Into the Looking Glass: Into the Looking Glass: Trends & Challenges in the P/C Insurance Industry CPCU Society Annual Meeting Philadelphia, PA September 9, 2008 Robert P. Hartwig, Ph.D., CPCU, President Insurance Information Institute ♦ 110 William Street ♦ New York, NY 10038 Tel: (212) 346-5520 ♦ Fax: (212) 732-1916 ♦ [email protected]♦ www.iii.org
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Trends & Challenges in the P/C Insurance Industry · 2014. 6. 13. · Presentation Outline • Weakening Economy: Insurance Impacts & Implications • Profitability • Underwriting
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Into the Looking Glass:Into the Looking Glass: Trends & Challenges in the g
P/C Insurance Industry
CPCU Society Annual MeetingPhiladelphia, PA
September 9, 2008
Robert P. Hartwig, Ph.D., CPCU, PresidentInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038
Shifti L l Li bilit T t & P liti l E i t• Shifting Legal Liability, Tort & Political Environment
THE ECONOMICTHE ECONOMIC STORMSTORM
What a Weakening Economy & Th Th f I fl i MThe Threat of Inflation Mean
for the Insurance Industryfo the nsu ance ndust y
Real GDP Growth*
6%
Economic toll of credit crunch, labor marketStimulus check,
7% %
4.8%
4.8%
%
5%
6% crunch, labor market contraction and high energy prices is growing, though no
official recession declared
,export effects
3.7
%
2.5%
3.6%
3.1%
2.9% 3.
3%
.0% 2.
5% 2.7%3%
4%
0.8%
1.6 %
.1%
0.9% 1.
2%
0.3%
1.1%
2 .
1%
2%0. 0
-0.2%-1%
0%
Q Q Q Q Q Q Q Q Q Q Q Q
20
00
20
01
20
02
20
03
20
04
20
05
20
06
07:1
Q
07:2
Q
07:3
Q
07:4
Q
08:1
Q
08:2
Q
08:3
Q
08:4
Q
09:1
Q
09:2
Q
09:3
Q
09:4
Q
*Yellow bars are Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 8/08; Insurance Information Institute.
U.S. Unemployment Rate,(2007:Q1 to 2009:Q4F)*(2007:Q1 to 2009:Q4F)
• Establishment of an Optional Federal Charter (OFC)Would provide system for federal chartering licensing regulation andWould provide system for federal chartering, licensing, regulation and supervision of insurers, reinsurer and producers (agents & brokers)
• OFC Would Incorporate Several Regulatory ConceptsEnsure safety and soundnessyEnhance competition in national and international marketsIncrease efficiency through elimination of price controls, promote more rapid technological change, encourage product innovation, reduce regulatory costs and provide consumer protectionregulatory costs and provide consumer protection
• Establishment of Office of National Insurance (ONI)Department within Treasury to regulate insurance pursuant to OFCHeaded by Commissioner of National InsuranceyCommissioner has regulatory, supervisory, enforcement and rehabilitative powers to oversee organization, incorporation, operation, regulation of national insurers and national agencies
• UPDATE: HR 5840 Introduced in April Would Establish
Source: Department of Treasury Blueprint for a Modernized Financial Regulatory System, March 2008.
UPDATE: HR 5840 Introduced in April Would Establish Office of Insurance Information (OII)
Would create industry “voice” within Treasury
Post-Crunch: Fundamental Issues To Be Examined GloballyIssues To Be Examined Globally
• Adequacy of Risk Management, Control & Supervision at Financial Institutions Worldwideat Financial Institutions Worldwide
Failure of risk management (and regulation)Implications for ERM?Includes review of incentives
• Effectiveness and Nature of RegulationWhat sort of oversite is optimal given recent experience?Credit problems arose under US and European (Basel II) regulatory
iregimesWill new regulations be globally consistent? Can overreactions be avoided?Capital adequacy & liquidityp q y q y
• Accounting RulesProblems arose under FAS, IASAsset Valuation, including Mark-to-MarketS d Fi & C l D i i
Source: Insurance Information Institute
Structured Finance & Complex Derivatives• Ratings on Financial Instruments
New approaches to reflect type of asset, nature of risk
InflationInflation OverviewOverview
Pressures Claim Costs, Expands Probable & Possible Max LossesPossible Max Losses
Annual Inflation Rates(CPI U %) 1990 2009F(CPI-U, %), 1990-2009F
5.66In July 2008, on a year-over-year basis inflation
Source: Department of Labor (Bureau of Labor Statistics; Insurance Information Institute.
