Title: Catastrophes, the Credit Crunch, and the Insurance Cycle Impacts
1Catastrophes,the Credit Crunch,and the
Insurance Cycle Impacts Implicationsfor the
P/C Insurance Industry
Casualty Actuaries of the Mid-Atlantic
Region Sheraton University City
Hotel Philadelphia, PA June 5, 2008
Steven N. Weisbart, Ph.D., CLU, Vice President
Chief Economist Insurance Information Institute
? 110 William Street ? New York, NY 10038 Tel
(212) 346-5540 ? Cell (917) 494-5945 ?
stevenw_at_iii.org ? www.iii.org
2The Weakening Economyandthe Credit Crunch
3Real Annual GDP Growth, 2000-2009F
Blue bars are actual Yellow bars are forecasts
March 2001-November 2001 recession
Recession?
Sources US Department of Commerce, Blue Economic
Indicators 4/08 Insurance Information Institute.
4Real Quarterly GDP Growth, 2005-2009F
Red bars are actual, seasonally adjusted Yellow
bars are forecasts
3 Major hurricanes
Recession?
Sources US Department of Commerce Blue Economic
Indicators 4/08 Insurance Information Institute.
5Case-Schiller Home Price Index Monthly 20 City
Composite (Jan 2000100)
Peak in July 2006 at 206.52. Home prices more
than doubled between January 2000 and July 2006
Home prices are now about where they were in Oct
2004
March 2008 index value was 172.16 home prices
were 16.6 below their July 2006 peak
Source http//www2.standardandpoors.com/spf/pdf/i
ndex/CSHomePrice_History_052703.xls
6New Private Housing Starts,1990-2014F (Millions
of Units)
I.I.I. estimate 100,000 housing starts 87.5
million in gross premium.
2008 vs. 2005 net premium loss is 954 million
(I.I.I. est).
Source US Department of Commerce Blue Chip
Economic Indicators (10/07), except 2008/09
figures from 4/08 edition of BCEI Insurance
Info. Institute
7Housing Starts, Annual Data
The slump is in single-family housing. Starts of
multi-family buildings have held at 310,000 to
350,000 units each year.
Thousands of Units
Source US Census Bureau
8Quarterly Housing Starts
The slump is in single-family housing. Starts of
multi-family buildings have held at 70,000 to
90,000 units each quarter.
Thousands of Units
Source US Census Bureau
9Homeowner Vacancy Rates,Quarterly, 1990-2008Q1
July 1990-March 1991 recession
March 2001-November 2001 recession
Vacancy rates began rising in 2005Q3
Source U.S. Census Bureau, http//www.census.gov
/hhes/www/housing/hvs/qtr108/q108tab1.html
10Rental Vacancy Rates,Quarterly, 1990-2008Q1
March 2001-November 2001 recession
July 1990-March 1991 recession
Vacancy rates began falling in 2004Q2
Source U.S. Census Bureau, http//www.census.gov
/hhes/www/housing/hvs/qtr108/q108tab1.html
11Auto/Light Truck Sales,1999-2014F (Millions of
Units)
Weakening economy, credit crunch, high gas prices
hurt auto sales
2008 vs. 2005 -8.3
Falling auto sales will have a smaller effect on
auto insurance exposure growth than problems in
the housing market will on home insurers
Source US Department of Commerce Blue Chip
Economic Indicators (10/07), except 2008/09
figures from 3/08 edition of BCEI Insurance
Info. Institute
12Do Increases in Gas Prices AffectAuto Collision
Claim Frequency?
Paid Claim Frequency (No. of paid
claims)/(Earned Car Years) x 100
Sources Energy Information Administration
(http//tonto.eia.doe.gov/dnav/pet/hist/mg_tt_usA.
htm) ISO Fast Track Monitoring System, Private
Passenger Automobile Fast Track Data Fourth
Quarter 2007, published March 31, 2008 and
earlier reports.
13Do Changes in Miles Driven AffectAuto Collision
Claim Frequency?
