Where Do We Stand?
Changes and Challenges
in 2013 and Beyond
PCI’s Marketing & Underwriting Professionals
Seminar
Fort Lauderdale, FL
April 29, 2013
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
Challenge #1:
Slow Exposure Growth
Most forecasts see the U.S. and
world economies continuing to
stumble along
2
Real GDP Growth: Past Recessions
and Recoveries, Yearly, 1970-2012
Real GDP
Growth (%)
In the current recovery,
real yearly GDP growth
has been 2.4% or less
But, following the 1991 and 2001
recessions, real yearly GDP
growth was weaker than 4%
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
8%
7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
In most recoveries, real
yearly GDP growth is
often 4% or more
Source: (GDP) U.S. Department of Commerce at http://www.bea.gov/national/xls/gdpchg.xls.
3
20%
5%
-5%
-10%
Sources: ISO; Insurance Information Institute.
1.3%
2.3%
1.7%
3.5%
1.6%
3.2%
3.8%
3.1%
4.2%
5.1%
0.5%
2.1%
0.0%
0%
10.3%
10.2%
13.4%
6.6%
15.1%
16.8%
16.7%
12.5%
10.1%
9.7%
7.8%
7.2%
5.6%
2.9%
5.5%
10%
10.2%
15%
2002:Q1
2002:Q2
2002:Q3
2002:Q4
2003:Q1
2003:Q2
2003:Q3
2003:Q4
2004:Q1
2004:Q2
2004:Q3
2004:Q4
2005:Q1 -4.6%
2005:Q2
-4.1%
2005:Q3 -5.8%
2005:Q4
-1.6%
2006:Q1
2006:Q2
2006:Q3
2006:Q4
2007:Q1
-1.6%
2007:Q2
2007:Q3
2007:Q4
-1.9%
2008:Q1
2008:Q2
-1.8%
2008:Q3
-0.7%
2008:Q4 -4.4%
2009:Q1
-3.7%
2009:Q2 -5.3%
2009:Q3 -5.2%
2009:Q4
-1.4%
2010:Q1
-1.3%
2010:Q2
2010:Q3
2010:Q4
2011:Q1
2011:Q2
2011:Q3
2011:Q4
2012:Q1
2012:Q2
2012:Q3
But Overall, Since 2010:Q2,
P/C Net Premiums Written Are Growing
P/C NPW: % Change,
Quarter vs. Year-Prior Quarter
This upward trend
is likely to continue
as the economy’s
recovery strengthens
Most recent
“hard market”
Finally! A sustained period (10 quarters) of growth in net premiums
written (vs. same quarter, prior year), and strengthening.
4
But the Growth Is Uneven: Wide Variation by State
(DPW: Total P/C Percent Change for 2006-2011)
Top 25 States
Just 9 states showed double-digit
DPW growth over the 5-year period
2006-2011, which includes the
“Great Recession”
71.5
80
60
50
41.8
6.6
6.3
6.1
5.8
4.9
4.7
4.2
3.9
2.4
2.2
2.1
2.1
2.1
0.9
0.7
0.4
LA
AR
WI
TN
IN
AK
DE
NM
NC
KY
SC
WA
MO
VT
MS
10.5
TX
OK
MT
SD
0
ND
10
MN
11.8
20.8
KS
WY
22.6
NE
20
18.2
22.8
30
IA
40
26.4
Pecent change (%)
70
Sources: SNL Financial, LLC.; Insurance Information Institute.
5
Direct Premiums Written: Total P/C
Percent Change by State, 2006-2011
Bottom 25 States
States with the poorest performing
economies also produced the most
negative net change in premiums of
the past 5 years
-13.5
-12.0
-4.4
OR
CA
-4.1
ID
-11.7
-3.5
MA
-15
FL
-3.2
MD
-10.8
-3.1
CO
WV
-2.5
NJ
-10.5
-2.0
PA
NH
-1.9
CT
-10.3
-1.6
GA
-10
HI
-1.4
US
-6.0
-1.3
UT
MI
-1.1
NY
-5.8
-0.8
VA
ME
-0.8
IL
-5
-5.2
-0.6
Sources: SNL Financial, LLC.; Insurance Information Institute.
