Presentation on theme: "Catastrophic Risk: Impacts & Implications for the P/C Insurance Industry: Houston Marine Insurance Seminar Houston, TX September 18, 2006 Robert P. Hartwig,"— Presentation transcript:
Catastrophic Risk: Impacts & Implications for the P/C Insurance Industry: Houston Marine Insurance Seminar Houston, TX September 18, 2006 Robert P. Hartwig, Ph.D., CPCU, Executive Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: (212) 346-5520 Fax: (212) 732-1916 firstname.lastname@example.org www.iii.org
Presentation Outline P/C Profit Overview Underwriting Trends Primary & Reinsurance Competitive Pressures Mounting: Pricing Trends Financial Strength & Ratings Investments Capital & Capacity Catastrophe Loss Management Terrorism: Are TRIA’s Days Numbered? Q & A
P/C Net Income After Taxes 1991-2006E ($ Millions)* *ROE figures are GAAP; 1 Return on avg. surplus. 2005 ROAS = 9.8% after adj. for one-time special dividend paid by the investment subsidiary of one company. 2 Based on Q1 results; For 12 months ending 3/31/06, ROAS=10.1%. Sources: A.M. Best, ISO, Insurance Information Inst. 2001 ROE = -1.2% 2002 ROE = 2.2% 2003 ROE = 8.9% 2004 ROE = 9.4% 2005 ROAS 1 = 10.5% 2006 ROAS 2 = 15.4% 2006 Net Income may shatter previous records
ROE vs. Equity Cost of Capital: US P/C Insurance:1991-2006E *Based on 2006:Q1E ROAS of 15.4% Source: The Geneva Association, Ins. Information Inst. The p/c insurance industry achieved its cost of capital in 2005 -13.2 pts +0.2 pts US P/C insurers missed their cost of capital by an average 6.7 points from 1991 to 2002, but on target 2003-05 +1.0 pts +5.9 pts -9.0 pts
ROE: P/C vs. All Industries 1987–2006:Q1 *2006 P/C insurer ROE based on annualized Q1 results. Source: Insurance Information Institute; Fortune Andrew Northridge Hugo Lowest CAT losses in 15 years Sept. 11 2004/5 ROEs excl. hurricanes 4 Hurricanes Katrina, Rita, Wilma Insurers will outperform only if CAT losses are “normal”
WALL STREET: MAINTAINING THE CONFIDENCE OF WALL STREET IS CRITICAL FOR MANY INSURERS
Source: SNL Securities; Insurance Information Institute Change in YTD Stock Performance by Sector Pre- & Post-Katrina/Rita/Wilma P/C & reinsurer stocks hurt but now fully recovered. Brokers rose on expectation of tighter conditions and demand for broker services; closure of Spitzer issues. Katrina: Aug. 29 Rita comes ashore Sept. 24 Wilma landfall Oct. 24
P/C Insurance Stocks Off to a Slow Start in 2006 Source: SNL Securities, Standard & Poor’s, Insurance Information Institute Total YTD Returns Through September 8, 2006 P/C insurer stocks now up in 2006. Investors less worried about potential hurricane losses, but price weakness looms. Broker stocks hurt by weak earnings
UNDERWRITING Surprisingly Strong in 2005, Stage is Set for a Good 2006!
P/C Industry Combined Ratio Sources: A.M. Best; ISO, III. *III forecasts/estimates for 2006 first half and full year. 2005 figure reflects heavy use of reinsurance which lowered net losses, but still a substantial deterioration from first half 2005 2006 is Off to a Strong Start Expectation is for an underwriting profit
Underwriting Gain (Loss) 1975-2006F Source: A.M. Best, Insurance Information Institute $ Billions Insurers sustained a $5.9 billion underwriting loss in 2005. 2006 could become only the second underwriting profit in 28 years, assuming “normal” CAT losses. 06Q1 U/W profit was $8.4B.
