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Casualty Actuarial Society 2002 Seminar on Ratemaking
The Impact of Terrorism on the P&C Market Place
March 7, 2002
P&C Pricing Considerations
Net Premium Growth
1
2
3
91 92 93 94 95 96 97 98 99 00 (est.)
4.4
0
4
5
6
908988
3.2
4.4
2.42.0
6.1
3.7 3.63.4
2.82.3
1.9
5.0
Underwriting vs. Investment Income
0
20
91 92 93 94 95 96 97 98 99 00 (est.)-40
90
30
-21.7
-20.5
-36.7
-18.1
-22.1
-17.7
-16.7
-5.8
-16.8
-23.1
-32.2
(US $B)
-30
-20
-10
10
40
11.3
13.8
-2.5
14.6
11.6
19.5
20.8
35.5 23.4
14.4
8.8
32.9
34.2 33.7 32.6 33.7 36.8 38.041.5 39.9 38.9 40.3
Underwriting Gain/Loss
Pretax Operating Income
Investment Income
Consolidated P/C Industry Combined Ratio
105
110
115
91 92 93 94 95 96 97 98 99 00 (est.)100
120
90
109.6
108.8
115.7
106.9
108.5
106.5
105.8
101.6 105.6
107.8
110.3
Combined Ratios by Coverage Line
50
70
90
30
110
Workers
Compe
nsati
on
108
1998
1999130
Commerc
ial
Packa
ges
Genera
l Liab
ility
Commerc
ial Auto
Medica
l Malp
ractice
Person
al Auto
Fire & Allie
d
Inlan
d Mari
ne
All Othe
r
Lines
115 11
8 120
118
112
109 11
7
115 11
811
9
114
130 13
4
116
104 10
9
101 10
810
4107
102
9697 103
104
100
2000 (estimate)
Workers’ Compensation Accident Year 2000 Combined Ratio Near Highest Ever
80
90
100
110
120
130
14019
91
1992
1993
1994
1995
1996
1997
1998
1999
2000
PCalendar Year Accident Year
Calendar Year vs. Ultimate Accident Year Countrywide-Private Carriers
Impact of Catastrophe Losses on Combined Ratio
100
105
110
115
90 91 92 93 94 95 96 97 98 99 00 (est.)
108.2
106.3
103.2102.5 102.4
103.3 103.35
101
102.6
104.9
108.9
109.6108.8
115.8
106.9
108.5
106.5 106
101.6
105.6
107.8
110.3
CatastrophePre-Catastrophe
Policyholders Surplus
0
50
100
150
90 91 92 93 94 95 96 97 98 99 00 (est.)
138.4
158.7 163.1182.3 193.3
230.0
255.5
308.5333.3 334.3 320.0
200
250
300(US$B)
Changes to Policyholders Surplus
0
10
20
69 7071 72 7374 75 76 77 79
-10
30
68
40
50
78 8081 82 84 85 86 87 88 8990 91 92 9483 93 95 96 9798 99 00(est.)
1.03.6
-2.0
1.0
4.7
-2.4-5.1
3.44.9 4.7 6.17.0
9.8
1.6
6.65.2
-1.8
11.7
18.8
9.7
14.2 15.8
4.4
20.3
4.4
19.2
11.1
36.7
25.5
53.0
1.4
-14.3
24.8
Start of Hard Market
Start of Hard Market
Start of Hard Market
P&C Coverage Considerations
Types of “Terrorism” exclusions in Property Insurance
Over 17 different Terrorism exclusions seen; most contain a broad definition encompassing some or all of following conditions:– any person or group(s) of persons;
– acting alone or on behalf of or in connection with any organization(s) or government(s);
– committed for political, religious, ideological or similar purposes;
– with the intention to influence any government and/or put the public, or any section of the public, in fear.
Many may be interpreted to exclude certain acts or losses previously covered such as vandalism, malicious mischief, riot, & civil commotion.
Types of “Terrorism” exclusions (… cont’d)
Some specifically exclude the use or release of chemical, biological or nuclear materials, but all exclusions encompass this intent.
Burden of proof on insured;
Except for ISO language, a concurrent causation exclusion applies. i.e., direct or indirect loss or damage caused by Terrorism, including other events or causes contributing concurrently or in any sequence to the loss is also excluded.
ISO CGL Terrorism Definition
“Terrorism’ means activities against persons, organizations or property of any nature that involve the following or preparation of the following: (a) use or threat of force or violence; or (b) commission or threat of a dangerous act; or (c) commission or threat of an act that interferes with or disrupts an electronic, communication, information or mechanical system.”
However, “dangerous act” is not defined
ISO CGL Terrorism Definition (cont’d)
“When one or both of the following applies: (a) the effect is to intimidate or coerce a government or the civilian population or any segment thereof, or to disrupt any segment of the economy; or (b) it appears that the intent is to intimidate or coerce a government, or to further political, ideological, religious, social or economic objectives, or to express (or express opposition to) a philosophy or ideology.”
Who will determine the intent of such acts?
ISO CGL Terrorism Exclusion Triggers
NBC “When pathogenic or poisonous biological or chemical
materials are released, and it appears that one purpose of the terrorism was to release such materials.”
“appears” could be a problem. Who’s perception? Insurer or insured.
