Uncovering the Mysteries of the Insurance Cycle

Uncovering the Mysteries of the Insurance Cycle 2011 CAS Spring Meeting

May 17th, 2011

Moderator Chris Najim, VP & Senior Actuary, Swiss Reinsurance America Corporation Panelists Shaun Wang, Chairman, Risk Lighthouse LLC Jessica Leong, Lead Casualty Specialty Actuary, Guy Carpenter & Company LLC Meyer Shields, Analyst, Stifel, Nicolaus & Company, Inc.

2011 CAS Spring Mee/ng

Underwri)ng Cycle for P&C Insurers

Dr. Shaun Wang, FCAS, MAAA Chair, Risk Lighthouse LLC

Professor, Georgia State University

Dynamics of Underwri)ng Cycles

•  Premium Rate Levels ü  Total WriBen Premium over private sector GDP ü Annual Growth Rate in NWP

•  Loss Levels ü UnderwriHng Loss (Development) Shocks ü Unexpected Investment Losses

•  Level of Capital and Surplus •  Market Structural Changes

ü California WC open raHng legislaHon in 1995 ü  St Paul Ins Co leP Medical Prof Liability market at the

end of 2001 5/17/2011 3 [email protected]

Total WriBen Premium to Private Sector GDP RaHo (1967-‐2009)

5/17/2011 4 [email protected]

5

-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 0910E

11F

Net WriBen Premium Growth Rate (Percent)

1975-‐78 1984-‐87 2000-‐03

Shaded areas denote “hard market” periods Sources: This slide is taken from iii.org, with credits to A.M. Best, ISO, Insurance Informa)on Ins)tute.

Net WriVen 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.

NWP was up 0.9% in 2010 with forecast growth of 1.4% in 2011

UnderwriHng Expense RaHo*: Personal vs. Commercial Lines, 1990-‐2010E**

24.3%24.7%24.4% 24.3%

26.4%26.6%

27.7%28.2%

29.9%

24.5%

26.4%

26.4%26.2%

24.7%24.7%24.6%24.4%

23.4%23.7%

23.5%

25.0%

23.9%

25.6%

25.6%

24.8%

30.5%30.6%

25.6%

28.5%

26.4%

26.6%

25.0%

29.1%

30.0%30.5%

28.4%

28.3%27.4%

27.8%

28.7%29.3%

29.9%

20%

22%

24%

26%

28%

30%

32%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E

Personal Lines Commercial Lines

*RaHo of expenses incurred to net premiums wriBen. **2010 figures are esHmates. Source: This slide is taken from iii.org, with credits to A.M. Best; Insurance InformaHon InsHtute.

Commercial lines expense ra)os are

highly cyclical

5/17/2011 [email protected] 7

1967 1968 1969 1970

1971 1972 1973

1974 1975

1976

1977 1978 1979 1980 1981

1982 1983

1984 1985

1986 1987 1988

1989 1990 1991

1992

1993 1994 1995 1996

1997

*1998 *1999 *2000

*2001

*2002

*2003 *2004 *2005

*2006 *2007

*2008

*2009

-‐0.01

0

0.01

0.02

0.03

0.04

0.05

90.0

95.0

100.0

105.0

110.0

115.0

120.0

125.0

130.0

135.0

140.0

Calendar Year

U.S. P&C Insurance Industry Combined Loss Ra)o (blue, le^) vs.

TWP/PSGDP Ra)o (red, right)

8

2.3

-2.1

-8.3

-2.6-6.6

-9.9 -9.8

-4.1

1

11.7

23.2

13.79.9

7.3

-6.7-9.5

-14.6-16 -15

-5

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

$3092 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

10E

11E

Prio

r Yr.

Res

erve

Rel

ease

($B

)

-6

-4

-2

0

2

4

6

8 Impact on C

ombined R

atio (Points)

Prior Yr. ReserveDevelopment ($B)

Impact onCombined Ratio(Points)

P/C Reserve Dev, 1992–2011E

Reserve Releases Remained Strong in 2010 But Should Begin to Taper Off in 2011

Sources: This slide is taken from iii.org, with credits to Barclay’s Capital; A.M. Best.

Prior year reserve releases totaled $8.8 billion in the first half of 2010, up from $7.1 billion in the first half

of 2009

0.000%

0.100%

0.200%

0.300%

0.400%

0.500%

0.600%

-‐30%

-‐20%

-‐10%

0%

10%

20%

30%

40%

50%

60%

70%

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

General Liability (Other Liability + Product Liability): Loss Ra)o Development versus NWP/PSGDP

LR Dev NPW/PSGDP


$0$50$100$150$200$250$300$350$400$450$500$550$600

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

US Policyholder Surplus:1975–2010

Source: This slide is directly taken from iii.org, with credit to A.M. Best, ISO, Insurance InformaHon InsHtute.