Paid Claim Frequency (No. of paid
claims)/(Earned Car Years) x 100
Sources Federal Highway Administration
(http//www.fhwa.dot.gov/ohim/tvtw/08martvt/08mart
vt.pdf ISO Fast Track Monitoring System, Private
Passenger Automobile Fast Track Data Fourth
Quarter 2007, published March 31, 2008 and
earlier reports.
14Miles Driven vs. Gas Pricesin Recent Months
(Moving 12-Month Totals)
Gas Price/ Gallon
Miles Driven
2008
2007
Sources Energy Information Administration
(http//tonto.eia.doe.gov/dnav/pet/hist/mg_tt_usA.
htm) Federal Highway Administration
(http//www.fhwa.dot.gov/ohim/tvtw/08martvt/08mart
vt.pdf .
15Miles Driven vs. Gas Pricesin Recent Months
Gas Price/ Gallon
Miles Driven
2008
2007
Sources Energy Information Administration
(http//tonto.eia.doe.gov/dnav/pet/hist/mg_tt_usA.
htm) Federal Highway Administration
(http//www.fhwa.dot.gov/ohim/tvtw/08martvt/08mart
vt.pdf .
16Total Industrial Production Affects Insured
Exposures both Directly and Indirectly
Annualized Change from Prior Quarter
Blue bars are actual Red bars are forecast
Sources US Bureau of Labor Statistics Blue Chip
Economic Indicators (4/08) Insurance Info. Inst.
17Inflation Rate (CPI-U), Changefrom Prior
Quarter, Annualized
Inflation is up again. Medical cost inflation,
important in WC, auto liability and other
casualty covers is running far ahead of overall
inflation.
Source US Bureau of Labor Statistics Blue Chip
Economic Indicators, Apr. 10, 2008 Ins. Info.
Institute.
18US Unemployment Rate,(2007Q1 to 2009Q4F)
Higher unemployment rate reduces workers comp
exposure could signal a temporary claim
frequency surge
Blue bars are actual Yellow bars are forecasts
Sources US Bureau of Labor Statistics Blue Chip
Economic Indicators (4/08) Insurance Info. Inst.
19Implications forthe P/C Insurance Industry
20Real GDP Growth vs. Real P/C Premium Growth
Modest Association
P/C insurance industrys growth is influenced
modestly by growth in the overall economy
Sources A.M. Best, US Bureau of Economic
Analysis, Blue Chip Economic Indicators, 4/08
I.I.I.
21Wage Salary Disbursements (Payroll Base) vs.
Workers Comp Net Written Premiums
Wage Salary Disbursement (Private Employment)
vs. WC NWP
Billions
Billions
7/90-3/91
3/01-11/01
Weakening wage and salary growth is expected to
cause a deceleration in workers comp exposure
growth
Shaded areas indicate recessions
As of 7/1/07 (latest available). Source US
Bureau of Economic Analysis Federal Reserve Bank
of St. Louis at http//research.stlouisfed.org/fre
d2/series/WASCUR I.I.I. Fact Books
22Whats Being Done to Fix the Economy?
Fix Effect on Insurers
Fed Rate Cuts Might reduce yields on new bond investments, but Might also raise asset value of existing bonds (65-80 of portfolio) In the longer run, might contribute to inflation
168 Billion Stimulus Package Hope is that plan boosts overall economic activity and employment (by 500,000 jobs) and therefore might support p/c personal and commercial exposures But plan contributes to already-large federal budget deficits Washington might hike taxes
Bear Stearns Bailout No direct effect, but tighter regulation of banks and hedge funds seems likely. Will it be the stimulus for a financial regulatory structure that includes insurers, too?
