Emerging Issues and Trends
Affecting
Commercial P/C Insurance
Seminar for State Committee Chairs & Legislators
Griffith Foundation
Columbus, OH
August 21, 2011
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
Profitability
How Can Commercial Insurers be Profitable When…
•Premiums/Rates are Flat or Declining,
•Investment Income is Low and Declining
•Losses (especially from CATs) are Increasing
2
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
2007:12.3%
1997:11.6%
2011:
6.1%*
15%
10 Years
10%
5%
0%
1975: 2.4%
1984: 1.8%
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%
*Profitability = P/C insurer ROEs are I.I.I. estimates. 2011 figure is an estimate based on annualized ROAS for Q1 data.
Note: Data for 2008-2011 exclude mortgage and financial guaranty insurers.
Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
P/C Commercial Insurance Direct
Premiums Written by Line, 2009
$ Billions
$50
$44.71
2009 Total: $467.8 billion
$39.89
$40
$33.33
$31.02
$30
$24.19
$22.81
$20
$12.99
$10.69
$8.47
$10
$5.41
$0
Other
Liability*
Workers
Comp
Comm'l
Multiple
Peril
Comm'l Fire & Allied Inland
Auto
Lines
Marine
Medical
Multiple Mortgage
Malpractice Peril Crop Guaranty
*Includes General Liability, Products Liability, D&O, Professional Malpractice (except Medical) etc.
Sources: SNL Financial, Insurance Information Institute
All Other
P/C Commercial Insurance Market
Shares by Direct Premiums Written, 2009
10.0%
Top Ten Insurance Groups
9.1%
Combined, the top 10
have less than 45%
market share
8.0%
6.4%
6.0%
6.0%
5.7%
4.0%
3.2%
3.1%
3.0%
2.9%
2.1%
2.1%
2.0%
0.0%
AIG
Travelers
Liberty
Mutual
Zurich
Sources: SNL Financial, Insurance Information Institute
CNA
Financial
ACE
Chubb
Hartford Nationwide
Financial
Mutual
Services
Allianz
Growth of Commercial Lines Direct Written
Premium vs. GDP, U.S., 2001-2010
0.2%
4.9%
1.9%
2003
2004
2005
2006
2007
2008
4.2%
5.4%
6.0%
2002
3.3%
6.5%
2001
4.5%
6.4%
5%
3.5%
10%
3.4%
15%
4.7%
11.4%
15.3%
25%
20%
From 2004 on, the economy
grew faster than commercial
insurance premium volume
US nominal GDP change
19.0%
US DWP: Comm. Lines
-10%
-2.5%
-5%
-7.3%
-2.5%
-1.2%
0%
2009
2010
-15%
Sources: SNL Financial; I.I.I.
6
Calendar Year Combined Ratio,
Commercial Insurance, 2008-2011F
90
91.1
93.6
95
98.9
100
102.0 102.5
105
103.8
105.4
106.0
110
115
112.3
110.2
111.1
In the last dozen years, the
only profitable years were
years of very low CATs
110.0 110.0
120
122.3
125
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009 2010P 2011F 2012F
Overall deterioration in 2011 underwriting performance is due to expected
return to normal catastrophe activity plus deteriorating underwriting
performance related to the prolonged commercial soft market
Sources: A.M. Best . Insurance Information Institute.
7
P/C Combined Ratios, Selected
Commercial Lines, 2008-2010P
Line of Business
2008 2009 2010P
Other Liability (incl. Prod Liab)
Workers Compensation
Commercial Multi Peril
95
101
104
105
110.5
97
110
115
101
Commercial Auto
96.8
99.5
98
Fire & Allied Lines (incl. EQ)
99
80
83
All Other Lines
113
96
101
Sources: All lines except WC for 2008-09, A.M. Best; Worker Comp., NCCI; 2010P data, ISO. Private carriers only.
