Financial Forecast 2010:
The Future of the Property/Casualty Insurance Industry
Property Casualty Insurers Association of AmericaExecutive Roundtable Seminar
Naples, FL
January 23, 2006
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
Crystal Ball: 2010
Financial Predictions
Slower Growth & Higher Losses = Disappointing Profits
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
05E
06F
07F
08F
09F
10F
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2010F*
*GAAP ROEs except 2005 P/C figure = return on average surplus. 2005E-10F are III estimates.Source: Insurance Information Institute; Fortune for all industry figures
P/C profits continue to disappoint. ROE stuck at 9-10%
-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
20
05
20
06
F2
00
7F
20
08
F2
00
9F
20
10
F
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
Strength of Recent Hard Markets by NWP Growth*
1975-78 1984-87 2001-04
*2005-10 figures are III forecasts/estimates.
2006-2010 (post-Katrina) period will resemble 1993-97
(post-Andrew)
2010: Leakage of P/C Insurance Premium Continues
• Large DeductiblesEfficient Use of Corporate CapitalMakes Sense for Personal Lines Policyholders
• Alternative Risk TransferEspecially Captives: Popular for Ever-Smaller RisksDedicated Reinsurance FacilitiesContingent Funding: Debt, Post-Event Assessments, Govt.SecuritizationDiversification in Portfolios of Asset-Backed SecuritiesSelf-Insurance Self Insurance Groups Risk-Retention Groups
• Residual MarketsFL; Large Expansion in LA, MS, TX & Elsewhere
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
$550
$600
75 80 85 90 95 00 05E 10F
U.S. Policyholder Surplus: 1975-2005*
Source: A.M. Best, ISO, Insurance Information Institute *As of 9/30/05.
$ B
illi
ons
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
Capacity at year-end 2005 was $420 billion (est.). It will reach $500B by
2009 and $536 billion by year-end 2010
CAGR 1975-2005E = 10.7%
Assume CAGR 2005-2010 = 5%
Announced Insurer Capital Raising*($ Millions, as of December 1, 2005)
$1,500
$38
$400$450$600
$710
$300$100$140
$600
$129$297
$620
$124$202$150$299
$490
$2,800
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$ M
illi
ons
*Existing (re) insurers. Announced amounts may differ from sums actually raised. Sources: Morgan Stanley, Lehman Brothers, Company Reports; Insurance Information Institute.
As of Dec. 1, 19 insurers announced plans to raise
$9.95 billion in new capital. Twelve start-ups plan to raise as much as $8.65
billion more for a total of $18.65B. Likely at least $20B
raised eventually.
Existing companies
will continue to find it
relatively easy to raise cash…
Announced Capital Raising by Insurance Start-Ups
($ Millions, as of December 11, 2006)
$1,500
$1,000$1,000$1,000$1,000
$750
$500 $500 $500 $500
$220 $180$100
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$ M
illi
ons
*Chubb, Trident are funding Harbor Point. Announced amounts may differ from sums actually raised. **Stated amount is $750 million to $1 billion. ***XL Capital/Hedge Fund venture. Arrow Capital formed by Goldman Sachs.Sources: Morgan Stanley, Company Reports; Insurance Information Institute.
As of Dec. 11, 13 start-ups plan to raise as
much as $8.75 billion. More likely to come.
…so will start-ups
U.S. InsuredCatastrophe Losses ($ Billions)
$7.5
$2.7
$4.7
$22.
9
$5.5 $1
6.9
$8.3
$7.4
$2.6 $1
0.1
$8.3
$4.6
$26.
5
$5.9 $1
2.9 $2
7.5
$57.
7
$100
$0
$20
$40
$60
$80
$100
$120
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05*
20??
*Includes $53.7 billion per ISO/PCS plus $4B offshore energy losses from Hurricanes Katrina & Rita.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Source: Property Claims Service/ISO; Insurance Information Institute
$ Billions
2005 will be by far the worst year ever for insured
catastrophe losses in the US, but the worst has yet to come.
