Insurance, Economic Turmoil and
Political Upheaval:
The Future of Risk Management in
the Post-Crisis World
28 March 2011
London, UK
Robert P. Hartwig, Ph.D., CPCU, President & Economist
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: 212.346.5520  Cell: 917.453.1885  bobh@iii.org  www.iii.org
Presentation Outline
 The Global Financial Crisis and the New World Order
 Reshuffling the Global Economic Deck
 Finding a path to long-term growth
 Foreign Direct Investment (FDI) and insurance exposure/demand
 Insurance in the Age of Austerity
 Fiscal discipline, end of stimulus: Insurance consequences
 Economic Threats to the Global (Re)Insurance Industry
 Debt crises
 Inflation/deflation
 Trade/Currency wars
 Low interest rate yields
 Catastrophe losses
 The Unfortunate Nexus: Opportunity, Risk & Instability
 Future growth is necessarily fraught with greater risk
 Types, magnitude of risk inherent in future growth opportunities
 Q&A
2
The Global Financial Crisis,
Risk and the New World
Economic Order
The Crisis Made Corporations’ Path
to Growth More Challenging/Risky,
Increasing Their Insurance
Challenges Too
3
The New World Order: A New Level of
Risk for Business
 Best Growth Opportunities are No Longer in Low-Risk Markets
(W. Europe, US/Canada, Japan)
 Growth Rates are 2-3 Times Higher in Developing World
 Business investment will remain high, much of it in need of insurance
 Investment conditions will remain challenging for decades
 Unemployment Rates Are Much Lower in Emerging Economies
 Establishment of a middle class and a wealthy upper class
 Incomes Are Rising Faster in Emerging Economies
 Fueling demand for goods and services
 Foreign Direct Investment (FDI) and insurance exposure/demand
 Immature Institutions Raise Risk/Possible Systemic Risks
 Legal system, financial markets, regulation, infrastructure issues
 Instability in Emerging Nations Will Remain High
 Political instability; Corruption in some countries
 Economic vulnerability (trade, xrt risk, credit risk, commodities, energy)
 Natural Hazard Risks Are Often Elevated w/Minimal Mitigation
4
World Economic Outlook: 2009-2012F
2009
2010
2011F
1.6%
1.8%
1.7%
2.0%
1.8%
3.0%
2.7%
2.8%
6.5%
6.5%
7.1%
2.5%
2.5%
3.0%
4.4%
4.5%
5.0%
8%
6%
4%
2.6%
2%
0%
-2% -0.6%
-2.6%
-4%
-3.4%
-4.1%
-6%
-8%
World Output Advanced
Emerging United States Euro Area
Economies Economies
4.3%
IMF says growth in emerging and developing economies
will outpace advanced ones in 2011/12. The impact will
be to accelerate the relative growth of insurance
exposures outside the US, W. Europe and Japan.
March 11 Japan
quake will slow
2011 growth
-6.3%
Japan
2012F
Outlook uncertain: The world economy continues to recover from the
global economics, but activity is reviving at different speeds in different
parts of the world, according to the IMF. A clear set of “winners” has
emerged with direct implications for all industries and their insurers.
Sources: IMF, World Economic Outlook, Jan. 2011; Insurance Information Institute.
5
Real GDP Growth Forecasts for
Advanced Economies: 2011 - 2012
3.0%
2.8%
1.5%
1.8%
1.5%
2.0%
2.0%
1.7%
1.8%
2.5%
2.2%
3.0%
2.3%
2.7%
3.3%
3.5%
3.1%
4.0%
1.0%
United
States
United
Kingdom
Germany
2011F
France
Japan
Canada
2012F
Growth projections could slow for 2011 if supplies of middle-eastern oil (political
disruption), developments involving sovereign debt (the PIGS or other countries)
or Japanese exports (earthquake/tsunami effects) are worse than expected.
Sources: Blue Chip Economic Indicators (3/2011 issue); Insurance Information Institute.
6
Real GDP Growth Forecasts for Key
Developing Economies: 2011 - 2012
3.7%
4%
4.1%
5.1%
5.0%
4.2%
Growth in China and India remain high,
though China is “tapping on the breaks”
to slow inflation. These markets are
promising but foreign firms must
contend with many barriers to entry.
4.2%
8%
8.5%
8.3%
9.1%
9.3%
12%
0%
China
India
Russia
2011F
Brazil
Mexico
2012F
Growth in emerging and developing economies will greatly outpace advanced
country growth in 2011/12. This will accelerate the growth of insurance
exposures in emerging markets relative to the U.S., W. Europe and Japan.
Sources: Blue Chip Economic Indicators (3/2011 issue); Insurance Information Institute.
7
GDP Growth: Advanced & Emerging
Economies vs. World, 1970-2012F
GDP Growth (%)
10.0
8.0
World output is forecast to grow by
4.4% in 2011 and 4.5% in 2011,
following growth of 3.0% in 2010
and a 0.6% drop in 2009.
