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Mega-Trends Influencing the Future of Auto Insurance National Auto Insurance ExecuSummit Uncasville, CT October 19, 2010 Steven N. Weisbart, Ph.D., CLU,

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Presentation on theme: "Mega-Trends Influencing the Future of Auto Insurance National Auto Insurance ExecuSummit Uncasville, CT October 19, 2010 Steven N. Weisbart, Ph.D., CLU,"— Presentation transcript:

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2 Mega-Trends Influencing the Future of Auto Insurance National Auto Insurance ExecuSummit Uncasville, CT October 19, 2010 Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY Office:  Cell: (917)  

3 2 Competition in the Auto Insurance Market

4 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 3 In Many States, the PP Auto Market in 2009 was Highly Competitive *Herfindahl-Hirschman Index, a standard measure of market concentration Sources: Insurance Information Institute research from SNL Financial. Number of States with HHI* in Indicated Range An HHI Under 1000 is Generally Considered a Highly Competitive Market; HHIs Between 1000 and 1800 Indicate a Moderately Competitive Market; Over 1800 Suggests a Concentrated Market HHI Range Highly Competitive Moderately Competitive

5 What HHIs of 775 and 1200 Look Like Sources: SNL Financial; Insurance Information Institute In the Highly Competitive Market, The Top 10 Carriers Have 77.8% Market Share; In the Moderately Competitive Market, the Top 10 Have 97.8% The bar segments show the market share of the top 10 insurers in the state’s market plus (far right, light gray) the combined share of rest of the companies in that state’s market

6 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 5 PP Auto Competitive Environment Varies by State and Region* *Data for 2009 Sources: SNL Financial; Insurance Information Institute. Southeast Mid-Atlantic New England HHI

7 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 6 PP Auto Competitive Environment Varies by State and Region* (cont’d) *Data for 2009 Sources: SNL Financial; Insurance Information Institute. Southwest Mountain Far West Great Plains Great Lakes HHI

8 7 Profitability in the Auto Insurance Market

9 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 8 Auto Insurance Return on Net Worth, 2008, Varies by Line, State and Region Sources: NAIC Report on Profitability by Line by State in 2008, pp , ; Insurance Information Institute. Southeast Mid-Atlantic New England

10 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 9 Auto Insurance Return on Net Worth, 2008, Varies by Line, State and Region Sources: NAIC Report on Profitability by Line by State in 2008, pp , ; Insurance Information Institute. Southwest Mountain Far West Great Plains Great Lakes

11 10 Premium Growth Trends in Auto Insurance They’re Not In Sync With the Economy

12 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 11 Monthly Change* in Auto Insurance Prices, (Percent Change from same month, prior year) *Percentage change from same month in prior year, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute Auto Insurance Price Increases Have Averaged About 5% in 2010 over 2009, After Averaging About 4.5% in 2009 over 2008 A Really Soft Market for Auto Insurance Lasted From Oct 2005 Through Dec 2007 (When the Great Recession Began!)

13 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 12 Average Expenditures on Auto Insurance Countrywide Auto Insurance Expenditures Increased 2.6% in 2008 and 4.5% Pace in 2009 (est.) and 5% in 2010 (est.) * Insurance Information Institute Estimates/Forecasts Sources: NAIC, Insurance Information Institute estimates based on CPI data for Auto Insurance.

14 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 13 Private Passenger Auto Insurance Net Written Premium, 2000–2009 Sources: A.M. Best; Insurance Information Institute. $ Billion

15 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 14 Commercial Auto Insurance Net Written Premium, 2000–2009 Sources: A.M. Best; Insurance Information Institute. $ Billion

16 15 Exposure Drivers in Auto Insurance

17 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 16 Registered Passenger Cars and Other 2-axle, 4-tire Vehicles It is likely that the number of vehicles dropped during and following the “Great Recession.” Recovery depends on employment and lending trends. Sources: Insurance Information Institutehttp://www.bts.gov/publications/national_transportation_statistics/html/table_01_11.html Millions Recession years in gold

18 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 17 (Millions of Units) Auto/Light Truck Sales, F Source: U.S. Department of Commerce; Blue Chip Economic Indicators (9/10); Insurance Information Institute. Car/Light Truck Sales Will Recover from the 2009 Low Point, but High Unemployment, Tight Credit Are Still Restraining Sales; Gas Prices Could Once Again Become a Factor Too New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for is still far below yearly average of 17 million units Sharply lower auto sales will have a smaller effect on auto insurance exposure level than problems in the housing market will on home insurers “Cash for Clunkers” generated about $300M in net new personal auto premiums

