P/C Insurance Industry Financial Overview · Natural Disasters in the United States, 1980 – 2012...
Transcript of P/C Insurance Industry Financial Overview · Natural Disasters in the United States, 1980 – 2012...
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Under Pressure: P/C Insurance Markets in an Era of High Catastrophe Losses, Low Interest Rates and Tort Liability Concerns
Robert P. Hartwig, Ph.D., CPCU President & Economist
Insurance Information Institute
P/C Insurance Industry Financial Overview
Industry Performance Has Been Affected by High CAT Losses and Low Interest Rates
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P/C Net Income after Taxes$1
4,17
8
$5,8
40
$19,
316
$10,
870
$20,
598
$24,
404 $3
6,81
9
$30,
773
$21,
865
$20,
559
-$6,970
$3,0
46
$30,
029
$38,
501
$44,
155
$65,
777
$62,
496
$3,0
43
$28,
672
$35,
204
$19,
456 $3
3,52
2
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
• 2005 ROE*= 9.6%• 2006 ROE = 12.7%• 2007 ROE = 10.9%• 2008 ROE = 0.1%• 2009 ROE = 5.0%• 2010 ROE = 6.6%• 2011 ROAS1 = 3.5%• 2012 ROAS1 = 5.9%
High catastrophe losses and low interest rates have impacted insurer
earnings, contributing to pricing pressure
1991–2012 ($ Millions)
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO, Insurance Information Institute.
A 100 Combined Ratio Isn’t What It Once WasInvestment Impact on ROEs
4
97.5100.6 100.1 100.8
92.795.7
101.299.5
101
106.5
102.4
14.3%15.9%
8.8% 9.6%
12.7%10.9%
4.3%
7.4% 7.9%
4.7%6.2%
0%
3%
6%
9%
12%
15%
18%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012
Combined Ratio ROE*
Catastrophes and lower investment income pulled down ROE in 2012
Combined Ratio / ROE
* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012 combined ratio including M&FG insurers is 103.2, 2011 combined ratio including M&FG insurers is 108.1, ROAS = 3.5%.
Source: Insurance Information Institute from A.M. Best and ISO data.
Combined ratios must be lower in today’s depressed investment environment to generate risk appropriate ROEs
A combined ratio of about 100 generated a ROE of just ~7.0% in 2012, ~7.5% ROE in 2009/10, 10% in 2005 and 16% in 1979
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-5%
0%
5%
10%
15%
20%
25%
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Profitability Peaks & Troughs in the P/C Insurance Industry 1975 – 2012*
1977: 19.0% 1987: 17.3% 1997: 11.6% 2006: 12.7%
1984: 1.8% 1992: 4.5% 2001: -1.2%
9 Years
History suggests next ROE peak will be in 2016-2017
1975: 2.4%
2012:5.9%
*Profitability = P/C insurer ROEs. 2011 figure is an estimate based on ROAS data. Note: Data for 2008-2012 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
ROE
Near Record Catastrophe Losses Continue to Pressure Rates
US Catastrophe Losses in Recent Years Have Been Very High and Vulnerability Is Rising Globally
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US Insured Catastrophe Losses
2012 was likely the third most expensive year ever
for insured CAT losses
Record tornado losses caused 2011 CAT losses
to surge*Through 6/2/13. Includes $2.6B for 2013:Q1 (PCS) and $5.32B for the period 4/1 – 6/2/13 (Aon Benfield Monthly Global Catastrophe Recap).Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars). Sources: Property Claims Service/ISO; Insurance Information Institute.
($ Billions, 2012 Dollars)
$14.
0
$4.8
$8.0
$37.
8
$8.8
$26.
4
$12.
6
$11.
0
$3.8 $1
4.3
$11.
6
$6.1
$34.
7
$7.6 $1
6.3
$33.
7
$73.
4
$10.
5
$7.5
$29.
2
$11.
5
$14.
4
$33.
6
$35.
0
$7.9
$0
$20
$40
$60
$80
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13*
2012 was the 3rd highest year on record for insured losses in US history on an inflation-adj. basis. 2011 losses were the 6th highest. YTD 2013
running below average but Q3 Is typically the costliest quarter
Top 16 Most Costly Disasters in US History
$4.4 $5.6 $5.6 $6.7 $7.1 $7.5 $7.8 $8.7 $9.2$11.1
$13.4
$18.8
$23.9 $24.6 $25.6
$48.7
$0
$10
$20
$30
$40
$50
$60
Irene (2011) Jeanne (2004) Frances(2004)
Rita (2005) Tornadoes/T-Storms (2011)
Tornadoes/T-Storms(2011)
Hugo (1989) Ivan (2004) Charley(2004)
Wilma (2005) Ike (2008) Sandy (2012) Northridge(1994)
9/11 Attack(2001)
Andrew (1992)Katrina (2005)
Superstorm Sandy could become 5th costliest event in
US insurance history
Hurricane Irene in 2011 ranks as the 12th most expense hurricane in US history
Includes Tuscaloosa, AL, tornado
Includes Joplin, MO, tornado
12 of the 16 most expensive events in US history have occurred over the past decade
(Insured Losses, 2012 Dollars, $ Billions)
Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.
