July, 2011 NSLA The Complexity of Natural Catastrophes Clift WSSL_Guy... · 2011. 8. 19. · Guy...
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The Complexity of Natural Catastrophes
July, 2011
Thomas Clift, WSSLC 2011 Incline Village, NV
NSLA
1Guy Carpenter
Natural Disasters are Very Complex
Natural Catastrophes -
1. Increase in Frequency and Severity – fact or fiction?
2. Loss Potential – true loss potential understood?
3. Financially Prepared - sufficient resources?
4. “Total” Loss verses “Insured” Loss – impact?
5. 2011 YTD Highlights – any helpful signals?
Natural Catastrophes –1. Frequency / Severity
3Guy Carpenter
Worldwide Natural Catastrophes 1980 – 2011Frequency
The number of worldwide storms and severe weather events over the last 30
years suggest we are in an upward cycle
“Flood”
“Storm”
“Earthquake”
“Extreme
Temperature”
4Guy Carpenter
Worldwide Natural Catastrophes 1980 – 2011Severity
Both “insured” and “total” losses are increasing over the last 30 years
“Total”
Losses
“Insured”
Losses
5Guy Carpenter
U.S. Natural Catastrophes 1980 – 2010Frequency of Events
The number of U.S. hurricanes and severe weather events is increasing
A record 247 natural disasters in 2010
“Extreme
Temperature”
“Flood”
“Storm”
“Earthquake”
Source: MR NatCatSERVICE
6Guy Carpenter
U.S. Natural Catastrophes 1989 – 2010Severity of Events (in billions)
U.S. property catastrophe losses averaging $13.8 billion between 1980 and 2010
$8
.3
$7
.4
$2
.6
$1
0.1
$8
.3
$4
.6
$2
6.5
$5
.9 $1
2.9
$2
7.5
$6
1.9
$9
.2
$6
.7
$2
7.1
$1
0.6
$1
3.8
$1
4.0
$7
.5
$2
.7
$4
.7
$2
2.9
$5
.5
$1
6.9
$0
$10
$20
$30
$40
$50
$60
$70
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11P
• Sources: Property Claims Service / ISO; Munich Re; Insurance Information Institute
Averaged $8.8 billion between
1989 and 1999Averaged $18.8 billion between
2000 and 2010
7Guy Carpenter
U.S. Natural Catastrophes 1960 – 2010Combined Ratio Points
Source: ISO; Insurance Information Institute estimate for 2010.
1.1% .85% 1.3% 3.4% 3.5%
8Guy Carpenter
U.S. Catastrophe Losses* from 1990 to 2011 by Peril* Inflation Adjusted – in Billions
Hurricane and tropical storm losses are the biggest component
Tornado share of catastrophe losses is sizeable and increasing
% 0.2
2.4%
3.4%
4.9%
6.6%
8.0%
31.8%
42.7%Hurricanes &
Tropical Storms, $160.5
Other,$0.6Fires, $9.0
Wind/Hail/Flood, $12.7
Geological Events, $18.5
Terrorism, $24.9
Winter Storms, $30.0
Tornadoes, $119.5
* Catastrophic events causing direct insured losses to property of $25 million or more in 2009 dollars.
Source: ISO’s Property Claim Services
9Guy Carpenter
1. Natural Catastrophe Trends – Conclusions / Comments
It is very important to understand the upward trend because…
– Global influence on risk, capital and reinsurance
– Industry’s evolution to be more “proactive” verses “reactive”
– Trend will have an increasing impact on individual Company’s financial
stability but ….
Does the industry have a “realistic” gauge on loss potential?
Worldwide U.S.
Frequency Increasing Increasing
Severity Increasing Increasing
Natural Catastrophes –2. Industry Loss Potential
11Guy Carpenter
7 5 0
0 7 1
5 7 0
8 7 5
0 6 84 1 2
Natural CatastrophesMother Nature is Patiently Raising the Threshold
1989
$15b
1992
$17b
1994
$18b1999
$9b
2004
$40b
2005
$85b
?