Tort Cost Growth & Medical Cost Inflation vs. Overall Inflation (CPI-U), 1961-2008*vs. Overall Inflation (CPI U), 1961 2008
14% Tort System is an Inflation AmplifierTort costs move with
inflation but at twice the rate
10%
12%
% Inflation AmplifierAvg. Ann. Change: 1961-2008*
Torts Costs: +8.4%M d C 6 0%
inflation but at twice the rate
8%
10% Med Costs: +6.0%Overall Inflation: +4.2%
4%
6%
0%
2%Tort Costs Medical Costs CPI
1961-70 1971-80 1981-90 1991-2000 2001-08E*Medical cost and CPI-U through April 2008 from BLS. Tort figure is for full-year 2008 from Tillinghast.Sources: US Bureau of Labor Statistics, Tillinghast-Towers Perrin, 2007 Update on U.S. Tort Costs; Insurance Info. Inst.
Med Costs Share of Total Costs is Increasing SteadilyCosts is Increasing Steadily
2007pMed cost inflation is one
Indemnity1997
2007pfactor to high WC severity. Med cost are now nearly 60%
of all lost time claim costsIndemnity
41%Medical
59%1987
1997
IndemnityMedical
46%
Indemnity53%
Medical47%
Indemnity54%
46%
Source: NCCI (based on states where NCCI provides ratemaking services).
PROFITABILITYP fit i 2006/07 R h dProfits in 2006/07 Reached
Their Cyclical Peak;y ;
By No Reasonable Standard CanBy No Reasonable Standard Can Profits Be Deemed Excessive
P/C Net Income After Taxes1991 2008 ($ Millions)*1991-2008 ($ Millions)
*ROE figures are GAAP; 2008 figure is annualized Q1 net income of $8.234B; 1Return on avg. surplus.Sources: A.M. Best, ISO, Insurance Information Inst. ***9.5% excl. mortgage and finl. guarantee insurers.
ROE: P/C vs. All Industries 1987–2008:Q1
20%
1987–2008:Q1P/C profitability is Mortgage & Financial
US P/C Insurers All US Industries2008 P/C insurer figure is annualized Q1 return on average surplus. Excluding mortgage and financial guarantee insurers = 9.5%. Source: ISO, Fortune; Insurance Information Institute.
Profitability Peaks & Troughs in the P/C Insurance Industry 1975 2008:Q1
*GAAP ROE for all years except 2007 which is ROAS of 12.3%. All figures include mortgage an d financial guarantee insurers. Excluding M&FG insurers 2008:Q1 ROAS is 9.5%..Source: Insurance Information Institute, ISO; Fortune
Advertising Expenditures by P/C Insurance Industry 1999-2007EInsurance Industry, 1999 2007E
$ Billions
$3 695
$4.323
$4.0
$4.5 Ad spending by P/C insurers is at a record high, signaling
i d titi $3.695
$2.975$3.5
$4.0 increased competition
$2.975
$2 111$2.5
$3.0
$1.736 $1.737 $1.803 $1.708
$2.111$1.882
$1 5
$2.0
$1.599 00 01 02 03 04 05 06 07E
Source: Insurance Information Institute from consolidated P/C Annual Statement data.
FINANCIAL STRENGTH &
RATINGSIndustry Has Weathered y
the Storms Well, But Cycle May Takes Its TollMay Takes Its Toll
P/C Insurer Impairment Frequency vs Combined Ratio 1969 2007Evs. Combined Ratio, 1969-2007E
Combined Ratio after DivP/C I i t F
Impairment rates are highly
115
120
1 61.82
P/C Impairment Frequencyg ycorrelated
underwriting performance and could reached a
record low in 2007
110
d R
atio
1.21.41.6
nt R
ate
record low in 2007
100
105
Com
bine
d
0.60.81
Impa
irmen
90
95
00.20.4
2007 impairment rate was a record low 0.12%, one-seventh the 0.8% average since 1969; Previous
Source: Insurance Information Institute; based on data from Conning and A.M. Best.
