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Transcript of Trends & Challenges in P/C Insurance Business Today Focus on Iowa Markets Independent Insurance...
Trends & Challenges in P/C Insurance Business Today
Focus on Iowa Markets
Independent Insurance Agents of Iowa98th Annual Convention
Des Moines, IA
September 23, 2004
Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org
About theInsurance Information Institute
The mission of the Insurance Information Institute (I.I.I.) is to improve public understanding of
insurance -- what it does and how it works. The I.I.I. enjoys broad membership throughout the insurance industry, including most of the major p/c insurers and reinsurers operating in the United States, as well as companies operating on a regional basis and internationally.
For more than 40 years, the I.I.I. has provided definitive insurance information. Today, the I.I.I. is recognized throughout the insurance industry as well as by the media, governments, regulatory organizations, universities and the public as a primary source of information, analysis and referral concerning insurance.
Each year, the I.I.I. works on more than 3,700 news stories, handles more than 6,000 requests for information from its members, the media, and other parties and answers nearly 50,000 questions from consumers.
In addition to direct contact with the media, individuals and organizations, the I.I.I. publishes a host of helpful brochures and books on a wide variety of insurance topics, ranging in subjects from 12 Ways to Lower Your Auto Insurance Costs to the I.I.I. Fact Book series. I.I.I.’s members benefit from direct access to all information, I.I.I. staff and its members-only web site. The Institute does not lobby. Its central function is to provide accurate and timely information on insurance subjects. Questions concerning I.I.I. membership should be directed to Cary Schneider at (212) 346-5566 or by email at [email protected].
Presentation Outline
• Profitability US & Iowa Wall Street Perspective
• Underwriting US & Iowa
• Ratings, Solvency & Financial Strength• Investment Overview• Pricing• Tort Environment• Insurance Scoring• The Challenge of Terrorism• Q & A
P/C INSURANCE FINANCIAL
UPDATE
Highlights: Property/Casualty Full-Year 2003 vs. 2002
2003 2002 Change
Net Written Prem. 405,855 369,673 +9.8%
Loss & LAE 289,800 283,640 +2.2%
Net UW Gain (Loss) (4,635) (30,840) -85.0%
Net Inv. Income 38,686 37,225 +3.9%
Net Income (a.t.) 29,877 3,046 +880.9%
Surplus* 346,987 285,386 +21.6%
Combined Ratio 100.1 107.3 -7.2 pts.
Highlights: Property/Casualty 1st Qtr. 2004 vs. 1st Qtr. 2003
($ Billions) 2004 2003 Change
Net Written Prem. 105,982 101,446 +4.5%
Loss & LAE 68,387 70,067 -2.4%
Net UW Gain (Loss) 5,647 (1,192) N/A
Net Inv. Income 9,414 9,220 +2.1%
Net Income (a.t.) 13,310 6,528 +103.9%
Surplus* 361,177 346,987 +4.1%
Combined Ratio** 93.3 99.6** -6.3 pts.*2003 surplus figure is as of 12/31/03**The combined ratio for full-year 2003 was 100.1
-10%
-5%
0%
5%
10%
15%
20%
25%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
F
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
Strength of Recent Hard Markets by NWP Growth*
Real NWP Growth During Past 3 Hard Markets
1975-78: 8.6%
1985-87: 14.5%
2001-04F: 7.0%
1975-78 1985-87 2001-04
2004 based on 1st quarter results from ISO.
Insurers need to be able to ride out the industry’s extreme cycles
0%
2%
4%
6%
8%
10%
12%
14%
16%
92 93 94 95 96 97 98 99 00 01 02 03* 04**
Iowa US
Growth in Direct Written Premiums: Iowa and US
*2003 IA figure is III estimate.**2004 US data based on first half results. IA figure is III estimate.Source: A.M. Best, Insurance Information Institute
Premium growth in IA has generally trended along
with the US, but growth is decelerating rapidly
P/C Net Income After Taxes1991-2004E* ($ Millions)
$14,178
$5,840
$19,316
$10,870
$20,598
$24,404
$36,819
$30,773
$21,865
-$6,970
$3,046
$29,877
$20,559
$13,
310
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04E*First quarter resultsSources: A.M. Best, ISO, Insurance Information Institute.
2001 was first-ever full year net loss
2002 ROE = 1.0%
2003 ROE = 9.4%
2004 ROE = 15.0% (est.)
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04E
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2004E
Source: Insurance Information Institute; Fortune
-5%
0%
5%
10%
15%
20%
91 92 93 94 95 96 97 98 99 00 01 02 03 04F
ROE Cost of Capital
ROE vs. Cost of Capital: US P/C Insurance: 1991 – 2004F
Source: The Geneva Association, Ins. Information Inst.
The p/c insurance industry likely achieved its costs of capital in 2004 for the first time in many years
-14.
6 p
ts -10.
2 p
ts
US P/C insurers missed their cost of capital by an average 6.5 points from 1991 to 2003
-1.2
p
ts
+1.
