trends & challenges in p/c insurance business today focus on oregon & idaho markets...
TRANSCRIPT
Trends & Challenges in P/C Insurance Business Today
Focus on Oregon & Idaho Markets
Professional Insurance Agents of Oregon & IdahoInsurance Institute of Oregon & Idaho
June 7/8, 2004
Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org
About theInsurance Information Institute
The mission of the Insurance Information Institute (I.I.I.) is to improve public understanding of
insurance -- what it does and how it works. The I.I.I. enjoys broad membership throughout the insurance industry, including most of the major p/c insurers and reinsurers operating in the United States, as well as companies operating on a regional basis and internationally.
For more than 40 years, the I.I.I. has provided definitive insurance information. Today, the I.I.I. is recognized throughout the insurance industry as well as by the media, governments, regulatory organizations, universities and the public as a primary source of information, analysis and referral concerning insurance.
Each year, the I.I.I. works on more than 3,700 news stories, handles more than 6,000 requests for information from its members, the media, and other parties and answers nearly 50,000 questions from consumers.
In addition to direct contact with the media, individuals and organizations, the I.I.I. publishes a host of helpful brochures and books on a wide variety of insurance topics, ranging in subjects from 12 Ways to Lower Your Auto Insurance Costs to the I.I.I. Fact Book series. I.I.I.’s members benefit from direct access to all information, I.I.I. staff and its members-only web site. The Institute does not lobby. Its central function is to provide accurate and timely information on insurance subjects. Questions concerning I.I.I. membership should be directed to Cary Schneider at (212) 346-5566 or by email at [email protected].
Presentation Outline
• Profitability• Underwriting• Ratings, Solvency & Financial Strength• Investment Overview• Pricing• Auto & Homeowners Overview• Workers Comp: The Insurance Industry’s Quiet Crisis?• Tort Environment• Insurance Scoring• The Challenge of Terrorism• Q & A
P/C FINANACIAL UPDATE:
Profitability: Good but Not Good EnoughUnderwriting: Need to Stay Disciplined
Investments: Keep Expectations Low
P/C FINANCIAL OVERVIEW:
PROFIT PRESSURE
Highlights: Property/Casualty Full-Year 2003 vs. 2002
2003 2002 Change
Net Written Prem. 405,855 369,673 +9.8%
Loss & LAE 289,800 283,640 +2.2%
Net UW Gain (Loss) (4,635) (30,840) -85.0%
Net Inv. Income 38,686 37,225 +3.9%
Net Income (a.t.) 29,877 3,046 +880.9%
Surplus* 346,987 285,386 +21.6%
Combined Ratio 100.1 107.3 -7.2 pts.
-10%
-5%
0%
5%
10%
15%
20%
25%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
F
Current $ Real $
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
Strength of Recent Hard Markets by Real NWP Growth*
Real NWP Growth During Past 3 Hard Markets
1975-78: 8.6%
1985-87: 14.5%
2001-04F: 7.6%
1975-78 1985-87 2001-04
2004 forecast from III Groundhog Survey, 2/04.
Commercial Insurance Share of P/C Market is Rising
Direct Premiums Written ($ Billions)
$132
.0
$135
.3
$136
.1
$136
.4
$135
.4
$138
.3
$141
.9
$152
.0
$176
.9
$211
.6
$235
.4
$137
.9
$145
.3
$149
.9
$153
.1
$156
.8
$169
.7
$188
.2
$204
.6
$118
.5
$132
.0
$125
.1
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
93 94 95 96 97 98 99 00 01 02 03E
Personal
Commercial
Source: A.M. Best; Insurance Information Institute
Commercial Market Share:1993: 52.7%1998: 48.0%2002: 52.9%
2003E: 53.5%
P/C Net Income After Taxes1991-2003 ($ Millions)
$14,178
$5,840
$19,316
$10,870
$20,598
$24,404
$36,819
$30,773
$21,865$20,559
-$6,970
$3,046
$29,877
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
91 92 93 94 95 96 97 98 99 00 01 02 03*
Sources: A.M. Best, ISO, Insurance Information Institute.
2001 was the first year ever with a full year net loss
2002 ROE = 1.0%
2003 ROE = 9.4%
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04E
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2004E
Source: Insurance Information Institute; Fortune
IMMEDIATE LESSON:
Results are better but the industry remains a laggard.
U/W, Pricing Discipline are Key!
-5%
0%
5%
10%
15%
20%
91 92 93 94 95 96 97 98 99 00 01 02 03 04F
ROE Cost of Capital
ROE vs. Cost of Capital: US P/C Insurance: 1991 – 2004F
Source: The Geneva Association, Ins. Information Inst.
The gap between the industry’s cost of capital and its rate of return is narrowing
14.6
pts
10.2
pts
US P/C insurers missed their cost of capital by an average 6.5 points from 1991 to 2003
2.1
pts
1.0
pts
RNW for Major P/C Lines,1993-2002 Average
10.2% 10.1%
8.2%7.4% 7.0%
6.1%5.1%
3.3%
-1.2% -1.2%
-4.1%
9.0%
6.4%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
InlandMarine
AllOther
WorkersComp
PP Auto
MedMal
All Lines OtherLiab
Fire CommAuto
CMP FMP HO Allied
Source: NAIC; Insurance Information Institute
10-Year returns for some major p/c lines surprisingly
good, but…
P/C Return on Equity: 2002Select Northwest States & CA
-1.6%
2.0%
3.0%
3.3%
8.0%
-4% -2% 0% 2% 4% 6% 8% 10%
Washington
US
Oregon
Idaho
California
Source: NAIC, Insurance Information Institute
2002: ALL P/C LINES
P/C ROE: 1993-2002Select Northwest States & CA
5.2%
7.7%
8.0%
9.4%
9.6%
0% 2% 4% 6% 8% 10% 12%
Oregon
Idaho
Washington
US
California
Source: NAIC, Insurance Information Institute
1993-2002: ALL P/C LINES
-5%
0%
5%
10%
15%
20%
93 94 95 96 97 98 99 00 01 02 03F
US P/C Insurers All US Industries Oregon Idaho
ROE: P/C (US, OR & ID) vs.All Industries, 1993–2003*
Source: Insurance Information Institute; NAIC, Fortune
Profitability in OR and ID has generally followed national
trends & lags the Fortune 500
ROE for Personal Lines in OREGON(1993 – 2002)
21.3
%
15.4
%
8.9% 10
.7%
5.2%7.
4%
10.8
%
5.3%
5.0%
9.2%
8.0%
6.4%
9.8%
-18.
1%
16.0
%
-2.7
%
11.6
%
7.5%
8.2%
15.1
%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Personal Auto
Homeowners
Source: NAIC
10-Year Average:
Auto: 10.0%
Home: +6.1%
Homeowners and auto experience has deteriorated in
recent years, but likely improved picked up in 2003/4
ROE for Major Commercial Lines in OREGON, 1993 - 2002
18.4
%
17.4
%
12.1
%
9.2%
12.8
%
7.6%
4.4%
2.7%
20.0
%
9.5%
4.7%
14.0
%
11.1
%
11.3
%
16.7
%18.2
%
5.2%
9.2%
7.3%
6.9%
0%
5%
10%
15%
20%
25%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Commercial Multi-Peril
Commercial Auto
Source: NAIC
Commercial lines had a
mixed performance in
recent years
ROE for Major Commercial Lines in IDAHO, 1993 - 2002
24.8
%
19.1
%
13.9
%
17.4
%
5.1%
22.7
%
12.6
%
10.7
%
12.1
%
10.4
%
2.0%
7.5%
16.3
%
19.9
%
9.7%
15.2
%
7.0%
10.2
%
1.8%
6.3%
0%
5%
10%
15%
20%
25%
30%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Commercial Multi-Peril
Commercial Auto
Source: NAIC
Commercial lines had a
mixed performance in
recent years
Rates of Return on Net Worth for Workers Comp: OR vs. ID
Source: NAIC, Insurance Information Institute
14.7%
6.2%
14.1%
-2.6%
13.8%12.6% 12.1%
5.2%3.6%
-10.5%
2.0%
-3.1%
10.0%11.0%
6.7%5.6%
-2.4%
8.1%
-0.2%
18.0%
-15%
-10%
-5%
0%
5%
10%
15%
20%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Oregon
Idaho
Averages: 1993 to 2002
US WC Insurance = +8.9%*
OR WC Insurance = +7.1%
ID WC Insurance = +5.4%
WALL STREET:
HIGH EXPECTATIONS
Insurer Stocks: Outperforming the S&P 500
2.05%
4.75%
8.85%
10.75%
12.73%
0.95%
0% 2% 4% 6% 8% 10% 12% 14%
S&P 500
Multiline
Life/Health
All Lines
P/C
Brokers
Source: SNL Securities, Insurance Information Institute
Total Return 2004 YTD Through June 4, 2004
66.3%68.8%
74.2%
81.4%
50%
55%
60%
65%
70%
75%
80%
85%
1977 1986 1997 2001
Sources: A.M. Best, Morgan Stanley, Insurance Information Institute.
Substantial consolidation evident over the past 25 years, suggesting:
•M&As more successful
•Scale economies
•Barriers to entry exist
•Capital (esp. foreign capital) cannot enter easily
Private Passenger Auto:Top 25 Writers Market Share
Commercial Lines:Top 25 Writers Market Share*
59.1%
61.9%
55.5%
61.3%
50%
52%
54%
56%
58%
60%
62%
1977 1986 1997 2002
* By direct premiums written.Sources: A.M. Best, Morgan Stanley, Insurance Information Institute.
Virtually no consolidation in commercial p/c sector over the past 25 years, suggesting:
•M&As not generally successful
•Scale?
•Execution?
•Legacy
•Distribution?
•Deconsolidation (asset sales, spin-offs, failures)
•Low barriers to entry
P/C FINANCIAL OVERVIEW:
UNDERWRITING PRESSURE
95
100
105
110
115
120
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
*0
4*
P/C Industry Combined Ratio
2001 = 115.7
2002 = 107.2
2003 = 100.1
2004E = 100.0*
Combined Ratios
1970s: 100.3
1980s: 109.2
1990s: 107.8
2000-04: 106.7
Sources: A.M. Best; ISO, III *2004 figures based on III Groundhog Survey, 2/04.
