Robert P. Hartwig , Ph.D., CPCU President & Economist Insurance Information Institute
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Transcript of Robert P. Hartwig , Ph.D., CPCU President & Economist Insurance Information Institute
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 & EconomistInsurance Information Institute
P/C Insurance Industry Financial Overview
Industry Performance Has Been Affected by High CAT Losses and Low Interest Rates
P/C Net Income after Taxes
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$1
4,1
78
$5
,84
0 $1
9,3
16
$1
0,8
70
$2
0,5
98
$2
4,4
04 $3
6,8
19
$3
0,7
73
$2
1,8
65
$2
0,5
59
-$6,970
$3
,04
6
$3
0,0
29
$3
8,5
01
$4
4,1
55
$6
5,7
77
$6
2,4
96
$3
,04
3
$2
8,6
72
$3
5,2
04
$1
9,4
56 $
33
,52
2
• 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 rate 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 Was:Investment Impact on ROEs
4
1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 201280
85
90
95
100
105
110
0%
3%
6%
9%
12%
15%
18%
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%
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
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
12-5%
0%
5%
10%
15%
20%
25%
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%
10 Years10 Years
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
U.S. Catastrophe Losses in Recent Years Have Been Very High and Vulnerability Is Rising Globally
U.S. 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)
2012 Was the 3rd Highest Year on Record for Insured Losses in U.S. History on an Inflation-Adj. Basis. 2011 Losses Were the
6th Highest. YTD 2013 Running Below Average but Q3 Is Typically the Costliest Quarter.
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*$0
$20
$40
$60
$80
$1
4.0
$4
.8
$8
.0
$3
7.8
$8
.8
$2
6.4
$1
2.6
$1
1.0
$3
.8 $1
4.3
$1
1.6
$6
.1
$3
4.7
$7
.6 $1
6.3
$3
3.7
$7
3.4
$1
0.5
$7
.5
$2
9.2
$1
1.5
$1
4.4
$3
3.6
$3
5.0
$7
.9
Top 16 Most Costly Disasters in U.S. History
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)
$0
$10
$20
$30
$40
$50
$60
$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
$48.7Hurricane 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.
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
50
100
150
200
250
300
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
There were 184 natural disaster events in the US
in 2012
Number of Events (Annual Totals 1980 – 2012)
Source: MR NatCatSERVICE
(2012 Dollars, $ Billions)
Losses Due to Natural Disasters in the US, 1980–2012(Overall and Insured Losses)
Source: MR NatCatSERVICE
20
40
60
80
100
120
140
160
180
200
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
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 : $101.1B
Insured: $57.9B
13
42.0%
33.9%
7.3%
6.3%
4.7%3.8%
1.6%
Other (5), $1.40.4%
Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1992–20111
Insured cat losses from 1992-2011
totaled $384.3B, an average of $19.2Bper
year or $1.6B 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 are by far cause the most
catastrophe losses, even
if hurricanes/TS 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
U.S. Thunderstorm Loss Trends, 1980 – 2012
14
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*
Hugo (1989)
Winter Storm Daria (1991)
Chile Quake (2010)
Ivan (2004)
Charley (2004)
Typhoon Mirielle (1991)
Wilma (2005)
Thailand Floods (2011)
New Zealand Quake (2011)
Ike (2008)
Sandy (2012)
Northridge
(1994)
WTC Terror Attack (2001)
Andrew (1992)
Japan Quake,
Tsunami (2011)
Katrina (2005)
$0
$10
$20
$30
$40
$50
$60
$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
5 of the top 14 most expensive catastrophes
in world history have occurred within the past 3 years (2010-
2012)Hurricane Sandy is now the 6th costliest event in global
insurance history
2012 insured CAT Losses totaled $60B; Economic losses totaled $140B, 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)
200
400
600
800
1 000
1 200
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
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
Top 12 Most Costly Hurricanes in U.S. History
Irene (2011)
Jeanne (2004)
Frances (2004)
Rita (2005)
Hugo (1989)
Ivan (2004)
Charley (2004)
Wilma (2005)
Ike (2008)
Sandy* (2012)
Andrew (1992)
Katrina (2005)
$0
$10
$20
$30
$40
$50
$60
$4.4 $5.6 $5.6 $6.7 $7.8 $8.7 $9.2 $11.1 $13.4$18.8
$25.6
$48.7
Hurricane Sandy became
the 3rd costliest hurricane
in US insurance history
Hurricane 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
21
NY NJ PA CT MD VA OH MA RI DE WV NC NH DC ME VT$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$9,600
$6,300
$700 $500 $410 $295 $292 $210 $103 $84 $58 $57 $55 $37 $36 $13
Insurers Will Pay at Least $18.75 Billion to 1.52 Million Policyholders across 15 States
and DC in the Wake of Hurricane Sandy
At $9.6B and $6.6B, respectively, NY and NJ suffered, by far, the largest losses from Hurricane
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 .
