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Trends & Challenges in P/C Insurance Business Today Focus on Oregon & Idaho Markets

Trends & Challenges in P/C Insurance Business Today Focus on Oregon & Idaho Markets. Professional Insurance Agents of Oregon & Idaho Insurance Institute of Oregon & Idaho June 7/8, 2004. Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist

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Trends & Challenges in P/C Insurance Business Today Focus on Oregon & Idaho Markets

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  1. Trends & Challenges in P/C Insurance Business TodayFocus on Oregon & Idaho Markets Professional Insurance Agents of Oregon & Idaho Insurance Institute of Oregon & Idaho June 7/8, 2004 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. About theInsurance Information Institute • The mission of the Insurance Information Institute (I.I.I.) is to improve public understanding of insurance -- what it does and how it works. The I.I.I. enjoys broad membership throughout the insurance industry, including most of the major p/c insurers and reinsurers operating in the United States, as well as companies operating on a regional basis and internationally.For more than 40 years, the I.I.I. has provided definitive insurance information. Today, the I.I.I. is recognized throughout the insurance industry as well as by the media, governments, regulatory organizations, universities and the public as a primary source of information, analysis and referral concerning insurance.Each year, the I.I.I. works on more than 3,700 news stories, handles more than 6,000 requests for information from its members, the media, and other parties and answers nearly 50,000 questions from consumers.In addition to direct contact with the media, individuals and organizations, the I.I.I. publishes a host of helpful brochures and books on a wide variety of insurance topics, ranging in subjects from 12 Ways to Lower Your Auto Insurance Costs to the I.I.I. Fact Book series. I.I.I.’s members benefit from direct access to all information, I.I.I. staff and its members-only web site. The Institute does not lobby. Its central function is to provide accurate and timely information on insurance subjects. Questions concerning I.I.I. membership should be directed to Cary Schneider at (212) 346-5566 or by email at carys@iii.org.

  3. Presentation Outline • Profitability • Underwriting • Ratings, Solvency & Financial Strength • Investment Overview • Pricing • Auto & Homeowners Overview • Workers Comp: The Insurance Industry’s Quiet Crisis? • Tort Environment • Insurance Scoring • The Challenge of Terrorism • Q & A

  4. P/C FINANACIAL UPDATE:Profitability: Good but Not Good EnoughUnderwriting: Need to Stay DisciplinedInvestments: Keep Expectations Low

  5. P/C FINANCIAL OVERVIEW:PROFIT PRESSURE

  6. Highlights: Property/Casualty Full-Year 2003 vs. 2002

  7. Strength of Recent Hard Markets by Real NWP Growth* 1985-87 2001-04 1975-78 Real NWP Growth During Past 3 Hard Markets 1975-78: 8.6% 1985-87: 14.5% 2001-04F: 7.6% Note: Shaded areas denote hard market periods. Source: A.M. Best, Insurance Information Institute 2004 forecast from III Groundhog Survey, 2/04.

  8. Commercial Insurance Share of P/C Market is Rising Commercial Market Share: 1993: 52.7% 1998: 48.0% 2002: 52.9% 2003E: 53.5% Source: A.M. Best; Insurance Information Institute

  9. P/C Net Income After Taxes1991-2003 ($ Millions) • 2001 was the first year ever with a full year net loss • 2002 ROE = 1.0% • 2003 ROE = 9.4% Sources: A.M. Best, ISO, Insurance Information Institute.

  10. ROE: P/C vs. All Industries 1987–2004E IMMEDIATE LESSON: Results are better but the industry remains a laggard. U/W, Pricing Discipline are Key! Source: Insurance Information Institute; Fortune

  11. ROE vs. Cost of Capital: US P/C Insurance:1991 – 2004F The gap between the industry’s cost of capital and its rate of return is narrowing 10.2 pts 14.6 pts 1.0 pts 2.1 pts US P/C insurers missed their cost of capital by an average 6.5 points from 1991 to 2003 Source: The Geneva Association, Ins. Information Inst.