$100 Billion CAT year is coming soon
Points (Reduced)/Increased
0.5
(2.4)
5.2
6.3
3.5
2.51.9
1.1
(0.4)
0.4
-3
-2
-10
1
2
3
45
6
7
1998 1999 2000 2001 2002 2003 2004 2005E 2006F 2007F
Combined Ratio:Impact of Reserve Changes (Points)
Source: ISO, A.M. Best, Lehman Brothers for years 2005E-2007F
Reserve adequacy is improving
substantially, which bodes well for 2010
Tort System Costs,2000-2010F
$179
$232$245
$262 $269$282 $283
$295$288
$279
$206
1.83%
2.03%2.22% 2.23%2.24% 2.25% 2.20%2.20%2.21%2.27%2.23%
$100
$150
$200
$250
$300
$350
00 01 02 03 04 05E 06F 07F 08F 09F 10F
Tor
t S
yste
m C
osts
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Tor
t C
osts
as
% o
f G
DP
Tort Sytem Costs Tort Costs as % of GDP
Source: Insurance Information Institute estimates from Tillinghast-Towers Perrin methodology.
After a period of rapid escalation, tort system costs as % of GDP appear to be stabilizing
Shareholder Class Action Lawsuits*
*Securities fraud suits filed in U.S. federal courts.**Suits of $100 million or more.Source: Stanford University School of Law (securities.stanford.edu); Insurance Information Institute
164202
163
231188
109
172
240203 214
497
272222 235
181
0
100
200
300
400
500
600
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
1997-2001 remain problematic from a D&O perspective Sarbanes-Oxley
Impact??
Regulatory Predictions
Congressional Apathy Continues on P/C Issues
Tough Road for Comprehensive National Catastrophe Plan
Personal Disaster Account
Private Insurance
State Regional Catastrophe Fund
Federal Catastrophe Reinsurance Contract
Program
Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.
State Attachment
1:50 Event
1:500 Event Unlikely National CAT Plan in place
by 2010. Major
obstacles include:
•Divisions within industry
•Opposition in Congress
TRIA’s Days Are Numbered: Congress & Administration Want it Dead
$10.0$12.5
$15.0
$25.0$27.5
$0
$5
$10
$15
$20
$25
$30
$35
Year 1(2003)
Year 2(2004)
Year 3(2005)
Year 4(2006)
Year 5(2007)
$ B
illi
ons
Source: Insurance Information Institute
Obstacles Include•Opposition in Congress &
Administration•Profitability/Growth in Capital
Base/New Entry•Few examples of econ. disruption
ExtensionIndustry Aggregate Retention ($ Bns)
Status of Other RegulatoryIssues by 2010
• No Optional Federal Charter by 2010
• Little Progress on Regulatory Modernization (e.g., SMART Act)
• Asbestos “Reform” Not to Industry Satisfaction
• Incremental Additional Improvements in Tort Environment
Competitive Predictions
Wave of Consolidation Among Primary P/C Companies is Not
Imminent
M&A Activity AffectingPersonal Lines, 1992-2004 ($ Mill)
$14
$3,073
$6,790
$386
$24,108
$9,182
$2,367
$66$978
$72 $68
$7,860
$798
119
1315
2423
1210
5
12
16
20
11
$0
$5,000
$10,000
$15,000
$20,000
$25,000
92 93 94 95 96 97 98 99 0 1 2 3 4
Val
ue
of D
eals
0
5
10
15
20
25
30
Nu
mb
er o
f D
eals
Value of Deals Number Of Deals
Source: Insurance Information Inst. based on tabulation by Conning report The Emerging Shakeout in Personal Lines, 2005
M&A activity has been in the doldrums, no
obvious reason for surge in
consolidation, at least in personal lines, except via non-renewals
Commercial lines M&A slow due to
fear of “skeletons in the closet”
Class of 2005:Many Will Be Gone by 2010
$1,500
$1,000$1,000$1,000$1,000
$750
$500 $500 $500 $500
$220 $180$100
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$ M
illi
ons
*Chubb, Trident are funding Harbor Point. Announced amounts may differ from sums actually raised. **Stated amount is $750 million to $1 billion. ***XL Capital/Hedge Fund venture. Arrow Capital formed by Goldman Sachs.Sources: Morgan Stanley, Company Reports; Insurance Information Institute.
As of Dec. 11, 13 start-ups plan to raise as
much as $8.75 billion. More likely to come.
…so will start-ups
Walmarted: Retailers Will Eventually Show Interest in P/C Insurance
• Banks will continue to acquire distribution channels
• Retailers chafing to get into retail banking
• Insurance not far behind, at least on distribution sideWalmart shaking up
warranty business
Retailing & Insurance have a long history.
Remember Sears and Allstate?
Political Predictions
Change is in the Air
2010: Political Order Will Be Shaken Up
• One House of Congress Changes Hands by 2010
• Change of Party in the White House
• Eliot Spitzer is the Next Governor of New York
Insurance Information Institute On-Line
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