Your Federal Quarterly Tax Payments are due April 15th Get Help Now >>

HC Roll Out by jolinmilioncherie

VIEWS: 0 PAGES: 32

									                             The State of the
                            Insurance Market



Kevin M. Bingham – Deloitte & Touche

2002 Casualty Actuarial Society Annual Meeting
Boston, Massachusetts
November 10, 2002
1:45 – 3:15pm
INTRODUCTION
• Hardening Market Drivers – The answers for your
  insurance consumers
• Historical Perspective
• Insurance Layering
  ° Perception Change
  ° Impact on Consumer
• Market Examples
• Closing Thoughts
Hardening Market Drivers
Hardening Market Drivers
•   Deteriorating industry results
•   September 11th
•   Reduced capacity
•   “Enronitis”
•   Asbestos
•   Litigation/Regulatory
•   Rating agency pressure
Deteriorating Industry Results
• Intense price competition during the 1990s soft market
   ° Rate decreases
   ° Pricing Spiral
• Declining investment returns
   ° Low interest rates
   ° Declining equity markets   Worst possible combination
• Catastrophes on the rise
• Favorable impact on calendar year financials from workers
  compensation reserve takedowns have been fully reflected
  by companies. Accident year combined ratios are rising
  significantly.
• Rising medical inflation
• Medical Malpractice crisis
September 11th
• Insured losses ranging from $30 to $50 billion dollars
• Rethinking of insurance industry’s determination/quantification of
  probable maximum loss (PML) – “Actuarial pricing for the WTC
  reflected a PML of 4 floors”
• Force insurers and reinsurers to step back and re-evaluate their
  exposures to:
    ° Concentration risk
        • Marquee properties in the same city
        • Multi-line exposure (e.g., WC, property and business interruption)
    ° Layer risk
        • Attritional
        • Severity
    ° Policy language (e.g., WilProp form, terrorism exclusions)
Reduced Capacity
• St. Paul exiting medical malpractice
• Collapse of Fortress Re aviation underwriting pool
• State specific capacity issues
   °   Texas homeowners’ and mold impact
   °   N.J. automobile
   °   Pennsylvania medical malpractice
   °   California homeowners’ (State Farm policy freeze)
   °   Florida nursing homes
• Workers compensation
   °   Reliance
   °   Frontier
   °   Fremont
   °   Collapse of Unicover and other WC carve-out pools eliminating
       cheap “working layer” protection
   Litigation/Regulatory
                                         Average Jury Awards (000s)
                                                                                                                               6,817
         $7,000                           1994                                                      2000

         $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

   •      Jury Verdict Research (www.juryverdictresearch.com) /Insurance Information Institute (www.iii.org)
Litigation/Regulatory
• Massive individual awards
   ° Texas $313 million dollar award to a plaintiff alleging negligence
     against a nursing home
   ° Numerous asbestos awards
   ° Mold (www.moldupdate.com)
       • Texas $32.1 million dollar award against Farmers
       • California $18.5 million dollar award against Allstate (judge reduced
         to $3 million, case under appeal)
• Class action lawsuits
• Bursting of internet bubble and rising D&O losses
• State elimination of credit scoring in rating personal lines
  products
“Enronitis”
• Enron “double hit” for insurers ($3.8 billion in exposure)
     ° 64% Investment Exposure
         • Common Stock, Preferred Stock, Corporate Bonds
         • John Hancock $320 million invested in Enron
         • After-tax write downs
     ° 36% Insurance Exposure
         • Surety
         • Directors and Officers
         • Financial Guarantee

• Worldcom ($5.7 billion in exposure – 94% investment related)

•   Global Crossing
•   Tyco
•   Adelphia                    And the list goes on and on and…
•   Quest
Asbestos
• A.M. Best industry estimates
    ° $65 billion as of May 2001
    ° $25 billion increase from prior estimate of $40 billion
• Key drivers
    ° Rising jury awards
        • 2002 $53 million dollar jury verdict to a family of a man who died of lung
          cancer caused by asbestos
    ° Asbestos related bankruptcies and push by lawyers for accessing deep
      pocketed insurers
    ° Shift from product coverage (limited) to premises/operations (unlimited)
    ° Claimants without manifestation
    ° Reserve strengthening impacting financials
        • CNA $1.2 billion in reserve strengthening
        • Allianz/Fireman’s Fund $750 million in reserve strengthening
        • Chubb $625 million in reserve strengthening
Rating Agency Pressure
                                 ANNUAL RATING ACTIVITY - P/C INDUSTRY
                                               2000                  2001                  2002
        CATEGORY                          #            %       #             %       #             %

        Superior       A++, A+                120     11.5%        107      10.5%         93       9.6%
        Excellent      A, A-                  507     48.4%        499      49.0%        499      51.5%
        Very Good      B++, B+, FPR 6,5       297     28.3%        266      26.1%        225      23.2%    SECURE
                                                                                                           RATINGS
          Total                               924     88.2%        872      85.6%        817      84.3%



