Insurance Industry
An Industry at the Crossroads
Insurance Information Institute
April 23, 2007
Robert P. Hartwig, Ph.D., CPCU, President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org
Presentation Outline
• P/C Profit Overview—2006, A Cyclical Peak• Underwriting Trends: Unsustainable?• Premium Growth: Approaching a Standstill• Pricing: Competitive Pressures Mounting• Expenses: Will Ratios Rise a Growth Slows?• Capital & Capacity: UnderleveragedROE Pressure• Catastrophe Loss Management
What is the Appropriate Role for Government?• Reinsurance Summary• Financial Strength & Ratings• Investments: Less Bang for the Buck• Tort System: Great News for a Change (Mostly)• Legislative & Regulatory Update• Q&A
P/C PROFIT:An Historical Perspective
Profits in 2006 ReachedTheir Cyclical Peak
Highlights: Property/Casualty,2006 vs. 2005
Item 2006 2005 Change
Net Written Prem. 443,778 425,500 +4.3%
Loss & LAE 283,700 311,624 -9.0%
Net UW Gain (Loss) 31,232 (5,612) N/A
Net Inv. Gain** 55,561 59,430 -6.4%
Net Income (a.t.) 63,695 44,155 +44.3%
Surplus* 487,123 425,760 +14.4%
Combined Ratio* 92.4 100.9 -8.5 pts.*Comparison is with year-end 2004 value. **Includes invest income and realized investment gains/losses.Source: ISO, Insurance Information Institute
Growth up due to coastal property premiums
Record underwriting profit: Unsustainable
P/C Net Income After Taxes1991-2006 ($ Millions)*
$14,178
$5,840
$19,316
$10,870
$20,598$24,404
$36,819
$30,773
$21,865
-$6,970
$3,046
$30,029
$63,695
$44,155
$20,559
$38,501
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
*ROE figures are GAAP; 1Return on avg. Surplus.Sources: A.M. Best, ISO, Insurance Information Inst.
2001 ROE = -1.2%2002 ROE = 2.2%2003 ROE = 8.9%2004 ROE = 9.4%2005 ROE= 10.5%2006 ROAS1 = 14.0%
Though up in 2006, insurer profits are highly volatile (2001 was the industry’s worst year ever). ROEs
generally fall below that of most other industries.
-5%
0%
5%
10%
15%
20%
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2008E
*2007-08 P/C insurer ROEs are I.I.I. estimates.Source: Insurance Information Institute; Fortune
Andrew Northridge
Hugo Lowest CAT losses in 15 years
Sept. 11
4 Hurricanes
Katrina, Rita, Wilma
P/C profitability is cyclical, volatile and vulnerable
RETURN ON EQUITY (Fortune):Stock & Mutual vs. All Companies*
*Fortune 1,000 group.
Source: Fortune Magazine, Insurance Information Institute.
13%
13.4%14.6%
10.0%
14.9%13.0%
11%
13%
15%14%
13%
7%6%
11%12%
8%
11%12%
10%9%
-2%
8%7%
2%
10%
10.4%15.0%
14.0%
13.9%12.6%
-4%-2%0%2%4%6%8%
10%12%14%16%
1998 2000 2001 2002 2003 2004 2005 2006E 2007F 2008F
StockMutualAll Cos.*
Mutual insurer ROEs are typically lower than for stock
companies, but gap has narrowed. All are cyclical.
-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 0607
F08
F
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2008F
*2007-08 P/C insurer ROEs are I.I.I. estimates.Source: Insurance Information Institute; ISO, A.M. Best.
1975: 2.4%
1977:19.0% 1987:17.3%
1997:11.6%
2006E:14.0%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years
10 Years 9 Years
-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 06E
ROE Cost of Capital
ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2006
Source: The Geneva Association, Ins. Information Inst.
The p/c insurance industry achieved its cost of capital in 2005/6 for the first time in many years
-13.
2 p
ts
+0.
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 2003-06
+1.
0 p
ts
+5.
5 p
ts
-9.0
pts
The cost of capital is the rate of return
insurers need to attract and retain
capital to the business
Insurance & Reinsurance Stocks:Strong Finish in 2006
0.61%
9.53%
10.33%
16.57%
19.95%
16.24%
13.62%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
S&P 500
Life/Health
Reinsurers
P/C
All Insurers
Multiine
Brokers
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Total Returns for 2006
P/C insurer & reinsurer stocks rallied in late 2006
as hurricane fears dissipated and insurers turned in strong resultsBroker stocks held back
by weak earnings
Insurance & Reinsurance Stocks: Slow Start in 2007 in P/C, Reins
8.23%
0.97%
2.84%
0.08%
-1.44%
8.16%
4.66%
-2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%
S&P 500
Life/Health
Reinsurers
P/C
All Insurers
Multiline
Brokers
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Total YTD Returns Through April 20, 2007
P/C insurance, reinsurance stocks lagging on soft market
concerns and worries over 2007 hurricane season
Advertising Expenditures by P/C Insurance Industry, 1999-2005
$ Billions
$1.736 $1.737 $1.803$1.708
$2.975
$2.111
$1.882
$1.5
$1.7
$1.9
$2.1
$2.3
$2.5
$2.7
$2.9
$3.1
99 00 01 02 03 04 05Source: Insurance Information Institute from consolidated P/C Annual Statement data.
Ad spending by P/C insurers is at a record high, signaling
increased competition
UNDERWRITING
Extremely Strong 2006, Momentum for 2007
115.8
107.4
100.198.3
100.7
92.4
98.696.6
90
100
110
120
01 02 03 04 05 06 07F 08F
P/C Industry Combined Ratio
Sources: A.M. Best; ISO, III. *Estimates/forecasts based on III’s 2007 Early Bird survey.
2005 figure benefited from heavy use of reinsurance which lowered net losses
2006 produced the best underwriting result
since the 87.6 combined ratio in 1949
As recently as 2001, insurers were paying out nearly $1.16 for
every dollar they earned in premiums
2007/8 deterioration due primarily to falling rates, but results still strong assuming
normal CAT activity
87.6
91.2
92.1 92.3 92.4 92.493.1 93.1 93.3
93.0
85
86
87
88
89
90
91
92
93
94
1949 1948 1943 1937 1935 2006 1950 1939 1953 1936
Ten Lowest P/C Insurance Combined Ratios Since 1920
Sources: Insurance Information Institute research from A.M. Best data.
The 2006 combined ratio of 92.4 was the best since the 87.6 combined in 1949
The industry’s best underwriting years are associated with
periods of low interest rates
-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
Underwriting Gain (Loss)1975-2006
Source: A.M. Best, Insurance Information Institute
$ B
illi
ons
Insurers earned an underwriting profit of $31.2 billion in 2006, the largest ever but only
the second since 1978. Despite the 2006 underwriting profit, the cumulative
underwriting deficit since 1975 is $419 billion.
110.
3
110.
2
107.
6
103.
9
109.
7
112.
3
111.
1
122.
3
110.
2
102.
5
105.
1
94
102.
0
112.
5
85
90
95
100
105
110
115
120
125
93 94 95 96 97 98 99 00 01 02 03 04 05 06F
Commercial Lines Combined Ratio, 1993-2006E*
Source: A.M. Best; Insurance Information Institute .
Outside CAT-affected lines, commercial
insurance is doing fairly well. Caution is
required in underwriting long-
tail commercial lines.
2006 results will benefited from relatively disciplined underwriting
and low CAT losses
Commercial coverages have exhibited extreme variability. Are current
results anomalous?
103.
9
104.
5
103.
5
104.
9
99.8 10
2.7
104.