19 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 18 Miles Driven*, 1990–2010** *Moving 12-month total **Most recent month is July Note: Recessions indicated by gray shaded columns. Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm ); National Bureau of Economic Research (recession dates); Insurance Information Institute.http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm Billions Sharp rise in gas prices, then pullback Two of the past three recessions temporarily slowed the rise in miles driven. Will the trend toward hybrid and non-gasoline- powered vehicles affect miles driven? What about the aging and retirement of the baby boomers? Growth per Decade 1999 vs. 1989: 27.2% 2009 vs. 1999: 9.4%

20 Do Changes in Miles Driven Affect Auto Collision Claim Frequency? No. Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/09dectvt/page2.cfm; ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: 2nd Qtr. 2010, published Sep. 30, 2010 and earlier reports. *2010 FHWA and ISO figures are for 12 months ending 6/30/2010.http://www.fhwa.dot.gov/ohim/tvtw/09dectvt/page2.cfm Paid Claim Frequency = (No. of paid claims)/(Earned Car Years) x 100

21 Source: ISO, US DOT. Oct. 17, 1973: Arab oil embargo begins Frequency Effects of the Embargo: Collision: -7.7% PD: -9.5% BI: -13.3% March 17, 1974: Arab oil states announce end to embargo Driving Stats  Gas prices rose 35-40%  Miles driven fell 6.7% in 1974 Collision frequency began to rebound almost immediately after the embargo ended and reached pre-embargo levels within 9 months Auto Insurance: Claim Frequency Impacts of Energy Crisis/Recession of 1973/74 Liability claim frequency remained below pre-embargo levels for 2 years

22 Source: ISO. Severity Effects of the Embargo Collision: -7.5% PD: +15.9% BI: N/A* Driving Stats  Gas prices rose 35-40%  Miles driven fell 6.7% in 1974 Oct. 17, 1973: Arab oil embargo begins March 17, 1974: Arab oil states announce end to embargo Collision severity began to rebound almost immediately after the embargo ended; PD liability severity accelerated as inflation rose; No discernable trend change in BI liability severity trend. Auto Insurance: Claim Severity Impacts of Energy Crisis/Recession of 1973/74

23 Commercial Auto Will Also See Slow Growth

24 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 23 Real GDP Growth, Yearly, F Estimates/Forecasts from Blue Chip Economic Indicators, 10/2010 issue. Sources: (GDP) U.S. Department of Commerce at Real GDP Growth (%) The “consensus” forecast is for several years of real yearly GDP growth around 3%--weaker than following most recent recessions

25 Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures Source: Federal Reserve Board statistical releases at 24 Percent of Manufacturing Capacity Hurricane Katrina March November 2001 recession “Full Capacity” The closer the economy is to operating at “full capacity,” the greater the inflationary pressure The US operated at 74.7% of industrial capacity in August 2010, above the June 2009 low of 68.3% Recession began December 2007

26 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 25 Business Bankruptcy Filings, :Q2 Source: American Bankruptcy Institute; Insurance Information Institute Significant Exposure Implications for All Commercial Lines There were 60,837 business bankruptcies in 2009, up 40% from 2008 and the most since :Q2 bankruptcies totaled 14,452, down 9.7% from Q2:2009 % Change Surrounding Recessions % % % % %*

27 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 26 Private Sector Business Starts, Quarterly, 1993:Q2 – 2009:Q4* Business Starts Are Down Nearly 20% in the Current Downturn, Holding Back Most Types of Commercial Insurance Exposure *Latest available as of October 11, 2010, seasonally adjusted Source: Bureau of Labor Statistics, (Thousands) Business Starts 2006: 872, : 843, : 790, : 697,000

28 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 27 Net New Business Formations* 1999:Q1-2009:Q1* Net Business Formations Likely Were Positive Again, at Least in the Fourth Quarter of 2009 and into *Seasonally adjusted. Net formations equals Business “births” minus business “deaths.” Latest data on business “deaths” is for 2009:Q1. Sources: Bureau of Labor Statistics at ; Insurance Information Institute.http://www.bls.gov/news.release/cewbd.t07.htm Thousands March- November 2001 recession recession In 2008, over 110,000 more businesses disappeared than started

29 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 28 Unemployment and Underemployment Rates: Is the Worst Over? September 2010 unemployment rate (U-3) was 9.6%. Peak rate in the last 30 years: 10.8% in Nov - Dec 1982 Source: U.S. Bureau of Labor Statistics; Insurance Information Institute. U-6 hit 17.5% in Oct 2009 but is now 17.1% January 2000 through September 2010, Seasonally Adjusted (%) Recession ended in November 2001 Unemployment kept rising slightly for 19 months more Recession began in December 2007 Recession ended in June 2009 Gap between U-3 and U-6 is normally 4 percentage points but is now 7.5 points

