Top Trends in Auto and Home Insurance

Transcription

1 Top Trends in Auto and Home Insurance Underwriting Insurance Information Institute March 5, 2010 Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute 110 William Street New York, NY Tel: Cell:

2 Presentation Outline Pricing Trends in Auto & Home Insurance Premium and Growth Trends: Auto and Home Exposure Trends in Auto and Home Insurance Economic Trends Impacting Auto and Home Insurance Key Cost Drivers in Auto Insurance Claim Trends in Auto Insurance BI, PD Liability, PIP, Collision and Comprehensive Underwriting Trends in Auto and Home Insurance Trends in Fraud and Abuse New York Case Study: No-Fault Claims Fraud Catastrophe Loss Trends Demographic Trends Impact Personal Lines Underwriting: The Technological Arms Race Q&A 2

3 Pricing Trends in Auto and Home Insurance Modest Improvements in Pricing i Can Will Help Profitability Amid Slack Demand 3

4 Average Expenditures on Auto Insurance $950 $900 $850 $800 $830 $842 $844 $831 $816 $816 $786 $795 $878 $750 $700 $650 $651 $668 $691 $705 $703 $685 $690 $726 $ * 09* 10* Countrywide Auto Insurance Expenditures Increased 2.6% in 2008 and 3.5% Pace in 2009 (est.) and 4% in 2010 (est.) * Insurance Information Institute Estimates/Forecasts Source: NAIC, Insurance Information Institute estimates based on CPI data. 4

5 Monthly Change in Auto Insurance Prices* (Percent) 6% Auto Insurance Price Increases Seem to Have Leveled Off in Recent Months, Averaging 4.5% for All of % 2.6% 2.7% 3.0% 3.1% 3.4% 3..7% 4.0% 4.0% 4.3% 4.4% 4.7% 4.4% 4.7% 4.6% 4.7% 4.5% 4.6% 4.5% 4.7% 5% 4% 3% 0.8% 0.8% 0.5% 0.4% 0.3% 0.3% 0.5% 0.6% 0.5% 0.1% 0. 2% 0.5% 0.9% 1.1% 1.3% 1.7% 2% 1% 0% 5 Jan 07 Feb 07 Mar 07 Apr 07 May 07 Jun 07 Jul 07 Aug 07 Sep 07 Oct 07 Nov 07 Dec 07 Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 * Percentage change from same month in prior year. Source: US Bureau of Labor Statistics

6 Average Premium for Home Insurance Policies** $950 $900 $850 $800 $750 $729 $764 $804 $822 $843 $868 $890 $700 $650 $600 $550 $500 $668 $593 $536 $ * 09* 10* Countrywide Home Insurance Expenditures Increased by an Estimated 2.5%in 2008, 3% in 2009 and 2010 * Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers. Source: NAIC, Insurance Information Institute estimates based on CPI data. 6

7 Average Commercial Rate Change, All Lines, (1Q:2004 4Q:2009) 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 (Percent) 0% -0.1% -2% Magnitude of Price Declines Shrank During Crisis, -5.9% -4.6% 3% -3.2% -2.7% -3.0%.1% -4.9% -5.8% -6.0% -4% -6% Reflecting Shrinking Capital, Reduced Investment Gains, Deteriorating Underwriting 4% -9.7% -9.6% -8.2% -7.0% % -5-8% -10% Performance, Higher Cat Losses and Costlier Reinsurance -11.3% -11.8%.3% -12.0% 5% -12.9% % -12% -14% KRW Effect Market Remains Soft as Capital Restored and Underwriting Losses Fall % Source: Council of Insurance Agents & Brokers; Insurance Information Institute

8 Exposure Trends in Auto and dhome Insurance Recession, Unemployment, Credit Crisis Have Hurt Personal Lines Exposures, But a Gradual Recovery Is Underway 8

9 New Private Housing Starts, F (Millions of Units) I.I.I. estimates that each incremental 100,000 decline in housing starts costs home insurers $87.5 million in new exposure (gross premium). The net exposure loss in 2009 vs is estimated at about $1.3 billion New home starts plunged 34% from ; drop through 2009 is 72% (est.); A net annual decline of 1.49 million units, lowest since records began in F11F Little Exposure Growth Likely for Homeowners Insurers Due to Weak Home Construction ti Forecast for Also Affects Commercial Insurers with Construction Risk Exposure, Surety Source: U.S. Department of Commerce; Blue Chip Economic Indicators (2/10); Insurance Information Institute. 9

10 Average Square Footage of Completed New Homes in U.S., :Q4 Square Ft 2,700 2,150 2,190 2,223 2,266 2,324 2,320 2,330 2,349 2,434 2,469 2,521 2,519 2,561 2,492 2,327 2,417 2, ,300 The trend to building larger homes reversed in , impacting exposure growth beyond the absolute decline in units 1,825 1,905 1,995 2,035 2,080 2,075 2,095 2,095 2,100 2,095 2,120 2,100 1,660 1,695 1,645 1,700 1,720 1,755 1,760 1,740 1,720 1,710 1,725 1,780 1,785 1,900 1,700 Average size of completed new homes often falls in recessions (yellow bars), but historically bounces back in expansions 1, :Q 1 09:Q 2 09:Q 3 09:Q 4 Source: U.S. Census Bureau: Insurance Information Institute. 10

