The Global Economy, Rising Risk
and Marine Insurance Markets
Risk and Reward in a Troubled World
San Francisco Board of Marine Underwriters
San Francisco, CA
May 1, 2014
Download at www.iii.org/presentations
Robert P. Hartwig, Ph.D., CPCU, President & Economist
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: 212.346.5520  Cell: 917.453.1885  bobh@iii.org  www.iii.org
Outlook: Property/Casualty
 Modest growth will continue in 2014 (~ 4.5% DPW)
 Exposure growth tied primarily to overall GDP growth/key sector drivers
 Rates remain in positive territory though more concern for commercial
lines in second half of the year
 Underlying loss cost trends remain manageable
 Very well capitalized
Personal Lines: Stable
Commercial Lines: Negative
Reinsurance: Stable
 For primary insurers, falling reinsurance pricing and
alternative capital are benefits
 Traditional reinsurers challenged by continued entry of
new capital and accumulation of “organic” capital
 Regulatory/Legislative concerns manageable
 TRIA, Systemic risk, FIO & general federal “intrusions”
2
Risk & Insurance
U.S. and Global Perspective
Marine Insurance Is Very Sensitive to
the Global Economic and Political
Environment
3
5 Major Categories for External Global Risks,
Uncertainties and Fears: Insurance Solutions
1. Economic Risks
2. Geopolitical Risks
3. Environmental Risks
4. Technological Risks
5. Societal Risks
While risks can
be broadly
categorized,
none are
mutually
exclusive
Source: Adapted from World Economic Forum, Global Risks 2014; Insurance Information Institute.
4
Multitude of Exogenous Factors Influence
Growth, Performance & Cyclicality
 Economic Issues in US, Europe
 Weakness in China/Emerging Economies
 Political Upheaval in the Ukraine, Middle East
 Argentina, Venezuela, Thailand
 Trade sanctions (e.g., Iran, Russia)










Political Gridlock in the US, Europe, Japan
Fiscal/Monetary Imbalances/Low Interest Rates
Unemployment
Resurgent Terrorism Risk
Cyber Attacks
Sabre Rattling (e.g., US-China, China-Japan)
Severe Natural Disaster Losses
Climate Change/Sea Level Rise
Environmental Degradation
(Over)Regulation: Systemic Risk?
Are “Black Swans”
everywhere or
does it just seem
that way?
5
Top 5 Global Risks in Terms of Impact,
2007—2014: Insurance Can Help With Most
In 2014,
economic
and
environmental
issues
dominated
severity
concerns
Concerns Over the Impacts of Economics Risks Remained High in 2014,
but Societal, Environment and Technological Risks Also Loom Large
Source: World Economic Forum, Global Risks 2014; Insurance Information Institute.
7
Gap Between Economic and Insured
Losses: 1980—2013
The gap between economic
and insured losses is
growing—suggesting both a
problem and an opportunity
Sources: Guy Carpenter, Swiss Re; Insurance Information Institute .
8
Globalization:
The Global Economy Creates
and Transmits Cycles & Risks
Globalization Is a Double Edged Sword—
Creating Opportunity and Wealth But
Potentially Creating and Amplifying Risk
Emerging vs. “Advanced” Economies
9
GDP Growth: Advanced & Emerging
Economies vs. World, 1970-2015F
GDP Growth (%)
10.0
8.0
World output is forecast to grow by
3.6% in 2014 and 3.9% in 2015. The
world economy shrank by 0.6% in
2009 amid the global financial crisis
Emerging economies (led
by China) are expected to
grow by 4.9% in 2014 and
5.3% in 2015.
6.0
4.0
2.0
(2.0)
(4.0)
Advanced economies are expected
to grow at a modest pace of 2.2% in
2014 and to 2.3% in 2015.
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
08
09
10
11
12
13F
14F
15F
0.0
Advanced economies
Emerging and developing economies
Source: International Monetary Fund, World Economic Outlook , April 2014; Insurance Information Institute.
World
7.3%
7.4%
7.8%
7.7%
2.7%
2.3%
1.7%
1.8%
2.6%
3.3%
3.0%
2.5%
2.7%
1.4%
0.2%
0.9%
1.4%
1.1%
1.5%
3.0%
2.7%
1.9%
2%
2.2%
4%
1.8%
6%
2.6%
The Eurozone
is ending
3.0%
8%
Growth in China has
outpaced the US
and Europe
4.6%
10%
US growth
should
accelerate
in 2014
9.3%
Real GDP Growth Forecasts:
Major Economies: 2011 – 2015F
-2%
US
-0.4%
-0.6%
0%
Euro Area
2011
UK
2012
2013F
Latin America
2014F
Canada
China
2015F
Growth Prospects Vary Widely by Region: Growth Returns to Most Areas
Even as China Slows; Some strengthening in Latin America
Sources: Blue Chip Economic Indicators (4/2014 issue); IMF; Insurance Information Institute.
11
Real GDP Growth Forecasts:
Selected Economies: 2011 – 2015F
Taiwan
2011
2012
Russia
2013
2014F
Brazil
Australia
3.1%
3.9%
1.4%
3.9%
3.9%
2.5%
2.6%
2.8%
2.4%
3.6%
2.4%
1.9%
2.3%
0.9%
2.7%
4.3%
3.4%
4.6%
5.4%
6.0%
4.0%
India
1.6%
1.0%
2.2%
1.3%
2.0%
3.3%
3.7%
7.7%
S. Korea
4.1%
2.8%
3.6%
3.7%
2.0%
3.6%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
Strong economies in smaller
industrialized nations will bolster
demand for products, services,
international trade and insure
Mexico
2015F
Growth Is Expected Accelerate in Most of the World in 2014 and 2015
Sources: Blue Chip Economic Indicators (4/2014 issue); Insurance Information Institute.
12
Global Industrial Production
(2000-Feb. 2012)
Global industrial
production has
been volatile but
is growing
12
Source: IMF, World Economic Outlook, April 2012; Insurance Information Institute.
13
World GDP and Industrial Production
(2005-Feb. 2015F)
Global industrial
production should continue
to rise as should exports
and imports of
manufactured goods
Source: IMF, World Economic Outlook, April 2014; Insurance Information Institute.
14
World Trade Volume: 1948—2015F
Global trade volume will
exceed $19 trillion in 2014, an
increase of nearly 160% over
the past decade
$ Billions
$25,000
$20,000
$17,930 $18,468
$19,262
$20,283
$15,000
$10,000
$7,380
$3,676
$5,000
$59
$84
$157
$579
1948
1953
1963
1973
$1,838
$0
1983
1993
2003
2012 2013E 2014F 2015F
Insurance Regulation Will Necessarily Become More Transnational,
Following Patterns of Global Economic Growth, the Creation of New
Insurable Exposures and International Capital Flows
Sources: World Trade Organization data through 2012 from International Trade Statistics 2013; Insurance Information Institute
estimates and forecasts for 2013-2015 based on IMF World Economic Outlook forecasts as of April 2014.
15
World Trade Volume Growth*,
2012 – 2015F
World trade volume growth is
expected to accelerate modestly
through 2015—translating into
$2.25 trillion in net trade growth
6%
5.3%
5%
4.3%
4%
3%
2.8%
3.0%
2%
1%
0%
2013
2014F
2015F
*Goods and services.
Source: International Monetary Fund, World Economic Outlook , April 2014; Insurance Information Institute.
