making sense of now and forecasting the future the economy’s impact on workers compensation...
TRANSCRIPT
Making Sense of Now and Forecasting the Future
The Economy’s Impact onWorkers Compensation
National Workers Compensation and DisabilityConference & Expo
Chicago, IL
November 18, 2009
Download at: www.iii.org/Presentations/
Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: (212) 346-5520 [email protected] www.iii.org
Presentation Outline• Economic Factors Affecting Exposure in WC
Economic Downturn Employment/PayrollsExposure Base
• Overall P/C Insurance Industry Performance Cycles Profitability Underwriting Premium Growth Drivers Investment Performance Capital/Capacity Financial Strength
• Workers Comp Performance Review Underwriting performance Premium Drivers Frequency & Severity Trends
• Emerging Trends
Q&A
THE ECONOMIC STORM
What the Financial Crisis and Recession Mean for the Industry’s
Exposure Base and Growth—Especially WC
4
3.7
%
0.8
% 1.6
% 2.5
% 3.6
%
3.1
%
2.9
%
0.1
%
4.8
%
4.8
%
-0.7
%
1.5
%
-2.7
%
3.5
%
2.8
%
2.7
%
2.9
%
2.8
%
3.0
%
-0.7
%
-6.4%
-5.4%
-0.2%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
2
00
0
2
00
1
2
00
2
2
00
3
2
00
4
2
00
5
2
00
6
07
:1Q
07
:2Q
07
:3Q
07
:4Q
08
:1Q
08
:2Q
08
:3Q
08
:4Q
09
:1Q
09
:2Q
09
:3Q
09
:4Q
10
:1Q
10
:2Q
10
:3Q
10
:4Q
Real GDP Growth*
*Blue bars are Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 11/09; Insurance Information Institute.
Recession began in December 2007. Economic toll of credit crunch, housing slump, labor market contraction has been severe but recovery is in sight
The Q1:2009 decline was the steepest since the
Q1:1982 drop of 6.4%
Personal and commercial lines
exposure base have been hit
hard and will be slow to come
back
5
Length of U.S. Business Cycles, 1929-Present*
43
138 11 10 8 10 11
166
168 8
19
50
80
3745
39
24
106
36
58
12
92
120
73
0
10
20
30
40
50
60
70
80
90
100
110
120
Aug.1929
May1937
Feb.1945
Nov.1948
July1953
Aug.1957
Apr.1960
Dec.1969
Nov.1973
Jan.1980
Jul.1981
Jul.1990
Mar.2001
Dec.2007
Contraction Expansion Following
* Through June 2009 (likely the “official end” of recession) **Post-WW II period through end of most recent expansion. Sources: National Bureau of Economic Research; Insurance Information Institute.
Duration (Months)
Month Recession Started
Average Duration** Recession = 10.4 MonthsExpansion = 60.5 Months
Length of expansions
greatly exceeds
contractions
Regional Differences Will Significantly
Impact P/C Markets Recovery in Some Areas Will Begin Years Ahead of Others & Speed of Recovery Will Differ By Orders of
Magnitude
8
State Economic Growth Varied Tremendously in 2008
Eastern US growing more slowly than Plains,
Mountains
9
Fastest Growing States in 2008: Plains, Mountain States Lead
7.3%
4.4%
3.5%2.9%
2.0%2.1%2.5%
2.7%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
ND WY SD CO OK WV IA TX, MN,NM, WA
Natural resource and agricultural states have done
better than most others recently, helping insurance
exposure in those areas
Source: US Bureau of Economic Analysis; Insurance Information Institute.
PercentReal State GDP Growth
10
Slowest Growing States in 2008: Diversity of States Suffering
-0.1%
-0.4%-0.6%-0.6%
-1.5%-1.6%-1.6%
-1.7%
-2.0%
-0.9%
-0.6%-0.6%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%KY CT AZ GA IN NV RI MI DE FL OH AK
States in the North, South, East and West all represented among
hardest hit but for differing reasons
Source: US Bureau of Economic Analysis; Insurance Information Institute.
PercentReal State GDP Growth
Inflation Trends Pressures Claim Cost
Severity via Medical and Tort Channels
12
Annual Inflation Rates(CPI-U, %), 1990-2010F
4.9 5.1
3.0 3.2
2.6
1.51.9
3.3 3.4
1.3
2.5 2.3
3.0
3.8
2.8
3.8
(0.4)
2.0
2.82.92.4
(1.0)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F10F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 11/09.
Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The
recession and the collapse of the commodity bubble have produced temporary deflation.
There is so much slack in the US economy that inflation should not be a concern through 2011, but depreciation of dollar is concern longer run.
Comparative 2009 Inflation Statistics Important to Insurers ( %)
(1.3)
3.52.9
1.5 1.8
7.1
(2)
(1)
0
1
2
3
4
5
6
7
8
CPI-U Core CPI* TotalMedical
Care
PhysicianServices
HospitalServices
LegalServices
Infl
atio
n R
ate
(%)
*Core CPI is the Consumer Price Index for all Urban Consumers (CPI-U) less food and energy costs.Source: US Bureau of Labor Statistics; Insurance Information Institute.
