The U.S. and Global Economies:
Outlook and Implications
for P/C Insurance
Brokers & Reinsurance Market Association
BRMA 2011 Committee Rendezvous
Princeton, NJ
April 11, 2011
Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist
Insurance Information Institute  110 William Street  New York, NY 10038
Office: 212.346.5540  Cell: 917.494.5945  stevenw@iii.org  www.iii.org
The Global Economic
Outlook*
*Before March 11, 2011
A Two-Speed Recovery:
Emerging Economies in Third Gear,
Advanced Economies in First
2
Relative Shares of Global Output,
Advanced vs. Developing Economies, 2009
Developing
Economies
47.1%
Advanced
Economies
52.9%
Source: EDC Economics, “The Moment of Truth: Global Export Forecast Fall 2010, at http://www.edc.ca/english/docs/gef_e.pdf
3
GDP Growth: Advanced vs.
Emerging Economies, 1970-2012F
GDP Growth
(%)
Emerging economies (led
by China) are expected to
grow by 6.5% in 2011.
9
6
3
0
Advanced economies grew
slowly (+3.0%) in 2010 with
deceleration expected in 2011,
dampening insurance demand
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
11F
12F
(3)
Advanced economies
Emerging and developing economies
Source: International Monetary Fund, World Economic Outlook Update, January 2011; Ins. Info. Institute.
Forecasts of 2011 & 2012 GDP
of Advanced Economies
12%
8%
4%
3.3%
3.0%3.1% 2.7%
2.7% 2.3%
2.2% 2.2% 2.0%
2.0%1.8% 2.3%
2.0%
1.8%
1.6%1.7% 1.8%
1.6%1.5% 1.8%
3.0%
2.8% 2.7%
2.3%
0%
United States
2011P
2011BC
United
Kingdom
2012P
Germany
France
Japan
Canada
2012BC
The January 2011 IMF forecasts for growth in advanced economies in 2011 is
generally around 2%. The March 2011 Blue Chip forecasts are a little higher. The
outcome could be worse if supplies of middle-eastern oil (political disruption),
developments involving sovereign debt (the PIGS or other countries) or Japanese
exports (earthquake/tsunami effects) are worse than expected.
Sources: IMF, World Economic Outlook, Jan 2011 Update; Blue Chip Economic Indicators (3/2011 issue); Insurance Information Institute.
5
Forecasts of 2011 & 2012 GDP
of Developing Economies
12%
9.6%9.3% 9.5%
9.1%
8%
8.5%
8.4%8.3%
8.0%
4.5%4.2% 4.4%4.2%
5.0%
4.5%
5.1%
4.1%
4.2%4.1%
4.8%
4%
3.7%
0%
China
India
2011P
Russia
2011BC
2012P
Brazil
Mexico
2012BC
IMF says growth in emerging and developing economies will outpace
advanced ones in 2011. This will accelerate the growth of insurance
exposures in emerging markets relative to the U.S., W. Europe and Japan.
Sources: IMF, World Economic Outlook, Jan 2011 Update; Insurance Information Institute.
6
Real Gross Fixed Investment: Advanced
vs. Emerging Economies, 2007:Q1-2010:Q3
Annualized
% Change
from prior
quarter
20%
Advanced economies
Emerging and developing economies
15%
10%
5%
0%
-5%
-10%
-15%
Emerging economies
kept investing (except for
2 quarters) throughout
the Great Recession
Advanced economies
dis-invested throughout
the Great Recession
-20%
Source: International Monetary Fund, World Economic Outlook Update, January 2011; Ins. Info. Institute.
