Challenges and Opportunities for Insurers in the Current Economic Environment CEA International...
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Transcript of Challenges and Opportunities for Insurers in the Current Economic Environment CEA International...
Challenges and Opportunitiesfor Insurers in the Current
Economic Environment
CEA International Insurance ConferenceLondon, England
June 11, 2010Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038Office: 212.346.5540 Cell: 917.494.5945 [email protected] www.iii.org
2
Four of the Many ChallengesFacing Insurers Today
Pricing, Investing: Will Inflation—As Insurers Experience It—Spike, Stay Low, or be Negative?
Can Insurers Achieve Target Profits in an Era of Low Investment Returns?
How Much More Capital Will Regulators, Rating Agencies, and Others Demand That Insurers Acquire and Hold?
How Best to Prepare for the Next Chapter of the Global Financial Crisis?
In 2008, Central Banks in Europe, the UK, andthe US Dramatically Expanded the Money Supply
Source : Ecowin
0
500000
1000000
1500000
2000000
2500000
300000026
/05/
2006
26/0
8/20
06
26/1
1/20
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26/0
2/20
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26/0
5/20
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8/20
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1/20
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5/20
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8/20
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09
Mo
illio
ns
of
Do
llars
or
Eu
ros
0
50000
100000
150000
200000
250000
300000US Federal reserve Banks, Total assets or liabilities, dollars
Euro Zone, Eurosystem, Total assets or liabilities, EUR
United Kingdom, Bank of England, assets, GBP
Inflation Rates for Largest European Economies & Euro Area, 2009-2011F
0.3%
0.3%
2.2%
0.1%
1.0%
1.3%
1.1%
2.4%
1.4%
1.1%
1.6%
1.6%
1.8%
1.6%
1.4%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
Euro Area Germany UK France Netherlands
2009 2010F 2011F
Source: Blue Chip Economic Indicators, 3/10/10 edition.
% Change from Prior Year Inflation is below 1.5% across major European economies and
interest rates remain low as a result, obscuring tight conditions
in trade credit markets
P/C Insurers Experience Inflation More Intensely than 2009 CPI Suggests
Source: CPI is Blue Chip Economic Indicator 2009 estimate, 12/09; Legal services, medical care and motor vehicle body work are avg. monthly year-over-year change from BLS; BI and no-fault figures from ISO Fast Track data for 4 quarters ending 09:Q3. Tort costs is 2009 Towers-Perrin estimate. WC figure is I.I.I. estimate based on historical NCCI data.
-0.4%
2.7% 3.0% 3.1%3.8%
4.3%
5.5%6.2%
-2%
0%
2%
4%
6%
8%
OverallCPI
LegalServices
US TortCosts
MedicalCare
MotorVehicleBodyWork
BodilyInjury
Severity
WC MedSeverity
No-FaultClaim
Severity
(Percent)
Healthcare and Legal/Tort Costs Are a Major P/C Insurance Cost Driver. These Are Expected to Increase Above the Overall Inflation Rate (CPI) Indefinitely
6
In the UK, the Household Rebuilding CostIndex is Also Higher Than the British CPI
Source : Association of British Insurers
Annual Change in the Household Rebuilding Cost Index and Retail Prices Index
0,00
1,00
2,00
3,00
4,00
5,00
6,00
7,00
8,00
9,00
10,00
janv-9
8
avr-
98
juil-
98
oct
-98
janv-9
9
avr-
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juil-
99
oct
-99
janv-0
0
avr-
00
juil-
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oct
-00
janv-0
1
avr-
01
juil-
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oct
-01
janv-0
2
avr-
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juil-
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oct
-02
janv-0
3
avr-
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oct
-03
janv-0
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avr-
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-04
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juil-
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oct
-05
janv-0
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avr-
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-06
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juil-
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oct
-07
janv-0
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avr-
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juil-
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-08
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Annual In
crease
(%
)
HRCI RPI
Household Rebuilding Cost Index
British CPI
French Health Insurance Tells the Same Story (as Does Many Other Countries)
Source : INSEE
100
105
110
115
120
125
130
135
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
100
= 1
998
CPI
Health Insurance CPI
9
Risks for Insurersif Inflation Is ReignitedRising Claim Severities
Cost of claims settlement rises across the board (property and liability)
Rate InadequacyRates inadequate due to low trend assumptions arising from
use of historical data
Reserve InadequacyReserves may develop adversely and become inadequate
(deficient)
Burn Through on RetentionsRetentions, deductibles burned through more quickly
Reinsurance Penetration/ExhaustionHigher costs risks burn through their retentions more
quickly, tapping into reinsurance more quickly and potentially exhausting their reinsurance more quickly
11
World Economic Outlook: 2009-2011P
Sources: IMF, World Economic Outlook; Insurance Information Institute.