23Summary of Economic Risks and Implications for
(Re) Insurers
Economic Concern Risks to Insurers
Subprime Meltdown/ Credit Crunch Some insurers have some asset risk DO/EO exposure for some insurers Client asset management liability for some Bond insurer problems Muni credit quality
Housing Slump Reduced exposure growth Deteriorating loss performance on neglected, abandoned and foreclosed properties
Lower Interest Rates Lower investment income
Stock Market Slump Decreased capital gains (often relied upon more heavily as a source of earnings as underwriting results deteriorate)
General Economic Slowdown/Recession Reduced commercial lines exposure growth Surety slump Increased workers comp frequency
24Post-CrunchFour Fundamental IssuesTo Be
Examined Globally
25Post-Crunch Fundamental Issues To Be Examined
Globally
- Effectiveness and Nature of Regulation
- What sort of oversight is optimal given recent
experience? - Credit problems arose under both US and European
(Basel II) regulatory regimes - Will new regulations be globally consistent?
- Can overreactions be avoided?
- Capital adequacy liquidity
- Ratings on Financial Instruments
- New approaches to reflect type of asset, nature
of risk
Source Insurance Information Institute
262 More Fundamental IssuesTo Be Examined Globally
- Adequacy of Risk Management at Financial
Institutions Worldwide - Colossal failure of risk management (and
regulation) - Implications for ERM?
- Includes review of incentives
- Accounting Rules
- Problems arose under FAS, IAS
- Asset Valuation, including Mark-to-Market
- Structured Finance Complex Derivatives
Source Insurance Information Institute
27Legal Aspectsof the Credit CrunchTurbulent
MarketsGive Rise to Lawsuits
28Shareholder Class Action Lawsuits
Count is current as of May 30.
Suits filed/year
Defendants include banks, investment banks,
builders, lenders, bond and mortgage insurers
Securities fraud suits filed in U.S. federal
courts. Not included above are 313 suits (all but
1 filed in 2001) relating to IPO
allocations. Source Stanford University School
of Law (http//securities.stanford.edu
29Origin of DO Claims for Public Companies, 2006
40 of DO suits originate with shareholders
Source Tillinghast Towers-Perrin, 2006 Directors
and Officers Liability Survey.
30Catastrophic Losses
31On Average, the U.S. has a 35B (Direct
EconomicLosses, 2005 ) Catastrophic Year Every
8 Years
Chart shows effects of hurricanes but not other
causes of catastrophic levels of property loss.
27 Years
Sources Source Roger Pielke et al, Normalized
Hurricane Damage in the United States
1900-2005, Natural Hazards Review, Vol. 9, No. 1
(February 1, 2008), pp. 29-41 Bonnie Cavanaugh,
A Century of Aftershocks, Bests Review, April
2006, pp. 24-31.
32Largest Insured Losses (Adjusted to 2005 Exposure
Levels) from 10 Hurricanes
With continued coastal development, 35B storms
will be more common.
32
Source AIR Worldwide ISO/PCS estimate as
of June 8, 2006
33Insured Losses (adjusted to 2005 exposure levels)
from 10 Most Damaging US Earthquakes
3 of the Top 10 are not West Coast events
With development along major fault lines, the
threat of 30B quakes looms large
Source AIR Worldwide
34Number of Tornadoes, 1985 2007
There are usually more than 1,000 confirmed
tornadoes each year in the US. They accounted
for about 25 of catastrophe losses since 1985.
Sources US Dept. of Commerce, Storm Prediction
Center, National Weather Service,at
http//www.spc.noaa.gov/climo/torn/monthlytornstat
s.pdf
35Top Five Catastrophic Wildland Fires In
California, 1970-2007
Insured Losses (Billions 2006 )
Estimated insured losses. Adjusted to 2006
dollars by the Insurance Information Institute.
2007 fire losses are stated in 2007
dollars.Source ISO's Property Claim Services
Unit Insurance Information Institute.
36Global Insured Catastrophe Lossesby Region,
Excluding U.S.,2001-2007
Sources Insurance Information Institute
compiled from Swiss Re sigma issues.
37Dont Overlook the Catastrophes that Didnt
Happen (or Havent Yet)
- In 2007 two Category 5 storms struck the Gulf of
Mexico - Luckily for the U.S., neither made landfall here
- Unluckily for Mexico, both made landfall there.
