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Future Shock:
Challenges and Opportunities for the
Global Insurance Industry in a
Rapidly Changing World
Connecticut Insurance Market Forecast
Hartford, CT
November 20, 2014
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
 Insurance: A Global Force
 The Impact of the “Insurance Economy”
 Dollars and Jobs
 Public Perceptions of the Insurance Industry
 The Importance of Insurance:
 P/C
 Life
 Health
 The Insurance Equation: Challenge = Opportunity
 Old & New: Challenges and Insurance Solutions
 An Industry Built of Strength & Experience
 Q&A
2
INSURANCE:
We Are a Global Force
Becoming More Global Is the Destiny of
the Insurance Industry
3
Distribution of Global Insurance
Premiums, 2013 ($ Trillions)
Total Premium Volume = $4.641 Trillion*
Non-Life,
$2.03 ,
43.8%
Life insurance
accounted for 56.2%
of global premium
volume in 2013 vs.
43.8% for Non-Life
Life, $2.61 ,
56.2%
Source: Swiss Re, sigma, No. 3/2014; Insurance Information Institute.
4
Distribution of Nonlife Premium:
Industrialized vs. Emerging Markets, 2013
2013, $Billions
Premium Growth Facts
 Emerging market’s share of
nonlife premiums increased to
19.5% in 2013, up from 17.3%
in 2012 and 14.3% in 2009.
The share of premiums written
in the $2 trillion global nonlife
market remains much larger
(80.5%) but continues to shrink.
Industrialized
Economies
$1, 653.0
 The financial crisis and sluggish
recovery in the major insurance
markets will accelerate the
expansion of the emerging
market sector
80.5%
19.5%
Emerging
Markets
$399.8
Developing markets now
account for about 40% of
global GDP but just under
20% of nonlife premiums
Sources: Swiss Re sigma No.4/2013; Insurance Information Institute research.
5
Tope 15 Insurance Markets in 2013,
Life and Property/Casualty
Global premium volume in 2013 =
$4.641 Trillion
$ Billions
$1,400
$1,259.3
Countries in all parts of
the world except Africa
are now represented
among the world’s largest
insurance markets
$1,200
$1,000
$800
$531.5
$600
$329.6
$400
$278.0 $254.8$247.2
$168.6 $145.4
$125.3
$200
$101.1 $90.0 $88.9 $78.3 $72.5 $65.6
Source: Swiss Re, sigma, No. 3/2014; Insurance Information Institute.
India
Spain
Australia
Brazil
Taiwan
Netherlands
Canada
S. Korea
Italy
Germany
France
China
UK
Japan
US
$0
World
N.
America
Latin
America
Life
7.1%
5.1%
9.0%
2.1%
10.2%
12.8%
2.6%
1.7%
Strength in Africa,
W.
Central & Advanced Emerging
Europe E. Europe
Asia
Asia
Non-Life
5.6%
7.5%
13.4%
4.1%
0.3%
-0.1%
1.7%
0.8%
2.6%
2.2%
Growth in Advanced Asia
(incl. China) markets
decelerated in 2013
-3.2%
-2.0%
-6.9%
-10%
-0.3%
0%
-5%
Latin America
growth was
the strongest
in 2013
4.0%
1.9%
1.4%
2.3%
5%
0.7%
10%
9.4%
15%
7.2%
12.2%
Premium Growth by Region, 2013
Total
Middle
East &
Central
Asia
Africa
Oceania
Global Premium Volume Totaled $4.641 Trillion in 2013, up 1.4% from
$4.599 Trillion in 2012. Global Growth Was Weighed Down by Slow Growth
in N. America and W. Europe and Partially Offset by Emerging Markets
Source: Swiss Re, sigma, No. 3/2013.
7
Non-Life Insurance: Global Real (Inflation
Adjusted) Premium Growth, 2013
Real growth in nonlife insurance
premiums was faster
in China and most of
SE Asia than the US
Market
Life
Non-Life
Total
Advanced
-0.2
1.1
0.3
Emerging
6.4
8.3
7.4
World
0.7
2.3
1.4
Source: Swiss Re, sigma, No. 3/2014.
Growth in
Emerging
markets is
much faster
than in
Advanced
markets
8
Global Real (Inflation Adjusted)
Premium Growth: 1980-2013
Premium growth is very erratic in part to inflation
volatility in emerging markets as well as a lack of
consistent cyclicality
Source: Swiss Re, sigma, No. 3/2014.
Emerging market growth
has exceeded that of
industrialized countries in
30 of the past 34 years,
including the entirety of the
global financial crisis and
subsequent recovery
9
GDP Growth: Advanced & Emerging
Economies vs. World, 1970-2015F
GDP Growth (%)
10.0
8.0
World output is forecast to grow by
3.3% in 2014 and 3.8% in 2015. The
world economy shrank by 0.6% in
2009 amid the global financial crisis
Emerging economy
growth rates are
expected to ease to 4.4%
in 2014 and 5.0% in 2015
6.0
4.0
2.0
(2.0)
(4.0)
Advanced economies are expected
to grow at a modest pace of 1.8% in
2014 and to 2.3% in 2015.
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
13
14F
15F
0.0
Advanced economies
Emerging and developing economies
Source: International Monetary Fund, World Economic Outlook , October 2014; Insurance Information Institute.
World
7.1%
7.4%
7.7%
9.3%
2.4%
2.3%
2.0%
1.7%
2.6%
2.2%
1.3%
2.6%
2.9%
4.6%
2.7%
3.2%
1.8%
0.3%
0.9%
3.1%
2.2%
2.2%
The Eurozone
remains weak
1.3%
2%
2.3%
4%
1.6%
6%
0.8%
8%
Growth in China has
slowed but outpaces
the US and Europe
1.5%
10%
US growth
should
accelerate
in 2015
7.7%
Real GDP Growth Forecasts:
Major Economies: 2011 – 2015F
-2%
US
Political turmoil in Latin
America is hurting growth
-0.5%
-0.7%
0%
Euro Area
2011
UK
2012
2013F
Latin America
2014F
Canada
China
2015F
Growth Prospects Vary Widely by Region but the Outlook for 2015 Has
Dimmed Except in the US and UK
Sources: Blue Chip Economic Indicators (10/2014 issue); IMF (10/2014); Insurance Information Institute.
11
Gap Between Economic and Insured
Losses: 1980—2013
The gap between economic
and insured losses is
growing—suggesting both a
problem and an opportunity
Sources: Guy Carpenter, Swiss Re; Insurance Information Institute .
13
Globalization:
The Global Economy Creates
Opportunities & Risks
Globalization Is a Double Edged Sword—
Creating Opportunity and Wealth But
Potentially Creating and Amplifying Risk
Greater Reward  Greater Risk
14
5 Major Categories for External Global Risks,
Uncertainties and Fears: Insurance Solutions
1. Economic Risks
2. Geopolitical Risks
3. Environmental Risks
4. Technological Risks
5. Societal Risks
While risks can
be broadly
categorized,
none are
mutually
exclusive
Source: Adapted from World Economic Forum, Global Risks 2014; Insurance Information Institute.
