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Mega-Trends in the Worldof Insurance:
Impacts on Captive & Alternative Risk Transfer
Markets17th Annual World Captive Forum
Scottsdale, AZ
November 6, 2007
Robert P. Hartwig, Ph.D., CPCU, Executive Vice President & Chief EconomistInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038
Tel: (212) 346-5520 ♦ Fax: (212) 732-1916 ♦ [email protected] ♦ www.iii.org
Presentation Outline
• Captive & ART Overview• Pricing Under Pressure
Traditional Insurers Starved for Growth• Capacity: New Record Highs• Profitability: Flush Times Breed Competition• Underwriting: Strong Results—Discipline is Tested? • Investment Income: Flat Gains More Discipline?• Key Lines: Back from the Brink—But Heading South?• Catastrophic Loss: Welcome Respite• Financial Strength & Ratings• State-Run Markets: A Traditional & ART Competitor?• Terrorism: No ART Solution Here• Torts: Legal Environment Getting Better• Q & A
CAPTIVE & ART OVERVIEW
Drivers of Growth: Slowdown Ahead?
Total Commercial Risk Protection Market (US, 2004)
Commercial Insurance, $229,
70%
Alternatives, $98, 30%
Source: Conning; MarketStance analysis; Insurance Information Institute.
Alternative market mechanisms cover about 30 percent
($98 billion) of the total commercial risk
protection market ($326.9 billion)
$ Billions
Size of Alternative Risk Transfer Market (2001 Direct Written Premiums)
Other Alternative
Carriers (US), $5 , 1.1%
Captives, $38 , 8.3%
Traditional Carriers, $370 ,
81.0%Self-Insurance,
$44 , 9.6%
Source: Swiss Re; Insurance Information Institute.
Captives accounted for about 8.3% of
global commercial insurance
premiums in 2001, likely at
least 10% today
$ Billions
Alternative Risk Transfer Marketby Line
Automobile, 12%
Property, 10%Workers Comp,
43%
Liability (excl. Auto), 35%
Source: MarketStance.
Workers Comp account for the
largest share of the alternative market
$ Billions
Alternative Market Share by Industry Group, All Lines
45.0%
42.8%
42.3%
34.6%
32.4%
28.3%
21.9%
21.8%
45.4%
0% 10% 20% 30% 40% 50%
Mining
Transport., Public Util.
Manufacturing
Services
Finance, Insurance
Retail Trade
Wholesale Trade
Construction
Agriculture
Source: MarketStance
The Mining industry makes the greatest use of alternative markets,
agriculture the least
Workers Compensation: Large Deductible Market Share
1%
33%
43%
0%5%
10%15%20%25%30%35%40%45%50%
1990 2000 2003Sources: National Council on Compensation Insurance; Insurance Information Institute.
Employers have become very
accustomed to accepting a greater share of risk and claim frequency has decreased
Alternative Market byRevenue Size
17.8%
58.2% 62.6%
0%
10%
20%
30%
40%
50%
60%
70%
Small (<$100 millionrevenue)
Medium ($100million to $1 billion
revenue)
Large (more than $1billion revenue)
Sources: MarketStance
Large companies are far more likely to retain risk via
alternative vehicles than are small
companies
ME
NH
MACT
PA
WVVA
NC
LATX
OK
NE
ND
MN
MI
IL
IA
ID
WA
OR
AZ
HI
NJ
RI
MDDE
AL
VT
NY
DC
SC
GA
TN
AL
FL
MS
ARNM
KYMOKS
SD WI
INOH
MT
CA
NVUT
WY
CO
Alternative Market By State Concentration
Above Average
Below Average PR
AK
Source: MarketStance; Conning 2006
U.S. Domiciled Captives – Top Lines
10.9%
10.2%
8.3%
6.3%
5.0%
37.6%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Medical Malpractice
Auto Phy. Damage
Priv. Pass. AutoLiab.
Other Liability
Commercial M.P.
Workers Comp.
Source: A.M. Best, 2007 Special Report: U.S. Captive Insurers – 2006 Market Review
Medical malpractice remains the dominant product line for
U.S. domiciled captives in 2006, followed by various
auto coverages, commercial M-P and workers comp.
U.S. Risk Retention Groups: Distribution by Line
Figures do not total 100% due to rounding.Source: A.M. Best, 2007 Special Report: U.S. Risk Retention Groups – 2006 Market Review
Med Mal Occur2.0%
Other Liab Cl Made23.0%
Med Mal Cl Made43.0%
Comm Auto Liab2.0%
Other Liab Occur29.0%
Medical Malpractice
(claims made)
remained a significant portion of
RRG business in
2006 at 43%, while
other liability (per occurrence)
remained virtually
unchanged at 29%.
U.S. Domiciled Captives- Net Premiums Written ($ Millions)
$8.4
$9.0
$9.3
$9.9
$10.2
$8.0
$8.5
$9.0
$9.5
$10.0
$10.5
2002 2003 2004 2005 2006
$ M
illio
ns
Source: A.M. Best, 2007 Special Report: U.S. Captive Insurers – 2006 Market Review
Following a five-year period of rapid growth, U.S. captive insurers saw net premiums written increase by just 2.7 percent in 2006, after 6.2 percent growth in 2005.
Risk Retention Group Premiums,1988 – 2006*
$1,7
37.7 $2
,197
.8
$2,4
49.1
$2,7
73.7
$585
.8$5
27.2
$493
.7$4
93.6
$419
.3
$358
.4
$250
.2 $575
.5$7
07.6
$751
.9
$790
.5
$875
.3
$775
.5
$944
.0 $1,2
65.1
0
500
1,000
1,500
2,000
2,500
3,000
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06*
*2006 ProjectedSource: Risk Retention Reporter, Insurance Info. Institute
Millions of Dollars
Risk retention (& self-insurance) group premiums have risen rapidly
in recent years and represent a form of competition to traditional
insurers and captives
U.S. Risk Retention Groups:Domicile Distribution 2006
12%
8%
4%
4%
4%
4%
4%
4%
4%
4%
4%
46%
0% 10% 20% 30% 40% 50%
Vermont
Hawaii
South Carolina
Colorado
D.C.
