Download Ocean Marine Lines - Insurance Information Institute

Riding the
Economic Tsunami:
Marine Insurance, Economic
Crisis and the Insurance Cycle
Board of Marine Underwriters
San Francisco, CA
May 1, 2008
Robert P. Hartwig, Ph.D., CPCU, President
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: (212) 346-5520  Fax: (212) 732-1916  [email protected]  www.iii.org
Presentation Outline
• Premium, Profits & Growth
 Ocean Marine markets have the upper hand
• Underwriting Trends
 Ocean Marine Outperforms
• The Economic Tsunami: Insurance Industry Impacts
• Economic Environment for Marine Insurers
 Marine insurers are riding the tide
 Bubble Trouble
• Top Threats Facing Marine Insurers Today
• Global Economic Review
 Ascendencey of China
 Restructuring of Global Trade Patterns
• Investment Overview
• Catastrophic Loss
• Shifting Legal Liability & Tort Environment
PREMIUMS,
PROFITS &
GROWTH
Marine Market is More Stable
Than Market Overall
PREMIUMS
Overall Industry Growth
Falling, But Marine Growth
Continues
Global Marine Hull Premium
2005
Spain, 4.9% USA, 6.3%
Korea, 4.5%
Japan, 9.3%
Rest of the
World, 28.3%
Italy, 6.7%
UK (IUA), 5.8%
France, 7.9%
Norway, 13.0%
Europe and
Asia write the
majority of
marine hull
coverage; Just
6.3% was
written in the
US in 2005.
UK (Lloyd's),
13.3%
Source: IUMI and Cefor (The Central Union of Marine Underwriters)
Marine Insurance Hull Premiums
2005, Market Share
Rest of
World
3.9%
N America
14.2%
Asia-Pacific
22.1%
Source: CEFOR (Central Union of Marine Underwriters Norway).
Europe
59.8%
Europe and
Asia write the
majority of
marine hull
coverage
Strength of Recent Hard Markets
by NWP Growth*
25%
1975-78
1984-87
2001-04
Post-Katrina period
resembles 1993-97
(post-Andrew)
20%
15%
10%
5%
0%
-5%
2007: -0.6% premium growth
was the first decline since 1943
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
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
2007F
2008F
-10%
Note: Shaded areas denote hard market periods.
Source: A.M. Best, Insurance Information Institute
Growth in Net Written
Premium, 2000-2008F
15.3%
10.0%
P/C insurers are experiencing
their slowest growth rates
since 1943… underwriting
results are deteriorating
8.4%
5.0%
4.3%
3.9%
0.5%
-0.6% -1.0%
2000
2001
2002
2003
2004
2005
*2008 forecast from A.M. Best.
Source: A.M. Best; Forecasts from the Insurance Information Institute.
2006
2007
2008F
Personal/Commercial Lines &
Reinsurance NPW Growth, 2006-2008F
30%
25%
20%
Net written premium
growth is expected to be
slower for commercial
insurers and reinsurers
28.1%
15%
10%
5%
2.0%-0.1%1.4%
3.5%
0%
-5%
-10%
-15%
-1.5%-2.3%
2006
2007E
Personal
2008F
Commercial
Sources: A.M. Best Review & Preview (historical and forecast).
-5.0%
-8.5%
Reinsurance
90
91
92
93
94
95
96
97
98
Source: A.M. Best, Insurance Information Institute;
25%
20%
6.7%
4.3%
0.3%
1.9%
7.2%
9.0%
10%
5%
-0.6%
99
30%
15%
4.7%
6.4%
9.8%
23.8%
14.1%
13.7%
8.1%
5.1%
All Lines
Ocean Marine
growing faster
than almost any
other p/c segment
0.3%
1.9%
Ocean Marine
-6.4%
1.8%
-2.9%
-5.3%
2.9%
3.4%
2.8%
3.6%
9.0%
18.4%
3.7%
6.1%
2.0%
Ocean Marine
premium growth
has outpaced the
industry overall
(5.8% vs. 4.3%)
since 1990 & every
year since 2001
-1.0%
2.4%
-1.2%
-2.3%
4.4%
22.9%
Net Written Premium Growth:
Ocean Marine vs. All Lines
0%
-5%
-10%
00
01
02
03
04
05
06
07*
*2006/07 Ocean Marine figure from AIMU.
Ocean Marine Lines vs. All P/C
Premium Growth,* 2006-2007
15%
Ocean Marine is likely the
fastest growing major line in
the p/c insurance industry
10%
5%
4.3%
2006
7.2% 6.7% 5.6%
2007*
9.0%
4.6%
2.8% 1.1%
0%
-5%
-0.6%
-10%
-15%
-20%
-25%
All P/C
Lines
Most Ocean Marine lines are
growing much faster than the
overall p/c insurance
industry—one of the few lines
showing any growth at all
Ocean
Marine
Cargo
Yacht
-22.0%
Bluewater
Hull
*All P/C lines is net premiums written (A.M. Best), Ocean Marine coverages are direct basis (AIMU).
Average Commercial Rate Change,
All Lines, (1Q:2004 – 1Q:2008)
0%
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
1Q08 -13.5%
-12.0%
4Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
4Q04
3Q04
2Q04
1Q04
-16%
3Q07 -13.3%
KRW Effect
-11.8%
-5.3%
-3.0%
-2.7%
-4.6%
-14%
-11.3%
-12%
-9.6%
-10%
-8.2%
-8%
-9.7%
-5.9%
-6%
-9.4%
-4%
-7.0%
-3.2%
-0.1%
-2%
Magnitude of rate decreases diminished
greatly after Katrina but have grown again
Cumulative Commercial Rate Change
by Line: 4Q99 – 1Q08
Commercial account pricing
has been trending down for 3+
years and is now on par with
prices in late 2001, early 2002
Source: Council of Insurance Agents & Brokers
UNDERWRITING
TRENDS
Ocean Marine Markets
Outperform Industry
P/C Insurance Combined Ratio,
1970-2008F*
Combined Ratios
120
115
110
1970s: 100.3
1980s: 109.2
1990s: 107.8
2000s: 102.0*
105
100
95
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
08F
90
Sources: A.M. Best; ISO, III
*Full year 2008 estimates from III.
P/C Insurance Combined Ratio,
2001-2008F
120
115.8
110
As recently as 2001,
insurers were paying
out nearly $1.16 for
every dollar they
earned in premiums
107.4
2006 produced the best
underwriting result
since the 87.6 combined
ratio in 1949
100.7
100.1
100
2007/8 deterioration due
primarily to falling rates, but
results still strong assuming
normal CAT activity
98.6
98.3
95.6
2005 figure benefited from
heavy use of reinsurance
which lowered net losses
92.4
90
01
02
03
Sources: A.M. Best; ISO, III. *III estimates for 2008.
