Overview & Outlook for the
P/C Insurance Industry
An Industry at the Crossroads
Insurance Information Institute
April 23, 2007
Robert P. Hartwig, Ph.D., CPCU, President & Chief Economist
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: (212) 346-5520  Fax: (212) 732-1916  bobh@iii.org  www.iii.org
Presentation Outline
•
•
•
•
•
•
•
P/C Profit Overview—2006, A Cyclical Peak
Underwriting Trends: Unsustainable?
Premium Growth: Approaching a Standstill
Pricing: Competitive Pressures Mounting
Expenses: Will Ratios Rise a Growth Slows?
Capital & Capacity: UnderleveragedROE Pressure
Catastrophe Loss Management
 What is the Appropriate Role for Government?
•
•
•
•
•
•
Reinsurance Summary
Financial Strength & Ratings
Investments: Less Bang for the Buck
Tort System: Great News for a Change (Mostly)
Legislative & Regulatory Update
Q&A
P/C PROFIT:
An Historical
Perspective
Profits in 2006 Reached
Their Cyclical Peak
Highlights: Property/Casualty,
2006 vs. 2005
Growth up due to coastal
property premiums
Item
Net Written Prem.
2006
443,778
2005
425,500
Change
+4.3%
Loss & LAE
283,700
311,624
-9.0%
Net UW Gain (Loss)
31,232
(5,612)
N/A
Record underwriting
Net Inv.
Gain**
profit:
Unsustainable
55,561
59,430
-6.4%
Net Income (a.t.)
63,695
44,155
+44.3%
Surplus*
487,123
425,760
+14.4%
92.4
100.9
Combined Ratio*
-8.5 pts.
*Comparison is with year-end 2004 value. **Includes invest income and realized investment gains/losses.
Source: ISO, Insurance Information Institute
P/C Net Income After Taxes
1991-2006 ($ Millions)*
$70,000
$60,000
$50,000
2001 ROE = -1.2%
2002 ROE = 2.2%
2003 ROE = 8.9%
2004 ROE = 9.4%
2005 ROE= 10.5%
2006 ROAS1 = 14.0%
Though up in 2006, insurer
profits are highly volatile
(2001 was the industry’s
worst year ever). ROEs
generally fall below that of
most other industries.
$36,819
$30,773
$40,000
$30,000
$20,000 $14,178
$10,000
$19,316
$24,404
$20,598
$63,695
$44,155
$38,501
$30,029
$21,865
$20,559
$10,870
$5,840
$3,046
*ROE figures are GAAP; 1Return on avg. Surplus.
Sources: A.M. Best, ISO, Insurance Information Inst.
06
05
04
03
-$6,970
01
00
99
98
97
96
95
94
93
92
91
-$10,000
02
$0
ROE: P/C vs. All Industries
1987–2008E
20%
P/C profitability is cyclical, volatile and vulnerable
15%
10%
Sept. 11
5%
US P/C Insurers
*2007-08 P/C insurer ROEs are I.I.I. estimates.
Source: Insurance Information Institute; Fortune
All US Industries
07
F
08
F
06
04
03
02
01
00
99
98
4 Hurricanes
97
96
93
92
91
90
89
88
95
Northridge
-5%
05
Andrew
87
Katrina,
Rita, Wilma
Lowest CAT
losses in 15 years
94
0%
Hugo
RETURN ON EQUITY (Fortune):
Stock & Mutual vs. All Companies*
Stock
14.6%
14.9%
15% 14.0%
16%
14%
Mutual
13.4%
13.0%
13%
15.0%
14%
All Cos.*
13%
12%
10.4%
13%
13.9%
12%
10.0%
11%
12%
12.6%
10%
11% 11%
10%
10%
9%
8%
8%
7%
8%
6%
7%
6%
4%
Mutual insurer ROEs are
2%
2%
typically lower than for stock
0%
companies, but gap has
-2%
-2%
narrowed. All are cyclical.
-4%
1998
2000
2001
2002
2003
*Fortune 1,000 group.
Source: Fortune Magazine, Insurance Information Institute.
2004
2005
2006E 2007F 2008F
Profitability Peaks & Troughs in the
P/C Insurance Industry, 1975 – 2008F
25%
1977:19.0%
1987:17.3%
2006E:14.0%
20%
1997:11.6%
15%
10%
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
07F
08F
-5%
*2007-08 P/C insurer ROEs are I.I.I. estimates.
Source: Insurance Information Institute; ISO, A.M. Best.
ROE vs. Equity Cost of Capital:
US P/C Insurance:1991-2006
18%
The p/c insurance industry achieved its cost of
capital in 2005/6 for the first time in many years
16%
+5.5 pts
14%
12%
6%
4%
2%
0%
-2%
-4%
The cost of capital
is the rate of return
insurers need to
attract and retain
capital to the
business
US P/C insurers missed their
cost of capital by an average 6.7
points from 1991 to 2002, but on
target or better 2003-06
91
92
93
94
95
96
97
98
Source: The Geneva Association, Ins. Information Inst.
99
+1.0 pts
-13.2 pts
8%
+0.2 pts
-9.0 pts
10%
00
01
02
ROE
03
04
05
06E
Cost of Capital
Insurance & Reinsurance Stocks:
Strong Finish in 2006
Total Returns for 2006
S&P 500
13.62%
Life/Health
16.24%
19.95%
Reinsurers
16.57%
10.33%
9.53%
0.61%
0.0%
Broker stocks held back
by weak earnings
5.0%
10.0%
P/C
P/C insurer & reinsurer
stocks rallied in late 2006
as hurricane fears
dissipated and insurers
turned in strong results
15.0%
20.0%
25.0%
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
All Insurers
Multiine
Brokers
Insurance & Reinsurance Stocks:
Slow Start in 2007 in P/C, Reins
Total YTD Returns Through April 20, 2007
S&P 500
4.66%
8.16%
-1.44%
P/C insurance, reinsurance
stocks lagging on soft market
concerns and worries over
2007 hurricane season
0.08%
2.84%
Life/Health
Reinsurers
P/C
All Insurers
0.97%
Multiline
8.23%
Brokers
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Advertising Expenditures by P/C
Insurance Industry, 1999-2005
$ Billions
$3.1
$2.9
$2.7
Ad spending by P/C insurers
is at a record high, signaling
increased competition
$2.975
$2.5
$2.3
$2.111
$2.1
$1.9
$1.882
$1.736
$1.737
99
00
$1.803
$1.708
$1.7
$1.5
01
02
03
04
Source: Insurance Information Institute from consolidated P/C Annual Statement data.
05
UNDERWRITING
Extremely Strong 2006,
Momentum for 2007
P/C Industry Combined Ratio
120
115.8
110
As recently as 2001,
insurers were paying
out nearly $1.16 for
every dollar they
earned in premiums
107.4
2006 produced the best
underwriting result
since the 87.6 combined
ratio in 1949
100.7
100.1
100
2007/8 deterioration due
primarily to falling rates, but
results still strong assuming
normal CAT activity
98.6
98.3
96.6
2005 figure benefited from
heavy use of reinsurance
which lowered net losses
92.4
90
01
02
03
04
05
06
Sources: A.M. Best; ISO, III. *Estimates/forecasts based on III’s 2007 Early Bird survey.
07F
08F
Ten Lowest P/C Insurance
Combined Ratios Since 1920
94
93.0
93
92.1
92
92.3
92.4
93.1
93.1
93.3
92.4
91.2
91
90
The industry’s best
underwriting years
are associated with
periods of low
interest rates
89
88
87.6
87
86
The 2006 combined
ratio of 92.4 was the
best since the 87.6
combined in 1949
85
1949
1948
1943
1937
1935
2006
1950
Sources: Insurance Information Institute research from A.M. Best data.
1939
1953
1936
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
-40
-45
-50
-55
Insurers earned an underwriting profit of
$31.2 billion in 2006, the largest ever but only
the second since 1978. Despite the 2006
underwriting profit, the cumulative
underwriting deficit since 1975 is $419 billion.
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
$ Billions
Underwriting Gain (Loss)
1975-2006
Source: A.M. Best, Insurance Information Institute
Commercial Lines Combined
Ratio, 1993-2006E*
03
04
122.3
110.2
111.1
112.3
109.7
105.1
102.5
100
Outside CATaffected lines,
commercial
insurance is doing
fairly well. Caution is
required in
underwriting longtail commercial lines.
