Economic Stimulus & the Future of the P/C Insurance Industry Trends, Challenges & Opportunities Robert P. Hartwig, Ph.D., CPCU, President Insurance Information Institute 110 William Street New York, NY 10038 Tel: (212) 346-5520 [email protected]www.iii.org Alamo CPCU Society, RIMS & San Antonio Agents Association San Antonio, TX March 5, 2009
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Financial Crisis, Economic Stimulus & the Future of the P/C Insurance Industry Trends, Challenges & Opportunities Robert P. Hartwig, Ph.D., CPCU, President.
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Financial Crisis, Economic Stimulus & the Future of the
P/C Insurance Industry Trends, Challenges & Opportunities
Robert P. Hartwig, Ph.D., CPCU, PresidentInsurance Information Institute 110 William Street New York, NY 10038
• Capital & Capacity• Regulatory Response to Crisis
• Emerging Blueprint of Regulatory Overhaul
Q & A
THE ECONOMIC STORM
What a Weakening Economy and Financial Crisis Mean for the
Insurance Industry
Exposure & Claim Cost Effects
3.7
%
0.8
% 1.6
% 2.5
% 3.6
%
3.1
%
2.9
%
0.1
%
4.8
%
4.8
%
0.9
%
2.8
%
-0.5
%
-1.5
%
0.8
% 2.0
%
2.4
%
2.9
%
3.1
%
3.1
%
-4.9%
-3.8%
-0.2%
-6%
-4%
-2%
0%
2%
4%
6%
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
Real GDP Growth*
*Yellow bars are Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 2/09; Insurance Information Institute.
Recession began in December 2007. Economic toll of credit crunch, housing
slump, labor market contraction is growing
The Q4:2008 decline was the steepest since the
Q1:1982 drop of 6.4%
Length of US Recessions,1929-Present*
43
13
811 10
810 11
16
6
16
8 8
14
0
5
10
15
20
25
30
35
40
45
50
Aug.1929
May1937
Feb.1945
Nov.1948
July1953
Aug.1957
Apr.1960
Dec.1969
Nov.1973
Jan.1980
Jul.1981
Jul.1990
Mar.2001
Dec.2007
* As of February 2009
Sources: National Bureau of Economic Research; Insurance Information Institute.
Current recession began in Dec. 2007 and is already the
longest since 1981. If it extends beyond April, it will become the longest recession since the Great Depression.
Months in Duration
“We will rebuild. We will recover.”
--President Barack Obama addressing a joint session
of Congress
February 24, 2009
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
January 2000 through January 2009
Unemployment will likely peak above 8% or 9% during this cycle, impacting payroll
sensitive p/c and non-life exposures
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Jan. 2009 unemployment jumped to 7.6%, exceeding the 6.3% peak during the previous cycle, and is now at it highest
level since Sept. 1992
Unemployment Rate:On the Rise
Average unemployment rate 2000-07 was 5.0%
Previous Peak: 6.3% in June 2003
Trough: 4.4% in March 2007
Jan
-09
January 1948 through January 2009
Source: US Bureau of Labor Statistics; Insurance Information Institute.
*9-month data for 2008Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books
Wage & Salary Disbursements (Payroll Base) vs. Workers Comp
Real GDP Growth vs. Real P/C Premium Growth: Modest Association
P/C insurance industry’s growth is influenced modestly by growth
in the overall economy
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 2/09; Insurance Information Inst.
