what keeps insurance ceos awake at night? overview & outlook for the p/c insurance industry...
TRANSCRIPT
What Keeps Insurance CEOs Awake at Night?
Overview & Outlook for the P/C Insurance Industry
Midwest Actuarial ForumCasualty Actuaries of the Midwest
Schaumburg, IL
March 12, 2003
Robert P. Hartwig, Ph.D., CPCU, Senior 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
• Improve Profitability• Improve Underwriting• Reserving Issues• Improve Pricing• Restore Destroyed Capacity• Improve Investment Performance• The Challenge of Terrorism• The Tragedy of Corporate Governance• Courts & Torts: Abuse of the Civil Justice System• Mold• Insurance Scoring• Q & A
IMPROVE PROFITABILITY
P/C Net Income After Taxes1991-2002E ($ Millions)
$14,178
$5,840
$19,316
$10,870
$20,598
$24,404
$36,819
$30,773
$21,865$20,559
-$6,970
$12,419
-$10,000
-$5,000
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
91 92 93 94 95 96 97 98 99 00 01 02*
*I.I.I. estimate based on first 9 months of 2002 data.Sources: A.M. Best, ISO, Insurance Information Institute.
2001 was the first year ever with a full year net loss
2002 9-Month ROE = 4.4%
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02E 03F
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2003F*
Source: Insurance Information Institute; Fortune
-5%
0%
5%
10%
15%
20%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
ROE Cost of Capital
ROE vs. Cost of Capital: US P/C Insurance: 1991 – 2002
Source: The Geneva Association, Ins. Information Inst.
There is an enormous gap between the industry’s cost of capital and its rate of return
14.6
pts
6.8.
pts
US P/C insurers have missed their cost of capital by an
average 6.6 points since 1991
IMPROVE UNDERWRITING
($60)
($50)
($40)
($30)
($20)
($10)
$0
$101
97
51
97
61
97
71
97
81
97
91
98
01
98
11
98
21
98
31
98
41
98
51
98
61
98
71
98
81
98
91
99
01
99
11
99
21
99
31
99
41
99
51
99
61
99
71
99
81
99
92
00
02
00
12
00
2
Underwriting Gain (Loss)1975-2002*
*Annualized estimate based on first 9 months of 2002 data.Source: A.M. Best, Insurance Information Institute
$ B
illi
ons
P-C insurers paid $22 billion more in claims & expenses than they collected in premiums
in 2002
95
100
105
110
115
120
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02*
P/C Industry Combined Ratio
2001 = 115.7
2002E = 106.3*
2003F = 103.2*
Combined Ratios
1970s: 100.3
1980s: 109.2
1990s: 107.7
2000s: 110.4
*Based on January 2003 III survey of industry analysts.
Sources: A.M. Best; III
110.
5
105.
0 113.
6
119.
2
104.
8
100.
8
100.
5
114.
3
106.
5 114.
4
108.
8 115.
8
106.
9
108.
5
106.
5
105.
8
101.
6
105.
6
107.
7
110.
0 115.
7
104.
9
126.
5
162.
5
90
100
110
120
130
140
150
160
170
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002*
Reinsurance All Lines Combined Ratio
Combined Ratio: Reinsurance vs. P/C Industry
*Reinsurance figure for first 9 months of 2002.
Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
2001’s combined ratio was the worst-ever for reinsurers
U.S. InsuredCatastrophe Losses
$7.5
$2.7$4.7
$22.9
$5.5
$16.9
$8.3 $7.3
$2.6
$10.1$8.3
$4.3
$28.1
$5.8
$0
$5
$10
$15
$20
$25
$30
89 90 91 92 93 94 95 96 97 98 99 00 01 02
*Estimate.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.Source: Property Claims Service/ISO; Insurance Information Institute
$ BillionsCAT losses continue to be a problem,
though 2002 was much better than 2001
10.1
%
8.0%
2.1% 2.5%
0.2%
6.1% 7.
3% 8.1%
11.2
%
14.7
%
1.3%
4.8% 5.2% 6.
6%
5.9%
8.4%
4.9%
8.1%
-1.1
%
-2.1
%
11.0
%
-5%
0%
5%
10%
15%
92 93 94 95 96 97 98 99 00 01 02
Health Benefit Costs WC
Med Claim Costs Rising Sharply
Source: NCCI; William M. Mercer, Insurance Information Institute.