102.0
105
103.9
110
107.6
2006 results will benefited from
relatively disciplined underwriting
and low CAT losses
95
90
94
115
110.3
120
110.2
125
112.5
Commercial coverages
have exhibited extreme
variability. Are current
results anomalous?
85
93
94
95
96
97
Source: A.M. Best; Insurance Information Institute
98
99
00
.
01
02
05
06F
90
91.0
A very strong 2006 resulted from
favorable frequency & severity
trends and low CAT activity
96.4
104.5
105.3
94.3
95
98.4
100
102.7
99.8
104.9
103.5
104.5
105
103.9
110
109.9
115
110.9
Personal Lines
Combined Ratio, 1993-2006E
85
93
94
95
96
97
98
Source: A.M. Best; Insurance Information Institute.
99
00
01
02
03
04
05
06F
Impact of Reserve Changes on
Combined Ratio
6.5
$22.7
$0
3
1.9
$0.4
2000
2001
2002
2003
2004
Source: A.M. Best, Lehman Brothers for years 2005E-2007F
2
1.1
2005E
$5.0
0.1
4
$8.0
$5
5
2.4
$13.9
$10
6
3.6
3.5
$9.9
$15
7
Reserve adequacy
has improved
substantially
$20
$10.8
Reserve Development ($B)
$25
Combined Ratio Points
0.4
2006E
2007E
1
$2.0
0
Combined Ratio Points
PY Reserve Development
The Big Question: Is the Industry
More Disciplined Today?
• Signs suggest that the answer is yes
• Current period of sustained underwriting profitability is the
first since the 1950s
• While prices are falling, underlying lost cost trends (frequency
and severity trends) are generally favorable to benign
 Suggest impact of falling prices will be less pronounced than late 1990s
• Reserve situation appears much improved an under control
• Management Information Systems: Much More Sophisticated
 Insurers can monitor and make adjustments much more quickly
 Adjustments made quickly by line, geographic area, producer, etc.
• Investment Income
 Relative to late 1990s, interest rates and stock markets returns are lower
 Has effect of imposing (some) discipline
• Ratings Agencies
 More stringent capital requirements
 Quicker to downgrade
PREMIUM
GROWTH
Deceleration in 2006,
Even Slower in 2007
Strength of Recent Hard Markets
by NWP Growth*
25%
1975-78
1984-87
2001-04
2006-2010 (post-Katrina)
period could resemble 1993-97
(post-Andrew)
20%
15%
10%
5%
0%
-5%
2005: biggest real drop in
premium since early 1980s
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007F
2008F
2009F
2010F
-10%
Note: Shaded areas denote hard market periods.
Source: A.M. Best, Insurance Information Institute
*2007-10 figures are III forecasts/estimates. 2005 growth of
0.4% equates to 1.8% after adjustment for a special one-time
transaction between one company and its foreign parent.
2006-2008 figures from III Groundhog Survey.
Growth in Net Written
Premium, 2000-2008F
14.1%
9.8%
8.1%
5.1%
P/C insurers will experience
their slowest growth rates
since the late 1990s…but
underwriting results are
expected to remain healthy
4.7%
4.3%
1.8%
1.9%
2007F
2008F
0.3%
2000
2001
2002
2003
2004
2005
2006
Source: A.M. Best; Forecasts from the Insurance Information Institute’s Groundhog
survey: http://www.iii.org/media/industry/financials/groundhog2007/.
PRICING
Under Pressure in 2007
$650
$847
$851
$847
$838
$823
$724
$690
$668
$700
$651
$750
$685
$800
$703
$850
$705
$900
Countrywide auto
insurance expenditures
are expected to fall 0.5%
in 2007, the first drop
since 1999
$691
$950
$780
Average Expenditures on
Auto Insurance
Lower underlying
frequency and modest
severity are keeping auto
insurance costs in check
$600
94 95 96 97 98 99 00 01 02 03 04 05* 06* 07*
*Insurance Information Institute Estimates/Forecasts
Source: NAIC, Insurance Information Institute
Average Expenditures on
Homeowners Insurance**
Countrywide home insurance expenditures
rose an estimated 6% in 2006
$900
$835
$850
$787
$800
Homeowners in non$729
$750
CAT zones will see
$668
$700
smaller increases, but
$650
$593
larger in CAT zones
$600
$536
$550
$508
$488
$481
$500
$455
$440
$450 $418
$400
95 96 97 98 99 00 01 02 03 04 05* 06*
*Insurance Information Institute Estimates/Forecasts
**Excludes cost of flood and earthquake coverage.
Source: NAIC, Insurance Information Institute
Average Commercial Rate Change,
All Lines, (1Q:2004 – 4Q:2006)
0%
-0.1%
-2%
-4%
-6%
-8%
Magnitude of rate decreases
has diminished greatly since
mid-2005 but is growing again
-2.7%-3.0%
-3.2%
-4.6%
-5.9%
-7.0%
-5.3%
-8.2%
-10%
-9.4%-9.7%
KRW Effect
-9.6%
-12%
1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Average Commercial Rate
Change by Line: 4Q99 – 4Q06
Commercial accounts
trended downward from
early 2004 to mid-2005
though that trend
moderated post-Katrina
Source: Council of Insurance Agents & Brokers
Average Commercial Rate Change
by Account Size: 4Q99 – 4Q06
Accounts of all sizes
are renewing
downward and more
quickly than in 06Q3
Source: Council of Insurance Agents & Brokers
Percent of Commercial Accounts Renewing
w/Positive Rate Changes, 2nd Qtr. 2006
80%
70%
Commercial Property
Business Interruption
71%
Largest increases for Commercial
Property & Business Interruption are
in the Southeast, smallest in Midwest
63%
60%
48%
50%
40%
32%
35%
28%
30%
21%
20%
21%
12%
10%
Northeast
Midwest
10%
0%
Southeast
Southwest
Pacific NW
Source: Council of Insurance Agents and Brokers
Percent of Commercial Accounts Renewing
w/Positive Rate Changes, 4th Qtr. 2006
Commercial Property
30%
25%
Business Interruption
Largest increases for
Commercial Property &
Business Interruption
are in the Southeast, but
are diminishing;
Smallest in Midwest
25%
20%
15%
11%
10%
8%
6% 6%
6%
5%
6%
3%
0% 0%
0%
Southeast
Southwest
Pacific NW
Source: Council of Insurance Agents and Brokers
Northeast
Midwest
Commercial Accounts Rate Changes,
2nd Qtr. 2006 vs. 4th Qtr. 2006
2Q06
10%
4Q06 9.3%
5%
Even commercial
property is now
renewing down in 2006
0%
-5%
-10%
-3.6%
-4.5%
-9.3%
-2.3%
-5.6%
-6.9%-8.1%
-8.1%
-7.7%
-9.6%
-8.6%
-15%
Commercial Workers Commercial General Umbrella Average
Auto
Comp Property Liability
Source: Council of Insurance Agents and Brokers
EXPENSES
Will Expense Ratio Rise as
Premium Growth Slows?
Personal vs. Commercial Lines
Underwriting Expense Ratio*
Personal
31.1%
32%
30.8%
30%
30.0%
29.4%
29.9%
29.1%
28%
26.6%
26%
25.0%
24.3%
24%
Commercial
25.6% 25.6%
23.4%
24.8% 24.5%
26.6%
25.0%
24.4%
Expenses ratios will
likely rise as premium
growth slows
22%
25.6%
24.6%
24.7%
20%
96
97
98
99
00
*Ratio of expenses incurred to net premiums written.
Source: A.M. Best; Insurance Information Institute
01
02
03
04
05
CAPACITY/
SURPLUS
The Industry in
Underleveraged
U.S. Policyholder Surplus:
1975-2006
$550
$500
$450
$400
$ Billions
$350
$300
$250
$200
$150
Capacity as of 12/31/06 was
$487.1B (est.), 14.4% above yearend 2005, 71% above its 2002
trough and 46% above its 1999
peak.
Foreign reinsurance
and residual market
mechanisms absorbed
45% of 2005 CAT
losses of $62.1B
$100
$50
“Surplus” is a measure of
underwriting capacity. It is
analogous to “Owners
Equity” or “Net Worth” in
non-insurance organizations
$0
7576 77 7879 8081 82 8384 8586 87 8889 9091 9293 94 9596 9798 99 0001 0203 04 0506
Source: A.M. Best, ISO, Insurance Information Institute.
