Rising Premiums:
Economic Windfall or
Insurance Industry Meltdown?
The Legend of the
Price-Gouging Insurer
Casualty Actuaries of Greater New York
New York, NY
June 11, 2003
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
• Overview
URBAN LEGENDS OF THE HARD MARKET
• Insurers are Making a Killing
• Commercial Insurance is More Expensive than Ever
• Rate Hikes are to Make Up for 9/11 Losses
• Rate Hikes are Mostly Due to Bad Investments
• There’s No Connection Between Litigiousness & Rates
• Insurers are Drowning in Capital
• Insurers are “Redlining” Businesses post-9/11
• The Terrorism Problem is Fixed
• Investors are Satisfied with P/C Stock Performance
• Q&A
PRICING:
Past, Present &
Future
Average Price Change of
Commercial Insurance Renewals
(Pre-9/11)
E&S
-7.0%
Umbrella
-4.3%-2.8%
1.4%
-3.5%-2.1%
-6.0%
Workers' Comp
-11.0%
Commercial Property
CMP
-5.0%
General Liability
-7.0%
Commercial Auto
2.8%
3.2%
8.8%
8.0%
8.3%10.0%
7.9%
-0.4%
-2.0%
-3.0%
13.5%
4.1%
-1.2%
-4.4%
9.5%
9.5%
-4.1% -1.6%
-6.0%
-10.0%
6.1%
0.8%
-1.8%
-6.6%
8.9%
12.0%
3.2%
0.2%
3.5%
9.0% 11.0%
-13 -11 -9% -7% -5% -3% -1% 1% 3% 5% 7% 9% 11 13
% %
% %
Spring 2001
Source: Conning
Fall 2000
Spring 2000
Fall 99
Spring 99
Fall 98
Council of Insurance Agents &
Brokers Rate Survey
First Quarter 2003
Rate Increases By Line of Business
No Change Up 1-10%
10-20%
20-30%
30-50%
50%-100%
>100%
Comm. Auto
8%
23%
40%
19%
5%
0%
0%
Workers Comp
7%
20%
35%
23%
7%
2%
0%
General Liability
7%
23%
42%
20%
3%
0%
0%
Comm. Umbrella
4%
12%
28%
27%
15%
8%
1%
D&O
3%
6%
25%
28%
15%
8%
2%
Comm. Property*
8%
24%
35%
17%
4%
0%
0%
Construction Risk 7%
5%
27%
23%
16%
3%
0%
Terrorism
13%
17%
19%
10%
2%
1%
1%
Business Interr.
13%
33%
28%
7%
1%
0%
0%
Surety Bonds
9%
14%
19%
10%
4%
0%
2%
Med Mal
2%
2%
5%
8%
18%
14%
8%
*9% of respondent reported a decline.
DEBUNKING URBAN LEGENDS
OF THE HARD MARKET
Legend #1:
Insurers are Exploiting the
Current Hard Market and
Making a Killing
P/C Net Income After Taxes
1991-2002 ($ Millions)
2001 was the first year ever
with a full year net loss
$40,000
$36,819
2002 ROE = 1.0%
$30,773
$30,000
$24,404
$20,598
$19,316
$20,000
$21,865
$20,559
$14,178
$10,870
$10,000
$5,840
$2,903
$0
-$6,970
-$10,000
91
92
93
94
95
96
Sources: A.M. Best, ISO, Insurance Information Institute.
97
98
99
00
01
02
ROE: P/C vs. All Industries
1987–2003F
20%
15%
10%
5%
There is an enormous gap between
the p/c industry’s rate of return and
that of most major industry groups
0%
-5%
87
88
89
90
91
92
93
94
US P/C Insurers
Source: Insurance Information Institute; Fortune
95
96
97
98
99
All US Industries
00
01
02
03F
ROE vs. Cost of Capital:
US P/C Insurance: 1991 – 2002
There is an enormous gap
between the industry’s cost of
capital and its rate of return
20%
15%
5%
10.2. pts
14.6 pts
10%
US P/C insurers have missed
their cost of capital by an
average 6.9 points since 1991
0%
-5%
1991
1992
1993
1994
1995
1996
1997
Source: The Geneva Association, Ins. Information Inst.
1998
1999
ROE
2000
2001
2002
Cost of Capital
Underexposed:
The Economic Cycle
Hurts Exposure Growth
Real GDP Growth
10%
Economy continues to
experience uneven growth
following the recession of 2001
8.3%
9%
8%
7%
5.7%
6%
5% 4.4%
4%
3%
2%
3.5%
2.5%
5.6%
4.8%
2.2%
1.0%
3.6%
3.3%
2.7%
2.9%
2.4%
2.2%
1.4%
1%
0%
-1%
19
9
19 8
99
19 :I
99
19 :II
99
19 :III
99
:I
20 V
00
20 :I
00
20 :II
00
20 :III
00
:I
20 V
01
20 :I
0
20 1:II
01
20 :III
01
:I
20 V
02
20 :I
02
20 :II
02
20 :III
02
:I
20 V
03
20 F
04
F
-2%
-0.6% -0.3%
-1.6%
Source: US Department of Commerce, Blue Economic Indicators 6/03, Insurance Information Institute.
