Transcript No Slide Title

Mega-Trends in the World
of Insurance:
Impacts on Captive &
Alternative Risk Transfer
Markets
17th Annual World Captive Forum
Scottsdale, AZ
November 6, 2007
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
• Captive & ART Overview
• Pricing Under Pressure
•
•
•
•
•
•
•
•
•
•
•
 Traditional Insurers Starved for Growth
Capacity: New Record Highs
Profitability: Flush Times Breed Competition
Underwriting: Strong Results—Discipline is Tested?
Investment Income: Flat GainsMore Discipline?
Key Lines: Back from the Brink—But Heading South?
Catastrophic Loss: Welcome Respite
Financial Strength & Ratings
State-Run Markets: A Traditional & ART Competitor?
Terrorism: No ART Solution Here
Torts: Legal Environment Getting Better
Q&A
CAPTIVE & ART
OVERVIEW
Drivers of Growth:
Slowdown Ahead?
Total Commercial Risk Protection
Market (US, 2004)
$ Billions
Alternative market
mechanisms cover
about 30 percent
($98 billion) of the
total commercial risk
protection market
($326.9 billion)
Commercial
Insurance, $229,
70%
Alternatives, $98,
30%
Source: Conning; MarketStance analysis; Insurance Information Institute.
Size of Alternative Risk Transfer
Market (2001 Direct Written Premiums)
Captives, $38 ,
8.3%
$ Billions
Other
Alternative
Carriers (US), $5
, 1.1%
Self-Insurance,
$44 , 9.6%
Source: Swiss Re; Insurance Information Institute.
Captives
accounted for
about 8.3% of
global
commercial
insurance
premiums in
2001, likely at
least 10% today
Traditional
Carriers, $370 ,
81.0%
Alternative Risk Transfer Market
by Line
$ Billions
Property, 10%
Workers Comp,
43%
Workers Comp
account for the
largest share of the
alternative market
Automobile,
12%
Source: MarketStance.
Liability (excl.
Auto), 35%
Alternative Market Share by
Industry Group, All Lines
Mining
Transport., Public Util.
Manufacturing
Services
42.8%
42.3%
32.4%
Retail Trade
28.3%
Wholesale Trade
Construction
21.9%
Agriculture
21.8%
Source: MarketStance
45.0%
34.6%
Finance, Insurance
0%
45.4%
The Mining industry
makes the greatest use
of alternative markets,
agriculture the least
10%
20%
30%
40%
50%
Workers Compensation: Large
Deductible Market Share
50%
45%
40%
35%
30%
25%
Employers have
become very
accustomed to
accepting a greater
share of risk and
claim frequency
has decreased
43%
33%
20%
15%
10%
5%
1%
0%
1990
2000
2003
Sources: National Council on Compensation Insurance; Insurance Information Institute.
Alternative Market by
Revenue Size
70%
60%
50%
40%
Large companies
are far more likely
to retain risk via
alternative vehicles
than are small
companies
58.2%
62.6%
Medium ($100
million to $1 billion
revenue)
Large (more than $1
billion revenue)
30%
20%
17.8%
10%
0%
Small (<$100 million
revenue)
Sources: MarketStance
Alternative Market By State
Concentration
AK
AL
WA
ME
MT
ND
VT
NH
MN
OR
ID
MA
NY
WI
SD
CT
MI
RI
WY
NJ
PA
IA
DC
OH
NE
IL
NV
IN
DE
MD
WV
UT
VA
CO
MO
KS
KY
CA
NC
TN
AZ
OK
NM
SC
AR
HI
MS
AL
GA
LA
TX
Above Average
Below Average
Source: MarketStance; Conning 2006
FL
PR
U.S. Domiciled Captives – Top Lines
Medical Malpractice
37.6%
Auto Phy. Damage
10.9%
Priv. Pass. Auto
Liab.
10.2%
Other Liability
8.3%
Commercial M.P.
Medical malpractice remains
the dominant product line for
U.S. domiciled captives in
2006, followed by various
auto coverages, commercial
M-P and workers comp.
6.3%
Workers Comp.
5.0%
0%
5%
10%
15%
20%
25%
30%
Source: A.M. Best, 2007 Special Report: U.S. Captive Insurers – 2006 Market Review
35%
40%
U.S. Risk Retention Groups:
Distribution by Line
Med Mal
Occur
2.0%
Other Liab Cl
Made
23.0%
Other Liab
Occur
29.0%
Comm Auto
Liab
2.0%
Med Mal Cl
Made
43.0%
Medical
Malpractice
(claims
made)
remained a
significant
portion of
RRG
business in
2006 at
43%, while
other
liability (per
occurrence)
remained
virtually
unchanged
at 29%.
Figures do not total 100% due to rounding.
Source: A.M. Best, 2007 Special Report: U.S. Risk Retention Groups – 2006 Market Review
U.S. Domiciled Captives- Net
Premiums Written ($ Millions)
$10.5
$ Millions
$10.0
Following a five-year period of
rapid growth, U.S. captive
insurers saw net premiums
written increase by just 2.7
percent in 2006, after 6.2
percent growth in 2005.
$9.5
$9.9
$9.3
$9.0
$9.0
$8.5
$10.2
$8.4
$8.0
2002
2003
2004
2005
Source: A.M. Best, 2007 Special Report: U.S. Captive Insurers – 2006 Market Review
2006
Risk Retention Group Premiums,
1988 – 2006*
$2,449.1
$2,773.7
06*
$2,197.8
$1,737.7
05
$751.9
97
$944.0
$575.5
$707.6
95
$775.5
$585.8
94
$875.3
$527.2
$493.7
92
93
$493.6
$419.3
90
91
$358.4
500
89
1,000
$250.2
1,500
99
2,000
$790.5
2,500
98
Risk retention (& self-insurance)
group premiums have risen rapidly
in recent years and represent a form
of competition to traditional
insurers and captives
3,000
$1,265.1
Millions of Dollars
*2006 Projected
Source: Risk Retention Reporter, Insurance Info. Institute
04
03
02
01
00
96
88
0
U.S. Risk Retention Groups:
Domicile Distribution 2006
Vermont
46%
Hawaii
12%
South Carolina
8%
Colorado
4%
D.C.
