2004 Overview & Outlook for the Property/Casualty Insurance Industry Casualty Actuaries of Greater New York New York, NY December 6, 2004 Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038
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2004 Overview & Outlook for the Property/Casualty Insurance Industry Casualty Actuaries of Greater New York New York, NY December 6, 2004 Robert P. Hartwig,
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2004 Overview & Outlook for the Property/Casualty
Insurance Industry
Casualty Actuaries of Greater New YorkNew York, NY
December 6, 2004
Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038
• Profitability• Presidential Party Affiliation & P/C Profitability• Underwriting• Investment Overview• Ratings, Solvency & Financial Strength• Impact of Spitzer Investigation• Capacity• Pricing Trends• Tort Environment • The Challenge of Terrorism• Q & A
THE INSURANCE INFORMATION
INSTITUTE: THE PLACE FOR
INSURANCE INFORMATION
About theInsurance Information Institute
The mission of the Insurance Information Institute (I.I.I.) is to improve public understanding of
insurance -- what it does and how it works. The I.I.I. enjoys broad membership throughout the insurance industry, including most of the major p/c insurers and reinsurers operating in the United States, as well as companies operating on a regional basis and internationally.
For more than 40 years, the I.I.I. has provided definitive insurance information. Today, the I.I.I. is recognized throughout the insurance industry as well as by the media, governments, regulatory organizations, universities and the public as a primary source of information, analysis and referral concerning insurance.
Each year, the I.I.I. works on more than 3,700 news stories, handles more than 6,000 requests for information from its members, the media, and other parties and answers nearly 50,000 questions from consumers.
In addition to direct contact with the media, individuals and organizations, the I.I.I. publishes a host of helpful brochures and books on a wide variety of insurance topics, ranging in subjects from 12 Ways to Lower Your Auto Insurance Costs to the I.I.I. Fact Book series. I.I.I.’s members benefit from direct access to all information, I.I.I. staff and its members-only web site. The Institute does not lobby. Its central function is to provide accurate and timely information on insurance subjects. Questions concerning I.I.I. membership should be directed to Cary Schneider at (212) 346-5566 or by email at [email protected].
With 90+ million visitors
annually, I.I.I drives
customers to your site
# 1 onGoogle!
I.I.I. ranks 1st on Google out of 99.6
million hits on “insurance”
Web Traffic onWWW.III.ORG
Millions of Hits
8
20
40
60
90
6.5
0
10
20
30
40
50
60
70
80
90
100
1999 2000 2001 2002 2003 2004E*
*2004 estimate based on average of 7.5 million hits per month through October.
Visits to I.I.I.’s public web site increased by 50% in 2003/4.
The average number of web
hits on I.I.I.’s site rose from 5 million per month in 2003 to 7.5
million in 2004 (est.)
P/C FINANACIAL UPDATE:
Profitability: Good but Not Good EnoughUnderwriting: Need to Stay Disciplined
Investments: Keep Expectations Low
P/C FINANCIAL OVERVIEW:
PROFIT PRESSURE
Highlights: Property/Casualty 1st Half 2004 vs. 1st Half 2003
2004 2003 Change
Net Written Prem. 212,117 202,828 +4.6%
Loss & LAE 140,057 142,129 -1.5%
Net UW Gain (Loss) 9,563 (2,070) N/A
Net Inv. Income 19,015 18,268 +4.1%
Net Income (a.t.) 23,520 22,813 +3.1%
Surplus* 370,433 346,987 +6.8%
Combined Ratio 94.4 99.8** -5.4 pts.*2003 surplus figure is as of 12/31/03**The combined ratio for full-year 2003 was 100.1
-10%
-5%
0%
5%
10%
15%
20%
25%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
F2
00
5
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
Strength of Recent Hard Markets by NWP Growth*
Real NWP Growth During Past 3 Hard Markets
1975-78: 8.6%
1984-87: 11.2%
2001-04F: 6.9%
1975-78 1984-87 2001-04
*2004 based on 1st half results from ISO.2005 figure is III forecast.
Premium growth is faltering. Real growth in 2005 will approach ZERO.
P/C Net Income After Taxes1991-2004E* ($ Millions)
$14,178
$5,840
$19,316
$10,870
$20,598
$24,404
$36,819
$30,773
$21,865
-$6,970
$3,046
$29,877
$20,559
$23,
520
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04E*First half results; ** After adjusting for 2004 hurricanesSources: A.M. Best, ISO, Insurance Information Institute.
Source: Wall Street Journal, October 7, 2004, D4, from survey of major brokerage firms.
Insurance Industry Contributions, Election Cycles 1990-2004*
$8.7
$11.7
$14.4
$9.2$10.5 $9.7 $10.0
$9.0
$25.9$27.3
$20.9$22.3
$11.7
$18.8$18.0
$12.0
$0
$5
$10
$15
$20
$25
$30
1990 1992 1994 1996 1998 2000 2002 2004*
$ M
illi
ons
Democrats
Republicans
*Data for current cycle released by Federal Election Commission as of October 4, 2004Source: Federal Election Commission via Center for Responsive Politics at www.opensecrets.org.