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The Past Two Years Have Not Been Kind to Insurers or Utilities
Hurricane Irene: Aug. 27-29, 2011
Insured losses: $4.3 billion
Customers w/o power: 5 million
“Snowtober” Blizzard: Oct. 29, 2011
Insured losses: ~$1 billion
Customers w/o power: 2.7 million
Derecho: June 29, 2012
Insured losses: ~$1+ billion
Customers w/o power: 3.7 million
Superstorm Sandy: Oct. 29-30, 2012
Insured losses: $18.8 billion
Customers w/o power: 8.1 million
Source: Insurance Information Institute research.
Nu
mb
er
Geophysical (earthquake, tsunami, volcanic activity)
Climatological (temperatureextremes, drought, wildfire)
Meteorological (storm)
Hydrological (flood, mass movement)
Natural Disasters in the United States, 1980 – 2012
41
19
121
3
There were 184 natural disaster events in the US in 2012
Number of Events (Annual Totals 1980 – 2012)
Source: MR NatCatSERVICE
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(2012 Dollars, $ Billions)
Losses Due to Natural Disasters in the US, 1980–2012(Overall and Insured Losses)
Source: MR NatCatSERVICE Overall losses (in 2012 values) Insured losses (in 2012 values)
2012 was the 2nd most expensive year on record for
insured catastrophe losses in the US (incl. NFIP flood)
Approximately 57% of the overall cost of catastrophes in the US was covered by insurance in 2012
2012 LossesOverall : $101.1 billionInsured: $57.9 billion
42.0%
33.9%
7.3%
6.3%
4.7%3.8%
1.6%
Other (5), $1.40.4%
Inflation Adjusted US Catastrophe Losses by Cause of Loss 1992–20111
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Insured CAT losses from 1992-2011 totaled $384.3
billion, an average of $19.2 billion per year or $1.6
billion per month
1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2009 dollars.2. Excludes snow.3. Does not include NFIP flood losses4. Includes wildland fires5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.Source: ISO’s Property Claim Services Unit.
Wind losses by far cause the most catastrophe
losses, even if hurricanes / tropicalstorms are excluded
Tornado share of CAT losses is rising
Hurricanes & Tropical Storms
$161.3
Fires (4), $6.0
Tornadoes (2), $130.2
Winter Storms, $28.2
Terrorism, $24.4
Geological Events, $18.2
Wind/Hail/Flood (3), $14.8
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US Thunderstorm Loss Trends1980 – 2012
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Average thunderstorm losses are up 7-fold since
the early 1980s. The 5-year running
average loss is up sharply.
Hurricanes get all the headlines, but thunderstorms are consistent producers
of large scale loss. 2008-2012 are the most expensive years on record.
Thunderstorm losses in 2012 totaled $14.9 billion, the 2nd highest on record
Source: Property Claims Service, MR NatCatSERVICE
Top 16 Most Costly World Insurance Losses, 1970-2012*
$7.8 $8.1 $8.5 $8.7 $9.2 $9.6 $11.1 $13.4 $13.4 $13.4$18.8
$23.9 $24.6 $25.6
$38.6
$48.7
$0
$10
$20
$30
$40
$50
$60
Hugo(1989)
WinterStormDaria(1991)
ChileQuake(2010)
Ivan(2004)
Charley(2004)
TyphoonMirielle(1991)
Wilma(2005)
ThailandFloods(2011)
NewZealandQuake(2011)
Ike(2008)
Sandy(2012)
Northridge(1994)
WTCTerrorAttack(2001)
Andrew(1992)
JapanQuake,
Tsunami(2011)
Katrina(2005)
5 of the top 14 most expensive catastrophes in
world history have occurred within the past 3 years
(2010-2012)Superstorm Sandy is now the 6th costliest event in global insurance
history
2012 insured CAT losses totaled $60 billion; economic losses totaled $140
billion, according to Swiss Re
*PCS estimate as of 4/12/13.Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.
