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Beyond the Crisis: The P/C Insurance in the Aftermath of the
“Great Recession”
Insurance Information InstituteJune 10, 2010
Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org
2
Presentation Outline
Reasons for Optimism, Causes for Concern
The Economic Storm: Financial Crisis & Recession Exposure, Growth & Profitability
Crisis-Driven Exposure Issues: Personal & Commercial Lines
When and Where Will Growth Return?
Threats and Issues Facing P/C Insurers Through 2015
Financial Strength & Ratings Key Differences Between Insurer and Bank Performance During Crisis
Insurance Industry Financial Overview & Outlook Profitability Premium Growth Underwriting Performance: Commercial & Personal Lines Financial Market Impacts
Capital & Capacity
Catastrophe Loss Trends
Q&A
3
Reasons for Optimism, Causes for Concern in the P/C Insurance Industry
Economic Recovery in US is Self-Sustaining: No Double Dip Recession
European Debt Crisis Will Pass; Concerns are Overblown Volatility will remain a reality, however
Era of Mass Commercial Insurance Exposure Destruction Has Ended But restoration of destroyed exposure will take 3+ years in US
No Secondary Spike in Unemployment or Swoon in Payrolls/WC Exposure But wage growth remains sluggish
Exposure Growth Will Begin in Earnest in 2nd Half 2010, Accelerate in 2011
Increase in Demand for Commercial Insurance is in its Earliest Stages and Will Accelerate in 2011 Includes workers comp, commercial auto, marine, many liability coverages, D&O
Laggards: Property, inland marine, aviation
Personal Lines: Auto leads, homeowners lags
P/C Insurance Industry Will See Growth in 2011 for the First Time Since 2006
Investment Environment Is/Remains Much More Favorable Volatility, however, will persist and yields remain low
Both are critical issues in long-tailed commercial lines like WC, Med Mal, D&O
Source: Insurance Information Institute.
4
P/C Insurance Industry Capacity as of 3/31/10 Is at Record Levels and Has Recovered 100%+ of the Capital Lost During the Financial Crisis As of 12/31/09 capacity was within 2% of pre-crisis high
Record Capacity, Depressed Exposures Mean that Generally Soft Market Conditions Will Persist through 2010 and Potentially into 2011
There is No Catalyst for a Robust Hard Market at the Current Time
High First Half 2010 CAT Losses Insufficient to Trigger Hard Market Localized insurance and reinsurance impacts are occurring, especially earthquake coverage in
Latin/South America, Offshore Energy Markets, European Wind Cover
Inflation Outlook for US and Major European Economies and Japan is Tame Will temper claims inflation
Financial Strength & Ratings of Global (Re)Insurance Industries Remained Strong Throughout the Financial Crisis in Sharp Contrast With Banks
Insurers Have Avoided (So Far) the Most Draconian Outcomes in Financial Services Reform Legislation
Tort Environment in US is Beginning to Deteriorate; No Tort Reform in US
Major Transformation of US Economy Underway with Major Opportunities for Insurers through 2020 in Health, Tech, Natural Resources, Energy
Source: Insurance Information Institute.
Reasons for Optimism, Causes for Concern in the P/C Insurance Industry
5
The Economic Storm
What the Financial Crisis and Recession Mean for the Industry’s
Exposure Base, Growth and Profitability
6
Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 5/10; Insurance Information Institute.
2.9
%
0.1
%
4.8
%
4.8
%
-0.2
%
-0.7
%
1.5
%
-2.7
%
-5.4
%
-6.4
%
-0.7
%
2.2
%
5.6
%
3.0
%
3.2
%
2.9
%
3.1
%
3.0
%
3.1
%
3.2
%
3.2
%
3.7
%
0.8
%
1.6
%
2.5
% 3.6
%
3.1
%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2
00
0
2
00
1
2
00
2
2
00
3
2
00
4
2
00
5
2
00
6
07
:1Q
07
:2Q
07
:3Q
07
:4Q
08
:1Q
08
:2Q
08
:3Q
08
:4Q
09
:1Q
09
:2Q
09
:3Q
09
:4Q
10
:1Q
10
:2Q
10
:3Q
10
:4Q
11
:1Q
11
:2Q
11
:3Q
11
:4Q
Personal and Commercial Lines Exposure Base Have Been Hit Hardand Will Be Slow to Come Back
Real GDP Growth (%)
Recession began in Dec. 2007. Economic toll of credit
crunch, housing slump, labor market contraction has
been severe but modest recovery is underway
The Q1:2009 decline was the steepest since the Q1:1982 drop of 6.4%
Economic growth up sharply in Q4:09 with rebuilding of inventories and stimulus.
More moderate growth expected in 2010/11
7
Length of US Business Cycles,1929–Present*
10 1116
6
168 8
19
50
80
3745
39
24
106
36
58
12
92
120
73
12
43
138 11 10 8
0
10
20
30
40
50
60
70
80
90
100
110
120
Aug1929
May1937
Feb1945
Nov1948
Jul1953
Aug1957
Apr1960
Dec1969
Nov1973
Jan1980
Jul1981
Jul1990
Mar2001
Dec2007
Month Recession Started
Contraction Expansion Following
* Through June 2010. Assumes “official” end of recession was June 2009. ** Post-WW II period through end of most recent expansion. Sources: National Bureau of Economic Research; Insurance Information Institute.
Average Duration**Recession = 10.4 MosExpansion = 60.5 Mos
Length of Expansions Greatly Exceeds
Contractions
Duration (Months)
8
Real GDP Growth vs. Real P/CPremium Growth: Modest Association
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 5/10; Insurance Information Institute
4.3
%1
8.6
%2
0.3
%5
.8%
0.3
%-1
.6%
-1.0
%-1
.8%
-1.0
%3
.1%
1.1
%0
.8%
0.4
%0
.6%
-0.4
%-0
.3%
1.6
% 5.6
%1
3.7
%7
.7%
1.2
%-2
.9%
-0.5
%-3
.8%
-4.4
%-3
.3%
-3.6
%
5.2
%-0
.9%
-7.4
%-6
.5% -1
.5%
1.8
%
-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
10
E
Re
al N
WP
Gro
wth
-4%
-2%
0%
2%
4%
6%
8%
Re
al G
DP
Gro
wth
Real NWP Growth Real GDP
P/C Insurance Industry’s Growth is Influenced Modestlyby Growth in the Overall Economy
Real GDP Growth vs. Real P/C (%)
9
Regional Differences Will Significantly Impact P/C Markets
Recovery in Some Areas Will Begin Years Ahead of Others
and Speed of Recovery Will Differ by Orders of Magnitude
10
State Economic Growth Varied Tremendously in 2008
US Bureau of Economic Analysis
Highest Quintile
Fourth Quintile
Third Quintile
Second Quintile
Lowest Quintile
Far West0.6
Rocky Mountain2.2
Southwest1.7
Plains2.0 Great Lakes
-0.4
New England1.0
Mideast1.3
Southeast0.0
US = 0.7
WA2.0
OR1.6
CA0.4
NV-0.6
ID0.0
MT1.8
WY4.4
UT1.4 CO
2.9
AZ-0.6 NM
2.0
TX2.0
OK2.7
KS2.2
NE1.3
SD3.5
ND7.3 MN
2.0
IA2.1
MO1.3
WI0.7
IL0.3
MI-1.5
IN-0.6
OH-0.7
NY1.6
PA1.1
NJ0.6
MD1.3
DE-1.6
DC3.0VA
1.3
WV2.5
KY-0.1
NC0.1
SC0.6
TN0.5
AR0.7
LA0.3
MS1.7
AL0.7
GA-0.6
FL-1.6
AK-2.0
HI0.7
ME1.4
NH1.8
VT1.7 MA
1.9
RI-0.9CT
-0.4
Mountain, Plains States Growing the Fastest
Percent Change in Real GDP by State, 2007–2008
11
Fastest Growing States in 2008:Plains, Mountain States Lead
2.1% 2.0%
7.3%
4.4%
3.5%2.9% 2.7% 2.5%
0%
1%
2%
3%
4%
5%
6%
7%
8%
ND WY SD CO OK WV IA TX, MN,NM, WA
Source: US Bureau of Economic Analysis; Insurance Information Institute.
Real State GDP Growth (%)
Natural Resource and Agricultural States Have Done Better Than Most Others Recently, Helping Insurance Exposure in Those Areas
12
Slowest Growing States in 2008: Diversity of States Suffering
Source: US Bureau of Economic Analysis; Insurance Information Institute.
States in the North, South, East and West All Represented Among Hardest Hit, But for Differing Reasons
Real State GDP Growth (%)
-0.9%
-1.5%-1.6% -1.6%
-1.7%
-2.0%
-0.1%
-0.4%-0.6% -0.6% -0.6% -0.6%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%KY CT AZ GA IN NV RI MI DE FL OH AK
13
Labor Market Trends
Fast & Furious:Massive Job Losses Sap the
Economy and Commercial/Personal Lines Exposure
14
Unemployment and Underemployment Rates: Rocketed Up in 2008-09; Stabilizing in 2010?
2
4
6
8
10
12
14
16
18
Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10
Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
May10
Unemployment rate was 9.7% in
May
Unemployment peaked at 10.1%
in Oct. 2009, highest monthly rate since 1983.
Peak rate in the last 30 years: 10.8% in Nov -
Dec 1982
Source: US Bureau of Labor Statistics; Insurance Information Institute.
U-6 went from 8.0% in March
2007 to 17.5% in Oct 2009; Stood at 16.6% in May
2010
January 2000 through May 2010, Seasonally Adjusted (%)
Recession ended in
November 2001
Unemployment kept rising for
19 more months
Recession began in
December 2007
15
Unemployment Rates by State, April 2010:Highest 25 States*
10.4
10.010
.8
10.5
10.6
10.6
9.4
9.2
9.2
9.09.
5
9.1
9.29.
8
11.512
.0
10.9
11.0
11.0
11.2
11.6
13.7
12.6
12.5
14.0
0
2
4
6
8
10
12
14
16
MI NV CA RI FL SC MS IL AL DC OH NC KY OR TN GA IN NJ AZ MO MA WA WV ID CT
Une
mpl
oym
ent R
ate
(%)
*Provisional figures for April 2010, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
The unemployment rate has been rising across the country, but in April just 6 out of 50 states recorded increases,
compared to 24 in March.
16
6.7
6.7
6.6
6.56.
97.1
7.27.3
4.75.
06.
4
7.1
7.2
3.8
6.7
8.3
8.4
7.57.
88.0
8.18.
49.0
8.7
8.59.
0
0
2
4
6
8
10
DE PA NM WI AK NY TX ME CO AR MD UT MN VA MT WY IA HI LA NH OK KS VT NE SD ND
Une
mpl
oym
ent R
ate
(%)
Unemployment Rates By State, April 2010: Lowest 25 States*
*Provisional figures for April 2010, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
The unemployment rate has been rising across the country, but in April just 6 out of 50 states recorded increases,
compared to 24 in March.
