An Economic Forecast
For P/C Insurers:
Critical Issues for
Long-Term Profitability
Insurance Education Day
Columbus, OH
April 5, 2006
http://www.iii.org/media/industry/outlooks/ohio/
Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist
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
• P/C Profit Overview
• Public Perceptions of the P/C Insurance Industry
• The Six Key Issues Impacting P/C Profitability
 Underwriting
 Pricing
 Investments
 Expenses
 Leverage (Capacity)
 P/C Operating Environment: Tort Focus
•
•
•
•
Catastrophe Loss Management
Commercial & Personal Lines: A Quick Overview
Insurance-to-Value & Proper Insurance
Q&A
P/C PROFIT
OVERVIEW
2006 Outlook is Good
Highlights: Property/Casualty,
9-Mos. 2005 vs. 9-Mos. 2004
Growth rate barely
1/2 that of CY2004
2005
2004
Change
Net Written Prem. (adj)
326,527
323,337
+1.3%
Loss & LAE
229,563
224,302
+2.3%
Investment Income
Net UW Gain (Loss)
Rebound?
(2,828)
3,238
N/A
Net Inv. Income
36,445
28,956
+25.6%
Net Income (a.t.)
28,787
27,567
+4.4%
Surplus*
414,264
393,488
+5.2%
100.0
98.1
Combined Ratio*
Source: ISO, Insurance Information Institute
+1.9 pts.
Lowest in many years
*Comparison is with year-end 2004 value.
P/C Net Income After Taxes
1991-2005:Q4E ($ Millions)
2001 ROE = -1.2%
$40,000 2003 ROE = 8.9%
$35,000
$30,000
2004 ROE = 9.4%
$19,316
$20,000
$15,000
$30,773
2005E ROAS = 9.5%**
$25,000
$24,404
$20,598
$14,178
$30,029
$21,865
$20,559
2005 NIAT will
probably be
above 2004
$10,870
$10,000
$38,722
$36,819
$5,840
$5,000
$43,000
$45,000 2002 ROE = 2.2%
$3,046
$0
-$5,000
-$6,970
-$10,000
91
92
93
94
95
96
97
98
99
00
*ROE figures are GAAP; 2005 is III estimate. **Return on avg. surplus.
Sources: A.M. Best, ISO, Insurance Information Institute.
01
02
03
04 05*
Strength of Recent Hard Markets
by NWP Growth*
25%
1975-78
1984-87
2001-04
2006-2010 (post-Katrina)
period will resemble 1993-97
(post-Andrew)
20%
15%
10%
5%
0%
-5%
2005: biggest real drop in
premium since early 1980s
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
2005E
2006F
2007F
2008F
2009F
2010F
-10%
Note: Shaded areas denote hard market periods.
Source: A.M. Best, Insurance Information Institute
*2005-10 figures are III forecasts/estimates.
Growth in Direct Written
Premiums: Ohio and US
25%
20%
15%
10%
5%
0%
-5%
Decline in premiums in OH was substantial
(-15.7%) in 2003-4 while US was up 6.6%
-10%
-15%
-20%
93
94
95
96
97
98
Ohio
Source: Insurance Information Institute; NAIC.
99
0
US
01
02
03
04
Advertising Expenditures by P/C
Insurance Industry, 1999-2004
$ Billions
$2.2
$2.1
$2.0
Ad spending by P/C insurers
is at a record high, signaling
increased competition
$2.111
$1.882
$1.9
$1.803
$1.8
$1.736
$1.737
99
00
$1.708
$1.7
$1.6
$1.5
01
02
03
Source: Insurance Information Institute from consolidated P/C Annual Statement data.
04
ROE: P/C vs. All Industries
1987–2006F*
20%
2006 Estimate = 13%
2005:H1 P/C ROAS = 15.3%
15%
10%
5%
2005 P/C ROAS = 9.5% after
adjusting for 2005 Hurricanes
0%
US P/C Insurers
06E
05E
05H1
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
89
88
87
-5%
All US Industries
*GAAP ROEs except 2005 P/C figure = return on average surplus. 2005/6E figure is III full-year estimate.
Source: Insurance Information Institute; Fortune for all industry figures
ROE: P/C vs. All Industries
1987–2005E
20%
2004/5 ROEs excl. hurricanes
15%
10%
Sept. 11
5%
Hugo
Katrina,
Rita, Wilma
Lowest CAT
losses in 15 years
0%
Andrew
Northridge
4 Hurricanes
-5%
87
88
89
90
91
92
US P/C Insurers
93
94
95
96
97
98
All US Industries
Source: Insurance Information Institute; Fortune
99
00
01
02
03
04 05*
P/C excl. Hurricanes
RETURN ON EQUITY (Fortune):
Stock & Mutual vs. All Companies*
16%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
14.6%
Stock insurer ROEs
consistently above mutuals
13.4%
13%
12%
11%
10%
10.4%
12.6%
9%
6%
1998
13.9%
10.0%
8%
Stock
Mutual
All Companies*
2000
14%
7%
7%
2%
Some mutual insurers
sell/market the mutuality
concept effectively
-2%
2001
*Fortune 1,000 group.
Source: Fortune Magazine, Insurance Information Institute.
2002
2003
2004
ROE: P/C (US & OH) vs. All
Industries, 1991–2004*
25%
OH has recently outperformed
US P/C insurers.
20%
15%
10%
5%
0%
-5%
91
92
93
94
95
96
US P/C Insurers
97
98
99
00
All US Industries
Source: Insurance Information Institute; NAIC, Fortune
01
02
Ohio
03
04
RNW for Major P/C Lines,
1994-2003 Average
20%
15%
10%
10-Year returns for some major
p/c lines surprisingly good, but
HO is a major laggard
19.7%
14.0%
13.4%
8.3%
8.3%
7.4%
5.8% 5.5%
5.0%
5%
5.0%
2.9%
0%
-2.1%
-5%
Inland Fire
All
WC
PP
Marine
Other
Auto
Source: NAIC; Insurance Information Institute
All
Lines
Med
Mal
Comm Other
Auto
Liab
CMP
HO
Allied
ROE for Major Commercial
Lines in Ohio, 1993 - 2004
1993
Source: NAIC
1994
1995
1996
1997
1998
17.0%
14.9%
-2.6%
0.1%
1.9%
10.1%
1999
2000
-14.5%
-25%
-14.8%
-15%
Commercial Auto
rebounded in Ohio in
recent years
-4.2%
-5%
0.0%
5.9%
7.1%
8.2%
8.0%
6.2%
7.4%
4.6%
5%
7.2%
13.6%
15%
4.9%
25%
20.1%
18.3%
35%
26.0%
29.9%
Commercial Multi-Peril
Commercial Auto
45%
2001
2002
2003
2004
ROE for Personal Lines in Ohio
1993 - 2004
20%
15%
10%
Personal Auto
Homeowners
14.3%
8.5%
7.2%
11.5%11.3%
8.4%
7.8%
5%
10.8%
15.4%
13.1%
9.9%
9.0%
7.6%
5.9% 6.2%
3.0% 3.6%
0%
-5%
-10%
-15%
-1.9%
-3.4%
-5.2%
-6.6%
-9.3%
-9.0%
12-Year Average:
Auto: 10.36% Home: -1.68%
-13.9%
-20%
1993
Source: NAIC
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Rates of Return on Net Worth for
Homeowners Ins: US vs. OH
15%
10%
5%
7.2%
7.8%
2.5%
3.6%
0%
-1.7%
-5%
-3.4%
-10%
-15%
-20%
Will coastal insurers reallocate
resources to Midwest/Plains?
12.4%
9.7%
5.4% 5.4%
7.6%
3.8%
1.4%
3.6%
3.0% 3.6%
-4.2%
-1.9%
-7.2%
-5.2%
-6.6%
-9.0%
-9.3%
Averages: 1993 to 2004
US HO Insurance = 2.89%
Ohio HO Insurance = -1.68%
1993 1994 1995 1996 1997 1998
Source: NAIC, Insurance Information Institute
-13.9%
US
Ohio
1999 2000 2001 2002 2003 2004
Rates of Return on Net Worth for
Pvt. Passenger Auto: US vs. OH
Averages: 1993 to 2004
18%
Ohio PPA Insurance = +10.4%
14%
14.2%
12%
11.5%
12.1% 12.4%
11.4% 11.6% 11.3%
10%
8%
13.3%
10.8%
9.9%
9.0%
8.4%
7.7%
6%
9.4%
5.9% 6.2%
US
Ohio
2%
13.1%
10.1%
8.5%
4%
15.4%
US PPA Insurance = +9.2%*
16% 14.3%
4.1%
2.2% 2.0%
0%
1993
1994
1995
1996
1997
Source: NAIC, Insurance Information Institute
1998
1999
2000
2001
2002
2003
2004
PP AUTO: 2004 Return on
Equity, Ohio & Nearby States
2004
Ohio
15.4%
Indiana
16.7%
13.2%
US
8.7%
Pennsylvania
11.7%
Kentucky
12.1%
W. Virginia
0%
5%
10%
Source: NAIC, Insurance Information Institute
15%
20%
HOME: 2004 Return on
Equity, Ohio & Nearby States
2004
Pennsylvania
18.1%
US
6.6%
-5.2%
7.6%
Indiana
Ohio
18.1%
W. Virginia
12.7%
Kentucky
0%
5%
10%
15%
20%
Source: NAIC, Insurance Information Institute
25%
30%
Share of Auto & HO Market in
OHIO by Distribution Channel
Regional Agency
National Agency
Captive Agency
Direct
PP Auto 2002
36.1%
10.1%
45.8%
8.0%
PP Auto 2004
36.9%
9.7%
46.1%
7.4%
HOME: Direct/Captives
gain, IA channel slips
AUTO: Direct slips while
Regional/Captive agencies gain
Homeowners 2002
33.2%
15.3%
50.0%
1.6%
Homeowners 2004
33.0%
14.4%
50.6%
2.0%
0%
10%
20%
30%
40%
Source: A.M. Best; Insurance Inforrmation Institute.
