The Perfect The Perfect StormStorm
STRIMA 2011
Mark A. Goode, CIC, CPCUExecutive Vice PresidentWillis Public Entity [email protected] (office)704.904.1792 (mobile)
2
The Perfect StormSTRIMA 2011
TOPICS
1. Current Market Place Conditions
2. Factors Contributing to Market Volatility
3. Impact of RMS 11
4. Impact on the Client
3
Current Marketplace Conditions
HARD OR SOFT MARKET?
Transition
Stressed
Volatile
“In Flux”
Fragile
Under Pressure
Dysfunctional
Inconsistent
Fluid
Schizophrenic
4
Large Account Property Rate Change Q2 - 2011
*
-9.48%
10.00%
4.98%
0.07%
-10.00% -10.00%
-8.00%
-12.00% -10.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
Effective Rate Change
Effective Rate Change -10.00% -10.00% -8.00% -12.00% -10.00% -9.48% 0.07% 4.98% 10.00%
Q1 2010 Q2 2010 Q3 2010 Q4 2010 Jan-11 Apr-11 May-11 Jun-11 Jul-11
Data includes 30 shared and layered accounts bound between April 1st and June 30th 2011
14.46% increase
in 60 days
Japanese Earthquake
RMS 11.0 debuts
5
Factors Contributing to Market Volatility
1. Deteriorating Carrier Financial Results
2. Black Swan Events
3. Political Uncertainty
4. Inflation Fears
5. Re-Insurance Treaty Premium Increases
6. Minimal / No Investment Income
7. RMS 11
6
2nd Quarter Insured US Catastrophe Losses, 2000-2011
$1.46
$6.24
$2.79
$5.05
$2.33
$0.93
$5.04
$2.30
$7.11
$4.47
$6.38
$15.09
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
$ Billions
For the 2nd Quarters of
2000-2010, the average US
Insured loss was
$4 billion.
For the 2nd Quarter of 2011,CAT losses in the US have topped $15 billion
Data Sourced from Insurance Information Institute, Is the World Becoming Riskier, Dr. Robert Hartwig July 15th, 2011
7
Industry Combined Ratios, 2000-2010
The U.S. property/casualty insurance industry’s after tax net income rose $6 billion to $34.7 billion from the previous year.
Increases in net income and overall profitability in 2010 were directly attributable to improvement in investment results.
Lower investment yields less financial leverage mean that combined ratios for insurers must be better (i.e. lower) in order for insurers to achieve ROE on par with past investments.
In 2010, Insurers experienced a net growth in written premium for the first time since 2007. Declines in premiums slowed to .2% down from .6% in 2009 and 3.5% in 2008.
Source: ISO 2010 Financial Results
Annual P/C Industry Combined Ratios
90.00%
100.00%
110.00%
120.00%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Q12011
Industry Combined Ratio
812/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C
Top 15 Most Costly World Insurance Losses, 1970-2011*
(Insured Losses, 2010 Dollars, $ Billions)
$11.3$14.0 $14.0$14.9$20.5$20.8 $23.1$24.9
$35.0
$72.3
$10.0$9.3$9.0$8.0$8.0
$0
$10
$20
$30
$40
$50
$60
$70
$80
ChileQuake(2010)
Hugo (1989)
TyphoonMirielle(1991)
Charley(2004)
NewZealandQuake(2011)
Rita (2005)
SpringTornadoes
(2011)
Wilma(2005)
Ivan (2004)
Ike (2008)
Northridge(1994)
WTCTerrorAttack(2001)
Andrew(1992)
JapanQuake,
Tsunami(2011)*
Katrina(2005)
Taken as a single event, the Spring 2011 tornado season would likely become the 9th costliest event in
global insurance history
3 of the top 15 most expensive
catastrophes in world history have occurred in the past 18 months
*Through June 20, 2011. 2011 disaster figures are estimates; Figures include federally insured flood losses, where applicable.Sources: Swiss Re sigma 1/2011; AIR Worldwide, RMS, Eqecat; Insurance Information Institute.
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100
200
300
400
500
600
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Worldwide Natural Disasters,1980 – 2011*
*2011 figure is through June 30. Source: MR NatCatSERVICE
Meteorological events(Storm)
Hydrological events(Flood, mass movement)
Climatological events(Extreme temperature, drought, forest fire)
Geophysical events(Earthquake, tsunami, volcanic eruption)
Already 355 events through the first 6
months of 2011
Number of Events
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Number of Federal Disaster Declarations, 1953-2011*
13 1
7 18
16
16
7 71
21
22
22
02
52
51
11
11
92
91
71
74
84
64
63
83
02
2 25
42
23
15
24
21
34
27 28
23
11
31
38
45
32 3
63
27
54
46
55
04
54
5 49
56
69
48 5
26
37
55
98
14
8
43
0
10
20
30
40
50
60
70
80
90
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
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
04
05
06
07
08
09
10
11
*
The Number of Federal Disaster Declarations Is Rising
There have been 1,998 federal disaster
declarations since 1953. The average
number of declarations per year is 34 from
1953-2010, though that few haven’t been
recorded since 1995.