Capital Raising by Class Within
15 Months of KRW
$ Billions
Insurance Linked
Securities, $6.253 ,
19%
Insurers &
Reinsurers raised
$33.7 billion in the
wake of Katrina,
Rita, Wilma
New Cos., $8.898 ,
26%
Source: Lane Financial Trade Notes, January 31, 2007.
Sidecars, $6.359 ,
19%
Existing Cos.,
$12.145 , 36%
Annual Catastrophe Bond
Transactions Volume, 1997-2006
Number of Issuances
Risk Capital Issues ($ Mill)
$4,693.4
$5,000
Catastrophe bond issuance has
$4,500
soared in the wake of Hurricanes
$4,000
Katrina and the hurricane
$3,500
seasons of 2004/2005
$3,000
$2,500
$1,991.1
$1,729.8
$2,000
$1,139.0
$1,500
$966.9$1,219.5
$1,142.8
$846.1 $984.8
$1,000 $633.0
$500
$0
97
98
99
00
01
02
03
Source: MMC Securities and Guy Carpenter; Insurance Information Institute.
04
05
06
20
18
16
14
12
10
8
6
4
2
0
Number of Issuances
Risk Capital Issued
£17.0
£9.0
£14.8
£13.7
£15.0
£12.2
£11.3
£10.1
£9.9
£8.9
£11.0
£10.2
£12.0
£10.3
£10.9
£13.0
£10.0
£14.0
£10.2
Lloyd’s capacity is up 1.3
GBP or 8.8% in 2007 and
63% since its 1999 trough
£15.0
£14.4
Billions of GBP
£16.0
£10.0
£16.1
Lloyd’s Capacity (Global)
£8.0
£7.0
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Sources: Lloyd’s
INVESTMENT
IRONY
Markets & Interest
Rates Up, Returns Flat
Property/Casualty Insurance
Industry Investment Gain*
$ Billions
$57.9
$60
$52.3
$40
$55.7
$51.9
$48.9
$47.2
$50
$59.4
$56.9
$36.0
$35.4
$30
$45.3
$44.4
$42.8
Investment gains fell in
2006 and are now only
comparable to gains
seen in the late 1990s
$20
$10
$0
94
95
96
97
98
99
00
01
02
03
04 05** 06
*Investment 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. Source: ISO; Insurance Information Institute.
Net Investment Income
$60
$ Billions
$50
Investment income
posted modest
gains in 2006
$40
Growth History
$30
$20
2002: -1.3%
2003: +3.9%
2004: +3.4%
$10
2005: +24.4%**
2006: +5.2%
$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
Source: A.M. Best, ISO, Insurance Information Institute;
**Includes special dividend of $3.2B. Increase is 15.7% excluding dividend.
Total Returns for Large
Company Stocks: 1970-2007*
S&P 500 was up 13.62% in 2006, Up 4.66% YTD 2007*
40%
30%
20%
10%
0%
-10%
Source: Ibbotson Associates, Insurance Information Institute.
*Through April 20, 2007.
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1976
1974
1972
-30%
1970
-20%
1978
Markets rose in 2006 for
the 4th consecutive year
US P/C Net Realized Capital Gains,
1990-2006 ($ Millions)
$15,000
$10,000
$10,808
$9,244
$9,893$9,818
$5,997
$9,701
$9,125
$6,631
$6,610
$4,806
$5,000
$2,880
$3,359
$20,000
Realized capital gains
rebounded strongly in
2004/5 but fell sharply in $18,019
2006 despite strong stock
$16,205
market as insurers “bank”
their gains
$13,016
$1,664
$0
-$1,214
-$5,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Sources: A.M. Best, ISO, Insurance Information Institute.
CATASTROPHIC
LOSS
Insurers Accused of
Crying Wolf Over Cats
U.S. Insured Catastrophe Losses*
$ Billions
$100.0
$61.9
$9.2
$27.5
$4.6
00
$12.9
$8.3
99
$26.5
$10.1
$2.6
97
98
$7.4
96
$4.7
91
$8.3
$2.7
90
95
$7.5
89
$40
$16.9
$60
$5.5
$80
$22.9
2006 was a welcome respite.
2005 was by far the worst
year ever for insured
catastrophe losses in the US,
but the worst has yet to come.
$100
$20
$100 Billion
CAT year is
coming soon
$5.9
$120
20??
06
05
04
03
02
01
94
93
92
$0
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.
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 = $12.2B.
Source: Property Claims Service/ISO; Insurance Information Institute
U.S. Catastrophe Losses 2006: States
With Largest Losses ($ Millions)
$1,600
$1,400
$1,200
$1,000
$1,500
Some 33 catastrophe events* in 34 states cost
insurers an estimated $8.8bn in 2006, compared
with $61.9bn in 2005. Cat losses in the following
five states -- totaling $4.5bn -- represent half the
total catastrophe losses for the year.
$878
$800
$873
$688
$601
$600
$400
$200
SURPRISE!! Indiana led the
US with $1.5 billion in
insured CAT losses in 2006
$0
Indiana
Missouri
Tennessee
Texas
Kansas
*ISO defines a catastrophe event as an event causing $25 million or more in insured property losses.
Source: ISO; Insurance Information Institute
1819
Number of Tornadoes,
1985 – 2006p
2,000
702
88
1333
1254
1376
941
1216
1071
1345
1424
1148
1173
1234
1082
856
656
87
800
684
1,000
765
1,200
1173
1133
1,400
1132
1,600
1297
1,800
There are usually more than
1,000 confirmed tornadoes
each year in the US. They
accounted for about 25% of
catastrophe losses since 1985
600
400
200
Source: US Dept. of Commerce, Storm Prediction Center, National Weather Service; Ins. Info. Inst.
06p
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
89
86
85
0
Insured Losses from Top 10 Earthquakes
Adjusted to 2005 Exposure Levels
(Billions of 2005 Dollars)
With development
along major fault
lines, the threat of
$25B+ quakes
looms large
$120
$100
$ Billions
$80
$60
$40
3 of the Top 10
are not West
Coast events
$11
$9
$11
$12
$88
$38
$25
$20
$108
$27
$16
Source: AIR Worldwide
2)
(1
or
-5
th
-1
rid
84
ge
3;
,C
6.
5)
A
(1
H
-1
ay
7w
19
ar
94
d,
;6
C
A
.7
(1
)
0Ft
21
.T
-1
86
ej
on
8;
,C
6.
8)
A
C
(
ha
19rl
es
18
to
57
n,
;7
S
N
.9
C
ew
)
(8
-3
M
-1
ad
88
ri
6;
d,
7.
M
3)
O
*
(
2Sa
7
n
-1
Fr
81
an
2;
cis
7.
7)
co
*
(4
-1
819
06
;7
.9
)
7.
R
(6
-1
-1
83
8;
N
Tr
ee
,A
Fr
an
n
Sa
M
ar
ke
d
cis
co
(8
R
rt
la
nd
,O
Po
Sa
n
Jo
se
,C
A
(7
-1
-1
91
1;
-1
218
77
;
6.
6.
6)
3)
$0
Percentage of California
Homeowners with Earthquake
Insurance, 1994-2004*
The vast majority of California
homeowners forego earthquake
coverage & play Russian Roulette
with their most valuable asset.
35% 32.9%33.2%
30%
25%
19.5%
17.4%16.8%
15.7% 15.8% 14.6%
13.3%13.8%
12.0%
20%
15%
10%
5%
0%
94
96
97
98
99
00
01
02
03
04
06**
*Includes CEA policies beginning in 1996. **2006 estimate from Insurance Information Network of CA.
Source: California Department of Insurance; Insurance Information Institute.