INVESTMENTINVESTMENT OVERVIEWOVERVIEW
More Pain, Littl G iLittle Gain
Property/Casualty Insurance Industry Investment Gain1Industry Investment Gain
$ Billions$63 6
$42 8$47.2
$52.3
$44.4 $45.3$48.9
$59.4$55.7
$63.6$56.9
$51.9
$57.9
$50
$60
$35.4$42.8 $44.4
$36.0
$
$30
$40
Investment gains are off in$12.2
$10
$20Investment gains are off in
2008 due to lower yields and poor equity market conditions.
$0
94 95 96 97 98 99 00 01 02 03 04 05* 06 07
08Q1
p q y
08
1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain.*2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.
CATASTROPHICCATASTROPHICLOSSLOSS
What Will 2008 Bring?What Will 2008 Bring?
U.S. Insured Catastrophe Losses*
0
$ Billions2008 CAT losses already exceed
$100 Billion CAT year is
$100
.0
9
$100
$120 2008 CAT losses already exceed all of 2006/2007. 2005 was by far the worst year ever for insured
*Excludes $4B $6b offshore energy losses from Hurricanes Katrina & Rita
08:Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.
**Based on preliminary PCS data through June 30. 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. Non-prop/BI losses = $12.2B.Source: Property Claims Service/ISO; Insurance Information Institute
REINSURANCE MARKETS
Reinsurance Prices are F lli i N C t lFalling in Non-Coastal Zones, Casualty LinesZones, Casualty Lines
Share of Losses Paid by Reinsurers, by Disaster*, y
60%70% Reinsurance is playing
an increasingly 60%
45%50%
60% an increasingly important role in the financing of mega-
*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for 2005.Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.
Reinsurer Market Share Comparison: 1990 vs 20061990 vs. 2006
1990 2006
Off hU.S.
Reinsurer64.7%
Offshore Reinsurer
35.3% U.S. Reinsurer
Offshore Reinsurer
53 1% 46.9%53.1%
U.S. Reinsurer market
Sources: Reinsurance Association of America; Insurance Information Institute.
Most states (25) get a “B”, but 7 got A’s, 10 got C’s (including DC) 5 earned D’s and 4 got F’s
ME
NH
ND
MN
WA
AL
VTMT
AK
C s (including DC), 5 earned D s and 4 got F s
NH
MA
CT
PA
NE
MN
MI
IL
IA
ID
OR
NJRI
MDDE
NY
DC
SD WI
INOH
WY
= A= B= C= D
WVVA
NC
OK
IL
AZ
MD
SC
TN
ARNM
KYMOKS
IN
CA
NVUT
CO
D= F
Source: James Madison Institute, February 2008.
LATX
HI GAAL
FL
MS
NM
*Criteria considered were auto/home residual mkts., auto/home mkt. concentration, loss ratio stability, reg. env.,form regulation, credit scores, territorial restrictions Source: James Madison Institute, Feb. 2008
• Does the P/C insurance industry performDoes the P/C insurance industry perform better (as measured by ROE) under Republican or Democratic administrations?epub ca o e oc at c ad st at o s?
• Under which President did the industry realize• Under which President did the industry realize its highest ROE (average over 4 years)?
• Under which President did the industry realize its lowest ROE (average over 4 years)?
ELECTION IMPACT
P/C Insurance Industry ROE byPresidential Administration,1950-2008*
15 10%16.43%Carter
Reagan II
ELECTION IMPACT
15.10%10.13%
8.93%8.65%
Reagan IIG.W. Bush II
NixonClinton I
OVERALL RECORD: 1950 2008*8.35%
7.98%7.68%
G.H.W. BushClinton IIReagan I
1950-2008*Republicans 8.05%
6.98%6.97%
5.43%5 03%
Nixon/FordTruman
Eisenhower IEisenhower II
Democrats 7.14%
Party of President has marginal bearing on5.03%
4.83%4.43%
3.55%
Eisenhower IIG.W. Bush I
JohnsonKennedy/Johnson
marginal bearing on profitability of P/C insurance industry
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
y
*ROE for 2008 based on Q1 data. Truman administration ROE of 6.97% based on 3 years only, 1950-52.Source: Insurance Information Institute
Insurance Information Institute On LineInstitute On-Line
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