($60)
($50)
($40)
($30)
($20)
($10)
$0
$10
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
Underwriting Gain (Loss)1975-2004F*
*2004 underwriting loss is forecast at $0 (based on forecast combined ration of 100.0 from IIIGroundhog forecast, 2/04.Source: A.M. Best, Insurance Information Institute
$ B
illi
ons
2003 was the best year since 1997, with underwriting losses of just $4.6 billion. The
forecast underwriting loss for 2004 is $0, given the expectation of a 100.0 combined ratio.
110
.3
110
.2
10
7.6
10
3.9
10
9.7 11
2.3
111
.5
12
2.2
110
.2
103.
9
104.
5
103.
5
104.
9
99.8 10
2.7
104.
5
109.
9
110.
9
105.
3
97.5
112
.5
10
3.0
90
95
100
105
110
115
120
125
93 94 95 96 97 98 99 00 01 02 03E
Commercial--Net Basis Personal--Net Basis
Commercial vs. Personal Lines Combined Ratios
Source: A.M. Best; Insurance Information Institute
10-Year Average Combined Ratios
Commercial: 111.1 Personal: 105.2
Combined Ratios:Selected Major Lines, 2003E—2004F
99.1 10
3.1 10
9.5
101.
9
94.4 10
0.1
96.6 10
0.2 10
8.3
99.7
92.7
81.6
98.1
120.
9
82.3
112.
0
70
80
90
100
110
120
130
PPAuto
Home GL &PL
WC CMP CommAuto
InlandMarine
AllLines
2003E 2004F
Source: A.M. Best; Insurance Information Institute
U/W performance improving, but variation in
results is enormous.
Personal
Commercial
110
.5
10
5.0 11
3.6 11
9.2
10
4.8
10
0.8
10
0.5
114
.3
10
6.5
12
1.3
10
0.31
08
.8 115
.8
10
6.9
10
8.5
10
6.5
10
5.8
10
1.6
10
5.6
10
7.7
110
.0 115
.7
10
7.2
10
0.1
16
2.5
12
6.5
90
100
110
120
130
140
150
160
170
Reinsurance All Lines Combined Ratio
Combined Ratio: Reinsurance vs. P/C Industry
Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
2001’s combined ratio was the worst-ever for reinsurers; 2002 was bad as well.
2003: Big improvement in primary and reinsurer segments
After-Tax ROE for Selected AY Combined Ratios*
*Assumes 4% tax-equivalent yield, 28% expense ratio and 140% premium/surplus ratioSource: Dowling & Partners Securities
23.5%21.8%
20.1%18.4%
16.6%14.9%
13.2%11.5%
9.8%8.1%
6.3%
2.1%
80% 82% 84% 86% 88% 90% 92% 94% 96% 98% 100% 105%
1993-2002
50%
55%
60%
65%
70%
75%
93 94 95 96 97 98 99 00 01 02
US Oregon Idaho
Private Passenger Auto Direct Loss Ratios: US vs. OR & ID
Source: NAIC; Insurance Information Institute
Loss Ratios in OR and ID have generally been better
than the US as a whole
U.S. InsuredCatastrophe Losses ($ Billions)
$7.5
$2.7$4.7
$22.9
$5.5
$16.9
$8.3 $7.3
$2.6
$10.1$8.3
$4.3
$28.1
$5.9
$12.9
$1.0$0
$5
$10
$15
$20
$25
$30
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04*
*2004 figure is for 1st quarter only ($963 million).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.Source: Property Claims Service/ISO; Insurance Information Institute
$ Billions2003 was the 4th worst year ever for insured catastrophe losses in the US. There were 4
events with losses exceeding $1 billion
$0
$50
$100
$150
$200
$250
Jan-
01
Mar
-01
May
-01
Jul-0
1
Sep-0
1
Nov-0
1
Jan-
02
Mar
-02
May
-02
Jul-0
2
Sep-0
2
Nov-0
2
Jan-
03
Mar
-03
May
-03
Jul-0
3
Sep-0
3
Wa
ter
Da
ma
ge
Pa
id L
os
se
s* ($
Mill
ion
s)
0
5000
10000
15000
20000
25000
30000
Cla
im C
ou
nt
Paid Losses
Claim Count
Source: Texas Department of Insurance; Insurance Information Institute
* Data are for TDI Cause 61: Discharge – Other Damage. Not all claims in cause 61 are mold and mold claims may also arise from other (non-water) causes of loss.
Texas: Mold Losses/Claims Continuing to Moderate*
FATAL ATTRACTION?
A LOSS OF PRICING & UNDERWRITING
DISCIPLINE
RATINGS, SOLVENCY, FINANCIAL STRENGTH
99
.5 10
1.1
10
9.5
10
7.9
10
4.2
99
.1
96
.6
10
3.5
10
1.3 10
1
$706 $704$683 $687
$781
$842
$871
$718$691
$668
90
95
100
105
110
115
95 96 97 98 99 00 01 02 03E 04F
Co
mb
ine
d R
ati
o
$500
$600
$700
$800
$900
Av
g. A
uto
Ins
ura
nc
e E
xp
en
dit
ure
PP Auto Combined Ratio
Average Auto InsuranceExpenditure
Private Passenger Auto Combined & Operating Ratios, 1993-2004F
Rating actions contributed to dramatic improvement in PP
Auto U/W performance
Sources: Insurance Information Institute from A.M. Best and NAIC data; 2003/4 expenditure estimates from III.
95.9 96.0
101.5
94.2
91.390.0 90.7
84.5
89.3
101.1
94.4
87.0
91.3 90.6
$8.30
$7.30$6.49
$8.91
$6.10$6.40
$7.70
$5.70
$5.25
$5.71$5.20
$4.83
$6.46
$11.96
80
85
90
95
100
105
110
90 91 92 93 94 95 96 97 98 99 00 01 02 03
Co
mm
erc
ial L
ine
s O
pe
rati
ng
Ra
tio
$0
$2
$4
$6
$8
$10
$12
Co
st
of
Ris
k/$
10
00
Re
ve
nu
e
Commercial Operating Ratio
Cost of Risk
Source: RIMS, A.M. Best; Insurance Information Institute * 2003 operating ratio is III estimate.
Cost of Risk vs. Commercial Lines Operating Ratio*
Number of P/C Failures vs. Combined Ratio, 1991-2003
35
25 24
10 10 8 10
2428
31
20
27
58
108
117
108107
106107
110
115
107
100
108
102
109
0
10
20
30
40
50
60
70
91 92 93 94 95 96 97 98 99 00 01 02 03
Nu
mb
er o
f F
ailu
res
90
95
100
105
110
115
120
Com
bin
ed R
atio
Number of P/C Failures Combined Ratio
Source: Standard & Poor’s; Insurance Information Institute
2003 failures fell to a 5-year low
0.4
5
0.4
1
0.4
3
0.4
2 0.6
8
1.2
2
1.7
1
1.1
2
0.4
4
0.5
8 0.8
2
0.9
9
1.0
5
1.7
8
1.1
0.8
3
1.5
6
1.0
8
0.8
0.5
1
0.4
1 0.7
4
1.9
8
3.7
8
3.5
4.93
0
1
2
3
4
5
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
E
Ra
tio
of
Do
wn
gra
des
to
Up
gra
des
Downgrade/Upgrade Ratio*
Sources: Impairment Rate and Rating Transition Study—1977 to 2002, A.M. Best & Co.; 2003E from S&P. *U.S. property/casualty and life/health insurers
P/C Insurers Maintaining Rating of A+ or Better Rating for 50+ Years
P/C Company1. AIU Insurance Co.2. Alfa Mutual Ins. Co.3. Amica Mutual Ins. Co.4. Church Mutual Ins. Co.5. Federal Insurance Co.6. General Reinsurance Corp.7. Great Northern Ins. Co.8. Lititz Mutual Ins. Co.9. Nationwide Mutual Fire Co.10. Otsego Mutual Fire11. Pharmacists Mutual Ins. Co.12. Quincy Mutual Fire Ins. Co.13. State Automobile Mutual Ins. Co.14. State Farm Mutual Automobile Ins. Co.15. Vigilant Insurance Co.
Group Affiliation1. American International Group2. Alfa Insurance Group3. Amica Mutual Group4. None5. Chubb Group of Ins Cos.6. Berkshire Hathaway Ins. Group7. Chubb Group of Ins Cos.8. Lititz Mutual Group9. Nationwide Mutual Group10. None11. None12. Quincy Mutual Group13. State Auto Ins. Group14. State Farm Group15. Chubb Group of Ins Cos.
Source: Best’s Review, January 1, 2004.
P/C Company Insolvency Rates,1993 to 2002
Source: A.M. Best; Insurance Information Institute
1.20%
0.58%
0.21%0.28%
0.79%
0.60%
0.23%
1.02% 1.03%
1.33%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
•Insurer insolvencies are increasing•10-yr industry failure rate: 0.72%
•Failure rating for B+ or better rating: 0.49%•Failure rate for D through B rating: 1.29%
383030
10-yr Failure Rate
= 0.72%
Reason for P/C Insolvencies(218 Insolvencies, 1993-2002)
Unidentified17%
Impaired Affiliate3%
Overstated Assets2%
Change in Business3%
CAT Losses3%
Reinsurer Failure0%
Rapid Growth10%
Discounted Ops8%
Alleged Fraud3%
Deficient Loss Reserves
51%
Source: A.M. Best, Insurance Information Institute
Reserve deficiencies account for
more than half of all p/c insurers
insolvencies
Insolvencies Generating Largest Guarantee Fund (Net) Payouts*
($ Millions, Costs-to-Date*)$547.5
$445.1 $430.8
$297.4 $279.8 $262.6$231.1 $220.7 $213.3 $204.5
$0
$100
$200
$300
$400
$500
$600
CA CompIns Co.
MidlandIns.
Reliance SuperiorNatl.
IdealMutual
AmericanMutualLiability
PIEMutual
IntegrityIns.
ChampionIns.
TexasEmployersIns Assn.
*Net expenses form inception to date (November 13, 2003).Source: National Conference of Insurance Guarantee Funds; Insurance Information Institute.
Guarantee Fund Net Assessments*(1979-2002)
$ Millions
$46.
2
$17.
8
$49.
8
$41.
1
$509
.4
$903
.2
$464
.8
$713
.9
$433
.6
$434
.8
$360
.5 $545
.4
$524
.9
$94.
8
$124
.2 $263
.7
$263
.6
$201
.3
$328
.6
$734
.7
$1,2
09.0
$30.