1 p
ts
-10%
-5%
0%
5%
10%
15%
20%
25%
91 92 93 94 95 96 97 98 99 00 01 02 03F
US P/C Insurers All US Industries Iowa
ROE: P/C (US & IA) vs. All Industries, 1991–2003*
Source: Insurance Information Institute; NAIC, Fortune
Iowa’s p/c insurance market is a slightly above-average performer
RNW for Personal Lines in Iowa1991 - 2002
8.0%
8.6%
-15.
0%
-24.
6%
-4.6
%
-78.
0%
-1.8
%
-2.3
%
3.3%7.1%16
.7%
8.0% 11
.7%
14.1
%
5.8% 7.5%
4.5%17
.1%
0.7%
-0.6
%
-2.7
%
-21.
8%
20.4
%
9.4%
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Personal Auto Homeowners
Source: NAIC
10-Year Average:Auto: 6.6% Home: -10.7%
(93-02)
Homeowners experience has been very bad and volatile in Iowa,
reflecting national trends.
RNW for Major Commercial Lines in Iowa, 1991 - 2002
14.1
%
-15.
6%
11.1
%
-24.
3%
8.7%
8.5% 14
.5%
-46.
5%
11.4
%
6.7%
1.0% 2.9%
24.3
%
20.5
%
-2.6
%
-20.
0%
0.7%
12.0
%
19.2
%
12.5
%
8.6% 13
.9%
5.2%
-4.2
%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Commercial Multi-Peril Commercial AutoSource: NAIC
CMP business has been volatile in Iowa
Rates of Return on Net Worth for Homeowners Ins: US vs. IA
Source: NAIC, Insurance Information Institute
* US Average is 1.35% if excluding 1992 (year of Hurricanes Andrew and Iniki.
-6.6%
-54.3%
2.5%-1.7%
3.6%12.4%
-7.2%1.4%
-15.0%
20.4%
9.4%17.1%
-2.7% -0.6%
-24.6%
0.7%-4.6%
-78.0%
-1.8%
5.4% 3.8%5.4%-4.2%
-21.8%
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
US
Iowa
Averages: 1991 to 2002
US HO Insurance = -3.29%*
Iowa HO Insurance = -8.46%
Rates of Return on Net Worth for Pvt. Passenger Auto: US vs. IA
Source: NAIC, Insurance Information Institute
10.6%
14.3% 14.2%
11.6%
2.0%
4.1%
8.00%
16.70%
14.1%
11.7%
7.1%
4.5%
7.5%
3.3%
-2.3%
8.6%12.4%
11.4%
7.7%
2.2%
10.1%
12.1%
8.0%
5.8%
-5%
0%
5%
10%
15%
20%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
US
Iowa
Averages: 1991 to 2002
US PPA Insurance = +9.4%*
Iowa PPA Insurance = +7.8%
-5%
0%
5%
10%
15%
20%
25%
91 92 93 94 95 96 97 98 99 00 01 02 03
US Iowa
Source: Insurance Information Institute; NAIC, ISO; 2003 WC figure is NCCI ROS estimate.
WC went from profit juggernaut to balance sheet
black hole within just 4-5 years
Rates of Return on Net Worth for Workers Comp Auto: US vs. IA
2002 Return on Equity:Iowa & Nearby States PP Auto
4.1%
6.6%
8.0%
8.6%
9.4%
11.5%
0% 5% 10% 15%
Minnesota
Missouri
Iowa
Wisconsin
Illinois
US
Source: NAIC, Insurance Information Institute
2002
2002 Return on Equity:Iowa & Nearby States HO
-18.0%
-5.2%
-1.8%
1.4%
2.0%
6.6%
-20% -15% -10% -5% 0% 5% 10%
Wisconsin
Illinois
US
Iowa
Minnesota
Missouri
Source: NAIC, Insurance Information Institute
2002
WALL STREET:
HIGH EXPECTATIONS
Insurer Stocks: Outperforming the S&P 500
6.21%
2.94%
8.73%
9.15%
14.96%
1.50%
0% 5% 10% 15% 20%
S&P 500
Life/Health
Multiline
All Insurers
P/C
Brokers
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Total Return 2004 YTD Through September 17, 2004
If 2004 represents the cyclical peak for this industry, why aren’t p/c
stocks soaring?
UNDERWRITING PERFORMANCE
90
100
110
120
70
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
E*
P/C Industry Combined Ratio
2001 = 115.7
2002 = 107.2
2003 = 100.1
2004E = 93*
Combined Ratios
1970s: 100.3
1980s: 109.2
1990s: 107.8
2000-04: 105.3
Sources: A.M. Best; ISO, III *2004 figures based on first half estimate.
($55)
($45)
($35)
($25)
($15)
($5)
$5
$15
$25
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
Underwriting Gain (Loss)1975-2004F*
*2004 underwriting gain is annualized figure based on first quarter result. Source: A.M. Best, Insurance Information Institute
$ B
illi
ons
2004 is likely to produce the largest underwriting profit in history =
$21.5B based on annualized Q1 result
110
.3
110
.2
10
7.6
10
3.9
10
9.7 11
2.3
111
.5
12
2.2
110
.2
103.
