Insurance Industry Credibility Issues, Concerns

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Insurance Industry CredibilityIssues, Concerns
Options

• INSURANCE INFORMATION INSTITUTE
• November 11, 2004

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
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Presentation Outline

• P/C Financial Overview
• Public Attitudes About Insurance
• Insurance ScoringPublic Perceptions
• The Blame Game
• Underinsurance in California
• Hurricanes in Florida
• Media Perspective
• Impact of Spitzer Investigation
• Politics Credibility
• Getting More Credit for What We Do
• Homeownership Rates
• Disaster Response

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2004 P/C FINANCIAL OVERVIEWMisconception P/C
Insurance is a Wildly Profitable Business
4
Strength of Recent Hard Markets by NWP Growth
1975-78
1985-87
2001-04
Real NWP Growth During Past 3 Hard
Markets 1975-78 8.6 1985-87 14.5 2001-04F
7.0
Premium growth is faltering. Real growth will
soon be ZERO.
Note Shaded areas denote hard market
periods. Source A.M. Best, Insurance
Information Institute
2004 based on 1st half results from ISO.
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P/C Industry Combined Ratio
2001 115.7 2002 107.2 2003 100.1 2004 1H
94.4 2004 100
Combined Ratios 1970s 100.3 1980s 109.2 1990s
107.8 2000-04 104.6
Sources A.M. Best ISO, III
2004 figures based on first half estimate.
After impact of hurricanes.
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Underwriting Gain (Loss)1975-2004F
2004 was likely to produce the largest
underwriting profit in history 18.1B based on
annualized first half result, but hurricanes
changed that
Billions
Based on first half result. Estimate for
full-year 2004 is 0 assuming a combined ratio .
Source A.M. Best, Insurance Information
Institute
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Property/Casualty Insurance Industry Investment
Gain
Investment gains are rising but remain well below
the peak of 57.9 billion in 1998
Investment gains consist primarily of interest,
stock dividends and realized capital gains and
losses. 2004 estimate is annualized figure based
on first half 2004 result. Source Insurance
Services Office Insurance Information Institute.
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U.S. Policyholder Surplus 1975-2004
Capacity TODAY is just 9.2 above its mid-1999
peak
Surplus (capacity) peaked at 339.3 Billion in
mid-1999 and fell by 15.9 (53.9 billion) to
285.4 billion at year-end 2002 Surplus
increased by 61.6B or 21.6 to 347.0B in 2003
and 4.9 in the 1st qtr. of 2004 to 361.2 billion
53.9 Billion
Billions
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 6/30/04.
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ROE Financial Services Industry Segments,
19872004F
P/C insurance was finally holding its own against
other financial services segments until hurricanes
Source Insurance Information Institute,
Fortune, Value Line.
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2004 INSURANCE PULSE SURVEYPublic Attitudes
About Insurance
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Percent of Public Rating Industry as Very or
Mostly Favorable, 1968-2004
Insurer favorability ratings have improved
dramatically. Will it be hurt by Spitzer probe?
Survey taken in early 2004 before announcement
of Spitzer suit in October. Source Insurance
Information Institute Annual Pulse Survey
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MUTUAL FUNDS Ratings Took HitShades of Things
to Come?
Very/Mostly Favorable
Very/Mostly Unfavorable
Unfavorable ratings TRIPLED in 5 years
Favorability ratings have declined
Source Insurance Information Institute, 2004
Pulse Survey
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GENDER GAP Insurer Favorability Ratings by Gender
Very/Mostly Favorable
Very/Mostly Unfavorable

• Insurers need to understand why males more likely
  to rate auto/home insurers negatively and work on
  that
• Likely related to cost of auto insurance higher
  for males
• Males have higher accident frequency