4%
Delaware
4%
Iowa
4%
Illinois
4%
Missouri
4%
Montana
4%
Tennessee
4%
Texas
4%
0%
The majority of RRGs are
domiciled in Vermont, with
12. Hawaii has 3 RRGs while
South Carolina has 2 RRGs.
The remaining groups are
distributed equally among
various domiciles.
10%
20%
30%
40%
Source: A.M. Best, 2007 Special Report: U.S. Risk Retention Groups – 2006 Market Review
50%
Food, Drink and Tobacco
Company Captives by Domicile
30%
27.6%
25%
19.0%
20%
17.0%
13.7%
15%
Captive solutions can be
extremely helpful to food, drink
and tobacco (FDT) companies.
Captives with parent companies
in the FDT sector exist in only
10 domiciles. Nearly half (46.6%)
were spread between Bermuda
and Vermont.
10%
5.0%
5%
5.0%
3.0%
1.0%
1.0%
1.0%
Source: Captive Review, October 2007
as
ah
am
of
Is
le
B
M
an
VI
B
itz
er
la
nd
Lu
xe
m
bo
ur
g
B
ar
ba
do
s
Sw
la
nd
Ire
ue
rn
se
y
G
on
t
Ve
rm
B
er
m
ud
a
0%
Leading Captive Domiciles
Worldwide, 2005 vs. 2006
158
160
200
165
161
242
235
400
166**
169**
600
380
383*
542
563
800
208
208
733
740
1,000
382
381
Mixed growth rates in captive
domiciles worldwide in 2006
as competition intensifies in
traditional market.
2006
987*
989
2005
Sources: Business Insurance, March 12, 2007, III
i
aw
ai
H
ue
rn
se
y
Ba
rb
ad
Lu
os
xe
m
bo
Tu
ur
rk
g
s&
C
ai
co
s
Is
le
of
M
an
*BI estimate. **Excludes credit life insurers.
G
BV
I
m
on
t
s
V
er
an
m
C
ay
Be
rm
ud
a
0
Leading US Captive Domiciles,
2005 vs. 2006
600
2006
U.S. captive domiciles
experienced dramatic
growth in 2006.
542
563
2005
500
400
15
17
6
10
DC
13
21
AZ
15
30
59
70
NV
33
39
53
74
SC
97
HI
100
58
122
146
200
158
160
300
NY
UT
MT
GA
KY
0
VT
Sources: Business Insurance, March 12, 2007; III
NV
KY
62%
1
67%
1
67%
1
100%
Fastest Growing US Captive
Domiciles, 2006 over 2005
Newer U.S. captive domiciles led
the way in growth rates in 2006,
but from small bases in 2005 (e.g.,
UT increased from 15 domiciles in
2005 to 30 in 2006)
NY
1.3%
DC
4%
SC
13%
18%
0
19%
0
20%
40%
1
VT
HI
0
UT
MT
Sources: Business Insurance, March 12, 2007; III
AZ
GA
G1500 Companies and Captives:
Room for Growth
Companies with a captive
1500
Companies in G1500
The captive market remains underdeveloped,
with over half (53%) of the world’s top G1500
companies not currently owning a captive.
1,600
1,400
1,200
705
ta
l
RC
(P
na
To
)
24
2
84
34
an
y
G
er
m
n
Ja
pa
Source: Aon, Global 1500: A Captive Insight 2007
Ch
i
Ko
re
a
(R
ep
u
bl
U.
S
ic
)
.
0
34
39
2
200
UK
400
243
325
600
564
800
118
93
Markets such as Asia have
considerable potential for growth.
For example, only 14% of Japanese
G1500 companies have a captive.
1,000
Captive Formations & Liquidations,
1993–2002
500
450
400
350
Why Do Captives Liquidate?
•Collapse of parent (cyclical)
•Collapse of parent (e.g., Enron)
•Consolidation
•Escalating loss costs/claim
severity (e.g., med mal)
Captive formation
and liquidation are
highly correlated
300
250
200
150
100
Captive Liquidations
50
New Captive Formations
0
1993
1994
1995
1996
Source: A.M. Best; Insurance Information Institute
1997
1998
1999
2000
2001
2002
Top 5 Captive Managers by
Premium Volume, 2006 ($Mill)
$10,000
$8,900
$9,000
$8,000
$7,000
$6,000
$5,000
$5,000
$4,200
$4,100
Aon
(Vermont)
Aon
(Bermuda)
$4,000
$3,486
$3,000
$2,000
$1,000
$0
Marsh
(Bermuda)
Marsh
(Vermont)
Sources: Business Insurance, March 12, 2007; III
International
Advisory
Services
Top 10 Largest Captive Managers
Worldwide, by Captives Managed 2006
2006
2005
1,386
1,352
Aon
1,120
1,103
Marsh
247
240
209
177
194
183
168
146
94
93
92
80
91
98
88
76
Willis
USA Risk
IAS
HSBC Insurance
Beecher Carlson
Quest
AIG
AMS
$0
$200
$400
Sources: Business Insurance, March 12, 2007; III
The number of captives
managed by the top firms
increased in 2006, though
not in all domiciles
$600
$800 $1,000 $1,200 $1,400 $1,600
Top Bermuda Captive Managers,
by Premium Volume, 2006
2006
2005
Marsh
7,150
4,100
Aon
8,900
5,200
3,486
2,824
IAS
1,103
1,056
1,078
1,130
1,000
1,000
941
1,800
579
447
490
450
Cedar Mgmt
JLT
Liberty Mutual
Beecher Carlson
USA Risk
Quest
$0
$2,000
Sources: Business Insurance, March 12, 2007; III
Premium volume grew for
some managers, but
shrank for others
$4,000
$6,000
$8,000
$10,000
Annual Catastrophe Bond
Transactions Volume, 1997-2007*
Catastrophe bond issuance has
soared in the wake of Hurricanes
Katrina and the hurricane
seasons of 2004/2005
$5,000
$4,000
$4,693.4
$3,000
$1,991.1
$1,729.8
$2,000
$1,139.0
$966.9$1,219.5
$846.1$984.8
$1,000 $633.0
$1,142.8
$0
97
98
99
00
01
02
03
04
05
06
Source: MMC Securities and Guy Carpenter; Insurance Information Institute. *Through 10/31/07
07*
20
18
16
14
12
10
8
6
4
2
0
Number of Issuances
Risk Capital Issues ($ Mill)
$6,000
Number of Issuances
$4,830
Risk Capital Issued
COMPETITIVE
PRICE PRESSURE
Traditional Insurance
Prices Falling Sharply
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
2006
2007F
2008F
2009F
2010F
-10%
Note: Shaded areas denote hard market periods.
