INFORM+INSPIRE
The Business of Insurance
Robert E. Hoyt, Ph.D.
May 6, 2013
The Griffith Insurance Education Foundation
Overview


Property and Casualty Insurance
Insurance Operations





Investments
Performance and Capacity
Reinsurance Principles
Insurance Guaranty Funds
Risk and Industry Trends to Watch
The Griffith Insurance Education Foundation
Premium Breakdown in the P/C
Industry (2011)
Other P/C Lines
$228.2B/46%
Homeowners
$73.7B/15%
Source: NAIC Data
Auto
$190.5B/39%
Property Exposures

Types of property exposed to
loss


Real property (buildings)
Personal property (contents)

Causes of loss affecting
property (perils)

Property loss consequences


Direct loss
Indirect loss
Major Property Insurance
Policies








homeowners (HO)
building and personal property
(BPP)
business income (BIC)
boiler & machinery
inland marine (floaters)
ocean marine
crime (employee dishonesty)
difference in conditions (DIC)
A World of Extremes
(Attention on Risk)

Earthquake in Haiti (record death toll)

Recent recession (deepest since the Great
Depression)

BP Platform explosion

Japanese Tsunami

1,000 all-time weather records set (most heat or rain)

10 U.S. weather cats costing over $1 billion each

99 federal disaster declarations (avg. 34 prev. 50 yrs)

Boston bombings
$70
$ Billions
$60
$61.9
U.S. Insured Catastrophe
Losses
Sandy $18.8B
$35.9
$35.0
$27.1
$10.6
$13.8
$10
$9.2
$6.7
$20
$7.5
$2.7
$4.7
$30
$5.5
$22.9
$40
$16.9
$8.3
$7.4
$2.6
$10.1
$8.3
$4.6
$26.5
$5.9
$12.9
$27.5
$50
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
$0
Source: Property Claims Service/ISO;
Insurance Information Institute
The Griffith Insurance Education Foundation
Top Most Costly Disasters in U.S.
(Insured Losses, 2011 Dollars, $ Billions)
$50
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
Taken as a single event, the Spring 2011
tornado and storm season is the 4th
costliest event in US insurance history
$19.1
$7.7 $8.5 $9.0
$6.5
$4.3 $4.4 $5.5
Irene
(2011)
Jeanne
(2004)
Frances
(2004)
Rita
(2005)
Hugo
(1989)
Ivan
(2004)
Charley
(2004)
Sources: PCS; Insurance Information Institute inflation adjustments.
The Griffith Insurance Education Foundation
$21.3
$47.6
$24.0 $25.0
$11.9 $13.1
Wilma
(2005)
Ike
Northridge Spring 9/11 Attack Andrew
(2008)
(1994) Tornadoes (2001)
(1992)
& Storms*
(2011)
Katrina
(2005)
Hurricane/Superstorm Sandy

Estimated $19 billion insured losses

Economic loss of nearly $80 billion

Over $7 billion in NFIP flood claims

Major infrastructure claims

Source of continued uncertainty in
estimates
The Griffith Insurance Education Foundation
Sandy Lessons and Issues

Flood risk remains a big issue

NFIP

Business interruption is one of the biggest
issues facing businesses – and it is poorly
assessed and addressed

Will insurers’ cat risk mitigation strategies
work?



watch decisions on “hurricane” deductibles
availability and pricing in cat-prone areas
Data Centers, utilities, supply chains …
The Griffith Insurance Education Foundation
Securitization of Property Risk
(Catastrophe Bonds)
Risk Capital Issues ($ Mill)
$8,000
$7,000
$6,000
$5,000
$4,000
Cincinnati Insurance in
Jan. 2013 issued $61.2
million cat bonds for New
Madrid earthquake and
severe thunderstorms
protection.
Number of Issuances
$6,300.0
$4,693.4
$1,000
$4,800.0
$4,300.0
$3,400.0
$2,700.0
$3,000
$2,000
35
$7,329.6
$1,729.8 $1,991.1
$1,139.0
$984.8
$1,219.5 $1,142.8
$846.1
$966.9
$633.0
$0
30
25
20
15
10
5
0
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: MMC Securities Guy Carpenter, A.M. Best; Insurance Information Institute.
The Griffith Insurance Education Foundation
Number of Issuances
Risk Capital Issued
Characteristics of Liability
Risks