Insurance industry contributions are overwhelmingly
Republican: $157 million, 89% more
than the $83 million contributed to
Democrats since 1990
65% of insurance industry contributions since 1990 have gone to Republicans
P/C Insurance Industry ROE by Presidential Party Affiliation,
1950–2004EBLUE = Democratic President RED = Republican President
Source: Insurance Information Institute
Tru
man
Nixon/FordKennedy/ Johnson
Eisenhower Carter Reagan/Bush Clinton Bush
P/C Insurance Industry ROE byPresidential Administration,1950-2004*
15.10%8.93%
8.65%8.35%
7.98%7.68%
6.98%6.97%
5.43%
5.30%5.03%
4.43%3.55%
16.43%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
Carter
Reagan II
Nixon
Clinton I
G.H.W. Bush
Clinton II
Reagan I
Nixon/Ford
Truman
Eisenhower I
G.W. Bush
Eisenhower II
Johnson
Kennedy/Johnson
*ROE for 2004 estimated by III. Truman administration ROE of 6.97% based on 3 years only, 1950-52.Source: Insurance Information Institute
OVERALL RECORD: 1950-2004
Democrats 8.00%
Republicans 7.85%
Party of President has little bearing on
profitability of P/C insurance industry
WALL STREET:
HIGH EXPECTATIONS
Insurer Stocks: Outperforming the S&P 500
6.44%
2.20%
3.04%
7.40%
16.10%
0.92%
0% 5% 10% 15% 20%
S&P 500
Life/Health
All Insurers
Multiline
P/C
Brokers
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Total Return 2004 YTD Through October 8, 2004
If 2004 represents the cyclical peak for this industry, why aren’t p/c
stocks soaring?
Insurer Stocks: Hammered by the Spitzer Suit
-20.29%
0.41%
-9.33%
2.20%
11.08%
-0.32%
-25% -20% -15% -10% -5% 0% 5% 10% 15%
S&P 500
Life/Health
All Insurers
Multiline
P/C
Brokers
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Total Return 2004 YTD Through October 15, 2004
Spitzer suit announced Oct. 14 produced huge hit on all insurance sectors,
especially brokers
Insurer Stocks: Spitzer Effect Will Linger
-21.91%
2.49%
-4.92%
4.74%
14.54%
1.64%
-30% -20% -10% 0% 10% 20%
S&P 500
Life/Health
All Insurers
Multiline
P/C
Brokers
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Total Return 2004 YTD Through October 29, 2004
P/C insurer stocks have bounced back
Insurer Stocks: Spitzer Effect Will Linger
-21.6%
-1.87%
1.04%
5.60%
10.07%
18.91%
5.50%
-30% -20% -10% 0% 10% 20% 30%
S&P 500
Life/Health
All Insurers
P/C
Reinsurance
Multiline
Brokers
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Total Return 2004 YTD Through November 19, 2004
P/C insurer stocks have bounced back
Insurer Stocks: Spitzer Effect Will Linger
-19.2%
1.05%
0.54%
6.39%
11.97%
20.59%
6.20%
-30% -20% -10% 0% 10% 20% 30%
S&P 500
Life/Health
All Insurers
P/C
Reinsurance
Multiline
Brokers
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Total Return 2004 YTD Through November 26, 2004
P/C insurer stocks have bounced back
P/C FINANCIAL OVERVIEW:
UNDERWRITING PRESSURE
90
100
110
120
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
04E
04*
P/C Industry Combined Ratio
2001 = 115.7
2002 = 107.2
2003 = 100.1
2004: 1H = 94.4*
2004** = 100
Combined Ratios
1970s: 100.3
1980s: 109.2
1990s: 107.8
2000-04: 104.6**
Sources: A.M. Best; ISO, III *2004 figures based on first half estimate. **After impact of hurricanes.
($55)
($45)
($35)
($25)
($15)
($5)
$5
$15
$25
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
04*
04**
Underwriting Gain (Loss)1975-2004F
*Based on first half result. **Estimate for full-year 2004 is $0 assuming a combined ratio . Source: A.M. Best, Insurance Information Institute
$ B
illi
ons
2004 was likely to produce the largest underwriting profit in history =
$18.1B based on annualized first half result, but hurricanes changed that…
110
.3
110
.2
10
7.6
10
3.9
10
9.7 11
2.3
111
.5
12
2.2
110
.2
103.
9
104.
5
103.
5
104.
9
99.8 10
2.7
104.
5
109.
9
110.
9
105.
3
98.4
112
.5
10
1.9
90
95
100
105
110
115
120
125
93 94 95 96 97 98 99 00 01 02 03
Commercial--Net Basis Personal--Net Basis
Commercial vs. Personal Lines Combined Ratios
Source: A.M. Best; Insurance Information Institute
10-Year Average Combined Ratios
Commercial: 109.9 Personal: 104.4
Combined Ratios:Selected Major Lines, 2003E—2004F
99.1 10
3.1 10
9.5
101.
9
94.4 10
0.1
96.6 10
0.2 10
8.3
99.7
92.7
81.6
98.1
120.
9
82.3
112.
0
70
80
90
100
110
120
130
PPAuto
Home GL &PL
WC CMP CommAuto
InlandMarine
AllLines
2003E 2004F
Source: A.M. Best; Insurance Information Institute
U/W performance improving, but variation in
results is enormous.