Health care inflation is affecting the cost of medical care, no matter
what system it is delivered through
Outlook for Personal Lines:2002-2003
99.5101.0101.1
109.4
103.5
109.5111.4
107.9
121.7
103.0
112.8
107.1108.2
100.3
90
95
100
105
110
115
120
125
Source: A.M. Best
97 98 99 00 01 02E 03F
PERSONAL AUTO HOMEOWNERS
97 98 99 00 01 02E 03F
Outlook for Commercial Lines:2002 - 2004
121.
7 130.
2
115.
8
118.
5
153.
3
100.
3
116.
6 125.
3
111.
9
103.
6
155.
3
98.8
113.
2 120.
2
108.
3
99.1
158.
1
95.2
113.
0
113.
6
106.
7
99.5
165.
0
92.8
90
100
110
120
130
140
150
160
170
WorkersComp
GL & Prod.Liab
CommercialAuto
CommercialPackage
Med Mal InlandMarine
2001 2002E 2003F 2004F
Sources: A.M. Best, Conning & Co.
HOW DOES THIS HARD MARKET STACK UP TO
PREVIOUS HARD MARKETS?
0%
5%
10%
15%
20%
25%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
Source: A.M. Best, Insurance Information Institute
Hard Markets Since 1970
There have been 3 hard markets since 1970:
1975-1978
1985-1987
2001-200?
1975-78 1985-87 2001-03
-10%
-5%
0%
5%
10%
15%
20%
25%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
Current $ Real $
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
Strength of Recent Hard Markets by Real NWP Growth
Real NWP Growth During Past 3 Hard Markets
1975-78: 8.6%
1985-87: 14.5%
2001-03: 9.1%
1975-78 1985-87 2001-03
100
125
150
175
200
225
250
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
E
20
03
F
Cumulative GDP GrowthCumulative NWP Growth
Note: Shaded area denotes hard market.Source: Insurance Information Institute
GDP Growth vs. Net Written Premium Growth (1987=100)
The gap between cumulative GDP and Net Written Premium growth
hit a maximum of 52.5 pts or 33.7% in 2000. In 2003, the
estimated gap is 29.0 pts or 15.2%.
Hard Market
52.5
pts
29.0 pts
RESERVING ISSUES
Reserve Deficiency, by Line(AY 1992-2001, as of 12/01)
-$0.8-$1.8
-$4.1
-$6.2
-$9.1
-$3.8
-$0.8
-$17.8 -$18.0
-$1.9
-$20
-$18
-$16
-$14
-$12
-$10
-$8
-$6
-$4
-$2
$0HO PPA Liab CA Liab WC CMP Med Mal*
SpecialLiab
OtherLiab*
XS LiabReins
ProdLiab*
*Occurrence and claims madeSource: Morgan Stanley
Estimated Deficiency
Total Excluding A&E: $64 Billion
A&E Deficiency: $55 Billion
Total Including A&E: $120 Billion
IMPROVE PRICING
0%
5%
10%
15%
20%
25%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
*Estimate/forecast based on January 2003 III survey of industry analysts.Source: A.M. Best, Insurance Information Institute
Growth in Net Premiums Written (All P/C Lines)
2001: 8.1%
2002: 14.2% (est.)*
2003: 12.7% (forecast)*
The underwriting cycle went AWOL in the 1990s.
It’s Back!
Council of Insurance Agents & Brokers Rate Survey
Fourth Quarter 2002Rate Increases By Line of BusinessRate Increases By Line of Business
No Change Up 1-10% 10-20% 20-30% 30-50% 50%-100% >100%Change Up 1-10% 10-20% 20-30% 30-50% 50%-100% >100%
Comm. Auto 6% 14% 42% 25% 8% 1% 0%
Workers Comp 8% 17% 25% 24% 10% 2% 2%
General Liability 7% 13% 29% 37% 11% 0% 0%
Comm. Umbrella 8% 3% 21% 21% 26% 10% 5%
D&O 6% 4% 22% 23% 18% 9% 3%
Comm. Property 8% 16% 25% 25% 18% 3% 0%
Construction Risk 4% 8% 17% 18% 23% 9% 4%
Terrorism 12% 5% 8% 12% 5% 0% 6%
Business Interr. 13% 19% 36% 14% 4% 0% 0%
Surety Bonds 8% 16% 16% 15% 6% 1% 1%
Med Mal 1% 5% 6% 6% 12% 12% 16%
100110
120130
140150
160170
180190
200210
220230
240250
260
89 90 91 92 93 94 95 96 97 98 99 00 01 02*
Rate On Line Index(1989=100)
Source: Guy Carpenter * III Estimate
Prices rising, limits falling: ROL up significantly
Cost of Risk per $1,000 of Revenues: 1990-2002E
$6.10
$6.40
$8.30$7.70
$7.30
$6.49
$5.70$5.25
$5.71
$5.20$4.83
$5.55
$6.94
$4
$5
$6
$7
$8
$9
$10
90 91 92 93 94 95 96 97 98 99 00 01E 02E
Source: 2001 RIMS Benchmark Survey; Insurance Information Institute estimates.
