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Transcript of MegaTrends and MicroTrends: The Past and Future of P/C Insurance Midwestern Actuarial Forum...
MegaTrends and MicroTrends: The Past and Future
of P/C InsuranceMidwestern Actuarial Forum
Cincinnati, OHSeptember 14, 2012
Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038Office: 212.346.5540 Cell: 917.494.5945 [email protected] www.iii.org
2
P/C Insurance Industry Financial Overview
The Long-Term Past andShort-Term Future
of the P/C Insurance Industry
3
-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
Net Written Premiums: Soft Market Persisted into 2011 but Growth Returned; More in 2012?
1975-78 1984-87 2000-03
Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
NWP rose
3.3% in 2011; best
growth since 2004
2012:Q1 growth:
3.1%
Net Written Premiums fell 0.7% in 2007 (1st year-over-year drop since 1943), fell2.0% in 2008, and 4.2% in 2009—the first 3-successive-year decline since 1930-33.
Underwriting Gain (Loss)1975–2011*
* Includes mortgage and financial guaranty insurers in all yearsSources: A.M. Best, ISO; Insurance Information Institute.
($4.
23)
($2.
19)
$1.1
1$1
.30
($1.
30)
($3.
33)
($6.
29)
($10
.29)
($13
.32)
($21
.62)
($25
.11)
($16
.57)
($10
.20)
($11
.81)
($20
.84)
($21
.65)
($20
.46)
($36
.26)
($18
.09)
($22
.08)
($17
.38)
($17
.16) ($
6.03
)($
17.6
7)($
24.7
5)($
32.1
4)($
52.6
9)($
32.3
5)($
5.22
)$1
.72
($5.
56)
$31.
12$1
9.02
($21
.17)
($2.
98)
($10
.43)
($36
.51)
-$70
-$60
-$50
-$40
-$30
-$20
-$10
$0
$10
$20
$30
$40
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 1011*
$ BillionsU/W
losses in 2011 at
$36.5B are the largest since 2001
5
P/C Insurance Industry Combined Ratio, 2001–2011*
* Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=106.4 Sources: A.M. Best, ISO.
95.7
99.3
100.9
106.4
101.0
92.6
100.8
98.4
100.1
107.5
115.8
90
100
110
120
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*
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
Cyclical Deterioration
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
6
2
(2)
(8)
(3)
(7)(10) (10)
(4)
(0)
11
24
15
119
(5)
(9)
(14)
(10) (11)(7)
(5)(2)
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
$25
$309
2
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
E
12
F
13
F
Pri
or
Yr.
Re
se
rve
Re
lea
se
($
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,1992–2013F
Reserve Releases Remained Strong in 2010 But Tapered Off in 2011. Releases Are Expected to Further Diminish in 2012 and 2103
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: Barclays Capital; A.M. Best.
Prior year reserve releases totaled $8.8
billion in the first half of 2010, up from
$7.1 billion in the first half of 2009
7
A “Hard Market” in the Future?
Criteria Status Comments
Sustained Period of Large
Underwriting Losses
Somewhat in Place
•Overall p/c underwriting losses exceeded $10 billion in 3 of last 4 years•Combined ratios rising, masked by reserve releases(110+ at onset of last hard market)
Material Decline in Surplus/ Capacity
NotEvenClose
•Surplus hit a record $565B as of 3/31/11•Analysts est. excess surplus of $75-$100B•Some excess capacity may still remain in reinsurance markets
Tight Reinsurance
MarketSomewhat
in Place•Higher prices in Asia/Pacific•Modestly improved pricing for US risks
Renewed Underwriting &
Pricing Discipline
NotBroadly Evident
•Commercial lines pricing trends now modestly rising•Competition remains intense as many seek to maintain market share•Terms & conditions—no broad tightening
Sources: Barclays Capital; Insurance Information Institute.
