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Excess Casualty Insurance Markets in the Post-Crisis World: A Looming Tort Crisis? March 9, 2010 Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org Presentation Outline I. Insurance Industry Financial Overview & Outlook Profitability Premium Growth Underwriting Performance Financial Market (Investment) Overview Financial Strength II. Tort Environment/Casualty Risk Assessment Profitability Premium Growth III. The Economic Storm: Financial Crisis, Recession & Recovery Exposure Overview & Outlook IV. Public Policy Initiatives Affecting Casualty Insurance Markets Financial Service Regulation/Systemic Risk Terrorism Risk Insurance Program in Jeopardy Q&A 2 I. P/C (Re)Insurance Financial Performance Profitability, Premiums, Investment Performance, Capacity & Financial Strength 3 Profitability A Profit Recovery is Underway, But Is it Enough and Can it Endure? 4 $65,777 $30,600 $44,155 $38,501 $30,029 $20,559 $20,598 $2,379 $10,870 $3,046 $10,000 $19,316 $20,000 $5,840 $30,000 $14,178 $40,000 $24,404 $50,000 $21,865 $60,000 2005 ROE*= 9.4% 2006 ROE = 12.2% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009:Q3 ROAS1 = 4.5% $30,773 $70,000 P-C Industry profits for fullyear 2009 were up sharply from 2008, but are still well below pre-crisis levels $36,819 $80,000 $62,496 P/C Net Income After Taxes 1991–2009P ($ Millions) $0 -$10,000 -$6,970 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09P * ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 4.5% ROAS for 2008 and 5.9% for the first 9 months of 2009. 2009:Q3 net income was $20.5 billion excluding M&FG. Sources: A.M. Best, ISO, Insurance Information Institute ROE: P/C vs. All Industries1987–2009:Q3* (Percent) P/C Profitability is Cyclical and Volatile 20% Katrina, Rita, Wilma 15% 10% Sept. 11 Hugo 5% 4 Hurricanes Lowest CAT Losses in 15 Years Andrew 0% Financial Crisis* Northridge -5% 87 88 89 90 91 92 93 94 95 96 97 98 US P/C Insurers * Excludes Mortgage & Financial Guarantee in 2008 and 2009 through Q3. Sources: ISO, Fortune; Insurance Information Institute. 99 00 01 02 03 04 05 06 07 08 09:Q3 All US Industries 6 ROE vs. Equity Cost of Capital: US P/C Insurance:1991-2009:Q3* (Percent) The P/C Insurance Industry Fell Well Short of Its Cost of Capital in 2008/09 18% 16% 14% 4% 2% 0% -4.6 pts -7.1 pts 6% -9.0 pts -13.2 pts 8% -1.7 pts 10% +2.3 pts 12% The Cost of Capital is the Rate of Return Insurers Need to Attract and Retain Capital to the Business US P/C Insurers Missed Their Cost of Capital by an Average 6.7 Points from 1991 to 2002, but On Target or Better 2003-07, but Fell Well Short in 2008/09 -2% 91 92 93 94 95 96 97 98 99 ROE * Excludes mortgage and financial guarantee insurers Source: The Geneva Association, Insurance Information Institute 00 01 02 03 04 05 06 07 08*09Q3* Cost of Capital 7 A 100 Combined Ratio Isn’t What It Once Was: 90-95 is Where It’s At Now Combined ratio of about 100 generated a 6% ROE in 2009, 10% in 2005 and16% in 1979 Combined Ratio / ROE 110 105 15.9% 14.3% 100.6 100 100.1 97.5 100.7 12.7% 15% 101.0 99.5 9.6% 95 18% 12% 9% 92.6 8.9% 5.9% 6% 90 4.5% 85 3% 0% 80 1978 1979 2003 2005 Combined Ratio 2006 2008* 2009:Q3 ROE* Combined Ratios Must Be Lower in Today’s Depressed Investment Environment to Generate Risk Appropriate ROEs * 2009 figure is return on average statutory surplus. 2008 and 2009 figures exclude mortgage and financial guarantee insurers Source: Insurance Information Institute from A.M. Best and ISO data ei ns ur an ce ** R Pe rs on Pv a l L in tP as es s Pe Au rs to Pr o C om p m er C om cial m lA C ut re o di t C om m P C om rop m C Fi de as lit y/ Su W re ar ty ra nt y Su rp lu s Li M ne ed s M al W C Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line* 0.0% -1.0% -2.0% -3.0% -4.0% -1.8%-1.8% -2.0% -1.9%-2.1% -3.6% -3.1% -3.3%-3.3% -3.7% -4.3% -5.0% -5.2% -6.0% -5.7% -7.0% -7.3% -8.0% Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline *Based on 2008 Invested Assets and Earned Premiums **US domestic reinsurance only. Source: A.M. Best; Insurance Information Institute. 11 P/C Reserve Development, 1992–2011E $20 23.2 6 Impact on Combined Ratio (Points) $15 $10 13.7 11.7 2.3 4 9.9 7.3 2 1 0 $0 -2.1 -$5 -$10 -2.6 -4.1 -6.6 -8.3 -6.7 -9.5 -9.9 -9.8 -$15 -5 -6 11E 10E 07 06 05 04 03 02 01 00 99 98 97 96 95 94 93 92 09 -14.6-16 -15 -$20 -2 -4 08 Prior Yr. Reserve Release ($B) $25 $5 8 Prior Yr. Reserve Development ($B) Impact on Combined Ratio (Points) $30 Reserve Releases Will Expected to Taper Off in 2010 and Drop Significantly in 2011 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: Barclay’s Capital; A.M. Best. 12 Net Prior Year Reserve Development by Line, 2008 Reserve release have contributed to the bottom line for several years, but pace will eventually slow Sources A.M. Best, ISO, Barclay’s Capital Research. 13 110 105 100 95 106.4 107.4 105.8 108.3 101.6 105.3 105.6 109.2 107.8 109.2 110.1 110.0 115.9 112.3 107.3 100.8 100.1 96.6 98.3 96.0 100.9 100.6 92.4 93.9 95.5 97.4 105.1 105.5 101.9 105.7 105.9 109.4 115 106.9 107.8 108.4 111.8 120 115.7 114.7 Calendar Year vs. Accident Year P/C Combined Ratio: 1992–2010E1 90 85 80 92 93 94 95 96 97 98 99 00 01 Calendar Year 02 03 04 05* 06 07 08 09E 10E Accident Year Accident Year Results Show a More Significant Deterioration in Underwriting Performance. Calendar Year Results Are Helped by Reserve Releases 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: Barclay’s Capital; A.M. Best. 14 Number of Years with Underwriting Profits by Decade, 1920s–2000s Number of Years with Underwriting Profits 12 10 10 8 8 7 6 6 5 4 4 3 2 0 0 1980s 1990s 0 1920s 1930s 1940s 1950s 1960s 1970s 2000s* Underwriting Profits Were Common Before the 1980s (40 of the 60 Years Before 1980 Had Combined Ratios Below 100) – But Then They Vanished. Not a Single Underwriting Profit Was Recorded in the 25 Years from 1979 Through 2003 * 2000 through 2009. 2009 combined ratio was 100.7 through Q3. Note: Data for 1920–1934 based on stock companies only. Sources: Insurance Information Institute research from A.M. Best Data. 16 Performance by Segment: Commercial/Personal Lines & Reinsurance 17 Calendar Year Combined Ratios by Segment: 2008-2010P 110 108 106 104 102 100 98 96 94 92 90 107.2 Commercial lines and reinsurance combined ratios are expected to deteriorate in 2010 while personal lines is expected to improve 103.7 103.6 101.0 101.2 100.3 100.5 99.8 92.2 Personal Lines Commercial Lines 2008 2009E US Reinsurance 2010P Overall deterioration in 2010 underwriting performance is due to expected return to normal catastrophe activity along with deteriorating underwriting performance related to the prolonged commercial soft market Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute. 18 Number of Top 10 Jury Awards, 1995 - 2007 25 22 22 TX, NY and CA lead the U.S. in jumbo-size jury awards 20 20 17 15 10 8 7 6 5 5 4 3 2 2 2 2 1 1 1 Source: LawyersWeekly USA,, January 22, 2008. N J N V N M SC