p/c insurance overview & outlook focus on california markets robert p. hartwig, ph.d., cpcu,...
TRANSCRIPT
P/C InsuranceOverview & Outlook
Focus on California Markets
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
Insurance Information Institute
Sacramento, CA
March 15, 2005
Presentation Outline
• Impact of Insurance Industry on California Economy• The Truth About Profitability in P/C Insurance• CALIFORNIA: The History of P/C Profitability• Underwriting Performance: US & TX• Ratings, Solvency & Financial Strength• Investment Overview• Capacity• Pricing Trends• IMPORTANT STATE & FEDERAL ISSUES
Spitzer/State/SEC Investigations Insurance Scoring (Credit)Federal vs. State RegulationThe Debate Over a Federal Natural Disaster Insurance
Facility
INSURERS’ IMPACT ON THE
CALIFORNIA ECONOMY
California’s Insurance Industry is an Important Economic Force
• 1,279 insurers in CA providing benefits to over 30 million Californians
• P/C insurers pay $50B+ CA homeowners drivers and businesses annually for their losses
• Insurers have invested $23B in municipal bonds in CA• Insurers paid about $2.1B in premium taxes in 2003/04
4th largest source of general revenue funds in CA
• Insurers provided jobs for 308,422 Californians in 2004 (228,460 directly & 79,961 indirectly)
• Helped record numbers of Californians realize the American dream of homeownership (59.7% HO rate)
Sources: Economic Impact Report: California Insurance industry, 2005 produced by ACLHIC, PIFC, ACIC, AIA, ACLI; Insurance Information Institute.
MARKET CONDITIONS
Highlights: Property/Casualty,9-Months 2004 vs. 9-Months 2003
2004 2003 Change
Net Written Prem. 321,225 307,472 +4.5%
Loss & LAE 223,687 216,796 +3.2%
Net UW Gain (Loss) 2,848 (5,854) N/A
Net Inv. Income 28,748 27,676 +3.9%
Net Income (a.t.) 26,707 20,819 +28.3%
Surplus* 369,018 346,987 +6.3%
Combined Ratio 97.9 100.3** -2.4 pts.*2003 surplus figure is as of 12/31/03**The combined ratio for full-year 2003 was 100.1
Growth rate less than half that of a year earlier
An underwriting profit? What’s that?
Record Surplus!
Combined < 100
TOP & BOTTOM LINES
Premiums & Profits
-10%
-5%
0%
5%
10%
15%
20%
25%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
F2
00
5
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
Strength of Recent Hard Markets by NWP Growth*
Real NWP Growth During Past 3 Hard Markets
1975-78: 8.6%
1984-87: 11.2%
2001-04E: 6.8%
1975-78 1984-87 2001-04
*2004/5 based on III forecast.
Premium growth is faltering. Real growth in 2005 will approach ZERO.
P/C Net Income After Taxes1991-2004E* ($ Millions)
$14,178
$5,840
$19,316
$10,870
$20,598
$24,404
$36,819
$30,773
$21,865
-$6,970
$3,046
$29,877
$36,000
$20,559
$26,707
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04* 04F*9-Month results; F = Full Year forecast/estimate.Sources: A.M. Best, ISO, Insurance Information Institute.
2001 ROE = -2.6%
2002 ROE = 1.0%
2003 ROE = 9.4%
2004 ROE = 11.5%F
-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
-10%
-5%
0%
5%
10%
15%
20%
91 92 93 94 95 96 97 98 99 00 01 02 03F
US P/C Insurers All US Industries California
ROE: US & CA P/C vs. All Industries, 1991–2003*
*2003 CA ROE is III estimate.Source: Insurance Information Institute; NAIC, Fortune
Since 1991 the results for p/c insurers in CA have been average to
below average
RNW for Major P/C Lines,1993-2002 Average
18.2%
13.7%
8.9% 8.8%7.7%
6.0% 5.5% 4.7%3.4%
2.1%
-7.1%
12.6%
7.3%
-15%
-10%
-5%
0%
5%
10%
15%
20%
InlandMarine
AllOther
Fire WC PPAuto
AllLines
MedMal
CommAuto
OtherLiab
CMP CMP HO Allied
Source: NAIC; Insurance Information Institute
10-Year returns for some major p/c lines surprisingly good
Top 10 California Companies by ROE vs. P/C Insurance, 2003
-1.6
5.2
40.6%
29.4%
24.3%23.7%23.3%21.5%19.9%18.0%14.9%
12.8% 9.4
Source: Fortune Magazine, April 5, 2004; corporate data are for 2003 ; ISO
%
Profitability of many leading CA-based companies dwarfs that of the insurance industry. Should they be forced to roll back their prices and be subject to the same micro-management style of regulation?
%
%
FINANCIAL STRENGTH
Is There Cause for Concern?
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
0.9
6
1.9
2
1.9
9
3.3
1.7
9
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
04
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.
*U.S. property/casualty and life/health insurers before 2000; P/C only 2000-2004.
Downgrade to upgrade ratio is falling (primarily because the number of downgrades is falling; only a small increase
in upgrades)
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%
Number of P/C Insurer Insolvencies, 2000 to 2004
Source: A.M. Best; Weiss Ratings; Insurance Information Institute
30 30
38
21
10
2000 2001 2002 2003 2004
The number of p/c insurer failures fell by more than 50%
in 2004
Reason for P/C Insolvencies(218 Insolvencies, 1993-2002)
Unidentified17%
Impaired Affiliate3%
Overstated Assets2%
Change in Business3%
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
$13.7
$0.3
($3.7)
$0.4
$11.0
($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, Prudential Securities, Ins. Info. Inst.
Adverse reserve development totaled $47.8 billion from 2000 through 2003
Adverse reserve development is the #1 killer of p/c insurance companies: Strength Matters
Cumulative Average Impairment Rates by Best Financial Strength Rating*
0%
10%
20%
30%
40%
50%
60%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15Average Years to Impairment
D
C/C-
C++/C+
B/B-
B++/B+
A/A-
A++/A+
Sources: A.M. Best: Best’s Impairment Rate and Rating Transition Study—1977-2002, March 1, 2004.
Insurers with strong ratings are far less likely to become impaired over
long periods of time. Especially important in long-tailed lines.
*US P/C and L/H companies, 1977-2002
Guarantee Fund Net Assessments*(1979-2003P)
$ 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
$1,2
25.9
$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
03
*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 records
WALL STREET:
HIGH EXPECTATIONS
Most Insurers Up, Brokers Down So Far in 2005
-4.11%
0.05%
2.14%
2.67%
1.71%
-0.42%
-0.15%
-6% -4% -2% 0% 2% 4%
S&P 500
Life/Health
All Insurers
P/C
Reinsur.
Multiline
Brokers
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Total Return 2004 YTD Through March 11, 2005
P/C insurer stocks outperforming the
market
Insurer/Broker Stocks: Hammered by the Spitzer Suit*
-26.73%
-12.36%
-5.20%
-5.02%
-1.79%
-1.24%
-30% -25% -20% -15% -10% -5% 0%
S&P 500
P/C
Life/Health
All
Multiline
Brokers
*Percentage point change.Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Change in YTD Total Return from October 8 to October 15, 2004
Spitzer suit announced Oct. 14 produced huge hit on all insurance sectors,
especially brokers
THE TRUTH ABOUT PROFITS IN
CALIFORNIA
California is the Largest US Insurance Market by Far
Market Share by State
Florida6.9%
Texas7.3%
All Other66.2%
New York7.3%
California12.2%Source: Insurance Information Institute; Based on 2003 Direct Premiums Written from A.M. Best.
