State Of The Market
March 7, 2008
Carol L. Murphy
Managing Director
Aon Risk Services
0
Overall State of the P/C Market
$44,155
$38,501
$30,029
$20,559
$21,865
$24,404
$20,598
$3,046
$10,000
$10,870
$20,000
$5,840
$30,000
$14,178
$40,000
$19,316
$50,000
$30,773
$60,000
$36,819
$70,000
$60,000
$80,000
$63,695
P/C Net Income After Taxes 1991 - 2006 ($Millions)
$0
-$10,000
07F
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
-$6,970
1
Property/Casualty Insurance Industry
Investment Gain1
$ Billions
$57.9
$60
$52.3
$51.9
$47.2
$50
$59.4
$56.9
$55.7
$48.9
$36.0
$40 $35.4
$30
$45.3
$44.4
$42.8
$63.6
Investment rose in 2007 but are just
9.8% higher than what they were
nearly a decade earlier in 1998
$20
$10
07
**
06
05
*
04
03
02
01
00
99
98
97
96
95
94
$0
1Investment
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 9-month result of $47.718B.
Sources: ISO; Insurance Information Institute. Source: Insurance Information Institute
2
Overall State of the P/C Market
U.S. P/C policyholder surplus decreased $60B from 1999 through
2002 but increased $270B from 2002 through 2007.
P/C Industry Combined Ratio
Calendar Year Combined Ratio (%)
U.S. Policyholder Surplus 1999 - 2007
Surplus
600
$ Billions
500
400
300
200
100
0
1999 2000 2001 2002 2003 2004 2005 2006 2007
1999
2000
106.5
108
2001
2002
2003
2004
2005
2006
2007
2008 *
115.8
107.4
100.1
98.1
100.7
92.7
93.8
97.3
* Projected
2007/2008 (to date) Results
3
Overall State of the P/C Market
P/C Industry Net Pretax Income
100
80
40
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
-20
1986
0
1985
20
1984
$ Billions
60
-40
-60
Year
UW
Investment
Pretax Income
4
Strength of Recent Hard Markets by NWP Growth*
25%
1975-78
20%
1984-87
2001-04
2006-2010 (post-Katrina) period could
resemble 1993-97 (post-Andrew)
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
5
ROE vs. Equity Cost of Capital: US P/C Insurance:1991-2007E
The p/c insurance industry achieved its cost of capital in 2005/6 for
the first time in many years
18%
+1.7 pts
14%
6%
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
2%
0%
-2%
-0.1 pts
-13.2 pts
8%
+0.2 pts
10%
-9.0 pts
12%
+3.1 pts
16%
-4%
91
92
93
94
95
96
Source: The Geneva Association, Ins. Information Inst.
Insurance Information Institute
97
98
99
00
01
02
ROE
03
04
05
06 07E
Cost of Capital6
P/C Insurance Combined Ratio, 2001-2007E
2007 deterioration due
primarily to falling rates,
but results still strong
assuming normal CAT
activity
120
115.8
110
As recently as 2001,
insurers were paying
out nearly $1.16 for
every dollar they
earned in premiums
2006 produced the best
underwriting result
since the 87.6 combined
ratio in 1949
107.4
100.7
100.1
100
98.3
2005 figure benefited from heavy use of
reinsurance which lowered net losses
92.5
93.8
90
01
02
03
04
05
Sources: A.M. Best; ISO, III. *Actual 9-month result; Insurance Information Institute
06
07F
7
Reinsurance Marketplace
• Reinsurance markets remained stable in 2007.
• January 1, 2008 renewal rates continued in softening
mode.
• Barring any major catastrophe, soft conditions are
expected to continue throughout 2008.
• Catastrophe bond issuance has soared since the
hurricane seasons of 2004/2005.
8
US Reinsurer Net Income & ROE, 1985-2006
$12
$9.68
Reinsurer profitability has
rebounded
$0
($2)
Net Income
0%
-5%
ROE
($4)
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%
($2.98)
-10%
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, Insurance Information Institute
9
State of the Property Marketplace
• In 2007, there was significant softening of the property
marketplace with increased market competition.
• Most clients can expect favorable renewals in 2008 including
significant rate decreases, increased capacity, and improved
terms. Incumbent markets are responding to competitive
pressures to retain quality insureds.