Involvement of a third party

Difficulty in defining the risk




measurement of the loss amount
establishing fault
identifying the scope of exposure
"Long-tail" problem
The Griffith Insurance Education Foundation
Major Liability Insurance
Policies










homeowners
personal auto policy (PAP)
commercial general liability (CGL)
business auto coverage (BAC)
umbrella liability policies (commercial and personal)
directors and officers liab. (D & O)
environmental impair. liab. (EIL)
workers comp. / employers liability
employment practices liability (EPL)
professional liability (malpractice)
Average Expenditures on Auto
Insurance
Countrywide auto insurance
expenditures are expected to
increase about 3% in 2012
$950
$900
$850
$830
$842
$831
$816
$795$789
$786
$800
$750
$839
$808$816
$785
$726
$691
$700
$651
$705$703
$668
$685$690
$650
$600
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10* 11* 12*
* Insurance Information Institute Estimates/Forecasts
Source: NAIC, Insurance Information Institute estimates 2010-2013
based on CPI and other data.
The Griffith Insurance Education Foundation
Average Auto Insurance Expenditure:
Top/Bottom 5 vs. US (2010)
$1,400
Detroit ($5,941), Philadelphia ($4,071)
$1,200
$1,000
$800
$600
$400
$200
$0
NJ
DC
LA
NY
FL
US
ME
ID
Source: NAIC; Insurance Information Institute.
IA
ND
SD
Cost of Insurance Fraud

Second largest economic crime

Healthcare fraud $81 to $270
billion per year (Medicare,
Medicaid and private insurance)

Property-casualty fraud $32 billion


auto insurance fraud $6.8 billion
workers’ compensation fraud $5 billion
$
$
$
INFORM+INSPIRE
Insurance Operations
The Griffith Insurance Education Foundation
Structure of Insurance Market

Types of insurers



property-liability insurers
life insurers
health insurers

Organizational form

Competitive market
The Griffith Insurance Education Foundation
Industry Size (L-H v. P-C)
2,343 Life Insurers in 1988
1106
Insurers
2737
627
Premiums ($billion)
481
4.8
Assets ($trillion)
0%
20%
40%
Life-Health
Property-Liability
1.49
60%
80% 100%
Source: III Insurance Fact Book 2011.
The Griffith Insurance Education Foundation
Statutory Accounting Principles (SAP)
(Insurance Accounting)

GAAP v. SAP




going concern v. liquidation
expenses recognized immediately while
revenues must be accrued
admitted v. non-admitted assets
conservative securities valuation
Insurance Market Direction
Reserves



Surplus
Assets – Liabilities = Net worth
Policyholder Surplus = Capital
= Capacity = Supply
Factors to consider

Underwriting (losses)