11 Auto/Light Truck Sales, F (Millions of Units) Cash for Clunkers generated about $300M in net new personal auto premiums Sharply lower auto sales will have a smaller effect on auto insurance exposure level than problems in the housing market will on home insurers New auto/light truck sales fell by 6 million units in 2009 vs. 2007, to the lowest level since the late 1960s. Forecast for 2010 is up 1.7 million units F 11F Car & Truck Sales Will Begin to Recover but Weak Economy, Credit Woes Are Still Restraining Sales; Gas Prices Could Remain a Factor Too Source: U.S. Department of Commerce; Blue Chip Economic Indicators (2/10); Insurance Information Institute. 11

12 New Boat Sales Symptomatic of Decline in Insured Exposure Growth for Luxury/Discretionary Items New Boat Sales $1,000,000 New Boats Sold Value of Boats Sold $12.5 $950,000 $900,000 $850, $800,000 $750,000 $700,000 $650,000 $600, $550, , , , , , , , , , , ,820 Boat sales fell by 16% in 2008 and the value of those sales plunged by 21% 70 04,820 $12.0 $11.5 $11.0 $10.5 $10.00 $9.5 $9.0 )$ $8.5 Valu ue of Boats Sold ($ Bill) $500, $8.0 Sources: National Marine Manufacturers Association, 2008 Abstract (latest available as of Feb. 2010); Insurance Information Institute. 12

13 Economic Trends Impacting Auto/Home Insurance Markets Recession, Recovery Can Influence Claiming Behavior 13

14 Unemployment and Underemployment Rates: Rocketing Up in January 2000 through January 2010, Seasonally Adjusted (%) 18 Traditional Unemployment Rate U Unemployment + Underemployment Rate U-6 Recession ended in November 2001 Unemployment kept rising for 19 more months Recession began in December 2007 U-6 went from 92%inApril 9.2% 2008 to 17.4% in Oct Stood at 16.5% as of Jan % Oct unemployment rate (U-3) was 8 the highest monthly rate since Peak rate in the last 30 years: % in Nov - Dec Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Stood at 9.7% as of Jan Source: US Bureau of Labor Statistics; Insurance Information Institute. 14

15 US Unemployment Rate 2007:Q1 to 2011:Q4F* 10.0% 10.2% 10.0% 11.0% 9.9% Rising unemployment is eroding payrolls and workers comp s exposure base. 8.1% 9.3% 9.6% 9.7% 9.5% 9.3% 9.1% 8.9% 10.0% 9.0% 8.0% Unemployment is expected to peak above 10% in early % 6.9% 7.0% 5% 5%.6% 4.8% 4.9% 5.4% 6.0% 5.0% % 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4 * = actual; = forecasts Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (2/10); Insurance Information Institute 15

16 Unemployment Rates by State, December 2009: Highest 25 States* Un employme ent Rate (% ) The unemployment rate has been rising across the country (up in 43 out of 50 states in Dec.), but some states are doing much better than others MI NV RI SC CA DC FL NC IL OR AL OH TN KY MS GA NJ IN MO WA MA ID AZ WV NY *Provisional figures for December 2009, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute. 16

17 Unemployment Rates By State, December 2009: Lowest 25 States* Une employme ent Rate (% ) The unemployment rate has been rising across the country (up in 43 out of 50 states in Dec.), but some states are doing much better than others DE PA CT AK WI TX ME NM AR CO LA MD WY MN NH HI VA VT MT UT OK IA KS SD NE ND *Provisional figures for December 2009, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute. 17

18 Do Changes in Miles Driven Affect Auto Collision Claim Frequency? Paid Claim Frequency = (No. of paid claims)/(earned )( Car Years) x 100 Paid Claim Freq Collision i Claim Frequency Billions of Vehicle Miles People are beginning to 2800 drive more Miles driven fell 0.4% for 12 mos Ended 09Q3 while collision claim freq was down 1.6% * Sources: Federal Highway Administration ( ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: 3rd Qtr. 2009, published Dec. 31, 2009 and earlier reports. *2009 ISO/FHWA figure is for 12 months ending 9/30/2009. Billions of Miles Driven

19 Unemployment s Effect on Percent of Uninsured Motorists, F % Uninsured Uninsured Motorist Percentage National Unemployment Percentage Unemployment 19% The unemployment rate 12% appears to be closely correlated with the In 2010 roughly 18% of 18% uninsured motorist motorists are expected percentage. to be driving without insurance as high 17% unemployment prompts some people 9% to drop coverage 16% 15% 14% 6% 13% 12% 3% E 2010F 2011F 2012F 2013F 2014F Source: Uninsured Motorists, 2008 Edition, Insurance Research Council; Blue Chip Economic Indicators (Unemployment data, including forecasts); Insurance Information Institute. 19

20 Auto Insurance: Claim Frequency Impacts of Energy Crisis/Recession of 1973/74 Oct. 17, 1973: Arab oil embargo begins Frequency Impacts Collision: -7.7% PD: -9.5% BI: -13.3% 3% Driving Stats Gas prices rose 35-40% Miles driven fell 6.7% in 1974 March 17, 1974: Arab oil states announce end to embargo Frequency began to rebound almost immediately after the embargo ended Source: ISO, US DOT.

