Post on 24-Dec-2015
Today’s Uncertain Economy: Implications for Public Entities
and P/C InsuranceApril 10, 2013
Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: 212.346.5540 Cell: 917.494.5945 stevenw@iii.org www.iii.org
The Strength of the Economy Will Influence P/C Insurer
Growth Opportunities
2
Growth Will Expandthe Insurer Exposure Base
Across Most Lines
2
3
A Continued Weak Recovery is Forecast:Real GDP Growth, Yearly, 1970-2014F
Forecasts from Blue Chip Economic Indicators, 3/2013 issue, median of range of 52 forecasts.Sources: (GDP) U.S. Department of Commerce at http://www.bea.gov/national/xls/gdpchg.xls.
-4.5%
-3.0%
-1.5%
0.0%
1.5%
3.0%
4.5%
6.0%
7.5%
Real GDP Growth (%)
The median forecast is for several more years of real yearly GDP growth under 3% -- weaker than after most recent recessions
In recoveries, real yearly GDP growth is often 4% or more
4
March 2013 Forecasts of Quarterly US Real GDP for 2013-14
2.0% 2.1% 2.2%
2.8% 2.9% 3.0%
3.6% 3.7% 3.7%
1.7%1.6% 1.7%
1.1%
2.6%
2.0%2.5%
2.7%
3.4%3.6%3.5%
2.9%
0%
1%
2%
3%
4%
13:Q2 13:Q3 13:Q4 14:Q1 14:Q2 14:Q3 14:Q4
10 Most Pessimistic
Median
10 Most Optimistic
Sources: Blue Chip Economic Indicators (3/13); Insurance Information Institute
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 March sees
improvement ahead
If it lasts, the sequester will have greatest effect here
State-by-State Leading Indicatorsthrough 2013:Q2
Sources: Federal Reserve Bank of Philadelphia at www.philadelphiafed.org/index.cfm; Insurance Information Institute.Next release is April 4, 2013 5
Near-term growth forecasts vary
widely by state. Strongest growth
= dark green; weakest = beige
6
State & Local Government Contribution to Change* in Real US GDP, Quarterly, 2009-2012
*seasonally adjusted at annual ratesSources: (GDP) U.S. Department of Commerce at http://www.bea.gov/national/xls/gdpchg.xls.; I.I.I.
-0.75%
-0.50%
-0.25%
0.00%
0.25%
0.50%
0.75%
1.00%
Real GDP Growth (%) The drag on the
economy from state & local governments is
diminishing.
Cutbacks by state and local governments have hampered the economy’s recovery from
the recession
8
Y-o-Y Percentage Change in the Value of Public Construction Put in Place, by Segment, Feb. 2013*
2.4%
-1.7% -2.9%-9.9%-10.4% -12.5%-12.9%
-22.2%
-12.3%
-3.8%
-13.8%
20.5%16.3%
2.9%
-30%
-20%
-10%
0%
10%
20%
30%
To
tal P
ub
licC
on
stru
ctio
n
Res
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wer
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ort
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n
Co
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& D
evel
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.
Hig
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ay &
Str
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Wat
er S
up
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Hea
lth C
are
Ed
uca
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al
Am
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ec.
Pu
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Saf
ety
Co
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Sew
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Dis
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Off
ice
With strained state and local government budgets, public construction activity declined in many segments; will the sequester crimp 2013?
Growth (%)
*seasonally adjusted; data published April 1, 2013Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
Transportation and Power projects lead public sector
construction
9
Labor Market Trends
Steady Job Gains in the Private SectorOffset Steady Job Losses in the
Public Sector
9
10
Unemployment and Underemployment Rates: Stubbornly High in 2012, But Falling
3.5
5.0
6.5
8.0
9.5
11.0
12.5
14.0
15.5
17.0
18.5
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Jan11
Jan12
Jan13
"Headline" Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
Unemployment “Headline”
unemployment stood at 7.6% in
Mar. 2013.
The Federal Reserve’s target for ending “easy money” is 6.5%
(assuming inflation remains
within its 2% target).
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 13.8%
in Mar. 2013
January 2000 through Mar. 2013, Seasonally Adjusted (%)
Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving.
