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Top 10 Economic and Public Policy Initiatives for 2010: Impact & Implications for the P/C Insurance Industry 21st Annual Property-Casualty Insurance Executive Conference New York, NY November 12, 2009 Robert P. Hartwig, Ph.D., CPCU, President & Economist 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 I. Economic Policy Initiatives 1. 2. 3. 4. Macroeconomic Policy Employment Policy & Actions Anti-Inflation Strategy International Trade Policy II. Public Policy Initiatives 5. Tort Reform 6. Healthcare Reform 7. Financial Services Regulation 8. Catastrophe Risk Funding 9. Climate Change/Energy Policy 10.Populism and Government Expansionism Q&A 2 I. ECONOMIC POLICY What the Financial Crisis, Recession & Government Recovery Strategy Mean for the Industry’s Exposure Base and Growth Prospects #1 Macroeconomic Policy Growth in the Macroeconomy Will Stimulate Personal & Commercial Lines Exposure and Demand but Less than Anticipated 0% -4% -6% -2.7% Recession began in December 2007. Economic toll of credit crunch, housing slump, labor market contraction has been severe but recovery is in sight 2.9% 2.8% 2.7% 2.6% Personal and commercial lines exposure base have been hit hard and will be slow to come back -0.7% -2% -0.7% -0.2% 2.4% 3.5% 1.5% 2.9% 3.1% 3.6% 2.5% 0.1% 2% 1.6% 0.8% 4% 3.7% 6% The Q1:2009 decline was the steepest since the Q1:1982 drop of 6.4% 4.8% 4.8% Real GDP Growth* -5.4% -6.4% *Blue bars are Estimates/Forecasts from Blue Chip Economic Indicators. Source: US Department of Commerce, Blue Economic Indicators 10/09; Insurance Information Institute. 5 10:4Q 10:3Q 10:2Q 10:1Q 09:4Q 09:3Q 09:2Q 09:1Q 08:4Q 08:3Q 08:2Q 08:1Q 07:4Q 07:3Q 07:2Q 07:1Q 2006 2005 2004 2003 2002 2001 2000 -8% Length of U.S. Business Cycles, 1929-Present* Duration (Months) 120 110 100 Contraction Expansion Following Average Duration** Recession = 10.4 Months Expansion = 60.5 Months 90 106 Length of expansions greatly exceeds contractions 58 80 80 70 60 50 50 43 45 39 37 40 92 73 36 24 30 20 13 10 Month 0 Recession Started 120 Aug. 1929 May 1937 8 Feb. 1945 11 Nov. 1948 10 8 July 1953 * Through June 2009 (likely the “official end” of recession) Aug. 1957 10 Apr. 1960 11 Dec. 1969 16 12 16 6 Nov. 1973 Jan. 1980 Jul. 1981 **Post-WW II period through end of most recent expansion. Sources: National Bureau of Economic Research; Insurance Information Institute. 19 8 Jul. 1990 8 Mar. 2001 Dec. 2007 6 5% 0% -5% Real NWP Growth -10% 6% 4% 5.2% 78 79 -0.9% 80-7.4% 81 -6.5% 82 -1.5% 1.8% 83 4.3% 84 85 86 5.8% 87 88 0.3% -1.6% 89 -1.0% 90 91 -1.8% -1.0% 92 3.1% 93 94 1.1% 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 -3.8% 07 -4.4% 08 -4.5% 09 Real NWP Growth 15% 10% 8% 2% 0% -2% Real GDP Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 10/09; Insurance Information Inst. -4% 7 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 Regional Differences Will Significantly Impact P/C Markets Recovery in Some Areas Will Begin Years Ahead of Others & Speed of Recovery Will Differ By Orders of Magnitude State Economic Growth Varied Tremendously in 2008 Eastern US growing more slowly than Plains, Mountains 9 Fastest Growing States in 2008: Plains, Mountain States Lead Real State GDP Growth Percent 8.0% Natural resource and agricultural states have done better than most others recently, helping insurance exposure in those areas 7.3% 7.0% 6.0% 5.0% 4.4% 3.5% 4.0% 2.9% 3.0% 2.7% 2.5% 2.1% 2.0% IA TX, MN, NM, WA 2.0% 1.0% 0.0% ND WY SD CO OK WV Source: US Bureau of Economic Analysis; Insurance Information Institute. 10 Slowest Growing States in 2008: Diversity of States Suffering Real State GDP Growth Percent KY CT AZ GA IN NV RI MI DE FL OH AK 0.0% -0.1% -0.5% -1.0% -1.5% -2.0% -0.4% -0.6%-0.6%-0.6% -0.6% -0.9% States in the North, South, East and West all represented among hardest hit but for differing reasons -1.5% -1.6%-1.6% -1.7% -2.0% -2.5% Source: US Bureau of Economic Analysis; Insurance Information Institute. 