Transcript No Slide Title

What Keeps Insurance CEOs
Awake at Night?
An Overview and Outlook for the P/C
Insurance Industry
May 2002
Robert P. Hartwig, Ph.D., 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
•
•
•
•
•
•
•
•
•
Tough Mission for CEOs but Not Mission Impossible
Restore Profitability >Restore & Rebuild Capacity
Rationalize Pricing
>Focus on the Fundamentals
Improve Investment Returns
Accelerate Consolidation
Add Value through Technology—Insurance Scoring
Restore Order in the Courts
Keep Wall Street Happy
The Challenge of Corporate Governance
The Challenge of Terrorism
RESTORE
PROFITABILITY
P/C Net Income After Taxes
1993-2001 ($ Millions)
$40,000
$36,819
$35,000
2001 was the first year ever
with a full year net loss
$30,773
$30,000
$24,404
$25,000
$20,000
$19,316
$15,000
$21,865
$20,598
$20,223
$10,870
$10,000
$5,000
$0
-$5,000
-$10,000
-$7,921
1993
1994
1995
1996
1997
Sources: A.M. Best, ISO, Insurance Information Institute.
1998
1999
2000
2001
Highlights: Property/Casualty
Full-Year 2001 ($ Millions)
2001
2000
Change
Net Written Prem.
323,977 299,652
+8.1%
Loss & LAE
276,120 238,781
+15.6%
Net UW Gain (Loss) (52,990) (31,220)
+69.7%
Net Inv. Income
37,066
40,704
-8.9%
Net Income (a.t.)
(7,921)
20,559
N/A
Surplus*
289,649 317,361
Combined Ratio**
116.0
110.1
*Comparison with year-end 2000;
**Comparison with full-year 2000; 2001 figure excl. 9/11 losses is 111.8.
-8.7%
+5.9 pts.
ROE: Financial Services
Industry Segments, 1987–2001
25%
20%
15%
10%
5%
0%
US P/C Insurers
Diversified Finl.
All US Industries
Comm. Banks
Source: Insurance Information Institute; Fortune
Life
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
-5%
2000 Return on Equity: US
(Profitability)
2000
14.2%
7.0%
Workers Comp
5.7%
Med Mal
5.4%
Comm Multi Peril
3.6%
PP Auto
2.9%
Comm Auto
1.3%
0%
2%
Fortune 500
Homeowners
4%
6%
8%
10%
Source: NAIC, Insurance Information Institute
12%
14%
16%
2000 Return on Equity:
Mid-Atlantic States PP Auto
2000
Dist. Of Columbia
9.7%
6.7%
Virginia
6.1%
New Jersey
2.9%
Maryland
2.2%
Delaware
2.2%
US
0%
2%
4%
6%
8%
Source: NAIC, Insurance Information Institute
10%
12%
2000 Return on Equity:
Mid-Atlantic States HO
2000
16.3%
16.1%
3.8%
New Jersey
Dist. of Columbia
US
2.5%
Delaware
0.9%
Maryland
-8.6%
Virginia
-10%
-5%
0%
5%
10%
Source: NAIC, Insurance Information Institute
15%
20%
12% After Tax ROE Requires
Underwriting Profit
Accident Year Combined Ratio
P:S
90.0%
92.5 %
95.0 %
97.5 %
100.0 %
102.5 %
105.0 %
107.5 %
110.0 %
112.5 %
100 %
13.0 %
11.5 %
10.1 %
8.6 %
7.1 %
5.6 %
4.1 %
2.6 %
1.1 %
-0.4 %
110 %
14.0 %
12.4 %
10.7 %
9.1 %
7.5 %
5.8 %
4.2 %
2..5 %
0.9 %
-0.7 %
120 %
15.0 %
13.2 %
11.4 %
9.6 %
7.8 %
6.1 %
4.3 %
2.5 %
0.7 %
-1.1 %
130 %
16.0%
14.0 %
12.1 %
10.2 %
8.2 %
6.3 %
4.4 %
2..4 %
0.5 %
-1.5 %
140 %
16.9 %
14.9 %
12.8 %
10.7 %
8.6 %
6.5 %
4.4 %
2.4 %
0.3 %
-1.8 %
150 %
17.9 %
15.7 %
13.5 %
11.2 %
9.0 %
6.8 %
4.5 %
2.3 %
0.1 %
-2.2 %
160 %
18.9 %
16.5 %
14.1 %
11.8 %
9.4 %
7.0 %
4.6 %
2.2 %
-0.2 %
-2.5 %
170 %
19.9 %
17.3 %
14.8 %
12.3 %
9.8 %
7.2 %
4.7 %
2.2 %
-0.4 %
-2.9 %
180 %
20.9 %
18.2 %
15.5 %
12.8 %
10.1 %
7.5 %
4.8 %
2.1 %
-0.6 %
-3.3 %
190 %
21.8 %
19.0 %
16.2 %
13.3 %
10.5 %
7.7 %
4.9 %
2.0 %
-0.8 %
-3.6 %
200 %
22.8 %
19.8 %
16.9 %
13.9 %
10.9 %
7.9 %
4.9 %
2.0 %
-1.0 %
-4.0 %
225 %
25.3 %
21.9 %
18.6 %
15.2 %
11.9 %
8.5 %
5.2 %
1.8 %
-1.5 %
-4.9 %
250 %
27.7 %
24.0 %
20.3 %
16.5 %
12.8 %
9.1 %
5.4 %
1.7 %
-2.1 %
-5.8 %
Source: Dowling & Partners
RESTORE &
REBUILD
DESTROYED
CAPACITY
Policyholder Surplus:
1975-2001
Billions
(US$)
$350
Surplus Peaked at $336.3 Billion in 1999
$300
•Surplus decreased 8.7% in 2001 to $289.6
Billion.