Insured Losses from Top 10 Hurricanes
Adjusted to 2005 Exposure Levels
(Billions of 2005 Dollars)
With rapid coastal
development,
$40B+ storms will
be more common
$33.0
L)
)*
26
,F
ur
r(
19
M
ia
m
iH
(1
9
nd
re
w
A
rin
a
(2
00
5,
92
,
LA
FL
)*
)
19
38
,N
Y
pr
es
s(
K
at
LI
Ex
(1
96
5,
(1
90
0,
TX
LA
)
)
FL
)
ve
st
on
G
al
be
e
O
ke
ec
ho
D
on
na
H
ur
r(
(1
96
0,
19
28
,
FL
)
FL
)
au
Ft
.L
$26.0
$24.0
ur
r(
19
47
,
FL
de
rd
a
le
H
ur
r(
19
45
,
H
d
es
te
a
H
om
Source: AIR Worldwide
$35.0
$80.0
$42.0
$41.0
)
$20.0
$34.0
$33.0
Be
sts
y
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
$ Billions
Plurality of
worst-case
scenarios involve
Florida
**ISO/PCS estimate as of June 8, 2006
Inflation-Adjusted U.S. Insured
Catastrophe Losses By Cause of Loss,
1986-2005¹
Wind/Hail/Flood5
2.8%
Earthquakes 4
6.7%
Winter Storms
7.8%
Terrorism
7.7%
Water Damage
Civil Disorders
0.1%
6 0.4%
Fire
Tornadoes 2
2.3%
Utility Disruption
24.5%
0.1%
Insured disaster losses
totaled $289.1 billion from
1984-2005 (in 2005 dollars).
Tropical systems accounted
for nearly half of all CAT
losses from 1986-2005, up
from 27.1% from 1984-2003.
All Tropical
Cyclones 3
47.5%
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2005 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)..
Total Value of Insured
Coastal Exposure (2004, $ Billions)
Florida
New York
Texas
Massachusetts
New Jersey
Connecticut
Louisiana
S. Carolina
Virginia
Maine
North Carolina
Alabama
Georgia
Delaware
New Hampshire
Mississippi
Rhode Island
Maryland
$1,937.3
$1,901.6
$740.0
$662.4
$505.8
$404.9
$209.3
$148.8
$129.7
$117.2
$105.3
$75.9
$73.0
$46.4
$45.6
$44.7
$43.8
$12.1
$0
Source: AIR Worldwide
$500
Florida & New York
lead the way for insured
coastal property at more
than $1.9 trillion each.
Northeast state insured
coastal exposure totals
$3.73 trillion.
$1,000
$1,500
$2,000
$2,500
Insured Coastal Exposure as a % of
Statewide Insured Exposure (2004, $ Billions)
Florida
Connecticut
New York
Maine
Massachusetts
Louisiana
New Jersey
Delaware
Rhode Island
S. Carolina
Texas
NH
Mississippi
Alabama
Virginia
NC
Georgia
Maryland
79.3%
63.1%
60.9%
57.9%
54.2%
37.9%
33.6%
33.2%
28.0%
25.6%
25.6%
23.3%
13.5%
12.0%
11.4%
8.9%
5.9%
1.4%
0%
Source: AIR Worldwide
10%
20%
30%
40%
After FL, many
Northeast states have
among the highest
coastal exposure as a
share of all insured
exposure in the state.
50%
60%
70%
80%
90%
Value of Insured Residential
Coastal Exposure (2004, $ Billions)
Florida
New York
Massachusetts
Texas
New Jersey
Connecticut
Louisiana
S. Carolina
Maine
Virginia
North Carolina
Alabama
Georgia
Delaware
Rhode Island
New
Mississippi
Maryland
$942.5
$512.1
$306.6
$302.2
$247.4
$205.5
$88.0
$65.1
$64.5
$60.0
$60.0
$36.5
$29.7
$26.6
$25.9
$24.8
$20.9
$5.4
$0
Source: AIR
Florida has nearly $1 trillion in
insured residential exposure and
counting. Nearly 1,000 people
move to the state per day!
$200
$400
$600
$800
$1,000
Value of Insured Commercial
Coastal Exposure (2004, $ Billions)
New York
Florida
Texas
Massachusetts
New Jersey
Connecticut
Louisiana
S. Carolina
Virginia
Maine
North Carolina
Georgia
Alabama
Mississippi
New Hampshire
Delaware
Rhode Island
Maryland
$1,389.6
$994.8
$437.8
$355.8
$258.4
$199.4
$121.3
$83.7
$69.7
$52.6
$45.3
$43.3
$39.4
$23.8
$20.9
$19.9
$17.9
$6.7
$0
Source: AIR
$200
$400
Commercial property
exposure also implies
significant business
interruption losses.
$600
$800
$1,000 $1,200 $1,400 $1,600
Nightmare Scenario: Insured Property
Losses for NJ/NY CAT 3/4 Storm
Insured Losses: $110B
Economic Losses: $200B+
Distribution of Insured Property Losses,
by State, ($ Billions)
$80
$70
$60
$40
$30
$20
Total Insured
Property Losses =
$110B, nearly 3
times that of
Hurricane Katrina
$5
$4
$1
PA
CT
Other
$0
NY
Source: AIR Worldwide
NJ
The 2007 Hurricane
Season:
Preview to Disaster?
Outlook for 2007 Hurricane
Season: 85% Worse Than Average
Average*
2005
2007F
9.6
49.1
5.9
24.5
2.3
28
115.5
14
47.5
7
17
85
9
40
5
5
7
11
Accumulated Cyclone Energy
96.2
NA
170
Net Tropical Cyclone Activity
100%
275%
185%
Named Storms
Named Storm Days
Hurricanes
Hurricane Days
Intense Hurricanes
Intense Hurricane Days
*Average over the period 1950-2000.
Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 3, 2007.
Probability of Major Hurricane
Landfall (CAT 3, 4, 5) in 2007
Entire US Coast
Average*
2007F
52%
74%
US East Coast Including
31%
50%
Florida Peninsula
Gulf Coast from FL Panhandle
30%
49%
to Brownsville, TX
ALSO…Above-Average Major Hurricane
Landfall Risk in Caribbean for 2007
*Average over the period 1950-2000.
Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 3, 2007.
REINSURANCE
MARKETS
Big Risk, Big Reward or
Big Government?
Share of Losses Paid by
Reinsurers, by Disaster*
70%
60%
50%
40%
30%
Reinsurance is playing
an increasingly
important role in the
financing of megaCATs; Reins. Costs are
skyrocketing
30%
25%
60%
45%
20%
20%
10%
0%
Hurricane Hugo Hurricane Andrew
Sept. 11 Terror
2004 Hurricane
2005 Hurricane
(1989)
(1992)
Attack (2001)
Losses
Losses
*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer,
which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at
$3.85 billion for 2004 and $4.5 billion for 2005.
Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.
Reinsurers Net Written Premiums,
US Business, 1997 - 2005
($ Billions)
$ Billions Premiums Written
$35
$30
Premiums written
are actually falling
despite higher prices
$29.50
$30.63
$28.76
$26.69
$25
$20
$25.33
$24.85
$21.21
$19.93
$19.44
97
98
US reinsurance premiums
written grew 54% between
1997 and 2003, but fell 17%
from 2003 through 2005
$15
$10
99
00
01
02
03
Source: Reinsurance Association of America; Insurance Information Institute Fact Book 2007, p. 38.
04
05
FINANCIAL
STRENGTH &
RATINGS
Industry Has Weathered
the Storms Well
Reasons for US P/C Insurer
Impairments, 1969-2005
2003-2005
Affiliate
Problems
8.6%
Catastrophe
Losses
8.6%
1969-2005
Deficient
Loss
Reserves/Inadequate
Pricing
62.8%
Deficient
Loss
Reserves/Inadequate
Pricing
38.2%
Investment
Problems*
7.3%
Alleged
Fraud
11.4%
Rapid
Growth
8.6%
Reinsurance
Sig. Change
Failure
in Business
3.5%
4.6%
Misc.
9.2%
Deficient
reserves,
CAT losses
are more
important
factors in
recent years
Affiliate
Problems
5.6%
Catastrophe
Losses
6.5%
Alleged
Fraud
8.6%
Rapid
Growth
16.5%
*Includes overstatement of assets.
Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;
P/C Insurer Impairments,
1969-2006
13
15
18
35
18
19
31
29
15
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
49
49
54
60
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
0
Source: A.M. Best; Insurance Information Institute
P/C Insurer Impairment Frequency
vs. Combined Ratio, 1969-2006
Combined Ratio
115
Combined Ratio after Div
P/C Impairment Frequency
110
105
1.6
1.4
1.2
1
0.8
0.6
0.4
100
95
2006 impairment rate was 0.43%, or 1-in-233
companies, half the 0.86% 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
90
2
1.8
Source: A.M. Best; Insurance Information Institute
0.2
0
Impairment Rate
120
Impairment
rates are highly
correlated
underwriting
performance
Debate Over Reinsurance Market
Performance & Government
• Reinsurance markets typically suffer large shocks, followed by a
period of higher prices and transient capacity constraints
• A new equilibrium between Supply and Demand is typically
found within 18 months, commensurate with changes in the risk
landscape. This is Economics 101 and is a textbook illustration
of how capitalism works.