- Stephen Flynns The Edge of Disaster
- Nassim Talebs Fooled by Randomness and The Black
Swan
38U.S. Insured Catastrophe Losses
2004 and 2005 remind us that its possible to
suffer damage from more than one hurricane and/or
other catastrophe in a year. 2007 (in Mexico)
reminds us that its possible to have two CAT-5
storms in one year.
Billions
Is a 100 Billion CAT year coming soon?
Excludes 4B-6b offshore energy losses from
Hurricanes Katrina Rita. 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
39Inflation-Adjusted U.S. Insured Catastrophe
Losses By Cause of Loss, 1987-2006¹
Insured disaster losses totaled 297.3 billion
from 1987-2006 (in 2006 dollars). Wildfires
accounted for approximately 6.6 billion of
these2.2 of the total.
1 Catastrophes are all events causing direct
insured losses to property of 25 million or more
in 2006 dollars. Catastrophe threshold changed
from 5 million to 25 million beginning in 1997.
Adjusted for inflation by the III. 2 Excludes
snow. 3 Includes hurricanes and tropical storms.
4 Includes other geologic events such as volcanic
eruptions and other earth movement. 5 Does not
include flood damage covered by the federally
administered National Flood Insurance Program. 6
Includes wildland fires.
Source Insurance Services Office (ISO)..
40The 2008 Hurricane SeasonIs a Bad Year in the
Forecast?
41Number of Major (Category 3, 4, 5) Hurricanes
Striking the US by Decade
Mid 1920s mid-1960s AMO Warm Phase
Mid-1990s 2030s? AMO Warm Phase
Already as many major storms in 2000-2007 as in
all of the 1990s
Figure for 2000s is extrapolated based on data
for 2000-2007 (6 major storms Charley, Ivan,
Jeanne (2004) Katrina, Rita, Wilma
(2005)). Source Tillinghast from National
Hurricane Center http//www.nhc.noaa.gov/pastint.
shtm.
42Atlantic Sea Surface Temperatures, 1948-2007
Source AIR web site, http//www.air-worldwide.co
m/_public/html/air_currentsitem.asp?ID1364
43Outlook for 2008 Hurricane Season 60 Worse Than
Average
Average 2005 2008F
Named Storms 9.6 28 15
Named Storm Days 49.1 115.5 80
Hurricanes 5.9 14 8
Hurricane Days 24.5 47.5 40
Intense Hurricanes 2.3 7 4
Intense Hurricane Days 5 7 9
Accumulated Cyclone Energy 96.2 248 150
Net Tropical Cyclone Activity 100 275 160
Average over the period 1950-2000. Source
Philip Klotzbach and Dr. William Gray, Colorado
State University, April 9, 2008.
44Major Hurricanes Might FormBut Not Make Landfall
- From Hurricane Irene in 1999 to Hurricane Lili in
2002, 21 consecutive hurricanes developed in the
Atlantic basin without a single U.S. landfall. - This is how nature sometimes works.
- From 1966 to 2003, of 79 major (3-4-5)
hurricanes, 19 (24) made landfall. - During 2004-5, 7 of 13 (54) major hurricanes
made landfall - During 2006-7, 0 of 4 (0) major hurricanes made
landfall
Source Philip Klotzbach and William Gray,
Extended Range Forecast of Atlantic Seasonal
Hurricane Activity and U.S. Landfall Strike
Probability for 2008, Department of Atmospheric
Science, Colorado State University, April 9,
2008, p. 27.
45Hurricane Landfall Probabilities in the2008
Season Considerably Above Average
Cat 1-2 Cat 3-4-5
Entire US East Gulf Coast 84 (68) 69 (52)
US East Coast Including Florida Peninsula 60 (44) 45 (31)
Gulf Coast from Florida Panhandle to Brownsville 59 (42) 44 (30)
Average over 1900-2000. Source Philip Klotzbach
and Dr. William Gray, Colorado State University,
April 9, 2008.
