Trends & Challenges in
the P/C Insurance Industry
Energy Markets at the Eye
of the Economic Storm
Insurance Information Institute
August 2008
Robert P. Hartwig, Ph.D., CPCU, President
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: (212) 346-5520  Fax: (212) 732-1916  bobh@iii.org  www.iii.org
Presentation Outline
•
•
•
•
•
•
•
•
•
•
•
•
Profitability
Underwriting Trends
Investment Overview
Premium Growth & Pricing
Capacity & Policyholder Surplus
Directors & Officers Market
Energy Market Review
Implications of the Weak Economy & Rising Inflation
Proposed Changes in the Insurance/Financial Sector Regulation
Catastrophic Loss Review & Energy’s Respite
Reinsurance Markets
Shifting Legal Liability & Tort Environment
PROFITABILITY
In the Midst
of a Cyclical Decline
$65,777
$32,936
$44,155
$38,501
$30,029
$20,559
$30,773
$21,865
$10,870
$3,046
$10,000
$19,316
$20,000
$5,840
$30,000
$14,178
$40,000
Insurer profits
peaked in 2006
$36,819
$50,000
$24,404
$60,000
$20,598
$70,000
2001 ROE = -1.2%
2002 ROE = 2.2%
2003 ROE = 8.9%
2004 ROE = 9.4%
2005 ROE= 9.6%
2006 ROE = 12.2%
2007 ROAS1 = 12.3%**
2008 ROAS = 6.4%***
$61,940
P/C Net Income After Taxes
1991-2008 ($ Millions)*
08*
07
06
05
04
03
01
-$6,970
00
99
98
97
96
95
94
93
92
91
-$10,000
02
$0
*ROE figures are GAAP; 2008 figure is annualized Q1 net income of $8.234B; 1Return on avg. surplus.
Sources: A.M. Best, ISO, Insurance Information Inst. ***9.5% excl. mortgage and finl. guarantee insurers.
ROE: P/C vs. All Industries
1987–2008:Q1
20%
Mortgage & Financial
Guarantee Impact
P/C profitability is
cyclical and volatile
15%
10%
Sept. 11
5%
Hugo
0%
Andrew
Katrina,
Rita, Wilma
Lowest CAT
losses in 15 years
Northridge
4 Hurricanes
-5%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08Q1
US P/C Insurers
All US Industries
2008 P/C insurer figure is annualized Q1 return on average surplus. Excluding mortgage and financial
guarantee insurers = 9.5%.
Source: ISO, Fortune; Insurance Information Institute.
Profitability Peaks & Troughs in the
P/C Insurance Industry,1975 – 2008:Q1
25%
1977:19.0%
1987:17.3%
2006:12.2%
20%
1997:11.6%
15%
10%
5%
2008Q1: 6.4%
(9.5% excl. M&FG)
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
-5%
*GAAP ROE for all years except 2007 which is ROAS of 12.3%. All figures include mortgage an d financial
guarantee insurers. Excluding M&FG insurers 2008:Q1 ROAS is 9.5%..
Source: Insurance Information Institute, ISO; Fortune
Factors that Will Influence the
Length and Depth of the Cycle
•
Capacity: Rapid surplus growth in recent years has left the industry with between $85
billion and $100 billion in excess capital, according to analysts, at end of 2007
 All else equal, rising capital leads to greater price competition and a liberalization of terms
and conditions
•
•
•
Reserves: Reserves are in the best shape (in terms of adequacy) in decades, which
could extend the depth and length of the cycle
Investment Gains: With sharp declines in stock prices and falling interest rates,
portfolio yields are certain to fallContributes to discipline and shallower cycle
Sarbanes-Oxley: Presumably SOX will lead to better and more conservative
management of company finances, including rapid recognition of deficient or
redundant reserves
 With more “eyes” on the industry, the theory is that cyclical swings should shrink
•
•
•
Ratings Agencies: Focus on Cycle Management; Quicker to downgrade
Information Systems: Management has more and better tools that allow faster
adjustments to price, underwriting and changing market conditions than it had
during previous soft markets
Analysts/Investors: Less fixated on growth, more on ROE through soft mkt.
 Management has backing of investors of Wall Street to remain disciplined
•
M&A Activity: More consolidatio would imply greater discipline
Source: Insurance Information Institute.
Top Industries by ROE: P/C Insurers
Still Underperformed in 2007*
56.0%
Household & Pers. Products
Petroleum Refining
Hotels, Casinos, Resorts
Oil and Gas Equip., Services
Food Services
Metals
Food Consumer Prod.
Network & Other Comms.
Aerospace & Defense
Medical Prod. & Equip.
Electronics, Electrical Equip.
Pharmaceuticals
Industrial & Farm Equip.
Wholesalers: Diversified
Packaging, Containers
26.3%
26.1%
24.9%
23.9%
23.0%
22.0%
21.8%
20.6%
20.4%
20.4%
20.3%
20.0%
19.4%
19.2%
14.0%
15.2%
P/C Insurers (Stock)
All Industries: 500 Median
0%
10%
20%
30%
Source: Fortune, May 5, 2008 edition; Insurance Information Institute
P/C insurer
profitability in 2007
ranked 31st out of 51
industry groups
despite renewed
profitability,
underperforming the
All Industry median
for the 20th
consecutive year
40%
50%
60%
UNDERWRITING
TRENDS
Extremely Strong 2006/07;
Relying on Momentum &
Discipline for 2008
P/C Insurance Combined Ratio,
2001-2008:Q1
Best
underwriting
result since the
87.6 combined
ratio in 1949
As recently as 2001,
insurers paid out
nearly $1.16 for every
$1 in earned premiums
120
115.8
2005 ratio benefited
107.4 from heavy use of
reinsurance which
lowered net losses
110
100
Excluding
Mortgage
& Fin.
Guarantee
insurers
Relatively
low CAT
losses,
reserve
releases
100.7
100.1
Including
Mortgage
& Fin.
Guarantee
insurers
99.9
98.3
96.7
95.6
92.4
90
2001
2002
Sources: A.M. Best, ISO; III.
2003
2004
2005
2006
2007
*Excluding Mortgage & Financial Guarantee insurers.
08:Q1
08:Q1*
Commercial Lines Combined
Ratio, 1993-2008F
04
90
91.2
Recent results benefited from
favorable loss cost trends, improved
tort environment, low CAT losses,
WC reforms and reserve releases
95
97.5
102.5
03
100
94.0
111.1
112.3
109.7
110.2
102.0
105
103.9
107.6
110
110.2
112.5
115
110.3
120
105.4
125
Outside CAT-affected lines,
commercial insurance is
doing fairly well. Caution is
required in underwriting
long-tail commercial lines.
122.3
Commercial coverages
have exhibited significant
variability over time.
85
93
94
95
96
97
Sources: A.M. Best (historical and forecasts)
98
99
00
01
02
05
06 07E 08F
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
-40
-45
-50
-55
Insurers earned a record underwriting profit of
$31.7 billion in 2006, the largest ever but only the
second since 1978. Cumulative underwriting deficit
from 1975 through 2007 is $422 billion.
$561 mill
underwriting
loss in 08:Q1
incl. mort. &
FG insurers
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
$ Billions
Underwriting Gain (Loss)
1975-2008:Q1*
Source: A.M. Best, ISO; Insurance Information Institute
* Includes mortgage & finl. guarantee insurers.
