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2004 MidYear Property Casualty Insurance Update Trends

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Growth History. 2002: -1.3% 2003: 3.9% 2004E: -2.7 ... I.I.I. quotes as compiled through Lexis/Nexis, Dow Jones and Factiva searches. ... – PowerPoint PPT presentation

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Title: 2004 MidYear Property Casualty Insurance Update Trends


1
2004 Mid-Year Property Casualty Insurance
Update Trends Challenges in P/C Insurance
Business Today
  • Insurance Information Institute
  • July 1, 2004

Robert P. Hartwig, Ph.D., CPCU, Senior Vice
President Chief Economist Insurance Information
Institute ? 110 William Street ? New York, NY
10038 Tel (212) 346-5520 ? Fax (212) 732-1916
? bobh_at_iii.org ? www.iii.org
2
Presentation Outline
  • Profitability
  • Underwriting
  • Ratings, Solvency Financial Strength
  • Investment Overview
  • The Media, Public Attitudes the Insurance
  • Capacity
  • Pricing Trends
  • Auto Homeowners Overview
  • Workers Comp The Insurance Industrys Quiet
    Crisis?
  • Tort Environment
  • Insurance Scoring
  • The Economic Environment P/C Insurance
    (Exposure)
  • The Challenge of Terrorism
  • Q A

3
About the Insurance Information Institute
  • The mission of the Insurance Information
    Institute (I.I.I.) is to improve public
    understanding of insurance -- what it does and
    how it works. The I.I.I. enjoys broad membership
    throughout the insurance industry, including most
    of the major p/c insurers and reinsurers
    operating in the United States, as well as
    companies operating on a regional basis and
    internationally. For more than 40 years, the
    I.I.I. has provided definitive insurance
    information. Today, the I.I.I. is recognized
    throughout the insurance industry as well as by
    the media, governments, regulatory organizations,
    universities and the public as a primary source
    of information, analysis and referral concerning
    insurance. Each year, the I.I.I. works on more
    than 3,700 news stories, handles more than 6,000
    requests for information from its members, the
    media, and other parties and answers nearly
    50,000 questions from consumers. In addition to
    direct contact with the media, individuals and
    organizations, the I.I.I. publishes a host of
    helpful brochures and books on a wide variety of
    insurance topics, ranging in subjects from 12
    Ways to Lower Your Auto Insurance Costs to the
    I.I.I. Fact Book series. I.I.I.s members
    benefit from direct access to all information,
    I.I.I. staff and its members-only web site. The
    Institute does not lobby. Its central function is
    to provide accurate and timely information on
    insurance subjects. Questions concerning I.I.I.
    membership should be directed to Cary Schneider
    at (212) 346-5566 or by email at carys_at_iii.org.

4
P/C FINANACIAL UPDATE Profitability Good but
Not Good Enough Underwriting Need to Stay
Disciplined Investments Keep Expectations Low
5
P/C FINANCIAL OVERVIEW PROFIT PRESSURE
6
Highlights Property/Casualty Full-Year 2003 vs.
2002
7
Highlights Property/Casualty 1st Qtr. 2004 vs.
1st Qtr. 2003
2003 surplus figure is as of 12/31/03 The
combined ratio for full-year 2003 was 100.1
8
Strength of Recent Hard Markets by Nominal Real
NWP Growth
1975-78
1985-87
2001-04
Real NWP Growth During Past 3 Hard
Markets 1975-78 8.6 1985-87 14.5 2001-04F
7.0
Note Shaded areas denote hard market
periods. Source A.M. Best, Insurance
Information Institute
2004 based on 1st quarter results from ISO.
9
Commercial Insurance Share of P/C Market is Rising
Commercial Market Share 1993 52.7 1998
48.0 2002 52.9 2003E 53.5
Source A.M. Best Insurance Information Institute
10
P/C Net Income After Taxes 1991-2004E (
Millions)
  • 2001 was first-ever full year net loss
  • 2002 ROE 1.0
  • 2003 ROE 9.4
  • 2004 ROE 15.0 (est.)

First quarter results Sources A.M. Best, ISO,
Insurance Information Institute.
11
P/C Net Income After Taxes 1991-2004E (
Millions)
  • 2001 was first-ever full year net loss
  • 2002 ROE 1.0
  • 2003 ROE 9.4
  • 2004 ROE 15.0 (est.)

Annualized results based on first quarter
results. Sources A.M. Best, ISO, Insurance
Information Institute.
12
ROE P/C vs. All Industries 19872004E
The P/C insurance industry could beat the Fortune
500 group for the first time since 1987
Source Insurance Information Institute Fortune
13
ROE vs. Cost of Capital US P/C Insurance 1991
2004F
The gap between the industrys cost of capital
could close in 2004
2.5 pts
-2.1 pts
-10.2 pts
-14.6 pts
US P/C insurers missed their cost of capital by
an average 6.5 points from 1991 to 2003
Source The Geneva Association, Ins. Information
Inst.
14
ROE Financial Services Industry Segments,
19872004F
P/C insurance is finally beginning to holds its
own against other financial services segments
Source Insurance Information Institute,
Fortune, Value Line.
15
RNW for Major P/C Lines, 1993-2002 Average
10-Year returns for some major p/c lines
surprisingly good, but…
Source NAIC Insurance Information Institute
16
ROE Selected P/C Commercial Lines vs. All
Industries, 19932004E
Commercial lines profitability trended downward
through the 1990s
Source NAIC, Fortune Insurance Information
Institute
17
Pure Premium Spread Personal Auto PD Liability
1999-2004
Margin necessary to maintain PPA profitability
2000 PPA Combined 110
2003 PPA Combined 98
1st quarter 2004 pure premium change is III
estimate. Source Insurance Information Institute
calculations based ISO Fast Track and US BLS data.
18
Pure Premium Spread Personal Auto BI Liability
1999-2004
Margin between Auto Insurance CPI and BI pure
premium is narrowing
1st quarter 2004 pure premium change is III
estimate. Source Insurance Information Institute
calculations based ISO Fast Track and US BLS data.
19
WALL STREET HIGH EXPECTATIONS
20
Insurer Stocks Outperforming the SP 500
Total Return 2004 YTD Through June 25, 2004
Source SNL Securities, Insurance Information
Institute
21
Commercial Lines Top 25 Writers Market Share
  • Virtually no consolidation in commercial p/c
    sector over the past 25 years, suggesting
  • MAs not generally successful
  • Scale?
  • Execution?
  • Legacy
  • Distribution?
  • Deconsolidation (asset sales, spin-offs,
    failures)
  • Low barriers to entry

By direct premiums written. Sources A.M. Best,
Morgan Stanley, Insurance Information Institute.
22
Private Passenger Auto Top 25 Writers Market
Share
  • Substantial consolidation evident over the past
    25 years, suggesting
  • MAs more successful
  • Scale economies
  • Barriers to entry exist
  • Capital (esp. foreign capital) cannot enter easily