85
103.0
101.0
94.2
98.6
97.6
95.1
89.8
105.4
83.8
90
93.8
89.0
95
101.9
97.7
100
108.0
116.1
116.2
121.0
117.0
115.0
115.0
122.4
113.1
104.9
105
97.3
110
100.7
115
125.0
115.3
120
119.0
125
119.8
116.8
130
108.5
113.6
Commercial Multi-Peril Combined Ratio:
1995–2011P
80
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09 10E* 11P*
Commercial Multi-Peril Underwriting Performance
is Expected to Deteriorate Modestly
*2010Eand 2011P figures are for the combined liability and non-liability components.
Sources: A.M. Best; Insurance Information Institute.
05
06
96.8
92.4
04
94.2
92.1
95.2
95
92.9
102.7
100
100.0
01
105
98.0
00
110
99.5
97
116.2
96
115.7
95
118.1
113.0
115
112.0
120
112.1
125
115.9
Commercial Auto Combined Ratio:
1993–2011P
90
85
80
98
99
02
03
07
08
09
Commercial Auto Underwriting Performance is
Expected to Deteriorate Modestly
Sources: A.M. Best; Insurance Information Institute.
10E 11P
Inland Marine Combined Ratio:
1999–2011P
105
101.9
100.2
100
95
93.2
92.8
89.9
90
83.8
85
80.8
94.5
94.5
10E
11P
89.3
82.5
79.5
80
77.3
75
70
99
00
01
02
03
04
05
06
07
08
09
Inland Marine is Expected to Remain Among the Most
Profitable of All Lines
Sources: A.M. Best; Insurance Information Institute.
117.5
115.0
110.5
101.0
103.5
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
07
08
09 10E 11P
Workers Comp underwriting results are deteriorating
markedly and are the worst they have been in a decade
Sources: A.M. Best (1994-2009); NCCI (2010E); Insurance Information Institute (2011P).
P/C Reserve Development, 1992–2011E
$25
$20
Impact on
Combined Ratio
(Points)
$15
$10
$5
23.2
13.7
11.7
2.3
9.9
7.3
1
-2.1
-$10
-2.6
-4.1
-6.6
-8.3
-5
-6.7
-9.5
-9.9 -9.8
-$15
-2
-6
11E
10E
09
07
06
05
04
03
02
01
00
99
98
97
96
95
94
-$20
93
4
-4
-14.6-16 -15
92
6
0
$0
-$5
8
2
08
Prior Yr. Reserve Release ($B)
Prior Yr. Reserve
Development ($B)
Impact on Combined Ratio (Points)
$30
Prior year reserve
releases totaled $8.8
billion in the first
half of 2010, up from
$7.1 billion in the
first half of 2009
Reserve releases remained strong in 2010 but should taper off in 2011
Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this
transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes
development from financial guaranty and mortgage insurance.
Sources: Barclay’s Capital; A.M. Best.
13
A 100 Combined Ratio Isn’t What It
Once Was: Investment Impact on ROEs
A combined ratio of about 100
generated ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Combined Ratio / ROE
110
105
15.9%
14.3%
100.6
100
100.1
97.5
100.7
12.7%
101.0
99.3
100.8
102.2
7.4%
92.6
15%
12%
9.6%
95
18%
7.5%
8.9%
6.5%
9%
6%
90
4.4%
85
3%
0%
80
1978
1979
2003
2005
2006
Combined Ratio
2008*
2009*
2010*
2011*
ROE*
Combined Ratios Must Be Lower in Today’s Depressed
Investment Environment to Generate Risk Appropriate ROEs
* 2009 and 2010 figures are return on average statutory surplus. 2008 -2011 figures exclude mortgage and financial guaranty
insurers
Source: Insurance Information Institute from A.M. Best and ISO data.
Catastrophe Loss
Developments and Trends
2011 and 2010 Are Rewriting
Catastrophe Loss and
Insurance History
15
81
59
63
48
52
56
45
45
49
There have been 2,013* federal disaster declarations since 1953.
