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How to Live to Be 100:I th P t /C ltIn the Property/Casualty
Insurance Industryy115th NAMIC Annual Convention
September 20, 2010pSan Diego, CA
Download at www.iii.org/presentationsRobert P. Hartwig, Ph.D., CPCU, President & Economist
Insurance Information Institute ♦ 110 William Street ♦ New York, NY 10038Tel: 212.346.5520 ♦ Cell: 917.453.1885 ♦ bobh@iii.org ♦ www.iii.org
Presentation Outline
The Life Cycle of Businesses: Lessons from the Natural WorldCharacteristics of the World’s Oldest BusinessesP/C Centenarians: Who Lives to Be 100+ and Why?Why Do Insurers Fail?Secrets of the Ancients: Leadership Attributes of 100+ Year Old InsurersLesson from the Financial CrisisTop Challenges for the Decade AheadQ&A
2
Lessons from Nature: What Would Darwin Would Say?
Longevity in the Business World Has Parallels in the Natural WorldHas Parallels in the Natural World
3
On the Life Cycle of Businesses: Lessons from Nature
Most Businesses, Like Living Species, Eventually Become Extinct99 5% of all living species to ever exist on Earth are now extinct; The99.5% of all living species to ever exist on Earth are now extinct; The proportion is higher for business and extinctions occur over a much compressed timespan.Changes in the natural environment (not external forces like humans) were responsible for almost all e tinctionsresponsible for almost all extinctionsThis means that despite millions of years of evolution and adaptation, virtually every species eventually confronts a change in its environment to which it cannot adaptIt is the same in business
Business Cycle Gives Rise to “Creative Destruction”Mass extinctions in business are commonEconomy is constantly reinventing itselfNew industries and businesses spring from the ashes of the previous ggeneration, fill voids and occupy niches
Mass Extinction: Surge in Business Bankruptcy Filings Amid Crisis Since 2007
00 277
81,2
3582
,446
3 549
43
90,000
% Change Surrounding Recessions
1980-82 58.6%1980-87 88 7%
694
8,12
569
,30
62,4
3664
,004 71,2 8
63,8
5363
,235
64,8
5371
,570
,662
,304
52,3
7451
,959
53,5
4954
,027
367
4 99 0 1 546 60
,837
60,000
70,000
80,0001980 87 88.7%1990-91 10.3%2000-01 13.0%2006-09 208.9%*
43,6 48
5 5 5
44,3
37,8
8435
,472
40,0
938
,540
35,0
3734
,317
39,2
0,6
95 28,3
2243
,5
29,0
59
30,000
40,000
50,000
Th 60 837 b i b k t i i 2009 19
0
10,000
20,000
,There were 60,837 business bankruptcies in 2009, up
40% from 2008 and the most since 1993. 2010:H1 bankruptcies totaled 29,059, down 4% from H1:2009, but
still very high by historical standards.
0
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910
:H1
The Crisis Will Destroy Hundreds of Thousands of Businesses, But Few to
5Source: American Bankruptcy Institute; Insurance Information Institute
None Property/Casualty Insurers
Private Sector Business Starts,1993:Q2 – 2009:Q4*
6 220 22
322
022
022
1
18220
230
(Thousands)
4 199 20
420
295 96 96
206
206
201
198
206
206
203
211
205
212
200 20
520
420
497
203 20
920
1
320
1 204
202
210 21
220
921
6 2 2 221
0 212
204
2 120
920
719
93
203
200
210
220
175
186
7418
018
6 192
188
187 18
918
6 190 19
419
1 1 9 19 19
192 1
192
192
193
191 19
317
7 180
180
190
200
180 000 businesses started in1 17
171
169
160
170180,000 businesses started in
2009:Q4, the best quarter in 2009. 2009 was the slowest year for new
business starts since 1993.
15093 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Business Starts Are Down Nearly 20% in the Current Downturn,
6
y ,Holding Back Most Types of Commercial Insurance Exposure
*Latest available as of September 12, 2010, seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm.
Lessons from History: What Types of Business Live a VeryWhat Types of Business Live a Very Long Time (500+ Years) and Why?
Longevity in the Business World Requires Focus, Long-Term ObjectivesRequires Focus, Long Term Objectives
7
Number of Firms More than 500 Years Old, by Industry*
Total NumberThe brewery
industry appears to have
BENEATH THE SURFACEM t f th i
3535
40
appears to have the greatest
longevity with 35 firms 500+
Most of these companies are:
1. Family Owned2 Hi hl f d28
1925
30
35 35 firms 500+ years old. 2. Highly focused on one
specific business3. Have some geographic 19
7 5 410
15
20g g p
focus (product or client)
5 4 2 2 2 2 10
5
wery otel
rant
Wine
acy ary
Glass
per
Sake
port
hers
Brewe
HotRest
aura W
iPharm
aCon
fectio
na Gla
Pap SakTra
nspo Othe
Source: http://en.wikipedia.org/wiki/List_of_oldest_companies
Characteristics of Firms That Stand the Test of Time
1. Business Model: Highly FocusedFirms tend to remain true to core businessAvoid businesses you don’t understandSome diversification is usually good, but leads to an exponential increase in complexity and unforeseen interactions across units
2. Ownership Structure: There Exists Some Concept of MutualitySome of the world’s oldest firms are family owned (artisans, craftsman)Others have some form of cooperative arrangement (agricultural)Such organizations also exhibit altruistic behavior, a proven survival trait
3. Communal Interest: A Concern for the Greater Common GoodPerpetual of the species (i e the industry) is evident in behaviorsPerpetual of the species (i.e., the industry) is evident in behaviorsConcept of mutuality extends beyond organization to communal interestA strong willingness to work for the common good
Characteristics of Firms That Stand the Test of Time (cont’d)
4. Growth: Tend to Grow SlowlyAs with living species, the longest lived businesses in the world tend to grow only slowly, if at all
5 Size: Tend to Be Small Relative to Competition5. Size: Tend to Be Small Relative to CompetitionSize seems to matter when it comes to species longevity: smaller = longerAlso true among living species (e.g., bacteria, insects)
6. Profitability: Tend Not to Be the Most ProfitableObject of continuous profit maximization is not consistent with longevityA “will to survive” is still necessaryA “will to survive” is still necessary
World’s Oldest Insurance Companies
Who’s Truly Endured?
11
World’s Oldest Insurance Companies, by Age and Country*
322368Bilsener (Germany)
Lloyd's (UK)321
300266
258
y ( )Gjensidige (Norway)
Royal & SunAlliance (UK)Dolleruper (Germany)
Philadelphia Contributionship (USA)254
243222218
p p ( )Möreler Brandgilde (Germany)
Storebrand (Norway)Ostangler (Germany)
CIGNA (USA)
The oldest insurance
companies are more likely to
216216
210200
( )Baltimore Equitable (USA)
Mutual Assurance (USA)Providence Mutual (USA)
The Hartford
more likely to be mutuals
197191189186
Neuendorfer (Germany)Gilmore & Associates (USA)
Hickok & Boardman (USA)Clerical Medical (Germany) 86
0 50 100 150 200 250 300 350 400
C e ca ed ca (Ge a y)
*Insurers’ age calculated as number of years from inception date to 2010Source: http://en.wikipedia.org/wiki/List_of_oldest_companies; III research.
# of Years Old
World’s Oldest Insurance Companies, by Age and Country* (cont’d)
184185Standard Life (UK)
Ci i ti E it bl (USA) 184184184
182
Cincinnati Equitable (USA)HEK (Germany)
Schweizerische Mobiliar (Switzerland)Vermont Mutual (USA) 182
171170
169
Vermont Mutual (USA)Lakeland Insurance
HüttenerNew York Life (USA) 169
168167167
New York Life (USA)Atlantic Mutual
Frederick MutualHolyoke Mutual (USA)
The oldest insurance
companies are more likely to167
163162
160
o yo e utua (US )Southern Mutual
Macomber, Farr and Whitten (USA)Aetna
more likely to be mutuals
145 150 155 160 165 170 175 180 185 190*Insurers’ age calculated as number of years from inception date to 2010. Source: http://en.wikipedia.org/wiki/List_of_oldest_companies
# of Years Old
The Centenarians: Who Lives to Be 100+ in the P/C Insurance World?
Characteristics of An Exclusive C fClub of Insurers
14
100+ Year Old Insurers as a Share of All P/C Insurers
Nearly 13% of P/C insurance companies (1-in-8) today is 100+ years old. This is a surprisingly high percentage.
