Download P6466 - iii Template - Houston Marine Insurance Seminar

Global Economic Turmoil,
Catastrophic Loss and Insurance:
Implications for Risk Management
& Marine Insurance Markets
Houston Marine Insurance Seminar
Houston, TX
September 19, 2011
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
 Is the World Becoming a Riskier Place?
 Recent Events and Implications for the Global P/C (Re)Insurance Industry
 Global Insurance Overview
 The Global Financial Crisis, Risk and the New World Order
 Global Economic and Trade Outlook
 The Unfortunate Nexus: Opportunity, Risk & Instability
 Future growth is necessarily fraught with greater risk
 Types, magnitude of risk inherent in future growth opportunities
 Reshuffling the Global Economic Deck
 The Ascendency of China
 Foreign Direct Investment (FDI) and insurance exposure/demand
 P/C Insurance Financial Overview & Outlook
2
What in the World Is
Going On?
Is the World Becoming a
Riskier Place?
What Are the Implications for
Insurance and Risk Management?
3
Uncertainty, Risk and Fear Abound


















Global Economic Slowdown
US Debt and Budget Crisis and S&P Downgrade
Echoes of the Financial Crisis
Housing Crisis
Persistently High Unemployment
European Sovereign Debt, Bank & Currency Crises
Japan, New Zealand, Haiti, Chile Earthquakes
Nuclear Fears
Record Tornado, Flooding in the US, Wildfires
Cyber Attacks
Manmade Disasters (e.g., Deepwater Horizon)
Resurgent Terrorism Risk (e.g., Bin Laden Killing)
Political Upheaval in the Middle East
Inflation/Deflation
Runaway Energy & Commodity Prices
Era of Fiscal Austerity
Reshuffling the Global Economic Deck
China Becomes #2 Economy in the World
Are “Black Swans”
everywhere or
does it just seem
that way?
4
Cost of Risk vs. Commercial Lines
Combined Ratio
$13.15
$10.02
$8.42
$8
$11.94
105.4
104.1
102.5
102.0
101.2
98.9
$4.83
$5.20
$5.71
$5.25
$5.70
$6.49
$7.30
$7.70
$6.40
104.1
$10
$10.35
$13.91
$13.50
110.2
$10.68
110.2
109.5
107.6
105
100
112.3
111.1
109.7
$12
$11.55
110.2
109.4
$8.30
110
112.5
$14
$11.95
115
122.3
93.7
95
$6
$4
$2
91.2
90
$0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: 2011 RIMS Benchmark Survey; A.M. Best; Insurance Information Institute
Cost of Risk/$1000 Revenue
Commercial
Combined Ratio
Cost of Risk
118.8
120
$6.10
Commercial Lines Combined Ratio
125
The cost of risk cannot
continue to fall as actual
results deteriorate
Déjà Vu? Lehman II?
Is This 2008 All Over Again?
Why Today is Not 2008 All Over Again
 The Situation Today is Very, Very Different from 2008
 Credit Markets Are Not Seizing; Some Contraction in Europe
 Bank Balance Sheets Are in Much Stronger Shape
 Capital up, charge offs falling
 We Will Not Experience the Collapses/Near Collapses Like in 2008
 No repeat of Lehman, AIG, Washington Mutual, Wachovia, Countrywide Financial
 Some Additional Regulatory Controls Are Now Place
What Would Be Helpful Now?
 Long-Term Fiscal and Monetary Policy Direction
 Fed on Aug. 9 stated rates would remain low “at least through mid-2013”
 This is not only a signal that borrowing costs will remain low over an extended
period of time and that inflation will remain muted; Also tells investors that they’ll
need to take on risk in order to earn returns in the market. Should be bullish for
stocks.
 Congress and the Administration need to remove regulatory and tax uncertainty
ASAP and drive a pro-growth agenda
8
P/C Insurance Industry
Financial Overview
Profit Recovery Will Be Set
Back by High CATs, Low
Interest Rates, Diminishing
Reserve Releases
9
$3,043
$7,807
$28,672
$34,670
$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
P-C Industry 2011:Q1 profits were
down 12.2% to $7.8B vs. $8.9B in
2010:Q1, as underwriting results
deteriorated
$30,773
$60,000
2005 ROE*= 9.6%
2006 ROE = 12.7%
2007 ROE = 10.9%
2008 ROE = 0.3%
2009 ROAS1 = 5.9%
2010 ROAS = 6.5%
2011:Q1 ROAS = 5.6%
$36,819
$70,000







$24,404
$80,000
$62,496
P/C Net Income After Taxes
1991–2011:Q1 ($ 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
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.5% ROAS for
2011:Q1, 7.5% for 2010 and 7.4% for 2009.