Personal
Commercial
110
.5
10
5.0 11
3.6 11
9.2
10
4.8
10
0.8
10
0.5
114
.3
10
6.5
12
1.3
10
0.3
96
.3
10
8.8 11
5.8
10
6.9
10
8.5
10
6.5
10
5.8
10
1.6
10
5.6
10
7.7
110
.0 115
.7
10
7.2
10
0.1
94
.4
16
2.5
12
6.5
90
100
110
120
130
140
150
160
170
91 92 93 94 95 96 97 98 99 00 01 02 03 04*
Reinsurance All Lines Combined Ratio
Combined Ratio: Reinsurance vs. P/C Industry
*1st Half 2004
Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
2001’s combined ratio was the worst-ever for reinsurers; 2002 was bad as well.
2003: Big improvement in primary and reinsurer segments
97.5
100.6 100.1
94.3 94.4
9.4%
13.1%
14.3%
15.9%15.0%
80
85
90
95
100
105
110
1978 1979 2003 Actual 2003 for 15%ROE
2004F
Co
mb
ined
Ratio
6%
8%
10%
12%
14%
16%
18%
Retr
un
on
Eq
uity*
Combined Ratio ROE*
* 2004 figure is return on average statutory surplus based in first half dataSource: Insurance Information Institute from A.M. Best and ISO data.
A 100 Combined Ratio Isn’t What it Used to Be: 95 is Where It’s At
Combined ratios today must be below
95 to generate Fortune 500 ROEs
PRICING:
DOWNWARD PRESSURE?
How the Risk Dollar is Spent (2003)
Source: RIMS (2003); Insurance Information Institute
Firms w/Revenues < $1 Billion
Total Mgmt. Liab.8%
Other2%
Total Prof. Liab10%
WC Premiums8%
Retained Liability
11%
Admin Costs5% Property
Premiums16%
Retained Property
6%
Liabilty Premiums
14%
Retained WC21%
Firms w/Revenues > $1 Billion
Total Mgmt. Liab.7%
Other4%
Total Prof. Liab13%
WC Premiums14%
Retained Liability
4%
Admin Costs9%
Property Premiums
20% Retained Property
3%
Liabilty Premiums
18%
Retained WC10%
$6.10$6.40
$8.30$7.70
$7.30
$6.49
$5.70$5.25
$5.71
$6.46
$8.91
$11.96
$4.83$5.20
$4
$5
$6
$7
$8
$9
$10
$11
$12
$13
90 91 92 93 94 95 96 97 98 99 00 01 02 03* Cost of risk includes insurance premiums, retained losses and administrative expenses
Source: 2003 RIMS Benchmark Survey; Insurance Information Institute
Cost of Risk: 1990-2003*
1992-2000 = -41.8%
2000
-03
= +1
47.6
%
$2.92$2.72
$2.55
$1.43
$3.63 $3.54 $3.57
$2.07
$1.26 $1.15
$2.49
$1.86$1.67
$1.00
$0.46$0.87 $0.82
$0.96
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
Total WCCosts
Total LiabilityCosts
TotalProperty
Costs
Other Costs Total Admin.Costs
Total Mgmt.LiabilityCosts
2001 2002 2003
Components of Cost of Risk Per $1,000 of Revenue*
* Cost of risk includes insurance premiums, retained losses and administrative expensesSource: 2003 RIMS Benchmark Survey; Insurance Information Institute
+45.8% +90.3% +113.8%
+107.0%
+44.8%+150.0%
% Change
2001 -03
14
%11
% 13
%1
6%
19
%2
2%
28
%3
1%
31
%2
8% 3
0% 3
2%
33
%2
8% 29
%3
0% 3
2%
30
%2
7%
25
%2
8%
22
%1
8%
18
%1
7%
16
%1
2%
12
%1
0% 1
2%
11%
9%
7%
7%
5%
4%
4%
2%
2%
9%
9%
0%
5%
10%
15%
20%
25%
30%
35%
Ju
l-0
1A
ug
-01
Sep
-01
Oct
-01
No
v-0
1D
ec-0
1J
an
-02
Feb
-02
Ma
r-0
2A
pr-
02
Ma
y-0
2J
un
-02
Ju
l-0
2A
ug
-02
Sep
-02
Oct
-02
No
v-0
2D
ec-0
2J
an
-03
Feb
-03
Ma
r-0
3A
pr-
03
Ma
y-0
3J
un
-03
Ju
l-0
3A
ug
-03
Sep
-03
Oct
-03
No
v-0
3D
ec-0
3J
an
-04
Feb
-04
Ma
r-0
4A
pr-
04
Ma
y-0
4J
un
-04
Ju
l-0
4A
ug
-04
Sep
-04
Oct
-04
No
v-0
4
Source: MarketScout.com
Commercial Premium Rate Changes Are Sharply Lower
Is moderation due to realization of performance and profit goals, increasing capacity/ capital, or market- share strategies?
