2004 overview & outlook for the p/c insurance industry marsh risk & insurance services...
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2004 Overview & Outlook for the P/C Insurance Industry
Marsh Risk & Insurance Services Client EventSan Francisco, CA
April 29, 2004
Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org
About theInsurance 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 [email protected]
Presentation Outline• P/C Insurance & Reinsurance Overview: Profit Pressure
Wall Street Pressure & The Urge to Merge
• Why Underwriting Matters: Pressure to Perform Ratings, Solvency & Financial Strength Issues
• Investment Performance: Low Pressure Area Capacity
• Macro Factors: Capital, Capacity & Cost Drivers• Pricing: Falling Pressure• Economic Pressures• Long-Term Underwriting Challenges
Tort Environment Workers Comp
• Q&A
P/C FINANCIAL OVERVIEW:
PROFIT PRESSURE
Highlights: Property/Casualty Full-Year 2003 vs. 2002
2003 2002 Change
Net Written Prem. 405,855 369,673 +9.8%
Loss & LAE 289,800 283,640 +2.2%
Net UW Gain (Loss) (4,635) (30,840) -85.0%
Net Inv. Income 38,686 37,225 +3.9%
Net Income (a.t.) 29,877 3,046 +880.9%
Surplus* 346,987 285,386 +21.6%
Combined Ratio 100.1 107.3 -7.2 pts.
-10%
-5%
0%
5%
10%
15%
20%
25%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
F
Current $ Real $
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
Strength of Recent Hard Markets by Real NWP Growth*
Real NWP Growth During Past 3 Hard Markets
1975-78: 8.6%
1985-87: 14.5%
2001-04F: 7.6%
1975-78 1985-87 2001-04
2004 forecast from III Groundhog Survey, 2/04.
P/C Net Income After Taxes1991-2003 ($ Millions)
$14,178
$5,840
$19,316
$10,870
$20,598
$24,404
$36,819
$30,773
$21,865$20,559
-$6,970
$3,046
$29,877
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
91 92 93 94 95 96 97 98 99 00 01 02 03*
Sources: A.M. Best, ISO, Insurance Information Institute.
2001 was the first year ever with a full year net loss
2002 ROE = 1.0%
2003 ROE = 9.4%
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04E
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2004E
Source: Insurance Information Institute; Fortune
-5%
0%
5%
10%
15%
20%
91 92 93 94 95 96 97 98 99 00 01 02 03 04F
ROE Cost of Capital
ROE vs. Cost of Capital: US P/C Insurance: 1991 – 2004F
Source: The Geneva Association, Ins. Information Inst.
The gap between the industry’s cost of capital and its rate of return is narrowing
14.6
pts
10.2
pts
US P/C insurers missed their cost of capital by an average 6.5 points from 1991 to 2003
2.1
pts
1.0
pts
P/C FINANCIAL OVERVIEW:
UNDERWRITING PRESSURE
95
100
105
110
115
120
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
*0
4*
P/C Industry Combined Ratio
2001 = 115.7
2002 = 107.2
2003 = 100.1
2004E = 100.0*
Combined Ratios
1970s: 100.3
1980s: 109.2
1990s: 107.8
2000-04: 106.7
Sources: A.M. Best; ISO, III *2004 figures based on III Groundhog Survey, 2/04.
($60)
($50)
($40)
($30)
($20)
($10)
$0
$10
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
Underwriting Gain (Loss)1975-2004F*
*2004 underwriting loss is forecast at $0 (based on forecast combined ration of 100.0 from IIIGroundhog forecast, 2/04.Source: A.M. Best, Insurance Information Institute
$ B
illi
ons
2003 was the best year since 1997, with underwriting losses of just $4.6 billion. The
forecast underwriting loss for 2004 is $0, given the expectation of a 100.0 combined ratio.
110
.5
10
5.0 11
3.6 11
9.2
10
4.8
10
0.8
10
0.5
114
.3
10
6.5
12
1.3
10
0.31
08
.8 115
.8
10
6.9
10
8.5
10
6.5
10
5.8
10
1.6
10
5.6
10
7.7
110
.0 115
.7
10
7.2
10
0.1
16
2.5
12
6.5
90
100
110
120
130
140
150
160
170
Reinsurance All Lines Combined Ratio
Combined Ratio: Reinsurance vs. P/C Industry
Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
2001’s combined ratio was the worst-ever for reinsurers; 2002 was bad as well.
2003: Big improvement in primary and reinsurer segments
2
0 0 0
5
9
1 1
0
1
6
5
<75 75-79 80-84 85-89 90-94 95-99 100-104
105-109
110-114
115-119
120-124
125+
Distribution of Reinsurer Combined Ratios, 2003*
Source: Insurance Information Institute from Reinsurance Association of America data *RAA results through first 9 months of 2003.
Reinsurer Combined Ratios:
2000: 110.8
2001: 162.5
2002: 121.3
2003: 100.3
WALL STREET:
PRESSURE TO PERFORM & THE URGE TO MERGE
Insurer Stocks: Outperforming the S&P 500
4.35%
8.53%
10.52%
10.60%
13.56%
2.04%
0% 5% 10% 15%
S&P 500
Multiline
All Insurers
Life/Health
P/C
Brokers
Source: SNL Securities, Insurance Information Institute
Total Return 2004 YTD Through April 16, 2004
Commercial Lines:Top 25 Writers Market Share*
59.1%
61.9%
55.5%
61.3%
50%
52%
54%
56%
58%
60%
62%
1977 1986 1997 2002
* By direct premiums written.Sources: A.M. Best, Morgan Stanley, Insurance Information Institute.
Virtually no consolidation in commercial p/c sector over the past 25 years, suggesting:
•M&As not generally successful
•Scale?
•Execution?
•Legacy
•Distribution?
•Deconsolidation (asset sales, spin-offs, failures)
•Low barriers to entry
($ Billions)$16.40 $16.40
$10.30
$5.40
$2.50 $2.20 $2.18
$5.05$4.70
$3.03
$0$2$4$6$8
$10$12$14$16$18
An
the
m &
We
llPo
int
He
alt
h
Tra
ve
lers
&S
t. P
au
l
Ma
nu
life
&J
oh
n H
an
co
ck
GE
Co
mm
l.F
ina
nc
e &
Tra
ns
am
eri
ca
Fin
an
ce
Gre
a-W
es
tL
ife
co
&C
an
ad
a L
ife
Fin
l.
