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Implications of the Quiet Catastrophe Season of 2006
An Industry at the Crossroads
2007 PCS Catastrophe Conference
Phoenix, AZApril 30, 2007
Robert P. Hartwig, Ph.D., CPCU, President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org
Presentation Outline
• P/C Profit Overview—2006, A Cyclical Peak• Underwriting Trends: Unsustainable?• Premium Growth: Approaching a Standstill• Pricing: Quiet 2006Competitive Pressures Mounting• Capital & Capacity: Growing Rapidly Post-KRW• Catastrophe Loss Management• What is the Appropriate Role for Government?• Reinsurance Summary• Financial Strength & Ratings• Investments: More Money to Invest• Katrina-Spawned Litigation• Legislative & Regulatory Interest in CATs
Federal, Florida• Q&A
PROFITS
Quiet 2006 Not the Major Reason for Great Results
P/C Net Income After Taxes1991-2006 ($ Millions)*
$14,178
$5,840
$19,316
$10,870
$20,598$24,404
$36,819
$30,773
$21,865
-$6,970
$3,046
$30,029
$63,695
$44,155
$20,559
$38,501
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
*ROE figures are GAAP; 1Return on avg. Surplus.Sources: A.M. Best, ISO, Insurance Information Inst.
2001 ROE = -1.2%2002 ROE = 2.2%2003 ROE = 8.9%2004 ROE = 9.4%2005 ROE= 10.5%2006 ROAS1 = 14.0%
Though up in 2006, insurer profits are highly volatile (2001 was the industry’s worst year ever). ROEs
generally fall below that of most other industries.
-5%
0%
5%
10%
15%
20%
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2008E
*2007-08 P/C insurer ROEs are I.I.I. estimates.Source: Insurance Information Institute; Fortune
Andrew Northridge
Hugo Lowest CAT losses in 15 years
Sept. 11
4 Hurricanes
Katrina, Rita, Wilma
P/C profitability is cyclical, volatile and vulnerable
-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 0607
F08
F
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2008F
*2007-08 P/C insurer ROEs are I.I.I. estimates.Source: Insurance Information Institute; ISO, A.M. Best.
1975: 2.4%
1977:19.0% 1987:17.3%
1997:11.6%
2006:14.0%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years
10 Years 9 Years
Insurance & Reinsurance Stocks:Strong Finish in 2006
0.61%
9.53%
10.33%
16.57%
19.95%
16.24%
13.62%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
S&P 500
Life/Health
Reinsurers
P/C
All Insurers
Multiine
Brokers
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Total Returns for 2006
P/C insurer & reinsurer stocks rallied in late 2006
as hurricane fears dissipated and insurers turned in strong resultsBroker stocks held back
by weak earnings
Insurance & Reinsurance Stocks: Slow Start in 2007 in P/C, Reins
7.30%
2.32%
3.39%
0.20%
-0.51%
9.47%
5.34%
-2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%
S&P 500
Life/Health
Reinsurers
P/C
All Insurers
Multiline
Brokers
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Total YTD Returns Through April 27, 2007
P/C insurance, reinsurance stocks lagging on soft market
concerns and worries over 2007 hurricane season
Advertising Expenditures by P/C Insurance Industry, 1999-2005
$ Billions
$1.736 $1.737 $1.803$1.708
$2.975
$2.111
$1.882
$1.5
$1.7
$1.9
$2.1
$2.3
$2.5
$2.7
$2.9
$3.1
99 00 01 02 03 04 05Source: Insurance Information Institute from consolidated P/C Annual Statement data.
Ad spending by P/C insurers is at a record high, signaling increased
competition. Competition is especially fierce for non-cat
impacted lines like auto insurance
UNDERWRITING
Extremely Strong Results Across the Board
115.8
107.4
100.198.3
100.7
92.4
98.696.6
90
100
110
120
01 02 03 04 05 06 07F 08F
P/C Industry Combined Ratio
Sources: A.M. Best; ISO, III. *Estimates/forecasts based on III’s 2007 Early Bird survey.
2005 figure benefited from heavy use of reinsurance which lowered net losses
2006 produced the best underwriting result
since the 87.6 combined ratio in 1949
As recently as 2001, insurers were paying out nearly $1.16 for
every dollar they earned in premiums
2007/8 deterioration due primarily to falling rates, but results still strong assuming
normal CAT activity
87.6
91.2
92.1 92.3 92.4 92.493.1 93.1 93.3
93.0
85
86
87
88
89
90
91
92
93
94
1949 1948 1943 1937 1935 2006 1950 1939 1953 1936
Ten Lowest P/C Insurance Combined Ratios Since 1920
Sources: Insurance Information Institute research from A.M. Best data.
