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The State of the Insurance Market

The State of the Insurance Market. Kevin M. Bingham – Deloitte & Touche 2002 Casualty Actuarial Society Annual Meeting Boston, Massachusetts November 10, 2002 1:45 – 3:15pm. INTRODUCTION. Hardening Market Drivers – The answers for your insurance consumers Historical Perspective

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The State of the Insurance Market

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  1. The State of the Insurance Market Kevin M. Bingham – Deloitte & Touche 2002 Casualty Actuarial Society Annual Meeting Boston, Massachusetts November 10, 2002 1:45 – 3:15pm

  2. INTRODUCTION • Hardening Market Drivers – The answers for your insurance consumers • Historical Perspective • Insurance Layering • Perception Change • Impact on Consumer • Market Examples • Closing Thoughts

  3. Hardening Market Drivers

  4. Hardening Market Drivers • Deteriorating industry results • September 11th • Reduced capacity • “Enronitis” • Asbestos • Litigation/Regulatory • Rating agency pressure

  5. Deteriorating Industry Results • Intense price competition during the 1990s soft market • Rate decreases • Pricing Spiral • Declining investment returns • Low interest rates • Declining equity markets • Catastrophes on the rise • Favorable impact on calendar year financials from workers compensation reserve takedowns have been fully reflected by companies. Accident year combined ratios are rising significantly. • Rising medical inflation • Medical Malpractice crisis Worst possible combination

  6. September 11th • Insured losses ranging from $30 to $50 billion dollars • Rethinking of insurance industry’s determination/quantification of probable maximum loss (PML) – “Actuarial pricing for the WTC reflected a PML of 4 floors” • Force insurers and reinsurers to step back and re-evaluate their exposures to: • Concentration risk • Marquee properties in the same city • Multi-line exposure (e.g., WC, property and business interruption) • Layer risk • Attritional • Severity • Policy language (e.g., WilProp form, terrorism exclusions)

  7. Reduced Capacity • St. Paul exiting medical malpractice • Collapse of Fortress Re aviation underwriting pool • State specific capacity issues • Texas homeowners’ and mold impact • N.J. automobile • Pennsylvania medical malpractice • California homeowners’ (State Farm policy freeze) • Florida nursing homes • Workers compensation • Reliance • Frontier • Fremont • Collapse of Unicover and other WC carve-out pools eliminating cheap “working layer” protection

  8. Litigation/Regulatory Average Jury Awards (000s) • Jury Verdict Research (www.juryverdictresearch.com) /Insurance Information Institute (www.iii.org)

  9. Litigation/Regulatory • Massive individual awards • Texas $313 million dollar award to a plaintiff alleging negligence against a nursing home • Numerous asbestos awards • Mold (www.moldupdate.com) • Texas $32.1 million dollar award against Farmers • California $18.5 million dollar award against Allstate (judge reduced to $3 million, case under appeal) • Class action lawsuits • Bursting of internet bubble and rising D&O losses • State elimination of credit scoring in rating personal lines products

  10. “Enronitis” • Enron “double hit” for insurers ($3.8 billion in exposure) • 64% Investment Exposure • Common Stock, Preferred Stock, Corporate Bonds • John Hancock $320 million invested in Enron • After-tax write downs • 36% Insurance Exposure • Surety • Directors and Officers • Financial Guarantee • Worldcom ($5.7 billion in exposure – 94% investment related) • Global Crossing • Tyco • Adelphia • Quest And the list goes on and on and…

  11. Asbestos • A.M. Best industry estimates • $65 billion as of May 2001 • $25 billion increase from prior estimate of $40 billion • Key drivers • Rising jury awards • 2002 $53 million dollar jury verdict to a family of a man who died of lung cancer caused by asbestos • Asbestos related bankruptcies and push by lawyers for accessing deep pocketed insurers • Shift from product coverage (limited) to premises/operations (unlimited) • Claimants without manifestation • Reserve strengthening impacting financials • CNA $1.2 billion in reserve strengthening • Allianz/Fireman’s Fund $750 million in reserve strengthening • Chubb $625 million in reserve strengthening

  12. Rating Agency Pressure

  13. Historical Perspective

  14. Effective Rate Level – The Story

  15. Effective Rate Level – Insurance Consumer Perspective • Risk manager (RM) • Budgetary focus • Pro formas usually only include one or two historical years • RM likely doesn’t know true cumulative “effective rate level” • RM may track audited premium • Audited premium doesn’t include • Soft market SIR/large deductible “give aways” • Broker driven coverage expansions • Exposure shift • RM likely attributes some (if not all) of the decreasing premiums to proactive risk management and EH&S department involvement “99.9% of companies are better than average”

  16. Effective Rate Level – Insurance Consumer Perspective • Thought process: • Focus on rate level only • Missing SIR changes • Missing long term pricing and concept of “rate adequacy”

  17. Effective Rate Level – Insurance Company Perspective • Thought process: • Focus on effective rate level • Focus on “rate adequacy” • If we assume 1992 rate levels are adequate, then the insurance company would need a 250% increase to break even

  18. Effective Rate Level – Message • Communication of rate change • +25% rate change • 36% of 1992 rate level • +75% rate change • 50% of 1992 rate level (still need to double rates) • Tough sell to RM RM – “Poor insurance company pricing decisions of the past should be borne by the Insurer, not the buyer.” Versus Insurer – “Cannot continue to operate at a loss. Current environment doesn’t allow for policy subsidation.”

