P/C Underwriting Cycles

NAIC Center for Insurance Policy and ResearchIndianapolis, IN August 27, 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

Do P/C Underwriting ResultsGo in Cycles?

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PP Auto & HO InsuranceLoss + LAE Ratio*, 1983-2011

*to Net Premiums EarnedSources: A.M.Best, Aggregates and Averages, 1993, 2002, 2012; I.I.I.

HO Multiple

PerilPP Auto Liability

10

WC, CMP, Med Mal:Loss + LAE Ratio*, 1983-2011

40

80

120

160

1983 84 85 86 87 88 89

1990 91 92 93 94 95 96 97 98 99

2000

1 2 3 4 5 6 7 8 920

10 11

WC CMP Med Mal

*to Net Premiums EarnedSources: A.M.Best, Aggregates and Averages, 1993, 2002, 2012; I.I.I calculations.

The underwriting cycles vary by line of businessand are loosely “in sync” with each other.

Cycles, Cycles (Nearly) Everywhere

Netherlands 12.0Malaysia 12.0France 10.2Singapore 7.8United States 7.4Japan 7.1Canada 5.8Spain 5.7Australia 5.2Italy 4.8

Austria NoneDenmark NoneS. Korea NoneTaiwan None

*Lamm-Tenant/Weiss study based on data for 1965 through 1987; Chen/Wong/Lee study based on data for 1970-1995.Sources: J. Lamm-Tenant and M. Weiss, “International Insurance Cycles: Rational Expectations/Institutional Intervention, Journal of Risk and Insurance, September 1997; R. Chen, K. Wong and H. Lee, “Underwriting Cycles in Asia,”, JRI, March 1999.

Cycle Length in Years*

Cyclicality in Premiums, Reserves, and Profits

1212

13

-5%

0%

5%

10%

15%

20%

25%

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 08 09 10 11 1213

:Q1

Net Premium Growth: Annual Change, 1971—2013:Q1

(Percent)1975-78 1984-87 2000-03

Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.

Net Written Premiums Fell 0.7% in 2007 (First Decline

Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.

2013:Q1 = 4.1%

2012 growth was +4.3%

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(2)

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1411 9

(5)

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(10)(7) (7)

-$20

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$309

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($

B)

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t on

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atio

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ints

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Prior Yr. ReserveDevelopment ($B)

Impact onCombined Ratio(Points)

P/C Reserve Development, 1992–2015E

Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: A.M. Best, ISO, Barclays Research (estimates).

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:Q1

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2013:Q1*

*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.

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

2012: 5.9%

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

2013:Q1 9.7%

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What Drives These Cycles?

• Claim Trends• Capital/Capacity• Reinsurance Usage• Pricing• Inflation

P/C Industry Homeowners Claim Frequency, US, 1997-2011

1.57

2.822.34

1.842.32

1.69

2.67 2.572.97

2.28

1.32

3.42

2.39 2.35

3.68

6.996.71

6.45 6.266.53

5.83

4.63

3.83 3.64 3.77 3.94 4.03 4.16 4.17 4.31

0

2

4

6

8

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2008 2010 2011

CAT-related claims Non-CAT-related claims

Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” p.29; Insurance Information Institute

Claims Paid per 100 Exposures

Gradually growing frequency of non-cat

claims since 2005

CAT claim frequency is variable but

generally rising

P/C Industry Homeowners Average Claim Severity, 1997-2011

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

non-cat claims cat claims

Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” p. 29, BLS inflation calculator,and Insurance Information Institute

HO average claim severity is now

three times what it was in 1997 (a

200% increase). In that span, the CPI

rose only 40%.

EEOC Workplace Discrimination Complaints, FY1997-FY2012*

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Biggest jumps in FY2008 complaints came for retaliation and age

discrimination. But FY2008 excluded the worst of the recession.

Thousands of Complaints

*The federal fiscal year runs from Oct 1 of a given year to Sept 30 of the following year. The year is designated by its endpoint. Thus FY2009 covers the period from Oct 1, 2008 through Sept 30, 2009.Sources: EEOC at http://www.eeoc.gov/stats/charges.html ; I.I.I.

1997-2007 Avg.= 79,800/year

FY

2008-2012 Avg.= 97,600/year

$0

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$450$500

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75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13*

US Policyholder Surplus:1975–2013*

* As of 3/31/13.Source: A.M. Best, ISO, Insurance Information Institute.

“Surplus” is a measure of underwriting capacity. It is

analogous to “Owners Equity” or “Net Worth” in non-

insurance organizations

($ Billions)

The Premium-to-Surplus Ratio Stood at $0.77:$1 as of3/31/13, A Near Record Low (at Least in Recent History)*

Surplus as of 3/31/13 was a record $607.7, up 3.6% from $586.9 of 12/31/12, and up 39.0% ($170.6B) from the crisis trough of $437.1B at 3/31/09. Pre-

crisis peak was $521.8 as of 9/30/07. Surplus as of 3/31/13 was 16.5% above 2007 peak.

Global Reinsurance Capital,2007-2012

$ Billions

% Change

Source: Aon Reinsurance Market Outlook, April 2013 Update from Individual Company and AonBenfield Analytics; Insurance Information Institute.

$410

$340

$400

$455$470

$505

18%

-17%

-3%

11%

18%

$300

$400

$500

$600

2007 2008 2009 2010 2011 2012-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Reinsurer Capital Change

2007-2012 compound average growth rate: 4.3%High Global Catastrophe Losses Have Had a Modest Adverse Impact on

Global Reinsurance Market Capacity

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Other Possible Cycle Drivers

Sudden Changes in the MarketplaceSuch as a wave of mergers, major new entrants,

etc.

Regulatory Approval Lags

Tort System Shocks

Investment Shocks

Such as massive capital losses due to interest rate spikes, stock market plunge, etc.

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Insurance Information Institute