10
Nov. 12
11
State Government EmploymentMonthly, 1990–2013*
*As of February 2013 (Jan 2013 and Feb 2013 are preliminary); Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
Millions
4.00
4.25
4.50
4.75
5.00
5.25
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Latest was 5.02 million, down 3.7% from peak (Aug 2008)
State government employment rises in recessions, shrinks
after them(for a while)
State government employment rises in recessions, shrinks
after them (for a while)
State government employment
rises in recessions,
shrinks after them (for a while)
12
Local Government EmploymentMonthly, 1990–2013*
*As of February 2013 (Jan 2013 and Feb 2013 are preliminary); Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
Millions
10.0
10.5
11.0
11.5
12.0
12.5
13.0
13.5
14.0
14.5
15.0
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Latest was 14.03 million,
down 3.9% from peak (Jun 2009)
Recession proof? Local government employment
rose through this and the prior recession
First significant drop in local government employment in over
three decades(-4.2% in 1980-82)
13
Unemployment Rates Vary Widelyby State and Region*
9.6%
9.4%
8.6%
8.6%
7.9%
7.8%
7.7%
7.3%
7.2%
7.2%
6.0%
5.6%
9.3%
8.4%
8.1%
7.2%
6.6%
9.4%
8.0%
7.3%
6.5%
5.8%
4.4%
6.5%
5.2%
0%
3%
6%
9%
12%
MS
NC
SC
GA KY
TN FL WV AR AL
LA VA NJ
NY
PA DE
MD RI
CT
ME
MA
NH VT
AK HI
Une
mpl
oym
ent R
ate
(%)
*Provisional figures for February 2013, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
Southeast Mid-Atlantic New England
14
Unemployment Rates Vary Widelyby State and Region* (cont’d)
9.6%
9.5%
5.0%
4.4%
3.8%
3.3%
7.5%
8.4%
9.6%
7.2%
7.0%
5.5%
8.7%
5.5%
6.7%
8.8%
6.2%
4.9%5.2%5.
6%
7.2%
6.8%
6.4%
5.0%
7.9%
0%
3%
6%
9%
12%
AZ
NM TX OK
CO ID MT
UT
WY
CA
NV
OR
WA IL MI
IN WI
OH
MO
MN
KS IA SD NE
ND
Une
mpl
oym
ent R
ate
(%)
*Provisional figures for February 2013, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute
Southwest MountainFar West
Great PlainsGreat Lakes
The Aging Workforce
19
Number of Workers Age 65-69, 70-74,and 75+, Quarterly, 1998-2012
2327
2312 2404
2406
2393 2530
2498 2559 2627
25702632
2627
2562 2674 2859
2896
2723 2842
28723127
2951 3079
3047 3218
3201 3330
3344
3351
33643396
3334 342634803505
35063547 3764
3775
3626 3833 4074
4138
41054213
1027
1022
10261069
1037 1129
1094
1090
1115
1139
11421181
1215
1160
1182
1177
1135
1162
1138
1141
1177
1182
1183
1213
11931244
1250
1314 1375
126213141356
1385
1397
1385
1367
1370 1452
1442
1407
1389 1530
1524
14301495 15801633
15051550
1498 1598
1564
1584 16821726
171917791835
1842
624
636
641686
668718773
758
789
780
775
801
779
792
762815
790
774
802
765 863926
811 919
928
947
969
1039
9741055
1018 1076
1057
1085
1085
1072 1171
1152
1133
11511210
1224
1258
1256
11431190
1206
1198
1166 1279
1243
1185 1267
1280
1302
1311
1301
12841381
2473
20432067
20432083
20192051
2014 2106 22182251
22422283
223422652304
1250
986
500
1000
1500
2000
2500
3000
3500
4000
4500
1998.1
1998.3
1999.1
1999.3
2000.1
2000.3
2001.1
2001.3
2002.1
2002.3
2003.1
2003.3
2004.1
2004.3
2005.1
2005.3
2006.1
2006.3
2007.1
2007.3
2008.1
2008.3
2009.1
2009.3
2010.1
2010.3
2011.1
2011.3
2012.1
2012.3
Age 65-69 Age 70-74 Age 75 & over
Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.
There are now over 7.4 million senior workers. This is double the number in 1998. Over the next decade it will
probably double again.
(Thousands)
This is the leading edge of the older half of the
“baby boom” generation
Labor Force Participation Rate, Ages 65-69, Quarterly, 1998:Q1-2013:Q1
25.2%
25.2%26.3%
26.5%
26.2%
27.9%
27.2%
27.4%27.9%
27.3%27.8%
27.6%
26.8% 27.6%
29.3%
29.5%
27.9% 28.5%
28.7%
30.8%
29.3% 30.1%
29.1%30.3%
30.1% 30.9%
31.0%
30.7%
31.0%
31.4%
30.9%
31.2%
31.6%
31.3%
31.5%
31.4%32.8%
32.3%
31.1%32.2%
32.2%
32.5%
31.8%
31.8%
31.7%
27.0%
22.9%
23.0%
22.8%
23.0%
22.3%
22.5%
22.1%
23.5% 24.4%
24.4%
24.3% 24.9%
24.4%
24.4%
24.8%
20%
22%
24%
26%
28%
30%
32%
34%
1998.1
1998.3
1999.1
1999.3
2000.1
2000.3
2001.1
2001.3
2002.1
2002.3
2003.1
2003.3
2004.1
2004.3
2005.1
2005.3
2006.1
2006.3
2007.1
2007.3
2008.1
2008.3
2009.1
2009.3
2010.1
2010.3
2011.1
2011.3
2012.1
2012.3
2013.1
Not seasonally adjusted. Sources: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.
The brown bars indicate recessions.
Labor Force participation rate
The switch from DB pension plans (with early-retirement incentives) to DC plans (with, in effect, later-retirement incentives) might be partly responsible for raising this rate.