6$9
7.4
$292
.4
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02
*Excludes NY and workers comp security funds in NJ and PA.Source: National Conference of Insurance Guarantee Funds; Insurance Information Institute
Assessments rose dramatically during the last hard market, setting
a new record now.
$ Billions, Calendar Year Basis
$2.3 $2.2 $1.2
($8.5)
($1.5)
($7.5)($6.7)($10.0)
$22.7
$16.8
$0.3
($3.7)($0.3)
$9.9
($15)
($10)
($5)
$0
$5
$10
$15
$20
$25
90 91 92 93 94 95 96 97 98 99 00 01 02 03
P/C Insurance Industry Prior Year Reserve Development*
*Negative numbers indicate favorable development; positive figures represent adverse development.Source: A.M. Best, Morgan Stanley, Dowling & Partners Securities, Insurance Information Institute.
Adverse reserve development of about $23 billion accounted for most of the
industry’s 2002 and $17 billion in 2003
Points (Reduced)/Increased
0.5
(2.4)
5.2
6.3
(0.4)
-3
-2
-10
1
2
3
45
6
7
1998 1999 2000 2001 2002
Combined Ratio:Impact of Reserve Changes (Points)
Source: ISO, A.M. Best, MorganStanley.
Adverse reserve development totaling an estimated $23 billion
added more than 6 points to the p/c combines ratio in 2002
Commercial Lines Reserve Shortfalls (Year-End 2002)[update?]*
$ Billions$15.1
$9.3$8.0
$4.7$3.8
$1.8
($0.1)($2)
$0
$2
$4
$6
$8
$10
$12
$14
$16
OtherLiability**
WorkersComp
CommercialMultiperil
Med Mal** CommercialAuto
ProductsLiability**
SpecialtyLiab
*Average of Morgan Stanley “top-down” and “bottoms-up” estimates for accident years 1993–2002 as of 12/31/02.**Occurrence and claims made basis.Source: Morgan Stanley, January 2004.
HOT TOPICS IN INSURANCE: THE MEDIA
PERSPECTIVE
I.I.I. Media Index: Top Issues(2003 vs. 2002)
12,6
78
6,60
0
7,68
4
4,38
2
4,79
2
3,62
6
2,50
3 4,19
6
309 1,
179
52
8,90
6
7,69
3
7,55
2
7,50
3
2,83
6
1,85
8
1,07
9
982
203
15,499
3,39
5
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
MarketConditions
WorkersComp
Asbestos Med Mal Auto Homeowners Tort Terrorism CreditScoring
Mold CLUE
Num
ber
of A
rtic
les
2002 2003
Source: Insurance Information Institute from Lexis/Nexis search.
Market Conditions & Commercial lines issues dominated the media in
2002 and 2003
The I.I.I. conducted nearly 4,000 media interviews in 2003
I.I.I. Media Index: Top Issues( % Change in Coverage, 2003 vs. 2002)
249%
72%57%
35% 22% 13% 0%
-6% -17%
-56%
290%
-100%
-50%
0%
50%
100%
150%
200%
250%
300%
CLUE CreditScoring
Med Mal Auto WorkersComp
MarketConditions
Tort Asbestos Home Mold Terrorism
Source: Insurance Information Institute from Lexis/Nexis search.
The fastest growing areas of media interest were CLUE, Credit &
Med Mal. Media interest in mold and terrorism waned substantially.
THE INSURANCE INFORMATION
INSTITUTE: THE PLACE FOR
INSURANCE INFORMATION
I.I.I. ranks 3rd on Google out of 105
million hits on “insurance.”
Web Traffic on WWW.III.ORG
Visits to I.I.I.’s public web site
increased by 50% in 2003.
I.I.I. Home Page
With 60 million vistors
annually, I.I.I drives
customers to your site
I.I.I. Hot Topics Home Page
Information you need is
only a mouse click away
I.I.I. Members: Searches by Issue/Topic
I.I.I. Members: Searches by Issue/Topic
Studies, presentations and message points for all major p/c industry issues
I.I.I. Members: Regional Info
National, Regional & International
news, studies and presentations at your company’s
fingertips
INVESTMENTS:
NO SUBSTITUTE FOR SOUND UNDERWRITING
$0
$9
$18
$27
$36
$45
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03
Net Investment Income
History
1997 Peak = $41.5B
2000= $40.7B
2001 = $37.7B
2002 = $37.2B
2003 = $38.7B
Bil
lion
s
(US
$)
Investment income fell 1.3%in 2002 but rose 3.9% in 2003
Source: A.M. Best, ISO, Insurance Information Institute
0%
2%
4%
6%
8%
10%
12%
14%
16%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Mar
04
Ap
r 04
*
3-Month T-Bill 1-Yr. T-Bill 10-Year T-Note
Interest Rates: Lower Than They’ve Been in Decades, But…
*As of April 29, 2004.Source: Board of Governors, Federal Reserve System; Insurance Information Institute
Lower bond yields were the primary driver behind declining investment income in recent years, with the 10-year note reaching a 45-year low in 2003
Higher rates are now a certainty as inflationary expectations build
About 2/3 of invested assets are in the form of bonds
-30%
-20%
-10%
0%
10%
20%
30%
40%
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
*Through June 4, 2004.Source: Ibbotson Associates, Insurance Information Institute
Total Returns for Large Company Stocks: 1970-2004*
2003 ended a streak of 3 consecutive years of declines for stocks
Will the bull market run out of steam in 2004?
S&P 500 was up 28.7% in 2003 but up just 1% through early June as fears of higher interest rates, Iraq, terror & high oil prices paralyze the market
US P/C Net Realized Capital Gains1990-2003 ($ Millions)
$2,880
$4,806
$9,893
$1,664
$5,997
$9,244$10,808
$18,019
$13,016
$16,205
$6,631
-$1,214
$6,917
$9,818
-$5,000
$0
$5,000
$10,000
$15,000
$20,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03
Sources: A.M. Best, ISO, Insurance Information Institute.
Realized capital gains rebounded strongly in 2003
Property/Casualty Insurance Industry Investment Gain*
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.6
$57.9
$51.9
$56.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 02 03
*Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.Source: Insurance Services Office; Insurance Information Institute.
Investment gains are simply returning to “pre-bubble” levels
CAPACITY CRUNCH?
$0
$50
$100
$150
$200
$250
$300
$350
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
U.S. Policyholder Surplus: 1975-2003
Source: A.M. Best, Insurance Information Institute *As of 9/30/03.
$ B
illi
ons
Surplus (capacity) peaked at $339.3 Billion in mid-1999 and fell by 15.9% ($53.9 billion) to $285.4 billion at year-end 2002 (a trough?)
•Surplus increased by $61.6B or 21.6% to $347.0B
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
$53.9 Billion
Capacity of Lloyd’s Market
£8.9
£10.9£10.2£10.0£10.3£10.2 £9.9 £10.1
£11.1
£12.2
£14.9£14.9
£8
£9
£10
£11
£12
£13
£14
£15
£16
93 94 95 96 97 98 99 00 01 02 03 04
After remaining stable at around GBP10bn, Lloyd’s capacity has increased by over 40% in the last three years.
2004 capacity is GBP14.9bn, unchanged from 2003.
Source: Lloyd’s
Number of Captive Formations & Liquidations 1993 to 2003E
294
305
250
245
316
462 51
0
238 28
9
243 29
0
0
100
200
300
400
500
600
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003E
New CaptivesSource: AM Best, Advisen
Hard market fueling captive formation
Corporate collapses and captive consolidations fueled the upward trend in captive liquidations in 2002.
PRICING:
DOWNWARD PRESSURE?
How the Risk Dollar is Spent (2003)
Source: RIMS (2003); Insurance Information Institute
Firms w/Revenues < $1 Billion
Total Mgmt. Liab.8%
Other2%
Total Prof. Liab10%
WC Premiums8%
Retained Liability
11%
Admin Costs5% Property
Premiums16%
Retained Property
6%
Liabilty Premiums
14%
Retained WC21%
Firms w/Revenues > $1 Billion
Total Mgmt. Liab.7%
Other4%
Total Prof. Liab13%
WC Premiums14%
Retained Liability
4%
Admin Costs9%
Property Premiums
20% Retained Property
3%
Liabilty Premiums
18%
Retained WC10%
Insurance is the Biggest Concern of Small Business Owners
Regulations11%
Competition9%
Labor Qlty.8%
Taxes17%
Poor Sales16%
Labor Costs5% Inflation
1%
Insurance28%
Credit/Int. Rates1%
Source: National Federation of Independent Business (November 2003); Insurance Information Institute
$6.10$6.40
$8.30$7.70
$7.30
$6.49
$5.70$5.25
$5.71
$6.46
$8.91
$11.96
$4.83$5.20
$4
$5
$6
$7
$8
$9
$10
$11
$12
$13
90 91 92 93 94 95 96 97 98 99 00 01 02 03* Cost of risk includes insurance premiums, retained losses and administrative expenses
Source: 2003 RIMS Benchmark Survey; Insurance Information Institute
Cost of Risk: 1990-2003*
1992-2000 = -41.8%
2000
-03
= +1
47.6
%
95.9 96.0
101.5
94.2
91.390.0 90.7
84.5
89.3
101.1
94.4
87.0
91.3 90.6
$8.30
$7.30$6.49
$8.91
$6.10$6.40
$7.70
$5.70
$5.25
$5.71$5.20
$4.83
$6.46
$11.96
80
85
90
95
100
105
110
90 91 92 93 94 95 96 97 98 99 00 01 02 03
Co
mm
erc
ial L
ine
s O
pe
rati
ng
Ra
tio
$0
$2
$4
$6
$8
$10
$12
Co
st
of
Ris
k/$
10
00
Re
ve
nu
e
Commercial Operating Ratio
Cost of Risk
Source: RIMS, A.M. Best; Insurance Information Institute * 2003 operating ratio is III estimate.