Proportion of Workers Comp Accounts Renewing With Increase of
20% or More
Source: Council of Insurance Agents and Brokers; Insurance Information Institute
Source: A.M. Best, ISO, Insurance Information Institute
0%
2%
4%
6%
8%
10%
12%
14%
16%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Mar
04
Jun
04Se
p 04
3-Month T-Bill 1-Yr. T-Bill 10-Year T-Note
Interest Rates: Lower Than They’ve Been in Decades, But…
Source: Board of Governors, Federal Reserve System; Insurance Information Institute
Lower bond yields were the primary driver behind declining investment income in recent years, with the 10-year note reaching a 45-year low in 2003
Higher ST rates as Fed tightens. In long run immense & growing deficit will force rates higher
LT rates actually falling again since econ not as strong as presumed
About 2/3 of invested assets are in the form of bonds
-30%
-20%
-10%
0%
10%
20%
30%
40%
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
Source: Ibbotson Associates, Insurance Information Institute. *Through December 3, 2004
Total Returns for Large Company Stocks: 1970-2004*
2003 ended a streak of 3 consecutive years of declines for stocks
Will the bull market run out of steam in 2004?
S&P 500 was up 28.7% in 2003 but up 7% early Dec. as falling oil prices and a certain election outcome bolstered stocks; Iraq, terrorism, resurgent
oil prices and fear of higher interest rates remain concerns
US P/C Net Realized Capital Gains1990-2004:Q1 ($ Millions)
$2,880
$4,806
$9,893
$1,664
$5,997
$9,244$10,808
$18,019
$13,016
$16,205
$6,631
-$1,214
$6,917$4,984
$9,818
-$5,000
$0
$5,000
$10,000
$15,000
$20,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04*
*First half 2004 resultSources: A.M. Best, ISO, Insurance Information Institute.
Realized capital gains rebounded
strongly in 2003/4
Property/Casualty Insurance Industry Investment Gain*
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.6$48.0
$57.9
$51.9
$56.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 02 03 04E*Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.2004 estimate is annualized figure based on first half result.Source: Insurance Services Office; Insurance Information Institute.
Investment gains are rising but remain well below the peak of
$57.9 billion in 1998
Significant Risks to Investment Portfolio in 2005 & Beyond?
• Out-of-Control US Fiscal PolicyVirtually no domestic savings so US govt. (and corporations)
borrowing heavily from abroadForeign appetite for US securities starting to wane Interest rates will rise, bond prices fall
• Loose Monetary Policy Has Accommodated DeficitGives inflation a change to take root & accelerate (& contribute
• Budget (& Current Acct.) Deficits Will Lead to Higher Interest Rates as Foreign Appetite for US Debt WanesTo attract more foreign capital interest rates must rise
• US Dollar Continues to DepreciateRepatriation of profits difficult for foreign insurersTheoretically makes acquisition of US insurers more feasible
• Stocks Market Performance Will Be RockyRising interest rates are bad news for stocks
HURRICANE SEASON OF 2004
One for the Record Books
U.S. InsuredCatastrophe Losses ($ Billions)
$7.5
$2.7$4.7
$22.9
$5.5
$16.9
$8.3 $7.3
$2.6
$10.1$8.3$4.3
$28.1
$5.9
$12.9
$24.7
$0
$5
$10
$15
$20
$25
$30
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
04E
*
*2004 figure is as of September 30, 2004.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.Source: Property Claims Service/ISO; Insurance Information Institute
$ Billions2004 could become the second worst year ever for natural
disaster losses in the US
Top 10 Insured Losses Worldwide,1970-2004 ($2003)
$4.8 $6.0 $6.2 $6.4 $6.4 $6.8 $7.6
$17.3
$20.9
$30.6
$0
$5
$10
$15
$20
$25
$30
$35
$ B
illi
ons
*Hurricanes Ivan and Charley in 2004 dollars.Sources: ISO/PCS; Swiss Re, “Natural Catastrophes and Man-Made Disasters in 2003,” Sigma, no. 1, 2004; except Sept. 11 estimate from Hartwig, Robert P., 2004 Mid-Year Property/Casualty Insurance Update, Insurance Information Institute. Figure is stated in 2001 dollars.
Seven of the 10 most expensive disasters is world history
occurred in the US: Two were this year’s hurricanes
Losses from Hurricanes of 2004
Source: ISO/PCS; Insurance Information Institute
$ Billions
$3.2
$4.4
$6.0$6.8
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
$7.0
$8.0
Jeanne Frances Ivan Charley
Estimated insured losses from the hurricanes of 2004 = $20.485B exceed the $15.5B in losses from Hurricane Andrew ($20.3B in $2003)
Four of the Top 10 hurricanes in US
history occurred in 2004
Claims Payouts for 4 Hurricanes Unparalleled
$2.8
$4.1 $3.8
$6.8$0.5
$0.3
$2.2
$0.1
$0
$1
$2
$3
$4
$5
$6
$7
$8
Jeanne Frances Ivan Charley
Florida All Other States
Bil
lion
s
Total = $3.2 Billion
Source: PCS/ISO
Total = $4.4 Billion
Total = $6.0 Billion
Total = $6.8 Billion
Total Insured Losses = $20.485B
Florida Only = 17.5B (85%)
Claims Handling Represented Herculean Effort by Insurers
297
505
285
60588
47
315
35
0
100
200
300
400
500
600
700
Jeanne Frances Ivan Charley
($ T
hous
ands
)
Florida All Other States
Total = 385,000
Source: PCS/ISO
Total = 552,000
Total = 600,000 Total = 640,000
Total Claims = 2.177 million
Florida Only = 1.692 Mill (78%)
Personal Property Losses Accounted for Largest Share Damage from
2004 Hurricanes*
56%
4%
40%
Source: ISO/PCS.