Sources: A.M. Best, ISO, Insurance Information Institute
10
11*
A 100 Combined Ratio Isn’t What It
Once Was: Investment Impact on ROEs
A combined ratio of about 100
generated ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Combined Ratio / ROE
110
105
15.9%
14.3%
100.6
100
108.0
100.1
97.5
100.7
12.7%
15%
101.0
99.3
100.8
12%
9.6%
95
18%
7.4%
92.6
9%
7.5%
8.9%
6%
90
2.5%
4.4%
85
3%
0%
80
1978
1979
2003
2005
2006
Combined Ratio
2008*
2009*
2010*
2011:H1*
ROE*
Combined Ratios Must Be Lower in Today’s Depressed
Investment Environment to Generate Risk Appropriate ROEs
* 2009 and 2010 figures are return on average statutory surplus. 2008 -2011 figures exclude mortgage and financial guaranty
insurers. 2011 figure is estimate through first half.
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
2007:12.3%
1997:11.6%
2011:
6.1%*
15%
10 Years
10%
5%
0%
1975: 2.4%
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*
-5%
*Profitability = P/C insurer ROEs are I.I.I. estimates. 2011 figure is an estimate based on annualized ROAS for Q1 data.
Note: Data for 2008-2011 exclude mortgage and financial guaranty insurers.
Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
Global P/C Insurance
Industry Overview
Profit Recovery Will Be Set
Back by High CATs, Low
Interest Rates, Diminishing
Reserve Releases
13
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
14
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%
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
15
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: NAIC; Insurance Information Institute research.
16
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
17
Global Catastrophe Loss
Developments and Trends
2011 and 2010 Are Rewriting
Catastrophe Loss and
Insurance History
18
Global Catastrophe Loss Summary:
First Half 2011
 2011 Is Already (as of June 30) the Highest Loss Year on Record Globally
 Extraordinary accumulation of severe natural catastrophe: Earthquakes, tsunami, floods
and tornadoes are the primary causes of loss
 $260 Billion in Economic Losses Globally
 New record for the first six months, exceeding the previous record of $220B in 2005
 Economy is more resilient than most pundits presume
 $55 Billion in Insured Losses Globally
 More than double the first half 2010 amount
 Over 4 times the 10-year average
 $27 Billion in Economic Losses in the US
 Represents a 129% increase over the $11.8 billion amount through the first half of 2010
 $17.3 Billion in Insured Losses in the US Arising from 100 CAT Events
 Represents a 162% increase over the $6.6 billion amount through the first half of 2010
19
Natural Loss Events,
January – June 2011
World Map
Severe storms, tornadoes
USA, 20–25 May
Floods
USA, April–June
Severe storms, tornadoes
USA, 22–28 April
Earthquake, tsunami
Japan, 11 March
Wildfires
USA, May–June
Cyclone Yasi
Australia, 2 Feb
Landslides, flash floods
Brazil, 12/16 Jan
Number of Events: 355
Natural catastrophes
Selection of significant
loss events (see table)
Source: MR NatCatSERVICE
Geophysical events
(earthquake, tsunami, volcanic activity)
Meteorological events
(storm)
Floods, flash floods
Australia,
Dec 2010-Jan 2011
Earthquake
New Zealand, 22 Feb
Earthquake
New Zealand, 13 June
Hydrological events
(flood, mass movement)
Climatological events
(extreme temperature, drought, wildfire)
20
Worldwide Natural Disasters 2011
% Distribution of Insured Losses Per Continent (January – June only)
Insured losses 2011 (January – June only): US$ 60bn
49%
<1%
29%
<1%
<1%
Continent
Africa
America
Asia
Australia/Oce
ania
Europe
Source: MR NatCatSERVICE
Insured losses [US$ m] in 2011
Jan - June
minor
17,800
30,080
21%
12,900
100
22
Worldwide Natural Disasters, 1980-2011
% Distribution of Insured Losses Per Continent (January – June only)
Insured losses 1980 - 2011 (January – June only): US$ 389bn
