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					What Keeps Insurance CEOs
     Awake at Night?
     Overview & Outlook for the
      P/C Insurance Industry
                    Midwest Actuarial Forum
                 Casualty Actuaries of the Midwest
                         Schaumburg, IL

                               March 12, 2003
  Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist
 Insurance Information Institute  110 William Street  New York, NY 10038
     Tel: (212) 346-5520  Fax: (212) 732-1916  bobh@iii.org  www.iii.org
                   Presentation Outline
•   Improve Profitability
•   Improve Underwriting
•   Reserving Issues
•   Improve Pricing
•   Restore Destroyed Capacity
•   Improve Investment Performance
•   The Challenge of Terrorism
•   The Tragedy of Corporate Governance
•   Courts & Torts: Abuse of the Civil Justice System
•   Mold
•   Insurance Scoring
•   Q&A
  IMPROVE
PROFITABILITY
                   P/C Net Income After Taxes
                    1991-2002E ($ Millions)
$40,000            2001 was the first year ever
                                                        $36,819
                   with a full year net loss
$35,000
                   2002 9-Month ROE = 4.4%                      $30,773
$30,000
                                                $24,404
$25,000                                                                 $21,865
                           $19,316        $20,598                              $20,559
$20,000
           $14,178
$15,000                            $10,870
                                                                                              $12,419
$10,000
                    $5,840
 $5,000
      $0
 -$5,000
-$10,000                                                                              -$6,970
              91      92      93     94      95    96       97     98      99    00      01     02*
*I.I.I. estimate based on first 9 months of 2002 data.
Sources: A.M. Best, ISO, Insurance Information Institute.
                        ROE: P/C vs. All Industries
                             1987–2003F*
 20%


 15%


 10%


  5%


  0%


 -5%
        87    88   89    90    91   92   93    94   95   96   97   98   99   00   01   02E 03F

                              US P/C Insurers            All US Industries
Source: Insurance Information Institute; Fortune
                ROE vs. Cost of Capital:
               US P/C Insurance: 1991 – 2002
20%                                             There is an enormous gap
                                              between the industry’s cost of
15%
                                               capital and its rate of return


10%




                                                                                             6.8. pts
                                                                                  14.6 pts
5%

                  US P/C insurers have missed
0%                  their cost of capital by an
                  average 6.6 points since 1991
-5%
      1991    1992    1993    1994    1995   1996    1997   1998    1999   2000     2001        2002
Source: The Geneva Association, Ins. Information Inst.             ROE      Cost of Capital
  IMPROVE
UNDERWRITING
                        Underwriting Gain (Loss)
                             1975-2002*
             $10


              $0


             ($10)
$ Billions




             ($20)


             ($30)


             ($40)
                     P-C insurers paid $22 billion more in claims
             ($50)   & expenses than they collected in premiums
                                       in 2002
             ($60)
                     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
    *Annualized estimate based on first 9 months of 2002 data.
    Source: A.M. Best, Insurance Information Institute
                    P/C Industry Combined Ratio
                                                                                   Combined
   120               2001 = 115.7                                                   Ratios
                                                                               1970s: 100.3
                    2002E = 106.3*
   115
                                                                               1980s: 109.2
                    2003F = 103.2*
                                                                               1990s: 107.7
                                                                               2000s: 110.4
   110



   105



   100



    95
         70

               72

                     74

                           76

                                 78

                                       80

                                             82

                                                   84

                                                          86

                                                               88

                                                                    90

                                                                         92

                                                                              94

                                                                                    96

                                                                                         98

                                                                                              00

                                                                                                   02*
*Based on January 2003 III survey of industry analysts.
Sources: A.M. Best; III
                          Combined Ratio:
                     Reinsurance vs. P/C Industry
                                   Reinsurance                            All Lines Combined Ratio




                                                                                                                                   162.5
170
                                                  2001’s combined ratio was the
160                                               worst-ever for reinsurers

150

140
                   126.5




130
                                                         119.2
                        115.8




                                                                                                                                           115.7

                                                                                                                                                        114.4
                                                                                                              114.3
                                               113.6
         110.5




120




                                                                                                                         110.0
        108.8




                                             108.5




                                                                                                           107.7
                                   106.9




                                                                 106.5




                                                                                                                        106.5
                                                                           105.8




                                                                                                 105.6
                                  105.0




                                                                                                                                                   104.9
                                                                           104.8


                                                                                     101.6
                                                                                     100.8


                                                                                               100.5
110

100

 90
      1991       1992           1993       1994        1995              1996      1997      1998        1999         2000       2001 2002*
*Reinsurance figure for first 9 months of 2002.
Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
                               U.S. Insured
                            Catastrophe Losses
                                    $ Billions
                       CAT losses continue to be a problem,
                     though 2002 was much better than 2001                                 $28.1
$30
$25                        $22.9
$20                                       $16.9
$15
                                                                     $10.1
$10 $7.5                                          $8.3 $7.3                  $8.3
                    $4.7           $5.5                                             $4.3           $5.8
 $5          $2.7                                             $2.6
 $0
       89     90     91     92     93      94     95   96     97      98     99     00      01     02
*Estimate.
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
                      Med Claim Costs Rising Sharply




                                                                                                                                   14.7%
                                                 Health care inflation is affecting the
   15%                                           cost of medical care, no matter what




                                                                                                                           11.2%
                                                                                                                           11.0%
                                                    system it is delivered through
           10.1%




                                                                                                  8.4%




                                                                                                                    8.1%
                                                                                                                    8.1%
                          8.0%




                                                                                                             7.3%
   10%




                                                                         6.6%




                                                                                              6.1%
                                                                                       5.9%
                                                           5.2%




                                                                                                         4.9%
                                            4.8%




                                                                  2.5%
    5%
                                                    2.1%
                   1.3%




    0%                                                                          0.2%
                                         -1.1%
                                 -2.1%




    -5%
            92             93            94          95            96            97            98         99        00     01        02
                                                    Health Benefit Costs                        WC