AZ
RI
AL
-25
-19.2
-20
NV
Pecent change (%)
0
OH
0.4
5
6
April 2013 Forecasts of Quarterly
US Real GDP for 2013-14
Real GDP Growth Rate
4%
3.6%
3.3%
3%
2.6%
2%
2.4%
2.6%
1.8%
3.4%
2.7%
2.0%
1.5%
1%
3.6%
3.7%
2.8%
2.9%
3.0%
2.2%
2.3%
2.0%
1.7%
10 Most Pessimistic
Currently, the
sequester will have
greatest effect here
0.8%
3.9%
Median
10 Most Optimistic
0%
13:Q2
13:Q3
13:Q4
14:Q1
14:Q2
14:Q3
14:Q4
Despite the sequester and other challenges to the U.S. economy,
virtually every forecast in the Blue Chip universe in early April sees
improvement ahead
Sources: Blue Chip Economic Indicators (4/13); Insurance Information Institute
7
Auto/Light Truck Sales, 1999-2014F
13
10.4
12
11
12.7
14
11.6
13.2
15
15.9
16
Lowest level
since the late
1960s
14.4
05
16.1
16.9
04
16.5
16.9
17
16.6
17.1
17.5
17.8
18
17.4
19
15.4
Forecast range
for 2013 is 14.7
to 15.9 million
units
(Millions of Units)
10
9
99
00
01
02
03
06
07
08
09
10
11
12 13F 14F
Job growth and improved credit market conditions will boost auto sales
in 2013 and beyond, bolstering the manufacturing sector and the
economy generally.
Sources: U.S. Department of Commerce; Blue Chip Economic Indicators (4/13); Insurance Information Institute.
8
PP Auto NWP vs. # of Vehicles
in Operation, 2001–2011
$ Billion
Private Passenger Auto Premium
No. of Vehicles in Operation (millions)
$165
250
245
$155
240
235
$145
230
225
$135
220
$125
215
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
PP Auto premiums written are recovering from a period of no growth
attributable to the weak economy affecting new vehicle sales, car choice,
and increased price sensitivity among consumers
Sources: A.M. Best; NADA, State of the Industry Report 2012, p. 16, at www.nada.org/nadadata citing R. L. Polk;
Insurance Information Institute.
9
Something Unusual is Happening:
Miles Driven*, 1990–2013
Billions
3,100
3,000
2,900
2,800
2,700
2,600
2,500
2,400
2,300
2,200
Miles Driven Growth per 5-Yr Span
1997 vs. 1992: 13.9%
2002 vs. 1997: 11.5%
2007 vs. 2002: 6.1%
2012 vs. 2007: -3.0%
Some of the growth in
miles driven is due to
population growth:
1997 vs. 1992: +5.1%
2002 vs. 1997: +7.4%
2007 vs. 2002: +4.7%
2012 vs. 2007: +3.4%
A record: miles driven
has been below the prior
peak for 63 straight
months. Previous record
was in the early 1980s
(39 months)
Will the trend toward
hybrid and non-gasolinepowered vehicles affect
miles driven? What
about the aging and
retirement of the baby
boomers?
2,100
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
*Moving 12-month total. The latest data is for February 2013.
Note: Recessions indicated by gray shaded columns..
Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm );
National Bureau of Economic Research (recession dates); Insurance Information Institute.
10
Private Housing Unit Starts, 1990-2014F
Millions
of Units
0.61
0.59
1.21
1.00
0.78
1.36
1.71
1.60
1.57
1.64
1.62
1.47
1.46
1.35
1.20
1.80
0.55
0.50
Housing unit starts
plunged 72% from 20052009 to lowest level since
records began in 1959
0.91
0.75
1.01
1.00
1.19
1.25
1.29
1.50
1.48
1.75
Forecast range
for 2013 is 0.89
to 1.35 million
units
2.07
Housing
“Bubble”
1.96
2.00
1.85
2.25
0.25
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F 14F
Homeowners insurers are starting to see meaningful exposure growth for
the first time since 2005. Commercial insurers with construction risk
exposure, surety also benefit.
Sources: U.S. Department of Commerce; Blue Chip Economic Indicators (4/13); Insurance Information Institute.