22
Hurricane 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
1/3 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$2,729
15%
Commercial$9,024
48%
Homeowner$6,997
37%
Outlook for 2013 Hurricane Season: 75% Worse Than Average
Forecast ParameterMedian
(1981-2010) 2013FNamed 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.
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.
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)
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.000.63
0.780.81
0.910.94
11.07
1.271.6
2.12.47
2.623.25
3.5
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 with Sandy in
2012
(Millions of Customers)
New YorkFloridaTexas
MassachusettsNew Jersey
ConnecticutLouisiana
S. CarolinaVirginia
MaineNorth Carolina
AlabamaGeorgia
DelawareNew Hampshire
MississippiRhode Island
Maryland
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500
$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
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
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012E
0
2
4
6
8
10
0.8 1.1
1.1
0.1 0
.93.6
0.4 1
.20.4 0.8 1
.30.3 0.4 0.7 1
.51.0
0.4
0.4 0.7
1.8
1.1
0.6 1
.4 2.0
1.3 2
.00.5
0.5 0.7
3.0
1.22.1
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
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.
Avg. 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
Federal Disaster Declarations Patterns: 1953-2013
Disaster Declarations Set New Records in Recent Years
53
55
57
59
61
63
65
67
69
71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
11
13
0
20
40
60
80
100
12013 17 18
16
16
7 712
12
22
20 2
525
11
11
19
29
17
17
48
46
46
38
30
22 25
42
23
15
24
21
34
27 28
23
11
31 3
8 43 45
32 36
32
75
44
65
50
45
45 49 5
669
48 52
63
75
59
81
99
47
27
Number of Federal Disaster Declarations, 1953-2013*
The Number of Federal Disaster Declarations Is Rising and Set New Records in 2010 and 2011. Hurricane Sandy Produced 13 Declarations in 2012/13.
*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 there few haven’t been
recorded since 1995.
27 federal disasters were declared so far in 2013*
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
Location of Tornado Reports: through July 3, 2013
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: through July 3, 2013
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
Location of High Wind Reports: through July 3, 2013
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: through July 3, 2013
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#
38
2013 count is running well
below average
There were 1,897 tornadoes in the U.S. in 2011 far above average,
but well below 2008’s record
*Through July 6, 2013. Source: http://www.spc.noaa.gov/wcm/.
U.S. Tornado Count, 2005-2013*
Investments: The New Reality
Investment Performance Is a Key Driver of Profitability
Depressed Yields Will Necessarily Impact Underwriting & Pricing
0 1 2 3 4 5 6 7 8 9 10 11 12 13*$30
$35
$40
$45
$50
$55
$60
$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$45.5
Investment earnings are running 16.7% below their
2007 pre-crisis peak
-16.7%*
Property/Casualty Insurance Industry Investment Income: 2000–2013*1
($ Billions)
1 Investment gains consist primarily of interest and stock dividends..*Estimate based on annualized actual Q1:2013 investment income of $11.385B.Sources: ISO; Insurance Information Institute.
Investment Income Fell in 2012 and is Falling in 2013 Due to Persistently Low Interest Rates, Putting Additional Pressure on (Re) Insurance Pricing
41
P/C Insurer Net Realized Capital Gains/Losses, 1990-2013:Q1
Insurers Posted Net Realized Capital Gains in 2010, 2011 and 2012 Following Two Years of Realized Losses During the Financial Crisis. Realized Capital
Losses Were a Primary Cause of 2008/2009’s Large Drop in Profits and ROE
($ Billions)
Sources: A.M. Best, ISO, Insurance Information Institute.
