inform+inspire the griffith insurance education foundation the business of insurance robert e. hoyt,...
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INFORM+INSPIRE
The Griffith Insurance Education Foundation
The Business of Insurance
Robert E. Hoyt, Ph.D.
May 6, 2013
Overview Property and Casualty Insurance Insurance Operations
Investments Performance and Capacity
Reinsurance Principles Insurance Guaranty Funds Risk and Industry Trends to Watch
The Griffith Insurance Education Foundation
Premium Breakdown in the P/C Industry (2011)
Source: NAIC Data
Auto$190.5B/39%
Homeowners$73.7B/15%
Other P/C Lines$228.2B/46%
Property Exposures Types of property exposed to
loss Real property (buildings) Personal property (contents)
Causes of loss affecting property (perils)
Property loss consequences Direct loss Indirect loss
Major Property Insurance Policies
homeowners (HO) building and personal property
(BPP) business income (BIC) boiler & machinery inland marine (floaters) ocean marine crime (employee dishonesty) difference in conditions (DIC)
A World of Extremes(Attention on Risk)
Earthquake in Haiti (record death toll)
Recent recession (deepest since the Great Depression)
BP Platform explosion
Japanese Tsunami
1,000 all-time weather records set (most heat or rain)
10 U.S. weather cats costing over $1 billion each
99 federal disaster declarations (avg. 34 prev. 50 yrs)
Boston bombings
U.S. Insured Catastrophe Losses
$7.5
$2.7
$4.7
$22.
9$5
.5$1
6.9
$8.3
$7.4
$2.6 $1
0.1
$8.3
$4.6
$26.
5$5
.9 $12.
9$2
7.5
$6.7
$27.
1$1
0.6
$13.
8$3
5.9
$35.
0
$61.
9
$9.2
$0
$10
$20
$30
$40
$50
$60
$70
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: Property Claims Service/ISO; Insurance Information Institute
$ Billions
Sandy $18.8B
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Top Most Costly Disasters in U.S.(Insured Losses, 2011 Dollars, $ Billions)
Sources: PCS; Insurance Information Institute inflation adjustments.
$9.0$11.9 $13.1
$19.1$21.3
$24.0 $25.0
$47.6
$8.5$7.7$6.5$5.5$4.4$4.3
$0$5
$10$15$20$25$30$35$40$45$50
Irene(2011)
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo (1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Ike (2008)
Northridge(1994)
SpringTornadoes& Storms*
(2011)
9/11 Attack(2001)
Andrew(1992)
Katrina(2005)
Taken as a single event, the Spring 2011 tornado and storm season is the 4th
costliest event in US insurance history
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Hurricane/Superstorm Sandy
Estimated $19 billion insured losses
Economic loss of nearly $80 billion
Over $7 billion in NFIP flood claims
Major infrastructure claims Source of continued uncertainty in
estimates
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Sandy Lessons and Issues Flood risk remains a big issue
NFIP
Business interruption is one of the biggest issues facing businesses – and it is poorly assessed and addressed
Will insurers’ cat risk mitigation strategies work?
watch decisions on “hurricane” deductibles availability and pricing in cat-prone areas
Data Centers, utilities, supply chains …
The Griffith Insurance Education Foundation
Securitization of Property Risk (Catastrophe Bonds)
$1,729.8
$2,700.0
$3,400.0
$4,800.0$4,300.0
$6,300.0
$966.9
$7,329.6
$4,693.4
$1,991.1
$1,142.8$1,219.5$846.1$984.8$1,139.0
$633.0
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Ris
k C
ap
ita
l Is
su
es
($
Mill
)
0
5
10
15
20
25
30
35
Nu
mb
er
of
Iss
ua
nc
es
Risk Capital Issued Number of Issuances
Source: MMC Securities Guy Carpenter, A.M. Best; Insurance Information Institute.
Cincinnati Insurance in Jan. 2013 issued $61.2
million cat bonds for New Madrid earthquake and severe thunderstorms
protection.
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Characteristics of Liability Risks Involvement of a third party
Difficulty in defining the risk measurement of the loss amount establishing fault identifying the scope of exposure
"Long-tail" problem
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Major Liability Insurance Policies
homeowners personal auto policy (PAP) commercial general liability (CGL) business auto coverage (BAC) umbrella liability policies (commercial and personal) directors and officers liab. (D & O) environmental impair. liab. (EIL) workers comp. / employers liability employment practices liability (EPL) professional liability (malpractice)
Average Expenditures on Auto Insurance
$651$668
$691$705
$726
$786
$830$842
$831$816
$795$789$785$808$816
$839
$690$685$703
$600
$650
$700
$750
$800
$850
$900
$950
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10* 11* 12*
* Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimates 2010-2013 based on CPI and other data.
