what really keeps insurance ceos awake at night? an update & outlook for the us...
TRANSCRIPT
What Really Keeps Insurance CEOs Awake at Night?
An Update & Outlook for the US Property/Casualty Insurance Industry
Rocky Mountain Insurance AssociationRadisson Hotel Denver
Denver, COMarch 14, 2001
Robert P. Hartwig, Ph.D. Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: (212) 669-9214 Fax: (212) 732-1916 [email protected] www.iii.org
Highlights: First 9-Mos. 2000($ Millions; *Year-end 1999)
2000 1999 Change
Net Written Prem. 228,036 217,957 +4.6%
Loss & LAE 176,108 164,186 +7.3%
Net UW Gain (Loss) (19,447) (13,374) +45.4%
Net Inv. Income 29,189 28,552 +2.2%
Net Income (a.t.) 16,502 17,368 -5.0%
Surplus 327,268 334,348* -2.1%
Combined Ratio 108.9 107.7* +1.2 pts.
Presentation Outline
Insomnia: Major Problem Among
Insurance CEOs
• Top 10 Reasons for Losing Sleep
• CATs: Asleep at the Switch?
• Q&A
#1PROFITS
P/C Net Income After Taxes1993-2000* ($ Millions)
$19,316
$10,870
$20,598
$24,404
$36,819
$30,773
$22,170 $22,000
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
1993 1994 1995 1996 1997 1998 1999 2000**Estimate based on First Nine Months 2000 data.Sources: A.M. Best, ISO, Insurance Information Institute.
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Non-Life US All US Industries
Return on Equity1975 – 2000*
*
*EstimateSource: Insurance Information Institute
0%
5%
10%
15%
20%
25%
US P/C Insurers All US Industries LifeDiversified Finl. Comm. Banks
ROE: Financial Services Industry Segments, 1987–2000*
* 2000 figures are estimates.Source: Insurance Information Institute
1999 Return on Equity (Profitability)DO CO
1.0%
2.8%
3.1%
5.5%
6.5%
7.4%
15.4%
0% 5% 10% 15% 20%
Fortune 500
PP Auto
US All P/C Lines
Workers Comp
Homeowners
Comm Multi Peril
Comm Auto
Source: NAIC, Insurance Information Institute
1999
Return on Equity (Profitability)UP
-18.4%
5.8%
5.7%
1.1%
9.0%
12.9%
-20% -15% -10% -5% 0% 5% 10% 15%
Fortune 500
US All P/C Lines
CO Workers Comp
CO PP Auto
CO All P/C Lines
CO Homeowners
*Insurers: 1989-1998; and Fortune 500: 1990-1999.Source: Quicken.com
10-Year Average*
Return on Net Worth,Selected Lines in ColoradoUP
Source: NAIC, Insurance Information Institute
-150%-140%-130%-120%-110%-100%
-90%-80%-70%-60%-50%-40%-30%-20%-10%
0%10%20%
Auto Homeowners Workers' Comp
10-Year Averages
Auto +5.7%
Home -18.4%
WC +1.1
Return on Net Worth,Selected Lines in ColoradoUP
Source: NAIC, Insurance Information Institute
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
Auto Homeowners Workers' Comp
10-Year Averages
Auto +5.7%
Home -18.4%
WC +1.1
Sagging Profits are the Symptom, not the Cause
•Capital/Capacity•Pricing•Fundamentals•Investments•Competition•Consolidation•Distribution•Class Action•Wall Street
#2CAPITAL/CAPACITY
$0
$50
$100
$150
$200
$250
$300
$350
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
Policyholder Surplus: 1975-2000* (Capital, Total P/C)
Source: A.M. Best, Insurance Information Institute
Bil
lion
s
(US
$)
•1999 Surplus = $336.3 Billion Is it a Peak?