15
Multitude of Exogenous Factors Influence
Insurer Growth, Performance & Cyclicality
 Economic Issues in US, Europe
 Weakness in China/Emerging Economies
 Political Upheaval in the Ukraine, Middle East
 Syria, Iraq, Thailand, Argentina, Venezuela
 Trade sanctions (e.g., Iran, Russia)












Political Gridlock in the US, Europe, Japan
Fiscal/Monetary Imbalances/Low Interest Rates
Unemployment
Resurgent Terrorism Risk: ISIS & Other Groups
Cyber Attacks (theft, espionage, terrorism)
Ebola Crisis
Sabre Rattling (e.g., US-China, Russia-Ukraine)
Separatist Fever (UK/Scotland, Spain)
Severe Natural Disaster Losses
Climate Change/Sea Level Rise
Environmental Degradation
(Over)Regulation: Systemic Risk?
Are “Black Swans”
everywhere or
does it just seem
that way?
16
The Economics of
Connecticut’s Insurance
Industry
Insurance Remains Key to
Connecticut’s Economy
17
US Insurance and Related Activities
as a Percent of US GDP, 1997-2012
3.0%
Insurance activity accounts for
about 2.5% of US GDP annually
2.8%
2.73%
2.70%
2.62% 2.64% 2.64%
2.63%
2.56%
2.6% 2.53%
2.50%
2.49%
2.45%
2.45%
2.4%
2.45%2.45%
2.31%
2.32%
2.2%
2.0%
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
Recessions and investment reverses (in 2001 and 2008) cut into the contribution
of the Insurance Industry to U.S. GDP. In times of healthier economic growth, the
industry contributes between 2.5% and 2.75% of U.S. GDP
Sources: U.S. Department of Commerce, Bureau of Economic Analysis; Insurance Information Institute.
18
Insurance and Related Activities in CT
as a Percent of CT GDP, 1997-2012
12.0%
10.66%
9.49%
8.74%
8.94%
8.53%
8.34%
8.26%
8.30%
7.59% 7.76%
8.0%
6.61%
8.91%
7.74%
7.58%
7.01%
7.41%
Insurance activity accounts for 7% - 8%
of Connecticut’s economy, three times
that of the US overall
4.0%
0.0%
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
Recessions and investment reverses (in 2001 and 2008) cut into the
contribution of the Insurance Industry to CT GDP. In times of healthier
economic growth, the industry contributes between 7% and 9% (and
sometimes more) of Connecticut’s state GDP
Sources: U.S. Department of Commerce, Bureau of Economic Analysis; Insurance Information Institute.
19
Insurance and Related Activities as a
Percent of GDP, US vs. CT, 1997-2012
2.56%
7.41%
2.45%
2.45%
7.74%
8.30%
8.91%
2.50%
2.32%
7.58%
8.94%
2.73%
7.76%
2.64%
2.64%
2.62%
7.59%
8.53%
2.45%
2.49%
2.70%
2.45%
2.63%
2.53%
8.0%
2.31%
6.61%
7.01%
8.34%
8.26%
8.74%
9.49%
12.0%
4.0%
Insurance activity in CT is
three times that of the US
overall
US
10.66%
CT
0.0%
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
Recessions and investment reverses (in 2001 and 2008) cut into the
contribution of the Insurance Industry to GDP. In times of healthier
economic growth, the industry contributes between 7% and 9% (and
sometimes more) of Connecticut’s state GDP
Sources: U.S. Department of Commerce, Bureau of Economic Analysis; Insurance Information Institute.
20
INSURANCE INDUSTRY
EMPLOYMENT TRENDS
A Big, Important Industry With Many
Employment Crosscurrents
21
Insurance Industry Employment*
2000-2014F
2,400.0
11
2,379.4
10
2,368.3
2,405.1
2,391.6
2,336.4
2,233.2
2,250
2,233.7
2,300
2,220.6
2,350
2,266.0
2,400
2,379.1
2,367.5
2,450
2,338.9
Insurance industry employment
added nearly 185,000 jobs from
2000 to 2008, an increase 8.3%
2,340.6
Annual Average, in Thousands
2,370.6
Insurance industry employment
is recovering and will likely
reach a new record level of
employment in early 2015
Insurance industry
employment fell by 2.9%
during Great Recession
2,200
2,150
2,100
00
01
02
03
04
05
06
07
08
09
12
13
14F
*Includes direct writers, claims adjusters, third-party administrators of insurance funds and other service personnel such as advisory
and insurance ratemaking services.
Sources: U.S. Department of Labor, Bureau of Labor Statistics; Insurance Information Institute (2014 forecast).
22
Overview of Insurance Sector
Employment Changes*
Insurance Subsector
August
September
2014
2014
Employment Employment
Change
CARRIERS
P-C Direct
534,300
535,000
+700
Life Direct
341,900
343,500
+1,600
Health/Medical Direct
496,200
498,300
+2,100
Title & Other Direct
73,500
73,100
-400
Reinsurers
27,400
27,400
0
Agents/Brokers
689,800
692,000
+2,200
3rd-Party Administration
164,500
166,500
+2,000
50,600
50,000
-600
OTHERS
Claims Adjusters
*Data are through September 2014 and are preliminary (i.e., subject to later revision); seasonally adjusted.
23
Insurance Industry
Employment Trends
Over the Past 25 Years, Each
Industry Segment Has Had
Different Employment
Experiences
24
U.S. Employment in the Direct
P/C Insurance Industry: 1990–2014*
Thousands
P/C
employment is
recovering
560
540
520
The BLS occasionally reclassifies
employment within industries. When
this happens, the change is spread
evenly over a 12-month period (in
this case March 2010-March 2011.
500
480
460
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
*As of September 2014; not seasonally adjusted; Does not including agents & brokers.
Note: Recessions indicated by gray shaded columns.
Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.
25
U.S. Employment in the Direct
Life Insurance Industry: 1990–2014*
Thousands
600
575
550
525
500
475
450
425
400
375
350
325
Every 4-5 years BLS reconciles its data
with census data; sometimes this
reclassifies employment within
industries. This drop, spread over March
2004-March 2005, moved some people
to the Health/Medical Expense sector.
Life
employment is
basically flat
300
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
*As of September 2014; not seasonally adjusted; Does not including agents & brokers.
Note: Recessions indicated by gray shaded columns.
Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.
26
U.S. Employment in the Direct HealthMedical Insurance Industry: 1990–2014*
Thousands
500
475
450
425
400
375
350
325
300
275
250
225
Employment in the HealthMedical insurance segment is
seeing strong growth, as it has
for most of the past 25 years.
200
175
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
*As of September 2014; not seasonally adjusted; Does not including agents & brokers.
Note: Recessions indicated by gray shaded columns.
Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.
27
U.S. Employment in the
Reinsurance Industry: 1990–2014*
Thousands
48
44
40
36
After a multi-decade
decline, Reinsurance
employment has shown
some recent growth
32
28
24
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
*As of September 2014; not seasonally adjusted; Does not including agents & brokers.
