Personal Lines Insurance: Overview & Outlook · Personal Lines Insurance: Overview & Outlook...
Transcript of Personal Lines Insurance: Overview & Outlook · Personal Lines Insurance: Overview & Outlook...
Personal Lines Insurance:Overview & Outlook
Pillars of Profitability &Drivers of Revenue, Cost,
Profit & Competition
Insurance Information Institute
March 2006
Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief EconomistInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038
Tel: (212) 346-5520 ♦ Fax: (212) 732-1916 ♦ [email protected] ♦ www.iii.org
Presentation Outline
• P/C Profit OverviewAuto & Home
• Public Perceptions of the P/C Insurance Industry• The Six Pillars of P/C Profitability
UnderwritingPricingInvestmentsExpensesLeverage (Capacity)P/C Operating Environment: Tort Focus
• Catastrophe Loss Management• Auto Insurance: Drivers of Success• Homeowners Insurance: The Jury’s Still Out
Insurance-to-Value
P/C PROFIT OVERVIEW
2006 Outlook is Good
Highlights: Property/Casualty,9-Mos. 2005 vs. 9-Mos. 2004
+5.2%393,488414,264Surplus*
98.1
27,567
28,956
3,238
224,302
323,3372004
+1.9 pts.100.0Combined Ratio*
+4.4%28,787Net Income (a.t.)
+25.6%36,445Net Inv. Income
N/A(2,828)Net UW Gain (Loss)
+2.3%229,563Loss & LAE
+1.3%326,527Net Written Prem. (adj)
Change2005
Source: ISO, Insurance Information Institute *Comparison is with year-end 2004 value.
Growth rate barely 1/2 that of CY2004
Investment Income Rebound?
Lowest in many years
P/C Net Income After Taxes1991-2005:Q3 ($ Millions)
$14,178
$5,840
$19,316
$10,870
$20,598$24,404
$36,819
$30,773
$21,865
-$6,970
$3,046
$30,029
$38,
383
$20,559
$38,722
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05**ROE figures are GAAP; 2005 figure is annualized based on 9-month results. **Return on avg. surplus.Sources: A.M. Best, ISO, Insurance Information Institute.
2001 ROE = -1.2%
2002 ROE = 2.2%
2003 ROE = 8.9%
2004 ROE = 9.4%
2005E ROAS = 9.0%**
2005 NIAT will probably be on par with 2004
-10%
-5%
0%
5%
10%
15%
20%
25%
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
F20
07F
2008
F20
09F
2010
F
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
Strength of Recent Hard Markets by NWP Growth*
1975-78 1984-87 2001-04
*2005-10 figures are III forecasts/estimates.
2006-2010 (post-Katrina) period will resemble 1993-97
(post-Andrew)
2005: biggest real drop in premium since early 1980s
Advertising Expenditures by P/C Insurance Industry, 1999-2004
$ Billions
$1.736 $1.737$1.803
$1.708
$2.111
$1.882
$1.5
$1.6
$1.7
$1.8
$1.9
$2.0
$2.1
$2.2
99 00 01 02 03 04Source: Insurance Information Institute from consolidated P/C Annual Statement data.
Ad spending by P/C insurers is at a record high, signaling
increased competition
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
05H
1
05E
06E
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2006F*
*GAAP ROEs except 2005 P/C figure = return on average surplus. 2005/6E figure is III full-year estimate.Source: Insurance Information Institute; Fortune for all industry figures
2005 P/C ROAS = 9% after adjusting for 2005 Hurricanes
2005:H1 P/C ROAS = 15.3%2006 Estimate = 13%
-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*
US P/C Insurers All US Industries P/C excl. Hurricanes
ROE: P/C vs. All Industries 1987–2005E
Source: Insurance Information Institute; Fortune
Andrew Northridge
Hugo Lowest CAT losses in 15 years
Sept. 11
2004/5 ROEs excl. hurricanes
4 Hurricanes
Katrina, Rita, Wilma
RETURN ON EQUITY (Fortune):Stock & Mutual vs. All Companies*
*Fortune 1,000 group.Source: Fortune Magazine, Insurance Information Institute.
9%
13.4%14.6%
10.4% 10.0%
14%13%
7%6%
11%12%
-2%
8%7%
2%
10%
13.9%12.6%
-4%-2%0%2%4%6%8%
10%12%14%16%
1998 2000 2001 2002 2003 2004
StockMutualAll Companies*
Stock insurer ROEsconsistently above mutuals
Some mutual insurers sell/market the mutuality
concept effectively
RNW for Major P/C Lines,1994-2003 Average
14.0%
8.3% 8.3%7.4%
5.5% 5.0% 5.0%
2.9%
-2.1%
19.7%
13.4%
5.8%
-5%
0%
5%
10%
15%
20%
InlandMarine
Fire AllOther
WC PPAuto
AllLines
MedMal
CommAuto
OtherLiab
CMP HO Allied
Source: NAIC; Insurance Information Institute
10-Year returns for some major p/c lines surprisingly good, but
HO is a major laggard
WALL STREET:
GENERALLY STRONG GAINS
P/C Insurers Stocks Up in 2005, Brokers Up Too, Reinsurers Down
-0.52%
9.31%
9.40%
13.29%
17.14%
22.09%
3.00%
-5% 0% 5% 10% 15% 20% 25%
S&P 500
Life/Health
All Insurers
Brokers
Multiline
P/C
Reinsurers
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Total 2005 ReturnsP/C insurer stocks outperforming
the market despite hurricanes
Reinsurers lagging on record CAT losses
Brokers up on tight market hopes
4.2%
4.0% 4.5%
3.8%
2.2% 2.5% 3.
3%
2.7% 3.
9%
2.6% 3.2%
2.9%
4.9%
8.7% 9.3%
-4.0
%
-3.5
%
-2.7
%
-4.1
%
-5.3
%
-4.5
%
-5.7
%
-5.8
%
-6.0
%
-6.2
%
-5.3
%
-5.6
%
-5.6
%
-1.3
%
-0.5
%
-5.5
%
-6.4
% -4.8
%
-5.5
%
-0.6
%
1.9%
2.1% 3.
6% 4.8%
3.4%
2.2% 2.
8%
5.0% 7.