THE $787 BILLION ECONOMIC STIMULUS
Sectoral Impacts & Implications for P/C
Insurance
Summary of Short-Run Impacts of Stimulus Package on P/C Insurance
• No Stimulus Provisions Specifically Address P/C Insurance• Spending, Aid and Tax Reductions benefit other industries, state and local
governments, as well as individual and some corporate taxpayers • Stimulus Package is Unlikely to Increase Net Premiums Written by
Less Than 1% or Approximately $4.5 Bill. by Year-End 2010 • “Direct” Impact to P/C Insurers Results Primarily from Increased
Demand for Commercial Insurance• Primarily the result of increased infrastructure spending and the resulting need to insure
workers, property and protect against liability risks• Because the primary objective of the stimulus is employment related, workers
compensation will be the p/c line that benefits the most• Assuming the target of 3.5 million jobs created or preserved is achieved, private workers
comp NPW (new and preserved) could amount to as much as $1.1 billion• Other commercial lines to benefit: surety, commercial auto, inland marine
• Other “Direct” P/C Demand Benefits Will Be Minimal• Tax provisions providing incentives to buy cars and homes and accelerate the
depreciation of equipment will have little net impact on exposure• Some additional premium may be generated as older cars and equipment are replaced
with new and more valuable (and therefore more expensive to insure)
Economic Stimulus Package: Where the $787B Goes
Tax Cuts, 38.0%
Aid, 37.9%
Spending, 24.1%
How much “stimulus” is actually in the stimulus
package is open to debate and dispute
Sources: Wall Street Journal , 2/13/09; House Ways and Means Committee; Senate Finance Committee.
Less than ¼ of the stimulus package is direct spending on
infrastructure
Economic Stimulus Package: Where the $787B Goes
Tax Relief, $288 , 38%
State & Local Fiscal Relief, $144 , 18%
Infrastructure & Science, $111 , 14%
Protecting the Vulnerable, $81 , 10%
Health Care, $59 , 7% Education & Training, $53 , 7%
Energy, $43 , 5%
Other, 8, 1%
Tax relief and aid to state and local
government account for 56% of stimulus. Actual
spending accounts for only about 25%
Source: http://www.recovery.gov/ accessed 2/18/09; Insurance Information Institute.
$ BillionsObjective is to create or preserve 3.5 million jobs
Economic Stimulus Package: $143.4 in Construction Spending
Transportation Infrastructure, 49.3, 32%
Water & Environmental Infrastructure, 21.4, 14%
Building Infrastructure, 29.6, 20%
Other, 0.2, 0%
Workforce Development & Safety, 4.3, 3%
Energy & Technology, 29.8, 20% School Building, 9.2, 6%
Other, 8.0, 5%
There is approximately $140B in new construction
spending in the stimulus package, about 1/3 of it for transportation.
Source: Associated General Contractors at http://www.agc.org/cs/rebuild_americas_future (2/18/09); Insurance Info. Inst..
$ Billions
State-by-State Infrastructure
SpendingBigger States Get More, Should Benefit
Commercial Insurer Exposure
Infrastructure Stimulus Spending by State (Total = $38.1B)
State Allocation State Allocation State AllocationAL $603,871,807 LA $538,575,876 OK $535,407,908
AK $240,495,117 ME $174,285,111 OR $453,788,475
AZ $648,928,995 MD $704,863,248 PA $1,525,011,979
AR $405,531,459 MA $890,333,825 RI $192,902,023
CA $3,917,656,769 MI $1,150,282,308 SC $544,291,398
CO $538,669,174 MN $668,242,481 SD $213,511,174
CT $487,480,166 MS $415,257,720 TN $701,516,776
DE $158,666,838 MO $830,647,063 TX $2,803,249,599
DC $267,617,455 MT $246,599,815 UT $292,231,904
FL $1,794,913,566 NE $278,897,762 VT $150,666,577
GA $1,141,255,941 NV $270,010,945 VA $890,584,959
HI $199,866,172 NH $181,678,856 WA $739,283,923
ID $219,528,313 NJ $1,335,785,100 WV $290,479,108
IL $1,579,965,373 NM $299,589,086 WI $716,457,120
IN $836,483,568 NY $2,774,508,711 WY $186,111,170
IA $447,563,924 NC $909,397,136 U.S. Territories
$238,045,760
KS $413,837,382 ND $200,318,301
KY $521,153,404 OH $1,335,600,553 Total $38,101,898,173
Sources: USA Today, 2/17/09; House Transportation and Infrastructure Committee; the Associated Press.