2011
$60+b
2011New Zealand Quakes $15b, Chile Quake $8b
Japan Quake $30b / Midwest Severe Weather $11b
12Guy Carpenter
U.S. Earthquake – Industry 250 Year Gross Loss Estimate
Occurrence
Commercial $34
Residential $14
All lines $47
EQECAT version 3.15 (2010)
EQECAT estimates a combined personal and commercial lines industry U.S.
earthquake loss indication of about $50 billion
13Guy Carpenter
U.S. Earthquake – Historical Events Using Current Industry Exposures
Losses are in billions / shake only
Select EQ Scenarios DescriptionEstimated Loss
(Industry)
1811-1812 Event Cluster, M8 $87
1811 NM Arkansas M7.7 rupture only $40
1812 NM Missouri M7.7 rupture $37
Cascadia Megathrust M9 $40
M7.05 Downtown LA $68
1906 SF M7.9 $40
1886 Charleston, SC $9
1994 Northridge $17
EQECAT does “not” generate “shake only” simulations reaching $150 billion in
industry loss
14Guy Carpenter
U.S. Hurricane – Industry 100 Year Gross Loss EstimateConsistent Message From Major Modelers
Near Term Single Occurrence
Residential – $85 to $103b
Commercial - $52 to $90b
Occurrence
Residential $91
Commercial $39
All lines $126
In billions / EQECAT version 3.15 (2010)
Near Term
A combined personal and commercial lines industry hurricane loss range of
$115 - $150 billion is realistic
15Guy Carpenter
U.S. Hurricane – Historical Events Using Current Industry Exposures
Historical U.S. hurricanes updated to current exposures fall well below $100 billion
Over 70 years since a SSI 3 made a Northeast landfall
Select Hurricane
ScenariosDescription
Estimated* Loss
(Industry)
1900-1 SSI 4, Houston $43
1992 Andrew SSI 5, Miami, Louisiana $34
1947-04 SSI 4, Miami, Louisiana $77
1926-06 SSI 4, Miami, Louisiana $74
1915-02 SSI 4, Houston $34
1938-04 SSI 3, Long Island Express $22
Ike SSI 4, U.S. Gulf $13
Katrina SSI 3, U.S. Gulf $45
* Losses are in billions
16Guy Carpenter
2. Industry Loss Potential - Conclusions
“Loss picks” based on reasonable benchmarks are
– U.S. Earthquake
$50 billion (excluding fire following) for 250 year return period
Probably within industry perception
– U.S. Hurricanes
$115 to 150 billion for 100 year return period
Generally higher than “perceived” by some segments
Is the insurance industry financially prepared to handle a $100 to
$150 billion natural catastrophe?
Natural Catastrophes –3. Is the Industry Financially Prepared
18Guy Carpenter
Natural CatastrophesReinsurers’ Participation in Prior Natural Catastrophes
History suggests that reinsurers generally participate 25 to 50% on U.S. natural
catastrophes
30%
25%
60%
20%
45%
33%
0%
10%
20%
30%
40%
50%
60%
70%
Hurricane
Hugo (1989)
Hurricane
Andrew (1992)
Sept. 11
Terrorist
Attack (2001)
2004
Hurricane
Season
2005
Hurricane
Season
2008 Texas
Hurricane
Source: Wharton Risk Center, Disaster Insurance Project, Renaissance Re, Insurance Information Institute.
Where does
the balance
end up?
