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After the Crisis: The Global Economics of the P/C Insurance IndustryEnergy Markets Trends and Challenges
Robert P. Hartwig, Ph.D., CPCU PresidentInsurance Information Institute
Presentation Outline
• After the Crisis: Europe’s Weak Economic Recovery– Exposure Impacts on the Insurance Industry and
Energy Concerns
• Post-Crisis: Trends in Energy Consumption, Generation and Carbon Emissions
– Changes in global and regional demand, supply for energy and insurance
– Focus on Europe
• Impact of the Global Financial Crisis on the Energy Business
• Insurer Financial Strength & Ratings– (Re) Insurers Weathered the Storm Well
Presentation Outline (cont.)
• P/C Insurance Industry Financial Performance– Profitability, Capital & Capacity
• Energy Insurance Market Review– Capacity, Rating, Exposure, Profitability, Reinsurance, ART
– The Financial Crisis: Global Energy Supply, Demand and Investment
• Catastrophe Losses– 2010 Already Producing Large Losses in Energy Sector
• Post-Crisis Changes to the Insurance Regulatory Environment– Systemic Risk Regulation
After the CrisisEurope’s Weak Recovery and Exposure Impactson the Insurance Industry and Energy Concerns
Real GDP by Market 2007-2011F
11
.9
3.0
2.0
2.02
.6
2.6
9.0
0.5
0.4
-1.2
1.0
0.5
8.6
-5.0
-2.4
-5.1
-4.9-4
.0
9.7
1.2
3.1
1.8
1.7
1.3
9.1
2.13
.0
1.51.9 2.0
-8%
-3%
2%
7%
12%
17%
Euro Area Germany Japan US UK China
2007 2008 2009 2010F 2011F
(% change from previous year)
Source: Blue Chip Economic Indicators, 3/10/10 edition.
Slow growth in GDP will constrain exposure growth on a global scale
Real GDP for Largest European Economiesand Euro Area, 2007-2011F
3.5
2.1
3.0
2.6
2.6
2.0
0.30.51.
0
0.5
-4.0
-2.2
-5.0
-4.9
-4.0
1.41.
7
1.21.
7
1.3 1.61.
92.1
2.0
1.9
-7%
-5%
-3%
-1%
1%
3%
5%
Euro Area Germany UK France Netherlands
2007 2008 2009 2010F 2011F
(% change from prior year)
Source: Blue Chip Economic Indicators, 3/10/10 edition.
All European economies are growing slowly
US Real GDP Growth*
3.3
3.3
3.2
2.9
3.0
2.72.9
2.8
5.9
2.2
-0.7
-6.4
-5.4
-2.7
1.5
-0.7
2.12.
73.13.
6
2.5
1.6
3.7
0.8
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
20
00
2
00
1
2
00
2
2
00
3
2
00
4
2
00
5
2
00
6
20
07
08
:1Q
08
:2Q
08
:3Q
08
:4Q
09
:1Q
09
:2Q
09
:3Q
09
:4Q
10
:1Q
10
:2Q
10
:3Q
10
:4Q
11
:1Q
11
:2Q
11
:3Q
11
:4Q
*Gold bars are Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 3/10; Insurance Information Institute.
Recession began in December 2007. The economic impact affected energy demand on a global scale.
The steepest decline since
the 6.4% drop in Q1:1982
Length of US Recessions
43
13
811
13
810 11
16
6
16
8 8
18
0
5
10
15
20
25
30
35
40
45
50
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
* Estimated end date of recession was June 2009.Sources: National Bureau of Economic Research; Insurance Information Institute.
Current recession began in Dec. 2007 and is already the longest since 1981. If is now tied for the longest recession since the Great Depression.
1929-Present*
Mo
nth
s in
Du
rati
on
GDP Growth: Advanced and Emerging Economies vs. World
-4
-2
0
2
4
6
8
10
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Advanced economies Emerging and developing economies World
1970-2011F
Source: International Monetary Fund, World Economic Outlook Update, Jan. 26, 2010; Insurance Information Institute.
Emerging economies (led by China) are expected to
grow by 6.0% in 2010
Advanced economies will grow slowly in 2010,
dampening energy demand
World output is forecast to growby 3.9% in 2010, following a
-0.8% drop in 2009
Global Industrial Production Rebounds from a Tailspin, Raising Energy Demand
-30
-25
-20
-15
-10
-5
0
5
10
15
20
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Industrial Production
Annualized 3-Month Percent Change
Source: International Monetary Fund, World Economic Outlook Update, Jan. 26, 2010; Insurance Information Institute.
Global industrial production was down over 25% in early 2009,
adversely impacting energy demand, but growing at a 9% clip in late 2009
Industrial demand for energy was particularly hard hit
Inflation Rates for Largest European Economies and Euro Area, 2008-2011F
2.5
2.8
3.6
2.6
3.3
1.0
0.1
2.2
0.3
0.3
1.1
1.4
2.4
1.11
.3 1.41
.61.8
1.6
1.6
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
Euro Area Germany UK France Netherlands
2008 2009 2010F 2011F
(% change from prior year)
Source: Blue Chip Economic Indicators, 3/10/10 edition.