Emerging economies (led
by China) are expected to
grow by 6.5% in 2011 and
2012. Role of FDI in
exposure growth key.
6.0
4.0
2.0
(2.0)
(4.0)
Advanced economies are expected
to grow at a relative modest 2.5% in
both 2011 and 2012.
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
0.0
Advanced economies
Emerging and developing economies
World
Source: International Monetary Fund, World Economic Outlook Update, January 2011; Ins. Info. Institute.
Relative Shares of Global Output,
Advanced vs. Developing Economies, 2009
The gap is closing quickly. China
became the world’s second largest
economy in 2010 and before long the
developing world’s share of GDP will
exceed that of advanced economies.
Developing
Economies
47.1%
Advanced
Economies
52.9%
Source: EDC Economics, “The Moment of Truth: Global Export Forecast Fall 2010, at http://www.edc.ca/english/docs/gef_e.pdf
9
Real Gross Fixed Investment:
2007:Q1 – 2010:Q3
Annualized % Change from Preceding Quarter
Investment in machinery
and equipment is
running ahead of
investment overall
30
20
Emerging
economy
investment
slumped in late
2010
10
0
Advanced economies
Emerging economies
Machinery & Equipment
Source: International Monetary Fund, World Economic Outlook Update, January 2011; Ins. Info. Institute.
2010 Q3
2010 Q2
2010 Q1
2009 Q4
2009 Q3
2009 Q2
2009 Q1
2008 Q4
2008 Q3
Advanced economy
investment is back
to pre-crisis levels
2008 Q2
2008 Q1
2007 Q4
(40)
2007 Q3
(30)
2007 Q2
(20)
Advanced economies
disinvested during
recession, while
investment in emerging
economies was mostly
positive
2007 Q1
(10)
Employment Growth in Advanced
Economies
January 2007 through November 2010 (Percent Change; 3-month moving avg.)
0.94
1.06
1.2
0.96
0.69
0.55
0.61
0.65
0.38
1
0.08
2
1.82
1.73
1.64
1.49
1.26
0.97
1.04
0.95
0.93
0.72
1.06
1.22
1.54
1.08
0.86
0.42
0.36
0.12
3
-1
-2
-3
-4
The job losses in 2008/2009 were
among the steepest in postDepression history
-0.33
-0.78
-1.08
-1.05
-1.14
-1.46
-2.33
-3.14
-3.9
-3.76
-3.52
-2.78
-2.35
-1.75
-1.49
-1.29
-1.17
-1.11
-0.43
0
2007m1
2007m2
2007m3
2007m4
2007m5
2007m6
2007m7
2007m8
2007m9
2007m10
2007m11
2007m12
2008m1
2008m2
2008m3
2008m4
2008m5
2008m6
2008m7
2008m8
2008m9
2008m10
2008m11
2008m12
2009m1
2009m2
2009m3
2009m4
2009m5
2009m6
2009m7
2009m8
2009m9
2009m10
2009m11
2009m12
2010m1
2010m2
2010m3
2010m4
2010m5
2010m6
2010m7
2010m8
2010m9
2010m10
2010m11
-5
Employment growth in
advanced economies
turned positive in 2010,
but is not yet sufficient to
offset the losses suffered
in 2008 and 2009
Unemployment Rates in Advanced Economies Remain Much
Higher than Among Emerging Economies
Source: International Monetary Fund, World Economic Outlook Update, January 2011; Ins. Info. Institute.
12
Unemployment Rates for
Major Global Economies, 2009-2011F
Persistently high unemployment is among
the greatest obstacles to insurer
exposure/demand growth (nonlife and life)
12%
10%
10.1%10.0%
9.4%
9.3% 9.7% 9.6%
8.0% 8.3% 8.2%
8%
6%
4.3% 3.8%
4%
4.9% 4.7% 4.6%
3.7%
2%
0%
Advanced
Economies
Newly
Industrialized
Economies
Euro Zone
Asia
2009
2010F
US
2011F
Unemployment in Advanced Economies is more than
double that of Emerging Economies
Sources: IMF, World Economic Outlook, Oct. 2010; Insurance Information Institute.
13
Real Private Consumption:
2007:Q1 – 2010:Q3
Annualized % Change from Preceding Quarter
Advanced economies
12
10
8
Emerging economies
Consumer spending is recovering on a
global scale, but much more powerfully in
emerging markets (up about 8% vs. 2% in
advanced economies)
6
4
2
0
(2)
(4)
(6)
2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Consumers in Emerging and Developing Markets Are
Increasingly Important to the Global Economy
Source: International Monetary Fund, World Economic Outlook Update, January 2011; Ins. Info. Institute.