(Insured Losses, 2012 Dollars, $ Billions)
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Nu
mb
er
Geophysical (earthquake, tsunami, volcanic activity)
Climatological (temperatureextremes, drought, wildfire)
Meteorological (storm)
Hydrological (flood, mass movement)
Natural Disasters Worldwide, 1980 – 2013
41
19
121
3
There were 460 natural disaster events globally in the first half of 2013 and 905
for full-year 2012
Number of Events
Source: MR NatCatSERVICE
Outlook for 2013 Hurricane Season: Above Average Activity Expected
Hurricanes and Tropical Storms Drive Some of the Largest Losses Utilities Experience Each Year
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Top 12 Most Costly Hurricanes in US History
$4.4 $5.6 $5.6 $6.7 $7.8 $8.7 $9.2 $11.1 $13.4$18.8
$25.6
$48.7
$0
$10
$20
$30
$40
$50
$60
Irene(2011)
Jeanne(2004)
Frances(2004)
Rita(2005)
Hugo(1989)
Ivan(2004)
Charley(2004)
Wilma(2005)
Ike(2008)
Sandy*(2012)
Andrew(1992)
Katrina(2005)
Superstorm Sandy became the 3rd costliest hurricane in US insurance historyHurricane Irene became
the 12th most expensive hurricane in US history in 2011
10 of the 12 most costly hurricanes in insurance history occurred over the past 9 years (2004 - 2012)
*PCS estimate as of 4/12/13.Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.
(Insured Losses, 2012 Dollars, $ Billions)
Hurricane Sandy: Claim Payments to Policyholders, by State
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$9,600
$6,300
$700 $500 $410 $295 $292 $210 $103 $84 $58 $57 $55 $37 $36 $13 $0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
NY NJ PA CT MD VA OH MA RI DE WV NC NH DC ME VT
Insurers will pay at least $18.75 billion to 1.52 million policyholders across 15 states and DC in the wake of Superstorm Sandy
At $9.6 billion and $6.6 billion, respectively, NY and NJ suffered, by far, the largest
losses from Superstorm Sandy
TOTAL = $18.75 Billion*
($ Thousands)
Sources: Catastrophe loss data is for Catastrophe Serial No. 90 (Oct. 28 - 31, 2012) from PCS as of Jan. 18, 2013; Insurance Information Institute .
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Superstorm Sandy: Insured Loss by Claim Type*
Although commercial lines accounted for
only 13% of total claims, they account for 48%
of all claim dollars paid. In most hurricanes,
commercial lines accounts for about one third of insured losses.
Total Claim Value = $18.75 Billion*
($ Millions)
*PCS insured loss estimates as of 1/18/13. Catastrophe modeler estimates range up to $25 billion. All figures exclude losses paid by the NFIP.Source: PCS; Insurance Information Institute.
Auto$2,72915%
Commercial$9,02448%
Homeowner$6,99737%
Outlook for 2013 Hurricane Season: 75% Worse Than Average
Forecast ParameterMedian
(1981-2010) 2013F
Named Storms 12.0 18
Named Storm Days 60.1 95
Hurricanes 6.5 9
Hurricane Days 21.3 40
Major Hurricanes 2.0 4
Major Hurricane Days 3.9 9
Accumulated Cyclone Energy 92.0 165
Net Tropical Cyclone Activity 103% 175%
Source: Philip Klotzbach and Dr. William Gray, Colorado State University, June 2013, accessed at http://tropical.atmos.colostate.edu/forecasts/2013/jun2013/jun2013.pdf; Insurance Information Institute.
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Landfall Probabilities for 2013 Hurricane Season: Above Average
Average* 2013F
Entire US East & Gulf Coasts 52% 72%
US East Coast Including Florida Peninsula 31% 48%
Gulf Coast from Florida Panhandle to Brownsville 30% 47%
Caribbean 42% 61%
*Average over the past century.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, June 2013.
0.63
0.78
0.81
0.91
0.94
1
1.07
1.27
1.6
2.1
2.47
2.62
3.25
3.5
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00
Connecticut: Sandy (2012)Texas: Rita (2005)
New Jersey: Irene (2011)Katrina: Katrina (2005)New York: Irene (2011)
Mississippi: Katrina (2005)Alabama: Ike (2008)
Pennsylvania: Sandy (2012)Florida: Charley (2004)
New York: Sandy (2012)Texas: Ike (2008)
New Jersey: Sandy (2012)Florida: Wilma (2005)
Florida: Frances (2004)
Sources: US Dept. of Energy, Vertyx, AP analysis; Insurance Information Institute.
Selected Large Outages Associated with Tropical Systems, by State
Hurricanes and tropical storms have produced significant losses for
insurers in recent years, including Sandy in 2012
(Millions of Customers)
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$2,923.1$2,862.3
$1,175.3$849.6
$713.9$567.8
$293.5$239.3
$182.3$164.6$163.5
$118.2$106.7
$81.9$64.0$60.6$58.3
$17.3
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500
New YorkFloridaTexas
MassachusettsNew JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaAlabamaGeorgia
DelawareNew Hampshire
MississippiRhode Island
Maryland
Source: AIR Worldwide.