  19. Insurance Layering: Insurers’ Perceptions Change and Impact on Insurance Consumers

  20. Insurance Layering: Insurers’ Perceptions Change Post-9/11 Pre-9/11 Excess Layers Statutory Limits? Excess Layers Terrorism Excluded By Reinsurers Working Layer(s) Working Layer(s) Retention Retention

  21. Impact on Insurance Consumer Post-9/11 • Increased SIRs/decreased large deductibles • Reversal of 90s trend • Little or no premium credit • Primary insurers forced to provide protection against terrorism • Shift of highly concentrated risk into state funds (e.g., N.Y. City financial service firms and WC) • Significant rate increases • Property • WC • Lack of coverage Statutory Limits? Excess Layers Working Layer(s) Retention

  22. Impact on Insurance Consumer Post-9/11 • Rising attachment points • “Actuarial Pricing” with U/W flair • Terrorism excluded • Must purchase separately • Limits range from $25-$50 million • Significant additional cost • Policy forms tightening • WilProp Form – occurrence defined • Coverage decreasing • D&O • WC • Significant rate on line increases • Fewer market players Statutory Limits? Excess Layers Working Layer(s) Retention

  23. Impact on Insurance Consumer Post-9/11 • “Best Terms” • “Actuarial Pricing” with U/W flair • Significant ROL increases • Minimum premiums • More creative “PMLs” • No credits for raising attachments • Willing to walk away from deal • Terrorism excluded Statutory Limits? $9M = Excess Layers $6M $3M Working Layer(s) Retention

  24. Impact on Insurance Consumer • Safety push from insurers/reinsurers • Return to work focus (a/k/a integrated disability management) • Employee training (e.g., officer training, EH&S involvement) • Demand for quicker claim notification • More detailed underwriting information • Review of business continuity plan • Increased audits (e.g., payroll, property, etc.)

  25. Market Examples

  26. Market Examples • Major state fund unable to purchase unlimited excess WC coverage. Drastically reduced coverage with significant price increases. • Governments and cities having difficulty obtaining insurance for their high profile buildings and land marks • Lack of coverage for major events (e.g., sports, fairs, concerts, etc.) • New Jersey Sports and Exposition Authority insurance costs more than tripled to $2.4 million.

  27. Market Examples • A hospital institution obtained 1/5th the property coverage for three times the prior year’s cost, with terrorism coverage excluded. It took 23 insurers to replace the coverage offered by a single insurer last year. • A steel merchant and fabricator’s general liability premiums increased from $8,000 last year to $75,000 upon renewal. As an added bonus, auto premiums jumped from $31,000 to $56,000 while umbrella premiums jumped from $6,000 to $34,000. A 267% increase in total. • Southwest Airlines’ liability insurance for their 364-plane fleet soared from $20 million to $100 million, a 400% increase.

  28. Market Examples • George Washington University’s insurers have cut the school’s former $1 billion policy in half, raised its premiums 160% and advised that renewing terrorism coverage would cost 15 times more. • Before September 11th, the MTA’s property insurance absorbed up to $1.5 billion in property damages, minus a $15 million deductible, at a cost of $6.4 million. Now the agency has two property insurance policies, one providing $500 million of plain property coverage with a $30 million deductible for $18.6 million, the other offering $100 million in terrorism coverage with a $30 million deductible for $7.5 million. A total increase of 308%, for less than 1/3rd of the original protection.

  29. Closing Thoughts

  30. Closing Thoughts • Self-insured clients developing “story board” for next round of renewals • Proactively address concentration risk • Perform independent actuarial analyses • Confidence levels • Worst case scenario testing • Put on “road show” including following professionals • Risk management • Legal • Claims • Safety • Flight to quality taking hold

  31. Closing Thoughts • Duration of hard market in question • Statutory limits becoming available • New Bermuda capital needs to find a home • Hard to deliver on 20% promised returns when holding free capital in 3% risk free investments • Federal back stop important • Passage critical • BUT CONSUMERS - will remember the insurers/reinsurers who abandoned ship • Clients are upset • What happened to long-term relationships? • “Best Terms” = Insurance Industry Collusion? • Captive boom • Majority of premium may never return to market

  32. Closing Thoughts • The insurance transaction will no longer be viewed simply as the insurer selling insurance and the insured paying a premium. Instead, the insurer/reinsurer will view themselves as “investing” in a portfolio of risks composed of the best prepared insurance consumers in the industry.

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