11
So Far, the Pickup Is Mostly in
Multi-Family Housing Starts
Thousands of
Units, Multi-Family
400
units in multi-family buildings
single family units
Thousands of Units,
Single Family
1800
Multi-family-unit
starts now near a
pre-recession pace
350
300
250
Single family
plunge began
in 2006
200
150
1600
1400
1200
1000
800
Multi-family plunge did
not begin until 2009
100
600
400
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*
Multi-unit starts, in 2012 at a seasonally adjusted annual rate of 235,000,
are double the 2009 rate. Average annual rate for 2001-2006: 339,000.
*January-March 2013 data, annualized, seasonally adjusted; March is preliminary.
Source: US Census Bureau at www.census.gov/construction/nrc/pdf/newresconst.pdf.
HO Insurance Net Written Premium vs.
No. of Housing Units*, 2000–2011
$ Billions
HO premium
Number of Housing Units
Millions of
Occupied
Units
$65
116
$60
112
$55
$50
108
$45
$40
104
$35
$30
100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Homeowners insurance NWP continues rising (up 95% 2000-2011) despite
very little unit growth in recent years. Reasons include rate increases, esp
*occupied as of start of year indicated
Sources: A.M. Best; Insurance Information Institute.
14
Commercial & Industrial Loans Outstanding
at FDIC-Insured Banks, Quarterly, 2006-2012*
$1.51
$1.46
$1.42
$1.37
$1.35
$1.28
$1.24
$1.20
$1.18
$1.17
$1.18
$1.21
$1.37
$1.49
$1.50
$1.48
$1.43
$1.39
$1.27
$1.25
$1.18
$1.16
$1.13
$1.2
$1.22
$1.3
$1.30
$1.4
$1.44
$1.5
$1.49
$1.6
$1.1
In nominal dollar
terms, this is an
all-time high.
Recession
$1.17
$Trillions
12:Q3
12:Q1
11:Q3
11:Q1
10:Q3
10:Q1
09:Q3
09:Q1
08:Q3
08:Q1
07:Q3
07:Q1
06:Q3
06:Q1
$1.0
Outstanding loan volume has been growing for over two years
and (as of year-end 2012) surpassed previous peak levels.
*Latest data as of 4/19/2013.
Source: FDIC at http://www2.fdic.gov/qbp/ (Loan Performance spreadsheet); Insurance Information Institute.
15
Percent of Non-current Commercial & Industrial
Loans Outstanding at FDIC-Insured Banks,
Quarterly, 2006-2012*
0.97%
0.87%
12:Q4
1.09%
12:Q2
12:Q3
1.17%
12:Q1
1.29%
11:Q4
1.49%
11:Q3
1.65%
11:Q2
1.89%
11:Q1
2.44%
2.73%
10:Q3
10:Q4
2.83%
2.80%
10:Q2
1.69%
3.05%
10:Q1
0.81%
08:Q1
09:Q4
3.57%
0.67%
07:Q4
09:Q3
0.63%
07:Q3
09:Q2
0.62%
07:Q2
09:Q1
0.63%
07:Q1
08:Q4
0.64%
06:Q4
1.18%
0.74%
06:Q3
08:Q3
0.70%
06:Q2
08;Q2
0.71%
06:Q1
1%
1.07%
2%
2.25%
3%
3.43%
Recession
4%
0%
Almost back to “normal”
levels of noncurrent
industrial & commercial
loans
Non-current loans (those past due 90 days or more or in nonaccrual status)
are back to early-recession levels, fueling bank willingness to lend.
*Latest data as of 4/19/2013.
Source: FDIC at http://www2.fdic.gov/qbp/ (Loan Performance spreadsheet); Insurance Information Institute.
16
10
8
6
4
12.9
9.2
12
Recessions in orange
11.5
14
New Bankruptcy
Law Takes Effect
9.7
16
Quarterly average for
2001:Q1-2005:Q3 was 8,915
4.1
4.9
5.3
5.6
6.3
6.7
7.2
8.0
8.7
18
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
(Thousands)
14.3
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
Business Bankruptcy Filings: Falling
but Still High in 2012 (1994:Q1 – 2012:Q3)
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
2
Business bankruptcies were down 42% in 2012:Q3 vs. recent peak in 2009:Q2 but
were still higher than 2008:Q1, the first full quarter of the Great Recession.