Global Real (Inflation Adjusted) Nonlife
Premium Growth: 1980-2009
Nonlife premium growth in
emerging markets has
exceeded that of
industrialized countries in
26 of the past 30 years,
including the entirety of the
global financial crisis..
Average: 1980-2009
Industrialized Countries: 3.9%
Real growth rates
Emerging Markets: 9.2%
20%
Overall Total: 4.2%
15%
10%
5%
0%
Total
Source: Swiss Re, sigma, No. 2/2010.
Industrialised countries
2009
2008
2007
2006
2005
2004
2003
2002
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
-10%
2000
2001
Real nonlife premium growth is very erratic in
part to inflation volatility in emerging markets as
well as a lack of consistent cyclicality
-5%
Emerging markets
15
Distribution of Nonlife Premium:
Industrialized vs. Emerging Markets, 2009
2009, $Billions
Premium Growth Facts
 Although premium growth
throughout the industrialized
world was negative in 2009, its
share of global nonlife
premiums remained very high
at nearly 86%--accounting for
nearly $1.5 trillion in premiums.
 The financial crisis and sluggish
recovery in the major insurance
markets will accelerate the
expansion of the emerging
market sector
Industrialized
Economies
$1, 485.8
85.7%
14.3%
Emerging
Markets
$248.8
Developing markets now
account for 47% of global
GDP but just 14% of nonlife
premiums
Sources: NAIC; Insurance Information Institute research.
17
Nonlife Real Premium Growth in 2009
Latin and South American
markets performed
relatively well during the
global financial crisis in
terms of growth
Source: Swiss Re, sigma, No. 2/2010.
There was also
growth in East and
South Asia and
well as Australia
and New Zealand
18
Economic Threats
to Global Economy &
(Re)Insurance Industries
At Least Eight to Monitor:
Near-Term and Longer-Term Risks
19
Near-Term Issues with Potentially
Adverse Impacts to Global Growth
 Japan Earthquake: Effects of the March 11
Earthquake/Tsunami/ Nuclear Reactor Accident
 Lost final production
 Disrupted supply chains
 Lost Japanese consumption
 Potential (modest) impact on GDP
 Political spillover in Europe (e.g., Germany)
 Political Unrest in the Middle East
 Higher energy prices
 Military action
 Elevated political uncertainty
 Safety of property and employees abroad
Source: Insurance Information Institute.
20
Near-Term Issues with Potentially
Adverse Impacts to Global Growth
 Inflation Transmitted Globally
 China, Brazil and other countries
 Soaring food, energy and other commodity prices
 Oil prices and supply reliability
 Tighter Monetary/Fiscal Policy/AusteritySlower Growth?
 Europe, US
Source: Insurance Information Institute.
21
Location of March 11, 2011 Earthquake
Near Sendai, Honshu, Japan
March 11 Earthquake Facts
as of 3/24/2011
 Magnitude 9.0 earthquake struck
Japan at 2:46PM local time
(2:46AM Eastern) off the northeast
cost of Honshu, 80 miles east of
the city of Sendai
 Quake is among the 5 strongest in
recorded history and the strongest
in the 140 years for which records
have been kept in Japan
 10,000+ fatalities
 Economic loss: $100 - $300 bn
LOCATION
130 km (80 miles) E of Sendai, Honshu, Japan
178 km (110 miles) E of Yamagata, Honshu, Japan
178 km (110 miles) ENE of Fukushima, Honshu, Japan
373 km (231 miles) NE of TOKYO, Japan
Source: US Geological Service; Insurance Information Institute.
 Insured losses up to $35 bn
 Significant tsunami damage was
recorded in Japan; relatively minor
damage on the U.S. West Coast
22
Political Risk in 2010: Greatest Business
Opportunities Are Often in Risky Nations
The fastest growing
markets are generally
also among the
politically riskiest
Heightened risk
has insurance
implications
Source: Maplecroft
23
Inflation Rate Forecast for Largest European
Economies & Euro Area, 2011F-2012F
Change from
Prior Year
4%
2011F
2012F
4%
Inflation is forecast to be around
2% across most major European
economies. If so, interest rates
will remain low, obscuring tight
conditions in trade credit markets
3.4%
3%
3%
2.2%
2.0% 2.0%
2%
1.8%
1.8%
1.7%
1.9%
1.8%
1.6%
2%
1%
1%
0%
Germany
France
Source: Blue Chip Economic Indicators, March 2011 issue
UK
Netherlands
EuroZone
Inflation Rate Forecast
for Other Important Countries, 2011-12F
% Change from Prior Year
2011F
2012F
8.6%
9%
7.7%
8%
7%
7.4%
6.5%
6%
5%
4%
5.3%
4.8%
4.3%
3.7%
3%
2.2% 2.2%
2%
1%
0.0%
0%
-0.2%
-1%
China
India
Brazil
Japan
Canada
Russia
Inflation is much higher in fast-growing economies such as Brazil, Russia, India,
and China (the BRIC group). Inflation there can spread to advanced economies
because the advanced countries import significantly from the BRICs.