11 P-C Exposures Impacted by Government Stimulus Policy Impacts on Many Lines Auto/Light Truck Sales, 1999-2010F (Millions of Units) 19 18 New auto/light truck sales are expected to experience a net drop of 6.5 million units annually by 2009 compared with 2005, a decline of 37% and the lowest level since the late 1960s Weak economy, credit crunch are hurting auto sales; Gas prices have been a factor too. 17.4 17.8 17.5 17.1 16.6 17 16 16.9 16.9 16.5 16.1 “Cash for Clunkers” should generate $225M - $375M in net new personal auto premiums 15 14 13.1 13 Impacts of falling auto sales will have a less pronounced effect on auto insurance exposure growth than problems in the housing market will on home insurers 12 11 10 11.8 10.4 9 99 00 01 02 03 04 05 06 07 08 09F 13 10F Source: US Department of Commerce; Blue Chip Economic Indicators (10/09); Insurance Information Inst. 1.80 1.96 1.85 1.36 1.60 1.57 1.64 1.62 0.90 90 91 92 93 94 95 96 97 98 99 00 01 0.58 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 2009 vs. 2005 is estimated at about $1.3 billion. 0.81 1.47 1.48 1.35 New home starts plunged 34% from 2005-2007; Drop through 2009 is 72% (est.)—a net annual decline of 1.49 million units, lowest since record began in 1959 1.01 1.29 1.20 1.46 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 0.8 0.7 0.6 0.5 1.71 Exposure growth due to home construction forecast for HO insurers is dim for 2009 with some improvement in 2010. 2.07 New Private Housing Starts, 1990-2010F (Millions of Units) 02 03 04 05 06 07 08 09F 10F 14 Source: US Department of Commerce; Blue Chip Economic Indicators (10/09); Insurance Information Inst. Private Sector Business Starts, 1993:Q2-2008:Q4* Thousands 220 192 188 187 189 186 190 194 191 199 204 202 195 196 196 206 206 201 192 198 206 206 203 211 205 212 200 205 204 204 197 203 201 209 203 192 192 193 201 204 202 210 212 209 216 220 223 220 220 210 221 212 204 218 210 209 195 187 189 230 189,000 business starts were recorded 2008:Q4, the lowest level since 1995 210 186 180 Business starts are down 15% in the current downturn, holding back most types of commercial insurance exposure 174 180 175 190 186 200 170 160 150 93 94 95 96 97 98 99 00 01 02 03 *Latest available as of Oct. 2009. Source: Bureau of Labor Statistics: http://www.bls.gov/news.release/cewbd.t07.htm 04 05 06 07 15 08 Business Bankruptcy Filings, 1980-2009* 90,000 80,000 60,000 50,000 40,000 30,000 20,000 10,000 There were 30,333 business bankruptcies during the first half of 2009, up 64% from 2008: H1 and on track for about 60,000 for all of 2009, the most since 1993. Current recession will generate 200%+ surge. 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 0 43,694 48,125 70,000 % Change Surrounding Recessions 1980-82: 58.6% 1980-87: 88.7% 1990-91: 10.3% 2000-01: 13.0% 2006-09: 204.6%* 69,300 62,436 64,004 71,277 81,235 82,446 63,853 63,235 64,853 71,549 70,643 62,304 52,374 51,959 53,549 54,027 44,367 37,884 35,472 40,099 38,540 35,037 34,317 39,201 19,695 28,322 43,546 60,000 Significant implications for bond & surety lines *Based estimate of 60,000 business bankruptcies in 2009; actual first half total was 30,333. Source: American Bankruptcy Institute; Insurance Information Institute 16 Year-Over-Year Change in Quarterly U.S. State Tax Revenues, Inflation Adjusted -5% -10% -15% -20% 6.6% 4.2% 3.7% 6.3% 2.6% 1.3% 1.9% 2.3% 0.4% 0.8% 0.4% 3.0% 0.2% 12.4% 0.1% 4.0% 4.7% 5.7% 8.2% 3.4% 6.0% 7.0% 0.0% 1.6% 0% 4.4% 1.8% 0.4% 5% 1Q99 2Q99 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 -1.3% 3Q01 -1.7% 4Q01 -3.0% 1Q02 -7.6% 2Q02 -10.7% 3Q02 4Q02 1Q03 -0.6% 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 -5.8% -13.4% 1Q09 2Q09-17.8% 10% 2.4% 2.4% 4.7% 5.6% 15% 9.9% 9.5% 20% States revenues were down 17.8% in Q2 2009, the second consecutive quarter of record revenue decline. This will impact public infrastructure spending significantly. Nationwide, state-tax collections for fiscal year 2009 declined by a record $63 billion, or 8.2 percent from the previous year. That loss is roughly twice the amount states gained in fiscal relief from the federal stimulus package. Source: U.S. Census Bureau; Nelson A. Rockefeller Institute of Government: http://www.rockinst.org/pdf/government_finance/state_revenue_report/2009-10-15-SRR_77.pdf Distribution of $787 B in Stimulus Funds* $350 Unused Paid Out $ Billions $288 $275 $300 $173.2B or 22% or the $787B in stimulus money has been spent as of Oct. 10, 2009. $224 $250 $200 $150 $225.5 $228.0 $160.3 $100 $50 $62.5 $47.0 $63.7 Tax Benefits Contracts, Grants, Loans Entitlements $0 *As of 10/10/09 Source: www.recovery.gov accessed 10/17/09; Insurance Information Institute. 