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What Keeps Insurance CEOs Awake at Night? An Overview and Outlook for the P/C Insurance Industry

This overview explores the top concerns for insurance CEOs, including profitability, pricing, investment returns, technology, and more. Learn how they can overcome these challenges and drive success in the industry.

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What Keeps Insurance CEOs Awake at Night? An Overview and Outlook for the P/C Insurance Industry

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  1. What Keeps Insurance CEOsAwake at Night?An Overview and Outlook for the P/C Insurance Industry May 2002 Robert P. Hartwig, Ph.D., Senior Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: (212) 346-5520 Fax: (212) 732-1916 bobh@iii.org  www.iii.org

  2. Presentation Outline • Tough Mission for CEOs but Not Mission Impossible • Restore Profitability >Restore & Rebuild Capacity • Rationalize Pricing >Focus on the Fundamentals • Improve Investment Returns • Accelerate Consolidation • Add Value through Technology—Insurance Scoring • Restore Order in the Courts • Keep Wall Street Happy • The Challenge of Corporate Governance • The Challenge of Terrorism

  3. RESTOREPROFITABILITY

  4. P/C Net Income After Taxes1993-2001 ($ Millions) 2001 was the first year ever with a full year net loss Sources: A.M. Best, ISO, Insurance Information Institute.

  5. Highlights: Property/Casualty Full-Year 2001 ($ Millions) *Comparison with year-end 2000; **Comparison with full-year 2000; 2001 figure excl. 9/11 losses is 111.8.

  6. ROE: Financial Services Industry Segments, 1987–2001 Source: Insurance Information Institute; Fortune

  7. 2000 Return on Equity: US (Profitability) 2000 Source: NAIC, Insurance Information Institute

  8. 2000 Return on Equity: Mid-Atlantic States PP Auto 2000 Source: NAIC, Insurance Information Institute

  9. 2000 Return on Equity: Mid-Atlantic States HO 2000 Source: NAIC, Insurance Information Institute

  10. 12% After Tax ROE Requires Underwriting Profit Source: Dowling & Partners

  11. RESTORE & REBUILD DESTROYEDCAPACITY

  12. Policyholder Surplus: 1975-2001 Surplus Peaked at $336.3 Billion in 1999 • Surplus decreased 8.7% in 2001 to $289.6 Billion. • Surplus is now lower than at year-end 1997. Billions (US$) “Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations Source: A.M. Best, Insurance Information Institute

  13. Capital Myth 1: Insurers Have $4 Trillion in Assets to Pay Terrorism Claims Total = $4.1 Trillion (as of 12/31/00) P/C The Facts P/C insurers have $931 billion in assets compared to $3.1 trillion for life insurers LIFE Source: Insurance Insurance Information Institute

  14. Capital Myth 2: P/C Insurers Have Nearly$1 Trillion in Assets to Pay Terrorism Claims The Facts 66% of Assets are offset by liabilities (mostly reserves) or are non-admitted Assets = Liabilities + Policyholder Surplus Source: Insurance Information Institute; A.M. Best

  15. Capital Myth 3: P/C Insurers Have $300 Billion to Pay Terrorism Claims Total PHS = $298.2 B as of 6/30/01 Only 33% of industry surplus backs up “target” lines *”Target” Commercial includes: Comm property, liability and workers comp; Surplus must also back-up on non-terrorist related property/liability and WC claims Source: Insurance Information Institute

  16. CGNU $1,700D Swiss Re 1,600V Axis (Marsh) 1,600S Ace Ltd. 1,150S AIG 1,000CD Montpelier 1,000PE Converium 985S Allied World 959S XL Capital 819S Endurance 800V Arch Capital 763S XL Capital 600D Chubb 600D St. Paul 575TP Wellington 564S ALL OTHERS 7,281 Total Completed = $24,584 Pending = $8,889 GRAND TOTAL = $33,473 Fresh Capital: Top 15 Deals(as of April 12, 2002) Will they shorten the hard market? Type of Issuance: CD=Convertible Debt; D= Debt; PE=Private Equity;S=Stock;TP=Trust Preferred;V=Various Source: Morgan Stanley