The 2006 combined ratio of 92.4 was the
best since 1949, a span of 57 years
The industry’s best underwriting years are associated with
periods of low interest rates
-55-50-45-40-35-30-25-20-15-10-505
101520253035
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
Underwriting Gain (Loss)1975-2006
Source: A.M. Best, Insurance Information Institute
$ B
illi
ons
Insurers earned an underwriting profit of $31.2 billion in 2006, the largest ever but only
the second since 1978. Despite the 2006 underwriting profit, the cumulative
underwriting deficit since 1975 is $419 billion.
110.
3
110.
2
107.
6
103.
9
109.
7
112.
3
111.
1
122.
3
110.
2
102.
5
105.
1
94
102.
0
112.
5
85
90
95
100
105
110
115
120
125
93 94 95 96 97 98 99 00 01 02 03 04 05 06F
Commercial Lines Combined Ratio, 1993-2006E*
Source: A.M. Best; Insurance Information Institute .
Outside CAT-affected lines, commercial
insurance is doing fairly well. Caution is
required in underwriting long-
tail commercial lines.
2006 results will benefited from relatively disciplined underwriting
and low CAT losses
Commercial coverages have exhibited extreme variability. Are current
results anomalous?
103.
9
104.
5
103.
5
104.
9
99.8 10
2.7
104.
5
109.
9
110.
9
105.
3
98.4
94.3 96
.4
91.0
85
90
95
100
105
110
115
93 94 95 96 97 98 99 00 01 02 03 04 05 06F
Personal LinesCombined Ratio, 1993-2006E
Source: A.M. Best; Insurance Information Institute.
A very strong 2006 resulted from favorable frequency & severity
trends and low CAT activity
117.7
158.4
113.6118.4
112.7
121.7
101.0
108.2111.4
121.7
109.3
98.294.4
100.3
93
113.0109.4
90
100
110
120
130
140
150
160
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06F
Homeowners Insurance Combined Ratio
Average 1990 to 2005= 113.1
Insurers have paid out an average of $1.13 in losses for every dollar earned
in premiums over the past 16 years
Sources: A.M. Best; III
Rates of Return on Net Worth for Homeowners Ins: US
Source: NAIC; 2005/6 figures are Insurance Information Institute estimates.
9.7%
3.6%
16.0%
-7.0%
-1.7%-4.2%
3.6%
12.4%
5.4%2.5%
5.4% 3.8%
1.4%
-7.2%-10%
-5%
0%
5%
10%
15%
20%
93 94 95 96 97 98 99 00 01 02 03 04 05E 06E
Averages: 1993 to 2005E
US HO Insurance = +2.1%
(+3.2% through 2006E)
10
0.7
116.8
113.6
115.3
12
2.4
115.0
117.0
97
.3
89
.0
97
.7
93
.8
89
80
85
90
95
100
105
110
115
120
125
95 96 97 98 99 00 01 02 03 04 05 06E
Commercial Multi-Peril Combined (Non-Liability Portion Only)
Sources: A.M. Best; III
The property component of CMP is performing very
well
PREMIUM GROWTH
Property Blip in 2006, But Profits Spur
Competition
-10%
-5%
0%
5%
10%
15%
20%
25%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
F2
00
8F
20
09
F2
01
0F
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
Strength of Recent Hard Markets by NWP Growth*
1975-78 1984-87 2001-04
*2007-10 figures are III forecasts/estimates. 2005 growth of 0.4% equates to 1.8% after adjustment for a special one-time transaction between one company and its foreign parent. 2006-2008 figures from III Groundhog Survey.
2006-2010 (post-Katrina) period could resemble 1993-97
(post-Andrew)
2005: biggest real drop in premium since early 1980s
Growth in Net Written Premium, 2000-2008F
Source: A.M. Best; Forecasts from the Insurance Information Institute’s Groundhog survey: http://www.iii.org/media/industry/financials/groundhog2007/.