Source: A.M. Best, Insurance Information Institute
*2007-10 figures are III forecasts/estimates.
Growth in Net Written
Premium, 2000-2008F
15.3%
10.0%
8.4%
5.0%
P/C insurers will experience
their slowest growth rates
since the late 1990s…but
underwriting results are
expected to remain healthy
3.9%
2.7%
0.5%
2000
2001
2002
2003
2004
2005
*2007 figure base on 2007 actual first half result of 0.1%.
Source: A.M. Best; Forecasts from the Insurance Information Institute.
2006
0.1%
0.3%
2007F*
2008F
Most Layers of Coverage are
Being Challenged/Leaking
$100 Million
Retro
Reinsurance
$50 Million
Excess
$10 Million
Primary
$2 Million
$1 Million
Reinsurers losing to
higher retentions,
securitization
Excess squeezed by
higher primary
retentions, lower
reins. attachments
Lg. deductibles,
self insurance,
RRGs, captives
erode primary
Retention
Source: Insurance Information Institute from Aon schematic.
Risks are comfortable
taking larger retentions
Average Commercial Rate Change,
All Lines, (1Q:2004 – 3Q:2007)
0%
Magnitude of rate decreases diminished
greatly after Katrina but have grown again
-0.1%
-2%
-4%
-2.7%
-3.0%
-4.6%
-5.3%
-3.2%
-6%
-5.9%
-7.0%
-8%
-8.2%
-9.4%
-9.7%
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
3Q07
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
4Q04
3Q04
2Q04
1Q04
-14%
2Q07
KRW Effect
-11.3%
-11.8%
-13.3%
1Q07
-12%
-9.6%
4Q06
-10%
Cumulative Commercial Rate
Change by Line: 4Q99 – 3Q07
Commercial account pricing
has been trending down for 3
years and is now on par with
prices in late 2001, early 2002
Source: Council of Insurance Agents & Brokers
D&O Premium Index
(1974 Average = 100)
Average D&O pricing is off
18% since 2003, after rising
146% from 1999-2003
1400
1200
600
1,113
931
1000
800
1,237
682
746
704 720 720
771 806 793
1,010
827
726
720
619
539 503 560
400
200
0
86 88 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Source: Tillinghast Towers-Perrin, 2006 Directors and Officers Liability Survey.
UNDERWRITING
CAPACITY
Does Expanding Capacity
Bode Ill for ART, Including
Captives?
U.S. Policyholder Surplus:
1975-2007*
$550
$500
$450
Capacity as of 6/30/07 was $512.8B,
5.3% above year-end 2006, 80%
above its 2002 trough and 54%
above its 1999 peak.
$400
$ Billions
$350
$300
$250
$200
Foreign reinsurance
and residual market
mechanisms absorbed
45% of 2005 CAT
losses of $62.1B
$150
$100
$50
Capacity exceeded a
half trillion dollars for
the first time during
the 2nd quarter of 2007
“Surplus” is a measure of
underwriting capacity. It is
analogous to “Owners
Equity” or “Net Worth” in
non-insurance organizations
$0
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07*
Source: A.M. Best, ISO, Insurance Information Institute.
*As of June 30, 2007
Capital Raising by Class Within
15 Months of KRW
$ Billions
Insurance Linked
Securities, $6.253 ,
19%
Insurers &
Reinsurers raised
$33.7 billion in the
wake of Katrina,
Rita, Wilma
New Cos., $8.898 ,
26%
Source: Lane Financial Trade Notes, January 31, 2007.
Sidecars, $6.359 ,
19%
Existing Cos.,
$12.145 , 36%
Annual Catastrophe Bond
Transactions Volume, 1997-2007*
Catastrophe bond issuance has
soared in the wake of Hurricanes
Katrina and the hurricane
seasons of 2004/2005
$5,000
$4,000
$4,693.4
$3,000
$1,991.1
$1,729.8
$2,000
$1,139.0
$966.9$1,219.5
$846.1$984.8
$1,000 $633.0
$1,142.8
$0
97
98
99
00
01
02
03
04
05
06
Source: MMC Securities and Guy Carpenter; Insurance Information Institute. *Through 10/31/07
07*
20
18
16
14
12
10
8
6
4
2
0
Number of Issuances
Risk Capital Issues ($ Mill)
$6,000
Number of Issuances
$4,830
Risk Capital Issued
Change in US Policyholder
Surplus, 1976-2007F*
$70
$60
$50
$ Billions
$40
US insurers have recorded large
increases in net capacity since 2003
despite record CAT losses. Net
income (less dividends) is the
largest source of net new capacity.
$30
$20
$10
$0
($10)
($20)
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
($30)
*2007 forecast based on actual 07:H1 increase of $25.6B
Source: A.M. Best, ISO, Insurance Information Inst.
New Capital Paid-In: US P/C
Insurers, 2003-2006 ($Bill)
$16
$14.4
$14
$12
$11.3
$8.8
$10
$8
New capital
entering US
markets was
down
significantly in
2006. Much
more raised
offshore.
$6
$3.6
$4
$2
$0
2003
2004
Sources: A.M. Best, ISO, Insurance Information Inst.
