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Market Cycle Update Personal Lines

Market Cycle Update Personal Lines. Greg Ciezadlo, FCAS, MAAA Farmers Insurance Group. Casualty Actuarial Society Spring Meeting 2002 – San Diego, California. Today’s Topics. Historical Overview Past cycles The current downturn Why cycles? Insurer reaction to the current cycle Pricing

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Market Cycle Update Personal Lines

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  1. Market Cycle UpdatePersonal Lines Greg Ciezadlo, FCAS, MAAA Farmers Insurance Group Casualty Actuarial Society Spring Meeting 2002 – San Diego, California

  2. Today’s Topics • Historical Overview • Past cycles • The current downturn • Why cycles? • Insurer reaction to the current cycle • Pricing • Product • Market availability • Segmentation • Future outlook for personal lines insurers

  3. …worst year ever in 2001 as the industry recorded an after-tax loss for the first time in history.

  4. P/C Net Income After Taxes1993-2001 ($ Millions) 2001 was the first year ever with a full year net loss Sources: A.M. Best, ISO, Insurance Information Institute.

  5. Key Drivers • Confluence of events • Insurance cycles • Capital markets • Investment yields • TORTure • Mold • WTC/Catastrophes

  6. Growth in Net Premiums Written (All P/C Lines) 2000: 5.1% 2001: 8.1% 2002 Forecast: 14.7%* The underwriting cycle went AWOL in the 1990s. It’s Back! *Estimate from I.I.I. Groundhog Survey. Source: A.M. Best, Insurance Information Institute

  7. Auto Repair Costs

  8. Construction Material Costs

  9. HO insurance costs & cost of home repairs *2001 Estimate

  10. Investment environment -19% -31% March 2000 – December 2001

  11. Net Investment Income Pricing & underwriting problems were exacerbated by declining investment income Billions (US$) Short-term interest rates are under 2%! • Facts • 1997 Peak = $41.5B • 1998 = $39.9B • 1999 = $38.9B • = $40.7B • = $37.1E Source: A.M. Best, Insurance Information Institute

  12. TORT-ure • Asbestos • “Toxic” Mold • Aftermarket Parts • Lead • Arsenic Treated Lumber • Construction Defects • Guns • What’s Next? • September 11!!!

  13. Average Jury Awards1994 vs. 2000 Source: Jury Verdict Research; Insurance Information Institute.

  14. Stachybotrys

  15. Texas: Paid Losses for Water Damage Claims In Millions * 2001 (estimate based on Jan. - Mar. data) Source: Texas Department of Insurance

  16. 9/11/2001

  17. U.S. insured catastrophe losses $ Billions

  18. P/C Industry Combined Ratio Combined Ratios 1970s: 100.3 1980s: 109.2 1990s: 107.7 2000 = 110.1 2001 Estimate = 116.0 2002 Forecast* = 108.0 Sources: A.M. Best; III * Based on III 2002 Groundhog Forecast

  19. Personal Lines Combined Ratios PERSONAL AUTO HOMEOWNERS 97 98 99 00 01E BE* 97 98 99 00 01E BE* *Breakeven Ratio: Reflects AY results, includes investment income; assumes 4% interest rate. Source: A.M. Best

  20. Policyholder Surplus: 1975-2001 • Surplus Peaked at $336.3 Billion in 1999 • Surplus decreased 8.7% in 2001 to $289.6 Billion. • Surplus is now lower than at year-end 1997. Billions (US$) Source: A.M. Best, Insurance Information Institute

  21. Why do we still have cycles? • Lag between emerging trends and insurers’ ability to react in the market • Continued reliance on investment income to offset underwriting losses • Reluctance to lead the pack • Incentives in place based on the past, not on the future • New and unusual events or coverage • Tort liability crises in the 70’s and 80’s • High inflation in the 70’s • Mold • Catastrophes

  22. The Industry’s Reaction • Price increases • New business limitations • Coverage modifications and/or exclusions • More sophisticated segmentation systems • Insurance scoring using credit information • Complex tiering plans using scoring plus other variables • Introduction of rating plans in HO focused on the individual not the property

  23. Average Price Change of Personal Lines Renewals *III estimates Source: Conning, III

  24. The Texas Result: A Lesson to be Learned 4 out of the 5 top insurers stopped writing homeowners HOB insurance policies due to the mold impact on business

  25. Tighter new business underwriting rules New business quotas Highly segmented rate changes Weaker nonstandard auto market Stop writing new business Withdrawal from the line Mold exclusions and water damage limitations Use of insurance scoring models for acceptance or retention Market Restrictions PERSONAL AUTO HOMEOWNERS

  26. Mold-Induced Rate Increases Will Impact Affordability in TX* • *As a % of the median family of 4’s income. • Source: NAIC, Insurance Information Institute

  27. In summary:

  28. Reasons Why Market Will Remain Hard • Price increases by market leaders • The Homeowners line has a long, tough road ahead to return to profitability • Large price increases • Catastrophes remain problematic • Will product suffer from affordability or availability issues? • Auto is in better shape, but … • Cost pressures from Diminished Value, OEM, etc. • Influence of legislation and court decisions on liability cases • Uncertain investment future • Wall Street pressure for short-term profits

  29. Where we are heading… …conditions are set for improved results in 2002 as: • pricing environment continues to harden appreciably • policy coverage terms and conditions become more restrictive.

  30. Outlook for 2002: Personal Lines PERSONAL AUTO HOMEOWNERS 97 98 99 00 01E 02E BE* 97 98 99 00 01E 02E BE* *Breakeven Ratio: Reflects AY results, includes investment income; assumes 4% interest rate. Source: A.M. Best

  31. Market Cycle UpdatePersonal Lines Greg Ciezadlo, FCAS, MAAA Farmers Insurance Group Casualty Actuarial Society Spring Meeting 2002 – San Diego, California

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