2010:Q3
2010:Q2
2010:Q1
2009:Q4
2009:Q3
2009:Q2
2009:Q1
2008:Q4
2008:Q3
2008:Q2
2008:Q1
2007:Q4
2007:Q3
2007:Q2
2007:Q1
-25%
Insurance “Penetration”
and “Density”
Beyond Exposure Growth,
Insurers Need
Increased Use of Insurance
8
Definitions:
Measures of Insurance Usage
“Penetration”
 The ratio of premium to GDP
 Indicates the degree to which premium growth
kept up with exposure growth (as proxied by
GDP)
“Density”
 The ratio of premium to total population
 Indicates the breadth of use of insurance
Source: Swiss Re, Sigma, various volumes
9
Non-life Premium/GDP* (Penetration)
for Advanced Economies, 2001-2009
2008
2009
2.20%
2.10%
2.22%
2.22%
2.20%
2.25%
2.22%
2.20%
2.10%
3.70%
2007
3.50%
2006
2005
3.59%
3.70%
3.82%
3.86%
3.73%
3.60%
3.60%
2004
3.13%
2003
3.00%
2002
2.85%
2.97%
3.16%
3.14%
3.13%
3.10%
3.00%
2001
3.00%
2.90%
3%
3.68%
3.55%
3.40%
3.00%
4.56%
4.75%
4.60%
3.45%
4%
4.50%
5%
4.57%
4.98%
5.23%
5.14%
5.01%
4.80%
4.20%
6%
2%
1%
0%
U.S.
U.K.
Japan
France
Germany
From 2001 to 2003, a hard market in the U.S. added 75 basis points
to the Penetration ratio, but a soft market in subsequent years
shaved a percentage point from the Penetration ratio.
*both measured in U.S. dollars; premiums exclude cross-border business
Source: Swiss Re Sigma, various volumes
Non-life Premium/GDP* (Penetration)
for Emerging Economies, 2001-2009
2001
2004
2007
6%
2002
2005
2008
2003
2006
2009
5%
Russia
Brazil
0.56%
0.67%
0.62%
0.64%
0.61%
0.60%
0.60%
0.60%
0.60%
1.78%
1.74%
1.68%
1.62%
1.68%
1.60%
1.60%
1.60%
1.50%
1%
0.86%
0.95%
1.03%
1.05%
0.92%
1.00%
1.10%
1.00%
1.10%
2%
1.51%
1.81%
2.13%
2.22%
2.15%
2.30%
2.40%
2.30%
2.50%
3%
2.78%
2.86%
2.92%
2.95%
3.03%
3.00%
2.80%
2.90%
2.90%
4%
0%
China
India
South Africa
From 2001-2009, Penetration in China and Russia grew steadily—an especially
strong showing in light of the rapid growth in GDP (denominator in the Penetration
ratio). Similarly, although the Penetration ratios in Brazil and India were essentially
flat, that means premium growth basically kept pace with exposure growth.
*both measured in U.S. dollars; premiums exclude cross-border business
Source: Swiss Re Sigma, various volumes
2004
2006
2007
2008
2009
2005
$809.9
$891.0
$1,120.8
$1,265.3
$1,268.4
$1,300.7
$1,427.9
$1,572.7
$1,539.2
$1,000
2003
$630.6
$714.7
$930.4
$1,057.7
$1,093.9
$1,152.9
$1,219.3
$1,339.2
$1,289.4
$825.9
$1,500
2002
$701.1
$714.7
$768.0
$830.8
$790.4
$760.4
$736.0
$829.2
$847.5
$2,000
2001
$1,199.7
$1,441.4
$1,318.0
$1,311.9
$1,327.1
$1,383.2
$1,275.7
$1,051.0
$2,500
$1,664.0
$1,799.0
$1,980.2
$2,062.6
$2,122.0
$2,134.2
$2,164.4
$2,177.4
$2,109.6
Non-life Premium* per capita (Density)
for Advanced Economies, 2001-2009
$500
$0
U.S.
U.K.
Japan
France
Germany
From 2001-2009, Insurance Density grew in most advanced economies,
retreating only slightly during the global recession.
*excludes cross-border business
Source: Swiss Re Sigma, various volumes
Non-life Premium* per capita (Density)
for Emerging Economies, 2001-2009
2001
2004
2007
$1,500
2002
2005
2008
2003
2006
2009
$1,200
$900
$53.2
$45.0
$46.8
$55.2
$72.1
$88.4
$106.9
$129.1
$124.0
$0
Russia
Brazil
India
$69.1
$64.8
$107.4
$141.0
$156.2
$160.2
$159.5
$163.6
$161.3
$32.6
$43.5
$64.3
$89.6
$116.5
$146.9
$203.3
$268.1
$276.4
China
$300
$2.4
$3.0
$3.5
$4.0
$4.4
$5.2
$6.2
$6.2
$6.7
$7.80
$9.50
$11.20
$12.9
$15.80
$19.40
$25.5
$33.7
$40.00
$600
South Africa
From 2001-2009, Insurance Density in India tripled, and in China it grew 5-fold.