•Increase of 0.9% over 1998, smallest gain since 1984
•Surplus decreased 2.1% in First 9 Months 2000 to $327.3 Billion
* First Nine Months 2000
0.5
1.3
2.0
2.8
US
Net Premiums Written to Policyholder Surplus
Source: A.M. Best, ISO, Insurance Information Institute
1998: 0.84
1999: 0.85
2000 (Forecast): 0.94
Berkshire Hathaway
12.3%
Other67.2%
USAA1.8%
Farmers1.3%
Nationwide3.1%
State Farm12.2%
Liberty2.1%
Distribution of Industry Surplus
Source: PaineWebber
Excess Capital: What to Do?
• CEOs: Buy It, Build It--They Will Come
• Policyholders: Lower my rates! Pay my dividend!
• Shareholders: Show me the money!
• Regulators: Keep your hands off of it!
• Rating Agencies: Keep your hands off of it and give it
back!
#3PRICING
Average Price Change of Commercial Insurance Renewals
8.9%
6.1%
9.5%
8.8%
8.3%
7.9%
9.0%
-1.6%
-1.2%
-0.4%
-7.0%
-6.0%
-11.0%
-6.0%
-10.0%
-7.0%
-3.0%
1.4%
0.8%
3.5%
3.2%
3.2%
2.8%
4.1%
-2.1%
-2.8%
-1.8%
0.2%
-5.0%
-4.4%
-3.5%
-4.3%
-6.6%
-4.1%
-2.0%
-13%
-11%
-9% -7% -5% -3% -1% 1% 3% 5% 7% 9%
E&S
Umbrella
Workers' Comp
Commercial Property
CMP
General Liability
Commercial Auto
Fall 2000 Spring 2000 Fall 99 Spring 99 Fall 98Source: Conning
Average Price Change of Personal Lines Renewals
3%
4%
1%
5%
4%
1%-1%
2%
0%
2%
-2% -1% 0% 1% 2% 3% 4% 5%
Homeowners
Personal Auto
Fall 2000 Spring 2000 Fall 99 Spring 99 Fall 98Source: Conning
100110
120130
140150
160170
180190
200210
220230
240250
260
89 90 91 92 93 94 95 96 97 98 99 00* 01*
Rate On Line Index(1989=100)
Source: Guy Carpenter, Insurance Information Institute * Estimate
Average Expenditures on Auto Insurance: US vs. CO
596 61
8 637 65
1 668 69
1 707
704
697
702
76377
4
751
722
721
698
653
612
$375
$425
$475
$525
$575
$625
$675
$725
$775
$825
1991
1992
1993
1994
1995
1996
1997
1998
1999
*
2000
*
* III estimates; Sources: NAIC, Insurance Information Institute
Countrywide rates fell by 2.8% in 1998, 3.2% in
1999 (est.)
States With Highest AutoInsurance Expenditures vs. CO
$1,138
$960$901
$734 $704
$600
$800
$1,000
$1,200
Expenditures/Rank
New Jersey New York Connecticut Colorado U.S.
Source: Insurance Information Institute from NAIC Data, 1998.
1 2 315
States With Highest AutoInsurance Expenditures vs. CO
$855
$666 $655$611
$504
$455
$0
$200
$400
$600
$800
$1,000
Expenditures/Rank
Texas Louisiana Hawaii Florida Colorado US
Source: Insurance Information Institute from NAIC Data, 1998.