Delaware
Iowa
Illinois
Missouri
Montana
Tennessee
Texas
Source: A.M. Best, 2007 Special Report: U.S. Risk Retention Groups – 2006 Market Review
The majority of RRGs are domiciled in Vermont, with
12. Hawaii has 3 RRGs while South Carolina has 2 RRGs. The remaining groups are distributed equally among
various domiciles.
Food, Drink and Tobacco Company Captives by Domicile
Source: Captive Review, October 2007
27.6%
19.0%17.0%
13.7%
1.0% 1.0% 1.0%3.0%
5.0%5.0%
0%
5%
10%
15%
20%
25%
30%
Bermuda
Vermon
tGue
rnse
y
Irelan
dSwitz
erlan
dLux
embourg
Barbad
os
BVIIsl
e of M
anBah
amas
Captive solutions can be extremely helpful to food, drink and tobacco (FDT) companies.
Captives with parent companies in the FDT sector exist in only
10 domiciles. Nearly half (46.6%) were spread between Bermuda
and Vermont.
733
542
380
382
242
208
165
158
989
740
563
381
235
208
161
160
166*
*
987*
169*
*383*
0
200
400
600
800
1,000
Bermuda
Cayman
sVerm
ont
BVIGuern
seyBar
bados
Luxembou
rgTurk
s & C
aicos
Isle o
f Man
Hawaii
2005 2006
Leading Captive Domiciles Worldwide, 2005 vs. 2006
Mixed growth rates in captive domiciles worldwide in 2006 as competition intensifies in
traditional market.
*BI estimate. **Excludes credit life insurers.Sources: Business Insurance, March 12, 2007, III
542
158
122
58 53 59
33 15 13 15 6
563
160
146
97
74 70
39 30 21 17 10
0
100
200
300
400
500
600
VT HI SC NV AZ DC NY UT MT GA KY
2005 2006
Leading US Captive Domiciles, 2005 vs. 2006
U.S. captive domiciles experienced dramatic
growth in 2006.
Sources: Business Insurance, March 12, 2007; III
100%
67%
67%
62%
40%
20%
19%
18%
13%
4% 1.3%
0
0
0
1
1
1
1
UT NV KY MT AZ SC DC NY GA VT HI
Fastest Growing US Captive Domiciles, 2006 over 2005
Newer U.S. captive domiciles led the way in growth rates in 2006,
but from small bases in 2005 (e.g., UT increased from 15 domiciles in
2005 to 30 in 2006)
Sources: Business Insurance, March 12, 2007; III
564
39
243
118
84 24
1500
325
2 34 93 34 2
705
0200400600800
1,0001,2001,4001,600
U.S.Korea
(Rep
ublic)
Japan UK
German
yChina (
PRC)
TotalCompanies in G1500 Companies with a captive
G1500 Companies and Captives: Room for Growth
The captive market remains underdeveloped, with over half (53%) of the world’s top G1500 companies not currently owning a captive.
Source: Aon, Global 1500: A Captive Insight 2007
Markets such as Asia have considerable potential for growth.
For example, only 14% of Japanese G1500 companies have a captive.
Captive Formations & Liquidations, 1993–2002
0
50
100
150
200
250
300
350
400
450
500
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Captive Liquidations New Captive Formations
Source: A.M. Best; Insurance Information Institute
Why Do Captives Liquidate?•Collapse of parent (cyclical)
•Collapse of parent (e.g., Enron)•Consolidation
•Escalating loss costs/claim severity (e.g., med mal)
Captive formation and liquidation are highly correlated
Top 5 Captive Managers by Premium Volume, 2006 ($Mill)
$8,900
$5,000$4,200 $4,100 $3,486
$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000
$10,000
Marsh(Bermuda)
Marsh(Vermont)
Aon(Vermont)
Aon(Bermuda)
InternationalAdvisoryServices
Sources: Business Insurance, March 12, 2007; III
Top 10 Largest Captive Managers Worldwide, by Captives Managed 2006
1,120
247
209
194
168
94
92
91
88
1,352
1,103
240
177
183
146
93
80
98
76
1,386
$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600
Aon
Marsh
Willis
USA Risk
IAS
HSBC Insurance
Beecher Carlson
Quest
AIG
AMS
2006 2005
The number of captives managed by the top firms increased in 2006, though
not in all domiciles
Sources: Business Insurance, March 12, 2007; III
Top Bermuda Captive Managers,by Premium Volume, 2006
4,100
3,486
1,103
1,078
1,000
941
579
490
7,150
5,200
2,824
1,056
1,130
1,000
1,800
447
450
8,900
$0 $2,000 $4,000 $6,000 $8,000 $10,000
Marsh
Aon
IAS
Cedar Mgmt
JLT
Liberty Mutual
Beecher Carlson
USA Risk
Quest
2006 2005
Premium volume grew for some managers, but
shrank for others
Sources: Business Insurance, March 12, 2007; III
Annual Catastrophe Bond Transactions Volume, 1997-2007*
$966.9
$1,729.8
$4,8
30
$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
$6,000
97 98 99 00 01 02 03 04 05 06 07*
Ris
k C
apita
l Iss
ues
($ M
ill)
02468101214161820
Num
ber o
f Iss
uanc
es
Risk Capital Issued Number of Issuances
Source: MMC Securities and Guy Carpenter; Insurance Information Institute. *Through 10/31/07
Catastrophe bond issuance has soared in the wake of
Hurricanes Katrina and the hurricane seasons of 2004/2005
COMPETITIVE PRICE PRESSURETraditional Insurance Prices Falling Sharply
-10%
-5%
0%
5%
10%
15%
20%
25%
1970
1971
1972
1973
1974
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
2003
2004
2005
2006
2007
F20
08F
2009
F20
10F
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
Strength of Recent Hard Markets by NWP Growth*
1975-78 1984-87 2001-04
*2007-10 figures are III forecasts/estimates.