0%
13.3
%
-10%
-5%
0%
5%
10%
15%
5-Aug
12-Aug
19-Aug
26-Aug
2-Sep
9-Sep
16-Sep
23-Sep
30-Sep
7-Oct
14-Oct
21-Oct
28-Oct
04-Nov
31-Dec
P/C Reinsurers Brokers
Source: SNL Securities; Insurance Information Institute
Change in YTD Stock Performance by Sector Pre- & Post-Katrina/Rita/Wilma
P/C & reinsurer stocks hurt but now fully recovered. Brokers rose on expectation of tighter conditions and demand for broker
services; closure of Spitzer issues.Katrina: Aug. 29
Rita comes ashore Sept. 24
Wilma landfall Oct. 24
Insurance Stocks Off to a Slow Start in 2006
-0.41%
-0.91%
-1.21%
0.75%
0.00%
3.81%
3.12%
-2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0%
S&P 500
Life/Health
All Insurers
Brokers
Multiline
P/C
Reinsurers
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Total YTD Returns Through February 17, 2006
PUBLIC PERCEPTIONS OF INSURANCE
INDUSTRYHave Public Perceptions of the
Industry Been Affected by Mega-Disasters and Scandals
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
1968
1972
1978
1981
1983
1985
1986
1988
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Jun-
05
Dec
-05
BanksElectric Power CompanyConsumer Finance CompaniesAuto & Home Insurance
Source: Insurance Information Institute Pulse Survey, December 2005.
Percent of Public Rating Industry as Very or Mostly Favorable, 1968-2005
Favorable ratings of insurers dropped just 1 point after Katrina
7%
11%
8%
9%
9%
12%
14%
13%
15%
15%
33%
21%
24%
25%
25%
17%
15%
20%
19%
21%
17%
37%
30%
29%
26%
15%
2%
3%
2%
3%
0% 20% 40% 60% 80% 100%
Insurance Cos.
Bush Admin.
FEMA
FederalGovernment
State & LocalGovt.
Source: Insurance Information Institute Pulse Survey, December 2005.
Public Perceptions of Hurricane Katrina Response AdequacyBest Worst Don’t
Know
Who Should be Responsible for Dealing With Katrina?
STATE & LOCAL GOVERNMENT
33%
FEMA26%
FEDERAL GOVERNMENT
17%
BUSH ADMINISTRATION
15%
INSURANCE COMPANIES
4%
DON'T KNOW4%
Source: Insurance Information Institute Pulse Survey, December 2005.
Most people believe governments, not
insurers, are primarily responsible
for dealing with Katrina
House Special Committee: Chertoffperformed his duties “late,
inefficiently or not at all.” -2/15/05.
Profit Pillar #1UNDERWRITING
Surprisingly Strong in 2005, Stage is Set for a
Good 2006
115.8
107.4
100.198.3
92.7
101.8
97.7
90
100
110
120
01 02 03 04 05H1 05E 06F IIIForecast*
P/C Industry Combined Ratio
Sources: A.M. Best; ISO, III. *III estimate/forecast for 2005/6
January survey of analysts called for a 101.8 combined ratio
in 2005, hurt by CATs and reserve charges. Actual 9-month
results came in at 100.0.
Expectation is for an underwriting
profit in 2006
103.
9
104.
5
103.
5
104.
9
99.8 10
2.7
104.
5
109.
9
110.
9
105.
3
98.4
94.3
100.
0
95.9
85
90
95
100
105
110
115
93 94 95 96 97 98 99 00 01 02 03 04 05E 06F
Personal LinesCombined Ratio, 1993-2006E
Source: A.M. Best; Insurance Information Institute. 2006 forecast from Fitch Ratings as of 12/7/05.
A very strong 2006 is expected in personal lines assuming “normal”
catastrophe loss activity
97.5100.6 100.1
98.3
92.7
100.0
9.4% 9.5%
15.3%14.3%
15.9%
9.4%
80
85
90
95
100
105
110
1978 1979 2003Actual
2004 2005:H1 2005E
Com
bine
d R
atio
6%
8%
10%
12%
14%
16%
18%
Ret
run
on E
quity
*
Combined Ratio ROE*
* 2005 figure is return on average statutory surplus based in first 9 monhts dataSource: Insurance Information Institute from A.M. Best and ISO data.
A 100 Combined Ratio Isn’t What it Used to Be: 95 is Where It’s At
Combined ratios today must be below
95 to generate Fortune 500 ROEs
($55)($50)($45)($40)($35)($30)($25)($20)($15)($10)($5)$0$5
$1075 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
05E
06F
Underwriting Gain (Loss)1975-2006F*
*2005 estimate is III estimate. Source: A.M. Best, Insurance Information Institute
$ B
illio
ns
Before Katrina, p/c insurers were on track for only the second underwriting profit in 27 years;
U/W profit in 2006 likely.
110.
5
105.
0 113.
6 119.
2
104.
8
100.
8
100.
5
114.
3
106.
5
125.
8
111.
0
124.
6
124.
1
108.
8 115.
8
106.
9
108.
5
106.
7
106.
0
101.
9
105.
9
108.
0
110.
1 115.
8
107.
4
100.
1
98.3 10
1.8
162.
4
126.
5
90
100
110
120
130
140
150
160
170
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05E*
Reinsurance All Lines Combined Ratio
Combined Ratio:Reinsurance vs. P/C Industry
* All lines figure is full-year III estimate. RAA figure for 2005:9 mos. Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
HurricaneAndrew
Sept. 11
2004/5 Hurricanes
UNDERWRITING AFFECTS FINANCIAL
STRENGTH
Is There Causefor Concern?