Insurers at Least 100 Years Old, 12.7%(287)
Insurers Less than12.7%
Insurers Less than 100 Years Old,
87.3%(1,979)
87.3%
Odds of a Human Living to 100Born 1900: ~0 25% (1-in-400)
15Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC; CDC
Born 1900: 0.25% (1 in 400)Born Today: ~2% (1-in-50)
Decade of Formation for P/C Insurers at Least 100 Years Old in 2010
Of the Centenarian p/c insurers in existence today, 70% were formed since 1870. There
was a post-Civil war spike in formations in the 1870s and another in the 1890s
6065
60
70
80
As of Jan. 1, 2010 there were 287 P/C that were at least 100 years old.
37 3840
50
9 10
22 2016
10
20
30
31 0 0 04 2
0
10
1750-59
1760-69
1770-79
1780-89
1790-99
1800-09
1810-19
1820-29
1830-39
1840-49
1850-59
1860-69
1870-79
1880-89
1890-99
1900-09
16
Decade Of Formation
Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC.
100-Year-Old Insurers: Independent vs. Part of Group/Holding Company
The number of 100-year-old insurers that are independent vs. part of a more diversified group structure is split almost evenly.
Independent, 48.8%(140)
51.2% 48.8%Part of Holding
Company, 51.2%(147)
17Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC.
100-Year-Old Insurers: Some Are Shell Companies or Are in Runoff
Approximately 12% of “existing” 100-year old insurers had net written premiums greater than zero, suggesting they were either unused shell
companies or in runoff and not actively writing new business.companies or in runoff and not actively writing new business.
NPW Equal or Less Than Zero, 12.2%(35)
12.2%
NPW Greater than Zero, 87.8%(252)
87.8%
18Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC.
100-year-old Insurers: Mutual vs. Stock vs. Reciprocal
The vast majority (62.4%) of 100-year-old insurers are mutual insurers, while stock insurers account for 35.9% of the total.
1 4%0.3%
Reciprocal, 1.4%,(4)
Other, 0.3%,(1)
35 9%
1.4%
Mutual, 62.4%,(179)
62 4%
35.9% ( )
Stock, 35.9%,(103)
62.4%
19Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC.
100-Year Old Insurers: Share of Total Industry NWP 1998 vs. 2008
19982008100-yr insurer
NWP
15.6%
NWP$44.33 Billion
16.5%
100-yr insurer NWP
$73.14 Billion
28.3%
6.9%
48.4%Total P/C industry NWP
$283.91 Billion
Total P/C industry NWP
$444.10 Billion
The market share of 100-year-old insurers as a % of total P/C industry NWP remained stable over the decade ending in 2008 (latest available)
20
Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC; A.M. Best
remained stable over the decade ending in 2008 (latest available)
100-year-old Insurers: Share of Total Industry Admitted Assets 1998 vs. 2008
19982008100-yr insurer
assets
17.5%
assets$183.74 Billion
19.0%
100-yr insurer assets
$306.65 Billion
28.3%
6.9%
48.4%Total P/C industry assets
$1,048.62 Billion
Total P/C industry assets
$1,617.31 Billion
The market share of 100-year-old insurers as a % of total P/C industry assets has increased slightly over the years
21Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC; A.M. Best
has increased slightly over the years.
Distribution of 2008 NWP by Decile
21.7"Centenarians" All P-C companies
Median NWP ($Million)
$1,3
2
$1,200
$1,500 There are a small number of large Centenarian insurers, mostly part of larger groups, that
make the median NWP size of this group larger
5
$690
.7
$600
$900for the top 50% of companies by size;
Centenarians tend to be somewhat larger among the smaller-sized firms.
51.5
$102
.1
$248
.5
0.2 .2 3.3
6.4
12.8
23.4
41.4
$80.
1
$164
.6
0.1 .0 2.7
4.9
11.4
23.0$300
$600
$$0 $1 $3 $6 $1 $2 $ $$0 $1 $2 $4 $1 $2$0
Lowest 2d 3d 4th 5th 5th 4th 3d 2d Highest
22
Note: 25 companies per decile for centenarians; 227 per decile for all p/c industrySource: NAIC Annual Statement data, via Highline
lowest lowest lowest lowest highest highest Highest Highest
Distribution of 2008 Surplus by Decile
1,90
9.6
$2,000
"Centenarians" All P/C IndustryMedian Surplus ($Million)
There are a small number of large Centenarian $15.
3
$1,500
There are a small number of large Centenarian insurers, mostly part of larger groups, that make the median size of this group by PHS larger for the top 50% of companies by size;
6 6.8
277.
6
3 4 3 4 .1 209.
6
$78 5
0 3$500
$1,000 Centenarians tend to be somewhat larger among the smaller-sized firms.
$59.
$11 $
$1.4
$3.8
$7.4
$12.
3
$20.
4
$32.
3
$57.
$98 $ 2
$1.4
$2.4
$5.0
$8.5
$16.
0
$32.
3
$0
Lowest 2d 3d 4th 5th 5th 4th 3d 2d HighestLowest 2dlowest
3dlowest
4thlowest
5thlowest
5thhighest
4thhighest
3dHighest
2dHighest
Highest
23
Note: 25 companies per decile for centenarians; 225 per decile for all P-CSource: NAIC Annual Statement data, via Highline
Distribution of 1998-2008 NWPChange, by Decile
.8%"Centenarians" All P-C
Median Rate of Change
1918
1400%1600%1800%2000%
Centenarian insurers tend to grow more slowly than the industry overall and across
% 483%
% 9% 60.6
%
600%800%
1000%1200%1400% virtually all sizes of firm
107%
138% 20
4%
4
% %
10.7
%
38.4
%
62.9
%
90.6
%
138.
0%
220.
9 4
%
-9%
18%
46%
61%
82%
-200%0%
200%400%600%
-91.
1%
-29.
2
-50200%
Lowest 2dlowest
3dlowest
4thlowest
5thlowest
5thhighest
4thhighest
3dHighest
2dHighest
Highest
24
Note: 24 companies per decile for centenarians’ 163 per decile for all P-C industry 1998-2008Source: NAIC Annual Statement data, via Highline
Distribution of 1998-2008 SurplusChange, by Decile
.0%
900%1000%
Centenarians All P-C
Median Rate of Change
%4%
722.
500%600%700%800%900%
92%
124% 16
6% 291 %
9.7%
40.4
%
62.9
%
91.8
%
130.
0%
186.
4% 288.
4
3% 32%
50%
65%
100%200%300%400%500%
-45.
8% -6.9
%
1 4
-42% -11%
1 3 5-100%
0%100%
Lowest 2d 3d 4th 5th 5th 4th 3d 2d Highestlowest lowest lowest lowest highest highest Highest Highest
Centenarian Insurers Surplus Expanded Less Quickly Relative to Other Insurers
25
Note: 24 companies per decile for centenarians; 163 per decile for all p-c 1998-2008Source: NAIC Annual Statement data, via Highline
to Other Insurers
Premium to Surplus Ratios, “Centenarians” vs. Current P-C Industry, 1998 and 2008
$0.95$1.00"Centenarians" Current P-C Industry
NWP/Surplus
$0.85
$0.72 $0.69
$0 60
$0.70
$0.80
$0.90
$0.30
$0.40
$0.50
$0.60
$0.00
$0.10
$0.20
1998 20081998 2008
Premiums are a rough measure of risk accepted; surplus is funds beyond reserves to pay unexpected losses. The larger surplus is in relation to premiums—the lower the ratio of premiums to surplus—the greater the
26
“Centurians” are companies at least 100 years old with positive NWP in 2008 Sources: National Association of Insurance Commissioners’ Annual Statements, via Highline; I.I.I. calculations
p e u s t e o e t e at o o p e u s to su p us t e g eate t ecapacity to handle the risk it has accepted.
Asset Class Distribution of Admitted Assets,“Centenarians” vs. All P/C Insurers, 2008
Bonds Stocks Cash Other
20.9%
5.9% 20.6%52.6%All P/C Insurers
%20.8%
3.2% 21.3%53.7%Centenarians
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
27
Note: 25 companies per decileSource: NAIC Annual Statement data, via Highline
Why Do Insurers Fail?Why Do Insurers Fail?
Leading Reasons Why Most Insurers Don’t Make it to 100
28
P/C Insurer Impairments, 1969–2009
705 of the 11 are Florida companies (1 of these
Since most failures are due to inadequate pricing, underreserving
and excessive growth (factors under management control) the leading
49 50 4855
60 58
49 504750
60
5 is a title insurer)management control), the leading cause of death in the p/c insurance
industry amounts to suicide
34 36
3134
4
4129 31
435
30
40
50
815
12 11 9 913 12
199
16 14 13
1612
18 19 1814 15
10
20
30
8 7 9 9 9 7 65
0
10
69 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 04 05 06 07 08 09
Source: A.M. Best; Insurance Information Institute.