12%
21%
58%
<1%
2%
6%
Continent
Insured losses [US$ m] Jan – June only
Africa
America
Asia
Australia/Oce
ania
Europe
Source: MR NatCatSERVICE
1,000
237,200
45,100
25,100
80,900
© 2011 Munich Re
23
Top 16 Most Costly World Insurance
Losses, 1970-2011*
(Insured Losses, 2010 Dollars, $ Billions)
Taken as a single event, the
Spring 2011 tornado season
would likely become the 9th
costliest event in global
insurance history
$80
$70
$60
$50
$40
3 of the top 15 most
expensive
catastrophes in world
history have occurred
in the past 18 months
$35.0
$30
$20
$10
$20.5 $20.8 $23.1
$11.3
$7.8 $8.0 $8.0 $9.0 $9.3 $10.0
$72.3
$24.9
$14.0 $14.0 $14.9
$0
Winter
Storm
Daria
(1991)
Chile Hugo
Typhoon Charley New
Rita
Spring Wilma
Quake (1989) Mirielle (2004) Zealand (2005) Tornadoes (2005)
(2010)
(1991)
Quake
(2011)
(2011)
Ivan
(2004)
Ike
Northridge WTC
(2008) (1994) Terror
Attack
(2001)
Andrew Japan Katrina
(1992) Quake, (2005)
Tsunami
(2011)*
*Through June 20, 2011. 2011 disaster figures are estimates; Figures include federally insured flood losses, where applicable.
Sources: Swiss Re sigma 1/2011; AIR Worldwide, RMS, Eqecat; Insurance Information Institute.
26
Worldwide Natural Disasters,
1980 – 2011*
Number of Events
Already 355 events
through the first 6
months of 2011
600
500
400
300
200
100
1980
1982
1984
1986
Geophysical events
(Earthquake, tsunami,
volcanic eruption)
*2011 figure is through June 30.
Source: MR NatCatSERVICE
1988
1990
1992
1994
Meteorological events
(Storm)
1996
1998
2000
2002
Hydrological events
(Flood, mass
movement)
2004
2006
2008
2010
Climatological events
(Extreme temperature,
drought, forest fire)
27
US Insured Catastrophe Losses
($ Billions)
$120
$100
$80
$61.9
2000s: A Decade of Disaster
2000s: $193B (up 117%)
1990s: $89B
$100.0
$100 Billion CAT Year is
Coming Eventually
Record Tornado
Losses Caused
H1 CAT Losses to
Surge
$17.3
$13.6
$10.6
$6.7
$9.2
$27.1
$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
$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??
First Half 2011 US CAT Losses Already Exceed Losses from All of
2010. Even Modest Hurricane Losses Will Make 2011 Among the
Most Expensive Ever for CATs
*First half 2011.
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.
29
Location of Tornadoes in the US,
January 1—June 30, 2011
1,585 tornadoes
killed 537 people
through June 30,
including at least
340 on April 26
mostly in the
Tuscaloosa area,
and 130 in Joplin
on May 22
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#
31
Location of Large Hail Reports in the
US, January 1—June 30, 2011
There were 7,176
“Large Hail”
reports through
June 30, causing
extensive damage
to homes,
businesses and
vehicles
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#
32
Location of Wind Damage Reports in
the US, January 1—June 30, 2011
There were 11,283
“Wind Damage”
reports through
June 30, causing
extensive damage
to homes and,
businesses
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#
33
Severe Weather Reports,
January 1—June 30, 2011
There have
been 20,044
severe weather
reports through
June 30;
including 1,585
tornadoes;
7,176 “Large
Hail” reports
and 11,283 high
wind events
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#
34
The Global Financial Crisis,
Risk and the New World
Economic Order
The Crisis Made Insurers’ Path to
Growth More Challenging/Risky
36
World Economic Outlook: 2009-2012F
2009
2010
2011F
2.9%
-0.7%
2.0%
1.7%
1.7%
2.5%
2.7%
2.8%
6.5%
6.6%
7.3%
2.2%
2.6%
3.0%
4.3%
4.5%
5.0%
8%
6%
4%
2.7%
2%
0%
-2% -0.5%
-2.6%
-4%
-3.4%
-4.1%
-6%
-8%
World Output Advanced
Emerging United States Euro Area
Economies Economies
3.9%
IMF says growth in emerging and developing economies
will outpace advanced ones in 2011/12. The impact will
be to accelerate the relative growth of insurance
exposures outside the US, W. Europe and Japan.
