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P/C Industry Outlook: 2013 and Beyond

P/C Industry Outlook: 2013 and Beyond. IIABSC Annual Meeting October 14, 2013. Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY 10038

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P/C Industry Outlook: 2013 and Beyond

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  1. P/C Industry Outlook:2013 and Beyond IIABSC Annual MeetingOctober 14, 2013 Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY 10038 Tel: 212.346.5540  Cell: 917.494.5945  stevenw@iii.org  www.iii.org

  2. The Strength of the Economy Will Influence P/C Insurer Growth Opportunities Growth Will Expand Insurer Exposure Base Across Most Lines 2

  3. Yearly Nominal U.S. GDP vs.P/C Net Written Premiums: 2000-2012 Index: 2000 = 100 “Soft” market: NWP slipped before the overall economy did “Hard” market: NWP grew much faster than the overall economy Recession Post recession: comparable growth rates Sources: http://www.bea.gov/national/xls/gdplev.xls ; SNL Financial; I.I.I. calculations

  4. US Real GDP, Quarterly, 2013-14 October 2013 Forecasts Real GDP Growth Rate Despite the sequester and other challenges to the U.S. economy,virtually every forecast in the Blue Chip universe in early Septembersees improvement ahead Sources: Blue Chip Economic Indicators (10/13); Insurance Information Institute eSlide – P6466 – The Financial Crisis and the Future of the P/C

  5. Federal Spending as a Share of State GDP: Vulnerability to Sequestration Varies Sources: Pew Center on the States (2012) Impact of the Fiscal Cliff on the States; Wells Fargo; Insurance Information Institute.

  6. State-by-State Leading Indicatorsthrough 2013:Q4 Sources: Federal Reserve Bank of Philadelphia at http://www.philadelphiafed.org/index.cfm ;Insurance Information Institute.

  7. Projected Population Growth Rates (2010-2020) Vary Widely by State and Region* South Carolina’s population is projected to grow less than neighboring states U.S. population growth overall, 2010-2020, is projected to be 8.7% *based on 2000 census.Source: http://www.census.gov/population/projections/data/state/projectionsagesex.html (Table 7) 8 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  8. July 2013 Unemployment Rates Vary Widely by State within the Region* U.S. unemployment rate in July was 7.4% *Provisional figures for July 2013, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute. 9 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  9. P/C Insurance:Forces Affecting Personal Lines Brighter Days Ahead,but Not Without Challenges 10

  10. Homeownership Rates* in the South** and the U.S., Quarterly, 2007:Q1-2013:Q2 The gap was 2.2 percentage points The gap is narrowing: now 1.5 percentage points Increasing percent of renters *Homeownership Rates are the owner-occupied homes as a percent of total occupied housing units. **The Census Bureau defined the South as including Alabama, Arkansas, Delaware, the District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia, and West Virginia.. The data are not seasonally adjusted.Sources: US Census Bureau, Residential Vacancies & Home Ownership in the Second Quarter of 2013 (released July 30, 2013) and earlier issues; Insurance Information Institute. 14 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  11. Single Family Housing Unit Starts: South vs. US, Monthly, July 2012-July 2013* Thousandsof Units The spurt in February 2013 occurred in the South and Northeast regions, not in the West or Midwest. *at annualized rate, seasonally adjusted; July 2013 numbers are preliminary.Source: US Census Bureau at www.census.gov/construction/nrc/pdf/newresconst.pdf.

  12. Auto/Light Truck Sales, 1999-2014F Truck purchases by contractors are especially strong Forecast range for 2013 is 15.3 to 15.8 million units (Millions of Units) Lowest level since the late 1960s Job growth and improved credit market conditions will boost auto sales in 2013 and beyond, bolstering the manufacturing sector and the economy generally. Sources: U.S. Department of Commerce; Blue Chip Economic Indicators (10/13); Insurance Information Institute.

  13. But Something Unusual is Happening:Miles Driven*, 1990–2013 Billions Peak in November 2007 Miles Driven Growth per 5-Yr Span1997 vs. 1992: 13.9%2002 vs. 1997: 11.5%2007 vs. 2002: 6.1% 2012 vs. 2007: -3.0% Some of the growth in miles driven is due to population growth: 1997 vs. 1992: +5.1% 2002 vs. 1997: +7.4%2007 vs. 2002: +4.7%2012 vs. 2007: +3.4% A record: miles driven has been below the prior peak for 67 straight months. Previous record below peak was in the early 1980s (39 months) Will the trend toward hybrid and non-gasoline-powered vehicles affect miles driven? What about the aging and retirement of the baby boomers? *Moving 12-month total. The latest data is for June 2013. Note: Recessions indicated by gray shaded columns.. Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm ); National Bureau of Economic Research (recession dates); Insurance Information Institute. 17 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  14. Miles Driven* in South Carolina,2010–2013 Millions *Moving 12-month total. The latest data is for June 2013. Note: Recessions indicated by gray shaded columns.. Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm ); National Bureau of Economic Research (recession dates); Insurance Information Institute. 18 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  15. P/C Insurance:Forces AffectingCommercial Lines Brighter Days Ahead,but Not Without Challenges 19

