Transcript PCIEC-1112091 - Insurance Information Institute

Top 10 Economic and Public
Policy Initiatives for 2010:
Impact & Implications for the
P/C Insurance Industry
21st Annual Property-Casualty Insurance Executive Conference
New York, NY
November 12, 2009
Robert P. Hartwig, Ph.D., CPCU, President & Economist
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: (212) 346-5520  Fax: (212) 732-1916  [email protected]  www.iii.org
Presentation Outline
I. Economic Policy Initiatives
1.
2.
3.
4.
Macroeconomic Policy
Employment Policy & Actions
Anti-Inflation Strategy
International Trade Policy
II. Public Policy Initiatives
5. Tort Reform
6. Healthcare Reform
7. Financial Services Regulation
8. Catastrophe Risk Funding
9. Climate Change/Energy Policy
10.Populism and Government Expansionism
Q&A
2
I. ECONOMIC
POLICY
What the Financial Crisis,
Recession & Government
Recovery Strategy Mean for the
Industry’s Exposure Base
and Growth Prospects
#1 Macroeconomic
Policy
Growth in the Macroeconomy Will
Stimulate Personal & Commercial
Lines Exposure and Demand but
Less than Anticipated
0%
-4%
-6%
-2.7%
Recession began in December
2007. Economic toll of credit
crunch, housing slump, labor
market contraction has been
severe but recovery is in sight
2.9%
2.8%
2.7%
2.6%
Personal and
commercial lines
exposure base
have been hit
hard and will be
slow to come
back
-0.7%
-2%
-0.7%
-0.2%
2.4%
3.5%
1.5%
2.9%
3.1%
3.6%
2.5%
0.1%
2%
1.6%
0.8%
4%
3.7%
6%
The Q1:2009 decline was
the steepest since the
Q1:1982 drop of 6.4%
4.8%
4.8%
Real GDP Growth*
-5.4%
-6.4%
*Blue bars are Estimates/Forecasts from Blue Chip Economic Indicators.
Source: US Department of Commerce, Blue Economic Indicators 10/09; Insurance Information Institute.
5
10:4Q
10:3Q
10:2Q
10:1Q
09:4Q
09:3Q
09:2Q
09:1Q
08:4Q
08:3Q
08:2Q
08:1Q
07:4Q
07:3Q
07:2Q
07:1Q
2006
2005
2004
2003
2002
2001
2000
-8%
Length of U.S. Business Cycles,
1929-Present*
Duration (Months)
120
110
100
Contraction
Expansion Following
Average Duration**
Recession = 10.4 Months
Expansion = 60.5 Months
90
106
Length of
expansions
greatly
exceeds
contractions
58
80
80
70
60
50
50 43
45
39
37
40
92
73
36
24
30
20
13
10
Month 0
Recession
Started
120
Aug.
1929
May
1937
8
Feb.
1945
11
Nov.
1948
10
8
July
1953
* Through June 2009 (likely the “official end” of recession)
Aug.
1957
10
Apr.
1960
11
Dec.
1969
16
12 16
6
Nov.
1973
Jan.
1980
Jul.
1981
**Post-WW II period through end of most recent expansion.
Sources: National Bureau of Economic Research; Insurance Information Institute.
19
8
Jul.
1990
8
Mar.
2001
Dec.
2007
6
5%
0%
-5%
Real NWP Growth
-10%
6%
4%
5.2%
78
79
-0.9%
80-7.4%
81 -6.5%
82
-1.5%
1.8%
83
4.3%
84
85
86
5.8%
87
88
0.3%
-1.6%
89
-1.0%
90
91
-1.8%
-1.0%
92
3.1%
93
94
1.1%
0.8%
95
0.4%
96
0.6%
97
-0.4%
98
-0.3%
99
1.6%
00
5.6%
01
02
7.7%
03
1.2%
04
-2.9%
05
-0.5%
06
-3.8%
07
-4.4%
08
-4.5%
09
Real NWP Growth
15%
10%
8%
2%
0%
-2%
Real GDP
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 10/09; Insurance Information Inst.
-4%
7
Real GDP Growth
20%
P/C insurance industry’s growth
is influenced modestly by growth
in the overall economy
13.7%
25%
18.6%
20.3%
Real GDP Growth vs. Real P/C
Premium Growth: Modest Association
Regional Differences
Will Significantly
Impact P/C Markets
Recovery in Some Areas Will Begin
Years Ahead of Others & Speed of
Recovery Will Differ By Orders of
Magnitude
State Economic Growth Varied
Tremendously in 2008
Eastern US growing more
slowly than Plains,
Mountains
9
Fastest Growing States in 2008:
Plains, Mountain States Lead
Real State GDP Growth
Percent
8.0%
Natural resource and
agricultural states have done
better than most others
recently, helping insurance
exposure in those areas
7.3%
7.0%
6.0%
5.0%
4.4%
3.5%
4.0%
2.9%
3.0%
2.7%
2.5%
2.1%
2.0%
IA
TX, MN,
NM, WA
2.0%
1.0%
0.0%
ND
WY
SD
CO
OK
WV
Source: US Bureau of Economic Analysis; Insurance Information Institute.