Bankruptcies restrict exposure growth in all commercial lines.
Sources: American Bankruptcy Institute at
www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; Insurance
Information Institute.
18
Private Sector Business Starts,
1993:Q2 – 2012:Q2*
(Thousands)
210
200
190
180
170
185
182
187
193
184
189
189
185
188
195
191
199
204
203
195
196
195
206
206
200
189
199
206
206
199
213
204
209
200
206
204
204
194
204
208
199
201
193
191
193
200
207
203
209
210
209
216
221
221
220
221
210
221
214
206
216
208
207
201
191
188
172
177
169
183
175
179
188
200
189
192
198
202
193
191
220
Recessions in orange
175
173
230
Business Starts
2006: 861,000
2007: 844,000
2008: 787,000
2009: 701,000
2010: 742,000
2011: 781,000
12:Q1
11:Q1
10:Q1
09:Q1
08:Q1
07:Q1
06:Q1
05:Q1
04:Q1
03:Q1
02:Q1
01:Q1
00:Q1
99:Q1
98:Q1
97:Q1
96:Q1
95:Q1
94:Q1
150
93:Q2
160
Business starts were down nearly 20% in the Great Recession,
holding back most types of commercial insurance exposure,
but now are recovering.
* Data through Jun 30, 2012 are the latest available (posted Jan 29, 2013); Seasonally adjusted.
Sources: Bureau of Labor Statistics, www.bls.gov/news.release/cewbd.t08.htm; NBER (recession dates).
19
Recovery in Capacity Utilization is a
Positive Sign for Commercial Exposures
March 2001 through Mar. 2013
“Full Capacity”
Percent of
Industrial Capacity
82%
Hurricane
Katrina
80%
78%
76%
The closer the economy
is to operating at “full
capacity,” the greater the
inflationary pressure
Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm.
Mar 13
Sep
Mar 12
Sep
Sep
Mar 10
Sep
Mar 09
Sep
Mar 08
Sep
Mar 07
Sep
Sep
Mar 04
Mar 11
The US operated at
78.5% of industrial
capacity in Feb.
2013, above the
June 2009 low of
66.9% and close to
its post-crisis peak
December 2007June 2009 Recession
Sep
Mar 03
Sep
Mar 02
66%
Mar 01
68%
Sep
March 2001November 2001
recession
Mar 06
70%
Sep
72%
Mar 05
74%
20
20
Challenge #2: Dealing with
Catastrophes
Are they more frequent and more
severe?
21
US Insured Catastrophe Losses
$7.5
$10.5
$37.0
$29.2
$33.7
$16.3
$7.6
$6.1
$11.6
$14.3
$3.8
$11.0
$12.6
$8.8
$10
$8.0
$20
$4.8
$30
$14.0
$40
$26.4
$37.8
$50
$34.7
$60
$33.1
$70
2012 CAT losses
were down nearly 50%
from 2011 until Sandy
struck in late October
$14.4
$80
$11.5
$73.4
($ Billions, 2012 Dollars)
$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*
US CAT Losses in 2012 Will Likely Become the 2nd or 3rd
Highest in US History on An Inflation-Adjusted Basis (Pvt
Insured). 2011 Losses Were the 5th Highest
Record Tornado
Losses Caused
2011 CAT Losses
to Surge
*As of 1/2/13. Includes $20B gross loss estimate for Hurricane Sandy.
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.
22
22
Natural Disasters in the United States,
1980 – 2012
Number of Events (Annual Totals 1980 – 2012)
There were 184 natural
disaster events in the
US in 2012
300
There were over 150 natural
disaster events in the US every
year since 2006. That hadn’t
happened in any year before.