Inflation is below 1.5% across Europe, reducing claim severity concerns
3-Month Interest Rates for Major Global Economies, 2008-2011F
1.4
2.0
0.7
0.3
0.7
0.2
1.3
2.1
0.6
1.8
0.4
4.0
1.2
0.4
1.2
1.7
4.4
2.5
0.5
2.6
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
Euro Area Germany UK France US
2008 2009 2010F 2011F
Source: Blue Chip Economic Indicators, 3/10/10 edition.
Interest rates remain generally low, depressing insurer investment earnings and
putting more pressure on rates
Real GDP Growth vs. Real P/C Premium Growth: Modest Association
-3.8
%
-3.3
0%-4.2-3.8
-0.5
-2.9
1.2
7.7
13
.7
5.6
1.6
-0.3
-0.4
0.6
0.40.81.1
3.1
-1.0
-1.8-1
.0
-1.6
0.3
5.8
20
.3
18
.6
4.3
1.8
-1.5
-6.5
-7.4
-0.9
5.2
-10%
-5%
0%
5%
10%
15%
20%
25%
78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E-4%
-2%
0%
2%
4%
6%
8%
Real NWP Growth Real GDP
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 3/10; Insurance Information Institute.
P/C insurance industry’s growth is influenced modestly by
growth in the overall economy
Rea
l NW
P G
row
th
Rea
l GD
P G
row
th
Global Industrial Production and Exports: 2005 to 2009Annual Percentage Change of 3-Month Moving Average
Source: International Monetary Fund, January 2010; Insurance Information Institute.
Industrial production and global trade crashed extraordinarily during the financial crisis
Post-CrisisTrends in Energy Consumption, Generation and Carbon Emissions
World & European Primary Energy Consumption
347.7
462.1 472.4508.3
551.5595.7
637.3678.3
70 81.4 81.6 82.2 84.8 87.9 90 91.8
0
100
200
300
400
500
600
700
800
1990 2005 2006 2010P 2015P 2020P 2025P 2030P
World Europe (OECD Countries)
Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.
1990-2030P
Qu
adri
llio
n B
TU
s
Between 2006 and 2030, energyconsumption is projected to
increase by 1.1% annually in OECDEurope and 1.5% worldwide
Global energy consumption is expected to increase by 33.4% between 2010 and 2030 but by only 11.7% in OECD Europe
European Energy Consumption As a Shareof Global Consumption
70
81.4 81.6 82.284.8
87.990
91.8
13.5%14.1%14.8%15.4%
16.2%17.3%17.6%
20.1%
50
55
60
65
70
75
80
85
90
95
1990 2005 2006 2010P 2015P 2020P 2025P 2030P
0%
5%
10%
15%
20%
25%
Europe (OECD Countries) OECD Europe Share of Global Energy Consumption
Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute calculations.
Europe’s share of global energy consumption is
projected to fall from 20.1%in 1990 to 16.2% in 2010
and 13.5% in 2030P
Eu
rop
ean
En
erg
y C
on
sum
pti
on
(O
EC
D C
ou
ntr
ies,
Qu
ad. B
tu)
OE
CD
Eu
rop
e S
har
e o
f G
lob
al
En
erg
y C
on
sum
pti
on
1990-2030P
Average Annual Change in Total Energy Consumption by Country/Region
3.2%
2.6% 2.5%
1.5% 1.4%1.2% 1.1%
0.9%
0.5% 0.5%
China Brazil India Canada S.Korea
Mexico Aust/NZ Russia US Europe(OECD)
Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.
2006-2030P
Ave
rag
e A
nn
ual
Ch
ang
e in
Co
nsu
mp
tio
n
(Qu
adri
llio
n B
TU
s)
Europe/US have the slowest growth rates for energy
consumption through 2030, growing at less than 1/6 the rate
in China and 1/5 that of India
European Share of Global Electricity Generation Capacity As a Share of Global Capacity
754838
925978
1039 1067
16.5%
17.4%17.8%
18.4%18.3%
18.8%
50
250
450
650
850
1050
1250
2006 2010P 2015P 2020P 2025P 2030P
15%
16%
17%
18%
19%
Europe (OECD Countries) OECD Europe Share of Installed Generating Capacity
Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute calculations.
1990-2030P
Europe’s share of globalenergy generation
capacity is projected tofall from 18.3% in 2010
and 16.5% in 2030
Eu
rop
ean
Ele
ctri
cal
Gen
erat
ion
Cap
acit
y (O
EC
D C
ou
ntr
ies
, G
igaw
atts
)
OE
CD
Eu
rop
e S
har
e o
f G
lob
al
Ele
ctri
city
Gen
era
tio
n C
apac
ity
Renewable Electricity Generation in OECD Europe by Fuel
Wind is by far the most important source of new
generation capacity in OECD
Europe (i.e., excludes Russia
and Eurasian countries)
2006-2030P
Sources: Energy Information Administration: International Energy Outlook 2009; Insurance Information Institute.
$0
$20
$40
$60
$80
$100
$120
$140
$160
Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
World Crude Oil Prices: 1997- March 2010
*All countries spot market price weighted by estimated export volume. Source: Energy Information Administration; http://tonto.eia.doe.gov/dnav/pet/hist/wtotworldw.htm
Crude oil prices peaked at $145.29 in July 2008,
fell 75% to $34.57 in Jan. 2009, but are rising again
to over $78/bbl inmid-March 2010
Jan. 1998 $15.21
PEAKJul. 2008 $145.29
TROUGHJan. 2009
$34.57
RECENT12 Mar.