Source: NCCI; William M. Mercer, Insurance Information Institute.
                       Outlook for Personal Lines:
                               2002-2003
125              PERSONAL AUTO                                               HOMEOWNERS
                                                                                   121.7
120

115                                                                                              112.8
                                                                                    111.4
                               109.5                                   109.4
110                                    107.9                                   108.2                     107.1

105                    103.5                   103.0
               101.1                                           101.0
        99.5                                           100.3
100

 95

 90
         97     98      99      00      01     02E 03F          97      98     99      00   01   02E 03F
Source: A.M. Best
                 Outlook for Commercial Lines:
                          2002 - 2004
                 2001    2002E       2003F   2004F




                                                                         165.0
170




                                                                      158.1
                                                                     155.3
                                                                    153.3
160
150
                             130.2




140
                           125.3
          121.7




                        120.2




                                                  118.5
130
        116.6




                                          115.8
                      113.6
       113.2
       113.0




                                        111.9
                                       108.3
120
                                      106.7


                                                            103.6




                                                                                    100.3
110



                                                          99.5
                                                          99.1




                                                                                   98.8
                                                                                  95.2
                                                                                 92.8
100
 90
        Workers      GL & Prod. Commercial Commercial               Med Mal       Inland
         Comp           Liab      Auto      Package                               Marine

Sources: A.M. Best, Conning & Co.
  HOW DOES THIS HARD
  MARKET STACK UP TO
PREVIOUS HARD MARKETS?
                     Hard Markets Since 1970
                        1975-78                      1985-87                            2001-03
25%
                                                               There have been 3 hard
                                                                markets since 1970:
20%
                                                                     1975-1978

15%                                                                  1985-1987
                                                                     2001-200?
10%



 5%



 0%
       1970
       1971
       1972
       1973
       1974
       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
       2003
Source: A.M. Best, Insurance Information Institute
             Strength of Recent Hard Markets
                  by Real NWP Growth
                        1975-78                      1985-87                                 2001-03
 25%
                                                               Real NWP Growth During
 20%                                                             Past 3 Hard Markets
                                                                    1975-78: 8.6%
 15%
                                                                   1985-87: 14.5%
 10%                                                                2001-03: 9.1%

  5%


  0%


 -5%
                                                                 Current $          Real $
-10%
        1970
        1971
        1972
        1973
        1974
        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
        2003
Note: Shaded areas denote hard market periods.
Source: A.M. Best, Insurance Information Institute
                      GDP Growth vs. Net Written
                       Premium Growth (1987=100)
250                                                                                                               Hard Market

                      The gap between cumulative GDP                                                                    29.0 pts
225                   and Net Written Premium growth
                         hit a maximum of 52.5 pts or
                          33.7% in 2000. In 2003, the
200                   estimated gap is 29.0 pts or 15.2%.




                                                                                                    52.5 pts
175


150


125
                                                             Cumulative GDP Growth
                                                             Cumulative NWP Growth
100




                                                                                                                        2002E

                                                                                                                                2003F
        1987

               1988

                       1989

                              1990

                                     1991

                                            1992

                                                   1993

                                                          1994

                                                                 1995

                                                                        1996

                                                                               1997

                                                                                      1998

                                                                                             1999

                                                                                                          2000

                                                                                                                 2001
Note: Shaded area denotes hard market.
Source: Insurance Information Institute
RESERVING
  ISSUES
                    Reserve Deficiency, by Line
                         (AY 1992-2001, as of 12/01)
                                                            Special   Other    XS Liab   Prod
         HO     PPA Liab CA Liab    WC     CMP     Med Mal* Liab      Liab*     Reins    Liab*
  $0
 -$2    -$0.8                                                -$0.8
                 -$1.8                                                                   -$1.9
 -$4
                          -$4.1                      -$3.8
 -$6
                                   -$6.2
 -$8
-$10                                       -$9.1
-$12                          Estimated Deficiency
-$14
              Total Excluding A&E:         $64 Billion
-$16
              A&E Deficiency:              $55 Billion
-$18
              Total Including A&E:         $120 Billion               -$17.8   -$18.0
-$20
*Occurrence and claims made
Source: Morgan Stanley
IMPROVE
 PRICING
                Growth in Net Premiums
                 Written (All P/C Lines)
25%
                                                                      2001: 8.1%

20%                                                             2002: 14.2% (est.)*
                                                              2003: 12.7% (forecast)*
15%                                                      The underwriting cycle went
                                                            AWOL in the 1990s.
10%                                                                 It‟s Back!


 5%



 0%
       1970
       1971
       1972
       1973
       1974
       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
       2003
*Estimate/forecast based on January 2003 III survey of industry analysts.
Source: A.M. Best, Insurance Information Institute
             Council of Insurance Agents &
                 Brokers Rate Survey
Fourth Quarter 2002
          Rate Increases By Line of Business

             No Change Up 1-10%   10-20%   20-30%   30-50%   50%-100%   >100%
Comm. Auto          6%    14%     42%       25%      8%        1%        0%
Workers Comp        8%    17%     25%       24%      10%       2%        2%
General Liability   7%    13%      29%      37%      11%       0%        0%
Comm. Umbrella      8%    3%       21%      21%      26%      10%        5%
D&O                 6%    4%       22%      23%      18%       9%        3%
Comm. Property      8%    16%      25%      25%      18%       3%        0%
Construction Risk 4%       8%      17%      18%      23%       9%        4%
Terrorism           12%    5%       8%       12%      5%        0%       6%
Business Interr.    13%   19%      36%      14%       4%       0%        0%
Surety Bonds        8%    16%      16%       15%      6%        1%       1%
Med Mal             1%     5%       6%       6%       12%      12%      16%
                              Rate On Line Index
                                  (1989=100)
260
250                                           Prices rising, limits falling:
240
230
                                              ROL up significantly
220
210
200
190
180
170
160
150
140
130
120
110
100
      89    90    91     92    93   94   95   96   97   98    99    00     01       02*