2016F
16
World Trade Volume: IMPORTS
2010 – 2015F
Growth (%)
Advanced Economies
Emerging Economies
18%
16%
14%
12%
11.5%
Import growth in Advanced
Economies is expected to
accelerate in 2014
15.3%
10%
Import growth in emerging
economies outpaces
Advanced Economies by a
wide margin but will slow in
2014
8.8%
8%
6%
4.3%
3.5%
4%
2%
5.6%
2012
2013 2014F 2015F
4.5%
1.1%
1.4%
2012
2013 2014F 2015F
6.3%
5.8%
5.2%
0%
2010
2011
2010
Sources: IMF World Economic Outlook (April 2014 ); Insurance Information Institute.
2011
17
World Trade Volume: EXPORTS
2010 – 2015F
Growth (%)
Advanced Economies
16%
14%
Export growth in
advanced economies
should accelerate in 2014
12.2%
12%
Emerging Economies
14.7%
Export growth in
emerging economies has
decelerated sharply
10%
8%
6.7%
5.3%
6%
4.2%
4%
4.8%
2.1%
2.3%
2012
2013 2014F 2015F
6.2%
5.0%
4.2%
4.4%
2012
2013 2014F 2015F
2%
0%
2010
2011
2010
Sources: IMF World Economic Outlook (April 2014); Insurance Information Institute.
2011
18
Country Shares of World
Merchandise Exports
The US, China, Japan and Western Europe lead the
world in merchandise exports
Source: World Trade Organization accessed 4/30/14 at: http://www.wto.org/english/res_e/statis_e/statis_e.htm ; Insurance
Information Institute.
19
Potential Output of Total Economy: US,
China, India, Indonesia and Japan, 2000-2060F
$ 2005 PPP
Growth in economic
output will be
concentrated in certain
developing economies
such as China and India
China will likely
become the
world’s largest
economy between
2025 and 2030
Source: OECD; Insurance Information Institute .
20
Ocean Marine Overview
Vessel Losses Have Dropped though
Underwriting Performance Remains
Volatile
21
Ferry Sewol Sinking in South Korea Is One of
the Greatest Maritime Tragedies in Recent History
The Sewol and Costa
Concordia disasters
will impact risk
management in the
maritime sector
22
Total Vessel Losses by Top 10 Regions:
2002 – 2013
S. China, Indo China,
Indonesia and the Philippines
was the region that saw the
most losses (296) from 2002
through 2013. The U.S.
eastern seaboard dropped of
the list as there were no total
losses last year.
Total Vessel Losses
296
215
207
417
50
Others
51
Bay of
Bengal
51
West Indies
73
W. Medit.
82
W. Africa
Coast
Arabian Gulf
&
Approaches
British Isles,
N. Sea, Eng.
Channel,
Japan,
Korea and
N. China
E. Medit.,
Black Sea
96
E. Africa
Coast
135
S. China,
Indo China,
Indonesia &
450
400
350
300
250
200
150
100
50
0
There were 1,673 total vessel losses from 2002 through 2013. The top 10
regions account for about 75% of all total losses
Sources: Lloyd’s List Intelligence Casualty Statistics as published in Safety and Shipping Review 2014, Allianz Global
Corporate and Specialty; Insurance Information Institute.
23
Country Shares of World
Merchandise Exports
Asia accounts for the
largest share of total
losses, followed by
the Middle East and
E. Mediterranean
Sources: Lloyd’s List Intelligence Casualty Statistics as published in Safety and Shipping Review 2014, Allianz Global
Corporate and Specialty; Insurance Information Institute.
24
Total Vessel Losses by Year: 2002 – 2013
Total losses have declined
by nearly 46% over the
past 11 years
Total Vessel Losses
200
180
160
140
120
100
80
60
40
20
0
173
174
170
152
151
154
150
128
121
117
94
89
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
While total vessel losses are down sharply over the past decade, the
question is whether this trend will continue
Sources: Lloyd’s List Intelligence Casualty Service as published in Safety and Shipping Review 2014, Allianz Global Corporate
and Specialty; Insurance Information Institute.
25
Total Vessel Losses by Top 10 Regions:
2013
S. China, Indo China,
Indonesia and the
Philippines was the region
that saw the most losses
(18) in 2013, but this was
down from 29 in 2012
Total Vessel Losses
17
3
3
3
Others
4
W. Medit.
5
British Isles,
N. Sea, Eng.
Channel,
Bay of
Canadian
Arctic,
Alaska
Arabian Gulf
&
Approaches
W. Africa
Coast
6
E. Medit.,
Black Sea
18
8
E. Africa
Coast
9
Bay of
Bengal
18
S. China,
Indo China,
Indonesia &
Philippines
Japan,
Korea, N.
China
20
18
16
14
12
10
8
6
4
2
0
There were 94 total vessel losses in 2013—about 8 per month
Sources: Lloyd’s List Intelligence Casualty Statistics as published in Safety and Shipping Review 2014, Allianz Global
Corporate and Specialty; Insurance Information Institute.
26
Total Losses by Type of Vessel: 2013
Cargo vessels accounted
for more than 1/3 of 94 total
vessel losses in 2013
32
14
6
ly
/
O
ffs
h
g
or
e
ff
on
/R
ol
lR
Su
pp
ng
ss
e
2
ol
l-o
er
er
er
y
2
Fi
sh
on
ta
i
C
al
/P
6
C
he
m
ic
ne
r
t
ro
du
c
ar
go
C
ul
k
B
ar
ge
B
6
4
3
Pa
7
Tu
12
O
th
35
30
25
20
15
10
5
0
Sources: Lloyd’s List Intelligence Casualty Statistics as published in Safety and Shipping Review 2014, Allianz Global
Corporate and Specialty; Insurance Information Institute.
27
Causes of Total Losses: 2002 – 2013
745
312
109
30
Wrecked/stranded
(aground)
Piracy
6
Machinery
damage/Failure
7
Missing/Overdue
Fire/Explosion
Foundered (sunk,
submerged)
Contact (e.g.,
harbor wall)
20
Hull damage
(holed, cracked,
etc.)
85
Sources: Lloyd’s List Intelligence Casualty Statistics as published in Safety and Shipping Review 2014, Allianz Global
Corporate and Specialty; Insurance Information Institute.
Miscellaneous
199
160
Collision
(involving
vessels)
800
700
600
500
400
300
200
100
0
Foundered vessels
accounted for 45% of the
1,673 total vessel losses
from 2002-2103
28
Global Insurance Premium
Growth Trends
Growth Is Uneven Across Regions
and Market Segments
29
Distribution of Nonlife Premium:
Industrialized vs. Emerging Markets, 2012
2012, $Billions
Premium Growth Facts
 Emerging market’s share of
nonlife premiums increased to
17.3% in 2012 from 14.3% in
2009. The share of premiums
written in the $2 trillion global
nonlife market remains much
larger (82.7%) but continues to
shrink.
Industrialized
Economies
$1, 647.5
 The financial crisis and sluggish
recovery in the major insurance
markets will accelerate the
expansion of the emerging
market sector
82.7%
17.3%
Emerging
Markets
$344.1
Developing markets now
account for about 40% of
global GDP but just 17.3% of
nonlife premiums
Sources: Swiss Re sigma No.3/2013; Insurance Information Institute research.
31
World
N.
America
Latin
America
Life
Non-Life
Total
13.0%
10.5%
13.8%
-1.0%
-0.1%
3.9%
4.8%
4.2%
1.9%
13.0%
8.1%
8.8%
5.8%
4.9%
W.
