Transcript Threat - Insurance Information Institute

Setting the Scene
Insurance Reform:
Opportunity or Threat?
CEA International Insurance Conference
Athens, Greece
June 16, 2011
Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist
Insurance Information Institute  110 William Street  New York, NY 10038
Office: 212.346.5540  Cell: 917.494.5945  [email protected]  www.iii.org
Capital Markets
Will Reform Help or Hinder the
Insurance Industry’s Capital
Management?
(and will it anticipate problems related to
one or a string of major sovereign defaults)?
2
Systemic Risk
Is Insurance Reform…
 an Opportunity for regulators to
target activities that can create or
disseminate systemic risk?
 a Threat to blindly treat large firms
differently from smaller ones?
– This risks missing activities that are
systemically important
– It creates an “unlevel playing field”
3
In the U.S., an Insurer Might be
Systemically Important if…
1. It is “interconnected”
2. It provides a critical product or service that
cannot easily be obtained from another provider
3. It has insufficient liquidity to pay claims or other
obligations in a timely manner and so must
liquidate assets at “fire sale” prices
4. It is highly leveraged, so that even small
shortfalls are magnified
5. It isn’t closely regulated regarding the relation of
its assumption of risk to its capital, so that it can
take on unacceptable levels of risk
6. It is large
4
Capital Adequacy
Is Insurance Reform…
 an Opportunity for each insurer to
“right size” its capital to the particular
risks it is assuming?
 a Threat to require some or all
insurers to carry much more capital
than they need, in order to assure
regulators that they are likely to
weather any future financial storm?
5
Universal Accounting Systems
Is Insurance Reform...
 an Opportunity to change insurance
accounting so that investors can
compare firms around the globe and
firms in other sectors of the financial
industry?
– If so, won’t this lower the cost of capital?
 a Threat to change insurance
accounting so that results will be much
more volatile and harder to understand,
even for one firm over time?
6
Mergers & Acquisitions
Will Reform Stifle or Boost M&A?
7
Is Large Scale Now Necessary?
Or Is It to be Avoided?
Is Insurance Reform…
 an Opportunity to facilitate insurer
diversification of operations and/or
lower costs through greater scale?
 a Threat to raise the cost of
regulatory compliance for large firms
and thereby favor smaller firms over
larger ones?
8
# of Mergers & Acquisitions, Worldwide,
Hasn’t Changed Much (2007-2010)
0
100
300
122
111
500
92
329
400
Services
70
422
40
250
27
26
200
Distribution
350
Health/Managed Care
69
2007
92
168
2008
68
139
2009
83
158
2010
Life-Annuity
65
157
Property-Casualty
600
700
800
Number of Transactions
Sources: Conning Research; Insurance Information Institute.
9
$ Value of Mergers & Acquisitions,
Worldwide, Sharply Down (2007-2010)
$0
$70
$105
$6.9
$13.9
Services
$15.3
$9.4
$7.6
$35
Distribution
$13.8
$5.8
$0.8
$9.8
$1.2
$2.4
$45.1
$24.4
Health/Managed Care
$51.8
2007
$5.5
$2.3
2008
Life-Annuity
$50.6
$16.5
2009
$30.3
2010
$15.0
Property-Casualty
$140
$ Billions
Sources: Conning Research; Insurance Information Institute.
10
Growth in Emerging Markets
Low Insurance Penetration
and Density
in Rapidly-Growing Economies
Implies Much Room for Growth
11
Greatest Growth Prospects
Is Insurance Reform…
 an Opportunity to lower the
obstacles to expansion of operations
around the globe?
 a Threat to raise the cost of
compliance, hindering expansion of
operations around the globe?
12
IMF Forecasts: Real GDP Growth in
Selected Emerging Economies in 2011 & 2012
2011P
10.0%
Advanced
economies:
2.5% in 2011
and 2012.
2012P
9.6% 9.5%
8.2%
7.8%
7.5%
6.8%
6.3%
4.8%
5.0%
6.9%
6.6%
5.5%
5.1%
4.6%
4.5% 4.5%
4.1%
4.6% 4.5%
4.0%
2.5%
0.0%
China
India
Russia
Brazil
Mexico
Turkey
Vietnam
Nigeria Commonwealth
of Independent
States*
Growth in emerging and developing economies implies more rapid
growth of insurance exposures relative to the U.S., W. Europe and Japan.
But will exposure growth mean comparable (or greater) premium growth?
*excluding Russia
Sources: IMF, World Economic Outlook, April 2011 Update; Insurance Information Institute.
13
Premium/GDP* (Penetration) in
Selected Emerging Economies, 2009
life
6%
5%
non-life
Non-life
U.S.
4.5%
France 3.1%
Germany 3.7%
4.6%
Life
3.5%
7.2%
3.3%
4%
3%
2.5%
2.3%
2%
1.6%1.5%
1.1%
1%
1.1%
0.9%
1.1%
0.7%0.8%
0.6%
0.4%
0.1%
0.2%
0.0%
0%
China
India
Russia
Brazil
Mexico
Turkey
Vietnam
Nigeria
Even despite the rapid growth in these economies, insurance penetration
is increasing at a high rate. The combination—growing penetration in a
rapidly growing economy—implies extremely rapid premium growth.
*both measured in U.S. dollars; premiums exclude cross-border business
Source: Swiss Re Sigma, No. 2/2010
Premium* per capita (Density) in
Selected Emerging Economies, 2009
$300
life
$276.4
non-life
$250
$200
$150
$100
$50
$127.9
$123.8
$88.2
$70.1
$81.1
$40.0
$89.6
$47.7
$6.7
$15.3
$4.5
$7.6$8.7
$0.9$5.1
$0
China
India
Russia
Brazil
Mexico
Turkey Vietnam Nigeria
From 2001-2009, Non-life Insurance Density in India tripled, and in China it grew 5fold. But the most spectacular Density growth in these years belongs to Russia:
in 2009 non-life Insurance Density in Russia was 9 times what it was in 2001!
* premiums measured in U.S. dollars, exclude cross-border business
Source: Swiss Re Sigma, various volumes
What Reform Shouldn’t Change
16
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!
17
In the Last Crisis, the Insurance Sector
Helped 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
18
Thank you for your time
and your attention!