Is the World Becoming a
Riskier Place?
Economic Overview and New York Insurance
Market Outlook for 2012 & Beyond
Independent Insurance Agents & Brokers of New York
Albany, NY
January 30, 2012
Download at www.iii.org/presentations
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
What in the World Is
Going On?
Is the World Becoming a
Riskier Place?
What Are the Implications for
Insurance and Risk Management?
3
We Are Living in an Age of Elevated
Global Economic Uncertainty
ECONOMIC & POLITICAL CONCERNS
 European Sovereign Debt, Bank & Currency Crises
 Global Economic Slowdown
 Echoes of the Financial Crisis & Financial Market Volatility
 Collapse of Major Financial Institutions
 U.S. Debt and Budget Crisis, S&P Downgrade & Tax Uncertainty
 Housing Crisis
 Persistently High Unemployment
 Inflation/Deflation
 Energy & Commodity Prices Volatility
 Political Upheaval in the Middle East (Arab Spring, Iran)
 Regulation & Regulatory Uncertainty
 New World Order: China’s Economic and Military Ascendency
 2012 US Elections & Political Brinksmanship
CATASTROPHIC LOSS
 Japan, New Zealand, Chile, Haiti Earthquakes
 Nuclear Fears (Japan, Germany, US)
 Floods (Thailand, US)
 U.S.: Tornadoes, Flooding, Wildfires, Hurricanes, Winter Storms
 Manmade Disasters (e.g., Deepwater Horizon)
 Cyber Attacks
 Resurgent Terrorism Risk (Bin Laden, Gadhafi, Kim Jong Il deaths)
Are “Black
Swans”
everywhere
or does it
just seem
that way?
4
P/C Insurance Industry
Financial Overview
Profit Recovery Was Set Back
in 2011 by High Catastrophe
Loss & Other Factors
8
$3,043
$7,979
$28,672
$34,670
$65,777
$44,155
$38,501
$30,029
$20,559
$20,598
$10,870
$3,046
$10,000
$19,316
$20,000
$5,840
$30,000
$14,178
$40,000
$21,865
$50,000
$30,773
$60,000
2005 ROE*= 9.6%
2006 ROE = 12.7%
2007 ROE = 10.9%
2008 ROE = 0.1%
2009 ROE = 5.0%
2010 ROE = 5.6%
2011:Q3 ROAS1 = 1.9%
P-C Industry 2011:Q3 profits were
down 71% to $8.0B vs. 2010:Q3,
due primarily to high catastrophe
losses and as non-cat
underwriting results deteriorated
$36,819
$70,000







$24,404
$80,000
$62,496
P/C Net Income After Taxes
1991–2011:Q3 ($ Millions)
$0
-$10,000
-$6,970
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 3.0% ROAS for
2011:Q3, 7.5% for 2010 and 7.4% for 2009.
Sources: A.M. Best, ISO, Insurance Information Institute
10
11*
A 100 Combined Ratio Isn’t What It
Once Was: Investment Impact on ROEs
A combined ratio of about 100
generated ~5.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Combined Ratio / ROE
15.9%
110
18%
108.2
14.3%
12.7%
105
100.6
100
100.1
15%
10.9%
101.0
100.8
9.6%
97.5
99.3
95.7
95
7.4%
92.7
8.8%
100.8
12%
7.5%
9%
4.4%
6%
90
3.0%
85
3%
80
0%
1978
1979
2003
2005
2006
Combined Ratio
2007
2008
2009
2010
2011:Q3*
ROE*
Combined Ratios Must Be Lower in Today’s Depressed
Investment Environment to Generate Risk Appropriate ROEs
* 2008 -2011 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2011:Q3 combined ratio
including M&FG insurers is 109.9, ROAS = 1.9%.
Source: Insurance Information Institute from A.M. Best and ISO data.
Profitability Peaks & Troughs in the P/C
Insurance Industry, 1975 – 2011*
ROE
25%
1977:19.0%
1987:17.3%
20%
History suggests next ROE
peak will be in 2016-2017
2006:12.7%
1997:11.6%
15%
9 Years
2011:
3.0%*
10%
5%
0%
1975: 2.4%
1992: 4.5%
2001: -1.2%
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*
-5%
1984: 1.8%
*Profitability = P/C insurer ROEs are I.I.I. estimates. 2011 figure is an estimate based on annualized ROAS through Q3 data.
Note: Data for 2008-2011 exclude mortgage and financial guaranty insurers. For 2011:Q3 ROAS = 1.9% including M&FG.
Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
Profitability and Growth in
New York P/C Insurance
Markets
Analysis by Line and Nearby
State Comparisons
15
RNW All Lines: NY vs. U.S., 2000-2010
(Percent)
20%
15%
10%
5%
0%
P/C Insurer profitability in
NY is below that of the US
overall from 2000-2010
US: 7.1%
NY: 3.7%
-5%
-10%
-15%
-20%
-25%
00
01
02
US All Lines
Sources: NAIC.
03
04
05
06
07
08
09
10
NY All Lines
16
RNW PP Auto: NY vs. U.S., 2000-2010
25%
20%
15%
10%
Average 2000-2010
5%
US: 7.1%
0%
NY: 8.0%
-5%
00
01
02
US PP Auto
Sources: NAIC.
03
04
05
06
07
08
09
10
NY PP Auto
17
RNW Comm. Auto: NY vs. U.S.,
2000-2010
(Percent)
Commercial Auto profitability in NY
is generally below the US average
20%
15%
10%
5%
Average 2000-2010
0%
US: 8.5%
-5%
NY: 6.1%
-10%
00
01
02
US Comm Auto
Sources: NAIC.
03
04
05
06
07
08
09
10
NY Comm Auto
18
RNW Comm. Multi-Peril: NY vs. U.S.,
2000-2010
(Percent)
30%
20%
10%
0%
-10%
-20%
-30%
-40%
Average 2000-2010
-50%
US: 8.2%
-60%
NY: 4.8%
-70%
00
01
02
US Comm M-P
Sources: NAIC.
03
04
05
06
07
08
09
10
NY Comm M-P
19
RNW Homeowners: NY vs. U.S.,
2000-2010
(Percent)
Average 2000-2010
US: 4.9%
25%
NY: 18.1%
20%
15%
10%
5%
0%
-5%
-10%
00
01
02
US HO
Sources: NAIC.
03
04
05
06
07
08
09
10
NY HO
20
RNW Workers Comp: NY vs. U.S.,
2000-2010
(Percent)
15%
10%
5%
0%
Average 2000-2010
US: 6.1%
-5%
NY: 4.6%
-10%
00
01
02
US WComp
Sources: NAIC.
03
04
05
06
07
08
09
10
NY WComp
21
All Lines: 10-Year Average RNW NY &
Nearby States
2001-2010
Vermont
12.2%
11.1%
Connecticut
10.9%
Massachussets
8.0%
7.1%
6.6%
3.2%
New Jersey
New York All Lines
profitability is below
the US and regional
average
U.S.
Pennsylvania
New York
0%
5%
Source: NAIC, Insurance Information Institute
10%
15%
Top Ten Most Expensive And Least Expensive
States For Automobile Insurance, 2009 (1)
Rank
Most
expensive states
Average
expenditure
Rank
Least
expensive states
Average
expenditure
1
D.C.
$1,128
1
North Dakota
$510
2
New Jersey
1,101
2
South Dakota
521
3
Louisiana
1,099
3
Iowa
532
4
New York
1,057
4
Idaho
555
5
Delaware
1,021
5
Nebraska
559
6
Florida
1,006
6
Kansas
578
7
Rhode Island
969
7
Wisconsin
590
8
Nevada
944
8
Maine
598
9
Connecticut
952
9
North Carolina
610
10
Maryland
929
10
Indiana
620
New York ranked 4th in 2009, with an average expenditure for
auto insurance of $1,057.
(1) Based on average automobile insurance expenditures.
Source: © 2011 National Association of Insurance Commissioners.
24
Comm. Auto: 10-Year Average RNW NY &
Nearby States
2000-2009
17.4%
14.3%
Vermont
Massachussets
12.6%
Connecticut
8.5%
U.S.