Total Value of Insured Coastal Exposure in 2012(2012 Dollars, $ Billions)
$2.923 trillion insured coastal exposure in New
York in 2012
In 2012, New York ranked as the #1 most exposed state to hurricane loss, overtaking Florida with $2.862
trillion. Texas is very exposed too, and ranked #3 with $1.175 trillionin insured coastal exposure
The insured value of all coastal property was $10.6 trillion in 2012, up 20% from $8.9 trillion in 2007 and up 48% from $7.2 trillion in 2004
0.8 1.1
1.1
0.1 0.
93.
60.
4 1.2
0.4 0.8 1.
30.
30.
4 0.7 1.
51.
00.
40.
4 0.7
1.8
1.1
0.6 1.
4 2.0
1.3 2.
00.
50.
50.
73.
01.
2 2.1
8.8
2.3
5.9
3.3
2.8
1.0
3.6
2.9
1.6
5.4
1.6
3.3
3.3
8.1
2.7
1.6
5.0
2.6 3.
48.
7 9.4
0
2
4
6
8
10
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
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
2010
2011
2012
E
Combined Ratio Points
Combined Ratio Points Associated with Catastrophe Losses 1960 – 2012*
The catastrophe loss component of private insurer losses has increased sharply in recent decades
Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO (1960-2011); A.M. Best (2012E) Insurance Information Institute.
Average CAT loss component of the combined ratio
by decade1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 7.20*
Catastrophe losses as a share of all losses reached a record high in 2012
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Federal Disaster Declarations Patterns: 1953-2013
Disaster Declarations Set New Records in Recent Years
1317 18 16 16
7 712 12
22 2025 25
11 1119
2917 17
48 46 4638
3022 25
4223
1524 21
3427 28
2311
3138
43 4532
3632
7544
6550
45 4549
5669
4852
6375
5981
9947
27
0
20
40
60
80
100
120
53 54 55 56 57 58 59 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 10 11 12 13
Number of Federal Disaster Declarations, 1953-2013*
*Through July 7, 2013.Source: Federal Emergency Management Administration; http://www.fema.gov/disasters; Insurance Information Institute.
The number of federal disaster declarations set a new record in 2011, with 99, shattering 2010’s
record 81 declarations
There have been 2,117 federal disaster
declarations since 1953. The average number of
declarations per year is 35 from 1953-2012, though that few haven’t been recorded since 1995
27 federal disasters were declared so far in 2013*
The number of federal disaster declarations is rising and set new records in 2010 and 2011. Superstorm Sandy produced 13 declarations in 2012 / 13.
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Severe Weather Report Update: 2013
Damage from Tornadoes, Large Hail and High Winds Keep Insurers Busy
Severe Weather Reports, 2012
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2012 annual summary.html#
There were 22,503 severe
weather reports in 2012; including
1,119 tornadoes; 7,033 “large hail”
reports and 14,351 high wind events
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Location of Tornado Reports 2013, through July 3
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2013 annual summary.html#; PCS.
There were 630 tornadoes through July 3,
causing extensive property damage in
several states
The storm system that spawned the
deadly EF-5 tornado on May 19 in Moore,
OK, produced insured losses of
$1.575 billion
Location of Large Hail Reports 2013, through July 3
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2013 annual summary.html#
Large hail reports were heavily concentrated
in the Plains states
There were 3,716 “large hail” reports through July 3, causing
extensive property and
vehicle damage
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Location of High Wind Reports 2013, through July 3
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2013 annual summary.html#
Wind damage reports were more heavily
concentrated in the Southeast
There were 7,371 “wind damage” reports through July 3, causing
extensive property damage
Severe Weather Reports 2013, through July 3
There were 11,717 severe weather reports through July 3; including 630 tornadoes;
3,716 “large hail” reports and 7,371 high wind events
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2013 annual summary.html#
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2013 count is running well below average
There were 1,897 tornadoes in the US in 2011 – far above
average, but well below 2008’s record
*Through July 6, 2013. Source: http://www.spc.noaa.gov/wcm/.
US Tornado Count, 2005-2013*
Investments: The New Reality
Investment Performance Is a Key Driver of Profitability
Depressed Yields Will Necessarily Impact Underwriting & Pricing
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$38.9$37.1 $36.7
$38.7 $39.6
$49.5
$52.3$54.6
$51.2
$47.1 $47.6$49.2
$47.7$45.5
$30
$35
$40
$45
$50
$55
$60
0 1 2 3 4 5 6 7 8 9 10 11 12 13*
Investment earnings are running 16.7% below their
2007 pre-crisis peak
Property / Casualty Insurance Industry Investment Income: 2000–2013*1
($ Billions)
1 Investment gains consist primarily of interest and stock dividends..*Estimate based on annualized actual Q1:2013 investment income of $11.385B.Sources: ISO; Insurance Information Institute.