$250
•Surplus is now lower than at year-end 1997.
$200
$150
$100
$50
“Surplus” is a measure of
underwriting capacity. It is
analogous to “Owners
Equity” or “Net Worth” in
non-insurance organizations
$0
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01
Source: A.M. Best, Insurance Information Institute
Capital Myth 1: Insurers Have $4 Trillion in
Assets to Pay Terrorism Claims
Total = $4.1 Trillion (as of 12/31/00)
$931 (23%)
P/C
The Facts
P/C insurers have
$931 billion in
assets compared
to $3.1 trillion for
life insurers
LIFE
$3,139 (77%)
Source: Insurance Insurance Information Institute
Capital Myth 2: P/C Insurers Have Nearly
$1 Trillion in Assets to Pay Terrorism Claims
The Facts
66% of Assets are
offset by liabilities
(mostly reserves) or
are non-admitted
Assets = Liabilities + Policyholder Surplus
NonAdmitted
Assets ($19B)
2%
PH Surplus
($317.4B)
34%
Liabilities
($594.6B)
64%
Source: Insurance Information Institute; A.M. Best
Capital Myth 3: P/C Insurers Have $300
Billion to Pay Terrorism Claims
Total PHS = $298.2 B as of 6/30/01
"Target"
Commercial*
$100 billion
33%
Only 33% of
industry surplus
backs up “target”
lines
Personal
$150 billion
50%
*”Target” Commercial includes: Comm property, liability and workers comp; Surplus must
also back-up on non-terrorist related property/liability and WC claims
Source: Insurance Information Institute
Other
Commercial
$50 billion
17%
Fresh Capital: Top 15 Deals
(as of April 12, 2002)
CGNU
$1,700D
Swiss Re
1,600V
Axis (Marsh)
1,600S
Ace Ltd.
1,150S
AIG
1,000CD
Montpelier
1,000PE
Converium
985S
Allied World
959S
XL Capital
819S
Endurance
800V
Arch Capital
763S
XL Capital
600D
Chubb
600D
St. Paul
575TP
Wellington
564S
ALL OTHERS
7,281
Total Completed = $24,584
Pending = $8,889
GRAND TOTAL = $33,473
Will they shorten the hard market?
Type of Issuance: CD=Convertible Debt; D= Debt; PE=Private
Equity;S=Stock;TP=Trust Preferred;V=Various
Source: Morgan Stanley
RATIONALIZE
PRICING
Average Price Change of
Commercial Insurance Renewals
E&S
-7.0%
Umbrella
-4.3%-2.8%
1.4%
-3.5%-2.1%
-6.0%
Workers' Comp
-11.0%
Commercial Property
CMP
-5.0%
General Liability
-7.0%
Commercial Auto
2.8%
3.2%
8.8%
8.0%
8.3%10.0%
7.9%
-0.4%
-2.0%
-3.0%
13.5%
4.1%
-1.2%
-4.4%
9.5%
9.5%
-4.1% -1.6%
-6.0%
-10.0%
6.1%
0.8%
-1.8%
-6.6%
8.9%
12.0%
3.2%
0.2%
3.5%
9.0% 11.0%
-13 -11 -9% -7% -5% -3% -1% 1% 3% 5% 7% 9% 11 13
% %
% %
Spring 2001
Source: Conning
Fall 2000
Spring 2000
Fall 99
Spring 99
Fall 98
CIAB Rate Survey
First Quarter 2002
Rate Increases By Line of Business
No
Change Up 1-10% Up 10-30%
Up 30-50%
Up>50% Up>100%
Commercial Auto
3%
19%
55%
13%
4%
1%
Workers Comp
7%
20%
45%
17%
3%
1%
General Liability
1%
13%
62%
17%
3%
1%
Commercial Umbrella
1%
4%
29%
32%
18%
11%
Commercial Property
1%
5%
39%
34%
13%
3%
Business Interruption
3%
10%
47%
22%
7%
2%
Surety Bonds
8%
20%
28%
7%
3%
1%
Source: Council of Insurance Agents and Brokers
CIAB Rate Survey
First Quarter 2002
Rate Increases By Size of Account
No
Change Up 1-10% Up 10-30%
Up 30-50%
Up>50% Up>100%
Small (<$25K)
3%
16%
61%
10%
1%
0%
Medium ($25K - $100K)
2%
4%
60%
25%
3%
1%
Large (>$100K)
1%
6%
45%
27%
6%
1%
Source: Council of Insurance Agents and Brokers
Rate On Line Index
(1989=100)
260
250
240
230
220
210
200
190
180
170
160
150
140
130
120
110
100
Prices rising, limits falling:
ROL up significantly
89
90
91
Source: Guy Carpenter
92
93
94
95
96
97
98
99
00
01
* III Estimate
02*
Cost of Risk per $1,000 of
Revenues: 1990-2002E
Cost of risk to corporations could rise sharply
in 2002; About half of increase due to 9/11
$10
$9
$8.30
$7.70
$7.30
$8
$7
$7.22
$6.49
$6.40
$6.10
$5.71
$5.70
$6
$5.25
$5.55
$5.20$4.83
$5
$4
90
91
92
93
94
95
96
97
98
99
00 01E 02E
Source: 2001 RIMS Benchmark Survey; Insurance Information Institute estimates.