5
109.
9
110.
9
105.
3
98.4
94.3 96
.4
91.0
85
90
95
100
105
110
115
93 94 95 96 97 98 99 00 01 02 03 04 05 06F
Personal LinesCombined Ratio, 1993-2006E
Source: A.M. Best; Insurance Information Institute.
A very strong 2006 resulted from favorable frequency & severity
trends and low CAT activity
$1
0.8
$2
2.7
$1
3.9
$9
.9
$8
.0
$5
.0
$2.0$0.4
2.41.9
1.1
0.4
6.5
3.63.5
0.1
$0
$5
$10
$15
$20
$25
2000 2001 2002 2003 2004 2005E 2006E 2007E
Re
se
rve
De
ve
lop
me
nt
($B
)
0
1
2
3
4
5
6
7
Co
mb
ine
d R
ati
o P
oin
ts
PY Reserve Development Combined Ratio Points
Impact of Reserve Changes on Combined Ratio
Source: A.M. Best, Lehman Brothers for years 2005E-2007F
Reserve adequacy has improved substantially
The Big Question: Is the Industry More Disciplined Today?
• Signs suggest that the answer is yes• Current period of sustained underwriting profitability is the first
since the 1950s• While prices are falling, underlying lost cost trends (frequency and
severity trends) are generally favorable to benign Suggest impact of falling prices will be less pronounced than late 1990s
• Reserve situation appears much improved an under control• Management Information Systems: Much More Sophisticated
Insurers can monitor and make adjustments much more quickly Adjustments made quickly by line, geographic area, producer, etc.
• Investment Income Relative to late 1990s, interest rates and stock markets returns are lower Has effect of imposing (some) discipline
• Ratings Agencies More stringent capital requirements Quicker to downgrade
PREMIUM GROWTH
Deceleration in 2006, Even Slower in 2007
-10%
-5%
0%
5%
10%
15%
20%
25%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
F2
00
8F
20
09
F2
01
0F
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
Strength of Recent Hard Markets by NWP Growth*
1975-78 1984-87 2001-04
*2007-10 figures are III forecasts/estimates. 2005 growth of 0.4% equates to 1.8% after adjustment for a special one-time transaction between one company and its foreign parent. 2006-2008 figures from III Groundhog Survey.
2006-2010 (post-Katrina) period could resemble 1993-97
(post-Andrew)
2005: biggest real drop in premium since early 1980s
Growth in Net Written Premium, 2000-2008F
Source: A.M. Best; Forecasts from the Insurance Information Institute’s Groundhog survey: http://www.iii.org/media/industry/financials/groundhog2007/.
5.1%
8.1%
14.1%
9.8%
4.7%
0.3%
4.3%
1.8% 1.9%
2000 2001 2002 2003 2004 2005 2006 2007F 2008F
P/C insurers will experience their slowest growth rates since the late 1990s…but underwriting results are
expected to remain healthy
PRICING
Under Pressure in 2007
$651 $6
68 $691 $7
05
$703
$685
$690 $7
24
$780 $8
23 $851
$847
$838
$847
$600
$650
$700
$750
$800
$850
$900
$950
94 95 96 97 98 99 00 01 02 03 04 05* 06* 07*
Average Expenditures on Auto Insurance
*Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute
Countrywide auto insurance expenditures
are expected to fall 0.5% in 2007, the first drop
since 1999
Lower underlying frequency and modest
severity are keeping auto insurance costs in check
$418$440 $455
$481 $488 $508$536
$593
$668
$729
$787$835
$400$450$500$550$600$650$700$750$800$850$900
95 96 97 98 99 00 01 02 03 04 05* 06*
Average Expenditures on Homeowners Insurance**
*Insurance Information Institute Estimates/Forecasts**Excludes cost of flood and earthquake coverage.Source: NAIC, Insurance Information Institute
Countrywide home insurance expenditures rose an estimated 6% in 2006
Homeowners in non-CAT zones will see
smaller increases, but larger in CAT zones
Average Commercial Rate Change,All Lines, (1Q:2004 – 4Q:2006)
-0.1%
-3.2%
-7.0%
-9.4%-9.7%
-4.6%
-2.7%-3.0%
-5.3%
-9.6%
-5.9%
-8.2%
-12%
-10%
-8%
-6%
-4%
-2%
0%
1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Magnitude of rate decreases has diminished greatly since
mid-2005 but is growing again
KRW Effect
Average Commercial Rate Change by Line: 4Q99 – 4Q06
Source: Council of Insurance Agents & Brokers
Commercial accounts trended downward from early 2004 to mid-2005
though that trend moderated post-Katrina
Average Commercial Rate Change by Account Size: 4Q99 – 4Q06
Source: Council of Insurance Agents & Brokers
Accounts of all sizes are renewing
downward and more quickly than in 06Q3
Percent of Commercial Accounts Renewing w/Positive Rate Changes, 2nd Qtr. 2006
71%
48%
28%21%
63%
32%
21%
12% 10%
35%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Southeast Southwest Pacific NW Northeast Midwest
Commercial Property Business Interruption
Source: Council of Insurance Agents and Brokers
Largest increases for Commercial Property & Business Interruption are in the Southeast, smallest in Midwest
Percent of Commercial Accounts Renewing w/Positive Rate Changes, 4th Qtr. 2006
25%
6% 6%
0%
8%6% 6%
3%
0%
11%
0%
5%
10%
15%
20%
25%
30%
Southeast Southwest Pacific NW Northeast Midwest
Commercial Property Business Interruption
Source: Council of Insurance Agents and Brokers
Largest increases for Commercial Property &
Business Interruption are in the Southeast, but
are diminishing; Smallest in Midwest
Commercial Accounts Rate Changes,2nd Qtr. 2006 vs. 4th Qtr. 2006
-4.5%-5.6%
-3.6%-2.3%
-9.3%-8.1%
-9.6%-7.7% -8.6%
-6.9%
9.3%
-8.1%
-15%
-10%
-5%
0%
5%
10%
CommercialAuto
WorkersComp
CommercialProperty
GeneralLiability
Umbrella Average
2Q06 4Q06
Source: Council of Insurance Agents and Brokers
Even commercial property is now
renewing down in 2006
EXPENSES
Will Expense Ratio Rise as Premium Growth Slows?
Personal vs. Commercial Lines Underwriting Expense Ratio*
23.4%24.3%
25.0%
30.8%
24.4%
24.5%24.8%25.6%
24.6%
25.6%24.7%
26.6%25.6%
30.0%
31.1%
29.4%29.9%
29.1%
26.6%
25.0%
20%
22%
24%
26%
28%
30%
32%
96 97 98 99 00 01 02 03 04 05
Personal Commercial
*Ratio of expenses incurred to net premiums written.Source: A.M. Best; Insurance Information Institute
Expenses ratios will likely rise as premium
growth slows
CAPACITY/SURPLUS
The Industry in Underleveraged
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
$550
7576777879808182838485868788899091929394959697989900010203040506
U.S. Policyholder Surplus: 1975-2006
Source: A.M. Best, ISO, Insurance Information Institute.
$ B
illi
ons
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
Capacity as of 12/31/06 was $487.1B (est.), 14.4% above year-
end 2005, 71% above its 2002 trough and 46% above its 1999
peak.Foreign reinsurance and residual market
mechanisms absorbed 45% of 2005 CAT
losses of $62.1B
Capital Raising by Class Within 15 Months of KRW
Existing Cos., $12.145 , 36%
New Cos., $8.898 , 26%
Sidecars, $6.359 , 19%Insurance Linked
Securities, $6.253 , 19%
Insurers & Reinsurers raised $33.7 billion in the wake of Katrina,
Rita, Wilma
Source: Lane Financial Trade Notes, January 31, 2007.