Infrastructure Stimulus Spending By State: Top 25 States ($ Millions)
$890
.6$8
90.3
$836
.5$8
30.6
$739
.3$7
16.5
$704
.9$7
01.5
$668
.2
$648
.9$6
03.9
$544
.3$5
38.7
$538
.6
$1,3
35.8
$1,5
80.0
$909
.4$1
,141
.3
$1,1
50.3
$1,3
35.6
$1,5
25.0
$2,8
03.2
$2,7
74.5
$1,7
94.9
$3,9
17.7
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
CA TX NY FL IL PA NJ OH MI GA NC VA MA IN MO WA WI MD TN MN AZ AL SC CO LA
Stim
ulus
Dol
lars
($ M
ill)
Sources: USA Today 2/19/09; House Transportation and Infrastructure Committee; the Associated Press.
Infrastructure spending is in the stimulus package total $38.1B, allocated
largely by population size. TX will get $2.8B—the 2nd
highest amount.
Expected Number of Jobs Gained or
Preserved by Stimulus Spending
Larger States = More JobsWorkers Comp Benefits
Estimated Job Effect of Stimulus: Jobs Created/Saved By State = 3.5 Mill Total
State Jobs Created State Jobs Created State Jobs CreatedAL 52,000 LA 50,000 OK 40,000
AK 8,000 ME 15,000 OR 44,000
AZ 70,000 MD 66,000 PA 143,000
AR 32,000 MA 79,000 RI 12,000
CA 396,000 MI 109,000 SC 50,000
CO 60,000 MN 66,000 SD 10,000
CT 41,000 MS 30,000 TN 71,000
DE 11,000 MO 69,000 TX 269,000
DC 12,000 MT 11,000 UT 32,000
FL 207,000 NE 23,000 VT 8,000
GA 107,000 NV 34,000 VA 93,000
HI 16,000 NH 16,000 WA 75,000
ID 17,000 NJ 100,000 WV 20,000
IL 148,000 NM 22,000 WI 70,000
IN 75,000 NY 215,000 WY 8,000
IA 37,000 NC 105,000
KS 33,000 ND 9,000
KY 48,000 OH 133,000 Total 3,467,000
Sources: http://www.recovery.gov/; Council of Economic Advisers; Insurance Information Institute.
Estimated Job Effect of Stimulus Spending By State: Top 25 States
9379 75 75 71 70 70 69 66 66 60 52 50 50
13314
8
100
105
107
109
143
269
215
207
396
0
100
200
300
400
CA TX NY FL IL PA OH MI GA NC NJ VA MA IN WA TN AZ WI MO MD MN CO AL LA SC
No.
of J
obs
Cre
ated
/Sav
ed b
y S
timul
us
Sources: http://www.recovery.gov/; Council of Economic Advisers Insurance Information Institute.
The economic stimulus plan calls for the creation or preservation of 3.5 million jobs, allocated roughly
in proportion to the size of the state’s labor force
(Thousands)
Stimulus: Reading The Economic Tea Leaves for the Next 4 to 8 Years
Source: Insurance Information Institute
• Growing Role of Government: 2009 Stimulus Package and Other Likely Spending Initiatives Guarantee that Government Will Play a Much Larger Role Than at Any Other Time in Recent History Every industry, including insurance, will and must attempt to
maximize direct and indirect benefits from this paradigm shift• Obama Administration Priorities: Stimulus Package
Acts as “Economic Tea Leaf” on the Administration’s Fiscal Priorities for the Next Several Years
• These Include: Alternative Energy Health Care Education Aging/New Infrastructure Aid to States
• Stimulus is Only One Leg of the Stool (1) Stimulus; (2) Housing, and (3) Financial Services Reform
FINANCIAL STRENGTH &
RATINGS Industry Has Weathered
the Storms Well
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2007
90
95
100
105
110
115
120
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
Co
mb
ined
Ratio
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
Imp
air
men
t R
ate
Combined Ratio after DivP/C Impairment Frequency
Impairment rates are highly correlated
underwriting performance and could reached a
record low in 2007
Source: A.M. Best; Insurance Information Institute
2007 impairment rate was a record low 0.12%, one-seventh the 0.8% average since 1969;
Previous record was 0.24% in 1972
Summary of A.M. Best’s P/C Insurer Ratings Actions in 2008*
Under Review, 63 , 4.3%
Upgraded, 59 , 4.0%
Initial, 41 , 2.8%
Other, 59 , 4.0%
Affirm, 1,183 , 81.0%
Downgraded, 55 , 3.8%
*Through December 19.Source: A.M. Best.
