the long shadow of september 11: terrorism & its impacts ...the long shadow of september 11:...
TRANSCRIPT
The Long Shadow ofSeptember 11:
Terrorism & Its Impacts on Insurance and Reinsurance Markets
July 25, 2002
If you would like a copy of this presentation, please leave me your business card with e-mail address or go to:
http://www.iii.org/media/hottopics/insurance/sept11/
Robert P. Hartwig, Ph.D., Senior Vice President & Chief EconomistInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038
Tel: (212) 346-5520 ♦ Fax: (212) 732-1916 ♦ [email protected] ♦ www.iii.org
Presentation Outline• Timeline of Terror & Immediate Industry Response • What will it cost & who’s going to pay?• Terror exclusions• Cyber Terrorism• Next Attack?• Implication for the Insurance Industry
FinancialCapacityPricing
• Modelling Terror• Federal Backstop: What’s Happening in Washington?
Timeline of Terror:
How We Got Here
Timeline of Terror• 8:46AM: American Airlines Flight 11
Strikes North WTC Tower
• 9:03AM: United Airlines Flight
175 Hits South Tower
Timeline of Terror• 9:43AM: American Airlines
Flight 77 Strikes Pentagon
• 10:05AM: South Tower of
WTC Collapses
Timeline of Terror• 10:10AM: United Airlines
Flight 93 Crashed in PA
• 10:28AM: North Tower of
WTC Collapses
Damage at WTC Site
Brown = Destroyed
Red = Severe Damage
Pink = Moderate Damage
26 million sq. ft. of office space damaged or destroyed
I.I.I.: Too Close for Comfort
21
I.I.I. Office
WTC Towers
Distance from WTC Towers to Insurance Information Institute Offices = 500 meters
Timeline of Terror
• Anthrax attacks begin in early October
Since Then…
Here’s where he is (was).
He did it.
Military Option Selected Bombs Away!
Immediate Market Response:Shock but No Panic
Reassured “world” that insurers can and will pay claimsNo “act of war” or terrorism exclusions in place
Aviation insurers virtually eliminate 3rd party war cover
CAT reinsurers impose terrorism exclusions
Primary commercial insurers adopt terror exclusions in most states on case
Push in Washington to establish a terror pool (like Pool Re in U.K.)
Limited stand-alone terror coverage market evolves
Source: Insurance Information Institute.
What’s this Going to Cost &Who’s Going to Pay for It?
Sept. 11 Insured Loss Estimates
• Biggest insured CAT is US and world history ($40B)Hurricane Andrew: $15.5B (1992$); $20B (2000$)
• 100+ insurers worldwide have made announcements accounting for about $25B in insured losses
• Industry loss estimates ranged from low of $30 billion to $70 billion (I.I.I. Estimate $40.2B)
First WC disaster ($2.0B); 2,250 physically injuredFirst life disaster ($2.7B); 3,132 killedAnthrax Issue? WC exposure if out of course of employment
• Estimated NYC economic losses are $83 billion• Insurance will pay biggest share by far
Fed. Govt. promised $21.5B, excluding Victims Comp. Fund• Where would NY be today if terror exclusions were
adopted after 1993 WTC bombing? Source: Insurance Information Institute
Sept. 11 Industry Loss Estimates($ Billions)
Life$2.7 (7%)
Aviation Liability
$3.5 (9%)
Other Liability
$10.0 (25%)
Biz Interruption$11.0 (27%)
Property -WTC 1 & 2$3.5 (9%)
Property - Other
$6.0 (15%)
Aviation Hull$0.5 (1%)
Event Cancellation
$1.0 (2%)
Workers Comp
$2.0 (5%)
Insured Losses Estimate: $40.2BSource: Insurance Information Institute, July 2002
WTC Claim BreakdownTotal Claim Count = 31,232*
Workers Comp4,748
Commercial Property
12,366
Biz Interruption
4,476
Personal Property
8,298
Personal Auto1,251
Commercial Auto/Other
93
*Reported to Disaster Insurance Information Office (DIIO) as of June 5, 2002; Excludes life claims.Source: Insurance Information Institute
Death Toll from September 11 Attack*
3,132TOTAL FATALITIES
44Pennsylvania Hijacked Jet (incl. 4 hijackers)
64Pentagon Hijacked Jet (incl. 5 hijackers)
125Pentagon Victims on Ground
157WTC Hijacked Jets (incl. 10 hijackers)
2,742WTC Victims (workers & visitors)*
Source: Official City of New York estimate as of Jan. 18, 2002; Ins. Info Inst.