5.1%
8.1%
14.1%
9.8%
4.7%
0.3%
4.3%
1.8% 1.9%
2000 2001 2002 2003 2004 2005 2006 2007F 2008F
P/C insurers will experience their slowest growth rates since the late 1990s…but underwriting results are
expected to remain healthy
PRICING
Under Pressure in 2007 in All Non-Coastal Risks
$418$440 $455
$481 $488 $508$536
$593
$668
$729
$787$835
$400$450$500$550$600$650$700$750$800$850$900
95 96 97 98 99 00 01 02 03 04 05* 06*
Average Expenditures on Homeowners Insurance**
*Insurance Information Institute Estimates/Forecasts**Excludes cost of flood and earthquake coverage.Source: NAIC, Insurance Information Institute
Countrywide home insurance expenditures rose an estimated 6% in 2006
Homeowners in non-CAT zones will see
smaller increases, but larger in CAT zones
$651 $6
68 $691 $7
05
$703
$685
$690 $7
24
$780 $8
23 $851
$847
$838
$847
$600
$650
$700
$750
$800
$850
$900
$950
94 95 96 97 98 99 00 01 02 03 04 05* 06* 07*
Average Expenditures on Auto Insurance
*Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute
Countrywide auto insurance expenditures
are expected to fall 0.5% in 2007, the first drop
since 1999
Lower underlying frequency and modest
severity are keeping auto insurance costs in check
Average Commercial Rate Change,All Lines, (1Q:2004 – 4Q:2006)
-0.1%
-3.2%
-7.0%
-9.4%-9.7%
-4.6%
-2.7%-3.0%
-5.3%
-9.6%
-5.9%
-8.2%
-12%
-10%
-8%
-6%
-4%
-2%
0%
1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Magnitude of rate decreases has diminished greatly since
mid-2005 but is growing again
KRW Effect
Percent of Commercial Accounts Renewing w/Positive Rate Changes, 2nd Qtr. 2006
71%
48%
28%21%
63%
32%
21%
12% 10%
35%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Southeast Southwest Pacific NW Northeast Midwest
Commercial Property Business Interruption
Source: Council of Insurance Agents and Brokers
Largest increases for Commercial Property & Business Interruption are in the Southeast, smallest in Midwest
Percent of Commercial Accounts Renewing w/Positive Rate Changes, 4th Qtr. 2006
25%
6% 6%
0%
8%6% 6%
3%
0%
11%
0%
5%
10%
15%
20%
25%
30%
Southeast Southwest Pacific NW Northeast Midwest
Commercial Property Business Interruption
Source: Council of Insurance Agents and Brokers
Largest increases for Commercial Property &
Business Interruption are in the Southeast, but
are diminishing; Smallest in Midwest
Commercial Accounts Rate Changes,2nd Qtr. 2006 vs. 4th Qtr. 2006
-4.5%-5.6%
-3.6%-2.3%
-9.3%-8.1%
-9.6%-7.7% -8.6%
-6.9%
9.3%
-8.1%
-15%
-10%
-5%
0%
5%
10%
CommercialAuto
WorkersComp
CommercialProperty
GeneralLiability
Umbrella Average
2Q06 4Q06
Source: Council of Insurance Agents and Brokers
Even commercial property is now
renewing down in 2006
CAPACITY/SURPLUS
Profits are Being
Reinvested & Banked for Future Catastrophes
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
$550
7576777879808182838485868788899091929394959697989900010203040506
U.S. Policyholder Surplus: 1975-2006
Source: A.M. Best, ISO, Insurance Information Institute.
$ B
illi
ons
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
Capacity as of 12/31/06 was $487.1B (est.), 14.4% above year-
end 2005, 71% above its 2002 trough and 46% above its 1999
peak.Foreign reinsurance and residual market
mechanisms absorbed 45% of 2005 CAT
losses of $62.1B
Capital Raising by Class Within 15 Months of KRW
Existing Cos., $12.145 , 36%
New Cos., $8.898 , 26%
Sidecars, $6.359 , 19%Insurance Linked
Securities, $6.253 , 19%
Insurers & Reinsurers raised $33.7 billion in the wake of Katrina,
Rita, Wilma
Source: Lane Financial Trade Notes, January 31, 2007.
$ Billions
Annual Catastrophe Bond Transactions Volume, 1997-2006
$966.9
$1,729.8
$4,693.4
$1,991.1
$1,142.8$1,219.5$846.1$984.8
$1,139.0
$633.0
$0$500
$1,000$1,500
$2,000$2,500$3,000
$3,500$4,000
$4,500$5,000
97 98 99 00 01 02 03 04 05 06
Ris
k C
apita
l Iss
ues
($ M
ill)
02
46
81012
1416
1820
Nu
mb
er o
f Iss
uan
ces
Risk Capital Issued Number of Issuances
Source: MMC Securities and Guy Carpenter; Insurance Information Institute.
Catastrophe bond issuance has soared in the wake of Hurricanes
Katrina and the hurricane seasons of 2004/2005
INVESTMENT IRONY
More Money Available to Invest, but Little to
Show for It
Property/Casualty Insurance Industry Investment Gain*
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7$56.9
$51.9
$57.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 02 03 04 05** 06*Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain. **2005 figure includes special one-time dividend of $3.2B. Source: ISO; Insurance Information Institute.
