the path ahead: property/casualty insurance in the wake of
TRANSCRIPT
The Path Ahead: Property/Casualty Insurance
in the Wake of the Global Financial Crisis
Professional Liability Underwriting Society22nd Annual Conference
Chicago, IL
November 11, 2009
Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038
Tel: (212) 346-5520 ♦ Fax: (212) 732-1916 ♦ [email protected] ♦ www.iii.org
2
Presentation Outline• The Economic Storm: Financial Crisis & Recession
Exposure, Growth & Profitability• Insurance Industry Financial Overview & Outlook
ProfitabilityPremium GrowthUnderwriting Performance: Commercial & Personal LinesFinancial Market ImpactsCapital & Capacity
• Shifting Legal Liability & Tort EnvironmentFinancial Scandals and Economic Crises
• Professional Liability Insurance Operating EnvironmentMed Mal, D&O
• Key Threats and Issues Facing P/C Insurers Through 2015• Healthcare Debate Spillover Effects
• Financial Strength & RatingsKey Differences Between Insurer and Bank Performance During Crisis
Q&A
THE ECONOMIC STORM
What the Financial Crisis and Recession Mean for the
Industry’s Exposure Base,Growth, Profitability and
Investments
4
3.7%
0.8% 1.
6% 2.5%
3.6%
3.1%
2.9%
0.1%
4.8%
4.8%
-0.7
%
1.5%
-2.7
%
3.5%
2.4% 2.6% 2.7% 2.8% 2.9%
-0.7
%
-6.4%
-5.4%
-0.2%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
20
00
20
01
20
02
20
03
20
04
20
05
20
06
07:1
Q
07:2
Q
07:3
Q
07:4
Q
08:1
Q
08:2
Q
08:3
Q
08:4
Q
09:1
Q
09:2
Q
09:3
Q
09:4
Q
10:1
Q
10:2
Q
10:3
Q
10:4
Q
Real GDP Growth*
*Blue bars are Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 10/09; Insurance Information Institute.
Recession began in December 2007. Economic toll of credit crunch, housing slump, labor market contraction has been severe but recovery is in sight
The Q1:2009 decline was the steepest since the
Q1:1982 drop of 6.4%
Personal and commercial lines
exposure base have been hit
hard and will be slow to come
back
5
Length of U.S. Business Cycles, 1929-Present*
43
138 11 10 8 10 11
166
168 8
19
50
80
3745
39
24
106
36
58
12
92
120
73
0102030405060708090
100110120
Aug.1929
May1937
Feb.1945
Nov.1948
July1953
Aug.1957
Apr.1960
Dec.1969
Nov.1973
Jan.1980
Jul.1981
Jul.1990
Mar.2001
Dec.2007
Contraction Expansion Following
* Through June 2009 (likely the “official end” of recession) **Post-WW II period through end of most recent expansion. Sources: National Bureau of Economic Research; Insurance Information Institute.
Duration (Months)
Month Recession Started
Average Duration**Recession = 10.4 Months
Expansion = 60.5 MonthsLength of
expansions greatly exceeds
contractions
6
5.2%
-0.9
%-7
.4%
-6.5
%-1
.5%
1.8%
4.3%
18.6
% 20.3
%5.
8%0.
3%-1
.6%
-1.0
%-1
.8%
-1.0
%3.
1%1.
1%0.
8%0.
4%0.
6%-0
.4%
-0.3
%1.
6%5.
6%13
.7%
7.7%
1.2%
-2.9
% -0.5
%-3
.8%
-4.4
%-4
.5%
-10%
-5%
0%
5%
10%
15%
20%
25%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
Real
NW
P G
row
th
-4%
-2%
0%
2%
4%
6%
8%
Rea
l GD
P G
row
th
Real NWP Growth Real GDP
Real GDP Growth vs. Real P/C Premium Growth: Modest Association
P/C insurance industry’s growth is influenced modestly by growth
in the overall economy
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 10/09; Insurance Information Inst.
Regional Differences Will Significantly
Impact P/C Markets Recovery in Some Areas Will Begin Years Ahead of Others & Speed of Recovery Will Differ By Orders of
Magnitude
8
State Economic Growth Varied Tremendously in 2008
Eastern US growing more slowly than Plains,
Mountains
9
Fastest Growing States in 2008: Plains, Mountain States Lead
7.3%
4.4%3.5%
2.9%2.0%2.1%2.5%
2.7%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
ND WY SD CO OK WV IA TX, MN,NM, WA
Natural resource and agricultural states have done
better than most others recently, helping insurance
exposure in those areas
Source: US Bureau of Economic Analysis; Insurance Information Institute.
PercentReal State GDP Growth
10
Slowest Growing States in 2008: Diversity of States Suffering
-0.1%
-0.4%-0.6%-0.6%
-1.5%-1.6%-1.6%-1.7%-2.0%
-0.9%-0.6%-0.6%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%KY CT AZ GA IN NV RI MI DE FL OH AK
States in the North, South, East and West all represented among
hardest hit but for differing reasons
Source: US Bureau of Economic Analysis; Insurance Information Institute.
PercentReal State GDP Growth
P/C Premium Growth
Primarily Driven by the Industry’s Underwriting Cycle, Not the Economy
12
-6%-4%-2%0%2%4%6%8%
10%12%14%16%18%20%22%24%
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
09:H
1
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute
Strength of Recent Hard Marketsby NWP Growth
1975-78 1984-87 2000-03
12
Net written premiums fell 1.0%
in 2007 (first decline since 1943) by 1.4% in 2008, and 4.2% in H1 2009, the first 3-
year decline since 1930-33
Shaded areas denote “hard
market” periods
13
Average Commercial Rate Change,All Lines, (1Q:2004 – 3Q:2009)
-3.2
%-5
.9%
-7.0
%-9
.4%
-9.7
% -8.2
%-4
.6% -2
.7%
-3.0
%-5
.3%
-9.6
%-1
1.3%
-11.
8%-1
3.3% -1
2.0%
-13.
5%-1
2.9% -1
1.0%
-6.4
% -5.1
%-4
.9%
-5.8
%
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%1Q
042Q
043Q
044Q
041Q
052Q
053Q
054Q
051Q
062Q
063Q
064Q
061Q
072Q
073Q
074Q
071Q
082Q
083Q
084Q
081Q
092Q
093Q
09
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
KRW Effect
-0.1
% Magnitude of price declines is now
shrinking. Reflects shrinking capital,
reduced investment gains, deteriorating
underwriting performance, higher cat losses and costlier
reinsurance
D&O Premium Index(1974 Average = 100)
682746704720720771806793
726619
539503560
720
931
1,2371,113
827805694
1,010
0
200
400
600
800
1000
1200
1400
86 88 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source: Tillinghast Towers-Perrin, 2008 Directors and Officers Liability Survey.
Average D&O pricing is off at 44% since 2003, after rising
146% from 1999-2003
Investment Environment
Volatility Breeds Litigation
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
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
2007
2008
2009
Source: Ibbotson Associates, Insurance Information Institute. *Through November 9, 2008.