Sources A.M. Best, Morgan Stanley, Insurance
Information Institute.
23
P/C FINANCIAL OVERVIEW UNDERWRITING PRESSURE
24
P/C Industry Combined Ratio
Combined Ratios 1970s 100.3 1980s 109.2 1990s
107.8 2000-04 105.3
2001 115.7 2002 107.2 2003 100.1 2004 Q1
93.3
2004 figures based on first quarter results.
Sources A.M. Best ISO, III
25
Underwriting Gain (Loss) 1975-2004F
Billions
2003 was the best year since 1997, with
underwriting losses of just 4.6 billion. 2004
could become the first year with an underwriting
profit since 1978.
2004 underwriting gain is based on first quarter
result. Source A.M. Best, Insurance
Information Institute
26
Commercial vs. Personal Lines Combined Ratios
10-Year Average Combined Ratios Commercial 111.1
Personal 105.2
Source A.M. Best Insurance Information Institute
27
Combined Ratios Selected Major Lines, 2003E2004F
Commercial
Personal
U/W performance improving, but variation in
results is enormous.
Source A.M. Best Insurance Information
Institute
28
Combined Ratio Reinsurance vs. P/C Industry
  • 2001s combined ratio was the worst-ever for
    reinsurers 2002 was bad as well.
  • 2003 Big improvement in primary and reinsurer
    segments

Source A.M. Best, ISO, Reinsurance Association
of America, Insurance Information Institute
29
A 100 Combined Ratio Isnt What it Used to Be 95
is Where Its At
Combined ratios today must be below 95 to
generate Fortune 500 ROEs
2004 figure is return on average statutory
surplus based in first quarter data Source
Insurance Information Institute from A.M. Best
and ISO data.
30
U.S. Insured Catastrophe Losses ( Billions)
2003 was the 4th worst year ever for insured
catastrophe losses in the US. There were 4
events with losses exceeding 1 billion
Billions
2004 figure is through June 25, 2004. 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
31
Texas Mold Losses/Claims Continuing to Moderate
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.
Source Texas Department of Insurance Insurance
Information Institute
32
FATAL ATTRACTION? A LOSS OF PRICING
UNDERWRITING DISCIPLINE RATINGS, SOLVENCY,
FINANCIAL STRENGTH
33
Private Passenger Auto Combined Operating
Ratios, 1993-2004F
Rating actions contributed to dramatic
improvement in PP Auto U/W performance
Sources Insurance Information Institute from
A.M. Best and NAIC data 2003/4 expenditure
estimates from III.
34
Cost of Risk vs. Commercial Lines Operating Ratio
Source RIMS, A.M. Best Insurance Information
Institute
2003 operating ratio is III estimate.
35
Number of P/C Failures vs. Combined Ratio,
1991-2003
2003 failures fell to a 5-year low
Source Standard Poors Insurance Information
Institute
36
Downgrade/Upgrade Ratio
Sources Impairment Rate and Rating Transition
Study1977 to 2002, A.M. Best Co. 2003E from
SP.
U.S. property/casualty and life/health insurers
37
P/C Company Insolvency Rates, 1993 to 2002
  • Insurer insolvencies are increasing
  • 10-yr industry failure rate 0.72
  • Failure rating for B or better rating 0.49
  • Failure rate for D through B rating 1.29

10-yr Failure Rate 0.72
38
30
30
Source A.M. Best Insurance Information
Institute
38
Reason for P/C Insolvencies (218 Insolvencies,
1993-2002)
Reserve deficiencies account for more than half
of all p/c insurers insolvencies
Source A.M. Best, Insurance Information
Institute
39
P/C Insurers Maintaining Rating of A or Better
Rating for 50 Years
  • P/C Company
  • AIU Insurance Co.
  • Alfa Mutual Ins. Co.
  • Amica Mutual Ins. Co.
  • Church Mutual Ins. Co.
  • Federal Insurance Co.
  • General Reinsurance Corp.
  • Great Northern Ins. Co.
  • Lititz Mutual Ins. Co.
  • Nationwide Mutual Fire Co.
  • Otsego Mutual Fire
  • Pharmacists Mutual Ins. Co.
  • Quincy Mutual Fire Ins. Co.
  • State Automobile Mutual Ins. Co.
  • State Farm Mutual Automobile Ins. Co.
  • Vigilant Insurance Co.
  • Group Affiliation
  • American International Group
  • Alfa Insurance Group
  • Amica Mutual Group
  • None
  • Chubb Group of Ins Cos.
  • Berkshire Hathaway Ins. Group
  • Chubb Group of Ins Cos.
  • Lititz Mutual Group
  • Nationwide Mutual Group
  • None
  • None
  • Quincy Mutual Group
  • State Auto Ins. Group
  • State Farm Group
  • Chubb Group of Ins Cos.

Source Bests Review, January 1, 2004.
40
P/C Insurance Industry Prior Year Reserve
Development
Adverse reserve development of about 23 billion
accounted for most of the industrys 2002 and 17
billion in 2003
Negative numbers indicate favorable development
positive figures represent adverse
development. Source A.M. Best, Morgan Stanley,
Dowling Partners Securities, Insurance
Information Institute.
41
Combined Ratio Impact of Reserve Changes (Points)
Adverse reserve development totaling an estimated
23 billion added more than 6 points to the p/c
combines ratio in 2002
Source ISO, A.M. Best, MorganStanley.
42
Commercial Lines Reserve Shortfalls (Year-End
2002)update?
Average of Morgan Stanley top-down and
bottoms-up estimates for accident years
19932002 as of 12/31/02. Occurrence and claims
made basis. Source Morgan Stanley, January 2004.
43
Guarantee Fund Net Assessments (1979-2002)
  • Assessments rose dramatically during the last
    hard market, setting a new record now.

Excludes NY and workers comp security funds in
NJ and PA. Source National Conference of
Insurance Guarantee Funds Insurance Information
Institute
44
Insolvencies Generating Largest Guarantee Fund
(Net) Payouts
While guarantee fund payouts maybe considerable,
they often leave many policyholders holding the
bag
Net expenses form inception to date (November
13, 2003). Source National Conference of
Insurance Guarantee Funds Insurance Information
Institute.
45
A 100 Combined Ratio Isnt What it Used to Be
Combined ratios between 98 and 100 today generate
ROEs 5-10 points below similar combined in the
late 1970s
Source Insurance Information Institute from A.M.
Best and ISO data.
A.M. Best figure for 2004 is return on
statutory surplus
46
INVESTMENTS NO SUBSTITUTE FOR SOUND UNDERWRITING
47
Net Investment Income
Growth History 2002 -1.3 2003
3.9 2004E -2.7
Billions
  • History
  • 1997 Peak 41.5B
  • 40.7B
  • 37.7B
  • 37.2B
  • 38.7B
  • E 37.7

Source A.M. Best, ISO, Insurance Information
Institute
48
Interest Rates Lower Than Theyve Been in
Decades, But…
  • Lower bond yields were the primary driver behind
    declining investment income in recent years, with
    the 10-year note reaching a 45-year low in 2003
  • Higher rates are now a certainty as inflationary
    expectations build

About 2/3 of invested assets are in the form of
bonds
Week of June 18. Source Board of Governors,
Federal Reserve System Insurance Information
Institute
49
Interest Rate Outlook
Source Board of Governors of the Federal
Reserve System, Blue Chip Economic Indicators,
June 2004 Insurance Information Institute
50
Total Returns for Large Company Stocks 1970-2004
SP 500 was up 28.7 in 2003 but up just 2.0
through late June as fears of higher interest
rates, Iraq terrorism paralyze the market
  • 2003 ended a streak of 3 consecutive years of
    declines for stocks
  • Will the bull market run out of steam in 2004?