  16. Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2013:Q2 Billions Latest (2013:Q2) was $7.09 trillion, a new peak -- $860B above 2009 trough Prior Peak was 2008:Q1 at $6.54 trillion Payrolls are 12.1% above their 2009 trough Recent trough (2009:Q1) was $6.23 trillion, down 4.7% from prior peak 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. 20 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  17. Commercial & Industrial Loans Outstandingat FDIC-Insured Banks, Quarterly, 2006-2013* In nominal dollar terms, this is an all-time high. $Trillions Recession Outstanding loan volume has been growing for over two yearsand (as of year-end 2012) surpassed previous peak levels. *Latest data, released 8/29/2013. Source: FDIC at http://www2.fdic.gov/qbp/ (Loan Performance spreadsheet); Insurance Information Institute. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  18. Percent of Non-current Commercial & Industrial Loans Outstanding at FDIC-Insured Banks,Quarterly, 2006-2013:Q2* Almost back to “normal” levels of noncurrent industrial & commercial loans Recession Non-current loans (those past due 90 days or more or in nonaccrual status) are back to early-recession levels, fueling bank willingness to lend. *Latest data, released 8/29/2013. Source: FDIC at http://www2.fdic.gov/qbp/ (Loan Performance spreadsheet); Insurance Information Institute. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  19. Business Bankruptcy Filings: Fallingbut Still High in 2012 (1994:Q1 – 2012:Q3) New Bankruptcy Law Takes Effect Quarterly average for 2001:Q1-2005:Q3 was 8,915 (Thousands) Recessions in orange Business bankruptcies were down 42% in 2012:Q3 vs. recent peak in 2009:Q2 but were still higher than 2008:Q1, the first full quarter of the Great Recession. Bankruptcies restrict exposure growth in all commercial lines. Sources: American Bankruptcy Institute at www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; Insurance Information Institute. 23 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  20. Private Sector Business Starts,1993:Q2 – 2012:Q3* Business Starts2006: 861,0002007: 844,0002008: 787,0002009: 701,000 2010: 742,000 2011: 781,000 (Thousands) Recessions in orange Business starts were down nearly 20% in the Great Recession, holding back most types of commercial insurance exposure,but now are recovering. * Data through Sept 30, 2012 are the latest available (posted May 1, 2013); Seasonally adjusted. Sources: Bureau of Labor Statistics, www.bls.gov/news.release/cewbd.t08.htm; NBER (recession dates). 24 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  21. Severe Weather Reports in South Carolina, 2013 (through Aug. 30) Through August, there were 402 severe weather reports in South Carolina in 2013:8 tornadoes (in red),43 “Large Hail” reports (in green), and351 high wind events (in blue). Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2013_annual_summary.html# 25

  22. If They Hit Today, the Dozen Costliest (to Insurers) Hurricanes in U.S. History Insured Losses,2012 Dollars, $ Billions Storms that hit long ago had less property and businesses to damage, so simply adjusting their actual claims for inflation doesn’t capture their destructive power.Karen Clark’s analysis aims to overcome that. When you adjust for the damage prior storms could have done if they occurred today, Hurricane Katrina slips to a tie for 6th among the most devastating storms. *Estimate as of 12/09/12 based on estimates of catastrophe modeling firms and reported losses as of 1/12/13. Estimates range up to $25B. Sources: Karen Clark & Company, Historical Hurricanes that Would Cause $10 Billion or More of Insured LossesToday, August 2012; I.I.I.

  23. P/C Industry Homeowners Claim Frequency, US, 1997-2011 Claims Paid per 100 Exposures Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” p.29; Insurance Information Institute

  24. P/C Industry Homeowners Average Claim Severity, 1997-2011 HO average claim severity is now three times what it was in 1997. Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” p. 29, BLS inflation calculator,and Insurance Information Institute

  25. P/C Insurance Industry Financial Overview 36

  26. P/C Net Income After Taxes1991–2013:1H ($ Millions) Net income is up substantially (+42.4%) from 2012:1H $17.2B • 2005 ROE*= 9.6% • 2006 ROE = 12.7% • 2007 ROE = 10.9% • 2008 ROE = 0.1% • 2009 ROE = 5.0% • 2010 ROE = 6.6% • 2011 ROAS1 = 3.5% • 2012 ROAS1 = 5.9% • 2013:Q1 ROAS1 = 9.6% • ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 9.7% ROAS in 2013:Q1, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009. • Sources: A.M. Best, ISO, Insurance Information Institute

  27. Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2013:1H* History suggests next ROE peak will be in 2016-2017 ROE 1977:19.0% 1987:17.3% 2006:12.7% 10 Years 1997:11.6% 2013:1H 8.2% 10 Years 9 Years 2012: 5.9% 1984: 1.8% 1975: 2.4% 1992: 4.5% 2001: -1.2% *Profitability = P/C insurer ROEs. 2011-13 figures are estimates based on ROAS data. Note: Data for 2008-2013 exclude mortgage and financial guaranty insurers. Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

  28. Underwriting Profit* on Selected Linesin SC vs. US, 2011 South Carolina outperformed the US overall in many lines – sometimes with smaller losses (e.g. PP Auto, HO, CMP, WC) and sometimes with more profit (e.g. Inland Marine, Fire, & Allied Lines) * As percent of earned premiums. Source: NAIC “Report on Profitability by Line by State in 2011, pp. 146 and 314

  29. Policyholder Surplus, Quarterly, 2006:Q4–2013:1H Up nearly $175 Billion from the 2009:Q1 trough, a new peak ($ Billions) Down $84 Billion from the previous peak, due to the financial crisis, CATs The industry at year-end 2012 had $1 of surplus for every $0.78 of NPW, the strongest claims-paying status in its history. 2013:Q1 is estimatedSources: ISO; A.M .Best. 41 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  30. I.I.I. Mobile Apps Our apps are designed to provide guidance to consumers in making informed decisions about their insurance and preparing for a disaster. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  31. Sharing the I.I.I. Mobile Apps Sharing our apps is as easy as hitting the copy-paste keys… eSlide – P6466 – The Financial Crisis and the Future of the P/C

  32. The I’s on Insurance: New Consumer Education Video Series The first in a series of animated videos on insurance basics starts with homeowners; next up: auto insurance and small business insurance. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  33. Insurance Information Institute www.iii.org Thank you for your timeand your attention!

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