Note that 2005 was a relatively low year for number of disaster
declarations in the 1996-2010 period,
but that year included Hurricanes Katrina, Rita, and Wilma.
*Through August 12, 2011. Sources: Federal Emergency Management Administration at
http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute.
11*
09
07
03
01
99
97
95
93
91
89
87
85
83
81
79
77
75
73
71
69
67
65
63
61
59
57
55
53
69
65
32
36
32
38
31
11
15
44
43
45
23
22
25
27
28
23
34
38
29
17
17
19
11
11
The number of federal
disaster declarations could
set a new record in 2011.
7
7
10
12
12
13
17
18
16
16
22
20
25
25
30
30
40
0
42
48
46
46
50
20
50
60
24
21
70
The average
number from
1972-1995 was
31.7.
05
From 1953-71, the
average number
of declarations
per year was 16.5.
80
75
90
75
The average
number from 19962010 was 58.4.
63
Number of Federal Disaster
Declarations, 1953-2011*
Worldwide Natural Disasters,
1980 – 2011*
Number of Events
Already 355 events
through the first 6
months of 2011
600
500
400
300
200
100
1980
1982
1984
1986
Geophysical events
(Earthquake, tsunami,
volcanic eruption)
*2011 figure is through June 30.
Source: MR NatCatSERVICE
1988
1990
1992
1994
Meteorological events
(Storm)
1996
1998
2000
2002
Hydrological events
(Flood, mass
movement)
2004
2006
2008
2010
Climatological events
(Extreme temperature,
drought, forest fire)
17
Worldwide Natural Disasters 1980–2011,
Overall and Insured Losses*
First Half 2011
Overall Losses: $265 Bill
300
Insured Losses: $60 Bill
250
US$bn
200
150
100
50
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2002
2004
2006
2008
2010
Insured losses (in 2011 values)
Overall losses (in 2011 values)
*2011 figure is through June 30.
Source: MR NatCatSERVICE
2000
© 2011 Munich Re
18
Residual Markets
19
U.S. Residual Market Exposure to Loss
($ Billions)
($ Billions)
$900
Katrina,
Rita and
Wilma
$800
$700
4 Florida
Hurricanes
$600
$500
$400
$281.8
$221.3
$200
$100
$656.7
$703.0
$696.4
$757.9
$430.5 $419.5
$372.3
Hurricane
Andrew
$300
$771.9
$292.0
$244.2
$150.0
$54.7
$0
1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
In the 21-year period between 1990 and 2010, total exposure to loss in the
residual market (FAIR & Beach/Windstorm) Plans has surged from $54.7
billion in 1990 to $757.9 billion in 2010.
Source: PIPSO; Insurance Information Institute (I.I.I.); http://www.iii.org/pr/last-resort-2010.
20
U.S. Residual Market: Policies In-Force
as Percent of Housing Units, 2000-2009
Katrina, Rita,
and Wilma
2.5%
2.20%
2.22%
2.03%
2.0%
1.80%
1.5%
1.38%
1.91%
1.77%
1.44%
1.25%
1.02%
1.0%
0.5%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Between 2000 and 2009, the number of housing units in the U.S. grew
by 13.7 million (up 12%) but policies in-force in the residual market
(FAIR & Beach/Windstorm Plans) grew by 70%.
Sources: U.S. Census Bureau at http://www.census.gov/popest/housing/HU-EST2009.html
PIPSO; Insurance Information Institute; http://www.iii.org/pr/last-resort-2010.
22
Pricing
Is There Evidence of a Broad
and Sustained Shift in Pricing?
23
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%
2011:Q1
growth was
+3.5%; First
Q1 growth
since 2007
15%
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 an estimate based on Q1 data.
Shaded areas denote “hard market” periods
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
24
5%
0%
-5%
-10%
Sources: ISO, Insurance Information Institute.
