2004 Overview & Outlook
for the Property/Casualty
Insurance Industry
Casualty Actuaries of Greater New York
New York, NY
December 6, 2004
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
•
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•
•
•
•
•
•
•
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Profitability
Presidential Party Affiliation & P/C Profitability
Underwriting
Investment Overview
Ratings, Solvency & Financial Strength
Impact of Spitzer Investigation
Capacity
Pricing Trends
Tort Environment
The Challenge of Terrorism
Q&A
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90
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70
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60
40
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30
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6.5
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2001
2002
2003
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2004E*
P/C FINANACIAL
UPDATE:
Profitability: Good but Not Good Enough
Underwriting: Need to Stay Disciplined
Investments: Keep Expectations Low
P/C FINANCIAL OVERVIEW:
PROFIT PRESSURE
Highlights: Property/Casualty
st
st
1 Half 2004 vs. 1 Half 2003
2004
2003
Change
Net Written Prem.
212,117
202,828
+4.6%
Loss & LAE
140,057
142,129
-1.5%
Net UW Gain (Loss)
9,563
(2,070)
N/A
Net Inv. Income
19,015
18,268
+4.1%
Net Income (a.t.)
23,520
22,813
+3.1%
Surplus*
370,433
346,987
+6.8%
94.4
99.8**
-5.4 pts.
Combined Ratio
*2003 surplus figure is as of 12/31/03
**The combined ratio for full-year 2003 was 100.1
Strength of Recent Hard Markets
by NWP Growth*
25%
1975-78
1984-87
2001-04
Real NWP Growth During
Past 3 Hard Markets
20%
1975-78: 8.6%
15%
1984-87: 11.2%
10%
2001-04F: 6.9%
5%
0%
-5%
Premium growth is faltering. Real
growth in 2005 will approach ZERO.
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
2004F
2005
-10%
Note: Shaded areas denote hard market periods.
Source: A.M. Best, Insurance Information Institute
*2004 based on 1st half results from ISO.
2005 figure is III forecast.
P/C Net Income After Taxes
1991-2004E* ($ Millions)
2001 was first-ever full
year net loss
$36,819
2002 ROE = 1.0%
2003 ROE = 9.4%
$30,000
$30,773
$29,877
2004 ROE = 10% (est.)**
$24,404
$20,598
$19,316
$20,000
$23,520
$40,000
$21,865
$20,559
$14,178
$10,870
$10,000
$5,840
$3,046
$0
-$6,970
-$10,000
91
92
93
94
95
96
97
*First half results; ** After adjusting for 2004 hurricanes
Sources: A.M. Best, ISO, Insurance Information Institute.
98
99
00
01
02
03
04E
ROE: P/C vs. All Industries
1987–2004E
20%
15%
10%
5%
0%
-5%
87
88
89
90
91
92
93
94
95
US P/C Insurers
Source: Insurance Information Institute; Fortune
96
97
98
99
00
All US Industries
01
02
03 04E
ROE vs. Cost of Capital:
US P/C Insurance: 1991 – 2004F
20%
The p/c insurance industry likely achieved its costs
of capital in 2004 for the first time in many years
-14.6 pts
5%
-1.2 pts
-10.2 pts
10%
+1.1 pts
15%
US P/C insurers missed their
cost of capital by an average
6.5 points from 1991 to 2003
0%
-5%
91
92
93
94
95
96
97
Source: The Geneva Association, Ins. Information Inst.
98
99
00
ROE
01
02
03
04F
Cost of Capital
ROE: Financial Services
Industry Segments, 1987–2004F
25%
20%
15%
10%
5%
0%
P/C insurance was finally holding its own against
other financial services segments until hurricanes
-5%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04F
US P/C Insurers
Diversified Finl.
All US Industries
Comm. Banks
Source: Insurance Information Institute, Fortune, Value Line.
Life
PRESIDENTIAL
POLITICS & P/C
PROFITABILITY
Political Quiz
• Does the P/C insurance industry perform
better (as measured by ROE) under
Republican or Democratic administrations?
• Under which President did the industry realize
its highest ROE (average over 4 years)?
• Under which President did the industry realize
its lowest ROE (average over 4 years)?
Sectors Thought to be Favored, by
Winner of 2004 Presidential Election
BUSH
KERRY
•P/C Insurance
•Life Insurers
•Asset Managers
•Energy/Oil/Coal
•HMOs/Drug Cos./
Benefit Managers
•Dividend Paying Stocks
•Defense
•Fannie Mae/Freddie Mac
•Alternative Energy
•Hospitals/Med Devices
•Medicaid HMOs
•Bonds/Municipal Bonds
•Home Builders
Source: Wall Street Journal, October 7, 2004, D4, from survey of major brokerage firms.
Insurance Industry Contributions,
Election Cycles 1990-2004*
$30
$25.9
$27.3
$25
$20.9
$ Millions
$20
$18.0
$14.4
$15
$12.0
$11.7
$10
$9.2
$8.7
$5
Insurance industry
contributions are
overwhelmingly
Republican: $157
$22.3
million, 89% more
than the $83 million $18.8
contributed to
Democrats since 1990
Democrats
Republicans
$10.5
$9.7
$11.7
$10.0
$9.0
65% of insurance industry contributions since
1990 have gone to Republicans
$0
1990
1992
1994
1996
1998
2000
2002
2004*
*Data for current cycle released by Federal Election Commission as of October 4, 2004
Source: Federal Election Commission via Center for Responsive Politics at www.opensecrets.org.
P/C Insurance Industry ROE by
Presidential Party Affiliation,
1950–2004E
20%
Truman
25%
BLUE = Democratic President
Eisenhower
Kennedy/
Johnson
RED = Republican President
Nixon/Ford Carter
Reagan/Bush
Clinton
Bush
15%
10%
5%
0%
Source: Insurance Information Institute
00
02
04E
92
94
96
98
82
84
86
88
90
74
76
78
80
64
66
68
70
72
56
58
60
62
50
52
54
-5%
P/C Insurance Industry ROE by
Presidential Administration,1950-2004*
16.43%
15.10%
Carter
Reagan II
8.93%
OVERALL RECORD:
8.65%
1950-2004
8.35%
7.98%
Democrats 8.00%
7.68%
6.98%
Republicans 7.85%
6.97%
5.43%
Party of President has
5.30%
little bearing on
5.03%
profitability of P/C
4.43%
insurance industry
3.55%
Nixon
Clinton I
G.H.W. Bush
Clinton II
Reagan I
Nixon/Ford
Truman
Eisenhower I
G.W. Bush
Eisenhower II
Johnson
Kennedy/Johnson
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
*ROE for 2004 estimated by III. Truman administration ROE of 6.97% based on 3 years only, 1950-52.
Source: Insurance Information Institute
WALL STREET:
HIGH EXPECTATIONS
Insurer Stocks:
Outperforming the S&P 500
Total Return 2004 YTD Through October 8, 2004
S&P 500
0.92%
Life/Health
16.10%
7.40%
All Insurers
3.04%
Multiline
2.20%
6.44%
0%
5%
If 2004 represents the cyclical peak
for this industry, why aren’t p/c
stocks soaring?