9
104.
5
103.
5
104.
9
99.8 10
2.7
104.
5
109.
9
110.
9
105.
3
112
.5
90
95
100
105
110
115
120
125
Commercial--Net Basis Personal--Net Basis
Commercial vs. Personal Lines Combined Ratios
Source: A.M. Best; Insurance Information Institute
10-Year Average Combined Ratios
Commercial: 111.1 Personal: 105.2
1991-2002
40%
60%
80%
100%
120%
140%
160%
180%
91 92 93 94 95 96 97 98 99 00 01 02
Personal Auto Homeowners Commercial Auto
Iowa Direct Loss Ratios
Source: NAIC; Insurance Information Institute
Iowa’s homeowners business is extremely volatile.
Key Auto Insurance Stats: IA vs. US2003 vs. 2004*
$10,052
$2,095
$9,321
$2,442
$10,234
$2,156
$9,635
$2,489
$0
$2,000
$4,000
$6,000
$8,000
$10,000
IA Bodily Injury IA PD Liability US Bodily Injury US PD Liability
20032004*
* Average for 4 quarters ending with the 1st quarter of 2004 vs. 4 Qtrs ending Q1:03.Source: Insurance Services Office, Insurance Information Institute
+1.8%
+2.9%
+3.4%
+1.9%
110
.5
10
5.0 11
3.6 11
9.2
10
4.8
10
0.8
10
0.5
114
.3
10
6.5
12
1.3
10
0.31
08
.8 115
.8
10
6.9
10
8.5
10
6.5
10
5.8
10
1.6
10
5.6
10
7.7
110
.0 115
.7
10
7.2
10
0.1
16
2.5
12
6.5
90
100
110
120
130
140
150
160
170
Reinsurance All Lines Combined Ratio
Combined Ratio: Reinsurance vs. P/C Industry
Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
2001’s combined ratio was the worst-ever for reinsurers; 2002 was bad as well.
2003: Big improvement in primary and reinsurer segments
U.S. InsuredCatastrophe Losses ($ Billions)
$7.5
$2.7$4.7
$22.9
$5.5
$16.9
$8.3 $7.3
$2.6
$10.1$8.3$4.3
$28.1
$5.9
$12.9$17.0
$0
$5
$10
$15
$20
$25
$30
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
04E
*
*2004 figure is 2004 estimate as of September 20, 2004.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims.Source: Property Claims Service/ISO; Insurance Information Institute
$ Billions2004 could become the second worst year ever for natural
disaster losses in the US
WHY UNDERWRITING DISCIPLINE MATTERS
97.5
100.6 100.1
94.3 93.3
9.4%
15.0%14.3%
15.9%15.0%
80
85
90
95
100
105
110
1978 1979 2003 Actual 2003 for 15%ROE
2004F
Co
mb
ine
d R
ati
o
6%
8%
10%
12%
14%
16%
18%
Re
tru
n o
n E
qu
ity
*
Combined Ratio ROE*
* 2004 figure is return on average statutory surplus based in first quarter dataSource: Insurance Information Institute from A.M. Best and ISO data.
A 100 Combined Ratio Isn’t What it Used to Be: 95 is Where It’s At
Combined ratios today must be below
95 to generate Fortune 500 ROEs
95.9 96.0
101.5
94.2
91.390.0 90.7
84.5
89.3
101.1
94.4
87.0
91.3 90.6
$8.30
$7.30$6.49
$8.91
$6.10$6.40
$7.70
$5.70
$5.25
$5.71$5.20
$4.83
$6.46
$11.96
80
85
90
95
100
105
110
90 91 92 93 94 95 96 97 98 99 00 01 02 03
Co
mm
erc
ial L
ine
s O
pe
rati
ng
Ra
tio
$0
$2
$4
$6
$8
$10
$12
Co
st
of
Ris
k/$
10
00
Re
ve
nu
e
Commercial Operating Ratio
Cost of Risk
Source: RIMS, A.M. Best; Insurance Information Institute * 2003 operating ratio is III estimate.
Cost of Risk vs. Commercial Lines Operating Ratio*
Number of P/C Failures vs. Combined Ratio, 1991-2003
35
25 24
10 10 8 10
2428
31
20
27
58
108
117
108107
106107
110
115
107
100
108
102
109
0
10
20
30
40
50
60
70
91 92 93 94 95 96 97 98 99 00 01 02 03
Nu
mb
er o
f F
ailu
res
90
95
100
105
110
115
120
Com
bin
ed R
atio
Number of P/C Failures Combined Ratio
Source: Standard & Poor’s; Insurance Information Institute
2003 failures fell to a 5-year low
RATINGS, SOLVENCY, FINANCIAL STRENGTH
0.4
5
0.4
1
0.4
3
0.4
2 0.6
8
1.2
2
1.7
1
1.1
2
0.4
4
0.5
8 0.8
2
0.9
9
1.0
5
1.7
8
1.1
0.8
3
1.5
6
1.0
8
0.8
0.5
1
0.4
1 0.7
4
1.9
8
3.7
8
3.5
4.93
0
1
2
3
4
5
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
E
Ra
tio
of
Do
wn
gra
des
to
Up
gra
des
Downgrade/Upgrade Ratio*
Sources: Impairment Rate and Rating Transition Study—1977 to 2002, A.M. Best & Co.; 2003E from S&P. *U.S. property/casualty and life/health insurers
It is in everyone’s best interest to have a
financial strong and stable insurance industry
Cumulative Average Impairment Ratesby Best Financial Strength Rating
0%
5%
10%
15%
20%
25%
30%
35%
40%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15Average Years to Impairment
Vulnerable
All
Secure
Sources: A.M. Best: Best’s Impairment Rate and Rating Transition Study—1977-2002, March 1, 2004.
