The Global Financial Crisis, International Trade

1
The Global Financial Crisis, International Trade
Piracy Impacts on Marine Insurance Markets

• Insurance Information Institute
• 12 May 2009

Robert P. Hartwig, Ph.D., CPCU,
President Insurance Information Institute ? 110
William Street ? New York, NY 10038 Tel (212)
346-5520 ? bobh_at_iii.org ? www.iii.org
2
Presentation Outline

• The Global Economic Storm Financial Crisis
  Recession
• Survey of International Economic Growth
  Statistics
• Industrial Production and Global Supply Chains
• Inflation Trends
• Economic Threats to Marine Insurance Markets
• Top Causes of Decline in International Trade
• Major Trade and Marine Exposure Trends
• Merchandise Trade (Import/Export) Analysis by
  Region
• Economic Stimulus ImpactsGlobal Review
• Financial Strength
• Ratings
• Investment Performance
• Piracy Trends by Region, Nature of Attack

3
THE GLOBAL ECONOMIC STORMWhat Financial Crisis
and Recession Mean for the Marine (Re)Insurance
Industry International Trade
4
Real GDP By Market 2007-2010F( change from
previous year)
All major economies except China are in
recession. Steep declines in GDP will negatively
impact trade on a global scale.
Source Blue Chip Economic Indicators, 4/10/09
edition.
5
Real GDP for Selected Large Trading
States,2007-2010F, ( change from prior yr.)
All major economies except China are in recession
Source Blue Chip Economic Indicators, 4/10/09
edition.
6
Real GDP for Selected Large Trading
States,2007-2010F, ( change from prior yr.)
All major economies except China are in recession
Source Blue Chip Economic Indicators, 4/10/09
edition.
7
United States Real GDP Growth
Recession began in December 2007. Economic toll
of credit crunch, housing slump, labor market
contraction is growing
The Q42008 decline was the steepest since the
Q11982 drop of 6.4
Blue bars are Estimates/Forecasts from Blue Chip
Economic Indicators. Source US Department of
Commerce, Blue Economic Indicators 4/09
Insurance Information Institute.
8
GDP Growth Advanced Emerging Economies vs.
World
1970-2010F
Emerging economies (led by China) are expected to
grow by 3.3 in 2009
The world economy is forecast to grow by 0.5 in
2009, but could shrink for the first time since
WW II by 1 to 2 according to the World Bank.
Advanced economies will shrink by 1.9 in 2009,
dampening energy demand
Source International Monetary Fund, World
Economic Outlook Update, Jan. 28, 2009 Ins.
Info. Institute.
9
Industrial Production Sharp Decline in
Production Spread by Global Supply Chains
10
Global Industrial Production Is in a Tailspin,
Signaling Weakness in Trade
Annualized 3-Month Percent Change
Industrial demand for energy has been
particularly hard hit
Global industrial production was down 13 in late
2008, adversely impacting energy demand
Source International Monetary Fund, World
Economic Outlook Update, Jan. 28, 2009 Ins.
Info. Institute.
11
Total Industrial Production,(2007Q1 to 2010Q4F)
Figures for 2010 revised upwards to reflect
expected impact of Obama stimulus program
Obama stimulus program is expected benefit impact
industrial production and therefore insurance
exposure both directly and indirectly
Industrial production began to contract sharply
during H2 2008 and is expected to shrink through
most of 2009
Sources US Bureau of Labor Statistics Blue Chip
Economic Indicators (4/09) Insurance Info. Inst.
12
Auto/Light Truck Sales,1999-2010F (Millions of
Units)
Weakening economy, credit crunch are hurting auto
sales Gas prices less of a factor now.
New auto/light truck sales are expected to
experience a net drop of 6.7 million units
annually by 2009 compared with 2005, a decline of
39.6 and the lowest level since the late 1960s
Impacts of falling auto sales will have a less
pronounced effect on auto insurance exposure
growth than problems in the housing market will
on home insurers
Source US Department of Commerce Blue Chip
Economic Indicators (4/09) Insurance Information
Inst.
13
Length of US Recessions,1929-Present
Months in Duration
Current recession began in Dec. 2007 and is
already the longest since 1981. It is now also
the longest recession since the Great Depression.
We will rebuild. We will recover. --President
Barack Obama addressing a joint session of
Congress February 24, 2009
As of May 2009, inclusive Sources National
Bureau of Economic Research Insurance
Information Institute.
14
Length of U.S. Business Cycles, 1929-Present
Duration (Months)
Average Duration Recession 10.4
Months Expansion 60.5 Months
Length of expansions greatly exceeds contractions
Month Recession Started
As of May 2009, inclusive Post-WW II period
through end of most recent expansion. Sources
National Bureau of Economic Research Insurance
Information Institute.
15
Inflation Trends Significant Moderation Should
Help Reduce Severity Trends, but Reduces
Merchandise Values
16
Inflation Rates for Largest European Economies
Euro Area, 2007-2010F, ( change from prior yr.)
Inflation is down sharply across Europe, reducing
claim severity concerns
Source Blue Chip Economic Indicators, 3/10/09
edition.
17
Annual Inflation Rates(CPI-U, ), 1990-2010F
Inflation peaked at 5.6 in August 2008 on high
energy and commodity crisis. The recession and
the collapse of the commodity bubble have
produced temporary deflation.
Sources US Bureau of Labor Statistics Blue
Chip Economic Indicators, April 10, 2009
(forecasts).
18
Baltic Dry Index Shipping Costs of Goods Plunged
as Trade Weakens
The Baltic Dry Index, a measure of shipping
costs, plunged more than 90 after the collapse
of the commodities bubble in late 2008
Sources InvestmentTools.com accessed 11 May
2009.
19
ECONOMIC THREATS TO MARINE INSURANCE MARKETS
Caught in the Economic Storm
20
Top Causes of Declinein Global Trade