Investment gains fell in 2006 and are now only
comparable to gains seen in the late 1990s
CATASTROPHICLOSS
Insurers Accused of Crying Wolf Over Cats,
But Worst is Yet to Come
U.S. Insured Catastrophe Losses*$7
.5
$2.7
$4.7
$22.
9
$5.5 $1
6.9
$8.3
$7.4
$2.6 $1
0.1
$8.3
$4.6
$26.
5
$5.9 $1
2.9 $2
7.5
$1.2
$100
.0
$61.
9
$9.2
$0
$20
$40
$60
$80
$100
$120
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
07Q
1
20??
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. 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. Non-prop/BI losses = $12.2B.Source: Property Claims Service/ISO; Insurance Information Institute
$ Billions
2006 was a welcome respite. 2005 was by far the worst
year ever for insured catastrophe losses in the US, but the worst has yet to come.
$100 Billion CAT year is coming soon
U.S. Catastrophe Losses 2006: States With Largest Losses ($ Millions)
*ISO defines a catastrophe event as an event causing $25 million or more in insured property losses.
Source: ISO; Insurance Information Institute
$601$688
$873$878
$1,500
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
Indiana Missouri Tennessee Texas Kansas
SURPRISE!! Indiana led the US with $1.5 billion in
insured CAT losses in 2006
Some 33 catastrophe events* in 34 states cost insurers an estimated $8.8bn in 2006, compared with $61.9bn in 2005. Cat losses in the following five states -- totaling $4.5bn -- represent half the
total catastrophe losses for the year.
Number of Tornadoes,1985 – 2006p
1071 12
16
941
1376
1819
1254 13
33
1132
1133
856
702
65676
5
684
1297
1173
1082 12
34
1173
1148
1424
1345
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06p
Source: US Dept. of Commerce, Storm Prediction Center, National Weather Service; Ins. Info. Inst.
There are usually more than 1,000 confirmed tornadoes each year in the US. They accounted for about 25% of
catastrophe losses since 1985
$9 $11 $11 $12 $16$25 $27
$38
$88
$108
$0
$20
$40
$60
$80
$100
$120
San Jo
se, C
A (7-1
-191
1; 6.
6)
Portla
nd, O
R (8-1
2-18
77; 6
.3)
San F
rancis
co (6
-1-1
838;
7.2)
Mar
ked T
ree,
AR (1-5
-184
3; 6.
5)
North
ridge
, CA (1
-17-
1994
; 6.7)
Haywar
d, CA (1
0-21
-186
8; 6.
8)
Ft. Tejo
n, CA (1
-9-1
857;
7.9)
Charle
ston, S
C (8-3
-188
6; 7.
3)*
New M
adrid
, MO (2
-7-1
812;
7.7)
*
San F
rancis
co (4
-18-
1906
; 7.9)
$ B
illi
ons
With development along major fault lines, the threat of
$25B+ quakes looms large
Source: AIR Worldwide
(Billions of 2005 Dollars)
3 of the Top 10 are not West Coast events
Insured Losses from Top 10 Earthquakes Adjusted to 2005 Exposure Levels
Percentage of California Homeowners with Earthquake
Insurance, 1994-2004*
32.9%33.2%
19.5%17.4%
14.6%13.3%13.8%12.0%
15.8%15.7%16.8%
0%
5%
10%
15%
20%
25%
30%
35%
94 96 97 98 99 00 01 02 03 04 06**
*Includes CEA policies beginning in 1996. **2006 estimate from Insurance Information Network of CA.Source: California Department of Insurance; Insurance Information Institute.
The vast majority of California homeowners forego earthquake
coverage & play Russian Roulette with their most valuable asset.
Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2005)
$3.5 $3.8 $4.8 $5.0$6.6 $7.4 $7.7
$10.3
$21.6
$40.6
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
Georges(1998)
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo(1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Andrew(1992)
Katrina(2005)
$ B
illi
ons
Sources: ISO/PCS; Insurance Information Institute.
Seven of the 10 most expensive hurricanes in US history
occurred in the 14 months from Aug. 2004 – Oct. 2005:
Katrina, Rita, Wilma, Charley, Ivan, Frances & Jeanne
Figure 2.
Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,
1986-2005¹
Utility Disruption0.1%
Terrorism7.7%
All Tropical
Cyclones3
47.5%
Tornadoes2
24.5%
Water Damage0.1%
Civil Disorders0.4%
Fire6
2.3%
Wind/Hail/Flood5
2.8%
Earthquakes4
6.7%
Winter Storms7.8%
Source: Insurance Services Office (ISO)..
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2005 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood Insurance Program. 6 Includes wildland fires.