46Catastrophe Litigation
47P/C Insurers Have Won Virtually Every Major
Post-Katrina Case
- Most cases centered on validity of flood
exclusion and various wind vs. water theories - The victories in court came at a high public
relations cost - Post-Katrina litigation was dragged out over a
2-year period accounting for the vast majority
of negative press in the first 16 months after
the storm - While the industry was successful at explaining
the rationale for pursuing most cases, it
struggled with the classic David vs. Goliath
story - The hostile stories feed Insurance Hoax genre
of stories - View that insurers systematically deny, delay and
lowball - Bad Faith litigation might be wave of future
(e.g., LA AG suit) - FL significantly added to negative press in 2007
- Exacerbated by hundreds of thousands of
nonrenewals
48Flood InsurancePeople Buy It After a Floodbut
Just for a Year or Two
49Number of New NFIP Flood Policies in the Gulf
States Since Katrina
The number of flood insurance policies sold in
the Gulf states in the 2 years following Katrina
increased by 618,335 or 21.6
Change from July 2005 through August
2007. Sources NFIP Insurance Information
Institute.
50Percent Growth of NFIP Flood Policies in Gulf
States Since Katrina
The number of flood insurance policies sold in
the Gulf states in the 2 years following Katrina
increased by 21.6
Change from July 2005 through August
2007. Sources NFIP Insurance Information
Institute.
51Percentage of NFIP Flood Policies Issued Since
Katrina That Are Not Renewed
Flood policy nonrenewal rates in Gulf states are
surprisingly high
Policies issued since July 2005 as of August
2007. US figure is nonrenewal rate for all
policies in force, average over 12 month period
ending August 2007. Sources NFIP Insurance
Information Institute.
52What Could Happenin theMid-Atlantic States?
53Nightmare Scenario Insured Property Losses for
NJ/NY CAT 3/4 Storm
Insured Losses 110B Economic Losses 200B
Distribution of Insured Property Losses, by
State, ( Billions)
Total Insured Property Losses 110B, nearly 3
times that of Hurricane Katrina
Source AIR Worldwide
54How Much DamageCan a Mid-Atlantic Hurricane Do?
55Once Upon a Time
- There is a detailed record of major destruction
by landfalling hurricanes in the NJ-NY-NE
region in 1635, 1815, 1821, and 1938. - A hurricane hitting the North does the same
damage as a hit by the next higher Safir-Simpson
category hurricane in the South. - The nature of northern hurricanes, and the
changes they undergo as they move northward, also
amplify damage. - Their radius of maximum winds increase 2-3 times
over southern hurricanes. This changes increases
storm surge damage along the coasts as well as
the areal extent of wind damage inland.
Source Nicholas Coch, The Unique Damage
Potential of Northern Hurricanes, at
http//gsa.confex.com/gsa/2006AM/finalprogram/abst
ract_108209.htm
56 The Flood Risk inthe Mid-Atlantic StatesFew
who live along theNew Jersey CoastHave Flood
Insurance
57Flood Insurance Penetration RatesTop 25
Counties/Parishes in the US
FL 11 countiesLA 6 parishes TX 2 counties GA
2 counties NC 2 counties SC 2 counties MS 0
counties AL 0 counties
As of 12/31/05. Source New Orleans
Times-Picayune, 3/19/06, from NFIP and US Census
Bureau data.
58Flood Insurance Penetration Rates
Counties/Parishes Ranked 26-50
FL 10 counties LA 3 parishes TX 2 counties SC
2 counties NJ 2 counties AL 1 county MS 0
counties CT 0 counties
Where is Cape May county?
As of 12/31/05. Source New Orleans
Times-Picayune, 3/19/06, from NFIP and US Census
Bureau data.
59Flood Insurance Penetration RatesCounties/Parish
es Ranked 51-75
Where are Cape May and Middlesex counties?
As of 12/31/05. Source New Orleans
Times-Picayune, 3/19/06, from NFIP and US Census
Bureau data.
