View
3
Download
0
Category
Preview:
Citation preview
The Legend of thePrice-Gouging Insurer
November 2002
Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief EconomistInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038
Tel: (212) 346-5520 ♦ Fax: (212) 732-1916 ♦ bobh@iii.org ♦ www.iii.org
Presentation Outline• Overview
URBAN LEGENDS OF THE HARD MARKET• Insurers are Making a Killing• Commercial Insurance is More Expensive than Ever• Rate Hikes are to Make Up for 9/11 Losses• Rate Hikes are Mostly Due to Bad Investments• There’s No Connection Between Litigiousness & Rates• Insurers are Drowning in Capital• Insurers are “Redlining” Businesses post-9/11• The Federal Terrorism Backstop will Solve Everything• Investors are Satisfied with P/C Stock Performance• Q&A
PRICING:Past, Present &
Future
CIAB Rate SurveyThird Quarter 2002
Rate Increases By Size of AccountRate Increases By Size of AccountNoNo
Change Up 1Change Up 1--10% 1010% 10--20% 2020% 20--30% 3030% 30--50% 50%50% 50%--100% >100%100% >100%
Small (<$25K) 8% 17% 46% 19% 2% 0% 0%
Med ($25-$100K)* 6% 8% 23% 44% 13% 2% 0%
Large (>$100K)** 6% 6% 14% 38% 21% 2% 0%
*1% indicated a decline of between 1% and 10%.
**1% indicated a decline of between 10% and 20%; 12% indicated don’t know or don’t handle this type of account
Source: Council of Insurance Agents and Brokers
CIAB Rate SurveyThird Quarter 2002
Rate Increases By Line of BusinessRate Increases By Line of BusinessNoNo
Change Up 1Change Up 1--10% 1010% 10--20% 2020% 20--30% 3030% 30--50% 50%50% 50%--100% >100%100% >100%
Comm. Auto 6% 18% 37% 24% 12% 0% 0%
Workers Comp 9% 16% 27% 23% 13% 2% 0%
General Liability 8% 13% 38% 28% 9% 1% 0%
Comm. Umbrella 4% 9% 12% 27% 27% 11% 5%
D&O 4% 9% 21% 16% 18% 16% 3%
Comm. Property 8% 9% 30% 23% 21% 5% 0%
Business Interr. 13% 17% 31% 20% 6% 2% 0%
Surety Bonds 16% 13% 17% 20% 2% 0% 1%
Med Mal 5% 3% 5% 6% 17% 11% 19%
Source: Council of Insurance Agents and Brokers
Average Price Change of Commercial Insurance Renewals
(Pre-9/11)
9.5%
13.5%
8.8%
10.0%
12.0%
11.0%
8.9%
6.1%
9.5%
8.0%
8.3%
7.9%
9.0%
-1.6%
-1.2%
-0.4%
-7.0%
-6.0%
-11.0%
-6.0%
-10.0%
-7.0%
-3.0%
1.4%
0.8%
3.5%
3.2%
3.2%
2.8%
4.1%
-2.1%
-2.8%
-1.8%
0.2%
-5.0%
-4.4%
-3.5%
-4.3%
-6.6%
-4.1%
-2.0%
-13%
-11%
-9% -7% -5% -3% -1% 1% 3% 5% 7% 9% 11%
13%
E&S
Umbrella
Workers' Comp
Commercial Property
CMP
General Liability
Commercial Auto
Spring 2001 Fall 2000 Spring 2000 Fall 99 Spring 99 Fall 98Source: Conning
Average Price Change of Commercial Insurance Renewals
17.5%
18.0%
22.5%
19.0%
17.9%
15.2%
14.2%
15.6%
13.7%
12.0%
14.0%
10.3%
11.6%
12.3%
10.5%
0% 5% 10% 15% 20% 25%
Workers' Comp
Commercial Property
CMP
General Liability
Commercial Auto
Spring 2002 Fall 2001 Spring 2001Source: Conning
100110120130140150160170180190200210220230240250260
89 90 91 92 93 94 95 96 97 98 99 00 01 02*
Rate On Line Index(1989=100)
Source: Guy Carpenter * III Estimate
Prices rising, limits falling: ROL up significantly
DEBUNKING URBAN LEGENDS OF THE HARD MARKET
Legend #1:Insurers are Exploiting the Current Hard Market and
Making a Killing
P/C Net Income After Taxes1991-2002 ($ Millions)
$14,178
$5,840
$19,316
$10,870
$20,598$24,404
$36,819
$30,773
$21,865$20,559
-$6,970
$9,278
-$10,000
-$5,000
$0
$5,000
$10,000
$15,000$20,000
$25,000
$30,000
$35,000
$40,000
91 92 93 94 95 96 97 98 99 00 01 02**I.I.I. estimate based on first half 2002 data.Sources: A.M. Best, ISO, Insurance Information Institute.