P/C Net Income After Taxes1991–2011
$1
4,1
78
$5
,84
0
$1
9,3
16
$1
0,8
70
$2
0,5
98
$2
4,4
04 $
36
,81
9
$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
9,1
50
$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
2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 5.6% 2011:Q3 ROAS1 = 1.9%
P-C Industry 2011 profits were down 46% vs. 2010 to $19.2B,
mainly due to high catastrophe losses and deteriorating non-cat
underwriting results
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 3.0% ROAS for 2011:Q3, 7.5% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO, Insurance Information Institute 8
$Millions
-5%
0%
5%
10%
15%
20%
25%
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
*1
2:
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2012:Q1*
*Profitability = P/C insurer ROEs. 2011 figure is an estimate based on ROAS data. Note: Data for 2008-2012 exclude mortgage and financial guaranty insurers. 2012:Q1 ROAS = 7.2% including M&FG.Sources: Insurance Information Institute; NAIC, ISO, A.M. Best.
1977:19.0% 1987:17.3%
1997:11.6%2006:12.7%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years
10 Years9 Years
2011:4.6%*
History suggests next ROE peak will be in 2016-2017
ROE
1975: 2.4%
2012:Q18.2%
10
Policyholder Surplus, 2006:Q4–2012:Q1
Source: ISO; A.M .Best.
($ 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
$556
.9
$559
.1
$538
.6
$550
.3
$570
.6
$564
.7
$505
.0
$515
.6
$517
.9
$425
$450
$475
$500
$525
$550
$575
$600
$625
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
2011:Q1 = previous surplus peak
Quarterly Surplus Changes Since 2011:Q1 Peak11:Q2: -$5.6B (-1.0%)
11:Q3: -$26.1B (-4.6%)11:Q4: -$14.4B (-2.6%)
Note: Beginning in 2010:Q1 figures include $22.5B of paid-in capital from a holding company parent to a subsidiary insurer. It was a single investment in a non-insurance business.
2012:Q1 = new peak
Economic Drivers of P/C Insurance Exposures
11
Growth in the Wakeof the “Great Recession”
12
The Post-Recession US Economy is Forecast to Keep Growing*, but Slowly
* Forecasts from Blue Chip Economic IndicatorsSources: US Department of Commerce, http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm ;Blue Chip Economic Indicators 8/2012 issue (forecasts); Insurance Information Institute.
0.1%
2.5%
1.3%
4.1%
2.0%
1.5%1.7%
1.9%1.8%
2.4%2.7%
2.9%
1.4%
4.0%
2.3%2.2%2.6%
2.4%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
09:3
Q
09:4
Q
10:1
Q
10:2
Q
10:3
Q
10:4
Q
11:1
Q
11:2
Q
11:3
Q
11:4
Q
12:1
Q
12:2
Q
12:3
Q
12:4
Q
13:1
Q
13:2
Q
13:3
Q
13:4
Q
Some economists worry that as of Jan 1, 2013, planned federal spending cuts, the expiration of income tax rate reductions, and the end of some unemployment
benefits will sap growth and could trigger another recession in 2013.
Real GDP Growth at Annual Rate(%) We need sustained inflation-
adjusted growth rates over 3%to make significant progress
toward full employment
13
Housing Starts, Millions of Units
Construction of Private HousingIs Picking Up
1.481.47
1.621.641.571.60
1.711.85
1.962.07
1.80
1.36
0.90
0.550.590.610.75
0.89
1.351.46
1.291.20
1.01
1.19
0.0
0.3
0.6
0.9
1.2
1.5
1.8
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
F
13
F
Sources: U.S. Census Bureau and Department of Housing and Urban Development (history) at http://www.census.gov/const/newresconst.pdf ; Blue Chip Economic Indicators (8/2012), forecasts; Insurance Information Institute.
Weak home construction forecast implies little exposure growth likely for Homeowners insurers and insurers with a residential construction book of
business for the next few years.
Forecast range for
2012: 660,000 to
800,000
Forecast range for
2013: 730,000 to 1,200,000
But the Pickup is Mostlyin Multi-Family Housing Starts
100
150
200
250
300
350
400
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*400
600
800
1000
1200
1400
1600
1800
units in multi-family buildings single family units
*January-July 2012 data, annualized, seasonally-adjusted, preliminary (July)Source: US Census Bureau at http://www.census.gov/construction/nrc/pdf/newresconst.pdf
Thousands of Units, Multi-Family
Multi-unit starts, currently at a seasonally-adjusted annual rate of 215,000,are double the 2009 rate. Average annual rate for 2001-2006: 339,000.
Multi-family-unit starts rose in 2011, and more in 2012.