10%
15%
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
20%
P/C
Brokers
Insurer Stocks:
Hammered by the Spitzer Suit
Total Return 2004 YTD Through October 15, 2004
Spitzer suit announced
Oct. 14 produced huge hit
on all insurance sectors,
especially brokers
S&P 500
-0.32%
11.08%
2.20%
Life/Health
All Insurers
-9.33%
Multiline
0.41%
P/C
-20.29%
Brokers
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
15%
Insurer Stocks:
Spitzer Effect Will Linger
Total Return 2004 YTD Through October 29, 2004
P/C insurer stocks
have bounced back
S&P 500
1.64%
14.54%
4.74%
All Insurers
-4.92%
Multiline
2.49%
P/C
-21.91%
-30%
Life/Health
Brokers
-20%
-10%
0%
10%
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
20%
Insurer Stocks:
Spitzer Effect Will Linger
Total Return 2004 YTD Through November 19, 2004
P/C insurer stocks
have bounced back
S&P 500
5.50%
Life/Health
18.91%
10.07%
All Insurers
5.60%
P/C
1.04%
Reinsurance
-1.87%
Multiline
-21.6%
-30%
-20%
Brokers
-10%
0%
10%
20%
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
30%
Insurer Stocks:
Spitzer Effect Will Linger
Total Return 2004 YTD Through November 26, 2004
P/C insurer stocks
have bounced back
S&P 500
6.20%
20.59%
11.97%
All Insurers
6.39%
P/C
0.54%
Reinsurance
1.05%
Multiline
-19.2%
-30%
-20%
Life/Health
Brokers
-10%
0%
10%
20%
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
30%
P/C FINANCIAL OVERVIEW:
UNDERWRITING PRESSURE
P/C Industry Combined Ratio
2001 = 115.7
120
2002 = 107.2
2003 = 100.1
2004: 1H = 94.4*
110
Combined Ratios
1970s: 100.3
1980s: 109.2
1990s: 107.8
2000-04: 104.6**
2004** = 100
100
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
04E
04*
90
Sources: A.M. Best; ISO, III *2004 figures based on first half estimate. **After impact of hurricanes.
Underwriting Gain (Loss)
1975-2004F
$25
$15
$ Billions
$5
2004 was likely to produce the largest
underwriting profit in history = $18.1B
based on annualized first half result,
but hurricanes changed that…
($5)
($15)
($25)
($35)
($45)
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
04*
04**
($55)
*Based on first half result. **Estimate for full-year 2004 is $0 assuming a combined ratio .
Source: A.M. Best, Insurance Information Institute
Commercial vs. Personal Lines
Combined Ratios
10-Year Average Combined Ratios
105.3
110.2
110.9
109.9
111.5
112.3
104.5
101.9
98.4
100
Personal: 104.4
109.7
99.8
103.9
104.9
107.6
103.5
110.3
112.5
104.5
105
103.9
110
110.2
Commercial: 109.9
120
102.7
125
115
Personal--Net Basis
122.2
Commercial--Net Basis
95
90
93
94
95
96
Source: A.M. Best; Insurance Information Institute
97
98
99
00
01
02
03
Combined Ratios:
Selected Major Lines, 2003E—2004F
U/W performance
improving, but variation in
results is enormous.
100.1
98.1
82.3
81.6
94.4
92.7
90
80
2004F
Commercial
101.9
99.7
100
103.1
100.2
110
99.1
96.6
120
Persona
l
109.5
108.3
130
120.9
112.0
2003E
70
PP
Auto
Home
GL &
PL
WC
Source: A.M. Best; Insurance Information Institute
CMP
Comm Inland
Auto Marine
All
Lines
Combined Ratio:
Reinsurance vs. P/C Industry
170
All Lines Combined Ratio
2001’s combined ratio was the worstever for reinsurers; 2002 was bad as well.
160
162.5
Reinsurance
2003: Big improvement in primary and
reinsurer segments
150
96.3
94.4
100.3
100.1
121.3
00
115.7
99
107.2
98
106.5
110.0
100.5
105.6
97
100
114.3
107.7
100.8
101.6
104.8
105.8
119.2
106.5
113.6
108.5
110
105.0
106.9
120
110.5
108.8
130
115.8
126.5
140
90
91
92
93
94
95
96
01
*1st Half 2004
Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
02
03
04*
A 100 Combined Ratio Isn’t What it
Used to Be: 95 is Where It’s At
110
Combined Ratio
15.9%
14.3%
100.6
16%
100.1
85
15.0%
14%
97.5
94.3
95
90
18%
Combined ratios
today must be below
95 to generate
Fortune 500 ROEs
94.4
13.1%
12%
10%
9.4%
8%
80
6%
1978
1979
2003 Actual 2003 for 15%
ROE
* 2004 figure is return on average statutory surplus based in first half data
Source: Insurance Information Institute from A.M. Best and ISO data.
2004F
Retrun on Equity*
Combined Ratio
105
100
ROE*
PRICING:
DOWNWARD
PRESSURE?
How the Risk Dollar is Spent (2003)
Firms w/Revenues < $1 Billion Firms w/Revenues > $1 Billion
Liabilty
Premiums
14%
Retained
Liability
11%
Admin Costs
5%
Property
Premiums
16%
Retained
Property
6%
Property
Premiums
20%
Admin Costs
9%
Retained
Liability
4%
Retained
Property
3%
WC Premiums
14%
Liabilty
Premiums
18%
Retained WC
21%
Other
2%
WC Premiums
8%
Total Prof.
Total Mgmt.
Liab
Liab.
10%
8%
Source: RIMS (2003); Insurance Information Institute
Retained WC
10%
Other
4%
Total Prof.
Liab
Total Mgmt. 13%
Liab.
7%
Cost of Risk: 1990-2003*
$13
$11.96
$12
$11
$10
$8.91
$9
$8.30
$7.70
$8
$7
$6.10
$7.30
$6.49
$6.40
$6.46
$5.70
$6
$5.71
$5.25
$5.20
$5
$4.83
$4
90
91
92
93
94
95
96
97
98
99
00
* Cost of risk includes insurance premiums, retained losses and administrative expenses
Source: 2003 RIMS Benchmark Survey; Insurance Information Institute
01
02
03
Components of Cost of Risk Per
$1,000 of Revenue*
% Change
2001 -03
+45.8%
$4.0
+90.3%
$3.63
+113.8%
2001
$3.57
$3.54
2002
2003
$3.5
$3.0
$2.5
$2.92
$2.72
$2.49
$2.55
+107.0%
$2.07
$1.86
$2.0
$1.67
$1.5
$1.43
$1.00
$1.0
+44.8%
+150.0%
$1.26
$0.96
$0.87
$1.15
$0.82
$0.46
$0.5
$0.0
Total WC
Costs
Total Liability
Costs
Total
Property
Costs
Other Costs
Total Admin.
Costs
* Cost of risk includes insurance premiums, retained losses and administrative expenses
Source: 2003 RIMS Benchmark Survey; Insurance Information Institute
Total Mgmt.
Liability
Costs
20%
15%
0%
10%
5%
Source: MarketScout.com
12%
12%
10%
12%
11%
9%
9%
9%
7%
7%
5%
4%
4%
2%
2%
30%
18%
18%
17%
16%
35%
28%
31%
31%
28%
30%
32%
33%
28%
29%
30%
32%
30%
27%
25%
28%
22%
14%
11%
13%
16%
19%
22%
25%
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
Commercial Premium Rate
Changes Are Sharply Lower
Is moderation due to
realization of
performance and profit
goals, increasing
capacity/ capital, or
market- share strategies?
Proportion of Workers Comp
Accounts Renewing With Increase of
20% or More
More than half of all
WC accounts
renewed up at least
20% in mid-2002,
two years later
virtually none did.