04
05
06
07
08F
Ten Lowest P/C Insurance Combined
Ratios Since 1920 vs. 2007
97
95
2007 was the 20th
best since 1920
The 2006 combined
ratio of 92.2 was the
best since the 87.6
combined in 1949
92.1 92.3 92.4 92.4
93
95.6
93.0 93.1 93.1 93.3
91.2
91
The industry’s best
underwriting years
are associated with
periods of low
interest rates
89
87.6
87
85
1949
1948
1943
1937
2006
1935
1950
1939
1953
1936
2007
Sources: Insurance Information Institute research from A.M. Best data. *2007: III Earlybird survey.
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
-40
-45
-50
-55
Insurers earned a record underwriting profit of
$31.7 billion in 2006, the largest ever but only the
second since 1978. Cumulative underwriting deficit
from 1975 through 2007 is $422 billion.
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
$ Billions
Underwriting Gain (Loss)
1975-2008F*
Source: A.M. Best, Insurance Information Institute
Impact of Reserve Changes on
Combined Ratio
$10
$5
$0
($5)
0.1
$0.4
$18.9
$15
$22.8
3.5
$36.9
$25
$20
$33.4
6.5
$10.8
Reserve Development ($B)
$35
$30
($10)
00
01
02
03
10
9
8
Reserve
7
adequacy has
6
4.5
improved
5
substantially
4
3
2
1
-1.2 -1.6 -1.3 -1.1
0
(1)
(2)
($5.0)
($5.3) ($7.0)($6.0)
(3)
04
05
06
Source: A.M. Best, Lehman Brothers estimates for years 2007-2009
07F
08F
09F
Combined Ratio Points
8.6 8.9
$40
PY Reserve Development
Combined Ratio Points
Combined Ratio: Ocean Marine
Lines vs. All P/C, 2006-2007
120
Ocean Marine is among the
best performing p/c lines
2006
2007*
110.0
110
100
92.4
89.2
86.0 85.9
90
98.4
95.9
95.6
77.2 79.0
80
70
60
50
All P/C
Lines
Ocean
Marine
Cargo
Yacht
Bluewater
Hull
*All P/C lines is net premiums written (A.M. Best), Ocean Marine coverages are direct basis (AIMU).; III
Combined Ratio:
Ocean Marine vs. Commercial Lines
Ocean Marine consistently
outperforms Commercial Lines
Ocean Marine
140
118.4
105.4
90.5
86.0
94.4
110
85.9
102.5
120
97.2
104.1
102.0
100
102.2
110.2
111.1
107.2
110.4
109.7
104.1
115.5
122.3
130
89.6
92.4
97.3
102
107.6
110.2
112.5
107.9
110.3
109.5
110.2
112.3
119.4
118.8
118.2
109.4
114.2
1989-2007 Combined Ratios
Ocean Marine: 104.1
Commercial Lines: 108.0
108.7
Commercial Lines
100
90
80
89
90
91
92
93
94
95
96
97
98
99
00
01
Source: A.M. Best, American Institute of Marine Underwriters;
02
03
04
05
06 07*
*2007 commercial lines est. from I.I.I.
Combined Ratio:
Ocean Marine vs. All Lines
Ocean Marine has slightly outperformed the
industry overall (104.1 vs. 105.7) since 1989
Ocean Marine
All Lines
106.0
102.0
102.0
110.4
105.9
115.5
108.0
107.2
110.1
102.6
115.8
100.0
107.5
104.1
100.1
97.2
98.4
118.4
100.8
125
120
115
110
95.6
100
95
85.9
92.4
105
86.0
92.4
89.6
106.4
109.5
106.9
107.9
108.4
119.4
115.7
108.8
97.3
114.2
109.2
118.2
109.6
130
90
85
80
89
90
91
92
93
94
95
96
97
98
99
00
01
Source: A.M. Best, American Institute of Marine Underwriters;
02
03
04
05
06 07*
*2007 commercial lines est. from I.I.I.
PROFITABILITY
Profits in 2006/07 Reached
Their Cyclical Peak;
$49,900
$65,777
$44,155
$38,501
$30,029
$3,046
$20,559
$30,773
$21,865
$10,870
$10,000
$19,316
$20,000
$5,840
$30,000
$14,178
$40,000
Insurer profits
peaked in 2006
$36,819
$50,000
$24,404
$60,000
$20,598
$70,000
2001 ROE = -1.2%
2002 ROE = 2.2%
2003 ROE = 8.9%
2004 ROE = 9.4%
2005 ROE= 9.6%
2006 ROE = 12.2%
2007 ROAS1 = 12.3%**
$61,940
P/C Net Income After Taxes
1991-2008F ($ Millions)*
08F
07
06
05
04
03
01
-$6,970
00
99
98
97
96
95
94
93
92
91
-$10,000
02
$0
*ROE figures are GAAP; 1Return on avg. surplus. **Return on Average Surplus; Sources: A.M. Best, ISO,
Insurance Information Inst.
ROE: P/C vs. All Industries
1987–2008E
20%
P/C profitability is cyclical, volatile and vulnerable
15%
10%
Sept. 11
5%
Hugo
Katrina,
Rita, Wilma
Lowest CAT
losses in 15 years
0%
Andrew
Northridge
4 Hurricanes
US P/C Insurers
2008 P/C insurer ROE is I.I.I. estimate.
Source: Insurance Information Institute; Fortune
All US Industries
08F
07
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
89
88
87
-5%
Personal/Commercial Lines &
Reinsurance ROEs, 2006-2008F*
18%
2006
2007E
16%
14.0%
2008F
10%
8%
16.8%
13.2%
14%
12%
ROEs are declining
as underwriting
results deteriorate
9.8%
9.4%
12.3%
10.7%
9.8%
6.3%
6%
4%
2%
0%
Personal
Commercial
Sources: A.M. Best Review & Preview (historical and forecast).
Reinsurance
Profitability Peaks & Troughs in the
P/C Insurance Industry,1975 – 2008F*
25%
1977:19.0%
1987:17.3%
2006:12.2%
20%
1997:11.6%
15%
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
07E
08F
-5%
*GAAP ROE for all years except 2007 which is actual ROAS of 12.3%. 2008 P/C insurer ROE is I.I.I.
estimate.
Source: Insurance Information Institute, ISO; Fortune
ROE vs. Equity Cost of Capital:
US P/C Insurance:1991-2007
18%
The p/c insurance industry achieved its cost of
capital in 2005/6 for the first time in many years
16%
12%
4%
2%
0%
-2%
-4%
The cost of capital
is the rate of return
insurers need to
attract and retain
capital to the
business
US P/C insurers missed their
cost of capital by an average 6.7
points from 1991 to 2002, but on
target or better 2003-07
91
92
93
94
95
96
97
98
99
Source: The Geneva Association, Ins. Information Inst.