Total Returns for Large Company Stocks: 1970-2009*
S&P 500 was down 38.5% in 2008; Up 21.0% so far in 2009*
Market rebound of 2009 still leaves
investors underwater from pre-crisis highs
17
Business Bankruptcy Filings,1980-2009*
43,6
9448
,125
69,3
0062
,436
64,0
04 71,2
77 81,2
3582
,446
63,8
5363
,235
64,8
53 71,5
4970
,643
62,3
0452
,374
51,9
5953
,549
54,0
2744
,367
37,8
8435
,472
40,0
9938
,540
35,0
3734
,317
39,2
0119
,695 28
,322
43,5
4660
,000
010,00020,00030,00040,00050,00060,00070,00080,00090,000
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
% Change SurroundingRecessions
1980-82: 58.6%1980-87: 88.7%1990-91: 10.3%2000-01: 13.0%
2006-09: 204.6%*
*Based estimate of 60,000 business bankruptcies in 2009; actual first half total was 30,333.Source: American Bankruptcy Institute; Insurance Information Institute
There were 30,333 business bankruptcies during the first half of 2009, up 64% from 2008: H1 and on track for about 60,000 for all of 2009, the most since 1993. Current
recession will generate 200%+ surge.
Business bankruptcies contribute to litigation
18
Recession, InvestmentVolatility & Reveal Scandals
• Charles Ponzi Was a Two-Bit Scamster by Today’s Standards
Made $20 million in 1920 ($225 in today’s dollars)
• Bernard Madoff: $65 Billion Ponzi Scheme• R. Allen Stanford: $8 Billion Fraudulent Investment
Scheme Involving CDs• Raj Rajaratnam (Galleon Group co-Founder) & 19
Others: Criminally Charged With Making Millions from Insider Trading
• Recessions ALWAYS Reveal Financial Scandals• 2001: Enron/Tyco• 1991-92: Bank of Commercial & Credit International
Sources: SEC, Bloomberg, BusinessWeek.
Shareholder Class Action Lawsuits*
*Securities fraud suits filed in U.S. federal courts; 2009 figure is current through 11/05/09.Source: Stanford University School of Law (securities.stanford.edu); Insurance Information Institute
164202
163
231188
111
174
242209216
498
266227239
182119
177222
146
0
100
200
300
400
500
600
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*
Securities litigation activity continues to be driven by claims
against financial services firms.
P/C Investment Performance
Investments are a Principle Source of Declining
Profitability
21
Property/Casualty Insurance Industry Investment Gain:1994- 2009:H11
$ Billions
$35.4$42.8
$47.2$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$64.0
$31.4
$12.4
$56.9$51.9
$57.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08
09:H
1
1Investment 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.
Sources: ISO; Insurance Information Institute.
Investment gains fell by 51% in 2008 due to lower yields, poor equity market
conditions. Falling again in 2009.
21
22
P/C Insurer Net Realized Capital Gains, 1990-2009:H1
$2.88$4.81
$9.89
$1.66
$6.00
$9.24$10.81
$13.02
$16.21
$6.63
-$1.21
$6.61$8.92
-$11.17
-$19.80
$18.02
$3.52
$9.70$9.13$9.82
-$20-$18-$16-$14-$12-$10-$8-$6-$4-$2$0$2$4$6$8
$10$12$14$16$18$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
09H
1
Sources: A.M. Best, ISO, Insurance Information Institute.
Realized capital losses hit a record $19.8 billion in 2008 due to financial market turmoil, a $27.7 billion swing from 2007, followed by an $11.2B
drop in H1 2009. This is a primary cause of 2008/2009’s large drop in profits and ROE.
$ Billions
22
23
0.06% 0.12% 0.21% 0.40%
0.96%1.48%
2.37%
3.02%3.40%
4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00% 5.19%
4.19%4.14%
0%
1%
2%
3%
4%
5%
6%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
September 2009 Yield CurvePre-Crisis (July 2007)
Treasury Yield Curves: Pre-Crisis (July 2007) vs. Sept. 2009
Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
Stock dividend cuts will further pressure investment income
Treasury Yield Curve is at its most depressed level in at least 45 years. Investment
income is falling as a result.
Distribution of P/C Insurance Industry’s Investment Portfolio
Cash & Short-Term Investments
7.2%
Common Stock17.9%
Bonds66.7%
Preferred Stock1.5%
Real Estate0.8%
Other5.9%
Portfolio Facts•Invested assets totaled $1.3 trillion as of 12/31/07•Insurers are generally conservatively invested, with 2/3 of assets invested in bonds as of 12/31/07•Only about 18% of assets were invested in common stock as of 12/31/07•Even the most conservative of portfolios was hit hard in 2008
Source: NAIC; Insurance Information Institute research;.
As of December 31, 2007
24
Distribution of P/C Insurance Industry’s Investment Portfolio
Cash & Short-Term Investments
8.0%
Common Stock14.8%
Bonds68.4%
Preferred Stock1.8%
Real Estate0.9%
Other6.2%
Portfolio Facts•Invested assets totaled $1.2 trillion as of 12/31/08, down from $1.3 trillion as of 12/31/07•Insurers are generally conservatively invested, with 2/3+ of assets invested in bonds as of 12/31/08•Only about 15% of assets were invested in common stock as of 12/31/08, down from 18% one year earlier•Even the most conservative of portfolios were hit hard in 2008
Source: NAIC; Insurance Information Institute research;.
As of December 31, 2008
25
Profitability
Historically Volatile
27
P/C Net Income After Taxes1991-2009:H1 ($ Millions)*
$14,
178
$5,8
40
$19,
316
$10,
870
$20,
598
$24,
404 $3
6,81
9
$30,
773
$21,
865
$3,0
46
$30,
029
$62,
496
$2,3
79
$5,7
57
-$6,970
$65,
777
$44,
155
$20,
559 $3
8,50
1
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,00091 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
09:H
1
*ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields an 4.5% ROAS for 2008 and 2.2%. 2009:Q1 net income was $10.0 billion excl. M&FG.Sources: A.M. Best, ISO, Insurance Information Inst.
2005 ROE= 9.4%2006 ROE = 12.2%2007 ROAS1 = 12.4%2008 ROAS = 0.5%*2009:H1 ROAS = 2.5%*
Insurer profits peaked in 2006 and 2007, but fell 96.2% during the economic
crisis in 2008
27
28
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0809:H1
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2009: H1*
*Excludes Mortgage & Financial Guarantee in 2008 and 2009Sources: ISO, Fortune; Insurance Information Institute.
Andrew Northridge
Hugo Lowest CAT losses in 15 years
Sept. 11
4 Hurricanes
Katrina, Rita, Wilma
P/C profitability is cyclical and volatile
Financial Crisis*
29
97.5
100.6 100.1 100.7
92.6
99.5101.0
8.9%4.2%
12.7%
14.3% 15.9%
9.6%
4.5%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2008* 2009:H1*
Com
bine
d R
atio
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Ret
run
on E
quity
*
Combined Ratio ROE*
* 2008/9 figures are return on average statutory surplus. Excludes mortgage and financial guarantee insurers.Source: Insurance Information Institute from A.M. Best and ISO data.