1 in 3 in this age group are working. Virtually
none of them are “baby boomers”
Labor Force Participation Rate,Ages 70-74, Quarterly, 1998:Q1-2013:Q1
14.2%
13.8%14.2%
14.0%
14.0%14.4%
14.4% 14.9%
14.9% 15.4%
15.6%
15.3%16.4% 17.0%
15.8%16.2% 16.7%
16.9%
17.2%
17.0%
16.7%
16.8%18.0%
17.5%
17.3%
16.9%
18.6%
18.2%
17.7%
17.9%18.9%
19.2%
18.0%
18.1%
17.4%18.4%
18.0%18.4% 19.3%19.5%
19.2%
19.1% 19.9%
19.6%
18.8%
14.6%
13.1%13.6%
12.4%12.9%
12.4%
12.2%
12.5% 13.1%
13.3%
13.5%
13.6%
13.8% 14.4%
13.7% 14.2%
9%
12%
15%
18%
21%
1998
.1
1998
.3
1999
.1
1999
.3
2000
.1
2000
.3
2001
.1
2001
.3
2002
.1
2002
.3
2003
.1
2003
.3
2004
.1
2004
.3
2005
.1
2005
.3
2006
.1
2006
.3
2007
.1
2007
.3
2008
.1
2008
.3
2009
.1
2009
.3
2010
.1
2010
.3
2011
.1
2011
.3
2012
.1
2012
.3
2013
.1
Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.
Labor Force participation rate
The labor force participation rate for workers 70-74 grew by about 50% since 1998.Growth stalled during and after the Great Recession but has since resumed.
Nearly 1 in 5 in this age group is working.
15 years ago it was 1 in 8.
Labor Force Participation Rate,Ages 70-74, Quarterly, 1998:Q1-2013:Q1
8%
10%
12%
14%
16%
18%
20%
22%
24%
26%
1998
.1
1998
.3
1999
.1
1999
.3
2000
.1
2000
.3
2001
.1
2001
.3
2002
.1
2002
.3
2003
.1
2003
.3
2004
.1
2004
.3
2005
.1
2005
.3
2006
.1
2006
.3
2007
.1
2007
.3
2008
.1
2008
.3
2009
.1
2009
.3
2010
.1
2010
.3
2011
.1
2011
.3
2012
.1
2012
.3
2013
.1
men women
Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.
Labor Force participation rate
The labor force participation rate for men 70-74 grew by about 50% since 1998,but for women 70-74 it nearly doubled (from about 9% to about 15.5%).
Labor Force Participation Rate, Quarterly Ages 75 and over, 1998-2013:Q1
5.4%
5.1%5.1% 5.2%
5.0%
5.5%5.9%
5.8% 5.9% 6.0% 6.1%6.5%
6.1%
6.6%
6.3%6.7%
6.4% 6.6%
6.0%
6.5%6.5%
7.1%
7.0%
6.9%6.9%7.2% 7.4% 7.6%7.6%
7.0% 7.2%7.3%7.3%
6.9%
7.7%
7.5%
7.1%7.5% 7.6% 7.7%
7.6%7.6%
7.4%7.8%
8.6%
5.8%
5.4%
5.1%
4.8%5.0%
4.6%4.6%
4.5%
5.2% 5.4%
5.3%
5.2% 5.3%
5.2%5.2%
5.1%
3%
5%
7%
9%
1998.1
1998.2
1998.3
1998.4
1999.1
1999.2
1999.3
1999.4
2000.1
2000.2
2000.3
2000.4
2001.1
2001.2
2001.3
2001.4
2002.1
2002.2
2002.3
2002.4
2003.1
2003.2
2003.3
2003.4
2004.1
2004.2
2004.3
2004.4
2005.1
2005.2
2005.3
2005.4
2006.1
2006.2
2006.3
2006.4
2007.1
2007.2
2007.3
2007.4
2008.1
2008.2
2008.3
2008.4
2009.1
2009.2
2009.3
2009.4
2010.1
2010.2
2010.3
2010.4
2011.1
2011.2
2011.3
2011.4
2012.1
2012.2
2012.3
2012.4
2013.1
Sources: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.
In the last 14 years, the labor force participation rate for workers 75 and over grew from 4.5% to 8.6%. So 91.4% of these people are retired.
Labor Force participation rate The labor force participation
rate for workers 75 and over will probably hit 10% soon. This is close to what the rate was for the 70-74 group a decade ago.
Labor Force Participation Rate, Quarterly Ages 75 and over, 1998-2013:Q1
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
1998.1
1998.2
1998.3
1998.4
1999.1
1999.2
1999.3
1999.4
2000.1
2000.2
2000.3
2000.4
2001.1
2001.2
2001.3
2001.4
2002.1
2002.2
2002.3
2002.4
2003.1
2003.2
2003.3
2003.4
2004.1
2004.2
2004.3
2004.4
2005.1
2005.2
2005.3
2005.4
2006.1
2006.2
2006.3
2006.4
2007.1
2007.2
2007.3
2007.4
2008.1
2008.2
2008.3
2008.4
2009.1
2009.2
2009.3
2009.4
2010.1
2010.2
2010.3
2010.4
2011.1
2011.2
2011.3
2011.4
2012.1
2012.2
2012.3
2012.4
2013.1
men women
Sources: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.