-0.1 pts
6%
+0.2 pts
-13.2 pts
8%
-9.0 pts
10%
+2.3 pts
+1.7 pts
14%
00
01
02
ROE
03
04
05
06
07
Cost of Capital
P/C, L/H Stocks: Ahead of the
S&P 500 Index in 2008
Total YTD Returns Through April 11, 2008
P/C insurance stocks not
affected as much as the overall
market by credit, subprime
concerns
Mortgage & Financial
Guarantee insurers were
down 69% in 2008
S&P 500
-9.23%
All Insurers
-16.66%
-7.70%
P/C
-6.58%
Life/Health
-22.14%
Multiline
-13.56%
Reinsurance
-52.00%
Mortgage*
-9.42%
-60.0%
-50.0%
-40.0%
-30.0%
-20.0%
-10.0%
*Includes Financial Guarantee.
Source: SNL Securities, Standard & Poor’s, Insurance Information Inst.
Brokers
0.0%
Factors that Will Influence the
Length and Depth of the Cycle
• Capacity: Rapid surplus growth in recent years has left the industry with
between $85 billion and $100 billion in excess capital, according to analysts
 All else equal, rising capital leads to greater price competition and a liberalization
of terms and conditions
• Reserves: Reserves are in the best shape (in terms of adequacy) in decades,
which could extend the depth and length of the cycle
 Looming reserve deficiencies are not hanging over insurers they way they did
during the last soft market in the late 1990s
 Many companies have been releasing redundant reserves, which allows them to
boost net income even as underwriting results deteriorate
 Reserve releases will diminish in 2008; Even more so in 2009
• Investment Gains: 2007 was the 5th consecutive up year on Wall Street. With
sharp declines in stock prices and falling interest rates, portfolio yields are
certain to fallContributes to discipline
 Realized capital gains are already rising as underwriting profits shrink, but like
redundant reserves, realized capital gains are a finite resource
 A sustained equity market decline (and potentially a drop in bond prices at some
point) could reduce policyholder surplus
Source: Insurance Information Institute.
Factors that Will Influence the
Length and Depth of the Cycle (cont’d)
• Sarbanes-Oxley: Presumably SOX will lead to better and more conservative
management of company finances, including rapid recognition of deficient or
redundant reserves
 With more “eyes” on the industry, the theory is that cyclical swings should shrink
• Ratings Agencies: Focus on Cycle Management; Quicker to downgrade
 Ratings agencies more concerned with successful cycle management strategy
 Many insurers have already had ratings “haircut” over the last several years they
way they did during the last soft market in the late 1990s; Less of a margin today
• Finite Reinsurance: Had smoothing effect on earnings; Finite market is gone
• Information Systems: Management has more and better tools that allow
faster adjustments to price, underwriting and changing market conditions
than it had during previous soft markets
• Analysts/Investors: Less fixated on growth, more on ROE through soft mkt.
 Management has backing of investors of Wall Street to remain disciplined
• M&A Activity: More consolidation implies greater discipline
 Liberty Mutual/Safeco deal creates 5th largest p/c insurer. More to come?
Source: Insurance Information Institute.
A STORMY
ECONOMIC
FORECAST
What a Weakening Economy
& Credit Crunch Mean for
the Insurance Industry
2.9%
2.2%
1.4%
2.2%
2%
US growth is
among the
slowest in 2008
2.8%
2.6%
1.6%
1.8%
4%
2.8%
2.7%
1.6%
2.4%
6%
2009
2.8%
3.1%
1.8%
2.0%
Economic growth is expected
to slow globally in 2008,
adversely impact global
exposure growth and slowing
absorption of excess capital
8%
2008
2.2%
2.1%
1.3%
1.7%
12%
10%
2007**
3.0%
2.6%
3.5%
2006*
4.8%
14%
11.1%
11.4%
9.8%
9.3%
Percent Change in GDP By Country,
2006-2009F
EuroZone
U.S.
-1%
Canada
Mexico
Japan
U.K.
China
* Best estimates available. **In most cases, actual data for 2007 GDP are not yet available. Where actual data
not available, figures are consensus forecasts from April 10, 2007 issue of Blue Chip Economic Indicators.
Source: Blue Chip Economic Indicators, April 10, 2008.
Real GDP Growth*
Economic growth is
slowed dramatically
in late 2007 into 2008
4.9%
6%
2.8%
2.9%
09:4Q
2.0%
09:1Q
09:3Q
1.9%
08:4Q
2.1%
0.6%
08:1Q
0.1%
0.6%
07:4Q
1%
0.6%
0.8%
2%
2.6%
3.8%
2.9%
1.6%
3%
3.1%
3.6%
2.5%
4%
3.7%
5%
09:2Q
08:3Q
08:2Q
07:3Q
07:2Q
07:1Q
2006
2005
2004
2003
2002
2001
2000
0%
*Yellow bars are Estimates/Forecasts.
Source: US Department of Commerce, Blue Economic Indicators 4/08; Insurance Information Institute.
What’s Going On With the US and
Global Economies Today?
Fundamental Factors Affecting Global Economy in 2008
• Puncture of Two Bubbles: Credit and Housing in US
 Burst BubbleAsset Price Deflation
 Subprime mortgage market was first part of credit bubble to burst
• Credit Crunch: Some credit markets have effectively seized
• Global Contagion Effect: Securitization of asset back securities, derivatives
based on those securities amplified via leverage produced contagion effect
 Many financial institutions around the world found they are exposed
 Many hedge funds, banks caught holding CDOs, credit default swaps and other
instruments against which they borrowed heavily (sometimes 10:1)
 Some face margin calls, distressed selling of every type of asset except Treasuries
• Global Economic Impacts: Global Economic Slowdown
 GDP growth in US down sharply, employment falling; Deceleration abroad too
 “Decoupling” theory was naïve
 Crashing dollar is symptom of irresponsible US fiscal policy, trade deficits. IOUs
are being redeemed for hard assets or states in corporations
 New bubbles forming in commodities and currencies
Source: Insurance Information Institute.
Toward a New World
Economic Order
1. Credit Crunch (incl. Subprime) Issue Will Ultimately
Cost Hundreds of Billions Globally (est. up to $600B)
•
Problem exacerbated by leveraged bets taken by some financial
institutions therefore its reach extends beyond simple defaults
2. Heavy Toll on Capital Base of Some Large Financial
Institutions Worldwide (e.g., Bear Stearns)
•
•
Cash infusions necessary; Sovereign Wealth Funds important source
Federal Reserve forced into playing a larger role; must improvise
3. Most Significant Economic Event in a Generation
•
US economy will recover, but will take 18-24 months
4. Shuffling of Global Economic Deck; Economic
Pecking Order Shifting
•
China, oil producing countries hold the upper hand
5. IOUs are Being Redeemed
•
Stakes in hard assets/institutions demanded
6. Good News: No Shortage of Available Capital
•
Central banks are (generally) making right decisions; Dollar sinks
Source: Insurance Information Institute
What’s Being Done to Fix the
Economy?Impacts on Insurers
Economic Fix
Fed Rate
Cuts
Fed Debt
Swap
Fed Bailout
of Bear
Stearns
Impacts on Insurers
•Reduces bond yields (65% - 80% of portfolio)
•Potentially contributes to inflation longer run
•Fed will swap up to $200B in bank holdings of
mortgage back securities for Treasuries up to
28 days; Improves bank finances
•Fed on 3/14 (via J.P. Morgan) provided Bear
with cash after what is effectively a “run on
the bank”
•“Too Big to Fail” doctrine is activated
•Fed acting to prevent broader loss of
confidence
•3/17: J.P. Morgan buys Bear for $236 million
($2/share); Price increased to $10 on 3/24
Source: Insurance Information Institute
What’s Being Done to Fix the
Economy?Impacts on Insurers
(cont’d)
Economic Fix
Stimulus
Package
Housing
Bailout (?)