But the most spectacular Density growth in these years belongs to Russia:
in 2009 Insurance Density in Russia was 9 times what it was in 2001!
* premiums measured in U.S. dollars, exclude cross-border business
Source: Swiss Re Sigma, various volumes
The New World Order: A New Level of
Risk for Business
 Best Growth Opportunities are No Longer in Low-Risk Markets
(W. Europe, US/Canada, Japan)
 Growth Rates are 2-3 Times Higher in Developing World
 Business investment will remain high, much of it in need of insurance
 Investment conditions will remain challenging for decades
 Unemployment Rates Are Much Lower in Emerging Economies
 Establishment of a middle class and a wealthy upper class
 Incomes Are Rising Faster in Emerging Economies
 Fueling demand for goods and services
 Foreign Direct Investment (FDI) and insurance exposure/demand
 Immature Institutions Raise Risk/Possible Systemic Risks
 Legal system, financial markets, regulation, infrastructure issues
 Instability in Emerging Nations Will Remain High
 Political instability; Corruption in some countries
 Economic vulnerability (trade, xrt risk, credit risk, commodities, energy)
 Natural Hazard Risks Are Often Elevated w/Minimal Mitigation
14
Foreign Direct Investment
To Find Insurance Exposure Growth,
Follow the
Foreign-Direct-Investment “Dollar”
15
Global Foreign Direct Investment,*
Net Inflows: 1990-2010
Trillions of Current
US Dollars
$2.5
*Foreign Direct Investment:
The net inflow of investment to
acquire a lasting management
interest (at least 10% of voting
$2.0
stock) in an enterprise
operating in an economy other
than that of the investor.
In 2008, financial
services accounted
for nearly 20% of FDI
$1.5
$1.0
FDI dropped by
60% in 2001-02 and
52% in 2007-09
$0.5
$0.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Most non-life insurer growth will be in parts of the world where
Foreign Direct Investment (FDI) is high. FDI flows are highly volatile
(so new income streams for insurers will also be volatile).
Sources: World Bank; Insurance Information Institute.
Following the Money Trail:
Foreign Direct Investment
The UK’s share of
FDI peaked at
45% in 1914
The US’s share of
FDI peaked at
50% in 1967
China’s share of
FDI stood at 6%
in 2009
Source: The Economist, Nov. 13 -19, 2010
17
Europe & U.S.: Outward
Foreign Direct Investment*: 1990-2009
Millions of Current
US Dollars
UK
$1,100,000
Europe (excl. UK)
U.S.
European FDI in the rest of the
world plunged 60% during the
global financial crisis. UK FDI
fell by a remarkable 79%.
$1,000,000
$900,000
$800,000
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
European Foreign Direct Investment Abroad Was Hit Much
Harder than Asia or the Americas
*Foreign Direct Investments are defined as the net inflows of investment to acquire a lasting management interest (at least 10% of voting stock) in an
enterprise operating in an economy other than that of the investor. Outward FDI represents flow from investing country to rest of the world.
Source: United Nations UNCTADSTAT; Insurance Information Institute.
China, Hong Kong, South Korea:
Outward FDI: 1990-2009*
Millions of
Current US
Dollars
South Korea
Hong Kong
China
$70,000
Chinese foreign direct
investment increased
5,600% from 2000 to
2008. The recession
caused only a minor
disruption in Chinese
investment abroad
$60,000
$50,000
$40,000
$30,000
$52,269
$50,581
$45,726
$10,000
$17,463
$11,345
$8,254
$5,514
$2,825
$2,448
$0
90
91
92
$44,979
$27,196
$26,531
$25,000
$24,407
$21,437
$19,369
$17,713
$16,985
$20,000
$61,081
$59,374
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
Despite the Crash in Foreign Direct Investment During the Global Financial
Crisis, Chinese Investments Abroad Remain Near Record Levels.
