Overview and Outlook for the P/C Insurance Industry: Trends and Challenges for 2013 and Beyond Underwriting Executives Council Bonita Springs, FL May 9, 2013 Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038
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Overview and Outlook for the P/C Insurance Industry: Trends and Challenges for 2013 and Beyond
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Overview and Outlook for the P/C Insurance Industry: Trends and Challenges for 2013 and Beyond
Underwriting Executives CouncilBonita Springs, FL
May 9, 2013
Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038
units in multi-family buildings single family units
*average of annualized seasonally adjusted January, February, and March 2013 data; March is preliminary.Source: US Census Bureau at www.census.gov/construction/nrc/pdf/newresconst.pdf.
Thousands of Units, Multi-Family
2013:Q1 multi-unit starts at a seasonally adjusted annual rate of 325,000,are nearly back to the average annual pre-recession rate of 339,000.
Multi-family-unit starts rose in 2011, more in 2012, still
Housing Unit Starts: Building Momentum,Monthly, Jan 2011-Mar 2013*
187
112
164
124
129
165
176
152 21
9
175 23
9
153
193
240
215
234
178
215
211
205
245
281
261 34
7
275
309 39
2
437
388 41
8
411
414 44
3
429
422 42
2
439 46
0
520 51
1
470
481 50
4
513 53
1
506
538 59
0 589
570
617
616 65
0 619
0
200
400
600
800
1000
Jan
11
Mar
11
May
11
Jul 1
1
Sep
11
Nov
11
Jan
12
Mar
12
May
12
Jul 1
2
Sep
12
Nov
12
Jan
13
Mar
13
units in multi-family buildings single family units
*at annualized rate, seasonally adjusted; Mar 2013 numbers are preliminary.Source: US Census Bureau at www.census.gov/construction/nrc/pdf/newresconst.pdf.
Thousandsof Units
The number of units in multi-unit starts more than doubledfrom Dec 2011 to Dec 2012. Single family start rose nicely, too.
Business Bankruptcy Filings: Fallingbut Still High in 2012 (1994:Q1 – 2012:Q3)
13.9
13.6
12.9
12.0 13
.112
.2 12.6
12.9 13
.4 14.0
13.2
12.9 13
.814
.013
.512
.712
.411
.610
.39.
99.
210
.49.
09.
0 9.5
9.2
8.2 8.4
10.0
10.3
9.5 10
.09.
89.
79.
49.
58.
8 9.3
8.3
10.6
8.2
7.6 7.8 8.1 8.
7 9.5
12.8
4.1 4.
9 5.3 5.6 6.
3 6.7 7.
2 8.0 8.
79.
711
.512
.914
.316
.014
.2 15.0
14.6
14.5
14.0
13.0
12.4
12.3
11.7
11.1
11.0
10.4
9.2
8.4
0
2
4
6
8
10
12
14
16
18
94
:Q1
94
:Q3
95
:Q1
95
:Q3
96
:Q1
96
:Q3
97
:Q1
97
:Q3
98
:Q1
98
:Q3
99
:Q1
99
:Q3
00
:Q1
00
:Q3
01
:Q1
01
:Q3
02
:Q1
02
:Q3
03
:Q1
03
:Q3
04
:Q1
04
:Q3
05
:Q1
05
:Q3
06
:Q1
06
:Q3
07
:Q1
07
:Q3
08
:Q1
08
:Q3
09
:Q1
09
:Q3
10
:Q1
10
:Q3
11
:Q1
11
:Q3
12
:Q1
12
:Q3
Business bankruptcies were down 42% in 2012:Q3 vs. recent peak in 2009:Q2 but were still higher than 2008:Q1, the first full quarter of the Great Recession.
Bankruptcies restrict exposure growth in all commercial lines.Sources: American Bankruptcy Institute at www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; Insurance Information Institute.
Business starts were down nearly 20% in the Great Recession, holding back most types of commercial insurance exposure,
but now are recovering.* Data through Jun 30, 2012 are the latest available (posted Jan 29, 2013); Seasonally adjusted.Sources: Bureau of Labor Statistics, www.bls.gov/news.release/cewbd.t08.htm; NBER (recession dates).
