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Into the Looking Glass: Trends & Challenges in the
P/C Insurance Industry
Robert P. Hartwig, Ph.D., CPCU, PresidentInsurance Information Institute 110 William Street New York, NY 10038
Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org
CPCU Society Annual MeetingPhiladelphia, PA
September 9, 2008
Presentation Outline
• Weakening Economy: Insurance Impacts & Implications
• Profitability
• Underwriting Trends
• Premium Growth
• Capacity/Capital
• Investment Overview
• Catastrophic Loss
• Shifting Legal Liability, Tort & Political Environment
THE ECONOMIC STORM
What a Weakening Economy & The Threat of Inflation Mean
for the Insurance Industry
3.7
%
0.8
% 1.6
%
2.5
%
3.6
%
3.1
%
2.9
%
0.1
%
4.8
%
4.8
%
0.9
%
3.3
%
1.2
%
0.3
% 1.1
%
2.0
% 2.5
%
2.7
%
-0.2%-1%
0%
1%
2%
3%
4%
5%
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
Real GDP Growth*
*Yellow bars are Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 8/08; Insurance Information Institute.
Economic toll of credit crunch, labor market
contraction and high energy prices is growing, though no
official recession declared
Stimulus check, export effects
U.S. Unemployment Rate,(2007:Q1 to 2009:Q4F)*
4.7%4.6%
4.7%
4.5% 4.5% 4.5%4.6%
4.8%4.9%
5.4%
5.7%
5.9%
6.1% 6.1% 6.1% 6.1%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
06:Q1 06:Q2 06:Q3 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
* Blue bars are actual; Yellow bars are forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (8/08); Insurance Info. Inst.
Rising unemployment will erode payrolls and workers
comp’s exposure base
New Private Housing Starts,1990-2014F (Millions of Units)
2.07
1.80
1.36
0.97
0.97
1.38 1.
45
1.54 1.56
1.51
1.48
1.35
1.46
1.29
1.20
1.01
1.19
1.47
1.62 1.64
1.57 1.60
1.71
1.85
1.96
0.91.01.11.21.31.41.51.61.71.81.92.02.1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07F08F09F10F11F12F13F14FSource: US Department of Commerce; Blue Chip Economic Indicators (10/07), except 2008/09 figures from 8/08 edition of BCEF; Insurance Info. Institute
Exposure growth forecast for HO insurers is dim for 2008/09
Impacts also for comml. insurers with construction risk exposure
New home starts plunged 34% from 2005-2007;
Drop through 2008 trough is 54% (est.)—a net annual decline of
1.1 million units
I.I.I. estimates that each incremental 100,000 decline in housing starts costs
home insurers $87.5 million in new exposure (gross premium). The net
exposure loss in 2008 vs. 2005 is estimated at $963 million.
50
3.7
51
1.9
50
8.3
50
3.3
49
6.6
50
2.2
49
6.2
48
9.1
49
1.4
49
2.2
49
5.9
400
500
600
98 99 00 01 02 03 04 05 06 07 08*
P/C Direct Carrier Employment
Source: U.S. Dept of Labor, Bureau of Labor Statistics *through June 2008, preliminary
Thousands P/C direct carrier employment has been stable in recent years. Will focus on expenses impact
employment?
5.2%
-0.9
%-7
.4%
-6.5
%-1
.5%
1.8%
4.3%
18.6
%20
.3%
5.8%
0.3%
-1.6
%-1
.0%
-1.8
%-1
.0%
3.1%
1.1%
0.8%
0.4%
0.6%
-0.4
%-0
.3%
1.6%
5.6%
13.7
%7.
7%1.
2%-2
.9% -0
.5%
-3.4
%-4
.9%
-10%
-5%
0%
5%
10%
15%
20%
25%7
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
8F
Rea
l N
WP
Gro
wth
-4%
-2%
0%
2%
4%
6%
8%
Rea
l G
DP
Gro
wth
Real NWP Growth Real GDP
Real GDP Growth vs. Real P/C Premium Growth: Modest Association
P/C insurance industry’s growth is influenced modestly by growth
in the overall economy
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 8/08; Insurance Information Inst.