Central & Advanced Emerging
Europe E. Europe Asia
Asia
Middle
East &
Central
Asia
Africa
-4.9%
-10%
Growth in Advanced Asia
(incl. China) markets was
third highest in 2012
-0.4%
-5%
-2.0%
-3.1%
0%
4.8%
5.1%
Latin America
growth was
the strongest
in 2012
-0.4%
1.8%
1.7%
2.0%
2.4%
5%
2.6%
10%
2.3%
15%
11.7%
20%
7.8%
16.8%
Premium Growth by Region, 2012
Oceania
Global Premium Volume Totaled $4.613 Trillion in 2012, up 2.4% from
$4.566 Trillion in 2011. Global Growth Was Weighed Down by Slow Growth
in N. America and W. Europe and Partially Offset by Emerging Markets
Source: Swiss Re, sigma, No. 3/2013.
32
Non-Life Insurance: Global Real (Inflation
Adjusted) Premium Growth, 2012
Real growth in nonlife insurance
premiums was faster
in China than the US
Market
Life
Non-Life
Total
Advanced
1.8
1.5
1.7
Emerging
4.9
8.6
6.8
World
2.3
2.6
2.4
Source: Swiss Re, sigma, No. 3/2013.
33
Global Real (Inflation Adjusted) Nonlife
Premium Growth: 1980-2010
Average: 1980-2010
Real growth rates
Industrialized Countries: 3.8%
Emerging Markets: 9.2%
20%
Overall Total: 4.2%
Nonlife premium growth in
emerging markets has
exceeded that of
industrialized countries in
27 of the past 31 years,
including the entirety of the
global financial crisis..
15%
10%
5%
0%
-10%
Real nonlife premium growth is very erratic in
part to inflation volatility in emerging markets as
well as a lack of consistent cyclicality
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
2007
2008
2009
2010
-5%
Total
Source: Swiss Re, sigma, No. 2/2010.
Industrialised countries
Emerging markets
34
Gap Between GDP Growth and Reinsurance
Limit in Asia-Pacific Region: 2004—2013
The gap between GDP and
reinsurance limit in Asia is
growing—suggesting the
region is “under-reinsured”
Sources: Guy Carpenter, World Bank, IMF; Insurance Information Institute .
36
The Unfortunate Nexus:
Opportunity, Risk & Instability
Most of the Global Economy’s Future
Gains Will be Fraught with Much
Greater Risk and Uncertainty than in
the Past
41
Political Risk in 2013: Greatest Business
Opportunities Are Often in Risky Nations
Problems in the
Ukraine will
intensify
political risk in
several former
Soviet republics
Latin and South
America also present
insurers with growth
opportunities but
political instability has
increased markedly
The fastest growing
markets are generally also
among the politically
riskiest, including East and
South Asia and Africa
Source: Aon PLC; Insurance Information Institute.
42
Terrorism Risk in 2013: Greatest Business
Opportunities Are Often in Risky Nations
Latin and South
America have modest
terrorist threats though
Brazil is elevated
Terrorism remains a
greater concern in
the Middle East,
Africa and South Asia
Source: Aon PLC; Insurance Information Institute.
43
P/C (Re)Insurance Industry
Financial Overview
2013: Best Year in the
Post-Crisis Era
Performance Improved with
Lower CATs, Strong Markets
44
$63,784
$35,074
$19,456
$3,043
$28,672
$35,204
$62,496
Net income in
2013 was up
substantially
(+81.9%) from
2012
$44,155
$38,501
$30,029
$20,559
$20,598
$10,870
$3,046
$10,000
$19,316
$20,000
$5,840
$30,000
$14,178
$40,000
$21,865
$50,000
$30,773
$60,000
2013 ROAS
was 10.3%
$36,819
$70,000
2005 ROE*= 9.6%
2006 ROE = 12.7%
2007 ROE = 10.9%
2008 ROE = 0.1%
2009 ROE = 5.0%
2010 ROE = 6.6%
2011 ROAS1 = 3.5%
2012 ROAS1 = 6.1%
2013 ROAS1 = 10.3%
$24,404
$80,000









$65,777
P/C Net Income After Taxes
1991–2013 ($ Millions)
$0
-$10,000
-$6,970
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
•ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 9.8% ROAS in 2013,
6.3% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.
Sources: A.M. Best, ISO, Insurance Information Institute
13
Profitability Peaks & Troughs in the P/C
Insurance Industry, 1975 – 2013*
ROE
History suggests next ROE
peak will be in 2016-2017
25%
1977:19.0%
1987:17.3%
20%
2006:12.7%
1997:11.6%
2013:
9.8 %
15%
9 Years
10%
5%
2011:
4.7%
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
07
08
09
10
11
12
13
-5%
*Profitability = P/C insurer ROEs. 2011-13 figures are estimates based on ROAS data. Note: Data for 2008-2013 exclude
mortgage and financial guaranty insurers.
Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
A 100 Combined Ratio Isn’t What It
Once Was: Investment Impact on ROEs
Combined Ratio / ROE
15.9%
110
A combined ratio of about 100 generates an
ROE of ~7.0% in 2012, ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
106.5
14.3%
12.7%
105
100.6 100.1 100.8
100
10.9%
101.2
99.5
15%
102.4
101.0
12%
97.5
96.7
95.7
95
8.8%
9.6%
7.4%
92.7
7.9%
6.2%
9.8%
4.7%
90
4.3%
85
18%
9%
6%
Lower CATs
helped ROEs
in 2013
3%
0%
80
1978
1979
2003
2005
2006
2007
Combined Ratio
2008
2009
2010
2011
2012
2013
ROE*
Combined Ratios Must Be Lower in Today’s Depressed
Investment Environment to Generate Risk Appropriate ROEs
* 2008 -2013 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2013 combined ratio
including M&FG insurers is 96.1; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%.
Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.
ROE: Property/Casualty Insurance vs.
Fortune 500, 1987–2013E*
(Percent)
P/C Profitability Is Both by
Cyclicality and Ordinary Volatility
20%
Katrina,
Rita, Wilma
15%
Low
CATs
10%
Sept. 11
5%
0%
Hugo
Lowest CAT
Losses in
15 Years
Andrew
Northridge
4 Hurricanes
Financial
Crisis*
Sandy
Record
Tornado
Losses
-5%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13E
* Excludes Mortgage & Financial Guarantee in 2008 – 2013. 2013 Fortune 500 figure is I.I.I. estimate.
Sources: ISO, Fortune; Insurance Information Institute.
48
Net Premium Growth: Annual Change,
1971—2014F
(Percent)
1975-78
1984-87
25%
2000-03
Net Written Premiums Fell
0.7% in 2007 (First Decline
Since 1943) by 2.0% in 2008,
and 4.2% in 2009, the First 3Year Decline Since 1930-33.
20%
2014F: 4.0%
15%
2013: 4.6%
2012: +4.3%
10%
5%
0%
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
08
09
10
11
12
13
14
-5%
Shaded areas denote “hard market” periods
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
51
3.4%
3.7%
6.2%
7.0%
6.0%
6.1%
5.8%
5.1%
5.1%
3.2%
3.6%
4.1%
4.7%
3.9%
4.4%
4.1%
4.4%
3.9%
4%
4.3%
5%
4.0%
6%
4.4%
7%
5.5%
8%
6.0%
9%
5.6%
10%
8.6%
P/C growth is expected
to remain fairly stable
through 2015
7.5%
(Percent)
8.0%
Growth in Direct Written Premium by
Line, 2013-2015F*
3%
2%
1%
0%
All Lines
Personal
Lines
Commercial
Lines
Personal Homeowners Commercial
Auto
Auto
2013F
Source: Conning.
