Rising Premiums: Economic Windfall or Insurance Industry Meltdown? The Legend of the Price-Gouging Insurer Casualty Actuaries of Greater New York New

Rising Premiums:Economic Windfall or

Insurance Industry Meltdown?

The Legend of the Price-Gouging Insurer

Casualty Actuaries of Greater New York New York, NYJune 11, 2003

Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038

Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org

Presentation Outline• Overview

URBAN LEGENDS OF THE HARD MARKET

• Insurers are Making a Killing

• Commercial Insurance is More Expensive than Ever

• Rate Hikes are to Make Up for 9/11 Losses

• Rate Hikes are Mostly Due to Bad Investments

• There’s No Connection Between Litigiousness & Rates

• Insurers are Drowning in Capital

• Insurers are “Redlining” Businesses post-9/11

• The Terrorism Problem is Fixed

• Investors are Satisfied with P/C Stock Performance

• Q&A

PRICING:Past, Present &

Future

Average Price Change of Commercial Insurance Renewals

(Pre-9/11)

9.5%

13.5%

8.8%

10.0%

12.0%

11.0%

8.9%

6.1%

9.5%

8.0%

8.3%

7.9%

9.0%

-1.6%

-1.2%

-0.4%

-7.0%

-6.0%

-11.0%

-6.0%

-10.0%

-7.0%

-3.0%

1.4%

0.8%

3.5%

3.2%

3.2%

2.8%

4.1%

-2.1%

-2.8%

-1.8%

0.2%

-5.0%

-4.4%

-3.5%

-4.3%

-6.6%

-4.1%

-2.0%

-13%

-11%

-9% -7% -5% -3% -1% 1% 3% 5% 7% 9% 11%

13%

E&S

Umbrella

Workers' Comp

Commercial Property

CMP

General Liability

Commercial Auto

Spring 2001 Fall 2000 Spring 2000 Fall 99 Spring 99 Fall 98Source: Conning

Council of Insurance Agents & Brokers Rate SurveyFirst Quarter 2003

Rate Increases By Line of BusinessRate Increases By Line of Business

No Change Up 1-10% 10-20% 20-30% 30-50% 50%-100% >100%Change Up 1-10% 10-20% 20-30% 30-50% 50%-100% >100%

Comm. Auto 8% 23% 40% 19% 5% 0% 0%

Workers Comp 7% 20% 35% 23% 7% 2% 0%

General Liability 7% 23% 42% 20% 3% 0% 0%

Comm. Umbrella 4% 12% 28% 27% 15% 8% 1%

D&O 3% 6% 25% 28% 15% 8% 2%

Comm. Property* 8% 24% 35% 17% 4% 0% 0%

Construction Risk 7% 5% 27% 23% 16% 3% 0%

Terrorism 13% 17% 19% 10% 2% 1% 1%

Business Interr. 13% 33% 28% 7% 1% 0% 0%

Surety Bonds 9% 14% 19% 10% 4% 0% 2%

Med Mal 2% 2% 5% 8% 18% 14% 8%

*9% of respondent reported a decline.

DEBUNKING URBAN LEGENDS OF THE HARD MARKET

Legend #1: Insurers are Exploiting the Current Hard Market and

Making a Killing

P/C Net Income After Taxes1991-2002 ($ Millions)

$14,178

$5,840

$19,316

$10,870

$20,598

$24,404

$36,819

$30,773

$21,865$20,559

-$6,970

$2,903

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

91 92 93 94 95 96 97 98 99 00 01 02

Sources: A.M. Best, ISO, Insurance Information Institute.

2001 was the first year ever with a full year net loss

2002 ROE = 1.0%

-5%

0%

5%

10%

15%

20%

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03F

US P/C Insurers All US Industries

ROE: P/C vs. All Industries 1987–2003F

Source: Insurance Information Institute; Fortune

There is an enormous gap between the p/c industry’s rate of return and that of most major industry groups

-5%

0%

5%

10%

15%

20%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

ROE Cost of Capital

ROE vs. Cost of Capital: US P/C Insurance: 1991 – 2002

Source: The Geneva Association, Ins. Information Inst.