•Cost of risk to corporations fell 42% between 1992 and 2000
•Estimated 15% increase in 2001, 25% in 2002
• About half of 2002 increase due to 9/11
Average Price Change of Personal Lines Renewals
9%
9%
7%
9%
6%
6%3%
4%
1%
5%
4%
1%-1%
2%
0%
2%
-2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9%
Homeowners
Personal Auto
2003* 2002* 2001* Fall 2000 Spring 2000 Fall 99 Spring 99 Fall 98*III estimatesSource: Conning, III
Average Expenditures on Auto Insurance: US
668
691 70
670
4
683 68
7
723
784
855
$600
$650
$700
$750
$800
$850
$900
1995
1996
1997
1998
1999
2000
2001
*
2002
*
2003
*
*Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute
Countrywide auto insurance expenditures are expected to rise
8-10% in 2003
Average Expenditures on Homeowners Ins.: US
418
440 45
548
1 488 50
0 512
553
603
$400
$450
$500
$550
$600
$650
1995
1996
1997
1998
1999
2000
*
2001
*
2002
*
2003
*
*III EstimatesSource: NAIC, Insurance Information Institute
Average HO expenditures are expected to rise by 8-10% in 2003
Urban Legend Insurance is More
Expensive than Ever and is Squeezing Families and
Businesses Alike
Commercial Lines Net Written Premium as % of GDP
2.3%
2.1%2.1%
2.0%
1.9%1.9%
1.9%1.8%
1.7%
1.6%
1.5%1.5%1.5%
1.6%
1.8%
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
2.2%
2.4%
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02E
Sources: Insurance Information Institute, calculated from U.S. Bureau of Economic Analysis and A.M. Best data.
Commercial insurance premiums as a % of GDP fell 35% between 1988 and 2000 and remains far
below late 1980’s levels
More Cover for Less Money: Terms & conditions broadened
significantly during the soft market, even as prices fell
Cost of Risk per $1,000 of Revenues: 1990-2002E
$6.10
$6.40
$8.30$7.70
$7.30
$6.49
$5.70$5.25
$5.71
$5.20$4.83
$5.55
$6.94
$4
$5
$6
$7
$8
$9
$10
90 91 92 93 94 95 96 97 98 99 00 01E 02E
Source: 2001 RIMS Benchmark Survey; Insurance Information Institute estimates.
•Cost of risk to corporations fell 42% between 1992 and 2000
•Estimated 15% increase in 2001, 25% in 2002
Cost of risk is still less than it was a decade ago!
Homeowners Insurance Expenditure as a % of Median Home Price
$1
07
,20
0
$1
15
,80
0
$1
21
,80
0
$1
28
,40
0
$1
33
,30
0
$1
39
,00
0
$1
47
,80
0
$1
57
,80
0
$1
10
,50
00.39%
0.38% 0.38%
0.37% 0.37% 0.37%
0.36%
0.35% 0.35%
$100,000
$125,000
$150,000
$175,000
$200,000
94 95 96 97 98 99 00 01 02
0.30%
0.33%
0.35%
0.38%
0.40%Median Sales Price of Existing HomesHO Insurance Expenditure as a % of Sales Price
*As of January 2003.Source: Insurance Information Institute calculations based on data from National Association of Realtors, NAIC.
HO
Exp
end
iture as %
of Sales P
riceMed
ian
Hom
e S
ales
Pri
ce
The cost of homeowners
insurance relative to the
price of a typical home has fallen!
Change in Cost of Homes vs. Change in Cost of Homeowners Insurance
$3,300
-$2
$5,300
$22
$6,000
$15
$6,600
$26
$4,900
$7
$5,700
$12
$8,800
$12
$10,000
$41
-$2,000
$0
$2,000
$4,000
$6,000
$8,000
$10,000
1995 1996 1997 1998 1999 2000 2001 2002*
Change in Cost of Median Existing HomeChange in Average Homeowners Insurance Expenditure
Recent increases in the cost of homeowners insurance are
miniscule in comparison to the soaring cost of homes
*August 2002Source: Insurance Info. Inst. calculations based on data from Natl. Association of Realtors, NAIC.
