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Transcript of Global Insurance & Reinsurance: Trends, Challenges & Opportunities Insurance Information Institute...
Global Insurance & Reinsurance: Trends, Challenges & Opportunities
Insurance Information InstituteApril 25, 2014
Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org
2
Outlook: Property/Casualty
Modest growth will continue in 2014 (~ 4.5% DPW) Exposure growth tied primarily to overall GDP growth/key sector drivers
Rates remain in positive territory
Underlying loss cost trends remain manageable Very well capitalized
For primary insurers, falling reinsurance pricing and alternative capital are benefits
Traditional reinsurers challenged by continued entry of new capital and accumulation of “organic” capital
Regulatory/Legislative concerns manageable TRIA, Systemic risk, FIO & general federal “intrusions”
Personal Lines: StableCommercial Lines: Negative
Reinsurance: Stable
A.M. Best
Outlook
3
Outlook: Life/Annuity
Major concern has been persistently low interest rates Remains a headwind, but currently thinking is that life insurers can
manage to achieve reasonable rates of return so long as the 10-year Treasury yield > 2.5% in a steep yield curve environment
New Fed Chair Janet Yellen on 4/16 focused on slack in the economy—Dovish outlook suggests short-term rate will remain low
On the margin, life insurers have increased investment allocations to less liquid assets such as pvt. placements, comm. mortgages and alternative assets (hedge funds, PE); more “bbb” bonds; longer maturity
US market is mature and penetration rates suffering Penetration of younger demographic groups (Gen X) is at 50-yr. low
Group sales/benefits benefiting from increased hiring Regulatory risks:
SIFI designations (Prudential, AIG, possibly Met) Unclaimed assets Consumer protection violations (e.g., NY)
4
P/C (Re)Insurance Industry Financial Overview
2013: Best Year in the Post-Crisis Era
Performance Improved with Lower CATs, Strong Markets
4
P/C Net Income After Taxes1991–2013 ($ Millions)
2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012 ROAS1 = 6.1% 2013 ROAS1 = 10.3%
• ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 9.8% ROAS in 2013, 6.3% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.
Sources: A.M. Best, ISO, Insurance Information Institute
$1
4,1
78
$5
,84
0
$1
9,3
16
$1
0,8
70
$2
0,5
98
$2
4,4
04 $3
6,8
19
$3
0,7
73
$2
1,8
65
$3
,04
6
$3
0,0
29
$6
2,4
96
$3
,04
3
$3
5,2
04
$1
9,4
56
$3
5,0
74
$6
3,7
84
$2
8,6
72
-$6,970
$6
5,7
77
$4
4,1
55
$2
0,5
59
$3
8,5
01
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
2013 ROAS was 10.3%
Net income in 2013 was up substantially
(+81.9%) from 2012
-5%
0%
5%
10%
15%
20%
25%
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
01
02
03
04
05
06
07
08
09
10
11
12
13
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2013*
*Profitability = P/C insurer ROEs. 2011-13 figures are estimates based on ROAS data. Note: Data for 2008-2013 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
1977:19.0% 1987:17.3%
1997:11.6%2006:12.7%
1984: 1.8% 1992: 4.5%2001: -1.2%
10 Years
10 Years9 Years
2011: 4.7%
History suggests next ROE peak will be in 2016-2017
ROE
1975: 2.4%
2013: 9.8 %
A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs
Combined Ratio / ROE
* 2008 -2013 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2013 combined ratio including M&FG insurers is 96.1; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.
97.5
100.6 100.1 100.8
92.7
101.299.5
101.0
96.7
102.4
106.5
95.7
14.3%
15.9%
12.7%
10.9%
7.4% 7.9%
4.7%6.2%9.6%
8.8%
4.3%
9.8%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 20130%
3%
6%
9%
12%
15%
18%
Combined Ratio ROE*
Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs
A combined ratio of about 100 generates an ROE of ~7.0% in 2012, ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Lower CATs helped ROEs
in 2013
8
ROE: Property/Casualty Insurance vs. Fortune 500, 1987–2013E*
* Excludes Mortgage & Financial Guarantee in 2008 – 2013. 2013 Fortune 500 figure is I.I.I. estimate. Sources: ISO, Fortune; Insurance Information Institute.
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13E
P/C Profitability Is Both by Cyclicality and Ordinary Volatility
Hugo
Andrew
Northridge
Lowest CAT Losses in 15 Years
Sept. 11
Katrina, Rita, Wilma
4 Hurricanes
Financial Crisis*
(Percent)
Record Tornado Losses
Sandy
Low CATs
9
ROE: ROEs by Industry vs. Fortune 500, 1987–2012*
* All figures are GAAP.Sources: ISO, Fortune; Insurance Information Institute.
-5%
0%
5%
10%
15%
20%
25%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
US P/C Insurers All US Industries L/H Insurance Comm Banks Div Fin
(Percent)Average: 1987-2012
Diversified Finl: 15.0% Commercial Banks: 13.1% All Industries (F500): 13.4%
Life/Health Insurance: 8.8% P/C Insurance: 7.6%
10
RNW All Lines by State, 2003-2012 Average:Highest 25 States
21
.0
17
.7
15
.1
14
.8
13
.4
13
.3
13
.1
12
.6
12
.0
11
.7
11
.4
11
.4
11
.4
11
.1
11
.0
11
.0
11
.0
10
.9
10
.9
10
.7
10
.7
10
.5
10
.3
10
.3
9.9
9.4
02468
1012141618202224
HI AK ND ME WY UT VT ID WA NH IA NE SC DC MA OR VA NC RI CA CT OH NM SD WV MT
Source: NAIC.
The most profitable states over the past decade are
widely distributed geographically, though none
are in the Gulf region
11
9.2
9.1
8.9
8.9
8.6
8.5
8.3
8.1
7.9
7.7
7.7
7.6
7.4
6.5
6.5
6.1
6.1
5.5
5.2
4.9
4.9
4.2
3.2
2.0
-6.5
-9.4
-14-12-10-8-6-4-202468
10
KS MD CO WI FL MN TX IN US AR PA IL AZ MO NV KY NJ GA NY MI TN DE OK AL MS LA
RNW All Lines by State, 2003-2012 Average: Lowest 25 States
Source: NAIC.
Some of the least profitable states over the past decade were hit hard
by catastrophes
12
-5%
0%
5%
10%
15%
20%
25%
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 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Net Premium Growth: Annual Change, 1971—2014F
(Percent)1975-78 1984-87 2000-03
Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
Net Written Premiums Fell 0.7% in 2007 (First Decline
Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.
2014F: 4.0%
2013: 4.6%
2012: +4.3%
13
Growth in Direct Written Premium by Line, 2013-2015F*
Source: Conning.
4.4
%
4.4
%
4.4
%
4.1
%
5.1
% 5.8
%
8.6
%
5.6
% 6.2
%
4.0
%
4.1
%
3.9
%
3.6
%
5.1
% 6.1
%
8.0
%
6.0
%
3.7
%4.3
%
3.9
% 4.7
%
3.2
%
5.5
% 6.0
%
7.5
%
7.0
%
3.4
%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
All Lines PersonalLines
CommercialLines
PersonalAuto
HomeownersCommercialAuto
WC CMP GL
2013F 2014F 2015F
(Percent) P/C growth is expected to remain fairly stable
through 2015
14
Average Commercial Rate Change,All Lines, (1Q:2004–4Q:2013)
-3.2
%-5
.9%
-7.0
%-9
.4%
-9.7
%-8
.2%
-4.6
% -2.7
%-3
.0%
-5.3
%-9
.6%
-11
.3%
-11
.8%
-13
.3%
-12
.0%
-13
.5%
-12
.9%
-11
.0%
-6.4
%-5
.1%
-4.9
%-5
.8%
-5.6
%-5
.3%
-6.4
%-5
.2%
-5.4
% -2.9
%
2.7
% 4.4
%4
.3%
3.9
%5
.0%
5.2
%4
.3%
3.4
%2
.1%
-0.1
% 0.9
%
-0.1
%
-16%
-11%
-6%
-1%
4%
9%
1Q
04
2Q
04
3Q
04
4Q
04
1Q
05
2Q
05
3Q
05
4Q
05
1Q
06
2Q
06
3Q
06
4Q
06
1Q
07
2Q
07
3Q
07
4Q
07
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
KRW Effect
Pricing as of Q4:2013 was positive for the 10th consecutive
quarter. Gains are likely to continue into 2014.
(Percent)
Q2 2011 marked the last of 30th
consecutive quarter of price declines
15
The Life/Annuities/A&H segment
Five Major Segments• Individual Life Insurance• Individual Annuities• Group Life Insurance• Group Annuities• A&H Insurance
16
Billions
Life/Annuity Industry Profits,2001-2013E
$31.6
-$52.3
$21.5$28.1
$14.4
$40.9$45.0
$37.0$36.6$32.5
$25.9
$3.6$11.0
($60)
($40)
($20)
$0
$20
$40
$60
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Sources: NAIC, via SNL Financial; Insurance Information Institute estimate for 2013.
The Life/Annuity industry has produced steady (if unspectacular) profits,except for years in which the industry’s investment results produced
significant realized capital losses.
