Communications & Public
Relations Obstacles in the P/C
Insurance Industry
Containing the Collateral Damage
for Government Affairs
October 23, 2007
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
• Favorability Ratings of Insurers
• Profitability: Egregious or Reasonable?
• Underwriting Trends: Paying Less of the
Premium Dollar?
• Prices: Too High, Too Low or Just Right?
• Catastrophic Loss: Are Insurers Exaggerating
the Risk to Raise Rates?
 Post-Katrina Litigation
• Regulatory & Legislative Environment: Too
Lax or Burdensome and Anti-Consumer
• Q&A
INSURANCE INFORMATION INSTITUTE
PUBLIC OPINION SURVEY
INSURANCE PULSE
FAVORABILITY BY INDUSTRY
100%
90%
80%
70%
Banking
Auto and home insurance
The electric power company
Consumer finance companies
60%
50%
40%
30%
20%
10%
19
68
19
72
19
78
19
81
19
83
19
85
19
86
19
88
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
05
(1)
20
06
20
07
0%
(1) December 2005.
Source: Insurance Information Institute Annual Pulse Survey.
INSURANCE PULSE
KEY FINDINGS 2007
The percentage of Americans with a favorable attitude
toward auto and home insurers basically held steady in
2007 at 57 percent, up two points from 2006.
Favorability improved significantly in the West, up nine
points, and was unchanged in the South.
The percentage of people who say that auto insurance is
somewhat of a financial burden fell 7 points in 2007 to 56
percent.
The percentage of people who say home insurance is
somewhat of a financial burden fell 5 points in 2007 to 43
percent.
INSURANCE INFORMATION INSTITUTE
I.I.I. MEDIA INDEX
G
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Source: Lexis/Nexis search.
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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
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or
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be
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os
ve
st
ig
at
io
ns
MEDIA INDEX
FIRST HALF 2006 vs. FIRST HALF 2007
2006
2007
MEDIA INDEX
250%
225%
200%
175%
150%
125%
100%
75%
50%
25%
0%
-25%
-50%
213%
157%
104%
40%
39%
33%
20%
22%
2%
5%
6%
-8%
tS
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co
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g
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di
pr
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ct
ic
e
m
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at
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st
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ns
os
es
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rs
A
sb
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om
p
ns
W
or
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H
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Source: Lexis/Nexis search.
A
ut
o
-27%
-26%
es
Percent
FIRST HALF 2006 vs. FIRST HALF 2007
(percent increase/decrease)
#1. Profits
Critics: Egregious Profits
Insurers: Inadequate Profits
Reality: Critics Fail to Understand
Cyclicality, Catastrophe Impacts &
Relative Profitability of Industry
$63,695
$65,192
07F
$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
2006/7. “Normal” CAT year,
average investment gain
imply flattening
$36,819
$50,000
$24,404
$60,000
$20,598
$70,000
2001 ROE = -1.2%
2002 ROE = 2.2%
2003 ROE = 8.9%
2004 ROE = 9.4%
2005 ROE= 9.4%
2006 ROAS1 = 14.0%
2007F ROAS = 13.1%**
06
P/C Net Income After Taxes
1991-2007F ($ Millions)*
05
04
03
01
-$6,970
00
99
98
97
96
95
94
93
92
91
-$10,000
02
$0
*ROE figures are GAAP; 1Return on avg. surplus. 2007F figure is annualized actual first half net income
of $32.596B **Actual first half 2007 result.
Sources: A.M. Best, ISO, Insurance Information Inst.
ROE: P/C vs. All Industries
1987–2008E
20%
P/C profitability is cyclical, volatile and vulnerable
15%
10%
Sept. 11
5%
US P/C Insurers
All US Industries
*2007 is actual first half ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate.
Source: Insurance Information Institute; Fortune
07
F
08
F
06
04
03
02
01
00
99
98
4 Hurricanes
97
96
93
92
91
90
89
88
95
Northridge
-5%
05
Andrew
87
Katrina,
Rita, Wilma
Lowest CAT
losses in 15 years
94
0%
Hugo
Profitability Peaks & Troughs in the
P/C Insurance Industry, 1975 – 2008F
25%
1977:19.0%
1987:17.3%
2006:14.0%
20%
1997:11.6%
15%
10%
5%
0%
1975: 2.4%
1984: 1.8%
1992: 4.5%
2001: -1.2%
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07F
08F
-5%
*2007 is actual first half ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate.
Source: Insurance Information Institute; Fortune
ROE vs. Equity Cost of Capital:
US P/C Insurance:1991-2007E
18%
The p/c insurance industry achieved its cost of
capital in 2005/6 for the first time in many years
16%
12%
4%
2%
0%
-2%
-4%
The cost of capital
is the rate of return
insurers need to
attract and retain
capital to the
business
US P/C insurers missed their
cost of capital by an average 6.7
points from 1991 to 2002, but on
target or better 2003-07
91
92
93
94
95
96
97
98
99
Source: The Geneva Association, Ins. Information Inst.