50%
60%
70%
80%
90% 100%
WALL STREET:
MAINTAINING THE
CONFIDENCE OF WALL
STREET IS CRITICAL FOR
MANY INSURERS
P/C Insurers Stocks Up in 2005,
Brokers Up Too, Reinsurers Down
Total 2005 Returns
3.00%
P/C insurer stocks outperforming
the market despite hurricanes
S&P 500
22.09%
Brokers up on tight
market hopes
17.14%
All Insurers
13.29%
Brokers
9.40%
Multiline
9.31%
-0.52%
-5%
P/C
Reinsurers lagging
on record CAT losses
0%
5%
10%
Life/Health
15%
20%
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Reinsurers
25%
Change in YTD Stock Performance by
Sector Pre- & Post-Katrina/Rita/Wilma
4.9%
5.0%
2.9%
2.8%
2.6%
3.4%
3.2%
2.2%
-1.3%
-5.6%
-5.6%
-5.3%
-6.0%
Wilma landfall
Oct. 24
-6.2%
3.9%
4.8%
3.3%
2.1%
2.7%
3.6%
-5.8%
-4.5%
Rita comes
ashore Sept. 24
-5.7%
2.2%
-0.6%
-2.7%
-4.8%
-4.1%
-5.5%
-10%
-3.5%
-6.4%
-5%
-4.0%
-5.5%
0%
-5.3%
3.8%
4.5%
4.0%
5%
4.2%
10%
2.5%
1.9%
Katrina:
Aug. 29
13.3%
15%
9.3%
Brokers
-0.5%
Reinsurers
8.7%
7.0%
P/C
P/C & reinsurer stocks hurt but now fully
recovered. Brokers rose on expectation of
tighter conditions and demand for broker
services; closure of Spitzer issues.
5- 12- 19- 26- 29- 16- 23- 30- 7- 14- 21- 28- 04- 31Aug Aug Aug Aug Sep Sep Sep Sep Sep Oct Oct Oct Oct Nov Dec
Source: SNL Securities; Insurance Information Institute
Insurance Stocks Off to a
Slow Start in 2006
Total YTD Returns Through March 31, 2006
S&P 500
3.73%
Life/Health
3.09%
-0.41%
All Insurers
2.39%
Brokers
-2.18%
Multiline
-0.59%
P/C
0.94%
-3.0% -2.0%
-1.0%
0.0%
1.0%
2.0%
Reinsurers
3.0%
4.0%
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
5.0%
PUBLIC PERCEPTIONS
OF INSURANCE
INDUSTRY
Have Public Perceptions of the
Industry Been Affected by MegaDisasters and Scandals
Percent of Public Rating Industry as
Very or Mostly Favorable, 1968-2005
90%
Banks
Electric Power Company
Consumer Finance Companies
Auto & Home Insurance
80%
70%
60%
50%
40%
Favorable ratings of insurers
dropped just 1 point after Katrina
30%
20%
10%
Source: Insurance Information Institute Pulse Survey, December 2005.
Dec-05
Jun-05
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1988
1986
1985
1983
1981
1978
1972
1968
0%
Public Perceptions of Hurricane
Katrina Response Adequacy
Best
State & Local
Govt.
9%
15%
25%
Federal
Government
9%
15%
25%
FEMA
8%
Bush Admin.
Insurance Cos.
11%
13%
14%
7% 12%
0%
Don’t
Know
Worst
20%
24%
21%
33%
40%
21%
19%
20%
15%
17%
60%
Source: Insurance Information Institute Pulse Survey, December 2005.
26%
3%
29%
2%
30%
37%
17%
80%
3%
2%
15%
100%
Who Should be Responsible
for Dealing With Katrina?
INSURANCE
COMPANIES
4%
DON'T KNOW
4%
BUSH
ADMINISTRATION
15%
House Special Committee: Chertoff
performed his duties “late,
inefficiently or not at all.” -2/15/05.
STATE & LOCAL
GOVERNMENT
33%
FEDERAL
GOVERNMENT
17%
FEMA
26%
Most people believe
governments, not
insurers, are
primarily responsible
for dealing with
Katrina
Source: Insurance Information Institute Pulse Survey, December 2005.
Issue #1
UNDERWRITING
Surprisingly Strong in
2005, Stage is Set for a
Good 2006
P/C Industry Combined Ratio
120
115.8
110
January survey of analysts
called for a 101.8 combined ratio
in 2005, hurt by CATs and
reserve charges. Actual 9-month
results came in at 100.0.
Expectation is for
an underwriting
profit in 2006
107.4
101.8
100.1
100
98.3
97.7
92.7
90
01
02
03
Sources: A.M. Best; ISO, III. *III estimate/forecast for 2005/6
04
05H1
05E
06F III
Forecast*
90
A very strong 2006 is expected in
personal lines assuming “normal”
catastrophe loss activity
95.9
100.0
104.5
105.3
94.3
95
98.4
100
102.7
99.8
104.9
103.5
104.5
105
103.9
110
109.9
115
110.9
Personal Lines
Combined Ratio, 1993-2006E
85
93
94
95
96
97
98
99
00
01
02
03
04
Source: A.M. Best; Insurance Information Institute. 2006 forecast from Fitch Ratings as of 12/7/05.
05E 06F
03
04
99.5
100
102.3
105
110.1
111.1
112.3
109.7
103.9
107.6
110
110.2
115
110.3
120
112.5
125
Outside CATaffected lines,
commercial
insurance is doing
fairly well. Caution is
required in
underwriting longtail commercial lines.
101.9
122.3
Commercial Lines Combined
Ratio, 1993-2005E*
2005 results
remarkably strong
despite storms
95
90
85
93
94
95
96
Source: A.M. Best; Insurance Information Institute
97
98
99
00
01
02
05E
*Fitch estimate for 2005. Actual 1H05 combined ratio all lines was 92.7.
Ohio Direct Loss Ratios
1993-2004
120%
Loss Ratios improved
substantially from
2001-2004
110%
100%
90%
80%
70%
60%
50%
40%
30%
Personal Auto
Homeowners
Commercial Auto
20%
93
94
95
96
97
Source: NAIC; Insurance Information Institute
98
99
00
01
02
03
04
Impact of Reserve Changes on
Combined Ratio
PY Reserve Development
Reserve adequacy
is improving
substantially
$20
$22.7
$0
1.9
$0.4
2000
2001
2002
2003
2004
Source: A.M. Best, Lehman Brothers for years 2005E-2007F
2
1.1
$5.0
0.1
3
$8.0
$5
4
2.4
$13.9
$10
5
3.6
3.5
$9.9
$15
6
0.4
1
$2.0
0
2005E 2006E 2007E
Combined Ratio Points
7
6.5
$10.8
Reserve Development ($B)
$25
Combined Ratio Points
($799)
($1,156)
($1,686)
($1,779)
Special Prop.
Homeowners
PP Auto
Auto PD
($617)
($103)
($27)
$27
$148
$241
$850
$1,109
Reserve
Strengthening
$1,729
$2,118
$3,513
Longer-tail casualty
coverages have been
the source of most
reserve problems in
recent years
Source: A.M. Best, Lehman Brothers.
Other
Special Liab.
Finl. Guaranty
International
Med Mal
Comml. Auto
Fidelity/Surety
Comml. MP
Prod. Liab.
Work. Comp
Reinsurance
Reserve Releases
Other Liability
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
($1,000)
($2,000)
($3,000)
$6,320
2004 Prior Year Reserve
Development by Line ($ Millions)
$10
$5
$0
($5)
($10)
($15)
($20)
($25)
($30)
($35)
($40)
($45)
($50)
($55)
Before Katrina, p/c insurers were
on track for only the second
underwriting profit in 27 years;
U/W profit in 2006 likely.
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
05E
06F
$ Billions
Underwriting Gain (Loss)
1975-2006F*
*2005 estimate is III estimate.
Source: A.M. Best, Insurance Information Institute
Combined Ratio:
Reinsurance vs. P/C Industry
All Lines Combined Ratio
Sept. 11
162.4
Reinsurance
170
160
101.8
98.3
111.0
124.6
125.8
100
100.1
00
107.4
99
115.8
98
106.5
110.1
97
114.3
108.0
96
100.5
105.9
95
100.8
101.9
104.8
106.0
Hurricane
Andrew
106.7
113.6
108.5
110
105.0
106.9
120
110.5
108.8
130
115.8
126.5
140
119.2
150
129
2004/5
Hurricanes
90
91
92
93
94
01
02
* All lines figure is full-year III estimate. RAA figure for 2005.
Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
03
04 05E*
A 100 Combined Ratio Isn’t What it
Used to Be: 95 is Where It’s At
Combined Ratio
15.9%
Combined Ratio
105
14.3% 100.6
100
15.3%
100.0
100.1
98.3
97.5
90
85
16%
12%
92.7
9.4%
18%
14%
95
Combined ratios
today must be below
95 to generate
Fortune 500 ROEs
ROE*
9.4%
10%
9.5%
8%
80
6%
1978
1979
2003
Actual
2004
* 2005 figure is return on average statutory surplus based in first 9 monhts data
Source: Insurance Information Institute from A.M. Best and ISO data.
2005:H1
2005E
Retrun on Equity*
110
UNDERWRITING
AFFECTS FINANCIAL
STRENGTH
Is There Cause
for Concern?