7.8%
6.9%
6.1%
New York Commercial
Auto profitability is
below the US and
regional average
Pennsylvania
New Jersey
New York
0%
5%
10%
Source: NAIC, Insurance Information Institute
15%
20%
Comm. M-P: 10-Year Average RNW NY &
Nearby States
2000-2009
18.1%
15.3%
Connecticut
13.5%
Vermont
11.9%
10.3%
8.0%
4.3%
0%
5%
10%
Source: NAIC, Insurance Information Institute
Massachussets
New Jersey
New York
Commercial MultiPeril profitability is
below the US and
regional average
15%
20%
Pennsylvania
U.S.
New York
Homeowners: 10-Year Average RNW NY
& Nearby States
2000-2009
19.9%
Connecticut
18.5%
New York
17.4%
Massachussets
14.3%
Pennsylvania
13.7%
11.9%
4.7%
0%
5%
10%
New Jersey
New York Homeowners
profitability is above the
US and regional average
15%
Source: NAIC, Insurance Information Institute
20%
25%
Vermont
U.S.
Workers Comp: 10-Year Average RNW
NY & Nearby States
2000-2010
7.5%
6.4%
New York Workers
Comp profitability is
below the US
average and regional
average
Massachussets
U.S.
6.0%
Connecticut
5.9%
Pennsylvania
5.8%
Vermont
5.0%
New York
3.5%
New Jersey
0%
2%
4%
Source: NAIC, Insurance Information Institute
6%
8%
All Lines DWP Growth: NY vs. U.S.,
2001-2010
0.0%
0.0%
0.5%
1.5%
5%
3.4%
4.0%
2.2%
0.3%
7.4%
8.9%
10%
9.8%
7.9%
15%
12.0%
12.2%
20%
14.3%
16.9%
(Percent)
-5%
-3.3%
-3.6%
-2.1%
-2.1%
0%
-10%
01
Source: SNL Financial.
02
03
US DWP: All Lines
04
05
06
07
08
NY DWP: All Lines
09
10
30
Comm. Lines DWP Growth: NY vs. U.S.,
2001-2010
-2.5%
-1.7%
-10%
-7.3%
-7.3%
4.0%
-1.2%
0.2%
2.2%
0%
5.4%
7.4%
3.3%
1.4%
10%
4.5%
5.1%
20%
15.3%
14.6%
30%
11.4%
9.0%
19.0%
24.1%
(Percent)
-20%
01
02
03
04
US DWP: Comm. Lines
Source: SNL Financial.
05
06
07
08
NY DWP: Comm. Lines
09
10
31
Personal Lines DWP Growth: NY vs. U.S.,
2001-2010
(Percent)
1.1%
2.2%
2.5%
2.2%
-5%
09
10
-0.6%
-1.5%
0%
-0.1%
1.2%
1.2%
0.7%
2.3%
2.3%
5%
5.4%
3.3%
10%
8.2%
9.4%
15%
9.2%
7.1%
11.1%
9.5%
20%
-10%
01
02
03
04
US DWP: Personal Lines
Source: SNL Financial.
05
06
07
08
NY DWP: Personal Lines
32
Private Passenger Auto DWP Growth: NY
vs. U.S., 2001-2010
(Percent)
-0.1%
1.6%
1.5%
2.0%
09
10
-0.4%
-0.1%
-4.3%
-5%
-2.6%
0%
-2.0%
0.0%
0.5%
5%
0.6%
3.6%
1.6%
7.9%
6.5%
10.2%
9.9%
10%
8.2%
10.3%
15%
-10%
01
Source: SNL Financial.
02
03
US DWP: PP Auto
04
05
06
07
08
NY DWP: PP Auto
33
Homeowner’s MP DWP Growth: NY vs.
U.S., 2001-2010
(Percent)
25%
4.9%
2.8%
09
10
0.5%
3.9%
3.5%
4.4%
8.2%
4.2%
5%
7.4%
5.5%
7.3%
7.7%
11.1%
9.7%
9.1%
7.9%
10%
8.3%
6.0%
15%
13.5%
14.4%
20%
0%
01
Source: SNL Financial.
02
03
04
US DWP: HO Lines
05
06
07
08
NY DWP: HO Lines
34
New York No-Fault Update
Fraud and Abuse Have Cost
New Yorkers Nearly $1 Billion
Since 2005
35
Average No-Fault Claim Severity,
2011:Q3*
$45,000
$40,000
$36,229
$50,000
MI, NJ, NY and FL currently are the
largest states that have the most severe
problems in their no-fault system
$35,000
$4,194
$2,919
$2,221
$1,868
MN
$5,160
NY
$5,042
FL
$4,615
$10,000
$5,510
$15,000
$7,194
$20,000
$8,019
$25,000
NY has the 4th highest auto no-fault
average claim cost (severity) in the US
$9,108
$17,664
$30,000
KY
DC
HI
ND
PA
KS
UT
MA
$5,000
$0
MI
NJ
Several States Including NY Have Severe and Growing Problems With Rampant
Fraud and Abuse in their No-Fault Systems. Claim Severities Are Up Sharply.
*Average of the four quarters ending 2011:Q3.
Source: ISO/PCI Fast Track data; Insurance Information Institute.
37
Increase in No-Fault Claim Severity:
Selected States, 2004-2011*
+48.6%
$40,000
$36,229
$35,000
+45.6%
$30,000
$25,000
$24,385
$17,664
$20,000
$15,000
+36.6%
+36.5%
+38.4%
$12,136
$10,000
$5,871
$8,019
$9,108
$6,674
$5,198
$7,194
$5,000
$0
Michigan
New Jersey
New York
2004
Florida
Minnesota
2011*
The no-fault systems in MI, NJ, NY, FL, and MN are under stress due to
rising fraud and abuse, which leads to higher premiums for honest drivers.
*2011 figures are for the 4 quarters ending 2011:Q3.
Sources: Insurance Information Institute research from ISO/PCI Fast Track data.
38
New York State No-Fault Claim
Frequency and Severity, 1997–2011:Q3
$7,000
$6,500
$6,000
$5,500
Avg. Claim
Severity Rose
63% in 5 years
after 1997
Presbyterian
Decision
$6,156
$6,052
$5,820
$5,991
$5,615
$6,094
$5,914
$6,250
$6,269
$6,530
$6,606
$7,063
$7,323
$7,378
$7,297
$7,670
$7,740
$6,699
$7,500
$7,773
$7,311
$6,958
$6,870
$8,347
$8,327
$7,888
$7,507
$8,234
$8,000
$5,675
$6,063
No-Fault Claim Severity
$8,500
Avg. Claim Severity
Frequency
Claim Frequency
was up 27% in
2011:Q1 from
2008:Q3
Claim Severity nearly
reached a record high
in 2010:Q2: $8,990
2.2%
2.0%
1.8%
1.6%
1.4%
1.2%
1.0%
1997
1998
1999
2000
1:01
1:02
1:03
1:04
2:01
2:02
2:03
2:04
3:01
3:02
3:03
3:04
4:01
4:02
4:03
4:04
5:01
5:02
5:03
5:04
6:01
6:02
6:03
6:04
7:01
7:02
7:03
7:04
8:01
8:02
8:03
8:04
9:01
9:02
9:03
9:04
10:01
10:02
10:03
10:04
11:01
11:02
11:03
$5,000
2.4%
No-Fault Claim Frequency
$9,000
$9,235
$8,727
$8,577
$9,500
$8,443
$8,177
$8,507
$8,025
$8,563
$8,726
$8,646
$8,830
$8,646
$8,990
$8,647
$8,407
$7,394
$8,285
$8,062
Avg. Claim Severity is up 44%
since 2004:Q4 though 2011:Q3
No-Fault Claim Severity
About 10% of No-Fault Claim Costs in 2011 Were Estimated to Be
Attributable to Fraud and Abuse
*2011 figure is based on data for the 4 quarters ending Q3:2011.
Source: Insurance Information Institute calculations and research from ISO/PCI Fast Track data.
41
New York’s No-Fault Fraud Tax: Estimated
Aggregate Annual Cost, 2005-2011E ($ Millions)*
Fraud Tax ($ Millions)
$250
The total fraud tax levied on
New York vehicle owners
exceeded more than $200
million in 2010 for the
second straight year.
