The Commercial P/C Insurance
Industry: Issues & Outlook
Midwest Actuarial Forum Spring Meeting
Chicago, IL
March 20, 2015
Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: 212.346.5540  Cell: 917.494.5945  stevenw@iii.org  www.iii.org
Insurance Industry:
Financial Update & Outlook
2014 Was a Reasonably Good Year
2013 Was the Industry’s Best Year
in the Post-Crisis Era
2
$50,203
$63,784
$33,522
$19,456
$3,043
$28,672
$35,204
$62,496
Net income rose
strongly (+81.9%)
in 2013 vs. 2012
on lower cats,
capital gains
$44,155
$38,501
$30,029
$20,559
$21,865
$30,773
$20,598
$10,870
$3,046
$10,000
$19,316
$20,000
$5,840
$30,000
$14,178
$40,000
$36,819
2005 ROE*= 9.6%
2006 ROE = 12.7%
2007 ROE = 10.9%
2008 ROE = 0.1%
2009 ROE = 5.0%
2010 ROE = 6.6%
2011 ROAS1 = 3.5%
2012 ROAS1 = 5.9%
2013 ROAS1 = 10.3%
2014 ROAS1 = 7.6%
$24,404

$ Millions 
$80,000 

$70,000 

$60,000 

$50,000 

$65,777
P/C Industry Net Income After Taxes
1991–2014E
$0
•ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.7% ROAS through
2014:Q2, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.
Sources: A.M. Best, ISO; Insurance Information Institute
14E
13
12
11
10
09
08
07
06
05
04
03
02
01
99
98
97
96
95
94
93
92
91
00
-$6,970
-$10,000
Back to the Future: P/C Insurance
Industry Profitability, 1950 – 2014*
1970-90: Peak ROEs were much
higher in this period while troughs
were comparable. High interest
rates, rapid inflation, economic
volatility all played roles
ROE
1950-70: ROEs were lower in
this period. Low interest rates,
low inflation, “Bureau” rate
regulation all played a role
25%
1990-2010s: Déjà vu.
Excluding megaCATs, this period is
very similar to the
1950-1970 period
1977:19.0%
20%
1987:17.3%
2006:12.7%
1972:13.7%
1997:11.6%
15%
2013
10.4%
1950:8.0%
10%
1959:6.8%
1966-67:
5.5%
5%
2014:H1
7.6%
1969: 3.9%
1992: 4.5%
*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude
mortgage and financial guaranty insurers. 2014 figure is through Q3.
Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
14E
12
10
08
06
04
02
00
98
96
94
2001: -1.2%
92
90
88
86
84
82
80
78
76
74
72
70
68
66
64
60
58
56
54
52
50
-5%
1984: 1.8%
1975: 2.4%
1965: 2.2%
1957: 1.8%
62
0%
P/C Insurance Industry
Combined Ratio, 2001–2014:Q3*
As Recently as 2001,
Insurers Paid Out
Nearly $1.16 for Every
$1 in Earned
Premiums
Heavy Use of
Reinsurance
Lowered Net
Losses
120
Relatively
Low CAT
Losses,
Reserve
Releases
Relatively
Low CAT
Losses,
Reserve
Releases
Avg. CAT
Losses,
More
Reserve
Releases
115.8
110
Best
Combined
Ratio Since
1949 (87.6)
107.5
101.0
100.8
100.1
Cyclical
Deterioration
99.3
98.4
100
Higher
CAT
Losses,
Shrinking
Reserve
Releases,
Toll of Soft
Market
Sandy
Impacts
106.3
102.4
100.8
Lower
CAT
Losses
96.7
95.7
97.9
92.6
90
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
* Excludes Mortgage & Financial Guaranty insurers 2008--2014. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2;
2013: = 96.1; 2014:9M = 97.7.
Sources: A.M. Best, ISO.