1 2 3 144
-6.0%
-8.8%
-14.0%
-20.6%
-24.8%-26.6%
-24.1%
-30%
-20%
-10%
0%
Cumulative Workers Comp Rate/Loss Cost Changes*
Source: NCCI*Advisory Loss Costs
0.0
4.3
7.9*
4.9
3.1
7.0
4.4
2.5
3.7*
10.3
1.11.2
4.5*
18.4
-2.2-2.4
-0.5
-22.8
-2.0
-4.5
-2.6 -2.5-2.7
-3.8
-7.8
-1.7
-4.4-2.4
-8.9
-0.4-3.4
Filings Approved With Effective Dates in 2000
•Cumulative change from multiple filings
Source: NCCI
IncreaseNo ChangeDecreaseNo Filing Approved
Countrywide Change = +3.3%
#4FUNDAMENTALS
95
100
105
110
115
120
Combined Ratio
P/C Industry Combined Ratio
1999 = 107.9
2000 (Est)* = 109.9
2001 Forecast* = 109.1
Combined Ratios
1970s: 100.3
1980s: 109.2
1990s: 107.7
* Based on III Groundhog Forecast
2001*
Direct Loss Ratio Trends, Selected Lines,
ColoradoUPDATE
Source: NAIC, Insurance Information Institute
40%
60%
80%
100%
120%
140%
160%
180%
200%
Auto Homeowners Workers' Comp
($40)
($30)
($20)
($10)
$0
$10
Underwriting Gain (Loss)1975-2000*
*I.I.I. estimate based on First 9 Monthsf 2000 data.Source: A.M. Best, Insurance Information Institute
Bil
lion
s
(US
$)
In 2000, P-C insurers will paid out nearly $26 billion more in claims & expenses than
they collected in premiums
U.S. InsuredCatastrophe Losses
$7.5
$2.7$4.7
$22.9
$5.5
$16.9
$8.3 $7.3
$2.6
$10.1$8.3
$4.3
0
5
10
15
20
25
89 90 91 92 93 94 95 96 97 98 99 00
Source: Property Claims Service, Insurance Information Institute
CATs in 1990s caused
$90B in insured losses
$ Billions CATs cost insurers $750 million per month during the 1990s
Didn’t lose much sleep over CATs in 2000
3% 3%
-4%-3%
-2%
0%
-6% -6%
-4%
-1%
-10%
-5%
0%
5%
Lost-Time Claim Frequency Per Worker: On the Rise?
Source: NCCI
15.0%14.9%
10.6%
10.3%10.2%
4.3%4.1%
3.3%3.0%
2.2%
0.6%0.2%
-7.4%
-8.9%
-12.2%
-17.2%
32.1%
-20%
-10%
0%
10%
20%
30%
NY FLDE UT
CO HIM
IKS M
N TX PA KY ND DCM
A NJSC
Growth in Total PIPClaims Costs*
*Change in “pure premium”Source: Insurance Information Institute from ISO Fast Track Data
PIP Claims Costs
PIP Costs in Colorado are growing faster than in most other no-fault states
.
Four Quarters Ending 2000:3rd
States With Highest PIP Average Loss (4 Qtrs. ending 2000:3rd)
$7,950 $7,796
$6,282
$5,081 $4,984
-$500
$500
$1,500
$2,500
$3,500
$4,500
$5,500
$6,500
$7,500
$8,500
Expenditures/Rank
New York New Jersey Colorado Florida Delaware
Source: Insurance Information Institute from ISO Fast Track Data
1 2 3 4 5
#5INVESTMENTS
$0
$9
$18
$27
$36
$45
Net Investment Income
Facts
1997 Peak = $41.5B
1998 = $39.9B
1999 = $38.6B
2000 (Forecast)* = $38.9B
Source: A.M. Best, Insurance Information Institute
Bil
lion
s
(US
$)
Pricing & underwriting problems were exacerbated by declining investment income
* Estimate based on First 9 Months 2000 results.
Stock Markets:Going Nowhere in 2001
-5.11%
-2.41%
-9.13%
-10% -8% -6% -4% -2% 0%
Nasdaq
S&P 500
DJIA
Source: Insurance Information Institute
YTD Total Return through 2/22/01
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
Mar-01 Dec-00 Dec-99 Jun-90
Source: A.M. Best, ISO, Insurance Information Institute
Treasury Yield Curves
Are interest rates too low for a recession?