The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2009
115
120
1.8
2.0Combined Ratio after Div P/C Impairment Frequency
110
115
Rat
io
1.2
1.4
1.6
Impair
100
105
Com
bine
d
0.6
0.8
1.0
rment R
ate
90
95
0 0
0.2
0.4
0.6
2009 estimated impairment rate rose to 0.36% up from a near record low of 0.23% in 2008 and the 0.17% record low in 2007; Rate is still less than one-half the 0.79% average since 1969
90
69 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 04 05 06 07 08 09* 0.0
g
Impairment Rates Are Highly Correlated With Underwriting Performance
30Source: A.M. Best; Insurance Information Institute
p g y gand Reached Record Lows in 2007/08
Summary of A.M. Best’s P/C Insurer Ratings Actions in 2009
Despite financial market turmoil and a soft market
in 2009, 76% of ratings actions by A.M. Best
11 9%
actions by A.M. Best were affirmations;
just 2.9% were downgrades and 3.2%
were upgradesOther – 216
3.8%2.4%
11.9%75.7%
pg
Affirm – 1,375
Initial 44Under Review – 69
2.9%3.2%
Downgraded –53
Upgraded – 59Initial – 44
P/C Insurance is by Design a Resilient Business. The Dual Threat of Financial Disasters and Catastrophic Losses
31
.Source: A.M. Best.
pAre Anticipated in the Industry’s Risk Management Strategy
Five Deadliest Sins for P/C Insurance Companies
OPERATIONAL ISSUES
1. Underpricing/Underreserving (~38% of failures)p g g ( )Leading cause of p/c insurer death according to A.M. Best
2. Excessive Growth (~14%)( )Too much growth too fast (organically or via M&A) can be fatal
3. Excessive Catastrophe Exposure (~8%)( )Too much underpriced exposure, too little reinsurance, insufficient diversification
4 I t t P bl ( 7%)4. Investment Problems (~7%)Investments are too risky, too illiquid or insufficiently understood
5 Affiliate Problems ( 8%)5. Affiliate Problems (~8%)Non-core operations can cause problems for parent (e.g., AIG)
Source: I.I.I. research.
Reasons for US P/C Insurer Impairments, 1969–2008
Deficient Loss Reserves and Inadequate Pricing Are the Leading Cause of Insurer Impairments, Underscoring the Importance of Discipline.
Investment Catastrophe Losses Play a Much Smaller Role
3.7%4 2%
Investment Catastrophe Losses Play a Much Smaller Role
Reinsurance Failure
Mi
Sig. Change in Business
4.2%9.1%
7.0% 38.1% Deficient Loss Reserves/Inadequate Pricing
Investment Problems
Misc.
7.9%
38.1% Inadequate Pricing
Affiliate Impairment
7.6%
8.1% 14.3%Catastrophe Losses
33Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008
Rapid GrowthAlleged Fraud
U.S. P/C Insurance-RelatedM&A Activity, 1988–2009
$56$60 140Transaction Values
$35$40
$40
$50
($ B
illio
n)
100
120
Num
be
Number of Transactions
$19 $20
$35
$16
$31
$20
$30
ctio
n Va
lue
60
80
er of Transa
$2$5
$1 $0 $0
$9$14
$16
$4$8
$12
$2$3 $3 $5$6
$10
$20
Tran
sac
20
40
ctions
$$0
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 090
2010: No Mega Deals So Far, Despite Record Capital Slo Gro th and Impro ed$ Value of Deals Down 78%
34
Note: U.S. Company was the acquirer and/or target.Source: Conning Research & Consulting.
Record Capital, Slow Growth and Improved Financial Market Conditions
$in 2009, Volume Up 7%
Leadership Attributes Found in pInsurers that Reach 100+ Years
Secrets of the Ancients
35
Leadership Attributes Inherent in Long-Lived Insurance Companies1. Management Acts as a Steward of the Enterprise
Objective is to pass a healthy firm safely and securely to the next generation of management and policyholders
2. Management Financial IncentivesIn line with the goal of providing the protection purchasedTh i t i ll 3rd t ( h h ld ) t tThere is typically no 3rd party (shareholders) to compensate
Objective if public company is to maximize profits
CEO (total) comp is a smaller multiple relative to average employee
3. Nimble: Environment for Small Insurers Can & Does ChangeNot likely first to change, but adaptation occurs within reasonable timeframe
4. Customer Focus & Relationship DrivenCustomer is the #1 priorityCommitted to agency form of distribution, with 21st century enhancementg y y
5. RegulationIn favor of comprehensive but local regulation (contrast with banks)
What Do I Admire in an Insurer and Its Management?1. A Firm Whose Management’s Incentives are Strictly
Aligned With the Insurer’s Principal StakeholdersCustomers agents employees communityCustomers, agents, employees, communityThese include financial and operational objectives
2 M t I K l d bl2. Management Is KnowledgeableManagement of small, long-lived insurer is no less knowledgeable about industry trends, opportunities and threats than larger competitorscompetitors
3. Intuitive and Comprehensive Understanding of Enterprise Risk ManagementRisk Management
Much is made of ERM today, but long-lived insurers practiced it well before it had a name
What Do I Admire in an Insurer and Its Management?4. CEO is Willing to Seek Advice and Counsel
No imperial CEOs; Self-aggrandizement is rareCEO is a listener and consensus builder
5. Commitment to Core ConstituenciesCustomer is the #1 priorityCommitted to agency form of distribution, with 21st century enhancement
6. Lack of a “Wandering Eye”Disciplined enough to stick with the business you know, but also adapting to changing business conditions and seizing opportunities as necessary
Lessons from the Financial CrisisLessons from the Financial Crisis
What Have the Past Two Years Taught /C ?the P/C Insurance Industry?
39
Lessons All Financial Industries Must Learn from the Recent Financial Crisis1. Risk Management Matters
2 Getting Involved in Businesses You Don’t Understand2. Getting Involved in Businesses You Don t Understand Can Be Fatal
3. Too Rapid Growth Can Kill Quickly3. Too Rapid Growth Can Kill Quickly
4. Management Financial Incentives Can Pervert Risk Management Controlsg
5. Support of Comprehensive and Appropriate Regulation is Vital to Longevity of Financial Services Enterprisesg y p
6. Keeping “Skin in the Game” is Critical
7. Never Lose Sight of What is in the Best Interest of the Customer
What Some Troubled Insurers Learned From the Financial Crisis
Bottom Line:
Adherence to Sound Risk Management Makes a Big Difference
Keeping Skin in the Game Matters
Taking Inordinate Risk on the Investment Portfolio to Earn a Few More Basis Points in Yield is Dangerous
Involvement in Non Core Business Can Cause Serious ProblemsInvolvement in Non-Core Business Can Cause Serious Problems
Tail Probabilities Matter and May Often Be Underestimated
Can’t Substitute Liquidity for CapitalCan t Substitute Liquidity for Capital
Regulatory Vacuums and Regulatory Arbitrage are Dangerous
Taking Government Money Can Be Like Making a Deal With the Devil
41
g y g
Source: Insurance Information Institute
How P/C Insurance Industry Stability Has Benefitted Consumers
Bottom Line:
Insurance markets – unlike banking – are operating normally
The basic function of insurance – the orderly transfer of risk from li t t i ti i t t dclient to insurer – continues uninterrupted
This means that insurers continue to:Pay claims (whereas 287 banks have gone under as of 9/10/10)y ( g )
– The promise is being fulfilledRenew existing policies (banks are reducing and eliminating lines of credit)W it li i (b k t i l d b i hWrite new policies (banks are turning away people and businesses who want or need to borrow)Develop new products (banks are scaling back the products they offer)Compete intensively (banks are consolidating reducing consumer choice)
42
Compete intensively (banks are consolidating, reducing consumer choice)
Source: Insurance Information Institute
5 Challenges for the Next 10 Years5 Challenges for the Next 10 Years
Staying Alive: The Decade Ahead
43
#1.Maintaining Adequate Reserves
and Pricingand Pricing
Historicall Fail re to Adeq atelHistorically Failure to Adequately Reserve and Price is the #1 Killer of
Insurance Companies44
Insurance Companies
P/C Reserve Development, 1992–2011E
23.2$25
$30
$B)
6
8 Impac
Prior Yr. ReserveDevelopment ($B)
Prior year reserve releases totaled
$8.8 billion in the first half of 2010 up
11.7 13.79.9
7.3$
$10
$15
$20
e R
elea
se ($
2
4
6 ct on Com
b
Impact onCombined Ratio
first half of 2010, up from $7.1 billion in
the first half of 2009
2.3
-2.1 -2.6-6 6
-4.1
1
6 7 -5$10
-$5
$0
$5
rYr.