The Workers’ Compensation Conundrum
Primary carriers can not exclude one of the biggest catastrophe risks they face
Treaty reinsurance markets are excluding terrorism coverage
Underwriting solutions?– Self insured retention's– Per claimant vs. per occurrence– Underwriting discipline
Legislative Proposals / Considerations
Top Five Costliest Terrorist Acts
Ranked by insured property losses including business interruption and aviation hull losses, in millions of dollars (2001 price levels)
Date Country EventInsured
property loss Injured Fatalities
9/11/01United States
World Trade Center, Pentagon attacked by hijacked airliners $19,000 2,250 3,122
4/24/93United
KingdomBomb explodes near NatWest tower in
London $907 54 1
6/15/96United
KingdomIRA car bomb explodes near Manchester shopping mall $744 228 0
2/26/93United States
Bomb explodes in garage of World Trade Center $725 1,000 6
4/10/92United
KingdomBomb explodes in London's financial
district $671 91 3
Insurance Programs Established by Federal Statute
The Price-Anderson Act of 1957, providing coverage for catastrophic nuclear accident.
The Overseas Private Investment Corp., formed in 1971, providing insurance against overseas political risk.
The National Insurance Development Program, authorized in 1968, providing insurance against urban riots and civil disorder
The National Flood Insurance Program, also in 1968, providing coverage in critical flood plains.
U.S. requests for stand-alone Terrorism
Numerous requests for stand-alone Terrorism cover from U.S. based clients, including “trophy” buildings or what insurers consider “target” risks such as stadiums, dams, bridges & tunnels.
To this point:– approx. 15% of clients have elected to purchase cover;– no client has been declined a quote outright;– approx. 12% of clients have declined to purchase cover;
Reasons for not purchasing have included:– clients waited to see what Federal action would be taken;– limited capacity;– expensive pricing.
Requests for cover now increasing.
Market Conditions Pre - 9/11
Industry Was Experiencing Pressures Prior to 9/11
Expedited time to trial in many venuesAsbestos
– “P&C Industry Underreserved by $30 Billion”
A.M. Best, July 2001Surprise awards/high profile settlements Increased awareness of claim trends causing
quicker settlements
Emerging Claim Challenges
Expanded Asbestos Environmental
(Sudden and Accidental) Lead Paint Construction Defects EIFS (Synthetic Stucco) Pharmaceuticals Class Actions Tobacco
Mold and Mildew Cell Phones Nursing Homes Automotive Tires Big Box Retailers MTBE (Fuel Additive) Ohio UM/UIM Internet-derived exposures
Market Conditions Post - 9/11
Demand for Terrorism insurance: Pre & Post WTC
Pre 9/11 - limited demand
– UK Terrorism;
– Specific countries (Colombia, Indonesia);
Post 9/11 - significant demand
– Worldwide Terrorism
USA & Canada
Europe
Rest of World
Main Sources of Requests
USA
Mexico
Canada
UK Eire
Singapore Australia
New Zealand
Colombia
Italy
Main Issues
Risk of future attacks still exists; Changing marketplace + structuring Terrorism programs complicated:
– Provides aggregate limit for declared locations only;– Values declared significantly affects price (rating on values);– Any cover for non-U.S. locations in less expensive local government schemes
(e.g. UK’s Pool Re.)? Avoid duplicating values declared. Policy forms involve complex language:
– Definition of Terrorism. Cover for physical loss or damage;– War exclusion. Need to understand policy limitations; – No cover for nuclear, chemical, or biological release;– No cover for damage from strike, riot, & civil commotion;– Cancellation provisions;– Non-concurrency between T3 and AIG form;– Business Interruption, Loss of Rent, Extra Expense.
Overview – The Post 9/11 Agenda The insurance industry is vulnerable to any large event in a
dense urban area
There is a correlation of multiple lines coming from multiple production sources
There is not a clear understanding of where exposures are located
New external demands from:– Investors– Regulators– Rating Agencies– Reinsurers
Density & Concentration Concerns Sample Questions Answered by Proposed
Portfolio Management Functionality
How much exposure do I have in each of the country’s largest XX office tower complexes? What is my exposure both gross and net of reinsurance at each of these locations?
How much exposure, by line of business, do I have within 0.25 miles of any office building greater than 40 stories?
How much exposure do I have within a one-block radius of an office building which just experienced an explosion?
Where in my portfolio do I have a concentration of value or limit that exceeds $XYZ in any 0.5 mile zone?
What urban risk load should I apply to my pricing of certain concentration zones?
World Trade Center Loss
Industry loss estimates now range as high as $60 billion. This will be the largest insured single event loss in
history:– Inflation Adjusted - Hurricane Andrew $20 billion,
Northridge EQ $14 billion Remembering Northridge Earthquake:
– Early estimates of insured losses were in the $2 billion range.
– The final loss amount was more than $10 billion.– Northridge was straightforward and simple compared
to WTC.
Overall Implications of World Trade Center Loss
Insolvencies should be expected Uncollectible reinsurance is going to be an issue Reinsurance and insurance capacity will shrink
significantly Prices for reinsurance and insurance will rise Coverage restrictions will be imposed Government pools may be necessary New entrants may emerge
Cause for Rise in Insurance and Reinsurance Pricing
WTC has made underwriters aware of new types of risks and larger potential losses
Standard deviation of loss is wider than previously expected
Amount of risk capital required to support insurance is greater than formerly understood
Industry’s liquidity needs are greater than previously understood
Capacity being reduced results in supply versus demand pressures
Insurance Demand After 9/11
The WTC attack will increase risk aversion
Buyers will rediscover the value of insurance
Demand for traditional risk transfer will rise
Financial stability of insurance carriers will be valued
A Grain of Salt
Insurance market conditions affected by:
– Investment results
– Catastrophe losses
– Investor psychology