Note: Recessions indicated by gray shaded columns.
Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.
28
U.S. Employment in Insurance
Agencies & Brokerages: 1990–2014*
Thousands
700
675
650
625
600
575
Agency/Brokerage
employment is
recovering despite
consolidation
550
525
500
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
*As of September 2014; not seasonally adjusted. Includes all types of insurance.
Note: Recessions indicated by gray shaded columns.
Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.
29
U.S. Employment in Insurance
Claims Adjusting: 1990–2014*
Thousands
60
Claims adjusting is
a profession in
transition
55
50
45
40
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
*As of September 2014; not seasonally adjusted.
Note: Recessions indicated by gray shaded columns.
Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.
30
U.S. Employment in Third-Party
Administration of Insurance Funds: 1990–2014*
Thousands
170
160
150
140
130
120
More work is
being done by
TPAs
110
100
90
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
*As of September 2014; not seasonally adjusted. Includes all types of insurance.
Note: Recessions indicated by gray shaded columns.
Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.
31
How Does the Public
(and Prospective Employees)
View the Industry?
I.I.I. Survey: Insurance Favorability
Ratings Are Fairly Strong
32
I.I.I. Poll: Favorability
Percent of Public Rating Industry as Very or Mostly Favorable, 2014
Auto/Home Favorability
outranks other key industries
70%
65%
62%
60%
60%
59%
53%
50%
50%
44%
36%
40%
35%
33%
30%
20%
10%
Auto insurance
Home
insurance
Banking
Life insurance
Source: Insurance Information Institute Annual Pulse Survey.
Health
insurance
Electric utility Mutual funds Pharmaceutical Financial
companies
companies
services
companies
Oil and gas
companies
34
I.I.I. Poll: Favorability
Percent of Public Rating Industry as Very or Mostly Favorable, 1968-2014
Auto/Home Favorability Has
Outranked Banking Four
Years in a Row.
90%
80%
70%
60%
50%
40%
30%
20%
Auto and home insurance
Banking
Mutual funds
10%
Auto/Home Insurers Continue to Rank Higher Than Banking, Mutual
Funds.
Source: Insurance Information Institute Annual Pulse Survey.
35
Insurance Market Overview:
A Segmented Industry
Property/Casualty
Life/Annuity
Health
36
Property/Casualty Insurance
Industry Trends
Rich History, Poised to Manage the Risks
and Seize the Opportunities of the Future
37
Cumulative Value of Inflation-Adjusted
Claims Paid by P/C Insurers, 1925–2010E*
Adjusted for inflation, it
took 36 years for the
industry to pay its first
$1 trillion in claims in
the years since 1925.
Today, the industry
pays $1 trillion in claims
every 2 to 3 years after
adjusting for inflation.
$ Billions
$14,000
$13,000
$12,000
$11,000
$10,000
$9,000
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
3 years (2008)
3 years (2005)
2 years (2002)
4 years (2000)
3 years (1996)
3 years (1993)
4 years (1990)
4 years (1986)
5 years (1982)
7 years (1977)
9 years (1970)
*1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006.
Sources: Insurance Information Institute research and calculations from A.M. Best data.
2010E
*2005
*2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
36 years (1925 – 1961)
38
$63,784
$25,980
$33,522
$19,456
$28,672
$3,043
$35,204
$62,496
Net income rose
strongly (+81.9%)
in 2013 vs. 2012
on lower cats,
capital gains
$44,155
$38,501
$30,029
$20,559
$21,865
$30,773
$20,598
$10,870
$3,046
$10,000
$19,316
$20,000
$5,840
$30,000
$14,178
$40,000
$36,819
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 ROAS1 = 5.9%
2013 ROAS1 = 10.3%
2014 ROAS1 = 7.8%
$24,404

$ Millions 
$80,000 

$70,000 

$60,000 

$50,000 

$65,777
P/C Industry Net Income After Taxes
1991–2014:H1
2014 is off to a
slower start
$0
•ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.7% ROAS through
2014:Q2, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.
Sources: A.M. Best, ISO; Insurance Information Institute
14:H1
13
12
11
10
09
08
07
06
05
04
03
02
01
99
98
97
96
95
94
93
92
91
00
-$6,970
-$10,000
Profitability Peaks & Troughs in the P/C
Insurance Industry, 1975 – 2014:H1*
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
2013
10.4%
10%
5%
2014:H1
7.7%
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
12
13
14
-5%
*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude
mortgage and financial guaranty insurers.
Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
Back to the Future: Profitability Peaks & Troughs
in the P/C Insurance Industry, 1950 – 2014*
1970-90: Peak ROEs were much
higher in this period while troughs
were comparable. High interest
rates, rapid inflation, economic
volatility all played roles
ROE
1950-70: ROEs were lower in
this period. Low interest rates,
low inflation, “Bureau” rate
regulation all played a role
25%
20%
1990-2010s: Déjà vu.
Excluding megaCATs, this period is
very similar to the
1950-1970 period
1977:19.0%
1987:17.3%
2006:12.7%
1972:13.7%
15%
1997:11.6%
2013
10.4%
1950:8.0%
10%
1959:6.8%
1966-67:
5.5%
5%
1969: 3.9%
1992: 4.5%
*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude
mortgage and financial guaranty insurers. 2014 figure is through Q2.
Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
14:H1
12
10
08
06
04
02
00
98
96
94
2001: -1.2%
92
90
88
86
84
82
80
78
74
72
70
68
66
64
62
60
58
56
54
52
50
1984: 1.8%
1975: 2.4%
1965: 2.2%
1957: 1.8%
76
0%
-5%
2014:H1
7.7%
ROE: Property/Casualty Insurance by
Major Event, 1987–2014:H1
(Percent)
P/C Profitability Is Both by
Cyclicality and Ordinary Volatility
20%
Katrina,
Rita, Wilma
Low
CATs
15%
10%
Sept. 11
5%
0%
Hugo
Lowest CAT
Losses in
15 Years
Andrew
4 Hurricanes
Northridge
Financial
Crisis*
Sandy
Record
Tornado
Losses
-5%
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 13 14*
* Excludes Mortgage & Financial Guarantee in 2008 – 2014. 2014 figure is through H1:2014.
Sources: ISO, Fortune; Insurance Information Institute.
42
$586.9
$583.5
$567.8
$570.7
$550.3
$538.6
$559.1
$544.8
$530.5
$540.7
$511.5
$490.8
$463.0
$624.4
$671.6
14:Q2
14:Q1
13:Q4
13:Q3
13:Q2
13:Q1
12:Q4
12:Q3
12:Q2
12:Q1
11:Q4
11:Q3
11:Q2
11:Q1
10:Q4
10:Q3
10:Q2
10:Q1
09:Q4
09:Q3
$437.1
Surplus as of 6/30/14 stood at
a record high $671.6B
09:Q2
08:Q4
08:Q3
08:Q2
08:Q1
07:Q4
07:Q3
07:Q2
07:Q1
$400
06:Q4
$450
09:Q1
$455.6
$478.5
$505.0
$515.6
$517.9
$521.8
$496.6
$500
$487.1
$550
$512.8
$600
$559.2
$566.5
$650
$614.0
2007:Q3
Pre-Crisis Peak
$700
$607.7
Drop due to near-record
2011 CAT losses
$662.0
($ Billions)
$653.3
Policyholder Surplus,
2006:Q4–2014:H1
The industry now has $1 of surplus for every $0.73 of NPW,
close to the strongest claims-paying status in its history.