21 Auto Insurance: Claim Severity Impacts of Energy Crisis/Recession of 1973/74 Oct. 17, 1973: Arab oil embargo begins Severity Impacts Collision: - 7.5% PD: +15.9% BI: N/A* Driving Stats Gas prices rose 35-40% Miles driven fell 6.7% in 1974 Source: ISO. March 17, 1974: Arab oil states announce end to embargo Collision severity began to rebound almost immediately after the embargo ended; PD accelerated as inflation rose; No discernable trend change in BI.

22 Estimated Homeowner Vacancy Rates, Quarterly, :Q3 July % March March 1991 November 2001 recession recession 2.5% 2.0% 1.5% 1.0% :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q1 Vacancy rates began rising in 2005:Q :Q :Q :Q :Q1 Source: U.S. Census Bureau, 22

23 Estimated Rental Vacancy Rates, Quarterly, :Q3 11.5% 11.0% 10.5% Probably few rental units will be built until the vacancy rate comes sharply down. 10.0% 0% March November 9.5% July March % recession recession 8.5% 8.0% 7.5% 7.0% 6.5% 1990: :Q1 1991: :Q1 1992: :Q1 1993: :Q1 1994: :Q1 1995: :Q1 1996: :Q1 1997: :Q1 1998: :Q1 1999: :Q1 2000: :Q1 2001: :Q1 2002: :Q1 2003: :Q1 2004: :Q1 11.1%: Highest recorded quarterly rental vacancy rate 10.4% peak in 2004:Q1. Vacancy rates began falling in 2004:Q2 2005: :Q1 2006: :Q1 2007: :Q1 2008: :Q1 2009: :Q1 Source: U.S. Census Bureau, 23

24 Value of Claims Paid to Policyholders with Creditor-Placed Homeowners Insurance, (Millions) $1,200 $1,000 $980.1 Creditor-Placed insurers paid nearly $1 billion in 2008, rising as more homeowners stopped paying their home insurance premiums along with their mortgage $925.0 $800 $600 $400 $491.5 $609.3 $626.9 $200 $ Creditor-Placed Home Insurers paid $3.6 billion in claims on behalf of policyholders from If lenders had not purchased this coverage on behalf of homeowners, tens of thousands of families would have had no source of recovery and would still be responsible for mortgage payments. Source: Insurance Information Institute calculations based on data from NAIC Credit Insurance Experience Exhibit. 24

25 Premium Growth Trends in Auto and Home Insurance Modest Improvements in Pricing i Can Will Help Profitability Amid Slack Demand 25

26 Strength of Recent Hard Markets by NWP Growth (Percent) 25% % 15% 10% 5% 0% -5% -10% 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 During the Great Depression. Expected decline of 1.6% in F Shaded areas denote hard market periods Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute 26

27 Auto & Home vs. All Lines, Net Written Premium Growth, P* 15% 13% 11% 9% 7% 5% 3% 1% -1% -3% -5% While homeowners insurance has grown faster than auto over the past decade, auto is generally more profitable 5.7% 50% 5.0% 0.9% 15.3% 92% 9.2% 14.4% Private Passenger Auto Homeowners All Lines Average P Auto = 3.0 Home = 6.5% All Lines = 3.9% P 3.0% 0.5% -4.2% *2009 figure is preliminary. Sources: A.M. Best; Insurance Information Institute. 27

28 Net Written Premium Growth by Segment: P 6% 4% 2% 0% -2% -4% -6% -8% -10% -0.7% Personal lines will return to growth in 2010 while commercial lines and reinsurance are expected to continue to shrink 1.8% 3.5% -1.1% -1.5% -4.0% -7.9% -5.6% Personal Lines Commercial Lines Reinsurance E 2010P -2.0% Rate and exposure are more favorable in personal lines, whereas a prolonged soft market and sluggish recovery from the recession weigh on commercial lines. Low catastrophe losses and ample capacity are holding down reinsurance prices while higher insurer retentions impact premiums Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute. 28

29 Cost Drivers in Auto Insurance Auto Insurers Experience Inflation Very Differently Than the Overall Economy 29

30 Annual Inflation Rates (CPI-U, %), F Annual Inflation Rates (%) Inflation was negative in 2009 and overall 6.0 should remain tame in 2010 and 2011, but that means little to auto insurers F11F Low Overall Inflation Does Not Imply Any Lack of Cost Pressure on Auto Insurers Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, Feb. 10, 2010 (forecasts). 30