43
Despite financial market turmoil, high cat losses and a soft market in 2008, 81% of ratings actions by A.M. Best
were affirmations; just 3.8% were downgrades
and 4.0% upgrades
P/C insurance is by design a resilient in business. The dual threat of financial
disasters and catastrophic losses are
anticipated in the industry’s risk
management strategy.
Historical Ratings Distribution,US P/C Insurers, 2008 vs. 2005 and 2000
Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report, November 8, 2004 for 2000; 2006 and 2009 Review & Preview. *Ratings ‘B’ and lower.
A/A-48.4%
D0.2%C++/C+
1.9%
E/F2.3% A++/A+
11.5%
C/C-0.6%
B++/B+28.3%
B/B-6.9%
2008 2005
P/C insurer financial strength has improved since 2005 despite financial crisis
A/A-52.3%
A++/A+9.2%
B++/B+26.4%
Vulnerable*12.1%
A/A-60.0%
A++/A+10.8%
B++/B+21.3%
Vulnerable*7.9%
2000A++/A+ and A/A- gains
Reasons for US P/C Insurer Impairments, 1969-2005
*Includes overstatement of assets.
Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;
Catastrophe Losses8.6%
Alleged Fraud11.4%
Deficient Loss
Reserves/In-adequate Pricing62.8%
Affiliate Problems
8.6%
Rapid Growth
8.6%
2003-2005 1969-2005
Deficient reserves,
CAT losses are more important factors in
recent years
Reinsurance Failure3.5%
Rapid Growth16.5%
Misc.9.2%
Affiliate Problems
5.6%
Sig. Change in Business
4.6%
Deficient Loss
Reserves/In-adequate Pricing38.2%
Investment Problems*
7.3%
Alleged Fraud8.6%
Catastrophe Losses6.5%
Critical Differences Between P/C
Insurers and BanksSuperior Risk Management Model
& Low Leverage Makea Big Difference
How Insurance Industry Stability Has Benefitted Consumers
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 41 banks have gone under as of 2/28) The Promise is Being Fulfilled
Renew existing policies (banks are reducing and eliminating lines of credit)
Write new policies (banks are turning away people who want or need to borrow)
Develop new products (banks are scaling back the products they offer)
Source: Insurance Information Institute48
• 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 claimsThere 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
Source: Insurance Information Institute49
Reasons Why P/C Insurers Have Fewer Problems Than Banks:
A Superior Risk Management Model
US Bank Failures:* 1995-2009**
86
13
8 7
4
11
3 4
0 0
3
25
16
0
5
10
15
20
25
30
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09**
Through February 28, 2009
Remarkably, as recently as 2005 and 2006, no
banks failed—the first time this had happened in
FDIC history (dating back to 1934)
*Includes all commercial banking and savings institutions. **Through Feb. 28. Source: FDIC: http://www.fdic.gov/bank/historical/bank/index.html; Insurance Info. Institute
Bank failures are up sharply. 41 banks (but no p/c or life
insurers) failed in 2008/09 due to the financial crisis, including the largest in history—Washington Mutual with $307B in assets.
53
P/C INSURANCE FINANCIAL
PERFORMANCE
A Resilient Industry in Challenging Times
Profitability
Historically Volatile
P/C Net Income After Taxes1991-2009F ($ Millions)*
*ROE figures are GAAP; 1Return on avg. surplus. 2008 numbers are annualized based on 9-mos. Actual of $4.066 billion.Sources: A.M. Best, ISO, Insurance Information Inst.
ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2008:Q3
*Excludes mortgage and financial guarantee insurers.Source: The Geneva Association, Ins. Information Inst.
The p/c insurance industry fell well short of is cost of capital in 2008
-13.
2 p
ts
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
-1.7
pts
+2.