$ Billions
Annual Catastrophe Bond Transactions Volume, 1997-2006
$966.9
$1,729.8
$4,693.4
$1,991.1
$1,142.8$1,219.5$846.1$984.8
$1,139.0
$633.0
$0$500
$1,000$1,500
$2,000$2,500$3,000
$3,500$4,000
$4,500$5,000
97 98 99 00 01 02 03 04 05 06
Ris
k C
apita
l Iss
ues
($ M
ill)
02
46
81012
1416
1820
Nu
mb
er o
f Iss
uan
ces
Risk Capital Issued Number of Issuances
Source: MMC Securities and Guy Carpenter; Insurance Information Institute.
Catastrophe bond issuance has soared in the wake of Hurricanes
Katrina and the hurricane seasons of 2004/2005
£8.9
£10.
9
£10.
2
£10.
0
£10.
3
£10.
2
£10.
1 £11.
3 £12.
2
£14.
4
£15.
0
£13.
7 £14.
8
£16.
1
£9.9
£7.0
£8.0
£9.0
£10.0
£11.0
£12.0
£13.0
£14.0
£15.0
£16.0
£17.0
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Lloyd’s Capacity (Global)
Lloyd’s capacity is up 1.3 GBP or 8.8% in 2007 and 63% since its 1999 trough
Sources: Lloyd’s
Billions of GBP
INVESTMENT IRONY
Markets & Interest Rates Up, Returns Flat
Property/Casualty Insurance Industry Investment Gain*
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7$56.9
$51.9
$57.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 02 03 04 05** 06*Investment 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. Source: ISO; Insurance Information Institute.
Investment gains fell in 2006 and are now only
comparable to gains seen in the late 1990s
$0
$10
$20
$30
$40
$50
$60
7576777879808182 83848586878889909192939495969798 9900010203040506
Net Investment Income$
Bil
lion
s
Growth History
2002: -1.3%
2003: +3.9%
2004: +3.4%
2005: +24.4%**
2006: +5.2%
Source: A.M. Best, ISO, Insurance Information Institute;**Includes special dividend of $3.2B. Increase is 15.7% excluding dividend.
Investment income posted modest gains in 2006
-30%
-20%
-10%
0%
10%
20%
30%
40%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Source: Ibbotson Associates, Insurance Information Institute. *Through April 20, 2007.
Total Returns for Large Company Stocks: 1970-2007*
S&P 500 was up 13.62% in 2006, Up 4.66% YTD 2007*
Markets rose in 2006 for the 4th consecutive year
US P/C Net Realized Capital Gains,1990-2006 ($ Millions)
$2,880
$4,806
$9,893
$1,664
$5,997
$9,244$10,808
$18,019
$13,016
$16,205
$6,631
-$1,214
$6,610
$3,3
59
$9,701$9,125
$9,818
-$5,000
$0
$5,000
$10,000
$15,000
$20,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06Sources: A.M. Best, ISO, Insurance Information Institute.
Realized capital gains rebounded strongly in
2004/5 but fell sharply in 2006 despite strong stock
market as insurers “bank” their gains
CATASTROPHICLOSS
Insurers Accused of Crying Wolf Over Cats
U.S. Insured Catastrophe Losses*$7
.5
$2.7
$4.7
$22.
9
$5.5 $1
6.9
$8.3
$7.4
$2.6 $1
0.1
$8.3
$4.6
$26.
5
$5.9 $1
2.9 $2
7.5
$100
.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
20??
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. 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
$ Billions
2006 was a welcome respite. 2005 was by far the worst
year ever for insured catastrophe losses in the US, but the worst has yet to come.
$100 Billion CAT year is coming soon
U.S. Catastrophe Losses 2006: States With Largest Losses ($ Millions)
*ISO defines a catastrophe event as an event causing $25 million or more in insured property losses.
Source: ISO; Insurance Information Institute
$601$688
$873$878
$1,500
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
Indiana Missouri Tennessee Texas Kansas
SURPRISE!! Indiana led the US with $1.5 billion in
insured CAT losses in 2006
Some 33 catastrophe events* in 34 states cost insurers an estimated $8.8bn in 2006, compared with $61.9bn in 2005. Cat losses in the following five states -- totaling $4.5bn -- represent half the
total catastrophe losses for the year.
Number of Tornadoes,1985 – 2006p
1071 12
16
941
1376
1819
1254 13
33
1132
1133
856
702
65676
5
684
1297
1173
1082 12
34
1173
1148
1424
1345
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06p
Source: US Dept. of Commerce, Storm Prediction Center, National Weather Service; Ins. Info. Inst.
There are usually more than 1,000 confirmed tornadoes each year in the US. They
accounted for about 25% of catastrophe losses since 1985
$9 $11 $11 $12 $16$25 $27
$38
$88
$108
$0
$20
$40
$60
$80
$100
$120
San Jo
se, C
A (7-1
-191
1; 6.
6)
Portla
nd, O
R (8-1
2-18
77; 6
.3)
San F
rancis
co (6
-1-1
838;
7.2)
Mar
ked T
ree,
AR (1-5
-184
3; 6.
5)
North
ridge
, CA (1
-17-
1994
; 6.7)
Haywar
d, CA (1
0-21
-186
8; 6.
8)
Ft. Tejo
n, CA (1
-9-1
857;
7.9)
Charle
ston, S
C (8-3
-188
6; 7.
3)*
New M
adrid
, MO (2
-7-1
812;
7.7)
*
San F
rancis
co (4
-18-
1906
; 7.9)
$ B
illi
ons
With development along major fault lines, the threat of
$25B+ quakes looms large
Source: AIR Worldwide
(Billions of 2005 Dollars)
3 of the Top 10 are not West Coast events
Insured Losses from Top 10 Earthquakes Adjusted to 2005 Exposure Levels
Percentage of California Homeowners with Earthquake
Insurance, 1994-2004*
32.9%33.2%
19.5%17.4%
14.6%13.3%13.8%12.0%
15.8%15.7%16.8%
0%
5%
10%
15%
20%
25%
30%
35%
94 96 97 98 99 00 01 02 03 04 06**
*Includes CEA policies beginning in 1996. **2006 estimate from Insurance Information Network of CA.Source: California Department of Insurance; Insurance Information Institute.
The vast majority of California homeowners forego earthquake
coverage & play Russian Roulette with their most valuable asset.
$20.0$24.0 $26.0
$33.0 $33.0 $34.0 $35.0$41.0 $42.0
$80.0
$0$10$20$30$40$50$60$70$80$90
Homes
tead
Hurr
(194
5, FL)
Ft. Lau
derdale
Hurr
(194
7, FL)
Donna (
1960
, FL)
Okeech
obee
Hurr
(192
8, F
L)
Galve
ston (
1900
, TX)
Bestsy
(196
5, LA)
LI Exp
ress
(193
8, NY)
Katrin
a (20
05, L
A)*
Andre
w (199
2, FL)*
Mia
mi H
urr (1
926,
FL)
$ B
illi
ons
With rapid coastal development,
$40B+ storms will be more common
Source: AIR Worldwide **ISO/PCS estimate as of June 8, 2006
(Billions of 2005 Dollars) Plurality of worst-case
scenarios involve Florida
Insured Losses from Top 10 Hurricanes Adjusted to 2005 Exposure Levels
Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,
1986-2005¹
Utility Disruption0.1%
Terrorism7.7%
All Tropical
Cyclones3
47.5%
Tornadoes2
24.5%
Water Damage0.1%
Civil Disorders0.4%
Fire6
2.3%
Wind/Hail/Flood5
2.8%
Earthquakes4
6.7%
Winter Storms7.8%
Source: Insurance Services Office (ISO)..