10
Slowest Growing States in 2008:
Diversity of States Suffering
Real State GDP Growth
Percent
KY
CT
AZ
GA
IN
NV
RI
MI
DE
FL
OH
AK
0.0%
-0.1%
-0.5%
-1.0%
-1.5%
-2.0%
-0.4%
-0.6%-0.6%-0.6%
-0.6%
-0.9%
States in the North,
South, East and West
all represented among
hardest hit but for
differing reasons
-1.5%
-1.6%-1.6%
-1.7%
-2.0%
-2.5%
Source: US Bureau of Economic Analysis; Insurance Information Institute.
11
P-C Exposures
Impacted by
Government
Stimulus Policy
Impacts on
Many Lines
Auto/Light Truck Sales,
1999-2010F (Millions of Units)
19
18
New auto/light truck sales
are expected to experience a
net drop of 6.5 million units
annually by 2009 compared
with 2005, a decline of 37%
and the lowest level since the
late 1960s
Weak economy, credit crunch are
hurting auto sales; Gas prices
have been a factor too.
17.4
17.8
17.5
17.1
16.6
17
16
16.9
16.9
16.5
16.1
“Cash for Clunkers” should
generate $225M - $375M in net
new personal auto premiums
15
14
13.1
13
Impacts of falling auto sales will
have a less pronounced effect on
auto insurance exposure growth
than problems in the housing
market will on home insurers
12
11
10
11.8
10.4
9
99
00
01
02
03
04
05
06
07
08
09F 13 10F
Source: US Department of Commerce; Blue Chip Economic Indicators (10/09); Insurance Information Inst.
1.80
1.96
1.85
1.36
1.60
1.57
1.64
1.62
0.90
90
91
92
93
94
95
96
97
98
99
00
01
0.58
I.I.I. estimates that each incremental
100,000 decline in housing starts costs
home insurers $87.5 million in new
exposure (gross premium). The net
exposure loss in 2009 vs. 2005 is
estimated at about $1.3 billion.
0.81
1.47
1.48
1.35
New home starts
plunged 34%
from 2005-2007;
Drop through
2009 is 72%
(est.)—a net
annual decline of
1.49 million
units, lowest
since record
began in 1959
1.01
1.29
1.20
1.46
Impacts also for comml. insurers with
construction risk exposure
1.19
2.1
2.0
1.9
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
0.5
1.71
Exposure growth due to home construction
forecast for HO insurers is dim for 2009
with some improvement in 2010.
2.07
New Private Housing Starts,
1990-2010F (Millions of Units)
02
03
04
05
06
07
08 09F 10F
14
Source: US Department of Commerce; Blue Chip Economic Indicators (10/09); Insurance Information Inst.
Private Sector Business Starts,
1993:Q2-2008:Q4*
Thousands
220
192
188
187
189
186
190
194
191
199
204
202
195
196
196
206
206
201
192
198
206
206
203
211
205
212
200
205
204
204
197
203
201 209
203
192
192
193
201
204
202
210
212
209
216
220
223
220
220
210
221
212
204
218
210
209
195
187
189
230
189,000 business starts
were recorded
2008:Q4, the lowest
level since 1995
210
186
180
Business starts are down 15% in
the current downturn, holding
back most types of commercial
insurance exposure
174
180
175
190
186
200
170
160
150
93
94
95
96
97
98
99
00
01
02
03
*Latest available as of Oct. 2009.
Source: Bureau of Labor Statistics: http://www.bls.gov/news.release/cewbd.t07.htm
04
05
06
07
15
08
Business Bankruptcy Filings,
1980-2009*
90,000
80,000
60,000
50,000
40,000
30,000
20,000
10,000
There were 30,333 business bankruptcies
during the first half of 2009, up 64% from
2008: H1 and on track for about 60,000 for
all of 2009, the most since 1993. Current
recession will generate 200%+ surge.
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
0
43,694
48,125
70,000
% Change
Surrounding
Recessions
1980-82: 58.6%
1980-87: 88.7%
1990-91: 10.3%
2000-01: 13.0%
2006-09: 204.6%*
69,300
62,436
64,004
71,277
81,235
82,446
63,853
63,235
64,853
71,549
70,643
62,304
52,374
51,959
53,549
54,027
44,367
37,884
35,472
40,099
38,540
35,037
34,317
39,201
19,695
28,322
43,546
60,000
Significant
implications for bond
& surety lines
*Based estimate of 60,000 business bankruptcies in 2009; actual first half total was 30,333.
Source: American Bankruptcy Institute; Insurance Information Institute
16
Year-Over-Year Change in Quarterly U.S.