60Total NFIP Claim Paymentsby State (Top 10)
1/1/1978 3/31/2008
Until 2005 Texas ranked 1st in terms of total
flood claims payments.
Source http//bsa.nfipstat.com/reports/1040.htm,
visited 5/30/2008
61Total Number of NFIP Claimsby State (Top 10)
1/1/1978 3/31/2008
Source http//bsa.nfipstat.com/reports/1040.htm,
visited 5/30/2008
62Who Should Payfor the Risk ofHurricane/Flood
Damage?
6363 of Non-coastal Policyowners Say
PremiumSubsidies for Coastal Property Owners are
Unfair
63
63
50
Coastal States
Source Insurance Research Council
64Most Non-coastal Policyowners Say
TaxpayerSubsidies for Coastal Property Owners
are Unfair
59
61
51
Coastal States
Source Insurance Research Council
65(No Transcript)
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67The InsuranceCycleWill the CycleBe Unbroken?
68ProfitabilityDid Profits Reacha Cyclical Peak
in 2006/07?By No Reasonable Standard Can
Profits Be Deemed Excessive
69Profitability Peaks Troughs in the P/C
Insurance Industry,1975 2008F
197719.0
198717.3
200612.2
10 Years
199711.6
9 Years
10 Years
1975 2.4
1984 1.8
1992 4.5
2001 -1.2
GAAP ROE for all years except 2007 which is
actual 9-month ROAS of 13.1. 2008 P/C insurer
ROE is I.I.I. estimate. Source Insurance
Information Institute Fortune
70ROE U.S. P/C Insurance Industry vs. Fortune 500
198717.3
200714.0
199711.6
Sept. 11
Hugo
Katrina, Rita, Wilma
Northridge
4 Hurricanes
Andrew
Sources Insurance Information Institute Fortune
71Top Industries by ROE P/C Insurers
Underperformed Again in 2007
ROE of publicly-held P/C insurers in 2007 ranked
31st out of 50 industry groups despite near-peak
profitability
but the P/C industry outperformed most other
financial industries in 2007
Source Fortune magazine
72Personal/Commercial Lines Reinsurance ROEs,
2006-2008F
ROEs are declining as underwriting results
deteriorate
Sources A.M. Best Review Preview (historical
and forecast).
73Can AnythingChange the Profit Cycle?4 Factors
That Could Affectthe Length and Depth of the
Cycle
74Factors that Could Affect theLength and Depth of
the Cycle
- Capacity Rapid surplus growth in recent years
has left the industry with between 85 billion
and 100 billion in excess capital, according to
analysts - All else equal, rising capital leads to greater
price competition and a liberalization of terms
and conditions - Investment Gains 2007 was the 5th consecutive up
year on Wall Street. With declines in stock
prices and falling interest rates, portfolio
yields are certain to fall - Smaller realized capital gains
- A sustained equity market decline (and
potentially a drop in bond values) could reduce
policyholder surplus
75Factors that Could Affect theLength and Depth of
the Cycle
- Reserves Reserves are in the best shape (in
terms of adequacy) in decades, which could extend
the depth and length of the cycle - Many companies have been releasing redundant
reserves, which allows them to boost net income
even as underwriting results deteriorate - But reserve releases will diminish in 2008 Even
more so in 2009 - Information Systems Management has more and
better tools that allow faster adjustments to
price, underwriting and changing market
conditions than it had during previous soft
markets
Source Insurance Information Institute.
76ROE vs. Equity Cost of CapitalUS P/C
Insurance1991-2007E
The p/c insurance industry achieved its cost of
capital in 2005/6 for the first time in many years
1.7 pts
3.1 pts
-9.0 pts
-0.1 pts
0.2 pts
-13.2 pts
US P/C insurers missed their cost of capital by
an average 6.7 points from 1991 to 2002, but on
target or better 2003-07
The cost of capital is the rate of return
insurers need to attract and retain capital to
the business
Source The Geneva Association, Ins. Information
Inst.
