Medical Professional Liability Outlook and Economic Impacts ......Medical Professional Liability Outlook and Economic Impacts of the Changing Healthcare Environment Insurance Information

Medical Professional Liability Outlook and Economic Impacts

of the Changing Healthcare Environment

Insurance Information Institute

August 27, 2014

Robert P. Hartwig, Ph.D., CPCU, President & Economist

Insurance 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

The US Healthcare System & the Economy

Employment/Professional Trends in Healthcare

Medical Professional Liability: Performance Overview & Outlook

The Affordable Care Act: Potential Impacts on MPL

Overall P/C Insurance Industry Performance

Investment Overview & Outlook

Tort Trends

Cyber Risk and the Healthcare Industry

Q&A

U.S. Health Care Expenditures,1965–2022F

$42

.0$

46

.3$

51

.8$

58

.8$

66

.2$

74

.9$83.2

$93

.1$

10

3.4

$11

7.2

$13

3.6

$15

3.0

$1

74

.0$

19

5.5

$22

1.7

$25

5.8

$2

96

.7$

33

4.7

$36

9.0

$40

6.5

$44

4.6

$47

6.9

$51

9.1

$58

1.7

$64

7.5

$72

4.3

$79

1.5

$85

7.9

$92

1.5

$97

2.7

$1,0

27

.4$

1,0

81

.8$

1,1

42

.6$

1,2

08

.9$

1,2

86

.5$

1,3

77

.2$

1,4

93

.3$

1,6

38

.0$

1,7

75

.4$

1,9

01

.6$

2,0

30

.5$

2,1

63

.3$

2,2

98

.3$

2,4

06

.6$

2,5

01

.2$

2,6

00

.0$

2,7

00

.7$

2,8

06

.6$

2,9

14

.7$

3,0

93

.2$

3,2

73

.4$

3,4

58

.3$

3,6

60

.4$

3,8

89

.1$

4,1

42

.4$

4,4

16

.2$

4,7

02

.0$

5,0

08

.8

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

65

66

67

68

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

10

11

12

13

14

15

16

17

18

19

20

21

22

U.S. health care expenditures have been on a relentless climb for most of the past half century, far outstripping population growth,

inflation of GDP growth

3

From 1965 through 2013, US health care expenditures had

increased by 69 fold. Population growth over the same period increased by a factor of just 1.6. By 2022, health spending will have

increased 119 fold.

$ Billions

Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-

Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.

http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

65

66

67

68

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

10

11

12

13

14

15

16

17

18

19

20

21

22

National Health Care Expenditures as a Share of GDP, 1965 – 2022F*



1965

5.8%

Health care expenditures as a share

of GDP rose from 5.8% in 1965 to

18.0% in 2013 and are expected to

reach 19.9% of GDP by 2022

% of GDP

2022 19.9%

1980:

9.2%

1990:

12.5%

2000:

13.8%

2010:

17.9%

Since 2009, heath expenditures as a %

of GDP have flattened out at about 18%--the

question is why and will it last?


-1%

0%

1%

2%

3%

4%

5%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*

Change in Medical CPI CPI-All Items

Medical Cost Inflation vs. Overall CPI, 1995 – 2014*

*July 2014 compared to July 2013.

Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.

Average Annual Growth Average

1995 – 2013

Healthcare: 3.8%

Total Nonfarm: 2.4%

Though moderating, medical inflation will continue to exceed inflation in the overall economy

6

63.1%650.7%

2235.9%

6839.8%

0%

1000%

2000%

3000%

4000%

5000%

6000%

7000%

8000%

Population CPI GDP Health Care

Expenditures

Rate of Health Care Expenditure Increase Compared to Population, CPI and GDP

Accelerating business investment will be a potent driver of

commercial property and liability insurance exposures and should drive employment and WC payroll

exposures as well (with a lag)

Source: Insurance Information Institute research.

1965: 194.3 Mill

2013: 317.0 Mill

1965: $719.1 Bill

2013: $16,797.5 Bill

1965: $42.0 Bill

2013: $2,914.7 Bill

Employment Trends in the Healthcare Industry

7

Employment Will Grow but Skills, Responsibilities and Risks Will

Evolve

7

8

Growth in Health Professions,1991-2013

Sources: Bureau of Labor Statistics, Insurance Information Institute.

-5.0

-3.0

-1.0

1.0

3.0

5.0

7.0

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

20

10

20

11

20

12

20

13

Health care

Total nonfarm

(Percent Annual Change)

Healthcare employment has continued to grow in good times and bad - including the Great Recession.

Average Annual Growth Average

Healthcare: 2.5%

Total Nonfarm: 1.0%

The U.S. economy lost more than 8 million jobs during the Great Recession, but health sector

employment expanded

28.1

21.5

21.4

20.9

18

17.2

12.5

12.5

11.1

10.8

10.7

10.1

9.6

9.4

8.6

7.9

7.3

7.3

7.2

7

6.8

0.8

-3.4

Healthcare Support

Healthcare Practitioners

Construction

Personal Care and Service

Computer and Math

Social Service

Business & Financial

Groundskeeping/Janitorial

Education

All Occupations

Legal

Life, Phys and Social Science

Repair

Food Preparation

Transportation

Fire, Police, Etc.

Architects and Engineers

Sales

Management

Arts and Media

Administrative Support

Production

Farming

Source: Bureau of Labor Statistics, Insurance Information Institute.

Occupations Ranked by Projected Percentage Growth, 2012-2022F

9

Healthcare professions are expected to grow at 2 to

nearly 3 times employment growth overall

10

Growth in Healthcare Profession by Skill Level, 2012 – 2022F

Source: Bureau of Labor Statistics, Insurance Information Institute.

5,0

05

2,8

93

2,4

92

1,7

71

6,0

20

3,5

90

3,2

42

2,1

96

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Practitioners, including

RNs

Technicians, including

LPNs

Aides Other

2012 2022

(Thousands of Jobs)

+1.015 Mill +20.3%

+697,000 +24.1%

+750,000 +30.1%

+425,000 +24.0%

Physician Supply and Demand, 2008–2020

Source: American Association of Medical Colleges https://www.aamc.org/advocacy/campaigns_and_coalitions/fixdocshortage/; Insurance Information Institute. 11

Demand for physicians is

expected to outstrip supply through 2020

by a wide margin

https://www.aamc.org/advocacy/campaigns_and_coalitions/fixdocshortage/

Projected Physician Supply and Demand, 2008–2020


851,300

759,800

A potential large and growing shortage of physicians

looms. Estimates suggest a shortage of 91,500 physicians

by 2020—a gap 12% gap.