INVESTMENT
OVERVIEW
More Pain,
Little Gain
Property/Casualty Insurance
Industry Investment Gain1
$ Billions
$57.9
$60
$52.3
$56.9
$51.9
$47.2
$50
$59.4
$44.4
$42.8
$55.7
$48.9
$36.0
$40 $35.4
$30
$45.3
$63.6
Investment gains are off in
2008 due to lower yields and
poor equity market conditions.
$20
$10
$12.2
1Investment
08
Q
1
07
06
05
*
04
03
02
01
00
99
98
97
96
95
94
$0
gains consist primarily of interest, stock dividends and realized capital gains and losses.
2006 figure consists of $52.3B net investment income and $3.4B realized investment gain.
*2005 figure includes special one-time dividend of $3.2B.
Sources: ISO; Insurance Information Institute.
FINANCIAL
STRENGTH &
RATINGS
Industry Has Weathered
Storms and Economy Well,
But Cycle May
Takes Its Toll
P/C Insurer Impairment Frequency
vs. Combined Ratio, 1969-2007E
Combined Ratio
115
Combined Ratio after Div
P/C Impairment Frequency
2
1.8
1.6
1.4
110
1.2
105
1
0.8
100
95
0.4
2007 impairment rate was a record low 0.12%,
one-seventh the 0.8% average since 1969; Previous
record was 0.24% in 1972
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
90
0.6
Source: A.M. Best; Insurance Information Institute
0.2
0
Impairment Rate
120
Impairment rates
are highly
correlated
underwriting
performance and
could reached a
record low in 2007
Reasons for US P/C Insurer
Impairments, 1969-2005
2003-2005
Affiliate
Problems
8.6%
Catastrophe
Losses
8.6%
1969-2005
Deficient
Loss
Reserves/Inadequate
Pricing
62.8%
Deficient
Loss
Reserves/Inadequate
Pricing
38.2%
Investment
Problems*
7.3%
Alleged
Fraud
11.4%
Rapid
Growth
8.6%
Reinsurance
Sig. Change
Failure
in Business
3.5%
4.6%
Misc.
9.2%
Deficient
reserves,
CAT losses
are more
important
factors in
recent years
Affiliate
Problems
5.6%
Catastrophe
Losses
6.5%
Alleged
Fraud
8.6%
Rapid
Growth
16.5%
*Includes overstatement of assets.
Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;
PREMIUM
GROWTH
Negative Growth
in 2007/08
Strength of Recent Hard Markets
by NWP Growth*
25%
20%
1975-78
1984-87
2001-04
Post-Katrina period
resembles 1993-97
(post-Andrew)
15%
10%
5%
0%
-5%
2007: -0.6% premium growth
was the first decline since 1943.
Down 0.9% in Q1 2008*
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008*
-10%
Note: Shaded areas denote hard market periods. *2008 is Q1 figure = -0.9%. Ex. M&FG insurers = -0.7%
Source: A.M. Best, Insurance Information Institute
Growth in Net Written
Premium, 2000-2008:Q1*
P/C insurers are experiencing
their slowest growth rates
since 1943… underwriting
results are deteriorating
15.3%
10.0%
8.4%
5.0%
4.3%
3.9%
Including
Mortgage
& Fin.
Guarantee
insurers
Excluding
Mortgage
& Fin.
Guarantee
insurers
0.5%
-0.6% -0.9% -0.7%
2000
2001
2002
2003
2004
2005
2006
2007
08:Q1 08:Q1
*2008:Q1 results shown including and excluding mortgage and financial guarantee insurers.
Source: A.M. Best; ISO; Insurance Information Institute.
WEAK PRICING
Under Pressure in 2008
Cost of Risk vs. Commercial
Lines Combined Ratio
$11.55
110.2
$8.42
$8
105.4
102.5
102.0
$6
$4
$4.83
$5.20
$5.71
$5.25
$5.70
$6.49
$7.30
$7.70
$6.40
104.1
$10
95
90.5
91.4
90
$2
$0
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
Source: RIMS Benchmark Survey, A.M. Best 2007 Aggregates & Averages; Insurance Information Institute
Cost of Risk/$1000 Revenue
$13.15
$13.91
$13.50
$12
107.6
105
100
112.3
111.1
109.7
$14
$11.94
110.2
109.4
$8.30
110
112.5
110.2
109.5
$11.95
115
122.3
Commercial
Combined Ratio
Cost of Risk
118.8
120
$6.10
Commercial Lines Combined Ratio
125
Average Commercial Rate Change,
All Lines, (1Q:2004 – 1Q:2008)
0%
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
1Q08 -13.5%
-12.0%
4Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
4Q04
3Q04
2Q04
1Q04
-16%
3Q07 -13.3%
KRW Effect
-11.8%
-5.3%
-3.0%
-2.7%
-4.6%
-14%
-11.3%
-12%
-9.6%
-10%
-8.2%
-8%
-9.7%
-5.9%
-6%
-9.4%
-4%
-7.0%
-3.2%
-0.1%
-2%
Magnitude of rate decreases diminished
greatly after Katrina but have grown again
Cumulative Commercial Rate Change
by Line: 4Q99 – 1Q08
Commercial account pricing
has been trending down for 3+
years and is now on par with
prices in late 2001, early 2002
Source: Council of Insurance Agents & Brokers
CAPACITY/
SURPLUS
Accumulation of Capital/
Surplus Depresses ROEs
U.S. Policyholder Surplus:
1975-2008:Q1*
$550
$500
Capacity as of 3/31/08 was $515.6, down 0.4% from
12/31/07 was $517.9B, but 80% above its 2002 trough.
$450
Recent peak was $521.8 as of 9/30/07
$400
$ Billions
$350
$300
$250
$200
The premium-to-surplus
fell to $0.85:$1 at yearend 2007, approaching
its record low of
$0.84:$1 in 1998
$150
$100
$50
“Surplus” is a measure of
underwriting capacity. It is
analogous to “Owners
Equity” or “Net Worth” in
non-insurance organizations
$0
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source: A.M. Best, ISO, Insurance Information Institute.
*As of March 31, 2008
Annual Catastrophe Bond
Transactions Volume, 1997-2007
Risk Capital Issues ($ Mill)
$8,000
Number of Issuances
Catastrophe bond issuance has
soared in the wake of Hurricanes
Katrina and the hurricane
seasons of 2004/2005, despite two
quiet CAT years
$7,000
$6,000
$5,000
$7,329.6
35
30
25
$4,693.4
20
$4,000
15
$3,000
$1,000
$633.0
$846.1$984.8
$1,139.0
$1,219.5
$966.9
10
$1,991.1
$1,729.8
$2,000
$1,142.8
5
$0
0
97
98
99
00
01
02
03
04
Source: MMC Securities Guy Carpenter, A.M. Best; Insurance Information Institute.
05
06
07
Number of Issuances
Risk Capital Issued
P/C Insurer Share Repurchases,
1987- Through Q4 2007 ($ Millions)
Reasons Behind Capital BuildUp & Repurchase Surge
•Strong underwriting results
$22,322.6
•Moderate catastrophe losses
$418.1
$566.8
$310.1
$658.8
$769.2
91
92
93
94
95
$7,094.1
$5,266.0
$5,242.3
$763.7
$952.4
90
$1,539.9
$311.0
89
$2,764.2
$646.9
88
$4,297.3
$564.0
87
$5,000
$4,586.5
$10,000
Returning capital owners
(shareholders) is one of the
few options available
2007 repurchases to
date equate to 3.9% of
industry surplus, the
highest in 20 years
$2,385.6
$4,497.5
$15,000
•Reasonable investment
performance
•Lack of strategic alternatives
(M&A, large-scale expansion)
$20,000
$4,370.0
$25,000
2007 share buybacks shattered
the 2006 record, up 214%
Sources: Credit Suisse, Company Reports; Insurance Information Inst.