CPI and “Core” CPI are not representative of
many of the costs insurers face
Medical/Legal costs typically run well ahead of inflation
September 2009 vs. September 2008
Medical & Tort Cost Inflation
Amplifiers of Inflation, Major Insurance Cost Driver
Consumer Price Index for Medical Care vs. All Items, 1960-2008
215.2
364.1
0
100
200
300
400
60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Ind
ex V
alu
e (1
982-
84=
100)
All Items Medical Care
Source: Department of Labor (Bureau of Labor Statistics; Insurance Information Institute.
(Base: 1982-84=100)
Inflation for Medical Care has been surging
ahead of general inflation (CPI) for 25
years. Since 1982-84, the cost of medical care has
more than tripled
Soaring medical inflation is among the most serious
long-term challenges facing
casualty, disability and LTC insurers
Tort Cost Growth & Medical Cost Inflation vs. Overall Inflation (CPI-U), 1961-2008*
0%
2%
4%
6%
8%
10%
12%
14%
1961-70 1971-80 1981-90 1991-2000 2001-08
Tort Costs Medical Costs CPI
*Medical cost and CPI-U from BLS. Tort figure is for full-year 2008 from Tillinghast.
Tort System is an Inflation Amplifier
Avg. Ann. Change: 1961-2008*
Torts Costs: +8.4%Med Costs: +6.0%
Overall Inflation: +4.2%
Sources: US Bureau of Labor Statistics, Tillinghast-Towers Perrin, 2007 Update on U.S. Tort Costs; Insurance Info. Inst.
Tort costs move with inflation but at twice the rate
Healthcare Reform
Spillover Effects Impact P/C Insurers Including WC
National Health Expenditures and Health Expenditures as a Share of GDP,
1960-2018F ($ Billions)$28
$1,9
81
$2,1
13
$2,2
41
$2,3
79
$2,5
10
$2,6
24
$2,7
70
$2,9
31
$3,1
11
$3,3
13
$3,5
41
$3,7
90
$4,0
62
$4,3
53
$1,6
03
$1,7
35
$253 $
714
$1,3
54
$75
$1,1
91
$1,8
55
$1,4
70
$1,1
25
$913 $1,2
66
5.2
%
7.2
% 9.1
%
13.7
%
14.5
%
15.3
%
15.9
%
15.9
%
16.0
%
16.2
%
16.6
%
20.3
%
19.8
%
19.3
%17.6
%
17.7
%
17.9
%
18.0
%
18.2
%
18.5
%
18.9
%
12.3
% 13.6
%
13.8
% 15.8
%
13.6
%
13.7
%
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
$5,00060 70 80 90 93 97 98 99 00 01 02 03 04 05 06 07
08E
09E
10E
11E
12E
13E
14E
15E
16E
17E
18E
Nat
iona
l Hea
lth
Exp
s
0%
5%
10%
15%
20%
25%
Nat
iona
l Hea
lth
Exp
. as
% o
f G
DP
National Health Expenditures National Health Expenditures as % of GDP
Health care expenditures consumed an estimated
16.6% of GDP in 2008 and are expected to rise to 20.3%
by 2018
Source: Centers for Medicare & Medicaid Services, Office of the Actuary; Insurance Information Institute.
20
Health Insurance Reform Debate—Potential Spillover Impacts on P/C Insurers
• 24-Hour Coverage Proposal Would roll WC and med components of auto into natl. health care plan
• Rollback of McCarran-Ferguson Act Would repeal or restrict for health and medical malpractice insurers Slippery slope—Med Mal is a p/c line; Congress will not hesitate to breach M-F for other p/c lines in the
future to show its ire over an issue (e.g., after major cat)
• Exclusion of Med Mal Reform from Health Care Bill Shows powerful influence of trial bar with Congress/Administration
• FTC granted authority to conduct studies “related to insurance” –All Lines!• Reporting of Claims• Adjustments to Medicare Fee Schedules• Patient “Bill of Rights” or Vague Standards of Care• Cost Shifting into WC, Auto from Health System
WC/Auto Medical: more lucrative from provider perspective
• “Windfall” Profit Taxes? Additional Premium Taxes?• Executive Compensation Restrictions?• Public “Option” in P/C Lines—Nat Cat/Wind?• Perception that Feds Regulate Insurance Industry Taking Root
The Affordable Health Care for America Act (H.R. 3962) includes the following benefit to the trial bar:
Section 2531, entitled “Medical Liability Alternatives,” establishes an incentive program for states to adopt and implement alternatives to medical liability litigation. [BUT]…… “a state is not eligible for the incentive payments if that state puts a law on the books that limits attorneys’ fees or imposes caps on damages.”
Jeopardizes some $54 billion in savings in medical care costs that Congressional Budget Office (CBO) says litigation reform would bring.
Source: Andrew Breitbart, http://biggovernment.com; Congressional Budget Office (CBO)
Healthcare Reform Bill is a Trial Lawyer Dream Come True
Labor Market Trends
Fast & Furious: Massive Job Losses Sap the Economy Workers Comp &
Other Commercial Exposure
23
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
Jan
-09
January 2000 through October 2009*
Unemployment will likely peak near 10.5 % during this cycle, impacting payroll
sensitive p/c and l/h exposures
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Oct. 2009 unemployment was 10.2%, up 0.4% from Sept. and nearing its
highest level since April 1983 (10.8%)
Unemployment Rate:On the Rise
Average unemployment rate 2000-07 was 5.0%
Previous Peak: 6.3% in June 2003
Trough: 4.4% in March 2007
Oct
-09
26
U.S. Unemployment Rate,(2007:Q1 to 2010:Q4F)*
4.5%
4.5% 4.6% 4.