2006-2010 (post-Katrina) period could resemble 1993-97
(post-Andrew)
2005: biggest real drop in premium since early 1980s
Growth in Net Written Premium, 2000-2008F
*2007 figure base on 2007 actual first half result of 0.1%.Source: A.M. Best; Forecasts from the Insurance Information Institute.
5.0%
8.4%
15.3%
10.0%
3.9%
0.5%
2.7%
0.1% 0.3%
2000 2001 2002 2003 2004 2005 2006 2007F* 2008F
P/C insurers will experience their slowest growth rates since the late 1990s…but underwriting results are
expected to remain healthy
Most Layers of Coverage are Being Challenged/Leaking
Retention$1 Million$2 Million
Primary
Excess
Reinsurance
Retro
$10 Million
$50 Million
$100 Million
Risks are comfortable taking larger retentions
Lg. deductibles, self insurance, RRGs, captives erode primary
Excess squeezed by higher primary
retentions, lower reins. attachments
Reinsurers losing to higher retentions,
securitization
Source: Insurance Information Institute from Aon schematic.
Average Commercial Rate Change,All Lines, (1Q:2004 – 3Q:2007)
-0.1%
-3.2%
-7.0%
-9.4%
-4.6%
-2.7%
-5.3%
-9.6%
-13.3%-11.8%
-3.0%
-9.7%-11.3%
-5.9%
-8.2%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%1Q
04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Magnitude of rate decreases diminished greatly after Katrina but have grown again
KRW Effect
Cumulative Commercial Rate Change by Line: 4Q99 – 3Q07
Source: Council of Insurance Agents & Brokers
Commercial account pricing has been trending down for 3 years and is now on par with prices in late 2001, early 2002
D&O Premium Index(1974 Average = 100)
682746 704 720 720 771 806 793
726619
539 503560
720
931
1,2371,113
827
1,010
0
200
400
600
800
1000
1200
1400
86 88 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Source: Tillinghast Towers-Perrin, 2006 Directors and Officers Liability Survey.
Average D&O pricing is off 18% since 2003, after rising
146% from 1999-2003
UNDERWRITING CAPACITY
Does Expanding Capacity Bode Ill for ART,
Including Captives?
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
$550
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 0607*
U.S. Policyholder Surplus: 1975-2007*
Source: A.M. Best, ISO, Insurance Information Institute. *As of June 30, 2007
$ B
illio
ns
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
Capacity as of 6/30/07 was $512.8B, 5.3% above year-end 2006, 80% above its 2002 trough and 54%
above its 1999 peak.
Foreign reinsurance and residual market
mechanisms absorbed 45% of 2005 CAT
losses of $62.1B
Capacity exceeded a half trillion dollars for the first time during
the 2nd quarter of 2007
Capital Raising by Class Within 15 Months of KRW
Existing Cos., $12.145 , 36%
New Cos., $8.898 , 26%
Sidecars, $6.359 , 19%Insurance Linked
Securities, $6.253 , 19%
Insurers & Reinsurers raised $33.7 billion in the wake of Katrina,
Rita, Wilma
Source: Lane Financial Trade Notes, January 31, 2007.
$ Billions
Annual Catastrophe Bond Transactions Volume, 1997-2007*
$966.9
$1,729.8
$4,8
30
$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
$6,000
97 98 99 00 01 02 03 04 05 06 07*
Ris
k C
apita
l Iss
ues
($ M
ill)
02468101214161820
Num
ber o
f Iss
uanc
es
Risk Capital Issued Number of Issuances
Source: MMC Securities and Guy Carpenter; Insurance Information Institute. *Through 10/31/07
Catastrophe bond issuance has soared in the wake of
Hurricanes Katrina and the hurricane seasons of 2004/2005
($30)
($20)
($10)
$0
$10
$20
$30
$40
$50
$60
$7076 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
Change in US PolicyholderSurplus, 1976-2007F*
*2007 forecast based on actual 07:H1 increase of $25.6BSource: A.M. Best, ISO, Insurance Information Inst.
$ B
illio
ns
US insurers have recorded large increases in net capacity since 2003
despite record CAT losses. Net income (less dividends) is the
largest source of net new capacity.
New Capital Paid-In: US P/C Insurers, 2003-2006 ($Bill)
$11.3
$8.8
$14.4
$3.6
$0
$2
$4
$6
$8
$10
$12
$14
$16
2003 2004 2005 2006Sources: A.M. Best, ISO, Insurance Information Inst.
New capital entering US markets was
down significantly in
2006. Much more raised
offshore.
P/C Insurer Share Repurchases,1987- First Half 2007 ($ Millions)*
$564
.0
$646
.9
$311
.0 $952
.4
$418
.1
$566
.8
$310
.1
$658
.8
$769
.2
$4,5
86.5
$5,2
66.0
$763
.7
$5,2
42.3
$4,3
70.0
$7,0
94.1
$6,1
73.0
$4,4
97.5
$1,5
39.9$2
,764
.2
$2,3
85.6
$4,2
97.3
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
07H
1
Sources: Credit Suisse, Company Reports; Insurance Information Inst.
First half 2007 share buybacks are already 86%
of the 2006 record
Reasons Behind Capital Build-Up & Repurchase Surge
•Strong underwriting results•Moderate catastrophe losses
•Reasonable investment performance
•Lack of strategic alternatives (M&A, large-scale expansion)
Returning capital owners (shareholders) is one of the few
options available
MERGER & ACQUISITION
Few Catalysts for Major P/C Consolidation
P/C Insurance-Related M&A Activity, 1988-2006
$2,4
35
$5,1
00
$19,
118
$40,
032
$1,2
49$4
86$2
0,35
3$4
25$9
,264
$35,
221
$55,825
$30,
873
$8,0
59$1
1,53
4
$1,8
82
$3,4
50$2
,780
$5,1
37
$5,6
38
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Tran
sact
ion
Valu
e ($
Mill
)
0
20
40
60
80
100
120
140
Num
ber o
f Tra
nsac
tions
Transaction Values Number of Transactions
*Announced May 7, 2007.Source: Conning Research & Consulting.