07
06
05
04
03
02
01
00
99
98
97
96
$0
COST OF RISK
Utility Sector Focus
Utilities: How the Risk Dollar is Spent
(Respondent Revenues < $1B)
Property
Retained Losses
6%
Total Liability
Premiums
28%
Total Property
Premiums
20%
Total
Administration
Costs
12%
Total
Professional
Liability Costs
Workers Comp
1%
Retained Losses
5%
Source: 2008 RIMS Benchmark Survey
Liability Retained
Losses
3%
Workers Comp
Premiums
12%
Total
Management
Liability Costs
12%
Utilities: How the Risk Dollar is Spent
(Respondent Revenues > $1B)
Property
Retained
Losses
7%
Total Property
Premiums
25%
Other Costs
1%
Total
Administration
Costs
9%
Workers Comp
Retained
Losses
9%
Source: 2008 RIMS Benchmark Survey
Total Liability
Premiums
26%
Liability
Retained
Losses
5%
Total
Management
Liability Costs
13%
Workers Comp
Premiums
5%
Directors &
Officers Coverage
Energy Issues Not Today’s
Driver of D&O Litigation
Leading Utility D&O Insurers
by Premium Volume
ACE, 6%
Chubb, 18%
Zurich Insurance,
6%
Lloyd's and other
London
underwriters, 12%
Aegis, 41%
AIG, 12%
Source: Tillinghast Towers-Perrin, 2007 Directors and Officers Liability Survey
Corporate Governance &
Directors & Officers Coverage
• D&O Litigation
Subprime & credit crisis is driving much of
the (threatened) litigation today
Energy sector is not at center of today’s
D&O concerns
 Focus is on financial institutions and other
entities affected by subprime/credit problems
 Outside of financial institutions, prices falling
Shareholder Class
Action Lawsuits*
600
497
500
400
300
202
200 164 163
242
231
188
173
Pace of suits is up due in
part to subprime issues,
housing collapse and
market volatility.
Defendants include banks,
investment banks,
builders, lenders, bond
and mortgage insurers
267
210215
226237
182
118
111
100
176
108
Includes 96 suits related
to subprime in 2007/08
0
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*
*Securities fraud suits filed in U.S. federal courts; 2008 figure is current through July 2.
Source: Stanford University School of Law (securities.stanford.edu); Insurance Information Institute
Securities Class Action Claims: Total
Settlement Dollars, 1998-2007
$17,618
$ Millions
$20,000
Cendant
WorldCom
6.2
$6,962
$9,693
$3,407
$2,559
3.5
$2,856
$4,992
$1,193
$471
$5,000
$2,002
Tyco
$10,000
7.2
Enron
3.2
$15,000
$0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
N = 29
N = 63
N = 89
Source: Towers Perrin; Cornerstone Research
N = 93
N = 109 N = 94
N = 109 N = 119 N = 92
N = 111
Disclosure Dollar Loss,
1996-2007* ($ Billions)
All Other Filings
$ Billions
1996-2007
Average $127B
$197
$203
$100
$151
$143
$140
$150
Subprime Filings
Disclosure Dollar
Loss increased
190% in 2007
$242
$250
$200
Options Backdating
$93
$81
$80
$52
$45
$50
$111
$42
$14
$0
96
97
98
99
00
01
02
03
04
05
06
07
* Dollar Disclosure Loss is the decline of market capitalization from the trading day immediately preceding the
end of class period to the trading day immediately following the end of the class period.
Source: Stanford University School of Law (securities.stanford.edu); Cornerstone Research.
Financial Restatements Filed
Continue to Grow
1,600
1,523
1,400
1,270
1,195
1,200
After reaching a record high
in 2006, restatements declined
by 17% to 1,270 in 2007
1,000
800
514
600
400
200
116
158
1997
1998
216
233
270
1999
2000
2001
613
330
0
2002
2003
2004
2005
2006
2007
Sources: Huron Consulting Group 1997-2002, Glass Lewis & Co. 2003-2007; Insurance Info. Institute
Origin of D&O Claims for
Public Companies, 2007
53% of D&O
suits originate
with shareholders
Competitors,
7%
Customers &
Clients, 2%
Employees,
20%
Shareholders,
53%
Government,
3%
Other 3rd
Party, 15%
Source: Tillinghast Towers-Perrin, 2007 Directors and Officers Liability Survey.
D&O prices are
generally falling
except for
Financial
Institutions
D&O Frequency Trends by
Asset Size*
98
99
00
03
Source: Tillinghast Towers-Perrin, 2006 Directors and Officers Liability Survey.
04
05
*For-profits only.
0.54
0.93
0.16
0.21
0.15
0.46
0.82
0.68
1.09
0.19
0.17
02
0.50
1.05
1.09
01
0.47
0.40
0.14
0.08
0.32
0.12
0.43
0.37
0.17
0.42
97
Under $100M
1.29
1.39
1.57
$100M-$1B
1.17
96
0.17
0.17
0.6
0.4
0.2
0
1.60
1.6
1.4
1.2
1
0.8
0.41
1.8
1.64
$1B+
06
Claim Incidence (Susceptibility):
Utilities vs. All Businesses, 2007*
Utilities
50%
Utilities show significantly
higher claim susceptibility
(50%) compared to all
business classes (11%).
All Size Groups
11%
0%
100%
*Claim susceptibility is defined as the percentage of participants that reported one or more claims
over the 10-year experience period. A claim susceptibility of 10% would indicate that one-tenth of
all survey participants had at least one claim during the 10-year experience period.
Source: Tillinghast Towers-Perrin, 2007 Directors and Officers Liability Survey
Claim Incidence (Frequency):
Utilities vs. All Businesses, 2007*
Utilities
0.94
All Size Groups
0.19
0
Utilities show significantly
higher claim frequency
(0.94) compared to all
business classes (0.19).
1
*Claim frequency is the average number of claims per participant over the 10-year experience
period. A claim frequency of 0.25 would indicate that 100 entities reported a total of 25 claims over
the 10-year experience period.
Source: Tillinghast Towers-Perrin, 2007 Directors and Officers Liability Survey
D&O Premium Index
(1974 Average = 100)
Average D&O pricing is down
35% since 2003, after rising
146% from 1999-2003
1400
1200
1,237
1,113
931
1000
800
600
682
746
704 720 720
771 806 793
1,010
827 805
726
720
619
539 503 560
400
200
0
86 88 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Source: Tillinghast Towers-Perrin, 2007 Directors and Officers Liability Survey.