Secure: A++, A+, A, A-, B++, B+
Vulnerable: B and Below
*US P/C and L/H companies, 1977-2002
Reason for P/C Insolvencies(218 Insolvencies, 1993-2002)
Unidentified17%
Impaired Affiliate3%
Overstated Assets2%
Change in Business3%
CAT Losses3%
Reinsurer Failure0%
Rapid Growth10%
Discounted Ops8%
Alleged Fraud3%
Deficient Loss Reserves
51%
Source: A.M. Best, Insurance Information Institute
Reserve deficiencies account for
more than half of all p/c insurers
insolvencies
$ Billions, Calendar Year Basis
$2.3 $2.2 $1.2
($8.5)
($1.5)
($7.5)($6.7)($10.0)
$22.7
$13.7
$0.3
($3.7)
$0.4
$11.0
($15)
($10)
($5)
$0
$5
$10
$15
$20
$25
90 91 92 93 94 95 96 97 98 99 00 01 02 03
P/C Insurance Industry Prior Year Reserve Development*
*Negative numbers indicate favorable development; positive figures represent adverse development.Source: A.M. Best, Morgan Stanley, Dowling & Partners Securities, Prudential Securities, Ins. Info. Inst.
Adverse reserve development totaled $47.8 billion from 2000 through 2003
Adverse reserve development is the #1 killer of p/c insurance companies: Strength Matters
Points (Reduced)/Increased
0.5
(2.4)
5.2
6.3
3.5
(0.4)
-3
-2
-10
1
2
3
45
6
7
1998 1999 2000 2001 2002 2003
Combined Ratio:Impact of Reserve Changes (Points)
Source: ISO, A.M. Best, MorganStanley, Prudential Securities.
Prior-year adverse reserve development totaling nearly $14 billion in 2003 added 3.5 points to the p/c combined
ratio in 2002
Guarantee Fund Net Assessments*(1979-2002)
$ Millions
$46.
2
$17.
8
$49.
8
$41.
1
$509
.4
$903
.2
$464
.8
$713
.9
$433
.6
$434
.8
$360
.5 $545
.4
$524
.9
$94.
8
$124
.2 $263
.7
$263
.6
$201
.3
$328
.6
$734
.7
$1,2
09.0
$30.
6$9
7.4
$292
.4
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02
*Excludes NY and workers comp security funds in NJ and PA.Source: National Conference of Insurance Guarantee Funds; Insurance Information Institute
Assessments rose dramatically during the last hard market, setting
a new record now.
INVESTMENTS:
NO SUBSTITUTE FOR SOUND UNDERWRITING
$0
$9
$18
$27
$36
$45
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
Net Investment Income
History
1997 Peak = $41.5B
2000= $40.7B
2001 = $37.7B
2002 = $37.2B
2003 = $38.7B
2004E = $37.7
$ B
illi
ons
Growth History
2002: -1.3%
2003: +3.9%
2004E: -2.7%
Source: A.M. Best, ISO, Insurance Information Institute
0%
2%
4%
6%
8%
10%
12%
14%
16%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Mar
04
Jun
04Se
p 04
*
3-Month T-Bill 1-Yr. T-Bill 10-Year T-Note
Interest Rates: Lower Than They’ve Been in Decades, But…
*Week of September 3.Source: Board of Governors, Federal Reserve System; Insurance Information Institute
Lower bond yields were the primary driver behind declining investment income in recent years, with the 10-year note reaching a 45-year low in 2003
Only short-term yields are rising consistently as the Fed hikes rates
About 2/3 of invested assets are in the form of bonds
-30%
-20%
-10%
0%
10%
20%
30%
40%
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
*Through September 17, 2004.Source: Ibbotson Associates, Insurance Information Institute
Total Returns for Large Company Stocks: 1970-2004*
2003 ended a streak of 3 consecutive years of declines for stocks
Has the bull market run out of steam in 2004?
S&P 500 was up 28.7% in 2003 but is up just 1.5% through mid-Sept. as fears of higher interest rates, a sluggish economy, Iraq & high oil prices hurt the market
CAPACITY CRUNCH?
$0
$50
$100
$150
$200
$250
$300
$350
$400
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
U.S. Policyholder Surplus: 1975-2004*
Source: A.M. Best, ISO, Insurance Information Institute *As of 3/31/04.