• A competing hypothesis suggests that reinsurance markets
“fail” because they do not provide a stable price or quantity of
protection as is required in an economy with continuously
exposed fixed assets, especially one that is growth oriented
• Public Policy Solution: Acting on this hypothesis generally
results in displacement of private (re)insurance capital by
government intermediaries
• Question Asked: Are policyholders and the economy better
served through free markets, government or some hybrid?
Sources: Insurance Information Institute
STATE
RESIDUAL
MARKETS
How Big is Too Big?
US FAIR Plans Exposure to Loss*
(Billions of Dollars)
$450
$400
Total exposure to loss in the residual market
(FAIR & Beach/Windstorm) Plans has surged
from $54.7bn in 1990 to $419.5 billion in 2005.
$250
In the 15-year period between
1990 and 2005, total exposure
to loss in the FAIR plans has
surged by a massive 965
percent, from $40.2bn in 1990
to $387.8bn in 2005!
$200
$170.1
$350
$300
$345.9
$269.6
$140.7
$150
$113.3
$96.5
$100
$50
$400.4 $387.8
$40.2
$0
1990
1995
1999
2000
Source: PIPSO; Insurance Information Institute
2001
2002
2003
2004
2005
*Hurricane exposed states only.
Florida Citizens Exposure to
Loss (Billions of Dollars)
$450
Exposure to loss in Florida
Citizens nearly doubled in 2006
408.8
$400
$350
$300
$250
$200
$195.5
$206.7
$210.6
2003
2004
2005
$154.6
$150
$100
$50
$0
2002
Source: PIPSO; Insurance Information Institute
2006
Major Residual Market Plan Estimated
Deficits 2004/2005 (Millions of Dollars)
Florida Hurricane
Catastrophe Fund
(FHCF)
$0
-$200
-$400
-$600
-$800
-$1,000
-$1,200
-$1,400
-$1,600
-$1,800
-$2,000
2004
Florida Citizens
2005
Louisiana Citizens
Mississippi Windstorm
Underwriting
Association (MWUA)
-$516
-$595 *
-$954
-$1,425
Hurricane Katrina pushed all of the
residual market property plans in
affected states into deficits for 2005,
following an already record
-$1,770
hurricane loss year in 2004
* MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in Federal Aid.
Source: Insurance Information Institute
What Role Should the
Federal Government
Play in Insuring
Against Natural
Disaster Risks?
NAIC’s Comprehensive
National Catastrophe Plan
• Proposes Layered Approach to Risk
• Layer 1: Maximize resources of private
insurance & reinsurance industry
 Includes “All Perils” Residential Policy
 Encourage Mitigation
 Create Meaningful, Forward-Looking Reserves
• Layer 2: Establishes system of state
catastrophe funds (like FHCF)
• Layer 3: Federal Catastrophe Reinsurance
Mechanism
Source: Insurance Information Institute
Guiding Principles of NAIC’s
National Catastrophe Plan
• National program should promote personal
responsibility among policyholders
• National program should support reasonable
building codes, development plans & mitigation
tools
• National program should maximize riskbearing capacity of private markets, and
• National plan should provide quantifiable risk
management to the federal government
Source: Insurance Information Institute from NAIC, Natural Catastrophe Risk: Creating a Comprehensive
National Plan, Dec. 1, 2005.
Comprehensive National
Catastrophe Plan Schematic
1:500 Event
National Catastrophe Contract Program
1:50 Event
State Regional Catastrophe Fund
State Attachment
Personal
Disaster
Account
Private Insurance
Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.
Legislation has been
introduced and ideas
espoused by
ProtectingAmerica.org
will likely get a more
thorough airing in
2007/8
KEY LINES
Discipline Will Remain
(Mostly) Intact in 2007
Private Passenger Auto
Private Passenger Auto is
Enormous Part of P/C Industry
Total 2004 Direct Personal + Commercial Premiums Written
= $467.0 Billion PPA Liability
Private passenger
auto accounted for
34.7% or $162.2B
in DPW in 2004
20.5%
$95.8B
$66.4B
All Commercial
Lines
53.9%
$251.6B
PPA Coll/Comp
14.2%
$53.2B
Homeowners
11.4%
Source: A.M. Best; Insurance Information Institute
Private Passenger Auto
Combined Ratio
PPA is the profit
juggernaut of the p/c
insurance industry today
110
105
109.5
107.9
104.2
103.5
101.7 101.3101.3
101.1
101.0
99.5
100
98.4
Average Combined 1993 to 2005= 101.4
94.3
Most auto insurers have shown significant improvements in underwriting
performance since mid-2002
95
95.1
93.0
90
93
94
Sources: A.M. Best; III
95
96
97
98
99
00
01
02
03
04
05
06F
RNW: Private Passenger Auto,
United States, 1992-2006E
Segmentation
should help
profitability
18%
16%
14%
12%
14%14%
12%
11% 12%
10%
8%
6%
4%
15%17%
13%
12%
10%
9%
Private passenger auto
profitability deteriorated 8%
throughout the 1990s but
has improved dramatically
4%
2%
2%
2%
0%
92
93
94
95
96
97
Source: NAIC; Insurance Information Institute
98
99
00
01
02
03
04 05E 06F
Pure Premium Spread: Personal
Auto PD Liability, 2000-2006:Q4
Auto Insurance Component of CPI
10%
8%
Margin necessary
to maintain PPA
profitability
6%
Personal Auto-PD Pure Premium
Inversion of pure
premium spread
is a warning sign
but now in synch
4%
2%
0%
-4%
2000 PPA
Combined=110
2006 PPA
Combined=92E
00:Q1
00:Q2
00:Q3
00:Q4
01:Q1
01:Q2
01:Q3
01:Q4
02:Q1
02:Q2
02:Q3
02:Q4
03:Q1
03:Q2
03:Q3
03:Q4
04:Q1
04:Q2
04:Q3
04:Q4
05:Q1
05:Q2
05:Q3
05:Q4
06:Q1
06:Q2
06:Q3
06:Q4
-2%
Source: Insurance Information Institute calculations based ISO Fast Track and US BLS data.
Bodily Injury: Severity Trend
Running Ahead of Frequency
6%
4%
2%
Medical
inflation
is a
powerful
cost
driver
Frequency
Severity
4.8%
4.7%
3.0%
3.6%
3.8%
3.4%
2.8%
0%
-0.3%
-0.9%
-2%
-2.2%
-2.6%
-3.3%
-4%
-3.8%
-4.0%
-5.3%
-6%
99
00
-5.4%
01
02
*Average of 4 quarters ending with 4th quarter 2006.
Source: ISO Fast Track data.
03
04
05
06*
PD Liability: Frequency Trend
Roughly Offsets Severity
Frequency
Fewer accidents, but more
damage when they occur:
Severity
8%
6.2%
Higher Deductibles?
6%
4.3%
3.9%
4%
2%
0.8%
3.3%
3.7%
2.8%
2.2%
0.5%
0.3%
0%
-2%
-1.5%
-2.0%
-1.6%
-2.3%
-2.4%
-3.3%
-4%
99
00
01
02
*Average of 4 quarters ending with 4th quarter 2006.
Source: ISO Fast Track data.
03
04
05
06*
PIP: Frequency Trend Now
Offsets Rising Claim Severity
Frequency
Severity
Fraud caused
problems from
1999-2001
20%
16.1%
15%
10%
6.5%
6.3%
5%
4.8%
3.2%
1.1%
-5%
-0.6%
-1.1%
-1.6%
Is No-Fault living on
borrowed time?
-10%
99
00
0.5%
0.0%
0%
01
*Average of 4 quarters ending with 4th quarter 2006.
Source: ISO Fast Track data.