5
A 100 Combined Ratio Isn’t What It
Once Was: Investment Impact on ROEs
Combined Ratio / ROE
15.9%
110
A combined ratio of about 100 generates an
ROE of ~7.0% in 2012/13, ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
106.5
14.3%
12.7%
105
100.6 100.1 100.8
100
10.9%
101.2
99.5
15%
102.4
101.0
97.5
96.7
95.7
95
8.8%
7.4% 7.9%
9.6% 92.7
6.2%
12%
9%
9.8%
Lower CATs
helped ROEs
in 2013
4.3%
85
97.9
7.4%
4.7%
90
18%
6%
3%
0%
80
1978
1979
2003
2005
2006
2007
2008
Combined Ratio
2009
2010
2011
2012
2013 2014:Q3
ROE*
Combined Ratios Must Be Lower in Today’s Depressed
Investment Environment to Generate Risk Appropriate ROEs
* 2008 -2014 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2014:9M combined ratio
including M&FG insurers is 97.7; 2013 = 96.1; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%.
Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.
Return on Net Worth (RNW) All Lines:
2004-2013 Average
7.1
-1.0
0
4.9
5
7.8
7.9
10
8.9
9.2
15
13.2
13.4
20
6.6
Personal
lines
18.4
25
7.1
25.6
30
Commercial lines have
tended to be more
profitable than personal
lines over the past decade
-5
re
Fi
d
an
l
In
M
e
in
r
a
A
O
ll
M
er
th
P
al
c
i
ed
f
ro
ty
il i
b
a
Li
C
Source: NAIC; Insurance Information Institute.
m
om
A
o
ut
l
ta
o
T
C
m
om
a
ci
r
e
P
lM
A
ll
l
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P
P
es
ta
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m
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M
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er
er
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to
s
L
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e
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lli
A
er
ow
ow
rk
A
P
th
e
o
m
P
r
O
W
om
Fa
H
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ne
i
L
7
RNW All Lines by State, 2004-2013 Average:
Highest 25 States
Profitability Benchmark: All P/C
9.5
9.6
9.8
9.8
9.9
10.3
10.5
10.5
10.7
10.7
10.8
10.9
US: 7.9%
11.1
11.1
11.4
11.7
12.0
12.0
12.1
12.3
13.3
13.4
14.3
14.6
18.4
20.5
24
22
20
18
16
14
12
10
8
6
4
2
0
The most profitable states
over the past decade are
widely distributed
geographically, though none
are in the Gulf region
HI AK VT ME WY ND VA ID NH UT WA SC MA NC OH DC CA OR RI WV CT IA NE SD MT MD
Source: NAIC; Insurance Information Institute.
8
NM FL TX WI KS MN CO PA US AR IL
Source: NAIC; Insurance Information Institute.
-9.3
-6.9
Some of the least
profitable states over the
past decade were hit hard
by catastrophes
1.9
2.5
4.3
5.0
5.2
5.3
5.7
6.1
6.4
6.6
6.8
7.4
7.5
7.7
7.7
7.9
8.0
8.1
8.2
8.2
8.3
8.4
8.6
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
9.2
RNW All Lines by State, 2004-2013 Average:
Lowest 25 States
IN AZ MO KY TN NV NJ GA NY DE MI AL OK MS LA
9
Performance by Segment and
by State
10
Net Premium Growth: Annual Change,
1971—2016F
(Percent)
1975-78
1984-87
25%
2000-03
Net Written Premiums Fell
0.7% in 2007 (First Decline
Since 1943) by 2.0% in 2008,
and 4.2% in 2009, the First 3Year Decline Since 1930-33.
20%
2015-16F:
4.0%
15%
2014E: 3.9%*
2013: 4.6%
10%
2012: +4.3%
5%
0%
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
10
11
12
13
14
15F
14F
-5%
*Actual figure based on data through Q3 2014.
Shaded areas denote “hard market” periods
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
11
Commercial Lines Combined Ratio,
1990-2015F*
99.9
104.3
102.4
103.4
105.4
104.2
102.0
102.5
110.2
111.1
112.3
109.7
107.9
Commercial lines
underwriting
performance is
expected to improve as
improvement in pricing
environment persists
122.3
105
104.1
107.6
110.2
109.5
110
112.5
118.8
115
110.2
120
109.4
98.9
98.9
100
90
93.6
95
91.1
Commercial Lines Combined Ratio
125
*2007-2012 figures exclude mortgage and financial guaranty segments.
Source: A.M. Best (1990-2014F); Conning (2015F) Insurance Information Institute.