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2005 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood Insurance Program. 6 Includes wildland fires.
Insured disaster losses totaled $289.1 billion from
1984-2005 (in 2005 dollars). Tropical systems accounted for nearly half of all CAT losses from 1986-2005, up
from 27.1% from 1984-2003.
Total Value of Insured Coastal Exposure (2004, $ Billions)
$1,901.6$740.0
$662.4$505.8
$404.9$209.3
$148.8$129.7$117.2$105.3
$75.9$73.0
$46.4$45.6$44.7$43.8
$12.1
$1,937.3
$0 $500 $1,000 $1,500 $2,000 $2,500
FloridaNew York
TexasMassachusetts
New JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaAlabamaGeorgia
DelawareNew Hampshire
MississippiRhode Island
Maryland
Source: AIR Worldwide
Florida & New York lead the way for insured coastal property at more than $1.9 trillion each.
Northeast state insured coastal exposure totals
$3.73 trillion.
Insured Coastal Exposure as a % of Statewide Insured Exposure (2004, $ Billions)
63.1%60.9%
57.9%54.2%
37.9%33.6%33.2%
28.0%25.6%25.6%
23.3%13.5%
12.0%11.4%
8.9%5.9%
1.4%
79.3%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
FloridaConnecticut
New YorkMaine
MassachusettsLouisiana
New JerseyDelaware
Rhode IslandS. Carolina
TexasNH
MississippiAlabamaVirginia
NCGeorgia
Maryland
Source: AIR Worldwide
After FL, many Northeast states have
among the highest coastal exposure as a share of all insured
exposure in the state.
Value of Insured Residential Coastal Exposure (2004, $ Billions)
$512.1$306.6$302.2
$247.4$205.5
$88.0$65.1$64.5$60.0$60.0
$36.5$29.7$26.6$25.9$24.8$20.9
$5.4
$942.5
$0 $200 $400 $600 $800 $1,000
FloridaNew York
MassachusettsTexas
New JerseyConnecticut
LouisianaS. Carolina
MaineVirginia
North CarolinaAlabamaGeorgia
DelawareRhode Island
NewMississippiMaryland
Source: AIR
Florida has nearly $1 trillion in insured residential exposure and
counting. Nearly 1,000 people move to the state per day!
Value of Insured Commercial Coastal Exposure (2004, $ Billions)
$994.8$437.8
$355.8$258.4
$199.4$121.3
$83.7$69.7
$52.6$45.3$43.3$39.4
$23.8$20.9$19.9$17.9$6.7
$1,389.6
$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600
New YorkFlorida
TexasMassachusetts
New JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaGeorgia
AlabamaMississippi
New HampshireDelaware
Rhode IslandMaryland
Source: AIR
Commercial property exposure also implies significant business interruption losses.
Source: AIR Worldwide
Insured Losses: $110BEconomic Losses: $200B+
$70
$30
$5 $4 $1$0
$20
$40
$60
$80
NY NJ PA CT Other
Nightmare Scenario: Insured Property Losses for NJ/NY CAT 3/4 Storm
Total Insured Property Losses =
$110B, nearly 3 times that of
Hurricane Katrina
Distribution of Insured Property Losses,
by State, ($ Billions)
The 2007 Hurricane Season:
Preview to Disaster?
Outlook for 2007 Hurricane Season: 85% Worse Than Average
Average* 2005 2007F
Named Storms 9.6 28 17Named Storm Days 49.1 115.5 85
Hurricanes 5.9 14 9Hurricane Days 24.5 47.5 40Intense Hurricanes 2.3 7 5
Intense Hurricane Days 5 7 11
Accumulated Cyclone Energy 96.2 NA 170
Net Tropical Cyclone Activity 100% 275% 185%*Average over the period 1950-2000.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 3, 2007.
Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2007
Average* 2007F
Entire US Coast 52% 74%
US East Coast Including Florida Peninsula
31% 50%
Gulf Coast from FL Panhandle to Brownsville, TX
30% 49%
ALSO…Above-Average Major Hurricane
Landfall Risk in Caribbean for 2007
*Average over the period 1950-2000.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 3, 2007.
REINSURANCE MARKETS
Big Risk, Big Reward orBig Government?
Share of Losses Paid by Reinsurers, by Disaster*
30%25%
60%
20%
45%
0%
10%
20%
30%
40%
50%
60%
70%
Hurricane Hugo(1989)
Hurricane Andrew(1992)
Sept. 11 TerrorAttack (2001)
2004 HurricaneLosses
2005 HurricaneLosses
*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for 2005.Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.
Reinsurance is playing an increasingly
important role in the financing of mega-CATs; Reins. Costs
are skyrocketing
$19.93 $19.44$21.21
$24.85$26.69
$29.50$30.63
$28.76
$25.33
$10
$15
$20
$25
$30
$35
97 98 99 00 01 02 03 04 05
$ B
illi
ons
Pre
miu
ms
Wri
tten
US reinsurance premiums written grew 54% between 1997 and 2003, but fell 17%
from 2003 through 2005
Source: Reinsurance Association of America; Insurance Information Institute Fact Book 2007, p. 38.
($ Billions)
Reinsurers Net Written Premiums, US Business, 1997 - 2005
Premiums written are actually falling
despite higher prices
FINANCIAL STRENGTH &
RATINGS Industry Has Weathered
the Storms Well
Reasons for US P/C Insurer Impairments, 1969-2005
*Includes overstatement of assets.
Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;
Catastrophe Losses8.6%
Alleged Fraud11.4%
Deficient Loss
Reserves/In-adequate Pricing62.8%
Affiliate Problems
8.6%
Rapid Growth
8.6%
2003-2005 1969-2005
Deficient reserves,
CAT losses are more important factors in
recent years
Reinsurance Failure3.5%
Rapid Growth16.5%
Misc.9.2%
Affiliate Problems
5.6%
Sig. Change in Business
4.6%
Deficient Loss
Reserves/In-adequate Pricing38.2%
Investment Problems*
7.3%
Alleged Fraud8.6%
Catastrophe Losses6.5%
P/C Insurer Impairments,1969-2006
815
127
11 934
913 12
199
16 14 1336
4931
3449 49
5460
5841
2915
1231
18 1949 50
4735
1813 15
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
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
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2006
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
Co
mb
ined
Rat
io
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
Imp
airm
ent R
ate
Combined Ratio after DivP/C Impairment Frequency
Impairment rates are highly
correlated underwriting performance
Source: A.M. Best; Insurance Information Institute
2006 impairment rate was 0.43%, or 1-in-233 companies, half the 0.86% average since 1969
Debate Over Reinsurance Market Performance & Government
• Reinsurance markets typically suffer large shocks, followed by a period of higher prices and transient capacity constraints
• A new equilibrium between Supply and Demand is typically found within 18 months, commensurate with changes in the risk landscape. This is Economics 101 and is a textbook illustration of how capitalism works.
• A competing hypothesis suggests that reinsurance markets “fail” because they do not provide a stable price or quantity of protection as is required in an economy with continuously exposed fixed assets, especially one that is growth oriented
• Public Policy Solution: Acting on this hypothesis generally results in displacement of private (re)insurance capital by government intermediaries
• Question Asked: Are policyholders and the economy better served through free markets, government or some hybrid?
Sources: Insurance Information Institute
STATE RESIDUAL MARKETS
How Big is Too Big?