Cost of Risk vs. Commercial Lines Operating Ratio*
14
%11
% 13
%1
6%
19
%2
2%
28
%3
1%
31
%2
8% 3
0% 3
2% 33
%2
8% 29
% 30
% 32
%3
0%
27
%2
5%
28
%2
2%
18
%1
8%
17
%1
6%
12
%1
2%
10
% 12
%11
%9
%9
%9
%
5%
10%
15%
20%
25%
30%
35%
Ju
l-0
1A
ug
-01
Sep
-01
Oct
-01
No
v-0
1D
ec-0
1
Ja
n-0
2F
eb-0
2M
ar-
02
Ap
r-0
2M
ay
-02
Ju
n-0
2J
ul-
02
Au
g-0
2S
ep-0
2
Oct
-02
No
v-0
2D
ec-0
2J
an
-03
Feb
-03
Ma
r-0
3A
pr-
03
Ma
y-0
3
Ju
n-0
3J
ul-
03
Au
g-0
3S
ep-0
3O
ct-0
3
No
v-0
3D
ec-0
3J
an
-04
Feb
-04
Ma
r-0
4A
pr-
04
Source: MarketScout.com
PRICINGCommercial Premium Rate Changes Highly Cyclical
Pricing power is ebbing
Is moderation due to realization of performance and profit goals, increasing capacity/capital, or market-share strategies?
$2.92$2.72
$2.55
$1.43
$3.63 $3.54 $3.57
$2.07
$1.26 $1.15
$2.49
$1.86$1.67
$1.00
$0.46$0.87 $0.82
$0.96
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
Total WCCosts
Total LiabilityCosts
TotalProperty
Costs
Other Costs Total Admin.Costs
Total Mgmt.LiabilityCosts
2001 2002 2003
Components of Cost of Risk Per $1,000 of Revenue*
* Cost of risk includes insurance premiums, retained losses and administrative expensesSource: 2003 RIMS Benchmark Survey; Insurance Information Institute
+45.8% +90.3% +113.8%
+107.0%
+44.8%+150.0%
% Change
2001 -03
P/C Soft Spots: % Accounts With Negative Price Change(1st Qtr. 2004)
58%
30%
16%12%
26%23%
11% 11%
0%5%
10%15%20%25%30%35%40%45%50%55%60%
Comm Prop BizInterruption
Terror Comm Auto WC GL EPL Umbrella
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
More moderation is evident in the commercial
casualty segments
Property
Casualty/Liability/Terrorism
Proportion of Accounts Renewing With Increase of 20% or More,
(Select Lines)
Source: Council of Insurance Agents and Brokers; Insurance Information Institute
54%
38%
38%
32%
20% 25
%
20%
6%
78%
53%
53%
53%
35%
18%
13%
8%6% 6% 3%2% 1% 2%
10%
23%
48%
38%
63%
5%
14%
23%
2002:II 2002:III 2002:IV 2003:I 2003:II 2003:III 2003:IV 2004:I
D&O Construction Risk GL Terrorism
Proportion of Workers Comp Accounts Renewing With Increase of
20% or More
Source: Council of Insurance Agents and Brokers; Insurance Information Institute
54%
38% 38%
32%
20%
12% 12%
3%
2002:II 2002:III 2002:IV 2003:I 2003:II 2003:III 2003:IV 2004:I
Average Expenditures on Auto Insurance: US
$668$691 $706 $704
$683 $687$718
$781
$842$871
$500
$550
$600
$650
$700
$750
$800
$850
$900
95 96 97 98 99 00 01 02* 03* 04*
Countrywide auto insurance expenditures are expected to
rise 3.5% in 2004
*III Estimates; Estimates for 2002-2004 based on BLS CPI data for motor vehicle insurance.Source: NAIC, Insurance Information Institute
Average Expenditures on Homeowners Ins.: US
$418$440 $455
$481 $488$508
$529$551
$591 $608
$200
$300
$400
$500
$600
$700
95 96 97 98 99 00 01* 02* 03* 04*
*III Estimates; Estimates for 2001-2003 based on BLS CPI data for tenants and household insuranceSource: NAIC, Insurance Information Institute.
Average US HO expenditures are expected
to rise by 2.8% in 2004
World Rate-On-Line Index(1990 = 100)
100116
283
372
337
288
248
193
160138 142
194
239 249
0
50
100
150
200
250
300
350
400
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Source: Guy Carpenter
Reinsurance prices rising, limits falling: ROL up significantly, though not as much as after Hurricane Andrew in 1992
Average Expenditures on Auto Insurance: ID, OR vs. Ohio
$651
$668 $6
91
$706
$704
$683
$687 $7
18
$565
$565 $5
85 $620
$630
$621
$625 $6
43$5
23
$505
$494
$494
$479
$465
$447
$445
$400
$500
$600
$700
$800
$900
1994 95 96 97 98 99 00 01
US ID OR
Source: NAIC, Insurance Information Institute
Average Auto expenditures in OR and ID are well below the US average.
Average Expenditures on Homeowners Ins.: ID, OR vs. US
$440 $455$481 $488 $508
$314
$324
$334
$343
$326
$319
$321
$312
$200
$300
$400
$500
$600
$700
96 97 98 99 00
Source: NAIC, Insurance Information Institute.
Average HO expenditures in OR and ID are well below the US average.
PERSONAL LINES ISSUES
AutoHomeowners
AUTO INSURANCE OVERVIEW
Private Passenger Auto is Enormous Part of P/C Industry
Total 2002 Direct Personal + Commercial Premiums Written = $399.7 Billion PPA Liability
21%
Homeowners11%
PPA Phys Dam15%
All Commercia Lines53%
Source: A.M. Best; Insurance Information Institute
Private passenger auto accounted for 36% or $145.1B in
DPW in 2002
$211.6B $43.0B
$83.9B
$61.2B
Auto Insurance:Direct Premiums Written
$61.3 $64.7 $67.8 $70.0 $72.3 $71.6 $70.7 $70.6 $75.9 $83.9
$159$34.4 $36.0 $38.2 $40.6 $43.8 $47.3 $49.9 $51.6$56.2
$61.2
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
93 94 95 96 97 98 99 00 01 02 03E
PP Auto Liability PP Auto Phys Damage
Bil
lion
s
$95.7B
Source: A.M. Best; Insurance Information Institute
$100.7B+5.2%
$106.0B+5.3%
$110.5B+4.3%
$116.1B+5.0%
$118.9B+2.4%
$120.6B+1.4%
$122.2B+1.3%
$132.1B+8.1%
$145.1B+9.8%
$159B+9.5%
101.7 101.3 101.3 101.0
99.5
101.1
103.5
109.5
107.9
104.2
99.1
96.6
95 95
.3
94
.9
94
.8
93
.5
95
.3
98
.4
10
4.1
10
3.1
10
1.0
94
.0
92
.5
90
95
100
105
110
93 94 95 96 97 98 99 00 01 02 03E 04F
Combined RatioOperating Ratio
Private Passenger Auto Combined & Operating Ratios, 1993-2004F
Average Combined 1993 to 2003E = 102.7
Many auto insurers have shown significant improvements in underwriting
performance since mid-2002
Sources: A.M. Best; III
Key Auto Insurance Stats: OR, ID vs. US, 2002 vs. 2003*
$7,902
$2,314 $2,163
$8,904$9,475
$9,216
$2,441
$9,357
$2,485$2,215$2,315
$7,764
$0
$2,000
$4,000
$6,000
$8,000
$10,000
OR Bodily Injury OR PD Liability ID Bodily Injury ID PD Liability US Bodily Injury US PD Liability
20022003
*Average for 4 quarters ending with the 4th quarter of 2003 vs. full year 2002.Source: Insurance Services Office, Insurance Information Institute
-1.7%
+0.0%
-4.8% +3.9%
+2.4%+2.5%
21%
15%
9%11%
5%
12%
9%
3%
23%
6%8% 10%
9%
5%
11%
9%
16% 14%
12% 12%
14%
7%
12%14% 14%
11% 12%12% 10%
8%
2%2%
4%
0%
5%
10%
15%
20%
25%
92 93 94 95 96 97 98 99 00 01 02
OR ID US
RNW: Private Passenger Auto, Select OR, ID vs. US, 1992-2002
Source: NAIC; Insurance Information Institute
Private passenger auto profitability deteriorated
throughout the 1990s
Average Expenditures on Auto Insurance: US
$668$691 $706 $704
$683 $687$718
$781
$842$871
$500
$550
$600
$650
$700
$750
$800
$850
$900
95 96 97 98 99 00 01 02* 03* 04*
Countrywide auto insurance expenditures are expected to
rise 3.5% in 2004
*III Estimates; Estimates for 2002-2004 based on BLS CPI data for motor vehicle insurance.Source: NAIC, Insurance Information Institute
Average Auto Insurance Expenditure: Top/Bottom 5 vs. US
(2001)
Source: NAIC; Insurance Information Institute.
$936 $912 $880
$686
$523 $523 $513 $510 $498
$1,028 $1,015
$0
$200
$400
$600
$800
$1,000
$1,200
NJ NY MA CT RI US ID WY IA SD ND
Most expensive states are in Northeast, least in upper Midwest.
Average Auto Insurance Expenditure, Selected States: 2001
Source: NAIC; Insurance Information Institute.
$826 $750
$705 $689 $643
$523
$718
0
100
200
300
400
500
600
700
800
900
AK WA HI CA OR ID US
Rank10
Auto insurance costs in the NW vary widely. Most expensive states are in NE,
least in upper midwest.
Rank15
Rank21
Rank23
Rank28
Rank48
Ratio of Avg. Auto Ins Expenditure to Median Income for Family of 4
1.64%1.64%
1.53%1.47%
1.16% 1.18%1.09%
1.07%1.02%
1.08%1.14%
1.44%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
LA DC NY AZ NV AK WA OR CA HI ID US
PPA Affordability“Pain Index:”Not an Issue in Select States*
No major pain in Alaska, Washington, Oregon, California, Hawaii and Idaho
*Ratio of 2001 state average auto expenditure to states median income for family of 4.
Sources: Auto Insurance Report, August 18, 2003
1 2 3 4 5 22 26 2920
31 35
1993-2002 Return on Equity:Western States PP Auto*
7.2%
19.8%
10.3%
10.0%
8.7%
8.8%
11.9%
0% 5% 10% 15% 20% 25%
Washington
Oregon
Idaho
Hawaii
Alaska
California
US
Source: NAIC, Insurance Information Institute
1993-2002 10-year average
Ratio of Avg. Auto Ins Expenditure to Median Income for Family of 4
1.64%1.64%
1.53%1.47%
1.18%
0.83%
0.90%0.88%0.85%
0.88%
1.44%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
LA DC NY AZ NV US KS* VA WI SD IA
PPA Affordability“Pain Index:”Not an Issue in Select States*
While the highest premiums are concentrated in the NE, measures of
affordability have considerable geographic spread.
