An Economic Forecast For PC Insurers: Critical Issues for LongTerm Profitability

1
An Economic Forecast For P/C InsurersCritical
Issues forLong-Term Profitability

• Insurance Education Day
• Columbus, OH
• April 5, 2006

http//www.iii.org/media/industry/outlooks/ohio/
Robert P. Hartwig, Ph.D., CPCU, Senior Vice
President Chief Economist Insurance Information
Institute ? 110 William Street ? New York, NY
10038 Tel [phone] ? Fax [phone]
? bobh_at_iii.org ? www.iii.org
2
Presentation Outline

• P/C Profit Overview
• Public Perceptions of the P/C Insurance Industry
• The Six Key Issues Impacting P/C Profitability
• Underwriting
• Pricing
• Investments
• Expenses
• Leverage (Capacity)
• P/C Operating Environment Tort Focus
• Catastrophe Loss Management
• Commercial Personal Lines A Quick Overview
• Insurance-to-Value Proper Insurance
• Q A

3
P/C PROFIT OVERVIEW2006 Outlook is Good
4
Highlights Property/Casualty,9-Mos. 2005 vs.
9-Mos. 2004
Growth rate barely 1/2 that of CY2004
Investment Income Rebound?
Lowest in many years
Source ISO, Insurance Information
Institute Comparison is with year-end 2004 value.
5
P/C Net Income After Taxes1991-2005Q4E (
Millions)