Best year in post-crisis era
U.S. Life/Annuity Insurance IndustryProfit Sources, by Percent, 2012
Group Annu-ities
Individual Annuities
Individual Life
Group Life Group A&H Other A&H Credit Misc0%
5%
10%
15%
20%
25%
30%
35%
40%
15.1%
37.1%
13.6%
3.5%
9.1%7.4%
0.5%
13.8%
Sources: NAIC Annual Statements, p. 6, from SNL Financial; I.I.I. calculations
52.1%
17.1%16.5%
Individual Life Insurance & AnnuityPremiums Tracked DPl Until 2009
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012$6
$8
$10
$12
$225
$250
$275
$300
$325
$350
$375
$7.6
5
$8.0
1
$8.3
8 $8.8
9 $9.2
8 $9.9
2
$10.
40 $10.
95
$11.
03
$11.
38
$11.
55 $11.
95
Disposable Personal IncomeIndividual Life Insurance & Annuity Premiums
Sources: www.bea.gov and SNL Financial; I.I.I. calculations
DPI ($ Trillion)
Individual Life Insurance & Annuity Premiums ($ Billion)
Individual Life Insurance & Annuity premiums dropped
31% in 2009 vs. 2008,although DPI rose by 1%
Group Insurance Premiums (line)Track Nonfarm Employment (bars)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012125
130
135
140
$150
$175
$200
$225
$250
$275
$300
13
1.9
13
0.5
13
0.1 13
1.5 1
33
.7 13
6.1 13
7.6
13
6.9
13
0.9
12
9.9 13
1.5 1
33
.7
Nonfarm employment*Group Ins Premiums
Non
farm
Em
ploy
men
t (m
illio
ns)
Group Premiums
(b
*Not seasonally adjusted. Group premiums = group life, group annuities, and group a&hSources: NAIC Annual Statements, via SNL Financial; http://www.bls.gov/ces/
The spike is mainly in Group Annuity premiums;
it represents “de-risking”by a few giant DB plans
20
Pct. Change in Group InsurancePremiums Tracks Nonfarm Employment
6.6% 6.4%
0.1%
-7.2%
1.7%
6.9%
19.6%
1.8% 1.1%-0.6%
-4.4%
-0.7%1.2% 1.7%
6.7%
0.8%
4.9%
-2.8% 1.7%
-1.1% -0.3%1.1%
-9%
-6%
-3%
0%
3%
6%
9%
12%
15%
18%
21%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Group Ins PremiumsNonfarm Employment
*Not seasonally adjusted. Group premiums = group life, group annuities, and group a&hSources: NAIC Annual Statements, via SNL Financial; http://www.bls.gov/ces/
The spike is mainly in Group Annuity premiums; it
represents “de-risking”by a few giant DB plans
A few employers with large defined-benefit pension plans recently bought group annuities in order to avoid excess longevity risk.
Individual Life Insurance: Direct Premiums by Frequency, 2006-2012
$17.3
$19.8
$20.5
$19.3
$17.9
$16.9
$17.4
$19.6
$21.3
$80.8
$83.5
$86.5
$86.9
$88.5
$90.9
$92.0
$29.3
$39.8
$32.9
$19.1
$19.6
$0 $25 $50 $75 $100 $125 $150
2006
2007
2008
2009
2010
2011
2012
Single First-Year Renewal
Sources: NAIC Annual Statements, from SNL Financial; I.I.I. calculations.
$Billions
Virtually no growth in life
insurance premiums in the
last 7 years
P/C UNDERWRITING
26
Underwriting Losses in 2013 Much Improved After High
Catastrophe Losses in 2011/12
26
27
P/C Insurance Industry Combined Ratio, 2001–2013*
* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1. Sources: A.M. Best, ISO.
95.7
99.3100.8
106.3
102.4
96.7
101.0
92.6
100.898.4
100.1
107.5
115.8
90
100
110
120
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Best Combined
Ratio Since 1949 (87.6)
As Recently as 2001, Insurers Paid Out
Nearly $1.16 for Every $1 in Earned
Premiums
Relatively Low CAT Losses, Reserve Releases
Heavy Use of Reinsurance Lowered Net
Losses
Relatively Low CAT Losses, Reserve Releases
Avg. CAT Losses,
More Reserve Releases
Higher CAT
Losses, Shrinking Reserve
Releases, Toll of Soft
Market
Cyclical Deterioration
Sandy Impacts
Lower CAT
Losses
Underwriting Gain (Loss)1975–2013*
* Includes mortgage and financial guaranty insurers in all years.Sources: A.M. Best, ISO; Insurance Information Institute.
Large Underwriting Losses Are NOT Sustainable in Current Investment Environment
-$55
-$45
-$35
-$25
-$15
-$5
$5
$15
$25
$35
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 01 02 03 04 05 06 07 08 09 10 11 12 13
Cumulative underwriting deficit from 1975 through
2012 is $510B
($ Billions) Underwriting profit in 2013
totaled $15.5B
High cat losses in 2011 led to the highest
underwriting loss since 2002
30
Combined Ratios by Predominant Business Segment, 2013 vs. 2012*
*Excludes mortgage and financial guaranty insurers.Source: ISO/PCI; Insurance Information Institute
102.3101.1
102.3
104.8
96.797.6
94.3
98.7
90
92
94
96
98
100
102
104
106
All Lines Personal LinesPredominating
Commercial LinesPredominating
Diversified Insurers
2012 2013
(Percent)
The combined ratios for both personal and
commercial lines improved substantially in 2013
31
2
(2)
(8)
(3)
(7)(10)(10)
(4)
(0)
11
24
1512
10
(4)
(9)
(13)(12)
(10)
(14)(11)(10)
(7) (7)
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
$25
$309
2
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
E
14
E
15
E
Pri
or
Yr.
Re
se
rve
Re
lea
se
($
B)
-6
-4
-2
0
2
4
6
8 Imp
ac
t on
Co
mb
ine
d R
atio
(Po
ints
)
Prior Yr. ReserveDevelopment ($B)
Impact onCombined Ratio(Points)
P/C Reserve Development, 1992–2015E
Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: A.M. Best, ISO, Barclays Research (estimates for 2013-2015).
P/C Estimated Loss Reserve Deficiency/ (Redundancy), Excl. Statutory Discount
Line of Business 2013Personal Auto Liability -$3.9B
Homeowners -$0.4Other Liab (incl. Prod Liab) $7.5
Workers Compensation $11.1
Commercial Multi Peril $1.9
Commercial Auto Liability $0.7
Medical Professional Liab. -$3.5
Reinsurance—Nonprop Assumed $1.0
All Other Lines* -$4.6 Total Core Reserves $9.8
Asbestos & Environmental $11.2
Total P/C Industry $21.0B
Source: A.M. Best, P/C Review/Preview 2014; Insurance Information Institute. *Excluding mortgage and financial guaranty segments.
32
33
Performance by Key Segment
33
Large Differences Exist in the Performance and Cyclical
Behavior of Key Lines
Homeowners Insurance Combined Ratio: 1990–2015F
11
3.0
11
7.7
15
8.4
11
3.6
10
1.0 10
9.4
10
8.2
11
1.4 1
21
.7
10
9.3
98
.2
94
.4 10
0.3
89
.0 95
.6
11
6.6
10
5.8
10
6.9
12
2.3
10
4.1
94
.0 97
.5
99
.5
11
8.4
11
2.7 12
1.7
80
90
100
110
120
130
140
150
160
170
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F 14F 15F
1
Homeowners Performance in 2011/12 Impacted by Large Cat Losses. Extreme Regional Variation Can Be Expected Due to
Local Catastrophe Loss Activity
34
Hurricane Ike
Hurricane Sandy
Record tornado activity
Hurricane Andrew
Sources: A.M. Best (1990-2014F);Conning (2015F); Insurance Information Institute.
10
9.4
11
0.2
11
8.8
10
9.5 1
12
.5
11
0.2
10
7.6
10
4.1
10
9.7
11
0.2
10
2.5 1
05
.4
91
.1
93
.6
10
4.2
98
.9
10
2.4
10
7.9
10
3.4
98
.3 99
.9
98
.9
10
2.0
11
1.1
11
2.3
12
2.3
90
95
100
105
110
115
120
125
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
F
14
F
15
F
Co
mm
erc
ial L
ine
s C
om
bin
ed
Ra
tio
*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best (1990-2014F); Conning (2015F) Insurance Information Institute.
Commercial Lines Combined Ratio, 1990-2015F*
Commercial lines underwriting
performance is expected to improve as
improvement in pricing environment persists
35
Workers Compensation Combined Ratio: 1994–2014F
102.
0
97.0 10
0.0
101.
0
112.
6
108.
6
105.
1
102.
7
98.5
103.
5
104.
5 110.
6 115.
0
115.
0
109.
0
105.
0
104.
0
121.
7
107.
0
115.
3
118.