Implication: Growth Opportunities for Insurers May Not Be in China but In
Chinese Investment Target Nations/Companies/Industries.
*Foreign Direct Investments are defined as the net inflows of investment to acquire a lasting management interest (at least 10% of voting stock) in an
enterprise operating in an economy other than that of the investor. Outward FDI represents flow from investing country to rest of the world.
Source: United Nations UNCTADSTAT; Insurance Information Institute.
20
Economic Threats
to the Global (Re)Insurance
Industry
At Least Eight to Monitor
21
Near-Term Issues
Effects of the March 11 Earthquake/Tsunami/
Nuclear Reactor Accident
 Lost final production
 Disrupted supply chains
 Lost Japanese consumption
Inflation Transmitted Globally
 China, Brazil and other countries
 Soaring food and other commodity prices
 Oil prices and supply reliability
Tighter monetary/fiscal policy => Slower Growth?
Source: Insurance Information Institute.
22
Inflation Rate Forecast for Largest European
Economies & Euro Area, 2011F-2012F
Change from
Prior Year
9%
8%
Inflation is forecast to be around
2% across most major European
economies. If so, interest rates
will remain low, obscuring tight
conditions in trade credit markets
2011F
2012F
7%
6%
5%
4%
3.4%
3%
2%
1.8% 1.7%
2.0% 2.0%
Germany
France
2.2%
1.6% 1.8%
1.9% 1.8%
Netherlands
EuroZone
1%
0%
Source: Blue Chip Economic Indicators, March 2011 issue
UK
Inflation Rate Forecast
for Other Important Countries, 2011-12F
% Change from Prior Year
2011F
2012F
8.6%
9%
7.7%
8%
7%
7.4%
6.5%
6%
5%
4%
5.3%
4.8%
4.3%
3.7%
3%
2.2% 2.2%
2%
1%
0.0%
0%
-0.2%
-1%
China
India
Brazil
Japan
Canada
Russia
Inflation is much higher in fast-growing economies such as Brazil, Russia, India,
and China (the BRIC group). Inflation there can spread to advanced economies
because the advanced countries import significantly from the BRICs.
Source: Blue Chip Economic Indicators, March 2011 issue
Commodity Price Changes
in 2010-2011*
Metals
Food
Raw Materials
*data are through Jan. 20, 2011
Source: International Monetary Fund World Economic Outlook January 2011 update at
http://www.imf.org/external/pubs/ft/weo/2010/update/01/data/figure_2.csv
Crude Oil
1/14/2011
12/31/2010
12/17/2010
12/3/2010
11/19/2010
11/5/2010
10/22/2010
10/8/2010
9/24/2010
9/10/2010
8/27/2010
8/13/2010
7/30/2010
7/16/2010
7/2/2010
6/18/2010
6/4/2010
5/21/2010
5/7/2010
4/23/2010
4/9/2010
Raw materials prices
doubled over the course
of 2010. Some other
commodity prices
dropped during the year
but ended 20-30% higher.
3/26/2010
3/12/2010
2/26/2010
2/12/2010
1/29/2010
1/15/2010
210
200
190
180
170
160
150
140
130
120
110
100
90
80
1/1/2010
Index (Jan 1, 2010 = 100)
Gold
25
Longer-Term Issues
Persistently Low Interest Rates
 Lower investment income, more pressure on u/w profit
Currency Market Instability
Sovereign Bond Market Concerns (Greece,
Spain, Ireland, etc.)
Strong Capital Flows to Emerging/Developing
Economies => Asset Price Bubbles?
Regulatory Backlash/Developments
 Solvency II, Basel III
 US Financial Services Reform
Source: Insurance Information Institute.
26
Forecast: End-of-Year 3-Month Interest Rates
for Major Global Economies, 2011-2012F
2011F
9%
2012F
Other countries
are intentionally
raising rates to
fight inflation.
8%
7%
6%
5%
4%
7.79%
7.23%
5.57%
5.16%
Interest rates remain generally low in much
of the world, depressing insurer investment
earnings. Some countries, including the
U.S., are intentionally holding rates low.