Thousands of Units, Single Family
Multi-family plunge didn’t begin until 2009
Single family plunge began
in 2006
15
The Auto Insurance Picture
A “New Normal”:More Old Cars on the Road
16
16.9
16.5
16.1
13.2
10.4
11.6
12.7
14.4 14
.8
16.9
16.617
.117.5
17.8
17.4
9
10
11
12
13
14
15
16
17
18
19
99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F
(Millions of Units)
The Car-Buying Slump Is Creating Pressure to Replace Aging Vehicles
Sources: history--U.S. Department of Commerce; forecasts (including 2011 preliminary--Blue Chip Economic Indicators (7/2012); Insurance Information Institute; USA Today 8/10/2011 edition (AAA Survey).
Many more older cars are on the road today than In “normal” times. Previously in a 3-year span, new cars would replace about 35 million old cars, but in 2008-10 only about 27 million old cars were replaced.
2011 AAA Survey: 1 in 4 drivers have neglected repairs and maintenance because of the
economyForecast range for
2012: 13.7 to
15.1
Forecast range for
2013: 13.7 to
16.7
17
But People Are Not Driving More:Miles Driven*, 1990–2012
*Moving 12-month total. The latest data is for June 2012. Note: Recessions indicated by gray shaded columns..Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm ); National Bureau of Economic Research (recession dates); Insurance Information Institute.
Billions
2,100
2,200
2,300
2,400
2,500
2,600
2,700
2,800
2,900
3,000
3,100
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
A record: miles driven has been below the prior
peak for 52 straight months. Previous record
was in the early 1980s (39 months)
Will the trend toward hybrid and non-gasoline-powered vehicles affect
miles driven? What about the aging and
retirement of the baby boomers?
Growth per Decade1999 vs. 1989: 27.2%2009 vs. 1999: 9.4%
Some of the prior growth in miles driven is due to population growth: 1999 vs. 1989: 10.5%2009 vs. 1999: 12.6%
Do Changes in Miles Driven AffectAuto Collision Claim Frequency?
6.91
6.65
6.32
6.025.94
5.71
5.85
5.705.62 5.60
5.66
5.5
6.0
6.5
7.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Pa
id C
laim
Fre
q
2750
2800
2850
2900
2950
3000
3050
Bil
lio
ns
of
Mil
es D
rive
n
Collision Claim FrequencyBillions of Vehicle Miles
Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm; ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: 4th Qtr. 2011, published April 5, 2012, and earlier reports.
Paid Claim Frequency = (# of paid claims)/(Earned Car Years) x 100
“Pay-As-You-Go” Auto Insurance: Fluctuations in miles driven will affect exposure
The frequency drop is slowing
19
The Commercial Insurance Picture
The Near-Term Outlookfor Small Business
is Getting Better but isn’t Bright
66%
68%
70%
72%
74%
76%
78%
80%
82%
Mar
01
Sep
Mar
02
Sep
Mar
03
Sep
Mar
04
Sep
Mar
05
Sep
Mar
06
Sep
Mar
07
Sep
Mar
08
Sep
Mar
09
Sep
Mar
10
Sep
Mar
11
Sep
Mar
12
Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures
Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 20
Percent of Industrial Capacity
Hurricane Katrina
March 2001-November 2001
recession
“Full Capacity”
The closer the economy is to operating at “full
capacity,” the greater the inflationary pressure
The US operated at 79.3% of industrial capacity in May 2012, above the June 2009
low of 68.3% and close to its post-crisis peak
December 2007-June 2009 Recession
March 2001 through July 2012
20
21
Business Bankruptcy Filings: Fallingbut Still High in 2012 (1994:Q1 – 2012:Q1)
13.9
13.6
12.9
12.0 13
.112
.2 12.6
12.9 13
.4 14.0
13.2
12.9 13
.814
.013
.512
.712
.411
.610
.39.
99.
210
.49.
09.
0 9.5
9.2
8.2 8.4
10.0
10.3
9.5 10
.09.
89.
79.
49.
58.
8 9.3
8.3
10.6
8.2
7.6 7.8 8.1 8.
7 9.5
12.8
4.1 4.
9 5.3 5.6 6.
3 6.7 7.
2 8.0 8.
79.