*There were also an estimated 2,250 non-fatal injuries
Top 5 Costliest Terrorist Attacks (by insured property loss*)
*Includes business interruption and aviation hull losses.Source: Swiss Re; Insurance Information Institute.
$20,300
$907 $744 $725 $671$0
$5,000
$10,000
$15,000
$20,000
9/11 TerroristAttacks
Bomb NearNatWestTower inLondon
IRA CarBomb NearManchester
Mall
Bomb in WTCGarage
Bomb inLondon
FinancialDistrict
$ Millions, Adjusted to 2001 Price Level
9/11/01
3,132 Killed
2.250 Injured
4/24/93
1 Killed
54 Injured
6/15/96
0 Killed
228 Injured
2/26/93
6 Killed
725 Injured
4/10/92
3 Killed
91 Injured
Oklahoma City bombing in 1995 cost insurers $125 million
Insured Loss Estimates*(updated through July 19, 2002)
2,913
1,323
952 950 941 900 840 820 769 677 650 645 620 550 468 440
2,3162,275
2,442
0
500
1000
1500
2000
2500
3000
3500
Lloyd's
Munic
h Re
Swiss R
eBerk
Hath
Allianz
Aioi XLSt. P
aul
Zurich
Nissan AIG
Citigro
upHar
tford
ACEChubb
ERCAxaCNAIN
G
Mill
ions
Source: Morgan Stanley, Benfield Research, Insurance Information Institute as of July 19, 2002.
Top 17 Groups (pre-tax, net of reinsurance, $ millions)
9/11 Gross vs. Net Losses*(Life & Non-Life)
Primary62%
Reinsurance38%
*Gross: before adjusting for reinsurance recoverables;Net: After adjusting for reinsurance recoverables.Source: Insurance Information Institute, as of February 2002.
Implies $27B in reinsurance involved. System worked because of spread of risk and reinsurance. What about the next attack?
Primary48%Reinsurance
52%
GROSS LOSSES = $49.3 B NET LOSSES = $22.2 B
$10.6B$11.6B$30.4B$18.8B
10 Costliest Disasters in U.S. History(by insured loss, 2001 $)
$40.2
$19.6$16.3
$5.9$3.2 $2.9 $2.5 $2.4 $2.1 $2.0
$0$5
$10$15$20$25$30$35$40$45
Ter
rori
stA
ttac
k: S
ept.
2001
*
Hur
rica
neA
ndre
w:
Aug
ust 1
992
Nor
thri
dge
Ear
thqu
ake:
Jan.
199
4
Hur
rica
neH
ugo:
Sep
t.19
89
Hur
rica
neG
eorg
es: S
ept.
1998
Hur
rica
neB
etsy
: Sep
t.19
65
TS
Alli
son:
Jul
y20
01
Hur
rica
ne O
pal:
Oct
ober
199
5
Hur
rica
neFl
oyd:
Sep
t.19
99
Hur
rica
ne I
niki
:Se
pt. 1
992
$ Billions
*Estimate includes propertyand business interruption losses as well as liability, workers comp,life, aviation and other coverages.
Source: Insurance Services Office, Insurance Information Institute.
World: Top 10 Biggest Catastrophes (by insured loss)
$40
$19.6$16.3
$7.1 $6.1 $6.0 $5.9 $4.6 $4.2 $4.2
$0$5
$10$15$20$25$30$35$40
Terror
ist A
ttack
s ('01
)*
Hurr. A
ndrew ('9
2)
Northrid
ge Eq.
('94)
Typh. M
ireille
WS D
aria
WS Loth
ar
Hurr. H
ugo ('9
5)
Misc
Storms/F
loods
WS V
ivian
Typh Bar
t
$ Billions, in 2001 $
*III Estimate; Includes life, liability and workers compensation losses.Source: Swiss Re, Insurance Information Institute.