2010 $78.25
Do
llars
Per
Bar
rel*
Global Net Electricity Generation is Growing Faster than Consumption
• Electricity generation is growing faster than total energy consumption
• This suggeststhat there is a net substitution away from other energy sources to electricity
• Implies a bright future for utilities
• Requires significant insurance capacity
Sources: Energy Information Administration: International Energy Outlook 2009; Insurance Information Institute.
Average Annual Change in ElectricityGenerating Capacity by Country/Region
4.6%
3.3%
3.0%
2.1% 2.1%1.9% 1.9%
1.5% 1.4% 1.3% 1.3%
0.9%
China India Brazil Africa MiddleEast
Mexico S.Korea
Europe(OECD)
Canada Russia Aust/NZ US
Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.
2006-2030P
Ave
rag
e A
nn
ual
Ch
ang
e in
Gen
erat
ing
Cap
acit
y(G
igaw
atts
)
Electricity generation capacity will grow faster than
consumption in Europe, suggesting a net substitution to
electricity as a primary energy
source
World & European Carbon Dioxide Emissions
21
,48
8
28
,29
6
29
,02
8
30
,96
7
33
,11
1
35
,42
8
37
,87
9
41
49
44
24
44
29
43
35
43
68
44
50
44
89
45
19
40
,38
5
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
1990 2005 2006 2010P 2015P 2020P 2025P 2030P
World Europe (OECD Countries)
Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.
1990-2030P
Mill
ion
s o
f M
etri
c T
on
s
Between 2006 and 2030, CO2 emissions are projected to increase by 0.1% annually in OECD Europe
and 1.4% worldwide
Global CO2 emissions are expected to increase by 30.4% between 2010 and 2030 but by only 4.3% in
OECD Europe
European Carbon Dioxide Emissions As a Share of Global Emissions
4,149
4,424 4,429
4,3354,368
4,4504,489
4,519
11.2%11.9%12.6%13.2%
14.0%15.3%15.6%
19.3%
3,900
4,000
4,100
4,200
4,300
4,400
4,500
4,600
1990 2005 2006 2010P 2015P 2020P 2025P 2030P
0%
5%
10%
15%
20%
25%
Europe (OECD Countries) OECD Europe Share of Global Energy Consumption
Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute calculations.
Europe’s share of global carbon emissions is projected to fall
from 19.3% in 1990 to 14.0% in 2010 and 11.2% in 2030P
1990-2030P
Eu
rop
ean
CO
2 E
mis
sio
ns
(OE
CD
Co
un
trie
s, M
ill. M
etri
c T
on
s)
OE
CD
Eu
rop
e S
har
e o
f G
lob
al C
O2
Em
issi
on
s
Average Annual Change in Carbon Dioxide Emissions by Country/Region
2.8%2.5%
2.1%1.9%
1.5%
1.2%1.1%
0.8%0.6% 0.6%
0.3%0.1%
China Brazil India MiddleEast
Africa S.Korea
Mexico Canada Aust/NZ Russia US Europe(OECD)
Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.
2006-2030P
Mill
ion
s o
f M
etri
c T
on
s Europe has the slowest growth rates for CO2
emissions, growing at about1/30th the rate in China
World & European Nuclear Energy Consumption
1,9
09
2,6
39
2,6
60
2,7
61
3,0
45
3,3
85
3,6
46
74
3 93
2
92
9
92
2
91
5
90
5
89
6
90
2
3,8
44
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
1990 2005 2006 2010P 2015P 2020P 2025P 2030P
World Europe (OECD Countries)
Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.
1990-2030P
Bill
ion
Kilo
wat
t H
ou
rs
Between 2006 and 2030, nuclear energy consumption is projected to
decrease by 0.1% annuallyin OECD Europe and increase
1.5% worldwide
Global nuclear energy consumption is expected to
increase by 39.2% between 2010 and 2030 but fall by 2.2% in OECD
Europe
European Nuclear Energy Consumption As a Share of Global Consumption
743
932 929 922 915 905 896 902
23.5%24.6%26.7%
30.0%33.4%
34.9%35.3%
38.9%
600
650
700
750
800
850
900
950
1990 2005 2006 2010P 2015P 2020P 2025P 2030P
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Europe (OECD Countries) OECD Europe Share of Global Energy Consumption
Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute calculations.
Europe’s share of global energy consumption is
projected to fall from 38.9% in 1990 to 33.4% in 2010 and
23.5% in 2030P
1990-2030P
Eu
rop
ean
Nu
clea
r en
erg
y C
on
sum
pti
on
(OE
CD
Co
un
trie
s, B
ill. K
wh
)
OE
CD
Eu
rop
e S
har
e o
f G
lob
al N
ucl
ear
En
erg
y C
on
sum
pti
on
Average Annual Change in Nuclear Energy Consumption by Country/Region
9.9%8.9%
3.5% 3.2%2.3% 2.0%
1.5% 1.2% 1.1% 0.8% 0.6% 0.6%
-0.1%
India China Russia Africa S.Korea
Brazil Canada Japan Mexico Canada Russia US Europe*
*OECD Countries.
Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.
