Transcript business08182009 - Insurance Information Institute

The “New Normal”
of Business and
Insurance
Defense Days Business Meeting
Westfield Insurance
Westfield, OH
August 18, 2009
Steven N. Weisbart, Ph.D., CLU, Senior Vice President and Chief Economist
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: (212) 346-5540  Cell: (917) 494-5945  [email protected]  www.iii.org
Presentation Outline:
The “New Normal” in…
• The U.S. Economy
• The P-C Insurance Industry
• The Liability Insurance Marketplace
• Litigation/Tort System Cost Trends
Q&A
The “New Normal”
in the U.S. Economy
Tough Times for
the Foreseeable Future
What Does the “New Normal”
Economy Look Like?
• High levels of unemployment/
underemployment
• Low levels of investment return
• Low levels of new borrowing
 Affects housing, autos, other consumer durables
• Low levels consumer demand/
business investment
 Significant increase in the personal saving rate, but
virtually all used to pay down outstanding debt
Unemployment and Underemployment
Rates: Rocketing Up in 2008-9
January 2000 through June 2009, seasonally adjusted
Percent
Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
18
16
14
12
10
8
6
4
2
0
U-6 went from 9.2% in April 2008 to 16.5% in June 2009
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
9.5% June 2009 unemployment rate (U-3) was the
highest monthly rate since 1983. Peak rate in the
last 30 years: 10.8% in Nov-Dec 1982.
U.S. Unemployment Rate Forecasts
Quarterly, 2009:Q3 to 2010:Q4
11.0%
10.6%
10.5%
10.0%
9.5%
10.6%
10.6%
10.4%
10.0%
10.0%
9.8%
9.8%
10.1%
10.0%
9.8%
9.6%
10.5%
9.9%
9.7%
9.6%
9.3%
9.0%
Broad agreement, for now:
Unemployment to peak in 2010:Q1.
8.9%
8.5%
09:Q3
09:Q4
10 most pessimistic
10:Q1
10:Q2
consensus
Sources: Blue Chip Economic Indicators (7/09); Insurance Info. Inst.
10:Q3
10:Q4
10 most optimistic
Households and Businesses
Are Now “Deleveraging”
Percent Change in Debt Held (Quarterly since 2004 at Annualized Rate)
Home Mortgage
16%
Consumer Credit
Business Corporate
12%
8%
4%
0%
Source: Federal Reserve Board, at http://www.federalreserve.gov/releases/z1/Current/z1r-2.pdf
2009:Q1
2008:Q4
2008:Q3
2008:Q2
2008:Q1
2007:Q4
2007:Q3
2007:Q2
2007:Q1
2006:Q4
2006:Q3
2006:Q2
2006:Q1
2005:Q4
2005:Q3
2005:Q2
2005:Q1
2004:Q4
2004:Q3
2004:Q2
2004:Q1
-4%
2.07
1.80
1.96
1.36
1.71
1.60
1.62
1.47
1.48
1.35
Housing
bubble
Recession
1.0
0.90
1.01
1.19
1.20
1.5
1.29
1.46
Recession
1.57
2.0
Measured by number of new units started,
exposure growth for HO insurers is low.
Housing start data also affects commercial
insurers with construction risk exposure.
1.64
Millions
of Units
1.85
Millions Fewer Private Homes
to be Started through 2010
0.55
0.76
I.I.I. estimate: each 100,000 decline in housing
starts “costs” home insurers $90 million in
gross premium. Estimated premium loss in
2008 vs. 2005: about $1 billion.
0.5
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08 09F 10F
Sources: US Department of Commerce; Blue Chip Economic Indicators (7/09); Insurance Information Inst.
Weak Economy, Tight Credit
are Hurting Auto Sales
Millions of Units Sold
17.8
18
17.5
17.4
17.1
16.6
16.9
Yearly new auto/light
truck sales are forecast
to drop by 6 million
units in 2009 vs. 2007
16.9
16.5
16.1
15
13.1
Falling auto sales will have a
smaller effect on auto insurance
exposure growth than problems
in the housing market will have
on home insurers
12
11.7
10.1
9
99
00
01
02
03
04
05
06
07F
08
09F
10F
Source: US Department of Commerce; Blue Chip Economic Indicators (7/09); Insurance Information Inst.