        Fair           B, B-, FPR 4           72       6.9%         76       7.5%         74       7.6%
        Marginal       C++, C+, FPR 3         20       1.9%         18       1.8%         21       2.2%
        Week           C, C-                   6       0.6%          4       0.4%          3       0.3%
        Poor           D                       2       0.2%          4       0.4%          6       0.6%    VULNERABLE
        State Sup/                                                                                         RATINGS
        Liquidation    E, F                   24       2.3%         45       4.4%         48       5.0%

          Total                               124     11.8%        147      14.4%        152      15.7%

          Total Letter Ratings            1,048       100.0%   1,019        100.0%       969      100.0%


        Upgrades                               80                   77                    76
        Downgrades                             77                  148                   151
        Downgrades/Upgrades                   1.0x                 1.9x                  2.0x


SOURCE: A.M. BEST SPECIAL REPORT, OCTOBER 2, 2002
        RATING DOWNGRADES OUTPACE UPGRADES DESPITE IMPROVED PRICING
Historical Perspective
Effective Rate Level – The Story
                                                     XYZ MANUFACTURING COMPANY
                                                                    SIR DROPPED FROM
                                                                    $250,000 TO $150,000   SIR DROPPED FROM
                                                                                           $150,000 TO $100,000


                                           1.200
               RATE INDEX (1992 = 1.000)




                                           1.000

                                           0.800

                                           0.600

                                           0.400

                                           0.200

                                           0.000
                                                   1992    1993    1994    1995    1996    1997    1998    1999    2000
  RATE LEVEL                                       1.000   0.769   0.552   0.481   0.443   0.454   0.449   0.449   0.456
  SIR LEVEL                                        1.000   1.000   1.000   0.796   0.796   0.667   0.667   0.667   0.667
  EFFECTIVE RATE LEVEL                             1.000   0.769   0.552   0.383   0.353   0.303   0.300   0.299   0.304
                                                                              CALENDAR YEAR


     RATE LEVEL: INCLUDES MANUAL RATE CHANGE, EXPERIENCE MOD, SCHEDULE RATING & TIER IMPACT
      SIR LEVEL: RATE IMPACT OF REDUCTION IN LOSSES FROM LOWER SELF-INSURED RETENTION (SIR)
Effective Rate Level – Insurance
Consumer Perspective
• Risk manager (RM)
   ° Budgetary focus
       • Pro formas usually only include one or two historical years
   ° RM likely doesn’t know true cumulative “effective rate level”
       • RM may track audited premium
       • Audited premium doesn’t include
           - Soft market SIR/large deductible “give aways”
           - Broker driven coverage expansions
           - Exposure shift
   ° RM likely attributes some (if not all) of the decreasing premiums
     to proactive risk management and EH&S department involvement
              “99.9% of companies are better than average”
Effective Rate Level – Insurance
Consumer Perspective
• Thought process:
                     INSURANCE CONSUMER PERSPECTIVE

                                           EFFECTIVE       1998        RM
          CALENDAR   RATE        SIR         RATE          RATE    "PERCIEVED"
            YEAR     LEVEL      LEVEL        LEVEL      LEVEL BASE   BENEFIT

            1992        1.000      1.000        1.000
            1993        0.769      1.000        0.769
            1994        0.552      1.000        0.552
            1995        0.481      0.796        0.383
            1996        0.443      0.796        0.353
            1997        0.454      0.667        0.303
            1998        0.447      0.667        0.298         1.000
            1999        0.422      0.667        0.281         0.943
            2000        0.428      0.667        0.285         0.957       4.5%


   ° Focus on rate level only
   ° Missing SIR changes
   ° Missing long term pricing and concept of “rate adequacy”
Effective Rate Level – Insurance
Company Perspective
• Thought process:
                         INSURANCE COMPANY PERSPECTIVE

                      EFFECTIVE                  REQUIRED     EFFECTIVE
           CALENDAR     RATE                       RATE         RATE
             YEAR       LEVEL                     CHANGE        LEVEL

             1992          1.000                      25.0%        0.357
             1993          0.769                      50.0%        0.428
             1994          0.552                      75.0%        0.499
             1995          0.383                     100.0%        0.570
             1996          0.353                     150.0%        0.713
             1997          0.303                     200.0%        0.856
             1998          0.298                     250.5%        1.000
             1999          0.281                     275.0%        1.070
             2000          0.285                     300.0%        1.141


   ° Focus on effective rate level
   ° Focus on “rate adequacy”
       • If we assume 1992 rate levels are adequate, then the insurance
         company would need a 250% increase to break even
Effective Rate Level – Message
• Communication of rate change
   ° +25% rate change
      • 36% of 1992 rate level
   ° +75% rate change
      • 50% of 1992 rate level (still need to double rates)


• Tough sell to RM
     RM – “Poor insurance company pricing decisions of the past
     should be borne by the Insurer, not the buyer.”
                           Versus
     Insurer – “Cannot continue to operate at a loss. Current
     environment doesn’t allow for policy subsidation.”
 Insurance Layering: Insurers’
Perceptions Change and Impact
   on Insurance Consumers
Insurance Layering: Insurers’
Perceptions Change
      Pre-9/11           Post-9/11

                     Statutory Limits?



