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Transcript of October 4, 2007 Proprietary & Confidential Overview of Professional Liability PLUS – Southwest...
October 4, 2007
Proprietary & Confidential
Overview of Professional Liability
PLUS – Southwest Chapter Meeting
Agenda
Section 1 Key drivers of market changes
Section 2 Softening reinsurance market
Section 3 Summary
Section 1
Key Drivers of Market Changes
Proprietary & Confidential 4
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
160.00
Year / event
Insu
red
loss
es in
US
D b
illio
ns
0
20
40
60
80
100
120
140
Com
bine
d R
atio
%
Sources:Swiss Re Sigma / III / Aon
Man-made losses
Nat Cat lossesGlobal P&C Combined Ratio
WTC property loss (per III)
Katrina loss
Legend
Rita lossWilma loss
North Atlantic Hurricane frequency trend line ‘70 to ‘06
Historical factors that have influenced dramatic changes in the market
An
dre
w
Hu
go
Bar
t, F
loyd
, sy
dn
ey H
ails
torm
, L
oth
ar,
Mar
tin
Fra
n
Geo
rges
Ch
arle
y, F
ran
ces,
Iva
n,
Jean
ne,
So
ng
da
Isab
el
Den
nis
, Kat
rin
a, R
ita,
Wilm
a
87J
Viv
ian
, Dar
ia (
Eu
rop
e)
Cal
ifo
rnia
fir
es, T
yph
oo
n M
irei
lle
Mis
siss
ipp
i flo
od
s
Eu
ro f
loo
ds,
Ko
be
EQ
No
rth
rid
ge
EQ
Pip
er A
lph
a
100
Proprietary & Confidential 5
Lack of Significant Catastrophe Losses
$0
$10
$20
$30
$40
$50
$60
$70
01
02
03
04
05
06
07
Q2
Source: Property Claims Service/ISO; Insurance Information Institute
Proprietary & Confidential 6
Industry Combined Ratio and Premium Growth
10
3.1
10
6.0
10
9.6
11
2.0
11
8.0
10
8.0
10
5.4
10
9.2
10
9.6
10
8.8
11
5.7
10
7.0 10
8.3
10
6.7
10
6.0
10
1.9
10
5.9 1
08
.0
11
0.3
11
5.7
98
.7
10
0.7
96
.8
98
.7
93
.2
10
0.1
11
6.3
10
4.6
10
7.5
90.0
95.0
100.0
105.0
110.0
115.0
120.0
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
07F
08F
0%
5%
10%
15%
20%
25%
Source: www.iii.org
Co
mb
ine
d R
ati
oP
rem
ium
Gro
wth
Proprietary & Confidential 7
90
95
100
105
110
115
120
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
F0
8F
Combined Ratios
1970s: 100.3
1980s: 109.2
1990s: 107.8
2000s: 102.4*
Sources: A.M. Best; ISO, III *Through 2008E; 103.6 through 2006 actual.
P/C Insurance Combined Ratio, 1970-2008F
Proprietary & Confidential 8
87.6
91.2
91.792.1
92.3 92.4
93.0 93.1 93.193.3
92.4
85
86
87
88
89
90
91
92
93
94
1949 1948 2007* 1943 1937 1935 2006 1950 1939 1953 1936
Ten Lowest P/C Insurance Combined Ratios Since 1920 (& 2007:Q1)
Sources: Insurance Information Institute research from A.M. Best data. *2007:Q1 actual.
2007 off to a great start
The industry’s best underwriting years are
associated with periods of low interest
ratesThe 2006 combined ratio of 92.4 was the best since the
87.6 combined in 1949
Proprietary & Confidential 9
-55-50-45-40-35-30-25-20-15-10-505
101520253035
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
F
Underwriting Gain (Loss) 1975-2007F*
Source: A.M. Best, Insurance Information Institute *Actual 2007:Q1 underwriting profit = $8.281B .
$ B
illi
ons
Insurers earned a record underwriting profit of $31.2 billion in 2006, the largest ever but only the second since 1978. Expect figure near $30 billion in 2007 assuming “normal” CAT losses. Cumulative underwriting deficit since
1975 is $390 billion.
Section 2
Softening Reinsurance Market
Proprietary & Confidential 11
Significant Capital Inflows
Existing Cos., $12.145 , 36%
New Cos., $8.898 , 26%
Sidecars, $6.359 , 19%Insurance Linked
Securities, $6.253 , 19% Insurers &
Reinsurers raised $33.7
billion in the wake of
Katrina, Rita, Wilma
Source: Lane Financial Trade Notes, January 31, 2007.
$ Billions
Proprietary & Confidential 12
US Reinsurer Net Income & ROE1985-2006
($4)
($2)
$0
$2
$4
$6
$8
$10
$12
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Ne
t In
co
me
($
Bill
)
-10%
-5%
0%
5%
10%
15%
20%
RO
E
Net Income ROE
Source: Reinsurance Association of America.
Proprietary & Confidential 13
Softening Reinsurance Market
Significant capital inflows:
Over $30b since Katrina, Rita & Wilma in 2005
In several forms:
• Insurance Linked Securities
• Sidecars
• New & existing companies
Loss trends:
Frequency – continues to decrease
Severity – single digit increases
Proprietary & Confidential 14
Impact to Industry
Better capitalized insurance companies
More upgrades than downgrades from the rating agencies
Softening market: Primary pricing softening Reinsurers attempting to maintain discipline – softening as well
Insurance companies buying less reinsurance: Increasing attachment points – i.e., higher retentions Larger co-participations
Risk management: Better understanding Implementation of tools to measure Risk accumulations
Proprietary & Confidential 15
Reinsurers’ Perspective
D&O: Public Cos:
• Reinsurers more selective• Aggregation issues important
Non-Public Cos:• More reinsurers willing to write – more capacity available
E&O: Reinsurers looking to write small misc. E&O
Lawyers: Reinsurers seeking to increase writings Reinsurance pricing aggressive
Medical Malpractice: Reinsurers’ appetite for this line has returned
London long-time supporter
Proprietary & Confidential 16
Reinsurance Placements
Movement to more detail data continues
Driven more by actuarial and financial analysis
Better and more transparency viewed as yielding pricing that is reflective of actual exposure/risk
Emphasis on company specific data rather than industry data
Reinsurers trying to identify niches or certain clients to ride soft market
Section 3
Summary
Proprietary & Confidential 18
Summary
Well capitalized market
Trying to maintain discipline –lower margins vs business with high loss potential
Insurance companies more comfortable with higher retentions – not buying down as in past
Challenge will be deployment of capital over next couple of years Hedge funds money treteching Stock buy backs Dividends higher Consolidation