US FAIR Plans Exposure to Loss* (Billions of Dollars)
Source: PIPSO; Insurance Information Institute *Hurricane exposed states only.
$387.8$400.4
$345.9
$269.6
$140.7$113.3
$170.1
$96.5
$40.2
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
1990 1995 1999 2000 2001 2002 2003 2004 2005
In the 15-year period between 1990 and 2005, total exposure to loss in the FAIR plans has
surged by a massive 965 percent, from $40.2bn in 1990
to $387.8bn in 2005!
Total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54.7bn in 1990 to $419.5 billion in 2005.
Florida Citizens Exposure to Loss (Billions of Dollars)
Source: PIPSO; Insurance Information Institute
408.8
$210.6$206.7$195.5
$154.6
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
2002 2003 2004 2005 2006
Exposure to loss in Florida Citizens nearly doubled in 2006
Major Residual Market Plan Estimated Deficits 2004/2005 (Millions of Dollars)
* MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in Federal Aid.Source: Insurance Information Institute
-$516
-$1,425
-$1,770
-$954
-$595 *
-$2,000-$1,800-$1,600-$1,400-$1,200-$1,000
-$800-$600-$400-$200
$0
Florida HurricaneCatastrophe Fund
(FHCF) Florida Citizens Louisiana Citizens
Mississippi WindstormUnderwriting
Association (MWUA)
2004 2005
Hurricane Katrina pushed all of the residual market property plans in
affected states into deficits for 2005, following an already record hurricane loss year in 2004
What Role Should the Federal Government
Play in Insuring Against Natural Disaster Risks?
NAIC’s Comprehensive National Catastrophe Plan
• Proposes Layered Approach to Risk• Layer 1: Maximize resources of private
insurance & reinsurance industry Includes “All Perils” Residential Policy Encourage Mitigation Create Meaningful, Forward-Looking Reserves
• Layer 2: Establishes system of state catastrophe funds (like FHCF)
• Layer 3: Federal Catastrophe Reinsurance Mechanism
Source: Insurance Information Institute
Guiding Principles of NAIC’s National Catastrophe Plan
• National program should promote personal responsibility among policyholders
• National program should support reasonable building codes, development plans & mitigation tools
• National program should maximize risk-bearing capacity of private markets, and
• National plan should provide quantifiable risk management to the federal government
Source: Insurance Information Institute from NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005.
Comprehensive National Catastrophe Plan Schematic
Personal Disaster Account
Private Insurance
State Regional Catastrophe Fund
National Catastrophe Contract Program
Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.
State Attachment
1:50 Event
1:500 Event
Legislation has been introduced and ideas
espoused by ProtectingAmerica.org will likely get a more
thorough airing in 2007/8
KEY LINES
Discipline Will Remain (Mostly) Intact in 2007
Private Passenger Auto
Private Passenger Auto is Enormous Part of P/C Industry
Total 2004 Direct Personal + Commercial Premiums Written = $467.0 Billion
All Commercial Lines
53.9%
PPA Coll/Comp14.2%
Homeowners11.4%
PPA Liability20.5%
Source: A.M. Best; Insurance Information Institute
Private passenger auto accounted for 34.7% or $162.2B in DPW in 2004
$251.6B $53.2B
$95.8B
$66.4B
101.7101.3101.3101.0
99.5
101.1
103.5
109.5
107.9
104.2
98.4
94.395.1
93.0
90
95
100
105
110
93 94 95 96 97 98 99 00 01 02 03 04 05 06F
Private Passenger Auto Combined Ratio
Average Combined 1993 to 2005= 101.4
Most auto insurers have shown sig-nificant improvements in underwriting
performance since mid-2002
Sources: A.M. Best; III
PPA is the profit juggernaut of the p/c
insurance industry today
9%
17%
13%
15%
12%14%14%
11% 12%12%
10%
8%
2% 2%
4%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
92 93 94 95 96 97 98 99 00 01 02 03 04 05E 06F
RNW: Private Passenger Auto, United States, 1992-2006E
Source: NAIC; Insurance Information Institute
Private passenger auto profitability deteriorated throughout the 1990s but
has improved dramatically
Segmentation should help profitability
-4%
-2%
0%
2%
4%
6%
8%
10%
00
:Q1
00
:Q2
00
:Q3
00
:Q4
01
:Q1
01
:Q2
01
:Q3
01
:Q4
02
:Q1
02
:Q2
02
:Q3
02
:Q4
03
:Q1
03
:Q2
03
:Q3
03
:Q4
04
:Q1
04
:Q2
04
:Q3
04
:Q4
05
:Q1
05
:Q2
05
:Q3
05
:Q4
06
:Q1
06
:Q2
06
:Q3
06
:Q4
Auto Insurance Component of CPI Personal Auto-PD Pure Premium
Source: Insurance Information Institute calculations based ISO Fast Track and US BLS data.
Pure Premium Spread: Personal Auto PD Liability, 2000-2006:Q4
Margin necessary to maintain PPA
profitability
2000 PPA Combined=110
Inversion of pure premium spread is a warning sign but now in synch
2006 PPA Combined=92E
-2.2%
-5.3%
-4.0%-3.3%
-0.9%
-2.6%
-5.4%
-3.8%
3.0%3.6% 3.8%
3.4%2.8%
4.8%
-0.3%
4.7%
-6%
-4%
-2%
0%
2%
4%
6%
99 00 01 02 03 04 05 06*
Frequency Severity
Bodily Injury: Severity Trend Running Ahead of Frequency
*Average of 4 quarters ending with 4th quarter 2006.Source: ISO Fast Track data.
Medical inflation
is a powerful
cost driver
0.8%
-1.5%
0.3%
-2.0% -2.3% -2.4%-1.6%
-3.3%
3.9%3.3%
2.8%
0.5%
2.2%
3.7%4.3%
6.2%
-4%
-2%
0%
2%
4%
6%
8%
99 00 01 02 03 04 05 06*
Frequency Severity
PD Liability: Frequency Trend Roughly Offsets Severity
Fewer accidents, but more damage when they occur:
Higher Deductibles?
*Average of 4 quarters ending with 4th quarter 2006.Source: ISO Fast Track data.
-1.6%
1.1%
-1.1%
0.0%
-0.6%
-7.2%-5.4% -5.1%
3.2%
6.5%
-4.0%
0.5%
4.8%2.4%
6.3%
16.1%
-10%
-5%
0%
5%
10%
15%
20%
99 00 01 02 03 04 05 06*
Frequency Severity
PIP: Frequency Trend Now Offsets Rising Claim Severity
Fraud caused problems from
1999-2001
Is No-Fault living on borrowed time?
*Average of 4 quarters ending with 4th quarter 2006.Source: ISO Fast Track data.
2.6%
-0.4%
1.9%
-3.8%
-5.1%-4.4%
-1.8%
-3.5%
3.7% 3.7%
1.7%
3.8%3.2%3.0%
4.1%
6.8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
99 00 01 02 03 04 05 06*
Frequency Severity
Collision: Frequency Trend Offsetting Rising Claim Severity
*Average of 4 quarters ending with 4th quarter 2006.Source: ISO Fast Track data.
-1.7% -2.6%
3.3%
-5.7%
-2.1%
-8.3%
-3.1%
-9.8%-6.9%
15.1%
-1.2%-4.1%
-2.4%
3.3%
-4.7%
8.9%
-15%
-10%
-5%
0%
5%
10%
15%
20%
99 00 01 02 03 04 05 06*
Frequency Severity
Comprehensive: Favorable Frequency and Severity Trends
*Average of 4 quarters ending with 3rd quarter 2006.Source: ISO Fast Track data.