NY’s no fault fraud tax
burden soared by 241%
between 2006 and 2009
$231.0
$203.6
$192.9
$200
$136.0
$150
$116.3
$100
$67.8
$50
$1.4
The total fraud tax levied on New
York vehicle owners will total
and estimated $136 million in
2011. The figure fell due to a
drop in average claim severity
and a flattening in frequency
$0
2005
2006
2007
2008
2009
2010
2011E
No-Fault Fraud Is Costing Honest New York State Drivers
Hundreds of Millions of Dollars
*2011 figure is based on data for the 4 quarters ending Q2:2011, adjusted by I.I.I. for 2011:Q1 data anomaly.
Source: Insurance Information Institute calculations and research from ISO/PCI Fast Track data.
44
New York’s No-Fault Fraud Tax:
Estimated Cumulative Cost, 2005-2011E ($ Millions)*
Cumultaive Fraud Tax ($ Millions)
The cumulative no-fault
fraud tax burden on New
York vehicle owners
exceeded $949 million from
2005 through 2011
$1,000
$900
$800
$949.0
$812.9
$700
$609.3
$600
$500
$400
$378.4
$300
$200
$100
$185.5
$69.2
$1.4
$0
2005
2006
2007
2008
2009
2010
2011E
Cumulative No-Fault Fraud Has Cost Honest New York State
Drivers and Their Insurers Nearly $1 Billion Since 2005
*2011 figure is based on data for the 4 quarters ending Q2:2011, adjusted by I.I.I. for 2011:Q1 data anomaly.
Source: Insurance Information Institute calculations and research from ISO/PCI Fast Track data.
45
Global Catastrophe Loss
Developments and Trends
2011 Will Rewrite Catastrophe Loss
and Insurance History
But Will Losses Turn the Market?
52
Global Catastrophe Loss Summary:
2011
 2011 Was the Highest Loss Year on Record for Economic Losses Globally
 Extraordinary accumulation of severe natural catastrophe: Earthquakes, tsunami, floods
and tornadoes are the primary causes of loss
 $380 Billion in Economic Losses Globally (New Record)
 New record, exceeding the previous record of $270B in 2005
 $105 Billion in Insured Losses Globally
 2011 losses were 2.5 times 2010 insured losses of $42B
 Second only to 2005 on an inflation adjusted basis (new record on a unadjusted basis)
 Over 5 times the 30-year average of $19B
 $72.8 Billion in Economic Losses in the US
 Represents a 129% increase over the $11.8 billion amount through the first half of 2010
 $35.9 Billion in Insured Losses in the US Arising from 171 CAT Events
 Fifth highest year on record
 Represents 51% increase over the $23.8 billion total in 2010
Source: Munich Re; Insurance Information Institute.
53
Natural Loss Events, 2011
World Map
Winter Storm Joachim
France, Switzerland,
Germany, 15–17 Dec.
Wildfires
Canada, 14–22 May Severe storms, tornadoes
USA, 20–27 May
Hurricane Irene
USA, Caribbean
22 Aug.–2 Sept.
Floods
USA, April–May
Drought
Severe
storms, tornadoes
USA, Oct. 2010–
USA,
22–28
April
ongoing
Flash floods, floods
Italy, France, Spain
4–9 Nov.
Earthquake
Turkey
23 Oct.
Earthquake, tsunami
Japan, 11 March
Wildfires
USA, April/Sept.
Floods
Pakistan
Aug.–Sept.
Floods, flash floods
Australia,
Dec. 2010–Jan. 2011
Landslides, flash floods
Brazil, 12/16 Jan.
Natural catastrophes
Selection of significant
loss events (see table)
Source: MR NatCatSERVICE
Cyclone Yasi
Australia, 2–7 Feb.
Floods
Thailand
Aug.–Nov.
Floods, landslides
Guatemala, El Salvador
11–19 Oct.
Number of Events: 820
Tropical Storm Washi
Philippines, 16–18 Dec.
Drought
Somalia
Oct. 2010–Sept. 2011
Geophysical events
(earthquake, tsunami, volcanic activity)
Meteorological events
(storm)
Earthquake
New Zealand, 22 Feb.
Earthquake
New Zealand, 13 June
Hydrological events
(flood, mass movement)
Climatological events
(extreme temperature, drought, wildfire)
54
Top 16 Most Costly World Insurance
Losses, 1970-2011**
(Insured Losses, 2011 Dollars, $ Billions)
$50
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
Taken as a single event, the
Spring 2011 tornado and
thunderstorm season would
likely become the 5th
costliest event in global
insurance history
5 of the top 14 most
expensive
catastrophes in world
history have occurred
within the past 2 years
$47.6
$37.5
$19.1
$11.9
$9.7 $10.0
$9.3
$8.5
$8.3
$8.1
$7.7
Hugo
(1989)
Winter
Storm
Daria
(1991)
Chile
Quake
(2010)
$21.3
$24.0 $25.0
$13.0 $13.1
Ivan
Typhoon Charley Thailand Wilma
New Ike
Northridge Spring WTC
(2004) Mirielle (2004) Floods (2005) Zealand (2008) (1994)Tornadoes/ Terror
(1991)
(2011)
Quake
Storms Attack
(2011)
(2011) (2001)
*Average of range estimates of $35B - $40B as of 1/4/12; Privately insured losses only.
**Figures do not include federally insured flood losses.
Sources: Swiss Re sigma 1/2011; Munich Re; Insurance Information Institute research.
Andrew Japan Katrina
(1992) Quake, (2005)
Tsunami
(2011)*
60
U.S. Insured Catastrophe
Loss Update
2011 Was One of the Most Expensive
Years on Record
63
Top 14 Most Costly Disasters
in U.S. History
(Insured Losses, 2011 Dollars, $ Billions)
$50
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
Taken as a single event, the Spring
2011 tornado and storm season are is
the 4th costliest event in US
insurance history
$19.1
$4.3
$4.4
$5.5
$6.5
Irene
(2011)
Jeanne
(2004)
Frances
(2004)
Rita
(2005)
$7.7
$8.5
$9.0
Hugo
(1989)
Ivan
(2004)
Charley
(2004)
Hurricane Irene became
the 11th most expense
hurricane in US history
$21.3
$47.6
$24.0 $25.0
$11.9 $13.1
Wilma
(2005)
Ike
Northridge Spring
9/11
(2008)
(1994) Tornadoes Attack
& Storms* (2001)
(2011)
Andrew
(1992)
Katrina
(2005)
*Losses will actually be broken down into several “events” as determined by PCS. Includes losses for the period April 1 – June 30.
Sources: PCS; Insurance Information Institute inflation adjustments.
64
Natural Disasters in the United States,
1980 – 2011
Number of Events (Annual Totals 1980 – 2011)
300
There were 117 natural
disaster events in 2011
250
Number
200
150
100
37
8
50
51
2
1980
1982
1984
1986
1988
Geophysical
(earthquake, tsunami,
volcanic activity)
Source: MR NatCatSERVICE
1990
1992
1994
1996
1998
Meteorological (storm)
Hydrological
(flood, mass movement)
2000
2002
2004
2006
2008
2010
Climatological
(temperature extremes,
drought, wildfire)
65
Losses Due to Natural Disasters in the US,
1980–2011 (Overall & Insured Losses)
(Overall and Insured Losses)
(2011 Dollars, $ Billions)
2011 was the 5th most
expensive year on
record for insured
catastrophe losses in
the US.
Approximately 50% of
the overall cost of
catastrophes in the
US was covered by
insurance in 2011
2011
Overall Losses: $72.8 Bill
Insured Losses: $35.9 Bill
Insured losses (in 2011 values)
Overall losses (in 2011 values)
Source: MR NatCatSERVICE
© 2011 Munich Re
66
US Insured Catastrophe Losses
($ Billions, 2011 Dollars)
$100
$32.6
$14.1
$28.5
$10.3
$11.2
$71.7
$32.9
$15.9
$7.4
$6.0
$11.3
$14.0
$3.7
$10.7
$12.3
$8.6
$7.8
$4.7
$13.7
$40
$25.8
$36.9
$60
$33.9
$80
$20
Record Tornado
Losses Caused
2011 CAT Losses
to Surge
$7.3
$120
$100.0
$100 Billion CAT Year is
Coming Eventually
$0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*20??