Workers Comp: Impact of
Loss Cost/Rate & Discounting
5%
0.9%
0%
-5%
-5.9%
-10%
-15%
-16.9%
-20%
-22.0%
-25%
-27.3%
-30%
-35.4%
20
01
*
19
99
-37.6%
20
00
p
Source: NCCI, Insurance Information Institute
P=preliminary
*Insurance Information Institute estimates.
-35.6%
19
98
19
97
19
96
2000 Reserve Deficiency: $20B
19
94
-40%
2000 AY Combined Ratio: 136
19
95
-35%
Average Price Change of
Personal Lines Renewals
6%
6%
5%
Homeowners
4%
2%
2%
4%
7%
6%
3%
Personal Auto
1%
-1%
0%
1%
-2%
-1%
2002*
*III estimates
Source: Conning, III
0%
2001*
1%
Fall 2000
2%
3%
Spring 2000
4%
Fall 99
5%
6%
Spring 99
7%
Fall 98
$740
$680
66
8
$700
68
3
69
1
70
6
$720
73
5
$760
69
3
$780
70
4
Countrywide rates were up
1.5% in 2000 and up est.
6% in 2001, 8% in 2002
$800
79
3
Average Expenditures on
Auto Insurance: US
$660
$640
$620
2*
200
9
199
1*
8
199
200
7
199
0*
6
199
*Insurance Information Institute Estimates/Forecasts
Source: NAIC, Insurance Information Institute
200
5
199
$600
Mid-Atlantic Auto
Insurance Expenditures vs. US
$1,200
$1034
Lowest in US
$988
$1,000
$824
$757
$800
$683
Highest in US
$600
$567
$469
$400
1
2
5
NJ
DC
DE
12
39
$200
$0
MD
US
Source: Insurance Information Institute from NAIC Data, 1999.
VA
ND
53
0
44
0
45
5
48
1
$500
50
0
$550
Average HO expenditures rose
by 1.5% in 2000;
Up 6.0% in 2001; 7.0% in 2002
48
8
$600
56
7
Average Expenditures on
Homeowners Ins.: US
41
8
$450
*III Estimates
Source: NAIC, Insurance Information Institute
200
2*
200
1*
200
0*
199
9
199
8
199
7
199
6
199
5
$400
Average HO Premium by
Region, 2000
$859
$713
$623
$565
$506
West
South
Central
Pacific
Source: Conning & Co.
New Mountain
England
West
North
Central
$495
MidAtlantic
$482
East
South
Central
$418
$392
South
Atlantic
East
North
Central
Mid-Atlantic HO-3
Insurance Premiums vs. US
$1,000
$861
Highest in US
$800
Lowest in US
$617
$600
$497
$487
$372
$400
4
$200
$0
DC
$317
$266
18
42
TX
$345
NJ
US
MD
Source: Insurance Information Institute from NAIC Data, 1999.
45
49
VA
DE
WI
Health Plan Costs per Employee
Tremendous cost pressure
Annual % Increase
Employers want help managing costs
Phamaceutical costs
20.0%
What is managed care?
15.6%
Most layoffs in this sector (e.g., Aetna
announced Dec. 13 the layoff of 6,000)
15.0%
Still LT growth industry
10.1%
10.0%
9.4%
7.8%
5.0%
0.0%
2002*
*Estimate
Source: Hewitt Associates LLC.
2001
2000
1999
Reasons Why Market Will
Remain Hard
• Total capital raised less than what was lost from 9/11
• Capacity lost is greater than dollar losses from attack
suggest
 More caution on the part of insurers/reinsurers means more
capital needed per dollar of risk assumed
• Demand up (we’re more at risk as a nation now)
• Reserve shortfalls (e.g, asbestos, WC)
• Poor results in many important lines for reason other
than 9/11
• Poor investment results
• Wall Street pressure
FOCUS ON
FUNDAMENTALS
Growth in Net Premiums
Written (All P/C Lines)
25%
2000: 5.1%
2001: 8.1%
20%
2002 Forecast: 14.7%*
15%
The underwriting cycle went
AWOL in the 1990s.
10%
It’s Back!
5%
U.S.
*Estimate from I.I.I. Groundhog Survey.
Source: A.M. Best, Insurance Information Institute
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
0%
P/C Industry Combined Ratio
2000 = 110.1
Combined
Ratios
2001 Estimate = 116.0
1970s: 100.3
2002 Forecast* = 108.0
1980s: 109.2
120
115
1990s: 107.7
110
105
100
* Based on III 2002 Groundhog Forecast
00
98
96
94
92
90
88
86
84
02**
Sources: A.M. Best; III
82
80
78
76
74
72
70
95
Combined Ratio Components
120
116.0
1.4
115
110.1
110
WTC losses accounted
for 4.8 pts. on the 2001
combined ratio
0.6
1.5
7.8
107.5
1.5
105
108.1
106.8
3.0
103.1
100
2000
"Normalized" Losses
Source: A.M. Best.; ISO.
2001E
Catastrophe Losses
2002E
Asbestos & Environmental
Kitchen Sink Quarter:
2001:Q4
P/C insurers took $5
billion in miscellaneous
charges against their
2001:Q4 results
Source: Morgan Stanley as of February 8, 2002.
