Setting the Scene

Insurance Reform: Opportunity or Threat?

CEA International Insurance ConferenceAthens, GreeceJune 16, 2011

Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038Office: 212.346.5540 Cell: 917.494.5945 stevenw@iii.org www.iii.org

2

Capital Markets

Will Reform Help or Hinder theInsurance Industry’s Capital

Management?(and will it anticipate problems related to

one or a string of major sovereign defaults)?

3

Systemic Risk

Is Insurance Reform…

an Opportunity for regulators to target activities that can create or disseminate systemic risk?

a Threat to blindly treat large firms differently from smaller ones?– This risks missing activities that are

systemically important– It creates an “unlevel playing field”

4

In the U.S., an Insurer Might be Systemically Important if…

1. It is “interconnected”

2. It provides a critical product or service that cannot easily be obtained from another provider

3. It has insufficient liquidity to pay claims or other obligations in a timely manner and so must liquidate assets at “fire sale” prices

4. It is highly leveraged, so that even small shortfalls are magnified

5. It isn’t closely regulated regarding the relation of its assumption of risk to its capital, so that it can take on unacceptable levels of risk

6. It is large

5

Capital Adequacy

Is Insurance Reform…

an Opportunity for each insurer to “right size” its capital to the particular risks it is assuming?

a Threat to require some or all insurers to carry much more capital than they need, in order to assure regulators that they are likely to weather any future financial storm?

6

Universal Accounting Systems

Is Insurance Reform... an Opportunity to change insurance

accounting so that investors can compare firms around the globe and firms in other sectors of the financial industry?– If so, won’t this lower the cost of capital?

a Threat to change insurance accounting so that results will be much more volatile and harder to understand, even for one firm over time?

Mergers & Acquisitions

7

Will Reform Stifle or Boost M&A?

8

Is Large Scale Now Necessary?Or Is It to be Avoided?

Is Insurance Reform…

an Opportunity to facilitate insurer diversification of operations and/or lower costs through greater scale?

a Threat to raise the cost of regulatory compliance for large firms and thereby favor smaller firms over larger ones?

9

# of Mergers & Acquisitions, Worldwide, Hasn’t Changed Much (2007-2010)

92

68

83

65

69

26

40

27

32

9

42

2

25

03

50

92

11

1

70

12

2

16

81

39

15

81

57

0 100 200 300 400 500 600 700 800

2007

2008

2009

2010

Property-Casualty Life-Annuity Health/Managed Care Distribution Services

Sources: Conning Research; Insurance Information Institute.

Number of Transactions

10

$ Value of Mergers & Acquisitions,Worldwide, Sharply Down (2007-2010)

$5

1.8

$5

.5

$2

4.4

$4

5.1

$1

3.8

$2

.3

$5

.8

$1

.2

$1

5.3

$9

.8$

0.8

$2

.4

$6

.9

$7

.6$

9.4

$1

3.9

$5

0.6

$3

0.3

$1

5.0

$1

6.5

$0 $35 $70 $105 $140

2007

2008

2009

2010

Property-Casualty Life-Annuity Health/Managed Care Distribution Services

Sources: Conning Research; Insurance Information Institute.

$ Billions

11

Growth in Emerging Markets

Low Insurance Penetrationand Density

in Rapidly-Growing EconomiesImplies Much Room for Growth

12

Greatest Growth Prospects

Is Insurance Reform…

an Opportunity to lower the obstacles to expansion of operations around the globe?

a Threat to raise the cost of compliance, hindering expansion of operations around the globe?

13

IMF Forecasts: Real GDP Growth inSelected Emerging Economies in 2011 & 2012

*excluding Russia Sources: IMF, World Economic Outlook, April 2011 Update; Insurance Information Institute.

6.3%

6.9%

5.5%

6.8% 6.6%

5.1%4.6%4.6%4.5%

4.8%

8.2%

9.6%

4.5%4.0%4.1%

4.5%

7.8%

9.5%

0.0%

2.5%

5.0%

7.5%

10.0%

China India Russia Brazil Mexico Turkey Vietnam Nigeria Commonwealthof Independent

States*

2011P 2012P

Growth in emerging and developing economies implies more rapid growth of insurance exposures relative to the U.S., W. Europe and Japan. But will exposure growth mean comparable (or greater) premium growth?

Advanced economies: 2.5% in 2011

and 2012.

Premium/GDP* (Penetration) inSelected Emerging Economies, 2009

2.3%

4.6%

0.0%

1.6%

0.9%

0.2%

0.7%

0.1%

1.1%

0.6%

2.5%

1.5%

1.1% 1.1%0.8%

0.4%

0%

1%

2%

3%

4%

5%

6%

China India Russia Brazil Mexico Turkey Vietnam Nigeria

life non-life

*both measured in U.S. dollars; premiums exclude cross-border business Source: Swiss Re Sigma, No. 2/2010

Even despite the rapid growth in these economies, insurance penetration is increasing at a high rate. The combination—growing penetration in a

rapidly growing economy—implies extremely rapid premium growth.

Non-life LifeU.S. 4.5% 3.5%France 3.1% 7.2%Germany 3.7% 3.3%

Premium* per capita (Density) in Selected Emerging Economies, 2009

$81.1

$47.7

$4.5

$127.9

$70.1

$15.3 $7.6 $0.9

$40.0

$6.7

$276.4

$123.8

$88.2 $89.6

$8.7 $5.1$0

$50

$100

$150

$200

$250

$300

China India Russia Brazil Mexico Turkey Vietnam Nigeria

life non-life

* premiums measured in U.S. dollars, exclude cross-border business Source: Swiss Re Sigma, various volumes

From 2001-2009, Non-life Insurance Density in India tripled, and in China it grew 5-fold. But the most spectacular Density growth in these years belongs to Russia:

in 2009 non-life Insurance Density in Russia was 9 times what it was in 2001!

16

What Reform Shouldn’t Change

17

Lessons Learned

The insurance sector’s business model is robust and generally able to withstand and conduct normal operations during

a sudden and sharp asset value meltdown

a soft pricing market,

an eroding exposure base, and

a challenging [man-made and natural] CAT environment

All at the same time!

18

In the Last Crisis, the Insurance SectorHelped Stabilise the World Economy

“…the insurance sector has arguably helped to provide a stabilising influence in light of its longer-term investment horizon and conservative investment approach.”

Source: OECD, The Impact of the Financial Crisis on the Insurance Sector and Public Policy Responses, April 2010

Thank you for your timeand your attention!