• 2001 ROE -1.2
• 2002 ROE 2.2
• 2003 ROE 8.9
• 2004 ROE 9.4
• 2005E ROAS 9.5

2005 NIAT will probably be above 2004
ROE figures are GAAP 2005 is III estimate.
Return on avg. surplus. Sources A.M. Best,
ISO, Insurance Information Institute.
6
Strength of Recent Hard Markets by NWP Growth
1975-78
1984-87
2001-04
2006-2010 (post-Katrina) period will resemble
1993-97 (post-Andrew)
2005 biggest real drop in premium since early
1980s
Note Shaded areas denote hard market
periods. Source A.M. Best, Insurance
Information Institute
2005-10 figures are III forecasts/estimates.
7
Growth in Direct Written Premiums Ohio and US
Decline in premiums in OH was substantial
(-15.7) in 2003-4 while US was up 6.6
Source Insurance Information Institute NAIC.
8
Advertising Expenditures by P/C Insurance
Industry, 1999-2004
Ad spending by P/C insurers is at a record high,
signaling increased competition
Source Insurance Information Institute from
consolidated P/C Annual Statement data.
9
ROE P/C vs. All Industries 19872006F
2006 Estimate 13
2005H1 P/C ROAS 15.3
2005 P/C ROAS 9.5 after adjusting for 2005
Hurricanes
GAAP ROEs except 2005 P/C figure return on
average surplus. 2005/6E figure is III full-year
estimate. Source Insurance Information
Institute Fortune for all industry figures
10
ROE P/C vs. All Industries 19872005E
2004/5 ROEs excl. hurricanes
Sept. 11
Hugo
Katrina, Rita, Wilma
Lowest CAT losses in 15 years
Andrew
Northridge
4 Hurricanes
Source Insurance Information Institute Fortune
11
RETURN ON EQUITY (Fortune)Stock Mutual vs.
All Companies
Stock insurer ROEs consistently above mutuals
Some mutual insurers sell/market the mutuality
concept effectively
Fortune 1,000 group. Source Fortune Magazine,
Insurance Information Institute.
12
ROE P/C (US OH) vs. All Industries, 19912004
OH has recently outperformed US P/C insurers.
Source Insurance Information Institute NAIC,
Fortune
13
RNW for Major P/C Lines,1994-2003 Average
10-Year returns for some major p/c lines
surprisingly good, but HO is a major laggard
Source NAIC Insurance Information Institute
14
ROE for Major Commercial Lines in Ohio, 1993 -
2004
Commercial Auto rebounded in Ohio in recent years
Source NAIC
15
ROE for Personal Lines in Ohio1993 - 2004
12-Year Average Auto 10.36 Home -1.68
Source NAIC
16
Rates of Return on Net Worth for Homeowners Ins
US vs. OH
Will coastal insurers reallocate resources to
Midwest/Plains?
Averages 1993 to 2004 US HO Insurance
2.89 Ohio HO Insurance -1.68
Source NAIC, Insurance Information Institute
17
Rates of Return on Net Worth for Pvt. Passenger
Auto US vs. OH
Averages 1993 to 2004 US PPA Insurance
9.2 Ohio PPA Insurance 10.4
Source NAIC, Insurance Information Institute
18
PP AUTO 2004 Return on Equity, Ohio Nearby
States
2004
Source NAIC, Insurance Information Institute
19
HOME 2004 Return on Equity, Ohio Nearby States
2004
Source NAIC, Insurance Information Institute
20
Share of Auto HO Market in OHIO by Distribution
Channel
HOME Direct/Captives gain, IA channel slips
AUTO Direct slips while Regional/Captive
agencies gain
Source A.M. Best Insurance Inforrmation
Institute.
21
WALL STREETMAINTAINING THE CONFIDENCE OF WALL
STREET IS CRITICAL FOR MANY INSURERS
22
P/C Insurers Stocks Up in 2005, Brokers Up Too,
Reinsurers Down
Total 2005 Returns
P/C insurer stocks outperforming the market
despite hurricanes
Brokers up on tight market hopes
Reinsurers lagging on record CAT losses
Source SNL Securities, Standard Poors,
Insurance Information Institute
23
Change in YTD Stock Performance by Sector Pre-
Post-Katrina/Rita/Wilma
P/C reinsurer stocks hurt but now fully
recovered. Brokers rose on expectation of tighter
conditions and demand for broker services
closure of Spitzer issues.
Katrina Aug. 29
Rita comes ashore Sept. 24
Wilma landfall Oct. 24
Source SNL Securities Insurance Information
Institute
24
Insurance Stocks Off to a Slow Start in 2006
Total YTD Returns Through March 31, 2006
Source SNL Securities, Standard Poors,
Insurance Information Institute
25
PUBLIC PERCEPTIONS OF INSURANCE INDUSTRYHave
Public Perceptions of the Industry Been Affected
by Mega-Disasters and Scandals
26
Percent of Public Rating Industry as Very or
Mostly Favorable, 1968-2005
Favorable ratings of insurers dropped just 1
point after Katrina
Source Insurance Information Institute Pulse
Survey, December 2005.
27
Public Perceptions of Hurricane Katrina Response
Adequacy
Dont Know
Best
Worst
Source Insurance Information Institute Pulse
Survey, December 2005.
28
Who Should be Responsible for Dealing With
Katrina?
House Special Committee Chertoff performed his
duties late, inefficiently or not at all.
-2/15/05.
Most people believe governments, not insurers,
are primarily responsible for dealing with Katrina
Source Insurance Information Institute Pulse
Survey, December 2005.
29
Issue 1UNDERWRITING Surprisingly Strong in
2005, Stage is Set for a Good 2006
30
P/C Industry Combined Ratio
January survey of analysts called for a 101.8
combined ratio in 2005, hurt by CATs and reserve
charges. Actual 9-month results came in at
100.0.
Expectation is for an underwriting profit in 2006
Sources A.M. Best ISO, III. III
estimate/forecast for 2005/6
31
Personal LinesCombined Ratio, 1993-2006E
A very strong 2006 is expected in personal lines
assuming normal catastrophe loss activity
Source A.M. Best Insurance Information
Institute. 2006 forecast from Fitch Ratings as of
12/7/05.
32
Commercial Lines Combined Ratio, 1993-2005E
Outside CAT-affected lines, commercial insurance
is doing fairly well. Caution is required in
underwriting long-tail commercial lines.
2005 results remarkably strong despite storms
Source A.M. Best Insurance Information
Institute Fitch estimate for 2005. Actual
1H05 combined ratio all lines was 92.7.
33
Ohio Direct Loss Ratios
Loss Ratios improved substantially from 2001-2004
Source NAIC Insurance Information Institute
34
Impact of Reserve Changes on Combined Ratio
Reserve adequacy is improving substantially
Source A.M. Best, Lehman Brothers for years
2005E-2007F
35
2004 Prior Year Reserve Development by Line (
Millions)
Longer-tail casualty coverages have been the
source of most reserve problems in recent years
Reserve Strengthening
Reserve Releases
Source A.M. Best, Lehman Brothers.
36
Underwriting Gain (Loss)1975-2006F
Billions
Before Katrina, p/c insurers were on track for
only the second underwriting profit in 27 years
U/W profit in 2006 likely.
2005 estimate is III estimate. Source A.M.
Best, Insurance Information Institute
37
Combined Ratio Reinsurance vs. P/C Industry
Sept. 11
2004/5 Hurricanes
HurricaneAndrew
All lines figure is full-year III estimate.
RAA figure for 2005. Source A.M. Best, ISO,
Reinsurance Association of America, Insurance
Information Institute
38
A 100 Combined Ratio Isnt What it Used to Be 95
is Where Its At
Combined ratios today must be below 95 to
generate Fortune 500 ROEs
2005 figure is return on average statutory
surplus based in first 9 monhts data Source
Insurance Information Institute from A.M. Best
and ISO data.
39
UNDERWRITING AFFECTS FINANCIAL STRENGTHIs There
Causefor Concern?
40
P/C Company Insolvency Rates,1993 to 2004

• Insurer insolvencies are increasing
• 12-yr industry failure rate 0.71
• Failure rating for B or better rating 0.49
• Failure rate for D through B rating 1.29

12-yr Failure Rate 0.71
38
30
30
21
10
Source A.M. Best Insurance Information
Institute 1993-2003
41
Reason for P/C Insolvencies(218 Insolvencies,
1993-2002)
Reserve deficiencies account for more than half
of all p/c insurers insolvencies
So far, Katrina appears to have claimed just 1
victimRosemont Reexpected to go into run-off
Source A.M. Best, Insurance Information
Institute
42
Ratings Agencies Tightening Requirements for CATs

• 2006 SRQ CAT Model Reqs.
• All Property Exposure
• Auto Physical Damage
• Reinsurance Assumed
• Pools Assessments
• All Flood Exposure
• WC Losses from Quake
• Fire Following
• Storm Surge
• Demand Surge
• Secondary Uncertainty

• ALSO A.M. Best will perform additional
  stress-tested risk-adjusted capital analysis
  for a second event in order to determine the
  potential financial condition of an entity post a
  severe event.
• IMPLICATION Some insurers may be required to
  carry more capital to maintain the same rating.