Regulatory/
Legislative
Action (?)
Impacts on Insurers
•Hope is that $168B plan boosts overall economic activity
and employment (by 500,000 jobs) and therefore p/c
personal and commercial exposures
•Contributes to already exploding budget deficits—
Washington may expand its search for people and
industries to tax
•Keeps more people in their homes and hopefully paying
HO insurance premiums
•Abandoned and neglected homes have demonstrably
worse loss performance
•Treasury March 31 “Blueprint” affects all financial firms
•For insurers, major recommendation is established of
Optional Federal Charter under Office of National
Insurance within Treasury
Source: Insurance Information Institute
Post-Crunch: Fundamental
Issues To Be Examined Globally
•
•
•
•
Adequacy of Risk Management, Control & Supervision
at Financial Institutions Worldwide



Colossal failure of risk management (and regulation)
Implications for ERM?
Includes review of incentives
Effectiveness and Nature of Regulation





What sort of oversite is optimal given recent experience?
Credit problems arose under US and European (Basel II) regulatory
regimes
Will new regulations be globally consistent?
Can overreactions be avoided?
Capital adequacy & liquidity
Accounting Rules



Problems arose under FAS, IAS
Asset Valuation, including Mark-to-Market
Structured Finance & Complex Derivatives
Ratings on Financial Instruments

New approaches to reflect type of asset, nature of risk
Source: Insurance Information Institute
Summary of Treasury
“Blueprint”for
Financial Services
Modernization
Impacts on Insurers
Treasury Regulatory
Recommendations Affecting Insurers
•
•
Establishment of an Optional Federal Charter (OFC)
 Would provide system for federal chartering, licensing,
regulation and supervision of insurers, reinsurer and
producers (agents & brokers)
 OFC insurers would still be subject to state taxes,
provisions for compulsory coverage, residual market and
guarantee funds
 OFC would specify specific lines covered by charter;
Separate charters needed for P/C and Life
OFC Would Incorporate Several Regulatory Concepts
 Ensure safety and soundness
 Enhance competition in national and international markets
 Increase efficiency through elimination of price controls,
promote more rapid technological change, encourage
product innovation, reduce regulatory costs and provide
consumer protection
Source: Department of Treasury Blueprint for a Modernized Financial Regulatory System, March 2008.
Treasury Regulatory Recommendations
Affecting Insurers (cont’d)
•
•
Establishment of Office of National Insurance (ONI)



Establishment of Office of Insurance Oversight (OIO)




•
Department within Treasury to regulate insurance pursuant to OFC
Headed by Commissioner of National Insurance
Commissioner has regulatory, supervisory, enforcement and
rehabilitative powers to oversee organization, incorporation, operation,
regulation of national insurers and national agencies
Department within Treasury to handle issues needing immediate
attention such “reinsurance collateral”; OIO could focus immediately
on “key areas of federal interest in the insurance sector”
OIO: lead regulatory voice on international regulatory policy
Would have authority to ensure states achieved uniform
implementation of declared US international insurance policy goals
OIO would also serve as advisor to Treasury Secretary on major
domestic and international policy issues
UPDATE: HR 5840 Introduced April 17 Would Establish
Office of Insurance Information (OII)

Very similar to OIO
Source: Department of Treasury Blueprint for a Modernized Financial Regulatory System, March 2008.
Insurance &
The Economy
Important But Somewhat
Muted Impacts
A Few Facts About the Relationship
Between Insurance & Economy
• Vast Majority of Insurance Business is Tied to Renewals
 Approximately 98+% of P/C business (units) is linked to renewals
 A very large share of p/c insurance premiums are statutorily or de facto
compulsory (e.g., WC, auto liability, surety, usually HO…)
 P/C insurers have marginal exposure impact due to economy
 Ocean Marine may be volatile because of association with global trade
flows
 Yachts—luxury for some, necessity for others
• Insurers are Sensitive to Interest Rates
 About 2/3 of P/C invested assets and 75% if Life assets are fixed income
 Historically, yield on industry portfolios has tracked 10-year note closely
 All else equal, lower total investment gain implies greater emphasis on
underwriting
 Historically, industry’s best underwriting performances are rooted in
periods when interests rates were low and/or equity market performance
poor (1930s – 1950s, early 2000s gave rise to strong 2006/07)
Source: Insurance Information Institute.
5%
0%
-5%
-10%
6%
4%
5.2%
78
-0.9%
79
80-7.4%
81 -6.5%
-1.5%
82
1.8%
83
4.3%
84
85
86
5.8%
87
0.3%
88
-1.6%
89
-1.0%
90
-1.8%
91
-1.0%
92
3.1%
93
1.1%
94
0.8%
95
0.4%
96
0.6%
97
-0.4%
98
-0.3%
99
1.6%
00
5.6%
01
02
7.7%
03
1.2%
04
-2.9%
05
-0.5%
06
-2.9%
07
-2.7%
08F
Real NWP Growth
15%
10%
8%
Real NWP Growth
Real GDP
2%
Real GDP Growth
20%
P/C insurance industry’s growth
is influenced modestly by growth
in the overall economy
13.7%
25%
18.6%
20.3%
Real GDP Growth vs. Real P/C
Premium Growth: Modest Association
0%
-2%
-4%
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 2/08; Insurance Information Inst.
Summary of Economic Risks and
Implications for (Re) Insurers
Economic Concern
Subprime Meltdown/
Credit Crunch
Housing Slump
Lower Interest Rates
Stock Market Slump
General Economic
Slowdown/Recession
Risks to Insurers
•Some insurers have some asset risk
•D&O/E&O exposure for some insurers
•Client asset management liability for some
•Bond insurer problems; Muni credit quality
•Reduced exposure growth
•Deteriorating loss performance on neglected,
abandoned and foreclosed properties
•Lower investment income
•Decreased capital gains (which are usually
relied upon more heavily as a source of
earnings as underwriting results deteriorate)
•Reduced commercial lines exposure growth
•Surety slump
•Increased workers comp frequency
New Private Housing Starts,
1990-2014F (Millions of Units)
1.56
1.54
1.51
1.45
1.38
1.36
1.10
I.I.I. estimates that each incremental
100,000 decline in housing starts costs
home insurers $87.5 million in new
exposure (gross premium). The net
exposure loss in 2008 vs. 2005 is
estimated at $954 million.
