The “New Normal” of Business and Insurance Steven N. Weisbart, Ph.D., CLU, Senior Vice President and Chief Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: (212) 346-5540 Cell: (917) 494-5945 [email protected]Defense Days Business Meeting Westfield Insurance Westfield, OH August 18, 2009
36
Embed
The “New Normal” of Business and Insurance Steven N. Weisbart, Ph.D., CLU, Senior Vice President and Chief Economist Insurance Information Institute
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
The “New Normal”of Business and
Insurance
Steven N. Weisbart, Ph.D., CLU, Senior Vice President and Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038
Measured by number of new units started, exposure growth for HO insurers is low.
Housing start data also affects commercial insurers with construction risk exposure.
I.I.I. estimate: each 100,000 decline in housing starts “costs” home insurers $90
million in gross premium. Estimated premium loss in 2008 vs. 2005: about $1
billion.
Sources: US Department of Commerce; Blue Chip Economic Indicators (7/09); Insurance Information Inst.
Millions of Units
Housing bubble
Recession
Recession
16.916.916.6
17.117.5
17.817.4
16.516.1
13.1
10.1
11.7
9
12
15
18
99 00 01 02 03 04 05 06 07F 08 09F 10F
Yearly new auto/light truck sales are forecast
to drop by 6 million units in 2009 vs. 2007
Falling auto sales will have a smaller effect on auto insurance exposure growth than problems in the housing market will have
on home insurers
Weak Economy, Tight Creditare Hurting Auto Sales
Source: US Department of Commerce; Blue Chip Economic Indicators (7/09); Insurance Information Inst.
Millions of Units Sold
Theory: Re-ignited Inflation Won’t ThreatenUntil the Economy Returns to a Full-Employment
Level—Likely a Few Years Away
The markets are starting to worry that the flood of money for the recovery will re-ignite inflation (the spread between 10-Year TIPS and 10-Year T-Notes is widening).
Source: Cooper, “Hints of Recovery—And Fears of Inflation,” BusinessWeek, May 11, 2009, p. 8
The “New Normal”for the P.C. Insurance
Industry
Premiums, InvestmentsFlat or Down;
Pressure on Expenses
Year-to-Year Change in Net Written Premium, 2000-2009:Q1
P/C Investment Income as a % of Invested Assets Follows 10-Year U.S. T-Note
*Blue Chip consensus forecasts. Sources: Board of Governors, Federal Reserve System; Blue Chip Economic Indicators (7/09 issue) A.M.Best; Insurance Information Institute.
Investment yield historically tracks 10-
year Treasury note quite closely
The “New Normal”in the
Liability Insurance Marketplace
Liability: Average Yearly Cost* Small and Medium-Sized Businesses, 2002-2008
$1.9
6
$0.9
4
$2.3
1
$1.3
0
$1.0
3
$3.2
1
$1.5
6
$1.2
7
$3.0
9
$1.3
7
$1.0
8
$2.3
3
$1.2
4
$0.9
5
$2.4
9
$1.0
6
$1.8
9
$0.9
6
$0.6
5
$0.7
2$1.0
7
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$0 - $200M $201M-$500M $501M-$1B
2002 2003 2004 2005 2006 2007 2008
*per $1,000 of revenue, across entire liability program (full population)
Source: Marsh, 2008 Limits of Liability Report
Costs have generally declined since 2004
Liability: Average Yearly Cost* Medium and Large Businesses, 2002-2008
$0.3
8
$0.2
4
$0.6
7
$0.4
2
$0.1
7
$0.8
6
$0.3
6
$0.1
8
$0.7
7
$0.4
4
$0.1
3
$0.6
9
$0.3
2
$0.1
6
$0.6
3
$0.1
4
$0.5
4
$0.2
7
$0.1
0
$0.1
3$0.2
3
$0.00
$0.25
$0.50
$0.75
$1.00
$1B-$5B $5B-$10B $10B+
2002 2003 2004 2005 2006 2007 2008
*per $1,000 of revenue, across entire liability program (full population)
Source: Marsh, 2008 Limits of Liability Report
Costs have generally declined since 2004.
Excess Liability Market Capacity– North America
Source: Marsh, 2008 Limits of Liability Report
$2.0
15
$1.6
60
$1.6
45
$1.5
70
$1.5
35
$1.4
25
$1.5
75
$1.7
10$
2.0
45
$1.9
41
$2.0
11
$1.7
21
$1.4
05
$1.3
34
$1.4
32
$1.0
$1.5
$2.0
$2.5
$3.0
Bil
lion
s
In 2008, capacity returned to 2000 levels, but it probably retreated again in 2009
Litigation, Tort System Cost Trends
In the ‘60s, ’70s, and ’80s, Tort System Costs Grew Much Faster than Inflation
2%
4%
6%
8%
10%
12%
1961-70 1971-80 1981-90 1991-2000 2001-08
Tort Costs CPI
Sources: US Bureau of Labor Statistics, Tillinghast-Towers Perrin, 2008 Update on U.S. Tort Costs; Insurance Info. Inst.
In the 1990s and Since 2003, Tort System Cost Growth Has Moderated
-6%
-3%
0%
3%
6%
9%
12%
15%
2001 2002 2003 2004 2005 2006 2007 2008
Rate of Tort System Cost Growth CPI
Sources: US Bureau of Labor Statistics, Tillinghast-Towers Perrin, 2008 Update on U.S. Tort Costs; Insurance Info. Inst.