2001 was the first year ever with a full year net loss
2002 First Half ROE = 3.3%
-5%
0%
5%
10%
15%
20%
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
*
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2002*
*2002 figures are estimates; p/c figure based on first-half 2002 data.Source: Insurance Information Institute; Fortune
-5%
0%
5%
10%
15%
20%
25%
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
US P/C Insurers All US Industries LifeDiversified Finl. Comm. Banks
ROE: Financial Services Industry Segments, 1987–2001
Source: Insurance Information Institute; Fortune
P/C insurance has consistently underperformed other segments of the financial services industry
-5%
0%
5%
10%
15%
20%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
ROE Cost of Capital
ROE vs. Cost of Capital:US Non-Life 1991 – 2002
Source: The Geneva Association, Ins. Information Inst.
There is an enormous gap between the industry’s cost of capital and its rate of return
14.6
pts
7.9.
pts
US P/C insurers have missed their cost of capital by an
average 6.7 points since 1991
World’s Most Dangerous Lines of Insurance(Combined Ratio + 1 Std. Deviation)
135.6135.1
133.9133.3
131.6129.3
121.8119.3
118.7117.1
116.3115.1114.6
112.9111
109.7109.1
107106.6
103.4102.9
101.7101.3
10084.1
73.3
70 80 90 100 110 120 130 140 150
EarthquakeMed Mal
Other LiabilityReinsurance
HomeownersAllied Lines
AircraftComm. Multi PerilComm. Auto Liab.
Workers CompFarm Multi PerilCommercial--All
Ocean MarineFire
All LinesPP Auto Liab
Personal--All LinesComm Auto PD
Boiler & MachineGroup A&HOther A&H
Priv Pass PDInland Marine
FidelityOther
SuretyBurglary & Theft
Source: Insurance Information Institute, calculated from A.M. Best combined ratio data.
407.3
4.4%3.5%
2.5%
5.7%
8.3%
4.8%5.6%
2.2%
1.0%
-0.6%-1.6%
-0.3%
5.0%
1.1%
3.1%2.4%
3.0%2.7%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
1998
1999
:I19
99:II
1999
:III19
99:IV
2000
:I20
00:II
2000
:III20
00:IV
2001
:I20
01:II
2001
:III20
01:IV
2002
:I20
02:II
2002
:III20
02E
2003
FReal GDP Growth
Source: US Department of Commerce, Blue Economic Indicators 10/02, Insurance Information Institute.
Economy is experiencing sluggish growth following the
recession of 2001
(first recession since 1990/91)
Impact of Recession on P/C Premiums and Profitability (1970-2001)
7.5%
5.7%
-1.8%-0.4%
4.3% 4.6% 4.2%4.1%
8.6%
4.6%
6.8%
9.0% 9.6%
11.4%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
Inflation (CPI) NWP Growth(unadj.)
Real NWPGrowth
ROE--P/CInsurers*
ROE--AllIndustries*
ROE--Banks* ROE--DiversifiedFinancial*
Recession Years (1970; 74-75; 80-82; 90-91;2001)
Non-Recession Years (all other years, 1970-2001)
*GAAP return on equity, adjusted for inflation; Bank data 1952-2001; Div. Fin. 1987-2001Source: Insurance Information Institute
ROE for Major Commercial Lines (2001 vs. 2002E)
-2.6% -2.4%
0.7%
-2.4%
1.1%
-5.1%
-16.2%
6.3%
2.1%
5.5%
-0.6%
-12.5%
14.0%
8.1%
-2.7%
0.4%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
CommercialLines
Comm Auto WorkersComp
CommercialMulti Peril
GeneralLiability
Med Mal Fire &Allied Lines
InlandMarine
2001 2002E
Source: Conning
Most major commercial lines lag well behind the Fortune 500
historical return of 13% -14%
Legend #2:Insurance is More
Expensive than Ever and is Squeezing Businesses and
Families Alike
Net Written Premium as % of GDP
3.8% 3.7%3.6% 3.6%
3.6% 3.5% 3.4%3.3%
3.2%3.1%
3.0%3.2%
2.0%2.2%2.4%2.6%2.8%3.0%3.2%3.4%3.6%3.8%4.0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Sources: Insurance Information Institute, calculated from U.S. Bureau of Economic Analysis and A.M. Best data.
