workers compensation: overview, outlook and review of critical issues insurance information...
TRANSCRIPT
Workers Compensation: Overview, Outlook and Review of Critical
Issues
Insurance Information InstituteMarch 29, 2012
Download at www.iii.org/presentationsRobert P. Hartwig, Ph.D., CPCU, President & Economist
Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org
2
Presentation Outline
Summary of P/C Financial Performance Profitability Underwriting Performance & Financial Strength Premium Growth Capital/Capacity Investments
Workers Compensation Operating Environment US and California Comparisons
Workers Compensation in the Aftermath of the “Great Recession” Economic Growth: US and CA Labor Market Analysis Impacts for Workers Compensation
Regulatory Update Dodd-Frank Implementation Federal Insurance Office: Status Update
Healthcare Reform: An Update and Implications for Workers Compensation Implementation Timetable for Key Provisions Medicare Issues Challenges to the PPACA (“ObamaCare”) & Supreme Court Hearings
Q&A
3
P/C Insurance Industry Financial Overview
Profit Recovery Was Set Back in 2011 by High Catastrophe
Loss & Other Factors
3
P/C Net Income After Taxes1991–2011:Q3 ($ Millions)
$1
4,1
78
$5
,84
0
$1
9,3
16
$1
0,8
70
$2
0,5
98
$2
4,4
04 $
36
,81
9
$3
0,7
73
$2
1,8
65
$3
,04
6
$3
0,0
29
$6
2,4
96
$3
,04
3
$3
4,6
70
$7
,97
9
$2
8,6
72
-$6,970
$6
5,7
77
$4
4,1
55
$2
0,5
59
$3
8,5
01
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*
2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 5.6% 2011:Q3 ROAS1 = 1.9%
P-C Industry 2011:Q3 profits were down 71% to $8.0B vs. 2010:Q3,
due primarily to high catastrophe losses and as non-cat
underwriting results deteriorated
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 3.0% ROAS for 2011:Q3, 7.5% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO, Insurance Information Institute 4
A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs
Combined Ratio / ROE
* 2008 -2010 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2011-12 combined ratios are A.M. Best estimate excl. M&FG insurers. Source: Insurance Information Institute from A.M. Best and ISO data.
97.5
100.6 100.1 100.8
92.7
101.099.3
100.8102.0
107.5
95.7
6.1%
3.9%
7.5%7.4%4.4%
9.6%
15.9%
14.3%
12.7% 10.9%
8.8%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2007 2008 2009 2010 2011E 2012F0%
3%
6%
9%
12%
15%
18%
Combined Ratio ROE*
Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs
A combined ratio of about 100 generated ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
5
-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
07
08
09
10
11
*1
2
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2012F*
*Profitability = P/C insurer ROEs. 2011-12 figures are A.M. Best estimates. Note: Data for 2008-2012 exclude mortgage and financial guaranty insurers. For 2011:Q3 ROAS = 1.9% including M&FG.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
1977:19.0% 1987:17.3%
1997:11.6%2006:12.7%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years
10 Years9 Years
2012F: 6.1%*
History suggests next ROE peak will be in 2016-2017
ROE
1975: 2.4%
2011E: 3.9%
6
7
ROE: Property/Casualty Insurance vs. Fortune 500, 1987–2011*
* Excludes Mortgage & Financial Guarantee in 2008 - 2011.Sources: ISO, Fortune; A.M. Best (2011 P/C ROE); Insurance Information Institute (2011 Fortune 500 est.)
-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 07 08 09 10 11E
P/C Profitability Is Both by Cyclicality and Ordinary Volatility
Hugo
Andrew
Northridge
Lowest CAT Losses in 15 Years
Sept. 11
Katrina, Rita, Wilma
4 Hurricanes
Financial Crisis*
(Percent)
8
ROE vs. Equity Cost of Capital:U.S. P/C Insurance:1991-2011*
* Return on average surplus used as proxy for ROE in 2008-2010 and excluding mortgage and financial guaranty insurers for these years. 2011 figure is A.M. Best ROE estimate. Change in model methodology in 2011 increased cost of capital by approximately 90 basis points.Source: The Geneva Association, Insurance Information Institute
-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 07 08* 09* 10* 11*
ROE Cost of Capital
-13
.2 p
ts +1
.7 p
ts
+2
.3 p
ts
-9.0
pts
-6.4
pts
-3.2
pts
The P/C Insurance Industry Fell WellShort of Its Cost of Capital Every Year Since 2008
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, Fell Short in 2008-2010
The Cost of Capital is the Rate of Return Insurers Need to
Attract and Retain Capital to the Business
(Percent)
-2.9
pts
-8.0
pts
8
The BIG Question:When Will the Market Turn?
10
Are Catastrophes and Other Factors Pressuring Insurance Markets?
10
11
Criteria Necessary for a “Market Turn”:All Four Criteria Must Be Met
Criteria Status Comments
Sustained Period of
Large Underwriting
LossesEarly Stage,
Inevitable
•Apart from 2011 CAT losses, overall p/c underwriting losses remain modest•Combined ratios (ex-CATs) still in low 100s (vs. 110+ at onset of last hard market)•Prior-year reserve releases continue to reduce u/w losses, boost ROEs, though more modestly
Material Decline in Surplus/ Capacity
Entered 2011 At Record
High; Since Fallen
•Surplus hit a record $565B as of 3/31/11•Fell by 4.6% through 9/30/11 (latest available)•Little excess capacity remains in reinsurance markets•Weak growth in demand for insurance is insufficient to absorb much excess capacity
Tight Reinsurance
MarketSomewhat in
Place
•Much of the global “excess capacity” was eroded by cats•Higher prices in Asia/Pacific•Modestly higher pricing for US risks
Renewed Underwriting
& Pricing Discipline
Some Firming esp. in
Property, WC
•Commercial lines pricing trends have turned from negative to flat or up in some lines (property, WC); Casualty is flat.•Competition remains intense as many seek to maintain market share
Sources: Barclays Capital; Insurance Information Institute.
P/C UNDERWRITING TRENDS
12
Have Underwriting Losses Been Large Enough for Long Enough to Turn the Market?
12
13
P/C Insurance Industry Combined Ratio, 2001–2011:Q3*
* Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=109.9 Sources: A.M. Best, ISO.
95.7
99.3100.8
108.2
101.0
92.6
100.898.4
100.1
107.5
115.8
90
100
110
120
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*
Best Combined
Ratio Since 1949 (87.6)
As Recently as 2001, Insurers Paid Out
Nearly $1.16 for Every $1 in Earned
Premiums
Relatively Low CAT Losses, Reserve Releases
Cyclical Deterioration
Heavy Use of Reinsurance Lowered Net
Losses
Relatively Low CAT Losses, Reserve Releases
Avg. CAT Losses,
More Reserve Releases
Higher CAT
Losses, Shrinking Reserve
Releases, Toll of Soft
Market
Underwriting Gain (Loss)1975–2011*
* Includes mortgage and financial guaranty insurers in all yearsSources: A.M. Best, ISO; Insurance Information Institute.
Large Underwriting Losses Are NOT Sustainable in Current Investment Environment
-$55
-$45
-$35
-$25
-$15
-$5
$5
$15
$25
$35
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 1011*
Cumulative underwriting deficit from 1975 through
2010 is $455B
($ Billions)Underwriting losses in
2011 at $34.9
through Q3 will be
largest since 2001
14
16
2
(2)
(8)
(3)
(7)(10) (10)
(4)
(0)
11
24
15
119
(5)
(9)
(14)
(10) (11)(7)
(5)(2)
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
$25
$309
2
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
E
12
F
13
F
Pri
or
Yr.
Re
se
rve
Re
lea
se
($
B)
-6
-4
-2
0
2
4
6
8 Imp
ac
t on
Co
mb
ine
d R
atio
(Po
ints
)
Prior Yr. ReserveDevelopment ($B)
Impact onCombined Ratio(Points)
P/C Reserve Development, 1992–2013F
Reserve Releases Remained Strong in 2010 But Tapered Off in 2011. Releases Are Expected to
Further Diminish in 2012 and 2103Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclays Capital; A.M. Best.
Prior year reserve releases totaled $8.8
billion in the first half of 2010, up from
$7.1 billion in the first half of 2009
P/C Estimated Loss Reserve Deficiency/ (Redundancy), Excl. Statutory Discount
Line of Business 2011
Personal Auto Liability -$1.8B
Homeowners -$0.2
Other Liab (incl. Prod Liab) $4.0
Workers Compensation $8.2
Commercial Multi Peril $1.5
Commercial Auto Liability $0.0
Medical Malpractice -$4.0
Reinsurance—Nonprop Assumed $3.4
All Other Lines* -$2.2
Total Core Reserves $8.9
Asbestos & Environmental $7.4
Total P/C Industry $16.3B
Source: A.M. Best, P/C Review/Preview 2012; Insurance Information Institute. *Excluding mortgage and financial guaranty segments.
17
Workers Comp has a significant
reserve deficiency
RENEWED PRICING DISCIPLINE?
18
Is There Evidence of a Broad and Sustained Shift in Pricing?
18
19
-5%
0%
5%
10%
15%
20%
25%
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*
12
Soft Market Persisted into Early 2011 but Growth Returned: More in 2012?
(Percent)1975-78 1984-87 2000-03
*2011 and 2012 figures are A.M. Best EstimatesShaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
Net Written Premiums Fell 0.7% in 2007 (First Decline
Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.