54%
38%
38%
32%
20%
12%
12%
3%
02:II
02:III
02:IV
03:I
03:II
03:III
03:IV
04:I
Source: Council of Insurance Agents and Brokers; Insurance Information Institute
1%
1%
04:II
04:III
World Rate-On-Line Index
(1990 = 100)
400
372
337
350
288
283
300
Reinsurance prices rising, limits
falling: ROL up significantly,
though not as much as after
Hurricane Andrew in 1992
248
250
239
160
150
100
230
194
193
200
260
138 142
116
100
50
0
90
91
92
93
Source: Guy Carpenter
94
94
96
97
98
99
00
01
02
03
04
P/C Soft Spots: % Accounts With
Negative Price Change(3rd Qtr. 2004)
90%
85%
Casualty/Liability/Terrorism
80%
70%
60%
Propert
y 59%
62%
53%
46%
50%
41%
37%
40%
30%
20%
10%
25%
More moderation is evident in
the commercial casualty
segments, but softening quickly
0%
Comm Prop Biz
Terror Comm Auto WC
Interruption
GL
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
EPL
Umbrella
P/C Soft Spots: % Accounts With
Negative Price Change(4th Qtr. 2003)
60%
55%
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Propert
y
Casualty/Liability/Terrorism
42%
18%
13%
13%
12%
5%
Comm Prop Biz
Terror Comm Auto WC
Interruption
11%
2%
GL
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
EPL
Umbrella
P/C Soft Spots: % Accounts With
Negative Price Change(4th Qtr. 2002)
60%
55%
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Casualty/Liability/Terrorism
Propert
y
7%
2%
0%
0%
0%
1%
Comm Prop Biz
Terror Comm Auto WC
Interruption
GL
EPL
Umbrella
0%
1%
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
P/C Soft Spots: % Accounts With
Negative Price Change(4th Qtr. 2001)
60%
55%
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Casualty/Liability/Terrorism
Propert
y
0%
0%
1%
0%
0%
Comm Prop Biz
Terror Comm Auto WC
Interruption
GL
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
0%
EPL
Umbrella
FATAL ATTRACTION?
A LOSS OF PRICING &
UNDERWRITING
DISCIPLINE
RATINGS, SOLVENCY,
FINANCIAL STRENGTH
Cost of Risk vs. Commercial
Lines Operating Ratio*
$11.96
$12
Commercial Operating Ratio
105
101.5
$8.30
100
95
95.9 96.0
$6.40
$6.10
$10
Cost of Risk
101.1
$8
$7.70
$7.30
94.2
90
$8.91
$6.46
$6.49
$5.71
$5.70
$5.20
91.3
$5.25
91.3 90.6$4.83
90.0 90.7
89.3
94.4
$6
87.0
84.5
85
$4
$2
80
$0
90
91
92
93
94
95
96
Source: RIMS, A.M. Best; Insurance Information Institute
97
98
99
00
01
02
* 2003 operating ratio is III estimate.
03
Cost of Risk/$1000 Revenue
Commercial Lines Operating Ratio
110
Private Passenger Auto Combined
& Operating Ratios, 1993-2004F
115
$871
PP Auto Combined Ratio
$700
96.6
99.1
Rating actions contributed to
dramatic improvement in PP
Auto U/W performance
95
90
$600
$500
95
96
97
98
99
00
01
02
03E
04F
Sources: Insurance Information Institute from A.M. Best and NAIC data; 2003/4 expenditure estimates from III.
Avg. Auto Insurance Expenditure
$718
103.5
$687
$800
107.9
$704
$683
99.5
100
101
$668
$691
$781
104.2
$706
101.1
105
101.3
Combined Ratio
110
$842
109.5
Average Auto Insurance
Expenditure
$900
Number of P/C Failures vs.
Combined Ratio, 1991-2003
70
117
2003 failures fell
to a 5-year low
40
115
115
58
108
108
110
109
107
107
106
35
108
102
30
25
24
31
28
24
27
10
8
10
105
100
100
20
10
110
107
20
10
95
0
90
91
92
93
94
95
96
97
Number of P/C Failures
Source: Standard & Poor’s; Insurance Information Institute
98
99
00
Combined Ratio
01
02
03
Combined Ratio
Number of Failures
60
50
120
Downgrade/Upgrade Ratio*
4.93
3.78
3.5
4
1.08
0.8
0.51
0.41
0.74
1.1
0.83
0.44
0.58
0.82
0.99
1.05
87
1.56
1.78
1.12
1
86
1.71
1.22
2
1.98
3
0.45
0.41
0.43
0.42
0.68
Ratio of Downgrades to Upgrades
5
Sources: Impairment Rate and Rating Transition Study—
1977 to 2002, A.M. Best & Co.; 2003E from S&P.
*U.S. property/casualty and life/health insurers
03E
02
01
00
99
98
97
96
95
94
93
92
91
90
89
88
85
84
83
82
81
80
79
78
0
Impairment Count by Year
60
56
Impairment rates rose
sharply during the poor
market conditions of the
mid-1980s and continued
well into the 1990s
50
40
40
30
40
33
32
26
Impairment rates rose
dramatically as the most
recent soft market
deepened and continued as
the market hardened
35
35
31
25
22
19
14
12
10
9
7
4 4
6
29
23
22
18
20
34
7
0
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
Sources: A.M. Best; Insurance Information Institute.
*A.M. Best defines a financial impaired company as one where
the insurance department in the state of domicile takes an
“official action.”
P/C Company Insolvency Rates,
1993 to 2002
•Insurer insolvencies are increasing
1.33%
•10-yr industry failure rate: 0.72%
1.20%
•Failure rating for B+ or better rating: 0.49%
•Failure rate for D through B rating: 1.29% 1.02% 1.03%
10-yr Failure Rate
0.79%
= 0.72%
0.60%
0.58%
0.21%
1993
1994
1995
0.28%
1996
30
30
38
2000
2001
2002
0.23%
1997
Source: A.M. Best; Insurance Information Institute
1998
1999
Reason for P/C Insolvencies
(218 Insolvencies, 1993-2002)
Impaired Affiliate
3%
Unidentified
17%
CAT Losses
3%
Reinsurer Failure
0%
Deficient Loss
Reserves
51%
Reserve
deficiencies
account for
more than half
of all p/c
insurers
insolvencies
Change in Business
3%
Discounted Ops
8%
Overstated Assets
2%
Alleged Fraud
3%
Rapid Growth
10% Source: A.M. Best, Insurance Information Institute
P/C Insurance Industry Prior Year
Reserve Development*
$ Billions, Calendar Year Basis
$25
Adverse reserve development totaled
$47.8 billion from 2000 through 2003
$20
$13.7
Adverse reserve development is
the #1 killer of p/c insurance
companies: Strength Matters
$15
$10
$5
$22.7
$2.3
$0.3
$0
$2.2 $1.2
$0.4
($1.5)
($5)
($10)
$11.0
($3.7) Actuaries partially
to blame for this—
not random
fluctuation
($7.5)($6.7)
($10.0)
($8.5)
($15)
90
91
92
93
94
95
96
97
98
99
00
01
02
03
*Negative numbers indicate favorable development; positive figures represent adverse development.
Source: A.M. Best, Morgan Stanley, Dowling & Partners Securities, Prudential Securities, Ins. Info. Inst.
Combined Ratio:
Impact of Reserve Changes (Points)
Points (Reduced)/Increased
7
6
5
4
3
2
1
0
-1
-2
-3
Prior-year adverse reserve
development totaling nearly
$14 billion in 2003 added 3.5
points to the p/c combined
ratio in 2002
6.3
5.2
3.5
0.5
(0.4)
(2.4)
1998
1999
2000
2001
Source: ISO, A.M. Best, MorganStanley, Prudential Securities.