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%
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%
2002:Q2
15%
10.2%
20%
2002:Q1
P/C Net Premiums Written: % Change,
Quarter vs. Year-Prior Quarter
The long-awaited uptick. In
2011:Q1 occurring in
personal lines
predominating cos. (+3.8%)
and commercial lines
predominating cos. (+3.5%)
Finally! Back-to-back quarters of net written premium growth
(vs. the same quarter, prior year)
25
Average Commercial Rate Change,
All Lines, (1Q:2004–2Q:2011)
-10%
-12%
-14%
KRW Effect
-16%
-0.1%
-6.4%
-5.1%
-4.9%
-5.8%
-5.6%
-5.3%
-6.4%
-5.2%
-5.4%
-2.9%
Pricing is flat for the
first time in more than
7 years
-9.6%
-11.3%
-11.8%
-13.3%
-12.0%
-13.5%
-12.9%
-11.0%
-8%
-4.6%
-2.7%
-3.0%
-5.3%
-6%
-9.4%
-9.7%
-8.2%
-4%
-5.9%
-7.0%
-2%
-3.2%
0%
-0.1%
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
(Percent)
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Q2 2011 decreases
were the smallest
since 2004, perhaps
signaling a market
firming
26
Cumulative Qtrly. Commercial Rate Changes,
by Account Size: 1999:Q4 to 2011:Q2
1999:Q4 = 100
Pricing today is
where is was in
Q3:2000 (pre-9/11)
Downward pricing
pressure is most
pronounced for
larger risks
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
27
Price Index for Premiums for Commercial
Multiple Peril Insurance, 1998–2011*
Index
June 1998 = 100
116
113
110
107
104
101
Jun-11
Dec-10
Jun-10
Dec-09
Jun-09
Dec-08
Jun-08
Dec-07
Jun-07
Dec-06
Jun-06
Dec-05
Jun-05
Dec-04
Jun-04
Dec-03
Jun-03
Dec-02
Jun-02
Dec-01
Jun-01
Dec-00
Jun-00
Dec-99
Jun-99
Dec-98
Jun-98
98
*As of July 2011; Not seasonally adjusted.
Note: Recessions indicated by gray shaded columns.
Sources: U.S. Bureau of Labor Statistics, Producer Price Index database; National Bureau of Economic Research (recession dates);
Insurance Information Institute.
28
Price Index for Premiums for
Non-auto Liability Insurance, 1998–2011*
Index
June 1998 = 100
116
113
110
107
104
101
Jun-11
Dec-10
Jun-10
Dec-09
Jun-09
Dec-08
Jun-08
Dec-07
Jun-07
Dec-06
Jun-06
Dec-05
Jun-05
Dec-04
Jun-04
Dec-03
Jun-03
Dec-02
Jun-02
Dec-01
Jun-01
Dec-00
Jun-00
Dec-99
Jun-99
Dec-98
Jun-98
98
*As of July 2011; Not seasonally adjusted.
Note: Recessions indicated by gray shaded columns.
Sources: U.S. Bureau of Labor Statistics, Producer Price Index database; National Bureau of Economic Research (recession dates);
Insurance Information Institute.
29
Price Index for Premiums for
Commercial Auto Insurance, 1998–2011*
Index
June 1998 = 100
116
113
110
107
104
Jun-11
Dec-10
Jun-10
Dec-09
Jun-09
Dec-08
Jun-08
Dec-07
Jun-07
Dec-06
Jun-06
Dec-05
Jun-05
Dec-04
Jun-04
Dec-03
Jun-03
Dec-02
Jun-02
Dec-01
Jun-01
Dec-00
Jun-00
Dec-99
Jun-99
Dec-98
98
Jun-98
101
*As of July 2011; Not seasonally adjusted.
Note: Recessions indicated by gray shaded columns.
Sources: U.S. Bureau of Labor Statistics, Producer Price Index database; National Bureau of Economic Research (recession dates);
Insurance Information Institute.
30
INVESTMENTS:
THE NEW REALITY
Investment Performance is a
Key Driver of Profitability
Does It Influence
Underwriting or Cyclicality?