*As of 1/2/13. Includes $20B gross loss estimate for Hurricane Sandy.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.
US CAT Losses in 2012 Will Likely Become the 2nd or 3rd Highest in US History on An Inflation-Adjusted Basis (Pvt
Insured). 2011 Losses Were the 5th Highest
2012 CAT losses were down nearly 50% from 2011 until Sandy struck in late October
There were over 150 natural disaster events in the US every
year since 2006. That hadn’t happened in any year before.
35
Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2012*
Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO (1960-2011); A.M. Best (2012E) Insurance Information Institute.
0.4
1.2
0.4 0.
8 1.3
0.3 0.4 0.
71.
51.
00.
40.
4 0.7
1.8
1.1
0.6
1.4 2.
01.
3 2.0
0.5
0.5 0.7
3.0
1.2
2.1
8.8
2.3
5.9
3.3
2.8
1.0
3.6
2.9
1.6
5.4
1.6
3.3
3.3
8.1
2.7
1.6
5.0
2.6
3.4
8.7 9.
4
3.6
0.9
0.1
1.1
1.1
0.8
0
1
2
3
4
5
6
7
8
9
10
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
E
The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades
Combined Ratio Points Catastrophe losses as a share of all losses reached
a record high in 2012
36
The Dozen Most Costly Hurricanesin U.S. History
Insured Losses, 2012 Dollars, $ Billions
*Estimate as of 12/09/12 based on estimates of catastrophe modeling firms and reported losses as of 1/12/13. Estimates range up to $25B.Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.
$9.2 $11.1$13.4
$18.8
$25.6
$48.7
$8.7$7.8$6.7$5.6$5.6$4.4
$0
$10
$20
$30
$40
$50
$60
Irene(2011)
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo (1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Ike (2008)
Sandy*(2012)
Andrew(1992)
Katrina(2005)
Sandy could become the 2nd costliest hurricane in
US insurance historyIrene became the
12th most expensive hurricane in US
history
10 of the 12 costliest hurricanes in private insurance history occurred in the past 9 years (2004—2012)
37
If They Hit Today, the Dozen Costliest (to Insurers) Hurricanes in U.S. History
Insured Losses,2012 Dollars, $ Billions
*Estimate as of 12/09/12 based on estimates of catastrophe modeling firms and reported losses as of 1/12/13. Estimates range up to $25B.Sources: Karen Clark & Company, Historical Hurricanes that Would Cause $10 Billion or More of Insured LossesToday, August 2012; I.I.I.
$40$50 $50 $50
$65
$125
$40$35$25$20$20$20
$0
$20
$40
$60
$80
$100
$120
$140
Sandy*(2012)
Betsy(1965)
Hazel(1954)
Donna(1960)
NewEngland(1938)
Katrina(2005)
Galveston(1915)
Andrew(1992)
south-Florida(1947)
Galveston(1900)
mid-Florida(1928)
Miami(1926)
When you adjust for the damage prior storms could have done if they occurred today, Hurricane Katrina slips to a tie for 6th among the most
devastating storms.
Storms that hit long ago had less property and businesses to damage, so simply adjusting their actual claims for inflation doesn’t capture their
destructive power.Karen Clark’s analysis aims to overcome that.
P/C Industry Homeowners Claim Frequency, US, 1997-2011
Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” p. 29, BLS inflation calculator,and Insurance Information Institute
HO average claim severity is now
three times what it was in 1997.
40
U.S. Employment in Insurance Claims Adjusting: 2004–2013*
Thousands
45
50
55
60
Jan
-04
Ma
y-0
4
Se
p-0
4
Jan
-05
Ma
y-0
5
Se
p-0
5
Jan
-06
Ma
y-0
6
Se
p-0
6
Jan
-07
Ma
y-0
7
Se
p-0
7
Jan
-08
Ma
y-0
8
Se
p-0
8
Jan
-09
Ma
y-0
9
Se
p-0
9
Jan
-10
Ma
y-1
0
Se
p-1
0
Jan
-11
Ma
y-1
1
Se
p-1
1
Jan
-12
Ma
y-1
2
Se
p-1
2
Jan
-13
*As of February 2013; Seasonally adjusted.Note: Recession indicated by gray shaded column.Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.