Impact of Recession on P/C Premiums
and Profitability (1970-2001)
14%
Recession Years (1970; 74-75; 80-82; 90-91;2001)
12%
Non-Recession Years (all other years, 1970-2001)
10%
8%
6%
4%
11.4%
9.0%
8.6%
7.5%
9.6%
6.8%
5.7%
4.1%
4.6%
4.3%
4.6%
4.2%
ROE--All
Industries*
ROE--Banks*
ROE-Diversified
Financial*
2%
0%
-0.4%
-2%
-1.8%
-4%
Inflation (CPI) NWP Growth
(unadj.)
Real NWP
Growth
ROE--P/C
Insurers*
*GAAP return on equity, adjusted for inflation; Bank data 1952-2001; Div. Fin. 1987-2001
Source: Insurance Information Institute
Unemployment Rate (%)
Unemployment
8.0
7.5
7.5
6.9
6.8
7.0
6.5
6.0
The unemployment rate is expected
to rise slightly in 2003, harming WC
exposure growth.
6.1
5.8
5.6
5.6
6.0
5.7
5.4
5.5
4.9
5.0
4.8
4.5
4.2 4.0
4.5
4.0
3.5
3.0
90
91
92
93
94
95
96
97
98
99
00
01
02 03E 04F
Source: US Bureau of Labor Statistics; Blue Chip Economic Indicators (6/03), Insurance Info. Institute.
Exposure: Employment, Wages &
Salaries
140
$9,000
Wage & Salary Disbursements
Employment (Millions)
135
$8,000
130
$7,000
125
$6,000
120
115
110
105
107
110
112
115
117 119 118
119 120
123
125 127
130
135 135 134
134
132
136 $5,000
$4,000
$3,000
100
$2,000
85
86
87
88
89
90
91
92
93
95
95
96
97
98
99
00
01 02E 03F
Sources: Bureau of Labor Statistics, Bureau of Economic Analysis, Blue Chip Economic Indicators,
Insurance Information Institute.
Disbursements ($Billions)
Employed Persons
Private Non-Residential
Investment (Real, $1996)
$1,500
Billions
(US$)
$1,250
Commercial exposure growth
is slowing as corporations cut
back on capital spending
$1,324
$1,255
$1,228
$1,183
$1,172
$1,136
$1,009
$1,000
$899
$818
$745
$750
$684
$631
$500
92
93
94
95
96
97
98
99
00
*Annualized based on first quarter data.
Source: U.S. Bureau of Economic Analysis, Insurance Information Institute
01
02
03:I*
New Private Housing Starts
(Millions of Units)
New Private Housing Starts
2.0
•Housing market remain strong.
1.9
•Virtually no exposure impact for insurers
1.8
1.62 1.64 1.57
1.7
1.6
1.2
1.29
1.20
1.19
1.01
1.1
1.0
1.62
1.35
1.4
1.3
1.60
1.48 1.47
1.46
1.5
1.71 1.68
90
91
92 93
94 95
96
97 98
99
00
01
02 03E 04F
Source: US Department of Commerce; Blue Chip Economic Indicators (5/03), Insurance Info. Institute
Motor Vehicle Retail Sales
(Millions of Units)
New Motor Vehicle Sales
20.0
Sales of automobiles remain relatively strong
despite the weak economy. There is little
adverse exposure impact on auto insurers.
19.5
19.0
18.5
17.8
18.0
17.4
17.2
17.5
17.1
17.0
16.5
16.0
15.5
16.7
16.7
03E
04F
16.0
15.5
15.5
15.0
96
97
98
99
00
01
02
Source: US Department of Commerce; Insurance Information Institute;
Blue Chip Economic Indicators as of May 2003.
Legend #2:
Insurance is More
Expensive than Ever and is
Squeezing Businesses and
Families Alike
Insurance is the Biggest Concern
of Small Business Owners
Labor Qlty.
9%
Labor Costs Inflation
5%
4%
Credit/Int.