Through June 29, 2004. Source Ibbotson
Associates, Insurance Information Institute
51
US P/C Net Realized Capital Gains 1990-2004Q1 (
Millions)
Realized capital gains rebounded strongly in
2003/4
First quarter 2004 result Sources A.M. Best,
ISO, Insurance Information Institute.
52
Property/Casualty Insurance Industry Investment
Gain
Investment gains are rising but remain well below
the peak of 57.9 billion in 1998
Investment gains consist primarily of interest,
stock dividends and realized capital gains and
losses. 2004 estimate is annualized figure based
on first quarter result. Source Insurance
Services Office Insurance Information Institute.
53
HOT TOPICS IN INSURANCE THE MEDIA PERSPECTIVE
54
I.I.I. Media Index Top Issues (2003 vs. 2002)
Market Conditions Commercial lines issues
dominated the media in 2002 and 2003 The I.I.I.
conducted nearly 4,000 media interviews in 2003
Source Insurance Information Institute from
Lexis/Nexis search.
55
I.I.I. Media Index Top Issues ( Change in
Coverage, 2003 vs. 2002)
The fastest growing areas of media interest were
CLUE, Credit Med Mal. Media interest in mold
and terrorism waned substantially.
Source Insurance Information Institute from
Lexis/Nexis search.
56
I.I.I. Media Index Top Issues (First 6 Months
2004 vs. 6 Months 2003)
Media coverage of the p/c insurance industry fell
about 18 during the first half of 2004 compared
with the same period in 2003.
As of June 15, 2004. Source Insurance
Information Institute from Lexis/Nexis search.
57
I.I.I. Media Index Top Issues Change in
Coverage, First 6 Months 2004 vs. First 6 Months
2003
Workers Comp was the only area of increased media
interest. Interest in most other areas fell
substantially.
As of June 15, 2004. Source Insurance
Information Institute from Lexis/Nexis search.
58
I.I.I. Media Hits First 6 Months 2004 vs. First
6 Months 2003
I.I.I. media penetration media is increasing
despite a general decline in stories written
about insurance
I.I.I. quotes as compiled through Lexis/Nexis,
Dow Jones and Factiva searches.
59
2004 INSURANCE PULSE SURVEY Public Attitudes
About Insurance
60
Percent of Public Rating Industry as Very or
Mostly Favorable, 1968-2004
Real NWP Growth During Past 3 Hard
Markets 1975-78 8.6 1985-87 14.5 2001-04F
8.0
Source Insurance Information Institute Annual
Pulse Survey
61
INSURANCE INFORMATION INSTITUTE MEDIA INDEX
62
I.I.I. Media Index Top Issues (First 6 Months
2004 vs. 6 Months 2003)
Media coverage of the p/c insurance industry fell
about 18 during the first half of 2004 compared
with the same period in 2003.
As of June 15, 2004. Source Insurance
Information Institute from Lexis/Nexis search.
63
I.I.I. Media Index Top Issues Change in
Coverage, First 6 Months 2004 vs. First 6 Months
2003
Workers Comp was the only area of increased media
interest. Interest in most other areas fell
substantially.
As of June 15, 2004. Source Insurance
Information Institute from Lexis/Nexis search.
64
I.I.I. Media Hits First 6 Months 2004 vs. First
6 Months 2003
I.I.I. penetration is increasing overall despite
a general decline in stories written about
insurance
I.I.I. quotes as compiled through Lexis/Nexis,
Dow Jones and Factiva searches.
65
THE INSURANCE INFORMATION INSTITUTE THE PLACE
FOR INSURANCE INFORMATION
66
About the Insurance Information Institute
  • The mission of the Insurance Information
    Institute (I.I.I.) is to improve public
    understanding of insurance -- what it does and
    how it works. The I.I.I. enjoys broad membership
    throughout the insurance industry, including most
    of the major p/c insurers and reinsurers
    operating in the United States, as well as
    companies operating on a regional basis and
    internationally. For more than 40 years, the
    I.I.I. has provided definitive insurance
    information. Today, the I.I.I. is recognized
    throughout the insurance industry as well as by
    the media, governments, regulatory organizations,
    universities and the public as a primary source
    of information, analysis and referral concerning
    insurance. Each year, the I.I.I. works on more
    than 3,700 news stories, handles more than 6,000
    requests for information from its members, the
    media, and other parties and answers nearly
    50,000 questions from consumers. In addition to
    direct contact with the media, individuals and
    organizations, the I.I.I. publishes a host of
    helpful pamphlets and books on a wide variety of
    insurance topics, ranging in subjects from 9 Ways
    to Lower Your Auto Insurance Costs to the I.I.I.
    Fact Book series. I.I.I.s members benefit from
    direct access to all information, I.I.I. staff
    and its members-only web site. The Institute does
    not lobby. Its central function is to provide
    accurate and timely information on insurance
    subjects. Questions concerning I.I.I. membership
    should be emailed to bobh_at_iii.org