Insured disaster losses totaled $289.1 billion from
1984-2005 (in 2005 dollars). Tropical systems accounted for nearly half of all CAT losses from 1986-2005, up
from 27.1% from 1984-2003.
Total Value of Insured Coastal Exposure (2004, $ Billions)
$1,901.6$740.0
$662.4$505.8
$404.9$209.3
$148.8$129.7$117.2$105.3
$75.9$73.0
$46.4$45.6$44.7$43.8
$12.1
$1,937.3
$0 $500 $1,000 $1,500 $2,000 $2,500
FloridaNew York
TexasMassachusetts
New JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaAlabamaGeorgia
DelawareNew Hampshire
MississippiRhode Island
Maryland
Source: AIR Worldwide
Florida & New York lead the way for insured coastal property at more than $1.9 trillion each.
Northeast state insured coastal exposure totals
$3.73 trillion.
New Condo Construction inSouth Miami Beach, 2007-2009
• Number of New Developments: 15
• Number of Individual Units: 2,111
• Avg. Price of Cheapest Unit: $940,333
• Avg. Price of Most Expensive Unit: $6,460,000
• Range: $395,000 - $16,000,000
• Overall Average Price per Unit: $3,700,167*
• Aggregate Property Value: At least $6 Billion*Based on average of high/low value for each of the 15 developments
Source: Insurance Information Institute from www.miamicondolifestyle.com accessed April 5, 2007.
Figure 14.
Insured Coastal Exposure as a % of Statewide Insured Exposure (2004, $ Billions)
63.1%60.9%
57.9%54.2%
37.9%33.6%33.2%
28.0%25.6%25.6%
23.3%13.5%
12.0%11.4%
8.9%5.9%
1.4%
79.3%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
FloridaConnecticut
New YorkMaine
MassachusettsLouisiana
New JerseyDelaware
Rhode IslandS. Carolina
TexasNH
MississippiAlabamaVirginia
NCGeorgia
Maryland
Source: AIR Worldwide
After FL, many Northeast states have
among the highest coastal exposure as a share of all insured
exposure in the state.
Historical Hurricane Strikes in Galveston County, TX, 1900-2002
Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
Population of Galveston County is 5
times what it was when the hurricane of 1900 struck, killing 8,000
Figure 7.
Historical Hurricane Strikes in Suffolk County, NY, 1900-2002
Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
Population in Suffolk County is 4.5 times what it was in the 1940s
Figure 8.
Historical Hurricane Strikes in Barnstable County, MA, 1900-2002
Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
Population in Barnstable County
(Cape Cod) is 5 times what it was in the 1950s
Figure 9.
Historical Hurricane Strikes in Dare County, NC, 1900-2002
Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
Population in Dare County is 6 times what
it was in the 1950s
Figure 10.
Source: AIR Worldwide
Insured Losses: $110BEconomic Losses: $200B+
$70
$30
$5 $4 $1$0
$20
$40
$60
$80
NY NJ PA CT Other
Nightmare Scenario: Insured Property Losses for NJ/NY CAT 3/4 Storm
Total Insured Property Losses =
$110B, nearly 3 times that of
Hurricane Katrina
Distribution of Insured Property Losses,
by State, ($ Billions)
REINSURANCE MARKETS
Capital Flowing In,But So Does Criticism
Ratio of Reinsurer Loss & Underwriting Expense to Premiums Written, 1985-2006
1.1
0
1.0
8
1.1
0
1.0
3
1.0
2
1.0
6 1.1
4
1.1
3
1.1
7
1.0
1 1.0
6
1.2
6
0.9
5
1.3
9
1.2
1
1.0
6
1.0
7
1.0
7
1.0
9 1.1
8
1.0
7 1.0
8
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Lo
ss
& L
AE
Ra
tio
Source: Reinsurance Association of America.
Despite the respite in 2006, reinsurers paid an average of $1.11 in loss and expense
for every $1 in written premium since 1985
Share of Losses Paid by Reinsurers, by Disaster*
30%25%
60%
20%
45%
0%
10%
20%
30%
40%
50%
60%
70%
Hurricane Hugo(1989)
Hurricane Andrew(1992)
Sept. 11 TerrorAttack (2001)
2004 HurricaneLosses
2005 HurricaneLosses
*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for 2005.Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.
Reinsurance is playing an increasingly
important role in the financing of mega-CATs; Reins. Costs
are skyrocketing
Announced Katrina, Rita, Wilma Losses by Segment
U.S. Primary, $14.2 , 39%
U.S. Reinsurer, $3.4 , 9%
Other, $0.3 , 1%
Lloyd's, $3.5 , 9%
Bermuda, $10.9 , 29%
Europe, $4.9 , 13%
Catastrophes are global events. Only 39% of
KRW losses were borne by US
primary insurers
*As of 2/21/06Source: Dowling & Partners, RAA.