-0.1 pts
6%
+0.2 pts
-13.2 pts
8%
-9.0 pts
10%
+3.1 pts
+3.5 pts
14%
00
01
02
ROE
03
04
05
06 07E
Cost of Capital
US Reinsurer Net Income
& ROE, 1985-2006
$12
$9.68
Reinsurer profitability
has rebounded
$0
($2)
Net Income
($4)
0%
-5%
ROE
($2.98)
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Source: Reinsurance Association of America.
5%
ROE
10%
$2.51
$3.41
$3.17
$1.31
$1.99
$1.47
$5.43
$3.71
$1.95
$1.79
$2.52
$1.17
$1.87
$2.03
$2
$1.38
$4
$1.22
$6
$1.95
$1.94
$8
$4.53
15%
$0.12
Net Income ($ Bill)
$10
20%
-10%
Insurance & Reinsurance Stocks:
Lagging Behind in 2007
Total YTD Returns Through October 19, 2007
5.81%
Mortgage*
-42.27%
6.53%
P/C insurance,
reinsurance stocks lagging
on soft market concerns,
subprime selloff
0.48%
2.71%
-0.34%
-30.0%
-20.0%
-10.0%
Reinsurers
P/C
Multiline
1.37%
-40.0%
Life/Health
All Insurers
-5.53%
-50.0%
S&P 500
0.0%
Brokers
10.0%
Source: SNL Securities, Standard & Poor’s, Insurance Information Inst. *Includes Financial Guarantee
Top Industries by ROE: P/C Insurers
Still Underperformed in 2006*
Oil & Gas Equip., Services
Petroleum Refining
Metals
Food Services
Household & Pers. Products
Pharmaceuticals
Industrial & Farm Equipment
Mining & Crude Oil Prod.
Aerospace & Defense
Chemicals
Securities
Food Consumer Prod.
Medical Prod. & Equip.
Specialty Retailers
Homebuilders
31.8%
30.7%
P/C insurer
30.3%
profitability in 2006
26.4%
th
ranked 30 out of 50
24.6%
24.2%
industry groups
22.6%
despite renewed
21.8%
21.5%
profitability
20.9%
P/C insurers
20.9%
underperformed
20.5%
the All Industry
19.6%
19.4%
median for the
19.1%
19th consecutive
0%
year
14.9%
15.4%
P/C Insurers (Stock)
All Industries: 500 Median
5%
10%
15%
20%
25%
30%
35%
*Excludes #1 ranked Airline category at 65.1% due to special one-time bankruptcy-related factors.
Source: Fortune, April 30, 2007 edition; Insurance Information Institute
Advertising Expenditures by P/C
Insurance Industry, 1999-2006
$ Billions
$4.0
$3.5
Ad spending by P/C insurers
is at a record high, signaling
increased competition
$3.695
$2.975
$3.0
$2.5
$2.0
$1.736 $1.737 $1.803 $1.708
$1.882
$2.111
$1.5
99
00
01
02
03
04
05
Source: Insurance Information Institute from consolidated P/C Annual Statement data.
06E
FINANCIAL
STRENGTH &
RATINGS
A Weak Insurance Industry
is in Nobody’s
Best Interest
Cumulative Average Impairment Rates by
Best Financial Strength Rating*
60%
50%
Insurers with strong ratings are far
less likely to become impaired over
long periods of time. Especially
important in long-tailed lines.
D
C/C-
40%
C++/C+
30%
B/BB++/B+
20%
A/A-
10%
A++/A+
0%
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15
Average Years to Impairment
*US P/C and L/H companies, 1977-2002
Sources: A.M. Best: Best’s Impairment Rate and Rating Transition Study—1977-2002, March 1, 2004.
P/C Insurer Impairment Frequency
vs. Combined Ratio, 1969-2006
Combined Ratio
115
Combined Ratio after Div
P/C Impairment Frequency
110
105
1.6
1.4
1.2
1
0.8
0.6
0.4
100
95
2006 impairment rate was 0.43%, or 1-in-233
companies, half the 0.86% average since 1969
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
90
2
1.8
Source: A.M. Best; Insurance Information Institute
0.2
0
Impairment Rate
120
Impairment
rates are highly
correlated
underwriting
performance
#2: Underwriting
Critics: Insurers Paying Out
Smaller Share of Premiums
Insurers: Underwriting Profits
are Justified
Reality: Lower Investment Returns
Imply Profits Must Come from
Underwriting
P/C Insurance Combined Ratio,
1970-2008F*
Combined Ratios
120
1970s: 100.3
1980s: 109.2
115
1990s: 107.8
2000s: 102.2**
110
105
100
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
04
05
06
07*
08F
90
Sources: A.M. Best; ISO, III
*Actual figure of 92.7 through first half 2007. **Through 2007:H1.