 Source: Guy Carpenter                                             * III Estimate
                  Cost of Risk per $1,000 of
                   Revenues: 1990-2002E
                                                       •Cost of risk to
  $10                                                  corporations fell 42%
                                                       between 1992 and
                                                       2000
   $9
                     $8.30                             •Estimated 15%
                          $7.70                        increase in 2001,
   $8                                                  25% in 2002
                               $7.30
                                                       • About half of 2002      $6.94
   $7         $6.40                     $6.49          increase due to 9/11
         $6.10                                             $5.71
   $6                                          $5.70                       $5.55
                                                       $5.25     $5.20$4.83
   $5

   $4
         90     91    92     93    94     95    96     97    98    99     00 01E 02E
Source: 2001 RIMS Benchmark Survey; Insurance Information Institute estimates.
                          Average Price Change of
                          Personal Lines Renewals
                                                                                               9%
                                                                                 7%
                                                                          6%
 Homeowners                                                          5%
                                              2%           4%
                                              2%
                                                           4%

                                                                                               9%
                                                                                               9%
                                                                          6%
Personal Auto                                        3%
                   -1%                   1%
                                 0%
                                      1%

              -2% -1%       0%     1%      2%    3%       4%    5%     6%      7%     8%    9%
                2003*    2002*   2001*   Fall 2000   Spring 2000     Fall 99   Spring 99   Fall 98
*III estimates
Source: Conning, III
                    Average Expenditures on
                      Auto Insurance: US
  $900
                 Countrywide auto insurance
               expenditures are expected to rise




                                                                               5
                                                                             85
  $850                 8-10% in 2003




                                                                        4
  $800




                                                                      78
  $750




                                                                 3
                                                               72
                                6



                                          4
                              70



                                        70
                      1




                                                          7
                    69




                                                   3


                                                        68
  $700


                                                 68
            8
          66




  $650


  $600
          5



                    6



                              7



                                        8



                                                  9



                                                        0



                                                               1*



                                                                      2*



                                                                             3*
         199



                   199



                            199



                                      199



                                                199



                                                       200



                                                              200



                                                                     200



                                                                            200
*Insurance Information Institute Estimates/Forecasts
Source: NAIC, Insurance Information Institute
                    Average Expenditures on
                     Homeowners Ins.: US
 $650
             Average HO expenditures are




                                                                               3
                                                                             60
 $600      expected to rise by 8-10% in 2003




                                                                        3
                                                                      55
 $550




                                                                 2
                                                               51
                                                          0
                                                        50
                                                   8
                                                 48
 $500
                                         1
                                       48
                               5
                             45
                      0
                    44




 $450
            8
          41




 $400
          5



                    6



                             7



                                       8



                                                 9



                                                        0*



                                                               1*



                                                                      2*



                                                                             3*
         199



                  199



                            199



                                      199



                                                199



                                                       200



                                                              200



                                                                     200



                                                                            200
*III Estimates
Source: NAIC, Insurance Information Institute
      Urban Legend
    Insurance is More
Expensive than Ever and is
 Squeezing Families and
    Businesses Alike
                 Commercial Lines Net Written
                    Premium as % of GDP
                                              Commercial insurance premiums
   2.4%                                       as a % of GDP fell 35% between
          2.3%                                 1988 and 2000 and remains far
   2.2%          2.1%
                        2.1%                       below late 1980’s levels
                               2.0%
   2.0%                                      1.9%
                                      1.9%       1.9%
                                                     1.8%                                        1.8%
                                                            1.7%
   1.8%
                                                                   1.6%
                                                                                          1.6%
   1.6%                                                                 1.5%
                                                                               1.5%1.5%
                More Cover for Less Money: Terms
   1.4%
                & conditions broadened significantly
   1.2%         during the soft market, even as prices
                                 fell
   1.0%
           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.
                  Cost of Risk per $1,000 of
                   Revenues: 1990-2002E
   $10
                                                       •Cost of risk to
                                                       corporations fell 42%
    $9                                                 between 1992 and
                      $8.30                            2000
                           $7.70
    $8                                                 •Estimated 15%
                                $7.30                  increase in 2001,
                                                       25% in 2002               $6.94
    $7         $6.40                     $6.49
          $6.10                                            $5.71
    $6                                         $5.70                       $5.55
                                                       $5.25     $5.20$4.83
    $5      Cost of risk is still less than
               it was a decade ago!
    $4
          90     91    92    93     94    95     96    97    98     99    00 01E 02E

Source: 2001 RIMS Benchmark Survey; Insurance Information Institute estimates.
                                 Homeowners Insurance Expenditure
                                   as a % of Median Home Price




                                                                                                                                                                      HO Expenditure as % of Sales Price
                          $200,000                               Median Sales Price of Existing Homes                                                         0.40%
                                                                 HO Insurance Expenditure as a % of Sales Price
                                                0.39%
                                                               0.38% 0.38%
Median Home Sales Price




                                                                                                                                                   $157,800
                          $175,000                                                                                                                            0.38%
                                        The cost of                                       0.37% 0.37% 0.37%




                                                                                                                                   $147,800
                                       homeowners
                                        insurance                                                                              0.36%




                                                                                                                    $139,000
                                      relative to the




                                                                                                         $133,300
                          $150,000   price of a typical                                                                                       0.35% 0.35%
                                                                                                                                                        0.35%




                                                                                              $128,400
                                     home has fallen!                          $121,800
                                                                    $115,800
                                                    $110,500
                                     $107,200




                          $125,000                                                                                                                            0.33%




                          $100,000                                                                                                                            0.30%
                                    94     95       96        97       98      99       00      01       02
                    *As of January 2003.
                    Source: Insurance Information Institute calculations based on data from National Association of
                    Realtors, NAIC.
                Change in Cost of Homes vs. Change
                 in Cost of Homeowners Insurance
                      Recent increases in the cost of
    $10,000            homeowners insurance are                                        $10,000
                      miniscule in comparison to the                          $8,800
     $8,000
                          soaring cost of homes
                                               $6,600
                                     $6,000                        $5,700
     $6,000                 $5,300                       $4,900

     $4,000     $3,300

     $2,000
                                  $22       $15      $26          $7      $12       $12       $41
           $0         -$2
    -$2,000
                  1995       1996       1997      1998     1999        2000     2001      2002*

            Change in Cost of Median Existing Home
            Change in Average Homeowners Insurance Expenditure
*August 2002
Source: Insurance Info. Inst. calculations based on data from Natl. Association of Realtors, NAIC.
 RESTORE
DESTROYED
 CAPACITY
                            Policyholder Surplus:
                                 1975-2002*
           $350
                  Surplus (capacity) peaked at $336.3 Billion in
                  mid-1999 and has fallen by 18.7% ($63 billion) to
           $300
                  $273.3 billion since then.