2014F
WC
CMP
GL
2015F
52
Average Commercial Rate Change,
All Lines, (1Q:2004–4Q:2013)
(Percent)
4%
-1%
-6%
-11%
-16%
-0.1%
-3.2%
-5.9%
-7.0%
-9.4%
-9.7%
-8.2%
-4.6%
-2.7%
-3.0%
-5.3%
-9.6%
-11.3%
-11.8%
-13.3%
-12.0%
-13.5%
-12.9%
-11.0%
-6.4%
-5.1%
-4.9%
-5.8%
-5.6%
-5.3%
-6.4%
-5.2%
-5.4%
-2.9%
-0.1%
0.9%
2.7%
4.4%
4.3%
3.9%
5.0%
5.2%
4.3%
3.4%
2.1%
9%
Pricing as of Q4:2013 was
positive for the 10th consecutive
quarter. Gains are likely to
continue into 2014.
Q2 2011 marked the
last of 30th
consecutive quarter
of price declines
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
KRW Effect
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
53
P/C UNDERWRITING
Underwriting Losses in 2013
Much Improved After High
Catastrophe Losses in 2011/12
54
P/C Insurance Industry
Combined Ratio, 2001–2013*
As Recently as 2001,
Insurers Paid Out
Nearly $1.16 for Every
$1 in Earned
Premiums
Heavy Use of
Reinsurance
Lowered Net
Losses
Relatively
Low CAT
Losses,
Reserve
Releases
Relatively
Low CAT
Losses,
Reserve
Releases
120
115.8
110
Best
Combined
Ratio Since
1949 (87.6)
Cyclical
Deterioration
Higher
CAT
Losses,
Shrinking
Reserve
Releases,
Toll of Soft
Market
Avg. CAT
Losses,
More
Reserve
Releases
107.5
Sandy
Impacts
Lower
CAT
Losses
106.3
101.0
100.8
100.1
99.3
98.4
100
102.4
100.8
96.7
95.7
92.6
90
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2;
2013: = 96.1.
Sources: A.M. Best, ISO.
55
Ocean Marine vs. Commercial Lines
Combined Ratio: 1989–2012
90
103.6
104.2
98.9
96.4
102.4
100.8
107.9
108.9
103.4
91.0
113.7
93.6
98.7
110.2
104.1
102.0
97.2
102.5
118.4
122.3
119.4
118.8
107.6
102.0
104.1
110.4
109.7
115.5
112.3
107.2
111.1
102.2
110.2
105.4
91.1
95
100.0
100
89.6
105
92.4
110
All Commercial Lines
109.5
109.5
107.9
112.5
115
110.2
120
97.3
125
114.2
108.7
118.2
109.4
Ocean Marine
Average: 1989-2012
Ocean Marine: 104.9
All Commercial Lines: 107.0
85
80
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Ocean Marine has marginally outperformed Commercial Lines
overall over the period from 1989 – 2012
Sources: A.M. Best; Insurance Information Institute.
56
Combined Ratios by Predominant Business
Segment, 2013 vs. 2012*
The combined ratios for
both personal and
commercial lines improved
substantially in 2013
(Percent)
106
104
2012
2013
104.8
102.3
102.3
101.1
102
100
98
98.7
97.6
96.7
96
94.3
94
92
90
All Lines
Personal Lines
Predominating
*Excludes mortgage and financial guaranty insurers.
Source: ISO/PCI; Insurance Information Institute
Commercial Lines
Predominating
Diversified Insurers
59
Some Key Drivers in the
US Economy
Economic Factors Driving
Exposure Growth and
Insurer Performance
62
US Real GDP Growth*
-7%
5.0%
-0.3%
The remainder of 2014
into 2015 are expected
to see a modest
acceleration in growth
-8.9%
2000
2001
2002
2003
2004
2005
2006
07:1Q
07:2Q
07:3Q
07:4Q
08:1Q
08:2Q
08:3Q
08:4Q
09:1Q
09:2Q
09:3Q
09:4Q
10:1Q
10:2Q
10:3Q
10:4Q
11:1Q
11:2Q
11:3Q
11:4Q
12:1Q
12:2Q
12:3Q
12:4Q
13:1Q
13:2Q
13:3Q
13:4Q
14:1Q
14:2Q
14:3Q
14:4Q
15:1Q
15:2Q
15:3Q
15:4Q
-9%
-5.3%
-5%
Recession began in
Dec. 2007. Economic
toll of credit crunch,
housing slump, labor
market contraction
was severe
-3.7%
-3%
-1.8%
-1%
2.3%
2.2%
2.6%
2.4%
0.1%
2.5%
1.3%
4.1%
2.0%
1.3%
3.1%
0.4%
1.1%
2.5%
4.1%
2.4%
0.1%
3.0%
3.0%
3.1%
3.0%
3.0%
3.0%
2.9%
1%
1.4%
3%
1.3%
5%
The Q4:2008 decline was
the steepest since the
Q1:1982 drop of 6.8%
1.1%
1.8%
2.5%
3.6%
3.1%
2.7%
0.5%
3.6%
3.0%
1.7%
7%
4.1%
Real GDP Growth (%)
Demand for Insurance Should Increase in 2014/15 as GDP Growth
Accelerates Modestly and Gradually Benefits the Economy Broadly
*
Estimates/Forecasts from Blue Chip Economic Indicators.
Source: US Department of Commerce, Blue Economic Indicators 4/14; Insurance Information Institute.
63
Unemployment and Underemployment
Rates: Still Too High, But Falling
January 2000 through March 2014,
Seasonally Adjusted (%)
18
"Headline" Unemployment Rate U-3
16
Unemployment + Underemployment Rate
U-6
U-6 went from
8.0% in March
2007 to 17.5% in
October 2009;
Stood at 12.7%
in Mar. 2014.
8% to 10% is
“normal.”
14
12
10
8
6
4
As the unemployment
rate approaches 6%,
the Fed will begin
signaling on shortterm rates
2
“Headline”
unemployment
was 6.7% in
March 2014. 4%
to 6% is
“normal.”
Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Stubbornly high unemployment and underemployment constrain overall
economic growth, but the job market is now clearly improving.
Source: US Bureau of Labor Statistics; Insurance Information Institute.
64
US Unemployment Rate Forecast
2007:Q1 to 2015:Q4F*
8%
7%
6%
5%
Unemployment
peaked at 10%
in late 2009.
9.3%
9.6%
10.0%
9.7%
9.6%
9.6%
9.6%
8.9%
9.1%
9.1%
8.7%
8.3%
8.2%
8.0%
7.8%
7.7%
7.6%
7.3%
7.0%
6.7%
6.5%
6.4%
6.2%
6.1%
6.0%
5.9%
5.8%
9%
Jobless figures
have been revised
slightly downwards
for 2014/15
8.1%
10%
4.5%
4.5%
4.6%
4.8%
4.9%
5.4%
6.1%
6.9%
11%
Rising
unemployment
eroded
payrolls
and WC’s
exposure base.
Unemployment forecasts
have been revised slightly
downwards. Optimistic
scenarios put the
unemployment as low as
6.0% by Q4 of this year.