As of February 2013, claims
adjusting employment was 51,800
Katrina, Rita, Wilma
Gustav, Ike
IreneSandy
Auto, 230,500 ,
17%
Commercial, 167,500 ,
12%
Homeowner, 982,000 ,
71%
Sandy caused an estimated 1.4 million
privately insured claims resulting in an estimated $15 to $25
billion in insured losses. Hurricane
Katrina produced 1.74 million claims and $47.6B in losses
(in 2011 $)
Superstorm (barely a CAT 1) Sandy:1.4 million Claims, by Type*
*PCS claim count estimate as of 11/26/12. Loss estimate represents high and low end estimates by risk modelers RMS, Eqecat and AIR. PCS estimate of insured losses as of 11/26/12 $11 billion. All figures exclude losses paid by the NFIP.Source: PCS; AIR, Eqecat, AIR Worldwide; Insurance Information Institute. 41
Sandy was a high-frequency, (relatively) low-severity event(avg. severity <50% Katrina)
44
Flood-Damaged Structures with/without Flood Insurance: Long Island NY
Source: Newsday, 1/14/13 from FEMA and Small Business Administration.
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Nassau Suffolk
Uninsured
Insured
Here’s a marketing challenge. Most people wholive on the coast in Long Island didn’t buy flood insurance.
46,681
28,055$2.2
44
74,736
20,798
46,681
5,74715,051
62.5% of flood-damaged buildings in Nassau County
were uninsured for flood
73.4% of flood-damaged buildings in Suffolk County
were uninsured for flood
5,747
Number of structures
Source: Wharton Center for Risk Management and Decision Processes, Issue Brief, Nov. 2012; Insurance Information Institute.
These coastal areas should have take-up rates of 75%
and over
Less than 5% penetration!
Challenge #3: Prolonged Low Investment Gains
49
Investment Performance is a Key Driver of Profitability
51
U.S. Treasury Security Yields*:A Long Downward Trend, 1990–2013
*Monthly, constant maturity, nominal rates, through Mar 2013.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.
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.
Distribution of Bond Maturities,P/C Insurance Industry, 2003-2011
16.0%
15.2%
15.7%
16.2%
16.3%
29.8%
29.2%
28.8%
29.5%
30.0%
32.4%
36.2%
39.5%
41.4%
31.3%
32.5%
34.1%
34.1%
33.8%
31.2%
28.7%
26.7%
26.8%
15.4%
15.4%
13.6%
13.1%
12.9%
12.7%
11.7%
11.1%
10.3%
9.2%
7.6%
7.6%
7.4%
8.1%
8.1%
7.3%
6.4%
6.3%15.2%
14.4%
16.0%
15.4%
0% 20% 40% 60% 80% 100%
2003
2004
2005
2006
2007
2008
2009
2010
2011
Under 1 year
1-5 years
5-10 years
10-20 years
over 20 years
Sources: A.M. Best; 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 16.9% in 2011) and then trimmed bonds in the 5-10-year category. Falling average maturity of the P/C industry’s bond portfolio is contributing to a drop in
investment income along with lower yields.
Purchasing Power of P/C Industry Investment Gains: 1994–2012F1
In 2012 (1st three quarters) both investment income and realized capital gains were lower than in the comparable period in 2011. And because the Federal Reserve Board aims to keep interest rates exceptionally low until the unemployment rate hits 6.5%—likely at
least another year off—maturing bonds will be re-invested at even lower rates.
1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.*2005 figure includes special one-time dividend of $3.2B; 2012F figure is I.I.I. estimate based on annualized actual 2012:Q3 result of
$38.089B. Sources: ISO; Insurance Information Institute.
($ Billions, 2012 dollars) Average yearly gain: $60.85B.
We haven’t hit that average in the last 5 years.
Challenge #4: Highly VariableP/C Claims Drivers
56
57
Change* in the Consumer Price Index, 2004–2013
*Monthly, year-over-year, through March 2013. Not seasonally adjusted.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13
RecessionCPICore CPI
Over the last decade, prices generally rose about 2% per year.
