Trends & Challenges in P/C Insurance Business Today

Transcription

1 Trends & Challenges in P/C Insurance Business Today Focus on Oregon & Idaho Markets Professional Insurance Agents of Oregon & Idaho Insurance Institute of Oregon & Idaho June 7/8, 2004 Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY Tel: (212) Fax: (212)

2 About the Insurance Information Institute The mission of the Insurance Information Institute (I.I.I.) is to improve public understanding of insurance -- what it does and how it works. The I.I.I. enjoys broad membership throughout the insurance industry, including most of the major p/c insurers and reinsurers operating in the United States, as well as companies operating on a regional basis and internationally. For more than 40 years, the I.I.I. has provided definitive insurance information. Today, the I.I.I. is recognized throughout the insurance industry as well as by the media, governments, regulatory organizations, universities and the public as a primary source of information, analysis and referral concerning insurance. Each year, the I.I.I. works on more than 3,700 news stories, handles more than 6,000 requests for information from its members, the media, and other parties and answers nearly 50,000 questions from consumers. In addition to direct contact with the media, individuals and organizations, the I.I.I. publishes a host of helpful brochures and books on a wide variety of insurance topics, ranging in subjects from 12 Ways to Lower Your Auto Insurance Costs to the I.I.I. Fact Book series. I.I.I. s members benefit from direct access to all information, I.I.I. staff and its members-only web site. The Institute does not lobby. Its central function is to provide accurate and timely information on insurance subjects. Questions concerning I.I.I. membership should be directed to Cary Schneider at (212) or by at carys@iii.org.

3 Presentation Outline Profitability Underwriting Ratings, Solvency & Financial Strength Investment Overview Pricing Auto & Homeowners Overview Workers Comp: The Insurance Industry s Quiet Crisis? Tort Environment Insurance Scoring The Challenge of Terrorism Q & A

4 P/C FINANACIAL UPDATE: Profitability: Good but Not Good Enough Underwriting: Need to Stay Disciplined Investments: Keep Expectations Low

5 P/C FINANCIAL OVERVIEW: PROFIT PRESSURE

6 Highlights: Property/Casualty Full-Year 2003 vs Change Net Written Prem. 405, , % Loss & LAE 289, , % Net UW Gain (Loss) (4,635) (30,840) -85.0% Net Inv. Income 38,686 37, % Net Income (a.t.) 29,877 3, % Surplus* 346, , % Combined Ratio pts.

7 Strength of Recent Hard Markets by Real NWP Growth* 25% 20% 15% 10% Real NWP Growth During Past 3 Hard Markets : 8.6% : 14.5% F: 7.6% 5% 0% -5% -10% Current $ Real $ F Note: Shaded areas denote hard market periods. Source: A.M. Best, Insurance Information Institute 2004 forecast from III Groundhog Survey, 2/04.

8 Commercial Insurance Share of P/C Market is Rising $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 $118.5 $132.0 $135.3 Direct Premiums Written ($ Billions) Commercial Market Share: 1993: 52.7% 1998: 48.0% 2002: 52.9% 2003E: 53.5% $125.1 $132.0 $136.1 $137.9 $136.4 $145.3 $135.4 $149.9 $ E Source: A.M. Best; Insurance Information Institute $153.1 $141.9 Personal Commercial $156.8 $152.0 $169.7 $176.9 $188.2 $211.6 $204.6 $235.4

9 P/C Net Income After Taxes ($ Millions) $40,000 $30,000 $20,000 $10,000 $ was the first year ever with a full year net loss 2002 ROE = 1.0% 2003 ROE = 9.4% $14,178 $5,840 $19,316 $10,870 $20,598 $24,404 $36,819 $30,773 $21,865 $20,559 $3,046 $29,877 -$10,000 -$6, * Sources: A.M. Best, ISO, Insurance Information Institute.