8% 4.9%
5.4%
6.1%
6.9%
8.1%
9.3% 9.
6% 9.9% 10
.1%
10.0
%
9.8%
9.6%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
10.5%
11.0%
07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4
* Blue bars are actual; Yellow bars are forecasts
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (11/09); Insurance Info. Inst.
Rising unemployment is eroding payrolls and
workers comp’s exposure base.
Unemployment is expected to peak above
10% in early 2010.
U.S. Unemployment Rate ForecastsQuarterly, 2009:Q4 to 2010:Q4
10.3%10.4% 10.4%
10.3%
9.6%9.9%
9.6%
9.3%
8.9%
10.1%
9.9%9.8%
10.0%10.1%
9.8%
8.5%
9.0%
9.5%
10.0%
10.5%
11.0%
09:Q4 10:Q1 10:Q2 10:Q3 10:Q4
10 most pessimistic consensus/midpoint 10 most optimistic
Sources: Blue Chip Economic Indicators (11/09); Insurance Info. Inst.
Unemployment is expected to peak in early 2010
Rising unemployment will erode payrolls and workers comp’s exposure base.
28
Labor Underutilization: Broader than Just
Unemployment
11.2%
16.4% 16.5% 16.3%
17.5%17.0%16.8%
10%
11%
12%
13%
14%
15%
16%
17%
18%
Sep-08 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09
Marginally attached and unemployed persons account for 17.5% of the labor
force in Oct. 2009 (1 out every 5.7 people). Unemployment rate alone was 10.2%.
Underutilization shows a broader impact on WC and other commercial exposures.
NOTE: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are availableFor a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-marketrelated reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Percent % of Labor Force
30
Monthly Change Employment*(Thousands)
-72
-144-122-160-137-161
-128-175
-321-380
-597
-681-741
-681-652
-519
-303
-463
-304
-154-219
-190
-800
-700
-600
-500
-400
-300
-200
-100
0
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Job losses since the recession began in Dec. 2007 total 8.2 mill; 15.7 million people are now
defined as unemployed.
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Info. Institute
Monthly losses in Dec. – May were the largest in the post-WW II period
but pace of loss is diminishing
January 2008 through October 2009
U.S. Nonfarm Private Employment, Monthly, Nov. 2007 – Oct. 2009
138.
0
138.
1
138.
0
137.
9
137.
8
137.
8
137.
7
137.
6
137.
6
137.
4
137.
0
136.
7
136.
2
135.
1
134.
3
133.
7
133.
0
132.
5
132.
2
131.
7
131.
4
131.
3
131.
0
130.
8
130.0130.5131.0131.5132.0132.5133.0133.5134.0134.5135.0135.5136.0136.5137.0137.5138.0138.5
Nov07
Dec07
Jan08
Feb08
Mar08
Apr08
May08
June08
Jul08
Aug08
Sep08
Oct08
Nov08
Dec08
Jan09
Feb09
Mar09
Apr09
May09
Jun09
Jul09
Aug09
Sep09
Oct09
Seasonally adjusted. Source: US Bureau of Labor Statistics
Millions
The U.S. economy lost 7.3 million
jobs over 2 years
Employment peak; recession starts
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45Wage & SalaryDisbursementsWC NPW
*Average Wage and Salary data as of 7/1/2009.Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books
Wage & Salary Disbursements (Payroll Base) vs. Workers Comp
Net Written Premiums
7/90-3/91
Shaded areas indicate recessions
3/01-11/01
Wage & Salary Disbursement (Private Employment) vs. WC NWP$ Billions $ Billions
12/07-?
Weakening payrolls have
eroded $2B+ in workers comp
premiums
Will the “Job Recession” End Soon?Feb.-Nov. 2009 Initial Jobless Claims*
620
640
643
647
650
650 65
865
965
164
863
862
5 632
630
627 63
262
361
761
861
660
758
556
756
055
7 566 57
156
7 573
570
564
554
549
541
533
532
527
524
520
500
520
540
560
580
600
620
640
660
Feb
14
Feb
21
Feb
28
Mar
7M
ar 1
4M
ar 2
1M
ar 2
8A
pr
4A
pr
11A
pr
18A
pr
25M
ay 2
May
9M
ay 1
6M
ay 2
3M
ay 3
0Ju
n 6
Jun
13
Jun
20
Jun
27
Jul 4
Jul 1
1Ju
l 18
Jul 2
5A
ug
1A
ug
8A
ug
15A
ug
22A
ug
29S
ep 5
Sep
12
Sep
19
Sep
26
Oct
3O
ct 1
0O
ct 1
7O
ct 2
4O
ct 3
1N
ov 7
4-week moving avg (000)
*seasonally adjusted; state programs only Source: http://www.dol.gov/opa/media/press/eta/ui/current.htm
Continued drop in initial unemployment claims is a good news.