77UnderwritingTrends
78U.S. P/C Insurance Industry Combined Ratio,
1970-2007
Combined Ratios 1970s 100.3 1980s 109.2 1990s
107.8 2000s 102.6
2000-2007
Sources A.M. Best ISO, III
79P/C Insurance Combined Ratio, 2001-2007
2007 deterioration due mainly to falling rates,
normal CAT activity
As recently as 2001, insurers paid out nearly
1.16 for every 1 in earned premiums
The best combined ratio since 1949
2005 figure benefited from heavy use of
reinsurance which lowered net losses
Sources A.M. Best ISO, III.
80Impact of Reserve Changes on Combined Ratio
Reserve adequacy has improved substantially
Source A.M. Best, Lehman Brothers estimates for
years 2007-2009
81Cumulative Prior Year Reserve Development by Line
(As of 12/31/06)
Strengthening
Reserve redundancies in most lines have resulted
in releases in recent years
Release
Sources Lehman Brothers A.M. Bests Aggregates
Averages Schedule P, Part 2.
82Premium Growth At a Virtual Standstillin 2007/08
83Three Hard Markets in the Last 40 Years
1975-78
1984-87
2001-04
Post-Katrina period resembles 1993-97
(post-Andrew)
2007 -0.6 premium growth is the first decline
since 1943
Note Shaded areas denote hard market
periods. Source A.M. Best, Insurance
Information Institute
84Growth in Net Written Premium, 2000-2007E
P/C insurers are experiencing their slowest
growth rates since 1943but underwriting results
are expected to remain relatively healthy
2007 figure based on actual 9-month
results. Source A.M. Best Forecasts from the
Insurance Information Institute.
85Personal/Commercial Lines Reinsurance NPW
Growth, 2006-2008F
Net written premium growth is expected to be
slower for commercial insurers and reinsurers
Sources A.M. Best Review Preview (historical
and forecast).
86 Rates Under Pressurein 2007/08,Especially
Commercial Lines
87Lower Underlying Frequency, Modest Severity,
Check Auto Insurance Costs
Across the U.S., auto insurance expenditures are
expected to fall 0.5 in 2007, the first drop
since 1999
88Across the U.S., Home Insurance Costs Rose 4 in
2007
Homeowners in non-CAT zones have seen smaller
increases than those in CAT zones
89Average Quarterly Commercial Rate Change, All
Lines, (1Q2004 1Q2008)
Commercial account pricing is now on par with
prices in late 2001, early 2002
-0.1
KRW Effect
Source Council of Insurance Agents Brokers
Insurance Information Institute
90Rising Epenses
91Expense Ratios Will Rise as Premium Growth Slows
Ratio of expenses incurred to net premiums
written. Source A.M. Best Insurance Information
Institute
92Advertising Expenditures by P/C Insurance
Industry, 1999-2007E
Ad spending by P/C insurers is at a record high,
signaling increased competition
Source Insurance Information Institute from
consolidated P/C Annual Statement data.
93PP Auto Insurance 2005 Market Concentration, by
HHI, by State
Green bars Unconcentrated marketsGray bars
Moderately concentrated markets
Concentrated markets
Sources J. Robert Hunter, State Automobile
Insurance Regulation, Consumer Federation of
America, April 2008, pp. 19-20 I.I.I.
calculations.
94The P/C IndustrysFinancial Strengthand
Capacity
95U.S. P-C Insurers Policyholder Surplus 1975-2007
Surplus exceeded a half trillion dollars for the
first time during the 2nd quarter of 2007.
Billions
At year end 2007, P/C insurers held 1.17 in
surplus for every 1 of NWP.
Surplus is a measure of underwriting capacity.
It is analogous to Owners Equity or Net Worth
in non-insurance organizations
Sources A.M. Best, ISO, Insurance Information
Institute.
96In General, the Industry Has Grown Its
Capacityto Accept Risk (but that capacity can
also shrink)
Capacity Surplus dollars per NWP dollar
Premiums measure risk accepted surplus is funds
beyond reserves to pay unexpected losses. The
higher the ratio of surplus to premiums, the
greater the industrys capacity to handle the
risk it has accepted.