Charley
63%
4%
33%
Ivan
66%
4%
30%
Frances
73%
4%
23%
Jeanne
Personal Property
63%
Vehicle
4%
Comm. Property
33%
TOTAL
*Breakdowns based on FL losses, which accounted for 85% of losses for all affected states.
Underwriting Gain (Loss) in Florida Homeowners Insurance,
1992-2004E*
$ B
illi
ons
Florida’s homeowners insurance market produces
small profits in most years and enormous losses in others
*2004 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2004 residential windstorm losses of $11.2B; 2003 figure is also from IIIestimates of loss and expense. Excludes Citizens Property Insurance Corp. results.
-$10.6-$10.8-$10.1 -$9.7
-$8.8-$7.7
-$6.5
-$5.2
-$3.8
-$2.7
-$1.2
$0.7
-$8.6
($12)
($10)
($8)
($6)
($4)
($2)
$0
$2
92 93 94 95 96 97 98 99 00 01 02 03 04E
Cumulative Underwriting Gain (Loss) in Florida Homeowners
Insurance, 1992-2004E*
*2004 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2004 residential windstorm losses of $11.2B; 2003 figure is also from IIIestimates of loss and expense. Excludes Citizens Property Insurance Corp. results.
$ B
illi
ons
It took insurers 11 years (1993-2003) to erase the UW loss
associated with Andrew, but the 4 hurricanes of 2004 erased
the past 7 years of profits
-$0.2
$0.5 $0.9$1.8
$2.9
$4.1
$5.4
$6.8
$7.9
$9.4
$11.3
$2.0
($2)
$0
$2
$4
$6
$8
$10
$12
93 94 95 96 97 98 99 00 01 02 03 04E
Cumulative Underwriting Gain (Loss) in Florida Homeowners
Insurance, 1993-2004E*
$ B
illi
ons
Hurricanes Charley, Frances, Ivan and
Jeanne erased 82% of the underwriting profit homeowners insurers in FL earned between
1993 and 2003
*2004 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2004 residential windstorm losses of $11.2B; 2003 figure is also from IIIestimates of loss and expense. Excludes Citizens Property Insurance Corp. results.
Average Annual WindstormInsured Losses*
(Top 10 States, $ Millions)
$1,423
$615
$196$109 $77 $64 $62 $61 $61 $51
$154
$0
$250
$500
$750
$1,000
$1,250
$1,500
FL TX LA NC MS MA SC AL NY CT AllOther
*Normalized losses adjusted for inflation, housing density, wealth and wind insurance coverage, based on historical data for 100-year period 1900-1999.Source: Tillinghast-Towers Perrin
Louisiana6.8%
N. Carolina
3.8%
Mississippi2.7%
All Other15.7%
Texas 21.4%
Florida49.5%
Distribution of Annual Losses
% of Comml. Property Accounts Renewing Negative (3rd Quarter 2004)
Source: Council of Insurance Agents and Brokers
93%90% 89%
85%
75%
60%
65%
70%
75%
80%
85%
90%
95%
Northwest Southwest Midwest Northeast Southeast
Commercial property is “less soft” in the Southeast
What’s Going to Happen in Florida?
• Special Legislative Session in December 2004• Elimination of Occurrence-Based Wind Deductible
Likely a “Seasonal” wind deductible will at least be an optionMay be able to choose a fixed dollar deductible or from a range of
percentage deductibles “Actuarial Integrity” of the rates likely to be preserved (i.e., if choose
seasonal deductible rate should be higher)• Florida Hurricane Catastrophe Fund
Industry’s retention likely to be lowered from current $4.5B per occurrence
Reduces demand for private reinsurance• Building Code Reform/Modification
Structures built to more recent code held-up betterManufactured housing still a big problemPoor land use policies remains; Builder political clout
• Expect Florida to Tap Federal Treasury Regularly
SPITZER INVESTIGATION
Has the Industry’s Reputation Been
Shattered?
Headlines from Hell
• INSURERS REEL FROM SPITZER’S STRIKE-Wall Street Journal, October 18, 2004, Page A1
• BROKER ACCUSED OF RIGGING BIDS FOR INSURANCE-New York Times, October 15, 2004, Page A1
• CLASS ACTION THREAT ADDED TO CHALLENGES FACING INSURERS-Wall Street Journal, October 20, 2004, Page C1
• STATE BASED INSURANCE REGULATION GETS SCRUTINY-Wall Street Journal, October 18, 2004, Page A15
• INSURERS POST STEEP LOSSES IN DAY OF WIDESPREAD DECLINES-New York Times, October 15, 2004, Page C4
3 Main Areas of Investigation• PROBE 1: Anti-Competitive Acts
Big-rigging, fraud is the only actual illegal act Contingent commissions not illegal but painted as root of problem Accusation: Broker contractual responsibility to buyer breached Likely Outcome: Fines, penalties, disclosure; E&O/D&O, sharehldr. suits New Economic Model Needed to replace lost broker (agent?) income Independent Agents: Distinction that agent works for insurer not as helpful as commonly
believed• PROBE 2: Tying
Alleges brokers steered business to certain insurers who would then utilize their reinsurance broker affiliate
Issue 1: Was there “significant” transfer of risk or merely a loan disguised as insurance? Issue 2: Was there proper accounting treatment Issue 3: Misrepresentation of policy details Likely Outcome: Fines, Penalties, revamped accounting definitions; stds.