Men view insurers less favorably than women
Men are twice as likely as women to view insurers
negatively
Source Insurance Information Institute, 2004
Pulse Survey
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INCOME GAP Insurer Favorability Ratings by Income
Very/Mostly Favorable
Very/Mostly Unfavorable
Favorability ratings decline with income
Unfavorable ratings rise with income
Source Insurance Information Institute, 2004
Pulse Survey
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Stating Auto/HO Insurance is NOT a Financial
Burden Among Those Rating Insurers Very/Mostly
Favorable
claiming insurance is NOT a financial burden
falling as prices rose
Source Insurance Information Institute, 2004
Pulse Survey
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INSURANCE SCORINGPublic Perceptions on a
Industry Major Issue
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Credit is a Statistically Irrefutable Rating
Criterion
Source The Relationship of Credit-Based
Insurance Scores to Private Passenger Automobile
Insurance Loss Propensity Michael Miller, FCAS
and Richard Smith, FCAS (EPIC Actuaries), June
2003 (Presented at June 2003 NAIC meeting).
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CREDIT More People Aware of Insurers Use of
Credit, But
Aware
Unaware
Fewer than half of people are aware that insurers
use credit info in auto/HO underwriting
Source Insurance Information Institute, 2004
Pulse Survey
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CREDIT More People Aware But They Still Dont
Like It
Dont Support Insurers Use of Credit Info
Support Insurers Use of Credit Info
Support for insurer use of credit info is weak
FYI 17 of people dont support banks use of
credit info before issuing a credit card!
Source Insurance Information Institute, 2004
Pulse Survey
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CREDIT Most People Dont Think Theyll Benefit
from InsurerUse of Credit Info
Wont Benefit
Will Benefit
In reality, more than half earn lower premiums
through use of credit info
Source Insurance Information Institute, 2004
Pulse Survey
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POLL Do You Think Its OK for Insurer to Look at
Credit Info?
YES (by Income)
NO (by Income)
Low High income groups view use of credit more
favorably
Unfavorable ratings rise with income
Source Insurance Information Institute, 2004
Pulse Survey
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We Failed to Tell Our Customers Agents About
Savings Credit DiscountCan Save 100s/Year
(actual example)

• Credit discount lowered annual premium by 14.7
• Policyholder saved nearly 300
• Credit was single largest discount
• Opponents of credit will force people to pay more
  for coverage