-6.3%
March 11
Japan
quake hurt
2011 growth
Japan
2012F
Outlook uncertain: The world economy continues to recover from the
global economics, but at a weakening pace and at different speeds in
different parts of the world, according to the IMF. A clear set of
“winners” has emerged with direct implications for all industries and
their insurers.
Sources: IMF, World Economic Outlook, Jun. 2011; Insurance Information Institute.
38
2009
2010
2011F
14.5%
8.8%
8.7%
-7.5%
-8.3%
-12.2%
-12.6%
Advanced Emerging
Economies Economies
2012F
6.8%
5.9%
12.0%
11.2%
8.3%
13.5%
8.2%
8.3%
11.2%
6.0%
20%
15%
10%
5%
0%
-5%
-10%
-15% -10.9%
World
Trade
Volume
6.5%
12.4%
World Trade Volume Outlook (Goods
and Services): 2009-2012F
IMPORTS
Advanced Emerging
Economies Economies
EXPORTS
Global trade in flows recovered sharply following the financial
crisis, with both imports and exports rising sharply, but will are
slowing in 2011 with further deceleration expected in 2012
Sources: IMF, World Economic Outlook, Jun. 2011; Insurance Information Institute.
39
Commodity Price Changes
in 2010-2011*
Index (Jan 3, 2006 = 100)
400
350
300
Raw materials prices doubled over the
course of 2010. Some other commodity
prices dropped during the year but
ended 20-30% higher. The upward
trend has continued in to 2011.
High Demand is Driving Up Prices And
Fueling Trade
250
200
100
1/1/2010
1/15/2010
1/29/2010
2/12/2010
2/26/2010
3/12/2010
3/26/2010
4/9/2010
4/23/2010
5/7/2010
5/21/2010
6/4/2010
6/18/2010
7/2/2010
7/16/2010
7/30/2010
8/13/2010
8/27/2010
9/10/2010
9/24/2010
10/8/2010
10/22/2010
11/5/2010
11/19/2010
12/3/2010
12/17/2010
12/31/2010
1/14/2011
1/28/2011
2/11/2011
2/25/2011
3/11/2011
3/25/2011
4/8/2011
4/22/2011
5/6/2011
5/20/2011
6/3/2011
150
Metals
Food
Raw Materials
*data are through June14, 2011
Source: International Monetary Fund World Economic Outlook June 2011 update at
http://www.imf.org/external/pubs/ft/weo/2010/update/01/data/figure_2.csv
Crude Oil
Gold
40
Exchange Rate Indices*
Daily (Jan 1, 2010 = 100)
Index
The US dollar has generally depreciated
against other major currencies, as US
monetary policy keeps yields on US
assets artificially low.
120
115
110
105
100
95
90
80
1/1/2010
1/15/2010
1/29/2010
2/12/2010
2/26/2010
3/12/2010
3/26/2010
4/9/2010
4/23/2010
5/7/2010
5/21/2010
6/4/2010
6/18/2010
7/2/2010
7/16/2010
7/30/2010
8/13/2010
8/27/2010
9/10/2010
9/24/2010
10/8/2010
10/22/2010
11/5/2010
11/19/2010
12/3/2010
12/17/2010
12/31/2010
1/14/2011
1/28/2011
2/11/2011
2/25/2011
3/11/2011
3/25/2011
4/8/2011
4/22/2011
5/6/2011
5/20/2011
6/3/2011
85
Euro
Yen
Renminbi
Swiss franc
*Data are through June 13, 2011
Source: International Monetary Fund World Economic Outlook June 2011 update at
http://www.imf.org/external/pubs/ft/weo/2010/update/01/data/figure_2.csv
Sterling
42
2.4%
2.5%
2.6%
-0.4%
1.4%
1.7%
1.7%
1.7%
1.1%
2.2%
1.6%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
3.0%
Real GDP Growth Forecasts for
Advanced Economies: 2011 - 2012
United
States
United
Kingdom
Germany
2011F
France
Japan
Canada
2012F
Growth projections could slow for 2011 and 2012 have been revised
downward as austerity measures take effect and concerns related to
sovereign debt worsen
Sources: Blue Chip Economic Indicators (9/2011 issue); Insurance Information Institute.