2010:Q1 data includes $22.5B of
paid-in capital from a holding
company parent for one insurer’s
investment in a non-insurance
business .
Sources: ISO, A.M .Best.
The P/C insurance industry entered 2014
in very strong financial condition.
43
P/C Net Premium Growth: Annual Change,
1971—2014F
(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%
2014F: 4.0%
15%
2013: 4.6%
2012: +4.3%
10%
5%
0%
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
13
14
-5%
Shaded areas denote “hard market” periods
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
45
Direct Premiums Written: Total P/C
Percent Change by State, 2007-2013
80
74.6
Top 25 States
North Dakota was the country’s
growth leader over the past 6
years with premiums written
expanding by 74.6%
60
16.6
15.9
15.7
14.5
14.5
14.3
12.6
11.9
11.8
11.2
10.5
10.3
9.9
9.8
9.3
9.1
9.0
8.6
TN
MN
AR
AK
IN
WI
CO
MI
KY
OH
NJ
LA
SC
VA
AL
MO
NM
22.2
TX
20
WY
22.5
24.9
IA
VT
25.2
KS
30
27.4
40
31.9
50
36.9
Pecent change (%)
70
NE
OK
SD
0
ND
10
Sources: SNL Financial LC.; Insurance Information Institute.
46
Direct Premiums Written: Total P/C
Percent Change by State, 2007-2013
Sources: SNL Financial LC.; Insurance Information Institute.
-15.3
DE
HI
WV
AZ
CA
ID
NH
RI
IL
PA
WA
UT
MA
MD
NY
GA
NC
US
CT
-20
MS
-15
NV
-12.6
-6.7
Growth was negative in 7
states and DC between
2007 and 2013
-10
-5.7
-4.1
-1.9
-0.7
DC
0.4
OR
-5
-1.7
1.0
ME
0
FL
1.6
4.1
4.2
3.5
MT
Pecent change (%)
5
5.3
5.6
5.9
6.2
6.9
7.0
7.3
7.6
7.8
7.9
8.2
10
8.5
Bottom 25 States
47
Life Insurance Trends
Critical Sector, Key Products
What Don’t Millennials Understand?
48
Amount of Life Insurance Death
Benefits Paid, 2005-2013
Millions
$120
$112.3
$104.3
2010
2011
$95.3
$100
$80
$100.9
$116.6
$89.0
$75.9
$79.3
2005
2006
$83.7
$60
$40
$20
$0
2007
2008
2009
2012
2013
The amount of death benefits life insurers paid grew by 53.6%
in the 8 years since 2005 (averaging 5.5% growth per year).
Sources: NAIC, via SNL Financial; Insurance Information Institute.
49
Amount of Individual Life Insurance (Death
Benefits) Issued, by Type of Policy, 2005-2013
Permanent Insurance
The Great Recession
negatively impacted life
insurance sales
$1.25
$1.09
$1.12
$1.27
$1.34
$1.27
$1.26
$1.50
$1.35
$1.75
$1.05
Term Insurance
$1.09
Billions
$0.56
2008
$0.56
2007
$0.55
$0.49
2006
$0.52
$0.52
2005
$0.50
$0.44
$0.51
$0.75
$0.51
$1.00
2010
2011
2012
2013
$0.25
$0.00
2009
The amount of term life insurance (measured by death benefit amounts)
issued yearly has slipped since 2008, from $1.35 billion to $1.05 billion,
while the amount of permanent life insurance grew slightly.
Sources: NAIC, via SNL Financial; Insurance Information Institute.
50
Group Insurance Premiums (line)
Track Nonfarm Employment (bars)
Nonfarm employment*
Group Ins Premiums
The spike is mainly in Group
Annuity premiums;
it represents “de-risking”
by a few giant DB plans
Group Premiums
140
$300
$275
135
$250
136.4
133.7
131.5
129.9
137.6
136.1
136.9
130.9
131.5
130.1
130.5
130
133.7
$225
131.9
Nonfarm Employment (millions)
…
125
$200
$175
$150
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
*Not seasonally adjusted. Group premiums = group life, group annuities, and group a&h
Sources: Bureau of Labor Statistics; NAIC Annual Statements, via SNL Financial; http://www.bls.gov/ces/; I.I.I.
Healthcare Cost Trends
Healthcare Cost Will Move Up for the
Indefinite Future
Health Insurers Will Grow and Adapt
55
U.S. Health Care Expenditures,
1965–2022F
$ Billions
$5,000
$4,000
$3,000
$2,000
$1,000
$0
65 $42.0
66 $46.3
67 $51.8
68 $58.8
69 $66.2
70 $74.9
71 $83.2
72 $93.1
73 $103.4
74 $117.2
75 $133.6
76 $153.0
77 $174.0
$195.5
78
$221.7
79
$255.8
80
$296.7
81
$334.7
82
$369.0
83
$406.5
84
$444.6
85
$476.9
86
$519.1
87
$581.7
88
$647.5
89
$724.3
90
$791.5
91
$857.9
92
$921.5
93
$972.7
94
$1,027.4
95
$1,081.8
96
$1,142.6
97
$1,208.9
98
$1,286.5
99
$1,377.2
00
$1,493.3
01
$1,638.0
02
$1,775.4
03
$1,901.6
04
$2,030.5
05
$2,163.3
06
$2,298.3
07
$2,406.6
08
$2,501.2
09
$2,600.0
10
$2,700.7
11
$2,806.6
12
$2,914.7
13
$3,093.2
14
$3,273.4
15
$3,458.3
16
$3,660.4
17
$3,889.1
18
$4,142.4
19
$4,416.2
20
$4,702.0
21
$5,008.8
22
$6,000
From 1965 through 2013, US
health care expenditures had
increased by 69 fold.
Population growth over the
same period increased by a
factor of just 1.6. By 2022,
health spending will have
increased 119 fold.
U.S. health care expenditures have been on a relentless climb for
most of the past half century, far outstripping population growth,
inflation of GDP growth
Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/StatisticsTrends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.
56
National Health Care Expenditures as a
Share of GDP, 1965 – 2022F*
% of GDP
20%
18%
16%
Health care expenditures as a share
of GDP rose from 5.8% in 1965 to
18.0% in 2013 and are expected to
reach 19.9% of GDP by 2022
2022
19.9%
2010:
17.9%
14%
12%
10%
1990:
12.5%
8%
6%
2%
0%
1965
5.8%
Since 2009, heath
expenditures as a %
of GDP have
flattened out at
about 18%--the
question is why and
will it last?