$ B
illi
ons
Surplus (capacity) peaked at $339.3 Billion in mid-1999 and fell by 15.9% ($53.9 billion) to $285.4 billion at year-end 2002
Surplus increased by $61.6B or 21.6% to $347.0B in 2003 and 4.9% in the 1st qtr. of 2004 to $361.2 billion
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
$53.9 Billion
Capacity TODAY is just 6.5% above its mid-1999 peak
US Reinsurers: Change in Policyholder Surplus ($ Billions)
$60.9$58.9
$56.4
$45.2
$48.8
$64.6
$40
$45
$50
$55
$60
$65
$70
1998 1999 2000 2001 2002 2003E
$ B
illi
ons
Source: A.M. Best; Insurance Information Institute
Reinsurer PHS fell 20% from 1998-2002. Capacity today similar to 1998. Same story
globally.
Capital Myth: US P/C Insurers Have $350 Billion to Pay Terrorism Claims
"Target" Commercial*$114 billion
33%
Commercial Reserve
Deficiency$30 billion (est.)
9%
Other Commercial$58 billion
17%
Personal$146 billion
42%
Total PHS = $298.2 B as of 6/30/01
= $291.1 B as of 12/31/02
= $347.0 B as of 12/31/03
*”Target” Commercial includes: Comm property, liability and workers comp; Surplus must also back-up on non-terrorist related property/liability and WC claimsSource: Insurance Information Institute estimates based on A.M. Best Q.A.R Data.
Only 33% of surplus backs
“target” lines net of reserve deficiency
PRICING TRENDS
Top Concerns US Businessesin 2004
23.2%
26.1%
30.1%
32.8%
65.6%
0% 10% 20% 30% 40% 50% 60% 70%
Health Ins.Costs
WorkersComp Costs
Cost/Avail-ability ofLiability Ins.
Energy Costs
US BusinessIncome Taxes
Source: National Federation of Independent Business; Insurance Information Institute
% of Firms in 2004 That Consider Problem Critical
Customers focus on costs, not security, but the two issues
are linked
$6.10$6.40
$8.30$7.70
$7.30
$6.49
$5.70$5.25
$5.71
$6.46
$8.91
$11.96
$4.83$5.20
$4
$5
$6
$7
$8
$9
$10
$11
$12
$13
90 91 92 93 94 95 96 97 98 99 00 01 02 03* Cost of risk includes insurance premiums, retained losses and administrative expenses
Source: 2003 RIMS Benchmark Survey; Insurance Information Institute
Cost of Risk: 1990-2003*
1992-2000 = -41.8%
2000
-03
= +1
47.6
%
$2.92$2.72
$2.55
$1.43
$3.63 $3.54 $3.57
$2.07
$1.26 $1.15
$2.49
$1.86$1.67
$1.00
$0.46$0.87 $0.82
$0.96
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
Total WCCosts
Total LiabilityCosts
TotalProperty
Costs
Other Costs Total Admin.Costs
Total Mgmt.LiabilityCosts
2001 2002 2003
Components of Cost of Risk Per $1,000 of Revenue*
* Cost of risk includes insurance premiums, retained losses and administrative expensesSource: 2003 RIMS Benchmark Survey; Insurance Information Institute
+45.8% +90.3% +113.8%
+107.0%
+44.8%+150.0%
% Change
2001 -03
14
%11
% 13
%1
6%
19
%2
2%
28
%3
1%
31
%2
8% 3
0% 3
2%
33
%2
8% 29
%3
0% 3
2%
30
%2
7%
25
%2
8%
22
%1
8%
18
%1
7%
16
%1
2%
12
%1
0% 1
2%
11%
9%
7%
7%
5%
4%
9%
9%
0%
5%
10%
15%
20%
25%
30%
35%
Ju
l-0
1A
ug
-01
Sep
-01
Oct
-01
No
v-0
1D
ec-0
1J
an
-02
Feb
-02
Ma
r-0
2A
pr-
02
Ma
y-0
2J
un
-02
Ju
l-0
2A
ug
-02
Sep
-02
Oct
-02
No
v-0
2D
ec-0
2J
an
-03
Feb
-03
Ma
r-0
3A
pr-
03
Ma
y-0
3J
un
-03
Ju
l-0
3A
ug
-03
Sep
-03
Oct
-03
No
v-0
3D
ec-0
3J
an
-04
Feb
-04
Ma
r-0
4A
pr-
04
Ma
y-0
4J
un
-04
Ju
l-0
4A
ug
-04
Source: MarketScout.com
Commercial Premium Rate Changes Are Sharply Lower
Is moderation due to realization of performance and profit goals, increasing capacity/ capital, or market- share strategies?