Impact of Spitzer Investigation• Impact on insurer & broker reputations has been devastating• Worst PR disaster in the history of the insurance industry• Will take years to repair damage• Negative spillover on other issues (TRIA, class action reform?)• Whole industry (p/c, life, health) painted with same brush
Impact most severe on commercial p/c companies Stock price of personal lines companies impacted (even those with exclusive agents, e.g. Allstate) Least impacted are mutuals with captive agents (e.g., State Farm)
• Spitzer cast into doubt on all producer compensation arrangements except straight commissions.
• Issue of “bid rigging” and contingent fees (PSAs, MSAs) were (inappropriately) linked by Spitzer (hence media & regulators)
• LOST in DEBATE: 2 Distinct Issues: Contingent fees are legal and useful when properly structured Illegal anti-competitive & fraudulent acts are a separate issue and should be treated as such &
Don’t represent how industry does business
Impact of Spitzer Investigation• Brokers lose substantial income in short-run• Brokers will look to replace revenue, reduce expense• In the end does not fundamentally change distribution system• Look for:
More heads to roleCivil/criminal indictments (brokers & insurers)Shareholder (D&O) suits; E&O suitsMassive fines, penalties and disgorgement of profitsMischief by state insurance commissioners & AGs
• Contingent commissions gone for now, but need some form of incentive compensationCan balance with disclosure
• Does not create greater impetus for federal regulation
Risk Managers: Concerned About Contingent Commission Issue
I am concerned that my company’s brokerage firm(s) may have participated in anti-competitive practices related to contingent commissions.
1) Strongly Agree 22.51%
2) Somewhat Agree 30.12%3) Neither Agree nor Disagree 11.11%
4) Somewhat Disagree 13.74%
5) Strongly Disagree 20.47%
6) Don't Know/NA 2.05%
Grand Total 100.00%
Source: Advisen Risk Manager Contingent Commission Survey, November 2004.
Risk Managers Concerned About Extent of Disclosure
I am concerned that my company’s insurance brokerage firm(s) does not fully disclose to my company all sources of income related to my insurance.
1) Strongly Agree 28.65%
2) Somewhat Agree 28.07%
3) Neither Agree nor Disagree 10.38%
4) Somewhat Disagree 13.30%
5) Strongly Disagree 17.25%
6) Don't Know/NA 2.34%
Grand Total 100.00%
Source: Advisen Risk Manager Contingent Commission Survey, November 2004.
Risk Managers Concerned Contingent Commissions are Conflict
I believe that contingent commissions are a conflict of interest.
1) Strongly Agree 38.45%
2) Somewhat Agree 25.58%
3) Neither Agree nor Disagree 13.74%
4) Somewhat Disagree 11.55%
5) Strongly Disagree 9.36%
6) Don't Know/NA 1.32%
Grand Total 100.00%
Source: Advisen Risk Manager Contingent Commission Survey, November 2004.
Most Risk Managers Believe Elimination of Contingencies Will Raise Their Costs
Elimination of contingent commissions will have the following result on the Total Cost of Risk for my company:
1) Increase 33.77%
2) No Impact 46.64%
3) Decrease 19.59%
Grand Total 100.00%
Source: Advisen Risk Manager Contingent Commission Survey, November 2004.
Most Risk Managers Favor Standardized Transparency
Should the transaction process to buy commercial insurance be standardized and transparent to your company?
1) Yes 74.12%
3) No 16.81%
2) Don't Know 9.06%
Grand Total 100.00%
Source: Advisen Risk Manager Contingent Commission Survey, November 2004.
Relatively Few Risk Managers Plan to Replace Their Broker(s)
1) Yes 14.33%
2) No 63.89%
3) Don't Know 21.78%
Grand Total 100.00%
Are you considering replacing your current insurance brokerage firm (s)?
Class Actions: You Can Sign Up to Sue Insurers & Brokers Online
Source: Yahoo! Search, 10/22/04
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
19
68
19
72
19
78
19
81
19
83
19
85
19
86
19
88
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
BanksElectric Power CompanyConsumer Finance CompaniesAuto & Home Insurance
Source: Insurance Information Institute Annual Pulse Survey
Percent of Public Rating Industry as Very or Mostly Favorable, 1968-2004
Source: Insurance Information Institute, 2004 Pulse Survey
5%
9%8%
9%
15%
13%
0%
2%
4%
6%
8%
10%
12%
14%
16%
1999 2000 2001 2002 2003 2004
53%51% 51%
48%
39%
44%
30%
35%
40%
45%
50%
55%
1999 2000 2001 2002 2003 2004
Very/Mostly Favorable Very/Mostly Unfavorable
MUTUAL FUNDS: Ratings Took Hit—Shades of Things to Come?