O R D M LA TN IL G A A L D C * O M FL C A N Y TX 0 *All against Iran for terrorist activity After-Tax Return on Surplus (ROE) by Segment: 2008-2010P 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% 7.3% 6.6% 7.1% Personal lines ROEs should improve in 2010 and remain flat in commercial lines and reinsurance 5.3% 5.2% 5.3% 3.9% 1.7% Personal Lines -1.3% Commercial Lines 2008 2009E Reinsurance 2010P Profitability will rise or stabilize across most p/c lines, barring a financial crisis relapse or major catastrophic losses Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute. 21 Net Written Premium Growth by Segment: 2008-2010P 6% Personal lines will return to growth in 2010 while commercial lines and reinsurance are expected to continue to shrink 3.5% 4% 1.8% 2% 0% -2% -0.7% -1.1% -4% -1.5% -2.0% -4.0% -6% -5.6% -8% -7.9% -10% Personal Lines Commercial Lines 2008 2009E Reinsurance 2010P Rate and exposure are more favorable in personal lines, whereas a prolonged soft market and sluggish recovery from the recession weigh on commercial lines. Low catastrophe losses and ample capacity are holding down reinsurance prices while higher insurer retentions impact premiums Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute. 23 Change in Net Investment Income by Segment: 2008-2010P* Net investment income is expected to begin to recover in all segments in 2010 15% 10.7% 10% 3.4% 5% 1.9% 1.9% 0% -0.8% -5% -4.1% -10% -15% -12.8% -13.4% -16.1% -20% Personal Lines Commercial Lines 2008 2009E Reinsurance 2010P Investment income consists primarily of interest on bonds and stock dividends. Both were hit hard during the financial crisis as the Fed slashed interest rates to near zero and corporations cut dividends. A recovery in investment asset values beginning in Q2 2009—which reduced realized capital losses—has helped offset some of the decrease in investment income. Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute. 24 Investment Yield by Segment: 2008-2010P* Investment yields are shrinking across all segments—down 10 to 100 bases points since 2008 5.0% 4.6% 4.5% 4.0% 3.8% 3.5% 3.5% 3.7% 3.9% 3.9% 3.6% 3.8% 3.3% 3.0% 2.5% 2.0% Personal Lines Commercial Lines 2008 2009E Reinsurance 2010P The Fed slashed interest rates in 2008 and has kept them low since, eroding the yield on all types of bonds, especially US Treasury securities. Yields will not recover until the Fed begins monetary policy tightening. Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute. 25 96 97 98 99 00 01 02 03 04 05 07 99.5 97.6 08 09E* 10P* Commercial Multi-Peril is Expected to Continue to Perform Reasonably Well *2009E and 2010P figures are for the combined liability and non-liability components. Sources: A.M. Best; Insurance Information Institute. 97.0 108.0 06 95.1 89.8 105.4 83.8 93.8 101.9 104.9 97.7 97.3 89.0 95 CMP-Non-Liability 116.1 116.2 121.0 117.0 115.0 115.0 113.1 122.4 125.0 CMP-Liability 115.3 108.5 113.6 100.7 119.0 130 125 120 115 110 105 100 95 90 85 80 119.8 116.8 Commercial Multi-Peril Combined Ratio: 1995–2010P P/C Premium Growth Primarily Driven by the Industry’s Underwriting Cycle, Not the Economy 30 Strength of Recent Hard Markets by NWP Growth (Percent) 25% 1975-78 1984-87 2000-03 20% 15% 10% 5% 0% -5% 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 10F -10% Net Written Premiums Fell 0.7% in 2007 (First Decline Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33 During the Great Depression. Expected decline of 1.6% in 2010. Shaded areas denote “hard market” periods Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute 33 Average Commercial Rate Change, All Lines, (1Q:2004–4Q:2009) Source: Council of Insurance Agents & Brokers; Insurance Information Institute 3Q09 4Q09 -6.0% 2Q09 -4.9% -5.8% 1Q09 -5.1% -6.4% -11.0% -12.9% -13.5% -12.0% -13.3% -16% 4Q08 3Q08 2Q08 1Q08 4Q07 3Q07 2Q07 -11.8% -5.3% -3.0% -2.7% 1Q07 4Q06 3Q06 2Q06 1Q06 4Q05 3Q05 2Q05 1Q05 3Q04 2Q04 4Q04 -4.6% KRW Effect -11.3% -14% Magnitude of Price Declines Shrank During Crisis, Reflecting Shrinking Capital, Reduced Investment Gains, Deteriorating Underwriting Performance, Higher Cat Losses and Costlier Reinsurance -9.6% -12% -8.2% -10% -9.7% -8% -9.4% -6% -7.0% -4% -5.9% -2% -3.2% 0% -0.1% 1Q04 (Percent) Market Remains Soft as Capital Restored and Underwriting Losses Fall 34 Change in Commercial Rate Renewals, by Line: 2009:Q4 Su re ty &O D EP L In te rru pt W io C n Bu s. ct io n C on st ru ut o lA m om C br el la U m m om C L G Al lC om lP ro p m er ci al Percentage Change (%) 1.0% 0.2% 0.0% -1.0% -2.0% -2.3% -3.0% -4.0% -4.0% -5.0% -6.0% -7.0% -5.0% -5.6% -6.0% -3.9% -1.9% -3.7% -4.6% -5.8% Most Major Commercial Lines Renewed Down in Q4:2009 by Roughly the Same Margin as a Year Earlier Source: Council of Insurance Agents and Brokers; Insurance Information Institute. 35 Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2009:Q4 Percentage Change (%) Peak = 2004:Q4 +28.5% Market has Been Soft for 6 years and Remains Soft as Capital is Restored and Underwriting Losses Fall KRW Effect Source: Council of Insurance Agents and Brokers; Insurance Information Institute. Trough = 2004:Q4 -13.6% 36 Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2009:Q4 1999:Q4 = 100 Pricing today is where is was in Q2:2001 (pre-9/11) KRW Effect Source: Council of Insurance Agents and Brokers; Insurance Information Institute. 37 Investment Performance Investments Drove Profit Decline in 2008 and Improvement in 2009 38 Property/Casualty Insurance Industry Investment Gain: 1994–2009P1 ($ Billions) $70 $64.0 $58.0 $60 $52.3 $51.9 $47.2 $50 $59.4 $56.9 $45.3 $44.4 $42.8 $40 $35.4 $55.7 $48.9 $36.0 $31.4 $35.1 $30 $20 $10 $0 94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09P Investment Gains Fell by 51% In 2008 Due to Lower Yields, Poor Equity Market Conditions. In 2009, the Return of Realized Capital Losses Helped Offset Lower Investment Income 1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. * 2005 figure includes special one-time dividend of $3.2B. Sources: ISO; Insurance Information Institute. Treasury Yield Curves: Pre-Crisis (July 2007) vs. Dec. 2009 6% 5% 4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00% 4.40% 4% Treasury yield curve is near its most depressed level in at least 45 years. Investment income is falling as a result 3% 2% 5.19% 4.49% 3.59% 3.07% 2.34% 1.38% 0.87% 1% 0.03% 0.05% 0.17% 1M 3M 6M December 2009 Yield Curve Pre-Crisis (July 2007) 0.37% 0% 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y Stock Dividend Cuts Will Further Pressure Investment Income Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute. 41 Capital/Policyholder Surplus (US) Shrinkage, but Not Enough to Trigger Hard Market 44 Policyholder Surplus, 2006:Q4–2009:Q4P Capacity Peaked at $521.8 as of 9/30/07 ($ Billions) $540 $512.8 $520 $500 $487.1 $521.8 $517.9 $515.6 Capacity as of 12/31/09 was just 0.5% below the 2007 peak and will likely set a new record in 2010 $519.3 $505.0 $496.6 $490.8 $478.5 $480 $463.0 $455.6 $460 $437.1 $440 $420 $400 $380 06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4P Declines Since 2007:Q3 Peak Source: ISO, AM Best. 08:Q2: -$16.6B (-3.2%) 08:Q3: -$43.3B (-8.3%) 08:Q4: -$66.2B (-12.9%) 09:Q1: -$84.7B (-16.2%) 09:Q2: -$58.8B (-11.2%) 09:Q3: -$31.8B (-5.9%) 09:Q4: -$2.5B (-0.5%) 46 Global Reinsurance Capacity Shrank in 2008, Mostly Due to Investments Global Reinsurance Capacity $370 Source of Decline Realized Capital Losses $360 $350 31% $330 $310 55% $300 Change in Unrealized Capital Losses $290 14% Hurricanes $270 2007 2008 Global Reinsurance Capacity Fell by an Estimated 17% in 2008 Source: AonBenfield Reinsurance Market Outlook 2009; Insurance Information Institute. 