State Tax Revenues, Inflation Adjusted
-5%
-10%
-15%
-20%
6.6%
4.2%
3.7%
6.3%
2.6%
1.3%
1.9%
2.3%
0.4%
0.8%
0.4%
3.0%
0.2%
12.4%
0.1%
4.0%
4.7%
5.7%
8.2%
3.4%
6.0%
7.0%
0.0%
1.6%
0%
4.4%
1.8%
0.4%
5%
1Q99
2Q99
3Q99
4Q99
1Q00
2Q00
3Q00
4Q00
1Q01
2Q01
-1.3%
3Q01
-1.7%
4Q01
-3.0%
1Q02
-7.6%
2Q02
-10.7%
3Q02
4Q02
1Q03
-0.6%
2Q03
3Q03
4Q03
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
-5.8%
-13.4%
1Q09
2Q09-17.8%
10%
2.4%
2.4%
4.7%
5.6%
15%
9.9%
9.5%
20%
States revenues were down 17.8% in Q2 2009, the second consecutive quarter of
record revenue decline. This will impact public infrastructure spending significantly.
Nationwide, state-tax collections
for fiscal year 2009 declined by a
record $63 billion, or 8.2 percent
from the previous year. That loss
is roughly twice the amount
states gained in fiscal relief from
the federal stimulus package.
Source: U.S. Census Bureau; Nelson A. Rockefeller Institute of Government:
http://www.rockinst.org/pdf/government_finance/state_revenue_report/2009-10-15-SRR_77.pdf
Distribution of $787 B in
Stimulus Funds*
$350
Unused
Paid Out
$ Billions
$288
$275
$300
$173.2B or 22% or the
$787B in stimulus
money has been spent
as of Oct. 10, 2009.
$224
$250
$200
$150
$225.5
$228.0
$160.3
$100
$50
$62.5
$47.0
$63.7
Tax Benefits
Contracts, Grants,
Loans
Entitlements
$0
*As of 10/10/09
Source: www.recovery.gov accessed 10/17/09; Insurance Information Institute.
26
GREEN SHOOTS
Business Mix & Geographic
Footprint Will Impact P-C
Insurer Growth Opportunities
Hopeful Signs that the
Economic Recovery Is Underway
•
Recession Appears to be Bottoming Out, Freefall Has Ended
•
•
•
•
GDP shrinkage has ended; Economy is expanding
Pace of job losses is slowing
Major stock market indices well off record lows, anticipating recovery
Some signs of retail sales stabilization are evident
• Financial Sector is Stabilizing
• Banks are reporting quarterly profits
• Many banks expanding lending to very credit worthy people & businesses
• Housing Sector Seems To Be Bottoming Out
• Home are much more affordable (attracting buyers)
• Mortgage rates are still low relative to pre-crisis levels (attracting buyers)
• Freefall in housing starts and existing home sales is ending in many areas
• Inflation & Energy Prices Are Under Control
• Consumer & Business Debt Loads Are Shrinking
35
Source: Ins. Info. Inst.
11 Industries for the Next 10 Years:
Insurance Solutions Needed
Government
Education
Health Care
Energy (Traditional)
Alternative Energy
Agriculture
Natural Resources
Environmental
Technology
Light Manufacturing
Export Oriented Industries
36
#2. Employment
Policy & Actions
Massive Job Losses Sap the Economy
and Stunt Personal & Commercial
Lines Exposure Growth
Unemployment Rate:
On the Rise
January 2000 through October 2009*
11.0
10.0
9.0
8.0
Previous Peak: 6.3% in
June 2003
Oct. 2009 unemployment was 10.2%,
up 0.4% from Sept. and nearing its
highest level since April 1983 (10.8%)
Trough: 4.4% in March 2007
7.0
6.0
5.0
Source: US Bureau of Labor Statistics; Insurance Information Institute.
38
Oct-09
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-03
Jan-02
Jan-00
2.0
Jan-01
Average unemployment
rate 2000-07 was 5.0%
3.0
Unemployment will likely peak near 10.5 %
during this cycle, impacting payroll
sensitive p/c and l/h exposures
Jan-04
4.0
Unemployment Rates by State,
September 2009: Highest 25 States*
8.8
8.9
8.9
9.1
9.2
9.3
9.3
9.5
9.6
10.1
9.8
10.5
10.5
10.8
10.7
10.9
11.0
11.4
13.3
13.0
11.5
10.1
10
11.6
12
12.2
Unemployment Rate (%)
14
Insurers with heavy footprints in
these states will lag behind
15.3
16
8
6
4
2
The unemployment rate has
been rising across the country,
but some states are doing much
better than others.
0
MI NV RI CA SC OR DC FL KY NC AL IL TN OH GA NJ IN MO WA MA MS AZ NY WV ID
*Provisional figures for September 2009, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
4
2
4.2
The unemployment rate has
been rising across the country,
but some states are doing much
better than others.