Theory: Re-ignited Inflation Won’t Threaten
Until the Economy Returns to a Full-Employment
Level—Likely a Few Years Away
The markets are
starting to worry that
the flood of money
for the recovery will
re-ignite inflation
(the spread between
10-Year TIPS and
10-Year T-Notes is
widening).
Source: Cooper, “Hints of
Recovery—And Fears of Inflation,”
BusinessWeek, May 11, 2009, p. 8
The “New Normal”
for the P.C. Insurance
Industry
Premiums, Investments
Flat or Down;
Pressure on Expenses
Year-to-Year Change in Net Written
Premium, 2000-2009:Q1
15.3%
First multi-year
decline in NWP
since 1930-33
10.0%
8.4%
5.0%
4.2%
3.9%
0.5%
-1.0% -1.4%
-3.6%
2000
2001
2002
2003
2004
Sources: A.M. Best, but 2009:Q1 is from ISO.
2005
2006
2007
2008
2009:Q1
Underwriting Gain/(Loss) 1975-2009:Q1
Billions
$35
$25
In the past 34 years, only twice has the p-c insurance
industry earned an underwriting profit of over $1.7
billion. In contrast, in that span it’s had underwriting
losses of $20 billion or more in 14 years.
$15
$5
-$5
-$15
-$25
-$35
-$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
05
06
07
08
09:Q1*
-$55
Sources: A.M. Best; ISO; Insurance Information Institute
Underwriting Expense Ratios Likely
Will Rise as Premium Growth Lags
Personal
32%
30%
Commercial
2009:Q1 blended
ratio was 29.1%
31.1%
30.8%
29.4%
29.9%
30.0%
28.3%
29.1%
27.7%
28%
26.6%
26%
25.0%
25.6% 25.6% 24.8%
24.3%
24.5%
24% 23.4%
25.6%
26.4%
26.3%
25.0%
26.1%25.9%
26.2%
24.7%
24.4% 24.6%
22%
96
97
98
99
00
01
*Ratio of expenses incurred to net premiums written.
Sources: A.M. Best; ISO; Insurance Information Institute
02
03
04
05
06
07
08
P/C Insurance Industry Combined
Ratio, 2001-2009:Q1
120
115.8
As recently as 2001, insurers
paid out nearly $1.16 for every
$1 in earned premiums
Relatively
low CAT
losses,
reserve
releases
2005 ratio benefited from
heavy use of reinsurance
which lowered net losses
110
107.5
Best combined
ratio since 1949
(87.6)
100
105.1
102.2
101.2
100.8
100.1
Including
Mortgage
& Fin’l
Guarantee
line
98.4
95.5
92.6
Cyclical
Deterioration
90
2001
2002
2003
2004
*Includes Mortgage & Financial Guarantee insurers.
2005
2006
2007
2008
Sources: A.M. Best.
2008* 2009:Q1
15
P/C Investment Income as a % of Invested
Assets Follows 10-Year U.S. T-Note
P-C Inv Income/Inv Assets
10-Year Treasury Note
9%
Investment yield
historically tracks 10year Treasury note
quite closely
8%
7%
6%
5%
4%
3%
*Blue Chip consensus forecasts. Sources: Board of Governors, Federal Reserve System; Blue Chip
Economic Indicators (7/09 issue) A.M.Best; Insurance Information Institute.
10*
09*
08
07
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
2%
The “New Normal”
in the
Liability Insurance
Marketplace
Liability: Average Yearly Cost* Small and
Medium-Sized Businesses, 2002-2008
2006
2007
2008
$0.50
$0.00
$0 - $200M
$201M-$500M
*per $1,000 of revenue, across entire liability program (full population)
Source: Marsh, 2008 Limits of Liability Report
$501M-$1B
$0.65
$1.06
$0.95
$1.08
$1.27
$1.03
$0.72
$0.96
$1.07
$1.24
$1.30
$0.94
$1.00
$1.56
$2.33
$2.31
$1.50
2005
Costs have generally
declined since 2004
$1.89
$2.00
$1.96
$3.00
$2.50
2004
$2.49
$3.50
2003
$3.09
$3.21
2002
$1.37
$4.00
Liability: Average Yearly Cost* Medium
and Large Businesses, 2002-2008
2005
2006
2007
$5B-$10B
*per $1,000 of revenue, across entire liability program (full population)
Source: Marsh, 2008 Limits of Liability Report
$10B+
$0.10
$0.14
$0.16
$0.13
$0.18
$0.17
$0.13
$0.27
$0.32
$0.00
$1B-$5B
2008
$0.44
$0.23
$0.25
$0.36
$0.42
$0.54
$0.63
$0.69
2004
Costs have generally
declined since 2004.