Insurance costs as a % of GDP shrank by 31% during the 1990s
and remains at very low levels
Commercial Lines Net Written Premium as % of GDP
2.3%2.1%
2.1%2.0%
1.9% 1.9%1.9%
1.8% 1.7%
1.6%1.5%
1.5%1.5%1.6%
1.8%
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
2.2%
2.4%
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02E
Sources: Insurance Information Institute, calculated from U.S. Bureau of Economic Analysis and A.M. Best data.
Commercial insurance premiums as a % of GDP fell 35% between 1988 and 2000 and remains far
below late 1980’s levels
More Cover for Less Money: Terms & conditions broadened
significantly during the soft market, even as prices fell
Cost of Risk per $1,000 of Revenues: 1990-2002E
$6.10$6.40
$8.30$7.70
$7.30
$6.49
$5.70$5.25
$5.71$5.20$4.83
$5.55
$7.22
$4
$5
$6
$7
$8
$9
$10
90 91 92 93 94 95 96 97 98 99 00 01E 02E
Source: 2001 RIMS Benchmark Survey; Insurance Information Institute estimates.
•Cost of risk to corporations fell 42% between 1992 and 2000•Estimated 15% increase in 2001, 30% in 2002• About half of 2002 increase due to 9/11
Cost of risk is still less than it was a decade ago!
Average Expenditures on Auto Insurance: US
668 69
1 706
704
683 687
723
784
855
$600
$650
$700
$750
$800
$850
$900
1995
1996
1997
1998
1999
2000
2001
*
2002
*
2003
*
*Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute
Countrywide auto insurance are expected to rise 8-10% in 2003
Average Expenditures on Homeowners Ins.: US
418
440 45
5
481 48
8 500 51
2
553
603
$400
$450
$500
$550
$600
$650
1995
1996
1997
1998
1999
2000
*
2001
*
2002
*
2003
*
*III EstimatesSource: NAIC, Insurance Information Institute
Average HO expenditures are expected to rise by 8-10% in 2003
Auto & Homeowners Insurance Expenditures as a% of Median Household Income
1.3%
2.0%
1.2%
1.9%
1.2%
1.9%
1.2%
1.8%
1.2%
1.7%
1.2%
1.6%
1.2%
1.8%
1.2%
0.0%
0.5%
1.0%
1.5%
2.0%
1994 1995 1996 1997 1998 1999 2000 2001
Auto Homeowners
The cost of auto and homeowners insurance relative to the typical
household’s income has remained stable over the years
Homeowners Insurance Expenditure as a % of Median Home Price*
$107
,200
$115
,800
$121
,800
$128
,400
$133
,300
$139
,000
$147
,800 $1
63,6
00
$110
,500
0.39%
0.38% 0.38%
0.37% 0.37% 0.37%
0.36%
0.35%
0.34%
$100,000
$125,000
$150,000
$175,000
$200,000
94 95 96 97 98 99 00 01 020.3%
0.3%
0.4%
0.4%
0.4%Median Sales Price of Existing HomesHO Insurance Expenditure as a % of Sales Price
Source: Insurance Information Institute calculations based on data from National Association of Realtors, NAIC.
HO
Expenditure as %
of Sales PriceMed
ian
Hom
e Sa
les P
rice
The cost of homeowners
insurance relative to the
price of a typical home is falling!
Change in Cost of Homes vs. Change in Cost of Homeowners Insurance
$3,300
-$2
$5,300
$22
$6,000
$15
$6,600
$26
$4,900
$7
$5,700
$12
$8,800
$12
$15,800
$41
-$2,000$0
$2,000$4,000$6,000$8,000
$10,000$12,000$14,000$16,000
1995 1996 1997 1998 1999 2000 2001 2002*
Change in Cost of Median Existing HomeChange in Average Homeowners Insurance Expenditure
Recent increases in the cost of homeowners insurance are
minuscule in comparison to the soaring cost of homes
*August 2002Source: Insurance Info. Inst. calculations based on data from Natl. Association of Realtors, NAIC.
Legend #3:Insurers are Raising Rates
to Make up for 9/11 Losses
95
100
105
110
115
120
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00
02**
P/C Industry Combined Ratio
2001 = 115.7
2002E = 105.0*
Combined Ratios
1970s: 100.31980s: 109.21990s: 107.72000s: 110.4
*Based on first half 2002 results
Sources: A.M. Best; III
110.
5
105.
0 113.
6 119.
2
104.
8
100.
8
100.
5
114.
3
106.
5
117.
4
108.
8 115.
8
106.
9
108.
5
106.
5
105.
8
101.
6
105.
6
107.
7
110.
0 115.
7
105.
0
126.
5
162.