Combined Ratios
Calendar Year vs. Ultimate Accident Year
Countrywide—Private Carrier
140
135
130
Percent
125
121
120 117
115
123
Calendar Year
Accident Year
120
122
137
133
129
129
122
118
115
112
109
110
105
101
100
100
95
95
108
107
101
99
97
96
108
101
90
90
91
92
93
94
95
96
*A.M. Best estimate;**Forecast
Includes dividends to policyholders
Accident year is developed to ultimate
Source: A.M. Best, NCCI; Insurance Information Institute
97
98
99
00
01* 02**
Combined Ratio:
Reinsurance vs. P/C Industry
107.2
110.1
114.3
107.7
100.5
105.6
100.8
101.6
104.8
105.8
119.2
106.5
110
105.0
106.9
120
110.5
108.8
130
115.8
126.5
140
113.6
108.5
2001’s combined ratio was the
worst-ever for reinsurers &
the 3rd worst ever for p/c
insurers in aggregate.
116.0
150
All Lines Combined Ratio
142.9
Reinsurance
100
90
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
2001
U.S. Insured
Catastrophe Losses
CAT Losses for 2001 Set a Record
$ Billions
•20 events (lowest since 1969)
•1.5 million claims
$24.1
$22.9
•9/11: $16.6B = 74,000 claims
25
20
$16.9
15
10 $7.5
5
$2.7
$8.3 $7.3
$5.5
$4.7
$10.1
$8.3
$4.3
$2.6
$0.6
0
89
90
91
92
93
94
95
96
97
98
99
00
01 02**
•Includes $16.6B for 9/11 losses reported through 12/31/01. Includes only business and personal
property claims, business interruption and auto claims.
**First Quarter 2002.
Source: Property Claims Service, Insurance Information Institute
Underwriting Gain (Loss)
1975-2001
$10
$0
$ Billions
($10)
($20)
($30)
($40)
($50)
P-C insurers paid $53 billion more in claims
& expenses than they collected in premiums
in 2001
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
($60)
Source: A.M. Best, Insurance Information Institute
Underwriting Loss in HO
Insurance, 1991-2002F
$0
-$0.3
($2)
-$2.2
-$2.8
$ Billions
($4)
-$2.6 -$2.4
-$2.9
-$3.6
-$4.0
-$5.4
($6)
-$6.5
Underwriting losses in homeowners
insurance from 2000 to 2002 alone are
estimated at $19.0 billion, 14.5% above the
$16.6 billion in 9/11 property losses.
($8)
($10)
-$8.9
-$11.5
Source: A.M. Best, Insurance Information Institute
2002F
2001E
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
($12)
Outlook for 2002: Personal Lines
PERSONAL AUTO
130
HOMEOWNERS
126.0
125
120
117.5
115
109.5
110
107.0106.3
103.5
105
100
111.4
99.5
109.4 108.2
105
101.1
103
101.0
95
90
97
98
99
00
01E
02E BE*
97
98
99
00
01E
02E
*Breakeven Ratio: Reflects AY results, includes investment income; assumes 4% interest rate.
Source: A.M. Best
BE*
Outlook for 2002: Commercial Lines
02E
Breakeven*
143.0
01E
100
107
95.0
102.5
107
115
116.5
122.0
132.0
107
114.5
113
117.0
110.0
110
112
120
107.8
130
129.0
140
135.5
150
90
Workers
Comp
GL & Prod. Commercial Commercial
Liab
Auto
Package
Med Mal
Inland
Marine
*Breakeven Ratio: Reflects AY results, includes investment income; assumes 4% interest rate.
Source: A.M. Best
IMPROVE
INVESTMENT
RETURNS
Net Investment Income
$45
Billions
(US$)
$36
$27
Pricing & underwriting
problems were exacerbated by
declining investment income
Short-term interest rates
are under 2%!
Facts
1997 Peak = $41.5B
1998 = $39.9B
$18
1999 = $38.9B
$9
2000= $40.7B
2001 = $37.1E
$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
Source: A.M. Best, Insurance Information Institute
Markets Down Considerably
in 2001
2001 Change in Major Market Indexes
Nasdaq
-21.05%
P/C Insurer Portfolio:
S&P 500
-13.04%
64% Bonds
-7.10%
23% Stocks
DJIA
5% Cash & ST Sec.
8% Other
-25%
-20%
-15%
Source: Insurance Information Institute
-10%
-5%
0%
2002: Not Off to a Great Start
YTD Change Through May 14, 2002
Nasdaq
-11.86%
P/C Insurer Portfolio:
S&P 500
-4.42%
64% Bonds
2.76%
23% Stocks
5% Cash & ST Sec.
8% Other
-15%
-10%
-5%
Source: Insurance Information Institute
0%
5%
DJIA
Total Returns for Large
Company Stocks: 1970-2002*
40%
30%
20%
10%
0%
-10%
Could be headed for 3rd consecutive year of
decline for stocks
-20%
Last happened 1939-1941 (years straddling
Great Depression & WW II)
Large Company Stocks
*As of May 14, 2002.
Source: Ibbotson Associates, Insurance Information Institute
2002*
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
-30%
Real GDP Growth
Economy is recovering quickly
from the recession of 2001
10%
9%
8.3%
(first recession since 1990/91)
8%
7%
6%
5%
4%
3%
2%
1%
5.7%
4.4%
3.5%
2.5%
5.8%
5.6%
4.8%
4.0%
3.5%
2.2%
1.7%
1.0%1.3%
0.3%
0%
-1%
-1.3%
19
98
19
99
:
19 I
99
19 :II
99
:
19 III
99
:IV
20
00
:
20 I
00
:
2 0 II
00
:
20 III
00
:IV
20
01
:
20 I
01
:
2 0 II
01
:
20 III
01
:IV
20
01
:I
20 I
02
E
20
02
F
-2%
Source: US Department of Commerce, Blue Economic Indicators, Insurance Information Institute.