Top 10 D&O Claim Allegations From
Shareholder Claimants by Ownership
Private Companies
Inadequate/inaccurate disclosure, incl.
financial reporting
28%
24%
General breach of fiduciary duty
13%
Stock or other public offering
Divestiture or spinoff
5%
Breach of duty to minority shareholders
4%
Contract dispute (not relating to construction)
4%
Merger or acquisition -- another company the
survivor
4%
Recapitalization
4%
Golden parachutes/executive compensation
3%
Merger or acquisition -- your company the
survivor
3%
0%
Source: Tillinghast Towers-Perrin, 2007 Directors and Officers Liability Survey
100%
Top 10 D&O Claim Allegations From
Shareholder Claimants by Ownership
Public Companies
Inadequate/inaccurate disclosure, incl.
financial reporting
42%
20%
Stock or other public offering
13%
General breach of fiduciary duty
8%
Other shareholder/investor issues (specify)
4%
Golden parachutes/Executive compensation
Dishonesty/fraud (not accounting fraud)
3%
Contract dispute (not relating to construction)
2%
Use of inside information
2%
Accounting fraud
1%
Divestiture or spinoff
1%
0%
Source: Tillinghast Towers-Perrin, 2007 Directors and Officers Liability Survey
100%
ENERGY MARKET
REVIEW
World Crude Oil Prices:
1997- July 2008
Dollars per Barrel*
$160
$140
$120
$100
$80
Crude oil prices in July
2008 ($145.29) are up
855% since January
1998 ($15.21) and 179%
from Feb. 2007 ($52.11)
In July 2008 oil
prices hit record
highs above
$145 per barrel
$60
$40
$20
$15.21
$0
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
*All countries spot market price weighted by estimated export volume. July 2008 figure is NYMEX crude.
Source: Energy Information Administration; http://tonto.eia.doe.gov/dnav/pet/hist/wtotworldw.htm
Avg. Annual Change in Consumption of
Crude Oil in Major World Regions
000 barrels per day
Demand for oil will increase by a
projected 49% in China, 30% in
India and Middle East by 2015
410
400
242
211
162
200
169158
112
86
100
68
99
36
0
68
15
90
294
230
171
61
-3-21
-100
2005-2015, projected
-200
-182
1990-2005
-300
Canada,
Mexico and
the U.S.
U.S.
Developing
Asia, excl.
China and
Latin
America
OECD
Europe*
Japan
Russia
Former
Soviet and
Communist
India
Middle East
-349
China
-400
19
56 53
Africa
300
276
Australia,
New
Zealand,
500
*Austria, Belgium, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy,
Luxembourg, the Netherlands, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey and UK.
Source: Wall Street Journal, January 3, 2008 edition; International Energy Agency
Energy Market: Key Trends
Energy loss record continues to improve
after second consecutive quiet year (2006/07)
Profitable energy sector has led to increased
market capacity (highest since 9/11)
Greater capacity has led to continued price
pressure in 2008 (mirrors most of
commercial mkt.)
Energy sector not at center of emerging
D&O issue arising from subprime issue (no
similarities to Enron era)
Source: Insurance Information Institute
Energy Market: Primary Threats
Major CATs, esp. in Gulf of Mexico
Facilities running at full capacity: strained?
Pushing limits of existing/new technology?
Increased political risk abroad in some areas
Inflation: Higher labor, contractor & building
materials costs: Rebuild/repair costs rising
Oil is at center of global commodities boom; Could go
bust, esp. as economies weaken?
Climate change, CO2 regs, environmental regs
Ocean Marine, Transport Risk
Terrorism Threats/Vulnerability
US political & tort shifts?
Source: Insurance Information Institute
Oil/Energy is Replacing Credit as
Chief Source of Economic Instability
Rising oil/energy prices leading to severe economic
dislocation and hardship on a global scale
Reduced economic growth globally (except energy
exporting countries)
Fueling inflation
 Forcing central banks to raise interest rates
Encouraging collateral boom in other commodities
Increasing the cost of food production
Disastrous for transport sector (e.g., airlines)
Food, energy costs are acute problems in poorest
parts of the world (rioting in some areas)
Increasing the power and wealth of states opposed
to US policy interests (e.g., Iran, Venezuela)
Influence on US biofuels policy
Source: Insurance Information Institute
Offshore Losses Excl.
Windstorm, 1997-2006
Source: Willis Energy Market Review: At Full Stretch? June 2007
Upstream Operating Underwriting
Capacities, 2000-07
Source: Willis Energy Market Review: At Full Stretch? June 2007
Worldwide Offshore Construction
Losses, 2000-2006 (> $1M)
Source: Willis Energy Market Review: At Full Stretch? June 2007
Liability Market Capacity
2000-2007
Source: Willis Energy Market Review: At Full Stretch? June 2007
Global Political Risk is Always
an Issue in Energy Markets
IRAN: Leader unpopular at home; Constant
saber-rattling with US; Domestic energy
shortages
IRAQ: Situation improving but unclear if
Iraqi regime can protect oil infrastucture
RUSSIA: Politically and economically
resurgent country; nationalism rising
NIGERIA: Domestic political instability,
energy infrastructure vulnerable
VENEZUELA: Chavez is US antagonist
Source: Insurance Information Institute
UTILITIES, CLIMATE
CHANGE &
INSURANCE RISK
Property, Casualty,
Operational and
Political Effects
Mean Temperature Rise Implies
Increase in Extreme Heat Events
Unclear whether climate change
increases or decreases net
demand for energy
Less heating in
cold months
More cooling
in hot months
Much bigger percentage changes in extremes
Source: Dr. Kevin E. Trenberth, National Center for Atmospheric Research, June 2008.
Mean Temperature Rise Implies
Increase in Extreme Heat Events
Increased volatility
unambiguously increases
operational challenges
Much bigger percentage changes in extremes
Source: Dr. Kevin E. Trenberth, National Center for Atmospheric Research, June 2008.
Elements of Climate Change
Risk Affecting Utilities
Property Risk
Liability Risk
Operational Risk
Political &
Reputation Risk
Potential Issues
•Assumption is that climate will generally be more volatile
•Extreme events more frequent
•Implies utility disruptions (local/regional power outages)
more frequent, more extensive
•Hurricanes more intense (facility/infrastructure damage,
fuel costs)
•Utilities will be blamed for less stable electrical service,
surge losses and interruption to business
•CO2 emission
•Carbon capture & sequestration
•Liability associated with alternative energy
•Rising and volatile fuel costs
•Increased need for hedging, substitute adds risk
•Utilities caught in between
•Consumers, consumer advocates, politicians will blame
power generators (in part) for high prices
•Regulators/legislators could slow ability to pass along
increases in cost to consumers
Source: Insurance Information Institute.
Risk
CO2
REGULATION
Greenhouse Gases Can Be
Reduced, But at What Cost?
CO2 Caps Set by S. 2191
Through 2050 (Billions of Metric Tons)
Billions of Metric Tons
2005 emission
level
Lieberman-Warner (S.
2191) imposes ambitious
CO2 reduction targets
15% below 2005
emission level
6
5.2
5
4.43
4
33% below 2005
emission level
52% below 2005
emission level
3.47
3
2.51
2
70% below 2005
emission level
1.56
1
0
2012
2020
2030
2040
Source: Heritage Foundation; America’s Climate Security Act of 2007, S. 2191, 110th
Congress, 1st Sess. (2007), Sec. 1201 (d).
2050
Comparing Simulations of
Carbon Dioxide Fees
Carbon Fees Per Ton, Adjusted for Inflation
Carbon fee estimates vary, but
price grows sharply over time with
emission reduction mandates
(108% under EPA scenario)
$150
$100
$83
$68
$50
$101
$49
$56
$40
$50
$51
$83
$65
$58
$68
$0
2015
2020
The Heritage Foundation*
2025
MIT**
2030
EPA**
*In 2006 dollars; *In 2005 Dollars.
Source: Heritage Foundation, The Economic Costs of the Lieberman-Warner Climate Change
Legislation, May 2008.