Terrorism Exclusions
ME
NH
MACT
PA
WVVA
NC
LATX
OK
NE
ND
MN
MI
IL
IA
ID
WA
OR
AZ
HI
NJ
RI
MDDE
AL
VT
NY
DC
SC
GA
TN
AL
FL
MS
ARNM
KYMOKS
SD WI
INOH
MT
CA
NVUT
WY
CO
PR
Terrorism Exclusions
Exclusions Approved,Mandatory Fire Following
No Terrorism Exclusion
Exclusions Approved,Fire Following NOT Mandatory
Terror exclusions approved in 45 states + DC and PR
ISO Definition of Terrorism Used in Property and Liability Exclusions:
“Terrorism” means activities against persons, organizations or property of any nature:
1. That involve the following or preparation for the following:
a) Use or threat of force or violence;b) Commission or threat of a dangerous act; orc) Commission or threat of an act that interferes
with or disrupts an electronic, communication, information, or mechanical system; and
Definition of Terrorism Under both Property and Liability Exclusions:
2. When one or both of the following applies:
a) The effect is to intimidate or coerce a government, or to cause chaos among the civilian population or any segment thereof, or to disrupt any segment of the economy; or
b) It is reasonable to believe the intent is to intimidate or coerce a government, or to seek revenge or retaliate, or to further political, ideological, religious, social or economic objectives or to express (or express opposition to) a philosophy or ideology.
Applied to Physical Damage:“Loss or damage caused directly or indirectly by terrorism, including action in hindering or defending against an actual or expected incident of terrorism. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.”
Original ISO Exclusion for Property Coverages:
Proposed Exclusion for General Liability Coverages:
Applied to bodily injury, property damage, and personal and advertising injury:
Arising directly or indirectly, out of “terrorism,” including any action taken in hindering or defending against an actual or expected incident of “terrorism” regardless of any other cause or event that contributes concurrently or in any sequence to the injury or damage.
One Major Commercial Insurer’s Endorsement and Definition:
Exclusion of:Any act of one or more persons, whether known or unknown and whether or not agents of a sovereign power, for Terrorist Purposes…
…Terrorist Purposes means the use or threatened use of any unlawful means, including the use of force or violence against any person(s) or propert(ies), for the actual or apparent purpose of intimidating, coercing, punishing or affecting society or some portion of society or government.
NEXT ATTACK: Will the war exclusion apply?
Cyberrisks & Terrorism
What Does Cyber(Usually) Insurance Cover?*
• Denial or Loss of Service• Malicious intrusion (e.g., hacking) • Theft of intellectual property (e.g., patents, copyrights)• Theft of confidential information (e.g., credit card data)• Extra expense costs (to recreate data & get back online)• Expert assistance• Liable/Slander• Cyber-extortion (e.g., Implication for the Insurance
Industry• NOTE: Traditional commercial property/liability policies
may provide little or no protection.Source: Insurance Information Institute *Terms of coverage can vary considerably by company.
CyberInsurance & Terrorism• Insurer definition of terror broad enough to include
terrorism, therefore exclusion could apply if added• Insurers could easily exclude, so far appear to have
not done soThreat from terrorism not significantly distinct from ordinary cyberrisks (e.g., hacking, DOS, viruses, etc.)
Source: Insurance Information Institute
What About the Next Attack?
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Nov. 0
1Dec
. 01
Jan-0
2Feb
-02Mar-
02Apr-
02May
-02
Jun-0
2
Jul-0
2Aug
-02Sep
-02
Oct-02
Nov-0
2Dec
-02
Insurers Overexposed to Terror Risk in 2002
Source: Insurance Information Institute* Excludes workers comp, which will carry no terrorism exclusion.