57
For two months in 2008, led by gasoline, the
general price level was rising at a 5.5% pace
58
Prices for Hospital Services:12-Month Change,* 1998–2013
*Percentage change from same month in prior year; through January 2013; seasonally adjustedSources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.
Cyclical peaks in PP Auto tend to occur approximately every 10 years(early 1990s, early 2000s, and possibly the early 2010s)
59
Forces that Drive Car Repair Costs:12-Month Change,* 2001–2013
*Percentage change from same month in prior year; through January 2013; seasonally adjustedSources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.
Cyclical peaks in PP Auto tend to occur approximately every 10 years(early 1990s, early 2000s, and possibly the early 2010s)
61
Change* in Price Index for Lumber: A Downward Trend but Sudden Spikes, 2004–2013
*Monthly, year-over-year, through March 2013. Not seasonally adjusted. Dec. 2012 and Jan., Feb., and Mar. prices are preliminary.Sources: US Bureau of Labor Statistics, Producer Price Index series WPS0811; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13
RecessionHardwoodSoftwood Lumber
The prices of building materials vary wildly and change levels rapidly.Prices for hardwood have been much less variable than softwood lumber.
61
The price of lumber dropped
before and during the recession…
But 30% spikes can
happen with no warning
62
Change* in Price Index for Plywood: A Downward Trend but Sudden Spikes, 2004–2013
*Monthly, year-over-year, through March 2013. Not seasonally adjusted. Dec. 2012 and Jan., Feb., and Mar. prices are preliminary.Sources: US Bureau of Labor Statistics, Producer Price Index series WPU083; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Recession
Plywood
From the end of the recession (June 2009) to March 2013, the effectof the ups and downs of the price of plywood has resulted in a rise of 25.6%.
62
The price of plywood rose by
50% in late Spring 2004 over
the prior year March 2013: +8.4%
63
Price Index for Waferboard, Monthly 2008–2013
Through March 2013. Not seasonally adjusted. Dec. 2012 and Jan., Feb., and Mar. price indeses are preliminary.Sources: US Bureau of Labor Statistics, Producer Price Index series WPU09220124; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
100
150
200
250
300
'08 '09 '10 '11 '12 '13
1991
=100
The prices of building materials such as waferboard and strandboard vary wildly and change levels rapidly.
63
The price of waferboard rose
by 50% during the recession, but then subsided
Oct 2012
Mar 2013The price of
waferboard rose by 50% again in the last year; will
it drop again?
64
But Something Unusual is Happening:Miles Driven*, 1990–2013
*Moving 12-month total. The latest data is for February 2013. Note: Recessions indicated by gray shaded columns..Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm ); National Bureau of Economic Research (recession dates); Insurance Information Institute.
From Congress (TRIA), HUD, CFPB, FSOC/Federal Reserve (SIFIs),
the NAIC’s SMI, etc.
66
I.I.I. Congressional Testimony on the Future of the Terrorism Risk Insurance Program
Issue: Act expires 12/31/14. Insurers still generally regard large-scale terror attacks as fundamentally uninsurable
I.I.I. Input: Testified at first hearing on the issue in DC (on 9/11/12) on trends in terrorist activity in the US and abroad, difficulties in underwriting terror risk; Noted that bin Laden may be dead but war on terror is far from over
Status: New House FS Committee Chair Jeb Hensarling has opposed TRIA in the past; Obama Administration does not seem to support extension; Little institutional memory on insurance subcommittee
Media: Virtually no media coverage yet apart form trade press; WSJ will likely editorialize against it.
Objective: Work with trades, risk management community and others to help build support
Life$1.2 (3%)
Aviation Liability
$4.3 (11%)
Other Liability
$4.9 (12%)
Biz Interruption $13.5 (33%)
Property -WTC 1 & 2*$4.4 (11%) Property -
Other$7.4 (19%)
Aviation Hull$0.6 (2%)
Event Cancellation
$1.2 (3%)Workers Comp
$2.2 (6%)
Total Insured Losses Estimate: $40.0B***Loss total does not include March 2010 New York City settlement of up to $657.5 million to compensate approximately 10,000 Ground Zero workers or any subsequent settlements.
