Transcript No Slide Title

What Really Keeps Insurance CEOs
Awake at Night?
Tillinghast Actuarial Conference
Orlando, FL
October 2, 2002
Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: (212) 346-5520  Fax: (212) 732-1916  [email protected]  www.iii.org
#10
THE ECONOMY
Real GDP Growth
Economy is experiencing
sluggish growth following the
recession of 2001
10%
9%
8.3%
8%
(first recession since 1990/91)
7%
6%
5%
4%
3%
2%
5.7%
4.4%
3.5%
2.5%
5.6%
4.8%
5.0%
2.7%
2.2%
1.0%
3.2%
2.3%
1.1%
1%
0%
-1%
19
98
19
99
19 :I
99
19 :II
99
19 :III
99
:IV
20
00
20 :I
00
20 :II
00
20 :III
00
:IV
20
01
20 :I
01
20 :II
01
20 :III
01
:IV
20
02
20 :I
02
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2 0 II
02
E
20
03
F
-2%
-0.6% -0.3%
-1.6%
Source: US Department of Commerce, Blue Economic Indicators 9/02, Insurance Information Institute.
Unemployment Rate (%)
Unemployment
8.0
7.5
7.5
Despite the economic slowdown, the
unemployment rate is less than it was
during the recession of 1990/91
6.9
6.8
7.0
6.5
6.0
6.1
5.6
5.6
5.7
5.4
5.5
4.9
5.0
4.8
4.5
4.2 4.0
4.5
4.0
3.5
3.0
90
91
92
93
94
95
96
97
98
99
00
Source: US Bureau of Labor Statistics; Insurance Information Institute.
01 Aug
'02
8.1%
8.1%
7.3%
4.9%
6.1%
8.4%
5.9%
6.6%
12.7%
0.2%
1.3%
5%
2.5%
4.8%
6.8%
10%
8.0%
10.1%
15%
2.1%
5.2%
Health care inflation is affecting the
cost of medical care, no matter what
system it is delivered through
11.2%
11.0%
Med Claim Costs Rising Sharply
01
P
00
99
98
97
96
Source: NCCI; William M. Mercer, Insurance Information Institute.
WC
02
E
-1.1%
Health Benefit Costs
95
93
92
91
-5%
94
-2.1%
0%
126
100
177
52
69
150
15
50
-350
-255
-290
-300
-269
-250
-111
-145
-164
-222
-200
-203
-150
-157
-100
-108
-50
-39
-22
0
90 91 92 93 95 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
*FY1990-2001 actual values; FY2002-2010 are CBO forecasts.
Source: Congressional Budget Office, Insurance Information Institute.
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
-1.5%
-2.0%
-2.5%
-3.0%
-3.5%
-4.0%
-4.5%
-5.0%
% GDP
Employment (Millions)
% GDP
88
Deficit/Surplus
200
127
250
133
236
U.S. Federal Budget Deficit/Surplus
FY1990-2010*
Impact of Recession on P/C Premiums
and Profitability (1970-2001)
14%
Recession Years (1970; 74-75; 80-82; 90-91;2001)
12%
Non-Recession Years (all other years, 1970-2001)
10%
8%
6%
11.4%
9.0%
8.6%
7.5%
9.6%
6.8%
5.7%
4.1%
4.6%
4.3%
4.6%
ROE--All
Industries*
ROE--Banks*
4.2%
4%
2%
0%
-0.4%
-2%
-1.8%
-4%
Inflation (CPI) NWP Growth
(unadj.)
Real NWP
Growth
ROE--P/C
Insurers*
*GAAP return on equity, adjusted for inflation; Bank data 1952-2001; Div. Fin. 1987-2001
Source: Insurance Information Institute
ROE-Diversified
Financial*
#9
CRISIS IN
CORPORATE
GOVERNANCE
Serious Implications for Insurers
• Insurers exposed to a wide variety of risks:
Investment risk (as institutional investors)
Insurance risk (surety, D&O, E&O, etc.)
Litigation risk (as both plaintiff & defendant)
Accounting Risk
Regulatory risk
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.
Institutional Investor Market in
Corporate Equities
by Market Value of Holdings, as of December 31, 2001
Insurers
$1,120.4
15%
State & Local
Gov't
Retirement
Plans
$1,215.7
16%
All Others
Total:
$459.5
6%
Mutual Funds
$2,836.8
38%
$7,534.7 billion
We’re big enough: Should
we cut our losses and run or
throw the bums out?
Private
Pension Funds
$1,902.3
25%
Source: Insurance Information Institute from Federal Reserve Flow of Funds Report
In Billions
Insurance Industry Stock
and Bond Holdings, 2001
Total Industry Holdings = $3.3 Trillion
$1,800
$1,600
Total $1531
Life
P/C $194
Life $1,337
$1,400
P/C
Total $1120
$1,200
P/C $185
Life $935
$1,000
$800
Total $438
$600
Total $209
$400
P/C $188
Life $21
$200
P/C $131
Life $307
$0
Corporate
Bonds
Corporate
Stocks
Source: Federal Reserve Flow of Funds Report as of Dec. 31, 2001.