RESTORE DESTROYED
CAPACITY
$0
$50
$100
$150
$200
$250
$300
$350
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
Policyholder Surplus: 1975-2002*
*As of September 30, 2002Source: A.M. Best, Insurance Information Institute
Bil
lion
s
(US
$)
Surplus (capacity) peaked at $336.3 Billion in mid-1999 and has fallen by 18.7% ($63 billion) to $273.3 billion since then.
•Surplus fell 5.6% during first 9 months of 2002
•Surplus is now lower than at year-end 1997.
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
Global P/C Insurance Capacity is Falling Dramatically
$920
$690
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
2000:I 2002:IV (est.)
$ B
illi
ons
Sources: Insurance Information Institute, Swiss Re
Global non-life capacity is down
25% over the past 2 years
Capital Raising by P/C Insurers Since September 11, 2001*
$20,492
$11,442
$16,437
$4,872
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
2001 2002*
($ M
illi
on
s)
Completed Pending
$25.4 Billion$27.9 Billion
*As of September 13, 2002.
Source: Morgan Stanley, Insurance Information Institute.
14 Pending 38 Pending
40 Completed 33 Completed
Capital Raising by P/C Insurers Since 9/11 Totals $53.2B
Capital Myth: US P/C Insurers Have $300 Billion to Pay Terrorism Claims
"Target" Commercial*$100 billion
33%
Other Commercial$50 billion
17%
Personal$150 billion
50%
Total PHS = $298.2 B as of 6/30/01
= $273.3 B as of 9/30/02
*”Target” Commercial includes: Comm property, liability and workers comp; Surplus must also back-up on non-terrorist related property/liability and WC claimsSource: Insurance Information Institute
Only 33% of industry surplus backs up “target” lines
IMPROVE INVESTMENT
PERFORMANCE
$0
$9
$18
$27
$36
$45
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
Net Investment Income
Facts
1997 Peak = $41.5B
2000= $40.7B
2001 = $37.7B
2002E* = $35.2B
Bil
lion
s
(US
$)
Investment income in 2002 is expected to fall 5 to 6% due primarily to historically low interest rates
*Annualized estimate based on first 9 months of 2002 data.Source: A.M. Best, Insurance Information Institute
0%
2%
4%
6%
8%
10%
12%
14%
16%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
*
3-Month T-Bill 1-Yr. T-Bill 10-Year T-Note
Interest Rates: Lower Than They’ve Been in Decades
*As of February 2003.Source: Board of Governors, Federal Reserve System; Insurance Information Institute
1. Historically low interest rates are the primary driver behind lower investment yields. Nevertheless, overall insurer investment performance outpaces all major market indices and almost every major category of mutual fund.
2. 66% of the industry’s invested assets are in bonds
-30%
-20%
-10%
0%
10%
20%
30%
40%
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
Large Company Stocks*As of March 7, 2003.Source: Ibbotson Associates, Insurance Information Institute
Total Returns for Large Company Stocks: 1970-2003*
2002 was 3rd consecutive year of decline for stocks
Will 2003 be the 4th?
P/C Industry Investments,by Type (as of Dec. 31, 2001)
Other5%
Bonds66%
Real Est. & Mortgages
1%
Common Stock21%
Cash & ST Secs.6%
Preferred Stock1%
Bond Holdings, by Type
Industrial & Misc. 32.5%
Special Revenue 30.5%
Governments 18.0%
States/Terr/Other 15.4%
Public Utilities 3.1%
Parents/Subs/Affiliates 0.5%
Source: A.M. Best, Insurance Information Institute
Common stock accounts for about 1/5 of invested
assets
Property/Casualty Insurance Industry Investment Gain*
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$39.5
$57.9
$51.9
$56.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 2002E
*Investment gains consists primarily of interest, stock dividends and realized capital gains and losses.Source: Insurance Services Office; Insurance Information Institute estimate annualized as of 9/30/02.
Investment gains are simply returning to “pre-bubble” levels
Geopolitical Instability Increased in 2002, Boiling Over in 2003
War on Terrorism
Terrorists & Terrorism
North Korea: Nukes & KooksIraq: War
Jitters
THE CHALLENGE OF TERRORISM
Sept. 11 Industry Loss Estimates($ Billions)
Life$2.7 (7%)
Aviation Liability$3.5 (9%)
Other Liability
$10.0 (25%)
Biz Interruption$11.0 (27%)
Property -WTC 1 & 2$3.5 (9%)
Property - Other
$6.0 (15%)
Aviation Hull$0.5 (1%)
Event Cancellation
$1.0 (2%)
Workers Comp
$2.0 (5%)
Consensus Insured Losses Estimate: $40.2BSource: Insurance Information Institute
Industry Losses Under Proposed Federal Backstop Using 9/11 Scenario
(as interpreted on date of enactment, Nov. 26, 2002)
$8.75$12.50
$18.75$1.125
$10.
