Transcript No Slide Title

Catastrophic Risk:
Impacts & Implications for
the P/C Insurance Industry:
Houston Marine Insurance Seminar
Houston, TX
September 18, 2006
Robert P. Hartwig, Ph.D., CPCU, Executive 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
• P/C Profit Overview
• Underwriting Trends
 Primary & Reinsurance
•
•
•
•
•
•
•
Competitive Pressures Mounting: Pricing Trends
Financial Strength & Ratings
Investments
Capital & Capacity
Catastrophe Loss Management
Terrorism: Are TRIA’s Days Numbered?
Q&A
P/C PROFIT
OVERVIEW
2006 Outlook is Good
P/C Net Income After Taxes
1991-2006E ($ Millions)*
$70,000
$60,000
$50,000
2001 ROE = -1.2%
2002 ROE = 2.2%
2003 ROE = 8.9%
2004 ROE = 9.4%
2005 ROAS1= 10.5%
2006 ROAS2 = 15.4%
2006 Net Income
may shatter
previous records
$43,013
$38,501
$36,819
$30,773
$40,000
$30,000
$20,000 $14,178
$10,000
$19,316
$24,404
$20,598
$60,000
$30,029
$21,865
$20,559
$10,870
$5,840
$3,046
06F
05
04
03
-$6,970
01
00
99
98
97
96
95
94
93
92
91
-$10,000
02
$0
*ROE figures are GAAP; 1Return on avg. surplus. 2005 ROAS = 9.8% after adj. for one-time special
dividend paid by the investment subsidiary of one company. 2Based on Q1 results; For 12 months ending
3/31/06, ROAS=10.1%.
Sources: A.M. Best, ISO, Insurance Information Inst.
ROE vs. Equity Cost of Capital:
US P/C Insurance:1991-2006E
18%
The p/c insurance industry
achieved its cost of capital in 2005
+5.9 pts
16%
14%
12%
6%
4%
+1.0 pts
-13.2 pts
8%
+0.2 pts
-9.0 pts
10%
04
05
US P/C insurers missed their
cost of capital by an average
6.7 points from 1991 to 2002,
but on target 2003-05
2%
0%
-2%
-4%
91
92
93
94
95
96
97
98
*Based on 2006:Q1E ROAS of 15.4%
Source: The Geneva Association, Ins. Information Inst.
99
00
01
02
ROE
03
06E
Cost of Capital
ROE: P/C vs. All Industries
1987–2006:Q1
20%
Insurers will outperform only
if CAT losses are “normal”
2004/5 ROEs excl. hurricanes
15%
10%
Sept. 11
5%
Hugo
Katrina,
Rita, Wilma
Lowest CAT
losses in 15 years
0%
Andrew
Northridge
4 Hurricanes
-5%
87
88
89
90
91
92
US P/C Insurers
93
94
95
96
97
98
All US Industries
*2006 P/C insurer ROE based on annualized Q1 results.
Source: Insurance Information Institute; Fortune
99
00
01
02
03
04
05 06*
P/C excl. Hurricanes
WALL STREET:
MAINTAINING THE
CONFIDENCE OF WALL
STREET IS CRITICAL FOR
MANY INSURERS
Change in YTD Stock Performance by
Sector Pre- & Post-Katrina/Rita/Wilma
-1.3%
4.9%
5.0%
2.9%
2.8%
2.6%
3.4%
3.2%
2.2%
-5.6%
-5.6%
-5.3%
-6.0%
-5.8%
-4.5%
Wilma landfall
Oct. 24
-6.2%
3.9%
4.8%
2.7%
3.6%
3.3%
2.1%
2.2%
-0.6%
-4.1%
-5.5%
-2.7%
-4.8%
Rita comes
ashore Sept. 24
-5.7%
-10%
-3.5%
-6.4%
-5%
-4.0%
-5.5%
0%
-5.3%
3.8%
4.5%
4.0%
5%
4.2%
10%
2.5%
1.9%
Katrina:
Aug. 29
13.3%
15%
9.3%
Brokers
-0.5%
Reinsurers
8.7%
7.0%
P/C
P/C & reinsurer stocks hurt but now fully
recovered. Brokers rose on expectation of
tighter conditions and demand for broker
services; closure of Spitzer issues.
5- 12- 19- 26- 29- 16- 23- 30- 7- 14- 21- 28- 04- 31Aug Aug Aug Aug Sep Sep Sep Sep Sep Oct Oct Oct Oct Nov Dec
Source: SNL Securities; Insurance Information Institute
P/C Insurance Stocks Off to a
Slow Start in 2006
Total YTD Returns Through September 8, 2006
P/C insurer stocks now
up in 2006. Investors
less worried about
potential hurricane
losses, but price
weakness looms.
