Transcript No Slide Title

The Property/Casualty
Insurance Industry Today
Critical Issues & Emerging Risks
September 3, 2003
Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief 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
• Profitability Issues
 What Does Wall Street Think of Us?
 Economic Concerns
•
•
•
•
Underwriting Performance
(In)Solvency Concerns
Investment Performance
Capacity Crunch?
•
•
•
•
Pricing
Tort Environment
Emerging Risks
Q&A
 US, World, Bermuda, Captives
P/C PROFITS:
NO LONGER AN OXYMORON
Highlights: Property/Casualty
First Quarter 2003 ($ Millions)
2003
Net Written Prem.
2002
$101,329 $89,874
Change
+12.7%
Loss & LAE
69,956
63,185
+10.7%
Net UW Gain (Loss)
(1,461)
(3,644)
-59.9%
Net Inv. Income
8,984
9,007
-0.3%
Net Income (a.t.)
6,365
5,279
+20.6%
Surplus*
Combined Ratio**
289,167 285,235
99.5
107.2
+1.4%
-7.7 pts.
*Comparison with year-end 2002.
**Comparison is with full year 2002 combined ratio. Comparable 1st quarter 2002 figure is 102.2.
P/C Net Income After Taxes
1991-2003* ($ Millions)
$40,000
2001 was the first year ever
with a full year net loss
$36,819
2002 ROE = 1.0%
$30,000
$30,773
2003 ROE = 8.8%*
$24,404
$20,598
$19,316
$20,000
$21,865$20,559
$14,178
$10,870
$10,000
$6,365
$2,903
$5,840
$0
-$6,970
-$10,000
91
92
93
94
95
96
97
*First quarter
Sources: A.M. Best, ISO, Insurance Information Institute.
98
99
00
01
02
03*
ROE: P/C vs. All Industries
1987–2003E*
20%
15%
10%
5%
0%
-5%
87
88
89
90
91
92
93
94
US P/C Insurers
*2003 p/c estimate based on first quarter data.
Source: Insurance Information Institute; Fortune
95
96
97
98
99
00
All US Industries
01
02
03F
ROE vs. Cost of Capital:
US P/C Insurance: 1991 – 2003E
15%
5%
10.2 pts
14.6 pts
10%
2.2 pts
The gap between the
industry’s cost of capital and
its rate of return is narrowing
20%
US P/C insurers missed their
cost of capital by an average
6.9 points from 1991 to 2002
0%
-5%
1991
1992
1993
1994
1995
1996
1997
Source: The Geneva Association, Ins. Information Inst.
1998
1999
2000
ROE
2001
2002
2003E
Cost of Capital
After-Tax ROE for Selected AY
Combined Ratios*
23.5%
21.8%
20.1%
18.4%
16.6%
14.9%
13.2%
11.5%
9.8%
8.1%
6.3%
2.1%
80% 82% 84% 86% 88% 90% 92% 94% 96% 98% 100% 105%
*Assumes 4% tax-equivalent yield, 28% expense ratio and 140% premium/surplus ratio
Source: Dowling & Partners Securities
RNW for Major P/C Lines,
1992-2001 Average
20%
15%
10%
10-Year returns for some major
p/c lines surprisingly good,
but…
17.0%
14.0%
9.8% 9.6% 9.5%
8.6% 7.9%
7.4% 7.2%
5%
3.4%
0.9%
0%
-5%
-3.4%
-10%
-15%
Inland All Personal Med WC
Marine Other Auto Mal
Source: NAIC; Insurance Information Institute
-14.8%
Fire All Lines Other Comm CMP
Liab Auto
FMP
HO
Allied
ROE: Financial Services Industry
Segments, 1987–2002
25%
20%
15%
10%
5%
0%
US P/C Insurers
Diversified Finl.
All US Industries
Comm. Banks
Source: Insurance Information Institute; Fortune
Life
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
-5%
WALL STREET:
HIGH EXPECTATIONS
P/C Performance Volatile,
Underperforming S&P 500 Lately
P/C
50%
S&P 500
43.4%
40%
30%
21.0%
20%
10.0%
14.6%
10%
0%
-1.2%
-10%
-9.1%
-20%
-30%
-10.9%
-6.4%
-23.4%
-25.7%
-40%
-50%
1999
2000
2001
*Through August 29, 2003.
Source: SNL Securities, Insurance Information Institute
2002
2003*
P/C Insurer Stocks:
Lagging the S&P 500
Total Return 2003 YTD Through August 29, 2003
Nasdaq
35.56%
S&P 500
14.56%
Life/Health
15.09%
All Insurers
11.20%
10.02%
8.46%
P/C
Swiss Re stock price is down 3.2%
through 1 Sept. 2003 (in SF terms).
3.48%
0%
Brokers
Multiline
10%
20%
Source: SNL Securities, Insurance Information Institute
30%
40%
ECONOMIC
CONCERNS
Economic Summary
•Weak Econ. Growth
GDP Growth: +1.9% 1st Half ‘03
•Stubborn Unemployment
Unemp. Rate: 6.2% (July)
•Low Inflation
CPI: +2.1% (July ’03 over ’02)
•Interest Rates
1-Yr T-bill =1.26%; 10-yr=4.45%
•Cautious Consumers
Sentiment Up
•Massive/Record Budget Deficit
$480B+ Soon (FY 2004)
•Uncertain Invest. Environment
Low Rates but Rising; Stocks??
Exposure growth picture for insurers mixed:
Personal lines better than commercial, but commercial is improving
Source: Insurance Information Institute as of September 1,2003.