P/C Company Insolvency Rates,1993 to 2004
Source: A.M. Best; Insurance Information Institute *1993-2003
1.20%
0.58%
0.21%0.28%
0.79%
0.60%
0.23%
1.02% 1.03%
1.33%
0.85%
0.42%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003E 2004
•Insurer insolvencies are increasing•12-yr industry failure rate: 0.71%
•Failure rating for B+ or better rating: 0.49%*•Failure rate for D through B rating: 1.29%*
383030
12-yr Failure Rate= 0.71%
21
10
Reason for P/C Insolvencies(218 Insolvencies, 1993-2002)
Unidentified17%
Impaired Affiliate3%
Overstated Assets2%
Change in Business3%
CAT Losses3%
Reinsurer Failure0%
Rapid Growth10%
Discounted Ops8%
Alleged Fraud3%
Deficient Loss Reserves
51%
Source: A.M. Best, Insurance Information Institute
Reserve deficiencies account for
more than half of all p/c insurers
insolvencies
So far, Katrina appears to have claimed just 1
victim—Rosemont Re—expected to go into run-off
Ratings Agencies Tightening Requirements for CATs
2006 SRQ CAT Model Reqs.*•All Property Exposure•Auto Physical Damage•Reinsurance Assumed•Pools & Assessments•All Flood Exposure•WC Losses from Quake•Fire Following•Storm Surge•Demand Surge•Secondary Uncertainty
ALSO “A.M. Best will perform additional “stress-tested” risk-adjusted capital analysis for a second event in order to determine the potential financial condition of an entity post a severe event.”IMPLICATION: Some insurers may be required to carry more capital to maintain the same rating.
*SRQ = Supplemental Rating QuestionnaireSource: A.M. Best Review & Preview, January 2006.
Best currently estimates PML for
100-yr. wind & 250-yr. quake to determine capital
adequacy
Historical Ratings Distribution,US P/C Insurers, 2000 vs. 2005
A/A-52.3%
A++/A+9.2%
B++/B+26.4%
Vulnerable*12.1%
Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report,November 8, 2004 for 2000; 2006 Review & Preview for 2005 distribution. *Ratings ‘B’ and lower.
A/A-48.4%
D0.2%C++/C+
1.9%
E/F2.3% A++/A+
11.5%
C/C-0.6%
B++/B+28.3%
B/B-6.9%
2000 2005 A++/A+ shrinkage
Ratings agencies increasing emphasis on multiple
events require more capital
P/C Insurers Maintaining Rating of A+ or Better Rating for 50+ Years
P/C Company1. AIU Insurance Co.2. Alfa Mutual Ins. Co.3. Amica Mutual Ins. Co.4. Church Mutual Ins. Co.5. Federal Insurance Co.6. General Reinsurance Corp.7. Great Northern Ins. Co.8. Lititz Mutual Ins. Co.9. Nationwide Mutual Fire Co.10. Otsego Mutual Fire11. Quincy Mutual Fire Ins. Co.12. State Automobile Mutual Ins. Co.13. State Farm Mutual Automobile Ins. Co.14. Vigilant Insurance Co.
Group Affiliation1. American International Group2. Alfa Insurance Group3. Amica Mutual Group4. None5. Chubb Group of Ins Cos.6. Berkshire Hathaway Ins. Group7. Chubb Group of Ins Cos.8. Lititz Mutual Group9. Nationwide Mutual Group10. None11. Quincy Mutual Group12. State Auto Ins. Group13. State Farm Group14. Chubb Group of Ins Cos.
Source: Best’s Review, January 1, 2004.
Underwriting Matters Because Pricing is Often Undisciplined
99.5 10
1.1
109.
5
104.
2
98.4
94.0
93.1
107.
9
103.
5
101.
3 101
$777
$821$844
$861
$689$685
$705$703 $723
$691$668
90
95
100
105
110
115
95 96 97 98 99 00 01 02 03 04 05E
Com
bine
d R
atio
$500
$600
$700
$800
$900
Avg
. Aut
o In
sura
nce
Expe
nditu
re
PP Auto Combined Ratio
Average Auto InsuranceExpenditure
Private Passenger AutoCombined Ratios, 1993-2005E
Sources: Insurance Information Institute from A.M. Best and NAIC data; 2004/5 expenditure estimates from III.
Somebody forgot there’s a relationship between price and
underwriting performance
Somebody remembered
CATASTROPHE LOSS
MANAGEMENT
Failure to Adequately Manage this Risk Has Been Devastating
Most of US Population & Property Has Major CAT Exposure
U.S. InsuredCatastrophe Losses ($ Billions)
$7.5
$2.7
$4.7
$22.
9
$5.5 $1
6.9
$8.3
$7.4
$2.6 $1
0.1
$8.3
$4.6
$26.
5
$5.9 $1
2.9 $2
7.5
$56.
8
$100
$0
$20
$40
$60
$80
$100
$120
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
20??
Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Source: Property Claims Service/ISO; Insurance Information Institute
$ Billions
2005 was by far the worst year ever for insured
catastrophe losses in the US, but the worst has yet to come.
$100 Billion CAT year is coming soon
Insured Property Catastrophe Losses as % Net Premiums Earned, 1983–2005E
0%
2%
4%
6%
8%
10%
12%
14%
16%
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05E
USWorldwideUS average: 1984-2004
*Insurance Information Institute estimate of 14.3% for 2005 based estimated 2005 DPE of $418.8B and estimated insured CAT losses of $60B.
Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute.
US CAT losses were a record 14.3% of
net premiums earned in 2005 and were 4.3 times the 1984-2004 average
of 3.3%*
2005 Was a Busy, Destructive, Deadly & Expensive Hurricane Season
Source: WeatherUnderground.com, January 18, 2006.
All 21 names were used for the first
time ever, so Greek letters were used for the final 6
storms: Alpha though Zeta
2005 set a new record for the number of hurricanes &
tropical storms at 27, breaking the old record set in 1933.
Number of Major (Category 3, 4, 5) Hurricanes Striking the US by Decade
4
6
65
4
6
88
5
8
6
9
1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*Figure for 2000s is extrapolated based on data for 2000-2005 (6 major storms: Charley, Ivan, Jeanne (2004) &Katrina, Rita, Wilma (2005)).
Source: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm.
10
1930s – mid-1960s:Period of Intense Tropical
Cyclone Activity
Mid-1990s – 2030s?New Period of Intense
Tropical Cyclone Activity
Tropical cyclone activity in the mid-1990s entered the active
phase of the “multi-decadal signal” that could last into the 2030s
Already as many major storms in
2000-2005 as in all of the 1990s
Top 10 U.S. Cities for Hurricane Risk
$-$25$50$75
$100$125$150$175$200
Miami/F
t. Laud
.New York
CityTam
pa/St. P
ete.