Portends gradual slowdown in the loss of worker comp exposure
0
5
10
15
20
25
30
'26
'28
'30
'32
'34
'36
'39
'41
'43
'45
'47
'49
'52
'54
'56
'58
'60
'62
'65
'67
'69
'71
'73
'75
'78
'80
'82
'84
'86
'88
'91
'93
'95
'97
'99
'01
'04
'06
Frequency: 1926-2008A Long-Term Drift Downward
Manufacturing—Total Recordable CasesRate of Injury and Illness Cases per 100 Full-Time Workers
Note: Recessions indicated by gray bar
Note: Recessions indicated by gray bar.
Sources: NCCI from U.S. Bureau of Labor Statistics; National Bureau of Economic Research
Crisis-Driven Exposure
DriversEconomic Obstacles
to Growth in Workers Comp Insurance
37
New Private Housing Starts,1990-2010F (Millions of Units)
2.07
1.80
1.36
0.90
0.57
0.79
1.48
1.351.
46
1.29
1.20
1.01
1.19
1.47
1.62 1.64
1.57 1.60 1.
71
1.85 1.
960.50.60.70.80.91.01.11.21.31.41.51.61.71.81.92.02.1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F 10F
Weakness is housing is symptomatic of problems in construction and ancillary
industries
Impacts also for comml. insurers with WC and construction risk exposure
New home starts plunged 34%
from 2005-2007; Drop through 2009 is 72% (est.)—a net
annual decline of 1.5 million units,
lowest since record began in
1959
I.I.I. estimates that each incremental 100,000 decline in housing starts costs
home insurers $87.5 million in new exposure (gross premium). The net
exposure loss in 2009 vs. 2005 is estimated at about $1.3 billion.
Source: US Department of Commerce; Blue Chip Economic Indicators (11/09); Insurance Information Inst.
38
Total Industrial Production,(2007:Q1 to 2010:Q4F)
1.5%3.2%3.6%
0.3%0.2%
-4.6%
-9.0%
-13.0%
-19.0%
-10.3%
4.5%4.3%4.3%4.5%5.2%5.5%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
07:Q
1
07:Q
2
07:Q
3
07:Q
4
08:Q
1
08:Q
2
08:Q
3
08:Q
4
09:Q
1
09:Q
2
09:Q
3
09:Q
4
10:Q
1
10:Q
2
10:Q
3
10:Q
4
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (1109); Insurance Info. Inst.
Industrial production began
to contracted sharply in late
2008 and plunged in Q1 2009
End of recession in mid-2009, Obama stimulus program are benefiting industrial production, but insurance exposure lags as most gains are productivity driven
Figures for H2 2009 and 2010 revised
upwards to reflect expected impact of Obama stimulus
program and a gradual economic recovery
39
Private Sector Business Starts,1993:Q2-2008:Q4*
175
186
174
180
186
192
188
187 18
918
6 190 19
419
119
9 204
202
195
196
196
206
206
201
192
198
206
206
203
211
205
212
200 20
520
420
419
720
320
9
203
192
192
193
201 20
420
221
0 212
209
216 22
0 223
220
220
210
221
212
204
218
210
209
195
187 18
9
201
150
160
170
180
190
200
210
220
230
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Business starts are down 15% in the current downturn, holding back most types of commercial
insurance exposure
*Latest available as of Oct. 2009.Source: Bureau of Labor Statistics: http://www.bls.gov/news.release/cewbd.t07.htm
Thousands189,000 business starts
were recorded 2008:Q4, the lowest
level since 1995
40
Business Bankruptcy Filings,1980-2009*
43,6
94
48,1
25
69,3
00
62,4
36
64,0
04
71,2
77
81,2
35
82,4
46
63,8
53
63,2
35
64,8
53
71,5
49
70,6
43
62,3
04
52,3
74
51,9
59
53,5
49
54,0
27
44,3
67
37,8
84
35,4
72
40,0
99
38,5
40
35,0
37
34,3
17
39,2
01
19,6
95
28,3
22 4
3,5
46
60,0
00
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
% Change Surrounding Recessions
1980-82: 58.6%1980-87: 88.7%1990-91: 10.3%2000-01: 13.0%
2006-09: 204.6%*
*Based estimate of 60,000 business bankruptcies in 2009; actual first half total was 30,333.Source: American Bankruptcy Institute; Insurance Information Institute
There were 30,333 business bankruptcies during the first half of 2009, up 64% from 2008: H1 and on track for about 60,000 for all of 2009, the most since 1993. Current
recession will generate 200%+ surge.
Business bankruptcies contribute to litigation
Change in Frequency: Business Cycle Impacts are Clear
Growth Rates, Workplace Illness and Injury—Manufacturing
© Copyright 2009 NCCI Holdings, Inc. All Rights Reserved.
Note: Recessions indicated by gray bar
Note: Recessions indicated by gray bar.