2002
2003
IS THERE CAUSE
FOR CONCERN?
Strength Matters
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.
Cumulative Avg. Implied Impairment Rates
by Holding Co. Senior Unsecured Debt
Insurers with strong credit ratings are
45% far less likely to become impaired over
long periods of time. Especially
40%
important in long-tailed lines.
c
35%
30%
25%
20%
15%
b
10%
5%
0%
aa
bb
bbb
a
aaa
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.
INVESTMENTS:
NO SUBSTITUTE FOR
SOUND UNDERWRITING
Net Investment Income
$45
Growth History
$36
2002: -1.3%
2003: +3.9%
$ Billions
History
$27
1997 Peak = $41.5B
2000= $40.7B
$18
2001 = $37.7B
2002 = $37.2B
$9
2003 = $38.7B
2004E = $38.0
$0
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
Source: A.M. Best, ISO, Insurance Information Institute
Interest Rates: Lower Than
They’ve Been in Decades, But…
14%
Lower bond yields were the primary driver behind
declining investment income in recent years, with the
10-year note reaching a 45-year low in 2003
12%
Higher ST rates as Fed tightens. In long run
immense & growing deficit will force rates higher
16%
LT rates actually falling again since econ not as
strong as presumed
10%
8%
6%
4%
About 2/3 of invested assets
are in the form of bonds
2%
3-Month T-Bill
1-Yr. T-Bill
10-Year T-Note
Source: Board of Governors, Federal Reserve System; Insurance Information Institute
Sep
04
04
Jun
Mar
04
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
0%
Total Returns for Large Company
Stocks: 1970-2004*
40%
S&P 500 was up 28.7% in 2003 but up 7% early Dec. as falling oil prices
and a certain election outcome bolstered stocks; Iraq, terrorism, resurgent
oil prices and fear of higher interest rates remain concerns
30%
20%
10%
0%
-10%
2003 ended a streak of 3 consecutive years of
declines for stocks
-20%
Source: Ibbotson Associates, Insurance Information Institute.
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
-30%
Will the bull market run out of steam in 2004?
*Through December 3, 2004
US P/C Net Realized Capital Gains
1990-2004:Q1 ($ Millions)
Realized capital
gains rebounded
strongly in 2003/4
$20,000
$15,000
$16,205
$13,016
$10,808
$9,244
$9,893 $9,818
$10,000
$18,019
$6,917
$4,984
$6,631
$5,997
$4,806
$5,000
$2,880
$1,664
$0
-$1,214
-$5,000
90
91
92
93
94
95
96
97
*First half 2004 result
Sources: A.M. Best, ISO, Insurance Information Institute.
98
99
00
01
02
03 04*
Property/Casualty Insurance
Industry Investment Gain*
$ Billions
$60
$57.9
$52.3
$56.9
$51.9
$47.2
$50
$44.4
$42.8
$40
$45.6
$48.0
$36.0
$35.4
$30
Investment gains are rising but
remain well below the peak of
$57.9 billion in 1998
$20
$10
$0
94
95
96
97
98
99
00
01
02
03
04E
*Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.
2004 estimate is annualized figure based on first half result.
Source: Insurance Services Office; Insurance Information Institute.
Significant Risks to Investment
Portfolio in 2005 & Beyond?
• Out-of-Control US Fiscal Policy
 Virtually no domestic savings so US govt. (and corporations)
borrowing heavily from abroad
 Foreign appetite for US securities starting to wane
 Interest rates will rise, bond prices fall
• Loose Monetary Policy Has Accommodated Deficit
 Gives inflation a change to take root & accelerate (&
contribute reserve deficiency)
 Forces Fed to raise rates (next hike expected Dec. 14)
• Budget (& Current Acct.) Deficits Will Lead to Higher
Interest Rates as Foreign Appetite for US Debt Wanes
 To attract more foreign capital interest rates must rise
• US Dollar Continues to Depreciate
 Repatriation of profits difficult for foreign insurers
 Theoretically makes acquisition of US insurers more feasible
• Stocks Market Performance Will Be Rocky
 Rising interest rates are bad news for stocks
HURRICANE
SEASON OF 2004
One for the Record Books
U.S. Insured
Catastrophe Losses ($ Billions)
2004 could become
the second
$ Billions
worst year ever for natural
disaster losses in the US
04E*
03
02
01
00
99
98
97
96
95
94
93
92
91
90
89
$28.1
$30
$24.7
$22.9
$25
$20
$16.9
$12.9
$15
$10.1$8.3
$8.3
$7.3
$10 $7.5
$5.9
$5.5
$4.7
$4.3
$2.7
$2.6
$5
$0
*2004 figure is as of September 30, 2004.
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
Top 10 Insured Losses Worldwide,
1970-2004 ($2003)
$35
Seven of the 10 most expensive
disasters is world history
occurred in the US: Two were
this year’s hurricanes
$30
$ Billions
$25
$20
$15
$10
$4.8
$5
$6.4
$6.2
$6.0
$20.9
$17.3
$7.6
$6.8
$6.4
$30.6
01
)
(2
0
A
tta
ck
(1
Se
pt
.1
1
Te
rr
or
nd
re
w
eA
ak
H
ur
ri
ca
n
ar
th
qu
eE
or
th
rid
g
N
99
2)
94
)
e(
(1
9
M
ir
ei
lle
n
ph
oo
Ty
19
91
)
00
4)
rle
y
ha
eC
D
H
ur
ri
ca
n
rm
st
o
in
d
W
(2
99
0)
ar
ia
r(
th
a
Lo
rm
st
o
in
d
W
(1
19
98
9)
eH
H
ur
ri
ca
n
eI
va
n
ug
o
(2
(1
00
4)
87
)
19
H
ur
ri
ca
n
rm
s(
St
o
ea
n
ro
p
Eu
99
)
$0
*Hurricanes Ivan and Charley in 2004 dollars.
Sources: ISO/PCS; Swiss Re, “Natural Catastrophes and Man-Made Disasters in 2003,” Sigma, no. 1,
2004; except Sept. 11 estimate from Hartwig, Robert P., 2004 Mid-Year Property/Casualty Insurance
Update, Insurance Information Institute. Figure is stated in 2001 dollars.
Losses from Hurricanes of 2004
$8.0
$7.0
Four of the Top 10
hurricanes in US
history occurred in
2004
$ Billions
$6.8
$6.0
$6.0
$5.0
$4.0
$3.0
$2.0
$1.0
$4.4
$3.2
Estimated insured losses from the hurricanes
of 2004 = $20.485B exceed the $15.5B in losses
from Hurricane Andrew ($20.3B in $2003)
$0.0
Jeanne
Frances
Source: ISO/PCS; Insurance Information Institute
Ivan
Charley
Claims Payouts for 4
Hurricanes Unparalleled
$8
$7
Total Insured Losses = $20.485B
Florida Only = 17.5B (85%)
Florida
All Other States
Total = $6.8 Billion
Total = $6.0 Billion
$0.1
Billions
$6
Total = $4.4 Billion
$5
$4
$2.2
Total = $3.2 Billion
$3
$6.8
$0.5
$2
$1
$0.3
$4.1
$3.8
Frances
Ivan
$2.8
$0
Jeanne
Source: PCS/ISO
Charley
Claims Handling Represented
Herculean Effort by Insurers
700
Total Claims = 2.177 million
Florida Only = 1.692 Mill (78%)
Florida
Total = 600,000
600
Total = 552,000
Total = 640,000
35
47
500
($ Thousands)
All Other States
Total = 385,000
315
400
88
605
300
505
200
297
285
100
0
Source: PCS/ISO
Jeanne
Frances
Ivan
Charley
Personal Property Losses Accounted for
Largest Share Damage from
2004 Hurricanes*
Charley
Ivan
TOTAL
4%
4%
Vehicle
4%
56%
63%
33%
40%
Personal
Property
63%
Frances
4%
Comm.