7.04%
4.36%
Broker stocks
hurt by weak
earnings
0.0%
5.0%
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Reinsurers
P/C
0.58%
-8.04%
-5.0%
Life/Health
5.96%
-1.48%
-10.0%
S&P 500
4.02%
10.0%
All Insurers
Multiline
Brokers
UNDERWRITING
Surprisingly Strong in
2005, Stage is Set for a
Good 2006!
P/C Industry Combined Ratio
120
115.8
110
2005 figure reflects heavy
use of reinsurance which
lowered net losses, but still
a substantial deterioration
from first half 2005
2006 is Off to a
Strong Start
Expectation is for an
underwriting profit
107.4
100.9
100.1
100
98.3
95
93.0
92.7
90
01
02
03
04
05H1
05
Sources: A.M. Best; ISO, III. *III forecasts/estimates for 2006 first half and full year.
06H1
06F III
Forecast*
$30
$25
$20
$15
$10
$5
$0
($5)
($10)
($15)
($20)
($25)
($30)
($35)
($40)
($45)
($50)
($55)
Insurers sustained a $5.9 billion underwriting loss in
2005. 2006 could become only the second underwriting
profit in 28 years, assuming “normal” CAT losses.
06Q1 U/W profit was $8.4B.
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
$ Billions
Underwriting Gain (Loss)
1975-2006F
Source: A.M. Best, Insurance Information Institute
A 100 Combined Ratio Isn’t What it
Used to Be: 95 is Where It’s At
Combined Ratio
15.9%
105
Combined Ratio
14.3%
100.6
100
95
90
16%
15.3%
100.9
100.1
18%
ROE*
15.4%
98.3
97.5
Combined ratios
today must be below
95 to generate
Fortune 500 ROEs 9.4%
14%
12%
92.7
9.4%
91.2
10.5%
10%
85
8%
80
6%
1978
1979
2003
2004
* 2005/6 figures are return on average statutory surplus.
Source: Insurance Information Institute from A.M. Best and ISO data.
2005:H1
2005
2006:H1
Retrun on Equity*
110
03
04
99
100
101
105
110.1
111.1
112.3
109.7
103.9
107.6
110
110.2
112.5
115
110.3
120
102.3
125
Outside CATaffected lines,
commercial
insurance is doing
fairly well. Caution is
required in
underwriting longtail commercial lines.
101.9
122.3
Commercial Lines Combined
Ratio, 1993-2006E*
2006 results dependent
on a return to “normal”
catastrophe loss levels
95
90
85
93
94
95
96
97
Source: A.M. Best; Insurance Information Institute
98
99
00
01
02
05E 06F
*Fitch estimate for 2005. Actual 1H05 combined ratio all lines was 92.7.
REINSURANCE
MARKETS
Higher Reinsurance Costs
Squeezing Insurers, Pushing
Property CAT Prices Upward
Global Number of
Catastrophic Events, 1970–2005
250
200
The number of natural
and man-made
catastrophes has been
increasing on a global
scale for 20 years
Record 248 manmade CATs &
record 149 natural
CATs in 2005
150
100
50
Natural catastrophes
Man-made disasters
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
0
Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 1/2005 and 2/2006.
Combined Ratio:
Reinsurance vs. P/C Industry
All Lines Combined Ratio
Sept. 11
162.4
Reinsurance
170
160
124.6
100.9
111.0
100.1
00
107.4
99
115.8
98
106.5
110.1
100.5
105.9
97
100
114.3
108.0
100.8
101.9
125.8
Hurricane
Andrew
104.8
106.0
119.2
106.7
113.6
108.5
110
105.0
106.9
120
110.5
108.8
130
115.8
126.5
140
98.3
150
129
2004/5
Hurricanes
90
91
92
93
94
95
96
01
02
Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
03
04
05
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.
Property Catastrophe Price Index*
1994 - 2006
US CAT prices are
continue to rise faster
than anywhere else in
the world
120
100
80
60
40
Worldwide
US
European Storm
Rest of the World
20
0
94
95
96
97
98
99
00
01
02
03
*Insurance Information Institute figure of 13.8% for 2005 based estimated 2005 DPE of $417.7B
and insured CAT losses of $57.7B. Includes primary and reinsurance coverage.
Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute.