NWP was up 3.5% (est.) in
20112012
expected growth is
3.8%
20
Average Commercial Rate Change,All Lines, (1Q:2004–4Q:2011)
-3.2
%-5
.9%
-7.0
%-9
.4%
-9.7
% -8.2
%-4
.6% -2
.7%
-3.0
%-5
.3%
-9.6
%-1
1.3
%-1
1.8
%-1
3.3
%-1
2.0
%-1
3.5
%-1
2.9
% -11
.0%
-6.4
% -5.1
%-4
.9%
-5.8
%-5
.6%
-5.3
%-6
.4% -5.2
%-5
.4%
-2.9
%
2.8
%
-0.1
% 0.9
%
-0.1
%
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
1Q
04
2Q
04
3Q
04
4Q
04
1Q
05
2Q
05
3Q
05
4Q
05
1Q
06
2Q
06
3Q
06
4Q
06
1Q
07
2Q
07
3Q
07
4Q
07
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
Source: Council of Insurance Agents & Brokers (1Q04-4Q11); Insurance Information Institute
KRW Effect
Pricing as of Q3:2011 was positive for the first time
since 2003. Slightly stronger gains in Q4.
(Percent)
Q2 2011 marked the 30th consecutive quarter of price
declines
21
Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2011:Q4
Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.
Percentage Change (%)
KRW Effect: No Lasting Impact
Pricing turned positive (+0.9%) in Q3:2011, the first increase in
nearly 8 years; Q4:2011 renewals were up 2.8%
Pricing Turned Negative in Early
2004 and Remained that
way for 7 ½ years
Peak = 2001:Q4 +28.5%
Trough = 2007:Q3 -13.6%
22
Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2011:Q4
1999:Q4 = 100
Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.
Despite Q4:2011 gain of 2.8%, pricing today is
where is was in late 2000 (pre-9/11)
Upward pricing pressure is small for large accounts, 1.8% in
Q4:2011, vs. 3.1% for small accounts and
3.5% for medium accounts
23
Change in Commercial Rate Renewals, by Line: 2011:Q4
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Major Commercial Lines Renewed Uniformly Upward in Q4:2011 for Only the Second Time Since 2003; Property Lines
& Workers Comp Leading the Way
Percentage Change (%)
2.7% 3.0%
5.7%
7.5%
0.8%
2.0% 2.0% 2.1% 2.2% 2.3%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Su
rety
EP
L
Co
mm
l Au
to
D&
O
Ge
ne
ral
Lia
bili
ty
Um
bre
lla
Co
nst
ruct
ion
Bu
s.In
terr
up
tion
Co
mm
erc
ial
Pro
pe
rty
Wo
rke
rsC
om
p
Property lines are showing larger increases than
casualty lines, with the exception of workers
compensation
109.4110.2
118.8
109.5
112.5
110.2
107.6
104.1
109.7 110.2
102.5
105.4
91.2
93.7
104.1
98.9
101.2
107.5
102.0
111.1112.3
122.3
$7
.30
$6
.49
$1
3.9
1
$1
3.1
5
$1
1.9
4
$1
1.5
5
$1
0.6
8
$1
0.3
5
$1
0.0
2
10
.25
$1
1.9
5
$8
.30
$1
3.5
0
$8
.42
$4
.83
$5
.20
$5
.71
$5
.25
$5
.70
$7
.70
$6
.40
$6
.10
90
95
100
105
110
115
120
125
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*
Co
mm
erc
ial L
ine
s C
om
bin
ed
Ra
tio
$0
$2
$4
$6
$8
$10
$12
$14
Co
st
of
Ris
k/$
10
00
Re
ve
nu
e
CommercialCombined RatioCost of Risk
*Insurance Information Institute estimates for 2011.Source: 2011 RIMS Benchmark Survey; A.M. Best; Insurance Information Institute
Cost of Risk vs. Commercial Lines Combined Ratio
The cost of risk cannot continue to fall as actual
results deteriorate
24
How the Risk Dollar is Spent (2011)
Source: 2011 RIMS Benchmark Survey, Advisen; Insurance Information Institute
Firms w/Revenues < $1 Billion
WC Premiums,
8%
Total Mgmt. Liab., 5%
Liability Retained
Losses, 13%
Liability Premiums,
21%
Property Premiums,
21%
Retained Property
Losses, 3%
WC Retained Losses, 9%
Total Prof. Liability
Costs, 8%
Firms w/Revenues > $1 Billion
Management & Professional Liability Costs Account for 17% - 27% of the Risk Dollar
WC Premiums,
6%
Total Mgmt. Liab., 6%
Liability Retained
Losses, 12%
Liability Premiums,
10%
Property Premiums,
13%
Retained Property
Losses, 8%
WC Retained Losses, 21%
Total Prof. Liability
Costs, 3%
25
28
Direct Premiums Written: Worker’s CompPercent Change by State, 2005-2010*
34
.4
23
.1
14
.2
10
.2
9.0
4.6
1.4
-3.7
-7.3
-9.3
-10
.0
-10
.3
-10
.9
-10
.9
-13
.0
-14
.7
-15
.3
-15
.9
-16
.9
-17
.8
-19
.8
-21
.4
-21
.7
-35-30-25-20-15-10-505
10152025303540
OK
MT ID LA
SD IA KS
NY WI
PA
MS IL
NM NJ
NE
MD
NC AL
CT VA
SC
AR
MN
Pe
ce
nt
ch
an
ge
(%
)
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.
Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 States
Only 7 (small) states showed growth in workers
comp premium volume between 2005 and 2010
29
Direct Premiums Written: Worker’s CompPercent Change by State, 2005-2010*
-22
.6
-23
.7
-24
.2
-25
.0
-25
.2
-25
.2
-25
.3
-26
.8
-26
.9
-28
.1
-28
.3
-28
.7
-29
.0
-30
.1
-32
.5
-32
.6
-33
.8
-34
.7
-36
.1
-42
.7
-45
.4
-50
.7
-51
.2
-57
.7
-70
-60
-50
-40
-30
-20
-10
0
AZ
ME
GA
KY IN NH
OR
DC
MA
TN VT
US
TX
AK
MO MI
UT RI
CO
DE
NV HI
CA
FL
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
States with the poorest performing economies also produced the most negative net change in premiums of
the past 5 years
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.
Sources: SNL Financial LC.; Insurance Information Institute.
CA Workers Comp DPW plunged 51.2%
between 2005 and 2010
Financial Strength & Underwriting
30
Cyclical Pattern is P-C Impairment History is Directly Tied to
Underwriting, Reserving & Pricing
30
32
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2011
90
95
100
105
110
115
1206
97
07
17
27
37
47
57
67
77
87
98
08
18
28
38
48
58
68
78
88
99
09
19
29
39
49
59
69
79
89
90
00
10
20
30
40
50
60
70
80
91
01
1
Co
mb
ine
d R
ati
o
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Imp
airm
en
t Ra
te
Combined Ratio after Div P/C Impairment Frequency
Source: A.M. Best; Insurance Information Institute
2011 impairment rate was 0.91%, up from 0.67% in 2010; the rate is slightly higher than the 0.82% average since 1969
Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007; Recent Increase Was Associated
Primarily With Mortgage and Financial Guaranty Insurers and Not Representative of the Industry Overall
33
Reasons for US P/C Insurer Impairments, 1969–2010
3.6%4.0%
8.6%
7.3%
7.8%
7.1%
7.8%13.6%
40.3%
Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.
Historically, Deficient Loss Reserves and Inadequate Pricing AreBy Far the Leading Cause of P-C 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 (Overstatement of Assets)
Misc.
Sig. Change in Business
34
Top 10 Lines of Business for US P/C Impaired Insurers, 2000–2010
2.0%4.4%
4.8%
6.5%
6.9%
7.7%
8.1%
10.9%
22.2%
26.6%
Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.
Workers Comp and Pvt. Passenger Auto Account for Nearly Half of the Premium Volume of Impaired Insurers Over the Past Decade
Workers Comp
Financial Guaranty
Pvt. Passenger Auto
Homeowners
Commercial Multiperil
Commercial Auto Liability
Other Liability
Med Mal
SuretyTitle
SURPLUS/CAPITAL/CAPACITY
35
Have Large Global Losses Reduced Capacity in the Industry, Setting
the Stage for a Market Turn?
35
36
Policyholder Surplus, 2006:Q4–2011:Q3
Sources: ISO, A.M .Best.
($ Billions)
$487.1$496.6
$512.8$521.8
$478.5
$455.6
$437.1
$463.0
$490.8
$511.5
$540.7$530.5
$544.8
$556.9 $559.1
$538.6
$564.7
$505.0$515.6$517.9
$420
$440
$460
$480
$500
$520
$540
$560
$580
06:Q4 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
2007:Q3Previous Surplus Peak
Quarterly Surplus Changes Since 2011:Q1 Peak
11:Q2: -$5.6B (-1.0%)
11:Q3: -$26.1B (-4.6%)
Surplus as of 9/30/11 was down 4.6% below its all
time record high of $564.7B set as of 3/31/11. Further
declines are possible.
*Includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business in early 2010.
The Industry now has $1 of surplus for every $0.83 of NPW, close to the strongest claims-
paying status in its history.
A.M. Best is predicting year-end 2011 surplus was down just 1.7%
and that surplus will increase sharply by 8.4% in 2012
36
Implied Excess (Deficit) Capital Assuming Premium/Surplus Ratio = 0.9:1
Excess/(Deficit) Capital (Policyholder Surplus)
($10.6)
($65.4)
($124.6)
($103.0)
($76.5)
($10.8)
$22.9$42.6
($49.2)
$41.7
$81.9
($32.7)
-1.5%
8.2%
13.4%
-5.1%
-8.8%
21.6%
14.4%
6.2%
-12.0%
12.3%8.9%
-4.6%
-150
-100
-50
0
50
100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Capital Excess (Deficit) Annual Change in CapitalRecord Policyholder Surplus (Capital) Resulted in Significant Excess Capital in the P/C
Insurance Sector in 2010. Deteriorating Underwriting Losses, Higher CAT Activity, More Modest Market Returns Shrank Excess Capital in 2011 by Nearly Half.
