The Property/Casualty Insurance Industry Today
Critical Issues & Emerging RisksSeptember 3, 2003
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
• Profitability Issues What Does Wall Street Think of Us?Economic Concerns
• Underwriting Performance• (In)Solvency Concerns• Investment Performance• Capacity Crunch?
US, World, Bermuda, Captives• Pricing• Tort Environment• Emerging Risks• Q & A
P/C PROFITS:
NO LONGER AN OXYMORON
Highlights: Property/Casualty First Quarter 2003 ($ Millions)
2003 2002 Change
Net Written Prem. $101,329 $89,874 +12.7%
Loss & LAE 69,956 63,185 +10.7%
Net UW Gain (Loss) (1,461) (3,644) -59.9%
Net Inv. Income 8,984 9,007 -0.3%
Net Income (a.t.) 6,365 5,279 +20.6%
Surplus* 289,167 285,235 +1.4%
Combined Ratio** 99.5 107.2 -7.7 pts.*Comparison with year-end 2002.
**Comparison is with full year 2002 combined ratio. Comparable 1st quarter 2002 figure is 102.2.
P/C Net Income After Taxes1991-2003* ($ Millions)
$14,178
$5,840
$19,316
$10,870
$20,598
$24,404
$36,819
$30,773
$21,865$20,559
-$6,970
$2,903$6,365
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
91 92 93 94 95 96 97 98 99 00 01 02 03*
*First quarterSources: A.M. Best, ISO, Insurance Information Institute.
2001 was the first year ever with a full year net loss
2002 ROE = 1.0%
2003 ROE = 8.8%*
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03F
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2003E*
*2003 p/c estimate based on first quarter data.Source: Insurance Information Institute; Fortune
-5%
0%
5%
10%
15%
20%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003E
ROE Cost of Capital
ROE vs. Cost of Capital: US P/C Insurance: 1991 – 2003E
Source: The Geneva Association, Ins. Information Inst.
The gap between the industry’s cost of capital and its rate of return is narrowing
14.6
pts
10.2
pts
US P/C insurers missed their cost of capital by an average 6.9 points from 1991 to 2002
2.2
pts
After-Tax ROE for Selected AY Combined Ratios*
*Assumes 4% tax-equivalent yield, 28% expense ratio and 140% premium/surplus ratioSource: Dowling & Partners Securities
23.5%21.8%
20.1%18.4%
16.6%14.9%
13.2%11.5%
9.8%8.1%
6.3%
2.1%
80% 82% 84% 86% 88% 90% 92% 94% 96% 98% 100% 105%
RNW for Major P/C Lines,1992-2001 Average
17.0%
14.0%
9.6% 9.5% 8.6%7.4% 7.2%
3.4%
0.9%
-3.4%
-14.8%
9.8%7.9%
-15%
-10%
-5%
0%
5%
10%
15%
20%
InlandMarine
AllOther
PersonalAuto
MedMal
WC Fire All Lines OtherLiab
CommAuto
CMP FMP HO Allied
Source: NAIC; Insurance Information Institute
10-Year returns for some major p/c lines surprisingly
good, but…
-5%
0%
5%
10%
15%
20%
25%
US P/C Insurers All US Industries Life
Diversified Finl. Comm. Banks
ROE: Financial Services Industry Segments, 1987–2002
Source: Insurance Information Institute; Fortune
WALL STREET:
HIGH EXPECTATIONS
P/C Performance Volatile, Underperforming S&P 500 Lately
-25.7%
43.4%
-1.2%-6.4%
10.0%
21.0%
-9.1% -10.9%
-23.4%
14.6%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
1999 2000 2001 2002 2003*
P/C S&P 500
*Through August 29, 2003.Source: SNL Securities, Insurance Information Institute
P/C Insurer Stocks: Lagging the S&P 500
3.48%
8.46%
10.02%
11.20%
15.09%
14.56%
35.56%
0% 10% 20% 30% 40%
Nasdaq
S&P 500
Life/Health
All Insurers
P/C
Brokers
Multiline
Source: SNL Securities, Insurance Information Institute
Total Return 2003 YTD Through August 29, 2003
Swiss Re stock price is down 3.2% through 1 Sept. 2003 (in SF terms).
ECONOMIC CONCERNS
Economic Summary•Weak Econ. Growth GDP Growth: +1.9% 1st Half ‘03
•Stubborn Unemployment Unemp. Rate: 6.2% (July)
•Low Inflation CPI: +2.1% (July ’03 over ’02)
•Interest Rates 1-Yr T-bill =1.26%; 10-yr=4.45%
•Cautious Consumers Sentiment Up
•Massive/Record Budget Deficit $480B+ Soon (FY 2004)
•Uncertain Invest. Environment Low Rates but Rising; Stocks??
Exposure growth picture for insurers mixed:
Personal lines better than commercial, but commercial is improving
Source: Insurance Information Institute as of September 1,2003.
4.4%3.5%
2.5%
5.7%
8.3%
4.8%5.6%
2.2%
1.0%
-0.6%
-1.6%
-0.3%
1.4%2.2%
3.3%2.9%
2.3%
3.7%2.7%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Real GDP Growth
Source: US Department of Commerce, Blue Economic Indicators 7/03;Insurance Information Institute.