07:Q1
07:Q2
07:Q3
07:Q4
08:Q1
08:Q2
08:Q3
08:Q4
09:Q1
09:Q2
09:Q3
09:Q4
10:Q1
10:Q2
10:Q3
10:Q4
11:Q1
11:Q2
11:Q3
11:Q4
12:Q1
12:Q2
12:Q3
12:Q4
13:Q1
13:Q2
13:Q3
13:Q4
14:Q1
14:Q2
14:Q3
14:Q4
15:Q1
15:Q2
15:Q3
15:Q4
4%
*
= actual;
= forecasts
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (4/14 edition); Insurance Information Institute.
65
Value of New Private Construction:
Residential & Nonresidential, 2003-2013*
Billions of Dollars
New Construction peaks
at $911.8. in 2006
Trough in 2010
at $500.6B,
after plunging
55.1% ($411.2B)
$1,000
$900
$800
$15.0
2013: Value of new
pvt. construction
hits $667.5B, up
33% from the 2010
trough but still
27% below 2006
peak
$613.7
$700
$600
$500
$311.5
$298.1
$400
$300
$261.8
Non Residential
Residential
$200
$100
$356.0
$238.8
$0
03
04
05
06
07
08
09
10
11
12
13*
Private Construction Activity Is Moving in a Positive Direction though
Remains Well Below Pre-Crisis Peak; Residential Dominates
*2013 figure is a seasonally adjusted annual rate as of December.
Sources: US Department of Commerce; Insurance Information Institute.
66
Dollar Value* of Manufacturers’
Shipments Monthly, Jan. 1992—Dec. 2013
$ Millions
$500,000
The value of Manufacturing
Shipments in Dec. 2013 was
$492.7B—a near record high.
$400,000
$300,000
Ja
n92
Ja
n93
Ja
n94
Ja
n95
Ja
n96
Ja
n97
Ja
n98
Ja
n99
Ja
n00
Ja
n
01
Ja
n
0
Ja 2
n
03
Ja
n
04
Ja
n
05
Ja
n
06
Ja
n
07
Ja
n
08
Ja
n
09
Ja
n
10
Ja
n
1
12 1
-J
an
13
-J
an
$200,000
Monthly shipments in Dec. 2013 exceeded the pre-crisis (July 2008) peak.
Manufacturing is energy-intensive and growth leads to gains in many commercial
exposures: WC, Commercial Auto, Marine, Property, and various Liability Coverages.
*seasonally adjusted; Dec. 2013 is preliminary; data published February 4, 2014.
Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/ 69
Manufacturing Growth for Selected
Sectors, 2013 vs. 2012*
Growth (%)
Non-Durables: +0.2%
Durables: +3.4%
14.0%
8.1%
Manufacturing of durable
goods was especially
strong in 2012 but
weakened in 2013
3.0%
0.2%
0.0%
Textile
Products
Food
Products
Non-Durable
Mfg.
Transportation
Equip.
Computers &
Electronics
Electrical
Equip.
Machinery
Fabricated
Metals
Primary
Metals
Plastics &
Rubber
-0.5%
-1.8%
-3.4%
Wood
Products
6.9%
3.1%
2.7%
Chemical
0.4% 1.3%
Petroleum &
Coal
3.1%
Durable Mfg.
All
Manufacturing
16%
14%
12%
10%
8%
6%
4% 1.7%
2%
0%
-2%
-4%
-6%
Manufacturing Is Expanding—Albeit Slowly—Across a Number of Sectors that
Will Contribute to Growth in Insurable Exposures Including: WC, Commercial
Property, Commercial Auto and Many Liability Coverages
*Seasonally adjusted; Date are YTD comparing data through November 2013 to the same period in 2012.
Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/ 70
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
2/30/2
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
12,250
12,000
11,750
11,500
11,460
11,460
11,466
11,497
11,531
11,539
11,558
11,548
11,554
11,555
11,577
11,590
11,624
11,662
11,682
11,707
11,715
11,724
11,747
11,760
11,762
11,770
11,769
11,797
11,841
11,870
11,910
11,920
11,926
11,935
11,957
11,943
11,925
11,931
11,938
11,951
11,965
11,988
11,984
11,977
11,972
11,965
11,948
11,963
11,993
12,011
12,046
12,053
12,061
12,080
12,079
Manufacturing Employment,
Jan. 2010—March 2014*
(Thousands)
Since Jan 2010,
manufacturing employment
is up (+619,000 or +5.4%)
and still growing.
11,250
Manufacturing employment is a surprising source of strength in the
economy. Employment in the sector is at a multi-year high.
*Seasonally adjusted; Feb. and Mar. 2014 are preliminary
Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
71
Business Investment: Expected to Accelerate,
Fueling Commercial Exposure Growth
Accelerating business investment
will be a potent driver of
commercial property and liability
insurance exposures and should
drive employment and WC payroll
exposures as well (with a lag)
9%
8%
7.8%
6.3%
7%
6%
4.9%
5%
4%
3%
2.5%
2%
1%
0%
2013
2014F
2015F
Source: IHS Global Insights as of Jan. 13, 2014; Insurance Information Institute.
2016F
72
12 Industries for the Next 10 Years:
Insurance Solutions Needed
Health Care
Health Sciences
Energy (Traditional)
Alternative Energy
Petrochemical
Agriculture
Natural Resources
Technology (incl. Biotechnology)
Many
industries are
poised for
growth,
though
insurers’
ability to
capitalize on
these
industries
varies widely
Light Manufacturing
Insourced Manufacturing
Export-Oriented Industries
Shipping (Rail, Marine, Trucking, Pipelines)
73
U.S. Natural Has Imports and Exports,
1990 - 2040
Trillions of Cubic Feet
The US is now
the largest gas
producer in the
world, though
Russia is the
largest exporter.
The US needs to
invest in its
pipeline and
LNG
infrastructure
and expedite
regulatory
approval to
realize its full
export potential
Sources: US Energy Information Administration, Annual Energy Outlook 2014 Early Release Overview; ;Insurance Information Institute.
74
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
2/30/2
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
220
210
200
190
180
170
160
156.4
156.4
156.7
157.6
158.7
157.8
158.0
159.5
160.0
161.5
161.2
161.2
163.1
164.4
166.6
169.3
170.1
171.0
172.5
173.6
176.3
178.2
178.5
180.9
181.9
183.1
184.8
185.2
185.7
186.8
187.6
188.0
188.0
188.2
190.0
191.7
191.9
193.4
192.4
192.6
193.1
193.3
195.0
196.5
199.7
200.6
203.0
204.1
205.3
207.7
208.1
Oil & Gas Extraction Employment,
Jan. 2010—March 2014*
(Thousands)
Oil and gas extraction employment
is up 33.1% since Jan. 2010 as the
energy sector booms. Domestic
energy production is essential to
any robust economic recovery in
the US.
*Seasonally adjusted
Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
Highest
since Aug.
1986
150
78
CYBER RISK
Cyber Risk is a Rapidly Emerging
Exposure for Businesses Large
and Small in Every Industry
NEW III White Paper:
http://www.iii.org/assets/docs/pdf/paper_CyberRisk_2013.pdf
79
Data Breaches 2005-2013, by Number of
Breaches and Records Exposed
# Data Breaches/Millions of Records Exposed
700
656
222.5
Millions
662
619
220
200
600
180
498
500
160
446
127.7
419
447
400
300
140
87.9
66.9
321
157
100
80
35.7
200
120
60
16.2
19.1
22.9
40
17.3
20
100
0
2005
2006
2007
2008
# Data Breaches
2009
2010
2011
2012
2013*
# Records Exposed (Millions)
The Total Number of Data Breaches (+38%) and Number of Records
Exposed (+408%) in 2013 Soared
* 2013 figures as of Jan. 1, 2014 from the ITRC updated to an additional 30 million records breached (Target) as disclosed in Jan. 2014.