17
US Unemployment Rate
4.5
%
4.5
%
4.6
%
4.8
%
4.9
% 5.4
% 6.1
%
6.9
%
8.1
%
9.3
%
9.6
% 10
.0%
9.7
%
9.6
%
9.4
%
9.2
%
9.0
%
8.8
%
8.6
%
9.4
%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
07
:Q1
07
:Q2
07
:Q3
07
:Q4
08
:Q1
08
:Q2
08
:Q3
08
:Q4
09
:Q1
09
:Q2
09
:Q3
09
:Q4
10
:Q1
10
:Q2
10
:Q3
10
:Q4
11
:Q1
11
:Q2
11
:Q3
11
:Q4
Rising unemployment eroded payrolls
and workers comp’s exposure base.
Unemployment likely peaked at 10% in late 2009.
* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (5/10); Insurance Information Institute
2007:Q1 to 2011:Q4F*
Unemployment forecasts are being
revised downward for the first time in years
18
Monthly Change Employment*-7
2
-14
4
-12
2
-16
0
-13
7
-16
1
-12
8
-17
5
-32
1
-38
0
-59
7
-68
1
-77
9
-72
6
-75
3
-52
8 -38
7
-51
5 -34
6 -21
2
-22
5
-22
4
64
-10
9
14 39
20
8 29
0 43
1
-1,000
-800
-600
-400
-200
0
200
400
600
Jan
08
Fe
b 0
8
Ma
r 0
8
Ap
r 0
8
Ma
y 0
8
Jun
08
Jul 0
8
Au
g 0
8
Se
p 0
8
Oct
08
No
v 0
8
De
c 0
8
Jan
09
Fe
b 0
9
Ma
r 0
9
Ap
r 0
9
Ma
y 0
9
Jun
09
Jul 0
9
Au
g 0
9
Se
p 0
9
Oct
09
No
v 0
9
De
c 0
9
Jan
10
Fe
b 1
0
Ma
r 1
0
Ap
r 1
0
Ma
y 1
0
Monthly Losses in Dec. 08–Mar. 09 Were
the Largest in the Post-WW II Period
*Estimate based on Reuters poll of economists.Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Job Losses Since the Recession Began in Dec. 2007 Total 8.4 Million Through Mar. 2010;
15.0 Million People are Now Defined as Unemployed
January 2008 through April 2010* (Thousands)
May’s gain of 431,000 jobs was distorted by the hiring of
411,000 temporary Census workers. Private sector
employment was up 41,000
19
Labor Underutilization: Broader than Just Unemployment
11.2%
16.4% 16.5% 16.3%16.8% 17.0%
17.5% 17.2% 17.3%16.5% 16.8% 16.9% 17.1%
16.6%
10%
11%
12%
13%
14%
15%
16%
17%
18%
Sep08
May09
Jun09
Jul 09 Aug09
Sep09
Oct09
Nov09
Dec09
Jan10
Feb10
Mar10
Apr10
May10
% of Labor Force
Marginally Attached and Unemployed Persons Account for 16.6% of the Labor Force in May 2010 (1 Out 6 People). Unemployment Rate Alone was 9.7%. Underutilization Shows a Broader Impact on WC and Other
Commercial ExposuresNOTE: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule. Source: US Bureau of Labor Statistics; Insurance Information Institute.
20
US Nonfarm Private Employment1
38
.01
38
.1
13
8.0
13
7.9
13
7.8
13
7.8
13
7.7
13
7.6
13
7.6
13
7.4
13
7.0
13
6.7
13
6.2
13
5.1
13
3.5
13
2.8
13
2.1
13
1.5
13
1.2
13
0.6
13
0.3
13
0.1
12
9.9
12
9.6
12
9.7
12
9.6
12
9.6
12
9.6
12
9.8
13
0.1
13
0.6
129130131132133134135136137138139
No
v 0
7
De
c 0
7Ja
n 0
8
Fe
b 0
8M
ar
08
Ap
r 0
8M
ay
08
Jun
eJu
l 08
Au
g 0
8S
ep
08
Oct
08
No
v 0
8
De
c 0
8Ja
n 0
9
Fe
b 0
9M
ar
09
Ap
r 0
9
Ma
y 0
9Ju
n 0
9
Jul 0
9A
ug
09
Se
p 0
9O
ct 0
9
No
v 0
9D
ec
09
Jan
10
Fe
b 1
0
Ma
r 1
0A
pr
10
Ma
y 1
0
Monthly, Nov 2007 – May 2010 (Millions)The US Economy Lost About
8.4 Million Jobs in the 2 Years from Dec. 07 – Dec. 09
.
As employment expands, workers comp insurers will
be among the first beneficiaries
Employment Peak; Recession Starts
Seasonally adjusted. Source: US Bureau of Labor Statistics
21
US Unemployment Rate Forecasts
9.6% 9.5% 9.4%
9.0%8.8%
8.6%8.3%
8.1%7.8%
9.7%9.9% 9.8%9.8%
9.2%
9.6%
9.4% 9.4%
8.6%8.9%
8.3%
9.4%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
10.5%
11.0%
10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4
10 Most PessimisticConsensus/Midpoint10 Most Optimistic
Unemployment will remain high even under the most optimistic of scenarios, but
forecasts are being revised downwards
Sources: Blue Chip Economic Indicators (5/10); Insurance Information Institute
Stubbornly High Unemployment Will Slow the Recovery of theWorkers Comp Exposure Base
Quarterly, 2010:Q1 to 2011:Q4
22
Wage & Salary Disbursement (Private Employment) vs. WC NWP ($ Billions)
Wage & Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums
* Average Wage and Salary data as of 10/1/2009. Shaded areas indicate recessionsSource: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; I.I.I. Fact Books
Weakening Payrolls Have Eroded $2B+ in Workers Comp Premiums
7/90-3/91 3/01-11/01 12/07-?
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
Wage & SalaryDisbursements
WC NPW
Estimated Effect of Recessions* on Payroll (Workers Comp Exposure)
*Data represent maximum recorded decline over 12-month period using annualized quarterly wage and salary accrual dataSource: Insurance Information Institute research; Federal Reserve Bank of St. Louis (wage and salary data); National Bureau of Economic Research (recession dates).
-4.4%
-2.0%-1.1%
1.1%
3.7%4.6%
8.5%
3.5%
2.1%
-0.5%
-3.6%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
1948-1949
1953-1954
1957-1958
1960-1961
1969-1970
1973-1975
1980 1981-1982
1990-1991
2001 2007-2009
Recessions in the 1970s and 1980s saw smaller exposure impacts
because of continued wage inflation, a factor not present
during the 2007-2009 recession
The Dec. 2007 to mid-2009 recession
caused the largest impact on WC
exposure in 60 years
(Percent Change)
(All Post WWII Recessions)
Recession Dates (Beginning/Ending Years)
24
Frequency: 1926–2008A Long-Term Drift Downward
Note: Recessions indicated by gray bars.Sources: NCCI from US Bureau of Labor Statistics; National Bureau of Economic Research
Manufacturing – Total Recordable CasesRate of Injury and Illness Cases per 100 Full-Time Workers
0
5
10
15
20
25
30
'26 '29 '32 '35 '39 '42 '45 '48 '52 '55 '58 '61 '65 '68 '71 '74 '78 '81 '84 '87 '91 '94 '97 '00 '04 '07
25
Insurance Industry Employment Trends
Soft Market, Difficult Economy, Outsourcing Have Contributed to
Industry’s Job Losses
26
U.S. Employment in the DirectP/C Insurance Industry: 1990–2010*
*As of April 2010; Not seasonally adjusted; Does not including agents & brokersNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
Thousands
460
480
500
520
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
As of Apr. 2010, P/C insurance industry employment was down by 27,700 or 5.6% to 463,400 since the
recession began in Dec. 2007 (compared to overall US employment decline of 7.2%)
27
U.S. Employment in the DirectLife Insurance Industry: 1990–2010*
*As of April 2010; Not seasonally adjusted; Does not including agents & brokersNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
Thousands
300
325
350
375
400
425
450
475
500
525
550
575
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
As of Apr. 2010, Life insurance industry employment was down by 10,400 or 2.9% to 343,900 since the recession began in
Dec. 2007 (compared to overall US employment decline of 7.2%)
28
U.S. Employment in the Direct Health-Medical Insurance Industry: 1990–2010*
*As of April 2010; Not seasonally adjusted; Does not including agents & brokersNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
Thousands
175
200
225
250
275
300
325
350
375
400
425
450
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
As of Apr. 2010, Health-Medical insurance industry employment was
down by 4,400 or 1.0% to 437,500 since the recession began in Dec.
2007 (compared to overall US employment decline of 7.2%)
29
U.S. Employment in the Reinsurance Industry: 1990–2010*
Thousands
24
28
32
36
40
44
48
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10*As of April 2010; Not seasonally adjusted; Does not including agents & brokersNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
As of Apr. 2010, US employment in the reinsurance industry was down by 1,800 or 6.7% to 25,100
since the recession began in Dec. 2007 (compared to overall US employment decline of 7.2%)
30
U.S. Employment in Insurance Agencies & Brokerages: 1990–2010*
Thousands
500
550
600
650
700
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10*As of April 2010; Not seasonally adjusted. Includes all types of insurance.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
As of Apr. 2010, employment at insurance agencies and
brokerages was down by 49,600 or 7.3% to 630,000 since the
recession began in Dec. 2007 (compared to overall US
employment decline of 7.2%)
31
U.S. Employment in Insurance Claims Adjusting: 1990–2010*
Thousands
40
45
50
55
60
Jan-
90
Sep
-90
May
-91
Jan-
92
Sep
-92
May
-93
Jan-
94
Sep
-94
May
-95
Jan-
96
Sep
-96
May
-97
Jan-
98
Sep
-98
May
-99
Jan-
00
Sep
-00
May
-01
Jan-
02
Sep
-02
May
-03
Jan-
04
Sep
-04
May
-05
Jan-
06
Sep
-06
May
-07
Jan-
08
Sep
-08
May
-09
Jan-
10
*As of April 2010; Not seasonally adjusted.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
As of Apr. 2010, claims adjusting employment was down by 8,500 or 16.3%
to 43,500 since the recession began in Dec. 2007 (compared to overall US
employment decline of 7.2%)
Katrina, Rita, Wilma
32
U.S. Employment in Third-Party Administration of Insurance Funds: 1990–2010*
Thousands
85
95
105
115
125
135
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10*As of April 2010; Not seasonally adjusted. Includes all types of insurance.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
Crisis-Driven Exposure Drivers
33
Economic Obstaclesto Growth in P/C Insurance
34
16.9
16.5
16.1
13.1
10.3
11.8
13.2
16.9
16.617
.117.5
17.8
17.4
9
10
11
12
13
14
15
16
17
18
19
99 00 01 02 03 04 05 06 07 08 09 10F 11F
(Millions of Units)
Auto/Light Truck Sales, 1999-2011F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (5/10); Insurance Information Institute.