  12. RNW for Major P/C Lines,1993-2002 Average 10-Year returns for some major p/c lines surprisingly good, but… Source: NAIC; Insurance Information Institute

  13. P/C Return on Equity: 2002Select Northwest States & CA 2002: ALL P/C LINES Source: NAIC, Insurance Information Institute

  14. P/C ROE: 1993-2002Select Northwest States & CA 1993-2002: ALL P/C LINES Source: NAIC, Insurance Information Institute

  15. ROE: P/C (US, OR & ID) vs.All Industries, 1993–2003* Profitability in OR and ID has generally followed national trends & lags the Fortune 500 Source: Insurance Information Institute; NAIC, Fortune

  16. ROE for Personal Lines in OREGON(1993 – 2002) 10-Year Average: Auto: 10.0% Home: +6.1% Homeowners and auto experience has deteriorated in recent years, but likely improved picked up in 2003/4 Source: NAIC

  17. ROE for Major Commercial Lines in OREGON, 1993 - 2002 Commercial lines had a mixed performance in recent years Source: NAIC

  18. ROE for Major Commercial Lines in IDAHO, 1993 - 2002 Commercial lines had a mixed performance in recent years Source: NAIC

  19. Rates of Return on Net Worth for Workers Comp: OR vs. ID Averages: 1993 to 2002 US WC Insurance = +8.9%* OR WC Insurance = +7.1% ID WC Insurance = +5.4% Source: NAIC, Insurance Information Institute

  20. WALL STREET:HIGH EXPECTATIONS

  21. Insurer Stocks: Outperforming the S&P 500 Total Return 2004 YTD Through June 4, 2004 Source: SNL Securities, Insurance Information Institute

  22. Private Passenger Auto:Top 25 Writers Market Share Substantial consolidation evident over the past 25 years, suggesting: • M&As more successful • Scale economies • Barriers to entry exist • Capital (esp. foreign capital) cannot enter easily Sources: A.M. Best, Morgan Stanley, Insurance Information Institute.

  23. Commercial Lines:Top 25 Writers Market Share* Virtually no consolidation in commercial p/c sector over the past 25 years, suggesting: • M&As not generally successful • Scale? • Execution? • Legacy • Distribution? • Deconsolidation (asset sales, spin-offs, failures) • Low barriers to entry * By direct premiums written. Sources: A.M. Best, Morgan Stanley, Insurance Information Institute.

  24. P/C FINANCIAL OVERVIEW:UNDERWRITING PRESSURE

  25. P/C Industry Combined Ratio Combined Ratios 1970s: 100.3 1980s: 109.2 1990s: 107.8 2000-04: 106.7 2001 = 115.7 2002 = 107.2 2003 = 100.1 2004E = 100.0* *2004 figures based on III Groundhog Survey, 2/04. Sources: A.M. Best; ISO, III

  26. Underwriting Gain (Loss)1975-2004F* $ Billions 2003 was the best year since 1997, with underwriting losses of just $4.6 billion. The forecast underwriting loss for 2004 is $0, given the expectation of a 100.0 combined ratio. *2004 underwriting loss is forecast at $0 (based on forecast combined ration of 100.0 from III Groundhog forecast, 2/04. Source: A.M. Best, Insurance Information Institute

  27. Commercial vs. Personal Lines Combined Ratios 10-Year Average Combined Ratios Commercial: 111.1 Personal: 105.2 Source: A.M. Best; Insurance Information Institute

  28. Combined Ratios:Selected Major Lines, 2003E—2004F Commercial Personal U/W performance improving, but variation in results is enormous. Source: A.M. Best; Insurance Information Institute

  29. Combined Ratio: Reinsurance vs. P/C Industry • 2001’s combined ratio was the worst-ever for reinsurers; 2002 was bad as well. • 2003: Big improvement in primary and reinsurer segments Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute

  30. After-Tax ROE for Selected AY Combined Ratios* *Assumes 4% tax-equivalent yield, 28% expense ratio and 140% premium/surplus ratio Source: Dowling & Partners Securities

  31. Private Passenger Auto Direct Loss Ratios: US vs. OR & ID Loss Ratios in OR and ID have generally been better than the US as a whole Source: NAIC; Insurance Information Institute

  32. U.S. InsuredCatastrophe Losses ($ Billions) 2003 was the 4th worst year ever for insured catastrophe losses in the US. There were 4 events with losses exceeding $1 billion $ Billions *2004 figure is for 1st quarter only ($963 million). 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/ISO; Insurance Information Institute

  33. Texas: Mold Losses/Claims Continuing to Moderate* * Data are for TDI Cause 61: Discharge – Other Damage. Not all claims in cause 61 are mold and mold claims may also arise from other (non-water) causes of loss. Source: Texas Department of Insurance; Insurance Information Institute

  34. FATAL ATTRACTION?A LOSS OF PRICING & UNDERWRITING DISCIPLINERATINGS, SOLVENCY, FINANCIAL STRENGTH

  35. Private Passenger Auto Combined & Operating Ratios, 1993-2004F Rating actions contributed to dramatic improvement in PP Auto U/W performance Sources: Insurance Information Institute from A.M. Best and NAIC data; 2003/4 expenditure estimates from III.

