National Trends In the Insurance Marketplace - 2003 ppt by liuqingyan


									 National Trends In the
Insurance Marketplace

 Presentation to Yellowstone
         July 2007
• Me
• The insurance cycle
• The operating environment – some
  history, the current situation and outlook
• Managing the cycle
• Managing the cycle – a different approach
• What about Yellowstone?
        The Insurance cycle
• What is it?
• When analysing decades of insurance and
  reinsurance pricing it is evident that it
  follows a cyclical pattern.
• The pattern is characterised by peaks and
• Not all classes are at the same stage
  through the cycle.
        Current Market Cycle
The chart below is an assessment of the stage in the cycle where each of Aspen’s lines
of business is currently trading

          Marine Hull, Energy PD
                                                US Cat
          & Specialty Liability
                                                   US Casualty
                            Cat Exposed Pro            International Casualty & ARA Casualty Market
                                       Rata               US Property Insurance
                                                             Marine RI & US Risk
                             Non Cat Pro Rata
                                                               Specialty RI
                                                                US Casualty Insurance

                                                                      Aviation RI & International Cat

                                                                            International Risk

                                                            UK Liability & IPF
                                                        UK Commercial Property

                              All Classes Declining or Trending Downwards
      Insurance Cycle Drivers
• The main forces acting upon the insurance cycle
• Capital availability
• Investment market returns
• Interest rates
• Market competition – need for growth and
  market share influencing pricing, terms and
• Note: catastrophes influence shape of the cycle
  but do not generate the overall pattern
    Comparative Historical Results

Insurance industry consistently underperforms rest of the market. Why invest?
See the cycle – some tough results
        and the lies within
        Operating Environment –
          Insurance Industry
• Best results in terms of ROE for 20 years. Probably
• Property rates remain strong especially in cat arena.
  Casualty rates had a delayed decline due to Katrina but are
  still trending down.
• New capacity is entering the market place with the class of
  2005 (7.7bn) now beginning to assert themselves. Overall
  30bn was raised in 2005/2006 mostly by existing
  companies offsetting 2005 losses.
• The insurance regulatory environment has remained steady
  with no increased burden
• Competitive environment has increased as “diversification”
  is now needed more than ever in order to operate and
  maintain ratings
• Some consolidation in the industry is happening
Operating Environment - Macro
• We now live in complex times –
• rapid population growth
• Rapid catch up in developing world
• Complex lives and financial instruments
• Stress on the environment and resources
  leading to economic concerns
• Many competing areas of concern and
  attention at a socio economic level
 Operating Environment - focus on
• Tort reform has reduced frequency considerably
  and got rid of “frivolous cases” in many states.
  Severity seems to be on the increase.
• Economic indicators are good despite potential
  for a “correction” in the system e.g. housing
• Margins are perceived to be healthy despite
  downturn in rates – enough not to impinge
  financial strength and ratings = danger zone who
  will get it wrong?
• The industry now needs to manage a downward
  trend in the cycle
          Managing the cycle
• The dichotomy is:
• When presented by soft market conditions
  underwriters should reduce their writings and
  withdraw from the market
• But
• Investors and Analysts like to see top line growth
  and this is important to maintaining share price
  integrity and capital backing
• So there are two opposing and competing forces
  at work
           Managing the cycle
• Diversification helps to balance insurance companies
  against the negative impact posed by the cycle – classes
  of business and geographic spread
• Financial strength is key
• Recognising where to optimise returns as opposed to
  maximising returns – enhance underwriting models and
  zone in on exposures and correct experience factors
• Recognising break point in any given sector before it is
  too late. What is break point?
• Choosing clients and distribution channels carefully
• Managing costs – acquisition costs and internal
  expenses are a major factor in combined ratio
        Managing the Cycle
• Warning signs should be:
• Adverse reserve increases - as per the
  end of the last soft cycle
• Barriers to exit remain strong
• Rating agency downgrades e.g. Alea,
  Converium, CNA Re
• Large scale withdrawal from major market
  leaders e.g. St Paul out of med mal
• Failure of competitors and receivership
  Managing the cycle – a different
• Captives – off shore and domestic
• Risk Retention Groups
• Mutual Insurance Companies
• Not for Profit friendly societies
• Associations looking for alternative
• As long as regulatory framework tolerates
   Managing the cycle – a different
• What do these offer?
• Stable and bespoke product in terms of pricing not following the
  cycle peaks and trough as much. Budgetary certainty. Experience
  based premiums once mature.
• Ability to build surplus which is owned by the members
• Through building surplus retain more exposure
• Actively manage exposures and bring resources to bear where they
  are most needed – risk management tailored to jurisdiction and
  relevant exposure base. Deliver a better product.
• Local team approach to handling litigation – the individual lawyers,
  judges, jury, procedures and so forth. This can’t be bought and is
• Access to reinsurance markets providing a different dynamic to the
  risk transfer process
    Managing the cycle – a different
•   Examples of where this has worked before:
•   NABRICO companies
•   Long Term Care
•   AICA
•   Barreau Du Quebec
•   Various physician RRG
•   Large hospital captives
•   Lawyers Mutual Ins Co California
   Managing the cycle – a different
• There is some give and take with this approach.
• To have certainty means that the temptation to move in the soft
  cycle out of the group must be dealt with and removed from the
  equation – three musqueteers
• The temptation to consolidate with other RRGs should also be
  approached with extreme caution – there are not always aligned
  agendas and levels of maturity
• When (if) things go wrong e.g. large loss – stick together and be
  constructive – dedication is required
• Long term game = long term gains and this gets away from the 5yr
  private equity 20% minimum return model that causes so many of
  the issues for the industry.
• Dedicated customer owned capital if looked after properly and
  nurtured correctly can be an excellent risk transfer mechanism
• Turn risk into an asset.
       What about Yellowstone?
• Yellowstone is not yet mature but is getting there.
• A cautious approach to reserves should protect surplus. Remember
  that casualty classes have “sting in the tail” - scorpion
• Grow with caution – protect what you have
• Price stability and integrity is key to future success – don’t be
  tempted to follow the market – do your own thing according to
  realistic objectives.
• With cautious reserving and in time obvious redundancy in reserves
  i.e. releases then reinsurers will gain greater confidence in the
  account and price accordingly.
• By being less reliant on outside support in the primary level the
  benefit is that member hospitals can continue to purchase insurance
  and deliver healthcare without the distressing and distracting burden
  of seeking insurance or reinsurance in times of little or no capacity.
    What about Yellowstone?
• Continue to search for better healthcare
  delivery – better product = better
• Look at what others are doing in the
  industry and seek feedback
• You have challenged status quo with new
  RRG Insurance Exchange. Build on this
  and remain focused on collective risk and
  claims management.

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