1.80
2.07
1.96
1.85
1.71
1.60
1.64
1.57
1.47
1.35
1.48
New home starts plunged
34% from 2005-2007;
Drop through 2008
trough is 53% (est.)—a
net annual decline of
1.09 million units
0.98
1.01
1.29
1.20
1.46
1.62
Impacts also for comml. insurers
with construction risk exposure
1.19
2.1
2.0
1.9
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
Exposure growth forecast for HO
insurers is dim for 2008/09
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07F08F 09F 10F11F 12F 13F 14F
Source: US Department of Commerce; Blue Chip Economic Indicators (10/07), except 2008/09 figures from
4/08 edition of BCEF; Insurance Info. Institute
Auto/Light Truck Sales,
1999-2014F (Millions of Units)
18.0
17.5
17.8
17.5
17.4
New auto/light trick sales are
expected to experience a net
drop of 1.4 million units
annually by 2008 compared
with 2005, a decline of 9.5%
Weakening economy,
credit crunch and high
gas prices are hurting
auto sales
17.1
16.9 16.9
17.0
16.6
16.9 16.8
16.6 16.7
16.5
16.5
16.4
16.1
16.0
15.7
15.0
Import sales will suffer too, but
foreign auto makers have more
fuel economy experience.
14.5
Weak dollar is an incentive to
shift more capacity to US.
15.5
15.3
14.0
99
00
01
02
03
04
05
06
07F
08F
09F
10F
11F
12F
13F
14F
Source: US Department of Commerce; Blue Chip Economic Indicators (10/07), except 2008/09 figures from
4/08 edition of BCEF; Insurance Info. Institute
Inflation Rate (CPI-U, %),
1990 – 2009F
6
5
4.9 5.1
Inflation was just 2.2% in 2007 but is accelerating.
Medical cost inflation, important in WC, auto liability
and other casualty covers is running far ahead of
inflation. Rising inflation can also lead to rate
inadequacy and adverse reserve development
4
3.0 3.2
3
2
4.0
3.8
3.3 3.4
3.4
3.0
2.9 2.8
2.6
2.4
2.5 2.3
1.9
1.5
2.2
2.4
1.3
1
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 08F 09F
*12-month change Feb. 2008 vs. Feb. 2007;
Source: US Bureau of Labor Statistics; Blue Chip Economic Indicators, Mar. 10, 2008; Ins. Info. Institute.
Favored Industry Groups for
Insurer Exposure Growth
Industry
Health Care
Energy (incl. Alt.)
Agriculture &
Food Processing
Export Driven
Natural Resources
& Commodities
Sources: Insurance Information Institute
Rationale
•Economic NecessityRecession Resistant
•Demographics: aging/immigrationGrowth
•Fossil, Solar, Wind, Bio-Fuels, Hydro & Other
•Consumer StapleRecession Resistant
•Grain and land prices high due to global demand,
weak dollar (exports)
•Acreage GrowingFarm Equipment, Transport
•Benefits many other industries
•Weak dollar, globalization persist; Cuba angle?
•Strong global demand,
•Supplies remain tight…but beware of bubbles
•Significant investments in R&D, plant & equip
required
Bubble Trouble
Direct Impacts on
Ocean Marine Insurers
World Crude Oil Prices:
1997- April 2008
Dollars per Barrel*
$120
Crude oil prices in April
2008 ($107.28) are up
605% since January
1998 ($15.21) and 106%
from Feb. 2007 ($52.11)
$100
$80
$60
As of April 18, 2008
oil prices were a
record $107.28 per
barrel
$40
$20
$15.21
$0
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
*All countries spot market price weighted by estimated export volume.
Source: Energy Information Administration; http://tonto.eia.doe.gov/dnav/pet/hist/wtotworldw.htm
Jan-08
Dow Jones-AIG Commodity
Price Index, 2000-2008*
220
200
180
160
Commodities prices
210.0
have soared in recent
202.6
years doubling since
2002; Sign of
169.4 172.2
demand, weak dollar,
160.4
flight to hard assets, 147.2
speculation
140
120
120.1
103.2 102.7
Are commodities
experiencing their
own price bubble?
99.6
100
80
60
00
01
02
03
04
05
06
07
08
YTD
Apr 08
*2008 values through April 29.
Sources: Dow Jones: http://www.djindexes.com/mdsidx/downloads/xlspages/aigci/djaig_full_hist.xls accessed 1/30/08; I.I.I.
calculations based on daily values.
Petroleum Price Index,
2000-2008*
660
560
Oil prices are soaring due to weak
dollar, refinery bottlenecks,
speculation, flight from real
estate/stocks/low interest rates &
demand from emerging economies
460
415.7
557.8
502.7
411.2
373.9
360
315.3
260
160
Petroleum prices in April
2008 were 49% above
their 2007 average and
283% above 2002 levels
203.3
153.0 156.6 145.9
60
00
01
02
03
04
05
06
07
08
YTD
Apr 08
*2008 values through April 29.
Sources: Dow Jones-AIG: http://www.djindexes.com/mdsidx/downloads/xlspages/aigci/djaig_full_hist.xls accessed 1/30/08; I.I.I.
calculations based on daily index values.
Grain Price Index, 2000-2008*
80
75
70
65
60
Grain prices are surging
due to speculation, strong
demand, poor harvests,
diversion of crops for
biofuels and more recently
export quotas & hoarding
Energy
prices in
April 2008
were 76%
above their
2006 level
76.9
59.3
59.2
55.7
53.9
55
49.0
50
77.5
49.6
46.8
43.8
45
40
00
01
02
03
04
05
06
07
08 YTD Apr 08
*2008 values through April 29.
Sources: Dow Jones-AIG: http://www.djindexes.com/mdsidx/downloads/xlspages/aigci/djaig_full_hist.xls accessed 1/30/08; I.I.I.
calculations based on daily index values.
Depreciation of Dollar is Partly
Responsible for Rising Energy Prices
US Dollars per Euro
$1.6
$1.5
$1.4
Weakening dollar spurs oil producers to
try to maintain purchasing power by
keeping oil prices high. Dollar has
dropped 57% relative to Euro since 2001.
$1.557
$1.371
$1.244 $1.245 $1.256
$1.132
$1.3
$1.2
$1.1 $1.065
Interest rate cuts
will keep downward
pressure on the
dollar
$0.923 $0.895 $0.945
$1.0
$0.9
$0.8
99
00
01
02
03
04
05
06
07
*As of April 30, 2008.
Source: Board of Governors of the Federal Reserve Bank; Insurance Information Institute.
08*
Economic
Environment for
Marine Insurers
Protectionism, Commodities Boom,
Economic Bust Make for
Uncertain Future
Top Economic Threats to
Ocean Marine Insurers
• Global Economic Meltdown
 Universal and protracted decline in shipping volume
• Protectionism
 Anti-globalization forces, protectionist sentiments and
xenophobia threaten to undo NAFTA and other accords
 Some politicians are fanning these flames (election year)
 Few, if any, new accords in the near/mid-term future
• Collapse of Commodities Bubble
 Collapse could dramatically slow shipments (temporarily)
• Terrorist Attacks
 Attacks on shipping or ports could be devastating in terms of
hull, cargo, facilities and [contingent] business inter.