30 Unemployment’s Effect on Percent of Uninsured Motorists, F Source: Uninsured Motorists, 2008 Edition, Insurance Research Council; Blue Chip Economic Indicators (Unemployment data, including forecasts); Insurance Information Institute. The regression equation IRC developed is Y= X, where X= the unemployment rate and Y is the estimated percent of uninsured motorists. Unemployment % Uninsured The unemployment rate appears to be closely correlated with the uninsured motorist percentage. In 2010 roughly 18% of motorists are expected to be driving without insurance as high unemployment prompts some people to drop coverage 29

31 30 Underwriting Trends in Auto Insurance

32 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 31 Auto Combined Ratios vs. All Lines, 2000–2010P* Sources: A.M. Best; Insurance Information Institute. Taking the U.S. as a Whole, Private Passenger Auto Combined Ratios Were Under 100 From 2004 Through 2010 (except for in 2008)

33 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 32 Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line* *Based on 2008 Invested Assets and Earned Premiums Source: A.M. Best; Insurance Information Institute. Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline

34 33 Claim Trends Rising Severity Held in Check by Falling Frequency: Can That Pattern Be Sustained?

35 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 34 PPAuto Bodily Injury Liability: Severity Trends Offset the Decline in Frequency *For 2010, data are for the 4 quarters ending with 2010:Q2. Source: ISO/PCI Fast Track data; Insurance Information Institute Annual Change, 2005 through 2010* Cost Pressures Will Increase if BI Severity Increases Outpace Declines in Frequency

36 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 35 PPAuto Property Damage Liability: Frequency, Severity Trends Offset in 2009/10 Annual Change, 2005 through 2010* Stable Severity/Frequency Trends Keeping PD Costs in Check, But Are These Trends Sustainable? *For 2010, data are for the 4 quarters ending with 2010:Q2. Source: ISO/PCI Fast Track data; Insurance Information Institute

37 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 36 No-Fault (PIP) Liability: Frequency & Severity Trends Are Adverse* *No-fault states included are: FL, HI, KS, KY, MA, MI, MN, NY, ND and UT; 2010 data are for the 4 quarters ending 2010:Q2. Source: ISO/PCI Fast Track data; Insurance Information Institute Annual Change, 2005 through 2010* Multiple States Are Experiencing Severe Fraud and Abuse Problems in their No-Fault Systems, Especially FL, MI, NY and NJ

38 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 37 Collision Coverage: Frequency and Severity Trends Have Been Favorable Annual Change, 2005 through 2010* The Recession, High Fuel Prices Have Helped Push Down Frequency and Temper Severity, But this Trend Will Likely Be Reversed Based on Evidence from Past Recoveries *For 2010, data are for the 4 quarters ending with 2010:Q2. Source: ISO/PCI Fast Track data; Insurance Information Institute

39 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 38 Comprehensive Coverage: Severity Trends Very Favorable in 2009/2010 Annual Change, 2005 through 2010* Weather Creates Volatility for Comprehensive Coverage; Recession Has Helped Push Down Frequency and Temper Severity, But This Factors Will Weaken as Economy Recovers *For 2010, data are for the 4 quarters ending with 2010:Q2. Source: ISO/PCI Fast Track data; Insurance Information Institute Hurricane Katrina

40 39 Subdued Inflation Doesn’t Reflect P/C Cost Pressures Inflation

41 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 40 Annual Inflation Rates (CPI-U, %), 1990–2014F Sources: U.S. Bureau of Labor Statistics (history); Blue Chip Economic Indicators, Oct 2010 (forecasts). The Consumer Price Index is Forecast to Remain Unusually Low for Several Years Annual Inflation Rates (%) The chart shows the midpoints of Blue Chip survey range. When was the last 5-year period in which inflation stayed this low?

42 Auto BI Liability Insurers Feel Higher Inflation than the CPI Measures Source: Bureau of Labor Statistics; Insurance Information Institute. (Percent increase Aug 09 to Aug 10) Healthcare Costs Are a Major Auto BI Liability Insurance Cost Driver. They Are Likely to Increase Faster than the CPI for the Next Few Years, at Least 41 Excludes Food and Energy Inpatient Services Rose 7.7%; Outpatient Services Rose 5.0%

43 Auto Physical Damage Insurers Feel Higher Inflation than the CPI Measures Sources: U.S. Dept of Labor, Bureau of Labor Statistics; Insurance Information Institute (Percent increase Aug 09 to Aug 10) Legal/Tort Costs and Auto Repair Costs Are Major Auto Physical Damage Insurance Cost Drivers That Are Expected to Increase Above the Inflation Rate Indefinitely 42

44 All Segments of French Motor Insurance Costs Have Grown Faster than the CPI for Over 20 Years Source : Fédération Française des Sociétés d’Assurance

45 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 44 Top Risks for Auto Insurers if Inflation Is Reignited Source: Insurance Information Institute. 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 reinsurance more quickly and potentially exhausting their reinsurance more quickly

46 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 45 We Can Have Inflation Despite High Unemployment We can “import” inflation.  For example, China is raising interest rates to tame a growing inflation rate. If the prices of things we import rise, importers will try to pass these increases along to buyers.  And if the dollar depreciates vs. currencies of nations from which we import, the dollar price of imports will rise. We had high inflation during the 1980 and recessions.