DPW: 2003
US: $438.1B
CA: $53.6B
TX: $32.2B
NY: $32.0B
FL: $30.2B
California is One of the World’sLargest P/C Insurance Markets
World's Largest P/C Insurance Markets ($ Bill., ex. US)
$77.0$74.9
$52.9$44.6
$31.6$28.5
$20.4$18.9
$16.1$13.7$13.3
$91.0
$0 $20 $40 $60 $80 $100
Japan
United Kingdom
Germany
CALIFORNIA
France
Italy
Canada
Spain
Netherlands
South Korea
Australia
Switzerland
Source: Swiss Re, Economic Research & Consulting, “World Insurance in 2002,” sigma No.8/2003.
If California were its own country (again), it would be
the world’s 5th largest market for insurance (including US)
-5%
0%
5%
10%
15%
20%
25%
30%
35%
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
California US
Growth in Direct Written Premiums: CA vs. US
Source: A.M. Best, Insurance Information Institute
Rate changes in CA over a period spanning nearly 20 years are
similar to US average: (1985-2002)
US: 7.1%
CA: 6.7%
-10%
-5%
0%
5%
10%
15%
20%
91 92 93 94 95 96 97 98 99 00 01 02 03F
US P/C Insurers All US Industries California
ROE: US & CA P/C vs. All Industries, 1991–2003*
*2003 CA ROE is III estimate.Source: Insurance Information Institute; NAIC, Fortune
Since 1991 the results for p/c insurers in CA have been average to
below average
ROE for Personal Lines in California1993 – 2003*
18.4
%
16.7
%
9.3%
3.5%
-13.
8%
13.9
%
6.1%
-4.5
%
12.4
%
0.4% 1.6%
19.3
%
18.7
%
18.9
%
-5.4
%-1.6
%
18.3
%
12.5
% 15.9
%
3.4%
17.1
%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Personal Auto
Homeowners
*2003 Auto date not yet available. HO figure is profit a % of direct premiums earned.Source: NAIC
Averages:Auto: 11.9% (93-02)Home: 5.6% (93-03)
All Lines: 5.2% (93-02)
ROE for Major Commercial Lines in CA, 1993 - 2002
15.3%13.7%
10.2%
3.9% 4.9%
1.0%
-6.7%
-11.5%
5.9%8.6%
5.0%
-0.2%
-5.3%-7.3%
0.6%
-14.6%
4.5%2.9%
10.3%
2.3%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Workers Comp
Commercial Multi-Peril
Source: NAIC
Profits in CA are woefully inadequate and are well below
the Fortune 500 historical return of
13% -14%
2002 Return on Equity:CA & Nearby States PP Auto
3.5%
3.7%
3.9%
4.5%
5.2%
8.2%
0% 2% 4% 6% 8% 10%
US
Oregon
Washington
Arizona
Nevada
California
Source: NAIC, Insurance Information Institute
2002
2003 Profit as % of DPE:*CA & Nearby States HO
-4.5%
7.5%
12.5%
15.6%
16.6%
21.1%
-10% -5% 0% 5% 10% 15% 20% 25%
Oregon
Washington
Nevada
Arizona
US
California
*DPE = Direct Premium EarnedSource: NAIC, Insurance Information Institute
2003
18.6%
13.9%12.7%12.4%
7.7%
-9.7%
5.0%3.4% 3.1%3.7%
5.2%
12.2%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
HI RI ME MA AK US CA NV/ OK
KY TX WV ND
Profitability in CA ranked below average from 1993-2002
Sources: NAIC; Insurance Information Institute
Top/Bottom 5 Markets for ALL P/C LINES By Average RNW*, 1993-2002
19.8%
14.4%13.3% 12.9%
8.8%
-0.7%
11.9%
4.2%
0.4%2.0%
4.4%
-5%
0%
5%
10%
15%
20%
25%
HI RI CT NH CA US NE LA KY ND SC
Sources: NAIC; Insurance Information Institute
Top/Bottom 5 Markets for PVT. PASS. AUTO By Avg. RNW, 1993-2002
PPA profitability in California was above the US
average from 1993-2002
44.6%
23.9%19.5%
13.5%6.6%
-24.8%
-57.2%
-25.5%
2.1%
-17.6%-20.6%
11.9%
-60%
-40%
-20%
0%
20%
40%
HI FL RI NY MA CA US SD KY NE MN ND
Sources: NAIC; Insurance Information Institute
Top/Bottom 5 Markets for HOME-OWNERS By Avg. RNW, 1993-2002
CA Homeowners profitability was bad but average given poor overall
US results from 1993-2002 (Excludes Earthquake)
THE BLAME GAME:
Insurance-to-ValueOnly in California is Underinsuring
Your Home the Insurer’s Fault
Insurance-to-Value in HO is a National Problem, Improved Recently
73%
64%61%
25%27%
35%
20%
30%
40%
50%
60%
70%
80%
2002 2003 2004
Proportion of Home Undervalued Average Undervaluation*According MS/B.Source: Marshall & Swift/Boeckh
Less than ITV means homeowners insurers left $8 billion on the table in 2003*
Who’s Responsibility Is It to Keep Homeowners Policy Up-to-Date?
Other/Don't Know3%
Agent19%
Insurer7%
Homeowner71%
Source: September 2004 poll of 800 Californians conducted for the Insurance Information Network ofCalifornia by Public Opinion Strategies. Margin of error = +/- 3.46%.
Nearly 3 out 4 people, even fire-weary Californians, believe it is the homeowner’s responsibility to keep insurance up-to-date
BUT 26% believe it’s the agent’s or insurer’s responsibility
This substantial minority is wrong, but gets heard (CA, FL) and comments reflect badly on insurers
Media, regulators and legislators join fray
Time Since Homeowner Last Updated HO Policy
3 - 5 Years12%
Don’t Know/Refused
9%
6 Mos. - 1 Yr.12%
More than 5 Yrs.25%
1 - 2 Years24%
Last 6 Months18%
Source: September 2004 poll of 800 Californians conducted for the Insurance Information Network ofCalifornia by Public Opinion Strategies. Margin of error = +/- 3.46%.
Nearly 40% of people haven’t updated their homeowner’s policy within the last 3 years
Huge potential for problems, especially in disaster-prone states
Leads automatically to large under-insurance problems
Most Homeowners Believe They Have a Good Understanding of Their HO Policy…BUT
Not Very Well11% Very Well
32%
Not at All1%
Well41%
Extremely Well15%
Source: Harris interactive poll conducted for Fireman’s Fund, July 2004.See: http://www.firemansfund.com/dcmssites/about/pdf/firemansfundtoplinerev2.pdf
88% of homeowners think they understand their HO policies Well, Very Well or Extremely Well
BUT 66% believe they have replacement cost coverage AND 13% believe their insurance will pay market value!
Hardly surprising coverage disputes erupt after major disasters, esp. in areas with rapid home price appreciation
Most Homeowners Believe They Have Replacement or Mkt. Value HO Coverage
Fixed $ Amount5%
Replacement Cost66%
Not Sure12%
Actual Cash Value5%
Market Value13%
Source: Harris interactive poll conducted for Fireman’s Fund, July 2004.See: http://www.firemansfund.com/dcmssites/about/pdf/firemansfundtoplinerev2.pdf
66% of homeowners (mostly mistakenly) think they have replacement cost coverage
13% (all mistakenly) believe their insurance pays market value!