250
Number
200
150
100
41
19
50
121
3
1980
1982
1984
1986
1988
Geophysical
(earthquake, tsunami,
volcanic activity)
Source: MR NatCatSERVICE
1990
1992
1994
1996
1998
2000
Meteorological (storm)
Hydrological
(flood, mass movement)
2002
2004
2006
2008
2010
2012
Climatological
(temperature extremes,
drought, wildfire)
23
The Dozen Most Costly Hurricanes
in U.S. History
Insured Losses,
2012 Dollars,
$ Billions
Sandy could become the
2nd costliest hurricane in
US insurance history
$60
$50
$40
$30
Irene became the
12th most expensive
hurricane in US
history
$25.6
$18.8
$20
$10
$48.7
$5.6
$6.7
$7.8
$8.7
$9.2
$4.4
$5.6
Irene
(2011)
Jeanne
(2004)
Frances
(2004)
Rita
(2005)
Hugo
(1989)
Ivan
(2004)
Charley
(2004)
$11.1
$13.4
$0
Wilma
(2005)
Ike
(2008)
Sandy*
(2012)
Andrew
(1992)
Katrina
(2005)
10 of the 12 costliest hurricanes in private insurance
history occurred in the past 9 years (2004—2012)
*Estimate as of 12/09/12 based on estimates of catastrophe modeling firms and reported losses as of 1/12/13. Estimates range up to $25B.
Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.
24
If They Hit Today, the Dozen Costliest
(to Insurers) Hurricanes in U.S. History
Insured Losses,
2012 Dollars, $ Billions
$140
$120
$100
Storms that hit long ago had less property and
businesses to damage, so simply adjusting their
actual claims for inflation doesn’t capture their
destructive power.
Karen Clark’s analysis aims to overcome that.
$80
$125
$65
$60
$35
$40
$20
$20
$20
Sandy*
(2012)
Betsy
(1965)
Hazel
(1954)
$40
$40
Katrina
(2005)
Galveston
(1915)
$50
$50
$50
Andrew
(1992)
southFlorida
(1947)
Galveston
(1900)
$25
$20
$0
Donna
(1960)
New
England
(1938)
midFlorida
(1928)
Miami
(1926)
When you adjust for the damage prior storms could have done if they
occurred today, Hurricane Katrina slips to a tie for 6th among the most
devastating storms.
*Estimate as of 12/09/12 based on estimates of catastrophe modeling firms and reported losses as of 1/12/13. Estimates range up to $25B.
Sources: Karen Clark & Company, Historical Hurricanes that Would Cause $10 Billion or More of Insured LossesToday, August 2012; I.I.I.
25
P/C Industry Homeowners Claim Frequency,
US, 1997-2011
Claims Paid per
100 Exposures
10
CAT-related claims
Non-CAT-related claims
All Claims
9.53
8.85
8.79
8.56
8.10
8
7.52
6.99
6.71
6
6.45
6.26
7.99
7.46
7.30
6.53
6.40
6.61
6.55
6.52
4.16
4.17 4.31
3.68
2.39
2.35
6.05
5.83
5.26
4.63
4
3.83
2.82
2
2.34
1.57
1.84
2.67
2.32
1.69
2.57
3.64
2.97
3.77
3.94
2.28
4.03
3.42
1.32
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2008 2010 2011
Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” p.29; Insurance Information Institute
P/C Industry Homeowners Average Claim
Severity, 1997-2011
non-cat claims
cat claims
$9,000
$8,000
$7,000
$6,000
$5,000
$4,000
HO average claim
severity is now
three times what it
was in 1997.
$3,000
$2,000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” p. 29, BLS inflation calculator,
and Insurance Information Institute
Superstorm (barely a CAT 1) Sandy:
1.4 million Claims, by Type*
Commercial
, 167,500 ,
12%
Auto,
230,500 ,
17%
Sandy was a high-frequency,
(relatively) low-severity event
(avg. severity <50% Katrina)
Sandy caused an
estimated 1.4 million
privately insured
claims resulting in an
estimated $15 to $25
billion in insured
losses. Hurricane
Katrina produced 1.74
million claims and
$47.6B in losses
(in 2011 $)
Homeowner
, 982,000 ,
71%
*PCS claim count estimate as of 11/26/12. Loss estimate represents high and low end estimates by risk modelers RMS, Eqecat and AIR. PCS
estimate of insured losses as of 11/26/12 $11 billion. All figures exclude losses paid by the NFIP.
Source: PCS; AIR, Eqecat, AIR Worldwide; Insurance Information Institute.
