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State of the P&C Market. State of the P&C Market. Presenters : Jim Dwane, Chartis Insurance Jim O’Connor, Willis. Agenda. Definitions & Historical Perspective Industry Trends Q & A. Definition of a Soft Market. Excess Capacity

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Presentation Transcript
slide2

State of the

P&C Market

Presenters : Jim Dwane, Chartis Insurance

Jim O’Connor, Willis

agenda
Agenda
  • Definitions & Historical Perspective
  • Industry Trends
  • Q & A
definition of a soft market
Definition of a Soft Market
  • Excess Capacity
  • Policy Holder Surplus (Current reserves to pay future losses)
  • The more surplus the more premium companies can write
  • Supply goes up; demand stays the same, Prices go down.
impact of combined ratios
Impact of Combined Ratios
  • Combined ratio = losses paid out + expenses incurred / premiums
  • Combined ratio < 100% Insurance company making a profit
  • Combined ratio > 100% companies losing money on underwriting
  • Historical Industry average – 100%
  • Why would insurance companies write to break even? “Investment Return”.
historical perspective
Historical Perspective

Middle 80’s

  • Industry was losing money
  • Rate of return had plummeted
  • Shortfall of capacity due to profitability
  • What Happened?
    • Coverage retracted
    • Prices go up an average of 25 – 50%
    • Tough to buy coverage
historical perspective7
Historical Perspective

2001

  • Worst Year in Industry History
  • Combined ratio was 115%
  • Industry lost money for the first time ever ($13.8 billion)
  • Surplus depleted
  • Rates sky rocketed
changes in the wind
“Changes in the Wind”

2007

  • Investment return 10.9%

2008

  • Many natural disasters (bad year)
  • Investment return .1%

2009

  • Investment return of 4.7%

2004

  • Capacity Increased
  • Combined's Improved
  • Rates come down

2006

  • Best Insurance Year Ever
  • Combined's at 92.4%
  • Investment return record 12.7%
historical perspective9
Historical Perspective

2010

  • Investment Returnof 3.1%

Pop Quiz

  • What is the average long term rate of return for the Fortune 500?
2011 market
2011 Market
  • Soft Phase which began in 2004 continues
  • No major storms make land fall in US in 2010
  • Deepwater Horizon spill. Insured losses 4.6 billion, only effects energy markets
  • Market remains “Over capitalized”
  • Mixed Underwriting Results – net income after taxes decreases 29% from 2010
2011 market11
2011 Market
  • Recession Issues
    • Started with Sub-prime meltdown in 2007
    • Economic slowdown – less to insure
    • Demand for Insurance has tumbled – “Capacity Increases”
    • Slow / No recovery – Continue pressure on premiums
    • Insurance companies still competing for their share of a shrinking market
what could change the market
What Could Change The Market?
  • Reserve release Issues
    • 2008 – 2010: Companies harvest “redundant” reserves to help offset losses on other parts of the balance sheets
    • 2011 reserves – will not have the benefit of prior year reserve releases
    • Possible release errors
    • Possibly to aggressive
    • Profitability could plummet
    • Inflation could put pressure on reserve adequacy.
what could change the market13
What Could Change The Market?
  • Loss Activity – a large catastrophe or a number of smaller ones
  • Universal application of RMS 11- increase loss estimates 60% to 150%
    • Current spotty usage and blended with RMS 7
  • Looming Workers Compensation crisis
    • Average Workers Compensation premium is now below Q4 2000 levels
    • Rates have dropped 63% since 2004
    • Combined Ratio
      • 2005 – 54%
      • 2010 – 115%
property casualty ongoing and future trends
Property /Casualty Ongoing and Future Trends
  • Low Levels of Premium Growth
  • Rate Stabilization
  • Continued Deterioration in Underlying Underwriting Results
  • Continued Strain on ROE
  • Continued Improvements in Governance & ERM – “Finally More than a Buzzword”
  • Increased Likelihood of Consolidation
  • More Sophisticated Modeling Driving Insurance Company Portfolio Management
low levels of nwp growth
Low Levels of NWP Growth
  • 2010 - .9%
  • 2011 – 3%-4%
  • 2012 – 4%-5%
  • 2013 – 5%-6%
  • Some recovery as a result of overall economic environment
  • Some recovery as a result of rate stabilization
  • Sources: AM Best; Insurance Information Institute; SNL Financial; Conning Research & Consulting
rate stabilization
Rate Stabilization
  • Six straight years of decline
  • Through 2Q, pricing is flat
  • …But the market is not quite ready to “turn”
criteria necessary for a market turn
Criteria Necessary for a “Market Turn”:
  • All Four Criteria Must Be Met:
continued deterioration in underlying u w results
Continued Deterioration in Underlying U/W Results
  • Large underwriting losses are not sustainable in the current investment environment.
  • Industry combined ratio has climbed steadily since 2006
  • 2011 is already the highest catastrophe loss year on record.
continued strain on return on equity
Continued Strain on Return on Equity
  • Combined ratios must be better than they used to be!
  • The industry continues to struggle to meet its cost of capital.
      • 2008 – 6.4% shortfall
      • 2009 – 3.2% shortfall
      • 2010 – 2.7% shortfall
continued improvements in governance erm
Continued Improvements in Governance & ERM
  • ERM – “Finally more than a Buzzword”
  • Companies are more aware of their correlated and uncorrelated risk
  • Board Level Committees
  • More robust Chief Risk Officer function
increased likelihood of consolidation
Increased Likelihood of Consolidation

Driven By:

  • Need for infrastructure & scale
  • Solvency II in Europe as a means of meeting the new Capital requirements
  • A protracted soft market that is having an “exhausting” effect on smaller and/or weaker carriers & brokers.
improved modeling sophistication
Improved Modeling Sophistication
  • Actuarial modeling has become more precise and more broadly used
  • Increased refinement of catastrophe modeling
  • There is an ongoing reduction in the correlation among lines as it relates to portfolio management.
      • Property markets have CAT & Casualty markets have TORT, inflation & public policy
historically hard markets follow when surplus growth is negative
Historically, Hard Markets Follow When Surplus “Growth” is Negative*

Historically, Hard Markets Follow

When Surplus “Growth” is Negative*