* 2005/6 figures are return on average statutory surplus. Source: 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
Commercial Lines Combined Ratio, 1993-2006E* Source: A.M. Best; Insurance Information Institute *Fitch estimate for 2005. Actual 1H05 combined ratio all lines was 92.7. Outside CAT- affected lines, commercial insurance is doing fairly well. Caution is required in underwriting long- tail commercial lines. 2006 results dependent on a return to “normal” catastrophe loss levels
Global Number of Catastrophic Events, 1970–2005 Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 1/2005 and 2/2006. The number of natural and man-made catastrophes has been increasing on a global scale for 20 years Record 248 man- made CATs & record 149 natural CATs in 2005
Combined Ratio: Reinsurance vs. P/C Industry Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute Hurricane Andrew Sept. 11 2004/5 Hurricanes
Share of Losses Paid by Reinsurers, by Disaster* *Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for 2005. Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute. Reinsurance is playing an increasingly important role in the financing of mega- CATs; Reins. Costs are skyrocketing
Property Catastrophe Price Index* 1994 - 2006 *Insurance Information Institute figure of 13.8% for 2005 based estimated 2005 DPE of $417.7B and insured CAT losses of $57.7B. Includes primary and reinsurance coverage. Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute. US CAT prices are continue to rise faster than anywhere else in the world
Sources: Swiss Re, Cat Market Research; Insurance Information Institute estimate for 2006. Reinsurance Prices Surged in 2006 Following Record CATs in 2005 US cat reinsurance price index: 1994 = 100 In hurricane-prone areas, property CAT reinsurance prices are up 100-300%+
Changes in the 2006 Reinsurance Markets Property CAT reins. rates up 20% - 30% nationally Property CAT coverage in hurricane exposed areas up 100%-300% Marine/Energy Reinsurance Up 300%+ Most challenging markets for reinsurers today Aggregate reinsurer exposure is down 20-30% Cedants retaining more risk, often by 50-100% or more (higher attachment pts.) Increased demand for Excess of Loss cover XoL is potentially more volatile for reinsurers Some supply issues as a few small players enter run-off Retrocessional market is much tighter Sources: Morgan Stanley, Lehman Brothers, III
A Look Ahead to Reinsurance Markets for 2007 Despite lack of major hurricane in 2006, reinsurance pricing strong in US for 2007 New capital entry not sufficient to fully meet demand Reinsurance prices flat at best outside peak CAT zones Retrocessional market still tight Softening in European p/c reinsurance markets Softening in US casualty reinsurance markets More pronounced if property cat reinsurers shift emphasis Capital market role expanding Hedge funds, private equity Securitization: Insurance Linked Securities Some concern over staying power, (lack of) regulation Complement or competitor to traditional reinsurance? Sources: Insurance Information Institute.
UNDERWRITING AFFECTS FINANCIAL STRENGTH Is There Cause for Concern?
Reasons for US P/C Insurer Impairments, 1969-2005 *Includes overstatement of assets. Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005; 2003-20051969-2005 Deficient reserves, CAT losses are more important factors in recent years
Historical Ratings Distribution, US P/C Insurers, 2000 vs. 2005 Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report, November 8, 2004 for 2000; 2006 Review & Preview for 2005 distribution. *Ratings ‘B’ and lower. 20002005 A++/A+ shrinkage Ratings agencies increasing emphasis on multiple events require more capital
Ratings Agencies Tightening Requirements for CATs 2006 SRQ CAT Model Reqs.* All Property Exposure Auto Physical Damage Reinsurance Assumed Pools & Assessments All Flood Exposure WC Losses from Quake Fire Following Storm Surge Demand Surge Secondary Uncertainty ALSO “A.M. Best will perform additional “stress-tested” risk- adjusted capital analysis for a second event in order to determine the potential financial condition of an entity post a severe event.” IMPLICATION: Some insurers may be required to carry more capital to maintain the same rating. *SRQ = Supplemental Rating Questionnaire Source: A.M. Best Review & Preview, January 2006. Best currently estimates PML for 100-yr. wind & 250- yr. quake to determine capital adequacy
Note: Shaded areas denote hard market periods. Source: A.M. Best, Insurance Information Institute Strength of Recent Hard Markets by NWP Growth* 1975-781984-872001-04 *2006-10 figures are III forecasts/estimates. 2005 growth of 0.4% equates to 1.8% after adjustment for a special one-time transaction between one company and its foreign parent. 2006 figure of 1.9% is based on 2006:Q1 data. 2006-2010 (post-Katrina) period could resemble 1993-97 (post-Andrew) 2005: biggest real drop in premium since early 1980s
Average Commercial Rate Change, All Lines, (1Q:2004 – 2Q:2006) Source: Council of Insurance Agents & Brokers; Insurance Information Institute Magnitude of rate decreases has diminished greatly since mid-2005
Average Commercial Rate Change by Account Size Source: Council of Insurance Agents & Brokers Commercial accounts trended downward from early 2004 to mid-2005 but now that trend is shrinking post-Katrina
Average Commercial Rate Change by Line Source: Council of Insurance Agents & Brokers Commercial property accounts are renewing sharply upward (+9.3%) in 2Q06. All other lines are renewing down.