US CAT Losses in 2011 Were the 5th Highest in US History on An
Inflation Adjusted Basis
*PCS estimate through Sept. 30, 2011.
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.
68
2011’s Most Expensive Catastrophes,
Insured Losses
$7,300
Thunderstorms, Apr. 22-26
$6,900
Thunderstorms, May 20-27
$5,000
Hurricane Irene, Aug. 26-28**
$2,000
Thunderstorms, Apr. 3-5
$1,510
Thunderstorms, Apr. 8-11
$1,400
Thunderstorms, Apr. 14-16
$1,200
Thunderstorms, Jun. 16-22
Texas Drought, 2011*
$1,000
Thunderstorms, Jul. 10-14
$980
Winter Storm, Jan. 31-Feb. 3
$975
Thunderstorms, Aug. 18-19
$840
Thunderstorms, Apr. 19-20
$830
Wildfire, Sep. 4-19
$530
Flooding, April*
$500
$0
Includes
approximately
$2B in losses
for May 22
Joplin tornado
$1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000
**Includes $700 million in flood losses insured through the National Flood Insurance Program.
Source: PCS except as noted by “*” which are sourced to Munich Re; Insurance Information Institute.
Includes
$1.65B in AL,
mostly in the
Tuscaloosa
and
Birmingham
areas
8.1
4.4
2010
2008
2006
1.6
2.6
2.7
3.3
3.3
1.6
2002
2004
1.6
2000
1998
1.0
1996
5.0
5.4
3.6
2.9
2.3
2.1
1990
1992
1.2
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1.2
0.4
0.8
1.3
0.3
0.4
0.7
1.5
1.0
0.4
0.4
0.7
1.8
1.1
0.6
1.4
2.0
1.3
2.0
0.5
0.5
0.7
1966
3.0
3.6
0.4
1964
1962
0.8
1.1
1.1
0.1
0.9
1
0
1960
5
4
3
2
5.9
1960s: 1.04
1970s: 0.85
1980s: 1.31
1990s: 3.39
2000s: 3.52
2010s: 6.70*
8
7
6
3.3
2.8
10
9
8.8
Avg. CAT Loss
Component of the
Combined Ratio
by Decade
1994
Combined Ratio Points
9.0
Combined Ratio Points Associated with
Catastrophe Losses: 1960 – 2011*
The Catastrophe Loss Component of Private Insurer Losses Has
Increased Sharply in Recent Decades
*Insurance Information Institute estimates for 2010 and 2011 based on A.M. Best data.
Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for
losses ultimately paid by foreign insurers and reinsurers.
Source: ISO; Insurance Information Institute.
71
U.S. Thunderstorm Loss Trends,
1980 – 2011
Thunderstorm losses in
2011 totaled a record
$25.8 billion
Average
thunderstorm
losses are up more
than 5 fold since
the early 1980s
Source: Property Claims Service, MR NatCatSERVICE
Hurricanes get all the headlines,
but thunderstorms are consistent
producers of large scale loss.
2008-2011 are the most expensive
years on record.
72
U.S. Winter Storm Loss Trends,
1980 – 2011
Insured winter storm losses in 2011
totaled $2.0 billion. Average winter
storm losses have nearly doubled
since the early 1980s
Source: Property Claims Service, MR NatCatSERVICE
73
U.S. Insured Catastrophe Losses by
Cause of Loss, 2011 ($ Millions)
Flood , $535, (1.5%)
Geological Events, $50, (0.1%)
Winter Storms, $2,017
Wildfires, $855
Other, $1,000
2.8%
Hurricanes & Tropical Storms,
1.5%
$5,510
5.6%
15.4%
Thunderstorm/
Tornado losses
were 2.5 times
above the 30year average
72.1%
Thunderstorms (Incl.
Tornadoes , $25,813
2011’s insured loss
distribution was
unusual with tornado
and thunderstorm
accounting for the
vast majority of loss
.
Source: ISO’s Property Claim Services Unit, Munich Re; Insurance Information Institute.
76
2011: Nowhere to Run,
Nowhere to Hide
Most of the Country East of
the Rockies Suffered Severe
Weather in 2011, Impacting
Most Insurers
78
Number of Federal Disaster
Declarations, 1953-2011*
0
99
81
75
59
63
48
52
56
44
32
36
32
38
43
45
11
31
34
27
28
23
24
21
15
23
22
25
29
17
17
19
11
11
22
20
25
25
12
12
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
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*
7
7
13
17
18
16
16
40
30
38
42
48
46
46
60
20
69
65
80
The number of federal
disaster declarations set a
new record in 2011, with 99,
shattering 2010’s record 81
declarations.
50
45
45
49
100
There have been 2,049
federal disaster
declarations since
1953. The average
number of declarations
per year is 34 from
1953-2010, though that
few haven’t been
recorded since 1995.
75
120
The Number of Federal Disaster Declarations Is Rising and Set a New
Record in 2011
*Through December 31, 2011.
Source: Federal Emergency Management Administration: http://www.fema.gov/news/disaster_totals_annual.fema ;
Insurance Information Institute.
Federal Disasters Declarations by State,
1953 – 2011: Highest 25 States*
Over the past
nearly 60 years,
Texas has had the
highest number of
Federal Disaster
Declarations
39
42
45
45
44
40
40
46
47
47
47
48
48
50
51
53
53
55
55
63
50
50
58
60
65
70
70
Disaster Declarations
80
78
90
86
100
30
20
10
0
TX CA OK NY FL LA AL KY AR MO IL MS TN IA MN KS NE PA WV OH VA WV ND NC IN
*Through Dec. 31, 2011.
Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.
80
Federal Disasters Declarations by State,
1953 – 2011: Lowest 25 States*
Over the past nearly 60
years, Wyoming, Utah
and Rhode Island had
the fewest number of
Federal Disaster
Declarations
9
9
10
9
11
14
15
16
17
17
22
23
24
24
25
25
26
26
27
33
35
36
39
33
20
20
28
30
36
Disaster Declarations
40
39
50
0
ME SD AK GA WI VT NJ NH OR MA PR HI MI AZ NM ID MD MT NV CT CO SC DE DC RI UT WY
*Through Dec. 31. Includes Puerto Rico and the District of Columbia.
Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.
81
SPRING 2011 TORNADO &
SEVERE STORM OUTBREAK
2011 Losses Are Putting Pressure on
US P/C Insurance and Reinsurance Markets
82
Number of Tornadoes and Related
Deaths, 1990 – 2011
800
600
1,894
1,282
1,098
1,103
1,376
1,216
1,148
1,173
1,234
1,082
1,297
1,173
1,071
941
1,000
1,132
1,200
1,133
1,400
552
There were 1,884
tornadoes recorded
in the US in 2011
400
600
500
400
300
200
Number of Deaths
Number of Tornadoes
1,600
1,345
1,424
Number of Deaths
1,800
1,692
1,819
1,156
Number of Tornadoes
1,264
2,000
Tornadoes claimed more than 550
lives in 2011, the most since 1925
100
200
0
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11P
Insurers Expect to Pay at Least $2 Billion Each for the April 2011
Tornadoes in Alabama and a Similar Amount for the May Storms in Joplin
Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service.
83
Location of Tornadoes in the US, 2011
1,894 tornadoes
killed 552 people
in 2011, including
at least 340 on
April 26 mostly in
the Tuscaloosa
area, and 130 in
Joplin on May 22
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#
85
Insurers Making a Difference in
Impacted Communities
Destroyed home in
Tuscaloosa. Insurers
will pay some 165,000
claims totaling $2 billion
in the Tuscaloosa/
Birmingham areas alone.