Car/Light Truck Sales Will Recover from the 2009 Low Point, but High Unemployment, Tight Credit Are Still Restraining Sales;
Gas Prices Could Once Again Become a Factor, Too
New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for
2010-11 is still far below 1999-2007 average of 17
million units
Sharply lower auto sales will have a smaller effect on auto insurance
exposure level than problems in the housing market will on home insurers
“Cash for Clunkers” generated about $300M in net new personal auto premiums
35
(Millions of Units)
New Private Housing Starts, 1990-2011F
1.4
8
1.4
7 1.6
2
1.6
4
1.5
7
1.6
0 1.7
1 1.8
5 1.9
6 2.0
7
1.8
0
1.3
6
0.9
0
0.5
6 0.6
9
0.9
4
1.3
51.4
6
1.2
9
1.2
0
1.0
11.1
9
0.3
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F11F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (5/10); Insurance Information Institute.
Little Exposure Growth Likely for Homeowners InsurersDue to Weak Home Construction Forecast for 2010-2011.
Also Affects Commercial Insurers with Construction Risk Exposure, Surety
New home starts plunged 34% from 2005-2007; drop
through 2009 was 72% (est.); A net annual decline of 1.49 million units,
lowest since records began
in 1959
I.I.I. estimates that each incremental 100,000 decline in housing starts costs home insurers
$87.5 million in new exposure (gross premium). The net exposure loss in 2009 vs. 2005 is
estimated at about $1.3 billion
Average Square Footage of Completed New Homes in U.S., 1973-2010:Q1
1,66
01,
695
1,64
51,
700
1,72
01,
755
1,76
01,
740
1,72
01,
710
1,72
51,
780
1,78
51,
825 1,90
5 1,99
52,
035
2,08
02,
075
2,09
52,
095
2,10
02,
095
2,12
02,
150
2,19
02,
223
2,26
62,
324
2,32
02,
330
2,34
9 2,43
42,
469
2,52
12,
519
2,43
82,
389
1,500
1,700
1,900
2,100
2,300
2,500
2,700
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
Source: U.S. Census Bureau: http://www.census.gov/const/www/quarterly_starts_completions.pdf; Insurance Information Institute.
Square Ft
The trend to building larger homes reversed in 2009, affecting exposure growth beyond
the decline in number of units built
Average size of completed new homes often falls in recessions (yellow bars), but historically bounces back in expansions
36
37
16.9
16.5
16.1
13.1
10.3
11.8
13.2
16.9
16.617
.117.5
17.8
17.4
9
10
11
12
13
14
15
16
17
18
19
99 00 01 02 03 04 05 06 07 08 09 10F 11F
(Millions of Units)
Auto/Light Truck Sales, 1999-2011F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (5/10); Insurance Information Institute.
Car & Truck Sales Are Beginning to Recover but Weak Economy, Credit Woes Are Still Restraining Sales;
Gas Prices Could Once Again Become a Factor Too, But Overall Exposure Trend is Becoming More Favorable
New auto/light truck sales fell by nearly 6 million units in 2009 vs. 2007, to the lowest
level since the late 1960s.
“Cash for Clunkers” generated about $300M in net new personal auto premiums in 2009
2010 forecast revised upwards to 11.8 million units
Unemployment’s Effect on Percent of Uninsured Motorists, 1989-2014F
12%
13%
14%
15%
16%
17%
18%
19%
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
20
08
20
09
E
20
10
F
20
11
F
20
12
F
20
13
F
20
14
F
3%
6%
9%
12%
Uninsured Motorist Percentage National Unemployment Percentage
Source: Uninsured Motorists, 2008 Edition, Insurance Research Council; Blue Chip Economic Indicators (Unemployment data, including forecasts); Insurance Information Institute.
Unemployment% Uninsured
The unemployment rate appears to be closely
correlated with the uninsured motorist
percentage.
In 2010 roughly 18% of motorists are expected
to be driving without insurance as high
unemployment prompts some people
to drop coverage
38
39
New Boat Sales Symptomatic of Decline in Insured Exposure Growth for Luxury/Discretionary Items
59
3,0
00
57
1,4
00
58
2,5
00
57
6,8
00
88
0,3
00
84
4,1
00
83
7,9
00
87
0,6
50
86
4,4
50
91
2,1
30
84
1,8
20
70
4,8
20
$500,000
$550,000
$600,000
$650,000
$700,000
$750,000
$800,000
$850,000
$900,000
$950,000
$1,000,000
97 98 99 00 01 02 03 04 05 06 07 08
Ne
w B
oa
t S
ale
s
$8.0
$8.5
$9.0
$9.5
$10.0
$10.5
$11.0
$11.5
$12.0
$12.5
Va
lue
of B
oa
ts S
old
($ B
ill)
New Boats Sold Value of Boats Sold
Sources: National Marine Manufacturers Association, 2008 Abstract (latest available as of Feb. 2010); Insurance Information Institute.
Boat sales fell by 16% in 2008 and the value of those
sales plunged by 21%
40
43,6
9448
,125
69,3
0062
,436
64,0
04 71,2
77 81,2
3582
,446
63,8
5363
,235
64,8
5371
,549
70,6
4362
,304
52,3
7451
,959
53,5
4954
,027
44,3
6737
,884
35,4
7240
,099
38,5
4035
,037
34,3
1739
,201
19,6
95 28,3
2243
,546
60,8
3714
,607
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910
:Q1
Business Bankruptcy Filings,1980-2010:Q1
Source: American Bankruptcy Institute; Insurance Information Institute
Significant Exposure Implications for All Commercial Lines
There were 60,837 business bankruptcies in 2009, up 40% from 2008 and the most since 1993. 2010:Q1 bankruptcies totaled 14,607, up 18% from Q1:2009
% Change Surrounding Recessions
1980-82 58.6%1980-87 88.7%1990-91 10.3%2000-01 13.0%2006-09 208.9%*
41
Private Sector Business Starts,1993:Q2 – 2009:Q3*
175
186
174
180
186
192
188
187 18
918
6 190 19
419
119
9 204
202
195
196
196
206
206
201
192
198
206
206
203
211
205
212
200 20
520
420
419
720
320
920
1
192
192
193
201 20
420
221
0 212
209
216 22
0 223
220
220
210
221
212
204
218
209
207
199
191 19
317
117
716
9
203
150
160
170
180
190
200
210
220
230
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Business Starts Are Down Nearly 20% in the Current Downturn, Holding Back Most Types of Commercial Insurance Exposure
*Latest available as of June 7, 2010, seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm.
(Thousands)
169,000 businesses started in 2009:Q3, actually declining during
form the prior quarter. The figure is the lowest level since 1993.
42
Net New Business Formations*1999:Q1-2008:Q4*
14
2220202524
136
2
-1-5 -3
13
2317
126 6
14
2225
1824
3125
36343639
26
14
28
19
3
15
2
-3
-28-32
-48-50
-40
-30
-20
-10
0
10
20
30
40
50
99
:Q1
00
:Q1
01
:Q1
02
:Q1
03
:Q1
04
:Q1
05
:Q1
06
:Q1
07
:Q1
08
:Q1
Net Business Formations Likely Were Positive Again,at Least in the Second Half of 2009 and into 2010.
*Business “births” minus business “deaths.” Latest data on business “deaths” is for 2008:Q4.Sources: Bureau of Labor Statistics at http://www.bls.gov/news.release/cewbd.t07.htm ; Insurance Information Institute.
Thousands
March-November
2001 recession
2008-2009 recession
In 2008, over 110,000 more businesses
disappeared than started
43
FDIC-Insured Banks AreReducing Credit: 2008, 2009, 2010:Q1
Source: FDIC Quarterly Banking Profile, First Quarter 2010, Table II-A
FDIC-Insured Institutions Had $541.1B (-13.1%) Less in Outstanding Loans in These Three Categories at Year-end 2009 vs. 2008,
and Even Less at End of 2010:Q1
$Billions
$451.5
$1,220.8
$1,916.7
$417.97
$1,187.61
$1,887.37
$590.9
$1,494.0
$2,045.2
$0
$500
$1,000
$1,500
$2,000
$2,500
Construction andDevelopment Secured by
Real Estate
Commercial and Industrial 1-4 Family ResidentialMortgages
2008
2009
2010
Down $139.4B (-13.1%)
Down $273.2B (-18.3%)
Down $128.5B (-6.3%)
April 2010: Many banks are maintaining tight loan standards; some are tightening further; virtually no one loosening; Hurts
business formation/expansion and commercial exposure
44
Business Fixed Investment
Source: Wells Fargo Securities Economics Group, Monthly Outlook, April 7, 2010
-18.
4% -13.
9%
-15.
0% -11.
0%
-5.0
%
-3.5
%
1.0% 3.
0% 4.5% 5.0%
-0.5
%
-5.0
%
-9.4
%
-25.
9%
-36.
4%
-4.9
%
1.5%
19.0
%
5.7% 6.5% 7.6% 9.2% 10
.3%
9.7%
9.6%
9.3%
6.8%
14.5
%
-0.1
%
-7.2
%
-43.
6%
-17.
3%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
08:Q
1
08:Q
2
08:Q
3
08:Q
4
09:Q
1
09:Q
2
09:Q
3
09:Q
4
10:Q
1
10:Q
2
10:Q
3
10:Q
4
11:Q
1
11:Q
2
11:Q
3
11:Q
4
Structures Equipment & Software
2008:Q1 to 2011:Q4F
Investment in Structures is forecast to be down in 2010 and low in 2011. This will
hold exposure in many commercial lines down
Investment in Equipment &
Software is forecast to be positive in
both 2010 and 2011.
45
Total Industrial Production
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (4/10); Insurance Information Institute
-9.0%
-13.0%
-19.0%
-10.4%
6.4% 6.6% 6.3%5.3% 5.0% 5.0% 4.4% 4.2% 4.1% 3.9%
1.5%3.2% 3.6%
0.3% 0.2%
-4.6%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
07
:Q1
07
:Q2
07
:Q3
07
:Q4
08
:Q1
08
:Q2
08
:Q3
08
:Q4
09
:Q1
09
:Q2
09
:Q3
09
:Q4
10
:Q1
10
:Q2
10
:Q3
10
:Q4
11
:Q1
11
:Q2
11
:Q3
11
:Q4
End of Recession in mid-2009, Stimulus Program Are Benefiting Industrial Production and Therefore Insurance Exposure Both
Directly and Indirectly, Albeit Very Modestly
2007:Q1 to 2011:Q4F (%)
Industrial Production is Aided by a Rebuild of Inventories, Gradual Economic Recovery
and Stimulus Program (Q2:09 through 2010)
Industrial Production Began to Contract Sharply in Late 2008 and Plunged
in 2009:Q1
State & Local Government Finances in Dire Straits
46
Large, Long-Term Cuts Necessary to Align Spending with Shrinking
Tax Revenues
47
Year-Over-Year Change in Quarterly USState Tax Revenues, Inflation Adjusted
Source: US Census Bureau; Nelson A. Rockefeller Institute of Government: http://www.rockinst.org/.