4.8
4.9
6.2
6.7
8.2
8.3
8.3
8.4
8.4
6
6.7
6.7
6.7
6.7
6.8
6.9
7.0
7.1
7.2
7.2
7.4
7.3
7.2
8
7.7
Unemployment Rate (%)
10
8.8
8.5
Unemployment Rates By State,
September 2009: Lowest 25 States*
0
PA ME AK CT WI DE TX NM LA MN HI MD NH AR CO KS WY IA OK VT MT VA UT NE SD ND
*Provisional figures for September 2009, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
Labor Underutilization:
Broader than Just Unemployment
% of Labor Force
Percent
18%
16.8%
17%
16.4%
16.5%
17.0%
17.5%
16.3%
16%
15%
14%
13%
12%
11.2%
11%
Marginally attached and unemployed
persons account for 17.5% of the labor
force in Oct. 2009 (1 out every 5.7 people).
Unemployment rate alone was 10.2%.
Underutilization shows a broader impact
on WC and other commercial exposures.
10%
Sep-08
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
NOTE: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available
For a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market
related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for
full-time work but have had to settle for a part-time schedule.
43
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Wage & Salary Disbursements
(Payroll Base) vs. Workers Comp
Net Written Premiums
Wage & Salary Disbursement (Private Employment) vs. WC NWP
$ Billions
12/07-?
$ Billions
7/90-3/91
$7,000
$6,000
3/01-11/01
Wage & Salary
Disbursements
WC NPW
$45
$40
$35
$5,000
$30
$4,000
$25
$3,000
$2,000
Shaded areas indicate recessions
$1,000
Weakening
payrolls have
eroded $2B+ in
workers comp
premiums
$0
$20
$15
$10
$5
$0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*
*Average Wage and Salary data as of 7/1/2009.
Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at
http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books
Frequency: 1926-2008
A Long-Term Drift Downward
Manufacturing—Total Recordable Cases
Rate of Injury and Illness Cases per 100 Full-Time Workers
30
25
20
15
10
5
'26
'28
'30
'32
'34
'36
'39
'41
'43
'45
'47
'49
'52
'54
'56
'58
'60
'62
'65
'67
'69
'71
'73
'75
'78
'80
'82
'84
'86
'88
'91
'93
'95
'97
'99
'01
'04
'06
0
Note: Recessions indicated by gray bar
Note: Recessions indicated by gray bar.
Sources: NCCI from U.S. Bureau of Labor Statistics; National Bureau of Economic Research
#3. Anti-Inflation
Strategy
Will Massive Stimulus & Cash
Infusions Spark Growth or Ignite
Inflation: Claims Cost Severities
at Risk?
Annual Inflation Rates
(CPI-U, %), 1990-2011F
Inflation peaked at 5.6% in August 2008 on
high energy and commodity crisis. The
recession and the collapse of the commodity
bubble have produced temporary deflation.
6.0
5.0
4.9 5.1
3.8
4.0
3.0
3.0
2.0
1.0
0.0
3.2
3.3 3.4
3.0
2.9 2.8
2.4
2.6
2.5 2.3
1.9
1.5
3.8
2.8
1.9 1.9
1.3
There is so much slack in the US economy that
inflation should not be a concern through 2011, but
depreciation of dollar is concern longer run.
(0.5)
(1.0)
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F10F11F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators,
Oct. 10, 2009 (2009/10 forecasts; 2011 Swiss Re).
51
US Budget Deficit, 1969-2019F
$500
Federal Deficit ($ Bill)
4%
% GDP
2%
$0
-$500
-4%
-6%
-$1,000
Concerns that deficit spending will
drive up inflation. This would
harmful to insurance claim severity.
-8%
-10%
-$1,500
-12%
2019
2015
2010
2005
-14%
2000
1995
1990
1985
1969
-$2,000
1980
Deficit expected to hit record
$1.8 trillion in 2009 or 13%
or GDP, a post-WW II high
1975
Federal Deficit
-2%
Sources: Congressional Budget Office analysis of President’s budget, March 2009; Insurance Information Institute.
Deficit as % of GDP
0%
$2,000
$926.4
$921.3
$922.9
$911.6
$899.4
$903.6
$1,000
$903.7
$1,500
$2,179.0
$2,052.2
The size of the Fed’s balance sheet
has more than doubled since the
crisis began in 2007 from about
$900 billion to $2.2 trillion, fueling
inflation concerns.
$1,186.2
$2,500
$2,270.4
$ Billions
$2,106.5
Balance Sheet of the
Federal Reserve, Dec. 2006- Sept. 2009*
$500
$0
Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep06
07
07
07
07
08
08
08
08
09
09
09
*As of final Friday in each quarter.
Source: Federal Reserve: http://www.federalreserve.gov/releases/h41/hist/h41hist1.htm
53
Depreciation of Dollar
is Inflationary
US Dollars per Euro
Weak dollar increases costs
of imports and dollardenominated commodities
$1.6
$1.5
Dollar has depreciated
40% against the Euro
since 2001
$1.473 $1.482
$1.371
$1.4
$1.244 $1.245 $1.256
$1.3
$1.132
$1.2
Weak economy, Fed
policy keep interest rates
low and downward
pressure on the dollar
$1.1 $1.065
$1.0
$0.923 $0.895 $0.945
$0.9
$0.8
99
00
01
02
03
04
05
06
07
08
*As of October 2009.