10 ROE: P/C vs. All Industries E 20% 15% 10% 5% 0% -5% IMMEDIATE LESSON: Results are better but the industry remains a laggard. U/W, Pricing Discipline are Key! E US P/C Insurers All US Industries Source: Insurance Information Institute; Fortune

11 ROE vs. Cost of Capital: US P/C Insurance: F 20% 15% The gap between the industry s cost of capital and its rate of return is narrowing 10% 5% 14.6 pts 10.2 pts 2.1 pts 1.0 pts 0% -5% US P/C insurers missed their cost of capital by an average 6.5 points from 1991 to F Source: The Geneva Association, Ins. Information Inst. ROE Cost of Capital

12 RNW for Major P/C Lines, Average 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% 10.2% 10.1% Inland Marine 9.0% All Workers Other Comp 8.2% 7.4% 7.0% PP Auto Med Mal Source: NAIC; Insurance Information Institute 6.4% All Lines Other Liab 6.1% Fire 10-Year returns for some major p/c lines surprisingly good, but 5.1% Comm Auto 3.3% -1.2% -1.2% -4.1% CMP FMP HO Allied

13 P/C Return on Equity: 2002 Select Northwest States & CA 2002: ALL P/C LINES 8.0% Washington -1.6% 2.0% 3.3% 3.0% US Oregon Idaho California -4% -2% 0% 2% 4% 6% 8% 10% Source: NAIC, Insurance Information Institute

14 P/C ROE: Select Northwest States & CA : ALL P/C LINES 9.6% 9.4% Oregon Idaho 5.2% 8.0% 7.7% Washington US California 0% 2% 4% 6% 8% 10% 12% Source: NAIC, Insurance Information Institute

15 ROE: P/C (US, OR & ID) vs. All Industries, * 20% 15% 10% 5% 0% -5% Profitability in OR and ID has generally followed national trends & lags the Fortune F US P/C Insurers All US Industries Oregon Idaho Source: Insurance Information Institute; NAIC, Fortune

16 ROE for Personal Lines in OREGON ( ) 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% 21.3% 7.4% 15.4% 16.0% Personal Auto Homeowners 6.4% -18.1% 8.0% -2.7% 9.8% 15.1% 8.9% 11.6% 10.7% 7.5% 10-Year Average: 5.0% Auto: 10.0% Home: +6.1% 10.8% 9.2% 8.2% Homeowners and auto experience has deteriorated in recent years, but likely improved picked up in 2003/4 5.2% 5.3% Source: NAIC

17 ROE for Major Commercial Lines in OREGON, % 20% 15% 10% 5% 18.4% 20.0% 17.4% 18.2% 12.1% 16.7% Commercial Multi-Peril Commercial Auto 9.2% 5.2% 12.8% 9.5% 7.6% 9.2% 4.4% Commercial lines had a mixed performance in recent years 7.3% 11.1% 4.7% 11.3% 6.9% 2.7% 14.0% 0% Source: NAIC

18 ROE for Major Commercial Lines in IDAHO, % 25% 20% 15% 10% 5% 24.8% 12.1% 19.1% 15.2% 13.9% 9.7% 17.4% Commercial Multi-Peril Commercial Auto 7.0% 5.1% 10.4% 22.7% 10.2% 12.6% Commercial lines had a mixed performance in recent years 1.8% 16.3% 2.0% 19.9% 6.3% 10.7% 7.5% 0% Source: NAIC

19 Rates of Return on Net Worth for Workers Comp: OR vs. ID 20% 15% 10% 14.7% 11.0% 10.0% 13.8% 12.6% 12.1% 18.0% 6.2% 14.1% 8.1% Oregon Idaho 6.7% 5.6% 5% 0% -5% -10% -15% Averages: 1993 to 2002 US WC Insurance = +8.9%* OR WC Insurance = +7.1% ID WC Insurance = +5.4% 5.2% 3.6% -0.2% -2.6% 2.0% -2.4% -3.1% -10.5% Source: NAIC, Insurance Information Institute