2.4
%4
.7%
5.6
% 9.9
%9
.5%
4.4
%1
.8%
0.4
%-1
.3%
-1.7
%-3
.0%
-7.6
%-1
0.7
%0
.0%
1.6
%-0
.6%
0.1
% 4.0
%4
.7%
5.7
% 8.2
%3
.4% 6.0
%7
.0%
12
.4%
6.6
%4
.2%
3.7
% 6.3
%2
.6%
1.3
%3
.2% 5.5
%3
.1%
3.6
%2
.6% 5.4
%2
.8%
-3.9
%
-10
.9%
-4.1
%
-16
.4%-11
.6%
2.4
%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
1Q
99
2Q
99
3Q
99
4Q
99
1Q
00
2Q
00
3Q
00
4Q
00
1Q
01
2Q
01
3Q
01
4Q
01
1Q
02
2Q
02
3Q
02
4Q
02
1Q
03
2Q
03
3Q
03
4Q
03
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
States Revenues Were Down 4.4% in Q4 2009, the 5th Consecutive Quarter of Revenue Decline. This Will Impact Public Infrastructure
Spending Significantly and Related Insurance Exposures and Demand.
Nationwide, state-tax collections for fiscal year 2009 declined by a record
$63 billion, or 8.2 percent from the previous year. That loss is roughly twice the amount states gained in fiscal relief
from the federal stimulus package
48
Mounting Pressure on Claim Cost Severities?
Inflation Trends:Concerns Over Stimulus Spending
and Monetary Policy
49
Annual Inflation Rates(CPI-U, %), 1990–2011F
2.8 2.6
1.51.9
3.3 3.4
1.3
2.5 2.3
3.0
3.8
2.8
3.8
-0.4
2.0 1.9
2.92.4
3.23.0
5.14.9
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F11F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, May 10, 2010 (forecasts).
There is So Much Slack in the US Economy That Inflation Should Not Be a Concern Through 2010/11, but Depreciation of Dollar is Concern Longer Run
Annual Inflation Rates (%) Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the
commodity bubble have reduced inflationary pressures
50
Forecasts of Annual Inflation Rates(CPI-U, %), 2010–2015F
2.21.9
2.1 2.2 2.3 2.4
1.7
1.01.2
1.41.6 1.7
3.13.03.03.02.92.8
0.0
1.0
2.0
3.0
4.0
2010 2011 2012 2013 2014 2015
Blue Chip AvgPessimistic
Blue Chip AvgMedian
Blue Chip AvgOptimistic
Sources: Blue Chip Economic Indicators, Oct. 2009 and Mar. 2010.
Inflation Will Accelerate Modestly through 2015 but Should Is Not Expected to Become a Major Concern or Threat
Annual Inflation Rates (%)Even the pessimistic forecasts don’t see the CPI rising much
above 3% in the next five years
P/C Insurers Experience Inflation More Intensely than 2009 CPI Suggests
Source: CPI is Blue Chip Economic Indicator 2009 estimate, 12/09; Legal services, medical care and motor vehicle body work are avg. monthly year-over-year change from BLS; BI and no-fault figures from ISO Fast Track data for 4 quarters ending 09:Q3. Tort costs is 2009 Towers-Perrin estimate. WC figure is I.I.I. estimate based on historical NCCI data.
-0.4%
2.7% 3.0% 3.1%3.8%
4.3%
5.5%6.2%
-2%
0%
2%
4%
6%
8%
OverallCPI
LegalServices
US TortCosts
MedicalCare
MotorVehicleBodyWork
BodilyInjury
Severity
WC MedSeverity
No-FaultClaim
Severity
(Percent)
Healthcare and Legal/Tort Costs Are a Major P/C Insurance Cost Driver. These Are Expected to Increase Above the Overall Inflation Rate (CPI) Indefinitely
51
WC Insurers Experience Inflation More Intensely than 2009 CPI Suggests
Source: Bureau of Labor Statistics; Insurance Information Institute.
2.7%
1.8%
6.9%
3.0% 3.0%3.4%
3.1%3.4%
0%
2%
4%
6%
8%
Overall CPI "Core" CPI HospitalServices
Physicians'Services
DentalServices
PrescriptionDrugs
Medical CareCommodities
Medical CPI
(Percent increase Dec 08 to Dec 09)
Healthcare Costs Are a Major WC Insurance Cost Driver. They AreLikely to Increase Faster than the CPI for the Next Few Years, at Least
52
Excludes Food and Energy
Inpatient Services Rose 6.7%;
Outpatient Services Rose 7.4%
4.5%
3.5%2.8%
3.2% 3.5%4.1%
4.6% 4.7%4.0%
4.4% 4.2% 4.0%4.4%
3.7% 3.4%
5.1%
7.4%
10.1%
8.3%
10.6%
7.3%
13.6%
7.6%7.2%
6.2%
9.2%8.6%
5.8% 6.0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Change in Medical CPI
Change Med Cost per Lost Time Claim
WC Medical Severity Risingat Twice the Medical CPI Rate
Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
Average annual increase in WC medical severity form 1995 through 2008 was
more than twice the medical CPI (8.1% vs. 4.0%). New healthcare reform legislation is unlikely to have any
impact on the gap.
54
Top Concerns/Risks for Insurersif Inflation Is Reignited
Source: Insurance Information Institute.
What are the potential impacts for insurers?
What can/should insurers do to protect themselves from the risks of inflation?
ConcernsThe Federal Reserve Has Flooded Financial System with Cash (Turned on the Printing Presses), the Federal Gov’t Has Approved a $787B Stimulus and the Deficit is Expected to Mushroom to $1.8 Trillion. All Are Potentially Inflationary.
Rising Claim Severities Cost of claims settlement rises across the board (property and liability)
Rate Inadequacy Rates inadequate due to low trend assumptions arising from use of historical data
Reserve Inadequacy Reserves may develop adversely and become inadequate (deficient)
Burn Through on Retentions Retentions, deductibles burned through more quickly
Reinsurance Penetration/Exhaustion Higher costs risks burn through their retentions more quickly, tapping into reinsurance
more quickly and potentially exhausting their reinsurance more quickly
Key Risks From Sustained/Accelerating Inflation
Tort Cost Growth & Medical Cost Inflation vs. Overall Inflation (CPI-U), 1961-2009E*
0%
2%
4%
6%
8%
10%
12%
14%
1961-70 1971-80 1981-90 1991-2000 2001-09E
Tort Costs Medical Costs CPI
* CPI-U and medical costs as of Sept 2009; Tort figure is for full-year 2009 from Tillinghast.
Tort system is an inflation amplifier
Avg. Ann. Change: 1961-2009E*
Tort costs: +8.4%Med costs: +5.9%
Overall inflation: +4.2%
Source: U.S. Bureau of Labor Statistics; Tillinghast-Towers Perrin, 2008 Update on U.S. Tort Costs; I.I.I.
Tort costs move with inflation but at twice the rate of inflation
Are there healthcare reform spillover effects?
56
Claim Trends in Auto Insurance
Rising Costs Held in Check by Falling Frequency:
Can That Pattern Be Sustained?
57
Bodily Injury: Severity Trends Generally Above Decline in Frequency
-5.4%
-3.8%-5.0%
-3.1% -3.2%
2.9%
4.7%5.9% 6.1%
2.1%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2005 2006 2007 2008 2009
Severity Frequency
Source: ISO/PCI Fast Track data; Insurance Information Institute
Annual Change, 2005 through 2009
Cost Pressures Will Increase if Current BI Frequency and Severity Trends Continue
58
Property Damage Liability: Frequency and Severity Trends Nearly Offset in 2009
-1.6%
-3.5%
0.8%
-3.4%
0.6%
2.9%3.6%
2.1%1.4%
-0.3%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
2005 2006 2007 2008 2009*
Severity Frequency
Source: ISO/PCI Fast Track data; Insurance Information Institute
Annual Change, 2005 through 2009
Favorable Severity/Frequency Trends Keeping PD Costs in Check, But Are TheseTrends Sustainable?
59
No-Fault (PIP) Liability: Frequency and Severity Trends Are Adverse*
-4.8%-5.7%
-2.7%
-6.9%
5.9%4.7%
2.4%
6.3% 6.4% 6.4%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2005 2006 2007 2008 2009*
Severity Frequency
*No-fault states included are: FL, HI, KS, KY, MA, MI, MN, NY, ND and UT.Source: ISO/PCI Fast Track data; Insurance Information Institute
Annual Change, 2005 through 2009
Multiple States Are Experiencing Severe Fraud and Abuse Problems in their No-Fault Systems, Especially FL, MI, NY and NJ
60
Collision Coverage: Frequency and Severity Trends Have Been Favorable
-1.8%
-3.5%
2.3%
-2.4%-1.6%
3.9%3.1%
0.7% 0.4%
-2.3%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
2005 2006 2007 2008 2009*
Severity Frequency
Source: ISO/PCI Fast Track data; Insurance Information Institute
Annual Change, 2005 through 2009
The Recession, High Fuel Prices Have Helped Push Down Frequency and Temper Severity, But this Trend Will Likely Be
Reversed Based on Evidence from Past Recoveries
61
Comprehensive Coverage: Frequency and Severity Trends Favorable in 2009
-3.1%
-9.8%-6.6%
1.6%
-1.6%
15.5%
-1.4% -1.4%
13.0%
-2.0%
-15%
-10%
-5%
0%
5%
10%
15%
20%
2005 2006 2007 2008 2009*
Severity Frequency
Source: ISO/PCI Fast Track data; Insurance Information Institute
Annual Change, 2005 through 2009
Weather Creates Volatility for Comprehensive Coverage; Recession Has Helped Push Down Frequency and Temper
Severity, But This Factors Will Weaken as Economy Recovers
62
Fraud & Abuse in Private Passenger Auto Insurance
Skyrocketing No-Fault (PIP) Claim Costs Are a Major Concern in
Several States
63
Average No-Fault Claim Severity, 2009:Q4
$1
7,7
27
$8
,86
2
$8
,67
0
$5
,51
7
$5
,19
8
$4
,88
7
$4
,32
7
$4
,12
1
$4
,03
1
$2
,99
8
$2
,89
5
$2
,99
1
$2
,55
1
$2
,21
9
$1
,74
9
$3
7,4
89
$8
,18
6
$7
,53
8
$6
,94
4
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
$50,000
MI NJ NY DC DE FL MN KY ND HI WA PA OR TX MD KS SC UT MA
Several States Have Severe and Growing Problems With Rampant Fraud and Abuse in their No-Fault Systems. Claim Severities Are Up Sharply.