Annual Change in Policyholder Surplus
2000-2002: Tech bubble bursts,
9/11, high underwriting losses erode capital base
2005: Katrina, Rita, Wilma produce record CAT losses
2006/07: Low CAT losses, strong underwriting results since 1940s
increase capital
2008: Financial crisis causes sharp drop in
capital
2009-10: End of financial crisis,
rising asset prices. modest
u/w losses push capital to record levels
Note: The assumption of a 0.9:1 P/S ratio is derived from a Feb. 2011 announcement by Advisen, Ltd., that the US P/C insurance industry has $74 billion in excess capital. The implied P/S ratio (calculated by III) is 0.88:1, which was rounded to 0.9:1.Source: Insurance Information Institute calculations from A.M. Best and ISO data. * Net Premiums Written
High cats, u/w losses push capital down
37
INVESTMENTS: THE NEW REALITY
39
Investment Performance is a Key Driver of Profitability
Does It Influence Underwriting or Cyclicality?
39
40
Insurers Have Not Yet Fully Adapted to a Persistently Low Interest Rate Environment
No Expectation that Rates Would Be:Pushed to Such Low Levels
Pushed Down so Rapidly
Held to Such Low Levels for So Long
Suppressed via Unprecedented Aggressiveness of the Federal Reserve– Use of traditional and unconventional tools (QE)– Unconventional ’s policies couldn’t be anticipated, esp. QE1, 2 (3?)
Competitive PressureProtracted Soft MarketAbility to Release Prior Reserves Eases UrgencyRealization of Capital Gains
OFFSETTING FACTORSCapitalization Still SolidEmergence of Sophisticated Price Monitoring and Underwriting Tools
Property/Casualty Insurance Industry Investment Income: 2000–2013F1
$38.9$37.1 $36.7
$38.7
$54.6
$51.2
$47.1 $47.2 $46.3 $45.5 $46.4
$39.6
$49.5
$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11E* 12F 13F
Investment Income in 2011 Was Surprisingly Strong, Though Investment Income Is Likely to Weaken in 2012 Due to Persistently Low Interest Rates
1 Investment gains consist primarily of interest and stock dividends.*2011E figure is annualized based on actual investment income through 2011:Q3; 2012F-201F based on Conning projections.Sources: ISO; Conning Research & Consulting; Insurance Information Institute.
($ Billions)
Investment earnings in 2011 are estimated to be about 15% below their 2007 pre-crisis peak
Property/Casualty Insurance Industry Investment Gain: 1994–2013F1
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$64.0
$31.7
$39.2
$52.9$53.6$51.3$53.0
$58.0
$51.9$56.9
$0
$10
$20
$30
$40
$50
$60
$70
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11E* 12F 13F
Investment Gains in 2011 Were Surprisingly Robust. Investment Gains Recovered Significantly Due to Realized Investment Gains; The Financial
Crisis Caused Investment Gains to Fall by 50% in 20081 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B; 2011 figure is annualized based 2011:Q3 actual; 2012-13F derived from
Conning forecast data.Sources: ISO; Conning; Insurance Information Institute.
($ Billions)
Total investment gains are expected to remain stable but still 18% to 20% below their pre-crisis peak through 2013
42
43
P/C Insurer Net Realized Capital Gains/Losses, 1990-2013F
*2011 is an estimate based on annualized actual 2011 9-month figure of $5.5B; 2012F and 2013F are Conning estimates.Sources: A.M. Best, ISO, Conning; Insurance Information Institute.
$2.8
8
$4.8
1 $9.8
9
$9.8
2
$10.
81 $18.
02
$13.
02
$16.
21
$6.6
3
-$1.
21
$6.6
1
$9.1
3
$9.7
0
$3.5
2 $8.9
2
-$7.
98
-$5.
70
$7.3
0
$6.0
0
$6.6
0
-$19
.81
$9.2
4
$6.0
0
$1.6
6
-$25
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11E*12F 13F
Insurers Posted Net Realized Capital Gains in 2011 for the First Time Since 2007. Realized Capital Losses Were a Primary Cause
of 2008/2009’s Large Drop in Profits and ROE
($ Billions)Realized capital gains returned in
2011 but are generally smaller than immediate pre-crisis era or 1990s
43
$13B (est.) net swing in 2011
44
U.S. 10-Year Treasury Note Yields:A Long Downward Trend, 1990–2012*
*Monthly, through February 2012. Note: Recessions indicated by gray shaded columns.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data/Monthly/H15_TCMNOM_Y10.txt National Bureau of Economic Research (recession dates); Insurance Information Institutes.
1%
2%
3%
4%
5%
6%
7%
8%
9%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Yields on 10-Year U.S. Treasury Notes have been essentially
below 5% for nearly a decade.
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.
Yields on 10-Year U.S. Treasury Notes have
been essentially below 4% since January 2008.
44
45
Treasury Yield Curves: Pre-Crisis (July 2007) vs. Feb. 2012
0.06% 0.09% 0.12% 0.16% 0.28%
1.37%
1.97%
4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00%5.19%
0.83%
0.38%
3.11%2.75%
0%
1%
2%
3%
4%
5%
6%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
February 2012 Yield CurvePre-Crisis (July 2007)
Treasury yield curve remains near its most depressed level
in at least 45 years. Investment income is falling as a result. Fed is unlikely to hike rates until well into 2014.
The Fed Is Actively Signaling that it Is Determined to Keep Rates Low Through Late 2014
Source: Federal Reserve Board of Governors; Insurance Information Institute.
46
-1.8
%
-1.8
%
-2.0
%
-3.6
%
-3.3
%
-3.3
%
-3.7
%
-4.3
%
-5.2
%
-5.7
%
-7.3%
-1.9
%
-2.1
%
-3.1
%
-8%-7%-6%-5%-4%-3%-2%-1%0%
Perso
nal L
ines
Pvt Pass
Aut
o
Pers P
rop
Comm
ercia
l
Comm
l Auto
Credit
Comm
Pro
p
Comm
Cas
Fidelity
/Sure
ty
War
rant
y
Surplu
s Line
s
Med
Mal
WC
Reinsu
ranc
e**
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
46
47
Performance by Segment:Commercial Lines
47
109.4110.2
118.8
109.5
112.5
110.2
107.6
104.1
109.7 110.2
102.5
105.4
91.2
94.8
101.299.5
101.0
107.5
102.0102.0
111.1112.3
122.3
90
95
100
105
110
115
120
125
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
P
12
F
Co
mm
erc
ial L
ine
s C
om
bin
ed
Ra
tio
*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best; Insurance Information Institute
Commercial Lines Combined Ratio, 1990-2012F*
Commercial lines underwriting
performance in 2011 was the worst since 2002
49
Workers Compensation Combined Ratio: 1994–2013F
10
2.0
97
.0 10
0.0
10
1.0
11
0.9
11
0.0
10
7.0
10
2.7
98
.4
10
3.6
10
4.4 1
10
.6 11
6.8
11
8.5
12
0.5
11
7.012
1.7
10
7.0
11
5.3
11
8.2
80
85
90
95
100
105
110
115
120
125
130
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11P 12F 13F
Workers Comp Underwriting Results Are Deteriorating Markedly and the Worst They
Have Been in a DecadeSources: A.M. Best (1994-2012F); Conning (2013F) ; Insurance Information Institute. 50
Workers Compensation Operating Environment
51
The Weak Economy and Soft Market Have Made the Workers Comp Operating
Increasingly Challenging
51
52
$3
.66
$3
.88
$4
.22
$4
.50
$4
.62
$4
.78
$5
.36 $
6.8
9
$1
6.0
8
$1
4.5
8
$1
1.1
5
$8
.98
$7
.64
$6
.89
$7
.83
$7
.11
10.8%
-9.9%-14.9%
28.5%
12.0%6.7%8.7%5.9% 3.3%
-19.5%-23.5%-9.4%
133.5%
3.6%2.7%
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
($ B
ill in
Dir
ec
t P
rem
ium
s W
ritt
en
)
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
Nu
mb
er o
f De
als
Direct Premiums Written
Annual % Change
Source: SNL Securities; NAIC; nsurance Information Institute.
WC: Direct Premiums Written in California, 1996-2011(Incl. SCIF 2004-2011)
CA WC premiums
written rose 10.8% in 2011
The Preciptious Decline in WC Premiums Written Has Ended With Growth Now Being Driven by Rate Actions and Improved Payroll Exposure Growth
State Fund included
beginning in 2004
Workers Compensation Premium Continues Its Sharp DeclineNet Written Premium
$ Billions
Calendar Yearp Preliminary
Source: 1990–2009 Private Carriers, Best's Aggregates & Averages; 2010p, NCCI1996–2010p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements
State Funds available for 1996 and subsequent
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*
$25
$30
$35
$40
$45
$50Wage & Salary DisbursementsWC NPW
54
Payroll Base* WC NWP
Payroll vs. Workers Comp Net Written Premiums, 1990-2011
*Private employment; Shaded areas indicate recessions. Payroll and WC premiums for 2011 is I.I.I. estimateSources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.
Resumption of payroll growth and rate increases suggests WC NWP will grow again in 2012
7/90-3/91 3/01-11/0112/07-6/09
$Billions $Billions
WC premium volume dropped two years before
the recession began
WC net premiums written were down $14B or 29.3% to
$33.8B in 2010 after peaking at $47.8B
in 2005
55
Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2011:Q4
Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates); Insurance Information Institute.