%
Insurer Exposure to Terrorism•+/- 70% reinsurance treaties expired 12/31/01•+/- 30% expire 6/30/02•Underlying policies renewed w/terror exclusion gradually as they expire
+/-70% Reinsurance Treaties Expired 12/31/01+/-30% Reinsurance Treaty
Coverage 1/1/02 – 6/30/020% Thereafter
100%
Rei
nsur
ance
Tre
aty
Cov
erag
e Pr
ior
to J
an. 1
, 200
2
Proportion of Commercial Risks
With Terrorism Coverage
Included in Basic Coverage
UNREINSURED EXPOSURE
UNREINSURED EXPOSURE
GAO Report: Highlights Economic Vulnerabilities
• GAO Report Released February 27, 2002• Major Findings:www.house.gov/financialservices/022702t2.htm
1. Insurers Shifting Terrorism Risk to Property Owners/Businesses
Reinsurers withdrawing from market for terrorismPrimary insurers excluding coverage as their exposure increases
2. As Business Exposure to Uninsured Risks Rise, so do Potential Economic Consequences
Economic consequences from next attack could be more severe3. Potential Economic Consequences of Not Having Terrorism
Insurance are Cause for Concern• Conclusions
Congressional action is “properly a matter of public policy”Consequences of inaction are “may be real and potentially large”
“A decision not to act could have debilitating financial consequences for for businesses…their employees, lenders, suppliers, and customers.”Government will face difficulties if it waits to act after an attack: “difficult to implements quickly—and extremely expensive.”
Joint Economic Committee,US Congress: Report Findings
• JEC Report Released May 2002; Heavy III input
• Major Findings:
1. Market for Terrorism Insurance Remains LimitedOnly small number of insurers actively providing stand-alone terror coverWhen available, coverage is expensive, limited and offered with restrictive terms
2. Problems Associated with Terrorism Insurance Pose a Significant Threat to Sustained Economic Growth
Lack of terror insurance stopping some business deals, esp. real estate and construction projects where terror cover necessary to obtain fundingHigh cost of terror insurance diverts resources from other more productive uses, negatively affecting investments and jobs.Low coverage limits mean that businesses are bearing a huge amount of risk themselves. In the event of another attack, insurance payments will not be available to the same degree for rebuilding.
Commercial Real Estate:Value at Risk*
Replacement Cost of
Structures52%
Inventory 13%
Equipment & Software
35%
*As of 12/31/2000; Excludes residential real estate.Source: Morgan Stanley, FDIC, Federal Reserve; Insurance Information Institute.
TOTAL = $10.6 TrillionWithout terror bill more of this risk will be shifted
to business/property owners
$1.40 Trillion
$3.70 Trillion
$5.53 Trillion
Commercial Real Estate Debt:Debt at Risk*
Real Estate/ Mortagage
Loans85%
Lease Receivables ($0.17 Tr)
2%Industrial
Loans13%
*As of 12/31/2000; Excludes residential real estate.Source: Morgan Stanley, FDIC, Federal Reserve; Insurance Information Institute.
TOTAL = $8.2 Trillion
Without terror bill more of this risk will be shifted to
commercial lenders/landlords
$1.08 Trillion
$6.94 Trillion
Most Businesses Have Little or No Terrorism Coverage
Lenders vs. Commercial Mortgage Holders•Cigna/Durst/4 Times Square/$5 mill for cover•GMAC require purchase on 40,000 properties w/$100 billion in loans across US.
Purchased Separate Coverage
6%
Limited Coverage
26%
Full Coverage18%
No Coverage50%
Source: Prudential Securities: 2002 Insurance Buyers Survey, June 2002
Lack of coverage underscores need for
federal backstop
But Most Banks Don’t Yet Seem to Recognize the Risk
BANKER POLL: Rejection Rate for High-Profile or Heavy Traffic Commercial Real
Estate Properties (Since 9/11) Has…
Increased Substantially
1.9%
Increased Moderately
1.9%
Stayed about Same
40.4%
Bank has received no applications
for such projects55.8%
Source: Federal Reserve survey of large bank lending practices, April 2002.
But Most Banks Don’t Yet Seem to Recognize the Risk
BANKER POLL: Rejection Rate for Commercial Real Estate Properties (Since 9/11) Has…
Increased Substantially
0%
Increased Moderately
5.9%
Stayed about Same
80.4%
Bank has received no applications
for such projects13.7%
Source: Federal Reserve survey of large bank lending practices, April 2002.