47 Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989* (Percent) The Financial Crisis at its Peak Ranks as the Largest “Capital Event” Over the Past 20+ Years 18% 15% 16.2% 13.8% 12% 10.9% 9.6% 9% 6.9% 6.2% 6% 3.3% 3% 0% 6/30/1989 Hurricane Hugo 6/30/1992 Hurricane Andrew 12/31/93 Northridge Earthquake 6/30/01 Sept. 11 Attacks 6/30/04 Florida Hurricanes 6/30/05 Hurricane Katrina * Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event ** Date of maximum capital erosion; As of 9/30/09 (latest available) ratio = 5.9% Source: PCS; Insurance Information Institute Financial Crisis as of 3/31/09** 49 Historically, Hard Markets Follow When Surplus “Growth” is Negative* Surplus growth is now positive but premiums continue to fall, a departure from the historical pattern (Percent) 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% 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 09E10P NWP % change Surplus % change Sharp Decline in Capacity is a Necessary but Not Sufficient Condition for a True Hard Market * 2009 NWP and Surplus figures are % changes as of Q4:09P vs Q4:08 Sources: A.M. Best, ISO, Insurance Information Institute 50 Financial Strength & Ratings Industry Has Weathered the Storms Well 51 P/C Insurer Impairments, 1969–2009p 5 of the 11 are Florida companies (1 of these 5 is a title insurer) 0 5 7 11 18 14 15 35 18 19 31 29 16 12 16 14 13 9 13 12 9 11 9 7 8 69 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 08 09p 10 15 12 20 19 30 31 34 34 40 36 41 50 49 50 47 49 50 48 55 60 60 58 70 The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets Source: A.M. Best; Insurance Information Institute. P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2009p 120 Combined Ratio after Div P/C Impairment Frequency 2.0 1.8 1.6 1.4 110 1.2 105 1.0 0.8 100 90 0.4 2009 estimated impairment rate rose to 0.36% up from a near record low of 0.23% in 2008 and the 0.17% record low in 2007; Rate is still less than one-half the 0.79% average since 1969 69 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 08 09* 95 0.6 Impairment Rate Combined Ratio 115 0.2 0.0 Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007/08 *Combined ratio of 101.7 is through Q3:09; 0.36% 2009 impairment rate is III estimate based on preliminary A.M. Best data. Source: A.M. Best; Insurance Information Institute 53 Summary of A.M. Best’s P/C Insurer Ratings Actions in 2009 Despite financial market turmoil and a soft market in 2009, 76% of ratings actions by A.M. Best were affirmations; just 2.9% were downgrades and 3.2% were upgrades Other – 216 11.9% 75.7% Affirm – 1,375 Under Review – 69 3.8% 2.4% Initial – 44 3.2% Upgraded – 59 2.9% Downgraded – 53 P/C Insurance is by Design a Resilient Business. The Dual Threat of Financial Disasters and Catastrophic Losses Are Anticipated in the Industry’s Risk Management Strategy . Source: A.M. Best. 54 Reasons for US P/C Insurer Impairments, 1969–2008 Deficient Loss Reserves and Inadequate Pricing Are the Leading Cause of Insurer Impairments, Underscoring the Importance of Discipline. Investment Catastrophe Losses Play a Much Smaller Role Reinsurance Failure Sig. Change in Business 3.7% 4.2% Misc. 9.1% Investment Problems 7.0% Affiliate Impairment 38.1% Deficient Loss Reserves/ In-adequate Pricing 7.9% 7.6% Catastrophe Losses 8.1% Alleged Fraud 14.3% Rapid Growth Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008 56 II. Tort Environment Overview Is the Pendulum Swinging Against Casualty Risks and their Insurers? 57 Over the Last Three Decades, Total Tort Costs* as a % of GDP Appear Somewhat Cyclical ($ Billions) $300 Tort Sytem Costs 2.50% Tort Costs as % of GDP $250 Tort System Costs $200 $150 2.00% $100 1.75% 2009–2010 Growth in Tort Costs as % of GDP is Due in Part to Shrinking GDP $50 $0 Tort Costs as % of GDP 2.25% 1.50% 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10E * Excludes the tobacco settlement, medical malpractice Sources: Tillinghast-Towers Perrin, 2009 Update on US Tort Cost Trends, Appendix 1A; I.I.I. calculations/estimates for 2009 and 2010 and 2011 58 Cost of US Tort System ($ Billions) $263 09E $273 $255 08 $247 $261 $260 $233 $252 $180 $169 07 $100 $167 $156 $156 $159 $148 $144 $130 $150 $129 $200 $141 $250 $205 $300 $246 $350 $289.5 Tort costs consumed 1.79% of GDP in 2008, down from 2.24% in 2003 Per capita “tort tax” was $? in 2009, up from $838 in 2008 and $636 in 2000 $50 Source: Tillinghast-Towers Perrin, 2009 Update on US Tort Cost Trends. 11E 10E 06 05 04 03 02 01 00 99 98 97 96 95 94 93 92 91 90 $0 The Nation’s Judicial Hellholes (2008/2009) Watch List Rio Grande Valley & Gulf Coast, TX Madison County, IL Baltimore, MD St Louis (the city of), St Louis and Jackson Counties, MO Nevada Illinois Clark County (Las Vegas) Cook County West Virginia New Jersey Atlantic County (Atlantic City) Dishonorable Mention MA Supreme Judicial Court MO Supreme Court California Alabama Los Angeles County Macon and Montgomery Counties Source: American Tort Reform Association; Insurance Information Institute South Florida 60 The Nation’s Judicial Hellholes: 2010 Illinois Watch List Cook County West Virginia New York City California Alabama Madison County, IL Jefferson County, MS Texas Gulf Coast Rio Grande Valley, TX Dishonorable Mention AR Supreme Court MN Supreme Court ND Supreme Court PA Governor MA Supreme Judicial Court Sacramento County New Jersey Atlantic County (Atlantic City) New Mexico Appellate Courts Source: American Tort Reform Association; Insurance Information Institute South Florida 61 Average Jury Awards 1998 - 2007 $1,400 2004 2005 2000 2001 $827 $600 $756 $700 2002 2003 $602 $800 $747 $725 $900 $834 $1,000 $986 $1,100 $1,052 $1,200 $1,062 $1,300 $1,224 The average jury award more than doubled from 1998 to 2007 $500 1998 1999 Source: Jury Verdict Research; Insurance Information Institute. 2006 2007 Average Jury Awards 1998 vs. 2002 and 2007 $10,000 1998 $9,000 2002 2007 $1,375 $590 $564 $472 $219 $170 $1,000 $834 $2,000 $602 $4,844 $4,426 $4,043 $2,854 $3,000 $1,224 $4,000 $2,338 $5,000 $2,731 $4,164 $6,000 $3,717 $7,000 $5,487 $8,000 $0 Overall Vehicular Liability *Award trends in wrongful deaths of adult males. Source: Jury Verdict Research; Insurance Information Institute. Premises Liability Wrongful Death* Medical Malpractice Products Liability Sum of Top 10 Jury Awards 2004-2008 Millions $6,000 Total of Top 10 awards has more than doubled in the last three years. $5,158.8 $5,000 $4,000 $2,953.7 $3,000 $2,000 $1,000 $815.0 $615.5 2006 2007 $1,344.0 $1,511.2 2008 2009 $0 2004 2005 Source: Insurance Information Institute from Lawyers USA, January 2005, 2006, 2007, 2008, 2009 and 2010. 