2006-2030P
Bill
ion
s o
f K
ilow
att
Ho
urs
Europe is the only region with net negative nuclear energy
consumption
World Net Effective Electric Power Generation
11.312.6
14.6
18.0
20.623.2
26.0
28.9
31.8
0
5
10
15
20
25
30
35
1990 1995 2000 2006 2010 2015 2020 2025 2030
Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.
1990-2030 (est.)
Tri
llio
ns
of
Kilo
wat
t H
ou
rs
Global electric power generation was dampened
about 3% by the global financial crisis, but will still grow at 2.9%
per year through 2030 compared to 1.9% for total
energy consumption
Electricity Supply Infrastructure: Despite Crisis, Huge Investments Needed along with Insurance
$1,351
$1,876
$809
$377
$1,913
$799 $783 $744
$258
$609
Europe NorthAmerica
Pacific Russia China E. Asia S. Asia LatinAmerica
MiddleEast
Africa
Source: International Atomic Energy Agency, World Outlook for Electricity Investment.
2001-2030 (est.)
$ B
illio
ns
Investments in electricitysupply infrastructure
globally are expected tototal $9.841 trillion
between 2001 and 2030
European investment could total $1.351 trillion
World Energy Supply Infrastructure Investment by Category
Source: International Atomic Energy Agency, World Outlook for Electricity Investment.
Generation-New$4,08042%
Generation-Refurbished$4394%
Transmission$1,56816%
Distribution$3,75538%
2001-2030PGeneration will
account for 46% or $4.5 trillion of all
investment through 2030 to meet rising demand. Financial
crisis had no significant impact on
long-term global energy demand and the need to develop
supply infrastructure
$ Billions
World Electricity Generation by Fuel
0.9
2.73.4 3.6
7.4
0.9
3.8
6.7 6.8
13.6
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Liquids Nuclear Renewables Natural Gas Coal
2006 2010 2015 2020 2025 2030
The sharp increase in generation and the
changing composition of fuel source will influence
insurance demand and the nature of products sold
Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.
Tri
llio
ns
of
Kilo
wat
t H
ou
rs
2006-2030F
World Electricity Generation by Fuel Source Share
Source: Insurance Information Institute from data reported in US Department of Energy Report #:DOE/EIA-0484 (Sept. 2008).
Renewables18%
Natural Gas20%
Coal41%
Liquids 6%
2005 vs. 2030F
2030
Nuclear15%
2005
Renewables15%
Natural Gas25%
Coal47%
Liquid 2%
Nuclear11%
Surprisingly, coal as asource of electricity
generation is expected torise through 2030. CO2,
pollution issues?
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2005 2010 2015 2020 2025 2030
Liquids Coal Natural Gas Renewables Nuclear
3.303.70
3.974.21
4.444.67
European Electricity Generation, by Fuel
Source: US Department of Energy Report #:DOE/EIA-0484 (Sept. 2008); Insurance Information Institute.
2005-2030F
Tri
llio
ns
of
Kilo
wat
t H
ou
rs
Gas and renewables grow, coal shrinks, implying
different insurance needs in Europe
Electricity Consumption in the United States*
1.52.0
-3.9
-1.6
2.8
0.2
2.8
1.20.8
2.1
-0.7
2.8
1.7
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010P 2011P
*Change based on billions of kilowatthours used per day. Source: Energy Information Administration, Short-Term Energy Outlook, March 2010, Insurance Information Institute.
1999-2011P
Electricity consumption in the US was hit severely due to the
deep recession but is now rebounding modestly
US Total Electricity Consumption
Recession had a
significant but in the long-run
minor impact on electricity consumption
Modest growth in
consumption is projected
for both 2010 and 2011
1999-2011P
Source: Energy Information Administration, Short-Term Energy Outlook, March 2010, Insurance Information Institute.
Severe Recession Depressed US Energy Demand
-1.7-1.7
-6.4
-1.3
-2.2
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
Oil Natural Gas Electricity(Industrial)
Electricity (All) Coal forElectricity
Sources: Energy Information Administration based on Short-Term Energy Outlook, March 2009 and March 2010.
Change 2009 vs. 2008
Per
cen
tag
e C
han
ge
in C
on
sum
pti
on
Industrial consumption of electricity has
experienced the most severe declines
US Energy Expenditures As a % of GDP Have Been Hurt by Recession
0%
2%
4%
6%
8%
10%
12%
14%
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 10F11F
Industrial Production
Source: Energy Information Administration, Short-Term Energy Outlook, March 2010; Insurance Information Institute.
The energy price bubble pushed energy expenditures to 9.9% of GDP in 2008. The bursting of the bubble and recession pushed expenditures down to 7.0% of GDP
in 2009, rising to about 8% in 2010 and 2011.