World Rate-On-Line Index(1990 = 100)
100116
283
372
337
288
248
193
160138 142
194
239260
230
0
50
100
150
200
250
300
350
400
90 91 92 93 94 94 96 97 98 99 00 01 02 03 04
Source: Guy Carpenter
Reinsurance prices rising, limits falling: ROL up significantly, though not as much as after Hurricane Andrew in 1992
P/C Soft Spots: % Accounts With Negative Price Change(2nd Qtr. 2004)
81%
47%
31%25%
41% 39%
20% 19%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Comm Prop BizInterruption
Terror Comm Auto WC GL EPL Umbrella
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
More moderation is evident in the commercial
casualty segments
Property
Casualty/Liability/Terrorism
P/C Soft Spots: % Accounts With Negative Price Change(1st Qtr. 2004)
58%
30%
16%12%
26% 23%
11% 11%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Comm Prop BizInterruption
Terror Comm Auto WC GL EPL Umbrella
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
More moderation is evident in the commercial
casualty segments
Property
Casualty/Liability/Terrorism
P/C Soft Spots: % Accounts With Negative Price Change(2nd Qtr. 2002)
0% 0% 1% 0% 0% 0%1%0%5%
10%15%20%25%30%35%40%45%50%55%60%
Comm Prop BizInterruption
Terror Comm Auto WC GL EPL Umbrella
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Property
Casualty/Liability/Terrorism
Average Expenditures on Auto Insurance: US vs. Iowa
$668 $6
91 $706
$704
$683
$687 $7
18
$781
$842 $8
71
$429
$445
$456
$459
$466 $4
79 $513
$400
$450
$500
$550
$600
$650
$700
$750
$800
$850
$900
95 96 97 98 99 00 01 02* 03* 04*
US IowaCountrywide auto insurance
expenditures are expected to rise 3.5% in 2004
*III Estimates; Estimates for 2002-2004 based on BLS CPI data for motor vehicle insurance.Source: NAIC, Insurance Information Institute
Average Expenditures on Homeowners Ins.: US vs. Iowa
$418$440 $455
$481 $488$508
$536$558
$598 $615
$382$358$347
$323$312$300
$200
$300
$400
$500
$600
$700
95 96 97 98 99 00 01 02* 03* 04*
*III Estimates; Estimates for 2002-2003 based on BLS CPI data for tenants and household insurance 2002/3 .Source: NAIC, Insurance Information Institute.
Average US HO expenditures are expected to rise by just 2.8% in 2004
Homeowners Insurance Expenditureas a % of Median Home Price
$1
07
,20
0
$1
15
,80
0
$1
21
,80
0
$1
28
,40
0
$1
33
,30
0
$1
39
,00
0
$1
47
,80
0
$1
58
,10
0
$1
70
,00
0
$1
10
,50
00.39%
0.38%
0.37%
0.34%
0.33%
0.35%
0.36%
0.37%0.37%
0.38%
$100,000
$125,000
$150,000
$175,000
$200,000
94 95 96 97 98 99 00 01 02 03
0.30%
0.33%
0.35%
0.38%
0.40%Median Sales Price of Existing HomesHO Insurance Expenditure as a % of Sales Price
Source: Insurance Information Institute calculations based on data from National Association of Realtors, NAIC.
HO
Exp
end
iture as %
of Sales P
riceMed
ian
Hom
e S
ales
Pri
ce
The cost of homeowners
insurance relative to the
price of a typical home has fallen
LEGAL LIABILITY & TORT
ENVIRONMENT
There is Was is Was a Glimmer of Hope for Tort Reform
Best Chance for Tort Reform in Years is Gone• Medical Malpractice
States—already happening: 20+ states have capsFederal reform discussed in Congress but bill failed in SenateAttempt to get caps for specialties failed February 2004
• Class Action ReformClass Action Fairness ActFailed by 1 Vote 10/22/03; Failed Again in 2004
• Asbestos ReformFairness in Asbestos Injury Resolution of 2003; Failed Apr. 2004
• Punitive Damages—What’s ReasonableSupreme Court ruled favorably in Campbell v. State Farm
Cost of U.S. Tort System($ Billions)
Source: Tillinghast-Towers Perrin.
$129 $130$141 $144 $148
$159 $156 $156$167 $169 $180
$205
$233
$298
$0
$50
$100
$150
$200
$250
$300
$350
90 91 92 93 94 95 96 97 98 99 00 01 02 05F
Tort costs consumed 2.23% of GDP in 2002
Per capita “tort tax” expected to rise to $1,003 by 2005, up
from $809 in 2002
Where the Tort Dollar Goes(2002)
Source: Tillinghast-Towers Perrin
Awards for Non-Economic
Loss24%
Claimants' Attorney Fees
19%Awards for
Economic Loss22%
Defense Costs14%
Administration21%
Tort System is extremely inefficient:
Only 22% of the tort dollar compensates victims for economic losses
At least 54% of every tort dollar never reaches the victim
Personal, Commercial & Self (Un) Insured Tort Costs*
$17.0$49.1 $57.2
$87.4$17.1
$51.0$70.9
$78.5
$5.4
$20.1
$29.6
$42.9
$0
$50
$100
$150
$200
$250
1980 1990 2000 2002
Commercial Lines Personal Lines Self (Un)Insured
Bil
lion
s
Total = $39.5 Billion
*Excludes medical malpracticeSource: Tillinghast-Towers Perrin
Total = $120.2 Billion
Total = $157.7 Billion
Total = $208.8 Billion
Average Jury Awards1994 vs. 2001and 2002
419
187
333
1,18
5
1,14
0 1,74
4
1,21
0
309 75
0
3,09
9 3,91
3
1,19
9
221 76
7
4,42
1
6,24
6
5,60
1
7,795
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
Overall VehicularLiability
PremisesLiability
Wrongful Death MedicalMalpractice
ProductsLiability
($00
0)
1994 2001 2002
Source: Jury Verdict Research; Insurance Information Institute.