Economy continues to experience uneven growth
following the recession of 2001.
Unemployment Rate (%)5.
6
5.4
4.9
4.5
4.2
4.0
4.8
5.8
6.2
5.8
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
95 96 97 98 99 00 01 02 03* 04F*July 2003.Source: US Bureau of Labor Statistics; Blue Chip Economic Indicators (7/03), Insurance Info. Institute.
Unemployment
The unemployment in June 2003 (6.4%) was at its highest level since
1993, harming WC exposure growth.
129.0
129.5
130.0
130.5
131.0
131.5
132.0
132.5
133.0
Jan-00
Apr-00
Jul-00
Oct-00
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Number of Employed Workers(Millions)
Source: U.S. Bureau of Labor Statistics; Insurance Information Institute
2.69 Million Jobs Lost Since Feb. 2001Employment peaked at 132. 56 million in February 2001.
By July 2003, employment stood at
129.87 million, its lowest level since October 1999.
$631$684
$745
$818
$899
$1,009
$1,136
$1,228
$1,324
$1,255$1,192
$1,172$1,183
$500
$750
$1,000
$1,250
$1,500
92 93 94 95 96 97 98 99 00 01 02 03:I 03:II
Private Non-Residential Investment (Real, $1996)
Source: U.S. Bureau of Economic Analysis, Insurance Information Institute
Bil
lion
s
Commercial exposure growth is slowing as corporations cut back on capital spending, but
that may be changing…
10.1
%
8.0%
2.1% 2.5%
0.2%
6.1% 7.
3% 8.1%
11.2
%
14.7
%
1.3%
9.0%
5.1% 6.
4% 7.3%
5.7%
7.4%
7.6%
-1.1
%
-2.1
%
10.7
% 12.0
%
-5%
0%
5%
10%
15%
92 93 94 95 96 97 98 99 00 01 02
Health Benefit Costs WC
Med Claim Costs Rising Sharply
Source: NCCI; William M. Mercer, Insurance Information Institute.
Health care inflation is affecting the cost of medical care, no matter
what system it is delivered through
UNDERWRITING CONCERNS
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
P/C Industry Combined Ratio
2001 = 115.7
2002 = 107.2
2003F = 103.2*
2003:Q1 Actual = 99.5
Combined Ratios
1970s: 100.3
1980s: 109.2
1990s: 107.7
2000s: 111.0
Sources: A.M. Best; III *Based on III Earlybird Survey, February 2003.
110.
5
105.
0 113.
6
119.
2
104.
8
100.
8
100.
5
114.
3
106.
5
121.
3
97.9
108.
8 115.
8
106.
9
108.
5
106.
5
105.
8
101.
6
105.
6
107.
7
110.
0 115.
7
107.
2
99.5
162.
5
126.
5
90
100
110
120
130
140
150
160
170
91 92 93 94 95 96 97 98 99 00 01 02 03*
Reinsurance All Lines Combined Ratio
Combined Ratio: Reinsurance vs. P/C Industry
*First quarter 2003 figures for full industry from ISO; 1st half reinsusrance figures from RAA.
Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
2001’s combined ratio was the worst-ever for reinsurers; 2003 was bad as well.
2003: Big improvement in Q1
Light weather helped Q1:03
($60)
($50)
($40)
($30)
($20)
($10)
$0
$101
97
51
97
61
97
71
97
81
97
91
98
01
98
11
98
21
98
31
98
41
98
51
98
61
98
71
98
81
98
91
99
01
99
11
99
21
99
31
99
41
99
51
99
61
99
71
99
81
99
92
00
02
00
12
00
22
00
3
Underwriting Gain (Loss)1975-2003*
*2003 figure of $5.84 billion is annualized based on first quarter underwriting loss of $1.46 billionSource: A.M. Best, Insurance Information Institute
$ B
illi
ons
Based on first quarter results, 2003 will likely be a much better year in terms of underwriting
losses. First quarter losses totaled $1.46 billion or $5.8 billion on an annualized basis
0.5
1.3
2.0
2.8
Net Premiums Written to Policyholder Surplus Ratio
Source: A.M. Best, Insurance Information Institute
2000: 0.95
2001: 1.13
2002 : 1.29
2003(Forecast): 1.35
U.S. InsuredCatastrophe Losses
$7.5
$2.7$4.7
$22.9
$5.5
$16.9
$8.3 $7.3
$2.6
$10.1$8.3
$4.3
$28.1
$5.9$7.6
$0
$5
$10
$15
$20
$25
$30
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03*
*Through August 2003.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.Source: Property Claims Service/ISO; Insurance Information Institute
$ Billions
$ Billions, Calendar Year Basis
$2.3 $2.2 $1.2
($8.5)
($1.5)
($7.5)($6.7)($10.0)
$23
$0.3
($3.7)($0.3)
$9.9
($15)
($10)
($5)
$0
$5
$10
$15
$20
$25
90 91 92 93 94 95 96 97 98 99 00 01 02E
P/C Insurance Industry Prior Year Reserve Development*
*Negative numbers indicate favorable development; positive figures represent adverse development.Source: A.M. Best, Morgan Stanley, Dowling & Partners Securities
Adverse reserve development of about $23 billion accounted for most of the
industry’s 2002 underwriting loss and “ate” much of the industry’s $37 billion
increase in earned premiums
Points (Reduced)/Increased
0.5
(2.4)
5.2
6.3
(0.4)
-3
-2-1
0
12
3
4
56
7
1998 1999 2000 2001 2002
Combined Ratio:Impact of Reserve Changes (Points)
Source: ISO, A.M. Best, MorganStanley.
