Financial Crisis and the
Future of the P/C
Insurance Industry
Challenges Amid the Economic Storm
Independent Insurance Agents of Texas
Austin, TX
June 14, 2009
Download:
http://www.iii.org/media/presentations/IIATX/
Robert P. Hartwig, Ph.D., CPCU, President
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: (212) 346-5520  bobh@iii.org  www.iii.org
Presentation Outline
•
•
•
•
•
•
The Economic Storm: Financial Crisis & Recession
Economic Trends: Personal, Commercial Exposure Implications
Aftershock: P/C Insurance After the Financial Crisis
Key Threats and Issues Facing P/C Insurers Through 2015
Financial Strength & Ratings
P/C Insurance Industry Overview & Outlook
•
•
•
•
•
Profitability
Premium Growth
Underwriting Performance
Financial Market Impacts
Merger & Acquisition Activity
• Capital & Capacity
• Catastrophe Loss Trends
THE ECONOMIC
STORM
What the Financial Crisis and
Recession Mean for the
Industry’s Exposure Base
and Growth
-0.2%
-2%
-4%
-6%
Recession began in December
2007. Economic toll of credit
crunch, housing slump, labor
market contraction is growing
but recovery is in sight
3.0%
2.8%
2.7%
2.2%
1.8%
Personal and
commercial lines
exposure base
have been hit
hard and will be
slow to come
back
-1.7%
-0.5%
0%
0.5%
0.9%
2.8%
2.9%
3.1%
3.6%
2.5%
0.1%
2%
1.6%
0.8%
4%
3.7%
6%
The Q4:2008 decline was
the steepest since the
Q1:1982 drop of 6.4%
4.8%
4.8%
Real GDP Growth*
-6.3% -6.1%
*Blue bars are Estimates/Forecasts from Blue Chip Economic Indicators.
Source: US Department of Commerce, Blue Economic Indicators 5/09; Insurance Information Institute.
10:4Q
10:3Q
10:2Q
10:1Q
09:4Q
09:3Q
09:2Q
09:1Q
08:4Q
08:3Q
08:2Q
08:1Q
07:4Q
07:3Q
07:2Q
07:1Q
2006
2005
2004
2003
2002
2001
2000
-8%
Length of U.S. Business Cycles,
1929-Present*
Duration (Months)
120
110
100
Contraction
Expansion Following
Average Duration**
Recession = 10.4 Months
Expansion = 60.5 Months
90
106
Length of
expansions
greatly
exceeds
contractions
58
80
80
70
60
50
50 43
45
37
40
39
92
73
36
24
30
20
13
8
10
Month 0
Recession
Started
120
Aug.
1929
May
1937
* As of May 2009, inclusive;
Feb.
1945
11
Nov.
1948
10
July
1953
8
Aug.
1957
10
Apr.
1960
11
Dec.
1969
**Post-WW II period through end of most recent expansion.
Sources: National Bureau of Economic Research; Insurance Information Institute.
16
12 16
6
Nov.
1973
Jan.
1980
Jul.
1981
18
8
Jul.
1990
8
Mar.
2001
Dec.
2007
Total Industrial Production,
(2007:Q1 to 2010:Q4F)
End of recession in late 2009, Obama stimulus program
are expected to benefit impact industrial production and
therefore insurance exposure both directly and indirectly
10.0%
5.0%
3.2% 3.6%
1.5%
1.5%
0.3% 0.2%
2.7% 3.2% 3.6%
3.9%
0.0%
-1.2%
-5.0%
-4.6%
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (5/09); Insurance Info. Inst.
10:Q4
10:Q3
10:Q2
09:Q3
09:Q2
09:Q1
08:Q4
08:Q3
-20.0%
10:Q1
-12.7%
09:Q4
Figures for 2010
revised upwards to
reflect expected
impact of Obama
stimulus program
and a gradual
economic recovery
-7.4%
-9.0%
08:Q2
08:Q1
07:Q4
-25.0%
07:Q1
-20.0%
07:Q3
-15.0%
07:Q2
Industrial
production began
to contracted
sharply in late
2008 and plunged
in Q1 2009
-10.0%
5%
0%
-5%
-10%
6%
4%
5.2%
78
-0.9%
79
80-7.4%
81 -6.5%
-1.5%
82
1.8%
83
4.3%
84
85
86
5.8%
87
0.3%
88
-1.6%
89
-1.0%
90
-1.8%
91
-1.0%
92
3.1%
93
1.1%
94
0.8%
95
0.4%
96
0.6%
97
-0.4%
98
-0.3%
99
1.6%
00
5.6%
01
02
7.7%
03
1.2%
04
-2.9%
05
-0.5%
06
-3.8%
07
-4.4%
08E
1.7%
09F
Real NWP Growth
15%
10%
8%
Real NWP Growth
Real GDP
2%
Real GDP Growth
20%
P/C insurance industry’s growth
is influenced modestly by growth
in the overall economy
13.7%
25%
18.6%
20.3%
Real GDP Growth vs. Real P/C
Premium Growth: Modest Association
0%
-2%
-4%
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 5/09; Insurance Information Inst.
Inflation Trends
Significant Moderation
Should Help Reduce
Severity Trends
Annual Inflation Rates
(CPI-U, %), 1990-2010F
Inflation peaked at 5.6% in August 2008 on
high energy and commodity crisis. The
recession and the collapse of the commodity
bubble have produced temporary deflation.
6.0
5.0
4.0
3.0
2.0
4.9 5.1
3.0 3.2
2.4
3.8
3.3 3.4
2.9 2.8
2.6
1.5
3.0
2.5 2.3
1.9
3.8
2.8
1.7
1.3
1.0
0.0
(1.0)
(0.8)
(2.0)
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F 10F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, May 10, 2009 (forecasts).
Top Concerns/Risks for Insurers if
Inflation is Reignited
CONCERNS: The Federal Reserve Has Flooded Financial System with Cash
(Turned on the Printing Presses), the Federal Govt. Has Approved a $787B
Stimulus and the Deficit is Expected to Mushroom to $1.8 Trillion. All Are
Potentially Inflationary.
 What are the potential impacts for insurers?
