Download Genesis-041013 - Insurance Information Institute

Today’s Uncertain Economy:
Implications for Public Entities
and P/C Insurance
April 10, 2013
Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: 212.346.5540  Cell: 917.494.5945  [email protected]  www.iii.org
The Strength of the Economy
Will Influence P/C Insurer
Growth Opportunities
Growth Will Expand
the Insurer Exposure Base
Across Most Lines
2
A Continued Weak Recovery is Forecast:
Real GDP Growth, Yearly, 1970-2014F
Real GDP
Growth (%)
The median forecast is for
several more years of real
yearly GDP growth under
3% -- weaker than after
most recent recessions
In recoveries, real yearly GDP
growth is often 4% or more
7.5%
6.0%
4.5%
3.0%
1.5%
0.0%
-1.5%
2014F
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
-4.5%
1970
-3.0%
Forecasts from Blue Chip Economic Indicators, 3/2013 issue, median of range of 52 forecasts.
Sources: (GDP) U.S. Department of Commerce at http://www.bea.gov/national/xls/gdpchg.xls.
3
March 2013 Forecasts of Quarterly
US Real GDP for 2013-14
Real GDP Growth Rate
4%
3.5%
3.6%
3%
2.9%
2.5%
2.7%
3.4%
2.6%
3.6%
3.7%
3.7%
2.8%
2.9%
3.0%
2.0%
2.1%
2.2%
2% 2.0%
1.6%
1%
1.7%
1.7%
10 Most Pessimistic
If it lasts, the
sequester will have
greatest effect here
1.1%
Median
10 Most Optimistic
0%
13:Q2
13:Q3
13:Q4
14:Q1
14:Q2
14:Q3
14:Q4
Despite the sequester and other challenges to the U.S. economy,
virtually every forecast in the Blue Chip universe in early March sees
improvement ahead
Sources: Blue Chip Economic Indicators (3/13); Insurance Information Institute
4
State-by-State Leading Indicators
through 2013:Q2
Near-term growth
forecasts vary
widely by state.
Strongest growth
= dark green;
weakest = beige
Sources: Federal Reserve Bank of Philadelphia at www.philadelphiafed.org/index.cfm; Insurance Information Institute.
Next release is April 4, 2013
5
State & Local Government Contribution to
Change* in Real US GDP, Quarterly, 2009-2012
Real GDP
Growth (%)
Cutbacks by state and local
governments have hampered
the economy’s recovery from
the recession
1.00%
The drag on the
economy from state &
local governments is
diminishing.
0.75%
0.50%
0.25%
0.00%
-0.25%
-0.50%
2012:Q4
2012:Q3
2012:Q2
2012:Q1
2011:Q4
2011:Q3
2011:Q2
2011:Q1
2010:Q4
2010:Q3
2010:Q2
2010:Q1
2009:Q4
2009:Q3
2009:Q2
2009:Q1
-0.75%
*seasonally adjusted at annual rates
Sources: (GDP) U.S. Department of Commerce at http://www.bea.gov/national/xls/gdpchg.xls.; I.I.I.
6
Y-o-Y Percentage Change in the Value of Public
Construction Put in Place, by Segment, Feb. 2013*
Growth (%)
30%
Transportation and Power
projects lead public sector
construction
20.5%
16.3%
20%
10%
2.9% 2.4%
0%
-1.7% -2.9%
-10% -3.8%
-9.9%-10.4%-12.3%
-12.5%-12.9%
-13.8%
-20%
Office
Commercial
Public Safety
Amusement &
Rec.
Educational
Health Care
Water Supply
Highway &
Street
Conservation
& Develop.
Transportation
Power
Residential
Total Public
Construction
Sewage &
Waste
Disposal
-22.2%
-30%
With strained state and local government budgets, public construction
activity declined in many segments; will the sequester crimp 2013?
*seasonally adjusted; data published April 1, 2013
Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
8
Labor Market Trends
Steady Job Gains in the Private Sector
Offset Steady Job Losses in the
Public Sector
9
Unemployment and Underemployment
Rates: Stubbornly High in 2012, But Falling
January 2000 through Mar. 2013, Seasonally Adjusted (%)
18.5
"Headline" Unemployment Rate U-3
17.0
Unemployment + Underemployment Rate U-6
15.5
U-6 went from
8.0% in March
2007 to 17.5% in
October 2009;
Stood at 13.8%
in Mar. 2013
14.0
12.5
Unemployment
“Headline”
unemployment
stood at 7.6% in
Mar. 2013.
11.0
9.5
8.0
6.5
5.0
3.5
Nov.
Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan
00 01 02 03 04 05 06 07 08 09 10 11 12 1312
The Federal
Reserve’s target
for ending “easy
money” is 6.5%
(assuming
inflation remains
within its 2%
target).
Stubbornly high unemployment and underemployment constrain overall
economic growth, but the job market is now clearly improving.
Source: US Bureau of Labor Statistics; Insurance Information Institute.
10
State Government Employment
Monthly, 1990–2013*
Millions
5.25
5.00
State government
employment rises in
recessions, shrinks
after them(for a while)
4.75
Latest was
5.02 million,
down 3.7%
from peak
(Aug 2008)
4.50
4.25
4.00
State government
employment rises in
recessions, shrinks
after them (for a while)
State government
employment rises
in recessions,
shrinks after
them (for a while)
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
*As of February 2013 (Jan 2013 and Feb 2013 are preliminary); 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.
11
Local Government Employment
Monthly, 1990–2013*
Millions
15.0
14.5
14.0
Recession proof? Local
government employment
rose through this and
the prior recession
13.5
13.0
Latest was
14.03 million,
down 3.9%
from peak
(Jun 2009)
12.5
12.0
11.5
11.0
10.5
First significant drop
in local government
employment in over
three decades
(-4.2% in 1980-82)
10.0
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
*As of February 2013 (Jan 2013 and Feb 2013 are preliminary); 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.