575
$15.
75
$18.
00
$0
$5
$10
$15
$20
$25
$30
Year 1 Year 2 Year 3
($ B
illi
ons)
Industry Retention Surcharge Layer Co-Reinsurance Layer
Source: Insurance Information Institute.
$1.75B Industry Co-Share
Assumes $30B Commercial Prop & WC Loss, $125B “At Risk” Commercial DPE
$2.0B Industry Co-Share
$0.925B Industry Co-Share
$0.125B Industry Co-Share
Total Ind. Loss: $10.875B $14.25B $19.675B
Terrorism Act Summary• Terrorism Risk Insurance Act signed into law Nov. 26, 2002• Capping of risk allows insurers to estimate PMLs
Enhances ability to price
• Industry maintains significant retentions & FF exposure Company: 7%, 10%, 15% Comm. DPE in Years 1, 2, 3
• Aggregate industry cap of $10B, $12.5, 15B in those years• 10% co-reinsurance above industry aggregate• Government liability capped at $100B• Legislation requires mandatory offer of terror coverage• Reinsurers/Life insurers NOT eligible under the program• UPSHOT:
Bill will help a bit (expectation may be too high) Laws of insurance economics are not suspended Price/availability still a function of risk and capital available
Terrorism Act Summary• Mechanics of the Bill:
Bill immediately creates/reinstates coverage for all commercial policyholders (even those that declined or purchased sub-limited coverage)
Mandatory offer of coverage within 90 days (Feb. 24, 2003)Policyholder has 30 days to accept/reject (can negotiate after
rejection)Charge for terrorism must now appear as a line itemClaims must be processed in accordance with “appropriate
business practices”• Law Sunsets in 3 years (12/31/05)• State authority to disapprove rates if excessive,
inadequate or unfairly discriminatory retained• Civil liability can exist as federal cause of action• Federal definition of terrorism applies
Property Market ResponseTerrorism Market is Inconsistent
High take-up rate among small risksVery low take-up rate for larger risks
Carriers/brokers report take-up rate of just 15% - 25 % for larger risksPrices cited varied from 0% to 1,000% of property premiums but quotes in
the 2% - 4% range typical as insurers sought to distribute max loss under TRIA loss across policyholder base
Could change substantially for 2003 renewal: more indiv. ratingReasons Businesses Decline Coverage
Expense Want to bargain with insurer; attempt to change terms/conditions Feel likelihood of an attack impacting them is remote Believe government will bail them out Feel“Fire Following” provision will compel coverage Will try self insurance; investigate alternative risk transfer options
Source:Marsh, Inc.; Insurance Information Institute.
Property Market Response• Problems
Low take-up rate => possible adverse selection problemInsurability of terrorism still question despite TRIA12/31/05 sunset date will cause market to unravel in 2004
• Stand-alone terrorism marketSome quotes being sought for certified and non-certified lossesThose treaties that existed are expiring and capacity for 2003 is uncertainSome insurers have reallocated resources
• Reinsurance MarketSome property catastrophe treaty renewals at Jan 1 were renewed
including “non-certified” terrorism but still excluding nuclear, biological and chemical
Reinsurers cautious about risk accumulation (e.g., zip code buckets)Insurers are seeking reinsurance to buy down their retentions
Source:Marsh, Inc.; Insurance Information Institute.
TRIA Effect on Upcoming Renewals be Affected?
• Unlike well-communicated issues surrounding in-force policies in TRIA notice period, there are no time constraints as respects offer, acceptance or payments
• Renewal quotations will include a separate line item for terrorism coverage
• Options are to decline, purchase or negotiate the terrorism premium
• Now that terrorism coverage must be offered - underwriters may be reluctant to offer any coverage or may offer reduced limits for risks they view as potential terrorist targetsCapital allocation vs. underwriting decisions
Source:Marsh, Inc.; Insurance Information Institute.
CRISIS IN CORPORATE
GOVERNANCE
Accounting Problems are Getting Many Companies into Trouble
•Enron was tip of an iceberg
•Major implications for insurers (p/c and life)
Financial Restatements Filed
116
160
215233
270
0
50
100
150
200
250
300
1997 1998* 1999* 2000 2001
*ApproximateSources: Huron Consulting Group
The number of financial restatements is rising
even thought the number of publicly traded
companies is falling.