Weather related claims from Hurricanes Katrina,
Rita & Wilma: 681,900 claims valued $3.29 billion
Private Passenger Auto: Future Shock
• Underwriting acumen is ultimate determinant of success• Innovations in technology, computing power, data retrieval/ storage
and new data/criteria will increase the number and quality of rating factors and lead to increasingly sophisticated underwriting models and a ever expanding number of price points; Integrate with new auto safety features
• Buzz Words: “Predictive Modeling” & “Segmentation”• Impact is to create a rating system that is more accurate and therefore
more fair, equitable to all• Risk is more accurately and reliably mapped to a price across a
broader range of circumstances• Life-cycle approach to underwriting
Can underwriting customer under almost any circumstance Recognizes fact that customer acquisition costs are high and new accounts
perform less well than seasoned accounts• Agents will need to be intimately familiar with new approaches in order
to communicate impact to customer
Homeowners Insurance
117.7
158.4
113.6118.4
112.7
121.7
101.0
108.2111.4
121.7
109.3
98.294.4
100.3
93
113.0109.4
90
100
110
120
130
140
150
160
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06F
Homeowners Insurance Combined Ratio
Average 1990 to 2005= 113.1
Insurers have paid out an average of $1.13 in losses for every dollar earned
in premiums over the past 16 years
Sources: A.M. Best; III
Rates of Return on Net Worth for Homeowners Ins: US
Source: NAIC; 2005/6 figures are Insurance Information Institute estimates.
9.7%
3.6%
16.0%
-7.0%
-1.7%-4.2%
3.6%
12.4%
5.4%2.5%
5.4% 3.8%
1.4%
-7.2%-10%
-5%
0%
5%
10%
15%
20%
93 94 95 96 97 98 99 00 01 02 03 04 05E 06E
Averages: 1993 to 2005E
US HO Insurance = +2.1%
(+3.2% through 2006E)
COMMERCIAL MULTI-PERIL & COMMERCIAL
AUTO
119.0
119.8
108.5
125.0
113.1
115.0
121.0
116.2
116.1
104.9
101.9
100.7
116.8
113.6
115.3
122.4
115.0
117.0
97.3
89.0
97.7
93.8
80
85
90
95
100
105
110
115
120
125
130
95 96 97 98 99 00 01 02 03 04 05
CMP-Liability
CMP-Non-Liability
Commercial Multi-Peril Combined (Liability vs. Non-Liability Portion)
Liab. Combined 1995 to 2004 = 114.6
Non-Liab. Combined = 107.1
Sources: A.M. Best; III
CMP- has improved recently
112.
1
112
113 11
5.9 12
0.5
120.
1
106.
6
99.4
96.6
93.396
.7
102.
2
99.0
99.7
99.0
103.
6
102.
3
95.9
92.1
87.1 90
.7
122.5
80
85
90
95
100
105
110
115
120
125
95 96 97 98 99 00 01 02 03 04 05
Comm Auto Liab Comm Auto PD
Commercial Auto Liability& PD Combined Ratios
Average Combined: Liability = 110.2
PD = 97.1
Sources: A.M. Best; III
Commercial Auto has improved dramatically
MEDICAL MALPRACTICE
99.8
106.
6
107.
9 115.
7
129.
7
133.
7 142.
5
137.
6
111.
0
95.5
154.7
80
90
100
110
120
130
140
150
160
95 96 97 98 99 00 01 02 03 04 05
Medical MalpracticeCombined Ratios
Average Med Mal Combined Ratio
1995-2005
121.3
Sources: A.M. Best; III
Reforms/Award Caps and higher rates have helped to improve
med mal dramatically
WORKERS COMPENSATION
OPERATING ENVIRONMENT
Workers Comp Calendar Year vs. Ultimate Accident Year – Private Carriers
10197
111 110107
102101106
120
131
138135
124
90 90
100 101
107
115118
122
97
105
96
80
90
100
110
120
130
140
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005p
Calendar Year Accident Year
Percent
p Preliminary AY figure. Accident Year data is evaluated as of 12/31/2005 and developed to ultimateSource: Calendar Years 1994-2004, A.M. Best Aggregates & Averages; Calendar Year 2005p and Accident Years 1994-2005pbased on NCCI Annual Statement Analysis.Includes dividends to policyholders
Workers Comp Combined Ratios, 1994-2005P
Lost-Time Claims
-4.2 -4.4
-9.2
-6.9-5.7
-4.3 -3.9
0.3
-6.5
-4.5
0.5
-3.9
-2.3
-4.5 -4.5
-10
-8
-6
-4
-2
0
2
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05p
Cumulative Change of –45.8%(1991-2004)
Accident Year
Percent Change
Workers Comp Lost-TimeClaim Frequency (% Change)
2003p: Preliminary based on data valued as of 12/31/20051991-2003: Based on data through 12/31/2004, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policiesSource: NCCI
IndemnityClaim Cost (000s)
Lost-Time Claims
$9.9 $9.6 $9.4 $9.8 $10.0$10.6
$11.4$12.4
$13.6
$15.1$16.5 $16.9
$17.7$18.6 $19.1
$5
$7
$9
$11
$13
$15
$17
$19
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05p
Annual Change 1992–1996: +1.3%Annual Change 1997–2004: +7.4%
2005p: Preliminary based on data valued as of 12/31/20051991-2004: Based on data through 12/31/2004, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policiesSource: NCCI
Accident Year
Workers Comp Indemnity Claims Costs Have Accelerated, 1993-2005p
Cumulative Change = +103.2%(1993-2005p)
2.8%
4.0%4.7%
4.2%4.9%
4.2%
2.2% 2.0% 2.2% 2.5%
5.9%
7.7%
9.0%9.4%
4.7%
6.0%
2.0%2.8% 2.2%
9.6%10.9%
1.7%
0%
2%
4%
6%
8%
10%
12%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005p
Change in CPS Wage Change in Indemnity Cost per Lost-Time Claim
WC Indemnity Severity vs. Wage Inflation
4.3
pts
WC indemnity severity is no longer outpacing
wage inflation
2005p: Preliminary based on data valued as of 12/31/2005; 1991-2004: Based on data through 12/31/2004, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. CPS = Current Population Survey.Source: NCCI
$8.3 $8.4 $8.2$8.9 $9.4
$10.1$11.1
$12.0$13.2
$14.2
$16.0$17.4
$19.0
$20.9
$22.7
$5
$7
$9
$11
$13
$15
$17
$19
$21
$23
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05p
Annual Change 1992–1996: +4.1%Annual Change 1997–2005: +9.5%
Accident Year
MedicalClaim Cost ($000s)
2005p: Preliminary based on data valued as of 12/31/20051991-2004: Based on data through 12/31/2004, developed to ultimateBased on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies
Workers Comp Medical Claims Continue to Climb
Cumulative Change = +176.8%(1993-2005p)
4.5%3.6%
2.8% 3.2% 3.5%4.1%
4.6% 4.7%4.0% 4.4% 4.2%
5.1%
7.4%
10.1%
8.3%
9.5%
8.1%
12.3%
8.7% 9.1%
10.3%
8.5%
0%
2%
4%
6%
8%
10%
12%
14%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Change in Medical CPIChange Med Cost per Lost Time Claim
WC Medical Severity Rising Far Faster than Medical CPI
Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
4.3
pts
WC medical severity is rising twice as fast as the
medical CPI
Med Costs Share of Total Costs is Increasing Steadily
Indemnity56%
Medical44%
Source: NCCI (based on states where NCCI provides ratemaking services).
