overview and outlook for the p/c insurance industry...overview and outlook for the p/c insurance...
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Overview and Outlook for the P/C Insurance Industry:
Focus on Lawyers’ Professional Liability Market and Tort Issues
Missoula, MT July 25, 2013
Robert P. Hartwig, Ph.D., CPCU, President & Economist
Insurance Information Institute 110 William Street New York, NY 10038
Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org
2
Presentation Outline
P/C Insurance Market Overview
Where is the market today?
Where is it headed?
Market drivers
Performance by Segment
Underwriting
Growth
Lawyer’s Professional Liability Market Overview
Tort System Update
Q&A
3
P/C Insurance Industry Financial Overview
Profit Recovery in Underway After High CAT Losses in
2011 and 2012
3
P/C Net Income After Taxes 1991–2013:Q1 ($ Millions)
2005 ROE*= 9.6%
2006 ROE = 12.7%
2007 ROE = 10.9%
2008 ROE = 0.1%
2009 ROE = 5.0%
2010 ROE = 6.6%
2011 ROAS1 = 3.5%
2012 ROAS1 = 5.9%
2013:Q1 ROAS1 = 9.6%
•ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 9.7% ROAS in 2013:Q1, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.
Sources: A.M. Best, ISO, Insurance Information Institute
$1
4,1
78
$5
,84
0
$1
9,3
16
$1
0,8
70
$2
0,5
98
$2
4,4
04 $
36
,81
9
$3
0,7
73
$2
1,8
65
$3
,04
6
$3
0,0
29
$6
2,4
96
$3
,04
3
$3
5,2
04
$1
9,4
56
$3
3,5
22
$1
4,3
94
$2
8,6
72
-$6,970
$6
5,7
77
$4
4,1
55
$2
0,5
59
$3
8,5
01
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13:Q1
2012:Q1 ROAS
was 7.2%
Net income is up substantially (+40.9%) from
2012:Q1 $10.2B
-5%
0%
5%
10%
15%
20%
25%
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
:Q1
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2013:Q1*
*Profitability = P/C insurer ROEs. 2011-13 figures are estimates based on ROAS data. Note: Data for 2008-2013 exclude
mortgage and financial guaranty insurers.
Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
1977:19.0% 1987:17.3%
1997:11.6%
2006:12.7%
1984: 1.8% 1992: 4.5% 2001: -1.2%
9 Years
2012:
5.9%
History suggests next ROE
peak will be in 2016-2017
ROE
1975: 2.4%
2013:Q1 9.7%
A 100 Combined Ratio Isn’t What It Once Was: Investment Impact on ROEs
Combined Ratio / ROE
* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012 combined ratio including M&FG insurers is 103.2, 2011 combined ratio including M&FG insurers is 108.1, ROAS = 3.5%.
Source: Insurance Information Institute from A.M. Best and ISO data.
97.5
100.6 100.1 100.8
92.7
101.299.5
101.0
94.8
102.4
106.5
95.79.7%
6.2%4.7%
7.9%7.4%
4.3%
9.6%
15.9%
14.3%
12.7% 10.9%
8.8%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013:Q1
0%
3%
6%
9%
12%
15%
18%
Combined Ratio ROE*
Combined Ratios Must Be Lower in Today’s Depressed Investment Environment to Generate Risk Appropriate ROEs
A combined ratio of about 100 generates an ROE of ~7.0% in 2012, ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Catastrophes and lower investment
income pulled down ROE in 2012
UNDERWRITING
7
Underwriting Losses in 2011 and 2012 Were Elevated by High Catastrophe Losses
7
8
P/C Insurance Industry Combined Ratio, 2001–2013:Q1*
* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2.
Sources: A.M. Best, ISO.
95.7
99.3100.8
106.3
102.4
94.8
101.0
92.6
100.898.4
100.1
107.5
115.8
90
100
110
120
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
:Q1
Best Combined Ratio Since 1949 (87.6)
As Recently as 2001, Insurers Paid Out
Nearly $1.16 for Every $1 in Earned Premiums
Relatively Low CAT Losses, Reserve Releases
Heavy Use of Reinsurance Lowered Net
Losses
Relatively Low CAT Losses, Reserve Releases
Avg. CAT Losses,
More Reserve Releases
Higher CAT
Losses, Shrinking Reserve
Releases, Toll of Soft
Market
Cyclical Deterioration
Lower CAT
Losses Before Sandy
Underwriting Gain (Loss) 1975–2013:Q1*
* Includes mortgage and financial guaranty insurers in all years.
Sources: A.M. Best, ISO; Insurance Information Institute.
Large Underwriting Losses Are NOT Sustainable in Current Investment Environment
-$55
-$45
-$35
-$25
-$15
-$5
$5
$15
$25
$35
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1213:Q1
Cumulative underwriting deficit from 1975 through
2012 is $510B
($ Billions) Underwriting
profit in 2013:Q1
totaled $4.6B
High cat losses in 2011 led to the highest
underwriting loss since 2002
10
2
(2)
(8)
(3)
(7)
(10)(10)
(4)
(0)
11
24
14
119
(5)
(9)
(13)(12)
(10)
(14)(12)
(10)(7) (7)
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
$25
$309
2
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
E
14
E
15
E
Pri
or
Yr.
Re
se
rve
Re
lea
se
($
B)
-6
-4
-2
0
2
4
6
8 Imp
ac
t on
Co
mb
ine
d R
atio
(Po
ints
)
Prior Yr. ReserveDevelopment ($B)
Impact onCombined Ratio(Points)
P/C Reserve Development, 1992–2015E
Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance.
Sources: A.M. Best, ISO, Barclays Research (estimates).
11
Number of Years with Underwriting Profits by Decade, 1920s–2010s
0 0
3
0
5
4
8
10
7
6
0
2
4
6
8
10
12
1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s* 2010s**
* 2009 combined ratio excl. mort. and finl. guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an u/w profit.
**Data for the 2010s includes 2010 through 2012.
Note: Data for 1920–1934 based on stock companies only.
Sources: Insurance Information Institute research from A.M. Best Data.
Number of Years with Underwriting Profits
Underwriting Profits Were Common Before the 1980s (40 of the 60 Years Before 1980 Had Combined Ratios Below 100) –
But Then They Vanished. Not a Single Underwriting Profit Was Recorded in the 25 Years from 1979 Through 2003
11
Financial Strength & Underwriting
12
Cyclical Pattern is P-C Impairment History is Directly Tied to
Underwriting, Reserving & Pricing
12
P/C Insurer Impairments, 1969–2012 8
15
12
71
19
34
91
31
21
99
16
14
13
36
49
31 3
45
04
85
56
05
84
12
91
61
23
11
8 19
49 50
47
35
18
14 15 16 1
9 21
34
18
5
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
09
10
11
12
Source: A.M. Best Special Report “1969-2011 Impairment Review,” June 2012 and March 6, 2013 update; Insurance Info. Institute.
The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets
13
Impairments among P/C insurers remain infrequent
14
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2011
90
95
100
105
110
115
1206
97
07
17
27
37
47
57
67
77
87
98
08
18
28
38
48
58
68
78
88
99
09
19
29
39
49
59
69
79
89
90
00
10
20
30
40
50
60
70
80
91
01
1
Co
mb
ine
d R
ati
o
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Imp
airm
en
t Ra
te
Combined Ratio after Div P/C Impairment Frequency
Source: A.M. Best; Insurance Information Institute
2011 impairment rate was 0.91%, up from 0.67% in 2010; the rate is slightly higher than the 0.82% average since 1969
Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007; Recent Increase Was Associated
Primarily With Mortgage and Financial Guaranty Insurers and Not Representative of the Industry Overall
15
Reasons for US P/C Insurer Impairments, 1969–2010
3.6%
4.0%
8.6%
7.3%
7.8%
7.1%
7.8%13.6%
40.3%
Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.
Historically, Deficient Loss Reserves and Inadequate Pricing Are By Far the Leading Cause of P-C Insurer Impairments.
Investment and Catastrophe Losses Play a Much Smaller Role
Deficient Loss Reserves/ Inadequate Pricing
Reinsurance Failure
Rapid Growth Alleged Fraud
Catastrophe Losses
Affiliate Impairment
Investment Problems (Overstatement of Assets)
Misc.
Sig. Change in Business
16
Top 10 Lines of Business for US P/C Impaired Insurers, 2000–2010
2.0%
4.4%4.8%
6.5%
6.9%
7.7%
8.1%
10.9%
22.2%
26.6%
Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.
Workers Comp and Pvt. Passenger Auto Account for Nearly Half of the Premium Volume of Impaired Insurers Over the Past Decade
Workers Comp
Financial Guaranty
Pvt. Passenger Auto
Homeowners
Commercial Multiperil
Commercial Auto Liability
Other Liability
Med Mal
Surety
Title
17
Performance by Segment
17
10
9.4
11
0.2
11
8.8
10
9.5 1
12
.5
11
0.2
10
7.6
10
4.1
10
9.7
11
0.2
10
2.5 1
05
.4
91
.1
93
.6
10
4.2
98
.9
10
2.1
10
6.7
10
4.9
10
2.1
10
1.4
10
1.3
10
2.0
11
1.1
11
2.3
12
2.3
90
95
100
105
110
115
120
125
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
F
14
F
15
F
Co
mm
erc
ial L
ine
s C
om
bin
ed
Ra
tio
*2007-2012 figures exclude mortgage and financial guaranty segments.
Source: A.M. Best (1990-2011); Conning (2012-2015F) Insurance Information Institute
Commercial Lines Combined Ratio, 1990-2015F*
Commercial lines underwriting
performance is expected to improve as
improvement in pricing environment persists
18
Commercial Auto Combined Ratio: 1993–2015F
11
2.1
11
2.0
11
3.0
11
5.9
10
2.7
95
.2
92
.9
92
.1
92
.4 94
.3 96
.8 99
.4
98
.0
10
4.6
10
7.1
10
1.7
10
0.3
99
.8
11
8.1
11
5.7
11
6.2
80
85
90
95
100
105
110
115
120
125
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12E 13F 14F 15F
Commercial Auto is Expected to Improve as Rate Gains Outpace Any Adverse Frequency and Severity Trends
19
Sources: A.M. Best (1990-2012E);Conning (2012-2015F); Insurance Information Institute.
Commercial Multi-Peril Combined Ratio: 1995–2015F
11
9.0
11
9.8
10
8.5
12
5.0
11
6.2
11
6.1
10
4.9
10
1.9
10
5.5
95
.4
97
.6
94
.2
96
.1
10
2.0
10
0.7
11
6.8
11
3.6
11
5.3 1
22
.4
11
5.0
11
7.0
97
.3
89
.0
97
.7
93
.8
83
.8
89
.8
10
8.4
98
.7 10
2.5
12
0.5
11
6.6
10
2.6
10
2.5
10
2.1
11
3.1
11
5.0 1
21
.0
80
85
90
95
100
105
110
115
120
125
130
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12E 13F 14F 15F
CMP-Liability CMP-Non-Liability
Commercial Multi-Peril Underwriting Performance is Expected to Improve in 2013 Assuming Normal Catastrophe Loss Activity
*2012-2013 figures are A.M. Best estimate/forecast for the combined liability and non-liability components. Same for Conning 2014-
2015F figures. Sources: A.M. Best; Conning; Insurance Information Institute.