04
05
06
Reinsurance Prices Surged in 2006
Following Record CATs in 2005
40%
In hurricane-prone
areas, property CAT
reinsurance prices
are up 100-300%+
US cat reinsurance price index:
1994 = 100
125
30%
25%
100
21%
20%
16%
75
11%
10%
2%
50
0%
-4%
-5%
-10%
-11%
-4%
-9% -8%
-6%
-20%
25
0
94
95
96
97
98
99
'00
'01
rate changes [left]
Sources: Swiss Re, Cat Market Research; Insurance Information Institute estimate for 2006.
'02
'03
'04 05E 06F
index level [right]
Changes in the 2006
Reinsurance Markets
• Property CAT reins. rates up 20% - 30% nationally
• Property CAT coverage in hurricane exposed areas up
100%-300%
• Marine/Energy Reinsurance Up 300%+
 Most challenging markets for reinsurers today
• Aggregate reinsurer exposure is down 20-30%
• Cedants retaining more risk, often by 50-100% or
more (higher attachment pts.)
• Increased demand for Excess of Loss cover
 XoL is potentially more volatile for reinsurers
• Some supply issues as a few small players enter run-off
• Retrocessional market is much tighter
Sources: Morgan Stanley, Lehman Brothers, III
A Look Ahead to Reinsurance
Markets for 2007
• Despite lack of major hurricane in 2006, reinsurance
pricing strong in US for 2007
 New capital entry not sufficient to fully meet demand
 Reinsurance prices flat at best outside peak CAT zones
• Retrocessional market still tight
• Softening in European p/c reinsurance markets
• Softening in US casualty reinsurance markets
 More pronounced if property cat reinsurers shift emphasis
• Capital market role expanding
 Hedge funds, private equity
 Securitization: Insurance Linked Securities
 Some concern over staying power, (lack of) regulation
 Complement or competitor to traditional reinsurance?
Sources: Insurance Information Institute.
UNDERWRITING
AFFECTS FINANCIAL
STRENGTH
Is There Cause
for Concern?
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%
Sig. Change in Reinsurance
Failure
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;
Historical Ratings Distribution,
US P/C Insurers, 2000 vs. 2005
2000
C/CC++/C+ 0.6%
1.9%
B/B6.9%
D
0.2%
E/F
2.3%
2005
A++/A+
11.5%
Vulnerable*
12.1%
B++/B+
26.4%
B++/B+
28.3%
A/A48.4%
A++/A+
shrinkage
A++/A+
9.2%
Ratings agencies increasing
emphasis on multiple
eventsrequire more capital
A/A52.3%
Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report,
November 8, 2004 for 2000; 2006 Review & Preview for 2005 distribution. *Ratings ‘B’ and lower.
Ratings Agencies Tightening
Requirements for CATs
2006 SRQ CAT Model Reqs.*
•All Property Exposure
•Auto Physical Damage
•Reinsurance Assumed
•Pools & Assessments
•All Flood Exposure
•WC Losses from Quake
Best currently
•Fire Following estimates
PML for
wind & 250•Storm Surge 100-yr.
yr. quake to
capital
•Demand Surge determine
adequacy
•Secondary Uncertainty
*SRQ = Supplemental Rating Questionnaire
Source: A.M. Best Review & Preview, January 2006.
ALSO “A.M. Best will
perform additional
“stress-tested” riskadjusted capital analysis
for a second event in
order to determine the
potential financial
condition of an entity post
a severe event.”
IMPLICATION: Some
insurers may be required
to carry more capital to
maintain the same rating.
COMPETITIVE
PRESSURE
Non-CAT Pricing
Momentum Slows
Strength of Recent Hard Markets
by NWP Growth*
25%
1975-78
1984-87
2001-04
2006-2010 (post-Katrina)
period could resemble 1993-97
(post-Andrew)
20%
15%
10%
5%
0%
-5%
2005: biggest real drop in
premium since early 1980s
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
2006F
2007F
2008F
2009F
2010F
-10%
Note: Shaded areas denote hard market periods.
Source: A.M. Best, Insurance Information Institute
*2006-10 figures are III forecasts/estimates. 2005 growth of
0.4% equates to 1.8% after adjustment for a special one-time
transaction between one company and its foreign parent. 2006
figure of 1.9% is based on 2006:Q1 data.
Average Commercial Rate Change,
All Lines, (1Q:2004 – 2Q:2006)
0%
-0.1%
Magnitude of rate
decreases has diminished
greatly since mid-2005
-2%
-2.7% -3.0%
-3.2%
-4%
-4.6%
-6%
-5.9%
-7.0%
-8%
-8.2%
-10%
-9.4% -9.7%
-12%
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
1Q06
2Q06
Average Commercial Rate
Change by Account Size
Commercial accounts
trended downward from
early 2004 to mid-2005 but
now that trend is
shrinking post-Katrina
Source: Council of Insurance Agents & Brokers
Average Commercial Rate
Change by Line
Commercial property
accounts are renewing
sharply upward (+9.3%) in
2Q06. All other lines are
renewing down.