Houston
/Galve
ston
New Orle
ans
Mobile
, AL
Boston
Biloxi/
Gulfpo
rt, MS
Myrtle
Beach
, SC
Norfolk,
VA
Potential Insured Losses ($B) Potential Economic Losses ($B)
Source: AIR Worldwide
Number of Hurricanes Directly and Indirectly Affecting the Northeast
United States Since 1900
0 19 8
146 2 22
3123
20
33
39
4 8
05
101520253035404550
DE NJ NY CT RI MA NH ME
Num
ber o
f Occ
uren
ces
Hurricanes, Direct Hurricanes, Direct and Indirect
Source: New Hampshire Office of Emergency Management
Hurricanes affect Northeast more commonly than
presumed
Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,
1985-2004¹
Utility Disruption0.1%
Terrorism9.7% All Tropical
Cyclones3
34.6%
Tornadoes2
30.4%
Water Damage0.2%
Civil Disorders0.5%
Fire6
2.9%
Wind/Hail/Flood5
3.4%
Earthquakes4
8.4%
Winter Storms9.7%
Source: Insurance Information Institute estimates based on ISO data.
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2004 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood Insurance Program. 6 Includes wildland fires.
Insured disaster losses totaled $221.3 billion from
1984-2004 (in 2004 dollars). After 2005 season, tropical cyclones will account for about 45% of the total.
Number of Tornados & Associated Deaths, 1985-2005p
684
656 702
856
1,13
3 1,29
71,
173
1,23
41,
173
1,42
41,
345
1,07
1 1,21
694
11,
376
1,81
91,
200
765
1,13
2
1,14
8
1,08
2
94
5950
3930
130
40 40
54
36 3953
15
69 67
94
5532 39 33
25
500
700
900
1,100
1,300
1,500
1,700
1,900
85 87 89 91 93 95 97 99 01 03 05E
Num
ber
of T
orna
dos
0
20
40
60
80
100
120
140
Tor
nado
Dea
ths
Number of Tornados Tornado DeathsSource: III from National Weather Service data.
There appears to be an upward trend in the number of tornados, though not deaths. Detection Increase?
Total Value of Insured Coastal Exposure (2004, $ Billions)
$1,901.6$740.0
$662.4$505.8
$404.9$209.3
$148.8$129.7$117.2$105.3
$75.9$73.0
$46.4$45.6$44.7$43.8
$12.1
$1,937.3
$0 $500 $1,000 $1,500 $2,000 $2,500
FloridaNew York
TexasMassachusetts
New JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaAlabamaGeorgia
DelawareNew Hampshire
MississippiRhode Island
Maryland
Source: AIR Worldwide
Value of Insured Residential Coastal Exposure (2004, $ Billions)
$512.1$306.6$302.2
$247.4$205.5
$88.0$65.1$64.5$60.0$60.0
$36.5$29.7$26.6$25.9$24.8$20.9
$5.4
$942.5
$0 $200 $400 $600 $800 $1,000
FloridaNew York
MassachusettsTexas
New JerseyConnecticut
LouisianaS. Carolina
MaineVirginia
North CarolinaAlabamaGeorgia
DelawareRhode Island
NewMississippiMaryland
Source: AIR
Insured Coastal Exposure as a % of Statewide Insured Exposure (2004, $ Billions)
63.1%60.9%
57.9%54.2%
37.9%33.6%33.2%
28.0%25.6%25.6%
23.3%13.5%
12.0%11.4%
8.9%5.9%
1.4%
79.3%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
FloridaConnecticut
New YorkMaine
MassachusettsLouisiana
New JerseyDelaware
Rhode IslandS. Carolina
TexasNH
MississippiAlabamaVirginia
NCGeorgia
Maryland
Source: AIR Worldwide
The 2006 Hurricane Season:
Preview to Disaster?
Outlook for 2006 Hurricane Season
572.3Intense Hurricane Days195%263%100%Net Tropical Cyclone Activity
572.3Intense Hurricanes4547.524.5Hurricane Days9145.9Hurricanes
85115.549.1Named Storm Days17269.6Named Storms
2006F2005**Average*
*Average over the period 1950-2000.**As of December 4, 2005.Source: Dr. William Gray, Colorado State University, December 6, 2005.
Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2006
ALSO…Above-Average Major HurricaneLandfall Risk in Caribbean for 2006
47%30%Gulf Coast from FL Panhandle to Brownsville, TX
64%31%US East Coast Including Florida Peninsula
81%52%Entire US Coast
2006FAverage*
*Average over past century. Source: Dr. William Gray, Colorado State University, December 6, 2005.
Hurricanes Katrina, Rita & Wilma:
Their Place in History
Insured Loss & Claim Count for Major Storms of 2005*
$1.1
$38.1
$8.4$5.0
104381
955
1,752
$0.000$5.000
$10.000$15.000$20.000$25.000$30.000$35.000$40.000$45.000
Dennis Rita Wilma KatrinaSize of Industry Loss ($ Billions)
Insu
red
Loss
($ B
illio
ns)
02004006008001,0001,2001,4001,6001,8002,000
Cla
ims
(thou
sand
s)
Insured Loss Claims
*Property and business interruption losses only. Excludes offshore energy & marine losses.Source: ISO/PCS as of February 8, 2006; Insurance Information Institute.
Hurricanes Katrina, Rita, Wilma & Dennis produced a record 3.2
million claims
Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2005)
$3.5 $3.8 $4.8 $5.0$6.6 $7.4 $7.7 $8.4
$21.6
$40.0
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
Georges(1998)
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo(1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Andrew(1992)
Katrina(2005)
$ B
illio
ns
Sources: ISO/PCS; Insurance Information Institute.
Seven of the 10 most expensive hurricanes in US history
occurred in the 14 months from Aug. 2004 – Oct. 2005:
Katrina, Rita, Wilma, Charley, Ivan, Frances & Jeanne
Hurricane Katrina Insured Loss Distribution by State ($ Millions)*
Mississippi, $12,105 , 31.8%
Louisiana, $24,275 , 63.7%
Tennessee, $59.0 , 0.2%Florida, $543.0 , 1.4%
Georgia, $27.0 , 0.1%Alabama, $1,102 ,
2.9%
*As of February 8, 2006Source: PCS division of ISO.
Louisiana accounted for
64% of the insured losses
paid and 56% of the claims filedTotal Insured
Losses = $38.111 Billion
Hurricane Katrina Claim Count Distribution by State*
Mississippi, 515,000 , 29.4%
Tennessee, 15,000 , 0.9%
Louisiana, 975,000 , 55.7%
Florida, 115,000 , 6.6%
Georgia, 7,800 , 0.4%
Alabama, 124,000 , 7.1%
*As of February 8, 2006Source: PCS division of ISO.
