Insurance Market Report 2002 The New Uncertainties Allen F. Hyman Managing Director Marsh Industry Practices.

Insurance Market Report 2002The New Uncertainties

Allen F. HymanManaging DirectorMarsh Industry Practices

September 11, 2001

September 11, 2001: New Dimensions of Risk

Targets of riskFinancial size of risksConcentrations/Aggregations of riskSpread of risk

September 11, 2001: New Dimensions of Risk

Target– Who is vulnerable?

SizeConcentrations/AggregationsSpread

September 11, 2001: New Dimensions of Risk

TargetSize

– Probable maximum loss– Wide range of estimates

Concentrations/AggregationsSpread

The Worst Terrorist Attacks: Insured Property Losses

Amount Event Country ($USB) Year

WTC, Pentagon US 20-35* 2001

NatWest bombing UK .9 1993

Manchester, car bombing UK .7 1996

London, financial district bombing UK .7 1992

WTC bombing US .5 1993

* Includes business interruption

September 11, 2001: New Dimensions of Risk

TargetSizeConcentrations/Aggregations

– Workers compensation– Other lines

Spread

September 11, 2001: New Dimensions of Risk

TargetSizeConcentrations/AggregationsSpread

September 11, 2002:Lines Affected

Property– Physical damage, $10-15B– Business interruption, $10-$20B

Third-party liability, $10-$20B Aviation, $10-15B Life / Disability, $5-10B Workers compensation, $5-$10B

September 11, 2001: Responses

Insurance markets Insurance buyers and their brokersGovernments

September 11, 2001: Responses

Insurance marketplace– Exclusions– Stand-alone market

InsuredsGovernments

September 11, 2001: Responses

Insurance marketplace Insureds

– Risk controlGovernments

September 11, 2001: Responses

Insurance marketplace– Exclusions– Stand-alone market

Insureds– Risk control

Governments– Relief legislation– Pools– “Catastrophe rate load”

One Thing That Hasn’t Changed:The Question of Insurability

Is terrorism insurable by private sector?– Degree of uncertainty?

Need to quantify exposures – Computer modeling – Account for new variables

Northridge “Blind-thrust” faults9-11 Concentrations/

Aggregations of risk

As if 9-11 Wasn’t Bad Enough...

Enron

Property/CasualtyInsurance Industry Overview

9.8

1.0

-2.0

1.03.6 3.4

6.14.94.7

4.7

-2.4 -5.1

7.01.6

6.65.2

-1.8

11.7

18.8

9.7

14.2 15.8

4.4

20.3

4.4

19.2

11.1

36.7

25.5

53.0

24.8

1.4

-17.0

-38.4-40

-30

-20

-10

0

10

20

30

40

50

60

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

Changes to Policyholders Surplus:Signaling a Hard Market

Start ofHard Market

Start ofHard Market

Start ofHard Market

196

9

197

1

197

3

197

5

197

7

197

9

198

1

198

3

198

5

198

7

198

9

199

1

199

3

199

5

199

7

199

9

200

1(e

st.)

Data Source: A.M. Best Company

Start ofHard Market

A Historical PerspectiveThe Pain Threshold

0

1

2

3

4

5

6

7

8

9

10

1970 1975 1980 1985 1990 1995 2000 2002

General Market

Market Symptoms

1976– Affordability– Gov’t a relatively unknown as exposed– Civil Rights– Workers Compensation– Immunity– GL too broad

Market Symptoms

1983-85– Availability– Affordability– Cash Flow Underwriting– Interest Rates - high– Combined ratios – high– Rejection of classes of business– Insurance became political

Market Symptoms

2001– Years of soft market– Record Dow indicators– High combined ratios– Reinsurance shift– Coverage constriction– Retention increases– Limit reductions– 9/11

Premium Increases

0

50

100

150

200

250

300

Premium

Average

720%

122% avg

Timeliness of Final Quote

10%

66%

19%

5%

2 days before

2 wks before

1 month before

1 month after

Terms of Retention (Increase or Decrease)

-100

0

100

200

300

400

500

600

91% avg

Change In Limits

-100

-80

-60

-40

-20

0

20

40

60

Limits

Average

Increase

-14.5% avg incl “no change”

-32% for those who had a change

Did you have terrorism coverage before?