There is an enormous gap between the industry’s cost of capital and its rate of return

14.6

pts

10.2

. pts

US P/C insurers have missed their cost of capital by an

average 6.9 points since 1991

Underexposed: The Economic Cycle

Hurts Exposure Growth

4.4%3.5%

2.5%

5.7%

8.3%

4.8%5.6%

2.2%

1.0%

-0.6%

-1.6%

-0.3%

1.4%2.2%

3.3%2.9%

2.4%

3.6%2.7%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Real GDP Growth

Source: US Department of Commerce, Blue Economic Indicators 6/03, Insurance Information Institute.

Economy continues to experience uneven growth

following the recession of 2001

Impact of Recession on P/C Premiums and Profitability (1970-2001)

7.5%

5.7%

-1.8%

-0.4%

4.3% 4.6% 4.2%4.1%

8.6%

4.6%

6.8%

9.0%9.6%

11.4%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Inflation (CPI) NWP Growth(unadj.)

Real NWPGrowth

ROE--P/CInsurers*

ROE--AllIndustries*

ROE--Banks* ROE--DiversifiedFinancial*

Recession Years (1970; 74-75; 80-82; 90-91;2001)

Non-Recession Years (all other years, 1970-2001)

*GAAP return on equity, adjusted for inflation; Bank data 1952-2001; Div. Fin. 1987-2001Source: Insurance Information Institute

Unemployment Rate (%)

5.6

6.8

7.5

6.9

6.15.6

5.44.9

4.5

4.2 4.0

4.8

5.86.0

5.7

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

90 91 92 93 94 95 96 97 98 99 00 01 02 03E 04FSource: US Bureau of Labor Statistics; Blue Chip Economic Indicators (6/03), Insurance Info. Institute.

Unemployment

The unemployment rate is expected to rise slightly in 2003, harming WC

exposure growth.

Exposure: Employment, Wages & Salaries

107112

115 117 119 118 119 120123 125 127

130 132 134 135 135 134 136

110

100

105

110

115

120

125

130

135

140

85 86 87 88 89 90 91 92 93 95 95 96 97 98 99 00 01 02E 03F

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000Employed Persons W age & Salary Disbursements

Sources: Bureau of Labor Statistics, Bureau of Economic Analysis, Blue Chip Economic Indicators,Insurance Information Institute.

Disb

ursem

ents ($B

illions)

Em

plo

ymen

t (M

illio

ns)

$631$684

$745$818

$899

$1,009

$1,136

$1,228

$1,324$1,255

$1,172$1,183

$500

$750

$1,000

$1,250

$1,500

92 93 94 95 96 97 98 99 00 01 02 03:I*

Private Non-Residential Investment (Real, $1996)

*Annualized based on first quarter data.Source: U.S. Bureau of Economic Analysis, Insurance Information Institute

Bil

lion

s

(US

$)

Commercial exposure growth is slowing as corporations cut

back on capital spending

New Private Housing Starts(Millions of Units)

1.19

1.01

1.20

1.29

1.461.35

1.48 1.47

1.62 1.64 1.57 1.60

1.71 1.681.62

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

90 91 92 93 94 95 96 97 98 99 00 01 02 03E 04F

Source: US Department of Commerce; Blue Chip Economic Indicators (5/03), Insurance Info. Institute

New Private Housing Starts

•Housing market remain strong.

•Virtually no exposure impact for insurers

Motor Vehicle Retail Sales (Millions of Units)

15.515.5

16.0

17.417.8

17.217.1

16.7 16.7

15.0

15.5

16.0

16.5

17.0

17.5

18.0

18.5

19.0

19.5

20.0

96 97 98 99 00 01 02 03E 04F

Source: US Department of Commerce; Insurance Information Institute;Blue Chip Economic Indicators as of May 2003.

New Motor Vehicle Sales

Sales of automobiles remain relatively strong despite the weak economy. There is little

adverse exposure impact on auto insurers.

Legend #2: Insurance is More

Expensive than Ever and is Squeezing Businesses and

Families Alike

Insurance is the Biggest Concern of Small Business Owners

Regulations11%

Competition9%

Labor Qlty.9%

Taxes19%

Poor Sales19%

Labor Costs5%

Inflation4%

Insurance20%

Credit/Int. Rates2%

Source: National Federation of Independent Business (February 2003); Insurance Information Institute

Commercial Lines Net Written Premium as % of GDP

2.3%

2.1%2.1%

2.0%

1.9%1.9%

1.9%1.8%

1.7%

1.6%

1.5%1.5%1.5%

1.6%

1.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02E

Sources: Insurance Information Institute, calculated from U.S. Bureau of Economic Analysis and A.M. Best data.