Regulatory Response &
Financial Services Modernization
Impacts on Insurers
Treasury Regulatory Recommendations Affecting Insurers
Source: Department of Treasury Blueprint for a Modernized Financial Regulatory System, March 2008.
• Establishment of an Optional Federal Charter (OFC) Would provide system for federal chartering, licensing, regulation and
supervision of insurers, reinsurer and producers (agents & brokers)• OFC Would Incorporate Several Regulatory Concepts
Ensure safety and soundness Enhance competition in national and international markets Increase efficiency through elimination of price controls, promote
more rapid technological change, encourage product innovation, reduce regulatory costs and provide consumer protection
• Establishment of Office of National Insurance (ONI) Department within Treasury to regulate insurance pursuant to OFC Headed by Commissioner of National Insurance Commissioner has regulatory, supervisory, enforcement and
rehabilitative powers to oversee organization, incorporation, operation, regulation of national insurers and national agencies
• UPDATE: HR 5840 Introduced in April Would Establish Office of Insurance Information (OII) Would create industry “voice” within Treasury
Post-Crunch: Fundamental Issues To Be Examined Globally
Source: Insurance Information Institute
• Adequacy of Risk Management, Control & Supervision at Financial Institutions Worldwide Failure of risk management (and regulation) Implications for ERM? Includes review of incentives
• Effectiveness and Nature of Regulation What sort of oversite is optimal given recent experience? Credit problems arose under US and European (Basel II) regulatory
regimes Will new regulations be globally consistent? Can overreactions be avoided? Capital adequacy & liquidity
• Accounting Rules Problems arose under FAS, IAS Asset Valuation, including Mark-to-Market Structured Finance & Complex Derivatives
• Ratings on Financial Instruments New approaches to reflect type of asset, nature of risk
Inflation Overview
Pressures Claim Costs, Expands Probable & Possible Max Losses
Annual Inflation Rates(CPI-U, %), 1990-2009F
4.9 5.1
3.0 3.2
2.6
1.51.9
3.3 3.4
1.3
2.5 2.3
3.0
3.8
2.8
5.6
4.4
2.92.82.92.4
0
1
2
3
4
5
6
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 08F09F
*12-month change July 2008 vs. July 2007 Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, August 10, 2008. (forecasts)
In July 2008, on a year-over-year basis inflation was 5.6% -- a level not seen since 1991.
Medical & Tort Cost Inflation
Amplifiers of Inflation, Major Insurance Cost Driver
Consumer Price Index for Medical Care vs. All Items, 1960-2007
207.3
351.1
0
100
200
300
400
60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Ind
ex V
alu
e (1
982-
84=
100)
All Items Medical Care
Source: Department of Labor (Bureau of Labor Statistics; Insurance Information Institute.
(Base: 1982-84=100)
Inflation for Medical Care has been surging
ahead of general inflation (CPI) for 25
years. Since 1982-84, the cost of medical care has
more than tripled
Soaring medical inflation is among the most serious
long-term challenges facing
casualty, disability and LTC insurers
Tort Cost Growth & Medical Cost Inflation vs. Overall Inflation (CPI-U), 1961-2008*
0%
2%
4%
6%
8%
10%
12%
14%
1961-70 1971-80 1981-90 1991-2000 2001-08E
Tort Costs Medical Costs CPI
*Medical cost and CPI-U through April 2008 from BLS. Tort figure is for full-year 2008 from Tillinghast.
Tort System is an Inflation Amplifier
Avg. Ann. Change: 1961-2008*
Torts Costs: +8.4%Med Costs: +6.0%
Overall Inflation: +4.2%
Sources: US Bureau of Labor Statistics, Tillinghast-Towers Perrin, 2007 Update on U.S. Tort Costs; Insurance Info. Inst.