Source: Board of Governors of the Federal Reserve Bank; Insurance Information Institute.
09*
Top Concerns/Risks for Insurers if
Inflation is Reignited
CONCERNS: The Federal Reserve Has Flooded Financial System with Cash
(Turned on the Printing Presses), the Federal Govt. Has Approved a $787B
Stimulus and the Deficit is Expected to Mushroom to $1.8 Trillion. All Are
Potentially Inflationary.
 What are the potential impacts for insurers?
 What can/should insurers do to protect themselves from the risks of inflation?
KEY RISKS FROM SUSTAINED/ACCELERATING INFLATION
• Rising Claim Severities
 Cost of claims settlement rises across the board (property and liability)
• Rate Inadequacy
 Rates inadequate due to low trend assumptions arising from use of historical data
• Reserve Inadequacy
 Reserves may develop adversely and become inadequate (deficient)
• Burn Through on Retentions
 Retentions, deductibles burned through more quickly
• Reinsurance Penetration/Exhaustion
 Higher costsrisks burn through their retentions more quickly, tapping into re55
insurance more quickly and potential exhausting their reinsurance more quickly
Source: Ins. Info. Inst.
Tort Cost Growth & Medical Cost Inflation
vs. Overall Inflation (CPI-U), 1961-2009E*
14%
Tort System is an
Inflation Amplifier
Tort costs move with
inflation but at twice the rate
Avg. Ann. Change: 1961-2009E*
12%
Tort Costs: +8.4%
Med Costs: +5.9%
Overall Inflation: +4.2%
10%
8%
6%
4%
2%
Tort Costs
Medical Costs
CPI
0%
1961-70
1971-80
1981-90
1991-2000
2001-09E
* CPI-U and medical costs as of Sept 2009; Tort figure is for full-year 2009 from Tillinghast.
Sources: US Bureau of Labor Statistics, Tillinghast-Towers Perrin, 2008 Update on U.S. Tort Costs; Insurance Info. Inst.
#4. International
Trade Policy
(Re)insurance is a Global Business;
A Shift to Protectionist Policies
Would Be Disastrous for the
Global Economy
Global Merchandise Exports, 1979-2009F
($ Trillions and Annual Growth Rate)
16
Merchandise Exports
% Change
20%
14
15%
12
10%
10
5%
8
0%
6
-5%
4
2
25%
Trade is expected to decline by its
largest amount in decades in 2009
-15%
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
0
-10%
Source: World Trade Organization; Insurance Information Institute.
Growth Rate in Exports
Merchandise Exports ($ Trillions)
18
Recessions routinely
depress trade, but the
current global
financial crisis is
much more severe
Global Nonlife Insurance Direct
Premiums Written, 2004-2008
$ Millions
$1,700
$1,650
$1,600
$1,550
$1,500
$1,450
$1,400
$1,350
$1,300
$1,250
Protectionism would
impair global premium
growth, which is highest in
developing, export-oriented
countries countries
$1,668
$1,538
$1,549
$1,442
$1,398
2004
2005
Global nonlife insurance
premiums fell in 2008 as world
economies entered recession and
many commercial markets
remained soft
2006
Source: Swiss Re sigma series; Insurance Information Institute.
2007
2008
59
II. PUBLIC
POLICY
Government Action (Direct and
Indirect) Will Shape the P/C
Insurance Industry for Decades to
Come
#5. Tort Reform
Erosion of Recent Reforms,
New Avenues of Tort Liability
Are Emerging Threats
Important Issues & Threats
Facing Insurers: 2009 -2015
Emerging Tort Threat
 No tort reform (or protection of recent reforms) is
forthcoming from the current Congress or
Administration
 Erosion of recent reforms is a certainty (already
happening)
 Innumerable legislative initiatives will create
opportunities to undermine existing reforms and
develop new theories and channels of liability
 Torts twice the overall rate of inflation
 Influence personal and commercial lines, esp. auto liab.
 Historically extremely costly to p/c insurance industry
 Leads to reserve deficiency, rate pressure
 Bottom Line: Tort “crisis” is on the horizon and will be
recognized as such by 2012-2014
62
Source: Insurance Information Inst.
Over the Last Three Decades, Total Tort Costs*
as a % of GDP Appear Somewhat Cyclical
Tort Sytem Costs
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
$300
#6. Healthcare
Reform
Spillover Effects Put P/C
Insurers at Increased Risk
National Health Expenditures
10%
5%
18E
17E
16E
15E
14E
13E
12E
11E
10E
09E
08E
07
06
05
04
20%
15%
Health care expenditures
consumed an estimated
16.6% of GDP in 2008 and
are expected to rise to 20.3%
by 2018
03
25%
National Health Expenditures as % of GDP
Source: Centers for Medicare & Medicaid Services, Office of the Actuary; Insurance Information Institute.