*Ratio of 2001 state average auto expenditure to states median income for family of 4.
Sources: Auto Insurance Report, August 18, 2003
Motor Vehicle Retail Sales (Millions of Units)
15.515.5
16.0
17.4
17.8
17.217.1
16.7 16.816.7
16.8 16.917.1
17.2
15.0
15.5
16.0
16.5
17.0
17.5
18.0
96 97 98 99 00 01 02 03 04F 05F 06F 07F 08F 09F
Source: US Department of Commerce; Insurance Information Institute;Blue Chip Economic Indicators as of December 2003.
New Motor Vehicle Sales
Sales of automobiles remained relatively strong despite the weak economy in recent years. Economic recovery, incentives, low rates & demographics will
keep exposure picture bright for auto insurers
6.6%
6.0%
6.5%6.1%6.0%
5.8%
5.1%5.4%
4.8%
3.2%
5.1%
4.1%
2%
3%
4%
5%
6%
7%
93 94 95 96 97 98 99 00 01 02 03E 04F
Private Passenger Auto: Investment Gain*
Average Inv. Gain 1993 to 2002= 5.5%
PPA investment gain (as a % of earned premium fell by more than 50% from 1993-2002), due
primarily to historically low interest rates.
*Ratio to earned premiums
Sources: A.M. Best; III estimate/forecast for 2003/4.
11.9%11.7%11.5%11.1%
4.1%
-4.1%
-1.3% -2.4%-3.2%
-2.2%
10.8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
ND MN KS ID GA US FL KY LA CO MI
Profitability of PPA line varies enormously by state. Unlike
homeowners, the variation is not significantly the result of CAT activity.
Sources: NAIC; Insurance Information Institute
2002 Return on Net Worth: Private Passenger Auto
-2.2%
-4.6%-4.0% -4.2%
-0.9%
3.5% 3.6% 3.9%
-0.3%
4.7%
-6%
-4%
-2%
0%
2%
4%
6%
99 00 01 02 03
Frequency Severity
US Bodily Injury: Severity Trends Now Offset Declining Claim Freq.
Source: ISO Fast Track data.
Medical inflation a powerful
driving force
0.8%
-1.5%
0.0%
-2.0% -2.3%
3.9%3.3%
2.5%
4.3%
6.3%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
99 00 01 02 03
Frequency Severity
US PD Liability: Severity Trend Now Offset Declining Claim Freq.
Source: ISO Fast Track data.
Fewer accidents, but more damage when they occur:
SUV Effect?
0.6%
-0.6%
0.0%
-0.6%
6.6%
-3.7%
15.9%
3.0%
-5%
0%
5%
10%
15%
20%
00 01 02 03
Frequency Severity
US PIP Liability: Claim Frequency & Severity Falling
Source: ISO Fast Track data.
Crackdown on fraud and abuse
evident in severity statistics.
2.6%
-0.4%
1.8%
-3.8%
-5.1%
3.7% 3.7%3.8%4.1%
6.9%
-6%
-4%
-2%
0%
2%
4%
6%
8%
99 00 01 02 03*
Frequency Severity
US Collision: Severity Trends Trail Declining Claim Freq.
Source: ISO Fast Track data.
Fewer accidents, but more damage when they occur:
SUV Effect?
-1.7%-2.7%
2.9%
-5.9%
-2.3%
7.3%
-2.1%
3.2%
-4.7%
8.8%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
99 00 01 02 03
Frequency Severity
US Comprehensive: Severity Now Offsets Falling Claim Freq.
Source: ISO Fast Track data.
0.7%
5.9%
1.4%0.9%
0%
1%
2%
3%
4%
5%
6%
00 01 02 03*
Auto Theft Rates: On the Rise
*Through first half of 2003Source: FBI Uniform Crime Report.
Reasons for Rising Auto Theft rates:
•Economy
•“Do not chase” restrictions
•Fraud
•Export/Chop Shop Demand
The Nation’s Worst Major Metropolitan Areas for Vehicle Theft in 2002
1,237.65
1,074.021,015.89 1,012.07 991.7
930.34 922.25 905.18852.97 835.74
0200400600800
1,0001,2001,400
Phoen
ix-M
esa,
AZ
Fresn
o, C
A
Mod
esto
, CA
Stock
ton-L
odi,
CA
Las V
egas
, NV
Mia
mi, F
L
Sacra
men
to, C
A
Oak
land
, CA
Seattl
e-Bell
evue
-Eve
rett,
WA
Tacom
a, W
A
Number of Vehicle Thefts Reported per 100,000 Population
(*Based on 2000 Census)
Source: National Insurance Crime Bureau (NICB)
Rate*
Fraud Costs Insurers Billions
Total Fraud = $96.4 Billion
Health64%PP Auto
11%
Life12%
P/C (excl. PPA)12%
Disability1%
Source: Conning & Co., Insurance Information Institute
Private passenger auto fraud costs
insurers at least $10 billion annually.
Countries with Lowest Traffic Death Rates: 1970 vs. 2001
(deaths per 100 million miles driven)
9.098.13
6.09
4.77
1.81 1.46 1.48 1.45 1.21 1.34 1.46 1.44 1.33 1.52
5.67
7.13*
12.31
0
2
4
6
8
10
12
14 1970 2001
*Australian rate is from 1971Source: New York Times 11/27/03, Organization for Economic Cooperation and Development, as well as data compiled by traffic agencies
in Australia, France and the US, and by Dr. Leonard Evans.
America’s ranking has fallen from first to ninth in the
course of 30 years.
Reasons for this include the rise in speeding and drunk
driving, lower seat-belt use, and the proliferation of
SUVs and pickup trucks.
NA NA NA
UNINSURED MOTORISTS
32.0%30.0%
28.0%
25.0%
14.0%
4.0%
7.0%6.0% 6.0%
7.0%
22.0%
0%
5%
10%
15%
20%
25%
30%
35%
CO NM SC AL CA US WY MA SD ND ME
Enforcement of compulsory insurance laws varies significantly by state.
Sources: Insurance Research Council; Insurance Information Institute
Percentage of Uninsured Motorists, Top/Bottom 5, (2000)
CO has/had the highest UM rate in US. ME has
the lowest.
PERSISTENCY INAUTO INSURANCE
Why Persistency Makes Sense for Insurers & Policyholders
• Claims Costs: Loss ratios for new customers 5-10 pts. higher than for those who have persisted for 1+ yrs.
• Acquisition Costs: USAA has 99% persistency rate, one of the lowest acquisition costs in the industry
• Volume: Hartford has 96% retention rate with AARP• Customer Service: Amica: Has 95% retention rate, rated #1 by J.D.
Power & Associates for 4 years in a row• Guaranteed Insurability: Safeco: “Pledge of Lifetime Insurability”
eligible if: Age 50+, insured 3 consecutive years, or 9 years accident free (regardless of age)
• Deductible Reduction: MetLife Auto & Home: Reduces deductible for each year of persistency
HOMEOWNERS INSURANCE OVERVIEW
Homeowners as a Percentage of the P/C Industry
Total 2002 Direct Personal + Commercial Premiums Written = $399.7 Billion
All Commercial Lines53%
PPA Phys Dam15%
Homeowners11%
PPA Liability21%
Source: A.M. Best; Insurance Information Institute
Homeowners insurance accounted for 11% or $43.0B in
DPW in 2002
$211.6B $43.0B
$83.9B
$61.2B
Homeowners Insurance:Direct Premiums Written
$0
$10
$20
$30
$40
$50
$60
93 94 95 96 97 98 99 00 01 02 03E
Homeowners Multiple Peril
Bil
lion
s
$22.9B
Source: A.M. Best; Insurance Information Institute
$24.4B+6.6%
$26.0B+6.6%
$27.4B+5.4%
$29.1B+6.2%
$30.9B+5.8%
$32.5B+5.2%
$34.6B+6.5%
$37.6B+8.7%
$43.0B+14.4%
$49.0B+14.0%
113117.7
158.4
113.6118.4
112.7
121.7
101
109.4108.2111.4
121.7
109.3
103.1100.2
95
100
105
110
115
120
125
130
135
140
145
150
155
160
165
90
91
92
93
94
95
96
97
98
99
00
01
02
03
F
04
F
Homeowners Insurance Combined Ratio
Average 1990 to 2002= 117
Insurers have paid out an average of $1.17 in losses for every dollar earned
in premiums over the past 13 years
2002 Loss: $3.4 Billion
2001 Loss: $7.4 Billion
Sources: A.M. Best; III
Rates of Return on Net Worth for Homeowners Ins: US vs. OR & ID
Source: NAIC, Insurance Information Institute
* US Average is 1.35% if excluding 1992 (year of Hurricanes Andrew and Iniki.
-1.7%
-18.1%
-4.2%
3.6%
12.4%
5.4%
2.5%
5.4% 3.8% 1.4%
-7.2%
15.1%
7.5%11.6%
5.3%
10.8%8.2%
16.0%
7.4%
-2.7%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
USOregonIdaho
Averages: 1993 to 2002
US HO Insurance = -3.29%*
Oregon HO Insurance = +6.1%
Idaho HO Insurance = +2.4%
Average Expenditures on Homeowners Ins.: US
$418$440 $455
$481 $488$508
$529$551
$591 $608
$200
$300
$400
$500
$600
$700
95 96 97 98 99 00 01* 02* 03* 04*
*III Estimates; Estimates for 2001-2003 based on BLS CPI data for tenants and household insuranceSource: NAIC, Insurance Information Institute, TX Department of Insurance.
Average US HO expenditures are expected
to rise by 2.8% in 2004
Homeowners Insurance Expenditureas a % of Median Home Price
$1
07
,20
0
$1
15
,80
0
$1
21
,80
0
$1
28
,40
0
$1
33
,30
0
$1
39
,00
0
$1
47
,80
0
$1
58
,10
0
$1
70
,00
0
$1
10
,50
00.39%
0.35%
0.38%
0.37%
0.35%
0.36%
0.37%0.37%0.37%
0.38%
$100,000
$125,000
$150,000
$175,000
$200,000
94 95 96 97 98 99 00 01 02 03
0.30%
0.33%
0.35%
0.38%
0.40%Median Sales Price of Existing HomesHO Insurance Expenditure as a % of Sales Price
Source: Insurance Information Institute calculations based on data from National Association of Realtors, NAIC.
