Historical and Potential Impacts of Deflation on the P/C Industry

Slides:



Advertisements
Similar presentations
Insurance Fraud: Are Policyholders the Only Victims? Conference of State Governments, Eastern Region Annual Meeting Atlantic City, NJ July 21, 2012 Steven.
Advertisements

Homeowners Insurance Rates Are Rising In Some Places: Here’s Why Spring 2012 Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist Insurance.
The State of the L/H Insurance Industry SIR Webinar June 6, 2011 Download at: Steven N. Weisbart, Ph.D., CLU, Senior Vice President.
State of the P&C Market. State of the P&C Market P&C Market Presenters : Jim Dwane, Chartis Insurance Jim O’Connor, Willis Jim O’Connor, Willis.
Chapter 1 Why Study Money, Banking, and Financial Markets?
Deflation and Its Effect on the P-C Industry Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist Insurance Information Institute 
11 Unit 1 Why Study Money, Banking, and Financial Markets?
Financial Literacy and P/C Insurance NAMIC Merit Society Washington, DC September 22, 2014 Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief.
Setting the Scene Insurance Reform: Opportunity or Threat? CEA International Insurance Conference Athens, Greece June 16, 2011 Steven N. Weisbart, Ph.D.,
Inflation Inflation Rate Price Indexes Demand-Pull Inflation Cost-Push Inflation Upward Spiral of Prices and Wages Impacts of Inflation.
Presentation to the Geneva Association’s 8 th Chief Communications Officer’s Meeting Jeanne M. Salvatore, Senior Vice President, Public Affairs & Insurance.
P/C Underwriting Cycles NAIC Center for Insurance Policy and Research Indianapolis, IN August 27, 2013 Steven N. Weisbart, Ph.D., CLU, Senior Vice President.
Louise Francis, FCAS, MAAA CAS 2012 RPM Seminar Francis Analytics and Actuarial Data Mining, Inc.
Analysis of Insured Catastrophe Losses and Competition in the Massachusetts Homeowners Insurance Market: 2005 – 2015 YTD Insurance Information Institute.
Lightning Safety Awareness Week Media Briefing and Workshop “Lightning and Property Insurance” University of Maryland’s Earth System Science Interdisciplinary.
Insurance Industry Employment Trends: Insurance Information Institute November 2015 Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance.
Chapter 1 Why Study Money, Banking, and Financial Markets?
Federal Reserve and Monetary Policy Chapter 18. Role of Fed Fed looks at inflation and unemployment and inflation is the key. – High inflation can destroy.
Intro to Business 2-2. The Business Cycle  All economies experience good and bad economic periods  This economic shift between good and bad economic.
Determinants of portfolio choice (demand for assets)
Nevada Driving Summit May 25, 2016
The impact on a business of higher interest rates
INFLATION & THE CONSUMER PRICE INDEX (CPI)
Economic Measurements
Money and Banking Instructor: Dr. Ming-Jang Weng
Insurance Information Institute Atlanta, GA May 17, 2016 Download at
Insurance IFRS Seminar December 2, 2016 Chris Hancorn Session 32
INFLATION.
Monetary and Fiscal Policy in a Global Setting
Insurance Industry Employment Trends:
Why Study Financial Markets?
Finance and Investment
AP Macroeconomics Fall 2013
Insurance Industry Employment Trends:
INFLATION.
Chapter 1 Why Study Money, Banking, and Financial Markets
Insurance Industry Employment Trends:
Insurance Industry Employment Trends: 1990–2016
Insurance Industry Employment Trends: 1990–2017
The Monetary System © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted.
Understanding the economy
Insurance Industry Employment Trends: 1990–2018
The Influence of Monetary and Fiscal Policy on Aggregate Demand
Tuesday, March 21, 2017 Objective: Students will be able to assess ways to be a wise investor in the stock market and in other personal investment options.
Lecture 11 Return and Risk.
Inflation Rising prices.
Insurance Industry Employment Trends:
Business Cycles STANDARD OA3
Insurance Industry Employment Trends: 1990–2016
Demand, Supply, and Equilibrium in the Money Market
Insurance Industry Employment Trends: 1990–2018
Saving, Investment, and the Financial System
© 2016 Pearson Education Ltd. All rights reserved.19-1© 2016 Pearson Education Ltd. All rights reserved.19-1 Chapter 1 Why Study Money, Banking, and Financial.
Insurance Industry Employment Trends: 1990–2017
Insurance Industry Employment Trends: 1990–2017
ENGINEERING ECONOMICS
Insurance Industry Employment Trends: 1990–2018
Insurance Industry Employment Trends: 1990–2017
Insurance Industry Employment Trends: 1990–2018
Insurance Industry Employment Trends: 1990–2017
Deflation What you must be able to do:
Insurance Industry Employment Trends: 1990–2018
Saving, Investment, and the Financial System
Economic Conditions Change Intro to Business 2-2.
Insurance Industry Employment Trends: 1990–2016
Insurance Industry Employment Trends: 1990–2018
Insurance Industry Employment Trends: 1990–2017
Insurance Industry Employment Trends: 1990–2017
Insurance Industry Employment Trends:
Insurance Industry Employment Trends: 1990–2018
Presentation transcript:

Historical and Potential Impacts of Deflation on the P/C Industry September 20, 2010 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  stevenw@iii.org  www.iii.org 1

Deflation Basics 2

eSlide – P6466 – The Financial Crisis and the Future of the P/C Definition Deflation is A falling general price level Note: this is different from A fall in the rate of increase of the general price level; This is called disinflation A fall in the prices of some items or category of items For a prolonged period That is expected to continue indefinitely Sources: http://www-personal.umich.edu/~alandear/glossary/d.html; http://en.wikipedia.org/wiki/Deflation; I.I.I. 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

Primary Causes and Major Bouts of Deflation Deflation results from some or all of A surge in productivity, generally from technological innovation A steep and prolonged drop in the money supply A steep and prolonged recession Note: this is different from a fall in the rate of increase of the price level Major US Bouts of Deflation 1920-22 1930-33 Sources: http://www-personal.umich.edu/~alandear/glossary/d.html; http://en.wikipedia.org/wiki/Deflation; I.I.I. 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

Broad Impact of Deflation Deflation causes… Consumers to delay buying things They expect to buy those things later at lower prices A drop in the level of aggregate demand, from the delay in consumption A transfer of wealth From borrowers and holders of illiquid assets To savers/lenders and holders of liquid assets and currency A drop in the level of business investment Following the drop in aggregate demand Slack in capacity if the economy is in recession Increased likelihood of lower profits or losses as selling prices drop below costs Sources: http://en.wikipedia.org/wiki/Deflation; I.I.I. 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

What History Teaches Us About Deflation and the P/C Industry 6

1920-1950: Inflation, Deflation and the P/C Industry’s Combined Ratio* Combined Ratio Price Index Declining CR Almost Completely a Result of Sharply Lower Loss/LAE Ratio From 1930 to 1933 the Price Level Dropped 24% From Year-end 1929 Through 1932, the Industry’s Combined Ratio Rose from 96.3 to 104.9 as the CPI Dropped. But from 1933 into the 1950s, the Combined Ratio Remained Below 100 Even as Prices Slowly Rose, Then Shot Up after WWII. *From 1920-1934, stock companies only Sources: Best’s Aggregates & Averages; http://www.rateinflation.com/consumer-price-index/usa-historical-cpi.php?form=usacpi 7 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C 7

1920-1950: Inflation, Deflation and P/C Industry Profitability* Return on Average Surplus Price Index From 1930-32 ROAS was below 1.2%, but was 5.1% in 1933 and 10% or higher in 1935-36 From 1930 to 1933 the Price Level Dropped 24% The Significant Deflation from 1930-32 Punished the Industry’s ROAS, But an Improving Economy (and Slight Inflation) Helped Achieve ROAS in Double Digits in 1935-36. *Stock companies only Sources: Best’s Aggregates & Averages; I.I.I.; ; http://www.rateinflation.com/consumer-price-index/usa-historical-cpi.php?form=usacpi 8 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C 8

Deflation’s Effects on the P/C Insurance Industry Lower Claim Severities Particularly for property claims, severity drops for many items that insurers pay for Rate contingency margins increase At least until rate construction reflects persistently declining claims severity, margins will be higher than otherwise due to high trend assumptions arising from use of historical data Reserve Releases? Reserves may develop beneficially to become “redundant” Lower Claim Frequency as Fewer Claims Reach Deductible, Retention Levels Less Use of Reinsurance Lower costs  risks burn through their retentions less quickly, reaching policy limits less quickly 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

www.iii.org Thank you for your time and your attention! Insurance Information Institute Online: www.iii.org Thank you for your time and your attention!