A 100 Combined Ratio Isn’t What it Used to Be: 95 is Where It’s At
Combined ratios must me must lower in today’s depressed
investment environment to generate risk
appropriate ROEs
Underwriting Trends
Financial Crisis Does Not Directly Impact Underwriting
Performance: Cycle, Catastrophes Were 2008’s Drivers
31
115.8
107.5
100.198.4
100.8
92.6
99.5101.0
95.7
90
100
110
120
2001 2002 2003 2004 2005 2006 2007 2008 2009:H1*
P/C Insurance Industry Combined Ratio, 2001-2009:H1*
*Excludes Mortgage & Financial Guaranty insurers in 2008. Including M&FG, 2008=105.1, 2009=100.9 Sources: A.M. Best, ISO.
Best combined ratio since 1949
(87.6)
As recently as 2001, insurers paid out nearly $1.16 for every
$1 in earned premiums
Relatively low CAT
losses, reserve releases
Cyclical Deterioration
31
2005 ratio benefited from heavy use of reinsurance which lowered net losses
32
P/C Reserve Development, 1992-2011E
-6.6
-9.8
13.7
9.9
7.3
-6.7
-9.5
-14.
6-1
6 -15
-5
23.2
11.7
1
-4.1
-9.9
-2.1
-8.3
-2.6
2.3
($20)($15)($10)($5)$0$5
$10$15$20$25$30
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E 11E
Prio
r Yr.
Res
erve
Rel
ease
($ B
ill)
(6)
(4)
(2)
0
2
4
6
8
Impa
ct o
n Co
mbi
ned
Ratio
(Poi
nts)
Prior Yr Reserve Development ($ Bill) Impact on Combined Ratio (Points)
.Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Source: Barclay’s Capital; A.M. Best.
2009 off to a stronger start with AIG unit sales and
Bermuda consolidation
$ Value of deal up 20% in 2009,
volume down 12%
33
Calendar Year vs. Accident Year P/C Combined Ratio:1992- 2010E1
115.
7
106.
9
108.
4
106.
4
107.
8 110.
1
115.
9
107.
3
100.
1
98.3 10
0.9
92.4
95.5
105.
1
101.
9 105.
9
115.
7
106.
9
108.
4
106.
4
105.
8
101.
6 105.
6 107.
8 110.
0 112.
3
100.
8
96.6
96.0
100.
6
93.9
97.4
105.
5
105.
7 109.
4
105.
6
101.
6
105.
8
80
85
90
95
100
105
110
115
120
92 93 94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09E 10E
Calendar Year Accident YearAccident year results show a
more significant deterioration in underwriting performance.
Calendar year results are helped by reserve releases
33
.Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Source: Barclay’s Capital; A.M. Best.
34
-55-50-45-40-35-30-25-20-15-10-505
101520253035
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 0809
:Q1
Source: A.M. Best, ISO; Insurance Information Institute * Includes mortgage & finl. guarantee insurers
$ B
illio
ns
Insurers earned a record underwriting profit of $31.7B in 2006 and $19.3B in 2007, the largest ever but only the 2nd
and 3rd since 1978. Cumulative underwriting deficit from 1975 through 2008 is $442B.
Underwriting Gain (Loss)1975-2009:H1*
$19.8 Bill underwriting loss in 2008
incl. mort. & FG insurers, -$2.2B in H1:09
34
Large underwriting losses are NOT
sustainable in current investment environment
35
Number of Years With Underwriting Profits by Decade, 1920s –2000s
67
10
8
45
0 0
3
0
2
4
6
8
10
1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*
Note: Data for 1920 – 1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data. *2000 through 2008.
Number of Years with Underwriting ProfitsUnderwriting profits were common before the 1980s (40 of the 60 years
before 1980 had combined ratios below 100)—but then they vanished. Not a single underwriting profit was recorded in the 25 years from 1979
through 2003.
35
Capital/Policyholder Surplus (US)
Shrinkage, but Not Enough to
Trigger Hard Market
37
Policyholder Surplus, 2006:Q4 – 2009:H1
$ Billions
$487.1$496.6
$512.8$521.8
$478.5
$455.6
$437.1
$463.0
$505.0$515.6
$517.9
$380
$400
$420
$440
$460
$480
$500
$520
$540
06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2
Source: ISO, AM Best.
Declines Since 2007:Q3 Peak08:Q2: -$16.6B (-3.2%) 08:Q3: -$43.3B (-8.3%) 08:Q4: -$66.2B (-12.9%) 09:Q1: -$84.7B (-16.2%) 09:Q2: -$58.8B (-11.2%)
Capacity peaked at $521.8 as of 9/30/07
37
38
Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*
3.3%
9.6%6.9%
10.9%
16.2%13.8%
6.2%
0%2%4%6%8%
10%12%14%16%18%
6/30
/198
9H
urric
ane
Hug
o
6/30
/199
2H
urric
ane
And
rew
12/3
1/93
Nor
thrid
geEa
rthq
uake
6/30
/01
Sept
. 11
Atta
cks
6/30
/04
Flor
ida
Hur
rican
es
6/30
/05
Hur
rican
eK
atrin
a
Fina
ncia
lC
risis
as
of3/
31/0
9**
*Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event. **Date of maximum capital erosion; As of 6/30/09 (latest available) ratio = 11.2%.Source: PCS; Insurance Information Institute.
The financial crisis now ranks as the largest
“capital event” over the past 20+ years
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
NWP % changeSurplus % change
*2009 NWP and Surplus figures are % changes for H1:09 vs H1:08Sources: A.M. Best, ISO, Insurance Information Institute
Historically, Hard Markets Follow When Surplus “Growth” is Negative*
Sharp decline in capacity is a necessary but not sufficient
condition for a true hard market
Labor Market Trends
Fast & Furious: Massive Job LossesSap the Economy and P/C Exposure & Can Also Cause EPL Problems
41
2.0
3.04.0
5.0
6.07.0
8.0
9.010.0
11.0
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
January 2000 through October 2009*
Unemployment will likely peak near 10.5 % during this cycle, impacting payroll
sensitive p/c and l/h exposures
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Oct. 2009 unemployment was 10.2%, up 0.4% from Sept. and nearing its
highest level since April 1983 (10.8%)
Unemployment Rate:On the Rise
Average unemployment rate 2000-07 was 5.0%
Previous Peak: 6.3% in June 2003
Trough: 4.4% in March 2007
Oct
-09
42
Monthly Change Employment*(Thousands)
-72-144-122
-160-137-161-128
-175
-321-380
-597
-681-741
-681-652
-519
-303
-463
-304
-154-219-190
-800
-700
-600
-500
-400
-300
-200
-100
0
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Job losses since the recession began in Dec. 2007 total 8.2 mill; 15.7 million people are now
defined as unemployed.
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Info. Institute
Monthly losses in Dec. – May were the largest in the post-WW II period
but pace of loss is diminishing
January 2008 through October 2009
43
Labor Underutilization: Broader than Just Unemployment
11.2%
16.4% 16.5% 16.3%
17.5%17.0%16.8%
10%
11%
12%
13%
14%15%
16%
17%
18%
Sep-08 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09
Marginally attached and unemployed persons account for 17.5% of the labor
force in Oct. 2009 (1 out every 5.7 people). Unemployment rate alone was 10.2%.