20 WALL STREET: HIGH EXPECTATIONS

21 Insurer Stocks: Outperforming the S&P 500 Total Return 2004 YTD Through June 4, % S&P % Multiline 10.75% Life/Health 8.85% All Lines 2.05% 4.75% P/C Brokers 0% 2% 4% 6% 8% 10% 12% 14% Source: SNL Securities, Insurance Information Institute

22 Private Passenger Auto: Top 25 Writers Market Share 85% 80% 75% 70% 65% 60% 66.3% 68.8% 74.2% 81.4% Substantial consolidation evident over the past 25 years, suggesting: M&As more successful Scale economies Barriers to entry exist Capital (esp. foreign capital) cannot enter easily 55% 50% Sources: A.M. Best, Morgan Stanley, Insurance Information Institute.

23 Commercial Lines: Top 25 Writers Market Share* 62% 60% 58% 56% 54% 52% 50% 59.1% 61.9% 55.5% 61.3% * By direct premiums written. Sources: A.M. Best, Morgan Stanley, Insurance Information Institute. Virtually no consolidation in commercial p/c sector over the past 25 years, suggesting: M&As not generally successful Scale? Execution? Legacy Distribution? Deconsolidation (asset sales, spinoffs, failures) Low barriers to entry

24 P/C FINANCIAL OVERVIEW: UNDERWRITING PRESSURE

25 P/C Industry Combined Ratio = = = E = 100.0* Combined Ratios 1970s: s: s: : * 04* Sources: A.M. Best; ISO, III *2004 figures based on III Groundhog Survey, 2/04.

26 Underwriting Gain (Loss) F* $10 $0 ($10) $ Billions ($20) ($30) ($40) ($50) ($60) 2003 was the best year since 1997, with underwriting losses of just $4.6 billion. The forecast underwriting loss for 2004 is $0, given the expectation of a combined ratio *2004 underwriting loss is forecast at $0 (based on forecast combined ration of from III Groundhog forecast, 2/04. Source: A.M. Best, Insurance Information Institute

27 Commercial vs. Personal Lines Combined Ratios Commercial--Net Basis Personal--Net Basis Year Average Combined Ratios Commercial: Personal: E Source: A.M. Best; Insurance Information Institute

28 Combined Ratios: Selected Major Lines, 2003E 2004F Personal PP Auto Home GL & PL Source: A.M. Best; Insurance Information Institute E WC CMP Comm Auto 2004F Commercial U/W performance improving, but variation in results is enormous Inland Marine All Lines

29 Combined Ratio: Reinsurance vs. P/C Industry Reinsurance All Lines Combined Ratio s combined ratio was the worstever for reinsurers; 2002 was bad as well : Big improvement in primary and reinsurer segments Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute

30 After-Tax ROE for Selected AY Combined Ratios* 23.5% 21.8% 20.1% 18.4% 16.6% 14.9% 13.2% 11.5% 9.8% 8.1% 6.3% 2.1% 80% 82% 84% 86% 88% 90% 92% 94% 96% 98% 100% 105% *Assumes 4% tax-equivalent yield, 28% expense ratio and 140% premium/surplus ratio Source: Dowling & Partners Securities

31 Private Passenger Auto Direct Loss Ratios: US vs. OR & ID 75% US Oregon Idaho 70% 65% 60% 55% Loss Ratios in OR and ID have generally been better than the US as a whole 50% Source: NAIC; Insurance Information Institute

32 U.S. Insured Catastrophe Losses ($ Billions) $30 $25 $20 $15 $10 $5 $0 $7.5 $2.7 $4.7 $ Billions 2003 was the 4 th worst year ever for insured catastrophe losses in the US. There were 4 events with losses exceeding $1 billion $22.9 $5.5 $16.9 $8.3 $7.3 $2.6 $10.1 $8.3 $4.3 $28.1 $5.9 $12.9 $ * *2004 figure is for 1 st quarter only ($963 million). 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. Source: Property Claims Service/ISO; Insurance Information Institute

