Download P6466 - iii Template - Insurance Information Institute

The Global Economy, Rising Risk
and Marine Insurance Markets
Risk and Reward in a Troubled World
San Francisco Board of Marine Underwriters
San Francisco, CA
May 3, 2012
Download at www.iii.org/presentations
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
 Global Economic Overview & Outlook
 International Overview
 Emerging vs. Developing Markets
 Global Trade Volume Forecasts: Imports/Exports
 US Economy Overview & Outlook




GDP Outlook
Drivers of P/C Insurance Exposures
Marine Drivers
Presidential Politics and P/C Profitability
 The Unfortunate Nexus of Opportunity, Risk and Uncertainty
 The Fusion of Economic and (Geo)Political Risk
 Top 10 Risks for the Global Economy
 Global Catastrophe Loss Trends and Threats
 Was 2011 an Aberration or a Foreshadowing of the Future
 US P/C Insurance Industry Financial Overview & Outlook
2
Global Economic Outlook:
Regional and Major Economy
Perspectives
Strength of Economies Varies Greatly as
Does Pace of Recovery from the
Economic Challenges
Important Consequences for Insurer and
Reinsurer Growth Opportunities
3
Rebuilding
acts as a
stimulus to
Japanese
economy
1.8%
1.7%
8.5%
9.2%
1.7%
0.9%
0.6%
3.1%
China growth
has slowed, but
remains strong
in an expected
“soft landing”
scenario
1.5%
2.6%
0.6%
2%
2.3%
4%
1.7%
6%
0.7%
8%
US
recovery
continues
The Eurozone
and UK are in
recession.
Both should
end in
Q3:2012
1.7%
10%
8.4%
Real GDP Growth Forecasts:
Major Economies: 2011 – 2013F
0%
-0.5%
-2%
US
UK
Euro Area
2011
2012F
-0.7%
Germany
China
Japan
2013F
Growth Prospects Vary Widely by Region: Brightening in the US,
Mild Recession in the Eurozone, A “Soft Landing” in China, Strength in
India, Reconstruction Stimulus in Japan and Modest Growth in
America’s Largest Trading Partners—Canada and Mexico.
Sources: Blue Chip Economic Indicators (4/2012 issue); Insurance Information Institute.
4
5.3%
5.4%
5.1%
5.3%
6.2%
4.5%
5.4%
7.0%
3.9%
4.0%
4.3%
4.3%
2.9%
1.9%
5.3%
4.5%
3.7%
4.2%
4.9%
7.3%
6.9%
4.1%
3.5%
4%
2%
3.5%
6%
3.9%
10%
8%
5.3%
12%
7.2%
10.6%
Real GDP Growth Forecasts: Emerging
Market Regions: 2010 – 2013F
0%
World
Output
India
Middle
East &
North
Africa*
2010
Central &
Eastern
Europe
2011
2012F
Russia
ASEAN-5**
SubSaharan
Africa
2013F
Growth Prospects Vary Widely by Region: All Regions Slowed in 2011 As
Economic Recovery Encountered Many Challenges. IMF Outlook for
2012 Is Mixed With Broader, More Robust Growth in 2013 Predicted.
Actual Growth in 2012 Could Surprise to the Upside.
*Excludes Libya in 2011. **Indonesia, Malaysia, Thailand, Philippines and Vietnam
Sources: IMF World Economic Outlook (April 2012 ); Insurance Information Institute.
5
GDP Growth: Advanced & Emerging
Economies vs. World, 1970-2013F
GDP Growth (%)
10.0
8.0
World output is forecast to grow by
3.5% in 2012 and 4.1% in 2013. The
world economy shrank by 0.6% in
2009 amid the global financial crisis
Emerging economies (led
by China) are expected to
grow by 5.7% in 2012 and
6.0% in 2013.
6.0
4.0
2.0
(2.0)
(4.0)
Advanced economies are expected
to grow at a sluggish pace of 1.4% in
2012 and 2.0% in 2013.
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
10
11
12F
13F
0.0
Advanced economies
Emerging and developing economies
World
Source: International Monetary Fund, World Economic Outlook Update, Apr. 2012; Ins. Info. Institute.
Relative Shares of Global Output,
Advanced vs. Developing Economies, 2009
The gap is closing quickly. China
became the world’s second largest
economy in 2010 and before long the
developing world’s share of GDP will
exceed that of advanced economies.
Developing
Economies
47.1%
Advanced
Economies
52.9%
Source: EDC Economics, “The Moment of Truth: Global Export Forecast Fall 2010, at http://www.edc.ca/english/docs/gef_e.pdf
7
Current Real GDP Growth vs. Pre-Crisis
Average (2000-2007 vs. 2011F-2012F*)
The US, Europe and
Eurasia have seen
significant slowdowns
Latin and South
American markets are
in general growing
more strongly than
prior to the crisis
Parts of the Middle
East and South Asia
have done well
*Percentage point difference between compound annual rates of change 2000-2007 vs. forecasts for 2011-2012.
Source: IMF, World Economic Outlook, September 2011; Insurance Information Institute.
8
Current Real GDP Growth vs. Pre-Crisis
Average (2000-2007 vs. 2011F-2012F*)
Growth in much
of Europe today
is about 2 pts.
Lower than precrisis
*Percentage point difference between compound annual rates of change 2000-2007 vs. forecasts for 2011-2012.
Source: IMF, World Economic Outlook, September 2011; Insurance Information Institute.
9
World Trade Volume:
2010—2013F
Percentage Change (%)
14%
12.9%
12%
10%
After decelerating in 2011
and 2012, global trade
growth is expected
accelerate in 2013
8%
5.8%
6%
5.6%
4.0%
4%
2%
0%
2010
2011
2012F
2013F
Growth in World Trade Volume (Imports + Exports) Has
Slowed But Continues to Grow
Sources: IMF World Economic Outlook (April 2012 ); Insurance Information Institute.
10
World Trade Volume: Imports
2010 – 2013F
Growth (%)
Advanced Economies
Emerging Economies
18%
16%
14%
12%
11.5%
Import growth in emerging
economies outpaces
Advanced Economies by a
wide margin.
15.3%
10%
8.8%
8.1%
8.1%
2012F
2013F
8%
6%
4.3%
4.1%
4%
1.8%
2%
0%
2010
2011
2012F
2013F
2010
Sources: IMF World Economic Outlook (April 2012 ); Insurance Information Institute.
2011
11
World Trade Volume: Exports
2010 – 2013F
Growth (%)
Advanced Economies
16%
14%
Emerging Economies
14.7%
12.2%
12%
10%
Export growth in emerging
economies outpaces Advanced
Economies by a much narrower
margin than imports.
8%
5.3%
6%
4%
6.7%
6.6%
2011
2012F
7.2%
4.7%
2.3%
2%
0%
2010
2011
2012F
2013F
2010
Sources: IMF World Economic Outlook (April 2012 ); Insurance Information Institute.