15F
14F
13
12
11
10
09
08
07
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
85
12
102.6
103.9
106.8
115.7
118.1
116.2
103.4
105
102.7
110
113.0
115
112.0
120
112.1
125
115.9
Commercial Auto Combined Ratio:
1993–2015F
99.8
97.8
99.1
96.8
94.3
92.4
85
92.1
90
92.9
95
95.2
100
80
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14F 15F
Commercial Auto is Expected to Improve as Rate Gains
Outpace Any Adverse Frequency and Severity Trends
Sources: A.M. Best (1990-2014F);Conning (2015F); Insurance Information Institute.
13
Commercial Multi-Peril Combined Ratio:
1995–2015F
99.0
99.4
112.0
103.1
102.5
102.1
94.2
98.7
96.1
94.0
84.1
83.8
108.4
120.1
CMP-Non-Liability
95.4
89.8
97.6
105.5
101.9
93.8
97.7
104.9
116.1
89.0
97.3
119.8
116.8
108.5
113.6
125.0
115.3
113.1
122.4
115.0
115.0
121.0
117.0
116.2
100.7
130
125
120
115
110
105
100
95
90
85
80
119.0
CMP-Liability
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14F 15F
Commercial Multi-Peril Underwriting Performance is Expected to
Improve in 2013 Assuming Normal Catastrophe Loss Activity
*2013F-2012F figures are Conning figures for the combined liability and non-liability components..
Sources: A.M. Best; Conning; Insurance Information Institute.
14
103.9
101.4
104.1
103.0
95
99.8
95.1
100
14F
15F
94.2
105
99.0
110
110.8
107.1
115
112.9
General Liability Combined Ratio:
2005–2015F
90
85
80
05
06
07
08
09
10
11
12
13F
Commercial General Liability Underwriting Performance Has
Been Volatile in Recent Years
Source: Conning Research and Consulting.
15
Direct Premiums Written: Comm. Lines
Percent Change by State, 2007-2013
3.2
3.1
3.0
2.7
2.2
2.0
1.7
1.3
0.6
CT
NM
LA
MS
NJ
NY
US
MO
6.5
WI
MA
6.7
TN
4.1
6.8
9.8
IN
AR
10.0
MN
US: 1.3%
11.3
14.0
TX
Growth Benchmarks: Commercial
WY
15.6
AK
19.1
ID
23.6
25.8
IA
KS
26.3
NE
33.7
41.4
SD
VT
42.1
OK
Only 30 states
showed any
commercial lines
growth from 2007
through 2013
OH
91.1
100
90
80
70
60
50
40
30
20
10
0
ND
Pecent change (%)
Top 25 States
Sources: SNL Financial LLC.; Insurance Information Institute.
16
Direct Premiums Written: Comm. Lines
Percent Change by State, 2007-2013
Bottom 25 States
-25.1
NV
WV
AZ
-22.4
-12.7
FL
-13.6
-12.6
DE
-11.7
HI
-4.9
DC
-11.4
-4.3
UT
MT
-3.7
CA
SC
MI
RI
ME
NC
KY
VA
WA
IL
-30
MD
-25
CO
-20
PA
States with the poorest
performing economies also
produced the most negative
net change in premiums of the
past 6 years
-15
-10.7
-3.3
GA
-10
OR
-2.7
-2.1
-2.0
-1.9
-1.1
-1.1
-1.0
-0.9
-0.8
-0.5
0.1
-5
NH
Pecent change (%)
0
0.2
0.4
0.5
5
AL
Nearly half the states have yet to
see commercial lines premium
volume return to pre-crisis levels
Sources: SNL Financial LLC.; Insurance Information Institute.
17
Cyber Risk: a Rapidly Emerging
Exposure for Businesses
Also Growing Interest from
Media & Public Policymakers
18
Data Breaches 2005-2014, by Number of
Breaches and Records Exposed
# Data Breaches/Millions of Records Exposed
Millions
222.5
800
700
783
200
662
656
619
180
600
160
498
500
140
446127.7
419
447
87.9
400
66.9
120
85.6
321
35.7
157
100
80
300
200
220
60
16.2
19.1
22.9
40
17.3
20
100
0
2005
2006
2007
2008
2009
# Data Breaches
2010
2011
2012
2013
2014
# Records Exposed (Millions)
The Total Number of Data Breaches Rose 28% While the Number of
Records Exposed Was Relatively Flat (-2.6%)
19
* 2014 figures as of Jan. 12, 2014 from the ITRC.