Adverse reserve development totaling an estimated $23 billion
added more than 6 points to the p/c combines ratio in 2002
SOLVENCY ISSUES
P/C Company Insolvency Rates,1993 to 2002
Source: A.M. Best; Insurance Information Institute
1.20%
0.58%
0.21%0.28%
0.79%
0.60%
0.23%
1.02% 1.03%
1.33%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
•Insurer insolvencies are increasing•10-yr industry failure rate: 0.72%
•Failure rating for B+ or better rating: 0.49%•Failure rate for D through B rating: 1.29%
383030
10-yr Failure Rate
= 0.72%
Reason for P/C Insolvencies(218 Insolvencies, 1993-2002)
Unidentified17%
Impaired Affiliate3%
Overstated Assets2%
Change in Business
3%
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
INVESTMENT PERFORMANCE:
$0
$9
$18
$27
$36
$45
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03E
Net Investment Income
History
1997 Peak = $41.5B
2000= $40.7B
2001 = $37.7B
2002 = $36.7B
2003E = $35.9B
Bil
lion
s
(US
$)
Investment income fell 2.8%in 2002 and 0.3% in Q1 of 2003 (v. Q1:2002) due primarily to historically low interest rates
Note: 2003 estimate is based on annualized first quarter investment income of $8.984 billion.Source: A.M. Best, Insurance Information Institute
-$5.6 Billion
0%
2%
4%
6%
8%
10%
12%
14%
16%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
*
3-Month T-Bill 1-Yr. T-Bill 10-Year T-Note
Interest Rates: Lower Than They’ve Been in Decades
*As of June 13, 2003.Source: Board of Governors, Federal Reserve System; Insurance Information Institute
1. Historically low interest rates are the primary driver behind lower investment yields. Nevertheless, overall insurer investment performance outpaces all major market indices and almost every major category of mutual fund.
2. 66% of the industry’s invested assets are in bonds
-30%
-20%
-10%
0%
10%
20%
30%
40%
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
*As of August 8, 2003.Source: Ibbotson Associates, Insurance Information Institute
Total Returns for Large Company Stocks: 1970-2003*
2002 was 3rd consecutive year of decline for stocks
Will it be the last?
S&P 500 up 11.1% so
far this year
Property/Casualty Insurance Industry Investment Gain*
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.6$40.3
$57.9
$51.9
$56.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 02 03E
*Investment gains consists primarily of interest, stock dividends and realized capital gains and losses.Source: Insurance Services Office; Insurance Information Institute estimate annualized as of 3/31/03.
Investment gains are simply returning to “pre-bubble” levels
-$600
-$500
-$400
-$300
-$200
-$100
$0
$100
$200
$300
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02
03E
04F
05F
06F
07F
08F
Bu
dg
et
De
fic
it (
$ B
illio
ns
)
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
% G
DP
Deficit % GDP
Source: Congressional Budget Office, Office of Management and Budget (July 2003); Insurance Information Institute
Federal Budget Deficit:Is it Out of Control?
Record Deficits:
FY 2003: $455B
2004: $475
Yield on 10-Year US Treasury Notes
3.20%3.31%
3.42%
3.67%3.73%
3.93%
4.18%
4.29%4.40%
3.00%
3.25%
3.50%
3.75%
4.00%
4.25%
4.50%
13-Jun 20-Jun 27-Jun 3-Jul 8-Jul 18-Jul 25-Jul 1-Aug 8-Aug
…But is the Bond BubbleAbout to Burst? Rates Will Rise!
Source: Board of Governors of the Federal Reserve; Insurance Information Institute
WHY RATES WILL RISE• Expectation of
improving economy• Rotation out of bonds
into stocks• Recording breaking
government budget deficits leading to massive borrowing
The yield on 10-year notes is up 109 basis
points in 7 weeks despite the Fed’s easing
CAPACITY CRUNCH?
U.S. & Global CapacityBermudaLloyd’s
Captives
$0
$50
$100
$150
$200
$250
$300
$350
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 0203*
U.S. Policyholder Surplus: 1975-2003*
Source: A.M. Best, Insurance Information Institute *First Quarter
$ B
illi
ons
Surplus (capacity) peaked at $336.3 Billion in mid-1999 and fell by 15.2% ($51 billion) to $285.2 billion at year-end 2002 (a trough?)