2013F
12
The Strength of the Economy
Will Influence P/C Insurer
Growth Opportunities
All Lines of Commercial Insurance Will
Benefit, Including Marine
13
1.6%
2%
0.6%
4%
The Q4:2008 decline was
the steepest since the
Q1:1982 drop of 6.8%
1.1%
1.8%
2.5%
3.6%
3.1%
2.7%
0.9%
3.2%
2.3%
2.9%
6%
4.1%
Real GDP Growth (%)
5.0%
3.9%
3.8%
2.5%
2.3%
0.4%
1.3%
1.8%
3.0%
2.2%
2.3%
2.4%
2.6%
2.4%
2.6%
2.9%
3.0%
US Real GDP Growth*
-2%
-4%
-6%
-8%
2000
2001
2002
2003
2004
2005
2006
07:1Q
07:2Q
07:3Q
07:4Q
08:1Q
-0.7%
08:2Q
08:3Q
-4.0%
08:4Q-6.8%
09:1Q
-4.9%
09:2Q
-0.7%
09:3Q
09:4Q
10:1Q
10:2Q
10:3Q
10:4Q
11:1Q
11:2Q
11:3Q
11:4Q
12:1Q
12:2Q
12:3Q
12:4Q
13:1Q
13:2Q
13:3Q
13:4Q
0%
Recession began in Dec.
2007. Economic toll of
credit crunch, housing
slump, labor market
contraction has been
severe but modest
recovery is underway
2012 is expected to see
a modest but choppy
acceleration in growth
continuing into 2013
Demand for Insurance Continues To Be Impacted by Sluggish Economic
Conditions, but the Benefits of Even Slow Growth Will Compound and
Gradually Benefit the Economy Broadly
*
Estimates/Forecasts from Blue Chip Economic Indicators.
Source: US Department of Commerce, Blue Economic Indicators 4/12; Insurance Information Institute.
14
Consumer Sentiment Survey (1966 = 100)
75.3
Feb-12
74.3
75.0
64.1
Mar-12
Dec-11
Nov-11
Oct-11
Sep-11
Aug-11
Jul-11
Jun-11
May-11
Apr-11
Mar-11
Feb-11
Jan-11
Dec-10
Sep-10
Aug-10
Jul-10
Jun-10
May-10
Apr-10
Mar-10
Feb-10
Jan-10
45
Nov-10
50
Oct-10
Optimism among consumers is
recovering, in part due to an
improving jobs outlook, after
plunging amid the debt debate
debacle and S&P downgrade
55
40
Jan-12
55.7
60
60.9
65
59.4
63.7
69.9
71.5
69.8
67.5
74.3
77.5
74.2
74.5
71.6
67.7
68.2
70
68.9
67.8
76
73.6
72.2
73.6
75
73.6
80
74.4
January 2010 through March 2012
Consumer confidence has been low for years amid high
unemployment, falling home prices and other factors adversely impact
consumers, but improved substantially in late 2011 and early 2012
Source: University of Michigan; Insurance Information Institute
15
Auto/Light Truck Sales, 1999-2022F
11.6
10.4
15.4
15.5
15.4
15.1
14.7
14.9
12.7
14.5
New auto/light truck sales fell to
the lowest level since the late
1960s. Forecast for 2012-13 is
still far below 1999-2007 average
of 17 million units, but a
recovery is underway.
13.2
16.1
16.5
16.9
16.9
16.6
17.1
17.5
17.8
19
18
17
16
15
14
13
12
11
10
9
17.4
(Millions of Units)
Job growth and improved
credit market conditions
will boost auto sales in
2012 and beyond
99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F 14F 15F 16F 17F 1822F
Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point,
Bolstering the Auto Insurer Growth and the Manufacturing Sector.
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 4/12); Insurance Information Institute.
16
Value of Construction Put in Place,
Feb. 2012 vs. Feb. 2011*
Growth (%)
Private: +10.2%
15%
10%
Public: -1.4%
10.2%
5.8%
4.6%
5%
6.4%
0%
-10%
-15%
-20%
-0.7%
-1.4%
-5%
Private sector
construction activity is up
in both the residential and
nonresidential segments
Public sector
construction activity
remains depressed
-21.9%
-25%
Total
Construction
Total Private Residential-Construction
Private
NonResidential-Private
Total Public
Construction
ResidentialPublic
NonResidential-Public
Overall Construction Activity is Up, But Growth Is Entirely in the Private
Sector as State/Local Government Budget Woes Continue
*seasonally adjusted
Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
17
ISM Manufacturing Index
(Values > 50 Indicate Expansion)
54.8
53.4
52.4
54.1
52.2
Nov-11
53.1
51.8
Oct-11
52.5
52.5
51.4
55.8
59.7
59.7
60.8
58.5
58.2
56.9
55.3
55.2
54.2
55
55.1
55.3
57.8
59.6
60.4
57.1
60
58.3
65
61.4
January 2010 through April 2012
50
Apr-12
Mar-12
Feb-12
Jan-12
Dec-11
Sep-11
Aug-11
Jul-11
Jun-11
May-11
Apr-11
Mar-11
Feb-11
Dec-10
Nov-10
Oct-10
Sep-10
Aug-10
Jul-10
Jun-10
May-10
Apr-10
Mar-10
Feb-10
40
Jan-10
45
Jan-11
Optimism among
manufacturers was
increasing in late 2011 and
into early 2012
The manufacturing sector has been expanding and adding jobs.
The question is whether this will continue.
Source: Institute for Supply Management at http://www.ism.ws/ismreport/mfgrob.cfm; Insurance Information Institute.
19
Dollar Value* of Manufacturers’
Shipments Monthly, Jan. 1992—Mar. 2012
$ Millions
$500,000
The value of Manufacturing
Shipments in Mar. 2012 was up 31%
to $466B from its May 2009 trough.
Dec. figure is only 3.9% below its
previous record high in July 2008.
$400,000
$300,000
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01
Ja
n
02
Ja
n
03
Ja
n
04
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n
05
Ja
n
06
Ja
n
07
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n
08
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n
09
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n
10
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11
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12
$200,000
Monthly shipments are nearly back to peak (in July 2008, 8 months into the
recession). Trough in May 2009. Growth from trough to March 2012 was 31%. This
growth leads to gains in many commercial exposures: WC, Commercial Auto, Marine,
Property and Various Liability Coverages
*seasonally adjusted
Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/ 20
Manufacturing Growth for Selected
Sectors, 2012 vs. 2011*
Growth (%)
Non-Durables: +8.5%
Durables: +11.4%
35%
31.4%
Manufacturing of durable
goods has been
especially strong
30%
25%
20%
15%
10%
9.8%
15.6%
13.5%
11.4%
12.7%
8.5%
7.2%
10.8%
7.1%
6.6%
6.2%
5%
Textile
Products
Plastics &
Rubber
Chemical
Petroleum &
Coal
Food
Products
Non-Durable
Mfg.
Transportation
Equip.
Electrical
Equip.
Machinery
Primary
Metals
Durable Mfg.
All
Manufacturing
0%
Manufacturing Is Expanding Across a Wide Range of Sectors that Will
Contribute to Growth in Insurable Exposures Including: WC, Commercial
Property, Commercial Auto and Many Liability Coverages
*Seasonally adjusted; Date are YTD comparing data through Feb. 2012 to the same period in 2011.
Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/ 21
Recovery in Capacity Utilization is a
Positive Sign for Commercial Exposures
March 2001 through March 2012
“Full Capacity”
The US operated at 78.6% of
industrial capacity in Mar.
2012, above the June 2009
low of 68.3% and close to its
post-crisis peak
Percent of Industrial Capacity
82%
Hurricane
Katrina
80%
78%
76%
The closer the economy is
to operating at “full
capacity,” the greater the
inflationary pressure
74%
72%
March 2001November 2001
recession
Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm.
Dec 11
Sep 11
Jun 11
Mar 11
Dec 10
Jun 10
Sep 10
Mar 10
Dec 09
Jun 09
Sep 09
Mar 09
Dec 08
Jun 08
Sep 08
Mar 08
Dec 07
Jun 07
Sep 07
Mar 07
Dec 06
Jun 06
Sep 06
Mar 06
Dec 05
Jun 05
Sep 05
Jun 04
Sep 04
Mar 04
Dec 03
Jun 03
Sep 03
Mar 03
Dec 02
Sep 02
Jun 02
Mar 02
Dec 01
Sep 01
Jun 01
Mar 01
66%
Mar 05
December 2007June 2009 Recession
68%
Dec 04
70%
22
22
Global Industrial Production
(2000-Feb. 2012)
Global industrial
production has
been volatile but
is growing
12
Source: IMF, World Economic Outlook, April 2012; Insurance Information Institute.
23
Business Bankruptcy Filings,
1980-2011
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%
208.9%*
2011 bankruptcies totaled 47,806, down 15.1%
from 56,282 in 2010—the second consecutive
year of decline. Business bankruptcies more
than tripled during the financial crisis.
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
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
60,837
56,282
47,806
% Change Surrounding
Recessions
Significant Exposure Implications for All Commercial Lines as
Business Bankruptcies Begin to Decline
Sources: American Bankruptcy Institute at
http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633;
Insurance Information Institute
25
Private Sector Business Starts,
1993:Q2 – 2011:Q3*
230
220
210
200
190
180
170
Business Starts
2006: 872,000
2007: 843,000
2008: 790,000
2009: 697,000
2010: 722,000
2011: 748,000**
175
186
174
180
186
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
207
199
191
193
172
176
169
184
175
179
188
200
183
187
191
(Thousands)
Business starts were up 3.5% to 561,000 in
the first 9 months of 2011 vs. first 9
months 2010. 722,000 new business
starts were recorded in 2010, up 3.6% from
697,000 in 2009, which was the slowest
year for new business starts since 1993
160
150
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
Business Starts Were Down Nearly 20% in the Recession,
Holding Back Most Types of Commercial Insurance Exposure, But
Are Recovering Slowly
* Data through September 30, 2011 are the latest available as of May 2, 2012; Seasonally adjusted. **Annualized based on data through 9/30.
Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.
26
12 Industries for the Next 10 Years:
Insurance Solutions Needed
Health Care
Health Sciences
Energy (Traditional)
Alternative Energy
Petrochemical
Agriculture
Natural Resources
Technology (incl. Biotechnology)
Many
industries are
poised for
growth,
though
insurers’
ability to
capitalize on
these
industries
varies widely
Light Manufacturing
Insourced Manufacturing
Export-Oriented Industries
Shipping (Rail, Marine, Trucking)
27
Global Oil Consumption and Price,
2008 – 2035F
$124.94
$124.68
140
110.8
120
109.1
107.6 $124.53
$124.20
106.1
$123.71
104.5
$123.09
103.2
$122.30
101.8
$121.34
100.5
$120.25
99.3
$118.99
98.2
$117.54
97.1
$115.96
96.1
$112.36
$114.21
95.1
93.5
92.9
92.5
92.0
91.5
91.1
90.4
90.3
88.9
87.4
86.0
Nominal Price/BBL
100
80
60
Global oil consumption is
expected to rise by 1.1% per
year on average through 2035
40
20
Total Consumption
2034
2035
2030
2031
2032
2033
2026
2027
2028
2029
2022
2023
2024
2025
2018
2019
2020
2021
0
2014
2015
2016
2017
80
2010
2011
2012
2013
85
2008 85.5
2009 83.7
90
89.6
95
94.3
$110.30
$108.10
$103.15
$100.50
$97.62
$94.58
$91.38
$88.03
$85.73
$83.21
$78.03
100
$61.66
105
$100.51
110
$105.71
The nominal price of oil is
expected to rise by 2.8% per year
on average through 2035
Millions of Barrels per Day
Nominal Price (Light, Low Sulfur Crude)
Oil Will Become Relatively More Expensive Over Time, With Price
Increases Outstripping Income Growth in Many Parts of the World
*
Source: US Energy Information Administration; Insurance Information Institute
US Natural Gas Production and Non-Hydro
Renewable Electricity Generation, 1990-2035P
Shale gas production is
expected to grow
rapidly in the US
Wind is expected to account
for the majority of renewable
electricity generation
Tight gas production
involves controversial
hydraulic fracturing
(fracking) techniques
Source: US Energy Information Administration, Annual Energy Outlook 2011; Insurance Information Institute.
29
World Primary Energy Consumption,
1990-2030P
Quadrillion BTUs
800
678.3
700
637.3
595.7
600
551.5
462.1
500
400
300
200
100
472.4
508.3
347.7
Between 2006 and 2030,
energy consumption in
projected to increase
annually by 1.5% worldwide
but only 0.5% in the US
Global energy
consumption is
expected to increase by
33.4% between 2010 and
2030 but by only 12% in
the US
0
1990
2005
2006
2010P
2015P
2020P
2025P
Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.
2030P
Presidential Politics & the P/C
Insurance Industry
How Is Profitability Affected by
the President’s Political Party?
31
P/C Insurance Industry ROE by
Presidential Administration, 1950- 2012*
16.43%
Carter
Reagan II
15.10%
G.W. Bush II
9.40%
Nixon
8.93%
8.65%
Clinton I
G.H.W. Bush
OVERALL RECORD:
1950-2012*
Democrats 7.67%
Republicans 7.97%
8.35%
Clinton II
7.98%
Reagan I
7.68%
Nixon/Ford
6.98%
Truman
6.97%
Obama
6.65%
Eisenhower I
5.43%
5.03%
Eisenhower II
G.W. Bush I
4.83%
Johnson
4.43%
Kennedy/Johnson
Party of President has
marginal bearing on
profitability of P/C
insurance industry
3.55%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
*Truman administration ROE of 6.97% based on 3 years only, 1950-52; ROEs for the years 2008 forward exclude mortgage and financial guaranty segments.
Estimated ROE for 2012 = 7.0%.