12% admit they don’t know how much their HO policy would pay
Many Homeowners Don’t Know What it Would Cost to Rebuild Home if Destroyed
Don't Know37%
Know63%
Source: Harris interactive poll conducted for Fireman’s Fund, July 2004.See: http://www.firemansfund.com/dcmssites/about/pdf/firemansfundtoplinerev2.pdf
Only 63% of homeowners believe they know what it would cost to replacement their home if destroyed
Why People Don’t Increase Homeowners Coverage
Didn't Know Needed To
25%
Other18%
Too Expensive5%
Didn't Have Time30%
Agent Said I'm Covered
26%
Don’t Want Rates to Go Up
17%
22% cite expense as reason they don’t adjust they’re HO coverage
25% don’t realize they need to
30% say they’re too busy (to think about protecting their most valuable asset)
25% say their agent said there’s nothing to worry about
Source: Harris interactive poll conducted for Fireman’s Fund, July 2004.See: http://www.firemansfund.com/dcmssites/about/pdf/firemansfundtoplinerev2.pdf
WORKERS COMP:A National Problem
Is California Out of the Woods?
National Perspective
Workers Comp Calendar Year vs. Ultimate Accident Year – Private Carriers
10197
111108 107 106
101106
119
129
138133
125
100 101
108
115118
122
97
106101
90
100
110
120
130
140
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003p 2004E 2005F
Calendar Year Accident Year
Percent
p Preliminary AY figure. Accident Year data is evaluated as of 12/31/2003 and developed to ultimateSource: Calendar Years 1994-2002, A.M. Best Aggregates & Averages; Calendar Year 2003p and Accident Years 1994-2003p and 2004/5 estimate and forecast, NCCIIncludes dividends to policyholders
Workers Comp Combined Ratios, 1994-2005F
$7.9 $8.0 $7.8$8.5 $8.9
$9.6$10.3
$11.1$12.0
$13.1
$14.7
$16.3
$17.8
$5
$7
$9
$11
$13
$15
$17
$19
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003p
Annual Change 1991–1995: +3.9%Annual Change 1996–2002: +9.0%
Accident Year
MedicalClaim Cost ($000s)
2003p: Preliminary based on data valued as of 12/31/20031991-2002: Based on data through 12/31/2002, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policies
Workers Comp Medical Claims Continue to Climb
4.5%3.6%
2.8% 3.2% 3.5%4.1%
4.6% 4.7%4.0%
5.1%
7.4% 7.7% 7.3%
8.7% 9.0%
12.0%11.0%
9.0%
0%
2%
4%
6%
8%
10%
12%
14%
1995 1996 1997 1998 1999 2000 2001 2002 2003
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.
5.0
pts
WC medical severity is rising 2.3 times faster than the
medical CPI
Med Costs Share of Total Costs is Increasing Steadily
Indemnity56%
Medical44%
Source: NCCI (based on states where NCCI provides ratemaking services).
Indemnity51%
Medical49%
Indemnity45% Medical
55%
1983
1993
2003p
Cost Drivers in Workers Comp
Source: Morgan Stanley
Prescription Drugs14%
Surgery/ Anesthesia
12%
Other25%
Physical Medicine
20%
Hospital & Facility Charges
13%
Diagnostic Radiology
16%
Average rate of inflation in the 5 specific areas is
likely to continue at 5%-6%for the indefinite future, which bodes ill
given current WC rate environment
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% 12%
3% 1% 1% 1%
02:II 02:III 02:IV 03:I 03:II 03:III 03:IV 04:I 04:II 04:III 04:IV
More than half of all WC accounts
renewed up at least 20% in mid-2002,
two years later virtually none did.
55% of WC accounts renewed negative during the 4th quarter of 2004
WC nationally is walking back into the woods
California Focus on Workers Compensation
$3
.24 $
4.2
1
$4
.40
$3
.52
$2
.59
$2
.56
$2
.47
$2
.35
$2
.30
$2
.68 $
3.5
3 $4
.28
$4
.86 $5
.65
$5
.75
$5
.34$6
.35
$0
$1
$2
$3
$4
$5
$6
$7
83 93 95 97 99 01 7/02-12/02
7/03-12/03
7/04-9/04Policy Year
Source: Workers Compensation Insurance Rating Bureau of California, WCIRB Summary of September 30, 2004 (release date Jan. 12, 2005).
CA: Average Insurer Rate Per$100 Payroll, 1983-2004:Q3
CA Employer costs for WC are finally falling
1999-2003:H2 = +176%
2003:H2-2004:Q3 = -16%
*As of 9/30/04
$5.5
$6.8$7.4
$6.0$5.1 $4.9 $5.3
$5.9$7.0
$8.4
$9.7$10.7
$12.2$12.7
$11.6
$0
$2
$4
$6
$8
$10
$12
$14
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
$ B
illi
on
s
Accident YearSource: Workers Compensation Insurance Rating Bureau of California, WCIRB Summary of September 30, 2004, (release date Jan. 12, 2005). *
CA: Estimated Ultimate Losses by Accident Year,1989-2003*
CA Ultimate Losses are Finally Falling
1994-2003 = +159%
2002-2003 = -9%
*As of 9/30/04, reflecting estimated impact of AB 227, SB 228 & SB 899 on unpaid losses.
7781
88
103 102
93 94
79
62
50
60
70
80
90
100
110
96 97 98 99 00 01 02 03 04*Calendar Year
Source: Workers Compensation Insurance Rating Bureau of California, WCIRB Summary of September 30, 2004, (release date Jan. 12, 2005). *
CA: Loss Ratios by Calendar Year,1996-2004*
CY loss ratios show a significant
improvement
*As of 9/30/04
96108 115
10084
93
127142
177 182165
117
85
155144
0
50
100
150
200
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
Losses LAE Other Expenses
Percent
Accident Year
CA: AY Combined and Loss Ratios, 1989-2003*
Source: Workers Compensation Insurance Rating Bureau of California, WCIRB Summary of September 30, 2004, (release date Jan. 12, 2005). *
The AY combined ratio has fallen by more than
half—all the way back to its 1994 levels
*As of 9/30/04, reflecting estimated impact of AB 227, SB 228 & SB 899 on unpaid losses.
-13.8
-20.8
-8.8-5.8
-18.2
-2.0
-3.7
-7.0
3.0
-0.3
-0.4
10.4
-7.0
-25
-20
-15
-10
-5
0
5
10
15
91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04*
CA USLine 3
CA indemnity claim frequency is more volatile than US
Accident Year
Percent Change
Estimated % Change in Indemnity Claim Frequency, AY 1991-2004*
Source: Workers Compensation Insurance Rating Bureau of California, WCIRB Summary of September 30, 2004, (release date Jan. 12, 2005). NCCI for US figures.
*As of 9/30/04 for CA; 12/31/03 for US.
TotalIndemnity Cost (000s) Lost-Time Claims
$8.7 $8.9 $9.7$11.1
$12.6$14.5
$17.6
$20.5$22.7
$25.5$27.4 $27.2
8.0 7.8 8.5 8.9 9.6 10.3 11.1 12.013.1
14.716.3
17.8
$5
$10
$15
$20
$25
$30
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003p
CA US
CA Change 1992–2003: +132.2%
US Change 1992–2003: +79.2%
Accident Year
CA vs. US: Est. Ultimate Medical Loss per Indemnity Claim,1992-2003*
Source: Workers Compensation Insurance Rating Bureau of California, WCIRB Summary of September 30, 2004, (release date Jan. 12, 2005). US data from NCCI: 2003 preliminary
*As of 9/30/04, reflecting estimated impact of AB 227, SB 228 & SB 899 on unpaid losses. Excludes med only.