Sources: NCCI from U.S. Bureau of Labor Statistics; National Bureau of Economic Research
Recessions push the change in frequency down, expansion push it up
Growth in Indemnity Severity Eased Coming Out of Prior Recessions
Accident/Calendar YearSource: NCCI; 2008p: Preliminary based on data valued as of 12/31/2008
1991–2007: Based on data through 12/31/2007, developed to ultimate
Based on the states where NCCI provides ratemaking services, including state funds
Excludes high deductible policies
Indemnity Claim Cost ($000s)
Economic Recessions
© Copyright 2009 NCCI Holdings, Inc. All Rights Reserved.
Lost Time Claims
Medical Claim Costs IncreasedDuring Prior Recessions
Accident/Calendar Year
Medical Claim Cost ($000s)
Economic Recessions
© Copyright 2009 NCCI Holdings, Inc. All Rights Reserved.
Source: NCCI; 2008p: Preliminary based on data valued as of 12/31/2008
1991–2007: Based on data through 12/31/2007, developed to ultimate
Based on the states where NCCI provides ratemaking services, including state funds
Excludes high deductible policies
Total Medical Claims
P/C INSURANCE FINANCIAL
PERFORMANCE
A Resilient Industry in Challenging Times
P/C Profitability Overview
A Profit Recovery is Underway
52
P/C Net Income After Taxes1991-2009:H1 ($ Millions)*
$14,
178
$5,8
40
$19,
316
$10,
870
$20,
598
$24,
404 $3
6,81
9
$30,
773
$21,
865
$3,0
46
$30,
029
$62,
496
$2,3
79
$5,7
57
-$6,970
$65,
777
$44,
155
$20,
559 $3
8,50
1
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,00091 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
09:H
1
*ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields an 4.5% ROAS for 2008 and 2.2%. 2009:Q1 net income was $10.0 billion excl. M&FG.Sources: A.M. Best, ISO, Insurance Information Inst.
2005 ROE= 9.4%2006 ROE = 12.2%2007 ROAS1 = 12.4%2008 ROAS = 0.5%*2009:H1 ROAS = 2.5%*
Insurer profits peaked in 2006 and 2007, but fell 96.2% during the economic
crisis in 2008
52
53
97.5
100.6 100.1 100.7
92.6
99.5101.0
8.9%4.2%
12.7%
14.3% 15.9%
9.6%
4.5%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2008* 2009:H1*
Co
mb
ined
Ratio
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Retr
un
on
Eq
uity*
Combined Ratio ROE*
* 2008/9 figures are return on average statutory surplus. Excludes mortgage and financial guarantee insurers.Source: Insurance Information Institute from A.M. Best and ISO data.
A 100 Combined Ratio Isn’t What it Used to Be: 95 is Where It’s At
Combined ratios must me must lower in today’s depressed
investment environment to generate risk
appropriate ROEs
55
P/C Reserve Development, 1992-2011E
-6.6
-9.8
13.7
9.9
7.3
-6.7
-9.5
-14.
6
-16 -15
-5
23.2
11.7
1
-4.1
-9.9
-2.1
-8.3
-2.6
2.3
($20)
($15)
($10)
($5)
$0
$5
$10
$15
$20
$25
$30
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E 11E
Pri
or Y
r. R
eser
ve R
elea
se ($
Bill
)
(6)
(4)
(2)
0
2
4
6
8
Impa
ct o
n C
ombi
ned
Rat
io (P
oint
s)
Prior Yr Reserve Development ($ Bill) Impact on Combined Ratio (Points)
.
Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Source: Barclay’s Capital; A.M. Best.
Reserve releases have contributed to good calendar year
underwriting results and bolstered the
bottom line
Redundant releases will shrink in 2010 and 2011, exerting
pressure on the bottom line
P/C Premium Growth
Any Recovery in Revenues Will Lag Severely Behind
Profitability Improvements
59
-6%
-4%-2%
0%
2%4%
6%
8%10%
12%
14%16%
18%
20%22%
24%
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
2004
2005
2006
2007
2008
09:H
1
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute
Strength of Recent Hard Marketsby NWP Growth
1975-78 1984-87 2000-03
59
Net written premiums fell 1.0%
in 2007 (first decline since 1943)
by 1.4% in 2008, and 4.2% in H1 2009, the first 3-
year decline since 1930-33
Shaded areas denote “hard
market” periods
60
Average Commercial Rate Change,All Lines, (1Q:2004 – 3Q:2009)
-3.2
%
-5.9
%
-7.0
%
-9.4
%
-9.7
% -8.2
%
-4.6
% -2.7
%
-3.0
%
-5.3
%
-9.6
%
-11.
3%
-11.
8%
-13.
3% -12.
0%
-13.
5%
-12.
9% -11.
0%
-6.4
% -5.1
%
-4.9
%-5
.8%
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
KRW Effect
-0.1
% Magnitude of price declines is now
shrinking. Reflects shrinking capital,
reduced investment gains, deteriorating
underwriting performance, higher cat losses and costlier
reinsurance
61
Average Workers Comp Rate Change,(1Q:2007 – 3Q:2009)
-11.6%-11.2%-11.9%-12.1%-12.3%
-9.9%
-5.5%-4.6%
-4.0%-4.6%
-9.4%
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%1Q
07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Magnitude of price decline actually
increased in Q3:2009 but is still much
smaller than is 2008
Declining prices eat into premiums above and
beyond recession-induced exposure losses
P/C Investment Performance
Investments are a Principle Source of Declining
Profitability
63
Property/Casualty Insurance Industry Investment Gain:1994- 2009:H11
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$64.0
$31.4
$12.4
$56.9$51.9
$57.9
$0
$10
$20
$30
$40
$50
$60
1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain. *2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.