P/C Company Insolvency Rates,
1993 to 2004
•Insurer insolvencies are increasing
•12-yr industry failure rate: 0.71%
•Failure rating for B+ or better rating: 0.49%*
1.20%
•Failure rate for D through B rating: 1.29%*
1.33%
1.02% 1.03%
12-yr Failure Rate
= 0.71%
0.85%
0.79%
0.60%
0.58%
30
30
38
21
0.21%
1993
0.28%
1994 1995 1996
0.23%
1997 1998
Source: A.M. Best; Insurance Information Institute
1999 2000
0.42%
10
2001 2002 2003E 2004
*1993-2003
Reason for P/C Insolvencies
(218 Insolvencies, 1993-2002)
Impaired Affiliate
3%
Unidentified
17%
CAT Losses
3%
Reinsurer Failure
0%
Change in Business
3%
Discounted Ops
8%
Overstated Assets
2%
Alleged Fraud
3%
Deficient Loss
Reserves
51%
Reserve
deficiencies
account for
more than half
of all p/c
insurers
insolvencies
So far, Katrina appears to
have claimed just 1
victim—Rosemont Re—
expected to go into run-off
Rapid Growth
10% Source: A.M. Best, Insurance Information Institute
Ratings Agencies Tightening
Requirements for CATs
2006 SRQ CAT Model Reqs.*
•All Property Exposure
•Auto Physical Damage
•Reinsurance Assumed
•Pools & Assessments
•All Flood Exposure
•WC Losses from Quake
Best currently
•Fire Following estimates
PML for
wind & 250•Storm Surge 100-yr.
yr. quake to
capital
•Demand Surge determine
adequacy
•Secondary Uncertainty
*SRQ = Supplemental Rating Questionnaire
Source: A.M. Best Review & Preview, January 2006.
ALSO “A.M. Best will
perform additional
“stress-tested” riskadjusted capital analysis
for a second event in
order to determine the
potential financial
condition of an entity post
a severe event.”
IMPLICATION: Some
insurers may be required
to carry more capital to
maintain the same rating.
Historical Ratings Distribution,
US P/C Insurers, 2000 vs. 2005
2000
C/CC++/C+ 0.6%
1.9%
B/B6.9%
D
0.2%
E/F
2.3%
2005
A++/A+
11.5%
Vulnerable*
12.1%
B++/B+
26.4%
B++/B+
28.3%
A/A48.4%
A++/A+
shrinkage
A++/A+
9.2%
Ratings agencies increasing
emphasis on multiple
eventsrequire more capital
A/A52.3%
Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report,
November 8, 2004 for 2000; 2006 Review & Preview for 2005 distribution. *Ratings ‘B’ and lower.
Underwriting
Matters Because
Pricing is Often
Undisciplined
Private Passenger Auto
Combined Ratios, 1993-2005E
115
$861
PP Auto Combined Ratio
109.5
$723
$685
Somebody
remembered
93.1
$600
94.0
Somebody forgot there’s a
relationship between price and
underwriting performance
95
$700
$689
98.4
101.1
99.5
101
$668
100
$800
90
$500
95
96
97
98
99
00
01
02
03
04
05E
Sources: Insurance Information Institute from A.M. Best and NAIC data; 2004/5 expenditure estimates from III.
Avg. Auto Insurance Expenditure
$705
$777
104.2
$691
107.9
$821
103.5
$703
105
101.3
Combined Ratio
$844
Average Auto Insurance
Expenditure
110
$900
OTHER OPERATING
ISSUES AFFECTING
UNDERWRITING
Other Operational Challenges
• Insurance Scoring: Challenges Based
on Disparate Impact
• Territorial Rating: Race-Based Issues
Loom Large
• Occupation/Education: Discrimination
alleged via rating factors, esp. in NJ
• CAT Modeling: Need Greater
Acceptance by Regulators
• Regulatory Environment: Still
Antiquated
CATASTROPHE
LOSS
MANAGEMENT
Failure to Adequately Manage this
Risk Has Been Devastating
Most of US Population & Property
Has Major CAT Exposure
U.S. Insured
Catastrophe Losses ($ Billions)
$100
$56.8
$27.5
$4.6
00
$12.9
$8.3
99
$26.5
$10.1
$2.6
97
98
$7.4
96
$4.7
91
$8.3
$2.7
90
95
$7.5
89
$40
$16.9
$60
$5.5
$80
$22.9
2005 was by far the worst
year ever for insured
catastrophe losses in the US,
but the worst has yet to come.
$100
$5.9
$120
$20
$100 Billion
CAT year is
coming soon
$ Billions
20??
05
04
03
02
01
94
93
92
$0
Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.
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
Global Number of
Catastrophic Events, 1970–2005
The number of natural
and man-made
catastrophes has been
increasing on a global
scale for 20 years
250
200
Record 248 manmade CATs &
record 149 natural
CATs in 2005
150
100
50
Natural catastrophes
Man-made disasters
Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 1/2005 and 2/2006.
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
0
Insured Property Catastrophe Losses
as % Net Premiums Earned, 1983–2005E
16%
14%
12%
10%
US
Worldwide
US average: 1984-2004
US CAT losses were
a record 14.3% of
net premiums
earned in 2005 and
were 4.3 times the
1984-2004 average
of 3.3%*
8%
6%
4%
2%
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05E
0%
*Insurance Information Institute estimate of 14.3% for 2005 based estimated 2005 DPE of $418.8B and estimated insured CAT losses of $60B.
Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute.
Global Insured CAT Losses, 1970–2005
(Property and Business Interruption)
Billion USD, at 2004 prices
$80
$70
$60
$50
There has been a huge
increase in the insured
value of global CAT
losses in recent years
Record $78 billion in
insured natural CAT
losses in 2005,
compared to $5B in
man-made disasters
$40
$30
Natural catastrophes
Man-made disasters
$20
$10
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
$0
Source: Swiss Re, sigma No. 1/2005 & 2/2006.
2005 Was a Busy, Destructive, Deadly
& Expensive Hurricane Season
All 21 names were
used for the first
time ever, so Greek
letters were used
for the final 6
storms: Alpha
though Zeta
Source: WeatherUnderground.com, January 18, 2006.
2005 set a new record for the
number of hurricanes &
tropical storms at 27, breaking
the old record set in 1933.
Number of Major (Category 3, 4, 5)
Hurricanes Striking the US by Decade
1930s – mid-1960s:
Period of Intense Tropical
Cyclone Activity
Mid-1990s – 2030s?
New Period of Intense
Tropical Cyclone Activity
10
9
8
8
8
4
6
6
6
5
5
4
Tropical cyclone activity in the
mid-1990s entered the active
phase of the “multi-decadal signal”
that could last into the 2030s
6
Already as many
major storms in
2000-2005 as in all
of the 1990s
1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s
*Figure for 2000s is extrapolated based on data for 2000-2005 (6 major storms: Charley, Ivan, Jeanne (2004) &
Katrina, Rita, Wilma (2005)).
Source: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm.
Top 10 U.S. Cities for
Hurricane Risk
Potential Insured Losses ($B)
Potential Economic Losses ($B)
$200
$150
$100
$50
Source: AIR Worldwide
M
yr
tle
VA
fo
lk,
No
r
Be
a
or
t,
ul
fp
/G
ch
M
,S
C
S
n
to
Bo
s
Bi
lo
xi
ob
il e
,A
L
M
s
rle
an
Ne
w
on
/
st
Ho
u
O
st
al
ve
G
/S
t.
pa
Ta
m
on
e.
Pe
t
k
Yo
r
Ne
w
M
ia
m
i/F
t.
La
u
d.
Ci
ty
$-
Number of Hurricanes Directly and
Indirectly Affecting the Northeast
United States Since 1900
Number of Occurences
Hurricanes, Direct
50
45
40
35
30
25
20
15
10
5
0
Hurricanes, Direct and Indirect
Hurricanes affect
Northeast more
commonly than
presumed
33
39
23
31
9
2
0
1
DE
NJ
NY
20
14
8
CT
Source: New Hampshire Office of Emergency Management
RI
6
4
2
MA
NH
8
2
ME
Inflation-Adjusted U.S. Insured
Catastrophe Losses By Cause of Loss,
1985-2004¹
Wind/Hail/Flood5
3.4%
Earthquakes 4
8.4%
Civil Disorders
0.5%
Fire 6
2.9%
Water Damage
0.2%
Tornadoes 2
30.4%
Utility Disruption
0.1%
Winter Storms
9.7%
Terrorism
9.7%
Insured disaster losses
totaled $221.3 billion from
1984-2004 (in 2004 dollars).
After 2005 season, tropical
cyclones will account for
about 45% of the total.
All Tropical
Cyclones 3
34.6%
1
Catastrophes are all events causing direct insured losses to property of $25 million or more in 2004 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 Information Institute estimates based on ISO data.
700
1,200
54
40
20
25
15
80
60
36 39
55
30
100
Source: III from National Weather Service data.
Number of Tornados
05E
03
01
99
97
95
93
91
89
87
0
85
500
Tornado Deaths
Tornado Deaths
40 40
1,376
1,071
1,216
1,424
1,345
94
67
69
33
120
941
39 39
140
702
900
765
656
32
856
50 53
1,100
130
1,148
59
1,234
1,173
1,300
1,173
1,082
94
1,297
1,500
684
Number of Tornados
1,700
1,133
1,132
1,900
There appears to be an
upward trend in the
number of tornados,
though not deaths.
Detection Increase?