Investment income fell in 2012 and is falling in 2013 due to persistently low interest rates, putting additional pressure on (re) insurance pricing
36
P/C Insurer Net Realized Capital Gains / Losses, 1990-2013:Q1
Insurers posted net realized capital gains in 2010, 2011 and 2012 following two years of realized losses during the financial crisis. Realized capital losses were a primary cause of
2008 / 2009’s large drop in profits and ROE.
($ Billions)
Sources: A.M. Best, ISO, Insurance Information Institute.
$2.9
$4.8 $9
.9
$9.8
$1.7 $6
.0 $9.2
$10.
8 $18.
0
$13.
0
$16.
2
$6.6
-$1.
2
$6.6 $9
.1
$9.7
$3.5 $8
.9
-$19
.8
-$7.
9
$5.9
$7.0
$6.2
$1.4
-$25-$20-$15-$10-$5$0$5
$10$15$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1213:Q1
Realized capital gains in 2012 were down 12% from 2011 and down 30% from 2007
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$35.4$42.8
$47.2$52.3
$58.0$51.9
$56.9
$44.4$36.0
$45.3$48.9
$59.4$55.7
$64.0
$31.7$39.2
$53.4 $56.2 $53.9
$12.8
$0$10$20$30$40$50$60$70
94 95 96 97 98 99 0 1 2 3 4 05* 6 7 8 9 10 11 12 13:Q1
Investment gains in 2012 were approximately 16% below their pre-crisis peak
Property / Casualty Insurance Industry Investment Gain: 1994–2013:Q11
($ Billions)
1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B; Sources: ISO; Insurance Information Institute.
Investment gains slipped in 2012 as low interest rates reduced investment income and realized investment gains fell; the financial crisis caused investment gains to fall by 50% in 2008.
Reduced investment earnings are pressuring rates / pricing.
$54.8$64.5
$69.1$74.8
$81.7
$71.5$75.9
$57.6
$45.9$56.5 $59.4
$69.8$63.4
$70.9
$33.8$42.0
$56.2 $57.4 $53.9 $50.0
$0$10$20$30$40$50$60$70$80$90
94 95 96 97 98 99 0 1 2 3 4 05* 6 7 8 9 10 11 12 13E
1994-2012 average yearly gain: $61 billion hasn’t been achieved since 2007
P/C Industry Investment Gains, Inflation-Adjusted: 1994–2013E1
($ Billions)
1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.*2005 figure includes special one-time dividend of $3.2B; 2013F figure is I.I.I. estimate for 2013:Q1, annualized.Sources: ISO; Insurance Information Institute.
Because the Federal Reserve Board aims to keep interest rates exceptionally low until the unemployment rate hits 6.5%—likely well into 2014—maturing bonds will be re-invested at still
low rates even once “tapering” begins
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US 10-Year Treasury Note YieldsA Long Downward Trend, 1990–2013*
1%
2%
3%
4%
5%
6%
7%
8%
9%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Yields on 10-Year US Treasury Notes have been essentially below
5% for a full decade
Yields on 10-Year US Treasury Notes recently plunged to record modern-era lows and remain low by historical
standards
*Monthly, through June 2013. Note: Recessions indicated by gray shaded columns.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come
US Treasury Security YieldsA Long Downward Trend, 1990–2013*
0%1%2%3%4%5%6%7%8%9%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13Recession 2-Yr Yield 10-Yr Yield
Yields on 10-Year US Treasury Notes have been essentially below
5% for a full decade
US Treasury security yields
recently plunged to record lows
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come
*Monthly, constant maturity, nominal rates, through June 2013.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.
8/1/2013
21
0.03% 0.05% 0.09% 0.14% 0.33%0.58%
1.20%1.71%
2.30%
3.07%3.40%
4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00% 5.19%
0%
2%
4%
6%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
June 2013 Yield Curve Pre-Crisis (July 2007)
Treasury Yield Curves Pre-Crisis (July 2007) vs. June 2013
Treasury yield curve remains near its most depressed level in at least 45 years. Investment income is falling as a result. If as Fed I “tapers” rates are unlikely to
return to pre-crisis levels anytime soon
The Fed Is actively signaling that it Is determined to keep rates low until unemployment drops below 6.5% or until inflation expectations exceed 2.5%; low rates add to pricing pressure for insurers
Source: Federal Reserve Board of Governors; Insurance Information Institute.