Source: ISO/PCI Fast Track data; Insurance Information Institute.
MI, NJ, NY and FL currently are the largest states that have the most severe
problems in their no-fault system
64
Increase in No-Fault Claim Severity: 2004-2009*
*2009 figure is for the 4 quarters ending 2009:Q4.**Since 2006 the increase in Florida was 17.3% (average severity that year was $6,344). Sources: Insurance Information Institute research from ISO/PCI Fast Track data.
$32,778
$17,198
$8,716 $7,524$6,674$5,871
$12,136
$24,385
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
Michigan New Jersey New York Florida
2004 2009
The no-fault systems in MI, NJ, NY and FL are under stress due to rising fraud and abuse which will ultimately lead to higher premiums for drivers
+34.4%
+41.7%
+48.5% +18.6%**
8.25% annual average compound
growth rate
Critical Differences Between P/C Insurers and Banks
65
Superior Risk Management Model and Low Leverage Make a Big Difference
66
How P/C Insurance Industry Stability Has Benefitted Consumers
Bottom Line:
Insurance markets – unlike banking – are operating normally
The basic function of insurance – the orderly transfer of risk from client to insurer – continues uninterrupted
This means that insurers continue to: Pay claims (whereas 246 banks have gone under as of 5/28/10)
– The promise is being fulfilled
Renew existing policies (banks are reducing and eliminating lines of credit)
Write new policies (banks are turning away people and businesses who want or need to borrow)
Develop new products (banks are scaling back the products they offer) Compete intensively (banks are consolidating, reducing consumer choice)
Source: Insurance Information Institute
67
Reasons Why P/C Insurers Have Fewer Problems Than Banks
Emphasis on Underwriting Matching of risk to price (via experience and modeling) Limiting of potential loss exposure Some banks sought to maximize volume and fees and disregarded risk
Strong Relationship Between Underwriting and Risk Bearing Insurers always maintain a stake in the business they underwrite, keeping “skin in the game” at
all times Banks and investment banks package up and securitize, severing the link between risk
underwriting and risk bearing, with (predictably) disastrous consequences – straightforward moral hazard problem from Econ 101
Low Leverage Insurers do not rely on borrowed money to underwrite insurance or pay claims There is no credit or
liquidity crisis in the insurance industry
Conservative Investment Philosophy High quality portfolio that is relatively less volatile and more liquid
Comprehensive Regulation of Insurance Operations The business of insurance remained comprehensively regulated whereas a separate banking system
had evolved largely outside the auspices and understanding of regulators (e.g., hedge funds, private equity, complex securitized instruments, credit derivatives – CDS’s)
Greater Transparency Insurance companies are an open book to regulators and the public
A Superior Risk Management Model
Source: Insurance Information Institute
68
Obama Administration Proposal to Scale Back Terrorism Risk Insurance Program
Administration’s Budget Proposal for FY 2011:
Includes proposal to scale back federal support for terrorism risk insurance program
Proposal projects savings of $249 million from 2011-2020
Administration’s justification is that this would “encourage the private sector to better mitigate terrorism risk through other means, such as developing alternative reinsurance options and building safer buildings.”
Source: Budget of the U.S. Government Fiscal Year 2011
Key Concerns Among Industry Observers Over Proposed Reduction in Federal Support
Suggestion of changes to law would have detrimental effect on availability and affordability of terrorism insurance
A 2009 Aon study estimated some 70-80 percent of the commercial property insurance market would revert to absolute exclusions for terrorism, if TRIA is changed.
5
69
Terrorism: Insurance Concerns Resurface
Reasons Why Concerns Are Mounting in 2010
Perception (Reality) that U.S. vulnerability is rising Thwarted Christmas Day attack by “underwear bomber”
And new bin Laden tape claiming al Qaeda is responsible
Foiled NYC Subway Bomber Plot (Zazi case) Failed Times Square Car Bombing on May 1 Trials of Guantanamo 9/11 suspects in Manhattan Court (?) U.K. in January Raised Terror Alert Status to 2nd Highest Level Increased anti-terror efforts, including full-body scans Effort by government to appear more vigilant, prepared Rise of groups such al Qaeda in the Arabian Peninsula U.S. military surge in Afghanistan operations Most buyers/producers haven’t thought about coverage recently Obama Administration’s Intent to Reduce Support for TRIA
Source: James Madison Institute, February 2008.
ME
NH
MA
CT
PA
WV
VA
NC
LA
TX
OK
NE
ND
MN
MI
IL
IA
ID
WA
OR
AZ
HI
NJRI C
DE
AL
VT
NY
MD
SC
GA
TN
AL
FL
MS
ARNM
KYMOKS
SDWI
IN
OH
MT
CA
NV
UT
WY
CO
AK
= A= B= C= D= F= NG
Source: Heartland Institute, May 2010
A- A-
A-
B-
B-
B-
B-
B-
B-B-
B-B-
B-
B-
B-
B-
B- C-
C-
C-
C -
C-
D-D-
A
A
A
A
B+
B+
B+
B
B
B
B
B
B
C+
C+
C
D+
D+D+
D
NG
NG
D F
F
2010 Property and Casualty InsuranceReport Card
Not Graded: District of ColumbiaMississippiLouisiana
Shifting Legal Liability & Tort Environment
71
Is the Tort PendulumSwinging Against Insurers?
72
Important Issues & Threats Facing Insurers: 2010–2015
Source: Insurance Information Institute
Bottom Line: Tort “crisis” is on the horizon and will be recognized as such by 2012–2014
No tort reform (or protection of recent reforms) is forthcoming from the current Congress or Administration
Erosion of recent reforms is a certainty (already happening)
Innumerable legislative initiatives will create opportunities to undermine existing reforms and develop new theories and channels of liability
Torts twice the overall rate of inflation
Influence personal and commercial lines, esp. auto liability
Historically extremely costly to p/c insurance industry
Leads to reserve deficiency, rate pressure
Emerging Tort Threat
73
Over the Last Three Decades, Total Tort Costs* as a % of GDP Appear Somewhat Cyclical
$0
$50
$100
$150
$200
$250
$300
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08E 10E
To
rt S
ys
tem
Co
sts
1.50%
1.75%
2.00%
2.25%
2.50%
To
rt Co
sts
as
% o
f GD
P
Tort Sytem Costs Tort Costs as % of GDP
($ Billions)
* Excludes the tobacco settlement, medical malpracticeSources: Tillinghast-Towers Perrin, 2008 Update on US Tort Cost Trends, Appendix 1A; I.I.I. calculations/estimates for 2009 and 2010
2009–2010 Growth in Tort Costs as % of GDP is Due in
Part to Shrinking GDP
74
The Nation’s Judicial Hellholes: 2010
Source: American Tort Reform Association; Insurance Information Institute
South Florida
West VirginiaIllinoisCook County
New MexicoAppellate
Courts
Watch List
California Alabama Madison County, IL Jefferson County, MS Texas Gulf Coast Rio Grande Valley,
TX
Dishonorable Mention
AR Supreme Court MN Supreme Court ND Supreme Court PA Governor MA Supreme
Judicial Court Sacramento County
New JerseyAtlantic County (Atlantic City)
New York City
Average Jury Awards 1999 - 2008
$725$747 $756
$800 $799
$1,018 $1,022
$950
$1,077$1,046
$500
$600
$700
$800
$900
$1,000
$1,100
$1,200
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Jury Verdict Research; Insurance Information Institute.
Avg. Jury Awards 1999 vs. 2003 and 2008
$6
44
$2
01
$5
89
$2
,33
8
$2
,88
7
$4
,83
8
$7
99
$2
08 $
90
1
$4
,16
4
$3
,49
9
$1
,04
6
$3
27 $8
49
$3
,71
7
$3
,72
2
$4
,88
5
$5
,44
6
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
Overall Vehicularliability
Premisesliability
Wrongfuldeath*
Medicalmalpractice
Productsliability
1999 2003 2008
*Award trends in wrongful deaths of adult males.Source: Jury Verdict Research; Insurance Information Institute.
Sum of Top 10 Jury Awards 2004-2009
$5,159
$2,954
$815$616
$1,344$1,511
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
2004 2005 2006 2007 2008 2009
Source: Insurance Information Institute from Lawyers USA, January 2005, 2006, 2007, 2008, 2009 and 2010.
Financial Strength & Ratings
78
Industry Has Weathered the Storms Well
P/C Insurer Impairments, 1969–2009p8
15
12
71
19
34
91
31
21
99
16
14
13
36
49
31 3
45
04
85
56
05
84
12
91
61
23
11
8 19
49 50
47
35
18
14 15
71
1
5
0
10
20
30
40
50
60
70
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
p
Source: A.M. Best; Insurance Information Institute.
The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets
5 of the 11 are Florida companies (1 of these
5 is a title insurer)
80
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2009p
90
95
100
105
110
115
1206
97
07
17
27
37
47
57
67
77
87
98
08
18
28
38
48
58
68
78
88
99
09
19
29
39
49
59
69
79
89
90
00
10
20
30
40
50
60
70
80
9*
Co
mb
ine
d R
ati
o
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Imp
airm
en
t Ra
te
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 Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007/08
81
Summary of A.M. Best’s P/C Insurer Ratings Actions in 2009
3.8%
2.9%3.2%
2.4%
11.9%75.7%
.Source: A.M. Best.
P/C Insurance is by Design a Resilient Business. The Dual Threat of Financial Disasters and Catastrophic Losses
Are Anticipated in the Industry’s Risk Management 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
Affirm – 1,375
Downgraded – 53
Upgraded – 59Initial – 44
Under Review – 69
Other – 216
82
Reasons for US P/C Insurer Impairments, 1969–2008
3.7%4.2%
9.1%
7.0%
7.9%
7.6%
8.1% 14.3%
38.1%
Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008
Deficient Loss Reserves and Inadequate Pricing Are the Leading Cause of Insurer Impairments, Underscoring the Importance of Discipline.
Investment Catastrophe Losses Play a Much Smaller Role
Deficient Loss Reserves/In-adequate Pricing
Reinsurance Failure
Rapid GrowthAlleged Fraud
Catastrophe Losses
Affiliate Impairment
Investment Problems
Misc.
Sig. Change in Business
P/C Insurance Financial Performance
83
A Resilient Industry in Challenging Times
84
Profitability
Historically Volatile
P/C Net Income After Taxes1991–2009 ($ Millions)
$14,1
78
$5,8
40
$19,3
16
$10,8
70
$20,5
98
$24,4
04 $36,8
19
$30,7
73
$21,8
65
$3,0
46
$30,0
29
$62,4
96
$3,0
43
$28,3
11
-$6,970
$65,7
77
$44,1
55
$20,5
59
$38,5
01
-$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 00 01 02 03 04 05 06 07 08 09
2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS1 = 5.8%
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.3% ROAS for 2009 and 4.4% for 2008. 2009 net income was $34.5 billion and $20.8 billion in 2008 excluding M&FG.Sources: A.M. Best, ISO, Insurance Information Institute
P-C Industry profits for full-year 2009 were up sharply from 2008, but are still well
below pre-crisis levels
86
ROE: P/C vs. All Industries1987–2009*
* Excludes Mortgage & Financial Guarantee in 2008 and 2009.Sources: ISO, Fortune; Insurance Information Institute.