Fo
rtis
IPO
Ch
ina
Lif
e IP
O
De
Ag
os
tin
o &
To
roA
ss
icu
razi
on
i
AIG
& G
E(V
ari
ou
s In
s.
Op
s.)
PM
I Gro
up
&F
ina
nc
ial
Gu
ara
nte
eIn
s. C
o.
Sources: Bannister Insurance Mergers Alert, January 2004.
Top 10 Global Insurance Industry Merger & IPO Announcements in 2003
WHY UNDERWRITING STILL MATTERS:
RATINGS, SOLVENCY, STRENGTH &
REINSURANCE
Number of Insurer Upgrades vs. Downgrades, 1993 to 2003*
45
64
34 4
-14
32
76
-2-1
-6 -6
-3-5
-7
-11
-15
-18-20
-15
-10
-5
0
5
10
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Upgrades Downgrades
*North American insurance holding companies through October 17, 2003
Source: Standard & Poor’s
Downgrades have outpaced upgrades by nearly 4:1 since 2000
Are we at a peak?
0.4
5
0.4
1
0.4
3
0.4
2 0.6
8
1.2
2
1.7
1
1.1
2
0.4
4
0.5
8 0.8
2
0.9
9
1.0
5
1.7
8
1.1
0.8
3
1.5
6
1.0
8
0.8
0.5
1
0.4
1 0.7
4
1.9
8
3.7
8
3.5
4.93
0
1
2
3
4
5
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
E
Ra
tio
of
Do
wn
gra
des
to
Up
gra
des
Downgrade/Upgrade Ratio*
Sources: Impairment Rate and Rating Transition Study—1977 to 2002, A.M. Best & Co.; 2003E from S&P. *U.S. property/casualty and life/health insurers
P/C Company Insolvency Rates,1993 to 2002
Source: A.M. Best; Insurance Information Institute
1.20%
0.58%
0.21%0.28%
0.79%
0.60%
0.23%
1.02% 1.03%
1.33%
1993 1994 1995 1996 1997 1998 1999 2000 2001 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%
383030
10-yr Failure Rate
= 0.72%
Reason for P/C Insolvencies(218 Insolvencies, 1993-2002)
Unidentified17%
Impaired Affiliate3%
Overstated Assets2%
Change in Business
3%
CAT Losses3%
Reinsurer Failure0%
Rapid Growth10%
Discounted Ops8%
Alleged Fraud3%
Deficient Loss Reserves
51%
Source: A.M. Best, Insurance Information Institute
Reserve deficiencies account for
more than half of all p/c insurers
insolvencies
$ Billions, Calendar Year Basis
$2.3 $2.2 $1.2
($8.5)
($1.5)
($7.5)($6.7)($10.0)
$22.7
$16.8
$0.3
($3.7)($0.3)
$9.9
($15)
($10)
($5)
$0
$5
$10
$15
$20
$25
90 91 92 93 94 95 96 97 98 99 00 01 02 03
P/C Insurance Industry Prior Year Reserve Development*
*Negative numbers indicate favorable development; positive figures represent adverse development.Source: A.M. Best, Morgan Stanley, Dowling & Partners Securities, Insurance Information Institute.
Adverse reserve development of about $23 billion accounted for most of the
industry’s 2002 and $17 billion in 2003
Points (Reduced)/Increased
0.5
(2.4)
5.2
6.3
(0.4)
-3
-2
-1
0
1
2
3
4
5
6
7
1998 1999 2000 2001 2002
Combined Ratio:Impact of Reserve Changes (Points)
Source: ISO, A.M. Best, MorganStanley.
Adverse reserve development totaling an estimated $23 billion
added more than 6 points to the p/c combines ratio in 2002
Commercial Lines Reserve Shortfalls (Year-End 2002)*
$ Billions$15.1
$9.3$8.0
$4.7$3.8
$1.8
($0.1)($2)
$0
$2
$4
$6
$8
$10
$12
$14
$16
OtherLiability**
WorkersComp
CommercialMultiperil
Med Mal** CommercialAuto
ProductsLiability**
SpecialtyLiab
*Average of Morgan Stanley “top-down” and “bottoms-up” estimates for accident years 1993–2002 as of 12/31/02.**Occurrence and claims made basis.Source: Morgan Stanley, January 2004.
25%
30%
35%
40%
45%
1998 1999 2000 2001 2002
Source: Reinsurance Association of America from Thompson Financial OneSource database.
US P/C Net Net Reinsurance Recoverables as % of Adjusted PHS
Alarm over sharp increase in reinsurance recoverables in 2002 to 41.5% of adjusted PHS
Guarantee Fund Net Assessments*(1979-2002)
$ Millions
$46.
2
$17.
8
$49.
8
$41.
1
$509
.4
$903
.2
$464
.8
$713
.9
$433
.6
$434
.8
$360
.5 $545
.4
$524
.9
$94.
8
$124
.2 $263
.7
$263
.6
$201
.3
$328
.6
$734
.7
$1,2
09.0
$30.
6$9
7.4
$292
.4
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02
*Excludes NY and workers comp security funds in NJ and PA.Source: National Conference of Insurance Guarantee Funds; Insurance Information Institute
Assessments rose dramatically during the last hard market, setting
a new record now.
INVESTMENTS:
NO SUBSTITUTE FOR SOUND UNDERWRITING
$0
$9
$18
$27
$36
$45
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03
Net Investment Income
History
1997 Peak = $41.5B
2000= $40.7B
2001 = $37.7B
2002 = $37.2B
2003 = $38.7B
Bil
lion
s
(US
$)
Investment income fell 1.3%in 2002 but rose 3.9% in 2003
Source: A.M. Best, ISO, Insurance Information Institute
0%
2%
4%
6%
8%
10%
12%
14%
16%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
*
3-Month T-Bill 1-Yr. T-Bill 10-Year T-Note
Interest Rates: Lower Than They’ve Been in Decades
*March 2004.Source: Board of Governors, Federal Reserve System; Insurance Information Institute
1. Historically low interest rates are the primary driver behind lower investment yields. Nevertheless, overall insurer investment performance outpaces all major market indices and almost every major category of mutual fund.