Energy demand is recoveringfrom the global recession and2008 energy price spike, but
remains below pre-crisis levels
Per
cen
tag
e o
f G
DP
Impact of the Global Financial Crisis on Energy Business
Global Financial Crisis Will Have Little Long-Term Impact on Consumption or Generation
• The net impact of the financial crisis was to reduce projected 2030 global capacity and consumption by 2 to 3% from levels projected pre-crisis
• The long-term impact is therefore negligible, though there were some significant short- and intermediate term impacts, particularly for industrial energy consumption
• Fossil fuel price volatility exacerbated the crisis
• The trends toward renewable energy sources will continue with little disruption
• The crisis, along with dissatisfaction over rising tax burdens in the US, have significantly reduced the chances of a comprehensive cap and trade systemin the US
• Relative weakness of US and European recoveries will accelerate shift in consumption and generation shares in Asia
Financial Crisis: Energy’s Lessons
Financial Strength & RatingsThe Global Insurance Industry Has Weathered the Economic Storm Well
P/C Insurer Impairment Frequency vs. Combined Ratio
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 0 1 2 3 4 5 6 7 8 09*0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Combined Ratio after Div P/C Impairment Frequency*Combined ratio of 101.7 is through Q3:09; 0.36% 2009 impairment rate is III estimate based on preliminary A.M. Best data.Source: A.M. Best; Insurance Information Institute.
2009 estimated impairment rate rose to 0.36% up from a near record low of 0.23% in 2008 and the 0.17% record low in
2007; Rate is still less than one-half the 0.79% average since 1969
Impairment rates arehighly correlated with
underwritingperformance and
reached record lows in2007/08
Co
mb
ined
Rat
io
Imp
airm
ent
Rat
e
1969-2009P
Summary of A.M. Best’s P/C Insurer Ratings Actions in 2009
Source: A.M. Best.
Upgraded – 59, 3.2%
Initial – 44, 2.4%
Under Review – 69, 3.8%
Other – 216, 11.9%
P/C insurance is by design aresilient business. The dualthreat of financial disastersand catastrophic losses are
anticipated in the industry’s riskmanagement strategy
Despite financial market turmoil and a soft market
in 2009, 76% of ratings actions by A.M. Best were affirmations;
just 2.9% were downgrades and 3.2%
were upgrades
Downgraded – 53, 2.9%
Affirm – 1,375, 75.7%
Reasons for US P/C Insurer Impairments
Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008.
Investment Problems 7.0%
Misc. 9.1%
Significant Change in Business 4.2%
Reinsurance Failure 3.7%
1969-2008
Affiliate Impairment 7.9%
Deficient Loss Reserves/Inadequate Pricing
38.1%
Deficient loss reserves and inadequate pricing are the leading causeof insurer impairments, underscoring the importance of discipline.
Investment catastrophe losses play a much smaller role.
Catastrophe Losses 7.6% Alleged Fraud 8.1%
Rapid Growth 14.3%
P/C Insurance Financial PerformanceA Resilient Industry in Challenging Times
ProfitabilityHistorically Volatile
P/C Net Income after Taxes
14
,17
8
5,8
40
19
,31
6
10
,87
0 20
,59
8
24
,40
4
36
,81
9
30
,77
3
21
,86
5
20
,55
9
3,0
46
30
,02
9 38
,50
1
44
,15
5
65
,77
7
62
,49
6
2,3
79
30
,60
0
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 09P
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 4.5% ROAS for 2008 and 5.9% for the first 9 months of 2009. 2009:Q3 net income was $20.5 billion excluding M&FG. Sources: A.M. Best, ISO, Insurance Information Institute.
1991-2009P
$ M
illio
ns
2005 ROE*= 9.4% 2006 ROE = 12.2% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009:Q3 ROAS1 = 4.5%
P/C industry profits for full-year 2009 were up sharply from 2008, but are still well below
pre-crisis levels
-$6,970
ROE: P/C vs. All Industries 1987–2009:Q3*
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09:Q3
US P/C Insurers All US Industries
P/C profitability iscyclical and volatile
Hugo
Andrew
Northridge
Lowest CAT Losses in 15 Years
Sept. 11
Katrina, Rita, Wilma
4 Hurricanes
Financial Crisis*
* Excludes Mortgage & Financial Guarantee in 2008 and 2009 through Q3. Sources: ISO, Fortune; Insurance Information Institute.
Per
cen
t
A 100 Combined Ratio Isn’t What ItOnce Was: 90-95 Is Where It’s at Now
97.5
100.6 100.1 100.7
92.6
99.5101.0
5.9%
9.6%
15.9%
14.3%
12.7%
4.5%
8.9%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2008* 2009:Q30%
3%
6%
9%
12%
15%
18%
Combined Ratio ROE*
Combined ratios must be lower in today’sdepressed investment environment to generate
risk appropriate ROEs
Combined ratio of about 100generated a 16% ROE in 1979, 10% in 2005 and 6% in 2009
*2009 figure is return on average statutory surplus. 2008 and 2009 figures exclude mortgage and financial guarantee insurers.Source: Insurance Information Institute from A.M. Best and ISO data.
Co
mb
ined
Rat
io /
RO
E
P/C Premium Growth Primarily Driven by the Industry’s Underwriting Cycle, Not the Economy
-10%
-5%
0%
5%
10%
15%
20%
25%71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Strength of Recent Hard Markets by NWP Growth
1975-78 1984-87 2000-03
Shaded areas denote “hard market” periods. Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
Per
cen
t
Net written premiums fell 0.7% in 2007 (first decline since 1943) by 2.0% in 2008, and 4.2% in
2009, the first 3-year decline since 1930-33 during the Great Depression. Expected decline of 1.6%
in 2010.