Over the Last Three Decades, Total Tort Costs* as a % of GDP Appear Somewhat Cyclical
$0
$50
$100
$150
$200
$250
$300
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008E
2010E
Tor
t S
yste
m C
osts
1.50%
1.75%
2.00%
2.25%
2.50%
Tor
t C
osts
as
% o
f G
DP
Tort Sytem Costs Tort Costs as % of GDP
Sources: Tillinghast-Towers Perrin, 2008 Update on US Tort Cost Trends, Appendix 1A; I.I.I. calculations/estimates for 2009 and 2010
Billions
*Excludes the tobacco settlement, medical malpractice
2009-2010 Growth in Tort Costs as % of GDP is due in part to shrinking GDP
In 10 Years, the Average Jury Award Grew (Inflation-Adjusted) by 60%
$602
$725 $747
$756
$834
$827
$1,0
62
$1,0
52
$986
$1,2
24
$790
$931
$928
$913
$991
$1,2
02
$1,1
52
$1,0
46
$1,2
62
$961
$500
$700
$900
$1,100
$1,300
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
($00
0)
Nominal $ 2009 Inflation-Adjusted $
Source: Jury Verdict Research; Insurance Information Institute.
Average Jury Awardsfor Selected Cases
$602
$170
$564
$834
$219
$1,2
24
$472
$1,3
75
$590
$0
$500
$1,000
$1,500
Overall Vehicular Liability Premises Liability
($00
0)
1998 2002 2007
Source: Jury Verdict Research; Insurance Information Institute.
Average Jury Awardsfor Selected Cases (cont’d)
$2,3
38
$2,7
31
$2,8
54
$4,1
64
$4,4
26 $4,8
44
$3,7
17
$4,0
43
$5,4
87
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
Wrongful Death* Medical Malpractice Products Liability
($00
0)
1998 2002 2007
*Adult malesSources: Jury Verdict Research; Insurance Information Institute.
Shareholder Class Action Lawsuits Filed Annually in Federal Courts*
*Securities fraud suits filed in U.S. federal courts; 2009 figure is current through 07/15/09. 2001 figure excludes 312 IPO suits that were unique to that year.
Source: Stanford University School of Law (http://securities.stanford.edu ); Insurance Information Institute
Biggest jumps came from retaliation and age discrimination
complaints
Thousands of Complaints
Source: EEOC at http://www.eeoc.gov/stats/charges.html
Insurer Defense and Cost Containment Expensesas a Percent of Incurred Losses, 2005-2008*
28.3
%
11.1
%
10.0
%
6.6%
27.1
%
11.0
%
9.9%
6.6%
24.5
%
12.0
%
11.6
%
6.1%
24.4
%
11.4
%
10.7
%
5.9%
0%
8%
16%
24%
32%
Per
cen
t of
In
curr
ed L
osse
s
2005 2006 2007 2008
*Net of reinsurance, excl. state funds. ***Excludes products liability.Sources: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data, LLC; Insurance Information Institute.
Insurer Defense and Cost Containment Expensesas a Percent of Incurred Losses, 2005-2008*
70.0
%
48.0
%
42.2
%
134.
5%
56.6
%
36.7
%
78.6
%
55.1
%
41.2
%
64.5
%
58.1
%
34.3
%
0%
50%
100%
150%
Products Liability Medical Malpractice Comm. M-P**
Per
cent
of
Incu
rred
Los
ses
2005 2006 2007 2008
*Net of reinsurance. **Liability portion only.Sources: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data, LLC; Insurance Information Institute.
The Administrative Expense Portion of Tort Costs Has Stabilized Since the 1980s
32.2%
29.0%
26.0%
22.0%
23.0%
23.5%2000-2007
1990-1999
1980-1989
1970-1979
1960-1969
1950-1959
Source: Tillinghast-Towers Perrin, 2008 Update on U.S. Tort Costs
• A switch to small, fuel-efficient cars with less crash-protection could lead to more severe accidents
• If a Financial Products Safety Commission is created as part of regulatory reform, suits might be filed claiming damages resulting manufacture or sale of “defective” financial products
• A more liberal federal judiciary and executive branch could ease standards for bringing tort actions
• There are many emerging risks to be alert to
What Else Could DriveTort System Costs Up?
Landscape of Emerging Risks
Invasionof privacy
Bogus parts
Powersystembreak
Organisedcrime
CO2 trading
Off-shore &internetmarkets
Spaceweather
ElectrosmogResistance to
antibiotics
Drinkingwater quality
Loss of reputation
Businessethics
Intercontinentaldata transmission
Customised drugs
NanotechnologyCaldera
erruption
RSI
Cyberrisks
Dirtybombs
Implants
Indoorpollution
Toxic mold
Foodcontaminants
Stress atwork
EndocrinedisruptorsMedia
risks
Ageinginfrastructures
Tele-medicine
CloningDeteriorating
safetystandards
Alcohol
Contingent Business
Interruption
MegaTsunami
Pervasivecomputing
Privatisation
Botox
Spread ofdiseases
Source: Sean Russell, “Emerging Risks: Risk perception at Swiss Re,” Presentation delivered July 4, 2007, at www.casact.org
• The U.S. economy will likely struggle for perhaps a few more years
• The P-C insurance industry will likely be challenged by low exposure growth, low investment results, and expense and profitability pressures
• The costs of liability insurance and the tort system generally have recently moderated, but not in all cases