 What can/should insurers do to protect themselves from the risks of inflation?
KEY RISKS FROM SUSTAINED/ACCELERATING INFLATION
• Rising Claim Severities
 Cost of claims settlement rises across the board (property and liability)
• Rate Inadequacy
 Rates inadequate due to low trend assumptions arising from use of historical data
• Reserve Inadequacy
 Reserves may develop adversely and become inadequate (deficient)
• Burn Through on Retentions
 Retentions, deductibles burned through more quickly
• Reinsurance Penetration/Exhaustion
 Higher costsrisks burn through their retentions more quickly, tapping into reinsurance more quickly and potential exhausting their reinsurance more quickly
Source: Ins. Info. Inst.
Labor Market
Trends
Fast & Furious: Massive Job Losses
Sap the Economy Workers Comp &
Other Commercial Exposure
Unemployment Rate:
On the Rise
January 2000 through April 2009
9.0
8.0
April 2009 unemployment
jumped to 8.9%, exceeding the
6.3% peak during the previous
cycle, and is now at it highest
level since March 1982
Previous Peak: 6.3% in
June 2003
7.0
Trough: 4.4% in March 2007
6.0
5.0
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Apr-09
Jan-08
Jan-07
Jan-06
Jan-05
Unemployment will likely peak between
9.5% and 10 % during this cycle, impacting
payroll sensitive p/c and non-life exposures
Jan-04
Jan-03
Jan-02
Jan-00
3.0
Average unemployment
rate 2000-07 was 5.0%
Jan-01
4.0
9.5%
9.6%
9.8%
9.8%
8.1%
6.9%
6.1%
5.4%
4.9%
4.8%
4.6%
4.5%
Unemployment is
expected to peak near
10% in early 2010.
9.7%
9.0%
Rising unemployment
will erode payrolls
and workers comp’s
exposure base.
4.5%
11.0%
10.5%
10.0%
9.5%
9.0%
8.5%
8.0%
7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
9.4%
U.S. Unemployment Rate,
(2007:Q1 to 2010:Q4F)*
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
* Blue bars are actual; Yellow bars are forecasts
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (5/09); Insurance Info. Inst.
Wage & Salary Disbursements
(Payroll Base) vs. Workers Comp
Net Written Premiums
Wage & Salary Disbursement (Private Employment) vs. WC NWP
$ Billions
7/90-3/91
$7,000
$6,000
3/01-11/01
$ Billions
12/07-?
Wage & Salary
Disbursements
WC NPW
$45
$40
$35
$5,000
$30
$4,000
$3,000
$2,000
Shaded areas indicate recessions
$1,000
Weakening wage
and salary
growth is
expected to cause
a deceleration in
workers comp
exposure growth
$0
$25
$20
$15
$10
$5
$0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*
*Wage and Salary data as of 1/1/2009.
Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at
http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books
State Construction Employment,
Dec. 2007 – Dec. 2008
WA
NH
MT
ND
VT
ME
MN
OR
ID
MA
WI
NY
SD
WY
NV
MI
PA
IA
NE
NJ
OH
IL
UT
IN
CO
CA
RI
WV
KS
MO
OK
NM
NC
TX
DC
SC
AL
DE
MD
AR
MS
AK
AK
VA
KY
TN
AZ
CT
GA
LA
Construction
employment
declined in
47 of 50
states in
2008
FL
HI
0% to 4%
-0.1% to -8.5%
-8.8% to -22%
1515
Sources: Associated General Contractors of America from Bureau of Labor Statistics; Insurance Information Institute.
Crisis-Driven
Exposure
Implications
Home, Contractor, Auto,
Exposure Growth Slows
as Sales Nosedive
1.80
1.96
1.85
1.36
1.60
1.57
1.64
1.62
0.90
90
91
92
93
94
95
96
97
98
99
00
01
0.56
I.I.I. estimates that each incremental
100,000 decline in housing starts costs
home insurers $87.5 million in new
exposure (gross premium). The net
exposure loss in 2009 vs. 2005 is
estimated at about $1.3 billion.
0.78
1.47
1.48
1.35
New home starts
plunged 34%
from 2005-2007;
Drop through
2009 is 73%
(est.)—a net
annual decline of
1.51 million
units, lowest
since record
began in 1959
1.01
1.29
1.20
1.46
Impacts also for comml. insurers
with construction risk exposure
1.19
2.1
2.0
1.9
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
0.5
1.71
Exposure growth forecast for HO
insurers is dim for 2009 with some
improvement in 2010.
2.07
New Private Housing Starts,
1990-2010F (Millions of Units)
02
03
04
05
06
07
08 09F 10F
Source: US Department of Commerce; Blue Chip Economic Indicators (5/09); Insurance Information Inst.
Auto/Light Truck Sales,
1999-2010F (Millions of Units)
19
18
New auto/light truck sales
are expected to experience a
net drop of 6.7 million units
annually by 2009 compared
with 2005, a decline of
40.8% and the lowest level
since the late 1960s
Weak economy, credit crunch are
hurting auto sales; Gas prices
have been a factor too.
17.4
17.8
17.5
17.1
16.6
17
16.9
16.9
16.5
16.1
16
15
14
13.1
Impacts of falling auto sales will
have a less pronounced effect on
auto insurance exposure growth
than problems in the housing
market will on home insurers
13
12
11
11.9
10.0
10
9
99
00
01
02
03
04
05
06
07
08
09F
10F
Source: US Department of Commerce; Blue Chip Economic Indicators (5/09); Insurance Information Inst.
Crisis Implications
Top Crisis-Driven Claim
Issues for Personal Lines
Insurers
Summary of Short-Run Changes in
Claiming Behavior Due to Economy
• CLAIMING BEHAVIOR
• Claim frequency falls with miles driven. History: Drop is temporary.
• Claim severity continues to rise: med costs, collisions repair costs up
• Likely maintenance on homes, cars deferredclaim. freq/sev. impact?