Total Annual Savings from Discounts 820
154
296
196
174
Annualized savings based on semi-annual data
from example Source Insurance Information
Institute
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THE BLAME GAMEUnderinsurance in California
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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.
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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.
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THE BLAME GAMEFlorida Hurricanes
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U.S. InsuredCatastrophe Losses ( Billions)
2004 could become the second worst year ever for
natural disaster losses in the US
Billions
2004 figure is as of September 30, 2004. 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. Source Property
Claims Service/ISO Insurance Information
Institute
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Top 10 Insured Losses Worldwide,1970-2004 (2003)
Seven of the 10 most expensive disasters is world
history occurred in the US Two were this years
hurricanes
Hurricanes Ivan and Charley in 2004
dollars. Sources ISO/PCS Swiss Re, Natural
Catastrophes and Man-Made Disasters in 2003,
Sigma, no. 1, 2004 except Sept. 11 estimate from
Hartwig, Robert P., 2004 Mid-Year
Property/Casualty Insurance Update, Insurance
Information Institute. Figure is stated in 2001
dollars.
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Losses from Hurricanes of 2004
Four of the Top 10 hurricanes in US history
occurred in 2004
Estimated insured losses from the hurricanes of
2004 20.485B exceed the 15.5B in losses from
Hurricane Andrew (20.3B in 2003)
Source ISO/PCS Insurance Information Institute
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Claims Handling Represented Herculean Effort by
Insurers
Total Claims 2.177 million Florida Only 1.692
Mill (78)
Total 640,000
Total 600,000
Total 552,000
Total 385,000
Source PCS/ISO
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Claims Payouts for 4 Hurricanes Unparalleled
Total Insured Losses 20.485B Florida Only
17.5B (85)
Total 6.8 Billion
Total 6.0 Billion
Total 4.4 Billion
Billions
Total 3.2 Billion
Source PCS/ISO
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Underwriting Gain (Loss) in Florida Homeowners
Insurance, 1992-2004E
Billions
Floridas homeowners insurance market produces
small profits in most years and enormous losses
in others
2004 estimate by Insurance Information Institute
based on historical loss and expense data for FL
adjusted for estimated 2004 residential windstorm
losses of 11.2B 2003 figure is also from
III estimates of loss and expense.
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Cumulative Underwriting Gain (Loss) in Florida
Homeowners Insurance, 1992-2004E
Billions
It took insurers 11 years (1993-2003) to erase
the UW loss associated with Andrew, but the 4
hurricanes of 2004 erased the past 7 years of
profits
2004 estimate by Insurance Information Institute
based on historical loss and expense data for FL
adjusted for estimated 2004 residential windstorm
losses of 11.2B 2003 figure is also from
III estimates of loss and expense.
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Average Annual Insured Losses(Top 10 States,
Millions)
Distribution of Annual Losses
Normalized losses adjusted for inflation,
housing density, wealth and wind insurance
coverage, based on historical data for 100-year
period 1900-1999. Source Tillinghast-Towers
Perrin
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HOT TOPICS IN INSURANCE Media Can Drive
Perceptions Too
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I.I.I. Media Index Top Issues(2003 vs. 2002)
Market Conditions Commercial lines issues
dominated the media in 2002 and 2003 The I.I.I.
conducted nearly 4,000 media interviews in 2003
Source Insurance Information Institute from
Lexis/Nexis search.
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I.I.I. Media Index Top Issues( Change in
Coverage, 2003 vs. 2002)
The fastest growing areas of media interest were
CLUE, Credit Med Mal. Media interest in mold
and terrorism waned substantially.
Source Insurance Information Institute from
Lexis/Nexis search.
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I.I.I. Media Index Top Issues(First 6 Months
2004 vs. 6 Months 2003)
Media coverage of the p/c insurance industry fell
about 18 during the first half of 2004 compared
with the same period in 2003.
As of June 15, 2004. Source Insurance
Information Institute from Lexis/Nexis search.
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I.I.I. Media Index Top Issues Change in
Coverage,First 6 Months 2004 vs. First 6 Months
2003
Workers Comp was the only area of increased media
interest. Interest in most other areas fell
substantially.
As of June 15, 2004. Source Insurance
Information Institute from Lexis/Nexis search.
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CREDIBILITY WITH INVESTORSShattered by Spitzer
Suit?
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Downgrade/Upgrade Ratio
It is in everyones best interest to have a
financial strong and stable insurance industry
Sources Impairment Rate and Rating Transition
Study1977 to 2002, A.M. Best Co. 2003E from
SP.
U.S. property/casualty and life/health insurers
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Insurer Stocks Outperforming the SP 500
Total Return 2004 YTD Through October 8, 2004
If 2004 represents the cyclical peak for this
industry, why arent p/c stocks soaring?
Source SNL Securities, Standard Poors,
Insurance Information Institute
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Insurer Stocks Hammered by the Spitzer Suit
Total Return 2004 YTD Through October 15, 2004
Spitzer suit has taken toll on all insurance
sectors, especially brokers
Source SNL Securities, Standard Poors,
Insurance Information Institute
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Impact of Spitzer Investigation

• Impact on insurer broker reputations has been
  devastating
• Worst PR disaster in the history of the insurance
  industry
• Will take years to repair damage
• Whole industry (p/c, life, health) painted with
  same brush
• Impact most severe on commercial p/c companies
• Stock price of personal lines companies impacted
  (even those with exclusive agents, e.g. Allstate)
• Least impacted are mutuals with captive agents
  (e.g., State Farm)
• Spitzer cast into doubt on all producer
  compensation arrangements except straight
  commissions.
• Issue of bid rigging and contingent fees (PSAs,
  MSAs) were (inappropriately) linked by Spitzer
  (hence media regulators)
• LOST in DEBATE 2 Distinct Issues
• Contingent fees are legal and useful when
  properly structured
• Illegal anti-competitive fraudulent acts are a
  separate issue and should be treated as such
  Dont represent how industry does business
• NOT LIKELY TO INCREASE ODDS OF FED. REGULATION