0%
National Health Exp. as % of GDP
20.3%
19.3% $3,790
19.8% $4,062
18.5% $3,313
18.9% $3,541
17.9%
$2,770
17.7%
$2,624
$2,510
16.6%
17.6%
$2,379
16.2%
$2,241
$2,113
15.9%
16.0%
$1,981
15.9%
$1,735
$1,855
15.3%
15.8%
$1,603
02
14.5%
$1,470
01
$1,354
00
99
$1,191
$1,266
98
97
$913
$1,125
93
$714
$253
80
$75
$0
70
$500
$28
$1,000
90
$1,500
5.2%
$2,000
7.2%
$2,500
9.1%
$3,000
13.7%
13.8%
12.3%
$3,500
13.7%
13.6%
13.6%
$4,000
60
National Health Exps
$4,500
$2,931 18.0%
$3,111 18.2%
$5,000
$4,353
National Health Expenditures and Health
Expenditures as a Share of GDP,
1960-2018F ($ Billions)
Healthcare Reform Bill is a Trial
Lawyer Dream Come True

The Affordable Health Care for America Act (H.R.
3962) includes the following benefit to the trial bar:
Section 2531, entitled “Medical Liability Alternatives,”
establishes an incentive program for states to adopt
and implement alternatives to medical liability
litigation. [BUT]…… “a state is not eligible for the
incentive payments if that state puts a law on the
books that limits attorneys’ fees or imposes caps
on damages.”

Jeopardizes some $54 billion in savings in medical
care costs that Congressional Budget Office (CBO)
says litigation reform would bring.
Source: Andrew Breitbart, http://biggovernment.com; Congressional Budget Office (CBO)
Health Insurance Reform Debate—
Potential Spillover Impacts on P/C Insurers
•
24-Hour Coverage Proposal
 Would roll WC and med components of auto into natl. health care plan
•
Rollback of McCarran-Ferguson Act
 Would repeal or restrict for health and medical malpractice insurers
 Slippery slope—Med Mal is a p/c line; Congress will not hesitate to breach M-F for other p/c
lines in the future to show its ire over an issue (e.g., after major cat)
•
Exclusion of Med Mal Reform from Health Care Bill
 Shows powerful influence of trial bar with Congress/Administration
•
•
•
•
•
FTC granted authority to conduct studies “related to insurance” –All
Reporting of Claims
Adjustments to Medicare Fee Schedules
Patient “Bill of Rights” or Vague Standards of Care
Cost Shifting into WC, Auto from Health System
Lines!
 WC/Auto Medical: more lucrative from provider perspective
•
•
•
•
“Windfall” Profit Taxes? Additional Premium Taxes?
Executive Compensation Restrictions?
Public “Option” in P/C Lines—Nat Cat/Wind?
Perception that Feds Regulate Insurance Industry Taking Root
68
#7. Financial
Services Regulation
Concern Over Duplicative,
Unnecessary and
Inappropriate Regulation
Impacting P/C Insurers
Regulatory Uncertainty Mounting:
2010 Outcome Unclear
Regulatory Overreach
 Principle danger is that P/C insurers get swept into vast federal
regulatory overhaul and subjected to inappropriate, duplicative
and costly regulation
 Systemic Risk Regulator:

Is any Insurer Systemically Important?

Will it be limited to banks/creditors?

Limited to Health & Med Mal?
 Federal Office of Insurance Creation Within Treasury?
 Consumer Financial Protection Agency
 Healthcare Reform Spillover
 Federal Trade Commission: All Lines Study Authority?
 McCarran-Ferguson Rollback:
 OFC vs. State Chartering Debate Lingers
 Taxation, Offshore Domiciles
 Impact of Regulatory Changes Will Be Felt for Decades

Bottom Line: Regulatory outcome is uncertain and risk of adverse
outcome exists
70
#8. Catastrophe
Risk Financing
Will the Feds Decide a
“Public Option” is the
Best Solution?
$40
$20
$7.5
$2.7
$4.7
$22.9
$5.5
$16.9
$8.3
$7.4
$2.6
$10.1
$8.3
$4.6
$26.5
$5.9
$12.9
$27.5
$60
$7.5
$80
2009 cat
losses were
down 29%
in H1 from
$10.6B in
H1 2008
$26.0
$100
2008 CAT losses exceeded
2006/07 combined. 2005 was by
far the worst year ever for
insured catastrophe losses in the
US, but the worst has yet to come.
$9.2
$6.7
$120
$100 Billion CAT
year is coming
eventually
$61.9
$ Billions
$100.0
U.S. Insured Catastrophe Losses
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09*
20??
$0
*Based on PCS data through June 30 = $7.5 billion.
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. Non-prop/BI losses = $12.2B. 72
Source: Property Claims Service/ISO; Insurance Information Institute
Insured Property Catastrophe Losses
as % Net Premiums Earned, 1984–2008
16%
14%
12%
10%
US
US average: 1984-2008
US CAT losses were
a record 14.4% of
net premiums
earned in 2005 and
were 4 times the
1984-2008 average
of 3.6%
8%
6%
4%
2%
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
0%
Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute.
