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Terror, Tragedy & Turmoil The Insurance Industry Responds

This article discusses the challenges faced by the insurance industry in response to terrorism, trial lawyers, corporate governance, and other factors affecting profitability and underwriting performance.

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Terror, Tragedy & Turmoil The Insurance Industry Responds

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  1. Terror, Tragedy & TurmoilThe Insurance Industry Responds CPCU I-Day 2002 Scottsdale, AZ November 20, 2002 Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: (212) 346-5520 Fax: (212) 732-1916 bobh@iii.org  www.iii.org

  2. Insurance Industry’s Axis of Evil Terrorism Toxic Mold? Trial Lawyers Tycoons

  3. Terror, Tragedy & Turmoil: Insurers’ Axis of Evil • Terror • ‘Traditional’ Terrorism and repercussions of 9/11 • Economic Terrorism = Trial Lawyers • Tragedy • Corporate Governance • Civil Justice System Run Amok • Lies & Misinformation Spread by Industry Critics • Turmoil • Mold • Credit • Investments • Profitability • Pricing • Underwriting

  4. PROFITABILITY

  5. Highlights: Property/Casualty First-Half 2002 ($ Millions) *Comparison with year-end 2001;

  6. P/C Net Income After Taxes1991-2002 ($ Millions) • 2001 was the first year ever with a full year net loss • 2002 First Half ROE = 3.3% *I.I.I. estimate based on first half 2002 data. Sources: A.M. Best, ISO, Insurance Information Institute.

  7. ROE: Financial Services Industry Segments, 1987–2001 Source: Insurance Information Institute; Fortune

  8. ROE vs. Cost of Capital: US Non-Life 1991 – 2002* There is an enormous gap between the industry’s cost of capital and its rate of return 9.5. pts 14.6 pts US P/C insurers have missed their cost of capital by an average 6.7 points since 1991 Source: The Geneva Association, Ins. Information Inst.

  9. 2000 Return on Equity:Southwest States PP Auto 2000 Source: NAIC, Insurance Information Institute

  10. 2000 Return on Equity:Southwest States HO 2000 Source: NAIC, Insurance Information Institute

  11. Impact of Recession on P/C Premiums and Profitability (1970-2001) *GAAP return on equity, adjusted for inflation; Bank data 1952-2001; Div. Fin. 1987-2001 Source: Insurance Information Institute

  12. UNDERWRITINGPERFORMANCE

  13. 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! *Estimate based on first half 2002 results. Source: A.M. Best, Insurance Information Institute

  14. P/C Industry Combined Ratio Combined Ratios 1970s: 100.3 1980s: 109.2 1990s: 107.7 2000s: 110.4 2001 = 115.7 2002E = 105.0* *Based on first half 2002 results Sources: A.M. Best; III

  15. Combined Ratio: Reinsurance vs. P/C Industry 2001’s combined ratio was the worst-ever for reinsurers *First Half 2002 figures. Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute

  16. Underwriting Gain (Loss)1975-2002* $ Billions P-C insurers paid $53 billion more in claims & expenses than they collected in premiums in 2001 *Annualized estimate based on first half 2002 data. Source: A.M. Best, Insurance Information Institute

  17. World’s Most Dangerous Lines of Insurance(Combined Ratio + 1 Std. Deviation) 407.3 Source: Insurance Information Institute, calculated from A.M. Best combined ratio data.

  18. 12% After Tax ROE Requires Underwriting Profit Source: Dowling & Partners

  19. U.S. InsuredCatastrophe Losses CAT Losses for 2001 Set a Record • 20 events (lowest since 1969) • 1.5 million claims • 9/11: $20.3B = 51,000 claims $ Billions *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

  20. Med Claim Costs Rising Sharply Health care inflation is affecting the cost of medical care, no matter what system it is delivered through Source: NCCI; William M. Mercer, Insurance Information Institute.

  21. Reserve Deficiency, by Line(AY 1992-2001, as of 12/01) Estimated Deficiency Total Excluding A&E: $64 Billion A&E Deficiency: $55 Billion Total Including A&E: $120 Billion *Occurrence and claims made Source: Morgan Stanley

  22. Outlook for Personal Lines:2002 - 2004 PERSONAL AUTO HOMEOWNERS 97 98 99 00 01 02E 03F 04F 97 98 99 00 01 02E 03F 04F Sources: A.M. Best, Conning & Co.

  23. Outlook for Commercial Lines:2002 - 2004 Sources: A.M. Best, Conning & Co.

  24. Arizona Direct Loss Ratio Trends, Selected Lines Auto, WC: Headed in the wrong direction? Source: NAIC, Insurance Information Institute

  25. Key Auto Insurance Stats for AZ1997 vs. 2002* +3.1% +34.1% +30.9% +1.2% * Average for 4 quarters ending with the second quarter of 2002. Source: Insurance Services Office, Insurance Information Institute

  26. Key Auto Insurance Stats for US1997 vs. 2002* +11.0% +35.0% +18.7% +21.3% +19.5% * Average for 4 quarters ending with the second quarter of 2002. Source: Insurance Services Office, Insurance Information Institute

  27. Crime: Returning as a Cost Driver? Increases in auto theft and robbery will add pressure to the cost of auto and homeowners insurance Source: FBI; Insurance Information Institute.