In the last 15 years, the labor force participation rate for men 75 and overgrew from 6.9% to 12.6% and for women doubled (from 2.9% to 5.8%).
Labor Force participation rate
26
Fatal Work Injury Rates Improved SlightlySince 2006 but Still Climb Sharply With Age
2.8
2.7 3.
3 3.7 4.
2
5.0
11.2
2.6 3.
0 3.1 3.4 4.
1 4.6
10.2
2.4 2.6 2.7 3.
2 3.7
4.5
12.2
2.5
2.4
2.4 3.
0 3.6 4.
3
12.1
2.8
2.2 2.
7 2.9 3.
6
4.7
11.9
0
2
4
6
8
10
12
14
18-19 20-24 25-34 35-44 45-54 55-64 65+
2006
2007
2008
2009
2010
Source: US Bureau of Labor Statistics, at http://www.bls.gov/iif/oshcfoi1.htm/#2010
The fatality rate for workers 65 and older was 5 times that of workers age 25-34. The workplace of the future will have to
be completely redesigned to accommodate the surge in older workers.
Fatal Work Injury Rate per 100,000 full-time-equivalent workers No improvement in
fatal work injury rate for this age group
27
Older Workers Lose More Daysfrom Work Due to Injury or Illness
56
910
12
15
56
9
1112
13
56
8
10
13
15
56
9
12
14 14
0
2
4
6
8
10
12
14
16
20-24 25-34 35-44 45-54 55-64 65+
2008200920102011
Source: US Bureau of Labor Statistics, Nonfatal Occupational Injuries and Illnesses Requiring Days Away From Work, 2011 (Table 10), released November 8, 2012.
Median Days Away From Work
Youngest baby boomer is age 49 (in 2013)
Median lost time of workers age 65+ is 2-3X that of workers age 25-34. These numbers are pretty stable—they haven’t changed much since 2008.
Oldest baby boomer is age 67 (in 2013)
29
Older Workers Are MuchMore Likely to Break a Bone
3.1 3.7 4.0 4.35.9 6.4
15.313.4
9.9
7.47.86.7
0
2
4
6
8
10
12
14
16
18
20-24 25-34 35-44 45-54 55-64 65+
Fractures Multiple Traumatic Injuries
*per 10,000 full-time-equivalent workersSource: US Bureau of Labor Statistics, US Department of Labor at http://www.bls.gov/news.release/pdf/osh2.pdf Table 14
Incidence Rate* (2011)
30
Older Workers Are More Likely to Slip When Walking, but Less Likely to Overexert Themselves
10
.9 12
.7 17
.0 22
.3
30
.6 35
.1
34
.7 37
.7
44
.3 49
.6
39
.6
23
.8
10
.212
.1
12
.8
11
.4
10
.5
9.9
0
10
20
30
40
50
60
20-24 25-34 35-44 45-54 55-64 65+
Vehicles Floors, Walkways, etc. Overexertion
Source: US Bureau of Labor Statistics, US Department of Labor at http://www.bls.gov/news.release/pdf/osh2.pdf Table 14
Incidence Rate (2011)
Source/Nature of Injury:
Incidence rate for injury caused by vehicles is
about the same for all age groups
Investments: The New Reality
31
Investment Performance is a Key Driver of Profitability
31
32
Insurers Have Not Yet Fully Adapted to a Persistently Low Interest Rate Environment
They Didn’t Expect Rates to bePushed to Such Low LevelsPushed Down so RapidlyHeld to Such Low Levels for So LongSuppressed via Unprecedented Aggressiveness
of the Federal ReserveAbility to Release Prior Reserves Eased UrgencyOFFSETTING FACTORSCapitalization Still SolidEmergence of Sophisticated Price Monitoring
and Underwriting Tools
33
U.S. 10-Year Treasury Note Yields:A Long Downward Trend, 1990–2013
Note: Recessions indicated by gray shaded columns.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. 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 '13
Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full 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 recently
plunged to all time record lows
33
34
Distribution of Bond Maturities,P/C Insurance Industry, 2003-2011
16.0%
15.2%
15.7%
16.2%
16.3%
29.8%
29.2%
28.8%
29.5%
30.0%
32.4%
36.2%
39.5%
41.4%
31.3%
32.5%
34.1%
34.1%
33.8%
31.2%
28.7%
26.7%
26.8%
15.4%
15.4%
13.6%
13.1%
12.9%
12.7%
11.7%
11.1%
10.3%
9.2%
7.6%
7.6%
7.4%
8.1%
8.1%
7.3%
6.4%
6.3%15.2%
14.4%
16.0%
15.4%
0% 20% 40% 60% 80% 100%
2003
2004
2005
2006
2007
2008
2009
2010
2011
Under 1 year
1-5 years
5-10 years
10-20 years
over 20 years
Sources: A.M. Best; Insurance Information Institute.
The main shift over these years has been from bonds with longer maturities to bonds with shorter maturities. The industry first trimmed its holdings of over-10-year bonds
(from 24.6% in 2003 to 16.9% in 2011) and then trimmed bonds in the 5-10-year category. Falling average maturity of the P/C industry’s bond portfolio is contributing to a drop in
investment income along with lower yields.