Source: Insurance Information Institute
P/C insurance Industry ROE by
Presidential Party Affiliation, 1950- 2012*
RED = Republican President
Reagan/Bush I
Clinton
Bush II
Obama
Nixon/Ford
Carter
Kennedy/
Johnson
20%
Truman
25%
Eisenhower
BLUE = Democratic President
15%
10%
5%
0%
*ROEs for the years 2008 forward exclude mortgage and financial guaranty segments; Estimated 2012 ROE = 7.0%
Source: Insurance Information Institute
12E
08
10
04
06
00
02
96
98
92
94
88
90
84
86
80
82
76
78
72
74
68
70
64
66
60
62
56
58
52
54
50
-5%
Election 2012: Political Issues Impacting
Insurers
 Presidential Race Is Tight
 Potential for Senate to Flip Republican
 Affordable Care Act/Health Care Reform (ObamaCare)
 Romney, Republicans generally vow to repeal the Act
 Complete repeal is unlikely as several popular ACA provisions are already implemented
 Supreme Court will rule on the constitutionality of the Act in June; Outcome uncertain
 Dodd-Frank Act/Financial Services Reform & Implementation





Republicans refer to DFA as a “confidence killer” and want it scaled back
Outright repeal is highly unlike irrespective of election outcome
Systemic criteria have been developed; Designations in late 2012
Financial Stability Oversight Council: Current/future composition impacted by election
Changes to DFA and/or implementation will have little impact on P/C insurers
 Key Committee Shifts Possible
 Senate Banking Chair: Tim Johnson (D-SD)  Richard Shelby (R-AL)
 House Finl. Svcs. Chair: Spencer Bachus (R-AL)  Jeb Hensarling (R-TX) (term limits)
– If House flipped Chair would go to Maxine Waters (D-CA)
 Federal Insurance Office
 If Romney wins, he will appoint a new Treasury Secretary
 FIO leadership, agenda and funding could be impacted
 Secretary Geithner likely to step down after election even if Obama is re-elected
 Agent Licensing, NFIP
34
The Unfortunate Nexus:
Opportunity, Risk & Instability
Most of the Global Economy’s Future
Gains Will be Fraught with Much
Greater Risk and Uncertainty than in
the Past
35
Global Real (Inflation Adjusted) Nonlife
Premium Growth: 1980-2010
Average: 1980-2010
Real growth rates
Industrialized Countries: 3.8%
Emerging Markets: 9.2%
20%
Overall Total: 4.2%
Nonlife premium growth in
emerging markets has
exceeded that of
industrialized countries in
27 of the past 31 years,
including the entirety of the
global financial crisis..
15%
10%
5%
0%
-10%
Real nonlife premium growth is very erratic in
part to inflation volatility in emerging markets as
well as a lack of consistent cyclicality
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-5%
Total
Source: Swiss Re, sigma, No. 2/2010.
Industrialised countries
Emerging markets
36
Nonlife Real Premium Growth in 2010
Latin and South American
markets performed
relatively well during and
after the global financial
crisis in terms of growth
Source: Swiss Re, sigma, No. 2/2011.
There was also growth
in the Middle East, East
and South Asia as well
as Australia and New
Zealand
37
Nonlife Real Premium Growth Rates
by Region: 2000-2009 and 2010
Real Premium Growth Rates
World
World
Every
emerging
market region
except Central
and Eastern
Europe
experienced
growth during
the financial
crisis and into
2010
Industrialised countries
countries
Industrialised
North America
America
North
Western Europe
Europe
Western
Continental Europe
Europe
Continental
and newly industrialised Asian economies
JapanJapan
and newly
industrialised Asian economies
Oceania
Oceania
Emerging markets
Emerging markets
South and East Asia
South and East Asia
Latin America and the Caribbean
Latin America and the Caribbean
Central and Eastern Europe
Central and Eastern Europe
Africa
Africa
Middle East and Central Asia
Middle East and Central Asia
-4%
-12%
The Middle East and many emerging
market economies continued to grow
during the global financial crisis and
continued to benefit from foreign
direct investment
Source: Swiss Re, sigma, No. 2/2011.
0%
-8%
4%
-4%
8%
12%
16%
20%
24%
0%
4%
8%
12%
16%
2009growth rate 2000-2009
Growth rate 2010Growth
Annualrate
average
Annual average growth rate 1999-2008
38
Distribution of Nonlife Premium:
Industrialized vs. Emerging Markets, 2009
2009, $Billions
Premium Growth Facts
 Although premium growth
throughout the industrialized
world was negative in 2009, its
share of global nonlife
premiums remained very high
at nearly 86%--accounting for
nearly $1.5 trillion in premiums.
 The financial crisis and sluggish
recovery in the major insurance
markets will accelerate the
expansion of the emerging
market sector
Industrialized
Economies
$1, 485.8
85.7%
14.3%
Emerging
Markets
$248.8
Developing markets now
account for 47% of global
GDP but just 14% of nonlife
premiums
Sources: Swiss Re; Insurance Information Institute research.
39
Political Risk in 2011/12: Greatest Business
Opportunities Are Often in Risky Nations
The fastest growing
markets are generally
also among the politically
riskiest, including East
and South Asia
Much of the middle East
and North Africa have
experienced and
continue to experience
political turmoil
Source: Maplecroft
Heightened risk
has economic
and insurance
implications
40
The “Arab Spring” Has Increased Uncertainty
in an Already Volatile Part of the World
Arab Spring
‫الربيع العربي‬
Some energy-rich nations
have been among the most
unstable in 2011/12
Longer-run,
significant
investment and
insurance
opportunities
exist throughout
the region
Government overthrown
Sustained civil disorder and governmental changes
Protests and governmental changes
Major protests
Minor protests
Protests outside the Arab world
Source: Wikipedia as of Nov. 7, 2011; Insurance Information Institute research.
41
Country Risk
The risk that country-specific factors could adversely affect an insurer’s
ability to pay its financial obligations
Macroeconomy
Economic Risk
Prospects
CRT-1
Lowest Risk
Government Finance
Business Environment
Government Stability
Political Risk
Social Stability
CRT-3
Moderate Risk
Legal System
Financial System Risk
Non-Insurance
Banking System
Reporting Standards &
Regulation
Sovereign Debt
Government & Legislation
Insurance
Supervisory Authority
Insurer Accountability
Source: A.M. Best.
CRT-5
Highest Risk
Country Risk Relates to
Insurance Market Development
Low risk
countries have
high insurance
penetration rates
and afford fewer
growth
opportunities
14.0%
12.0%
Penetration (%)
10.0%
8.0%
Higher risk countries
have low insurance
penetration rates and
often offer more
growth opportunities
6.0%
4.0%
2.0%
0.0%
Country Risk Score (from lower to higher risk)
Low Risk
Source: A.M. Best.
High Risk
Summary of 10 Greatest Potential Threats
to Global Economy as of May 2012
1. Armed Conflict in the Middle East, Disrupting Oil Markets


$200/bbl oil is possible; Severe supply disruptions
Resultserious damage to the global economy, killing fragile recovery
2. Rising Oil Prices


Even in the absence of armed conflict, oil prices slowing growth
Sustained $10/bbl increase  -0.2% on global GDP in Year 1; -0.5% Year 2
3. Sovereign Debt Concerns in Europe (was #1 threat in 2011)



Contagion spreads beyond GreeceSpain, Italy, Portugal, etc.