Property
33%
Jeanne
4%
66%
23%
30%
Source: ISO/PCS.
73%
*Breakdowns based on FL losses, which accounted
for 85% of losses for all affected states.
Underwriting Gain (Loss) in
Florida Homeowners Insurance,
1992-2004E*
$4
$2
$0.69 $0.43
$1.43 $1.16 $1.47
$0.86 $1.08 $1.23 $1.28
$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)
($10)
($12)
($9.31)
($10.60)
92
93
94
95
96
97
98
99
00
01
02
03
04E
*2004 estimate by Insurance Information Institute based on historical loss and expense data for FL
adjusted for estimated 2004 residential windstorm losses of $11.2B; 2003 figure is also from III
estimates of loss and expense. Excludes Citizens Property Insurance Corp. results.
Cumulative Underwriting Gain
(Loss) in Florida Homeowners
Insurance, 1992-2004E*
$2
$0.7
$0
-$1.2
$ Billions
($2)
-$2.7
($4)
-$3.8
($6)
-$5.2
-$6.5
It took insurers 11 years (1993-$7.7
2003) to erase the UW loss
-$8.8
associated with Andrew, but
($10)
-$9.7
the 4 hurricanes of 2004 erased
-$10.1
-$10.6-$10.8
the past 7 years of profits
($12)
($8)
92
93
94
95
96
97
98
99
00
01
02
03
-$8.6
04E
*2004 estimate by Insurance Information Institute based on historical loss and expense data for FL
adjusted for estimated 2004 residential windstorm losses of $11.2B; 2003 figure is also from III
estimates of loss and expense. Excludes Citizens Property Insurance Corp. results.
Cumulative Underwriting Gain
(Loss) in Florida Homeowners
Insurance, 1993-2004E*
$12
$10
$ Billions
$8
$6
Hurricanes Charley,
Frances, Ivan and
Jeanne erased 82% of
the underwriting profit
homeowners insurers
in FL earned between
1993 and 2003
$4
$11.3
$9.4
$7.9
$6.8
$5.4
$4.1
$2.9
$2.0
$1.8
$2
$0.5
$0.9
$0
-$0.2
($2)
93
94
95
96
97
98
99
00
01
02
03
04E
*2004 estimate by Insurance Information Institute based on historical loss and expense data for FL
adjusted for estimated 2004 residential windstorm losses of $11.2B; 2003 figure is also from III
estimates of loss and expense. Excludes Citizens Property Insurance Corp. results.
Average Annual Windstorm
Insured Losses*
(Top 10 States, $ Millions)
Distribution of Annual Losses
Florida
49.5%
$1,500 $1,423
All Other
15.7%
$1,250
$1,000
Mississippi
2.7%
$750
N.
Carolina
3.8%
$615
$500
$196
$250
Texas
21.4%
Louisiana
6.8%
$154
$109
$77
$64
$62
$61
$61
$51
NC
MS
MA
SC
AL
NY
CT
$0
FL
TX
LA
All
Other
*Normalized losses adjusted for inflation, housing density, wealth and wind insurance coverage,
based on historical data for 100-year period 1900-1999.
Source: Tillinghast-Towers Perrin
% of Comml. Property Accounts
Renewing Negative (3rd Quarter 2004)
95%
Commercial property is “less
soft” in the Southeast
93%
90%
90%
89%
85%
85%
80%
75%
75%
70%
65%
60%
Northwest
Southwest
Source: Council of Insurance Agents and Brokers
Midwest
Northeast
Southeast
What’s Going to Happen in Florida?
• Special Legislative Session in December 2004
• Elimination of Occurrence-Based Wind Deductible
 Likely a “Seasonal” wind deductible will at least be an option
 May be able to choose a fixed dollar deductible or from a range
of percentage deductibles
 “Actuarial Integrity” of the rates likely to be preserved (i.e., if
choose seasonal deductible rate should be higher)
• Florida Hurricane Catastrophe Fund
 Industry’s retention likely to be lowered from current $4.5B
per occurrence
 Reduces demand for private reinsurance
• Building Code Reform/Modification
 Structures built to more recent code held-up better
 Manufactured housing still a big problem
 Poor land use policies remains; Builder political clout
• Expect Florida to Tap Federal Treasury Regularly
SPITZER
INVESTIGATION
Has the Industry’s
Reputation Been
Shattered?
Headlines from Hell
• INSURERS REEL FROM SPITZER’S STRIKE
-Wall Street Journal, October 18, 2004, Page A1
• BROKER ACCUSED OF RIGGING BIDS FOR INSURANCE
-New York Times, October 15, 2004, Page A1
• CLASS ACTION THREAT ADDED TO CHALLENGES
FACING INSURERS
-Wall Street Journal, October 20, 2004, Page C1
• STATE BASED INSURANCE REGULATION GETS
SCRUTINY
-Wall Street Journal, October 18, 2004, Page A15
• INSURERS POST STEEP LOSSES IN DAY OF
WIDESPREAD DECLINES
-New York Times, October 15, 2004, Page C4
3 Main Areas of Investigation
• PROBE 1: Anti-Competitive Acts






Big-rigging, fraud is the only actual illegal act
Contingent commissions not illegal but painted as root of problem
Accusation: Broker contractual responsibility to buyer breached
Likely Outcome: Fines, penalties, disclosure; E&O/D&O, sharehldr. suits
New Economic Model Needed to replace lost broker (agent?) income
Independent Agents: Distinction that agent works for insurer not as
helpful as commonly believed
• PROBE 2: Tying
 Alleges brokers steered business to certain insurers who would then
utilize their reinsurance broker affiliate
 Likely Outcome: Fines, penalties, disclosure; divestiture (worse case)
• PROBE 3: Finite (Re) Insurance/”Non-Traditional” Products
 Issue 1: Was there “significant” transfer of risk or merely a loan
disguised as insurance?
 Issue 2: Was there proper accounting treatment
 Issue 3: Misrepresentation of policy details
 Likely Outcome: Fines, Penalties, revamped accounting definitions; stds.
Impact of Spitzer Investigation
•
•
•
•
•
Impact on insurer & broker reputations has been devastating
Worst PR disaster in the history of the insurance industry
Will take years to repair damage
Negative spillover on other issues (TRIA, class action reform?)
Whole industry (p/c, life, health) painted with same brush
 Impact most severe on commercial p/c companies
 Stock price of personal lines companies impacted (even those with
exclusive agents, e.g. Allstate)
 Least impacted are mutuals with captive agents (e.g., State Farm)
• Spitzer cast into doubt on all producer compensation
arrangements except straight commissions.