#6COMPETITION
Competition—Still on the Rise: Number of Insurers: 1970-1998
1095 1059
15751702
2406 2430 2485 2480
1802 17461958
2261 2195
17151563
0
500
1,000
1,500
2,000
2,500
3,000
1970 1975 1980 1985 1990 1995 1998 1999
Property/Casualty
Life/Health
Sources: P/C: A.M. Best; L/H: NAIC.
Market Share of Top 5 P/C Insurers
30.2%
29.7%
29.3%
28.5%
1995 1997 1998 1999
Source: Insurance Information Institute Fact Book (annual issues)
Market Share of Top 5 Life/Health Insurers
14.0%
17.0%18.0%
1997 1998 1999
Source: Insurance Information Institute Fact Book (annual issues)
0%
5%
10%
15%
20%
25%
U.S.
Source: A.M. Best, Insurance Information Institute
Growth in Net Premiums Written (All P/C Lines)
2000 est.; 2001 forecast from III Groundhog Survey
1999: 1.9%
2000 Est: 5.2%
2001 Forecast: 7.4%
The underwriting cycle went AWOL in the 1990s.
Is it Back?
2001*
#7CONSOLIDATION
Insurance Mergers and Acquisitions
7.1 6.9 8.6 5 8.5 12.527
40.856.2
41.6
11.3
243 246
171 188149
221
349382
433
161
472
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
89 90 91 92 93 94 95 96 97 98 99 00*
Val
ue
of M
& A
s ($
bill
ion
s)
0
100
200
300
400
500
600
Nu
mb
er o
f M
& A
s
Value of Deals Number of Deals
*First Half 2000Source: Compiled from Conning & Company reports.
1998: 565 deals valued at $165.4 B
Number of Deals: First Half 2000 vs. First Half 1999
3034
18 2016
2824
57
73
105
P/C Life Health/MC Service Distribution
Source: Conning
19992000
Total = 161 Total = 244
Value of Deals: First Half 2000 vs. First Half 1999
4.2
12.9
6.5
11.8
0.70.6
3.5
1.6
3.9
P/C Life Health/MC Service Distribution
Source: Conning
19992000
Total = $11.3B Total = $30.9B
N/A
#8DISTRIBUTION
Shifting Distribution Channels: Property/Casualty Insurers
Source: Datamonitor
20031998
Direct Response
10.0%Banks8.1%
Internet7.3%
Other2.5%
Independent Agents23.3%
Captive Agents48.8%
Direct Response
9.8%Banks2.8%
Internet0.9%
Other3.0%
Independent Agents27.0%
Captive Agents56.5%
Web Presence of the Nation's 250 Largest P/C Companies
Source: John P. Franzis, PricewaterhouseCoopers Management
No Web Site Whatsoever
27.5%
Transaction Sites: Real Time Quotes
but No Sales7.2%
Rudimentary E-Mail Quote
Forms4.0%
Processor Sites: Quotes, Sales, and
Claims Online0.4%
Billboard Sites: No Quotes or
Transactions60.9%
Projected Online Sales of Auto, Home & Term Life Insurance
0
500
1000
1500
2000
2500
3000
3500
Auto Home Term Life
1998
1999
2000
2001
2002
2003
Source: Forrester Research
$ Millions
Life = $1.3B27%
Home = $0.3B6%
Auto = $3.2B67%
Internet Insurance Sales Forecast, 2003
Source: Conning & Co. (Life), Forrester Group (Auto & Home)
(Online-closed sales=Total $4.8 Billion)
Small Insurance Firms Lag in Web Access and Exposure
Source: The Industry Standard, Summer 2000
Percentage of Small Firms with Internet Access
82%
70%
56%
0%10%20%30%40%50%60%70%80%90%
Real EstateAgencies
Law Firms InsuranceFirms andAgencies
Percentage of Small Firms with Their Own Web Site
30%
41%
23%
0%5%
10%15%20%25%30%35%40%45%
Real EstateAgencies
Law Firms InsuranceFirms andAgencies
Distribution Channels Continue to Proliferate
Customer InsurerAgent Broker
Mail Telephone
Bank
Internet Dealerships Payroll Plans
Stock Exchanges
Online Auctions (e.g. Priceline.com)
????
