P/C Underwriting Cycles
NAIC Center for Insurance Policy and Research
Indianapolis, IN
August 27, 2013
Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: 212.346.5540  Cell: 917.494.5945  [email protected]  www.iii.org
Do P/C Underwriting Results
Go in Cycles?
3
PP Auto & HO Insurance
Loss + LAE Ratio*, 1983-2011
130
HO
Multiple
Peril
PP Auto
Liability
120
110
100
90
80
70
60
*to Net Premiums Earned
Sources: A.M.Best, Aggregates and Averages, 1993, 2002, 2012; I.I.I.
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
50
WC, CMP, Med Mal:
Loss + LAE Ratio*, 1983-2011
WC
160
CMP
Med Mal
120
80
11
2010
8
9
6
7
5
3
4
2
2000
1
98
99
97
95
96
93
94
92
1990
91
89
87
88
85
86
84
1983
40
The underwriting cycles vary by line of business
and are loosely “in sync” with each other.
*to Net Premiums Earned
Sources: A.M.Best, Aggregates and Averages, 1993, 2002, 2012; I.I.I calculations.
10
Cycles, Cycles (Nearly) Everywhere
Cycle Length in Years*
Netherlands
Malaysia
France
Singapore
United States
Japan
Canada
Spain
Australia
Italy
12.0
12.0
10.2
7.8
7.4
7.1
5.8
5.7
5.2
4.8
Austria
Denmark
S. Korea
Taiwan
None
None
None
None
*Lamm-Tenant/Weiss study based on data for 1965 through 1987; Chen/Wong/Lee study based on data for 1970-1995.
Sources: J. Lamm-Tenant and M. Weiss, “International Insurance Cycles: Rational Expectations/Institutional Intervention, Journal of
Risk and Insurance, September 1997; R. Chen, K. Wong and H. Lee, “Underwriting Cycles in Asia,”, JRI, March 1999.
Cyclicality in Premiums,
Reserves, and Profits
12
Net Premium Growth: Annual Change,
1971—2013:Q1
(Percent)
1975-78
1984-87
25%
2000-03
Net Written Premiums Fell
0.7% in 2007 (First Decline
Since 1943) by 2.0% in 2008,
and 4.2% in 2009, the First 3Year Decline Since 1930-33.
20%
15%
2013:Q1 =
4.1%
10%
2012 growth
was +4.3%
5%
0%
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
12
13:Q1
-5%
Shaded areas denote “hard market” periods
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
13
P/C Reserve Development, 1992–2015E
Prior Yr. Reserve Release ($B)
$25
$20
24
6
Impact on
Combined Ratio
(Points)
$15
$10
$5
8
Prior Yr. Reserve
Development ($B)
14
11
11
4
9
2
2
0
$0
(2)
-$5
-$10
(0)
(3)
(4)
(7)
(8)
(7) (7)
(9)
(10)(10)
-$15
-2
(5)
(13)
(12)
(10)
(14)
(12)
(10)
-4
15E
14E
13E
12
11
10
09
08
07
06
05
04
03
02
01
00
99
98
97
96
95
94
93
-6
92
-$20
Impact on Combined Ratio (Points)
$30
Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this
transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes
development from financial guaranty and mortgage insurance.
Sources: A.M. Best, ISO, Barclays Research (estimates).
14
Profitability Peaks & Troughs in the P/C
Insurance Industry, 1975 – 2013:Q1*
ROE
History suggests next ROE
peak will be in 2016-2017
25%
1977:19.0%
1987:17.3%
20%
2006:12.7%
1997:11.6%
2013:Q1
9.7%
15%
9 Years
10%
5%
2012:
5.9%
0%
1975: 2.4%
1984: 1.8%
1992: 4.5%
2001: -1.2%
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
12
13:Q1
-5%
*Profitability = P/C insurer ROEs. 2011-13 figures are estimates based on ROAS data. Note: Data for 2008-2013 exclude
mortgage and financial guaranty insurers.
Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
What Drives These Cycles?
•Claim Trends
•Capital/Capacity
•Reinsurance Usage
•Pricing
•Inflation
16
P/C Industry Homeowners Claim Frequency,
US, 1997-2011
Claims Paid per
100 Exposures
CAT-related claims
Non-CAT-related claims
8
6.99
6.71
6.45
6
6.26
Gradually growing
frequency of non-cat
claims since 2005
6.53
5.83
4.63
4
3.83
2.82
2.34
2
1.57
2.67
2.32
1.84
1.69
3.64
3.77
3.94
4.03
4.16
4.17 4.31
3.68
2.39
2.35
3.42
2.97
2.57
2.28
1.32
CAT claim frequency
is variable but
generally rising
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2008 2010 2011
Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” p.29; Insurance Information Institute
P/C Industry Homeowners Average Claim
Severity, 1997-2011
non-cat claims
cat claims
$9,000
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
HO average claim
severity is now
three times what it
was in 1997 (a
200% increase). In
that span, the CPI
rose only 40%.
$2,000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” p. 29, BLS inflation calculator,
and Insurance Information Institute
EEOC Workplace Discrimination
Complaints, FY1997-FY2012*
10
11
12
75.8
82.8
75.4
01
79.4
80.8
00
81.3
79.9
77.4
80
79.6
80.7
90
84.4
1997-2007 Avg.
= 79,800/year
99.4
95.4
100
99.9
Biggest jumps in FY2008 complaints
came for retaliation and age
discrimination. But FY2008 excluded
the worst of the recession.
110
99.9
2008-2012 Avg.
= 97,600/year
93.3
Thousands of
Complaints
05
06
70
FY97
98
99
02
03
04
07
08
09
*The federal fiscal year runs from Oct 1 of a given year to Sept 30 of the following year. The year is designated by its endpoint.
Thus FY2009 covers the period from Oct 1, 2008 through Sept 30, 2009.
Sources: EEOC at http://www.eeoc.gov/stats/charges.html ; I.I.I.
US Policyholder Surplus:
1975–2013*
($ Billions)
Surplus as of 3/31/13 was a record $607.7, up 3.6%
from $586.9 of 12/31/12, and up 39.0% ($170.6B)
from the crisis trough of $437.1B at 3/31/09. Precrisis peak was $521.8 as of 9/30/07. Surplus as of
3/31/13 was 16.5% above 2007 peak.
$650
$600
$550
$500
$450
$400
$350
$300
$250
$200
$150
$100
$50
$0
“Surplus” is a measure of
underwriting capacity. It is
analogous to “Owners Equity”
or “Net Worth” in noninsurance organizations
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
The Premium-to-Surplus Ratio Stood at $0.77:$1 as of
3/31/13, A Near Record Low (at Least in Recent History)*
* As of 3/31/13.
Source: A.M. Best, ISO, Insurance Information Institute.
09
11 13*
Global Reinsurance Capital,
2007-2012
$ Billions
% Change
18%
$600
18%
20%
15%
$505
$500
$470
$410
11%
10%
5%
$455
-3%
0%
$400
-5%
$400
-10%
$340
-17%
-15%
-20%
$300
2007
2008
2009
Reinsurer Capital
2010
2011
2012
Change
2007-2012 compound average growth rate: 4.3%
High Global Catastrophe Losses Have Had a Modest Adverse Impact on
Global Reinsurance Market Capacity
Source: Aon Reinsurance Market Outlook, April 2013 Update from Individual Company and AonBenfield Analytics;
Insurance Information Institute.
22
Other Possible Cycle Drivers
Sudden Changes in the Marketplace
 Such as a wave of mergers, major new entrants,
etc.
Regulatory Approval Lags
Tort System Shocks
Investment Shocks
 Such as massive capital losses due to interest
rate spikes, stock market plunge, etc.
23
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www.iii.org
Thank you for your time
and your attention!