• Supply Chain Disruption
• Shift in Tort Environment
 Environmental vulnerabilities loom large
• Higher Taxes on the “Wealthy” & Capital Gains
 Hurts Yacht Sales
Source: Insurance Information Institute.
Global Economic Outlook Points to
Long Run Marine Insurance Growth
• Global economic growth suggests intl. trade in finished
products, raw materials as well as energy demand and
exploration will remain strong.
 Current credit crunch will hurt global growth through 2009
• The 21st century is the century of Chinese ascendancy.
China today is very much like late 19th century
America—industrious, rapid growth, internationally
and militarily ambitious and certain of its destiny and
primacy over the old world order. But inflation looms,
country is an environmental disaster (incl. waterways)
 Defective products scare won’t dent trade much or for long
• US dollar is undervalued but not likely to fully recover
Expect more shipping within regional trade zones and
blocks (e.g., within Southeast Asia, Middle East)
Source: Aon; III..
But Patterns of Global Economic
Growth and Trade May Shift
• Maturation of Chinese Economy
 Implies web of trade will extend further into developing
world (South Asia, Africa), aiding international marine
shipping business
• Number and Size of Marine Shipping Growth Zones
Will Expand
 Intra-Asian trade will expand
 Asia-Africa
 Asia-Australia
 Middle East - World
 Russia – World
 Arctic (Transit & Resource Hub) – Europe/Asia/North
America
Source: Insurance Information Institute.
Changes in Global Economy are
Pushing Shipping Industry Changes
• Strong demand for shipping
• Building of ever larger ships
 Creates concentration of risk problem
• Significant number of new ships under construction
 Shipyards are building for or have orders for in 2007/2008
as much as 20% of the current world fleet
• Manpower (crew) shortages are more likely
• Port and lock log jams; New routes needed
 Expansion of Panama Canal
 Arctic routes
• Eventually shipping industry will see overcapacity
and falling transport prices
Source: Aon Marine Insurance Review, 2006; Insurance Information Institute.
Ship Prices Rising:
Bigger Ships, Strong Demand
$ Millions
$220
LNG Carrier
$150
2007
$129
Large Crude
Carrier
$64
$68
Capesize Bulk
Carrier
$36
$57
Midsize Container
Ship
$33
$0
$50
2002
•Ship prices are up 50% on
average. Builders are ramping-up
production, cutting production
time. China is trying to compete
with Japan and Korea.
•Cargo/Hull losses for a mage-ship
could exceed $1B - $2 billion.
$100
$150
Source: Clarkson Research Services, Insurance Information Institute
$200
$250
0.4%
0.4%
-6.2%
2008*
0.1%
-1.3%
4.8%
3.9%
0.3%
1.1%
3.7%
3.7%
3.2%
0.5%
2007*
1999
2000
2001
2004
-2.3%
2003
-8%
-5.1%
-5.0%
2002
-5.0%
-4.6%
-6%
-4.2%
-3.1%
-2%
-3.9%
-0.6%
0%
-4%
0.7%
2.8%
0.1%
0.3%
2%
2.2%
2.6%
4%
2.6%
America’s current account deficit continues to grow and
remains one of the biggest risks to economic stability. It
also contributes to the dollar’s depreciation which should
eventually lead to export growth.
6%
5.4%
Current Account Balances
as a % of GDP
2005
2006
Japan
*Forecasts
Source: OECD Economic Outlook 81 database
US
EU
U.S./CHINA
TRADE
China’s Trade With The World
($ billion)
$700
$600
$266
$244
$195
$166
$184
$140
$183
$142
$200
$151
$139
$300
$149
$132
$400
$249
$225
$500
$792
$762
$660
$800
Imports
$593
$561
$900
China’s export and import
growth rates are exploding.
China’s total import and export
volume reached $1,761 billion in
2006, a 24% increase on 2005.
$326
$295
$1,000
$438
$413
Exports
$969
$ Billion
$100
$0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Note: PRC exports reported on a FOB basis;
Sources: U.S. China Business Council; PRC General Administration of Customs, China’s Customs
Statistics; and the National Bureau of Statistics.
China’s Top Trade Partners 2006
($ billion)
$262.7
United States
$207.4
Japan
$166.2
Hong Kong
$134.3
South Korea
$107.8
Taiwan
$78.2
Germany
$40.9
Singapore
Malaysia
$37.1
The Netherlands
$34.5
Russia
$33.4
$0
$50
$100
$150
The U.S. is China’s top
trade partner, as are
other major world
shipping centers.
$200
Source: PRC General Administration of Customs, China’s Customs Statistics
$250
$300
China’s Trade With The U.S.
($ billion)
$ billion
$300
$250
$200
U.S. Exports
U.S. imports from China grew by
$242.2 billion from 1997 to 2006,
while U.S. exports to China grew by
$43.4 billion during the same period
U.S. Imports
$287.8
$243.5
$196.7
$152.4
$150
$100.0
$100
$45.6 $51.5
$62.6 $71.2
$125.2
$102.3
$81.8
$34.7 $41.8
$50
$28.4
$13.1 $16.3 $19.2 $22.1
$12.8
$14.3
$12.0
$11.8
$0
$55.2
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Note: U.S. exports reported on FOB basis; imports on a general customs value, CIF basis
Sources: U.S. International Trade Commission, U.S. Department of Commerce; and U.S. Census Bureau.
KEY INDUSTRY
FINANCIALS
Factors Affecting the
Industry Behind the Scenes
FINANCIAL
STRENGTH &
RATINGS
Industry Has Weathered
the Storms Well, But Cycle
May Takes Its Toll
P/C Insurer Impairment Frequency
vs. Combined Ratio, 1969-2007E
Combined Ratio
115
Combined Ratio after Div
P/C Impairment Frequency
2
1.8
1.6
110
1.4
1.2
105
1
100
0.8
0.6
95
0.4
0.2
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
07E
90
2006 impairment rate was 0.43%, or 1-in-233
companies, half the 0.86% average since 1969;
2007 will be lower; Record is 0.24% in 1972
Source: A.M. Best; Insurance Information Institute
0
Impairment Rate
120
Impairment rates
are highly
correlated
underwriting
performance and
could reach nearrecord low in 2007
Reasons for US P/C Insurer
Impairments, 1969-2005
2003-2005
Affiliate
Problems
8.6%
Catastrophe
Losses
8.6%
1969-2005
Deficient
Loss
Reserves/Inadequate
Pricing
62.8%
Deficient
Loss
Reserves/Inadequate
Pricing
38.2%
Investment
Problems*
7.3%
Alleged
Fraud
11.4%
Rapid
Growth
8.6%
Reinsurance
Sig. Change
Failure
in Business
3.5%
4.6%
Misc.