Percent of Commercial Accounts Renewing w/Positive Rate Changes, 2 nd Qtr. 2006 Source: Council of Insurance Agents and Brokers Largest increases for Commercial Property & Business Interruption are in the Southeast, smallest in Midwest
Commercial Accounts Rate Changes, 2 nd Qtr. 2005 vs. 2 nd Qtr. 2006 Source: Council of Insurance Agents and Brokers Only commercial property is renewing up in 2006
UNDERWRITING CAPACITY Can the Industry Efficiently Employ Its Increasing Capital?
U.S. Policyholder Surplus: 1975-2006* Source: A.M. Best, ISO, Insurance Information Institute*As of 3/31/06. $ Billions “Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations Capacity TODAY is $440.1B, 10.1% above year-end 2005, 54% above its 2002 trough and 30% above its 1999 peak. Foreign reinsurance and residual market mechanisms absorbed 50%+ of 2005 CAT losses of $62.1B
Announced Insurer Capital Raising* ($ Millions, as of December 1, 2005) *Existing (re) insurers. Announced amounts may differ from sums actually raised. Sources: Morgan Stanley, Lehman Brothers, Company Reports; Insurance Information Institute. As of Dec. 1, 19 insurers announced plans to raise $10.35 billion in new capital. Twelve start-ups plan to raise as much as $8.75 billion more for a total of $19.1 billion. Actual total higher as Lloyd’s syndicates have added capacity for 2006.
Announced Capital Raising by Insurance Start-Ups ($ Millions, as of April 15, 2006) *Chubb, Trident are funding Harbor Point. Announced amounts may differ from sums actually raised. **Stated amount is $750 million to $1 billion. ***XL Capital/Hedge Fund venture. Arrow Capital formed by Goldman Sachs. Sources: Investment Bank Reports; Insurance Information Institute. As of April 15, 14 start- ups plan to raise as much as $10 billion.
INVESTMENTS Does Investment Performance Affect Discipline?
Property/Casualty Insurance Industry Investment Gain * *Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 estimate based on actual annualized 2006:Q1 results. **2005 figure includes special one-time dividend of $3.2B. Source: ISO; Insurance Information Institute. Investment gains are up but are only now comparable to gains seen in the late 1990s
CATASTROPHE LOSS MANAGEMENT Insurers Have Done a Better Job at Managing CAT Risk
Most of US Population & Property Has Major CAT Exposure Is Anyplace Safe?
2005 Was a Busy, Destructive, Deadly & Expensive Hurricane Season Source: WeatherUnderground.com, January 18, 2006. All 21 names were used for the first time ever, so Greek letters were used for the final storms 2005 set a new record for the number of hurricanes & tropical storms at 28, breaking the old record set in 1933.
2005 Was a Busy, Destructive, Deadly & Expensive Hurricane Season Source: WeatherUnderground.com, September 17, 2006. What a difference a year makes! Just 8 named storms through Sept. 18, 2006 vs. 17 as of same date in 2005!
2006 Hurricane Season: Forecasts Repeatedly Scaled Back 2006 hurricane seasons has turned out to be far less severe than anticipated *Average over the period 1950-2000. Source: Insurance Information Institute compilation of forecasts by Dr. William Gray, Colorado State University.