Indemnity52%
Medical48%
Indemnity42%
Medical58%1985
1995
2005p
OTHER LIABILITY
138.6
117.6
108.5112.3
104.5
110.5
122.6 124.4
111.8114.4
112.1
80
90
100
110
120
130
140
150
95 96 97 98 99 00 01 02 03 04 05
Other LiabilityCombined Ratios*
Average Combined Ratio 1995-2005
116.1
Sources: A.M. Best; III *Includes Officers’ & Directors’ coverage.
Improvements in tort and D&O environment have
contributed to performance
D&O Premium Index(1974 Average = 100)
682746 704 720 720
771 806 793726
619539 503
560
720
931
1,237
1,113
1,010
0
200
400
600
800
1000
1200
1400
86 88 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Source: Tillinghast Towers-Perrin, 2005 Directors and Officers Liability Survey.
Average D&O pricing is off 18% since 2003, after rising
146% from 1999-2003
PRODUCTS LIABILITY
189.5179.1
131.9 138.8156.4
133.3
215.4
355.2
167.2153.1
124.0
80
130
180
230
280
330
380
95 96 97 98 99 00 01 02 03 04 05
Products LiabilityCombined Ratios
Average Combined Ratio 1995-2005
176.7
Sources: A.M. Best; III
Improvements in the tort
environment, rates have
contributed to performance
Legal Liability & Tort Environment
Definitely Improving ButNot Out of the Woods
Legal Liability & Tort Environment
Definitely Improving ButNot Out of the Woods
Cost of U.S. Tort System($ Billions)
$129
$130 $1
41
$144
$148 $1
59
$156
$156 $1
67
$169 $1
80 $205 $2
33 $246 $2
60
$261 $270 $2
82 $295
$0
$50
$100
$150
$200
$250
$300
$350
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
06E
07E
08E
Tort costs consumed 2.09% of GDP in 2005, down from 2.24% in 2003
Per capita “tort tax” was $880 in 2005, up from $680 in 2000
Reducing tort costs relative to GDP by just 0.25% (to 1.84%) would produce an
economic stimulus of $31.1B
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.
Inflation Adjusted Tort CostsPer Capita, 1950-2005
$96
$199
$340
$444
$780$722
$878 $897 $914 $880
$0$100$200$300$400$500
$600$700$800$900
$1,000
50 60 70 80 90 00 02 03 04 05
Tort costs per capita have
increased 817% since 1950 even
after adjusting for inflation
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.
Tort Costs Relative to GDP,1950-2005
0.62%
1.03%
1.34%1.53%
2.24%
1.82%2.03%
2.22%2.24%2.22%2.09%
$0
$0
$0
$0
$0
$0
50 60 70 80 90 00 01 02 03 04 05
Tort costs relative to GDP have increased more than
3 fold since 1950
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.
Personal, Commercial & Self (Un) Insured Tort Costs*
$17.0$49.6 $58.7
$95.2
$17.1
$51.0$70.9
$86.7
$5.2
$20.4
$30.0
$49.4
$0
$50
$100
$150
$200
$250
1980 1990 2000 2005
Commercial Lines Personal Lines Self (Un)Insured
Bil
lion
s
Total = $39.3 Billion
*Excludes medical malpracticeSource: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.
Total = $121.0 Billion
Total = $159.6 Billion
Total = $231.3 Billion
Tort System Costs,2000-2008F
$179
$233$246
$270
$295
$260
$261
$261
$205
1.82%2.03%
2.22% 2.22%
2.04%2.09% 2.03%2.05%
2.24%
$100
$120
$140
$160
$180
$200
$220
$240
$260
$280
$300
00 01 02 03 04 05 06E 07F 08F
Tor
t S
yste
m C
osts
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Tor
t C
osts
as
% o
f G
DP
Tort Sytem Costs Tort Costs as % of GDP
After a period of rapid escalation, tort system costs as % of GDP are now falling
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends;2006 is III estimate.
KATRINA TORT UPDATE
Suits Add to Uncertainty, Expense
Likely Market Impacts of Post-Katrina Litigation
• Litigation Creates an Additional Layer of Uncertainty in What is Already a Very Difficulty Market
Ultimate Thrust of Litigation is to Compel Insurers to Pay Water Damage (Flood/Surge) Losses for Which They Have Never Received A Penny in Premium
• Some Courts’ Apparent Willingness to Retroactively Rewrite Long-Standing, Regulator Approved Terms & Conditions of Insurance Contracts Creates an Unpriceable Risk
Compounded by juries willing to award millions in punitives• People Discouraged from Buying Flood Coverage• BOTTOM LINE: Weather, Courts, Juries Together
Create Nearly Impossible Operating Environment• Coverage Under These Circumstances Will Necessarily
Become More Expensive, Less Available
REGULATORY UPDATE
Busy Year for Insurersin Washington
Federal Legislative UpdateFederal Terrorism Reinsurance (TRIA)• TRIA expires 12/31/07. The current federal program offers $100 billion of
coverage subject to a $27.5B industry aggregate retention.
• New Democratic Congress (with Committee chairs from urban Northeast states) predisposed to extend. Despite resistance/lackluster Administration support TRIA will likely extended for a multi-year period, perhaps 6-8 but potentially as long as 15 years (last extension in 2005 was for 2 years)
• Potential changes include extensions of coverage for domestic terrorism losses
(not included currently), and a lower industry retention for nuclear, biological, chemical, or radiological (NBCR) attacks. There could possibly be a modestly higher industry retention for non-NBCR losses, and it needs to be resolved whether liability and group life losses will be covered.
• Original hope for first-half 2007 extension have faded. Now looking at fall or even 11th-hour extension as in 2005.
Sources: Lehman Brothers, Insurance Information Institute
Federal Legislative Update
Natural Disaster Catastrophe Plan• Some insurers are pushing for federal catastrophic risk fund coverage in the
wake of billions of dollars of losses suffered by insurers from the 2004-2005 hurricane seasons.
• Legislative relief addressing property/casualty insurers’ exposure to natural catastrophes, such as the creation of state and federal catastrophe funds, has been advocated by insurers include Allstate and State Farm. However, there is active opposition many other insurers and all reinsurers.
• There is bi-partisan supporters in Congress, mostly from CAT-prone states. Skeptics in Congress believe such a plan would be a burden on taxpayers like the NFIP and that the private sector can do a better job. Unlike TRIA, the industry is not unified on this issue.
• Allowing insurers to establish tax free reserves for future catastrophe losses has also been proposed, but Congress has yet to indicate broad support.
Sources: Lehman Brothers, Insurance Information Institute
Federal Legislative UpdateOptional Federal Charter (OFC)• Large P&C and life insurers are the major supporters of OFC. Supporters
argue that the current patchwork of 50 state regulators reduces competition, redundant, slows new product introductions and adds cost to the system.
• In general, global P/C insurers , reinsurers and large brokers mostly support the concept, while regulators (state insurance commissioners), small single-state and regional insurers, and independent agency groups largely oppose the idea. An optional federal charter is more favorable for global P&C insurers, because an insurer that operates in multiple states could opt to be regulated under federal rules rather than multiple state regulations. As a result, this could increase innovation in the industry.
• A new bill should be introduced in May or June. Currently appears to be more momentum for OFC for life than for P&C insurers based on the homogeneous nature of many life products. The debate should intensify and although passage may not occur in the current session of Congress, it may lay the groundwork for passage in the 2009-2010 session.
