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Insurance CEO Nightmares: 2001 Outlook & Update for Property/Casualty Industry

An analysis of the major concerns keeping insurance CEOs up at night in 2001, with a focus on the Pennsylvania property/casualty market and a look ahead at industry trends. Presented by Robert P. Hartwig, Vice President & Chief Economist at the Insurance Information Institute.

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Insurance CEO Nightmares: 2001 Outlook & Update for Property/Casualty Industry

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  1. What Will Keep Insurance CEOs Awake at Night in 2001?An Update & Outlook for the US & Pennsylvania Property/Casualty Insurance Industry for 2001 and Beyond Pennsylvania Association of Mutual Insurance Companies Underwriting & Loss Prevention Seminar Harrisburg Hilton & Towers Hotel Harrisburg, PA November 15, 2000 Robert P. Hartwig, Ph.D. Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: (212) 669-9214Fax: (212) 732-1916 bobh@iii.org  www.iii.org

  2. Highlights: First Half 2000($ Millions)

  3. Presentation Outline • Insomnia: Major Problem Among Insurance CEOs • Top 10 Reasons for Losing Sleep • Q&A

  4. #1 PROFITS

  5. Return on Equity (Profitability) 10-Year Average* *Insurers: 1989-1998; and Fortune 500: 1990-1999. Source: NAIC, Insurance Information Institute

  6. P/C Net Income After Taxes1993-2000* ($ Billions) *Estimate based on First Half 2000 data. Sources: A.M. Best, ISO.

  7. ROE: Financial Services Industry Segments, 1987–2000* * 2000 figures are estimates. Source: Insurance Information Institute

  8. Return on Net Worth,Selected Lines in Pennsylvania 10-Year Averages Auto +10.5% Home -2.1% WC +7.7 Source: NAIC, Insurance Information Institute

  9. Capital/Capacity Pricing Fundamentals Investments Competition Consolidation Distribution Class Action Wall Street Sagging Profits are the Symptom, not the Cause

  10. #2 CAPITAL/ CAPACITY

  11. Policyholder Surplus: 1975-2000* (Capital, Total P/C) • 1999 Surplus = $336.3 Billion Is it a Peak? • Increase of 0.9% over 1998, smallest gain since 1984 • Surplus decreased 2.3% in First Half 2000 to $326.7 Billion Billions (US$) Source: A.M. Best, Insurance Information Institute * First Half 2000

  12. Net Premiums Written to Policyholder Surplus 1998: 0.84 1999: 0.85 2000 (Forecast): 0.94 Source: A.M. Best, ISO, Insurance Information Institute

  13. Distribution of Industry Surplus Source: PaineWebber

  14. Excess Capital: What to Do? • CEOs: Buy It, Build It--They Will Come • Policyholders: Lower my rates! Pay my dividend! • Shareholders: Show me the money! • Regulators: Keep your hands off of it! • Rating Agencies: Keep your hands off of it and give it back!

  15. #3 PRICING

  16. Average Price Change of Commercial Insurance Renewals Source: Conning

  17. Policy Renewal Premiums in Standard Commercial Lines Source: Goldman Sachs

  18. Policy Renewal Premiums in Workers’ Compensation Source: Goldman Sachs

  19. Cumulative Workers Comp Rate/Loss Cost Changes* Source: NCCI *Advisory Loss Costs

  20. * III estimates; Sources: NAIC, Insurance Information Institute Average Expenditures on Auto Insurance: US vs. PA Countrywide rates fell by 2.8% in 1998, 3.2% in 1999 (est.)

  21. Nearby States’ Auto Insurance Expenditures & Rank, 1998 1 2 14 19 37 Source: NAIC (March 2000 release), Insurance Information Institute

  22. Nearby States’ Average Homeowners Insurance Premium, 1997 11 18 34 38 50 Source: NAIC (March 2000 release), Insurance Information Institute

  23. #4 FUNDAMENTALS

  24. P/C Industry Combined Ratio Combined Ratios 1970s: 100.3 1980s: 109.2 1990s: 107.7 1999 = 107.9 2000 (Est)* = 109.6 2001 Forecast* = 108.7 2001* * Based on III Earlybird Forecast

  25. Direct Loss Ratio Trends, Selected Lines, Pennsylvania Source: NAIC, Insurance Information Institute

  26. Underwriting Gain (Loss)1975-2000* Billions (US$) In 2000, P-C insurers will pay out nearly $30 billion more in claims and expenses than they collected in premiums *I.I.I. estimate based on First Half 2000 data. Source: A.M. Best, Insurance Information Institute

  27. U.S. InsuredCatastrophe Losses CATs cost insurers $750 million per month during the 1990s CATs in 1990s caused $90B in insured losses $ Billions * First Half 2000. Source: Property Claims Service, Insurance Information Institute

  28. Lost-Time Claim Frequency Per Worker: On the Rise? Source: NCCI

  29. Auto Claim Cost andFrequency Trends Source: ISO

  30. Auto Claim Cost andFrequency Trends Source: ISO

  31. Auto Claim Cost andFrequency Trends Source: ISO

  32. #5 INVESTMENTS

  33. Net Investment Income Pricing & underwriting problems were exacerbated by declining investment income Billions (US$) Facts 1997 Peak = $41.5B 1998 = $39.9B 1999 = $38.6B 2000 (Forecast)* = $39.2B Source: A.M. Best, Insurance Information Institute * Estimate based on First Half 2000 results.

  34. Interest Rates: Up, Up,But Not Away Rising interest rates reduced the market value of the industry’s bond portfolio by $55 billion in 1999 **Forecast Source: Federal Reserve Board of Governors.

  35. Stock Markets:Going Nowhere Fast in 2000 YTD Total Return through 11/13/00 Source: Insurance Information Institute

  36. #6 COMPETITION

  37. Competition—Still on the Rise: Number of Insurers: 1970-1998 Sources: P/C: A.M. Best; L/H: NAIC.

  38. Market Share of Top 5 P/C Insurers Source: Insurance Information Institute Fact Book (annual issues)

  39. Market Share of Top 5 Life/Health Insurers Source: Insurance Information Institute Fact Book (annual issues)

  40. Growth in Net Premiums Written (All P/C Lines) 1999: 1.9% 2000 Est: 5.2% 2001 Forecast: 7.0% The underwriting cycle went AWOL in the 1990s. Is it Back? 2001* 2000 est.; 2001 forecast from III Earlybird Survey Source: A.M. Best, ISO, Insurance Information Institute

  41. #7 CONSOLIDATION

  42. Insurance Mergers and Acquisitions 1998: 565 deals valued at $165.4 B *First Half 2000 Source: Compiled from Conning & Company reports.

  43. Number of Deals: First Half 2000 vs. First Half 1999 Total = 161 Total = 244 2000 1999 Source: Conning

  44. Value of Deals: First Half 2000 vs. First Half 1999 Total = $11.3B Total = $30.9B N/A 2000 1999 Source: Conning

  45. #8 DISTRIBUTION

  46. Small Insurance Firms Lag in Web Access and Exposure Source: The Industry Standard, Summer 2000

  47. Web Presence of the Nation's 250 Largest P/C Companies Source: John P. Franzis, PricewaterhouseCoopers Management

  48. Shifting Distribution Channels: Property/Casualty Insurers 1998 2003 Source: Datamonitor

  49. Projected Online Sales of Auto, Home & Term Life Insurance $ Millions Source: Forrester Research

  50. Internet Insurance Sales Forecast, 2003 (Online-closed sales=Total $4.8 Billion) Source: Conning & Co. (Life), Forrester Group (Auto & Home)

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