1,819
Number of Tornados &
Associated Deaths, 1985-2005p
Total Value of Insured
Coastal Exposure (2004, $ 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
$1,937.3
$1,901.6
$740.0
$662.4
$505.8
$404.9
$209.3
$148.8
$129.7
$117.2
$105.3
$75.9
$73.0
$46.4
$45.6
$44.7
$43.8
$12.1
$0
Source: AIR Worldwide
$500
$1,000
$1,500
$2,000
$2,500
Value of Insured Residential
Coastal Exposure (2004, $ Billions)
Florida
New York
Massachusetts
Texas
New Jersey
Connecticut
Louisiana
S. Carolina
Maine
Virginia
North Carolina
Alabama
Georgia
Delaware
Rhode Island
New
Mississippi
Maryland
$942.5
$512.1
$306.6
$302.2
$247.4
$205.5
$88.0
$65.1
$64.5
$60.0
$60.0
$36.5
$29.7
$26.6
$25.9
$24.8
$20.9
$5.4
$0
Source: AIR
$200
$400
$600
$800
$1,000
Insured Coastal Exposure as a % of Statewid
Insured Exposure (2004, $ Billions)
Florida
Connecticut
New York
Maine
Massachusetts
Louisiana
New Jersey
Delaware
Rhode Island
S. Carolina
Texas
NH
Mississippi
Alabama
Virginia
NC
Georgia
Maryland
79.3%
63.1%
60.9%
57.9%
54.2%
37.9%
33.6%
33.2%
28.0%
25.6%
25.6%
23.3%
13.5%
12.0%
11.4%
8.9%
5.9%
1.4%
0%
Source: AIR Worldwide
10%
20%
30%
40%
50%
60%
70%
80%
90%
TRIA
EXTENSION
The Burden Grows
Insurance Industry Retention
Under TRIA ($ Billions)
$35
$30
$ Billions
$25
$20
•Individual company
retentions rise to 17.5%
in 2006, 20% in 2007
•Above the retention,
federal govt. pays 90% in
2006, 85% in 2007
Extension
$27.5
$25.0
$15.0
$15
$12.5
$10.0
Congress &
Administration
want TRIA dead
$10
$5
$0
Year 1
(2003)
Source: Insurance Information Institute
Year 2
(2004)
Year 3
(2005)
Year 4
(2006)
Year 5
(2007)
TRIA Extension: Major Features
• Term: 2-Year Extension—Sunsets December 31, 2007
 Extension for 3rd year possible if progress made toward long-term solution
• Trigger Increased:
 Up from $5MM now to $50MM in 2006 and $100MM in 2007
• Lines Dropped
 Commercial Auto, Prof. Liability, Surety, Burglary & Theft, FMP
• Deductibles Increase for Individual Companies:
 15% Now 17.5% in 2006  20% in 2007 for all lines
• Retentions Increase for Industry Aggregate:
 $15B Now  $25B in 2006  $27.5B in 2007
• Co-Pays Increase for Amount Above Industry Aggregate
 10% Now  10% in 2006  15% in 2007
• Federal Recoupment
 Remains conditional
• Study to Develop Long-Term Solutions
 Must produce report to Congress by September 30
• Nuclear, Biological, Chemical & Radiological Risk
 Maintains exclusion
Terrorism Coverage
Take-Up Rate Rising
Terrorism take-up rate for
non-WC risk rose through
2003, 2004 and 2005
55.0%
48.0%
46.2%
44.2%
44.0%
32.7%
23.5%
26.0%
TAKE UP RATE FOR WC
COMP TERROR
COVERAGE IS 100%!!
2003:II
2003:III 2003:IV
2004:I
Source: Marsh, Inc.; Insurance Information Institute
2004:II
2004:III 2004:IV
2005
August
Terrorism Coverage:
Take-Up Rates by Industry
Real estate
Financial Institutions
Health care
Hospitality
Tech/Telecom
Education
Media
Utility
Public Entity
Transportation
Manufacturing
Retail
Construction
Energy
Food & beverage
31.0%
48.4%
31.5%
63.3%
42.5%
22.1%
21.6%
35.3%
25.9%
29.5%
18.2%
20.0%
23.1%
12.2%
41.7%
41.5%
10%
20%
30%
53.4%
47.8%
40.5%
41.2%
37.8%
38.6%
48.0%
37.5%
40%
50%
2005*
2004
2003
53.7% 58.1%
57.9%
58.3%
54.3%
36.4%
35.5%
40.5%
28.6%
39.0%
34.7%
0%
Source: Marsh, Inc.
71.0%
65.3%
66.3%
60.1%
65.1%
26.8%
27.1%
72.5%
60.2%
30.2%
60%
If TRIA sunsets at
the end of 2007,
additional
reinsurance
capacity will be
badly needed (now
estimated at just
$4-$6 billion)
70%
80%
*As of August 2005.
The 2006 Hurricane
Season:
Preview to Disaster?
Outlook for 2006 Hurricane Season
Average*
2005
2006F
9.6
49.1
5.9
24.5
2.3
26
115.5
14
47.5
7
17
85
9
45
5
13
7
13
100%
275%
195%
Named Storms
Named Storm Days
Hurricanes
Hurricane Days
Intense Hurricanes
Intense Hurricane Days
Net Tropical Cyclone Activity
*Average over the period 1950-2000.
Source: Dr. William Gray, Colorado State University, April 4, 2006.
Probability of Major Hurricane
Landfall (CAT 3, 4, 5) in 2006
Entire US Coast
Average*
2006F
52%
81%
US East Coast Including Florida
31%
64%
Peninsula
Gulf Coast from FL Panhandle
30%
47%
to Brownsville, TX
ALSO…Above-Average Major Hurricane
Landfall Risk in Caribbean for 2006
*Average over past century.
Source: Dr. William Gray, Colorado State University, April 4, 2006.
Hurricanes Katrina,
Rita & Wilma:
Their Place in History
Insured Loss & Claim Count for
Major Storms of 2005*
$45.000
$40.000
$35.000
$30.000
$25.000
$20.000
$15.000
$10.000
$5.000
$0.000
Claims
Hurricanes Katrina,
Rita, Wilma & Dennis
produced a record 3.2
million claims
955
1,752
$38.1
381
104
$1.1
Dennis
$5.0
Rita
$8.4
Wilma
Katrina
Size of Industry Loss ($ Billions)
*Property and business interruption losses only. Excludes offshore energy & marine losses.
Source: ISO/PCS as of February 8, 2006; Insurance Information Institute.
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
Claims (thousands)
Insured Loss ($ Billions)
Insured Loss
Top 10 Most Costly Hurricanes in
US History, (Insured Losses, $2005)
$45
$40
$35
$ Billions
$30
$25
$20
$15
Seven of the 10 most expensive
hurricanes in US history
occurred in the 14 months from
Aug. 2004 – Oct. 2005:
$21.6
Katrina, Rita, Wilma, Charley,
Ivan, Frances & Jeanne
$10
$5
$40.0
$3.5
$3.8
Georges
(1998)
Jeanne
(2004)
$4.8
$5.0
Frances
(2004)
Rita
(2005)
$6.6
$7.4
$7.7
$8.4
Hugo
(1989)
Ivan
(2004)
Charley
(2004)
Wilma
(2005)
$0
Sources: ISO/PCS; Insurance Information Institute.
Andrew
(1992)
Katrina
(2005)
Hurricane Katrina Insured Loss
Distribution by State ($ Millions)*
Florida, $543.0 , 1.4%
Alabama, $1,102 ,
2.9%
Mississippi, $12,105 ,
31.8%
Total Insured
Losses =
$38.111 Billion
*As of February 8, 2006
Source: PCS division of ISO.
Tennessee, $59.0 ,
0.2%
Georgia, $27.0 , 0.1%
Louisiana
accounted for
64% of the
insured losses
paid and 56% of
the claims filed
Louisiana, $24,275 ,
63.7%
Hurricane Katrina Claim Count
Distribution by State*
Florida, 115,000 ,
6.6%
Tennessee, 15,000 ,
0.9%
Georgia, 7,800 , 0.4%
Alabama, 124,000 ,
7.1%
Louisiana, 975,000 ,
55.7%
Mississippi, 515,000 ,
29.4%
Total # Claims
= 1,751,800
*As of February 8, 2006
Source: PCS division of ISO.
Louisiana accounted
for 64%of insured
losses paid and 56%
of claims filed
Hurricane Katrina Loss
Distribution by Line ($ Billions)*
Commercial
Property & BI,
$18,278.0 , 48%
Total insured
losses are
estimated at
$38.1 billion
from 1.7518
million claims.
Excludes $2$3B in offshore
energy losses
*As of February 8, 2006
Source: PCS division of ISO.
Vehicle, $2,139.0 ,
6%
Homeowners,
$17,694.0 , 46%
Hurricane Katrina Insured Loss
and Claim Distribution by State*
State
Losses ($Mill)
# Claims % Losses
% Claims
LA
$
24,275.0
975,000
63.7%
55.7%
MS
$
12,105.0
515,000
31.8%
29.4%
AL
$
1,102.0
124,000
2.9%
7.1%
FL
$
543.0
115,000
1.4%
6.6%
TN
$
59.0
15,000
0.2%
0.9%
GA
$
27.0
7,800
0.1%
0.4%
Totals
$
38,111.0
1,751,800
100.0%
100.0%
*As of February 8, 2006.
Source: PCS division of ISO.
Hurricane Rita Insured Loss
Distribution by State ($ Millions)*
Tennessee, $10.0 ,
0.2% Arkansas, $13.7 , 0.3%
Florida, $23.0 , 0.5%
Alabama, $13.0 , 0.3%
Louisiana
accounted for
59% of the
insured losses,
Texas 40%.
Total claims =
381,000.
Mississippi, $34.0 ,
0.7%
Texas, $1,970.0 ,
39.6%
Total Insured
Losses =
$4.9762 Billion
*As of February 8, 2006
Source: PCS division of ISO.
Louisiana, $2,912.5 ,
58.5%
Excludes
offshore energy
losses of $2-3B
Hurricane Rita Claim Count
Distribution by State*
Alabama, 5,000 , 1.3%
Arkansas, 5,500 , 1.4%
Florida, 6,000 , 1.6%
Tennessee, 3,500 ,
0.9%
Louisiana
accounted for
48.6% of the
insured losses,
Texas 44.4%.