30%
70%75%
40%
80%
55%
67%
100%
Reinsurers
19Guy Carpenter
Reinsurers – Capability to Respond
Reinsurers “total” surplus has grown 39% since 2008
Global reinsurance markets entered 2011 with record capital
0
100
200
300
400
500
600
2007 2008 2009 2010
$411b
$342b
$402b
$475b
20Guy Carpenter
Reinsurer “Peak Zone” Probable Maximum Loss Estimates
“Reinsurer Peak Zone Net PML to Shareholder Equity” as a percentage
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
A B C D E F G H I K L M N O P Q R S T U V
U.S. Earthquake
U.S. Hurricane
European Wind
Source: Public information gathered by Guy Carpenter Business Intelligence Unit
Perc
en
t o
f E
qu
ity
Reinsurer
21Guy Carpenter
U.S. Primary Insurers – Generally Strong Balance Sheets
December, 2010
– Net written premiums = $422b (up 1% over prior)
– Earned premiums $420.5b (down 5% over prior)
– 2011 net income after taxes = $34.7b (up 21% over prior)
– Rate of return on policyholders’ surplus = 6.5% (up 10%)
– Policyholders’ surplus = $556.9b (up 9% over prior – record high)
– Net losses on underwriting = $10.4b (up 247% over prior)
– Combined ratio = 102.4% (up 1% over prior)
– Net investment income = $47.2b ( Flat over prior year)
First Quarter, 2011
– Net income after taxes = $9.0b (down 29% over prior)
– Record policyholders’ surplus =$561.2b
– Combined ratio of 102.3% (up from 99.3% on prior)
22Guy Carpenter
U.S. Property & Casualty ROE Performance
Property / Casualty profitability is both cyclical and volatile
All U.S. Industries
…………………………………………………………
…………………………….…………………………
………..
U.S. P & C Industry
Break Even
23Guy Carpenter
Potential Concern – Residual Markets
Exposure growth in Residual Markets (FAIR, Coastal / Windstorm) has
increased from $54.7 billion in 1990 to about $700 billion as of 2008
$372.3$430.5 $419.5
$656.7
$771.9
$696.4
$54.7
$150.0
$281.8$221.3
$244.2$292.0
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
24Guy Carpenter
Florida Citizens Insurance Company
State-created, not for profit, tax-exempted government entity that provides
property insurance to those unable to find coverage in the voluntary admitted
market
Insures 1,237,289(1)
policyholders or about 15% of the Florida
residential and 53% of the commercial residential markets
Total Insured Values = $540.8 billion generating $2.6 billion in premium
Issues about 25,000 new policies each month
Surplus of $4.6 billion
1 in 100 year gross loss = $22.2 billion
Florida Hurricane Catastrophe Fund coverage of $6.35 billion
$11.0 billion in assessments (about $1,200 for “every household and
business)
Source: Florida House Insurance & Banking Subcommittee Presentation, January, 2011
Statistics as of June, 2010
(1) Policy count as of June
,2011 increased to 1,392,000
25Guy Carpenter
Potential Concern – Residential Earthquake Take-Up Rates
Today 1 out of 8 California homeowners has EQ coverage compared to 1 out of 3 in 1996
Residential take-up rates in Missouri quake-prone areas also decreased in recent
26Guy Carpenter
3. Industry Financial Position – Conclusions
Reinsurers have a strong capital base and well positioned to handle 1Q 2011 losses
New sources of capital are emerging
U.S. Property & Casualty insurers financial position continues to improve
A number of “key” unknowns
– Company ratings
– Timing of next “big” event
– Trends in residual markets / earthquake coverage
– Marketplace pricing (primary and reinsurance)
– Fragile economic environment in terms of unemployment rate, inflation,
GNP growth rate, etc.
How does “Total loss compare to “Insured” loss?
Natural Catastrophes –4. Total Impact
28Guy Carpenter
Worldwide Natural Disasters 1980 – 2011Severity of Events
Worldwide “insured” losses represent about 25% of the “total economic” loss
As a general guide a “2 to 1” ratio appears more reasonable for the U.S.