  28. RESTORE & REBUILD DESTROYEDCAPACITY

  29. Policyholder Surplus: 1975-2002* Surplus Peaked at $336.3 Billion in 1999 • Surplus decreased 8.7% in 2001 to $289.6 Billion. • Surplus fell 2.3% in the 1st half of 2002 • Surplus is now lower than at year-end 1997. Billions (US$) “Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations *As of June 30, 2002 Source: A.M. Best, Insurance Information Institute

  30. Capital Raising by P/C Insurers Since September 11, 2001* Capital Raising by P/C Insurers Since 9/11 Totals $53.2B $27.9 Billion $25.4 Billion 14 Pending 38 Pending 40 Completed 33 Completed *As of September 13, 2002. Source: Morgan Stanley, Insurance Information Institute.

  31. Capital Myth: P/C Insurers Have $300 Billion to Pay Terrorism Claims Total PHS = $298.2 B as of 6/30/01 = $282.9 B as of 6/30/02 Only 33% of industry surplus backs up “target” lines *”Target” Commercial includes: Comm property, liability and workers comp; Surplus must also back-up on non-terrorist related property/liability and WC claims Source: Insurance Information Institute

  32. RATIONALIZE PRICING

  33. Average Price Change of Personal Lines Renewals *III estimates Source: Conning, III

  34. *Insurance Information Institute Estimates/Forecasts Source: NAIC, Insurance Information Institute Average Expenditures on Auto Insurance: USvs. AZ Countrywide auto insurance are expected to rise 8-10% in 2003

  35. *III Estimates Source: NAIC, Insurance Information Institute Average Expenditures on Homeowners Ins.: US vs. AZ Average HO expenditures are expected to rise by 8-10% in 2003

  36. Homeowners Insurance Expenditure as a % of Median Home Price* HO Expenditure as % of Sales Price Median Home Sales Price Source: Insurance Information Institute calculations based on data from National Association of Realtors, NAIC.

  37. Cost of Risk per $1,000 of Revenues: 1990-2002E • 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 Source: 2001 RIMS Benchmark Survey; Insurance Information Institute estimates.

  38. CIAB Rate Survey Third Quarter 2002 Rate Increases By Line of Business No Change Up 1-10% 10-20% 20-30% 30-50% 50%-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

  39. Rate On Line Index(1989=100) Prices rising, limits falling: ROL up significantly Source: Guy Carpenter * III Estimate

  40. Commercial Lines Net Written Premium as % of GDP Commercial insurance premiums as a % of GDP fell 35% between 1988 and 2000 and remains far below late 1980’s levels Sources: Insurance Information Institute, calculated from U.S. Bureau of Economic Analysis and A.M. Best data.

  41. INVESTMENT PERFORMANCE

  42. Net Investment Income Investment income in 2002 is expected to fall 5% due primarily to historically low interest rates Billions (US$) Facts 1997 Peak = $41.5B • = $40.7B • = $37.7B • E = $35.8B Source: A.M. Best, Insurance Information Institute

  43. Interest Rates: Lower Than They’ve Been in Decades • 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. • 66% of the industry’s invested assets are in bonds *Average for week ending November 1, 2002. Source: Board of Governors, Federal Reserve System; Insurance Information Institute

  44. Total Returns for Large Company Stocks: 1970-2002* • Headed for 3rd consecutive year of decline for stocks • Last happened 1939-1941 • Stocks account for just 21% of p/c insurer investments *As of November 15, 2002. Source: Ibbotson Associates, Insurance Information Institute

  45. P/C Industry Investments,by Type (as of Dec. 31, 2001) Common stock accounts for about 1/5 of invested assets Bond Holdings, by Type Industrial & 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

  46. Investment Gain, by Segment* Investment returns have shrunk, but are still important. “Heavy Lifting” must be done through underwriting & pricing Investment gains returning to pre-bubble levels *As a % of net earned premium. Investment gains consists primarily of interest, dividends and realized capital gains and losses. Source: A.M. Best; Insurance Information Institute estimate

  47. Property/Casualty Insurance Industry Investment Gain* Investment gains are returning to “pre-bubble” levels *Investment gains consists primarily of interest, stock dividends and realized capital gains and losses. Source: Insurance Services Office; Insurance Information Institute estimate

  48. Accounting Problems are Getting Many Companies into Trouble • Enron was tip of an iceberg • Major implications for insurers (p/c and life)

  49. Financial Restatements Filed The number of financial restatements is rising even thought the number of publicly traded companies is falling. *Approximate Sources: Huron Consulting Group

  50. KEEP WALL STREET HAPPY

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