Countrywide auto insurance expenditures are expected to increase about 3% in 2012
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Average Auto Insurance Expenditure:Top/Bottom 5 vs. US (2010)
Source: NAIC; Insurance Information Institute.
NJ DC LA NY FL US ME ID IA ND SD$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,157 $1,134 $1,121 $1,079 $1,037
$791
$582 $548 $547 $529 $525
Detroit ($5,941), Philadelphia ($4,071)
Cost of Insurance Fraud
Second largest economic crime
Healthcare fraud $81 to $270 billion per year (Medicare, Medicaid and private insurance)
Property-casualty fraud $32 billion auto insurance fraud $6.8 billion workers’ compensation fraud $5 billion
$$$
Structure of Insurance Market
Types of insurers property-liability insurers life insurers health insurers
Organizational form
Competitive market
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Industry Size (L-H v. P-C)
0% 20% 40% 60% 80% 100%
Assets ($trillion)
Premiums ($billion)
Insurers
4.8
627
1106
1.49
481
2737
Life-HealthProperty-Liability
Source: III Insurance Fact Book 2011.
2,343 Life Insurers in 1988
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Statutory Accounting Principles (SAP)(Insurance Accounting)
GAAP v. SAP going concern v. liquidation expenses recognized immediately while
revenues must be accrued admitted v. non-admitted assets conservative securities valuation
Insurance Market Direction
Assets – Liabilities = Net worth Policyholder Surplus = Capital
= Capacity = Supply Factors to consider
Underwriting (losses) Reserves Reinsurance Cats
Investments Regulation (e.g., Basel III)
Surplus
If domicile of parent considered, 83.4% of
reinsurance bought by U.S. insurers was from
foreign reinsurers
Reserves
Sources: NAIC & III.
Invested assets totaled $1.32 trillion
Generally, insurers invest conservatively, with over 2/3 of invested assets in bonds
Only 17% of invested assets were in common or preferred stock
66.4%
9.9%17.2%6.5%
Bonds
Common & Preferred Stock
As of December 31, 2010
Cash & Short-term
Investments
Other
Distribution of P/C Insurance Industry’s Investment Portfolio
-55-50-45-40-35-30-25-20-15-10-505
101520253035
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
Source: A.M. Best, ISO; Insurance Information Institute
$ B
illi
ons
Underwriting Gain (Loss)
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P/C Insurer Investment Gains$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$63.6
$51.5
$39.2
$53.4 $53.9$56.2$56.9
$51.9
$57.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. Sources: ISO; Insurance Information Institute.
The Griffith Insurance Education Foundation
Policyholder Surplus
$ Billions
$497
$513$522
$518
$456
$437
$463
$491
$512
$541$531
$545
$557$565
$559
$539
$550
$568$570
$479
$505
$516
$420
$440
$460
$480
$500
$520
$540
$560
$580
07
:Q1
07
:Q2
07
:Q3
07
:Q4
08
:Q1
08
:Q2
08
:Q3
08
:Q4
09
:Q1
09
:Q2
09
:Q3
09
:Q4
10
:Q1
10
:Q2
10
:Q3
10
:Q4
11
:Q1
11
:Q2
11
:Q3
11
:Q4
12
:Q1
12
:Q2
12
:Q3
12
:Q4
Policyholder Surplus (Net Worth) = Assets – LiabilitiesSource: ISO (historical); Insurance Information Institute.
$584 $587
The Griffith Insurance Education Foundation
Average Commercial Insurance Rate Changes
3.9%
4.7%5.3%
4.8%5.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012
Average commercial insurance rate changes in that quarter. Source: Council of Insurance Agents and Brokers.
The Griffith Insurance Education Foundation
Reinsurance
Definition Shifting of part or all of the insurance
originally written by one insurer to another insurer
Customer other insurers ( primary insurer )
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Terms Ceding Company ( primary insurer )
Reinsurer
Net Retention
Cession
Retrocession retrocessionnaire and retrocedent
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Types of Reinsurance Contracts
Facultative Treaty
Coverage Proportional (quota and
surplus share) Excess
Functions of ReinsuranceBenefits for Insureds & Insurers
Benefits for Insureds
Benefits for Insurers
All coverage can be obtained from one insurer, reducing the chance of coverage gaps & problems in loss collection.