Investment gains fell by 51% in 2008 due to lower yields, poor equity market
conditions. Falling again in 2009.
63
66
0.04% 0.07% 0.16%0.37%
0.95%
1.46%
2.33%
2.96%3.39%
4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00% 5.19%
4.19%4.16%
0%
1%
2%
3%
4%
5%
6%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
October 2009 Yield CurvePre-Crisis (July 2007)
Treasury Yield Curves: Pre-Crisis (July 2007) vs. Oct. 2009
Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
Stock dividend cuts will further pressure investment income
Treasury Yield Curve is at its most depressed level in at least 45 years. Investment
income is falling as a result.
68
Important Issues & Threats Facing Insurers: 2010 - 2015
Source: Insurance Information Inst.
Long-Term Reduction in Investment Earnings Low interest rates, risk aversion toward equities and many
categories of fixed income securities lock in a multi-year trajectory toward ever lower investment gains
Fed actions in Treasury markets keep yields low Many insurers have not adjusted to this new investment
paradigm of a sustained period of low investment gains Regulators will not readily accept it; Many will reject it Implication 1: Industry must be prepared to operate in
environment with investment earnings accounting for a smaller fraction of profits
Implication 2: Implies underwriting discipline of a magnitude not witnessed in this industry in more than 30 years. Yet to manifest itself.
Lessons from the period 1920-1975 need to be relearned
Capital/Policyholder
Surplus
Shrinkage, but Not Enough to
Trigger Hard Market
71
Policyholder Surplus, 2006:Q4 – 2009:H1
$ Billions
$487.1$496.6
$512.8$521.8
$478.5
$455.6
$437.1
$463.0
$505.0$515.6
$517.9
$380
$400
$420
$440
$460
$480
$500
$520
$540
06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2
Source: ISO, AM Best.
Declines Since 2007:Q3 Peak
08:Q2: -$16.6B (-3.2%) 08:Q3: -$43.3B (-8.3%) 08:Q4: -$66.2B (-12.9%) 09:Q1: -$84.7B (-16.2%)
09:Q2: -$58.8B (-11.2%)
Capacity peaked at $521.8 as of 9/30/07
71
72
Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*
3.3%
9.6%
6.9%
10.9%
16.2%
13.8%
6.2%
0%2%4%6%8%
10%12%14%16%18%
6/3
0/1
989
Hu
rric
an
eH
ug
o
6/3
0/1
992
Hu
rric
an
eA
nd
rew
12/3
1/9
3N
ort
hri
dg
eE
art
hq
uake
6/3
0/0
1S
ep
t. 1
1A
ttacks
6/3
0/0
4F
lori
da
Hu
rric
an
es
6/3
0/0
5H
urr
ican
eK
atr
ina
Fin
an
cia
lC
risis
as o
f3/3
1/0
9**
*Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event. **Date of maximum capital erosion; As of 6/30/09 (latest available) ratio = 11.2%.Source: PCS; Insurance Information Institute.
The financial crisis now ranks as the largest
“capital event” over the past 20+ years
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
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
2004
2005
2006
2007
2008
2009
NWP % changeSurplus % change
*2009 NWP and Surplus figures are % changes for H1:09 vs H1:08Sources: A.M. Best, ISO, Insurance Information Institute
Historically, Hard Markets Follow When Surplus “Growth” is Negative*
Sharp decline in capacity is a necessary but not sufficient
condition for a true hard market
FINANCIAL STRENGTH &
RATINGS Industry Has Weathered
the Storms Well
75
P/C Insurer Impairments,1969-2008
815
12
711
934
913
12
19
916
14
13
36
49
31 3
450
48
55
60
58
41
29
16
12
31
18 19
49 50
47
35
18
14 15
75
0
10
20
30
40
50
60
70
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
The number of impairments varies significantly over the p/c insurance cycle,
with peaks occurring well into hard markets
Source: A.M. Best; Insurance Information Institute
79
Reasons for US P/C Insurer Impairments, 1969-2008
Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008
Deficient loss reserves and inadequate
pricing are the leading cause of
insurer impairments,
underscoring the importance of
discipline. Investment
catastrophe losses play a much smaller role.
