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Insurance Market Report 2002The New Uncertainties
Allen F. HymanManaging DirectorMarsh Industry Practices
September 11, 2001
September 11, 2001: New Dimensions of Risk
Targets of riskFinancial size of risksConcentrations/Aggregations of riskSpread of risk
September 11, 2001: New Dimensions of Risk
Target– Who is vulnerable?
SizeConcentrations/AggregationsSpread
September 11, 2001: New Dimensions of Risk
TargetSize
– Probable maximum loss– Wide range of estimates
Concentrations/AggregationsSpread
The Worst Terrorist Attacks: Insured Property Losses
Amount Event Country ($USB) Year
WTC, Pentagon US 20-35* 2001
NatWest bombing UK .9 1993
Manchester, car bombing UK .7 1996
London, financial district bombing UK .7 1992
WTC bombing US .5 1993
* Includes business interruption
September 11, 2001: New Dimensions of Risk
TargetSizeConcentrations/Aggregations
– Workers compensation– Other lines
Spread
September 11, 2001: New Dimensions of Risk
TargetSizeConcentrations/AggregationsSpread
September 11, 2002:Lines Affected
Property– Physical damage, $10-15B– Business interruption, $10-$20B
Third-party liability, $10-$20B Aviation, $10-15B Life / Disability, $5-10B Workers compensation, $5-$10B
September 11, 2001: Responses
Insurance markets Insurance buyers and their brokersGovernments
September 11, 2001: Responses
Insurance marketplace– Exclusions– Stand-alone market
InsuredsGovernments
September 11, 2001: Responses
Insurance marketplace Insureds
– Risk controlGovernments
September 11, 2001: Responses
Insurance marketplace– Exclusions– Stand-alone market
Insureds– Risk control
Governments– Relief legislation– Pools– “Catastrophe rate load”
One Thing That Hasn’t Changed:The Question of Insurability
Is terrorism insurable by private sector?– Degree of uncertainty?
Need to quantify exposures – Computer modeling – Account for new variables
Northridge “Blind-thrust” faults9-11 Concentrations/
Aggregations of risk
As if 9-11 Wasn’t Bad Enough...
Enron
Property/CasualtyInsurance Industry Overview
9.8
1.0
-2.0
1.03.6 3.4
6.14.94.7
4.7
-2.4 -5.1
7.01.6
6.65.2
-1.8
11.7
18.8
9.7
14.2 15.8
4.4
20.3
4.4
19.2
11.1
36.7
25.5
53.0
24.8
1.4
-17.0
-38.4-40
-30
-20
-10
0
10
20
30
40
50
60
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
Changes to Policyholders Surplus:Signaling a Hard Market
Start ofHard Market
Start ofHard Market
Start ofHard Market
196
9
197
1
197
3
197
5
197
7
197
9
198
1
198
3
198
5
198
7
198
9
199
1
199
3
199
5
199
7
199
9
200
1(e
st.)
Data Source: A.M. Best Company
Start ofHard Market
A Historical PerspectiveThe Pain Threshold
0
1
2
3
4
5
6
7
8
9
10
1970 1975 1980 1985 1990 1995 2000 2002
General Market
Market Symptoms
1976– Affordability– Gov’t a relatively unknown as exposed– Civil Rights– Workers Compensation– Immunity– GL too broad
Market Symptoms
1983-85– Availability– Affordability– Cash Flow Underwriting– Interest Rates - high– Combined ratios – high– Rejection of classes of business– Insurance became political
Market Symptoms
2001– Years of soft market– Record Dow indicators– High combined ratios– Reinsurance shift– Coverage constriction– Retention increases– Limit reductions– 9/11
Premium Increases
0
50
100
150
200
250
300
Premium
Average
720%
122% avg
Timeliness of Final Quote
10%
66%
19%
5%
2 days before
2 wks before
1 month before
1 month after
Terms of Retention (Increase or Decrease)
-100
0
100
200
300
400
500
600
91% avg
Change In Limits
-100
-80
-60
-40
-20
0
20
40
60
Limits
Average
Increase
-14.5% avg incl “no change”
-32% for those who had a change
Did you have terrorism coverage before?
YES83%
NO17%
Was terrorism offered at renewal?