CA med claim costs: 53% higher than US in 2003
TotalIndemnity Cost (000s) Lost-Time Claims
$10.0 $10.6$11.5
$13.2
$15.1
$17.2$19.0
$20.9 $21.4$22.6 $22.6 $23.2
9.4 9.1 9.6 9.7 10.3 11.0 11.812.8
14.215.2
16.1 16.8
$5
$10
$15
$20
$25
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003p
CA US
CA Change 1992–2003: +132.2%
US Change 1992–2003: +79.2%
Accident Year
CA vs. US: Est. Ultimate Indemnity Loss per Indemnity Claim,1992-2003*
Source: Workers Compensation Insurance Rating Bureau of California, WCIRB Summary of September 30, 2004, (release date Jan. 12, 2005). US data from NCCI: 2003 preliminary
*As of 9/30/04, reflecting estimated impact of AB 227, SB 228 & SB 899 on unpaid losses.
CA indem. claim costs were 38.1% higher than the US in 2003
TotalClaim Cost (000s) Lost-Time Claims
$18.7 $19.5 $21.2$24.3
$27.7$31.7
$36.6
$41.3$44.1
$48.0$49.9 $50.4
17.3 16.9 18.1 18.7 19.9 21.4 22.9 24.927.3
29.932.4
34.6
$5
$15
$25
$35
$45
$55
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003p
CA US
CA Change 1992–2003: +169.9%
US Change 1992–2003: +99.6%
Accident Year
CA vs. US: Est. Ultimate Total Loss per Indemnity Claim, 1992-2003*
Source: Workers Compensation Insurance Rating Bureau of California, WCIRB Summary of September 30, 2004, (release date Jan. 12, 2005). US data from NCCI: 2003 preliminary.
*As of 9/30/04, reflecting estimated impact of AB 227, SB 228 & SB 899 on unpaid losses. Excludes med only.
CA claim costs were 47.6% higher than the US in 2003
UNDERWRITING PERFORMANCE:
US & California
90
100
110
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
04
E0
5F
P/C Industry Combined Ratio2001 = 115.7
2002 = 107.2
2003 = 100.1
2004E = 98.7
2005F = 98.9
Combined Ratios
1970s: 100.3
1980s: 109.2
1990s: 107.8
2000-04E: 106.5
Sources: A.M. Best; ISO, III
($55)
($45)
($35)
($25)
($15)
($5)
$5
$15
$25
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
04
*0
4**
Underwriting Gain (Loss)1975-2004F
*Based on 9-month result. Source: A.M. Best, Insurance Information Institute
$ B
illi
ons
2004 is likely to produce the first underwriting profit since 1978
110.
3
110.
2
107.
6
103.
9
109.
7
112.
3
111.
5
122.
2
110.
2
98
100
103.
9
104.
5
103.
5
104.
9
99.8 10
2.7
104.
5 109.
9
110.
9
105.
3
98.4
97 98
112.
5
101.
9
90
95
100
105
110
115
120
125
93 94 95 96 97 98 99 00 01 02 03 04E 05F
Commercial--Net Basis Personal--Net Basis
Commercial vs. Personal Lines Combined Ratios
Source: A.M. Best; Insurance Information Institute *1994-2003 average
10-Year Average Combined Ratios*
Commercial: 109.9 Personal: 104.4
Compression of results is due to low interest. Underwriting is now more important in
long-tail commercial lines
50%
60%
70%
80%
90%
100%
110%
99
:Q1
99
:Q3
00
:Q1
00
:Q3
01
:Q1
01
:Q3
02
:Q1
02
:Q3
03
:Q1
03
:Q3
04
:Q1
04
:Q3
Collision Comprehensive Liability (BI & PD)
Source: ISO Fast Track; Insurance Information Institute.
Private Passenger Auto:Incurred Loss Ratios, 1999-2004:Q3
Loss ratios for all major coverage are trending
downward
50%
55%
60%
65%
70%
75%
80%
93 94 95 96 97 98 99 00 01 02 03
Homeowners PP Auto
Loss Ratios: Private Passenger Auto & Homeowners
Source: NAIC; 2003 figure from A.M. Best; Insurance Information Institute
Homeowners loss ratio is very volatile, but both are
improving nationally
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
00
:Q1
00
:Q2
00
:Q3
00
:Q4
01
:Q1
01
:Q2
01
:Q3
01
:Q4
02
:Q1
02
:Q2
02
:Q3
02
:Q4
03
:Q1
03
:Q2
03
:Q3
03
:Q4
04
:Q1
04
:Q2
04
:Q3
Auto Insurance Component of CPI Personal Auto-PD Pure Premium
Source: Insurance Information Institute calculations based ISO Fast Track and US BLS data.
Pure Premium Spread: Personal Auto PD Liability, 2000-2004:Q3
Margin necessary to maintain PPA profitability
2000 PPA Combined = 110
2003 PPA Combined = 98
-2%
0%
2%
4%
6%
8%
10%
00
:Q1
00
:Q2
00
:Q3
00
:Q4
01
:Q1
01
:Q2
01
:Q3
01
:Q4
02
:Q1
02
:Q2
02
:Q3
02
:Q4
03
:Q1
03
:Q2
03
:Q3
03
:Q4
04
:Q1
04
:Q2
04
:Q3
Auto Insurance Component of CPI Personal Auto-BI Pure Premium
Source: Insurance Information Institute calculations based ISO Fast Track and US BLS data.
Pure Premium Spread: Personal Auto BI Liability, 1999-2004:Q3
Margin between Auto Insurance CPI and BI pure
premium has narrowed
-6.0%-5.7%
-4.5% -4.7%
-1.6%
-0.9%
-1.7%
-3.4%-3.9% -4.0%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
00 01 02 03 04*
CA FrequencyUS Frequency
PPA Bodily Injury Frequency:US vs. CA
*4 quarters ending September 30, 2004.Source: ISO Fast Track data.
BI frequency trends in US and CA are similar
5.6%
2.9% 3.1%
5.8%
-2.6%
3.6% 3.9%
2.8%
3.9%3.5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
00 01 02 03 04*
CA SeverityUS Severity
PPA Bodily Injury Severity:US vs. CA
*4 quarters ending September 30, 2004.Source: ISO Fast Track data.
CA BI severity was worse than US, now better
1985-2003E
30%
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03E
US California
Homeowners Direct Loss Ratios: CA vs. US
Source: NAIC; Insurance Information Institute
Averages: 1985-2002/3E
CA: 66.1% (excl, EQ)
US: 70.6%
WHY UNDERWRITING DISCIPLINE MATTERS
97.5
100.6 100.1
94.3
97.9
9.4%9.9%
14.3%
15.9%15.0%
80
85
90
95
100
105
110
1978 1979 2003 Actual 2003 for 15%ROE
2004F
Co
mb
ine
d R
ati
o
6%
8%
10%
12%
14%
16%
18%
Re
tru
n o
n E
qu
ity
*
Combined Ratio ROE*
* 2004 figure is return on average statutory surplus based in first 9 monhts dataSource: Insurance Information Institute from A.M. Best and ISO data.
A 100 Combined Ratio Isn’t What it Used to Be: 95 is Where It’s At
Combined ratios today must be below
95 to generate Fortune 500 ROEs
FATAL ATTRACTION?
A LOSS OF PRICING & UNDERWRITING
DISCIPLINE
99
.5 10
1.1
10
9.5
10
4.2
98
.4
93
.3
93
.1
10
7.9
10
3.5
10
1.3 10
1
$774
$834$855
$868
$687$683
$706
$704$718
$691
$668
90
95
100
105
110
115
95 96 97 98 99 00 01 02 03 04E 05F
Co
mb
ine
d R
ati
o
$500
$600
$700
$800
$900
Av
g. A
uto
Ins
ura
nc
e E
xp
en
dit
ure
PP Auto Combined Ratio
Average Auto InsuranceExpenditure
Private Passenger AutoCombined Ratios, 1993-2005F
Sources: Insurance Information Institute from A.M. Best and NAIC data; 2004/5 expenditure estimates from III.