-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
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*
(Percent)
87
ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2009*
* Return on average suplus in 2008/09 excluding mortgage and financial guaranty insurers.Source: The Geneva Association, Insurance Information Institute
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 09*
ROE Cost of Capital
-13
.2 p
ts
-1.7
pts
+2
.3 p
ts
-9.0
pts
-6.4
pts
-3.2
pts
The P/C Insurance Industry Fell WellShort of Its Cost of Capital in 2008/09
US P/C Insurers Missed Their Cost of Capital by an Average 6.7 Points from 1991 to 2002, but On Target or Better
2003-07, but Fell Well Short in 2008/09
The Cost of Capital is the Rate of Return Insurers Need to
Attract and Retain Capital to the Business
(Percent)
88
Median ROE for Insurers vs. Financial Firms & Other Key Industries 2009
(Profits as a % of Stockholders’ Equity)
Source: Fortune, May 3, 2010; Insurance Information Institute.
9%
9%
9%
7%
7%
5%
4%
0%
3.5%
10.5%
12%
14%
14%
19%
21%
21%
$0 $0 $0 $0 $0 $0
Food Consumer Products
Pharmaceuticals
Computers, Office Equip.
Health Insurance & Mgd. Care
Specialty Retailers
Energy
All Industries
Diversified Financials
Telecommunications
Utilities
P/C Insurance (Stock)
L/H Insurance (Stock)
Entertainment
Commercial Banks
P/C Insurance (Mutual)*
L/H Insurance (Mutual)
Stock P/C insurers earned a 7% ROE in 2009, below the
10.5% earned by the Fortune 500 as a whole and well below health insurers’ 14%. P/C Mutuals’ average
ROE was 3.5%.
Commercial bank ROE was 4% in 2009
A 100 Combined Ratio Isn’t What ItOnce Was: 90-95 is Where It’s At Now
Combined Ratio / ROE
* 2009/2008 figures are return on average statutory surplus. 2008 and 2009 figures exclude mortgage and financial guaranty insurersSource: Insurance Information Institute from A.M. Best and ISO data
97.5
100.6 100.1 100.7
92.6
99.3101.0
7.3%
9.6%
15.9%
14.3%
12.7%
4.4%
8.9%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2008* 2009*0%
3%
6%
9%
12%
15%
18%
Combined Ratio ROE*
Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs
Combined ratio of about 100 generated a 6% ROE in 2009, 10%
in 2005 and16% in 1979
P/C Premium Growth Primarily Driven by the
Industry’s Underwriting Cycle, Not the Economy
90
91
-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
10F
Strength of Recent HardMarkets by NWP Growth
(Percent)1975-78 1984-87 2000-03
Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute
Net Written Premiums Fell 0.7% in 2007 (First Decline Since 1943) by 2.0% in 2008, and 3.7% in 2009, the First 3-Year Decline Since 1930-33
During the Great Depression. Expected decline of 1.6% in 2010.
Good News
P/C insurance industry should
see positive growth in 2011
for the first time since 2006
92
Average Expenditures on Auto Insurance
$651$668
$691$705
$726
$786
$830$842
$831$816
$795$816
$844
$878
$690$685$703
$600
$650
$700
$750
$800
$850
$900
$950
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 09* 10*
Countrywide Auto Insurance Expenditures Increased2.6% in 2008 and 3.5% Pace in 2009 (est.) and 4% in 2010 (est.)
* Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimates 2008-2010 based on CPI data.
93
Monthly Change in Auto Insurance Prices*
(Percent)
* Percentage change from same month in prior year.Source: US Bureau of Labor Statistics
0.8
%0
.8%
0.5
%0
.4%
0.3
%0
.3%
0.5
%0
.6%
0.5
%0
.1% 0.5
% 0.9
%1
.1%
1.3
% 1.7
%2
.6%
2.6
%2
.7% 3.0
%3
.1% 3.4
% 3.7
% 4.0
%4
.0% 4.3
%4
.4% 4.7
%4
.4% 4.7
%4
.6%
4.7
%4
.5%
4.6
%4
.5%
4.7
%
0.2
%
0%
1%
2%
3%
4%
5%
6%
Jan
07
Fe
b 0
7M
ar
07
Ap
r 0
7M
ay
07
Jun
07
Jul 0
7A
ug
07
Se
p 0
7O
ct 0
7N
ov
07
De
c 0
7Ja
n 0
8F
eb
08
Ma
r 0
8A
pr
08
Ma
y 0
8Ju
n 0
8Ju
l 08
Au
g 0
8S
ep
08
Oct
08
No
v 0
8D
ec
08
Jan
09
Fe
b 0
9M
ar
09
Ap
r 0
9M
ay
09
Jun
09
Jul 0
9A
ug
09
Se
p 0
9O
ct 0
9N
ov
09
De
c 0
9
Auto Insurance Price Increases Seem to Have Leveled Off in Recent Months,
Averaging 4.5% for All of 2009
94
Average Premium forHome Insurance Policies**
* Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2008-2010 based on CPI data.
$508$536
$593
$668
$822 $835$854
$879
$804
$764
$729
$500
$550
$600
$650
$700
$750
$800
$850
$900
$950
00 01 02 03 04 05 06 07 08* 09* 10*
95
Average Commercial Rate Change,All Lines, (1Q:2004–1Q:2010)
-3.2
%
-5.9
%
-7.0
%
-9.4
%
-9.7
% -8.2
%
-4.6
%
-2.7
%
-3.0
%
-5.3
%
-9.6
%
-11
.3%
-11
.8%
-13
.3%
-12
.0%
-13
.5%
-12
.9% -1
1.0
%
-6.4
% -5.1
%
-4.9
%
-5.8
%
-5.6
%
-5.3
%
-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
1Q
10
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
KRW Effect
Magnitude of Price Declines Shrank
During Crisis, Reflecting Shrinking
Capital, Reduced Investment Gains,
Deteriorating Underwriting
Performance, Higher Cat Losses and
Costlier Reinsurance
(Percent)
Market Remains Soft as Capital Restored and Underwriting Losses Fall
96
Change in Commercial Rate Renewals, by Line: 2010:Q1
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Most Major Commercial Lines Renewed Down in Q1:2010 by Roughly the Same Margin as a Year Earlier
Percentage Change (%)
-3.9%
-2.9%-2.5%
-2.1%
0.4%
-5.3% -5.4%-5.0%
-4.6% -4.4%-3.9%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%All C
omm
ercia
l
Comm
l Pro
p
GL
Umbr
ella
Comm
l Aut
o
Const
ructi
on
WC
Bus. I
nter
rupt
ion
EPLD&O
Suret
y
97
Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2010:Q1
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Percentage Change (%)
Market has Been Soft for 6 years
and Remains Soft as Capital is Restored and Underwriting Losses Fall
Peak = 2004:Q4 +28.5%
KRW Effect
Trough = 2007:Q3 -13.6%
Pricing Turned Negative in Early
2004 and Has Been Negative
Ever Since
98
Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2010:Q1
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
1999:Q4 = 100
Pricing today is where is was in
Q4:2000 (pre-9/11)
Merger & Acquisition
99
Barriers to Consolidation Will Diminish in 2010
100
U.S. P/C Insurance-RelatedM&A Activity, 1988–2009
$2$5
$19
$1 $0
$20
$0
$9
$35
$14$16
$4
$56
$31
$8$12
$2$3 $3 $5$6
$40
$0
$10
$20
$30
$40
$50
$60
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Tra
ns
ac
tio
n V
alu
e (
$ B
illio
n)
0
20
40
60
80
100
120
140
Nu
mb
er o
f Tra
ns
ac
tion
s
Transaction Values
Number of Transactions
Note: U.S. Company was the acquirer and/or target.
Source: Conning Research & Consulting.
2010: No Mega Deals So Far, Despite Record Capital, Slow Growth and Improved
Financial Market Conditions
$ Value of Deals Down 78% in 2009, Volume Up 7%
Capital/PolicyholderSurplus (US)
101
Shrinkage, but Not Enoughto Trigger Hard Market
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
$550
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09*
US Policyholder Surplus:1975–2009*
* As of 9/30/09Source: A.M. Best, ISO, Insurance Information Institute.
“Surplus” is a measure of underwriting capacity. It is
analogous to “Owners Equity” or “Net Worth” in
non-insurance organizations
($ Billions)
The Premium-to-Surplus Ratio Stood at $0.82:$1 as of12/31/09, A Record Low (at Least in Recent History)
Surplus as of 12/31/09 was $511.5B, up from $437.1B as of 3/31/09. Recent peak was $521.8
as of 9/30/07. Surplus as of 12/31/09 is now only 2.0% below 2007 peak; Crisis trough was
as of 3/31/0916.2% below 2007 peak.
103
Policyholder Surplus, 2006:Q4–2009:Q4
Source: ISO, AM Best.
($ Billions)
$487.1$496.6
$512.8$521.8
$478.5
$455.6
$437.1
$463.0
$490.8
$511.5$505.0
$515.6$517.9
$380
$400
$420
$440
$460
$480
$500
$520
$540
06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4
Capacity Peaked at $521.8 as of 9/30/07
Declines Since 2007:Q3 Peak
08:Q2: -$16.6B (-3.2%) 08:Q3: -$43.3B (-8.3%) 08:Q4: -$66.2B (-12.9%)09:Q1: -$84.7B (-16.2%)
09:Q2: -$58.8B (-11.2%)09:Q3: -$31.8B (-5.9%)09:Q4: -$2.5B (-0.5%)
Capacity as of 12/31/09 was just 2.0% below the 2007 peak and will likely set a new record in 2010
104
Global Reinsurance Capacity Source of Decline
Global Reinsurance Capacity Shrankin 2008, Mostly Due to Investments
$360
$300
$270
$290
$310
$330
$350
$370
2007 2008
55% 14%
31%
Source: AonBenfield Reinsurance Market Outlook 2009; Insurance Information Institute.