• GLOBAL RECESSION
• Global nature of recession and rapid spread
  throughout the world
• Downturn is deep and broad, sharply reducing
  imports/exports
• GLOBAL SUPPLY CHAINS
• Finished products often contain component parts
  from many countries with ultimate buyers in still
  others
• Global supply chains act as a contagion mechanism
  that transmit and accelerate economic
  disturbances (positive and negative)
• SHORTAGE OF TRADE FINANCING (TRADE CREDIT)
• Bursting of credit bubble has made obtaining
  trade credit difficult and expensive to obtain
• Renders some trade noneconomical
• FUTURE CONCERN PROTECTIONISM
• Countries may erect or increase tariffs and
  quotas to protect domestict producers
• This was a disastrous policy in 1930s
• Ultimate reduces global trade flows and deepen
  global recession

Source World Trade Organization Insurance
Information Institute.
21
Global Merchandise Exports, 1979-2009F (
Trillions and Annual Growth Rate)
Recessions routinely depress trade, but the
current global financial crisis is much more
severe
Trade is expected to decline by its largest
amount in decades in 2009
Source World Trade Organization Insurance
Information Institute.
22
Major Economic Trends Affecting Marine Insurance
Markets

• All Major World Economies Except China Are in
  Recession
• Demand for Imported Products Has Plunged Globally
• Global Trade Expected to Shrink by 9 in 2009,
  the First Decline Since 1982 and the Largest Drop
  Since World War II
• Trans-Pacific containerized trade was down 3.9
  in 2008 with a 4.1 drop projected for 2009
• Immense Amounts of Excess Shipping Capacity is
  Driving Down Shipping Prices
• Baltic Dry Index of shipping prices fell 94 from
  record high 11,793 in May 2008 to 663 in December
  2008
• As Much as 11.3 of Global Shipping Fleet is Idle
• As Much as 45 of the New Containership Capacity
  Scheduled for Delivery in 2010 Will Be Delayed or
  Cancelled
• Concern that Rising Protectionist Sentiments
  Could Increase Tariffs, Quotas and Further Hurt
  Trade and Ultimately Deepen Global Recession