20
General Liability Combined Ratio: 2005–2015F
11
2.9
95
.1 99
.0
94
.2
10
1.4
10
4.4
10
5.8
10
8.3
10
7.1 11
0.8
99
.8
80
85
90
95
100
105
110
115
05 06 07 08 09 10 11 12 13F 14F 15F
Commercial General Liability Underwriting Performance Has Been Volatile in Recent Years
Source: Conning Research and Consulting.
21
Inland Marine Combined Ratio: 1999–2015F
101.9
92.8
100.2
83.8
77.379.5
93.3
89.3
86.2
97.796.7
89.7 89.6 89.5
80.882.5
89.9
70
75
80
85
90
95
100
105
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F 14F 15F
Inland Marine is Expected to Remain Among the Most Profitable of All Lines
Sources: A.M. Best (1999-2011); Conning (2012-2015F)
22
Workers Compensation Combined Ratio: 1994–2012P
10
2.0
97
.0 10
0.0
10
1.0
11
2.6
10
8.6
10
5.1
10
2.7
98
.5
10
3.5
10
4.5 1
10
.6 11
5.0
11
5.0
10
9.0
12
1.7
10
7.0
11
5.3
11
8.2
80
85
90
95
100
105
110
115
120
125
130
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Workers Comp Results Began to Improve in 2012. Underwriting Results Deteriorated Markedly from 2007-2010/11 and Were the Worst They Had Been in a Decade.
Sources: A.M. Best (1994-2009); NCCI (2010-2012P) and are for private carriers only; Insurance Information Institute.
23
WC showed a better-than-expected
improvement for private carriers in 2012
Other & Products Liability Combined Ratio: 1991–2013F
11
0.3
10
9.1
11
2.0
12
2.6
12
4.4
11
1.8
11
4.4
11
2.1
96
.3
99
.0
95
.1
10
5.4
10
9.8
10
0.5
10
3.6
10
6.3
12
5.51
32
.8
13
3.2
11
4.5
143.6
12
3.5
11
0.6
80
90
100
110
120
130
140
150
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12E13F
Liability Lines Have Performed Better in the Post-Tort Reform Era (~2005), but There Has
Been Some Deterioration in Recent Years Sources: A.M. Best ; Insurance Information Institute.
24
10
3.7
10
8.0
96
.4 99
.8
10
6.6
10
7.9 1
15
.7
13
0.4 13
6.0
15
4.7
14
2.3
13
7.3
11
0.9
10
0.9
91
84
.3
77
.4 83
.4
80
.6
87
.9 93
.7
93
.5 97
.0 10
2.0
12
7.9
70
80
90
100
110
120
130
140
150
160
170
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
E
13
F
14
F
15
F
Medical Malpractice Combined Ratio vs. All Lines Combined Ratio, 1991-2015F
Source: AM Best (1991-2011); Conning (2012E-2015F) Insurance Information Institute
Med Mal Insurers in 2012 paid out $0.91 in loss and expense for every $1 they
earned in premiums
In 2001, med mal insurers paid out $1.55 for every dollar earned
The dramatic improvement over the past decade has restored med
mal’s viability, though some deterioration is anticipated
25
Lawyer’s Professional Liability Operating Environment
26
Operating Performance Has Been Quite Variable Over Time
26
Lawyers’ Professional Liability Claims Frequency Trends
Source: Ames & Gough, Lawyers’ Professional Liability Claims Trends: 2013.
Claim frequency increased in 2012
The magnitude of claim frequency
growth was fairly high
Estimated Year-Over-Year Percentage Increase in Large Claims (Combined Reserve Exceeding $500K)
Source: Ames & Gough, Lawyers’ Professional Liability Claims Trends: 2013.
Practice Areas Generating Largest Number of Lawyers’ Professional Liability Claims*
Source: Ames & Gough, Lawyers’ Professional Liability Claims Trends: 2013.
Real Estate, followed by Corporate
Business Organization & Securities and
Trusts and Estates generated the largest number of LPL claims
First and Second Most Frequently Alleged Malpractice Errors
Source: Ames & Gough, Lawyers’ Professional Liability Claims Trends: 2013.
Conflict of Interest
remained the most
commonly alleged
malpractice error in 2013
Reported LPL Claim Frequency per $1 Million of Gross Earned Premium
19
.4
19
.1
19
.0
16
.7
14
.2 15
.9
15
.3
15
.7
15
.3
15
.7
13
.114
.9
13
.0
12
.2
0
5
10
15
20
25
99 00 01 02 03 04 05 06 07 08 09 10 11 12
Sources: Milliman, P&C Perspectives, May 2013.
31
Frequency has increased since the “Great Recession”
Aggregate Calendar-Year Operating Results for LPL Specialty Writers
Sources: Milliman, P&C Perspectives, May 2013, compiled from SNL Financial data.
Combined Ratio
improved in 2012 but remains elevated
Investment Income Ratio is shrinking due to low
interest rates
Breakdown of Aggregate Combined Ratio by Calendar Year for LPL Specialty Writers
Sources: Milliman, P&C Perspectives, May 2013, compiled from SNL Financial data.
Combined Ratio have shown volatility over the past 17 years
(1996-2012, inclusive)
SURPLUS/CAPITAL/CAPACITY
34
How Will Large Catastrophe Losses Impact Capacity?
34
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
$550
$600
$650
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13*
US Policyholder Surplus: 1975–2013*
* As of 3/31/13.
Source: A.M. Best, ISO, Insurance Information Institute.
“Surplus” is a measure of underwriting capacity. It is
analogous to “Owners Equity” or “Net Worth” in non-
insurance organizations
($ Billions)
The Premium-to-Surplus Ratio Stood at $0.77:$1 as of 3/31/13, A Near Record Low (at Least in Recent History)*
Surplus as of 3/31/13 was a record $607.7, up 3.6% from $586.9 of 12/31/12, and up 39.0% ($170.6B) from the crisis trough of $437.1B at 3/31/09. Pre-
crisis peak was $521.8 as of 9/30/07. Surplus as of 3/31/13 was 16.5% above 2007 peak.
36
Policyholder Surplus, 2006:Q4–2013:Q1
Sources: ISO, A.M .Best.
($ Billions)
$487.1$496.6
$512.8$521.8
$478.5
$455.6
$437.1
$463.0
$490.8
$511.5
$540.7
$530.5
$544.8
$559.2 $559.1
$538.6
$550.3
$567.8
$583.5$586.9
$607.7
$570.7$566.5
$505.0
$515.6$517.9
$420
$440
$460
$480
$500
$520
$540
$560
$580
$600
$620
06:Q407:Q107:Q207:Q307:Q408:Q108:Q208:Q308:Q409:Q109:Q209:Q309:Q410:Q110:Q210:Q310:Q411:Q111:Q211:Q311:Q412:Q112:Q212:Q312:Q413:Q1
2007:Q3 Pre-Crisis Peak
Surplus as of 3/31/13 stood at a record high $607.7B
*Includes $22.5B of paid-in capital
from a holding company parent for
one insurer’s investment in a non-
insurance business in early 2010.
The Industry now has $1 of surplus for every $0.80
of NPW, close to the strongest claims-paying
status in its history.
Drop due to near-record 2011 CAT losses
The P/C Insurance Industry Both Entered and Emerged from the 2012 Hurricane
Season Very Strong Financially.
37
U.S. INSURANCE MERGERS AND ACQUISITIONS, 2002-2012 (1)
$9,704
$59,925
$14,878
$50,793
$43,022
$50,417
$31,435
$14,373
$46,509
$54,724
$43,152
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Tra
ns
ac
tio
n v
alu
es
0
100
200
300
400
500
600
Nu
mb
er o
f tran
sa
ctio
ns
($ Millions)
(1) Includes transactions where a U.S. company was the acquirer and/or the target.
Source: Conning proprietary database.
M&A activity has returned to its pre-crisis levels.
38
REINSURANCE MARKET CONDITIONS
Capacity Has Recovered from the Effects of High
Global Catastrophes Losses
38
Change in Global Reinsurer Capital
Reinsurance Capital Is at a Record High
Source: Reinsurance Association of America from company reports and Aon Benfield Analytics.
60
80
100
120
140
160
180
200
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1Q13
US
D b
n
Soft market
Hard market
Hard market softening
Crisis
Excess capital
Long-Term Evolution of Shareholders’ Funds for the Guy Carpenter Global Reinsurance Composite
Source: Guy Carpenter
RENEWED PRICING DISCIPLINE
41
Evidence of a Broad and Sustained Shift in Pricing
41
42
-5%
0%
5%
10%
15%
20%
25%
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13:Q
1
Net Premium Growth: Annual Change, 1971—2013:Q1
(Percent)
1975-78 1984-87 2000-03
Shaded areas denote “hard market” periods Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
Net Written Premiums Fell 0.7% in 2007 (First Decline
Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.
2013:Q1 = 4.1%
2012 growth was +4.3%
43
P/C Net Premiums Written: % Change, Quarter vs. Year-Prior Quarter
Sources: ISO, Insurance Information Institute.
Sustained Growth in Written Premiums (vs. the same quarter, prior year) Will Continue through 2013
10
.2%
15
.1%
16
.8%
16
.7%
12
.5%
10
.1%
9.7
%7
.8%
7.2
%5
.6%
2.9
% 5.5
%-4
.6%
-4.1
%-5
.8%
-1.6
%1
0.3
%1
0.2
% 13
.4%
6.6
%-1
.6%
2.1
%0
.0%
-1.9
%0
.5%
-1.8
%-0
.7%
-4.4
%-3
.7%
-5.3
%-5
.2%
-1.4
%-1
.3%
1.3
%2
.3%
1.7
% 3.5
%1
.6% 4
.1%
3.8
%3
.0%
4.2
%5
.1%
4.8
%4
.1%
-10%
-5%
0%
5%
10%
15%
20%
2002:Q
1
2002:Q
2
2002:Q
3
2002:Q
4
2003:Q
1
2003:Q
2
2003:Q
3
2003:Q
4
2004:Q
1
2004:Q
2
2004:Q
3
2004:Q
4
2005:Q
1
2005:Q
2
2005:Q
3
2005:Q
4
2006:Q
1
2006:Q
2
2006:Q
3
2006:Q
4
2007:Q
1
2007:Q
2
2007:Q
3
2007:Q
4
2008:Q
1
2008:Q
2
2008:Q
3
2008:Q
4
2009:Q
1
2009:Q
2
2009:Q
3
2009:Q
4
2010:Q
1
2010:Q
2
2010:Q
3
2010:Q
4
2011:Q
1
2011:Q
2
2011:Q
3
2011:Q
4
2012:Q
1
2012:Q
2
2012:Q
3
2012:Q
4
2013:Q
1
Premium growth in Q1 2013 was up 4.1% over Q1 2012, marking the
12th consecutive quarter of growth
44
Average Commercial Rate Change, All Lines, (1Q:2004–2Q:2013)
-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%
-5.6
%-5
.3%
-6.4
%-5
.2%
-5.4
% -2.9
%
2.7
% 4.4
%4
.3%
3.9
%5
.0%
5.2
%4
.3%
-0.1
% 0.9
%
-0.1
%
-16%
-11%
-6%
-1%
4%
9%
1Q
04
2Q
04
3Q
04
4Q
04
1Q
05
2Q
05
3Q
05
4Q
05
1Q
06
2Q
06
3Q
06
4Q
06
1Q
07
2Q
07
3Q
07
4Q
07
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially. Source: Council of Insurance Agents & Brokers; Insurance Information Institute
KRW Effect
Pricing as of Q2:2013 was positive for the89th consecutive
quarter. Gains are likely to continue through 2013.
