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Casualty Actuarial Society 2002 Seminar on Ratemaking

Casualty Actuarial Society 2002 Seminar on Ratemaking. The Impact of Terrorism on the P&C Market Place March 7, 2002. P&C Pricing Considerations. Net Premium Growth. 6. 6.1. 5. 5.0. 4.4. 4.4. 4. 3.7. 3.6. 3.4. 3.2. 3. 2.8. 2.4. 2.3. 2. 2.0. 1.9. 1. 0. 88. 89. 90. 91.

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Casualty Actuarial Society 2002 Seminar on Ratemaking

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  1. Casualty Actuarial Society 2002 Seminar on Ratemaking The Impact of Terrorism on the P&C Market Place March 7, 2002

  2. P&C Pricing Considerations

  3. Net Premium Growth 6 6.1 5 5.0 4.4 4.4 4 3.7 3.6 3.4 3.2 3 2.8 2.4 2.3 2 2.0 1.9 1 0 88 89 90 91 92 93 94 95 96 97 98 99 00 (est.)

  4. 40 30 20 10 0 -10 -20 -30 Underwriting vs. Investment Income (US $B) 41.5 40.3 39.9 38.9 Investment Income 38.0 36.8 34.2 33.7 33.7 32.6 35.5 23.4 32.9 19.5 14.4 14.6 13.8 20.8 8.8 Pretax Operating Income 11.3 11.6 -2.5 -5.8 -18.1 -17.7 -20.5 -16.8 -16.7 Underwriting Gain/Loss -21.7 -22.1 -23.1 -32.2 -36.7 -40 90 91 92 93 94 95 96 97 98 99 00 (est.)

  5. Consolidated P/C Industry Combined Ratio 120 115.7 115 110.3 109.6 110 108.5 107.8 105.8 108.8 105 106.9 106.5 105.6 101.6 100 90 91 92 93 94 95 96 97 98 99 00 (est.)

  6. Combined Ratios by Coverage Line 1998 1999 130 134 2000 (estimate) 130 120 119 118 118 118 110 117 116 115 115 114 112 109 109 108 108 107 104 104 104 103 102 101 100 97 90 96 70 50 30 All Other Lines Commercial Packages Workers Compensation Inland Marine Fire & Allied Personal Auto General Liability Commercial Auto Medical Malpractice

  7. Workers’ Compensation Accident Year 2000 Combined Ratio Near Highest Ever Calendar Year vs. Ultimate Accident Year Countrywide-Private Carriers

  8. Impact of Catastrophe Losses on Combined Ratio 115.8 115 Catastrophe Pre-Catastrophe 110.3 109.6 108.8 110 108.5 107.8 108.9 108.2 106.9 106.5 106 105.6 106.3 105 104.9 103.35 103.2 103.3 102.6 101.6 102.5 102.4 101 100 90 91 92 93 94 95 96 97 98 99 00 (est.)

  9. Policyholders Surplus 334.3 333.3 320.0 308.5 (US$B) 300 255.5 230.0 250 193.3 200 182.3 163.1 158.7 138.4 150 100 50 0 90 91 92 93 94 95 96 97 98 99 00 (est.)

  10. 53.0 50 40 36.7 30 24.8 20.3 19.2 18.8 25.5 20 Start of Hard Market Start of Hard Market Start of Hard Market 15.8 14.2 11.7 9.8 10 7.0 6.6 5.2 11.1 6.1 4.9 4.7 4.7 9.7 3.6 3.4 1.0 1.0 1.4 4.4 4.4 0 1.6 -2.4 -1.8 -2.0 -5.1 -10 -14.3 68 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 (est.) Changes to Policyholders Surplus

  11. P&C Coverage Considerations

  12. Types of “Terrorism” exclusions in Property Insurance • Over 17 different Terrorism exclusions seen; most contain a broad definition encompassing some or all of following conditions: • any person or group(s) of persons; • acting alone or on behalf of or in connection with any organization(s) or government(s); • committed for political, religious, ideological or similar purposes; • with the intention to influence any government and/or put the public, or any section of the public, in fear. • Many may be interpreted to exclude certain acts or losses previously covered such as vandalism, malicious mischief, riot, & civil commotion.

  13. Types of “Terrorism” exclusions (… cont’d) • Some specifically exclude the use or release of chemical, biological or nuclear materials, but all exclusions encompass this intent. • Burden of proof on insured; • Except for ISO language, a concurrent causation exclusion applies. i.e., direct or indirect loss or damage caused by Terrorism, including other events or causes contributing concurrently or in any sequence to the loss is also excluded.

  14. ISO CGL Terrorism Definition • “Terrorism’ means activities against persons, organizations or property of any nature that involve the following or preparation of the following: (a) use or threat of force or violence; or (b) commission or threat of a dangerous act; or (c) commission or threat of an act that interferes with or disrupts an electronic, communication, information or mechanical system.” • However, “dangerous act” is not defined

  15. ISO CGL Terrorism Definition (cont’d) • “When one or both of the following applies: (a) the effect is to intimidate or coerce a government or the civilian population or any segment thereof, or to disrupt any segment of the economy; or (b) it appears that the intent is to intimidate or coerce a government, or to further political, ideological, religious, social or economic objectives, or to express (or express opposition to) a philosophy or ideology.” • Who will determine the intent of such acts?

  16. ISO CGL Terrorism Exclusion Triggers • NBC • “When pathogenic or poisonous biological or chemical materials are released, and it appears that one purpose of the terrorism was to release such materials.” • “appears” could be a problem. Who’s perception? Insurer or insured.