P/C Insurance Combined Ratio,
2001-2008F
120
115.8
110
As recently as 2001,
insurers were paying
out nearly $1.16 for
every dollar they
earned in premiums
107.4
2006 produced the best
underwriting result
since the 87.6 combined
ratio in 1949
100.7
100.1
100
2007/8 deterioration due
primarily to falling rates, but
results still strong assuming
normal CAT activity
98.3
97.0
2005 figure benefited from
heavy use of reinsurance
which lowered net losses
92.5
92.7
06
07:H1
93.5
90
01
02
03
04
Sources: A.M. Best; ISO, III. *III estimates for 2007/8.
05
07F
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. Expect figure near $28 billion in
2007 assuming “normal” CAT losses. Cumulative
underwriting deficit since 1975 is $412 billion.
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
07F
$ Billions
Underwriting Gain (Loss)
1975-2007F*
Source: A.M. Best, Insurance Information Institute *Actual 2007:H1 underwriting profit = $14.402B
annualized to $28.8B.
Private Passenger Auto (PPA)
Combined Ratio
110
PPA is the profit
juggernaut of the p/c
insurance industry today
105
107.9
104.2
103.5
101.7101.3101.3
101.0
Auto insurers have
shown significant
improvement in
PPA underwriting
performance since
mid-2002, but
results are
deteriorating.
109.5
101.1
99.5
100
98.4
96.5
95
Average Combined
Ratio for 1993 to 2006:
101.0
94.3
95.1 95.5
90
93
94
95
Sources: A.M. Best; III
96
97
98
99
00
01
02
03
04
05
06
07F
RNW: Private Passenger Auto,
United States, 1992-2006E
Segmentation
should help
profitability
16%
14%
14%14%
12%
12%
13%
11%
12%
11% 12%
10%
10%
11%
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
04
05 06E
Homeowners Insurance
Combined Ratio
165
158.4
Average 1990 to 2006= 111.8
155
Insurers have paid out an average of
$1.12 in losses for every dollar earned
in premiums over the past 17 years
145
135
121.7
125
118.4
113.6 112.7
117.7
115 113.0
121.7
109.4108.2111.4
105
109.3
101.0
98.2
95
100.3
94.4
90.4 91
85
90
91
92
Sources: A.M. Best; III
93
94
95
96
97
98
99
00
01
02
03
04
05
06 07F
Rates of Return on Net Worth for
Homeowners Ins: US
Averages: 1993 to 2005
US HO Insurance = +2.5%
(+3.3% through 2006E)
20%
14.0%
15%
12.4%
9.7%
10%
5%
2.5%
3.6%
5.4%
5.4%
3.6%
3.8%
1.4%
0%
-2.8%
-1.7%
-5%
-4.2%
-7.2%
-10%
93
94
95
96
97
98
99
00
01
Source: NAIC; 2006 figure is Insurance Information Institute estimate.
02
03
04
05
06E
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
$60.6
Investment gains fell in 2006 and
even now are only marginally larger
than in the late 1990s
$20
$10
1Investment
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. **Annualized H1 result of $30.301B.
Sources: ISO; Insurance Information Institute.
#3. Prices/Rates
Critics: Prices are Outrageous
Insurers: Adequacy Varies
Reality: Markets are Highly
Competitive But Regulatory Rate
Suppression Hurts Competition
in Key States
Strength of Recent Hard Markets
by NWP Growth*
25%
1975-78
1984-87
2001-04
2006-2010 (post-Katrina)
period could 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
2005
2006
2007F
2008F
2009F
2010F
-10%
Note: Shaded areas denote hard market periods.
Source: A.M. Best, Insurance Information Institute
*2007-10 figures are III forecasts/estimates.
Growth in Net Written
Premium, 2000-2008F
15.3%
10.0%
8.4%
5.0%
P/C insurers will experience
their slowest growth rates
since the late 1990s…but
underwriting results are
expected to remain healthy
3.9%
2.7%
0.5%
2000
2001
2002
2003
2004
2005
*2007 figure base on 2007 actual first half result of 0.1%.
Source: A.M. Best; Forecasts from the Insurance Information Institute.