Source: Identity Theft Resource Center.
Worldwide Cybersecurity Spending,
2011- 2016F
($ Billions)
$83.2
$85
$80
9.8%
7.9%
8.4%
$76.9
8.2%
12%
10%
8.2%
$75
8%
$71.1
$70
$65.9
6%
$65
$60.0
Cybersecurity spending increased
by an estimated $5.2B in 2014,
$5.8B in 2015 and $6.3B in 2016
$60
$55.0
$55
$50
4%
2%
0%
2011
2012
2013
2014F
Worldwide Cybersecurity Spending
2015F
2016F
% Change from Previous Year
Cybersecurity Spending Is Rising Sharply, Up by About 8%+ Annually
through 2016—a Projected Increase of $12.1 Billion from 2014 to 2016
20
Source: Gartner Group; Insurance Information Institute; Adapted from Wall Street Journal: “Financial Firms Boost Cybersecurity Funds,” Nov. 17, 2014.
Data/Privacy Breach:
Many Potential Costs Can Be Insured
Costs of
notifying
regulatory
authorities
Regulatory
fines at
home &
abroad
Costs of
notifying
affecting
individuals
Data
Breach
Event
Forensic costs
to discover
cause
Defense and
settlement
costs
Lost customers
and damaged
reputation
Cyber extortion
payments
Business
Income Loss
Source: Zurich Insurance; Insurance Information Institute
21
The Three Basic Elements of Cyber
Coverage: Prevention, Transfer, Response
Loss
Prevention
Loss
Transfer
(Insurance)
Post-Breach
Response
(Insurable)
Cyber risk management today involves
three essential components, each designed
to reduce, mitigate or avoid loss. An
increasing number of cyber risk products
offered by insurers today provide all three.
Source: Insurance Information Institute research.
22
I.I.I. Released its Second Cyber Report in
2014: Cyber Risk: The Growing Threat
 I.I.I.’s 2nd report on cyber risk
released June 2014
 Provides information on cyber
threats and insurance market
solutions
 Global cyber risk overview
 Quantification of threats by
type and industry
 Cyber security and cost of attacks
 Cyber terrorism
 Cyber liability
 Insurance market for cyber risk
 3rd Report in Q2 2015
23
Investment Performance:
A Key Driver of Profitability
Depressed Yields Will Continue
to Affect Underwriting & Pricing
24
Distribution of Invested Assets: P/C
Insurance Industry, 2013
$ Billions
All Other, 10%
Bonds, 62%
Cash, Cash Equiv. &
ST Investments, 6%
Stocks, 22%
Source: Insurance Information Institute Fact Book 2015, A.M. Best.
Total Invested
Assets = $1.5
Trillion
U.S. Treasury 2- and 10-Year Note
Yields*: Monthly, 1990–2015
9%
Yields on 10-Year U.S. Treasury
Notes have been essentially
below 5% for over a decade.
8%
U.S. Treasury
10-year note
yields “spiked”
7%
6%
5%
4%
3%
Recession
2-Yr Yield
10-Yr Yield
2%
1%
Jun-14
Jun-13
Jun-12
Jun-11
Jun-10
Jun-09
Jun-08
Jun-07
Jun-06
Jun-05
Jun-04
Jun-03
Jun-02
Jun-01
Jun-00
Jun-99
Jun-98
Jun-97
Jun-96
Jun-95
Jun-94
Jun-93
Jun-92
Jun-91
Jun-90
0%
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations,
most P/C insurer portfolios will have low-yielding bonds for years to come.
*Monthly, constant maturity, nominal rates, through February 2015.
Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm.
National Bureau of Economic Research (recession dates); Insurance Information Institutes.
26
Book Yield on Property/Casualty
Insurance Invested Assets, 2007–2016F
(Percent)
4.6
Book yield in 2014 is
down 114 BP from
pre-crisis levels
4.42
4.4
4.19
4.2
3.95
4.0
3.71
3.8
3.74
3.52
3.6
3.38
3.4
3.28
3.20
3.2
3.13
3.0
07
08
09
10
11
12
13
14E
15F
16F
The yield on invested assets continues to decline as returns
on maturing bonds generally still exceed new money yields.