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
19
20
21
22
4%
1980:
9.2%
2000:
13.8%
Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/StatisticsTrends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.
Medical Cost Inflation vs. Overall CPI,
1995 – 2014*
Though moderating, medical
inflation will continue to exceed
inflation in the overall economy
5%
4%
3%
2%
Average Annual Growth Average
1995 – 2013
Healthcare: 3.8%
Total Nonfarm: 2.4%
1%
0%
Change in Medical CPI
CPI-All Items
-1%
95
96
97
98
99
00
01 02
03
04
05
06
07 08
09
*July 2014 compared to July 2013.
Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
10
11
12
13 14*
Rate of Health Care Expenditure Increase
Compared to Population, CPI and GDP
8000%
Accelerating business investment
will be a potent driver of
commercial property and liability
insurance exposures and should
drive employment and WC payroll
exposures as well (with a lag)
1965: $42.0 Bill
2013: $2,914.7 Bill
6839.8%
7000%
1965: $719.1 Bill
6000%
2013: $16,797.5 Bill
5000%
4000%
3000%
1965: 194.3 Mill
2235.9%
2013: 317.0 Mill
2000%
1000%
650.7%
63.1%
0%
Population
Source: Insurance Information Institute research.
CPI
GDP
Health Care
Expenditures
59
Reshaping the Insurance
Industry:
Consolidation Trends
Merger & Acquisition Activity:
Will Slow Growth, Rising Capacity in
Some Segments Lead to Consolidation?
60
U.S. INSURANCE MERGERS AND ACQUISITIONS,
All Sectors, 1989-2013 (1)
($ Billions)
$165.4
$100
M&A activity recovered
to pre-crisis levels but
deal values dropped
sharply in 2013
600
$90
500
$70
400
$59.9
$60
$56.2
$55.7
$54.7
$50.8 $50.4
$50
$40.8
$46.5
$43.0
$41.7 $41.5
$43.2
300
$40
$31.4
$30
$20
$10
200
$27.0
$19.3
$12.5
$8.6
$8.5
$7.1$6.9
$5.0
$14.9
$14.4
$9.7
$0
Number of transactions
Transaction values
$80
100
0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
(1) Includes transactions where a U.S. company was the acquirer and/or the target.
Source: Conning proprietary database.
61
U.S. INSURANCE MERGERS AND ACQUISITIONS,
P/C SECTOR, 2002-2013 (1)
($ Millions)
M&A activity in the P/C
sector remains below
pre-crisis levels.
$40,000
$35,221
80
$35,000
60
$25,000
50
$20,353
$20,000
$16,294
40
$13,615
$15,000
$12,458
30
$9,264
$10,000
20
$6,419
$3,507
$5,000
$486
Number of transactions
70
$30,000
Transaction values
90
$4,651 $4,397
10
$425
$0
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2012
(1) Includes transactions where a U.S. company was the acquirer and/or the target.
Source: Conning proprietary database.
62
U.S. INSURANCE MERGERS AND ACQUISITIONS,
LIFE/ANNUITY SECTOR, 2002-2013 (1)
($ Millions)
Life/Annuity sector M&A
activity is highly volatile
$30,000
35
$23,848
$25,000
Transaction values
30
$18,533
25
$15,000
20
15
$10,000
$5,000
$2,796
$3,817
$6,083
$5,849
$5,055
$3,063
$3,299
10
Number of transactions
$21,865
$20,000
40
5
$382 $840
$0
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
(1) Includes transactions where a U.S. company was the acquirer and/or the target.
Source: Conning proprietary database.
63
Agent/Broker M&A Deals, 2000-2014:6M
Number of Deals
360
321
297
310
264
314
289
279
267
260
224 216
210
188
177
204
189 182
184
160
Agent/Broker activity is running at
a record pace in 2014 with 314
deals announced through June 30.
110
60
10
00
01
02
03
04
05
06
07
08
09
10
11
12
13 14:6M
Source: Optis Partners, “Agent-Broker Merger & Acquisition Statistics: The New Normal?”, August 2014; Insurance Information Institute.
Insurance Equation
Challenge = Opportunity
We Solve Problems: Old and New
66
Insurance in the Age of
Mega-Disasters
Insurers and Reinsurers Worldwide Have
Risen to the Challenge and Are Prepared
for Increasing Variability and Volatility in
the Climate
67
U.S. Insured Catastrophe Losses,
1989 – 2014E
($ Billions, $ 2013)
$74.5
The majority of the
costliest disasters
events have occurred
over the past decade
$80
$70
$14.5
$12.9
$35.5
$34.1
$14.6
$11.6
$29.6
$7.6
$10.7
$16.5
$7.7
$34.2
$35.2
$6.2
$11.7
$14.5
$11.1
$12.8
$3.8
$10
$8.1
$20
$4.9
$30
$14.2
$40
$8.9
$50
$26.8
$38.3
$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 12 13 14E
2013/14 Were Welcome Respites from 2011/12, among the Costliest
Years for Insured Disaster Losses in US History. Longer-term Trend
is for more—not fewer—Costly Events
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.
68
68
Inflation Adjusted U.S. Catastrophe
Losses by Cause of Loss, 1994–20131
Wind/Hail/Flood (3), $14.6
Fires (4), $5.5
Other (5), $0.2
1.4%
Geological Events, $18.4
4.8% 3.8%0.1%
Terrorism, $24.8
6.4%
Winter Storms, $24.7
6.4%
Tornado share of
CAT losses is
rising
Events Involving
Tornadoes (2), $139.3
Insured cat losses
from 1993-2012
totaled $386.7B, an
average of $19.3B
per year or $1.6B
per month
41.1%
Hurricanes & Tropical Storms,
$159.1
36.0%
Wind losses are by
far cause the most
catastrophe losses,
even if hurricanes/TS
are excluded.
1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2013 dollars.
2. Excludes snow.
3. Does not include NFIP flood losses
4. Includes wildland fires
5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.
Source: ISO’s Property Claim Services Unit.
69
Top 16 Most Costly Disasters
in U.S. History
(Insured Losses, 2013 Dollars, $ Billions)
Superstorm Sandy in
2012 was the last megaCAT to hit the US
$60
$50
$49.4
$40
$30
Includes
Tuscaloosa, AL,
tornado
Includes
Joplin, MO,
tornado
$24.2 $24.9 $25.9
$19.0
$20
$10
$0
$9.3 $11.2
$8.8
$7.9
$7.6
$7.2
$6.8
$4.5 $5.6 $5.7
Irene (2011) Jeanne
(2004)
Frances
(2004)
Rita
Tornadoes/Tornadoes/ Hugo
(2005) T-Storms T-Storms
(1989)
(2011)
(2011)
Ivan
(2004)
Charley
(2004)
Wilma
(2005)
$13.6
Ike
(2008)
Sandy* Northridge9/11 Attack Andrew
(2012)
(1994)
(2001)
(1992)
Katrina
(2005)
12 of the 16 Most Expensive
Events in US History Have
Occurred Over the Past Decade
Sources: PCS; Insurance Information Institute inflation adjustments to 2013 dollars using the CPI.