•Surplus during the first quarter of 2003 rose by $4B or 1.4% to $289.2B
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
$47 Billion
Capacity of Lloyd’s Market
£8.9
£10.9£10.2 £10.0
£10.3 £10.2£9.9 £10.1
£11.1
£12.2
£14.4
£8
£9
£10
£11
£12
£13
£14
£15
93 94 95 96 97 98 99 00 01 02 03
After remaining stable at around GBP10bn, Lloyd’s capacity has increased by over 40% in the last three years.
2003 capacity is GBP14.4bn, 18% higher than 2002.
Source: Lloyd’s
Number of Captive Formations & Liquidations 1993 to 2002
294
305
250
245
316
462
238
289
243 29
0
150
113
103
102 13
5
154
156
170 20
2
311
0
100
200
300
400
500
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
New Captives Liquidated CaptivesSource: AM Best, Tillinghast-Towers Perrin
Hard market fueling captive formation
Corporate collapses and captive consolidations fueled the upward trend in captive liquidations in 2002.
PRICING
-10%
-5%
0%
5%
10%
15%
20%
25%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
Current $ Real $
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
Strength of Recent Hard Markets by Real NWP Growth
Real NWP Growth During Past 3 Hard Markets
1975-78: 8.6%
1985-87: 14.5%
2001-03F: 9.4%
1975-78 1985-87 2001-03
*2003 figure is estimate on first quarter result.
Insurance is the Biggest Concern of Small Business Owners
Regulations9%
Competition7%
Labor Qlty.10%
Taxes17%
Poor Sales18%
Labor Costs5%
Inflation2%
Insurance28%
Credit/Int. Rates2%
Source: National Federation of Independent Business (June 2003); Insurance Information Institute
Council of Insurance Agents & Brokers Rate Survey
Second Quarter 2003
Rate Increases By Line of BusinessRate Increases By Line of Business
No Change Up 1-10% 10-20% 20-30% 30-50% 50%-100% >100%Change Up 1-10% 10-20% 20-30% 30-50% 50%-100% >100%
Comm. Auto 8% 31% 43% 8% 2% 0% 0%
Workers Comp 11% 27% 28% 15% 3% 0% 2%
General Liability 10% 32% 41% 9% 1% 0% 0%
Comm. Umbrella 8% 21% 28% 27% 6% 3% 0%
D&O 3% 17% 30% 19% 13% 2% 1%
Comm. Property* 17% 32% 23% 5% 2% 0% 0%
Construction Risk 8% 18% 26% 17% 7% 1% 1%
Terrorism* 27% 18% 13% 4% 1% 0% 1%
Business Interr. 21% 38% 16% 3% 0% 0% 0%
Surety Bonds 12% 17% 13% 9% 2% 0% 1%
Med Mal 1% 2% 4% 20% 11% 12% 6%Source: Council of Insurance Agents & Brokers.
P/C Soft Spots: % Accounts With Negative Price Change(2nd Qtr 2003)
17%
9%
3%2% 2%
1%
9%
2%
0%
5%
10%
15%
20%
Comm Prop BizInterruption
Terror Comm Auto WC GL EPL Umbrella
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Property-related coverages are clearly the softest segment
of the p/c market today.
Proportion of Accounts Renewing With Increase of 20% or More,
(Select Lines)
Source: Council of Insurance Agents and Brokers; Insurance Information Institute
54%
38% 38%32%
20%
78%
53% 53% 53%
35%
10%
23%
48%
38%
63%
5%
14%
23%
2002:II 2002:III 2002:IV 2003:I 2003:II
D&O Construction Risk GL Terrorism
Urban Legend Insurance is More Expensive than Ever, Putting Businesses
Over the Edge
Cost of Risk per $1,000 of Revenues: 1990-2002E
$6.10
$6.40
$8.30$7.70
$7.30
$6.49
$5.70$5.25
$5.71
$5.20$4.83
$5.55
$6.94
$4
$5
$6
$7
$8
$9
$10
90 91 92 93 94 95 96 97 98 99 00 01E 02E
Source: 2001 RIMS Benchmark Survey; Insurance Information Institute estimates.
•Cost of risk to corporations fell 42% between 1992 and 2000
•Estimated 15% increase in 2001, 25% in 2002
Cost of risk is still less than it was a decade ago!
TORT-ureABUSE OF THE U.S. CIVIL
JUSTICE SYSTEM
TORT-ure
• Asbestos• “Toxic” Mold• Medical Malpractice• Construction Defects• Lead• Fast/Fattening Foods & Obesity• Reality TV• Arsenic Treated Lumber • Guns• Genetically Modified Foods (Corn)• Pharmaceuticals & Medical Devices• Security exposures (workplace violence, post-9/11 issues)• Slavery• What’s Next?
New
New
Average Jury Awards1994 vs. 2001
419 187 333759
1,185 1,1401,744
1,365
323789
1,7272,288
3,902
9,113
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
Overall VehicularLiability
PremisesLiability
BusinessNegligence*
WrongfulDeath
MedicalMalpractice
ProductsLiability
($00
0)
1994 2001
*Figure is for 2000 (latest available)Source: Jury Verdict Research; Insurance Information Institute.