Real GDP Growth
10%
Economy continues to
experience uneven growth
following the recession of 2001.
8.3%
9%
8%
7%
5.7%
6%
5% 4.4%
4%
3%
2%
3.5%
2.5%
5.6%
4.8%
2.2%
1.0%
3.7%
3.3%
2.7%
2.9%
2.3%
2.2%
1.4%
1%
0%
-1%
19
9
19 8
99
19 :I
99
19 :II
99
19 :III
99
:IV
20
00
20 :I
00
20 :II
00
20 :III
00
:I
20 V
01
20 :I
0
20 1:II
01
20 :III
01
:I
20 V
02
20 :I
02
20 :II
02
20 :III
02
:IV
20
03
20 F
04
F
-2%
-0.6% -0.3%
-1.6%
Source: US Department of Commerce, Blue Economic Indicators 7/03;
Insurance Information Institute.
Unemployment Rate (%)
Unemployment
8.0
The unemployment in June 2003
(6.4%) was at its highest level since
1993, harming WC exposure growth.
7.5
6.2
7.0
5.8
5.8
4.8
4.9
4.5
4.0
96
5.0
4.2
95
5.5
4.5
5.4
6.0
5.6
6.5
4.0
3.5
3.0
97
98
99
00
01
02
03*
04F
*July 2003.
Source: US Bureau of Labor Statistics; Blue Chip Economic Indicators (7/03), Insurance Info. Institute.
Number of Employed Workers
(Millions)
133.0
132.5
132.0
131.5
131.0
Employment peaked at
132. 56 million in
February 2001.
130.5
130.0
129.5
By July 2003,
employment stood at
129.87 million, its lowest
level since October 1999.
129.0
Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul00
00
00
00
01
01
01
01
02
02
02
02
03
03
03
Source: U.S. Bureau of Labor Statistics; Insurance Information Institute
Private Non-Residential
Investment (Real, $1996)
$1,500
Billions
$1,250
Commercial exposure growth
is slowing as corporations cut
back on capital spending, but
that may be changing…
$1,324
$1,255
$1,228
$1,192
$1,183
$1,172
$1,136
$1,009
$1,000
$899
$818
$745
$750
$684
$631
$500
92
93
94
95
96
97
98
99
00
Source: U.S. Bureau of Economic Analysis, Insurance Information Institute
01
02
03:I
03:II
7.3%
7.4%
8.1%
7.6%
6.1%
5.7%
99
00
14.7%
12.0%
0.2%
1.3%
2.1%
5%
2.5%
5.1%
10%
6.4%
9.0%
8.0%
10.1%
15%
7.3%
Health care inflation is affecting the
cost of medical care, no matter what
system it is delivered through
11.2%
10.7%
Med Claim Costs Rising Sharply
-5%
92
93
-1.1%
-2.1%
0%
94
95
96
97
Health Benefit Costs
98
WC
Source: NCCI; William M. Mercer, Insurance Information Institute.
01
02
UNDERWRITING
CONCERNS
P/C Industry Combined Ratio
120
115
2001 = 115.7
Combined
Ratios
2002 = 107.2
1970s: 100.3
2003F = 103.2*
1980s: 109.2
1990s: 107.7
2003:Q1 Actual = 99.5
2000s: 111.0
110
105
100
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
95
Sources: A.M. Best; III
*Based on III Earlybird Survey, February 2003.
Combined Ratio:
Reinsurance vs. P/C Industry
100
97.9
99.5
100.5
105.6
100.8
101.6
104.8
105.8
106.5
113.6
108.5
126.5
105.0
106.9
110
115.8
120
110.5
108.8
130
121.3
Light weather helped Q1:03
107.2
140
106.5
110.0
2003: Big improvement in Q1
114.3
107.7
150
119.2
160
2001’s combined ratio was the worstever for reinsurers; 2003 was bad as
well.
170
162.5
All Lines Combined Ratio
115.7
Reinsurance
90
91
92
93
94
95
96
97
98
99
00
01
*First quarter 2003 figures for full industry from ISO; 1st half reinsusrance figures from RAA.
Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
02
03*
Underwriting Gain (Loss)
1975-2003*
$10
$0
$ Billions
($10)
($20)
($30)
($40)
($50)
Based on first quarter results, 2003 will likely be
a much better year in terms of underwriting
losses. First quarter losses totaled $1.46 billion or
$5.8 billion on an annualized basis
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
($60)
*2003 figure of $5.84 billion is annualized based on first quarter underwriting loss of $1.46 billion
Source: A.M. Best, Insurance Information Institute
Net Premiums Written to
Policyholder Surplus Ratio
2.8
2000: 0.95
2001: 1.13
2002 : 1.29
2.0
2003(Forecast): 1.35
1.3
Source: A.M. Best, Insurance Information Institute
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
70
0.5
U.S. Insured
Catastrophe Losses
$ Billions
$28.1
$30
$22.9
$25
$20
$16.9
$15
$10 $7.5
$2.7
$5
$5.5
$4.7
$10.1
$8.3 $7.3
$8.3
$5.9
$4.3
$2.6
$7.6
$0
89
90
91
92
93
94
95
96
97
98
99
00
01
02 03*
*Through August 2003.
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.