(Percent)
Q2 2011 marked the last of 30th
consecutive quarter of price declines
45
Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2013:Q1
Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute. Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Percentage Change (%)
Pricing turned positive in Q3:2011, the first increase in
nearly 8 years; Q1:2013 renewals were up 5.2%, the largest increase since late
2003; Some insurers posted stronger numbers.
KRW : No Lasting Impact
Pricing Turned Negative in Early
2004 and Remained that
way for 7 ½ years
Peak = 2001:Q4 +28.5%
Trough = 2007:Q3 -13.6%
46
Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2013:Q1
Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute. Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Despite 8 consecutive quarters of gains (Q4:2012 = 5.0%),
pricing today is where is was in mid-2001 (pre-9/11), suggesting
additional rate need going forward, esp. in light of record
low interest rates
1999:Q4 = 100
47
Change in Commercial Rate Renewals, by Line: 2013:Q2
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Major Commercial Lines Renewed Uniformly Upward in Q2:2013 for the 8th Consecutive Quarter; Property Lines & Workers Comp Leading the Way; Cat
Losses and Low Interest Rates Provide Momentum Going Forward
Percentage Change (%)
5.4%5.9% 5.9%
8.3%
1.1%
3.5% 3.6% 3.7%
4.6% 4.5%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
Su
rety
Ge
ne
ral
Lia
bili
ty
Bu
sin
ess
Inte
rru
ptio
n
Um
bre
lla
Co
mm
erc
ial
Au
to
Co
nstr
uctio
n
EP
L
D&
O
Co
mm
erc
ial
Pro
pe
rty
Wo
rke
rs
Co
mp
Workers Comp rate increases are large than any other line, followed
by Property lines
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
48
Growth Analysis by State and Business Segment
Premium Growth Rates Vary Tremendously by State
48
49
Direct Premiums Written: Total P/C Percent Change by State, 2007-2012*
58
.4
25
.4
24
.5
21
.0
19
.2
17
.6
16
.3
13
.2
13
.2
12
.4
9.9
9.2
9.2
8.5
8.0
6.2
5.8
5.2
4.5
4.4
4.3
4.3
4.2
4.0
3.8
3.6
0
10
20
30
40
50
60
70
ND
SD
OK
NE IA
KS
VT
AK
TX
WY
MN
AR
TN IN W
I
KY
MT
OH LA
VA
NJ
MI
SC
CO
MO
NM
Pe
ce
nt
ch
an
ge
(%
)
*Data are preliminary as of 5/1/13 and do not yet fully reflect the impact of state-run pools and plans.
Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 States
Montana was a growth leader over the past 5 years with
premiums written expanding by 5.8% compared to 2.1% for the
US overall
50
Direct Premiums Written: Total P/C Percent Change by State, 2007-2012*
3.6
3.1
3.0
2.9
2.7
2.2
2.1
2.1
2.0
1.8
1.1
0.0
-0.1
-0.3
-0.7
-0.9
-2.8
-5.6
-6.0
-7.2
-7.2
-9.3
-10
.1
-11
.2
-12
.5
-17
.3
-20
-15
-10
-5
0
5
CT
MS
NC AL
MD
PA
U.S
.
MA IL
WA
GA
UT
NH RI
ID
ME
NY
FL
CA
DC
WV HI
AZ
OR
DE
NV
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
*Data are preliminary as of 5/1/13 and do not yet fully reflect the impact of state-run pools and plans.
Sources: SNL Financial LC.; Insurance Information Institute.
The Strength of the Economy Will Influence P/C Insurer &
Policyholder Growth Opportunities
51
Growth Will Expand Insurer Exposure
Base Across Most Lines; Impacts on
Loss Experience 51
52
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.
Source: US Department of Commerce, Blue Economic Indicators 7/13; Insurance Information Institute.
2.7
%0
.5%
3.6
%3
.0%
1.7
%-1
.8%
1.3
%-3
.7%
-5.3
%-0
.3%
1.4
%5
.0%
2.3
%2
.2%
2.6
%2
.4%
0.1
%2
.5%
1.3
%4
.1%
2.0
%1
.3% 3
.1%
1.8
%1
.7%
2.3
%2
.7%
2.7
%2
.8%
2.8
%2
.9%
0.4
%
-8.9%
4.1
%1
.1%
1.8
%2
.5% 3.6
%3
.1%
-9%
-7%
-5%
-3%
-1%
1%
3%
5%
7%
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
11
:1Q
11
:2Q
11
:3Q
11
:4Q
12
:1Q
12
:2Q
12
:3Q
12
:4Q
13
:1Q
13
:2Q
13
:3Q
13
:4Q
14
:1Q
14
:2Q
14
:3Q
14
:4Q
Demand for Insurance Continues To Be Impacted by Sluggish Economic Conditions, but the Benefits of Even Slow Growth Will Compound and
Gradually Benefit the Economy Broadly
Real GDP Growth (%)
Recession began in Dec. 2007. Economic toll of credit crunch, housing slump, labor market contraction
was severe
The Q4:2008 decline was the steepest since the Q1:1982
drop of 6.8%
2013 is expected to see uneven growth, then gradually accelerate throughout the year
and into 2014
53
Real GDP by State Percent Change, 2012: Highest 25 States
13
.4
4.8
3.9
3.6
3.5
3.5
3.4
3.3
3.3
3.3
2.7
2.7
2.6
2.4
2.4
2.4
2.4
2.2
2.2
2.2
2.2
2.1
2.1
2.1
2.1
2.0
0
2
4
6
8
10
12
14
ND TX OR WA CA MN UT IN TN WV NC SC AZ FL IA MD MS MA MI OH US CO GA MT OK MO
Pe
rce
nt
Ch
an
ge
(%
)
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
North Dakota was the economic growth juggernaut of the US
in 2012—by far
Only 10 states experienced growth in excess of 3%, which is what we would see nationally in
a more typical recovery
54
1.9
1.7
1.6
1.5
1.5
1.5
1.5
1.4
1.4
1.4
1.3
1.3
1.3
1.2
1.2
1.1
1.1
0.7
0.5
0.5
0.4
0.2
0.2
0.2
0.2
-0.1
-0.4
-0.2
0.00.2
0.4
0.6
0.8
1.0
1.2
1.41.6
1.8
2.0
IL PA HI LA NE NV WI KS KY RI AR NJ NY AL VT AK VA DC ME NH ID DE NM SD WY CT
Pe
rce
nt
Ch
an
ge
(%
)
Real GDP by State Percent Change, 2012:
Lowest 25 States
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
Connecticut was the only state to shrink in 2012
Growth rates in 8 states (and DC) were still below
1% in 2012
74
.47
3.6
73
.67
2.2
73
.6 76
67
.86
8.9
68
.26
7.7 7
1.6 74
.57
4.2 7
7.5
67
.5 69
.8 74
.37
1.5
63
.75
5.7 5
9.5
60
.9 64
.16
9.9
75
.07
5.3
76
.27
6.4 79
.37
3.2
72
.3 74
.38
2.6
82
.77
4.5
73
.8 77
.67
8.6
84
.58
2.7
76
.4
40
45
50
55
60
65
70
75
80
85
90
Ja
n-1
0
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Ju
n-1
0
Ju
l-1
0
Au
g-1
0
Se
p-1
0
Oct-
10
No
v-1
0
De
c-1
0
Ja
n-1
1
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Ju
n-1
1
Ju
l-1
1
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Ja
n-1
2
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Oct-
12
No
v-1
2
De
c-1
2
Ja
n-1
3
Fe
b-1
3
Ma
r-1
3
Ap
r-1
3
Ma
y-1
3
Ju
n-1
3
Consumer Sentiment Survey (1966 = 100)
January 2010 through June 2013
Consumer confidence has been low for years amid high unemployment, falling home prices and other factors adversely impact
consumers, but improved substantially over the past two years
Source: University of Michigan; Insurance Information Institute
Optimism among consumers has remained fairly strong
despite tax hikes, federal budget concerns. May’s reading was
the highest since July 2007
55
56
(Millions of Units)
New Private Housing Starts, 1990-2019F
1.4
8
1.4
7 1.6
2
1.6
4
1.5
7
1.6
0 1.7
1 1.8
5 1.9
6 2.0
7
1.8
0
1.3
6
0.9
1
0.5
5
0.5
9
0.6
1 0.7
8
0.9
9
1.2
2 1.3
5
1.4
4
1.5
0
1.5
1
1.5
0
1.3
51.4
6
1.2
9
1.2
0
1.0
11.1
9
0.3
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F14F15F16F17F18F19F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (7/13 and 3/13); Insurance Information Institute.
Insurers Are Starting to See Meaningful Exposure Growth for the First Time Since 2005 Associated with Home Construction: Construction Risk Exposure,
Surety, Commercial Auto; Potent Driver of Workers Comp Exposure
New home starts plunged 72% from 2005-2009; A net
annual decline of 1.49 million units, lowest since records began
in 1959
Job growth, low inventories of existing homes, low mortgage
rates and demographics are stimulating new home construction
for the first time in years
57
Existing Home Sales and Months of Inventory, 2010-2013*
4.19 4.26
4.66
5.08
5.2
8.3
9.4
5.9
3.0
3.5
4.0
4.5
5.0
5.5
2010 2011 2012 2013*
Ex
isti
ng
Ho
me
Sa
les
0
1
2
3
4
5
6
7
8
9
10
Mo
nth
s o
f Inv
en
tory
(Millions)
*Seasonally adjusted annualized figure for June 2013.
Source: Conning proprietary database.
The number of real estate transactions continue to rise
and inventories are falling
58
Mortgage Interest Rates Will Rise as Expectations Over the Fed’s Tapering of QE3 Persist; Still Low by Historical Standards
3.3
4%
3.4
0%
3.3
8%
3.4
2%
3.5
3%
3.5
3%
3.5
3%
3.5
6%
3.5
1%
3.5
2%
3.6
3%
3.5
4%
3.5
7%
3.5
4%
3.4
3%
3.4
1%
3.4
0%
3.3
5%
3.4
2%
3.5
1%
3.5
9%
3.8
1%
3.9
1%
3.9
8%
3.9
3%
4.4
6%
4.2
9%
4.5
1%
4.3
7%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
03-J
an
10-J
an
17-J
an
24-J
an
31-J
an
07-F
eb
14-F
eb
21-F
eb
28-F
eb
07-M
ar
14-M
ar
21-M
ar
28-M
ar
04-A
pr
11-A
pr
18-A
pr
25-A
pr
02-M
ay
09-M
ay
16-M
ay
23-M
ay
30-M
ay
06-J
un
13-J
un
20-J
un
27-J
un
04-J
ul
11-J
ul
18-J
ul
30-year mortgage rates are up more than 100
basis points since early May
30-Year Mortgages in 2013 Are Rising: What Will Be the Impact on Real Estate?
*Weekly through July 18, 2013.
Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm.; Insurance Information Institutes.
59
Interest Rate on Conventional 30-Year Mortgages: Headed Back Up, 1990–2013*
*Monthly, through July 2013 (as of July 18). Note: Recessions indicated by gray shaded columns.
Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.
0%
2%
4%
6%
8%
10%
12%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Yields on 30-Year mortgages have been below 6% for a five years
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.
Yields on 10-Year U.S. Treasury Notes plunged to all time record lows in early 2013 but are now
rising as the Fed considers tapering its QE program
59
60
Construction Employment, Jan. 2010—June 2013*
*Seasonally adjusted
Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
5,5
81
5,5
22
5,5
42
5,5
54
5,5
27
5,5
12
5,4
97
5,5
19
5,4
99
5,5
01
5,4
97
5,4
68
5,4
35 5
,47
8
5,4
85
5,4
97
5,5
24
5,5
30
5,5
47
5,5
46 5,5
83
5,5
76
5,5
77 5,6
12
5,6
29
5,6
44
5,6
40
5,6
36
5,6
15
5,6
22
5,6
27
5,6
30
5,6
33
5,6
49
5,6
73 5,7
11
5,7
35 5
,78
3
5,7
97
5,7
92
5,7
99
5,8
12
5,400
5,450
5,500
5,550
5,600
5,650
5,700
5,750
5,800
5,850
5,900
Ja
n-1
0
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Ju
n-1
0
Ju
l-1
0
Au
g-1
0S
ep
-10
Oct-
10
No
v-1
0
De
c-1
0
Ja
n-1
1
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1Ju
n-1
1
Ju
l-1
1
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Ja
n-1
22
/30
/2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
Oct-
12
No
v-1
2
De
c-1
2
Ja
n-1
3
2/3
0/2
Ma
r-1
3
Ap
r-1
3
Ma
y-1
3
Ju
n-1
3
Construction employment growth accelerated in the second half of
2012. Continued growth in this key sector is possible through 2013. Construction is a key driver of
workers comp exposure growth.
(Thousands)
61
Commercial & Industrial Loans Outstanding at FDIC-Insured Banks, Quarterly, 2006-2013*
$1
.16
$1
.18
$1
.22
$1
.44
$1
.48
$1
.49
$1
.50
$1
.49
$1
.43
$1
.37
$1
.27
$1
.21
$1
.18
$1
.17
$1
.17
$1
.18
$1
.20
$1
.24
$1
.28 $1
.35
$1
.37
$1
.42
$1
.46
$1
.51
$1
.53
$1
.13
$1
.25
$1
.30
$1
.39
$1.0
$1.1
$1.2
$1.3
$1.4
$1.5
$1.6
06
:Q1
06
:Q3
07
:Q1
07
:Q3
08
:Q1
08
:Q3
09
:Q1
09
:Q3
10
:Q1
10
:Q3
11
:Q1
11
:Q3
12
:Q1
12
:Q3
13
:Q1
Outstanding loan volume has been growing for over two years and (as of year-end 2012) surpassed previous peak levels.
*Latest data as of 6/14/2013. Source: FDIC at http://www2.fdic.gov/qbp/ (Loan Performance spreadsheet); Insurance Information Institute.
$Trillions In nominal dollar terms, this is an
all-time high.
Recession
62
Percent of Non-current Commercial & Industrial Loans Outstanding at FDIC-Insured Banks, Quarterly, 2006-2012:Q4*
0.7
0%
0.7
4%
0.6
4%
0.6
7%
0.8
1%
1.0
7%
1.1
8% 1
.69
% 2.2
5% 2
.80
%
3.5
7%
3.4
3%
3.0
5%
2.8
3%
2.7
3%
2.4
4%
1.8
9%
1.6
5%
1.4
9%
1.2
9%
1.1
7%
1.0
9%
0.9
7%
0.8
7%
0.7
1%
0.6
3%
0.6
2%
0.6
3%
0%
1%
2%
3%
4%
06
:Q1
06
:Q2
06
:Q3
06
:Q4
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
11
:Q1
11
:Q2
11
:Q3
11
:Q4
12
:Q1
12
:Q2
12
:Q3
12
:Q4
Non-current loans (those past due 90 days or more or in nonaccrual status) are back to early-recession levels, fueling bank willingness to lend.
*Latest data as of 3/18/2013. Source: FDIC at http://www2.fdic.gov/qbp/ (Loan Performance spreadsheet); Insurance Information Institute.
Almost back to “normal” levels of noncurrent
industrial & commercial loans
Recession
63
Value of Construction Put in Place, May 2013 vs. May 2012*
-4.7%
4.1%
-4.9%
5.4%
10.6%
23.1%
-0.9%
-10%
-5%
0%
5%
10%
15%
20%
25%
Total
Construction
Total Private
Construction
Residential--
Private
Non-
Residential--
Private
Total Public
Construction
Residential-
Public
Non-
Residential--
Public
Overall Construction Activity is Up, But Growth Is Entirely in the Private Sector as State/Local Government Budget Woes Continue
Growth (%)
Private sector construction activity is up in the
residential segment but down in nonresidential
*seasonally adjusted Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
Private: +10.6% Public: -4.7%
Public sector construction activity remains depressed
64
Value of Private Construction Put in Place, by Segment, May 2013 vs. May 2012*
2.2%
-4.8%
-0.3%-2.8%
-4.8%
-13.7%
-1.5%-3.4%
2.2%
10.6%
23.1%
-0.9%
22.1%
4.8%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
To
tal
Pri
vate
Co
nstr
ucti
on
Resid
en
tial
To
tal
No
nre
sid
en
tial
Lo
dg
ing
Off
ice
Co
mm
erc
ial
Healt
h C
are
Ed
ucati
on
al
Reli
gio
us
Am
usem
en
t &
Rec.
Tra
nsp
ort
ati
on
Co
mm
un
icati
on
Po
wer
Man
ufa
ctu
rin
g
Private Construction Activity is Up in Some Segments, Including the Key Residential Construction Sector, But Weakening in Early 2013
Growth (%) Led by the Residential Construction, Lodging and Office segments, Private sector construction activity is remains mixed after
plunging during the “Great Recession.” Most segments expanded in 2012 but
weakened in early 2013.
*seasonally adjusted Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
65
Value of Public Construction Put in Place, by Segment, May 2013 vs. May 2012*
-1.2%
-10.5%-7.3%
-19.5%
17.5%
-7.3%
2.7%
9.9%
-10.8%
11.3%
-4.7%
4.1%
-4.9%
-25.9% -25.8%-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
To
tal
Pu
bli
c
Co
nstr
ucti
on
Resid
en
tial
To
tal
No
nre
sid
en
tial
Off
ice
Co
mm
erc
ial
Healt
h C
are
Ed
ucati
on
al
Pu
bli
c S
afe
ty
Am
usem
en
t &
Rec.
Tra
nsp
ort
ati
on
Po
wer
Hig
hw
ay &
Str
eet
Sew
ag
e &
Waste
Dis
po
sal
Wate
r S
up
ply
Co
nserv
ati
on
&
Develo
p.
Public Construction Activity is Down in Many Segments as State and Local Budgets Remain Under Stress; Improvement Possible in 2014.
Growth (%)
*seasonally adjusted Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
Public sector construction activity is down substantially in most segments, a situation that will likely persist, dragging
on public entity risk exposures
Transportation and Power projects lead
public sector construction
66
Manufacturing Growth for Selected Sectors, 2013 vs. 2013*
5.1%
-0.8%
7.2%
-0.2%
3.1%
-1.0%-2.1%
2.7%
5.1%
1.1%2.6%
15.2%
-2.8%
0.6%
-4%-2%0%2%4%6%8%
10%12%14%16%18%
All
Ma
nu
factu
rin
g
Du
rab
le M
fg.
Wo
od
Pro
du
cts
Pri
ma
ry
Me
tals
Fa
bri
ca
ted
Me
tals
Ma
ch
ine
ry
Ele
ctr
ica
l
Eq
uip
.
Tra
nsp
ort
atio
n
Eq
uip
.
No
n-D
ura
ble
Mfg
.
Fo
od
Pro
du
cts
Pe
tro
leu
m &
Co
al
Ch
em
ica
l
Pla
stics &
Ru
bb
er
Te
xtile
Pro
du
cts
Manufacturing Is Expanding—Albeit More Slowly—Across a Number of Sectors that Will Contribute to Growth in Insurable Exposures Including: WC,
Commercial Property, Commercial Auto and Many Liability Coverages
Growth (%)
Manufacturing of durable goods was especially
strong in 2012 but weakened in 2013
*Seasonally adjusted; Date are YTD comparing data through May 2013 to the same period in 2012. Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/
Durables: +2.6% Non-Durables: -0.2%
50
.7 52
.7 54
.15
4.6
54
.85
3.5
53
.75
2.8 53
.95
4.6 56 5
7.1 5
9.4
59
.75
6.3
54
.45
3.3
53
.45
3.8
52
.65
2.6
52
.65
2.6
53
.05
6.8
56
.15
5.0
53
.75
4.1
52
.75
2.9 54
.3 55
.25
4.8
54
.85
5.7
55
.25
6.0
53
.15
3.7
52
.254
.4
40
45
50
55
60
65
Ja
n-1
0
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Ju
n-1
0
Ju
l-1
0
Au
g-1
0
Se
p-1
0
Oct-
10
No
v-1
0
De
c-1
0
Ja
n-1
1
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Ju
n-1
1
Ju
l-1
1
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Ja
n-1
2
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
Oct-
12
No
v-1
2
De
c-1
2
Ja
n-1
3
Fe
b-1
3
Ma
r-1
3
Ap
r-1
3
Ma
y-1
3
Ju
n-1
3
ISM Non-Manufacturing Index (Values > 50 Indicate Expansion)
January 2010 through June 2013
Non-manufacturing industries have been expanding and adding jobs. The question is whether this will continue.
Source: Institute for Supply Management at http://www.ism.ws/ismreport/nonmfgrob.cfm; Insurance Information Institute.
Optimism among non-manufacturers is stable
and remains expansionary in 2013
67
68
43
,69
4
48
,12
5
69
,30
0
62
,43
6
64
,00
4
71
,27
7
81
,23
5
82
,44
6
63
,85
3
63
,23
5
64
,85
3
71
,54
9
70
,64
3
62
,30
4
52
,37
4
51
,95
9
53
,54
9
54
,02
7
44
,36
7
37
,88
4
35
,47
2
40
,09
9
38
,54
0
35
,03
7
34
,31
7
39
,20
1
19
,69
5
28
,32
2 43
,54
6
60
,83
7
56
,28
2
47
,80
6
30
,62
0
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
10
11
12
:Q3
Business Bankruptcy Filings, 1980-2012:Q3
Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; Insurance Information Institute
Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline
2011 bankruptcies totaled 47,806, down 15.1% from 56,282 in 2010—the second consecutive year of decline. Business bankruptcies more
than tripled during the financial crisis. Through Q3:2012, filings were down 15.8% vs. Q3:2011
% Change Surrounding Recessions
1980-82 58.6%
1980-87 88.7%
1990-91 10.3%
2000-01 13.0%
2006-09 208.9%*
68
69
Private Sector Business Starts, 1993:Q2 – 2012:Q3*
17
51
86
17
41
80
18
61
92
18
81
87
18
91
86 1
90 1
94
19
11
99 2
04
20
21
95
19
61
96
20
62
06
20
11
92
19
82
06
20
62
03
21
12
05
21
22
00 2
05
20
42
04
19
72
03
20
92
01
19
21
92
19
32
01 20
42
02
21
02
12
20
92
16 2
20 22
32
20
22
02
10
22
12
12
20
42
18
20
92
07
20
71
99
19
11
93
17
2 17
61
69
18
41
75 1
79
18
82
00
18
3 18
7 19
11
97
19
31
91
19
3
20
3
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 09 10 11 12
Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure, But
Are Recovering Slowly * Data through Sep. 30, 2012 are the latest available as of June 21, 2013; Seasonally adjusted.
Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.
(Thousands)
Business starts were up an estimated 2.8% in 2012 to 769,000 following a 2.2% to 748,000 in 2011. Start-ups
could accelerate in 2013.
Business Starts 2006: 872,000 2007: 843,000 2008: 790,000 2009: 697,000 2010: 742,000 2011: 748,000 2012E: 769,000*
69
NFIB Small Business Optimism Index
January 1985 through June 2013
Source: National Federation of Independent Business at http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gif ; Insurance Information Institute. 70
Small business optimism is off crisis lows but still suffering
from economic and regulatory uncertainty. Confidence today is basically where it was when the crisis began in Dec. 2007.
71
12 Industries for the Next 10 Years: Insurance (and Legal) Solutions Needed
Export-Oriented Industries
Health Sciences
Health Care
Energy (Traditional)
Alternative Energy
Petrochemical
Agriculture
Natural Resources
Technology (incl. Biotechnology)
Light Manufacturing
Insourced Manufacturing
Many industries are
poised for growth, though
insurers’ ability to
capitalize on these
industries varies widely
Shipping (Rail, Marine, Trucking, Pipelines)
72
U.S. Insured Catastrophe Loss Update
Catastrophe Losses in Recent Years
Have Been Very High
72
73
$1
2.6
$1
1.0
$3
.8
$1
4.3
$1
1.6
$6
.1
$3
4.7
$7
.6
$1
6.3
$3
3.7
$7
3.4
$1
0.5
$7
.5
$2
9.2
$1
1.5
$1
4.4
$3
3.6
$3
5.0
$7
.9$1
4.0
$4
.8
$8
.0
$3
7.8
$8
.8
$2
6.4
$0
$10
$20
$30
$40
$50
$60
$70
$80
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13*
U.S. Insured Catastrophe Losses
*Through 6/2/13. Includes $2.6B for 2013:Q1 (PCS) and $5.32B for the period 4/1 – 6/2/13 (Aon Benfield Monthly Global Catastrophe Recap).
Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.)
Sources: Property Claims Service/ISO; Insurance Information Institute.
2012 Was the 3rd Highest Year on Record for Insured Losses in U.S. History on an Inflation-Adj. Basis. 2011 Losses Were the 6th Highest. YTD 2013 Running Below
Average But Q3 Is Typically the Costliest Quarter.
2012 was likely the third most expensive year ever for insured
CAT losses
Record tornado losses caused
2011 CAT losses to surge
($ Billions, 2012 Dollars)
73
74
Top 16 Most Costly Disasters in U.S. History
(Insured Losses, 2012 Dollars, $ Billions)
$7.8 $8.7 $9.2$11.1
$13.4
$18.8$23.9 $24.6$25.6
$48.7
$7.5$7.1$6.7$5.6$5.6$4.4
$0
$10
$20
$30
$40
$50
$60
Irene (2011) Jeanne
(2004)
Frances
(2004)
Rita
(2005)
Tornadoes/
T-Storms
(2011)
Tornadoes/
T-Storms
(2011)
Hugo
(1989)
Ivan
(2004)
Charley
(2004)
Wilma
(2005)
Ike
(2008)
Sandy*
(2012)
Northridge
(1994)
9/11 Attack
(2001)
Andrew
(1992)
Katrina
(2005)
Hurricane Sandy could become the 4th or 5th costliest event in US
insurance history
Hurricane Irene became the 12th most expense hurricane
in US history in 2011
Includes Tuscaloosa, AL,
tornado
Includes Joplin, MO, tornado
12 of the 16 Most Expensive Events in US History Have
Occurred Over the Past Decade
*PCS estimate as of 4/12/13.
Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.
Nu
mb
er
Geophysical
(earthquake, tsunami,
volcanic activity)
Climatological
(temperature extremes,
drought, wildfire)
Meteorological (storm)
Hydrological
(flood, mass movement)
Natural Disasters in the United States, 1980 – June 2013* Number of Events (Annual Totals 1980 – June 2013*)
*Through June 30, 2013.
Source: MR NatCatSERVICE 75
41
19
121
3
50
100
150
200
250
300
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
There were 68 natural disaster events in the
first half of 2013
Losses Due to Natural Disasters in the US, 1980–2012 (Overall & Insured Losses)
76
Overall losses (in 2012 values) Insured losses (in 2012 values)
Source: MR NatCatSERVICE
(2012 Dollars, $ Billions) (Overall and Insured Losses)
20
40
60
80
100
120
140
160
180
200
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
2012 was the 2nd or 3rd most expensive year on record for
insured catastrophe losses in the US.
Approximately 57% of the overall cost of
catastrophes in the US was covered by insurance in 2012
2012 Losses
Overall : $101.1B
Insured: $57.9B
As of July 1, 2013
Number of
Events Fatalities
Estimated Overall
Losses (US $m)
Estimated Insured
Losses (US $m)
Severe
Thunderstorm 29 66 10,180 6,325
Winter Storm 13 17 2,434 1,255
Flood 10 9 500 Minor
Earthquake &
Geophysical 5 0 Minor Minor
Tropical Cyclone 1 1 Minor Minor
Wildfire, Heat, &
Drought 11 23 700 365
Totals 68 116 13,814 7,945
77 Source: MR NatCatSERVICE
Natural Disaster Losses in the United States: First Half 2013
U.S. Thunderstorm Loss Trends, 1980 – June 30, 2013
78
Source: Property Claims Service, MR NatCatSERVICE
Average
thunderstorm
losses are up 7 fold
since the early
1980s. The 5- year
running average
loss is up sharply.
Hurricanes get all the headlines,
but thunderstorms are consistent
producers of large scale loss.
2008-2012 are the most expensive
years on record.
1st Half 2013 thunderstorm losses total $6.325B; The
system that included the EF-5 tornado in Moore, OK, accounted for $1.575B
79
Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1992–20111
0.4%
1.6%
3.8%4.7%
6.3%
7.3%
33.9%
42.0%
1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2009 dollars.
2. Excludes snow.
3. Does not include NFIP flood losses
4. Includes wildland fires
5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.
Source: ISO’s Property Claim Services Unit.
Hurricanes & Tropical Storms, $161.3
Fires (4), $6.0
Tornadoes (2), $130.2
Winter Storms, $28.2
Terrorism, $24.4
Geological Events, $18.2
Wind/Hail/Flood (3), $14.8
Other (5), $1.4
Wind losses are by far cause the most catastrophe losses,
even if hurricanes/TS are excluded.
Tornado share of CAT losses is
rising
Insured cat losses from 1992-2011
totaled $384.3B, an average of $19.2B per year or $1.6B
per month
80
Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2012*
Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.
Source: ISO (1960-2011); A.M. Best (2012E) Insurance Information Institute.
0.4
1.2
0.4 0
.8 1.3
0.3 0.4 0.7
1.5
1.0
0.4
0.4 0.7
1.8
1.1
0.6
1.42
.01
.32
.00
.50
.5 0.7
3.0
1.2
2.1
8.8
2.3
5.9
3.3
2.8
1.0
3.6
2.9
1.6
5.4
1.6
3.3
3.3
8.1
2.7
1.6
5.0
2.6
3.4
8.7
9.4
3.6
0.9
0.1
1.1
1.1
0.8
0
1
2
3
4
5
6
7
8
9
10
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
E
The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades
Avg. CAT Loss Component of the Combined Ratio
by Decade
1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 7.20*
Combined Ratio Points Catastrophe losses as a share of all losses reached
a record high in 2012
81
Federal Disaster Declarations Patterns:
1953-2013
81
Disaster Declarations Set New Records in Recent Years
Number of Federal Disaster Declarations, 1953-2013*
13 1
7 18
16
16
7 71
21
22
22
0 25
25
11
11
19
29
17
17
48
46
46
38
30
22 2
54
22
31
52
42
13
42
7 28
23
11
31
38
45
32 3
63
27
54
46
55
04
54
5 49
56
69
48 5
26
37
55
98
19
94
72
9
43
0
20
40
60
80
100
120
53
54
55
56
57
58
59
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
09
10
11
12
13
*Through July 19, 2013.
Source: Federal Emergency Management Administration; http://www.fema.gov/disasters; Insurance Information Institute.
The Number of Federal Disaster Declarations Is Rising and Set New Records in 2010 and 2011. Hurricane Sandy Produced 13 Declarations in 2012/13.
The number of federal disaster declarations set a
new record in 2011, with 99, shattering 2010’s record 81
declarations.
There have been 2,119 federal disaster
declarations since 1953. The average
number of declarations per year is 35 from 1953-2012, though
there few haven’t been recorded since 1995.
29 federal disasters were declared so far in 2013*
82
83
Federal Disasters Declarations by State, 1953 – 2013: Highest 25 States*
86
78
74
67
65
60
57
56
54
54
52
52
51
51
50
49
49
48
47
47
47
46
43
40
39
0
10
20
30
40
50
60
70
80
90
100
TX CA OK NY FL LA AL KY AR MO MS IL TN IA WV KS MN PA NE VA OH WA ND NC IN
Dis
as
ter
De
cla
rati
on
s
Over the past 60 years, Texas has had the highest
number of Federal Disaster
Declarations
*Through July 19, 2013. Includes Puerto Rico and the District of Columbia.
Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.
84
Federal Disasters Declarations by State, 1953 – 2013: Lowest 25 States*
41
40
38
36
36
35
35
32
29
28
26
26
26
24
24
24
23
23
19
19
17
15
15
13
11
11
9
0
10
20
30
40
50
SD ME AK GA WI NJ VT NH MA OR PR HI MI AZ MD NM ID MT CT CO NV DE SC DC UT RI WY
Dis
as
ter
De
cla
rati
on
s
Over the past 60 years, Wyoming and Rhode Island had the fewest
number of Federal Disaster Declarations
*Through July 19, 2013. Includes Puerto Rico and the District of Columbia.
Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.
Despite its size, Montana has relatively few disasters
85
SEVERE WEATHER REPORT UPDATE: 2013
Damage from Tornadoes, Large Hail
and High Winds Keep Insurers Busy
85
Severe Weather Reports: Through July 22, 2013
86 Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2013_annual_summary.html#
There were 13,667 severe
weather reports through July 22;
including 663 tornadoes; 4,111
“Large Hail” reports and
8,892 high wind events
More than 300 severe weather reports in MT
87
Labor Market Trends
Massive Job Losses Sapped the Economy and Commercial/Personal
Lines Exposure, But Trend is Improving
87
88
Unemployment and Underemployment Rates: Stubbornly High in 2012, But Falling
2
4
6
8
10
12
14
16
18
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
Jan
11
Jan
12
Jan
13
Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
Unemployment stood at 7.6% in
June 2013—nearly its lowest level in 4 years.
Unemployment peaked at 10.1% in October 2009, highest monthly rate since 1983.
Peak rate in the last 30 years:
10.8% in November -
December 1982
Source: US Bureau of Labor Statistics; Insurance Information Institute.