2009 Top Ten Verdicts Value Issue State $370 Million Defamation California $330 Million Personal Injury (Drunk driving case) Florida $300 Million Personal Injury (Tobacco verdict) Florida $89 Million Personal Injury (Drunk driving case) Missouri $78.75 Million Personal Injury (Prempro) New Jersey $77.4 Million Medical Malpractice New York $71 Million Conversion and Breach of Fiduciary Duty Texas $70 Million Workers Comp Case Texas $65 Million Personal Injury Florida $60 Million Medical Malpractice New York Source: Lawyers USA, January 15, 2010. Trends in Million Dollar Verdicts* 100% 50% 40% 10% 60% 65% 59% 53% 57% 11% 15% 13% 17% 14% 11% 5% 6% 4% 20% 13% 15% 17% 30% 41% 60% 29% 30% 33% 70% 51% The frequency of multimillion dollar awards is increasing across virtually all types of defendants. Across all liability types, million dollar-plus awards rose from 13% of all awards from 2001-2003 to 17% in 2006-2007. 80% 2006-2007 48% 2004-2005 37% 2001-2003 90% 0% All Liabilities Vehicular Liability Personal Negligence Premises Liability *Verdicts of $1 million or more. Source: Jury Verdict Research; Insurance Information Institute. Business Negligence Government Negligence Medical Malpractice Products Liability Insurer Defense & Cost Containment Expenses as a % of Incurred Losses, 2005-2008* 150% 2007 2008 10.0% 9.9% 11.6% 10.7% bi li 6.6% 6.6% 6.1% 5.9% 11.1% 11.0% 12.0% 11.6% om p 28.3% 27.1% 24.5% 24.4% 42.2% 36.7% 41.2% 34.3% 50% 48.0% 56.6% 55.1% 58.1% 70.0% 100% 78.6% 65.4% 134.5% 2006 15.9% 15.2% 14.5% 13.6% Percent of Incurred Losses 2005 C lit y ab i Li PP A om W or ke m .A ut o rs Li a C ty ** Li ab er al G en om C ic a M ed ili ty * m .M -P ** e ct ic pr a lM al Li a ts Pr od uc A ll L ia b ili ty Li n bi lit y es 0% *Net of reinsurance, excl. state funds. **Liability portion only. ***Excludes products liability. Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data, LLC; Insurance Information Institute. Shareholder Class Action Lawsuits* 600 498 500 After surging in 2007 and 2008, litigation activity related to the financial crisis began to ebb after financial markets began to recover in the 2nd quarter of 2009 400 300 202 200 164 163 241 231 188 173 209216 266 227238 182 111 223 178 176 119 100 19 0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10* *Securities fraud suits filed in U.S. federal courts as of March 1, 2010. Source: Stanford University School of Law (securities.stanford.edu); Insurance Information Institute Business Leaders Ranking of Liability Systems* Best States 1. Delaware 2. Nebraska 3. Maine 4. Indiana 5. Utah 6. Virginia 7. Iowa 8. Vermont 9. Colorado 10. Kansas New in 2008 Colorado Indiana Kansas Virginia Vermont Drop-offs Minnesota New Hampshire Tennessee Wisconsin Midwest/West has mix of good and bad states. Worst States 41. Texas Newly Notorious 42. Florida Florida South Carolina 43. South Carolina 44. California 45. Hawaii 46. Illinois 47. Alabama 48. Mississippi 49. Louisiana 50. West Virginia Source: US Chamber of Commerce 2008 State Liability Systems Ranking Study; Insurance Info. Institute. Rising Above Arkansas Alaska Average Total Limits Purchased by All U.S. Firms* ($ Millions) $110 $105.0 $101.8 $99.1 $95.7 $100 $88.7 $85.8 $85.9 $83.2 $90 Limits fell by 45% between 2000 and 2008. Price/capacity are issues. $87 $80 $77.9 $77 $75 $70 $66 $66 $58 $60 *Includes underlying primary limits Source: Limits of Liability 2008, Marsh, Inc. 08 20 07 20 06 20 05 20 04 20 03 20 02 20 01 20 00 20 99 19 98 19 97 19 96 19 95 19 19 94 $50 Excess Liability Market Capacity North America ($ Billions) $2.015 $1.660 $1.645 $1.570 $1.535 $1.575 $1.425 $2.045 $1.710 $1.405 $2.0 $1.334 $1.432 $2.5 $1.941 $1.721 $3.0 $2.011 In 2008, capacity is back to 2000 levels. $1.5 $1.0 $0.5 Source: Marsh, 2008 Limits of Liability Report 08 20 07 20 06 20 05 20 04 20 03 20 02 20 01 20 00 20 99 19 98 19 97 19 96 19 95 19 19 94 $0.0 How the Risk Dollar is Spent (2008) Total liability costs account for about 30% of the risk dollar Firms w/Revenues > $1 Billion Firms w/Revenues < $1 Billion Property Premiums, 15% Other Costs, 21% Property Premiums, 12% Other Costs, 15% Retained Property Losses, 1% Retained Property Losses, 5% Admin Costs, 7% Admin Costs, 9% Liability Premiums, Prof. Liability 13% Liability Premiums, 11% Costs, 4% Prof. Liability Costs, 9% Retained WC Losses, 10% WC Premiums, 7% Liability Retained Losses, 9% Total Mgmt. Liab., 5% Retained WC Losses, 22% Source: 2009 RIMS Benchmark Survey; Insurance Information Institute WC Premiums, 6% Retained Liability Losses, 12% Total Mgmt. Liab., 6% Discrimination Charges Filed with EEOC by Type: Percent Change FY06-FY09 Change in Charges Filed (%) Retaliation and age discrimination suits are up substantially 60% 49.0% 50% 40% 30% 37.6% 33.7% 23.1% 23.3% 37.7% 33.3% 20.6% 20% 9.4% 10% ay Eq ua lP is ab ilit y D Ag e et al ia tio n R el ig io n R rig in N at io na lO Se x ac e R Al l 0% The Financial Crisis and Poor Labor Market Conditions Have Contributed to a Surge Employment Discrimination Charges Source: Equal Opportunity Employment Commission; Insurance Information Institute. 74 Rising Medical/Health Care Costs Medical Costs Will Rise Steeply in the Years Ahead, Pressuring Many Casualty Lines 75 Consumer Price Index for Medical for All Items vs. Medical Care, 1960-2009* (1982-1984 = 100) 400 350 Medical Care inflation has been surging ahead of general inflation (CPI) for 25 years. Since 1982-84, the cost of medical care has more than tripled. 300 250 200 150 100 0 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 50 All Items Medical Care Medical costs Will Continue to Rise Relatively Rapidly Irrspective of Outcome of US Healthcare Reform Debate * Through June 30, 2009 Sources: Bureau of Labor Statistics, Insurance Information Institute 76 National Health Expenditures and Expenditures as a Share of GDP, 1960-2018E ($ Billions) $5,000 25% National Health Expenditures National Health Expenditures as % of GDP $4,500 20% $3,500 $3,000 15% $2,500 $2,000 10% $1,500 Healthcare expenditures as a share of GDP consumed an estimated 16.6% of GDP in 2008 and are expected to rise to 20.3% by 2018 $1,000 $500 $0 Tort Costs as % of GDP Tort System Costs $4,000 5% 0% 60 80 93 98 00 02 04 06 08E 10E 12E 14E 16E 18E Sources: Centers for Medicare and Medicaid, Office of the Actuary; Insurance Information Institute. 