Shareholder Class Action Lawsuits*
*Securities fraud suits filed in U.S. federal courts.**Suits of $100 million or more.Source: Stanford University School of Law; Insurance Information Institute
164202
163
231188
110
178
236209 216
487
258
0
100
200
300
400
500
600
91 92 93 94 95 96 97 98 99 00 01 02
Shareholders typically recover just 2.56% of amount lost; 1/3 of that
goes to lawyers & expenses**
ABUSE OF THE U.S. CIVIL JUSTICE
SYSTEM
TORT-ure
• Asbestos• “Toxic” Mold• Medical Malpractice• Construction Defects• Lead• Fast Food• Arsenic Treated Lumber • Guns• Genetically Modified Foods (Corn)• Pharmaceuticals & Medical Devices• Security exposures (workplace violence, post-9/11 issues)• What’s Next?• Slavery• Sept. 11??
Favorite 5 for 2002:Is the U.S. Legal System Out of Control?
5. “Children Uncover Porn in Barney Book”-CNN.com, December 27, 2002
4. “Cat Owners Sue Airlines for $5 Million”-The Daily Review, August 29, 2002
3. “Ed McMahon Sues Over Toxic Mold Invasion”-USA Today, April 11, 2002
2. “Rodman Sued for Rubbing Dice on Casino Employee’s Crotch”-The Gazette (Montreal)
1. “Teenagers’ Suit Says McDonald’s Made Them Obese”
-The New York Times, November 21, 2002
Average Jury Awards1994 vs. 2000
419759
187 333
1,140 1,185
1,744
1,168
1,727
269698
3,482 3,566
6,817
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
Overall BusinessNegligence
VehicularLiability*
PremisesLiability
MedicalMalpractice
WrongfulDeath
ProductsLiability
($00
0)
1994 2000
Source: Jury Verdict Research; Insurance Information Institute.
Trends in Million Dollar Verdicts*
4%
8% 8%
19% 24
%
34% 40
%
4%
9%
12%
25%
24%
39%
50%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
VehicularLiability
PremisesLiability
PersonalNegligence
BusinessNegligence
GovernmentNegligence
MedicalMalpractice
ProductsLiability
94-96 97-98 99-00
*Verdicts of $1 million or more.Source: Jury Verdict Research; Insurance Information Institute.
Very sharp jumps in multi-million dollar awards in recent years across virtually all types of defendants
Cost of U.S. Tort System($ Billions)
Source: Tillinghast-Towers Perrin; Insurance Information Institute estimates for 2001/2002 assume tort costs equal to 2% of GDP. 2005 forecasts from Tillinghast.
$129 $130$141 $144 $148
$159 $156 $156$167 $169 $179
$198 $204
$298
$0
$50
$100
$150
$200
$250
$300
$350
90 91 92 93 94 95 96 97 98 99 00 01* 02E* 05F
Tort costs consumed 2.0% of GDP annually on average since 1990, expected to rise to 2.4% of GDP by 2005!
Tort costs equaled $636 per person in 2000!
Expected to rise to $1,000 by 2005
Tort Costs as a % of GDP*
0.4%
0.6%
0.8%
0.8%
0.8%
0.9%
1.0%
1.1%
1.1%
1.3%
1.7%
1.9%
0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0%
Denmark
U.K.
France
Japan
Canada
Switzerland
Spain
Australia
Belgium
Germany
Italy
U.S.
*1998 (latest available)Source: Tillinghast-Towers Perrin
High tort costs put the U.S. economy at a significant disadvantage.
Where the Tort Dollar Goes(2000)
Source: Tillinghast-Towers Perrin
Awards for Non-Economic
Loss22%
Claimants' Attorney Fees
17%Awards for
Economic Loss20%
Defense Costs16%
Administration25%
Tort System is extremely inefficient:
Only 20% of the tort dollar compensates victims for economic losses
At least 58% of every tort dollar never reaches the victim
Personal, Commercial & Self (Un) Insured Tort Costs*
$17.0
$49.1 $57.2$17.1
$51.0
$70.9
$5.4
$20.1
$29.6
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
1980 1990 2000
Commercial Lines Personal Lines Self (Un)Insured
Bil
lion
s
Total = $39.5 Billion
*Excludes medical malpracticeSource: Tillinghast-Towers Perrin
Total = $120.2 Billion
Total = $157.7 Billion
Medical Malpractice: Tort Cost Growth is Skyrocketing
$ Billions
$1.2
$1.5
$1.9
$2.3
$5.4 $6
.5 $7.1
$7.0
$6.8
$7.1
$7.2 $7
.9 $8.7 $9
.4 $10.
