Insurance Industry Meltdown? The Legend of the Price-Gouging Insurer Casualty Actuaries of Greater New York New York, NY June 11, 2003 Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038
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Rising Premiums: Economic Windfall or Insurance Industry Meltdown? The Legend of the Price-Gouging Insurer Casualty Actuaries of Greater New York New.
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Rising Premiums:Economic Windfall or
Insurance Industry Meltdown?
The Legend of the Price-Gouging Insurer
Casualty Actuaries of Greater New York New York, NYJune 11, 2003
Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038
*Estimate through May 2003.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims.Source: Property Claims Service/ISO; Insurance Information Institute
$ BillionsCAT losses continue to be a problem,
though 2002 was much better than 2001
$ Billions, Calendar Year Basis
$2.3 $2.2 $1.2
($8.5)
($1.5)
($7.5)($6.7)($10.0)
$23
$0.3
($3.7)($0.3)
$9.9
($15)
($10)
($5)
$0
$5
$10
$15
$20
$25
90 91 92 93 94 95 96 97 98 99 00 01 02E
P/C Insurance Industry Prior Year Reserve Development*
Investment income in 2002 fell 2.8% due primarily to historically low interest rates
Source: A.M. Best, Insurance Information Institute
-$4.8 Billion
0%
2%
4%
6%
8%
10%
12%
14%
16%
3-Month T-Bill 1-Yr. T-Bill 10-Year T-Note
Interest Rates: Lower Than They’ve Been in Decades
*As of April 21, 2003.Source: Board of Governors, Federal Reserve System; Insurance Information Institute
1. Historically low interest rates are the primary driver behind lower investment yields. Nevertheless, overall insurer investment performance outpaces all major market indices and almost every major category of mutual fund.
2. 66% of the industry’s invested assets are in bonds
-30%
-20%
-10%
0%
10%
20%
30%
40%
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
*As of June 6, 2003.Source: Ibbotson Associates, Insurance Information Institute
Total Returns for Large Company Stocks: 1970-2003*
2002 was 3rd consecutive year of decline for stocks
Will it be the last?
S&P 500 up 13.2% so
far this year
P/C Industry Investments,by Type (as of Dec. 31, 2001)
Other5%
Bonds66%
Real Est. & Mortgages
1%
Common Stock21%
Cash & ST Secs.6%
Preferred Stock1%
Bond Holdings, by Type
Industrial & Misc. 32.5%
Special Revenue 30.5%
Governments 18.0%
States/Terr/Other 15.4%
Public Utilities 3.1%
Parents/Subs/Affiliates 0.5%
Source: A.M. Best, Insurance Information Institute
Common stock accounts for about 1/5 of invested
assets
Property/Casualty Insurance Industry Investment Gain*
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.6
$57.9
$51.9
$56.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 02
*Investment gains consists primarily of interest, stock dividends and realized capital gains and losses.Source: Insurance Services Office; Insurance Information Institute estimate annualized as of 9/30/02.
Investment gains are simply returning to “pre-bubble” levels
Crisis in Corporate Governance Affecting Even Blue Chip Portfolios
Sources: Tillinghast-Towers Perrin, US Bureau of Labor Statistics, Insurance Information Institute
•Over the period from 1990 through 2000, medical malpractice tort costs rose 140%, more than double the 60% increase in medical costs generally over the same period!
•Over the period from 1975 through 2000, medical malpractice tort costs skyrocketed by 1,642% while medical costs generally rose 449%, nearly 4 times as fast!
The Nation’s Judicial Hellholes:An International Embarrassment
Source: American Tort Reform Association; Insurance Information Institute
City of St. Louis, MO
CALIFORNIA
Alameda County
Los Angeles County
San Francisco County
Orleans Parish, LA
MIAMI
Madison County, IL
TEXAS
Jefferson County
Hidalgo County
Starr County
Mississippi’s 22nd Judicial
District
Average Cost per $1 Million Liability Coverage2001 vs. 2002
Source: AM Best, Conning, Insurance Information Institute
Trial lawyers have destroyed commercial viability of med mal. The future holds:
Increased mutualization
Local market collapses
HC Providers seeking govt. protection
Insurers in 2001 paid out an estimated $1.65 for every $1 they earned in premiums!
Asbestos
Who Will Pay for the US Asbestos Mess?
Source: Tillinghast-Towers Perrin; Insurance Information Institute
US Insurers30%Asbestos
Defendants39%
Foreign Insurers
31%
Estimated Total US Settlements & Expenses = $200 billion
$78 billion $60 billion
$62 billion
‘Toxic’ Mold
Litigiousness in US Society Compounded the Problem
Documented Toxic Mold SuitsFormer
Owners of Sold Homes
10%Bad Faith
Against Insurers
50%Builder for
Construction Defects
20%
HO Associations
for Improper Maintenance
20% Source: www.toxlaw.com; Guy Carpenter
1,000 Cases
2,000 Cases
5,000 Cases
2,000 Cases
TX: Mold Claim Frequency*(# claims per 1,000 policyholders)
1.7
3.22.7
4.1
6.7
11.7
18.4
23.6
0
5
10
15
20
25
00:Q1 00:Q2 00:Q3 00:Q4 01:Q1 01:Q2 01:Q3 01:Q4
Source: Texas Department of Insurance; Insurance Information Institute estimates.