43
Real GDP Growth Forecasts for Key
Developing Economies: 2011 - 2012
3.5%
4.2%
3.9%
4%
3.8%
4.3%
Growth in China and India remain high,
though China is “tapping on the breaks”
to slow inflation. These markets are
promising but foreign firms must
contend with many barriers to entry.
4.2%
8.0%
8%
7.5%
8.6%
9.1%
12%
0%
China
India
Russia
2011F
Brazil
Mexico
2012F
Growth in emerging and developing economies will greatly outpace advanced
country growth in 2011/12. This will accelerate the growth of insurance
exposures in emerging markets relative to the U.S., W. Europe and Japan.
Sources: Blue Chip Economic Indicators (9/2011 issue); Insurance Information Institute.
44
Real GDP Growth Forecasts for Other
Key Trading Economies: 2011 - 2012
3.6%
1.9%
5.2%
1.3%
1.9%
4.3%
4.5%
4.1%
3.9%
4%
4.4%
Asia/Pacific trading nations should
show strong growth in 2011/12
compared to Europe and the US
8%
0%
South Korea
Taiwan
Netherlands
2011F
Hong Kong
Australia
2012F
Growth in industrialized Asian economies will greatly outpace much of the
rest of the world in 2011/12. This will accelerate the growth of insurance
exposures in emerging markets relative to the U.S., W. Europe and Japan.
Sources: Blue Chip Economic Indicators (9/2011 issue); Insurance Information Institute.
45
GDP Growth: Advanced & Emerging
Economies vs. World, 1970-2012F
GDP Growth (%)
10.0
8.0
World output is forecast to grow by
4.3% in 2011 and 4.6% in 2011,
following growth of 3.0% in 2010
and a 0.6% drop in 2009.
Emerging economies (led
by China) are expected to
grow by 6.6% in 2011 and
6.4% in 2012. Role of FDI
in exposure growth key.
6.0
4.0
2.0
(2.0)
(4.0)
Advanced economies are expected
to grow at a relative modest 2.2% in
both 2011 and 2.6% in 2012.
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
12
0.0
Advanced economies
Emerging and developing economies
World
Source: International Monetary Fund, World Economic Outlook Update, June 2011; 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
47
11 Industries for the Next 10 Years:
Insurance Solutions Needed
Health Care
Health Sciences
Energy (Traditional)
Alternative Energy
Agriculture
Natural Resources
Environmental
Many
industries are
poised for
growth, but
many insurers
do not write in
these
economic
segments
Technology (incl. Biotechnology)
Light Manufacturing
Export-Oriented Industries
Shipping (Rail, Marine, Trucking)
48
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
49
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
50
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
51
Political Risk in 2010: Greatest Business
Opportunities Are Often in Risky Nations
The fastest growing
markets are generally
also among the
politically riskiest
Heightened risk
has insurance
implications
Source: Maplecroft
52
Reshuffling the Global
Economic Deck Through
Foreign Direct Investment
The Global Financial Crisis
Concentrates Growth Opportunities
in Risky Places/Industry Groups
53
Global Foreign Direct Investment,
Net Inflows: 1980-2009*
Trillions of Current US Dollars
$2.5
$2.0
FDI collapsed during
the financial crisis,
plunging $1.23 trillion
or 52.3%
FDI dropped by 59.6%
following the tech bubble
bursting in 2000
$1.5
$1.0
$0.5
$0.0
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
Most Growth Will Be in Parts of the World Where Foreign Direct
Investment is High. FDI Flows Are Highly Volatile Meaning that New
Income Streams for Businesses (and Insurers) Will Also Be Volatile
*Foreign Direct Investments are defined as the net inflows of investment to acquire a lasting management interest (at least 10% of voting stock) in an
enterprise operating in an economy other than that of the investor.
Source: World Bank; Insurance Information Institute.