Best currently estimates PML for 100-yr. wind
250-yr. quake to determine capital adequacy
SRQ Supplemental Rating Questionnaire Source
A.M. Best Review Preview, January 2006.
43
Historical Ratings Distribution,US P/C Insurers,
2000 vs. 2005
2000
2005
A/A shrinkage
Ratings agencies increasing emphasis on multiple
events?require more capital
Source A.M. Best Rating Downgrades Slowed but
Outpaced Upgrades for Fourth Consecutive Year,
Special Report, November 8, 2004 for 2000 2006
Review Preview for 2005 distribution.
Ratings B and lower.
44
Underwriting Matters Because Pricing is Often
Undisciplined
45
Private Passenger AutoCombined Ratios, 1993-2005E
Somebody remembered
Somebody forgot theres a relationship between
price and underwriting performance
Sources Insurance Information Institute from
A.M. Best and NAIC data 2004/5 expenditure
estimates from III.
46
OTHER OPERATING ISSUES AFFECTING UNDERWRITING
47
Other Operational Challenges

• Insurance Scoring Challenges Based on Disparate
  Impact
• Territorial Rating Race-Based Issues Loom Large
• Occupation/Education Discrimination alleged via
  rating factors, esp. in NJ
• CAT Modeling Need Greater Acceptance by
  Regulators
• Regulatory Environment Still Antiquated

48
CATASTROPHE LOSS MANAGEMENTFailure to
Adequately Manage this Risk Has Been Devastating
49
Most of US Population Property Has Major CAT
Exposure
50
U.S. InsuredCatastrophe Losses ( Billions)
Billions
100 Billion CAT year is coming soon
2005 was by far the worst year ever for insured
catastrophe losses in the US, but the worst has
yet to come.
Excludes 4B-6b offshore energy losses from
Hurricanes Katrina Rita. Note 2001 figure
includes 20.3B for 9/11 losses reported through
12/31/01. Includes only business and personal
property claims, business interruption and auto
claims. Non-prop/BI losses 12.2B. Source
Property Claims Service/ISO Insurance
Information Institute
51
Global Number of Catastrophic Events, 19702005
The number of natural and man-made catastrophes
has been increasing on a global scale for 20 years
Record 248 man-made CATs record 149 natural
CATs in 2005
Man-made disasters without road disasters.
Source Swiss Re, sigma No. 1/2005 and 2/2006.
52
Insured Property Catastrophe Losses as Net
Premiums Earned, 19832005E
US CAT losses were a record 14.3 of net premiums
earned in 2005 and were 4.3 times the 1984-2004
average of 3.3
Insurance Information Institute estimate of
14.3 for 2005 based estimated 2005 DPE of
418.8B and estimated insured CAT losses of
60B. Sources ISO, A.M. Best, Swiss Re Economic
Research Consulting Insurance Information
Institute.
53
Global Insured CAT Losses, 19702005(Property
and Business Interruption)
Billion USD, at 2004 prices
There has been a huge increase in the insured
value of global CAT losses in recent years
Record 78 billion in insured natural CAT losses
in 2005, compared to 5B in man-made disasters
Source Swiss Re, sigma No. 1/2005 2/2006.
54
2005 Was a Busy, Destructive, Deadly Expensive
Hurricane Season
All 21 names were used for the first time ever,
so Greek letters were used for the final 6
storms Alpha though Zeta
2005 set a new record for the number of
hurricanes tropical storms at 27, breaking the
old record set in 1933.
Source WeatherUnderground.com, January 18, 2006.
55
Number of Major (Category 3, 4, 5) Hurricanes
Striking the US by Decade
1930s mid-1960s Period of Intense Tropical
Cyclone Activity
Mid-1990s 2030s? New Period of Intense Tropical
Cyclone Activity
10
Tropical cyclone activity in the mid-1990s
entered the active phase of the multi-decadal
signal that could last into the 2030s
Already as many major storms in 2000-2005 as in
all of the 1990s
Figure for 2000s is extrapolated based on data
for 2000-2005 (6 major storms Charley, Ivan,
Jeanne (2004) Katrina, Rita, Wilma
(2005)). Source Tillinghast from National
Hurricane Center http//www.nhc.noaa.gov/pastint.
shtm.
56
Top 10 U.S. Cities for Hurricane Risk
Source AIR Worldwide
57
Number of Hurricanes Directly and Indirectly
Affecting the Northeast United States Since 1900
Hurricanes affect Northeast more commonly than
presumed
Source New Hampshire Office of Emergency
Management
58
Inflation-Adjusted U.S. Insured Catastrophe
Losses By Cause of Loss, 1985-2004¹
Insured disaster losses totaled 221.3 billion
from 1984-2004 (in 2004 dollars). After 2005
season, tropical cyclones will account for about
45 of the total.
1 Catastrophes are all events causing direct
insured losses to property of 25 million or more
in 2004 dollars. Catastrophe threshold changed
from 5 million to 25 million beginning in 1997.
Adjusted for inflation by the III. 2 Excludes
snow. 3 Includes hurricanes and tropical storms.
4 Includes other geologic events such as volcanic
eruptions and other earth movement. 5 Does not
include flood damage covered by the federally
administered National Flood Insurance Program. 6
Includes wildland fires.
Source Insurance Information Institute estimates
based on ISO data.
59
Number of Tornados Associated Deaths, 1985-2005p
There appears to be an upward trend in the number
of tornados, though not deaths. Detection
Increase?
Source III from National Weather Service data.
60
Total Value of Insured Coastal Exposure (2004,
Billions)
Source AIR Worldwide
61
Value of Insured Residential Coastal Exposure
(2004, Billions)
Source AIR
62
Insured Coastal Exposure as a of Statewide
Insured Exposure (2004, Billions)
Source AIR Worldwide
63
TRIA EXTENSIONThe Burden Grows
64
Insurance Industry Retention Under TRIA (
Billions)
Extension