Res
erve
-2
0
ined Ratio (
-8.3 -6.6-9.9 -9.8
-6.7-9.5
-14.6-16 -15-$20
-$15
-$10
2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 E E
Prio
r
-6
-4
(Points)
92 9 94 9 9 9 9 9 0 0 02 0 0 4 0 0 0 0 0
10E
11E
Reserve Releases Are Continuing Strong in 2010 But Should Begin to Taper Off in 2011
45
Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclay’s Capital; A.M. Best.
Calendar Year vs. Accident Year P/C Combined Ratio: 1992–2010E1
.1 115.
9
114.
7
1.8
2 2 .0 2.3
4115.
7
4115
120
105.
6
107.
8
110.
107.
3
100.
1
8.3 10
0.9 10
5.1
101.
9 105.
9
1
107.
8 11
107.
4
108.
3
105.
3 109.
2
109.
2
110. 11
100.
8
6 0 100.
6
.4
105.
5
105.
7 109.
4
106.
9
108.
4
106.
4
105.
8
101.
6
105
110
115
1 98
92.4 95
.5
96. 6
96.0 1
93.9 97
.
90
95
100
80
85
92 93 94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09E 10E
Calendar Year Accident Year
Accident Year Results Show a More Significant Deterioration in Underwriting Performance. Calendar Year Results Are Helped by Reserve Releases
46
Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclay’s Capital; A.M. Best.
Underwriting Gain (Loss)1975–2010:H1*
$
$35 Cumulative underwriting deficit f 1975 th h
($ Billions)
$5
$15
$25 from 1975 through 2009 is $445B
-$25
-$15
-$5
$55
-$45
-$35
$ 5The industry recorded a $5.1B underwriting
loss in 2010:H1 compared to $2.1B in
2009:H1
Large Underwriting Losses Are NOT Sustainable
-$55
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
* Includes mortgage and financial guarantee insurers.Sources: A.M. Best, ISO; Insurance Information Institute.
in Current Investment Environment
P/C Insurance Industry Combined Ratio, 2001–2010:H1*
As Recently as 2001, Insurers Paid Out
Nearly $1 16 for Every
Relatively Low CAT L
Heavy Use of Reinsurance Lowered Net
Relatively Low CAT LNearly $1.16 for Every
$1 in Earned Premiums
Losses, Reserve Releases
Cyclical
Lowered Net Losses Losses,
Reserve Releases
115.8120
Best Combined
Ratio Since 1949 (87 6)
Cyc caDeterioration
Lower CAT Losses,
More Reserve R l
99 3 100.1101.0100.8100.1
107.5110 1949 (87.6) Releases
95.7
99.3
92.6
98.4
90
100
48
* Excludes Mortgage & Financial Guaranty insurers in 2008, 2009 and 2010. Including M&FG, 2008=105.1, 2009=100.7, 2010:H1=101.7 Sources: A.M. Best, ISO.
902001 2002 2003 2004 2005 2006 2007 2008 2009* 2010:H1
Number of Years with Underwriting Profits by Decade, 1920s–2010s
10
12Number of Years with Underwriting Profits For insurers to
survive the next 5-10 years, they will need to run underwriting
8
10
76
8
10to run underwriting
profits on a consistent basis
3
54
6
4
6
0 0 00
2
1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s* 2010s**
Underwriting Profits Were Common Before the 1980s (40 of the 60 Years Before 1980 Had Combined Ratios Below 100) –
But Then They Vanished. Not a Single Underwriting Profit Was Recorded in the 25 Years from 1979 Through 2003
49
*2000 through 2009. 2009 combined ratio excluding mortgage and financial guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an underwriting profit.**Based on estimated combined ration of 101.7 for 2010.Note: Data for 1920–1934 based on stock companies only. Sources: Insurance Information Institute research from A.M. Best Data.
Recorded in the 25 Years from 1979 Through 2003
Average Expenditures on Auto Insurance
$950
$830 $842 $831$816 $816
$844
$878
$850
$900
$705$726
$786$816
$795$816
$703$750
$800
$651$668
$691$705
$690$685$703
$650
$700
$60094 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 09* 10*
Countrywide Auto Insurance Expenditures Increased
50
Countrywide Auto Insurance Expenditures Increased2.6% in 2008 and 3.5% Pace in 2009 (est.) and 4% in 2010 (est.)
* Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimates 2008-2010 based on CPI data.
Average Premium forHome Insurance Policies**
$950
$822 $835$854
$879
$804$764$800
$850
$900
$668
$764$729
$6 0
$700
$750
$
$508$536
$593
$550
$600
$650
$508$500
00 01 02 03 04 05 06 07 08* 09* 10*
51
* Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2008-2010 based on CPI data.
Average Commercial Rate Change,All Lines, (1Q:2004–2Q:2010)
Q04
Q04
Q04
Q04
Q05
Q05
Q05
Q05
Q06
Q06
Q06
Q06
Q07
Q07
Q07
Q07
Q08
Q08
Q08
Q08
Q09
Q09
Q09
Q09
Q10
Q10
(Percent)-0
.1%
-2%
0%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
Magnitude of Price Declines Shrank
During Crisis,
-3.2
%% -4
.6%
-2.7
%-3
.0%
3% .1%
4.9% % 6% 3%-6%
-4%
During Crisis, Reflecting Shrinking
Capital, Reduced Investment Gains,
Deteriorating Underwriting
-5.9
%-7
.0%
4% 7%-8
.2%
-
-5.
6%
-6.4
% -5 -4-5
.8%
-5.6 -5.
-6.4
%
-10%
-8%
gPerformance, Higher
Cat Losses and Costlier Reinsurance
-9.
-9.7
-9.6
-11.
3%-1
1.8%
.3% -12.
0%5% 2.
9% -11.
0%
-14%
-12%
KRW Eff t
Market Remains Soft as Capital
52
-13
-13. -1
2-16%
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
KRW Effectp
Restored and Underwriting Losses
Remain Modest
Change in Commercial Rate Renewals, by Line: 2010:Q2Percentage Change (%)
n
All Com
mercial
Comml P
ropGL Umbre
llaCom
ml Auto
WV
Constr
uctio
nD&O
Bus. In
terrup
tion
EPL
Surety
-0.1%
-3 0%-2.0%-1.0%0.0%
-4.6%
-3.4% -3.3% -3.0%
6 0%-5.5% -5.4%-6.0%
-5.0%-4.0%3.0%
Most Major Commercial Lines Renewed Down in Q2:2010 at a
-6.4%-7.0%
-6.3% -6.0%
-8.0%-7.0%
53Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
jFaster Pace than a year Earlier
Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2010:Q2Percentage Change (%)
Market has Been Soft for 6 years and Remains Soft
Peak = 2001:Q4 +28.5%
as Capital is Restored and Underwriting Losses
Remain Modest
Pricing Turned Negati e in Earl
28.5%
KRW
Negative in Early 2004 and Has Been Negative
Ever Since
KRW Effect
Trough = 2007:Q3 -13.6%
54Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2010:Q2
1999:Q4 = 100
Pricing today is where is was in
Q4:2000 (pre-9/11)
55Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
#2F lli B hi d iFalling Behind in
Underwriting Technology:Underwriting Technology: The Competitive Leading Edge
U d iti A WillUnderwriting Acumen Will Determine Long-Run Success
56
A Technological Arms Race?
Competition: Success Defined More by Underwriting Acumen than by Price
Consumers see competition mostly in terms of price and serviceWhile insurance is generally very price competitive, long-run success for insurers is not solely correlated with the lowest priceinsurers is not solely correlated with the lowest priceUnderwriting is the key to accurate risk assessment and pricingAn insurer that systematically prices business more accurately will turn in a better financial performance and lead competitors mispricea better financial performance and lead competitors misprice There are theoretically no boundaries when it comes to underwritingThe past 15 years launched a technological revolution in underwriting
Now we’re in the midst of a Technological Arms Race
From Credit, to Predictive Modeling to Telematics to….???Next Wave of Innovations Will Include Integration of Real-Time gInformation About the Vehicle and DriverInteractive Technologies
Allows drivers to “log on” to view how driving behaviors influence risk and price
57
Ability for Consumer to Adjust BehaviorsTremendous public policy, public safety implications
#3Th E i StThe Economic Storm
C ti d E i W k dContinued Economic Weakness and Financial Market Volatility Will Ch ll I d t ’ EChallenge Industry’s Exposure Base, Growth and Profitability
58
US Real GDP Growth*
0% %% %6%
Real GDP Growth (%) The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%
2.7%
0.9%
3.2%
2.3% 2.
9%
0.6% 1.
6%5.
03.
7%1.
6% 1.8% 2.3% 2.5% 2.8% 3.0% 3.2%4.
1 %1.
1% 1.8% 2.