2006
0.1%
0.3%
2007F*
2008F
$650
$847
$851
$847
$838
$823
$724
$690
$668
$700
$651
$750
$685
$800
$703
$850
$705
$900
Countrywide auto
insurance expenditures
are expected to fall 0.5%
in 2007, the first drop
since 1999
$691
$950
$780
Average Expenditures on
Auto Insurance
Lower underlying
frequency and modest
severity are keeping auto
insurance costs in check
$600
94 95 96 97 98 99 00 01 02 03 04 05* 06* 07*
*Insurance Information Institute Estimates/Forecasts
Source: NAIC, Insurance Information Institute
Average Expenditures on
Homeowners Insurance**
Countrywide home insurance expenditures
rose an estimated 6% in 2006
$900
$835
$850
$787
$800
Homeowners in non$729
$750
CAT zones will see
$668
$700
smaller increases, but
$650
$593
larger in CAT zones
$600
$536
$550
$508
$488
$481
$500
$455
$440
$450 $418
$400
95 96 97 98 99 00 01 02 03 04 05* 06*
*Insurance Information Institute Estimates/Forecasts
**Excludes cost of flood and earthquake coverage.
Source: NAIC, Insurance Information Institute
($25,000)
95
96
97
98
99
00
01
0.41%
0.40%
0.39%
0.38%
0.37%
0.36%
0.35%
0.34%
0.33%
0.32%
02
03
04
05 06E 07F 08F 0.31%
Median Existing Home Price
Homeowners Insurance Expenditure as % Home Price
Source: National Association of Realtors, NAIC; Insurance Info. Institute calculations and HO expenditure estimates/
forecasts for years 2005-2008.
HO Ins. Expend. As % Home Price
0.398%$222,700
0.397%
$218,800
$221,900
0.376%
$219,000
0.359%
0.373%
$180,200
0.371%
$167,600
0.354%
$156,600
0.342%
$147,300
0.345%
$141,200
$136,000
$129,000
$25,000
0.346%
$75,000
0.354%
$125,000
0.353%
$175,000
0.359% $122,600
$225,000
0.357% $117,000
Median Existing Home Price
$275,000
Record catastrophe losses and
declining home prices are pushing
HO insurance expenditures as a %
of median home price up
$195,200
Homeowners Insurance Expenditures
as a % of Median Existing Home
Prices, 1995-2008F
Average Commercial Rate Change,
All Lines, (1Q:2004 – 3Q:2007)
0%
Magnitude of rate decreases diminished
greatly after Katrina but have grown again
-0.1%
-2%
-4%
-2.7%
-3.0%
-4.6%
-5.3%
-3.2%
-6%
-5.9%
-7.0%
-8%
-8.2%
-9.4%
-9.7%
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
3Q07
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
4Q04
3Q04
2Q04
1Q04
-14%
2Q07
KRW Effect
-11.3%
-11.8%
-13.3%
1Q07
-12%
-9.6%
4Q06
-10%
#4. CAT Losses
Critics: Insurers Exaggerate
Insurers: Worst is Yet to Come
Reality: Catastrophic Loss Potential
is Growing Rapidly Everywhere
Most of US Population & Property
Has Major CAT Exposure
Is
Anyplace
Safe?
U.S. Insured Catastrophe Losses*
$8.3
$7.4
$2.6
$10.1
$8.3
$4.6
95
96
97
98
99
00
01
02
$100.0
$4.7
$5.5
$16.9
$9.2
$61.9
$4.7
91
92
93
94
$5.9
$7.5
$2.7
$20
89
90
$40
$26.5
$60
$22.9
$80
2006 was a welcome respite.
2005 was by far the worst
year ever for insured
catastrophe losses in the US,
but the worst has yet to come.
$12.9
$27.5
$120
$100
$100 Billion
CAT year is
coming soon
$ Billions
07**
20??
03
04
05
06
$0
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. **Through 9/30/07.
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
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%
After FL, many
Northeast states have
among the highest
coastal exposure as a
share of all insured
exposure in the state.
50%
60%
70%
80%
90%
Top 10 Most Costly Hurricanes in
US History, (Insured Losses, $2005)
$45
$40
Seven of the 10 most expensive
hurricanes in US history impacted
Florida:
$41.1
$35
$ Billions
$30
$25
$20
$15
Andrew, Katrina, Wilma, Charley,
Ivan, Frances & Jeanne
Hugo still ranks as the
most expensive storm ever
$10.3
$10
$5
$21.6
6th
$3.5
$3.8
$4.8
$5.0
Georges
(1998)
Jeanne
(2004)
Frances
(2004)
Rita
(2005)
$6.6
$7.4
$7.7
Hugo
(1989)
Ivan
(2004)
Charley
(2004)
$0
Sources: ISO/PCS; Insurance Information Institute.
Wilma
(2005)
Andrew
(1992)
Katrina
(2005)
Insured Losses from Top 10 Earthquakes
Adjusted to 2005 Exposure Levels
(Billions of 2005 Dollars)
With development
along major fault
lines, the threat of
$25B+ quakes
looms large
$120
$100
$ Billions
$80
$60
$40
3 of the Top 10
are not West
Coast events
$11
$9
$11
$12
$88
$38
$25
$20
$108
$27
$16
Source: AIR Worldwide
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$0
Percentage of California
Homeowners with Earthquake
Insurance, 1994-2004*
The vast majority of California
homeowners forego earthquake
coverage & play Russian Roulette
with their most valuable asset.