12
Unemployment Rates Vary Widely
by State and Region*
5.2%
9.4%
8.0%
7.3%
6.5%
5.8%
4.4%
9.3%
8.4%
8.1%
7.2%
6.6%
9.6%
9.4%
8.6%
8.6%
7.9%
7.8%
7.7%
7.3%
7.2%
7.2%
6.0%
5.6%
6%
HI
AK
VT
NH
MA
ME
CT
RI
MD
DE
PA
NY
NJ
VA
LA
AL
AR
WV
FL
TN
KY
GA
SC
0%
NC
3%
MS
Unemployment Rate (%)
9%
New England
Mid-Atlantic
6.5%
Southeast
12%
*Provisional figures for February 2013, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
13
Unemployment Rates Vary Widely
by State and Region* (cont’d)
Great Plains
6.7%
5.5%
5.5%
5.0%
4.4%
3.8%
3.3%
7.2%
7.0%
9.6%
8.4%
7.5%
NV
Great Lakes
9.5%
8.8%
8.7%
9.6%
7.2%
6.2%
5.6%
5.2%
4.9%
CO
Far West
CA
5.0%
6%
Mountain
OK
7.9%
6.8%
6.4%
9%
Southwest
ND
NE
SD
IA
KS
MN
MO
OH
WI
IN
MI
IL
WA
OR
WY
UT
MT
ID
TX
0%
NM
3%
AZ
Unemployment Rate (%)
12%
*Provisional figures for February 2013, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute
14
The Aging Workforce
19
Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.
2012.3
2012.1
2011.3
2011.1
2010.3
2010.1
2009.3
2009.1
2008.3
2008.1
2007.3
2007.1
2006.3
2006.1
2005.3
Age 70-74
2005.1
2004.3
2004.1
2003.3
2003.1
Age 65-69
2002.3
1000
2002.1
1500
2001.3
2000
2001.1
2500
2000.3
(Thousands)
2000.1
3000
1999.3
3500
1999.1
4000
1998.3
4500
624 1027
2014
636 1022
2051
641 1026
2019
686 1069
2083
668 1037
2043
718 1129
2067
773 1094
2043
758 1090
2106
789 1115
2218
780 1139
2251
775 1142
2242
801 1181
2283
779 1215
2234
792 1160
2265
762 1182
2304
815 1177
2327
790 1135
2312
774 1162
2404
802 1138
2406
765 1141
2393
863 1177
2530
9261182
2498
811 1183
2473
919 1213
2559
9281193
2627
947 1244
2570
969 1250
2632
1039
1250
2627
974 1314
2562
1055 1375
2674
10181262
2859
1076
1314
2896
10571356
2723
10851385
2842
986 1397
2872
10851385
3127
10721367
2951
1171
1370
3079
11521452
3047
11331442
3218
11511407
3201
1210
1389
3330
12241530
3344
12581524
3351
1256
1430
3364
1143 1495
3396
1190 1580
3334
1206 1633
3426
11981505
3480
1166 1550
3505
1279
1498
3506
1243 1598
3547
1185 1564
3764
1267 1584
3775
1280 1682
3626
1302 1726
3833
1311 1719
4074
1301
4138
1284
1381 1779
1835
1842
4105
4213
500
1998.1
Number of Workers Age 65-69, 70-74,
and 75+, Quarterly, 1998-2012
Age 75 & over
There are now over 7.4 million senior
workers. This is double the number
in 1998. Over the next decade it will
probably double again.
This is the leading edge
of the older half of the
“baby boom” generation
2013.1
2012.3
2012.1
31.1%
32.2%
32.2%
32.5%
31.8%
31.8%
31.7%
2011.3
2010.3
2010.1
2009.3
2009.1
2008.3
2008.1
2007.3
27.9%
28.5%
28.7%
2006.3
2005.3
2005.1
2004.3
2004.1
2003.3
2003.1
2002.3
2002.1
2001.3
2001.1
2000.3
2000.1
1999.3
20%
1999.1
22%
1998.3
24%
22.1%
22.5%
22.3%
23.0%
22.8%
23.0%
22.9%
23.5%
24.4%
24.4%
24.3%
24.9%
24.4%
24.4%
24.8%
25.2%
25.2%
26.3%
26.5%
26.2%
26%
1998.1
28%
The brown bars
indicate recessions.
27.9%
27.2%
27.0%
27.4%
27.9%
27.3%
27.8%
27.6%
26.8%
27.6%
30%
2006.1
29.3%
29.5%
32%
2007.1
34%
30.8%
29.3%
30.1%
29.1%
30.3%
30.1%
30.9%
31.0%
30.7%
31.0%
31.4%
30.9%
31.2%
31.6%
31.3%
31.5%
31.4%
1 in 3 in this age group
are working. Virtually
none of them are “baby
boomers”
2011.1
Labor Force
participation rate
32.8%
32.3%
Labor Force Participation Rate,
Ages 65-69, Quarterly, 1998:Q1-2013:Q1
The switch from DB pension plans (with early-retirement incentives) to DC plans (with, in
effect, later-retirement incentives) might be partly responsible for raising this rate.
Not seasonally adjusted. Sources: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.
9%
Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.
The labor force participation rate for workers 70-74 grew by about 50% since 1998.
Growth stalled during and after the Great Recession but has since resumed.