The average jury award appears to be leveling out
Business Leaders Ranking of Liability Systems for 2004
Best States1. Delaware2. Nebraska3. Virginia4. Iowa5. Idaho6. Utah7. New Hampshire8. Minnesota9. Kansas10. Wisconsin
Worst States41. Missouri42. Arkansas43. Montana44. Illinois45. Texas46. California47. Louisiana48. Alabama49. West Virginia50. Mississippi
Source: US Chamber of Commerce States Liability Systems Ranking Study; Insurance Info. Institute.
The Nation’s Judicial Hellholes
Source: American Tort Reform Association; Insurance Information Institute
City of St. Louis, MO
CALIFORNIA
Alameda County
Los Angeles County
San Francisco County
Orleans Parish, LA
I
Madison County, IL
TEXAS
Jefferson County
Hidalgo County
Starr County
Mississippi’s 22nd Judicial
District
INSURANCE SCORING (CREDIT)
Importance of Rating Factors by Coverage Type
Coverage Factor 1 Factor 2 Factor 3
BI Liability Age/Gender Ins. Score Geography
PD Liability Age/Gender Ins. Score Geography
PIP Ins. Score Geography Yrs. Insured
Med Pay Ins. Score Limit Age/Gender
Comprehensive Model Year Age/Gender Ins. Score
Collision Model Year Age/Gender Ins. Score
Source: The Relationship of Credit-Based Insurance Scores to Private Passenger Automobile Insurance Loss Propensity Michael Miller, FCAS and Richard Smith, FCAS (EPIC Actuaries), June 2003 (Presented at June 2003 NAIC meeting).
1.07
1.53
1.35
1.14
0.990.94
0.99
0.83 0.810.74 0.75
0.4
0.6
0.8
1.0
1.2
1.4
1.6
NoScore
1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th
Score Range
Avg
. Rel
ativ
e L
oss
Rat
ioTexas Auto: Relative Loss Ratio (by Credit Score Decile, Total Market)*
*Each decile contains approximately 15,300 policies.
Includes standard and non-standard policyholders.
Interpretation:
Those with poorest credit scores generated losses more than double that of those with the best scores
Source: University of Texas, Bureau of Business Research, March 2003.
1st Decile = Lowest Credit Scores
10th Decile = Highest Credit Scores.
Extremely strong statistical evidence linking credit score with loss/claim outcomes:•Credit score & likelihood of positive claim (p<.0001)•Size of loss related to credit score (p<.0001)•Correlation between relative loss ratio and credit score (r = .95)
Average Loss = $695
$668
$918
$846
$791
$707 $703$681
$631
$584$568 $558
$500
$600
$700
$800
$900
$1,000
NoScore
1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th
Score Range
Avg
. In
curr
ed L
oss
per
Pol
icy
Texas Auto: Average Loss per Policy (by Credit Score Decile, Total Market)
Interpretation:
Those with poorest credit scores generated incurred losses 65% higher
those with the best scores
Source: University of Texas, Bureau of Business Research, March 2003.
1st Decile = Lowest Credit Scores
10th Decile = Highest Credit Scores.
9%
33%
18%
10%
3%0%
-7%-11%
-14% -15%-19%
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
NoHit/Thin
File
607 659 693 722 748 774 802 837 894 997
Score Range
Rel
ativ
e P
ure
Pre
miu
mIndicated Relative Pure Premium by Insurance Score (PD Liability)*
Interpretation:
Those with poorest credit scores had loss experience 33% above average while
those with the best scores had loss experience that was 19% below average
Source: EPIC Actuaries, June 2003
Example: Credit Discount Can Save $100s per Year*
Good Driver Discount
24%
Credit-Related
Discount36%
Safety/Anti-Theft
Discount19%
Multipolicy Discount
21%
$296
$174
$196
$154
*Annualized savings based on semi-annual data from example
Source: Insurance Information Institute
•Credit discount lowered annual premium by 14.7%
•Policyholder saved nearly $300
•Credit was single largest discount
•Opponents of credit will force people to pay more for coverage
Total Annual Savings from Discounts: $820
Adverse Impact: No Evidence
New Private Housing Starts(Millions of Units)
1.19
1.01
1.20
1.29
1.461.35
1.48 1.47
1.62 1.64 1.57 1.60
1.71
1.851.90
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04F
Source: US Department of Commerce; National Association of Realtors; Insurance Info. Institute
*Annualized January 2004 figure
New Private Housing Starts
•Housing market remains strong.