2. 66% of the industry’s invested assets are in bonds
Rates likely to rise sharply soon
-30%
-20%
-10%
0%
10%
20%
30%
40%
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
*As of April 14, 2004.Source: Ibbotson Associates, Insurance Information Institute
Total Returns for Large Company Stocks: 1970-2004*
2003 ended a streak of 3 consecutive years of declines for stocks
Will the bull market run out of steam in 2004?
S&P 500 was up 28.7% in
2003
US Insurers’ Asset Allocation, 1998-2002 (%)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1998 2000 2002
Other
Cash & short-term assets
Bonds
Common andpreferred stock
Real estate andmortgages
Source: Insurance Information Institute and A.M. Best Co
Swiss Re Asset Allocation Shift: 1999-2003
62%69%
75%81% 86%
34%26%
20%14%
10%
4% 5% 5% 5% 4%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1999 2000 2001 2002 2003*
OtherInvestments
Shares
Fixed IncomeInvestments
*As of June 30, 2003
Source: Swiss Re
“Strong growth in fixed income portfolio reflects reallocation of funds from equity portfolios, cash inflows, market appreciation and two Admin Re transactions.”
- Swiss Re Analysts’ Meeting, 08/29/03
Swiss Re’s fixed income portfolio increased to CHF 81 billion at the end of the first half of 2003, up from CHF 74 billion at year-end 2002.
Allianz Group Asset Allocation Shift: 1999-2003*
54% 55%67%
73% 77%
37% 36%26% 19% 16%
6% 6% 4% 5% 4%3%3%3.0%3% 3%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1999 2000 2001 2002 2003*
Other
Real Estate
Equities
Fixed IncomeInvestments
*As of September 30, 2003.
Source: Allianz Group Financial Results 9M 2003.
Allianz’s equity exposure has reduced significantly since 1999.
US P/C Net Realized Capital Gains1990-2003 ($ Millions)
$2,880
$4,806
$9,893
$1,664
$5,997
$9,244$10,808
$18,019
$13,016
$16,205
$6,631
-$1,214
$6,917
$9,818
-$5,000
$0
$5,000
$10,000
$15,000
$20,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03
Sources: A.M. Best, ISO, Insurance Information Institute.
Realized capital gains rebounded strongly in 2003
Property/Casualty Insurance Industry Investment Gain*
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.6
$57.9
$51.9
$56.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 02 03
*Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.Source: Insurance Services Office; Insurance Information Institute.
Investment gains are simply returning to “pre-bubble” levels
PRICING:
DOWNWARD PRESSURE?
How the Risk Dollar is Spent (2003)
Source: RIMS (2003); Insurance Information Institute
Firms w/Revenues < $1 Billion
Total Mgmt. Liab.8%
Other2%
Total Prof. Liab10%
WC Premiums8%
Retained Liability
11%
Admin Costs5% Property
Premiums16%
Retained Property
6%
Liabilty Premiums
14%
Retained WC21%
Firms w/Revenues > $1 Billion
Total Mgmt. Liab.7%
Other4%
Total Prof. Liab13%
WC Premiums14%
Retained Liability
4%
Admin Costs9%
Property Premiums
20% Retained Property
3%
Liabilty Premiums
18%
Retained WC10%
Insurance is the Biggest Concern of Small Business Owners
Regulations11%
Competition9%
Labor Qlty.8%
Taxes17%
Poor Sales16%
Labor Costs5% Inflation
1%
Insurance28%
Credit/Int. Rates1%
Source: National Federation of Independent Business (November 2003); Insurance Information Institute
$6.10$6.40
$8.30$7.70
$7.30
$6.49
$5.70$5.25
$5.71
$6.46
$8.91
$11.96
$4.83$5.20
$4
$5
$6
$7
$8
$9
$10
$11
$12
$13
90 91 92 93 94 95 96 97 98 99 00 01 02 03* Cost of risk includes insurance premiums, retained losses and administrative expenses
Source: 2003 RIMS Benchmark Survey; Insurance Information Institute
Cost of Risk: 1990-2003*
1992-2000 = -41.8%
2000
-03
= +1
47.6
%
$2.92$2.72
$2.55
$1.43
$3.63 $3.54 $3.57
$2.07
$1.26 $1.15
$2.49
$1.86$1.67
$1.00
$0.46$0.87 $0.82
$0.96
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
Total WCCosts
Total LiabilityCosts
TotalProperty
Costs
Other Costs Total Admin.Costs
Total Mgmt.LiabilityCosts
2001 2002 2003
Components of Cost of Risk Per $1,000 of Revenue*
* Cost of risk includes insurance premiums, retained losses and administrative expensesSource: 2003 RIMS Benchmark Survey; Insurance Information Institute
+45.8% +90.3% +113.8%
+107.0%
+44.8%+150.0%
% Change
2001 -03
95.9 96.0
101.5
94.2
91.390.0 90.7
84.5
89.3
101.1
94.4
87.0
91.3 90.6
$8.30
$7.30$6.49
$8.91
$6.10$6.40
$7.70
$5.70
$5.25
$5.71$5.20
$4.83
$6.46
$11.96
80
85
90
95
100
105
110
90 91 92 93 94 95 96 97 98 99 00 01 02 03
Co
mm
erc
ial L
ine
s O
pe
rati
ng
Ra
tio
$0
$2
$4
$6
$8
$10
$12
Co
st
of
Ris
k/$
10
00
Re
ve
nu
e
Commercial Operating Ratio
Cost of Risk
Source: RIMS, A.M. Best; Insurance Information Institute * 2003 operating ratio is III estimate.
Cost of Risk vs. Commercial Lines Operating Ratio*
14
%11
% 13
%1
6%
19
%2
2%
28
%3
1%
31
%2
8% 3
0% 3
2% 33
%2
8% 29
% 30
% 32
%3
0%
27
%2
5%
28
%2
2%
18
%1
8%
17
%1
6%
12
%1
2%
10
% 12
%11
%9
%
5%
10%
15%
20%
25%
30%
35%
Ju
l-0
1
Au
g-0
1
Sep
-01
Oct
-01
No
v-0
1
Dec
-01
Ja
n-0
2
Feb
-02
Ma
r-0
2
Ap
r-0
2
Ma
y-0
2
Ju
n-0
2
Ju
l-0
2
Au
g-0
2
Sep
-02
Oct
-02
No
v-0
2
Dec
-02
Ja
n-0
3
Feb
-03
Ma
r-0
3
Ap
r-0
3
Ma
y-0
3
Ju
n-0
3
Ju
l-0
3
Au
g-0
3
Sep
-03
Oct
-03
No
v-0
3
Dec
-03
Ja
n-0
4
Feb
-04
Source: MarketScout.com
PRICINGCommercial 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?