2005
2006
Reasons Behind Capital Build-Up
& Repurchase Surge
$769.2
95
$7,094.1
$4,370.0
$5,242.3
$763.7
$658.8
94
$566.8
92
$310.1
$418.1
91
$952.4
$311.0
$646.9
88
$1,000
$564.0
$2,000
87
$3,000
$1,539.9
$4,000
Returning capital owners
(shareholders) is one of the few
options available
$2,764.2
$5,000
$4,297.3
$6,000
$5,266.0
•Reasonable investment
performance
•Lack of strategic alternatives
(M&A, large-scale expansion)
$4,586.5
$7,000
98
•Moderate catastrophe losses
$4,497.5
$8,000
$2,385.6
•Strong underwriting results
97
First half 2007 share
buybacks are already 86%
of the 2006 record
$6,173.0
P/C Insurer Share Repurchases,
1987- First Half 2007 ($ Millions)*
06
05
04
03
02
01
07H1
Sources: Credit Suisse, Company Reports; Insurance Information Inst.
00
99
96
93
90
89
$0
MERGER &
ACQUISITION
Few Catalysts for Major
P/C Consolidation
P/C Insurance-Related M&A
Activity, 1988-2006
$35,221
140
100
80
$425
$9,264
60
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
*Announced May 7, 2007.
Source: Conning Research & Consulting.
120
40
20
0
Number of Transactions
$20,353
$486
$19,118
$40,032
No model for
successful
consolidation
has emerged
$1,249
$0
$1,882
$5,137
$2,435
$2,780
$10,000
$3,450
$20,000
$8,059
$30,000
Liberty Mutual
acquired Ohio
Casualty for $2.7B*
$11,534
$40,000
$55,825
$5,100
$50,000
2006 surge due
mostly to 2 deals. No
trend started.
$5,638
Transaction Value ($ Mill)
$60,000
Number of Transactions
$30,873
Transaction Values
PROFITABILITY
OVERVIEW
Rising Profits Breeds
Competition
$63,695
$65,192
07F
$44,155
$38,501
$30,029
$20,559
$30,773
$21,865
$10,870
$3,046
$10,000
$19,316
$20,000
$5,840
$30,000
$14,178
$40,000
Insurer profits peaked in
2006/7. “Normal” CAT year,
average investment gain
imply flattening
$36,819
$50,000
$24,404
$60,000
$20,598
$70,000
2001 ROE = -1.2%
2002 ROE = 2.2%
2003 ROE = 8.9%
2004 ROE = 9.4%
2005 ROE= 9.4%
2006 ROAS1 = 14.0%
2007F ROAS = 13.1%**
06
P/C Net Income After Taxes
1991-2007F ($ Millions)*
05
04
03
01
-$6,970
00
99
98
97
96
95
94
93
92
91
-$10,000
02
$0
*ROE figures are GAAP; 1Return on avg. surplus. 2007F figure is annualized actual first half net income
of $32.596B **Actual first half 2007 result.
Sources: A.M. Best, ISO, Insurance Information Inst.
ROE: P/C vs. All Industries
1987–2008E
20%
P/C profitability is cyclical, volatile and vulnerable
15%
10%
Sept. 11
5%
US P/C Insurers
All US Industries
*2007 is actual first half ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate.
Source: Insurance Information Institute; Fortune
07
F
08
F
06
04
03
02
01
00
99
98
4 Hurricanes
97
96
93
92
91
90
89
88
95
Northridge
-5%
05
Andrew
87
Katrina,
Rita, Wilma
Lowest CAT
losses in 15 years
94
0%
Hugo
RETURN ON EQUITY (Fortune):
Stock & Mutual vs. All Companies*
Stock
18%
Mutual
14.9% 15.4%
14.6%
16%
14.0%
All Cos.*
14%
13.4%
13.0%
13%
14%
13% 15% 13%
10.4%
12%
13.9%
12%
10.0%
11%
12% 11% 11%
12.6%
10%
10%
10%
9%
8%
8%
7%
6%
8%
7%
6%
4%
Mutual insurer ROEs are
2%
2%
typically lower than for stock
0%
companies, but gap has
-2%
-2%
narrowed. All are cyclical.
-4%
1998
2000
2001
2002
2003
*Fortune 1,000 group.
Source: Fortune Magazine, Insurance Information Institute.
2004
2005
2006E 2007F 2008F
Profitability Peaks & Troughs in the
P/C Insurance Industry, 1975 – 2008F
25%
1977:19.0%
1987:17.3%
2006:14.0%
20%
1997:11.6%
15%
10%
5%
0%
1975: 2.4%
1984: 1.8%
1992: 4.5%
2001: -1.2%
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07F
08F
-5%
*2007 is actual first half ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate.
Source: Insurance Information Institute; Fortune
ROE vs. Equity Cost of Capital:
US P/C Insurance:1991-2007E
18%
The p/c insurance industry achieved its cost of
capital in 2005/6 for the first time in many years
16%
12%
4%
2%
0%
-2%
-4%
The cost of capital
is the rate of return
insurers need to
attract and retain
capital to the
business
US P/C insurers missed their
cost of capital by an average 6.7
points from 1991 to 2002, but on
target or better 2003-07
91
92
93
94
95
96
97
98
99
Source: The Geneva Association, Ins. Information Inst.
-0.1 pts
6%
+0.2 pts
-13.2 pts
8%
-9.0 pts
10%
+3.1 pts
+3.5 pts
14%
00
01
02
ROE
03
04
05
06 07E
Cost of Capital
L/H Insurance Industry
Net Income ($ Bill), 1997-2006
$40
$35.9
$35
$32.18
Billions
$30
$34.0
$26.55
$25 $21.72
$20
$20.88$22.20
$17.98
$15
$10
$9.81
$4.14
$5
$0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: NAIC data, from Highline National Underwriter.
Return on Equity: L/H Insurance
vs. Fortune 500, 1995-2005
L/H
Fortune 500
16%
14%
12%
10%
8%
6%
4%
2%
0%
1995
1996
1997
1998
1999
Source: NAIC, from Highline National Underwriter.
