Transcript P6466 - iii Template

Briefing on the Property/Casualty
Insurance Industry:
Function and Financial Overview
Maryland Economic Matters Committee
Maryland House of Delegates
Annapolis, MD
January 29, 2015
Robert P. Hartwig, Ph.D., CPCU, President & Economist
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: 212.346.5520  Cell: 917.453.1885  [email protected]  www.iii.org
Presentation Outline
The Structure of the Property/Casualty Insurance
Industry
 Organizational & Marketing Structure of Insurers
 Facts about the P/C Insurance Industry
How Property/Casualty Insurance Works
 Insurance Cycles
 Drivers of, and Importance of, Profits
P/C Insurance: Performance Overview
Structure Overview of the P/C
Insurance Industry
Very Diverse, Competitive &
Innovative Industry
3
How Many? What Types?
 2,718 P/C insurance companies in US in 2013*
 These 2,718 companies consolidate to 1,266 groups
 Some larger insurance groups have dozens of subsidiaries
 Baltimore Equitable is the 3rd oldest insurer in the US, est. in 1794
(George Washington was its president!)
 Most insurers are small, operate regionally
 A highly competitive business in most
areas and for most types of coverage
 Lines of Business
 Personal, Commercial, Multi-Line
Maryland in 2013
• 820 insurers wrote $9.95B
in P/C premiums in MD
• 132 wrote pvt. pass. auto
• 158 wrote homeowners
• 284 wrote workers comp
 Primary vs. Reinsurance
*Best’s Aggregates and Averages, Property/Casualty, 2014 Edition, p. 2.
What is Reinsurance?
Reinsurance is insurance for insurance companies
Essential to helping spread risk globally
 Very important in CAT risk
 Critical for liability coverages, especially when large
awards or settlements are possible
 Stabilizes results of, and expands capacity of primary
insurers
 Especially important to smaller companies but used by all
 Supplemented by “alternative” market which includes
structures such as Catastrophe Bonds
Organizational Structure of Insurers
 Shareholder-owned (Stock) insurers: 776 organizations
 Policyholder-owned insurers
 Mutual companies: 397 organizations
 Reciprocals: 70 organizations
 Business-owned insurers
 Captive: Insurance subsidiary wholly owned by a single company whose
primary business is not insurance
 Risk Retention Groups: Businesses (or other organizations) in same/similar
industry form and own an insurer
 Self-Insurance: assumption of its own risk by a business
 Government-owned insurers: ~20 organizations
 “Partner”-owned insurers: (Lloyds): 11 US organizations
Federal Government Insurance Programs
Where Government Bears Risk
 Flood: National Flood Insurance Program
 HO and most commercial policies exclude flood
 Crop: National Crop Insurance Program
 Available for virtually all perils on most crops
 Basically a federal subsidy to farmers
 Nuclear: Price-Anderson Act
 Insures nuclear power facilities
 Terrorism: Terrorism Risk Insurance Act (TRIA)
 Just reauthorized for 6 years through 12/31/20
 Political Risk: Overseas Private Investment Corporation
 Pensions: Pension Benefit Guarantee Corporation
Differences in Focus and Strategy
Among Insurers
 Personal Lines (many also sell Life)
 Sells only/mostly auto and homeowners insurance
 Examples: State Farm, Allstate, USAA
 Commercial Lines (some sell Life)
 Sells only/mostly business insurance
 Examples : AIG, CNA, ACE
 Multi-Line (many also sell Life)
 Sells many different types of insurance
 Examples : Hartford, Liberty Mutual, Travelers
 Mono-Line
 Sells only 1 type of insurance
 Examples: GEICO, Progressive, Zenith
Why Do Strategies Differ?
 Some insurers believe that specializing yields certain
advantages:
 Underwriting edge/experience
 Price advantage since can keep expenses low
 Customer loyalty
 Some emphasize wide range of products
 One brand for many customer needs
 Product/customer diversification as a business strategy
 Some emphasize price
 Some emphasize quality (e.g., service, claims approach)
over price
 Some emphasize long-term financial strength
 Distribution strategies may vary
What Determines in Which Markets an
Insurer Operates?
 Most insurers started as a regional/niche “player”
 E.g., note “Farm” in many insurance company names
 Note geographic reference in many company names
 Note special nature of risk in name (Church Mutual)
 Some have local reputations—and do little advertising
 Risk Appetite
 Different insurers are willing/able to accept varying amounts of
CAT exposure (may depend on capitalization, expertise, etc.)