**$32.5 billion in 2001 dollars.
Source: Insurance Information Institute.
Loss Distribution by Type of Insurancefrom Sept. 11 Terrorist Attack ($ 2011)
($ Billions)
Terrorism Violates Traditional Requirements for Insurability
Requirement Definition Violation
EstimableFrequency
Insurance requires large number of observations to develop predictive rate-making models (an actuarial concept known as credibility)
Very few data pointsTerror modeling still in infancy, untested.Inconsistent assessment of threat
EstimableSeverity
Maximum possible/ probable loss must be at least estimable in order to minimize “risk of ruin” (insurer cannot run an unreasonable risk of insolvency though assumption of the risk)
Potential loss is virtually unbounded.Losses can easily exceed insurer capital resources for paying claims.Extreme risk in workers compensation and statute forbids exclusions.
Source: Insurance Information Institute
Exhibit 3A
Requirement Definition Violation
Diversifiable Risk
Must be able to spread/distribute risk across large number of risks“Law of Large Numbers” helps makes losses manageable and less volatile
Losses likely highly concentrated geographically or by industry (e.g., WTC, power plants)
Random Loss Distribution/Fortuity
Probability of loss occurring must be purely random and fortuitousEvents are individually unpredictable in terms of time, location and magnitude
Terrorism attacks are planned, coordinated and deliberate acts of destructionDynamic target shifting from “hardened targets” to “soft targets”Terrorist adjust tactics to circumvent new security measuresActions of US and foreign govts. may affect likelihood, nature and timing of attack
Source: Insurance Information Institute
Terrorism Violates Traditional Requirements for Insurability (cont’d)
70
The New HUD Ruling
HO Underwriting vs. Disparate Impact
71
What Did HUD Rule?
The Fair Housing Act prohibits discrimination in the sale, rental, or
financing of dwellings on the basis of race, color, religion, sex,
disability, familial status, or national origin.
HUD’s rule says Plaintiffs may use statistical analysis to show that
certain insurer/lender/municipality behavior had a
disproportionately adverse effect on the sale, rental, or financing of
housing for minorities Under the rule, this showing violates the federal Fair Housing
Act even if the insurer/lender/municipality did not intend to discriminate
Defendant can prevail if it shows the practice was needed to achieve one or more substantial, legitimate, nondiscriminatory interests
But plaintiff may win by showing that another practice with a less discriminatory effect could achieve this interest
Why does this affect property insurance? Insurers don’t use race, religion, sex, etc. to underwrite property
insurance But they do use credit-based insurance scores, neighborhood, and
other factors that could be the basis of a “disparate impact” conclusion
Isn’t this a federal government agency’s intrusion into state regulation, against McCarran-Ferguson?
HUD says M-F says federal laws/regulations that “specifically relate to the business of insurance” supercede state law
But how can insurers defend themselves if they don’t have data on race (which they’re prohibited from collecting)? HUD says plaintiff have the same problem, so it’s fair
73
Potential Impact on Property Insurance Underwriting (cont’d) Could increase costs to monitor compliance and defend
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.2% ROAS for 2012:H1, 4.6% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.Sources: A.M. Best; ISO; Insurance Information Institute.
$ Millions
$1
6.2
$1
5.6
$1
6.4
$1
4.6
$8
.6
$5
.8
-$1
0.3
-$0
.1
-$1
.0
$1
0.8
$1
1.0
$8
.2
$8
.3
-$3
.4
$3
.4
$1
1.2
$1
2.2
$6
.2
$1
1.1
$6
.4$9
.0$1
0.7
$7
.0
$1
3.1
-$15.0
-$10.0
-$5.0
$0.0
$5.0
$10.0
$15.0
$20.0
20
07
:Q1
20
07
:Q2
20
07
:Q3
20
07
:Q4
20
08
:Q1
20
08
:Q2
20
08
:Q3
20
08
:Q4
20
09
:Q1
20
09
:Q2
20
09
:Q3
20
09
:Q4
20
10
:Q1
20
10
:Q2
20
10
:Q3
20
10
:Q4
21
1:Q
1
20
11
:Q2
20
11
:Q3
20
11
:Q4
20
12
:Q1
20
12
:Q2
20
12
:Q3
20
12
:Q4
Sources: SNL Financial; Insurance Information Institute
P/C Industry Net Income,Quarterly, 2007:Q1-2012:Q4
Spring 2011 tornadoes
79
$Billions Financial crisis,
Hurricane Ike
Virtually a yearwithout any profits
Sandy
$1
6.2
$1
5.6
$1
6.4
$1
4.6
$8.6
$5.8
-$10
.3
-$0.