23
Implications for Marine Insurance Markets

• Decline in Shipping Volume Due to Collapse in
  Trade is Reducing Exposure (Vessels and Cargo)
• Likely reducing claim frequency
• Premium Volume is Flat or Falling in Most Marine
  Segments
• Return of Major Catastrophic Losses (Hurricane
  Ike) Hurt Offshore Energy Segment
• Competition Remains Strong in Many Marine
  Segments, Potentially Hurting Underwriting
  Performance
• Global Economy Will Recover Slowly, Hurting
  Premium
• Investment Earnings Are Declining as Returns
  Suffer
• Global Interest Rates Have Dropped, Insurers
  Locking in Lower Returns for Years to Come
• If Major Economies Become Protectionist, Marine
  Insurers Will See Further Erosion of their
  Business
• Financial Collapse Means More/Different
  Regulation of Insurers Globally, Especially in US
  (Federal Regulation)

24
Real GDP and Trade Growth OECD Countries
2007Q12008Q4
Global trade (imports and exports) fell sharply
in late 2008 as major economies entered
recessions. WTO estimates global trade will
shrink 9 in 2009
Sources World Trade Organization
http//www.wto.org/english/news_e/pres09_e/pr554_e
.pdf
25
Growth in Volume of Merchandise Trade and GDP,
1998 2008 (Annual Change)
Merchandise trade volume is shrinking as major
economies enter recession
Sources World Trade Organization
http//www.wto.org/english/news_e/pres09_e/pr554_e
.pdf
26
Merchandise Trade Exports by Region,2007 and
2008, ( change from prior yr.)
Global merchandise trade growth fell by 2/3 in
2008 and will likely be negative in 2009
Sources World Trade Organization
http//www.wto.org/english/news_e/pres09_e/pr554_e
.pdf
27
Monthly Merchandise Exports and Imports, Jan.
2006- Feb. 2009 ( Bn)
Exports ----- Imports------
Exports ----- Imports------
Exports ----- Imports------
Exports ----- Imports------
Sources World Trade Organization
http//www.wto.org/english/news_e/pres09_e/pr554_e
.htmappendix_chart1
28
Monthly Merchandise Exports and Imports, Jan.
2006- Feb. 2009 ( Bn)
Sources World Trade Organization
http//www.wto.org/english/news_e/pres09_e/pr554_e
.htmappendix_chart1
29
Monthly Merchandise Exports and Imports, Jan.
2006- Feb. 2009 ( Bn)
Sources World Trade Organization
http//www.wto.org/english/news_e/pres09_e/pr554_e
.htmappendix_chart1
30
THE 2.75 TRILLION GLOBAL ECONOMIC STIMULUS
Stimulus Spending Will Have Only a Minor Impact
on Trade
31
Announced Economic Stimulus Packages Worldwide
(US Bill)
U.S. stimulus comprises a mix of spending, tax
relief and aid to states
Governments around the world are seeking to
soften the economic blow through spending.
Deficits as a share of GDP will mushroom leading
to a potential inflationary threat and higher
interest rates the future. P/C insurers will
provide insurance necessary for stimulus projects
and will benefit from enhanced economic growth
As of March 2009, these countries have approved
or proposed at least US2.3 trillion in stimulus
spending
As of March 2009.
Sources Wall Street Journal, January 8, 2009
with updates by I.I.I. Institute of
International Finance and Brookings Institute.
32
FINANCIAL STRENGTH RATINGS Industry Has
Weathered the Storms Well
33
US P/C Insurer Impairment Frequency vs. Combined
Ratio, 1969-2007
Impairment rates are highly correlated
underwriting performance and could reached a
record low in 2007
2007 impairment rate was a record low 0.12,
one-seventh the 0.8 average since 1969 Previous
record was 0.24 in 1972
Source A.M. Best Insurance Information
Institute
34
Summary of A.M. Bests P/C Insurer Ratings
Actions in 2008
P/C insurance is by design a resilient in
business. The dual threat of financial disasters
and catastrophic losses are anticipated in the
industrys risk management strategy.
Despite financial market turmoil, high cat losses
and a soft market in 2008, 81 of ratings
actions by A.M. Best were affirmations just
3.8 were downgrades and 4.0 upgrades
Through December 19. Source A.M. Best.
35
Historical Ratings Distribution,US P/C Insurers,
2008 vs. 2005 and 2000
2000
2008
2005
A/A and A/A- gains
P/C insurer financial strength has improved since
2005 despite financial crisis
Source A.M. Best Rating Downgrades Slowed but