U-6 went from 8.0% in March
2007 to 17.5% in October 2009; Stood at 14.3% in June 2013
January 2000 through June 2013, Seasonally Adjusted (%)
Recession ended in
November 2001
Unemployment kept rising for
19 more months
Recession began in
December 2007
Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving
88
22
75
41
68
50
12
36
61
-79
24 6
8 74
51
2-1
14
-10
5-2
22
-21
9-2
03
-26
7-2
69
-42
9-4
84
-78
6 -70
1-8
21
-69
2-8
12
-82
1-2
88
-44
2-2
82 -2
22 -1
62
-23
3-3
4-1
67
-17
-26
17
01
02
94 10
31
29
11
3 18
81
54
11
48
02
43
22
33
03
18
31
77
20
61
29
25
61
74
19
7 24
9 32
32
65
20
81
20 15
27
81
77
13
11
18
21
7 25
62
24
16
43
19
15
4 18
82
07
20
2
11
1(1,000)
(800)
(600)
(400)
(200)
0
200
400
Ja
n-0
7F
eb
-07
Ma
r-0
7A
pr-
07
Ma
y-0
7Ju
n-0
7Ju
l-0
7A
ug
-07
Se
p-0
7O
ct-
07
No
v-0
7D
ec-0
7Ja
n-0
8F
eb
-08
Ma
r-0
8A
pr-
08
Ma
y-0
8Ju
n-0
8Ju
l-0
8A
ug
-08
Se
p-0
8O
ct-
08
No
v-0
8D
ec-0
8Ja
n-0
9F
eb
-09
Ma
r-0
9A
pr-
09
Ma
y-0
9Ju
n-0
9Ju
l-0
9A
ug
-09
Se
p-0
9O
ct-
09
No
v-0
9D
ec-0
9Ja
n-1
0F
eb
-10
Ma
r-1
0A
pr-
10
Ma
y-1
0Ju
n-1
0Ju
l-1
0A
ug
-10
Se
p-1
0O
ct-
10
No
v-1
0D
ec-1
0Ja
n-1
1F
eb
-11
Ma
r-1
1A
pr-
11
Ma
y-1
1Ju
n-1
1Ju
l-1
1A
ug
-11
Se
p-1
1O
ct-
11
No
v-1
1D
ec-1
1Ja
n-1
2F
eb
-12
Ma
r-1
2A
pr-
12
Ma
y-1
2Ju
n-1
2Ju
l-1
2A
ug
-12
Se
p-1
2O
ct-
12
No
v-1
2D
ec-1
2Ja
n-1
3F
eb
-13
Ma
r-1
3A
pr-
13
Ma
y-1
3Ju
n-1
3
Monthly Change in Private Employment
January 2007 through June 2013 (Thousands)
Private Employers Added 7.16 million Jobs Since Jan. 2010 After Having Shed 4.98 Million Jobs in 2009 and 3.80 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Monthly Losses in Dec. 08–Mar. 09 Were
the Largest in the Post-WW II Period
202,000 private sector jobs were created in June
89
Jobs Created
2012: 2.247 Mill
2011: 2.420 Mill
2010: 1.235 Mill
0.0
51
0.0
53
-0.0
61
-0.1
66
-0.3
88
-0.6
07
-0.8
10
-1.0
77
-1.3
46
-1.7
75
-2.2
59
-3.0
45
-3.7
46
-4.5
67
-5.2
59
-6.0
71
-6.8
92
-7.1
80
-7.6
22
-7.9
04
-8.1
26
-8.2
88
-8.5
21
-8.5
55
-8.7
22
-8.7
39
-8.7
65
-8.6
54
-8.4
84
-8.3
82
-8.2
88
-8.1
85
-8.0
56
-7.9
43
-7.7
55
-7.6
01
-7.4
87
-7.4
07
-6.9
41
-6.6
38
-6.4
55
-6.2
78
-6.0
72
-5.9
43
-5.6
87
-5.5
13
-5.3
16
-5.0
67
-4.7
44
-4.4
79
-4.2
71
-4.1
51
-3.9
99
-3.9
21
-3.7
44
-3.6
13
-3.4
95
-3.2
78
-3.0
22
-2.7
98
-2.6
34
-2.3
15
-2.1
61
-1.9
73
-1.7
66
-1.5
64
-7.1
64
-10
-8
-6
-4
-2
0
2
De
c-0
7Ja
n-0
8F
eb
-08
Ma
r-0
8A
pr-
08
Ma
y-0
8Ju
n-0
8Ju
l-0
8A
ug
-08
Se
p-0
8O
ct-
08
No
v-0
8D
ec-0
8Ja
n-0
9F
eb
-09
Ma
r-0
9A
pr-
09
Ma
y-0
9Ju
n-0
9Ju
l-0
9A
ug
-09
Se
p-0
9O
ct-
09
No
v-0
9D
ec-0
9Ja
n-1
0F
eb
-10
Ma
r-1
0A
pr-
10
Ma
y-1
0Ju
n-1
0Ju
l-1
0A
ug
-10
Se
p-1
0O
ct-
10
No
v-1
0D
ec-1
0Ja
n-1
1F
eb
-11
Ma
r-1
1A
pr-
11
Ma
y-1
1Ju
n-1
1Ju
l-1
1A
ug
-11
Se
p-1
1O
ct-
11
No
v-1
1D
ec-1
1Ja
n-1
2F
eb
-12
Ma
r-1
2A
pr-
12
Ma
y-1
2Ju
n-1
2Ju
l-1
2A
ug
-12
Se
p-1
2O
ct-
12
No
v-1
2D
ec-1
2Ja
n-1
3F
eb
-13
Ma
r-1
3A
pr-
13
Ma
y-1
3Ju
n-1
3
Millio
ns
Cumulative Change in Private Employment: Dec. 2007—May 2013
December 2007 through May 2013 (Millions)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Cumulative job losses peaked at 8.765 million
in February 2010
Cumulative job losses as of June 2013 totaled
1.564 million
90
All of the jobs “lost” since President
Obama took office in Jan.
2009 have been recouped
Private Employers Added 7.16 million Jobs Since Jan. 2010 After Having Shed 4.98 Million Jobs in 2009 and 3.80 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)
-0.0
17
-0.0
43
0.0
68
0.2
38
0.3
40
0.4
34
0.5
37
0.6
66
0.7
79
0.9
67
1.1
21
1.2
35
1.3
15
1.5
58
1.7
81
2.0
84
2.2
67
2.4
44
2.6
50
2.7
79
3.0
35
3.2
09
3.4
06
3.6
55
3.9
78
4.2
43
4.4
51
4.5
71
4.7
23
4.8
01
4.9
78
5.1
09
5.2
27
5.4
44
5.7
00
5.9
24
6.0
88
6.4
07
6.7
49
6.9
56
7.1
58
6.5
61
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Jan-1
0
Feb-1
0
Mar-
10
Apr-
10
May-1
0
Jun-1
0
Jul-10
Aug-1
0
Sep-1
0
Oct-
10
Nov-1
0
Dec-1
0
Jan-1
1
Feb-1
1
Mar-
11
Apr-
11
May-1
1
Jun-1
1
Jul-11
Aug-1
1
Sep-1
1
Oct-
11
Nov-1
1
Dec-1
1
Jan-1
2
Feb-1
2
Mar-
12
Apr-
12
May-1
2
Jun-1
2
Jul-12
Aug-1
2
Sep-1
2
Oct-
12
Nov-1
2
Dec-1
2
Jan-1
3
Feb-1
3
Mar-
13
Apr-
13
May-1
3
Jun-1
3
Mil
lio
ns
Cumulative Change in Private Sector Employment: Jan. 2010—June 2013
January 2010 through June 2013* (Millions)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Cumulative job gains through June 2013 totaled 7.16 million
91
Job gains and pay
increases have added more
than $600 billion to payrolls
since Jan. 2010
Private Employers Added 7.16 million Jobs Since Jan. 2010 After Having Shed 4.98 Million Jobs in 2009 and 3.80 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)
4
-10
33 9
2
511
287
98
-68
-224
-184
-194
-213
-224
-271
-289
-288
-356
-324
-452
-449
-480
-488
-511
-530
-542
-536
-539
-547
-574
-565
-589
-555
-535
-592
-601
-606
-622
-609
-610
-622
-629
-621
-800
-600
-400
-200
0
200
400
600
Jan-1
0
Feb-1
0
Mar-
10
Apr-
10
May-1
0
Jun-1
0
Jul-10
Aug-1
0
Sep-1
0
Oct-
10
Nov-1
0
Dec-1
0
Jan-1
1
Feb-1
1
Mar-
11
Apr-
11
May-1
1
Jun-1
1
Jul-11
Aug-1
1
Sep-1
1
Oct-
11
Nov-1
1
Dec-1
1
Jan-1
2
Feb-1
2
Mar-
12
Apr-
12
May-1
2
Jun-1
2
Jul-12
Aug-1
2
Sep-1
2
Oct-
12
Nov-1
2
Dec-1
2
Jan-1
3
Feb-1
3
Mar-
13
Apr-
13
May-1
3
Jun-1
3
Cumulative Change in Government Employment: Jan. 2010—June 2013
January 2010 through June 2013* (Millions)
Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute
Cumulative job losses through June 2013 totaled 629,000
92
Governments at All Levels are Under Severe Fiscal Strain As Tax Receipts Plunged and Pension Obligations Soared During the
Financial Crisis: Sequestration Will Add to this Toll
Government at all levels has
shed more than 625,000 jobs
since Jan. 2010 even as private
employers created 7.16 million
jobs, though losses may now
be stabilizing.
Temporary Census hiring distorted 2010
figures
93
Unemployment Rates by State, May 2013: Highest 25 States*
9.5
9.1
9.1
8.9
8.8
8.6
8.6
8.5
8.4
8.3
8.3
8.3
8.1
8.0
8.0
7.8
7.8
7.6
7.5
7.3
7.2
7.1
7.0
7.0
6.9
0
2
4
6
8
10
12
NV IL MS RI NC CA NJ DC MI GA IN TN KY CT SC AZ OR NY PA AR DE FL OH WI CO
Un
em
plo
ym
en
t R
ate
(%
)
*Provisional figures for May 2013, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In May, 25 states had over-the-month unemployment rate decreases, 17 had
increases, and 8 and the District of Columbia had no change.
94
6.8
6.8
6.8
6.8
6.8
6.7
6.7
6.6
6.5
6.2
6.2
5.9
5.7
5.4
5.3
5.3
5.3
5.0
4.7
4.6
4.6
4.6
4.1
4.0
3.8
3.2
0
2
4
6
8
AL LA ME MO WA MD NM MA TX ID WV AK KS MT MN NH VA OK HI IA UT WY VT SD NE ND
Un
em
plo
ym
en
t R
ate
(%
)
Unemployment Rates by State, May 2013:
Lowest 25 States*
*Provisional figures for May 2013, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In May, 25 states had over-the-month unemployment rate decreases, 17 had
increases, and 8 and the District of Columbia had no change.