HO
Exp
end
iture as %
of Sales P
riceMed
ian
Hom
e S
ales
Pri
ce
The cost of homeowners
insurance relative to the
price of a typical home has fallen
Change in Cost of Homes vs. Change in Cost of Homeowners Insurance
$3,300
-$2
$5,300
$22
$6,000
$15
$6,600
$26
$4,900
$7
$5,700
$20
$8,800
$21
$10,300
$22
$11,900
$40
-$2,000
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
1995 1996 1997 1998 1999 2000 2001 2002 2003
Change in Cost of Median Existing HomeChange in Average Homeowners Insurance Expenditure
Recent increases in the cost of homeowners insurance
are miniscule in comparison to the soaring cost of homes
Source: Insurance Information Institute calculations based on data from Natl. Association of Realtors, NAIC. 2001-2003 HO figures are III estimates.
Ratio of Avg. Homeowners Ins Expenditure to Median Income for Family of 4
1.28%
0.55%
1.52%1.64%
1.26%
0.50%0.43%
0.82%
0.47%0.54%
1.20%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
TX LA MS OK FL VA OH MD DE WI US
Homeowners Affordability “HURT Index”* (Top/Bottom 5 States)
CAT-prone and “moldy” states have biggest affordability issues
*Ratio of 2000 state average auto expenditure to states median income for family of 4.
Sources: Property Insurance Report, Sept 8, 2003
Estimated Insured Mold Losses: 2000-2002
Source: Insurance Information Institute
$ Billions
$0.5
$1.4
$3.0
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
2000 2001 2002
Insured mold losses rose by 500% from 2000 to 2002.
$0
$50
$100
$150
$200
$250
Jan-
01
Mar
-01
May
-01
Jul-0
1
Sep-0
1
Nov-0
1
Jan-
02
Mar
-02
May
-02
Jul-0
2
Sep-0
2
Nov-0
2
Jan-
03
Mar
-03
May
-03
Jul-0
3
Sep-0
3
Wa
ter
Da
ma
ge
Pa
id L
os
se
s* ($
Mill
ion
s)
0
5000
10000
15000
20000
25000
30000
Cla
im C
ou
nt
Paid Losses
Claim Count
Source: Texas Department of Insurance; Insurance Information Institute
* Data are for TDI Cause 61: Discharge – Other Damage. Not all claims in cause 61 are mold and mold claims may also arise from other (non-water) causes of loss.
Texas: Mold Losses/Claims Continuing to Moderate*
44.6%
23.9%19.5%
11.9%2.1%
-57.2%
-11.6%-20.6%
-25.5%-17.6%
11.1%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
HI FL RI MA CO US IN SD KY MN ND
Profitability of HOMEOWNERS line varies enormously by state.
Sources: NAIC; Insurance Information Institute
Top/Bottom 5 Markets for Homeowners Insurance By Average RNW*
Causes of Homeowners Insurance Losses, 1998-2002*
0%
20%
40%
60%
80%
100%
1998 1999 2000 2001 2002
Liability
All other propertydamage
Theft
Water damage andfreezing
Wind and hail
Fire, lightning anddebris removal
*Data exclude tenants and condominium owners insurance. All other property damage includes vandalism and malicious mischief. Liability includes bodily injury and property damage, medical payments and credit card and other.
Source: Insurance Services Office, Inc (ISO)
Percent of Losses Incurred
Average Annual Insured Losses*(Top 10 States, $ Millions)
$1,423.0
$615.0
$196.0$109.0 $77.0 $64.0 $62.0 $61.0 $61.0 $51.0
$154.0
$0
$250
$500
$750
$1,000
$1,250
$1,500
FL TX LA NC MS MA SC AL NY CT AllOther
*Normalized losses adjusted for inflation, housing density, wealth and wind insurance coverage, based on historical data for 100-year period 1900-1999.Source: Tillinghast-Towers Perrin
Louisiana6.8%
N. Carolina
3.8%
Mississippi2.7%
All Other15.7%
Texas 21.4%
Florida49.5%
Distribution of Annual Losses
New Private Housing Starts(Millions of Units)
1.19
1.01
1.20
1.29
1.461.35
1.48 1.47
1.62 1.64 1.57 1.60
1.71
1.79 1.80
1.68
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04F 05F
Source: US Department of Commerce; Blue Chip Economic Indicators (4/04), Insurance Info. Institute
New Private Housing Starts
•Housing market remain strong.
•Virtually no exposure impact for insurers
Workers CompensationResidual Market
$1.2
$2.1$2.6
$2.8
$3.5$4.0
$4.4$4.8
$4.1
$3.1
$2.0
$1.0$0.6
$0.3$0.3$0.4
$0
$1
$2
$3
$4
$5
$6
$1.1B$0.6B
* Excludes Maine Residual Market Pool** Incomplete Policy Year Projected to Ultimate
Source: NCCI
$1.4B
$ Billions
Policy Year
Workers Comp Residual Market Premium Volume
NCCI-Serviced Workers Compensation Residual Market Poolsas of December 31, 2003
Size of residual market nearly quadrupled from 1999 to 2003
Workers Compensation Residual Market Shares Continue to Rise
Workers Compensation Insurance Plan States* Premium as a Percent of Direct Written Premium
9
1618 17 17
2122
2426
23
16
118
4 3 3
1210
6
0
5
10
15
20
25
30
Percent
p Preliminary•NCCI Plan states plus DE, IN, MA, MI, NJ, NC•Source: NCCI
Calendar Year
Residual market share quadrupled from 3% to 12% from 1999 to 2003
Workers Compensation Residual Market Combined Ratios
NCCI-Serviced Workers Compensation Residual Market Pools As of December 31, 2003
177
164169 166
159
142
127
111103
97 94 98 102
114 118 118113116115
80
100
120
140
160
180
200
* Excludes Maine Residual Market Pool** Incomplete Policy Year Projected to Ultimate
Source: NCCI
Policy Year
Percent
($9
37
)
($1
,35
9)
($1
,79
3)
($1
,87
6)
($1
,67
4)
($1
,17
6)
($5
37
) ($1
26
)
($1
3)
($4
6)
($4
9)
($6
4)
($2
,05
9)
$2
4
$1
16
$8
8
($1
80
)
($1
71
)
($9
5)
-2,500
-2,000
-1,500
-1,000
-500
0
500
WC Residual Market Underwriting Results Continue to Decline
NCCI-Serviced Workers Compensation Residual Market PoolsAs of December 31, 2003
Policy Year
$ Millions
* Excludes Maine Residual Market Pool** Incomplete Policy Year Projected to Ultimate
Source: NCCI
WORKERS COMPENSATION MEDICAL COSTS:
CRITICAL CONDITION
$7.9 $8.0 $7.8$8.5 $8.9
$9.6$10.3
$11.1$12.0
$13.1
$14.7
$16.3
$17.8
$5
$7
$9
$11
$13
$15
$17
$19
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003p
Annual Change 1991–1995: +3.9%Annual Change 1996–2002: +9.0%
Accident Year
MedicalClaim Cost ($000s)
2003p: Preliminary based on data valued as of 12/31/20031991-2002: Based on data through 12/31/2002, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policies
Workers Comp Medical Claims Continue to Climb
Med Costs Share of Total Costs is Increasing Steadily
Indemnity56%
Medical44%
Source: NCCI (based on states where NCCI provides ratemaking services).
Indemnity51%
Medical49%
Indemnity45% Medical
55%
1983
1993
2003p
6.5%
7.7%8.6%
9.5% 9.6%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
1997 1998 1999 2000 2001
WC Drug Costs as % of Total WC Medical Costs*
*Analysis is on an accident year (AY) basis, developed through 8th report.Source: National Council on Compensation: Prescription Drugs: Comparison of Drug Costs and Patterns of Use in Workers Compensation and Group Health Plans.
WC drug costs account for an increasingly large share of WC medical costs. They are a major driver behind
the accelerating cost of providing medical care to injured workers.
1.06
1.13
1.07 1.061.05
1.20 1.21
1.141.11
1.36
1.29
1.21
1.0
1.1
1.2
1.3
1.4
1997-1998 1998-1999 1999-2000 2000-2001
Price Impact Utilization Impact Total Impact
Impact of Price & Utilization on Workers Comp Drug Costs*
Utilization has greater impact on WC drug costs than price. Reflects trend
toward new/more powerful drugs and more
prescriptions.
Source: National Council on Compensation: Prescription Drugs: Comparison of Drug Costs and Patterns of Use in Workers Compensation and Group Health Plans.
Generic Prescriptions Written When Generics Available in WC
21%79% 8% 92%
% of times generic available but not
prescribed
% of times generic available but not
prescribed
Additional cost savings if generic
used 100% of time when available
All other brand and prescription
drug costs
Source: National Council on Compensation Insurance: Prescription Drugs: Comparison of Drug Costs and Patterns of Use in Workers Compensation and Group Health Plans.
Prescription Drug Cost Breakdown: WC vs. General Health
Pain-killers55%
Antide-pressants
14%Muscle Relaxants
20%
All Other11%
Source: National Council on Compensation Insurance: Prescription Drugs: Comparison of Drug Costs and Patterns of Use in Workers Compensation and Group Health Plans.
Cardio-vascular
18%
Anti-infectives
13%Antide-pressants
15%
All Other54%
Workers Comp % Total Paid
Group Health % Total Paid
DRUG NAME Brand vs. GenericCelebrex (anti-inflammatory) Brand (generic not available)
Oxycontin (painkiller) Brand (generic not available)
Vioxx (anti-inflammatory) Brand (generic not available)
Hydrocodone (painkiller) GenericNeurontin (painkiller) Brand (generic not available)
Ultram (painkiller) Brand (generic available)
Carisoprodol (muscle relaxant) Generic (same as Soma)
Cyclobenzaprine (muscle relaxant) GenericSoma (muscle relaxant) Brand (Same as carisoprodol)
Ambien (sedative) Brand (generic not available)
Top 10 Prescription Drugs by Total Paid in Workers Comp
Source: National Council on Compensation Insurance.
Reasons for Increased Prescription Drug Utilization in Workers Comp
Aggressive Marketing Major pharmaceuticals spend twice as much on advertising as on R&D
Greater Availability & Dependence on Medications for Treatments
Aging Workforce: requires more assistance from prescription drugs
Unhealthy Workforce E.g.,: About 2/3 of adults are overweight or obese, increasing the frequency of
some types of injuries and making recovery more difficult relative to a
healthy weight individual.