Reinsurance Failure3.7%
Rapid Growth14.3%
Misc.9.1%
Affiliate Impairment
7.9%
Sig. Change in Business
4.2%
Deficient Loss
Reserves/In-adequate Pricing38.1%
Investment Problems
7.0%
Alleged Fraud8.1%
Catastrophe Losses7.6%
Workers Compensation
Review:
Underwriting andOperating Performance
102
97
111 110107
103
93
101 101100 101
107
115118
122
80
85
90
95
100
105
110
115
120
125
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008p
Percent
p Preliminary. Sources: Calendar Years 1994-2007, A.M. Best Aggregates & Averages; Calendar Year 2008p NCCIIncludes dividends to policyholders
Workers Comp Combined Ratios, (Calendar Year, Private Carriers) 1994-2008p
WC insurers lopped 29 points off the combined ratio in just 5 years, but soft market is taking toll
Workers CompCost Drivers
Medical/Indemnity Frequency & Severity
Trends
Workers Compensation Medical Claim Trends
$8.5 $8.6$8.4$9.2$9.6$10.3
$11.4$12.3
$13.6$14.6
$16.6$18.0
$19.2$20.3
$21.8$23.1
$24.5$26.0
$5
$10
$15
$20
$25
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08p
Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002-2007: +6.7%
Accident Year
MedicalClaim Cost ($000s)
2008p: Preliminary based on data valued as of 12/31/20081991-2007: Based on data through 12/31/2007, developed to ultimateBased on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies
Workers Comp Medical Claims Costs Continue to Climb
Cumulative Change = 210%(1993-2008p)
4.5%3.5%
2.8% 3.2%3.5%4.1%
4.6%4.7%4.0%4.4% 4.2%4.0%4.4%
3.7%
5.1%
7.4%
10.1%
8.3%
10.6%
7.3%
13.6%
7.6%7.2%6.2%
9.2%8.6%
5.8%6.0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Change in Medical CPIChange Med Cost per Lost Time Claim
WC Medical Severity Rising at Double the Medical CPI Rate
Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
Average annual increase in WC medical severity from
1995 through 2008 was more than twice the medical CPI
rate (8.1% vs. 4.0%)
Med Costs Share of Total Costs is Increasing Steadily
Indemnity54%
Medical46%
Source: NCCI (based on states where NCCI provides ratemaking services).
Indemnity47% Medical
53%
Indemnity42%
Medical58%1988
1998
2008p
Indemnity Claim Cost Trends
$10.0
$9.7
$9.4
$9.9
$10.1
$10.7
$11.5
$12.5
$13.8
$15.2
$16.6
$17.1
$17.9
$21.2
$20.2
$19.5
$18.1
$18.6
+3.4%
+1.0% -3.1% -2.8% +4.9%+1.7%+5.9%
+7.7%+9.0%
+10.1%
+10.1%
+8.9%+2.3%+4.5%+1.1%
+3.0%+4.8%
5
7
9
11
13
15
17
19
21
23
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008p
IndemnityClaim Cost ($ 000s)
Annual Change 1991–1993: -1.7%Annual Change 1994–2001: +7.3%Annual Change 2002–2007: +3.4%
2008p: Preliminary based on data valued as of 12/31/20081991–2007: Based on data through 12/31/2007, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policies
Workers Compensation IndemnityClaim Costs Continue to Grow
Lost-Time Claims
Accident Year
+5.0
3.0%
4.3%5.0%
4.4%5.2%
4.4%
2.4%2.0%
2.4%2.8%
3.4%3.3%3.7%
5.9%
7.7%
9.0%
10.1%
4.4%
1.3%
3.0%
4.8%
3.4%
5.0%
3.0%3.1%
9.2%10.1%
1.7%
0%
2%
4%
6%
8%
10%
12%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Change in CPS Wage Change in Indemnity Cost per Lost-Time Claim
WC Indemnity Severity vs. Wage Inflation
2008p: Preliminary based on data valued as of 12/31/2007; 1991-2007: Based on data through 12/31/2006, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. CPS = Current Population Survey.Source: NCCI
WC indemnity severity is once again outpacing
wage inflation
Premium Growth &Pricing Environment
31.0 31.3 29.8 30.5 29.126.3 25.2 24.2 23.3 22.3
25.0 26.129.3 31.1
34.7 34.037.737.8 38.7
31.0 31.329.8 30.5
29.126.3
28.226.9 25.9 25.0
28.5
32.0
37.5
42.0
46.244.2
39.3
47.546.3
0.0
10.0
20.0
30.0
40.0
50.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 20072008p
State Funds ($ B)Private Carriers ($ B)
Total Workers Compensation Premium Declined Again in 2008
Net Written Premium
Calendar Year
$ Billions
p Preliminary
Source: 1990–2007 Private Carriers, A.M. Best Aggregates & Averages; 2008p, NCCI 1996–2008p State Funds: AZ, CA, CO, HI, ID, KY, LA, MO, MT, NM, OR, RI, TX, UT Annual Statements State Funds available for 1996 and subsequent
* States approved through 4/17/2009Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by the applicable rating organization
History of Average WC Bureau Rate/Loss Cost Level Changes
12.1
7.4
10.0
2.9 3.5
1.2
4.9
6.6
-1.7
-6.6
-3.1
-6.0
-2.6
-5.4
-8.0
-6.0
-3.2
-6.4-5.1
-5.7
-10
-5
0
5
10
15
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008* 2009*
Cumulative1990-1993
+36.3%
Cumulative 1994-1999
-27.8%
Percent
Cumulative 2000-2003
+17.1%
Cumulative 2004-2009
-25.2%
Calendar Year
EMERGING TRENDS & CHALLENGES IN WORKERS COMP
#1Emerging (Mega) Trend
The Obesity Epidemic
106
In Every State (except Colorado), Over 20% of the Adult Population is Obese
Source: Centers for Disease Control and Prevention, Behavioral Risk Factor Surveillance System www.cdc.gov/Features/dsObesity
107
The Most Obese Workers File Twice as ManyWC Claims as Healthy-Weight Workers
40.9760.17
75.21
14.19
183.63
117.61
5.53 5.807.05
10.80
8.81
11.65
0
20
40
60
80
100
120
140
160
180
200
BMI <18.5(Underweight)
18.5-24.9(HealthyWeight)
25-29.9(Overweight)
30-34.9 (ObeseClass I)
35-39.9 (ObeseClass II)
40+ (ObeseClass III)
Los
t W
ork
day
s p
er 1
00 F
TE
s
0
2
4
6
8
10
12
14
Cla
ims
per
100
FT
Es
Lost Workdays Claims
Source: Ostbye, T., et al, “Obesity and Workers Compensation,” Archives of Internal Medicine, April 23, 2007.