35% 32.9%33.2%
30%
25%
19.5%
17.4%16.8%
15.7% 15.8% 14.6%
13.3%13.8%
12.0%
20%
15%
10%
5%
0%
94
96
97
98
99
00
01
02
03
04
06**
*Includes CEA policies beginning in 1996. **2006 estimate from Insurance Information Network of CA.
Source: California Department of Insurance; Insurance Information Institute.
Catastrophe Litigation
• Insurers have won virtually every major case in postKatrina litigation environment
 Most cases centered on validity of flood exclusion and
various wind vs. water theories
• This came at a high PR cost as post-Katrina litigation
was dragged out over a 2-year period accounting for
the vast majority of negative press in the first 16
months after the storm
 FL significantly added to negative press in 2007
• While industry was successful at explaining the
rational for pursuing most cases, we struggled with the
classic David vs. Goliath story
• Championed by personally affected politicians
• Feeds “Insurance Hoax” genre of stories
 View that insurers systematically deny, delay and lowball
• Exacerbated by hundreds of thousands of nonrenewals
States Create Their
Own Vulnerability and
Try to Blame Insurers
Underwriting Gain (Loss) in
Florida Homeowners Insurance,
1992-2006E*
$4
$2.75
$2
$0.69 $0.43 $0.86
$1.08 $1.23 $1.28 $1.43 $1.16 $1.47
$1.88
$0
($0.21)
$ Billions
($2)
($4)
Florida’s homeowners
insurance market produces
small profits in most years and
enormous losses in others
($6)
($8)
($3.73)
($10)
($12)
($10.39)
($10.60)
92
93
94
95
96
97
98
99
00
01
02
03
04 05E 06F
*2005 estimate by Insurance Information Institute based on historical loss and expense data for FL
adjusted for estimated 2005 residential windstorm losses of $7.35B. 2006 estimate from Ins. Info. Inst.
Cumulative Underwriting Gain
(Loss) in Florida Homeowners
Insurance, 1992-2006E*
$2
$0
$ Billions
($2)
($4)
($6)
Regulator under US law
has duty to allow rates
that are “fair,” “not
excessive” and “not
unduly discriminatory.”
Reality is that regulators
in CAT-prone states
suppress rates.
$0.7
-$1.2
-$2.7
-$3.8
-$5.2
-$6.5
($8)
-$7.7
($10)
-$9.7
-$10.1
-$10.8
($12) -$10.6
($14)
($16)
92
93
94
95
-$8.8
It took insurers 11 years (1993-2003)
to erase the UW loss associated with
Andrew, but the 4 hurricanes of 2004
erased the prior 7 years of profits &
2005 deepened the hole.
96
97
98
99
00
01
02
03
-$9.7
-$10.7
-$13.4
04 05E 06F
*2005 estimate by Insurance Information Institute based on historical loss and expense data for FL
adjusted for estimated 2005 residential windstorm losses of $7.35B. 2006 estimate from Ins. Info. Inst.
Rates of Return on Net Worth for
Homeowners Ins: US vs. Florida
1990 – 2006E
US
100%
Florida
-2.8%36.0%
0%
-100%
-54.3%
-200%
-300%
-53.4%
Averages: 1990 to 2006E
US HO Insurance = -0.9%
FL HO Average = -36.5%
-183.3%
-400%
-500%
4 Hurricanes
-600%
-700%
Andrew
-714.9%
Wilma, Dennis, Katrina
-800%
90
91
92
93
94
95
96
97
98
99
00
01
02
Source: NAIC; 200/6 US and FL estimates from the Insurance Information Institute.
03
04
05 06E
Major Residual Market Plan Estimated
Deficits 2004/2005 (Millions of Dollars)
Florida Hurricane
Catastrophe Fund
(FHCF)
$0
-$200
-$400
-$600
-$800
-$1,000
-$1,200
-$1,400
-$1,600
-$1,800
-$2,000
2004
Florida Citizens
2005
Louisiana Citizens
Mississippi Windstorm
Underwriting
Association (MWUA)
-$516
-$595 *
-$954
-$1,425
Hurricane Katrina pushed all of the
residual market property plans in
affected states into deficits for 2005,
following an already record
-$1,770
hurricane loss year in 2004
* MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in Federal Aid.
Source: Insurance Information Institute
Florida Citizens Exposure to
Loss (Billions of Dollars)
$700
$600
Exposure to loss in Florida
Citizens nearly doubled in 2006
and was up another 50%
during the first half of 2007
$600.0
$500
$408.8
$400
$300
$200
$154.6
$195.5
$206.7
$210.6
2003
2004
2005
$100
$0
2002
Source: PIPSO; Insurance Information Institute. *As of June 30.