• Insurers continue to differentiate between insureds with difficult
catastrophe exposures and those without in terms of their
underwriting aggressiveness.
• The Terrorism Risk Insurance Act (TRIA) was extended for
seven more years. Pricing and capacity are expected to remain
stable for terrorism insurance.
10
State of the Casualty Market
• Capacity
– Abundant choice of markets for most risks.
– Excess capacity has remained fairly stable since 2001
– Currently, there is approximately $2 billion of total available
capacity with about $1 billion for US risks
• Pricing
– Financial responsibility (fronting) – very competitive
– Risk transfer rates above client loss retentions for WC, GL and
Auto continue to decrease
– Underwriting scrutiny continues, especially as respects
concentration of employees in major metropolitan areas.
– Umbrella excess liability rates continued to decline throughout
2007 and into 2008.
11
Umbrella/Excess Market
Umbrella/Excess Liability Average Year Over Year Rate
Average Year Over Year Rate Change - Umbrella/Excess Liability
Change (07 vs. 06 & Jan. 07 vs. 08)
0.0
1Q07
2Q07
3Q07
4Q07
1Q08
-2.0
% Rate Change
-4.0
-6.0
-7.3
-8.0
-8.3
-8.4
-10.0
-9.6
-8.5
-9.9
-9.9
-10.8
-10.7
-11.1
-12.0
Lead
Total Program
12
Umbrella/Excess Market
Council of Insurance Agents and Brokers - Historical Umbrella Rate Changes
60.0%
50.0%
40.0%
20.0%
10.0%
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
4Q04
3Q04
2Q04
1Q04
4Q03
3Q03
2Q03
1Q03
4Q02
3Q02
2Q02
1Q02
4Q01
3Q01
2Q01
1Q01
4Q00
3Q00
2Q00
-10.0%
1Q00
0.0%
4Q99
% Change
30.0%
Data Source: Council of Insurance Agents and Brokers, CIAB market surveys and Aon estimate.
-20.0%
13
$100
$180
$169
$167
$156
$156
$144
$141
$130
$150
$129
$200
$159
$277
$265
$253
$247
$261
$246
$250
$148
Per capita “tort tax” was $825 in 2006,
up from $680 in 2000
$233
$300
$205
Tort costs consumed 1.87% of GDP in 2006,
down from 2.24% in 2003
$260
Cost of US Tort System
($ Billions)
Reducing tort costs relative to GDP by just 0.25% (to
1.84%) would produce an economic stimulus of
$31.1B
$50
Source: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends; Insurance Information Institute
09E
08E
07E
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
$0
14
State of the Casualty Market
• Loss Retentions
– In general, retentions have not retreated, however in
some cases, we are obtaining reduced retentions with
little or no cost impact.
• Coverage Issues
– Areas of concern include: silica, mold, electromagnetic
fields (EMF), bovine spongiform encephalopathy
(BSE), genetically modified food and labeling,
nutraceuticals and avian flu.
• Collateral
– Credit rating of insured impacts level of collateral
required for a “fronted” program.
15
State of the Casualty Market
• WC Pass Through Costs
- State Assessments & Surcharges
- Boards & Bureaus
- Premium taxes
- Assigned Risk Charges
- 2nd Injury Funds
- NY, GA, SC have closed
16
Med Costs Share of Total WC Costs is
Increasing Steadily
2006p
1996
Medical
59%
1986
Indemnity
52%
Indemnity
55%
Indemnity
41%
Medical
48%
Medical
45%
Source: NCCI (based on states where NCCI provides ratemaking services). Insurance Information Institute
17
Summary
• Strong P/C Industry results in 2007 with overall profitability at its
highest point since 1988.
• Underwriting results are aided by lack of CAT’s and favorable
loss trends, including tort system improvements.
• Premium growth rates are slowing considerably.
• Investment returns are insufficient to support deep soft market
in terms of price, terms & conditions.
• Major challenges:
–
–
–
–
Slow Growth Environment (Economy and market driven)
Maintaining price / underwriting discipline
Managing variability / volatility of results
Widening impact of credit crunch on major insurers / reinsurers.
Source: Insurance Information Institute
18