16.0%
15.2%
15.7%
16.2%
16.3%
15.2%
16.5%
29.5%
30.0%
32.4%
36.2%
39.5%
41.4%
40.4%
34.1%
33.8%
31.2%
28.7%
26.7%
26.8%
27.6%
13.1%
12.9%
12.7%
11.7%
11.1%
10.3%
9.8%
7.4%
8.1%
8.1%
7.3%
6.4%
6.3%
5.7%
0% 20% 40% 60% 80% 100%
2006
2007
2008
2009
2010
2011
2012
Under 1 year
1-5 years
5-10 years
10-20 years
Over 20 years
Distribution of Bond Maturities,P/C Insurance Industry, 2003-2012
The main shift over these years has been from bonds with longer maturities to bonds with shorter maturities. Since 2006, the industry trimmed its holdings of bonds with maturities greater than 10 years from 20.5% in 2006 to 15.5% in
2012 and then trimmed bonds in the 5-10-year category from 34.1% in 2006 to 27.6% in 2012) . Falling average maturity of the P/C industry’s bond portfolio is contributing to a drop in investment income along with lower yields.
Sources: SNL Financial; Insurance Information Institute.
8/1/2013
22
43
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
Lower investment earnings place a greater burden on underwriting and pricing discipline*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.
-1.8
%
-1.8
%
-2.0
%
-3.6
% -1.9
%
-2.1
%
-3.1
%
-3.3
%
-3.3
%
-3.7
%
-4.3
%
-5.2
%
-5.7
%
-7.3
%-8%
-6%
-4%
-2%
0%
Per
sona
l Lin
es
Pvt
Pas
s A
uto
Per
s P
rop
Com
mer
cial
Com
ml A
uto
Cre
dit
Com
m P
rop
Com
m C
as
Fid
elity
/Sur
ety
War
rant
y
Sur
plus
Lin
es
Med
Mal
WC
Rei
nsur
ance
**$4.9 $5.1
$3.0 $3.2$2.4 $2.9 $2.8 $2.6
$1.5$1.9
$3.3 $3.4
$1.3
$2.5 $2.3$3.0
$3.8
$2.8
$3.8
-$0.4
$1.6
$3.2
$2.1$1.5
$1.9
-1.00.01.02.03.04.05.06.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F14F
Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the commodity
bubble reduced inflationary pressures in 2009/10
Annual Inflation Rates, (CPI-U, %),1990–2014FAnnual Inflation Rates (%)
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 7/13 (forecasts).
The slack in the US economy suggests that inflationary pressures should remain subdued for an extended period of times. Energy, health care and commodity prices, plus US debt burden,
remain longer-run concerns.
Inflationary expectations remain quite low, allowing the
Fed to continue its QE3 program into 2014
8/1/2013
23
Workers’ Compensation Operating Environment
Rising Medical and Indemnity Lost Time Claim Severities Continue to Rise
Persistently Low Interest Rates Have a Larger Impact on Long-Tail Lines Like WC
$102.0
$97.0$100.0$101.0
$107.0
$115.3$118.2
$121.7
$112.6$108.6
$105.1$102.7
$98.5
$103.5$104.5
$110.6
$115.0$115.0
$109.0
$80
$90
$100
$110
$120
$130
94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 12
WC showed a better-than-expected improvement for private carriers in 2012
Workers’ Compensation Combined Ratio1994–2012P
Sources: A.M. Best (1994-2009); NCCI (2010-2012P) and are for private carriers only; Insurance Information Institute.
Workers’ comp results began to improve in 2012. Underwriting results deteriorated markedly from 2007-2010 / 11 and were the worst they had been in a decade.
8/1/2013
24
$8.1
$8.2
$8.1
$8.8
$9.2
$9.9
$10.9
$11.8
$13.1
$14.0
$15.9
$17.3
$18.7
$19.7
$21.2
$22.3
$23.7
$25.3
$26.4
$26.7
$27.7
$28.5
+6.8%+1.3% 2.1% +9.0%+5.1%+7.4%+10.1%+8.3%+10.6%+7.3%
+13.5%+8.8%
+7.7%+5.4%+7.8%+5.4%
+6.3%+6.6%+4.1%+1.4%+3.6% +3%
0.0
5.0
10.0
15.0
20.0
25.0
30.0
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12p
Workers’ Compensation Medical SeverityModerate Increase in 2012Average Medical Cost per Lost-Time Claim
2012p: Preliminary based on data valued as of 12/31/2012.1991-2011: Based on data through 12/31/2011, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.
