Transcript Casualty Actuarial Society 2002 Seminar on Ratemaking The Impact of Terrorism on the P&C Market Place March 7, 2002

Casualty Actuarial Society
2002 Seminar on Ratemaking
The Impact of Terrorism on the P&C Market Place
March 7, 2002
P&C Pricing Considerations
Net Premium Growth
6
6.1
5
4
5.0
4.4
4.4
3.7
3.2
3
3.6
3.4
2.8
2.4
2
2.3
2.0
1.9
1
0
88
89
90
91
92
93
94
95
96
97
98
99
00 (est.)
Underwriting vs. Investment Income
(US $B)
Investment Income
34.2 33.7
32.6 33.7
40
30
38.0
35.5
32.9
19.5
20
10
36.8
41.5
14.6
13.8
39.9 38.9
23.4
14.4
20.8
8.8
Pretax Operating Income
11.3
40.3
11.6
0
-2.5
-10
-18.1
-20.5
-20
-30
-40
-5.8
-17.7
-16.8
-16.7
-21.7
-22.1
Underwriting Gain/Loss
-23.1
-32.2
-36.7
90
91
92
93
94
95
96
97
98
99
00 (est.)
Consolidated P/C Industry Combined Ratio
120
115.7
115
110.3
110
109.6
108.5
107.8
105.8
108.8
105
100
106.9
90
91
92
93
106.5
94
95
101.6
96
97
105.6
98
99
00 (est.)
110
70
50
30
115
109
117
114
118
119
116
130
134
130
101
104
109
107
108
104
97
102
96
100
103
104
90
108
115
118
120
118
112
Combined Ratios by Coverage Line
1998
1999
2000 (estimate)
Workers’ Compensation Accident Year 2000
Combined Ratio Near Highest Ever
140
130
120
110
100
90
Calendar Year
Accident Year
2000P
1999
1998
1997
1996
1995
1994
1993
1992
1991
80
Calendar Year vs. Ultimate Accident
Year Countrywide-Private Carriers
Impact of Catastrophe Losses on Combined Ratio
115.8
115
110
Catastrophe
Pre-Catastrophe
109.6
110.3
108.8
108.5
108.9
108.2
106.9
106.5 106
105.6
106.3
105
104.9
103.2
100
107.8
90
91
92
102.5 102.4
93
94
103.3 103.35
95
96
101.6 102.6
101
97
98
99 00 (est.)
Policyholders Surplus
308.5
(US$B)
300
255.5
230.0
250
200
158.7
150
333.3 334.3 320.0
163.1
182.3 193.3
138.4
100
50
0
90
91
92
93
94
95
96
97
98
99 00 (est.)
Changes to Policyholders Surplus
53.0
50
40
30
Start of Hard Market
20
24.8
1.0
1.0
3.6 4.7
3.4
4.9 4.7
6.1 7.0
20.3 19.2
18.8
Start of Hard Market
10
25.5
14.2 15.8
9.8
11.7
6.65.2
11.1
9.7
4.4
0
4.4
1.4
1.6
-2.0
-10
36.7
Start of Hard Market
-2.4
-1.8
-5.1
-14.3
68 69 70 71 72 7374 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
(est.)
P&C Coverage Considerations
Types of “Terrorism” exclusions in Property Insurance
 Over 17 different Terrorism exclusions seen; most contain
a broad definition encompassing some or all of following
conditions:
– any person or group(s) of persons;
– acting alone or on behalf of or in connection with any
organization(s) or government(s);
– committed for political, religious, ideological or similar
purposes;
– with the intention to influence any government and/or put the
public, or any section of the public, in fear.
 Many may be interpreted to exclude certain acts or losses
previously covered such as vandalism, malicious
mischief, riot, & civil commotion.
Types of “Terrorism” exclusions (… cont’d)
 Some specifically exclude the use or release of chemical,
biological or nuclear materials, but all exclusions
encompass this intent.
 Burden of proof on insured;
 Except for ISO language, a concurrent causation
exclusion applies. i.e., direct or indirect loss or damage
caused by Terrorism, including other events or causes
contributing concurrently or in any sequence to the loss is
also excluded.
ISO CGL Terrorism Definition
 “Terrorism’ means activities against persons,
organizations or property of any nature that involve the
following or preparation of the following: (a) use or threat
of force or violence; or (b) commission or threat of a
dangerous act; or (c) commission or threat of an act that
interferes with or disrupts an electronic, communication,
information or mechanical system.”
 However, “dangerous act” is not defined
ISO CGL Terrorism Definition (cont’d)
 “When one or both of the following applies: (a) the effect
is to intimidate or coerce a government or the civilian
population or any segment thereof, or to disrupt any
segment of the economy; or (b) it appears that the intent is
to intimidate or coerce a government, or to further
political, ideological, religious, social or economic
objectives, or to express (or express opposition to) a
philosophy or ideology.”
 Who will determine the intent of such acts?
ISO CGL Terrorism Exclusion Triggers
 NBC
 “When pathogenic or poisonous biological or chemical
materials are released, and it appears that one purpose of
the terrorism was to release such materials.”
 “appears” could be a problem. Who’s perception? Insurer
or insured.
The Workers’ Compensation Conundrum
 Primary carriers can not exclude one of the biggest
catastrophe risks they face
 Treaty reinsurance markets are excluding terrorism
coverage
 Underwriting solutions?