Source: Property Claims Service/ISO; Insurance Information Institute
P/C Insurance Industry Prior Year
Reserve Development*
$ Billions, Calendar Year Basis
$25
Adverse reserve development of about $23
billion accounted for most of the
industry’s 2002 underwriting loss and
“ate” much of the industry’s $37 billion
increase in earned premiums
$20
$15
$10
$5
$23
$2.3
$0.3
$0
$9.9
$2.2 $1.2
($0.3)
($1.5)
($5)
($10)
($3.7)
($7.5)($6.7)
($10.0)
($8.5)
($15)
90
91
92
93
94
95
96
97
98
99
00
01
02E
*Negative numbers indicate favorable development; positive figures represent adverse development.
Source: A.M. Best, Morgan Stanley, Dowling & Partners Securities
Combined Ratio:
Impact of Reserve Changes (Points)
Points (Reduced)/Increased
7
6
5
4
3
2
1
0
-1
-2
-3
6.3
Adverse reserve development
totaling an estimated $23 billion
added more than 6 points to the p/c
combines ratio in 2002
5.2
0.5
(0.4)
(2.4)
1998
1999
Source: ISO, A.M. Best, MorganStanley.
2000
2001
2002
SOLVENCY ISSUES
P/C Company Insolvency Rates,
1993 to 2002
•Insurer insolvencies are increasing
1.33%
•10-yr industry failure rate: 0.72%
1.20%
•Failure rating for B+ or better rating: 0.49%
•Failure rate for D through B rating: 1.29% 1.02% 1.03%
10-yr Failure Rate
0.79%
= 0.72%
0.60%
0.58%
0.21%
1993
1994
1995
0.28%
1996
30
30
38
2000
2001
2002
0.23%
1997
Source: A.M. Best; Insurance Information Institute
1998
1999
Reason for P/C Insolvencies
(218 Insolvencies, 1993-2002)
Impaired Affiliate
3%
Unidentified
17%
CAT Losses
3%
Reinsurer Failure
0%
Deficient Loss
Reserves
51%
Reserve
deficiencies
account for
more than half
of all p/c
insurers
insolvencies
Change in
Business
3%
Discounted Ops
8%
Overstated Assets
2%
Alleged Fraud Rapid Growth
3%
10% Source: A.M. Best, Insurance Information Institute
INVESTMENT
PERFORMANCE:
Net Investment Income
$45
Investment income
fell 2.8%in 2002
and 0.3% in Q1 of
2003 (v. Q1:2002)
due primarily to
historically low
interest rates
Billions
(US$)
$36
$27
History
1997 Peak = $41.5B
$18
2000= $40.7B
2001 = $37.7B
$9
2002 = $36.7B
2003E = $35.9B
$0
75
77
79
81
83
85
87
89
91
93
95
97
99
01
Note: 2003 estimate is based on annualized first quarter investment income of $8.984 billion.
Source: A.M. Best, Insurance Information Institute
03E
Interest Rates: Lower Than
They’ve Been in Decades
16%
1.
Historically low interest rates are the primary driver
behind lower investment yields. Nevertheless, overall
insurer investment performance outpaces all major
market indices and almost every major category of
mutual fund.
66% of the industry’s invested assets are in bonds
14%
12%
2.
10%
8%
6%
4%
2%
3-Month T-Bill
1-Yr. T-Bill
10-Year T-Note
2002
2003
*
*As of June 13, 2003.
Source: Board of Governors, Federal Reserve System; Insurance Information Institute
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
0%
Total Returns for Large Company
Stocks: 1970-2003*
S&P 500 up
11.1% so
far this year
40%
30%
20%
10%
*As of August 8, 2003.
Source: Ibbotson Associates, Insurance Information Institute
2002
2000
1998
1994
1992
1990
1988
1986
1984
1982
1980
1978
-30%
1976
Will it be the last?
1974
-20%
1972
2002 was 3rd consecutive
year of decline for stocks
1970
-10%
1996
0%
Property/Casualty Insurance
Industry Investment Gain*
$ Billions
$60
$57.9
$52.3
$56.9
$51.9
$47.2
$50
$44.4
$42.8
$40
$40.3
$36.6
$35.4
$30
Investment gains are simply
returning to “pre-bubble” levels
$20
$10
$0
94
95
96
97
98
99
00
01
02
03E
*Investment gains consists primarily of interest, stock dividends and realized capital gains and losses.
Source: Insurance Services Office; Insurance Information Institute estimate annualized as of 3/31/03.
Federal Budget Deficit:
Is it Out of Control?
$300
Deficit
2%
% GDP
1%
$100
-1%
-$100
-2%
-$200
-3%
-$300
-$400
-$500
-$600
-4%
Record Deficits:
FY 2003: $455B
2004: $475
-5%
-6%
-7%
Source: Congressional Budget Office, Office of Management and Budget (July 2003); Insurance Information Institute
% GDP
0%
$0
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03E
04F
05F
06F
07F
08F
Budget Deficit ($ Billions)
$200
3%
…But is the Bond Bubble
About to Burst? Rates Will Rise!
Yield on 10-Year US Treasury Notes
4.50%
4.25%
4.00%
3.75%
WHY RATES WILL RISE
•
Expectation of
improving economy
•
Rotation out of bonds
into stocks
•
Recording breaking
government budget
deficits leading to
massive borrowing
4.40%
4.29%
4.18%
3.93%
3.67%
3.73%
The yield on 10-year
notes is up 109 basis
points in 7 weeks despite
the Fed’s easing
3.50%
3.42%
3.25%
3.31%
3.20%
3.00%
13-Jun 20-Jun 27-Jun 3-Jul
8-Jul
18-Jul 25-Jul 1-Aug 8-Aug
Source: Board of Governors of the Federal Reserve; Insurance Information Institute
CAPACITY CRUNCH?