($ Billions)

The Premium-‐to-‐Surplus Ra)o = $0.76:$1 as of 12/31/10, A Record Low

Surplus as of 12/31/10 was a record $556.9B,

up from $437.1B at the crisis trough at 3/31/09.

P/C Insurer Impairments, 1969–2010 8

1512

711 9

34913 12

199

16 14 1336

493134

50 485560 58

4129

1612

3118 19

49 50

4735

1814 15 16 18

9

5

0

10

20

30

40

50

60

70

69 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 05 06 07 08 09 10

Source: This slide is taken from iii.org, with credit to A.M. Best Special Report “1969-‐2009 Impairment Review,” June 21, 2010; Insurance InformaHon InsHtute.

The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets

8 of the 18 in 2009 were small Florida carriers. Total also includes a few )tle insurers.

Shocks and Reac)ons: It requires a perfect storm to turn the market

•  1983-‐87 Liability crisis created a bust-‐and-‐boom of casualty insurance business

•  1992 Hurricane Andrew changed the way companies managed catastrophe accumulaHons, but did not turn the cycle

•  1994 California Northridge Earthquake had negligible impact on the cycle


ü APer a prolonged soPening market (1987-‐2000), industry did not have adequate cushion for major losses

ü Catastrophe event (9/11/2001) ü Bear stock market caused investment losses ü Waves of reserve increases prompted S&P report 19-‐Nov-‐2003 Insurance Actuaries – A Crisis of Credibility: “Actuaries are signing off on reserves that turn out to be wildly inaccurate”

The 2001-‐2003 Perfect Storm



This slide is taken from NCCI report


(100)

(80)

(60)

(40)

(20)

0

20

40

2001 Y

2002 Y

2003 Y

2004 Y

2005 Y

2006 Y

2007 Y

2008 Y

2009 Y

2010 Y

Billions

P&C Insurance Industry Investment Gains (Losses)

Realized Capital Gains Unrealized Capital Gains

•  The 2004 and 2005 major catastrophes did not turn the P&C market cycle

•  The industry enjoyed strong hard market during 2003-‐2005 and had redundant reserves

•  Investment income/gain on the rise

Katrina Didn’t Turn the P&C market


•  Insured property losses from the 3/11 Japan earthquake (9.0 magnitude) could range from $20 billion to $30 billion. This es7mate does not include the devasta7on brought about by the tsunami, damage to automobiles, damage to infrastructure and the impact of a demand surge on the cost of labor and materials for rebuilding.

•  From March 2010 to March 2011, reinsurers were hit by a major earthquake in Chile and two quakes in New Zealand, massive floods in Australia, two damaging windstorms and the Deepwater Horizon oil rig explosion.

Increased Catastrophe AcHviHes (iii.org)


•  The recent market soPening slide has lasted five years (2005-‐2010)

•  The 2008-‐2009 Financial Crisis brought heavy investment losses for P&C insurers, but it did not turn the market. Or should it have?

•  The 3/11/2011 Japan earthquake has not turned the market yet

•  So what will? •  A perfect storm seems to gather clouds

How stubborn can a soP market be?


A Perfect Storm in the Making?

•  A mega earthquake in the U.S. may trigger economic collapse and market meltdown

•  Unlike the 2008-‐2009 crisis, this Hme federal bailout is no longer available

•  Insurers may suffer asset losses due to defaults of municipal bond and corporate bonds



Muni Bond Exposures As of 9/30/2010

SNL top-tier entity Total

municipal bonds* ($M)

Surplus ($M) Invested assets ($M)

Total municipal

bonds/ surplus (%)

Total municipal

bonds/ invested

assets (%)

American International Group 45,520 28,876 84,219 157.6 54.0

Travelers Cos (TRV) 40,253 20,347 63,521 197.8 63.4

Auto Club Exchange Group 3,293 3,997 5,896 82.4 55.8

Mercury General Corp. (MCY) 2,474 1,559 3,277 158.7 75.5

COUNTRY Financial 1,893 1,807 3,446 104.8 54.9

Texas Farm Bureau 809 731 1,079 110.6 74.9

P&C Industry 363,291 547,042 1,303,796 66.4 27.9

Source: SNL Financial

Other Economic Factors

•  Rising oil prices may cause a double dip recession; on the other hand, an economic downturn may crash oil prices (Gail Tverberg)

•  QE2 will end by end of June 2011 •  VolaHlity in exchange rates will impact inflaHon in some areas and deflaHon in other areas

•  Housing Price volaHlity (divergence of replacement cost and housing market value)


Contact :

Phone: 1-‐678-‐732-‐9112 [email protected]

Uncovering the Mysteries of the Insurance Cycle

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