Average Commercial Rate Change, All Lines
-6.0
-5.8-4
.9
-5.1
-6.4
-11
.0
-12
.9
-13
.5-12
.0
-13
.3-11
.8
-11
.3
-9.6
-5.3
-3.0-2.7
-4.6
-8.2
-9.7
-9.4
-7.0-5
.9
-3.2
-0.1
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
1Q
04
2Q
04
3Q
04
4Q
04
1Q
05
2Q
05
3Q
05
4Q
05
1Q
06
2Q
06
3Q
06
4Q
06
1Q
07
2Q
07
3Q
07
4Q
07
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
KRW Effect
Magnitude of price declines shrank during
crisis, reflecting shrinking capital,
reduced investment gains, deteriorating
underwriting performance, higher cat
losses and costlier reinsurance
Market remains soft as capital restored and underwriting
losses fall
(1Q:2004-4Q:2009)
Per
cen
t
Source: Council of Insurance Agents & Brokers; Insurance Information Institute.
Change in Commercial Rate Renewals
Most major commercial linesrenewed down in Q4:2009 byroughly the same margin as
a year earlier
0.2
-1.9-2.3
-3.7-3.9
-5.6-6.0 -5.8
-5.0-4.6
-4.0
-7.0%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
Source: Council of Insurance Agents & Brokers; Insurance Information Institute.
Per
cen
tag
e C
han
ge
(%)
By Line: 2009:Q4
Change in Commercial Rate Renewals
Market has been soft for 6 years
and remains soft as capital is restored and underwriting
losses fall
KRW Effect
Peak = 2001:Q4 +28.5%
Trough = 2007:Q3 -13.6%
Source: Council of Insurance Agents & Brokers; Insurance Information Institute.
Per
cen
tag
e C
han
ge
(%)
By Account Size: 1999:Q4 to 2009:Q4
By Account Size: 1999:Q4 to 2009:Q4Cumulative Quarterly Commercial Rate Changes
Pricing today is where it was in
Q2:2001 (pre-9/11)
Source: Council of Insurance Agents & Brokers; Insurance Information Institute.
1999
:Q4=
100
Capital/Policyholder Surplus (US)Shrinkage, but Not Enough to Trigger Hard Market
Policyholder Surplus
487.1496.6
512.8521.8
478.5
457.3
437.1
463.0
490.8
511.5505.0515.6517.9
$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 09:Q3 09:Q4P
Pre-crisis peak. Capacity peaked at $521.8 as of 9/30/07.
Capacity as of 12/31/09 was just 0.5% below the 2007 peak and will
likely set a new record in 2010.
Capacity has recovered and is now within 2% of its pre-crisis peak.
Declines Since 2007:Q3 Peak
08:Q2: -$16.6B (-3.2%) 08:Q3: -$43.3B (-8.3%) 08:Q4: -$64.5B (-12.4%)09:Q1: -$84.7B (-16.2%)
09:Q2: -$58.8B (-11.2%)09:Q3: -$31.8B (-5.9%)09:Q4: -$10.3B (-1.9%)
Source: ISO, AM Best.
$ B
illio
ns
2006:Q4–2009:Q4P
Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*
16.2
13.8
6.2
10.9
6.9
9.6
3.3
0%
3%
6%
9%
12%
15%
18%
6/30/1989Hurricane
Hugo
6/30/1992HurricaneAndrew
12/31/93NorthridgeEarthquake
6/30/01Sept. 11Attacks
6/30/04Florida
Hurricanes
6/30/05Hurricane
Katrina
FinancialCrisis as of3/31/09**
The financial crisis at its peakranks as the largest “capital
event” over the past 20+ years
* 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 9/30/09 (latest available) ratio = 5.9%. Source: PCS; Insurance Information Institute.
Per
cen
t
Historically, Hard Markets Follow When Surplus “Growth” Is Negative*
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
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 09E10P
NWP % change Surplus % change
Sharp decline in capacityis a necessary but notsufficient condition for
a true hard market
Surplus growth is now positive but premiums
continue to fall, a departure from the historical pattern
* 2009 NWP and Surplus figures are % changes as of Q4:09P vs Q4:08. Sources: A.M. Best, ISO, Insurance Information Institute.
Per
cen
t
Investment PerformanceInvestments Are a Principle Source of Declining Profitability
Property/Casualty Insurance Industry Investment Gain
35.4
42.847.2
52.3
44.4
36.0
45.348.9
59.455.7
64.0
31.435.1
58.0
51.956.9
$0
$10
$20
$30
$40
$50
$60
$70
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09P
Investment gains fell by 51% in 2008 due to lower yields andpoor equity market conditions. In 2009, the return of realized capital
losses helped offset lower investment income
1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. * 2005 figure includes special one-time dividend of $3.2B. Sources: ISO; Insurance Information Institute.
$ B
illio
ns
1994–2009P1
-7.3
-5.7-5.2
-4.3-3.7
-3.3-3.3-3.1
-1.8 -1.8 -2.0
-3.6
-1.9 -2.1
-8.0%
-7.0%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
Reduction in Combined Ratio Necessaryto Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
Lower investment earnings place a greater burden on underwriting
and pricing discipline
*Based on 2008 Invested Assets and Earned Premiums. **US domestic reinsurance only. Source: A.M. Best; Insurance Information Institute.