• Individual company retentions rise to 17.5 in
  2006, 20 in 2007
• Above the retention, federal govt. pays 90 in
  2006, 85 in 2007

Congress Administration want TRIA dead
Source Insurance Information Institute
65
TRIA Extension Major Features

• Term 2-Year ExtensionSunsets December 31, 2007
• Extension for 3rd year possible if progress made
  toward long-term solution
• Trigger Increased
• Up from 5MM now to 50MM in 2006 and 100MM in
  2007
• Lines Dropped
• Commercial Auto, Prof. Liability, Surety,
  Burglary Theft, FMP
• Deductibles Increase for Individual Companies
• 15 Now ?17.5 in 2006 ? 20 in 2007 for all
  lines
• Retentions Increase for Industry Aggregate
• 15B Now ? 25B in 2006 ? 27.5B in 2007
• Co-Pays Increase for Amount Above Industry
  Aggregate
• 10 Now ? 10 in 2006 ? 15 in 2007
• Federal Recoupment
• Remains conditional
• Study to Develop Long-Term Solutions
• Must produce report to Congress by September 30
• Nuclear, Biological, Chemical Radiological Risk
• Maintains exclusion

66
Terrorism Coverage Take-Up Rate Rising
Terrorism take-up rate for non-WC risk rose
through 2003, 2004 and 2005
TAKE UP RATE FOR WC COMP TERROR COVERAGE IS 100!!
Source Marsh, Inc. Insurance Information
Institute
67
Terrorism Coverage Take-Up Rates by Industry
If TRIA sunsets at the end of 2007, additional
reinsurance capacity will be badly needed (now
estimated at just 4-6 billion)
Source Marsh, Inc.