• PURCHASING BEHAVIOR: Efforts to Economize
•
•
•
•
•
•
More shopping around
Increased deductibles
Dropping optional coverages (collision, comprehensive)
Lower limits
Insuring fewer vehicles (3 or 4th vehicle sold)
Insuring older vehicles (old cars retained, new car purchases deferred)
• UNINSURED/UNDERINSURED MOTORIST % RISES
• Expected to rise from 13.8% in 2007 to 16.1% in 2010
• FRAUD & ABUSE:
• Evidence emerging of increased frequency of “give-ups” where car owners
underwater on payments commit fraud to obtain insurance money (e.g., car
arson, fabricated theft, etc.)
• Anecdotal evidence of owner-caused home arson
Percentage Motorists Driving
Without Insurance, 2003-2010F
A record 16.1% of motorists
are expected to be driving
without insurance by 2010 as
rising unemployment prompts
some people to drop coverage
16.5%
16.0%
15.5%
15.0%
14.9%
14.6%
14.5%
14.5%
14.0%
13.5%
13.0%
16.1%
14.3%
13.8%
In 2007, 1-in-7.2
motorists was
uninsured; That figure
is expected to rise to 1in-6.2 by 2010
12.5%
2003
2004
2005
2006
2007
2010F
Source: Uninsured Motorists, 2008 Edition, Insurance Research Council; Insurance Information Institute
Do Changes in Miles Driven Affect
Auto Collision Claim Frequency?
Paid Claim Frequency = (No. of paid
claims)/(Earned Car Years) x 100
7.00
6.81
Paid Claim Freq
3100
6.91
6.80
6.78
3000
6.65
6.59
2900
6.5
6.32
2800
2700
6.02
6.0
5.91
2600
5.83
Miles driven fell 3.6% in 2008
but collision claim freq was
down just 2.6
5.70
5.68
5.5
2500
2400
96
97
98
99
00
01
02
03
04
05
06
07
08
Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/08septvt/index.cfm;
ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: Nine Months 2008,
published April 1, 2009 and earlier reports. *2008 ISO figure is for 4 quarters ending Q4 2008.
Billions of Miles Driven
7.0
Collision Claim Frequency
Billions of Vehicle Miles
Auto Insurance: Claim Frequency
Impacts of Energy Crisis of 1973/4
Oct. 17,
1973: Arab
oil embargo
begins
Frequency
Impacts
Collision: -7.7%
PD: -9.5%
BI: -13.3%
Driving Stats
Gas prices rose
35-40%
Miles driven
fell 6.7% in
1974
Source: ISO, US DOT.
March 17,
1974: Arab
oil states
announce
end to
embargo
Frequency
began to
rebound
almost
immediately
after the
embargo
ended
AFTERSHOCK
What Will the P/C
Insurance Industry Look
Like After the Crisis?
6 Key Differences
6 Key Differences: P/C Insurance in
the Post-Financial Catastrophe World
1. The P/C Insurance Industry Will Be Smaller: The Industry
Will Have Shrunk by About 3% in Dollar Terms and by 7%
on an Inflation Adjusted Basis, 2007-09


Falling prices, weak exposure growth, increasing government
intervention in private (re)insurance markets, large retentions and
alternative forms of risk transfer have siphoned away premium
There will be fewer competitors after a mini consolidation wave
2. P/C Industry Will Emerge With Its Risk Mgmt. Model
More Intact than Most other Financial Service Segments

Benefits of risk-based underwriting, pricing and low leverage clear
3. There Will Be Federal Regulation of Insurers: Now in
Waning Months of Pure State-Based Regulation





Federal regulation of “systemically important” firms seems certain
Solvency and Rates regulation, Consumer Protection may be shared
Dual regulation likely; federal/state regulatory conflicts are likely
With the federal nose under the tent, anything is possible
Life insurers want federal regulation
Source: Insurance Info. Inst.
6 Key Differences: P/C Insurance in
the Post-Financial Catastrophe World
4. Investment Earnings Will Shrink Dramatically for an
Extended Period of Time: Federal Reserve Policy,
Shrinking Dividends, Aversion to Stocks

Trajectory toward lower investment earnings is being locked in
5. Back to Basics: Insurers Return to Underwriting Roots:
Extended Period of Low Investments Exert Greatest
Pressure to Generate Underwriting Profits Since 1960s

Chastened and “derisked” but facing the same (or higher) expected
losses, insurers must work harder to match risk to price
6. P/C Insurers: Profitable Before, During & After Crisis:
Resiliency Once Again Proven

Directly the result of industry’s risk management practices
Source: Insurance Information Inst.
Key Threats Facing
Insurers Amid
Financial Crisis
Challenges for the
Next 5-8 Years
Important Issues & Threats
Facing Insurers: 2009 - 2015
1. Erosion of Capital
 Losses are larger and occurring more rapidly than is commonly
understood or presumed
 Surplus down 13%=$66B since 9/30/07 peak; 12% ($80B ) in 2008
 P/C policyholder surplus could be even more by year-end 2009
 Some insurers propped up results by reserve releases
 Decline in PHS of 1999-2002 was 15% over 3 years and was
entirely made up and them some in 2003. Current decline is ~13%
in 5 qtrs.
 During the opening years of the Great Depression (1929-1933)
PHS fell 37%, Assets fell 28% and Net Written Premiums fell by
35%. It took until 1939-40 before these key measures returned to
their 1929 peaks.
 BOTTOM LINE: Capital and assets could fall much farther and
faster than many believe. It will take years to return to the 2007
peaks (likely until 2011 with a sharp hard market and 2015
without one)
Source: Insurance Information Inst.
Important Issues & Threats
Facing Insurers: 2009 - 2015
2. Reloading Capital After “Capital Event”
 Continued asset price erosion coupled with major “capital
event” could lead to shortage of capital among some
companies
 Possible Consequences: Insolvencies, forced mergers, calls
for govt. aid, requests to relax capital requirements
 P/C insurers have come to assume that large amounts of
capital can be raised quickly and cheaply after major
events (post-9/11, Katrina).

This assumption may be incorrect in the current environment
 Cost of capital is much higher today, reflecting both
scarcity & risk
 Implications: P/C (re)insurers need to protect capital
today and develop detailed contingency plans to raise fresh
capital & generate internally. Already a reality for some
life insurers.
Source: Insurance Information Inst.