Source: Blue Chip Economic Indicators, March 2011 issue
U.S. Annual Inflation Rates, (CPI-U, %),
1990–2014F
Annual
Inflation
Rates (%)
Inflation peaked at 5.6% in August 2008
on high energy and commodity crisis.
The recession and the collapse of the
commodity bubble have reduced nearterm inflationary pressures
6.0
5.0
4.9
5.1
3.8
4.0
3.0
3.0
2.0
3.3 3.4
3.2
2.9 2.8
2.4
3.0
2.6
2.5
3.8
2.8
2.3
2.2 2.1 2.2 2.2
1.9
1.5
1.6
1.3
1.0
0.0
-0.4
-1.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F 12F 13F 14F
The slack in the U.S. economy suggests that inflation should not heat up
before 2012, but other forces (commodity prices, inflation in countries from
which we import, etc.), plus U.S. debt burden, remain longer-run concerns
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/10 and 3/11 (forecasts).
26
Commodity Price Changes
in 2010-2011*
Metals
Food
Raw Materials
*data are through Jan. 20, 2011
Source: International Monetary Fund World Economic Outlook January 2011 update at
http://www.imf.org/external/pubs/ft/weo/2010/update/01/data/figure_2.csv
Crude Oil
1/14/2011
12/31/2010
12/17/2010
12/3/2010
11/19/2010
11/5/2010
10/22/2010
10/8/2010
9/24/2010
9/10/2010
8/27/2010
8/13/2010
7/30/2010
7/16/2010
7/2/2010
6/18/2010
6/4/2010
5/21/2010
5/7/2010
4/23/2010
4/9/2010
Raw materials prices doubled over the
course of 2010. Some other commodity
prices dropped during the year but
ended 20-30% higher. The upward
trend has continued in to 2011.
3/26/2010
3/12/2010
2/26/2010
2/12/2010
1/29/2010
1/15/2010
210
200
190
180
170
160
150
140
130
120
110
100
90
80
1/1/2010
Index (Jan 1, 2010 = 100)
Gold
28
Longer-Term Issues
Persistently Low Interest Rates/Int. Rate Policy
 Lower investment income, more pressure on u/w profit
 Policy Dilemma: Stimulus/Low UnN or Price Stability
Currency Market Instability
 Exchange rate volatility
 Future of the euro
Sovereign Bond Market Concerns
 Portugal, Greece, Ireland, Spain, etc.
Strong Capital Flows to Emerging/Developing
Economies => Asset Price Bubbles?
Regulatory Backlash/Developments
 Solvency II, Basel III
Source: Insurance Information Institute.
29
2012F
6%
5%
Interest rates remain generally low in much
of the world, depressing insurer investment
earnings. Some countries, including the
U.S., are intentionally holding rates low.
7.79%
5.57%
7%
5.16%
8%
4.78%
Other countries
are intentionally
raising rates to
fight inflation.
4.57%
2011F
9%
7.23%
Forecast: End-of-Year 3-Month Interest Rates
for Major Global Economies, 2011-2012F
1.10%
0.20%
2.14%
1.09%
0.33%
1%
0.24%
2%
1.30%
3%
2.18%
4%
0%
Euro Area
Japan
U.K.
Source: Blue Chip Economic Indicators, March 2011 issue
U.S.
China
Australia
India
10-Year Bond: Yield Forecasts
for 2011:Q1-2012:Q2
U.S.
Euroland
U.K.
Canada
4.60%
4.40%
4.20%
4.00%
3.80%
3.60%
3.40%
2011:Q1
2011:Q2
2011:Q3
2011:Q4
2012:Q1
2012:Q2
As these nations’ economies improve, and actions to keep interest rates low
are ended, the yields on longer-term bonds are expected to rise. But
persistent high rates of unemployment and excess capacity, plus central
bank concerns about inflation, will likely keep them from rising more than
one percentage point by mid-2012.