YES65%
NO22%
UNCLEAR13%
Did you buy terrorism?
YES27%
NO73%
Consolidated P/C Industry Net Income
14.2
5.8
19.3
10.9
24.4
36.8
30.8
-9.0
20.620.6
21.9
-10
-5
0
5
10
15
20
25
30
35
40
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001(est.)
(US$B)Data Source: A.M. Best Company
Net Premium Growth
2.42.0
6.1
3.7 3.63.4
2.82.3
1.9
4.4
8.5
0
1
2
3
4
5
6
7
8
9
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001(est.)
Data Source: A.M. Best Company(% Change)
Consolidated P/C Industry Combined Ratio
105.8
101.6
108.8
115.7
106.9
108.5
105.6
117.0
107.8106.5
110.1
100
105
110
115
120
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001(est.)
Data Source: A.M. Best Company
Insurer Financial Performance
14.6 11.6
19.5 20.8
35.5
23.4
14.49.9
-36.3
-18.1-22.1
-17.7 -16.7
-5.8
-16.8-23.1
38.0 41.5
34.2 33.7 32.6 33.739.9 38.038.936.8 40.7
-2.5
-18.3
13.8
-31.2
-20.5
-56.3-60
-50
-40
-30
-20
-10
0
10
20
30
40
50
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001(est.)
Investment Income Pretax Operating Income Underwriting Gain/Loss(US$B)
Data Source: A.M. Best Company
Policyholders Surplus
158.7 163.1
182.3193.3
230.0
255.5
308.5
333.3 334.3
317.4
279.0
150
200
250
300
350
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001(est.)
(US$B)Data Source: A.M. Best Company
Where Have All the Profits Gone?Volatile Variables
Investment income – Low interest rates
Catastrophe losses
P/C Insurers’ vs. Reinsurers’ Combined Ratio
103.7
103.6
106.5
118.0
107.9
106.7
105.6
145.0
114.9
110.6
116.4
105.8
117.0
110.1107.7
105.6101.6
106.5
108.5
106.9
115.7108.8
100
105
110
115
120
125
130
135
140
145
150
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001(est.)
Reinsurers' Combined Ratio Insurers' Combined Ratio
Data Source: A.M. Best Company
Impact of Catastrophe Losses on Combined Ratio
106.3
108.8
103.2
115.8
102.5
106.9
102.4
108.5
103.3
106.5
103.4
106.0
101.0101.6 102.6
105.6104.9
107.8108.9
110.3
108.2
117.0
100
105
110
115
120
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Pre-Catastrophe CatastropheData Source: A.M. Best Company
(est
.)
The Worst Catastrophes(including liability awards)
Amount Event Country ($USB) Year
1. Tobacco industry award US 14519992. World Trade Center attacks US 40-70 20013. Asbestos US 30-60 1990s+4. Hurricane Andrew US 18.6 19925. Northridge earthquake US 13.8 19946. Alaska oil tanker spill US 9.0 19767. Silicone breast implants US 5-71990s8. Typhoon Mireille Japan 6.7 19919. Winter storms Lothar-Martin Europe 6.0 199910. Hurricane Daria Europe 5.7 1999
(Continued)
The Worst Catastrophes (including liability awards)
Amount Event Country ($USB) Year
11. Hurricane Hugo Puerto Rico 5.5 198912. Auto fuel tank explosion US 4.9 199913. Autumn storm Europe 4.3 198714. Hurricane Vivian Europe 4.0 199015. Hurricane Georges US/Caribbean 3.5 199816. Intrauterine devices US 3.0+ 1969-7517. Tank car chemical leakage US 3.0 199718. Piper Alpha oil rig explosion UK 2.8 198819. Leaking chemical pipe US 2.7 1970s/1980s20. Kobe earthquake Japan 2.6 1995
Medical InflationAnnual change in average total health benefit cost, 1987-2001
11.2
8.1
7.36.1
0.2
2.52.1
-1.1
8.0
10.1
12.1
17.1
16.7
18.6
6.9
-4
0
4
8
12
16
20
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001(est.)
NOTE: Results for 1987-1998 are based on cost for active and retired employees combined. The change in cost from 1998-2001 is based on cost for active employees only.
(%)