New Private Housing Starts
(Millions of Units)
2.0
1.9
1.8
New Private Housing Starts
Annualized starts in early 2001 were
surprisingly strong: Virtually no
exposure impact for insurers
1.62 1.67 1.59
1.7
1.6
1.35
1.4
1.3
1.2
1.29
1.20
1.19
1.01
1.1
1.0
1.48 1.47
1.46
1.5
1.60 1.61 1.58
90
91
92
93
94
95
96
97
98
99
00
Source: US Department of Commerce; Insurance Information Institute
*Projections from Blue Chip Economic Indicators.
1
02* 03*
Motor Vehicle Retail Sales
(Millions of Units)
New Motor Vehicle Sales
20.0
19.5
19.0
18.5
Sales so far in 2001 are surprisingly
strong—up from from 2000’s record pace.
Despite slowing economy, no adverse
exposure impact on auto insurers.
17.8
18.0
17.4
17.1
17.5
16.5
17.0
16.2
16.5
16.0
15.5
16.0
15.5
15.5
15.0
96
97
98
99
00
01
Source: US Department of Commerce; Insurance Information Institute
*Projections from Blue Chip Economic Indicators.
02*
03*
ACCELERATE
CONSOLIDATION
Insurance Mergers and
Acquisitions
1998: 565 deals
valued at $165.4 B
$140
8 of the 10 top deals in 2001
were in the Life sector; 2
were Health/Mgd. Care
$120
None of the top10 deals
were in the P/C sector
$160
600
468
500
433
349
382
400
295 300
$100
$80
300
243 246
171 188
$60
221
56.2
149
41.7
40.8
$40
$20
55.7
200
41.5
27
7.1 6.9 8.6
5
100
8.5 12.5
$0
0
89
90
91
92
93
94
Value of Deals
95
96
97
98
Number of Deals
Source: Compiled from Conning & Company reports.
99
00
01
Number of M & As
Value of M & As ($Billions)
$180
Competition—Still Intense:
Number of Insurers: 1970-2000
3,000
Property/Casualty
Life/Health
2,500
2,000
2430
2406
2261
2195
2485
2480
2455
1958
1802
1746
1575
1715
1702
1563
1,500
1095
1059
1,000
500
0
1970
1975
1980
Sources: P/C: A.M. Best; L/H: NAIC.
1985
1990
1995
1998
1999
2000
ADD VALUE
THROUGH
TECHNOLOGY
Application of Technology in
Underwriting:
Insurance Scoring
Insurance Scoring
• What is “Insurance Scoring”?
 Insurers use credit information as way of determining
individual’s financial stability and responsibility. Not
being assessed for ability to repay a loan.
 Insurance scores are HIGHLY accurate predictors of
future loss in auto and homeowners insurance
 Produces more fair, more equitable rating structure
 Those most likely to impose costs on system pay more
 Those least likely to impose costs on the system pay less
 Does not discriminate by income, location,
gender,marital status, etc.
 In use by 85% - 90+% of the market (roots back to
1970s)
FICO Scores
Distribution of Borrower Credit Scores by Risk Tier
Risk Tier
Credit Score –
Banking
% of Borrowers
A (prine) – Good
660+
70%
A – Fair
620 – 659
18%
B
580 – 619
9%
C
550 – 579
2.7%
D
520 – 549
0.3%
Source: HSH Associates, National Home Equity Assoc.
29%
20%
16%
11%
11%
<= 499 500-549 550-599 600-649 650-699 700-749 750-799
800+
7%
5%
1%
Source: Fair, Isaac
155
Performance by Score
Claims Frequency
Interpretation:
70
71
70
80
75
72
83
82
90
80
80
100
93
92
110
99
97
100
104
120
As score improves (gets larger),
performance in terms of loss ratio and
frequency of claims improves
118
118
130
121
127
140
Score Range
82
999
7
78
582
8
75
478
4
72
675
3
70
172
5
67
670
0
65
167
5
61
965
0
57
561
8
60
25
657
4
Relative Performance
150
Loss Ratio
142
160
CAS Credit Study
Personal Automobile Loss Ratio by Credit Categoty
Category
Earned
Premium
Incurred
Loss
Loss Ratio
Loss Ratio
Relativity
A
$74,279
$75,333
101.4%
133
B
158,922
124,723
78.5%
103
C
69,043
47,681
69.1%
91
D
91,746
52,688
57.4%
75
Total
$393,990
$300,425
76.3%
Category A – Unacceptable Credit Rating
Category B – No established credit history (or does not meet the definition of A, C or D)
Category C – Good Credit Rating
Category D – Excellent Credit Rating
Source: Casualty Actuarial Society
Fraud & Credit
Percentage of People Saying It Is Acceptable to Increase the Amount of the Claim to
Make Up for the Deductible by Insurance Score
50%
49%
45%
38%
40%
33%
35%
30%
24%
25%
23%
20%
15%
10%
5%
0%
300-399
Source: Conning & Company
400-499
500-599
600-699
700 +
Insurance Scoring*
• What information is used?
Adverse public records
Collections
Types of accounts
Payment timing
Utilization of balance relative to limits
Age of accounts
Number of accounts opened recently
Inquiries
*Practices vary by insurer and state
Delinquencies & Loss Ratio*
(Homeowners HO-3)
2000
1800
Loss Ratio Relativity
1600
Interpretation:
1804
Higher number of delinquencies
correlated with higher loss ratios
1293
1400
1200
1000
1000
800
600
400
200
0
Zero
One
Number of 60+ Day Delinquencies
Two or More
Average Credit Score by
Income Group
800
733
733
723
711
708
711
716
721
722
$100124
>=$125
Credit Score
700
600
500
Interpretation:
400
Credit score is not significantly
correlated with income
300
200
<$15
$15-19
$20-29
$30-39
$40-49
$50-74
Income ($000)
Source: American Insurance Association
$75-99
Insurance Scoring: Is it Fair?