3 p
ts
-9.0
pts
The cost of capital is the rate of return
insurers need to attract and retain
capital to the business
-9.7
pts
60
$ Billions
$1,409 $1,386$1,257
$1,018$919 $894 $878
$804$925$937
$998
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
TX** FL LA OK MS CA MA RI AL CT US
61
Top 10 Most Expensive States for Homeowners Insurance vs. US (2006)*
The average expenditure for home insurance in Texas was $1,409 in 2006, ranking it 1st.
FL has likely overtaken TX.
*Most recent available.**The Texas Dept. of Insurance developed HO policy forms that are similar but not identical to the standard forms.Source: NAIC, Insurance Information Institute
Presidential Politics & P/C Insurance
How is Profitability Affected by the President’s Political Party?
15.10%10.13%
8.93%8.65%
8.35%7.98%
7.68%6.98%6.97%
5.43%5.03%
4.83%4.43%
3.55%
16.43%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
Carter
Reagan II
G.W. Bush II
Nixon
Clinton I
G.H.W. Bush
Clinton II
Reagan I
Nixon/Ford
Truman
Eisenhower I
Eisenhower II
G.W. Bush I
Johnson
Kennedy/Johnson
*ROE for 2008 based on H1 data. Truman administration ROE of 6.97% based on 3 years only, 1950-52.Source: Insurance Information Institute
OVERALL RECORD: 1950-2008*
Democrats 8.05%
Republicans 8.02%
Party of President has marginal bearing on profitability of P/C insurance industry
P/C Insurance Industry ROE byPresidential Administration,1950-2008*
P/C Premium Growth
Primarily Driven by the Industry’s Underwriting Cycle, Not the Economy
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
22%
24%
1971
1972
1973
1974
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
2004
2005
2006
2007
2008
F20
09F
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute
Strength of Recent Hard Marketsby NWP Growth
1975-78 1984-87 2000-03Shaded areas denote “hard
market” periods
Net written premiums fell 1.0%
in 2007 (first decline since 1943)
and by 0.4% in 2008, the first back-
to-back decline since 1930-33
66
Year-to-Year Change in Net Written Premium, 2000-2009F*
*2008 figure is 9-month actual result from ISO.Source: A.M. Best (historical and forecast)
Declines in premium growth began to stabilize in later 2008 and are firming to some extent as we move into 2009, but are partly offset by flat/declining exposures due to the recession
Source: ISO (historical); Towers Perrin (Oct. 21) estimates for Q4 2008. Q4 assumes no major Investment market recovery before year-end 2008.
Declines Since 2007:Q3 Peak
Q2: -$16.6B (-3.2%) Q3E: -$43.3B (-8.3%)
Q4E: -$84B (-16.1%)
Capacity peaked at $521.8 as of 9/30/07
71
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
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
20
05
20
06
20
07
20
08
*
NWP % changeSurplus % change
*Actual 9-month 2008 result.Sources: A.M. Best, ISO, Insurance Information Institute
Historically, Hard Markets Follow When Surplus “Growth” is Negative
Sharp decline in capacity is a necessary but not sufficient
condition for a true hard market
Investment Performance
Investments are the Principle Source of Declining
Profitability
Distribution of P/C Insurance Industry’s Investment Portfolio
Cash & Short-Term Investments
7.2%
Common Stock17.9%
Bonds66.7%
Preferred Stock1.5%
Real Estate0.8%
Other5.9%
Portfolio Facts
•Invested assets totaled $1.3 trillion as of 12/31/07
•Insurers are generally conservatively invested, with 2/3 of assets invested in bonds as of 12/31/07
•Only about 18% of assets were invested in common stock as of 12/31/07
•Even the most conservative of portfolios was hit hard in 2008
Source: NAIC; Insurance Information Institute research;.
As of December 31, 2007
75
Property/Casualty Insurance Industry Investment Gain:1994- 2008:Q3 1
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$63.6
$28.3
$56.9$51.9
$57.9
$0
$10
$20
$30
$40
$50
$60
1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain. *2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.
Investment gains are off sharply in 2008 due to lower yields and poor equity market conditions.