2006
2007E*
Pre- vs. Post-Event in FL for
2007 Hurricane Season
$43.8B
$10.1
$10.4
$10.9
$12.4
$15.0
$17.6
1-in-20
1-in-30
1-in-50
1-in-70
1-in-85
1-in-100
$0
$25.8
$14.6
$10
Total =
$25.0B
$20.0 Billion
$24.1
$35.0B
$40
$20
$54.2
$49.5B
$50
$30
$55.0B
$37.4
$60
There is a very significant
likelihood of major, multiyear assessments in 2007
$80.0B
$9.9
Billions
$70
Post-Event Funding (Assessments & Bonds)
$34.5
$80
Pre-Event Funding
$31.4
$90
1-in-250
Notes: Pre-event funding includes funds available to Citizens, FHCF and private carriers plus contingent funding available
through private reinsurance to pay claims in 2007. Post-event funding is on a present value basis and does not include
financing costs. Probabilities are expressed as “odds of a single storm of this magnitude or greater happening in 2007.”
Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.
New Condo Construction in
South Miami Beach, 2007-2009
• Number of New Developments: 15
• Number of Individual Units: 2,111
• Avg. Price of Cheapest Unit: $940,333
• Avg. Price of Most Expensive Unit: $6,460,000
• Range: $395,000 - $16,000,000
• Overall Average Price per Unit: $3,700,167*
• Aggregate Property Value: At least $6 Billion
*Based on average of high/low value for each of the 15 developments
Source: Insurance Information Institute from www.miamicondolifestyle.com accessed April 5, 2007.
Historical Hurricane Strikes in
Galveston County, TX, 1900-2002
Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
TWIA Growth In Exposure to Loss
(Building & Contents Only, $ Billions)
Exposure to Loss (Building & Contents Only)
$50
$45
$40
$35
TWIA’s liability in-force for
building & contents has surged
by 260 percent in the last 7
years from $12.1bn in 2000 to
$43.5bn as of 3/31/07
$43.5
$35.9
$30
$25
$20
$15
$12.1
$13.2
2000
2001
$16.0
$18.8
$20.8
$23.3
$10
$5
$0
2002
Source: TWIA; Insurance Information Institute;
2003
2004
2005
2006*
2007**
*As of 11/30/06; **As of 3/31/07.
ROE for Homeowners Insurance
in Texas, 1992 - 2005
13.1%
10.2%
10%
14.7%
6.2%
20%
11.9%
30%
19.4%
40%
20.7%
50%
38.1%
14-Year Average: 92-05
Auto: +7.6%
Home: -2.1%
-10%
-23.5%
-20%
-50%
Despite recent
improvements, TX
is a very risky longrun proposition
-38.8%
-30%
-40%
-10.9%
-6.0%
0%
1992
Source: NAIC
1993
1994
1995
1996
1997
1998
1999
2000
-42.4%-41.9%
2001
2002
2003
2004
2005
New Construction in Galveston:
Will Dreams be Blown Away?
•
More than $2.3 Billion Residential, Commercial and Public
Construction is Under Way in 2007
•
More than 6,500 Residential Units Under Construction
 Mostly condos, including several towers up to 27 stories high
 One development by Centex Homes will consist of 2,300 condos and houses on 1,000 acres
•
The Average Home Price Rose 89% to $232,800 over the 4 Years Ending Jan. 2007
•
Typical Price Range for Newer Condos: $400,000 Up to $1.5 Million
 An undeveloped waterview lot can go for as much as $300,000
 Most will be insured via TWIALimits up to $1.6 million + contents
•
Inconvenient Truth: Galveston is Site of the Deadliest Natural Disaster in US History
 At least 8,000 people were killed in a 1900 hurricane
 3,600 homes were destroyed
 The current seawall is only 15.6 ft. high; Katrina’s storm surge was nearly 30 feet.
•
Insured Losses Today from Repeat of 1900 Storm Would Cost $21 - $33 Billion
 Would become the 3rd most expensive hurricane in US history (after Katrina and Andrew)
Source: Insurance Information Institute from “A Texas-Sized Hunger for Gulf Coast Homes,” New York Times, March 18, 2007
and www.1900storm.com and www.twia.org accessed July 9, 2007.
Percentage Increase in Estimated Housing
Units for MA Counties, 2000 to 2006
Nantucket
Dukes
Plymouth
Worcester
Barnstable
Hampshire
Bristol
Norfolk
Essex
Franklin
Middlesex
Berkshire
Suffolk
Hampden
Massachusetts (State)
0%
13.8%
8.2%
5.2%
5.2%
5.0%
3.5%
3.3%
3.1%
3.0%
2.8%
2.4%
2.1%
1.8%
1.3%
3.2%
2%
4%
Source: Population Division, U.S. Census Bureau
Coastal growth in housing
construction in MA exceeds
the state overall by a wide
margin. Barnstable, Dukes,
Plymouth and Nantucket
counties are seeing large
increases in housing units.