Important Issues & Threats
Facing Insurers: 2009 - 2015
3. Long-Term Reduction in Investment Earnings
 Low interest rates, risk aversion toward equities and many
categories of fixed income securities lock in a multi-year
trajectory toward ever lower investment gains
 Price bubble in Treasury securities keeps yields low
 Many insurers have not adjusted to this new investment
paradigm of a sustained period of low investment gains
 Regulators will not readily accept it; Many will reject it
 Implication 1: Industry must be prepared to operate in
environment with investment earnings accounting for a
smaller fraction of profits
 Implication 2: Implies underwriting discipline of a
magnitude not witnessed in this industry in more than 30
years. Yet to manifest itself.
 Lessons from the period 1920-1975 need to be relearned
Source: Insurance Information Inst.
Important Issues & Threats
Facing Insurers: 2009 – 2???
4. Regulatory Overreach
 Principle danger is that P/C insurers get swept into
vast federal regulatory overhaul and subjected to
inappropriate, duplicative and costly regulation (Dual
Regulation)
 Danger is high as feds get their nose under the tent
 Status Quo is viewed as unacceptable by all
 Pushing for major change is not without significant
risk in the current highly charged political
environment
 Insurance & systemic risk
 Disunity within the insurance industry
 Impact of regulatory changes will be felt for decades
 Bottom Line: Regulatory outcome is uncertain and
risk of adverse outcome is high
Source: Insurance Information Inst.
Important Issues & Threats
Facing Insurers: 2009 - 2015
5. Creeping Restrictions on Underwriting
 Attacks on underwriting criteria such as credit,
education, occupation, territory increasing
 Industry will lose some battles
 View that use of numerous criteria are discriminatory
and create an adverse impact on certain populations
 Impact will be to degrade the accuracy of rating systems
to increase subsidies
 Predictive modeling also at risk
 Current social and economic environment could
accelerate these efforts
 Danger that bans could be codified at federal level
during regulatory overhaul
 Bottom Line: Industry must be prepared to defend
existing and new criteria indefinitely
Source: Insurance Information Inst.
Important Issues & Threats
Facing Insurers: 2009 -2015
6. Emerging Tort Threat
 No tort reform (or protection of recent reforms) is
forthcoming from the current Congress or
Administration
 Erosion of recent reforms is a certainty (already
happening)
 Innumerable legislative initiatives will create
opportunities to undermine existing reforms and
develop new theories and channels of liability
 Torts twice the overall rate of inflation
 Influence personal and commercial lines, esp. auto liab.
 Historically extremely costly to p/c insurance industry
 Leads to reserve deficiency, rate pressure
 Bottom Line: Tort “crisis” is on the horizon and will be
recognized as such by 2012-2014
Source: Insurance Information Inst.
THE $787 BILLION
ECONOMIC
STIMULUS
Sectoral Impacts &
Implications for P/C
Insurance
Economic Stimulus Package:
$143.4 in Construction Spending
$ Billions
Energy & Technology,
29.8, 20%
Workforce Development
& Safety, 4.3, 3%
School Building, 9.2, 6%
Other, 8.0, 5%
Other, 0.2, 0%
There
is
Building Infrastructure,
approximately
$140B
29.6,
20%
in new construction
spending in the
stimulus package,
about 1/3 of it for
transportation.
Transportation
Infrastructure, 49.3, 32%
Water & Environmental
Infrastructure, 21.4, 14%
Source: Associated General Contractors at http://www.agc.org/cs/rebuild_americas_future (2/18/09); Insurance Info. Inst..
50
50
52
60
66
66
69
70
70
71
75
75
79
93
109
107
143
133
The economic stimulus plan calls
for the creation or preservation of
3.5 million jobs, allocated roughly
in proportion to the size of the
state’s labor force—269,000 in TX
105
100
100
148
200
207
215
300
269
400
(Thousands)
396
No. of Jobs Created/Saved by Stimulus
Estimated Job Effect of Stimulus
Spending By State: Top 25 States
0
CA TX NY FL IL PA OH MI GA NC NJ VA MA IN WA TN AZ WI MO MD MN CO AL LA SC
Sources: http://www.recovery.gov/; Council of Economic Advisers Insurance Information Institute.
FINANCIAL
STRENGTH &
RATINGS
Industry Has Weathered
the Storms Well
P/C Insurer Impairments,
1969-2008
49
50
48
55
60
5
7
18
14
15
35
18
19
31
29
16
12
16
14
13
9
13
12
9
11
9
7
8
10
15
12
20
19
30
31
34
34
40
36
41
50
49
50
47
70
60
58
The number of impairments varies
significantly over the p/c insurance cycle,
with peaks occurring well into hard markets
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
0
Source: A.M. Best; Insurance Information Institute
P/C Insurer Impairment Frequency
vs. Combined Ratio, 1969-2008
Combined Ratio
115
Combined Ratio after Div
P/C Impairment Frequency
2.0
1.8
1.6
1.4
110
1.2
105
1.0
0.8
100
95
0.4
2008 impairment rate was a record low 0.23%,
second only to the 0.17% record low in 2007 and
barely one-fourth the 0.82% average since 1969
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
90
0.6
Source: A.M. Best; Insurance Information Institute
0.2
0.0
Impairment Rate
120
Impairment rates
are highly
correlated with
underwriting
performance and
reached record
lows in 2007/08
Summary of A.M. Best’s P/C Insurer
Ratings Actions in 2008*
P/C insurance is by
design a resilient in
business. The dual
threat of financial
disasters and
catastrophic losses are
anticipated in the
industry’s risk
management strategy.
Upgraded, 59 , 4.0%
Downgraded, 55 ,
3.8%
Initial, 41 , 2.8%
Under Review, 63 ,
4.3%
Other, 59 , 4.0%
Despite financial market
turmoil, high cat losses
and a soft market in
2008, 81% of ratings
actions by A.M. Best
were affirmations; just
3.8% were downgrades
and 4.0% upgrades
Affirm, 1,183 , 81.0%
*Through December 19.
Source: A.M. Best.