           $250   •Surplus fell 5.6% during first 9 months of 2002
                  •Surplus is now lower than at year-end 1997.
Billions
 (US$)




           $200


           $150

                                                             “Surplus” is a measure of
           $100
                                                             underwriting capacity. It is
                                                             analogous to “Owners
            $50                                              Equity” or “Net Worth” in
                                                             non-insurance organizations
             $0
             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
 *As of September 30, 2002
 Source: A.M. Best, Insurance Information Institute
                      Global P/C Insurance Capacity is
                           Falling Dramatically
             $1,000
                                $920
              $900
              $800
                                                               $690
              $700
              $600                               Global
$ Billions




                                                non-life
              $500
                                                capacity
              $400                              is down
              $300                                25%
                                                over the
              $200                               past 2
              $100                                years

                $0
                               2000:I                      2002:IV (est.)

Sources: Insurance Information Institute, Swiss Re
                           Capital Raising by P/C Insurers
                             Since September 11, 2001*
                      Capital Raising by P/C Insurers Since 9/11 Totals $53.2B
                 $30,000                                   $27.9 Billion
                                 $25.4 Billion
                 $25,000
                                         $4,872            14 Pending                         38 Pending
                 $20,000                                                            $16,437
  ($ Millions)




                 $15,000

                 $10,000               $20,492
                                                           40 Completed                       33 Completed
                  $5,000                                                            $11,442

                     $0
                                         2001                                       2002*
                                                     Completed            Pending
*As of September 13, 2002.
Source: Morgan Stanley, Insurance Information Institute.
                     Capital Myth: US P/C Insurers Have
                    $300 Billion to Pay Terrorism Claims
Total PHS = $298.2 B as of 6/30/01
                                                                       "Target"
              = $273.3 B as of 9/30/02
                                                                     Commercial*
                                                                      $100 billion
                                                                         33%
                                                                                Only 33% of
                                                                                industry surplus
                                                                                backs up “target”
                                                                                lines


     Personal                                                                               Other
    $150 billion                                                                         Commercial
       50%                                                                                $50 billion
                                                                                            17%



*”Target” Commercial includes: Comm property, liability and workers comp; Surplus must
also back-up on non-terrorist related property/liability and WC claims
Source: Insurance Information Institute
   IMPROVE
 INVESTMENT
PERFORMANCE
                            Net Investment Income
           $45
                  Investment income in
                      2002 is expected
           $36        to fall 5 to 6%
                      due primarily to
                      historically low
           $27
Billions




                      interest rates
 (US$)




                                                                        Facts
                                                                   1997 Peak = $41.5B
           $18
                                                                           2000= $40.7B

            $9                                                            2001 = $37.7B
                                                                       2002E* = $35.2B
            $0
                 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

 *Annualized estimate based on first 9 months of 2002 data.
 Source: A.M. Best, Insurance Information Institute
                                  Interest Rates: Lower Than
                                   They’ve Been in Decades
16%
                                                        1.           Historically low interest rates are the primary driver
                                                                     behind lower investment yields. Nevertheless, overall
14%                                                                  insurer investment performance outpaces all major
                                                                     market indices and almost every major category of
12%                                                                  mutual fund.
                                                        2.           66% of the industry‟s invested assets are in bonds
10%

8%

6%

4%

2%
                           3-Month T-Bill                                   1-Yr. T-Bill                          10-Year T-Note
0%
      1980
             1981
                    1982
                           1983
                                  1984
                                         1985
                                                1986
                                                       1987
                                                              1988
                                                                     1989
                                                                            1990
                                                                                   1991
                                                                                          1992
                                                                                                 1993
                                                                                                        1994
                                                                                                               1995
                                                                                                                      1996
                                                                                                                             1997
                                                                                                                                    1998
                                                                                                                                           1999
                                                                                                                                                  2000
                                                                                                                                                         2001
                                                                                                                                                                2002

                                                                                                                                                                           *
                                                                                                                                                                       2003
*As of February 2003.
Source: Board of Governors, Federal Reserve System; Insurance Information Institute
                        Total Returns for Large
                      Company Stocks: 1970-2003*
 40%

 30%

 20%

 10%

   0%

-10%
                                    2002 was 3rd consecutive year of decline for stocks
-20%                                Will 2003 be the 4th?

-30%
        1970

               1972

                      1974

                             1976

                                      1978

                                             1980

                                                    1982

                                                           1984

                                                                  1986

                                                                         1988

                                                                                1990

                                                                                       1992

                                                                                              1994

                                                                                                     1996

                                                                                                            1998

                                                                                                                   2000

                                                                                                                          2002
                                                    Large Company Stocks
*As of March 7, 2003.
Source: Ibbotson Associates, Insurance Information Institute
                   P/C Industry Investments,
                     by Type (as of Dec. 31, 2001)
                                                                                        Common
                                                                                     stock accounts
                   Common Stock                                                       for about 1/5
                      21%                                                              of invested
                                                                                          assets

               Other                                   Bond Holdings, by Type
                5%                                   Industrial & Misc.   32.5%
                                                     Special Revenue      30.5%
Cash & ST Secs.                                      Governments          18.0%

     6%                                              States/Terr/Other    15.4%
                                                     Public Utilities       3.1%
                                                     Parents/Subs/Affiliates 0.5%
     Real Est. &
     Mortgages
        1%
                                                                                    Bonds
     Preferred Stock                                                                66%
           1%
Source: A.M. Best, Insurance Information Institute
                       Property/Casualty Insurance
                        Industry Investment Gain*