Favorability ratings have declined
Unfavorable ratings TRIPLED in 5 years
AN ECONOMIC THEORY OF WHAT
WENT WRONG
Contingent CommissionsAre Not to Blame
Economic & Insurance Market Factorsare at the Root of the Problem, Not Contingent Commissions
• Increasing Market Concentration Among BrokersE.g., Market share of Top 3 out largest 10 brokers rose from 62% in
1989 to 79% in 2003• Declining Capacity in P/C Insurance Industry
“Supply” of capital (as measured by policyholder surplus) fell by 16% or $54 billion from mid-1999 to year-end 2002
• Severe Drop in Capacity in Excess Casualty MarketCapacity plunged 30% from 2000 to 2003Created acute supply shortage as demand increased
• Tort Environment Deterioration Increased Demand for Excess Casualty Coverage as Capacity FellCommercial tort costs rose 53% from 2000 to 2002Average jury award rose 186% from 1994 to 2002
• Combination of Decreased Supply, Increased Demand Gave Producers Securing Coverage More Leverage In a few instances, some stepped over a VERY BRIGHT line
Relative Market Share of Top Brokers Increased Significantly in the 1990s
41%
70%
79%
48%
62%
72%
84%
32%30%
40%
50%
60%
70%
80%
90%
100%
1 2 3 4 5 6 7 8 9 10Broker Rank by Revenue
Cum
ulat
ive
Mar
ket
Shar
e
2003 1989
Sources: Business Insurance, Dowling & Partners; Insurance Information Institute
Relative market share of top
brokers much higher than in
2003 than in 1989
Relative market share of top 3 brokers (out of top 10) rose from
U.S. Insurer Capacity Decreased Significantly from 1999-2002
Source: A.M. Best, ISO, Insurance Information Institute
$ B
illi
ons
Surplus (capacity) peaked at $339.3 Billion in mid-1999 and fell by a record 15.9% ($53.9 billion) to $285.4 billion at year-end 2002
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
$53.9 Billion
Excess Casualty Market: Problem AreaCapacity Fell Even More Sharply at a
Time When Demand Was Soaring
Source: Marsh, 2003 Limits of Liability Report
$1.432$1.334
$1.405
$1.721
$2.011$1.941
$2.045
$1.710$1.575
$1.425
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Bil
lio
ns Capacity dropped 30% from 2000 to 2003
Supply (Capacity) fell in excess casualty markets as capacity overall fell, the tort environment deteriorated and downgrades for insurers to become more conservative with capital allocation
Extreme Pressure on Excess Casualty Markets as Commercial Tort Costs Skyrocketed
Commercial Tort Costs$87.4
$57.2
$49.1
$17.0
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
1980 1990 2000 2002
Bil
lion
s
*Excludes medical malpracticeSource: Tillinghast-Towers Perrin
Commercial tort costs rose 53%
from 2000 to 2002!
Demand rose as capacity crashed, increasing the
importance of the broker’s role in securing coverage
p PreliminaryAccident Year data is evaluated as of 12/31/2003 and developed to ultimateSource: Calendar Years 1994-2002, A.M. Best Aggregates & Averages; Calendar Year 2003p and Accident Years 1994-2003p, NCCIIncludes dividends to policyholders
Workers Comp Combined Ratios, 1994-2003p
WC Combined Ratios:Problems are National in Scope
Source: A.M. Best, NCCI
*Includes dividends to policyholdersAccident year is developed to ultimate as 12/31/02;Note: CY figures from AM Best; AY figures from NCCI, 2003E is III estimate.
Calendar Year vs. Ultimate Accident Year Countrywide—Private Carrier*
2003p: Preliminary based on data valued as of 12/31/20031991-2002: Based on data through 12/31/2002, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policiesSource: NCCI
Accident Year
Workers Comp Indemnity Claims Costs Have Accelerated, 1993-2003p
Indemnity severity 2003p: Preliminary based on data valued as of 12/31/2003Indemnity severity 1995-2002: Based on data through 12/31/2002, developed to ultimateBased on the states where NCCI provides ratemaking services, excludes the effects of deductible policiesSource: Calendar Year Current Population Survey, Economy.com; Accident Year indemnity severity, NCCI
2.8 2.84.0
4.7 4.24.9
4.2
2.2 2.0
1.7
5.96.9 7.3
8.3
10.5
7.3
6.0
4.5
0
2
4
6
8
10
12
1995 1996 1997 1998 1999 2000 2001 2002 2003p
(% C
han
ge)
Change in CPS Wage Change in Indemnity Cost per Lost-Time Claim
Year
Workers Compensation Indemnity Severity Is Outpacing Wage Inflation
2003p: Preliminary based on data valued as of 12/31/20031991-2002: Based on data through 12/31/2002, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policies
Workers Comp Medical Claims Continue to Climb
4.5%3.6%
2.8% 3.2% 3.5%4.1%