70
Natural Disasters in the United States,
1980 – 2013
Number of Events (Annual Totals 1980 – 2013)
250
There were 128 natural
disaster events in 2013
Number
200
150
100
22
50
19
81
6
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Geophysical
(earthquake, tsunami,
volcanic activity)
Source: MR NatCatSERVICE
Meteorological (storm)
Hydrological
(flood, mass movement)
Climatological
(temperature extremes,
drought, wildfire)
71
Losses Due to Natural Disasters in the US,
1980–2013
(2013 Dollars, $ Billions)
(Overall and Insured Losses)
Indicates a great
deal of losses are
uninsured (~40%50% in the US) =
Growth
Opportunity
200
150
2013 CAT Losses
Overall : $21.8B
Insured: $12.8B
100
50
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Overall losses (in 2012 values)
Source: MR NatCatSERVICE
Insured losses (in 2013 values)
72
Total Value of Insured Coastal Exposure
in 2012
(2012, $ Billions)
New York
$2,923.1
Florida
$2,862.3
Texas
$1,175.3
Massachusetts
$849.6
The value of insured
New Jersey
$713.9
$567.8
Connecticut
coastal exposures in NY
Louisiana
$293.5
and FL lead the US.
S. Carolina
$239.3
Virginia
$182.3
In 2012, New York Ranked as the #1 Most
Maine
$164.6
Exposed State to Hurricane Loss, Overtaking Florida
North Carolina
$163.5
with $2.862 Trillion. Texas is very exposed too, and
Alabama
$118.2
ranked #3 with $1.175 Trillion
Georgia
$106.7
in insured coastal exposure
Delaware
$81.9
New Hampshire $64.0
The Insured Value of All Coastal Property Was $10.6
Mississippi $60.6
Trillion in 2012 , Up 20% from $8.9 Trillion in 2007 and
Rhode Island $58.3
Up 48% from $7.2 Trillion in 2004
Maryland $17.3
$0
Source: AIR Worldwide
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
73
I.I.I. Poll: Homes Near Hazards
Q. If you were to purchase a home today, which of the following summarizes your views
on that home’s risk of damage from natural disasters . . . and your decision to purchase
that home?
Don’t Know
Willing to
Accept Risk
3%
17%
Risk Not a Major
Consideration
28%
53%
Risk a
Significant
Influence
on
Purchase
More Than Half of the Public Would Be Significantly Influenced by
Risk of Damage from Natural Disasters. Close to a Third Do Not
Regard Such a Risk To Be a Major Consideration.
Source: Insurance Information Institute Annual Pulse Survey.
74
Top 16 Most Costly World Insurance
Losses, 1970-2014*
(Insured Losses, 2013 Dollars, $ Billions)
5 of the top 14 most
expensive catastrophes in
world history have occurred
within the most recent 4
years (2010-2014)
$60
$50
$40
$30
$49.4
Hurricane Sandy became the
6th costliest event in global
insurance history
$20
$10
$11.2
$7.9 $8.2 $8.7 $8.8 $9.3 $9.7
$39.1
$24.2 $24.9 $25.9
$19.0
$13.6 $13.6 $13.6
$0
Hugo
(1989)
Winter
Storm
Daria
(1991)
Chile
Quake
(2010)
Ivan
Charley Typhoon Wilma Thailand New Ike
(2004) (2004) Mirielle (2005) Floods Zealand (2008)
(1991)
(2011) Quake
(2011)
*Figures do not include federally insured flood losses.
Sources: Munich Re; Swiss Re; Insurance Information Institute research.
Sandy Northridge WTC
(2012) (1994) Terror
Attack
(2001)
Andrew Japan Katrina
(1992) Quake, (2005)
Tsunami
(2011)**
75
Natural Loss Events:
Full Year 2013
World Map
Winter Storm Christian (St. Jude)
Europe, 27–30 October
Flash floods
Canada, 8–9 July
Floods
Meteorite impact
Europe,
30 May–19 June
Russian Federation, 15
February
Earthquake
Floods
China, 20 April
Canada, 19–24 June
Hailstorms
Germany,
27–28 July
Floods
Typhoon Fitow
China, Japan,
5–9 October
Severe storms,
tornadoes
USA, 9–16 September
USA, 18–22 May
Typhoon Haiyan
Philippines,
8–12 November
Severe storms, tornadoes
USA, 28–31 May
Floods
India, 14–30 June
Hurricanes Ingrid &
Manuel
Australia,
21–31 January
Mexico, 12–19 September
880
Loss events
Floods
Earthquake (series)
Pakistan, 24–28 September
Heat wave
India, April–June
Natural catastrophes
Selection of significant
Natural catastrophes
Geophysical events
(earthquake, tsunami, volcanic activity)
Meteorological events
(storm)
Source: Munich Re Geo Risks Research, NatCatSERVICE – as of January 2014.
Hydrological events
(flood, mass movement)
Climatological events
(extreme temperature, drought, wildfire)
Extraterrestrial events
(Meteorite impact)
76
Natural Disasters Worldwide,
1980 – 2013 (Number of Events)
There were 880 natural
disaster events globally in
2013 compared to 905 in 2012
1 000
Number
800
600
400
200
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Geophysical
(earthquake, tsunami,
volcanic activity)
Source: MR NatCatSERVICE
Meteorological (storm)
Hydrological
(flood, mass movement)
Climatological
(temperature extremes,
drought, wildfire)
77
Losses Due to Natural Disasters Worldwide,
1980–2013 (Overall & Insured Losses)
(Overall and Insured Losses)
(2013 Dollars, $ Billions)
10-Yr. Avg. Losses
US$ bn
400
Overall : $184B
2013 Losses
Insured: $56B
Overall : $125B
Insured: $34B
300
200
There is a clear
upward trend in both
insured and overall
losses over the past
30+ years
100
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Overall losses (in 2013 values)
Source: MR NatCatSERVICE
Insured losses (in 2013 values)
78
The “Underinsurance” Gap
Why is So Much Loss Uninsured
and How to Close the Gap
79
Even as Insurance Coverage Expands,
the Insured Share of Losses Is Falling
Total Global vs. Insured Losses as % GDP (1974 – 2013)
Total and insured
losses as a share of
global GDP have both
increased over the past
40 years, but insured
losses as a share of
total losses has shrunk
Natural Catastrophe Protection Gap (1974 – 2013)
Many emerging
market nations have
very large insurance
gaps. In the US, the
gap is about 50%.
Source: Swiss Re Economic Research & Consulting; Geneva Association; Insurance Information Institute.
80
Insurance Density and Penetration in
Advanced Markets, 2013
(Premiums per Capita in US $)
Western/Northern
Europe, the US and
Advanced Asia are
relatively well insured,
but many “Advanced”
economies are not,
especially Southern
Europe
Spending on insurance
fell 1% to $3,621 per
capita in 2013.
Penetration decreased
too. Nonlife penetration
is down from its from a
high of 5.7% of GDP in
2000 to 4.7% in 2013.