9.2%
Deficient
reserves,
CAT losses
are more
important
factors in
recent years
Affiliate
Problems
5.6%
Catastrophe
Losses
6.5%
Alleged
Fraud
8.6%
Rapid
Growth
16.5%
*Includes overstatement of assets.
Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;
CAPACITY/
SURPLUS
Accumulation of Capital/
Surplus Depresses ROEs
U.S. Policyholder Surplus:
1975-2007*
$550
$500
$450
Capacity as of 12/31/07 was
$517.9B, 6.5% above year-end
2006, 81% above its 2002 trough
and 55% above its 1999 peak.
$400
$ Billions
$350
$300
$250
$200
The premium-to-surplus
fell to $0.85:$1 at yearend 2007, approaching
its record low of
$0.84:$1 in 1998
$150
$100
$50
“Surplus” is a measure of
underwriting capacity. It is
analogous to “Owners
Equity” or “Net Worth” in
non-insurance organizations
$0
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
Source: A.M. Best, ISO, Insurance Information Institute.
*As of December 31, 2007
Lloyd’s Insurance Market
Capacity, 1998-2008 (£ billions)*
The capacity of the Lloyd’s market rose significantly during the period 2001 to 2004.
In 2005, capacity reduced but increased again in 2006 and 2007 due to the impact of
the U.S. hurricane season. Capacity reduced to £15.95 billion ($32 billion) in 2008.
18
£16.1 £15.95
£ billions
16
£14.4 £14.9
14
12
10
£11.3
£14.8
£13.7
£12.2
£10.2 £9.9 £10.1
8
6
4
2
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
*Beginning of the year.
Source: Lloyd’s Members’ Services Unit.
Annual Catastrophe Bond
Transactions Volume, 1997-2007
Risk Capital Issues ($ Mill)
$8,000
Number of Issuances
Catastrophe bond issuance has
soared in the wake of Hurricanes
Katrina and the hurricane
seasons of 2004/2005, despite two
quiet CAT years
$7,000
$6,000
$5,000
$7,329.6
35
30
25
$4,693.4
20
$4,000
15
$3,000
$1,000
$633.0
$846.1$984.8
$1,139.0
$1,219.5
$966.9
10
$1,991.1
$1,729.8
$2,000
$1,142.8
5
$0
0
97
98
99
00
01
02
03
04
Source: MMC Securities Guy Carpenter, A.M. Best; Insurance Information Institute.
05
06
07
Number of Issuances
Risk Capital Issued
P/C Insurer Share Repurchases,
1987- Through Q4 2007 ($ Millions)
Reasons Behind Capital BuildUp & Repurchase Surge
•Strong underwriting results
$22,322.6
•Moderate catastrophe losses
$418.1
$566.8
$310.1
$658.8
$769.2
91
92
93
94
95
$7,094.1
$5,266.0
$5,242.3
$763.7
$952.4
90
$1,539.9
$311.0
89
$2,764.2
$646.9
88
$4,297.3
$564.0
87
$5,000
$4,586.5
$10,000
Returning capital owners
(shareholders) is one of the
few options available
2007 repurchases to
date equate to 3.9% of
industry surplus, the
highest in 20 years
$2,385.6
$4,497.5
$15,000
•Reasonable investment
performance
•Lack of strategic alternatives
(M&A, large-scale expansion)
$20,000
$4,370.0
$25,000
2007 share buybacks shattered
the 2006 record, up 214%
Sources: Credit Suisse, Company Reports; Insurance Information Inst.
07
06
05
04
03
02
01
00
99
98
97
96
$0
MERGER &
ACQUISITION
Catalysts for P/C
Consolidation Growing
in 2008
P/C Insurance-Related M&A
Activity, 1988-2006
100
$425
$9,264
60
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Source: Conning Research & Consulting.
120
40
20
0
Number of Transactions
$35,221
140
80
$20,353
$486
$8,059
$11,534
$1,882
$0
$2,435
$5,137
$2,780
$10,000
$3,450
$20,000
$5,100
$30,000
No model for
successful
consolidation
has emerged
$19,118
$40,000
$40,032
$55,825
$30,873
$50,000
M&A activity
began to accelerate
during the second
half of 2007
$5,638
Transaction Value ($ Mill)
$60,000
Number of Transactions
$1,249
Transaction Values
Motivating Factors for Increased
P/C Insurer Consolidation
Motivating Factors for P/C M&As
• Slow Growth: Growth is at its lowest levels since the late 1990s
 NWP growth was 0% in 2007; Appears similarly flat in 2008
 Prices are falling or flat in most non-coastal markets
• Accumulation of Capital: Excess capital depresses ROEs




Policyholder Surplus up 6-7%% in 2007 and up 80% since 2002
Insurers hard pressed to maintain earnings momentum
Options: Share Buybacks, Boost Dividends, Invest in Operation, Acquire
Option B: Engage in destructive price war and destroy capital
• Reserve Adequacy: No longer a drag on earnings
 Favorable development in recent years offsets pre-2002 adverse develop.
• Favorable Fundamentals/Drop-Off in CAT Activity
 Underlying claims inflation (frequency and severity trends) are benign
 Lower CAT activity took some pressure of capital base
Source: Insurance Information Institute.
INVESTMENT
OVERVIEW
More Pain,
Little Gain
Property/Casualty Industry
Investment Results, 1994-2007
$39.6
02**
03
04
$9.0
$54.6
$38.7
01
$52.3
$9.3
$36.7
00
$35.6
$37.1
99
$3.5
$59.2
$55.8
$48.9
$45.6
$6.9
$44.0
$6.9
$16.9
$40.8
98
$13.7
$18.0
$10.8
97
$38.6
96
$39.9
95
$41.5
$9.2
$38.0
$40
$36.8
$6.0
$50
$30
$63.6
$57.9
$52.3
$33.7 $1.7
Billions
$60
Realized capital
gains rising as
underwriting
$57.7
results slip
$9.7
Capital Gains/Losses
Investment Income
$49.5
$70
06
07E
$20
94
05
*Primarily interest, stock dividends, and realized capital gains and losses.
**Not shown: $1.1B capital loss in 2002.
2005 figure includes special one-time dividend of $3.2B.
Sources: ISO; Insurance Information Institute.
CATASTROPHIC
LOSS
What Will 2008 Bring?
Most of US Population & Property
Has Major CAT Exposure
Most of
the Coast
at Risk
$80
$60
$40
$20
$9.2
$6.7
$3.4
$100
2006/07 were welcome
respites. 2005 was by far the
worst year ever for insured
catastrophe losses in the US,
but the worst has yet to come.
$7.5
$2.7
$4.7
$22.9
$5.5
$16.9
$8.3
$7.4
$2.6
$10.1
$8.3
$4.6
$26.5
$5.9
$12.9
$27.5
$120
$100 Billion
CAT year is
coming soon
$61.9
$ Billions
$100.0
U.S. Insured Catastrophe Losses*
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08:Q1
20??