31 P/C Insurers Experience Inflation More Intensely than 2009 CPI Suggests (Percent) 8% 6% 4% 2.7% 3.0% 3.1% 3.8% 4.3% 55% 5.5% 6.2% 2% 0% -2% -0.4% Overall Legal US Tort Medical Motor Bodily WC Med No-Fault CPI Services Costs Care Vehicle Body Work Injury Severity Severity Claim Severity Healthcare and Legal/Tort Costs Are a Major P/C Insurance Cost Driver. These Are Expected to Increase Above the Overall Inflation Rate (CPI) Indefinitely Source: CPI is Blue Chip Economic Indicator 2009 estimate, 12/09; Legal services, medical care and motor vehicle body work are avg. monthly year-over-year change from BLS; BI and no-fault figures from ISO Fast Track data for 4 quarters ending 09:Q3. Tort costs is 2009 Towers-Perrin estimate. WC figure is I.I.I. estimate based on historical NCCI data. 31

32 Top Concerns/Risks for Insurers if Inflation Is Reignited Concerns The Federal Reserve Has Flooded Financial System with Cash (Turned on the Printing Presses), the Federal Gov t Has Approved a $787B Stimulus and the Deficit is Expected to Mushroom to $1.8 Trillion. All Are Potentially Inflationary. What are the potential impacts for insurers? What can/should insurers do to protect themselves from the risks of inflation? Key Risks From Sustained/Accelerating Inflation Rising Claim Severities Cost of claims settlement rises across the board (property p and liability) Rate Inadequacy Rates inadequate due to low trend assumptions arising from use of historical data Reserve Inadequacy Reserves may develop adversely and become inadequate (deficient) Burn Through on Retentions Retentions, deductibles burned through more quickly Reinsurance Penetration/Exhaustion Higher costs risks burn through their retentions more quickly, tapping into reinsurance more quickly and potentially exhausting their reinsurance more quickly Source: Insurance Information Institute. 32

33 Over the Last Three Decades, Total Tort Costs* as a % of GDP Appear Somewhat Cyclical ($ Billions) $300 Tort Sytem Costs Tort Costs as % of GDP 2.50% $250 Tort Sys stem Costs $200 $150 $100 $ Growth in Tort Costs as % of GDP is Due in Part to Shrinking GDP 2.25% 2.00% 1.75% To ort Costs as % of GDP $ E 10E 1.50% * Excludes the tobacco settlement, medical malpractice Sources: Tillinghast-Towers Perrin, 2008 Update on US Tort Cost Trends, Appendix 1A; I.I.I. calculations/estimates for 2009 and

34 The Nation s Judicial Hellholes: 2010 Watch List California Alabama Madison County, IL Jefferson County, MS Texas Gulf Coast Rio Grande Valley, TX Illinois Cook County West Virginia New York City Dishonorable Mention AR Supreme Court MN Supreme Court ND Supreme Court PA Governor MA Supreme Judicial Court Sacramento County New Mexico Appellate Courts New Jersey Atlantic County (Atlantic City) South Florida Source: American Tort Reform Association; Insurance Information Institute 34

35 Claim Trends in Auto Insurance Rising i Costs Held in Check by Falling Frequency: Can That Pattern Be Sustained? 35

36 Bodily Injury: Severity Trends Above Decline in Frequency Annual Change, 2005 through 2009* Severity Frequency 8% 6% 4% 2.9% 4.8% 6.0% 6.1% 43% 4.3% 2% 0% -2% -4% -6% -3.2% -3.8% -4.2% 42% -5.4% -5.0% * Cost Pressures Will Increase if Current BI Frequency and Severity Trends Continue *2009 figure is for the 4 quarters ending 2009:Q3 Source: ISO/PCI Fast Track data; Insurance Information Institute 36

37 Property Damage Liability: Frequency Trends Offsetting Rising Severity Annual Change, 2005 through 2009* 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% Severity Frequency 3.7% 2.9% 2.1% 2.0% 0.6% 0.4% -1.6% -1.7% -3.3% -3.4% * Favorable Frequency Trend is Keeping PD Costs in Check, But Is the Trends Sustainable? *2009 figure is for the 4 quarters ending 2009:Q3 Source: ISO/PCI Fast Track data; Insurance Information Institute 37

38 No-Fault (PIP) Liability: Frequency and Severity Trends Are Adverse* Annual Change, 2005 through 2009* 8% 6% 4% 2% 0% Severity 4.7% Frequency 2.5% 6.3% 6.5% 6.2% 2.9% -2% -4% -6% -8% -2.7% -4.8% -5.7% -6.9% * Multiple States Are Experiencing Severe Fraud and Abuse Problems in their No-Fault Systems, Especially FL, MI, NY and NJ *2009 figure is for the 4 quarters ending 2009:Q3. No-fault states included are: FL, HI, KS, KY, MA, MI, MN, NY, ND and UT. Source: ISO/PCI Fast Track data; Insurance Information Institute 38