26 GREEN SHOOTS Business Mix & Geographic Footprint Will Impact P-C Insurer Growth Opportunities Hopeful Signs that the Economic Recovery Is Underway • Recession Appears to be Bottoming Out, Freefall Has Ended • • • • GDP shrinkage has ended; Economy is expanding Pace of job losses is slowing Major stock market indices well off record lows, anticipating recovery Some signs of retail sales stabilization are evident • Financial Sector is Stabilizing • Banks are reporting quarterly profits • Many banks expanding lending to very credit worthy people & businesses • Housing Sector Seems To Be Bottoming Out • Home are much more affordable (attracting buyers) • Mortgage rates are still low relative to pre-crisis levels (attracting buyers) • Freefall in housing starts and existing home sales is ending in many areas • Inflation & Energy Prices Are Under Control • Consumer & Business Debt Loads Are Shrinking 35 Source: Ins. Info. Inst. 11 Industries for the Next 10 Years: Insurance Solutions Needed Government Education Health Care Energy (Traditional) Alternative Energy Agriculture Natural Resources Environmental Technology Light Manufacturing Export Oriented Industries 36 #2. Employment Policy & Actions Massive Job Losses Sap the Economy and Stunt Personal & Commercial Lines Exposure Growth Unemployment Rate: On the Rise January 2000 through October 2009* 11.0 10.0 9.0 8.0 Previous Peak: 6.3% in June 2003 Oct. 2009 unemployment was 10.2%, up 0.4% from Sept. and nearing its highest level since April 1983 (10.8%) Trough: 4.4% in March 2007 7.0 6.0 5.0 Source: US Bureau of Labor Statistics; Insurance Information Institute. 38 Oct-09 Jan-09 Jan-08 Jan-07 Jan-06 Jan-05 Jan-03 Jan-02 Jan-00 2.0 Jan-01 Average unemployment rate 2000-07 was 5.0% 3.0 Unemployment will likely peak near 10.5 % during this cycle, impacting payroll sensitive p/c and l/h exposures Jan-04 4.0 Unemployment Rates by State, September 2009: Highest 25 States* 8.8 8.9 8.9 9.1 9.2 9.3 9.3 9.5 9.6 10.1 9.8 10.5 10.5 10.8 10.7 10.9 11.0 11.4 13.3 13.0 11.5 10.1 10 11.6 12 12.2 Unemployment Rate (%) 14 Insurers with heavy footprints in these states will lag behind 15.3 16 8 6 4 2 The unemployment rate has been rising across the country, but some states are doing much better than others. 0 MI NV RI CA SC OR DC FL KY NC AL IL TN OH GA NJ IN MO WA MA MS AZ NY WV ID *Provisional figures for September 2009, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute. 4 2 4.2 The unemployment rate has been rising across the country, but some states are doing much better than others. 4.8 4.9 6.2 6.7 8.2 8.3 8.3 8.4 8.4 6 6.7 6.7 6.7 6.7 6.8 6.9 7.0 7.1 7.2 7.2 7.4 7.3 7.2 8 7.7 Unemployment Rate (%) 10 8.8 8.5 Unemployment Rates By State, September 2009: Lowest 25 States* 0 PA ME AK CT WI DE TX NM LA MN HI MD NH AR CO KS WY IA OK VT MT VA UT NE SD ND *Provisional figures for September 2009, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute. Labor Underutilization: Broader than Just Unemployment % of Labor Force Percent 18% 16.8% 17% 16.4% 16.5% 17.0% 17.5% 16.3% 16% 15% 14% 13% 12% 11.2% 11% Marginally attached and unemployed persons account for 17.5% of the labor force in Oct. 2009 (1 out every 5.7 people). Unemployment rate alone was 10.2%. Underutilization shows a broader impact on WC and other commercial exposures. 10% Sep-08 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 NOTE: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available For a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule. 43 Source: US Bureau of Labor Statistics; Insurance Information Institute. Wage & Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums Wage & Salary Disbursement (Private Employment) vs. WC NWP $ Billions 12/07-? $ Billions 7/90-3/91 $7,000 $6,000 3/01-11/01 Wage & Salary Disbursements WC NPW $45 $40 $35 $5,000 $30 $4,000 $25 $3,000 $2,000 Shaded areas indicate recessions $1,000 Weakening payrolls have eroded $2B+ in workers comp premiums $0 $20 $15 $10 $5 $0 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09* *Average Wage and Salary data as of 7/1/2009. Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books Frequency: 1926-2008 A Long-Term Drift Downward Manufacturing—Total Recordable Cases Rate of Injury and Illness Cases per 100 Full-Time Workers 30 25 20 15 10 5 '26 '28 '30 '32 '34 '36 '39 '41 '43 '45 '47 '49 '52 '54 '56 '58 '60 '62 '65 '67 '69 '71 '73 '75 '78 '80 '82 '84 '86 '88 '91 '93 '95 '97 '99 '01 '04 '06 0 Note: Recessions indicated by gray bar Note: Recessions indicated by gray bar. Sources: NCCI from U.S. Bureau of Labor Statistics; National Bureau of Economic Research #3. Anti-Inflation Strategy Will Massive Stimulus & Cash Infusions Spark Growth or Ignite Inflation: Claims Cost Severities at Risk? Annual Inflation Rates (CPI-U, %), 1990-2011F Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the commodity bubble have produced temporary deflation. 6.0 5.0 4.9 5.1 3.8 4.0 3.0 3.0 2.0 1.0 0.0 3.2 3.3 3.4 3.0 2.9 2.8 2.4 2.6 2.5 2.3 1.9 1.5 3.8 2.8 1.9 1.9 1.3 There is so much slack in the US economy that inflation should not be a concern through 2011, but depreciation of dollar is concern longer run. (0.5) (1.0) 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F10F11F Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, Oct. 10, 2009 (2009/10 forecasts; 2011 Swiss Re). 51 US Budget Deficit, 1969-2019F $500 Federal Deficit ($ Bill) 4% % GDP 2% $0 -$500 -4% -6% -$1,000 Concerns that deficit spending will drive up inflation. This would harmful to insurance claim severity. -8% -10% -$1,500 -12% 2019 2015 2010 2005 -14% 2000 1995 1990 1985 1969 -$2,000 1980 Deficit expected to hit record $1.8 trillion in 2009 or 13% or GDP, a post-WW II high 1975 Federal Deficit -2% Sources: Congressional Budget Office analysis of President’s budget, March 2009; Insurance Information Institute. Deficit as % of GDP 0% $2,000 $926.4 $921.3 $922.9 $911.6 $899.4 $903.6 $1,000 $903.7 $1,500 $2,179.0 $2,052.2 The size of the Fed’s balance sheet has more than doubled since the crisis began in 2007 from about $900 billion to $2.2 trillion, fueling inflation concerns. $1,186.2 $2,500 $2,270.4 $ Billions $2,106.5 Balance Sheet of the Federal Reserve, Dec. 2006- Sept. 2009* $500 $0 Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep06 07 07 07 07 08 08 08 08 09 09 09 *As of final Friday in each quarter. Source: Federal Reserve: http://www.federalreserve.gov/releases/h41/hist/h41hist1.htm 53 Depreciation of Dollar is Inflationary US Dollars per Euro Weak dollar increases costs of imports and dollardenominated commodities $1.6 $1.5 Dollar has depreciated 40% against the Euro since 2001 $1.473 $1.482 $1.371 $1.4 $1.244 $1.245 $1.256 $1.3 $1.132 $1.2 Weak economy, Fed policy keep interest rates low and downward pressure on the dollar $1.1 $1.065 $1.0 $0.923 $0.895 $0.945 $0.9 $0.8 99 00 01 02 03 04 05 06 07 08 *As of October 2009. Source: Board of Governors of the Federal Reserve Bank; Insurance Information Institute. 09* Top Concerns/Risks for Insurers if Inflation is Reignited CONCERNS: The Federal Reserve Has Flooded Financial System with Cash (Turned on the Printing Presses), the Federal Govt. Has Approved a $787B Stimulus and the Deficit is Expected to Mushroom to $1.8 Trillion. All Are Potentially Inflationary. What are the potential impacts for insurers? What can/should insurers do to protect themselves from the risks of inflation? KEY RISKS FROM SUSTAINED/ACCELERATING INFLATION • Rising Claim Severities Cost of claims settlement rises across the board (property and liability) • Rate Inadequacy Rates inadequate due to low trend assumptions arising from use of historical data • Reserve Inadequacy Reserves may develop adversely and become inadequate (deficient) • Burn Through on Retentions Retentions, deductibles burned through more quickly • Reinsurance Penetration/Exhaustion Higher costsrisks burn through their retentions more quickly, tapping into re55 insurance more quickly and potential exhausting their reinsurance