– Self insured retention's
– Per claimant vs. per occurrence
– Underwriting discipline
Legislative Proposals / Considerations
Top Five Costliest Terrorist Acts
Ranked by insured property losses including business interruption
and aviation hull losses, in millions of dollars (2001 price levels)
Date
9/11/01
4/24/93
6/15/96
2/26/93
4/10/92
Country
United
States
United
Kingdom
United
Kingdom
United
States
United
Kingdom
Event
World Trade Center, Pentagon
attacked by hijacked airliners
Bomb explodes near NatWest tower in
London
IRA car bomb explodes near
Manchester shopping mall
Bomb explodes in garage of World
Trade Center
Bomb explodes in London's financial
district
Insured
property loss
Injured Fatalities
$19,000
2,250
3,122
$907
54
1
$744
228
0
$725
1,000
6
$671
91
3
Insurance Programs Established by Federal Statute
 The Price-Anderson Act of 1957, providing coverage for
catastrophic nuclear accident.
 The Overseas Private Investment Corp., formed in 1971,
providing insurance against overseas political risk.
 The National Insurance Development Program,
authorized in 1968, providing insurance against urban
riots and civil disorder
 The National Flood Insurance Program, also in 1968,
providing coverage in critical flood plains.
U.S. requests for stand-alone Terrorism
 Numerous requests for stand-alone Terrorism cover from
U.S. based clients, including “trophy” buildings or what
insurers consider “target” risks such as stadiums, dams,
bridges & tunnels.
 To this point:
– approx. 15% of clients have elected to purchase cover;
– no client has been declined a quote outright;
– approx. 12% of clients have declined to purchase cover;
 Reasons for not purchasing have included:
– clients waited to see what Federal action would be taken;
– limited capacity;
– expensive pricing.
 Requests for cover now increasing.
Market Conditions Pre - 9/11
Industry Was Experiencing Pressures Prior to 9/11
Expedited time to trial in many venues
Asbestos
– “P&C Industry Underreserved by $30 Billion”
A.M. Best, July 2001
Surprise awards/high profile settlements
Increased awareness of claim trends causing
quicker settlements
Emerging Claim Challenges
 Expanded Asbestos
 Environmental
(Sudden and Accidental)
 Lead Paint
 Construction Defects
 EIFS (Synthetic Stucco)
 Pharmaceuticals
 Class Actions
 Tobacco








Mold and Mildew
Cell Phones
Nursing Homes
Automotive Tires
Big Box Retailers
MTBE (Fuel Additive)
Ohio UM/UIM
Internet-derived exposures
Market Conditions Post - 9/11
Demand for Terrorism insurance:
Pre & Post WTC
 Pre 9/11 - limited demand
– UK Terrorism;
– Specific countries (Colombia, Indonesia);
 Post 9/11 - significant demand
– Worldwide Terrorism
USA & Canada
Europe
Rest of World
Main Sources of Requests
Canada
UK
USA
Eire
Italy
Mexico
Colombia
Singapore
Australia
New
Zealand
Main Issues
 Risk of future attacks still exists;
 Changing marketplace + structuring Terrorism programs complicated:
– Provides aggregate limit for declared locations only;
– Values declared significantly affects price (rating on values);
– Any cover for non-U.S. locations in less expensive local government
schemes (e.g. UK’s Pool Re.)? Avoid duplicating values declared.
 Policy forms involve complex language:
–
–
–
–
–
–
–
Definition of Terrorism. Cover for physical loss or damage;
War exclusion. Need to understand policy limitations;
No cover for nuclear, chemical, or biological release;
No cover for damage from strike, riot, & civil commotion;
Cancellation provisions;
Non-concurrency between T3 and AIG form;
Business Interruption, Loss of Rent, Extra Expense.
Overview – The Post 9/11 Agenda
 The insurance industry is vulnerable to any large event in
a dense urban area
 There is a correlation of multiple lines coming from
multiple production sources
 There is not a clear understanding of where exposures
are located
 New external demands from:
– Investors
– Regulators
– Rating Agencies
– Reinsurers
Density & Concentration Concerns
Sample Questions Answered by Proposed
Portfolio Management Functionality
How much exposure do I have in each of the country’s
largest XX office tower complexes? What is my exposure both
gross and net of reinsurance at each of these locations?
How much exposure, by line of business, do I have
within 0.25 miles of any office building greater than 40 stories?
How much exposure do I have within a one-block
radius of an office building which just experienced an explosion?
Where in my portfolio do I have a concentration of
value or limit that exceeds $XYZ in any 0.5 mile zone?
What urban risk load should I apply to my pricing of
certain concentration zones?
World Trade Center Loss
 Industry loss estimates now range as high as $60 billion.
 This will be the largest insured single event loss in
history:
– Inflation Adjusted - Hurricane Andrew $20 billion,
Northridge EQ $14 billion
 Remembering Northridge Earthquake:
– Early estimates of insured losses were in the $2 billion
range.
– The final loss amount was more than $10 billion.
– Northridge was straightforward and simple compared
to WTC.
Overall Implications of World Trade Center Loss
 Insolvencies should be expected
 Uncollectible reinsurance is going to be an issue
 Reinsurance and insurance capacity will shrink
significantly
 Prices for reinsurance and insurance will rise
 Coverage restrictions will be imposed
 Government pools may be necessary
 New entrants may emerge
Cause for Rise in Insurance and Reinsurance Pricing
 WTC has made underwriters aware of new types of risks
and larger potential losses
 Standard deviation of loss is wider than previously
expected
 Amount of risk capital required to support insurance is
greater than formerly understood
 Industry’s liquidity needs are greater than previously
understood
 Capacity being reduced results in supply versus demand
pressures
Insurance Demand After 9/11
 The WTC attack will increase risk aversion
 Buyers will rediscover the value of insurance
 Demand for traditional risk transfer will rise
 Financial stability of insurance carriers will be valued
A Grain of Salt
Insurance market conditions affected by:
– Investment results
– Catastrophe losses
– Investor psychology