Source: Wells Fargo Economics Group, Global Chartbook, March 2011
PIGS Government Bond Spreads
(2-Year Yield Spreads over German Bunds) in 2010-2011*
Basis Points
For one day in 2010,
1800
it took nearly 18
1600
percentage points
more yield to lure an
1400
investor to a 2-Year
Greek bond vs. a
1200
comparable German
bond
1000
110-billion-Euro
rescue package
drove the Greece
bond spread down
below 700 bp…
…but the
market isn’t
convinced
the rescue
will work
800
600
400
Greece
Ireland
Portugal
*data are through Jan. 21, 2011
Source: International Monetary Fund World Economic Outlook January 2011 update at
http://www.imf.org/external/pubs/ft/weo/2010/update/01/data/figure_2.csv
1/14/2011
12/31/2010
12/17/2010
12/3/2010
11/19/2010
11/5/2010
10/22/2010
10/8/2010
9/24/2010
9/10/2010
8/27/2010
8/13/2010
7/30/2010
7/16/2010
7/2/2010
6/18/2010
6/4/2010
5/21/2010
5/7/2010
4/23/2010
4/9/2010
3/26/2010
3/12/2010
2/26/2010
2/12/2010
1/29/2010
1/15/2010
0
1/1/2010
200
Spain
33
Trade-Index-Weighted
U.S. Dollar Exchange Rate*
Monthly, January 2000
through February 2011
115
110
Dollar appreciates as role
as global “reserve
currency” affirmed during
global financial crisis
105
100
Post-crisis
depreciation
of dollar
Greece
anxiety
Depreciation
of dollar after
Tech bubble
and post 9-11
95
90
85
80
75
70
65
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
Jan
11
The global financial crisis created significant exchange-rate volatility
in 2008-09 and 2010—when the world needed a “safe haven” currency.
As global stability returns, the dollar is depreciating again.
*The Major Currency index is a weighted average of the foreign exchange values of the U.S. dollar against a subset of the currencies
of a large group of major U.S. trading partners. The index weights, which change over time, are derived from U.S. export shares and
from U.S. and foreign import shares.
Sources: US Federal Reserve, Board of Governors; Insurance Information Institute.
Exchange Rate Indices*
Daily (Jan 1, 2010 = 100)
Index
The US dollar has generally depreciated
against other major currencies, as US
monetary policy keeps yields on US
assets artificially low.
120
115
110
105
100
95
Euro
Yen
Renminbi
1/14/2011
12/31/2010
12/17/2010
12/3/2010
11/19/2010
11/5/2010
10/22/2010
10/8/2010
9/24/2010
9/10/2010
8/27/2010
8/13/2010
7/30/2010
7/16/2010
7/2/2010
6/18/2010
6/4/2010
5/21/2010
5/7/2010
4/23/2010
4/9/2010
3/26/2010
3/12/2010
2/26/2010
2/12/2010
1/29/2010
1/15/2010
85
1/1/2010
90
Pound Sterling
*data are through Jan. 21, 2011
Source: International Monetary Fund World Economic Outlook January 2011 update at
http://www.imf.org/external/pubs/ft/weo/2010/update/01/data/figure_2.csv
35
Reshuffling the Global
Economic Deck Through
Foreign Direct Investment
The Global Financial Crisis
Concentrates Growth Opportunities
in Risky Places/Industry Groups
37
Global Foreign Direct Investment,
Net Inflows: 1980-2009*
Trillions of Current US Dollars
$2.5
$2.0
FDI collapsed during
the financial crisis,
plunging $1.23 trillion
or 52.3%
FDI dropped by 59.6%
following the tech bubble
bursting in 2000
$1.5
$1.0
$0.5
$0.0
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Most Growth Will Be in Parts of the World Where Foreign Direct
Investment is High. FDI Flows Are Highly Volatile Meaning that New
Income Streams for Businesses (and Insurers) Will Also Be Volatile
*Foreign Direct Investments are defined as the net inflows of investment to acquire a lasting management interest (at least 10% of voting stock) in an
enterprise operating in an economy other than that of the investor.
Source: World Bank; Insurance Information Institute.
Following the Money Trail:
Foreign Direct Investment
Source: The Economist, Nov. 13 -19, 2010
39
Following the Money Trail:
Outward Foreign Direct Investment
The UK’s share of
FDI peaked at
45% in 1914
The US’s share of
FDI peaked at
50% in 1967
China’s share of
FDI stood at 6%
in 2009
Source: The Economist, Nov. 13 -19, 2010
40
Crisis Driven Change in Outward
Foreign Direct Investment by Region:
Who’s Creating Global Insurance Exposure?
(Percent)
0%
-10%
-7.6%
-12.2%
-20%
-30%
-40%
-50%
-60%
-70%
-36.7%
Growth in the global GDP (and
insurable exposures) will
increasingly by tied to the
direction and magnitude of
global flow of investment capital
-67.9%
-80%
Asia
Oceania
North America
Europe
*Foreign Direct Investments are defined as the net inflows of investment to acquire a lasting management interest (at least 10% of voting stock) in an
enterprise operating in an economy other than that of the investor. Outward FDI represents flow from investing country to rest of the world.
Source: United Nations UNCTADSTAT; Insurance Information Institute.
41
China: Outward Foreign Direct
Investment: 1982-2009*
Millions of Current US Dollars
Chinese foreign direct investment
increased 5,600% from 2000 to 2008
(from $916 mill to $52.2 bill). The
financial crisis caused only a minor
disruption in Chinese investment abroad
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$0
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
Despite the Crash in Foreign Direct Investment During the Global Financial
Crisis, Chinese Investments Abroad Remain Near Record Levels. Implication:
Growth Opportunities for Business (and their Insurers) May Not Be in China
but In Chinese Investment Target Nations/Companies/Industries.