Property/Casualty Insurance Industry Investment Gain: 1994–2012F1
$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
$53.4$56.2
$50.8
$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 11 12F
In 2012 (1st three quarters) both investment income and realized capital gains were lower than in the comparable period in 2011. And because
the Federal Reserve Board aims to keep interest rates exceptionally low through mid-2015, maturing bonds will be re-invested at even lower rates.
1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.*2005 figure includes special one-time dividend of $3.2B; 2012F figure is I.I.I. estimate based on annualized actual 2012:Q3 result of
$38.089B. Sources: ISO; Insurance Information Institute.
($ Billions)
Investment gains in 2012 are running approximately 20% below their pre-crisis peak
A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs
Combined Ratio / ROE
* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012:H1 combined ratio including M&FG insurers is 102.2, ROAS = 5.9%; 2011 combined ratio including M&FG insurers is 108.2, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO data.
97.5
100.6 100.1 100.8
92.7
101.099.3
100.9 101.1
106.4
95.7
6.2%4.6%
7.6%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 2011 2012:H10%
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 generates an ROE of ~7.0% in 2012, ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Year Ago
2011:H1 = 109.4, 2.3% ROE
38
P/C Insurance Industry Financial Overview
Profit Recovery Was Set Backin 2011 and 2012
by High Catastrophe Losses& Other Factors
38
39
P/C Net Premiums Written: % Change, Quarter vs. Year-Prior Quarter, 2002–2012
Sources: ISO; Insurance Information Institute.
Finally! A sustained period (10 quarters) of growth in net premiums written (vs. same quarter, prior year), and strengthening.
10.2
%15
.1%
16.8
%16
.7%
12.5
%10
.1%
9.7%
7.8%
7.2%
5.6%
2.9%
5.5%
-4.6
%-4
.1%
-5.8
%-1
.6%
10.3
%10
.2% 13
.4%
6.6%
-1.6
%2.
1%0.
0%-1
.9%
0.5%
-1.8
%-0
.7%
-4.4
%-3
.7%
-5.3
%-5
.2%
-1.4
%-1
.3%
1.3% 2.
3%1.
7% 3.5%
1.6% 3.
2% 3.8%
3.1% 4.
2% 5.1%
-10%
-5%
0%
5%
10%
15%
20%
2002
:Q1
2002
:Q2
2002
:Q3
2002
:Q4
2003
:Q1
2003
:Q2
2003
:Q3
2003
:Q4
2004
:Q1
2004
:Q2
2004
:Q3
2004
:Q4
2005
:Q1
2005
:Q2
2005
:Q3
2005
:Q4
2006
:Q1
2006
:Q2
2006
:Q3
2006
:Q4
2007
:Q1
2007
:Q2
2007
:Q3
2007
:Q4
2008
:Q1
2008
:Q2
2008
:Q3
2008
:Q4
2009
:Q1
2009
:Q2
2009
:Q3
2009
:Q4
2010
:Q1
2010
:Q2
2010
:Q3
2010
:Q4
2011
:Q1
2011
:Q2
2011
:Q3
2011
:Q4
2012
:Q1
2012
:Q2
2012
:Q3
This upward trendis likely to continue
as the economy’s recovery strengthens
Most recent “hard market”
42
Commercial Lines Direct Premiums Written:
Pct. Change by State, 2006-2011*
100.
9
60.8
38.9
28.9
27.9
25.6
14.9
8.3
4.0
2.9
2.7
0.9
0.2
0.0
-0.5
-1.5
-2.5
-6.3
-6.4
-6.6
-6.6
-6.7
-7.6
-7.8
-7.9
-20
0
20
40
60
80
100
120N
D
SD
MT IA NE
KS
OK
WY
MN
TX
AK WI
VT IN AR
LA
TN IL
OH
MA
NM
MS
WA
NY
NC
Pe
ce
nt
ch
an
ge
(%
)
Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 States
Only 13 states showed any direct written premium
growth in commercial lines from 2006 to 2011
43
Direct Premiums Written: Comm. LinesPercent Change by State, 2006-2011*
-7.9
-8.0
-8.1
-9.0
-10
.0
-10
.1
-10
.8
-11
.4
-11
.6
-12
.2
-12
.7
-12
.9
-13
.2
-13
.2
-13
.6
-14
.7
-15
.0
-16
.0
-16
.7
-19
.4
-19
.8
-19
.9
-23
.7
-24
.4
-26
.4
-33
.0
-40
-35
-30
-25
-20
-15
-10
-5
0
KY
PA
MO
US
ME
CT
SC AL
VA
GA ID
MD NJ RI
CO
UT
OR MI
DE
CA
NH HI
FL AZ
WV
NV
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
States with the poorest performing economies also producedthe most negative net change in premiums of the past 5 years
Sources: SNL Financial LC.; Insurance Information Institute.
Underwriting Gain (Loss)1975–2012:Q3**
*Includes mortgage and financial guaranty insurers in all years. **through first three quarters of 2012Sources: A.M. Best; ISO; Insurance Information Institute.