Source: Identity Theft Resource Center.
U.S. Insured Catastrophe
Loss Update
2013 Was a Welcome Respite from the
High Catastrophe Losses in Recent Years
87
U.S. Insured Catastrophe Losses
$73.4
($ Billions, $ 2012)
$33.6
$35.0
$12.9
$7.5
$10.5
$29.2
$33.7
$16.3
$7.6
$6.1
$11.6
$14.3
$3.8
$11.0
$12.6
$8.8
$10
$8.0
$20
$4.8
$30
$14.0
$40
$26.4
$37.8
$50
$34.7
$60
$14.4
$70
2012 was the third
most expensive year
ever for insured CAT
losses
$11.5
$80
$0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13*
2012 Was the 3rd Highest Year on Record for Insured
Losses in U.S. History on an Inflation-Adj. Basis. 2011
Losses Were the 6th Highest. YTD 2013 Running Well
Below 2011 and 2012 YTD Totals.
Record tornado
losses caused
2011 CAT losses
to surge
*Through 12/31/13.
Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property
claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.)
Sources: Property Claims Service/ISO; Insurance Information Institute.
88
88
Combined Ratio Points Associated with
Catastrophe Losses: 1960 – 2013*
8.7
8.9
8.1
3.4
3.4
2012
2010
2008
2006
1.6
2.6
2.7
3.3
3.3
1.6
2002
2004
1.6
2000
1.0
1998
1996
5.0
5.4
3.6
2.9
3.3
2.8
2.3
2.1
1990
1992
1.2
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1.2
0.4
0.8
1.3
0.3
0.4
0.7
1.5
1.0
0.4
0.4
0.7
1.8
1.1
0.6
1.4
2.0
1.3
2.0
0.5
0.5
0.7
1968
1966
3.0
3.6
0.4
1964
1962
0.8
1.1
1.1
0.1
0.9
1960
1
0
5.9
1960s: 1.04
1970s: 0.85
1980s: 1.31
1990s: 3.39
2000s: 3.52
2010s: 6.1E*
8
7
3
2
8.8
10
9
6
5
4
Catastrophe losses as a
share of all losses reached
a record high in 2012
Avg. CAT Loss
Component of the
Combined Ratio
by Decade
1994
Combined Ratio Points
The Catastrophe Loss Component of Private Insurer Losses Has
Increased Sharply in Recent Decades
*2010s represent 2010-2013.
Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for
losses ultimately paid by foreign insurers and reinsurers.
Source: ISO (1960-2011); A.M. Best (2012E) Insurance Information Institute.
89
Top 10 States for Insured
Catastrophe Losses, 2013
$ Millions
$1,995
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
Oklahoma let the
country in insured
CAT losses in 2013
$1,509
$1,190
$909
$907
$677
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sk
a
$762
$593
Lo
ui
si
an
a
M
Source: The Property Claim Services (PCS) unit of ISO, a Verisk Analytics company.
$773
N
is
si
ss
ip
pi
do
ol
or
a
C
Ill
in
oi
s
Te
xa
s
in
ne
so
ta
M
O
kl
ah
om
a
$805
90
Top 5 States by Insured Catastrophe
Losses in 2012*
(2012, $ Billions)
$12,000
$10,000
NY and NJ let the US
in CAT losses in
2012 due Sandy
$9,756
$8,000
$6,369
$6,000
$4,000
$2,318
$2,000
$1,511
$1,440
$0
New York
New Jersey
*Includes catastrophe losses of at least $25 million.
Sources: PCS unit of ISO; Insurance Information Institute.
Texas
Kentucky
Colorado
91
Inflation Adjusted U.S. Catastrophe
Losses by Cause of Loss, 1993–20121
Wind/Hail/Flood (3), $14.9
Fires (4), $6.5
Other (5), $0.2
1.7%
Geological Events, $18.4
4.7% 3.8%0.1%
Terrorism, $24.8
6.3%
Winter Storms, $27.8
7.1%
Tornado share of
CAT losses is
rising
Tornadoes (2), $140.9
Insured cat losses
from 1993-2012
totaled $391.7B, an
average of $19.6B
per year or $1.6B
per month
40.4%
Hurricanes & Tropical Storms,
$158.2
36.0%
Wind losses are by
far cause the most
catastrophe losses,
even if hurricanes/TS
are excluded.
1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2012 dollars.
2. Excludes snow.
3. Does not include NFIP flood losses
4. Includes wildland fires
5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.
Source: ISO’s Property Claim Services Unit.
93
Top 16 Most Costly Disasters
in U.S. History
(Insured Losses, 2012 Dollars, $ Billions)
Hurricane Sandy
became the 5th
costliest event in US
insurance history
$60
$50
$48.7
$40
$30
Includes
Tuscaloosa, AL,
tornado
Includes
Joplin, MO,
tornado
$23.9 $24.6 $25.6
$18.8
$20
$10
$0
$9.2 $11.1
$8.7
$7.8
$7.5
$7.1
$6.7
$4.4 $5.6 $5.6
Irene (2011) Jeanne
(2004)
Frances
(2004)
Rita
Tornadoes/Tornadoes/ Hugo
(2005) T-Storms T-Storms
(1989)
(2011)
(2011)
Hurricane Irene became the
12th most expense hurricane
in US history in 2011
Ivan
(2004)
Charley
(2004)
Wilma
(2005)
$13.4
Ike
(2008)
Sandy* Northridge9/11 Attack Andrew
(2012)
(1994)
(2001)
(1992)
Katrina
(2005)
12 of the 16 Most Expensive
Events in US History Have
Occurred Over the Past Decade
*PCS estimate as of 4/12/13.
Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.
94
Top 16 Most Costly World Insurance
Losses, 1970-2013*
(Insured Losses, 2012 Dollars, $ Billions)
2012 insured CAT Losses totaled
$60B; Economic losses totaled
$140B, according to Swiss Re
$60
$50
$40
$30
$20
$10
5 of the top 14 most
expensive catastrophes in
world history have occurred
within the past 3 years
(2010-2012)
$48.7
Hurricane Sandy is now the
6th costliest event in global
insurance history
$11.1 $13.4 $13.4
$9.6
$9.2
$8.7
$8.5
$8.1
$7.8
$38.6
$23.9 $24.6 $25.6
$18.8
$13.4
$0
Hugo
(1989)
Winter
Storm
Daria
(1991)
Chile
Quake
(2010)
Ivan
Charley Typhoon Wilma Thailand New Ike
Sandy Northridge WTC
(2004) (2004) Mirielle (2005) Floods Zealand (2008) (2012)** (1994) Terror
(1991)
(2011) Quake
Attack
(2011)
(2001)
*Figures do not include federally insured flood losses.
**Estimate based on PCS value of $18.75B as of 4/12/13.
Sources: Munich Re; Swiss Re; Insurance Information Institute research.