Billions
$5,500
$5,750
$6,000
$6,250
$6,500
$6,75005
:Q1
05:Q
2
05:Q
3
05:Q
4
06:Q
1
06:Q
2
06:Q
3
06:Q
4
07:Q
1
07:Q
2
07:Q
3
07:Q
4
08:Q
1
08:Q
2
08:Q
3
08:Q
4
09:Q
1
09:Q
2
09:Q
3
09:Q
4
10:Q
1
10:Q
2
10:Q
3
10:Q
4
11:Q
1
11:Q
2
11:Q
3
11:Q
4
Peak was 2008:Q1 at $6.60 trillion
Latest (2011:Q4) was $6.71 trillion,
a new peak
Recent trough (2009:Q3) was $6.25 trillion, down
5.3% from prior peak
Growth rates in 2011Q2 over Q1: 0.6%
Q3 over Q2: 0.4% Q4 over Q3: 1.0%
Pace of payroll growth is
accelerating
55
56
Personal Income Growth in 2011:Top 10 States
8.1
6.8 6.66.2
5.9 5.9 5.9 5.7 5.6 5.55.1
0
1
2
3
4
5
6
7
8
9
ND IA TX OK SD NE WY CO CA UT US
Sources: US Dept. of Commerce and Wells Fargo Securities, March 28, 2012; Insurance Information Institute.
% ChangeNorth Dakota is the fastest gains in personal income, driven by the
state’s energy boom. Energy, Mining and Agriculture drove the gains in most states except CA
CA personal income growth was the 9th fastest in the US in 2011, driven by the tech and
entertainment industries
$8
.2
$8
.9
$9
.4
$1
0.1
$1
1.1
$1
2.0
$1
3.3
$1
4.2
$1
6.2
$1
7.6
$1
8.9
$2
0.0
$2
1.8
$2
3.1
$2
4.5
$2
5.7
$2
7.1
$2
7.7
$8
.4
$8
.2
$5
$10
$15
$20
$25
$30
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10p
Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002-2009: +6.6%
Accident Year
MedicalClaim Cost ($000s)
2010p: Preliminary based on data valued as of 12/31/20101991-2008: Based on data through 12/31/2008, developed to ultimateBased on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies
Cumulative Change = 238%(1991-2010p)
Workers Comp Medical Claim Costs Continue to Rise
+2.0%+5.4%
+5.0%+6.1%
+6.1%+9.1%
+5.4%+7.7%
+8.8%+13.5%
+7.3%+10.6%
+8.3%+10.1%
+7.4%+5.1%+9.0%
-2.1%+1.3%+6.8%
Average Medical Cost per Lost-Time Claim
Does smaller pace of increase suggest that small
med-only claims are becoming lost-time claims?
57
$1
0.0
$9
.7
$9
.4
$9
.9
$1
0.1
$1
0.7
$1
1.5
$1
2.5
$1
3.8
$1
5.2
$1
6.6
$1
7.1
$1
7.9
$2
2.8
$2
3.0
$2
2.3
$2
0.8
$1
9.9
$1
8.2
$1
8.8
+5.9%
+1.0%-3.1%-2.8%+4.9%+1.7%+5.9%
+7.7%+9.0%
+10.1%
+10.1%
+9.2%+3.1%+4.6%+1.6%
+3.4%+5.6%
5
7
9
11
13
15
17
19
21
23
25
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010p
IndemnityClaim Cost ($ 000s)
Annual Change 1991–1993: -1.7%Annual Change 1994–2001:+7.3%Annual Change 2002–2009:+4.1%
2010p: Preliminary based on data valued as of 12/31/20101991–2008: Based on data through 12/31/2008, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policies
Accident Year
-3%
Workers Comp Indemnity Claim Costs Decline in 2010
+8.2%+0.8%
Claiming behavior has changed significantly. Large numbers of lost time,
low severity claims have entered the system—claims that previously were medical only, driving down average
indemnity costs per claim.
Average Indemnity Cost per Lost-Time Claim
58
59
Number of Liens Filed per Month, Jan. 2000—Oct. 2010
Sources: California Commission on Health and Safety and Workers Compensation, Liens Report, January 5, 2011
Rising number of liens, opioid abuse, fee schedule issues are pressure in WC costs in CA; Pressure to
raise benefits as well.
Average Approved BureauRates/Loss Costs
12.1
7.4
10.0
2.9
-6.4
-3.2
-6.0
-8.0
-5.4
-2.6
3.5
1.2
4.9
6.6
-6.0-5.1
-5.7-6.6
-3.1-2.0
-1.1
0.2
-10
-5
0
5
10
15
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*
Percent
Calendar Year* States approved through 4/23/2010Countrywide approved changes in advisory rates, loss costs, and assigned risk rates as filed by the applicable rating organization
Cumulative1990–1993
+36.3%
Cumulative 2000–2003
+17.1%
Cumulative 2004–2011
-26.2%
Cumulative 1994–1999
-27.8%
*States approved through 4/8/11.Note: Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by applicable rating organization.Source: NCCI.
History of Average WC Bureau Rate/Loss Cost Level Changes
Workers Comp Rate Changes,2008:Q4 – 2011:Q4
Source: Council of Insurance Agents and Brokers; Information Institute.
-5.5%-4.6%
-4.0%-4.6%
-3.7% -3.9%
-5.4%
-3.7% -3.4%
-1.6%
2.6%
4.1%
7.5%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
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
The Q4 2011 WC rate change was the largest
among all major commercial lines
(Percent Change)
61
62
$5,707
$7,163
$7,862
$8,814 $8,893
$7,913 $7,954
$7,615
$7,093 $7,18813.0%
16.1%
24.0%
22.0%20.6%
17.4%
16.9%
18.7%
22.5%22.3%
5,000
5,500
6,000
6,500
7,000
7,500
8,000
8,500
9,000
9,500
04 05 06 07 08 09 10 11E 12F 13F
(In
ve
stm
en
t In
co
me
$ M
ill)
0%
5%
10%
15%
20%
25%
30%
Inv
es
tme
nt In
co
me
Ra
tio
Investment Income
Investment Income Ratio
Source: Conning. Note: Investment Income Ratio is ratio of investment income from WC reserves and surplus to WC net earned premium.
Workers Comp Investment Income Earned and Investment Income Ratio, 2004-2013F
Restoring the Workers Comp Line to Profitability Will Be Made More Difficult Because Investments Will Provide Little Lift, Requiring More of
an Emphasis on Underwriting Profitability
In 2012, investment income attributable to the WC line is projected to be 20% below its 2008 peak, and pushing the
investment income ratio down to 18.7% of Net Earned Premium
Workers CompensationInvestment Returns
63
Percent
Calendar Yearp=Preliminary
Source: 1990–2009, Annual Statement Data; 2010p, NCCIInvestment Gain on Insurance Transactions includes Other Income•Adjusted to include realized capital gains to be consistent with 1992 and afterSource: NCCI
Average (1990–2009): 14.6%
Investment Gain on Insurance Transactions-to-Premium RatioPrivate Carriers
Calendar Year
Workers Compensation ResultsModest Operating Loss
-4.2
-8.6
-3.2
7.5
12.7
19.717.9
19.8
13.9
5.2
1.3
-7.6
-0.1
0.9
4.4
8.4
16.8
12.0
8.8
0.4
-1
-15
-10
-5
0
5
10
15
20
25
1990*1991*1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20092010p
Still a loss even after adding in
investment earnings
64
Percent
Calendar Yearp Preliminary
Source: 1990–2009, Annual Statement Data; 2010p, NCCIOperating Gain Equals 1.00 minus (Combined Ratio Less Investment Gain on Insurance Transactions and Other Income)•Adjusted to include realized capital gains to be consistent with 1992 and afterSource: NCCI
Average (1990–2009): 6.3%
Pre-Tax Operating Gain RatioPrivate Carriers
65
Competitiion, Profitability and Growth in California P/C and WC Insurance Markets vs. US
Analysis by Line and Nearby State Comparisons
HHI Index Value
Source: Insurance Information Institute calculations from SNL Financial data.
803.1608.2 503.8
2,754.2
1,320.8
16.0%
32.0%
51.1%
12.9%
22.6%
0
500
1,000
1,500
2,000
2,500
3,000
2004 2006 2008 2010 20110%
10%
20%
30%
40%
50%
60%
Herfindahl-Hirschman Index Value State Fund Market Share
66
CA has gone from the most concentrated (non-monopolistic
fund) states to one that is highly competitive.
Market Concentration in CA WC Market Has Dropped Precipitously: HHI Index, 2004-2011
CA State Fund Market Share
Herfindahl-Hirschman Index:Less than 1,000 = Not Concentrated
1,000 - 1,800 = Moderately Concentrated
Greater than 1,800 = Concentrated
67
RNW All Lines: CA vs. U.S., 2001-2010
Sources: NAIC.
-5%
0%
5%
10%
15%
20%
01 02 03 04 05 06 07 08 09 10
US All Lines CA All Lines
P/C Insurer profitability in CA is above that of the US
overall over the past decade
US: 7.1%
CA: 9.2%
(Percent)
68
RNW Workers Comp: CA vs. U.S.,2001-2010
Sources: NAIC.
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
01 02 03 04 05 06 07 08 09 10
US WC CA WC
(Percent)
Average 2001-2010
US: 5.0%
CA: 5.6%
All Lines: 10-Year Average RNW CA & Nearby States
4.0%
9.2%
10.2%
5.7%
7.1%
0% 2% 4% 6% 8% 10% 12%
Oregon
California
U.S.