2
80
85
90
95
100
105
110
115
120
125
130
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F 14F
Workers Comp Results Began to Improve in 2012. Underwriting Results Deteriorated Markedly from 2007-
2010/11 and Were the Worst They Had Been in a Decade. Sources: A.M. Best (1994-2009); NCCI (2010-2012P) and are for private carriers only; Insurance Information Institute (2013-14). 36
WC results have improved markedly
since 2012
Commercial Auto Combined Ratio: 1993–2015F
11
2.1
11
2.0
11
3.0
11
5.9
10
2.7
95
.2
92
.9
92
.1
92
.4 94
.3 96
.8 99
.1
97
.8
10
3.4 10
6.8
10
4.1
10
2.6
99
.8
11
8.1
11
5.7
11
6.2
80
85
90
95
100
105
110
115
120
125
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F 14F 15F
Commercial Auto is Expected to Improve as Rate Gains Outpace Any Adverse Frequency and Severity Trends
37Sources: A.M. Best (1990-2014F);Conning (2015F); Insurance Information Institute.
General Liability Combined Ratio: 2005–2015F
112.
9
95.1 99
.0
94.2
104.
1
101.
4
103.
0
103.
9107.
1 110.
8
99.8
80
85
90
95
100
105
110
115
05 06 07 08 09 10 11 12 13F 14F 15F
Commercial General Liability Underwriting Performance Has Been Volatile in Recent Years
Source: Conning Research and Consulting. 39
Other & Products Liability Combined Ratio: 1991–2013F
11
0.3
10
9.1
11
2.0
12
2.6
12
4.4
11
1.8
11
4.4
11
2.1
96
.3 99
.0
95
.1
10
5.4
10
9.8
10
0.5
10
3.6
10
6.3
12
5.51
32
.8
13
3.2
11
4.5
143.6
12
3.5
11
0.6
80
90
100
110
120
130
140
150
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12E13F
Liability Lines Have Performed Better in the Post-Tort Reform Era (~2005), but There Has
Been Some Deterioration in Recent YearsSources: A.M. Best ; Insurance Information Institute. 41
10
3.7
10
8.0
96
.4 99
.8
10
6.6
10
7.9 1
15
.7
13
0.4 13
6.0
15
4.7
14
2.3
13
7.3
11
0.9
10
0.9
91
84
.3
77
.4
85
82
.0 87
.9 93
.3
95
.5 98
.9
10
1.0
12
7.9
70
80
90
100
110
120
130
140
150
160
170
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
E
14
F
15
F
Medical Malpractice Combined Ratio vs. All Lines Combined Ratio, 1991-2015F
Source: AM Best (1991-2014F); Conning (2015F) Insurance Information Institute.
MPL insurers in 2013 paid out an estimated $0.96 in loss and expense for every $1 they earned in premiums
In 2001, med mal insurers paid out $1.55 for every dollar earned
The dramatic improvement over the past decade has restored med
mal’s viability, though some deterioration is anticipated
42
Globalization:The Global Economy Creates and Transmits Cycles & Risks
48
Globalization Is a Double Edged Sword—Creating Opportunity and Wealth But
Potentially Creating and Amplifying Risk
48
Emerging vs. “Advanced” Economies
(4.0)
(2.0)
0.0
2.0
4.0
6.0
8.0
10.0
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
01
02
03
04
05
06
07
08
09
10
11
12
13
F1
4F
15
F
Advanced economies Emerging and developing economies World
Source: International Monetary Fund, World Economic Outlook , January 2014 WEO Update; Ins. Info. Institute.
Emerging economies (led by China) are expected to grow by 5.1% in 2014 and
5.4% in 2015.
GDP Growth: Advanced & Emerging Economies vs. World, 1970-2015F
Advanced economies are expected to grow at a modest pace of 2.2% in
2014 and to 2.3% in 2015.
World output is forecast to grow by 3.7% in 2014 and 3.9% in 2015. The world economy shrank by 0.6% in
2009 amid the global financial crisis
GDP Growth (%)
Life, $2.62 , 56.8%
Non-Life, $1.99 , 43.2%
Life insurance accounted for nearly
57% of global premium volume in
2012 vs. 43% for Non-Life
Distribution of Global Insurance Premiums, 2012 ($ Trillions)
57
Total Premium Volume = $4.613 Trillion*
Source: Swiss Re, sigma, No. 3/2013; Insurance Information Institute.
58
Distribution of Nonlife Premium: Industrialized vs. Emerging Markets, 2012
Sources: Swiss Re sigma No.3/2013; Insurance Information Institute research.
Emerging market’s share of nonlife premiums increased to 17.3% in 2012 from 14.3% in 2009. The share of premiums written in the $2 trillion global nonlife market remains much larger (82.7%) but continues to shrink.
The financial crisis and sluggish recovery in the major insurance markets will accelerate the expansion of the emerging market sector
Premium Growth Facts
17.3%82.7%
Industrialized Economies
$1, 647.5
Emerging Markets$344.1
2012, $Billions
Developing markets now account for about 40% of
global GDP but just 17.3% of nonlife premiums
60
Global Real (Inflation Adjusted) Premium Growth (Life and Non-Life): 2012
Source: Swiss Re, sigma, No. 3/2013; Insurance Information Institute.
Market Life Non-Life Total
Advanced 1.8 1.5 1.7
Emerging 4.9 8.6 6.8
World 2.3 2.6 2.4
Emerging markets in Asia, including China, showed faster growth an the US or Europe
Premium growth in emerging
markets was 4 times that of
advanced economies in
2012
6565Sources: Guy Carpenter, World Bank, IMF; Insurance Information Institute .
Gap Between GDP Growth and Reinsurance Limit in Asia-Pacific Region: 2004—2013
The gap between GDP and reinsurance limit in Asia is growing—suggesting the
region is “under-reinsured”
68
Premiums Written in Life and Non-Life, by Region: 1962-2012
Source: Swiss Re, sigma, No. 3/2013.
Emerging market shares rose rapidly over the past 50 years
72
The Unfortunate Nexus: Opportunity, Risk & Instability
Most of the Global Economy’s Future Gains Will be Fraught with Much
Greater Risk and Uncertainty than in the Past
73Source: Aon PLC; Insurance Information Institute.
The fastest growing markets are generally also
among the politically riskiest, including East and
South Asia and Africa
Latin and South America also present insurers with growth
opportunities but political instability has
increased markedly
Problems in the Ukraine will
intensify political risk in several former
Soviet republics
Political Risk in 2013: Greatest Business Opportunities Are Often in Risky Nations
76
Some Key Drivers in the US Economy
Economic Factors Driving Exposure Growth and Insurer Performance
76
77
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 4/14; Insurance Information Institute.
2.7%
0.5%
3.6%
3.0%
1.7%
-1.8
%1.
3%-3
.7%
-5.3
%-0
.3%
1.4%
5.0%
2.3%
2.2% 2.6%
2.4%
0.1%
2.5%
1.3%
4.1%
2.0%
1.3%
3.1%
1.1% 2.
5%4.
1%2.
4%1.
7% 3.0%
3.0%
3.1%
3.0%
3.0%
3.0%
2.9%
0.4%
-8.9%
4.1%
1.1% 1.
8% 2.5% 3.
6%3.
1%
-9%
-7%
-5%
-3%
-1%
1%
3%
5%
7%
2
00
0
2
00
1
2
00
2
2
00
3
2
00
4
2
00
5
2
00
6
07
:1Q
07
:2Q
07
:3Q
07
:4Q
08
:1Q
08
:2Q
08
:3Q
08
:4Q
09
:1Q
09
:2Q
09
:3Q
09
:4Q
10
:1Q
10
:2Q
10
:3Q
10
:4Q
11
:1Q
11
:2Q
11
:3Q
11
:4Q
12
:1Q
12
:2Q
12
:3Q
12
:4Q
13
:1Q
13
:2Q
13
:3Q
13
:4Q
14
:1Q
14
:2Q
14
:3Q
14
:4Q
15
:1Q
15
:2Q
15
:3Q
15
:4Q
Demand for Insurance Should Increase in 2014/15 as GDP Growth Accelerates Modestly and Gradually Benefits the Economy Broadly
Real GDP Growth (%)
Recession began in Dec. 2007. Economic toll of credit crunch, housing slump, labor market contraction
was severe
The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%
2014/15 are expected to see a
modest acceleration in growth
78
Unemployment and Underemployment Rates: Still Too High, But Falling
2
4
6
8
10
12
14
16
18
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Jan11
Jan12
Jan13
Jan14
"Headline" Unemployment Rate U-3
Unemployment + Underemployment RateU-6
“Headline” unemployment
was 6.7% in March 2014. 4%
to 6% is “normal.”
Source: US Bureau of Labor Statistics; Insurance Information Institute.
U-6 went from 8.0% in March
2007 to 17.5% in October 2009; Stood at 12.7%
in Mar. 2014.8% to 10% is
“normal.”
January 2000 through March 2014, Seasonally Adjusted (%)
Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving.
78
As the unemployment rate approaches 6%,
the Fed will begin signaling on short-
term rates
79
US Unemployment Rate Forecast4
.5%
4.5
%4
.6%
4.8
%4
.9% 5.4
% 6.1
%6
.9%
8.1
%9
.3%
9.6
% 10
.0%
9.7
%9
.6%
9.6
%
8.9
%9
.1%
9.1
%8
.7%
8.3
%8
.2%
8.0
%7
.8%
7.7
%7
.6%
7.3
%7
.0%
6.7
%6
.5%
6.4
%6
.2%
6.1
%6
.0%
5.9
%5
.8%
9.6
%
4%
5%
6%
7%
8%
9%
10%
11%
07
:Q1
07
:Q2
07
:Q3
07
:Q4
08
:Q1
08
:Q2
08
:Q3
08
:Q4
09
:Q1
09
:Q2
09
:Q3
09
:Q4
10
:Q1
10
:Q2
10
:Q3
10
:Q4
11
:Q1
11
:Q2
11
:Q3
11
:Q4
12
:Q1
12
:Q2
12
:Q3
12
:Q4
13
:Q1
13
:Q2
13
:Q3
13
:Q4
14
:Q1
14
:Q2
14
:Q3
14
:Q4
15
:Q1
15
:Q2
15
:Q3
15
:Q4
Rising unemployment
eroded payrolls
and WC’s exposure base.