67
With 70 million vistors annually, I.I.I drives
customers to your site
68
I.I.I. ranks 3rd on Google out of 105 million
hits on insurance.
69
Web Traffic on WWW.III.ORG
Visits to I.I.I.s public web site increased by
50 in 2003. The average number of web hits on
I.I.I.s site rose from 5 million per month in
2003 to 6 million in 2004
2004 estimate based on average of 6 million hits
per month through first six months
70
Members I.I.I. Daily On-Line
Direct to your desktop and read by thousands of
industry employees, regulators and others every
morning
71
I.I.I. Members Regional Info
National, Regional International news at your
companys fingertips
72
I.I.I. Members Searches by Issue/Topic
73
I.I.I. Hot Topics Home Page
Information you need is only a mouse click away
74
I.I.I. Members Searches by Issue/Topic
Studies, presentations and message points for all
major p/c industry issues
75
Life Insurance Financial Planning
I.I.I. is providing an increasing amount of
information of life insurance and other financial
products
76
CAPACITY CRUNCH?
77
U.S. Policyholder Surplus 1975-2004
Capacity is just 6.5 above its mid-1999 peak
Surplus (capacity) peaked at 339.3 Billion in
mid-1999 and fell by 15.9 (53.9 billion) to
285.4 billion at year-end 2002 Surplus
increased by 61.6B or 21.6 to 347.0B in 2003
and 4.9 in the 1st qtr. of 2004 to 361.2 billion
53.9 Billion
Billions
Surplus is a measure of underwriting capacity.
It is analogous to Owners Equity or Net Worth
in non-insurance organizations
Source A.M. Best, ISO, Insurance Information
Institute As of 3/31/04.
78
Capital Myth US P/C Insurers Have 350 Billion
to Pay Terrorism Claims
Total PHS 298.2 B as of 6/30/01 291.1 B
as of 12/31/02 347.0 B as of 12/31/03
Only 40 of industry surplus backs up target
lines
Industry emphasizing limited capital resources
against virtually unlimited losses
Target Commercial includes Comm property,
liability and workers comp Surplus must also
back-up on non-terrorist related
property/liability and WC claims Source
Insurance Information Institute estimates based
on A.M. Best Q.A.R Data.
79
Capital Myth US P/C Insurers Have 350 Billion
to Pay Terrorism Claims
Only 33 of surplus backs target lines net of
reserve deficiency
Total PHS 298.2 B as of 6/30/01 291.1 B
as of 12/31/02 347.0 B as of 12/31/03
Target Commercial includes Comm property,
liability and workers comp Surplus must also
back-up on non-terrorist related
property/liability and WC claims Source
Insurance Information Institute estimates based
on A.M. Best Q.A.R Data.
80
Capacity of Lloyds Market
  • After remaining stable at around GBP10bn, Lloyds
    capacity has increased by over 40 in the last
    three years.
  • 2004 capacity is GBP14.9bn, unchanged from 2003.

Source Lloyds
81
Number of Captive Formations Liquidations 1993
to 2003E
  • Hard market fueling captive formation
  • Corporate collapses and captive consolidations
    fueled the upward trend in captive liquidations
    in 2002.

Source AM Best, Advisen
82
PRICING DOWNWARD PRESSURE?
83
How the Risk Dollar is Spent (2003)
Firms w/Revenues 1 Billion
Firms w/Revenues Source RIMS (2003) Insurance Information
Institute
84
Insurance is the Biggest Concern of Small
Business Owners
Source National Federation of Independent
Business (November 2003) Insurance Information
Institute
85
Cost of Risk 1990-2003
2000-03 147.6
1992-2000 -41.8
Cost of risk includes insurance premiums,
retained losses and administrative
expenses Source 2003 RIMS Benchmark Survey
Insurance Information Institute
86
Cost of Risk vs. Commercial Lines Operating Ratio
Source RIMS, A.M. Best Insurance Information
Institute
2003 operating ratio is III estimate.
87
PRICING Commercial Premium Rate Changes Highly
Cyclical
  • Pricing power is ebbing
  • Is moderation due to realization of performance
    and profit goals, increasing capacity/capital, or
    market-share strategies?