6%
8%
10%
12%
14%
16%
Barnstable County, Massachusetts*
Last period of
intense hurricane
activity ran from
the 1930s to 1960
*Barnstable County is mostly comprised of Cape Cod
The population
of Barnstable
County is five
times larger than
it was during the
last period of
intense hurricane
activity (19401960).
Historical Hurricane Strikes in
Dare County, NC, 1900-2002
Population in Dare
County is 6 times what
it was in the 1950s
Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
Historical Hurricane Strikes in
Suffolk County, NY, 1900-2002
Population in
Suffolk County is
4.5 times what it
was in the 1940s
Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
Hurricane Strikes vs. Population for
Charleston County, South Carolina
Source: NOAA
Public Attitude Monitor 2006:
Unfairness of Taxpayer Subsidies
70%
60%
Most non-coastal dwellers believe taxpayer
subsidies for coastal property owners are unfair
Very unfair
Somewhat Unfair
50%
40%
22%
34%
31%
29%
25%
30%
Coastal Counties
Interior Counties
Noncoastal States
30%
20%
10%
0%
Coastal States
Source: Insurance Research Council
#5. Regulation
Critics: Regulation is Lax
Insurers: Regulation is a Mess
Reality: Insurance Regulation is
Byzantine, Anachronistic, Expensive
and Too Politicized
Legal, Legislative & Regulatory
Issues are Multiplying
•
•
•
Attacks on Underwriting: Perennial issue, with challenges to even longestablished underwriting criteria popping up; Will be a bigger problem with
evolution of Predictive Modeling
 Credit-Based Insurance Scores: Remain the largest issue & became the
subject of a US House O&I hearing Oct. 2
 Education/Occupation Attacked (e.g., FL)
 CAT Models: Black box allegation, short vs. long-term model
 Any type of individual risk rating factor is subject to allegations of
discrimination
Allegations of Collusion via Ratings Agencies, Trades & Modelers: Novel theory
espoused by Gov. Crist and OIR in FL that insurers collude indirectly via ratings
agencies, trade associations and modeling firms
 Some insurers subpoenaed for documents
 Some discussion at recent NAIC meeting
Proliferation of Insurance Regulators: Insurance Commissioner’s influence and
power is waning in many states. There are 632 insurance regulators in the US (50
Commissioners, 50 AGs, 50 Governors, 50 Senators and 432 US)
 Attorneys General: Spitzer (and copycats) did serious damage to
commissioner authority; Followed by AG Hood in MS
 Congress is exerting itself over a wide range of issues
 Governors like Crist not shy on insurance matters Source: Insurance Information Institute.
Legal, Legislative & Regulatory
Issues are Multiplying
•
•
Claim Conspiracy Allegations: Bad faith litigation could mushroom based on
allegations of systematic hardball, lowball, delay and denial tactics used by
insurers beginning in early 1990s, mostly in personal lines
 Emergence of infamous “McKinsey Documents” viewed as Holy Grail;
Fueling litigation & wild media stories Urban Legend in the Making
 “Hager” case won by Allstate in Lexington, KY on 10/10—jury deliberated
for less than 2 hours. Was sued for $1.43 billion. Alleged claims were
systematically dragged-out to force policyholder into low settlement
Pre-Event CAT Reserving: NY Insurance Superintendent Dinallo promulgated
draft regulations Oct. 4 requiring insurers to set aside reserves for hurricaneexposed personal and commercial lines property risks
 No tax recognition since IRS only recognizes as an expense after event
 Sets up several conflicts: Statutory Authority (e.g., are non-NY domiciled
insurers subject?); Tax consequences will be challenged.
 Ties-Up Capital (e.g., 5% of HO premium = $250 million in NY annually)
 Could create another schism within industry on CAT issues
 Could get very expensive if other states follow Dinallo’s lead
Source: Insurance Information Institute.
Legal, Legislative & Regulatory
Issues are Multiplying
•
Antitrust Allegations Against Reinsurance Broker: CT Attorney General Richard
Blumenthal on Oct. 9 filed an antitrust action against Guy Carpenter in CT
Superior Court accusing the reinsurance broker of “choreographing the
reinsurance market to fix prices, stifle competitors and collect excessive profits
at the expense of the entire industry.”
 Alleges 170 small/medium insurers over 50 years overpaid for reinsurance
 Blumenthal says policyholders consequently paid premiums that were up to
40% higher costing them potentially hundreds of millions of dollars
 Suit alleges “Guy Carpenter conspired with numerous reinsurers to exploit
its position as a well-known and dominant reinsurance broker in order to fix
prices and output, foreclose competitors from access, allocate markets,
eliminate competition and substantially increase profits in the extremely
lucrative market for reinsurance.”