Louisiana accounted for 64%of insured
losses paid and 56% of claims filed
Total # Claims = 1,751,800
Hurricane Katrina Loss Distribution by Line ($ Billions)*
Homeowners, $17,694.0 , 46%
Commercial Property & BI, $18,278.0 , 48%
Vehicle, $2,139.0 , 6%
Total insured losses are
estimated at $38.1 billion from 1.7518
million claims. Excludes $2-
$3B in offshore energy losses
*As of February 8, 2006Source: PCS division of ISO.
Hurricane Katrina Insured Loss and Claim Distribution by State*
100.0%100.0%1,751,800 $ 38,111.0 Totals
0.4%0.1%7,800 $ 27.0 GA
0.9%0.2%15,000 $ 59.0 TN
6.6%1.4%115,000 $ 543.0 FL
7.1%2.9%124,000 $ 1,102.0 AL
29.4%31.8%515,000 $ 12,105.0 MS
55.7%63.7%975,000 $ 24,275.0 LA
% Claims% Losses# ClaimsLosses ($Mill)State
*As of February 8, 2006.Source: PCS division of ISO.
Hurricane Rita Insured Loss Distribution by State ($ Millions)*
Texas, $1,970.0 , 39.6%
Tennessee, $10.0 , 0.2%
Louisiana, $2,912.5 , 58.5%
Arkansas, $13.7 , 0.3%Florida, $23.0 , 0.5% Alabama, $13.0 , 0.3%
Mississippi, $34.0 , 0.7%
*As of February 8, 2006Source: PCS division of ISO.
Louisiana accounted for
59% of the insured losses,
Texas 40%. Total claims =
381,000.
Excludes offshore energy losses of $2-3B
Total Insured Losses =
$4.9762 Billion
Hurricane Rita Claim Count Distribution by State*
Texas, 169,000 , 44.4%
Tennessee, 3,500 , 0.9%
Louisiana, 185,000 , 48.6%
Arkansas, 5,500 , 1.4%Florida, 6,000 , 1.6%
Alabama, 5,000 , 1.3%
Mississippi, 7,000 , 1.8%
*As of February 8, 2006Source: PCS division of ISO.
Louisiana accounted for 48.6% of the
insured losses, Texas 44.4%.
Excludes offshore energy losses of $2-3BTotal # Claims
= 381,000
Hurricane Rita Loss Distribution, by Line ($ Millions)*
Homeowners, $2,944.0 , 59%
Commercial Property & BI, $1,846.2 , 37%
Vehicles, $186.0 , 4%Total insured
losses are estimated at $5.0
billion (excl. offshore energy of $2-$3B) from 381,000 claims.
*As of February 8, 2006Source: PCS division of ISO.
Hurricane Rita Insured Loss and Claim Distribution by State*
0.9%0.2%3,500 $ 10.0 TN
100.0%100.0%381,000 $ 4,976.2 Totals
1.3%0.3%5,000 $ 13.0 AL
1.4%0.3%5,500 $ 13.7 AR
1.6%0.5%6,000 $ 23.0 FL
1.8%0.7%7,000 $ 34.0 MS
44.4%39.6%169,000 $ 1,970.0 TX
48.6%58.5%185,000 $ 2,912.5 LA
% Claims% Losses# ClaimsLosses ($Mill)State
*As of February 8, 2006.Source: PCS division of ISO.
Government Aid After Major Disasters (Billions)*
$104.4
$43.9
$17.7 $15.5 $15.0
$0
$20
$40
$60
$80
$100
$120
Hurricane Katrina(2005)
Sept. 11 TerroristAttack (2001)
Hurricane Andrew(1992)
NorthridgeEarthquake (1994)
Hurricanes Charley,Frances, Ivan &Jeanne (2004)
$ B
illio
ns
*In 2005 dollars.Source: United States Senate Budget Committee, Insurance Information Institute as of 12/31/05.
Hurricane Katrina aid will dwarf aid following
all other disasters. Congress may authorize
$150-$200 billion ultimately (about
$400,000 for each of the 500,000 displaced
families). Is the incentive to buy insurance and
insure to value diminished?
Within 3 weeks of Katrina’s LA landfall, the federal government
had authorized $75B in aid—more than all the federal aid for the 9/11 terrorist attacks, 2004’s
4 hurricanes and Hurricane Andrew combined! $29B more
was authorized in Dec. 2005. At least $80B more is sought.
Distribution of Katrina Losses by Market ($Billions)
$39.9 - $54.6100%TOTAL
$0.4 - $1.61% - 3%Capital Markets
$20.7 - $24.052% - 44%Reinsurers
$18.8 - $28.947% - 53%Insurers
AmountPercentageMarket
Source: Hurricane Katrina: Analysis of the Impact on the Insurance Industry, Tillinghast, October 2005.
Overview of Plans for a National Catastrophe
Insurance Plan
NAIC’s Comprehensive National Catastrophe Plan
• Proposes Layered Approach to Risk• Layer 1: Maximize resources of private
insurance & reinsurance industryIncludes “All Perils” Residential PolicyEncourage MitigationCreate Meaningful, Forward-Looking Reserves
• Layer 2: Establishes system of state catastrophe funds (like FHCF)
• Layer 3: Federal Catastrophe Reinsurance Mechanism
Source: Insurance Information Institute
Comprehensive National Catastrophe Plan Schematic
Personal Disaster Account
Private Insurance
State Regional Catastrophe Fund
National Catastrophe Contract Program
Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.
State Attachment
1:50 Event
1:500 Event
Legislation: ComprehensiveNational Catastrophe Plan
• H.R. 846: Homeowners Insurance Availability Act of 2005Introduced by Representative Ginny Brown-Waite (R-FL)Requires Treasury to implement a reinsurance program offering contracts sold at regional auctions
• H.R. 4366: Homeowners Insurance Protection Act of 2005Also worked on by Rep. Brown-WaiteEstablishes national commission on catastrophe preparation and protectionAuthorizes sale of federally-backed reinsurance contracts to state catastrophe funds
• H.R. 2668: Policyholder Disaster Protection Act of 2005Backed by Rep. Mark Foley (R-FL)Amends IRS code to permit insurers to establish tax-deductible reserve funds for catastrophic events20-year phase-in for maximum reserveUse limited to declared disasters Source: NAIC, Insurance Information Institute
Profit Pillar #2PRICING
Can Discipline be Maintained?