P/C Soft Spots: % Accounts With Negative Price Change(1st Qtr. 2004)
58%
30%
16%12%
26%23%
11% 11%
0%5%
10%15%20%25%30%35%40%45%50%55%60%
Comm Prop BizInterruption
Terror Comm Auto WC GL EPL Umbrella
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
More moderation is evident in the commercial
casualty segments
Property
Casualty/Liability/Terrorism
Proportion of Accounts Renewing With Increase of 20% or More,
(Select Lines)
Source: Council of Insurance Agents and Brokers; Insurance Information Institute
54%
38%
38%
32%
20% 25
%
20%
6%
78%
53%
53%
53%
35%
18%
13%
8%6% 6% 3%2% 1% 2%
10%
23%
48%
38%
63%
5%
14%
23%
2002:II 2002:III 2002:IV 2003:I 2003:II 2003:III 2003:IV 2004:I
D&O Construction Risk GL Terrorism
Proportion of Workers Comp Accounts Renewing With Increase of
20% or More
Source: Council of Insurance Agents and Brokers; Insurance Information Institute
54%
38% 38%
32%
20%
12%
3%
2002:II 2002:III 2002:IV 2003:I 2003:II 2003:III 2003:IV 2004:I
Average Expenditures on Auto Insurance: US
$668$691 $706 $704
$683 $687$718
$781
$842$871
$500
$550
$600
$650
$700
$750
$800
$850
$900
95 96 97 98 99 00 01 02* 03* 04*
Countrywide auto insurance expenditures are expected to
rise 3.5% in 2004
*III Estimates; Estimates for 2002-2004 based on BLS CPI data for motor vehicle insurance.Source: NAIC, Insurance Information Institute
Average Expenditures on Homeowners Ins.: US
$418$440 $455
$481 $488$508 $520 $532
$569$615
$200
$300
$400
$500
$600
$700
95 96 97 98 99 00 01* 02* 03* 04*
*III Estimates; Estimates for 2001-2003 based on BLS CPI data for tenants and household insuranceSource: NAIC, Insurance Information Institute, TX Department of Insurance.
Average US HO expenditures are expected
to rise by 8% in 2004
100110
120130
140150
160170
180190
200210
220230
240250
260
89 90 91 92 93 94 95 96 97 98 99 00 01 02* 03*
Rate On Line Index(1989=100)
Source: Guy Carpenter * III Estimate
Prices rising, limits falling: ROL up significantly
P/C COST DRIVERS
Macro Factors
$0
$50
$100
$150
$200
$250
$300
$350
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
U.S. Policyholder Surplus: 1975-2003
Source: A.M. Best, Insurance Information Institute *As of 9/30/03.
$ B
illi
ons
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 (a trough?)
•Surplus increased by $61.6B or 21.6% to $347.0B
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
$53.9 Billion
Capacity of Lloyd’s Market
£8.9
£10.9£10.2£10.0£10.3£10.2 £9.9 £10.1
£11.1
£12.2
£14.9£14.9
£8
£9
£10
£11
£12
£13
£14
£15
£16
93 94 95 96 97 98 99 00 01 02 03 04
After remaining stable at around GBP10bn, Lloyd’s capacity has increased by over 40% in the last three years.
2004 capacity is GBP14.9bn, unchanged from 2003.
Source: Lloyd’s
Number of Captive Formations & Liquidations 1993 to 2003E
294
305
250
245
316
462 51
0
238 28
9
243 29
0
150
113
103
102 13
5
154
156
170 20
2
311
0
100
200
300
400
500
600
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003E
New Captives Liquidated CaptivesSource: AM Best, Advisen
Hard market fueling captive formation
Corporate collapses and captive consolidations fueled the upward trend in captive liquidations in 2002.
Change in Policyholder Surplus for US Reinsurers
$59.2
($23.5)
($4.4)
$24.9
$13.8
($4.3)($11.1)($7.6)
$15.8
($15.6)
$47.3$54.8
($30)
($20)
($10)
$0
$10
$20
$30
$40
$50
$60
$701/
1/98
PH
S
Net
U/W
Los
s
Oth
er I
nco
me
Net
In
v.In
com
e
Rea
lized
Cap
.G
ain
s
Inco
me
Tax
Un
real
ized
Cap
. Gai
ns
Oth
er S
urp
lus
Los
ses
Con
trib
ute
dC
apit
al
Sto
ckh
old
erD
ivid
end
s
12/3
1/02
PH
S
9/30
/03
PH
S
$ B
illi
ons
Source: A.M. Best
Contributing Factors Over 5 years: 1/1/98 -12/31/02
U.S. InsuredCatastrophe Losses ($ Billions)
$7.5
$2.7$4.7
$22.9
$5.5
$16.9
$8.3 $7.3
$2.6
$10.1$8.3
$4.3
$28.1
$5.9
$12.9
$1.0$0
$5
$10
$15
$20
$25
$30
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04*
*2004 figure is for 1st quarter only ($963 million).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
$ Billions2003 was the 4th worst year ever for insured catastrophe losses in the US. There were 4
events with losses exceeding $1 billion
1st Quarter U.S. InsuredCatastrophe Losses, 2000-2004*
$0.68 $0.62
$1.48
$0.96
$1.98
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
2000 2001 2002 2003 2004
Ins
ure
d L
os
se
s (
$ B
illio
ns
)
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
Cla
im C
ou
ntInsured Loss
Claim Count
*Events with insured losses of at least $25 millionSource: Property Claims Service/ISO; Insurance Information Institute
$ BillionsThere were 5 official catastrophes*
during the 1st Quarter 2004 (same as in 2003), producing insured losses of
$963 million from 230,150 claims
WORKERS COMP
WORKERS COMPENSATION MEDICAL COSTS:
CRITICAL CONDITION
+6.8%+1.3%
+5.1%+6.4%
+7.3%+5.7%
+7.4%
+7.6%
+10.7%
+12.0%
-2.1%+9.0%
6
7
8
9
10
11
12
13
14
15
16
Accident Year
WC Medical Claim Costs Accelerating Too
Medical Claim Cost (000s)
Annual Change 1991-1995: +4.0%
Annual Change 1996-2001: +8.1%
Based on data through 12/31/2001, developed to ultimate, as of 12/2/2002Based on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policies
Source: NCCI
4.5%3.6%
2.8% 3.2% 3.5%4.1%
4.6% 4.7%
5.1%
6.4%7.3%
5.7%
7.4% 7.6%
10.7%
12.0%
0%
2%
4%
6%
8%
10%
12%
14%
1995 1996 1997 1998 1999 2000 2001 2002
Change in Medical CPIChange Med Cost per Lost Time Claim
WC Medical Severity Rising Far Faster than Medical CPI
Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
7.3
pts
WC medical severity is rising 2.7 times faster than the
medical CPI
Med Costs Share of Total Costs is Increasing Steadily
Indemnity60%
Medical40%
Source: NCCI (based on states where NCCI provides ratemaking services).