Mississippi, 7,000 ,
1.8%
Texas, 169,000 ,
44.4%
Total # Claims
= 381,000
*As of February 8, 2006
Source: PCS division of ISO.
Louisiana, 185,000 ,
48.6%
Excludes
offshore energy
losses of $2-3B
Hurricane Rita Loss Distribution,
by Line ($ Millions)*
Commercial
Property & BI,
$1,846.2 , 37%
Total insured
losses are
estimated at $5.0
billion (excl.
offshore energy
of $2-$3B) from
381,000 claims.
*As of February 8, 2006
Source: PCS division of ISO.
Vehicles, $186.0 ,
4%
Homeowners,
$2,944.0 , 59%
Hurricane Rita Insured Loss and
Claim Distribution by State*
State
Losses ($Mill)
# Claims % Losses
% Claims
LA
$
2,912.5
185,000
58.5%
48.6%
TX
$
1,970.0
169,000
39.6%
44.4%
MS
$
34.0
7,000
0.7%
1.8%
FL
$
23.0
6,000
0.5%
1.6%
AR
$
13.7
5,500
0.3%
1.4%
AL
$
13.0
5,000
0.3%
1.3%
TN
$
10.0
3,500
0.2%
0.9%
Totals
$
4,976.2
381,000
100.0%
100.0%
*As of February 8, 2006.
Source: PCS division of ISO.
Government Aid After Major
Disasters (Billions)*
$120
$104.4
$100
$ Billions
$80
Within 3 weeks of Katrina’s LA
landfall, the federal government
had authorized $75B in aid—
more than all the federal aid for
the 9/11 terrorist attacks, 2004’s
4 hurricanes and Hurricane
Andrew combined! $29B more
was authorized in Dec. 2005. At
least $80B more is sought.
$60
$43.9
Hurricane Katrina aid
will dwarf aid following
all other disasters.
Congress may authorize
$150-$200 billion
ultimately (about
$400,000 for each of the
500,000 displaced
families). Is the incentive
to buy insurance and
insure to value
diminished?
$40
$20
$17.7
$15.5
$15.0
Hurricane Andrew
(1992)
Northridge
Earthquake (1994)
Hurricanes Charley,
Frances, Ivan &
Jeanne (2004)
$0
Hurricane Katrina
(2005)
Sept. 11 Terrorist
Attack (2001)
*In 2005 dollars.
Source: United States Senate Budget Committee, Insurance Information Institute as of 12/31/05.
Distribution of Katrina Losses
by Market ($Billions)
Market
Percentage
Amount
Insurers
47% - 53%
$18.8 - $28.9
Reinsurers
52% - 44%
$20.7 - $24.0
Capital Markets
1% - 3%
$0.4 - $1.6
TOTAL
100%
$39.9 - $54.6
Source: Hurricane Katrina: Analysis of the Impact on the Insurance Industry, Tillinghast, October 2005.
Overview of Plans for
a National
Catastrophe
Insurance Plan
NAIC’s Comprehensive
National Catastrophe Plan
• Proposes Layered Approach to Risk
• Layer 1: Maximize resources of private
insurance & reinsurance industry
 Includes “All Perils” Residential Policy
 Encourage Mitigation
 Create Meaningful, Forward-Looking Reserves
• Layer 2: Establishes system of state
catastrophe funds (like FHCF)
• Layer 3: Federal Catastrophe Reinsurance
Mechanism
Source: Insurance Information Institute
Comprehensive National
Catastrophe Plan Schematic
1:500 Event
National Catastrophe Contract Program
1:50 Event
State Regional Catastrophe Fund
State Attachment
Personal
Disaster
Account
Private Insurance
Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.
Legislation: Comprehensive
National Catastrophe Plan
• H.R. 846: Homeowners Insurance Availability Act of 2005
 Introduced by Representative Ginny Brown-Waite (R-FL)
 Requires Treasury to implement a reinsurance program offering
contracts sold at regional auctions
• H.R. 4366: Homeowners Insurance Protection Act of 2005
 Also worked on by Rep. Brown-Waite
 Establishes national commission on catastrophe preparation and
protection
 Authorizes sale of federally-backed reinsurance contracts to state
catastrophe funds
• H.R. 2668: Policyholder Disaster Protection Act of 2005
 Backed by Rep. Mark Foley (R-FL)
 Amends IRS code to permit insurers to establish tax-deductible reserve
funds for catastrophic events
 20-year phase-in for maximum reserve
 Use limited to declared disasters
Source: NAIC, Insurance Information Institute
Issue #2
PRICING
Can Discipline be
Maintained?
Average Expenditures on
Homeowners Insurance**
$800
$750
$700
$650
$600
$550
$500
Countrywide home
insurance expenditures
are expected to rise at
least 4% in 2006
$739
$668
$440 $455
$450 $418
$400
95 96
97
98
99
Homeowners in
CAT zones will
see much larger
increases
$508
00
*Insurance Information Institute Estimates/Forecasts
**Excludes cost of flood and earthquake coverage.
Source: NAIC, Insurance Information Institute
01
$711
$593
$536
$481 $488
$693
02
03 04* 05* 06*
Average Expenditures on
Auto Insurance
$950
$900
$850
Countrywide auto insurance
expenditures are expected to
rise 1.5% in 2006
$800
$821
$844
$777
$750
$700
$650
$861 $874
$651
$668
$691
$705 $703
$723
$685 $689
Will the “big guys”
stay disciplined? So
far, so good. Tiering
adopted to avoid
adverse selection
$600
94 95
96 97 98
99 00 01
*Insurance Information Institute Estimates/Forecasts
Source: NAIC, Insurance Information Institute
02 03 04* 05* 06*
20%
15%
10%
5%
-5%
-10%
Source: MarketScout.com
12%
12%
10%
12%
11%
9%
9%
9%
7%
7%
5%
4%
4%
2%
2%
2%
1%
0%
0%
-1%
-2%
-2%
-3%
-5%
-6%
-5%
-4%
-4%
-6%
-6%
-5%
25%
18%
18%
17%
16%
28%
31%
31%
28%
30%
32%
33%
28%
29%
30%
32%
30%
27%
25%
28%
22%
30%
14%
11%
13%
16%
19%
22%
35%
Jul-01
Aug-01
Sep-01
Oct-01
Nov-01
Dec-01
Jan-02
Feb-02
Mar-02
Apr-02
May-02
Jun-02
Jul-02
Aug-02
Sep-02
Oct-02
Nov-02
Dec-02
Jan-03
Feb-03
Mar-03
Apr-03
May-03
Jun-03
Jul-03
Aug-03
Sep-03
Oct-03
Nov-03
Dec-03
Jan-04
Feb-04
Mar-04
Apr-04
May-04
Jun-04
Jul-04
Aug-04
Sep-04
Oct-04
Nov-04
Dec-04
Jan-05
Feb-05
Mar-05
Apr-05
May-05
Jun-05
Jul-05
Aug-05
Sep-05
Oct-05
Nov-05
Dec-05
Jan-06
Feb-06
Commercial Premium Rate
Changes Are Sharply Lower
The magnitude of rate
decreases is leveling off, but no
reversal is evident postKatrina/Rita/Wilma
Average Rate Change, All Lines,
(1Q:2004 – 4Q:2005)
0%
-0.1%
-2%
-3.2%
-4%
-4.6%
-6%
-5.9%
-7.0%
-8%
-10%
Magnitude of rate decreases
accelerated during the first half
-9.4% -9.7%
of 2005, but flattened out in Q3/4
-8.2%
1Q04
3Q05
-12%
2Q04
3Q04
4Q04
1Q05
2Q05
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
4Q05
Average Commercial Rate
Change by Account Size
Commercial accounts have
trended downward for early
2004 to mid-2005 but are
now that trend is shrinking
post-Katrina
Percent of Commercial Accounts Renewing
w/Positive Rate Changes, 4th Qtr. 2005
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Commercial Property
45%
25%
Business Interruption
Largest increases for Commercial
Property & Business Interruption are
in the Southeast, smallest in Midwest
27%
21%
25%
20%
18%
17%17%
6%
Southeast
Northeast
Southwest Pacific NW
Source: Council of Insurance Agents and Brokers
Midwest
Average Rate Increase/Decrease
by Industry Class
September 2005
15%
February 2006
11%
Largest increases are
in the energy sector
10%
5%
5%
4%
0%
0%
0%
3%
1%
-1%
-3%
-5%
-10%
-2%
-4%
-5%
-5%
-7%
Energy
Source: MarketScout.com
Contracting Public Entity Transport. Habitational
Service
Manufacturing
Reinsurance Prices Surged in 2006
Following Record CATs in 2005
US cat reinsurance price index:
1994 = 100
40%
125
30%
25%
100
21%
20%
16%
75
11%
10%
2%
50
0%
-4%
-5%
-10%
-11%
-4%
-9% -8%
-6%
-20%
25
0
94
95
96
97
98
99
'00
'01
rate changes [left]
Sources: Swiss Re, Cat Market Research; Insurance Information Institute estimate for 2006.
'02
'03
'04 05E 06F
index level [right]
Issue #3
INVESTMENTS
Does Investment
Performance Affect
Discipline?
Property/Casualty Insurance
Industry Investment Gain*
$ Billions
$57.9
$60
$52.3
$51.9
$48.9 $50.2
$47.2
$50
$40
$56.9
$36.0
$35.4
$30
$45.3
$44.4
$42.8
Investment gains are rising
but will still fall short of
their 1998 peak. CAT losses
will reduce investable assets.