2.4%
02
-4.0%
-5.4%
-5.1%
-7.2%
03
04
05
06*
Collision: Frequency Trend
Offsetting Rising Claim Severity
8%
Frequency
6.8%
Severity
6%
4.1%
4%
3.0%
1.9%
2.6%
2%
3.7%
3.8%
3.7%
3.2%
1.7%
0%
-0.4%
-2%
-1.8%
-4%
-3.5%
-3.8%
-5.1%
-6%
99
00
01
02
*Average of 4 quarters ending with 4th quarter 2006.
Source: ISO Fast Track data.
03
-4.4%
04
05
06*
Comprehensive: Favorable
Frequency and Severity Trends
Frequency
20%
15%
8.9%
10%
Severity
Weather related claims
from Hurricanes Katrina,
Rita & Wilma: 681,900
claims valued $3.29 billion
15.1%
3.3% 3.3%
5%
0%
-5%
-1.7%
-2.6%
-4.7%
-2.4%-2.1%
-5.7%
-6.9%
-10%
-4.1%-3.1%
-8.3%
-1.2%
-9.8%
-15%
99
00
01
02
*Average of 4 quarters ending with 3rd quarter 2006.
Source: ISO Fast Track data.
03
04
05
06*
Private Passenger Auto:
Future Shock
• Underwriting acumen is ultimate determinant of success
• Innovations in technology, computing power, data retrieval/
storage and new data/criteria will increase the number and
quality of rating factors and lead to increasingly sophisticated
underwriting models and a ever expanding number of price
points; Integrate with new auto safety features
• Buzz Words: “Predictive Modeling” & “Segmentation”
• Impact is to create a rating system that is more accurate and
therefore more fair, equitable to all
• Risk is more accurately and reliably mapped to a price across a
broader range of circumstances
• Life-cycle approach to underwriting
 Can underwriting customer under almost any circumstance
 Recognizes fact that customer acquisition costs are high and new
accounts perform less well than seasoned accounts
• Agents will need to be intimately familiar with new approaches
in order to communicate impact to customer
Homeowners Insurance
Homeowners Insurance
Combined Ratio
158.4
160
Average 1990 to 2005= 113.1
Insurers have paid out an average of
$1.13 in losses for every dollar earned
in premiums over the past 16 years
150
140
130
121.7
120
118.4
113.6
112.7
117.7
113.0
121.7
109.4 108.2111.4
110
109.3
101.0
100.3
98.2
100
94.4
93
90
90
91
92
Sources: A.M. Best; III
93
94
95
96
97
98
99
00
01
02
03
04
05 06F
Rates of Return on Net Worth for
Homeowners Ins: US
Averages: 1993 to 2005E
US HO Insurance = +2.1%
(+3.2% through 2006E)
20%
16.0%
15%
12.4%
9.7%
10%
5%
2.5%
3.6%
5.4%
3.6%
3.8%
5.4%
1.4%
0%
-1.7%
-5%
-4.2%
-7.2%
-7.0%
-10%
93
94
95
96
97
98
99
00
01
Source: NAIC; 2005/6 figures are Insurance Information Institute estimates.
02
03
04
05E
06E
COMMERCIAL
MULTI-PERIL &
COMMERCIAL
AUTO
Commercial Multi-Peril Combined
85
93.8
101.9
97.7
104.9
Liab. Combined 1995 to 2004 = 114.6
89.0
95
90
116.1
116.2
121.0
117.0
115.0
115.0
122.4
CMP- has
improved recently
100
CMP-Liability
CMP-Non-Liability
97.3
105
100.7
110
113.1
115
108.5
113.6
120
119.8
116.8
125
119.0
130
115.3
125.0
(Liability vs. Non-Liability Portion)
Non-Liab. Combined = 107.1
80
95
96
Sources: A.M. Best; III
97
98
99
00
01
02
03
04
05
Commercial Auto Liability
& PD Combined Ratios
120.1
Average Combined:
Liability = 110.2
122.5
85
93.3
90.7
87.1
Commercial Auto has
improved dramatically
90
96.6
92.1
95
99.4
95.9
106.6
102.3
103.6
PD = 97.1
99.0
99.7
100
96.7
105
99.0
102.2
110
113
112
115
112.1
120
120.5
Comm Auto PD
115.9
Comm Auto Liab
125
80
95
96
Sources: A.M. Best; III
97
98
99
00
01
02
03
04
05
MEDICAL
MALPRACTICE
Medical Malpractice
Combined Ratios
160
90
137.6
142.5
133.7
111.0
Reforms/Award Caps and higher
rates have helped to improve
med mal dramatically
95.5
100
106.6
110
99.8
120
129.7
121.3
115.7
130
150
107.9
140
Average Med Mal
Combined Ratio
1995-2005
154.7
97
05
80
95
96
Sources: A.M. Best; III
98
99
00
01
02
03
04
WORKERS
COMPENSATION
OPERATING
ENVIRONMENT
Workers Comp Combined Ratios,
1994-2005P
Workers Comp Calendar Year vs. Ultimate Accident Year –
Private Carriers
Percent
138
140
135
131
130
124
122
120
118
120
115
111 110
107
107
106
110
105
102
101
101 100 101
97 97
96
100
90
90
90
80
1994
1995
1996
1997
1998
1999
Calendar Year
2000
2001
2002
Accident Year
2003
2004 2005p
p Preliminary AY figure.
Accident Year data is evaluated as of 12/31/2005 and developed to ultimate
Source: Calendar Years 1994-2004, A.M. Best Aggregates & Averages; Calendar Year 2005p and Accident Years 1994-2005pbased on NCCI
Annual Statement Analysis.
Includes dividends to policyholders
Workers Comp Lost-Time
Claim Frequency (% Change)
Percent
Change
Cumulative Change of –45.8%
(1991-2004)
Lost-Time Claims
2
0.5
0.3
0
-2
-2.3
-4
-6
-4.2 -4.4
-3.9
-4.5
-5.7
-6.5
-8
-10
91
92
-9.2
93
94
95
-4.3 -3.9 -4.5
-4.5
-6.9
96
97
98
Accident Year
2003p: Preliminary based on data valued as of 12/31/2005
1991-2003: Based on data through 12/31/2004, developed to ultimate
Based on the states where NCCI provides ratemaking services
Excludes the effects of deductible policies
Source: NCCI
99
00
01
02
03
04
05p
Workers Comp Indemnity Claims
Costs Have Accelerated, 1993-2005p
Indemnity
Claim Cost (000s)
$19
$17
Lost-Time Claims
Annual Change 1992–1996:
Annual Change 1997–2004:
+1.3%
+7.4%
$16.5 $16.9
$17.7
$18.6 $19.1
$15.1
$15
$13.6
$12.4
$13
$11 $9.9 $9.6
$10.0
$9.4 $9.8
$9
$10.6
$11.4
Cumulative Change = +103.2%
(1993-2005p)
$7
$5
91
92
93
94
95
96
97
98
Accident Year
2005p: Preliminary based on data valued as of 12/31/2005
1991-2004: Based on data through 12/31/2004, developed to ultimate
Based on the states where NCCI provides ratemaking services
Excludes the effects of deductible policies
Source: NCCI
99
00
01
02
03
04 05p
WC Indemnity Severity vs.
Wage Inflation
12%
Change in CPS Wage
Change in Indemnity Cost per Lost-Time Claim
9.4% 10.9%
9.0%
10%
9.6%
WC indemnity severity
is no longer outpacing
wage inflation
7.7%
8%
6.0%
5.9%
6%
4%
4.7%
2.8%
2%
4.0%
4.3 pts
4.7%
4.9%
4.2%
4.2%
2.8%
2.2%
2.0%
2.2% 2.0% 2.2% 2.5%
1.7%
0%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005p
2005p: Preliminary based on data valued as of 12/31/2005; 1991-2004: Based on data through 12/31/2004, developed to ultimate. Based on the states
where NCCI provides ratemaking services. Excludes the effects of deductible policies. CPS = Current Population Survey.