• Scoring Models Exclude Factors Such As:
 Gender
 Race
 Income
 Location
 Net Worth
 Marital Status
 Age
• Always used in conjunction with other factors
(e.g., driving record, type of car…)
Insurance Scoring: Is it Fair?
• Insurers comply with Fair Credit Reporting
Act of 1970 (& subsequent amendments)
Firms must have permissable purpose to access
(underwriting of insurance is explicitly listed as
a permissable purpose)
Consumer must notified of adverse action
Consumer may obtain free copy of report
Consumer may request full reinvestigation
Consumer may dispute reinvestigation results
RESTORE
ORDER TO THE
COURTS
TORT-ure
•
•
•
•
•
•
•
•
•
•
•
Asbestos
“Toxic” Mold
Aftermarket Parts
Lead
Arsenic Treated Lumber
Construction Defects
Guns
Genetically Modified Foods (Corn)
Nursing Homes/Med Mal
What’s Next?
Sept. 11??
Average Jury Awards
1994 vs. 2000
6,817
2000
1994
$7,000
$6,000
($000)
$5,000
$4,000
3,482
3,566
$3,000
1,744
1,727
$2,000
1,168
$1,000
419
1,140
759
1,185
698
187 269
333
Vehicular
Liability*
Premises
Liability
$0
Overall
Business
Negligence
Source: Jury Verdict Research; Insurance Information Institute.
Medical
Malpractice
Wrongful
Death
Products
Liability
Rising Jury Awards
7%
$450,000 $999,999
20%
$250,000 $499,999
$100,000 $249,999
52%
30%
LESS THAN
$100,000
1994
Source: Jury Verdict Research
2000
$1 MILLION
AND OVER
Percentage of Awards at
$1 Million and Above (2000)
Top 10 States
25.0% 24.0%
25.0%
20.0%
20.0%
18.0%
15.0%
16.0% 15.0% 15.0% 15.0% 15.0%
14.0%
10.0%
5.0%
Source: Jury Verdict Research; Insurance Information Institute
V
/W
IL
ta
h
U
hu
se
tts
N
ew
Je
rs
ey
as
sa
c
M
Lo
ui
sia
na
a
am
la
b
A
ev
ad
a
N
a
nn
sy
lv
an
i
ip
pi
Pe
iss
iss
M
N
ew
Yo
r
k
0.0%
Cost of U.S. Tort System
($ Billions)
Tort costs consumed 2.0% of GDP annually on average since 1990
$250
$200
$150
Tort costs equaled $636 per
person in 2000!
$140.8$144.1
$128.9$129.8
$197.5$204.2
$178.6
$166.8$168.8
$159.3$155.6$156.0
$148.3
$100
$50
$0
90
91
92
93
94
95
96
97
98
Source: Tillinghast-Towers Perrin; Insurance Information Institute estimates for
2001/2002 assume tort costs equal to 2% of GDP.
99
00
01* 02E*
Source: New York Daily News, September 10, 2001
Source: New York
Times Magazine,
August 12, 2001
Source: New York Daily News, September 10, 2001
Texas:
Estimated Total # of Mold Claims
7000
6000
5000
4000
The number of mold
claims increased
548% between early
2000:I and 2001:II
3413
3000
2326
2000
1000
5722
1722
1547
2000 Q2
2000 Q3
883
0
2000 Q1
2000 Q4
2001 Q1
2001 Q2
Note: Data are not developed
Source: Texas Department of Insurance Special Call for Homeowners mold experience issued July 30, 2001; Insurance Information Institute.
Asbestos: Reserve Deficiency and
Ultimate Costs Growing
Incurred Losses to Date
Unfunded Future Liabilities
Ultimate Costs
$70
65.0
Reserve Deficiency = $33.1 Billion
$60
($ Billions)
$50
40.0
$40
40.0
31.9
$30
26.0
23.9
$20
33.1
16.1
14.0
$10
$0
1996
Source: A.M. Best.