EU political/economic solution fails resulting in disorderly default
Sharp drift to the left in Europe & lose of resolve to address Eurozone problems
4. “Hard Landing” of Chinese Economy

A sharp decline in China’s GDP would damage global economies
5. Mega-Catastrophe Trends Continue at Record Pace


6.
7.
8.
9.
10.
Catastrophes trimmed 0.5% off global GDP in 2011
Massive disruptions to fragile global supply chains
Sudden Weakening of US Economy
Intensification of Geopolitical Instability (esp. Middle & Far East)
Disintegration of Eurozone (Political Failure)
Commodity Price Inflation (apart from oil)
Large-Scale Cyber Attack/Terrorism Attack (including cyberterror)
45
Global Catastrophe Loss
Developments and Trends
2011 Rewrote Catastrophe Loss and
Insurance History
But Will Losses Turn the Market?
46
Natural Loss Events, 2011
World Map
Winter Storm Joachim
France, Switzerland,
Germany, 15–17 Dec.
Wildfires
Canada, 14–22 May Severe storms, tornadoes
USA, 20–27 May
Hurricane Irene
USA, Caribbean
22 Aug.–2 Sept.
Floods
USA, April–May
Drought
Severe
storms, tornadoes
USA, Oct. 2010–
USA,
22–28
April
ongoing
Flash floods, floods
Italy, France, Spain
4–9 Nov.
Earthquake
Turkey
23 Oct.
Earthquake, tsunami
Japan, 11 March
Wildfires
USA, April/Sept.
Floods
Pakistan
Aug.–Sept.
Floods, flash floods
Australia,
Dec. 2010–Jan. 2011
Landslides, flash floods
Brazil, 12/16 Jan.
Natural catastrophes
Selection of significant
loss events (see table)
Source: MR NatCatSERVICE
Cyclone Yasi
Australia, 2–7 Feb.
Floods
Thailand
Aug.–Nov.
Floods, landslides
Guatemala, El Salvador
11–19 Oct.
Number of Events: 820
Tropical Storm Washi
Philippines, 16–18 Dec.
Drought
Somalia
Oct. 2010–Sept. 2011
Geophysical events
(earthquake, tsunami, volcanic activity)
Meteorological events
(storm)
Earthquake
New Zealand, 22 Feb.
Earthquake
New Zealand, 13 June
Hydrological events
(flood, mass movement)
Climatological events
(extreme temperature, drought, wildfire)
48
Natural Catastrophes Worldwide 2011
Insured losses US$ 105bn - Percentage distribution per continent
2%
44%
In 2011, just 37% of
insured natural
catastrophe losses
were in the
Americas, barely half
the average of 66%
over the prior 30
years (1981-2010)
Continent
America (North and South
America)
Europe
Africa
37%
<1%
17%
Insured losses
US$ m
40,000
2,000
Minor damages
Asia
45,000
Australia/Oceania
18,000
In 2011, 61% of insured
natural catastrophe losses
were in the Asia/Pacific
region, nearly 3.5 times the
average of 13% over the
prior 30 years (1981-2010)
Source: MR NatCatSERVICE
49
49
Natural Catastrophes Worldwide 1980 – 2011
Insured losses US$ 870bn - Percentage distribution per continent
16%
13%
66%
<1%
5%
Continent
America (North and South
America)
Europe
Africa
Asia
Australia/Oceania
Insured losses
US$ m
566,000
146,000
2,000
115,000
41,000
In 2011, 61% of natural
catastrophe losses were
in the Asia/Pacific region,
nearly 3.5 times the
average of 13% over the
prior 30 years (1981-2010)
Source: MR NatCatSERVICE
50
50
Top 16 Most Costly World Insurance
Losses, 1970-2011**
(Insured Losses, 2011 Dollars, $ Billions)
$50
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
Large catastrophes in
Asia/Pacific and South
America Have dominated
mega-losses since 2010
5 of the top 14 most
expensive
catastrophes in world
history have occurred
within the past 2 years
$47.6
$37.5
$19.1
$9.7
$7.7 $8.1 $8.3 $8.5 $9.3
Hugo
(1989)
Winter
Storm
Daria
(1991)
Chile
Quake
(2010)
Ivan
Typhoon Charley
(2004) Mirielle (2004)
(1991)
$21.3
$24.0 $25.0
$11.9 $13.0 $13.0 $13.1
Wilma Thailand New Ike
Northridge Spring WTC
(2005) Floods Zealand (2008) (1994)Tornadoes/ Terror
(2011) Quake
Storms Attack
(2011)
(2011) (2001)
*Average of range estimates of $35B - $40B as of 1/4/12; Privately insured losses only.
**Figures do not include federally insured flood losses.
Sources: Swiss Re sigma 1/2011; Munich Re; Insurance Information Institute research.
Andrew Japan Katrina
(1992) Quake, (2005)
Tsunami
(2011)*
52
Worldwide Natural Disasters,
1980 – 2011
Number of Events
There were 820
events in 2011
1 200
1 000
800
600
400
200
1980
1982
1984
Geophysical events
(Earthquake, tsunami,
volcanic eruption)
Source: MR NatCatSERVICE
1986
1988
1990
1992
1994
Meteorological events
(Storm)
1996
1998
2000
2002
Hydrological events
(Flood, mass
movement)
2004
2006
2008
2010
Climatological events
(Extreme temperature,
drought, forest fire)
53
U.S. Insured Catastrophe
Loss Update
2011 Was One of the Most Expensive
Years on Record
55
Top 14 Most Costly Disasters
in U.S. History
(Insured Losses, 2011 Dollars, $ Billions)
$50
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
Taken as a single event, the Spring
2011 tornado and storm season are is
the 4th costliest event in US
insurance history
$19.1
$4.3
$4.4
$5.5
$6.5
Irene
(2011)
Jeanne
(2004)
Frances
(2004)
Rita
(2005)
$7.7
$8.5
$9.0
Hugo
(1989)
Ivan
(2004)
Charley
(2004)
Hurricane Irene became
the 11th most expense
hurricane in US history
$21.3
$47.6
$24.0 $25.0
$11.9 $13.1
Wilma
(2005)
Ike
Northridge Spring
9/11
(2008)
(1994) Tornadoes Attack
& Storms* (2001)
(2011)
Andrew
(1992)
Katrina
(2005)
*Losses will actually be broken down into several “events” as determined by PCS. Includes losses for the period April 1 – June 30.
Sources: PCS; Insurance Information Institute inflation adjustments.
56
Natural Disasters in the United States,
1980 – 2011
Number of Events (Annual Totals 1980 – 2011)
300
There were 117 natural
disaster events in 2011
250
Number
200
150
100
37
8
50
51
2
1980
1982
1984
1986
1988
Geophysical
(earthquake, tsunami,
volcanic activity)
Source: MR NatCatSERVICE
1990
1992
1994
1996
1998
Meteorological (storm)
Hydrological
(flood, mass movement)
2000
2002
2004
2006
2008
2010
Climatological
(temperature extremes,
drought, wildfire)
57
US Insured Catastrophe Losses
($ Billions, 2011 Dollars)
$100
$32.3
$14.1
$28.5
$10.3
$11.2
$71.7
$32.9
$15.9
$7.4
$6.0
$11.3
$14.0
$3.7
$10.7
$12.3
$8.6
$7.8
$4.7
$13.7
$40
$25.8
$36.9
$60
$33.9
$80
$20
Record Tornado
Losses Caused
2011 CAT Losses
to Surge
$7.3
$120
$100.0
$100 Billion CAT Year is
Coming Eventually
$0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*20??