5
90
100
110
120
130
140
150
160
170
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002*
Reinsurance All Lines Combined Ratio
Combined Ratio:Reinsurance vs. P/C Industry
*First Half 2002 figures.Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
2001’s combined ratio was the worst-ever for reinsurers
($60)
($50)
($40)
($30)
($20)
($10)
$0
$1019
7519
7619
7719
7819
7919
8019
8119
8219
8319
8419
8519
8619
8719
8819
8919
9019
9119
9219
9319
9419
9519
9619
9719
9819
9920
0020
0120
02
Underwriting Gain (Loss)1975-2002*
*Annualized estimate based on first half 2002 data.Source: A.M. Best, Insurance Information Institute
$ B
illio
ns
P-C insurers paid $52 billion more in claims & expenses than they collected in premiums
in 2001
Outlook for Commercial Lines:2002 - 2004
121.
7 130.
2
115.
8
118.
5
153.
3
100.
3
116.
6 125.
3
111.
9
103.
6
155.
3
98.8
113.
2 120.
2
108.
3
99.1
158.
1
95.2
113.
0
113.
6
106.
7
99.5
165.
0
92.8
90
100
110
120
130
140
150
160
170
WorkersComp
GL & Prod.Liab
CommercialAuto
CommercialPackage
Med Mal InlandMarine
2001 2002E 2003F 2004F
Sources: A.M. Best, Conning & Co.
12% After Tax ROE Requires Underwriting Profit
Source: Dowling & Partners
-5.8 %-2.1 %1.7 %5.4 %9.1 %12.8 %16.5 %20.3 %24.0 %27.7 %250 %
-4.9 %-1.5 %1.8 %5.2 %8.5 %11.9 %15.2 %18.6 %21.9 %25.3 %225 %
-4.0 %-1.0 %2.0 %4.9 %7.9 %10.9 %13.9 %16.9 %19.8 %22.8 %200 %
-3.6 %-0.8 %2.0 %4.9 %7.7 %10.5 %13.3 %16.2 %19.0 %21.8 %190 %
-3.3 %-0.6 %2.1 %4.8 %7.5 %10.1 %12.8 %15.5 %18.2 %20.9 %180 %
-2.9 %-0.4 %2.2 %4.7 %7.2 %9.8 %12.3 %14.8 %17.3 %19.9 %170 %
-2.5 %-0.2 %2.2 %4.6 %7.0 %9.4 %11.8 %14.1 %16.5 %18.9 %160 %
-2.2 %0.1 %2.3 %4.5 %6.8 %9.0 %11.2 %13.5 %15.7 %17.9 %150 %
-1.8 %0.3 %2.4 %4.4 %6.5 %8.6 %10.7 %12.8 %14.9 %16.9 %140 %
-1.5 %0.5 %2..4 %4.4 %6.3 %8.2 %10.2 %12.1 %14.0 %16.0%130 %
-1.1 %0.7 %2.5 %4.3 %6.1 %7.8 %9.6 %11.4 %13.2 %15.0 %120 %
-0.7 %0.9 %2..5 %4.2 %5.8 %7.5 %9.1 %10.7 %12.4 %14.0 %110 %
-0.4 %1.1 %2.6 %4.1 %5.6 %7.1 %8.6 %10.1 %11.5 %13.0 %100 %
112.5 %110.0 %107.5 %105.0 %102.5 %100.0 %97.5 %95.0 %92.5 %90.0%P : S
Accident Year Combined Ratio
0%
5%
10%
15%
20%
25%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
*Estimate based on first half 2002 results.Source: A.M. Best, Insurance Information Institute
Growth in Net Premiums Written (All P/C Lines)
2000: 5.1%
2001: 8.1%
2002: 12.0(est.)
The underwriting cycle went AWOL in the 1990s.
It’s Back!
Reserve Deficiency, by Line(AY 1992-2001, as of 12/01)
-$0.8-$1.8
-$4.1
-$6.2
-$9.1
-$3.8
-$0.8
-$17.8 -$18.0
-$1.9
-$20-$18-$16-$14-$12-$10
-$8-$6-$4-$2$0
HO PPA Liab CA Liab WC CMP Med Mal*Special
LiabOtherLiab*
XS LiabReins
ProdLiab*
*Occurrence and claims madeSource: Morgan Stanley
Estimated Deficiency
Total Excluding A&E: $64 Billion
A&E Deficiency: $55 Billion
Total Including A&E: $120 Billion
10.1
%
8.0%
-1.1
%
2.1% 2.5%
0.2%
6.1% 7.
3% 8.1%
11.2
% 12.7
%
6.8%
1.3%
-2.1
%
4.8% 5.2% 6.