1
-$1.
0
$7.0
$10.
7
$13.
1
$10.
8
$9.0 $1
1.0
$8.2
$8.3
-$3.
4
$3.4
$11.
2
$12.
2
$6.2
$11.
1
$6.4
-$15
-$10
-$5
$0
$5
$10
$15
$20
1st Quarter 2d Quarter 3rd Quarter 4th Quarter
200720082009201020112012
Sources: SNL Financial; Insurance Information Institute
P/C Industry Net Income,Quarterly, 2007:Q1-2012:Q4
Spring 2011 tornadoes
80
$Billions
Financial crisis,
Hurricane Ike
Hurricane Irene
Over the past 6 years, no calendar quarter has been consistently profitable.
-5%
0%
5%
10%
15%
20%
25%
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
*1
2*
Profitability (ROE) Peaks & Troughs,P/C Insurance Industry, 1975 – 2012
*Profitability = P/C insurer ROEs. 2012 is an estimate based on ROAS data. Note: Data for 2008-2012 exclude mortgage and financial guaranty insurers. 2012 ROAS = 5.9% including M&FG.Sources: Insurance Information Institute; NAIC; ISO; A.M. Best.
1977:19.0% 1987:17.3%
1997:11.6%
2006:12.7%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years
10 Years9 Years
ROE
1975: 2.4%
6+ years so far
History suggests next ROE peak will
be in 2016-2017
82
Policyholder Surplus, Quarterly, 2006:Q4–2012:Q4
Sources: ISO; A.M .Best.
($ 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
$553
.8
$583
.5
$583
.5
$586
.9
$570
.7
$566
.5
$505
.0
$515
.6
$517
.9
$350
$400
$450
$500
$550
$600
$650
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
3
12:Q
3
12:Q
4
The industry now (at year-end 2012) has $1 of surplus for every $0.78 of NPW, the strongest claims-paying status in its history.
Up $150 Billion from the 2009:Q1 trough,
a new peak
Down $84 Billion from the previous peak,
due to the financial crisis,
CATs
A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs
Combined Ratio / ROE
* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012:Q3 combined ratio including M&FG insurers is 100.9, ROAS = 6.3%; 2011 combined ratio including M&FG insurers is 108.2, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO data.
Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs
A combined ratio of about 100 generates an ROE of ~6.6% in 2012, ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Year Ago
2011:Q3 = 108.1, 3.1% ROE
85
Policyholder Surplus, 2006:Q4–2012:Q4
Sources: ISO; A.M .Best.
($ 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 $583
.5
$586
.9
$570
.7
$566
.5
$505
.0
$515
.6
$517
.9
$400
$450
$500
$550
$600
$650
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
3
12:Q
4
Surplus as of 12/31/12 was a
new peak
The industry now has $1 of surplus for every $0.80 of NPW, the strongest claims-paying status in its history
Drop due to near-record 2011 CAT losses
87
Key Takaways
87
88
P/C Insurance Exposures Will Grow With the U.S. Economy Personal and commercial exposure growth is likely in 2013
– But restoration of destroyed exposure will take until mid-decade Wage growth is also positive and could modestly accelerate
P/C Industry Growth in 2013 Will Be Strongest Since 2004 Growth likely to exceed A.M. Best projection of +3.8% for 2012 No traditional “hard market” emerges in 2013
Underwriting Fundamentals Deteriorate Modestly Some pressure from claim frequency, severity in some key lines But WC will be tough to fix
Industry Capacity Hits a New Record by Year-End 2013 (Barring Meg-CAT)