U.S. & Global Capacity
Bermuda
Lloyd’s
Captives
U.S. Policyholder Surplus:
1975-2003*
$350
$300
$ Billions
$250
$200
$150
Surplus (capacity) peaked at
$336.3 Billion in mid-1999 and
fell by 15.2% ($51 billion) to
$285.2 billion at year-end 2002
(a trough?)
•Surplus during the first
quarter of 2003 rose by $4B or
1.4% to $289.2B
“Surplus” is a measure of
underwriting capacity. It is
analogous to “Owners
Equity” or “Net Worth” in
non-insurance organizations
$100
$50
$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 0203*
Source: A.M. Best, Insurance Information Institute
*First Quarter
Capacity of Lloyd’s Market
£15
After remaining stable at around GBP10bn, Lloyd’s
capacity has increased by over 40% in the last three
years.
£14
2003 capacity is GBP14.4bn, 18% higher than 2002.
£13
£12.2
£12
£11.1
£10.9
£11
£10.2 £10.0 £10.3 £10.2
£10
£9
£14.4
£9.9 £10.1
£8.9
£8
93
Source: Lloyd’s
94
95
96
97
98
99
00
01
02
03
Number of Captive Formations &
Liquidations 1993 to 2002
400
Corporate collapses and captive consolidations fueled
the upward trend in captive liquidations in 2002.
202
170
156
245
250
154
135
102
311
316
305
294
290
100
103
243
113
150
200
238
300
462
Hard market fueling captive formation
289
500
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
New Captives
Source: AM Best, Tillinghast-Towers Perrin
Liquidated Captives
PRICING
Strength of Recent Hard Markets
by Real NWP Growth
25%
1975-78
1985-87
2001-03
Real NWP Growth During
Past 3 Hard Markets
20%
1975-78: 8.6%
15%
1985-87: 14.5%
10%
2001-03F: 9.4%
5%
0%
-5%
-10%
Real $
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
Current $
Note: Shaded areas denote hard market periods.
Source: A.M. Best, Insurance Information Institute
*2003 figure is estimate on first quarter result.
Insurance is the Biggest Concern
of Small Business Owners
Competition
7%
Regulations
9%
Poor Sales
18%
Labor Qlty. Labor Costs Inflation
5%
10%
2%
Credit/Int.
Rates
2%
Insurance
28%
Taxes
17%
Source: National Federation of Independent Business (June 2003); Insurance Information Institute
Council of Insurance Agents &
Brokers Rate Survey
Second Quarter 2003
Rate Increases By Line of Business
No Change Up 1-10%
10-20%
30-50%
50%-100%
>100%
8%
2%
0%
0%
3%
0%
2%
Comm. Auto
8%
31%
Workers Comp
11%
27%
28%
15%
General Liability
10%
32%
41%
9%
1%
0%
0%
Comm. Umbrella
8%
21%
28%
27%
6%
3%
0%
D&O
3%
17%
30%
19%
13%
2%
1%
Comm. Property*
17%
32%
23%
5%
2%
0%
0%
18%
26%
17%
7%
1%
1%
4%
1%
Construction Risk 8%
43%
20-30%
Terrorism*
27%
18%
13%
Business Interr.
21%
38%
16%
3%
0%
0%
0%
Surety Bonds
12%
17%
13%
9%
2%
0%
1%
1%
2%
4%
20%
11%
12%
6%
Med Mal
Source: Council of Insurance Agents & Brokers.
0%
1%
P/C Soft Spots: % Accounts With
Negative Price Change(2nd Qtr 2003)
Property-related coverages
are clearly the softest segment
of the p/c market today.
20%
17%
15%
10%
5%
9%
9%
3%
2%
2%
2%
Comm Prop Biz
Terror Comm Auto WC
Interruption
GL
EPL
1%
0%
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Umbrella
Proportion of Accounts Renewing
With Increase of 20% or More,
(Select Lines)
D&O
Construction Risk
GL
Terrorism
78%
63%
54%
53%
53%
53%
48%
38%
2002:II
38%
2002:III
38%
32%
23%
2002:IV
35%
23% 20%
14%
2003:I
Source: Council of Insurance Agents and Brokers; Insurance Information Institute
10%
2003:II
5%
Urban Legend
Insurance is More Expensive
than Ever, Putting Businesses
Over the Edge
Cost of Risk per $1,000 of
Revenues: 1990-2002E
$10
•Cost of risk to
corporations fell 42%
between 1992 and
2000
$9
$8.30
$7.70
$7.30
$8
$7
$6.49
$6.40
$6.10
$5.70
$6
$5
$4
•Estimated 15%
increase in 2001,
25% in 2002
$6.94
$5.71
$5.55
$5.25
$5.20$4.83
Cost of risk is still less than
it was a decade ago!
90
91
92
93
94
95
96
97
98
99
00 01E 02E
Source: 2001 RIMS Benchmark Survey; Insurance Information Institute estimates.
TORT-ure
ABUSE OF THE U.S. CIVIL
JUSTICE SYSTEM
TORT-ure
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Asbestos
“Toxic” Mold
Medical Malpractice
Construction Defects
Lead
Fast/Fattening Foods & Obesity New
Reality TV New
Arsenic Treated Lumber
Guns
Genetically Modified Foods (Corn)
Pharmaceuticals & Medical Devices
Security exposures (workplace violence, post-9/11 issues)
Slavery
What’s Next?