5% 3.6 %
3.1%
2%
4%
6%
-0.7
%
%
-0.7
%
-4%
-2%
0%
Recession began in Dec. 2007. Economic toll of credit
crunch, housing slump,
Economic growth up sharply in late 2009 with rebuilding of
inventories and stimulus. M d t th
-4.0
%-6
.8% -4
.9%
-8%
-6%
0
1
2
3
4
5
6
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
crunch, housing slump, labor market contraction has
been severe but modest recovery is underway
More moderate growth expected in 2010/11 but no
“double dip”
20
00
20
01
20
02
20
03
20
04
20
05
20
06
07:1
07:2
07:3
07:4
08:1
08:2
08:3
08:4
09:1
09:2
09:3
09:4
10:1
10:2
10:3
10:4
11:1
11:2
11:3
11:4
Demand Commercial Insurance Continues To Be Impacted by Sluggish Economic Conditions
59
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 7/10; Insurance Information Institute.
Economic Conditions
Real GDP Growth vs. Real P/CPremium Growth: Modest Association
% 3%25% 8%R l NWP G th R l GDP
Real GDP Growth vs. Real P/C (%)
18.6
%20
.3
13.7
%%
15%
20%
25%
owth
4%
6%
8%
Real
Real NWP Growth Real GDP
4.3% 5.
8%0.
3% 3.1%
1.1%
0.8%
0.4%
0.6% 1.6%
5.6% 7.
7%1.
2%
5.2%
1.8%
0%
5%
10%
eal N
WP
Gro
0%
2%
l GD
P Grow
-1.6
%-1
.0%
-1.8
%-1
.0%
-0.4
%-0
.3%
-2.9
% -0.5
%-3
.8%
-4.4
%-3
.3%
-1.6
%
-0.9
%.4
%6.
5%-1
.5%
-10%
-5%
0%Re
-4%
-2%
wth
-7 -6
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 04 05 06 07 08 0910
E
P/C I I d t ’ G th i I fl d M d tl
60Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 9/10; Insurance Information Institute
P/C Insurance Industry’s Growth is Influenced Modestlyby Growth in the Overall Economy
Soft Market Appears to Persist in 2010 but May Be Easing: Relief in 2011?
25%
(Percent)1975-78 1984-87 2000-03
20%
Net Written Premiums Fell 0.7% in 2007 (First Decline Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.
10%
15%
5%
-5%
0%
1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 F
NWP was flat with 0.0% growth in 10:H1 vs. -4.4% in 09:H1
61
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 04 05 06 07 08 09 10F
Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
Auto/Light Truck Sales, 1999-2011F
9917.5
17.8
7.4
1819
(Millions of Units)New auto/light truck sales
fell to the lowest level since the late 1960s. Forecast for
2010-11 is still far below 1999-2007 average of 17
16.9
16.5
16.116
.9
16.617
.1 7117
15161718 1999-2007 average of 17
million units
13.1
1.5 12
.7
12131415
“Cash for Clunkers” generated about $300M in net new personal auto premiums
10.3
11
9101112
Sharply lower auto sales will have a smaller effect on auto insurance
exposure level than problems in the housing market will on home insurers
999 00 01 02 03 04 05 06 07 08 09 10F 11F
Car/Light Truck Sales Will Recover from the 2009 Low Point, but
62Source: U.S. Department of Commerce; Blue Chip Economic Indicators (9/10); Insurance Information Institute.
High Unemployment, Tight Credit Are Still Restraining Sales
New Private Housing Starts, 1990-2011F
(Millions of Units)
1 .85 1.96 2.
07
801 9
2.1
New home starts plunged 34% from 2005-2007; drop
through 2009 was
1.48
1.47 1.
62 1.64
1.57 1.60 1.
71 1 1.8
1.36
1.351.
46
.29
09
1.5
1.7
1.9g
72% (est.); A net annual decline of 1.49 million units,
lowest since records began
0.90
.76
1
1.2
1.01
1.1
0.9
1.1
1.3 in 1959
I.I.I. estimates that each incremental 100,000
0.56 0.60 0
0 3
0.5
0.7
,decline in housing starts costs home insurers
$87.5 million in new exposure (gross premium). The net exposure loss in 2009 vs. 2005 is estimated
at about $1.3 billion0.3
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F11F
Little Exposure Growth Likely for Homeowners InsurersD t W k H C t ti F t f 2010 2011
63Source: U.S. Department of Commerce; Blue Chip Economic Indicators (9/10); Insurance Information Institute.
Due to Weak Home Construction Forecast for 2010-2011.Also Affects Commercial Insurers with Construction Risk Exposure, Surety
Recovery in Capacity Utilization is a Positive Sign for Insurance Exposure
82%
Percent of Capacity Utilized (Manufacturing, Mining, Utilities)
H i
“Full Capacity”
78%
80%Hurricane
Katrina Recession began December 2007
74%
76%Manufacturing
capacity stood at 74.8% in July 2010,
above the June 2009 low of 68 2% but well
70%
72%
M h 2001The closer the economy is
low of 68.2% but well below the pre-crisis
peak of 80%+
66%
68%
70% March 2001-November 2001
recession
yto operating at “full
capacity,” the greater the demand for insurance
66%
Mar
01
Jun
01
Sep
01
Dec
01
Mar
02
Jun
02
Sep
02
Dec
02
Mar
03
Jun
03
Sep
03
Dec
03
Mar
04
Jun
04
Sep
04
Dec
04
Mar
05
Jun
05
Sep
05
Dec
05
Mar
06
Jun
06
Sep
06
Dec
06
Mar
07
Jun
07
Sep
07
Dec
07
Mar
08
Jun
08
Sep
08
Dec
08
Mar
09
Jun
09
Sep
09
Dec
09
Mar
10
Jun
10
Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 64
Unemployment and Underemployment Rates: Rocketed Up in 2008-09; Stabilizing in 2010?
18 Traditional Unemployment Rate U 3 U 6 went from
January 2000 through August 2010, Seasonally Adjusted (%)
14
16
18 Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
U-6 went from 8.0% in March
2007 to 17.5% in Oct 2009; Stood at 16.7% in July
2010Recession U l t R i
12
14
Unemployment rate was 9.6% in
J l
2010Recession ended in
November 2001
Unemployment kept rising for
19 more months
Recession began in
December 2007
8
10 JulyUnemployment peaked at 10.1%
in Oct. 2009, highest monthly
4
6
Aug10
g est o t yrate since 1983.Peak rate in the last 30 years: 10.8% in Nov -
Dec 1982
65
2Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10
10 Dec 1982
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Estimated Effect of Recessions* on Payroll (Workers Comp Exposure)y ( p p )
8.5%10% Recessions in the 1970s and 1980s saw smaller exposure impacts
because of continued wage
The Dec. 2007 to mid-2009 recession
caused the largest
(Percent Change)
(All Post WWII Recessions)
3.7%4.6%
3.5%4%
6%
8% because of continued wage inflation, a factor not present
during the 2007-2009 recession
caused the largest impact on WC
exposure in 60 years
1 1%
1.1%2.1%
-0.5%2%
0%
2%
-4.4%
-2.0%-1.1%
-3.6%-6%
-4%
-2%
1948-1949
1953-1954
1957-1958
1960-1961
1969-1970
1973-1975
1980 1981-1982
1990-1991
2001 2007-2009
Recession Dates (Beginning/Ending Years)
*Data represent maximum recorded decline over 12-month period using annualized quarterly wage and salary accrual dataSource: Insurance Information Institute research; Federal Reserve Bank of St. Louis (wage and salary data); National Bureau of Economic Research (recession dates).
Deflation: An Old AdversaryWh t Hi t T h UWhat History Teaches Us
About Deflationand the P-C Industry
All Ins rers that Are 100+ Year Old TodaAll Insurers that Are 100+ Year Old Today Survived Bouts of Inflation in the Past, but
Not in the Most Recent 75 or So Years
67
Not in the Most Recent 75 or So Years
Primary Causesand Major Bouts of Deflation
Deflation is:A falling general price level
Note: this is different fromNote: this is different from A fall in the rate of increase of the general price level;
This is called disinflationA fall in the prices of some items or category of items
F l d i dFor a prolonged period That is expected to continue indefinitely
Deflation results from some or all of:A surge in productivity, generally from technological innovationA steep and prolonged drop in the money supplyA steep and prolonged recession
Note: this is different from a fall in the rate of increase of the price levelNote: this is different from a fall in the rate of increase of the price level
Major US Bouts of Deflation1920 22
68
1920-22 1930-33
Sources: http://www-personal.umich.edu/~alandear/glossary/d.html; http://en.wikipedia.org/wiki/Deflation; I.I.I.