Source: NCCI
Workers Comp Medical Claims
Continue to Climb
Medical
Claim Cost ($000s)
$23
$21
Annual Change 1992–1996:
Annual Change 1997–2005:
$22.7
$20.9
+4.1%
+9.5%
$19.0
$19
$17.4
$16.0
$17
$15
$13.2
$13
$11
$9
$8.3 $8.4 $8.2
$8.9 $9.4
$10.1
$11.1
$14.2
$12.0
Cumulative Change = +176.8%
(1993-2005p)
$7
$5
91
92
93
94
95
96
97
98
99
00
Accident Year
2005p: Preliminary based on data valued as of 12/31/2005
1991-2004: Based on data through 12/31/2004, developed to ultimate
Based on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies
01
02
03
04
05p
WC Medical Severity Rising Far
Faster than Medical CPI
14%
12%
WC medical severity is
rising twice as fast as the
medical CPI
10.3%
10.1%
9.5%
10%
8.3%
4%
8.7% 9.1%
8.1%
8.5%
4.3 pts
7.4%
8%
6%
12.3%
5.1%
4.5%
3.6%
2%
2.8%
3.2% 3.5%
1996
1997
4.6% 4.7%
4.0%
4.4% 4.2%
Change in Medical CPI
Change Med Cost per Lost Time Claim
0%
1995
4.1%
1998
1999
2000
2001
2002
2003
2004
2005
Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
Med Costs Share of Total
Costs is Increasing Steadily
2005p
1995
Indemnity
42%
Medical
58%
1985
Indemnity
52%
Indemnity
56%
Medical
48%
Medical
44%
Source: NCCI (based on states where NCCI provides ratemaking services).
OTHER LIABILITY
Other Liability
Combined Ratios*
150
140
138.6
Average Combined Ratio
1995-2005
116.1
130
122.6 124.4
117.6
120
112.3
110.5
108.5
110
111.8
114.4
112.1
104.5
100
Improvements in tort and
D&O environment have
contributed to performance
90
80
95
96
Sources: A.M. Best; III
97
98
99
00
01
02
03
04
05
*Includes Officers’ & Directors’ coverage.
D&O Premium Index
(1974 Average = 100)
Average D&O pricing is off
18% since 2003, after rising
146% from 1999-2003
1400
1200
1,237
1,113
931
1000
800
1,010
682
746
704 720 720
771 806 793
726
720
619
600
539 503 560
400
200
0
86
88
90 91
92
93 94
95
96 97
98
99 00
01
02 03
Source: Tillinghast Towers-Perrin, 2005 Directors and Officers Liability Survey.
04
05
PRODUCTS
LIABILITY
Products Liability
Combined Ratios
380
355.2
Average Combined Ratio
1995-2005
330
Improvements
in the tort
environment,
rates have
contributed to
performance
176.7
280
230
215.4
189.5
180
179.1
167.2
156.4
131.9 138.8
153.1
133.3
124.0
130
80
95
96
Sources: A.M. Best; III
97
98
99
00
01
02
03
04
05
Legal Liability &
Tort Environment
Definitely Improving But
Not Out of the Woods
Legal Liability &
Tort Environment
Definitely Improving But
Not Out of the Woods
Cost of U.S. Tort System
($ Billions)
$180
$169
$167
$156
$156
$159
$148
$130
$150
$129
$200
$144
$295
$282
$270
$261
$260
$246
$250
$141
Per capita “tort tax” was $880
in 2005, up from $680 in 2000
$300
$233
$350
$205
Tort costs consumed 2.09% of GDP in
2005, down from 2.24% in 2003
Reducing tort costs relative to GDP by
just 0.25% (to 1.84%) would produce an
economic stimulus of $31.1B
$100
$50
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.
08E
07E
06E
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
$0
Inflation Adjusted Tort Costs
Per Capita, 1950-2005
$1,000
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
Tort costs per
capita have
increased 817%
since 1950 even
after adjusting for
inflation
$914
$878 $897
$880
$780
$722
$444
$340
$199
$96
50
60
70
80
90
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.
00
02
03
04
05
Tort Costs Relative to GDP,
1950-2005
$0
2.24%
$0
2.22%2.24%2.22%
2.09%
2.03%
1.82%
1.53%
1.34%
$0
Tort costs relative to GDP
have increased more than 3
fold since 1950
1.03%
$0
0.62%
$0
$0
50
60
70
80
90
00
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.
01
02
03
04
05
Personal, Commercial &
Self (Un) Insured Tort Costs*
$250
Commercial Lines
Personal Lines
Self (Un)Insured
Total = $231.3 Billion
$49.4
Billions
$200
Total = $159.6 Billion
$150
Total = $121.0 Billion
$30.0
$20.4
$100
$70.9
Total = $39.3 Billion
$51.0
$50
$0
$86.7
$95.2
$5.2
$17.1
$17.0
$49.6
$58.7
1980
1990
2000
*Excludes medical malpractice
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.
2005
Tort System Costs,
2000-2008F
Tort System Costs
$260
2.03%
1.82%
$246
$233
$240
$220
$200
$180
$260
2.0%
1.5%
$205
$179
After a period of rapid
escalation, tort system costs
as % of GDP are now falling
$160
$140
$120
2.5%
2.09% 2.05% $270
2.04% 2.03%
$261
$280
$295
$100
1.0%
0.5%
0.0%
00
01
02
03
Tort Sytem Costs
04
05
06E
07F
Tort Costs as % of GDP
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends;2006 is III estimate.
08F
Tort Costs as % of GDP
2.22% 2.24% 2.22%
$261
$300
KATRINA TORT
UPDATE
Suits Add to
Uncertainty, Expense
Likely Market Impacts of PostKatrina Litigation
•
Litigation Creates an Additional Layer of Uncertainty
in What is Already a Very Difficulty Market
 Ultimate Thrust of Litigation is to Compel Insurers to Pay
Water Damage (Flood/Surge) Losses for Which They Have
Never Received A Penny in Premium
•
Some Courts’ Apparent Willingness to Retroactively
Rewrite Long-Standing, Regulator Approved Terms &
Conditions of Insurance Contracts Creates an
Unpriceable Risk
 Compounded by juries willing to award millions in punitives
•
•
•
People Discouraged from Buying Flood Coverage
BOTTOM LINE: Weather, Courts, Juries Together
Create Nearly Impossible Operating Environment
Coverage Under These Circumstances Will Necessarily
Become More Expensive, Less Available
REGULATORY
UPDATE
Busy Year for Insurers
in Washington
Federal Legislative Update
Federal Terrorism Reinsurance (TRIA)
• TRIA expires 12/31/07. The current federal program offers $100 billion of
coverage subject to a $27.5B industry aggregate retention.
• New Democratic Congress (with Committee chairs from urban Northeast
states) predisposed to extend. Despite resistance/lackluster Administration
support TRIA will likely extended for a multi-year period, perhaps 6-8 but
potentially as long as 15 years (last extension in 2005 was for 2 years)
• Potential changes include extensions of coverage for domestic terrorism
losses (not included currently), and a lower industry retention for nuclear,
biological, chemical, or radiological (NBCR) attacks. There could possibly
be a modestly higher industry retention for non-NBCR losses, and it needs
to be resolved whether liability and group life losses will be covered.
• Original hope for first-half 2007 extension have faded. Now looking at fall
or even 11th-hour extension as in 2005.
Sources: Lehman Brothers, Insurance Information Institute
Federal Legislative Update
Natural Disaster Catastrophe Plan
• Some insurers are pushing for federal catastrophic risk fund coverage in the
wake of billions of dollars of losses suffered by insurers from the 2004-2005
hurricane seasons.
• Legislative relief addressing property/casualty insurers’ exposure to natural
catastrophes, such as the creation of state and federal catastrophe funds, has
been advocated by insurers include Allstate and State Farm. However, there
is active opposition many other insurers and all reinsurers.
• There is bi-partisan supporters in Congress, mostly from CAT-prone states.
Skeptics in Congress believe such a plan would be a burden on taxpayers like
the NFIP and that the private sector can do a better job. Unlike TRIA, the
industry is not unified on this issue.
• Allowing insurers to establish tax free reserves for future catastrophe losses
has also been proposed, but Congress has yet to indicate broad support.
Sources: Lehman Brothers, Insurance Information Institute
Federal Legislative Update
Optional Federal Charter (OFC)
• Large P&C and life insurers are the major supporters of OFC.
Supporters argue that the current patchwork of 50 state regulators
reduces competition, redundant, slows new product introductions and
adds cost to the system.
• In general, global P/C insurers , reinsurers and large brokers mostly
support the concept, while regulators (state insurance commissioners),
small single-state and regional insurers, and independent agency groups
largely oppose the idea. An optional federal charter is more favorable for
global P&C insurers, because an insurer that operates in multiple states
could opt to be regulated under federal rules rather than multiple state
regulations. As a result, this could increase innovation in the industry.