 Some insurers specialize in certain industries
 E.g., Aviation, marine, energy, medical malpractice
What Determines in Which Markets an
Insurer Operates? (cont’d)
Tort Environment
Regulatory Environment
If viewed as onerous, rigid, capricious, unfair, hostile,
or confiscatory, fewer insurers participate
Size of Market
Growth Opportunities/Demographics
Synergies with Other Types of Products Offered
How Is Insurance Regulated?
States Remain the Principal Regulator of Insurers in
the Wake of Dodd-Frank
 Solvency, rate & form approval, licensing, product
approval, consumer protection and education
A Small Number of Insurers Have Received
“Systemically Important Financial Institution” (SIFI)
Designations
 Their ultimate regulator is the Federal Reserve and
are subject to more stringent capital requirements
Federal Insurance Office (FIO) Is Not a Regulatory
Agency
The P/C Insurance Industry
(as of year-end 2013)
$467.9 billion in Earned Premiums
 About 51% personal lines, 49% commercial
 An “earned premium” is a premium dollar for which
insurance coverage has already been provided
$1.5 trillion in assets (compared to $3.5 trillion for
life insurers)
$663.3 billion in Policyholder Surplus (in other
industries, this would be called “Net Worth”)
 Surplus is a primary measure of claims-paying ability
because it is assets in excess of known obligations
Economic Facts About the Insurance
Industry in Maryland
 Employment
 Insurers employed 47,930 people in Maryland in 2013
 Generated $3.7 billion in payroll
 Gross State Product
 Insurers contributed $7.2 billion to Maryland GSP in 2012, accounting
for 2.15% of total state GSP
 Taxes
 Premium taxes alone totaled $429.4 million in 2013
 Claims Payouts
 P/C insurers paid (or incurred) claims totaling $5.6 billion in 2
 L/H claims and benefits paid totaled $8.7
Characteristics of the P/C
Insurance Industry
Cyclical and Sometimes Volatile, but
Financially Conservative & Strong
15
Profitability Peaks & Troughs in the P/C
Insurance Industry, 1975 – 2016F
ROE
25%
1977:19.0%
1987:17.3%
20%
1997:11.6%
2006:12.7%
2013
10.4%
15%
9 Years
2015F=6.5%
2016F=6.3%
10%
5%
2014E
7.6%
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
07
08
09
10
11
12
13
14
15F
16F
-5%
*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude
mortgage and financial guaranty insurers.
Source: Insurance Information Institute; NAIC, ISO, A.M. Best, Conning
ROE: Property/Casualty Insurance by
Major Event, 1987–2014E
(Percent)
20%
P/C Profitability Is Impacted by Both
Cyclicality and Ordinary Volatility
Modestly
higher
CATs
Katrina,
Rita, Wilma
Low
CATs
15%
10%
Sept. 11
5%
0%
Hugo
Lowest CAT
Losses in
15 Years
Andrew
4 Hurricanes
Northridge
Financial
Crisis*
Sandy
Record
Tornado
Losses
-5%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*
* Excludes Mortgage & Financial Guarantee in 2008 – 2014. 2014 figure is through Q3:2014.
Sources: ISO, Fortune; Insurance Information Institute.
17
Back to the Future: Profitability Peaks & Troughs
in the P/C Insurance Industry, 1950 – 2014*
1970-90: Peak ROEs were much
higher in this period while troughs
were comparable. High interest
rates, rapid inflation, economic
volatility all played roles
ROE
1950-70: ROEs were lower in
this period. Low interest rates,
low inflation, “Bureau” rate
regulation all played a role
25%
1990-2010s: Déjà vu.
Excluding megaCATs, this period is
very similar to the
1950-1970 period
1977:19.0%
20%
1987:17.3%
2006:12.7%
1972:13.7%
1997:11.6%
15%
2013
10.4%
1950:8.0%
10%
1959:6.8%
1966-67:
5.5%
5%
2014:H1
7.6%
1969: 3.9%
1992: 4.5%
*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude
mortgage and financial guaranty insurers. 2014 figure is through Q3.
Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
14E
12
10
08
06
04
02
00
98
96
94
2001: -1.2%
92
90
88
86
84
82
80
78
76
74
72
70
68
66
64
60
58
56
54
52
50
-5%
1984: 1.8%
1975: 2.4%
1965: 2.2%
1957: 1.8%
62
0%
RNW All Lines by State, 2004-2013 Average:
Highest 25 States
9.5
9.6
9.8
9.8
9.9
10.3
10.5
10.5
10.7
10.7
10.8
10.9
11.1
11.1
11.4
11.7
12.0
12.0
12.1
12.3
13.3
13.4
14.3
14.6
18.4
20.5
24
22
20
18
16
14
12
10
8
6
4
2
0
The most profitable states
over the past decade are
widely distributed
geographically, though none
are in the Gulf region
HI AK VT ME WY ND VA ID NH UT WA SC MA NC OH DC CA OR RI WV CT IA NE SD MT MD
Source: NAIC; Insurance Information Institute.
19
NM FL TX WI KS MN CO PA AR
Source: NAIC; Insurance Information Institute.
IL
-9.3
-6.9
Some of the least
profitable states over the
past decade were hit hard
by catastrophes
1.9
2.5
4.3
5.0
5.2
5.3
5.7
6.1
6.4
6.6
6.8
7.4
7.5
7.7
7.7
8.0
8.1
8.2
8.2
8.3
8.4
8.6
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
9.2
RNW All Lines by State, 2004-2013 Average:
Lowest 25 States
IN AZ MO KY TN NV NJ GA NY DE MI AL OK MS LA
20
Three Key Drivers of Profits
 Underwriting Results – Insurance operations

Companies sometimes lose money on insurance
operations, especially from catastrophic losses
 Investment Results – Earned on money held until
needed for claims or expenses
 Adequacy of Reserves and Capital/Surplus –

Reserves -- assets dedicated to known/expected claims

Capital/surplus -- assets dedicated to
unknown/unexpected claims

Insurers may need to use profits to strengthen reserves
and/or build surplus
U.S. Insured Catastrophe
Loss Update
2014 Experiencing Below Average CAT
Activity Following a Welcome Respite in
2013 from Very High CAT Losses in 2011/12
22
U.S. Insured Catastrophe Losses
$74.5
($ Billions, $ 2013)
$80
$70
2012 was the 3rd most
expensive year ever for
insured CAT losses
$15.3
$12.9
$35.5
$34.1
$14.6
$11.6
$29.6
$7.6
$10.7
$16.5
$7.7
$34.2
$35.2
$6.2
$11.7
$14.5
$11.1
$12.8
$3.8
$10
$8.1
$20
$4.9
$30
$14.2
$40
$8.9
$50
$26.8
$38.3
$60
$0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14E
2013 Was a Welcome Respite from 2012, the 3rd
Costliest Year for Insured Disaster Losses in US
History. Longer-term Trend is for more—not
fewer—Costly Events
$15.3 billion in
insured CAT
losses estimated
for 2014
*Through 12/31/14.
Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property
claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.)
Sources: Property Claims Service/ISO; Insurance Information Institute.
23
23
Inflation Adjusted U.S. Catastrophe
Losses by Cause of Loss, 1994–20131
Wind/Hail/Flood (3), $14.6
Fires (4), $5.5
Other (5), $0.2
1.4%
Geological Events, $18.4
4.8% 3.8%0.1%
Terrorism, $24.8
6.4%
Winter Storms, $24.7
6.4%
Tornado share of
CAT losses is
rising
Events Involving
Tornadoes (2), $139.3
Insured cat losses
from 1993-2012
totaled $386.7B, an
average of $19.3B
per year or $1.6B
per month
41.1%
Hurricanes & Tropical Storms,
$159.1
36.0%
Wind losses are by
far cause the most
catastrophe losses,
even if hurricanes/TS
are excluded.
1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2013 dollars.
2. Excludes snow.
3. Does not include NFIP flood losses
4. Includes wildland fires
5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.
Source: ISO’s Property Claim Services Unit.