2000
2001
2002
2003 20004 2005
WALL STREET:
INSURERS LAGGING
BEHIND IN 2007
Insurance & Reinsurance Stocks:
Strong Finish in 2006
Total Returns for 2006
S&P 500
13.62%
Life/Health
16.24%
19.95%
Reinsurers
16.57%
10.33%
9.53%
0.61%
0.0%
Broker stocks held back
by weak earnings
5.0%
10.0%
P/C
P/C insurer & reinsurer
stocks rallied in late 2006
as hurricane fears
dissipated and insurers
turned in strong results
15.0%
20.0%
25.0%
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
All Insurers
Multiine
Brokers
Insurance & Reinsurance Stocks:
Finally Gaining in 2007
Total YTD Returns Through November 2, 2007
Mortgage insurers are
6.44%
down 66%, Title insurers
down 35% on subprime
7.58%
& real estate woes
P/C insurance, reinsurance -1.10%
stocks lagging on soft market
concerns, and subprime
selloff. Some relief due to
very low hurricane losses -1.93%
S&P 500
Life/Health
Reinsurers
3.25%
P/C
All Insurers
-9.99%
Multiline
5.15%
Brokers
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
Source: SNL Securities, Standard & Poor’s, Insurance Information Inst. *Includes Financial Guarantee
UNDERWRITING
Insurer Underwriting
Has Improved
Dramatically
P/C Insurance Combined Ratio,
1970-2008F*
Combined Ratios
120
1970s: 100.3
1980s: 109.2
115
1990s: 107.8
2000s: 102.2**
110
105
100
95
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07*
08F
90
Sources: A.M. Best; ISO, III
*Actual figure of 92.7 through first half 2007. **Through 2007:H1.
P/C Insurance Combined Ratio,
2001-2008F
120
115.8
110
As recently as 2001,
insurers were paying
out nearly $1.16 for
every dollar they
earned in premiums
107.4
2006 produced the best
underwriting result
since the 87.6 combined
ratio in 1949
100.7
100.1
100
2007/8 deterioration due
primarily to falling rates, but
results still strong assuming
normal CAT activity
98.3
97.0
2005 figure benefited from
heavy use of reinsurance
which lowered net losses
92.5
92.7
06
07:H1
93.5
90
01
02
03
04
Sources: A.M. Best; ISO, III. *III estimates for 2007/8.
05
07F
08F
Ten Lowest P/C Insurance Combined
Ratios Since 1920 (& 2007:H1)
94
92.7
92.4 92.5
92.3
92.1
93
92
93.3
93.0 93.1 93.1
2007 is looking
very strong
91.2
91
90
89
88
87.6
87
86
The industry’s best
underwriting years
are associated with
periods of low
interest rates
The 2006 combined
ratio of 92.5 was the
best since the 87.6
combined in 1949
85
1949
1948
1943
1937
1935
2006
2007*
1950
1939
1953
Sources: Insurance Information Institute research from A.M. Best data. *2007 first half actual.
1936
Commercial Lines Combined
Ratio, 1993-2006
03
04
122.3
110.2
111.1
112.3
109.7
105.4
102.5
100
Outside CATaffected lines,
commercial
insurance is doing
fairly well. Caution is
required in
underwriting longtail commercial lines.
102.0
105
103.9
110
107.6
2006 results benefited from relatively
disciplined underwriting, low CAT
losses and reserve releases
95
90
90.5
115
110.3
120
110.2
125
112.5
Commercial coverages
have exhibited extreme
variability. Are current
results anomalous?
85
93
94
95
96
97
Source: A.M. Best; Insurance Information Institute
98
99
00
.
01
02
05
06
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
-40
-45
-50
-55
Insurers earned a record underwriting profit of
$31.7 billion in 2006, the largest ever but only the
second since 1978. Expect figure near $28 billion in
2007 assuming “normal” CAT losses. Cumulative
underwriting deficit since 1975 is $412 billion.
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07F
$ Billions
Underwriting Gain (Loss)
1975-2007F*
Source: A.M. Best, Insurance Information Institute *Actual 2007:H1 underwriting profit = $14.402B
annualized to $28.8B.
Impact of Reserve Changes on
Combined Ratio
$10
$5
$0
($5)
0.1
$0.4
$18.9
$15
$22.8
3.5
$36.9
$25
$20
$33.4
6.5
$10.8
Reserve Development ($B)
$35
$30
($10)
00
01
02
03
10
9
8
Reserve
7
adequacy has
6
4.5
improved
5
substantially
4
3
2
1
-1.2 -1.6 -1.3 -1.1
0
(1)
(2)
($5.0)
($5.3) ($7.0)($6.0)
(3)
04
05
06
Source: A.M. Best, Lehman Brothers estimates for years 2007-2009
07F
08F
09F
Combined Ratio Points
8.6 8.9
$40
PY Reserve Development
Combined Ratio Points
Cumulative Prior Year Reserve
Development by Line (As of 12/31/06)
$1,500
$1,000
$366
$1,172 $1,176
-$1,500
-$1,886
-$2,000
-$2,500
-$1,116
Release
-$3,000
-$96
-$100
-$100
-$254
om
m
.A
Pr
ut
od
o
.L
ia
bi
Fi
lit
nl
y
.G
ua
ra
In
nt
te
y
rn
at
io
na
l
O
Sp
th
ec
er
ia
lty
W
Li
or
ab
ke
.
r'
sC
Fi
om
de
p
lit
y/
C
Su
om
re
m
ty
er
ci
al
M
O
ul
th
ti
er
Li
ab
ili
R
ty
ein
su
ra
nc
e
Reserve redundancies in
most lines have resulted
in releases in recent
years
C
Pr
op
ec
ia
l
ty
M
al
Sp
M
ed
H
om
PD
A
PP
Li
ab
A
PP
e
-$3,006
ili
ty
-$3,500
-$413
-$1,000
-$475
-$779
-$500
-$1,174
$ Billions
$0
-$48
$500
-$53
Strengthening
Sources: Lehman Brothers; A.M. Best’s Aggregates & Averages Schedule P, Part 2.
REINSURANCE
MARKETS
Reinsurance Markets Have
Stabilized, Prices Falling
Announced Katrina, Rita, Wilma
Losses by Segment
$ Billions
Lloyd's, $3.5 , 9%
Europe, $4.9 , 13%
Catastrophes are
global events.
Only 39% of
KRW losses were
borne by US
primary insurers
Bermuda, $10.9 ,
29%
*As of 2/21/06
Source: Dowling & Partners, RAA.