                            $ Billions
                                                   $57.9
 $60                                                                   $56.9
                                         $52.3               $51.9
 $50                           $47.2
                    $42.8                                                          $44.4
                                                                                             $39.5
 $40     $35.4

 $30                                   Investment gains are simply
                                     returning to “pre-bubble” levels
 $20

 $10


  $0
           94        95         96        97         98        99         00        01      2002E
*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.
       Geopolitical Instability Increased
        in 2002, Boiling Over in 2003
             Terrorists &
             Terrorism



                                       War on Terrorism

North Korea: Nukes & Kooks
                              Iraq:
                              War
                             Jitters
THE CHALLENGE
 OF TERRORISM
           Sept. 11 Industry Loss Estimates
                                               ($ Billions)

                                                      Property -
                                                      WTC 1 & 2
                                                      $3.5 (9%)
                  Other                      Life
                Liability                 $2.7 (7%)                Property -
               $10.0 (25%)                                           Other
                                                                   $6.0 (15%)

          Aviation
         Liability
         $3.5 (9%)                                              Biz
                                                           Interruption
           Event                         Workers           $11.0 (27%)
        Cancellation       Aviation Hull   Comp
         $1.0 (2%)          $0.5 (1%)    $2.0 (5%)

   Consensus Insured Losses Estimate: $40.2B
Source: Insurance Information Institute
                        Industry Losses Under Proposed Federal
                             Backstop Using 9/11 Scenario
                             (as interpreted on date of enactment, Nov. 26, 2002)
Total Ind. Loss: $10.875B                               $14.25B                 $19.675B
                  $30




                                                                                   $10.575
                                                                     $0.925B
                  $25                        $1.75B                  Industry




                                                           $15.75
                        $2.0B
                                    $18.00

                        Industry             Industry                Co-Share
                  $20                        Co-Share
   ($ Billions)




                        Co-Share

                  $15
                        $0.125B
                  $10 Industry $1.125                                           $18.75
                        Co-Share                        $12.50
                   $5              $8.75

                   $0
                               Year 1               Year 2                   Year 3
                        Industry Retention   Surcharge Layer        Co-Reinsurance Layer
                  Assumes $30B Commercial Prop & WC Loss, $125B “At Risk” Commercial DPE
Source: Insurance Information Institute.
                    Terrorism Act Summary
• Terrorism Risk Insurance Act signed into law Nov. 26, 2002
• Capping of risk allows insurers to estimate PMLs
     Enhances ability to price
• Industry maintains significant retentions & FF exposure
     Company: 7%, 10%, 15% Comm. DPE in Years 1, 2, 3
•   Aggregate industry cap of $10B, $12.5, 15B in those years
•   10% co-reinsurance above industry aggregate
•   Government liability capped at $100B
•   Legislation requires mandatory offer of terror coverage
•   Reinsurers/Life insurers NOT eligible under the program
•   UPSHOT:
     Bill will help a bit (expectation may be too high)
     Laws of insurance economics are not suspended
     Price/availability still a function of risk and capital available
                 Terrorism Act Summary
• Mechanics of the Bill:
    Bill immediately creates/reinstates coverage for all
     commercial policyholders (even those that declined or
     purchased sub-limited coverage)
    Mandatory offer of coverage within 90 days (Feb. 24, 2003)
    Policyholder has 30 days to accept/reject (can negotiate after
     rejection)
    Charge for terrorism must now appear as a line item
    Claims must be processed in accordance with “appropriate
     business practices”
• Law Sunsets in 3 years (12/31/05)
• State authority to disapprove rates if excessive,
  inadequate or unfairly discriminatory retained
• Civil liability can exist as federal cause of action
• Federal definition of terrorism applies
                    Property Market Response
Terrorism Market is Inconsistent
   High take-up rate among small risks
   Very low take-up rate for larger risks
         Carriers/brokers report take-up rate of just 15% - 25 % for larger risks
   Prices cited varied from 0% to 1,000% of property premiums but
    quotes in the 2% - 4% range typical as insurers sought to
    distribute max loss under TRIA loss across policyholder base
   Could change substantially for 2003 renewal: more indiv. rating
   Reasons Businesses Decline Coverage
           Expense
           Want to bargain with insurer; attempt to change terms/conditions
           Feel likelihood of an attack impacting them is remote
           Believe government will bail them out
           Feel“Fire Following” provision will compel coverage
           Will try self insurance; investigate alternative risk transfer options
Source:Marsh, Inc.; Insurance Information Institute.
                    Property Market Response
• Problems
   Low take-up rate => possible adverse selection problem
   Insurability of terrorism still question despite TRIA
   12/31/05 sunset date will cause market to unravel in 2004
• Stand-alone terrorism market
   Some quotes being sought for certified and non-certified losses
   Those treaties that existed are expiring and capacity for 2003 is
     uncertain
   Some insurers have reallocated resources
• Reinsurance Market
   Some property catastrophe treaty renewals at Jan 1 were renewed
     including “non-certified” terrorism but still excluding nuclear,
     biological and chemical
   Reinsurers cautious about risk accumulation (e.g., zip code buckets)
   Insurers are seeking reinsurance to buy down their retentions
 Source:Marsh, Inc.; Insurance Information Institute.
                    TRIA Effect on Upcoming
                     Renewals be Affected?
• Unlike well-communicated issues surrounding in-force
  policies in TRIA notice period, there are no time
  constraints as respects offer, acceptance or payments
• Renewal quotations will include a separate line item for
  terrorism coverage
• Options are to decline, purchase or negotiate the
  terrorism premium
• Now that terrorism coverage must be offered -
  underwriters may be reluctant to offer any coverage or
  may offer reduced limits for risks they view as potential
  terrorist targets
     Capital allocation vs. underwriting decisions
Source:Marsh, Inc.; Insurance Information Institute.
  CRISIS IN
 CORPORATE
GOVERNANCE
     Accounting Problems are Getting
      Many Companies into Trouble
•Enron was tip of an iceberg
•Major implications for insurers (p/c and life)
              Financial Restatements Filed
300     The number of financial
          restatements is rising                  270
        even thought the number
250                                        233
            of publicly traded      215
          companies is falling.
200
                            160
150
           116