As of August 2005.
68
The 2006 Hurricane SeasonPreview to Disaster?
69
Outlook for 2006 Hurricane Season
Average over the period 1950-2000. Source Dr.
William Gray, Colorado State University, April 4,
2006.
70
Probability of Major Hurricane Landfall (CAT 3,
4, 5) in 2006
Average over past century. Source Dr. William
Gray, Colorado State University, April 4, 2006.
71
Hurricanes Katrina, Rita WilmaTheir Place in
History
72
Insured Loss Claim Count for Major Storms of
2005
Hurricanes Katrina, Rita, Wilma Dennis produced
a record 3.2 million claims
Property and business interruption losses only.
Excludes offshore energy marine losses. Source
ISO/PCS as of February 8, 2006 Insurance
Information Institute.
73
Top 10 Most Costly Hurricanes in US History,
(Insured Losses, 2005)
Seven of the 10 most expensive hurricanes in US
history occurred in the 14 months from Aug. 2004
Oct. 2005 Katrina, Rita, Wilma, Charley, Ivan,
Frances Jeanne
Sources ISO/PCS Insurance Information
Institute.
74
Hurricane Katrina Insured Loss Distribution by
State ( Millions)
Louisiana accounted for 64 of the insured losses
paid and 56 of the claims filed
Total Insured Losses 38.111 Billion
As of February 8, 2006 Source PCS division of
ISO.
75
Hurricane Katrina Claim Count Distribution by
State
Louisiana accounted for 64of insured losses paid
and 56 of claims filed
Total Claims 1,751,800
As of February 8, 2006 Source PCS division of
ISO.
76
Hurricane Katrina Loss Distribution by Line (
Billions)
Total insured losses are estimated at 38.1
billion from 1.7518 million claims. Excludes
2-3B in offshore energy losses
As of February 8, 2006 Source PCS division of
ISO.
77
Hurricane Katrina Insured Loss and Claim
Distribution by State
As of February 8, 2006. Source PCS division of
ISO.
78
Hurricane Rita Insured Loss Distribution by State
( Millions)
Louisiana accounted for 59 of the insured
losses, Texas 40. Total claims
381,000. Excludes offshore energy losses of 2-3B
Total Insured Losses 4.9762 Billion
As of February 8, 2006 Source PCS division of
ISO.
79
Hurricane Rita Claim Count Distribution by State
Louisiana accounted for 48.6 of the insured
losses, Texas 44.4. Excludes offshore energy
losses of 2-3B
Total Claims 381,000
As of February 8, 2006 Source PCS division of
ISO.
80
Hurricane Rita Loss Distribution, by Line (
Millions)
Total insured losses are estimated at 5.0
billion (excl. offshore energy of 2-3B) from
381,000 claims.
As of February 8, 2006 Source PCS division of
ISO.
81
Hurricane Rita Insured Loss and Claim
Distribution by State
As of February 8, 2006. Source PCS division of
ISO.
82
Government Aid After Major Disasters (Billions)
Hurricane Katrina aid will dwarf aid following
all other disasters. Congress may authorize
150-200 billion ultimately (about 400,000 for
each of the 500,000 displaced families). Is the
incentive to buy insurance and insure to value
diminished?
Within 3 weeks of Katrinas LA landfall, the
federal government had authorized 75B in
aidmore than all the federal aid for the 9/11
terrorist attacks, 2004s 4 hurricanes and
Hurricane Andrew combined! 29B more was
authorized in Dec. 2005. At least 80B more is
sought.
In 2005 dollars. Source United States Senate
Budget Committee, Insurance Information Institute
as of 12/31/05.
83
Distribution of Katrina Losses by Market
(Billions)
Source Hurricane Katrina Analysis of the Impact
on the Insurance Industry, Tillinghast, October
2005.
84
Overview of Plans for a National Catastrophe
Insurance Plan
85
NAICs Comprehensive National Catastrophe Plan

• Proposes Layered Approach to Risk
• Layer 1 Maximize resources of private insurance
  reinsurance industry
• Includes All Perils Residential Policy
• Encourage Mitigation
• Create Meaningful, Forward-Looking Reserves
• Layer 2 Establishes system of state catastrophe
  funds (like FHCF)
• Layer 3 Federal Catastrophe Reinsurance Mechanism

Source Insurance Information Institute
86
Comprehensive National Catastrophe Plan Schematic
1500 Event
National Catastrophe Contract Program
150 Event
State Regional Catastrophe Fund
Private Reinsurance
State Attachment
Personal Disaster Account
Private Insurance
Source NAIC, Natural Catastrophe Risk Creating
a Comprehensive National Plan, Dec. 1, 2005
Insurance Information. Inst.
87
Legislation Comprehensive National Catastrophe
Plan

• H.R. 846 Homeowners Insurance Availability Act
  of 2005
• Introduced by Representative Ginny Brown-Waite
  (R-FL)
• Requires Treasury to implement a reinsurance
  program offering contracts sold at regional
  auctions
• H.R. 4366 Homeowners Insurance Protection Act of
  2005
• Also worked on by Rep. Brown-Waite
• Establishes national commission on catastrophe
  preparation and protection
• Authorizes sale of federally-backed reinsurance
  contracts to state catastrophe funds
• H.R. 2668 Policyholder Disaster Protection Act
  of 2005
• Backed by Rep. Mark Foley (R-FL)
• Amends IRS code to permit insurers to establish
  tax-deductible reserve funds for catastrophic
  events
• 20-year phase-in for maximum reserve
• Use limited to declared disasters