US CAT Losses in 2011 Were the 5th Highest in US History on An
Inflation Adjusted Basis
*PCS figure as of April 6, 2012.
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.
59
59
Combined Ratio Points Associated with
Catastrophe Losses: 1960 – 2011*
8.0
8.1
4.4
2010
2008
2006
1.6
2.6
2.7
3.3
3.3
1.6
2002
2004
1.6
2000
1998
1.0
1996
5.0
5.4
3.6
2.9
2.3
2.1
1990
1992
1.2
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1.2
0.4
0.8
1.3
0.3
0.4
0.7
1.5
1.0
0.4
0.4
0.7
1.8
1.1
0.6
1.4
2.0
1.3
2.0
0.5
0.5
0.7
1966
3.0
3.6
0.4
1964
1962
0.8
1.1
1.1
0.1
0.9
1
0
1960
5
4
3
2
5.9
1960s: 1.04
1970s: 0.85
1980s: 1.31
1990s: 3.39
2000s: 3.52
2010s: 6.20*
8
7
6
3.3
2.8
10
9
8.8
Avg. CAT Loss
Component of the
Combined Ratio
by Decade
1994
Combined Ratio Points
The Catastrophe Loss Component of Private Insurer Losses Has
Increased Sharply in Recent Decades
*Insurance Information Institute estimates for 2010 and 2011 based on A.M. Best data.
Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for
losses ultimately paid by foreign insurers and reinsurers.
Source: ISO; Insurance Information Institute.
62
U.S. Thunderstorm Loss Trends,
1980 – 2011
Thunderstorm losses in
2011 totaled a record
$25.8 billion
Average
thunderstorm
losses are up more
than 5 fold since
the early 1980s
Source: Property Claims Service, MR NatCatSERVICE
Hurricanes get all the headlines,
but thunderstorms are consistent
producers of large scale loss.
2008-2011 are the most expensive
years on record.
63
P/C Insurance Industry
Financial Overview
Profit Recovery Was Set Back
in 2011 by High Catastrophe
Loss & Other Factors
64
$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
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:Q3 ROAS1 = 3.5%
P-C Industry 2011 profits were
down 46% to $19.2B vs. 2010, due
primarily to high catastrophe
losses and as non-cat
underwriting results deteriorated
$36,819
$70,000







$24,404
$80,000
$62,496
P/C Net Income After Taxes
1991–2011 ($ 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 4.6% ROAS for 2011,
7.6% for 2010 and 7.4% for 2009.
Sources: A.M. Best, ISO, Insurance Information Institute
11*
A 100 Combined Ratio Isn’t What It
Once Was: Investment Impact on ROEs
A combined ratio of about 100
generated ~5.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Combined Ratio / ROE
15.9%
110
18%
106.4
14.3%
12.7%
105
100.6
100
100.1
101.0
100.8
9.6%
97.5
99.3
95.7
95
7.4%
92.7
8.8%
15%
10.9%
100.9
12%
7.6%
9%
4.4%
4.6%
90
6%
85
3%
80
0%
1978
1979
2003
2005
2006
Combined Ratio
2007
2008
2009
2010
2011
ROE*
Combined Ratios Must Be Lower in Today’s Depressed
Investment Environment to Generate Risk Appropriate ROEs
* 2008 -2011 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2011 combined ratio
including M&FG insurers is 108.2, ROAS = 3.5%.
Source: Insurance Information Institute from A.M. Best and ISO data.
Profitability Peaks & Troughs in the P/C
Insurance Industry, 1975 – 2011*
ROE
25%
1977:19.0%
1987:17.3%
20%
History suggests next ROE
peak will be in 2016-2017
2006:12.7%
1997:11.6%
15%
9 Years
2011:
4.6%*
10%
5%
0%
1975: 2.4%
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*
-5%
1984: 1.8%
*Profitability = P/C insurer ROEs are I.I.I. estimates. 2011 figure is an estimate based on ROAS data. Note: Data for 20082011 exclude mortgage and financial guaranty insurers. For 2011:Q3 ROAS = 3.5% including M&FG.
Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
The BIG Question:
When Will the Market Turn?
Are Catastrophes and Other Factors
Pressuring Insurance Markets?
68
Criteria Necessary for a “Market Turn”:
All Four Criteria Must Be Met
Criteria
Sustained
Period of
Large
Underwriting
Losses
Material
Decline in
Surplus/
Capacity
Status
Comments
•Apart from 2011 CAT losses, overall p/c underwriting losses
remain modest
•Combined ratios (ex-CATs) still in low 100s (vs. 110+ at
onset of last hard market)
Early Stage, •Prior-year reserve releases continue to reduce u/w losses,
Inevitable boost ROEs, though more modestly
•Surplus hit a record $565B as of 3/31/11
•Fell just 1.6% through 12/31/11 from 12/31/10
Entered 2011 •Will likely see new record in 2012
At Record •Little excess capacity remains in reinsurance markets
High; Only •Modest growth in demand for insurance is insufficient to
Small Decline absorb much excess capacity
Tight
Reinsurance Somewhat in
Market
Place
Renewed
Underwriting Some Firming
& Pricing
esp. in
Discipline
Property, WC
•Much of the global “excess capacity” was eroded by cats
•Higher prices in Asia/Pacific
•Modestly higher pricing for US risks
•Commercial lines pricing trends have turned from negative
to flat and now positive, esp. Property & WC;
•Competition remains intense as many seek to maintain
market share
Sources: Barclays Capital; Insurance Information Institute.
69
1. UNDERWRITING
Have Underwriting Losses
Been Large Enough for Long
Enough to Turn the Market?
70
P/C Insurance Industry
Combined Ratio, 2001–2011*
As Recently as 2001,
Insurers Paid Out
Nearly $1.16 for Every
$1 in Earned
Premiums
Heavy Use of
Reinsurance
Lowered Net
Losses
Relatively
Low CAT
Losses,
Reserve
Releases
Relatively
Low CAT
Losses,
Reserve
Releases
120
115.8
110
Cyclical
Deterioration
Best
Combined
Ratio Since
1949 (87.6)
Avg. CAT
Losses,
More
Reserve
Releases
108.2
107.5
100.1
100
Higher
CAT
Losses,
Shrinking
Reserve
Releases,
Toll of Soft
Market
101.0
100.8
98.4
99.3
100.8
95.7
92.6
90
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011*
* Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=106.4
Sources: A.M. Best, ISO.
71
Underwriting Gain (Loss)
1975–2011E*
($ Billions)
$35
$25
Cumulative
underwriting deficit
from 1975 through
2011 is $479B
$15
Underwriting
losses in
2011 totaled
$36.5B, the
largest since
2001
$5
-$5
-$15
-$25
-$35
-$45
-$55
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 1011*
Large Underwriting Losses Are NOT Sustainable
in Current Investment Environment
* Includes mortgage and financial guaranty insurers in all years
Sources: A.M. Best, ISO; Insurance Information Institute.