4.78%
4.57%
3%
2.18%
2%
2.14%
1.30%
1%
1.09%
0.24%0.33%
1.10%
0.20%
0%
Euro Area
Japan
U.K.
Source: Blue Chip Economic Indicators, March 2011 issue
U.S.
China
Australia
India
10-Year Bond: Yield Forecasts
for 2011:Q1-2012:Q2
U.S.
Euroland
U.K.
Canada
4.60%
4.40%
4.20%
4.00%
3.80%
3.60%
3.40%
2011:Q1
2011:Q2
2011:Q3
2011:Q4
2012:Q1
2012:Q2
As these nations’ economies improve, and actions to keep interest rates low
are ended, the yields on longer-term bonds are expected to rise. But
persistent high rates of unemployment and excess capacity, plus central
bank concerns about inflation, will likely keep them from rising more than
one percentage point by mid-2012.
Source: Wells Fargo Economics Group, Global Chartbook, March 2011
PIGS Government Bond Spreads
(2-Year Yield Spreads over German Bunds) in 2010-2011*
Basis Points
For one day in 2010,
1800
it took nearly 18
1600
percentage points
more yield to lure an
1400
investor to a 2-Year
Greek bond vs. a
1200
comparable German
bond
1000
110-billion-Euro
rescue package
drove the Greece
bond spread down
below 700 bp…
…but the
market isn’t
convinced
the rescue
will work
800
600
400
Greece
Ireland
Portugal
*data are through Jan. 21, 2011
Source: International Monetary Fund World Economic Outlook January 2011 update at
http://www.imf.org/external/pubs/ft/weo/2010/update/01/data/figure_2.csv
1/14/2011
12/31/2010
12/17/2010
12/3/2010
11/19/2010
11/5/2010
10/22/2010
10/8/2010
9/24/2010
9/10/2010
8/27/2010
8/13/2010
7/30/2010
7/16/2010
7/2/2010
6/18/2010
6/4/2010
5/21/2010
5/7/2010
4/23/2010
4/9/2010
3/26/2010
3/12/2010
2/26/2010
2/12/2010
1/29/2010
1/15/2010
0
1/1/2010
200
Spain
30
Trade-Index-Weighted
U.S. Dollar Exchange Rate*
Monthly, January 2000
through February 2011
115
110
Dollar appreciates as role
as global “reserve
currency” affirmed during
global financial crisis
105
100
Post-crisis
depreciation
of dollar
Greece
anxiety
Depreciation
of dollar after
Tech bubble
and post 9-11
95
90
85
80
75
70
65
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
Jan
11
The global financial crisis created significant exchange-rate volatility
in 2008-09 and 2010—when the world needed a “safe haven” currency.
As global stability returns, the dollar is depreciating again.
*The Major Currency index is a weighted average of the foreign exchange values of the U.S. dollar against a subset of the currencies
of a large group of major U.S. trading partners. The index weights, which change over time, are derived from U.S. export shares and
from U.S. and foreign import shares.
Sources: US Federal Reserve, Board of Governors; Insurance Information Institute.
But Exchange-Rate Changes Generally
Have Little Effect on U.S. Import Prices
 In theory, a change in the value of the dollar should raise or lower the
cost of foreign goods, thereby reducing or increasing U.S. demand for
imports.
 However, numerous economic studies have shown that when the
dollar fluctuates against foreign currencies, U.S. import prices tend to
show much less change.
 Using data for 1999 to 2008, a recent paper estimates exchange rate
pass-through to U.S. import prices for aggregate U.S. imports (all
imports excluding oil and consumer goods), and for prices of imports
from Japan, the European Union (EU), Canada, the NIEs, and Latin
America.
 The exchange rate pass-through estimates were found to be low (0.47 for
all imports excluding oil and 0.26 for consumer goods) over 4 quarters.
 Estimates of bilateral exchange- rate pass-through range from 0.59 for
Latin America (largely Mexico) to 0.0 for the NIEs (Taiwan, Singapore,
South Korea, and Hong Kong).
Source: U.S. International Trade Commission at http://www.usitc.gov/publications/332/working_papers/ID-21_revised.pdf.