2013.1
2012.3
2012.1
2011.3
2011.1
2010.3
2010.1
2009.3
2009.1
2008.3
2008.1
2007.3
2007.1
2006.3
2006.1
2005.3
2005.1
2004.3
2004.1
2003.3
2003.1
2002.3
2002.1
2001.3
2001.1
2000.3
2000.1
1999.3
1999.1
15%
1998.3
Labor Force
participation rate
21%
12.5%
12.2%
12.4%
12.9%
12.4%
13.6%
13.1%
13.1%
13.3%
13.5%
13.6%
13.8%
14.4%
13.7%
14.2%
14.2%
13.8%
14.2%
14.0%
14.0%
14.4%
14.4%
14.6%
14.9%
14.9%
15.4%
15.6%
15.3%
16.4%
17.0%
15.8%
16.2%
16.7%
16.9%
17.2%
17.0%
16.7%
16.8%
18.0%
17.5%
17.3%
16.9%
18.6%
18.2%
17.7%
17.9%
18.9%
19.2%
18.0%
18.1%
17.4%
18.4%
18.0%
18.4%
19.3%
19.5%
19.2%
19.1%
19.9%
19.6%
18.8%
18%
1998.1
Labor Force Participation Rate,
Ages 70-74, Quarterly, 1998:Q1-2013:Q1
Nearly 1 in 5 in this age
group is working.
15 years ago it was 1 in 8.
12%
Labor Force Participation Rate,
Ages 70-74, Quarterly, 1998:Q1-2013:Q1
Labor Force
participation rate
men
women
26%
24%
22%
20%
18%
16%
14%
12%
The labor force participation rate for men 70-74 grew by about 50% since 1998,
but for women 70-74 it nearly doubled (from about 9% to about 15.5%).
Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.
2013.1
2012.3
2012.1
2011.3
2011.1
2010.3
2010.1
2009.3
2009.1
2008.3
2008.1
2007.3
2007.1
2006.3
2006.1
2005.3
2005.1
2004.3
2004.1
2003.3
2003.1
2002.3
2002.1
2001.3
2001.1
2000.3
2000.1
1999.3
1999.1
1998.3
8%
1998.1
10%
5%
4.5%
4.6%
4.6%
5.0%
4.8%
5.1%
5.4%
5.2%
5.4%
5.3%
5.2%
5.3%
5.2%
5.2%
5.1%
5.4%
5.1%
5.1%
5.2%
5.0%
5.5%
5.9%
5.8%
5.8%
5.9%
6.0%
6.1%
6.5%
6.1%
6.6%
6.3%
6.7%
6.4%
6.6%
6.0%
6.5%
6.5%
7.1%
7.0%
6.9%
6.9%
7.2%
7.4%
7.6%
7.6%
7.0%
7.2%
7.3%
7.3%
6.9%
7.7%
7.5%
7.1%
7.5%
7.6%
7.7%
7.6%
7.6%
7.4%
7.8%
7%
1998.1
1998.2
1998.3
1998.4
1999.1
1999.2
1999.3
1999.4
2000.1
2000.2
2000.3
2000.4
2001.1
2001.2
2001.3
2001.4
2002.1
2002.2
2002.3
2002.4
2003.1
2003.2
2003.3
2003.4
2004.1
2004.2
2004.3
2004.4
2005.1
2005.2
2005.3
2005.4
2006.1
2006.2
2006.3
2006.4
2007.1
2007.2
2007.3
2007.4
2008.1
2008.2
2008.3
2008.4
2009.1
2009.2
2009.3
2009.4
2010.1
2010.2
2010.3
2010.4
2011.1
2011.2
2011.3
2011.4
2012.1
2012.2
2012.3
2012.4
2013.1
Labor Force
participation rate
9%
The labor force participation
rate for workers 75 and over will
probably hit 10% soon. This is
close to what the rate was for
the 70-74 group a decade ago.
In the last 14 years, the labor force participation rate for workers 75 and over grew
from 4.5% to 8.6%. So 91.4% of these people are retired.
Sources: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.
8.6%
Labor Force Participation Rate, Quarterly
Ages 75 and over, 1998-2013:Q1
3%
Labor Force Participation Rate, Quarterly
Ages 75 and over, 1998-2013:Q1
Labor Force
participation rate
13%
men
women
12%
11%
10%
9%
8%
7%
6%
5%
4%
2%
1998.1
1998.2
1998.3
1998.4
1999.1
1999.2
1999.3
1999.4
2000.1
2000.2
2000.3
2000.4
2001.1
2001.2
2001.3
2001.4
2002.1
2002.2
2002.3
2002.4
2003.1
2003.2
2003.3
2003.4
2004.1
2004.2
2004.3
2004.4
2005.1
2005.2
2005.3
2005.4
2006.1
2006.2
2006.3
2006.4
2007.1
2007.2
2007.3
2007.4
2008.1
2008.2
2008.3
2008.4
2009.1
2009.2
2009.3
2009.4
2010.1
2010.2
2010.3
2010.4
2011.1
2011.2
2011.3
2011.4
2012.1
2012.2
2012.3
2012.4
2013.1
3%
In the last 15 years, the labor force participation rate for men 75 and over
grew from 6.9% to 12.6% and for women doubled (from 2.9% to 5.8%).
Sources: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.
Fatal Work Injury Rate per 100,000
full-time-equivalent workers
No improvement in
fatal work injury rate
for this age group
14
10
8
The fatality rate for workers 65 and older
was 5 times that of workers age 25-34.
The workplace of the future will have to
be completely redesigned to
accommodate the surge in older workers.
20-24
25-34
4.2
4.1
3.7
3.6
3.6
3.3
3.1
2.7
2.4
2.7
18-19
3.7
3.4
3.2
3.0
2.9
2.7
3.0
2.6
2.4
2.2
4
2.8
2.6
2.4
2.5
2.8
6
2006
2007
2008
2009
2010
5.0
4.6
4.5
4.3
4.7
12
11.2
10.2
12.2
12.1
11.9
Fatal Work Injury Rates Improved Slightly
Since 2006 but Still Climb Sharply With Age
2
0
35-44
45-54
Source: US Bureau of Labor Statistics, at http://www.bls.gov/iif/oshcfoi1.htm/#2010
55-64
65+
26
Older Workers Lose More Days
from Work Due to Injury or Illness
Median Days
Away From
Work
16
14
Oldest baby
boomer is age
67 (in 2013)
Youngest baby
boomer is age
49 (in 2013)
2008
2009
2010
2011
14
12
12
10
9 9
10
8
11
12 12
13
15
15
14
13
10
9
8
6 6 6 6
6
5 5 5 5
4
2
0
20-24
25-34
35-44
45-54
55-64
65+
Median lost time of workers age 65+ is 2-3X that of workers age 25-34.