100

50

 0
           1997            1998*   1999*   2000   2001
*Approximate
Sources: Huron Consulting Group
                  Shareholder Class Action Lawsuits*

   600
                    Shareholders typically recover just                                  487
   500               2.56% of amount lost; 1/3 of that
                      goes to lawyers & expenses**
   400

   300                                                                                         258
                                       231                               236
                      202                                                      209 216
                                               188              178
   200        164              163
                                                        110
   100

        0
               91      92       93      94      95       96      97      98    99   00   01    02
*Securities fraud suits filed in U.S. federal courts.
**Suits of $100 million or more.
Source: Stanford University School of Law; Insurance Information Institute
  ABUSE OF THE
U.S. CIVIL JUSTICE
      SYSTEM
                           TORT-ure
•   Asbestos
•   “Toxic” Mold
•   Medical Malpractice
•   Construction Defects
•   Lead
•   Fast Food
•   Arsenic Treated Lumber
•   Guns
•   Genetically Modified Foods (Corn)
•   Pharmaceuticals & Medical Devices
•   Security exposures (workplace violence, post-9/11 issues)
•   What’s Next?
•   Slavery
•   Sept. 11??
                  Favorite 5 for 2002:
       Is the U.S. Legal System Out of Control?

5. “Children Uncover Porn in Barney Book”
      -CNN.com, December 27, 2002
4. “Cat Owners Sue Airlines for $5 Million”
      -The Daily Review, August 29, 2002
3. “Ed McMahon Sues Over Toxic Mold Invasion”
      -USA Today, April 11, 2002
2. “Rodman Sued for Rubbing Dice on Casino
       Employee’s Crotch”
       -The Gazette (Montreal)
  1. “Teenagers’ Suit Says McDonald’s Made Them Obese”
       -The New York Times, November 21, 2002
                         Average Jury Awards
                            1994 vs. 2000

          $7,000             1994                                     2000                       6,817

          $6,000

          $5,000
 ($000)




          $4,000                                                       3,482         3,566

          $3,000

          $2,000                 1,727                                                       1,744
                     1,168                                         1,140         1,185
          $1,000             759                             698
                   419                                 333
                                          187 269
             $0
                   Overall    Business    Vehicular    Premises     Medical      Wrongful     Products
                             Negligence   Liability*   Liability   Malpractice    Death       Liability

Source: Jury Verdict Research; Insurance Information Institute.
            Trends in Million Dollar Verdicts*
    100%
     90%            94-96                    97-98                                  99-00

     80%         Very sharp jumps in multi-million




                                                                                                                        63%
     70%         dollar awards in recent years across
                 virtually all types of defendants




                                                                                                      52%
     60%




                                                                                                                  50%
     50%




                                                                                                            40%
                                                                                                39%
                                                                                    38%
                                                                 37%




                                                                                          34%
     40%


                                                           25%



                                                                        24%
                                                                              24%
     30%
                                                     19%
                                  13%



                                             12%




     20%
                                             11%
                                 9%
                            8%




                                        8%
                     6%




     10%
               4%
                    4%




       0%
               Vehicular    Premises     Personal     Business         Government  Medical                  Products
               Liability    Liability   Negligence   Negligence        Negligence Malpractice               Liability
*Verdicts of $1 million or more.
Source: Jury Verdict Research; Insurance Information Institute.
                               Cost of U.S. Tort System
                                                 ($ Billions)

     Tort costs consumed 2.0% of GDP annually on average since 1990,
$350 expected to rise to 2.4% of GDP by 2005!
                                                                                                    $298
$300              Tort costs equaled $636 per person in 2000!
$250                     Expected to rise to $1,000 by 2005
                                                                                        $198 $204
$200                                                                 $167 $169
                                                                               $179
                                               $159 $156 $156
                        $141 $144 $148
$150     $129 $130

$100
 $50
   $0
           90     91      92     93      94     95     96      97     98      99   00   01* 02E* 05F

Source: Tillinghast-Towers Perrin; Insurance Information Institute estimates for
2001/2002 assume tort costs equal to 2% of GDP. 2005 forecasts from Tillinghast.
                      Tort Costs as a % of GDP*
  Denmark                    0.4%            High tort costs put the U.S. economy at
       U.K.                         0.6%           a significant disadvantage.
    France                                 0.8%
     Japan                                 0.8%
    Canada                                 0.8%
Switzerland                                   0.9%
      Spain                                       1.0%

  Australia                                          1.1%
   Belgium                                           1.1%
  Germany                                                   1.3%
       Italy                                                          1.7%
       U.S.                                                                  1.9%

          0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0%
*1998 (latest available)
Source: Tillinghast-Towers Perrin
                 Where the Tort Dollar Goes
                                        (2000)
Tort System
is extremely          Claimants'
inefficient:         Attorney Fees
                                                          Awards for
Only 20%
                         17%
                                                         Economic Loss
of the tort                                                  20%
dollar
compensates
victims for
economic                                                         Administration
losses                                                              25%
              Awards for
At least    Non-Economic
58% of every     Loss
tort dollar      22%
never reaches
the victim
                        Defense Costs
                            16%                  Source: Tillinghast-Towers Perrin
                     Personal, Commercial &
                   Self (Un) Insured Tort Costs*
            $180        Commercial Lines     Personal Lines         Self (Un)Insured
                                                                         Total = $157.7 Billion
            $160
            $140                                                                $29.6
                                           Total = $120.2 Billion
 Billions




            $120
                                                   $20.1
            $100
                                                                                $70.9
             $80
                                                   $51.0
             $60   Total = $39.5 Billion

             $40          $5.4
                          $17.1                    $49.1                        $57.2
             $20
                          $17.0
             $0
                           1980                    1990                         2000
*Excludes medical malpractice
Source: Tillinghast-Towers Perrin
                            Medical Malpractice:
                       Tort Cost Growth is Skyrocketing
                                                                           $ Billions
           •Over the period from 1990 through 2000, medical




                                                                                                                                                                                         $20.9
  $22      malpractice tort costs rose 140%, more than double the




                                                                                                                                                                                 $19.4
           60% increase in medical costs generally over the same
  $20




                                                                                                                                                                         $17.6
           period!