711
.512
.914
.316
.014
.2 15.0
14.6
14.5
14.0
13.0
12.4
12.3
11.7
11.1
11.0
8.4
0
2
4
6
8
10
12
14
16
18
94
:Q1
94
:Q3
95
:Q1
95
:Q3
96
:Q1
96
:Q3
97
:Q1
97
:Q3
98
:Q1
98
:Q3
99
:Q1
99
:Q3
00
:Q1
00
:Q3
01
:Q1
01
:Q3
02
:Q1
02
:Q3
03
:Q1
03
:Q3
04
:Q1
04
:Q3
05
:Q1
05
:Q3
06
:Q1
06
:Q3
07
:Q1
07
:Q3
08
:Q1
08
:Q3
09
:Q1
09
:Q3
10
:Q1
10
:Q3
11
:Q1
11
:Q3
12
:Q1
Business bankruptcies were down 46.5% in 2012:Q1 vs. recent peak in 2009:Q2 but were still higher than 2008:Q2, early in the Great Recession.
Bankruptcies restrict exposure growth in all commercial lines.
Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633 ; Insurance Information Institute
(Thousands) New Bankruptcy Law Takes
Effect
Recessions in orange
22
Private Sector Business Starts, 1993:Q2 – 2011:Q4*
175
186
174
180
186
192
188
187 18
918
6 190 19
419
119
9 204
202
195
196
196
206
206
201
192
198
206
206
203
211
205
212
200 20
520
620
420
419
420
4 208
201
193
191 19
320
020
720
320
921
020
921
6 221
221
220
221
210
221
214
206
216
208
207
200
191
188
172 17
716
918
217
5 179
188
200
183 18
7 191
19719
9
150
160
170
180
190
200
210
220
230
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Business starts were down nearly 20% in the Great Recession, holding back most types of commercial insurance exposure,
but now are recovering.* Data through Dec 31, 2011 are the latest available as of August 2, 2012; Seasonally adjusted.Sources: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm. NBER (recession dates)
(Thousands) Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010: 722,000 2011: 758,000
22
Recessions in orange
Catastrophe Loss Developments and Trends
23
2011 Rewrote Catastrophe Loss and Insurance History
Number of Federal Major Disaster Declarations, Yearly, 1953-2012*
13 1
7 18
16
16
7 71
21
22
22
02
52
51
11
11
92
91
71
74
84
64
63
83
02
2 25
42
23
15
24
21
34
27 28
23
11
31
38
45
32 3
63
27
54
46
55
04
54
5 49
56
69
48 5
26
37
55
98
19
94
243
0
10
20
30
40
50
60
70
80
90
100
53
55
57
59
61
63
65
67
69
71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
11
*Through July 27, 2012. Sources: Federal Emergency Management Administration at http://www.fema.gov/disasters?field_state_tid=All&field_disaster_type_term_tid=All&field_disaster_declaration_type_value=All&items_per_page=60&=GO ; Insurance Information Institute.
The number of federal disaster declarations set
a new record in 2011.
From 1953-71, the average number of declarations
per year was 16.5.
The average number from
1996-2010 was 58.4.
The average number from
1972-1995 was 31.7.
Of the 42 federal major disaster declarations in 2012 so far, 23 were for wildfires, 16 were windstorms, 2 winter storms, 1 tropical storm.
25
$12.
3
$10.
7
$3.7
$14.
0
$11.
3
$6.0
$33.
9
$7.4 $1
5.9
$32.
9
$71.
7
$10.
3
$7.3
$28.
5
$11.
2
$14.
3
$32.
3
$13.
7
$4.7 $7
.8
$36.
9
$8.6
$25.
8
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*
US Insured Catastrophe Losses, Yearly, 1989-2011*
*ISO estimate.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.
US insured CAT losses do not include amounts paidby the National Flood Insurance Program.