$418$440 $455
$481 $488$508
$536
$593
$668 $693 $711$739
$400$450$500$550$600$650$700$750$800
95 96 97 98 99 00 01 02 03 04* 05* 06*
Average Expenditures on Homeowners Insurance**
*Insurance Information Institute Estimates/Forecasts**Excludes cost of flood and earthquake coverage.Source: NAIC, Insurance Information Institute
Countrywide home insurance expenditures are expected to rise at
least 4% in 2006Homeowners in CAT zones will see much larger
increases
$651 $668$691 $705 $703
$685 $689$723
$777$821
$874$844$861
$600
$650
$700
$750
$800
$850
$900
$950
94 95 96 97 98 99 00 01 02 03 04* 05* 06*
Average Expenditures on Auto Insurance
*Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute
Countrywide auto insurance expenditures are expected to
rise 1.5% in 2006
Will the “big guys”stay disciplined? So far, so good. Tiering
adopted to avoid adverse selection
Profit Pillar #3INVESTMENTS
Does Investment Performance Affect
Discipline?
Property/Casualty Insurance Industry Investment Gain*
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9 $50.2
$56.9$51.9
$57.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 02 03 04 05**Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.Annualized 2005 figure based on data as of 9/30/05, adjusted for special dividend of $3.1B.Source: Insurance Services Office; Insurance Information Institute.
Investment gains are rising but will still fall short of
their 1998 peak. CAT losses will reduce investable assets.
Profit Pillar #4EXPENSES
Will Expense Ratio Rise as Premium Growth Slows?
Personal Lines Underwriting Expense Ratio,* 1994-2005E
21.8% 22.0% 21.8%
23.5%
29.8%
24.3%24.4%
23.6%
23.4%
22.7%23.2% 23.3%
23.4%
28.4%
28.4%
28.5%28.5%
30.8%31.1%
30.8%
30.6% 30.3%
30.6%
29.4%
20%
22%
24%
26%
28%
30%
32%
94 95 96 97 98 99 00 01 02 03 04 05E
Auto Home
*Ratio of expenses incurred to net premiums written. 2005 figures are III estimates.Source: A.M. Best; Insurance Information Institute
Can the downward trend in PPA and HO expenses
ratios be sustained as premium growth slows?
Profit Pillar #5LEVERAGE
Can the Industry Efficiently Employ Its Increasing Capital?
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
75 767778 7980 818283 848586 8788 899091 9293 949596 979899 0001 02030405*
U.S. Policyholder Surplus: 1975-2005*
Source: A.M. Best, ISO, Insurance Information Institute *As of 9/30/05.
$ B
illio
ns
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
Capacity TODAY is $414.3B, 5.2% above year-end 2004, 45% above its 2002 trough and
22% above its mid-1999 peak. Sufficient capacity exists to pay all hurricane claims.
Foreign reinsurance and residual market mechanisms absorbed
$27-$32B (57%-67%) of 9-month 2005 CAT losses of $47.6B
Announced Insurer Capital Raising*($ Millions, as of December 1, 2005)
$1,500
$38
$400$450$600
$710
$300$100$140
$600
$129$297
$620
$124$202$150$299
$490
$2,800
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
Ace Ltd.
Argonau
tAspen Axis
Enduran
ceEver
est Re
Fairfax
Finl.Glac
ier Re
HCC Insuran
ceIP
C Hldgs
Kiln PLC
Max R
eMon
tpelier
ReNav
igator
sOdyss
ey Re
Partner
RePlat
inumPXRE
XL Cap
ital
$ M
illio
ns
*Existing (re) insurers. Announced amounts may differ from sums actually raised. Sources: Morgan Stanley, Lehman Brothers, Company Reports; Insurance Information Institute.
As of Dec. 1, 19 insurers announced plans to raise
$9.95 billion in new capital. Twelve start-ups plan to raise as much as $8.65
billion more for a total of $18.65B. Likely at least $20B raised eventually.
Existing companies
will continue to find it
relatively easy to raise cash…
Announced Capital Raising by Insurance Start-Ups
($ Millions, as of December 11, 2006)
$1,500
$1,000$1,000$1,000$1,000
$750
$500 $500 $500 $500
$220 $180$100
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
Harbo
r Poin
t*Amlin
Bermuda
Flagsto
ne Re
Validus H
oldings
Lanca
shire
Re*
*
Ariel R
eHisc
ox B
ermud
aNew
Cast
le Re
Arrow C
apita
lXL/H
ighfie
ldsGre
enlig
ht Re
Omega S
pecialt
yAsce
ndent R
e$
Mill
ions
*Chubb, Trident are funding Harbor Point. Announced amounts may differ from sums actually raised. **Stated amount is $750 million to $1 billion. ***XL Capital/Hedge Fund venture. Arrow Capital formed by Goldman Sachs.Sources: Morgan Stanley, Company Reports; Insurance Information Institute.
As of Dec. 11, 13 start-ups plan to raise as
much as $8.75 billion.
…so will start-ups
Profit Pillar #6P/C OPERATING ENVIRONMENT
Have Things Changed for the Better?
TORT SYSTEM
Personal, Commercial & Self (Un) Insured Tort Costs*
$17.0$49.1 $57.2
$91.4$17.1
$51.0$70.9
$82.5
$5.4
$20.1
$29.6
$45.3
$0
$50
$100
$150
$200
$250
1980 1990 2000 2003
Commercial Lines Personal Lines Self (Un)Insured
Bill
ions
Total = $39.5 Billion
*Excludes medical malpracticeSource: Tillinghast-Towers Perrin
Total = $120.2 Billion
Total = $157.7 Billion
Total = $219.2 BillionState Farm is a leader is drawing the line on litigation
(e.g., Avery & Campbell decisions, MS litigation)
Tort System Costs, 2000-2006E
$179.2
$233.2$245.7
$261.7$278.7
$296.8
$205.5
1.83%2.03%
2.22% 2.23% 2.24% 2.27%2.23%
$100
$150
$200
$250
$300
$350
00 01 02 03 04E 05E 06E
Tor
t Sys
tem
Cos
ts
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Tor
t Cos
ts a
s % o
f GD
P
Tort Sytem Costs Tort Costs as % of GDP
Source: Tillinghast-Towers Perrin
After a period of rapid escalation, tort system costs as % of GDP appear to be stabilizing
Other Operational Challenges
• Insurance Scoring: Challenges Based on Disparate Impact
• Territorial Rating: Race-Based Issues Loom Large
• CAT Modeling: Need Greater Acceptance by Regulators
• Regulatory Environment: Still Antiquated
AUTO & HOME:A SUCCESSFUL SHIFT TO
THE UNDERWRITING CULTURE?