Interest rate increases are unlikely until mid-to-late 2015, and
increases are expected to be small for a while.
Sources: Conning.
Distribution of Bond Maturities,
P/C Insurance Industry, 2004-2013
2013
15.6%
2012
16.5%
40.4%
27.6%
9.8% 5.7%
2011
15.2%
41.4%
26.8%
10.3% 6.3%
2010
16.3%
39.5%
26.7%
11.1% 6.4%
2009
16.2%
36.4%
36.2%
29.0%
11.9% 7.1%
28.7%
11.7% 7.3%
Under 1 year
1-5 years
5-10 years
2008
15.7%
2007
15.2%
30.0%
2006
16.0%
2005
2004
0%
31.2%
12.7%
8.1%
10-20 years
33.8%
12.9%
8.1%
over 20 years
29.5%
34.1%
13.1%
7.4%
16.0%
28.8%
34.1%
13.6%
7.6%
15.4%
29.2%
32.4%
20%
32.5%
40%
60%
15.4%
80%
7.6%
100%
The main shift over these years has been from longer maturities to
shorter maturities, but the 2013 data suggest a shift back has begun.
The 2013 distribution resembles that at year-end 2009.
Sources: SNL Financial; Insurance Information Institute.
28
Property/Casualty Insurance Industry
Investment Income: 2000–20141
Investment earnings
are still below their
2007 pre-crisis peak
($ Billions)
$60
$54.6
$52.3
$50
$40
$51.2
$49.5
$49.2
$47.1 $47.6
$38.9
$38.7
$48.0 $47.4
$45.7
$39.6
$37.1 $36.7
$30
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14*
Due to persistently low interest rates,
investment income fell in 2012, 2013 and 2014.
1
Investment gains consist primarily of interest and stock dividends.
Sources: ISO; Insurance Information Institute.
*2014 figure is estimated based on annualized data through Q3.
$8.76
$11.43
$6.18
-$7.90
-$19.81
-$5
-$10
-$15
-$20
-$25
$7.04
$5.85
$8.92
$3.52
$9.70
$9.13
-$1.21
$6.63
$6.61
Realized capital gains rose
sharply as equity markets rallied
in 2013-14
$16.21
$13.02
$10.81
$9.24
$6.00
$1.66
$9.82
$9.89
$4.81
$20
$15
$10
$5
$0
$2.88
($ Billions)
$18.02
P/C Insurer Net Realized
Capital Gains/Losses, 1990-2014:Q3
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 1314:Q3
Insurers Posted Net Realized Capital Gains in 2010 - 2014 Following Two
Years of Realized Losses During the Financial Crisis. Realized Capital
Losses Were a Primary Cause of 2008/2009’s Large Drop in Profits and ROE
Sources: A.M. Best, ISO, Insurance Information Institute.
30
Property/Casualty Insurance Industry
Investment Gain: 1994–2014E1
$70
$60
$50
$64.0
$58.0
$56.9
$52.3
$51.9
$47.2
$44.4
$42.8
$40 $35.4
$59.4
$55.7
$58.8
$56.2
$54.2
$53.4
$57.4
($ Billions)
$48.9
$45.3
$39.2
$36.0
$31.7
$30
$20
$10
Investment gains in 2014
will rival the post-crisis
high reached in 2013
$0
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11 12 13 14E
Total investment gains were flat in 2014 because low
interest rates offset realized capital gains
1
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.
Interest Rate Forecasts: 2015 – 2020
Yield (%)
3-Month Treasury
10-Year Treasury
5%
3.9%
4%
3.4%
3.2% 3.3%
2.7%
3%
2%
4.2% 4.3% 4.3%
3.2%
2.4%
1.6%
1%
0.3%
0%
15F
16F
17F
18F
19F
20F
15F
16F
17F
18F
19F
20F
A normalization of interest rates is unlikely until 2017-18
– a full decade after the onset of the Financial Crisis and Great Recession.
Sources: Blue Chip Economic Indicators (3/15 issue); Insurance Info. Institute.