Nevada
Arizona
Source: NAIC, Insurance Information Institute.
2001-2010
California All Lines profitability is above the US and regional
average
Workers Comp: 10-Year Average RNWCA & Nearby States
6.1%
7.2%
13.6%
5.0%
5.6%
0% 5% 10% 15%
Nevada
Arizona
U.S.
California
Oregon
Source: NAIC, Insurance Information Institute
2001-2010
California WC profitability is below the US and regional
average
71
WC Benefits Per $100 of Covered Wagesby State, 2009: Highest 25 States
2.1
0
1.8
9
1.8
2
1.5
7
1.5
6
1.4
7
1.3
3
1.3
2
1.3
0
1.2
7
1.2
6
1.2
2
1.1
9
1.1
8
1.1
5
1.1
4
1.1
3
1.1
0
1.0
9
1.0
9
1.0
7
1.0
3
1.0
3
0.9
8
0.9
8
0.9
8
$0.00
$0.25
$0.50
$0.75
$1.00
$1.25
$1.50
$1.75
$2.00
$2.25
$2.50
WV MT WA OK AK SC VT ID ME WY CA PA OH KY LA IL WI FL DE HI IA NM US GA NJ NC
Be
ne
fits
Pe
r $
10
0 o
f C
ov
ere
d W
ag
es
Source: National Academy of Social Science.
At $1.26 per $100 covered wages,
California’s benefits are more generous
than the US average of $1.03
72
WC Benefits Per $100 of Covered Wagesby State, 2009: Lowest 25 States
0.9
8
0.9
6
0.9
6
0.9
6
0.9
6
0.9
5
0.9
2
0.9
1
0.9
1
0.8
9
0.8
8
0.8
7
0.8
7
0.8
6
0.8
4
0.8
1
0.7
9
0.7
6
0.7
0
0.6
6
0.6
1
0.5
7
0.5
7
0.5
5
0.4
7
0.2
7
$0.00
$0.25
$0.50
$0.75
$1.00
$1.25
$1.50
$1.75
$2.00
$2.25
$2.50
OR AL M
IM
S NEM
N ND CT NVCO NY
MO NH KS RI
TN MD SD UT AZ IN AR VA
MA TX DC
Be
ne
fits
Pe
r $
10
0 o
f C
ov
ere
d W
ag
es
Source: National Academy of Social Science.
73Source: National Academy of Social Insurance.
$0.00
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
$1.40
$1.60
$1.80
05 06 07 08 09
AZ CA NV OR US
(Percent)
Dollar Amount Change 2005-2009
US: -$0.07
CA: -$0.31
WC Benefits Per $100 of Covered Wages by State,2005-2009: CA & Nearby States
74
All Lines DWP Growth: CA vs. U.S., 2001-2010
*2004 and onward includes major state funds.
Source: SNL Financial.
12.0
%
14.3
%
9.8%
7.6%
2.2% 3.
4%
0.5%
-2.2
%
-3.2
%
0.0%
11.1
%
16.0
%
13.6
%
22.1
%
-0.5
%
-1.8
%
-3.0
%
-5.9
%
-5.0
% -0.8
%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
01 02 03 04 05 06 07 08 09 10
US DWP: All lines CA DWP: All lines
(Percent)
Average 2001-2010
US: 4.4%
CA: 4.6%
75
Workers Comp DWP Growth: CA vs. U.S., 2001-2011P*
*2004 and onward includes state funds.
Source: SNL Financial.
7.5% 11
.1%
8.7%
36.5
%
2.6%
-1.3
%
-4.1
%
-12.
3% -3.3
%
6.0%
3.6% 12
.0% 28
.5%
133.
5%
-9.4
%
-23.
5%
-19.
5%
-14.
9%
-9.9
%
3.3% 10
.8%
-11.
7%
-50%
-25%
0%
25%
50%
75%
100%
125%
150%
01 02 03 04 05 06 07 08 09 10 11P
US DWP: WC CA DWP: WC
(Percent)
Average 2005-2011P*
US: -3.4%
CA: -9.0%
77
Direct Incurred Loss Ratio: WC & All Lines CA, 2001-2010
10
9.4
11
0.5
83
.4
64
.7
58
.4
47
.3 54
.2 58
.3
69
.2
72
.5
69
.5
70
.6
61
.1
53
.1
51
.4
45
.6 52
.3 57
.3
51
.2
53
.3
0
10
20
30
40
50
60
70
80
90
100
110
120
01 02 03 04 05 06 07 08 09 10
Workers comp All Lines
(Percent)
*2004-2010 includes major state funds;Source: SNL Financial.
78
Workers Comp Direct Incurred Loss Ratio: CA vs. U.S., 2001-2011P*
*2004-2010 includes major state funds; Preliminary data for 2011 do not include state funds.
Source: SNL Financial.
10
9.4
11
0.5
83
.4
64
.7
58
.4
47
.3 54
.2 58
.3
69
.2
72
.5
66
.8
85
.8
76
.5
72
.3
67
.4
65
.0
61
.0
61
.8
63
.1 67
.7 74
.7
64
.0
0
10
20
30
40
50
60
70
80
90
100
110
120
01 02 03 04 05 06 07 08 09 10 11P*
CA WC U.S. WC
(Percent)
79
Economics 2012:
Workers Comp in the Aftermath of the Great Recession
2012 Is the First Year Since 2005 Where Economic Perceptions and Reality in the US Will Be Positive
Potentially Enormous Benefits for Workers Comp Insurers
79
80
Economic Outlook for 2012
Economic Growth Will Accelerate Modestly in 2012/13, Beating Expectations No Double Dip Recession Economy remains more resilient than most pundits presume
Consumer Confidence Will Continue to Improve Consumer Spending/Investment Will Continue to Expand Consumer and Business Lending Continue to Expand Housing Market Remains Weak, but Some Improvement Expected in 2012 Inflation Remains Tame
Runaway inflation highly unlikely but energy spike possible; Fed has things under control Private Sector Hiring Remains Consistently Positive, Exceeds Expectations
Unemployment dips below 8% by year’s end Sovereign Debt, Euro Currency/Economy, Muni Bond “Crises” Overblown European Recession in Milder than Commonly Presumed Soft Landing in China Higher Oil Prices and Current Middle East Turmoil Pose Greater Risk to US Economy than in
2011 Interest Rates Remain Low by Historical Standards; Edge Up by Year’s End Stock and Bond Markets More Stable, Less Volatile Political Environment Is More Hospitable to Business Interests Obama Wins Re-Election Based on Improving Economy
The Strength of the Economy Will Influence WC Insurer
Growth Opportunities
82
Growth Will Expand Insurable Exposures Including WC Payroll Exposures
82
83
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 3/12; Insurance Information Institute.
2.7
%0
.9%
3.2
%2
.3%
2.9
%-0
.7%
0.6
%-4
.0%
-6.8
% -4.9
%-0
.7%
1.6
%5
.0%
3.9
%3
.8%
2.5
%2
.3%
0.4
%1
.3%
1.8
% 3.0
%2
.1%
2.2
%2
.4%
2.6
%2
.5%
2.7
%2
.9%
3.0
%4.1
%1
.1%
1.8
%2
.5% 3.6
%3
.1%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
2
00
0
2
00
1
2
00
2
2
00
3
2
00
4
2
00
5
2
00
6
07
:1Q
07
:2Q
07
:3Q
07
:4Q
08
:1Q
08
:2Q
08
:3Q
08
:4Q
09
:1Q
09
:2Q
09
:3Q
09
:4Q
10
:1Q
10
:2Q
10
:3Q
10
:4Q
11
:1Q
11
:2Q
11
:3Q
11
:4Q
12
:1Q
12
:2Q
12
:3Q
12
:4Q
13
:1Q
13
:2Q
13
:3Q
13
:4Q
Demand for Insurance Continues To Be Impacted by Sluggish Economic Conditions, but the Benefits of Even Slow Growth Will Compound and
Gradually Benefit the Economy Broadly
Real GDP Growth (%)
Recession began in Dec. 2007. Economic toll of credit crunch, housing
slump, labor market contraction has been
severe but modest recovery is underway
The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%
2012 is expected to see a steady
acceleration in growth continuing into 2013
58
.3
57
.1
60
.4
59
.6
57
.8
55
.3
55
.1
55
.2
55
.3 56
.9 58
.2
58
.5 60
.8
61
.4
59
.7
59
.7
54
.2 55
.8
51
.4 52
.5
52
.5
51
.8
52
.2 53
.1 54
.1
52
.4
40
45
50
55
60
65
Jan
-10
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Jun
-10
Jul-
10
Au
g-1
0
Se
p-1
0
Oct
-10
No
v-1
0
De
c-1
0
Jan
-11
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Jun
-11
Jul-
11
Au
g-1
1
Se
p-1
1
Oct
-11
No
v-1
1
De
c-1
1
Jan
-12
Fe
b-1
2
ISM Manufacturing Index(Values > 50 Indicate Expansion)
January 2010 through February 2012
The manufacturing sector has been expanding and adding jobs. The question is whether this will continue.
Source: Institute for Supply Management at http://www.ism.ws/ismreport/mfgrob.cfm; Insurance Information Institute.
