Capital Adequacy of the PropertyCasualty Insurance Industry : Post 911

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Capital Adequacy of the Property/Casualty
Insurance Industry Post 9/11

• Date 7 October 2002

Robert Wolf, FCAS, MAAA Principal, Mercer Risk,
Finance Insurance Consulting James W,
MacGinnitie, FCAS, MAAA Actuary Consultant
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Presentation Outline

• Researchers State of the World Before 9/11
• Researchers State of the World - Post 9/11
• Suggested Implications
• Socratic Dialogue - QA

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From a Presentation at CAS November 200 Meeting
Worshipping at the Alter of Shareholder Value
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From a Presentation at CAS November 200 Meeting
Worshipping at the Alter of Shareholder Value
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E-Risks Research
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Bests Aggregates and Averages

• Industry Leverage Ratios have been dropping to
  lowest point in 30 years
• Has been increasing slightly

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Bests Aggregates and Averages

• Only three times in the last thirty years did the
  PC industry have an operating ratio gt 100

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Connings 2001 Study
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Connings 2001 Study
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Connings 2001 Study
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Connings 2001 Study
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Morgan Stanley Study

• Deficiency (when including asbestos et el..)
• 32 Carried Reserves
• 41 surplus
• comparable to deficiency preceding the last hard
  market
• 1984 25 deficiency of carried reserves
• 50 surplus
• ..but more concentrated now

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• Primarily Stock Companies

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• 9/11 Obscures fundamentals
• The well is dry for personal lines

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Morgan Stanley Recent 2002 Analysis

• Reserves _at_12/31/01 Significantly Deficient
• 120.0 Billion shortfall
• 64.0 Billion excl asbestos
• 55.0 Billion asbestos
• 41 of reported surplus
• 80 of commercial lines premiums
• Primarily Stock Companies
• Capital down 6.7B as of 9/30/02
• Market has hardened
• Combined Ratios in mid 90s for large carriers

• Forecasts
• Rate increases to slow in 2003
• But hard market could last longer due to
  strengthening the balance sheet
• Fundamentals Attractive

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(No Transcript)
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Predictions 2002-2003 - ???????

• Higher Loss ratios than warranted
• Reserve charges
• income smoothing
• Lets book into the middle/high end of the
  actuarys range
• Will Hard Market stay Hard?
• Yes
• Longest soft market in history. Need a longer
  hard market to offset. 9/11 lingers
• Capital is more consolidated today. Newer
  management styles
• Mutuals well is dry. Less influence to affect
  price
• soft cycle global in scope
• Low investment returns

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..But

• No
• Alternative markets more defined and refined
  today rather than the mid 80s.

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Caveats to Industry Loss Reserve Studies

• Finite Risk Treaties
• Combo of unwinding a discount as well as actual
  reserve shortages
• Reinsurance Costs
• causing higher retentions
• higher reserve variability

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Adjusted Industry Leverage Ratios Reflecting
Projected Reserve Deficiencies
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• Was the Industry Overcapitalized?
• Maybe
• Is the Industry Overcapitalized Now?
• Probably Not
• Can the industry Sustain Another 9/11?
• Probably Not without capital infusion

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• What do you think?