I.I.I. quarterly P/C industry snapshot: Fourth quarter 2017€¦ · I.I.I. quarterly P/C industry...
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I.I.I. quarterly P/C industry snapshot: Fourth quarter 2017 Information and analysis provided by the Insurance Information Institute
Transcript of I.I.I. quarterly P/C industry snapshot: Fourth quarter 2017€¦ · I.I.I. quarterly P/C industry...
I.I.I. quarterly P/C industry snapshot:Fourth quarter 2017
Information and analysis provided by the Insurance Information Institute
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2017:Q4 Overview:The insurance industry and the economy
• Ample (excess?) capital continues to spur competition.
• Premium rates are flat or falling in most markets, except auto, where loss costs force rates higher.
• 2018 Combined Ratio will vary by line of business but will likely be close to 100, except Commercial Auto (108) and Workers Comp (95).
• Exposures will grow with the economy.
P/C insurance markets
Financial markets The U.S. economy
• Interest rates remain near historic lows. Projections for rate increases have gotten more modest.
• Overall inflation remains below 2 percent; that’s likely to continue for five or more years.
• Carriers are giving alternative investments –ETFs, equities, real estate – a close look.
• Real GDP continues its slow, steady 2-3 percent annual growth.
• Unemployment rates suggest we are near full employment but other measures say no.
• This is the second longest expansion since WWII, but there are no signs of a future recession.
Commercial lines trends: 2017:Q4
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Investments predict premium growth*
*Commercial property direct premiums written (fire, allied lines, CMP, inland marine, burglary and theft); business fixed investment (structures, equipment, and software).
Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.
Sources: https://fred.stlouisfed.org/series/PNFI#0; National Bureau of Economic Research (recession dates); Insurance Information Institute.
-20%
-10%
0%
10%
20%
30%
07:Q2 08:Q2 09:Q2 10:Q2 11:Q2 12:Q2 13:Q2 14:Q2 15:Q2 16:Q2 17:Q2
Recession
% change, property ins premiums
% change, fixed investment
4.9%
% change from same quarter, prior year
Business fixed investment is forecast to grow at 5%–6% in 2017:2H and at 4.5%–5.5% in 2018.
Investment in equipment and software is expected to grow but investment in structures is expected to shrink.
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As hiring goes, exposures follow
Sources: U.S. Department of Commerce, Census Bureau; Insurance Information Institute.
0
5,000
10,000
15,000
20,000
25,000
07:Q1 08:Q1 09:Q1 10:Q1 11:Q1 12:Q1 13:Q1 14:Q1 15:Q1 16:Q1 17:Q1
Manufacturing Construction Mining & other extraction
20,095
22,391
17,668
Employment in the three industries that are the heart of workers composition exposure is not quite back yet to the level reached before the Great Recession.
000 at quarter-end
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Price changes* for hospital care
*Percentage change from same month in prior year; through October 2017; seasonally adjusted.
Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.
0%
2%
4%
6%
8%
10%
12%
99 01 03 05 07 09 11 13 15 17
Recession
Hospital CPI
For the past 5 years,
price changes
ranged from 3%-6%
Over the last two decades, prices for hospital care rose, on average, several percentage points faster than for medical services generally.
Personal lines trends: 2017:Q4
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Driving patterns predict claim frequency
Billions of miles driven in prior year
Sources: Federal Highway Administration; Rolling four-quarter average frequency from Fast Track Monitoring System; Insurance Institute for Highway Safety; Insurance Information Institute.
5.5
5.6
5.7
5.8
5.9
6.0
6.1
6.2
2,900
2,950
3,000
3,050
3,100
3,150
3,200
3,250
06:Q
2
06:Q
4
07:Q
2
07:Q
4
08:Q
2
08:Q
4
09:Q
2
09:Q
4
10:Q
2
10:Q
4
11:Q
2
11:Q
4
12:Q
2
12:Q
4
13:Q
2
13:Q
4
14:Q
2
14:Q
4
15:Q
2
15:Q
4
16:Q
2
16:Q
4
17:Q
2
Miles driven Collision claim frequency
Overall collision claims per 100 insured vehicles
The only force that could derail this relationship would be a sharp and persistent rise in the cost of gasoline.
Recession
9
58
60
62
64
66
68
70
72
74
76
78
32
34
36
38
40
42
44
46
90:Q
1
91:Q
1
92:Q
1
93:Q
1
94:Q
1
95:Q
1
96:Q
1
97:Q
1
98:Q
1
99:Q
1
00:Q
1
01:Q
1
02:Q
1
03:Q
1
04:Q
1
05:Q
1
06:Q
1
07:Q
1
08:Q
1
09:Q
1
10:Q
1
11:Q
1
12:Q
1
13:Q
1
14:Q
1
15:Q
1
16:Q
1
16:Q
3
17:Q
3
Renter-occupied Owner-occupied
To rent or to buy?
Sources: U.S. Census Bureau at http://www.census.gov/housing/hvs/data/histtabs.html, Table 8; Insurance Information Institute.
Millions of owner-occupied
housing units
Millions of renter-occupied
housing units
Since 2004 the number of renter-occupied housing units has grown by about 10.5 million units (+34%), but there has been no growth in the number of owner-occupied housing units in 12 years. Did this streak end in 2017?
Economic and financial trends:
2017:Q4
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P/C industry net income after taxes*
*Through second quarter. Adjusted for inflation using the BLS CPI calculator, to 2017 dollars.Sources: A.M. Best Special Report, ”A.M. Best First Look – 2Qtr 2017 U.S. Property/Casualty Financial Results”; ISO, a Verisk Analytics company; Insurance Information Institute.