Trends in Million Dollar Verdicts*
4%
10%
8%
21%
21%
36% 42
%
4%
11%
11%
27%
25%
43%
59%
6%
10% 17
%
44% 47
% 54%
68%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
VehicularLiability
PersonalNegligence
PremisesLiability
BusinessNegligence
GovernmentNegligence
MedicalMalpractice
ProductsLiability
95-97 98-99 2000-2001
*Verdicts of $1 million or more.Source: Jury Verdict Research; Insurance Information Institute.
Very sharp jumps in multi-million dollar awards in recent years across virtually all types of defendants
Cost of U.S. Tort System($ Billions)
Source: Tillinghast-Towers Perrin. 2005 forecasts from Tillinghast.
$129 $130$141 $144 $148
$159 $156 $156$167 $169 $180
$205
$298
$0
$50
$100
$150
$200
$250
$300
$350
90 91 92 93 94 95 96 97 98 99 00 01 05F
Tort costs consumed 2.0% of GDP annually on average since 1990, expected to rise to 2.4% of GDP by 2005!
Per capita “tort tax” expected to rise to $1,000 by 2005, up from $721 in 2001
Even a modest reduction in tort costs would be more stimulative than the $674 billion Bush tax/spending plan
Where the Tort Dollar Goes(2000)
Source: Tillinghast-Towers Perrin
Awards for Non-Economic
Loss22%
Claimants' Attorney Fees
17%Awards for
Economic Loss20%
Defense Costs16%
Administration25%
Tort System is extremely inefficient:
Only 20% of the tort dollar compensates victims for economic losses
At least 58% of every tort dollar never reaches the victim
Personal, Commercial & Self (Un) Insured Tort Costs*
$17.0
$49.1 $57.2$17.1
$51.0
$70.9
$5.4
$20.1
$29.6
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
1980 1990 2000
Commercial Lines Personal Lines Self (Un)Insured
Bil
lion
s
Total = $39.5 Billion
*Excludes medical malpracticeSource: Tillinghast-Towers Perrin
Total = $120.2 Billion
Total = $157.7 Billion
States With the Most Top 10 Jury Awards1995-2002
18
1312
7
54 4
0
5
10
15
20
NY CA TX MO FL GA AL
Source: Lawyers Weekly USA; Insurance Information Institute.
•79% (63/80) of Top 10 awards came from just 7 states between 1995-2002
•TX has 3rd largest number of giant awards
•23 States have had no award in the top 10
Business Leaders Ranking of Liability Systems for 2003
Best States1. Delaware2. Nebraska3. Iowa4. South Dakota5. Indiana6. North Dakota7. Utah8. Virginia9. Minnesota10. New Hampshire
Worst States41. New Mexico42. South Carolina43. Hawaii44. California45. Arkansas46. Texas47. Louisiana48. Alabama49. West Virginia50. Mississippi
Source: US Chamber of Commerce States Liability Systems Ranking Study; Insurance Info. Institute.
The Nation’s Judicial Hellholes:An International Embarrassment
Source: American Tort Reform Association; Insurance Information Institute
City of St. Louis, MO
CALIFORNIA
Alameda County
Los Angeles County
San Francisco County
Orleans Parish, LA
MIAMI
Madison County, IL
TEXAS
Jefferson County
Hidalgo County
Starr County
Mississippi’s 22nd Judicial
District
There is a Glimmer of Hopefor Tort Reform
Best Chance for Tort Reform in Years
• Medical MalpracticeStates—already happening: 20+ states have caps
Federal reform discussed in Congress but bill failed in Senate
• Class Action ReformClass Action Fairness Act
Presently 2 or 3 votes short in the Senate. Vote in September
• Asbestos ReformFairness in Asbestos Injury Resolution of 2003; Sept. vote?
• Punitive Damages—What’s ReasonableSupreme Court ruled favorably in Campbell v. State Farm
Are We Finally Seeing Punitives Reigned In by the Supreme Court?
10:1 ??
145:1
500:1
0
100
200
300
400
500
1996 2003 The Future?