Federal Backstop:Winner/Loser Matrix
SCENARIO 2WINNERS:•Primary insurers/Reinsurers/Brokers•Capital Markets-Focused Firms; Less so for credit-sensitive firms
LOSERS:•REITs
SCENARIO 3WINNERS:•Reinsurers/Brokers•Capital Markets-Focused Firms•Asset managers w/fixed-income focus
LOSERS:•Primary insurers•REITs•Credit Sensitive Firms•Asset managers w/equity focus
SCENARIO 1WINNERS:•Primary insurers/Reinsurers/Brokers•REITS
LOSERS: None
SCENARIO 4WINNERS:•Primary insurers/Reinsurers/Brokers•Capital Markets-Focused Firms
LOSERS:•REITs•Credit Sensitive Firms
TERRORISM BILL PASSES
NO TERRORISM BILL PASSES
ATTACKSOCCUR
NOATTACKS
OCCUR
Source: Morgan Stanley
Capacity:
How Much Money Do We Really Have?
Capital Myth 1: Insurers Have $4 Trillion in Assets to Pay Terrorism Claims
$3,139 (77%)
$931 (23%)
Source: Insurance Insurance Information Institute
The FactsP/C insurers have $931 billion in assets compared to $3.1 trillion for life insurers
Total = $4.1 Trillion (as of 12/31/00)
P/C
LIFE
Capital Myth 2: P/C Insurers Have Nearly$1 Trillion in Assets to Pay Terrorism Claims
Liabilities ($594.6B)
64%
PH Surplus ($317.4B)
34%
Non-Admitted Assets ($19B)
2%
Source: Insurance Information Institute; A.M. Best
The Facts66% of Assets are offset by liabilities
(mostly reserves) or are non-admitted
Assets = Liabilities + Policyholder Surplus
Capital Myth 3: P/C Insurers Have $300 Billion to Pay Terrorism Claims
"Target" Commercial*$100 billion
33%
Other Commercial$50 billion
17%
Personal$150 billion
50%
Total PHS = $298.2 B as of 6/30/01
*”Target” Commercial includes: Comm property, liability and workers comp; Surplus must also back-up on non-terrorist related property/liability and WC claims.Source: Insurance Information Institute
The FactsOnly 33% of industry
surplus backs up “target” lines.
$0
$50
$100
$150
$200
$250
$300
$350
75 77 79 81 83 85 87 89 91 93 95 97 99 01
Policyholder Surplus: 1975-2002*
*As of 1st quarter 2002Source: A.M. Best, Insurance Information Institute
Bill
ions
(US$
)
Surplus Peaked at $336.3 Billion in 1999
•Surplus decreased 8.7% in 2001 to $289.6 Billion.
•Surplus rose 1.9% in the 1st quarter of 2002
•Surplus is now lower than at year-end 1997.
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
Capacity Crunch Brings Opportunity
Rapid rush of capital in to offshore domiciles; U.S. and European insurers had no problem raising cash equity and bond markets
But some new cash is hedge fund/venture capital = short term
“Flight to Quality” Big, highly-rated insurers benefit
Risk modeling firms begin research:Terror risk generallyWC especially (no terror exclusions approved)
Source: Insurance Information Institute.
Fresh Capital: Top 15 Deals(Completed as of July 12, 2002)
CGNU $1,700DSwiss Re 1,600VAxis (Marsh) 1,600SAce Ltd. 1,150SWinterthur 1,100UAIG 1,000CDMontpelier 1,000PEConverium 985SAllied World 959SXL Capital 819S
Endurance 800VArch Capital 763SChubb 600DSt. Paul 575TPWellington 564SALL OTHERS 7,281Total Completed = $28,037
Pending = $16,431GRAND TOTAL = $44,468
Will they shorten the hard market?Type of Issuance: CD=Convertible Debt; D= Debt; PE=Private Equity;S=Stock;TP=Trust Preferred; U=Unspecified; V=Various Source: Morgan Stanley
Capital Raising by P/C Insurers Since September 11, 2001*
$20,492
$7,545
$11,059
$5,372
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
2001 2002*
($ M
illio
ns)
Completed Pending
$25.9 Billion
$18.6 Billion
*As of July 12, 2002.
Source: Morgan Stanley
15 Pending
32 Pending
40 Completed
26 Completed
Capital Raising by P/C Insurers Since 9/11 Totals $44.5B
Financial Implications for the U.S. Non-Life Insurance Industry
P/C Net Income After Taxes1991-2002 ($ Millions)
$14,178
$5,840
$19,316
$10,870
$20,598$24,404
$36,819
$30,773
$21,865$20,223
-$7,921
$20,420
-$10,000
-$5,000
$0
$5,000
$10,000
$15,000$20,000
$25,000
$30,000
$35,000
$40,000
91 92 93 94 95 96 97 98 99 00 01 02**I.I.I. estimate based on first quarter 2002 data.Sources: A.M. Best, ISO, Insurance Information Institute.