Sources: Lehman Brothers, Insurance Information Institute
Federal Legislative UpdateMcCarran-Ferguson Insurance Antitrust Exemption• Under McCarran-Ferguson Act of 1945, insurers have limited immunity under
federal anti-trust laws allowing insurers to pool past claims information to develop accurate (actuarially credible) rates.
• Very low level of understanding of M-F in Washington.
• Certain legislators threaten to revoke McCarran-Ferguson because of alleged collusion in the wake of Hurricane Katrina. However, the view among some Washington insiders is that such a move would hurt small insurers with less resources rather than the large insurers perhaps being targeted. Current bills designed to revoke McCarran-Ferguson are S.618 and H.R. 1081.
• The government appointed Antitrust Modernization Commission in an April 2007 report strongly encouraged Congress to re-examine the McCarran-Ferguson Act. Notably, 4 of the commissions 12 members called for a full repeal of the law.
Sources: Lehman Brothers, Insurance Info. Institute
TRIA EXTENSION
The Burden Grows, and the Clock is Ticking
Terrorism Coverage Take-Up Rate Continues to Rise
Source: Narketwatch: Terrorism Insurance 2006, Marsh, Inc.; Insurance Information Institute
24% 26%33%
44% 46% 44%48% 47%
54%59%
64%
03Q2 03Q3 03Q4 04Q1 04Q2 04Q3 04Q4 05Q1 05Q2 05Q3 05Q4
Terrorism take-up rate for non-WC risk rose steadily
through 2003, 2004 and 2005
TAKE UP RATE FOR WC COMP TERROR
COVERAGE IS 100%!!
Insurance Industry Retention Under TRIA ($ Billions)
$10.0$12.5
$15.0
$25.0$27.5
$0
$5
$10
$15
$20
$25
$30
$35
Year 1(2003)
Year 2(2004)
Year 3(2005)
Year 4(2006)
Year 5(2007)
$ B
illi
ons
Source: Insurance Information Institute
•Individual company retentions rise to 17.5%
in 2006, 20% in 2007
•Above the retention, federal govt. pays 90% in
2006, 85% in 2007
Extension
Insured Loss Estimates: Large CNBR Terrorist Attack ($ Bill)
Type of Coverage New York WashingtonSan
FranciscoDes
Moines
Group Life $82.0 $22.5 $21.5 $3.4
General Liability 14.4 2.9 3.2 0.4
Workers Comp 483.7 126.7 87.5 31.4
Residential Prop. 38.7 12.7 22.6 2.6
Commercial Prop. 158.3 31.5 35.5 4.1
Auto 1.0 0.6 0.8 0.4
TOTAL $778.1 $196.8 $171.2 $42.3
Source: American Academy of Actuaries, Response to President’s Working Group, Appendix II, April 26, 2006.
FLORIDA SPECIAL SESSION
LEGISLATIVE CHANGES
Insurer, Policyholder & State Impacts
Summary: Florida Legislature Special Session (January 2007)
1. Exponential Expansion of the Role of the State in Insuring Homes & In Reinsurance Markets
More than doubles exposure of Florida Hurricane Catastrophe Fund to $35 billion from $16 billion (FHCF only has $1B cash), greatly displacing private reinsurers
Allows Florida Citizens to compete with private insurers by lowering rates and lowering eligibility standards
Allows Florida Citizens to displace private insurers by expanding into non-wind coastal business
Disbands disciplined, small and adequately priced Commercial JUA and transfers business to poorly run, underpriced, Citizens Commercial Account
Sources: Zurich Insurance Technical Center; Insurance Information Institute.
Summary: Florida Legislature Special Session (January 2007)
2. Dramatically Increases Exposure of Florida Policyholders to Post-Catastrophe Taxes
Expands the Citizens assessment base more than 4 fold
Increases maximum annual assessment facing Florida policyholders from $9.2 billion to $25 billion
Increases maximum general liability and commercial auto assessment exposure from 14% to 74% (These are 2 types of insurance that having nothing to do with hurricane risk)
Accelerates growth of Citizens, already the largest home insurers in the state and which doubled in size in 2006, by lowering rates and making access easier
Sources: Zurich Insurance Technical Center; Insurance Information Institute.
Summary: Florida Legislature Special Session (January 2007)
3. Disincentives for Insurers to Offer Policies in Florida Introduces “excess profits law” (a virtual oxymoron in FL) Requires Executive Officer review on routine rate filings
Threatens perjury charges and administrative penalties
Increases cost of processing and maintaining policies Requires “premium discounts” even if not actuarially justified
4. Threatens State of Florida’s Credit Rating Major event could result in simultaneous issuance of $40+
billion in debt from Cat Fund, Citizens and Guarantee Fund Governor’s promise to cut property taxes could compound
state’s fiscal problems after an event
Sources: Zurich Insurance Technical Center; Insurance Information Institute.
$8.3
$1.3
$35.0 $35.0 $35.0
$11.2
$35.0
$8.3 $8.3
$35.0
$11.2
$0
$5
$10
$15
$20
$25
$30
$35
$40
FL CitizensPersonal
Lines Acct.
FL CitizensCommercialLines Acct.
FL High RiskAcct.
FLHurricaneCat Fund
FL PCJUA FLGuarantee
Assoc.
2006 2007
Florida Hurricane Assessment Base, 2006 vs. 2007* ($ Bill)
The FL legislature
quadrupled the assessment
base for Citizens
Sources: Zurich Insurance Technical Center; Ins. Info. Inst. *Per special legislative session, Jan. 2007.
$1
.66
0
$0
.26
0
$7
.0
$7
.0
$7
.0
$0
.44
8
$3
.50
0
$1
.66
0
$1
.66
0 $3
.5
$0
.44
8
$0
$1
$2
$3
$4
$5
$6
$7
$8
FL CitizensPersonal
Lines Acct.
FL CitizensCommercialLines Acct.
FL High RiskAcct.
FLHurricaneCat Fund
FL PCJUA FLGuarantee
Assoc.
2006 2007
Florida Hurricane Max. Policyholder Annual Burden, 2006 vs. 2007* ($ Bill)
The FL legislature nearly tripled state
insurers’ assessment base from $9.2B to
$25B, an increase of $15.8B or 174%
Sources: Zurich Insurance Technical Center; Ins. Info. Inst. *Per special legislative session, Jan. 2007.
Why There is Concern Over the Florida Legislature’s & Governor’s Changes
• Risk is Now Almost Entirely Borne Within State• Virtually Nothing Done to Reduce Actual Vulnerability• Creates Likelihood of Very Large Future Assessments• Potentially Crushing Debt Load• State May be Forced to Raise/Levy Taxes to Avoid Credit
Downgrades• Many Policyholder Will See Minimal Price Drop
“Savings” came from canceling recent/planned rate hikes• Residents in Lower-Risk Areas, Drivers, Business
Liability Policyholders Will Come to Resent Subsidies to Coastal Dwellers
• Governor’s Emergency Order for Rate Freezes & Rollbacks Viewed as Unfair & Capricious
Sources: Insurance Information Institute.
Summary• Personal & Commercial lines results were unsustainably good 2006; Overall
profitability reached its highest level (est. 14%) since 1988• Underwriting results were aided by lack of CATs & favorable underlying loss
trends, including tort system improvements• Property cat reinsurance market remains tight• Premium growth rates are slowing to their levels since the late 1990s;
Commercial leads decreases• Rising investment returns insufficient to support deep soft market in terms of
price, terms & conditions• Clear need to remain underwriting focused• How/where to deploy/redeploy capital??• Major Challenges:
Slow Growth Environment AheadMaintaining price/underwriting disciplineManaging variability/volatility of results
Insurance Information Institute On-Line
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