2006 surge due mostly to 2 deals. No
trend started.
Liberty Mutual acquired Ohio
Casualty for $2.7B*
No model for successful
consolidation has emerged
PROFITABILITY OVERVIEW
Rising Profits Breeds Competition
P/C Net Income After Taxes1991-2007F ($ Millions)*$1
4,17
8
$5,8
40
$19,
316
$10,
870
$20,
598
$24,
404 $3
6,81
9
$30,
773
$21,
865
$3,0
46
$30,
029
$65,
192
-$6,970
$63,
695
$44,
155
$20,
559
$38,
501
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07F
*ROE figures are GAAP; 1Return on avg. surplus. 2007F figure is annualized actual first half net income of $32.596B **Actual first half 2007 result.Sources: A.M. Best, ISO, Insurance Information Inst.
2001 ROE = -1.2%2002 ROE = 2.2%2003 ROE = 8.9%2004 ROE = 9.4%2005 ROE= 9.4%2006 ROAS1 = 14.0%2007F ROAS = 13.1%**
Insurer profits peaked in 2006/7. “Normal” CAT year,
average investment gain imply flattening
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07F
08F
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2008E
*2007 is actual first half ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate.Source: Insurance Information Institute; Fortune
Andrew Northridge
Hugo Lowest CAT losses in 15 years
Sept. 11
4 Hurricanes
Katrina, Rita, Wilma
P/C profitability is cyclical, volatile and vulnerable
RETURN ON EQUITY (Fortune):Stock & Mutual vs. All Companies*
*Fortune 1,000 group.Source: Fortune Magazine, Insurance Information Institute.
13%13.4%
14.6%
10.0%
14.9%13.0%
11%
13%15%14%13%
7%6%
11%12%
8%
11%12%10%
9%
-2%
8%7%
2%
10%
10.4%
15.4%14.0%
13.9%12.6%
-4%-2%0%2%4%6%8%
10%12%14%16%18%
1998 2000 2001 2002 2003 2004 2005 2006E 2007F 2008F
StockMutualAll Cos.*
Mutual insurer ROEs are typically lower than for stock
companies, but gap has narrowed. All are cyclical.
-5%
0%
5%
10%
15%
20%
25%
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 07F
08F
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2008F
1975: 2.4%
1977:19.0% 1987:17.3%
1997:11.6%
2006:14.0%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years
10 Years 9 Years
*2007 is actual first half ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate.Source: Insurance Information Institute; Fortune
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E
ROE Cost of Capital
ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2007E
Source: The Geneva Association, Ins. Information Inst.
The p/c insurance industry achieved its cost of capital in 2005/6 for the first time in many years
-13.
2 pt
s
+0.2
pts
US P/C insurers missed their cost of capital by an average 6.7 points from 1991 to 2002, but on
target or better 2003-07
-0.1
pts
+3.5
pts
-9.0
pts
The cost of capitalis the rate of return
insurers need to attract and retain
capital to the business
+3.1
pts
L/H Insurance IndustryNet Income ($ Bill), 1997-2006
$21.72$17.98
$20.88$22.20
$9.81
$4.14
$26.55
$32.18$35.9 $34.0
$0
$5
$10
$15
$20
$25
$30
$35
$40
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Billi
ons
Source: NAIC data, from Highline National Underwriter.
Return on Equity: L/H Insurancevs. Fortune 500, 1995-2005
0%
2%
4%
6%
8%
10%
12%
14%
16%
1995 1996 1997 1998 1999 2000 2001 2002 2003 20004 2005
L/H Fortune 500
Source: NAIC, from Highline National Underwriter.
WALL STREET:
INSURERS LAGGING BEHIND IN 2007
Insurance & Reinsurance Stocks:Strong Finish in 2006
0.61%
9.53%
10.33%
16.57%
19.95%
16.24%
13.62%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
S&P 500
Life/Health
Reinsurers
P/C
All Insurers
Multiine
Brokers
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Total Returns for 2006
P/C insurer & reinsurer stocks rallied in late 2006
as hurricane fears dissipated and insurers turned in strong resultsBroker stocks held back
by weak earnings
Insurance & Reinsurance Stocks: Finally Gaining in 2007
5.15%
-9.99%
-1.93%
3.25%
-1.10%
7.58%
6.44%
-15.0% -10.0% -5.0% 0.0% 5.0% 10.0%
S&P 500
Life/Health
Reinsurers
P/C
All Insurers
Multiline
Brokers
Source: SNL Securities, Standard & Poor’s, Insurance Information Inst. *Includes Financial Guarantee
Total YTD Returns Through November 2, 2007
P/C insurance, reinsurance stocks lagging on soft market
concerns, and subprimeselloff. Some relief due to very low hurricane losses
Mortgage insurers are down 66%, Title insurers down 35% on subprime
& real estate woes
UNDERWRITING
Insurer Underwriting Has Improved Dramatically
90
95
100
105
110
115
120
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*
08F
Combined Ratios1970s: 100.31980s: 109.21990s: 107.8
2000s: 102.2**
Sources: A.M. Best; ISO, III *Actual figure of 92.7 through first half 2007. **Through 2007:H1.
P/C Insurance Combined Ratio, 1970-2008F*
115.8
107.4
100.198.3
100.7
92.5
97.0
93.592.7
90
100
110
120
01 02 03 04 05 06 07:H1 07F 08F
P/C Insurance Combined Ratio, 2001-2008F
Sources: A.M. Best; ISO, III. *III estimates for 2007/8.
2005 figure benefited from heavy use of reinsurance which lowered net losses
2006 produced the best underwriting result
since the 87.6 combined ratio in 1949
As recently as 2001, insurers were paying out nearly $1.16 for
every dollar they earned in premiums
2007/8 deterioration due primarily to falling rates, but results still strong assuming
normal CAT activity
87.6
91.2
92.1 92.3 92.4 92.593.0 93.1 93.1 93.3
92.7
85
86
87
88
89
90
91
92
93
94
1949 1948 1943 1937 1935 2006 2007* 1950 1939 1953 1936
Ten Lowest P/C Insurance Combined Ratios Since 1920 (& 2007:H1)
Sources: Insurance Information Institute research from A.M. Best data. *2007 first half actual.