77 Average Annual Growth in US Per Capita Health Care Costs, 1960-2018F 25% 20.9% 20% The 1970s were the most inflationary decade for medical costs, rising at nearly 21% per year 15.6% 15% 14.1% 10% 7.0% Over the decade, health expenditures will likely increase well ahead of the general pace of inflation 7.9% 6.2% 5% 0% 1960-1970 1970-1980 1980-1990 1990-2000 2000-2007 Source: Insurance Information Institute calculations based on data from the Centers for Medicare & Medicaid Services, Office of the Actuary. 2007-2018 III. The Economic Storm What the Financial Crisis, Recession and Recovery Mean for the Industry’s Exposure Base 79 3.2% 3.3% 3.2% 3.0% 3.0% 2.8% 2.8% 2.8% 2.2% 11:4Q 11:3Q 11:2Q 11:1Q 10:4Q 10:3Q 10:2Q 10:1Q Economic growth up sharply in Q4:09 with rebuilding of inventories and stimulus. More moderate growth expected in 2010/11 09:3Q 09:2Q 09:1Q-6.4% 08:4Q -5.4% 08:3Q 08:2Q -2.7% -0.7% 08:1Q 07:4Q 07:3Q 07:2Q 07:1Q 2006 2005 2004 2000 -8% 2003 -6% 2002 -4% Recession began in Dec. 2007. Economic toll of credit crunch, housing slump, labor market contraction has been severe but modest recovery is underway 2001 -2% -0.2% 0% -0.7% 1.5% 4.8% 2.9% 3.1% 3.6% 2.5% 0.1% 2% 1.6% 4% 0.8% 6% 3.7% 8% 4.8% The Q1:2009 decline was the steepest since the Q1:1982 drop of 6.4% 09:4Q Real GDP Growth (%) 5.7% Real GDP Growth* Personal and Commercial Lines Exposure Base Have Been Hit Hard and Will Be Slow to Come Back * Estimates/Forecasts from Blue Chip Economic Indicators. Source: US Department of Commerce, Blue Economic Indicators 2/10; Insurance Information Institute. 80 Real GDP Growth vs. Real P/C Premium Growth: Modest Association 18.6% 20.3% Real GDP Growth vs. Real P/C (%) 4% 7.7% 2% 1.2% 1.6% 5.6% 6% 0% -2.9% -0.5% -3.8% -4.4% -3.8% -3.8% -1.6% -1.0% -1.8% -1.0% 8% -2% -4% 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 10E -10% -7.4% -6.5% -1.5% -5% -0.9% 0% -0.4% -0.3% 3.1% 1.1% 0.8% 0.4% 0.6% 0.3% 5% 5.8% 1.8% 4.3% 5.2% 15% 10% Real GDP Real GDP Growth Real NWP Growth 20% Real NWP Growth 13.7% 25% P/C Insurance Industry’s Growth is Influenced Modestly by Growth in the Overall Economy Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 2/10; Insurance Information Institute 82 Regional Differences Will Significantly Impact P/C Markets Recovery in Some Areas Will Begin Years Ahead of Others and Speed of Recovery Will Differ by Orders of Magnitude 83 State Economic Growth Varied Tremendously in 2008 Percent Change in Real GDP by State, 2007–2008 Rocky Mountain 2.2 WA 2.0 MT 1.8 OR 1.6 WY 4.4 NV -0.6 UT 1.4 CA 0.4 Plains 2.0 ND 7.3 ID 0.0 Mountain, Plains States Growing the Fastest Great Lakes -0.4 MN 2.0 IA 2.1 CO 2.9 KS 2.2 MI -1.5 IL 0.3 IN -0.6 NY 1.6 OH -0.7 AZ -0.6 OK 2.7 NM 2.0 TX 2.0 WV 2.5 AR 0.7 LA 0.3 MS 1.7 AL 0.7 VA 1.3 NC 0.1 TN 0.5 SC 0.6 GA -0.6 Southwest 1.7 RI CT -0.9 -0.4 NJ 0.6 DE -1.6 Mideast 1.3 DC 3.0 US = 0.7 Highest Quintile Fourth Quintile FL -1.6 HI 0.7 MA 1.9 Third Quintile AK -2.0 US Bureau of Economic Analysis PA 1.1 MD 1.3 MO 1.3 KY -0.1 Far West 0.6 ME 1.4 VT NH 1.7 1.8 WI 0.7 SD 3.5 NE 1.3 New England 1.0 Southeast 0.0 Second Quintile Lowest Quintile 84 Fastest Growing States in 2008: Plains, Mountain States Lead Real State GDP Growth (%) 8% 7.3% 7% 6% 5% 4.4% 4% 3.5% 2.9% 3% 2.7% 2.5% 2.1% 2.0% IA TX, MN, NM, WA 2% 1% 0% ND WY SD CO OK WV Natural Resource and Agricultural States Have Done Better Than Most Others Recently, Helping Insurance Exposure in Those Areas Source: US Bureau of Economic Analysis; Insurance Information Institute. 85 Slowest Growing States in 2008: Diversity of States Suffering Real State GDP Growth (%) KY CT AZ GA IN NV RI MI DE FL OH AK 0.0% -0.1% -0.5% -0.4% -0.6% -0.6% -0.6% -0.6% -1.0% -0.9% -1.5% -1.5% -1.6% -1.6% -1.7% -2.0% -2.0% -2.5% States in the North, South, East and West All Represented Among Hardest Hit, But for Differing Reasons Source: US Bureau of Economic Analysis; Insurance Information Institute. 86 Labor Market Trends Fast & Furious: Massive Job Losses Sap the Economy and Commercial/Personal Lines Exposure 87 Unemployment and Underemployment Rates: Rocketing Up in 2008-09 January 2000 through February 2010, Seasonally Adjusted (%) 18 Traditional Unemployment Rate U-3 U-6 went from 8.0% in March 2007 to 17.5% in Oct 2009; Stood at 16.8% in Feb. 2010 Unemployment + Underemployment Rate U-6 16 Recession ended in November 2001 14 12 Unemployment kept rising for 19 more months Recession began in December 2007 10.1% Oct 2009 unemployment rate (U-3) was the highest monthly rate since 1983. 10 8 6 4 Feb 10 2 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Source: US Bureau of Labor Statistics; Insurance Information Institute. Jan 07 Jan 08 Jan 09 Peak rate in the last 30 years: 10.8% in Nov Dec 1982 Stood at 9.7% in Feb. 2010. Jan 10 89 9.0 9.0 9.1 9.1 9.4 9.5 9.6 9.9 10.6 10.3 10.7 10.1 10 10.9 10.9 11.0 11.0 11.1 11.2 11.8 12.4 12.1 12 12.6 Unemployment Rate (%) 14 The unemployment rate has been rising across the country (up in 43 out of 50 states in Dec.), but some states are doing much better than others. 12.9 16 14.6 13.0 Unemployment Rates by State, December 2009: Highest 25 States* 8 6 4 2 0 MI NV RI SC CA DC FL NC IL OR AL OH TN KY MS GA NJ IN MO WA MA ID AZ WV NY *Provisional figures for December 2009, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute. 92 4.4 4.7 4.7 6.6 6.6 6.6 6.7 6.7 6.9 6.9 6.9 7.0 7.4 8.3 8.3 8.7 8.3 8.8 8.9 6 7.5 7.5 8 The unemployment rate has been rising across the country (up in 43 out of 50 states in Dec.), but some states are doing much better than others. 7.7 7.5 7.5 Unemployment Rate (%) 10 9.0 8.9 Unemployment Rates By State, December 2009: Lowest 25 States* 4 2 0 DE PA CT AK WI TX ME NM AR CO LA MD WY MN NH HI VA VT MT UT OK IA KS SD NE ND *Provisional figures for December 2009, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute. 93 US Unemployment Rate 6.9% 8.9% 9.1% 9.9% 10:Q3 9.3% 10.0% 10:Q2 9.5% 10.2% 10:Q1 9.7% 10.0% 4.9% 08:Q1 4.6% 07:Q3 4.8% 4.5% 07:Q2 07:Q4 4.5% 5.0% 07:Q1 6.0% 5.4% 7.0% 6.1% 8.0% 8.1% Unemployment is expected to peak above 10% in early 2010. 9.0% 09:Q4 10.0% 9.3% Rising unemployment is eroding payrolls and workers comp’s exposure base. 11.0% 9.6% 2007:Q1 to 2011:Q4F* * = actual; = forecasts Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (2/10); Insurance Information Institute 11:Q4 11:Q3 11:Q2 11:Q1 10:Q4 09:Q3 09:Q2 09:Q1 08:Q4 08:Q3 08:Q2 4.0% 94 Monthly Change Employment* -36 -26 -109 -224 -225 -212 -346 -515 Feb 10 Jan 10 Dec 09 Nov 09 Oct 09 Sep 09 Aug 09 February’s loss of 36,000 jobs was a better than expected; Labor market recoveries are often erratic. Jul 09 Jun 09 -387 May 09 -753 Mar 09 Apr 09 -726 Feb 09 -779 Jan 09 -681 Dec 08 -597 Nov 08 Oct 08 Sep 08 Aug 08 Jul 08 Jun 08 May 08 Apr 08 Mar 08 Feb 08 -528 -380 -321 -175 -128 -161 -137 -160 -122 -144 -72 Monthly Losses in Dec–May Were the Largest in the Post-WW II Period but Pace of Loss is Diminishing Jan 08 200 100 0 -100 -200 -300 -400 -500 -600 -700 -800 -900 64 January 2008 through February 2010 (Thousands) Job Losses Since the Recession Began in Dec. 2007 Total 8.4 Million; 14.9 Million People are Now Defined as Unemployed Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute 95 