Following the Money Trail:
Foreign Direct Investment
Source: The Economist, Nov. 13 -19, 2010
55
China: Outward Foreign Direct
Investment: 1982-2009*
Millions of Current US Dollars
Chinese foreign direct investment
increased 5,600% from 2000 to 2008
(from $916 mill to $52.2 bill). The
financial crisis caused only a minor
disruption in Chinese investment abroad
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$0
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
Despite the Crash in Foreign Direct Investment During the Global Financial
Crisis, Chinese Investments Abroad Remain Near Record Levels. Implication:
Growth Opportunities for Business (and their Insurers) May Not Be in China
but In Chinese Investment Target Nations/Companies/Industries.
*Foreign Direct Investments are defined as the net inflows of investment to acquire a lasting management interest (at least 10% of voting stock) in an
enterprise operating in an economy other than that of the investor. Outward FDI represents flow from investing country to rest of the world.
Source: United Nations UNCTADSTAT; Insurance Information Institute.
United States: Outward Foreign Direct
Investment: 1980-2009*
Millions of Current US Dollars
$450,000
$400,000
Foreign Direct Investment from the
United States plunged $145.4 bill or
36% during the financial crisis
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$0
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
Direct Investments Abroad by US Interests Were Hit Hard by the
Global Financial Crisis
*Foreign Direct Investments are defined as the net inflows of investment to acquire a lasting management interest (at least 10% of voting stock) in an
enterprise operating in an economy other than that of the investor. Outward FDI represents flow from investing country to rest of the world.
Source: United Nations UNCTADSTAT; Insurance Information Institute.
The BIG Question:
When Will the Market Turn?
Insurance Cycle Dynamics
61
Criteria Necessary for a “Market Turn”:
All Four Criteria Must Be Met
Criteria
Status
Comments
•Apart from Q2:2011, overall p/c underwriting losses remain
Sustained
modest
Period of
•Combined ratios (ex-Q2 CATs) still in low 100s (vs. 110+ at
Large
Not Yet
Underwriting Happened, But onset of last hard market)
•Prior-year reserve releases continue reduce u/w losses,
Losses
Inevitable boost ROEs
Material
Decline in
Surplus/
Capacity
•Surplus hit a record $565B as of 3/31/11
•Analysts est. excess surplus of $75-$100B
Entered 2011 •Some excess capacity may still remain in reinsurance
At Record markets
High; Since •Weak growth in demand for insurance is insufficient to
Fallen
absorb much excess capacity
Tight
Reinsurance Somewhat in •Higher prices in Asia/Pacific
Market
Place
•Modestly improved pricing for US risks
Renewed
•Commercial lines pricing trends turning from negative to flat
Underwriting Not Broadly •Competition remains intense as many seek to maintain
& Pricing
Evident; Some market share
Discipline
Firming
•Terms & conditions—no broad tightening
Sources: Barclays Capital; Insurance Information Institute.
62
UNDERWRITING
Have Underwriting Losses
Been Large Enough for Long
Enough to Turn the Market?
63
P/C Insurance Industry
Combined Ratio, 2001–2011:H1*
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
108.0
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=109.1
Sources: A.M. Best, ISO.; III Estimated for 2011:H1 (Q1 actual ex-M&FG was 102.2).
64
P/C Reserve Development, 1992–2011E
$25
$20
Impact on
Combined Ratio
(Points)
$15
$10
$5
23.2
13.7
11.7
2.3
9.9
7.3
1
-2.1
-$10
-2.6
-4.1
-6.6
-8.3
-5
-6.7
-9.5
-9.9 -9.8
-$15
-2
-6
11E
10E
09
07
06
05
04
03
02
01
00
99
98
97
96
95
94
-$20
93
4
-4
-14.6-16 -15
92
6
0
$0
-$5
8
2
08
Prior Yr. Reserve Release ($B)
Prior Yr. Reserve
Development ($B)
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 Are Remained Strong in
2010 But Should Begin to Taper Off 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 $7 billion. The data from 2000 and subsequent years excludes
development from financial guaranty and mortgage insurance.
Sources: Barclay’s Capital; A.M. Best.