Private Passenger Auto
Private Passenger Auto is Enormous Part of P/C Industry
Total 2004 Direct Personal + Commercial Premiums Written = $467.0 Billion
All Commercial Lines
53.9%
PPA Coll/Comp14.2%
Homeowners11.4%
PPA Liability20.5%
Source: A.M. Best; Insurance Information Institute
Private passenger auto accounted for 34.7% or $162.2B in DPW in 2004
$251.6B $53.2B
$95.8B
$66.4B
Auto Insurance:Direct Premiums Written
$61.3 $64.7 $67.8 $70.0 $72.3 $71.6 $70.7 $70.6 $75.9 $84.0 $91.7
$34.4 $36.0 $38.2 $40.6 $43.8 $47.3 $49.9 $51.6$56.2
$61.2$64.9
$66.4
$95.8
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
93 94 95 96 97 98 99 00 01 02 03 04
PP Auto Liability PP Auto Phys Damage
Bill
ions $95.7B
Source: A.M. Best; Insurance Information Institute
$100.7B+5.2%
$106.0B+5.3%
$110.5B+4.3%
$116.1B+5.0%
$118.9B+2.4%
$120.6B+1.4%
$122.2B+1.3%
$132.1B+8.1%
$145.1B+9.8%
$162.2B+11.9%
Motor Vehicle Retail Sales (Millions of Units)
15.5 15.5
16.0
17.4
17.8
17.5
17.1
17.0
17.3
17.1
16.8 16.9 17
.0
17.1 17
.3 17.4 17
.6
15.0
15.5
16.0
16.5
17.0
17.5
18.0
96 97 98 99 00 01 02 03 04 05E 06F 07F 08F 09F 10F 11F 12-16FSource: US Department of Commerce; Insurance Information Institute;
Blue Chip Economic Indicators as of January 2006 through 2007; III forecast thereafter.
New Motor Vehicle Sales
Sales of automobiles are being hurt by high gas prices and rising interest rates;
Likely some shift away from SUVs to cars
101.7 101.3 101.3 101.099.5
101.1
103.5
109.5107.9
104.2
98.4
94.093.1
90
95
100
105
110
93 94 95 96 97 98 99 00 01 02 03 04 05F
Private Passenger Auto Combined Ratio
Average Combined 1993 to 2004= 102.7
Many auto insurers have shown sig-nificant improvements in underwriting
performance since mid-2002
Sources: A.M. Best; III
PPA is the profit juggernaut of the p/c
insurance industry today
9%
14%13%
15%
12%14%14%
11% 12%12%
10%
8%
2% 2%
4%
0%
2%
4%
6%
8%
10%
12%
14%
16%
92 93 94 95 96 97 98 99 00 01 02 03 04E 05E 06F
RNW: Private Passenger Auto, United States, 1992-2006F
Source: NAIC; Insurance Information Institute
Private passenger auto profitability deteriorated throughout the 1990s but
has improved dramatically
Segmentation should help profitability
50%
60%
70%
80%
90%
100%
110%
99:Q
1
99:Q
2
99:Q
3
99:Q
4
00:Q
1
00:Q
2
00:Q
3
00:Q
4
01:Q
1
01:Q
2
01:Q
3
01:Q
4
02:Q
1
02:Q
2
02:Q
3
02:Q
4
03:Q
1
03:Q
2
03:Q
3
03:Q
4
04:Q
1
04:Q
2
04:Q
3
04:Q
4
05:Q
1
05:Q
2
05:Q
3
Collision Comprehensive Liability (BI & PD)
Source: ISO Fast Track; Insurance Information Institute. *Direct basis
Private Passenger Auto:Incurred Loss Ratios*, 1999-2005:Q3
Loss ratios for all major coverages trending down; Comp is CAT impacted
0%1%2%3%4%5%6%7%8%9%
10%
00:Q
1
00:Q
3
01:Q
1
01:Q
3
02:Q
1
02:Q
3
03:Q
1
03:Q
3
04:Q
1
04:Q
3
05:Q
1
05:Q
3
Auto Insurance Component of CPI Personal Auto-PD Pure Premium
Source: Insurance Information Institute calculations based ISO Fast Track and US BLS data.
Pure Premium Spread: Personal Auto PD Liability, 2000-2005:Q3
Margin necessary to maintain PPA
profitability
2000 PPA Combined=110
2004 PPA Combined=94
Inversion of pure premium spread is a warning sign
-2.2%
-5.3%
-4.0%-3.4%
-0.9%
-2.6%
-5.3%
3.0%3.6% 3.9%
3.4% 3.4%
-0.3%
4.7%
-6%
-4%
-2%
0%
2%
4%
6%
99 00 01 02 03 04 05*
Frequency Severity
Bodily Injury: Severity Trends Now Offset Declining Claim Freq.
*Four quarters ending 2005:Q3.Source: ISO Fast Track data.
Medical inflation a powerful
cost driver
0.8%
-1.5%
0.3%
-1.8%-2.6% -2.4%
-1.6%
3.9%3.3%
2.4%
0.5%
2.3%
4.3%
6.2%
-4%-3%-2%-1%0%1%2%3%4%5%6%7%
99 00 01 02 03 04 05*
Frequency Severity
PD Liability: Frequency Trend Swamps Rising Claim Severity
Fewer accidents, but more damage when
they occur:
Higher Deductibles?
*Four quarters ending 2005:Q3.Source: ISO Fast Track data.
-1.6%
1.1%
-1.1%
0.0%
-0.6%
-7.2%-5.9%
3.2%
6.5%
-3.9%
0.5%
4.5%6.3%
16.1%
-10%
-5%
0%
5%
10%
15%
20%
99 00 01 02 03 04 05*
Frequency Severity
PIP: Frequency Trend Now Offsets Rising Claim Severity
Fraud caused problems from
1999-2001
*Four quarters ending 2005:Q3.Source: ISO Fast Track data.