2001 was the first year ever with a full year net loss
2002 Q1 ROE = 6.9%
95
100
105
110
115
120
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00
02**
P/C Industry Combined Ratio
2001 = 116.0
2002 Forecast* = 108.0
2002 Q1: 102.3
Combined Ratios
1970s: 100.3
1980s: 109.2
1990s: 107.7
Sources: A.M. Best; III
* Based on III 2002 Groundhog Forecast
110.
5
105.
0
113.
6 119.
2
104.
8
100.
8
100.
5
114.
3
107.
2
142.
9
102.
3108.
8 115.
8
106.
9
108.
5
106.
5
105.
8
101.
6 105.
6
107.
7
110.
1 116.
0
101.
6
126.
5
90
100
110
120
130
140
150
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002*
Reinsurance All Lines Combined Ratio
Combined Ratio:Reinsurance vs. P/C Industry
*First Quarter 2002Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
2001’s combined ratio was the worst-ever for reinsurers
($60)
($50)
($40)
($30)
($20)
($10)
$0
$1019
7519
7619
7719
7819
7919
8019
8119
8219
8319
8419
8519
8619
8719
8819
8919
9019
9119
9219
9319
9419
9519
9619
9719
9819
9920
0020
0120
02
Underwriting Gain (Loss)1975-2002*
*Annualized estimate based on first quarter 2002 data.Source: A.M. Best, Insurance Information Institute
$ B
illio
ns
P-C insurers paid $53 billion more in claims & expenses than they collected in premiums
in 2001
-5%
0%
5%
10%
15%
20%
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
*
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2002*
*EstimateSource: Insurance Information Institute; Fortune
U.S. InsuredCatastrophe Losses
$7.5
$2.7$4.7
$22.9
$5.5
$16.9
$8.3 $7.3
$2.6
$10.1$8.3
$4.3
$24.1
0
5
10
15
20
25
89 90 91 92 93 94 95 96 97 98 99 00 01
* Includes $16.6B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims.Source: Property Claims Service, Insurance Information Institute
$ BillionsCAT Losses for 2001 Set a Record
•20 events (lowest since 1969)•1.5 million claims
•9/11: $16.6B = 74,000 claims
-5%
0%
5%
10%
15%
20%
25%
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
US P/C Insurers All US Industries LifeDiversified Finl. Comm. Banks
ROE: Financial Services Industry Segments, 1987–2001
Source: Insurance Information Institute; Fortune
Combined Ratio Components
108.1 106.8103.1
1.5
8.8
3.0
0.6
1.4
1.5
100
105
110
115
120
2000 2001E 2002E
"Normalized" Losses Catastrophe Losses Asbestos & Environmental
117.0
110.1 107.5
WTC losses accounted for almost 6 pts. on the
2001 combined ratio
Source: A.M. Best.
0%
5%
10%
15%
20%
25%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
*Estimate based on first quarter 2002Source: A.M. Best, Insurance Information Institute
Growth in Net Premiums Written (All P/C Lines)
2000: 5.1%
2001: 8.1%
2002: 10.3%*
The underwriting cycle went AWOL in the 1990s.
It’s Back!
Pricing:
What’s Going On?