Reduces the chance of primary insurer insolvency.
Allows small insurers to compete with large insurers, which should increase availability & reduce price.
Stabilizes loss experience.
Increases large line capacity.
Provides surplus relief.
Protects against catastrophic losses.
Provides underwriting assistance.
Allows withdrawal from a territory or class of business.
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Reinsurance Regulation Less stringent (little rate regulation) Domestic, foreign, alien Credit for reinsurance
(indirect regulation) effects primary insurer’s liabilities
and its surplus creates incentives to deal with
sound reinsurers
FIO has a monitoring role as well
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Top three domiciles
are:
• Germany
• Switzerla
nd
• U.S.
Guaranty Funds
Funds in all states (P-C and Life) Coverage limits vary across states Funded on a post-assessment
basis (except NY) Modest levels of insolvencies have
made this workable
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P/C Insurer Impairments8
15
12
71
19
34
91
31
21
99
16
14
13
36
49
31 3
44
94
95
46
05
84
12
91
51
23
11
8 19
49 50
47
35
18
13 15
71
9 21
34
4
0
10
20
30
40
50
60
70
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
The number of impairments varies significantly over the p/c insurance cycle, with peaks occurring
well into hard markets
Source: A.M. Best; Insurance Information Institute
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Reasons for P/C Insurer Impairments(1969-2010)
Deficient Loss Reserves and Inadequate Pricing Are the Leading Cause of Insurer Impairments. Investment and Catastrophe Losses Play a Much Smaller Role
Deficient Loss Reserves/Inadequate Pricing
Reinsurance Failure
Rapid GrowthAlleged Fraud
Catastrophe Losses
Affiliate Impairment
Investment Problems
Misc.
Sig. Change in Business
Reason in 54.5% of insolvencies in
2010
3.6%4.0%
8.6%
7.3%
7.8%
7.1%
7.8%13.6%
40.3%
Source: A.M. Best
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Number of Impaired L/H Insurers6
11
17
10 12 13
12
32
16
16
16
23 2
75
54
68
13
82
41
21
11
91
81
22
61
08 1
05 5
10
38 9
12
62
0
10
20
30
40
50
60
70
80
907
6
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
Source: A.M. Best Special Report “1969-2011 Impairment Review”; Insurance Information Institute.
The Number of Impairments Spiked in 1989-92. But in the Financial Crisis, When Large Numbers of Banks
Failed, Virtually No Life Insurers Failed.
Average number of impairments, 1976-2010: 18.2
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Deficient Loss Reserves/Inadequate
Pricing, 27.5%
Affiliate Problems;
18.6%
Investment Problems; 15.4%
Rapid Growth, 14.5%
AllegedFraud, 9.1%
Other, 15.0%
Source: A.M. Best, 1976-2009 Impairment Review, Special Report
Leading Causes of Impairment
---Business Management (Rapid Growth, Investment Problems, Affiliate Problems)
---Deficient Loss Reserves/ Inadequate Pricing
Reasons for L-H Insurer Impairments(1976-2009)
Interest and Concern in Risk Management Google Search
Risk Management – 2006 & 2007: 3.2 million 2008 & 2009: 27.2 million 2011 & 2012: 81.4 million
“Audit committee members rank risk management as top worry”
KPMG Survey of Corporate Directors
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Risk Trends Reputation risks
80% chance of a company losing at least 20% of its value in any single month over a five-year period due to a reputation crisis (Aon, 2012)
Cyber-Liability Need to think about these risks outside of the IT
department Data loss, privacy, virus issues Need broad-based, disaster recovery plan (need
to test it!) Liability / Tort issues
Climate, energy, professional
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Top Insurance Industry Trends Risk and Capital Management
Low interest rate environment Strategic risk management (ERM)
Financial Reporting Regulatory Compliance
Dodd-Frank (Thrift owners and SIFIs) ORSA and Solvency II
Catastrophe Risk Terrorism Risk (especially without TRIA)
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Other Insurance Industry Trends Businesses opting for higher retentions
Especially in workers’ compensation Big data
Predictive modeling (underwriting and claims) Distribution issues (web and social media) Talent
The graying of the workforce Recruiting and retaining it
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Contact Information for the Risk Management and Insurance Program at the University of Georgia
Department Head, Rob Hoyt Brooks Hall 206 [email protected]
Our web site www.terry.uga.edu/insurance
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