76
P/C Insurer Net Realized Capital Gains, 1990-2008:Q3
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.**Based on PCS data through Dec. 31. PCS $2.1B loss of for Gustav. $10.655B for Ike of 12/05/08.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.Source: Property Claims Service/ISO; Insurance Information Institute
$ Billions2008 CAT losses exceeded
2006/07 combined. 2005 was by far the worst year ever for
insured catastrophe losses in the US, but the worst has yet to come.
$100 Billion CAT year is coming soon
110
States With Highest Insured Catastrophe Losses in 2008
$ Billions
$10.2
$2.2$1.6 $1.3 $1.0
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
Texas California Minnesota Ohio Georgia
Source: PCS; Insurance Information Institute.
Big catastrophe losses turned up in some surprising states in 2008, due to high tornado, hail and wildfire damage as well as
inland hurricane damage
Top 12 Most Costly Disasters in US History, (Insured Losses, $2007)
$4.0 $5.0 $6.0 $7.0 $7.8 $8.2$10.7 $10.9 $10.9
$22.0 $22.9
$43.6
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo(1989)
Ivan (2004)
Charley(2004)
Ike(2008)*
Wilma(2005)
Northridge(2004)
9/11Attacks(2001)
Andrew(1992)
Katrina(2005)
$ B
illi
ons
*PCS estimate as of 12/15/08.Sources: ISO/PCS; AIR Worldwide, RMS, Eqecat; Insurance Information Institute inflation adjustments.
9 of the 12 most expensive disasters in US history
have occurred since 2004
In 2008, Ike became the 6th most expensive insurance event and 4th most
expensive hurricane in US history
112
AFTERSHOCK: Regulatory Response
Could Be Harsh
All Financial Segments Including InsurersWill Be Impacted
Emerging Blueprint for Financial Services Regulatory Overhaul
Source: Wall Street Journal, “Frank Backs Regulator for Systemic Risk,” 2/4/09, p. C3; I.I.I. research.
Phase I: Systemic Risk Regulation/Regulator Identification of systemic risk points in the financial system Design of appropriate regulation to prevent future collapses Will require international consultation (US can’t manage systemic risk
alone) • Oversight Responsibility: Likely With Federal Reserve
Fed would have capacity and power to assess risk across financial markets regardless of corporate form and to intervene when appropriate *
Fed could oversee (according to House FS Committee Chairman Barney Frank: Hedge funds (need to ensure “complete transparency”) Credit ratings agencies Executive compensation (to curb “perverse risk incentives”)
TIMELINE: Frank wants “general outline” by April 2 meeting of G20 industrialized and developing nations
Emerging Blueprint for Financial Services Regulatory Overhaul (cont’d)
Phase I: Systemic Risk Regulation/Regulator: OTHER (cont’d)
• Unification of federal bank regulatory agencies• Creation of a Financial Products Safety Commission to vet products
before sold to investors• Creation of federal insurance program for muni bonds paid via premiums• Support for status quo on mark-to-market
Phase II: Sectoral Reform/Overhaul• Each segment of the financial services industry will be examined and
subject to regulation specific to its function, risks and other factors• TIMELINE: August 2009 or later
Source: Wall Street Journal, “Frank Backs Regulator for Systemic Risk,” 2/4/09, p. C3; I.I.I. research.
Possible Regulatory Scenarios for P/C Insurers as of Year-End 2009
Source: Insurance Information Inst.
• Status Quo: P/C Insurers Remain Entirely Under Regulatory Supervision of the States Unlikely, but some segments of the industry might welcome this
outcome above all others• Federal Regulation: Everything is Regulated by Feds
Unlikely that states will be left totally in the cold• Optional Federal Charter (OFC): Insurers Could Choose
Between Federal and State Regulation Unlikely to be implemented as envisioned for past several years by
OFC supporters• Dual Regulation: Federal Regulation Layer Above State
Feds assume solvency regulation, states retain rate/form regulation• Hybrid Regulation: Feds Assume Regulation of Large
Insurers at the Holding Company Level• Systemic Risk Regulator: Feds Focus on Regulation of
Systemic Risk Points in Financial Services Sector What are these points for insurers? P/C vs. Life?