U.S. Reinsurer,
$3.4 , 9%
Other, $0.3 , 1%
U.S. Primary, $14.2
, 39%
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.
Ratio of Reinsurer Loss & Underwriting
Expense to Premiums Written, 1985-2006
1.26
1.06
1.01
1.17
1.13
1.14
1.06
1.02
1.10
1.18
1.08
1.03
0.95
1.0
Katrina,
Rita, Wilma
Hurricane Andrew
1.07
1.1
1.08
1.09
1.06
1.10
1.2
1.07
1.3
Liability Crisis
1.07
1.4
1.21
Loss & LAE Ratio
1.5
Sept. 11
1.39
Despite the respite in 2006,
reinsurers paid an average of
$1.11 in loss and expense for
every $1 in written premium
since 1985
0.9
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Source: Reinsurance Association of America.
US Reinsurer Net Income
& ROE, 1985-2006
$12
$9.68
Reinsurer profitability
has rebounded
$0
($2)
Net Income
($4)
0%
-5%
ROE
($2.98)
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Source: Reinsurance Association of America.
5%
ROE
10%
$2.51
$3.41
$3.17
$1.31
$1.99
$1.47
$4.53
$3.71
$1.95
$1.79
$2.52
$1.17
$1.87
$2.03
$2
$1.38
$4
$1.22
$6
$1.95
$1.94
$8
$5.43
15%
$0.12
Net Income ($ Bill)
$10
20%
-10%
INVESTMENTS
Investment Gains
Are Flat
Net Investment Income
$60
$ Billions
$50
$40
Investment income
posted modest gains
in 2006, but is
running flat in 2007
Growth History
$30
2002: -1.3%
2003: +3.9%
$20
2004: +3.4%
2005: +24.4%*
$10
$0
2006: +5.2%
2007: 0.0%**
757677 787980 818283 848586 878889 909192 939495 969798 990001 020304 050607*
Source: A.M. Best, ISO, Insurance Information Institute;
*Includes special dividend of $3.2B. Increase is 15.7% excluding dividend. **Based on annualized H1 result of $26.128B.
Total Returns for Large Company
Stocks: 1970-2007*
S&P 500 was up 13.62% in 2006, Up 9.82% YTD 2007*
40%
30%
20%
10%
0%
-10%
Markets are up in 2007
for the 5th consecutive
-20%
Source: Ibbotson Associates, Insurance Information Institute.
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
-30%
1970
year (so far)
*Through November 2, 2007.
$4,173
$3,359
$13,016
$9,701
$9,125
$6,610
$9,244
$5,997
$1,664
$4,806
$5,000
$2,880
$10,000
$9,818
$9,893
$15,000
$10,808
$18,019
Realized capital gains
rebounded strongly in 2004/5
but fell sharply in 2006
despite strong stock market
as insurers “bank” their
gains. Rising again in 2007.
$6,631
$20,000
$16,205
US P/C Net Realized Capital Gains,
1990-2007:H1 ($ Millions)
-$1,214
$0
-$5,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07*
Sources: A.M. Best, ISO, Insurance Information Institute.
*As of June 30, 2007.
Property/Casualty Insurance
Industry Investment Gain1
$ Billions
$57.9
$60
$52.3
$56.9
$51.9
$47.2
$50
$59.4
$44.4
$42.8
$55.7
$48.9
$36.0
$40 $35.4
$30
$45.3
$60.6
Investment gains fell in 2006 and
even now are only marginally larger
than in the late 1990s
$20
$10
1Investment
07
**
06
05
*
04
03
02
01
00
99
98
97
96
95
94
$0
gains consist primarily of interest, stock dividends and realized capital gains and losses.
2006 figure consists of $52.3B net investment income and $3.4B realized investment gain.
*2005 figure includes special one-time dividend of $3.2B. **Annualized H1 result of $30.301B.
Sources: ISO; Insurance Information Institute.
KEY LINE
IMPROVEMENTS:
WILL INSURERS SWEETEN
THE DEAL FOR RISKS?
Commercial Auto Liability
& PD Combined Ratios
85
87.7
94
93.4
88.3
84.5
Commercial Auto has
improved dramatically
90
82.8
95
96.6
99.4
106.6
101.6
105.9
112.1
108.9
113
PD = 97.5
93.8
100
Average Combined:
Liability = 108.8
122.5
96.7
105
105.6
102.2
110
112
115
112.1
120
115.9
125
120.1
Comm Auto PD
120.5
Comm Auto Liab
80
95
96
Sources: A.M. Best; III
97
98
99
00
01
02
03
04
05
06
Commercial Multi-Peril Combined
105.5
93.8
101.9
83.6
85
97.7
104.9
Liab. Combined 1995 to 2004 = 113.8
89.0
95
90
116.1
116.2
121.0
117.0
115.0
115.0
122.4
CMP- has
improved recently
100
CMP-Liability
CMP-Non-Liability
97.3
105
100.7
110
113.1
115
108.5
113.6
120
119.8
116.8
125
119.0
130
115.3
125.0
(Liability vs. Non-Liability Portion)
Non-Liab. Combined = 105.2
80
95
96
Sources: A.M. Best; III
97
98
99
00
01
02
03
04
05
06
Workers Comp Combined Ratios,
1994-2006P
95
103
107
111
101
100
97
100
101
110
107
120
118
115
130
110
Percent
122
Workers Comp Calendar Year –
Private Carriers
90
80
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006p
Calendar Year
p Preliminary AY figure.
Accident Year data is evaluated as of 12/31/2006 and developed to ultimate
Source: Calendar Years 1994-2005, A.M. Best Aggregates & Averages; Calendar Year 2006p and Accident Years 1994-2006pbased on NCCI
Annual Statement Analysis.