40
Historical Ratings Distribution,
US P/C Insurers, 2008 vs. 2005 and 2000
2008
Vulnerable*
7.9%
A++/A+ and
A/A- gains
A++/A+
10.8%
Vulnerable*
12.1%
2000
2005
A++/A+
9.2%
C/CC++/C+ 0.6%
1.9%
B/B6.9%
D
0.2%
E/F
2.3%
A++/A+
11.5%
B++/B+
21.3%
B++/B+
26.4%
B++/B+
28.3%
A/A52.3%
A/A60.0%
A/A48.4%
P/C insurer financial strength
has improved since 2005
despite financial crisis
Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report,
November 8, 2004 for 2000; 2006 and 2009 Review & Preview. *Ratings ‘B’ and lower.
Reasons for US P/C Insurer
Impairments, 1969-2008
Sig. Change
in Business
Misc. 4.2%
Reinsurance
Failure
3.7%
9.1%
Deficient
Loss
Reserves/Inadequate
Pricing
38.1%
Investment
Problems
7.0%
Affiliate
Impairment
7.9%
Catastrophe
Losses Alleged Fraud
7.6%
8.1%
Rapid
Growth
14.3%
Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008
Deficient loss
reserves and
inadequate
pricing are the
leading cause of
insurer
impairments,
underscoring the
importance of
discipline.
Investment
catastrophe losses
play a much
smaller role.
Critical Differences
Between P/C
Insurers and Banks
Superior Risk Management Model
& Low Leverage Make
a Big Difference
How Insurance Industry Stability
Has Benefitted Consumers
BOTTOM LINE:
• Insurance Markets—Unlike Banking—Are Operating
Normally
• The Basic Function of Insurance—the Orderly Transfer
of Risk from Client to Insurer—Continues Uninterrupted
• This Means that Insurers Continue to:
 Pay claims (whereas 61 banks have gone under as of 5/29)
 The Promise is Being Fulfilled
 Renew existing policies (banks are reducing and eliminating
lines of credit)
 Write new policies (banks are turning away people who want
or need to borrow)
 Develop new products (banks are scaling back the products
they offer)
Source: Insurance Information Institute
44
Reasons Why P/C Insurers Have Fewer
Problems Than Banks:
A Superior Risk Management Model
•
Emphasis on Underwriting
 Matching of risk to price (via experience and modeling)
 Limiting of potential loss exposure
 Some banks sought to maximize volume and fees and disregarded risk
•
Strong Relationship Between Underwriting and Risk Bearing
 Insurers always maintain a stake in the business they underwrite, keeping “skin in the game”
at all times
 Banks and investment banks package up and securitize, severing the link between risk
underwriting and risk bearing, with (predictably) disastrous consequences—straightforward
moral hazard problem from Econ 101
•
Low Leverage
 Insurers do not rely on borrowed money to underwrite insurance or pay claimsThere is no
credit or liquidity crisis in the insurance industry
•
Conservative Investment Philosophy
 High quality portfolio that is relatively less volatile and more liquid
•
Comprehensive Regulation of Insurance Operations
 The business of insurance remained comprehensively regulated whereas a separate banking
system had evolved largely outside the auspices and understanding of regulators (e.g., hedge
funds, private equity, complex securitized instruments, credit derivatives—CDS’s)
•
Greater Transparency
 Insurance companies are an open book to regulators and the public
Source: Insurance Information Institute
45
P/C INSURANCE
FINANCIAL
PERFORMANCE
A Resilient Industry in
Challenging Times
Profitability
Historically Volatile
$65,777
$62,496
06
07
$44,155
$38,501
$30,029
$20,559
$20,598
$2,496
$10,870
$3,046
$10,000
$19,316
$20,000
$5,840
$30,000
$14,178
$40,000
$21,865
$50,000
Insurer profits
peaked in 2006 and
2007, but fell 96.2%
during the economic
crisis in 2008
$30,773
$60,000
$24,404
$70,000
2001 ROE = -1.2%
2002 ROE = 2.2%
2003 ROE = 8.9%
2004 ROE = 9.4%
2005 ROE= 9.4%
2006 ROE = 12.2%
2007 ROAS1 = 12.4%
2008 ROAS = 0.5%*
$36,819
P/C Net Income After Taxes
1991-2008F ($ Millions)*
08F
05
04
03
01
-$6,970
00
99
98
97
96
95
94
93
92
91
-$10,000
02
$0
*ROE figures are GAAP; 1Return on avg. Surplus. Excluding Mortgage & Financial Guarantee insurers
yields an 4.2% ROAS for 2008.
48
Sources: A.M. Best, ISO, Insurance Information Inst.
P/C Insurance Industry ROEs,
1975 – 2009F*
1977:19.0%
1987:17.3%
25%
1997:11.6%
2006:12.2%
20%
15%
10%
2009F: 7.4%
5%
2008: 0.5%
0%
1975: 2.4%
1984: 1.8%
1992: 4.5%
2001: -1.2%
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
06
08F
09F
-5%
Note: 2008 result excluding Mortgage & Financial Guarantee insurers is 4.2%.
Sources: ISO; A.M. Best (2009F); Insurance Information Institute.
49
A 100 Combined Ratio Isn’t What it
Used to Be: 95 is Where It’s At
110
14.3%
15.9%
Combined Ratio
100.6
100
ROE*
18%
16%
100.1
100.7
97.5
101.0
14%
12.7%
12%
95
90
85
Combined ratios
must me must lower
in today’s depressed
investment
environment to
generate risk
appropriate ROEs
92.6
10%
9.6%
8%
8.9%
4.2%
80
6%
4%
1978
1979
2003
2005
2006
2008*
* 2008 figure is return on average statutory surplus. Excludes mortgage and financial guarantee insurers.
Source: Insurance Information Institute from A.M. Best and ISO data.
Retrun on Equity*
105
Combined Ratio
Advertising Trends
Advertising Expenditures by P/C
Insurance Industry, 1999-2008
$ Billions
$4.5
$4.0
$3.5
$3.0
Ad spending by P/C
insurers was at a
record high in 2008,
signaling strong
competition despite
the recession.
$2.5
$2.0 $1.736 $1.737 $1.803 $1.708
$4.354
$4.102
$3.426
$2.975
$2.111
$1.882
$1.5
99
00
01
02
03
04
05
06
07
Source: Insurance Information Institute from consolidated P/C Annual Statement data.