Per-Household Carbon Dioxide
Emissions
In Metric Tons for 2007
AK
AL
19.9
WA
4.2
ME
10.3
MT
51.3
ND
114.8
MN
18.4
OR
4.9
ID
1.6
WY
218.1
UT
44.8
CO
22.7
CA
4.9
HI
20.9
20 to 29.9
30 to 39.9
40 to 220
Source: Heritage Foundation
DC
0.4
OH
28.7
IN
50.1
WV
114.5
VA
14.5
KY
56.4
MO
34.3
NC
21.2
TN
25.8
AZ
24
OK
37.7
NM
45.5
SC
24.7
AR
25.8
MS
24
TX
31.8
AL
47.4
CT 8.3
NJ
6.3
PA
26
IL
21.1
KS
32.7
0 to 9.9
10 to 19.9
MI
19.5
IA
33.6
NE
31.8
NV
17.7
NY
7.2
WI
21.6
SD
11.3
VT
0 NH
14
MA 9.7
GA
26.6
LA
34.6
FL
17.8
RI
6.2
DE 18.4
MD 14.6
Carbon Sequestration: An Alien
Concept to Most Americans
Source: Back cover of Discover Magazine, July 2008.
Domestic Political
Risk Rising for
Energy Sector
Profits, Economic Dislocation
Could Lead to Taxation
& More Regulation
Energy Goods & Services as % of All
Personal Consumption Expenditures**
1929 -2008:Q1
10%
Great Depression
Arab Oil Embargo,
Iranian Revolution
9%
WW II
8%
Energy Goods &
Services account for
6.6% of all consumer
expenditures and are
at their highest level
since 1985, and up
from 4.5% in 2002
7%
6%
This is fourth and second
largest (in % terms) of
the great energy
inflations since 1929
5%
4%
Crash of
Dollar
3%
1929
1939
1949
1959
1969
1979
1989
*First quarter 2008. **Includes electricity and fuel oils.
Source: US Bureau of Economic Analysis (Insurance Information Institute calculations).
1999
2008*
Increases in Energy Goods & Services as a
% of All Personal Cons. Expenditures**
60%
53.9%
47.0%
50%
40%
30%
20%
10%
46.4%
39.3%
Energy Goods & Services
expenditures (including electricity)
as % of all expenditures are in the
midst of their biggest run-up since
the 1970s energy crises
0%
1929-1933
1944-1958
1972-1981
1998-2008*
*As of 2008:Q1
**Includes energy and food costs.
Sources: Insurance Information Institute calculations from Bureau of Economic Analysis data.
Domestic Political Problems
on the Rise for Energy Concerns
Windfall profits tax is a major risk to energy firms
 Top 5 publicly traded energy firms earned $120 billion in
2007 (roughly twice entire p/c industry)
Announced share buybacks increased from $10B in
2003 to $60B in 2006 (500%), while spending on:
 Existing oil field develop. rose just 43% ($35B to $50B)
 New oil field development rose 67% ($6B to $10B)
Reality is that “incidence” of a tax will largely fall
on the consumer
Watch for additional focus on “bottlenecks” such as
refineries which exert control over supply
Source: CNNMoney.com, 5/6/08; Insurance Information Institute
Domestic Political Problems
on the Rise for Energy Concerns
Continued Local Opposition to Building New
Energy Generation Facilities of Any Sort
(“NIMBY”)
 But energy firms will still be blamed for high prices
States Requiring Plant Designs that Conform to
Their Own CO2 Reduction Goals (Patchwork)
 Recent Georgia Case
High Construction Costs; Immense Red Tape
Miscomprehension over Short and IntermediateTerm Potential of Alternative Energy
No Understanding of Carbon Capture &
Sequestration Technology, Risk or Cost
Source: Insurance Information Institute
A STORMY
ECONOMIC
FORECAST
What a Weakening Economy &
The Threat of Inflation Mean
for the Insurance Industry
Real GDP Growth*
1.9%
1.2%
1.5%
0.4%
0.9%
0.6%
1%
0.6%
0.8%
2%
2.9%
3.8%
2.9%
1.6%
3%
3.1%
3.6%
2.5%
4%
3.7%
5%
2.7%
4.9%
6%
2.5%
Economic growth has
slowed dramatically in
recent quarters,
though no official
recession has occurred
09:4Q
09:3Q
09:2Q
09:1Q
08:4Q
08:3Q
08:2Q
08:1Q
07:4Q
07:3Q
07:2Q
07:1Q
2006
2005
2004
2003
2002
2001
2000
0%
*Yellow bars are Estimates/Forecasts from Blue Chip Economic Indicators.
Source: US Department of Commerce, Blue Economic Indicators 6/08; Insurance Information Institute.
2.9%
2.2%
1.4%
2.0%
2.8%
2.7%
1.6%
2.3%
2%
US growth is
among the
slowest in 2008
2.8%
2.6%
1.6%
1.7%
Economic growth is expected
to slow globally in 2008,
adversely impact global
exposure growth and slowing
absorption of excess capital
6%
4%
2009
2.8%
3.1%
1.8%
1.9%
8%
2008
2.2%
2.1%
1.3%
1.6%
10%
2007**
3.0%
2.7%
3.5%
12%
2006*
4.8%
14%
11.1%
11.4%
9.7%
9.3%
Percent Change in GDP By Country,
2006-2009
EuroZone
U.S.
-1%
Canada
Mexico
Japan
U.K.
China
* Best estimates available. **In most cases, actual data for 2007. Where actual data not available, figures are
consensus forecasts from Dec. 10., 2007 issue of Blue Chip Economic Indicators.
Source: Blue Chip Economic Indicators, May 10, 2008.
5%
0%
-5%
Real NWP Growth
-10%
6%
4%
78
5.2%
79
-0.9%
80-7.4%
81 -6.5%
82
-1.5%
1.8%
83
84
4.3%
85
86
87
5.8%
88
0.3%
89
-1.6%
-1.0%
90
91
-1.8%
92
-1.0%
3.1%
93
94
1.1%
95
0.8%
96
0.4%
97
0.6%
98
-0.4%
99
-0.3%
1.6%
00
01
5.6%
02
03
7.7%
04
1.2%
05
-2.9%
06
-0.5%
-3.4%
07
08F
-4.9%
Real NWP Growth
15%
10%
8%
2%
Real GDP Growth
20%
P/C insurance industry’s growth
is influenced modestly by growth
in the overall economy
13.7%
25%
18.6%
20.3%
Real GDP Growth vs. Real P/C
Premium Growth: Modest Association
0%
-2%
Real GDP
-4%
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 6/08; Insurance Information Inst.