$20
$10
$0
94
95
96
97
98
99
00
01
02
03
04
05*
*Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.
Annualized 2005 figure based on data as of 9/30/05, adjusted for special dividend of $3.1B.
Source: Insurance Services Office; Insurance Information Institute.
Issue #4
EXPENSES
Will Expense Ratio Rise as
Premium Growth Slows?
Personal Lines Underwriting
Expense Ratio,* 1994-2005E
30.8%
30%
28%
26%
Auto
31.1%
32%
30.6%
30.8%
30.6%
29.8%
30.3%
Can the downward trend
in PPA and HO expenses
ratios be sustained as
premium growth slows?
29.4%
22%
28.5% 28.5%
28.4%
28.4%
24.4%
24%
21.8% 22.0% 21.8%
Home
24.3%
23.5%
23.4%
23.4%
23.6%
23.2% 23.3%
22.7%
20%
94
95
96
97
98
99
00
01
02
03
04
*Ratio of expenses incurred to net premiums written. 2005 figures are III estimates.
Source: A.M. Best; Insurance Information Institute
05E
Issue #5
LEVERAGE
Can the Industry
Efficiently Employ Its
Increasing Capital?
U.S. Policyholder Surplus:
1975-2005*
$450
$400
$350
$ Billions
$300
$250
$200
$150
Capacity TODAY is $414.3B, 5.2% above yearend 2004, 45% above its 2002 trough and 22%
above its mid-1999 peak. Sufficient capacity
exists to pay all hurricane claims.
Foreign reinsurance and residual
market mechanisms absorbed
$27-$32B (57%-67%) of 9-month
2005 CAT losses of $47.6B
“Surplus” is a measure of
underwriting capacity. It is
analogous to “Owners
Equity” or “Net Worth” in
non-insurance organizations
$100
$50
$0
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 0405*
Source: A.M. Best, ISO, Insurance Information Institute
*As of 9/30/05.
Announced Insurer Capital Raising*
($ Millions, as of December 1, 2005)
$3,500
As of Dec. 1, 19 insurers announced
plans to raise $10.35 billion in new
capital. Twelve start-ups plan to
raise as much as $8.75 billion more
for a total of $19.1 billion. Actual
total higher as Lloyd’s syndicates
have added capacity for 2006.
$3,000
$ Millions
$2,500
$2,000
$1,500
$1,500
$3,200
$1,000
$400 $450
$500
$38
$600
$710
$620
$600
$300
$297
$100 $140
$129
$490
$124 $202 $150
$299
Ax
En
i
du s
r
Ev anc
e
er
es
tR
Fa
e
ir
fa
x
Fi
G
nl
la
.
c
H
CC ier
In R e
su
ra
nc
IP
e
C
H
ld
g
K
iln s
PL
M C
M
ax
on
tp Re
eli
er
Re
Na
vi
ga
t
O
dy ors
ss
ey
R
Pa
e
rt
ne
rR
e
Pl
at
in
um
PX
XL RE
Ca
pi
ta
l
Ar
g
Ac
e
Lt
d.
on
au
t
As
pe
n
$0
*Existing (re) insurers. Announced amounts may differ from sums actually raised.
Sources: Morgan Stanley, Lehman Brothers, Company Reports; Insurance Information Institute.
Announced Capital Raising by
Insurance Start-Ups
($ Millions, as of December 11, 2006)
As of Dec. 11, 13 startups plan to raise as
much as $8.75 billion.
$1,600 $1,500
$1,400
$1,200
$ Millions
$1,000$1,000$1,000$1,000
$1,000
$750
$800
$600
$500 $500 $500 $500
$400
$220 $180
$200
$100
en
de
nt
R
e
ia
A
sc
Sp
ec
O
m
eg
a
nl
ig
re
e
G
lty
e
R
ht
fie
ig
h
/H
X
L
ow
ld
s
l
C
ap
ita
R
A
rr
C
as
tle
m
N
ew
Be
r
ox
isc
H
e
ud
a
e
R
el
A
ri
R
e
id
us
H
ol
di
La
ng
nc
s
as
hi
re
R
e*
*
V
al
Fl
a
gs
to
ne
er
m
B
lin
A
m
H
ar
bo
rP
oi
nt
*
ud
a
$0
*Chubb, Trident are funding Harbor Point. Announced amounts may differ from sums actually raised. **Stated amount is $750 million to $1 billion. ***XL
Capital/Hedge Fund venture. Arrow Capital formed by Goldman Sachs.
Sources: Morgan Stanley, Company Reports; Insurance Information Institute.
Issue #6
P/C OPERATING
ENVIRONMENT
Have Things Changed for
the Better?
TORT SYSTEM
Personal, Commercial &
Self (Un) Insured Tort Costs
$350
Commercial Lines
Personal Lines
Self (Un)Insured
Total = $309.5 Billion
Total = $291.0 Billion
$300
Billions
$45.3
$49.4
$250
Total = $209.1 Billion
$200
$30.0
$84.2
$86.8
Total = $150.6 Billion
$150
$20.4
$100
$52.0
$50
$78.2
$72.3
$161.5
$173.3
2003
2004
$106.8
$0
1990
Source: Tillinghast-Towers Perrin
2000
Tort System Costs,
2000-2007F
2.22%
2.23%
2.22%
2.23%
2.25%
2.03%
Tort System Costs
$300
2.27%
$314
$295
1.83%
2.5%
2.0%
$277
$260
$246
$250
1.5%
$232
$206
$200
1.0%
$179
After a period of rapid
escalation, tort system costs as %
of GDP appear to be stabilizing
$150
$100
0.5%
0.0%
00
01
02
03
Tort Sytem Costs
04
05E
06F
Tort Costs as % of GDP
Source: Insurance Information Institute estimates from Tillinghast-Towers Perrin methodology.
07F
Tort Costs as % of GDP
$350
Business Leaders Ranking of
Liability Systems for 2005
New in 2005
Best States
1. Delaware
ND, IN, SD, WY
2. Nebraska
Drop-Offs
3. North Dakota
4. Virginia
ID, UT, NH, KS
5. Iowa
6. Indiana
7. Minnesota
8. South Dakota
9. Wyoming
LA, AL and MS’s
10. Idaho
liability systems are
ranked among the worst
in the country by the US
Chamber of Commerce
Worst States
41. Hawaii
42. Florida
43. Arkansas
44. Texas
45. California
46. Illinois
Newly
Notorious
47.Louisiana
48.Alabama
HI, FL
Rising
Above
MO, MT
49. West Virginia
50.Mississippi
Source: US Chamber of Commerce 2005 State Liability Systems Ranking Study; Insurance Info. Institute.
The Nation’s Judicial Hellholes
(2005)
Dishonorable
Mention
WI Supreme Ct.
Watch List
California
Eastern Kentucky
Eastern Alabama
Philadelphia
New Mexico
Delaware
Oklahoma
Orleans Parish, LA
Washington, DC
There were notably
fewer “Judicial
Hellholes” in 2005
ILLINOIS
Cook County
Madison County
St. Clair County
TEXAS
Rio Grande
Valley and Gulf
Coast
Source: American Tort Reform Association; Insurance Information Institute
West Virginia
South Florida
Information
Security Liability
A Growing Threat
Worldwide Financial Impact of
Malicious Software Attacks
(1995-2005)
$ Billion
$20
$18
$16
$14
$12
$10
$8
$6
$4
$2
$0
Worldwide Financial Impact ($ Billion)
$17.5
$17.1
$13.2
$13.0
$14.2
$13.0
$11.1
$6.1
$3.3
$1.8
$0.5
95
96
97
98
99
Source: 2005 Malware Report, Computer Economics
00
01
02
03
04
05
Organizations with External
Insurance Against Cyber Risks
%
80
70
Only 25% of organizations use
external insurance to help manage
cyber security risks.
75%
60
50
40
30
25%
20
10
0
Insurance
Source: CSI/FBI 2005 Computer Crime and Security Survey.
No Insurance
COMMERCIAL
INSURANCE
BETTER—FOR NOW
Commercial Multi-Peril Combined
(Liability Portion)
CMP-Liability has improved
recently but results have
historically been bad
130
125.0
125
120
119.0
121.0
119.8
116.2
115.0
115
116.2
113.1
110
108.5
Average Combined 1995 to 2004= 115.4
105
104.1
Average Operating Ratio = 100.4
100
95
96
Sources: A.M. Best; III
97
98
99
00
01
02
03
04
Products Liability
Combined Ratio
Average Combined 1995 to 2004 = 180.0
400
355.2
350
300
Products Liability has
improved dramatically, but
remains very much a problem
250
215.4
200
189.5
179.1
156.4
150
131.9
138.8
97
98
167.2
159.8
03
04
133.3
100
95
96
Sources: A.M. Best; III
99
00
01
02
Commercial Auto Liability
Combined Ratio
125
122.5
120.5
120.1
120
Average Combined
1995 to 2004 =
110.7
115.9
115
112.1
112
113
110
105.6
105
Commercial Auto Liability
has improved dramatically
100
99.4
95.8
95
90
95
Sources: A.M. Best; III
96
97
98
99
00
01
02
03
04
Other Liability Combined Ratio
145
140
Average Combined 1995 to 2004 = 116.3
138.6
Other Liability remains a
problematic “catch all” category
135
130
125
122.5
120
124.3
117.6
114.5
115
112.3
111.8
110.9
108.5
110
104.5
105
100
95
96
Sources: A.M. Best; III
97
98
99
00
01
02
03
04
Medical Malpractice
Combined Ratio
160
154.8
Average Combined
1995 to 2004 = 125.5
150
142.3
138.1
140
133.8
129.7
130
120
115.7
112.3
110
100
106.6
107.9
Med Mal is off life support but
is still in critical condition
99.8
90
95
96
Sources: A.M. Best; III
97
98
99
00
01
02
03
04
AUTO & HOME:
A SUCCESSFUL SHIFT TO
THE UNDERWRITING
CULTURE?