$0.24
$0.50
2003
$0.38
$0.75
2002
$0.77
$0.67
$0.86
$1.00
$1.660
$1.645
$1.570
$1.535
$1.425
$1.575
$2.015
$2.045
$1.710
$1.405
$2.0
$1.334
$1.432
$2.5
$1.941
$3.0
$2.011
In 2008, capacity returned to 2000 levels,
but it probably retreated again in 2009
$1.721
Billions
Excess Liability Market Capacity
– North America
$1.5
Source: Marsh, 2008 Limits of Liability Report
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
19
94
$1.0
Litigation, Tort System
Cost Trends
In the ‘60s, ’70s, and ’80s, Tort System
Costs Grew Much Faster than Inflation
12%
10%
8%
6%
4%
Tort Costs
CPI
2%
1961-70
1971-80
1981-90
1991-2000
2001-08
Sources: US Bureau of Labor Statistics, Tillinghast-Towers Perrin, 2008 Update on U.S. Tort Costs; Insurance Info. Inst.
In the 1990s and Since 2003, Tort
System Cost Growth Has Moderated
Rate of Tort System Cost Growth
15%
CPI
12%
9%
6%
3%
0%
-3%
-6%
2001
2002
2003
2004
2005
2006
2007
2008
Sources: US Bureau of Labor Statistics, Tillinghast-Towers Perrin, 2008 Update on U.S. Tort Costs; Insurance Info. Inst.
Over the Last Three Decades, Total Tort Costs*
as a % of GDP Appear Somewhat Cyclical
Tort Sytem Costs
$300
Tort Costs as % of GDP
2.50%
Tort System Costs
$250
2.25%
$200
$150
2.00%
$100
1.75%
2009-2010 Growth in Tort Costs as % of
GDP is due in part to shrinking GDP
$50
Sources: Tillinghast-Towers Perrin, 2008 Update on US Tort Cost Trends, Appendix 1A;
I.I.I. calculations/estimates for 2009 and 2010
2010E
2008E
2006
2004
2002
2000
1998
*Excludes the tobacco settlement, medical malpractice
1996
1994
1992
1990
1988
1986
1984
1982
1.50%
1980
$0
Tort Costs as % of GDP
Billions
In 10 Years, the Average Jury Award
Grew (Inflation-Adjusted) by 60%
2009 Inflation-Adjusted $
$1,224
$1,262
Nominal $
$986
$1,046
$827 $961
$991
$834
$756
$747
$725
$602
$700
$913
$928
$931
$900
$790
($000)
$1,100
$1,052
$1,152
$1,062 $1,202
$1,300
$500
1998
1999
2000
2001
2002
2003
Source: Jury Verdict Research; Insurance Information Institute.
2004
2005
2006
2007
Average Jury Awards
for Selected Cases
$1,500
2007
$1,375
2002
$1,224
1998
Overall
$590
$564
$472
$0
$219
$170
$500
$602
$834
($000)
$1,000
Vehicular Liability
Source: Jury Verdict Research; Insurance Information Institute.
Premises Liability
Average Jury Awards
for Selected Cases (cont’d)
$6,000
2002
2007
$4,844
$4,426
$4,043
$2,854
$2,000
$2,731
$3,000
$2,338
($000)
$4,000
$3,717
$4,164
$5,000
$5,487
1998
$1,000
$0
Wrongful Death*
Medical Malpractice
*Adult males
Sources: Jury Verdict Research; Insurance Information Institute.