CAT Losses Surged on
Record Tornado Activity
$ Billions of 2011 dollars
2000s: A Decade of Disaster
2001-2010: $202B (up 122%)
1991-2000: $91B
26
Inflation & Price Driversof P/C Insurance Claims
P-C Claim Severity GenerallyHas Risen Faster than the CPI
27
The Bond Market’s Recent* Expectationof U.S. Inflation in the Next Two Years
*Daily, from 8/17/2010 through 9/6/2012Source: http://www.bloomberg.com/apps/quote?ticker=USGGBE02:IND
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%08
/16/
10
09/1
5/10
10/1
5/10
11/1
4/10
12/1
4/10
01/1
3/11
02/1
2/11
03/1
4/11
04/1
3/11
05/1
3/11
06/1
2/11
07/1
2/11
08/1
1/11
09/1
0/11
10/1
0/11
11/0
9/11
12/0
9/11
01/0
8/12
02/0
7/12
03/0
8/12
04/0
7/12
05/0
7/12
06/0
6/12
07/0
6/12
08/0
5/12
09/0
4/12
The rate is calculated by subtracting the real yield of the 2-year TIPS bond from the yield of the 2-year Treasury note.
The result is the implied inflation rate for the next 2 years.
In early 2011, the bond market
thought near-term inflation
would rise above 2%.
But by Summer 2011 the bond
market thought near-term inflation
was likely to fall below 1.5%.
Lately the bond market expects inflation over the
next two years near 1.5% per year.
28
Auto Liability Claims Severity Trends, 2005-2010
2.9%
3.6%
2.1% 1.9%
-0.3%
0.8%
4.7%
2.4%
6.5% 6.5%6.2%
5.4%
2.9%
4.7%
6.0% 6.1%
2.2%
3.3%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
2005 2006 2007 2008 2009 2010
BI Severity PD Severity PIP Severity
Sources: ISO/PCI Fast Track data; Bureau of Labor Statistics (CPI); Insurance Information Institute
The average severity of auto property damage liability claims has grown slightly more slowly than overall inflation. Beginning
in 2006, average severity for BI and PIP grew much faster.
Change from prior year
P/C Insurance Claim Cost Drivers Grow Faster than even the Medical CPI Suggests
Source: Bureau of Labor Statistics; Insurance Information Institute.
2.7%2.3%
3.5%
5.3%4.9%
1.3%
4.2%
3.3%
0%
2%
4%
6%
Overall CPI "Core" CPI Medical CPI InpatientHospitalServices
OutpatientHospitalServices
Physicians'Services
PrescriptionDrugs
Medical CareCommodities
Mar 2012 Y-o-Y Price Changes
Healthcare costs are a major liability, med pay, and PIP claim cost driver. They are likely to grow faster than the CPI for the next few years, at least
29
Excludes Food and Energy
P/C Commercial Property Insurance Claim Cost Drivers Grow Faster than the Overall CPI Suggests
Sources: Bureau of Labor Statistics; Insurance Information Institute.
2.7%
3.8%
2.7%
8.7%
3.9% 3.9%
7.6%
2.3%
1%
3%
5%
7%
9%
Overall CPI "Core" CPI Inputs toConstruction
Industries
Non-residentialmaintenance &
repair
Asphalt Paving& RoofingMaterials
HVAC &Commercialrefrigeration
PlumbingFixtures &
Fittings
Paint, coating& adhesive
mfg.
Copper prices spiked and retreated in 2011. In July its price was 33% higher than a year earlier; by November it cost 8% less than in November 2010.
30
Excludes Food and Energy
Price Level Change: 2011 vs. 2010
30
31
What’s a “MegaTrend? What’s a “MicroTrend?
What are the implications for Insurance and Risk Management?
Looking beyond day-to-day developments
32
A MegaTrend is…
• Something…
• Generally changing the way things get done
• Happening on an enormous scale
• Growing rapidly
Books and WebsitesProclaim Various MegaTrends
33
34
3 MegaTrends to Watch
There are many proclaimed MegaTrends. These three come from Forbes.com
http://www.forbes.com/sites/haydnshaughnessy/2011/12/28/3-megatrends-for-2012-or-why-shared-value-is-indeed-an-answer/
35
1. The Global Growth and Transformation of the Middle Class
• A huge market for personal insurance (possibly 1 billion people) is emerging in developing countries
• At the same time, the middle class in “advanced economies” is shrinking
• Selling insurance to the new global middle class will require teaching whole populations
• what insurance is, • how it works, and • why one would choose one “brand” over another
Non-life Premium* per capita (Density) for Selected Economies, 2010
$2,127
$1,887
$1,502
$1,311$1,249
$1,060$917
$290$200 $158
$53 $9$0
$400
$800
$1,200
$1,600
$2,000
$2,400
U.S. Canada Germany Australia France U.K. Japan Russia SouthAfrica
Brazil China India
* premiums measured in U.S. dollars, exclude cross-border business Source: Swiss Re Sigma, various volumes
From 2002-2010, Insurance Density in India tripled, and in China it grew 5-fold.But the most spectacular Density growth in these years belongs to Russia:
in 2010 Insurance Density in Russia was 7 times what it was in 2002!