Somebody forgot there’s a relationship between price and
underwriting performance
Somebody remembered
109.4110.2
118.8
109.5
112.5
110.2
107.6
103.9
109.7
122.3
110.3
101.9
111.5112.3
$7.30$6.49
$8.91
$8.30
$11.96
$6.46
$4.83$5.20
$5.71
$5.25
$5.70
$7.70
$6.40$6.10
100
105
110
115
120
125
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 Combined Ratio
Cost of Risk
Source: RIMS, A.M. Best; Insurance Information Institute
Cost of Risk vs. Commercial Lines Combined Ratio
INVESTMENTS:
NO SUBSTITUTE FOR SOUND UNDERWRITING
$0
$9
$18
$27
$36
$45
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
Net Investment Income
History
1997 Peak = $41.5B
2000= $40.7B
2001 = $37.7B
2002 = $37.2B
2003 = $38.7B
2004E = $38.3B
$ B
illi
ons
Growth History
2002: -1.3%
2003: +3.9%
2004E: -1.0%
Source: A.M. Best, ISO, Insurance Information Institute
-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
Source: Ibbotson Associates, Insurance Information Institute. *Through March 15, 2005
Total Returns for Large Company Stocks: 1970-2005*
2003/4 were the first consecutive gains since 1999
S&P 500 was up 9% in 2004. Fears of higher interest rates, inflation, the falling dollar, big deficits, resurgent oil prices are concerns in 2005
2005
Property/Casualty Insurance Industry Investment Gain*
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.6 $46.9
$56.9
$51.9
$57.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 02 03 04E*Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.2004 estimate is annualized figure based on first 9-months results.Source: Insurance Services Office; Insurance Information Institute.
Investment gains are rising but remain well below the peak of
$57.9 billion in 1998
CAPACITY CRUNCH?
$0
$50
$100
$150
$200
$250
$300
$350
$400
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
U.S. Policyholder Surplus: 1975-2004*
Source: A.M. Best, ISO, Insurance Information Institute *As of 9/30/04.
$ 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
•Surplus is up $83.6B or 29.3% since year-end 2002
•Surplus increased by $22B or 6.3% to $369B by 2004:Q3 from $347B at year-end 2003 “Surplus” is a measure of
underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
$53.9 Billion
Capacity TODAY is just 8.8% above its mid-1999 peak
PRICING:
DOWNWARD PRESSURE?
Average Expenditures on Auto Insurance: US vs. CA$6
68 $691 $7
06
$704
$683
$687 $7
18
$774
$834 $8
55 $868
$778
$705
$667
$666
$709
$753
$793
$803
$600
$650
$700
$750
$800
$850
$900
95 96 97 98 99 00 01 02 03* 04* 05*
US CA
Countrywide auto insurance expenditures are expected to
rise 1.5% in 2005
*III Estimates; Estimates for 2003-2004 based on BLS CPI data for motor vehicle insurance.Source: NAIC, Insurance Information Institute
Average Expenditures on Homeowners Ins.: US vs. CA
$418$440
$455
$488$508
$536
$636
$481
$593
$660$677
$660
$599$592$578$577
$489$501
$400
$450
$500
$550
$600
$650
$700
95 96 97 98 99 00* 01 02* 03* 04* 05*
US CA
*III EstimatesSource: NAIC, Insurance Information Institute.
Countrywide HO insurance expenditures are expected to
rise 2.5% in 2005
Ratio of Avg. Homeowners Ins Expenditure to Median Income for Family of 4
1.31%
0.94%
0.58%
1.48%
1.69%
1.25%
0.51%0.47%
0.85%
0.49%0.56%
1.24%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
TX LA MS FL OK CA VA OH MD DE WI US
Homeowners Affordability “HURT Index”* (Top/Bottom 5 States)
CAT-prone and “moldy” states have biggest affordability issues
*Ratio of 2001 state average auto expenditure to states median income for family of 4.
Sources: Property Insurance Report, Oct 4, 2004
14
%11
% 13
%1
6%
19
%2
2%
28
%3
1%
31
%2
8% 3
0% 3
2%
33
%2
8%
29
%3
0% 3
2%
30
%2
7%
25
%2
8%
22
%1
8%
18
%1
7%
16
%1
2%
12
%1
0% 12
%11
%9
%
7%
7%
5%
4%
4%
2%
2%
2%
1%
0%
9%
9%
0%
5%
10%
15%
20%
25%
30%
35%
Ju
l-0
1A
ug
-01
Sep
-01
Oct
-01
No
v-0
1D
ec-0
1J
an
-02
Feb
-02
Ma
r-0
2A
pr-
02
Ma
y-0
2J
un
-02
Ju
l-0
2A
ug
-02
Sep
-02
Oct
-02
No
v-0
2D
ec-0
2J
an
-03
Feb
-03
Ma
r-0
3A
pr-
03
Ma
y-0
3J
un
-03
Ju
l-0
3A
ug
-03
Sep
-03
Oct
-03
No
v-0
3D
ec-0
3J
an
-04
Feb
-04
Ma
r-0
4A
pr-
04
Ma
y-0
4J
un
-04
Ju
l-0
4A
ug
-04
Sep
-04
Oct
-04
No
v-0
4D
ec-0
4J
an
-05
Feb
-05
Source: MarketScout.com
Commercial Premium Rate Changes Are Sharply Lower
Is moderation due to realization of performance and profit goals, increasing capacity/ capital, or market- share strategies?
World Rate-On-Line Index(1990 = 100)
100116
283
372
337
288
248
193
160138 142
194
239260
230
0
50
100
150
200
250
300
350
400
90 91 92 93 94 94 96 97 98 99 00 01 02 03 04
Source: Guy Carpenter
Reinsurance prices rising, limits falling: ROL up significantly, though not as much as after Hurricane Andrew in 1992
REPORT ON IMPORTANT ISSUES IN WASHINGTON &
THE STATES
SPITZER INVESTIGATION
Has the Industry’s Reputation Been
Shattered?
Headlines from Hell
• HOW INVESTIGATIONS OF AIG LED TO RETIREMENT OF LONGTIME CEO-Wall Street Journal, March 15, 2005, Page A1
• AON SETTLES CASE ON COMMISSIONS FOR $190 MILLION-Wall Street Journal, March 5, 2005, Page C3
• INQUIRY MAY PUT HEAT ON INSURERS-Wall Street Journal, February 16, 2005, Page C3
• MORE PLEAD GUILTY IN MARSH CASE-Wall Street Journal, February 16, 2005, Page C3
• MARSH, SPITZER SETTLE WITH $850 MILLION, AN APOLOGY TO CLIENTS-Wall Street Journal, February 1, 2005, Page C1
• INSURERS REEL FROM SPITZER’S STRIKE-Wall Street Journal, October 18, 2004, Page A1
• BROKER ACCUSED OF RIGGING BIDS FOR INSURANCE-New York Times, October 15, 2004, Page A1
• CLASS ACTION THREAT ADDED TO CHALLENGES FACING INSURERS-Wall Street Journal, October 20, 2004, Page C1
• INSURERS POST STEEP LOSSES IN DAY OF WIDESPREAD DECLINES-New York Times, October 15, 2004, Page C4
5 Main Areas of Investigation• PROBE 1: Anti-Competitive Acts
Big-rigging, fraud is the only actual illegal act Contingent commissions not illegal but painted as root of problem Accusation: Broker contractual responsibility to buyer breached Likely Outcome: Fines, penalties, disclosure; E&O/D&O, sharehldr. suits New Economic Model Needed to replace lost broker (agent?) income Independent Agents: Distinction that agent works for insurer not as helpful as commonly
believed• PROBE 2: Tying
Alleges brokers steered business to certain insurers who would then utilize their reinsurance broker affiliate
Likely Outcome: Fines, penalties, disclosure; divestiture (worse case)• PROBE 3: Finite (Re) Insurance/”Non-Traditional” Products
Issue 1: Was there “significant” transfer of risk or merely a loan disguised as insurance? Issue 2: Was there proper accounting treatment Issue 3: Misrepresentation of policy details Likely Outcome: Fines, Penalties, revamped accounting definitions; stds.