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13:Q1
-$25
-$15
-$5
$5
$15
$2
.9
$4
.8 $9
.9
$9
.8
$1
.7 $6
.0 $9
.2
$1
0.8 $1
8.0
$1
3.0
$1
6.2
$6
.6
-$1
.2
$6
.6
$9
.1
$9
.7
$3
.5 $8
.9
-$1
9.8
-$7
.9
$5
.9
$7
.0
$6
.2
$1
.4
Realized capital gains in 2012 were down 12% from 2011 and
down 30% from 2007
94 95 96 97 98 99 0 1 2 3 4 05* 6 7 8 9 10 11 12 13:Q1
$0$10$20$30$40$50$60$70
$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
$12.8Investment gains in 2012 were
approximately 16% below their pre-crisis peak
-16%*
Property/Casualty Insurance Industry Investment Gain: 1994–2013:Q11
($ 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.
94 95 96 97 98 99 0 1 2 3 4 05* 6 7 8 9 10 11 12 13E$0
$20
$40
$60
$80
$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
1994-2012 average yearly gain: $61B hasn’t been achieved since
2007
-24%*
P/C Industry Investment Gains, Inflation-Adjusted: 1994–2013E1
($ 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.
U.S. 10-Year Treasury Note Yields:A Long Downward Trend, 1990–2013*
'90'90'90'90'90'90'90'90'90'90'90'90'91'91'91'91'91'91'91'91'91'91'91'91'92'92'92'92'92'92'92'92'92'92'92'92'93'93'93'93'93'93'93'93'93'93'93'93'94'94'94'94'94'94'94'94'94'94'94'94'95'95'95'95'95'95'95'95'95'95'95'95'96'96'96'96'96'96'96'96'96'96'96'96'97'97'97'97'97'97'97'97'97'97'97'97'98'98'98'98'98'98'98'98'98'98'98'98'99'99'99'99'99'99'99'99'99'99'99'99'00'00'00'00'00'00'00'00'00'00'00'00'01'01'01'01'01'01'01'01'01'01'01'01'02'02'02'02'02'02'02'02'02'02'02'02'03'03'03'03'03'03'03'03'03'03'03'03'04'04'04'04'04'04'04'04'04'04'04'04'05'05'05'05'05'05'05'05'05'05'05'05'06'06'06'06'06'06'06'06'06'06'06'06'07'07'07'07'07'07'07'07'07'07'07'07'08'08'08'08'08'08'08'08'08'08'08'08'092/29/2009'08'09'09'09'09'09'09'09'09'09'10'10'10'10'10'10'10'10'10'10'10'10'11'11'11'11'11'11'11'11'11'11'11'11'122/30/2012'12'12'12'12'12'12'12'12'12'12'132/30/2013'13'13'13'131%
2%
3%
4%
5%
6%
7%
8%
9%
Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a
full decade.
Yields on 10-Year U.S. 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.
U.S. Treasury Security Yields:A Long Downward Trend, 1990–2013*
'90'90'90'90'90'90'90'90'90'90'90'90'91'91'91'91'91'91'91'91'91'91'91'91'92'92'92'92'92'92'92'92'92'92'92'92'93'93'93'93'93'93'93'93'93'93'93'93'94'94'94'94'94'94'94'94'94'94'94'94'95'95'95'95'95'95'95'95'95'95'95'95'96'96'96'96'96'96'96'96'96'96'96'96'97'97'97'97'97'97'97'97'97'97'97'97'98'98'98'98'98'98'98'98'98'98'98'98'99'99'99'99'99'99'99'99'99'99'99'99'00'00'00'00'00'00'00'00'00'00'00'00'01'01'01'01'01'01'01'01'01'01'01'01'02'02'02'02'02'02'02'02'02'02'02'02'03'03'03'03'03'03'03'03'03'03'03'03'04'04'04'04'04'04'04'04'04'04'04'04'05'05'05'05'05'05'05'05'05'05'05'05'06'06'06'06'06'06'06'06'06'06'06'06'07'07'07'07'07'07'07'07'07'07'07'07'08'08'08'08'08'08'08'08'08'08'08'08'092/29/2009'08'09'09'09'09'09'09'09'09'09'10'10'10'10'10'10'10'10'10'10'10'10'11'11'11'11'11'11'11'11'11'11'11'11'122/30/2012'12'12'12'12'12'12'12'12'12'12'13'13'13'13'136/31/20130%
2%
4%
6%
8%
Recession 2-Yr Yield 10-Yr Yield
Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a
full decade.