Unemployment peaked at 10%
in late 2009.
* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (4/14 edition); Insurance Information Institute.
2007:Q1 to 2015:Q4F*
Unemployment forecasts have been revised slightly
downwards. Optimistic scenarios put the
unemployment as low as 6.0% by Q4 of this year.
Jobless figures have been revised
slightly downwards for 2014/15
23
15
21
70
52
12
65
73
-71
32 6
4 81
55
3-1
15
-10
6-2
21
-21
5-2
06
-26
1-2
58
-42
2-4
86
-77
6 -69
3-8
21
-69
8-8
10
-80
1-2
94
-42
6-2
72
-23
2 -14
1-2
71
-15
-23
22
0-3
8
19
29
4 11
01
20
11
71
07 1
99
14
99
47
22
23
23
1 32
01
66
18
6 21
91
25
26
81
77
19
12
22
36
42
28
24
61
02
13
17
51
72
13
61
59
25
52
11
21
52
19 26
31
64
18
82
22
20
11
70
18
01
53 2
47
27
28
61
66
18
81
92
11
3
(1,000)
(800)
(600)
(400)
(200)
0
200
400
600
Jan
-07
Fe
b-0
7M
ar-
07
Ap
r-0
7M
ay-
07
Jun
-07
Jul-
07
Au
g-0
7S
ep
-07
Oct
-07
No
v-0
7D
ec-
07
Jan
-08
Fe
b-0
8M
ar-
08
Ap
r-0
8M
ay-
08
Jun
-08
Jul-
08
Au
g-0
8S
ep
-08
Oct
-08
No
v-0
8D
ec-
08
Jan
-09
Fe
b-0
9M
ar-
09
Ap
r-0
9M
ay-
09
Jun
-09
Jul-
09
Au
g-0
9S
ep
-09
Oct
-09
No
v-0
9D
ec-
09
Jan
-10
Fe
b-1
0M
ar-
10
Ap
r-1
0M
ay-
10
Jun
-10
Jul-
10
Au
g-1
0S
ep
-10
Oct
-10
No
v-1
0D
ec-
10
Jan
-11
Fe
b-1
1M
ar-
11
Ap
r-1
1M
ay-
11
Jun
-11
Jul-
11
Au
g-1
1S
ep
-11
Oct
-11
No
v-1
1D
ec-
11
Jan
-12
Fe
b-1
2M
ar-
12
Ap
r-1
2M
ay-
12
Jun
-12
Jul-
12
Au
g-1
2S
ep
-12
Oct
-12
No
v-1
2D
ec-
12
Jan
-13
Fe
b-1
3M
ar-
13
Ap
r-1
3M
ay-
13
Jun
-13
Jul-
13
Au
g-1
3S
ep
-13
Oct
-13
No
v-1
3D
ec-
13
Jan
-14
Fe
b-1
4M
ar-
14
Monthly Change in Private Employment
January 2007 through March 2014 (Thousands, Seasonally Adjusted)
Private Employers Added 8.88 million Jobs Since Jan. 2010 After Having Shed 5.01 Million Jobs in 2009 and 3.76 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Monthly losses in Dec. 08–Mar. 09
were the largest in the
post-WW II period
192,000 private sector jobs were
created in March. As of March 2014, all the jobs lost in
the Great Recession have been recovered
80
Jobs Created2013: 2.368 Mill2012: 2.294 Mill2011: 2.400 Mill2010: 1.277 Mill
81
(Millions of Units)
New Private Housing Starts, 1990-2019F
1.4
8
1.4
7 1.6
21
.64
1.5
71
.60 1.7
1 1.8
5 1.9
6 2.0
71
.80
1.3
6
0.9
10
.55
0.5
9
0.6
1 0.7
8 0.9
2 1.0
81
.31 1.4
41
.50
1.5
11
.50
1.3
51.4
61
.29
1.2
0
1.0
11.1
9
0.3
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F14F15F16F17F18F19F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (4/14 and 3/13); Insurance Information Institute.
Insurers Are Continue to See Meaningful Exposure Growth in the Wake of the “Great Recession” Associated with Home Construction: Construction Risk
Exposure, Surety, Commercial Auto; Potent Driver of Workers Comp Exposure
New home starts plunged 72% from 2005-2009; A net
annual decline of 1.49 million units, lowest since records began
in 1959
Job growth, low inventories of existing homes, low mortgage rates and demographics should continue to stimulate new home construction
for several more years
Florida Total Private Housing Starts,2000 – 2017F
82
The economic outlook for most of
the US is positive for the first time in many
years
Source: University of Central Florida Institute for Economic Competitiveness: http://iec.ucf.edu/post/2014/01/07/Florida-Metro-Forecast-December-2013.aspx
CRASH, CRATER, RECOVERY Homebuilding in FL continues
to recover, adding substantially to coastal exposures.
(Thousands of Units)
83
The combined ratios for both personal and commercial lines
improved substantially in 2013:H1
U.S. Residual Market: Total Policies In-Force (1990-2012) (000)
Source: PIPSO; Insurance Information Institute
931.6
1,785.0
1,458.1
1,196.5
1,741.7
2,841.4
3,311.83,227.3
2,479.4
1,319.7
2,621.32,780.6
1,642.3
2,840.4
2,209.32,203.9
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
(000)
Hurricane Andrew
4 Florida Hurricanes
Katrina, Rita and Wilma
In the 23-year period between 1990 and 2012, the total number of policies in-force in the residual market (FAIR & Beach/Windstorm) Plans has more than tripled.
Hurricane Sandy
85
Value of New Private Construction: Residential & Nonresidential, 2003-2013*
Billions of Dollars
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
03 04 05 06 07 08 09 10 11 12 13*
Non ResidentialResidential
Private Construction Activity Is Moving in a Positive Direction though Remains Well Below Pre-Crisis Peak; Residential Dominates
$298.1
$15.0
$613.7
New Construction peaks at $911.8. in 2006
Trough in 2010 at $500.6B,
after plunging 55.1% ($411.2B)
2013: Value of new pvt. construction hits $667.5B, up
33% from the 2010 trough but still
27% below 2006 peak
85
$261.8
$238.8
$311.5
$356.0
*2013 figure is a seasonally adjusted annual rate as of December.Sources: US Department of Commerce; Insurance Information Institute.
86
Value of Private Construction Put in Place, by Segment, Jan. 2014 vs. Jan. 2013*
14.9%
-3.9%
1.7%
-12.2%
7.8%
41.0%
0.9%7.9%
13.8%12.3% 14.6%9.7%
47.8%
17.0%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
To
tal
Pri
vate
Co
nst
ruct
ion
Res
iden
tial
To
tal
No
nre
sid
enti
al
Lo
dg
ing
Off
ice
Co
mm
erci
al
Hea
lth
Car
e
Ed
uca
tio
nal
Rel
igio
us
Am
use
men
t &
Rec
.
Tra
nsp
ort
atio
n
Co
mm
un
icat
ion
Po
wer
Man
ufa
ctu
rin
g
Private Construction Activity is Up in Most Segments, Including the Key Residential Construction Sector; Bodes Well for Early 2014
Growth (%) Led by the Residential Construction, Lodging, Communication and Office segments, Private
sector construction activity is rising after plunging during the “Great Recession.”
*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
89
Construction Employment,Jan. 2010—March 2014*
*Seasonally adjusted.Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
5,58
15,
522
5,54
25,
554
5,52
75,
512
5,49
75,
519
5,49
95,
501
5,49
75,
468
5,43
5 5,47
85,
485
5,49
75,
524
5,53
05,
547
5,54
6 5,58
35,
576
5,57
7 5,61
25,
629
5,64
45,
640
5,63
65,
615
5,62
25,
627
5,63
05,
633
5,64
95,
673 5,71
15,
735 5,
783
5,79
95,
792
5,79
15,
801
5,80
45,
805
5,82
25,
830
5,84
95,
876 5,
927
5,94
55,
964
5,400
5,500
5,600
5,700
5,800
5,900
6,000
Jan-
10F
eb-1
0M
ar-1
0A
pr-1
0M
ay-1
0Ju
n-10
Jul-1
0A
ug-1
0S
ep-1
0O
ct-1
0N
ov-1
0D
ec-1
0Ja
n-11
Feb
-11
Mar
-11
Apr
-11
May
-11
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
122/
30/2
Mar
-12
Apr
-12
May
-12
Jun-
12Ju
l-12
Aug
-12
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Jan-
13F
eb-1
3M
ar-1
3A
pr-1
3M
ay-1
3Ju
n-13
Jul-1
3A
ug-1
3S
ep-1
2O
ct-1
3N
ov-1
3D
ec-1
3Ja
n-14
Feb
-14
Mar
-14
Construction employment is +529,000 above
Jan. 2011 (+9.7%) trough
(Thousands)
Construction and manufacturing employment constitute 1/3 of all payroll exposure.