Underutilization shows a broader impact on WC and other commercial exposures.
NOTE: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are availableFor a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-marketrelated reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available forfull-time work but have had to settle for a part-time schedule.Source: US Bureau of Labor Statistics; Insurance Information Institute.
Percent % of Labor Force
Unemployment Rates by State, September 2009: Highest 25 States*
10.5
9.8
9.610
.110
.110
.5
9.3
9.1
9.2
8.89.
3
8.9
8.99.
5
11.4
11.6
10.7
10.8
10.9
11.011
.5
13.3
13.0
12.2
15.3
0
2
4
6
8
10
12
14
16
MI NV RI CA SC OR DC FL KY NC AL IL TN OH GA NJ IN MO WA MA MS AZ NY WV ID
Une
mpl
oym
ent R
ate
(%)
*Provisional figures for September 2009, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
The unemployment rate has been rising across the country, but some states are doing much
better than others.
Insurers with heavy footprints in these states will lag behind
6.8
6.7
6.7
6.7
6.76.97.
27.
2
4.84.9
6.27.
07.1
4.2
6.7
8.2
8.3
7.27.37.47.
78.38.
58.
48.
48.8
0
2
4
6
8
10
PA ME AK CT WI DE TX NM LA MN HI MD NH AR CO KS WY IA OK VT MT VA UT NE SD ND
Une
mpl
oym
ent R
ate
(%)
Unemployment Rates By State, September 2009: Lowest 25 States*
The unemployment rate has been rising across the country, but some states are doing much
better than others.
*Provisional figures for September 2009, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
Crisis-Driven Exposure Drivers
Economic Obstaclesto Growth in P/C
Insurance
47
Private Sector Business Starts,1993:Q2-2008:Q4*
175
186
174 18
0 186 19
218
818
7 189
186 19
0 194
191
199 20
420
219
519
619
620
620
620
119
2 198
206
206
203
211
205
212
200 20
520
420
419
7 203 20
9
203
192
192
193
201 20
420
221
0 212
209
216 22
0 223
220
220
210
221
212
204
218
210
209
195
187 18
9
201
150
160
170
180
190
200
210
220
230
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Business starts are down 15% in the current downturn, holding back most types of commercial
insurance exposure
*Latest available as of Oct. 2009.Source: Bureau of Labor Statistics: http://www.bls.gov/news.release/cewbd.t07.htm
Thousands189,000 business starts
were recorded 2008:Q4, the lowest
level since 1995
GREEN SHOOTS
Business Mix & Geographic Footprint Will Impact P-C
Insurer Growth Opportunities
49
Hopeful Signs that theEconomic Recovery Is Underway
• Recession Appears to be Bottoming Out, Freefall Has Ended• GDP shrinkage has ended; Economy is expanding• Pace of job losses is slowing• Major stock market indices well off record lows, anticipating recovery• Some signs of retail sales stabilization are evident
• Financial Sector is Stabilizing• Banks are reporting quarterly profits• Many banks expanding lending to very credit worthy people & businesses
• Housing Sector Seems To Be Bottoming Out• Home are much more affordable (attracting buyers)• Mortgage rates are still low relative to pre-crisis levels (attracting buyers)• Freefall in housing starts and existing home sales is ending in many areas
• Inflation & Energy Prices Are Under Control• Consumer & Business Debt Loads Are Shrinking Source: Ins. Info. Inst.
50
11 Industries for the Next 10 Years: Insurance Solutions Needed
GovernmentEducation
Health CareEnergy (Traditional)Alternative Energy
AgricultureNatural Resources
EnvironmentalTechnology
Light ManufacturingExport Oriented Industries
Inflation Trends: Concerns Over
Stimulus Spending and Monetary Policy
Mounting Pressure on Claim Cost Severities?
52
Annual Inflation Rates(CPI-U, %), 1990-2010F
4.9 5.1
3.0 3.22.6
1.51.9
3.3 3.4
1.3
2.5 2.3
3.0
3.8
2.8
3.8
(0.5)
1.9
2.82.92.4
(1.0)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F10F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, Oct. 10, 2009 (forecasts).
Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The
recession and the collapse of the commodity bubble have produced temporary deflation.
There is so much slack in the US economy that inflation should not be a concern through 2010, but depreciation of dollar is concern longer run.
-$2,000
-$1,500
-$1,000
-$500
$0
$50019
69
1975
1980
1985
1990
1995
2000
2005
2010
2015
2019
Fede
ral D
efic
it
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
Def
icit
as %
of G
DP
Federal Deficit ($ Bill) % GDP
US Budget Deficit, 1969-2019F
Deficit expected to hit record $1.8 trillion in 2009 or 13% or GDP, a post-WW II high
Sources: Congressional Budget Office analysis of President’s budget, March 2009; Insurance Information Institute.
Concerns that deficit spending will drive up inflation. This would
harmful to insurance claim severity.
54
$903
.7
$903
.6
$899
.4
$911
.6
$922
.9
$921
.3
$926
.4 $1,1
86.2
$2,2
70.4
$2,1
06.5
$2,1
79.0
$2,0
52.2
$0
$500
$1,000
$1,500
$2,000
$2,500
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Balance Sheet of theFederal Reserve, Dec. 2006- Sept. 2009*
*As of final Friday in each quarter.Source: Federal Reserve: http://www.federalreserve.gov/releases/h41/hist/h41hist1.htm
The size of the Fed’s balance sheet has more than doubled since the crisis began in 2007 from about
$900 billion to $2.2 trillion, fueling inflation concerns.
$ Billions
55
Top Concerns/Risks for Insurers if Inflation is Reignited
CONCERNS: The Federal Reserve Has Flooded Financial System with Cash (Turned on the Printing Presses), the Federal Govt. Has Approved a $787B Stimulus and the Deficit is Expected to Mushroom to $1.8 Trillion. All Are Potentially Inflationary.
What are the potential impacts for insurers?What can/should insurers do to protect themselves from the risks of inflation?
KEY RISKS FROM SUSTAINED/ACCELERATING INFLATION• Rising Claim Severities
Cost of claims settlement rises across the board (property and liability)• Rate Inadequacy
Rates inadequate due to low trend assumptions arising from use of historical data • Reserve Inadequacy
Reserves may develop adversely and become inadequate (deficient)• Burn Through on Retentions
Retentions, deductibles burned through more quickly• Reinsurance Penetration/Exhaustion
Higher costs risks burn through their retentions more quickly, tapping into re-insurance more quickly and potential exhausting their reinsurance more quickly
Source: Ins. Info. Inst.
Tort Cost Growth & Medical Cost Inflation vs. Overall Inflation (CPI-U), 1961-2009E*
0%
2%
4%
6%
8%
10%
12%
14%
1961-70 1971-80 1981-90 1991-2000 2001-09E
Tort Costs Medical Costs CPI
* CPI-U and medical costs as of Sept 2009; Tort figure is for full-year 2009 from Tillinghast.