The frequency of mold claims rose 1,286% between 2000:I and 2001:IV
$0
$50
$100
$150
$200
$250
Wa
ter
Da
ma
ge
Pa
id L
os
se
s*
($M
illio
ns
)
0
5000
10000
15000
20000
25000
30000
Cla
im C
ou
nt
Paid Losses
Claim Count
Source: Texas Department of Insurance; Insurance Information Institute
* Data are for TDI Cause 61: Discharge – Other Damage. Not all claims in cause 61 are mold and mold claims may also arise from other (non-water) causes of loss.
Texas: Mold Losses/Claims Are Finally Moderating*
Sharply Rising Average Water Claim Cost in CA: Mold Symptom
$2,537$2,631
$3,339
$3,719
$4,730
$2,000
$3,000
$4,000
$5,000
1997 1998 1999 2000 2001
Source: Insurance Information Institute based on data from the Insurance Information Network of California;
The cost of the average water loss in CA surged 27% in 2001 and 80% since 1998
Construction Defect Litigation Destroying CA Condo Market
$1.87
$2.95
$1.00
$1.25
$1.50
$1.75
$2.00
$2.25
$2.50
$2.75
$3.00
1998 2000
Source: ISO, Insurance Information Institute
Condo construction in parts of CA has come to a virtual stop.
Insurer costs rose 58% in just 2 years!
Ratio of Losses Paid Out to Premiums Taken In
“Right-to-Cure” laws now in 5
states: AZ, CA, NV, TX, WA
16 considering such laws.
Where are the Next Battlefields for Mold?
• Homeowners issue probably crested in 2002• Migration to commercial area affects many lines:
• Hot Spots: Apartments/Condos/Co-ops Office Structures Schools Municipal BuildingsCars? (GM case in NC)
• Trend toward class actions since science doesn’t support massive individual non-economic damagesMuch more lucrative for trial lawyers to form class
Source: Insurance Information Institute.
Obesity
Fast Food/Junk Science:Edible Asbestos?
•Are the food service & manufacturing industry’s vulnerable to suits over obesity?•McDonald’s sued in late 2002 over allegations that their food makes people fat•Kraft sued earlier this year over trans fats in Oreo cookies
Fast Food & Junk Science:The Case Against Pizza
•Premise: Cheese makes you fat•Why? Cheese is addictive!!
Digestion breaks down milk protein called casein, into components called casomorphins which are opiates like morphine & codeine, which are addictive
Caseins are concentrated in cheeses
•Manipulation of cheese content in products—or sale of cheese itself—knowing its addictive qualities—is theoretically a “scientific” basis to file suit on behalf of the pizza-addicted obese.•ADA’s Cheese Logo
SARS:
A Threat to the P/C Insurance Industry?
SARS: Limited P/C Insurance Industry Exposure
•Are there any potential SARS-related p/c insurance exposures?
Workers comp? Mostly health care workers
Event cancellation? Fear of SARS insufficient, but legitimate claims possible
CGL? Several courts have ruled that viruses/bacteria (e.g., E. Coli, Legionnaires’ disease) not covered
EIL? Court decisions + fact that at least half of EILs have “naturally occurring substance” exclusions preclude coverage.
Legend #6:Insurers are Awash in Cash and Have More Money than They Know What to Do With
Capital Raising by P/C Insurers Since September 11, 2001*
$20,492
$11,442
$16,437
$4,872
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
2001 2002*
($ M
illi
on
s)
Completed Pending
$25.4 Billion$27.9 Billion
*As of September 13, 2002.
Source: Morgan Stanley, Insurance Information Institute.
14 Pending 38 Pending
40 Completed 33 Completed
Capital Raising by P/C Insurers Since 9/11 Totals $53.2B
Source: A.M. Best, Insurance Information Institute
$ B
illi
ons
Surplus (capacity) peaked at $336.3 Billion in mid-1999 and fell by 15.2% ($51 billion) to $285.2 billion since then.
•Surplus is now lower than at year-end 1997.
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
$51 Billion
Global P/C Insurance Capacity is Falling Dramatically
$920
$690
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
2000:I 2002:IV (est.)
$ B
illio
ns
Sources: Insurance Information Institute, Swiss Re
Global non-life capacity is down
25% over the past 2 years
Capital Myth: P/C Insurers Have $300 Billion to Pay Terrorism Claims
"Target" Commercial*$100 billion
33%
Other Commercial$50 billion
17%
Personal$150 billion
50%
Total PHS = $298.2 B as of 6/30/01
= $285.2 B as of 12/31/02
*”Target” Commercial includes: Comm property, liability and workers comp; Surplus must also back-up on non-terrorist related property/liability and WC claimsSource: Insurance Information Institute
Only 33% of industry surplus backs up “target” lines
Legend #7: Insurers are “Redlining”
Businesses in the Wake of 9/11
89.9
%
85.5
%
81.1
%
69.2
% 84.2
%
51.1
%
73.3
%
65.1
%
85.0
%
82.4
%
79.2
%
67.2
% 82.5
%
49.2
%
69.9
%
63.6
%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Prior to 9/11/01 Currently
Insurance Coverage in Lower Manhattan
Source: Downtown Alliance
Over 95% of businesses in Downtown were able to continue