Summary of Economic Risks and
Implications for (Re) Insurers
Economic Concern
Subprime Meltdown/
Credit Crunch
Lower Interest Rates
Stock Market Slump
General Economic
Slowdown/Recession
Risks to Insurers
•Some insurers have some asset risk
•D&O/E&O exposure for some insurers
•Client asset management liability for some
•Bond insurer problems; Muni credit quality
•Lower investment income
•Decreased capital gains (which are usually
relied upon more heavily as a source of
earnings as underwriting results deteriorate)
•Reduced commercial lines exposure growth
•Surety slump
•Decreased workers comp frequency due to
drop in high hazard class employment
Toward a New World
Economic Order
1. Credit Crunch (incl. Subprime) Issue Will Ultimately
Cost Hundreds of Billions Globally (est. up to $600B)
•
Problem exacerbated by leveraged bets taken by some financial
institutions therefore its reach extends beyond simple defaults
2. Heavy Toll on Capital Base of Some Large Financial
Institutions Worldwide (e.g., Bear Stearns)
•
•
Cash infusions necessary; Sovereign Wealth Funds important source
Federal Reserve forced into playing a larger role; must improvise
3. Most Significant Economic Event in a Generation
•
US economy will recover, but will take 18-24 months
4. Shuffling of Global Economic Deck; Economic
Pecking Order Shifting
•
China, oil producing countries hold the upper hand
5. IOUs are Being Redeemed
•
Stakes in hard assets/institutions demanded
6. Good News: No Shortage of Available Capital
•
Central banks are (generally) making right decisions; Dollar sinks
Source: Insurance Information Institute
Post-Crunch: Fundamental
Issues To Be Examined Globally
•
•
•
•
Adequacy of Risk Management, Control & Supervision
at Financial Institutions Worldwide



Failure of risk management (and regulation)
Implications for ERM?
Includes review of incentives
Effectiveness and Nature of Regulation





What sort of oversite is optimal given recent experience?
Credit problems arose under US and European (Basel II) regulatory
regimes
Will new regulations be globally consistent?
Can overreactions be avoided?
Capital adequacy & liquidity
Accounting Rules



Problems arose under FAS, IAS
Asset Valuation, including Mark-to-Market
Structured Finance & Complex Derivatives
Ratings on Financial Instruments

New approaches to reflect type of asset, nature of risk
Source: Insurance Information Institute
Summary of Treasury
“Blueprint”for
Financial Services
Modernization
Impacts on Insurers
Treasury Regulatory
Recommendations Affecting Insurers
•
•
•
•
Establishment of an Optional Federal Charter (OFC)

Would provide system for federal chartering, licensing, regulation and
supervision of insurers, reinsurer and producers (agents & brokers)
OFC Would Incorporate Several Regulatory Concepts



Ensure safety and soundness
Enhance competition in national and international markets
Increase efficiency through elimination of price controls, promote more
rapid technological change, encourage product innovation, reduce
regulatory costs and provide consumer protection
Establishment of Office of National Insurance (ONI)



Department within Treasury to regulate insurance pursuant to OFC
Headed by Commissioner of National Insurance
Commissioner has regulatory, supervisory, enforcement and
rehabilitative powers to oversee organization, incorporation, operation,
regulation of national insurers and national agencies
UPDATE: HR 5840 Introduced April 17 Would Establish
Office of Insurance Information (OII)

Would create industry “voice” within Treasury
Source: Department of Treasury Blueprint for a Modernized Financial Regulatory System, March 2008.
Inflation
Overview
Pressures Claim Costs,
Expands Probable &
Possible Max Losses
Inflation Rate (CPI-U, %),
1990 – 2009F
6
5
4.9 5.1
Inflation was just 2.8% in 2007 but is accelerating. Medical cost
inflation, important in WC, auto liability and other casualty covers
is running far ahead of inflation. Rising inflation can also lead to
adverse reserve development and inadequate reinsurance.
4.2
3.8
4
3.0 3.2
3
2
1
3.3 3.4
3.0
2.9 2.8
2.6
2.4
2.5 2.3
2.8
3.9
2.6
1.9
1.5
1.3
Inflation on year-over-year basis was 3.9% in
April, well above the recent historical average
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 08F 09F
*12-month change May 2008 vs. May 2007;
Source: US Bureau of Labor Statistics; Blue Chip Economic Indicators, June 10, 2008; Ins. Info. Institute.
Inflation: A Growing Problem
Around the World*
Venezuela
Egypt
Pakistan
Russia
South Africa
Turkey
Saudi Arabia
Argentina
Thailand
Hungary
Czech Republic
Brazil
South Korea
Mexico
United States
Euro Zone
Canada
Japan
0%
31.4%
19.7%
19.3%
15.1%
11.7%
Inflation in most developing
10.7%
10.4%
economies is food driven.
9.1%
In developed economies,
8.9%
7.0%
energy and commodities
6.8%
pries play a larger role
5.6%
5.5%
Inflation in developed economies
4.9%
4.2%
has accelerated, but appears tame
4.0%
relative to developing economies
2.2%
1.3%
5%
10%
15%
20%
25%
30%
*Data are for the year ending in the most recent month available, typically May 2008.
Source: The Economist, July 5 - 11, 2008 edition; Insurance Information Institute.
35%
Inflation: Important Economic Risks
and Implications for Insurers (cont’d)
Effects of Inflation
Claim Severity
Increase
Rate Inadequacy
Business
Interruption &
Contingent BI
Cost Escalation
Risks to Insurers & Buyers
•Claims (property and liability) costs may rise as
the price of goods and services increase
•PMLs could be (much) higher
•Accelerating inflation can contribute to rate
inadequacy because ratemaking is largely a
retrospective process
•Many types of loss trends are sensitive to the pace
of inflation: medical cost, tort, etc.
•Historical loss cost trends could be biased
predictors of future loss if inflation accelerates
•Business interruption and contingent business
interruption claim costs will rise because the
nominal value of interrupted business and expense
costs will grow more rapidly
•Especially pronounced in energy, commodity and
natural resource intensive industries
Inflation: Important Economic Risks
and Implications for Insurers (cont’d)
Effects of Inflation
Reserve
Deficiency
Inadequate
Insurance Limits
Inadequate
Reinsurance
Risks to Insurers
•Reserves are established using certain assumptions
about future development and discounting factors
•If inflation accelerates, development could be more
rapid and/or be more substantial (in dollar terms)
than assumed and discount factors may be too low
•Policyholders could find themselves inadequately
insured as claims costs escalate
•Inflation can lead to a more rapid and unexpected
exhaustion of reinsurance because losses are higher
than expected
Comparative 2007 Inflation
Statistics Important to Insurers ( %)
8
Inflation Rate (%)
7
CPI and “Core” CPI are
not representative of
many of the costs
insurers face
6.7
6
4.4
5
4
3
4.1
3.9
2.8
2
2.3
1
0
CPI-U
Core CPI*
Total
Medical
Care
Physician
Services
Hospital
Services
Legal
Services
*Core CPI is the Consumer Price Index for all Urban Consumers (CPI-U) less food and energy costs.
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Industrial Metals Index,
2000-2008*
250
230
210
190
170
150
130
Metals prices are soaring
due to a weak dollar,
speculation, & demand
from emerging economies
191.9
Industrial metals prices in April
2008 were 272% above their 2002
levels, driving up oil/gas
exploration and repair costs
108.8
110
90
222.4 218.2 227.1
90.8
77.5
70
65.7
61.0
66.7
01
02
03
50
00
04
05
06
07
08
YTD
Apr 08
*2008 values through April 29.
Sources: Dow Jones-AIG: http://www.djindexes.com/mdsidx/downloads/xlspages/aigci/djaig_full_hist.xls accessed 1/30/08; I.I.I.
calculations based on daily index values.
Medical & Tort
Cost Inflation
Amplifiers of Inflation, Major
Insurance Cost Driver
Consumer Price Index for Medical
Care vs. All Items, 1960-2007
(Base: 1982-84=100)
Index Value (1982-84=100)
400
300
200
Soaring medical
inflation is among
the most serious
long-term
challenges facing
casualty, disability
and LTC insurers
Inflation for Medical
Care has been surging
ahead of general
inflation (CPI) for 25
years. Since 1982-84, the
cost of medical care has
more than tripled
351.1
207.3
100
0
Medical Care
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
All Items
Source: Department of Labor (Bureau of Labor Statistics; Insurance Information Institute.