5 Main Areas of Investigation
• PROBE 4: Legal Malpractice Allegations by trial lawyers that their firms’ premiums have risen and
coverage is more difficult to get Response (& the Truth): All professional liability markets have tightened
due to litigation explosion against providers of professional services E.g., Doctors, accountants, brokers, lawyers, directors
Med mal D&O E&O
• PROBE 5: Outsourced Claims Handling Subpoenas issued to several firms that handle outsourced claims
functions Nature of allegations unclear, but could be performance-based incentives
Approximately 42 states have different investigations and inquires underway by Attorneys General and Insurance Departments as of mid-January 2005
Details of Spitzer’s $850 Million Settlement with Marsh*
*Agreement announced January 31, 2005.Source: Insurance Information Institute
Restitution Payment Timetable($Millions)
$255 $255
$170 $170
$0
$50
$100
$150
$200
$250
$300
1-Jun-05 1-Jun-06 1-Jun-07 1-Jun-08
Details of Settlement:•Pay $850 million into restitution fund over 4 years•Apologize to clients acknowledging certain employees “unlawfully deceived their customers.” •Marsh to codify ban on contingent commissions•Prohibits tying (steering business to insurers who promise to pay for services of other Marsh units)•Marsh pays no “fine”•Marsh neither admits nor denies wrongdoing•Participation in restitution fund requires forgoing other litigation
Marsh also agreed to not accept anything of value from insurers including “credits, loans, forgiveness of principal or interest,
vacations, prizes, gifts or payment of employee salaries or expenses.”
LEGAL LIABILITY & TORT
ENVIRONMENT
Cost of U.S. Tort System($ Billions)
Source: Tillinghast-Towers Perrin.
$129$130$141$144 $148
$159 $156$156$167$169 $180
$205
$233$246
$262$279
$297
$0
$50
$100
$150
$200
$250
$300
$350
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04E 05F 06F
Tort costs will consume an estimated 2.24% of GDP in 2005
Per capita “tort tax” was $845 in 2003, up from $680 in 2000
Reducing tort costs relative to GDP by just 0.25% (to about 2%) would
produce an economic stimulus of $27.5B
Personal, Commercial & Self (Un) Insured Tort Costs*
$17.0$49.1 $57.2
$91.4
$17.1
$51.0$70.9
$82.5
$5.4
$20.1
$29.6
$45.3
$0
$50
$100
$150
$200
$250
1980 1990 2000 2003
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 = $219.2 Billion
LEGAL LIABILITY & TORT
ENVIRONMENTGood News for a Change?
There is Was is Was Is a Glimmerof Hope for Tort Reform
Best Chance for Tort Reform in Years is BACK• 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; Failed again in 2004
Passed by Senate 2/10/05 with 72-26 vote; Signed by Pres. Bush 2/18.
• Asbestos ReformFairness in Asbestos Injury Resolution of 2003; Failed Apr. 2004
• Punitive Damages—What’s ReasonableSupreme Court ruled favorably in Campbell v. State Farm
Summary of Class Action Fairness Act (S. 5, approved Feb. 10, 2005)
1. Allows most state court suits seeking $5 million or more to be removed to federal courts
2. Lets federal judges decline to hear cases involving many out-of-state class members
3. Requires greater scrutiny of settlements offering goods/services or coupons (in lieu of cash)
4. Bans settlements resulting in a net loss to class members
5. Bans settlements giving plaintiffs larger awards on basis of proximity to court
Source: Business Insurance, February 14, 2005, p.1.
Likely Impacts of Class Action Fairness Act on P/C Insurance Industry
1. Effect will be modestly positive, benefiting primarily commercial casualty lines, though some benefit to PPA
1. Likely to reduce both freq. & severity (incl. defense costs)
2. Does NOT create a windfall for insurers Most savings will be quickly passed along to policyholders
3. Improves underwriting and rating environment, creates incentives to expand capacity, esp. commercial casualty coverages (excl. WC) & creates some new opportunities; insurers can return to some markets
4. Does NOT limit legal fees, non-economic damages or provide appeal bond limits
5. Does NOT solve asbestos or med mal crises
Source: Insurance Information Institute
Summary of Class Action Fairness Act Details on Removal to Federal Courts
• Aggregate amount in dispute must exceed $5 million
• At 100 class members
• At least one member of the plaintiff class is citizen of a different
state than that of the defendant.
• Any member of class or defendant is citizen or subject of a
foreign state
• Home State Exception (Feinstein Amendment): If more than 2/3 of class members are from defendant’s home state then
case is not subject to removal to fed. court
Source: The Class Action Fairness Act: Cleaning Up the Class Action Mess, Bureau of National Affairs, pp. 104-108, 2/11/05.
Summary of Class Action Fairness Act Details on Removal to Federal Courts
• Home State Exception (Feinstein Amendment): If more than 2/3 of class members are from defendant’s home state then case is not subject to removal to federal court If 1/3 to 2/3 of class have shared citizenship with defendant, fed court
could decline to exercise jurisdiction depending on: Whether claims are of significant national or interstate interest Whether claims would be governed by laws other than forum state Whether case pleaded in manner that seeks to avoid federal jurisdiction Whether action brought in forum with distinct nexus to class members, defendants
or the alleged harm Whether number of citizens of forum state in class substantially larger from other
states and whether class members from other states substantially dispersed Whether similar claims filed by 1+ class members over past 3 years
Source: The Class Action Fairness Act: Cleaning Up the Class Action Mess, Bureau of National Affairs, pp. 104-108, 2/11/05.
Potential Hazards in the Post-CAFA Era for Insurers
1. Insurers overestimate CAFA’s impact1. Reduce rates too much2. Reduce rates too quickly3. Assume reserves are redundant when they’re not 4. Reserve inadequately
2. Rapid expansion into lines with little or no experience to seize post-CAFA territory
3. Unwarranted broadening of terms and conditions4. Commit too much capital to some casualty lines5. Entry of new capital = accelerated casualty market softening6. Succumb to regulatory pressure to reduce rates when
reductions can’t be justified actuarially
Source: Insurance Information Institute
Growth in Cost of U.S. Tort System,1951-2003
Source: Tillinghast-Towers Perrin.
11.6%
9.8%
11.9% 11.8%
3.2%
14.0% 13.4%
5.4%
0%
2%
4%
6%
8%
10%
12%
14%
16%
1951-60 1961-70 1971-80 1981-90 1991-2000
2001 2002 2003
Tort costs moderated in 2003 as some of the asbestos-related costs that drove growth up in 2001 and 2002 abated.
Asbestos-related costs drove tort growth sharply upward in
2001 and 2002
Tort System Costs, 2000-2006E
$179.2
$233.2$245.7
$261.7$278.7
$296.8
$205.5
1.83%
2.03%2.22% 2.23% 2.24% 2.27%2.23%
$100
$150
$200
$250
$300
$350
00 01 02 03 04E 05E 06E
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: Tillinghast-Towers Perrin
After a period of rapid escalation, tort system costs as % of GDP appear to be stabilizing
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
($00
0)
1994 2001 2002
Source: Jury Verdict Research; Insurance Information Institute.