Top 12 Most Costly Disasters in
US History, (Insured Losses, $2008)
$50
$45
8 of the 12 most expensive disasters in
US history have occurred since 2004;
$40
$45.3
8 of the top 12 disasters affected FL
$ Billions
$35
$30
$25
$20
In 2008, Ike became the 4th most
expensive insurance event and 3rd most
expensive hurricane in US history
arising from about 1.35 mill claims
$11.3 $11.3 $12.5
$15
$10
$5
$22.8 $23.8
$4.2
$5.2
$6.2
$7.3
$8.1
$8.5
Ivan
(2004)
Charley
(2004)
$0
Jeanne
(2004)
Frances
(2004)
Rita
(2005)
Hugo
(1989)
Wilma
(2005)
Northridge
(1994)
*PCS estimate as of August 1, 2009.
Sources: PCS; Insurance Information Institute inflation adjustments.
Ike
(2008)*
9/11
Attacks
(2001)
Andrew
(1992)
Katrina
(2005)
74
Distribution of US Insured CAT Losses:
TX, FL, LA vs US, 1980-2008*
$ Billions of Dollars
Rest of US, $176,
60%
Florida
accounted for
19% of all US
insured CAT
losses from
1980-2008:
$57.1B out of
$297.9B
Texas, $31.2,
10%
Louisiana, $33.6,
11%
Florida, $57.1,
19%
*All figures (except 2006-2008 loss) have been adjusted to 2005 dollars.
Source: PCS division of ISO.
Inflation-Adjusted U.S. Insured
Catastrophe Losses By Cause of Loss,
1988-2007¹
Fire, $8.1 , 2.6%
Wind/Hail/Flood,
$9.9 , 3.2%
Earthquakes, $19.5 ,
6.3%
Winter Storms,
$24.4 , 7.9%
Civil Disorders, $1.1
, 0.4%
Water Damage, $0.4
, 0.1%
Utility Disruption,
$0.2 , 0.1%
Tornadoes, $82.4 ,
26.5%
Insured disaster losses
totaled $310.5 billion from
1988-2007 (in 2007 dollars)
Terrorism, $22.9 ,
7.4%
All Tropical
Cyclones, $141.6 ,
45.6%
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2007 dollars.
Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.
2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions
and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood
Insurance Program. 6 Includes wildland fires.
76
Source: Insurance Services Office (ISO)..
Total Value of Insured
Coastal Exposure (2007, $ Billions)
Florida
New York
Texas
Massachusetts
New Jersey
Connecticut
Louisiana
S. Carolina
Virginia
Maine
North Carolina
Alabama
Georgia
Delaware
New Hampshire
Mississippi
Rhode Island
Maryland
$2,458.6
$2,378.9
$895.1
$522B increase
$772.8
since 2004, up 27%
$635.5
$479.9
In 2007, Florida still ranked as the #1
$224.4
most exposed state to hurricane loss,
$191.9
with $2.459 trillion exposure, an
$158.8
increase of $522B or 27% from $1.937
$146.9
trillion in 2004.
$132.8
$92.5
The insured value of all coastal
$85.6
property was $8.9 trillion in 2007, up
$60.6
24% from $7.2 trillion in 2004.
$55.7
$51.8
$54.1
$14.9
$0
Source: AIR Worldwide
$500
$1,000
$1,500
$2,000
$2,500
$3,000
78
U.S. Residual Market Property
Policies In-ForceExposure
3,000
2,500
In the 19-year period between
1990 and 2008, total residual
market policy count (FAIR &
Beach/Windstorm Plans) has
nearly tripled to more than 2.6
million policies
2,000
1,785.0
1,500
1,000
2,840.4
2,780.6
2,621.3
2,209.3
2,203.9
1,741.7
1,642.3
1,458.1
1,196.5
1,319.7
931.6
Katrina, Rita
and Wilma
4 Florida
Hurricanes
500
0
1990
1995
1999
2000
2001
Source: PIPSO; Insurance Information Institute
2002
2003
2004
2005
2006
2007
2008
U.S. Residual Market Exposure
to Loss (Billions of Dollars)
$900
$800
$700
$600
In the 19-year period
between 1990 and 2008,
total exposure to loss in the
residual market (FAIR &
Beach/Windstorm) Plans
has surged from $54.7bn in
1990 to $696.4bn in 2008.
$696.4
$656.7
4 Florida
Hurricanes
$500
$400
$771.9
Katrina, Rita
and Wilma
$430.5$419.5
$372.3
Hurricane
Andrew
$292.0
$281.8
$244.2
$221.3
$150.0
$300
$200
$100 $54.7
$0
1990
1995
1999
2000
2001
Source: PIPSO; Insurance Information Institute
2002
2003
2004
2005
2006
2007
2008
#9. Climate
Change/Energy
Policy
Risks and Opportunities
Abound
Climate Change/Energy Policy
Opportunities Abound…
 Massive increase in energy generation capacity and
infrastructure required over next 20 years will drive
demand for energy markets and related insurance products
 Large investments in traditional and alternative energy
 Heavy investment in technology required
 Some insurers want to participate in “cap and trade”
…As Do Risks
 Concern that EPA designation of CO2 as a pollutant could
lead to litigation
 State GHG emission standards may vary by state, causing
confusion and litigation
 Political risk is high globally on global for energy issues
 Some calls to regulate investments of insurers
82
Source: Insurance Information Inst.
