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Outline

Outline. Historical Results and Baseline 2005 and 2007 – A period of change 2007 and beyond – Insight and Perspective Industry Issues TRIA, OFC and Cat Fund. Questions. Supply Side Business. Insurance is classic supply & demand business model Demand is more or less constant follows GDP

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Outline

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  1. Outline • Historical Results and Baseline • 2005 and 2007 – A period of change • 2007 and beyond – Insight and Perspective • Industry Issues • TRIA, OFC and Cat Fund. • Questions

  2. Supply Side Business • Insurance is classic supply & demand business model • Demand is more or less constant follows GDP • Market is supply driven • Supply = Capital = Surplus. • Capital Moves to returns and away from losses • Capital becomes variable creating hard and soft markets • Capital leaves: capital to reserves, losses, buy-backs and reduction of risk appetite. • Capital enters: net income, new capital models and new capital

  3. Underwriting Gain (Loss)1975-2006 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. $ Billions Source: A.M. Best, Insurance Information Institute

  4. Cyclical Growth Rate for P&C Insurance Industry* and Historical Interest Rates 1975-78 1984-87 2001-04 Hard Market Hard Market Hard Market Soft Market • Note: Shaded areas denote hard market periods. • Source: A.M. Best, Insurance Information Institute. Treasury Yields – Federal Reserve • 2007 figures for ACE based on 2007 forecast. • 1999 NWP for ACE was adjusted to include 12 months of premium from the CIGNA acquisition (as if it was acquired on Jan. 1, 1999 instead of July 2, 1999.

  5. U.S. PolicyholderSurplus: 1975-2006 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. $ Billions $285.4M Source: A.M. Best, ISO, Insurance Information Institute.

  6. Ten Lowest P/C Insurance Combined Ratios Since 1920 The industry’s best underwriting years are associated with periods of low interest rates The 2006 combined ratio of 92.4 was the best since the 87.6 combined in 1949 Sources: Insurance Information Institute research from A.M. Best data.

  7. 2006 Calendar Year by Accident Year

  8. A 100 Combined Ratio Isn’t What it Used to Be * 2005/6 figures are return on average statutory surplus. Source: Insurance Information Institute from A.M. Best and ISO data.

  9. Historical ROE For Property & Casualty vs. All Industries - 1987–2006 and Interest Rates Source: Insurance Information Institute; Fortune, Federal Reserve

  10. 2005 to 2007 - A Period of Change • 2004 and 2005 – Natural Cat losses. • Model Changes • Rating Agency Changes • Bifurcated market: CAT and all else • New Capital Sources • Distribution – Finding balance • Casualty Pricing Pressure

  11. Why Property Prices Went Up… Historical results Cost and availability of reinsurance Portfolio Management RMS Model changes S&P and AM Best capital requirements Magnitude of supply imbalance.

  12. Commercial Property Calendar Year Results 1993-2005

  13. Industry Track Record • During the period January 1, 1997 through December 31, 2005, the US P&C Industry experienced $35.2 Billion in adverse development: 1996 & prior AY’s $ 21.2 Billion 1997 - 2001 AY’s $ 58.7 Billion 2002 & subs. AY’s $(44.7)Billion Total $ 35.2 Billion Source Dowling IBNR Weekly • 1996 & prior was primarily due to asbestos • Both the 1997 – 2001 period and 2002 – 2005 period are a function of mis-estimation. Actual experience proved to be quite different from expected

  14. Reserve Development DistortsCalendar Year PictureP & C Insurance Industry Prior Year Reserve Development* * Negative numbers indicate favorable development; positive figures represent adverse development. Source: A.M. Best, Lehman Brothers for years 2005E-2007F

  15. Industry Reserve Track Record Workers Compensation 19971998199920002001 Initial L/R 75.6% 79.5% 81.2% 79.5% 78.9% Current L/R 82.6% 91.9% 99.2% 96.2% 87.8%

  16. Industry Reserve Track Record General Liability 19971998199920002001 Initial L/R 78.3% 77.6% 76.1% 76.2% 83.3% Current L/R 82.7% 95.2% 104.3% 100.6% 101.5%

  17. Industry Reserve Track Record Casualty Reinsurance 19971998199920002001 Initial L/R 69.3% 78.6% 82.3% 81.6% 119.7% Current L/R 78.6% 109.5% 120.1% 118.7% 131.2%

  18. Reasons for US P/C Insurer Impairments, 1969-2005 1969-2005 2003-2005 *Includes overstatement of assets. Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report,Nov. 2005.

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