Presentation of a check
to Tuscaloosa Mayor
Walt Maddox to the
Tuscaloosa Storm
Recovery Fund
Source: Insurance Information Institute
86
Location of Large Hail Reports in the
US, 2011
There were 9,417
“Large Hail”
reports in 2011,
causing extensive
damage to homes,
businesses and
vehicles
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#
87
Location of Wind Damage Reports in
the US, 2011
There were 18,685
“Wind Damage”
reports through
Dec. 27, causing
extensive damage
to homes and,
businesses
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#
88
Severe Weather Reports, 2011
There were
29,996 severe
weather reports
in 2011;
including 1,894
tornadoes;
9,417 “Large
Hail” reports
and 18,685 high
wind events
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#
89
New York’s Catastrophe
Loss History: 2011
NY May Not Be a Gulf Coastal State,
but It is No Stranger to Catastrophe
91
Severe Weather Reports in New York,
January 1—December 31, 2011
There were 653
severe weather
reports in NY in 2011
MN
Total Reports = 653
Tornadoes = 17 (Red)
Hail Reports = 197 (Green)
Wind Reports = 439 (Blue)
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#
92
The BIG Question:
When Will the Market Turn?
Are Catastrophes and Other Factors
Pressuring Insurance Markets?
93
Criteria Necessary for a “Market Turn”:
All Four Criteria Must Be Met
Criteria
Sustained
Period of
Large
Underwriting
Losses
Material
Decline in
Surplus/
Capacity
Status
Comments
•Apart from 2011 CAT losses, overall p/c underwriting losses
remain modest
•Combined ratios (ex-CATs) still in low 100s (vs. 110+ at
onset of last hard market)
Early Stage, •Prior-year reserve releases continue to reduce u/w losses,
Inevitable boost ROEs, though more modestly
Entered 2011
At Record
High; Since
Fallen
Tight
Reinsurance Somewhat in
Market
Place
Renewed
Underwriting Some Firming
& Pricing
esp. in
Discipline
Property, WC
•Surplus hit a record $565B as of 3/31/11
•Fell by 4.6% through 9/30/11 (latest available)
•Little excess capacity remains in reinsurance markets
•Weak growth in demand for insurance is insufficient to
absorb much excess capacity
•Much of the global “excess capacity” was eroded by cats
•Higher prices in Asia/Pacific
•Modestly higher pricing for US risks
•Commercial lines pricing trends have turned from negative
to flat or up in some lines (property, WC); Casualty is flat.
•Competition remains intense as many seek to maintain
market share
Sources: Barclays Capital; Insurance Information Institute.
94
1. UNDERWRITING
Have Underwriting Losses
Been Large Enough for Long
Enough to Turn the Market?
96
P/C Insurance Industry
Combined Ratio, 2001–2011:Q3*
As Recently as 2001,
Insurers Paid Out
Nearly $1.16 for Every
$1 in Earned
Premiums
Heavy Use of
Reinsurance
Lowered Net
Losses
Relatively
Low CAT
Losses,
Reserve
Releases
Relatively
Low CAT
Losses,
Reserve
Releases
120
115.8
110
Cyclical
Deterioration
Best
Combined
Ratio Since
1949 (87.6)
Avg. CAT
Losses,
More
Reserve
Releases
108.2
107.5
100.1
100
Higher
CAT
Losses,
Shrinking
Reserve
Releases,
Toll of Soft
Market
101.0
100.8
98.4
99.3
100.8
95.7
92.6
90
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011*
* Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=109.9
Sources: A.M. Best, ISO.
97
Underwriting Gain (Loss)
1975–2011*
($ Billions)
$35
$25
Cumulative
underwriting deficit
from 1975 through
2010 is $455B
$15
Underwriting
losses in
2011 at $34.9
through Q3
will be
largest since
2001
$5
-$5
-$15
-$25
-$35
-$45
-$55
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 1011*
Large Underwriting Losses Are NOT Sustainable
in Current Investment Environment
* Includes mortgage and financial guaranty insurers in all years
Sources: A.M. Best, ISO; Insurance Information Institute.
Financial Strength &
Underwriting
Cyclical Pattern is P-C Impairment
History is Directly Tied to
Underwriting, Reserving & Pricing
101
0
16
19
21
18
14
15
12
16
18
19
28
31
35
41
49
50
47
60
58
5
9
13
12
9
9
11
7
8
69
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
10
15
12
20
16
14
13
19
30
29
34
40
50
48
50
31
34
60
49
70
36
3 small insurers in
Missouri did encounter
problems in 2011
following the May
tornado in Joplin. They
were absorbed by a
larger insurer and all
claims were paid.
55
P/C Insurer Impairments, 1969–2011
The Number of Impairments Varies Significantly Over the P/C Insurance
Cycle, With Peaks Occurring Well into Hard Markets
Source: A.M. Best Special Report “1969-2011 Impairment Review,” January 23, 2012; Insurance Information Institute.
Reasons for US P/C Insurer
Impairments, 1969–2010
Historically, Deficient Loss Reserves and Inadequate Pricing Are
By Far the Leading Cause of P-C Insurer Impairments.
Investment and Catastrophe Losses Play a Much Smaller Role
Reinsurance Failure
Sig. Change in Business
3.6%
4.0%
Misc.
8.6%
Investment Problems
(Overstatement of Assets)
7.3%
40.3%
Affiliate Impairment
Deficient Loss Reserves/
Inadequate Pricing
7.8%
7.1%
Catastrophe Losses
7.8%
Alleged Fraud
13.6%
Rapid Growth
Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.
104
Performance by Segment:
Personal & Commercial Lines
107
158.4
Homeowners Insurance Combined
Ratio: 1990–2011P
170
160
116.0
106.7
105.7
116.8
95.6
100.3
109.3
94.4
88.9
90
98.2
100
121.7
111.4
108.2
109.4
118.4
112.7
101.0
110
113.6
120
117.7
130
113.0
140
121.7
150
80
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11P
Homeowners Line Could Deteriorate in 2011 Due to Large Cat
Losses. Extreme Regional Variation Can Be Expected Due to
Local Catastrophe Loss Activity
Sources: A.M. Best (1990-2010); Insurance Information Institute (2011P).
08
09
10 11P
100.5
101.0
06
101.3
05
100.2
95.5
04
98.3
95.1
95
94.3
96
98.4
95
104.2
101.0
94
101.1
101.3
93
100
99.5
101.3
105
101.7
110
103.5
109.5
115
107.9
Private Passenger Auto Combined
Ratio: 1993–2011P
90
85
80
97
98
99
00
01
02
03
07
Private Passenger Auto Accounts for 34% of Industry Premiums and
Remains the Profit Juggernaut of the P/C Insurance Industry
Sources: A.M. Best (1990-2010); Insurance Information Institute (2011P).
Commercial Lines Combined Ratio,
1990-2012F
Commercial Lines Combined Ratio
125
122.3
118.8
120
115
110
Commercial lines
underwriting
performance in 2011 was
the worst since 2002
112.5
110.2
109.4
112.3
111.1
109.7
110.2
109.5
110.2
108.2
107.6
105.4
104.1
105
104.1
103.9
102.7
102.5
102.0
98.9
100
95
93.7
91.2
Source: A.M. Best; Insurance Information Institute
12F
11P
10
09
08
07
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
90
104.4
07
08
118.0
116.8
110.6
103.6
03
98.4
02
102.7
97
107.0
96
110.0
101.0
100
100.0
105
97.0
110
102.0
115
107.0
120
110.9
115.3
125
118.2
130
121.7
Workers Compensation Combined
Ratio: 1994–2011P
95
90
85
80
94
95
98
99
00
01
04
05
06
09
Workers Comp Underwriting Results Are
Deteriorating Markedly and the Worst They
Have Been in a Decade
Sources: A.M. Best (1994-2010); Insurance Information Institute (2011P).
10 11P
2. SURPLUS/CAPITAL/CAPACITY
Have Large Global Losses Reduced
Capacity in the Industry, Setting
the Stage for a Market Turn?
112
Policyholder Surplus,
2006:Q4–2011:Q3
($ Billions)
2007:Q3
Previous Surplus Peak
$580
$564.7
$556.9
$544.8
$560
$540
$520
$500
$480
$460
$440
$559.1
$540.7
$530.5
$521.8
$517.9$515.6
$512.8
$505.0
$496.6
$487.1
$478.5
The Industry now has $1 of
surplus for every $0.83 of NPW,
close to the strongest claimspaying status in its history.
$538.6
$511.5
$490.8
$463.0
$455.6
$437.1
Surplus as of 9/30/11 was
down 4.6% below its all time
record high of $564.7B set
as of 3/31/11. Further
declines are possible.
$420
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
*Includes $22.5B of paid-in
capital from a holding
company parent for one
insurer’s investment in a
non-insurance business in
early 2010.