Commercial insurance premiums as a % of GDP fell 35% between 1988 and 2000 and remains far

below late 1980’s levels

More Cover for Less Money: Terms & conditions broadened

significantly during the soft market, even as prices fell

Cost of Risk per $1,000 of Revenues: 1990-2002E

$6.10

$6.40

$8.30$7.70

$7.30

$6.49

$5.70$5.25

$5.71

$5.20$4.83

$5.55

$6.94

$4

$5

$6

$7

$8

$9

$10

90 91 92 93 94 95 96 97 98 99 00 01E 02E

Source: 2001 RIMS Benchmark Survey; Insurance Information Institute estimates.

•Cost of risk to corporations fell 42% between 1992 and 2000

•Estimated 15% increase in 2001, 25% in 2002

Cost of risk is still less than it was a decade ago!

Homeowners Insurance Expenditure as a % of Median Home Price

$107

,200

$115

,800

$121

,800

$128

,400

$133

,300

$139

,000

$147

,800

$157

,800

$110

,500

0.39%

0.38% 0.38%

0.37% 0.37% 0.37%

0.36%

0.35% 0.35%

$100,000

$125,000

$150,000

$175,000

$200,000

94 95 96 97 98 99 00 01 02

0.30%

0.33%

0.35%

0.38%

0.40%Median Sales Price of Existing HomesHO Insurance Expenditure as a % of Sales Price

*As of January 2003.Source: Insurance Information Institute calculations based on data from National Association of Realtors, NAIC.

HO

Exp

end

iture as %

of Sales P

riceMed

ian

Hom

e S

ales

Pri

ce

The cost of homeowners

insurance relative to the

price of a typical home has fallen!

Legend #3: Insurers are Raising Rates to Make up for 9/11 Losses

-10%

-5%

0%

5%

10%

15%

20%

25%

19

70

19

71

19

72

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

Current $ Real $

Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute

Strength of Recent Hard Markets by Real NWP Growth

Real NWP Growth During Past 3 Hard Markets

1975-78: 8.6%

1985-87: 14.5%

2001-03F: 9.2%

1975-78 1985-87 2001-03

($60)

($50)

($40)

($30)

($20)

($10)

$0

$10

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Underwriting Gain (Loss)1975-2002

Source: A.M. Best, Insurance Information Institute

$ B

illi

ons

P-C insurers paid $30.5 billion more in claims & expenses than they collected in

premiums in 2002

95

100

105

110

115

120

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

P/C Industry Combined Ratio

2001 = 115.7

2002 = 107.2

2003F = 103.2*

Combined Ratios

1970s: 100.3

1980s: 109.2

1990s: 107.7

2000s: 111.0

Sources: A.M. Best; III *Based on III Earlybird Survey, February 2003.

110.

5

105.

0 113.

6

119.

2

104.

8

100.

8

100.

5

114.

3

106.

5

121.

3

96.4

108.

8 115.

8

106.

9

108.

5

106.

5

105.

8

101.

6

105.

6

107.

7

110.

0

115.

7

107.

2

162.

5

126.

5

90

100

110

120

130

140

150

160

170

91 92 93 94 95 96 97 98 99 00 01 02 03*

Reinsurance All Lines Combined Ratio

Combined Ratio: Reinsurance vs. P/C Industry

*First quarter 2003 estimate from RAA.

Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute

2001’s combined ratio was the worst-ever for reinsurers; 2003 was bad as well.