Source: Council of Insurance Agents & Brokers
Percent of Commercial Accounts Renewing
w/Positive Rate Changes, 2nd Qtr. 2006
80%
70%
Commercial Property
Business Interruption
71%
Largest increases for Commercial
Property & Business Interruption are
in the Southeast, smallest in Midwest
63%
60%
48%
50%
40%
32%
35%
30%
28%
21%
20%
21%
12%
10%
Southwest Pacific NW Northeast
Midwest
10%
0%
Southeast
Source: Council of Insurance Agents and Brokers
Commercial Accounts Rate Changes,
2nd Qtr. 2005 vs. 2nd Qtr. 2006
10%
2Q05
2Q06
9.3%
Only commercial
property is
renewing up in 2006
5%
0%
-5%
-10%
-15%
-4.5%
-6.0%
-3.6%
-5.6%
-6.9%
-7.3%
-9.1%
-2.3%
-6.6%
-8.4%
-13.3%
Commercial Workers Commercial General Umbrella Average
Auto
Comp Property Liability
Source: Council of Insurance Agents and Brokers
UNDERWRITING
CAPACITY
Can the Industry
Efficiently Employ Its
Increasing Capital?
U.S. Policyholder Surplus:
1975-2006*
$500
$450
$400
Capacity TODAY is $440.1B,
10.1% above year-end 2005, 54%
above its 2002 trough and 30%
above its 1999 peak.
$ Billions
$350
$300
$250
$200
$150
Foreign reinsurance
and residual market
mechanisms absorbed
50%+ of 2005 CAT
losses of $62.1B
$100
$50
“Surplus” is a measure of
underwriting capacity. It is
analogous to “Owners
Equity” or “Net Worth” in
non-insurance organizations
$0
7576 77 7879 80 8182 8384 85 8687 88 8990 9192 93 9495 96 9798 9900 01 0203 04 0506
Source: A.M. Best, ISO, Insurance Information Institute
*As of 3/31/06.
Announced Insurer Capital Raising*
($ Millions, as of December 1, 2005)
$3,500
As of Dec. 1, 19 insurers announced
plans to raise $10.35 billion in new
capital. Twelve start-ups plan to
raise as much as $8.75 billion more
for a total of $19.1 billion. Actual
total higher as Lloyd’s syndicates
have added capacity for 2006.
$3,000
$2,500
$ Millions
$3,200
$2,000
$1,500
$1,500
$1,000
$400 $450
$500
$38
$600
$710
$620
$600
$300
$100$140
$129
$297
$490
$124$202 $150
$299
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*Existing (re) insurers. Announced amounts may differ from sums actually raised.
Sources: Morgan Stanley, Lehman Brothers, Company Reports; Insurance Information Institute.
Announced Capital Raising by
Insurance Start-Ups
($ Millions, as of April 15, 2006)
As of April 15, 14 startups plan to raise as
much as $10 billion.
$1,600 $1,500
$1,400
$1,200
$ Millions
$1,000$1,000$1,000$1,000$1,000$1,000
$1,000
$800
$600
$500 $500 $500 $500
$400
$220 $180
$200
$100
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$0
*Chubb, Trident are funding Harbor Point. Announced amounts may differ from sums actually raised. **Stated amount is $750 million to $1 billion. ***XL
Capital/Hedge Fund venture. Arrow Capital formed by Goldman Sachs.
Sources: Investment Bank Reports; Insurance Information Institute.
INVESTMENTS
Does Investment
Performance Affect
Discipline?
Property/Casualty Insurance
Industry Investment Gain*
$ Billions
$57.9
$60
$52.3
$40
$54.5
$51.9
$48.9
$47.2
$50
$59.2
$56.9
$36.0
$35.4
$30
$45.3
$44.4
$42.8
Investment gains are up
but are only now
comparable to gains
seen in the late 1990s
$20
$10
$0
94
95
96
97
98
99
00
01
02
03
04 05** 06E
*Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.
2006 estimate based on actual annualized 2006:Q1 results.
**2005 figure includes special one-time dividend of $3.2B. Source: ISO; Insurance Information Institute.
CATASTROPHE
LOSS
MANAGEMENT
Insurers Have Done a Better Job
at Managing CAT Risk
Most of US Population & Property
Has Major CAT Exposure
Is Anyplace
Safe?