Medical Claim Cost ($000s)
Accident Year
Cumulative change = 252%(1991-2012p)
Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002–2011: +5.7%
Annual Change 1991–1993: -1.7%Annual Change 1994–2001: +7.3%Annual Change 2002–2011: +3.2%
$9.8
$9.5
$9.2
$9.7
$9.8
$10.4
$11.2
$12.2
$13.5
$14.8
$16.2
$16.7
$17.5
$17.7
$18.2
$19.2
$20.4
$22.2
$22.4
$21.7
$22.2
$22.4
1.0% -3.1%-2.8% 4.9% 1.7% 5.9% 7.7%9.0%
10.1%10.1%
9.2% 3.1% 4.6% 1.0% 3.1%5.6%
6.2%8.8% 0.7% -3.0% 2.2% 1.0%
0.0
5.0
10.0
15.0
20.0
25.0
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12p
Workers’ Comp Indemnity Claim Costs: Small Increase in 2012Average Indemnity Cost per Lost-Time Claim
2012p: Preliminary based on data valued as of 12/31/2012.1991-2011: Based on data through 12/31/2011, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.
Indemnity claim cost ($ 000s)
Accident Year
Average indemnity costs per claim were up 1%
in 2012 to $22,400
8/1/2013
25
p PreliminarySource:1990–20102p Private Carriers, Annual Statement Data, NCCI.1996–2012p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual StatementsState Funds available for 1996 and subsequent
31.0
31.3
29.8
30.5
29.1
26.3
25.2
24.2
23.3
22.3
25.0
26.1
29.2
31.1
34.7
37.8
38.6
37.6
33.8
30.3
29.9
32.3
35.2
31.0 31.3 29.8 30.5 29.126.3 28.2 26.9 25.9 25.0
28.632.1
37.742.3
46.5 47.8 46.544.3
39.334.6 33.8
36.439.6
0.0
10.0
20.0
30.0
40.0
50.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12p
Private Carriers ($B) State Funds ($B)
Workers’ Compensation Premium: Second Consecutive Year of IncreaseNet Written Premium($ Billions)
Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002–2011: +5.7%
Private carrier NWP growth was +9.0% in 2012, as pricing reacts to poor
underwriting results and low interest rates
Cyber Risk
Cyber Risk is a Rapidly Emerging Exposure for Businesses Large and Small in Every Industry
NEW III White Paper: www.iii.org/assets/docs/pdf/paper_CyberRisk_2013.pdf
8/1/2013
26
Data Breaches 2005-2013 By Number of Breaches and Records Exposed
51
157
321
446
656
498
662
419 447
66.9
19.1
127.7
35.7
222.5
16.222.9 17.3
0306090120150180210240
0100200300400500600700
2005 2006 2007 2008 2009 2010 2011 2012# Data Breaches # Records Exposed (Millions)
# Data Breaches / Millions of Records Exposed
*2013 figures as of March 19, 2013.Source: Identity Theft Resource Center
The total number of data breaches and number of records exposed fluctuates from year to year and over time
2012 Data Breaches By Category, By Number of Records Exposed
Source: Identity Theft Resource Center, http://www.idtheftcenter.org/ITRC%20Breach%20Report%202012.pdf.
Government / Military7.7 million (44.4%)
Medical / Healthcare2.2 million (12.9%)
Banking / Credit / Financial 470,048 (2.7%)
Educational2.3 million (13.3%)
Business4.6 million (26.7%)
Government / military and business organizations accounted for the majority of records exposed by data breaches during 2012
8/1/2013
27
Main Causes of Data Breach
Source: 2011 Cost of Data Breach Study: United States, Ponemon Institute, March 2012
Negligent employees and malicious attacks are most often the cause of the data breach. Some 39 percent of incidents involve a negligent employee or contractor, while 37 percent concern a malicious or criminal attack.
Negligence39%
System Glitch 24%
Malicious or Criminal Attack
37%
$5.50
$7.20
$6.80
$6.70
$0 $1 $2 $3 $4 $5 $6 $7 $8 $9 $10
2011
2010
2009
2008
*Findings of this benchmark study pertain to the actual data breach experiences of 49 U.S. companies from 14 different industry sectors, all of which participated in the 2011 study. Total breach costs include: lost business resulting from diminished trust or confidence of customers ;costs related to detection, escalation, and notification of the breach; and ex-post response activities, such as credit report monitoring. Source: 2011 Annual Study: U.S. Cost of a Data Breach, the Ponemon Institute.