$36.6
$15.6
$6.6
$18.6
$5.2
$17.6
$25.2$26.8
$31.9
$22.0
$15.5
$0
$5
$10
$15
$20
$25
$30
$35
$40
07 08 09 10 11 12 13 14 15 16 17
Billions, 2017 dollars
In the first half of the year, net income varied. 2017 was the third-lowest profit in the last 11 years.
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Key sources of P/C insurer profits
Data are before taxes and exclude extraordinary items.
Sources: NAIC data, sourced from S&P Global Market Intelligence; Insurance Information Institute.
$27.8
$14.1
$25.8 $28.4$25.4 $27.1
$30.2 $31.6$26.6 $27.1
-$6.3-$2.5
-$5.7
-$26.1
-$7.5
$2.4 $0.3
$3.5
-$1.5-$4.5
-$30
-$20
-$10
$0
$10
$20
$30
$40
$50
08 09 10 11 12 13 14 15 16 17
Net investment gains Underwriting gains/losses
$ Billions
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Sources of investment gains
Through second quarter.
Sources: ISO/PCI; Insurance Information Institute.
$29.0 $26.9$23.6 $24.8 $23.7 $23.2 $23.0 $23.4 $22.2 $23.5
-$1.2
-$12.8
$2.2$3.9
$1.7 $3.9$7.2 $8.2
$4.4 $3.6
-$20
-$10
$0
$10
$20
$30
$40
08 09 10 11 12 13 14 15 16 17
Net investment income Realized capital gains/losses
Billions
In the first half of the year, net investment income has been steady, but realized capital gains/losses have been quite variable.
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Bond yields
Note: Recession indicated by gray shaded column.
Sources: https://fred.stlouisfed.org/series/AAA#0 ; National Bureau of Economic Research (recession dates); Insurance Information Institute.
3.00%
3.25%
3.50%
3.75%
4.00%
4.25%
4.50%
4.75%
5.00%
5.25%
5.50%
5.75%
6.00%0
7:Q
1
07:Q
3
08:Q
1
08:Q
3
09:Q
1
09:Q
3
10:Q
1
10:Q
3
11:Q
1
11:Q
3
12:Q
1
12:Q
3
13:Q
1
13:Q
3
14:Q
1
14:Q
3
15:Q
1
15:Q
3
16:Q
1
16:Q
3
17:Q
1
17:Q
3
Yie
ld
3.65%
Top investment-grade bond yields have ranged from 3.8% to 4.0% for the last 3 years. 2017:Q3 was 3.65%. These yields probably won’t rise much above 4.5% through 2018.
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Change* in the core** Consumer Price Index
*Monthly, year-over-year, through October 2017. Seasonally adjusted. **CPI less food and energy.
Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
04 05 06 07 08 09 10 11 12 13 14 15 16 17
Recession Core CPI
Over the last decade, prices tracked by the Core CPI have generally risen about 2% per year.
Quarterly industry snapshotspecial report: 2017:Q4
Is a hard market coming?
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Is a hard market coming?
How is a hard market defined?
A hard market occurs when insurance premiums grow substantially faster than the economy.
– Premiums are measured by Net Written Premiums
– The economy is measured by nominal GDP
The last hard market was 15 years ago. Are we due for another one?
With three major hurricanes, an earthquake and record wildfires in the third quarter of the year, following an above-average catastrophe first-half, there is talk about a “hard market” emerging.
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Three hard markets in the last 45 years
Shaded areas indicate hard markets.
Sources: A.M. Best (1971-2013), ISO (2014-16); U.S. Commerce Dept., Bureau of Economic Analysis; Insurance Information Institute calculations.
8.7%
14.6%
-10%
-5%
0%
5%
10%
15%
20%
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
10.7%
16.6%
12.0%
Net Premium Growth (All P/C Lines) Minus Nominal GDP, Annual Change
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What predicts a hard market?
There are a number of theories. A hard market is thought to develop when…
Return on equity falls to 4 percent or below
Surplus drops due to financial market declines and/or significant underwriting losses
There are unusually large losses due to catastrophes
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P/C industry ROE and hard markets
Year P/C Industry
ROE less
than 4%
Growth of
(NWP-GDP) in
following year
Hard Market?
1975 2.4% 10.7% Yes
1984 1.8% 14.6% Yes
2001 -1.2% 12.0% Yes
2002 2.1% 5.1% Yes
2017 <4% ? ?
This has been a reliable predictor. The last four times ROE fell below 4 percent, a hard market followed. One of those times (2002), a hard market was
already under way.
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Policyholder surplus and hard markets
Year Surplus
decline
Growth of
(NWP-GDP) in
following year
Hard Market?
1984 -2.7% 14.6% Yes
1999 -0.9% -1.5% No
2000 -4.7% 5.1% Yes
2001 -8.0% 12.0% Yes
2008 -12.5% -2.2% No
2011 -0.8% 0.2% No
2017 >0%? ? ?
This has not been a reliable predictor. Three times after a decline in surplus, a hard market followed. Three times it did not.
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Catastrophe claims and hard markets
Year CAT claims over
$35 billion
($2016, billions)
Growth of
(NWP-GDP) in
following year
Hard Market?
1992 $39.6 0.9% No
2001 $36.4 12.0% Yes
2004 $36.4 -6.2% No
2005 $77.1 -3.1% No
2011 $35.2 0.2% No
2012 $36.8 1.3% No
2017 $80+ ? ?
This is the least reliable predictor. Only one year of outsized catastrophe losses (2001) ushered in a hard market.
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Hard markets: Conclusion
Industrywide low return on equity is the best predictor of a hard market.
As of this writing, return on equity in 2017 might fall to 4 percent or below, implying a hard market will develop in 2018.