2005 Was a Busy, Destructive, Deadly
& Expensive Hurricane Season
All 21 names
were used for the
first time ever, so
Greek letters
were used for the
final storms
Source: WeatherUnderground.com, January 18, 2006.
2005 set a new record for the
number of hurricanes &
tropical storms at 28, breaking
the old record set in 1933.
2005 Was a Busy, Destructive, Deadly
& Expensive Hurricane Season
What a difference a
year makes! Just 8
named storms
through Sept. 18,
2006 vs. 17 as of
same date in 2005!
Source: WeatherUnderground.com, September 17, 2006.
2006 Hurricane Season:
Forecasts Repeatedly Scaled Back
275%
30
Named Storms
25
20
15
2006 hurricane seasons has
turned out to be far less
severe than anticipated
195%
140%
100%
10
5
Net Tropical Cyclone Activity
90%
26
17
10
300%
250%
200%
150%
100%
15
13
0
50%
Net Tropical Cyclone Activity
Named Storms
0%
50-Year 2005 Actual May 31
Average*
Forecast
August 3 September 1
Forecast
Forecast
*Average over the period 1950-2000.
Source: Insurance Information Institute compilation of forecasts by Dr. William Gray, Colorado State University.
$61.2
$5.2
$27.5
$12.9
$4.6
00
$5.9
$8.3
99
$26.5
$10.1
$2.6
97
98
$7.4
96
$4.7
91
$8.3
$2.7
90
95
$7.5
89
$40
$16.9
$60
$5.5
$80
$22.9
2005 was by far the worst
year ever for insured
catastrophe losses in the US,
but the worst has yet to come.
$100
$20
$100 Billion
CAT year is
coming soon
$ Billions
$120
$100.0
U.S. Insured
Catastrophe Losses ($ Billions)*
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. ** As of June 30, 2006.
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
20??
06**
05
04
03
02
01
94
93
92
$0
Number of Major (Category 3, 4, 5)
Hurricanes Striking the US by Decade
1930s – mid-1960s:
Period of Intense Tropical
Cyclone Activity
Mid-1990s – 2030s?
New Period of Intense
Tropical Cyclone Activity
10
9
8
8
8
4
6
6
6
5
5
4
Tropical cyclone activity in the
mid-1990s entered the active
phase of the “multi-decadal signal”
that could last into the 2030s
6
Already as many
major storms in
2000-2005 as in all
of the 1990s
1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s
*Figure for 2000s is extrapolated based on data for 2000-2005 (6 major storms: Charley, Ivan, Jeanne (2004) &
Katrina, Rita, Wilma (2005)).
Source: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm.
Top 10 Most Costly Hurricanes in
US History, (Insured Losses, $2005)
$45
$40
$35
$ Billions
$30
$25
$20
$15
Seven of the 10 most expensive
hurricanes in US history
occurred in the 14 months from
Aug. 2004 – Oct. 2005:
$21.6
Katrina, Rita, Wilma, Charley,
Ivan, Frances & Jeanne
$10.3
$10
$5
$40.6
$3.5
$3.8
Georges
(1998)
Jeanne
(2004)
$4.8
$5.0
Frances
(2004)
Rita
(2005)
$6.6
$7.4
$7.7
Hugo
(1989)
Ivan
(2004)
Charley
(2004)
$0
Sources: ISO/PCS; Insurance Information Institute.
Wilma
(2005)
Andrew
(1992)
Katrina
(2005)
Insured Loss & Claim Count for
Major Storms of 2005*
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
Claims
Hurricanes Katrina,
Rita, Wilma & Dennis
produced a record 3.3
1,047
million claims
1,744
$40.6
383
104
$1.1
Dennis
$10.3
$5.0
Rita
Wilma
Katrina
Size of Industry Loss ($ Billions)
*Property and business interruption losses only. Excludes offshore energy & marine losses.
Source: ISO/PCS as of June 8, 2006; Insurance Information Institute.
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
Claims (thousands)
Insured Loss ($ Billions)
Insured Loss
Hurricane Katrina Insured Loss
Distribution by State ($ Millions)*
Florida, $572.0 , 1.4%
Alabama, $1,032 ,
2.5%
Mississippi, $13,605 ,
33.5%
Total Insured
Losses =
$40.579 Billion
*As of June 8, 2006
Source: PCS division of ISO.