2003: Big improvement in Q1

Light weather helped Q1:03

12% After Tax ROE Requires Underwriting Profit

Source: Dowling & Partners; Insurance Information Institute

Accident Year Combined Ratio

P : S 90.0% 92.5 % 95.0 % 97.5 % 100.0 % 102.5 % 105.0 % 107.5 % 110.0 % 112.5 %

100 % 13.0 % 11.5 % 10.1 % 8.6 % 7.1 % 5.6 % 4.1 % 2.6 % 1.1 % -0.4 %

110 % 14.0 % 12.4 % 10.7 % 9.1 % 7.5 % 5.8 % 4.2 % 2..5 % 0.9 % -0.7 %

120 % 15.0 % 13.2 % 11.4 % 9.6 % 7.8 % 6.1 % 4.3 % 2.5 % 0.7 % -1.1 %

130 % 16.0% 14.0 % 12.1 % 10.2 % 8.2 % 6.3 % 4.4 % 2..4 % 0.5 % -1.5 %

140 % 16.9 % 14.9 % 12.8 % 10.7 % 8.6 % 6.5 % 4.4 % 2.4 % 0.3 % -1.8 %

150 % 17.9 % 15.7 % 13.5 % 11.2 % 9.0 % 6.8 % 4.5 % 2.3 % 0.1 % -2.2 %

160 % 18.9 % 16.5 % 14.1 % 11.8 % 9.4 % 7.0 % 4.6 % 2.2 % -0.2 % -2.5 %

170 % 19.9 % 17.3 % 14.8 % 12.3 % 9.8 % 7.2 % 4.7 % 2.2 % -0.4 % -2.9 %

180 % 20.9 % 18.2 % 15.5 % 12.8 % 10.1 % 7.5 % 4.8 % 2.1 % -0.6 % -3.3 %

190 % 21.8 % 19.0 % 16.2 % 13.3 % 10.5 % 7.7 % 4.9 % 2.0 % -0.8 % -3.6 %

200 % 22.8 % 19.8 % 16.9 % 13.9 % 10.9 % 7.9 % 4.9 % 2.0 % -1.0 % -4.0 %

225 % 25.3 % 21.9 % 18.6 % 15.2 % 11.9 % 8.5 % 5.2 % 1.8 % -1.5 % -4.9 %

250 % 27.7 % 24.0 % 20.3 % 16.5 % 12.8 % 9.1 % 5.4 % 1.7 % -2.1 % -5.8 %

Combined Ratio is 10-

15 pts. too high

U.S. InsuredCatastrophe Losses

$7.5

$2.7$4.7

$22.9

$5.5

$16.9

$8.3 $7.3

$2.6

$10.1$8.3

$4.3

$28.1

$5.9 $5.0

$0

$5

$10

$15

$20

$25

$30

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03*

*Estimate through May 2003.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

$ BillionsCAT losses continue to be a problem,

though 2002 was much better than 2001

$ Billions, Calendar Year Basis

$2.3 $2.2 $1.2

($8.5)

($1.5)

($7.5)($6.7)($10.0)

$23

$0.3

($3.7)($0.3)

$9.9

($15)

($10)

($5)

$0

$5

$10

$15

$20

$25

90 91 92 93 94 95 96 97 98 99 00 01 02E

P/C Insurance Industry Prior Year Reserve Development*

*Negative numbers indicate favorable development; positive figures represent adverse development.Source: A.M. Best, Morgan Stanley, Dowling & Partners Securities

Adverse reserve development of about $23 billion accounted for most of the

industry’s 2002 underwriting loss and “ate” much of the industry’s $37 billion

increase in earned premiums

10.1

%

8.0%

2.1% 2.5%

0.2%

6.1% 7.

3% 8.1%

11.2

%

14.7

%

1.3%

9.0%

5.1% 6.

4% 7.3%

5.7%

7.4%

7.6%

-1.1

%

-2.1

%

10.7

% 12.0

%

-5%

0%

5%

10%

15%

92 93 94 95 96 97 98 99 00 01 02

Health Benefit Costs WC

Med Claim Costs Rising Sharply

Source: NCCI; William M. Mercer, Insurance Information Institute.

Health care inflation is affecting the cost of medical care, no matter

what system it is delivered through

Legend #4: Insurers’ Reckless

Investment Strategies are the Primary Reason Why Rates

are Rising Today

$0

$9

$18

$27

$36

$45

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

Net Investment Income

History

1997 Peak = $41.5B

2000= $40.7B

2001 = $37.7B

2002 = $36.7B

Bil

lion

s

(US

$)

Investment income in 2002 fell 2.8% due primarily to historically low interest rates


-$4.8 Billion

0%

2%

4%

6%

8%

10%

12%

14%

16%

3-Month T-Bill 1-Yr. T-Bill 10-Year T-Note

Interest Rates: Lower Than They’ve Been in Decades

*As of April 21, 2003.Source: Board of Governors, Federal Reserve System; Insurance Information Institute

1. Historically low interest rates are the primary driver behind lower investment yields. Nevertheless, overall insurer investment performance outpaces all major market indices and almost every major category of mutual fund.

2. 66% of the industry’s invested assets are in bonds

-30%

-20%

-10%

0%

10%

20%

30%

40%

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

*As of June 6, 2003.Source: Ibbotson Associates, Insurance Information Institute

Total Returns for Large Company Stocks: 1970-2003*

2002 was 3rd consecutive year of decline for stocks

Will it be the last?