Private Passenger Auto
Private Passenger Auto is
Enormous Part of P/C Industry
Total 2004 Direct Personal + Commercial Premiums Written
= $467.0 Billion PPA Liability
Private passenger
auto accounted for
34.7% or $162.2B
in DPW in 2004
20.5%
$95.8B
$66.4B
All Commercial
Lines
53.9%
$251.6B
PPA Coll/Comp
14.2%
$53.2B
Homeowners
11.4%
Source: A.M. Best; Insurance Information Institute
Auto Insurance:
Direct Premiums Written
$180
$160
Billions
$140
$120
$145.1B $162.2B
+9.8% +11.9%
$132.1B
$122.2B
$120.6
+8.1%
$118.9B
+1.3%
$116.1B
B
$110.5B+5.0% +2.4% +1.4%
$106.0B +4.3%
$100.7B +5.3%
$64.9 $95.8
$61.2
$95.7B +5.2%
PP Auto Liability
PP Auto Phys Damage
$100
$43.8 $47.3 $49.9 $51.6
$40.6
$38.2
$80 $34.4 $36.0
$56.2
$60
$40
$91.7 $66.4
$84.0
$72.3 $71.6 $70.7 $70.6 $75.9
$61.3 $64.7 $67.8 $70.0
$20
$0
93
94
95
96
Source: A.M. Best; Insurance Information Institute
97
98
99
00
01
02
03
04
Motor Vehicle Retail Sales
96
97
17.6
17.4
17.3
17.1
17.0
Sales of automobiles are being hurt by
high gas prices and rising interest rates;
Likely some shift away from SUVs to cars
15.5
15.0
16.9
New Motor Vehicle Sales
15.5
15.5
16.0
16.0
16.5
16.8
17.0
17.1
17.3
17.0
17.5
17.1
17.4
18.0
17.5
17.8
(Millions of Units)
98
99
00
01
02
03
04 05E 06F 07F 08F 09F 10F 11F 1216F
Source: US Department of Commerce; Insurance Information Institute;
Blue Chip Economic Indicators as of January 2006 through 2007; III forecast thereafter.
Private Passenger Auto
Combined Ratio
109.5
PPA is the profit
juggernaut of the p/c
insurance industry today
110
105
107.9
104.2
103.5
101.7 101.3 101.3
101.1
101.0
99.5
100
98.4
Average Combined 1993 to 2004= 102.7
Many auto insurers have shown significant improvements in underwriting
performance since mid-2002
95
94.0
93.1
90
93
94
Sources: A.M. Best; III
95
96
97
98
99
00
01
02
03
04
05F
Key Auto Insurance Stats:
OH vs. US, 2004 vs. 2005
$12,000
$10,000
-0.14%
+2.81%
$9,768 $10,042
$9,397 $9,384
2004
2005
$8,000
$6,000
+1.09%
+2.80%
$4,000
$2,498 $2,568
$2,292 $2,317
$2,000
$0
OH Bodily Injury
Severity
OH PD Liability Severity
US Bodily Injury
Severity
Source: Insurance Services Office, Insurance Information Institute
US PD Liability Severity
Key Auto Insurance Stats:
OH vs. US, 2004 vs. 2005*
$4,000
+2.88%
-0.23%
2004
2005*
$2,809 $2,890
$2,612 $2,606
$2,000
-4.11%
$1,020
+2.20%
$978
$952
$973
$0
OH Collision Severity
OH Comprehensive
Severity
US Collision Severity
* Average for 4 quarters ending with the 3rd quarter of 2005 vs. full year 2004.
Source: Insurance Services Office, Insurance Information Institute
US Comprehensive
Severity
RNW: Private Passenger Auto,
United States, 1992-2006F
Segmentation
should help
profitability
16%
14%
14%14%
12%
12%
11% 12%
10%
15%
13%
14%
12%
10%
9%
8%
6%
4%
8%
Private passenger auto
profitability deteriorated
throughout the 1990s but
has improved dramatically
4%
2%
2%
2%
0%
92
93
94
95
96
97
Source: NAIC; Insurance Information Institute
98
99
00
01
02
03 04E 05E 06F
Private Passenger Auto:
Incurred Loss Ratios*, 1999-2005:Q4
Collision
Comprehensive
Liability (BI & PD)
110%
Loss ratios for all major
coverages trending down;
Comp is CAT impacted
100%
90%
80%
70%
50%
99:Q1
99:Q2
99:Q3
99:Q4
00:Q1
00:Q2
00:Q3
00:Q4
01:Q1
01:Q2
01:Q3
01:Q4
02:Q1
02:Q2
02:Q3
02:Q4
03:Q1
03:Q2
03:Q3
03:Q4
04:Q1
04:Q2
04:Q3
04:Q4
05:Q1
05:Q2
05:Q3
05:Q4
60%
Source: ISO Fast Track; Insurance Information Institute.
*Direct basis
Pure Premium Spread: Personal
Auto PD Liability, 2000-2005:Q4
Auto Insurance Component of CPI
10%
Personal Auto-PD Pure Premium
Margin necessary
to maintain PPA
profitability
8%
Inversion of pure
premium spread
is a warning sign
6%
4%
2%
0%
Source: Insurance Information Institute calculations based ISO Fast Track and US BLS data.
05:Q4
05:Q3
05:Q2
05:Q1
04:Q4
04:Q3
04:Q2
04:Q1
03:Q4
03:Q3
03:Q2
03:Q1
02:Q4
02:Q2
2004 PPA
Combined=94
02:Q1
01:Q4
01:Q3
01:Q2
01:Q1
00:Q4
00:Q3
00:Q2
00:Q1
-4%
2000 PPA
Combined=110
02:Q3
-2%
Bodily Injury: Severity Trends
Now Offset Declining Claim Freq.
6%
4%
Medical
inflation a
powerful
cost driver
Frequency
Severity
4.7%
3.0%
3.6%
3.8%
3.4%
2.8%
2%
0%
-0.3%
-0.9%
-2%
-2.2%
-2.6%
-4%
-4.0%
-3.4%
-5.3%
-6%
99
00
*Four quarters ending 2005:Q4.
Source: ISO Fast Track data.
-5.4%
01
02
03
04
05*
PD Liability: Frequency Trend
Swamps Rising Claim Severity
Frequency
7%
Fewer accidents, but more
damage when they occur:
Severity
6.2%
6%
5%
Higher Deductibles?
4.3%
3.9%
4%
3.3%
3%
2.8%
2.4%
2%
1%
0.8%
0.5%
0.3%
0%
-1%
-2%
-1.5%
-1.8%
-3%
-2.6%
-2.4%
-2.3%
-4%
99
00
*Four quarters ending 2005:Q4.
Source: ISO Fast Track data.
01
02
03
04
05*
PIP: Frequency Trend Now
Offsets Rising Claim Severity
Frequency
Severity
Fraud caused
problems from
1999-2001
20%
16.1%
15%
10%
6.5%
6.3%
5%
4.9%
3.2%
1.1%
0%
-5%
-0.6%
-1.1%
-1.6%
Is No-Fault living on
borrowed time?
-10%
99
00
*Four quarters ending 2005:Q4.
Source: ISO Fast Track data.
0.5%
0.0%
01
02
-3.9%
-5.4%
-7.2%
03
04
05*
Collision: Frequency Trend
Swamps Rising Claim Severity
8%
Frequency
6.8%
Severity
6%
4.1%
4%
3.0%
1.9%
2.6%
2%
3.7%
3.9%
3.7%
1.6%
0%
-0.4%
-2%
-1.8%
-4%
-3.8%
-5.1%
-6%
99
00
*Four quarters ending 2005:Q4.
Source: ISO Fast Track data.
01
02
03
-4.6%
04
05*
Comprehensive: Favorable
Frequency and Severity Trends
10%
Frequency
8.9%
Severity
7.0%
8%
6%
3.3% 3.3%
4%
2%
0%
-2%
-1.7%
-4%
-6%
-2.6%
-2.7%
-2.1%
-2.1%
-4.1%
-4.7%
-5.6%
-8%
-7.0%
-8.2%
-10%
99
00
*Four quarters ending 2005:Q4.
Source: ISO Fast Track data.
01
02
03
04
05*
Homeowners
Private Passenger Auto is
Enormous Part of P/C Industry
Total 2004 Direct Personal + Commercial Premiums Written
= $467.0 Billion
PPA Liability
20.5%
Private passenger
auto accounted for
34.7% or $162.2B
in DPW in 2004
$95.8B
$66.4B
All Commercial
Lines
53.9%
PPA Coll/Comp
14.2%
$251.6B
$53.2B
Homeowners
11.4%
Source: A.M. Best; Insurance Information Institute
Homeowners Insurance:
Direct Premiums Written
Homeowners premium growth has
been strong, tracking the US real
estate boom and higher rates
$60
Billions
$50
$40
$30
$37.6B
$34.6B +8.7%
$48.7B
$43.0B +13.3%
+14.4%
$53.2B
+9.2%
$30.9B $32.5B +6.5%
+5.2%
$26.0B $27.4B $29.1B +5.8%
$24.4B +6.6% +5.4% +6.2%
$22.9B +6.6%
$20
$10
$0
93
94
95
96
Source: A.M. Best; Insurance Information Institute
97
98
99
00
01
02
03
04
New Private Housing Starts
1.74
1.75
1.75
1.71
1.69
1.82
1.90
1.96
2.05
1.60
1.71
1.57
1.64
1.62
1.47
1.35
1.48
1.46
12-16F
11F
10F
09F
08F
07F
06F
05E
04
03
02
01
00
99
98
97
96
95
Exposure growth forecast for HO
insurers is excellent, though new
building is expected to slow modestly
94
93
92
91
1.19
1.01
1.20
1.29
90
2.1
2.0
1.9
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
1.85
(Millions of Units)
Source: US Department of Commerce; Blue Chip Economic Indicators (1/06), Insurance Info. Institute
Homeowners Insurance
Combined Ratio
158.4
160
Average 1990 to 2005E= 114
Insurers have paid out an average of
$1.14 in losses for every dollar earned
in premiums over the past 16 years
150
140
130
121.7
120
121.7
118.4
113.6
112.7
117.7
113.0
109.4 108.2111.4
110
110
109.3
101.0
98.2
100
95.1
90
90
91
Sources: A.M. Best; III
92
93
94
95
96
97
98
99
00
01
02
03
04
05E
Rates of Return on Net Worth for
Homeowners Ins: US
Averages: 1993 to 2005E
US HO Insurance = +3.4%
15%
12.4%
9.7%
11%
10%
5%
2.5%
3.6%
5.4%
5.4%
2%
3.8%
1.4%
0%
-1.7%
-5%
-4.2%
-7.2%
-10%
93
94
95
96
97
98
99
00
01
Source: NAIC; 2004/5 figures are Insurance Information Institute estimates.