Will this be a negative for MPL?


Physician Supply and Demand, 2008–2020


A potential large and growing physician gap looms over the next decade, with potential negative impacts on MPL


14

12 Industries for the Next 10 Years: Insurance Solutions Needed

Export-Oriented Industries

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Petrochemical

Agriculture

Natural Resources

Technology (incl. Biotechnology)

Light Manufacturing

Insourced Manufacturing

Many industries are

poised for growth, though

insurers’ ability to

capitalize on these

industries varies widely

Shipping (Rail, Marine, Trucking, Pipelines)

Medical Professional Liability

15

Performance Overview

15

16

Medical Professional Liability:4 Major Challenges

Increasing Competition Price (rate) competition is intensifying

Physicians: More employed by hospitals, large inst. hurts exposure

Self-insurance by hospitals adds to downward pressure

Falling Investment Income Despite Fed “tapering,” rates remain low

More complete “normalization” will not occur until 2015, if then

Rising Number of Self-Insured Exposures Hospitals increasingly self-insure

More use of captives

Legal & Legislative Reform Tort reform law changes (caps)

Affordable Care Act (“ObamaCare”)

Impacts on practice of defensive medicine

Other: Reserves, Loss Frequency & Severity Trends

17

Medical Errors: Rate of Lethal and Serious Adverse Events

Source: “A New, Evidence-Based Estimate of Patient Harms Associated with Hospital Care, Journal of Patient Safety, Volume 9, Issue 3 (Sept. 2013) by John T. James, Ph.D. accessed at: http://journals.lww.com/journalpatientsafety/Fulltext/2013/09000/A_New,_Evidence_based_Estimate_of_Patient_Harms.2.aspx

1.1

%

1.4

%

1.1

%

0.6

%

15%

15%

21%

14%

0%

5%

10%

15%

20%

25%

OIG (2008) OIG (2010) Classen, et al (2011) Landrigan, et al (2011)

Lethal Events Serious Adverse Events

Error RateNew study reviewed 4

studies authored

since 2008

Sept. 2013 study in the Journal of

Patient Health suggests that 210,000

– 400,000+ die each year from

preventable medical errors (implies

3rd leading cause of death in US)

http://journals.lww.com/journalpatientsafety/Fulltext/2013/09000/A_New,_Evidence_based_Estimate_of_Patient_Harms.2.aspx

18

Distribution of MPL Premium by Segment, 2001 vs. 2012

1%

33%

66%

Source: Conning.

Specialist

RRG

Multiline

2001

8%

22%

70%

2012

Specialist

Multiline

RRG

RRG and Specialist market shares have risen over the past

10+ years

19

$2,226

$2,480

$2,182

$1,904$1,718

$2,228

$2,884

$2,303$2,161

$2,896

$2,521

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F 2016F

($ Millions)

MPL profits peaked in 2010. Falling rates and exposures and lower investment earnings are impacting the bottom line.

MPL Statutory Net Income After Tax,2006 – 2016F

Source: Conning.

Rates and yields will need to improve to reverse the drop in

profits+29.4%

-20.1%-6.2%

+34.0%

-12.9%

-11.4%

+11.4%

-12.0%

-12.7%-9.8%

10

3.7

10

8.0

96

.4 99

.8

10

6.6

10

7.9 1

15

.7

13

0.4 13

6.0

15

4.7

14

2.3

13

7.3

11

0.9

10

0.9

91

83

.3

76

.7

83

.5

80

.0

87

.2 93

.3

89

.4

10

1.0

91

.5 97

.0

12

7.9

70

80

90

100

110

120

130

140

150

160

170

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14

F

15

F

16

F

Medical Malpractice Combined Ratio vs. All Lines Combined Ratio, 1991-2016F

Source: AM Best (1991-2012); Conning (2013-16F) Insurance Information Institute.

MPL insurers in 2013 paid out an estimated $0.894 in loss and expense for every $1 they earned in premiums

In 2001, med mal insurers paid out $1.55 for every dollar earned

The dramatic improvement over the past decade has restored MPL’s viability, though some

deterioration has occurred and is expected to continue

20

21

RNW: MPL vs. All P/C Lines, 2003-2012

Sources: NAIC.

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

03 04 05 06 07 08 09 10 11 12

US All Lines MPL

(Percent)

Average 2003-2012

All P/C Lines: 7.9%

MPL: 12.3%

Since 2005, MPL has outperformed the p/c

insurance industry overall by a wide margin

MPL Combined Ratio and ROE,2006 - 2016F

Combined Ratio / GAAP ROE

Source: Conning; Insurance Information Institute.

91.0

83.3

76.7

83.5

80.0

93.3

89.491.5

101.0

97.0

87.2

15.6%

13.7%

11.3%

6.4%5.5%

18.0%

7.7%

9.5%

11.9%

13.5%

9.2%

70

75

80

85

90

95

100

105

110

06 07 08 09 10 11 12 13 14F 15F 16F

0%

3%

6%

9%

12%

15%

18%

Combined Ratio GAAP ROE

As underwriting results deteriorate, ROEs are have begun to decline

ROEs are under pressure as underwriting results deteriorate

and persistently low interest rates impact investment income

23

$24,908

$27,599$29,029

$30,205$31,189

$14,162

$17,290 $16,502

$19,421

$23,013 $23,052

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F 2016F

($ Millions)

Capital and surplus growth in the MPL shows steady growth mirroring the overall P/C insurance industry

MPL Capital & Surplus,2006 – 2016F

Source: Conning.

Capital is increasing even as premium growth has been

negative

+22.1% -4.6%

+17.7%

+18.5% +0.2%+8.1%

+10.8%+5.2%

+4.1% +3.3%

24

15.1%

22.1%

-4.6%

17.7% 18.5%

0.2%

8.0%

14.2%

6.5%

-11.7%

11.8%9.3%

-1.6%

6.6%7.8%

6.4%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

06 07 08 09 10 11 12 13E

MPL All P/C Lines

Since 2006, MPL capital and surplus has grown at twice the pace of the p/c

insurance industry overall

Source: Insurance Information Institute from A.M. Best and Conning data.