S&P 500 up 13.2% so

far this year

P/C Industry Investments,by Type (as of Dec. 31, 2001)

Other5%

Bonds66%

Real Est. & Mortgages

1%

Common Stock21%

Cash & ST Secs.6%

Preferred Stock1%

Bond Holdings, by Type

Industrial & Misc. 32.5%

Special Revenue 30.5%

Governments 18.0%

States/Terr/Other 15.4%

Public Utilities 3.1%

Parents/Subs/Affiliates 0.5%


Common stock accounts for about 1/5 of invested

assets

Property/Casualty Insurance Industry Investment Gain*

$ Billions

$35.4

$42.8$47.2

$52.3

$44.4

$36.6

$57.9

$51.9

$56.9

$0

$10

$20

$30

$40

$50

$60

94 95 96 97 98 99 00 01 02

*Investment gains consists primarily of interest, stock dividends and realized capital gains and losses.Source: Insurance Services Office; Insurance Information Institute estimate annualized as of 9/30/02.

Investment gains are simply returning to “pre-bubble” levels

Crisis in Corporate Governance Affecting Even Blue Chip Portfolios

•Crisis has affected both equity and bond markets

Legend #5:There is No Relationship

Between Litigiousness and Rising Insurance Costs

(A Trial Lawyer Favorite)

TORT-ure• Asbestos• “Toxic” Mold• Medical Malpractice• Construction Defects• Lead• Fast/Fattening Foods & Obesity• Dietary Supplements (e.g., Ephedra)• Reality TV• Arsenic Treated Lumber • Guns• Genetically Modified Foods (Corn)• Pharmaceuticals & Medical Devices• Security exposures (workplace violence, post-9/11 issues)• Slavery• What’s Next? SARS??

New

New

Average Jury Awards1994 vs. 2001

419187 333

7591,185 1,140

1,7441,365

323789

1,727

2,288

3,902

9,113

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

Overall VehicularLiability

PremisesLiability

BusinessNegligence*

WrongfulDeath

MedicalMalpractice

ProductsLiability

($00

0)

1994 2001

*Figure is for 2000 (latest available)Source: Jury Verdict Research; Insurance Information Institute.

Trends in Million Dollar Verdicts*

4%

10%

8%

21%

21%

36% 42

%

4%

11%

11%

27%

25%

43%

59%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

VehicularLiability

PersonalNegligence

PremisesLiability

BusinessNegligence

GovernmentNegligence

MedicalMalpractice

ProductsLiability

95-97 98-99 2000-2001

*Verdicts of $1 million or more.Source: Jury Verdict Research; Insurance Information Institute.

Very sharp jumps in multi-million dollar awards in recent years across virtually all types of defendants

Cost of U.S. Tort System($ Billions)

Source: Tillinghast-Towers Perrin. 2005 forecasts from Tillinghast.

$129 $130$141 $144 $148

$159 $156 $156$167 $169

$180$205

$298

$0

$50

$100

$150

$200

$250

$300

$350

90 91 92 93 94 95 96 97 98 99 00 01 05F

Tort costs consumed 2.0% of GDP annually on average since 1990, expected to rise to 2.4% of GDP by 2005!

Per capita “tort tax” expected to rise to $1,000 by 2005, up from $721 in 2001

Even a modest reduction in tort costs would be more stimulative than the $674 billion Bush tax/spending plan

Personal, Commercial & Self (Un) Insured Tort Costs*

$17.0

$49.1 $57.2$17.1

$51.0

$70.9

$5.4

$20.1

$29.6

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

1980 1990 2000

Commercial Lines Personal Lines Self (Un)Insured

Bil

lion

s

Total = $39.5 Billion

*Excludes medical malpracticeSource: Tillinghast-Towers Perrin



Who Will Pay for the US Asbestos Mess?

Source: Tillinghast-Towers Perrin; Insurance Information Institute

US Insurers30%Asbestos

Defendants39%

Foreign Insurers

31%

Estimated Total US Settlements & Expenses = $200 billion

$78 billion $60 billion

$62 billion

Medical Malpractice: Tort Cost Growth is Skyrocketing

$ Billions

$1.2

$1.5

$1.9

$2.3

$5.4 $6

.5 $7.1

$7.0

$6.8

$7.1

$7.2 $7

.9 $8.7 $9

.4 $10.