Seasonally adjusted. Source: US Bureau of Labor Statistics 137.8 137.8 137.7 137.6 137.6 137.4 Mar 08 Apr 08 May 08 June 08 Jul 08 Aug 08 130.6 130.3 130.1 129.9 129.6 129.7 129.6 129.6 129.5 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 131.2 May 09 Jun 09 131.5 132.1 136.2 135.1 133.5 132.8 Apr 09 Mar 09 Feb 09 Jan 09 Dec 08 Nov 08 136.7 137.9 Feb 08 Oct 08 138.0 Jan 08 137.0 138.1 Dec 07 Sep 08 138.0 139 138 137 136 135 134 133 132 131 130 129 Nov 07 US Nonfarm Private Employment Monthly, Nov 2007 – Feb 2010 (Millions) Employment Peak; Recession Starts The US Economy Lost About 8.4 Million Jobs in Just Over 2 Years 97 US Unemployment Rate Forecasts Quarterly, 2010:Q1 to 2011:Q4 11.0% 10.5% 10.0% 10.3% 10.3% 10.3% 10.3% 10.2% 10.0% 9.5% 10.0% 9.9% 9.6% 9.4% 10 Most Pessimistic Consensus/Midpoint 10 Most Optimistic 9.0% 8.5% 9.7% 10.1% 9.5% 9.2% 8.9% 10.0% 9.3% 9.9% 9.1% 8.7% 8.9% 8.4% 8.0% Unemployment will remain high even under the most optimistic of scenarios 7.5% 9.7% 7.9% 7.0% 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4 Stubbornly High Unemployment Will Hurt the Workers Comp’s Exposure Base Sources: Blue Chip Economic Indicators (2/10); Insurance Information Institute 98 Unemployment and Educational Attainment: More Education = Less Unemployment Unemployment Rate (%), January 2009 vs. January 2010 Jan. 2009 Unemployment Rate 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Jan. 2010 Unemployment Rate 17.6% 14.4% 11.5% 10.0% 9.3% 7.5% 7.3% 5.7% 4.1% Less than HS Diploma HS Graduate Some College, No Degree Associate Degree 5.1% Bachelor's Degree or Higher A Higher (Record) Proportion of WC Exposure Base is Associated With Employment of Women Source: US Bureau of Labor Statistics accessed at ftp://ftp.bls.gov/pub/suppl/empsit.cpseea17.txt . 99 Wage & Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums Wage & Salary Disbursement (Private Employment) vs. WC NWP ($ Billions) 7/90-3/91 12/07-? 3/01-11/01 $7,000 $45 $6,000 $40 $35 $5,000 $30 $4,000 $25 $3,000 $20 $2,000 $1,000 Wage & Salary Disbursements $15 WC NPW $5 $0 $10 $0 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09* Weakening Payrolls Have Eroded $2B+ in Workers Comp Premiums * Average Wage and Salary data as of 10/1/2009. Shaded areas indicate recessions Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; I.I.I. Fact Books 101 Estimated Effect of Recessions* on Payroll (Workers Comp Exposure) (Percent Change) 10% 8% 6% (All Post WWII Recessions) Recessions in the 1970s and 1980s saw smaller exposure impacts because of continued wage inflation, a factor not present during the 2007-2009 recession The Dec. 2007 to mid2009 recession caused the largest impact on WC exposure in 60 years 8.5% 4.6% 3.7% 4% 3.5% 2.1% 2% 1.1% 0% -0.5% -1.1% -2% -2.0% -4% -6% -3.6% -4.4% 19481949 19531954 19571958 19601961 19691970 19731975 1980 19811982 19901991 2001 20072009 Recession Dates (Beginning/Ending Years) *Data represent maximum recorded decline over 12-month period using annualized quarterly wage and salary accrual data Source: Insurance Information Institute research; Federal Reserve Bank of St. Louis (wage and salary data); National Bureau of Economic Research (recession dates). Frequency: 1926–2008 A Long-Term Drift Downward Manufacturing – Total Recordable Cases Rate of Injury and Illness Cases per 100 Full-Time Workers 30 25 20 15 10 5 0 '26 '29 '32 '35 '39 '42 '45 '48 '52 '55 '58 '61 '65 '68 '71 '74 '78 '81 '84 '87 '91 '94 '97 '00 '04 '07 Note: Recessions indicated by gray bars. Sources: NCCI from US Bureau of Labor Statistics; National Bureau of Economic Research 103 When Might All of the Lost Jobs Be Regained? 2016? Source: Wall Street Journal, October 9, 2009, p. A3 106 Insurance Industry Employment Trends Soft Market, Difficult Economy, Consolidation and Outsourcing Have All Contributed to Industry’s Job Losses 107 U.S. Employment in the Direct P/C Insurance Industry: 1990–2010* Thousands 520 500 480 As of Jan. 2010, P/C insurance industry employment was down by 24,200 or 4.9% to 466,900 since the recession began in Dec. 2007 (compared to overall US employment decline of 6.1%) 460 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 *As of January 2010; Not seasonally adjusted; Does not including agents & brokers Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes. 108 U.S. Employment in the Reinsurance Industry: 1990–2010* Thousands 48 44 40 As of Jan. 2010, US employment in the reinsurance industry was down by 1,600 or 5.9% to 25,300 since the recession began in Dec. 2007 (compared to overall US employment decline of 6.1%) 36 32 28 24 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 *As of January 2010; Not seasonally adjusted; Does not including agents & brokers Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes. 109 U.S. Employment in Insurance Agencies & Brokerages: 1990–2010* Thousands 700 650 600 550 As of Jan. 2010, employment at insurance agencies and brokerages was down by 44,200 or 6.5% to 635,400 since the recession began in Dec. 2007 (compared to overall US employment decline of 6.1%) 500 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 *As of January 2010; Not seasonally adjusted. Includes all types of insurance. Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes. 110 U.S. Employment in Insurance Claims Adjusting: 1990–2010* Thousands 60 55 50 45 As of Jan. 2010, claims adjusting employment was down by 7,200 or 13.8% to 44,800 since the recession began in Dec. 2007 (compared to overall US employment decline of 6.1%) 40 '90 '90 '91 '92 '93 '94 '95 '95 '96 '97 '98 '99 '00 '00 '01 '02 '03 '04 '05 '05 '06 '07 '08 '08 '10 *As of January 2010; Not seasonally adjusted. Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes. 111 Crisis-Driven Exposure Drivers Economic Obstacles to Growth in P/C Insurance 112 0.96 1.36 0.56 0.9 0.7 0.71 2.07 1.80 1.71 1.60 1.57 1.64 1.47 1.48 1.35 1.29 New home starts plunged 34% from 2005-2007; drop through 2009 is 72% (est.); A net annual decline of 1.49 million units, lowest since records began in 1959 0.90 1.1 1.20 1.3 1.01 1.5 1.19 1.7 1.46 1.9 1.62 2.1 1.85 (Millions of Units) 1.96 New Private Housing Starts, 1990-2011F 0.5 0.3 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F11F Weak Construction Risk Exposure Forecast for 2010-2011. Source: U.S. Department of Commerce; Blue Chip Economic Indicators (2/10); Insurance Information Institute. 113 Business Bankruptcy Filings, 1980-2009* 90,000 80,000 50,000 40,000 30,000 20,000 10,000 0 1980-82 1980-87 1990-91 2000-01 2006-09 58.6% 88.7% 10.3% 13.0% 204.2%* There were 45,510 business bankruptcies during the first three quarters of 2009, up 52% from 2008:Q3 and on track for about 60,000 for all of 2009, the most since 1993. Current recession will generate 200%+ surge 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 60,000 43,694 48,125 70,000 69,300 62,436 64,004 71,277 81,235 82,446 63,853 63,235 64,853 71,549 70,643 62,304 52,374 51,959 53,549 54,027 44,367 37,884 35,472 40,099 38,540 35,037 34,317 39,201 19,695 28,322 43,546 60,000 % Change Surrounding Recessions Significant Implications for all Commercial Lines *2009 is annualized estimate based on actual business bankruptcies in first three quarters of 2009 Source: American Bankruptcy Institute, http://www.abiworld.org/AM/Template.cfm?Section=Business_Bankruptcy_Filings1&Template=/TaggedPage/Tagge dPageDisplay.cfm&TPLID=59&ContentID=36301. 