33
CAPITAL/CAPACITY
Capital Accumulation Has
Multiple Impacts
34
$671.6
$673.9
14:Q3
$624.4
14:Q2
$586.9
$583.5
$567.8
$570.7
$550.3
$538.6
$559.1
$544.8
$530.5
$540.7
$511.5
$490.8
14:Q1
13:Q4
13:Q3
13:Q2
13:Q1
12:Q4
12:Q3
12:Q2
12:Q1
11:Q4
11:Q3
11:Q2
11:Q1
10:Q4
10:Q3
10:Q2
10:Q1
09:Q4
Surplus as of 9/30/14 stood at
a record high $673.9B
09:Q3
$437.1
$463.0
09:Q2
08:Q4
08:Q3
08:Q2
08:Q1
07:Q4
07:Q3
07:Q2
07:Q1
$400
06:Q4
$450
09:Q1
$455.6
$478.5
$505.0
$515.6
$517.9
$521.8
$496.6
$500
$487.1
$550
$512.8
$600
$559.2
$566.5
$650
$614.0
2007:Q3
Pre-Crisis Peak
$700
$607.7
Drop due to near-record
2011 CAT losses
$662.0
($ Billions)
$653.3
Policyholder Surplus,
2006:Q4–2014:Q3
The industry now has $1 of surplus for every $0.73 of NPW,
close to the strongest claims-paying status in its history.
2010:Q1 data includes $22.5B of
paid-in capital from a holding
company parent for one insurer’s
investment in a non-insurance
business .
Sources: ISO, A.M .Best.
The P/C insurance industry entered 2015
in very strong financial condition.
35
Premium-to-Surplus Ratio:
1985–2014*
(Ratio of NWP to PHS)
$2.00
The larger surplus is in relation to
premiums—the lower the P:S ratio—
and the great the industry’s capacity
to handle the risk it has accepted
$1.75
Surplus as of 9/30/14 was
$0.75:$1, a near-record low
(at least in modern history)
$1.50
$1.25
$1.00
9/11, Recession
& Hard Market
$0.75
$0.50
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 10 11 12 13 14*
The Premium-to-Surplus Ratio Stood at $0.75:$1 as of
9/30/14, a Record Low (at Least in Recent History)
* As of 9/30/14.
Source: A.M. Best, ISO, Insurance Information Institute.
Alternative Capital
New Investors Continue to Change
the Reinsurance Landscape
First I.I.I. White Paper on Issue Will Be
Released Q1 2015
38
Global Reinsurance Capital (Traditional
and Alternative), 2006 - 2014
Total reinsurance capital reached a
record $570B in 2013, up 68% from
2008.
But alternative capacity has grown 210% since 2008, to $50B. It has more
than doubled in the past three years.
2014 data is as of June 30, 2014.
Source: Aon Benfield Analytics; Insurance Information Institute.
Growth of Alternative Capital Structures,
2002 - 2014
Collateralized Re’s Growth
Has Accelerated in the
Past Three Years.
Collateralized Reinsurance and Catastrophe Bonds Currently Dominate
the Alternative Capital Market.
2014 data is as of June 30, 2014.
Source: Aon Benfield Analytics; Insurance Information Institute.
I.I.I. Will Release its First Report on
Alternative Capital During Q1 2015
 Issue of alternative capital in
(re)insurance has received
increased attention in recent years
 Significant structural changes in
property catastrophe reinsurance
space
 Questions addressed include:
Forthcoming: Q1 2015
 Sources of new capital
 Reasons/Drivers of growth
 New structures
 Impact of major triggering
event(s)
 Impacts of higher interest rates
 Cat bond yield compression
41
Questions Arising from Influence of
Alternative Capital
 What Will Happen When Investors Face Large-Scale
Losses?
 What Happens When Interest Rates Rise?
 Does ILS Have a Higher Propensity to Litigate?
 How Much Lower Will Risk Premiums Shrink/ROLs
Fall?
 Will There Be Spillover Into Casualty Reinsurance?
 Will Alternative Capital Drive Consolidation?