8

$11.

6

$12.

4

$13.

5

$14.

6 $16.

2 $17.

6 $19.

4 $20.

9

$2.9

$3.6 $4

.4

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

$22

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00

Sources: Tillinghast-Towers Perrin, US Bureau of Labor Statistics, Insurance Information Institute

•Over the period from 1990 through 2000, medical malpractice tort costs rose 140%, more than double the 60% increase in medical costs generally over the same period!

•Over the period from 1975 through 2000, medical malpractice tort costs skyrocketed by 1,642% while medical costs generally rose 449%, nearly 4 times as fast!

The Nation’s Judicial Hellholes:An International Embarrassment

Source: American Tort Reform Association; Insurance Information Institute

City of St. Louis, MO

CALIFORNIA

Alameda County

Los Angeles County

San Francisco County

Orleans Parish, LA

MIAMI

Madison County, IL

TEXAS

Jefferson County

Hidalgo County

Starr County

Mississippi’s 22nd Judicial

District

Average Cost per $1 Million Liability Coverage2001 vs. 2002

$3,8

01

$3,8

30 $5,3

17

$5,3

68

$5,5

31

$8,2

13

$5,4

11

$4,8

78

$5,6

09

$6,4

64

$6,0

54 $7,6

06

$7,1

06

$12,649

$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000

$10,000$11,000$12,000$13,000

$0 - $200M $201M-$500M

$501M-$1B $1B-$5B $5B-$10B $10B+ All

Firm Revenue Size

($00

0)

2001

2002

Source: Marsh, 2002 Limits of Liability Report

Excess litigiousness is raising the cost of liability coverage for businesses of all sizes

Average Total Limits Purchased by All Firms* ($ Millions)

*Includes underlying primary limits

Source: Limits of Liability 2002, Marsh, Inc.

$77.9

$85.8$83.2

$85.9$88.7

$99.1

$105.0$101.8

$95.7

$50

$60

$70

$80

$90

$100

$110

1994 1995 1996 1997 1998 1999 2000 2001 2002

Limits purchased fell by 9.9% between 2000 and 2002. Price/capacity are issues.

EXAMPLES

Medical Malpractice Asbestos

“Toxic” MoldObesitySARS

Medical Malpractice

ME

NH

MA

CT

PA

WVVA

NC

LA

TX

OK

NE

ND

MN

MI

IL

IA

ID

WA

OR

AZ

HI

NJ

RI

MDDE

AL

VT

NY

DC

SC

GA

TN

AL

FL

MS

ARNM

KYMOKS

SDWI

IN

OH

MT

CA

NV

UT

WY

CO

Medical Crises across the US

Crisis states

Crisis looming

AMA: Crises reached in at least 18 states !

PR

AK

Figure 1

Source: American Medical Association, March 2003

103.

7

108.

1

97.6 99

.7 106.

0

107.

9 115.

7

129.

5

133.

5

153.

3

165

108.

8 115.

7

106.

9

108.

4

106.

4

105.

8

101.

6

105.

6

107.

8

110.

0 115.

7

107.

2

127.

9

90

100

110

120

130

140

150

160

170

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002E

Medical Malpractice All Lines Combined Ratio

Medical Malpractice Combined Ratio

Source: AM Best, Conning, Insurance Information Institute

Trial lawyers have destroyed commercial viability of med mal. The future holds:

Increased mutualization

Local market collapses

HC Providers seeking govt. protection

Insurers in 2001 paid out an estimated $1.65 for every $1 they earned in premiums!

Asbestos

Who Will Pay for the US Asbestos Mess?

Source: Tillinghast-Towers Perrin; Insurance Information Institute

US Insurers30%Asbestos

Defendants39%

Foreign Insurers

31%

Estimated Total US Settlements & Expenses = $200 billion

$78 billion $60 billion

$62 billion

‘Toxic’ Mold

Litigiousness in US Society Compounded the Problem

Documented Toxic Mold SuitsFormer

Owners of Sold Homes

10%Bad Faith

Against Insurers

50%Builder for

Construction Defects

20%

HO Associations

for Improper Maintenance

20% Source: www.toxlaw.com; Guy Carpenter

1,000 Cases

2,000 Cases

5,000 Cases

2,000 Cases

TX: Mold Claim Frequency*(# claims per 1,000 policyholders)

1.7

3.22.7

4.1

6.7

11.7

18.4

23.6

0

5

10

15

20

25

00:Q1 00:Q2 00:Q3 00:Q4 01:Q1 01:Q2 01:Q3 01:Q4

Source: Texas Department of Insurance; Insurance Information Institute estimates.