Pre-Sept. 11: Average Price Change of Commercial Insurance Renewals
9.5%
13.5%
8.8%
10.0%
12.0%
11.0%
8.9%
6.1%
9.5%
8.0%
8.3%
7.9%
9.0%
-1.6%
-1.2%
-0.4%
-7.0%
-6.0%
-11.0%
-6.0%
-10.0%
-7.0%
-3.0%
1.4%
0.8%
3.5%
3.2%
3.2%
2.8%
4.1%
-2.1%
-2.8%
-1.8%
0.2%
-5.0%
-4.4%
-3.5%
-4.3%
-6.6%
-4.1%
-2.0%
-13%
-11%
-9% -7% -5% -3% -1% 1% 3% 5% 7% 9% 11%
13%
E&S
Umbrella
Workers' Comp
Commercial Property
CMP
General Liability
Commercial Auto
Spring 2001 Fall 2000 Spring 2000 Fall 99 Spring 99 Fall 98Source: Conning
CIAB Rate Survey
20%
31% 31%30%
55%50%
45%
81%
63%
44%
77% 74%
62%
82%91%
97%98%89%
Q3:00 Q4:00 Q1:01 Q2:01 Q3:01 Q4:01SMALL
Q3:00 Q4:00 Q1:01 Q2:01 Q3:01 Q4:01MEDIUM
Q3:00 Q4:00 Q1:01 Q2:01 Q3:01 Q4:01LARGE
Commercial Accounts (Q3:00 – Q4:01)% of Respondents indicating price increases > 10%
Source: Council of Insurance Agents and Brokers
CIAB Rate SurveySecond Quarter 2002
Rate Increases By Size of AccountRate Increases By Size of AccountNoNo
Change Up 1Change Up 1--10% 1010% 10--20% 2020% 20--30% 3030% 30--50% 50%50% 50%--100% >100%100% >100%
Small (<$25K) 4% 8% 40% 35% 7% 1% 0%
Med ($25-$100K) 1% 4% 19% 43% 28% 1% 0%
Large (>$100K) 1% 4% 10% 32% 31% 4% 3%
Source: Council of Insurance Agents and Brokers
CIAB Rate SurveySecond Quarter 2002
Rate Increases By Line of BusinessRate Increases By Line of BusinessNoNo
Change Up 1Change Up 1--10% 1010% 10--20% 2020% 20--30% 3030% 30--50% 50%50% 50%--100% >100%100% >100%
Comm. Auto 2% 6% 28% 39% 21% 1% 1%
Workers Comp 5% 13% 19% 32% 15% 5% 2%
General Liability 2% 9% 24% 45% 15% 2% 1%
Comm. Umbrella 2% 4% 10% 20% 27% 17% 16%
Comm. Property 3% 4% 16% 30% 31% 13% 1%
Business Interr. 3% 8% 32% 33% 10% 1% 0%
Surety Bonds 10% 13% 16% 14% 6% 0% 1%
Source: Council of Insurance Agents and Brokers
100110120130140150160170180190200210220230240250260
89 90 91 92 93 94 95 96 97 98 99 00 01 02*
Rate On Line Index(1989=100)
Source: Guy Carpenter * III Estimate
Prices rising, limits falling: ROL up significantly
Cost of Risk per $1,000 of Revenues: 1990-2002E
$6.10$6.40
$8.30$7.70
$7.30
$6.49
$5.70$5.25
$5.71
$5.20$4.83
$5.55
$7.22
$4
$5
$6
$7
$8
$9
$10
90 91 92 93 94 95 96 97 98 99 00 01E 02E
Source: 2001 RIMS Benchmark Survey; Insurance Information Institute estimates.
Cost of risk to corporations could rise sharply in 2002; About half of increase due to 9/11
0%
5%
10%
15%
20%
25%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
*Estimate based on first quarter 2002Source: A.M. Best, Insurance Information Institute
Growth in Net Premiums Written (All P/C Lines)
2000: 5.1%
2001: 8.1%
2002: 10.3%*
The underwriting cycle went AWOL in the 1990s.
It’s Back!
Cause for Rise in Insurance and Reinsurance Pricing
WTC has made underwriters aware of new types of risks and larger potential lossesStandard deviation of loss is wider than previously expectedAmount of risk capital required to support insurance is greater than formerly understoodIndustry’s liquidity needs are greater than previously understoodCapacity being reduced results in supply versus demand pressuresInvestment shortfallsMany problems beyond WTC (Enron, D&O, med mal…)
Reasons Why Market Will Remain Hard
• Total capital raised less than what was lost from 9/11• Capacity lost is greater than dollar losses from attack
suggestMore caution on the part of insurers/reinsurers means more capital needed per dollar of risk assumed
• Demand up (we’re more at risk as a nation now)• Poor results in many important lines for reason other
than 9/11• Poor investment results• Wall Street pressure
Assessing the Threat of Terrorism to the Insurance Industry:
Terrorism Modelling &Risk Analysis
Property Exposure Per Location Overview
Source: Modelling by Herbert Clough. Inc.