Commercial Lines Combined Ratio,
1990-2012F*
Commercial Lines Combined Ratio
125
118.8
120
115
110
Commercial lines
underwriting
performance in 2011 was
the worst since 2002
122.3
112.5
110.2
109.4
112.3
111.1
109.7
110.2
109.5
110.2
107.6
107.5
105.4
104.1
105
102.5
102.0
102.0
101.2
101.0
99.5
100
94.8
95
91.2
*2007-2012 figures exclude mortgage and financial guaranty segments.
Source: A.M. Best; Insurance Information Institute
12F
11P
10
09
08
07
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
90
74
P/C Reserve Development, 1992–2013F
Prior Yr. Reserve Release ($B)
Prior Yr. Reserve
Development ($B)
$25
$20
Impact on
Combined Ratio
(Points)
$15
$10
$5
24
15
11
11
8
6
4
9
2
2
0
$0
(2)
-$5
-$10
(0)
(3)
(2)
(4)
(5)
(7)
(8)
-$15
(7)
(9)
(10) (10)
(5)
-2
-4
(10) (11)
(14)
13F
12F
11E
10
09
08
07
06
05
04
03
02
01
00
99
98
97
96
95
94
93
-6
92
-$20
Impact on Combined Ratio (Points)
$30
Prior year reserve
releases totaled $8.8
billion in the first
half of 2010, up from
$7.1 billion in the
first half of 2009
Reserve Releases Remained Strong in 2010 But
Tapered Off in 2011. Releases Are Expected to
Further Diminish in 2012 and 2103
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 $7 billion. The data from 2000 and subsequent years excludes
development from financial guaranty and mortgage insurance.
Sources: Barclays Capital; A.M. Best.
75
2. SURPLUS/CAPITAL/CAPACITY
Have Large Global Losses Reduced
Capacity in the Industry, Setting
the Stage for a Market Turn?
76
Policyholder Surplus,
2006:Q4–2011:Q4
($ Billions)
2007:Q3
Previous Surplus Peak
$580
$564.7
$559.2
$559.1
$560
$540
$520
$500
$480
$460
$440
$544.8
$540.7
$530.5
$521.8
$517.9$515.6
$512.8
$505.0
$496.6
$487.1
$478.5
$550.3
$538.6
$511.5
$490.8
$463.0
The Industry now has $1 of
$455.6
surplus for every $0.80 of NPW,
$437.1
close to the strongest claimspaying status in its history.
Surplus as of 12/31/11 was
down 2.5% below its all time
record high of $564.7B set
as of 3/31/11. A new record
high in 2012 is possible.
$420
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:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4
*Includes $22.5B of paid-in
capital from a holding
company parent for one
insurer’s investment in a
non-insurance business in
early 2010.
Sources: ISO, A.M .Best.
Quarterly Surplus Changes Since 2011:Q1 Peak
11:Q2: -$5.6B (-1.0%)
11:Q3: -$26.1B (-4.6%)
11:Q4: -$14.3B (-2.5%)
77
3. REINSURANCE MARKET
CONDITIONS
Record Global
Catastrophes Activity is
Pressuring Pricing
78
Reinsurer Share of Recent Significant
Market Losses
Billions of 2011
Dollars
$40
$35
$30
$25
$20
$15
$10
$5
$0
$37.5
40% Reinsurance
share of total
insured loss
Reinsurer Share
Primary Insurer Share
$15.0
73%
$13.0
$22.5
60%
$10.0
$9.5
$6.0
$3.5
$4.0
95%
$8.3
$7.9
44%
$5.0
$2.2
$2.8
$0.4
Japan
Earthquake/
Tsunami (Mar
2011)
New Zealand Thailand Floods Chile Earthquake
Australia
Earthquake (Feb (Aug - Nov 2011) (Feb. 2010)
Cyclone/ Floods
2011)
(Jan-Feb 2011)
Reinsurers Paid a High Proportion of Insured Losses Arising from
Major Catastrophic Events Around the World in Recent Years
Source: Insurance Information Institute from reinsurance share percentages provided in RAA,
ABIR and CEA press release, Jan. 13, 2011.
79
Historical Capital Levels of Guy Carpenter
Reinsurance Composite, 1998—3Q11
Most excess
reinsurance
capacity was
removed from the
market in 2011, but
there does not
appear to be a
shortage, leading to
modest increases
in 2012 reinsurance
renewals except in
areas hit hard by
CATs.
Source: Guy Carpenter, GC Capital Ideas.com, February 28, 2012.
80
Global Property Catastrophe Rate on Line
Index, 1990—2012 (as of Jan. 1)
Property-Cat reinsurance
pricing is up about 8% as
of 1/1/12—modest relative
to the level CAT losses
Year Over Year % Change
100%
300
237
76%
68%
80%
255
250
235
233
230
60%
199
200
8%
10%
145
-3%
-12%
-16%
-9%
-6%
100
-11%
-11%
-18%
-20%
-8%
-13%
-20%
-3%
0%
0%
105
150
14%
115
154
152
133
14%
123 111
200
184
3%
100
20%
25%
15%
20%
147
141
195
173
184
40%
190
-40%
50
Cumulative Rate on Line (1990=100)
Year Over Year % Change in ROL
Cumulative Rate on Line Index
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Sources: Guy Carpenter; Insurance Information Institute.
81
4. RENEWED PRICING
DISCIPLINE
Is There Evidence of a Broad
and Sustained Shift in Pricing?
82
Premium Growth Is Up Modestly:
More in 2012?
(Percent)
1975-78
1984-87
25%
2000-03
Net Written Premiums Fell
0.7% in 2007 (First Decline
Since 1943) by 2.0% in 2008,
and 4.2% in 2009, the First 3Year Decline Since 1930-33.
20%
15%
2011
growth
was
+3.3%
10%
5%
0%
NWP was up
0.9% in 2010
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
10
11*
-5%
Shaded areas denote “hard market” periods
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
83
Average Commercial Rate Change,
All Lines, (1Q:2004–4Q:2011)
(Percent)
2%
0%
-2%
-4%
-6%
-8%
-10%
-12%
-14%
-16%
-0.1%
1Q04
-3.2%
2Q04
3Q04
-5.9%
-7.0%
4Q04
-9.4%
1Q05
2Q05
-9.7%
-8.2%
3Q05
-4.6%
4Q05
1Q06
-2.7%
2Q06
-3.0%
-5.3%
3Q06
-9.6%
4Q06
1Q07
-11.3%
-11.8%
2Q07
3Q07 -13.3%
4Q07
-12.0%
1Q08-13.5%
2Q08 -12.9%
3Q08
-11.0%
-6.4%
4Q08
-5.1%
1Q09
2Q09
-4.9%
-5.8%
3Q09
-5.6%
4Q09
1Q10
-5.3%
2Q10
-6.4%
-5.2%
3Q10
-5.4%
4Q10
1Q11
-2.9%
2Q11
-0.1%
0.9%
3Q11
2.8%
4Q11
4%
Pricing as of Q3:2011 was
positive for the first time
since 2003. Slightly stronger
gains in Q4.