$ Billions
US Reinsurer Net Income& ROE, 1985-2006
$1.9
4
$2.0
3
$1.9
5 $3.7
1
$4.5
3
$5.4
3
$1.4
7
$1.9
9
$1.3
1 $3.1
7
$3.4
1
$2.5
1
$9.6
8
($2.98)
$0.1
2
$1.9
5
$1.3
8
$1.2
2
$1.8
7
$1.1
7 $2.5
2
$1.7
9
($4)
($2)
$0
$2
$4
$6
$8
$10
$12
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Net
Inco
me
($ B
ill)
-10%
-5%
0%
5%
10%
15%
20%
RO
E
Net Income ROE
Source: Reinsurance Association of America.
Reinsurer profitability has rebounded
Debate Over Reinsurance Market Performance & Government
• Reinsurance markets typically suffer large shocks, followed by a period of higher prices and transient capacity constraints
• A new equilibrium between Supply and Demand is typically found within 18 months, commensurate with changes in the risk landscape. This is Economics 101 and is a textbook illustration of how capitalism works.
• A competing hypothesis suggests that reinsurance markets “fail” because they do not provide a stable price or quantity of protection as is required in an economy with continuously exposed fixed assets, especially one that is growth oriented
• Public Policy Solution: Acting on this hypothesis generally results in displacement of private (re)insurance capital by government intermediaries
• Question Asked: Are policyholders and the economy better served through free markets, government or some hybrid?
Sources: Insurance Information Institute
FINANCIAL STRENGTH &
RATINGS Industry Has Weathered
the Storms Well
Reasons for US P/C Insurer Impairments, 1969-2005
*Includes overstatement of assets.
Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;
Catastrophe Losses8.6%
Alleged Fraud11.4%
Deficient Loss
Reserves/In-adequate Pricing62.8%
Affiliate Problems
8.6%
Rapid Growth
8.6%
2003-2005 1969-2005
Deficient reserves,
CAT losses are more important factors in
recent years
Reinsurance Failure3.5%
Rapid Growth16.5%
Misc.9.2%
Affiliate Problems
5.6%
Sig. Change in Business
4.6%
Deficient Loss
Reserves/In-adequate Pricing38.2%
Investment Problems*
7.3%
Alleged Fraud8.6%
Catastrophe Losses6.5%
P/C Insurer Impairments,1969-2006
815
127
11 934
913 12
199
16 14 1336
4931
3449 49
5460
5841
2915
1231
18 1949 50
4735
1813 15
0
10
20
30
40
50
60
70
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
The number of impairments varies significantly over the p/c insurance cycle,
with peaks occurring well into hard markets
Source: A.M. Best; Insurance Information Institute
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2006
90
95
100
105
110
115
120
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
Co
mb
ined
Rat
io
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
Imp
airm
ent R
ate
Combined Ratio after DivP/C Impairment Frequency
Impairment rates are highly
correlated underwriting performance
Source: A.M. Best; Insurance Information Institute
2006 impairment rate was 0.43%, or 1-in-233 companies, half the 0.86% average since 1969
STATE RESIDUAL MARKETS
Still Growing Despitea Quiet 2006
US FAIR Plans Exposure to Loss* (Billions of Dollars)
Source: PIPSO; Insurance Information Institute *Hurricane exposed states only.
$387.8$400.4
$345.9
$269.6
$140.7$113.3
$170.1
$96.5
$40.2
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
1990 1995 1999 2000 2001 2002 2003 2004 2005
In the 15-year period between 1990 and 2005, total exposure to loss in the FAIR plans has
surged by a massive 965 percent, from $40.2bn in 1990
to $387.8bn in 2005!
Total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54.7bn in 1990 to $419.5 billion in 2005.
U.S. Beach and Windstorm Plans Exposure to Loss (Bill. of Dollars)
Source: PIPSO; Insurance Information Institute
$14.5
$53.5
$111.8$108.0
$103.5
$22.4$26.4 $30.0 $31.7
$0
$20
$40
$60
$80
$100
$120
1990 1995 1999 2000 2001 2002 2003 2004 2005
In the 15-year period between 1990 and 2005, total exposure to loss in the Beach and Windstorm plans has more than doubled, from $14.5bn in 1990 to $31.7bn in 2005.