Tort Cost Growth & Medical Cost Inflation
vs. Overall Inflation (CPI-U), 1961-2008*
14%
Tort System is an
Inflation Amplifier
Tort costs move with
inflation but at twice the rate
Avg. Ann. Change: 1961-2008*
12%
Torts Costs: +8.4%
Med Costs: +6.0%
Overall Inflation: +4.2%
10%
8%
6%
4%
2%
Tort Costs
Medical Costs
CPI
0%
1961-70
1971-80
1981-90
1991-2000
2001-08E
*Medical cost and CPI-U through April 2008 from BLS. Tort figure is for full-year 2008 from Tillinghast.
Sources: US Bureau of Labor Statistics, Tillinghast-Towers Perrin, 2007 Update on U.S. Tort Costs; Insurance Info. Inst.
WC Medical Severity Rising Far
Faster than Medical CPI
16%
13.6%
14%
12%
WC medical severity rose
more than twice as fast as the
medical CPI (8.3% vs. 4.0%)
from 1995 through 2007p
10.6%
10.1%
9.2%
10%
8.3%
7.4%
7.6% 7.2%
6.2%
6% 5.1%
4%
2%
0%
6.0%
1.6 pts
8%
7.3%
8.6%
4.5%
3.5%
3.5%
3.2%
2.8%
4.1%
4.6% 4.7%
4.0% 4.4% 4.2% 4.0% 4.4%
Change in Medical CPI
Change Med Cost per Lost Time Claim
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007p
Sources: NCCI; Med CPI from Economy.com; WC med severity from NCCI based on NCCI states.
Dollar
Depreciation
Driver of Higher Energy,
Commodities Prices and
Overall Inflation
Depreciation of Dollar is Partly
Responsible for Rising Energy Prices
US Dollars per Euro
$1.6
$1.5
$1.4
Weakening dollar spurs oil producers to
try to maintain purchasing power by
keeping oil prices high. Dollar has
dropped 57% relative to Euro since 2001.
$1.555
$1.371
$1.244 $1.245 $1.256
$1.132
$1.3
$1.2
$1.1 $1.065
Interest rate cuts
will keep downward
pressure on the
dollar
$0.923 $0.895 $0.945
$1.0
$0.9
$0.8
99
00
01
02
03
04
05
06
07
*As of May 2008.
Source: Board of Governors of the Federal Reserve Bank; Insurance Information Institute.
08*
CATASTROPHIC
LOSS
What Will 2008 Bring?
$80
$60
$40
$20
$9.2
$6.7
$9.3
$100
2008 CAT losses already exceed
the annual totals recorded for all
of 2007 and 2006. 2005 was by
far the worst year ever for
insured catastrophe losses in the
US, but the worst has yet to come.
$7.5
$2.7
$4.7
$22.9
$5.5
$16.9
$8.3
$7.4
$2.6
$10.1
$8.3
$4.6
$26.5
$5.9
$12.9
$27.5
$120
$100 Billion
CAT year is
coming soon
$61.9
$ Billions
$100.0
U.S. Insured Catastrophe Losses*
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08:Q2**
20??
$0
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.
**Based on preliminary PCS data through June 30.
Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and
personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.
Source: Property Claims Service/ISO; Insurance Information Institute
Natural Disasters in the United
States, 1980-2008 (Jan – June Only)
Number
Number of events
has more than
doubled since 1980
109 events
through June 30
is a record
Geophysical
(earthquake, tsunami,
volcanic activity)
© 2008 Munich Re Group
Meteorological (storm)
Hydrological
(flood, mass movement)
Climatological
(temperature extremes,
drought, wildfire)
Source: MR NatCatSERVICE
Inflation-Adjusted U.S. Insured
Catastrophe Losses By Cause of Loss,
1987-2006¹
Fire, $6.6 , 2.2%
Civil Disorders, $1.1
, 0.4%
Wind/Hail/Flood,
$9.3 , 3.1%
Earthquakes, $19.1 ,
6.4%
Winter Storms,
$23.1 , 7.8%
Terrorism, $22.3 ,
7.5%
Water Damage, $0.4
, 0.1%
Utility Disruption,
$0.2 , 0.1%
Tornadoes, $77.3 ,
26.0%
Insured disaster losses
totaled $297.3 billion from
1987-2006 (in 2006 dollars).
Wildfires accounted for
approximately $6.6 billion of
these—2.2% of the total.
All Tropical
Cyclones, $137.7 ,
46.3%
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2006 dollars.
Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.
2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions
and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood
Insurance Program. 6 Includes wildland fires.
Source: Insurance Services Office (ISO)..
Total Value of Insured
Coastal Exposure (2007, $ Billions)
Florida
New York
Texas
Massachusetts
New Jersey
Connecticut
Louisiana
S. Carolina
Virginia
Maine
North Carolina
Alabama
Georgia
Delaware
New Hampshire
Mississippi
Rhode Island
Maryland
$2,458.6
$2,378.9
$895.1
$772.8
$635.5
$479.9
$224.4
$191.9
$158.8
$146.9
$132.8
$92.5
$85.6
$60.6
$55.7
$51.8
$54.1
$14.9
The insured value of coastal
property was $8.9 trillion in
2007, up 24% from 2004.
Florida still leads the way
with nearly $2.5 trillion
(27.7% of total)
$0
Source: AIR Worldwide
$500
$1,000
$1,500
$2,000
$2,500
$3,000
Global Insured Catastrophe Losses
1970-2007 ($ 2007)
$80
$60
$40
$20
$16.9
$27.6
$100
$2.4
$5.0
$5.8
$9.1
$5.0
$6.4
$5.6
$5.4
$11.3
$7.0
$4.2
$8.9
$10.3
$6.8
$11.6
$5.6
$15.4
$12.4
$23.7
$27.9
$24.4
$42.5
$18.4
$34.4
$25.6
$18.0
$11.2
$24.9
$43.1
$15.0
$41.8
$16.7
$21.6
$52.8
$120
Impact of Hurricane Katrina
on 2005 losses was dramatic,
but losses are trending
upward in general
$113.9
$ Billions
$0
71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Source: Swiss Re Sigma No.1/08, Natural catastrophes and man-made disasters in 2007
Insured Offshore Energy Losses for
Recent Major Gulf Storms
$4.0
Hurricanes Katrina, Rita
and Ivan cost energy
insurers at least $7 billion
$ Billions
$3.0
$2.0
$2.0
$3.0
$2.25
$1.0
$0.0
Katrina (2005)
Ivan (2004)*
Sources: Insurance Information Institute research estimates.
Rita (2005)
*Midpoint of estimated range for $2.0 to $2.5 billion)
Katrina & Rita: Total Energy
Losses, Onshore vs. Offshore*
Offshore
Billions
$10
$8
Total = $9.15 Billion
$2.53
$6
$4
Onshore
Total = $5.89 Billion
$0.915
$6.63
$2
$4.982
$0
Katrina
Source: Willis
Rita
*Loss estimates are total losses, not just insured losses.
FIRST HALF 2008
CATASTROPHE
LOSSES
Many Record Set
The 2008 Hurricane
Season:
Preview to Disaster?