2007 is looking very strong
The industry’s best underwriting years are associated with
periods of low interest rates
The 2006 combined ratio of 92.5 was the best since the 87.6 combined in 1949
110.
3
110.
2
107.
6
103.
9 109.
7
112.
3
111.
1
122.
3
110.
2
102.
5 105.
4
90.5
102.
0
112.
5
85
90
95
100
105
110
115
120
125
93 94 95 96 97 98 99 00 01 02 03 04 05 06
Commercial Lines Combined Ratio, 1993-2006
Source: A.M. Best; Insurance Information Institute .
Outside CAT-affected lines, commercial
insurance is doing fairly well. Caution
is required in underwriting long-
tail commercial lines.
2006 results benefited from relatively disciplined underwriting, low CAT
losses and reserve releases
Commercial coverages have exhibited extreme variability. Are current
results anomalous?
-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 07F
Underwriting Gain (Loss)1975-2007F*
Source: A.M. Best, Insurance Information Institute *Actual 2007:H1 underwriting profit = $14.402Bannualized to $28.8B.
$ B
illio
ns
Insurers earned a record underwriting profit of $31.7 billion in 2006, the largest ever but only the
second since 1978. Expect figure near $28 billion in 2007 assuming “normal” CAT losses. Cumulative
underwriting deficit since 1975 is $412 billion.
$10.
8 $22.
8 $33.
4
$36.
9
$18.
9
($5.0)($6.0)($5.3)
$0.4
($7.0)
8.9
-1.1-1.3-1.6
4.5
-1.20.1
3.5
8.6
6.5
($10)($5)$0$5
$10$15$20$25$30$35$40
00 01 02 03 04 05 06 07F 08F 09F
Res
erve
Dev
elop
men
t ($B
)
(3)(2)(1)012345678910
Com
bine
d R
atio
Poi
nts
PY Reserve DevelopmentCombined Ratio Points
Impact of Reserve Changes on Combined Ratio
Source: A.M. Best, Lehman Brothers estimates for years 2007-2009
Reserve adequacy has
improved substantially
Cumulative Prior Year Reserve Development by Line (As of 12/31/06)
-$1,
886 -$
1,17
4
-$1,
116 -$77
9
-$47
5
-$41
3
-$25
4
-$10
0
-$10
0
-$96
-$53
-$48
$366
$1,176$1,172
-$3,006-$3,500-$3,000-$2,500-$2,000-$1,500-$1,000
-$500$0
$500$1,000$1,500
PPA Liab
ility
PPA PD
Home
Med
Mal
Specialt
y Pro
pCom
m. Auto
Prod. L
iabilit
yFinl. G
uaran
tyIn
ternati
onal
Other
Specialt
y Liab
.W
orker'
s Com
pFideli
ty/Suret
y
Commerc
ial M
ulti
Other
Liabilit
yRein
sura
nce$
Bill
ions
Sources: Lehman Brothers; A.M. Best’s Aggregates & Averages Schedule P, Part 2.
Reserve redundancies in most lines have
resulted in releases in recent years
Release
Strengthening
REINSURANCE MARKETS
Reinsurance Markets Have Stabilized, Prices Falling
Announced Katrina, Rita, Wilma Losses by Segment
U.S. Primary, $14.2 , 39%
U.S. Reinsurer, $3.4 , 9%
Other, $0.3 , 1%
Lloyd's, $3.5 , 9%
Bermuda, $10.9 , 29%
Europe, $4.9 , 13%
Catastrophes are global events. Only 39% of
KRW losses were borne by US
primary insurers
*As of 2/21/06Source: Dowling & Partners, RAA.
$ Billions
Share of Losses Paid by Reinsurers, by Disaster*
30%25%
60%
20%
45%
0%
10%
20%
30%
40%
50%
60%
70%
Hurricane Hugo(1989)
Hurricane Andrew(1992)
Sept. 11 TerrorAttack (2001)
2004 HurricaneLosses
2005 HurricaneLosses
*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for 2005.Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.
Reinsurance is playing an increasingly
important role in the financing of mega-CATs; Reins. Costs
are skyrocketing
Ratio of Reinsurer Loss & Underwriting Expense to Premiums Written, 1985-2006
1.10
1.08 1.10
1.03
1.02 1.
061.
14
1.13 1.
17
1.01 1.
06
1.26
0.95
1.39
1.21
1.06
1.07
1.07 1.09
1.18
1.07 1.
08
0.9
1.0
1.1
1.2
1.3
1.4
1.5
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Loss
& L
AE
Rat
io
Source: Reinsurance Association of America.
Despite the respite in 2006, reinsurers paid an average of $1.11 in loss and expense
for every $1 in written premium since 1985
Hurricane Andrew
Sept. 11
Katrina, Rita, Wilma
Liability Crisis
US Reinsurer Net Income& ROE, 1985-2006
$1.9
4
$2.0
3
$1.9
5 $3.7
1$4
.53
$5.4
3$1
.47
$1.9
9
$1.3
1 $3.1
7$3
.41
$2.5
1$9
.68
($2.98)
$0.1
2
$1.9
5
$1.3
8$1
.22
$1.8
7
$1.1
7 $2.5
2$1
.79
($4)($2)$0$2$4$6$8
$10$12
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Net
Inco
me
($ B
ill
-10%
-5%
0%
5%
10%
15%
20%
RO
E
Net Income ROE
Source: Reinsurance Association of America.
Reinsurer profitability has rebounded
INVESTMENTS
Investment GainsAre Flat
$0
$10
$20
$30
$40
$50
$60
757677787980818283848586878889909192939495969798990001020304050607*
Net Investment Income$
Bill
ions
Growth History2002: -1.3%2003: +3.9%2004: +3.4%
2005: +24.4%*2006: +5.2%2007: 0.0%**
Source: A.M. Best, ISO, Insurance Information Institute;*Includes special dividend of $3.2B. Increase is 15.7% excluding dividend. **Based on annualized H1 result of $26.128B.