U.S. Hurricane
Katrina was
reported at $81b
total and $40.6b
insured
29Guy Carpenter
Market Changer Event
In my opinion a single, independent occurrence
Show graphically
25
50
100
150
UnlikelyProbably
notPossible
Probably
yes
In $ billions
30Guy Carpenter
Natural Disasters – Total Loss PerspectiveThings to Consider
Primary
Insurers /
Reinsurers
Consumers
of Insurance
Products
In General
Earnings
Downgrades
Financial stability
Self Insured / Under-
insured
Product cost and
availability
Displacement
Inflation
Stock market
“Losers” vs. “Gainers”
“Supply” and
“demand”
31Guy Carpenter
Economic Outlook – Next 3 – 5 Years*
Area 2010 / 2011 Forecast
Considerations
from a $100b
U.S. Natural
Disaster
U.S. GDP Growth
Rate 3.3% by 4th Q 2012F = 3.2%
“Winners” and
“Losers”
Inflation Rate 2010 = 1.6% 2014F = 2.2% Supply and
demand
Unemployment
Rate
Countrywide = 9.0
with considerable
state variance
2012F = 8.3%Displacement vs.
new job creation
New Housing
StartsAbout 600,000
2013F = 1.2m
2016F = 1.5m“Spike”
Source : Overview & Outlook for P & C Industry, June 22, 2011, Robert Hartwig, CPCU, President, Insurance Information Institute
32Guy Carpenter
4. Economic Impact – Conclusions
Doubling “insured” loss is fair proxy for estimating “Total” loss
Recession officially ended November, 2011 but unusually slow recovery
Economic outlook and insurance industry performance closely linked to a
major catastrophic event
There is a significant number of “unknown” components that increases the
complexity surrounding a natural catastrophe
Has year-to-date 2011 increased or decreased the complexity
surrounding natural catastrophes?
Natural Catastrophes –5. 2011 Headlines
34Guy Carpenter
Natural Catastrophe Headlines for 2011
Significant worldwide losses in 1st & 2nd quarters, 2011
U.S. insured losses for first two quarters of 2011 are over 65% higher than
same period for prior year
Devastating U.S. tornadoes, Mississippi floods, wildfires
Above average prediction for U.S. hurricane landfall
47%30%Gulf Coast from Florida Panhandle to Texas
61%42%Caribbean
Geography
Average
(1950 to 2010)
2011
(Forecast)
U.S. Texas to Maine Coastline 52% 72%
U.S. East Coast including Florida 31% 48%
47%30%Gulf Coast from Florida Panhandle to Texas
61%42%Caribbean
Geography
Average
(1950 to 2010)
2011
(Forecast)
U.S. Texas to Maine Coastline 52% 72%
U.S. East Coast including Florida 31% 48%
Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, April 6, 2011.
Probability for SSI 3 – 5 U.S. Hurricane in 2011
35Guy Carpenter
Catastrophe Loss Activity - 1st Quarter, 2011
Reinsurer
1Q Cat
Losses
Incurred
(000,000's)
Munich 3,702
Swiss Re 2,405
PartnerRe 1,071
Hannover Re 758
AXIS 577
QBE 550
TRC 545
SCOR 486
Ren Re 427
Amlin 425
XL 387
Catlin 375
Validus 294
Aspen 285
Hiscox 266
Flagstone 257
Platinum 248
Montpelier 200
Endurance 185
Beazley 154
R+V 133
Lancashire 117
Novae 80
Ariel 50
Hardy 40
Amlin
Ariel
Aspen
AXISBeazley
Catlin
Endurance
Flagstone
Hannover Re
Hardy
Hiscox
Lancashire
Montpelier
Munich
Novae
PartnerRe
Platinum
QBE
R+VRen Re
SCOR
Swiss Re
TRC
Validus
XL
0.00%
50.00%
100.00%
150.00%
200.00%
250.00%
300.00%
0.00% 5.00% 10.00% 15.00% 20.00% 25.00%
Dis
clo
sed
1Q
201
1 C
at L
oss
es a
s P
erce
nt
of Y
ear
End
201
0 N
et In
com
e
Disclosed 1Q 2011 Cat Losses as Percent of Year End 2010 Equity
Source: Guy Carpenter & Company, LLC
• 2011 ROE forecast reduced for a number of reinsurers
Percent of 2010 Equity
Pe
rce
nt
of
20
10
Net
Inc
om
e
36Guy Carpenter
Current Market Dynamics – Highlights
Model Version Impact (RMS v11)
– Significant individual company variation ( - 30% to +180%)
– RMS change not yet fully integrated into pricing or capacity assessment
Quoting Behavior
– Increasing variability as reinsurers address pricing mechanics and capital
assessment
Capacity Dynamics
– Some increase in demand
– Reinsurers more carefully allocating capacity
– No expectation for a capacity shortage