Source NAIC, Insurance Information Institute
88
Issue 2PRICINGCan Discipline be Maintained?
89
Average Expenditures on Homeowners Insurance
Countrywide home insurance expenditures are
expected to rise at least 4 in 2006
Homeowners in CAT zones will see much larger
increases
90
Average Expenditures on Auto Insurance
Countrywide auto insurance expenditures are
expected to rise 1.5 in 2006
Will the big guys stay disciplined? So far, so
good. Tiering adopted to avoid adverse selection
91
Commercial Premium Rate Changes Are Sharply Lower
The magnitude of rate decreases is leveling off,
but no reversal is evident post-
Katrina/Rita/Wilma
Source MarketScout.com
92
Average Rate Change, All Lines,(1Q2004
4Q2005)
Magnitude of rate decreases accelerated during
the first half of 2005, but flattened out in Q3/4
Source Council of Insurance Agents Brokers
Insurance Information Institute
93
Average Commercial Rate Change by Account Size
Commercial accounts have trended downward for
early 2004 to mid-2005 but are now that trend is
shrinking post-Katrina
94
Percent of Commercial Accounts Renewing
w/Positive Rate Changes, 4th Qtr. 2005
Largest increases for Commercial Property
Business Interruption are in the Southeast,
smallest in Midwest
Source Council of Insurance Agents and Brokers
95
Average Rate Increase/Decreaseby Industry Class
Largest increases are in the energy sector
Source MarketScout.com
96
Reinsurance Prices Surged in 2006 Following
Record CATs in 2005
US cat reinsurance price index 1994 100
Sources Swiss Re, Cat Market Research Insurance
Information Institute estimate for 2006.
97
Issue 3INVESTMENTSDoes Investment Performance
Affect Discipline?
98
Property/Casualty Insurance Industry Investment
Gain
Investment gains are rising but will still fall
short of their 1998 peak. CAT losses will reduce
investable assets.
Investment gains consist primarily of interest,
stock dividends and realized capital gains and
losses. Annualized 2005 figure based on data as
of 9/30/05, adjusted for special dividend of
3.1B. Source Insurance Services Office
Insurance Information Institute.
99
Issue 4EXPENSESWill Expense Ratio Rise as
Premium Growth Slows?
100
Personal Lines Underwriting Expense Ratio,
1994-2005E
Can the downward trend in PPA and HO expenses
ratios be sustained as premium growth slows?
Ratio of expenses incurred to net premiums
written. 2005 figures are III estimates. Source
A.M. Best Insurance Information Institute
101
Issue 5LEVERAGECan the Industry Efficiently
Employ Its Increasing Capital?
102
U.S. Policyholder Surplus 1975-2005
Capacity TODAY is 414.3B, 5.2 above year-end
2004, 45 above its 2002 trough and 22 above its
mid-1999 peak. Sufficient capacity exists to pay
all hurricane claims.
Billions
Foreign reinsurance and residual market
mechanisms absorbed 27-32B (57-67) of 9-month
2005 CAT losses of 47.6B
Surplus is a measure of underwriting capacity.
It is analogous to Owners Equity or Net Worth
in non-insurance organizations
Source A.M. Best, ISO, Insurance Information
Institute As of 9/30/05.
103
Announced Insurer Capital Raising( Millions,
as of December 1, 2005)
As of Dec. 1, 19 insurers announced plans to
raise 10.35 billion in new capital. Twelve
start-ups plan to raise as much as 8.75 billion
more for a total of 19.1 billion. Actual total
higher as Lloyds syndicates have added capacity
for 2006.
Existing (re) insurers. Announced amounts may
differ from sums actually raised. Sources
Morgan Stanley, Lehman Brothers, Company Reports
Insurance Information Institute.
104
Announced Capital Raising by Insurance
Start-Ups( Millions, as of December 11, 2006)
As of Dec. 11, 13 start-ups plan to raise as much
as 8.75 billion.
Chubb, Trident are funding Harbor Point.
Announced amounts may differ from sums actually
raised. Stated amount is 750 million to 1
billion. XL Capital/Hedge Fund venture. Arrow
Capital formed by Goldman Sachs. Sources Morgan
Stanley, Company Reports Insurance Information
Institute.
105
Issue 6P/C OPERATING ENVIRONMENTHave Things
Changed for the Better?
106
TORT SYSTEM
107
Personal, Commercial Self (Un) Insured Tort
Costs
Total 309.5 Billion
Total 291.0 Billion
Total 209.1 Billion
Billions
Total 150.6 Billion
Source Tillinghast-Towers Perrin
108
Tort System Costs,2000-2007F
After a period of rapid escalation, tort system
costs as of GDP appear to be stabilizing
Source Insurance Information Institute estimates
from Tillinghast-Towers Perrin methodology.
109
Business Leaders Ranking of Liability Systems for
2005
New in 2005 ND, IN, SD, WY Drop-Offs ID, UT, NH,
KS

• Best States
• Delaware
• Nebraska
• North Dakota
• Virginia
• Iowa
• Indiana
• Minnesota
• South Dakota
• Wyoming
• Idaho

• Worst States
• Hawaii
• Florida
• Arkansas
• Texas
• California
• Illinois
• Louisiana
• Alabama
• West Virginia
• Mississippi

Newly Notorious HI, FL Rising Above MO, MT
LA, AL and MSs liability systems are ranked
among the worst in the country by the US Chamber
of Commerce
Source US Chamber of Commerce 2005 State
Liability Systems Ranking Study Insurance Info.
Institute.
110
The Nations Judicial Hellholes(2005)
There were notably fewer Judicial Hellholes in
2005
Dishonorable Mention WI Supreme Ct. Watch
List California Eastern Kentucky Eastern
Alabama Philadelphia New Mexico Delaware Oklahoma
Orleans Parish, LA Washington, DC
ILLINOIS Cook County Madison County St. Clair
County
Source American Tort Reform Association
Insurance Information Institute
111
Information Security LiabilityA Growing Threat
112
Worldwide Financial Impact of Malicious Software
Attacks(1995-2005)
Billion
Source 2005 Malware Report, Computer Economics
113
Organizations with External Insurance Against
Cyber Risks