  17. RATIONALIZE PRICING

  18. Average Price Change of Commercial Insurance Renewals Source: Conning

  19. CIAB Rate Survey First Quarter 2002 Rate Increases By Line of Business No Change Up 1-10% Up 10-30% Up 30-50% Up>50% Up>100% Commercial Auto 3% 19% 55% 13% 4% 1% Workers Comp 7% 20% 45% 17% 3% 1% General Liability 1% 13% 62% 17% 3% 1% Commercial Umbrella 1% 4% 29% 32% 18% 11% Commercial Property 1% 5% 39% 34% 13% 3% Business Interruption 3% 10% 47% 22% 7% 2% Surety Bonds 8% 20% 28% 7% 3% 1% Source: Council of Insurance Agents and Brokers

  20. CIAB Rate Survey First Quarter 2002 Rate Increases By Size of Account No Change Up 1-10% Up 10-30% Up 30-50% Up>50% Up>100% Small (<$25K) 3% 16% 61% 10% 1% 0% Medium ($25K - $100K) 2% 4% 60% 25% 3% 1% Large (>$100K) 1% 6% 45% 27% 6% 1% Source: Council of Insurance Agents and Brokers

  21. Rate On Line Index(1989=100) Prices rising, limits falling: ROL up significantly Source: Guy Carpenter * III Estimate

  22. Cost of Risk per $1,000 of Revenues: 1990-2002E Cost of risk to corporations could rise sharply in 2002; About half of increase due to 9/11 Source: 2001 RIMS Benchmark Survey; Insurance Information Institute estimates.

  23. Workers Comp: Impact of Loss Cost/Rate & Discounting 2000 AY Combined Ratio: 136 2000 Reserve Deficiency: $20B Source: NCCI, Insurance Information Institute P=preliminary *Insurance Information Institute estimates.

  24. Average Price Change of Personal Lines Renewals *III estimates Source: Conning, III

  25. *Insurance Information Institute Estimates/Forecasts Source: NAIC, Insurance Information Institute Average Expenditures on Auto Insurance: US Countrywide rates were up 1.5% in 2000 and up est. 6% in 2001, 8% in 2002

  26. Mid-Atlantic AutoInsurance Expenditures vs. US Lowest in US Highest in US 1 2 5 12 39 Source: Insurance Information Institute from NAIC Data, 1999.

  27. *III Estimates Source: NAIC, Insurance Information Institute Average Expenditures on Homeowners Ins.: US Average HO expenditures rose by 1.5% in 2000; Up 6.0% in 2001; 7.0% in 2002

  28. Average HO Premium by Region, 2000 Source: Conning & Co.

  29. Mid-Atlantic HO-3Insurance Premiums vs. US Highest in US Lowest in US 4 18 42 45 49 Source: Insurance Information Institute from NAIC Data, 1999.

  30. Health Plan Costs per Employee • Tremendous cost pressure • Employers want help managing costs • Phamaceutical costs • What is managed care? • Most layoffs in this sector (e.g., Aetna announced Dec. 13 the layoff of 6,000) • Still LT growth industry Annual % Increase *Estimate Source: Hewitt Associates LLC.

  31. Reasons Why Market Will Remain Hard • Total capital raised less than what was lost from 9/11 • Capacity lost is greater than dollar losses from attack suggest • More caution on the part of insurers/reinsurers means more capital needed per dollar of risk assumed • Demand up (we’re more at risk as a nation now) • Reserve shortfalls (e.g, asbestos, WC) • Poor results in many important lines for reason other than 9/11 • Poor investment results • Wall Street pressure

  32. FOCUS ON FUNDAMENTALS

  33. Growth in Net Premiums Written (All P/C Lines) 2000: 5.1% 2001: 8.1% 2002 Forecast: 14.7%* The underwriting cycle went AWOL in the 1990s. It’s Back! *Estimate from I.I.I. Groundhog Survey. Source: A.M. Best, Insurance Information Institute

  34. P/C Industry Combined Ratio Combined Ratios 1970s: 100.3 1980s: 109.2 1990s: 107.7 2000 = 110.1 2001 Estimate = 116.0 2002 Forecast* = 108.0 Sources: A.M. Best; III * Based on III 2002 Groundhog Forecast

  35. Combined Ratio Components WTC losses accounted for 4.8 pts. on the 2001 combined ratio 116.0 110.1 107.5 Source: A.M. Best.; ISO.