 Suit accuses Guy Carpenter of trading exclusive access to a lucrative
book of business in exchange for “excessive fees and other benefits by
creating a series of reinsurance ‘facilities’ aimed at a large block of its
smallest clients.” and “by withholding critical information and leading them
to believe that Guy Carpenter was acting in their best interests.”
Legal, Legislative & Regulatory
Issues are Multiplying
•
Guy Carpenter Rebuttal to Antitrust Allegations by CT AG Blumenthal:
“The Connecticut Attorney General’s complaint is based on a
fundamental misunderstanding of reinsurance facilities that have
been in operation for the benefit of small- and mid-sized clients for
as long as 50 years. As many of our clients have confirmed during
this investigation, these facilities result in improved availability and
terms of reinsurance and ultimately benefit insurance buyers. Simply
put, there is no basis for the Attorney General's lawsuit and we
intend to defend ourselves vigorously.”
-Guy Carpenter Press Release, October 8, 2007
•
OTHER ISSUES:
 Collateralization Requirement for Non-Domestic Reinsurers: Foreign
reinsurers, NY Superintendent Dinallo want the requirement eliminated
and to be replaced with sliding scale based on a reinsurer’s rating. Many
domestic insurers oppose.
 Taxation of Premium Ceded to Bermuda Subsidiaries: Some domestic
insurers/reinsurers oppose current tax treatment of premiums ceded to
Bermuda reinsurers.
Shifting Legal
Liability & Tort
Environment
Is the Pendulum Swinging
Against Insurers?
Tort System Costs,
2000-2008F
Tort System Costs
$260
2.03%
1.82%
$246
$233
$240
$220
$200
$180
$260
2.09% 2.05% $270
2.04% 2.03%
2.0%
1.5%
$205
$179
After a period of rapid
escalation, tort system costs
as % of GDP are now falling
$160
$140
$120
2.5%
$100
1.0%
0.5%
0.0%
00
01
02
03
Tort Sytem Costs
04
05
06E
07F
Tort Costs as % of GDP
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends;2006 is III estimate.
08F
Tort Costs as % of GDP
$280
$295
$261
2.22% 2.24% 2.22%
$261
$300
The Nation’s Judicial Hellholes
(2006)
Some improvement
in “Judicial
Hellholes” in 2006
Watch List
Miller County, AR
Los Angeles County, CA
San Francisco, CA
Philadelphia, PA
Orleans Parish, LA
Delaware
ILLINOIS
Cook County
Madison County
St. Clair County
West Virginia
Dishonorable
Mentions
Providence, RI
MA Supreme Court
LA Supreme Court
New Jersey
NE Supreme Court
California
TEXAS
Rio Grande
Valley and Gulf
Coast
Source: American Tort Reform Association; Insurance Information Institute
South Florida
Preventing/Limiting Erosion
of Recent Tort Reform
•
•
Tort Pendulum Likely to Swing Against Insurers as Political
Environment Changes (WA referendum, FL No-Fault?)
Insurers Must Remain Active Members of Tort Reform
Coalitions at State and Federal Level

•
Pursuing Good Cases Can Set Precedent & Bring About
Quantum Shifts in Judicial Philosophy




•
Campbell v. State Farm (limited punitives)
Safeco v. Burr, Geico v. Edo (FCRA reporting violations)
Asbestos: Class actions limited; no pre-pack bankruptcies
Products Liability: Merck’s successful Vioxx defense
Educate Policyholders About Link Between Tort Environment
and Cost/Availability of Insurance


•
May have more success at the state level
Businesses understand; Need facts to support local efforts
Personal lines customers understand relationship, agents do
Tighten Contract Language

From 9/11 to Katrina, alleged “ambiguities” cost big bucks
Summary
• P/C insurance will never be the most beloved industry, but
CEOs are wrong when they assert that we are among the most
despised industry in America. CEO survey…??
• Most Americans have a favorable or very favorable view of their
insurer and even the industry overall
• Price is the principal determinant of public sentiment about
insurers in the long-run
 Outside FL and Katrina areas, perception of industry is quite good
• I.I.I. is investing heavily in direct-to-consumer messaging and
tools; Companies can leverage off these.
 Customer service oriented approach to dealing with all stakeholders:
media, general public, regulators, legislators and insurers
 Home inventory software (Business forthcoming)
 Video News Releases
 Testimonials offering lessons from actual claimants
 Web content
• Putting out regional fires (e.g., credit) will always be a problem
• Political opportunism is on the rise and is a major challenge
 Spitzer, Crist, Hood, Blumenthal are just the vanguard
Insurance Information
Institute On-Line
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