*Foreign Direct Investments are defined as the net inflows of investment to acquire a lasting management interest (at least 10% of voting stock) in an
enterprise operating in an economy other than that of the investor. Outward FDI represents flow from investing country to rest of the world.
Source: United Nations UNCTADSTAT; Insurance Information Institute.
Major Chinese Banks’ Loans Abroad:
2006-2009
(Billions of US $)
$500
$400
$300
Chinese banks are willing to loan
heavily, despite global economic
turmoil, to expand Chinese investment
abroad. The health and investment
policies of Chinese will take on an evergreater impact in the ability to financial
insurable exposures worldwide.
Financial risk is an issue.
$200
$100
Dim Sun Bonds??
America’s industrial rise began 50-60
years before it became a global
financial power in the 1920s. Will it
take China that long? Probably not.
$0
2006
2007
2008
2009
Chinese Banks’ Lending Activity Abroad Showed Little Impact from the
Global Financial Crisis, but Eventually, Bank Crises Will Originate in China
Source: Data estimated from The Economist, Nov. 13-19, 2010 from: ICBC, China Construction Bank, China Development Bank, Bank of China and China Eximbank.
43
United States: Outward Foreign Direct
Investment: 1980-2009*
Millions of Current US Dollars
$450,000
$400,000
Foreign Direct Investment from the
United States plunged $145.4 bill or
36% during the financial crisis
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$0
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Direct Investments Abroad by US Interests Were Hit Hard by the
Global Financial Crisis
*Foreign Direct Investments are defined as the net inflows of investment to acquire a lasting management interest (at least 10% of voting stock) in an
enterprise operating in an economy other than that of the investor. Outward FDI represents flow from investing country to rest of the world.
Source: United Nations UNCTADSTAT; Insurance Information Institute.
Doing Business in the Age
of Austerity
Governments in Most of the World’s
Major Economies Have Embraced
Austerity as Fiscal Risk Rises
Significant Impacts for Global
Commerce and Insurance
47
Government Surplus/Deficit
as a % of GDP, 2005-2011F
% of GDP
4%
2005
2006
2007
2008
2009
2010F
2011F
2%
0%
-2%
-4%
-6%
-8%
-10%
What will public sector budget cuts mean for insurers?
Macroeconomic theory would suggest that the effect is
negative in the short run (anti-stimulative) and positive
medium-to-longer run as stability returns
-12%
-14%
US
UK
Ireland
Source: Insurance Information Institute research.
France Germany Spain
Italy
Portugal Greece
Sovereign Fiscal Responsibility Index
2011
Country
Australia
New Zealand
Estonia
Sweden
China
Luxembourg
Chile
Denmark
United Kingdom
Brazil
Canada
India
Poland
Netherlands
Norway
Slovak Republic
Korea
Overall Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
Country
Mexico
Israel
Slovenia
Austria
Finland
France
Spain
Germany
Belgium
Italy
United States
Hungary
Ireland
Japan
Iceland
Portugal
Greece
Source: Stanford University and the Comeback America Initiative (CAI).
Overall Rank
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
The US and much
of Western Europe
and Japan rank
poorly in terms of
fiscal
responsibility
50
The Unfortunate Nexus:
Opportunity, Risk & Instability
Most of the Global Economy’s Future
Gains Will be Fraught with Much
Greater Risk and Uncertainty than in
the Past—Insurance Is There to Help
58
Political Risk in 2010: Greatest Business
Opportunities Are Often in Risky Nations
The fastest growing
markets are generally
also among the
politically riskiest
Heightened risk
has insurance
implications
Source: Maplecroft
59
Middle East Unrest in 2011: Unanticipated Events
Creating Significant Economic & Political Risk
Most of the countries
experiencing unrest
are strategic allies of
the US and/or major
oil producers. Also,
does a desperate
Gaddafi raise the risk
of terrorism (Libya
was responsible for
the bombing of Pan
Am flight 103 in
1988)?
Heightened risk
has insurance
implications
Source: Wall Street Journal, March 23, 2011; Insurance Information Institute.
60
Nonlife Real Premium Growth in 2009
Latin and South American
markets performed
relatively well during the
global financial crisis in
terms of growth
Source: Swiss Re, sigma, No. 2/2010.