Tennessee, $59.0 ,
0.1%
Georgia, $36.0 , 0.1%
Louisiana
accounted for
62% of the
insured losses
paid and 56% of
the claims filed
Louisiana, $25,275 ,
62.3%
Hurricane Katrina Loss
Distribution by Line ($ Billions)*
Commercial
Property & BI,
$20,847.0 , 52%
Total insured
losses are
estimated at
$40.579 billion
from 1.7438
million claims.
Excludes $2$3B in offshore
energy losses
*As of June 8, 2006
Source: PCS division of ISO.
Vehicle, $2,168.0 ,
5%
Homeowners,
$17,564.0 , 43%
Hurricane Rita Claim Count
Distribution by State*
Alabama, 5,000 , 1.3%
Arkansas, 5,500 , 1.4%
Florida, 6,000 , 1.6%
Tennessee, 3,500 ,
0.9%
Louisiana
accounted for
48.3% of the
insured losses,
Texas 44.6%.
Mississippi, 7,000 ,
1.8%
Texas, 171,000 ,
44.6%
Total # Claims
= 383,000
*As of June 8, 2006
Source: PCS division of ISO.
Louisiana, 185,000 ,
48.3%
Excludes
offshore energy
losses of $2-3B
Hurricane Rita Loss Distribution,
by Line ($ Millions)*
Commercial
Property & BI,
$1,861.2 , 37%
Vehicles, $211.0 ,
4%
Total insured
losses are
estimated at $5.0
billion (excl.
offshore energy
of $2-$3B) from
383,000 claims.
Homeowners,
$2,974.2 , 59%
*As of June 8, 2006
Source: PCS division of ISO.
Hurricane Wilma Loss
Distribution by Line ($ Millions)*
Commercial
Property & BI,
$2,200 , 21%
Total insured
losses are
estimated at
$10.3 billion
from 1.047
million claims
*As of June 8, 2006. All losses are in FL.
Source: PCS division of ISO.
Vehicle, $750 , 7%
Homeowners,
$7,350 , 72%
2005 Storms Have
Developed Adversely
+18.0%
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
$38.1
$40.6
$34.4
Wilma is the storm
with the most
extraordinary adverse
development
+54.0%
$6.1
Katrina
Are the
models
inaccurate?
+6.3%
$8.4 $9.4 $10.3
$4.7 $5.0 $5.0
Wilma
Source: Insurance Information Institute from PCS survey data.
Rita
Inflation-Adjusted U.S. Insured
Catastrophe Losses By Cause of Loss,
1986-2005¹
Wind/Hail/Flood5
2.8%
Earthquakes 4
6.7%
Winter Storms
7.8%
Terrorism
7.7%
Water Damage
Civil Disorders
0.1%
6 0.4%
Fire
Tornadoes 2
2.3%
Utility Disruption
24.5%
0.1%
Insured disaster losses
totaled $289.1 billion from
1984-2005 (in 2005 dollars).
Tropical systems accounted
for nearly half of all CAT
losses from 1986-2005, up
from 27.1% from 1984-2003.
All Tropical
Cyclones 3
47.5%
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2005 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)..
Total Value of Insured
Coastal Exposure (2004, $ 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
$1,937.3
$1,901.6
$740.0
$662.4
$505.8
$404.9
$209.3
$148.8
$129.7
$117.2
$105.3
$75.9
$73.0
$46.4
$45.6
$44.7
$43.8
$12.1
Florida & New York
lead the way for insured
coastal property at more
than $1.9 trillion each.
Texas has $740B.
$0
Source: AIR Worldwide
$500
$1,000
$1,500
$2,000
$2,500
Insured Coastal Exposure as a % of Statewid
Insured Exposure (2004, $ Billions)
Florida
Connecticut
New York
Maine
Massachusetts
Louisiana
New Jersey
Delaware
Rhode Island
S. Carolina
Texas
NH
Mississippi
Alabama
Virginia
NC
Georgia
Maryland
79.3%
63.1%
60.9%
57.9%
54.2%
37.9%
33.6%
33.2%
28.0%
25.6%
25.6%
23.3%
After FL, many
Northeast states have
among the highest
coastal exposure as a
share of all insured
exposure in the state.
13.5%
12.0%
11.4%
8.9%
5.9%
1.4%
0%
Source: AIR Worldwide
10%
20%
30%
40%
50%
60%
70%
80%
90%
Value of Insured Commercial
Coastal Exposure (2004, $ Billions)
New York
Florida
Texas
Massachusetts
New Jersey
Connecticut
Louisiana
S. Carolina
Virginia
Maine
North Carolina
Georgia
Alabama
Mississippi
New Hampshire
Delaware
Rhode Island
Maryland
$1,389.6
$994.8
$437.8
$355.8
$258.4
$199.4
$121.3
$83.7
$69.7
$52.6
$45.3
$43.3
$39.4
$23.8
$20.9
$19.9
$17.9
$6.7
Commercial property
exposure also implies
significant business
interruption losses.