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Headlines from Hell

• INSURERS REEL FROM SPITZERS STRIKE-Wall Street
  Journal, October 18, 2004, Page A1
• BROKER ACCUSED OF RIGGING BIDS FOR INSURANCE
• -New York Times, October 15, 2004, Page A1
• CLASS ACTION THREAT ADDED TO CHALLENGES FACING
  INSURERS
• -Wall Street Journal, October 20, 2004, Page C1
• STATE BASED INSURANCE REGULATION GETS SCRUTINY
• -Wall Street Journal, October 18, 2004, Page A15
• INSURERS POST STEEP LOSSES IN DAY OF WIDESPREAD
  DECLINES
• -New York Times, October 15, 2004, Page C4

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Class Actions You Can Sign Up to Sue Insurers
Brokers Online
Source Yahoo! Search, 10/22/04
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CREDIBILITY WITH POLITICIANSLittle Success
onMajor Issues
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There is Was is Was a Glimmer of Hope for Tort
Reform

• Best Chance for Tort Reform in Years is Gone
• Medical Malpractice
• Statesalready happening 20 states have caps
• Federal reform discussed in Congress but bill
  failed in Senate
• Attempt to get caps for specialties failed
  February 2004
• Class Action Reform
• Class Action Fairness Act
• Failed by 1 Vote 10/22/03 Failed Again in 2004
• Will try again in 2005
• Asbestos Reform
• Fairness in Asbestos Injury Resolution of 2003
  Failed Apr. 2004
• Punitive DamagesWhats Reasonable
• Supreme Court ruled favorably in Campbell v.
  State Farm

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Sectors Thought to be Favored, by Winner of 2004
Presidential Election

• BUSH
• P/C Insurance
• Asset Managers
• Energy/Oil/Coal
• HMOs/Drug Cos./ Benefit Managers
• Dividend Paying Stocks
• Defense

• KERRY
• Life Insurers
• Fannie Mae/Freddie Mac
• Alternative Energy
• Hospitals/Med Devices
• Medicaid HMOs
• Bonds/Municipal Bonds
• Home Builders

Source Wall Street Journal, October 7, 2004,
D4, from survey of major brokerage firms.
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P/C Insurance Industry ROE by Presidential Party
Affiliation,19502004E
BLUE Democratic President RED
Republican President
Truman
Nixon/Ford
Kennedy/ Johnson
Eisenhower
Carter
Reagan/Bush
Clinton
Bush
Source Insurance Information Institute
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P/C Insurance Industry ROE byPresidential
Administration,1950-2004
OVERALL RECORD 1950-2004 Democrats 8.00 Republic
ans 7.85
Party of President has little bearing on
profitability of P/C insurance industry
ROE for 2004 estimated by III. Truman
administration ROE of 6.97 based on 3 years
only, 1950-52. Source Insurance Information
Institute
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Insurance Industry Contributions, Election Cycles
1990-2004
Insurance industry contributions are
overwhelmingly Republican 157 million, 89 more
than the 83 million contributed to Democrats
65 of insurance industry contributions since
1990 have gone to Republicans
Data for current cycle released by Federal
Election Commission as of October 4, 2004 Source
Federal Election Commission via Center for
Responsive Politics at www.opensecrets.org.
53
WE NEED MORE CREDIT FOR THINGS WE
ENABLEHomeownership Rates
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New Private Housing Starts(Millions of Units)

• New Private Housing Starts
• Housing market remains strong.

Source US Department of Commerce National
Association of Realtors Insurance Info.
Institute Annualized January 2004 figure
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U.S. Homeownership Rate,1990 to 2004Q3
Homeownership is at a record high. Because you
cant buy a home without insurance, insurance is
clearly available and affordable, including to
millions of Americans of modest means and all
ethnic groups.
Point of Pride Industry is insuring more homes
at greater value than at anytime in US history,
enabling record homeownerships rates
Source U.S. Census Bureau
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Homeownership Rates in Central Cities, 1990 to
2003
Homeownership rates in central cities is at an
all time record high. Because you cant buy a
home without insurance, insurance is clearly
available and affordable, including to millions
of Americans of modest means and all ethnic
groups.
Point of Pride Industry is enabling hundreds of
thousands of people in urban settings to own
homes. We support urban housing redevelopment
initiatives throughout the US
Source U.S. Census Bureau
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Homeownership Rates AmongMinorities is Rising,
1994 to 2003