Average yearly underwriting loss in the 2008-2011 low-interest-rate environment? $17.8B. With interest rates this low, large persistent
underwriting losses are not a recipe for success.
-$55
-$45
-$35
-$25
-$15
-$5
$5
$15
$25
$35
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
In historical context, 2006-07 underwriting
results were an anomaly
($ Billions) Net underwriting losses in 1st 3 qtrs of 2012 totaled $6.7B
High cat losses in 2011 led to
the worst underwriting
year since 2002
Cumulative underwriting loss since 1975? $500B, averaging $13.2B/year.
46
P/C Insurance Industry Combined Ratio, 2001–2012:Q3*
* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.2; 2012:Q3=100.9. Sources: A.M. Best; ISO.
95.7
99.3100.8
106.4
100.0101.0
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* 2012:Q3
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
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
Cyclical Deterioration
Lower CAT
Losses Before Sandy
109.4110.2
118.8
109.5
112.5
110.2
107.6
104.1
109.7 110.2
102.5
105.4
91.1
93.6
104.2
98.9
102.1
106.7
109.0
102.9102.0
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
12
F
13
F
Co
mm
erc
ial L
ine
s C
om
bin
ed
Ra
tio
*2007-2013F figures exclude mortgage and financial guaranty segments.Sources: A.M. Best; Insurance Information Institute
Commercial Lines Combined Ratio, 1990-2013F*
Commercial lines underwriting
performance in 2012 was the worst since 2002 due
to heavy impact from Sandy
47
Commercial Auto Combined Ratio: 1993–2014F
11
2.1
11
2.0
11
3.0 11
5.9
10
2.7
95
.2
92
.9
92
.1
92
.4 94
.3 96
.8 99
.4
98
.0
10
4.6
10
7.1
10
3.6
10
1.2
11
8.1
11
5.7
11
6.2
85
90
95
100
105
110
115
120
125
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F 14F
Commercial Auto is Expected to Improve as Rate Gains Outpace Any Adverse Frequency and Severity Trends
48Sources: A.M. Best (1990-2013F);Conning (2014F); Insurance Information Institute.
Commercial Multi-Peril Combined Ratio: 1995–2013F
80
90
100
110
120
130
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12E 13F
CMP-Liability CMP-Non-Liability
Commercial Multi-Peril Underwriting Performance is Expected to Improve in 2013 Assuming Normal Catastrophe Loss Activity
*2012-2013 figures are A.M. Best estimate/forecast for the combined liability and non-liability components.Sources: A.M. Best; Insurance Information Institute. 49
General Liability Combined Ratio: 2005–2014F
112.9
95.1
99.0
94.2
100.7
103.3 103.7
107.1
110.8
99.6
90
95
100
105
110
115
05 06 07 08 09 10 11 12F 13F 14F
Commercial General Liability Underwriting Performance Has Been Volatile in Recent Years
Source: Conning Research and Consulting. 50
Inland Marine Combined Ratio: 1999–2014F
101.9
92.8
100.2
83.8
77.379.5
93.3
89.3
86.2
97.7 97.7
89.7 89.7
80.882.5
89.9
75
80
85
90
95
100
105
99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F 14F
Inland Marine is Expected to Remain Among the Most Profitable of All Lines
Sources: A.M. Best (1999-2011); Insurance Information Institute (2012F); Conning (2013F-2014F) 51
Surety Bonds Combined Ratio,2002–2011
116.9122.0 119.5
101.8
79.5
70.5 72.5
81.6
70.466.6
50
75
100
125
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: A.M. Best Aggregates & Averages, 2012, p. 376. 52
Workers Compensation Combined Ratio: 1994–2014F
102.
0
97.0
100.
0
101.
0
112.
6
108.
6
105.
1
102.
7
98.5
103.
5
104.
5
110.
6
116.
8
116.
9
117.
3
115.
0
111.
0
121.
7
107.
0
115.
3
118.
2
90
100
110
120
130
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12E 13F 14F
Workers Comp underwriting results are expected to begin improving in 2013. They deteriorated markedly since 2007 and in
2012 are estimated to have hit their worst level in a decade.
Sources: A.M. Best (1994-2013F); Insurance Information Institute (2014F). 53
P/C Net Income After Taxes1991–2012: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
5,2
04
$1
9,1
50
$2
6,9
81
$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
$80,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12:Q3
2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012:Q3 ROAS1 = 6.3%
Through the first three quarters of 2012, P/C
Industry profits were up 222% from the comparable period in 2011, mainly due
to lower CAT losses in 2012:Q2 and Q3
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.2% ROAS for 2012:H1, 4.6% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.Sources: A.M. Best; ISO; Insurance Information Institute.
-5%
0%
5%
10%
15%
20%
25%
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
*1
2:
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2012:Q3*
*Profitability = P/C insurer ROEs. 2012 is an estimate based on ROAS data. Note: Data for 2008-2012 exclude mortgage and financial guaranty insurers. 2012:H1 ROAS = 5.9% including M&FG.Sources: Insurance Information Institute; NAIC; ISO; A.M. Best.