6%
5.9%
8.4%
4.9%
11.0
%
8.1%
-5%
0%
5%
10%
15%
91 92 93 94 95 96 97 98 99 00 01P
02E
Health Benefit Costs WC
Med Claim Costs Rising Sharply
Source: NCCI; William M. Mercer, Insurance Information Institute.
Health care inflation is affecting the cost of medical care, no matter
what system it is delivered through
U.S. InsuredCatastrophe Losses
$7.5$2.7 $4.7
$22.9
$5.5
$16.9
$8.3 $7.3$2.6
$10.1 $8.3$4.3
$28.1
$4.1
05
1015202530
89 90 91 92 93 94 95 96 97 98 99 00 01 02*
*Estimate through October 2002.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims.Source: Property Claims Service, Insurance Information Institute
$ BillionsCAT Losses for 2001 Set a Record
•20 events (lowest since 1969)•1.5 million claims
•9/11: $20.3B = 51,000 claims
Legend #4:Insurers’ Reckless
Investment Strategies are the Primary Reason Why Rates
are Rising Today
$0
$9
$18
$27
$36
$45
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
Net Investment Income
Facts
1997 Peak = $41.5B
2000= $40.7B
2001 = $37.7B
2002E = $35.8B
Source: A.M. Best, Insurance Information Institute
Bill
ions
(US$
)
Investment income in 2002 is expected to fall 5% due primarily to historically low interest rates
0%
2%
4%
6%
8%
10%
12%
14%
16%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
*
3-Month T-Bill 1-Yr. T-Bill 10-Year T-Note
Interest Rates: Lower Than They’ve Been in Decades
*Average for week ending November 1, 2002.Source: Board of Governors, Federal Reserve System; Insurance Information Institute
1. Historically low interest rates are the primary driver behind lower investment yields. Nevertheless, overall insurer investment performance outpaces all major market indices and almost every major category of mutual fund.
2. 66% of the industry’s invested assets are in bonds
-30%
-20%
-10%
0%
10%
20%
30%
40%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
*
Large Company Stocks*As of November 1, 2002.Source: Ibbotson Associates, Insurance Information Institute
Total Returns for Large Company Stocks: 1970-2002*
Headed for 3rd consecutive year of decline for stocksLast happened 1939-1941Stocks account for just 21% of p/c insurer investments
P/C Industry Investments,by Type (as of Dec. 31, 2001)
Other5%
Bonds66%
Real Est. & Mortgages
1%
Common Stock21%
Cash & ST Secs.6%
Preferred Stock1%
Bond Holdings, by TypeIndustrial & Misc. 32.5%Special Revenue 30.5%Governments 18.0%States/Terr/Other 15.4%Public Utilities 3.1%Parents/Subs/Affiliates 0.5%
Source: A.M. Best, Insurance Information Institute
Common stock accounts for about 1/5 of invested
assets
Investment Gain, by Segment*
*As a % of net earned premium. Investment gains consists primarily of interest, dividends andrealized capital gains and losses.
Source: A.M. Best; Insurance Information Institute estimate
7.0%
6.5%
5.7% 6.2%
5.9%
5.7%
5.6%
5.0%
5.2%
4.5%
17.3
%
15.4
%
12.5
% 14.3
%
14.1
%
15.5
%
15.6
%
13.7
%
15.3
%
13.1
%
12.4
%
11.2
%
9.3% 10
.4%
10.0
%
10.6
%
10.4
%
9.1% 10
.1%
8.7%
0%
5%
10%
15%
20%
92 93 94 95 96 97 98 99 00 01
Personal Lines Commercial Lines All Lines
Investment returns have shrunk, but are still important. “Heavy Lifting” must be done through underwriting & pricing
Investment gains returning to pre-bubble levels
Property/Casualty Insurance Industry Investment Gain*
$ Billions
$35.4
$42.8$47.2
$52.3
$43.9
$17.3
$57.9
$51.9$56.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 2002 (1stHalf)
*Investment gains consists primarily of interest, stock dividends and realized capital gains and losses.Source: Insurance Services Office; Insurance Information Institute estimate
Investment gains are simply returning to “pre-bubble” levels
Institutional Investor Market in Corporate Equities
by Market Value of Holdings, as of December 31, 2001All Others
$459.56%
Insurers$1,120.4
15%
State & Local Gov't
Retirement Plans
$1,215.716% Private
Pension Funds$1,902.3
25%
Mutual Funds$2,836.8
38%
Source: Insurance Information Institute from Federal Reserve Flow of Funds Report
Total: $7,534.7 billion
Insurers, like all large institutional investors, have significant stock holdings
Crisis in Corporate Governance Affecting Even Blue Chip Portfolios
•Crisis has affected both equity and bond markets
Legend #5:There is No Relationship
Between Litigiousness and Rising Insurance Costs
(A Trial Lawyer Favorite)
Average Jury Awards1994 vs. 2000
419759
187 333
1,140 1,1851,744
1,1681,727
269698
3,482 3,566
6,817
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
Overall BusinessNegligence
VehicularLiability*
PremisesLiability
MedicalMalpractice
WrongfulDeath
ProductsLiability
($00
0)
1994 2000
Source: Jury Verdict Research; Insurance Information Institute.