08
P/C Premium
Growth
Primarily Driven by the
Industry’s Underwriting
Cycle, Not the Economy
Strength of Recent Hard Markets
by NWP Growth
24%
22%
1975-78
1984-87
Shaded areas
denote “hard
market” periods
2000-03
20%
18%
16%
14%
12%
10%
8%
Net written
premiums fell 1.0%
in 2007 (first
decline since 1943)
and by 1.4% in
2008, the first backto-back decline
since 1930-33
6%
4%
2%
0%
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
2007
2008
2009F
-2%
54
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
-6.0%
1Q09
4Q08
-11.0%
3Q08
1Q08 -13.5%
2Q08 -12.9%
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
4Q04
3Q04
2Q04
1Q04
-16%
3Q07 -13.3%
-12.0%
4Q07
KRW Effect
-11.8%
-5.3%
-3.0%
-2.7%
-4.6%
-14%
-11.3%
-12%
Magnitude of price
declines is now
shrinking. Reflects
shrinking capital,
reduced investment
gains, deteriorating
underwriting
performance, higher
cat losses and costlier
reinsurance
-9.6%
-10%
-8.2%
-8%
-9.7%
-5.9%
-6%
-9.4%
-4%
-7.0%
-3.2%
-2%
-0.1%
0%
-5.0%
Average Commercial Rate Change,
All Lines, (1Q:2004 – 1Q:2009)
$650
$690
$685
$703
$705
$668
$700
$651
$750
$691
$800
$875
$841
$820
$817
$726
$786
$850
$831
$900
$842
$950
Countrywide auto insurance
expenditures increased 2.6%
in 2008 and are rising at a
4% pace in 2009
$830
Average Expenditures on
Auto Insurance
$600
94 95 96 97 98 99 00 01 02 03 04 05 05 07* 08* 09*
*Insurance Information Institute Estimates/Forecasts
Source: NAIC, Insurance Information Institute estimates 2007-2009 based on CPI data.
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
AugSep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
AugSep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
5%
4%
2%
1%
0.8%
0.8%
0.5%
0.4%
0.3%
0.3%
0.5%
0.6%
0.5%
0.1%
0.2%
0.5%
0.9%
1.1%
1.3%
1.7%
Auto insurance
prices have clearly
begun to rise in
recent months
3%
*Percentage change from same month in prior year.
Source: US Bureau of Labor Statistics
2.6%
2.6%
2.7%
3.0%
3.1%
3.4%
3.7%
4.0%
4.0%
4.3%
4.4%
4.7%
Monthly Change in Auto
Insurance Prices*
6%
0%
$820
$841
$764
$729
$807
01
06
07*
08*
09*
$593
$668
00
$536
$508
$950
$900
$850
$800
$750
$700
$650
$600
$550
$500
Countrywide auto insurance
expenditures increased 1.6%
in 2008 and are increasing
at 2.6% annual rate in 2009
$804
Average Premium for
Home Insurance Policies**
02
03
04
05
*Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.
Source: NAIC, Insurance Information Institute estimates 2007-2009 based on CPI data.
Merger &
Acquisition
Barriers to Consolidation
Will Diminish in 2009/10
P/C Insurance-Related
M&A Activity, 1988-2008
.
88 89 90 91 92
Source: Conning Research & Consulting.
120
$16,294
$9,264
$13,615
$20,353
80
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
60
40
20
0
Number of Transactions
$35,221
140
100
$425
$8,059
$486
$0
$1,882
$5,100
$5,137
$2,435
$2,780
$10,000
$3,450
$20,000
$11,534
$30,000
$ Value of deal up
20% in 2009,
volume down 12%
$19,118
$40,000
$30,873
$50,000
$40,032
$55,825
2009 off to a
stronger start with
AIG unit sales and
Bermuda
consolidation
$5,638
Transaction Value ($ Mill)
$60,000
Number of Transactions
$1,249
Transaction Values
Distribution Sector: InsuranceRelated M&A Activity, 1988-2008
$14,000
$12,000
350
$15,205
Consolidation within
the distribution sector
remains elevated
300
250
$5,812
$10,000
96 97
99 00
Source: Conning Research & Consulting.
01 02
03 04
$944
$212
$60
$0
$446
$1,633
$689
$2,000
200
150
100
$7
$4,000
$542
$6,000
$2,720
$8,000
$1,934
Transaction Value ($ Mill)
$16,000
Number of Transactions
05 06
50
0
07 08
Number of Transactions
Transaction Values
Distribution Sector M&A
Activity, 2008 vs. 2006
2008
Other
2%
Insurer
Buying
Distributor
12%
PE Buying
Agency
4%
Title
2%
Bank Buying
Agency
13%
Source: Conning Research & Consulting
2006
Agency
Buying
Agency
67%
Insurer
Title
Buying
4%
Distributor
7%
Bank Buying
Agency
25%
Number of bank
acquisitions is
falling; More
private equity
interest
Other
2%
Agency
Buying
Agency
62%
Capital/
Policyholder
Surplus
Shrinkage, but
Capital is Within
Historic Norms
U.S. Policyholder Surplus:
1975-2008*
$550
$500
$450
Actual capacity as of 12/31/08 was $455.6, down 12.0%
from 12/31/07 at $517.9B, but still 60% above its 2002
trough. Recent peak was $521.8 as of 9/30/07. Surplus
as of 12/31/08 is 12.7% below 2007 peak.
$400
$ Billions
$350
$300
$250
$200
$150
The premium-to-surplus
ratio stood at $0.95:$1 at
year end 2008, up from
near record low of $0.85:$1
at year-end 2007
$100
$50
“Surplus” is a measure of
underwriting capacity. It is
analogous to “Owners
Equity” or “Net Worth” in
non-insurance organizations
$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 05 06 07 08
Source: A.M. Best, ISO, Insurance Information Institute.