                                                                                                                                                                 $16.2
  $18      •Over the period from 1975 through 2000, medical




                                                                                                                                                         $14.6
  $16      malpractice tort costs skyrocketed by 1,642% while




                                                                                                                                                 $13.5
           medical costs generally rose 449%, nearly 4 times as fast!




                                                                                                                                         $12.4
                                                                                                                                 $11.6
  $14




                                                                                                                         $10.8
  $12




                                                                                                                  $9.4
                                                                                                           $8.7
  $10



                                                                                                    $7.9
                                                                 $7.1




                                                                                      $7.1
                                                                                             $7.2
                                                                        $7.0
                                                                               $6.8
                                                          $6.5




   $8
                                                   $5.4
                                            $4.4




   $6
                                     $3.6
                                     $2.9
                              $2.3




   $4
                       $1.9
                $1.5
         $1.2




   $2
   $0
         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
             Frequency of $1 Million + Jury Verdicts
                      (Per 1,000 Doctors)
       4.0                                            CA’s Medical Injury Compensation
                   3.71                                 Reform Act, passed in 1975, has
                                                     helped to contain jumbo jury awards,
       3.5
                                 3.10                     keeping med mal premiums
                                                     affordable and health care available.
       3.0
                                               2.40
       2.5
                                                              2.14
                                                                            1.93
       2.0

       1.5                                                                                 1.31

       1.0
                    The frequency of awards for $1 million and
       0.5          up in CA is 32% below the national average.

       0.0
                   NY             NJ            OH             FL          US Avg.          CA

Source: Jury Verdict Research, American Medical Association, Insurance Information Institute.
„TOXIC‟ MOLD
                          Great Pyramid of Mold




Source: Insurance Information Institute
   U.S.: Documented Toxic Mold Suits
                   Former
                  Owners of
                 Sold Homes                      Bad Faith
                    10%                           Against
                                                  Insurers
                          1,000
                          Cases
                                                    50%
 Builder for
Construction
                  2,000                5,000
  Defects
                  Cases                Cases
    20%
                          2,000
                          Cases
       HO
  Associations
  for Improper
  Maintenance
       20%                        Source: www.toxlaw.com; Guy Carpenter
                Texas Accounted for the Vast
             Majority of New Mold Cases in 2001

                                              Claims
            Claims                        Arising Inside
            Arising                             TX
           Outside TX                          70%
             30%




Source: Insurance Information Institute
                     Texas: Estimated Total Number
                      of Mold Claims, 1999-2002E*

                                                                           237,299
  250,000

              The number of mold claims rose 106%
                    between 1999 and 2002
  200,000
                                                         169,982


  150,000                             128,271

                   115,182


  100,000
                  1999               2000               2001               2002E

Source: Texas Department of Insurance;
*2002 III estimate is annualized figure based on data through September 2002.
             TX: Annual Losses from Mold Claims*

                                           $ Millions                            $2,279
   $2,500
                   Mold claim costs rose 612%
   $2,000           between 1999 and 2002

   $1,500
                                                            $1,002
   $1,000
                                         $417
                     $320
     $500


        $0
                   1999                2000               20001                 2002E

Source: Texas Department of Insurance;
*2002 III estimate is annualized figure based on data through September 2002.
                        California: Surging Water Claim
                             Frequency and Costs:
                       Symptom of Growing Mold Problem
 $450                                                                                               $430.6    34%

      •Water losses paid rose 109% from 1997 to 2001 and
 $400 50% since 1999                                                          $383.7                    32%   32%
      •Water claims accounted for less than 1/4 of all HO                           31%
 $350 claims in 1997, now they account for nearly 1/3.                                                        30%
                                       29%
 $300                                                  $286.6                                                 28%
                                $276.5
                                                            27%
 $250                                                                                                         26%

             $206.1
                                                                            California may be
 $200            24%                                                        in a drought, but                 24%
                                                                            homeowners say
 $150                                                                       they’re drowning                  22%


 $100                                                                                                         20%
              1997               1998                  1999                    2000                 2001

                          Paid Water Losses ($ Mill)   Water Claims as % of All Homeowners Claims



Source: Insurance Information Network of California; Insurance Information Institute
                     Sharply Rising Average Water
                      Claim Cost: Mold Symptom
$5,000             The cost of the average water loss in CA
                   surged 27% in 2001 and 80% since 1998                                       $4,730




$4,000
                                                                           $3,719

                                                        $3,339


$3,000
                                     $2,631
                  $2,537



$2,000
                   1997               1998               1999                2000               2001
Source: Insurance Information Institute based on data from the Insurance Information Network of California;
                           Where are the Next
                          Battlefields for Mold?
• Homeowners issue probably crested in 2003
• Migration to commercial area affects many lines:
     Commercial Property                  Commercial Liability
     Products Liability                   Builders Risk/Construction Defects
     Workers Comp…
• Hot Spots:
      Apartments/Condos/Co-ops                   Office Structures
      Schools                                    Municipal Buildings
     Cars? (GM case in NC)
• Trend toward class actions since science doesn’t
  support massive individual non-economic damages
     Much more lucrative for trial lawyers to form class
Source: Insurance Information Institute.
INSURANCE
 SCORING
Credit in Personal Lines
     Underwriting
     Why Insurers Use Credit Information
         in Insurance Underwriting
1. There is a strong correlation between credit standing
   and loss ratios in both auto and homeowners insurance.
2. There is a distinct and consistent decline in relative loss
   ratios (which are a function of both claim frequency and
   cost) as credit standing improves.
3. The relationship between credit standing and relative
   loss ratios is statistically irrefutable.
4. The odds that such a relationship does not exist in a
   given random sample of policyholders are usually
   between 500, 1,000 or even 10,000 to one.