Optimism among manufacturers was
increasing in late 2011 and into early 2012
84
66%
68%
70%
72%
74%
76%
78%
80%
82%
Mar
01
Jun 0
1
Sep 0
1
Dec 0
1
Mar
02
Jun 0
2
Sep 0
2
Dec 0
2
Mar
03
Jun 0
3
Sep 0
3
Dec 0
3
Mar
04
Jun 0
4
Sep 0
4
Dec 0
4
Mar
05
Jun 0
5
Sep 0
5
Dec 0
5
Mar
06
Jun 0
6
Sep 0
6
Dec 0
6
Mar
07
Jun 0
7
Sep 0
7
Dec 0
7
Mar
08
Jun 0
8
Sep 0
8
Dec 0
8
Mar
09
Jun 0
9
Sep 0
9
Dec 0
9
Mar
10
Jun 1
0
Sep 1
0
Dec 1
0
Mar
11
Jun 1
1
Sep 1
1
Dec 1
1
Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures
Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 86
Percent of Industrial Capacity
Hurricane Katrina
March 2001-November 2001
recession
“Full Capacity”
The closer the economy is to operating at “full
capacity,” the greater the inflationary pressure
The US operated at 78.7% of industrial capacity in Feb. 2012, above the June 2009
low of 68.3% and close to its post-crisis peak
December 2007-June 2009 Recession
March 2001 through February 2012
86
50
.7 52
.7 54
.1
54
.6
54
.8
53
.5
53
.7
52
.8 53
.9
54
.6 56 5
7.1 5
9.4
59
.7
56
.3
54
.4
53
.3
53
.4
53
.8
52
.6
52
.6
52
.6
52
.6
53
.0
56
.8
57
.3
40
45
50
55
60
65
Jan
-10
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Jun
-10
Jul-
10
Au
g-1
0
Se
p-1
0
Oct
-10
No
v-1
0
De
c-1
0
Jan
-11
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Jun
-11
Jul-
11
Au
g-1
1
Se
p-1
1
Oct
-11
No
v-1
1
De
c-1
1
Jan
-12
Fe
b-1
2
ISM Non-Manufacturing Index(Values > 50 Indicate Expansion)
January 2010 through February 2012
Non-manufacturing industries have been expanding and adding jobs. The question is whether this will continue.
Source: Institute for Supply Management at http://www.ism.ws/ismreport/nonmfgrob.cfm; Insurance Information Institute.
Optimism among non-manufacturers was
stable in late 2011 and increased in early 2012
87
88
43,6
9448
,125
69,3
0062
,436
64,0
04 71,2
77 81,2
3582
,446
63,8
5363
,235
64,8
53 71,5
4970
,643
62,3
0452
,374
51,9
5953
,549
54,0
2744
,367
37,8
8435
,472
40,0
9938
,540
35,0
3734
,317
39,2
0119
,695 28
,322
43,5
4660
,837
56,2
8247
,806
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
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
Business Bankruptcy Filings,1980-2011
Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; Insurance Information Institute
Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline
2011 bankruptcies totaled 47,806, down 15.1% from 56,282 in 2010—the second consecutive year of decline. Business bankruptcies more
than tripled during the financial crisis.
% Change Surrounding Recessions
1980-82 58.6%1980-87 88.7%1990-91 10.3%2000-01 13.0%2006-09 208.9%*
88
89
Private Sector Business Starts, 1993:Q2 – 2011:Q2*
175
186
174
180
186
192
188
187 18
918
6 190 19
419
119
9 204
202
195
196
196
206
206
201
192
198
206
206
203
211
205
212
200 20
520
420
419
720
320
920
119
219
219
320
1 204
202
210 21
220
921
6 220 22
322
022
021
022
121
220
421
820
920
720
719
919
1 193
172 17
616
918
417
5 179
188
200
183 18
7
203
150
160
170
180
190
200
210
220
230
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure, But
Are Recovering Slowly* Data through June 30, 2011 are the latest available as of March 7, 2012; Seasonally adjusted.Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.
(Thousands)
Business starts were up 4.5% to 370,000 in the first half of 2011 vs. first half 2011.
722,000 new business starts were recorded in 2010, up 3.6% from 697,000 in 2009, which was the slowest year for new
business starts since 1993
Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010: 722,000 2011: 740,000**
89
90
12 Industries for the Next 10 Years: Insurance Solutions Needed
Export-Oriented Industries
Health Sciences
Health Care
Energy (Traditional)
Alternative Energy
Petrochemical
Agriculture
Natural Resources
Technology (incl. Biotechnology)
Light Manufacturing
Insourced Manufacturing
Many industries are
poised for growth, though
insurers’ ability to
capitalize on these
industries varies widely
Shipping (Rail, Marine, Trucking)
91
12 Fastest Growing Industries in 2011, by Sales Growth*1. Metal & Mineral Wholesalers +28.1%
2. Forging & Stamping +26.2%
3. Resins, Synthetic Rubber/Fiber/Filaments +24.5%
4. Cattle Ranching & Farming +22.8%
5. Coating, Engraving, Heat Testing & Allied Act. +22.4%
6. Motor Vehicle Parts Mfg. +21.7%
7. Machine Shops +21.0%
8. Petroleum & Petro. Merchant Wholesaling +19.9%
9. Freight Transportation +19.3%
10. Rubber Product Manufacturing +18.7%
11. Wholesale Electronic Markets +18.6%
12. Foundries +17.7%
*12-months ending Oct. 2011. Total of 184 industries.Source: Sageworks Consulting from US Census Bureau data as published in BusinessInsider.com (Oct. 5, 2011); Insurance Information Inst.
92
Labor Market Trends
Massive Job Losses Sapped the Economy and Commercial/Personal
Lines Exposure, But Trend is Improving
92
93
Unemployment and Underemployment Rates: Stubbornly High in 2012, But Falling
2
4
6
8
10
12
14
16
18
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Jan11
Jan12
Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
Unemployment stood at 8.3% in February 2012
Unemployment peaked at 10.1% in October 2009, highest monthly rate since 1983.
Peak rate in the last 30 years:
10.8% in November -
December 1982
Source: US Bureau of Labor Statistics; Insurance Information Institute.
U-6 went from 8.0% in March
2007 to 17.5% in October 2009; Stood at 14.9%
in Feb. 2012
January 2000 through February 2012, Seasonally Adjusted (%)
Recession ended in
November 2001
Unemployment kept rising for
19 more months
Recession began in
December 2007
Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving
93
Feb 12
94
US Unemployment Rate
4.5
%
4.5
%
4.6
%
4.8
%
4.9
% 5.4
% 6.1
%
6.9
%
8.1
%
9.3
%
9.6
% 10
.0%
9.7
%
9.6
%
9.6
%
8.9
%
9.1
%
9.1
%
8.7
%
8.3
%
8.3
%
8.2
%
8.1
%
8.0
%
7.8
%
7.7
%
7.6
%
9.6
%4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
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
12
:Q1
12
:Q2
12
:Q3
12
:Q4
Rising unemployment eroded payrolls
and workers comp’s
exposure base.
Unemployment peaked at 10% in
late 2009.
* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (3/12 edition); Insurance Information Institute.
2007:Q1 to 2013:Q4F*
Unemployment forecasts have been revised
downwards for 2012 and 2013. Optimistic scenarios
put the unemployment as low as 7.7% by Q4 of this year.
Jobless figures have been revised
downwards for 2012
186
7921
365
127
42 15-1
09-1
465
9723
-12
-85 -58
-161
-253 -230
-257
-347
-456
-547
-734 -6
67-8
06-7
07-7
44-6
49-3
34-4
52-2
97-2
15 -186
-262
75-8
316
62
229
51 6111
714
311
2 193
128 16
711
925
726
126
410
810
2 175
5221
613
9 178 23
4 285
233
144
(1,000)
(800)
(600)
(400)
(200)
0
200
400
Jan-
07F
eb-0
7M
ar-0
7A
pr-0
7M
ay-0
7Ju
n-07
Jul-0
7A
ug-0
7S
ep-0
7O
ct-0
7N
ov-0
7D
ec-0
7Ja
n-08
Feb
-08
Mar
-08
Apr
-08
May
-08
Jun-
08Ju
l-08
Aug
-08
Sep
-08
Oct
-08
Nov
-08
Dec
-08
Jan-
09F
eb-0
9M
ar-0
9A
pr-0
9M
ay-0
9Ju
n-09
Jul-0
9A
ug-0
9S
ep-0
9O
ct-0
9N
ov-0
9D
ec-0
9Ja
n-10
Feb
-10
Mar
-10
Apr
-10
May
-10
Jun-
10Ju
l-10
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11F
eb-1
1M
ar-1
1A
pr-1
1M
ay-1
1Ju
n-11
Jul-1
1A
ug-1
1S
ep-1
1O
ct-1
1N
ov-1
1D
ec-1
1Ja
n-12
Feb
-12
Monthly Change in Private Employment
January 2008 through February 2012* (Thousands)
Private Employers Added 4.046 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Monthly Losses in Dec. 08–Mar. 09 Were
the Largest in the Post-WW II Period
233,000 private sector jobs were created in
February
95
0.02
30.