Change in MPL vs. All Lines P/C Capital & Surplus, 2006-2013E

% ChangeAverage 2006-2013E

All P/C Lines: 5.2%

MPL: 10.6%

P/C Estimated Loss Reserve Deficiency/ (Redundancy), Excl. Statutory Discount

Line of Business 2012

Personal Auto Liability -$3.9B

Homeowners -$0.4

Other Liab (incl. Prod Liab) $7.5

Workers Compensation $11.1

Commercial Multi Peril $1.9

Commercial Auto Liability $0.7

Medical Malpractice -$3.5

Reinsurance—Nonprop Assumed $1.0

All Other Lines* -$4.6

Total Core Reserves $9.8

Asbestos & Environmental $11.2

Total P/C Industry $21.0B

Source: A.M. Best, P/C Review/Preview 2014; Insurance Information Institute. *Excluding mortgage and financial guaranty

segments.25

26

MPL Direct Premiums Written: 2004-2016F

$10.76 $10.67$10.99

$11.88

$11.14$10.82

$10.36$10.11

$9.77 $9.80 $9.63$9.36 $9.18

$9.00

$5

$6

$7

$8

$9

$10

$11

$12

$13

03 04 05 06 07 08 09 10 11 12 13 14F 15F 16F

Source: A.M. Best (2003-2012); Conning (2013-2016F); Insurance Information Institute.

MPL direct premiums written have been declining steadily since 2006

$ Millions

MPL DPW is expected to drop to $9.36B in

2014, down 21.2% from its 2006 peak of $11.9B

27

-0.8%

3.0%

8.1%

-6.2%

-2.9%-4.3%

-2.4%-3.4%

0.3%

-1.7% -1.9%-2.0%-2.8%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

04 05 06 07 08 09 10 11 12 13 14F 15F 16F

Competition and an increasing number of

self-insured exposures are weighing on MPL

premium growth

Source: Conning.

Annual Change in Medical Professional Liability DPW, 2004-2016F

% Change

28

-7.1%

-15.6%

-11.8%

3.5%

-10.4%

5.9%

12.4%

-10.2%

1.1%

4.6%3.4%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

06 07 08 09 10 11 12 13 14F 15F 16F

Incurred losses have been generally increasing since 2011

after years of sharp declines

Source: Conning.

Annual Change in Medical Professional Liability Incurred Losses, 2004-2016F

% Change

29

8.1%

-6.2%

-2.9%-4.3%

-2.4%-3.4%

0.3%

-2.8% -1.9%

-7.1%

-15.6%

-11.8%

3.5%

-10.4%

5.9%

12.4%

1.1%

4.6%3.4%

-1.7% -2.0%

-10.2%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

06 07 08 09 10 11 12 13 14F 15F 16F

MPL DPW Growth Change in Incurred Losses

Mid-2000s: Favorable loss

trends precipitated lower prices and falling premium

Source: Insurance Information Institute from A.M. Best and Conning data.

Medical Professional Liability: Change inPremium and Incurred Losses, 2006-2016F

% Change

Today: Premium seems to be lagging the increase in

losses

30

Medical Professional Liability, RNWBy State, Average 2003-2012

35

.4

24

.9

22

.5

21

.9

20

.6

20

.1

19

.4

19

.0

19

.0

18

.7

18

.0

17

.6

17

.3

17

.3

17

.2

17

.1

16

.6

16

.3

16

.0

16

.0

15

.9

15

.4

15

.4

15

.0

14

.6

0

5

10

15

20

25

30

35

40

OH AL

ND

TX MI

KS

NC

AK

WV

NV

MS

CA

LA

NE

VA ID WA

CO IA W

I

MO

MN

OR

GA

ME

Source: NAIC; Insurance Information Institute.