                      Excess Layers       Terrorism
   Excess Layers                           Excluded
                                         By Reinsurers


                     Working Layer(s)

  Working Layer(s)
                        Retention
     Retention
Impact on Insurance Consumer
     Post-9/11
                     • Increased SIRs/decreased large
                       deductibles
 Statutory Limits?
                        ° Reversal of 90s trend
                        ° Little or no premium credit
                     • Primary insurers forced to provide
  Excess Layers        protection against terrorism
                        ° Shift of highly concentrated risk into
                          state funds (e.g., N.Y. City financial
                          service firms and WC)
 Working Layer(s)    • Significant rate increases
                        ° Property
                        ° WC
  Retention          • Lack of coverage
Impact on Insurance Consumer
     Post-9/11
                     • Rising attachment points
 Statutory Limits?   • “Actuarial Pricing” with U/W flair
                     • Terrorism excluded
                        ° Must purchase separately
                            • Limits range from $25-$50 million
  Excess Layers
                            • Significant additional cost
                     • Policy forms tightening
                        ° WilProp Form – occurrence defined
   Working              ° Coverage decreasing
                            • D&O
   Layer(s)                 • WC
                     • Significant rate on line increases
    Retention        • Fewer market players
Impact on Insurance Consumer
     Post-9/11
                     • “Best Terms”
 Statutory Limits?   $9M


                     $6M
                                             =
                     $3M

Excess Layers
                     • “Actuarial Pricing” with U/W flair
                           ° Significant ROL increases
                               • Minimum premiums
                               • More creative “PMLs”
 Working Layer(s)
                           ° No credits for raising attachments
                           ° Willing to walk away from deal
    Retention        • Terrorism excluded
Impact on Insurance Consumer

• Safety push from insurers/reinsurers
   ° Return to work focus (a/k/a integrated disability
     management)
   ° Employee training (e.g., officer training, EH&S
     involvement)
   ° Demand for quicker claim notification
   ° More detailed underwriting information
   ° Review of business continuity plan
   ° Increased audits (e.g., payroll, property, etc.)
Market Examples
Market Examples
• Major state fund unable to purchase unlimited
  excess WC coverage. Drastically reduced
  coverage with significant price increases.
• Governments and cities having difficulty
  obtaining insurance for their high profile
  buildings and land marks
• Lack of coverage for major events (e.g., sports,
  fairs, concerts, etc.)
   ° New Jersey Sports and Exposition Authority insurance
     costs more than tripled to $2.4 million.
Market Examples
• A hospital institution obtained 1/5th the property coverage
  for three times the prior year’s cost, with terrorism
  coverage excluded. It took 23 insurers to replace the
  coverage offered by a single insurer last year.
• A steel merchant and fabricator’s general liability
  premiums increased from $8,000 last year to $75,000 upon
  renewal. As an added bonus, auto premiums jumped from
  $31,000 to $56,000 while umbrella premiums jumped
  from $6,000 to $34,000. A 267% increase in total.
• Southwest Airlines’ liability insurance for their 364-plane
  fleet soared from $20 million to $100 million, a 400%
  increase.
Market Examples
• George Washington University’s insurers have cut the
  school’s former $1 billion policy in half, raised its
  premiums 160% and advised that renewing terrorism
  coverage would cost 15 times more.
• Before September 11th, the MTA’s property insurance
  absorbed up to $1.5 billion in property damages, minus a
  $15 million deductible, at a cost of $6.4 million. Now the
  agency has two property insurance policies, one providing
  $500 million of plain property coverage with a $30 million
  deductible for $18.6 million, the other offering $100
  million in terrorism coverage with a $30 million
  deductible for $7.5 million. A total increase of 308%, for
  less than 1/3rd of the original protection.
Closing Thoughts
Closing Thoughts
• Self-insured clients developing “story board” for next
  round of renewals
   ° Proactively address concentration risk
   ° Perform independent actuarial analyses
       • Confidence levels
       • Worst case scenario testing
   ° Put on “road show” including following professionals
       •   Risk management
       •   Legal
       •   Claims
       •   Safety
• Flight to quality taking hold
Closing Thoughts
• Duration of hard market in question
   ° Statutory limits becoming available
   ° New Bermuda capital needs to find a home
       • Hard to deliver on 20% promised returns when holding free capital in
         3% risk free investments
• Federal back stop important
   ° Passage critical
   ° BUT CONSUMERS - will remember the insurers/reinsurers who
     abandoned ship
• Clients are upset
   ° What happened to long-term relationships?
   ° “Best Terms” = Insurance Industry Collusion?
• Captive boom
   ° Majority of premium may never return to market
Closing Thoughts

• The insurance transaction will no longer be
  viewed simply as the insurer selling insurance and
  the insured paying a premium. Instead, the
  insurer/reinsurer will view themselves as
  “investing” in a portfolio of risks composed of the
  best prepared insurance consumers in the industry.

								
To top