39 Collision Coverage: Frequency and Severity Trends Have Been Favorable* Annual Change, 2005 through 2009* 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% Severity Frequency 3.9% -1.8% 3.1% 0.0% 2.3% 0.5% -1.4% -2.6% -2.6% -3.5% * The Recession, High Fuel Prices Have Helped Push Down Frequency and Temper Severity, But this Trend Will Likely Be Reversed Based on Evidence from Past Recoveries *2009 figure is for the 4 quarters ending 2009:Q3 Source: ISO/PCI Fast Track data; Insurance Information Institute 39

40 Comprehensive Coverage: Frequency and Severity Trends Favorable in 2009* Annual Change, 2005 through 2009* Severity Frequency 20% 15.5% 15% 13.0% 10% 5% 0% -5% -10% -15% -3.1% -9.8% -6.6% 1.6% -1.4% -1.4% -2.0% -1.6% * Weather Creates Volatility for Comprehensive Coverage; Recession Has Helped Push Down Frequency and Temper Severity, But This Factors Will Weaken as Economy Recovers *2009 figure is for the 4 quarters ending 2009:Q3 Source: ISO/PCI Fast Track data; Insurance Information Institute 40

41 Underwriting Trends in Auto and Home Insurance Modest Improvements in Pricing i Can Will Help Profitability Amid Slack Demand 41

42 Calendar Year Combined Ratios by Segment: P Personal lines combined ratio is expected to improve in 2010 while commercial lines 110 and reinsurance deteriorate Personal Lines Commercial Lines US Reinsurance E 2010P Overall deterioration in 2010 underwriting performance is due to expected return to normal catastrophe activity along with deteriorating underwriting performance related to the prolonged commercial soft market Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute. 42

43 After-Tax Return on Surplus (ROE) by Segment: P Personal lines ROEs should improve in 2010 and remain flat in commercial lines and reinsurance 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% 6.6% 7.3% 7.1% 5.3% 5.2% 5.3% 39% 3.9% 1.7% -1.3% Personal Lines Commercial Lines Reinsurance E 2010P Profitability will rise or stabilize across most p/c lines, barring a financial crisis relapse or major catastrophic losses Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute. 43

44 Change in Policyholder Surplus by Segment: P 25% 20% 15% 10% 5% 0% -5% -10% -15% After a steep decline in capacity during the crisis, most of that capacity was restored in Virtually all is expected to be restored in % 7.0% 5.0% 6.0% 19.0% -11.5% -12.1% -12.3% Personal Lines Commercial Lines Reinsurance E 2010P 21.0% Rapid growth in policyholder surplus to pre-crisis levels combined with ongoing slow growth or declines in premiums (esp. in commercial lines) implies a build-up of excess capacity a major factor in weak commercial lines and reinsurance pricing Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute. 44

45 Change in Net Investment Income by Segment: P* 15% 10% 5% 0% -5% -10% -15% -20% -12.8% Net investment income is expected to begin to recover in all segments in % 3.4% -0.8% -16.1% 1.9% -13.4% 1.9% Personal Lines Commercial Lines Reinsurance E 2010P 10.7% Investment income consists primarily of interest on bonds and stock dividends. Both were hit hard during the financial crisis as the Fed slashed interest rates to near zero and corporations cut dividends. A recovery in investment asset values beginning in Q which reduced realized capital losses has helped offset some of the decrease in investment income. Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute. 45

46 Investment Yield by Segment: P* 50% 5.0% 4.5% Investment yields are shrinking across all segments down 10 to 100 bases points since % 4.0% 3.5% 3.8% 35% 3.5% 3.3% 3.7% 3.6% 3.9% 3.9% 3.8% 3.0% 2.5% 2.0% Personal Lines Commercial Lines Reinsurance E 2010P The Fed slashed interest rates in 2008 and has kept them low since, eroding the yield on all types of bonds, especially US Treasury securities. Yields will not recover until the Fed begins monetary policy tightening. Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute. 46

47 Auto & Home Combined Ratios vs. All Lines, P* Private Passenger Auto Homeowners All Lines Average P Auto = Home = All Lines = Homeowners has been the most volatile component of personal lines, but can be profitable P Countrywide Home Insurance Month Recession Expenditures Started Increased by an Estimated 2.5%in 2008, 3% in 2009 and 2010 Sources: A.M. Best; Insurance Information Institute. 47

48 Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line* 0.0% -1.0% 10% -2.0% -3.0% -4.0% -5.0% -6.0% -7.0% -8.0% Personal Lines Pvt Pass Auto Pers Prop Commercial -1.8%-1.8% -2.0% -1.9% -2.1% Comml Auto Credit Comm Prop Comm Cas Fidelity/Surety Warranty Surplus Lines Med Mal WC -3.1% -3.3%-3.3% -3.6% -3.7% 37% -4.3% -5.2% -5.7% -7.3% Reinsuran nce** 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. 48