Tort System is an Inflation Amplifier
Avg. Ann. Change: 1961-2009E*
Tort Costs: +8.4%Med Costs: +5.9%
Overall Inflation: +4.2%
Sources: US Bureau of Labor Statistics, Tillinghast-Towers Perrin, 2008 Update on U.S. Tort Costs; Insurance Info. Inst.
Tort costs move with inflation but at twice the rate
Shifting Legal Liability & Tort
EnvironmentIs the Tort Pendulum
Swinging Against Insurers?
58Source: Insurance Information Inst.
Emerging Tort ThreatNo tort reform (or protection of recent reforms) is forthcoming from the current Congress or AdministrationErosion of recent reforms is a certainty (already happening)Innumerable legislative initiatives will create opportunities to undermine existing reforms and develop new theories and channels of liabilityTorts twice the overall rate of inflationHistorically extremely costly to p/c insurance industryLeads to reserve deficiency, rate pressureBottom Line: Tort “crisis” is on the horizon and will be recognized as such by 2012-2014
Important Issues & Threats Facing Insurers: 2009 -2015
Over the Last Three Decades, Total Tort Costs* as a % of GDP Appear Somewhat Cyclical
$0
$50
$100
$150
$200
$250
$300
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
E
2010
E
Tor
t Sys
tem
Cos
ts
1.50%
1.75%
2.00%
2.25%
2.50%
Tor
t Cos
ts a
s % o
f GD
P
Tort Sytem Costs Tort Costs as % of GDP
Sources: Tillinghast-Towers Perrin, 2008 Update on US Tort Cost Trends, Appendix 1A; I.I.I. calculations/estimates for 2009 and 2010
Billions
*Excludes the tobacco settlement, medical malpractice
2009-2010 Growth in Tort Costs as % of GDP is due in part to shrinking GDP
The Nation’s Judicial Hellholes (2008/2009)
Source: American Tort Reform Association; Insurance Information Institute
ALABAMAMacon and
Montgomery Counties
South Florida
ILLINOISCook County West Virginia
Watch ListRio Grande
Valley & Gulf Coast, TX
Madison County, IL
Baltimore, MDSt Louis (the city of), St Louis and
Jackson Counties, MO
Dishonorable Mentions
MA Supreme Judicial CourtMO Supreme
Court
NEVADAClark County (Las Vegas)
NEW JERSEYAtlantic County (Atlantic City)
CALIFORNIALos Angeles
County
Sum of Top 10 Jury Awards, 2004-2008
$ Millions
$1,344.0$615.0$815.0
$2,953.7
$5,158.8
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
2004 2005 2006 2007 2008Source: Insurance Information Institute from LawyersWeekly USA, January 2005, 2006, 2007, 2008 and 2009.
Total of Top 10 awards in 2008 was 74% lower
than in 2004
Number of Top 10 Jury Awards, 1995 - 2008
23 2321
17
8 7 64 3 2 2 2 2 2 1 1
7
0
5
10
15
20
25
TX NY CA FL
MO
DC*
GA AL IL TN LA MD OR SC NV NM NJ
TX, NY and CA lead the U.S. in jumbo-size jury awards
Source: LawyersWeekly USA,, January 1996-2009 issues. *All against Iran for terrorist activity
MEDICAL & HEALTH CARE
COST INFLATION
National Problem & Insurer Cost Driver
Consumer Price Index for Medical Care vs. All Items, 1960-2009*
213.1*
373.3*
0
100
200
300
400
60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
All Items Medical Care
*First Half 2009 data.Source: Department of Labor (Bureau of Labor Statistics).
(Base: 1982-84=100)
Inflation for Medical Care has been surging ahead of general inflation (CPI) for
25 years. Since 1982-84, the cost of medical care has more than tripled.
National Health Expenditures Per Capita, 1960-2018E ($Bill)
$4,5
23$4
,790
$5,1
48$5
,560
$5,9
67$6
,319
$6,6
87$7
,062
$7,4
21$7
,804
$8,1
60$8
,459
$8,8
51$9
,282
$9,7
67$1
0,31
2$1
0,92
9$1
1,59
8$1
2,32
5$1
3,10
1
$356
$2,8
13$1
,100
$148
$3,4
69$4
,104
$4,2
97
$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000
$10,000$11,000$12,000$13,000$14,000$15,000
60 70 80 90 93 97 98 99 00 01 02 03 04 05 06 07 08E
09E
10E
11E
12E
13E
14E
15E
16E
17E
18E
Source: Centers for Medicare & Medicaid Services, Office of the Actuary; Insurance Information Institute.
Health costs on a per capita basis continue to rise rapidly, as health expenditures rise faster
than population growth
National Health Expenditures and Health Expenditures as a Share of GDP,
1960-2018F ($ Billions)$2
8
$1,9
81$2
,113
$2,2
41$2
,379
$2,5
10$2
,624
$2,7
70$2
,931
$3,1
11$3
,313
$3,5
41$3
,790 $4,0
62 $4,3
53
$1,6
03
$1,7
35
$253
$714
$1,3
54
$75
$1,1
91
$1,8
55
$1,4
70
$1,1
25$9
13 $1,2
66
5.2%
7.2%
9.1%
13.7
%
14.5
%15
.3%
15.9
%15
.9%
16.0
%16
.2%
16.6
%
20.3
%
19.8
%19
.3%17
.6%
17.7
%17
.9%
18.0
%18
.2%
18.5
%18
.9%
12.3
% 13.6
%
13.8
% 15.8
%
13.6
%
13.7
%
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
$5,00060 70 80 90 93 97 98 99 00 01 02 03 04 05 06 07 08E
09E
10E
11E
12E
13E
14E
15E
16E
17E
18E
Nat
iona
l Hea
lth E
xps
0%
5%
10%
15%
20%
25%
Nat
iona
l Hea
lth E
xp. a
s % o
f GD
P
National Health Expenditures National Health Expenditures as % of GDP
Health care expenditures consumed an estimated
16.6% of GDP in 2008 and are expected to rise to 20.3%
by 2018
Source: Centers for Medicare & Medicaid Services, Office of the Actuary; Insurance Information Institute.
Average Annual Growth in US Per Capital Health Care Costs, 1960-2018F
14.1%
20.9%
15.6%
7.0% 7.9%6.2%
0%
5%
10%
15%
20%
25%
1960-1970 1970-1980 1980-1990 1990-2000 2000-2007 2007-2018
The 1970s were the most inflationary decade for medical costs at nearly
21% per year
Over the net decade health care expenditures will likely
increase well ahead of economic growth and the general pace of inflation
Source: Insurance Information Institute calculations based on data from the Centers for Medicare &Medicaid Services, Office of the Actuary.
Auto Claim Costs Rise Faster than CPI or Health Care Costs
9%
4%
8%
6%
3%4%
0%1%2%3%4%5%6%7%8%9%
10%
Claimed BIEconomic
Loss
Total BIPayment
Claimed PIPEconomic
Loss
Total PIPPayment
CPI CPI-Medical
Sources: Insurance Research Council, Auto Insurance Claims: Countrywide Patterns in Treatment, Cost and Compensation, 2008 Edition; Insurance Information Institute.