24
Top 16 Most Costly Disasters
in U.S. History
(Insured Losses, 2013 Dollars, $ Billions)
Superstorm Sandy in
2012 was the last
mega-CAT to hit the
US
$60
$50
$49.4
$40
$30
Includes
Tuscaloosa, AL,
tornado
Includes
Joplin, MO,
tornado
$24.2 $24.9 $25.9
$19.0
$20
$10
$0
$9.3 $11.2
$8.8
$7.9
$7.6
$7.2
$6.8
$4.5 $5.6 $5.7
Irene (2011) Jeanne
(2004)
Frances
(2004)
Rita
Tornadoes/Tornadoes/ Hugo
(2005) T-Storms T-Storms
(1989)
(2011)
(2011)
Ivan
(2004)
Charley
(2004)
Wilma
(2005)
$13.6
Ike
(2008)
Sandy* Northridge9/11 Attack Andrew
(2012)
(1994)
(2001)
(1992)
Katrina
(2005)
12 of the 16 Most Expensive
Events in US History Have
Occurred Over the Past Decade
Sources: PCS; Insurance Information Institute inflation adjustments to 2013 dollars using the CPI.
25
Total Value of Insured Coastal Exposure
in 2012
(2012, $ Billions)
New York
$2,923.1
$2,862.3
Florida
Texas
$1,175.3
Massachusetts
$849.6
$713.9
New Jersey
Connecticut
$567.8
Louisiana
$293.5
$239.3
S. Carolina
Virginia
$182.3
In 2012, New York Ranked as the #1 Most
Maine
$164.6
Exposed State to Hurricane Loss, Overtaking Florida
$163.5
North Carolina
with $2.862 Trillion. Texas is very exposed too, and
Alabama
$118.2
ranked #3 with $1.175 Trillion
Georgia
$106.7
in insured coastal exposure
$81.9
Delaware
New Hampshire $64.0
The Insured Value of All Coastal Property Was $10.6
Mississippi $60.6
Trillion in 2012 , Up 20% from $8.9 Trillion in 2007 and
Rhode Island $58.3
Up 48% from $7.2 Trillion in 2004
Maryland $17.3
MD =
$17.3B
Source: AIR Worldwide
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
26
I.I.I. Poll: Homes Near Hazards
Q. If you were to purchase a home today, which of the following summarizes your views
on that home’s risk of damage from natural disasters . . . and your decision to purchase
that home?
Don’t Know
Willing to
Accept Risk
3%
17%
Risk Not a Major
Consideration
28%
53%
Risk a
Significant
Influence
on
Purchase
More Than Half of the Public Would Be Significantly Influenced by
Risk of Damage from Natural Disasters. Close to a Third Do Not
Regard Such a Risk To Be a Major Consideration.
Source: Insurance Information Institute Annual Pulse Survey.
27
Number of Federal Major Disaster
Declarations, 1953-2014*
99
81
75
55
54
47
59
63
48
52
56
44
32
36
32
38
43
45
11
31
34
24
21
15
23
22
25
27
28
23
38
30
29
17
17
19
11
11
22
20
25
25
12
12
54 federal disasters were
declared in 2014*
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
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
07
08
09
10
11
12
13
14
7
7
13
17
18
16
16
40
0
42
48
46
46
60
20
69
65
80
The number of federal disaster
declarations set a new record in
2011, with 99, shattering 2010’s
record 81 declarations.
50
45
45
49
100
There have been 2,180
federal disaster
declarations since
1953. The average
number of declarations
per year is 35 from
1953-2013, though
there few haven’t been
recorded since 1995.
75
120
The Number of Federal Disaster Declarations Is Rising and Set New Records
in 2010 and 2011 Before Dropping in 2012-2014
*Through December 31, 2014.
Source: Federal Emergency Management Administration; http://www.fema.gov/disasters; Insurance Information Institute.
29
Federal Disasters Declarations by State,
1953 – 2014: Highest 25 States*
Over the past 60 years,
Texas has had the highest
number of Federal Disaster
Declarations
75
45
47
49
47
43
40
40
50
51
51
51
53
53
50
50
53
55
56
56
57
58
60
60
67
70
69
Disaster Declarations
80
80
90
88
100
30
20
10
0
TX CA OK NY FL LA AL KY AR MO IA
IL MS TN WV MN NE KS PA WA OH VA ND SD ME
*Through December 31, 2014. Includes Puerto Rico and the District of Columbia.
Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.
30
Federal Disasters Declarations by State,
1953 – 2014: Lowest 25 States*
Over the past 60 years,
Wyoming and Rhode
Island had the fewest
number of Federal
Disaster Declarations
11
11
13
15
17
9
10
17
22
23
24
25
25
26
27
28
28
29
33
35
38
38
40
19
20
29
30
37
Disaster Declarations
40
40
43
50
0
NC AK IN GA VT WI NJ NH MA OR HI NM MI PR MD MT AZ ID CO CT NV SC DE DC UT RI WY
*Through December 31, 2014. Includes Puerto Rico and the District of Columbia.
Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.
31
GROWTH & CAPACITY
P/C Insurance Industry Is Growing
Modestly and Capacity Is
Increasing
32
Net Premium Growth: Annual Change,
1971—2016F
(Percent)
1975-78
1984-87
25%
2000-03
Net Written Premiums Fell
0.7% in 2007 (First Decline
Since 1943) by 2.0% in 2008,
and 4.2% in 2009, the First 3Year Decline Since 1930-33.
20%
2015-16F:
4.0%
15%
2014E: 3.9%*
2013: 4.6%
10%
2012: +4.3%
5%
0%
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
08
09
10
11
12
13
14
15F
14F
-5%
*Actual figure based on data through Q3 2014.
Shaded areas denote “hard market” periods
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
33
Direct Premiums Written: Total P/C
Percent Change by State, 2007-2013
Top 25 States
74.6
80
North Dakota was the country’s
growth leader over the past 6
years with premiums written
expanding by 74.6%, fueled by
the state’s energy boom
60
16.6
15.9
15.7
14.5
14.5
14.3
12.6
11.9
11.8
11.2
10.5
10.3
9.9
9.8
9.3
9.1
9.0
8.6
TN
MN
AR
AK
IN
WI
CO
MI
KY
OH
NJ
LA
SC
VA
AL
MO
NM
22.2
TX
20
WY
22.5
24.9
IA
VT
25.2
KS
30
27.4
40
31.9
50
36.9
Pecent change (%)
70
NE
OK
SD
0
ND
10
Sources: SNL Financial LC.; Insurance Information Institute.
34
Direct Premiums Written: Total P/C
Percent Change by State, 2007-2013
Sources: SNL Financial LC.; Insurance Information Institute.
-15.3
DE
HI
WV
AZ
CA
MT
ID
NH
RI
IL
PA
WA
UT
MA
MD
NY
GA
NC
US
CT
-20
MS
-15
NV
-12.6
-6.7
Growth was negative in 7
states and DC between
2007 and 2013
-10
-5.7
-4.1
-1.9
DC
-0.7
-5
-1.7
0.4
OR
0
FL
1.0
ME
4.1
4.2
3.5
1.6
Pecent change (%)
5
5.3
5.6
5.9
6.2
6.9
7.0
7.3
7.6
7.8
7.9
8.2
10
8.5
Bottom 25 States
35
US Policyholder Surplus:
1975–2014*
($ Billions)
$750
$700
$650
$600
$550
$500
$450
$400
$350
$300
$250
$200
$150
$100
$50
$0
Surplus as of 9/30/14 was a record $673.9, up 3.2%
from $653.3 of 12/31/13, and up 53.6% ($234.5B)
from the crisis trough of $437.1B at 3/31/09
“Surplus” is a measure of
underwriting capacity. It is analogous
to “Owners Equity” or “Net Worth” in
non-insurance organizations
75 77
79 81 83
85 87 89 91
93 95 97
99 01 03
05 07 09 11
The Premium-to-Surplus Ratio Stood at $0.73:$1 as of
9/30/14, a Near Record Low (at Least in Recent History)
* As of 9/30/14.
Source: A.M. Best, ISO, Insurance Information Institute.
13
Catastrophe Bond Issuance and
Outstanding: 1997-2014
Risk Capital Amount ($ Millions)
2014 Has Seen the Largest Cat Bond Ever - $1.5 Billion (Florida Citizens).
Bond Issuance Set a Record.
Source: Guy Carpenter.
37
INVESTMENTS:
THE NEW REALITY
Investment Performance is a Key
Driver of Profitability
Depressed Yields Will Necessarily
Influence Underwriting & Pricing
38
Distribution of Invested Assets: P/C
Insurance Industry, 2013
$ Billions
All Other, 10%
Bonds, 62%
Cash, Cash Equiv. &
ST Investments, 6%
Stocks, 22%
Source: Insurance Information Institute Fact Book 2015, A.M. Best.
Total Invested
Assets = $1.5
Trillion
Property/Casualty Insurance Industry
Investment Income: 2000–20141
Investment earnings
are still below their
2007 pre-crisis peak
($ Billions)
$60
$54.6
$52.3
$50
$40
$51.2
$49.5
$49.2
$47.1 $47.6
$38.9
$38.7
$48.0 $47.4
$45.7
$39.6
$37.1 $36.7
$30
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14*
Due to persistently low interest rates,
investment income fell in 2012, 2013 and 2014.