49 Fraud & Abuse in Private Passenger Auto Insurance Skyrocketing k No-Fault (PIP) Claim Costs Are a Major Concern in Several Statest 49

50 Average No-Fault Claim Severity, 2009:Q3 $35,000 $30,856 $30,000 MI, NJ, NY and FL currently have the most severe problems in their no-fault system $25,000 $20,000 $16,63 37 $15,000 $10,000 $5, $8, 66 $7,5 $6,67 78 $6,343 3 $6,298 $5,578 $4,999 $4,268 $4,125 $3,954 $3,951 $2,924 $2,862 $2,851 $2,445 $2,087 $1,797 $0 MI NJ NY FL MN DC DE KY ND PA OR WA HI TX MD KS SC UT MA Several States Have Severe and Growing Problems With Rampant Fraud and Abuse in their No-Fault Systems. Claim Severities Are Up Sharply. Source: ISO/PCI Fast Track data; Insurance Information Institute. 50

51 Increase in No-Fault Claim Severity: * $35, % $32,490 $30, % $24,385 $25,000 $20, $16, % $15,000 $10,000 $5,000 $0 $12,136 $5, %** $8,504 $7,441 $6,674 Michigan New Jersey New York Florida The no-fault systems in MI, NJ, NY and FL are under stress due to rising fraud and abuse which will ultimately lead to higher premiums for drivers *2009 figure is for the 4 quarters ending 2009:Q3. **Since 2006 the increase in Florida was 17.3% (average severity that year was $6,674). Sources: Insurance Information Institute research from ISO/PCI Fast Track data. 51

52 New York State No-Fault Claim Severity, :Q3 No-Fault Claim Severity $9,500 Avg. Claim Severity 2.4% Frequency $9, % $8, % $8,000 $6,063 $6,156 $6,052 $6,094 $5,914 $6,250 $6,269 $6,699 $6,530 $6,606 $7,311 $6,958 $6,870 $7,063 $7,323 $8,347 $8,327 $7,888 $7,5077 $8,234 $7,378 $7,297 $7,773 $7,670 $7,740 $9,235 $8,727 $8,577 $8,443 $8,177 $8,507 $8,025 $8,562 $8,748 $8,690 $7,500 $7,000 $6,500 Avg. Claim Severity Rose 63% in 5 years after 1997 Presbyterian Decision 1.8% 1.6% $5,675 $5,820 $5,991 $5,615 $6,000 $5,500 $5,000 Avg. Claim Severity is at its 3 rd Highest Level in History = $8, % 1.2% 1.0% :01 1:03 2:01 2:03 3:01 3:03 4:01 4:03 5:01 5:03 6:01 6:03 7:01 7:03 8:01 8:03 9:01 9:03 About 20% of No-Fault Claim Costs Are Attributable to Fraud and Abuse Sources: ISO/PCI Fast Track data; Insurance Information Institute.

53 Estimated Cost of No-Fault Fraud in New York State, * ($ Millions) $300 $250 No-fault fraud cost NY drivers and their insurers an estimated $229 million in 2009, up 17.3% from 2008 and 90.3% from 2007 $229.1 $241.2 $200 $195.3 $150 $100 $50 $0 $120.4 $70.5 The cost of no-fault fraud could rise to $241 million in 2010 if no reforms are enacted $ ** 2010F *No-fault severity reached a post-reform low in 2004 before, hence selection of 2005 as the first year of analysis. Actual no-fault losses in 2005 and beyond are higher than estimates indicate due to base level of fraud imbedded in 2004 data. **2009 figure is estimated based on 4 quarters ending 2009:Q3 (latest available). Source: Insurance Information Institute analysis and research. 53

54 Estimated Cumulative Cost of No-Fault Fraud in New York State, F* ($ Millions) $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 The cumulative cost of no-fault fraud in NY state could rise to $858 in 2010 and more than $1 billion by early 2011 if no reforms are enacted No-fault fraud cost NY drivers and their insurers totaled an estimated $617 million from 2005 through 2009 $2 $72 $193 $388 $617 $ ** 2010F *No-fault severity reached a post-reform low in 2004 before, hence selection of 2005 as the first year of analysis. Actual no-fault losses in 2005 and beyond are higher than estimates indicate due to base level of fraud imbedded in 2004 data. **2009 figure is estimated based on 4 quarters ending 2009:Q3 (latest available). Source: Insurance Information Institute analysis and research. 54

55 Estimated Per-Claim Cost of No-Fault Fraud in New York State, F* $1,800 $1,600 $1,400 The estimated per claim cost of no-fault fraud (a.k.a. Fraud Tax) in NY state was $1,561 in 2009, up 12.3% from 2008 and 78.4% from 2007 $1,390 $1,561 $1,644 $1,200 $1,000 $800 $600 $400 $200 $0 $12 $504 $875 No-fault fraud costs per claim could rise to $1,644 in 2010 without reform ** 2010F *No-fault severity reached a post-reform low in 2004 before, hence selection of 2005 as the first year of analysis. Actual no-fault losses in 2005 and beyond are higher than estimates indicate due to base level of fraud imbedded in 2004 data. **2009 figure is estimated based on 4 quarters ending 2009:Q3 (latest available). Source: Insurance Information Institute analysis and research. 55