Addiction? (e.g., Oxycontin)
Source: National Council on Compensation Insurance, Insurance Information Institute
LEGAL LIABILITY & TORT
ENVIRONMENT(full presentation available upon
request to III members)
Cost of U.S. Tort System($ Billions)
Source: Tillinghast-Towers Perrin.
$129 $130$141 $144 $148
$159 $156 $156$167 $169 $180
$205
$233
$298
$0
$50
$100
$150
$200
$250
$300
$350
90 91 92 93 94 95 96 97 98 99 00 01 02 05F
Tort costs consumed 2.23% of GDP in 2002
Per capita “tort tax” expected to rise to
$1,003 by 2005, up from $809 in 2002
Personal, Commercial & Self (Un) Insured Tort Costs*
$17.0$49.1 $57.2
$87.4$17.1
$51.0$70.9
$78.5
$5.4
$20.1
$29.6
$42.9
$0
$50
$100
$150
$200
$250
1980 1990 2000 2002
Commercial Lines Personal Lines Self (Un)Insured
Bil
lion
s
Total = $39.5 Billion
*Excludes medical malpracticeSource: Tillinghast-Towers Perrin
Total = $120.2 Billion
Total = $157.7 Billion
Total = $208.8 Billion
Where the Tort Dollar Goes(2002)
Source: Tillinghast-Towers Perrin
Awards for Non-Economic
Loss24%
Claimants' Attorney Fees
19%Awards for
Economic Loss22%
Defense Costs14%
Administration21%
Tort System is extremely inefficient:
Only 22% of the tort dollar compensates victims for economic losses
At least 54% of every tort dollar never reaches the victim
THE U.S. LEGAL SYSTEM:IS IT OUT OF CONTROL?
TRENDS, CONDITIONS & OUTLOOK
TORT-ure
• Asbestos• Silicosis• “Toxic” Mold• Medical Malpractice• Construction Defects• Lead• Fast/Fattening Foods & Obesity• Reality TV• Arsenic Treated Lumber • Guns• Genetically Modified Foods & Labeling• Generic Drugs, Pharmaceuticals & Medical Devices• Security exposures (workplace violence, post-9/11 issues)• Slavery
New
New
New
Business Leaders Ranking of Liability Systems for 2004
Best States1. Delaware2. Nebraska3. Virginia4. Iowa5. Idaho6. Utah7. New Hampshire8. Minnesota9. Kansas10. Wisconsin
Worst States41. Missouri42. Arkansas43. Montana44. Illinois45. Texas46. California47. Louisiana48. Alabama49. West Virginia50. Mississippi
Source: US Chamber of Commerce States Liability Systems Ranking Study; Insurance Info. Institute.
The Nation’s Judicial Hellholes
Source: American Tort Reform Association; Insurance Information Institute
City of St. Louis, MO
CALIFORNIA
Alameda County
Los Angeles County
San Francisco County
Orleans Parish, LA
I
Madison County, IL
TEXAS
Jefferson County
Hidalgo County
Starr County
Mississippi’s 22nd Judicial
District
Average Jury Awards1994 vs. 2001and 2002
419
187
333
1,18
5
1,14
0 1,74
4
1,21
0
309 75
0
3,09
9 3,91
3
1,19
9
221 76
7
4,42
1
6,24
6
5,60
1
7,795
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
Overall VehicularLiability
PremisesLiability
Wrongful Death MedicalMalpractice
ProductsLiability
($00
0)
1994 2001 2002
Source: Jury Verdict Research; Insurance Information Institute.
Median Jury Award, 1996-2002
Source: 2003 Current Award Trends, Jury Verdicts Research.
$36,250$38,604 $38,000
$29,983
$45,000$42,945
$30,000
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
$50,000
1996 1997 1998 1999 2000 2001 2002
The median award fell by 1/3 between 2000 to 2002, but
average awards rose because of a large number of jumbo awards
Probability of Plaintiff Verdict is Rising
Source: Jury Verdict Research, 2003 Current Award Trends
1994 1997 2002
Premises Liability 43% 45% 49%
Business Negligence NA 57% 62%
Vehicular Liability 58% 59% 63%
Products Liability 39% 39% 61%
There is Was is Was a Glimmer of Hope for Tort Reform
Best Chance for Tort Reform in Years• Medical Malpractice
States—already happening: 20+ states have capsFederal reform discussed in Congress but bill failed in SenateAttempt to get caps for specialties failed February 2004
• Class Action ReformClass Action Fairness ActFailed by 1 Vote 10/22/03; Likely back up 2004???
• Asbestos ReformFairness in Asbestos Injury Resolution of 2003; Failed Apr. 2004
• Punitive Damages—What’s ReasonableSupreme Court ruled favorably in Campbell v. State Farm
Medical Malpractice: Tort Cost Growth is Skyrocketing
$ Billions
$1.2
$1.5
$1.9
$2.3
$5.4 $6
.5 $7.1
$7.0
$6.8
$7.1
$7.2 $7
.9 $8.7 $9
.4 $10.
8
$11
.6
$12.
4
$13.
5
$14.
6 $16.
2
$17.
6 $19.
4 $20.
9
$2.9
$3.6 $4
.4
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
$20
$22
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
Sources: Tillinghast-Towers Perrin, US Bureau of Labor Statistics, Insurance Information Institute
•Over the period from 1990 through 2000, medical malpractice tort costs rose 140%, more than double the 60% increase in medical costs generally over the same period!
•Over the period from 1975 through 2000, medical malpractice tort costs skyrocketed by 1,642% while medical costs generally rose 449%, nearly 4 times as fast!
Who Will Pay for the US Asbestos Mess?
Source: Tillinghast-Towers Perrin; Insurance Information Institute
US Insurers30%Asbestos
Defendants39%
Foreign Insurers
31%
Estimated Total US Settlements & Expenses = $200 billion
$78 billion $60 billion
$62 billion
INSURANCE SCORING (CREDIT)
1.07
1.53
1.35
1.14
0.990.94
0.99
0.83 0.810.74 0.75
0.4
0.6
0.8
1.0
1.2
1.4
1.6
NoScore
1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th
Score Range
Avg
. Rel
ativ
e L
oss
Rat
ioTexas Auto: Relative Loss Ratio (by Credit Score Decile, Total Market)*
*Each decile contains approximately 15,300 policies.
Includes standard and non-standard policyholders.
Interpretation:
Those with poorest credit scores generated losses more than double that of those with the best scores
Source: University of Texas, Bureau of Business Research, March 2003.
1st Decile = Lowest Credit Scores
10th Decile = Highest Credit Scores.
Extremely strong statistical evidence linking credit score with loss/claim outcomes:•Credit score & likelihood of positive claim (p<.0001)•Size of loss related to credit score (p<.0001)•Correlation between relative loss ratio and credit score (r = .95)
Average Loss = $695
$668
$918
$846
$791
$707 $703$681
$631
$584$568 $558
$500
$600
$700
$800
$900
$1,000
NoScore
1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th
Score Range
Avg
. In
curr
ed L
oss
per
Pol
icy
Texas Auto: Average Loss per Policy (by Credit Score Decile, Total Market)
Interpretation:
Those with poorest credit scores generated incurred losses 65% higher
those with the best scores
Source: University of Texas, Bureau of Business Research, March 2003.
1st Decile = Lowest Credit Scores
10th Decile = Highest Credit Scores.
9%
33%
18%
10%
3%0%
-7%-11%
-14% -15%-19%
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
NoHit/Thin
File
607 659 693 722 748 774 802 837 894 997
Score Range
Rel
ativ
e P
ure
Pre
miu
mIndicated Relative Pure Premium by Insurance Score (PD Liability)*
Interpretation:
Those with poorest credit scores had loss experience 33% above average while
those with the best scores had loss experience that was 19% below average
Source: EPIC Actuaries, June 2003
Importance of Rating Factors by Coverage Type
Coverage Factor 1 Factor 2 Factor 3
BI Liability Age/Gender Ins. Score Geography
PD Liability Age/Gender Ins. Score Geography
PIP Ins. Score Geography Yrs. Insured
Med Pay Ins. Score Limit Age/Gender
Comprehensive Model Year Age/Gender Ins. Score
Collision Model Year Age/Gender Ins. Score
Source: The Relationship of Credit-Based Insurance Scores to Private Passenger Automobile Insurance Loss Propensity Michael Miller, FCAS and Richard Smith, FCAS (EPIC Actuaries), June 2003 (Presented at June 2003 NAIC meeting).
Adverse Impact: No Evidence
New Private Housing Starts(Millions of Units)
1.19
1.01
1.20
1.29
1.461.35
1.48 1.47
1.62 1.64 1.57 1.60
1.71
1.851.90
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04F
Source: US Department of Commerce; National Association of Realtors; Insurance Info. Institute
*Annualized January 2004 figure
New Private Housing Starts
•Housing market remains strong.
U.S. Homeownership Rate,1990 to 2003
Source: U.S. Census Bureau
63.9% 64.1%64.5%
64.0%
64.7%
65.4%65.7%
66.3%66.8%
67.4%67.8% 67.9%
68.3%
90 92 93 94 95 96 97 98 99 00 01 02 03
Homeownership is at a record high. Because you can’t buy a home without
insurance, insurance is clearly available and affordable, including to
millions of Americans of modest means and all ethnic groups.
Homeownership Rates in Central Cities, 1990 to 2003
Source: U.S. Census Bureau
48.7%
49.2%
48.6%48.5%
49.5%49.7%
49.9%50.0%50.4%
51.4%51.9%51.7%
52.3%
48.7%
90 91 92 93 94 95 96 97 98 99 00 01 02 03
Homeownership rates in central cities is at an all time record high. Because you can’t buy a home
without insurance, insurance is clearly available and affordable, including to millions of Americans of
modest means and all ethnic groups.