Inflation in auto insurance claims is a significant and long-
term cost driver
Claimed BI economic
losses are 3 times the overall
inflation rate
MEDICAL MALPRACTICE
OPERATING ENVIRONMENT
Improved, But Still Vulnerable
103.
7
108.
0
96.4 99
.8 106.
6
107.
9 115.
7
130.
4 136.
0
155
142.
9
128.
2
106.
6
95.0
87.3
83.8
77.6
108.
8 115.
7
107.
0
108.
3
106.
7
106.
0
102.
0
105.
9
108.
0
109.
2 117.
6
106.
1
98.8
97.6
105.
5
89.5
90.9
103.
1
127.
9
70
80
90
100
110
120
130
140
150
160
170
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Medical Malpractice All Lines Combined Ratio
Medical Malpractice Combined Ratio
Source: AM Best, Insurance Information Institute
Insurers in 2008 paid out an estimated $0.77 for every $1
they earned in premiums.As recently as 2002,
med mal insurers paid out $1.55 for
every dollar earned
The dramatic improvement has
restored med mal’s viability
Medical Malpractice: Losses & Expenses Paid vs. Premiums Earned
$ Billions
$4.0
$4.0
$4.1
$4.2 $4
.9
$5.2 $6
.0 $6.3 $6
.9
$8.8
$10.
3
$10.
3
$10.
8
$11.
3
$10.
7
$10.
4
$4.2
$4.1 $5
.2
$4.6
$4.5 $5
.1
$5.3 $6
.0
$7.8 $8
.6
$10.
7
$12.
6
$13.
2
$11.
0
$10.
2
$9.9
$9.0
$8.1
$4.7
$4.8
$4.8
$4.8
$2
$4
$6
$8
$10
$12
$14
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Earned Premiums Losses & Expenses Paid
Source: Computed from A.M. Best data by the Insurance Information Institute
Before reforms took hold in the mid-2000s, premium earned rose ?% while losses and expenses rose 93% over the
period from 1990 through 2008
Outlook for MPLIOperating Environment
• Short-Term: Soft market persists, driven by relatively good underlying underwriting performance
• Tort Threat: Med mal tort costs may start to accelerate due to: current erosion of tort reforms at state and Federal level, e.g.Healthcare reform bill and potential giveaway to trial lawyers; plus increase in “never events” and strict liability for hospitals.
• Antitrust Repeal: Med mal insurers’ limited exemption from federal antitrust law is under attack as part of healthcare reform. Repeal would undermine competition in already fragile market
• Long-Run: Erosion of reforms of recent years begins to take toll, further damaging results
• Conclusion: Underwriting Cycle can’t be banished, but its depth and length can be moderated via disciplined underwriting and pricing
The Affordable Health Care for America Act (H.R. 3962) includes the following benefit to the trial bar:
Section 2531, entitled “Medical Liability Alternatives,” establishes an incentive program for states to adopt and implement alternatives to medical liability litigation. [BUT]…… “a state is not eligible for the incentive payments if that state puts a law on the books that limits attorneys’fees or imposes caps on damages.”
Jeopardizes some $54 billion in savings in medical care costs that Congressional Budget Office (CBO) says litigation reform would bring.
Source: Andrew Breitbart, http://biggovernment.com; Congressional Budget Office (CBO)
Healthcare Reform Bill is a Trial Lawyer Dream Come True
Investment Componentof Medical Malpractice
Operating Results
Investment Gain: Med Mal vs.All Commercial Lines*
*As a % of net earned premium. Investment gains consists primarily of interest, dividends andrealized capital gains and losses.
Source: A.M. Best; Insurance Information Institute estimate
12.5
%
14.3
%
14.1
%
16.8
%
16.9
%
15.1
%
16.8
%
14.3
%
9.6%
8.9% 9.4% 10
.3%
10.4
%
10.3
%
5.7%
27.4
%
29.3
%
30.2
%
30.0
%
28.0
%
23.7
% 27.9
%
19.1
%
12.8
%
15.5
%
15.1
%
14.0
% 18.8
%
16.6
%
7.4%
0%
5%
10%
15%
20%
25%
30%
35%
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Commercial Lines Med Mal
Investment returns have generally shrunk since 2000, but are still important. “Heavy Lifting” must be done through underwriting & pricing
Medical Malpractice Investment Gain*
$ Billions
$1.5 $1.5
$2.1
$1.8
$1.5 $1.4$1.2
$1.5
$1.1$0.9
$1.3 $1.2 $1.3
$1.8
$1.5
$0.7
$1.3$1.4 $1.5
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*Imputed from investment gain data as a % of net earned premium. Investment gains consistsprimarily of interest, dividends and realized capital gains and losses.
Source: A.M. Best; Insurance Information Institute estimate
Investment returns have risen, but poor investment environment today implies “Heavy Lifting” must be done through
underwriting & pricing
Medical Malpractice Tort
Environment
Harvesting the Fruitsof Reform
Medical Malpractice Tort Cost: Growth Continues, Though Modestly
$ Billions
$1.2
$1.4
$1.8
$2.2 $4
.8 $5.8 $6
.8$6
.7$6
.9$7
.3$7
.6 $8.5 $9.2 $1
0.1
$10.
6$1
1.5
$12.
5$1
3.3
$14.
1$1
5.5
$16.
4$1
7.9
$19.
6 $21.
7 $24.
2 $26.
5$2
8.2
$29.
4$3
0.1
$30.
4
$2.7
$3.4
$4.1
$0$2$4$6$8
$10$12$14$16$18$20$22$24$26$28$30$32
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
Sources: Tillinghast-Towers Perrin, US Bureau of Labor Statistics, Insurance Information Institute
•Over the period from 1990 through 2007, medical malpractice tort costs rose 230%, more than double the 94% increase in tort costs generally over the same period.
•Over the period from 1975 through 2007, medical malpractice tort costs have increased at an annual rate of ? percent, versus ? percent for all other tort costs.
ME
NH
MACT
PA
WVVA
NC
LATX
OK
NE
ND
MN
MI
IL
IA
ID
WA
OR
AZ
HI
NJ
RI
MDDE
AL
VT
NY
DC
SC
GA
TN
AL
FL
MS
ARNM
KYMOKS
SD WI
INOH
MT
CA
NVUT
WY
CO
Med Mal Crises Across theU.S in the Early 2000s.*
Crisis states at height of 2000s
AMA: Crises reached in 22 states in the 2000s
PR
AK
*The AMA is no longer categorizing states as crisis states.
Source: American Medical Association, February 2008
Source: LawyersWeekly USA, January 15, 2009.
2008 Top Ten Verdicts
Value Issue State
$388 Million Fraud, Intentional Infliction of Emotional Distress
Nevada
$316 Million Breach of Contract Georgia$188 Million Defamation New York$85 Million Premises Liability Pennsylvania$84 Million Negligence, Personal Injury Texas$66 Million Breach of Fiduciary Duty Oklahoma$60 Million Insurance Bad Faith Nevada$55 Million Negligence California$54 Million Wrongful Death Georgia$48 Million Negligence Indiana
2007 Top Ten Verdicts
Source: LawyersWeekly USA, January 22, 2008.