31
Property/Casualty Insurance Industry
Investment Gain: 1994–2011:Q11
($ 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
$31.7
$30
Investment gains in
2010 were the best
since 2007
$20
$10
$13.5
$0
94
95
96
97
98
99
00
01
02
03
04
05*
06
07
08
09
10 11:Q1
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.
Treasury Yield Curves Before and
After S&P Downgrade
Treasury actually fell in the wake
of the S&P downgrade, despite
(theoretically) higher risk
5%
4%
4.27%
3.95%
4%
3.68%
3.00%
3.31%
3%
2.28%
3%
2.40%
2%
1.54%
2%
1.75%
0.68%
1%
1%
0%
0.41%
0.04%
0.02%
1M
0.04%
0.08%
1.11%
July 2011 Yield Curve*
Post-Downgrade (July 2007)
0.19%
0.05% 0.07% 0.12%
3M
6M
1Y
0.27%
2Y
0.45%
3Y
5Y
7Y
10Y
20Y
30Y
The End of the Fed’s Quantitative Easing Is Unlikely to Push Interest
Rates Up Substantially Given Ongoing Economic Weakness
*Average of daily rates.
Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
33
Inflation
Is it a Threat to Claim Cost
Severities?
34
Annual Inflation Rates, (CPI-U, %),
1990–2014F
Annual
Inflation
Rates (%)
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
3.0
2.8
2.3
2.2 2.1 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, 3/11 and 8/11 (forecasts).
35
P/C Personal Insurance Claim Cost Drivers
Grow Faster than the Overall CPI Suggests
Price Changes
in 2010
9%
8.8%
6%
Excludes
Food and
Energy
6.1%
4.3%
3%
3.3%
4.3%
3.6%
3.1%
3.3%
1.6%
1.0%
0%
Overall CPI "Core" CPI
Inpatient
Hospital
Services
Outpatient Physicians' Prescription Medical Care Legal Motor Vehicle Residential
Hospital
Services
Drugs Commodities Services
Parts &
Maint. &
Services
Equipment
Repair
Healthcare costs are a major liability, med pay, and PIP claim cost driver.
They are likely to grow faster than the CPI for the next few years, at least
Source: Bureau of Labor Statistics; Insurance Information Institute.
36
WC Medical Severity Rising
at Twice the Medical CPI Rate
15%
Change in Medical CPI
13.5%
Change Med Cost per Lost Time Claim
12%
10.6%
10.1%
8.3%
9%
7.4%
9.1%
8.8%
7.7%
7.3%
6.1% 6.1%
6%
5.4%
5.1%
4.5%
3%
3.5%
2.8%
3.2% 3.5%
4.1%
4.6% 4.7%
4.0%
5.0%
4.4% 4.2%
4.4%
4.0%
3.7%
5.4%
2.2%
3.2% 3.4%
0%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
The average annual increase in WC medical severity from 1995 through 2009 was
nearly twice the medical CPI (7.6% vs. 3.9%). Will healthcare reform affect this gap?
Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
P/C Commercial Property Insurance Claim Cost
Drivers Grow Faster than the Overall CPI Suggests
Price Changes
in 2010
24%
22.0%
21.2%
18%
An oil price spike in
early 2011 will likely
be reflected in higher
prices for
construction products
that are based on oil,
like asphalt and
plastic pipe.
16.3%
Excludes
Food and
Energy
12%
7.3%
6%
0%
1.6%
1.0%
Overall CPI
"Core" CPI
2.5%
Waferboard
Steel Mill
Products
Copper Brass &
Mill Shapes
Plastic Pipe
Asphalt Paving &
Roofing Materials
Commercial liability and workers comp costs are also affected by the
exploding cost of health care.
Source: Bureau of Labor Statistics; Insurance Information Institute.
38
Insurance Information Institute Online:
www.iii.org
Thank you for your time
and your attention!