1997
2001
KEEP
WALL STREET
HAPPY
Insurer Stock Performance:
It Could Have a Lot Worse
2001
2000
-1.2%
Property/Casualty
All Insurers
-7.6%
Life/Health
-7.0%
39.8%
34.5%
1.8% 18.1%
Banks
S&P 500
Nasdaq
43.4%
-39.3%
-60%
-10.9%
-9.1%
-21.1%
-40%
-20%
0%
Percentage Change
Source: SNL Securities; Insurance Information Institute
20%
40%
60%
Insurer Stock Price Performance:
Before & After 9/11
Total Return
All
Multi
L/H
P/C
Broker S&P500
1.2
5.0
-1.2
0.0
-35.0
21-Sep
2001
-10.9
-16.5
-20.0
-21.1
-8.2
-7.0
Source: SNL Securities, Insurance Information Institute
-18.3
-15.9
-21.7
10-Sep
-26.2
-30.0
-29.5
-25.0
-21.6
-20.0
-23.0
-15.0
-9.7
-7.6
-10.0
-13.2
Percent
-5.0
Insurer Stocks:
Outperforming the S&P 500
Total Return 2002 YTD Through May 10, 2002
-7.70%
S&P 500
-17.90%
Nasdaq
3.36%
Banks
3.53%
Life/Health
-1.07%
Brokers
4.14%
P/C
1.55%
All
-10.57%
-20%
-15%
Multiline
-10%
-5%
0%
Source: SNL Securities, Insurance Information Institute
5%
10%
THE CHALLENGE
OF CORPORATE
GOVERNANCE
CORPORATE GOVERNANCE:
New & Difficult Risk for
Financial Institutions
Accounting Problems are Getting
Many Companies into Trouble
•Enron fallout much worse than anticipated
•Many companies restating earnings
Corporate Governance: Expensive
and Hard-Learned Lessons
• Crisis of Confidence—skepticism is on the rise
 Ratings agencies
Analysts
Regulators
 Investors/Creditors
Employees
Lawmakers
• Regulatory/Legislative Fallout Unclear
 SEC opened record 49 financial cases opened in first 2
months of 2002 compared to 18 during same period of 2001
 Most new SEC cases are against large companies
• SEC, Administration & Congressional proposals vary
• Surge in shareholder suits has already begun
Breach of Faith
Cover of
BusinessWeek,
May 13, 2002
Shareholder Class Action Lawsuits*
600
Shareholders typically recover just
2.56% of amount lost; 1/3 of that
goes to lawyers & expenses**
487
500
400
300
200
202
164
236
231
163
188
209
216
178
110
100
0
1 92 93 94 95 96 97 98 99 00 01
9
19 19 19 19 19 19 19 19 19 20 20
*Securities fraud suits filed in U.S. federal courts.
**Suits of $100 million or more.
Source: Stanford University School of Law;Woodruff-Sawyer & Co.; Insurance Information Institute
Serious Implications for
Financial Institutions
• FIs exposed to wide variety of risks:
 Investment risk (as institutional investors)
 Insurance risk (surety, credit guarantees, D&O)
 Professional liability (investment banks advisory role)
 Reputation risk
• FIs will be targets of regulatory/legal action
 Most large FIs are organizationally complex
 GLB necessarily increases complexity (BHC tent is big)
 As principals go bankrupt, shareholders go in search of deep
pockets (Read: Wall Street)
Houston…
We Have a Problem
Total Exposure (Life & Non-Life): $3.796 Billion
Multiple
7%
Enron is the biggest
bankruptcy in US
history ($31B+)
Equity/debt
widely-held as S&P
500 company
Surety
26%
Biggest impact in
institutional
investors/creditors
11 Congressional
investigations
56 suits against
officers & directors
Fin.
Guarantee
D&O
2%
1%
Will spark similar
suits
Investment
64%
Source: Loss estimates from Morgan Stanley as Feb. 8, 2002; Insurance Information Institute.
THE CHALLENGE
OF TERRORISM
TERRORIST ATTACKS OF
SEPTEMBER 11, 2001
What’s this Going to Cost &
Who’s Going to Pay for It?
Sept. 11 Insured Loss Estimates
• Biggest insured CAT is US and world history ($40B)
 Hurricane Andrew: $15.5B (1992$); $20B (2000$)
• 100+ insurers worldwide have made announcements
accounting for about $22B in insured losses
• Industry loss estimates range from low of $30 billion
to $70 billion (consensus = low $40Bs)
 First WC disaster ($3.5B); 8,000 physically injured
 First life disaster ($2.7B); 3,000+ killed
 Anthrax Issue? WC exposure if out of course of employment
• Estimated NYC economic losses are $83 billion
• Insurance will pay biggest share by far
 Fed. Govt. promised $20B, excluding Victims Comp. Fund
• Where would NY be today if terror exclusions were
adopted after 1993 WTC bombing? Source: Insurance Information Institute
Sept. 11 Industry Loss Estimates
($ Billions)
Property WTC 1 & 2
$3.5 (9%)
Other
Liability
$10.0 (26%)
Life
$2.7 (7%)
Aviation
Liability
$3.5 (9%)
Event
Cancellation
$1.0 (3%)
Aviation Hull
$0.5 (1%)
Workers
Comp
$2.0 (5%)
Property Other
$5.0 (13%)
Biz
Interruption
$10.0 (26%)
Consensus Insured Losses Estimate: $38.2B
9/11 Gross vs. Net Losses*
(Life & Non-Life)
GROSS LOSSES = $49.3 B
NET LOSSES = $22.2 B
Reinsurance
38%
Primary
48%
Reinsurance
52%
$18.8B
$30.4B
$11.6B
$10.6B
Primary
62%
*Gross: before adjusting for reinsurance recoverables;
Net: After adjusting for reinsurance recoverables.
Source: Insurance Information Institute, as of February 2002.
Implies $27B in reinsurance
involved. System worked
because of spread of risk and
reinsurance. What about the
next attack?
Insured Loss Estimates*
(updated through Dec. 31, 2001)
Millions
Top 15 Groups (pre-tax, net of reinsurance, $ millions)
3000 2,800
2500
2,3682,280
2000
1500
1000
500
1,740
1,300
1,070
820 800 769
700 606
550 450
420 400
Ll
M oyd
un 's
ic
Be h R
rk e
H
at
h
Sw Ace
iss
Re
A
lli
an
z
A
Zu IG
ric
C h*
iti
*
g
X ro
L
u
C p
ap
i
St tal
.P
au
l
A
H xa
ar
tfo
Em C rd
pl hub
oy b
er
sR
e
0
*Midpoint if company has announced range.