Tort costs move with inflation but at twice the rate
Med Costs Share of Total Costs is Increasing Steadily
Indemnity54%
Medical46%
Source: NCCI (based on states where NCCI provides ratemaking services).
Indemnity53%
Medical47%
Indemnity41%
Medical59%1987
1997
2007pMed cost inflation is one factor to high WC severity.
Med cost are now nearly 60% of all lost time claim costs
PROFITABILITY
Profits in 2006/07 ReachedTheir Cyclical Peak;
By No Reasonable Standard Can Profits Be Deemed Excessive
P/C Net Income After Taxes1991-2008 ($ Millions)*
$14,
178
$5,8
40
$19,
316
$10,
870
$20,
598
$24,
404 $3
6,81
9
$30,
773
$21,
865
$3,0
46
$30,
029
$61,
940
$32,
936
-$6,970
$65,
777
$44,
155
$20,
559
$38,
501
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*
*ROE figures are GAAP; 2008 figure is annualized Q1 net income of $8.234B; 1Return on avg. surplus.Sources: A.M. Best, ISO, Insurance Information Inst. ***9.5% excl. mortgage and finl. guarantee insurers.
2001 ROE = -1.2%2002 ROE = 2.2%2003 ROE = 8.9%2004 ROE = 9.4%2005 ROE= 9.6%2006 ROE = 12.2%2007 ROAS1 = 12.3%**2008 ROAS = 6.4%***
Insurer profits peaked in 2006
-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 08Q1
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2008:Q1
2008 P/C insurer figure is annualized Q1 return on average surplus. Excluding mortgage and financial guarantee insurers = 9.5%. Source: ISO, Fortune; Insurance Information Institute.
Andrew Northridge
Hugo Lowest CAT losses in 15 years
Sept. 11
4 Hurricanes
Katrina, Rita, Wilma
P/C profitability is cyclical and volatile
Mortgage & Financial Guarantee Impact
-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
Profitability Peaks & Troughs in the P/C Insurance Industry,1975 – 2008:Q1
1975: 2.4%
1977:19.0% 1987:17.3%
1997:11.6%
2006:12.2%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years
10 Years
9 Years
*GAAP ROE for all years except 2007 which is ROAS of 12.3%. All figures include mortgage an d financial guarantee insurers. Excluding M&FG insurers 2008:Q1 ROAS is 9.5%..Source: Insurance Information Institute, ISO; Fortune
2008Q1: 6.4%(9.5% excl. M&FG)
Advertising Expenditures by P/C Insurance Industry, 1999-2007E
$ Billions
$1.736 $1.737 $1.803 $1.708
$3.695
$4.323
$2.975
$2.111$1.882
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
99 00 01 02 03 04 05 06 07ESource: Insurance Information Institute from consolidated P/C Annual Statement data.
Ad spending by P/C insurers is at a record high, signaling
increased competition
FINANCIAL STRENGTH &
RATINGS Industry Has Weathered
the Storms Well, But Cycle May Takes Its Toll
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2007E
90
95
100
105
110
115
120
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
Co
mb
ine
d R
ati
o
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
Imp
air
me
nt
Ra
te
Combined Ratio after DivP/C Impairment Frequency
Impairment rates are highly correlated
underwriting performance and could reached a
record low in 2007
Source: A.M. Best; Insurance Information Institute
2007 impairment rate was a record low 0.12%, one-seventh the 0.8% average since 1969;
Previous record was 0.24% in 1972
UNDERWRITINGTRENDS
Extremely Strong 2006/07;Relying on Momentum &
Discipline for 2008
90
95
100
105
110
115
120
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08F
Combined Ratios
1970s: 100.3
1980s: 109.2
1990s: 107.8
2000s: 102.0*
Sources: A.M. Best; ISO, III *Full year 2008 estimates from III.
P/C Insurance Combined Ratio, 1970-2008F*
115.8
107.4
100.198.3
100.7
92.4
103
107
102.5
99.0
95.6
90
100
110
120
2001 2002 2003 2004 2005 2006 2007 2008 2008* 2009F 2010F
P/C Insurance Industry Combined Ratio, 2001-2010F
*Includes Mortgage & Financial Guarantee insurers. Sources: A.M. Best, ISO; III.