Source MarketScout.com
88
Components of Cost of Risk Per 1,000 of Revenue
Change 2001 -03
45.8
90.3
113.8
107.0
44.8
150.0
Cost of risk includes insurance premiums,
retained losses and administrative
expenses Source 2003 RIMS Benchmark Survey
Insurance Information Institute
89
Proportion of Accounts Renewing With Increase of
20 or More, (Select Lines)
Source Council of Insurance Agents and Brokers
Insurance Information Institute
90
Proportion of Workers Comp Accounts Renewing With
Increase of 20 or More
Source Council of Insurance Agents and Brokers
Insurance Information Institute
91
P/C Soft Spots Accounts With Negative Price
Change(1st Qtr. 2004)
Casualty/Liability/Terrorism
Property
More moderation is evident in the commercial
casualty segments
Source Council of Insurance Agents Brokers
Insurance Information Institute
92
P/C Soft Spots Accounts With Negative Price
Change(4th Qtr. 2003)
Casualty/Liability/Terrorism
Property
Source Council of Insurance Agents Brokers
Insurance Information Institute
93
P/C Soft Spots Accounts With Negative Price
Change(3rd Qtr. 2003)
Casualty/Liability/Terrorism
Property
Source Council of Insurance Agents Brokers
Insurance Information Institute
94
P/C Soft Spots Accounts With Negative Price
Change(2nd Qtr. 2003)
Casualty/Liability/Terrorism
Property
Source Council of Insurance Agents Brokers
Insurance Information Institute
95
P/C Soft Spots Accounts With Negative Price
Change(1st Qtr. 2003)
Casualty/Liability/Terrorism
Property
Source Council of Insurance Agents Brokers
Insurance Information Institute
96
P/C Soft Spots Accounts With Negative Price
Change(4th Qtr. 2002)
Casualty/Liability/Terrorism
Property
Source Council of Insurance Agents Brokers
Insurance Information Institute
97
P/C Soft Spots Accounts With Negative Price
Change(3rd Qtr. 2002)
Casualty/Liability/Terrorism
Property
Source Council of Insurance Agents Brokers
Insurance Information Institute
98
P/C Soft Spots Accounts With Negative Price
Change(2nd Qtr. 2002)
Casualty/Liability/Terrorism
Property
Source Council of Insurance Agents Brokers
Insurance Information Institute
99
P/C Soft Spots Accounts With Negative Price
Change(1st Qtr. 2002)
Casualty/Liability/Terrorism
Property
Source Council of Insurance Agents Brokers
Insurance Information Institute
100
P/C Soft Spots Accounts With Negative Price
Change(4th Qtr. 2001)
Casualty/Liability/Terrorism
Property
Source Council of Insurance Agents Brokers
Insurance Information Institute
101
P/C Soft Spots Accounts With Negative Price
Change(3rd Qtr. 2001)
Casualty/Liability/Terrorism
Property
Source Council of Insurance Agents Brokers
Insurance Information Institute
102
Average Expenditures on Auto Insurance US
Countrywide auto insurance expenditures are
expected to rise 3.5 in 2004
103
Average Expenditures on Homeowners Ins. US
Average US HO expenditures are expected to rise
by 2.8 in 2004
104
World Rate-On-Line Index (1990 100)
Reinsurance prices rising, limits falling ROL up
significantly, though not as much as after
Hurricane Andrew in 1992
Source Guy Carpenter
105
PERSONAL LINES ISSUES Auto Homeowners
106
AUTO INSURANCE OVERVIEW
107
Private Passenger Auto is Enormous Part of P/C
Industry
Private passenger auto accounted for 36 or
145.1B in DPW in 2002
83.9B
61.2B
211.6B
43.0B
Source A.M. Best Insurance Information
Institute
108
Auto Insurance Direct Premiums Written
159B 9.5
145.1B 9.8
132.1B 8.1
122.2B 1.3
120.6B 1.4
118.9B 2.4
116.1B 5.0
110.5B 4.3
106.0B 5.3
100.7B 5.2
Billions
95.7B
Source A.M. Best Insurance Information Institute
109
Average Expenditures on Auto Insurance US
Countrywide auto insurance expenditures are
expected to rise 3.5 in 2004
110
Private Passenger Auto Combined Operating
Ratios, 1993-2004F
Average Combined 1993 to 2003E 102.7 Many auto
insurers have shown significant improvements in
underwriting performance since mid-2002
Sources A.M. Best III
111
RNW Private Passenger Auto, United States,
1992-2002
Private passenger auto profitability deteriorated
throughout the 1990s
Source NAIC Insurance Information Institute
112
Average Auto Insurance Expenditure Top/Bottom 5
vs. US (2001)
Most expensive states are in Northeast, least in
upper Midwest.
Source NAIC Insurance Information Institute.
113
PPA AffordabilityPain Index Not an Issue in
Select States
While the highest premiums are concentrated in
the NE, measures of affordability have
considerable geographic spread.
Ratio of 2001 state average auto expenditure to
states median income for family of 4. Sources
Auto Insurance Report, August 18, 2003
114
2002 Return on Net Worth Private Passenger Auto
Profitability of PPA line varies enormously by
state. Unlike homeowners, the variation is not
significantly the result of CAT activity.
Sources NAIC Insurance Information Institute
115
US Bodily Injury Severity Trends Now Offset
Declining Claim Freq.
Medical inflation a powerful driving force
Source ISO Fast Track data.
116
Pure Premium Spread Personal Auto PD Liability
1999-2004
Margin necessary to maintain PPA profitability
2000 PPA Combined 110
2003 PPA Combined 98
1st quarter 2004 pure premium change is III
estimate. Source Insurance Information Institute
calculations based ISO Fast Track and US BLS data.
117
Pure Premium Spread Personal Auto BI Liability
1999-2004
Margin between Auto Insurance CPI and BI pure
premium is narrowing
1st quarter 2004 pure premium change is III
estimate. Source Insurance Information Institute
calculations based ISO Fast Track and US BLS data.
118
HOMEOWNERS INSURANCE OVERVIEW
119
Homeowners as a Percentage of the P/C Industry
Homeowners insurance accounted for 11 or 43.0B
in DPW in 2002
83.9B
61.2B
211.6B
43.0B
Source A.M. Best Insurance Information
Institute
120
Homeowners Insurance Direct Premiums Written
49.0B 14.0
43.0B 14.4
37.6B 8.7
34.6B 6.5
32.5B 5.2
30.9B 5.8
Billions
29.1B 6.2
27.4B 5.4
26.0B 6.6
24.4B 6.6
22.9B
Source A.M. Best Insurance Information Institute
121
Homeowners Insurance Combined Ratio
Average 1990 to 2002 117 Insurers have paid out
an average of 1.17 in losses for every dollar
earned in premiums over the past 13 years 2002
Loss 3.4 Billion 2001 Loss 7.4 Billion
Sources A.M. Best III
122
Rates of Return on Net Worth for Homeowners Ins
US
Averages 1993 to 2002 US HO Insurance -3.29
Source NAIC, Insurance Information Institute
US Average is 1.35 if excluding 1992 (year of
Hurricanes Andrew and Iniki.
123
Average Expenditures on Homeowners Ins. US
Average US HO expenditures are expected to rise
by 2.8 in 2004
124
Homeowners Insurance Expenditure as a of Median
Home Price
The cost of homeowners insurance relative to the
price of a typical home has fallen
HO Expenditure as of Sales Price
Median Home Sales Price
Source Insurance Information Institute
calculations based on data from National
Association of Realtors, NAIC.
125
Change in Cost of Homes vs. Change in Cost of
Homeowners Insurance
Recent increases in the cost of homeowners
insurance are miniscule in comparison to the
soaring cost of homes
Source Insurance Information Institute
calculations based on data from Natl. Association
of Realtors, NAIC. 2001-2003 HO figures are III
estimates.
126
Homeowners Affordability HURT Index
(Top/Bottom 5 States)
CAT-prone and moldy states have biggest
affordability issues
Ratio of 2000 state average auto expenditure to
states median income for family of 4. Sources
Property Insurance Report, Sept 8, 2003
127
Estimated Insured Mold Losses 2000-2002
Insured mold losses rose by 500 from 2000 to
2002.
Source Insurance Information Institute
128
Texas Mold Losses/Claims Continuing to Moderate
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.
Source Texas Department of Insurance Insurance
Information Institute
129
Top/Bottom 5 Markets for Homeowners Insurance By
Average RNW
Profitability of HOMEOWNERS line varies
enormously by state.
Sources NAIC Insurance Information Institute
130
Causes of Homeowners Insurance Losses, 1998-2002
Percent of Losses Incurred
Data exclude tenants and condominium owners
insurance. All other property damage includes
vandalism and malicious mischief. Liability
includes bodily injury and property damage,
medical payments and credit card and
other. Source Insurance Services Office, Inc
(ISO)
131
Average Annual Insured Losses (Top 10 States,
Millions)
Distribution of Annual Losses
Normalized losses adjusted for inflation,
housing density, wealth and wind insurance
coverage, based on historical data for 100-year
period 1900-1999. Source Tillinghast-Towers
Perrin
132
New Private Housing Starts (Millions of Units)
  • New Private Housing Starts
  • Housing market remain strong.
  • Virtually no exposure impact for insurers

Source US Department of Commerce Blue Chip
Economic Indicators (4/04), Insurance Info.
Institute
133
WORKERS COMPENSATION full presentation
available to III member companies
134
Workers Compensation The Industrys Quiet Crisis?
  • Problems in WC systems throughout the US
  • Rapid run-up in losses, premiums
  • 38 states considering 271 pieces of legislation
    (as of April 2004)
  • Upcoming significant reforms TX, TN, NY, OK, AK,
    KS
  • Recent reform successes CA, FL
  • Most problems center around medical utilization,
    fraud, abuse
  • WC residual market share is rising
  • Extreme terrorism risk in many areas (esp. Tier 1
    and 2)
  • Little WC reinsurance for terrorism risk, system
    is HIGHLY dependent on TRIA and its
    reauthorization (WC-only pool determined to be
    infeasible in recent Towers Perrin study)