Investment income posted modest gains
in 2006, but is running flat in 2007
-30%
-20%
-10%
0%
10%
20%
30%
40%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Source: Ibbotson Associates, Insurance Information Institute. *Through November 2, 2007.
Total Returns for Large Company Stocks: 1970-2007*
S&P 500 was up 13.62% in 2006, Up 9.82% YTD 2007*
Markets are up in 2007 for the 5th consecutive
year (so far)
US P/C Net Realized Capital Gains,1990-2007:H1 ($ Millions)
$2,8
80 $4,8
06
$9,8
93
$1,6
64
$5,9
97
$9,2
44 $10,
808
$13,
016 $1
6,20
5
$6,6
31
-$1,
214
$6,6
10
$4,1
73
$18,019
$3,3
59
$9,7
01
$9,1
25
$9,8
18
-$5,000
$0
$5,000
$10,000
$15,000
$20,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07*Sources: A.M. Best, ISO, Insurance Information Institute. *As of June 30, 2007.
Realized capital gains rebounded strongly in 2004/5
but fell sharply in 2006 despite strong stock market
as insurers “bank” their gains. Rising again in 2007.
Property/Casualty Insurance Industry Investment Gain1
$ Billions
$35.4$42.8
$47.2$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$60.6$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**
1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain.*2005 figure includes special one-time dividend of $3.2B. **Annualized H1 result of $30.301B.
Sources: ISO; Insurance Information Institute.
Investment gains fell in 2006 and even now are only marginally larger
than in the late 1990s
KEY LINE IMPROVEMENTS:
WILL INSURERS SWEETEN THE DEAL FOR RISKS?
112.
1
112 113 11
5.9 12
0.5
120.
1
106.
6
99.4
96.6
93.4
94
96.7
102.
2 105.
6 108.
9 112.
1
105.
9
101.
6
93.8
84.5
82.8
88.3
87.7
122.5
80
85
90
95
100
105
110
115
120
125
95 96 97 98 99 00 01 02 03 04 05 06
Comm Auto Liab Comm Auto PD
Commercial Auto Liability& PD Combined Ratios
Average Combined: Liability = 108.8
PD = 97.5
Sources: A.M. Best; III
Commercial Auto has improved dramatically
119.
0
119.
8
108.
5
125.
0
113.
1
115.
0 121.
0
116.
2
116.
1
104.
9
101.
9 105.
5
100.
7
116.
8
113.
6
115.
3
122.
4
115.
0
117.
0
97.3
89.0
97.7
93.8
83.6
80
85
90
95
100
105
110
115
120
125
130
95 96 97 98 99 00 01 02 03 04 05 06
CMP-LiabilityCMP-Non-Liability
Commercial Multi-Peril Combined (Liability vs. Non-Liability Portion)
Liab. Combined 1995 to 2004 = 113.8
Non-Liab. Combined = 105.2
Sources: A.M. Best; III
CMP- has improved recently
Workers Comp Calendar Year – Private Carriers
101
97
111
110
107
103
95
100
101 10
7
115 11
8 122
80
90
100
110
120
130
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006p
Calendar Year
Percent
p Preliminary AY figure. Accident Year data is evaluated as of 12/31/2006 and developed to ultimateSource: Calendar Years 1994-2005, A.M. Best Aggregates & Averages; Calendar Year 2006p and Accident Years 1994-2006pbased on NCCI Annual Statement Analysis.Includes dividends to policyholders
Workers Comp Combined Ratios, 1994-2006P
99.8 10
6.6
107.
9 115.
7
129.
7
133.
7 142.
5
137.
6
111.
0
101.
0
91.2
154.7
80
90
100
110
120
130
140
150
160
95 96 97 98 99 00 01 02 03 04 05 06
Medical MalpracticeCombined Ratios
Average Med Mal Combined Ratio
1995-2006
119.3
Sources: A.M. Best; III
Reforms/Award Caps and higher rates have helped to improve
med mal dramatically
138.6
117.6
108.5112.3
104.5110.5
122.6 124.4
111.8114.4 112.1
96.3
80
90
100
110
120
130
140
150
95 96 97 98 99 00 01 02 03 04 05 06
Other LiabilityCombined Ratios*
Average Combined Ratio 1995-2006
114.5
Sources: A.M. Best; III *Includes Officers’ & Directors’ coverage.
Improvements in tort and D&O environment have
contributed to performance
CATASTROPHIC LOSS
Is the Worst Over orYet to Come?
Most of US Population & Property Has Major CAT Exposure
Is Anyplace
Safe?
U.S. Insured Catastrophe Losses*$7
.5$2
.7$4
.7$2
2.9
$5.5 $1
6.9
$8.3
$7.4
$2.6 $1
0.1
$8.3
$4.6
$26.
5$5
.9 $12.
9 $27.
5
$4.7
$100
.0
$61.
9
$9.2
$0
$20
$40
$60
$80
$100
$120
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 0607
**20
??
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. **Through 9/30/07. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Source: Property Claims Service/ISO; Insurance Information Institute
$ Billions
2006 was a welcome respite. 2005 was by far the worst
year ever for insured catastrophe losses in the US, but the worst has yet to come.
$100 Billion CAT year is coming soon
Total Value of Insured Coastal Exposure (2004, $ Billions)
$1,901.6$740.0
$662.4$505.8
$404.9$209.3
$148.8$129.7$117.2$105.3
$75.9$73.0
$46.4$45.6$44.7$43.8
$12.1
$1,937.3
$0 $500 $1,000 $1,500 $2,000 $2,500
FloridaNew York
TexasMassachusetts
New JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaAlabamaGeorgia
DelawareNew Hampshire
MississippiRhode Island
Maryland
Source: AIR Worldwide
Florida & New York lead the way for insured coastal property at more than $1.9 trillion each.
Northeast state insured coastal exposure totals
$3.73 trillion.