Value Issue State
$109 Million Medical Malpractice New York
$102.7 Million Premises Liability, Death Florida
$55.2 Million Product Liability, Death California
$54 Million Private Air Crash Florida
$54 Million Nursing Home, Death New Mexico
$50 Million DUI Crash Florida
$50 Million Product Liability, Death Alabama
$47.6 Million Prempro Nevada
$47.5 Million Vioxx New Jersey
$45 Million Auto Crash, Death Florida
2002 Top Ten Verdicts
Source: LawyersWeekly USA, January 2003.
Value Issue State
$28 Billion Tobacco (Product Liability) Florida
$2.2 Billion Negligence (Pharmacy Mal) Missouri
$270 Million Personal Injury (Burn) Kentucky
$225 Million Product Liability (Rollover) Texas
$150 Million Tobacco (Product Liability) Oregon
$122 Million Product Liab. (Auto Accident) Virginia
$97.2 Million Business Fraud California
$95.2 Million Med Mal (Birth Injury) New York$91 Million Medical Malpractice New York
$80 Million Med Mal (Birth Injury) New York
$80 Million Prod. Liab/Personal Inj. (Auto) Missouri
2001 Top Ten Verdicts
Source: LawyersWeekly USA, January 2002.
Value Issue State$3 Billion Tobacco California$1 Billion Land Contamination Louisiana$480 Million Private Airplane Crash Florida$312.8 Million Nursing Home Texas$ 256 Million Police Auto Crash Colorado
$116 Million Intellectual Property Theft Virginia$114.9 Million Medical Malpractice New York$108.2 Million Inheritance Dispute Texas$107.8 Million Medical Malpractice New York$94.5 Million Real Estate California
Average Jury Award inMedical Malpractice Cases*
$ Millions
$1.14
$2.02 $1.88 $1.93
$3.11
$4.50
$3.49$3.89 $3.71
$4.01
$2.92 $2.89$3.12
$0.0$0.5$1.0$1.5$2.0$2.5$3.0$3.5$4.0$4.5$5.0
94 95 96 97 98 99 00 01 02 03 04 05 06*Ultimate award may be reduced by judge or upon appeal.Source: Jury Verdict Research; Insurance Information Institute.
The average med mal jury award more than tripled
between 1994 and 2006, but has moderated since 2002
*Verdicts of $1 million or more **2006-2007 is latest available data
Source: Jury Verdict Research; Insurance Information Institute.
Trends in Million Dollar Verdicts*13
%
4%
11% 13%
29% 37
%
48%
59%
5%
17%
11%
41%
53%
17%
6%
14%
15%
33%
51% 57
% 65%
60%
15%
30%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
AllLiabilities
VehicularLiability
PersonalNegligence
PremisesLiability
BusinessNegligence
GovernmentNegligence
MedicalMalpractice
ProductsLiability
2001-2003 2004-2005 2006-2007Frequency of multi-million dollar awards is increasing across most types of defendants. In med mal, million dollar-plus awards rose from 48% of all awards from 2001-03 to 57% in 2006-07, well above most other categories.
DIRECTORS & OFFICERS
ENVIRONMENT
Financial Crisis Considerations
Changes in D&O Limits, All Business Classes, 2008
Increased,12%
Decreased,3%Same,
86%
Source: Tillinghast Towers-Perrin, 2008 Directors and Officers Liability Survey
Only 3 percent of participants
reported decreasing their
D&O policy limit in 2008, compared
to 18% in 2007.
Increases in D&O Limits by Classof Business, 2008
46%22%
19%17%
15%15%
14%14%
11%10%10%
9%9%9%
7%7%
12%
0% 50%
UtilitiesMerchandising
Transport. & CommunicationsPetro., Mining & Ag.
Biotech & Pharma.Nondurable Goods
Personal & Business ServicesOther
Health ServicesNonbanking Financial Services
Real Estate, ConstructionDurable Goods
Govt. & Other NonprofitTechnology
BankingEducation
All Business Classes
Some 46% of Utilities reported increasing their
D&O policy limits. Meanwhile, 0%
reported a decrease and 54%
reported no change in their
policy limit.
Source: Tillinghast Towers-Perrin, 2008 Directors and Officers Liability Survey
Changes in D&O Policy Enhancements, All Business Classes, 2008
Increased,54%
Decreased,1%
Same,45%
Source: Tillinghast Towers-Perrin, 2008 Directors and Officers Liability Survey
Only 1 percent of participants reported a
decrease in D&O policy
enhancements in 2008, compared to
3% in 2007.
Increases in Enhancements by Class of Business, 2008
79%77%77%
76%76%
75%75%
71%66%
62%57%
55%46%
38%7%7%
54%
0% 100%
Biotech & PharmaHealth Services
Nonbanking Financial ServicesPersonal & Business Services
Transport. & CommunicationsMerchandising
OtherReal Estate, Construction
Nondurable GoodsDurable Goods
TechnologyBanking
Petro., Mining & Agr.Utilities
EducationGovt. & Other Nonprofit
All Size Groups
Some 79% of Biotech & Pharmaceutical
companies reported an increase in coverage
enhancements to their D&O policies.
Meanwhile, 0% reported a decrease
and 45% no change in policy enhancements.
Source: Tillinghast Towers-Perrin, 2008 Directors and Officers Liability Survey
Prevalence of EPL Coverage by Full-Time Employees, 2008
D&O With EPL,57%
No EPL,10%Stand-Alone EPL,
33%
Source: Tillinghast Towers-Perrin, 2008 Directors and Officers Liability Survey
The percentage of participants
purchasing EPL coverage as part of their D&O policy decreased slightly, from 60% in 2007
to 57% in 2008.
Only 10% of respondents
reporting buying no EPL coverage.
D&O Premium Index(1974 Average = 100)
682746704720720771806793
726619
539503560
720
931
1,2371,113
827805694
1,010
0
200
400
600
800
1000
1200
1400
86 88 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source: Tillinghast Towers-Perrin, 2008 Directors and Officers Liability Survey.
Average D&O pricing is off at 44% since 2003, after rising
146% from 1999-2003
Key Threats Facing P/C Insurers Amid
Financial CrisisChallenges for the
Next 5-8 Years
94
Important Issues & Threats Facing Insurers: 2010 - 2015
Source: Insurance Information Inst.
Reloading Capital After “Capital Event”Continued asset price erosion coupled with major “capital event” would have led to shortage of capital among somecompaniesPossible Consequences: Insolvencies, forced mergers, calls for govt. aid, requests to relax capital requirementsP/C insurers have come to assume that large amounts of capital can be raised quickly and cheaply after major events (post-9/11, Katrina).
This assumption may be incorrect in the current environmentCost of capital is much higher today (relative “risk-free”rates), reflecting both scarcity & riskImplications: P/C (re)insurers need to protect capital today and develop detailed contingency plans to raise fresh capital & generate internally. Already a reality for some life insurers.
95
Important Issues & Threats Facing Insurers: 2010 - 2015
Source: Insurance Information Inst.