28
Flood-Damaged Structures with/without
Flood Insurance: Long Island NY
Number of structures
80,000
70,000
74,736
62.5% of flood-damaged
buildings in Nassau County
were uninsured for flood
46,681
60,000
73.4% of flood-damaged
buildings in Suffolk County
were uninsured for flood
50,000
40,000
46,681
30,000
20,000
Uninsured
Insured
28,055
20,798
15,051
10,000
$2.2
5,747
5,747
0
Nassau
Suffolk
Here’s a marketing challenge. Most people who
live on the coast in Long Island didn’t buy flood insurance.
Source: Newsday, 1/14/13 from FEMA and Small Business Administration.
30
Residential NFIP Flood Take-Up Rates
in NY, CT (2010) & Sandy Storm Surge
Less than 5%
penetration!
These coastal
areas should
have take-up
rates of 75%
and over
Source: Wharton Center for Risk Management and Decision Processes, Issue Brief, Nov. 2012; Insurance Information Institute.
Flood
insurance
penetration
rates were
under 15% in
many very
vulnerable
areas of NY
and CT.
31
Challenge #3: Prolonged Low
Investment Gains
Investment Performance is a Key
Driver of Profitability
32
U.S. Treasury Security Yields*:
A Long Downward Trend, 1990–2013
9%
Yields on 10-Year U.S. Treasury
Notes have been essentially
below 5% for a full decade.
8%
7%
U.S. Treasury
security yields
recently plunged
to record lows
6%
5%
4%
3%
2%
1%
0%
Recession
2-Yr Yield
10-Yr Yield
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
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 March 2013.
Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm.
National Bureau of Economic Research (recession dates); Insurance Information Institutes.
33
Distribution of Bond Maturities,
P/C Insurance Industry, 2003-2011
2011
15.2%
41.4%
2010
16.3%
39.5%
2009
16.2%
2008
15.7%
2007
15.2%
30.0%
2006
16.0%
2005
36.2%
10.3% 6.3%
26.7%
28.7%
11.7% 7.3%
8.1%
33.8%
12.9%
8.1%
29.5%
34.1%
13.1%
7.4%
16.0%
28.8%
34.1%
13.6%
7.6%
2004
15.4%
29.2%
2003
14.4%
29.8%
20%
31.2%
11.1% 6.4%
12.7%
0%
32.4%
26.8%
32.5%
31.3%
40%
60%
15.4%
15.4%
80%
Under 1 year
1-5 years
5-10 years
10-20 years
over 20 years
7.6%
9.2%
100%
The main shift over these years has been from bonds with longer maturities to bonds
with shorter maturities. The industry first trimmed its holdings of over-10-year bonds
(from 24.6% in 2003 to 16.9% in 2011) and then trimmed bonds in the 5-10-year category.
Falling average maturity of the P/C industry’s bond portfolio is contributing to a drop in
investment income along with lower yields.
Sources: A.M. Best; Insurance Information Institute.
34
Purchasing Power of P/C Industry
Investment Gains: 1994–2012F1
($ Billions,
2012 dollars)
Average yearly gain: $60.85B.
We haven’t hit that average in
the last 5 years.
$90
$81.7
$75.9
$74.8
$71.5
$69.1
$70.9
$69.8
$64.5
$63.4
$57.6
$60 $54.8
$56.5
$59.4
$56.2 $57.4
$50.8
$45.9
$42.0
$33.8
$30
94
95
96
97
98
99
00
01
02
03
04
05* 06
07
08
09
10
11 12F
In 2012 (1st three quarters) both investment income and realized capital gains were lower
than in the comparable period in 2011. And because the Federal Reserve Board aims to
keep interest rates exceptionally low until the unemployment rate hits 6.5%—likely at
least another year off—maturing bonds will be re-invested at even lower rates.
1Investment
gains consist primarily of interest, stock dividends and realized capital gains and losses.
*2005 figure includes special one-time dividend of $3.2B; 2012F figure is I.I.I. estimate based on annualized actual 2012:Q3 result of
$38.089B. Sources: ISO; Insurance Information Institute.
Challenge #4: Inflation
and P/C Claims
38
Change* in the Consumer Price Index, 2004–2013
14%
Recession
CPI
Core CPI
For two months in 2008,
led by gasoline, the
general price level was
rising at a 5.5% pace
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
Over the last decade, prices generally rose about 2% per year.
*Monthly, year-over-year, through March 2013. Not seasonally adjusted.
Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
39
Prices for Hospital Services:
12-Month Change,* 1998–2013
Recession
Outpatient Services
Inpatient Services
14%
12%
10%
8%
6%
4%
2%
0%
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
Cyclical peaks in PP Auto tend to occur approximately every 10 years
(early 1990s, early 2000s, and possibly the early 2010s)
*Percentage change from same month in prior year; through January 2013; seasonally adjusted
Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.
40
Forces that Drive Car Repair Costs:
12-Month Change,* 2001–2013
Recession
Auto repair
Auto body work
14%
12%
10%
8%
6%
4%
2%
0%
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
Cyclical peaks in PP Auto tend to occur approximately every 10 years
(early 1990s, early 2000s, and possibly the early 2010s)
*Percentage change from same month in prior year; through January 2013; seasonally adjusted
Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.
41
Change* in Price Index for Lumber: A Downward
Trend but Sudden Spikes, 2004–2013
40%
35%
The price of
lumber dropped
before and during
the recession…
30%
25%
But 30%
spikes can
happen with
no warning
Recession
Hardwood
Softwood Lumber
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
'12
'11
'10
'09
'08
'07
'06
'05
The prices of building materials vary wildly and change levels rapidly.
Prices for hardwood have been much less variable than softwood lumber.
'04
*Monthly, year-over-year, through March 2013. Not seasonally adjusted. Dec. 2012 and Jan., Feb., and Mar. prices are preliminary.
Sources: US Bureau of Labor Statistics, Producer Price Index series WPS0811; National Bureau of Economic Research (recession
dates); Insurance Information Institutes.
'13
42
Change* in Price Index for Plywood: A
Downward Trend but Sudden Spikes, 2004–2013
60%
The price of
plywood rose by
50% in late
Spring 2004 over
the prior year
50%
40%
30%
Recession
Plywood
March 2013:
+8.4%
20%
10%
0%
-10%
-20%
-30%
'13
'12
'11
'10
'09
'08
'07
'06
'05
From the end of the recession (June 2009) to March 2013, the effect
of the ups and downs of the price of plywood has resulted in a rise of 25.6%.
'04
*Monthly, year-over-year, through March 2013. Not seasonally adjusted. Dec. 2012 and Jan., Feb., and Mar. prices are preliminary.
Sources: US Bureau of Labor Statistics, Producer Price Index series WPU083; National Bureau of Economic Research (recession
dates); Insurance Information Institutes.
43
Challenge #5: Regulatory Pressure?
From Congress (TRIA), HUD, CFPB,
FSOC/Federal Reserve (SIFIs),
the NAIC’s SMI, etc.
44
I.I.I. Congressional Testimony on the Future
of the Terrorism Risk Insurance Program
 Issue: Act expires 12/31/14. Insurers
still generally regard large-scale terror
attacks as fundamentally uninsurable
 I.I.I. Input: Testified at first hearing on
the issue in DC (on 9/11/12) on trends in
terrorist activity in the US and abroad,
difficulties in underwriting terror risk;
Noted that bin Laden may be dead but
war on terror is far from over
 Status: New House FS Committee Chair
Jeb Hensarling has opposed TRIA in the
past; Obama Administration does not
seem to support extension; Little
institutional memory on insurance
subcommittee
 Media: Virtually no media coverage yet
apart form trade press; WSJ will likely
editorialize against it.
 Objective: Work with trades, risk
management community and others to
help build support
45
Loss Distribution by Type of Insurance
from Sept. 11 Terrorist Attack ($ 2011)
($ Billions)
Other
Liability
$4.9 (12%)
Property Life
WTC 1 & 2*
$1.2 (3%)
$4.4 (11%)
Aviation
Liability
$4.3 (11%)
Event
Cancellation
$1.2 (3%)
Aviation Hull
$0.6 (2%)
Workers
Comp
$2.2 (6%)
Property Other
$7.4 (19%)
Biz
Interruption
$13.5 (33%)
Total Insured Losses Estimate: $40.0B**
*Loss total does not include March 2010 New York City settlement of up to $657.5 million to compensate approximately 10,000
Ground Zero workers or any subsequent settlements.
**$32.5 billion in 2001 dollars.
Source: Insurance Information Institute.