Reserves
Reinsurance
Cats
If domicile of parent
considered, 83.4% of
reinsurance bought by U.S.
insurers was from foreign
reinsurers
Investments
Regulation (e.g., Basel III)
Distribution of P/C Insurance Industry’s
Investment Portfolio
As of December 31,
2010
66.4%
 Invested assets
totaled $1.32 trillion
 Generally, insurers
invest conservatively,
with over 2/3 of
invested assets in
bonds
 Only 17% of invested
assets were in
common or preferred
stock
Bonds
9.9%
Other
6.5%
Cash &
Short-term
Investments
Common &
Preferred
Stock 17.2%
Sources: NAIC & III.
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
-40
-45
-50
-55
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
$ Billions
Underwriting Gain (Loss)
Source: A.M. Best, ISO; Insurance Information Institute
The Griffith Insurance Education Foundation
P/C Insurer Investment Gains
$ Billions
$60
$50
$63.6
$57.9
$52.3
$47.2
$42.8
$40 $35.4
$59.4
$55.7
$56.9
$51.9
$44.4
$48.9
$45.3
$36.0
$51.5
$56.2
$53.4 $53.9
$39.2
$30
$20
$10
$0
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Investment gains consist primarily of interest, stock dividends and realized
capital gains and losses. Sources: ISO; Insurance Information Institute.
The Griffith Insurance Education Foundation
Policyholder Surplus
$ Billions
$584 $587
$580
$565
$559
$557
$560
$540
$520
$500
$570
$568
$545
$541
$531
$516
$522
$518
$513
$505
$497
$550
$539
$512
$491
$479
$480
$463
$456
$460
$437
$440
12:Q4
12:Q3
12:Q2
12:Q1
11:Q4
11:Q3
11:Q2
11:Q1
10:Q4
10:Q3
10:Q2
10:Q1
09:Q4
09:Q3
09:Q2
09:Q1
08:Q4
08:Q3
08:Q2
08:Q1
07:Q4
07:Q3
07:Q2
07:Q1
$420
Policyholder Surplus (Net Worth) = Assets – Liabilities
Source: ISO (historical); Insurance Information Institute.
The Griffith Insurance Education Foundation
Average Commercial Insurance
Rate Changes
8.0%
7.0%
6.0%
5.3%
4.7%
5.0%
4.0%
4.8%
5.0%
3.9%
3.0%
2.0%
1.0%
0.0%
Q4 2011
Q1 2012
Q2 2012
Q3 2012
Q4 2012
Average commercial insurance rate changes in that quarter.
Source: Council of Insurance Agents and Brokers.
The Griffith Insurance Education Foundation
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Reinsurance Principles
The Griffith Insurance Education Foundation
Reinsurance

Definition


Shifting of part or all of the insurance
originally written by one insurer to
another insurer
Customer

other insurers ( primary insurer )
The Griffith Insurance Education Foundation
Reinsurers

Professional
reinsurers



direct
broker market
Reinsurance
departments
Terms

Ceding Company ( primary insurer )

Reinsurer

Net Retention

Cession

Retrocession

retrocessionnaire and retrocedent
The Griffith Insurance Education Foundation
Types of Reinsurance

Contracts



Facultative
Treaty
Coverage


Proportional (quota and
surplus share)
Excess
Functions of Reinsurance
Benefits for Insureds & Insurers
Benefits for
Insureds
All coverage can be obtained from one insurer,
reducing the chance of coverage gaps & problems in
loss collection.
Benefits for
Insurers
Stabilizes loss experience.
Increases large line capacity.
Provides surplus relief.
Reduces the chance of primary insurer insolvency.
Protects against catastrophic losses.
Allows small insurers to compete with large insurers,
which should increase availability & reduce price.
Provides underwriting assistance.
Allows withdrawal from a territory or class of business.
The Griffith Insurance Education Foundation
Reinsurance Regulation



Less stringent (little rate regulation)
Top three
Domestic, foreign, alien
domiciles
Credit for reinsurance
are:
(indirect regulation)