These numbers are pretty stable—they haven’t changed much since 2008.
Source: US Bureau of Labor Statistics, Nonfatal Occupational Injuries and Illnesses Requiring Days Away From Work, 2011
(Table 10), released November 8, 2012.
27
Older Workers Are Much
More Likely to Break a Bone
Incidence
Rate* (2011)
Fractures
Multiple Traumatic Injuries
18
15.3
16
13.4
14
12
9.9
10
8
7.8
6.7
7.4
6
4
6.4
5.9
4.0
4.3
3.1
3.7
20-24
25-34
35-44
45-54
2
0
55-64
65+
*per 10,000 full-time-equivalent workers
Source: US Bureau of Labor Statistics, US Department of Labor at http://www.bls.gov/news.release/pdf/osh2.pdf Table 14
29
Older Workers Are More Likely to Slip When
Walking, but Less Likely to Overexert Themselves
Floors, Walkways, etc.
10
22.3
12.8
17.0
11.4
10.5
10.9
9.9
20
12.7
30
23.8
40
30.6
34.7
37.7
50
39.6
44.3
49.6
Incidence rate for injury
caused by vehicles is about
the same for all age groups
Overexertion
10.2
60
Vehicles
35.1
Source/Nature of Injury:
12.1
Incidence
Rate (2011)
0
20-24
25-34
35-44
45-54
55-64
65+
Source: US Bureau of Labor Statistics, US Department of Labor at http://www.bls.gov/news.release/pdf/osh2.pdf Table 14
30
Investments:
The New Reality
Investment Performance is a
Key Driver of Profitability
31
Insurers Have Not Yet Fully Adapted to a
Persistently Low Interest Rate Environment
They Didn’t Expect Rates to be
 Pushed to Such Low Levels
 Pushed Down so Rapidly
 Held to Such Low Levels for So Long
 Suppressed via Unprecedented Aggressiveness
of the Federal Reserve
Ability to Release Prior Reserves Eased Urgency
OFFSETTING FACTORS
Capitalization Still Solid
Emergence of Sophisticated Price Monitoring
and Underwriting Tools
32
U.S. 10-Year Treasury Note Yields:
A Long Downward Trend, 1990–2013
9%
8%
Yields on 10-Year U.S.
Treasury Notes recently
plunged to all time
record lows
7%
6%
5%
4%
3%
2%
Yields on 10-Year U.S. Treasury
Notes have been essentially
below 5% for a full decade.
1%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations,
most P/C insurer portfolios will have low-yielding bonds for years to come.
Note: Recessions indicated by gray shaded columns.
Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm.
National Bureau of Economic Research (recession dates); Insurance Information Institutes.
33
Distribution of Bond Maturities,
P/C Insurance Industry, 2003-2011
2011
15.2%
41.4%
2010
16.3%
39.5%
2009
16.2%
2008
15.7%
2007
15.2%
30.0%
2006
16.0%
2005
36.2%
10.3% 6.3%
26.7%
28.7%
11.7% 7.3%
8.1%
33.8%
12.9%
8.1%
29.5%
34.1%
13.1%
7.4%
16.0%
28.8%
34.1%
13.6%
7.6%
2004
15.4%
29.2%
2003
14.4%
29.8%
20%
31.2%
11.1% 6.4%
12.7%
0%
32.4%
26.8%
32.5%
31.3%
40%
60%
15.4%
15.4%
80%
Under 1 year
1-5 years
5-10 years
10-20 years
over 20 years
7.6%
9.2%
100%
The main shift over these years has been from bonds with longer maturities to bonds
with shorter maturities. The industry first trimmed its holdings of over-10-year bonds
(from 24.6% in 2003 to 16.9% in 2011) and then trimmed bonds in the 5-10-year category.
Falling average maturity of the P/C industry’s bond portfolio is contributing to a drop in
investment income along with lower yields.
Sources: A.M. Best; Insurance Information Institute.
34
Property/Casualty Insurance Industry
Investment Gain: 1994–2012F1
($ Billions)
$70
$64.0
$58.0
$60
$52.3
$55.7
$51.9
$53.4
$56.2
$50.8
10
11 12F
$48.9
$47.2
$50
$59.4
$56.9
$45.3
$44.4
$42.8
$40 $35.4
$39.2
$36.0
$31.7
$30
$20
Investment gains in 2012 are
running approximately 20%
below their pre-crisis peak
$10
$0
94
95
96
97
98
99
00
01
02
03
04
05* 06
07
08
09
In 2012 (1st three quarters) both investment income and realized capital
gains were lower than in the comparable period in 2011. And because
the Federal Reserve Board aims to keep interest rates exceptionally low
through mid-2015, maturing bonds will be re-invested at even lower rates.
1Investment
gains consist primarily of interest, stock dividends and realized capital gains and losses.
*2005 figure includes special one-time dividend of $3.2B; 2012F figure is I.I.I. estimate based on annualized actual 2012:Q3 result of
$38.089B. Sources: ISO; Insurance Information Institute.