$0
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.
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.
Source: Property Claims Service/ISO; Insurance Information Institute
Inflation-Adjusted U.S. Insured
Catastrophe Losses By Cause of Loss,
1987-2006¹
Fire, $6.6 , 2.2%
Civil Disorders, $1.1
, 0.4%
Wind/Hail/Flood,
$9.3 , 3.1%
Earthquakes, $19.1 ,
6.4%
Winter Storms,
$23.1 , 7.8%
Terrorism, $22.3 ,
7.5%
Water Damage, $0.4
, 0.1%
Utility Disruption,
$0.2 , 0.1%
Tornadoes, $77.3 ,
26.0%
Insured disaster losses
totaled $297.3 billion from
1987-2006 (in 2006 dollars).
Wildfires accounted for
approximately $6.6 billion of
these—2.2% of the total.
All Tropical
Cyclones, $137.7 ,
46.3%
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2006 dollars.
Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.
2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions
and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood
Insurance Program. 6 Includes wildland fires.
Source: Insurance Services Office (ISO)..
Insured Offshore Energy Losses for
Recent Major Gulf Storms
$4.0
Hurricanes Katrina, Rita
and Ivan cost energy
insurers at least $7 billion
$ Billions
$3.0
$2.0
$2.0
$3.0
$2.25
$1.0
$0.0
Katrina (2005)
Ivan (2004)*
Sources: Insurance Information Institute research estimates.
Rita (2005)
*Midpoint of estimated range for $2.0 to $2.5 billion)
Great Natural Disasters: Overall
Insured Losses, 1950 – 2007
200
Insured and total
losses surged earlier
in this decade
180
US $Billions
160
140
120
100
80
60
40
20
0
1950
1955
1960
1965
1970
1975
1980
1985
1990
Overall losses
(2007 values)
Insured losses
(2007 values)
Trend overall losses
Trend insured losses
© 2008 Münchener Rückversicherungs-Gesellschaft Geo Risks Research, NatCatSERVICE
1995
2000
2005
As at January 2008
The 2008 Hurricane
Season:
Preview to Disaster?
Outlook for 2008 Hurricane
Season: 60% Worse Than Average
Average*
2005
2008F
9.6
49.1
5.9
24.5
2.3
28
115.5
14
47.5
7
15
80
8
40
4
5
7
9
Accumulated Cyclone Energy
96.2
NA
150
Net Tropical Cyclone Activity
100%
275%
160%
Named Storms
Named Storm Days
Hurricanes
Hurricane Days
Intense Hurricanes
Intense Hurricane Days
*Average over the period 1950-2000.
Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 9, 2007.
Landfall Probabilities for 2008
Hurricane Season: Above Average
Entire US East & Gulf Coasts
US East Coast Including
Florida Peninsula
Gulf Coast from Florida
Panhandle to Brownsville
Caribbean
Average*
2008F
52%
31%
69%
45%
30%
44%
NA
Above
Average
*Average over the past century.
Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 9, 2007.
REINSURANCE
MARKETS
Reinsurance Prices are
Falling in Non-Coastal
Zones, Casualty Lines
Share of Losses Paid by
Reinsurers, by Disaster*
70%
60%
50%
40%
30%
Reinsurance is playing
an increasingly
important role in the
financing of megaCATs; Reins. Costs are
skyrocketing
30%
25%
60%
45%
20%
20%
10%
0%
Hurricane Hugo Hurricane Andrew
Sept. 11 Terror
2004 Hurricane
2005 Hurricane
(1989)
(1992)
Attack (2001)
Losses
Losses
*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer,
which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at
$3.85 billion for 2004 and $4.5 billion for 2005.
Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.
US Reinsurer Net Income
& ROE, 1985-2007*
$7.96
$9.68
5%
0%
-5%
ROE
07*
06
05
04
-10%
03
02
99
98
97
96
95
94
93
92
91
90
89
88
87
86
01
($2.98)
($4)
85
15%
ROE
$2.51
$3.41
$3.17
$1.31
$4.53
$1.47
$1.95
$2.52
$1.79
$1.17
$1.87
$2.03
Net Income
($2)
20%
10%
00
$0
$1.95
$1.94
$2
$1.38
$4
$1.22
$6
$3.71
$8
$0.12
Net Income ($ Bill)
$10
$1.99
$12
$5.43
Reinsurer profitability
rebounded post-Katrina
but is now falling
Source: Reinsurance Association of America. *2007 ROE figure is III estimate based return on average 2007 surplus.
Shifting Legal
Liability & Tort
Environment
Is the Tort Pendulum
Swinging Against Insurers?
“King of Torts” Dickie Scruggs
•Won billions in tobacco, asbestos and Katrina
litigation
•Pleaded guilty for attempting to offer a judge
$40,000 bribe to resolve attorney fee allocation
from Katrina litigation in his firm’s favor. His
son/othersguilty on related charges
•Could get 5 years in prison, $250,000 fine
Source: Wall Street Journal, 3/15/07
“King of Class Actions” Bill Lerach
•Former partner in class action firm Milberg
Weiss
•Admitted felon. Guilty of paying 3 plaintiffs
$11.4 million in 150+ cases over 25 years &
lying about it repeatedly to courts
•Will serves 1-2 years in prison and forfeit
$7.75 million; $250,000 fine
Source: San Diego Union Tribune, 9/19/07
Bad Year for Tort Kingpins*
(Continued)
$300
Tort System Costs
$250
$200
$150
$100
$50
After a period of
rapid escalation,
tort system costs as
a % of GDP are
now falling
2.24%
$277
2.24%
$265
2.14%
$246.0
1.98%
$247.0
1.82%
1.83%
1.83%
1.53%
1.87%
$179.2
1.34%
$158.5
1.22%
1.11%
$130.2
1.03%
0.82%
$83.7
0.62%
2.5%
$42.7
$13.9$20.0
$7.9
$5.4
$1.8 $3.4
0.5%
$0
2.0%
1.5%
1.0%
0.0%
50
55
60
65
70
75
80
Tort Sytem Costs
85
90
95
00
03
06 08E 09E
Tort Costs as % of GDP
Source: Tillinghast-Towers Perrin, 2007 Update on U.S. Tort Costs as % of GDP
Tort Costs as % of GDP
Tort System Costs, 1950-2009E
The Nation’s Judicial
Hellholes (2007)
Watch List
Madison County, IL
St. Clair County, IL
Northern New
Mexico
Hillsborough
County, FL
Delaware
California
Some improvement
in “Judicial
Hellholes” in 2007
NEVADA
Clark County
(Las Vegas)
ILLINOIS
Cook County
NEW JERSEY
Atlantic County
(Atlantic City)
West Virginia
Dishonorable
Mentions
District of Columbia
MO Supreme Court
MI Legislature
GA Supreme Court
Oklahoma
TEXAS
Rio Grande
Valley and
Gulf Coast
Source: American Tort Reform Association; Insurance Information Institute
South Florida
Insurance Information
Institute On-Line
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