135
Workers Comp Combined Ratios, 1994-2003p
Percent
p Preliminary Accident Year data is evaluated as
of 12/31/2003 and developed to ultimate Source
Calendar Years 1994-2002, A.M. Best Aggregates
Averages Calendar Year 2003p and Accident Years
1994-2003p, NCCI Includes dividends to
policyholders
136
WC Combined Ratios Problems are National in Scope
2.9 pts due to 9/11
Includes dividends to policyholders Accident
year is developed to ultimate as 12/31/02 Note
CY figures from AM Best AY figures from NCCI,
2003E is III estimate.
Source A.M. Best, NCCI
137
US Components of Cost of Risk Per 1,000 of
Revenue
Change 2001 -03
45.8
90.3
113.8
107.0
44.8
150.0
Cost of risk includes insurance premiums,
retained losses and administrative
expenses Source 2003 RIMS Benchmark Survey
Insurance Information Institute
138
How the Risk Dollar is Spent (2003)
WC costs account for 25-30 of the risk dollar
Firms w/Revenues 1 Billion
Firms w/Revenues Source RIMS (2003) Insurance Information
Institute
139
Workers Comp Reserves, 1993-2003p
Billions
Loss and LAE Reserve Deficiency Through Year End
p Preliminary Difference between NCCI estimated
ultimate losses and LAE as of 12/31/2003 and
reported in Schedule P Source NCCI
140
Workers Comp Indemnity Claims Costs Have
Accelerated, 1993-2003p
Indemnity Claim Cost (000s)
Annual Change 19911995 0.3 Annual Change
19962002 7.4
Accident Year
2003p Preliminary based on data valued as of
12/31/2003 1991-2002 Based on data through
12/31/2002, developed to ultimate Based on the
states where NCCI provides ratemaking
services Excludes the effects of deductible
policies Source NCCI
141
Workers Compensation Indemnity Severity Is
Outpacing Wage Inflation Change, LostTime
Claims
Year
Indemnity severity 2003p Preliminary based on
data valued as of 12/31/2003 Indemnity severity
1995-2002 Based on data through 12/31/2002,
developed to ultimate Based on the states where
NCCI provides ratemaking services, excludes the
effects of deductible policies Source Calendar
Year Current Population Survey, Economy.com
Accident Year indemnity severity, NCCI
142
Workers Comp Medical Claims Continue to Climb
Medical Claim Cost (000s)
Annual Change 19911995 3.9 Annual Change
19962002 9.0
Accident Year
2003p Preliminary based on data valued as of
12/31/2003 1991-2002 Based on data through
12/31/2002, developed to ultimate Based on the
states where NCCI provides ratemaking
services Excludes the effects of deductible
policies
143
WC Medical Severity Rising Far Faster than
Medical CPI
WC medical severity is rising 2.3 times faster
than the medical CPI
5.0 pts
Sources Med CPI from US Bureau of Labor
Statistics, WC med severity from NCCI based on
NCCI states.
144
Workers Compensation Residual Market
145
Workers Comp Residual Market Premium
Volume NCCI-Serviced Workers Compensation
Residual Market Pools as of December 31, 2003
Billions
Size of residual market nearly quadrupled from
1999 to 2003
Policy Year
Excludes Maine Residual Market
Pool Incomplete Policy Year Projected to
Ultimate Source NCCI
146
Workers Compensation Residual Market Shares
Continue to Rise Workers Compensation Insurance
Plan States Premium as a Percent of Direct
Written Premium
Percent
Residual market share quadrupled from 3 to 12
from 1999 to 2003
Calendar Year
  • p Preliminary
  • NCCI Plan states plus DE, IN, MA, MI, NJ, NC
  • Source NCCI

147
Workers Compensation Residual Market Combined
Ratios NCCI-Serviced Workers Compensation
Residual Market Pools As of December 31, 2003
Percent
Policy Year
Excludes Maine Residual Market
Pool Incomplete Policy Year Projected to
Ultimate Source NCCI
148
WC Residual Market Underwriting Results Continue
to Decline NCCI-Serviced Workers Compensation
Residual Market Pools As of December 31, 2003
Millions
Policy Year
Excludes Maine Residual Market
Pool Incomplete Policy Year Projected to
Ultimate Source NCCI
149
LEGAL LIABILITY TORT ENVIRONMENT (full
presentation available upon request to III
members)
150
Cost of U.S. Tort System ( Billions)
Tort costs consumed 2.23 of GDP in 2002
Per capita tort tax expected to rise to 1,003
by 2005, up from 809 in 2002
Source Tillinghast-Towers Perrin.
151
Personal, Commercial Self (Un) Insured Tort
Costs
Total 208.8 Billion
Total 157.7 Billion
Billions
Total 120.2 Billion
Total 39.5 Billion
Excludes medical malpractice Source
Tillinghast-Towers Perrin
152
Where the Tort Dollar Goes (2002)
  • Tort System is extremely inefficient
  • Only 22 of the tort dollar compensates victims
    for economic losses
  • At least 54 of every tort dollar never reaches
    the victim

Source Tillinghast-Towers Perrin
153
THE U.S. LEGAL SYSTEM IS IT OUT OF
CONTROL? TRENDS, CONDITIONS OUTLOOK
154
TORT-ure
  • Asbestos
  • Silicosis
  • Toxic Mold
  • Medical Malpractice
  • Construction Defects
  • Lead
  • Fast/Fattening Foods Obesity
  • Reality TV
  • Arsenic Treated Lumber
  • Guns
  • Genetically Modified Foods Labeling
  • Generic Drugs, Pharmaceuticals Medical Devices
  • Security exposures (workplace violence, post-9/11
    issues)
  • Slavery

New
New
New
155
Business Leaders Ranking of Liability Systems for
2004
  • Best States
  • Delaware
  • Nebraska
  • Virginia
  • Iowa
  • Idaho
  • Utah
  • New Hampshire
  • Minnesota
  • Kansas
  • Wisconsin
  • Worst States
  • Missouri
  • Arkansas
  • Montana
  • Illinois
  • Texas
  • California
  • Louisiana
  • Alabama
  • West Virginia
  • Mississippi

Source US Chamber of Commerce States Liability
Systems Ranking Study Insurance Info. Institute.
156
The Nations Judicial Hellholes
Source American Tort Reform Association
Insurance Information Institute
157
Average Jury Awards 1994 vs. 2001and 2002
Source Jury Verdict Research Insurance
Information Institute.
158
Median Jury Award, 1996-2002
The median award fell by 1/3 between 2000 to
2002, but average awards rose because of a large
number of jumbo awards
Source 2003 Current Award Trends, Jury Verdicts
Research.
159
Probability of Plaintiff Verdict is Rising
Source Jury Verdict Research, 2003 Current
Award Trends
160
There is Was is Was a Glimmer of Hope for Tort
Reform
  • Best Chance for Tort Reform in Years
  • Medical Malpractice
  • Statesalready happening 20 states have caps
  • Federal reform discussed in Congress but bill
    failed in Senate
  • Attempt to get caps for specialties failed
    February 2004
  • Class Action Reform
  • Class Action Fairness Act
  • Failed by 1 Vote 10/22/03 Likely back up 2004???
  • Asbestos Reform
  • Fairness in Asbestos Injury Resolution of 2003
    Failed Apr. 2004
  • Punitive DamagesWhats Reasonable
  • Supreme Court ruled favorably in Campbell v.
    State Farm