Outlook for 2008 Hurricane
Season: 60% Worse Than Average
Average*
2005
2008F
9.6
49.1
5.9
24.5
2.3
28
115.5
14
47.5
7
15
80
8
40
4
5
7
9
Accumulated Cyclone Energy
96.2
NA
150
Net Tropical Cyclone Activity
100%
275%
160%
Named Storms
Named Storm Days
Hurricanes
Hurricane Days
Intense Hurricanes
Intense Hurricane Days
*Average over the period 1950-2000.
Source: Philip Klotzbach and Dr. William Gray, Colorado State University, June 3, 2008.
Landfall Probabilities for 2008
Hurricane Season: Above Average
Entire US East & Gulf Coasts
US East Coast Including
Florida Peninsula
Gulf Coast from Florida
Panhandle to Brownsville
Caribbean
Average*
2008F
52%
31%
69%
45%
30%
44%
NA
Above
Average
*Average over the past century.
Source: Philip Klotzbach and Dr. William Gray, Colorado State University, June 3, 2008.
REINSURANCE
MARKETS
Reinsurance Prices are
Falling in Non-Coastal
Zones, Casualty Lines
Share of Losses Paid by
Reinsurers, by Disaster*
70%
60%
50%
40%
30%
Reinsurance is playing
an increasingly
important role in the
financing of megaCATs; Reins. Costs are
skyrocketing
30%
25%
60%
45%
20%
20%
10%
0%
Hurricane Hugo Hurricane Andrew
Sept. 11 Terror
2004 Hurricane
2005 Hurricane
(1989)
(1992)
Attack (2001)
Losses
Losses
*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer,
which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at
$3.85 billion for 2004 and $4.5 billion for 2005.
Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.
US Reinsurer Net Income
& ROE, 1985-2007*
$7.96
$9.68
5%
0%
-5%
ROE
07*
06
05
04
-10%
03
02
99
98
97
96
95
94
93
92
91
90
89
88
87
86
01
($2.98)
($4)
85
15%
ROE
$2.51
$3.41
$3.17
$1.31
$4.53
$1.47
$1.95
$2.52
$1.79
$1.17
$1.87
$2.03
Net Income
($2)
20%
10%
00
$0
$1.95
$1.94
$2
$1.38
$4
$1.22
$6
$3.71
$8
$0.12
Net Income ($ Bill)
$10
$1.99
$12
$5.43
Reinsurer profitability
rebounded post-Katrina
but is now falling
Source: Reinsurance Association of America. *2007 ROE figure is III estimate based return on average 2007 surplus.
Shifting Legal
Liability & Tort
Environment
Is the Tort Pendulum
Swinging Against Insurers?
“King of Torts” Dickie Scruggs
•Won billions in tobacco, asbestos and Katrina
litigation
•Pleaded guilty for attempting to offer a judge
$40,000 bribe to resolve attorney fee allocation
from Katrina litigation in his firm’s favor. His
son/othersguilty on related charges
•Could get 5 years in prison, $250,000 fine
Source: Wall Street Journal, 3/15/07
“King of Class Actions” Bill Lerach
•Former partner in class action firm Milberg
Weiss
•Admitted felon. Guilty of paying 3 plaintiffs
$11.4 million in 150+ cases over 25 years &
lying about it repeatedly to courts
•Will serves 1-2 years in prison and forfeit
$7.75 million; $250,000 fine
Source: San Diego Union Tribune, 9/19/07
Bad Year for Tort Kingpins*
Personal, Commercial &
Self (Un) Insured Tort Costs*
$250
Commercial Lines
Personal Lines
Self (Un)Insured
Total = $216.7 Billion
Billions
$200
$45.5
Total = $159.6 Billion
$150
Total = $121.0 Billion
$30.0
$85.6
$20.4
$100
$70.9
Total = $39.3 Billion
$51.0
$50
$0
$85.6
$5.2
$17.1
$17.0
$49.6
$58.7
1980
1990
2000
*Excludes medical malpractice
Source: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.
2006
Tort System Costs and Tort Costs as
a Share of GDP, 2000-2009F
1.82%
$246
$220
$200
$180
$260
$233
$240
2.10%
$205
$179
$277
$265
1.87% 1.84%1.83%1.83% 2.0%
1.5%
After a period of rapid
escalation, tort system costs
as % of GDP are now falling
$160
$140
$120
1.0%
0.5%
$100
0.0%
00
01
02
03
04
Tort Sytem Costs
05
06
07E
Tort Costs as % of GDP
Source: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.
08E
09E
Tort Costs as % of GDP
$260
2.03%
$261
Tort System Costs
$280
2.5%
$253
2.22% 2.24% 2.23%
$247
$300
Liability: Average Cost per $1,000 of Revenue*
United States, 2001 to 2007
$0.48
$0.32
$0.23
$0.18
$0.14
$0.11
$1.27
$1.06
$0.50
$0.33
$1.00
$0.67
$0.65
$1.25
$2.00
$1.56
$1.07
$2.50
$1.50
Liability insurance costs
relative to the client’s
revenues are down by
25% - 35% since 2004
$2.49
$3.00
2007
$0.36
$0.23
$3.50
2004
$0.17
$3.21
2001
$0.86
$0.63
$4.00
$0.00
$0 - $200M
$201M$500M
$501M-$1B
*Across entire liability program (full population)
Source: Marsh, 2007 Limits of Liability Report
$1B-$5B
$5B-$10B
$10B+
All
The Nation’s Judicial
Hellholes (2007)
Watch List
Madison County, IL
St. Clair County, IL
Northern New
Mexico
Hillsborough
County, FL
Delaware
California
Some improvement
in “Judicial
Hellholes” in 2007
NEVADA
Clark County
(Las Vegas)
ILLINOIS
Cook County
NEW JERSEY
Atlantic County
(Atlantic City)
West Virginia
Dishonorable
Mentions
District of Columbia
MO Supreme Court
MI Legislature
GA Supreme Court
Oklahoma
TEXAS
Rio Grande
Valley and
Gulf Coast
Source: American Tort Reform Association; Insurance Information Institute
South Florida
Sum of Top 10 Jury Awards,
2004-2007
$6,000
$ Millions
$5,158.8
$5,000
$4,000
$2,953.7
$3,000
Total of Top 10
awards in 2007
was 25% lower
than in 2006
$2,000
$1,000
$815.0
$615.0
2006
2007
$0
2004
2005
Source: Insurance Information Institute from LawyersWeekly USA, January 2005, 2006, 2007 and 2008.
2008 ELECTIONS
Major Implications for
Energy Industry &
Its Insurers
Political Implications for
Energy Insurers & Policyholders
• All 435 House Seats and 35 of 50 Senate Seats Up for Grabs
 State legislatures and key committees will also see significant turnover
• Election Impacts Will Be Felt by All Industries, Energy and
Insurance Included
• Areas to Watch Include:











Climate Change Regulation (CO2)
Energy Policy (drilling, refineries, permitting & licensing, nuclear)
Political response to energy “crisis”
Restrictions on “speculators” in energy markets (CFTC)
Environmental Policy
Shifts in Tort Environment
Tax Policy (Energy firms, international (re)insurance)
Insurance Regulation (OFC?)
Congressional/Presidential response to rising inflation
Dollar Strategy (strong vs. weak)
Federal Reserve monetary policy (interest rates)
Insurance Information
Institute On-Line
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