State/Local
Bonds
U.S. Gov't Bonds
#8
CONSOLIDATION
$180
Number of M&As was down
39.4% during the first half of
2002 vs. first half 2001.
$160
Value of deals was down 80.8%.
$140
None of the top deals were in the
P/C sector
$120
468
349
1998: 565 deals
valued at $165.4 B
433
382
400
300
300
243 246
171 188
$60
221
56.2
149
55.7
41.7
40.8
$40
$20
500
295
$100
$80
600
200
41.5 109
27.0
100
7.1 6.9 8.6 5.0 8.5 12.5
6.6
$0
0
89
90
91
92
93
94
Value of Deals
95
96
97
98
99
Number of Deals
Source: Compiled from Conning & Company reports.
00
01
02*
Number of M & As
Value of M & As ($Billions)
Insurance Mergers and
Acquisitions
#7
INVESTMENTS
Net Investment Income
$45
Billions
(US$)
$36
Investment income in 2002
could fall 5% to 6%
Realized capital gains in the
1st half of 2002 were down
$5.9B
$27
Facts
1997 Peak = $41.5B
$18
2000= $40.7B
2001 = $37.7B
$9
2002E = $35.7B
$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
Source: A.M. Best, Insurance Information Institute
Total Returns for Large
Company Stocks: 1970-2002*
40%
30%
20%
10%
0%
-10%
Headed for 3rd consecutive year of decline for stocks
-20%
Last happened 1939-1941
Large Company Stocks
*As of September 20, 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%
#6
ABUSE OF THE
TORT SYSTEM
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
$0
Overall
Business
Negligence
Source: Jury Verdict Research; Insurance Information Institute.
Medical
Malpractice
Wrongful
Death
Products
Liability
Cost of U.S. Tort System
($ Billions)
Tort costs consumed 2.0% of GDP annually on average since 1990,
$350 expected to rise to 2.4% of GDP by 2005!
$298
$300
Tort costs equaled $636 per person in 2000!
$250
Expected to rise to $1,000 by 2005
$198 $204
$200
$150
$129 $130
$141 $144 $148
$159 $156 $156
$179
$167 $169
$100
$50
$0
90
91
92
93
94
95
96
97
98
99
Source: Tillinghast-Towers Perrin; Insurance Information Institute estimates for
2001/2002 assume tort costs equal to 2% of GDP. 2005 forecasts from Tillinghast.
00
01* 02E* 05F
#5
TERRORISM
Sept. 11 Industry Loss Estimates
($ Billions)
Property WTC 1 & 2
$3.5 (9%)
Other
Liability
$10.0 (25%)
Life
$2.7 (7%)
Aviation
Liability
$3.5 (9%)
Event
Cancellation
$1.0 (2%)
Workers
Comp
Aviation Hull
$2.0 (5%)
$0.5 (1%)
Property Other
$6.0 (15%)
Biz
Interruption
$11.0 (27%)
Consensus Insured Losses Estimate: $40.2B
Source: Insurance Information Institute
Insured Loss Estimates
(updated through September 13, 2002)
3500
2500
NOTES:
*Includes $474 mil for American Re
2,
44
2, 2
40
0
2,
31
6
3000
2,
91
3
$ Millions
Top 20 Groups (pre-tax, net of reinsurance, $ millions)
**Includes $289 mil for Converium
***Insurer is bankrupt
96
0
95
2
94
1
90
0
84
0
82
0
76
9
67
7
65
0
64
5
60
6
60
0
55
0
46
8
46
2
44
0
41
2
40
0
1500
1,
32
3
2000
1000
500
Source: Morgan Stanley, Insurance Information Institute as of September 13, 2002.
CN
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Mu
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ING
Roy
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Sun
Par
tner
Re
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Axa
gro
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Har
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AC
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Tai
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Citi
AIG
Aio
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Zur
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Llo
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#5
ASBESTOS
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
Non-Malignant Asbestos Claimants
File Most Claims, Get Most $$$
DISTRIBUTION OF CLAIMS
ALLOCATION OF COMPENSATION
1991-2000
1991-2000
Lung &
Other
Cancers
7%
Mesothelioma
3%
Nonmalignant
90%
Source: RAND, Tillinghast-Towers Perrin
Lung &
Other
Cancers
18%
Mesothelioma
17%
Nonmalignant
65%
Who Will Pay for the
US Asbestos Mess?
Estimated Total US Settlements & Expenses = $200 billion
Asbestos
Defendants
39%
US Insurers
30%
$78 billion
$60 billion
$62 billion
Source: Tillinghast-Towers Perrin; Insurance Information Institute
Foreign
Insurers
31%
#4
CAPACITY
Policyholder Surplus:
1975-2002*
Billions
(US$)
$350
Surplus Peaked at $336.3 Billion in 1999
$300
•Surplus decreased 8.7% in 2001 to $289.6
Billion.
$250
•Surplus fell 2.3% in the 1st half of 2002
$200
•Surplus is now lower than at year-end 1997.