  36. Cost of Risk vs. Commercial Lines Operating Ratio* Source: RIMS, A.M. Best; Insurance Information Institute * 2003 operating ratio is III estimate.

  37. Number of P/C Failures vs. Combined Ratio, 1991-2003 2003 failures fell to a 5-year low Source: Standard & Poor’s; Insurance Information Institute

  38. Downgrade/Upgrade Ratio* Sources: Impairment Rate and Rating Transition Study—1977 to 2002, A.M. Best & Co.; 2003E from S&P. *U.S. property/casualty and life/health insurers

  39. P/C Company AIU Insurance Co. Alfa Mutual Ins. Co. Amica Mutual Ins. Co. Church Mutual Ins. Co. Federal Insurance Co. General Reinsurance Corp. Great Northern Ins. Co. Lititz Mutual Ins. Co. Nationwide Mutual Fire Co. Otsego Mutual Fire Pharmacists Mutual Ins. Co. Quincy Mutual Fire Ins. Co. State Automobile Mutual Ins. Co. State Farm Mutual Automobile Ins. Co. Vigilant Insurance Co. Group Affiliation American International Group Alfa Insurance Group Amica Mutual Group None Chubb Group of Ins Cos. Berkshire Hathaway Ins. Group Chubb Group of Ins Cos. Lititz Mutual Group Nationwide Mutual Group None None Quincy Mutual Group State Auto Ins. Group State Farm Group Chubb Group of Ins Cos. P/C Insurers Maintaining Rating of A+ or Better Rating for 50+ Years Source: Best’s Review, January 1, 2004.

  40. P/C Company Insolvency Rates,1993 to 2002 • Insurer insolvencies are increasing • 10-yr industry failure rate: 0.72% • Failure rating for B+ or better rating: 0.49% • Failure rate for D through B rating: 1.29% 10-yr Failure Rate = 0.72% 30 30 38 Source: A.M. Best; Insurance Information Institute

  41. Reason for P/C Insolvencies(218 Insolvencies, 1993-2002) Reserve deficiencies account for more than half of all p/c insurers insolvencies Source: A.M. Best, Insurance Information Institute

  42. Insolvencies Generating Largest Guarantee Fund (Net) Payouts* *Net expenses form inception to date (November 13, 2003). Source: National Conference of Insurance Guarantee Funds; Insurance Information Institute.

  43. Guarantee Fund Net Assessments*(1979-2002) Assessments rose dramatically during the last hard market, setting a new record now. *Excludes NY and workers comp security funds in NJ and PA. Source: National Conference of Insurance Guarantee Funds; Insurance Information Institute

  44. P/C Insurance Industry Prior Year Reserve Development* Adverse reserve development of about $23 billion accounted for most of the industry’s 2002 and $17 billion in 2003 *Negative numbers indicate favorable development; positive figures represent adverse development. Source: A.M. Best, Morgan Stanley, Dowling & Partners Securities, Insurance Information Institute.

  45. Combined Ratio:Impact of Reserve Changes (Points) Adverse reserve development totaling an estimated $23 billion added more than 6 points to the p/c combines ratio in 2002 Source: ISO, A.M. Best, MorganStanley.

  46. Commercial Lines Reserve Shortfalls (Year-End 2002)[update?]* *Average of Morgan Stanley “top-down” and “bottoms-up” estimates for accident years 1993–2002 as of 12/31/02. **Occurrence and claims made basis. Source: Morgan Stanley, January 2004.

  47. HOT TOPICS IN INSURANCE: THE MEDIA PERSPECTIVE

  48. I.I.I. Media Index: Top Issues(2003 vs. 2002) Market Conditions & Commercial lines issues dominated the media in 2002 and 2003 The I.I.I. conducted nearly 4,000 media interviews in 2003 Source: Insurance Information Institute from Lexis/Nexis search.

  49. I.I.I. Media Index: Top Issues( % Change in Coverage, 2003 vs. 2002) The fastest growing areas of media interest were CLUE, Credit & Med Mal. Media interest in mold and terrorism waned substantially. Source: Insurance Information Institute from Lexis/Nexis search.

  50. THE INSURANCE INFORMATION INSTITUTE:THE PLACE FOR INSURANCE INFORMATION

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