Indemnity52%
Medical48%
Indemnity47%
Medical53%
1982
1992
2002p
6.5%
7.7%8.6%
9.5% 9.6%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
1997 1998 1999 2000 2001
WC Drug Costs as % of Total WC Medical Costs*
*Analysis is on an accident year (AY) basis, developed through 8th report.Source: National Council on Compensation: Prescription Drugs: Comparison of Drug Costs and Patterns of Use in Workers Compensation and Group Health Plans.
WC drug costs account for an increasingly large share of WC medical costs. They are a major driver behind
the accelerating cost of providing medical care to injured workers.
1.06
1.13
1.07 1.061.05
1.20 1.21
1.141.11
1.36
1.29
1.21
1.0
1.1
1.2
1.3
1.4
1997-1998 1998-1999 1999-2000 2000-2001
Price Impact Utilization Impact Total Impact
Impact of Price & Utilization on Workers Comp Drug Costs*
Utilization has greater impact on WC drug costs than price. Reflects trend
toward new/more powerful drugs and more
prescriptions.
Source: National Council on Compensation: Prescription Drugs: Comparison of Drug Costs and Patterns of Use in Workers Compensation and Group Health Plans.
Generic Prescriptions Written When Generics Available in WC
21%79% 8% 92%
% of times generic available but not
prescribed
% of times generic available but not
prescribed
Additional cost savings if generic
used 100% of time when available
All other brand and prescription
drug costs
Source: National Council on Compensation Insurance: Prescription Drugs: Comparison of Drug Costs and Patterns of Use in Workers Compensation and Group Health Plans.
Prescription Drug Cost Breakdown: WC vs. General Health
Pain-killers55%
Antide-pressants
14%Muscle Relaxants
20%
All Other11%
Source: National Council on Compensation Insurance: Prescription Drugs: Comparison of Drug Costs and Patterns of Use in Workers Compensation and Group Health Plans.
Cardio-vascular
18%
Anti-infectives
13%Antide-pressants
15%
All Other54%
Workers Comp % Total Paid
Group Health % Total Paid
DRUG NAME Brand vs. GenericCelebrex (anti-inflammatory) Brand (generic not available)
Oxycontin (painkiller) Brand (generic not available)
Vioxx (anti-inflammatory) Brand (generic not available)
Hydrocodone (painkiller) GenericNeurontin (painkiller) Brand (generic not available)
Ultram (painkiller) Brand (generic available)
Carisoprodol (muscle relaxant) Generic (same as Soma)
Cyclobenzaprine (muscle relaxant) GenericSoma (muscle relaxant) Brand (Same as carisoprodol)
Ambien (sedative) Brand (generic not available)
Top 10 Prescription Drugs by Total Paid in Workers Comp
Source: National Council on Compensation Insurance.
Reasons for Increased Prescription Drug Utilization in Workers Comp
Aggressive Marketing Major pharmaceuticals spend twice as much on advertising as on R&D
Greater Availability & Dependence on Medications for Treatments
Aging Workforce: requires more assistance from prescription drugs
Unhealthy Workforce E.g.,: About 2/3 of adults are overweight or obese, increasing the frequency of
some types of injuries and making recovery more difficult relative to a
healthy weight individual.
Addiction? (e.g., Oxycontin)
Source: National Council on Compensation Insurance, Insurance Information Institute
Prevalence of Overweight and Obesity among US Adults (aged 20-74 years)
32 33 33
56%
64%
47%
0
10
20
30
40
50
60
70
NHANES II (1976-80) NHANES III (1988-94) NHANES (1999-2000)
%
Obese (BMI>30)
Overweight (BMI 25.0-29.9)
Source: Centers of Disease Control and Prevention (CDC), National Center for Health Statistics (NCHS), National Health and Nutrition
Examination Survey (NHANES); Insurance Information Institute
Nearly 2/3 of US adults are overweight or obese, up
from 47% in the late 1970s
15
2331
Millions
3032 33
36 3740 39
4143
0
5
10
15
20
25
30
35
40
45
50
87 89 91 93 95 97 99 01 02
Number of Uninsured People in the US Under Age 65*
Source: Employee Benefits Research Institute
•A record 43 million people were without health insurance in the US in 2002. •More cost-shifting into WC is unavoidable as the number of uninsured people continues to rise.
Industries Where Workers Without Health Benefits are Employed
Personal Services
31%
Agri-culture,
Forestry, Fishing &
Mining17%
Public Sector
6%
Wholesale & Retail Trade31%
Manu-facturing
15% •About 1/3 of Americans w/o health coverage work in hazardous class industries•Cost shifting into WC among this group is likely
Source: Employee Benefits Research Institute; Ins. Info. Inst.
“CHALLENGING” STATES
CaliforniaTexas
Problem StatesCalifornia:
State would be insolvent if it were a private carrierHas about 50% of state market share, making it not only the largest WC insurer in CA, but also USRecent sharp increase in benefitsPassed reform 9/03; Hope to lower costs $5 - $6B
Texas:Fraud/Abuse, esp w/chirosUtilization issuesLegislature doesn’t reconvene until January 2005
Florida:Bona fide “crisis”Utilization/fraud/abuse problemsPassed reform this summer: reduced rates 12.5%
95 9183
75
136
122
105
8982
40
60
80
100
120
140
160
1999 2000 2001 2002 2003:Q1
US CA
Workers Comp Loss Ratios Much Higher in California*
*Accident year data except Q1 2003 for CA which is calendar year.Source: NCCI, WCIRB
Losses in CA are far worse than the national experience.