Sources: ISO, A.M .Best.
Quarterly Surplus Changes Since 2011:Q1 Peak
11:Q2: -$5.6B (-1.0%)
11:Q3: -$26.1B (-4.6%)
114
3. REINSURANCE MARKET
CONDITIONS
Record Global
Catastrophes Activity is
Pressuring Pricing
121
Global Property Catastrophe Rate on
Line Index, 1990-2011 YTD (6/1/11)
A modest increase in global property catastrophe
reinsurance pricing was evident in June 1 renewals in
the wake of record global catastrophe losses.
Jan. 1, 2012 renewals were up modestly or flat in the
US but higher in CAT-impacted areas.
Source: Guy Carpenter, GC Capital Ideas.com, September 26, 2011.
Historical Capital Levels of Guy Carpenter
Reinsurance Composite, 1998—2Q11
Most excess
reinsurance capacity
was removed from
the market in 2011,
but there does not
appear to be a
shortage, leading
relatively flat 2012
reinsurance renewals
except in areas hit
hard by CATs.
Source: Guy Carpenter, GC Capital Ideas.com, November 23, 2011.
4. RENEWED PRICING
DISCIPLINE
Is There Evidence of a Broad
and Sustained Shift in Pricing?
128
Soft Market Persisted in 2010 but
Growth Returned: More in 2011?
(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%
15%
2011:Q3
growth
was
+3.1%
10%
5%
0%
NWP was up
0.9% in 2010
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*
-5%
*2011 figure is through first 9 months vs. same period in 2010
Shaded areas denote “hard market” periods
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
129
5%
0%
-5%
-10%
Sources: ISO, Insurance Information Institute.
2011:Q3
2011:Q2
2011:Q1
2010:Q4
2010:Q3
2010:Q2
2010:Q1
2009:Q4
2009:Q3
2009:Q2
2009:Q1
2008:Q4
2008:Q3
2008:Q2
2008:Q1
2007:Q4
2007:Q3
2007:Q2
2007:Q1
2006:Q4
2006:Q3
2006:Q2
2006:Q1
2005:Q1
-1.8%
-0.7%
-4.4%
-3.7%
-5.3%
-5.2%
-1.4%
-1.3%
-1.9%
-1.6%
-4.6%
2005:Q2
-4.1%
2005:Q3 -5.8%
2005:Q4
-1.6%
2004:Q4
2004:Q3
2004:Q2
2004:Q1
2003:Q4
2003:Q3
2003:Q2
2003:Q1
2002:Q4
2002:Q3
1.3%
2.3%
1.3%
3.5%
1.6%
4.1%
0.5%
2.1%
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:Q2
20%
2002:Q1
P/C Net Premiums Written: % Change,
Quarter vs. Year-Prior Quarter
Through 2011:Q3, growth
in personal lines
predominating cos. (+3.1%)
and commercial lines
predominating cos.
(+3.9%), diversified (+2.3%)
Finally! Back-to-back quarters of net written premium growth
(vs. the same quarter, prior year)
130
Monthly Change* in Auto Insurance
Prices, 1991–2011*
10%
8%
Cyclical peaks in PP
Auto tend to occur
approximately every 10
years (early 1990s, early
2000s and likely the
early 2010s)
Pricing peak
occurred in 2010
6%
4%
2%
0%
“Hard” markets
tend to occur
during
recessionary
periods
-2%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
*Percentage change from same month in prior year; through October 2011; seasonally adjusted
Note: Recessions indicated by gray shaded columns.
Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
131
Average Commercial Rate Change,
All Lines, (1Q:2004–4Q:2011)
(Percent)
2%
0%
-2%
-4%
-6%
-8%
-10%
-12%
-14%
-16%
-0.1%
1Q04
-3.2%
2Q04
3Q04
-5.9%
-7.0%
4Q04
-9.4%
1Q05
2Q05
-9.7%
-8.2%
3Q05
-4.6%
4Q05
1Q06
-2.7%
2Q06
-3.0%
-5.3%
3Q06
-9.6%
4Q06
1Q07
-11.3%
-11.8%
2Q07
3Q07 -13.3%
4Q07
-12.0%
1Q08-13.5%
2Q08 -12.9%
3Q08
-11.0%
-6.4%
4Q08
-5.1%
1Q09
2Q09
-4.9%
-5.8%
3Q09
-5.6%
4Q09
1Q10
-5.3%
2Q10
-6.4%
-5.2%
3Q10
-5.4%
4Q10
1Q11
-2.9%
2Q11
-0.1%
0.9%
3Q11
2.8%
4Q11
4%
Pricing as of Q3:2011 was
positive for the first time
since 2003. Slightly stronger
gains in Q4.
KRW Effect
Source: Council of Insurance Agents & Brokers (1Q04-4Q11); Insurance Information Institute
Q2 2011 marked the
30th consecutive
quarter of price
declines
132
Change in Commercial Rate Renewals,
by Account Size: 1999:Q4 to 2011:Q3
Percentage Change (%)
Peak = 2001:Q4
+28.5%
Pricing Turned
Negative in Early
2004 and Has
Been Negative
Ever Since
Pricing turned positive (+0.9%)
in Q3:2011, the first increase in
nearly 7 years (Q4:2003)
KRW Effect: No
Lasting Impact
Trough = 2007:Q3
-13.6%
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
133
Change in Commercial Rate Renewals,
by Line: 2011:Q4
Percentage Change (%)
Property lines are showing
larger increases than
casualty lines, with the
exception of workers
compensation
8.0%
7.0%
7.5%
5.7%
6.0%
5.0%
2.0%
2.0%
2.1%
2.2%
2.3%
Comml Auto
D&O
General
Liability
Umbrella
3.0%
EPL
4.0%
2.7%
3.0%
2.0%
Workers
Comp
Commercial
Property
Bus.
Interruption
Construction
0.0%
0.8%
Surety
1.0%
Major Commercial Lines Renewed Uniformly Upward in
Q4:2011 for Only the Second Time Since 2003; Property Lines
& Workers Comp Leading the Way
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
135
Direct Premiums Written: All P/C Lines
Percent Change by State, 2005-2010
Top 25 States
44.8
45
North Dakota is the growth
juggernaut of the P/C
insurance industry—too
bad nobody lives there…
35
30
3.0
AL
1.1
3.1
WA
TN
3.7
ID
1.2
3.8
NC
AK
4.7
AR
1.5
5.2
UT
WI
5.4
6.8
SC
LA
SD
0
ND
5
DC
7.1
8.1
MS
NM
8.1
DE
11.9
MT
9.1
12.3
TX
10
NE
12.4
13.9
KS
IA
14.2
15
WV
16.6
OK
20
17.3
19.8
25
WY
25.4
Pecent change (%)
40
Sources: SNL Financial LC.; Insurance Information Institute.
139
Direct Premiums Written: All P/C Lines
Percent Change by State, 2005-2010
Bottom 25 States
Sources: SNL Financial LC; Insurance Information Institute.
-15.5
-13.5
NV
CA
-8.3
AZ
-14.2
-8.2
MA
ME
HI
NJ
CO
RI
OH
VT
CT
IL
MI
-8
NH
-5.8
-4.8
-4.7
-4.5
-4.1
-3.6
-3.4
-2.9
-2.8
FL
OR
VA
MN
GA
NY
IN
KY
-20
MO
-15
PA
States with the poorest
performing economies also
produced the most negative
net change in premiums of
the past 5 years
US
-10
-5.7
US Direct Premiums
Written declined by
1.6% between 2005
and 2010
-2.5
-1.7
-1.6
-1.4
-0.8
-0.5
-0.3
-0.1
-5
MD
Pecent change (%)
0
0.1
0.6
0.7
5
140
INVESTMENTS:
THE NEW REALITY
Investment Performance is a
Key Driver of Profitability
Does It Influence
Underwriting or Cyclicality?