115 Private Sector Business Starts, 1993:Q2 – 2009:Q2* (Thousands) 192 188 187 189 186 190 194 191 199 204 202 195 196 196 206 206 201 192 198 206 206 203 211 205 212 200 205 204 204 197 203 209 201 203 192 192 193 201 204 202 210 212 209 216 220 223 220 220 210 221 212 204 218 209 207 199 191 193 230 220 210 177 180 186 174 177,000 businesses started in 2009:Q2, the lowest level since 1993 170 171 180 175 190 186 200 160 150 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Business Starts Are Down Nearly 20% in the Current Downturn, Holding Back Most Types of Commercial Insurance Exposure *Latest available as of March 2010, seasonally adjusted Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm. 117 Amount of Outstanding Loans by FDIC-Insured Institutions, 2009 vs. 2008 $Billions $2,500 $2,000 Down $273.2B (-18.3%) 2008 2009 Down $139.4B (-13.1%) $1,500 Down $128.5B (-6.3%) $2,045.2 $1,916.7 $1,494.0 $1,220.8 $1,000 $590.9 $500 $451.5 $0 Construction and Development Secured by Real Estate Commercial and Industrial 1-4 Family Residential Mortgages FDIC-Insured Institutions Had $541.1B (-13.1%) Less in Outstanding Loans in These Three Categories at Year-end 2009 vs. 2008 Source: FDIC Quarterly Banking Profile, Fourth Quarter 2009, Table I-A 118 Capacity Utilization, monthly, Mar 2001-Jan 2010 “Full Capacity” Index 82% Hurricane Katrina 80% 78% 76% Recession began December 2007 74% 72% Source: Federal Reserve Board statistical releases 119 Jan 10 Oct 09 Jun 09 Mar 09 Dec 08 Sep 08 Jun 08 Mar 08 Dec 07 Sep 07 Jun 07 Mar 07 Dec 06 Sep 06 Jun 06 Mar 06 Dec 05 Sep 05 Jun 05 Mar 05 Dec 04 Sep 04 Jun 04 Mar 04 Dec 03 Sep 03 Jun 03 Mar 03 Dec 02 Sep 02 Jun 02 Mar 02 Dec 01 Sep 01 66% Jun 01 68% The closer the economy is to operating at “full capacity,” the greater the inflationary pressure March 2001November 2001 recession Mar 01 70% Total Industrial Production, monthly, Mar 2001-Jan 2010 (Index 2002=100)* There is a lot of unused capacity in the economy. This might hold inflation down. Index 113 March 2001November 2001 recession 110 Hurricane Katrina 107 104 101 Source: http://www.federalreserve.gov/releases/g17/ipdisk/ip_sa.txt. *seasonally adjusted 120 10-Jan Oct 09 Jun 09 Mar 09 Dec 08 Sep 08 Jun 08 Mar 08 Dec 07 Sep 07 Jun 07 Mar 07 Dec 06 Sep 06 Jun 06 Mar 06 Dec 05 Sep 05 Jun 05 Mar 05 Sep 04 Jun 04 Mar 04 Dec 03 Sep 03 Jun 03 Mar 03 Dec 02 Sep 02 Jun 02 Mar 02 Dec 01 Sep 01 Jun 01 Mar 01 95 Dec 04 Recession began December 2007 98 Total Industrial Production 2007:Q1 to 2011:Q4F (%) 6.9% 7.0% 3.2% 3.6% 5.0% 1.5% 5.3% 4.7% 4.5% 4.5% 4.2% 4.1% 4.2% 3.8% 0.3% 0.2% 0.0% -4.6% -9.0% -10.4% -13.0% 11:Q4 11:Q3 11:Q2 11:Q1 10:Q4 10:Q3 09:Q4 09:Q3 09:Q2 09:Q1 08:Q4 -19.0% 08:Q3 08:Q2 08:Q1 07:Q4 07:Q3 07:Q1 -20.0% 07:Q2 -15.0% Industrial Production Began to Contract Sharply in Late 2008 and Plunged in 2009:Q1 10:Q2 -10.0% Industrial Production is Aided by a Rebuild of Inventories, Gradual Economic Recovery and Stimulus Program (Q2:09 through 2010) 10:Q1 -5.0% End of Recession in mid-2009, Stimulus Program Are Benefiting Industrial Production and Therefore Insurance Exposure Both Directly and Indirectly, Albeit Very Modestly Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (2/10); Insurance Information Institute 121 Year-Over-Year Change in Quarterly US State Tax Revenues, Inflation Adjusted 3Q08 1Q08 3Q07 1Q07 3Q06 1Q06 3Q05 1Q05 3Q04 1Q04 3Q03 1Q03 3Q02 1Q02 3Q01 1Q01 3Q00 1Q00 3Q99 1Q99 -25% 3Q09 -20% -13.3% -17.6% -10.9% -15% 1Q09 -10% Nationwide, state-tax collections for fiscal year 2009 declined by a record $63 billion, or 8.2 percent from the previous year. That loss is roughly twice the amount states gained in fiscal relief from the federal stimulus package -5.8% -1.3% -1.7% -3.0% -7.6% -10.7% 0% -5% 0.1% 4.0% 4.7% 5.7% 8.2% 3.4% 6.0% 7.0% 12.4% 6.6% 4.2% 3.7% 6.3% 2.6% 1.3% 1.9% 2.3% 0.4% 0.8% 0.4% 3.0% 0.2% 5% -0.6% 10% 0.0% 1.6% 15% 2.4% 2.4% 4.7% 5.6% 9.9% 9.5% 4.4% 1.8% 0.4% 20% States Revenues Were Down 10.9% in Q3 2009, the Second Consecutive Quarter of Record Revenue Decline. This Will Impact Public Infrastructure Spending Significantly. Source: US Census Bureau; Nelson A. Rockefeller Institute of Government: http://www.rockinst.org/pdf/government_finance/state_revenue_report/2010-01-07-SRR_78.pdf 123 Green Shoots The Recession May Have Ended, but Is it Self-Sustaining? 128 Hopeful Signs That the Economic Recovery is Underway Recession appears to have ended, freefall of 2008/09 is over GDP shrinkage has ended; Economy is expanding Pace of job losses is slowing, despite setbacks Major stock market indices well off record lows, anticipating recovery Some signs of retail sales stabilization are evident Financial sector is stabilizing Banks are reporting quarterly profits Many banks expanding lending to very credit worthy people and businesses Housing sector seems to be bottoming out Home are much more affordable (attracting buyers) Mortgage rates are still low relative to pre-crisis levels (attracting buyers) Freefall in housing starts and existing home sales is ending in many areas Inflation and energy prices are under control Consumer and business debt loads are shrinking Source: Insurance Information Institute. 129 10 Industries for the Next 10 Years: Insurance Solutions Needed Government Health Care Energy (Traditional) Alternative Energy Agriculture Natural Resources Environmental Technology Light Manufacturing Export-Oriented Industries 130 Inflation Trends: Concerns Over Stimulus Spending and Monetary Policy Mounting Pressure on Claim Cost Severities? 131 Annual Inflation Rates (CPI-U, %), 1990–2011F Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the commodity bubble have reduced inflationary pressures Annual Inflation Rates (%) 6.0 5.0 4.9 5.1 3.8 4.0 3.0 3.2 3.0 2.0 3.3 3.4 3.0 2.9 2.8 2.6 2.4 2.5 2.3 3.8 2.8 2.2 2.0 1.9 1.5 1.3 1.0 0.0 -0.4 -1.0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F11F There is So Much Slack in the US Economy That Inflation Should Not Be a Concern Through 2010/11, but Depreciation of Dollar is Concern Longer Run Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, Feb. 10, 2010 (forecasts). 132 Forecasts of Annual Inflation Rates (CPI-U, %), 2010–2015F Even the pessimistic forecasts don’t see the CPI rising much above 3% in the next five years Annual Inflation Rates (%) 4.0 3.0 2.8 2.1 2.0 3.0 2.9 2.0 3.0 2.1 1.6 1.1 1.2 3.1 3.0 2.2 1.4 Blue Chip Avg Pessimistic 2.3 1.6 2.4 1.7 Blue Chip Avg Median Blue Chip Avg Optimistic 1.0 0.0 2010 2011 2012 2013 2014 2015 Inflation Will Accelerate Modestly through 2015 but Should Is Not Expected to Become a Major Concern or Threat Sources: Blue Chip Economic Indicators, Oct 2009 and Feb 2010. 