There was also
growth in East and
South Asia and
well as Australia
and New Zealand
61
Countries by Insurance Risk Tier Rating
CRT-1
Australia
Austria
Canada
Denmark
Finland
France
Germany
Gibraltar*
CRT-2
Barbados*
Netherlands
Singapore
Sweden
Switzerland
Malaysia
Malta
Ireland
Mexico
Netherlands Antilles*
Japan
Oman
Liechtenstein*
Poland
Macau
New Zealand
Slovenia
Qatar
Saudi Arabia
South Africa
South Korea
United Kingdom
United States
Spain
Taiwan
Belarus
Kuwait
Hong Kong
Norway
Antigua &
Barbuda*
Israel
Cayman
Islands*
Luxembourg
Bahamas*
Cyprus
British Virgin
Islands*
Isle of Man*
CRT-5
China
Bermuda
Italy
CRT-4
Bahrain
Belgium
Guernsey*
CRT-3
Thailand
Trinidad and Tobago
United Arab Emirates
Brunei
Darussalam
Bosnia and
Herzegovina
Egypt
Dominican
Republic
India
Ghana
Indonesia
Jamaica
Jordan
Kenya
Kazakhstan
Lebanon
Mauritius
Nigeria
Morocco
Ukraine
Panama
Vietnam
Philippines
Russia
Tunisia
Turkey
The fastest
growing markets
are pose a much
greater risk to an
insurer’s stability,
strength and
performance
*Denotes countries to be considered “Special Cases” by A.M. Best
Source: A.M. Best., as of 4/13/10
64
Summary of the 11 March Japan
Quake and Other Recent Major
Catastrophe Loss Activity
Earthquake Losses Dominate
65
Recent Major Catastrophe Losses
(Insured Losses, $US Billions)
$30
$25
$20
The March 2011 earthquake in Japan will
become among the most expensive in world
history in terms of insured losses (current
leader is the 1994 Northridge earthquake with
$22.5B in insured losses in 2010 dollars)
$25.0
$15
$8.0
$10
$10.0
$5.0
$5
$0.5
$2.0
$0
Cyclone Yasi
(Australia) Feb
2011
Australia Floods
New Zealand
Chile Earthquake
New Zealand
Japan Earthquake
(Dec - Feb 2011) Quake (Sep 2010)
(Feb 2010)
Quake (Feb 2011)
(Mar 2011)*
Insured Losses from Recent Major Catastrophe Events Exceed
$50 Billion, an Estimated $48 Billion of that from Earthquakes
*Midpoint of AIR Worldwide estimated insured loss range of $15 billion to $35 billion as of March 13, 2011. Does not
include tsunami losses.
Sources: Insurance Council of Australia, Munich Re, AIR Worldwide; Insurance Information Institute.
66
Insured Japan Earthquake Loss
Estimates*
(Insured Losses, $ Billions)
Eqecat
$12 - $25 bn
$25 - $35 bn
AIR Worldwide
Economic losses are likely to
total in the $200 billion range,
meaning only a fraction of the
loss is insured
RMS
$-
$5
$10
$15
*As of March 17, 2011. Figures do not include insured tsunami losses.
Sources: AIR Worldwide, Eqecat; Insurance Information Institute.
$20
$25
$30
$35
$40
67
Significant Natural Catastrophes:
1980 – February 2011
10 Costliest Events Ordered by Overall Losses
Overall losses Insured losses
Period
Event
Affected Area
Fatalities
US$ m, original values
25-30.8.2005
Hurricane Katrina
17.1.1995
Earthquake
12.5.2008
Earthquake
17.1.1994
Earthquake
6-14.9.2008
Hurricane Ike
125,000
62,200
1,300
100,000
3,000
6,400
85,000
300
84,000
44,000
15,300
60
38,300
18,500
170
May-Sept. 1998
Floods
China: Sichuan, Mianyang, Beichuan, Wenchuan,
Shifang, Chengdu, Guangyuan, Ngawa, Ya'an
USA: Northridge, Los Angeles, San Fernando
Valley, Ventura, Orange
USA. Cuba. Haiti. Dominican Republic. Turks and
Caicos Islands. Bahamas
China: Jangtsekiang, Songhua Jiang
30,700
1,000
4,200
27.2.2010
30,000
8,000
520
28,000
760
50
23-27.8.1992
Earthquake, tsunami Chile: Bio Bio, Concepción, Talcahuano, Coronel,
Dichato, Chillán; Del Maule, Talca, Curicó
Earthquake
Japan: Honshu, Niigata, Ojiya, Tokyo, Nagaoka,
Yamakoshi
Hurricane Andrew
USA: FL, Homestead; LA. Bahamas
26,500
17,000
60
27.6-13.8.1996
Floods
24,000
445
3,050
23.10.2004
USA: LA, New Orleans, Slidell; MS, Biloxi,
Pascagoula, Waveland, Gulfport
Japan: Hyogo, Kobe, Osaka, Kyoto
China: Guizhou, esp. Guiyang; Zhejiang; Sichuan;
Hunan; Anhui; Jiangxi; Hubei; Guangxi; Jiangsu
© Munich Re, Geo Risks Research, NatCatSERVICE – As at 11 March 2011.