142
Property/Casualty Insurance Industry
Investment Gain: 1994–2011:Q31
($ Billions)
$70
$64.0
$58.0
$60
$52.3
$55.7
$51.9
$52.9
$48.9
$47.2
$50
$59.4
$56.9
$45.3
$44.4
$42.8
$40 $35.4
$39.2
$36.0
$42.0
$31.7
$30
Investment gains through
Q3:2011 were $2.1B above the
same period in 2010—a
surprise given falling rates
and flat stock markets
$20
$10
$0
94
95
96
97
98
99
00
01
02
03
04
05*
06
07
08
09
10 11:Q3
Investment Gains through Q3:2011 Were Surprisingly Robust. Investment
Gains Recovered Significantly in 2010 Due to Realized Investment Gains;
The Financial Crisis Caused Investment Gains to Fall by 50% in 2008
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.
-$7.98
-$19.81
-$15
-$20
-$25
-$5.70
$5.50
$8.92
$3.52
$9.70
-$1.21
$6.61
$6.63
$9.13
$11.2B
positive
swing
$16.21
$13.02
$10.81
$9.24
$6.00
$9.82
$9.89
$1.66
$5
$0
-$5
-$10
$4.81
$20
$15
$10
$2.88
($ Billions)
$18.02
P/C Insurer Net Realized
Capital Gains/Losses, 1990-2011:3Q
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 1011:Q3
Insurers Are Posting Net Realized Capital Gains in 2011 for the First Time
Since 2007. Realized Capital Losses Were the Primary Cause
of 2008/2009’s Large Drop in Profits and ROE
Sources: A.M. Best, ISO, Insurance Information Institute.
144
Treasury Yield Curves:
Pre-Crisis (July 2007) vs. Dec. 2011
6%
5%
4%
3%
2%
4.82%
4.96%
5.04%
4.96%
4.82%
4.82%
4.88%
Treasury yield curve remains
near its most depressed level
in at least 45 years.
Investment income is falling
as a result. Fed is unlikely to
hike rates until well into 2014.
5.00%
4.93%
5.00%
5.19%
2.98%
2.67%
1.98%
1.43%
0.89%
1%
0.00%
0.01%
0.05%
0.12%
0.26%
1M
3M
6M
1Y
2Y
0.39%
November 2011 Yield Curve*
Pre-Crisis (July 2007)
0%
3Y
5Y
7Y
10Y
20Y
30Y
The Fed Is Actively Signaling that it Is Determined to Keep Rates Low
Through 2013 and Possibly into 2014
Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
147
Reduction in Combined Ratio Necessary to Offset
1% Decline in Investment Yield to Maintain
Constant ROE, by Line*
s
ne
i
L
-5.7%
-5.2%
-4.3%
-3.7%
-3.3%
-3.3%
-3.1%
-2.1%
-1.9%
-3.6%
-2.0%
-1.8%
0%
-1%
-2%
-3%
-4%
-5%
-6%
-7%
-8%
-1.8%
s
ty
l
e
e
o
p
t
r
a
s
n
i
a
ro
p
l
Li
y
rc
Su
Au
s
o
t
P
C
a
/
al
r
e
l
s
s
n
y
n
t
a
t
P
u
M
m
m
m
m
li
P
di
so
s
pl
rra
d
e
m
m
m
m
r
r
r
t
e
C
a
e
d
o
o
r
o
o
Pe
Pv
Pe
C
C
C
C
C
Fi
W
Su
M
W
to
u
A
R
a
ur
s
n
ei
**
e
nc
-7.3%
Lower Investment Earnings Place a Greater Burden on
Underwriting and Pricing Discipline
*Based on 2008 Invested Assets and Earned Premiums
**US domestic reinsurance only
Source: A.M. Best; Insurance Information Institute.
148
Inflation
Is it a Threat to Claim Cost
Severities
155
Annual Inflation Rates, (CPI-U, %),
1990–2017F
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 reduced inflationary
pressures in 2009/10
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
3.2
2.8
2.3
2.1 2.1
1.9
1.5
Higher energy,
commodity and food
prices pushed up
inflation in 2011, but
not longer turn
inflationary
expectations.
2.4 2.4 2.4 2.5
1.6
1.3
1.0
0.0
-1.0
-0.4
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F13F14F15F16F17F
The slack in the U.S. economy suggests that inflationary pressures should
remain subdued for an extended period of times. Energy, health care and
commodity prices, plus U.S. debt burden, remain longer-run concerns
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/11 and 1/12 (forecasts).
156
The Strength of the Economy
Will Influence P/C Insurer
Growth Opportunities
Growth Would Also Help Absorb
Excess Capital
167
1.6%
2%
0.6%
4%
The Q4:2008 decline was
the steepest since the
Q1:1982 drop of 6.8%
1.1%
1.8%
2.5%
3.6%
3.1%
2.7%
0.9%
3.2%
2.3%
2.9%
6%
4.1%
Real GDP Growth (%)
5.0%
3.9%
3.8%
2.5%
2.3%
0.4%
1.3%
1.8%
2.8%
2.0%
2.3%
2.3%
2.7%
2.6%
2.7%
2.8%
3.0%
US Real GDP Growth*
-2%
-4%
-6%
-8%
2000
2001
2002
2003
2004
2005
2006
07:1Q
07:2Q
07:3Q
07:4Q
08:1Q
-0.7%
08:2Q
08:3Q
-4.0%
08:4Q-6.8%
09:1Q
-4.9%
09:2Q
-0.7%
09:3Q
09:4Q
10:1Q
10:2Q
10:3Q
10:4Q
11:1Q
11:2Q
11:3Q
11:4Q
12:1Q
12:2Q
12:3Q
12:4Q
13:1Q
13:2Q
13:3Q
13:4Q
0%
Recession began in Dec.
2007. Economic toll of
credit crunch, housing
slump, labor market
contraction has been
severe but modest
recovery is underway
2011 got off to a sluggish
start, but growth is
expected to proceed at a
modest pace in 2012-2013
Demand for Insurance Continues To Be Impacted by Sluggish Economic
Conditions, but the Benefits of Even Slow Growth Will Compound and
Gradually Benefit the Economy Broadly
*
Estimates/Forecasts from Blue Chip Economic Indicators.
Source: US Department of Commerce, Blue Economic Indicators 1/12; Insurance Information Institute.
168
1.9
1.7
1.5
1.3
1.1
0.9
0.7
0.5
The plunge and lack of recovery in
homebuilding and in construction in general
is holding back payroll exposure growth
0.55
0.59
0.60
0.71
0.87
2.1
New home
starts plunged
72% from
2005-2009; A
net annual
decline of 1.49
million units,
lowest since
records began
in 1959
1.19
1.01
1.20
1.29
1.46
1.35
1.48
1.47
1.62
1.64
1.57
1.60
1.71
1.85
1.96
2.07
1.80
1.36
0.91
(Millions of Units)
1.34
1.23
1.32
1.38
1.42
New Private Housing Starts, 1990-2022F
Job growth,
improved credit
market conditions
and demographics
will eventually boost
home construction
0.3
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F12F13F14F15F 16F17F 1822F
Little Exposure Growth Likely for Homeowners Insurers Until at least 2014.
Also Affects Commercial Insurers with Construction Risk Exposure, Surety
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 1/12); Insurance Information Institute.
170
Auto/Light Truck Sales, 1999-2022F
11.6
10.4
15.4
15.5
15.4
15.1
14.7
14.4
13.7
12.8
New auto/light truck sales fell to
the lowest level since the late
1960s. Forecast for 2012-13 is
still far below 1999-2007 average
of 17 million units, but a
recovery is underway.
13.2
16.1
16.5
16.9
16.9
16.6
17.1
17.5
17.8
19
18
17
16
15
14
13
12
11
10
9
17.4
(Millions of Units)
Job growth and improved
credit market conditions
will boost auto sales in
2012 and beyond
99 00 01 02 03 04 05 06 07 08 09 10 11F 12F 13F 14F 15F 16F 17F 1822F
Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point,
Bolstering the Auto Insurer Growth and the Manufacturing Sector.
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 1/12); Insurance Information Institute.
171
Recovery in Capacity Utilization is a
Positive Sign for Commercial Exposures
“Full Capacity”
Percent of
Industrial Capacity
The US operated at 77.8%
of industrial capacity in
Nov. 2011, above the June
2009 low of 68.3% and a
post-crisis high
82%
Hurricane
Katrina
80%
78%
76%
The closer the economy is
to operating at “full
capacity,” the greater the
inflationary pressure
74%
72%
March 2001November 2001
recession
Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm.