Rates
2%
Competition
9%
Insurance
20%
Regulations
11%
Poor Sales
19%
Taxes
19%
Source: National Federation of Independent Business (February 2003); Insurance Information Institute
Commercial Lines Net Written
Premium as % of GDP
Commercial insurance premiums
as a % of GDP fell 35% between
1988 and 2000 and remains far
below late 1980’s levels
2.4%
2.3%
2.2%
2.1%
2.1%
2.0%
2.0%
1.9%
1.9%
1.9%
1.8%
1.8%
1.8%
1.7%
1.6%
1.6%
1.5%
1.6%
1.5%1.5%
More Cover for Less Money: Terms
& conditions broadened significantly
during the soft market, even as prices
fell
1.4%
1.2%
1.0%
88
89
90
91
92
93
94
95
96
97
98
99
00
01 02E
Sources: Insurance Information Institute, calculated from U.S. Bureau of
Economic Analysis and A.M. Best data.
Cost of Risk per $1,000 of
Revenues: 1990-2002E
$10
•Cost of risk to
corporations fell 42%
between 1992 and
2000
$9
$8.30
$7.70
$7.30
$8
$7
•Estimated 15%
increase in 2001,
25% in 2002
$6.49
$6.40
$6.10
$5.70
$6
$6.94
$5.71
$5.55
$5.25
$5.20$4.83
$5 Cost of risk is still less than
it was a decade ago!
$4
90
91
92
93
94
95
96
97
98
99
00 01E 02E
Source: 2001 RIMS Benchmark Survey; Insurance Information Institute estimates.
Homeowners Insurance Expenditure
as a % of Median Home Price
$100,000
0.36%
0.40%
$157,800
$139,000
$133,300
$128,400
0.37% 0.37% 0.37%
$121,800
$115,800
$125,000
$110,500
$150,000
The cost of
homeowners
insurance
relative to the
price of a typical
home has fallen!
$147,800
0.38% 0.38%
$175,000
$107,200
Median Home Sales Price
0.39%
Median Sales Price of Existing Homes
HO Insurance Expenditure as a % of Sales Price
0.38%
0.35%
0.35% 0.35%
0.33%
0.30%
94
95
96
97
98
99
00
01
02
*As of January 2003.
Source: Insurance Information Institute calculations based on data from National Association of
Realtors, NAIC.
HO Expenditure as % of Sales Price
$200,000
Legend #3:
Insurers are Raising Rates
to Make up for 9/11 Losses
Strength of Recent Hard Markets
by Real NWP Growth
25%
1975-78
1985-87
2001-03
Real NWP Growth During
Past 3 Hard Markets
20%
1975-78: 8.6%
15%
1985-87: 14.5%
10%
2001-03F: 9.2%
5%
0%
-5%
-10%
Real $
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
Current $
Note: Shaded areas denote hard market periods.
Source: A.M. Best, Insurance Information Institute
Underwriting Gain (Loss)
1975-2002
$10
$0
$ Billions
($10)
($20)
($30)
($40)
($50)
P-C insurers paid $30.5 billion more in
claims & expenses than they collected in
premiums in 2002
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
($60)
Source: A.M. Best, Insurance Information Institute
P/C Industry Combined Ratio
120
2001 = 115.7
2002 = 107.2
115
2003F = 103.2*
Combined
Ratios
1970s: 100.3
1980s: 109.2
1990s: 107.7
2000s: 111.0
110
105
95
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
100
Sources: A.M. Best; III
*Based on III Earlybird Survey, February 2003.
Combined Ratio:
Reinsurance vs. P/C Industry
All Lines Combined Ratio
160
2001’s combined ratio was the worstever for reinsurers; 2003 was bad as
well.
150
2003: Big improvement in Q1
170
121.3
96.4
00
107.2
99
115.7
98
106.5
110.0
100.5
105.6
97
114.3
107.7
100.8
101.6
104.8
105.8
119.2
106.5
113.6
108.5
105.0
106.9
110
110.5
108.8
130
126.5
115.8
Light weather helped Q1:03
140
120
162.5
Reinsurance
100
90
91
92
93
94
95
96
01
*First quarter 2003 estimate from RAA.
Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
02
03*
12% After Tax ROE Requires
Underwriting Profit
Accident Year Combined Ratio
P:S
90.0%
92.5 %
95.0 %
97.5 %
100.0 %
102.5 %
105.0 %
107.5 %
110.0 %
112.5 %
100 %
13.0 %
11.5 %
10.1 %
8.6 %
7.1 %
5.6 %
4.1 %
2.6 %
1.1 %
-0.4 %
110 %
14.0 %
12.4 %
10.7 %
9.1 %
7.5 %
5.8 %
4.2 %
2..5 %
0.9 %
-0.7 %
120 %
15.0 %
13.2 %
11.4 %
9.6 %
7.8 %
6.1 %
4.3 %
2.5 %
0.7 %
-1.1 %
130 %
16.0%
14.0 %
12.1 %
10.2 %
8.2 %
6.3 %
4.4 %
2..4 %
0.5 %
-1.5 %
140 %
16.9 %
14.9 %
12.8 %
10.7 %
8.6 %
6.5 %
4.4 %
2.4 %
0.3 %
-1.8 %
150 %
17.9 %
15.7 %
13.5 %
11.2 %
9.0 %
6.8 %
4.5 %
2.3 %
0.1 %
-2.2 %
160 %
18.9 %
16.5 %
14.1 %
11.8 %
9.4 %
7.0 %
4.6 %
2.2 %
-0.2 %
-2.5 %
170 %
19.9 %
17.3 %
14.8 %
12.3 %
9.8 %
7.2 %
4.7 %
2.2 %
-0.4 %
-2.9 %
180 %
20.9 %
18.2 %
15.5 %
12.8 %
10.1 %
7.5 %
4.8 %
2.1 %
-0.6 %
-3.3 %
190 %
21.8 %
19.0 %
16.2 %
13.3 %
10.5 %
7.7 %
4.9 %
2.0 %
-0.8 %
-3.6 %
200 %
22.8 %
19.8 %
16.9 %
13.9 %
10.9 %
7.9 %
4.9 %
2.0 %
-1.0 %
-4.0 %
225 %
25.3 %
21.9 %
18.6 %
15.2 %
11.9 %
8.5 %
5.2 %
1.8 %
-1.5 %
-4.9 %
250 %
27.7 %
24.0 %
20.3 %
16.5 %
12.8 %
9.1 %
5.4 %
1.7 %
-2.1 %
-5.8 %
Source: Dowling & Partners; Insurance Information Institute
U.S. Insured
Catastrophe Losses
$ Billions
CAT losses continue to be a problem,
though 2002 was much better than 2001 $28.1
$30
$22.9
$25
$20
$16.9
$15
$10.1
$8.3
$8.3
$7.3
$10 $7.5
$5.9 $5.0
$5.5
$4.7
$4.3
$2.7
$2.6
$5
$0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03*
*Estimate through May 2003.
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.
Source: Property Claims Service/ISO; Insurance Information Institute
P/C Insurance Industry Prior Year
Reserve Development*
$ Billions, Calendar Year Basis
$25
Adverse reserve development of about $23
billion accounted for most of the
industry’s 2002 underwriting loss and
“ate” much of the industry’s $37 billion
increase in earned premiums
$20
$15
$10
$5
$23
$2.3
$0.3
$0
$9.9
$2.2 $1.2
($0.3)
($1.5)
($5)
($10)
($3.7)
($7.5)($6.7)
($10.0)
($8.5)
($15)
90
91
92
93
94
95
96
97
98
99
00
01
02E
*Negative numbers indicate favorable development; positive figures represent adverse development.
Source: A.M. Best, Morgan Stanley, Dowling & Partners Securities
7.3%
7.4%
8.1%
7.6%
6.1%
5.7%
99
00
14.7%
12.0%
0.2%
2.5%
6.4%
9.0%
8.0%
2.1%
5.1%
5%
1.3%
10%
10.1%
15%
7.3%
Health care inflation is affecting the
cost of medical care, no matter what
system it is delivered through
11.2%
10.7%
Med Claim Costs Rising Sharply
-5%
92
93
-1.1%
-2.1%
0%
94
95
96
97
Health Benefit Costs
98
WC
Source: NCCI; William M. Mercer, Insurance Information Institute.
01
02
Legend #4:
Insurers’ Reckless
Investment Strategies are the
Primary Reason Why Rates
are Rising Today
Net Investment Income
$45
Billions
(US$)
$36
Investment income in 2002
fell 2.8% due primarily to
historically low interest rates
$27
History
1997 Peak = $41.5B
$18
2000= $40.7B
2001 = $37.7B
$9
2002 = $36.7B
$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
Source: A.M. Best, Insurance Information Institute
Interest Rates: Lower Than
They’ve Been in Decades
16%
1.
Historically low interest rates are the primary driver
behind lower investment yields. Nevertheless, overall
insurer investment performance outpaces all major
market indices and almost every major category of
mutual fund.
66% of the industry’s invested assets are in bonds
14%
12%
2.
10%
8%
6%
4%
2%
3-Month T-Bill
1-Yr. T-Bill
10-Year T-Note
*As of April 21, 2003.
Source: Board of Governors, Federal Reserve System; Insurance Information Institute
2002
2003
*
2000
2001
1998
1999
1996
1997
1994
1995
1992
1993
1990
1991
1988
1989
1986
1987
1984
1985
1982
1983
1980
1981
0%
Total Returns for Large Company
Stocks: 1970-2003*
S&P 500 up
13.2% so
far this year
40%
30%
20%
10%
*As of June 6, 2003.
Source: Ibbotson Associates, Insurance Information Institute
2002
2000
1998
1994
1992
1990
1988
1986
1984
1982
1980
1978
-30%
1976
Will it be the last?