Significant Natural Catastrophes:
1980 – February 2011
10 Costliest Events Ordered by Insured Losses
Overall losses Insured losses
Period
Event
Affected Area
Fatalities
US$ m, original values
25-30.8.2005
Hurricane Katrina
6-14.9.2008
Hurricane Ike
23-27.8.1992
Hurricane Andrew
17.1.1994
Earthquake
7-21.9.2004
Hurricane Ivan
19-24.10.2005
Hurricane Wilma
20-24.9.2005
Hurricane Rita
22.2.2011
Earthquake
27.2.2010
Earthquake, tsunami Chile: Bio Bio, Concepción, Talcahuano, Coronel,
Dichato, Chillán; Del Maule, Talca, Curicó
Hurricane Charley
USA. Cuba. Jamaica. Cayman Islands
11-14.8.2004
USA: LA, New Orleans, Slidell; MS, Biloxi,
Pascagoula, Waveland, Gulfport
USA. Cuba. Haiti. Dominican Republic. Turks and
Caicos Islands. Bahamas
USA: FL, Homestead; LA. Bahamas
125,000
62,200
1,300
38,300
18,500
170
26,500
17,000
60
USA: Northridge, Los Angeles, San Fernando
Valley, Ventura, Orange
USA. Trinidad and Tobago. Venezuela. Colombia.
Mexico
USA. Bahamas. Cuba. Haiti. Jamaica. Mexico
44,000
15,300
60
23,000
13,800
130
22,000
12,500
40
USA: LA, Lake Charles, Holly Beach, Cameron,
New Orleans; MS; TX, Houston
New Zealand: Christchurch
16,000
12,100
10
20,000*
10,000*
>150
30,000
8,000
520
18,000
8,000
40
*loss estimation still in progress
© Munich Re, Geo Risks Research, NatCatSERVICE – As at 11 March 2011.
Natural Catastrophes Worldwide,
1980 – 2010 (Number of events with trend)
Number
Increased claims paying
capacity will be required on
a global scale if current
trends continue (as is
expected)
1 200
1 000
800
600
400
200
1980
1982
1984
1986
Geophysical events
(Earthquake, tsunami,
volcanic eruption)
Source: Geo Risks Research, NatCatSERVICE.
1988
1990
1992
Meteorological events
(Storm)
1994
1996
1998
2000
Hydrological events
(Flood, mass movement)
© 2011 Munich Re
2002
2004
2006
2008
2010
Climatological events
(Extreme temperature,
drought, forest fire)
71
Natural Catastrophes, 2010
950 loss events
Volcanic eruption
Island, March/April
Severe storms, tornadoes, floods
Severe storms, floods
United States, 30 April – 3 May
United States, 13 -15 March
Severe storms, hail
United States, 12-16 May
Flash floods
France,
15 June
Earthquake
Haiti, 12 Jan.
Winter Storm Xynthia, storm surge
Western Europe, 26-28 Feb.
Heat wave/ Wildfires
Russia, July-Sept.
Landslides, flash floods
China, 7 Aug.
Floods
Eastern Europe,
2-12 June
Floods, flash floods,
landslides
China, 13-29 June
Hurricane Karl, floods
Mexico, 15-21 Sept.
Insurance is a
global business and
claims paying ability
is interconnected
via reinsurance
markets
Natural catastrophes
Selection of significant
loss events (see table)
Source: Geo Risks Research, NatCatSERVIC.E
Earthquake
China, 13 April
Floods, flash floods
Pakistan, July-Sept.
Earthquake, tsunami
Chile, 27 Feb.
Geophysical events
(earthquake, tsunami, volcanic activity)
Meteorological events
(storm)
Typhoon Megi
China, Philippines,
Taiwan, 18-24 Oct.
Hailstorms,
severe storms
Australia, 22 March/6-7 March
Floods
Australia, Dec.
Earthquake
New Zealand, 4 Sept.
Hydrological events
(flood, mass movement)
Climatological events
(extreme temperature, drought, wildfire)
73
Summary & Conclusions
 The Global Financial Crisis Has Laid Bare the New World
Economic Order
 There is no question that most of the world’s largest economies (save
China) suffered the most and continue to languish
 The impacts of the crisis and associated impacts on the demand for goods
and service as well as insurance demand will be felt for the better part of a
decade (2015-2016)
 Following the Money Trail
 China and other newly industrialized nations create exposure and demand
within their own borders
 Many of the best insurance opportunities are associated with Chinese with
Outward Foreign Direct Investment (FDI)
 Commerce and Insurance in the Age of Austerity
 Fiscal discipline in the largest insurance economies is a net short-term
negative; Long-term positive; Process will be drawn out (e.g., Europe)
 Economic Threats Remain Plentiful
 Generally manageable; Some have been exaggerated
 The Unfortunate Nexus: Opportunity, Risk & Instability
 Future growth comes with greater risk than in the past
74
Insurance Information Institute Online:
www.iii.org
Thank you for your time
and your attention!
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