2005 ratio benefited from heavy use of reinsurance which lowered net losses
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
Including Mortgage
& Fin. Guarantee insurers
Cyclical Deterioration
-55-50-45-40-35-30-25-20-15-10-505
101520253035
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
Source: A.M. Best, ISO; Insurance Information Institute * Includes mortgage * finl. guarantee insurers
$ B
illi
ons
Insurers earned a record underwriting profit of $31.7 billion in 2006, the largest ever but only the
second since 1978. Cumulative underwriting deficit from 1975 through 2007 is $422 billion.
Underwriting Gain (Loss)1975-2008:Q1*
$561 mill underwriting loss in 08:Q1 incl. mort. & FG insurers
PREMIUM GROWTH &
PRICING Sluggishness Persists
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
22%
24%
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
F20
09F
2010
F
Sources: A.M. Best, ISO, Insurance Information Institute
Strength of Recent Hard Markets by NWP Growth
1975-78 1984-87 2000-03
In 2007 net written premiums fell 0.6%, the first decline since 1943
Shaded areas denote “hard
market” periods
Negative or zero growth
likely
$651 $6
68 $691 $7
05
$703
$685
$690 $7
24
$780 $8
23 $851
$847
$838
$847
$600
$650
$700
$750
$800
$850
$900
$950
94 95 96 97 98 99 00 01 02 03 04 05* 06* 07*
Average Expenditures on Auto Insurance
*Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute
Countrywide auto insurance expenditures
are expected to fall 0.5% in 2007, the first drop
since 1999
Lower underlying frequency and modest
severity are keeping auto insurance costs in check
Cumulative Commercial Rate Change by Line: 4Q99 – 2Q08
Source: Council of Insurance Agents & Brokers
Commercial account pricing has been trending down for 4+ years and is now
on par with prices in late 2001
U.S. Domiciled Captives- Net Premiums Written ($ Millions)
$8.4
$9.0
$9.3
$9.9
$10.2
$8.0
$8.5
$9.0
$9.5
$10.0
$10.5
2002 2003 2004 2005 2006
$ M
illi
ons
Source: A.M. Best, 2007 Special Report: U.S. Captive Insurers – 2006 Market Review
Following a five-year period of rapid growth, U.S. captive insurers saw net premiums written increase by just 2.7 percent in 2006, after 6.2 percent growth in 2005.
RISING EXPENSES
Expense Ratios Will Rise as Premium Growth Slows
Personal vs. Commercial Lines Underwriting Expense Ratio*
23.4%24.3%
25.0%27.1%
24.4%
24.5%24.8%25.6%
24.6%
25.6%24.7%
26.1%26.6%
27.5%
30.8%
27.0%
26.3%26.4%25.6%
30.0%
31.1%
29.4%
29.9%29.1%
26.6%
25.0%
20%
22%
24%
26%
28%
30%
32%
96 97 98 99 00 01 02 03 04 05 06 07E 08F
Personal Commercial
*Ratio of expenses incurred to net premiums written.Source: A.M. Best; Insurance Information Institute
Expenses ratios will likely rise as premium growth slows
CAPACITY/SURPLUS
Accumulation of Capital/ Surplus Depresses ROEs
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
$550
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
U.S. Policyholder Surplus: 1975-2008:Q1*
Source: A.M. Best, ISO, Insurance Information Institute. *As of March 31, 2008
$ B
illi
ons
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
Capacity as of 3/31/08 was $515.6, down 0.4% from 12/31/07 was $517.9B, but 80% above its 2002 trough.