56 Average Expenditure on Auto Insurance In NY State, * $1,300 $1,200 $1,100 $1,000 $900 $800 $700 NY ranked as the 2 nd most expensive state during its previous crisis, falling to 4 th by 2007 $959 $960 $930 $939 $1,015 $705 $703 $686 $718 $726 $1,100 $7 81 $1,168 NY $1,172 $1,122 $1,083 $824 $840 $829 $816 US $1,047 $7 795 $600 $ In the wake of NY s first no-fault crisis, the avgerage expenditure on auto insurance fell by $125 or 10.7% between 2004 and 2007, twice the 5.4% drop in the US overall *Latest available. Sources: NAIC; Insurance Information Institute. 56

57 Catastrophic Loss Catastrophe Losses Trends Are Trending Adversely 57

58 US Insured Catastrophe Losses ($ Billions) $120 $100 $80 $ s: A Decade of Disaster 2000s: $193B (up 117%) 1990s: $89B $100 Billion CAT Year is Coming Eventually $ CAT Losses Were Down 48% though Q3 from $21.1B 1B $ $40 $20 $0 $7.5 $2.7 $4.7 $22.9 $ $ $8.3 $7.4 $2.6 $ $8.3 $ *20?? 2009 CAT Losses Were Less than Half of Was by Far the Worst Year Ever for Insured Catastrophe Losses in the Decade of the 2000s Were More than Double the 1990s, ButtheWorstHasYettoCome the to * 2009 figure is Munich Re estimate. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B. Sources: Property Claims Service/ISO; Insurance Information Institute. $26.5 $ $1 $27.5 $9.2 $6.7 $26.0 $

59 States with Highest Insured Catastrophe Losses in 2009 ($ Millions) $3,000 $2,500 $2,000 $2,458.0 Texas led the US with $2.458 billion in catastrophe losses in 2009 even with no hurricanes hitting the state. Texas also led the US with $10.2 billion in insured in 2008 due largely to Hurricane Ike. US insured catastrophe losses totaled $10.57 billion from 28 events in 2009, down from $26 billion in $1,500 $1,319.0 $1,000 $500 $821.9 $776.9 $604.5 $0 Texas Colorado Georgia Kentucky Oklahoma *As of February 22, Source: PCS/ISO 59

60 Insured Property Catastrophe Losses as % Net Premiums Earned, % US CAT losses were a record US 14% 14.4% of net premiums earned US average: % in 2005 and were 4 times the % 2008 average of 3.6% 8% 6% 4% 2% 0% Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute.

61 Insured Property Catastrophe Losses as % Net Premiums Earned, P (Percent) 16% 14% 12% 10% 8% 6% 4% 2% Catastrophe losses consumed an average of 3.6% of all premiums earned from 1987 through 2009, though the share is highly variable from year to year 0% P There is an Upward Trend in the Share of Premiums Needed to Finance Catastrophe Losses Source: A.M. Best; Insurance Information Institute.

62 Global Natural Catastrophes Overall and insured losses with trend US$bn MEGATREND Global natural catastrophe loss trends are ominous and portend an even more disastrous decade ahead. Terrorism and other man- made disasters could exacerbate the trend Overall losses (in 2009 values) Trend overall losses Insured losses (in 2009 values) Trend insured losses Source: Munich Re NatCatSERVICE; Insurance Information Institute.

63 Natural Catastrophe Losses in the U.S As of January 2010 Fatalities Estimated Estimated Overall Losses Insured Losses (US $m) (US $m) Tropical 8 Minor Minor Cyclones Severe Thunderstorms 21 13,710 9,625 Winter Storms 70 1, was a Wildfires Floods 22 1, near record year for thunderstorm losses Sources: (unmarked) - MR NatCatSERVICE, - Property Claims Services (PCS)

64 U.S. Significant Natural Catastrophes in 2009 Sources: (unmarked) - MR NatCatSERVICE, - $1+ billion economic loss and/or 50+ fatalities (as of Jan. 2010) Date Event Est. Economic Estimated Losses (US $m) Insured Losses (US $m) January Winter Storm 1, February Thunderstorms 2,500 1,350 March Thunderstorms 1, March April Flood 1, April 9-11 Thunderstorms 1,700 1,150 June Thunderstorms 2,000 1,100 July Thunderstorms 1,

65 U.S. Significant Natural Catastrophes, Number of Events ($1+ Bill economic loss and/or 50+ fatalities) There were 7 Significant Natural Catastrophes in the United States in 2009 Sources: MR NatCatSERVICE

66 Losses from U.S. Significant Natural Catastrophes ($1+ billion economic loss and/or 50+ fatalities) Overall losses from U.S. significant catastrophes totaled $10.8 billion; insured losses totaled $5.9 billion Sources: MR NatCatSERVICE