• Issue of “bid rigging” and contingent fees (PSAs, MSAs) were
(inappropriately) linked by Spitzer (hence media & regulators)
• LOST in DEBATE: 2 Distinct Issues:
 Contingent fees are legal and useful when properly structured
 Illegal anti-competitive & fraudulent acts are a separate issue and should
be treated as such & Don’t represent how industry does business
Impact of Spitzer Investigation
• Brokers lose substantial income in short-run
• Brokers will look to replace revenue, reduce expense
• In the end does not fundamentally change distribution
system
• Look for:
 More heads to role
 Civil/criminal indictments (brokers & insurers)
 Shareholder (D&O) suits; E&O suits
 Massive fines, penalties and disgorgement of profits
 Mischief by state insurance commissioners & AGs
• Contingent commissions gone for now, but need some
form of incentive compensation
 Can balance with disclosure
• Does not create greater impetus for federal regulation
Risk Managers: Concerned About
Contingent Commission Issue
I am concerned that my company’s brokerage firm(s) may
have participated in anti-competitive practices related to
contingent commissions.
1) Strongly Agree
22.51%
2) Somewhat Agree
3) Neither Agree nor
Disagree
30.12%
4) Somewhat Disagree
13.74%
5) Strongly Disagree
20.47%
6) Don't Know/NA
Grand Total
Source: Advisen Risk Manager Contingent Commission Survey, November 2004.
11.11%
2.05%
100.00%
Risk Managers Concerned About
Extent of Disclosure
I am concerned that my company’s insurance brokerage firm(s)
does not fully disclose to my company all sources of income
related to my insurance.
1) Strongly Agree
28.65%
2) Somewhat Agree
28.07%
3) Neither Agree nor Disagree
10.38%
4) Somewhat Disagree
13.30%
5) Strongly Disagree
17.25%
6) Don't Know/NA
2.34%
Grand Total
100.00%
Source: Advisen Risk Manager Contingent Commission Survey, November 2004.
Risk Managers Concerned
Contingent Commissions are Conflict
I believe that contingent commissions are a conflict of interest.
1) Strongly Agree
38.45%
2) Somewhat Agree
25.58%
3) Neither Agree nor Disagree
13.74%
4) Somewhat Disagree
11.55%
5) Strongly Disagree
9.36%
6) Don't Know/NA
1.32%
Grand Total
100.00%
Source: Advisen Risk Manager Contingent Commission Survey, November 2004.
Most Risk Managers Believe Elimination
of Contingencies Will Raise Their Costs
Elimination of contingent commissions will have the following
result on the Total Cost of Risk for my company:
1) Increase
33.77%
2) No Impact
46.64%
3) Decrease
19.59%
Grand Total
Source: Advisen Risk Manager Contingent Commission Survey, November 2004.
100.00%
Most Risk Managers Favor
Standardized Transparency
Should the transaction process to buy commercial insurance be
standardized and transparent to your company?
1) Yes
74.12%
3) No
16.81%
2) Don't Know
Grand Total
Source: Advisen Risk Manager Contingent Commission Survey, November 2004.
9.06%
100.00%
Relatively Few Risk Managers
Plan to Replace Their Broker(s)
Are you considering replacing your current insurance
brokerage firm (s)?
1) Yes
14.33%
2) No
63.89%
3) Don't Know
21.78%
Grand Total
100.00%
Class Actions: You Can Sign Up to
Sue Insurers & Brokers Online
Source: Yahoo! Search, 10/22/04
Percent of Public Rating Industry as
Very or Mostly Favorable, 1968-2004
90%
Banks
Electric Power Company
Consumer Finance Companies
Auto & Home Insurance
80%
70%
60%
50%
40%
30%
20%
10%
Source: Insurance Information Institute Annual Pulse Survey
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1988
1986
1985
1983
1981
1978
1972
1968
0%
MUTUAL FUNDS: Ratings Took
Hit—Shades of Things to Come?
Very/Mostly Favorable
55%
Very/Mostly Unfavorable
16%
53%
51%
51%
50%
15%
14%
48%
13%
12%
44%
45%
10%
9%
9%
8%
8%
39%
40%
6%
4%
Favorability ratings
have declined
35%
5%
Unfavorable ratings
TRIPLED in 5 years
2%
0%
30%
1999
2000
2001
2002
2003
2004
1999
Source: Insurance Information Institute, 2004 Pulse Survey
2000
2001
2002
2003
2004
AN ECONOMIC
THEORY OF WHAT
WENT WRONG
Contingent Commissions
Are Not to Blame
Economic & Insurance Market Factors
are at the Root of the Problem,
Not Contingent Commissions
• Increasing Market Concentration Among Brokers
 E.g., Market share of Top 3 out largest 10 brokers rose from
62% in 1989 to 79% in 2003
• Declining Capacity in P/C Insurance Industry
 “Supply” of capital (as measured by policyholder surplus) fell
by 16% or $54 billion from mid-1999 to year-end 2002
• Severe Drop in Capacity in Excess Casualty Market
 Capacity plunged 30% from 2000 to 2003
 Created acute supply shortage as demand increased
• Tort Environment Deterioration Increased Demand for
Excess Casualty Coverage as Capacity Fell
 Commercial tort costs rose 53% from 2000 to 2002
 Average jury award rose 186% from 1994 to 2002
• Combination of Decreased Supply, Increased Demand
Gave Producers Securing Coverage More Leverage
 In a few instances, some stepped over a VERY BRIGHT line
Relative Market Share of Top Brokers
Increased Significantly in the 1990s
100%
2003
1989
Cumulative Market Share
90%
79% 84%
80%
70%
70%
72%
60%
50%
Relative market
share of top
brokers much
higher than in
2003 than in 1989
62%
Relative market share of top 3
brokers (out of top 10) rose from
62% in 1989 to 79% in 2003.
41%
48%
40%
32%
30%
1
2
3
4
5
6
7
Broker Rank by Revenue
Sources: Business Insurance, Dowling & Partners; Insurance Information Institute
8
9
10
U.S. Insurer Capacity Decreased
Significantly from 1999-2002
$400
$350
$300
Surplus (capacity) peaked at
$339.3 Billion in mid-1999 and
fell by a record 15.9% ($53.9
billion) to $285.4 billion at
year-end 2002
$ Billions
$250
$200
$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, ISO, Insurance Information Institute
Billions
Excess Casualty Market: Problem Area
Capacity Fell Even More Sharply at a
Time When Demand Was Soaring
Capacity dropped 30% from 2000 to 2003
$3.0
$2.011
$2.5
$2.0
$1.941
$2.045
$1.721
$1.710
$1.575
$1.432
$1.334
$1.405
$1.425
$1.5
Supply (Capacity) fell in excess casualty
markets as capacity overall fell, the tort
environment deteriorated and
downgrades for insurers to become more
conservative with capital allocation
$1.0
$0.5
$0.0
1994
1995
1996
Source: Marsh, 2003 Limits of Liability Report
1997
1998
1999
2000
2001
2002
2003
Extreme Pressure on Excess Casualty Markets
as Commercial Tort Costs Skyrocketed
$100
$90
Billions
$80
$70
Commercial Tort Costs
$87.4
Commercial tort
costs rose 53%
from 2000 to 2002!
$60
$49.1
$50
$40
Demand rose as capacity
crashed, increasing the
importance of the broker’s
role in securing coverage
$30
$20
$57.2
$17.0
$10
$0
1980
*Excludes medical malpractice
Source: Tillinghast-Towers Perrin
1990
2000
2002
Skyrocketing Jury Awards Pressured
Casualty/Liability Markets
$8,000
2002
$7,000
1,744
1,140
4,421
1,185
767
$1,000
419
$2,000
333
$3,000
221
$4,000
187
($000)
$5,000
Average jury awards
skyrocketed between the
mid-1990s and 2002. From
1994 through 2002, the
average award rose 186%
1,199
$6,000
5,601
6,246
1994
$0
Overall
Vehicular
Liability
Premises
Liability
Wrongful Death
Source: Jury Verdict Research; Insurance Information Institute.