Average jury award appears to be leveling out
Appeal Bond Limit Laws Enacted Since July 2003 ($ Millions)
$150 $150 $150
$100
$50 $50
$150
$100
$50
$25
$0
$20
$40
$60
$80
$100
$120
$140
$160
CA HI OR PA MO NJ SC MN WI NE* OK***Lesser amounts may apply.
**$25 million figure applies to tobacco companies; other defendants have different limits.
Source: Covington & Burling; NY Times June 2004; Insurance Info Institute.
Giant verdicts have led more
states to impose appeal bond limits
No
Bon
d R
equ
ired
Tobacco Cos. & Affiliates All Defendants
States With Split Recovery Laws & Share of Punitives Taken by State
*IL trial judge determines share and when taken.Note: FL, KS, NY have repealed/allowed law allowing spit recoveries to expire; CO struck down law as unconstitutional.Sources: Yale Law Journal, California Legislative Analyst’s Office; NY Times, May 30, 2004, A16; Insurance Info. Institute
75% A
60% B
50% A
50% A
75% A
50% A
See Note*
75% B
75% AWhere Does the Money Go?
CA: Public Benefit Trust Fund
GA, AK, UT: General Revenue Fund
IL: State Dept. of Human Services
IN: Violent Crimes Reparation Fund
IA: Civil Reparations Fund
OR: Criminal Injuries Compensation Account
MO: Tort Plaintiffs’ Compensation Fund
Proposed May 2004
A: After Lawyers’ Fees
B: Before Lawyers’ Fees
The Nation’s Judicial Hellholes
Source: American Tort Reform Association; Insurance Information Institute
CALIFORNIA
Los Angeles County
Orleans Parish, LA
Jefferson County, TX
South Florida
Philadelphia, PA
Hampton County, SC
ILLINOIS
Madison County
St. Clair County
West Virginia
INSURANCE SCORING
Biggest Losers from California’s Ban on Credit
are Consumers
Importance of Rating Factors by Coverage Type
Coverage Factor 1 Factor 2 Factor 3
BI Liability Age/Gender Ins. Score Geography
PD Liability Age/Gender Ins. Score Geography
PIP Ins. Score Geography Yrs. Insured
Med Pay Ins. Score Limit Age/Gender
Comprehensive Model Year Age/Gender Ins. Score
Collision Model Year Age/Gender Ins. Score
Source: The Relationship of Credit-Based Insurance Scores to Private Passenger Automobile Insurance Loss Propensity Michael Miller, FCAS and Richard Smith, FCAS (EPIC Actuaries), June 2003 (Presented at June 2003 NAIC meeting).
AUTO: New TX Study Confirms Strong Correlation Between Credit
Score & Loss Performance
Source: Use of Credit Information by Insurers in Texas, Texas Department of Insurance, December 30, 2004.
The average loss per vehicle for people with the worst credit scores is double that of people with the best scores for this group.
HOMEOWNERS: New TX Study Confirms Strong Correlation Between
Credit Score & Loss Performance
Source: Use of Credit Information by Insurers in Texas, Texas Department of Insurance, December 30, 2004.
Homeowners insurance loss ratios for people with the worst credit scores is triple that of people with the best scores for this group.
AUTO: New TX Study Shows People With Good Credit Involved in Far
Fewer Accidents
Source: Use of Credit Information by Insurers in Texas, Texas Department of Insurance, December 30, 2004.
Drivers with the best credit are involved in about 40% fewer accidents than those with the worst credit for this group
THE DEBATE OVER FEDERAL vs. STATE
REGULATION OF INSURANCE
Is a Federal Regulatory Mechanism for Insurance Just a Matter of Time?
• Agreement that current regulatory system is broken
• 2 Main Problems:Speed-to-Market:
Too slow
Duplicative regulatory process: Slow, inefficient, expensive& byzantine patchwork system
• Solutions/OutcomesStatus Quo (unsupported but could be short/intermediate-term outcome)
Federal Standards Approach
Optional Federal Charter (OFC)
Source: Insurance Information Institute.
What Do Proponents of Optional Federal Chartering Want?
• MAJOR PROPONENTS: AIA, ACLI, FSR…• Market Based System
Competition, not regulatory approval, should determine products sold by insurers and prices charged
Enhances speed- to-market, efficiency
• National TreatmentOFC allows insurer to operate in all 50 states w/ 1 licenseFederal RBC and capital requirements
• Uniform Regulatory RequirementsFed regulator would promulgate and enforce federal requirements
governing market conduct, claims practices, solvency, liquidation…
What Do Proponents of Optional Federal Chartering Want? (cont’d)
• Timely & Impartial ImplementationEnforcement of regulatory requirements will be timely, impartial
and professional;Fines and other penalties proportional to violation
• Level Playing FieldLevel regulatory playing vis a vis other financial services industriesNew federal regulatory to be located within Treasury Dept.
• Technology for the 21st CenturyFed regulator would embrace use of new technologies by federally
chartered insurers and pre-empts inconsistent state requirements
Source: American Insurance Association
What Do Proponents of StateInsurance Regulation Want?
• MAJOR PROPONENTS: NAMIC, PCIAA, IIABA, NAIC
• Federal Standards/Tools Approach“Targeted and limited” national standards with state enforcement,
national/multi-state reciprocity, incentives and pre-emption of certain state laws provides a superior regulatory mechanism
• CLAIM: Not obvious you get better regulation from Washington
Note previous failures in banking system, mutual fund & securities scandals
• CLAIM: State regulators more responsive to local needs and market idiosyncrasies
Key Elements of SMART Act• Affirms 1945 McCarran-Ferguson Act, which preserves state
authority to regulate insurance unless specific federal pre-emption exists
• SMART would (for the first time) pre-empt state personal & commercial lines rating laws to create “nationwide competitive insurance pricing”2 years after enactment—rate deregulation for virtually all commercial lines
except med malFlex band rating in personal lines: +/-7% yr. 1; +/-12% yr. 2
• Speeds up approval process for new products• Licensing: Creates “single point-of-entry” system
Allows a company licensed and in good standing in 1 state to submit uniform application to conduct business in other states
Source: Insurance Information Institute.
Key Elements of SMART Act (cont’d)
• Limits market conduct exams to “for cause” situations
• Creates 7-member “state-national insurance coordination partnership” to assess if uniformity requirements met. Has no regulatory/supervisory authority but must make a report to Congress
• In wake of Spitzer probes, future drafts of SMART Act will likely contain language on disclosure of producer compensation.
• SUMMARY: Likely more hearings in Congress, but no bill in 2005
Source: Insurance Information Institute.
SHOULD THERE BE A NATIONAL DISASTER
(RE)INSURANCE FACILITY?
California is No Stranger to Disaster
Earthquake
Wildfire
Flood & Mud
U.S. InsuredCatastrophe Losses ($ Billions)
$7.5
$2.7$4.7
$22.9
$5.5
$16.9
$8.3 $7.4
$2.6
$10.1$8.3
$4.6
$26.5
$5.9
$12.9
$27.3
$0
$5
$10
$15
$20
$25
$30
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04Note: 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
$ Billions2004 was the second worst year ever for natural disaster losses in the US after adjusting for inflation.
About 79% of those losses originated in Florida.