Outpaced Upgrades for Fourth Consecutive Year,
Special Report, November 8, 2004 for 2000 2006
and 2009 Review Preview. Ratings B and
lower.
36
Investment Performance Investments are a
Principal Source of Declining Profitability
37
Property/Casualty Insurance Industry Investment
Gain1994- 20081
Investment gains fell by 51 in 2008 due to lower
yields, poor equity market conditions
1Investment gains consist primarily of interest,
stock dividends and realized capital gains and
losses. 2006 figure consists of 52.3B net
investment income and 3.4B realized investment
gain. 2005 figure includes special one-time
dividend of 3.2B. Sources ISO Insurance
Information Institute.
37
38
PIRACY An Ancient Scourge Impacts 21st Century
Marine Insurers
39
Prime Locations for Piracy Attacks, 2008
Seven locations accounted for more than
two-thirds, or 216 of a total 293 reported piracy
attacks in 2008
Source ICC International Maritime Bureau (IMB)
2008 annual report.
40
Monthly Worldwide Piracy Attacks,Jan 2008 - Mar
2009
Attacks reached a new record in March 2009 with
41 attacks, after peaking in September 2008 with
39 attacks. November 08 (37) and January 09 (36)
were also busy months.
Source ICC International Maritime Bureau (IMB)
First Quarter 2009 and 2008 annual reports.
41
Total Piracy Incidents WorldwideBy Region, 2008
A total of 293 incidents of piracy and robbery
against ships were reported in 2008 an increase
of more than 11 percent on 263 incidents in 2007
due to the unprecedented number of attacks in
the Gulf of Aden.
Source ICC International Maritime Bureau (IMB)
2008 annual report.
42
Countries Where Five or MoreIncidents Have
Occurred, 2008
A total of 111 incidents were reported for
Somalia and the Gulf of Aden in 2008, up nearly
200 percent on 2007. A total of 42 vessels were
hijacked by Somali pirates and 815 crew taken
hostage.
In Jan-Mar 2009, a total of 61 attacks were
reported for Somalia and the Gulf of Aden,
continuing 2008s trend. Out of the 61 attacks,
nine vessels were hijacked and 157 crew members
taken hostage.
Source ICC International Maritime Bureau (IMB)
First Quarter 2009 and 2008 annual reports.
43
Piracy Attacks By Vessel Type, 2008
All types of vessels from cargo ships to
passenger ships and fishing vessels have been
attacked.
Source ICC International Maritime Bureau (IMB)
2008 annual report.
44
Flag States of Vessels Attacked 10 Times or
More, 2008
The flag of registry subject to the highest
number of attacks in 2008 was Panama, followed by
Singapore and Liberia.
Source ICC International Maritime Bureau (IMB)
2008 annual report.
45
Managing Country of Ships Attacked 10 Times or
More, 2008
The managing country of ships subject to the
highest number of attacks in 2008 was Germany,
followed by Singapore and Greece.
Source ICC International Maritime Bureau (IMB)
2008 annual report.
46
Total Piracy Incidents Worldwide2003 - Q12009
A total of 293 incidents of piracy and robbery
against ships were reported in 2008 up 23
percent since 2006 the second consecutive year
of increases.
Attacks in the first quarter of 2009 have almost
doubled from 53 in Q1 2008 to 102 in Q1 2009
due almost entirely to increased Somali pirate
activity off the Gulf of Aden.
Source ICC International Maritime Bureau (IMB)
First Quarter 2009 and 2008 annual reports.
47
Types of Arms Used During Attacks, 2008
Pirates boarding vessels are better armed and
prepared to assault and injure crew. Total
incidents in which guns were used rose 93 percent
2007-2008.
Source ICC International Maritime Bureau (IMB)
2008 annual report.
48
Types of Violence to Crew, 2008
Worldwide in 2008 a total of 49 vessels were
hijacked, 889 crew taken hostage and a further 46
vessels fired upon surpassing all previous
records.
Source ICC International Maritime Bureau (IMB)
2008 annual report.
49
Total Maritime Hostage Incidents Worldwide,
2003-2008
Worldwide a total of 889 crew were taken hostage
in 2008, an increase of 200 percent over 2007! In
the first three months of 2009, 178 crew were
already taken hostage.
Source ICC International Maritime Bureau (IMB)
2008 annual report.
50
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