67
CAPITAL MANAGEMENT &
LEVERAGE
Excess Capital is a Major Obstacle
to a Market Turn;
Capital Management Decisions Will
Impact Market Direction
68
Policyholder Surplus,
2006:Q4–2011:Q1
($ Billions)
2007:Q3
Previous Surplus Peak
Surplus set a new
record in 2011:Q1*
$580
$564.7
$556.9
$544.8
$560
$540.7
$530.5
$540
$521.8$517.9
$515.6
$512.8
$520
$505.0
$496.6
$500 $487.1
$478.5
$480
$460
$440
The Industry now has $1 of
surplus for every $0.77 of
NPW—the strongest claimspaying status in its history.
$511.5
$490.8
$455.6
$463.0
$437.1
$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
Quarterly Surplus Changes Since 2007:Q3 Peak
*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.
09:Q1: -$84.7B (-16.2%)
09:Q2: -$58.8B (-11.2%)
09:Q3: -$31.0B (-5.9%)
09:Q4: -$10.3B (-2.0%)
10:Q1: +$18.9B (+3.6%)
10:Q2: +$8.7B (+1.7%)
10:Q3: +$23.0B (+4.4%)
10:Q4: +$35.1B (+6.7%)
11:Q4: +$42.9B (+8.2%)
70
REINSURANCE MARKET
CONDITIONS
Has Record Global
Catastrophes Activity
Erased Enough Capacity
to Turn Markets?
71
Significant Market Losses, 1985-2011*
$100
$90
$70
Billions
$60
$50
$40
$30
Reinsurers’ share of major
market losses was
exceptionally high in 2010
and early 2011
REINSURANCE
PRICING TRENDS
$80
•Property/CAT
reinsurance prices
are up substantially in
Asia/Pacific markets
•US pricing is up 1015%, but ex-Florida
closer to flat
$20
$10
$0
1985
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1998
1999
Worldwide Direct Insured Losses
2001
2002
2003
2004
2005
2007
2008
2009
2010
2011
Reinsured Losses
Source: Holborn; RAA.
* 2011 events are as of March 31 and are preliminary and may change as loss estimates are refined further.
Significant Market Losses by Event,
1985-2011*
Reinsurers are
bearing a very high
share of recent
catastrophe losses
Losses are putting pressure on property
cat reinsurance prices in affected
regions. The impact for US property
catastrophe pricing is uncertain.
Source: Holborn, RAA. *2011 events as of March 31 are preliminary and may change as loss estimates are refined further .
Global Property Catastrophe Rate on
Line Index, 1990-2011 YTD
No sharp increase in
global property
catastrophe reinsurance
pricing is evident
Source: Guy Carpenter, September 8, 2011.
RENEWED PRICING DISCIPLINE
Is There Evidence of a Broad
and Sustained Shift in Pricing?
75
Soft Market Persisted in 2010 but
Growth Returned: More in 2011?
(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%
2011:Q1
growth was
+3.5%; First
Q1 growth
since 2007
15%
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%
*2011 figure is an estimate based on Q1 data.
Shaded areas denote “hard market” periods
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
76
Average Commercial Rate Change,
All Lines, (1Q:2004–2Q:2011)
-10%
-12%
-14%
KRW Effect
-16%
-0.1%
-6.4%
-5.1%
-4.9%
-5.8%
-5.6%
-5.3%
-6.4%
-5.2%
-5.4%
-2.9%
Pricing is flat for the
first time in more than
7 years
-9.6%
-11.3%
-11.8%
-13.3%
-12.0%
-13.5%
-12.9%
-11.0%
-8%
-4.6%
-2.7%
-3.0%
-5.3%
-6%
-9.4%
-9.7%
-8.2%
-4%
-5.9%
-7.0%
-2%
-3.2%
0%
-0.1%
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
(Percent)
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Q2 2011 decreases
were the smallest
since 2004, perhaps
signaling a market
firming
78
INVESTMENTS:
THE NEW REALITY
Investment Performance is a
Key Driver of Profitability
Does It Influence
Underwriting or Cyclicality?
85
Property/Casualty Insurance Industry
Investment Gain: 1994–20101
($ Billions)
$70
$64.0
$58.0
$60
$52.3
$40
$55.7
$51.9
$52.9
$48.9
$47.2
$50
$59.4
$56.9
$45.3
$44.4
$42.8
$39.2
$36.0
$35.4
$31.7
$30
Investment gains in
2010 were the best
since 2007
$20
$10
$0
94
95
96
97
98
99
00
01
02
03
04
05*
06
07
08
09
Investment Gains Recovered Significantly in 2010 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.
10
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