The most obese have 13 times more lost workdays
than healthy weight workers
108
WC Medical Claims Costs are 6.8x Higher for the Most Obese Workers
$7,1
09
$13,
338
$19,
661
$3,9
24
$5,3
96 $13,
569
$34,
293
$7,5
03
$51,
091
$23,
373
$23,
633
$59,
178
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
BMI <18.5(Underweight)
18.5-24.9(Healthy Weight)
25-29.9(Overweight)
30-34.9 (ObeseClass I)
35-39.9 (ObeseClass II)
40+ (ObeseClass II)
Medical Claims Costs Indemnity Claims Costs
Source: Ostbye, T., et al, “Obesity and Workers Compensation,” Archives of Internal Medicine, April 23, 2007.
Indemnity costs are 11 times higher for the most obese workers than for healthy-
weight workers.
#2Emerging (Mega)Trend
The Aging Workforce
110Source: US Bureau of Labor Statistics, 2004.
40.5
39.0
35.8
34.335.2
36.6
38.0
39.440.6 40.7
30
32
34
36
38
40
42
1962 1970 1975 1980 1985 1990 1995 2000 2005 2008Year
U.S. Workforce is Aging: Significant Implications for Workers Comp
Median Age of U.S. Worker
The median age of US workers as the Baby Boomer begin to retire is about 41 years. Immigration will hold this
number down and may even lower the figure.
Older and less healthy workforce
111
Fatal Work Injury RatesClimb Sharply With Age
5.04.2
3.73.32.72.8
0.9
11.2
0
2
4
6
8
10
12
16-17 18-19 20-24 25-34 35-44 45-54 55-64 65+
Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.
The fatality rate for workers 65 and older is triple that of workers age 35-44. The workplace of the future will have to be completely redesigned to accommodate
the surge in older workers.
Fatal Work Injuries per 100,000 Workers (2006)
112
Older Workers Have More Lost Time from Work Due to Injury or Illness
1211
10
8
6
44
0
2
4
6
8
10
12
14
16-19 20-24 25-34 35-44 45-54 55-64 65+
Source: US Bureau of Labor Statistics, US Department of Labor
There will be more lost time as the workforce ages
in the future
Median Days Away From Work (2005)
Age 65+ workers median lost time is 50% greater than workers age 35-44
#3Emerging (Mega) Trend
Distracting Driving/ Equipment Operation
618665 651
691734
810719 696
822770
827 814
1,0741,0801,036
927860
643559 567 540 542
1,242
1,3431,3461,3461,393
1,4421,365
1,4091,3731,3531,398
1,4371,356
1,249
721706
716600 632
609677
651714
1,044
1,496
1,158
400
600
800
1000
1200
1400
1600
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Falls Homicides Highway Incidents
Four Most Frequent Work-Related Fatal Events, 1992-2007
Highway incidents are the leading cause of occupational death and are
down due to recession, but distracted driving will likely become
more of a problem
Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.114
Distracted Driving/Equipment Operation is a Growing in General
and Therefore for WC Too
Source: Nationwide Insurance, 2008 Driving While Distracted Survey; Insurance Information Institute.
Q. Do you ever do other tasks like talk on cell phones, eat or
drink while driving?
No27.6%
Yes72.4%
Nearly 3/4 of drivers
admitted to distracted
driving. Also occurs in
occupational settings
Q. Have you ever been hit or nearly hit by someone talking on a cell phone?
No53.1%
Yes45.4%
Don't Know1.5%
Nearly half have been hit or nearly hit
Distracted driving and equipment operation while working is a major and rapidly growing problem but
is largely unquantified115
116
Who’s Driving While Distracted? Everyone!
65.3%
80.3%78.4%
59.8%
50%
55%
60%
65%
70%
75%
80%
85%
Teens (16-17) Gen Y (18-30) Gen X (31-44) Boomers (45-61)
Examples of Occupational Settings Involving Actual
Distraction IncidentsAircraft
Taxi DriversTruck Drivers
Crane OperatorsFarm Equipment
Landscaping EquipmentHeavy Equipment Operators
Paving EquipmentWatercraft & Aircraft
Fork LiftTrains/Mass Transit
Median Days Away From Work (2005)
Source: Nationwide Insurance, 2008 Driving While Distracted Survey; Insurance Information Institute.
Insurance Information Institute On-Line
Download at: www.iii.org/presentations