Insurers: Tangled in the Web?
#9CLASS ACTION
ABUSE
TORT-ure
• Asbestos• Aftermarket Parts• Medical Claims Review• Totaled Cars (CCC/ADP)• Guns• Genetically Modified Foods (Corn)• Y2K Sue & Labor• HMOs• Nursing Homes/Med Mal• Tobacco• Redlining• Toxic Mold
Average Jury Awards1993 vs.1999
520759
175 324 249
1,9531,444
1,004
1,727
316 457
2,9593,495
7,361
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
Overall BusinessNegligence
VehicularLiability*
PremisesLiability
PersonalNegligence
MedicalMalpractice
ProductsLiability
($00
0)
1993 1999
*Comparison is between 1994 and 1999.Source: Jury Verdict Research; Insurance Information Institute.
Median Jury Award for Product Liability Cases
500,300 434,247 497,000
702,500550,000
1,257,000
1,806,000
$200,000
$500,000
$800,000
$1,100,000
$1,400,000
$1,700,000
$2,000,000
93 94 95 96 97 98 99
Source: Jury Verdict Research
Median Jury Award for Vehicular Liability Cases
175,127183,711
287,569
230,619
199,676
315,653
$150,000
$200,000
$250,000
$300,000
$350,000
94 95 96 97 98 99
Source: Jury Verdict Research
Trends in Million Dollar Verdicts*
4%
8% 7%
17%
26%
35%
37%
4%
7%
11%
22%
23%
36% 43
%
12%
12%
14%
28%
20%
45%
63%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
VehicularLiability
PremisesLiability
PersonalNegligence
BusinessNegligence
GovernmentNegligence
MedicalMalpractice
ProductsLiability
93-95 96-97 98-99
*Verdicts of $1 million or more.Source: Jury Verdict Research; Insurance Information Institute.
Florida Average Severity per GL/PL Claim
217
262278
314
370
455
170
203223
248
279
$150
$200
$250
$300
$350
$400
$450
$500
1995 1996 1997 1998 1999 2000
($00
0)
2001 Aon Study 2000 Aon Study
Source: Aon Risk Consultants.
Long-Term Care Facilities
Florida Loss Cost per Occupied Bed
2,800
4,000
5,400
7,900
10,000
12,700
2,0962,806
3,865
5,082
6,283
$0$1,000$2,000
$3,000$4,000$5,000$6,000
$7,000$8,000$9,000
$10,000
$11,000$12,000$13,000
1995 1996 1997 1998 1999 2000
($00
0)
2001 Aon Study 2000 Aon Study
Source: Aon Risk Consultants.
Long-Term Care Facilities
Asbestos Cumulative Paid Lossesand Reserves
12.914.0
15.016.0
17.6
8.49.5 9.2
9.810.4
$0
$5
$10
$15
$20
1995 1996 1997 1998 1999
($ B
illi
ons)
Cumulative Paid Losses Net Asbestos Reserves
Source: A.M. Best.
Paid vs. IncurredAsbestos Losses
3.4
2.2
0.9
1.6
2.2
1.31.1 1.0 1.0
1.6
$0
$1
$2
$3
$4
$5
1995 1996 1997 1998 1999
($ B
illi
ons)
Incurred Losses Paid Losses
Source: A.M. Best.