1974
-20%
1972
2002 was 3rd consecutive
year of decline for stocks
1970
-10%
1996
0%
P/C Industry Investments,
by Type (as of Dec. 31, 2001)
Common
stock accounts
for about 1/5
of invested
assets
Common Stock
21%
Other
5%
Cash & ST Secs.
6%
Real Est. &
Mortgages
1%
Preferred Stock
1%
Source: A.M. Best, Insurance Information Institute
Bond Holdings, by Type
Industrial & Misc.
32.5%
Special Revenue
30.5%
Governments
18.0%
States/Terr/Other
15.4%
Public Utilities
3.1%
Parents/Subs/Affiliates 0.5%
Bonds
66%
Property/Casualty Insurance
Industry Investment Gain*
$ Billions
$57.9
$60
$52.3
$56.9
$51.9
$47.2
$50
$44.4
$42.8
$40
$36.6
$35.4
$30
Investment gains are simply
returning to “pre-bubble” levels
$20
$10
$0
94
95
96
97
98
99
00
01
02
*Investment gains consists primarily of interest, stock dividends and realized capital gains and losses.
Source: Insurance Services Office; Insurance Information Institute estimate annualized as of 9/30/02.
Crisis in Corporate Governance
Affecting Even Blue Chip Portfolios
•Crisis has affected both equity and bond markets
Legend #5:
There is No Relationship
Between Litigiousness and
Rising Insurance Costs
(A Trial Lawyer Favorite)
TORT-ure
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Asbestos
“Toxic” Mold
Medical Malpractice
Construction Defects
Lead
Fast/Fattening Foods & Obesity New
Dietary Supplements (e.g., Ephedra)
Reality TV New
Arsenic Treated Lumber
Guns
Genetically Modified Foods (Corn)
Pharmaceuticals & Medical Devices
Security exposures (workplace violence, post-9/11 issues)
Slavery
What’s Next? SARS??
Average Jury Awards
1994 vs. 2001
9,113
1994
$7,000
2001
$6,000
($000)
$5,000
3,902
$4,000
$3,000
$2,000
$1,000
2,288
1,365
419
1,744
1,727
1,185
789
187 323
333
Vehicular
Liability
Premises
Liability
1,140
759
$0
Overall
Business
Negligence*
*Figure is for 2000 (latest available)
Source: Jury Verdict Research; Insurance Information Institute.
Wrongful
Death
Medical
Malpractice
Products
Liability
Trends in Million Dollar Verdicts*
100%
11%
8%
10%
11%
6%
4%
10%
4%
68%
42%
36%
25%
21%
20%
10%
30%
17%
40%
27%
50%
21%
60%
44%
70%
54%
Very sharp jumps in multi-million
dollar awards in recent years across
virtually all types of defendants
43%
80%
47%
95-97
59%
2000-2001
98-99
90%
0%
Vehicular
Liability
Personal
Negligence
Premises
Liability
Business
Negligence
Medical
Government
Negligence Malpractice
*Verdicts of $1 million or more.
Source: Jury Verdict Research; Insurance Information Institute.
Products
Liability
Cost of U.S. Tort System
($ Billions)
Tort costs consumed 2.0% of GDP annually on average since 1990,
$350 expected to rise to 2.4% of GDP by 2005!
$300
$250
$200
$150
$298
Per capita “tort tax” expected to rise to $1,000 by 2005,
up from $721 in 2001
Even a modest reduction in tort costs would be more
stimulative than the $674 billion Bush tax/spending plan
$129 $130
$141 $144 $148
$159 $156 $156
$167 $169
$205
$180
$100
$50
$0
90
91
92
93
94
95
96
Source: Tillinghast-Towers Perrin. 2005 forecasts from Tillinghast.
97
98
99
00
01
05F
Personal, Commercial &
Self (Un) Insured Tort Costs*
$180
Commercial Lines
Personal Lines
Total = $157.7 Billion
$160
$29.6
Billions
$140
Total = $120.2 Billion
$120
$20.1
$100
$70.9
$80
$51.0
$60
Total = $39.5 Billion
$40
$5.4
$17.1
$20
$0
Self (Un)Insured
$49.1
$57.2
1990
2000
$17.0
1980
*Excludes medical malpractice
Source: Tillinghast-Towers Perrin
Who Will Pay for the
US Asbestos Mess?
Estimated Total US Settlements & Expenses = $200 billion
Asbestos
Defendants
39%
US Insurers
30%
$78 billion
$60 billion
$62 billion
Source: Tillinghast-Towers Perrin; Insurance Information Institute
Foreign
Insurers
31%
Medical Malpractice:
Tort Cost Growth is Skyrocketing
$16.2
$14.6
$13.5
$12.4
$11.6
$10.8
$9.4
$8.7
$7.9
$7.2
$7.1
$6.8
$7.0
$7.1
$6.5
$5.4
$4.4
$2.9
$3.6
$2.3
$1.9
$1.5
•Over the period from 1975 through 2000, medical
malpractice tort costs skyrocketed by 1,642% while
medical costs generally rose 449%, nearly 4 times as fast!