4.6% 4.7%4.0%
5.1%
7.4% 7.7% 7.3%
8.7% 9.0%
12.0%11.0%
9.0%
0%
2%
4%
6%
8%
10%
12%
14%
1995 1996 1997 1998 1999 2000 2001 2002 2003
Change in Medical CPIChange Med Cost per Lost Time Claim
WC Medical Severity Rising Far Faster than Medical CPI
Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
5.0
pts
WC medical severity is rising 2.3 times faster than the
medical CPI
Workers Compensation Residual Market Shares Continue to Rise
Workers Compensation Insurance Plan States* Premium as a Percent of Direct Written Premium
9
1618 17 17
2122
2426
23
16
118
4 3 3
1210
6
0
5
10
15
20
25
30
Percent
p Preliminary•NCCI Plan states plus DE, IN, MA, MI, NJ, NC•Source: NCCI
Calendar Year
Residual market share quadrupled from 3% to 12% from 1999 to 2003
LEGAL LIABILITY & TORT
ENVIRONMENT
TORT-AGEDDON
INSURERS HAVE BEEN BATTLING THE TORT SYSTEM FOR DECADES, BUT LAWYERS ARE BETTER ORGANIZED, BETTER FUNDED AND
POLTICALLY BETTER CONNECTED
There is Was is Was a Glimmer of Hope for Tort Reform
Best Chance for Tort Reform in Years is Gone• Medical Malpractice
States—already happening: 20+ states have capsFederal reform discussed in Congress but bill failed in SenateAttempt to get caps for specialties failed February 2004
• Class Action ReformClass Action Fairness ActFailed by 1 Vote 10/22/03; Failed Again in 2004
• Asbestos ReformFairness in Asbestos Injury Resolution of 2003; Failed Apr. 2004
• Punitive Damages—What’s ReasonableSupreme Court ruled favorably in Campbell v. State Farm
Insurance Industry Has Been Doing Battle With Trial Lawyers for More
Than a Half Century
Insurance industry ads from the Saturday Evening Post in 1953!
But It is Attorneys Who Spend Most of the Ad Money Today
Cost of U.S. Tort System($ Billions)
Source: Tillinghast-Towers Perrin.
$129 $130$141 $144 $148
$159 $156 $156$167 $169 $180
$205
$233
$298
$0
$50
$100
$150
$200
$250
$300
$350
90 91 92 93 94 95 96 97 98 99 00 01 02 05F
Tort costs consumed 2.23% of GDP in 2002
Per capita “tort tax” expected to rise to $1,003 by 2005, up
Source: US Chamber of Commerce States Liability Systems Ranking Study; Insurance Info. Institute.
The Nation’s Judicial Hellholes
Source: American Tort Reform Association; Insurance Information Institute
City of St. Louis, MO
CALIFORNIA
Alameda County
Los Angeles County
San Francisco County
Orleans Parish, LA
I
Madison County, IL
TEXAS
Jefferson County
Hidalgo County
Starr County
Mississippi’s 22nd Judicial
District
THE CHALLENGE OF TERRORISM
Sept. 11 Industry Loss Estimates($ Billions)
Life$1.0 (3.1%)
Aviation Liability
$3.5 (10.8%)
Other Liability
$4.0 (12.3%)
Biz Interruption
$11.0 (33.8%)
Property -WTC 1 & 2
$3.6 (11.1%) Property - Other
$6.0 (19.5%)
Aviation Hull$0.5 (1.5%)
Event Cancellation$1.0 (3.1%)
Workers Comp
$1.8 (5.8%)
Current Insured Losses Estimate: $32.5BSource: Insurance Information Institute
Terrorism Coverage Take-Up Rate Rising
Source: Marsh, Inc.; Insurance Information Institute
23.5%26.0%
32.7%
44.2%46.2%
2003:II 2003:III 2003:IV 2004:I 2004:II
Terrorism take-up rate for non-WC risk rose
through 2003 and continues to rise in 2004
TAKE UP RATE FOR WC COMP TERROR
COVERAGE IS 100%!!
Capital Myth: US P/C Insurers Have $350 Billion to Pay Terrorism Claims
"Target" Commercial*$139 billion
40%
Other Commercial$63 billion
18%Personal$146 billion
42%
Total PHS = $298.2 B as of 6/30/01
= $291.1 B as of 12/31/02
= $347.0 B as of 12/31/03
*”Target” Commercial includes: Comm property, liability and workers comp; Surplus must also back-up on non-terrorist related property/liability and WC claimsSource: Insurance Information Institute estimates based on A.M. Best Q.A.R Data.
Only 40% of industry surplus backs up “target” lines
Industry emphasizing limited
capital resources against virtually unlimited losses
Capital Myth: US P/C Insurers Have $350 Billion to Pay Terrorism Claims
"Target" Commercial*$114 billion
33%
Commercial Reserve
Deficiency$30 billion (est.)
9%
Other Commercial$58 billion
17%
Personal$146 billion
42%
Total PHS = $298.2 B as of 6/30/01
= $291.1 B as of 12/31/02
= $347.0 B as of 12/31/03
*”Target” Commercial includes: Comm property, liability and workers comp; Surplus must also back-up on non-terrorist related property/liability and WC claimsSource: Insurance Information Institute estimates based on A.M. Best Q.A.R Data.
Only 33% of surplus backs
“target” lines net of reserve deficiency
Summary• 2004/5 represent “sweet spot” in the current cycle for p/c insurance