Average Jury Awards
1994 vs. 2001
9,113
$9,000
1994
2001
$8,000
$7,000
($000)
$6,000
$5,000
3,902
$4,000
$3,000
$2,000
$1,000
2,288
1,727
1,365
419
789
187 323
333
Vehicular
Liability
Premises
Liability
759
1,744
1,185
1,140
$0
Overall
Business
Negligence*
*Figure is for 2000 (latest available)
Source: Jury Verdict Research; Insurance Information Institute.
Wrongful
Death
Medical
Malpractice
Products
Liability
Trends in Million Dollar Verdicts*
100%
11%
8%
10%
11%
6%
4%
10%
4%
20%
10%
59%
54%
43%
25%
21%
30%
17%
40%
27%
50%
36%
44%
60%
47%
70%
68%
Very sharp jumps in multi-million
dollar awards in recent years across
virtually all types of defendants
42%
80%
2000-2001
98-99
95-97
21%
90%
0%
Vehicular
Liability
Personal
Negligence
Premises
Liability
Business
Negligence
Government
Negligence
*Verdicts of $1 million or more.
Source: Jury Verdict Research; Insurance Information Institute.
Medical
Malpractice
Products
Liability
Cost of U.S. Tort System
($ Billions)
Tort costs consumed 2.0% of GDP annually on average since 1990,
$350 expected to rise to 2.4% of GDP by 2005!
$300
$250
$200
$150
$298
Per capita “tort tax” expected to rise to $1,000 by 2005,
up from $721 in 2001
Even a modest reduction in tort costs would be more
stimulative than the $674 billion Bush tax/spending plan
$129 $130
$141 $144 $148
$159 $156 $156
$167 $169
$205
$180
$100
$50
$0
90
91
92
93
94
95
96
Source: Tillinghast-Towers Perrin. 2005 forecasts from Tillinghast.
97
98
99
00
01
05F
Where the Tort Dollar Goes
(2000)
Tort System
is extremely
inefficient:
Only 20%
of the tort
dollar
compensates
victims for
economic
losses
Claimants'
Attorney Fees
17%
Awards for
At least
Non-Economic
58% of every
Loss
tort dollar
22%
Awards for
Economic Loss
20%
Administration
25%
never reaches
the victim
Defense Costs
16%
Source: Tillinghast-Towers Perrin
Personal, Commercial &
Self (Un) Insured Tort Costs*
$180
Commercial Lines
Personal Lines
Total = $157.7 Billion
$160
$29.6
$140
Billions
Self (Un)Insured
Total = $120.2 Billion
$120
$20.1
$100
$70.9
$80
$51.0
$60
Total = $39.5 Billion
$40
$5.4
$17.1
$20
$0
$49.1
$57.2
1990
2000
$17.0
1980
*Excludes medical malpractice
Source: Tillinghast-Towers Perrin
States With the Most Top 10 Jury Awards
1995-2002
20
•79% (63/80) of Top 10 awards came from just
7 states between 1995-2002
18
•TX has 3rd largest number of giant awards
15
13
•23 States have had no award in the top 10
12
10
7
5
5
4
4
GA
AL
0
NY
CA
TX
MO
Source: Lawyers Weekly USA; Insurance Information Institute.
FL
Business Leaders Ranking of
Liability Systems for 2003
Best States
1. Delaware
2. Nebraska
3. Iowa
4. South Dakota
5. Indiana
6. North Dakota
7. Utah
8. Virginia
9. Minnesota
10. New Hampshire
Worst States
41. New Mexico
42. South Carolina
43. Hawaii
44. California
45. Arkansas
46. Texas
47. Louisiana
48. Alabama
49. West Virginia
50. Mississippi
Source: US Chamber of Commerce States Liability Systems Ranking Study; Insurance Info. Institute.
The Nation’s Judicial Hellholes:
An International Embarrassment
CALIFORNIA
Alameda
County
Los Angeles
County
San Francisco
County
Madison
County, IL
City of St.
Louis, MO
TEXAS
Jefferson
County
Hidalgo County
Starr County
MIAMI
Mississippi’s
22nd Judicial
District
Orleans Parish,
LA
Source: American Tort Reform Association; Insurance Information Institute
There is a Glimmer of Hope
for Tort Reform
Best Chance for Tort Reform in Years
• Medical Malpractice
 States—already happening: 20+ states have caps
 Federal reform discussed in Congress but bill failed in Senate
• Class Action Reform
 Class Action Fairness Act
 Presently 2 or 3 votes short in the Senate. Vote in September
• Asbestos Reform
 Fairness in Asbestos Injury Resolution of 2003; Sept. vote?
• Punitive Damages—What’s Reasonable
 Supreme Court ruled favorably in Campbell v. State Farm
Ratio of Punitive Award to Compensatory
Are We Finally Seeing Punitives
Reigned In by the Supreme Court?
500
500:1
400
300
200
100
In Campbell v. State Farm
(2003) the Supreme Court
ruled in a 22-year old Utah
case that punitive awards
that were 145 to 1 were
excessive (actual damages in
the case, which involved
insurer bad faith were $1
million)
In BMW of North America v. Gore (1996)the
Supreme Court ruled in an Alabama case that
punitive awards that were 500 to 1 were
excessive (actual damages in the case, which
involved the repainting of a car, were $4,000
but the jury awarded the plaintiff $2 million)
145:1
In Campbell v. State Farm the Court
added that “…few awards exceeding a
single- digit ratio between punitive and
compensatory damages will satisfy due
process…Single digit multipliers are
more likely to comport with due process,
still achieving the State’s deterrence and
retribution goals…”
10:1 ??
0
1996
Sources: Insurance Information Institute
2003
The Future?