Recent peak was $521.8 as of 9/30/07
The premium-to-surplus fell to $0.85:$1 at year-end 2007, approaching
its record low of $0.84:$1 in 1998
Annual Catastrophe Bond Transactions Volume, 1997-2007
$1,729.8
$966.9
$7,329.6
$4,693.4
$1,991.1
$1,142.8$1,219.5$846.1$984.8$1,139.0
$633.0
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
97 98 99 00 01 02 03 04 05 06 07
Ris
k C
apita
l Iss
ues
($ M
ill)
0
5
10
15
20
25
30
35
Nu
mb
er o
f Iss
uan
ces
Risk Capital Issued Number of Issuances
Source: MMC Securities Guy Carpenter, A.M. Best; Insurance Information Institute.
Catastrophe bond issuance has soared in the wake of Hurricanes
Katrina and the hurricane seasons of 2004/2005, despite two
quiet CAT years
MERGER & ACQUISITION
Are Catalysts for P/C Consolidation Growing
in 2008?
P/C Insurer M&A Activity,* 1997-2008**
$18,289
$6,750$599
$12,823
$800
$9,325
$36,407
$13,808
$3,318$8,683
7
15
10
2
0
2
01
9
21 2
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
97 98 99 00 01 02 03 04 05 06 07 08**
Tran
sact
ion
Val
ue ($
Mill
)
0
2
4
6
8
10
12
14
16
Num
ber o
f Tra
nsac
tions
Transaction Values Number of Transactions
Source: Lehman Brothers. *Deals exceeding $500 million. *Through June 30, 2008.
M&A activity began to accelerated in 2007. The largest deals as of mid 2008
are Liberty Mutual’s acquisition of Safeco for $6.2B and Allied World’s
acquisition of Darwin for $550 million
Distribution Sector: Insurance-Related M&A Activity, 1988-2006
$542
$446
$1,9
34
$7$1,633
$2,7
20
$689
$60 $2
12
$944
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
96 97 99 00 01 02 03 04 05 06
Tran
sact
ion
Val
ue ($
Mill
)
0
50
100
150
200
250
300
Num
ber o
f Tra
nsac
tions
Transaction Values Number of Transactions
Source: Conning Research & Consulting.
No extraordinary trends evident
0%
10%
20%
30%
40%
50%
60%
70%
83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Direct Independent Agents
All P/C Lines Distribution Channels, Direct vs. Independent Agents
Source: Insurance Information Institute; based on data from Conning and A.M. Best.
Independent agents steadily lost market share from the early 1980s through the early 2000s across all P/C lines, but have gained in recent
years. Direct channels include exclusive agency companies, direct marketers and
direct sales (e.g., internet)
INVESTMENT OVERVIEW
More Pain, Little Gain
Property/Casualty Insurance Industry Investment Gain1
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$63.6
$12.2
$56.9$51.9
$57.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 02 03 04 05* 06 07
08Q1
1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain. *2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.
Investment gains are off in 2008 due to lower yields and
poor equity market conditions.
CATASTROPHICLOSS
What Will 2008 Bring?
U.S. Insured Catastrophe Losses*$7
.5
$2.7
$4.7
$22.
9
$5.5 $1
6.9
$8.3
$7.4
$2.6 $1
0.1
$8.3
$4.6
$26.
5
$5.9 $1
2.9 $2
7.5
$6.7
$9.3
$100
.0
$61.
9
$9.2
$0
$20
$40
$60
$80
$100
$120
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
08:Q
2**
20??
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.**Based on preliminary PCS data through June 30. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Source: Property Claims Service/ISO; Insurance Information Institute
$ Billions2008 CAT losses already exceed all of 2006/2007. 2005 was by far the worst year ever for insured catastrophe losses in the US, but
the worst has yet to come.
$100 Billion CAT year is coming soon
REINSURANCE MARKETS
Reinsurance Prices are Falling in Non-Coastal Zones, Casualty Lines
Share of Losses Paid by Reinsurers, by Disaster*
30%25%
60%
20%
45%
0%
10%
20%
30%
40%
50%
60%
70%
Hurricane Hugo(1989)
Hurricane Andrew(1992)
Sept. 11 TerrorAttack (2001)
2004 HurricaneLosses
2005 HurricaneLosses
*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for 2005.Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.