Includes dividends to policyholders
Medical Malpractice
Combined Ratios
160
137.6
142.5
133.7
90
101.0
111.0
Reforms/Award Caps and higher
rates have helped to improve
med mal dramatically
91.2
100
106.6
110
99.8
120
129.7
119.3
115.7
130
150
107.9
140
Average Med Mal
Combined Ratio
1995-2006
154.7
80
95
96
Sources: A.M. Best; III
97
98
99
00
01
02
03
04
05
06
Other Liability
Combined Ratios*
150
140
138.6
Average Combined Ratio
1995-2006
114.5
130
122.6
124.4
117.6
120
112.3
110.5
108.5
110
111.8
114.4
112.1
104.5
100
96.3
Improvements in tort and
D&O environment have
contributed to performance
90
80
95
96
Sources: A.M. Best; III
97
98
99
00
01
02
03
04
05
06
*Includes Officers’ & Directors’ coverage.
CATASTROPHIC
LOSS
Is the Worst Over or
Yet to Come?
Most of US Population & Property
Has Major CAT Exposure
Is
Anyplace
Safe?
U.S. Insured Catastrophe Losses*
$8.3
$7.4
$2.6
$10.1
$8.3
$4.6
95
96
97
98
99
00
01
02
$100.0
$4.7
$5.5
$16.9
$9.2
$61.9
$4.7
91
92
93
94
$5.9
$7.5
$2.7
$20
89
90
$40
$26.5
$60
$22.9
$80
2006 was a welcome respite.
2005 was by far the worst
year ever for insured
catastrophe losses in the US,
but the worst has yet to come.
$12.9
$27.5
$120
$100
$100 Billion
CAT year is
coming soon
$ Billions
07**
20??
03
04
05
06
$0
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. **Through 9/30/07.
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
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
$0
Source: AIR Worldwide
$500
Florida & New York
lead the way for insured
coastal property at more
than $1.9 trillion each.
Northeast state insured
coastal exposure totals
$3.73 trillion.
$1,000
$1,500
$2,000
$2,500
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
58% or all insured
coastal exposure is
commercial, totaling
some $4.2 trillion in 2004
$0
Source: AIR
$200
$400
$600
$800
$1,000 $1,200 $1,400 $1,600
FINANCIAL
STRENGTH &
RATINGS
Industry Has Weathered
the Storms Well
Reasons for US P/C Insurer
Impairments, 1969-2005
2003-2005
Affiliate
Problems
8.6%
Catastrophe
Losses
8.6%
1969-2005
Deficient
Loss
Reserves/Inadequate
Pricing
62.8%
Deficient
Loss
Reserves/Inadequate
Pricing
38.2%
Investment
Problems*
7.3%
Alleged
Fraud
11.4%
Rapid
Growth
8.6%
Reinsurance
Sig. Change
Failure
in Business
3.5%
4.6%
Misc.
9.2%
Deficient
reserves,
CAT losses
are more
important
factors in
recent years
Affiliate
Problems
5.6%
Catastrophe
Losses
6.5%
Alleged
Fraud
8.6%
Rapid
Growth
16.5%
*Includes overstatement of assets.
Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;
P/C Insurer Impairment Frequency
vs. Combined Ratio, 1969-2006
Combined Ratio
115
Combined Ratio after Div
P/C Impairment Frequency
110
105
100
95
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
90
2006 impairment rate was 0.43%, or 1-in-233
companies, half the 0.86% average since 1969
Source: A.M. Best; Insurance Information Institute
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Impairment Rate
120
Impairment
rates are highly
correlated
underwriting
performance
Cumulative Average Impairment Rates by
Best Financial Strength Rating*
60%
50%
Insurers with strong ratings are far
less likely to become impaired over
long periods of time. Especially
important in long-tailed lines.
D
C/C-
40%
C++/C+
30%
B/BB++/B+
20%
A/A-
10%
A++/A+
0%
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15
Average Years to Impairment
*US P/C and L/H companies, 1977-2002
Sources: A.M. Best: Best’s Impairment Rate and Rating Transition Study—1977-2002, March 1, 2004.
Legal Liability &
Tort Environment
Definitely Improving But
Not Out of the Woods
Cost of U.S. Tort System
($ Billions)
$180
$169
$167
$156
$156
$159
$148
$130
$150
$129
$200
$144
$295
$282
$270
$261
$260
$246
$250
$141
Per capita “tort tax” was $880
in 2005, up from $680 in 2000
$300
$233
$350
$205
Tort costs consumed 2.09% of GDP in
2005, down from 2.24% in 2003
Reducing tort costs relative to GDP by
just 0.25% (to 1.84%) would produce an
economic stimulus of $31.1B
$100
$50
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.
08E
07E
06E
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
$0
Inflation Adjusted Tort Costs
Per Capita, 1950-2005
$1,000
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
Tort costs per
capita have
increased 817%
since 1950 even
after adjusting for
inflation
$914
$878 $897
$880
$780
$722
$444
$340
$199
$96
50
60
70
80
90
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.
00
02
03
04
05
Tort Costs Relative to GDP,
1950-2005
$0
2.24%
$0
2.22%2.24%2.22%
2.09%
2.03%
1.82%
1.53%
1.34%
$0
Tort costs relative to GDP
have increased more than 3
fold since 1950
1.03%
$0
0.62%
$0
$0
50
60
70
80
90
00
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.
01
02
03
04
05
Personal, Commercial &
Self (Un) Insured Tort Costs*
$250
Commercial Lines
Personal Lines
Self (Un)Insured
Total = $231.3 Billion
$49.4
Billions
$200
Total = $159.6 Billion
$150
Total = $121.0 Billion
$30.0
$20.4
$100
$70.9
Total = $39.3 Billion
$51.0
$50
$0
$86.7
$95.2
$5.2
$17.1
$17.0
$49.6
$58.7
1980
1990
2000
*Excludes medical malpractice
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.
2005
Tort System Costs,
2000-2008F
Tort System Costs
$260
2.03%
1.82%
$246
$233
$240
$220
$200
$180
$260
2.0%
1.5%
$205
$179
After a period of rapid
escalation, tort system costs
as % of GDP are now falling
$160
$140
$120
2.5%
2.09% 2.05% $270
2.04% 2.03%
$261
$280
$295
$100
1.0%
0.5%
0.0%
00
01
02
03
Tort Sytem Costs
04
05
06E
07F
Tort Costs as % of GDP
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends;2006 is III estimate.