$9,5
00
$9,2
30
$9,6
80
$9,8
50
$10,
420
$11,
010
$11,
720
$12,
570
$13,
550
$14,
600
$15,
620
$9,8
90
$10,
494
$11,
030
$12,
352
$14,
137
$16,
188
$18,
108
$19,
860
$20,
592
$21,
587
$22,
119
$5,000
$10,000
$15,000
$20,000
$25,000
92 93 94 95 96 97 98 99 00 01 02US CA
Workers Comp Indemnity (Wage Replacement) Costs Higher in CA
Source: NCCI, WCIRB
•Wage replacement costs in California are 41.6% above the US average
$7,8
00
$7,9
00
$7,7
35
$8,4
30
$8,8
60
$10,
120
$10,
690
$11,
410
$12,
360
$13,
680
$15,
320
$9,5
47
$9,8
85
$10,
619
$11,
746
$13,
137
$15,
230
$18,
385
$21,
588
$24,
519
$28,
673
$35,
201
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
92 93 94 95 96 97 98 99 00 01 02US CA
Workers Comp Medical Costs are Much Higher in California
Source: NCCI, WCIRB
•Medical costs in California are 129.8%% above the US average
Average Payment per Claim for Chiro. Visits in Selected States
$468$771 $824
$1,191 $1,209$1,539
$2,317
$4,836
$0
$1,000
$2,000
$3,000
$4,000
$5,000
FL MA GA CT WI PA CA TX
Pa
yme
nt p
er
Cla
im to
Ch
iros
Source Eccleston, Wang, Watson and Zhao (2000) in Targeting More Costly Care: Area Variation in Texas Medical Costs and Utilization, Workers Compensation Research Institute (2002).
Major problems with payments to chiropractors in Texas
Variation in Medical Costs Per Claim in Texas
$4,662$5,042
$6,113$6,424
$7,062$7,353
$4,000
$5,000
$6,000
$7,000
$8,000
Austin SanAntonio
El Paso Dallas Ft. Worth Houston
Me
d C
ost
pe
r C
laim
Source Targeting More Costly Care: Area Variation in Texas Medical Costs and Utilization, Workers Compensation Research Institute (2002); 1996 injuries w/experience as of June 1997.
+8%
+31%
+38%
+51%+58%
Deviation from Austin
Utilization, unbundling, surgery costs, diagnostic
tests, chiro charges, hospital supplies all
show enormous variation across TX
Duration of Temporary Disability Claims in Texas
84
91 9398
103 104 106 106 107111
70
80
90
100
110
120
Du
ratio
n o
f Cla
im (
Da
ys)
Source Targeting More Costly Care: Area Variation in Texas Medical Costs and Utilization, Workers Compensation Research Institute (2002); 1996 injuries w/experience as of June 1997.
+8%+11%
+17%
+23% +24% +26% +26% +27%+32%
Deviation from Austin
LEGAL LIABILITY & TORT
ENVIRONMENT(full presentation available upon
request to III members)
Cost of U.S. Tort System($ Billions)
Source: Tillinghast-Towers Perrin.
$129 $130$141 $144 $148
$159 $156 $156$167 $169 $180
$205
$233
$298
$0
$50
$100
$150
$200
$250
$300
$350
90 91 92 93 94 95 96 97 98 99 00 01 02 05F
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
Personal, Commercial & Self (Un) Insured Tort Costs*
$17.0$49.1 $57.2
$87.4$17.1
$51.0$70.9
$78.5
$5.4
$20.1
$29.6
$42.9
$0
$50
$100
$150
$200
$250
1980 1990 2000 2002
Commercial Lines Personal Lines Self (Un)Insured
Bil
lion
s
Total = $39.5 Billion
*Excludes medical malpracticeSource: Tillinghast-Towers Perrin
Total = $120.2 Billion
Total = $157.7 Billion
Total = $208.8 Billion
Where the Tort Dollar Goes(2002)
Source: Tillinghast-Towers Perrin
Awards for Non-Economic
Loss24%
Claimants' Attorney Fees
19%Awards for
Economic Loss22%
Defense Costs14%
Administration21%
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
Who Will Pay for the US Asbestos Mess?
Source: Tillinghast-Towers Perrin; Insurance Information Institute
US Insurers30%Asbestos
Defendants39%
Foreign Insurers
31%
Estimated Total US Settlements & Expenses = $200 billion
$78 billion $60 billion
$62 billion
THE U.S. LEGAL SYSTEM:IS IT OUT OF CONTROL?
TRENDS, CONDITIONS & OUTLOOK
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
Business Leaders Ranking of Liability Systems for 2004
Best States1. Delaware2. Nebraska3. Virginia4. Iowa5. Idaho6. Utah7. New Hampshire8. Minnesota9. Kansas10. Wisconsin
Worst States41. Missouri42. Arkansas43. Montana44. Illinois45. Texas46. California47. Louisiana48. Alabama49. West Virginia50. Mississippi
Source: US Chamber of Commerce States Liability Systems Ranking Study; Insurance Info. Institute.
The Nation’s Judicial Hellholes
Source: American Tort Reform Association; Insurance Information Institute
City of St. Louis, MO
CALIFORNIA
Alameda County
Los Angeles County
San Francisco County
Orleans Parish, LA
I
Madison County, IL
TEXAS
Jefferson County
Hidalgo County
Starr County
Mississippi’s 22nd Judicial
District
Claims Filed Against U.S. Silica By Claimant (1997-2003)
Source: Coalition for Litigation Justice; (* through 6/30/03)
93 153 505 6541,371
5,142
15,342
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
1997 1998 1999 2000 2001 2002 2003*
• Leading industrial sand producer U.S. Silica today faces more than 22,000 silica claims!
• Some 15,342 plaintiffs have named the company in lawsuits so far in 2003 - triple the number seen in 2002!
Some 87% of the lawsuits filed are from Mississippi and Texas!