Imagine the amount of P/C premium that would be
generated if the density in China or India matched the current density in the major
European countries
37
2. The Growth ofa More Individualistic Capitalism
Mass marketing is giving way to…
•Online services—retailers and special-interest community/peer sites—are giving customers/ users more control, making the shopping/info-gathering experience more personalized
•The younger generations are leading the way to managing their lives as unique individuals, sharing with friends/peers but not strangers
•Implications for P/C insurance• Follow the microtrends?
38
3. The Rise ofthe New Business Ecosystem
• The new ecosystem is technology-enabled and works with potentially hundreds of sub-vendors• the Apple App store or Itunes• Amazon marketplace
• It marries small-firm innovation with large-firm financial muscle
• Implications for P/C insurance?• A radically different “distribution” system?
• Will Amazon.com develop a “virtual Lloyd’s”?
• A radically different claims apparatus?
An Insightful BookPublished About 5 Years Ago
39
40
A MicroTrend is…
• An intense identity group, growing rapidly
• With needs and wants unmet by the current crop of companies, policymakers, and others who would influence society’s behavior
• Typical size: ± 1% of the population
41
7 MicroTrends to Watch
There’s More: Mark Penn’s bookcites 68 other MicroTrends
42
1. Sex-Ratio Singles (Single Women)
• For the first time in America, there are more single women than ever who are likely to stay that way.
• From shortly after birth, women outnumber men, and men are more likely to be homosexual than women are• In 2005, single women were the 2nd largest group of
home buyers, just behind married couples.• They bought 1.5 million homes, more than twice
as many as single men.• The number of single women bearing/adopting
children in 2005 tripled since the early 1990s
43
2. Commuter Couples
• Dual-career couples who maintain two households
• In 1990: 1.7 million peopleIn 2005: 3.5 million
• All ages – the number of married people over 50 who live separately tripled between 2001 and 2005
44
3. 30-Winkers
• The number of people who sleep fewer than 6 hours/night is rising fast• 1998: 12%• 2005: 16% (34 million people)
• In the 2005 “Sleep in America” poll,• 37% said they’ve nodded off or fallen asleep while
driving
• Less sleep leads to• Less productivity• Increased obesity• New businesses to help people get more sleep
• Should sleep be an underwriting factor?
45
4. Hard-of-Hearers
• Roughly 1/3 of people over 65 (about 35 million) are hard-of-hearing• But many with hearing loss are under 65• Hearing loss varies by race, geography, gender
• Occupational/Business Impact: Overcoming hearing loss will be a hot industry in the next few decades• New technology (who will lead this? Apple? Bose?
Sony? Ford? New entrepreneurs?)
• Public policy/Insurance impact• An anti-noise campaign similar to anti-smoking?• Do the hard-of-hearing cause more accidents?
46
5. Old New Dads
• Births to men aged 50 or older• In 1980: 1 in 23• In 2002: 1 in 18
• Births to men age 40-44: up 32%• Births to men age 45-49: up 21%
• Old dads will likely• Work longer• Retire later• Drive at older ages
47
6. Newly Released Ex-Cons
• 650,000 people (90% men, avg. age 34) released from prison of jail each year
• These people generally have little connection with economic society:• Little education• Few job prospects
• Many employers won’t hire them
• Likely results:• Increasing crime• Worsening public cost of family support “financial
safety net”
• Are these people insurable in the voluntary market?
48
7. High School Moguls
• A dozen years ago 8% of all teens (1.6 million) were making money on the internet
• The top 100 entrepreneurs aged 8-18 in 2001 earned total profits of $7 million
• In 2006 the U.S. Small Business Administration launched “Mind Your Own Business,” an online resource to help teenagers develop their start-ups
• How much do teen business owners know about insurance? How well are we reaching them?
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