Global Reinsurance CapacityFell by an Estimated 17% in 2008
Change inUnrealizedCapital Losses
RealizedCapitalLosses
Hurricanes
105
Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*
* 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
3.3%
9.6%
6.9%
10.9%
6.2%
13.8%
16.2%
0%
3%
6%
9%
12%
15%
18%
6/30/1989Hurricane
Hugo
6/30/1992HurricaneAndrew
12/31/93NorthridgeEarthquake
6/30/01 Sept.11 Attacks
6/30/04Florida
Hurricanes
6/30/05Hurricane
Katrina
FinancialCrisis as of3/31/09**
The Financial Crisis at its Peak Ranks as the Largest
“Capital Event” Overthe Past 20+ Years
(Percent)
106
* 2009 NWP and Surplus figures are % changes as of Q4:09 vs Q4:08Sources: A.M. Best, ISO, Insurance Information Institute
Historically, Hard Markets FollowWhen 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
(Percent)
Sharp Decline in Capacity is a Necessary butNot Sufficient Condition for a True Hard Market
Surplus growth is now positive but premiums
continue to fall, a departure from the historical pattern
Investment Performance
107
Investments Are a PrincipleSource of Declining Profitability
Property/Casualty Insurance Industry Investment Gain: 1994–20091
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$64.0
$31.7
$39.0
$58.0
$51.9$56.9
$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 50% In 2008 Due to Lower Yields,Poor Equity Market Conditions. In 2009, the Lower Realized Capital Losses
Helped Offset Lower Investment Income
1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.
($ Billions)
109
P/C Insurer Net Realized Capital Gains, 1990-2009
Sources: A.M. Best, ISO, Insurance Information Institute.
$2.8
8
$4.8
1
$9.8
9
$9.8
2
$10.8
1
$18.0
2
$13.0
2
$16.2
1
$6.6
3
-$1.2
1
$6.6
1
$9.1
3
$9.7
0
$3.5
2
$8.9
2
-$7.9
8
-$19.8
1
$9.2
4
$6.0
0
$1.6
6
-$25-$20-$15-$10-$5$0$5
$10$15$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09Q3
Realized Capital Losses Hit a Record $19.8 Billion in 2008 Due to Financial Market Turmoil, a $27.7 Billion Swing From 2007,
Followed by an $8.0B Drop in 2009. This is a Primary Cause of 2008/2009’s Large Drop in Profits and ROE
($ Billions)
110
Treasury Yield Curves: Pre-Crisis (July 2007) vs. May 2010*
0.15% 0.16% 0.22% 0.34%
0.76%
2.75%
3.31%
4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00%5.19%
2.10%
1.26%
4.22%4.05%
0%
1%
2%
3%
4%
5%
6%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
April 2010 Yield Curve*Pre-Crisis (July 2007)
Treasury yield curve is near its most depressed level in at least 45 years. Investment
income is falling as a result
Stock Dividend Cuts Have Further Pressured Investment Income
*Week ending May 24, 2010.Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
111
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance only.Source: A.M. Best; Insurance Information Institute.
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
-3.1%-3.3%-3.3%-3.7%
-4.3%
-5.2%-5.7%
-7.3%
-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%
112
Distribution of P/C Insurance Industry’s Investment Portfolio
Sources: NAIC; Insurance Information Institute research.
Invested assets totaled $1.214 trillion as of 12/31/08
Insurers are generally conservatively invested, with more than 2/3 of assets invested in bonds as of 12/31/08
Only about 15% of assets were invested in common stock as of 12/31/08
Even the most conservative of portfolios was hit hard in 2008
Portfolio Facts
8.0%14.8%
0.9%1.8%
6.1%
68.4%
Bonds
Common Stock
Real Estate
As of December 31, 2008
Cash and Short-term
Investments
Preferred Stock
Other
113
Underwriting Trends – Financial Crisis Does Not
Directly Impact Underwriting Performance: Cycle, Catastrophes
Were 2008’s Drivers
114
P/C Insurance Industry Combined Ratio, 2001–2009*
* Excludes Mortgage & Financial Guaranty insurers in 2008/2009. Including M&FG, 2008=105.0, 2009=101.0 Sources: A.M. Best, ISO.
95.7
99.3101.0
92.6
100.898.4
100.1
107.5
115.8
90
100
110
120
2001 2002 2003 2004 2005 2006 2007 2008 2009
Best Combined
Ratio Since 1949 (87.6)
As Recently as 2001, Insurers Paid Out
Nearly $1.16 for Every $1 in Earned
Premiums
Relatively Low CAT Losses, Reserve Releases
Cyclical Deterioration
2005 Ratio Benefited from Heavy Use of Reinsurance
Which Lowered Net Losses
Underwriting Gain (Loss)1975–2009*
* Includes mortgage and financial guarantee insurers.Sources: A.M. Best, ISO; Insurance Information Institute.
Large Underwriting Losses Are NOT Sustainable in Current Investment Environment
-$55
-$45
-$35
-$25
-$15
-$5
$5
$15
$25
$35
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
The industry “improved” as of 2009:Q3 to an underwriting loss of $3.1 billion, compared to a
loss for all of 2008 of $21.2 billion.
Cumulative underwriting deficit from 1975 through
2009 is $445B
($ Billions)
116
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
$309
2
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
E
11
E
Pri
or
Yr.
Re
se
rve
Re
lea
se
($
B)
-6
-4
-2
0
2
4
6
8 Imp
ac
t on
Co
mb
ine
d R
atio
(Po
ints
)
Prior Yr. ReserveDevelopment ($B)
Impact onCombined Ratio(Points)
P/C Reserve Development, 1992–2011E
Reserve Releases Will Expected to Taper Off in 2010 and Drop Significantly 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.
117
Calendar Year vs. Accident Year P/C Combined Ratio: 1992–2010E1
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.
10
5.6
10
7.8
11
0.1 1
15
.9
10
7.3
10
0.1
98
.3 10
0.9
92
.4 95
.5
10
5.1
10
1.9 10
5.9
11
4.7
10
7.8 11
1.8
10
7.4
10
8.3
10
5.3 10
9.2
10
9.2
11
0.0
11
2.3
10
0.8
96
.6
96
.0
10
0.6
93
.9 97
.4
10
5.5
10
5.7 10
9.4
11
5.7
10
6.9
10
8.4
10
6.4
10
5.8
10
1.6
80
85
90
95
100
105
110
115
120
92 93 94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09E 10E
Calendar Year Accident Year
Accident Year Results Show a More Significant Deterioration in Underwriting Performance. Calendar Year Results Are Helped by Reserve Releases
118
Number of Years with Underwriting Profits by Decade, 1920s–2000s
0 0
3
54
8
10
76
0
2
4
6
8
10
12
1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*
* 2000 through 2009. 2009 combined ratio excluding mortgage and financial guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an underwriting profit.Note: Data for 1920–1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data.
Number of Years with Underwriting Profits
Underwriting Profits Were Common Before the 1980s (40 of the 60 Years Before 1980 Had Combined Ratios Below 100) –
But Then They Vanished. Not a Single Underwriting Profit Was Recorded in the 25 Years from 1979 Through 2003
119
Performance by Segment:Commercial/Personal Lines &
Reinsurance
120
Calendar Year Combined Ratios by Segment: 2008-2010P
Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.
101.0 101.2
92.2
100.3
103.7
100.599.8
107.2
103.6
9092949698
100102104106108110
Personal Lines Commercial Lines US Reinsurance
2008 2009E 2010P
Overall deterioration in 2010 underwriting performance is due to expected return to normal catastrophe activity along with deteriorating underwriting
performance related to the prolonged commercial soft market
Personal lines combined ratio is expected to improve in 2010 while commercial lines
and reinsurance deteriorate
121
Calendar vs. Accident Year Combined Ratios by Segment: 2008-2010P*
*Normalized to reflect average/typical level of catastrophe losses.Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.
98.6
101.3100.3
102.4
106.4
104.0
90
92
94
96
98
100
102
104
106
108
Commercial Lines-Calendar Year Commercial Lines-Accident Year
2008 2009E 2010P
The ability of reserves releases to favorably impact calendar year results will diminish over time reserved redundancies fall
CY commercial lines combined ratios are lower than AY due to reserve releases
122
After-Tax Return on Surplus (ROE) by Segment: 2008-2010P
Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.
5.3%
7.3%
5.2%
6.6%7.1%
5.3%
3.9%
-1.3%
1.7%
-2%-1%0%1%2%3%4%5%6%7%8%
Personal Lines Commercial Lines Reinsurance
2008 2009E 2010P
Profitability will rise or stabilize across most p/c lines, barring a financial crisis relapse or major catastrophic losses
Personal lines ROEs should improve in 2010 and remain flat in commercial lines and
reinsurance
123
Change in Policyholder Surplus by Segment: 2008-2010P
Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.
8.0% 7.0%
19.0%
5.0% 6.0%
21.0%
-12.3%-12.1%-11.5%-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Personal Lines Commercial Lines Reinsurance
2008 2009E 2010P
Rapid growth in policyholder surplus to pre-crisis levels combined with ongoing slow growth or declines in premiums (esp. in
commercial lines) implies a build-up of excess capacity—a major factor in weak commercial lines and reinsurance pricing
After a steep decline in capacity during the crisis, most of that capacity was
restored in 2009. Virtually is expected to be restored in 2010.
124
Net Written Premium Growth by Segment: 2008-2010P
Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.
-1.1%
-7.9%
-1.5%
1.8%
-5.6%
-2.0%
3.5%
-4.0%
-0.7%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
Personal Lines Commercial Lines Reinsurance
2008 2009E 2010P
Rate and exposure are more favorable in personal lines, whereas a prolonged soft market and sluggish recovery from the recession weigh on commercial lines. Low catastrophe losses and ample
capacity are holding down reinsurance prices while higher insurer retentions impact premiums
Personal lines will return to growth in 2010 while commercial lines and reinsurance are
expected to continue to shrink
125
Change in Net Investment Income by Segment: 2008-2010P*
Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.
-4.1%
-16.1%
1.9%3.4% 1.9%
10.7%
-13.4%
-0.8%
-12.8%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
Personal Lines Commercial Lines Reinsurance
2008 2009E 2010P
Investment income consists primarily of interest on bonds and stock dividends. Both were hit hard during the financial crisis as the Fed slashed
interest rates to near zero and corporations cut dividends. A recovery in investment asset values beginning in Q2 2009—which reduced realized capital
losses—has helped offset some of the decrease in investment income.
Net investment income is expected to begin to recover in all segments in 2010
126
Investment Yield by Segment: 2008-2010P*
Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.
3.5%3.7%
3.9%
3.3%3.6%
3.8%3.9%
4.6%
3.8%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
Personal Lines Commercial Lines Reinsurance
2008 2009E 2010P
The Fed slashed interest rates in 2008 and has kept them low since, eroding the yield on all types of bonds, especially US Treasury securities. Yields will
not recover until the Fed begins monetary policy tightening.
Investment yields are shrinking across all segments—down 10 to 100 bases points since 2008
Homeowners Insurance Combined Ratio: 1990–2010P
11
3.0
11
7.7
15
8.4
11
3.6
10
1.0 10
9.4
10
8.2
11
1.4 1
21
.7
10
9.3
98
.3
94
.2 10
0.1
89
.4 95
.7
11
7.0
10
5.5
10
5.0
11
8.4
11
2.7 12
1.7
80
90
100
110
120
130
140
150
160
170
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09E 10P
Homeowners Line Is Expected to Be Marginally Profitable Overall in 2010, but in Many States Could Be Quite Profitable. Volatility Due to
Catastrophe Losses Will Persist
Sources: A.M. Best; Insurance Information Institute.