8
$11
.6
$12.
4
$13.
5
$14.
6 $16.
2
$17.
6 $19.
4 $20.
9
$2.9
$3.6 $4
.4
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
$20
$22
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
Sources: Tillinghast-Towers Perrin, US Bureau of Labor Statistics, Insurance Information Institute
•Over the period from 1990 through 2000, medical malpractice tort costs rose 140%, more than double the 60% increase in medical costs generally over the same period!
•Over the period from 1975 through 2000, medical malpractice tort costs skyrocketed by 1,642% while medical costs generally rose 449%, nearly 4 times as fast!
Frequency of $1 Million + Jury Verdicts (Per 1,000 Doctors)
3.71
3.10
2.40
2.141.93
1.31
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
NY NJ OH FL US Avg. CA
Source: Jury Verdict Research, American Medical Association, Insurance Information Institute.
CA’s Medical Injury Compensation Reform Act, passed in 1975, has
helped to contain jumbo jury awards, keeping med mal premiums
affordable and health care available.
The frequency of awards for $1 million and up in CA is 32% below the national average.
‘TOXIC’ MOLD
Great Pyramid of Mold
Source: Insurance Information Institute
U.S.: Documented Toxic Mold SuitsFormer
Owners of Sold Homes
10%Bad Faith
Against Insurers
50%Builder for
Construction Defects
20%
HO Associations for Improper Maintenance
20% Source: www.toxlaw.com; Guy Carpenter
1,000 Cases
2,000 Cases
5,000 Cases
2,000 Cases
Texas Accounted for the Vast Majority of New Mold Cases in 2001
Claims Arising Inside
TX70%
Claims Arising
Outside TX 30%
Source: Insurance Information Institute
Texas: Estimated Total Number of Mold Claims, 1999-2002E*
115,182
128,271
169,982
237,299
100,000
150,000
200,000
250,000
1999 2000 2001 2002E
Source: Texas Department of Insurance;*2002 III estimate is annualized figure based on data through September 2002.
The number of mold claims rose 106% between 1999 and 2002
TX: Annual Losses from Mold Claims*
$320$417
$1,002
$2,279
$0
$500
$1,000
$1,500
$2,000
$2,500
1999 2000 20001 2002E
Mold claim costs rose 612% between 1999 and 2002
$ Millions
Source: Texas Department of Insurance;*2002 III estimate is annualized figure based on data through September 2002.
California: Surging Water Claim Frequency and Costs:
Symptom of Growing Mold Problem
$206.1
$276.5$286.6
$383.7
$430.6
24%
29%
27%
32%
31%
$100
$150
$200
$250
$300
$350
$400
$450
1997 1998 1999 2000 2001
20%
22%
24%
26%
28%
30%
32%
34%
Paid Water Losses ($ Mill) Water Claims as % of All Homeowners Claims
Source: Insurance Information Network of California; Insurance Information Institute
•Water losses paid rose 109% from 1997 to 2001 and 50% since 1999
•Water claims accounted for less than 1/4 of all HO claims in 1997, now they account for nearly 1/3.
California may be in a drought, but homeowners say they’re drowning
Sharply Rising Average Water Claim Cost: Mold Symptom
$2,537$2,631
$3,339
$3,719
$4,730
$2,000
$3,000
$4,000
$5,000
1997 1998 1999 2000 2001
Source: Insurance Information Institute based on data from the Insurance Information Network of California;
The cost of the average water loss in CA surged 27% in 2001 and 80% since 1998
Where are the Next Battlefields for Mold?
• Homeowners issue probably crested in 2003• Migration to commercial area affects many lines:
Commercial Property Commercial LiabilityProducts Liability Builders Risk/Construction DefectsWorkers Comp…
• Hot Spots: Apartments/Condos/Co-ops Office Structures Schools Municipal BuildingsCars? (GM case in NC)
• Trend toward class actions since science doesn’t support massive individual non-economic damagesMuch more lucrative for trial lawyers to form class
Source: Insurance Information Institute.
INSURANCE SCORING
Credit in Personal Lines Underwriting
Why Insurers Use Credit Information in Insurance Underwriting
1. There is a strong correlation between credit standing and loss ratios in both auto and homeowners insurance.
2. There is a distinct and consistent decline in relative loss ratios (which are a function of both claim frequency and cost) as credit standing improves.
3. The relationship between credit standing and relative loss ratios is statistically irrefutable.
4. The odds that such a relationship does not exist in a given random sample of policyholders are usually between 500, 1,000 or even 10,000 to one.
Source: Insurance Information Institute.