Andrew Japan Katrina
(1992) Quake, (2005)
Tsunami
(2011)**
95
Natural Disasters in the United States,
1980 – 2013
Number of Events (Annual Totals 1980 – 2013)
250
There were 128 natural
disaster events in 2013
Number
200
150
100
22
50
19
81
6
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Geophysical
(earthquake, tsunami,
volcanic activity)
Source: MR NatCatSERVICE
Meteorological (storm)
Hydrological
(flood, mass movement)
Climatological
(temperature extremes,
drought, wildfire)
106
Losses Due to Natural Disasters in the US,
1980–2013
(2013 Dollars, $ Billions)
200
150
(Overall and Insured Losses)
2013 losses were far
below 2011 and 2012
and were 44% lower
than the average from
2000-2012
Indicates a great
deal of losses are
uninsured (~40%50% in the US) =
Growth
Opportunity
2013 CAT Losses
Overall : $21.8B
Insured: $12.8B
100
50
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Overall losses (in 2012 values)
Source: MR NatCatSERVICE
Insured losses (in 2013 values)
107
Natural Loss Events:
Full Year 2013
World Map
Winter Storm Christian (St. Jude)
Europe, 27–30 October
Flash floods
Canada, 8–9 July
Floods
Meteorite impact
Europe,
30 May–19 June
Russian Federation, 15
February
Earthquake
Floods
China, 20 April
Canada, 19–24 June
Hailstorms
Germany,
27–28 July
Floods
Typhoon Fitow
China, Japan,
5–9 October
Severe storms,
tornadoes
USA, 9–16 September
USA, 18–22 May
Typhoon Haiyan
Philippines,
8–12 November
Severe storms, tornadoes
USA, 28–31 May
Floods
India, 14–30 June
Hurricanes Ingrid &
Manuel
Australia,
21–31 January
Mexico, 12–19 September
880
Loss events
Floods
Earthquake (series)
Pakistan, 24–28 September
Heat wave
India, April–June
Natural catastrophes
Selection of significant
Natural catastrophes
Geophysical events
(earthquake, tsunami, volcanic activity)
Meteorological events
(storm)
Source: Munich Re Geo Risks Research, NatCatSERVICE – as of January 2014.
Hydrological events
(flood, mass movement)
Climatological events
(extreme temperature, drought, wildfire)
Extraterrestrial events
(Meteorite impact)
109
Natural Disasters Worldwide,
1980 – 2013 (Number of Events)
There were 880 natural
disaster events globally in
2013 compared to 905 in 2012
1 000
Number
800
600
400
200
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Geophysical
(earthquake, tsunami,
volcanic activity)
Source: MR NatCatSERVICE
Meteorological (storm)
Hydrological
(flood, mass movement)
Climatological
(temperature extremes,
drought, wildfire)
110
Losses Due to Natural Disasters Worldwide,
1980–2013 (Overall & Insured Losses)
(Overall and Insured Losses)
(2013 Dollars, $ Billions)
10-Yr. Avg. Losses
US$ bn
400
Overall : $184B
2013 Losses
Insured: $56B
Overall : $125B
Insured: $34B
300
200
There is a clear
upward trend in both
insured and overall
losses over the past
30+ years
100
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Overall losses (in 2013 values)
Source: MR NatCatSERVICE
Insured losses (in 2013 values)
111
Terrorism Update
TRIA’s Success
Consequences of Expiration
Download III’s Terrorism Insurance Report at:
http://www.iii.org/white_papers/terrorismrisk-a-constant-threat-2014.html
112
Loss Distribution by Type of Insurance
from Sept. 11 Terrorist Attack ($ 2013)
($ Billions)
Other
Liability
$4.9 (12%)
Property Life
WTC 1 & 2*
$1.2 (3%)
$4.4 (11%)
Aviation
Liability
$4.3 (11%)
Event
Cancellation
$1.2 (3%)
Aviation Hull
$0.6 (2%)
Workers
Comp
$2.2 (6%)
Property Other
$7.4 (19%)
Biz
Interruption
$13.5 (33%)
Total Insured Losses Estimate: $42.9B**
*Loss total does not include March 2010 New York City settlement of up to $657.5 million to compensate approximately 10,000
Ground Zero workers or any subsequent settlements.
**$32.5 billion in 2001 dollars.
Source: Insurance Information Institute.
Terrorism Insurance Take-up Rates,
By Year, 2003-2013
80%
70%
58%
60%
59%
59%
61%
62%
64%
62%
62%
57%
49%
50%
40%
30%
TRIA’s high take-up rates, availability and
affordability have benefitted businesses,
workers and the entire US economy
since the program’s enactment
27%
20%
10%
0%
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
In 2003, the first year TRIA was in effect, the terrorism take-up rate
was 27 percent. Since then, it has increased steadily, remaining in the
low 60 percent range since 2009.
Source: Marsh Global Analytics, 2014 Terrorism Risk Insurance Report, April 2014 and earlier editions.
117
Terrorism Insurance Take-Up Rates by
State for 2013*
The overall US takeup rate for terrorism
coverage was 62% in
2013 and ranged from
a lows of 41% in
Michigan to a high of
84% in Massachusetts
(where demand likely
increased due to the
April 2013 Boston
Marathon bombing)
*Data for 27 states with sufficient data.
Source: Marsh 2014 Terrorism Risk Insurance Report; Insurance Information Institute.
118
SURPLUS/CAPITAL/CAPACITY
2013 Recorded Yet Another
Record High in the Primary
and Reinsurance Sectors
124
Policyholder Surplus,
2006:Q4–2013:Q4
($ Billions)
Drop due to near-record
2011 CAT losses
2007:Q3
Pre-Crisis Peak
$700
$653.3
$650
$624.4
$614.0
$607.7
$600
$559.2
$521.8$517.9$515.6
$512.8
$505.0
$496.6
$487.1
$478.5
$490.8
$463.0
13:Q4
13:Q3
13:Q2
13:Q1
12:Q4
12:Q3
12:Q2
12:Q1
11:Q4
10:Q4
10:Q3
10:Q2
10:Q1
09:Q4
09:Q1
08:Q4
08:Q3
08:Q2
08:Q1
07:Q4
07:Q3
07:Q2
07:Q1
06:Q4
11:Q3
Surplus as of 12/31/13 stood
at a record high $653.3B
$437.1
11:Q2
$450
11:Q1
$455.6
$400
$550.3
$538.6
$511.5
09:Q3
$500
$559.1
$544.8
$540.7
$530.5
09:Q2
$550
$583.5$586.9
$570.7 $567.8
$566.5
The industry now has $1 of surplus for every $0.73 of NPW,
close to the strongest claims-paying status in its history.
2010:Q1 data includes $22.5B of
paid-in capital from a holding
company parent for one insurer’s
investment in a non-insurance
business .
Sources: ISO, A.M .Best.
The P/C insurance industry entered 2014
in very strong financial condition.
125
U.S. INSURANCE MERGERS AND ACQUISITIONS,
P/C SECTOR, 2002-2012 (1)
($ Millions)
$40,000
$35,221
M&A activity in the P/C
sector remains below
pre-crisis levels.
90
80
$35,000
Transaction values
60
$25,000
50
$20,353
$20,000
$16,294
$13,615
$15,000
40
$12,458
30
$9,264
$10,000
20
$6,419
$3,507
$5,000
$486
Number of transactions
70
$30,000
$4,651
10
$425
$0
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
(1) Includes transactions where a U.S. company was the acquirer and/or the target.
Source: Conning proprietary database.