37Guy Carpenter
U.S. Reinsurance Renewal Pricing
Property
U.S. property catastrophe rates have experienced a directional shift
since January, 2011 expectation of “flat to single digit “ decrease
Increases primarily due to global losses and new catastrophe model
versions
Rate Change Summary
January, 2011 ………….…………………………...…. - 6% to - 10%
April 1, 2011 ………….. ……………………….………. flat to +5%
June / July, 2011.……………………………………… + 5% to + 10%
Source: Guy Carpenter & Company, LLC
38Guy Carpenter
U.S. Property CatastropheCapacity Utilization
95% of authorized
capacity used to fill
out second quarter,
2011 renewals
compared to 89% for
similar period in 2010
While utilization has
increased the
marketplace is not
experiencing a
capacity shortage
39Guy Carpenter
U.S. Property CatastropheReinsurance Cycle
Over time profits
generate capital (supply)
Capital competes for
premium (demand)
Demand creates
downward pressure on
pricing
Trend usually continues
until a “shock” loss
occurs that reduces
excess capital (When ?)
Reaction is higher rates
to strengthen balance
sheets and higher profits
Reset cycle
January,
2011
renewals
40Guy Carpenter
Wrap up
Frequency and severity of natural catastrophes are on an upward
slope – inconclusive if cyclical or long term trend
$115 to 150 billion U.S. hurricane is a realistic benchmark which we
have not experienced to date
Insurance industry is financially sound but individual companies need
to manage for frequency and severity potential
Insurance and reinsurance “partially” finance economic recovery but
there is the potential for an equally large segment that is uninsured
Our understanding of natural catastrophes has increased significantly
because of research, better information and technology advancements
This more in-depth understanding of natural catastrophes has
“highlighted” the many facets and complexity
41Guy Carpenter
Disclaimer
The data and analysis provided by Guy Carpenter herein or in connection herewith are provided “as is”, without
warranty of any kind, whether express or implied. The analysis is based upon data provided by, or obtained
from, external sources, the accuracy of which has not been independently verified by Guy Carpenter.
Neither Guy Carpenter, its affiliates nor their officers, directors, agents, modelers, or subcontractors
(collectively, “Providers”) guarantee or warrant the correctness, completeness, currentness, merchantability,
or fitness for a particular purpose of such data and analysis. The data and analysis is intended to be used
solely for the purpose of internal evaluation and the recipient shall not disclose the analysis to any third
party, except its reinsurers, auditors, rating agencies, and regulators, without Guy Carpenter’s prior written
consent. In the event that the recipient discloses the data and analysis, or any portion thereof, to any
permissible third party, the recipient shall adopt the data and analysis as its own. In no event will any
Provider be liable for loss of profits or any other indirect, special, incidental and/or consequential damage of
any kind howsoever incurred or designated, arising from any use of the data and analysis provided herein or
in connection herewith. This presentation is not intended to be a complete actuarial communication. Upon
request, we can prepare one. We are available to respond to questions regarding our analysis. There are
many limitations on actuarial analyses, including uncertainty in the estimates and reliance on data. We will
provide additional information regarding these limitations upon request. As with any actuarial analysis, the
results presented herein are subject to significant variability. While these estimates represent our best
professional judgment, it is probable that the actual results will differ from those projected. The degree of
such variability could be substantial and could be in either direction from our estimates.