Prevalence of Overweight and Obesity among US Adults (aged 20-74 years)
32 33 33
56%
64%
47%
0
10
20
30
40
50
60
70
NHANES II (1976-80) NHANES III (1988-94) NHANES (1999-2000)
%
Obese (BMI>30)
Overweight (BMI 25.0-29.9)
Source: Centers of Disease Control and Prevention (CDC), National Center for Health Statistics (NCHS), National Health and Nutrition
Examination Survey (NHANES); Insurance Information Institute
Nearly 2/3 of US adults are overweight or obese, up
from 47% in the late 1970s
15
2331
Average Jury Awards1994 vs. 2001and 2002
419
187
333
1,18
5
1,14
0 1,74
4
1,21
0
309 75
0
3,09
9 3,91
3
1,19
9
221 76
7
4,42
1
6,24
6
5,60
1
7,795
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
Overall VehicularLiability
PremisesLiability
Wrongful Death MedicalMalpractice
ProductsLiability
($00
0)
1994 2001 2002
Source: Jury Verdict Research; Insurance Information Institute.
Probability of Plaintiff Verdict is Rising
Source: Jury Verdict Research, 2003 Current Award Trends
1994 1997 2002
Premises Liability 43% 45% 49%
Business Negligence NA 57% 62%
Vehicular Liability 58% 59% 63%
Products Liability 39% 39% 61%
There is Was is Was a Glimmer of Hope for Tort Reform
Best Chance for Tort Reform in Years• Medical Malpractice
States—already happening: 20+ states have capsFederal reform discussed in Congress but bill failed in SenateAttempt to get caps for specialties failed February 2004
• Class Action ReformClass Action Fairness ActFailed by 1 Vote 10/22/03; Likely back up 2004???
• Asbestos ReformFairness in Asbestos Injury Resolution of 2003; Failed Apr. 2004
• Punitive Damages—What’s ReasonableSupreme Court ruled favorably in Campbell v. State Farm
INFLUENCE OF TORT ENVIRONMENT AND LEGAL
LIABILITY TRENDS ON PRICING
Liability: Average Cost per $1,000 of Revenue*2001 to 2003
$1.2
5
$0.6
5
$0.6
7
$0.3
3
$0.1
7
$0.1
1
$0.2
3
$1.9
6
$0.9
4
$2.3
1
$1.3
0
$1.0
3
$0.6
7
$0.4
2
$0.1
7 $0.4
0
$0.7
2
$0.3
8
$0.2
4
$0.2
6
$0.1
3
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$0 - $200M $201M-$500M
$501M-$1B $1B-$5B $5B-$10B $10B+ All
200120022003
*Across entire liability program
Source: Marsh, 2003 Limits of Liability Report
INFLUENCE OF MASS TORT ENVIRONMENT AND LEGAL
LIABILITY TRENDS ON AVAILABILITY
Average Total Limits Purchased by All Firms* ($ Millions)
*Includes underlying primary limits
Source: Limits of Liability 2003, Marsh, Inc.
$77.9
$85.8$83.2
$85.9$88.7
$99.1
$105.0$101.8
$95.7
$87
$50
$60
$70
$80
$90
$100
$110
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Limits purchased fell by 17.1% between 2000 and 2003. Price/capacity are issues.
Excess Liability Market Capacity
Source: Marsh, 2003 Limits of Liability Report
$1.425$1.575
$1.710
$2.045$1.941
$2.011
$1.721
$1.405$1.334
$1.432
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Bil
lio
ns Capacity has dropped 30% since peaking in 2000
ECONOMIC PRESSURE:
PERSONAL LINES DOING WELL, BUT PRODUCTIVITY
GAINS & “JOBLESS” RECOVERY IS (WAS?) BAD NEWS FOR COMMERCIAL
INSURERS
4.4
%
3.0
%
2.0
%
5.2
%
7.1
%
2.6
%
4.8
%
0.6
%
1.1
%
-0.6
%
-0.3
%
5.0
%
1.3
%
4.0
%
1.4
%
1.4
%
3.3
%
8.2
%
4.1
%
4.4
%
-1.6%2
.7%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
19
98
99
:I
99
:II
99
:III
99
:IV
00
:I
00
:II
00
:III
00
:IV
01
:I
01
:II
01
:III
01
:IV
02
:I
02
:II
02
:III
02
:IV
03
:I
03
:II
03
:III
03
:IV
*
20
04
*
Real GDP Growth
*Estimate/ForecastSource: US Department of Commerce, Blue Economic Indicators 12/03; Insurance Information Institute.
Economy experienced weak growth following the recession of 2001,
strengthening now with only small positive impact on commercial
exposure growth.
New Private Housing Starts(Millions of Units)
1.19
1.01
1.20
1.29
1.461.35
1.48 1.47
1.62 1.64 1.57 1.60
1.71
1.79
1.70
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04F
Source: US Department of Commerce; Blue Chip Economic Indicators (12/03), Insurance Info. Institute
New Private Housing Starts
•Housing market remain strong.
•Virtually no exposure impact for insurers
Motor Vehicle Retail Sales (Millions of Units)
15.515.5
16.0
17.4
17.8
17.217.1
16.7 16.816.7
16.8 16.917.1
17.2
15.0
15.5
16.0
16.5
17.0
17.5
18.0
96 97 98 99 00 01 02 03 04F 05F 06F 07F 08F 09F
Source: US Department of Commerce; Insurance Information Institute;Blue Chip Economic Indicators as of December 2003.
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
1.3%1.2%
3.6%
0.5%
1.3%0.9%
2.5%2.0%
2.6%2.3%
1.9% 2.1%
7.0%
9.5%
2.7%3.0%
5.4%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
90
91
92
93
94
95
96
97
98
99
00
01
02
03
Q1
03
Q2
03
Q3
03
Q4
Current Recovery is Productivity Led
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Productivity increases are unambiguously good for the
economy, but commercial insurance exposure growth is likely to be held back as businesses remain skittish over hiring and big investments in
plant & equipment
129.0
129.5
130.0
130.5
131.0
131.5
132.0
132.5
133.0
Jan-00
Apr-00
Jul-00
Oct-00
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Number of Employed Workers(Millions)
Source: U.S. Bureau of Labor Statistics; Insurance Information Institute
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
129.81 million, its lowest level since October 1999.
MARCH 2004: Employment rose by 308,000
Economy needs to create 150,000 – 200,000 jobs per month to keep
pace with population growth
0
500
1000
1500
2000
2500
3000
3500
4000
4500
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03*
*III estimate based in data through September 2003.Source: US Bureau of Economic Analysis; Insurance Information Institute.