U.S. Insured Catastrophe Losses ($ Billions)* *Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. ** As of June 30, 2006. 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. Source: Property Claims Service/ISO; Insurance Information Institute $ Billions 2005 was by far the worst year ever for insured catastrophe losses in the US, but the worst has yet to come. $100 Billion CAT year is coming soon
Number of Major (Category 3, 4, 5) Hurricanes Striking the US by Decade *Figure for 2000s is extrapolated based on data for 2000-2005 (6 major storms: Charley, Ivan, Jeanne (2004) & Katrina, Rita, Wilma (2005)). Source: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm. http://www.nhc.noaa.gov/pastint.shtm 10 1930s – mid-1960s: Period of Intense Tropical Cyclone Activity Mid-1990s – 2030s? New Period of Intense Tropical Cyclone Activity Tropical cyclone activity in the mid-1990s entered the active phase of the “multi-decadal signal” that could last into the 2030s Already as many major storms in 2000-2005 as in all of the 1990s
Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2005) Sources: ISO/PCS; Insurance Information Institute. Seven of the 10 most expensive hurricanes in US history occurred in the 14 months from Aug. 2004 – Oct. 2005: Katrina, Rita, Wilma, Charley, Ivan, Frances & Jeanne
Insured Loss & Claim Count for Major Storms of 2005* *Property and business interruption losses only. Excludes offshore energy & marine losses. Source: ISO/PCS as of June 8, 2006; Insurance Information Institute. Hurricanes Katrina, Rita, Wilma & Dennis produced a record 3.3 million claims
Hurricane Katrina Insured Loss Distribution by State ($ Millions)* *As of June 8, 2006 Source: PCS division of ISO. Louisiana accounted for 62% of the insured losses paid and 56% of the claims filed Total Insured Losses = $40.579 Billion
Hurricane Katrina Loss Distribution by Line ($ Billions)* Total insured losses are estimated at $40.579 billion from 1.7438 million claims. Excludes $2- $3B in offshore energy losses *As of June 8, 2006 Source: PCS division of ISO.
Hurricane Rita Claim Count Distribution by State* *As of June 8, 2006 Source: PCS division of ISO. Louisiana accounted for 48.3% of the insured losses, Texas 44.6%. Excludes offshore energy losses of $2-3B Total # Claims = 383,000
Hurricane Rita Loss Distribution, by Line ($ Millions)* Total insured losses are estimated at $5.0 billion (excl. offshore energy of $2-$3B) from 383,000 claims. *As of June 8, 2006 Source: PCS division of ISO.
Hurricane Wilma Loss Distribution by Line ($ Millions)* Total insured losses are estimated at $10.3 billion from 1.047 million claims *As of June 8, 2006. All losses are in FL. Source: PCS division of ISO.
2005 Storms Have Developed Adversely Source: Insurance Information Institute from PCS survey data. Are the models inaccurate? Wilma is the storm with the most extraordinary adverse development +18.0% +54.0% +6.3%
Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss, 1986-2005¹ Source: Insurance Services Office (ISO).. 1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2005 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. Insured disaster losses totaled $289.1 billion from 1984-2005 (in 2005 dollars). Tropical systems accounted for nearly half of all CAT losses from 1986-2005, up from 27.1% from 1984-2003.
Total Value of Insured Coastal Exposure (2004, $ Billions) Source: AIR Worldwide Florida & New York lead the way for insured coastal property at more than $1.9 trillion each. Texas has $740B.
Insured Coastal Exposure as a % of Statewide Insured Exposure (2004, $ Billions) Source: AIR Worldwide After FL, many Northeast states have among the highest coastal exposure as a share of all insured exposure in the state.
Value of Insured Commercial Coastal Exposure (2004, $ Billions) Source: AIR Commercial property exposure also implies significant business interruption losses.
Percentage of California Homeowners with Earthquake Insurance, 1994-2004* *Includes CEA policies beginning in 1996. Source: California Department of Insurance; Insurance Information Institute. The vast majority of California homeowners forego earthquake coverage & play Russian Roulette with their most valuable asset.
The 2006 Hurricane Season: Lowering Expectations
Outlook for 2006 Hurricane Season Average*20052006F Named Storms9.62813 Named Storm Days49.1115.550 Hurricanes5.9145 Hurricane Days24.547.513 Intense Hurricanes2.372 Intense Hurricane Days1374 Net Tropical Cyclone Activity100%275%90% *Average over the period 1950-2000. Source: Dr. William Gray, Colorado State University, September 1, 2006.
Probability of Major Hurricane Landfall (CAT 3,4,5) in Sept/Oct 2006 9/06FAvg.*10/06FAvg.* Named Storms74%67%22%29% Hurricanes59%48%14%15% Intense Hurricanes35%27%4%6% *Average over past 52 years. Source: Dr. William Gray, Colorado State University, September 1, 2006.