Source: AM Best, III
**Includes $289MM for Converium
World: Top 10 Biggest
Catastrophes (by insured loss)
$40
$40
$35
$30
$25
$20
$15
$10
$5
$0
$ Billions, in 2000 $
$19.6
$16.3
ur
r
H
Te
rr
or
ist
A
tta
ck
s(
'0
.A
1)
nd
*
N
or
re
th
w
ri
('9
dg
2)
eE
q.
Ty
('9
4)
ph
.M
ire
ill
e
W
S
Da
ria
W
S
H
Lo
ur
th
r.
ar
H
M
ug
isc
o
St
('9
or
5)
m
s/F
lo
od
W
s
S
Vi
vi
an
Ty
ph
Ba
rt
$7.1 $6.1 $6.0 $5.8
$4.6 $4.2 $4.2
*III Estimate; Includes life, liability and workers compensation losses.
Source: Swiss Re, Insurance Information Institute.
What About the Next Attack?
Insurers Overexposed to
Terror Risk in 2002
Insurer Exposure to Terrorism
100%
•+/- 70% reinsurance treaties expired
12/31/01
80%
•+/- 30% expire 6/30/02
100% Reinsurance Treaty Coverage
Prior to Jan. 1, 2002
90%
70%
%
60%
50%
40%
30%
20%
10%
•Underlying policies renewed w/terror
exclusion gradually as they expire
UNREINSURED
EXPOSURE
Proportion of
Commercial Risks
With Terrorism
Coverage Included
in Basic Coverage
+/-70% Reinsurance Treaties
Expired 12/31/01
+/-30% Reinsurance Treaty
Coverage 1/1/02 – 6/30/02
UNREINSURED
EXPOSURE
0% Thereafter
Source: Insurance Information Institute
* Excludes workers comp, which will carry no terrorism exclusion.
-0
2
ec
D
No
v02
O
ct
-0
2
p02
Se
Au
g02
Ju
l-0
2
Ju
n02
M
ay
-0
2
r-0
2
Ap
M
ar
-0
2
b02
Fe
n02
Ja
.0
ec
D
No
v.
0
1
1
0%
GAO Report: Highlights
Economic Vulnerabilities
•
•
GAO Report Released February 27, 2002
Major Findings:www.house.gov/financialservices/022702t2.htm
1. Insurers Shifting Terrorism Risk to Property
Owners/Businesses


Reinsurers withdrawing from market for terrorism
Primary insurers excluding coverage as their exposure increases
2. As Business Exposure to Uninsured Risks Rise, so do Potential
Economic Consequences

•
Economic consequences from next attack could be more severe
3. Potential Economic Consequences of Not Having Terrorism
Insurance are Cause for Concern
Conclusions
 Congressional action is “properly a matter of public policy”
 Consequences of inaction are “may be real and potentially large”


“A decision not to act could have debilitating financial consequences for
for businesses…their employees, lenders, suppliers, and customers.”
Government will face difficulties if it waits to act after an attack: “difficult
to implements quickly—and extremely expensive.”
Commercial Real Estate:
Value at Risk*
TOTAL = $10.6 Trillion
Without terror bill more of this risk will be shifted
to business/property owners
Inventory
13%
$3.70
Trillion
$1.40
Trillion
$5.53
Trillion
Equipment &
Software
35%
*As of 12/31/2000; Excludes residential real estate.
Source: Morgan Stanley, FDIC, Federal Reserve; Insurance Information Institute.
Replacement
Cost of
Structures
52%
Commercial Real Estate Debt:
Debt at Risk*
TOTAL = $8.2
Trillion
Industrial
Loans
Without terror bill
13%
more of this risk
$1.08
will be shifted to
Trillion
commercial
lenders/landlords
Lease
Receivables
($0.17 Tr)
2%
$6.94
Trillion
*As of 12/31/2000; Excludes residential real estate.
Source: Morgan Stanley, FDIC, Federal Reserve; Insurance Information Institute.
Real Estate/
Mortagage
Loans
85%
A Federal Backstop for Insuring
the Peril of Terrorism
• Industry Proposal: Pool (similar to Pool Re in U.K.)
 Called for creation of pool that would receive premiums
for terrorist act coverage and pay losses
 Fed steps in only as pool becomes depleted
 STATUS = DEAD
• Administration Proposal: Quota Share
 3-yr plan (then sunsets)
 2002: 80% Fed, 20% Private; ret./sharing above $10B…
– $12B max industry exposure
 2003: $10B insurer retention; 50/50 sharing… ($23B max)
 2004: $20 B insurer retention; 50/50 sharing… ($36B max)
 Attacked by critics on left and right
 STATUS = DEAD
Source: Insurance Information Institute
A Federal Backstop for Insuring
the Peril of Terrorism
• Capitol Hill—SENATE (Banking Committee)
 2-yr plan (White House approval for 1-year extension)
 Industry retains first $10 billion in terror losses
 90% fed share above $10B, 10% industry
 NO BILL PASSED IN 2001
• Capitol Hill—HOUSE (H.R. 3210, passed Nov. 29)
 3-year loan guarantee program
 Industrywide losses must exceed $1B, or
 industrywide losses exceed $100 million and those losses exceed
10% of surplus and 10% of net premium written of an individual
commercial carrier.
 Criticized by industry for complexity of loan repayment/
assessment formula; some view triggers as too high.
Congress recessed Dec. 21 w/o bill for President.
• President spoke on issue April 8 w/business, labor
leaders; Cited construction slowdown
• Possible bill by Memorial Day??
Insurance Information
Institute On-Line
If you would like a copy of this presentation, please
give me your business card with e-mail address