KRW Effect
Source: Council of Insurance Agents & Brokers (1Q04-4Q11); Insurance Information Institute
Q2 2011 marked the
30th consecutive
quarter of price
declines
85
Change in Commercial Rate Renewals,
by Account Size: 1999:Q4 to 2011:Q4
Percentage Change (%)
Peak = 2001:Q4
+28.5%
Pricing turned positive (+0.9%)
in Q3:2011,
first increase
in
KRWthe
Effect:
No
nearly
8 years;
Q4:2011
Lasting
Impact
renewals were up 2.8%
Pricing Turned
Negative in Early
2004 and
Remained that
way for 7 ½ years
Trough = 2007:Q3
-13.6%
Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.
86
Cumulative Qtrly. Commercial Rate Changes,
by Account Size: 1999:Q4 to 2011:Q4
1999:Q4 = 100
Despite Q4:2011 gain of
2.8%, pricing today is
where is was in late 2000
(pre-9/11)
Upward pricing pressure
is small for large
accounts, 1.8% in
Q4:2011, vs. 3.1% for
small accounts and 3.5%
for medium accounts
Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.
87
Change in Commercial Rate Renewals,
by Line: 2011:Q4
Percentage Change (%)
Property lines are showing
larger increases than
casualty lines, with the
exception of workers
compensation
8.0%
7.0%
7.5%
5.7%
6.0%
5.0%
2.0%
2.0%
2.1%
2.2%
2.3%
Comml Auto
D&O
General
Liability
Umbrella
3.0%
EPL
4.0%
2.7%
3.0%
2.0%
Workers
Comp
Commercial
Property
Bus.
Interruption
Construction
0.0%
0.8%
Surety
1.0%
Major Commercial Lines Renewed Uniformly Upward in
Q4:2011 for Only the Second Time Since 2003; Property Lines
& Workers Comp Leading the Way
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
88
INVESTMENTS:
THE NEW REALITY
How Much of a Threat Are
Persistently Low Interest
Rates for (Re)Insurers?
89
Property/Casualty Insurance Industry
Investment Income: 2000–2013F1
($ Billions)
$60
$54.6
$52.3
$51.2
$49.5
$50
$47.1
$47.6
$49.0
$45.5
$40
$38.9
$38.7
$37.1
$36.7
01
02
$39.6
$46.4
Investment earnings in
2011 were 10.3% below
their 2007 pre-crisis peak
$30
00
03
04
05
06
07
08
09
10
11
12F
13F
Investment Income in 2011 Was Surprisingly Strong, Though Investment
Income Is Likely to Weaken in 2012 Due to Persistently Low Interest Rates
1
Investment gains consist primarily of interest and stock dividends.
*2012F-201F based on Conning projections.
Sources: ISO; Conning Research & Consulting; Insurance Information Institute.
Property/Casualty Insurance Industry
Investment Gain: 1994–2011:Q41
($ Billions)
$70
$64.0
$58.0
$60
$52.3
$55.7
$51.9
$53.4
$56.2
$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
Investment gains in 2011 were
$2.8B above 2010 levels—a
surprise given falling rates
and flat stock markets
$20
$10
$0
94
95
96
97
98
99
00
01
02
03
04
05*
06
07
08
09
10
11
Investment Gains in 2011 Were Surprisingly Robust. Investment Gains
Recovered Significantly in 2011 Due to Realized Investment Gains; The
Financial Crisis Caused Investment Gains to Fall by 50% in 2008
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.
-$7.90
-$19.81
-$15
-$20
-$25
$7.19
$5.69
$8.92
$3.52
$9.70
-$1.21
$6.61
$6.63
$9.13
$27.0B positive
swing since 2008
$16.21
$13.02
$10.81
$9.24
$6.00
$9.82
$9.89
$1.66
$5
$0
-$5
-$10
$4.81
$20
$15
$10
$2.88
($ Billions)
$18.02
P/C Insurer Net Realized
Capital Gains/Losses, 1990-2011
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Insurers Posted Net Realized Capital Gains in 2010 and 2011 After Following
Two Years of Realized Losses During the Financial Crisis. Realized Capital
Losses Were the Primary Cause of 2008/2009’s Large Drop in Profits and ROE
Sources: A.M. Best, ISO, Insurance Information Institute.
93
U.S. 10-Year Treasury Note Yields:
A Long Downward Trend, 1990–2012*
9%
8%
Yields on 10-Year U.S.
Treasury Notes have
been essentially below
4% since January 2008.
7%
6%
5%
4%
3%
2%
Yields on 10-Year U.S. Treasury
Notes have been essentially
below 5% for nearly a 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
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.
*Monthly, through March 2012.
Note: Recessions indicated by gray shaded columns.
Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data/Monthly/H15_TCMNOM_Y10.txt
National Bureau of Economic Research (recession dates); Insurance Information Institutes.
94
3-Month Interest Rates for
Major Global Economies, 2008-2013F
0.2%
0.2%
0.1%
0.1%
0.2%
1.3%
2.0%
0.7%
0.8%
0.9%
1.1%
0.7%
0.3%
0.6%
0.2%
0.2%
0.2%
0.3%
1.8%
0.9%
1.1%
0.9%
1.2%
0.7%
2.0%
1.0%
2.1%
3.0%
1.4%
2.9%
4.0%
1.0%
0.9%
1.1%
0.9%
1.2%
5.0%
2.5%
6.0%
2008
2009
2010
2011
2012F
2013F
4.9%
5.1%
5.1%
Interest rates remain
generally low in much of the
world, depressing insurer
investment earnings.
Central banks in many
countries, including the US,
are intentionally holding
rates low.
0.0%
Euro Area
Japan
UK
Source: Blue Chip Economic Indicators, Apr. 2012 edition.
China
Netherlands
US
Reduction in Combined Ratio Necessary to Offset
1% Decline in Investment Yield to Maintain
Constant ROE, by Line*
s
ne
i
L
-5.7%
-5.2%
-4.3%
-3.7%
-3.3%
-3.3%
-3.1%
-2.1%
-1.9%
-3.6%
-2.0%
-1.8%
0%
-1%
-2%
-3%
-4%
-5%
-6%
-7%
-8%
-1.8%
s
ty
l
e
e
o
p
t
r
a
s
n
i
a
ro
p
l
Li
y
rc
Su
Au
s
o
t
P
C
a
/
al
r
e
l
s
s
n
y
n
t
a
t
P
u
M
m
m
m
m
li
P
di
so
s
pl
rra
d
e
m
m
m
m
r
r
r
t
e
C
a
e
d
o
o
r
o
o
Pe
Pv
Pe
C
C
C
C
C
Fi
W
Su
M
W
to
u
A
R
a
ur
s
n
ei
**
e
nc
-7.3%
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.
97
Insurance Information Institute Online:
www.iii.org
Thank you for your time
and your attention!
Twitter: twitter.com/bob_hartwig
Download at www.iii.org/presentations
98