Source: Insurance Information Institute.
                                                                Credit Quality &
                                                                Auto Insurance*
                        2.0
                                                                                       Interpretation
                                          Individuals with the lowest scores have losses that are 32.4% above average;
                                              those with the best scores have losses that are 33.3% below average.
 Relative Performance




                        1.5                     Should those who impose less cost on the system be forced to
                                1.324                       subsidize those who impose more?
                                         1.122        1.107      1.070
                                                                            0.978                 0.969
                        1.0                                                            0.922
                                                                                                             0.859
                                                                                                                        0.798    0.767


                        0.5



                        0.0




                                                                                                                                5+
                                91



                                            4


                                                       6


                                                                  5


                                                                             1


                                                                                        7


                                                                                                   3


                                                                                                              1


                                                                                                                         4
                                         62


                                                    64


                                                               66


                                                                          68


                                                                                     69


                                                                                                71


                                                                                                           73


                                                                                                                      75
                              >5




                                                                                                                              75
                                       2-


                                                  5-


                                                             7-


                                                                        6-


                                                                                   2-


                                                                                              8-


                                                                                                         4-


                                                                                                                    2-
                                     59


                                                62


                                                           64


                                                                      66


                                                                                 68


                                                                                            69


                                                                                                       71


                                                                                                                  73
                                                                           Score Range                 *Actual data from sampled company. More
Source: Tillinghast Towers-Perrin                                                                      examples are given later in this presentation.
                                                              Age of Drivers Involved in
                                                                Auto Accidents, 2000
                                                                                                 Interpretation:
     Involvement Rate per 100,000 Licensed Drivers




                                                     70
                                                                                  Drivers age 16-20 are 2 to 3 times more likely
                                                          61.88                   to be involved in auto accidents. Should this
                                                     60                             be ignored with better, more experienced
                                                                                          drivers subsidizing teenagers?
                                                     50           45.96
                                                                                              OF COURSE NOT!
                                                     40
                                                                          31.65                                         29.95
                                                     30                             26.19
                                                                                             22.59    20.81
                                                                                                               18.3
                                                     20

                                                     10

                                                     0
                                                          16-20   21-24   25-34     35-44    45-54    55-64    65-69 Overall


Source: National Highway Traffic Safety Administration, Traffic Safety Facts 2000.
                                                                Gender of Drivers Involved in
                                                                 Fatal Auto Accidents, 2000
                                                                                         Interpretation:
     No. Drivers in Fatal Accidents/billion miles driven




                                                                 Males are 69% more likely to be driving in fatal auto accidents.
                                                                Should this be ignored and females be forced to subsidize males?
                                                                                      OF COURSE NOT!

                                                           30                27


                                                           20                                                   16

                                                           10


                                                            0
                                                                           Male                              Female

Source: National Safety Council
                                     Credit Quality & Homeowners
                                       Insurance (Sample Company)
                        2.0
                                        Probability that Correlation Exists: 99.32%
                                1.593
 Relative Performance




                        1.5

                                            1.066
                        1.0                                 0.911
                                                                          0.795
                                                                                        0.656

                        0.5



                        0.0




                                                                                        0+
                                45




                                               4




                                                             4




                                                                           9
                                            71




                                                          76




                                                                        80
                              >6




                                                                                      81
                                          5-




                                                        5-




                                                                      5-
                                        64




                                                      71




                                                                    76




                                                      Score Range
Source: Tillinghast Towers-Perrin
                                Intuition Behind
                              Insurance Scoring*
1. Personal Responsibility
      Responsibility is a personality trait that carries over into many
       aspects of a person’s life
      It is intuitive and reasonable to believe that the responsibility
       required to prudently manage one’s finances is associated with
       other types of responsible and prudent behaviors, for example:
               Proper maintenance of homes and automobiles
               Safe operation of cars
2. Stability
      It is intuitive and reasonable to believe that financially stable
       individuals are like to exhibit stability in many other aspects of
       their lives.
3. Stress/Distraction
      Financial stress could lead to stress, distractions or other
       behaviors that produce more losses (e.g., deferral of car/home
       maintenance).
*This list is neither exhaustive nor is it intended to characterize the behavior of any specific individual.
Source: Insurance Information Institute
        Consequences of Banning Use of
        Credit in Insurance Underwriting
Banning the use of credit information will:
•   Force good drivers and responsible homeowners to
    subsidize those with poor loss histories by hundreds of
    millions of dollars each year.
•   Decrease incentives to drive safely
•   Decrease incentives to properly maintain cars and homes
•   Force insurers to rely on less accurate types of
    information, such as DMV records.
•   Make non-standard risks more difficult to place
•   Increase size of residual market pools/plans
                                                       Average Omission Rate for
                                                         Selected Convictions
  % Convictions Missing from DMV Records




                                                     28.5%
                                               30%
                                               25%           21.0% 21.0% 20.0% 19.3%
                                               20%                                     16.0% 15.0% 14.8%
                                               15%                                                              11.8% 10.0%
                                               10%
                                                5%
                                                0%




                                                                                                     I
                                                                              .




                                                                                                              n
                                                                             s




                                                                                                                      ng
                                                                            g




                                                                            p.
                                                                             e




                                                                           es
                                                                           rn




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Source: Insurance Research Council, Accuracy of Motor Vehicle Records (2002).
Some Groups Want to Ban
     C.L.U.E. Too!
            Ad run by realtors in AZ in January
            2003: But how would homeowners be
                 helped if CLUE is banned?
              CLUE helps protect homebuyers by
            letting them see what problems a house
                    has had before they buy it
            A house without problems or that has
            been properly repaired will command a
                  premium, benefiting sellers
             A house can be made safer and less
              expensive to insure if repairs have
                     been made properly
               Don’t YOU want to know what
             you’re buying before you make the
              biggest investment of your life???
                         Summary
• Economics of the industry suggest hard market should
  continue into 2004
    If it doesn’t, it will end badly for some insurers
    Combined ratio remains unacceptably high given current
     investment environment
    Top line improvement outpacing bottom line improvement
    Reserve hangover still enormous
• US courts still out of control
    Hopes for significant tort reform probably too high
• Regulatory zealotry making a come back
• Many challenges to deal with today, more tomorrow!
     Insurance Information
        Institute On-Line




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