Average Organizational Cost of a Data Breach, 2008-2011*
Government / military and business organizations accounted for the majority of records exposed by data breaches during 2012
($ Millions)
8/1/2013
28
The Ever-Shifting Legal Liability & Tort Environment
Mixed Experience Depending on the Age of Claims
Over the Last Three Decades, Total Tort Costs as a % of GDP Appear Somewhat Cyclical, 1980-2013E
56
1.50%
1.75%
2.00%
2.25%
2.50%
$0
$50
$100
$150
$200
$250
$300
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 1011E12E13E
Tort C
osts a
s % o
f GD
PTo
rt S
yste
m C
ost
s
Tort Sytem Costs Tort Costs as % of GDP
Tort costs in dollar terms have remained high but relatively stable since the mid-2000s., but
are down substantially as a share of GDP
Deepwater Horizon Spike in
2010
1.68% of GDP in 2013
2.21% of GDP in 2003 = pre-tort
reform peak
($ Billions)
Sources: Towers Watson, 2011 Update on US Tort Cost Trends, Appendix 1A
8/1/2013
29
1.66%
1.19%1.05%
0.78% 0.77%0.68% 0.67% 0.63% 0.56%
0.46% 0.43% 0.42% 0.40%
0.0%
0.3%
0.6%
0.9%
1.2%
1.5%
1.8%
US
Can
ada
UK
Irel
and
Italy
Ger
man
y
Spa
in
Eur
ozon
e
Fra
nce
Den
mar
k
Por
tuga
l
Bel
gium
Net
herla
nds
Liability Costs as a Fraction of GDP, 2011
The US has by far the most costly tort system in the
industrialized world. The very long-tailed nature of many
liabilities is one reason.
Sources: US Chamber of Commerce; Insurance Information Institute.
$2.3
-$0.4 -$0.6 -$0.7-$1.1 -$1.3
-$4.6
-$0.5-$0.9
-$4.2-$5-$4-$3-$2-$1$0$1$2$3
Prior to2003
3 4 5 6 7 8 9 10 11
Which Accident Years Generated Reserve Changes in 2012: Old Claims Still a Problem
Reserves for older accident years (claims occurring many years ago) are actually increasing in cost—requiring insurers to add $2.3 billion
to their reserves in 2012 alone. Old environmental claims are contributing to this deterioration.
Sources: SNL Financial; Insurance Information Institute.
($ Billions)
Insurance liabilities, especially in areas such as environmental claims, can be very long-lived and can develop adversely even decades later
8/1/2013
30
50
100
150
200
250
300
1933
1935
1937
1939
1941
1943
1945
1947
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
*
1933: $343 million
2011 (est.): $253 billion (770 times more than 1933)
A clear flattening of tort cost has occurred in recent years after 7 decades of increases
Claims that occurred in the “Tort Era” can and
still do flare up and adversely impact
insurers today, decades later
Tort Costs: Rose for Seven Decades: Old Claims Can Be ProblematicGrowth in Tort Costs, Current (Nominal) Dollars,1933-2011($ Millions)
* ProjectedSources: Trends in Tort Costs, Towers Watson; Insurance Information Institute.
-15.0%
-5.0%
5.0%
15.0%
25.0%
35.0%
1934
1935
1936
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
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
2010
2011
(es
t.)
Sources: Trends in Tort Costs, Towers Perrin, Insurance Information Institute.
Explosion in Tort Costs Lasted for Much of the 20th CenturyAnnual Change in Inflation-Adjusted Tort Costs
End of WWII The postwar era: In 40 years of 43, tort costs rose faster than inflation
Mid-80s liability crisis
Decline in 6 of last 7
DeepwaterHorizon
8/1/2013
31
2.00%
13.50%
11.60%
9.90%
11.90% 11.80%
3.20% 3.50%
1.10%
11.20%
6.00%7.00%
10.40%
7.60%
5.50%4.30%
0.0%
4.0%
8.0%
12.0%
16.0%
1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s
Tort Costs Nominal GDP
From the 1940s through the 1980s, Tort Costs Grew Much Faster than GDP Some older liability
claims from the era of explosive tort costs
continue to suffer from adverse development,
requiring insurers to add to their reserves
Sources: Trends in Tort Costs, Towers Perrin, Insurance Information Institute.
136%
66%
47%
71%
19%10%
-10%-20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
160.0%
1950s 1960s 1970s 1980s 1990s 2000s 2010s
Change in Tort Costs by Decade, Even After Adjusting for Inflation, Still Showed Rapid Growth
Liability claims from decades past grew with explosive
momentum and still increase in cost today
Sources, Trends in Tort Costs, Towers Watson, Insurance Information Institute.
Change from Prior Decade
8/1/2013
32
Energy Supply and Demand
The World Will Remain Energy Hungry and Demand Will Increase Steadily for Decades on a Global Scale Utilizing All Fuel Sources
Global Electricity Generation by Fuel Source, 2010-2040
64
Electricity demand will
continue to rise on a global scale
Billions of kWH
Source: Energy Information Administration, International Energy Outlook 2013.
8/1/2013
33
Thank you for your time and your attention!
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