08F
Tort Costs as % of GDP
2.22% 2.24% 2.22%
$261
$300
Preventing/Limiting Erosion
of Recent Tort Reform
•
•
Tort Pendulum Likely to Swing Against Insurers as Political
Environment Changes (WA referendum, FL No-Fault?)
Insurers Must Remain Active Members of Tort Reform
Coalitions at State and Federal Level

•
Pursuing Good Cases Can Set Precedent & Bring About
Quantum Shifts in Judicial Philosophy




•
Campbell v. State Farm (limited punitives)
Safeco v. Burr, Geico v. Edo (FCRA reporting violations)
Asbestos: Class actions limited; no pre-pack bankruptcies
Products Liability: Merck’s successful Vioxx defense
Educate Policyholders About Link Between Tort Environment
and Cost/Availability of Insurance


•
May have more success at the state level
Businesses understand; Need facts to support local efforts
Personal lines customers understand relationship, agents do
Tighten Contract Language

From 9/11 to Katrina, alleged “ambiguities” cost big bucks
REGULATORY
UPDATE
Busy Year for Insurers
in Washington
Proposed IRS Rule Change:
Domestic Captive Concerns?
• October 2007: IRS proposes rule change that would
end deductible status of discounted loss reserves kept
by captive insurers. Proposed regulation would:
Defer the tax deduction for an incurred loss arising from
related party business until it is actually paid.
Essentially result in treating the transaction as noninsurance for tax purposes.
Affect domestic captives (including foreign captives
which have elected to be treated as domestic for U.S. tax
purposes) and all coverages.
Overrides the insurance tax treatment afforded to
captive insurance transactions for decades by the courts
and the IRS.
Source: Business Insurance article 10/18/07; Vermont Captive Insurance Association
Federal Legislative Update
Federal Terrorism Reinsurance (TRIA)
•
TRIA expires 12/31/07. The current federal program offers $100 billion of coverage
subject to a $27.5B industry aggregate retention.
•
Under S. XXXX: “Terrorism Risk Insurance Program Reauthorization Act of 2007”








•
7-Yr. Extension, expiring 12/31/14
Maintains 20% Direct Earned Premium Deductible for duration of Extension
NBCR risks remain excluded (in contrast to House bill)
Eliminates distinction between foreign and domestic acts of terrorism
Deletes requirement that terrorist act be on behalf of foreign person or foreign interest
Changes in definition of terrorist act require substantial rate and form filings in states
Federal government’s cap remains at $100 billion through 2014
Requires Comptroller General to issue report within 1 year on feasibility of NBCR
insurance market; CG must also issue report within 180 days on obstacles in development
of private sector market for terror insurance
Administration has said it will not oppose Senate bill (issued veto threat for House)
Sources: Insurance Information Institute
Federal Legislative Update
Natural Disaster Coverage
• Some insurers are pushing for federal catastrophic risk fund coverage in the
wake of billions of dollars of losses suffered by insurers from the 2004-2005
hurricane seasons.
• Legislative relief addressing property/casualty insurers’ exposure to natural
catastrophes, such as the creation of state and federal catastrophe funds, has
been advocated by insurers include Allstate and State Farm
recently. However, there is active opposition many other insurers and all
reinsurers.
• There are supporters in Congress, mostly from CAT-prone states. Skeptics in
Congress believe such a plan would be a burden on taxpayers like the NFIP
and that the private sector can do a better job. Unlike TRIA, the industry is
not unified on this issue.
• Allowing insurers to establish tax free reserves for future catastrophe losses
has also been proposed, but Congress has not yet indicated much support.
Sources: Lehman Brothers, Insurance Information Institute
Federal Legislative Update
Optional Federal Charter (OFC)
• Large P&C and life insurers are the major supporters of OFC.
Supporters argue that the current patchwork of 50 state regulators
reduces competition, redundant, slows new product introductions and
adds cost to the system.
• In general, global P/C insurers , reinsurers and large brokers mostly
support the concept, while regulators (state insurance commissioners),
small single-state and regional insurers, and independent agency groups
largely oppose the idea. An optional federal charter is more favorable for
global P&C insurers, because an insurer that operates in multiple states
could opt to be regulated under federal rules rather than multiple state
regulations. As a result, this could increase innovation in the industry.
• Currently appears to be more momentum for OFC for life than for P&C
insurers based on the homogeneous nature of many life products. The
debate should intensify and although passage may not occur in the
current session of Congress, it may lay the groundwork for passage in the
2009-2010 session.
Sources: Lehman Brothers, Insurance Information Institute
Federal Legislative Update
McCarran-Ferguson Insurance Antitrust Exemption
• Under McCarran-Ferguson Act of 1945, insurers have limited immunity
under federal anti-trust laws allowing insurers to pool past claims
information to develop accurate (actuarially credible) rates.
• Very low level of understanding of M-F in Washington
• Certain legislators threaten to revoke McCarran-Ferguson because of
alleged collusion in the wake of Hurricane Katrina. However, the view
among some Washington insiders is that such a move would hurt small
insurers with less resources rather than the large insurers perhaps being
targeted. The current bills designed to revoke McCarran-Ferguson are
S.618 and H.R. 1081.
• The government appointed Antitrust Modernization Commission in an
April 2007 report strongly encouraged Congress to re-examine the
McCarran-Ferguson Act. Notably, 4 of the commissions 12 members
called for a full repeal of the law. Sources: Lehman Brothers, Insurance Info. Institute
TRIA
EXTENSION
ART/Captives Cannot Fill
the Void if TRIA Expires
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.
Summary
• Global commercial lines results were excellent in 2006
and 2007 with momentum for 2008
• Soft pricing, limited growth opportunities, increasing
capacity, falling reinsurance prices suggest traditional
insurers will look to recapture some of what has been
lost to ART—This may be more difficult than many
assume
• Will insurers lose discipline?
• Major Challenges:
Slow Growth Environment Ahead
Maintaining price/underwriting discipline
How/where to deploy/redeploy capital
Managing variability/volatility of results
Insurance Information
Institute On-Line
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