effects primary insurer’s liabilities
and its surplus
creates incentives to deal with
sound reinsurers
• Germany
• Switzerland
FIO has a monitoring role as well
The Griffith Insurance Education Foundation
• U.S.
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Guaranty Funds
The Griffith Insurance Education Foundation
Guaranty Funds
 Funds in all states (P-C and Life)
 Coverage limits vary across states
 Funded on a post-assessment
basis (except NY)
 Modest levels of insolvencies have
made this workable
The Griffith Insurance Education Foundation
P/C Insurer Impairments
The number of impairments varies significantly
over the p/c insurance cycle, with peaks occurring
well into hard markets
49
50
47
13
15
19
21
34
35
18
18
19
31
15
12
16
14
13
4
7
9
13
12
9
11
9
7
8
10
15
12
20
19
30
29
31
34
34
40
36
41
50
49
49
49
54
60
60
58
70
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
0
Source: A.M. Best; Insurance Information Institute
The Griffith Insurance Education Foundation
Reasons for P/C Insurer Impairments
(1969-2010)
Deficient Loss Reserves and Inadequate Pricing Are the Leading Cause
of Insurer Impairments. Investment and Catastrophe Losses Play a Much Smaller Role
Reinsurance Failure
Sig. Change in Business
3.6%
4.0%
Misc.
8.6%
Investment
Problems
Deficient Loss Reserves/
Inadequate Pricing
7.3%
40.3%
7.8%
Affiliate Impairment
7.1%
Catastrophe Losses
7.8%
13.6%
Reason in 54.5% of
insolvencies in
2010
Alleged Fraud
Rapid Growth
The Griffith Insurance Education Foundation
Source: A.M. Best
Number of Impaired L/H Insurers
81
90
80
70
46
60
55
Average number
of impairments,
1976-2010: 18.2
0
2
6
12
3
8
9
10
5
5
10
8
10
12
19
18
12
11
16
16
16
6
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
10
11
20
10
12
13
12
17
30
24
23
27
32
40
26
38
50
The Number of Impairments Spiked in 1989-92. But in
the Financial Crisis, When Large Numbers of Banks
Failed, Virtually No Life Insurers Failed.
Source: A.M. Best Special Report “1969-2011 Impairment Review”; Insurance Information Institute.
The Griffith Insurance Education Foundation
Reasons for L-H Insurer Impairments
(1976-2009)
Leading Causes of Impairment
Other, 15.0%
Alleged
Fraud, 9.1%
Deficient
Loss
Reserves/
Inadequate
Pricing, 27.5%
Rapid
Growth,
14.5%
---Business Management
(Rapid Growth, Investment
Problems, Affiliate Problems)
---Deficient Loss Reserves/
Inadequate Pricing
Affiliate
Problems,
18.6%
Investment
Problems,
15.4%
Source: A.M. Best, 1976-2009 Impairment Review, Special Report
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Trends to Watch
The Griffith Insurance Education Foundation
Interest and Concern in
Risk Management

Google Search

Risk Management –



2006 & 2007: 3.2 million
2008 & 2009: 27.2 million
2011 & 2012: 81.4 million
“Audit committee members rank risk
management as top worry”


KPMG Survey of Corporate Directors
The Griffith Insurance Education Foundation
Risk Trends

Reputation risks


80% chance of a company losing at least 20% of
its value in any single month over a five-year
period due to a reputation crisis (Aon, 2012)
Cyber-Liability




Need to think about these risks outside of the IT
department
Data loss, privacy, virus issues
Need broad-based, disaster recovery plan (need
to test it!)
Liability / Tort issues

Climate, energy, professional
The Griffith Insurance Education Foundation
Top Insurance Industry Trends

Risk and Capital Management




Financial Reporting
Regulatory Compliance




Low interest rate environment
Strategic risk management (ERM)
Dodd-Frank (Thrift owners and SIFIs)
ORSA and Solvency II
Catastrophe Risk
Terrorism Risk (especially without TRIA)
The Griffith Insurance Education Foundation
Other Insurance Industry Trends

Businesses opting for higher retentions


Big data



Especially in workers’ compensation
Predictive modeling (underwriting and claims)
Distribution issues (web and social media)
Talent


The graying of the workforce
Recruiting and retaining it
The Griffith Insurance Education Foundation
Contact Information for the
Risk Management and Insurance
Program at the University of Georgia

Department Head, Rob Hoyt



Brooks Hall 206
rhoyt@uga.edu
Our web site

www.terry.uga.edu/insurance
The Griffith Insurance Education Foundation