INFLUENCE OF TORTS
ENVIRONMENT AND LEGAL
LIABILITY TRENDS ON PRICING
Liability: Average Cost per $1,000 of Revenue*
2001 vs. 2002
$2.00
$1.96
2001
2002
$1.50
$1.25
$1.00
$0.94
$0.65
$0.67
$0.72
$0.50
$0.33 $0.38
$0.17
$0.24
$0.11$0.13
$0.23
$0.26
$0.00
$0 - $200M $201M-$500M $501M-$1B
*Across entire liability program
Source: Marsh, 2002 Limits of Liability Report
$1B-$5B
$5B-$10B
$10B+
All
$12,649
$0 - $200M
$201M$500M
$501M-$1B
Source: Marsh, 2002 Limits of Liability Report
$1B-$5B
$5B-$10B
$10B+
All
$7,106
$5,411
$8,213
$7,606
$5,531
$6,054
$5,368
$6,464
$5,317
$5,609
$3,830
2001
2002
$4,878
$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
$3,801
($000)
Average Cost per $1 Million Liability Coverage
2001 vs. 2002
Excess Layer Hit With Leveraged
Impact of Increase in Trend
Assumptions: Primary Limit of $1 M
Ground Up Trend of 7.0%
Claim
Total
Loss
Primary
Loss
Excess
Loss
% Loss
Trend
Total
Loss
Primary
Loss
Excess
Loss
1
2
3
Total
0.900
1.000
2.000
3.900
0.900
1.000
1.000
2.900
0
0
1.00
1.00
7.0
7.0
7.0
0.963
1.070
2.140
4.173
0.963
1.000
1.000
2.963
0
0.070
1.140
1.210
Loss Trend:
7.0%
2.2%
21.0%
Trend in excess layers is 3 times the ground-up
trend and nearly 10 times the primary trend
INFLUENCE OF MASS TORTS AND
LEGAL LIABILITY TRENDS ON
AVAILABILITY
Average Total Limits Purchased
by All Firms* ($ Millions)
$110
$100
Limits purchased fell by 9.9%
between 2000 and 2002.
Price/capacity are issues.
$90
$80
$85.8
$83.2
$85.9
$105.0
$99.1
$101.8
$95.7
$88.7
$77.9
$70
$60
$50
1994 1995 1996 1997 1998 1999 2000 2001 2002
*Includes underlying primary limits
Source: Limits of Liability 2002, Marsh, Inc.
Average Underlying Limits
(Attachment Points)
+0%*
$2.0
$1.8
$1.6
$1.4
$1.8
$1.9
$1.9
$1.2
$1.0
All
2000
* Percent Change 2002 from 2001
Source: Marsh, 2002 Limits of Liability Report
2001
2002
2001
0%* -10.4%*
2002
$92
$94
$88
$61
$59
$146
$148
Russian Roulette? Many risks
skimping on coverage to save money
$376
$337
2000
1.4%*
$338
-6.4%*
$241
$256
$256
-3.3%*
$70
$400
$350
$300
$250
$200
$150
$100
$50
$0
-6.2%*
$50
$48
$45
Millions
Average Limits by Revenue Class
2000-2002 ($ Millions)
$0 - $200 M $201 - $500 $501M - $1B
M
* Percent Change 2002 over 2001.
Source: Marsh, 2002 Limits of Liability Report
$1 - $5B
$5 - $10B
$10+ B
Millions
Excess Liability Market Capacity
Capacity has dropped 23% since peaking in 2000
$3,000
$2,011
$2,500
$2,000
$1,941
$2,045
$1,721
$1,432
$1,334
$1,710
$1,575
$1,405
$1,500
$1,000
$500
$0
1994
1995
1996
Source: Marsh, 2002 Limits of Liability Report
1997
1998
1999
2000
2001
2002p
CASE STUDIES
Possible Top Risks from
Current Perspective
30
28
27.0
26.5
26
No shortage of emerging problems, other include:
Generic Drugs, MTBE, Softeners, Xenotransplants,
Nanotechnology, Asbestos, Stress in the Workplace,
Repetitive Strain Disorders, Antibiotic resistance,
Chem Additives to Building Materials (IAQ)
26.0
25.5
24.5
24
24.0
24.0
22
20
EMF/
Electrosmog
BSE (Mad
Cow)
Source: Swiss Re: Emerging Risks
GM Food &
Labelling
Eco/Bio
Damage
Deteriorating Accidental
Acct. Stds. GM/non-GM
Mixing
GM Crops
ASBESTOS
Who Will Pay for the
US Asbestos Mess?
Estimated Total US Settlements & Expenses = $200 billion
Asbestos
Defendants
39%
US Insurers
30%
$78 billion
$60 billion
$62 billion
Source: Tillinghast-Towers Perrin; Insurance Information Institute
Foreign
Insurers
31%
MEDICAL
MALPRACTICE
Medical Malpractice:
Tort Cost Growth is Skyrocketing
$2.3
$1.9
$2
$1.5
$4
$1.2
$4.4
$6
$2.9
$3.6
$8.7
$7.9
$7.2
$7.1
$6.8
$7.0
$6.5
$8
$5.4
$10
$7.1
$12
$16.2
$14.6
$13.5
$14
$12.4
$16
•Over the period from 1975 through 2000, medical
malpractice tort costs skyrocketed by 1,642% while
medical costs generally rose 449%, nearly 4 times as fast!
$11.6
$18
$10.8
$20.9
$19.4
$20
$9.4
$22
•Over the period from 1990 through 2000, medical
malpractice tort costs rose 140%, more than double the
60% increase in medical costs generally over the same
period!