Top 25 States and DC

31

Medical Professional Liability RNWBy State, Average 2003-2012

13

.8

13

.7

13

.4

13

.0

12

.6

12

.5

12

.3

12

.2

12

.1

11

.6

11

.3

11

.3

11

.2

11

.2

11

.0

10

.6

10

.1

5.9

5.3

3.5

3.4

-1.7

7.1

9.19.310

.0

-0.4

-4

-2

0

2

4

6

8

10

12

14

16

TN

UT

DC AZ

FL

CT

SD

KY

US HI

IN MA

MT

NJ

VT

AR

WY

NH

PA IL RI

MD

NM

NY

SC

DE

OK

Source: NAIC; Insurance Information Institute

Bottom 25 States

32

Medical Professional Liability, RNWBy State, 2012

53

.1

31

.8

28

.2

27

.7

26

.6

25

.4

23

.8

23

.2

21

.6

21

.2

20

.3

19

.9

19

.9

19

.4

19

.0

18

.7

18

.6

17

.9

17

.8

17

.6

17

.6

15

.7

15

.4

15

.3

15

.2

15

.0

0

10

20

30

40

50

60

OH

NV

WI

OK

ND AL

MT

WV

KS

MN

MS

UT

VT HI

SD

CT

TX

MO MI

ID NE

AK IL

CO

NC

DC



33

Medical Professional Liability RNWBy State, 2012

14

.5

14

.3

13

.0

12

.7

12

.2

11

.6

11

.3

11

.3

11

.0

10

.8

10

.7

10

.4

10

.3

10

.0

8.8

8.8

7.6

-9.8

-3.6

-2.0

-0.9

0.5

5.66

.27.1

-51

.4

-60

-50

-40

-30

-20

-10

0

10

20

LA

GA

WA

PA

VA

AZ

ME

US

MA

NJ

FL IN CA IA

KY

OR

SC

AR

WY

NY

TN

NM R

I

MD

NH

DE


Bottom 25 States

34


32

.4

22

.8

19

.2

15

.5

12

.9

12

.0

11

.3

11

.1

11

.1

9.7

8.8

8.1

7.3

6.7

6.6

6.6

6.5

5.7

5.5

4.5

3.6

3.5

3.3

2.4

2.0

0.3

0.2

-0.1

-0.1

4.9

9.9

14.9

19.9

24.9

29.9

34.9

AL

MN

ND HI

MI

CA

WA

CT

WV

MA

NV

LA

NC

UT

ME WI

TN

NE

KS ID

CO NJ

VA

NM AZ

GA

DE

US


Top 27 States and US

35


-1.4

-1.8

-2.6

-2.9

-3.1

-3.2

-4.4

-4.5

-4.5

-5.3

-5.3

-5.6

-6.0

-6.3

-7.2

-7.8

-7.8

-9.0

-11

.8

-13

.7

-29

.5

-30

.2

-51

.9

-75

-65

-55

-45

-35

-25

-15

-5

OR IN NH NY KY TX RI AK DC MD VT SD FL IL AR IA PA MO MT MS SC OH WY OK

Source: NAIC; Insurance Information Institute OK -202.5

Bottom 24 States and DC

36


45

.3

32

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20

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14

.6

14

.6

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14

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0

5

10

15

20

25

30

35

40

45

50

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OK

KS

AL

WV

OH

AK IA TX

NE

DC

WA

CA

NJ

ND LA

TN

UT

MS

CT

MO W

I

MN RI

ME

VA



37


13

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11

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CO ID MA

VT

KY

NV

NC MI

US AZ

GA

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SC IL IN NY

MT HI

NH

SD

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MD

DE


Bottom 25 States

38


47

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AK

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WV

MI

NC

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TX IA AL

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NE

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CA

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VA IN KY

NJ

LA

UT

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39


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ID DC

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Bottom 25 States

40


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41


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Bottom 25 States

42


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48

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TX

NH

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43


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Bottom 25 States

44


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MS ID KS

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LA

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45


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FL

NE

US

WA

TN NJ

ND

MD IA

ME

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PA

MN

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MA IL

UT RI

OK

NY

NH

DE

VT

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Bottom 25 States

46


51

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20

30

40

50

60

OH

ND MI

VT

MS

AL

MN

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AK

TX

NC ID TN VA

DC

CA IA

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GA

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LA

WA

NE

KS

OR

MO



47


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CO PA IL RI

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MD

SC HI


Bottom 25 States

48


60

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NC AL

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NE

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49


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16

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DE

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PA

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NY

AK RI

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Bottom 25 States

50


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20

25

30

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TX AL

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NC

MS

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UT

LA

ME

CO FL

GA IN IA NV

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51


15

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14

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14

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9.59.69

.8

1.8

0

2

4

6

8

10

12

14

16

SD

AR

WA

CT

AK

US

TN

MT

DE

MN

NE

KY

NJ

CA

NH

PA

OK RI

MD

WV

ND

SC

NY HI

NM

WY


Bottom 25 States

The Affordable Care Act and Medical Professional Liability

52

A Summary of Potential Impacts

52

Issue Concern Contravening Argument

Surge in People

Covered by Health

Insurance

(VOLUME EFFECT)

• System is

overwhelmed

• Doctors spend less

time on patients

• Patient care

adversely impacted

• Over time, people will have

access to preventative care,

improving the general health of

the population

• People are receiving care

already via suboptimal channels

• Less use of ERs

Electronic Health

Records

• Digitization could

create a treasure

trove of data for

plaintiff attorneys

• Computerization of patient data

could help flag issues and

improve risk management and

improve patient outcomes

MPL Claim Severity • More large verdicts• ACA will help contain system

costs

Source: Insurance Information Institute research. 53

Potential Impacts of the ACA on Medical Professional Liability

54

Projected Number of People with No Health Insurance, 2013—2022*

31

55

44

37

30

5

15

25

35

45

55

65

2013E 2014F 2015F 2018F 2022F

Millions

The projected decline in the uninsured population is very sensitive to the enrollment rate under the Affordable Care Act

By 2018 the number of people under age 65 without

insurance is expected to drop by 25 million (~45%)

54

*Under age 65.




Number of People Signed Up for Health Care Under the ACA, Oct. 1 – March 1

55

759,800

Source: Centers for Medicare and Medicaid as of March 7, 2014:

http://aspe.hhs.gov/health/reports/2014/MarketPlaceEnrollment/Mar2014/ib_2014mar_enrollment.pdf

As of March 1, 4.2 million people have signed up for coverage under the ACA

since enrollment opened on Oct. 1, 2013

UPDATE

HHS announced

that enrollment as of 3/16 now exceeds 5

million

http://aspe.hhs.gov/health/reports/2014/MarketPlaceEnrollment/Mar2014/ib_2014mar_enrollment.pdf

Estimated Number of Americans Newly Eligible for Expanded Preventative Services Under the ACA

56

Source: Centers for Medicare and Medicaid as of June 27, 2014:

http://www.aspe.hhs.gov/health/reports/2014/PreventiveServices/ib_PreventiveServices.pdf

As of June 2014 1, 76 million people (est.) are newly eligible for expanded benefits under the ACA

Much of the increase in MPL costs associated

with the ACA results from a

greater volume of care being

rendered via new enrollees

and benefit expansions.

http://www.aspe.hhs.gov/health/reports/2014/PreventiveServices/ib_PreventiveServices.pdf

57

Source: “How Will the Patient Protection and Affordable Care Act Affect Liability Insurance Costs?” RAND, April 2014;

http://www.rand.org/pubs/research_reports/RR493.html; Insurance Information Institute.