Rat
io o
f P
un
itiv
e A
war
d t
o C
omp
ensa
tory
Sources: Insurance Information Institute
In Campbell v. State Farm (2003) the Supreme Court ruled in a 22-year old Utah case that punitive awards that were 145 to 1 were
excessive (actual damages in the case, which involved insurer bad faith were $1
million)
In BMW of North America v. Gore (1996)the Supreme Court ruled in an Alabama case that
punitive awards that were 500 to 1 were excessive (actual damages in the case, which involved the repainting of a car, were $4,000 but the jury awarded the plaintiff $2 million)
In Campbell v. State Farm the Court added that “…few awards exceeding a single- digit ratio between punitive and compensatory damages will satisfy due process…Single digit multipliers are
more likely to comport with due process, still achieving the State’s deterrence and
retribution goals…”
INFLUENCE OF TORTS ENVIRONMENT AND LEGAL
LIABILITY TRENDS ON PRICING
Liability: Average Cost per $1,000 of Revenue*2001 vs. 2002
$1.25
$0.65 $0.67
$0.33
$0.17$0.11
$0.23
$1.96
$0.94
$0.72
$0.38$0.24 $0.26
$0.13
$0.00
$0.50
$1.00
$1.50
$2.00
$0 - $200M $201M-$500M $501M-$1B $1B-$5B $5B-$10B $10B+ All
2001
2002
*Across entire liability program
Source: Marsh, 2002 Limits of Liability Report
Average Cost per $1 Million Liability Coverage2001 vs. 2002
$3,8
01
$3,8
30 $5,3
17
$5,3
68
$5,5
31
$8,2
13
$5,4
11
$4,8
78
$5,6
09
$6,4
64
$6,0
54 $7,6
06
$7,1
06
$12,649
$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000
$10,000$11,000$12,000$13,000
$0 - $200M $201M-$500M
$501M-$1B $1B-$5B $5B-$10B $10B+ All
($00
0)
2001
2002
Source: Marsh, 2002 Limits of Liability Report
Excess Layer Hit With Leveraged Impact of Increase in Trend
Assumptions: Primary Limit of $1 M
Ground Up Trend of 7.0%
ClaimTotal Loss
Primary Loss
Excess Loss
% Loss Trend
Total Loss
Primary Loss
Excess Loss
1 0.900 0.900 0 7.0 0.963 0.963 02 1.000 1.000 0 7.0 1.070 1.000 0.0703 2.000 1.000 1.00 7.0 2.140 1.000 1.140
Total 3.900 2.900 1.00 4.173 2.963 1.210
7.0% 2.2% 21.0%Loss Trend:Trend in excess layers is 3 times the ground-up
trend and nearly 10 times the primary trend
INFLUENCE OF MASS TORTS AND LEGAL LIABILITY TRENDS ON
AVAILABILITY
Average Total Limits Purchased by All Firms* ($ Millions)
*Includes underlying primary limits
Source: Limits of Liability 2002, Marsh, Inc.
$77.9
$85.8$83.2
$85.9$88.7
$99.1
$105.0$101.8
$95.7
$50
$60
$70
$80
$90
$100
$110
1994 1995 1996 1997 1998 1999 2000 2001 2002
Limits purchased fell by 9.9% between 2000 and 2002. Price/capacity are issues.
Average Underlying Limits(Attachment Points)
* Percent Change 2002 from 2001Source: Marsh, 2002 Limits of Liability Report
$1.8 $1.9 $1.9
$1.0
$1.2
$1.4
$1.6
$1.8
$2.0
All
2000 2001 2002
+0%*
Average Limits by Revenue Class 2000-2002 ($ Millions)
* Percent Change 2002 over 2001.Source: Marsh, 2002 Limits of Liability Report
$45 $5
9 $88
$148
$256
$337
$92
$146
$241
$338
$50 $7
0
$48
$94
$256
$376
$61
$0
$50$100
$150$200
$250
$300$350
$400
$0 - $200 M $201 - $500M
$501M - $1B $1 - $5B $5 - $10B $10+ B
Mill
ions 2000 2001 2002
-6.2%* -3.3%* -6.4%* 1.4%* 0%* -10.4%*
Russian Roulette? Many risks skimping on coverage to save money
Excess Liability Market Capacity
Source: Marsh, 2002 Limits of Liability Report
$1,575$1,710
$2,045$1,941
$2,011
$1,721
$1,405$1,334
$1,432
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
1994 1995 1996 1997 1998 1999 2000 2001 2002p
Mil
lio
ns Capacity has dropped 23% since peaking in 2000
CASE STUDIES
Possible Top Risks from Current Perspective
27.026.5
25.5
24.524.0
26.0
24.0
20
22
24
26
28
30
EMF/Electrosmog
BSE (MadCow)
GM Food &Labelling
Eco/BioDamage
DeterioratingAcct. Stds.
AccidentalGM/non-GM
Mixing
GM Crops
Source: Swiss Re: Emerging Risks
No shortage of emerging problems, other include: Generic Drugs, MTBE, Softeners, Xenotransplants, Nanotechnology, Asbestos, Stress in the Workplace, Repetitive Strain Disorders, Antibiotic resistance, Chem Additives to Building Materials (IAQ)
ASBESTOS
Who Will Pay for the US Asbestos Mess?
Source: Tillinghast-Towers Perrin; Insurance Information Institute
US Insurers30%Asbestos
Defendants39%
Foreign Insurers
31%
Estimated Total US Settlements & Expenses = $200 billion
$78 billion $60 billion
$62 billion
MEDICAL MALPRACTICE
Medical Malpractice: Tort Cost Growth is Skyrocketing
$ Billions
$1.2
$1.5
$1.9
$2.3
$5.4 $6
.5 $7.1
$7.0
$6.8
$7.1
$7.2 $7
.9 $8.7 $9
.4 $10.
8
$11
.6
$12.
4
$13.
5
$14.
6 $16.
2
$17.
6 $19.
4 $20.
9
$2.9
$3.6 $4
.4
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
$20
$22
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
Sources: Tillinghast-Towers Perrin, US Bureau of Labor Statistics, Insurance Information Institute
•Over the period from 1990 through 2000, medical malpractice tort costs rose 140%, more than double the 60% increase in medical costs generally over the same period!