Underwriting TrendsFinancial Crisis Does Not Directly Impact Underwriting Performance: Cycle, Catastrophes Were 2009’s Drivers
2.3
-2.1
-8.3
-2.6-6.6
-9.9 -9.8
-4.1
1
11.7
23.2
13.79.9
7.3
-6.7-9.5
-14.6-16 -15
-5
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
$25
$309
2
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
E
11
E
-6
-4
-2
0
2
4
6
8
Prior Yr. Reserve Development ($B) Impact on Combined Ratio (Points)
P/C Reserve Development
Reserve releases areexpected to taper off
in 2010 and dropsignificantly in 2011
Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclay’s Capital; A.M. Best.
Pri
or
Yr.
Res
erve
Rel
ease
($B
)Im
pact o
n C
om
bin
ed R
atio (P
oin
ts)
1992–2011E
Calendar Year vs. Accident Year P/C Combined Ratio
105.
6
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
114.
7
107.
8 111.
8
107.
4
108.
3
105.
3 109.
2
109.
2
110.
0
112.
3
100.
8
96.6
96.0
100.
6
93.9
97.4
105.
5
105.
7 109.
4
115.
7
106.
9
108.
4
106.
4
105.
8
101.
6
80
85
90
95
100
105
110
115
120
92 94 96 98 00 02 04 06 08 10ECalendar Year Accident Year
Accident year results show a more significant deteriorationin underwriting performance. Calendar year results are
helped by reserve releases
Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclay’s Capital; A.M. Best.
1992–2010E1
Energy Insurance Market ReviewGlobal Energy Business Rebounding as Financial Crisis Eases; Other Factors Matter Too
Key Trends
• Capacity
• Exposure
• Profitability
• Reinsurance
• Alternative Risk Transfer
Global Energy Insurance Markets: Key Trends
• Aggregate commercial property/casualty (nonlife) capacity is now just below its 2007 Q3 peak after falling sharply in 2008 and is expected to set a new record in 2010
• Capital providers remain attracted to the energy sector despite potential losses because of the profitable underwriting results posted by many P/C insurers in 2009
• Abundance of capital and lack of major catastrophe losses are driving down prices and increasing competition
• 2010 global capacity for upstream energy at 10-year high. Capacity for downstream risks also back up to 2000 levels
Source: Willis Energy Market Review: March 2010.
Insurance Capacity
Upstream Operating Underwriting Capacities, 2000-2010 (Excl. GOM)Capacity at Ten Year High
Source: Willis Energy Market Review: March 2010.
Downstream Operating Underwriting Capacities, 2000-2010 (Excl. GOM)Capacity
Source: Willis Energy Market Review: March 2010.
Upstream Capacities and Average Rating Levels, 1993-2010 (Excl. GOM)How Far are Rating Levels Set to Fall?
Source: Willis Energy Market Review: March 2010.
Onshore Capacities and Average Rating Levels, 1993-2010 (Excl. GOM)Rating Levels
Source: Willis Energy Market Review: March 2010.
International Liability Market Capacity,2001-2010
Source: Willis Energy Market Review: March 2010.
Global Energy Insurance Markets: Key Trends
• Global energy demand rebounding as financial crisis eases. Energy insurers’ exposure and therefore premium income levels can only benefit from upturn in energy industry activity and recovery of worldwide oil prices.
• BUT, capital providers’ willingness to invest fresh capital in insurance industry has boosted capacity to 10-year high, creating soft market conditions
• Upswing in project activity begins to get underway following oil price recovery
• BOTTOM LINE IN 2010: Renewed confidence in the economic recovery boosts demand and supply for energy and energy assets
– Global energy demand will continue to rebound
– Rise in fuel prices signals new sources of premium income, but could also signal potential increase in frequency and severity of losses
– Long-term partnerships and risk quality key as insurance industry continues to meet demands of buyers in increasingly competitive market
Insured Exposure
Source: Willis Energy Market Review March 2010; Insurance Information Institute.
Global Energy Insurance Markets: Key Trends
• Loss of investment return necessarily increases pressure on (re)insurers to generate underwriting profits in soft market
• Lack of major catastrophes and relatively benign claims environment (for now) reduces insurers’ reliance on decreasing investment returns for profits
• Many insurers struggling to obtain premium growth in face of global recession and softening market
• Insurers will be forced to compete more fiercely for premium income and market share in future
Source: Willis Energy Market Review March 2010; Insurance Information Institute.
Profitability
Energy Losses vs. Global Energy Premium Income 1990-2009*
Source: Willis Energy Loss Database (figures include both insured and uninsured losses*Figures include both insured and uninsured lossesSource: Willis Energy Market Review: March 2010.
Reinsurance Market Trends
• Over the preceding 12 months when many other markets were in turmoil the global reinsurance industry continued to meet its clients requirements
• By and large reinsurers have maintained a responsible underwriting attitude over the January 1 renewal season
• January 1 renewals saw a softening in reinsurance pricing due to a profitable 2009 underwriting year and a recovery from 2008 lossesfollowing the global investment market recovery in 2009
• Primary insurers struggling to obtain premium growth put pressure on their expense ratios and reinsurance cost budgets
• Cat bond market recovering helped by convergence in pricing between traditional reinsurance and cat bonds
• Reinsurers’ ability to continue to provide clients with long-term capital security
Source: Willis Energy Market Review March 2010; Insurance Information Institute.