Expected Increase in Rates of Insurance Coverage,by State, Due to the Patient Protection andAffordable Care Act (%) as of 2016

States in the West will see the

sharpest increase in the

share of the population that

is insured

http://www.rand.org/pubs/research_reports/RR493.html

58

7.8

5.6

5

4.6

4.5

4.2

4.1

4.1

4 3.8

3.7

3.6

3.6

3.5

3.3

3.1

3 3 2.8

2.8

2.7

2.7

2.6

2.6

2.6

2.5

0

1

2

3

4

5

6

7

8

9

NM

MT

TX

AR

KY

WA

GA

WV

LA

SC

WY

MS

NJ

NC

ND VA

NV RI

OK

US

CA

FL IA ID MI

AZ




Med Malpractice: Estimated Changes in LiabilityClaim Costs, by State and Market, Due to the PatientProtection and Affordable Care Act (%) in 2016

RAND estimates that the ACA will increase MPL claim

costs by 2.8% by 2016, mostly due to increased

patient volume

Total MPL liability

payouts in 2016 are

projected to be $4.8 billion


59

2.4

2.4

2.4

2.4

2.3

2.2

2.1

2 2

1.9

1.9

1.8

1.8

1.8

1.7

1.7

1.6

1.5

1.3

1.3

1.2

1.1

1

0.8

0.7

0.4

0

0.5

1

1.5

2

2.5

3

IN

MN

MO

OR

MA

TN

CT

AK

AL

PA

SD

CO IL

OH

NY

VT

NE

NH

DC

ME HI

DE

UT

KS

MD WI

Bottom 25 States and DC

Med Malpractice: Estimated Changes in LiabilityClaim Costs, by State and Market, Due to the PatientProtection and Affordable Care Act (%) in 2016




60

P/C Insurance Industry Financial Overview

2013: Best Year in the Post-Crisis Era

60

P/C Industry Net Income After Taxes1991–2014:Q1 2005 ROE*= 9.6%

2006 ROE = 12.7%

2007 ROE = 10.9%

2008 ROE = 0.1%

2009 ROE = 5.0%

2010 ROE = 6.6%

2011 ROAS1 = 3.5%

2012 ROAS1 = 5.9%

2013 ROAS1 = 10.3%

2014 ROAS1 = 8.4%

•ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields an 8.2% ROAS through 2014:Q1, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.

Sources: A.M. Best, ISO; Insurance Information Institute

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $3

6,8

19

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$3

5,2

04

$1

9,4

56 $

33

,52

2

$6

3,7

84

$1

3,6

54

$3

8,5

01

$2

0,5

59

$4

4,1

55

$6

5,7

77

-$6,970

$2

8,6

72

-$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

10

11

12

13

14:Q

1

Net income rose strongly (+81.9%) in 2013 vs. 2012 on lower cats, capital gains

$ Millions

2014 is off to a slower start

62

-5%

0%

5%

10%

15%

20%

25%

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14

Net Premium Growth: Annual Change, 1971—2014F

(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 4.2% in 2009, the First 3-Year Decline Since 1930-33.

2014F: 4.0%

2013: 4.6%

2012: +4.3%

-5%

0%

5%

10%

15%

20%

25%

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

11

12

13

14

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2014:Q1*

*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude

mortgage and financial guaranty insurers.

Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0%1987:17.3%

1997:11.6% 2006:12.7%

1984: 1.8% 1992: 4.5% 2001: -1.2%

9 Years

History suggests next ROE

peak will be in 2016-2017

ROE

1975: 2.4%

2013 10.4%

2014:Q1 8.2%

64

ROE: Property/Casualty Insurance by Major Event, 1987–2014:Q1

* Excludes Mortgage & Financial Guarantee in 2008 – 2014. 2014 figure is through Q1:2014. 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 10 11 12 13 14*

P/C Profitability Is Both by Cyclicality and Ordinary Volatility

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

Record Tornado Losses

Sandy

Low CATs

65

P/C Insurance Industry Combined Ratio, 2001–2014:Q1*

* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014:Q1 = 97.3.

Sources: A.M. Best, ISO.

95.7

99.3100.8

106.3

102.4

96.7 97.4

101.0

92.6

100.8

98.4100.1

107.5

115.8

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned Premiums

Relatively Low CAT Losses, Reserve Releases

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Avg. CAT Losses,

More Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Cyclical Deterioration

Sandy Impacts

Lower CAT

Losses

Best Combined Ratio Since 1949 (87.6)

A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs

Combined Ratio / ROE

* 2008 -2014 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2014:Q1 combined ratio including M&FG insurers is 97.3; 2013 = 96.1; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%.

Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.

97.5

100.6 100.1 100.8

92.7

101.299.5

101.0

96.7 97.4

102.4

106.5

95.7

14.3%

15.9%

12.7%

10.9%

7.4%7.9%

4.7%

6.2%8.2%

9.6%8.8%

4.3%

9.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014:Q1

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

A combined ratio of about 100 generates an ROE of ~7.0% in 2012/13, ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

Lower CATs helped ROEs

in 2013

67

2

(2)

(8)

(3)

(7)

(10)(10)

(4)

(0)

11

24

14

119

(5)

(9)

(13)(12)

(10)

(14)(12)

(10)(7) (7)

-$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

11

12

13

E

14

E

15

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, 1992–2015E

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: A.M. Best, ISO, Barclays Research (estimates).

68

Policyholder Surplus, 2006:Q4–2014:Q1

Sources: ISO, A.M .Best.

($ Billions)

$487.1

$496.6

$512.8

$521.8

$478.5

$455.6

$437.1 $463.0 $

490.8 $511.5 $

540.7

$530.5

$544.8

$559.2

$559.1

$538.6

$550.3

$567.8

$583.5

$586.9 $607.7

$614.0

$624.4 $

653.3

$662.0

$570.7

$566.5

$505.0

$515.6

$517.9

$400

$450

$500

$550

$600

$650

$700

06:Q

4

07:Q

1

07:Q

2

07:Q

3

07:Q

4

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

12:Q

1

12:Q

2

12:Q

3

12:Q

4

13:Q

1

13:Q

2

13:Q

3

13:Q

4

14:Q

1

2007:Q3Pre-Crisis Peak

Surplus as of 3/31/14 stood at a record high $662.0B

2010:Q1 data includes $22.5B of

paid-in capital from a holding

company parent for one insurer’s

investment in a non-insurance

business .

The industry now has $1 of surplus for every $0.73 of NPW,close to the strongest claims-paying status in its history.

Drop due to near-record 2011 CAT losses

The P/C insurance industry entered 2014in very strong financial condition.

Financial Strength & Underwriting

69

History Suggests that MPL, Like Other Long-Tailed Lines Is Much

More Difficult to Underwrite

69

P/C Insurer Impairments, 1969–20128

15

12

711

93

49

13

12

19

91

61

41

33

64

93

1 34

50

48

55

60

58

41

29

16

12

31

18 19

49 50

47

35

18

14 15

51

6 19 2

13

42

1

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

10

11

12

Source: A.M. Best Special Report “Pace of P/C Impairments Slowed in 2012; Auto Writers, RRGs Continued to Struggle,” June 2013; Insurance Information Institute.