Sources NAIC Annual Statement data, via
HighlineData Ins. Info. Inst.
97Annual Catastrophe Bond Transactions Volume,
1997-2007
Catastrophe bond issuance has soared in the wake
of Hurricanes Katrina and the hurricane seasons
of 2004/2005, despite two quiet CAT years
Source MMC Securities Guy Carpenter, A.M. Best
Insurance Information Institute.
98Lloyds Insurance Market Capacity, 1998-2008 (
billions)
The capacity of the Lloyds market rose
significantly during the period 2001 to 2004. In
2005, capacity reduced but increased again in
2006 and 2007 due to the impact of the U.S.
hurricane season. Capacity reduced to 15.95
billion (32 billion) in 2008.
billions
Beginning of the year. Source Lloyds Members
Services Unit.
99P/C Insurer Impairment Frequency vs. Combined
Ratio, 1969-2007E
Impairment rates are highly correlated with
underwriting performance and could reach
near-record low in 2007
2006 impairment rate was 0.43, or 1-in-233
companies, half the 0.86 average since 1969
2007 will be lower Record is 0.24 in 1972
Source A.M. Best Insurance Information
Institute
100Reasons for US P/C Insurer Impairments, 1969-2005
2003-2005
1969-2005
Deficient reserves, CAT losses are more important
factors in recent years
Includes overstatement of assets. Source
A.M. Best P/C Impairments Hit Near-Term Lows
Despite Surging Hurricane Activity, Special
Report, Nov. 2005
101Investment Overview Not Much to Look Forward To
102P/C Investment Income as a of Invested Assets
Follows 10-Year US T-Note
Investment yield historically tracks 10-year
Treasury note quite closely
As of May 30, 2008. Sources Board of
Governors, Federal Reserve System A.M.Best
Insurance Information Institute.
103Property/Casualty Industry Investment Income,
1994-2007
Primarily interest and stock dividends. 2005
figure includes special one-time dividend of
3.2B. Sources ISO Insurance Information
Institute.
104US P/C Industry Net Realized Capital Gains,
1990-2007
Realized capital gains exceeded 9 billion in
2004/5 but fell sharply in 2006 despite a strong
stock market. Nearly 9 billion again in 2007.
Millions
Sources A.M. Best, ISO, Insurance Information
Institute.
105BonusPresidential Politics and P/C Insurance
Industry Profitability
106Political Quiz
- Does the P/C insurance industry perform better
(as measured by ROE) under Republican or
Democratic administrations? - Under which President did the P/C insurance
industry realize its highest ROE (average over 4
years)? - Under which President did the P/C insurance
industry realize its lowest ROE (average over 4
years)?
107P/C Insurance Industry ROE byPresidential
Administration,1950-2008
OVERALL RECORD 1950-2008 Republicans 8.92 Democ
rats 8.00
Party of President has marginal bearing on
profitability of P/C insurance industry
ROE for 2007/8 estimated by III. Truman
administration ROE of 6.97 based on 3 years
only, 1950-52. Source Insurance Information
Institute
108P/C Insurance Industry ROE by Presidential Party
Affiliation,19502008E
BLUE Democratic President RED
Republican President
Truman
Nixon/Ford
Kennedy/ Johnson
Eisenhower
Carter
Reagan/Bush
Clinton
Bush
Source Insurance Information Institute
109Summary
- Results were excellent in 2006/07 Overall
profitability reached its highest level (est.
13-14) since 1988 - Underwriting results were aided by lack of CATs
favorable underlying loss trends, including tort
system improvements - But forecast for 2008 is for worse-than-average
hurricane season - Premium growth rates are slowing to their levels
since WW II Commercial lines lead decreases - Investment returns insufficient to support deep
soft market in terms of price, terms conditions
as in 1990s
110Insurance Information Institute On-Line
WWW.III.ORG
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