1977:19.0% 1987:17.3%
1997:11.6%2006:12.7%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years
10 Years9 Years
2011:4.6%*
History suggests next ROE peak will be in 2016-2017
ROE
1975: 2.4%
2012:Q3: 6.3%
59
Policyholder Surplus, 2006:Q4–2012:Q3
Sources: ISO; A.M .Best.
($ 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
$559.2 $559.1
$538.6$550.3
$583.5$570.7$566.5
$505.0$515.6$517.9
$425
$450
$475
$500
$525
$550
$575
$600
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
12:Q
1
12:Q
3
Surplus as of 9/30/12 was a
new peak
The industry now has $1 of surplus for every $0.80 of NPW, the strongest claims-paying status in its history
Drop due to near-record 2011 CAT losses
60
Inflation and Claims Trends
61
Prices for Hospital Services:12-Month Change,* 1998–2013
*Percentage change from same month in prior year; through January 2013; seasonally adjustedSources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.
0%
2%
4%
6%
8%
10%
12%
14%
'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Recession Outpatient Services Inpatient Services
Cyclical peaks in PP Auto tend to occur approximately every 10 years(early 1990s, early 2000s, and possibly the early 2010s)
62
Forces that Drive Car Repair Costs:12-Month Change,* 2001–2013
*Percentage change from same month in prior year; through January 2013; seasonally adjustedSources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.
0%
2%
4%
6%
8%
10%
12%
14%
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Recession Auto repair Auto body work
Cyclical peaks in PP Auto tend to occur approximately every 10 years(early 1990s, early 2000s, and possibly the early 2010s)
Catastrophes
6363
Nu
mb
er
Geophysical (earthquake, tsunami, volcanic activity)
Climatological (temperature extremes, drought, wildfire)
Meteorological (storm)
Hydrological (flood, mass movement)
Natural Disasters in the United States, 1980 – 2012Number of Events (Annual Totals 1980 – 2012)
Source: MR NatCatSERVICE 64
41
19
121
3
50
100
150
200
250
300
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
There were 184 natural disaster events in the
US in 2012
There were over 150 natural disaster events in the US every
year since 2006. That hadn’t happened in any year before.
65
$1
2.6
$1
1.0
$3
.8
$1
4.3
$1
1.6
$6
.1
$3
4.7
$7
.6
$1
6.3
$3
3.7
$7
3.4
$1
0.5
$7
.5
$2
9.2
$1
1.5
$1
4.4
$3
3.1
$3
7.0
$1
4.0
$4
.8
$8
.0
$3
7.8
$8
.8
$2
6.4
$0
$10
$20
$30
$40
$50
$60
$70
$80
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*
US Insured Catastrophe Losses
*As of 1/2/13. Includes $20B gross loss estimate for Hurricane Sandy.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.
US CAT Losses in 2012 Will Likely Become the 2nd or 3rd Highest in US History on An Inflation-Adjusted Basis (Pvt
Insured). 2011 Losses Were the 5th Highest
2012 CAT losses were down nearly 50% from 2011 until Sandy struck in late October
Record Tornado Losses Caused
2011 CAT Losses to Surge
($ Billions, 2012 Dollars)
65
66
The Dozen Most Costly Hurricanesin U.S. History
Insured Losses, 2012 Dollars, $ Billions
*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: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.
$9.2 $11.1$13.4
$20.0
$25.6
$48.7
$8.7$7.8$6.7$5.6$5.6$4.4
$0
$10
$20
$30
$40
$50
$60
Irene(2011)
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo (1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Ike (2008)
Sandy*(2012)
Andrew(1992)
Katrina(2005)
Sandy will likely become the 3rd costliest hurricane in US insurance history
Irene became the 12th most expensive
hurricane in US history
10 of the 12 most costly hurricanes in insurance history occurred in the past 9 years (2004—2012)
67
If They Hit Today, the Dozen Costliest (to Insurers) Hurricanes in U.S. History
Insured Losses,2012 Dollars, $ Billions
*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.
$40$50 $50 $50
$65
$125
$40$35$25$20$20$20
$0
$20
$40
$60
$80
$100
$120
$140
Sandy*(2012)
Betsy(1965)
Hazel(1954)
Donna(1960)
NewEngland(1938)
Katrina(2005)
Galveston(1915)
Andrew(1992)
south-Florida(1947)
Galveston(1900)
mid-Florida(1928)
Miami(1926)
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.
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.
Auto, 230,500 ,
17%
Commercial, 167,500 ,
12%
Homeowner, 982,000 ,
71%
Hurricane Sandy resulted in an
estimated 1.4 million privately insured
claims resulting in an estimated $15 to $25
billion in insured losses. Hurricane
Katrina produced 1.74 million claims and $47.6B in losses
(in 2011 $)
Superstorm Sandy:Number of Claims by Type*
*PCS claim count estimate as of 11/26/12. Loss estimate represents high and low end estimates by risk modelers RMS, Eqecat and AIR. PCS estimate of insured losses as of 11/26/12 $11 billion. All figures exclude losses paid by the NFIP.Source: PCS; AIR, Eqecat, AIR Worldwide; Insurance Information Institute. 68
Sandy is a high frequency, (relatively
low) severity event (avg. severity <50% Katrina)
69
Long Island (NY) Flood-Damaged Structures with & w/o Flood Insurance
Source: Newsday, 1/14/13 from FEMA and Small Business Administration.