  36. Kitchen Sink Quarter:2001:Q4 P/C insurers took $5 billion in miscellaneous charges against their 2001:Q4 results Source: Morgan Stanley as of February 8, 2002.

  37. Combined Ratios *A.M. Best estimate;**Forecast Includes dividends to policyholders Accident year is developed to ultimate Source: A.M. Best, NCCI; Insurance Information Institute

  38. Combined Ratio: Reinsurance vs. P/C Industry 2001’s combined ratio was the worst-ever for reinsurers & the 3rd worst ever for p/c insurers in aggregate. Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute

  39. U.S. InsuredCatastrophe Losses CAT Losses for 2001 Set a Record • 20 events (lowest since 1969) • 1.5 million claims • 9/11: $16.6B = 74,000 claims $ Billions • Includes $16.6B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. **First Quarter 2002. Source: Property Claims Service, Insurance Information Institute

  40. Underwriting Gain (Loss)1975-2001 $ Billions P-C insurers paid $53 billion more in claims & expenses than they collected in premiums in 2001 Source: A.M. Best, Insurance Information Institute

  41. Underwriting Loss in HO Insurance, 1991-2002F $ Billions Underwriting losses in homeowners insurance from 2000 to 2002 alone are estimated at $19.0 billion, 14.5% above the $16.6 billion in 9/11 property losses. Source: A.M. Best, Insurance Information Institute

  42. Outlook for 2002: Personal Lines PERSONAL AUTO HOMEOWNERS 97 98 99 00 01E 02E BE* 97 98 99 00 01E 02E BE* *Breakeven Ratio: Reflects AY results, includes investment income; assumes 4% interest rate. Source: A.M. Best

  43. Outlook for 2002: Commercial Lines *Breakeven Ratio: Reflects AY results, includes investment income; assumes 4% interest rate. Source: A.M. Best

  44. IMPROVEINVESTMENT RETURNS

  45. Net Investment Income Pricing & underwriting problems were exacerbated by declining investment income Billions (US$) Short-term interest rates are under 2%! Facts 1997 Peak = $41.5B 1998 = $39.9B 1999 = $38.9B • = $40.7B • = $37.1E Source: A.M. Best, Insurance Information Institute

  46. Markets Down Considerably in 2001 2001 Change in Major Market Indexes P/C Insurer Portfolio: 64% Bonds 23% Stocks 5% Cash & ST Sec. 8% Other Source: Insurance Information Institute

  47. 2002: Not Off to a Great Start YTD Change Through May 14, 2002 P/C Insurer Portfolio: 64% Bonds 23% Stocks 5% Cash & ST Sec. 8% Other Source: Insurance Information Institute

  48. Total Returns for Large Company Stocks: 1970-2002* • Could be headed for 3rd consecutive year of decline for stocks • Last happened 1939-1941 (years straddling Great Depression & WW II) *As of May 14, 2002. Source: Ibbotson Associates, Insurance Information Institute

  49. Real GDP Growth Economy is recovering quickly from the recession of 2001 (first recession since 1990/91) Source: US Department of Commerce, Blue Economic Indicators, Insurance Information Institute.

  50. New Private Housing Starts(Millions of Units) New Private Housing Starts Annualized starts in early 2001 were surprisingly strong: Virtually no exposure impact for insurers Source: US Department of Commerce; Insurance Information Institute *Projections from Blue Chip Economic Indicators.

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