• Homeownership rates for minorities are at or near
  record highs
• Minorities are using their good credit to buy
  homes and get insurance

Point of Pride Insurers helped propel
homeownership among minorities to record highs
Source U.S. Census Bureau
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Percent Change in Homeownership, 1995-2001

• Homeownership rates have increased much faster
  for minority groups than for whites
• Minorities are using their good credit to buy
  homes and get insurance
• 4.3 million minority net new homeowners were
  created between 1995 and 2001

Includes American Indian, Eskimo, Aleut, Asian
and Pacific Islander. Source U.S. Census Bureau
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Homeowners Insurance Expenditureas a of Median
Home Price
The cost of homeowners insurance relative to the
price of a typical home has fallen
HO Expenditure as of Sales Price
Median Home Sales Price
Source Insurance Information Institute
calculations based on data from National
Association of Realtors, NAIC.
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Homeowners Insurance Combined Ratio
Average Combines Ratio 1990 to 2003 115 Insurers
have paid out an average of 1.15 in losses for
every dollar earned in premiums over the past 13
years
Point of Pride Homeowners insurance remains
available affordable despite big losses
suffered by insurers
Sources A.M. Best III
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WE NEED MORE CREDIT FOR THINGS WE
ENABLEDisaster Response
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U.S. InsuredCatastrophe Losses ( Billions)
2004 could become the second worst year ever for
natural disaster losses in the US
Billions
2004 figure is 2004 estimate as of September 30,
2004. 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. Source Property
Claims Service/ISO Insurance Information
Institute
63
Top 10 Insured Losses Worldwide,1970-2004 (2003)
Seven of the 10 most expensive disasters is world
history occurred in the US Two were this years
hurricanes
Hurricanes Ivan and Charley in 2004
dollars. Sources ISO/PCS Swiss Re, Natural
Catastrophes and Man-Made Disasters in 2003,
Sigma, no. 1, 2004 except Sept. 11 estimate from
Hartwig, Robert P., 2004 Mid-Year
Property/Casualty Insurance Update, Insurance
Information Institute. Figure is stated in 2001
dollars.
64
Average Annual Insured Losses(Top 10 States,
Millions)
Distribution of Annual Losses
Normalized losses adjusted for inflation,
housing density, wealth and wind insurance
coverage, based on historical data for 100-year
period 1900-1999. Source Tillinghast-Towers
Perrin
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AFFORDABILITYRising Auto HO Insurance Costs
Increase Hostility
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Average Expenditures on Auto Insurance
Countrywide auto insurance expenditures are
expected to rise 3.5 in 2004
67
PPA AffordabilityPain IndexNot an Issue in
Select States
Auto insurance expenditures are a small fraction
of the typical familys budget.
1
2
3
4
5
25
31
26
18
34
38
Ratio of 2002 state average auto expenditure to
states median income for family of 4. Sources
Auto Insurance Report, October 2004.
68
Average Expenditures on Homeowners Insurance
Countrywide home insurance expenditures are
expected to rise 2.8 in 2004
69
Homeowners Affordability HURT Index
Home insurance expenditures are a small fraction
of the typical familys budget.
1
2
3
4
5
33
46
13
18
22
38
Ratio of 2001 state average auto expenditure to
states median income for family of 4. Sources
Property Insurance Report, Oct 4, 2004
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Summary

• Perceptions of auto/home insurers much better
  than typical industry employee assumes
• Certain issues (insurance scoring) present
  difficult challenge
• Attacks on industry by critics and certain
  regulators (e.g. Garamendi) dont reflect general
  point of view
• Spitzer suit may harm favorability ratings
• Regulator opportunism is rife
• Thousands of fires to put out
• Insurers deserve more credit for industrys good
  deeds

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