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
US P/C Insurers All US Industries P/C excl. Hurricanes
ROE: P/C vs. All Industries 1987–2004E*
*2004 p/c estimate based on first 9 months data.Source: Insurance Information Institute; Fortune
AndrewNorthridge
Hugo Lowest CAT losses in 15 years
Sept. 11
2004 ROE excl. hurricanes
2004 ROE reduced due to
hurricanes
Losses from Hurricanes of 2004
*III estimates as of 9/29/04Source: ISO/PCS; Insurance Information Institute
$ Billions
$4.4$5.0
$6.0$6.8
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
$7.0
$8.0
Frances Ivan* Jeanne* Charley
Estimated insured losses from the hurricanes of 2004 exceed the $15.5B in losses from Hurricane Andrew ($20.3B in $2003)
Four of the Top 10 hurricanes in US
history occurred in 2004
Top 10 Insured Losses In California History ($2003)
$0.3 $0.4 $0.5 $1.0 $1.0 $1.1$2.3
$7.1
$10.4
$15.5
$0$2$4$6$8
$10$12$14$16$18
$ B
illi
ons
Source: Insurance Information Institute
Two of the 10 most expensive disasters in US history occurred in California
Top 10 Insured Losses Worldwide,1970-2004 ($2003)
$4.9 $6.0 $6.2 $6.4 $6.4 $6.8 $7.6
$17.3
$20.9
$32.5
$0
$5
$10
$15
$20
$25
$30
$35
$ B
illi
ons
*Insurance Information Institute estimate; Hurricane Charley figure is from ISO/PCS. Both in 2004 $.Sources: Swiss Re, “Natural Catastrophes and Man-Made Disasters in 2003,” Sigma, no. 1, 2004; except Sept. 11 estimate from Hartwig, Robert P., 2004 Mid-Year Property/Casualty Insurance Update, Insurance Information Institute. Figure is stated in 2001 dollars.
Six of the 10 most expensive disasters is world history
occurred in the US
Top 10 Insured Losses in U.S. History,1980-2004 ($2003)
$3.3 $3.4 $4.6$6.2 $7.1 $7.5
$10.4
$15.5
$20.3
$32.5
$0
$5
$10
$15
$20
$25
$30
$35
$ B
illi
ons
*Insurance Information Institute estimate; Hurricane Charley figure is from ISO/PCS. Both in 2004 $.Sources: Swiss Re, “Natural Catastrophes and Man-Made Disasters in 2003,” Sigma, no. 1, 2004; except Sept. 11 estimate from Hartwig, Robert P., 2004 Mid-Year Property/Casualty Insurance Update, Insurance Information Institute. Figure is stated in 2001 dollars.
Six of the 10 most expensive disasters is world history
occurred in the US
Top 10 Most Costly Earthquakes in U.S. History Since 1930 ($2003)
$57 $87 $121 $417 $566 $580
$2,512 $2,968
$10,387
$15,500
$0$2,000$4,000$6,000$8,000
$10,000$12,000$14,000$16,000$18,000
$ M
illi
ons
Source: Insurance Information Institute
Nine of the 10 most expensive earthquakes in US history
occurred in California
Average Annual Insured Losses*(Top 10 States, $ Millions)
$1,423.0
$615.0
$196.0$109.0 $77.0 $64.0 $62.0 $61.0 $61.0 $51.0
$154.0
$0
$250
$500
$750
$1,000
$1,250
$1,500
FL TX LA NC MS MA SC AL NY CT AllOther
*Normalized losses adjusted for inflation, housing density, wealth and wind insurance coverage, based on historical data for 100-year period 1900-1999.Source: Tillinghast-Towers Perrin
Louisiana6.8%
N. Carolina
3.8%
Mississippi2.7%
All Other15.7%
Texas 21.4%
Florida49.5%
Distribution of Annual Losses
$4.96 B Industry Aggregate Retention
$11.19 B Bonding Capacity (Includes Loss Adjustment Expense)
53 year return
time*
Initial Season Capacity For the 2005 Hurricane Season (Projection for 2005 Estimate)
Assumes Cash Balance is Reduced $3 billion
Initial Season Capacity For the 2005 Hurricane Season (Projection for 2005 Estimate)
Assumes Cash Balance is Reduced $3 billion
Maximum Emergency Assessment -- $1.608 billion
2.80%
$21.86 B Overall Industry Loss
$3.81 B Projected 2005 Year-end Cash Balance
$15 Billion Capacity
(only $750.4 million needed)
$1.9 B In
du
stry
Co
-Paym
ents
Not Drawn to scale.Source: FHCF, Jan. 14, 2005 *Return time not adjusted for premium/exposure growth.
Note: Since the FHCFyear-end cashbalance will not grow due to lossesin 2004, it remainsat $15 billion. Hadthere been no lossesthe capacity wouldhave grown to $16.5 billion.
Note: The insuranceindustry aggregateretention is adjusted to growwith exposure growth.
Credit Ratings: Aa3, AA-, AA
Source: CSFB, Secrets of the CEA, 09/13/04
California Earthquake Authority 2004 Capacity Schematic
CEA Capital ($1.7)
Post-Earthquake Industry Assessments ($2.183)
Reinsurance Layers ($1.5)
Post-Earthquake Industry Assessments ($1.456)
CEA $7.2 Billion
A privately-financed, publicly managed entity, the CEA is the world’s largest provider of residential earthquake insurance,
with current funding capacity of over $7.2 billion.
THE CHALLENGE OF TERRORISM
Sept. 11 Industry Loss Estimates($ Billions)
Life$1.0 (3.1%)
Aviation Liability
$3.5 (10.8%)
Other Liability
$4.0 (12.3%)
Biz Interruption
$11.0 (33.8%)
Property -WTC 1 & 2
$3.6 (11.1%) Property - Other
$6.0 (19.5%)
Aviation Hull$0.5 (1.5%)
Event Cancellation$1.0 (3.1%)
Workers Comp
$1.8 (5.8%)
Current Insured Losses Estimate: $32.5BSource: Insurance Information Institute
Terrorism Coverage Take-Up Rate Rising
Source: Marsh, Inc.; Insurance Information Institute
23.5%26.0%
32.7%
44.2%46.2%
2003:II 2003:III 2003:IV 2004:I 2004:II
Terrorism take-up rate for non-WC risk rose
through 2003 and continues to rise in 2004
TAKE UP RATE FOR WC COMP TERROR
COVERAGE IS 100%!!
Percent of 2003 Surplus Lost Due to a $25 Billion Terrorism Attack in 2004
With TRIA in Place
Source: The Economic Effects of Federal Participation in Terrorism Risk, Analysis Group, September 14, 2004.
Top 10 US P/C Insurers by Market Share
14.4%
32.5%
11.7% 12.6% 13.3%14.7%
11.7%
7.7%
22.1%
4.7%
1 2 3 4 5 6 7 8 9 10
Even with TRIA in place, some major insurers will lose more
than 10% of their policyholder surplus: Terrorism is a clear
threat to stability.
Capital Myth: US P/C Insurers Have $350 Billion to Pay Terrorism Claims
"Target" Commercial*$114 billion
33%
Commercial Reserve
Deficiency$30 billion (est.)
9%
Other Commercial$58 billion
17%
Personal$146 billion
42%
Total PHS = $298.2 B as of 6/30/01
= $291.1 B as of 12/31/02
= $347.0 B as of 12/31/03
*”Target” Commercial includes: Comm property, liability and workers comp; Surplus must also back-up on non-terrorist related property/liability and WC claimsSource: Insurance Information Institute estimates based on A.M. Best Q.A.R Data.
Only 33% of surplus backs
“target” lines net of reserve deficiency
Summary• US: 2004/5 sweet spots in the current cycle in terms of
earnings and underwriting performance• CA market getting better though historically the state has
historically been difficult• Despite recent progress, nothing has changed that suggests
we are on the threshold of a prolonged period of stability and prosperity in CA
• Factors that guarantee long-term problemsCAT exposureTort environmentOccasionally hostile legislative & regulatory environmentUninformed critics get big play
• OUTLOOK: Short-term improvement
Insurance Information Institute On-Line
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