Density = Premiums per capita
Penetration = Premiums as % of GDP
(Premiums as % of GDP)
Source: Swiss Re, sigma no. 3, 2014; Insurance Information Institute.
81
Insurance Density and Penetration in
Emerging Markets, 2013
(Premiums per Capita in US $)
Although emerging markets
posted growth of 7.4% in
2013 (Life: +6.4%; Nonlife:
+8.3%), most emerging
economies are poorly
insured, representing growth
opportunities for the
insurance industry.
Spending on insurance
in emerging markets
increased to $129 per
capita in 2013 from $121
in 2012. Penetration
decreased was flat art
2.7% of GDP
Density = Premiums per capita
Penetration = Premiums as % of GDP
(Premiums as % of GDP)
Source: Swiss Re, sigma no. 3, 2014;
Insurance Information Institute.
82
Causes of the Underinsurance Gap and
Ways to Narrow/Close It
Contributing Factors to the
Underinsurance Gap
Affordability
Lack of Awareness
Limits to Insurability
Regulatory
Deficiencies
Solutions that Will Help
Close the Underinsurance Gap
 Compulsory Insurance
 Create a Conducive Regulatory,
Legal and Tax Environment
 Build Public-Private Partnerships
 Develop New Products
 Microinsurance
 Enhance Data Collection/Sharing
 Foster a More Strategic
Approach to Risk Among
Businesses
Source: Geneva Association; Insurance Information Institute.
CYBER RISK
Cyber Risk is a Rapidly Emerging
Exposure for Businesses Large
and Small in Every Industry
84
Data Breaches 2005-2013, by Number of
Breaches and Records Exposed
# Data Breaches/Millions of Records Exposed
700
656
222.5
Millions
662
619
220
200
600
180
498
500
160
446
127.7
419
447
400
300
140
87.9
66.9
321
157
100
80
35.7
200
120
60
16.2
19.1
22.9
40
17.3
20
100
0
2005
2006
2007
2008
# Data Breaches
2009
2010
2011
2012
2013*
# Records Exposed (Millions)
The Total Number of Data Breaches (+38%) and Number of Records
Exposed (+408%) in 2013 Soared
85
* 2013 figures as of Jan. 1, 2014 from the ITRC updated to an additional 30 million records breached (Target) as disclosed in Jan. 2014.
Source: Identity Theft Resource Center.
Evolving Cyber Threats in Need of
Insurance Solutions
State Sponsored
Groups
Organized Cyber
Criminals
• Foreign government sponsored
• Sophisticated and well-funded
Hacktivists
• Politically-motivated hackers
• Increasing capabilities
• Traditional organized crime groups
• Loosely organized global hacker crews
Insiders
• Easy access to sensitive information
• Difficult to detect
Terrorists
• Destruction of physical and digital
assets
86
Source: Price Waterhouse Cooper (PwC).
Worldwide Cybersecurity Spending,
2011- 2016F
($ Billions)
$83.2
$85
$80
9.8%
7.9%
8.4%
$76.9
8.2%
12%
10%
8.2%
$75
8%
$71.1
$70
$65.9
6%
$65
$60.0
Cybersecurity spending is expected
to increase by $5.2B in 2014, $5.8B
in 2015 and $6.3B in 2016
$60
$55.0
$55
$50
4%
2%
0%
2011
2012
2013
2014F
Worldwide Cybersecurity Spending
2015F
2016F
% Change from Previous Year
Cybersecurity Spending Is Rising Sharply, Up by About 8%+ Annually
through 2016—a Projected Increase of $12.1 Billion from 2014 to 2016
87
Source: Gartner Group; Insurance Information Institute; Adapted from Wall Street Journal: “Financial Firms Boost Cybersecurity Funds,” Nov. 17, 2014.
Worldwide Information Security Spending per
Employee, by Industry, 2013
(Dollars per Employee)
$684
Insurance
$651
Utilities
$553
Banking
Professional Services
$376
$326
Industrial Manufacturing
$169
Retail and Wholesale
$0
$100
$200
$300
$400
$500
$600
$700
$800
Information Security Spending by Financial Services and Critical
Infrastructure Industries (e.g., Utilities) Outpaces that of Other Industries
Source: Gartner Group; Insurance Information Institute; Adapted from Wall Street Journal: “Financial Firms Boost Cybersecurity Funds,” Nov. 17, 2014.
88
2013 Data Breaches By Business
Category, By Number of Breaches
The majority of the 614 data breaches in 2013 affected business and
medical/healthcare organizations, according to the Identity Theft Resource Center.
Banking/Credit/Financial,
23 (3.7%)
Govt/Military, 56 (9.1%)
Business, 211 (34.4%)
3.7%
9.1%
Educational, 55 (9.0%)
9.0%
34.4%
Medical/Healthcare, 269 (43.8%)
43.8%
Source: Identity Theft Resource Center, http://www.idtheftcenter.org/images/breach/2013/UpdatedITRCBreachStatsReport.pdf
89
External Cyber Crime Costs: Fiscal Year
2013
Information loss (43%) and business disruption or lost productivity (36%) account for
the majority of external costs due to cyber crime.
Equipment damages
Information loss
4%
Revenue loss
17%
43%
Business disruption
36%
Other costs* 0%
* Other costs include direct and indirect costs that could not be allocated to a main external cost category
Source: 2013 Cost of Cyber Crime: United States, Ponemon Institute.
90
TYPICAL STRUCTURE OF
INSURER CYBER RISK PRODUCTS
Insurers’ Product Offerings Are
Increasingly Designed to Provide
End-to-End Cyber Risk
Management Solutions
91
The Three Basic Elements of Cyber
Coverage: Prevention, Transfer, Response
Loss
Prevention
Loss
Transfer
(Insurance)
Post-Breach
Response
(Insurable)
Cyber risk management today involves
three essential components, each designed
to reduce, mitigate or avoid loss. An
increasing number of cyber risk products
offered by insurers today provide all three.
Source: Insurance Information Institute research.
92
Data/Privacy Breach:
Many Potential Costs Can Be Insured
Costs of
notifying
regulatory
authorities
Regulatory
fines at
home &
abroad
Costs of
notifying
affecting
individuals
Data
Breach
Event
Forensic costs
to discover
cause
Defense and
settlement
costs
Lost customers
and damaged
reputation
Cyber extortion
payments
Business
Income Loss
Source: Zurich Insurance; Insurance Information Institute
93
Big Data and the Era of Predictive
Analytics & Modelling
For Insurers, It’s Always Been
About the Data
94
Percentage of Carriers Using Predictive
Analytics by Major P/C Line, 2013
Predictive analytics is
more like to be used
in personal lines, but
commercial lines use
is growing
60%
50%
82% of insurers report using
predicative analytics in at least
one line. 18% do not use it all.
Benefits Cited
Drive Profitability: 85%
49%
Reduce Risk: 55%
Grow Revenue: 52%
37%
40%
32%
Improve Op. Efficiency: 39%
30%
30%
25%
20%
9%
10%
5%
0%
Personal
Auto
Home
Comm. Auto
Comm.