Medical
Malpractice
Products
Liability
The Rest is History…
Download III’s
Broker/Agent
Compensation
background paper at:
http://www.iii.org/media/hottopics/
insurance/brokercompensation/
Eliot Spitzer, New York State Attorney General
CAPACITY
CRUNCH?
U.S. Policyholder Surplus:
1975-2004*
$400
$350
$300
$ Billions
$250
$200
Surplus (capacity) peaked at
$339.3 Billion in mid-1999 and
fell by 15.9% ($53.9 billion) to
$285.4 billion at year-end 2002
Capacity TODAY is just 9.2%
above its mid-1999 peak
Surplus increased by $61.6B or
21.6% to $347.0B in 2003 and
4.9% in the 1st qtr. of 2004 to
$361.2 billion
$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 03 04
Source: A.M. Best, ISO, Insurance Information Institute
*As of 6/30/04.
Capacity of Lloyd’s Market
After remaining stable at around GBP10bn, Lloyd’s
capacity has increased by over 40% in the last three
£14.9 £14.9
years.
£16
£15
2004 capacity is GBP14.9bn, unchanged from 2003.
£14
£13
£12.2
£12
£11.1
£10.9
£11
£10.2 £10.0£10.3£10.2 £9.9 £10.1
£10
£8.9
£9
£8
93 94 95 96 97 98 99 00 01 02 03
Source: Lloyd’s
04
500
Hard market fueling captive formation
Corporate collapses and captive consolidations fueled
the upward trend in captive liquidations in 2002.
462
600
510
Number of Captive Formations &
Liquidations 1993 to 2003E
1998
316
305
1997
245
294
1996
250
290
243
238
300
289
400
1999
2000
200
100
0
1993
1994
1995
2001
New Captives
Source: AM Best, Advisen
2002 2003E
WORKERS
COMPENSATION
[full presentation available to
III member companies]
Workers Comp Combined Ratios,
1994-2003p
Percent
140
130
120
110
101
100
97
Workers Comp Calendar Year vs. Ultimate Accident Year –
Private Carriers
138
133
129
125
122
119
118
115
111
108
108
106
106
101
101 100
101
97
90
1994
1995
1996
1997
1998
Calendar Year
1999
2000
2001
2002
Accident Year
p Preliminary
Accident Year data is evaluated as of 12/31/2003 and developed to ultimate
Source: Calendar Years 1994-2002, A.M. Best Aggregates & Averages; Calendar Year 2003p and Accident Years 1994-2003p, NCCI
Includes dividends to policyholders
2003p
WC Combined Ratios:
Problems are National in Scope
140
130
123
120
2.9 pts due
to 9/11
Calendar Year vs. Ultimate Accident Year
Countrywide—Private Carrier*
Calendar Year
122
122
118
117
115
111
109
110
108
101
100
108
100 101
97
90
90
91
92
93
94
95
96
97
98
99
*Includes dividends to policyholders
Accident year is developed to ultimate as 12/31/02;
Note: CY figures from AM Best; AY figures from NCCI, 2003E is III estimate.
00
01
02 03E
Source: A.M. Best, NCCI
Workers Comp Reserves,
1993-2003p
$ Billions
25
$20.0
$21.0
$18.3
20
$18.0
$15.2
$14.5
15
$10.0
10
$4.6
5
$0.5
$2.0
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
Loss and LAE Reserve Deficiency Through Year End
p Preliminary
Difference between NCCI estimated ultimate losses and LAE as of 12/31/2003 and reported in Schedule P
Source: NCCI
2003p
Workers Comp Indemnity Claims
Costs Have Accelerated, 1993-2003p
Indemnity
Claim Cost (000s)
Lost-Time Claims
$19
$17
Annual Change 1991–1995:
Annual Change 1996–2002:
+0.3%
+7.4%
$15.2
$16.8
$14.2
$15
$12.8
$13
$11
$16.1
$9.7
$9.7 $9.4
$9.1 $9.6
$10.3
$11.0
$11.8
$9
$7
$5
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003p
Accident Year
2003p: Preliminary based on data valued as of 12/31/2003
1991-2002: Based on data through 12/31/2002, developed to ultimate
Based on the states where NCCI provides ratemaking services
Excludes the effects of deductible policies
Source: NCCI
Workers Compensation Indemnity
Severity Is Outpacing Wage Inflation
% Change, Lost–Time Claims
12
10.5
(% Change)
10
8.3
7.3
6.9
8
7.3
6.0
5.9
6
4.5
4
1.7
2
2.8
4.7
4.0
4.2
4.9
4.2
2.8
2.2
2.0
2002
2003p
0
1995
1996
1997
1998
1999
2000
2001
Year
Change in CPS Wage
Change in Indemnity Cost per Lost-Time Claim
Indemnity severity 2003p: Preliminary based on data valued as of 12/31/2003
Indemnity severity 1995-2002: Based on data through 12/31/2002, developed to ultimate
Based on the states where NCCI provides ratemaking services, excludes the effects of deductible policies
Source: Calendar Year Current Population Survey, Economy.com; Accident Year indemnity severity, NCCI
Workers Comp Medical Claims
Continue to Climb
Medical
Claim Cost ($000s)
$19
$17
Annual Change 1991–1995:
Annual Change 1996–2002:
$17.8
+3.9%
+9.0%
$16.3
$14.7
$15
$13.1
$13
$12.0
$11
$9
$7.9
$8.0
$7.8
1991
1992
1993
$8.5
$8.9
$9.6
$10.3
$11.1
$7
$5
1994
1995
1996
1997
Accident Year
2003p: Preliminary based on data valued as of 12/31/2003
1991-2002: Based on data through 12/31/2002, developed to ultimate
Based on the states where NCCI provides ratemaking services
Excludes the effects of deductible policies
1998
1999
2000
2001
2002 2003p
WC Medical Severity Rising Far
Faster than Medical CPI
14%
10%
8.7%
7.4%
8%
6%
4%
7.7%
12.0%
11.0%
9.0%
9.0%
7.3%
5.0 pts
12%
WC medical severity is rising
2.3 times faster than the
medical CPI
5.1%
4.5%
3.6%
2%
2.8%
3.2%
1996
1997
4.7%
4.0%
Change in Medical CPI
Change Med Cost per Lost Time Claim
0%
1995
3.5%
4.1%
4.6%
1998
1999
2000
2001
2002
2003
Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
Workers Compensation Residual
Market Shares Continue to Rise
Workers Compensation Insurance Plan States*
Premium as a Percent of Direct Written Premium
Percent
30
24
25
21
20
16
22
18 17 17
Residual market share
quadrupled from 3% to
12% from 1999 to 2003
26
23
16
15
10
12
11
9
10
8
4
5
6
3
3
0
p
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
19
89
19
88
19
87
19
86
19
85
19
Calendar Year
p Preliminary
•NCCI Plan states plus DE, IN, MA, MI, NJ, NC
•Source: NCCI
LEGAL LIABILITY
& TORT
ENVIRONMENT
TORT-AGEDDON
INSURERS HAVE BEEN BATTLING THE TORT
SYSTEM FOR DECADES, BUT LAWYERS ARE
BETTER ORGANIZED, BETTER FUNDED AND
POLTICALLY BETTER CONNECTED
There is Was is Was a Glimmer of
Hope for Tort Reform
Best Chance for Tort Reform in Years is Gone
• Medical Malpractice
 States—already happening: 20+ states have caps
 Federal reform discussed in Congress but bill failed in Senate
 Attempt to get caps for specialties failed February 2004
• Class Action Reform
 Class Action Fairness Act
 Failed by 1 Vote 10/22/03; Failed Again in 2004
• Asbestos Reform
 Fairness in Asbestos Injury Resolution of 2003; Failed Apr. 2004
• Punitive Damages—What’s Reasonable
 Supreme Court ruled favorably in Campbell v. State Farm
Insurance Industry Has Been Doing
Battle With Trial Lawyers for More
Than a Half Century
Insurance industry ads from the
Saturday Evening Post in 1953!