172
Sep 11
Jun 11
Mar 11
Dec 10
Sep 10
Jun 10
Mar 10
Dec 09
Jun 09
Sep 09
Mar 09
Dec 08
Sep 08
Jun 08
Mar 08
Dec 07
Sep 07
Jun 07
Mar 07
Dec 06
Sep 06
Jun 06
Mar 06
Dec 05
Jun 05
Sep 05
Mar 05
Jun 04
Mar 04
Dec 03
Sep 03
Jun 03
Mar 03
Dec 02
Sep 02
Jun 02
Mar 02
Dec 01
Jun 01
Sep 01
Mar 01
66%
Dec 04
December 2007June 2009 Recession
68%
Sep 04
70%
Dollar Value* of Manufacturers’
Shipments Monthly, Jan 1992-Nov 2011
$ Millions
$500,000
$400,000
The value of Manufacturing
Shipments in Nov. 2011 is up 27.8%
to $455B from its May 2009 trough.
Nov. figure is only 6.2% below its
previous record high.
$300,000
Ja
n92
Ja
n93
Ja
n94
Ja
n95
Ja
n96
Ja
n97
Ja
n98
Ja
n99
Ja
n00
Ja
n
01
Ja
n
02
Ja
n
03
Ja
n
04
Ja
n
05
Ja
n
06
Ja
n
07
Ja
n
08
Ja
n
09
Ja
n
10
Ja
n
11
$200,000
Monthly shipments are nearly back to peak (in July 2008, 6 months into the
recession). Trough in May 2009. Growth from trough to November 2011 was 27.8%
*seasonally adjusted
Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, November 2011, Jan. 4, 2012
173
Business Bankruptcy Filings,
1980-2011:Q3
90,000
80,000
50,000
40,000
30,000
20,000
10,000
0
1980-82
1980-87
1990-91
2000-01
2006-09
58.6%
88.7%
10.3%
13.0%
208.9%*
2010 bankruptcies totaled 56,282, down 7.5%
from 60,837 in 2009—which were up 40%
from 2008 and the most since 1993. As of
2011:Q3 filings are down 15.4% from 2010:Q3.
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
60,000
43,694
48,125
70,000
69,300
62,436
64,004
71,277
81,235
82,446
63,853
63,235
64,853
71,549
70,643
62,304
52,374
51,959
53,549
54,027
44,367
37,884
35,472
40,099
38,540
35,037
34,317
39,201
19,695
28,322
43,546
60,837
56,282
36,385
% Change Surrounding
Recessions
Significant Exposure Implications for All Commercial Lines as
Business Bankruptcies Begin to Decline
Sources: American Bankruptcy Institute at
http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633 ;
Insurance Information Institute
180
Private Sector Business Starts,
1993:Q2 – 2011:Q1*
230
220
210
200
190
180
170
Business Starts
2006: 872,000
2007: 843,000
2008: 790,000
2009: 697,000
2010: 722,000
175
186
174
180
186
192
188
187
189
186
190
194
191
199
204
202
195
196
196
206
206
201
192
198
206
206
203
211
205
212
200
205
204
204
197
203
209
201
203
192
192
193
201
204
202
210
212
209
216
220
223
220
220
210
221
212
204
218
209
207
207
199
191
193
172
176
169
184
175
179
188
200
183
(Thousands)
722,000 new business starts were recorded in
2010, up 3.6% from 697,000 in 2009, which was the
slowest year for new business starts since 1993.
Business starts remained weak in early 2011.
160
150
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
Business Starts Were Down Nearly 20% in the Recession,
Holding Back Most Types of Commercial Insurance Exposure
* Data through March 31, 2011 are the latest available as of January 16, 2012; Seasonally adjusted
Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.
181
11 Industries for the Next 10 Years:
Insurance Solutions Needed
Health Care
Health Sciences
Energy (Traditional)
Alternative Energy
Agriculture
Natural Resources
Environmental
Many
industries are
poised for
growth, but
many insurers
do not write in
these
economic
segments
Technology (incl. Biotechnology)
Light Manufacturing
Export-Oriented Industries
Shipping (Rail, Marine, Trucking)
182
Labor Market Trends
Massive Job Losses Sapped the
Economy and Commercial/Personal
Lines Exposure, But Trend is
Improving
183
Unemployment and Underemployment
Rates: Stubbornly High in 2011, But Falling
January 2000 through December 2011, Seasonally Adjusted (%)
18
Traditional Unemployment Rate U-3
U-6 went from
8.0% in March
2007 to 17.5% in
October 2009;
Stood at 15.2%
in Dec. 2011
Unemployment + Underemployment Rate U-6
16
Recession
ended in
November
2001
14
12
Unemployment
kept rising for
19 more
months
Recession
began in
December
2007
Unemployment
stood at 8.5% in
December
10
Unemployment
peaked at 10.1%
in October 2009,
highest monthly
rate since 1983.
8
6
4
2
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
Jan
11
Dec
11
Peak rate in the
last 30 years:
10.8% in
November December 1982
Stubbornly high unemployment and underemployment constrain overall
economic growth, but the job market might finally be improving
Source: US Bureau of Labor Statistics; Insurance Information Institute.
184
Monthly Change in Private Employment
(800)
(1,000)
144
229
16
62
75
-83
-334
-297
-215
-186
-262
-452
-109
Monthly Losses in
Dec. 08–Mar. 09 Were
the Largest in the
Post-WW II Period
212,000 private sector jobs
were created in December
-734
-667
-806
-707
-744
-649
(600)
-12
-85
-58
-161
-253
-230
-257
-347
-456
-547
(400)
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
DecJan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
DecJan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
DecJan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
DecJan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-
(200)
-14
0
65
97
23
213
65
127
42
15
79
200
186
400
51
61
117
143
112
193
128
167
94
261
219
241
99
75
173
72
220
120
134
212
January 2008 through December 2011* (Thousands)
Private Employers Added 3.343 million Jobs Since Jan. 2010 After
Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State
and Local Governments Have Shed Hundreds of Thousands of Jobs
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Unemployment Rates by State, November 2011:
Highest 25 States*
8.0
8.2
8.4
8.5
8.5
8.7
8.7
8.7
9.0
9.1
9.1
8.7
8.1
8
9.1
9.4
9.8
9.9
9.9
10.0
10.0
10.5
11.3
10.5
10.0
10
10.6
Unemployment Rate (%)
12
13.0
14
In November, 43 states and the District
of Columbia reported over-the-month
unemployment rate decreases, 3 had
increases, and 4 had no change.
6
4
2
0
NV CA DC MS RI FL IL NC GA SC MI KY NJ OR TN IN US AL AZ WA ID OH CT MO TX AR
*Provisional figures for November 2011, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
190
Unemployment Rates By State, November 2011:
Lowest 25 States*
3.4
4
4.1
4.3
5.2
5.3
5.7
5.8
5.9
6.2
6.4
6.5
6.1
6
6.5
6.9
6.9
7.0
7.0
7.1
7.3
7.3
7.6
7.9
7.9
8.0
8
8.0
Unemployment Rate (%)
10
6.5
In November, 43 states and the District of
Columbia reported over-the-month
unemployment rate decreases, 3 had
increases, and 4 had no change.
2
0
CO NY PA WV DE AK WI MT ME MA LA MD HI KS NM UT VA OK MN WY IA VT NH SD NE ND
*Provisional figures for November 2011, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
191
Payroll vs. Workers Comp Net Written
Premiums, 1990-2011
Payroll Base*
$Billions
WC NWP
$Billions
Wage & Salary Disbursements
WC NPW
$7,000
7/90-3/91
$6,000
$5,000
$4,000
$3,000
$50
12/07-6/09
3/01-11/01
$45
WC premium
volume dropped
two years before
the recession began
$40
WC net premiums
written were down
$14B or 29.3% to
$33.8B in 2010 after
peaking at $47.8B
in 2005
$2,000
$35
$30
$25
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*
Resumption of payroll growth and rate increases suggests WC NWP will
grow again in 2012
*Private employment; Shaded areas indicate recessions. Payroll and WC premiums for 2011 is I.I.I. estimate
Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.
194
Insurance Information Institute Online:
www.iii.org
Thank you for your time
and your attention!
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