$0
Source: AIR
$200
$400
$600
$800
$1,000 $1,200 $1,400 $1,600
Percentage of California
Homeowners with Earthquake
Insurance, 1994-2004*
35% 32.9% 33.2%
30%
25%
The vast majority of California
homeowners forego earthquake
coverage & play Russian Roulette
with their most valuable asset.
19.5%
20%
15%
17.4% 16.8%
15.7% 15.8% 14.6%
13.3% 13.8%
10%
5%
0%
94
96
97
98
99
00
01
*Includes CEA policies beginning in 1996.
Source: California Department of Insurance; Insurance Information Institute.
02
03
04
The 2006 Hurricane
Season:
Lowering Expectations
Outlook for 2006 Hurricane Season
Named Storms
Named Storm Days
Hurricanes
Hurricane Days
Intense Hurricanes
Intense Hurricane Days
Net Tropical Cyclone Activity
Average*
2005
2006F
9.6
49.1
5.9
24.5
2.3
28
115.5
14
47.5
7
13
50
5
13
2
13
7
4
100%
275%
90%
*Average over the period 1950-2000.
Source: Dr. William Gray, Colorado State University, September 1, 2006.
Probability of Major Hurricane Landfall
(CAT 3,4,5) in Sept/Oct 2006
9/06F
Avg.*
10/06F
Avg.*
Named Storms
74%
67%
22%
29%
Hurricanes
59%
48%
14%
15%
Intense Hurricanes
35%
27%
4%
6%
*Average over past 52 years.
Source: Dr. William Gray, Colorado State University, September 1, 2006.
CAT Models for 2006 Show Increase
in Hurricane Frequency & Severity
Increase in Frequency
Increase in Severity: 1-in-50 Year Event
Increase in Severity: 1-in-100 Year Event
70%
60%
60%
50%
40%
40%
25%25%
30%
Expected
frequency and
severity are up
40% in every region 40%
25%
20%
20%
15%
10%
Frequency in the
Northeast is up
30% and severity
10-15%
25%25%
30%
15%
10%
10%
0%
Total/
Average
Source: EQECAT
FL Only
Gulf of
GA, NC &
Mexico, excl.
SC
FL
VA to NY
ENERGY
MARKET
OVERVIEW
The Biggest Casualty
of 2004/5
Katrina’s Path of Destruction Through
the Offshore Energy Industry
Katrina (& Rita)
tore through
offshore facilities
Source: “Hurricane Katrina: Profile of a Super Cat,” RMS, October 2005.
Hurricane Rita’s Path Was at Least
as Devastating for Energy Concerns
Rita did significant
damage to onshore
facilities too
Source: Energy Information Administration; iMapData Inc.
Hurricanes Katrina/Rita: Initial Damage
to Oil Platforms & Rigs in Gulf of Mexico
No. of Platforms/Rigs Destroyed, Damaged or Adrift, as of October 4, 2005.
About 75% (3,050
out of roughly 4,000
GOM platforms
were in the path of
Katrina & Rita
70
60
50
50
Totals:
64
Damaged: 69
Adrift: 19
40
40
30
Destroyed: 114
Missing: 3
29
20
13
6
10
3
0
Hurricane Katrina
Destroyed
Damaged
Hurricane Rita
Rigs Adrift
Source: Minerals Management Service (MMS), US Department of the Interior.
Unaccounted For
Katrina and Rita Total Energy
Sector Estimated Losses*
Millions
$10,000
$8,000
$6,000
Downstream
Rigs
Total = $9.149 Upstream
Billion excluding Rigs
$2,419.7
$532.4
Total = $5.880 Billion
$846.2
$547.7
$4,000
$6,197.1
$4,486.5
$2,000
$0
Katrina
Source: Willis, Energy Market Review, May 2006.
Rita
*Loss estimates are total losses, not just insured losses.
Katrina and Rita Total Energy
Sector Losses, by Type*
Millions
$10,000
$8,000
Total = $9.149 Billion
$1,518.5
$1,228.1
Business Interruption
Operators Extra Expense
Physical Damage
Total = $5.880 Billion
$6,000
$1,267.8
$870.5
$4,000
$6,402.6
$2,000
$3,742.1
$0
Katrina
Source: Willis, Energy Market Review, May 2006.
Rita
*Loss estimates are total losses, not just insured losses.