#10WALL STREET
Performance on Wall Street Highly Erratic
86.0%
-9.6%
-6.5%
-25.7%
39.8%
-3.1%
21.0%
43.4%
34.5%
18.1%
-9.1%
-39.3%
-60% -40% -20% 0% 20% 40% 60% 80% 100%
Nasdaq
S&P 500
Banks
Life/Health
All Insurers
Property/Casualty
Percentage Change
20001999
Source: SNL Securities; Insurance Information Institute
P/C insurers were up 43.4% in 2000;
Down 25.7% in 1999;
YTD 2001= -7.5%
Insurance Stock Performance:After the Tech Crash
-10.6%
47.8%
72.6%
76.6%
77.5%
78.0%
32.6%
-51.1%
-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80%
Nasdaq
S&P 500
Banks
P/C
Life/Health
All Insurers
Multiline
Brokers
* NASDAQ peaked on March 10, 2000 at 5048.62Source: Insurance Information Institute, SNL Securities
Total Return: March 10 through Year End 2000*
Insurance Stock Performance:Off to a Slow StartUP
-4.95%
-9.57%
-8.40%
-8.53%
-10.39%
5.16%
2.71%
-1.18%
12.60%
-15% -10% -5% 0% 5% 10% 15%
Nasdaq
DJIA
S&P 500
Banks
Multiline
All Insurers
P/C
Brokers
Life/Health
Source: SNL Securities, Insurance Information Institute
YTD Total Return through March 8, 2001
CREDIT SENSITIVITY
Mortgage Guarantee: -15.22%
Financial Guarantee: -7.34
BONUSWORRYThe Economy
Impact of Recession on P/C Premiums and Profitability (1970-1999)
8.1%
5.4%
-2.7%
0.2%
3.9% 3.8%2.7%
4.1%
8.8%
4.7%
7.0%
8.9%9.4%
11.3%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
Inflation (CPI) NWP Growth(unadj.)
Real NWPGrowth
ROE--P/CInsurers*
ROE--AllIndustries*
ROE--Banks* ROE--DiversifiedFinancial*
Recession Years (1970; 74-75; 80-82; 90-91)
Non-Recession Years (all other years, 1970-1999)
*GAAP return on equity, adjusted for inflation; Bank data 1952-99; Div. Fin. 1987-99Source: Insurance Information Institute
-2
0
2
4
6
8
10
12
14
Per
cen
t
CPI - All Items (1982-84=100)
Change in Consumer Price Index
Source: Bureau of Labor Statistics
Motor Vehicle Retail Sales (Millions of Units)
15.515.5
16.0
17.4
18.0
16.9
15.0
15.5
16.0
16.5
17.0
17.5
18.0
18.5
19.0
96 97 98 99 00* Nov. '00
Source: US Department of Commerce; Insurance Information Institute*Seasonally Adjusted Annual Rate (Jan-Nov 2000).
New Motor Vehicle Sales
Sales in late 2000 fell sharply. There will be an impact on
exposure growth in the personal auto line in 2001
Net loss of 2 to 3 million vehicles likely by mid-2001
New Private Housing Starts(Millions of Units)
1.193
1.014
1.200
1.288
1.4571.345
1.477 1.474
1.617 1.667
1.527
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
90 91 92 93 94 95 96 97 98 99 00*
Source: US Department of Commerce; Insurance Information Institute*Annualized 3rd Quarter 2000 data.
New Private Housing Starts Annualized starts in late 2000 were
down by 140,000 units compared with 1999, representing an estimated $70 million decrease in new exposure.
Recession & Credit Risk:Impact on Earnings & Surplus
-2.1%
-0.5%
-5.2%-4.1%
-1.2%
-12.1%
Decline 2001E Earnings
Decline in Surplus
Source: Goldman Sachs; 10K/10Q Reports.
4.08% Default RateAll Corporates
10% Default BelowInvestment Grade
100% Default BelowInvestment Grade
Some Companies with Credit Woes
Xerox
Sunbeam
TWA
PG&E
Edison Intl.Credit Default Swaps
Debt Guarantees
Anything Else—You Bet?
•Worries 1-10•The Economy•Banks in Insurance•Privacy•Federal vs. State Regulation•Attracting/Retaining Talent
Insurance Information Institute On-Line
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