Broad Impact of Deflation
Deflation causes…Consumers to delay buying things
Th t t b th thi l t t l iThey expect to buy those things later at lower pricesA drop in the level of aggregate demand, from the delay in consumptionA transfer of wealth
From borrowers and holders of illiquid assetsTo savers/lenders and holders of liquid assets and currency
A drop in the level of business investmentFollowing the drop in aggregate demandSlack in capacity if the economy is in recessionIncreased likelihood of lower profits or losses as selling prices drop below costs
69Sources: http://en.wikipedia.org/wiki/Deflation; I.I.I.
1920-1950: Inflation, Deflation andthe P-C Industry’s Combined Ratio*y
110 26
Combined Ratio Price IndexCombined Ratio Price Index (1982-84 = 100)
105
22
24Declining CR Almost Completely a Result of Sharply
Lower Loss/LAE Ratio
95
100
18
20
9014
16
From 1930 to 1933 the Price Level Dropped 24%
85
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
12
pp
From Year-end 1929 Through 1932, the Industry’s Combined Ratio Rose from 96.3 t 104 9 th CPI D d B t f 1933 i t th 1950 th C bi d R ti
70
*From 1920-1934, stock companies onlySources: Best’s Aggregates & Averages; http://www.rateinflation.com/consumer-price-index/usa-historical-cpi.php?form=usacpi
to 104.9 as the CPI Dropped. But from 1933 into the 1950s, the Combined Ratio Remained Below 100 Even as Prices Slowly Rose, Then Shot Up after WWII.
1920-1950: Inflation, Deflation andP-C Industry Profitability*y y
15% 26
ROAS Price Index
From 1930 to 1933 From 1930-32 ROAS was below 1 2% b 1% i 1933 d
Combined Ratio Price Index (1982-84 = 100)
10%22
24
From 1930 to 1933 the Price Level Dropped 24%
1.2%, but was 5.1% in 1933 and 10% or higher in 1935-36
5%
18
20
0%
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
14
16
‐5% 12
The Significant Deflation from 1930-32 Punished the Industry’s ROAS, But an Improving Economy (and Slight Inflation) Helped Achieve
71
*stock companies onlySources: Best’s Aggregates & Averages; I.I.I.; ; http://www.rateinflation.com/consumer-price-index/usa-historical-cpi.php?form=usacpi
Improving Economy (and Slight Inflation) Helped AchieveROAS in Double Digits in 1935-36.
Deflation’s Effectson the P-C Insurance Industry
Lower Claim SeveritiesParticularly for property claims, severity drops for many items that insurers pay forthat insurers pay for
Rate contingency margins increaseAt least until rate construction reflects persistently declining claims se erit margins ill be higher than other ise d e toclaims severity, margins will be higher than otherwise due to high trend assumptions arising from use of historical data
Reserve Releases?Reserves may develop beneficially to become “redundant”
Lower Claim Frequency as Fewer Claims Reach Deductible, Retention Levelsete t o e e sLess Use of Reinsurance
Lower costs risks burn through their retentions less quickly reaching policy limits less quickly
72
quickly, reaching policy limits less quickly
#4Investment Performance WillInvestment Performance Will
Remain a Drag on Results
Investments Are a PrincipleS f S b P fi bili dSource of Subpar Profitability and
Will Force Insurers’ Hand on G ti U d iti P fit
73
Generating Underwriting Profits
Property/Casualty Insurance Industry Investment Gain: 1994–2010:H11
$64.0$70
($ Billions) 2009:H1 gain was $12.5B
$42.8$47.2
$52.3
$44.4 $45.3$48.9
$59.4$55.7
$39 0
$58.0$51.9
$56.9
$50
$60
$35.4 $36.0$31.7
$39.0
$25.8
$20
$30
$40
Investment gains in
$0
$10
$20 Investment gains in 2010 are on track to be their best since 2007
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10:H1In 2008, Investment Gains Fell by 50% Due to Lower Yields and
Nearly $20B of Realized Capital Losses 2009 Saw Smaller Realized Capital Losses But Declining Investment Income p g
Investment Gains Are Recovering So Far in 20101 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.
P/C Insurer Net Realized Capital Gains, 1990-2010:H1
9 2 81 $18.
023.
02 16.2
1
3 04$20
($ Billions) Capital losses have turned to capital gains,
aiding earnings
$2.8
8$4
.81 $9
.89
$9.8
2
$10. $
$13 $
$6.6
3
$6.6
1$9
.13
$9.7
0$3
.52 $8
.92
$2.2
3$9.2
4$6
.00
$1.6
6$5
$10$15$20
-$1.
21
7.98
-$15-$10
-$5$0
-$7
$19.
81-$25-$20-$15
-$
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910:Q1
Realized Capital Losses Were the Primary Cause
75Sources: A.M. Best, ISO, Insurance Information Institute.
Realized Capital Losses Were the Primary Cause of 2008/2009’s Large Drop in Profits and ROE
Treasury Yield Curves: Pre-Crisis (July 2007) vs. August 2010
4 82% 4.96% 5.04% 4.96% 4 82% 4 82% 4 88% 5.00% 4 93% 5.00% 5.19%6%
4.82% 4.96% 4.96% 4.82% 4.82% 4.88% 4.93%
3.80%3.52%4%
5%
Treasury yield curve is near its most depressed level in at
2.10%
2.70%
%2%
3%
most depressed level in at least 45 years. Investment
income is falling as a result
0.15% 0.16% 0.19% 0.26%0.52%
1.47%
0.78%1%
2%
August 2010 Yield Curve*Pre-Crisis (July 2007)
0%1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
Pre Crisis (July 2007)
Stock Dividend Cuts Have Further Pressured Investment Income
76
Stock Dividend Cuts Have Further Pressured Investment Income
Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
l Lines
s Autop cia
lAuto
PropCas Suret
yy Lin
esl ance
**
y
Persona
l L
Pvt Pas
s A
Pers Prop
Commerc
i
Comml A
u
Credit
Comm Pro
Comm C
a
Fidelity
/Su
Warranty
Surplus L
i
Med M
al
WC Reinsu
ran
.8%
.8%
.0% .9%
.1%
%
-3%-2%-1%0%
-1 -1 -2.
-3.6
%
-3.3
%
-3.3
%
-3.7
%
-4.3
%
-5.2
%
5.7%
-1 -2.
-3.1
%
-7%-6%-5%-4%
-5 -7.3%-8%
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
77
Underwriting and Pricing Discipline*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.
#5Shifting Legal Liability &Shifting Legal Liability &
Tort Environment
Is the Tort PendulumSSwinging Against Insurers?
78
Important Issues & Threats Facing Insurers: 2010–2015
Emerging Tort Threat
No tort reform (or protection of recent reforms) is forthcoming from the current Congress or Administration
Erosion of recent reforms is a certaint (alread happening)Erosion of recent reforms is a certainty (already happening)
Innumerable legislative initiatives will create opportunities to undermine existing reforms and develop new theories and channels of liability
T t t i th ll t f i fl tiTorts twice the overall rate of inflation
Influence personal and commercial lines, esp. auto liability
Historically extremely costly to p/c insurance industry
Bottom Line: Tort “crisis” is on the horizon and will be
Leads to reserve deficiency, rate pressure
79Source: Insurance Information Institute
Bottom Line: Tort crisis is on the horizon and will be recognized as such by 2012–2014
Trial Bar Priorities
Reverse U.S. S p eme Supreme Court decisions on pleadingspleadings
Eliminate pre-dispute
Pass Foreign Manufactures L l
Confirm pro-trial lawyer j d pre dispute
arbitration
Erode federal
Legal Accountability Act
judges –“Federalize Madison County”preemption
Expand iti
Grant enforcement authorities to
County
Roll back existing securities
litigationauthorities to state AGs
existing legal reforms
Source: Institute for Legal Reform.
Trial Lawyer Poll: Which Areas Offer the Greatest Potential Benefit?
Top Categories Percentage
Environmental 14%
Insurance coverage 13%Insurance coverage 13%
Mortgage fraud 12%
Nursing home/seniors issues 11%
Bad-faith against insurance companies 10%Bad-faith against insurance companies 10%
41 different practice areas were included as categories41 different practice areas were included as categories
Source: Institute for Legal Reform poll, December 2009.
Cost of US Tort System ($ Billions)
Tort costs consumed 1.79% of GDP in 2008, down from 2.24% in 2003
3 46 $260
$261
247
252
255
$263 $273 $2
89.5
$300
$3501 44 48 15
956 56 $1
67$1
69 $180 $2
05 $23 $2 $ $ $2 $2 $2 $
$200
$250
$129
$130 $1
4$1
4$1
4 $1 $1 $1 $ $
$100
$150
Per capita “tort tax” was $? in
$0
$50
Per capita tort tax was $? in 2009, up from $838 in 2008
and $636 in 2000
$0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0809
E10
E11
E
Source: Tillinghast-Towers Perrin, 2009 Update on US Tort Cost Trends.