011
-0.0
74-0
.132
-0.2
93-0
.546
-0.7
76-1
.033
-1.3
80-1
.836
-2.3
83-3
.117
-3.7
84-4
.590
-5.2
97-6
.041
-6.6
90-7
.024
-7.4
76-7
.773
-7.9
88-8
.174
-8.4
36-8
.361
-8.4
44-8
.428
-8.3
66-8
.222
-7.9
93-7
.942
-7.8
81-7
.764
-7.6
21-7
.509
-7.3
16-7
.188
-7.0
21-6
.902 -6.3
84-6
.120
-6.0
12-5
.910
-5.7
35-5
.683
-5.4
67-5
.328
-5.1
50-4
.916
-4.6
31-4
.396
-6.6
45
-10
-8
-6
-4
-2
0
2
Dec
-07
Jan-
08F
eb-0
8M
ar-0
8A
pr-0
8M
ay-
Jun-
08Ju
l-08
Aug
-08
Sep
-08
Oct
-08
Nov
-08
Dec
-08
Jan-
09F
eb-0
9M
ar-0
9A
pr-0
9M
ay-
Jun-
09Ju
l-09
Aug
-09
Sep
-09
Oct
-09
Nov
-09
Dec
-09
Jan-
10F
eb-1
0M
ar-1
0A
pr-1
0M
ay-
Jun-
10Ju
l-10
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11F
eb-1
1M
ar-1
1A
pr-1
1M
ay-
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
12F
eb-1
2
Mill
ion
sCumulative Change in Private Employment: Dec. 2007—Feb. 2012
December 2007 through February 2012* (Millions)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Cumulative job losses peaked at 8.444 million
in December 2009
Cumulative job losses as of Feb. 2012 totaled
4.398 million
96
All of the jobs “lost” since President
Obama took office in Jan. 2009 have been
recouped
Private Employers Added 4.046 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)
98
Unemployment Rates by State, January 2012:Highest 25 States*
12
.7
10
.9
10
.9
10
.2
9.9
9.9
9.6
9.4
9.3
9.2
9.0
9.0
8.8
8.8
8.7
8.7
8.3
8.3
8.2
8.1
8.0
7.8
7.8
7.7
7.6
0
2
4
6
8
10
12
14
NV CA RI NC DC MS FL IL SC GA MI NJ KY OR AZ IN NY WA TN ID CT AL CO OH AR
Un
em
plo
ym
en
t R
ate
(%
)
*Provisional figures for January 2012, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In January, 45 states and the District of Columbia reported over-the-month
unemployment rate decreases, 1 state had an increase, and 4 had no change.
California is tied with RI for the 2nd highest
unemployment rate in the US
99
7.6
7.5
7.4
7.3
7.2
7.0
7.0
7.0
6.9
6.9
6.9
6.5
6.5
6.5
6.1
6.1
5.8
5.7
5.6
5.5
5.4
5.2
5.0
4.2
4.0
3.2
0
2
4
6
8
10
PA MO WV TX AK DE ME NM LA MA WI HI MD MT KS OK VA UT MN WY IA NH VT SD NE ND
Une
mpl
oym
ent R
ate
(%)
Unemployment Rates By State, January 2012: Lowest 25 States*
*Provisional figures for January 2012, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In January, 45 states and the District of Columbia reported over-the-month
unemployment rate decreases, 1 state had an increase, and 4 had no change.
Inflation
100
Is it a Threat to Claim Cost Severities
100
101
Annual Inflation Rates, (CPI-U, %),1990–2017F
2.8 2.6
1.51.9
3.3 3.4
1.3
2.5 2.3
3.0
3.8
2.8
3.8
-0.4
1.6
3.2
2.2 2.2 2.4 2.4 2.4 2.52.9
2.4
3.23.0
5.14.9
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F13F14F15F16F17F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/11 and 3/12 (forecasts).
The slack in the U.S. economy suggests that inflationary pressures should remain subdued for an extended period of times. Energy, health care and
commodity prices, plus U.S. debt burden, remain longer-run concerns
Annual Inflation Rates (%)
Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the
commodity bubble reduced inflationary pressures in 2009/10
Higher energy, commodity and food
prices pushed up inflation in 2011, but
not longer turn inflationary
expectations.
P/C Personal Insurance Claim Cost Drivers Grow Faster Than the Core CPI Suggests
Sources: Bureau of Labor Statistics; Insurance Information Institute.
3.2%
1.7%
6.8%
5.1%
4.2%
3.0% 3.2%
0%
2%
4%
6%
8%
Overall CPI "Core" CPI Inpatient HospitalServices
OutpatientHospital Services
PrescriptionDrugs
Medical CareCommodities
Legal Services
Healthcare costs are a major liability, med pay, and PIP claim cost driver. They are likely to grow faster than the CPI for the next few years, at least
102
Excludes Food and Energy
Price Level Change: 2011 vs. 2010
102
Medical Cost Inflation Has Outpaced Overall Inflation For Over 50 Years
752.3
1747.1
0
300
600
900
1200
1500
1800
61 66 71 76 81 86 91 96 01 06 11
Inde
x V
alue
(196
1=10
0)
All Items
Medical Care
Source: Department of Labor (Bureau of Labor Statistics)
A claim that cost $1,000 in 1961 would cost nearly $17,500 based on
medical cost inflation trends over the past 51 years.
103
Federal Regulatory Update:Dodd-Frank Implementation
Health Care Reform
104
A Brief Summary of Implications for Insurers
Dodd-Frank Financial Services Reform & Consumer Protection Act
105
A Brief Summary of Implications for Insurers
106
Financial Services Reform:What does it mean for insurers?
Systemic Risk and Resolution Authority
Creates the Financial Stability Oversight Council and the Office of Financial Research
Imposes heightened federal regulation on large bank holding companies and “systemically risky” nonbank financial companies, including insurers
Federal Insurance Office (FIO)
Establishes the FIO (while maintaining state regulation of insurance) within the Department of Treasury, headed by a Director appointed by the Secretary of Treasury
FIO will have authority to monitor the insurance industry, identify regulatory gaps that could contribute to systemic crisis
CONCERN: FIO morphs into quasi/shadow or actual regulator
Surplus Lines/Reinsurance
Title V of the Dodd-Frank bill includes, as a separate subtitle, the Nonadmitted and Reinsurance Reform Act (NRRA), which eliminates regulatory inefficiencies associated with surplus lines insurance and reinsurance
The Dodd-Frank Wall Street Reform and Consumer Protection Act
Source: Insurance Information Institute (I.I.I.) updates and research; The Financial Services Roundtable; Adapted from summary by Dewey & LeBoeuf LLP
108
Federal Insurance Office (FIO):What Would it Do?
Establishes office within US Treasury headed by a Director appointed
by Treasury Secretary, and charged with:
Monitor the insurance industry to gain expertise (oversight extends to all lines of
insurance except health insurance, long-term care and federal crop insurance).
Identify regulatory gaps that could contribute to a systemic crisis in the insurance
industry or the U.S. financial system.
Gather information from the insurance industry in order to analyze such data and
issue reports. May require insurers, with exception of small insurers which are
exempt, to submit data and FIO director can issue subpoenas to gain such info.
Deal with international insurance matters.
Monitor the extent to which underserved communities have access to affordable
insurance products.
Assist in administration of the Terrorism Risk Insurance Program (expires end of
2014)
Duties of the Federal Insurance Office
Source: Insurance Information Institute (I.I.I.) updates/research; The Financial Services Roundtable; Adapted from summary by Dewey & LeBoeuf LLP
110
Dodd-Frank ImplementationStatus Report for Insurers: Slow Start
Financial Stability Oversight Council—Slow to Consider Insurer Concerns
FSOC deliberates largely behind closed doors
Criteria and process for designation of Systemically Important Financial Institutions (SIFIs) were not announced until October 12, 2011
• Likely that a small number of US insurers will be designated as SIFIs
Operated/deliberated until late September 2011 without a voting member representing the insurance industry
• Roy Woodall, approved by Senate in Sept. 27, 2011, is the sole voting representative for the entire p/c and life insurance industry (was Kentucky Ins. Comm. 1966-1967; Worked in other insurance trade posts, Treasury)
Two non-voting FSOC members represent insurance interests:
• FIO Director Michael McRaith (started June 1, 2011)
• Missouri Insurance Director John Huff (started in Sept. 2010)
Not allowed to brief fellow regulators on FSOC discussions
The Dodd-Frank Wall Street Reform and Consumer Protection Act
Source: Insurance Information Institute (I.I.I.) updates and research
111
Dodd-Frank Implementation:SYSTEMIC RISK CRITERIA
All Banks with Assets > $50B Considered Systemically Important Non-Bank Financial Groups with Global Consolidated Assets > $50B Will Be Examined
for Systemic Riskiness, But Not Automatically Labeled as a Systemically Important Financial Institution (SIFI)
Foreign firms with assets in the US exceeding $50 billion will also fall under review
If Firm Exceeds the $50B Threshold, a 3-Stage Test Applies STAGE 1: Non-Banks Financial Groups with $50B+ Assets Will Be Evaluated on Five
“Uniform Quantitative Thresholds,” at Least One of Which Will Have to Be Met to Trigger a Further (Stage 2) Review Potentially Leading to a SIFI Designation
Leverage: Would have to be leveraged more than 15:1 (insurers unlikely to trigger)
ST Debt-to-Assets: Would have to a ratio of ST debt (less than 12 months to maturity) to consolidate assets exceeding 10%
Debt: Have total debt exceeding $20 billion (i.e., loans borrowed and bond issues)
Derivative Liabilities: Have derivative liabilities exceeding $3.5 billion
Credit Default Swaps: Have more than $30 billion CDS outstanding for which the nonbank financial firm is the reference entity (i.e., CDS written against firm’s failure)
Thresholds Considered to Be Guideposts Not all companies that breach a barrier will be deemed systemically important
Regulators retain right to include firms that do meet any of the criteria
The Dodd-Frank Act and Systemic Importance
Source: Financial Stability Oversight Council; Insurance Information Institute (I.I.I.) research.