“Jobless Recovery” of 2001-2003 Hurting Workers Comp Exposure
1/80-7/80 7/81-11/82 7/90-3/91
Shaded areas
represent recessions
3/01-11/01
Wage & Salary Disbursement (Private Employment, $Billions)
THE CHALLENGE OF TERRORISM
Sept. 11 Industry Loss Estimates($ Billions)
Life$2.7 (7%)
Aviation Liability
$3.5 (9%)
Other Liability
$10.0 (25%)
Biz Interruption$11.0 (27%)
Property -WTC 1 & 2$3.5 (9%)
Property - Other
$6.0 (15%)
Aviation Hull$0.5 (1%)
Event Cancellation
$1.0 (2%)
Workers Comp
$2.0 (5%)
Consensus Insured Losses Estimate: $40.2BSource: Insurance Information Institute
Capital Myth: US P/C Insurers Have $300 Billion to Pay Terrorism Claims
"Target" Commercial*$116 billion
40%
Other Commercial$53 billion
18%Personal$123 billion
42%
Total PHS = $298.2 B as of 6/30/01
= $291.1 B as of 12/31/02
*”Target” Commercial includes: Comm property, liability and workers comp; Surplus must also back-up on non-terrorist related property/liability and WC claimsSource: Insurance Information Institute based on A.M. Best Q.A.R Data.
Only 40% of industry surplus backs up “target” lines
Terrorism Coverage Take-Up Rate Rising
Source: Marsh, Inc.; Insurance Information Institute
24%26%
33%
27%
2003:II 2003:III 2003:IV Average
FACTS on Take-Up Rates
Highest = Energy Industry = 40.5%
Lowest = Construction = 12.2%
Northeast = Highest = 30.3%
West = Lowest = 18.6%
Terrorism take-up rate rose through 2003 as commercial property
premiums level-off or fall
Total International Terrorist Attacks, 2002
Source: Patterns of Global Terrorism, US Department of State; Insurance Information Institute
5
99
7
5029
0 98
327
245
13
132
0 0
Africa Asia Eurasia LatinAmerica
MiddleEast
NorthAmerica
WesternEurope
Number of Attacks Deaths
In 2002, there were 199 terrorist attacks resulting in 725 deaths and 2,013 injuries
International Terrorist Attacks by Type of Event, 2002
Bombing, 137
Kidnapping, 5
Armed Attack, 50
Barricade Hostage, 2
Firebombing, 2
Other, 1
Assault, 1Hijacking, 1
Source: Patterns of Global Terrorism, US Department of State; Insurance Information Institute
Bombings accounted for 69% of the 218 facility attacks in 2002, while
armed attacks accounted for 25%,
International Terrorist Attacks by Type of Facility Struck, 2002
Military, 1 Other, 75
Government, 17
Diplomat, 14
Business, 111
Source: Patterns of Global Terrorism, US Department of State; Insurance Information Institute
Attacks on businesses accounted for 56% of the 199 terror attacks in 2002,
while armed attacks accounted for 9%,
International Terrorist Attacks by Casualty, 2002*
Military, 83
Other, 2,257
Government, 337
Diplomat, 39
Business, 22
*Total of 2,738 casualties consists of 725 deaths and 2,013 injuries.Source: Patterns of Global Terrorism, US Department of State; Insurance Information Institute
Terrorist attacks killed more civilians than any other group (82% of the
2,738 casualties), followed by government workers (12%) in 2002. Business personnel accounted for
less than 1% of casualties (despite 56% of attacks being against business
facilities).
Political Risk Rankings for Selected Countries
Low Med/Low Medium Med/High HighUnited States China Russia Pakistan Iraq
Canada Saudi Arabia Mexico Venezuela Afghanistan
W. Europe South Africa India Honduras Argentina
Japan Poland Indonesia Uruguay Nicaragua
Australia South Korea Turkey Ukraine Cuba
New Zealand Baltic States Egypt Jordan Georgia
Singapore Malaysia Thailand Bangladesh North Korea
Chile Columbia Nigeria Myanmar
Israel Brazil Ecuador Tajikistan
Source: Global Political Risk 2004, Sovereign Risk Insurance Ltd.; Insurance Information Instititute
EMERGING RISKS:
No Shortage of Long-Term Challenges
Possible Top Risks from Contemporary Perspective
27.026.5
25.5
24.524.0
26.0
24.0
20
22
24
26
28
30
EMF/Electrosmog
BSE (MadCow)
GM Food &Labelling
Eco/BioDamage
DeterioratingAcct. Stds.
AccidentalGM/non-GM
Mixing
GM Crops
Source: Swiss Re: Emerging Risks
No shortage of emerging problems, others include: Generic Drugs, MTBE, Softeners, Xenotransplants, Nanotechnology, Asbestos, Stress in the Workplace, Repetitive Strain Disorders, Antibiotic Resistance, Chem. Additives to Building Materials (IAQ)
Old McDonald Had a Problem
Blackouts: Are More in Store?
Estimated Insured Mold Losses: 2000-2002
Source: Insurance Information Institute
$ Billions
$0.5
$1.4
$3.0
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
2000 2001 2002
Insured mold losses rose by 500% from 2000 to 2002.
$0
$50
$100
$150
$200
$250
Jan-
01
Mar
-01
May
-01
Jul-0
1
Sep-0
1
Nov-0
1
Jan-
02
Mar
-02
May
-02
Jul-0
2
Sep-0
2
Nov-0
2
Jan-
03
Mar
-03
May
-03
Jul-0
3
Sep-0
3
Wa
ter
Da
ma
ge
Pa
id L
os
se
s* ($
Mill
ion
s)
0
5000
10000
15000
20000
25000
30000
Cla
im C
ou
nt
Paid Losses
Claim Count
Source: Texas Department of Insurance; Insurance Information Institute
* 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.
Texas: Mold Losses/Claims Continuing to Moderate*
Summary• Pressure to perform is intense: profits, UW, Wall Street…
• 2004/5 represent “sweet spot” in the current cycle for p/c insurance
(underwriting/earnings)
• Soaring capacity: Tougher to higher ROE; Tests discipline
• Rising investment returns: Hopefully not a distraction
• Reserve deficiency remains industry’s principal boogieman
• Major Challenges: Maintaining price/underwriting discipline
Managing variability/volatility of results
New/emerging/re-emerging risks
Product innovation: Will ART Eat our Lunch?
Insurance Information Institute On-Line
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