World Net Effective Electric
Power Generation, 1990-2030 (est.)
Trillions of Kilowatt Hours
35
33.3
30.4
30
27.5
24.4
25
21.0
20
17.3
14.6
15
11.3
12.6
The current economic
downturn will have little, if
any, long-term impact on
electric power generation
10
5
0
1990
1995
2000
2005
2010
2015
2020
2025
2030
Source: Energy Information Administration, 2008 International Energy Outlook, Insurance Information Institute.
8
2.63
0.764
2
0.956
4
3.754
6
Renewables
Natural Gas
7.152
10
8.389
12
3.422
14
4.996
16
Trillions of Kilowatt Hours
The sharp increase in
generation and the
changing composition of
fuel source will influence
insurance demand and the
nature of products sold
3.16
18
15.361
World Electricity Generation by Fuel
2005-2030F
0
Liquids
Nuclear
2005
2025
2010
2030
2015
2020
Source: US Department of Energy Report #:DOE/EIA-0484 ( Sept. 2008); Insurance Information Institute
Coal
Non-Hydro Renewable Electricity Generation
by Energy Source (US): 2005-2030F
Billions of Kilowatt Hours
450
400
350
300
250
Electricity generation from
renewable sources is
expected to rise 315%
between 2007 and 2030
requiring new property and
liability insurance solutions
317.76
180.55
200
150
428.25
103.27
100
50
0
2007
MSW/LFG*
2010
Biomass
2020
Wind
2030
Solar Thermal
Sources: Energy Information Administration, Annual Energy Outlook, March 2009.
Geothermal
*Municipal Solid Waste/Landfill Gas.
World Energy Supply Infrastructure
Investment by Category: 2001-2030 (Est.)
$ Billions
Distribution, $3,755 ,
38%
Transmission, $1,568 ,
16%
Generation will account
for 46% or $4.5 trillion
of all investment
through 2030 to meet
rising demand. Current
downturn will have no
impact on long-term
global energy demand
and the need to develop
supply infrastructure
Generation-New, $4,080
, 42%
Generation-Refurbished,
$439 , 4%
Source: International Atomic Energy Agency , World Outlook for Electricity Investment.
#10. Populism and
Government
Expansionism
Increased Restrictions on
Underwriting, Usurpation
of Private Markets
Important Issues & Threats
Facing Insurers: 2010 - 2015
Creeping Restrictions on Underwriting
 Attacks on underwriting criteria such as credit,
education, occupation, territory increasing
 View that use of numerous criteria are discriminatory
and create an adverse impact on certain populations
 Impact will be to degrade the accuracy of rating systems
to increase subsidies
 Catastrophe and Predictive modeling also at risk
 Current social and economic environment could
accelerate these efforts
 Danger that bans could be codified at federal level
during regulatory overhaul
 Bottom Line: Industry must be prepared to defend
existing and new criteria indefinitely
94
Source: Insurance Information Inst.
Important Issues & Threats
Facing Insurers: 2009 -2015
Creeping Socialization and Partial Nationalization of
Insurance System
 CAT risk is, on net, being socialized directly via state-run insurance
and reinsurance mechanisms or via elaborate subsidy schemes
involving assessments, premium tax credits, etc.
 Some insurers sought/received TARP money
 Efforts to expand flood program to include wind
 Health insurance may be substantively socialized
 Terrorism risk—already a major federal role backed by insurers
 Eventually impacts for other lines such as personal auto, WC?
 Feds, states may open to more socialization of private insurance risk
 Ownership stakes in some insurers could be a slippery slope
 States like FL will lean heavily on Washington in the event of a megacat that threatens state finance
 Bottom Line: Additional socialization likely. Can insurers/will
insurers draw the line—and where?
Source: Insurance Information Inst.
Important Issues & Threats
Facing Insurers: 2009 - 2015
Exploitation of Insurance as a Wealth Redistribution
Mechanism
 There is a longstanding history of attempts to use insurance
to advance wealth redistribution/economic agendas
 Urban subsidies; Coastal subsidies are old; Could be
extended to workers comp in variety of ways
 Insurer focus on underwriting profitability (resulting in
higher rates) coupled with poor economic conditions could
raise profile of affordability issue
 Calls for “excess profits tax” on insurers
 Increased government involvement in insurance (including
ownership stakes) make this more likely
 Federal regulation could impose such redistribution schemes
 Bottom Line: Expect efforts to address social and economic
inequities through insurance
Source: Insurance Information Inst.
Insurance Information
Institute On-Line
THANK YOU FOR YOUR TIME AND
YOUR ATTENTION!
97