42
The Strength of the Economy
Will Influence P/C Insurer
Growth Opportunities
Growth Will Expand Insurer Exposure
Base Across Most Lines
43
Real U.S. Quarterly GDP Growth
Since the “Great Recession
5%
2.2%
5.0%
4.6%
3.5%
4.5%
1.8%
2.7%
4.6%
2.5%
1.6%
0.1%
-2.1%
-1%
0.8%
2.9%
-1.5%
2.5%
10:4Q
3.9%
2.7%
0%
10:3Q
1%
1.3%
2%
1.7%
3.9%
3%
2.3%
4%
-2%
14:4Q
14:3Q
14:2Q
14:1Q
13:4Q
13:3Q
13:2Q
13:1Q
12:4Q
12:3Q
12:2Q
12:1Q
11:4Q
11:3Q
11:2Q
11:1Q
10:2Q
10:1Q
09:4Q
09:3Q
-3%
Since the Great Recession ended, even 3% real growth (at an annual rate)
in a quarter has been unusual. It happened only 7 times in 22 quarters,
but 4 of those 7 were in the most recent 6 quarters.
Data are quarterly changes at annualized rates. 2014:Q4 is revised estimate
Sources: US Department of Commerce, at http://www.bea.gov/national/index.htm#gdp ; Insurance Information Institute.
44
NFIB Small Business Optimism Index
January 1985 through January 2015
Source: National Federation of Independent Business at http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIBoptimism-index.gif ; Insurance Information Institute.
45
Business Bankruptcy Filings: Still Falling
(1994:Q1 – 2014:Q3)
8
6
4
14.3
9.2
9.3
8.5
8.9
8.1
7.6
7.0
7.3
6.4
10
16.0
14.2
15.0
14.6
14.5
14.0
13.0
12.4
12.3
11.7
11.1
11.0
10.4
12
12.9
14
4.1
4.9
5.3
5.6
6.3
6.7
7.2
8.0
8.7
16
13.9
13.6
12.9
12.0
13.1
12.2
12.6
12.9
13.4
14.0
13.2
12.9
13.8
14.0
13.5
12.7
12.4
11.6
10.3
9.9
9.2
10.4
9.0
9.0
9.5
9.2
8.2
8.4
10.0
10.3
9.5
10.0
9.8
9.7
9.4
9.5
8.8
9.3
8.4
8.3
10.6
8.2
7.6
7.8
8.1
8.7
9.5
12.8
Recessions in orange
Below prerecession
level
11.5
18
New
Bankruptcy
Law Takes
Effect
9.7
(Thousands)
0
94:Q1
94:Q3
95:Q1
95:Q3
96:Q1
96:Q3
97:Q1
97:Q3
98:Q1
98:Q3
99:Q1
99:Q3
00:Q1
00:Q3
01:Q1
01:Q3
02:Q1
02:Q3
03:Q1
03:Q3
04:Q1
04:Q3
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
08:Q3
09:Q1
09:Q3
10:Q1
10:Q3
11:Q1
11:Q3
12:Q1
12:Q3
13:Q1
13:Q3
14:Q1
14:Q3
2
Business bankruptcies in 2014 were below both the Great Recession levels and
the 2003:Q3-2005:Q1 period (the best five-quarter stretch in the last 20 years).
Bankruptcies restrict exposure growth in all commercial lines.
Sources: U.S. Courts at http://www.uscourts.gov/uscourts/Statistics/BankruptcyStatistics/BankruptcyFilings/2013/0913_f2q.pdf ;
Insurance Information Institute
46
Index of Total Industrial Production:*
A Near Peak as of December 2014
110
105
100
Many economists
expect business
investment to
rise in 2015
95
90
85
80
75
70
65
Recession
Peak at 100.82 in
December 2007
(officially the 1st
month of the
Great Recession)
December 2014
Index at 106.5
60
Insurance exposures for industrial production will continue growing in 2015, and
commercial insurance premium volume with them. Y-o-Y growth to December 2014
was 4.6%. Both production and premium volume growth for 2015 should exceed this.
*Monthly, seasonally adjusted, through December 2014 (which is preliminary). Index based on year 2007 = 100
Sources: Federal Reserve Board at http://www.federalreserve.gov/releases/g17/ipdisk/ip_sa.txt .
National Bureau of Economic Research (recession dates); Insurance Information Institute.