67 Insured Losses Due to Weather Perils in the U.S.: (Tropical Cyclone, Thunderstorm, and Winter Storm only) Insured losses due to weather perils in the U.S. in 2009 were the highest on record for a year without a hurricane landfall Sources: MR NatCatSERVICE, Property Claims Services

68 Distribution of US Insured CAT Losses: TX, FL, LA vs. US, * ($ Billions) Texas $31.20, 10% Louisiana $33.60, 11% Rest of US $176, 60% $57.10, 19% Florida Florida Accounted for 19% of All US Insured CAT Losses from : $57.1B out of $297.9B * All figures (except loss) have been adjusted to 2005 dollars. Source: PCS division of ISO. 68

69 Top 12 Most Costly Disasters in US History (Insured Losses, 2008, $ Billions) $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 In 2008, Ike Became the 4th Most Expensive Insurance Event and 3rd Most Expensive Hurricane in US History Arising from $ About 1.35MM Claims $4.2 Jeanne (2004) $5.2 Frances (2004) $6.2 Rita (2005) $7.3 Hugo (1989) $8.1 Ivan (2004) $8.5 Charley (2004) $11.3 $11.3 $12.5 Wilma (2005) Northridge (1994) Ike (2008)* $22.8 $23.8 9/11 Attacks (2001) Andrew (1992) $45.3 Katrina (2005) 8 of the 12 Most Expensive Disasters in US History Have Occurred Since 2004; 8 of the Top 12 Disasters Affected FL * PCS estimate as of August 1, Sources: PCS; Insurance Information Institute inflation adjustments. 69

70 Total Value of Insured Coastal Exposure (2007, $ Billions) Florida New York Texas Massachusetts New Jersey Connecticut Louisiana S. Carolina Virginia Mi Maine North Carolina Alabama Georgia Delaware New Hampshire Mississippi Rhode Island Maryland $479.9 $224.4 $191.9 $158.8 $146.9 $132.8 $92.5 $85.6 $60.66 $55.7 $51.8 $54.1 $14.9 $895.1 $772.8 $635.5 $2,458.6 $2,378.9 $522B Increase Since 2004, Up 27% In 2007, Florida Still Ranked as the #1 Most Exposed State to Hurricane Loss, with $2.459 Trillion Exposure, an Increase of $522B or 27% from $1.937 Trillion in 2004 The Insured Value of All Coastal Property Was $8.9 Trillion in 2007, Up 24% from $7.2 Trillion in 2004 $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 Source: AIR Worldwide 70

71 Demographic Trends Impacting Auto/Home Insurance Markets Aging, Immigration Will Influence Insurance Demand 71

72 Increase in Population by Age Category, 2010 to 2020 (Millions) Over the next decade, the demand for personal lines insurance will be driven by an increasingly older population Under Claim Trends in Personal Lines Will Shift With Demographics; Insurers Must Adapt Source: US Census Bureau 72

73 Younger and Older Drivers Are Over- Represented in Fatal Crashes Share of Drivers in Involvement Rate Age Group per 100,000 Drivers Percent of Licensed Total Drivers in Age Group 25% Involvement Rate in Fatal Crashes % 15% 10% 5% 0% 0.1% % 19.2% 17.4% 15.2% % 6.3% 6.7% % Under to to to to to to to Immigration and High Birth Rates in Some Demographic Groups, Combined With Baby Boomers Aging Creates Challenges for Insurers and Auto Safety Experts Sources: US DOT, NHTSA, Federal Highway Administration; Insurance Information Institute

74 Motor Vehicle Deaths per 100,000 Persons by Age, 2008 The elderly are almost as likely to be killed in a motor vehicle accident as a teenager. As the Baby Boomers age, this is a looming public health crisis Problem: How to Keep the Elderly Safe in Cars (Not Just When They re Behind the Wheel) Sources: Insurance Institute for Highway Safety; Insurance Information Institute

75 Underwriting Technology: The Competitive Front Line Underwriting Acumen Will Determine Long-Run Success A Technological Arms Race? 75

76 Competition: Success Defined More by Underwriting Acumen than by Price Consumers see competition mostly in terms of price and service While personal lines insurance is generally very price competitive, long- run success for insurers is not solely correlated with the lowest price Underwriting is the key to accurate risk assessment and pricing An insurer that systematically prices business more accurately will turn in a better financial performance and lead competitors misprice There are theoretically no boundaries when it comes to underwriting The past 15 years launched a technological revolution in underwriting Now we re in the midst of a Technological Arms Race From Credit, to Predictive Modeling to Telematics to.??? Next Wave of Innovations Will Include Integration of Real-Time Information About the Vehicle and Driver Interactive Technologies Allows drivers to log on to view how driving behaviors influence risk and price Ability for Consumer to Adjust Behaviors Tremendous public policy, public safety implications 76

77 Insurance Information Institute Online: Thank you for your time and your attention! ti Twitter: twitter.com/bob_hartwig