Property
Source: ISO/Earnix Survey, September 2013; Insurance Information Institute.
Business
Owners
Workers
Comp
GL
95
ALTERNATIVE CAPITAL &
REINSURANCE MARKETS
Ample Capacity as
Alternative Capital is
Transforming
Reinsurance Markets
97
Alternative Capacity as a Percentage of
Global Reinsurance Capital
(As of Year End)*
Alternative Capacity
accounted for approximately
11.5% or $59 billion of the
$511 in global reinsurance
capital as of mid-2014
*As of June 30.
Source: Aon Benfield Analytics.
Investor by Category
Hedge
Fund
5%
Mutual
Fund
5%
Reinsurer
5%
2012
Hedge
Fund
2%
Reinsurer
2%
2013
Mutual
Fund
12%
Institutional
34%
Instituti
onal
41%
Catastrophe
Fund
51%
Years ended June 30.
Source: Aon Benfield Securities; Insurance Information Institute.
Catastrophe
Fund
43%
Institutional investors are
accounting for a larger
share of alternative
reinsurance investors
Catastrophe Bonds: Issuance and
Outstanding, 1997- 2014:Q2
$20,542.8
5,701.7
11
7,083.0
10
$14,835.7
$12,139.1
$12,185.0
$12,508.8
07
5,852.9
$4,904.2
06
4,108.8
01
4,600.3
00
1,991.1
1,729.8
1,219.5
1,142.8
3,391.7
966.9
99
2,729.2
1,130.0
98
6,996.3
984.8
97
$4,040.4
846.1
$4,000
633.0
$8,000
$3,450.0
$2,950.0
$12,000
4,693.4 $8,541.6
$16,000
$14,024.2
Risk capital
outstanding
reached a record
high in 2014
$20,000
$12,043.6
$24,000
$18,516.7
Risk Capital Amount ($ Millions)
$0
02
03
Risk Capital Issued
Risk Capital Outstandng at Year End
04
05
08
Financial crisis
depressed issuance
09
12
13 14:Q2
CAT bond issuance
reached a record high
in 2013.
2014 Issuance Slowed Down Substantially; May Not Surpass 2013 Record
Sources: Guy Carpenter; Insurance Information Institute.
Terrorism Risk
Insurers Met the Challenge
But Politics Threaten to End a
Successful Public/Private Partnership
101
Loss Distribution by Type of Insurance
from Sept. 11 Terrorist Attack ($ 2013)
($ 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: $42.9B**
*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 Insurance Take-up Rates,
By Year, 2003-2013
80%
70%
58%
60%
59%
59%
61%
62%
64%
62%
62%
57%
49%
50%
40%
30%
TRIA’s high take-up rates, availability and
affordability have benefitted businesses,
workers and the entire US economy
since the program’s enactment
27%
20%
10%
0%
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
In 2003, the first year TRIA was in effect, the terrorism take-up rate
was 27 percent. Since then, it has increased steadily, remaining in the
low 60 percent range since 2009.
Source: Marsh Global Analytics, 2014 Terrorism Risk Insurance Report, April 2014 and earlier editions.
103
Insurance:
A Financially Stable, Sound &
Secure Industry
Very Different from Banks
Industry Impairment Rates Are Near
Record Lows
104
P/C Insurer Impairment Frequency vs.
Combined Ratio, 1969-2013
120
Combined Ratio after Div
P/C Impairment Frequency
2.0
1.8
1.6
1.4
110
1.2
105
1.0
0.8
100
0.6
0.4
95
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
2013 impairment rate was 0.43%, down from 0.76% in
2012; the rate is lower than the 0.81% average since 1969
90
Impairment Rate
Combined Ratio
115
0.2
0.0
Impairment Rates Are Highly Correlated With Underwriting Performance
and Reached Record Lows in 2007; Recent Increase Was Associated
Primarily With Mortgage and Financial Guaranty Insurers and Not
Representative of the Industry Overall
Source: A.M. Best; Insurance Information Institute
106
100+ Year Old Insurers as a Share of
All P/C Insurers
About 12% of P/C insurance companies (fewer than 1-in-8) today (2013) are
100+ years old. This is a surprisingly high percentage.
Insurers at Least 100
Years Old, 12.3%
(287)
Insurers Less than
100 Years Old,
87.7%
(1,979)
12.3%
87.7%
Odds of a Human Living to 100
Born 1900: ~0.25% (1-in-400)
Born Today: ~2% (1-in-50)
Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC; CDC
107
Number of Recessions Endured by P/C
Insurers, by Number of Years in Operation
Number of Recessions Since 1860
Insurers that have made it to
the age of 150 have endured
32 recessions over the years
35
30
32
27
25
20
20
13
15
10
8
5
0
1-50
51-75
76-100
101-125
126-150
Number of Years in Operation
Longevity Requires an Insurer to Overcome Extreme
Economic Adversity of Every Sort
Sources: Insurance Information Institute research from National Bureau of Economic Research data.
108
The Global Financial Crisis: The Pendulum
Swings: Dodd-Frank & Systemic Risk
 Dodd-Frank Act of 2010: The implosion of the housing bubble and
virtual collapse of the US banking system, the seizure of credit
markets and massive government bailouts of US financial institutions
led to calls for sweeping regulatory reforms of the financial industry
 Limiting Systemic Risk is at the Core of Dodd-Frank
 Designation as a Systemically Important Financial Institutional (SIFI)
Will Result in Greater Regulatory Scrutiny and Heightened Capital
Requirements
 Dodd-Frank Established Several Entities Impacting Insurers
 Federal Insurance Office
 Financial Stability Oversight Council
 Office of Financial Research
 Consumer Financial Protection Bureau
109
Global Financial Crises &
Global Systemic Risk
 The Global Financial Crisis Prompted the G-20 Leaders to Request
that the Financial Stability Board (FSB) Assess the Systemic Risks
Associated with SIFIs, Global-SIFIs in Particular
 In July 2013, the FSB Endorsed the International Association of
Insurance Supervisors Methodology for Identifying Globally
Systemically Important Insurers (G-SIIs)
 For Each G-SII, the Following Will Be Required:
(i) Recovery and resolution plans
(ii) Enhanced group-wide supervision
(iii) Higher loss absorbency (HLA) requirements
 G-SIIs as Designated by the FSB as of July 2013:
 Allianz SE
AIG
Assicurazioni Generali
 Aviva
Axa
MetLife
 Ping An
Prudential Financial
Prudential plc
110
Summary
 Insurance Remains an Essential Tool for Reducing Risk
 The Industry’s Future Is Increasingly Global
 Future Growth Will Incur More Risk
 New Challenges Abound, But So Do Opportunities
 Insurers Have Centuries of History Demonstrating their
Ability to Major Through Era of Disruptive Risks
 Operational
 Economic
 Regulatory
 Insurers Will Manage through Quantum Shifts and
“Disruptor” Forces in the Decades Ahead
111
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
112