U.S. 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.
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y0%
2%
4%
6%
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%
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.
2006
2007
2008
2009
2010
2011
2012
0% 20% 40% 60% 80% 100%
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%
Under 1 year1-5 years5-10 years10-20 yearsOver 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.
50
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.
Pe
rso
na
l L..
.
Pvt
Pa
ss .
..
Pe
rs P
rop
Co
mm
erc
ial
Co
mm
l A
uto
Cre
dit
Co
mm
Pro
p
Co
mm
Ca
s
Fid
elity
/Su
...
Wa
rra
nty
Su
rplu
s L
...
Me
d M
al
WC
Re
insu
ran
...
-8%
-6%
-4%
-2%
0%
-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
%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F
14F
-1.00.01.02.03.04.05.06.0
$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
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, %),1990–2014F
Annual Inflation Rates (%)
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 7/13 (forecasts).
The slack in the U.S. economy suggests that inflationary pressures should remain subdued for an extended period of times. Energy, health care and
commodity prices, plus U.S. debt burden, remain longer-run concerns
Inflationary expectations remain quite low,
allowing the Fed to continue its QE3 program
into 2014
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
94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 12$80
$90
$100
$110
$120
$130
$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
WC showed a better-than-expected improvement for private carriers in
2012
Workers Compensation Combined Ratio: 1994–2012P
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.
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12p0.0
5.0
10.0
15.0
20.0
25.0
30.0
$8
.1
$8
.2
$8
.1
$8
.8
$9
.2
$9
.9
$1
0.9
$1
1.8
$1
3.1
$1
4.0
$1
5.9
$1
7.3
$1
8.7
$1
9.7
$2
1.2
$2
2.3
$2
3.7
$2
5.3
$2
6.4
$2
6.7
$2
7.7
$2
8.5
+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%
Workers Compensation Medical SeverityModerate Increase in 2012
Average 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%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12p0.0
5.0
10.0
15.0
20.0
25.0
$9
.8
$9
.5
$9
.2
$9
.7
$9
.8
$1
0.4
$1
1.2
$1
2.2
$1
3.5
$1
4.8
$1
6.2
$1
6.7
$1
7.5
$1
7.7
$1
8.2
$1
9.2
$2
0.4
$2
2.2
$2
2.4
$2
1.7
$2
2.2
$2
2.4
1.0% -3.1%-2.8% 4.9% 1.7% 5.9% 7.7%9.0%
10.1%10.1%
9.2% 3.1% 4.6% 1.0% 3.1%5.6%
6.2%8.8% 0.7% -3.0% 2.2% 1.0%
Workers Comp Indemnity Claim Costs: Small Increase in 2012
Average Indemnity Cost per Lost-Time Claim
2012p: Preliminary based on data valued as of 12/31/2012.1991-2011: Based on data through 12/31/2011, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.
Indemnity Claim Cost ($ 000s)
Accident Year
Average indemnity costs per claim were up 1% in
2012 to $22,400
p PreliminarySource:1990–20102p Private Carriers, Annual Statement Data, NCCI.1996–2012p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual StatementsState Funds available for 1996 and subsequent
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12p0.0
10.0
20.0
30.0
40.0
50.0
31
.0
31
.3
29
.8
30
.5
29
.1
26
.3
25
.2
24
.2
23
.3
22
.3
25
.0
26
.1
29
.2
31
.1
34
.7
37
.8
38
.6
37
.6
33
.8
30
.3
29
.9
32
.3
35
.2
31.0 31.3 29.8 30.5 29.126.3 28.2 26.9 25.9 25.0
28.632.1
37.742.3
46.5 47.8 46.544.3
39.334.6 33.8
36.439.6
Private Carriers ($B) State Funds ($B)
Workers Compensation Premium: Second Consecutive Year of Increase
Net Written Premium($ Billions)
Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002–2011: +5.7%
Pvt. 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: http://www.iii.org/assets/docs/pdf/paper_CyberRisk_2013.pdf
Data Breaches 2005-2013, By Number of Breaches and Records Exposed
65
2005 2006 2007 2008 2009 2010 2011 20120
100200300400500600700
0
60
120
180
240
157
321
446
656
498
662
419 447
66.9
19.1
127.7
35.7
222.5
16.2 22.9 17.3
# 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.
Govt/Military7.7 million (44.4%)
Medical/Healthcare
2.2 million (12.9%)
Banking/Credit/Financial470,048
(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.