$1.2
$20.9
$19.4
$22
$20
$18
$16
$14
$12
$10
$8
$6
$4
$2
$0
•Over the period from 1990 through 2000, medical
malpractice tort costs rose 140%, more than double the
60% increase in medical costs generally over the same
period!
$17.6
$ Billions
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
Sources: Tillinghast-Towers Perrin, US Bureau of Labor Statistics, Insurance Information Institute
The Nation’s Judicial Hellholes:
An International Embarrassment
CALIFORNIA
Alameda
County
Los Angeles
County
San Francisco
County
Madison
County, IL
City of St.
Louis, MO
TEXAS
Jefferson
County
Hidalgo County
Starr County
MIAMI
Mississippi’s
22nd Judicial
District
Orleans Parish,
LA
Source: American Tort Reform Association; Insurance Information Institute
$0 - $200M
$201M$500M
$501M-$1B
$1B-$5B
$5B-$10B
Firm Revenue Size
Source: Marsh, 2002 Limits of Liability Report
$5,411
$10B+
All
$7,106
$7,606
$5,531
$6,054
$5,368
$6,464
$5,317
$5,609
$3,830
2002
$12,649
$8,213
Excess litigiousness is raising
the cost of liability coverage for
businesses of all sizes
2001
$4,878
$13,000
$12,000
$11,000
$10,000
$9,000
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
$3,801
($000)
Average Cost per $1 Million Liability Coverage
2001 vs. 2002
Average Total Limits Purchased
by All Firms* ($ Millions)
$110
$100
Limits purchased fell by 9.9%
between 2000 and 2002.
Price/capacity are issues.
$90
$80
$85.8
$83.2
$85.9
$105.0
$99.1
$101.8
$95.7
$88.7
$77.9
$70
$60
$50
1994 1995 1996 1997 1998 1999 2000 2001 2002
*Includes underlying primary limits
Source: Limits of Liability 2002, Marsh, Inc.
EXAMPLES
Medical Malpractice
Asbestos
“Toxic” Mold
Obesity
SARS
Medical Malpractice
Figure 1
Medical Crises across the US
AMA: Crises reached in at least 18 states !
AK
AL
WA
ME
MT
ND
VT
NH
MN
OR
ID
MA
NY
WI
SD
CT
MI
RI
WY
NJ
PA
IA
DC
OH
NE
IL
NV
IN
DE
MD
WV
UT
VA
CO
MO
KS
KY
CA
NC
TN
AZ
OK
NM
SC
AR
HI
MS
AL
GA
LA
TX
Crisis states
Crisis looming
Source: American Medical Association, March 2003
FL
PR
Medical Malpractice
Combined Ratio
170
Local market collapses
150
107.2
115.7
110.0
133.5
107.8
105.6
107.9
101.6
106.0
105.8
99.7
106.4
108.4
97.6
108.1
106.9
100
115.7
127.9
115.7
103.7
108.8
130
Insurers in 2001 paid out an
estimated $1.65 for every $1
they earned in premiums!
129.5
HC Providers seeking govt. protection
140
110
153.3
Increased mutualization
160
120
165
Trial lawyers have destroyed commercial
viability of med mal. The future holds:
90
1991
1992
1993
1994
1995
1996
1997
Medical Malpractice
Source: AM Best, Conning, Insurance Information Institute
1998
1999
2000
2001 2002E
All Lines Combined Ratio
Asbestos
Who Will Pay for the
US Asbestos Mess?
Estimated Total US Settlements & Expenses = $200 billion
Asbestos
Defendants
39%
US Insurers
30%
$78 billion
$60 billion
$62 billion
Source: Tillinghast-Towers Perrin; Insurance Information Institute
Foreign
Insurers
31%
‘Toxic’ Mold
Litigiousness in US Society
Compounded the Problem
Documented Toxic Mold Suits
Former
Owners of
Sold Homes
10%
Builder for
Construction
Defects
20%
Bad Faith
Against
Insurers
50%
1,000
Cases
5,000
Cases
2,000
Cases
2,000
Cases
HO
Associations
for Improper
Maintenance
20%
Source: www.toxlaw.com; Guy Carpenter
TX: Mold Claim Frequency*
(# claims per 1,000 policyholders)
25
The frequency of mold claims rose
1,286% between 2000:I and 2001:IV
20
15
18.4
11.7
10
6.7
4.1
3.2
5
2.7
1.7
0
23.6
00:Q1
00:Q2
00:Q3
00:Q4
01:Q1
01:Q2
01:Q3
Source: Texas Department of Insurance; Insurance Information Institute estimates.