The number of federal disaster
declarations is on track to set a new
record in 2011, with 48
declarations through July 1.
Source: Federal Emergency Management Administration: http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute.
*Through July 1, 2011.
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2011 Black Swan Events
Major Global Loss Events December 2010: Australia - Flash
Flooding January 12th-16th: Brazilian
Landslides and Earthquake January 12th: Haitian Earthquake February 2nd: Australia – Cyclone
Yasi February 22nd: New Zealand
Earthquake March 11th: Japanese Tsunami,
Earthquake, Nuclear Disaster April 27th: Tuscaloosa, Alabama
Tornado May 22nd: Joplin, Missouri Tornado June 1st: Springfield, Massachusetts
Tornado
2011 is already the highest global Loss Year on record
$260 billion on worldwide economic losses
$55 billion in insured losses
Three of the most 15 costly global catastrophes in the world have occurred over the course of the past 18 months
Japanese Tsunami: 2nd, $35 billion in losses
February New Zealand Earthquake: 9th, $10 billion in losses
2010 Chilean Earthquake: 14th, $8 billion in losses
Source: Insurance Information Institute: Reinsurance in the Age of Black Swans, Robert P. Hartwig CPCU
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Modeling Differences: Regional Variation
Portfolios concentrated across certain geographic areas will be affected by different influencing factors.
The state of Florida is least impacted by the new release of RMS version 11.0 due to a better understanding of wind speed reduction and decreased landfall in the panhandle region.
The State of Texas has the largest increase between versions because of increased inland exposure and poorer construction quality than originally thought.
Region Reason for Modeling Change
Gulf States Poorer construction practices than originally thought.
Southeast Across the board increases in inland wind exposures.
Mid-Atlantic Greater inland exposures as well as slower weakening of storms after landfall.
Northeast Higher inland wind speeds and increased presence of transitioning storms.
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RMS 9.0 vs RMS 11.0Actual Results (% Change – Same Data Points)
ClientModel
Version100-Year Wind PML
% Change250-Year Wind PML
% Change500 Year Wind PML
% Change
State
(SE Footprint)
RMS 9.0
RMS11.0
$77,842,969
$256,021,944228%
$146,672,639
$499,981,762327%
$210,780,730
$780,030,063270%
Real Estate Management
(SE Footprint)
RMS 9.0
RMS11.0
$11,153,505
$23,363,687109%
$21,308,356
$44,331,966108%
$30,899,628
$64,910,657110%
Academic Institute
(Texas Footprint)
RMS 9.0
RMS11.0
$227,780,274
$485,651,081113%
$390,468,355
$835,285,185114%
$555,861,620
$1,160,294,560109%
Hotel Gaming and Casino
(NOLA Footprint)
RMS 9.0
RMS11.0
$33,995,256
$45,177,31732%
$62,605,792
$104,228,47866%
$90,670,458
$159,337,13976%
1412/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C
Criteria Necessary for a “Market Turn”
Sources: Barclays Capital; Insurance Information Institute.
CRITERIA STATUS COMMENTS
Sustained Period of Large Underwriting Losses
Not Yet Happened
Apart from Q2:2011, overall p/c underwriting losses remain modest
Combined ratios (ex-Q2 CATs) still in low 100s (vs. 110+ at onset of last hard market)
Prior-year reserve releases continue reduce u/w losses, boost ROEs
Material Decline in Surplus / Capacity
Surplus is At / Near Record
High
Surplus hit a record $565B as of 3/31/11 Analysts est. excess surplus of $75-$100B Some excess capacity may still remain in reinsurance markets Weak growth in demand for insurance is insufficient to absorb
much excess capacity
Tight Reinsurance Market
Somewhat in Place
Higher prices in Asia/Pacific Modestly improved pricing for US risks Upwardly pressure on US treaty pricing 7/1/2011
Renewed Underwriting & Pricing Discipline
Not Broadly Evident
Commercial lines pricing trends remain negative Competition remains intense as many seek to maintain market
share Terms & conditions—no broad tightening
15
Stages of the Insurance Cycle
Capital Infusion>>>Increased Capacity
Premium Falls as Capacity is Deployed
Profits Erode into Losses
Severe Underwriting Losses>>>Bottom of Market
Increased Underwriting Standards>>>Rising Premiums>>>Reduced Capacity
“Happy Days are Here Again!”
Profit
Loss
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