A 100 Combined Ratio Isn’t What It
Once Was: Investment Impact on ROEs
Combined Ratio / ROE
15.9%
110
A combined ratio of about 100 generates an
ROE of ~7.0% in 2012, ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
106.4
14.3%
12.7%
105
100.6
100
100.1
101.0
100.8
99.3
95.7
95
7.4%
92.7
8.8%
15%
10.9%
9.6%
97.5
18%
101.1
100.9
7.6%
12%
9%
6.2%
4.4%
4.6%
90
6%
Year Ago
85
3%
2011:H1 = 109.4,
2.3% ROE
0%
80
1978
1979
2003
2005
2006
2007
Combined Ratio
2008
2009
2010
2011
2012:H1
ROE*
Combined Ratios Must Be Lower in Today’s Depressed
Investment Environment to Generate Risk Appropriate ROEs
* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012:H1 combined ratio
including M&FG insurers is 102.2, ROAS = 5.9%; 2011 combined ratio including M&FG insurers is 108.2, ROAS = 3.5%.
Source: Insurance Information Institute from A.M. Best and ISO data.
P/C Insurance Industry
Financial Overview
Profit Recovery Was Set Back
in 2011 and 2012
by High Catastrophe Losses
& Other Factors
38
20%
5%
-5%
-10%
Most recent
“hard market”
Sources: ISO; Insurance Information Institute.
1.3%
2.3%
1.7%
3.5%
1.6%
3.2%
3.8%
3.1%
4.2%
5.1%
0.5%
2.1%
0.0%
0%
10.3%
10.2%
13.4%
6.6%
15.1%
16.8%
16.7%
12.5%
10.1%
9.7%
7.8%
7.2%
5.6%
2.9%
5.5%
10%
10.2%
15%
2002:Q1
2002:Q2
2002:Q3
2002:Q4
2003:Q1
2003:Q2
2003:Q3
2003:Q4
2004:Q1
2004:Q2
2004:Q3
2004:Q4
2005:Q1 -4.6%
2005:Q2
-4.1%
2005:Q3 -5.8%
2005:Q4
-1.6%
2006:Q1
2006:Q2
2006:Q3
2006:Q4
2007:Q1
-1.6%
2007:Q2
2007:Q3
2007:Q4
-1.9%
2008:Q1
2008:Q2
-1.8%
2008:Q3
-0.7%
2008:Q4 -4.4%
2009:Q1
-3.7%
2009:Q2 -5.3%
2009:Q3 -5.2%
2009:Q4
-1.4%
2010:Q1
-1.3%
2010:Q2
2010:Q3
2010:Q4
2011:Q1
2011:Q2
2011:Q3
2011:Q4
2012:Q1
2012:Q2
2012:Q3
P/C Net Premiums Written: % Change,
Quarter vs. Year-Prior Quarter, 2002–2012
This upward trend
is likely to continue
as the economy’s
recovery strengthens
Finally! A sustained period (10 quarters) of growth in net premiums
written (vs. same quarter, prior year), and strengthening.
39
Commercial Lines Direct Premiums Written:
Pct. Change by State, 2006-2011*
NC -7.9
NY -7.8
WA -7.6
MS -6.7
NM -6.6
MA -6.6
OH -6.4
IL -6.3
-2.5
0.0
IN
TN
0.2
VT
-1.5
0.9
WI
LA
2.7
AK
-0.5
2.9
TX
WY
OK
MT
SD
-20
ND
0
AR
4.0
25.6
KS
MN
27.9
NE
20
8.3
28.9
40
IA
38.9
60
14.9
80
Only 13 states showed any
direct written premium
growth in commercial lines
from 2006 to 2011
60.8
Pecent change (%)
100
Top 25 States
100.9
120
Sources: SNL Financial LC.; Insurance Information Institute.
42
Direct Premiums Written: Comm. Lines
Percent Change by State, 2006-2011*
Bottom 25 States
0
-24.4
AZ
WV
-40
US
-35
NV
-33.0
-30
-26.4
-23.7
-19.9
HI
FL
-19.8
NH
-13.6
CO
-19.4
-13.2
RI
-25
CA
-13.2
NJ
-16.7
-12.9
MD
DE
-12.7
ID
-16.0
-12.2
GA
MI
-11.6
VA
-15.0
-11.4
AL
OR
-10.8
SC
-14.7
-10.1
CT
-20
UT
-10.0
-8.1
MO
-15
ME
-8.0
PA
-9.0
-7.9
-10
KY
Pecent change (%)
-5
States with the poorest performing economies also produced
the most negative net change in premiums of the past 5 years
Sources: SNL Financial LC.; Insurance Information Institute.
43
Underwriting Gain (Loss)
1975–2012:Q3**
($ Billions)
$35
$25
In historical context,
2006-07 underwriting
results were an
anomaly
Net
underwriting
losses in 1st 3
qtrs of 2012
totaled $6.7B
$15
$5
-$5
-$15
-$25
-$35
-$45
Cumulative underwriting
loss since 1975? $500B,
averaging $13.2B/year.
-$55
High cat losses
in 2011 led to
the worst
underwriting
year since 2002
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Average yearly underwriting loss in the 2008-2011 low-interest-rate
environment? $17.8B. With interest rates this low, large persistent
underwriting losses are not a recipe for success.
*Includes mortgage and financial guaranty insurers in all years. **through first three quarters of 2012
Sources: A.M. Best; ISO; Insurance Information Institute.
P/C Insurance Industry
Combined Ratio, 2001–2012:Q3*
Heavy Use of
Reinsurance
Lowered Net
Losses
As Recently as 2001,
Insurers Paid Out
Nearly $1.16 for Every
$1 in Earned
Premiums
Relatively
Low CAT
Losses,
Reserve
Releases
Relatively
Low CAT
Losses,
Reserve
Releases
120
115.8
110
Best
Combined
Ratio Since
1949 (87.6)
107.5
Cyclical
Deterioration
Higher
CAT
Losses,
Shrinking
Reserve
Releases,
Toll of Soft
Market
Avg. CAT
Losses,
More
Reserve
Releases
106.4
101.0
100.8
100.1
99.3
98.4
100
100.8
Lower
CAT
Losses
Before
Sandy
100.0
95.7
92.6
90
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011*
2012:Q3
* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.2; 2012:Q3=100.9.