Katrina & Rita: Total Energy
Losses, Onshore vs. Offshore*
Offshore
Billions
$10
$8
Total = $9.15 Billion
$2.53
$6
$4
Onshore
Total = $5.89 Billion
$0.915
$6.63
$2
$4.982
$0
Katrina
Source: Willis, Energy Market Review, May 2006.
Rita
*Loss estimates are total losses, not just insured losses.
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)
Insured Offshore Energy Losses
as a % of All Offshore Losses
Katrina
Rita
Insured Uninsured
$2.0
$2.0
30%
40%
Uninsured
$4.6
70%
Insured share of
losses for Rita
much higher
Source: Insurance Information Institute; Willis, Energy Market Review, May 2006.
Insured
$3.0
60%
2005 North American Energy
Losses a % of Worldwide Losses
North American losses
accounted for 96% of
all energy sector losses
(insured & insured) in
2005
North
America
$17,715.1
96%
Source: Willis, Energy Market Review, May 2006.
$ Millions
Rest of
World
$756.8
4%
*Loss estimates are total losses, not just insured losses.
LITIGATION
UPDATE
Insurers Are Ahead
Post-Katrina Litigation Update
• 95% of HO claims settled as of One-Year Anniversary
• About 2% in dispute (mediation/litigation) in LA/MS
• Insurers have won several major decisions
 Leonard v. Nationwide
 Class Actions Contained in MS: Each case tried on its merits
 Most cases no longer economical to pursue
• A.G. Hood Case Still Outstanding
 Case substantially weakened, though not bound by Fed court decisions
• Trial Lawyers will Try to Try Better Cases, Refine
Classes
• Misc. commercial litigation: coverage disputes, pollution
TRIA
EXTENSION
The Burden Grows, and the
Clock is Ticking
Terrorism Coverage Take-Up
Rate Continues to Rise
Terrorism take-up rate for
non-WC risk rose steadily
through 2003, 2004 and 2005
64%
59%
54%
48% 47%
46%
44%
44%
33%
24%
26%
TAKE UP RATE FOR WC
COMP TERROR
COVERAGE IS 100%!!
03Q2 03Q3 03Q4 04Q1 04Q2 04Q3 04Q4 05Q1 05Q2 05Q3 05Q4
Source: Narketwatch: Terrorism Insurance 2006, Marsh, Inc.; Insurance Information Institute
Insurance Industry Retention
Under TRIA ($ Billions)
$35
$30
$ Billions
$25
$20
•Individual company
retentions rise to 17.5%
in 2006, 20% in 2007
•Above the retention,
federal govt. pays 90% in
2006, 85% in 2007
Extension
$27.5
$25.0
$15.0
$15
$12.5
$10.0
Congress &
Administration
want TRIA dead
$10
$5
$0
Year 1
(2003)
Year 2
(2004)
Source: Insurance Information Institute
Year 3
(2005)
Year 4
(2006)
Year 5
(2007)
Insured Loss Estimates:
Large CNBR Terrorist Attack ($ Bill)
Type of Coverage
Group Life
General Liability
Workers Comp
Residential Prop.
Commercial Prop.
Auto
TOTAL
New York
Washington
San
Francisco
Des
Moines
$82.0
$22.5
$21.5
$3.4
14.4
2.9
3.2
0.4
483.7
126.7
87.5
31.4
38.7
12.7
22.6
2.6
158.3
31.5
35.5
4.1
1.0
0.6
0.8
0.4
$778.1
$196.8
$171.2
$42.3
Source: American Academy of Actuaries, Response to President’s Working Group, Appendix II, April
26, 2006.
Surplus Under TRIA/TRIEA
Covered Lines
(Billions of Dollars)
$175
$170
$169
$ Billions
$165
$160
$155
Shrinkage in 2006 (-11%)
surplus is due to elimination
of several lines covered under
TRIA though 2005 but
dropped under the Act’s
extension effective 1/1/06
$151
$150
$145
$140
2004
2006E
*2006 figure uses 2005 estimated year-end surplus and premiums by line as basis for calculations.
Source: Insurance Information Institute.
Summary
• Commercial/Personal lines picture is bright for 2006,
assuming “normal” CAT loss activity
• Concern about pricing discipline in some some
commercial lines, including casualty segments
• Rising investment returns insufficient to support deep
soft market in terms of price, terms & conditions
• Clear need to remain underwriting focused
• How/where to deploy/redeploy capital??
• Major Challenges:
Slow Growth Environment Ahead
Maintaining price/underwriting discipline
Managing variability/volatility of results
Insurance Information
Institute On-Line
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