Only 25 of organizations use external insurance
to help manage cyber security risks.
Source CSI/FBI 2005 Computer Crime and Security
Survey.
114
COMMERCIAL INSURANCEBETTERFOR NOW
115
Commercial Multi-Peril Combined (Liability
Portion)
CMP-Liability has improved recently but results
have historically been bad
Average Combined 1995 to 2004 115.4 Average
Operating Ratio 100.4
Sources A.M. Best III
116
Products LiabilityCombined Ratio
Average Combined 1995 to 2004 180.0
Products Liability has improved dramatically, but
remains very much a problem
Sources A.M. Best III
117
Commercial Auto LiabilityCombined Ratio
Average Combined 1995 to 2004 110.7
Commercial Auto Liability has improved
dramatically
Sources A.M. Best III
118
Other Liability Combined Ratio
Average Combined 1995 to 2004 116.3
Other Liability remains a problematic catch all
category
Sources A.M. Best III
119
Medical MalpracticeCombined Ratio
Average Combined 1995 to 2004 125.5
Med Mal is off life support but is still in
critical condition
Sources A.M. Best III
120
AUTO HOMEA SUCCESSFUL SHIFT TO THE
UNDERWRITING CULTURE?
121
Private Passenger Auto
122
Private Passenger Auto is Enormous Part of P/C
Industry
Private passenger auto accounted for 34.7 or
162.2B in DPW in 2004
95.8B
66.4B
251.6B
53.2B
Source A.M. Best Insurance Information
Institute
123
Auto InsuranceDirect Premiums Written
162.2B 11.9
145.1B 9.8
132.1B 8.1
122.2B 1.3
120.6B 1.4
118.9B 2.4
116.1B 5.0
110.5B 4.3
106.0B 5.3
100.7B 5.2
95.7B
Billions
Source A.M. Best Insurance Information Institute
124
Motor Vehicle Retail Sales (Millions of Units)
New Motor Vehicle Sales Sales of automobiles
are being hurt by high gas prices and rising
interest rates Likely some shift away from SUVs
to cars
Source US Department of Commerce Insurance
Information Institute Blue Chip Economic
Indicators as of January 2006 through 2007 III
forecast thereafter.
125
Private Passenger Auto Combined Ratio
PPA is the profit juggernaut of the p/c insurance
industry today
Average Combined 1993 to 2004 102.7 Many auto
insurers have shown sig-nificant improvements in
underwriting performance since mid-2002
Sources A.M. Best III
126
Key Auto Insurance Stats OH vs. US, 2004 vs.
2005
-0.14
2.81
1.09
2.80
Source Insurance Services Office, Insurance
Information Institute
127
Key Auto Insurance Stats OH vs. US, 2004 vs.
2005
2.88
-0.23
-4.11
2.20
Average for 4 quarters ending with the 3rd
quarter of 2005 vs. full year 2004. Source
Insurance Services Office, Insurance Information
Institute
128
RNW Private Passenger Auto, United States,
1992-2006F
Segmentation should help profitability
Private passenger auto profitability deteriorated
throughout the 1990s but has improved dramatically
Source NAIC Insurance Information Institute
129
Private Passenger AutoIncurred Loss Ratios,
1999-2005Q4
Loss ratios for all major coverages trending
down Comp is CAT impacted
Source ISO Fast Track Insurance Information
Institute. Direct
basis
130
Pure Premium Spread Personal Auto PD Liability,
2000-2005Q4
Margin necessary to maintain PPA profitability
Inversion of pure premium spread is a warning sign
2000 PPA Combined110
2004 PPA Combined94
Source Insurance Information Institute
calculations based ISO Fast Track and US BLS data.
131
Bodily Injury Severity Trends Now Offset
Declining Claim Freq.
Medical inflation a powerful cost driver
Four quarters ending 2005Q4. Source ISO Fast
Track data.
132
PD Liability Frequency Trend Swamps Rising
Claim Severity
Fewer accidents, but more damage when they occur
Higher Deductibles?
Four quarters ending 2005Q4. Source ISO Fast
Track data.
133
PIP Frequency Trend Now Offsets Rising Claim
Severity
Fraud caused problems from 1999-2001
Is No-Fault living on borrowed time?
Four quarters ending 2005Q4. Source ISO Fast
Track data.
134
Collision Frequency Trend Swamps Rising Claim
Severity
Four quarters ending 2005Q4. Source ISO Fast
Track data.
135
Comprehensive Favorable Frequency and Severity
Trends
Four quarters ending 2005Q4. Source ISO Fast
Track data.
136
Homeowners
137
Private Passenger Auto is Enormous Part of P/C
Industry
Private passenger auto accounted for 34.7 or
162.2B in DPW in 2004
95.8B
66.4B
251.6B
53.2B
Source A.M. Best Insurance Information
Institute
138
Homeowners InsuranceDirect Premiums Written
Homeowners premium growth has been strong,
tracking the US real estate boom and higher rates
53.2B 9.2
48.7B 13.3
43.0B 14.4
37.6B 8.7
34.6B 6.5
32.5B 5.2
Billions
30.9B 5.8
29.1B 6.2
26.0B 6.6
27.4B 5.4
24.4B 6.6
22.9B
Source A.M. Best Insurance Information Institute
139
New Private Housing Starts(Millions of Units)
Exposure growth forecast for HO insurers is
excellent, though new building is expected to
slow modestly
Source US Department of Commerce Blue Chip
Economic Indicators (1/06), Insurance Info.
Institute
140
Homeowners Insurance Combined Ratio
Average 1990 to 2005E 114 Insurers have paid out
an average of 1.14 in losses for every dollar
earned in premiums over the past 16 years
Sources A.M. Best III
141
Rates of Return on Net Worth for Homeowners Ins
US
Averages 1993 to 2005E US HO Insurance 3.4
Source NAIC 2004/5 figures are Insurance
Information Institute estimates.
142
INSURANCE-TO-VALUEEnding the Blame Game is
aWin-Win Situation Deal
143
Insurance-to-Value in HO is a National Problem,
Improved Recently
Less than ITV means homeowners insurers left 8
billion on the table in 2003
According MS/B. Source Marshall Swift/Boeckh
144
Whos Responsibility Is It to Keep Homeowners
Policy Up-to-Date?