Global Reinsurance Capacity Shrank in 2008, Mostly Recouped in 2009
Source: AonBenfield Reinsurance Market Outlook 2009; Insurance Information Institute.
Hurricanes14%
RealizedCapitalLosses
31%
Change inUnrealized
CapitalLosses
55%
360
300
340
270
280
290
300
310
320
330
340
350
360
370
2007 2008 2009P
Global Reinsurance Capacity
Global reinsurance
capacity fell by an estimated
17% in 2008, but rebounded on investments
and light cats losses in 2009
Source of Decline
$ B
illio
ns
Catastrophe Bonds: Risk Capital Issuance
633846 985 1,139 967
1,220
1,730
1,143
1,991
4,693
6,996
2,686
3,392
0
1000
2000
3000
4000
5000
6000
7000
8000
97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Guy Carpenter; Insurance Information Institute.
Catastrophe bond risk capital issuance plunged by 62% when credit market turmoil spread in 2008 but was up 26% in 2009 as
markets improved
$ M
illio
ns
Catastrophe LossesAdverse Trends in Catastrophe Losses
50
100
150
200
250
300
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Global Natural Catastrophes 1980-2009
MEGATRENDGlobal natural catastrophe
loss trends are ominous and portend an even more
disastrous decade ahead. Terrorism and other man-
ade disasters couldexacerbate the trend.
Overall and insured losses with trend
Source: Munich Re NatCatSERVICE; Insurance Information Institute.
US
$ B
illio
ns
Overall losses (in 2009 values) Insured losses (in 2009 values)
Trend overall losses Trend insured losses
Natural Catastrophes 2009-Jan 2010
Fast growing India is
exposed to many large-scale natural catastrophes, though still
a “small” insurance
market
China is also exposed to many large-scale natural catastrophes, but still has relatively low
levels of insurance
penetration
2009: Catastrophe losses were relatively lightdue to the lack of hurricane activity
Longer-run: An increasing share of insuredcatastrophe losses will come from the
developing world, especially China, India
Worldmap
Source: Munich Re NatCatSERVICE; Insurance Information Institute.
Natural Catastrophes: Jan-Mar 2010
Winter Storm Xynthia
produced at least $2B in
insured losses and $4B in economic
losses, including damage to
energy infrastructure
Chilean earthquake (mag.
8.8) on 27 Feb. produced at least
$4 billion in insured losses,
$20 billion in economic losses, including damage
to energy infrastructure
Severe winter weather in the
Eastern US produced at least
$1B in insured losses and $2B in economic losses, including damage
to energy infrastructure
Source: Munich Re NatCatSERVICE; Insurance Information Institute.
Worldmap
The Costliest Catastrophes So Far in 2010 Impacted the Energy Business and Its Insurers Significantly
*Period from 1 January through 31 March 2010. Source: 2010 Münchener Rückversicherungs-Gesellschaft, Geo Risk Research, NatCatSERVICE.
Post-Crisis Changes to the Insurance Regulatory EnvironmentRegulators Are Threatening to Impose Regulations Appropriate for Banks on (Re)Insurers
Systemic Risk: Oversight & Resolution Authority
Issues Related to Systemic Risk & Resolution Authority• US federal authority created to oversee systemic risk of large
financial holding companies (e.g., Federal Reserve or other existing/new agency) [a.k.a. TOO BIG TOO FAIL]
– P/C insurers are working to “carve out” an exception to systemic risk oversight (arguing they were not the source/cause of problems)
– Without such an exception, P/C insurers could be subject to assessments (e.g., Financial Responsibility Tax) for failed non-insurance financial institutions or could be forced to repay funds provided for government assistance to firms due to problems outside of their P/C insurance operations
• European regulators seem to believe large (re)insurers should be included under the definition of systemically important firms
Source: Insurance Information Institute.
Systemic Risk: Oversight & Resolution Authority
How Current Systemic Risk Proposal Could Affect Insurers• Bank holding companies with more than $50 billion in assets would be
subject to an assessment (Financial Responsibility Tax) in order to build a $50 billion fund to wind down (resolve) large, insolvent financial institutions
– This first group could include some insurers that own banks
• If the $50 billion resolution fund is exhausted, then other non-bank financial institutions (including insurers, even those without banks) with more that $50 billion in consolidated assets would be assessed to make up any shortfall
• Bottom Line: P/C insurers do not object to the concept of systemic risk, but feel that the focus on size alone is inappropriate given the roots of the financial crisis and the fact that P/C insurers were not the cause
Source: Insurance Information Institute.
Systemic Risk: Oversight & Resolution Authority
Rational for Excluding P/C Insurers from Systemic Regulation
• The insurance business model (encompassing both insurers and reinsurers) has specific features that make it a source of stability within the financial system
– Up-front premiums provide strong operating cash flow
– Insurance policies generally represent longer-term liabilities with little or no ability for the policyholder to demand immediate payments (no “run” on insurers)
– The few insurers that experienced serious problems were impacted not by their insurance business but by quasi-banking activities. This includes AIG and “monoline” insurers that provided financial guarantees and engaged in CDS writing and trading
Source: Geneva Association, Systemic Risk in Insurance, March 2010.
Thank you for your time and your attention!
Insurance Information Institute Online:
www.iii.org
Twitter: twitter.com/bob_hartwig