• A new bill should be introduced in May or June. Currently appears to
be more momentum for OFC for life than for P&C insurers based on the
homogeneous nature of many life products. The debate should intensify
and although passage may not occur in the current session of Congress, it
may lay the groundwork for passage in the 2009-2010 session.
Sources: Lehman Brothers, Insurance Information Institute
Federal Legislative Update
McCarran-Ferguson Insurance Antitrust Exemption
• Under McCarran-Ferguson Act of 1945, insurers have limited immunity
under federal anti-trust laws allowing insurers to pool past claims
information to develop accurate (actuarially credible) rates.
• Very low level of understanding of M-F in Washington.
• Certain legislators threaten to revoke McCarran-Ferguson because of
alleged collusion in the wake of Hurricane Katrina. However, the view
among some Washington insiders is that such a move would hurt small
insurers with less resources rather than the large insurers perhaps being
targeted. Current bills designed to revoke McCarran-Ferguson are
S.618 and H.R. 1081.
• The government appointed Antitrust Modernization Commission in an
April 2007 report strongly encouraged Congress to re-examine the
McCarran-Ferguson Act. Notably, 4 of the commissions 12 members
called for a full repeal of the law. Sources: Lehman Brothers, Insurance Info. Institute
TRIA
EXTENSION
The Burden Grows, and the
Clock is Ticking
Terrorism Coverage Take-Up
Rate Continues to Rise
Terrorism take-up rate for
non-WC risk rose steadily
through 2003, 2004 and 2005
64%
59%
54%
48% 47%
46%
44%
44%
33%
24%
26%
TAKE UP RATE FOR WC
COMP TERROR
COVERAGE IS 100%!!
03Q2 03Q3 03Q4 04Q1 04Q2 04Q3 04Q4 05Q1 05Q2 05Q3 05Q4
Source: Narketwatch: Terrorism Insurance 2006, Marsh, Inc.; Insurance Information Institute
Insurance Industry Retention
Under TRIA ($ Billions)
$35
$30
$ Billions
$25
$20
•Individual company
retentions rise to 17.5%
in 2006, 20% in 2007
•Above the retention,
federal govt. pays 90% in
2006, 85% in 2007
Extension
$27.5
$25.0
$15.0
$15
$12.5
$10.0
$10
$5
$0
Year 1
(2003)
Year 2
(2004)
Source: Insurance Information Institute
Year 3
(2005)
Year 4
(2006)
Year 5
(2007)
Insured Loss Estimates:
Large CNBR Terrorist Attack ($ Bill)
Type of Coverage
Group Life
General Liability
Workers Comp
Residential Prop.
Commercial Prop.
Auto
TOTAL
New York
Washington
San
Francisco
Des
Moines
$82.0
$22.5
$21.5
$3.4
14.4
2.9
3.2
0.4
483.7
126.7
87.5
31.4
38.7
12.7
22.6
2.6
158.3
31.5
35.5
4.1
1.0
0.6
0.8
0.4
$778.1
$196.8
$171.2
$42.3
Source: American Academy of Actuaries, Response to President’s Working Group, Appendix II, April
26, 2006.
FLORIDA SPECIAL
SESSION
LEGISLATIVE
CHANGES
Insurer, Policyholder &
State Impacts
Summary: Florida Legislature
Special Session (January 2007)
1. Exponential Expansion of the Role of the State in
Insuring Homes & In Reinsurance Markets
 More than doubles exposure of Florida Hurricane
Catastrophe Fund to $35 billion from $16 billion (FHCF only
has $1B cash), greatly displacing private reinsurers
 Allows Florida Citizens to compete with private insurers by
lowering rates and lowering eligibility standards
 Allows Florida Citizens to displace private insurers by
expanding into non-wind coastal business
 Disbands disciplined, small and adequately priced
Commercial JUA and transfers business to poorly run,
underpriced, Citizens Commercial Account
Sources: Zurich Insurance Technical Center; Insurance Information Institute.
Summary: Florida Legislature
Special Session (January 2007)
2. Dramatically Increases Exposure of Florida
Policyholders to Post-Catastrophe Taxes
 Expands the Citizens assessment base more than 4 fold
 Increases maximum annual assessment facing Florida
policyholders from $9.2 billion to $25 billion
 Increases maximum general liability and commercial auto
assessment exposure from 14% to 74% (These are 2 types of
insurance that having nothing to do with hurricane risk)
 Accelerates growth of Citizens, already the largest home
insurers in the state and which doubled in size in 2006, by
lowering rates and making access easier
Sources: Zurich Insurance Technical Center; Insurance Information Institute.
Summary: Florida Legislature
Special Session (January 2007)
3. Disincentives for Insurers to Offer Policies in Florida
 Introduces “excess profits law” (a virtual oxymoron in FL)
 Requires Executive Officer review on routine rate filings

Threatens perjury charges and administrative penalties
 Increases cost of processing and maintaining policies
 Requires “premium discounts” even if not actuarially
justified
4. Threatens State of Florida’s Credit Rating
 Major event could result in simultaneous issuance of $40+
billion in debt from Cat Fund, Citizens and Guarantee Fund
 Governor’s promise to cut property taxes could compound
state’s fiscal problems after an event
Sources: Zurich Insurance Technical Center; Insurance Information Institute.
Florida Hurricane Assessment
Base, 2006 vs. 2007* ($ Bill)
2006
$40
$35.0
$35.0
2007
$35.0 $35.0 $35.0
$35
$30
$25
The FL
legislature
quadrupled
the assessment
base for
Citizens
$20
$15
$10
$8.3
$8.3
$11.2 $11.2
$8.3
$5
$1.3
$0
FL Citizens
Personal
Lines Acct.
FL Citizens FL High Risk
Commercial
Acct.
Lines Acct.
FL
Hurricane
Cat Fund
Sources: Zurich Insurance Technical Center; Ins. Info. Inst.
FL PCJUA
FL
Guarantee
Assoc.
*Per special legislative session, Jan. 2007.
Florida Hurricane Max. Policyholder
Annual Burden, 2006 vs. 2007* ($ Bill)
$0.448
$1
$0.448
$0.260
$2
$1.660
$3
$1.660
$4
$1.660
$5
$3.500
$6
$3.5
$7
$7.0
$8
2007
$7.0
$7.0
2006
The FL legislature
nearly tripled state
insurers’ assessment
base from $9.2B to
$25B, an increase of
$15.8B or 174%
$0
FL Citizens
Personal
Lines Acct.
FL Citizens FL High Risk
Commercial
Acct.
Lines Acct.
FL
Hurricane
Cat Fund
Sources: Zurich Insurance Technical Center; Ins. Info. Inst.
FL PCJUA
FL
Guarantee
Assoc.
*Per special legislative session, Jan. 2007.
Why There is Concern Over the Florida
Legislature’s & Governor’s Changes
•
•
•
•
•
•
Risk is Now Almost Entirely Borne Within State
Virtually Nothing Done to Reduce Actual Vulnerability
Creates Likelihood of Very Large Future Assessments
Potentially Crushing Debt Load
State May be Forced to Raise/Levy Taxes to Avoid
Credit Downgrades
Many Policyholder Will See Minimal Price Drop
 “Savings” came from canceling recent/planned rate hikes
•
•
Residents in Lower-Risk Areas, Drivers, Business
Liability Policyholders Will Come to Resent Subsidies
to Coastal Dwellers
Governor’s Emergency Order for Rate Freezes &
Rollbacks Viewed as Unfair & Capricious
Sources: Insurance Information Institute.
Summary
• Personal & Commercial lines results were unsustainably good
2006; Overall profitability reached its highest level (est. 14%)
since 1988
• Underwriting results were aided by lack of CATs & favorable
underlying loss trends, including tort system improvements
• Property cat reinsurance market remains tight
• Premium growth rates are slowing to their levels since the late
1990s; Commercial leads decreases
• Rising investment returns insufficient to support deep soft
market in terms of price, terms & conditions
• Clear need to remain underwriting focused
• How/where to deploy/redeploy capital??
• Major Challenges:
 Slow Growth Environment Ahead
 Maintaining price/underwriting discipline
 Managing variability/volatility of results
Insurance Information
Institute On-Line
If you would like a copy of this presentation, please
give me your business card with e-mail address