Sources: A.M. Best; ISO.
46
Commercial Lines Combined Ratio,
1990-2013F*
Commercial Lines Combined Ratio
125
122.3
118.8
120
115
110
Commercial lines
underwriting
performance in 2012 was
the worst since 2002
due to heavy impact
from Sandy
112.5
110.2
109.4
112.3
111.1
109.7
110.2
109.5
110.2
109.0
107.6
106.7
105.4
104.2
104.1
105
102.5
102.0
102.9
102.1
100
98.9
95
93.6
90
13F
12F
11
10
09
08
07
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
91.1
*2007-2013F figures exclude mortgage and financial guaranty segments.
Sources: A.M. Best; Insurance Information Institute
47
101.2
102.7
103.6
01 02
105
107.1
00
110
104.6
97
116.2
96
115.7
95
115.9
113.0
115
112.0
120
112.1
125
118.1
Commercial Auto Combined Ratio:
1993–2014F
05
06
98.0
99.4
96.8
04
94.3
92.4
90
92.1
95.2
95
92.9
100
85
98
99
03
07 08
09
10
11 12F 13F 14F
Commercial Auto is Expected to Improve as Rate Gains
Outpace Any Adverse Frequency and Severity Trends
Sources: A.M. Best (1990-2013F);Conning (2014F); Insurance Information Institute.
48
Commercial Multi-Peril Combined Ratio:
1995–2013F
CMP-Liability
CMP-Non-Liability
130
120
110
100
90
80
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11 12E 13F
Commercial Multi-Peril Underwriting Performance is Expected to
Improve in 2013 Assuming Normal Catastrophe Loss Activity
*2012-2013 figures are A.M. Best estimate/forecast for the combined liability and non-liability components.
Sources: A.M. Best; Insurance Information Institute.
49
General Liability Combined Ratio:
2005–2014F
115
112.9
110.8
110
107.1
105
103.3
103.7
13F
14F
100.7
100
99.6
99.0
95
95.1
94.2
90
05
06
07
08
09
10
11
12F
Commercial General Liability Underwriting Performance Has
Been Volatile in Recent Years
Source: Conning Research and Consulting.
50
Inland Marine Combined Ratio:
1999–2014F
105
101.9
100.2
100
97.7 97.7
95
93.3
92.8
90
89.9
89.7 89.7
89.3
85
86.2
83.8
80
82.5
80.8
79.5
77.3
75
99
00
01
02
03
04
05
06
07
08
09
10
11
12F 13F 14F
Inland Marine is Expected to Remain Among the Most
Profitable of All Lines
Sources: A.M. Best (1999-2011); Insurance Information Institute (2012F); Conning (2013F-2014F)
51
Surety Bonds Combined Ratio,
2002–2011
125
116.9
122.0
119.5
101.8
100
81.6
75
79.5
70.4
66.6
70.5
72.5
2010
2011
50
2002
2003
2004
2005
Source: A.M. Best Aggregates & Averages, 2012, p. 376.
2006
2007
2008
2009
52
Workers Compensation Combined
Ratio: 1994–2014F
90
111.0
115.0
117.3
116.9
116.8
110.6
104.5
103.5
98.5
102.7
105.1
108.6
121.7
112.6
107.0
97.0
100
101.0
100.0
110
102.0
120
118.2
115.3
130
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12E 13F 14F
Workers Comp underwriting results are expected to begin
improving in 2013. They deteriorated markedly since 2007 and in
2012 are estimated to have hit their worst level in a decade.
Sources: A.M. Best (1994-2013F); Insurance Information Institute (2014F).
53
$26,981
$19,150
$3,043
$28,672
$35,204
$65,777
$44,155
$38,501
$30,029
$20,559
$20,598
$10,870
$3,046
$10,000
$19,316
$20,000
$5,840
$30,000
$14,178
$40,000
$21,865
$50,000
$30,773
$60,000
Through the first three
quarters of 2012, P/C
Industry profits were up
222% from the comparable
period in 2011, mainly due
to lower CAT losses in
2012:Q2 and Q3
$36,819
$70,000
2005 ROE*= 9.6%
2006 ROE = 12.7%
2007 ROE = 10.9%
2008 ROE = 0.1%
2009 ROE = 5.0%
2010 ROE = 6.6%
2011 ROAS1 = 3.5%
2012:Q3 ROAS1 = 6.3%
$24,404
$80,000








$62,496
P/C Net Income After Taxes
1991–2012:Q3 ($ Millions)
$0
-$10,000
-$6,970
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.2% ROAS for
2012:H1, 4.6% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.
Sources: A.M. Best; ISO; Insurance Information Institute.
11 12:Q3
Profitability Peaks & Troughs in the P/C
Insurance Industry, 1975 – 2012:Q3*
ROE
25%
1977:19.0%
History suggests next ROE
peak will be in 2016-2017
1987:17.3%
20%
2006:12.7%
1997:11.6%
15%
9 Years
2012:Q3:
6.3%
10%
5%
2011:
4.6%*
0%
1984: 1.8%
1992: 4.5%
2001: -1.2%
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11*
12:
-5%
1975: 2.4%
*Profitability = P/C insurer ROEs. 2012 is an estimate based on ROAS data. Note: Data for 2008-2012 exclude mortgage and
financial guaranty insurers. 2012:H1 ROAS = 5.9% including M&FG.
Sources: Insurance Information Institute; NAIC; ISO; A.M. Best.