more quickly Source: Ins. Info. Inst. Tort Cost Growth & Medical Cost Inflation vs. Overall Inflation (CPI-U), 1961-2009E* 14% Tort System is an Inflation Amplifier Tort costs move with inflation but at twice the rate Avg. Ann. Change: 1961-2009E* 12% Tort Costs: +8.4% Med Costs: +5.9% Overall Inflation: +4.2% 10% 8% 6% 4% 2% Tort Costs Medical Costs CPI 0% 1961-70 1971-80 1981-90 1991-2000 2001-09E * CPI-U and medical costs as of Sept 2009; Tort figure is for full-year 2009 from Tillinghast. Sources: US Bureau of Labor Statistics, Tillinghast-Towers Perrin, 2008 Update on U.S. Tort Costs; Insurance Info. Inst. #4. International Trade Policy (Re)insurance is a Global Business; A Shift to Protectionist Policies Would Be Disastrous for the Global Economy Global Merchandise Exports, 1979-2009F ($ Trillions and Annual Growth Rate) 16 Merchandise Exports % Change 20% 14 15% 12 10% 10 5% 8 0% 6 -5% 4 2 25% Trade is expected to decline by its largest amount in decades in 2009 -15% 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 0 -10% Source: World Trade Organization; Insurance Information Institute. Growth Rate in Exports Merchandise Exports ($ Trillions) 18 Recessions routinely depress trade, but the current global financial crisis is much more severe Global Nonlife Insurance Direct Premiums Written, 2004-2008 $ Millions $1,700 $1,650 $1,600 $1,550 $1,500 $1,450 $1,400 $1,350 $1,300 $1,250 Protectionism would impair global premium growth, which is highest in developing, export-oriented countries countries $1,668 $1,538 $1,549 $1,442 $1,398 2004 2005 Global nonlife insurance premiums fell in 2008 as world economies entered recession and many commercial markets remained soft 2006 Source: Swiss Re sigma series; Insurance Information Institute. 2007 2008 59 II. PUBLIC POLICY Government Action (Direct and Indirect) Will Shape the P/C Insurance Industry for Decades to Come #5. Tort Reform Erosion of Recent Reforms, New Avenues of Tort Liability Are Emerging Threats Important Issues & Threats Facing Insurers: 2009 -2015 Emerging Tort Threat No tort reform (or protection of recent reforms) is forthcoming from the current Congress or Administration Erosion of recent reforms is a certainty (already happening) Innumerable legislative initiatives will create opportunities to undermine existing reforms and develop new theories and channels of liability Torts twice the overall rate of inflation Influence personal and commercial lines, esp. auto liab. Historically extremely costly to p/c insurance industry Leads to reserve deficiency, rate pressure Bottom Line: Tort “crisis” is on the horizon and will be recognized as such by 2012-2014 62 Source: Insurance Information Inst. Over the Last Three Decades, Total Tort Costs* as a % of GDP Appear Somewhat Cyclical Tort Sytem Costs Tort Costs as % of GDP 2.50% Tort System Costs $250 2.25% $200 $150 2.00% $100 1.75% 2009-2010 Growth in Tort Costs as % of GDP is due in part to shrinking GDP $50 Sources: Tillinghast-Towers Perrin, 2008 Update on US Tort Cost Trends, Appendix 1A; I.I.I. calculations/estimates for 2009 and 2010 2010E 2008E 2006 2004 2002 2000 1998 *Excludes the tobacco settlement, medical malpractice 1996 1994 1992 1990 1988 1986 1984 1982 1.50% 1980 $0 Tort Costs as % of GDP Billions $300 #6. Healthcare Reform Spillover Effects Put P/C Insurers at Increased Risk National Health Expenditures 10% 5% 18E 17E 16E 15E 14E 13E 12E 11E 10E 09E 08E 07 06 05 04 20% 15% Health care expenditures consumed an estimated 16.6% of GDP in 2008 and are expected to rise to 20.3% by 2018 03 25% National Health Expenditures as % of GDP Source: Centers for Medicare & Medicaid Services, Office of the Actuary; Insurance Information Institute. 