• Nearly 3 out 4 people, even fire-weary
  Californians, believe it is the homeowners
  responsibility to keep insurance up-to-date
• BUT 26 believe its the agents or insurers
  responsibility
• This substantial minority is wrong, but gets
  heard (CA, FL) and comments reflect badly on
  insurers
• Media, regulators and legislators join fray

Source September 2004 poll of 800 Californians
conducted for the Insurance Information Network
of California by Public Opinion Strategies.
Margin of error /- 3.46.
145
Time Since Homeowner Last Updated HO Policy

• Nearly 40 of people havent updated their
  homeowners policy within the last 3 years
• Huge potential for problems, especially in
  disaster-prone states
• Leads automatically to large under-insurance
  problems

Source September 2004 poll of 800 Californians
conducted for the Insurance Information Network
of California by Public Opinion Strategies.
Margin of error /- 3.46.
146
Why People Dont Increase Homeowners Coverage

• 22 cite expense as reason they dont adjust
  theyre HO coverage
• 25 dont realize they need to
• 30 say theyre too busy (to think about
  protecting their most valuable asset)
• 25 say their agent said theres nothing to worry
  about

Source Harris interactive poll conducted for
Firemans Fund, July 2004. See
http//www.firemansfund.com/dcmssites/about/pdf/fi
remansfundtoplinerev2.pdf
147
California Hazards People Stating
Prepared/Very Prepared
Source Insurance Information Network of
California Survey, February 2006.
148
National Flood Insurance ProgramWhy Dont
People Buy Flood Coverage?
149
Flood Insurance Penetration RatesTop 25
Counties/Parishes in US
Highest flood insurance penetration rates are in
LA and FL, but most are underinsured
No counties in the Northeast are represented in
Top 25
As of 12/31/05. Source New Orleans
Times-Picayune, 3/19/06, from NFIP and US Census
Bureau data.
150
Flood Insurance Penetration RatesCounties/Parish
es Ranked 26-50
Mid-Atlantic/Northeast Counties are
underrepresented
People along the eastern seaboard have not gotten
the message
As of 12/31/05. Source New Orleans
Times-Picayune, 3/19/06, from NFIP and US Census
Bureau data.
151
Flood Insurance Penetration RatesCounties/Parish
es Ranked 51-75
MS coastal counties rank abysmally low
Barnstable is only county in all of New England
among Top 75
As of 12/31/05. Source New Orleans
Times-Picayune, 3/19/06, from NFIP and US Census
Bureau data.
152
What Needs to Happen for the NFIP To Be More
Effective

• Move to actuarially based rates
• Include loading to build-up reserve fund
• Expand refusals on irresponsible construction
  repeats
• Expand share of homeowners who buy coverage in
  100 year flood plain beyond (200/500-year
  plain)
• Update digitize flood maps
• Need process for continuous updating
• Coordinate inundation flood maps
• Create/formalize central lender property
  tax-based authority for tracking properties
  subject to mandatory purchase requirement

Source Insurance Information Institute
153
Why Insurers Are Helped by High NFIP Penetration
Rates

• Greatly Reduce Wind vs. Water Litigation
• Reduces uncertainty
• Prevents trampling of insurance commissioner by
  AG
• Reduce agent EO problem
• Local Economy Bounces Back More Quickly
• Preserves exposure base increases growth
  opportunities
• If NFIP Rates Moved to (More) Actuarially Sound
  Basis Private Flood Excess Flood Market Could
  Expand

Source Insurance Information Institute
154
Summary

• Home/Auto picture is bright for 2006, assuming
  normal CAT loss activity
• Concern about pricing discipline, esp. if
  freq/severity trends turn adverse
• Rising investment returns insufficient to support
  deep soft market in terms of price, terms
  conditions
• Clear need to be more underwriting focused
• Major Challenges
• Maintaining price/underwriting discipline
• Managing variability/volatility of results

155
Insurance Information Institute On-Line
WWW.III.ORG
DOWNLOAD AT http//www.iii.org/media/industry/out
looks/ohio/
If you would like a copy of this presentation,
please give me your business card with e-mail
address