Products Liability
Shareholder Class Action Lawsuits
Filed Annually in Federal Courts*
300
266
250
202
200
241
231
164
227
209 216
188
173
163
238
186
224
182
150
176
119
111
87
100
In 2008, litigation against
financial services firms
accounted for more than
half (114 class actions)
50
0
91 92 93
94 95
96 97 98
99 00 01
02 03 04
05 06
07 08 09*
*Securities fraud suits filed in U.S. federal courts; 2009 figure is current through 07/15/09. 2001 figure excludes
312 IPO suits that were unique to that year.
Source: Stanford University School of Law (http://securities.stanford.edu ); Insurance Information Institute
EEOC Workplace Discrimination
Complaints, FY1997-FY2008
Thousands of Complaints
Biggest jumps came
from retaliation and
age discrimination
complaints
100
95.4
90
84.4
80.7
80
79.9
79.6
82.8
81.3
80.8
79.4
77.4
75.4
75.8
05
06
70
97
98
99
00
01
02
03
Source: EEOC at http://www.eeoc.gov/stats/charges.html
04
07
08
Insurer Defense and Cost Containment Expenses
as a Percent of Incurred Losses, 2005-2008*
2007
2008
24.4%
2006
24.5%
27.1%
24%
2005
28.3%
5.9%
6.1%
6.6%
6.6%
10.7%
11.6%
9.9%
10.0%
11.4%
12.0%
8%
11.0%
16%
11.1%
Percent of Incurred Losses
32%
0%
ity
iabil
L
l
a
r
Gene
***
o
rs C
e
k
r
Wo
mp
ia
uto L
A
.
m
Com
bil ity
Lia
PPA
bi lity
*Net of reinsurance, excl. state funds. ***Excludes products liability.
Sources: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline
Data, LLC; Insurance Information Institute.
Insurer Defense and Cost Containment Expenses
as a Percent of Incurred Losses, 2005-2008*
2008
2007
2006
134.5%
2005
34.3%
41.2%
36.7%
42.2%
58.1%
55.1%
56.6%
48.0%
64.5%
50%
78.6%
100%
70.0%
Percent of Incurred Losses
150%
0%
Comm. M-P**
Medical Malpractice
Products Liability
*Net of reinsurance. **Liability portion only.
Sources: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via
Highline Data, LLC; Insurance Information Institute.
The Administrative Expense Portion of Tort
Costs Has Stabilized Since the 1980s
2000-2007
1990-1999
1980-1989
1970-1979
1960-1969
1950-1959
Source: Tillinghast-Towers Perrin, 2008 Update on U.S. Tort Costs
23.5%
23.0%
22.0%
26.0%
29.0%
32.2%
What Else Could Drive
Tort System Costs Up?
• A switch to small, fuel-efficient cars with less crashprotection could lead to more severe accidents
• If a Financial Products Safety Commission is created
as part of regulatory reform, suits might be filed
claiming damages resulting manufacture or sale of
“defective” financial products
• A more liberal federal judiciary and executive branch
could ease standards for bringing tort actions
• There are many emerging risks to be alert to
Landscape of Emerging Risks
Ageing
infrastructures
Telemedicine
Cloning
Deteriorating
safety
standards
Endocrine
Stress at
Media
Food
disruptors
risks
Contingent work
contaminants
Dirty
Business
Cyber
Indoor
bombs
Interruption
pollution
Alcohol
risks
Spread of
Toxic mold
Implants
RSI
diseases
Mega
Drinking
Intercontinental
water quality
Space
Tsunami
data transmission
weather
Resistance to
Botox
antibiotics
CO2 trading Electrosmog
Business
Loss of
ethics
reputation
Off-shore &
Power
Invasion
internet
Organised Customised system
of privacy
markets
crime
break
drugs
Privatisation
Pervasive
Caldera
Bogus parts
computing Nanotechnology
erruption
Source: Sean Russell, “Emerging Risks: Risk perception at Swiss Re,” Presentation delivered July 4, 2007,
at www.casact.org
Presentation Summary
• The U.S. economy will likely struggle for perhaps a
few more years
• The P-C insurance industry will likely be challenged
by low exposure growth, low investment results, and
expense and profitability pressures
• The costs of liability insurance and the tort system
generally have recently moderated, but not in all cases
• There are many emerging risks to be alert to
Q&A
Insurance Information
Institute On-Line
Thank you for your time
and your attention.