Value of Insured Commercial Coastal Exposure (2004, $ Billions)
$994.8$437.8
$355.8$258.4
$199.4$121.3
$83.7$69.7
$52.6$45.3$43.3$39.4
$23.8$20.9$19.9$17.9$6.7
$1,389.6
$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600
New YorkFlorida
TexasMassachusetts
New JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaGeorgia
AlabamaMississippi
New HampshireDelaware
Rhode IslandMaryland
Source: AIR
58% or all insured coastal exposure is
commercial, totaling some $4.2 trillion in 2004
FINANCIAL STRENGTH &
RATINGSIndustry Has Weathered
the Storms Well
Reasons for US P/C Insurer Impairments, 1969-2005
*Includes overstatement of assets.Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;
Catastrophe Losses8.6%
Alleged Fraud11.4%
Deficient Loss
Reserves/In-adequate Pricing62.8%
Affiliate Problems
8.6%
Rapid Growth
8.6%
2003-2005 1969-2005
Deficient reserves,
CAT losses are more important factors in
recent years
Reinsurance Failure3.5%
Rapid Growth16.5%
Misc.9.2%
Affiliate Problems
5.6%
Sig. Change in Business
4.6%
Deficient Loss
Reserves/In-adequate Pricing38.2%
Investment Problems*
7.3%
Alleged Fraud8.6%
Catastrophe Losses6.5%
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2006
90
95
100
105
110
115
120
69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Com
bine
d R
ati o
00.20.40.60.811.21.41.61.82
Impa
irmen
t Rat
e
Combined Ratio after DivP/C Impairment Frequency
Impairment rates are highly
correlated underwriting performance
Source: A.M. Best; Insurance Information Institute
2006 impairment rate was 0.43%, or 1-in-233 companies, half the 0.86% average since 1969
Cumulative Average Impairment Rates by Best Financial Strength Rating*
0%
10%
20%
30%
40%
50%
60%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15Average Years to Impairment
D
C/C-
C++/C+
B/B-
B++/B+
A/A-
A++/A+
Sources: A.M. Best: Best’s Impairment Rate and Rating Transition Study—1977-2002, March 1, 2004.
Insurers with strong ratings are far less likely to become impaired over
long periods of time. Especially important in long-tailed lines.
*US P/C and L/H companies, 1977-2002
Legal Liability & Tort Environment
Definitely Improving ButNot Out of the Woods
Cost of U.S. Tort System($ Billions)
$129
$130 $1
41
$144
$148 $1
59
$156
$156 $1
67
$169 $1
80 $205 $2
33 $246 $2
60
$261 $270 $2
82 $295
$0
$50
$100
$150
$200
$250
$300
$350
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
06E
07E
08E
Tort costs consumed 2.09% of GDP in 2005, down from 2.24% in 2003
Per capita “tort tax” was $880 in 2005, up from $680 in 2000
Reducing tort costs relative to GDP by just 0.25% (to 1.84%) would produce an
economic stimulus of $31.1B
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.
Inflation Adjusted Tort CostsPer Capita, 1950-2005
$96$199
$340$444
$780$722
$878 $897 $914 $880
$0$100$200$300$400$500$600$700$800$900
$1,000
50 60 70 80 90 00 02 03 04 05
Tort costs per capita have
increased 817% since 1950 even
after adjusting for inflation
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.
Tort Costs Relative to GDP,1950-2005
0.62%
1.03%
1.34%1.53%
2.24%
1.82%2.03%
2.22%2.24%2.22%2.09%
$0
$0
$0
$0
$0
$0
50 60 70 80 90 00 01 02 03 04 05
Tort costs relative to GDP have increased more than
3 fold since 1950
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.
Personal, Commercial & Self (Un) Insured Tort Costs*
$17.0$49.6 $58.7
$95.2$17.1
$51.0$70.9
$86.7
$5.2
$20.4
$30.0
$49.4
$0
$50
$100
$150
$200
$250
1980 1990 2000 2005
Commercial Lines Personal Lines Self (Un)Insured
Bill
ions
Total = $39.3 Billion
*Excludes medical malpracticeSource: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.
Total = $121.0 Billion
Total = $159.6 Billion
Total = $231.3 Billion
Tort System Costs,2000-2008F
$179
$233$246
$270$295
$260
$261
$261
$205
1.82%2.03%
2.22% 2.22%2.04%2.09% 2.03%2.05%
2.24%
$100
$120
$140
$160
$180
$200
$220
$240
$260
$280
$300
00 01 02 03 04 05 06E 07F 08F
Tor
t Sys
tem
Cos
ts
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Tor
t Cos
ts a
s % o
f GD
P
Tort Sytem Costs Tort Costs as % of GDP
After a period of rapid escalation, tort system costs as % of GDP are now falling
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends;2006 is III estimate.
Preventing/Limiting Erosionof Recent Tort Reform
• Tort Pendulum Likely to Swing Against Insurers as Political Environment Changes (WA referendum, FL No-Fault?)
• Insurers Must Remain Active Members of Tort Reform Coalitions at State and Federal Level
May have more success at the state level• Pursuing Good Cases Can Set Precedent & Bring About
Quantum Shifts in Judicial PhilosophyCampbell v. State Farm (limited punitives)Safeco v. Burr, Geico v. Edo (FCRA reporting violations)Asbestos: Class actions limited; no pre-pack bankruptciesProducts Liability: Merck’s successful Vioxx defense
• Educate Policyholders About Link Between Tort Environment and Cost/Availability of Insurance
Businesses understand; Need facts to support local effortsPersonal lines customers understand relationship, agents do
• Tighten Contract LanguageFrom 9/11 to Katrina, alleged “ambiguities” cost big bucks
REGULATORY UPDATE
Busy Year for Insurersin Washington
Proposed IRS Rule Change: Domestic Captive Concerns?
• October 2007: IRS proposes rule change that would end deductible status of discounted loss reserves kept by captive insurers. Proposed regulation would:
Defer the tax deduction for an incurred loss arising from related party business until it is actually paid.Essentially result in treating the transaction as non-insurance for tax purposes.Affect domestic captives (including foreign captives which have elected to be treated as domestic for U.S. tax purposes) and all coverages.Overrides the insurance tax treatment afforded to captive insurance transactions for decades by the courts and the IRS.