Exhibit 3A
Terrorism Violates Traditional
Requirements for Insurability
Requirement
Definition
Violation
Estimable
Frequency
Insurance requires large
number of observations to
develop
predictive
ratemaking models (an actuarial
concept known as credibility)
Very few data points
Terror modeling still in
infancy, untested.
Inconsistent
assessment of threat
Estimable
Severity
Maximum possible/ probable
loss must be at least
estimable in order to minimize
“risk of ruin” (insurer cannot
run an unreasonable risk of
insolvency though assumption
of the risk)
Potential
loss
is
virtually unbounded.
Losses can easily
exceed insurer capital
resources for paying
claims.
Extreme
risk
in
workers compensation
and statute forbids
exclusions.
Source: Insurance Information Institute
Terrorism Violates Traditional
Requirements for Insurability (cont’d)
Requirement Definition
Violation
be able to Losses likely highly
Diversifiable Must
spread/distribute
risk concentrated geographically or
Risk
across large number of by industry (e.g., WTC, power
Random
Loss
Distribution/
Fortuity
Source: Insurance
Information Institute
risks
“Law
of
Large
Numbers” helps makes
losses manageable and
less volatile
Probability of loss
occurring
must
be
purely random and
fortuitous
Events are individually
unpredictable in terms
of time, location and
magnitude
plants)
Terrorism attacks are planned,
coordinated and deliberate acts
of destruction
Dynamic target shifting from
“hardened targets” to “soft
targets”
Terrorist adjust tactics to
circumvent new security
measures
Actions of US and foreign govts.
may affect likelihood, nature and
timing of attack
The New HUD Ruling
HO Underwriting vs. Disparate Impact
49
What Did HUD Rule?
 The Fair Housing Act prohibits discrimination in the sale, rental, or
financing of dwellings on the basis of race, color, religion, sex,
disability, familial status, or national origin.
 HUD’s rule says Plaintiffs may use statistical analysis to show that
certain insurer/lender/municipality behavior had a disproportionately
adverse effect on the sale, rental, or financing of housing for
minorities
 Under the rule, this showing violates the federal Fair Housing
Act even if the insurer/lender/municipality did not intend to
discriminate
 Defendant can prevail if it shows the practice was needed to
achieve one or more substantial, legitimate, nondiscriminatory
interests
 But plaintiff may win by showing that another practice with a less
discriminatory effect could achieve this interest
50
Potential Impact on
Property Insurance Underwriting
 Why does this affect property insurance?
 Insurers don’t use race, religion, sex, etc. to underwrite property
insurance
 But they do use credit-based insurance scores, neighborhood, and
other factors that could be the basis of a “disparate impact”
conclusion
 Isn’t this a federal government agency’s intrusion into
state regulation, against McCarran-Ferguson?
 HUD says M-F says federal laws/regulations that “specifically relate
to the business of insurance” supercede state law
 But how can insurers defend themselves if they don’t have
data on race (which they’re prohibited from collecting)?
 HUD says plaintiff have the same problem, so it’s fair
51
Other Regulatory Challenges?
 Designating Some Insurers as Systemically Important?
 Creating a two-tiered, “unlevel playing field”
 Extending the “Reach” of the Consumer Financial
Protection Bureau?
 The CFPB is now proposing regulations for mortgage servicers
regarding property insurance on homes with mortgages
 Will it deal with insurance offered with credit cards?
 Bank marketing of insurance products?
53
Key Takaways
54
Takeaways:
Insurance Industry Predictions for 2013
 P/C Insurance Exposures Will Grow With the U.S.
Economy
 Personal and commercial exposure growth is likely in 2013
– But restoration of destroyed exposure will take until mid-decade
 Wage growth is also positive and could modestly accelerate
 P/C Industry Growth in 2013 Will Be Strongest Since 2004
 Growth likely to exceed A.M. Best projection of +3.8% for 2012
 No traditional “hard market” emerges in 2013
 Underwriting Fundamentals Deteriorate Modestly
 Some pressure from claim frequency, severity in some key lines
 But WC will be tough to fix
 Industry Capacity Hits a New Record by Year-End 2013
(Barring Meg-CAT)
 Investment Environment Is/Remains Challenging
 Interest rates remain low
55
Insurance Information Institute
www.iii.org
Thank you for your time
and your attention!