95
Oil & Gas Extraction Employment, Jan. 2010—June 2013*
*Seasonally adjusted
Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
15
6.4
15
6.4
15
6.7
15
7.6
15
8.7
15
7.8
15
8.0
15
9.5
16
0.0
16
1.5
16
1.2
16
1.2
16
3.1
16
4.4
16
6.6 16
9.3
17
0.1
17
1.0
17
2.5
17
3.6 17
6.3
17
8.2
17
8.5
18
0.9
18
1.9
18
3.1
18
4.8
18
5.2
18
5.7
18
6.8
18
7.6
18
8.0
18
8.0
18
8.2
19
0.0
19
1.7
19
1.9
19
3.4
19
2.4
19
2.6
19
2.8
19
2.1
150
155
160
165
170
175
180
185
190
195
200
Ja
n-1
0
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Ju
n-1
0
Ju
l-1
0
Au
g-1
0
Se
p-1
0
Oct-
10
No
v-1
0
De
c-1
0
Ja
n-1
1
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Ju
n-1
1
Ju
l-1
1
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Ja
n-1
2
2/3
0/2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
Oct-
12
No
v-1
2
De
c-1
2
Ja
n-1
3
Fe
b-1
3
Ma
r-1
3
Ap
r-1
3
Ma
y-1
3
Ju
n-1
3
Oil and gas extraction employment is up 22.8% since Jan. 2010 as the energy sector booms.
Domestic energy production is essential to any robust economic
recovery in the US.
(Thousands)
The BIG Question: Where Is the Market Heading?
96
Catastrophes and Other Factors Are Pressuring Insurance Markets
96
New Factor: Record Low Interest Rates Are Contributing to
Underwriting and Pricing Pressures
INVESTMENTS: THE NEW REALITY
97
Investment Performance is a Key Driver of Profitability
Depressed Yields Will Necessarily Influence Underwriting & Pricing
97
Property/Casualty Insurance Industry Investment Income: 2000–2013*1
$38.9$37.1 $36.7
$38.7
$54.6
$51.2
$47.1 $47.6$49.2
$47.7
$45.5
$39.6
$49.5
$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12 13*
Investment Income Fell in 2012 and is Falling in 2013 Due to Persistently Low Interest Rates, Putting Additional Pressure on (Re) Insurance Pricing
1 Investment gains consist primarily of interest and stock dividends.. *Estimate based on annualized actual Q1:2013 investment income of $11.385B. Sources: ISO; Insurance Information Institute.
($ Billions)
Investment earnings are running below their 2007
pre-crisis peak
99
P/C Insurer Net Realized Capital Gains/Losses, 1990-2013:Q1
Sources: A.M. Best, ISO, Insurance Information Institute.
$2
.88
$4
.81
$9
.89
$9
.82
$1
0.8
1 $1
8.0
2
$1
3.0
2
$1
6.2
1
$6
.63
-$1
.21
$6
.61
$9
.13
$9
.70
$3
.52 $8
.92
-$7
.90
$5
.85
$7
.04
$6
.21
$1
.38
-$1
9.8
1
$9
.24
$6
.00
$1
.66
-$25
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1213:Q1
Insurers Posted Net Realized Capital Gains in 2010, 2011 and 2012 Following Two Years of Realized Losses During the Financial Crisis. Realized Capital
Losses Were the Primary Cause of 2008/2009’s Large Drop in Profits and ROE
($ Billions) Realized capital gains in 2012 were down 12% from 2011
Property/Casualty Insurance Industry Investment Gain: 1994–2013:Q11
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$64.0
$31.7
$39.2
$53.4$56.2
$53.9
$12.8
$58.0
$51.9
$56.9
$0
$10
$20
$30
$40
$50
$60
$70
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11 12 13:Q1
Investment Gains Are Slipping in 2012 as Low Interest Rates Reduce Investment Income and Lower Realized Investment Gains; The Financial
Crisis Caused Investment Gains to Fall by 50% in 2008
1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. * 2005 figure includes special one-time dividend of $3.2B; Sources: ISO; Insurance Information Institute.
($ Billions)
Investment gains in 2012 were approximately 16%
below their pre-crisis peak
P/C Industry Investment Gains, Inflation-Adjusted: 1994–20121
$54.8
$64.5
$69.1
$74.8
$57.6
$45.9
$56.5$59.4
$69.8
$63.4
$70.9
$33.8
$42.0
$56.2$57.4$53.9
$50.0
$81.7
$71.5
$75.9
$30
$45
$60
$75
$90
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11 1213:Q1E
Because the Federal Reserve Board aims to keep interest rates exceptionally low until the unemployment rate hits 6.5%—likely at least
another year off—maturing bonds will be re-invested at even lower rates.
1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. *2005 figure includes special one-time dividend of $3.2B; 2013F figure is I.I.I. estimate for 2013:Q1, annualized.
Sources: ISO; Insurance Information Institute.
($ Billions, 2012 dollars) 1994-2012 average yearly gain:
$60.85B. We haven’t hit that average in the last 5 years.
102
U.S. 10-Year Treasury Note Yields: A Long Downward Trend, 1990–2013*
*Monthly, through June 2013. Note: Recessions indicated by gray shaded columns.
Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.
1%
2%
3%
4%
5%
6%
7%
8%
9%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.
Yields on 10-Year U.S. Treasury Notes recently plunged to record modern-era lows and remain low
by historical standards
102
103
U.S. Treasury Security Yields: A Long Downward Trend, 1990–2013*
*Monthly, constant maturity, nominal rates, through June 2013.
Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Recession2-Yr Yield10-Yr Yield
Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.
U.S. Treasury security yields
recently plunged to record lows
103
104
Treasury Yield Curves: Pre-Crisis (July 2007) vs. June 2013
0.03% 0.05% 0.09% 0.14%0.33%
1.71%
2.30%
4.82%4.96% 5.04% 4.96%
4.82% 4.82% 4.88% 5.00% 4.93% 5.00%5.19%
1.20%
0.58%
3.40%3.07%
0%
1%
2%
3%
4%
5%
6%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
January 2013 Yield Curve
Pre-Crisis (July 2007)
Treasury yield curve remains near its most depressed level in
at least 45 years. Investment income is falling as a result. If as Fed I “tapers” rates are unlikely
to return to pre-crisis levels anytime soon
The Fed Is Actively Signaling that it Is Determined to Keep Rates Low Until Unemployment Drops Below 6.5% or Until Inflation Expectations
Exceed 2.5%; Low Rates Add to Pricing Pressure for Insurers.
Source: Federal Reserve Board of Governors; Insurance Information Institute.
105
Average Maturity of Bonds Held by US P/C Insurers, 2006—2011*
6.456.53
6.89
7.307.46
7.32
5.0
5.5
6.0
6.5
7.0
7.5
8.0
2006 2007 2008 2009 2010 2011
*Year-end figures. Latest available.
Sources: Insurance Information Institute calculations based on A.M. Best data.
Average Maturity (Years)
Falling Average Maturity (and Duration) of the P/C Industry’s Bond Portfolio is Contributing to the Drop in Investment
Income Along With Lower Yields
The average bond maturity is down by a full year between
2007 and 2011
105
106
Distribution of Bond Maturities, P/C Insurance Industry, 2003-2012
16.0%
15.2%
15.7%
16.2%
16.3%
29.8%
29.2%
28.8%
29.5%
30.0%
32.4%
36.2%
39.5%
41.4%
40.4%
31.3%
32.5%
34.1%
34.1%
33.8%
31.2%
28.7%
26.7%
26.8%
27.6%
15.4%
15.4%
13.6%
13.1%
12.9%
12.7%
11.7%
11.1%
10.3%
9.8%
9.2%
7.6%
7.6%
7.4%
8.1%
8.1%
7.3%
6.4%
6.3%
5.7%16.5%
15.2%
14.4%
16.0%
15.4%
0% 20% 40% 60% 80% 100%
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Under 1 year
1-5 years
5-10 years
10-20 years
over 20 years
Sources: SNL Financial; Insurance Information Institute.
The main shift over these years has been from bonds with longer maturities to bonds with shorter maturities. The industry first trimmed its holdings of over-10-year bonds
(from 24.6% in 2003 to 15.5% in 2012) and then trimmed bonds in the 5-10-year category (from 31.3% in 2003 to 27.6% in 2012) . Falling average maturity of the P/C industry’s
bond portfolio is contributing to a drop in investment income along with lower yields.
Bonds Rated NAIC Quality Category 3-6 as a Percent of Total Bonds, 2003–2012
2.69%
2.10%2.17%
1.98%
3.07% 3.10%
4.07%
2.04%
2.27%
2.58%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
There are many ways to capture higher yields on bond portfolios. One is to accept greater risk, as measured by NAIC bond ratings.
The ratings range from 1 to 6, with the highest quality rated 1. Even in 2012, over 95% of the industry’s bonds were rated 1 or 2.
Sources: SNL Financial; Insurance Information Institute.
From 2006-07 to year-end 2012, the percentage of lower-quality
bonds in P/C industry portfolios more than doubled
108
-1.8
%
-1.8
%
-2.0
%
-3.6
%
-3.3
%
-3.3
%
-3.7
%
-4.3
%
-5.2
%
-5.7
%
-7.3%
-1.9
%
-2.1
%
-3.1
%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
Per
sona
l Lin
es
Pvt P
ass
Aut
o
Per
s Pro
p
Com
mer
cial
Com
ml A
uto
Cre
dit
Com
m P
rop
Com
m C
as
Fidel
ity/S
uret
y
War
rant
y
Sur
plus
Lin
es
Med
Mal
WC
Rei
nsur
ance
**
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
*Based on 2008 Invested Assets and Earned Premiums
**US domestic reinsurance only
Source: A.M. Best; Insurance Information Institute.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
108
109
Annual Inflation Rates, (CPI-U, %), 1990–2014F
2.82.6
1.51.9
3.3 3.4
1.3
2.52.3
3.0
3.8
2.8
3.8
-0.4
1.6
3.2
2.11.7
2.0
2.9
2.4
3.23.0
5.14.9
-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 09 10 11 12 13F 14F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 5/13 (forecasts).
The slack in the U.S. economy suggests that inflationary pressures should remain subdued for an extended period of times. Energy, health care and
commodity prices, plus U.S. debt burden, remain longer-run concerns
Annual Inflation Rates (%)
Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the
commodity bubble reduced inflationary pressures in 2009/10
Inflationary expectations remain quite
low, allowing the Fed to continue its QE3 program
Shifting Legal Liability & Tort Environment
110
Is the Tort Pendulum Swinging Against Insurers?
110
111
Over the Last Three Decades, Total Tort Costs as a % of GDP Appear Somewhat Cyclical, 1980-2013E
$0
$50
$100
$150
$200
$250
$300
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12E
To
rt S
ys
tem
Co
sts
1.50%
1.75%
2.00%
2.25%
2.50%
To
rt Co
sts
as
% o
f GD
P
Tort Sytem Costs Tort Costs as % of GDP
($ Billions)
Sources: Towers Watson, 2011 Update on US Tort Cost Trends, Appendix 1A
Tort costs in dollar terms have remained high but relatively stable since the mid-2000s., but are down
substantially as a share of GDP
Deepwater Horizon Spike
in 2010
1.68% of GDP in 2013
2.21% of GDP in 2003
= pre-tort reform peak
112
Commercial Lines Tort Costs: Insured vs. Self-(Un)Insured Shares, 1973-2010
Billions of Dollars
$0
$20
$40
$60
$80
$100
$120
$140
$160
73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Self (Un) Insured Share
Insurer Share
Tort Costs and the Share Retained by Risks Both Grew Rapidly from the mid-1970s to mid-2000s, When Tort Costs Began to Fall But Self-
Insurance Shares Continued to Rise
$9.5
$15.0
$6.0
1973: Commercial Tort Costs
Totaled $6.49B, 94% was insured,
6% self-(un)insured
1985: $46.6B 74.5% insured,
25.5% self-(un)insured
1995: $83.6B 69.5% insured,
30.5% self-(un)insured
2005: $143.5B 66.4% insured,
33.6% self-(un)insured
2009: $126.5B 64.4% insured,
35.6% self-(un)insured
Sources: Towers Watson, 2011 Update on US Tort Cost Trends, III Calculations based on data from Appendix 4. 112
113
Commercial Lines Tort Costs: Insured vs. Self-(Un)Insured Shares, 1973-2010
Percent
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Self (Un) Insured Share
Insurer Share
The Share of Tort Costs Retained by Risks Has Been Steadily Increasing for Nearly 40 Years. This Trend Contributes Has Left
Insurers With Less Control Over Pricing.