YES83%

NO17%

Was terrorism offered at renewal?

YES65%

NO22%

UNCLEAR13%

Did you buy terrorism?

YES27%

NO73%

Consolidated P/C Industry Net Income

14.2

5.8

19.3

10.9

24.4

36.8

30.8

-9.0

20.620.6

21.9

-10

-5

0

5

10

15

20

25

30

35

40

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001(est.)

(US$B)Data Source: A.M. Best Company

Net Premium Growth

2.42.0

6.1

3.7 3.63.4

2.82.3

1.9

4.4

8.5

0

1

2

3

4

5

6

7

8

9

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001(est.)

Data Source: A.M. Best Company(% Change)

Consolidated P/C Industry Combined Ratio

105.8

101.6

108.8

115.7

106.9

108.5

105.6

117.0

107.8106.5

110.1

100

105

110

115

120

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001(est.)

Data Source: A.M. Best Company

Insurer Financial Performance

14.6 11.6

19.5 20.8

35.5

23.4

14.49.9

-36.3

-18.1-22.1

-17.7 -16.7

-5.8

-16.8-23.1

38.0 41.5

34.2 33.7 32.6 33.739.9 38.038.936.8 40.7

-2.5

-18.3

13.8

-31.2

-20.5

-56.3-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001(est.)

Investment Income Pretax Operating Income Underwriting Gain/Loss(US$B)

Data Source: A.M. Best Company

Policyholders Surplus

158.7 163.1

182.3193.3

230.0

255.5

308.5

333.3 334.3

317.4

279.0

150

200

250

300

350

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001(est.)

(US$B)Data Source: A.M. Best Company

Where Have All the Profits Gone?Volatile Variables

Investment income – Low interest rates

Catastrophe losses

P/C Insurers’ vs. Reinsurers’ Combined Ratio

103.7

103.6

106.5

118.0

107.9

106.7

105.6

145.0

114.9

110.6

116.4

105.8

117.0

110.1107.7

105.6101.6

106.5

108.5

106.9

115.7108.8

100

105

110

115

120

125

130

135

140

145

150

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001(est.)

Reinsurers' Combined Ratio Insurers' Combined Ratio

Data Source: A.M. Best Company

Impact of Catastrophe Losses on Combined Ratio

106.3

108.8

103.2

115.8

102.5

106.9

102.4

108.5

103.3

106.5

103.4

106.0

101.0101.6 102.6

105.6104.9

107.8108.9

110.3

108.2

117.0

100

105

110

115

120

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Pre-Catastrophe CatastropheData Source: A.M. Best Company

(est

.)

The Worst Catastrophes(including liability awards)

Amount Event Country ($USB) Year

1. Tobacco industry award US 14519992. World Trade Center attacks US 40-70 20013. Asbestos US 30-60 1990s+4. Hurricane Andrew US 18.6 19925. Northridge earthquake US 13.8 19946. Alaska oil tanker spill US 9.0 19767. Silicone breast implants US 5-71990s8. Typhoon Mireille Japan 6.7 19919. Winter storms Lothar-Martin Europe 6.0 199910. Hurricane Daria Europe 5.7 1999

(Continued)

The Worst Catastrophes (including liability awards)

Amount Event Country ($USB) Year

11. Hurricane Hugo Puerto Rico 5.5 198912. Auto fuel tank explosion US 4.9 199913. Autumn storm Europe 4.3 198714. Hurricane Vivian Europe 4.0 199015. Hurricane Georges US/Caribbean 3.5 199816. Intrauterine devices US 3.0+ 1969-7517. Tank car chemical leakage US 3.0 199718. Piper Alpha oil rig explosion UK 2.8 198819. Leaking chemical pipe US 2.7 1970s/1980s20. Kobe earthquake Japan 2.6 1995

Medical InflationAnnual change in average total health benefit cost, 1987-2001

11.2

8.1

7.36.1

0.2

2.52.1

-1.1

8.0

10.1

12.1

17.1

16.7

18.6

6.9

-4

0

4

8

12

16

20

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001(est.)

NOTE: Results for 1987-1998 are based on cost for active and retired employees combined. The change in cost from 1998-2001 is based on cost for active employees only.

(%)