161
Who Will Pay for the US Asbestos Mess?
Estimated Total US Settlements Expenses 200
billion
78 billion
60 billion
62 billion
Source Tillinghast-Towers Perrin Insurance
Information Institute
162
INSURANCE SCORING (CREDIT) full presentation
available to III member companies
163
Importance of Rating Factors by Coverage Type
Source The Relationship of Credit-Based
Insurance Scores to Private Passenger Automobile
Insurance Loss Propensity Michael Miller, FCAS
and Richard Smith, FCAS (EPIC Actuaries), June
2003 (Presented at June 2003 NAIC meeting).
164
Texas Auto Relative Loss Ratio (by Credit Score
Decile, Total Market)
Interpretation Those with poorest credit scores
generated losses more than double that of those
with the best scores
  • Extremely strong statistical evidence linking
    credit score with loss/claim outcomes
  • Credit score likelihood of positive claim
    (p
  • Size of loss related to credit score (p
  • Correlation between relative loss ratio and
    credit score (r .95)

Each decile contains approximately 15,300
policies. Includes standard and non-standard
policyholders.
1st Decile Lowest Credit Scores 10th Decile
Highest Credit Scores.
Source University of Texas, Bureau of Business
Research, March 2003.
165
Adverse Impact No Evidence
166
U.S. Homeownership Rate, 1990 to 2003
Homeownership is at a record high. Because you
cant buy a home without insurance, insurance is
clearly available and affordable, including to
millions of Americans of modest means and all
ethnic groups.
Source U.S. Census Bureau
167
Homeownership Rates in Central Cities, 1990 to
2003
Homeownership rates in central cities is at an
all time record high. Because you cant buy a
home without insurance, insurance is clearly
available and affordable, including to millions
of Americans of modest means and all ethnic
groups.
Source U.S. Census Bureau
168
Homeownership Rates Among Minorities is Rising,
1994 to 2003
  • Homeownership rates for minorities are at or near
    record highs
  • Minorities are using their good credit to buy
    homes and get insurance

Source U.S. Census Bureau
169
Critique of MDOI Credit Study Methodologically
Fatally Flawed
  • MDOI STUDY IS FATALLY FLAWED METHODOLOGICALLY
  • ZIP-code level analysis violates fundamental
    insurance principle of matching risk
    characteristics to specific individuals (instead
    uses averages)
  • MDOI approach is like using average number of
    years driving experience for everyone in a given
    ZIP code rather than matching experience to the
    specific policyholder
  • MDOI aggregation approach includes millions of
    people who shouldnt be included in the analysis.
    In urban areas significant numbers of people do
    not own homes or cars and therefore should not be
    included in the analysis ( up to 50 of families
    in urban areas live in apartments and many/most
    use public transportation). Also appears MDOI
    study includes prisoners and other
    institutionalized populations that distort racial
    and income averages.
  • QUESTION How can people be adversely affected by
    the use of credit scoring if they dont need
    insurance?
  • MDOI EVEN ACKNOWLEDGES ITS METHODOLOGICAL
    SHORTCOMINGS (p. 16 of study)
  • Because of the aggregation problem, the study
    can
  • …not make inferences about minority
    individuals or poor individuals per se data
    limitations prevent any direct inferences about
    the relationship between credit scores and
    individual charateristics such as race/ethnicity
    or socioeconomic status.

170
Critique of MDOI Credit Study Inferences are
Misleading, Biased and Results are Statistically
Meaningless
  • MDOI STUDY MAKES MISLEADING INFERENCES
  • MDOI asserts credit scores are significantly
    correlated with minority status and income but
    offers no evidence of adverse impact to back-up
    its allegation
  • BIAS MDOI fails to acknowledge that credit
    scores contain no information whatsoever on race,
    ethnicity, income or any other socioeconomic/demog
    raphic information
  • RESULTS OF MDOI ANALYSES ARE STATISTICALLY
    MEANINGLESS
  • Analyses explain little of the variation between
    minority status, income and credit score
  • Minority Status Median model explains just 19
    of variation (81 UNEXPLAINED)
  • Income Median model explains just 10 of
    variation ((90 UNEXPLAINED)
  • Some models explain as little as 2 to 3 of the
    variation Random Number Generator
  • Problem is obvious MDOI omitted the most
    important variables that explain the majority of
    variation in credit score. Race and income are
    likely not among them.

171
MDOI Models Fail to Explain Variability in Credit
Scores Based on Ethnicity or Income
Ethnicity
Income
Regression of std. dev. of credit score on
Minority
Regression of std. dev. of credit score on Per
Capita Income
Source Insurance Information Institute based on
Missouri Dept. of Insurance study
Insurance-Based Credit Scores Impact on
Minority and Low Income Populations in Missouri,
January 2004.
172
THE ECONOMY P/C INSURANCE Personal
Lines Commercial Lines
173
Real GDP Growth
Economic growth in 2004 is expected to be reach
4.7, the fastest rate of growth in 5 years.
Commercial/personal exposure growth will benefit.
Estimate/Forecast Source US Department of
Commerce Blue Economic Indicators 6/04
Insurance Information Institute.
174
New Private Housing Starts (Millions of Units)
  • New Private Housing Starts
  • Housing market remain relatively strong despite
    rising mortgage rates
  • Exposure outlook for HO insurers in still good in
    2004

YTD (Jan-May) homebuilding is running well ahead
of forecasts as people rush to beat rising rates
and economy improves
Source US Department of Commerce Insurance
Information Institute 2004 estimates based on
actual data for Jan-May. Blue Chip Economic
Indicators 6/04 for forecast.
175
U.S. Homeownership Rate, 1990 to 2003
Homeownership is at a record high. Because you
cant buy a home without insurance, insurance is
clearly available and affordable, including to
millions of Americans of modest means and all
ethnic groups.
Source U.S. Census Bureau
176
Homeownership Rates in Central Cities, 1990 to
2003
Homeownership rates in central cities is at an
all time record high. Because you cant buy a
home without insurance, insurance is clearly
available and affordable, including to millions
of Americans of modest means and all ethnic
groups.
Source U.S. Census Bureau
177
Homeownership Rates Among Minorities is Rising,
1994 to 2003
  • Homeownership rates for minorities are at or near
    record highs
  • Minorities are using their good credit to buy
    homes and get insurance