*As of 12/31/08
64
Policyholder Surplus,
2006:Q4 – 2008:Q4
Capacity peaked at
$521.8 as of 9/30/07
$ Billions
$540
$521.8 $517.9
$512.8
$520
$500
$515.6
$505.0
$496.6
$487.1
$480
Declines Since 2007:Q3 Peak
$460
Q2: -$16.6B (-3.2%)
Q3: -$43.3B (-8.3%)
Q4: -$66.2 (-12.9%)
$440
$478.5
$455.6
$420
06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4
Source: ISO.
65
Premium-to-Surplus Ratios
Before Major Capital Events*
P/C insurance industry was better
capitalized going into the
financial crisis than before any
“capital event” in recent history
$1.9
$1.7
$1.65
$1.42
$1.5
$1.40
$1.15
$1.3
$1.05
$1.03
$1.1
$0.88
$0.9
$0.95
As of
12/31/08**
6/30/07
Financial
Crisis
6/30/05
Hurricane
Katrina
6/30/04
Florida
Hurricanes
6/30/01
Sept. 11
Attacks
12/31/93
Northridge
Earthquake
6/30/1992
Hurricane
Andrew
$0.5
6/30/1989
Hurricane
Hugo
$0.7
*Ratio is for end of quarter immediately prior to event. Date shown is end of quarter prior to event.
**Latest available
Source: PCS; Insurance Information Institute.
Ratio of Insured Loss to Surplus for
Largest Capital Events Since 1989*
16%
14%
The financial crisis now
ranks as the 2nd largest
“capital event” over the
past 20+ years
12%
6.9%
8%
6%
4%
12.9%
10.9%
9.6%
10%
13.8%
6.2%
3.3%
Financial
Crisis as of
12/31/08**
6/30/05
Hurricane
Katrina
6/30/04
Florida
Hurricanes
6/30/01
Sept. 11
Attacks
12/31/93
Northridge
Earthquake
6/30/1992
Hurricane
Andrew
0%
6/30/1989
Hurricane
Hugo
2%
*Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event.
**Latest available
Source: PCS; Insurance Information Institute.
Historically, Hard Markets Follow
When Surplus “Growth” is Negative
30%
NWP % change
Surplus % change
25%
Sharp decline in capacity is a
necessary but not sufficient
condition for a true hard market
20%
15%
10%
5%
0%
-5%
-10%
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
2007
2008
-15%
Sources: A.M. Best, ISO, Insurance Information Institute
Investment
Performance
Investments are the Principle
Source of Declining
Profitability
Property/Casualty Insurance Industry
Investment Gain:1994- 20081
$ Billions
$64.0
$57.9
$60
$52.3
$51.9
$47.2
$50
$59.4
$56.9
$45.3
$44.4
$42.8
$40 $35.4
$55.7
$48.9
$36.0
$31.4
$30
Investment gains fell by 51% in
2008 due to lower yields, poor
equity market conditions
$20
$10
$0
94
1Investment
95
96
97
98
99
00
01
02
03
04
05*
06
07
08
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.
70
Sources: ISO; Insurance Information Institute.
P/C Insurer Net Realized
Capital Gains, 1990-2008
Sources: A.M. Best, ISO, Insurance Information Institute.
71
08
07
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
$20 $ Billions
$18.02
$18
$16.21
$16
$13.02
$14
$10.81
$12
$9.89 $9.82
$9.24
$8.92
$9.13 $9.70
$10
$6.63
$6.61
$8
$6.00
$4.81
$6
$3.52
$4 $2.88
$1.66
$2
$0
-$2
-$1.21
-$4
-$6
Realized capital losses hit a record
-$8
$19.8 billion in 2008 due to financial
-$10
market turmoil, a $27.7 billion swing
-$12
-$14
from 2007. This is the primary cause of
-$16
2008’s large drop in profits and ROE.
-$18
-$19.80
-$20
Treasury Yield Curves:
Pre-Crisis vs. Current*
6%
5%
4%
3%
5.19%
5.04% 4.96%
5.00%
5.00%
4.96%
4.93%
4.82%
4.82% 4.82% 4.88%
Treasury Yield Curve is at its most
depressed level in at least 45 years.
Investment income will fall
significantly as a result.
1.82%
2%
1.31%
1%
0.10% 0.22%
0.43%
0.64%
0.93%
3M
6M
2.82%
2.42%
Stock dividend cuts will
further pressure
investment income
Current Yield Curve*
Pre-Crisis (July 2007)
0%
1M
3.78% 3.64%
1Y
2Y
3Y
*March 2009.
Sources: Federal Reserve; Insurance Information Institute.
5Y
7Y
10Y
20Y
30Y
72
Underwriting
Trends
Financial Crisis Does Not Directly
Impact Underwriting
Performance: Cycle, Catastrophes
Were 2008’s Drivers
P/C Insurance Industry Combined
Ratio, 2001-2009E
120
115.8
As recently as 2001, insurers
paid out nearly $1.16 for every
$1 in earned premiums
Relatively
low CAT
losses,
reserve
releases
2005 ratio benefited from
heavy use of reinsurance
which lowered net losses
110
107.5
Best combined
ratio since 1949
(87.6)
100
Cyclical
Deterioration
105.1
101.0
100.8
100.1
Including
Mortgage
& Fin.
Guarantee
insurers
101
98.4
95.7
92.6
90
2001
2002
2003
2004
*Includes Mortgage & Financial Guarantee insurers.
2005
2006
2007
2008
Sources: A.M. Best.
2008*
2009F
74
U.S. Insured Catastrophe Losses*
$100
$80
2008 CAT losses exceeded
2006/07 combined. 2005 was by
far the worst year ever for
insured catastrophe losses in the
US, but the worst has yet to come.
$100.0
$120
$100 Billion
CAT year is
coming soon
$61.9
$ Billions
$20
$26.0
$9.2
$6.7
$40
$7.5
$2.7
$4.7
$22.9
$5.5
$16.9
$8.3
$7.4
$2.6
$10.1
$8.3
$4.6
$26.5
$5.9
$12.9
$27.5
$60
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08**
20??
$0
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.
**Based on PCS data through Dec. 31. PCS $2.1B loss of for Gustav. $10.655B for Ike of 12/05/08.
Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and
personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B. 75
Source: Property Claims Service/ISO; Insurance Information Institute
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
-40
-45
-50
-55
Insurers earned a record underwriting profit of $31.7B in
2006 and $19.3B in 2007, the largest ever but only the 2nd
and 3rd since 1978. Cumulative underwriting deficit from
1975 through 2008 is $442B.