02
03
04E
05E
INSURANCE-TOVALUE:
Ending the Blame Game is a
Win-Win Situation Deal
Insurance-to-Value in HO is a
National Problem, Improved Recently
80%
73%
70%
Less than ITV means homeowners insurers
left $8 billion on the table in 2003*
64%
61%
60%
59%
50%
40%
35%
27%
30%
25%
22%
20%
2002
*According MS/B.
Source: Marshall & Swift/Boeckh
2003
2004
Proportion of Home Undervalued
2005
Average Undervaluation
Who’s Responsibility Is It to Keep
Homeowners Policy Up-to-Date?
Other/Don't Know
3%
Insurer
7%
Agent
19%
Homeowner
71%
Nearly 3 out 4 people,
even fire-weary
Californians, believe it is
the homeowner’s
responsibility to keep
insurance up-to-date
BUT 26% believe it’s
the agent’s or insurer’s
responsibility
This substantial
minority is wrong, but
gets heard (CA, FL) and
comments reflect badly
on insurers
Media, regulators and
legislators join fray
Source: September 2004 poll of 800 Californians conducted for the Insurance Information Network of
California by Public Opinion Strategies. Margin of error = +/- 3.46%.
Time Since Homeowner Last
Updated HO Policy
Don’t
Know/Refused
9%
Nearly 40% of
people haven’t
updated their
homeowner’s
policy within the
last 3 years
Last 6 Months
18%
More than 5 Yrs.
25%
6 Mos. - 1 Yr.
12%
3 - 5 Years
12%
1 - 2 Years
24%
Huge potential
for problems,
especially in
disaster-prone
states
Leads
automatically to
large underinsurance
problems
Source: September 2004 poll of 800 Californians conducted for the Insurance Information Network of
California by Public Opinion Strategies. Margin of error = +/- 3.46%.
Why People Don’t Increase
Homeowners Coverage
Don’t Want
Rates to Go Up
17%
Too Expensive
5%
Other
18%
Didn't Have
Time
30%
Agent Said I'm
Covered
26%
Didn't Know
Needed To
25%
22% cite expense as
reason they don’t adjust
they’re HO coverage
25% don’t realize they
need to
30% say they’re too
busy (to think about
protecting their most
valuable asset)
25% say their agent
said there’s nothing to
worry about
Source: Harris interactive poll conducted for Fireman’s Fund, July 2004.
See: http://www.firemansfund.com/dcmssites/about/pdf/firemansfundtoplinerev2.pdf
California Hazards: % People
Stating Prepared/Very Prepared
10%
0%
Los Angeles
Bay Area
Sacramento
San Diego
Source: Insurance Information Network of California Survey, February 2006.
Central
Valley
21%
19%
32%
31%
34%
25%
33%
24%
17%
25%
33%
35%
42%
48%
49%
Wildfire
Tsunami
43%
44%
19%
22%
32%
34%
29%
33%
25%
18%
20%
27%
40%
30%
44%
47%
34%
50%
Earthquake
Storms
28%
Flood
Slides
60%
National Flood
Insurance Program
Why Don’t People Buy Flood
Coverage?
Flood Insurance Penetration Rates:
Top 25 Counties/Parishes in US*
JEFFERSON/LA
WALTON/FL
BROWARD/FL
COLLIER/FL
LEE/FL
GALVESTON/TX
GLYNN/GA
ST. BERNARD/LA
MIAMI-DADE/FL
ORLEANS/LA
CARTERET/NC
ST. CHARLES/LA
ST. JOHNS/FL
CHARLOTTE/FL
ST. TAMMANY/LA
HORRY/SC
INDIAN RIVER/FL
BAY/FL
BRUNSWICK/NC
NASSAU/FL
BERKELEY/SC
PINELLAS/FL
BRAZORIA/TX
CHATHAM/GA
TERREBONNE/LA
0%
84.0%
81.5%
80.0%
78.7%
Highest flood insurance
77.1%
74.1%
penetration rates are in
69.6%
68.4%
LA and FL, but most
68.1%
66.7%
are underinsured
65.9%
65.5%
62.4%
59.0%
56.2%
51.6%
No counties in
49.6%
48.0%
the Northeast
46.3%
44.4%
are represented
42.8%
42.8%
in Top 25
42.0%
41.9%
40.1%
20%
40%
60%
80%
*As of 12/31/05.
Source: New Orleans Times-Picayune, 3/19/06, from NFIP and US Census Bureau data.
100%
Flood Insurance Penetration Rates:
Counties/Parishes Ranked 26-50*
BALDWIN/AL
SARASOTA/FL
PALM BEACH/FL
CHARLESTON/SC
MANATEE/FL
MARTIN/FL
ATLANTIC/NJ
LAFOURCHE/LA
OKALOOSA/FL
GEORGETOWN/SC
FLAGLER/FL
MAUI/HI
LIVINGSTON/LA
BREVARD/FL
SUSSEX/DE
VOLUSIA/FL
ST. LUCIE/FL
JEFFERSON/TX
HAMPTON CITY/VA
OCEAN/NJ
HARRIS/TX
PASCO/FL
BOSSIER/LA
NEW HANOVER/NC
BRONX/NY
0%
39.8%
39.7%
39.2%
Mid-Atlantic/Northeast
39.1%
38.7%
Counties are
37.2%
36.5%
underrepresented
36.2%
34.2%
33.0%
32.1%
30.6%
28.3%
27.6%
People along the
27.0%
26.8%
eastern
26.4%
26.1%
seaboard have
25.4%
25.3%
not gotten the
25.2%
23.4%
message
23.3%
22.1%
21.7%
10%
20%
30%
40%
*As of 12/31/05.
Source: New Orleans Times-Picayune, 3/19/06, from NFIP and US Census Bureau data.
50%
Flood Insurance Penetration Rates:
Counties/Parishes Ranked 51-75*
21.6%
20.9%
20.1%
19.1%
18.3%
17.8%
17.7%
17.5%
16.7%
16.3%
MS coastal
15.8%
counties
15.6%
15.4%
rank
14.5%
14.0%
abysmally
13.3%
low
12.9%
12.6%
11.7%
Barnstable is only
11.6%
11.3%
county in all of
10.2%
9.3%
New England
9.1%
among Top 75
8.5%
CAMERON/TX
FORT BEND/TX
SANTA ROSA/MS
HARRISON/MS
JACKSON/MS
NORFOLK CITY/VA
HILLSBOROUGH/FL
LAFAYETTE/LA
EAST BATON ROUGE/LA
VIRGINIA BEACH
ESCAMBIA/FL
HONOLULU/HI
SACRAMENTO/CA
CALCASIEU/LA
MONTGOMERY/TX
CITRUS/FL
MERCED/CA
CHESAPEAKE,
OSCEOLA/FL
HUDSON/NJ
DUVAL/FL
BARNSTABLE/MA
MARIN/CA
TULARE/CA
MONMOUTH/NJ
0%
5%
10%
15%
20%
*As of 12/31/05.
Source: New Orleans Times-Picayune, 3/19/06, from NFIP and US Census Bureau data.
25%
What Needs to Happen for the
NFIP To Be More Effective
•
Move to actuarially based rates
 Include loading to build-up reserve fund
 Expand refusals on irresponsible construction & repeats
•
•
Expand share of homeowners who buy coverage in
100 year flood plain & beyond (200/500-year plain)
Update & digitize flood maps
 Need process for continuous updating
 Coordinate inundation & flood maps
•
Create/formalize central lender property tax-based
authority for tracking properties subject to
mandatory purchase requirement
Source: Insurance Information Institute
Why Insurers Are Helped by High
NFIP Penetration Rates
•
Greatly Reduce Wind vs. Water Litigation
 Reduces uncertainty
 Prevents trampling of insurance commissioner by AG
•
Reduce agent E&O problem
•
Local Economy Bounces Back More Quickly
 Preserves exposure base & increases growth opportunities
•
If NFIP Rates Moved to (More) Actuarially Sound
Basis Private Flood Excess Flood Market Could
Expand
Source: Insurance Information Institute
Summary
• Home/Auto picture is bright for 2006, assuming
“normal” CAT loss activity
• Concern about pricing discipline, esp. if freq/severity
trends turn adverse
• Rising investment returns insufficient to support deep
soft market in terms of price, terms & conditions
• Clear need to be more underwriting focused
• Major Challenges:
Maintaining price/underwriting discipline
Managing variability/volatility of results
Insurance Information
Institute On-Line
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http://www.iii.org/media/industry/outlooks/ohio/
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