0% National Health Exp. as % of GDP 20.3% 19.3% $3,790 19.8% $4,062 18.5% $3,313 18.9% $3,541 17.9% $2,770 17.7% $2,624 $2,510 16.6% 17.6% $2,379 16.2% $2,241 $2,113 15.9% 16.0% $1,981 15.9% $1,735 $1,855 15.3% 15.8% $1,603 02 14.5% $1,470 01 $1,354 00 99 $1,191 $1,266 98 97 $913 $1,125 93 $714 $253 80 $75 $0 70 $500 $28 $1,000 90 $1,500 5.2% $2,000 7.2% $2,500 9.1% $3,000 13.7% 13.8% 12.3% $3,500 13.7% 13.6% 13.6% $4,000 60 National Health Exps $4,500 $2,931 18.0% $3,111 18.2% $5,000 $4,353 National Health Expenditures and Health Expenditures as a Share of GDP, 1960-2018F ($ Billions) Healthcare Reform Bill is a Trial Lawyer Dream Come True The Affordable Health Care for America Act (H.R. 3962) includes the following benefit to the trial bar: Section 2531, entitled “Medical Liability Alternatives,” establishes an incentive program for states to adopt and implement alternatives to medical liability litigation. [BUT]…… “a state is not eligible for the incentive payments if that state puts a law on the books that limits attorneys’ fees or imposes caps on damages.” Jeopardizes some $54 billion in savings in medical care costs that Congressional Budget Office (CBO) says litigation reform would bring. Source: Andrew Breitbart, http://biggovernment.com; Congressional Budget Office (CBO) Health Insurance Reform Debate— Potential Spillover Impacts on P/C Insurers • 24-Hour Coverage Proposal Would roll WC and med components of auto into natl. health care plan • Rollback of McCarran-Ferguson Act Would repeal or restrict for health and medical malpractice insurers Slippery slope—Med Mal is a p/c line; Congress will not hesitate to breach M-F for other p/c lines in the future to show its ire over an issue (e.g., after major cat) • Exclusion of Med Mal Reform from Health Care Bill Shows powerful influence of trial bar with Congress/Administration • • • • • FTC granted authority to conduct studies “related to insurance” –All Reporting of Claims Adjustments to Medicare Fee Schedules Patient “Bill of Rights” or Vague Standards of Care Cost Shifting into WC, Auto from Health System Lines! WC/Auto Medical: more lucrative from provider perspective • • • • “Windfall” Profit Taxes? Additional Premium Taxes? Executive Compensation Restrictions? Public “Option” in P/C Lines—Nat Cat/Wind? Perception that Feds Regulate Insurance Industry Taking Root 68 #7. Financial Services Regulation Concern Over Duplicative, Unnecessary and Inappropriate Regulation Impacting P/C Insurers Regulatory Uncertainty Mounting: 2010 Outcome Unclear Regulatory Overreach Principle danger is that P/C insurers get swept into vast federal regulatory overhaul and subjected to inappropriate, duplicative and costly regulation Systemic Risk Regulator: Is any Insurer Systemically Important? Will it be limited to banks/creditors? Limited to Health & Med Mal? Federal Office of Insurance Creation Within Treasury? Consumer Financial Protection Agency Healthcare Reform Spillover Federal Trade Commission: All Lines Study Authority? McCarran-Ferguson Rollback: OFC vs. State Chartering Debate Lingers Taxation, Offshore Domiciles Impact of Regulatory Changes Will Be Felt for Decades Bottom Line: Regulatory outcome is uncertain and risk of adverse outcome exists 70 #8. Catastrophe Risk Financing Will the Feds Decide a “Public Option” is the Best Solution? $40 $20 $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 $60 $7.5 $80 2009 cat losses were down 29% in H1 from $10.6B in H1 2008 $26.0 $100 2008 CAT losses exceeded 2006/07 combined. 2005 was by far the worst year ever for insured catastrophe losses in the US, but the worst has yet to come. $9.2 $6.7 $120 $100 Billion CAT year is coming eventually $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 09* 20?? $0 *Based on PCS data through June 30 = $7.5 billion. 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. 72 Source: Property Claims Service/ISO; Insurance Information Institute Insured Property Catastrophe Losses as % Net Premiums Earned, 1984–2008 16% 14% 12% 10% US US average: 1984-2008 US CAT losses were a record 14.4% of net premiums earned in 2005 and were 4 times the 1984-2008 average of 3.6% 8% 6% 4% 2% 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 0% Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute. Top 12 Most Costly Disasters in US History, (Insured Losses, $2008) $50 $45 8 of the 12 most expensive disasters in US history have occurred since 2004; $40 $45.3 8 of the top 12 disasters affected FL $ Billions $35 $30 $25 $20 In 2008, Ike became the 4th most expensive insurance event and 3rd most expensive hurricane in US