129
REINSURANCE MARKET
CONDITIONS
Ample Capacity as
Alternative Capital is
Transforming the
Market—And Pushing
Down Prices
130
Global Reinsurance Capital (Traditional
and Alternative), 2007 - 2013
Total reinsurance capital reached
a record $540B in 2013, up 58.8%
from 2008. Of that, $50B (9.3%) is
alternative capacity, up 163% from
$19B since 2008
Source: Aon Benfield Reinsurance Market Outlook, April 1, 2014; Insurance Information Institute.
Reinsurance Pricing: Rate-on-Line Index
by Region, 1990 – 2014*
Lower CATs and a
flood of new
capital has pushed
reinsurance
pricing down in
most regions,
including the US
*As of Jan. 1.
Source: Guy Carpenter
Reinsurer Combined Ratios
(Aon Benfield Aggregate), 2007 - 2013
Reinsurers posted a combined under
90 in 2013, the best result since 2009
Source: Aon Benfield Reinsurance Market Outlook, April 1, 2014; Insurance Information Institute.
Alternative Capacity as a Percentage of Global
Property Catastrophe Reinsurance Limit
(As of Year End)
Alternative Capacity accounted for
approximately 14% or $45 billion
of the $316 in global property
catastrophe reinsurance capital as
of mid-2013 (expected to rise to
~15% by year-end 2013)
Source: Guy Carpenter
Alternative Capacity Development,
2001—2013:H1
Source: Guy Carpenter; Mid-Year Market Report, September 2013; Insurance Information Institute.
Catastrophe Bonds: Issuance and
Outstanding, 1997- 2014:Q1*
99
00
01
11
$18,516.7
7,083.0
10
5,852.9$14,835.7
$12,508.8
$12,139.1
07
$12,185.0
06
1,410.0
966.9
98
1,991.1
1,729.8
1,219.5
1,142.8
4,108.8
1,130.0
97
Financial crisis
depressed issuance
4,600.3
984.8
$2,000
846.1
$4,000
633.0
$6,000
$4,040.4
$2,950.0
$8,000
$3,450.0
$10,000
3,391.7
$12,000
2,729.2
$14,000
6,996.3
$16,000
$4,904.2
Risk capital
outstanding
reached a record
high in 2013
4,693.4 $8,541.6
$18,000
$14,024.2
$20,000
$12,043.6
Risk Capital Amount ($ Millions)
$0
02
Risk Capital Issued
Risk Capital Outstandng at Year End
03
04
05
08
09
12
13 14:Q1
CAT bond issuance reached a
record high in 2013
Catastrophe Bond Issuance Is Approaching Pre-Crisis Levels While Risk
Capital Outstanding Stands at an All-Time Record
*Through Jan. 31, 2014.
Source: Guy Carpenter; Insurance Information Institute.
Questions Arising from Influence of
Alternative Capital
 What Will Happen When Investors Face Large-Scale
Losses?
 Does ILS Have a Higher Propensity to Litigate?
 Short-term focus could contribute to disputes
 Large share of triggered transactions ended up in dispute
 How Low Will ROLs Be Pushed?
 Does the New Interconnectedness with Capital Markets
Lend Credence to the Suggestion that Reinsurance Is a
Systemic Risky Business?
 Will Alternative Capital Drive Consolidation Among
Traditional Reinsurers?
 Has the mating dance begun?  Endurance/Aspen
145
INVESTMENTS:
THE NEW REALITY
Investment Performance is a Key
Driver of Profitability
Depressed Yields Will Necessarily
Influence Underwriting & Pricing
146
Property/Casualty Insurance Industry
Investment Income: 2000–20131
($ Billions)
$60
$54.6
$52.3
$50
$40
$51.2
$49.5
$49.2
$47.1
$38.9
$38.7
$37.1
$36.7
01
02
$39.6
$47.6
$48.0
$47.4
12
13
Investment earnings are
running below their 2007
pre-crisis peak
$30
00
03
04
05
06
07
08
09
10
11
Investment Income Fell in 2012 and 2013 Due to Persistently Low Interest
Rates, Putting Additional Pressure on (Re) Insurance Pricing
1
Investment gains consist primarily of interest and stock dividends...
Sources: ISO; Insurance Information Institute.
U.S. Treasury Security Yields:
A Long Downward Trend, 1990–2014*
9%
Yields on 10-Year U.S. Treasury
Notes have been essentially
below 5% for a full decade.
8%
7%
6%
U.S. Treasury
yields plunged to
historic lows in
2013. Only
longer-term
yields have
rebounded.
5%
4%
3%
2%
1%
0%
Recession
2-Yr Yield
10-Yr Yield
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations,
most P/C insurer portfolios will have low-yielding bonds for years to come.
*Monthly, constant maturity, nominal rates, through February 2014.
Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm.
National Bureau of Economic Research (recession dates); Insurance Information Institute.
152
New Waves of Regulations
2008 - Present
Global Crisis and Regulatory Response
168
Global Financial Crises &
Global Systemic Risk
 The Global Financial Crisis Prompted the G-20 Leaders to Request
that the Financial Stability Board (FSB) Assess the Systemic Risks
Associated with SIFIs, Global-SIFIs in Particular
 In July 2013, the FSB Endorsed the International Association of
Insurance Supervisors Methodology for Identifying Globally
Systemically Important Insurers (G-SIIs)
 For Each G-SII, the Following Will Be Required:
(i) Recovery and resolution plans
(ii) Enhanced group-wide supervision
(iii) Higher loss absorbency (HLA) requirements
 G-SIIs as Designated by the FSB as of July 2013:
 Allianz SE
AIG
Assicurazioni Generali
 Aviva
Axa
MetLife
 Ping An
Prudential Financial
Prudential plc
171
Global Financial Crises &
Global Systemic Risk…There’s More…
 IAIS Also Plans to Develop the First-Ever Risk-Based Global
Insurance Capital Standards by 2016
 Would be Tested in 2017-2018; Implemented in 2019
 Would Be Included as Part of ComFrame and Apply to Internationally
Active Insurance Groups (IAIGs): ~50 IAIGs Designations Likely
 While Flexibility May Exist within the Standards, Doubts in the US Are
Likely to Be Strong
 Concern that the standards may be bank-centric
 Questions as to whether such standards are even needed:
 “Although US state insurance regulators continue to have doubts about the
timing, necessity and complexity of developing a global capital standard given
regulatory differences around the globe, we intend to remain fully engaged in
the process to ensure that any development augments the strong legal entity
capital requirements in the US that have provided proven and tested security
for US policyholders and stable insurance markets for consumers and
industry.” --NAIC President Ben Nelson (P/C 360, Oct. 16, 2013)
173
P/C Insurer Impairment Frequency vs.
Combined Ratio, 1969-2012
120
Combined Ratio after Div
P/C Impairment Frequency
2.0
1.8
1.6
1.4
110
1.2
1.0
105
0.8
100
0.6
Impairment Rate
Combined Ratio
115
0.4
95
2012 impairment rate was 0.69%, down from 1.11% in 2011; the
rate is lower than the 0.82% average since 1969
0.0
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
07
08
09
10
11
12
90
0.2
Impairment Rates Are Highly Correlated With Underwriting Performance
and Reached Record Lows in 2007; Recent Increase Was Associated
Primarily With Mortgage and Financial Guaranty Insurers and Not
Representative of the Industry Overall
Source: A.M. Best; Insurance Information Institute
176
Insurance Information Institute Online:
www.iii.org
Thank you for your time
and your attention!
Twitter: twitter.com/bob_hartwig
180