01:Q4
Texas: Mold Losses/Claims
Are Finally Moderating*
$200
30000
Paid Losses
Claim Count
25000
20000
$150
15000
$100
10000
$50
Claim Count
Water Damage Paid Losses*
($Millions)
$250
5000
0
Ja
nFe 01
b
M -01
ar
Ap 01
r
M -01
ay
Ju 01
n0
Ju 1
l
Au -01
g
Se -01
pO 01
ct
No 01
v
De -01
cJa 01
nFe 02
b
M -02
ar
Ap 02
r
M -02
ay
Ju 02
n0
Ju 2
l
Au -02
g
Se -02
pO 02
ct
-0
2
$0
Source: Texas Department of Insurance; Insurance Information Institute
* Data are for TDI Cause 61: Discharge – Other Damage.
Not all claims in cause 61 are mold and mold claims may
also arise from other (non-water) causes of loss.
Sharply Rising Average Water
Claim Cost in CA: Mold Symptom
$5,000
The cost of the average water loss in CA
surged 27% in 2001 and 80% since 1998
$4,000
$4,730
$3,719
$3,339
$3,000
$2,537
$2,631
$2,000
1997
1998
1999
2000
2001
Source: Insurance Information Institute based on data from the Insurance Information Network of California;
Construction Defect Litigation
Destroying CA Condo Market
$3.00
$2.75
$2.50
Ratio of Losses Paid Out
to Premiums Taken In
$2.95
Condo construction in parts of CA has
come to a virtual stop.
Insurer costs rose 58% in just 2 years!
$2.25
$2.00
$1.87
$1.75
$1.50
“Right-to-Cure”
laws now in 5
states: AZ, CA,
NV, TX, WA
16 considering
such laws.
$1.25
$1.00
1998
Source: ISO, Insurance Information Institute
2000
Where are the Next
Battlefields for Mold?
• Homeowners issue probably crested in 2002
• Migration to commercial area affects many lines:
Commercial Property
Commercial Liability
Products Liability
Builders Risk/Construction Defects
Workers Comp…(very little)
• Hot Spots:
 Apartments/Condos/Co-ops
 Schools
Cars? (GM case in NC)
Office Structures
Municipal Buildings
• Trend toward class actions since science doesn’t
support massive individual non-economic damages
Much more lucrative for trial lawyers to form class
Source: Insurance Information Institute.
Obesity
Fast Food/Junk Science:
Edible Asbestos?
•Are the food service &
manufacturing industry’s
vulnerable to suits over
obesity?
•McDonald’s sued in late
2002 over allegations
that their food makes
people fat
•Kraft sued earlier this
year over trans fats in
Oreo cookies
Fast Food & Junk Science:
The Case Against Pizza
•Premise: Cheese makes you fat
•Why? Cheese is addictive!!
 Digestion breaks down milk
protein called casein, into
components called casomorphins
which are opiates like morphine &
codeine, which are addictive
 Caseins are concentrated in cheeses
•Manipulation of cheese content in
products—or sale of cheese itself—
knowing its addictive qualities—is
theoretically a “scientific” basis to
file suit on behalf of the pizzaaddicted obese.
•ADA’s Cheese Logo 
SARS:
A Threat to the P/C
Insurance Industry?
SARS: Limited P/C Insurance
Industry Exposure
•Are there any potential
SARS-related p/c insurance
exposures?
 Workers comp? Mostly
health care workers
 Event cancellation? Fear of
SARS insufficient, but
legitimate claims possible
 CGL? Several courts have
ruled that viruses/bacteria
(e.g., E. Coli, Legionnaires’
disease) not covered
 EIL? Court decisions + fact
that at least half of EILs
have “naturally occurring
substance” exclusions
preclude coverage.
Legend #6:
Insurers are Awash in Cash
and Have More Money than
They Know What to Do With
Capital Raising by P/C Insurers
Since September 11, 2001*
Capital Raising by P/C Insurers Since 9/11 Totals $53.2B
$30,000
$27.9 Billion
$25.4 Billion
$25,000
14 Pending
($ Millions)
$4,872
38 Pending
$20,000
$16,437
$15,000
$10,000
$20,492
40 Completed
33 Completed
$11,442
$5,000
$0
2002*
2001
Completed
*As of September 13, 2002.
Source: Morgan Stanley, Insurance Information Institute.
Pending
Policyholder Surplus:
1975-2002
$350
$300
$ Billions
$250
$200
Surplus (capacity) peaked at
$336.3 Billion in mid-1999 and
fell by 15.2% ($51 billion) to
$285.2 billion since then.
•Surplus is now lower than at
year-end 1997.