•Over the period from 1975 through 2000, medical malpractice tort costs skyrocketed by 1,642% while medical costs generally rose 449%, nearly 4 times as fast!
WORKERS COMP
WC Combined Ratios
Source: A.M. Best, NCCI
*Includes dividends to policyholdersAccident year is developed to ultimate;2002estimate from NCCI.
Calendar Year vs. Ultimate Accident Year Countrywide—Private Carrier*
123 122
109
10197
100
122
110
101
108
115117 118
9095
100105110115120125130135140
90 91 92 93 94 95 96 97 98 99 00 01 02P
Per
cent
Calendar Year
1.9 points due to 9/11
+1.0% +1.7%+5.8%
+5.7%+6.4%
+7.3%+7.8%
+7.7%+7.0%
-3.1% -2.8%+4.9%
5
7
9
11
13
15
17
Accident Year
WC Indemnity Claim Costs Has Accelerated Since 1995
Indemnity Claim Cost (000s)
Annual Change 1991-1995: +0.3%
Annual Change 1996-2002p: +6.8%
Based on data through 12/31/2001, developed to ultimate, as of 12/2/2002; 2002 data are preliminary.Based on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policies
Source: NCCI
+6.8%+1.3%
+5.1%+6.4%
+7.3%+5.7%
+7.4%
+7.6%
+10.7%
+12.0%
-2.1%+9.0%
6
7
8
9
10
11
12
13
14
15
16
Accident Year
WC Medical Claim Costs Accelerating Too
Medical Claim Cost (000s)
Annual Change 1991-1995: +4.0%
Annual Change 1996-2001: +8.1%
Based on data through 12/31/2001, developed to ultimate, as of 12/2/2002Based on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policies
Source: NCCI
Average Payment per Claim for Chiro. Visits
$468$771 $824
$1,191 $1,209$1,539
$2,317
$4,836
$0
$1,000
$2,000
$3,000
$4,000
$5,000
FL MA GA CT WI PA CA TX
Pay
men
t pe
r C
laim
to
Chi
ros
Source Eccleston, Wang, Watson and Zhao (2000) in Targeting More Costly Care: Area Variation in Texas Medical Costs and Utilization, Workers Compensation Research Institute (2002).
Major problems with payments to chiropractors in CA, TX
Schwartzenegger’s Solution to California’s Chiro Problem
You will terminate all
excess utilization!
MOLD
$0
$50
$100
$150
$200
$250
Wa
ter
Da
ma
ge
Pa
id L
os
se
s*
($M
illio
ns
)
0
5000
10000
15000
20000
25000
30000
Cla
im C
ou
nt
Paid Losses
Claim Count
Source: Texas Department of Insurance; Insurance Information Institute
* Data are for TDI Cause 61: Discharge – Other Damage. Not all claims in cause 61 are mold and mold claims may also arise from other (non-water) causes of loss.
Texas: Mold Losses/Claims Are Finally Moderating*
California: Surging Water Claim Frequency and Costs:
Symptom of Growing Mold Problem
$224.1
$298.9$316.5
$441.6
$496.3
$562.4
24%
36%
27%
32%33%
31%
$100
$150
$200
$250
$300
$350
$400
$450
$500
$550
$600
1997 1998 1999 2000 2001 2002
20%
22%
24%
26%
28%
30%
32%
34%
36%
38%
Paid Water Losses ($ Mill) Water Claims as % of All Homeowners Claims
Source: Insurance Information Network of California; Insurance Information Institute
•Water losses paid rose 151% from 1997 to 2002 and 77% since 1999
•Water claims accounted for less than 1/4 of all HO claims in 1997, now they for 1/3.
California may be in a drought, but homeowners say they’re drowning
Where are the Next Battlefields for Mold?
• Homeowners issue probably crested in 2002• Migration to commercial area affects many lines:
Commercial Property Commercial LiabilityProducts Liability Builders Risk/Construction DefectsWorkers Comp…
• Hot Spots: Apartments/Condos/Co-ops Office Structures (e.g., IBM) Schools Municipal BuildingsCars? (GM case in NC)
• Trend toward class actions since science doesn’t support massive individual non-economic damagesMuch more lucrative for trial lawyers to form class
Source: Insurance Information Institute.
Construction Defect Litigation Destroying CA Condo Market
$1.87
$2.95
$1.00
$1.25
$1.50
$1.75
$2.00
$2.25
$2.50
$2.75
$3.00
1998 2000
Source: ISO, Insurance Information Institute
Condo construction in parts of CA has come to a virtual stop.
Insurer costs rose 58% in just 2 years!
Ratio of Losses Paid Out to Premiums Taken In
“Right-to-Cure” laws now in 5
states: AZ, CA, NV, TX, WA
16 considering such laws.
CORPORATE GOVERNANCE
Financial Restatements Filed
116
158
216233
270
330
0
50
100
150
200
250
300
350
1997 1998 1999 2000 2001 2002
Sources: Huron Consulting Group; Insurance Information Institute
The number of financial restatements is rising even thought the number of publicly
traded companies is falling.