In 2002 Florida combined its Windstorm and Joint Underwriting Association to create Florida Citizens, so
Florida data shifted to the FAIR plans from this date
Florida Citizens Exposure to Loss (Billions of Dollars)
Source: PIPSO; Insurance Information Institute
408.8
$210.6$206.7$195.5
$154.6
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
2002 2003 2004 2005 2006
Exposure to loss in Florida Citizens nearly doubled in 2006
Major Residual Market Plan Estimated Deficits 2004/2005 (Millions of Dollars)
* MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in Federal Aid.Source: Insurance Information Institute
-$516
-$1,425
-$1,770
-$954
-$595 *
-$2,000-$1,800-$1,600-$1,400-$1,200-$1,000
-$800-$600-$400-$200
$0
Florida HurricaneCatastrophe Fund
(FHCF) Florida Citizens Louisiana Citizens
Mississippi WindstormUnderwriting
Association (MWUA)
2004 2005
Hurricane Katrina pushed all of the residual market property plans in
affected states into deficits for 2005, following an already record hurricane loss year in 2004
What Role Should the Federal Government
Play in Insuring Against Natural Disaster Risks?
NAIC’s Comprehensive National Catastrophe Plan
• Proposes Layered Approach to Risk• Layer 1: Maximize resources of private
insurance & reinsurance industry Includes “All Perils” Residential Policy Encourage Mitigation Create Meaningful, Forward-Looking Reserves
• Layer 2: Establishes system of state catastrophe funds (like FHCF)
• Layer 3: Federal Catastrophe Reinsurance Mechanism
Source: Insurance Information Institute
Guiding Principles of NAIC’s National Catastrophe Plan
• National program should promote personal responsibility among policyholders
• National program should support reasonable building codes, development plans & mitigation tools
• National program should maximize risk-bearing capacity of private markets, and
• National plan should provide quantifiable risk management to the federal government
Source: Insurance Information Institute from NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005.
Comprehensive National Catastrophe Plan Schematic
Personal Disaster Account
Private Insurance
State Regional Catastrophe Fund
National Catastrophe Contract Program
Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.
State Attachment
1:50 Event
1:500 Event
Legislation has been introduced and ideas
espoused by ProtectingAmerica.org will likely get a more
thorough airing in 2007/8
KATRINA: The Legal Storm
Silence in the Court?Keep Dreaming
Hurricane Katrina Claim Status on Storm’s 1st Anniversary*
In Process, 3%
Mediation/ Litigation, 2%
Settled, 95%
95% of the 1.2 million
homeowners insurance claims in Louisiana & Mississippi are
settled, with just 2% in dispute
*Hurricane Katrina made its north Gulf coast landfall August 29, 2005.Source: Insurance Information Institute survey, August 2006.
Figure 3.
Likely Market Impacts of Post-Katrina Litigation
• Litigation Creates an Additional Layer of Uncertainty in What is Already a Very Difficulty Market
Ultimate Thrust of Litigation is to Compel Insurers to Pay Water Damage (Flood/Surge) Losses for Which They Have Never Received A Penny in Premium
• Some Courts’ Apparent Willingness to Retroactively Rewrite Long-Standing, Regulator Approved Terms & Conditions of Insurance Contracts Creates an Unpriceable Risk
Compounded by juries willing to award millions in punitives• People Discouraged from Buying Flood Coverage• BOTTOM LINE: Weather, Courts, Juries Together
Create Nearly Impossible Operating Environment• Coverage Under These Circumstances Will Necessarily
Become More Expensive, Less Available
REGULATORY ACTIVITY
Washington Has Taken an Interest in Catastrophe-
Related Issues
Federal Legislative Update
Natural Disaster Coverage• Some insurers are pushing for federal catastrophic risk fund coverage in the
wake of billions of dollars of losses suffered by insurers from the 2004-2005 hurricane seasons.
• Legislative relief addressing property/casualty insurers’ exposure to natural catastrophes, such as the creation of state and federal catastrophe funds, has been advocated by insurers include Allstate and State Farm recently. However, there is active opposition many other insurers and all reinsurers.
• There are supporters in Congress, mostly from CAT-prone states. Skeptics in Congress believe such a plan would be a burden on taxpayers like the NFIP and that the private sector can do a better job. Unlike TRIA, the industry is not unified on this issue.
• Allowing insurers to establish tax free reserves for future catastrophe losses has also been proposed, but Congress has not yet indicated much support.
Sources: Lehman Brothers, Insurance Information Institute
Federal Legislative UpdateMcCarran-Ferguson Insurance Antitrust Exemption• Under McCarran-Ferguson Act of 1945, insurers have limited immunity under
federal anti-trust laws allowing insurers to pool past claims information to develop accurate (actuarially credible) rates.