The frequency of mold claims rose 1,286% between 2000:I and 2001:IV

$0

$50

$100

$150

$200

$250

Wa

ter

Da

ma

ge

Pa

id L

os

se

s*

($M

illio

ns

)

0

5000

10000

15000

20000

25000

30000

Cla

im C

ou

nt

Paid Losses

Claim Count

Source: Texas Department of Insurance; Insurance Information Institute

* Data are for TDI Cause 61: Discharge – Other Damage. Not all claims in cause 61 are mold and mold claims may also arise from other (non-water) causes of loss.

Texas: Mold Losses/Claims Are Finally Moderating*

Sharply Rising Average Water Claim Cost in CA: Mold Symptom

$2,537$2,631

$3,339

$3,719

$4,730

$2,000

$3,000

$4,000

$5,000

1997 1998 1999 2000 2001

Source: Insurance Information Institute based on data from the Insurance Information Network of California;

The cost of the average water loss in CA surged 27% in 2001 and 80% since 1998

Construction Defect Litigation Destroying CA Condo Market

$1.87

$2.95

$1.00

$1.25

$1.50

$1.75

$2.00

$2.25

$2.50

$2.75

$3.00

1998 2000

Source: ISO, Insurance Information Institute

Condo construction in parts of CA has come to a virtual stop.

Insurer costs rose 58% in just 2 years!

Ratio of Losses Paid Out to Premiums Taken In

“Right-to-Cure” laws now in 5

states: AZ, CA, NV, TX, WA

16 considering such laws.

Where are the Next Battlefields for Mold?

• Homeowners issue probably crested in 2002• Migration to commercial area affects many lines:

Commercial Property Commercial LiabilityProducts Liability Builders Risk/Construction DefectsWorkers Comp…(very little)

• Hot Spots: Apartments/Condos/Co-ops Office Structures Schools Municipal BuildingsCars? (GM case in NC)

• Trend toward class actions since science doesn’t support massive individual non-economic damagesMuch more lucrative for trial lawyers to form class

Source: Insurance Information Institute.

Obesity

Fast Food/Junk Science:Edible Asbestos?

•Are the food service & manufacturing industry’s vulnerable to suits over obesity?•McDonald’s sued in late 2002 over allegations that their food makes people fat•Kraft sued earlier this year over trans fats in Oreo cookies

Fast Food & Junk Science:The Case Against Pizza

•Premise: Cheese makes you fat•Why? Cheese is addictive!!

Digestion breaks down milk protein called casein, into components called casomorphins which are opiates like morphine & codeine, which are addictive

Caseins are concentrated in cheeses

•Manipulation of cheese content in products—or sale of cheese itself—knowing its addictive qualities—is theoretically a “scientific” basis to file suit on behalf of the pizza-addicted obese.•ADA’s Cheese Logo

SARS:

A Threat to the P/C Insurance Industry?

SARS: Limited P/C Insurance Industry Exposure

•Are there any potential SARS-related p/c insurance exposures?

Workers comp? Mostly health care workers

Event cancellation? Fear of SARS insufficient, but legitimate claims possible

CGL? Several courts have ruled that viruses/bacteria (e.g., E. Coli, Legionnaires’ disease) not covered

EIL? Court decisions + fact that at least half of EILs have “naturally occurring substance” exclusions preclude coverage.

Legend #6:Insurers are Awash in Cash and Have More Money than They Know What to Do With

Capital Raising by P/C Insurers Since September 11, 2001*

$20,492

$11,442

$16,437

$4,872

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

2001 2002*

($ M

illi

on

s)

Completed Pending

$25.4 Billion$27.9 Billion

*As of September 13, 2002.

Source: Morgan Stanley, Insurance Information Institute.

14 Pending 38 Pending

40 Completed 33 Completed

Capital Raising by P/C Insurers Since 9/11 Totals $53.2B

$0

$50

$100

$150

$200

$250

$300

$350

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

Policyholder Surplus: 1975-2002


$ B

illi

ons

Surplus (capacity) peaked at $336.3 Billion in mid-1999 and fell by 15.2% ($51 billion) to $285.2 billion since then.