$17.6
$ Billions
$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
Sources: Tillinghast-Towers Perrin, US Bureau of Labor Statistics, Insurance Information Institute
WORKERS COMP
WC Combined Ratios
1.9 points
due to 9/11
Percent
Calendar Year vs. Ultimate Accident Year
Countrywide—Private Carrier*
140
135
130
125
120 117
115
110
105
100
95
90
90
123
Calendar Year
122
122
115
109
97
92
93
*Includes dividends to policyholders
Accident year is developed to ultimate;
2002estimate from NCCI.
110
108
101
91
118
94
95
100 101
96
97
98
99
00
01 02P
Source: A.M. Best, NCCI
WC Indemnity Claim Costs Has
Accelerated Since 1995
Indemnity Claim Cost (000s)
17
+7.0%
+7.7%
15
Annual Change 1996-2002p: +6.8%
+7.8%
+7.3%
13
+6.4%
+5.7%
-3.1%-2.8%
+5.8%
11
+1.0%
+4.9%+1.7%
Annual Change 1991-1995: +0.3%
9
7
Accident Year
Based on data through 12/31/2001, developed to ultimate, as of 12/2/2002; 2002 data are preliminary.
Based on the states where NCCI provides ratemaking services
Excludes the effects of deductible policies
Source: NCCI
20
02
p
20
01
20
00
19
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
5
WC Medical Claim Costs
Accelerating Too
Medical Claim Cost (000s)
Accident Year
Based on data through 12/31/2001, developed to ultimate, as of 12/2/2002
Based on the states where NCCI provides ratemaking services
Excludes the effects of deductible policies
Source: NCCI
20
02
p
20
01
20
00
19
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
16
+12.0%
Annual Change 1991-1995: +4.0%
15
+10.7%
14
Annual Change 1996-2001: +8.1%
13
+7.6%
12
+7.4%
+5.7%
11
+7.3%
10
+6.4%
+5.1%
9
+9.0%
-2.1%
+6.8%+1.3%
8
7
6
Average Payment per Claim
for Chiro. Visits
Payment per Claim to Chiros
$5,000
$4,000
$4,836
Major problems with payments
to chiropractors in CA, TX
$3,000
$2,317
$2,000
$1,539
$1,191 $1,209
$1,000
$468
$771
$824
MA
GA
$0
FL
CT
WI
PA
CA
TX
Source Eccleston, Wang, Watson and Zhao (2000) in Targeting More Costly Care: Area Variation in
Texas Medical Costs and Utilization, Workers Compensation Research Institute (2002).
Schwartzenegger’s Solution to
California’s Chiro Problem
You will
terminate all
excess
utilization!
MOLD
Texas: Mold Losses/Claims
Are Finally Moderating*
$200
30000
Paid Losses
Claim Count
25000
20000
$150
15000
$100
10000
$50
Claim Count
Water Damage Paid Losses*
($Millions)
$250
5000
0
Ja
n
Fe -01
b
M -01
ar
Ap 01
r
M -01
ay
Ju 01
nJu 01
l
Au -01
g
Se -01
p
O -01
ct
No -01
v
De -01
cJa 01
n
Fe -02
b
M -02
ar
Ap 02
r
M -02
ay
Ju 02
nJu 02
l
Au -02
g
Se -02
pO 02
ct
No -02
v
De -02
c02
$0
Source: Texas Department of Insurance; Insurance Information Institute
* Data are for TDI Cause 61: Discharge – Other Damage.
Not all claims in cause 61 are mold and mold claims may
also arise from other (non-water) causes of loss.
California: Surging Water Claim
Frequency and Costs:
Symptom of Growing Mold Problem
•Water losses paid rose 151%
from 1997 to 2002 and 77%
since 1999
$600
$550
36%
$500
•Water claims accounted for less
than 1/4 of all HO claims in
1997, now they for 1/3.
34%
33%
32%
31%
$350
$298.9
$300
$200
$496.3
32%
$400
38%
36%
$441.6
$450
$250
$562.4
30%
$316.5
28%
27%
California may be
in a drought, but
homeowners say
they’re drowning
$224.1
24%
$150
$100
26%
24%
22%
20%
1997
1998
1999
Paid Water Losses ($ Mill)
2000
2001
Water Claims as % of All Homeowners Claims
Source: Insurance Information Network of California; Insurance Information Institute
2002
Where are the Next
Battlefields for Mold?
• Homeowners issue probably crested in 2002
• Migration to commercial area affects many lines:
Commercial Property
Products Liability
Workers Comp…
Commercial Liability
Builders Risk/Construction Defects
• Hot Spots:
 Apartments/Condos/Co-ops
 Schools
Cars? (GM case in NC)
Office Structures (e.g., IBM)
Municipal Buildings
• Trend toward class actions since science doesn’t
support massive individual non-economic damages
Much more lucrative for trial lawyers to form class
Source: Insurance Information Institute.
Construction Defect Litigation
Destroying CA Condo Market
$3.00
$2.75
$2.50
Ratio of Losses Paid Out
to Premiums Taken In
$2.95
Condo construction in parts of CA has
come to a virtual stop.
Insurer costs rose 58% in just 2 years!
$2.25
$1.50
“Right-to-Cure”
laws now in 5
states: AZ, CA,
NV, TX, WA
$1.25
16 considering
such laws.
$2.00
$1.87
$1.75
$1.00
1998
Source: ISO, Insurance Information Institute
2000
CORPORATE
GOVERNANCE
Financial Restatements Filed
350
300
The number of financial restatements is
rising even thought the number of publicly
traded companies is falling.