history arising from about 1.35 mill claims $11.3 $11.3 $12.5 $15 $10 $5 $22.8 $23.8 $4.2 $5.2 $6.2 $7.3 $8.1 $8.5 Ivan (2004) Charley (2004) $0 Jeanne (2004) Frances (2004) Rita (2005) Hugo (1989) Wilma (2005) Northridge (1994) *PCS estimate as of August 1, 2009. Sources: PCS; Insurance Information Institute inflation adjustments. Ike (2008)* 9/11 Attacks (2001) Andrew (1992) Katrina (2005) 74 Distribution of US Insured CAT Losses: TX, FL, LA vs US, 1980-2008* $ Billions of Dollars Rest of US, $176, 60% Florida accounted for 19% of all US insured CAT losses from 1980-2008: $57.1B out of $297.9B Texas, $31.2, 10% Louisiana, $33.6, 11% Florida, $57.1, 19% *All figures (except 2006-2008 loss) have been adjusted to 2005 dollars. Source: PCS division of ISO. Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss, 1988-2007¹ Fire, $8.1 , 2.6% Wind/Hail/Flood, $9.9 , 3.2% Earthquakes, $19.5 , 6.3% Winter Storms, $24.4 , 7.9% Civil Disorders, $1.1 , 0.4% Water Damage, $0.4 , 0.1% Utility Disruption, $0.2 , 0.1% Tornadoes, $82.4 , 26.5% Insured disaster losses totaled $310.5 billion from 1988-2007 (in 2007 dollars) Terrorism, $22.9 , 7.4% All Tropical Cyclones, $141.6 , 45.6% 1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2007 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. 76 Source: Insurance Services Office (ISO).. Total Value of Insured Coastal Exposure (2007, $ Billions) Florida New York Texas Massachusetts New Jersey Connecticut Louisiana S. Carolina Virginia Maine North Carolina Alabama Georgia Delaware New Hampshire Mississippi Rhode Island Maryland $2,458.6 $2,378.9 $895.1 $522B increase $772.8 since 2004, up 27% $635.5 $479.9 In 2007, Florida still ranked as the #1 $224.4 most exposed state to hurricane loss, $191.9 with $2.459 trillion exposure, an $158.8 increase of $522B or 27% from $1.937 $146.9 trillion in 2004. $132.8 $92.5 The insured value of all coastal $85.6 property was $8.9 trillion in 2007, up $60.6 24% from $7.2 trillion in 2004. $55.7 $51.8 $54.1 $14.9 $0 Source: AIR Worldwide $500 $1,000 $1,500 $2,000 $2,500 $3,000 78 U.S. Residual Market Property Policies In-ForceExposure 3,000 2,500 In the 19-year period between 1990 and 2008, total residual market policy count (FAIR & Beach/Windstorm Plans) has nearly tripled to more than 2.6 million policies 2,000 1,785.0 1,500 1,000 2,840.4 2,780.6 2,621.3 2,209.3 2,203.9 1,741.7 1,642.3 1,458.1 1,196.5 1,319.7 931.6 Katrina, Rita and Wilma 4 Florida Hurricanes 500 0 1990 1995 1999 2000 2001 Source: PIPSO; Insurance Information Institute 2002 2003 2004 2005 2006 2007 2008 U.S. Residual Market Exposure to Loss (Billions of Dollars) $900 $800 $700 $600 In the 19-year period between 1990 and 2008, total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54.7bn in 1990 to $696.4bn in 2008. $696.4 $656.7 4 Florida Hurricanes $500 $400 $771.9 Katrina, Rita and Wilma $430.5$419.5 $372.3 Hurricane Andrew $292.0 $281.8 $244.2 $221.3 $150.0 $300 $200 $100 $54.7 $0 1990 1995 1999 2000 2001 Source: PIPSO; Insurance Information Institute 2002 2003 2004 2005 2006 2007 2008 #9. Climate Change/Energy Policy Risks and Opportunities Abound Climate Change/Energy Policy Opportunities Abound… Massive increase in energy generation capacity and infrastructure required over next 20 years will drive demand for energy markets and related insurance products Large investments in traditional and alternative energy Heavy investment in technology required Some insurers want to participate in “cap and trade” …As Do Risks Concern that EPA designation of CO2 as a pollutant could lead to litigation State GHG emission standards may vary by state, causing confusion and litigation Political risk is high globally on global for energy issues Some calls to regulate investments of insurers 82 Source: Insurance Information Inst. World Net Effective Electric Power Generation, 1990-2030 (est.) Trillions of Kilowatt Hours 35 33.3 30.4 30 27.5 24.4 25 21.0 20 17.3 14.6 15 11.3 12.6 The current economic downturn will have little, if any, long-term impact on electric power generation 10 5 0 1990 1995 2000 2005 2010 2015 2020 2025 2030 Source: Energy Information Administration, 2008 International Energy Outlook, Insurance Information Institute. 