Cost of U.S. Tort System($ Billions)
Source: Tillinghast-Towers Perrin; Insurance Information Institute estimates for 2001/2002 assume tort costs equal to 2% of GDP. 2005 forecasts from Tillinghast.
$129 $130 $141 $144 $148 $159 $156 $156 $167 $169 $179$198 $204
$298
$0
$50
$100
$150
$200
$250
$300
$350
90 91 92 93 94 95 96 97 98 99 00 01* 02E* 05F
Tort costs consumed 2.0% of GDP annually on average since 1990, expected to rise to 2.4% of GDP by 2005!
Tort costs equaled $636 per person in 2000!
Expected to rise to $1,000 by 2005
Commercial Lines Tort Costs($ Billions)
$17.0
$57.2$5.0
$28.2
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
1980 2000
Insured Self-Insured
Bill
ions
Total $22.0 Billion
Source: Tillinghast-Towers Perrin
Total $85.4 Billion
Where the Tort Dollar Goes(2000)
Source: Tillinghast-Towers Perrin
Awards for Non-Economic
Loss22%
Claimants' Attorney Fees
17%Awards for
Economic Loss20%
Defense Costs16%
Administration25%
Tort System is extremelyinefficient:
Only 20% of the tort dollar compensates victims for economic losses
At least 58% of every tort dollar never reaches the victim
Average Cost per $1 Million Liability Coverage2001 vs. 2002
$3,8
01
$3,8
30 $5,3
17
$5,3
68
$5,5
31
$8,2
13
$5,4
11
$4,8
78
$5,6
09 $6,4
64
$6,0
54 $7,6
06
$7,1
06
$12,649
$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000
$10,000$11,000$12,000$13,000
$0 - $200M $201M-$500M
$501M-$1B $1B-$5B $5B-$10B $10B+ All
Firm Revenue Size
($00
0)
20012002
Source: Marsh, 2002 Limits of Liability Report
Excess litigiousness is raising the cost of liability coverage for businesses of all sizes
EXAMPLES
Medical MalpracticeAsbestos
“Toxic” Mold
103.
7 108.
1
97.6 99
.7
106.
0
107.
9 115.
7
129.
5 133.
5
153.
3
108.
8 115.
7
106.
9
108.
4
106.
4
105.
8
101.
6 105.
6
107.
8
110.
0 115.
7
127.
9
90
100
110
120
130
140
150
160
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Medical Malpractice All Lines Combined Ratio
Medical Malpractice Combined Ratio
Source: AM Best
Trial lawyers have destroyed commercial viability of med mal. The future holds:Increased mutualizationLocal market collapsesHC Providers seeking govt. protection
Medical Malpractice: Underwriting Losses
$ Millions
-$230.8-$147.8
-$1,135.9
-$344.1
$111.6 $14.4
-$289.3-$388.0
-$804.9
-$1,529.2-$1,839.0
-$3,001.8-$3,500
-$3,000
-$2,500
-$2,000
-$1,500
-$1,000
-$500
$0
$500
90 91 92 93 94 95 96 1997 1998 1999 2000 2001
Source: Insurance Information Institute calculations based on data from A.M. Best.
Med Mal underwriting losses exploded by $2.7 billion or 938% between 1996 and 2001!
Non-Malignant Asbestos Claimants File Most Claims, Get Most $$$
DISTRIBUTION OF CLAIMS
1991-2000
ALLOCATION OF COMPENSATION
1991-2000Lung & Other
Cancers7%
Non-malignant
90%
Meso-thelioma
3%
Source: RAND, Tillinghast-Towers Perrin
Lung & Other
Cancers18%
Non-malignant
65%
Meso-thelioma
17%
Who Will Pay for theUS Asbestos Mess?