90
$200,000
$300,000
$400,000
$500,000
Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—Dec. 2013
*seasonally adjusted; Dec. 2013 is preliminary; data published February 4, 2014.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/
Monthly shipments in Dec. 2013 exceeded the pre-crisis (July 2008) peak. Manufacturing is energy-intensive and growth leads to gains in many commercial
exposures: WC, Commercial Auto, Marine, Property, and various Liability Coverages.
$ Millions
90
The value of Manufacturing Shipments in Dec. 2013 was $492.7B—a near record high.
92
Manufacturing Employment,Jan. 2010—March 2014*
11
,46
01
1,4
60
11
,46
61
1,4
97
11
,53
11
1,5
39
11
,55
81
1,5
48
11
,55
41
1,5
55
11
,57
71
1,5
90
11
,62
41
1,6
62
11
,68
21
1,7
07
11
,71
51
1,7
24
11
,74
71
1,7
60
11
,76
21
1,7
70
11
,76
91
1,7
97
11
,84
11
1,8
70
11
,91
01
1,9
20
11
,92
61
1,9
35
11
,95
71
1,9
43
11
,92
51
1,9
31
11
,93
81
1,9
51
11
,96
51
1,9
88
11
,98
41
1,9
77
11
,97
21
1,9
65
11
,94
81
1,9
63
11
,99
31
2,0
11
12
,04
61
2,0
53
12
,06
11
2,0
80
12
,07
9
11,250
11,500
11,750
12,000
12,250Ja
n-1
0F
eb
-10
Ma
r-1
0A
pr-
10
Ma
y-1
0Ju
n-1
0Ju
l-1
0A
ug
-10
Se
p-1
0O
ct-1
0N
ov-
10
De
c-1
0Ja
n-1
1F
eb
-11
Ma
r-1
1A
pr-
11
Ma
y-1
1Ju
n-1
1Ju
l-1
1A
ug
-11
Se
p-1
1O
ct-1
1N
ov-
11
De
c-1
1Ja
n-1
22
/30
/2M
ar-
12
Ap
r-1
2M
ay-
12
Jun
-12
Jul-
12
Au
g-1
2S
ep
-12
Oct
-12
No
v-1
2D
ec-
12
Jan
-13
Fe
b-1
3M
ar-
13
Ap
r-1
3M
ay-
13
Jun
-13
Jul-
13
Au
g-1
3S
ep
-13
Oct
-13
No
v-1
3D
ec-
13
Jan
-14
Fe
b-1
4M
ar-
14
Manufacturing employment is a surprising source of strength in the economy. Employment in the sector is at a multi-year high.
*Seasonally adjusted; Feb. and Mar. 2014 are preliminarySources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
(Thousands) Since Jan 2010, manufacturing employment
is up (+619,000 or +5.4%)and still growing.
94
2.5%
4.9%
6.3%
7.8%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
2013 2014F 2015F 2016F
Business Investment: Expected to Accelerate, Fueling Commercial Exposure Growth
Accelerating business investment will be a potent driver of
commercial property and liability insurance exposures and should drive employment and WC payroll
exposures as well (with a lag)
Source: IHS Global Insights as of Jan. 13, 2014; Insurance Information Institute.
97
12 Industries for the Next 10 Years: Insurance Solutions Needed
Export-Oriented Industries
Health Sciences
Health Care
Energy (Traditional)
Alternative Energy
Petrochemical
Agriculture
Natural Resources
Technology (incl. Biotechnology)
Light Manufacturing
Insourced Manufacturing
Many industries are
poised for growth, though
insurers’ ability to
capitalize on these
industries varies widely
Shipping (Rail, Marine, Trucking, Pipelines)
U.S. Natural Has Imports and Exports, 1990 - 2040
Sources: US Energy Information Administration, Annual Energy Outlook 2014 Early Release Overview; ;Insurance Information Institute. 98
Trillions of Cubic Feet
The US is now the largest gas producer in the world, though Russia is the
largest exporter. The US needs to
invest in its pipeline and
LNG infrastructure and expedite
regulatory approval to
realize its full export potential
102
Oil & Gas Extraction Employment,Jan. 2010—March 2014*
*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
156.
415
6.4
156.
715
7.6
158.
715
7.8
158.
015
9.5
160.
016
1.5
161.
216
1.2
163.
116
4.4
166.
616
9.3
170.
117
1.0
172.
517
3.6
176.
317
8.2
178.
518
0.9
181.
918
3.1
184.
818
5.2
185.
718
6.8
187.
618
8.0
188.
018
8.2
190.
019
1.7
191.
919
3.4
192.
419
2.6
193.
119
3.3
195.
019
6.5
199.
720
0.6
203.
020
4.1
205.
320
7.7
208.
1
150
160
170
180
190
200
210
220
Jan-
10F
eb-1
0M
ar-1
0A
pr-1
0M
ay-1
0Ju
n-10
Jul-1
0A
ug-1
0S
ep-1
0O
ct-1
0N
ov-1
0D
ec-1
0Ja
n-11
Feb
-11
Mar
-11
Apr
-11
May
-11
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
122/
30/2
Mar
-12
Apr
-12
May
-12
Jun-
12Ju
l-12
Aug
-12
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Jan-
13F
eb-1
3M
ar-1
3A
pr-1
3M
ay-1
3Ju
n-13
Jul-1
3A
ug-1
3S
ep-1
3O
ct-1
3N
ov-1
3D
ec-1
3Ja
n-14
Feb
-14
Mar
-14
Oil and gas extraction employment is up 33.1% since Jan. 2010 as the energy sector booms. Domestic energy production is essential to any robust economic recovery in
the US.
(Thousands) Highest since Aug.
1986
103
The Future of Healthcare in America
Insurers Are Increasingly Along for the Ride in the
American Health Care Saga
103
U.S. Health Care Expenditures,1965–2022F
65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$42.
0$4
6.3
$51.
8$5
8.8
$66.
2$7
4.9
$83.
2$9
3.1
$103
.4$1
17.2
$133
.6$1
53.0
$174
.0$1
95.5
$221
.7$2
55.8
$296
.7$3
34.7
$369
.0$4
06.5
$444
.6$4
76.9
$519
.1$5
81.7
$647
.5$7
24.3
$791
.5$8
57.9
$921
.5$9
72.7
$1,0
27.4
$1,0
81.8
$1,1
42.6
$1,2
08.9
$1,2
86.5
$1,3
77.2
$1,4
93.3
$1,6
38.0
$1,7
75.4
$1,9
01.6
$2,0
30.5
$2,1
63.3
$2,2
98.3
$2,4
06.6
$2,5
01.2
$2,6
00.0
$2,7
00.7
$2,8
06.6
$2,9
14.7
$3,0
93.2
$3,2
73.4
$3,4
58.3
$3,6
60.4
$3,8
89.1
$4,1
42.4
$4,4
16.2
$4,7
02.0
$5,0
08.8
U.S. health care expenditures have been on a relentless climb for most of the past half century, far outstripping population growth,
inflation of GDP growth
104
From 1965 through 2013, US health care expenditures had
increased by 69 fold. Population growth over the same period increased by a factor of just 1.6. By 2022, health spending will have
increased 119 fold.
$ Billions
Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
65 66 67 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 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22
National Health Care Expenditures as a Share of GDP, 1965 – 2022F*
Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.
1965 5.8%
Health care expenditures as a share of GDP rose from 5.8% in 1965 to 18.0% in 2013 and are expected to
reach 19.9% of GDP by 2022
% of GDP
2022 19.9%
1980: 9.2%
1990: 12.5%
2000: 13.8%
2010: 17.9%
Since 2009, heath expenditures as a %
of GDP have flattened out at about 18%--the
question is why and will it last?
4.5%
3.5%2.8%
3.2%3.5%4.1%
4.6%4.7%4.0%
4.4%4.2%4.0%4.4%
3.7%3.2%3.4%
3.0%
5.1%
7.4%
10.1%10.6%
13.5%
5.4%
7.8%
6.3%6.6%
4.1%3.6% 4%
3%
1.4%
5.4%
8.8%
7.7%
7.3%
8.3%
0%
2%
4%
6%
8%
10%
12%
14%
16%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Change in Medical CPI
Change Med Cost per Lost Time Claim
WC Medical Severity Generally Outpaces the Medical CPI Rate
Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
Average annual increase in WC medical severity form 1995 through 2011 was well above the medical CPI (6.8% vs. 3.8%), but
the gap is narrowing.
CYBER RISK
109
Cyber Risk is a Rapidly Emerging Exposure for Businesses Large
and Small in Every IndustryNEW III White Paper:
http://www.iii.org/assets/docs/pdf/paper_CyberRisk_2013.pdf
109
Data Breaches 2005-2013, by Number of Breaches and Records Exposed# Data Breaches/Millions of Records Exposed
* 2013 figures as of Jan. 1, 2014 from the ITRC updated to an additional 30 million records breached (Target) as disclosed in Jan. 2014.Source: Identity Theft Resource Center.