Source U.S. Census Bureau
178
Motor Vehicle Retail Sales (Millions of Units)
YTD (Jan-May) auto sales are running well ahead
of forecasts
New Motor Vehicle Sales Sales of automobiles
remained relatively strong despite the weak
economy in recent years. Economic recovery,
incentives, low rates demographics will keep
exposure picture bright for auto insurers
Source US Department of Commerce Insurance
Information Institute 2004 estimates based on
actual data for Jan-May. Blue Chip Economic
Indicators 12/03 forecasts thereafter.
179
Change in Selected Components of GDP Growth,
2003-2005
Commercial exposure growth rate peak in 2004
pushed into 2004, for personal.
Source Bureau of Economic Analysis Blue Chip
Economic Indicators, June 2004.
180
Number of Employed Workers (Millions)
  • Employment rose by 248,000 in May 2004 and
    346,000 in April
  • 1.435 million jobs created since 8/03
  • 1.336 million net loss since 2/01

2.68 Million Jobs Lost from Feb. 2001 Aug. 2003
Employment peaked at 132. 56 million in February
2001.
By August 2003, employment stood at 129.80
million, its lowest level since October 1999.
Source U.S. Bureau of Labor Statistics
Insurance Information Institute
181
End of Jobless Recovery of 2001-2003 Will Help
Workers Comp Exposure
Wage Salary Disbursement (Private Employment,
Billions)
1/80-7/80
7/81-11/82
7/90-3/91
3/01-11/01
Shaded areas represent recessions
Payroll growth is re-emerging, bolstering WC
exposure base
Data for first quarter 2004. Source US Bureau
of Economic Analysis Insurance Information
Institute.
182
THE CHALLENGE OF TERRORISM
183
TRIA UPDATE
  • TRIA expires 12/31/05
  • House subcommittee hearings held April 28went
    well
  • Senate hearings May 18many committee members
    amenable
  • Industry coalescing around a 2-year extension
  • Some life insurers trying to push for inclusion
    of group life
  • Treasury required to complete a study of the
    program by 6/05
  • Broad support from non-insurance industry
    groups/coalitions
  • Reauthorization opposed by
  • Consumer Federation of America
  • Some conservative think tanks (e.g., American
    Enterprise Institute)
  • Laissez-faire academics
  • Make Available requirement expires this year
  • Treasury must make ruling on extension of this
    provision by 9/1/04.
  • Industry, non-insurers and regulators support
    extension

184
Terrorism Is it Insurable Three Years After
9/11?
  • Traditional arguments against insurability still
    apply
  • No solid sense of frequency or severity of future
    events despite modeling efforts
  • Most major modern industrialized democracies have
    determined that terrorism risk is appropriately
    borne or at least shared by the state
  • UK, Spain, France, Germany Australia, Israel,
    South Africa…
  • No appreciable reinsurance market has developed
  • Very little securitization of terrorism risk
  • Very limited standalone market
  • Workers comp terror exposure problem seems
    insoluble
  • Terrorism is the face of warfare in the 21st
    century
  • NEW Increasing politicization of terrorism is
    compromising the integrity of the threat
    assessment process
  • NEW Budget and turf battles in Washington could
    harm funding for anti-terror programs
    initiatives (e.g., Homeland Security, esp. TSA
    funding)

185
Sept. 11 Industry Loss Estimates ( Billions)
Current Insured Losses Estimate 32.5B Source
Insurance Information Institute
186
Capital Myth US P/C Insurers Have 300 Billion
to Pay Terrorism Claims
Total PHS 298.2 B as of 6/30/01 291.1 B
as of 12/31/02
Only 40 of industry surplus backs up target
lines
Target Commercial includes Comm property,
liability and workers comp Surplus must also
back-up on non-terrorist related
property/liability and WC claims Source
Insurance Information Institute based on A.M.
Best Q.A.R Data.
187
Terrorism Take-Up Rates, Coverage Types Pricing
188
Terrorism Coverage Take-Up Rate Rising
Terrorism take-up rate rose through 2003 and
continues to rise in 2004
FACTS on Take-Up Rates Highest Energy Industry
40.5 Lowest Construction 12.2 Northeast
Highest 30.3 West Lowest 18.6
Source Marsh, Inc. Insurance Information
Institute
189
Terrorism Coverage Take-Up Rates by Industry
Source Marsh, Inc.
190
Terrorism Coverage Take-Up Rates by Region
Terrorism take-up rate is highest in the Northeast
Source Marsh, Inc. Insurance Information
Institute
191
Terrorism Coverage Take-Up Rates by Total Insured
Value (TIV)
Millions
Nearly 40 of firms with TIV between 500 million
and 1 billion buy terror coverage
Take-Up Rates for Small Firms TIV Between 5
million and 50 million take-up rate estimated at
30 TIV below 5 million Terror coverage
regularly purchased via package policies
Does not include firms that buy coverage through
package policies. Source Marsh, Inc. Insurance
Information Institute
192
Terrorism Premium as a Percentage of Property
Premium
Increase reflects fall in price of property
coverage rather than increase in price of terror
coverage
FACTs on Terror Premium Relative to Property
Premium Highest Energy Industry 8.03 Lowest
Construction 2.36
Source Marsh, Inc. Insurance Information
Institute
193
Terrorism Pricing Median Rates by Total Insured
Value (TIV)
The price of terrorism coverage fell during
2003helps explain increase in take-up rate
FACTS on Price Relative to TIV Highest Energy
Industry 0.0128 Lowest Education .0030
Excludes risks with nominal 1 premium or built
into all risks policy Source Marsh, Inc.
Insurance Information Institute
194
Terrorism Premium as Percentage of Property
Premium, by Industry
Source Marsh, Inc.
195
Terrorism Pricing Median Rates as Percentage of
Total Insured Value
Source Marsh, Inc.
196
World Rate-On-Line Index (1990 100)
Reinsurers didnt exclude windstorm after Andrew
in 1992, but generally excluded terror post 9/11,
so ROL not up as much
After unprecedented disasters, reinsurance prices
rise, limits fall so ROL rises 1991-93
221 2000-2003 75
Source Guy Carpenter Rate-on-Line is
the ratio of premium to loss limit.
197
Types of Terrorism Coverage Being Purchased
Source Marsh, Inc.
198
Types of Terrorism Coverage Being Purchased
32.7
27.3
26.0
23.5
Source Marsh, Inc.
199
THE POLITICIZATION OF TERRORISM
200
If They Dont Know, Insurers Cant Presume to
Know Either
201
Theyre Here and Plans are 90 Complete to
Attack
  • Most major government officials believe another
    attack is imminent
  • Terrorists plans are 90 complete for next
    attack
  • Government has no idea of how, when, where, who
    or what kind of attack is next.

202
Summary
  • 2004/5 represent sweet spot in the current
    cycle for p/c insurance (underwriting/earnings)
  • Yet expect more downgrades 1H04
  • OH remains has historically been a
    better-than-average state for the industry, but…
  • Rising investment returns could be a distraction
  • Reserve deficiency remains industrys principal
    boogieman
  • Concern exacerbated in Sarbanes-Oxley world
  • Major Challenges
  • Maintaining price/underwriting discipline
  • Managing variability/volatility of results
  • New/emerging/re-emerging risks

203
Insurance Information Institute On-Line
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