Source: Tillinghast-Towers Perrin; Insurance Information Institute
US Insurers30%Asbestos
Defendants39%
Foreign Insurers
31%
Estimated Total US Settlements & Expenses = $200 billion
$78 billion $60 billion
$62 billion
U.S.: Documented Toxic Mold SuitsFormer
Owners of Sold Homes
10%Bad Faith
Against Insurers
50%Builder for
Construction Defects
20%
HO Associations for Improper Maintenance
20% Source: www.toxlaw.com; Guy Carpenter
1,000 Cases
2,000 Cases
5,000 Cases
2,000 Cases
TX: Mold Claim Frequency*(# claims per 1,000 policyholders)
1.73.2
2.74.1
6.7
11.7
18.4
23.6
0
5
10
15
20
25
00:Q1 00:Q2 00:Q3 00:Q4 01:Q1 01:Q2 01:Q3 01:Q4
Source: Texas Department of Insurance; Insurance Information Institute estimates.
The frequency of mold claims rose 1,286% between 2000:I and 2001:IV
TX : Average Cost per PolicyholderDue to Mold (per year)
$23.32$48.57 $64.05
$114.39
$242.31
$404.36$444.35
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
00:Q1 00:Q2 00:Q3 00:Q4 01:Q1 01:Q2 01:Q3
Source: Texas Department of Insurance; Insurance Information Institute estimates.
Texas “Mold Tax”: Up to $444 per Policyholder per Year
The average cost per policyholder increased 1,805% between 2000:I and 2001:III
Legend #6:Insurers are Awash in Cash and Have More Money than They Know What to Do With
Capital Raising by P/C InsurersSince September 11, 2001*
$20,492
$11,442
$16,437$4,872
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
2001 2002*
($ M
illio
ns)
Completed Pending
$25.4 Billion$27.9 Billion
*As of September 13, 2002.
Source: Morgan Stanley, Insurance Information Institute.
14 Pending 38 Pending
40 Completed 33 Completed
Capital Raising by P/C Insurers Since 9/11 Totals $53.2B
$0
$50
$100
$150
$200
$250
$300
$350
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02
Policyholder Surplus: 1975-2002*
*As of June 30, 2002Source: A.M. Best, Insurance Information Institute
Bill
ions
(US$
)
Surplus (capacity) peaked at $336.3 Billion in mid-1999 and has fallen by 15.9% ($53.4 billion) to $282.9 billion since then.
•Surplus fell 2.3% in the 1st half of 2002
•Surplus is now lower than at year-end 1997.
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
Capital Myth: P/C Insurers Have $300 Billion to Pay Terrorism Claims
"Target" Commercial*$100 billion
33%
Other Commercial$50 billion
17%
Personal$150 billion
50%
Total PHS = $298.2 B as of 6/30/01= $282.9 B as of 6/30/02
*”Target” Commercial includes: Comm property, liability and workers comp; Surplus must also back-up on non-terrorist related property/liability and WC claimsSource: Insurance Information Institute
Only 33% of industry surplus backs up “target” lines
Legend #7:Insurers are “Redlining”
Businesses in the Wake of 9/11
Sept. 11 Industry Loss Estimates($ Billions)
Life$2.7 (7%)
Aviation Liability
$3.5 (9%)
Other Liability
$10.0 (25%)
Biz Interruption$11.0 (27%)
Property -WTC 1 & 2$3.5 (9%)
Property - Other
$6.0 (15%)
Aviation Hull$0.5 (1%)
Event Cancellation
$1.0 (2%)
Workers Comp
$2.0 (5%)
Consensus Insured Losses Estimate: $40.2BSource: Insurance Information Institute
89.9
%
85.5
%
81.1
%
69.2
% 84.2
%
51.1
%
73.3
%
65.1
%
85.0
%
82.4
%
79.2
%
67.2
% 82.5
%
49.2
%
69.9
%
63.6
%
0%10%20%30%40%50%60%70%80%90%
100%
Genera
l
Liabilit
y
Disabil
ity
Casualt
yW
orkers
Com
pBus
iness
Inter
r.Pro
perty
Dam
age
Equip./M
achin
ery
Prior to 9/11/01 Currently
Insurance Coverage in Lower Manhattan
Source: Downtown Alliance
Over 95% of businesses in Downtown were able to continue
coverage in the wake of 9/11
WC Residual Market Shares
*Insurance Information Institute estimateSource: NCCI
Residual Market Shares
5%9%
16%18%17%17%
21%22%24%
26%
16%
11%7%
4% 3% 4%6%
9%
23%
0%
10%
20%
30%
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02*
•The vast majority of employers are finding coverage in the private market
•Residual market share is growing but is still just 1/3 of the share in 1993.