But It is Attorneys Who Spend
Most of the Ad Money Today
Cost of U.S. Tort System
($ Billions)
Tort costs consumed 2.23% of GDP in 2002
$350
$300
$250
Per capita “tort tax” expected
to rise to $1,003 by 2005, up
from $809 in 2002
$200
$150
$129 $130
$141 $144 $148
$159 $156 $156
$298
$233
$205
$167 $169
$180
$100
$50
$0
90
91
92
Source: Tillinghast-Towers Perrin.
93
94
95
96
97
98
99
00
01
02
05F
Personal, Commercial &
Self (Un) Insured Tort Costs*
$250
Commercial Lines
Personal Lines
Self (Un)Insured
Total = $208.8 Billion
Billions
$200
Total = $157.7 Billion
$150
Total = $120.2 Billion
$42.9
$29.6
$78.5
$20.1
$100
$70.9
Total = $39.5 Billion
$51.0
$50
$0
$87.4
$5.4
$17.1
$17.0
$49.1
$57.2
1980
1990
2000
*Excludes medical malpractice
Source: Tillinghast-Towers Perrin
2002
How the Risk Dollar is Spent (2003)
Total liability costs account for about 40% of the risk dollar
Firms w/Revenues < $1 Billion Firms w/Revenues > $1 Billion
Retained
Liability
11%
Admin Costs
5%
Liabilty
Premiums
14%
Property
Premiums
16%
Property
Premiums
20%
Admin Costs
9%
Retained
Liability
4%
Retained
Property
6%
Retained
Property
3%
WC Premiums
14%
Liabilty
Premiums
18%
WC Premiums
8%
Retained WC
21%
Other
2%
Total Mgmt.
Liab.
8%
Total Prof.
Liab
10%
Source: RIMS (2003); Insurance Information Institute
Retained WC
10%
Other
4%
Total Prof.
Liab
Total Mgmt.
13%
Liab.
7%
Where the Tort Dollar Goes
(2002)
Tort System
is extremely
inefficient:
Claimants'
Attorney Fees
19%
Only 22%
of the tort
dollar
compensates
victims for
economic
losses
At least
54% of every
tort dollar
never reaches
the victim
Awards for
Economic Loss
22%
Administration
21%
Awards for
Non-Economic
Loss
24%
Defense Costs
14%
Source: Tillinghast-Towers Perrin
Average Jury Awards
1994 vs. 2001and 2002
7,795
2002
$7,000
Average jury award
appears to be leveling out
3,099
($000)
$5,000
3,913
4,421
$6,000
$4,000
Premises
Liability
1,140
Vehicular
Liability
1,185
333
750
767
419
$1,000
187
309
221
1,210
1,199
$3,000
$2,000
5,601
2001
1,744
1994
6,246
$8,000
$0
Overall
Wrongful Death
Source: Jury Verdict Research; Insurance Information Institute.
Medical
Malpractice
Products
Liability
Probability of Plaintiff
Verdict is Rising
1994
1997
2002
Premises Liability
43%
45%
49%
Business Negligence
NA
57%
62%
Vehicular Liability
58%
59%
63%
Products Liability
39%
39%
61%
Source:
Jury Verdict Research, 2003 Current Award Trends
Business Leaders Ranking of
Liability Systems for 2004
Best States
1. Delaware
2. Nebraska
3. Virginia
4. Iowa
5. Idaho
6. Utah
7. New Hampshire
8. Minnesota
9. Kansas
10. Wisconsin
Worst States
41. Missouri
42. Arkansas
43. Montana
44. Illinois
45. Texas
46. California
47. Louisiana
48. Alabama
49. West Virginia
50. Mississippi
Source: US Chamber of Commerce States Liability Systems Ranking Study; Insurance Info. Institute.
The Nation’s Judicial Hellholes
CALIFORNIA
Alameda
County
Los Angeles
County
San Francisco
County
Madison
County, IL
City of St.
Louis, MO
TEXAS
Jefferson
County
Hidalgo County
Starr County
I
Mississippi’s
22nd Judicial
District
Orleans Parish,
LA
Source: American Tort Reform Association; Insurance Information Institute
THE CHALLENGE
OF TERRORISM
Sept. 11 Industry Loss Estimates
($ Billions)
Property Life
WTC 1 & 2
Other $1.0 (3.1%) $3.6 (11.1%)
Liability
$4.0 (12.3%)
Aviation
Liability
$3.5 (10.8%)
Event
Cancellation
$1.0 (3.1%)
Aviation Hull
$0.5 (1.5%)
Workers
Comp
$1.8 (5.8%)
Property Other
$6.0 (19.5%)
Biz
Interruption
$11.0 (33.8%)
Current Insured Losses Estimate: $32.5B
Source: Insurance Information Institute
Terrorism Coverage
Take-Up Rate Rising
Terrorism take-up rate
for non-WC risk rose
through 2003 and
continues to rise in 2004
44.2%
46.2%
32.7%
23.5%
26.0%
TAKE UP RATE FOR WC
COMP TERROR
COVERAGE IS 100%!!
2003:II
2003:III
2003:IV
Source: Marsh, Inc.; Insurance Information Institute
2004:I
2004:II
Capital Myth: US P/C Insurers Have
$350 Billion to Pay Terrorism Claims
Total PHS = $298.2 B as of 6/30/01
= $291.1 B as of 12/31/02
= $347.0 B as of 12/31/03
"Target"
Commercial*
$139 billion
40%
Only 40% of
industry
surplus backs
up “target”
lines
Industry
emphasizing limited
capital resources
against virtually
unlimited losses
Personal
$146 billion
42%
*”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 estimates based on A.M. Best Q.A.R Data.
Other
Commercial
$63 billion
18%
Capital Myth: US P/C Insurers Have
$350 Billion to Pay Terrorism Claims
Total PHS = $298.2 B as of 6/30/01
= $291.1 B as of 12/31/02
= $347.0 B as of 12/31/03
Only 33% of surplus
backs “target” lines
net of reserve
deficiency
"Target"
Commercial*
$114 billion
33%
Personal
$146 billion
42%
*”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 estimates based on A.M. Best Q.A.R Data.
Commercial
Reserve
Deficiency
$30 billion (est.)
9%
Other
Commercial
$58 billion
17%
Summary
• 2004/5 represent “sweet spot” in the current cycle for p/c
insurance (underwriting/earnings); Hurricanes hurt
• Cyclical concerns quickly becoming significant issue
• Rising investment returns insufficient to support deep soft
market in terms of price, terms & conditions
• Tort environment bad, but not getting significantly worse at
present time; State efforts (OH, TX, even MS) will help.
• Conclusion: Not obvious it will be different this time
• Major Challenges:
Maintaining price/underwriting discipline
 Managing variability/volatility of results
 New/emerging/re-emerging risks
Insurance Information
Institute On-Line
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