• Very low level of understanding of M-F in Washington
• Certain legislators threaten to revoke McCarran-Ferguson because of alleged collusion in the wake of Hurricane Katrina. However, the view among some Washington insiders is that such a move would hurt small insurers with less resources rather than the large insurers perhaps being targeted. The current bills designed to revoke McCarran-Ferguson are S.618 and H.R. 1081.
• The government appointed Antitrust Modernization Commission in an April 2007 report strongly encouraged Congress to re-examine the McCarran-Ferguson Act. Notably, 4 of the commissions 12 members called for a full repeal of the law.
Sources: Lehman Brothers, Insurance Info. Institute
Federal Legislative UpdateFederal Terrorism Reinsurance (TRIA)• TRIA expires 12/31/07. The current federal program offers $100 billion of
coverage subject to a $27.5B industry aggregate retention.
• New Democratic Congress (with Committee chairs from urban Northeast states) predisposed to extend. Despite resistance/lackluster Administration support TRIA will likely extended for a multi-year period, perhaps 6-8 but potentially as long as 15 years (last extension in 2005 was for 2 years)
• Potential changes include extensions of coverage for domestic terrorism losses
(not included currently), and a lower industry retention for nuclear, biological, chemical, or radiological (NBCR) attacks. There could possibly be a modestly higher industry retention for non-NBCR losses, and it needs to be resolved whether liability and group life losses will be covered.
• Original hope for first-half 2007 extension have faded. Now looking at fall or even 11th-hour extension as in 2005.
Sources: Lehman Brothers, Insurance Information Institute
FLORIDA SPECIAL SESSION
LEGISLATIVE CHANGES
Insurer, Policyholder & State Impacts
Why There is Concern Over the Florida Legislature’s & Governor’s Changes
• Risk is Now Almost Entirely Borne Within State• Virtually Nothing Done to Reduce Actual Vulnerability• Creates Likelihood of Very Large Future Assessments• Potentially Crushing Debt Load• State May be Forced to Raise/Levy Taxes to Avoid Credit
Downgrades• Many Policyholder Will See Minimal Price Drop
“Savings” came from canceling recent/planned rate hikes• Residents in Lower-Risk Areas, Drivers, Business
Liability Policyholders Will Come to Resent Subsidies to Coastal Dwellers
• Governor’s Emergency Order for Rate Freezes & Rollbacks Viewed as Unfair & Capricious
Sources: Insurance Information Institute.
Pre- vs. Post-Event in FL for 2007 Hurricane Season
$12.
4
$15.
0
$17.
6
$25.
8
$9.9
$14.
6
$24.
1
$31.
4
$34.
5
$37.
4
$54.
2
$10.9$10.4$10.1$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
1-in-20 1-in-30 1-in-50 1-in-70 1-in-85 1-in-100 1-in-250
Pre-Event Funding Post-Event Funding (Assessments & Bonds)
Bil
lion
s
Total = $20.0 Billion
Notes: Pre-event funding includes funds available to Citizens, FHCF and private carriers plus contingent funding available through private reinsurance to pay claims in 2007. Post-event funding is on a present value basis and does not includefinancing costs. Probabilities are expressed as “odds of a single storm of this magnitude or greater happening in 2007.”Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.
$35.0B
$25.0B
$43.8B $49.5B
$55.0B
$80.0BThere is a very significant likelihood of major, multi-year assessments in 2007
22%30% 31%
28%
33% 32%
0%
10%
20%
30%
40%
50%
60%
70%
Coastal Counties Interior Counties Noncoastal States
Very unfair
Somewhat Unfair
Source: Insurance Research Council
Public Attitude Monitor 2006: Unfairness of Policyholder Subsidies
Coastal States
Most non-coastal policyholders believe premium subsidies for coastal property owners are unfair
29% 25% 30%
22% 34% 31%
0%
10%
20%
30%
40%
50%
60%
70%
Coastal Counties Interior Counties Noncoastal States
Very unfair
Somewhat Unfair
Source: Insurance Research Council
Public Attitude Monitor 2006: Unfairness of Taxpayer Subsidies
Most non-coastal dwellers believe taxpayer subsidies for coastal property owners are unfair
Coastal States
Summary• Quiet 2006 was a welcome respite for insurers and policyholders• Underwriting results were merely aided by lack of CATs. Strong
underwriting results and favorable underlying loss trends accounted for most of the improvement
• Personal & Commercial lines results were unsustainably good 2006; Overall profitability reached its highest level (est. 14%) since 1988
• Premium growth rates are slowing to their levels since the late 1990s; Commercial leads decreases
• Clear need to remain underwriting focused for catastrophic and non-cat risks alike
• Major Challenges:Slow Growth Environment AheadMaintaining price/underwriting disciplineManaging variability/volatility of results
Insurance Information Institute On-Line
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