Legend #8:Federal Backstop Alone Will
Solve Capacity Problems
Most Businesses Have Little or No Terrorism Coverage
Lenders vs. Commercial Mortgage Holders•Cigna/Durst/4 Times Square/$5 mill for cover•GMAC require purchase on 40,000 properties w/$100 billion in loans across US. Purchased
Separate Coverage
8%
Sublimited Coverage
24%
Full Coverage14%
No Coverage54%
Source: Prudential Securities: 2002 Insurance Buyers Survey, July 2002.
Lack of coverage underscores need for
federal backstop
Structure of Proposed Federal Backstop (as proposed/interpreted as of 11/1/02)
$0
$25
$50
$75
$100
Year 1 Year 2 Year 3
($ B
illio
ns)
* Industry retention based on direct premiums written.Source: U.S. Congress, Insurance Information Institute.
10%
Indu
stry
Co-
Rei
nsur
ance
ab
ove
7% R
eten
tion
Max Loss
$15 billion$12.5 billion
$10 billion
10%
Indu
stry
Co-
Rei
nsur
ance
ab
ove
10%
Ret
entio
n
10%
Indu
stry
Co-
Rei
nsur
ance
ab
ove
15%
Ret
entio
n
Fede
ral G
over
nmen
t cov
ers 9
0%
abov
e 7%
ret
entio
n to
$10
0B m
ax
Fede
ral G
over
nmen
t cov
ers 9
0%
abov
e 10
% r
eten
tion
to $
100B
max
Fede
ral G
over
nmen
t cov
ers 9
0%
abov
e 15
% r
eten
tion
to $
100B
max
7% Retention* 10% Retention* 15% Retention*
Government recoups payouts below $10B in Year 1, $12.5 Year 2, $15B Year 3 with 3% max surcharge on policy premium.
Industry Losses Under Proposed Federal Backstop Using 9/11 Scenario
(as proposed/interpreted as of 10/18/02)
$8.75$12.50
$18.75$1.125
$10.
575
$15.
75
$18.
00
$0
$5
$10
$15
$20
$25
$30
Year 1 Year 2 Year 3
($ B
illio
ns)
Industry Retention Surcharge Layer Co-Reinsurance Layer
Source: Insurance Information Institute.
$1.75B Industry Co-Share
Assumes $30B Commercial Prop & WC Loss, $125B “At Risk” Commercial DPW
$2.0B Industry Co-Share
$0.925B Industry Co-Share
$0.125B Industry Co-Share
Total Ind. Loss: $10.875B $14.25B $19.675B
ME
NH
MACT
PA
WVVA
NC
LATX
OK
NE
ND
MN
MI
IL
IA
ID
WA
OR
AZ
HI
NJ
RI
MDDE
AL
VT
NY
DC
SC
GA
TN
AL
FL
MS
ARNM
KYMOKS
SD WI
INOH
MT
CA
NVUT
WY
CO
PR
Terrorism Exclusions
Exclusions Approved,Mandatory Fire Following
No Terrorism Exclusion
Exclusions Approved,Fire Following NOT Mandatory
Terror exclusions approved in 45 states + DC and PR
Legend #9:Wall Street Investors Should
be Satisfied With Insurer Stock Performance
P/C Performance Volatile, but Better than S&P 500 Lately
-25.7%
43.4%
-1.2% -4.3%
21.0%
-9.1% -10.9%
-20.6%
-50%-40%-30%-20%-10%
0%10%20%30%40%50%
1999 2000 2001 2002*
P/C S&P 500
*Through November 1, 2002.Source: SNL Securities, Insurance Information Institute
Insurer Stocks:Outperforming the S&P 500, but
Negative Returns Still Disappoint
-3.55%
-4.33%
-11.25%
-13.67%
-23.37%
-21.52%
-30.23%
-35% -30% -25% -20% -15% -10% -5% 0%
Nasdaq
S&P 500
Multiline
L/H
All
P/C
Brokers
Source: SNL Securities, Insurance Information Institute
Total Return 2002 YTD Through November 1, 2002
Insurance Mergers and Acquisitions
7.1 6.9 8.6 5.0 8.5 12.527.0
40.856.2
41.755.7
6.6
41.5
243 246
171 188149
221
349382
433
109
300
295
468
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
89 90 91 92 93 94 95 96 97 98 99 00 01 02*
Val
ue o
f M &
As (
$Bill
ions
)
0
100
200
300
400
500
600
Num
ber
of M
& A
s
Value of Deals Number of Deals
Source: Compiled from Conning & Company reports.
1998: 565 deals valued at $165.4 B
Number of M&As was down 39.4% during the first half of 2002 vs. first half 2001.Value of deals was down 80.8%.None of the top deals were in the
P/C sector
Insurance Information Institute On-Line
If you would like a copy of this presentation, please give me your business card with e-mail address
Recommended