47
Labor Market Trends
We’re Now Gaining Jobs at a Strong Pace,
Mainly in the Private Sector
49
Monthly Change in Nonfarm Employment,
2011 – 2015*
Thousands
Average Monthly Gain
2012: 186,300 2013: 194,250
2011: 173,600
2014: 259,700
423
500
239
295
329
330
236
286
249
213
250
221
166
188
225
203
199
201
149
202
164
237
274
141
226
243
225
203
214
197
280
84
70
150
96
110
88
160
150
161
200
102
168
212
250
100
217
300
106
122
350
221
183
164
196
322
400
360
450
Jan-15
Nov-14
Sep-14
Jul-14
May 14
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
May 13
Mar-13
Jan-13
Nov-12
Sep-12
Jul-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
Mar-11
0
Jan-11
50
If job growth continues at the recent pace
we will add over a million new workers every four months.
*Seasonally adjusted. Jan 2015 and Feb 2015 are preliminary data.
Sources: US Bureau of Labor Statistics; Insurance Information Institute
50
Unemployment and Underemployment
Rates: Still Too High, But Falling
January 2000 through February 2015,
Seasonally Adjusted (%)
18
"Headline" Unemployment Rate U-3
16
Unemployment + Underemployment Rate
U-6
U-6 went from
8.0% in March
2007 to 17.5% in
October 2009
14
12
U-6 was 11.0%
in Feb. 2015.
10
8
6
For U-6, 8% to
10% is “normal.”
4
“Headline”
unemployment
was 5.5% in
February 2015.
4% to 6% is
“normal.”
2
Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
High unemployment and underemployment still constrain overall
economic growth, but the job market is now clearly improving.
Source: US Bureau of Labor Statistics; Insurance Information Institute.
51
Nonfarm Payroll (Wages and Salaries):
Quarterly, 2005–2014:Q3
Billions
$7,750
$7,500
$7,250
Prior Peak was
2008:Q3 at $6.54 trillion
Latest (2014:Q3) was
$7.46 trillion, a new
peak--$1.21 trillion
above 2009 trough
$7,000
$6,750
$6,500
$6,250
$6,000
$5,750
Recent trough (2009:Q1)
was $6.23 trillion, down
5.3% from prior peak
Growth rates
2011:Q3 over 2010:Q3: 4.1%
2012:Q3 over 2011:Q3: 3.2%
2013:Q3 over 2012:Q3: 3.6%
2014:Q3 over 2013:Q3: 4.4%
05:Q1
05:Q2
05:Q3
05:Q4
06:Q1
06:Q2
06:Q3
06:Q4
07:Q1
07:Q2
07:Q3
07:Q4
08:Q1
08:Q2
08:Q3
08:Q4
09:Q1
09:Q2
09:Q3
09:Q4
10:Q1
10:Q2
10:Q3
10:Q4
11:Q1
11:Q2
11:Q3
11:Q4
12:Q1
12:Q2
12:Q3
12:Q4
13:Q1
13:Q2
13:Q3
13:Q4
14:Q1
14:Q2
14:Q3
$5,500
Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.
Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates); Insurance
Information Institute.
52
U.S. Insured Catastrophe
Loss Update
2014 Had Below-Average CAT Activity
54
U.S. Insured Catastrophe Losses
$74.5
($ Billions, $ 2013)
$80
$70
2012 was the 3rd most
expensive year ever for
insured CAT losses
$15.3
$12.9
$35.5
$34.1
$14.6
$11.6
$29.6
$7.6
$10.7
$16.5
$7.7
$34.2
$35.2
$6.2
$11.7
$14.5
$11.1
$12.8
$3.8
$10
$8.1
$20
$4.9
$30
$14.2
$40
$8.9
$50
$26.8
$38.3
$60
$0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14E
2013-14 were welcome respites from 2011-12, which
were among the costliest years for insured disaster
losses in U.S. history. Longer-term trend is for
more—not fewer—costly events.
$15.3 billion in
insured CAT
losses estimated
for 2014
*Through 12/31/14.
Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property
claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.)
Sources: Property Claims Service/ISO; Insurance Information Institute.
55
55
Insurance Information Institute Online:
www.iii.org
Thank you for your time
and your attention!
58