$150
“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
Source: A.M. Best, Insurance Information Institute
Global P/C Insurance Capacity is
Falling Dramatically
$1,000
$920
$900
$800
$690
$ Billions
$700
$600
Global
non-life
capacity
is down
25%
over the
past 2
years
$500
$400
$300
$200
$100
$0
2000:I
Sources: Insurance Information Institute, Swiss Re
2002:IV (est.)
Capital Myth: P/C Insurers Have $300
Billion to Pay Terrorism Claims
Total PHS = $298.2 B as of 6/30/01
= $285.2 B as of 12/31/02
"Target"
Commercial*
$100 billion
33%
Only 33% of
industry surplus
backs up “target”
lines
Personal
$150 billion
50%
*”Target” Commercial includes: Comm property, liability and workers comp; Surplus must
also back-up on non-terrorist related property/liability and WC claims
Source: Insurance Information Institute
Other
Commercial
$50 billion
17%
Legend #7:
Insurers are “Redlining”
Businesses in the Wake of 9/11
84.2%
82.5%
60%
50%
40%
65.1%
63.6%
73.3%
69.9%
70%
Currently
51.1%
49.2%
80%
69.2%
67.2%
90%
81.1%
79.2%
100%
Prior to 9/11/01
85.5%
82.4%
89.9%
85.0%
Insurance Coverage in Lower Manhattan
Over 95% of businesses in
Downtown were able to continue
coverage in the wake of 9/11
30%
20%
10%
Source: Downtown Alliance
ac
hi
ne
ry
ag
e
Eq
ui
p.
/M
Da
m
Pr
op
er
ty
nt
er
r.
p
Bu
sin
es
sI
W
or
ke
rs
Co
m
as
ua
lty
C
isa
bi
lit
y
D
Li
ab
ili
ty
G
en
er
al
0%
WC Residual Market Shares
•The vast majority of
employers are
finding coverage in
the private market
Residual Market Shares
30%
26%
24%
23%
21%22%
18%17%17%
16%
16%
20%
10%
9%
5%
•Residual market
share is growing but
is less than 1/6 of the
share in 1993.
11%
7%
4% 3%
1% 2%
4%
0%
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02
Source: NCCI
Legend #8:
TRIA Has Solved the
Industry’s Terrorism
Exposure Problems
Sept. 11 Industry Loss Estimates
($ Billions)
Property WTC 1 & 2
$3.5 (9%)
Other
Liability
$10.0 (25%)
Life
$2.7 (7%)
Aviation
Liability
$3.5 (9%)
Event
Cancellation
$1.0 (2%)
Workers
Comp
Aviation Hull
$2.0 (5%)
$0.5 (1%)
Property Other
$6.0 (15%)
Biz
Interruption
$11.0 (27%)
Consensus Insured Losses Estimate: $40.2B
Source: Insurance Information Institute
Industry Losses Under Proposed Federal
Backstop Using 9/11 Scenario
(as proposed/interpreted as of 10/18/02)
$14.25B
Total Ind. Loss: $10.875B
$19.675B
$20
$1.75B
Industry
Co-Share
$0.925B
Industry
Co-Share
$10.575
$2.0B
Industry
Co-Share
$18.00
($ Billions)
$25
$15.75
$30
$15
$0.125B
$10 Industry $1.125
Co-Share
$5
$8.75
$18.75
$12.50
$0
Year 1
Industry Retention
Year 2
Surcharge Layer
Year 3
Co-Reinsurance Layer
Assumes $30B Commercial Prop & WC Loss, $125B “At Risk” Commercial DPW
Source: Insurance Information Institute.
Legend #9:
Wall Street Investors Should
be Satisfied With Insurer Stock
Performance
Insurer Stocks:
Underperforming the S&P 500
Total Return 2003 YTD Through June 6, 2002
22.00%
S&P 500
11.94%
Multiline
1.59%
12.21%
L/H
9.10%
All
7.52%
P/C
16.14%
0%
5%
Nasdaq
10%
15%
Source: SNL Securities, Insurance Information Institute
20%
Brokers
25%
$180
Number of M&As was down
39.4% during the first half of
2002 vs. first half 2001.
$160
Value of deals was down 80.8%.
$140
None of the top deals were in the
P/C sector
$120
468
349
1998: 565 deals
valued at $165.4 B
433
382
400
300
300
243 246
171 188
$60
221
56.2
149
55.7
41.7
40.8
$40
$20
500
295
$100
$80
600
200
41.5 109
27.0
100
7.1 6.9 8.6 5.0 8.5 12.5
6.6
$0
0
89
90
91
92
93
94
Value of Deals
95
96
97
98
99
Number of Deals
Source: Compiled from Conning & Company reports.
00
01
02*
Number of M & As
Value of M & As ($Billions)
Insurance Mergers and
Acquisitions
Insurance Information
Institute On-Line
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