Current and Longterm Prospects of the Insurance Market

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Current and Long-term Prospects of the Insurance
Market
2003 ALARM Scotland ConferenceSeptember 8, 2003
Presented by Tony KuczinskiSenior Vice
President, American RePresident, Munich-American
RiskPartners
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Discussion Outline

• Current Market Conditions
• Reasons for Continued Hardening Market
• Options for Reinsurance Buyers
• Questions and Answers

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Growth in Net Premiums Written (All P/C Lines)
Current Market Conditions
2001 Actual 8.1 2002 Actual 14.1 2003
Forecast 12.3
Forecast based on 2003 III Early Bird Survey of
industry analysts. Source A.M. Best, Insurance
Information Institute
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Current Market Conditions

• Underwriting cycles go through soft and hard
  cycles.
• We are entering the third year of hardening
  market conditions.
• Typified by increasing premium rates, reduced
  capacity, tightening of terms and conditions,
  unavailability of coverage.

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Current Market Conditions

• Current market cycle not solely attributable to
  the fall out of the World Trade Center disaster.
• Market was hardening, however WTC has accelerated
  market response.
• Emerging issues mold, latent and other
  unforeseen exposures, relationship of exposures
  (i.e. WTC)

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Reasons for Continued Hardening Market

• There are six key reasons to assume a continued
  hardening of the market for the foreseeable
  future.

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Underwriting Gain (Loss)1975-2002
Reason 1 No relief from poor underwriting
results
0
Annualized estimate based on first 9 months of
2002 data. Source A.M. Best, Insurance
Information Institute
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Reason 1 No relief from poor underwriting
results poor market returns

• Bond yields on a downward trend, mainly due to
  declining inflation rates
• No obvious return to the high bond yields of the
  1990s
• If rates continue to increase as we have seen,
  then bond yields mark-to-market will be a concern

• Stock markets have fallen dramatically since 2000

Source Bloomberg
Source Yahoo Finance
Result Asset management is no longer a
substitute for good underwriting
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Reason 2 Uncertain Economic Outlook

• Fragile state of world economy
• US economy expected to recover only gradually in
  2003
• Mainland Europe under-performing in terms of
  growth rates
• Ongoing economic malaise in Japan and some other
  emerging markets
• Continued moderate inflation / risk of deflation
  in industrialized countries
• Risks of a possible long lasting Middle Eastern
  conflicts

Result Insurance sector under pressure due to
poor macroeconomic environment on both the asset
and liability side.
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Reason 3 Recognition of Value of Insurance

• Old Risks
• Rising economic and insured losses from
• Natural perils
• Man-made risk such as mold, asbestos judicial
  uncertainty.
• New Risks
• Advent of new man-made risks
• Cyber risks
• Increased terrorism risk
• Stress

Natural Catastrophes
Source Munich Re
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Reason 4 Revised risk profiles and loss
scenarios

• Greater appreciation of interdependencies between
  risks.
• Greater recognition of correlations between
  assets and liabilities.
• Introduction of more sophisticated loss and
  exposure modeling.

Result More sophisticated loss and exposure
modeling allows for more scientific exposure
ratings.
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Reason 5 Capacity reduced by reduction in
policyholder surplus (Policyholder Surplus 90-03)

• Surplus (capacity) peaked at 336.3 Billion in
  mid-1999 and fell by 15.2 (51 billion) to
  285.2 billion at year-end 2002

47 Billion
Surplus is a measure of underwriting capacity.
It is analogous to Owners Equity or Net Worth
in non-insurance organizations
First Quarter 2003 Source A.M. Best, Insurance
Information Institute
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Reason 6 Capacity reduced by withdrawals and
increased credit risks

• Capacity withdrawals
• Increased credit risks
• Downgrades far outnumber upgrades
• Some insurance failures
• Influx of capital (30bn) cannot fill capacity gap

• Examples of raised equity capital since 09/11/01
• Axis Specialty 1.6bn
• Allied World 1.5bn
• Endurance 1.2bn
• ACE 1.2bn
• Montpellier Re 1.0nn
• Arch Capital 0.9bn
• XL Capital 0.8bn

Result Significant decrease in capacity and
increase in rating agency action in last 18
months. Capacity created does not address the
amount of capacity needed for long term market
needs.
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What options do insurance buyers have in a hard
market?

• Explore the world of Alternative Risk Transfer
• Take proactive measures today to follow different
  paths to avoid what the US experienced
• Increase focus on risk management
• Loss control
• Loss prevention
• Loss mitigation
• Safety and engineering
• Continue to be involved in the judicial process
  by supporting ALARMs activities

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Escalating Migration of PremiumInto ART Market
(1985- 2002)
Estimated for 2001 and 2002 Source A. M. Best
Special Report March 2002
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Questions?