112
Dodd-Frank Implementation:SYSTEMIC RISK CRITERIA (continued)
STAGE 2: Analysis of Firms Triggering Uniform Quantitative Thresholds Firms triggering one or more of the quantitative thresholds in Stage 1 will be analyzed using publicly
available information in order to conduct a more thorough review
No data call will be required at this stage
Firms viewed as potentially systemically important (candidate SIFIs) will subject to a Stage 3 analysis
STAGE 3: Analysis of Candidate Systemically Important Financial Institutions Firms deemed in Stage 2 to be potentially systemically important will be subjected to more detailed
analysis including data not available during the Stage 2 analysis
Stage 3 firms will be notified by the FSOC that they are under consideration and will have the opportunity to contest their consideration
SIFI DESIGNATION PROCEDURE: 2-Stage Voting Procedure by FSOC is Required Before a Final SIFI Designation is Made
At the conclusion of the Stage 3, FSOC has the authority to propose a firm be designated as a SIFI
Requires 2/3 majority vote of FSOC members, including affirmation of the Chair (Treasury Secretary)
Potential SIFI firm will be given written explanation for the determination
Firm can request a hearing to contest the determination
Final determination requires another 2/3 majority of FSOC members and affirmation of the Chair
The Dodd-Frank Act and Systemic Importance
Source: Financial Stability Oversight Council; Insurance Information Institute (I.I.I.) research.
113
Dodd-Frank Implementation:FSOC MEMBERS
Members of the Financial Stability Oversight Council
There are 10 voting members of the FSCO
Treasury Secretary and FSOC Chair: Timothy Geithner
Federal Reserve Chairman: Ben Bernanke
Securities & Exchange Commission Chairman: Mary Shapiro
Commodities Futures Trading Commission Chairman: Gary Gensler
National Credit Union Administration Chairman: Debbie Matz
(Acting) Comptroller of the Currency: John Walsh
Federal Housing Finance Agency (Acting) Director: Edward DeMarco
Consumer Financial Protection Bureau Director: Richard Cordray
Independent Insurance Expert: Roy Woodall
There are 2 nonvoting members of the FSOC representing insurance interests
Federal Insurance Office Director Mike McGraith
John Huff, Director of the Missouri Insurance Department
The Dodd-Frank Act and Systemic Importance
Source: Financial Stability Oversight Council; Insurance Information Institute (I.I.I.) research.
118
Dodd-Frank Implementation:Federal Insurance Office: Very Quiet
FIO’s First Director Did Not Assume Office Until June 1, 2011
Former Illinois Insurance Director Michael McRaith
Small staff (10-12) and modest budget; Trying to staff up
McRaith has made relatively few appearances or public comments
FIO held small conference at Treasury on Dec. 9
Study on State of Insurance Regulation Was Due Jan. 2012
Delayed—April release likely
Report will likely review previously identified inefficiencies and strengths of current regulatory system with an eye toward modernization.
Consumer protection could play a larger-than-expected role
Treasury Will Exert Heavy Influence on the Report
Federal Insurance Office Update: Activity Update
Source: Insurance Information Institute (I.I.I.) updates and research
Former President of P/C Insurance at The Hartford
Source: James Madison Institute, February 2008.
ME
NH
MA
CT
PA
WV
VA
NC
LA
TX
OK
NE
ND
MN
MI
IL
IA
ID
WA
OR
AZ
HI
NJRI B
DE
AL
VT
NY
MD
SC
GA
TN
AL
FL
MS
ARNM
KYMOKS
SDWI
IN
OH
MT
CA
NV
UT
WY
CO
AK
= A= B= C= D= F= NG
Source: Heartland Institute, May 2011
B B+
B+
D
B
C-
B-
B+
B+C-
B+C-
B
C+
C-
C-
B- D-
B
F
D
C-
C-C+
B+
B+
B+
A+
A+
C-
B
A
A
B
C+
C+
B-
B-
C+
C
F
D+F
D+
B
C+
F F
D-
2010 Property & Casualty InsuranceRegulatory Report Card: Enormous Variation
Not Graded: District of Columbia
There is enormous variation in the quality of insurance regulation in the United States. There are many sources of this variation, though problems in
prudential/solvency regulation are rare.
Dodd-Frank and Insurance:The Years Ahead
121
Outlook for Its Medium and Long-Term Viability & Global Influence
122
Dodd-Frank:What does the future hold for insurers?
Short-to-Mid-Term Uncertainty
Outcome of 250-300 rules across many federal agencies (ETA: months to years)
Legal challenges to the Dodd-Frank (ETA: Years)
Outcome of 2012 election (US Senate could fall under Republican control, Republican presidential candidates vow to repeal/revisit reforms) (ETA: 9-21 months)
Mid-Term Issues for Insurers
FIO report in 2012: Will there be renewed effort for federal chartering in the US?
Federal chartering will reopen a large scale battle within the US insurance industry
Systemic Risk Designations: Will affect very few US insurers (3-5)
CONCERN: FIO morphs into quasi/shadow or actual regulator; CFPB too.
Mid-to-Long-Term Issues for Insurers
SIFI: Do enhanced capital requirements put them at a competitive disadvantage or is the “Too Big To Fail” designation viewed as an advantage?
Solvency II: Tough sell in the US right now (Solvency II = Basel III = European Banks)
Insurance Issues Timeline for Dodd-Frank
Source: Insurance Information Institute (I.I.I.) updates and research.
123
Dodd-Frank: Long-term Issues for Insurers & the Dodd-Frank Blueprint
Longer-Term Issues for Insurers
Streamlining of Regulation: Dodd-Frank does little to directly address the inefficiencies of the US insurance regulatory system. (ETA: Many Years, Never)
2012 FIO study will address some of these issues, but likelihood of timely, uniform implementation of recommendations is remote (FIO has no regulatory power; Treasury/Fed powers very limited)
Begs questions of regulatory authority: States vs. Federal Government
Ultimate Resolution of Regulatory Authority: (ETA: Years)
Possible outcomes: OFC, status quo or bifurcation (life = federal, nonlife = OFC)
Can Dodd-Frank Serve as a Blueprint for International Reforms?
The US is and will remain in a greatly weakened position in terms of its credibility to offer regulatory or policy solutions internationally
Elements of Dodd-Frank (e.g., derivatives regulation) could prove useful; Systemic risk criteria
Dodd-Frank provides little guidance on international insurance issues, though FIO will define its role (albeit a narrow one) on this issue
Insurance Issues Timeline for Dodd-Frank
Source: Insurance Information Institute (I.I.I.) updates and research.
124
Healthcare Reform & Implications for
Workers Compensation
124
A Status Report
125
Outline of Discussion Items
Summary of the Major Provisions of the Patient Protection and Affordable Care Act (PPACA) of 2010 – popularly known as ObamaCare
Implementation Timetable for Key Provisions of PPACA
Challenges to the Act
Possible Effects on Workers Compensation Benefits/Insurance
137
Possible Effects of Affordable Care Act onWorkers Compensation
137
138
Possible Effects on Workers Comp
1. Changes in Medicare Reimbursement Levels
If CMS-authorized Medicare reimbursement levels are modified there could be impacts on states that used Medicare as a basis for reimbursement in their fee schedules. This could affect Physician Fee Schedules, Hospital Fee Schedules (inpatient, outpatient and ambulatory surgical centers) Magnitude of impact depends on (i) when feds make changes to
Medicare reimbursements How (if?) states adopt new Medicare reimbursement formula for
their own WC fee schedules
2. Reduced Cost Shifting into Workers Comp
If health care coverage is expanded, presumably the incentive to cost shift is diminished
Source: NCCI, 2011 Issues Report.
139
Possible Effects on Workers Comp (cont’d)
3. Wellness Initiatives Affordable Care Act promotes wellness programs which
could, over the long run, reduce the incidence and duration of workers comp claims
4. Protecting Consumer Access to Generic Drugs One provision of the Act facilitates early entry of generic
drugs, which could have a favorable incremental effect on WC pharmaceutical costs
5. New Taxes Act calls for new taxes on medical devices, drug
manufacturers and health insurance companies
6. Reduction in Fraud and Abuse Broad reach of Affordable Care Act combined with
enforcement and penalty provisions could reduce fraud and abuseSource: NCCI, 2011 Issues Report.
142
Challenges to “ObamaCare”
142
Few Acts of Congress Have Generated Such Intense Debate
and Aroused Such Passions Among the Public and Politicians
143
Legal and Political Challenges
1. U.S. Supreme Court
Heard arguments on constitutionality of PPACA on Monday-Wednesday, March 26-28 in rare 3 sessions totaling 6 hours Longest block of time for arguments in 40 years
Decision expected in June at end of Supreme Court session
2. U.S. Congress
H.R. 5, the Protecting Access to Healthcare Act, Repeals the Independent Payment Advisory Board An amendment to H.R. 5 repeals, for health insurers, the limited
exemption from anti-trust laws that they have had under McCarran-Ferguson since 1945
All candidates for the Republican presidential nomination and many GOP party leaders have repeatedly stated their intention to repeal the PPACA next year.
145
Summary of Supreme Court Hearings on Affordable Care Act1. Day 1: Anti-Injunction Act
Anti-Injunction Act dates to an 1867 law asserting that a tax cannot be challenged before it is paid. Court seemed unpersuaded by idea that it could not hear challenges to the Act now even though “penalty” for not complying with the mandate does begin until 2014
2. Day 2: The Mandate to Purchase Coverage Court seemed to believe that such a mandate represented an overreach of
Congressional authority It appears (highly) likely that the mandate will be ruled unconstitutional
3. Day 3: Severing the Mandate & Viability of the ACA Unclear that the Act can survive of the mandate is severed. Two issues
are inextricably linked to the mandate: Guarantee Issue: Can’t deny coverage due to pre-existing conditions Community Rating: Everyone charged the same
4. What’s Next: Ruling Likely in June Will the Court rule to invalidate the entire ACA or rule narrowly on the
mandate Does that mortally wound the Act: Death by Adverse Selection? Will states develop a Plan B?
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146