Policyholder Surplus,
2006:Q4–2012:Q3
($ Billions)
Drop due to near-record
2011 CAT losses
$600
The industry now has $1 of surplus for
every $0.80 of NPW, the strongest
claims-paying status in its history
$575
$500
$566.5
$559.2
$570.7
$559.1
$550.3
$538.6
$544.8
$550
$525
$583.5
$540.7
$530.5
$521.8$517.9
$515.6
$512.8
$505.0
$496.6
$487.1
$478.5
$475
$511.5
$490.8
$463.0
$455.6
$450
Surplus as of
9/30/12 was a
new peak
$437.1
12:Q3
12:Q1
11:Q4
11:Q3
11:Q2
11:Q1
10:Q4
10:Q3
10:Q2
10:Q1
09:Q4
09:Q3
09:Q2
09:Q1
08:Q4
08:Q3
08:Q2
08:Q1
07:Q4
07:Q3
07:Q2
07:Q1
06:Q4
$425
Sources: ISO; A.M .Best.
59
Inflation and Claims Trends
60
Prices for Hospital Services:
12-Month Change,* 1998–2013
Recession
Outpatient Services
Inpatient Services
14%
12%
10%
8%
6%
4%
2%
0%
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
Cyclical peaks in PP Auto tend to occur approximately every 10 years
(early 1990s, early 2000s, and possibly the early 2010s)
*Percentage change from same month in prior year; through January 2013; seasonally adjusted
Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.
61
Forces that Drive Car Repair Costs:
12-Month Change,* 2001–2013
Recession
Auto repair
Auto body work
14%
12%
10%
8%
6%
4%
2%
0%
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
Cyclical peaks in PP Auto tend to occur approximately every 10 years
(early 1990s, early 2000s, and possibly the early 2010s)
*Percentage change from same month in prior year; through January 2013; seasonally adjusted
Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.
62
Catastrophes
63
Natural Disasters in the United States,
1980 – 2012
Number of Events (Annual Totals 1980 – 2012)
There were 184 natural
disaster events in the
US in 2012
300
There were over 150 natural
disaster events in the US every
year since 2006. That hadn’t
happened in any year before.
250
Number
200
150
100
41
19
50
121
3
1980
1982
1984
1986
1988
Geophysical
(earthquake, tsunami,
volcanic activity)
Source: MR NatCatSERVICE
1990
1992
1994
1996
1998
2000
Meteorological (storm)
Hydrological
(flood, mass movement)
2002
2004
2006
2008
2010
2012
Climatological
(temperature extremes,
drought, wildfire)
64
US Insured Catastrophe Losses
$7.5
$10.5
$37.0
$29.2
$33.7
$16.3
$7.6
$6.1
$11.6
$14.3
$3.8
$11.0
$12.6
$8.8
$10
$8.0
$20
$4.8
$30
$14.0
$40
$26.4
$37.8
$50
$34.7
$60
$33.1
$70
2012 CAT losses
were down nearly 50%
from 2011 until Sandy
struck in late October
$14.4
$80
$11.5
$73.4
($ Billions, 2012 Dollars)
$0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*
US CAT Losses in 2012 Will Likely Become the 2nd or 3rd
Highest in US History on An Inflation-Adjusted Basis (Pvt
Insured). 2011 Losses Were the 5th Highest
Record Tornado
Losses Caused
2011 CAT Losses
to Surge
*As of 1/2/13. Includes $20B gross loss estimate for Hurricane Sandy.
Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and
personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.)
Sources: Property Claims Service/ISO; Insurance Information Institute.
65
65
The Dozen Most Costly Hurricanes
in U.S. History
Insured Losses,
2012 Dollars,
$ Billions
Sandy will likely become
the 3rd costliest hurricane
in US insurance history
$60
$50
$40
$30
Irene became the
12th most expensive
hurricane in US
history
$48.7
$25.6
$20.0
$20
$10
$5.6
$6.7
$7.8
$8.7
$9.2
$4.4
$5.6
Irene
(2011)
Jeanne
(2004)
Frances
(2004)
Rita
(2005)
Hugo
(1989)
Ivan
(2004)
Charley
(2004)
$11.1
$13.4
$0
Wilma
(2005)
Ike
(2008)
Sandy*
(2012)
Andrew
(1992)
Katrina
(2005)
10 of the 12 most costly hurricanes in insurance history
occurred in the past 9 years (2004—2012)
*Estimate as of 12/09/12 based on estimates of catastrophe modeling firms and reported losses as of 1/12/13. Estimates range up to $25B.
Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.
66
If They Hit Today, the Dozen Costliest
(to Insurers) Hurricanes in U.S. History
Insured Losses,
2012 Dollars, $ Billions
$140
$120
$100
Storms that hit long ago had less property and
businesses to damage, so simply adjusting their
actual claims for inflation doesn’t capture their
destructive power.
Karen Clark’s analysis aims to overcome that.
$80
$125
$65
$60
$35
$40
$20
$20
$20
Sandy*
(2012)
Betsy
(1965)
Hazel
(1954)
$40
$40
Katrina
(2005)
Galveston
(1915)
$50
$50
$50
Andrew
(1992)
southFlorida
(1947)
Galveston
(1900)
$25
$20
$0
Donna
(1960)
New
England
(1938)
midFlorida
(1928)
Miami
(1926)
When you adjust for the damage prior storms could have done if they
occurred today, Hurricane Katrina slips to a tie for 6th among the most
devastating storms.
*Estimate as of 12/09/12 based on estimates of catastrophe modeling firms and reported losses as of 1/12/13. Estimates range up to $25B.
Sources: Karen Clark & Company, Historical Hurricanes that Would Cause $10 Billion or More of Insured LossesToday, August 2012; I.I.I.