Homeownership Rates AmongMinorities is Rising, 1994 to 2003
Source: U.S. Census Bureau
42.3
%
42.7
% 44.1
%
44.8
%
45.6
%
46.3
% 47.2
%
47.7
%
47.4
%
48.1
%
41.2
% 42.1
%
42.8
%
43.3
% 44.7
% 45.5
% 46.3
% 47.3
%
46.7
%
47.0
%
40%
42%
44%
46%
48%
50%
94 95 96 97 98 99 00 01 02 03
Blacks Hispanics•Homeownership rates for minorities are at or near
record highs•Minorities are using their good credit to buy homes
and get insurance
Homeownership Ratesin Oregon, 1990 to 2003
Source: U.S. Census Bureau
64.4%65.2%
64.3%63.8%63.9%
63.2%63.1%
61.0%
63.4%64.3%
65.3%65.8%
66.2%
68.0%
90 91 92 93 94 95 96 97 98 99 00 01 02 03
Homeownership rates in Oregon are at an all-time record high.
Homeownership Ratesin Idaho, 1990 to 2003
Source: U.S. Census Bureau
69.4%
68.4%
70.3%
72.1%
70.7%
72.0%71.4%
72.3%72.6%
70.3%70.5%
71.7%
73.0%
74.4%
90 91 92 93 94 95 96 97 98 99 00 01 02 03
Homeownership rates in Idaho are at an all-time record high.
Percent Change in Homeownership, 1995-2001
*Includes American Indian, Eskimo, Aleut, Asian and Pacific Islander.Source: U.S. Census Bureau
10.7%
23.2%
45.9%
83.5%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
White Black Hispanic Other*
•Homeownership rates have increased much faster for minority groups than for whites•Minorities are using their good credit to buy homes and get insurance•4.3 million minority net new homeowners were created between 1995 and 2001
Credit Contrast:Western States vs. US
Note: Range of possible scores is 300 to 900.Source: Experian; Insurance Information Institute.
690 689 688684
673 671
660
652
678
630
640
650
660
670
680
690
700
WA ID HI OR AK CA AZ NV US
Inco
me
Ran
k =
15
NW states generally have above-average credit scores,
but income varies widelyIn
com
e R
ank
= 3
0
Inco
me
Ran
k =
9
Inco
me
= 2
6
Inco
me
= 2
6
Scor
e =
51In
c.=
18
Inco
me
Ran
k =
3
Inco
me
Ran
k =
9
THE CHALLENGE OF TERRORISM
TRIA UPDATE• TRIA expires 12/31/05
• House subcommittee hearings held April 28—went well
• Senate hearings May 18—many committee members amenable
• Industry coalescing around a 2-year extension
Some life insurers trying to push for inclusion of group life
• Treasury required to complete a study of the program by 6/05
• Broad support from non-insurance industry groups/coalitions
• Reauthorization opposed by: Consumer Federation of America
Some conservative think tanks (e.g., American Enterprise Institute)
Laissez-faire academics
• “Make Available” requirement expires this year
Treasury must make ruling on extension of this provision by 9/1/04.
Industry, non-insurers and regulators support extension
Terrorism: Is it Insurable ThreeYears After 9/11?
• Traditional arguments against insurability still apply No solid sense of frequency or severity of future events despite modeling efforts
• Most major modern industrialized democracies have determined that terrorism risk is appropriately borne or at least shared by the state UK, Spain, France, Germany Australia, Israel, South Africa…
• No appreciable reinsurance market has developed
• Very little securitization of terrorism risk
• Very limited standalone market
• Workers comp terror exposure problem seems insoluble
• Terrorism is the face of warfare in the 21st century
• NEW: Increasing politicization of terrorism is compromising the integrity of the threat assessment process
• NEW: Budget and turf battles in Washington could harm funding for anti-terror programs & initiatives (e.g., Homeland Security, esp. TSA funding)
Sept. 11 Industry Loss Estimates($ Billions)
Life$1.0 (3.1%)
Aviation Liability
$3.5 (10.8%)
Other Liability
$4.0 (12.3%)
Biz Interruption
$11.0 (33.8%)
Property -WTC 1 & 2
$3.6 (11.1%) Property - Other
$6.0 (19.5%)
Aviation Hull$0.5 (1.5%)
Event Cancellation$1.0 (3.1%)
Workers Comp
$1.8 (5.8%)
Current Insured Losses Estimate: $32.5BSource: Insurance Information Institute
Capital Myth: US P/C Insurers Have $300 Billion to Pay Terrorism Claims
"Target" Commercial*$116 billion
40%
Other Commercial$53 billion
18%Personal$123 billion
42%
Total PHS = $298.2 B as of 6/30/01
= $291.1 B as of 12/31/02
*”Target” Commercial includes: Comm property, liability and workers comp; Surplus must also back-up on non-terrorist related property/liability and WC claimsSource: Insurance Information Institute based on A.M. Best Q.A.R Data.
Only 40% of industry surplus backs up “target” lines
Terrorism Take-Up Rates, Coverage Types & Pricing
Terrorism Coverage Take-Up Rate Rising
Source: Marsh, Inc.; Insurance Information Institute
23.5%26.0%
32.7%
27.3%
2003:II 2003:III 2003:IV Average
FACTS on Take-Up Rates
Highest = Energy Industry = 40.5%
Lowest = Construction = 12.2%
Northeast = Highest = 30.3%
West = Lowest = 18.6%
Terrorism take-up rate rose through 2003 as commercial property
premiums level-off or fall
Terrorism Coverage: Take-Up Rates by Industry
35.3%34.7%
31.5%31.0%
30.2%29.5%
27.1%26.8%
25.9%22.1%
21.6%20.0%
18.2%12.2%
40.5%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Energy
Media
Food & Beverage
Habitational/Hospitality
Healthcare
Real Estate
Transportation
Utility
Financial Institution
Public Entity
Tech/Telecom
Education
Retail
Manufacturing
Construction
Source: Marsh, Inc.
Terrorism Coverage: Take-Up Rates by Region
Source: Marsh, Inc.; Insurance Information Institute
30.3%
26.2%
21.8%
18.6%
Northeast Midwest South West
Terrorism take-up rate is highest in
the Northeast
Terrorism Coverage Take-Up Ratesby Total Insured Value (TIV)*
*Does not include firms that buy coverage through package policies.Source: Marsh, Inc.; Insurance Information Institute
18.2%
26.3%
39.7%
27.1% 27.3%
<$100 $100-$500 $500-$1,000 >$1,000 Average
Take-Up Rates for Small Firms
TIV: Between $5 million and $50 million take-up rate estimated at 30%
TIV below $5 million: Terror coverage “regularly purchased” via package policies
Nearly 40% of firms with TIV between $500 million and $1 billion buy terror coverage
$ Millions
Source: Marsh, Inc.; Insurance Information Institute
5.18%
3.67%
4.26% 4.36%
2003:II 2003:III 2003:IV Average
FACTs on Terror Premium Relative to Property Premium
Highest = Energy Industry = 8.03%
Lowest = Construction = 2.36%
Increase reflects fall in price of property coverage
rather than increase in price of terror coverage
Terrorism Premium as a Percentage of Property Premium
*Excludes risks with nominal $1 premium or built into all risks policySource: Marsh, Inc.; Insurance Information Institute
0.0078%
0.0055%
0.0045%
0.0056%
2003:II 2003:III 2003:IV Average
FACTS on Price Relative to TIV
Highest = Energy Industry = 0.0128%
Lowest = Education = .0030%
The price of terrorism coverage fell during 2003—helps explain
increase in take-up rate
Terrorism Pricing: Median Ratesby Total Insured Value (TIV)*
Terrorism Premium as Percentageof Property Premium, by Industry
7.65%6.07%
5.09%4.94%
4.76%4.76%4.69%
4.20%4.02%
3.75%3.56%
3.31%3.10%
2.36%
8.03%
0% 1% 2% 3% 4% 5% 6% 7% 8% 9%
Energy
Habitational/Hospitality
Media
Real Estate
Utility
Education
Transportation
Food & Beverage
Public Entity
Technology/Telecom
Retail
Financial Institutions
Healthcare
Manufacturing
Construction
Source: Marsh, Inc.
Terrorism Pricing: Median Rates as Percentage of Total Insured Value
0.0115%0.0101%
0.0061%0.0059%0.0058%0.0058%
0.0055%0.0055%
0.0052%0.0049%
0.0041%0.0041%
0.0037%0.0030%
0.0128%
0.000% 0.002% 0.004% 0.006% 0.008% 0.010% 0.012% 0.014%
Energy
Habitational/Hospitality
Real Estate
Construction
Financial Institutions
Transportation
Food & Beverage
Media
Utility
Technology/Telecom
Manufacturing
Public Entity
Retail
Healthcare
Education
Source: Marsh, Inc.
World Rate-On-Line Index*(1990 = 100)
100116
283
372
337
288
248
193
160138 142
194
239 249
0
50
100
150
200
250
300
350
400
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Source: Guy Carpenter *Rate-on-Line is the ratio of premium to loss limit.
After unprecedented disasters, reinsurance prices rise, limits fall so
ROL rises:
1991-93: +221%
2000-2003: +75%
Reinsurers didn’t exclude windstorm after Andrew in 1992, but generally excluded terror post
9/11, so ROL not up as much
Types of Terrorism Coverage Being Purchased
39.8 38.7 32.2 36.4
58.3 57.1 65.2 60.7
1.9 4.2 2.6 2.9
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2003:II 2003:III 2003:IV Average
TRIA Only
TRIA & Non-Certified
TRIA Only
Source: Marsh, Inc.
Types of Terrorism Coverage Being Purchased
4.5% 2.7% 3.1% 3.4%
23.9%23.3%
29.6%
19.0%
0%
5%
10%
15%
20%
25%
30%
35%
2003:II 2003:III 2003:IV Average
TRIA & Non-Certified
TRIA Only
Source: Marsh, Inc.
23.5%26.0%
32.7%
27.3%
THE POLITICIZATION OF TERRORISM
If They Don’t Know, Insurers Can’t Presume to Know Either
They’re Here and Plans are “90% Complete” to Attack
• Most major government officials believe another attack is imminent
• Terrorists’ plans are 90% complete for next attack
• Government has no idea of how, when, where, who or what kind of attack is next.
Summary• 2004/5 represent “sweet spot” in the current cycle for p/c insurance
(underwriting/earnings); Yet expect more downgrades 1H04
• OH remains has historically been a better-than-average state for the industry,
but…
• Rising investment returns could be a distraction
• Reserve deficiency remains industry’s principal boogieman Concern exacerbated in Sarbanes-Oxley world
• Major Challenges: Maintaining price/underwriting discipline
Managing variability/volatility of results
New/emerging/re-emerging risks
Insurance Information Institute On-Line
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