157
321
446
656
498
419447
619662
87.9
17.322.9
35.7
19.1
66.9
222.5
16.2
127.7
100
200
300
400
500
600
700
2005 2006 2007 2008 2009 2010 2011 2012 2013*0
20
40
60
80
100
120
140
160
180
200
220
# Data Breaches # Records Exposed (Millions)
The Total Number of Data Breaches (+38%) and Number of Records Exposed (+408%) in 2013 Soared
Millions
Shifting Legal Liability & Tort Environment
111
Is the Tort PendulumSwinging Against Insurers?
111
112
Over the Last Three Decades, Total Tort Costs as a % of GDP Appear Somewhat Cyclical, 1980-2013E
$0
$50
$100
$150
$200
$250
$300
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12E
To
rt S
ys
tem
Co
sts
1.50%
1.75%
2.00%
2.25%
2.50%
To
rt Co
sts
as
% o
f GD
P
Tort Sytem Costs Tort Costs as % of GDP
($ Billions)
Sources: Towers Watson, 2011 Update on US Tort Cost Trends, Appendix 1A
Tort costs in dollar terms have remained high but relatively stable
since the mid-2000s., but are down substantially as a share of GDP
Deepwater Horizon Spike
in 2010
1.68% of GDP in 2013
2.21% of GDP in 2003
= pre-tort reform peak
117
U.S. Insured Catastrophe Loss Update
2013 Was a Welcome Respite from the High Catastrophe Losses in Recent Years
117
118
$1
2.6
$1
1.0
$3
.8
$1
4.3
$1
1.6
$6
.1
$3
4.7
$7
.6
$1
6.3
$3
3.7
$7
3.4
$1
0.5
$7
.5
$2
9.2
$1
1.5
$1
4.4
$3
3.6
$3
5.0
$1
2.9
$1
4.0
$4
.8
$8
.0
$3
7.8
$8
.8
$2
6.4
$0
$10
$20
$30
$40
$50
$60
$70
$80
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13*
U.S. Insured Catastrophe Losses
*Through 12/31/13.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.
2012 Was the 3rd Highest Year on Record for Insured Losses in U.S. History on an Inflation-Adj. Basis. 2011 Losses Were the 6th Highest. YTD 2013 Running Well
Below 2011 and 2012 YTD Totals.
2012 was the third most expensive year ever for insured CAT
losses
Record tornado losses caused
2011 CAT losses to surge
($ Billions, $ 2012)
118
119
Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2013*
*2010s represent 2010-2013.Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO (1960-2011); A.M. Best (2012E) Insurance Information Institute.
0.4
1.2
0.4 0.
8 1.3
0.3
0.4 0.
71.
51.
00.
40.
4 0.7
1.8
1.1
0.6
1.4 2.
01.
3 2.0
0.5
0.5 0.7
3.0
1.2
2.1
8.8
2.3
5.9
3.3
2.8
1.0
3.6
2.9
1.6
5.4
1.6
3.3
3.3
8.1
2.7
1.6
5.0
2.6
3.4
8.7 8.9
3.43.6
0.9
0.1
1.1
1.1
0.8
0
1
2
3
4
5
6
7
8
9
10
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades
Avg. CAT Loss Component of the Combined Ratio
by Decade
1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 6.1E*
Combined Ratio Points Catastrophe losses as a share of all losses reached
a record high in 2012
120
Top 10 States for InsuredCatastrophe Losses, 2013
$1,995
$1,509
$1,190
$909 $907$805 $773 $762
$677$593
0200400600800
1,0001,2001,4001,6001,8002,000
Okl
ahoma
Texas
Illin
ois
Min
nesota
Colora
do
Mis
siss
ippi
Nebra
ska
Geo
rgia
India
na
Louisia
na
Source: The Property Claim Services (PCS) unit of ISO, a Verisk Analytics company.
$ Millions
Oklahoma let the country in insured CAT losses in 2013
123
Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1993–20121
0.1%
1.7%
3.8%4.7%
6.3%
7.1%
36.0%
40.4%
1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2012 dollars.2. Excludes snow.3. Does not include NFIP flood losses4. Includes wildland fires5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.Source: ISO’s Property Claim Services Unit.
Hurricanes & Tropical Storms, $158.2
Fires (4), $6.5
Tornadoes (2), $140.9
Winter Storms, $27.8
Terrorism, $24.8
Geological Events, $18.4
Wind/Hail/Flood (3), $14.9
Other (5), $0.2
Wind losses are by far cause the most catastrophe losses,
even if hurricanes/TS are excluded.
Tornado share of CAT losses is
rising
Insured cat losses from 1993-2012
totaled $391.7B, an average of $19.6B per year or $1.6B
per month
124
Top 16 Most Costly Disastersin U.S. History
(Insured Losses, 2012 Dollars, $ Billions)
$7.8 $8.7 $9.2 $11.1$13.4$18.8
$23.9 $24.6$25.6
$48.7
$7.5$7.1$6.7$5.6$5.6$4.4
$0
$10
$20
$30
$40
$50
$60
Irene (2011) Jeanne(2004)
Frances(2004)
Rita (2005)
Tornadoes/T-Storms
(2011)
Tornadoes/T-Storms
(2011)
Hugo (1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Ike (2008)
Sandy*(2012)
Northridge(1994)
9/11 Attack(2001)
Andrew(1992)
Katrina(2005)
Hurricane Sandy became the 5th
costliest event in US insurance history
Hurricane Irene became the 12th most expense hurricane
in US history in 2011
Includes Tuscaloosa, AL,
tornado
Includes Joplin, MO, tornado
12 of the 16 Most Expensive Events in US History Have
Occurred Over the Past Decade
*PCS estimate as of 4/12/13.Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.
125
Top 16 Most Costly World Insurance Losses, 1970-2013*
(Insured Losses, 2012 Dollars, $ Billions)
*Figures do not include federally insured flood losses.**Estimate based on PCS value of $18.75B as of 4/12/13.Sources: Munich Re; Swiss Re; Insurance Information Institute research.
$11.1$13.4 $13.4$13.4$18.8
$23.9 $24.6$25.6
$38.6
$48.7
$7.8 $8.1 $8.5 $8.7 $9.2 $9.6
$0
$10
$20
$30
$40
$50
$60
Hugo (1989)
WinterStormDaria(1991)
ChileQuake(2010)
Ivan (2004)
Charley(2004)
TyphoonMirielle(1991)
Wilma(2005)
ThailandFloods(2011)
NewZealandQuake(2011)
Ike (2008)
Sandy(2012)**
Northridge(1994)
WTC TerrorAttack(2001)
Andrew(1992)
JapanQuake,
Tsunami(2011)**
Katrina(2005)
5 of the top 14 most expensive catastrophes in
world history have occurred within the past 3 years
(2010-2012)
Hurricane Sandy is now the 6th costliest event in global
insurance history
2012 insured CAT Losses totaled $60B; Economic losses totaled $140B, according to Swiss Re
127
Total Value of Insured Coastal Exposure in 2012
(2012, $ Billions)
Source: AIR Worldwide
$293.5$239.3
$182.3$164.6$163.5
$118.2$106.7$81.9$64.0$60.6$58.3
$17.3
$567.8$713.9
$849.6$1,175.3
$2,862.3$2,923.1
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500
New YorkFloridaTexas
MassachusettsNew JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaAlabamaGeorgia
DelawareNew Hampshire
MississippiRhode Island
Maryland
In 2012, New York Ranked as the #1 Most Exposed State to Hurricane Loss, Overtaking Florida with $2.862 Trillion. Texas is very exposed too, and
ranked #3 with $1.175 Trillionin insured coastal exposure
The Insured Value of All Coastal Property Was $10.6 Trillion in 2012 , Up 20% from $8.9 Trillion in 2007 and
Up 48% from $7.2 Trillion in 2004
NY and FL lead the US in the value of insured coastal exposure at $2.9 Trillion
132Sources: Munich Re NatCatSERVICE; Insurance Information Institute.
Winter Storm and Winter Damage Events in the US and Canada, 1980-2013 (2013 US$)
Three of the four most costly years ever for insured losses from
winter storms and damage occurred in the 1990s, led by the “Storm of the Century” in 1993.
Insured losses from
severe winter events
totaled $2 billion in
2013.
Insured winter storm and damage losses in Jan. 2014 already totaled $1.5 billion. Continued severe weather since then makes it likely that
2014 will become one of the top 5 costliest winters since 1980.
Insured Losses (Millions, $ 2013)
5-year running average
U.S. Thunderstorm Insured Loss Trends, 1980 – 2013
135Source: Property Claims Service, and MR NatCatSERVICE
Thunderstorm losses in 2013 totaled $10.3 billion, the 6th
highest on record
Average thunderstorm
losses are up 7 fold since the early
1980s. The 5-year running average
loss is up sharply
Hurricanes get all the headlines, but thunderstorms are consistent
producers of large scale loss. 2008-2013 are the most expensive
years on record.