Source: Business Insurance article 10/18/07; Vermont Captive Insurance Association
Federal Legislative UpdateFederal Terrorism Reinsurance (TRIA)• TRIA expires 12/31/07. The current federal program offers $100 billion of coverage
subject to a $27.5B industry aggregate retention.
• Under S. XXXX: “Terrorism Risk Insurance Program Reauthorization Act of 2007”7-Yr. Extension, expiring 12/31/14Maintains 20% Direct Earned Premium Deductible for duration of ExtensionNBCR risks remain excluded (in contrast to House bill)Eliminates distinction between foreign and domestic acts of terrorismDeletes requirement that terrorist act be on behalf of foreign person or foreign interestChanges in definition of terrorist act require substantial rate and form filings in statesFederal government’s cap remains at $100 billion through 2014Requires Comptroller General to issue report within 1 year on feasibility of NBCR insurance market; CG must also issue report within 180 days on obstacles in development of private sector market for terror insurance
• Administration has said it will not oppose Senate bill (issued veto threat for House)
Sources: Insurance Information Institute
Federal Legislative UpdateNatural Disaster Coverage• Some insurers are pushing for federal catastrophic risk fund coverage in the
wake of billions of dollars of losses suffered by insurers from the 2004-2005 hurricane seasons.
• Legislative relief addressing property/casualty insurers’ exposure to natural catastrophes, such as the creation of state and federal catastrophe funds, has been advocated by insurers include Allstate and State Farm recently. However, there is active opposition many other insurers and allreinsurers.
• There are supporters in Congress, mostly from CAT-prone states. Skeptics in Congress believe such a plan would be a burden on taxpayers like the NFIP and that the private sector can do a better job. Unlike TRIA, the industry is not unified on this issue.
• Allowing insurers to establish tax free reserves for future catastrophe losses has also been proposed, but Congress has not yet indicated much support.
Sources: Lehman Brothers, Insurance Information Institute
Federal Legislative UpdateOptional Federal Charter (OFC)• Large P&C and life insurers are the major supporters of OFC.
Supporters argue that the current patchwork of 50 state regulators reduces competition, redundant, slows new product introductions and adds cost to the system.
• In general, global P/C insurers , reinsurers and large brokers mostly support the concept, while regulators (state insurance commissioners), small single-state and regional insurers, and independent agency groups largely oppose the idea. An optional federal charter is more favorable for global P&C insurers, because an insurer that operates in multiple states could opt to be regulated under federal rules rather than multiple state regulations. As a result, this could increase innovation in the industry.
• Currently appears to be more momentum for OFC for life than for P&C insurers based on the homogeneous nature of many life products. The debate should intensify and although passage may not occur in the current session of Congress, it may lay the groundwork for passage in the 2009-2010 session.
Sources: Lehman Brothers, Insurance Information Institute
Federal Legislative UpdateMcCarran-Ferguson Insurance Antitrust Exemption• Under McCarran-Ferguson Act of 1945, insurers have limited immunity
under federal anti-trust laws allowing insurers to pool past claims information to develop accurate (actuarially credible) rates.
• Very low level of understanding of M-F in Washington • Certain legislators threaten to revoke McCarran-Ferguson because of
alleged collusion in the wake of Hurricane Katrina. However, the view among some Washington insiders is that such a move would hurt small insurers with less resources rather than the large insurers perhaps being targeted. The current bills designed to revoke McCarran-Ferguson are S.618 and H.R. 1081.
• The government appointed Antitrust Modernization Commission in an April 2007 report strongly encouraged Congress to re-examine the McCarran-Ferguson Act. Notably, 4 of the commissions 12 members called for a full repeal of the law. Sources: Lehman Brothers, Insurance Info. Institute
TRIA EXTENSION
ART/Captives Cannot Fill the Void if TRIA Expires
Terrorism Coverage Take-Up Rate Continues to Rise
Source: Narketwatch: Terrorism Insurance 2006, Marsh, Inc.; Insurance Information Institute
24% 26%33%
44% 46% 44%48% 47%
54%59%
64%
03Q2 03Q3 03Q4 04Q1 04Q2 04Q3 04Q4 05Q1 05Q2 05Q3 05Q4
Terrorism take-up rate for non-WC risk rose steadily
through 2003, 2004 and 2005
TAKE UP RATE FOR WC COMP TERROR
COVERAGE IS 100%!!
Insurance Industry Retention Under TRIA ($ Billions)
$10.0$12.5
$15.0
$25.0$27.5
$0
$5
$10
$15
$20
$25
$30
$35
Year 1(2003)
Year 2(2004)
Year 3(2005)
Year 4(2006)
Year 5(2007)
$ B
illio
ns
Source: Insurance Information Institute
•Individual company retentions rise to 17.5%
in 2006, 20% in 2007•Above the retention,
federal govt. pays 90% in 2006, 85% in 2007
Extension
Congress & Administration
want TRIA dead
Insured Loss Estimates: Large CNBR Terrorist Attack ($ Bill)
0.40.80.61.0Auto
$42.3$171.2$196.8$778.1TOTAL
4.135.531.5158.3Commercial Prop.
2.622.612.738.7Residential Prop.
31.487.5126.7483.7Workers Comp
0.43.22.914.4General Liability
$3.4$21.5$22.5$82.0Group Life
Des Moines
San FranciscoWashingtonNew YorkType of Coverage
Source: American Academy of Actuaries, Response to President’s Working Group, Appendix II, April 26, 2006.
Summary• Global commercial lines results were excellent in 2006
and 2007 with momentum for 2008• Soft pricing, limited growth opportunities, increasing
capacity, falling reinsurance prices suggest traditional insurers will look to recapture some of what has been lost to ART—This may be more difficult than many assume
• Will insurers lose discipline?• Major Challenges:
Slow Growth Environment AheadMaintaining price/underwriting disciplineHow/where to deploy/redeploy capitalManaging variability/volatility of results
Insurance Information Institute On-Line
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