2.6%
-0.4%
1.9%
-3.8%-5.1% -4.6%
-2.5%
3.7% 3.6%
1.6%
3.6%3.0%
4.1%
6.8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
99 00 01 02 03 04 05*
Frequency Severity
Collision: Frequency Trend Swamps Rising Claim Severity
*Four quarters ending 2005:Q3.Source: ISO Fast Track data.
-1.7%-2.6%
3.3%
-5.6%
-2.1%
-8.1%
-5.0%
-7.0%
-4.0%
2.7%
-2.7%
3.3%
-4.7%
8.9%
-10%-8%-6%-4%-2%0%2%4%6%8%
10%
99 00 01 02 03 04 05*
Frequency Severity
Comprehensive: Favorable Frequency and Severity Trends
*Four quarters ending 2005:Q3.Source: ISO Fast Track data.
Homeowners
Private Passenger Auto is Enormous Part of P/C Industry
Total 2004 Direct Personal + Commercial Premiums Written = $467.0 Billion
All Commercial Lines
53.9%
PPA Coll/Comp14.2%
Homeowners11.4%
PPA Liability20.5%
Source: A.M. Best; Insurance Information Institute
Private passenger auto accounted for 34.7% or $162.2B in DPW in 2004
$251.6B$53.2B
$95.8B
$66.4B
Homeowners Insurance:Direct Premiums Written
$0
$10
$20
$30
$40
$50
$60
93 94 95 96 97 98 99 00 01 02 03 04
Bill
ions
$22.9B
Source: A.M. Best; Insurance Information Institute
$24.4B+6.6%
$26.0B+6.6%
$27.4B+5.4%
$29.1B+6.2%
$30.9B+5.8%
$32.5B+5.2%
$34.6B+6.5%
$37.6B+8.7%
$43.0B+14.4%
$48.7B+13.3%
$53.2B+9.2%
Homeowners premium growth has been strong, tracking the US real
estate boom and higher rates
New Private Housing Starts(Millions of Units)
2.05
1.90
1.82
1.69 1.71 1.
751.
74 1.75
1.48
1.351.
461.
291.
201.
011.
19
1.47
1.62
1.64
1.57
1.60 1.
71
1.85
1.96
1.01.11.21.31.41.51.61.71.81.92.02.1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 0405
E06
F07
F08
F09
F10
F11
F12
-16F
Source: US Department of Commerce; Blue Chip Economic Indicators (1/06), Insurance Info. Institute
Exposure growth forecast for HO insurers is excellent, though new
building is expected to slow modestly
117.7
158.4
113.6118.4
112.7
121.7
101.0
108.2111.4
121.7
109.3
98.295.1
110113.0
109.4
90
100
110
120
130
140
150
160
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05E
Homeowners Insurance Combined Ratio
Average 1990 to 2005E= 114
Insurers have paid out an average of $1.14 in losses for every dollar earned
in premiums over the past 16 years
Sources: A.M. Best; III
Rates of Return on Net Worth for Homeowners Ins: US
Source: NAIC; 2004/5 figures are Insurance Information Institute estimates.
9.7%11%
2%
-1.7%-4.2%
3.6%
12.4%
5.4%2.5% 5.4% 3.8%
1.4%
-7.2%-10%
-5%
0%
5%
10%
15%
93 94 95 96 97 98 99 00 01 02 03 04E 05E
Averages: 1993 to 2005EUS HO Insurance = +3.4%
INSURANCE-TO-VALUE:
Ending the Blame Game is aWin-Win Situation Deal
Insurance-to-Value in HO is a National Problem, Improved Recently
73%
64% 61% 59%
22%
25%27%35%
20%
30%
40%
50%
60%
70%
80%
2002 2003 2004 2005Proportion of Home Undervalued Average Undervaluation
*According MS/B.Source: Marshall & Swift/Boeckh
Less than ITV means homeowners insurers left $8 billion on the table in 2003*
Who’s Responsibility Is It to Keep Homeowners Policy Up-to-Date?
Other/Don't Know3%
Agent19%
Insurer7%
Homeowner71%
Source: September 2004 poll of 800 Californians conducted for the Insurance Information Network ofCalifornia by Public Opinion Strategies. Margin of error = +/- 3.46%.
Nearly 3 out 4 people, even fire-weary Californians, believe it is the homeowner’s responsibility to keep insurance up-to-dateBUT 26% believe it’s
the agent’s or insurer’sresponsibilityThis substantial
minority is wrong, but gets heard (CA, FL) and comments reflect badly on insurersMedia, regulators and
legislators join fray
Time Since Homeowner Last Updated HO Policy
3 - 5 Years12%
Don’t Know/Refused
9%
6 Mos. - 1 Yr.12%
More than 5 Yrs.25%
1 - 2 Years24%
Last 6 Months18%
Source: September 2004 poll of 800 Californians conducted for the Insurance Information Network ofCalifornia by Public Opinion Strategies. Margin of error = +/- 3.46%.
Nearly 40% of people haven’t updated their homeowner’s policy within the last 3 yearsHuge potential
for problems, especially in disaster-prone statesLeads
automatically to large under-insurance problems
Why People Don’t Increase Homeowners Coverage
Didn't Know Needed To
25%
Other18%
Too Expensive5%
Didn't Have Time30%
Agent Said I'm Covered
26%
Don’t Want Rates to Go Up
17%
22% cite expense as reason they don’t adjust they’re HO coverage25% don’t realize they
need to30% say they’re too
busy (to think about protecting their most valuable asset)25% say their agent
said there’s nothing to worry about
Source: Harris interactive poll conducted for Fireman’s Fund, July 2004.See: http://www.firemansfund.com/dcmssites/about/pdf/firemansfundtoplinerev2.pdf
Summary• Home/Auto picture is bright for 2006, assuming
“normal” CAT loss activity• Concern about pricing discipline, esp. if freq/severity
trends turn adverse• Rising investment returns insufficient to support deep
soft market in terms of price, terms & conditions• Clear need to be more underwriting focused• Major Challenges:
Maintaining price/underwriting disciplineManaging variability/volatility of results
Insurance Information Institute On-Line
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