U.S. Homeownership Rate,1990 to 2003
Source: U.S. Census Bureau
63.9% 64.1%64.5%
64.0%
64.7%
65.4%65.7%
66.3%66.8%
67.4%67.8% 67.9%
68.3%
90 92 93 94 95 96 97 98 99 00 01 02 03
Homeownership is at a record high. Because you can’t buy a home without
insurance, insurance is clearly available and affordable, including to
millions of Americans of modest means and all ethnic groups.
Homeownership Ratesin Iowa, 1990 to 2003
Source: U.S. Census Bureau
70.7%
68.4%
66.3%
68.2%
70.1%
71.4%
72.8%72.7%72.1%
73.9%
75.2%
76.6%
73.9%73.4%
90 91 92 93 94 95 96 97 98 99 00 01 02 03
Homeownership in Iowa is high by
historical standards but off its 2001 peak
Homeownership Rates in Central Cities, 1990 to 2003
Source: U.S. Census Bureau
48.7%
49.2%
48.6%48.5%
49.5%49.7%
49.9%50.0%50.4%
51.4%51.9%51.7%
52.3%
48.7%
90 91 92 93 94 95 96 97 98 99 00 01 02 03
Homeownership rates in central cities is at an all time record high. Because you can’t buy a home
without insurance, insurance is clearly available and affordable, including to millions of Americans of
modest means and all ethnic groups.
Homeownership Rates AmongMinorities is Rising, 1994 to 2003
Source: U.S. Census Bureau
42.3
%
42.7
% 44.1
%
44.8
%
45.6
%
46.3
% 47.2
%
47.7
%
47.4
%
48.1
%
41.2
% 42.1
%
42.8
%
43.3
% 44.7
% 45.5
% 46.3
% 47.3
%
46.7
%
47.0
%
40%
42%
44%
46%
48%
50%
94 95 96 97 98 99 00 01 02 03
Blacks Hispanics•Homeownership rates for minorities are at or near
record highs•Minorities are using their good credit to buy homes
and get insurance
Percent Change in Homeownership, 1995-2001
*Includes American Indian, Eskimo, Aleut, Asian and Pacific Islander.Source: U.S. Census Bureau
10.7%
23.2%
45.9%
83.5%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
White Black Hispanic Other*
•Homeownership rates have increased much faster for minority groups than for whites•Minorities are using their good credit to buy homes and get insurance•4.3 million minority net new homeowners were created between 1995 and 2001
THE CHALLENGE OF TERRORISM
Sept. 11 Industry Loss Estimates($ Billions)
Life$2.7 (7%)
Aviation Liability
$3.5 (9%)
Other Liability
$10.0 (25%)
Biz Interruption$11.0 (27%)
Property -WTC 1 & 2$3.5 (9%)
Property - Other
$6.0 (15%)
Aviation Hull$0.5 (1%)
Event Cancellation
$1.0 (2%)
Workers Comp
$2.0 (5%)
Consensus Insured Losses Estimate: $40.2BSource: Insurance Information Institute
Terrorism Coverage Take-Up Rate Rising
Source: Marsh, Inc.; Insurance Information Institute
23.5%26.0%
32.7%
44.2%46.2%
2003:II 2003:III 2003:IV 2004:I 2004:II
Terrorism take-up rate for non-WC risk rose
through 2003 and continues to rise in 2004
TAKE UP RATE FOR WC COMP TERROR
COVERAGE IS 100%!!
$0.9 $1.1 $1.8$7.4
$15.4
$91.0
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
SearsTower
AirplaneAttack
El PasoEnergyTruckBomb
9/11 Attack RockefellerCtr. Truck
Bomb
NuclearPowerPlant
Sabotage
New YorkCity
AnthraxRelease
WC
Lo
ss
es
($
Bill
ion
s)
Source: Eqecat, NCCI.
Estimated Workers Comp Insured Losses & Deaths for Terrorist Events
1,000
12,300
173,000
1,300
Fatalities
Percent of 2003 Surplus Lost Due to a $25 Billion Terrorism Attack in 2004
With TRIA in Place
Source: The Economic Effects of Federal Participation in Terrorism Risk, Analysis Group, September 14, 2004.
Top 10 US P/C Insurers by Market Share
14.4%
32.5%
11.7% 12.6% 13.3%14.7%
11.7%
7.7%
22.1%
4.7%
1 2 3 4 5 6 7 8 9 10
Even with TRIA in place, some major insurers will lose more
than 10% of their policyholder surplus: Terrorism is a clear
threat to stability.
Summary• 2004/5 represent “sweet spot” in the current cycle for p/c insurance
(underwriting/earnings);
• Iowa returns have historically been a better-than-average state for the
industry, but some recent volatility
• Rising investment returns insufficient to support deep soft market in
terms of price, terms & conditions
• Reserve deficiency remains industry’s principal boogieman
• Major Challenges: Maintaining price/underwriting discipline
Managing variability/volatility of results
New/emerging/re-emerging risks
Insurance Information Institute On-Line
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