Nu
mb
er
Geophysical (earthquake, tsunami, volcanic activity)
Climatological (temperature extremes, drought, wildfire)
Meteorological (storm)
Hydrological (flood, mass movement)
Natural Disasters in the United States, 1980 – 2013Number of Events (Annual Totals 1980 – 2013)
Source: MR NatCatSERVICE 137
22
19
81
6
50
100
150
200
250
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
There were 128 natural disaster events in 2013
Losses Due to Natural Disasters in the US, 1980–2013
139
Overall losses (in 2012 values) Insured losses (in 2013 values)
Source: MR NatCatSERVICE
(2013 Dollars, $ Billions) (Overall and Insured Losses)
50
100
150
200
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
2013 CAT Losses
Overall : $21.8B
Insured: $12.8B
Indicates a great deal of losses are uninsured (~40%-50% in the US) =
Growth Opportunity
2013 losses were far below 2011 and 2012 and were 44% lower
than the average from 2000-2012
Source: Munich Re Geo Risks Research, NatCatSERVICE – as of January 2014. 144
Geophysical events(earthquake, tsunami, volcanic activity)
Meteorological events (storm)
Hydrological events(flood, mass movement)
Climatological events(extreme temperature, drought, wildfire)
Extraterrestrial events(Meteorite impact)
880Loss events
EarthquakeChina, 20 April
Severe storms, tornadoesUSA, 18–22 May
FloodsIndia, 14–30 June
HailstormsGermany, 27–28 July
Winter Storm Christian (St. Jude)Europe, 27–30 October
Typhoon HaiyanPhilippines, 8–12 NovemberSevere storms, tornadoes
USA, 28–31 May
Hurricanes Ingrid & ManuelMexico, 12–19 September
FloodsCanada, 19–24 June
FloodsEurope, 30 May–19 June
Heat waveIndia, April–June
Typhoon FitowChina, Japan, 5–9 October
Earthquake (series)Pakistan, 24–28 September
FloodsAustralia, 21–31 January
Meteorite impactRussian Federation, 15 February
Flash floodsCanada, 8–9 July
FloodsUSA, 9–16 September
Geophysical events(earthquake, tsunami, volcanic activity)
Meteorological events (storm)
Selection of significant Natural catastrophes
Natural catastrophes Hydrological events(flood, mass movement)
Climatological events(extreme temperature, drought, wildfire)
Natural Loss Events:Full Year 2013
World Map
Geophysical (earthquake, tsunami, volcanic activity)
Climatological (temperature extremes, drought, wildfire)
Meteorological (storm)
Hydrological (flood, mass movement)
Natural Disasters Worldwide,1980 – 2013 (Number of Events)
Source: MR NatCatSERVICE145
Nu
mb
er
200
400
600
800
1 000
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
There were 880 natural disaster events globally in
2013 compared to 905 in 2012
Losses Due to Natural Disasters Worldwide, 1980–2013 (Overall & Insured Losses)
146
Overall losses (in 2013 values) Insured losses (in 2013 values)
Source: MR NatCatSERVICE
(2013 Dollars, $ Billions)(Overall and Insured Losses)
100
200
300
400
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
US$ bn
2013 Losses
Overall : $125B
Insured: $34B
There is a clear upward trend in both insured and overall losses over the past
30+ years
10-Yr. Avg. Losses
Overall : $184B
Insured: $56B
Flood Insurance
147
Biggert-Waters 2012 Created Opportunity for Private Insurers
2014 Backtracking on Those Reforms Reduces Opportunities
148
$6,558$10,994
$44,563
$57,277
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
Homeowners* Vehicle Commercial NFIP Flood**
Commercial (i.e., business claims) are more expensive
because the value of property is often higher as well as the impact of insured business
interruption losses
*Includes rental and condo policies (excludes NFIP flood). **As of Oct. 31, 2013.Sources: Catastrophe loss data is for Catastrophe Serial No. 90 (Oct. 28 – 31, 2012) from PCS as of March 2013; Insurance Information Institute.
Hurricane Sandy: Average Claim Payment by Type of Claim
The average insured flood loss was nearly 9 times larger than the average non-flood insured loss
(mostly wind)
Post-Sandy, the I.I.I. worked very hard to make help media, consumers and regulators understand the distinction between a flood claim and a
standard homeowners claim. NFIP is $24B in debt.
149
Total Potential Home Value Exposure to Storm Surge Risk in 2013*
($ Billions)
*Insured and uninsured property. Based on estimated property values as of April 2013.Source: Storm Surge Report 2013, CoreLogic.
$65.2$51.0$50.3
$35.0$22.4$20.5
$15.9$10.4$7.2$4.7$3.1$2.7$2.6$0.6
$65.6$72.0$78.0
$118.8$135.0
$386.5
$0 $50 $100 $150 $200 $250 $300 $350 $400 $450
FloridaNew York
New JerseyVirginia
LouisianaS. CarolinaN. Carolina
TexasMassachusetts
ConnecticutMarylandGeorgia
DelawareMississippi
Rhode IslandAlabama
MaineNew
PennsylvaniaDC
The Value of Homes Exposed to Storm Surge was $1.147 Trillion in 2013.* Only a fraction of this is insured, hence the huge demand for federal aid
following major coastal flooding events.
Florida is by the state most vulnerable to storm surge.
Terrorism Update
151
Down to the Wire? Boston Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program
Download III’s Terrorism Insurance Report at: http://www.iii.org/white_papers/terrorism-risk-a-constant-threat-2013.html
151
153
Terrorism Insurance Take-up Rates,By Year, 2003-2012
Source: Marsh Global Analytics, 2013 Terrorism Risk Insurance Report, May 2013.
27%
49%
58% 59% 59% 57%61% 62% 64% 62%
0%
10%
20%
30%
40%
50%
60%
70%
80%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
In 2003, the first year TRIA was in effect, the terrorism take-up rate was 27 percent. Since then, it has increased steadily, remaining in the
low 60 percent range since 2009.
Take-up rates for smaller commercial risks are lower—
potentially very low in some areas and industries
154
Terrorism Risk Insurance Program
Testified before Senate Banking Cmte. in Sept. 2013 Testified before House Financial Services Nov. 2013 Provided testimony at NYC hearing on June 2013 I.I.I. Accelerated Planned Study on Terrorism Risk and
Insurance in the Wake of Boston and Hearings; Was Well Received and Widely Circulated
Working with Trades, Congressional Staff, GAO & Others
Senate Banking Committee, 9/25/13House Financial Services Subcommittee, 11/13/13
SURPLUS/CAPITAL/CAPACITY
155
2013 Recorded Yet Another Record High in the Primary and Reinsurance Sectors
155
156
Policyholder Surplus, 2006:Q4–2013:Q4
Sources: ISO, A.M .Best.
($ Billions)
$487.1$496.6
$512.8$521.8
$478.5
$455.6
$437.1
$463.0
$490.8
$511.5
$540.7$530.5
$544.8$559.2 $559.1
$538.6$550.3
$567.8$583.5$586.9
$607.7$614.0$624.4
$653.3
$570.7$566.5
$505.0$515.6$517.9
$400
$450
$500
$550
$600
$650
$700
06:Q
4
07:Q
1
07:Q
2
07:Q
3
07:Q
4
08:Q
1
08:Q
2
08:Q
3
08:Q
4
09:Q
1
09:Q
2
09:Q
3
09:Q
4
10:Q
1
10:Q
2
10:Q
3
10:Q
4
11:Q
1
11:Q
2
11:Q
3
11:Q
4
12:Q
1
12:Q
2
12:Q
3
12:Q
4
13:Q
1
13:Q
2
13:Q
3
13:Q
4
2007:Q3Pre-Crisis Peak
Surplus as of 12/31/13 stood at a record high $653.3B
2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business .
The industry now has $1 of surplus for every $0.73 of NPW,close to the strongest claims-paying status in its history.
Drop due to near-record 2011 CAT losses
The P/C insurance industry entered 2014in very strong financial condition.
159
U.S. INSURANCE MERGERS AND ACQUISITIONS, All Sectors, 1989-2012 (1)
$7.1$6.9$8.6$5.0
$8.5$12.5
$27.0
$40.8
$56.2
$41.7
$55.7
$41.5
$9.7
$59.9
$14.9
$50.8
$43.0
$50.4
$31.4
$14.4
$46.5
$54.7
$43.2
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Tra
ns
ac
tio
n v
alu
es
0
100
200
300
400
500
600
Nu
mb
er o
f tran
sa
ctio
ns
($ Billions)
(1) Includes transactions where a U.S. company was the acquirer and/or the target.
Source: Conning proprietary database.
M&A activity is close to its pre-crisis levels
$165.4
160
U.S. INSURANCE MERGERS AND ACQUISITIONS,P/C SECTOR, 2002-2012 (1)
$486
$20,353
$425
$9,264
$35,221
$13,615
$16,294
$3,507
$6,419
$12,458
$4,651
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Tra
ns
ac
tio
n v
alu
es
0
10
20
30
40
50
60
70
80
90
Nu
mb
er o
f tran
sa
ctio
ns
($ Millions)
(1) Includes transactions where a U.S. company was the acquirer and/or the target.
Source: Conning proprietary database.
M&A activity in the P/C sector remains below
pre-crisis levels.
161
U.S. INSURANCE MERGERS AND ACQUISITIONS,LIFE/ANNUITY SECTOR, 2002-2012 (1)
$2,796
$18,533
$3,817
$21,865
$5,055$5,849
$382 $840
$23,848
$3,063
$6,083
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Tra
ns
ac
tio
n v
alu
es
0
5
10
15
20
25
30
35
40
Nu
mb
er o
f tran
sa
ctio
ns
($ Millions)
(1) Includes transactions where a U.S. company was the acquirer and/or the target.