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%
2011
2010
2009
2008
$0 $2 $4 $6 $8 $10
$5.50
$7.20
$6.80
$6.70
*Findings of this benchmark study pertain to the actual data breach experiences of 49 U.S. companies from 14 different industry sectors, all of which participated in the 2011 study. Total breach costs include: lost business resulting from diminished trust or confidence of customers ;costs related to detection, escalation, and notification of the breach; and ex-post response activities, such as credit report monitoring. Source: 2011 Annual Study: U.S. Cost of a Data Breach, the Ponemon Institute.
Average Organizational Cost of a Data Breach, 2008-2011*
Government/Military and Business organizations accounted for the majority of records exposed by data breaches during 2012.
($ Millions)
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
71
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
11E
12E
13E
$0
$50
$100
$150
$200
$250
$300
1.50%
1.75%
2.00%
2.25%
2.50%
Tort Sytem Costs Tort Costs as % of GDP
Tort
Syst
em
Cost
sTort C
osts a
s % o
f GD
P
Tort costs in dollar terms have remained high but relatively stable
since the mid-2000s., but are down substantially as a share of GDP
Deepwater Horizon Spike
in 2010
1.68% of GDP in 2013
2.21% of GDP in 2003 = pre-
tort reform peak
($ Billions)
Sources: Towers Watson, 2011 Update on US Tort Cost Trends, Appendix 1A
US
Canada
UK
Irela
nd
Italy
Germ
any
Spain
Euro
zone
France
Denm
ark
Port
ugal
Belg
ium
Neth
erl
ands0.0%
30.0%
60.0%
90.0%
120.0%
150.0%
180.0% 166.00%
119.00%105.00%
78.00% 77.00%68.00% 67.00% 63.00% 56.00%
46.00% 43.00% 42.00% 40.00%
Liability Costs as a Fraction of GDP, 2011
There 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.
Prior to 2003
3 4 5 6 7 8 9 10 11-$5
-$3
-$1
$1
$3 $2.3
-$0.4 -$0.6 -$0.7-$1.1
-$1.3
-$4.6
-$0.5-$0.9
-$4.2
Which Accident Years Generated Reserve Changes in 2012: Old Claims Still a ProblemReserves 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
19
33
19
35
19
37
19
39
19
41
19
43
19
45
19
47
19
49
19
51
19
53
19
55
19
57
19
59
19
61
19
63
19
65
19
67
19
69
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
100
200
300
1933: $343 million
2011 (est.): $253 billion (770 times more than 1933)
A clear flattening of tort cost has
occurred in recent years after 7 decades of increases
Claims that occurred in the “Tort Era” can and still do flare up
and adversely impact insurers today, decades later
Tort Costs: Rose for Seven Decades: Old Claims Can Be Problematic
Growth in Tort Costs, Current (Nominal) Dollars,1933-2011($ Millions)
* ProjectedSources: Trends in Tort Costs, Towers Watson; Insurance Information Institute.
19
34
19
36
19
38
19
40
19
42
19
44
19
46
19
48
19
50
19
52
19
54
19
56
19
58
19
60
19
62
19
64
19
66
19
68
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
20
06
20
08
20
10
-15.0%
-5.0%
5.0%
15.0%
25.0%
35.0%
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
Deepwater Horizon
1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s0.0%
4.0%
8.0%
12.0%
16.0%
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%
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.
1950s 1960s 1970s 1980s 1990s 2000s 2010s-20.0%
0.0%20.0%40.0%60.0%80.0%
100.0%120.0%140.0%160.0%
136%
66%
47%
71%
19%10%
-10%
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
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
79
Electricity demand will continue to
rise on a global scale
Billions of kWH
Source: Energy Information Administration, International Energy Outlook 2013.
Thank you for your timeand your attention!
Insurance Information Institute Online: www.iii.org
Twitter: twitter.com/bob_hartwig
Download at: www.iii.org/presentations