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Nassau Suffolk
InsuredUninsured
The Maximum FEMA Grant is $31,900. The Average Grant Award to Homeowners and Renters on Long Island is About $7,300
52,428
$15.0
43,106
$2.2
69
74,736
20,7985,747
Only 37.5% of flood damaged buildings in Nassau County were insured for flood, 62.5% uninsured
27.6% of flood damaged buildings in Suffolk County were insured for
flood, 73.4% uninsured
15,051
Number of buildings
Source: Wharton Center for Risk Management and Decision Processes, Issue Brief, Nov. 2012; Insurance Information Institute.
Residential NFIP Flood Take-Up Rates in NY, CT (2010) & Sandy Storm Surge
70
Flood coverage
penetration rates were
extremely low in many very
vulnerable areas of NY and CT, with take-up rates far below 50% in many areas
71
TERRORISM RISK
The Countdown to TRIA Expiration Begins
Reauthorization Faces an Uphill Battle in Congress
72
I.I.I. Congressional Testimony on the Future of the Terrorism Risk Insurance Program
Issue: Act expires 12/31/14. Insurers still generally regard large-scale terror attacks as fundamentally uninsurable
I.I.I. Input: Testified at first hearing on the issue in DC (on 9/11/12) on trends in terrorist activity in the US and abroad, difficulties in underwriting terror risk; Noted that bin Laden may be dead but war on terror is far from over
Status: New House FS Committee Chair Jeb Hensarling has opposed TRIA in the past; Obama Administration does not seem to support extension; Little institutional memory on insurance subcommittee
Media: Virtually no media coverage yet apart form trade press; WSJ will likely editorialize against it.
Objective: Work with trades, risk management community and others to help build support
Life$1.2 (3%)
Aviation Liability
$4.3 (11%)
Other Liability
$4.9 (12%)
Biz Interruption $13.5 (33%)
Property -WTC 1 & 2*$4.4 (11%) Property -
Other$7.4 (19%)
Aviation Hull$0.6 (2%)
Event Cancellation
$1.2 (3%)Workers Comp
$2.2 (6%)
Total Insured Losses Estimate: $40.0B***Loss total does not include March 2010 New York City settlement of up to $657.5 million to compensate approximately 10,000 Ground Zero workers or any subsequent settlements.
**$32.5 billion in 2001 dollars.
Source: Insurance Information Institute.
Loss Distribution by Type of Insurancefrom Sept. 11 Terrorist Attack ($ 2011)
($ Billions)
Terrorism Violates Traditional Requirements for Insurability
Requirement Definition Violation
EstimableFrequency
Insurance requires large number of observations to develop predictive rate-making models (an actuarial concept known as credibility)
Very few data pointsTerror modeling still in infancy, untested.Inconsistent assessment of threat
EstimableSeverity
Maximum possible/ probable loss must be at least estimable in order to minimize “risk of ruin” (insurer cannot run an unreasonable risk of insolvency though assumption of the risk)
Potential loss is virtually unbounded.Losses can easily exceed insurer capital resources for paying claims.Extreme risk in workers compensation and statute forbids exclusions.
Source: Insurance Information Institute
Requirement Definition Violation
Diversifiable Risk
Must be able to spread/distribute risk across large number of risks“Law of Large Numbers” helps makes losses manageable and less volatile
Losses likely highly concentrated geographically or by industry (e.g., WTC, power plants)
Random Loss Distribution/Fortuity
Probability of loss occurring must be purely random and fortuitousEvents are individually unpredictable in terms of time, location and magnitude
Terrorism attacks are planned, coordinated and deliberate acts of destructionDynamic target shifting from “hardened targets” to “soft targets”Terrorist adjust tactics to circumvent new security measuresActions of US and foreign govts. may affect likelihood, nature and timing of attack
Source: Insurance Information Institute
Terrorism Violates Traditional Requirements for Insurability (cont’d)
76
Key Takaways
76
77
P/C Insurance Exposures Will Grow With the U.S. Economy Personal and commercial exposure growth is likely in 2013
– But restoration of destroyed exposure will take until mid-decade Wage growth is also positive and could modestly accelerate
P/C Industry Growth in 2013 Will Be Strongest Since 2004 Growth likely to exceed A.M. Best projection of +3.8% for 2012 No traditional “hard market” emerges in 2013
Underwriting Fundamentals Deteriorate Modestly Some pressure from claim frequency, severity in some key lines But WC will be tough to fix
Industry Capacity Hits a New Record by Year-End 2013 (Barring Meg-CAT)
Investment Environment Is/Remains Challenging Interest rates remain low
Takeaways:Insurance Industry Predictions for 2013
www.iii.org
Thank you for your timeand your attention!
Insurance Information Institute