Impact of Sarbanes-Oxley??
Financial Restatements by Industry (1987-2002)
Transp & Comm12%
Computer Mfg.11%
Ag & Mining6%
Trade10%
Software15%
Services11%
Fin, Ins, Real Est.14%
Manufacturing21%
Source: Huron Consulting; Insurance Information Institute
Financial Restatements by Revenue Size (1998-2002)
$500-$999M7%
$100-$249M17%
Greater than $1B18%
$250-$499M10%
Under $100M48%
Source: Huron Consulting; Insurance Information Institute
OBESITY/FAST FOOD
Fast Food/Junk Science:Edible Asbestos?
•Are the food service & manufacturing industry’s vulnerable to suits over obesity?•McDonald’s sued in late 2002 over allegations that their food makes people fat•Kraft sued earlier this year over trans fats in Oreo cookies
CYBER RISK
The Cost of Worms & Viruses($ Billions)
Source: USA TODAY, September 3, 2003
$10bn
$9bn
$80m
$1bn
$590m to $2bn
$2.6bn
$0 $2 $4 $6 $8 $10 $12
Melissa virus (1999)
Slammer worm (2003)
Nimda virus (2001)
Code Red I and II worms (2001)
Klez worm (2002)
Love Bug virus (2000)
Estimated cleanup and lost productivity costs of worms and viruses can add up to
billions of dollars!
Cyber-Risk Gaps in Insurance Coverage
Source: Ernst & Young 2003 Global Information Security Surveyof 1,400 organizations from 66 countries
33%
34%
22%
7%
0 5 10 15 20 25 30 35 40
Risks covered bygeneral policies
Do not haveinsurance
Do not know theanswer
Insured by aspecific policy
Despite increasing risks, only 7% of respondents knew they had specific insurance geared to
cyber-risks!
EMPLOYMENT PRACTICES LIABILITY
Employment Practices Liability:Median Compensatory Award ($000)
Source: Trends in Employment Practices Liability, LRP Publications.
($ 000)
$128.0$140.9
$150.8 $146.6
$182.5$175.0
$200.0
$50
$70
$90
$110
$130
$150
$170
$190
$210
1996 1997 1998 1999 2000 2001 2002
CONSTRUCTION DEFECTS
Construction Defect Problem• Growing number of lawsuits target:
Builders, Contractors, Developers, Sub-Contractors, Material Suppliers, Product Manufacturers, Architects & Engineers.
• Construction defect claims include:Subsidence, collapse, cracks in walls & foundations.Leaking roofs, windows, doors, foundations.Dry rot of wood or other building materials, pest
infestations.Mold, code violations, improper specification of building
materials.
• Hotspots:California, Nevada, Colorado, Texas, the Carolinas, Florida,
New York.
Construction Defect Litigation Destroying CA Condo Market
$1.87
$2.95
$1.00
$1.25
$1.50
$1.75
$2.00
$2.25
$2.50
$2.75
$3.00
1998 2000
Source: ISO, Insurance Information Institute
Condo construction in parts of CA has come to a virtual stop.
Insurer costs rose 58% in just 2 years!
Ratio of Losses Paid Out to Premiums Taken In
“Right-to-Cure” laws now in 5
states: AZ, CA, NV, TX, WA
16 considering such laws.
TERRORISM
Terrorism:Sept. 11 Industry Loss Estimates
($ Billions)
Life$2.7 (7%)
Aviation Liability$3.5 (9%)
Other Liability
$10.0 (25%)
Biz Interruption$11.0 (27%)
Property -WTC 1 & 2$3.5 (9%)
Property - Other
$6.0 (15%)
Aviation Hull$0.5 (1%)
Event Cancellation
$1.0 (2%)
Workers Comp
$2.0 (5%)
Consensus Insured Losses Estimate: $40.2BSource: Insurance Information Institute
Status of 9/11 Death Claims (Through August 2003)
Claim Filed and Compensation Sought (1,035)
34%
Claim Filed but No
Compensation Sought (205)
7%
No Claim Filed (1,776)
59%
Source: September 11 Victims Compensation Fund; Insurance Information Institute
Out of 3,016 9/11 deaths (excl. hijackers), only 34%of claimants had sought
compensation by Aug. 29, 2003. The deadline is Dec. 22.
Will many choose litigation?
•Fund has paid $623.1 million to date
•Total could exceed $3 billion
OTHER
Blackouts???
SARS: Limited P/C Insurance Industry Exposure
•Are there any potential SARS-related p/c insurance exposures?
Workers comp? Mostly health care workers
Event cancellation? Fear of SARS insufficient, but legitimate claims possible
CGL? Several courts have ruled that viruses/bacteria (e.g., E. Coli, Legionnaires’ disease) not covered
EIL? Court decisions + fact that at least half of EILs have “naturally occurring substance” exclusions preclude coverage.
Summary
• Profitability on the mend, but for how long?
• Underwriting still needs improvement
• Economic & Investment outlook uncertain
• Tort system: A partial fix is in underway
• Emerging Risks: No Shortage
• Constant Challenge for Underwriters
Insurance Information Institute On-Line
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