Private Passenger Auto Combined Ratio: 1993–2010P
10
1.7
10
1.3
10
1.3
10
1.0
10
9.5
10
7.9
10
4.2
98
.4
94
.3
95
.1
95
.5 98
.3 10
0.3
99
.3
98
.5
99
.5 10
1.1
10
3.5
80
85
90
95
100
105
110
115
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09E 10P
Private Passenger Auto Accounts for 34% of Industry Premiums and Remains the Profit Juggernaut of the P/C Insurance Industry
Sources: A.M. Best; Insurance Information Institute.
Commercial Multi-Peril Combined Ratio: 1995–2010P
11
9.0
11
9.8
10
8.5
12
5.0
11
6.2
11
6.1
10
4.9
10
1.9
10
5.4
95
.1 97
.610
0.7
11
6.8
11
3.6
11
5.3
12
2.4
11
5.0
11
7.0
97
.3
89
.0
97
.7
93
.8
83
.8
89
.8
10
8.0
97
.0 99
.5
11
3.1
11
5.0 1
21
.0
80
85
90
95
100
105
110
115
120
125
130
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09E* 10P*
Commercial Multi-Peril is Expected to Continue to Perform Reasonably Well
*2009E and 2010P figures are for the combined liability and non-liability components.Sources: A.M. Best; Insurance Information Institute.
Commercial Auto Combined Ratio: 1993–2010P
11
2.1
11
2.0
11
3.0
11
5.9
10
2.7
95
.2
92
.9
92
.1
92
.4 94
.2 96
.8
97
.0
98
.5
11
8.1
11
5.7
11
6.2
80
85
90
95
100
105
110
115
120
125
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09E 10P
Commercial Auto is Expected to Remain Reasonably Profitable in 2010
Sources: A.M. Best; Insurance Information Institute.
Inland Marine Combined Ratio: 1999–2010P
101.9
92.8
100.2
83.8
77.379.5
93.2
86.088.5
80.882.5
89.9
70
75
80
85
90
95
100
105
99 00 01 02 03 04 05 06 07 08 09E 10P
Inland Marine is Expected to Remain Among the Most Profitable of All Lines
Sources: A.M. Best; Insurance Information Institute.
Workers Compensation Combined Ratio: 1994–2010P
10
2.0
97
.0 10
0.0
10
1.0
11
0.9
11
0.0
10
7.0
10
2.7
98
.4
10
3.5
10
4.3 1
09
.0
11
2.0
121.7
10
7.0
11
5.3
11
8.2
80
85
90
95
100
105
110
115
120
125
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09E 10P
Workers Comp Underwriting Results Are Deteriorating Markedly
Sources: A.M. Best; Insurance Information Institute.
133
Catastrophic Loss –Catastrophe Losses Trends Are
Trending Adversely
Geophysical events(earthquake, tsunami, volcanic activity)
Meteorological events (storm)
Hydrological events(flood, mass movement)
Climatological events(extreme temperature, drought, wildfire)
Selection of significant natural catastrophes (see table)
© 2010 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE – As at 29 March 2010
Global natural catastrophes
4
5
3
12
7
8
6
Natural Catastrophes: Jan – Mar 2010Worldmap
Chilean earthquake (mag. 8.8) on 27 Feb. produced at least $4 billion in insured losses, $20
billion in economic losses. Most costly insurance event in 2010
Severe winter weather in the Eastern US produced insured
losses of produced at least $1B in insured losses and $2B
in economic losses
Winter Storm Xynthia produced at least $2B in insured losses and $4B in economic losses
The 12 Jan. Haiti quake killed 225,500 people, caused $8B+ in economic damage, but little in the way of
insured losses
© 2010 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE – As at 29 March 2010
No. Period Event Affected Area
Overall losses*
Insured losses* Fatal-
ities*US$ m, original values
1 7–12 January Winter damage, cold wave
United States: Midwest (MO, IA); South (AR, LA, OK, TX); Southeast (FL, AL, GA, MS, NC, SC, TN)
800 160 5
2 12 January Earthquake Haiti: South (esp. Port-au-Prince) >8,000 222,500
3 18–22 January Severe storms United States: Southwest (CA, AZ, UT) 180 120 20
4 4–6 February Winter storm, blizzards
United States: Northeast (DC, DE, MD, NJ, PA); Southeast (NC, VA, WV)
180 135 2
5 9–14 February Winter storm, blizzards, winter damage
United States. Canada 800 560
6 26–28 February
Winter storm Xynthia, storm surge
Belgium. France. Germany. Netherlands. Portugal. Spain. Switzerland. United Kingdom
4,500 >2,000 63
7 27 February Earthquake, tsunami Chile: Central; South >20,000 >4,000 507
8 6–7 March Hailstorm, severe storms
Australia: Southeast (Victoria) 1,200 780
*Preliminary figures
Natural Catastrophes: January – March 2010Selection of Significant Events
First Quarter 2010 Insured Major Catastrophe Losses Were Among the Highest on Record for Q1, Totaling at least $7.755 Billion. Economic
Losses Total at Least $35.66. More than 223,000 People Were Killed in These Events.
Gulf Coast Near Deepwater Horizon Site
Sources: Energy Information Administration
On April 20, 2010, an explosion and
fire occurred on the offshore drilling rig Deepwater Horizon,
which had been drilling an
exploratory well in approx. 5,000 ft of water in the Gulf of
Mexico, 52 miles SE of Venice,
Louisiana.
The platform subsequently sank,
with 11 crewmembers
presumed dead, and the
uncompleted well leaking oil.
137
Announced Deepwater Horizon Insured Losses
*Lloyd’s estimates net loss to the market of $300 million to $600 million. Includes estimate across all Lloyd’s syndicates. Those syndicates that have reported losses individually are also shown in this chart and included in the Lloyd’s total.**Munich Re expects low triple digit million euro loss***Hanover Re expects a Eur40 million loss ****Hiscox expects net claims of below GBP10 million ($14.8 million)Source: Insurance Information Institute (I.I.I.); Company disclosures, SNL Financial Citi research note 05/04/10; Barclays Capital research note 05/10/10
$2
00
.0
$1
00
.0
$7
0.0
$5
3.0
$4
5.0
$4
0.0
$3
0.0
$2
5.0
$2
5.0
$2
0.0
$2
0.0
$1
5.0
$1
5.0
$1
5.0
$1
3.0
$8
.0
$7
.5
$5
.0
$600.0
$2
0.0
$0
$100
$200
$300
$400
$500
$600
$700
Insured losses are well-syndicated and spread across a broad range of
global insurers and reinsurers.
(Millions)
138
$8.3
$7.4
$2.6 $10.1
$8.3
$4.6
$26.5
$5.9 $12.9 $
27.5
$61.9
$9.2
$6.7
$27.1
$10.6
$100.0
$7.5
$2.7
$4.7
$22.9
$5.5 $
16.9
$0
$20
$40
$60
$80
$100
$120
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 20??
US Insured Catastrophe Losses
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.Sources: Property Claims Service/ISO; Insurance Information Institute.
2009 CAT Losses Were Less than Half of 2008. 2005 Was by Far the Worst Year Ever for Insured Catastrophe
Losses in the Decade of the 2000s Were More than Double the 1990s, But the Worst Has Yet to Come
$100 Billion CAT Year is Coming Eventually
2009 CAT Losses
Were Down 61% from
2008
($ Billions)
2000s: A Decade of Disaster
2000s: $193B (up 117%)
1990s: $89B
50
100
150
200
250
300
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Global Natural Catastrophes 1980–2009Overall and insured losses with trend
US
$bn
Overall losses (in 2009 values) Insured losses (in 2009 values)
Trend insured lossesTrend overall losses
Source: Munich Re NatCatSERVICE; Insurance Information Institute.
MEGATREND
Global natural catastrophe loss trends are ominous and
portend an even more disastrous decade ahead. Terrorism and other man-
made disasters could exacerbate the trend.
Sources: MR NatCatSERVICE
U.S. Significant Natural Catastrophes, 1950 – 2009
Number of Events ($1+ Bill economic loss and/or 50+ fatalities)
There were 7 Significant Natural Catastrophes in
the United States in 2009
141
Distribution of US Insured CAT Losses: TX, FL, LA vs. US, 1980-2008*
($ Billions)
* All figures (except 2006-2008 loss) have been adjusted to 2005 dollars.Source: PCS division of ISO.
Florida Accounted for 19% of All US Insured CAT Losses from 1980-2008: $57.1B out of $297.9B
$176 , 60% $57.10 ,
19%
$31.20 , 10%
$33.60 , 11%
Florida
Texas
Louisiana
Rest of US
142
Top 12 Most Costly Disastersin US History
(Insured Losses, 2009, $ Billions)
Sources: PCS; Insurance Information Institute inflation adjustments.
$11.3 $12.5
$18.2$22.8 $23.8
$45.3
$8.5$8.1$7.3$6.2$5.2$4.2
$0$5
$10$15$20$25$30$35$40$45$50
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo(1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Ike (2008)
Northridge(1994)
9/11Attacks(2001)
Andrew(1992)
Katrina(2005)
8 of the 12 Most Expensive Disasters in US History Have Occurred Since 2004;
8 of the Top 12 Disasters Affected FL
Hurricane Katrina Remains, By Far, the Most Expensive Insurance Event in US
and World History
143
Total Value of Insured Coastal Exposure
(2007, $ Billions)
Source: AIR Worldwide
$224.4$191.9
$158.8$146.9$132.8
$92.5$85.6$60.6$55.7$51.8$54.1
$14.9
$479.9$635.5
$772.8$895.1
$2,378.9$2,458.6
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000
FloridaNew York
TexasMassachusetts
New JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaAlabamaGeorgia
DelawareNew Hampshire
MississippiRhode Island
Maryland
$522B Increase Since 2004,
Up 27%
In 2007, Florida Still Ranked as the #1 Most Exposed State to Hurricane Loss, with
$2.459 Trillion Exposure, an Increase of $522B or 27% from $1.937 Trillion in 2004
The Insured Value of All Coastal Property Was $8.9 Trillion in 2007, Up 24% from $7.2 Trillion in 2004
144
US Residual Market Exposure to Loss
$372.3$430.5 $419.5
$656.7
$771.9
$696.4
$292.0$244.2$221.3
$281.8
$150.0
$54.7
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: PIPSO; Insurance Information Institute
Hurricane Andrew
4 Florida Hurricanes
Katrina, Rita, and Wilma
In the 19-year Period Between 1990 and 2008, Total Exposure to Loss in the Residual Market (FAIR & Beach/Windstorm) Plans Has Surged from
$54.7B in 1990 to $696.4B in 2008
($ Billions)
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