67
Superstorm Sandy:
Number of Claims by Type*
Commercial
, 167,500 ,
12%
Auto,
230,500 ,
17%
Sandy is a high
frequency, (relatively
low) severity event (avg.
severity <50% Katrina)
Hurricane Sandy
resulted in an
estimated 1.4 million
privately insured
claims resulting in an
estimated $15 to $25
billion in insured
losses. Hurricane
Katrina produced 1.74
million claims and
$47.6B in losses
(in 2011 $)
Homeowner
, 982,000 ,
71%
*PCS claim count estimate as of 11/26/12. Loss estimate represents high and low end estimates by risk modelers RMS, Eqecat and AIR. PCS
estimate of insured losses as of 11/26/12 $11 billion. All figures exclude losses paid by the NFIP.
Source: PCS; AIR, Eqecat, AIR Worldwide; Insurance Information Institute.
68
Long Island (NY) Flood-Damaged
Structures with & w/o Flood Insurance
Only 37.5% of flood damaged buildings in Nassau
County were insured for flood, 62.5% uninsured
Number of
buildings
80,000
$15.0
74,736
70,000
60,000
43,106
27.6% of flood damaged buildings
in Suffolk County were insured for
flood, 73.4% uninsured
50,000
Insured
Uninsured
40,000
30,000
20,000
20,798
52,428
10,000
5,747
$2.2
15,051
0
Nassau
Suffolk
The Maximum FEMA Grant is $31,900. The Average Grant Award to
Homeowners and Renters on Long Island is About $7,300
Source: Newsday, 1/14/13 from FEMA and Small Business Administration.
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Residential NFIP Flood Take-Up Rates
in NY, CT (2010) & Sandy Storm Surge
Flood
coverage
penetration
rates were
extremely low
in many very
vulnerable
areas of NY
and CT, with
take-up rates
far below 50%
in many areas
Source: Wharton Center for Risk Management and Decision Processes, Issue Brief, Nov. 2012; Insurance Information Institute.
70
TERRORISM RISK
The Countdown to TRIA Expiration Begins
Reauthorization Faces an Uphill
Battle in Congress
71
I.I.I. Congressional Testimony on the Future
of the Terrorism Risk Insurance Program
 Issue: Act expires 12/31/14. Insurers
still generally regard large-scale terror
attacks as fundamentally uninsurable
 I.I.I. Input: Testified at first hearing on
the issue in DC (on 9/11/12) on trends in
terrorist activity in the US and abroad,
difficulties in underwriting terror risk;
Noted that bin Laden may be dead but
war on terror is far from over
 Status: New House FS Committee Chair
Jeb Hensarling has opposed TRIA in the
past; Obama Administration does not
seem to support extension; Little
institutional memory on insurance
subcommittee
 Media: Virtually no media coverage yet
apart form trade press; WSJ will likely
editorialize against it.
 Objective: Work with trades, risk
management community and others to
help build support
72
Loss Distribution by Type of Insurance
from Sept. 11 Terrorist Attack ($ 2011)
($ Billions)
Other
Liability
$4.9 (12%)
Property Life
WTC 1 & 2*
$1.2 (3%)
$4.4 (11%)
Aviation
Liability
$4.3 (11%)
Event
Cancellation
$1.2 (3%)
Aviation Hull
$0.6 (2%)
Workers
Comp
$2.2 (6%)
Property Other
$7.4 (19%)
Biz
Interruption
$13.5 (33%)
Total Insured Losses Estimate: $40.0B**
*Loss total does not include March 2010 New York City settlement of up to $657.5 million to compensate approximately 10,000
Ground Zero workers or any subsequent settlements.
**$32.5 billion in 2001 dollars.
Source: Insurance Information Institute.
Terrorism Violates Traditional
Requirements for Insurability
Requirement
Definition
Violation
Estimable
Frequency
Insurance requires large
number of observations to
develop
predictive
ratemaking models (an actuarial
concept known as credibility)
Very few data points
Terror modeling still in
infancy, untested.
Inconsistent
assessment of threat
Estimable
Severity
Maximum possible/ probable
loss must be at least
estimable in order to minimize
“risk of ruin” (insurer cannot
run an unreasonable risk of
insolvency though assumption
of the risk)
Potential
loss
is
virtually unbounded.
Losses can easily
exceed insurer capital
resources for paying
claims.
Extreme
risk
in
workers compensation
and statute forbids
exclusions.
Source: Insurance Information Institute
Terrorism Violates Traditional
Requirements for Insurability (cont’d)
Requirement Definition
Violation
be able to Losses likely highly
Diversifiable Must
spread/distribute
risk concentrated geographically or
Risk
across large number of by industry (e.g., WTC, power
Random
Loss
Distribution/
Fortuity
Source: Insurance
Information Institute
risks
“Law
of
Large
Numbers” helps makes
losses manageable and
less volatile
Probability of loss
occurring
must
be
purely random and
fortuitous
Events are individually
unpredictable in terms
of time, location and
magnitude
plants)
Terrorism attacks are planned,
coordinated and deliberate acts
of destruction
Dynamic target shifting from
“hardened targets” to “soft
targets”
Terrorist adjust tactics to
circumvent new security
measures
Actions of US and foreign govts.
may affect likelihood, nature and
timing of attack
Key Takaways
76
Takeaways:
Insurance Industry Predictions for 2013
 P/C Insurance Exposures Will Grow With the U.S.
Economy
 Personal and commercial exposure growth is likely in 2013
– But restoration of destroyed exposure will take until mid-decade
 Wage growth is also positive and could modestly accelerate
 P/C Industry Growth in 2013 Will Be Strongest Since 2004
 Growth likely to exceed A.M. Best projection of +3.8% for 2012
 No traditional “hard market” emerges in 2013
 Underwriting Fundamentals Deteriorate Modestly
 Some pressure from claim frequency, severity in some key lines
 But WC will be tough to fix
 Industry Capacity Hits a New Record by Year-End 2013
(Barring Meg-CAT)
 Investment Environment Is/Remains Challenging
 Interest rates remain low
77
Insurance Information Institute
www.iii.org
Thank you for your time
and your attention!