Reinsurance is playing an increasingly
important role in the financing of mega-CATs; Reins. Costs
are skyrocketing
Reinsurer Market Share Comparison: 1990 vs. 2006
U.S. Reinsurer
64.7%
Offshore Reinsurer
35.3%
1990 2006
Sources: Reinsurance Association of America; Insurance Information Institute.
U.S. Reinsurer
46.9%
Offshore Reinsurer
53.1%
U.S. Reinsurer market share fell precipitously between 1990 and 2006
Shifting Legal Liability & Tort
Environment
Is the Tort PendulumSwinging Against Insurers?
$17.0$49.6 $58.7
$85.6$17.1
$51.0$70.9
$85.6
$5.2
$20.4
$30.0
$45.5
$0
$50
$100
$150
$200
$250
1980 1990 2000 2006
Commercial Lines Personal Lines Self (Un)Insured
Bil
lion
s
Total = $39.3 Billion
*Excludes medical malpracticeSource: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.
Total = $121.0 Billion
Total = $159.6 Billion
Total = $216.7 Billion
Personal, Commercial & Self (Un) Insured Tort Costs*
Tort System Costs and Tort Costs as a Share of GDP, 2000-2009F
$179
$233$246
$265
$253
$260
$261
$277
$247
$205
1.82%2.03%
2.22% 2.23%
1.83%1.84%
2.10%
1.83%1.87%
2.24%
$100
$120
$140
$160
$180
$200
$220
$240
$260
$280
$300
00 01 02 03 04 05 06 07E 08E 09E
Tor
t S
yste
m C
osts
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Tor
t C
osts
as
% o
f G
DP
Tort Sytem Costs Tort Costs as % of GDP
After a period of rapid escalation, tort system costs as % of GDP are now falling
Source: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.
REGULATORY & LEGISLATIVE
ENVIRONMENT
Isolated Improvements, Mounting Zealoutry
Rating of Auto/Home Insurance Regulatory & Operating Environment*
Source: James Madison Institute, February 2008.
ME
NH
MA
CT
PA
WVVA
NC
LA
TX
OK
NE
ND
MN
MI
IL
IA
ID
WA
OR
AZ
HI
NJ
RI
MDDE
AL
VT
NY
DC
SC
GA
TN
AL
FL
MS
ARNM
KYMOKS
SDWI
IN
OH
MT
CA
NV
UT
WY
CO
AK
Most states (25) get a “B”, but 7 got A’s, 10 got C’s (including DC), 5 earned D’s and 4 got F’s
*Criteria considered were auto/home residual mkts., auto/home mkt. concentration, loss ratio stability, reg. env.,form regulation, credit scores, territorial restrictions
= A= B= C= D= F
Source: James Madison Institute, Feb. 2008
PRESIDENTIAL POLITICS & P/C PROFITABILITY
Political Quiz
• Does the P/C insurance industry perform better (as measured by ROE) under Republican or Democratic administrations?
• Under which President did the industry realize its highest ROE (average over 4 years)?
• Under which President did the industry realize its lowest ROE (average over 4 years)?
15.10%10.13%
8.93%8.65%
8.35%7.98%
7.68%6.98%6.97%
5.43%5.03%
4.83%4.43%
3.55%
16.43%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
Carter
Reagan II
G.W. Bush II
Nixon
Clinton I
G.H.W. Bush
Clinton II
Reagan I
Nixon/Ford
Truman
Eisenhower I
Eisenhower II
G.W. Bush I
Johnson
Kennedy/Johnson
*ROE for 2008 based on Q1 data. Truman administration ROE of 6.97% based on 3 years only, 1950-52.Source: Insurance Information Institute
OVERALL RECORD: 1950-2008*
Republicans 8.05%
Democrats 7.14%
Party of President has marginal bearing on profitability of P/C insurance industry
ELECTION IMPACT
P/C Insurance Industry ROE byPresidential Administration,1950-2008*
Insurance Information Institute On-Line
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