1973: 94% was insured,
6% self-(un)insured
1985:74.5% insured,
25.5% self-(un)insured
1995: 69.5% insured,
30.5% self-(un)insured
2005: 66.4% insured,
33.6% self-(un)insured
2010: $138.1B 56.6% insured, 44.4% self-(un)insured
(distorted by Deepwater Horizon event with most losses retained by BP)
Sources: Towers Watson, 2011 Update on US Tort Cost Trends, III Calculations based on data from Appendix 4. 113
Business Leaders Ranking of Liability Systems in 2012
Best States
1. Delaware
2. Nebraska
3. Wyoming
4. Minnesota
5. Kansas
6. Idaho
7. Virginia
8. North Dakota
9. Utah
10. Iowa
Worst States
41. Florida
42. Oklahoma
43. Alabama
44. New Mexico
45. Montana
46. Illinois
47. California
48. Mississippi
49. Louisiana
50. West Virginia
Source: US Chamber of Commerce 2012 State Liability Systems Ranking Study; Insurance Info. Institute.
New in 2012
Wyoming
Minnesota
Kansas
Idaho
Drop-offs
Indiana
Colorado
Massachusetts
South Dakota
Newly Notorious
Oklahoma
Rising Above
Arkansas
114
115
The Nation’s Judicial Hellholes: 2011
Source: American Tort Reform Association; Insurance Information Institute
South Florida
West Virginia
Illinois
Madison , St. Clair and McLean
counties
New York
Albany and NYC
Watch List
Eastern District of Texas
Cook County, IL
Southern NJ
Franklin County, AL
Smith County, MS
Louisiana
Dishonorable
Mention
MI Supreme Court
AK Supreme Court
MO Supreme Court
California
Philadelphia
Nevada
Clark County
CYBER RISK
116
Cyber Risk is a Rapidly Emerging Exposure for Businesses Large
and Small in Every Industry NEW III White Paper:
http://www.iii.org/assets/docs/pdf/paper_CyberRisk_2013.pdf
116
Data Breaches 2005-2013, By Number of Breaches and Records Exposed
# Data Breaches/Millions of Records Exposed
* 2013 figures as of March 19, 2013. Source: Identity Theft Resource Center
157
321
446
656
498
419447
662
17.322.9
35.7
19.1
66.9
222.5
16.2
127.7
100
200
300
400
500
600
700
2005 2006 2007 2008 2009 2010 2011 2012
0
20
40
60
80
100
120
140
160
180
200
220
# Data Breaches # Records Exposed (Millions)
The total number of data breaches and number of records exposed fluctuates from year to year and over time.
Millions
118
2012 Data Breaches By Business Category, By Number of Breaches
3.8%
11.2%
13.6%
34.5%
36.9%
Source: Identity Theft Resource Center, http://www.idtheftcenter.org/ITRC%20Breach%20Report%202012.pdf.
The majority of the 447 data breaches in 2012 affected business and medical/healthcare organizations, according to the Identity Theft Resource Center.
Business, 165 (36.9%)
Govt/Military, 50 (11.2%)
Banking/Credit/Financial, 17 (3.8%)
Educational, 61 (13.6%)
Medical/Healthcare, 154 (34.5%)
119
2012 Data Breaches By Category, By Number of Records Exposed
2.7%
12.9%
13.3%
26.7%
44.4%
Source: Identity Theft Resource Center, http://www.idtheftcenter.org/ITRC%20Breach%20Report%202012.pdf.
Government/Military and Business organizations accounted for the majority of records exposed by data breaches during 2012.
Govt/Military, 7.7 million (44.4%)
Medical/Healthcare, 2.2 million (12.9%)
Banking/Credit/Financial, 470,048 (2.7%)
Educational, 2.3 million (13.3%)
Business, 4.6 million (26.7%)
120
AIG Survey: Cyber Attacks Top Concern Among Execs
Source: Penn Schoen Berland on behalf of American International Group.
82%
76%
80%
85%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Securities & Investment
Risk
Property Damage
Loss of income
Cyber Attacks
While companies are focused on managing a variety of business risks, cyber attacks are a top concern. Some 85% of 258 executives surveyed said they
were very or somewhat concerned about cyber attacks on their businesses.
121
The Most Costly Cyber Crimes, Fiscal Year 2012
4%4%
7%
7%
8%
12%
12%
20%
26%
Source: 2012 Cost of Cyber Crime: United States, Ponemon Institute.
Malicious code, denial of service and web-based attacks account for more than 58 percent of the total annualized cost of cyber crime experienced by 56 companies.
Malicious code
Botnets
Denial of service
Malware
Viruses, Worms, Trojans
Phishing + social engineering
Malicious insiders
Stolen devices
Web-based attacks
122
External Cyber Crime Costs: Fiscal Year 2012
2%5%
19%
30%
44%
* Other costs include direct and indirect costs that could not be allocated to a main external cost category
Source: 2012 Cost of Cyber Crime: United States, Ponemon Institute.
Information loss (44%) and business disruption or lost productivity (30%) account for the majority of external costs due to cyber crime.
Information loss
Equipment damages
Other costs*
Revenue loss
Business disruption
High Profile Data Breaches, 2012-2013
Date Company Description of Breach
Mar 2013* South Korean banks, media cos
Cyber attack causes computers to crash at South Korean banks and media companies, paralyzing bank machines across the country. No immediate reports of records compromised.
July 2012 Yahoo Security breach at Yahoo in which some 450,000 passwords lifted and posted to the Internet.
July 2012 eHarmony Online dating site eHarmony confirms security breach in which some 1.5 million user names and passwords compromised.
July 2012 LinkedIn Social networking site LinkedIn reportedly targeted in hacker attack that saw 6.5
million hashed passwords posted to the Internet.
April 2012 Utah Dept of Technology Services
Utah Department of Technology notifies of a March 30 breach of a server containing personal data including social security numbers for about 780,000 Medicaid patient claims. Breach traced to Eastern Europe hackers.
Mar 2012 Global Payments Credit card processor Global Payments confirms hacker attack has compromised the payment card numbers of around 1.5 million cardholders.
Mar 2012 CA Dept of Child Support Services
Officials announce that four computer storage devices containing personal information for about 800,000 adults and children in California’s child support system were lost by IBM and Iron Mountain Inc.
Jan 2012 Zappos Online shoe retailer Zappos announces that information, such as names, addresses and passwords on as many as 24 million customers illegally accessed.
Jan 2012 NY State Electric + Gas Co
Security breach at NYSEG that allowed unauthorized access to NYSEG customer data, containing social security numbers, dates of birth and bank account numbers, exposing 1.8 million records.
*March 2013 attack is not part of ITRC research.
Sources: Identity Theft Resource Center, http://www.idtheftcenter.org/ITRC%20Breach%20Report%202012.pdf; Insurance Information Institute (I.I.I.) research.
124
Average Organizational Cost of a Data Breach, 2008-2011* ($ Millions)
*Findings of this benchmark study pertain to the actual data breach experiences of 49 U.S. companies from 14 different industry sectors, all of which participated in the 2011 study. Total breach costs include: lost business resulting from diminished trust or confidence of customers ;costs related to detection, escalation, and notification of the breach; and ex-post response activities, such as credit report monitoring.
Source: 2011 Annual Study: U.S. Cost of a Data Breach, the Ponemon Institute.
$6.8
$5.5
$7.2
$6.7
$0 $1 $2 $3 $4 $5 $6 $7 $8 $9 $10
2011
2010
2009
2008
($ Millions)
The average organizational cost of a data breach in 2011 was $5.5 million, down 24% from $7.2 million in 2010. Companies have improved steps
taken in both preparing for and responding to a data breach.
125
Main Causes of Data Breach
24%
37%
39%
Source: 2011 Cost of Data Breach Study: United States, Ponemon Institute, March 2012
Negligent employees and malicious attacks are most often the cause of the data breach. Some 39 percent of incidents involve a negligent employee or
contractor, while 37 percent concern a malicious or criminal attack.
Negligence
System glitch
Malicious or criminal attack
126
Marsh: Increase in Purchase of Cyber Insurance Among U.S. Companies, 2012
Source: Marsh Global Analytics, Marsh Risk Management Research Briefing, March 2013
27.7%
20.2%
21.6%
22.9%
32.2%
72.2%
75.5%
33.3%
All Other
Health Care
Communications, Media & Technology
Retail/Wholesale
Financial Institutions
Education
Services
All Industries
Interest in cyber insurance continues to climb. The number of companies purchasing cyber insurance increased 33 percent from 2011 to 2012.
127
Marsh: Total Limits Purchased, By Industry – Cyber Liability, All Revenue Size
Source: Marsh Global Analytics, Marsh Risk Management Research Briefing, March 2013
$16.8
$33.4
$8.1
$26.0
$13.1 $12.6
$20.7
$9.8
$20.5
$9.0
$12.4
$8.1
$14.1
$9.3
$24.6
$14.1
All Industries Comms, Media
& Technology
Education Financial
Institutions
Health Care Retail/Wholesale Services All Other
Avg. 2012 Limits Avg. 2011 Limits
Cyber insurance limits purchased in 2012 averaged $16.8 million across all industries, an increase of nearly 20% over 2011.
($ Millions)
128
Marsh: Total Limits Purchased, By Industry – Cyber Liability, Revenue $1 Billion+
Source: Marsh Global Analytics, Marsh Risk Management Research Briefing, March 2013
$27.9
$59.4
$11.7
$46.6
$18.7
$30.0
$38.7
$12.7
$41.8
$11.3
$17.3
$11.6
$27.5
$9.0
$40.6
$14.1
All Industries Comms, Media
& Technology
Education Financial
Institutions
Health Care Retail/Wholesale Services All Other
Avg. 2012 Limits Avg. 2011 Limits
Among larger companies, average cyber insurance limits purchased in 2012 increased nearly 30% over 2011.
($ Millions)
129
Cyber Liability: Historical Rate (price per million) Changes
-0.21%
2.67%
0.55%
2.92%
-0.81%
2.22%2.24%
0.54%
12:Q1 12:Q2 12:Q3 12:Q4
Primary Price Per Million Change
Total Price Per Million Change
Overall, rates for cyber insurance were essentially flat in the fourth quarter of 2012.
Source: Marsh Global Analytics, Marsh Risk Management Research Briefing, March 2013
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Thank you for your time and your attention!
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130