Over the Last Three Decades, Total Tort Costs* as a % of GDP Appear Somewhat Cyclical
$300 2.50%Tort Sytem Costs Tort Costs as % of GDP
($ Billions)
$250
2.25%
To
y
$150
$200
stem
Cos
ts
2.00%
ort Costs as
$100Tort
Sys
1.75%
% of G
DP
2009–2010 Growth in Tort
$0
$50
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08E 10E1.50%
2009 2010 Growth in Tort Costs as % of GDP is Due in
Part to Shrinking GDP
83
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08E 10E
* Excludes the tobacco settlement, medical malpracticeSources: Tillinghast-Towers Perrin, 2008 Update on US Tort Cost Trends, Appendix 1A; I.I.I. calculations/estimates for 2009 and 2010
Business Leaders Ranking of Liability Systems in 2009*
Best States1 Delaware
Worst States41 New Mexico
New in 2009N l N t i1. Delaware
2. North Dakota
3 Nebraska
41. New Mexico
42. Florida
43. Montana
North DakotaMassachusettsSouth Dakota
Newly Notorious
New MexicoMontana3. Nebraska
4. Indiana
5. Iowa
43. Montana
44. Arkansas
45. IllinoisDrop-offs
Arkansas
Rising Above
6. Virginia
7. Utah
46. California
47. Alabama
MaineVermontKansas
TexasSouth CarolinaHawaii
8. Colorado
9. Massachusetts
48. Mississippi
49. LouisianaMidwest/West has mix of
10. South Dakota 50. West Virginia
Source: US Chamber of Commerce 2009 State Liability Systems Ranking Study; Insurance Info. Institute.
good and bad states.
The Nation’s Judicial Hellholes: 2010
West VirginiaIllinoisCook County
Watch List
California
New York City
AlabamaMadison County, ILJefferson County, MSTexas Gulf CoastTexas Gulf CoastRio Grande Valley, TX
Dishonorable Mention
AR Supreme CourtMN Supreme Court
S C
New JerseyAtlantic County (Atlantic City)
New MexicoAppellate
ND Supreme CourtPA GovernorMA Supreme Judicial Court
85Source: American Tort Reform Association; Insurance Information Institute
South Florida
Appellate CourtsSacramento County
#6Regulatory and Fiscal Threats
Bad Regulation is Still the Norm in Some States
New Taxes Can Help/Hurt
86
New Taxes Can Help/Hurt P-C Insurers
Financial Services Reform:What does it mean for insurers?
Systemic Risk and Resolution Authority
The Dodd Frank Wall Street Reform and Consumer Protection Act
Creates the Financial Stability Oversight Council and the Office of Financial Research
Imposes heightened federal regulation on large bank holding companies and “systemically risky” nonbank financial companies, including insurersy y y p g
Federal Insurance Office (FIO)Establishes the FIO (while maintaining state regulation of insurance) within the Department of Treasury headed by a Director appointed by the Secretary of TreasuryDepartment of Treasury, headed by a Director appointed by the Secretary of Treasury
FIO will have authority to monitor the insurance industry, identify regulatory gaps that could contribute to systemic crisis
CONCERN: FIO morphs into quasi/shadow or actual regulatorCONCERN: FIO morphs into quasi/shadow or actual regulator
Surplus Lines/ReinsuranceTitle V of the Dodd-Frank bill includes, as a separate subtitle, the Nonadmitted and
87
Reinsurance Reform Act (NRRA), which eliminates regulatory inefficiencies associated with surplus lines insurance and reinsurance
Source: Insurance Information Institute (I.I.I.) updates and research; The Financial Services Roundtable; Adapted from summary by Dewey & LeBoeuf LLP
2010 Property and Casualty InsuranceReport Card
ME
NH
ND
MN
WA
AL
VTMT
AK
B-B-
B
C -
AB
F NH
MA
CT
PA
NE
MN
MI
IL
IA
IDOR
NJRI C
DE
NY
MD
SD WI
INOH
NV
WY
= A= B= C= D
A-
B-
B
B-B-
B-
B- C-A
B+B+
BB
C+
C+
C
D+F
WVVA
NC
OK
IL
AZSC
TN
ARNM
KYMOKS
IN
CA
NV
UTCO
D= F= NG
A- A-
B-B-
B
B-
B-
B-C-
C-
D-D-
AB
B
C+
D+D+D
Source: James Madison Institute, February 2008.
LATX
HI GAAL
FL
MS
NM
B- B-B-C-
C-A B+ BNG
NGN t G d d Di t i t f C l bi
Source: Heartland Institute, May 2010
D FNot Graded: District of ColumbiaMississippiLouisiana
Potential Impacts of Current Federal Tax Proposals on P/C Insurance Industry
Proposal Potential P/C Insurance Industry Impact P/C Lines that Benefit
100% Expensing of N I t t i
Could produce a 5-10% surge in i t t i h i l l t d
•Commercial PropertyNew Investment in Plant & Equipment in 2011 and Continuation of Bonus Depreciation
investment in physical plant and equipment in 2011 which will need to be insured immediately. Although the proposal only “steals” investment from the future this provides a permanent
•Construction•Commercial Liability•Commercial AutoSpecialty LinesBonus Depreciation the future, this provides a permanent
benefit to commercial insurers since insurance coverage must be purchased sooner and be maintained. New construction activity boosts WC and
•Specialty Lines•Excess & Surplus•Workers Comp•Suretyconstruction activity boosts WC and
surety.Surety
•ReinsuranceReinstate 36% and 39.6% Rates for High Income Taxpayers
Potential damage to new/small business formation and growth. Weakness in these areas has hurt p/c insurance
•None
Income Taxpayers >$250K
these areas has hurt p/c insurance exposure and tax hikes could depress insurance exposure in this segment
Continue 2001 and 2003 T C t f All
Should produce an environment that b fi i l t i ll
•Small Business
Sources: Proposals from Tax Policy Center; P/C discussion is Insurance Information Institute research.
2003 Tax Cuts for All Taxpayers
more beneficial to recovery in small business segment & associate insurance exposures
Commercial Lines•Personal Lines
Potential Impacts of Current Federal Tax Proposals on P/C Insurance Industry (cont’d)
Proposal Potential P/C Insurance Industry Impact P/C Lines that Benefit
Impose 20% Tax The increase in dividends and capital gains •NoneRate for Capital Gains and Dividends for High Income
taxes makes private investment less attractive. Under current law the rate is 15%. Additional taxes on investment would presumably result in a marginal but
Taxpayers negative impact on p/c insurance exposure.Payroll Tax Holiday
Reducing the cost of hiring workers would theoretically reduce the cost of employment and should spark hiring,
•Workers comp
e p oy e t a d s ou d spa g,increasing overall employment and payrolls
Limit Value of Itemized Deductions to
Will have an unambiguously negative impact on charitable giving. Nonprofit sector will be negatively impacted
•None (Commercial lines products Designed for NPOsDeductions to
28% for High Income Taxpayers
sector will be negatively impacted. Designed for NPOs would be negatively impacted; This is a large p/c market.)
Sources: Proposals (except Payroll Tax Holiday) from Tax Policy Center; P/C discussion is Insurance Information Institute research.
#7
Catastrophic Loss –An Omnipresent ChallengeAn Omnipresent Challenge
Whil R M j CAT C KillWhile Rare, Major CATs Can Kill Insurance Companies
91
US Insured Catastrophe Losses
$100
.0$120$100 Billion CAT Year is
Coming Eventually
First Half 2010
($ Billions)
$61.
9
$
$60
$80
$100 First Half 2010 CAT Losses
Were Up $1.9B or 32% compared to
avg. H1 losses over the past 10
2000s: A Decade of Disaster2000s: $193B (up 117%)
1990s: $89B
3 4 0.1
3
$26.
5
9 12.9 $2
7.5
2 7
$27.
1
0.6
95 $22.
9
5 $16.
9
$20
$40
$60 over the past 10 years
$8.3
$7.4
$2.6 $1
0
$8.3
$4.6
$5. 9 $1 $9.
$6.7 $10
$7.9
$7.5
$2.7
$4.7
$5.5 $
$0
$20
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*20??
2010 CAT Losses Are Running Below 2009, So FarFigures Do Not Include an Estimate of Deepwater Horizon Loss
92
*Through June 30, 2010.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Sources: Property Claims Service/ISO; Munich Re; Insurance Information Institute.
Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2009
810 Avg. CAT Loss Component of the
Combined Ratio Points
8.8
.9
8.1
789
Component of theCombined Ratio
by Decade
1960s: 1.04
3.0
35
3.3
2.8 3.
62.
9
5.4
3.3
3.3
.7
5.0
.6
3.6
3456 1970s: 0.85
1980s: 1.31 1990s: 3.39 2000s: 3.52
0.4 1.
20.
4 0.8 1.
30.
3 0.4 0.
7 1.5
1.0
0.4
0.4 0.
71.
81.
10.
6 1.4 2.
01.
3 2.0
0.5
0.5 0.7 1.
22.
1 2.3 2
1.0
21.
6
1.6
21.
62 .
0.9
0.1
1.1
1.1
0.8
0123
0
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
The Catastrophe Loss Component of Private Insurer Losses Has I d Sh l i R t D d
93
Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO; Insurance Information Institute.
Increased Sharply in Recent Decades
Global Natural Catastrophes: January – June 2010
6
2
3
6
8 911 10
12
1The 12 Jan. Haiti
quake killed 225,500 people, caused $8B+ in economic damage, but little in the way of
insured losses
4
5
7Severe winter weather in the
Eastern US produced insured l f d d t l t
insured losses
Chilean earthquake (mag. 8.8) on 27 Feb. produced at least $4 billion in insured losses, $20
Winter Storm Xynthia produced
at least $2B in insured losses
and $4B in
Geophysical events(earthquake, tsunami, volcanic activity)
Hydrological events(flood, mass movement)
Global natural catastrophes
losses of produced at least $1B in insured losses and $2B
in economic losses
,billion in economic losses. Most
costly insurance event in 2010economic losses
( q , , y)Meteorological events (storm)
( , )Climatological events(extreme temperature, drought, wildfire)
Selection of significant natural catastrophes (see table)
© 2010 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE – As at 16 June 2010
Largest International Oil Well Blowouts by Volume, as of July 12, 2010*
Date Well Location Bbl Spilled
April 20 2010-July 12 2010
Deepwater Horizon Gulf of Mexico, USA est. 4,900,000July 12, 2010June 1979-April 1980
Ixtoc I Bahia del Campeche, Mexico 3,300,000
October 1986 Abkatun 91 Bahia del Campeche, Mexico 247,000
April 1977 Ekofisk Bravo North Sea, Norway 202,381
January 1980 Funiwa 5 Forcados, Nigeria 200,000
October 1980 Hasbah 6 Gulf Saudi Arabia 105 000October 1980 Hasbah 6 Gulf, Saudi Arabia 105,000
December 1971 Iran Marine International Gulf, Iran 100,000
January 1969 Alpha Well 21 Platform A Pacific, CA, USA 100,000
March 1970 Main Pass Block 41 Platform C
Gulf of Mexico 65,000
October 1987 Yum II/Zapoteca Bahia del Campeche, Mexico 58,643
December 1970 South Timbalier B-26 Gulf of Mexico USA 53 095December 1970 South Timbalier B 26 Gulf of Mexico, USA 53,095
*Date well was capped. Federal government estimate as of August 2, 2010. Does not include offset for any amounts recovered.Source: American Petroleum Institute (API), 09/18/2009; http://www.api.org/ehs/water/spills/upload/356-Final.pdf and updates from the Insurance Information Institute.
Natural Disasters in the United States, 1980 – 2010Number of Events (Annual Totals 1980 – 2009 vs. First Half 2010)
250
Fi t H lf 2010
Number of events in first half of 2010 is close to the annual totals from five of past ten years.
u be o e ts ( ua ota s 980 009 s st a 0 0)
200
First Half 201095 Events
100
150
Num
ber
50
100
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Geophysical ClimatologicalMeteorological (storm)Geophysical (earthquake, tsunami, volcanic activity)
Climatological (temperature extremes, drought, wildfire)
Meteorological (storm)
Hydrological (flood, mass movement)
Source: MR NatCatSERVICE 96© 2010 Munich Re
U.S. Thunderstorm Loss TrendsAnnual Totals 1980 – 2009 vs. First Half 2010
Thunderstorm losses have quadrupled since 1980.
First Half 2010 $3.0 Bn
Source: Property Claims Service, MR NatCatSERVICE 97© 2010 Munich Re
U.S. Winter Storm Loss TrendsAnnual totals 1980 – 2009 vs. First Half 2010
Average annual winter storm losses have increased over 50% since 1980.
Severe winter storms in
First Half 2010
early 2010 caused major damage to energy
infrastructure
$2.4 Bn
Source: Property Claims Service, MR NatCatSERVICE 98© 2010 Munich Re
U.S. Significant Natural Catastrophes, 1950 – 2009Number of Events ($1+ Bill economic loss and/or 50+ fatalities)
There were 7 Significant Natural Catastrophes in
Sthe United States in 2009
Sources: MR NatCatSERVICE
Distribution of US Insured CAT Losses: TX, FL, LA vs. US, 1980-2008*($ Billions)
$
Texas
$31.20 , 10%
$33.60 , 11%
Louisiana
$176 , 60% $57 10
Rest of US60% $57.10 ,
19%Florida
Florida Accounted for 19% of All US Insured CAT Losses
100
* All figures (except 2006-2008 loss) have been adjusted to 2005 dollars.Source: PCS division of ISO.
from 1980-2008: $57.1B out of $297.9B
Top 12 Most Costly Disastersin US History(Insured Losses, 2009, $ Billions)
$45 3$50 Hurricane Katrina Remains, By Far, the
$23 8
$45.3
$30$35$40$45$50 Hurricane Katrina Remains, By Far, the
Most Expensive Insurance Event in US and World History
$11.3 $12.5$18.2
$22.8 $23.8
$8.5$8.1$7.3$6.2$5.2$4 2$10$15$20$25$
$5.2$4.2
$0$5
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo(1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Ike (2008)
Northridge(1994)
9/11Attacks(2001)
Andrew(1992)
Katrina(2005)
(2001)
8 of the 12 Most Expensive Disasters in US History Have Occurred Since 2004;
8 f th T 12 Di t Aff t d FL
101Sources: PCS; Insurance Information Institute inflation adjustments.
8 of the Top 12 Disasters Affected FL
Share of Losses Paid by Reinsurers for Major Catastrophic Events
70%
Reinsurance plays a very large role in claims payouts
associated with major60%
45%50%
60%
associated with major catastrophes
30%25%
45%
33%30%
40%
25%20%
10%
20%
30%
0%
10%
HurricaneHugo (1989)
HurricaneAndrew (1992)
Sept. 11Terrorist
2004Hurricane
2005Hurricane
2008 TexasHurricaneHugo (1989) Andrew (1992) Terrorist
Attack (2001)Hurricane
SeasonHurricane
SeasonHurricane
Source: Wharton Risk Center, Disaster Insurance Project, Renaissance Re, Insurance Information Institute.
Total Value of Insured Coastal Exposure
(2007, $ Billions)
$2,458.6Florida
$635.5$772.8
$895.1$2,378.9
$ ,New York
TexasMassachusetts
New Jersey $159B Insured C t l
$224.4$191.9
$158.8$146 9
$479.9ConnecticutLouisiana
S. CarolinaVirginia
Maine
Coastal Exposure in
Virginia in 2007
I 2007 Fl id Still R k d th #1 M t$146.9$132.8
$92.5$85.6$60.6
MaineNorth Carolina
AlabamaGeorgia
Delaware
In 2007, Florida Still Ranked as the #1 Most Exposed State to Hurricane Loss, with
$2.459 Trillion Exposure, but Texas is very exposed too, and ranked #3 with $895B
in insured coastal exposure$60.6$55.7$51.8$54.1
$14.9
DelawareNew Hampshire
MississippiRhode Island
Maryland
in insured coastal exposure
The Insured Value of All Coastal Property Was $8.9 Trillion in 2007, Up 24% from $7.2 Trillion in 2004
103Source: AIR Worldwide
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000
US Residual Market Exposure to Loss
$900
Katrina, Rita, and Wilma
($ Billions)
$656.7
$771.9$696.4
$600
$700
$800
$900
4 Florida Hurricanes
$372.3$430.5 $419.5
$292.0$281 8$400
$500
$600Hurricane Andrew
$292.0$244.2$221.3
$281.8
$150.0
$54.7$100
$200
$300
$01990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
In the 19-year Period Between 1990 and 2008, Total Exposure to Loss in the Resid al Market (FAIR & Beach/Windstorm) Plans Has S rged from
104Source: PIPSO; Insurance Information Institute
the Residual Market (FAIR & Beach/Windstorm) Plans Has Surged from $54.7B in 1990 to $696.4B in 2008
Insurance Information Institute Online:
www iii orgwww.iii.org
Thank you for your timed tt ti !and your attention!
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