$19.799 Bill
underwriting
loss in 2008
incl. mort. &
FG insurers
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
$ Billions
Underwriting Gain (Loss)
1975-2008*
Source: A.M. Best, ISO; Insurance Information Institute
76insurers
* Includes mortgage & finl. guarantee
Number of Years With Underwriting
Profits by Decade, 1920s –2000s
Number of Years with Underwriting Profits
10
10
8
8
6
7
6
Underwriting profits were common
before the 1980s (40 of the 60 years
before 1980 had combined ratios
below 100)—but then they vanished.
Not a single underwriting profit was
recorded in the 25 years from 1979
through 2003.
5
4
4
3
2
0
1920s
1930s
1940s
1950s
1960s
Note: Data for 1920 – 1934 based on stock companies only.
Sources: Insurance Information Institute research from A.M. Best Data.
1970s
0
0
1980s
1990s
2000s*
77
*2000 through 2008.
Homeowners Insurance
Combined Ratio
165
158.4
Average 1990 to 2008E= 111.1
155
Insurers have paid out an average of
$1.11in losses for every dollar earned
in premiums over the past 17 years
145
135
121.7
125
117.7
115 113.0
118.4
113.6 112.7
105
121.7
116.5
111.4
109.4108.2
101.0
95
109.3
98.3 100.1
95.7
94.2
89.4
98
85
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08E 09F
Sources: A.M. Best (historical and forecasts)
Private Passenger Auto
(PPA) Combined Ratio
110
105
PPA is the profit
juggernaut of the
p/c insurance
industry today
107.9
104.2
103.5
101.7101.3101.3
101.0
Auto insurers have
shown significant
improvement in PPA
underwriting
performance since
mid-2002, but results
are deteriorating.
109.5
101.1
99.5
100
98.3 98.5
98.4
97.5
Average Combined
Ratio for 1993 to 2006:
100.7
95
94.4
95.1 95.5
90
93
94
95
96
97
98
99
Sources: A.M. Best (historical and forecasts)
00
01
02
03
04
05
06
07 08E 09F
Commercial Lines Combined
Ratio, 1993-2009F
Mortgage and financial
guarantee may account for up
to 4 points on the commercial
combined ratio in 2008
122.3
125
Commercial coverages
have exhibited significant
variability over time.
90
105.1
106.5
102.5
102.0
110.2
111.1
112.3
109.7
107.6
105.4
95.1
95
2006/07 benefited from favorable loss cost
trends, improved tort environment, low CAT
losses, WC reforms and reserve releases.
Most of these trends reversed in 2008 and
mortgage and financial guarantee segments
have big influence. 2009 is transition year.
91.1
100
103.9
105
110.2
110
112.5
115
110.3
120
85
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08E 09F
Sources: A.M. Best (historical and forecasts)
Catastrophic Loss
Catastrophe Losses Trends
Are Trending Adversely
U.S. Insured Catastrophe Losses*
$100
$80
2008 CAT losses exceeded
2006/07 combined. 2005 was by
far the worst year ever for
insured catastrophe losses in the
US, but the worst has yet to come.
$100.0
$120
$100 Billion
CAT year is
coming soon
$61.9
$ Billions
$20
$26.0
$9.2
$6.7
$40
$7.5
$2.7
$4.7
$22.9
$5.5
$16.9
$8.3
$7.4
$2.6
$10.1
$8.3
$4.6
$26.5
$5.9
$12.9
$27.5
$60
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08**
20??
$0
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.
**Based on PCS data through Dec. 31. PCS $2.1B loss of for Gustav. $10.655B for Ike of 12/05/08.
Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and
personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B. 82
Source: Property Claims Service/ISO; Insurance Information Institute
States With Highest Insured
Catastrophe Losses in 2008
$ Billions
$12.0
$10.2
$10.0
$8.0
$6.0
Big catastrophe losses turned
up in some surprising states in
2008, due to high tornado, hail
and wildfire damage as well as
inland hurricane damage
$4.0
$2.2
$2.0
$1.6
$1.3
$1.0
Minnesota
Ohio
Georgia
$0.0
Texas
California
Source: PCS; Insurance Information Institute.
Top 12 Most Costly Disasters in
US History, (Insured Losses, $2007)
$50
$45
$40
9 of the 12 most expensive
disasters in US history
have occurred since 2004
$43.6
$ Billions
$35
$30
$25
In 2008, Ike became the 6th most
expensive insurance event and 4th most
expensive hurricane in US history
$22.0 $22.9
$20
$15
$10
$5
$4.0
$5.0
$6.0
$7.0
$7.8
$8.2
Hugo
(1989)
Ivan
(2004)
Charley
(2004)
$10.7 $10.9 $10.9
$0
Jeanne
(2004)
Frances
(2004)
Rita
(2005)
Ike
(2008)*
Wilma
(2005)
Northridge
(1994)
9/11
Attacks
(2001)
Andrew
(1992)
Katrina
(2005)
84
*PCS estimate as of 12/15/08.
Sources: ISO/PCS; AIR Worldwide, RMS, Eqecat; Insurance Information Institute inflation adjustments.
Inflation-Adjusted U.S. Insured
Catastrophe Losses By Cause of Loss,
1988-2007¹
Fire, $8.1 , 2.6%
Wind/Hail/Flood,
$9.9 , 3.2%
Earthquakes, $19.5 ,
6.3%
Winter Storms,
$24.4 , 7.9%
Civil Disorders, $1.1
, 0.4%
Water Damage, $0.4
, 0.1%
Utility Disruption,
$0.2 , 0.1%
Tornadoes, $82.4 ,
26.5%
Insured disaster losses
totaled $310.5 billion from
1988-2007 (in 2007 dollars)
Terrorism, $22.9 ,
7.4%
All Tropical
Cyclones, $141.6 ,
45.6%
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2007 dollars.
Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.
2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions
and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood
Insurance Program. 6 Includes wildland fires.
Source: Insurance Services Office (ISO)..
Insurance Information
Institute On-Line
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