Long-Term Reduction in Investment EarningsLow interest rates, risk aversion toward equities and many categories of fixed income securities lock in a multi-year trajectory toward ever lower investment gainsFed actions in Treasury markets keep yields lowMany insurers have not adjusted to this new investment paradigm of a sustained period of low investment gainsRegulators will not readily accept it; Many will reject itImplication 1: Industry must be prepared to operate in environment with investment earnings account for a smaller fraction of profitsImplication 2: Implies underwriting discipline of a magnitude not witnessed in this industry in more than 30 years. Yet to manifest itself.Lessons from the period 1920-1975 need to be relearned
96Source: Insurance Information Inst.
Regulatory Overreach Principle danger is that P/C insurers get swept into vast federal regulatory overhaul and subjected to inappropriate, duplicative and costly regulation (Dual Regulation)Strong arguments for Optional Federal Charter, but…Pushing for major change is not without risk in the current highly charged political environmentDangers exist if feds get their nose under the tentStatus Quo is viewed as unacceptable by allDisunity within the insurance industryInsurance & systemic risk—Who is important?Impact of regulatory changes will be felt for decadesBottom Line: Regulatory outcome is uncertain and risk of adverse outcome exists
Important Issues & Threats Facing Insurers: 2010 – 20??
97
Health Insurance Reform Debate—Potential Spillover Impacts on P/C Insurers
• 24-Hour Coverage ProposalWould roll WC and med components of auto into natl. health care plan
• Rollback of McCarran-Ferguson ActWould repeal or restrict for health and medical malpractice insurersSlippery slope—Med Mal is a p/c line; Congress will not hesitate to breach M-F for other p/c lines in the future to show its ire over an issue (e.g., after major cat)
• Exclusion of Med Mal Reform from Health Care BillShows powerful influence of trial bar with Congress/Administration
• FTC granted authority to conduct studies “related to insurance” –All Lines!• Reporting of Claims• Adjustments to Medicare Fee Schedules• Patient “Bill of Rights” or Vague Standards of Care• Cost Shifting into WC, Auto from Health System
WC/Auto Medical: more lucrative from provider perspective• “Windfall” Profit Taxes? Additional Premium Taxes?• Executive Compensation Restrictions?• Public “Option” in P/C Lines—Nat Cat/Wind?• Perception that Feds Regulate Insurance Industry Taking Root
FINANCIAL STRENGTH &
RATINGSIndustry Has Weathered
the Storms Well
99
P/C Insurer Impairments,1969-2008
815
127
11 934
913 12
199
16 14 1336
4931
3450 48
5560 58
4129
1612
3118 19
49 5047
3518
14 15
75
0
10
20
30
40
50
60
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
The number of impairments varies significantly over the p/c insurance cycle,
with peaks occurring well into hard markets
Source: A.M. Best; Insurance Information Institute
100
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2008
90
95
100
105
110
115
120
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
Com
bine
d R
atio
0.00.20.40.60.81.01.21.41.61.82.0
Impa
irmen
t Rat
e
Combined Ratio after DivP/C Impairment Frequency
Impairment rates are highly
correlated with underwriting
performance and reached record lows in 2007/08
Source: A.M. Best; Insurance Information Institute
2008 impairment rate was a record low 0.23%, second only to the 0.17% record low in 2007 and barely one-fourth the 0.82% average since 1969
101
Summary of A.M. Best’s P/C Insurer Ratings Actions in 2008*
Under Review, 63 , 4.3%
Upgraded, 59 , 4.0%
Initial, 41 , 2.8%
Other, 59 , 4.0%
Affirm, 1,183 , 81.0%
Downgraded, 55 , 3.8%
*Through December 19.Source: A.M. Best.
101
Despite financial market turmoil, high cat losses
and a soft market in 2008, 81% of ratings actions by A.M. Best
were affirmations; just 3.8% were downgrades
and 4.0% upgrades
P/C insurance is by design a resilient in business. The dual threat of financial
disasters and catastrophic losses are
anticipated in the industry’s risk
management strategy.
102
Historical Ratings Distribution,US P/C Insurers, 2008 vs. 2005 and 2000
Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report,November 8, 2004 for 2000; 2006 and 2009 Review & Preview. *Ratings ‘B’ and lower.
A/A-48.4%
D0.2%C++/C+
1.9%
E/F2.3% A++/A+
11.5%
C/C-0.6%
B++/B+28.3%
B/B-6.9%
2008 2005
P/C insurer financial strength has improved since 2005 despite financial crisis
A/A-52.3%
A++/A+9.2%
B++/B+26.4%
Vulnerable*12.1%
A/A-60.0%
A++/A+10.8%
B++/B+21.3%
Vulnerable*7.9%
2000A++/A+ and A/A- gains
103
Reasons for US P/C Insurer Impairments, 1969-2008
Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008
Deficient loss reserves and inadequate
pricing are the leading cause of
insurer impairments,
underscoring the importance of
discipline. Investment
catastrophe losses play a much smaller role.
Reinsurance Failure3.7%
Rapid Growth14.3%
Misc.9.1%
Affiliate Impairment
7.9%
Sig. Change in Business
4.2%
Deficient Loss
Reserves/In-adequate Pricing38.1%
Investment Problems
7.0%
Alleged Fraud8.1%
Catastrophe Losses7.6%
Critical Differences Between P/C
Insurers and BanksSuperior Risk Management Model
& Low Leverage Makea Big Difference
105
How Insurance Industry Stability Has Benefitted Consumers
BOTTOM LINE:• Insurance Markets—Unlike Banking—Are Operating
Normally• The Basic Function of Insurance—the Orderly Transfer
of Risk from Client to Insurer—Continues Uninterrupted• This Means that Insurers Continue to:
Pay claims (whereas 145 banks have gone under as of 11/6/09)The Promise is Being Fulfilled
Renew existing policies (banks are reducing and eliminating lines of credit)Write new policies (banks are turning away people and businesses who want or need to borrow)Develop new products (banks are scaling back the products they offer)Compete Intensively (banks are consolidating, reducing consumer choice)
Source: Insurance Information Institute105
106
• Emphasis on UnderwritingMatching of risk to price (via experience and modeling)Limiting of potential loss exposureSome banks sought to maximize volume and fees and disregarded risk
• Strong Relationship Between Underwriting and Risk BearingInsurers always maintain a stake in the business they underwrite, keeping “skin in the game”at all timesBanks and investment banks package up and securitize, severing the link between risk underwriting and risk bearing, with (predictably) disastrous consequences—straightforward moral hazard problem from Econ 101
• Low LeverageInsurers do not rely on borrowed money to underwrite insurance or pay claims There is no credit or liquidity crisis in the insurance industry
• Conservative Investment PhilosophyHigh quality portfolio that is relatively less volatile and more liquid
• Comprehensive Regulation of Insurance OperationsThe business of insurance remained comprehensively regulated whereas a separate banking system had evolved largely outside the auspices and understanding of regulators (e.g., hedge funds, private equity, complex securitized instruments, credit derivatives—CDS’s)
• Greater TransparencyInsurance companies are an open book to regulators and the public
Source: Insurance Information Institute106
Reasons Why P/C Insurers Have Fewer Problems Than Banks:
A Superior Risk Management Model
107
Insurance Information Institute On-Line
THANK YOU FOR YOUR TIME AND
YOUR ATTENTION!
107