CAT Models for 2006 Show Increase in Hurricane Frequency & Severity Source: EQECAT Expected frequency and severity are up in every region Frequency in the Northeast is up 30% and severity 10-15%
ENERGY MARKET OVERVIEW The Biggest Casualty of 2004/5
Katrina’s Path of Destruction Through the Offshore Energy Industry Source: “Hurricane Katrina: Profile of a Super Cat,” RMS, October 2005. Katrina (& Rita) tore through offshore facilities
Hurricane Rita’s Path Was at Least as Devastating for Energy Concerns Source: Energy Information Administration; iMapData Inc. Rita did significant damage to onshore facilities too
Hurricanes Katrina/Rita: Initial Damage to Oil Platforms & Rigs in Gulf of Mexico No. of Platforms/Rigs Destroyed, Damaged or Adrift, as of October 4, 2005. Totals: Destroyed: 114 Damaged: 69 Adrift: 19 Missing: 3 Source: Minerals Management Service (MMS), US Department of the Interior. About 75% (3,050 out of roughly 4,000 GOM platforms were in the path of Katrina & Rita
Katrina and Rita Total Energy Sector Estimated Losses* Millions Total = $9.149 Billion Source: Willis, Energy Market Review, May 2006. *Loss estimates are total losses, not just insured losses. Total = $5.880 Billion
Katrina and Rita Total Energy Sector Losses, by Type* Millions Total = $9.149 Billion Source: Willis, Energy Market Review, May 2006. *Loss estimates are total losses, not just insured losses. Total = $5.880 Billion
Katrina & Rita: Total Energy Losses, Onshore vs. Offshore* Billions Total = $9.15 Billion Source: Willis, Energy Market Review, May 2006. *Loss estimates are total losses, not just insured losses. Total = $5.89 Billion
Insured Offshore Energy Losses for Recent Major Gulf Storms Hurricanes Katrina, Rita and Ivan cost energy insurers at least $7 billion Sources: Insurance Information Institute research estimates. *Midpoint of estimated range for $2.0 to $2.5 billion)
Insured Offshore Energy Losses as a % of All Offshore Losses KatrinaRita Source: Insurance Information Institute; Willis, Energy Market Review, May 2006. Insured share of losses for Rita much higher
2005 North American Energy Losses a % of Worldwide Losses $ Millions North American losses accounted for 96% of all energy sector losses (insured & insured) in 2005 Source: Willis, Energy Market Review, May 2006. *Loss estimates are total losses, not just insured losses.
Post-Katrina Litigation Update 95% of HO claims settled as of One-Year Anniversary About 2% in dispute (mediation/litigation) in LA/MS Insurers have won several major decisions Leonard v. Nationwide Class Actions Contained in MS: Each case tried on its merits Most cases no longer economical to pursue A.G. Hood Case Still Outstanding Case substantially weakened, though not bound by Fed court decisions Trial Lawyers will Try to Try Better Cases, Refine Classes Misc. commercial litigation: coverage disputes, pollution
TRIA EXTENSION The Burden Grows, and the Clock is Ticking
Terrorism Coverage Take-Up Rate Continues to Rise Source: Narketwatch: Terrorism Insurance 2006, Marsh, Inc.; Insurance Information Institute Terrorism take-up rate for non-WC risk rose steadily through 2003, 2004 and 2005 TAKE UP RATE FOR WC COMP TERROR COVERAGE IS 100%!!
Insurance Industry Retention Under TRIA ($ Billions) Source: Insurance Information Institute Individual company retentions rise to 17.5% in 2006, 20% in 2007 Above the retention, federal govt. pays 90% in 2006, 85% in 2007 Extension Congress & Administration want TRIA dead
Insured Loss Estimates: Large CNBR Terrorist Attack ($ Bill) Type of CoverageNew YorkWashington San Francisco Des Moines Group Life $82.0$22.5$21.5$3.4 General Liability 184.108.40.206.4 Workers Comp 483.7126.787.531.4 Residential Prop. 38.712.722.62.6 Commercial Prop. 158.331.535.54.1 Auto 1.00.60.80.4 TOTAL$778.1$196.8$171.2$42.3 Source: American Academy of Actuaries, Response to President’s Working Group, Appendix II, April 26, 2006.
Shrinkage in 2006 (-11%) surplus is due to elimination of several lines covered under TRIA though 2005 but dropped under the Act’s extension effective 1/1/06 *2006 figure uses 2005 estimated year-end surplus and premiums by line as basis for calculations. Source: Insurance Information Institute. (Billions of Dollars) Surplus Under TRIA/TRIEA Covered Lines
Summary Commercial/Personal lines picture is bright for 2006, assuming “normal” CAT loss activity Concern about pricing discipline in some some commercial lines, including casualty segments Rising investment returns insufficient to support deep soft market in terms of price, terms & conditions Clear need to remain underwriting focused How/where to deploy/redeploy capital?? Major Challenges: Slow Growth Environment Ahead Maintaining price/underwriting discipline Managing variability/volatility of results
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