8 2.63 0.764 2 0.956 4 3.754 6 Renewables Natural Gas 7.152 10 8.389 12 3.422 14 4.996 16 Trillions of Kilowatt Hours The sharp increase in generation and the changing composition of fuel source will influence insurance demand and the nature of products sold 3.16 18 15.361 World Electricity Generation by Fuel 2005-2030F 0 Liquids Nuclear 2005 2025 2010 2030 2015 2020 Source: US Department of Energy Report #:DOE/EIA-0484 ( Sept. 2008); Insurance Information Institute Coal Non-Hydro Renewable Electricity Generation by Energy Source (US): 2005-2030F Billions of Kilowatt Hours 450 400 350 300 250 Electricity generation from renewable sources is expected to rise 315% between 2007 and 2030 requiring new property and liability insurance solutions 317.76 180.55 200 150 428.25 103.27 100 50 0 2007 MSW/LFG* 2010 Biomass 2020 Wind 2030 Solar Thermal Sources: Energy Information Administration, Annual Energy Outlook, March 2009. Geothermal *Municipal Solid Waste/Landfill Gas. World Energy Supply Infrastructure Investment by Category: 2001-2030 (Est.) $ Billions Distribution, $3,755 , 38% Transmission, $1,568 , 16% Generation will account for 46% or $4.5 trillion of all investment through 2030 to meet rising demand. Current downturn will have no impact on long-term global energy demand and the need to develop supply infrastructure Generation-New, $4,080 , 42% Generation-Refurbished, $439 , 4% Source: International Atomic Energy Agency , World Outlook for Electricity Investment. #10. Populism and Government Expansionism Increased Restrictions on Underwriting, Usurpation of Private Markets Important Issues & Threats Facing Insurers: 2010 - 2015 Creeping Restrictions on Underwriting Attacks on underwriting criteria such as credit, education, occupation, territory increasing View that use of numerous criteria are discriminatory and create an adverse impact on certain populations Impact will be to degrade the accuracy of rating systems to increase subsidies Catastrophe and Predictive modeling also at risk Current social and economic environment could accelerate these efforts Danger that bans could be codified at federal level during regulatory overhaul Bottom Line: Industry must be prepared to defend existing and new criteria indefinitely 94 Source: Insurance Information Inst. Important Issues & Threats Facing Insurers: 2009 -2015 Creeping Socialization and Partial Nationalization of Insurance System CAT risk is, on net, being socialized directly via state-run insurance and reinsurance mechanisms or via elaborate subsidy schemes involving assessments, premium tax credits, etc. Some insurers sought/received TARP money Efforts to expand flood program to include wind Health insurance may be substantively socialized Terrorism risk—already a major federal role backed by insurers Eventually impacts for other lines such as personal auto, WC? Feds, states may open to more socialization of private insurance risk Ownership stakes in some insurers could be a slippery slope States like FL will lean heavily on Washington in the event of a megacat that threatens state finance Bottom Line: Additional socialization likely. Can insurers/will insurers draw the line—and where? Source: Insurance Information Inst. Important Issues & Threats Facing Insurers: 2009 - 2015 Exploitation of Insurance as a Wealth Redistribution Mechanism There is a longstanding history of attempts to use insurance to advance wealth redistribution/economic agendas Urban subsidies; Coastal subsidies are old; Could be extended to workers comp in variety of ways Insurer focus on underwriting profitability (resulting in higher rates) coupled with poor economic conditions could raise profile of affordability issue Calls for “excess profits tax” on insurers Increased government involvement in insurance (including ownership stakes) make this more likely Federal regulation could impose such redistribution schemes Bottom Line: Expect efforts to address social and economic inequities through insurance Source: Insurance Information Inst. Insurance Information Institute On-Line THANK YOU FOR YOUR TIME AND YOUR ATTENTION! 97