The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets

70

Impairments among P/C insurers remain infrequent

71

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2012

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

91

01

11

2

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

Source: A.M. Best; Insurance Information Institute

2012 impairment rate was 0.69%, down from 1.11% in 2011; the rate is lower than the 0.82% average since 1969

Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007; Recent Increase Was Associated

Primarily With Mortgage and Financial Guaranty Insurers and Not Representative of the Industry Overall

72

Reasons for US P/C Insurer Impairments, 1969–2012

43.4%

12.6%7.2%

7.1%

8.0%

6.6%

8.4%3.5%

3.1%


Historically, Deficient Loss Reserves and Inadequate Pricing AreBy Far the Leading Cause of P-C Insurer Impairments.

Investment and Catastrophe Losses Play a Much Smaller Role

Deficient Loss Reserves/Inadequate Pricing

Reinsurance Failure

Rapid GrowthAlleged Fraud

Catastrophe Losses

Affiliate Impairment

Investment Problems (Overstatement of Assets)

Misc.

Sig. Change in Business

73

Top 10 Lines of Business for US P/C Impaired Insurers, 2000–2012

19.7%

22.2%

9.2%8.8%

7.3%

8.6%

6.7%

4.8%

4.0%8.6%


.

Medical Professional Liability Accounts for Only About 2% of Industry DPW but 6.7% of Insurer Impairments

Workers Comp

Other

Pvt. Passenger Auto

HomeownersCommercial Multiperil

Commercial Auto Liability

Other Liability

Med Mal

Surety

Title

INVESTMENTS: THE NEW REALITY

74

The Challenge of Low Investment Yields Is a Critical Issue for MPL

Insurers

Is Relief in Sight?74

Property/Casualty Insurance Industry Investment Income: 2000–20141

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.2

$48.0 $47.4$45.8

$39.6

$49.5

$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*

Due to persistently low interest rates,investment income fell in 2012 and in 2013

and is falling again in 2014.

1 Investment gains consist primarily of interest and stock dividends. *2014 investment income is estimated Q1, annualized.Sources: ISO; Insurance Information Institute.

($ Billions)Investment earnings are still below their 2007 pre-crisis peak

76

P/C Insurer Net Realized Capital Gains/Losses, 1990-2014:Q1

Sources: A.M. Best, ISO, Insurance Information Institute.

$2

.88

$4

.81

$9

.89

$9

.82

$1

0.8

1 $1

8.0

2

$1

3.0

2

$1

6.2

1

$6

.63

-$1

.21

$6

.61

$9

.13

$9

.70

$3

.52 $8

.92

-$7

.90

$5

.85

$7

.04

$6

.18 $1

1.4

3

$3

.00

-$1

9.8

1

$9

.24

$6

.00

$1

.66

-$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 09 10 11 12 1314:Q1

Insurers Posted Net Realized Capital Gains in 2010 - 2013 Following Two Years of Realized Losses During the Financial Crisis. Realized Capital

Losses Were a Primary Cause of 2008/2009’s Large Drop in Profits and ROE

($ Billions)Realized capital gains rose

sharply as equity markets rallied

Property/Casualty Insurance Industry Investment Gain: 1994–2014:Q11

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7

$39.2

$53.4$56.2

$54.2

$58.8

$14.1

$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 09 10 11 12 1314:Q1

Investment Income Continued to Fall in 2013 Due to Low Interest Rates but Realized Investment Gains Were Up Sharply; The Financial Crisis

Caused Investment Gains to Fall by 50% in 2008

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)

Investment gains in 2013 were their highest in the

post-crisis era

78

-1.8

%

-1.8

%

-2.0

%

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

-5.7

%

-7.3%

-1.9

%

-2.1

%

-3.1

%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

Per

sona

l Lin

es

Pvt P

ass

Aut

o

Per

s Pro

p

Com

mer

cial

Com

ml A

uto

Cre

dit

Com

m P

rop

Com

m C

as

Fidel

ity/S

uret

y

War

rant

y

Sur

plus

Lin

es

Med

Mal

WC

Rei

nsur

ance

**

Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline

*Based on 2008 Invested Assets and Earned Premiums

**US domestic reinsurance only

Source: A.M. Best; Insurance Information Institute.

Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*

78

79

U.S. 10-Year Treasury Note Yields:A Long Downward Trend, 1990–2014*

*Monthly, through June 2014. Note: Recessions indicated by gray shaded columns.

Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.

1%

2%

3%

4%

5%

6%

7%

8%

9%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.

Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.

Yields on 10-Year U.S. Treasury Notes recently plunged to record modern-era lows in early 2013 but have since risen as the Fed begins “tapering” its

QE program in 2014

79

http://www.federalreserve.gov/releases/h15/data.htm

80

U.S. Treasury Security Yields:A Long Downward Trend, 1990–2014*

*Monthly, constant maturity, nominal rates, through July 2014.

Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

Recession2-Yr Yield10-Yr Yield

Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.

Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.

U.S. Treasury yields plunged to historic lows in 2013. Longer-

term yields have rebounded a bit.

80

http://www.federalreserve.gov/releases/h15/data.htm

81

Treasury Yield Curves: Pre-Crisis (July 2007) vs. Feb. 2014

0.05% 0.05% 0.08% 0.12%0.33%

2.15%

2.71%

4.82%4.96% 5.04% 4.96%

4.82% 4.82% 4.88% 5.00% 4.93% 5.00%5.19%

1.40%

0.69%

3.66%3.38%

0%

1%

2%

3%

4%

5%

6%

1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y

Feb. 2014 Yield Curve

Pre-Crisis (July 2007)

Treasury yield curve remains near its most depressed level in

at least 45 years. Investment income is falling as a result.

Even as the Fed “tapers” rates are unlikely to return to pre-crisis

levels anytime soon

The Fed Is Actively Signaling that it Is Determined to Keep Rates Low Until Unemployment Drops Below 6.5% or Until Inflation Expectations

Exceed 2.5%; Low Rates Add to Pricing Pressure for Insurers.

Source: Federal Reserve Board of Governors; Insurance Information Institute.