47 The Aging Population 46

48 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 47 Increase in Population by Age Category, 2010 to 2020 (Millions) Source: US Census Bureau Over the next decade, the demand for personal lines insurance will be driven by an increasingly older population Claim Trends in Personal Lines Will Shift With Demographics; Insurers Must Adapt

49 Labor Force Participation Rate, Ages 55-64, Quarterly, :Q3 Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute. The brown bars indicate recessions. Labor Force participation rate This percent is forecast to grow to 68.1% by 2018 The labor force participation rate for workers grew from about 59% in 2000 to 64% by 2006 and then flattened, but might be inching up again.

50 Labor Force Participation Rate, Ages 55-64, Quarterly, P Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute. Labor Force participation rate This is what happens if the labor force participation rate for this group grows by 0.1% per quarter

51 Labor Force Participation Rate, Ages 65-69, Quarterly, :Q3 Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute. The brown bars indicate recessions. Labor Force participation rate The labor force participation rate for workers might grow even faster in the future as seniors find they can’t fully retire on their meager retirement savings.

52 Labor Force Participation Rate, Ages 70-74, Quarterly, :Q3 Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute. Labor Force participation rate The labor force participation rate for workers grew by about 50% since 1998, but growth has stalled since the Great Recession began.

53 Labor Force Participation Rate, Ages 75 & over, Quarterly, :Q3 Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute. Labor Force participation rate These people were born before 1935 This percent is forecast to grow to 10.3% by 2018 The labor force participation rate for workers grew by about 50% since 2002, but growth has stalled since the Great Recession began.

54 Younger and Older Drivers Are Over- Represented in Fatal Crashes Share of Drivers in Age Group Sources: US DOT, NHTSA, Federal Highway Administration; Insurance Information Institute Immigration and High Birth Rates in Some Demographic Groups, Combined With Baby Boomers Aging Creates Challenges for Insurers and Auto Safety Experts Involvement Rate per 100,000 Drivers

55 Motor Vehicle Deaths per 100,000 Persons by Age, 2008 Problem: How to Keep the Elderly Safe in Cars (Not Just When They’re Behind the Wheel) Sources: Insurance Institute for Highway Safety; Insurance Information Institute The elderly are almost as likely to be killed in a motor vehicle accident as a teenager. As the Baby Boomers age, this is a looming public health crisis

56 55 Fraud & Abuse in Private Passenger Auto Insurance Skyrocketing No-Fault (PIP) Claim Costs Are a Major Concern in Several States

57 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 56 Increase in No-Fault Claim Severity: * *2010 figure is for the 4 quarters ending 2010:Q2. Sources: Insurance Information Institute research from ISO/PCI Fast Track data. The no-fault systems in MI, NJ, NY, FL, and MN are under stress due to rising fraud and abuse which will ultimately lead to higher premiums for drivers +36.8% +37.1% +50.0% +15.5% +32.1%

58 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 57 New York State No-Fault Claim Severity, 2001:Q1–2010:Q2 Sources: ISO/PCI Fast Track data; Insurance Information Institute. About 20% of No-Fault Claim Costs Are Attributable to Fraud and Abuse No-Fault Claim Severity No-Fault Claim Frequency Avg. Claim Severity Rose 63% in 5 years after 1997 Presbyterian Decision

59 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 58 Estimated Per-Claim Cost of No-Fault Fraud in New York State, F* *No-fault severity reached a post-reform low in 2004 before, hence selection of 2005 as the first year of analysis. Actual no-fault losses in 2005 and beyond are higher than estimates indicate due to base level of fraud imbedded in 2004 data. **2009 figure is estimated based on 4 quarters ending 2009:Q3 (latest available). Source: Insurance Information Institute analysis and research. No-fault fraud costs per claim could rise to $1,644 in 2010 without reform The estimated per claim cost of no-fault fraud (a.k.a. Fraud Tax) in NY state was $1,561 in 2009, up 12.3% from 2008 and 78.4% from 2007

60 Thank you for your time and your attention! Insurance Information Institute Online:


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