32
Exchange Rate Indices*
Daily (Jan 1, 2010 = 100)
Index
120
115
110
105
100
95
Euro
Yen
Renminbi
1/14/2011
12/31/2010
12/17/2010
12/3/2010
11/19/2010
11/5/2010
10/22/2010
10/8/2010
9/24/2010
9/10/2010
8/27/2010
8/13/2010
7/30/2010
7/16/2010
7/2/2010
6/18/2010
6/4/2010
5/21/2010
5/7/2010
4/23/2010
4/9/2010
3/26/2010
3/12/2010
2/26/2010
2/12/2010
1/29/2010
1/15/2010
85
1/1/2010
90
Pound Sterling
*data are through Jan. 21, 2011
Source: International Monetary Fund World Economic Outlook January 2011 update at
http://www.imf.org/external/pubs/ft/weo/2010/update/01/data/figure_2.csv
33
Political Risk Insurance
Covers Various Risks, Including
Currency Inconvertibility,
Sovereign Non-Payment, Political
Interference, Strikes, War/Riot
34
Political Risk: Insurers’ Greatest
Opportunities Are Often in Risky Nations
The fastest growing
markets are generally
also among the
politically riskiest
Source: Aon
35
Aon: 2011 Political Risk,
by Country Count
(Number of
countries)
125
111
104
100
88
88
76
75
50
34
25
0
Risk
War/Civil War
Exchange
Transfer
Sabotage/Riot
Terrorism/Civil
Commotion
Sovereign Non- Legal/Regulatory
Risk
Payment
Political
Interference
Chinese Banks’ Lending Activity Abroad Showed Little Impact
from the Global Financial Crisis
Source: Aon, published January 19, 2011, accessed at http://aon.mediaroom.com/index.php?s=43&item=2162
36
Changes on
Aon’s 2011 Political Risk Map
 Aon 19 downgraded countries at the start of 2011:
Algeria, Benin, Comoros, Antigua and Barbuda, Bahamas,
Barbados, Bermuda, Cayman Islands, Dominica, Granada,
Haiti, Netherlands Antilles, St. Kitts and Nevis, St. Lucia, St.
Vincent, Trinidad, Myanmar, Iceland, Bahrain.
 Many of these were downgraded because they rely on tourism
for their prosperity and the global recession severely cut that
revenue/ profit source
 Aon upgraded 8 countries/territories:
Kenya, Mozambique, Rwanda, Uganda, Zambia, Panama,
Georgia, Uzbekistan, Indonesia, Malaysia, India
Bottom Line: Political and financial instability
remain a feature of the business landscape in 2011.
Source: Aon, published January 19, 2011, accessed at http://aon.mediaroom.com/index.php?s=43&item=2162
37
A.M. Best: Country Risk Evaluation*
Number of countries
16
14
Least risk
14
13
12
12
10
8
11
Special
cases:
Gibraltar
Guernsey
Isle of Man
6
4
2
Small
countries:
Luxembourg
Singapore
0
CRT-1
Special cases:
9
Special cases:
Barbados
British Virgin
Islands
Cayman Islands
Liechtenstein
Macau
Special cases:
Anguilla
Bahamas
Cyprus
Malta
Netherlands
Antilles
Oman
Trinidad and
Tobago
Antigua and
Barbuda
Mauritius
Small
countries:
Bermuda
Hong Kong
Taiwan
CRT-2
CRT-3
CRT-4
CRT-5
*Country risk: the risk that country-specific factors could adversely affect an insurer’s ability to meet its financial
obligations. A. M. Best places countries into one of five tiers: Country Risk Tier 1 (CRT-1, a stable environment
with the least amount of risk), to Country Risk Tier 5 (CRT-5, countries that pose the most risk and greatest
challenge to an insurer’s financial stability, strength and performance).
Countries in CRT-5): Algeria, Belarus, Bosnia and Herzegovina, Dominican Republic, Ghana,
Jamaica, Kenya, Lebanon, Libya, Nigeria, Pakistan, Syria, Ukraine and Vietnam.
Source: http://www3.ambest.com/ratings/cr/crisk.aspx
Insurance Information Institute Online:
www.iii.org
Thank you for your time
and your attention!