270
Impact of Sarbanes-Oxley??
250
216
330
233
200
158
150
116
100
50
0
1997
1998
1999
2000
Sources: Huron Consulting Group; Insurance Information Institute
2001
2002
Financial Restatements
by Industry (1987-2002)
Ag & Mining
6%
Trade
10%
Manufacturing
21%
Software
15%
Computer Mfg.
11%
Services
11%
Transp &
Comm
12%
Source: Huron Consulting; Insurance Information Institute
Fin, Ins, Real
Est.
14%
Financial Restatements
by Revenue Size (1998-2002)
Greater than
$1B
18%
Under $100M
48%
$500-$999M
7%
$250-$499M
10%
$100-$249M
17%
Source: Huron Consulting; Insurance Information Institute
OBESITY/
FAST FOOD
Fast Food/Junk Science:
Edible Asbestos?
•Are the food service &
manufacturing industry’s
vulnerable to suits over
obesity?
•McDonald’s sued in late
2002 over allegations
that their food makes
people fat
•Kraft sued earlier this
year over trans fats in
Oreo cookies
CYBER RISK
The Cost of Worms & Viruses
($ Billions)
$10bn
Love Bug virus (2000)
$9bn
Klez worm (2002)
$2.6bn
Code Red I and II worms (2001)
$590m to $2bn
Nimda virus (2001)
Slammer worm (2003)
$1bn
Melissa virus (1999)
$80m
$0
Source: USA TODAY, September 3, 2003
$2
Estimated cleanup and lost
productivity costs of worms
and viruses can add up to
billions of dollars!
$4
$6
$8
$10
$12
Cyber-Risk Gaps in Insurance
Coverage
Insured by a
specific policy
Despite increasing risks, only 7%
of respondents knew they had
specific insurance geared to
cyber-risks!
7%
Do not know the
answer
22%
Do not have
insurance
34%
Risks covered by
general policies
33%
0
5
10
15
20
Source: Ernst & Young 2003 Global Information Security Survey
of 1,400 organizations from 66 countries
25
30
35
40
EMPLOYMENT
PRACTICES
LIABILITY
Employment Practices Liability:
Median Compensatory Award ($000)
$210
$190
$170
$150
$130
$110
$90
$70
$50
($ 000)
$200.0
$182.5
$150.8
$146.6
1998
1999
$140.9
$175.0
$128.0
1996
1997
Source: Trends in Employment Practices Liability, LRP Publications.
2000
2001
2002
CONSTRUCTION
DEFECTS
Construction Defect Problem
• Growing number of lawsuits target:
 Builders, Contractors, Developers, Sub-Contractors,
Material Suppliers, Product Manufacturers, Architects &
Engineers.
• Construction defect claims include:
 Subsidence, collapse, cracks in walls & foundations.
 Leaking roofs, windows, doors, foundations.
 Dry rot of wood or other building materials, pest
infestations.
 Mold, code violations, improper specification of building
materials.
• Hotspots:
 California, Nevada, Colorado, Texas, the Carolinas, Florida,
New York.
Construction Defect Litigation
Destroying CA Condo Market
$3.00
$2.75
$2.50
Ratio of Losses Paid Out
to Premiums Taken In
$2.95
Condo construction in parts of CA has
come to a virtual stop.
Insurer costs rose 58% in just 2 years!
$2.25
$1.50
“Right-to-Cure”
laws now in 5
states: AZ, CA,
NV, TX, WA
$1.25
16 considering
such laws.
$2.00
$1.87
$1.75
$1.00
1998
Source: ISO, Insurance Information Institute
2000
TERRORISM
Terrorism:
Sept. 11 Industry Loss Estimates
($ Billions)
Property WTC 1 & 2
$3.5 (9%)
Other
Liability
$10.0 (25%)
Life
$2.7 (7%)
Aviation
Liability
$3.5 (9%)
Event
Cancellation
$1.0 (2%)
Workers
Comp
Aviation Hull
$2.0 (5%)
$0.5 (1%)
Property Other
$6.0 (15%)
Biz
Interruption
$11.0 (27%)
Consensus Insured Losses Estimate: $40.2B
Source: Insurance Information Institute
Status of 9/11 Death Claims
(Through August 2003)
Claim Filed but
No
Compensation
Sought (205)
7%
Claim Filed and
Compensation
Sought (1,035)
34%
No Claim Filed
(1,776)
59%
Out of 3,016 9/11 deaths (excl.
hijackers), only 34%of
claimants had sought
compensation by Aug. 29, 2003.
The deadline is Dec. 22.
Will many choose litigation?
•Fund has paid $623.1 million to date
•Total could exceed $3 billion
Source: September 11 Victims Compensation Fund; Insurance Information Institute
OTHER
Blackouts???
SARS: Limited P/C Insurance
Industry Exposure
•Are there any potential
SARS-related p/c insurance
exposures?
 Workers comp? Mostly
health care workers
 Event cancellation? Fear of
SARS insufficient, but
legitimate claims possible
 CGL? Several courts have
ruled that viruses/bacteria
(e.g., E. Coli, Legionnaires’
disease) not covered
 EIL? Court decisions + fact
that at least half of EILs
have “naturally occurring
substance” exclusions
preclude coverage.
Summary
• Profitability on the mend, but for how long?
• Underwriting still needs improvement
• Economic & Investment outlook uncertain
• Tort system: A partial fix is in underway
• Emerging Risks: No Shortage
• Constant Challenge for Underwriters
Insurance Information
Institute On-Line
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