$150
“Surplus” is a measure of
underwriting capacity. It is
analogous to “Owners
Equity” or “Net Worth” in
non-insurance organizations
$100
$50
$0
75
77
79
81
83
85
87
*As of June 30, 2002
Source: A.M. Best, Insurance Information Institute
89
91
93
95
97
99
01
Capital Raising by P/C Insurers
Since September 11, 2001*
Capital Raising by P/C Insurers Since 9/11 Totals $53.2B
$30,000
$27.9 Billion
$25.4 Billion
$25,000
14 Pending
($ Millions)
$4,872
38 Pending
$20,000
$16,437
$15,000
$10,000
$20,492
40 Completed
33 Completed
$11,442
$5,000
$0
2002*
2001
Completed
*As of September 13, 2002.
Source: Morgan Stanley, Insurance Information Institute.
Pending
#3
PRICING
Cost of Risk per $1,000 of
Revenues: 1990-2002E
•Cost of risk to
corporations fell 42%
between 1992 and
2000
$10
$9
$8
$7
•Estimated 15%
increase in 2001,
30% in 2002
$8.30
$7.70
$7.30
• About half of 2002
increase due to 9/11
$6.49
$6.40
$6.10
$5.70
$6
$7.22
$5.71
$5.55
$5.25
$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.
CIAB Rate Survey
Second Quarter 2002
Rate Increases By Line of Business
No
Change Up 1-10%
10-20%
20-30%
30-50%
50%-100%
>100%
Comm. Auto
2%
6%
28%
39%
21%
1%
1%
Workers Comp
5%
13%
19%
32%
15%
5%
2%
General Liability
2%
9%
24%
45%
15%
2%
1%
Comm. Umbrella
2%
4%
10%
20%
27%
17%
16%
Comm. Property
3%
4%
16%
30%
31%
13%
1%
Business Interr.
3%
8%
32%
33%
10%
1%
0%
Surety Bonds
10%
13%
16%
14%
6%
0%
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*
#2
UNDERWRITING
Underwriting Gain (Loss)
1975-2002*
$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
2002
($60)
*Annualized estimate based on first half 2002 data.
Source: A.M. Best, Insurance Information Institute
Combined Ratio:
Reinsurance vs. P/C Industry
170
All Lines Combined Ratio
162.5
Reinsurance
2001’s combined ratio was the
worst-ever for reinsurers
160
150
105.0
117.4
115.7
106.5
110.0
114.3
107.7
100.5
105.6
100.8
101.6
104.8
105.8
106.5
119.2
113.6
108.5
110
105.0
106.9
120
110.5
108.8
130
115.8
126.5
140
100
90
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001 2002*
*First Quarter 2002 figures.
Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
World’s Most Dangerous Lines of Insurance
(Combined Ratio + 1 Std. Deviation)
Earthquake
Med Mal
Other Liability
Reinsurance
Homeowners
Allied Lines
Aircraft
Comm. Multi Peril
Comm. Auto Liab.
Workers Comp
Farm Multi Peril
Commercial--All
Ocean Marine
Fire
All Lines
PP Auto Liab
Personal--All Lines
Comm Auto PD
Boiler & Machine
Group A&H
Other A&H
Priv Pass PD
Inland Marine
Fidelity
Other
Surety
Burglary & Theft
407.3
135.6
135.1
133.9
133.3
131.6
129.3
121.8
119.3
118.7
117.1
116.3
115.1
114.6
112.9
111
109.7
109.1
107
106.6
103.4
102.9
101.7
101.3
100
84.1
80
90
100
110
120
130
140
Source: Insurance Information Institute, calculated from A.M. Best combined ratio data.
150
#1
PROFITS
ROE: P/C vs. All Industries
1987–2002*
20%
15%
10%
5%
0%
US P/C Insurers
All US Industries
*2002 figures are estimates; p/c figure based on first-half 2002 data.
Source: Insurance Information Institute; Fortune
2002
*
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
-5%
P/C Net Income After Taxes
1991-2002 ($ Millions)
2001 was the first year ever
with a full year net loss
$40,000
$35,000
$36,819
2002 First Half ROE = 3.3%
$30,773
$30,000
$24,404
$20,598
$25,000
$19,316
$20,000
$15,000
$21,865
$20,223
$14,178
$10,870
$10,000
$9,278
$5,840
$5,000
$0
-$5,000
-$10,000
-$7,921
91
92
93
94
95
96
*I.I.I. estimate based on first half 2002 data.
Sources: A.M. Best, ISO, Insurance Information Institute.
97
98
99
00
01
02*
ROE vs. Cost of Capital:
US Non-Life 1991 – 2002
There is an enormous gap
between the industry’s cost of
capital and its rate of return
20%
15%
5%
7.9. pts
14.6 pts
10%
US P/C insurers have missed
their cost of capital by an
average 6.7 points since 1991
0%
Source: The Geneva Association, Ins. Information Inst.
ROE
20
02
20
01
20
00
19
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
-5%
Cost of Capital
Insurance Information
Institute On-Line
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