82

Treasury Yield Curves: Pre-Crisis (July 2007) vs. Feb. 2014

4.85%

4.48%

1.40%

0.15% 0.14% 0.09% 0.10%

4.75%4.43%

2.80%

2.20%1.93%

1.52%

0.76%

1.17%

1.80%

3.50%

4.80%4.63%

3.66%

3.26% 3.22%

2.78%

1.80%

2.35%

3.50%

4.20%

0.06%0.05%

1.60%

0%

1%

2%

3%

4%

5%

6%

2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F

3-Month

5-Year

10-Year

Longer term yields are expected to rise in 2014 and 2015 while

short-term yields will not begin to normalize until 2015

Higher longer-term yields will help insurers but short term yields are expected to lag behind

Source: Federal Reserve Board of Governors (2006-2013), Swiss Re (2014-2015); Insurance Information Institute.

83

Outlook for U.S. Treasury Bond Yields Through 2015

0.76

1.17

1.80

2.30

1.80

2.35

3.50

4.20

1.40

0.100.090.060.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2012 2013 2014F 2015F

3-Month 5-Year 10-Year

% Yield

Longer-tail lines like MPL and workers comp will benefit the most from the normalization of yields

Long-term yields should begin to normalize in 2014 but short-term yields will

remain very low until 2015

83Source: Federal Reserve Board of Governors (2012-2013), Swiss Re (2014-2015); Insurance Information Institute.

84

-1.8

%

-1.8

%

-2.0

%

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

-5.7

%

-7.3%

-1.9

%

-2.1

%

-3.1

%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

Per

sona

l Lin

es

Pvt P

ass

Aut

o

Per

s Pro

p

Com

mer

cial

Com

ml A

uto

Cre

dit

Com

m P

rop

Com

m C

as

Fidel

ity/S

uret

y

War

rant

y

Sur

plus

Lin

es

Med

Mal

WC

Rei

nsur

ance

**

Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline

*Based on 2008 Invested Assets and Earned Premiums

**US domestic reinsurance only

Source: A.M. Best; Insurance Information Institute.

Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*

84

85

Distribution of Bond Maturities,P/C Insurance Industry, 2003-2013

14.4%

15.4%

16.0%

16.0%

15.2%

15.7%

15.6%

16.0%

14.9%

16.6%

16.5%

29.8%

29.2%

28.8%

29.5%

30.0%

32.4%

36.4%

39.5%

41.2%

40.4%

38.8%

31.3%

32.5%

34.1%

34.1%

33.8%

31.2%

29.0%

27.1%

27.3%

27.6%

29.3%

15.4%

15.4%

13.6%

13.1%

12.9%

12.7%

11.9%

11.2%

10.4%

9.8%

9.8%

9.2%

7.6%

7.6%

7.4%

8.1%

8.1%

7.1%

6.2%

6.2%

5.7%

5.7%

0% 20% 40% 60% 80% 100%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Under 1 year

1-5 years

5-10 years

10-20 years

over 20 years

Sources: SNL Financial; Insurance Information Institute.

The main shift over these years has been from bonds with longer maturities to bonds with shorter maturities. The industry first trimmed its holdings of over-10-year bonds

(from 24.6% in 2003 to 15.5% in 2012) and then trimmed bonds in the 5-10-year category (from 31.3% in 2003 to 27.6% in 2012) . Falling average maturity of the P/C industry’s

bond portfolio is contributing to a drop in investment income along with lower yields.

Bonds Rated NAIC Quality Category 3-6 as a Percent of Total Bonds, 2003–2012

2.69%

2.10%2.17%

1.98%

3.07% 3.10%

4.07%

2.04%

2.27%

2.58%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

There are many ways to capture higher yields on bond portfolios.One is to accept greater risk, as measured by NAIC bond ratings.

The ratings range from 1 to 6, with the highest quality rated 1.Even in 2012, over 95% of the industry’s bonds were rated 1 or 2.

Sources: SNL Financial; Insurance Information Institute.

From 2006-07 to year-end 2012, the percentage of lower-quality

bonds in P/C industry portfolios more than doubled

Shifting Legal Liability & Tort Environment

87

Is the Tort PendulumSwinging Against Insurers?

87

88

Over the Last Three Decades, Total Tort Costs as a % of GDP Appear Somewhat Cyclical, 1980-2013E

$0

$50

$100

$150

$200

$250

$300

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12E

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)

Sources: Towers Watson, 2011 Update on US Tort Cost Trends, Appendix 1A

Tort costs in dollar terms have remained high but relatively stable since the mid-2000s., but are down

substantially as a share of GDP

Deepwater Horizon Spike

in 2010

1.68% of GDP in 2013

2.21% of GDP in 2003

= pre-tort reform peak

89

Commercial Lines Tort Costs: Insured vs. Self-(Un)Insured Shares, 1973-2010

Billions of Dollars

$0

$20

$40

$60

$80

$100

$120

$140

$160

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

Self (Un) Insured Share

Insurer Share

Tort Costs and the Share Retained by Risks Both Grew Rapidly from the mid-1970s to mid-2000s, When Tort Costs Began to Fall But Self-

Insurance Shares Continued to Rise

$9.5

$15.0

$6.0

1973: Commercial Tort Costs

Totaled $6.49B, 94% was insured,

6% self-(un)insured

1985: $46.6B 74.5% insured,

25.5% self-(un)insured

1995: $83.6B 69.5% insured,


2005: $143.5B 66.4% insured,


2009: $126.5B 64.4% insured,


Sources: Towers Watson, 2011 Update on US Tort Cost Trends, III Calculations based on data from Appendix 4. 89

90

Commercial Lines Tort Costs: Insured vs. Self-(Un)Insured Shares, 1973-2010

Percent

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

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

Self (Un) Insured Share

Insurer Share

The Share of Tort Costs Retained by Risks Has Been Steadily Increasing for Nearly 40 Years. This Trend Contributes Has Left

Insurers With Less Control Over Pricing.