•Surplus is now lower than at year-end 1997.

“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations

$51 Billion

Global P/C Insurance Capacity is Falling Dramatically

$920

$690

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

2000:I 2002:IV (est.)

$ B

illio

ns

Sources: Insurance Information Institute, Swiss Re

Global non-life capacity is down

25% over the past 2 years

Capital Myth: P/C Insurers Have $300 Billion to Pay Terrorism Claims

"Target" Commercial*$100 billion

33%

Other Commercial$50 billion

17%

Personal$150 billion

50%

Total PHS = $298.2 B as of 6/30/01

= $285.2 B as of 12/31/02

*”Target” Commercial includes: Comm property, liability and workers comp; Surplus must also back-up on non-terrorist related property/liability and WC claimsSource: Insurance Information Institute

Only 33% of industry surplus backs up “target” lines

Legend #7: Insurers are “Redlining”

Businesses in the Wake of 9/11

89.9

%

85.5

%

81.1

%

69.2

% 84.2

%

51.1

%

73.3

%

65.1

%

85.0

%

82.4

%

79.2

%

67.2

% 82.5

%

49.2

%

69.9

%

63.6

%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Prior to 9/11/01 Currently

Insurance Coverage in Lower Manhattan

Source: Downtown Alliance

Over 95% of businesses in Downtown were able to continue

coverage in the wake of 9/11

WC Residual Market Shares

Source: NCCI

Residual Market Shares

5%

9%

16%18%17%17%

21%22%24%

26%

16%

11%

7%4% 3%

1% 2%4%

23%

0%

10%

20%

30%

84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

•The vast majority of employers are finding coverage in the private market

•Residual market share is growing but is less than 1/6 of the share in 1993.

Legend #8:TRIA Has Solved the Industry’s Terrorism Exposure Problems

Sept. 11 Industry Loss Estimates($ Billions)

Life$2.7 (7%)

Aviation Liability$3.5 (9%)

Other Liability

$10.0 (25%)

Biz Interruption$11.0 (27%)

Property -WTC 1 & 2$3.5 (9%)

Property - Other

$6.0 (15%)

Aviation Hull$0.5 (1%)

Event Cancellation

$1.0 (2%)

Workers Comp

$2.0 (5%)

Consensus Insured Losses Estimate: $40.2BSource: Insurance Information Institute

Industry Losses Under Proposed Federal Backstop Using 9/11 Scenario

(as proposed/interpreted as of 10/18/02)

$8.75$12.50

$18.75$1.125

$10.

575

$15.

75

$18.

00

$0

$5

$10

$15

$20

$25

$30

Year 1 Year 2 Year 3

($ B

illi

ons)

Industry Retention Surcharge Layer Co-Reinsurance Layer

Source: Insurance Information Institute.

$1.75B Industry Co-Share

Assumes $30B Commercial Prop & WC Loss, $125B “At Risk” Commercial DPW




Total Ind. Loss: $10.875B $14.25B $19.675B

Legend #9: Wall Street Investors Should

be Satisfied With Insurer Stock Performance

Insurer Stocks: Underperforming the S&P 500

16.14%

7.52%

9.10%

12.21%

1.59%

11.94%

22.00%

0% 5% 10% 15% 20% 25%

Nasdaq

S&P 500

Multiline

L/H

All

P/C

Brokers

Source: SNL Securities, Insurance Information Institute

Total Return 2003 YTD Through June 6, 2002

Insurance Mergers and Acquisitions

7.1 6.9 8.6 5.0 8.5 12.527.0

40.856.2

41.755.7

6.6

41.5

243 246

171 188149

221

349382

433

109

300

295

468

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

89 90 91 92 93 94 95 96 97 98 99 00 01 02*

Val

ue o

f M

& A

s ($

Bil

lion

s)

0

100

200

300

400

500

600

Num

ber

of M

& A

s

Value of Deals Number of Deals

Source: Compiled from Conning & Company reports.

1998: 565 deals valued at $165.4 B

Number of M&As was down 39.4% during the first half of 2002 vs. first half 2001.

Value of deals was down 80.8%.

None of the top deals were in the P/C sector

Insurance Information Institute On-Line

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Documents

Rising Premiums: Economic Windfall or Insurance Industry Meltdown? The Legend of the Price-Gouging Insurer Casualty Actuaries of Greater New York New