1
Investment gains consist primarily of interest and stock dividends.
Sources: ISO; Insurance Information Institute.
*2014 figure is estimated based on annualized data through Q3.
U.S. Treasury Security Yields:
A Long Downward Trend, 1990–2014*
9%
Yields on 10-Year U.S. Treasury
Notes have been essentially
below 5% for a full decade.
8%
7%
6%
U.S. Treasury
yields plunged to
historic lows in
2013. Longerterm yields have
rebounded a bit.
5%
4%
3%
2%
1%
0%
Recession
2-Yr Yield
10-Yr Yield
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations,
most P/C insurer portfolios will have low-yielding bonds for years to come.
*Monthly, constant maturity, nominal rates, through Dec. 2014.
Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research
(recession dates); Insurance Information Institute.
41
Book Yield on Property/Casualty
Insurance Invested Assets, 2007–2016F
(Percent)
4.6
Book yield in 2014 is
down 114 BP from
pre-crisis levels
4.42
4.4
4.19
4.2
3.95
4.0
3.71
3.8
3.74
3.52
3.6
3.38
3.4
3.28
3.20
3.2
3.13
3.0
07
08
09
10
11
12
13
14E
15F
16F
The yield on invested assets continues to decline as returns on
maturing bonds generally still exceed new money yields. The end
of the Fed’s QE program in Oct. 2014 should allow some increase
in longer maturities while short term interest rate increases are
unlikely until mid-to-late 2015
Sources: Conning.
CYBER RISK &
CYBER INSURANCE
P/C Insurance Is an Innovative Industry
Cyber Insurance Is a Recent Example
43
Data Breaches 2005-2014, by Number of
Breaches and Records Exposed
# Data Breaches/Millions of Records Exposed
Millions
222.5
800
700
783
200
662
656
619
180
600
160
498
500
140
446127.7
419
447
87.9
400
66.9
120
85.6
321
35.7
157
100
80
300
200
220
60
16.2
19.1
22.9
40
17.3
20
100
0
2005
2006
2007
2008
2009
# Data Breaches
2010
2011
2012
2013
2014
# Records Exposed (Millions)
The Total Number of Data Breaches Rose 28% While the Number of
Records Exposed Was Relatively Flat (-2.6%)
44
* 2014 figures as of Jan. 12, 2014 from the ITRC.
Source: Identity Theft Resource Center.
Data/Privacy Breach:
Many Potential Costs Can Be Insured
Costs of
notifying
regulatory
authorities
Regulatory
fines at
home &
abroad
Costs of
notifying
affecting
individuals
Data
Breach
Event
Forensic costs
to discover
cause
Defense and
settlement
costs
Lost customers
and damaged
reputation
Cyber extortion
payments
Business
Income Loss
Source: Zurich Insurance; Insurance Information Institute
45
The Three Basic Elements of Cyber
Coverage: Prevention, Transfer, Response
Loss
Prevention
Loss
Transfer
(Insurance)
Post-Breach
Response
(Insurable)
Cyber risk management today involves
three essential components, each designed
to reduce, mitigate or avoid loss. An
increasing number of cyber risk products
offered by insurers today provide all three.
Source: Insurance Information Institute research.
46
I.I.I. Released its Second Cyber Report in
2014: Cyber Risk: The Growing Threat
 I.I.I.’s 2nd report on cyber risk
released June 2014
 Provides information on cyber
threats and insurance market
solutions
 Global cyber risk overview
 Quantification of threats by
type and industry
 Cyber security and cost of attacks
 Cyber terrorism
 Cyber liability
 Insurance market for cyber risk
 3rd Report in Q2 2015
47
Conclusion
The P/C insurance industry is highly competitive
It’s a highly cyclical/volatile business
The industry is financially very strong
Profitability depends not only on claims activity
but also investment returns and other factors
Many factors influence price (rate) and availability
 General & individual risk rating factors
 Nature of regulation has significant impact on
competition, consumer choice, and price
Q&A
49
Insurance Information Institute Online:
www.iii.org
Thank you for your time
and your attention!
Twitter: twitter.com/bob_hartwig
Download at www.iii.org/presentations
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