2.3%
6.3%
3.1%
1.0%1.9%
-5.2%-4.1%
-2.4%
2.4%
-3.2%
2.0%1.5%2.6%
6.5%
2.4%
-6%
-4%
-2%
0%
2%
4%
6%
8%
AdvancedEconomies
EmergingEconomies
United States Euro Area Japan
2009 2010P 2011P
Outlook uncertain: The world economy is recovering from the global crisis, but at different speeds in different parts of the world, according to the IMF. Insurance exposure growth will vary
regionally and by industry.
This growth is strong, but most insurance activity is in the U.S. and Europe, where growth will be weak.
3-Month Interest Rates forMajor Global Economies, 2008-2011F
1.8%
0.6%
2.1%
1.3%
0.2%
1.2%
0.4%
1.2%
4.0%
0.4%
2.6%
0.5%
2.5%
4.4%
1.7%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
Euro Area Japan UK China US
2009
2010F
2011F
Source: Blue Chip Economic Indicators, 3/10/10 edition.
Due to central bank action and lingering economic weakness, interest rates are
expected to remain low in much of the world, depressing insurer investment earnings. But in spite of low rates, credit market conditions
remain tight.
Internationally, Most Short-termInterest Rates Are Still Quite Low
Central Bank Current Interest Rate
Last Changed
Bank of Canada 0.25% April 21, 2009
Bank of England 0.50% March 5, 2009
Bank of Japan 0.10% Dec 19, 2008
European Central Bank 1.00% May 7, 2009
U.S. Federal Reserve 0.25% Dec 16, 2008
The Reserve Bank of Australia 4.50% May 4, 2010
China 5.31% Dec 22,2008
Hong Kong SAR 0.50% Dec 17, 2008
India 5.00% Mar 19, 2010
Korea, Republic of 2.00% Feb 16, 2009
Source: http://www.fxstreet.com/fundamental/interest-rates-table/
50
100
150
200
250
300
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Global Natural Catastrophes 1980–2009Overall and insured losses with trend
US
$bn
Overall losses (in 2009 values) Insured losses (in 2009 values)
Trend insured lossesTrend overall losses
Source: Munich Re NatCatSERVICE; Insurance Information Institute.
Global natural catastrophe loss trends portend an even more
disastrous decade ahead. Terrorism and environmental
and other man-made disasters could exacerbate the trend.
Annual insured losses exceeding
$100B by decade’s end?
16
Global Reinsurance Capacity Source of Decline
Global Reinsurance Capacity Shrankin 2008, Mostly Due to Investments
$360
$300
$270
$290
$310
$330
$350
$370
2007 2008
55% 14%
31%
Source: AonBenfield Reinsurance Market Outlook 2009; Insurance Information Institute.
Global Reinsurance CapacityFell by an Estimated 17% in 2008
Change inUnrealizedCapital Losses
RealizedCapitalLosses
Hurricanes
17
“Bullets Dodged”
Being “overcapitalized”—the criticism often leveled at insurers before the financial crisis began—was a good thing
We might have needed some billions of that capital for death and medical benefits if the H1N1 “swine” influenza pandemic—which began in April 2009— had been much worse than it was
19
If fiscal imbalances are not addressed through spending cuts and revenue increases, only two options remain:
inflation for countries that borrow in their own currency and can monetize their deficits; or
default for countries that borrow in a foreign currency or can’t print their own.
Thus, the recent ... global financial crisis is not over; it has, instead, reached a new and more dangerous stage. ... now comes the rescue of the rescuers – i.e., governments. The scale of these bailouts is mushrooming. …But who will then bail out governments...? Our global debt mechanics are looking increasingly like a Ponzi scheme.
Source: Return to the Abyss, by Nouriel Roubini, Commentary, Project Syndicate at http://www.project-syndicate.org/commentary/roubini25/English
The Next Global Financial CrisisMight Come Sooner Than We Think
20
Lessons Learned
The effects of the crisis on insurance companies varied considerably, depending on
What products they sold
What investments they made
The economic environment in which they operated, and
How strong they were entering the crisis
21
Insurance LOBs Most DirectlyAffected by the Financial Turmoil
Mortgage and Financial Guarantee insurance
Trade Credit insurance
Credit Default Swaps (not legally insurance, but functioned that way)
Variable annuities (unit-linked life insurance products) with downside investment guarantees
22
Lessons Learned
The insurance sector’s business model is robust and generally able to withstand and conduct normal operations during
a sudden and sharp asset value meltdown
a soft pricing market,
an eroding exposure base, and
a challenging [man-made and natural] CAT environment
All at the same time!
23
In the Last Crisis, the Insurance SectorHelped Stabilise the World Economy
“…the insurance sector has arguably helped to provide a stabilising influence in light of its longer-term investment horizon and conservative investment approach.”
Source: OECD, The Impact of the Financial Crisis on the Insurance Sector and Public Policy Responses, April 2010