1.324
1.107 1.0700.978 0.922 0.969
0.8590.798 0.767
1.122
0.0
0.5
1.0
1.5
2.0
Score Range
Rel
ativ
e P
erfo
rman
ceCredit Quality & Auto Insurance*
Interpretation
Individuals with the lowest scores have losses that are 32.4% above average; those with the best scores have losses that are 33.3% below average.
Should those who impose less cost on the system be forced to subsidize those who impose more?
Source: Tillinghast Towers-Perrin *Actual data from sampled company. More examples are given later in this presentation.
Age of Drivers Involved in Auto Accidents, 2000
61.88
45.96
31.6526.19
22.59 20.81 18.3
29.95
0
10
20
30
40
50
60
70
16-20 21-24 25-34 35-44 45-54 55-64 65-69 OverallInvo
lve
me
nt R
ate
pe
r 1
00
,00
0 L
ice
nse
d D
rive
rs
Source: National Highway Traffic Safety Administration, Traffic Safety Facts 2000.
Interpretation:
Drivers age 16-20 are 2 to 3 times more likely to be involved in auto accidents. Should this
be ignored with better, more experienced drivers subsidizing teenagers?
OF COURSE NOT!
Gender of Drivers Involved in Fatal Auto Accidents, 2000
27
16
0
10
20
30
Male FemaleNo
. Driv
ers
in F
ata
l Acc
ide
nts
/bill
ion
mile
s d
rive
n
Source: National Safety Council
Interpretation:
Males are 69% more likely to be driving in fatal auto accidents. Should this be ignored and females be forced to subsidize males?
OF COURSE NOT!
1.593
0.9110.795
0.656
1.066
0.0
0.5
1.0
1.5
2.0
Score Range
Rel
ativ
e P
erfo
rman
ceCredit Quality & Homeowners
Insurance (Sample Company)
Probability that Correlation Exists: 99.32%
Source: Tillinghast Towers-Perrin
Intuition Behind Insurance Scoring*
1. Personal Responsibility Responsibility is a personality trait that carries over into many
aspects of a person’s life It is intuitive and reasonable to believe that the responsibility
required to prudently manage one’s finances is associated with other types of responsible and prudent behaviors, for example: Proper maintenance of homes and automobiles Safe operation of cars
2. Stability It is intuitive and reasonable to believe that financially stable
individuals are like to exhibit stability in many other aspects of their lives.
3. Stress/Distraction Financial stress could lead to stress, distractions or other
behaviors that produce more losses (e.g., deferral of car/home maintenance).
*This list is neither exhaustive nor is it intended to characterize the behavior of any specific individual.
Source: Insurance Information Institute
Consequences of Banning Use of Credit in Insurance Underwriting
Banning the use of credit information will:
• Force good drivers and responsible homeowners to subsidize those with poor loss histories by hundreds of millions of dollars each year.
• Decrease incentives to drive safely• Decrease incentives to properly maintain cars and homes• Force insurers to rely on less accurate types of
information, such as DMV records.• Make non-standard risks more difficult to place• Increase size of residual market pools/plans
Average Omission Rate for Selected Convictions
28.5%
21.0% 21.0% 20.0% 19.3%16.0%15.0% 14.8%
11.8% 10.0%
0%5%
10%15%20%25%30%
Negl/R
eckl
ess
No In
sura
nce
Unsaf
e Driv
ing
Licen
se/R
egis
.
Illeg
al T
urn
Defec
tive/
Imp
Equip.
Insp
ectio
n/ Pla
tes
DUI
Stop
Light/
Sign
Speed
ing
% C
onvi
ctio
ns M
issi
ng fr
om D
MV
Rec
ords
Source: Insurance Research Council, Accuracy of Motor Vehicle Records (2002).
Some Groups Want to Ban C.L.U.E. Too!
Ad run by realtors in AZ in January 2003: But how would homeowners be
helped if CLUE is banned?
CLUE helps protect homebuyers by letting them see what problems a house has had before they buy it
A house without problems or that has been properly repaired will command a
premium, benefiting sellers
A house can be made safer and less expensive to insure if repairs have
been made properly
Don’t YOU want to know what you’re buying before you make the biggest investment of your life???
Summary• Economics of the industry suggest hard market should
continue into 2004 If it doesn’t, it will end badly for some insurersCombined ratio remains unacceptably high given current
investment environmentTop line improvement outpacing bottom line improvementReserve hangover still enormous
• US courts still out of controlHopes for significant tort reform probably too high
• Regulatory zealotry making a come back• Many challenges to deal with today, more tomorrow!
Insurance Information Institute On-Line
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