1973: 94% was insured,

6% self-(un)insured

1985:74.5% insured,


1995: 69.5% insured,


2005: 66.4% insured,


2010: $138.1B 56.6% insured, 44.4% self-(un)insured

(distorted by Deepwater Horizon event with most losses retained by BP)

Sources: Towers Watson, 2011 Update on US Tort Cost Trends, III Calculations based on data from Appendix 4. 90

Business Leaders Ranking of Liability Systems in 2012

Best States

1. Delaware

2. Nebraska

3. Wyoming

4. Minnesota

5. Kansas

6. Idaho

7. Virginia

8. North Dakota

9. Utah

10. Iowa

Worst States

41. Florida

42. Oklahoma

43. Alabama

44. New Mexico

45. Montana

46. Illinois

47. California

48. Mississippi

49. Louisiana

50. West Virginia

Source: US Chamber of Commerce 2012 State Liability Systems Ranking Study; Insurance Info. Institute.

New in 2012

Wyoming

Minnesota

Kansas

Idaho

Drop-offs

Indiana

Colorado

Massachusetts

South Dakota

Newly Notorious

Oklahoma

Rising Above

Arkansas

91

92

The Nation’s Judicial Hellholes: 2012/2013

Source: American Tort Reform Association; Insurance Information Institute

West VirginiaIllinois

Madison County

New York

Albany and NYC

Watch List

Philadelphia, Pennsylvania

South Florida

Cook County, Illinois

New Jersey

Nevada

Louisiana

Dishonorable Mention

MO Supreme Court

WA Supreme Court

California

Maryland

Baltimore

CYBER RISK

93

Cyber Risk is a Rapidly Emerging Exposure for All Industries—Especially Healthcare/Medical

NEW III White Paper: http://www.iii.org/assets/docs/pdf/paper_CyberRisk_2014.pdf

93

http://www.iii.org/assets/docs/pdf/paper_CyberRisk_2013.pdf

Data Breaches 2005-2013, by Number of Breaches and Records Exposed

# Data Breaches/Millions of Records Exposed

* 2013 figures as of Jan. 1, 2014 from the ITRC updated to an additional 30 million records breached (Target) as disclosed in Jan. 2014.Source: Identity Theft Resource Center.

157

321

446

656

498

419447

619662

87.9

17.322.9

35.7

19.1

66.9

222.5

16.2

127.7

100

200

300

400

500

600

700

2005 2006 2007 2008 2009 2010 2011 2012 2013*

0

20

40

60

80

100

120

140

160

180

200

220

# Data Breaches # Records Exposed (Millions)

The Total Number of Data Breaches (+38%) and Number of Records Exposed (+408%) in 2013 Soared

Millions

95

2013 Data Breaches By Business Category, By Number of Breaches

3.7%

9.1%

9.0%

43.8%

34.4%

Source: Identity Theft Resource Center, http://www.idtheftcenter.org/images/breach/2013/UpdatedITRCBreachStatsReport.pdf

The majority of the 614 data breaches in 2013 affected business and medical/healthcare organizations, according to the Identity Theft Resource Center.

Business, 211 (34.4%)Govt/Military, 56 (9.1%)

Banking/Credit/Financial, 23 (3.7%)

Educational, 55 (9.0%)

Medical/Healthcare, 269 (43.8%)

Medical/Health organizations accounted for

nearly 43.8% of all cyber breaches in

2013, up from 34.5% in 2012

96

The Most Costly Cyber Crimes, Fiscal Year 2013

5%

5%

7%

8%

9%

11%

13%

21%

21%

Source: 2013 Cost of Cyber Crime: United States, Ponemon Institute.

Denial of service, malicious code and web-based attacks account for more than 55 percent of all cyber costs per U.S. organization on an annual basis.

Malicious code

Viruses, Worms, Trojans

Denial of service

Botnets

Malware

Malicious insiders

Stolen devices

Phishing + social engineering

Web-based attacks

97

External Cyber Crime Costs: Fiscal Year 2013

4%

17%

36%

43%

* Other costs include direct and indirect costs that could not be allocated to a main external cost category

Source: 2013 Cost of Cyber Crime: United States, Ponemon Institute.

Information loss (43%) and business disruption or lost productivity (36%) account for the majority of external costs due to cyber crime.

Information loss

Equipment damages

Other costs* 0%

Revenue loss

Business disruption

Information loss is the major concern,

business interruption could

cause serious issues for health

institutions as well

98

Main Causes of Data Breach

24%

37%

39%

Source: 2011 Cost of Data Breach Study: United States, Ponemon Institute, March 2012

Negligent employees and malicious attacks are most often the cause of the data breach. Some 39 percent of incidents involve a negligent employee or

contractor, while 37 percent concern a malicious or criminal attack.

Negligence

System glitch

Malicious or criminal attack

99

Marsh: Increase in Purchase of Cyber Insurance Among U.S. Companies, 2012

Source: Marsh Global Analytics, Marsh Risk Management Research Briefing, March 2013

27.7%

20.2%

21.6%

22.9%

32.2%

72.2%

75.5%

33.3%

All Other

Health Care

Communications, Media & Technology

Retail/Wholesale

Financial Institutions

Education

Services

All Industries

Interest in cyber insurance continues to climb. The number of companies purchasing cyber insurance increased 33 percent from 2011 to 2012.

100

Marsh: Total Limits Purchased, By Industry –Cyber Liability, All Revenue Size


$16.8

$33.4

$8.1

$26.0

$13.1 $12.6

$20.7

$9.8

$20.5

$9.0

$12.4

$8.1

$14.1

$9.3

$24.6

$14.1

All Industries Comms, Media

& Technology

Education Financial

Institutions

Health Care Retail/Wholesale Services All Other

Avg. 2012 Limits Avg. 2011 Limits

Cyber insurance limits purchased in 2012 averaged $16.8 million across all industries, an increase of nearly 20% over 2011.

($ Millions)

101

Marsh: Total Limits Purchased, By Industry –Cyber Liability, Revenue $1 Billion+


$27.9

$59.4

$11.7

$46.6

$18.7

$30.0

$38.7

$12.7

$41.8

$11.3

$17.3

$11.6

$27.5

$9.0

$40.6

$14.1

All Industries Comms, Media

& Technology

Education Financial

Institutions

Health Care Retail/Wholesale Services All Other

Avg. 2012 Limits Avg. 2011 Limits

Among larger companies, average cyber insurance limits purchased in 2012 increased nearly 30% over 2011.

($ Millions)

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