  17. The Workers’ Compensation Conundrum • Primary carriers can not exclude one of the biggest catastrophe risks they face • Treaty reinsurance markets are excluding terrorism coverage • Underwriting solutions? • Self insured retention's • Per claimant vs. per occurrence • Underwriting discipline

  18. Legislative Proposals / Considerations

  19. Top Five Costliest Terrorist Acts Ranked by insured property losses including business interruption and aviation hull losses, in millions of dollars (2001 price levels)

  20. Insurance Programs Established by Federal Statute • The Price-Anderson Act of 1957, providing coverage for catastrophic nuclear accident. • The Overseas Private Investment Corp., formed in 1971, providing insurance against overseas political risk. • The National Insurance Development Program, authorized in 1968, providing insurance against urban riots and civil disorder • The National Flood Insurance Program, also in 1968, providing coverage in critical flood plains.

  21. U.S. requests for stand-alone Terrorism • Numerous requests for stand-alone Terrorism cover from U.S. based clients, including “trophy” buildings or what insurers consider “target” risks such as stadiums, dams, bridges & tunnels. • To this point: • approx. 15% of clients have elected to purchase cover; • no client has been declined a quote outright; • approx. 12% of clients have declined to purchase cover; • Reasons for not purchasing have included: • clients waited to see what Federal action would be taken; • limited capacity; • expensive pricing. • Requests for cover now increasing.

  22. Market Conditions Pre - 9/11

  23. Industry Was Experiencing Pressures Prior to 9/11 • Expedited time to trial in many venues • Asbestos • “P&C Industry Underreserved by $30 Billion” A.M. Best, July 2001 • Surprise awards/high profile settlements • Increased awareness of claim trends causing quicker settlements

  24. Expanded Asbestos Environmental (Sudden and Accidental) Lead Paint Construction Defects EIFS (Synthetic Stucco) Pharmaceuticals Class Actions Tobacco Mold and Mildew Cell Phones Nursing Homes Automotive Tires Big Box Retailers MTBE (Fuel Additive) Ohio UM/UIM Internet-derived exposures Emerging Claim Challenges

  25. Market Conditions Post - 9/11

  26. Demand for Terrorism insurance: Pre & Post WTC • Pre 9/11 - limited demand • UK Terrorism; • Specific countries (Colombia, Indonesia); • Post 9/11 - significant demand • Worldwide Terrorism • USA & Canada • Europe • Rest of World

  27. Main Sources of Requests Canada UK Eire USA Mexico Italy Colombia Singapore Australia New Zealand

  28. Main Issues • Risk of future attacks still exists; • Changing marketplace + structuring Terrorism programs complicated: • Provides aggregate limit for declared locations only; • Values declared significantly affects price (rating on values); • Any cover for non-U.S. locations in less expensive local government schemes (e.g. UK’s Pool Re.)? Avoid duplicating values declared. • Policy forms involve complex language: • Definition of Terrorism. Cover for physical loss or damage; • War exclusion. Need to understand policy limitations; • No cover for nuclear, chemical, or biological release; • No cover for damage from strike, riot, & civil commotion; • Cancellation provisions; • Non-concurrency between T3 and AIG form; • Business Interruption, Loss of Rent, Extra Expense.

  29. Overview – The Post 9/11 Agenda • The insurance industry is vulnerable to any large event in a dense urban area • There is a correlation of multiple lines coming from multiple production sources • There is not a clear understanding of where exposures are located • New external demands from: • Investors • Regulators • Rating Agencies • Reinsurers

  30. Sample Questions Answered by ProposedPortfolio Management Functionality How much exposure do I have in each of the country’s largest XX office tower complexes? What is my exposure both gross and net of reinsurance at each of these locations? How much exposure, by line of business, do I have within 0.25 miles of any office building greater than 40 stories? How much exposure do I have within a one-block radius of an office building which just experienced an explosion? Where in my portfolio do I have a concentration of value or limit that exceeds $XYZ in any 0.5 mile zone? What urban risk load should I apply to my pricing of certain concentration zones? Density & Concentration Concerns

  31. World Trade Center Loss • Industry loss estimates now range as high as $60 billion. • This will be the largest insured single event loss in history: • Inflation Adjusted - Hurricane Andrew $20 billion, Northridge EQ $14 billion • Remembering Northridge Earthquake: • Early estimates of insured losses were in the $2 billion range. • The final loss amount was more than $10 billion. • Northridge was straightforward and simple compared to WTC.

  32. Overall Implications of World Trade Center Loss • Insolvencies should be expected • Uncollectible reinsurance is going to be an issue • Reinsurance and insurance capacity will shrink significantly • Prices for reinsurance and insurance will rise • Coverage restrictions will be imposed • Government pools may be necessary • New entrants may emerge

  33. Cause for Rise in Insurance and Reinsurance Pricing • WTC has made underwriters aware of new types of risks and larger potential losses • Standard deviation of loss is wider than previously expected • Amount of risk capital required to support insurance is greater than formerly understood • Industry’s liquidity needs are greater than previously understood • Capacity being reduced results in supply versus demand pressures

  34. Insurance Demand After 9/11 • The WTC attack will increase risk aversion • Buyers will rediscover the value of insurance • Demand for traditional risk transfer will rise • Financial stability of insurance carriers will be valued

  35. A Grain of Salt • Insurance market conditions affected by: • Investment results • Catastrophe losses • Investor psychology

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