133 P/C Insurers Experience Inflation More Intensely than 2009 CPI Suggests (Percent) 8% 5.5% 6% 3.8% 4% 2.7% 3.0% 3.1% Legal Services US Tort Costs Medical Care 4.3% 2% 0% -0.4% -2% Overall CPI Motor Vehicle Body Work Bodily Injury Severity WC Med Severity Healthcare and Legal/Tort Costs Are a Major P/C Insurance Cost Driver. These Are Expected to Increase Above the Overall Inflation Rate (CPI) Indefinitely Source: CPI is Blue Chip Economic Indicator 2009 estimate, 12/09; Legal services, medical care and motor vehicle body work are avg. monthly year-over-year change from BLS. Tort costs is 2009 Towers-Perrin estimate. WC figure is I.I.I. estimate based on historical NCCI data. 134 Top Concerns/Risks for Insurers if Inflation Is Reignited Concerns The Federal Reserve Has Flooded Financial System with Cash (Turned on the Printing Presses), the Federal Gov’t Has Approved a $787B Stimulus and the Deficit is Expected to Mushroom to $1.8 Trillion. All Are Potentially Inflationary. What are the potential impacts for insurers? What can/should insurers do to protect themselves from the risks of inflation? Key Risks From Sustained/Accelerating Inflation Rising Claim Severities Cost of claims settlement rises across the board (property and liability) Rate Inadequacy Rates inadequate due to low trend assumptions arising from use of historical data Reserve Inadequacy Reserves may develop adversely and become inadequate (deficient) Burn Through on Retentions Retentions, deductibles burned through more quickly Reinsurance Penetration/Exhaustion Higher costs risks burn through their retentions more quickly, tapping into reinsurance more quickly and potentially exhausting their reinsurance more quickly Source: Insurance Information Institute. 135 Tort Cost Growth & Medical Cost Inflation vs. Overall Inflation (CPI-U), 1961-2009E* 14% Tort costs move with inflation but at twice the rate of inflation 12% Tort system is an inflation amplifier Avg. Ann. Change: 1961-2009E* Tort costs: +8.4% Med costs: +5.9% Overall inflation: +4.2% 10% 8% 6% 4% Are there healthcare reform spillover effects? 2% Tort Costs Medical Costs 1971-80 1981-90 CPI 0% 1961-70 1991-2000 2001-09E * CPI-U and medical costs as of Sept 2009; Tort figure is for full-year 2009 from Tillinghast. Source: U.S. Bureau of Labor Statistics; Tillinghast-Towers Perrin, 2008 Update on U.S. Tort Costs; I.I.I. IV. Public Policy Issues Government Action (Direct & Indirect) Will Shape the Casualty Insurance Enviroment for Many Years to Come 137 Financial Services Regulation Any Change to the Status Quo Will Be Felt for Decades 138 Important Issues & Threats Facing Insurers: 2010–2??? Regulatory Overreach Principle danger is that P/C insurers get swept into vast federal regulatory overhaul and subjected to inappropriate, duplicative and costly regulation (Dual Regulation) Systemic Risk Regulator (Too Big To Fail/Too Interconnected to Fail) Is any insurer systemically important? Federal Insurance Office Creation Within Treasury? Eventual “mission creep”?; Activist director? Consumer Financial Protection Agency Will it be limited to banks/creditors Federal Trade Commission: All Lines Study Authority? McCarran-Ferguson Rollback Will it be limited to Health/Med Mal lines? OFC/State Regulation Debate Lingers Taxation/Offshore Domiciles Bottom Line: Regulatory Outcome is Uncertain and Risk of Adverse Outcome Exists. Ultimate Regulation Structure Will Be in Place for Decades Source: Insurance Information Institute. 139 Terrorism: Insurance Concerns Resurface Reasons Why Concerns Are Mounting in 2010 Perception (Reality) that U.S. vulnerability is rising Thwarted Christmas Day attack by “underwear bomber” And new bin Laden tape claiming al Qaeda is responsible Foiled NYC Subway Bomber Plot (Zazi case) Trials of Guantanamo 9/11 suspects in Manhattan Court (?) U.K. in January Raised Terror Alert Status to 2nd Highest Level Increased anti-terror efforts, including full-body scans Effort by government to appear more vigilant, prepared Rise of groups such al Qaeda in the Arabian Peninsula U.S. military surge in Afghanistan operations Most buyers, producers have not thought about coverage issues recently Obama Administration’s Intent to Reduce Support for TRIA 145 Obama Administration Proposal to Scale Back Terrorism Risk Insurance Program Administration’s Budget Proposal for FY 2011: Includes proposal to scale back federal support for terrorism risk insurance program Proposal projects savings of $249 million from 2011-2020 Administration’s justification is that this would “encourage the private sector to better mitigate terrorism risk through other means, such as developing alternative reinsurance options and building safer buildings.” Key Concerns Among Industry Observers Over Proposed Reduction in Federal Support Suggestion of changes to law would have detrimental effect on availability and affordability of terrorism insurance A 2009 Aon study estimated some 70-80 percent of the commercial property insurance market would revert to absolute exclusions for terrorism, if TRIA is changed. Source: Budget of the U.S. Government Fiscal Year 2011 146 Terrorism Risk Insurance Program Faces Reduced Support Under 2011 Proposed Federal Budget $ Millions By shifting more costs to insurers and insureds in the event of a major terrorist attack, the Administration believes that it can save $378 million from 2011 through 2015 $400 $321 $320 $300 $200 $206 $193 $147 $100 $0 ($100) ($26) ($42) ($102) ($200) 2011 2012 Baseline Net Costs 2013 ($74) ($134) 2014 2015 Proposed Change from Current Law The availability of terrorism coverage is threatened by the proposal in the FY 2011 federal budget. Coverage will likely be less available and more expensive. Sources: U.S. federal budget for FY 2011 as proposed in February 2010; Insurance Information Institute. 147 Catastrophic Loss – How Big of a CAT Would it Take to Turn the Market Hard? 153 $100 Billion CAT Year is Coming Eventually $10.6 $27.5 $12.9 $5.9 $26.5 $4.6 $8.3 $10.1 $2.6 $7.4 $8.3 $16.9 $4.7 $2.7 $20 $7.5 $40 $5.5 $22.9 $60 2009 CAT Losses Were Down 48% though Q3 from $21.1B 2008 $26.0 $80 $61.9 2000s: A Decade of Disaster 2000s: $193B (up 117%) 1990s: $89B $100 $6.7 $120 $9.2 ($ Billions) $100.0 US Insured Catastrophe Losses $0 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*20?? 2009 CAT Losses Were Less than Half of 2008. 2005 Was by Far the Worst Year Ever for Insured Catastrophe Losses in the Decade of the 2000s Were More than Double the 1990s, But the Worst Has Yet to Come * 2009 figure is Munich Re estimate. 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. Sources: Property Claims Service/ISO; Insurance Information Institute. 154 Insurance Information Institute Online: www.iii.org Thank you for your time and your attention! Twitter: twitter.com/bob_hartwig