Source: Conning proprietary database.
Life/Annuity sector M&A activity is highly volatile
162
REINSURANCE MARKET CONDITIONS
Ample Capacity as Alternative Capital is
Transforming the Market—And Pushing Down
Prices162
Global Reinsurance Capital (Traditional and Alternative), 2007 - 2013
Source: Aon Benfield Reinsurance Market Outlook, April 1, 2014; Insurance Information Institute.
Total reinsurance capital reached a record $540B in 2013, up 58.8% from 2008. Of that, $50B (9.3%) is alternative capacity, up 163% from
$19B since 2008
Reinsurance Pricing: Rate-on-Line Index by Region, 1990 – 2014*
*As of Jan. 1.Source: Guy Carpenter
Lower CATs and a flood of new
capital has pushed reinsurance pricing
down in most regions, including
the US
Reinsurer Combined Ratios(Aon Benfield Aggregate), 2007 - 2013
Source: Aon Benfield Reinsurance Market Outlook, April 1, 2014; Insurance Information Institute.
Reinsurers posted a combined under 90 in 2013, the best result since 2009
168168Sources: Guy Carpenter and A.M. Best; Insurance Information Institute .
Sources of Reinsurance Capital Change: YE 2012 to YE 2013
Net income and new 3rd party capital were the leading source of reinsurance capital growth in 2013
Alternative Capacity as a Percentage of Global Property Catastrophe Reinsurance Limit
Source: Guy Carpenter
(As of Year End)
Alternative Capacity accounted for approximately 14% or $45 billion
of the $316 in global property catastrophe reinsurance capital as
of mid-2013 (expected to rise to ~15% by year-end 2013)
Alternative Capacity Development, 2001—2013:H1
Source: Guy Carpenter; Mid-Year Market Report, September 2013; Insurance Information Institute.
Investor by Category, 2013 vs. 2012*
*As of June 30 each year.Source: Aon Benfield Securities; Insurance Information Institute.
Institutional Investors are
accounting for a larger share of
alternative reinsurance
investors
Non-Traditional Property CatastropheLimits by Type, YE 2012 vs. YE 2015E
Source: Guy Carpenter; Reinsurance Association of America; Insurance Information Institute.
$13 $15
$6 $8
$10 $11
$15
$23 $44
$57
$0
$10
$20
$30
$40
$50
$60
2012* 2015E
NON-TRADITIONAL P/CAT LIMITS BY TYPE
Cat Bond Retro ILW Collateralized Re
Source: Guy Carpenter; *As Of Mar-2013
Alternative capital is expected to rise by 30% by YE 2015 and will ultimately
account for 20-30% of total reinsurance
spend, according to Guy Carpenter
Catastrophe Bonds: Issuance and Outstanding, 1997- 2014:Q1*Risk Capital Amount ($ Millions)
*Through Jan. 31, 2014.Source: Guy Carpenter; Insurance Information Institute.
63
3.0
84
6.1
98
4.8
1,1
30
.0
96
6.9 2
,72
9.2
3,3
91
.7
4,6
00
.3
4,1
08
.8
5,8
52
.9
7,0
83
.0
1,4
10
.0
1,991.11,142.8
1,729.8
6,9
96
.3
4,6
93
.4
1,219.5
$3
,45
0.0
$4
,04
0.4
$4
,90
4.2 $
8,5
41
.6
$1
4,0
24
.2
$1
2,0
43
.6
$1
2,5
08
.8
$1
2,1
85
.0
$1
2,1
39
.1
$1
4,8
35
.7 $1
8,5
16
.7
$2
,95
0.0
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
$20,000
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14:Q1Risk Capital IssuedRisk Capital Outstandng at Year End
Catastrophe Bond Issuance Is Approaching Pre-Crisis Levels While Risk Capital Outstanding Stands at an All-Time Record
CAT bond issuance reached a record high in 2013
Risk capital outstanding
reached a record high in 2013
Financial crisis depressed issuance
176
Questions Arising from Influence of Alternative Capital Could Pension Fund Money Swamp Traditional Capacity?
US private pension funds hold ~$7 trillion in assets 2% allocation = $140 billion Global property cat capital = ~$316 bill as of mid-2013
Do New Investors Have a Lower Cost of Capital? New capacity expects 6-8% rate of return compared to 8-
10% for traditional reinsurance, according to Dowling & Partners
Will Reinsurance Pricing Become More Closely Linked to Interest Rates? What happens when interest rates rise?
Terms and Conditions Could Weaken Multi-year deals
177
Questions Arising from Influence of Alternative Capital
What Will Happen When Investors Face Large-Scale Losses?
Does ILS Have a Higher Propensity to Litigate? Short-term focus could contribute to disputes
Large share of triggered transactions ended up in dispute
How Low Will ROLs Be Pushed?
Does the New Interconnectedness with Capital Markets Lend Credence to the Suggestion that Reinsurance Is a Systemic Risky Business?
Will Alternative Capital Drive Consolidation Among Traditional Reinsurers? Has the mating dance begun? Endurance/Aspen
INVESTMENTS: THE NEW REALITY
178
Investment Performance is a Key Driver of Profitability
Depressed Yields Will Necessarily Influence Underwriting & Pricing
178
Property/Casualty Insurance Industry Investment Income: 2000–20131
$38.9$37.1 $36.7
$38.7
$54.6
$51.2
$47.1 $47.6$49.2
$48.0 $47.4
$39.6
$49.5
$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Investment Income Fell in 2012 and 2013 Due to Persistently Low Interest Rates, Putting Additional Pressure on (Re) Insurance Pricing
1 Investment gains consist primarily of interest and stock dividends...Sources: ISO; Insurance Information Institute.
($ Billions)
Investment earnings are running below their 2007
pre-crisis peak
182
-1.8
%
-1.8
%
-2.0
%
-3.6
%
-3.3
%
-3.3
%
-3.7
%
-4.3
%
-5.2
%
-5.7
%
-7.3%
-1.9
%
-2.1
%
-3.1
%
-8%-7%-6%-5%-4%-3%-2%-1%0%
Perso
nal L
ines
Pvt Pass
Aut
o
Pers P
rop
Comm
ercia
l
Comm
l Auto
Credit
Comm
Pro
p
Comm
Cas
Fidelity
/Sure
ty
Warra
nty
Surplu
s Line
s
Med
Mal
WC
Reinsu
rance
**
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
182
184
U.S. Treasury Security Yields:A Long Downward Trend, 1990–2014*
*Monthly, constant maturity, nominal rates, through February 2014.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
Recession2-Yr Yield10-Yr Yield
Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.
U.S. Treasury yields plunged to historic lows in
2013. Only longer-term yields have rebounded.
184
PRICING TRENDS
191
Modest Growth Continues
191
Financial Strength & Underwriting
207
Cyclical Pattern is P-C Impairment History is Directly Tied to
Underwriting, Reserving & Pricing
207
209
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2012
90
95
100
105
110
115
1206
97
07
17
27
37
47
57
67
77
87
98
08
18
28
38
48
58
68
78
88
99
09
19
29
39
49
59
69
79
89
90
00
10
20
30
40
50
60
70
80
91
01
11
2
Co
mb
ine
d R
ati
o
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Imp
airm
en
t Ra
te
Combined Ratio after Div P/C Impairment Frequency
Source: A.M. Best; Insurance Information Institute
2012 impairment rate was 0.69%, down from 1.11% in 2011; the rate is lower than the 0.82% average since 1969
Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007; Recent Increase Was Associated
Primarily With Mortgage and Financial Guaranty Insurers and Not Representative of the Industry Overall
210
Reasons for US P/C Insurer Impairments, 1969–2012
43.4%
12.6%
7.2%
7.1%
8.0%
6.6%
8.4%
3.5% 3.1%
Source: A.M. Best Special Report “Pace of P/C Impairments Slowed in 2012; Auto Writers, RRGs Continued to Struggle,” June 2013; Insurance Information Institute.
Historically, Deficient Loss Reserves and Inadequate Pricing AreBy Far the Leading Cause of P-C Insurer Impairments.
Investment and Catastrophe Losses Play a Much Smaller Role
Deficient Loss Reserves/Inadequate Pricing
Reinsurance Failure
Rapid GrowthAlleged Fraud
Catastrophe Losses
Affiliate Impairment
Investment Problems (Overstatement of Assets)
Misc.
Sig. Change in Business
212
Top 10 Lines of Business for US P/C Impaired Insurers, 2000–2012
19.7%
22.2%
9.2%8.8%
7.3%
8.6%
6.7%
4.8%
4.0%
8.6%
Source: A.M. Best Special Report “Pace of P/C Impairments Slowed in 2012; Auto Writers, RRGs Continued to Struggle,” June 2013; Insurance Information Institute..
Workers Comp and Pvt. Passenger Auto Account for More Than 40 Percent of the Impaired Insurers Since 2000
Workers Comp
Other
Pvt. Passenger Auto
HomeownersCommercial Multiperil
Commercial Auto Liability
Other Liability
Med Mal
Surety
Title
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213