Midtown Manhattan1,000 ft Radius
Source: Modelling by Herbert Clough. Inc.
Property and Worker’s Comp Exposure Per Location
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3
W 73rd St
9th
Ave
12 th
Ave
11th
Ave
W 53rd St
W 63rd St
Broa
dway
8th
Ave
E 5th Walk
E 59th St
W 68th St
W 4th StAv
enue
of T
he A
mer
icas
Ave
Patchi
n Pl
2nd
Ave
Macombs Pl
Fdr D
r
Ram
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1
5
3
1
3
10
8
3
28
2 2
52
25
210
10
4
10
5
9
8
5
7
92
13
3
Property Exposure(in $)
2,000,000 to 42,400,000100,000 to 2,000,000
1,000 to 100,000
Employees Per Location
: Over 50
: 5 to 50
: 1 to 5
Herbert Clough Inc. 11/2001
Property And Worker's CompExposure Per Location
New York, NY
Source: Modelling by Herbert Clough. Inc.
Indian Point Power Plant*10 Mile Radius
Total Exposure - $27.6M
Source: Modelling by Herbert Clough, Inc. *Peekskill, NY
Terror Coverage Criteria & Offering Companies
Key CriteriaSize of CompanySize of Class of RisksGeographic Spread of ExposureLines of BusinessDesired CapacityQuality of Available DataWillingness to Pay Premium
Property Per RiskReadily Available (including NBC)Opportunistic PremiumCapacity Up to Occurrence Limits
Companies Offering CoverACE-USAAIGAllianzArch CapitalAXIS SpecialtyBerkshire HathawayOil Insurance LtdLloyd’s of LondonSpecialty Risk Insurance & Reinsurance Luxembourg [Zurich, XL, Swiss Re, SCOR, HannoverRe, Allianz)
Source: GeneralCologne Re;The Betterley Report and Risk and Insurance.
The Federal Backstop for Property/Casualty Insurance:
What’s Happening in Washington?
What Insurers Want in aFederal Backstop
• Public/private plan• Maximizes availability• Minimizes costs
A Federal Backstop for Insuring the Peril of Terrorism
• SENATE (S.B. 2600, passes June 18, 2002)2-yr planIndustry aggregate deductible of $10B in 2002, $15B in 2003
Company deductible = (Mkt. Share) x ($10B) in 2002, (x $15B in 2003)80% fed share below $10B, 90% aboveGovt. liability capped at $100B
• HOUSE (H.R. 3210, passed Nov. 29, 2001)3-year loan guarantee program
Industrywide losses must exceed $1B, orindustrywide losses exceed $100 million and those losses exceed 10% of surplus and 10% of net premium written of an individual commercial carrier.
Criticized by industry for complexity of loan repayment/ assessment formula; some view triggers as too high.
• Original Industry Proposal: Pool (similar to Pool Re in U.K.)Called for creation of pool that would receive premiums for terrorist act coverage and pay lossesFed steps in only as pool becomes depletedEffort failed early on
Federal Terrorism Insurance Program?
Government Backed Terrorism Insurance Isn’t Unprecedented
Terrorism Risk Insurance
Country Provider DetailsUnited Kingdom Pool Re Created in 1990’s due to IRA terrorism losses.Spain Consorcio Covers “Extraordinary Risks” such as Earthquake,
Volcanic Eruption, Flood, Storm, Terrorism and Civil Commotion
South Africa SASRIA Created in 1929 due to political climate in South Africa - still in existence today.
Israel PTCF Covers losses triggered by politically motivated violence (including terrorism).
France GAREAT Created post September 11, pool with state guarantee for terrorism coverage.
Source: Swiss Re Focus Report: Terrorism
Why is a Terrorism Insurance Program so Hard to Get???
U.S. Government Backed Insurance Isn’t Unprecedented
• FDIC (bank deposits)
• National Flood Insurance Program
• The Price-Anderson Act (Nuclear Contamination)
• Federal Crop Insurance
• The Overseas Private Investment Corp. (Overseas Political Risk)
• The National Insurance Development Program (Urban Riots and Civil Disorder)
Insurance Information Institute On-Line
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