33 Texas: Mold Losses/Claims Continuing to Moderate* Water Damage Paid Losses* ($Millions) $250 $200 $150 $100 $50 $0 Jan-01 Mar-01 May-01 Paid Losses Claim Count Jul-01 Sep-01 Nov-01 Jan-02 Mar-02 May-02 Jul-02 Sep-02 Nov-02 Jan-03 Mar-03 May-03 Jul-03 Sep Claim Count Source: Texas Department of Insurance; Insurance Information Institute * Data are for TDI Cause 61: Discharge Other Damage. Not all claims in cause 61 are mold and mold claims may also arise from other (non-water) causes of loss.

34 FATAL ATTRACTION? A LOSS OF PRICING & UNDERWRITING DISCIPLINE RATINGS, SOLVENCY, FINANCIAL STRENGTH

35 Private Passenger Auto Combined & Operating Ratios, F 115 PP Auto Combined Ratio $842 $871 $900 Combined Ratio $ Average Auto Insurance Expenditure $ $706 $ $683 $ $718 $ E 04F Rating actions contributed to dramatic improvement in PP Auto U/W performance Sources: Insurance Information Institute from A.M. Best and NAIC data; 2003/4 expenditure estimates from III $800 $700 $600 $500 Avg. Auto Insurance Expenditure

36 Cost of Risk vs. Commercial Lines Operating Ratio* 110 $11.96 $12 Commercial Lines Operating Ratio Commercial Operating Ratio Cost of Risk $8.30 $7.70 $ $ $6.49 $6.10 $6.40 $5.70 $5.71 $ $ $ $ $10 $8 $6 $4 $2 Cost of Risk/$1000 Revenue $0 Source: RIMS, A.M. Best; Insurance Information Institute * 2003 operating ratio is III estimate.

37 Number of P/C Failures vs. Combined Ratio, Number of Failures failures fell to a 5-year low Combined Ratio Number of P/C Failures Combined Ratio Source: Standard & Poor s; Insurance Information Institute

38 Ratio of Downgrades to Upgrades 03E Downgrade/Upgrade Ratio* Sources: Impairment Rate and Rating Transition Study 1977 to 2002, A.M. Best & Co.; 2003E from S&P. *U.S. property/casualty and life/health insurers

39 P/C Insurers Maintaining Rating of A+ or Better Rating for 50+ Years P/C Company 1. AIU Insurance Co. 2. Alfa Mutual Ins. Co. 3. Amica Mutual Ins. Co. 4. Church Mutual Ins. Co. 5. Federal Insurance Co. 6. General Reinsurance Corp. 7. Great Northern Ins. Co. 8. Lititz Mutual Ins. Co. 9. Nationwide Mutual Fire Co. 10. Otsego Mutual Fire 11. Pharmacists Mutual Ins. Co. 12. Quincy Mutual Fire Ins. Co. 13. State Automobile Mutual Ins. Co. 14. State Farm Mutual Automobile Ins. Co. 15. Vigilant Insurance Co. Group Affiliation 1. American International Group 2. Alfa Insurance Group 3. Amica Mutual Group 4. None 5. Chubb Group of Ins Cos. 6. Berkshire Hathaway Ins. Group 7. Chubb Group of Ins Cos. 8. Lititz Mutual Group 9. Nationwide Mutual Group 10. None 11. None 12. Quincy Mutual Group 13. State Auto Ins. Group 14. State Farm Group 15. Chubb Group of Ins Cos. Source: Best s Review, January 1, 2004.

40 P/C Company Insolvency Rates, 1993 to % Insurer insolvencies are increasing 10-yr industry failure rate: 0.72% Failure rating for B+ or better rating: 0.49% Failure rate for D through B rating: 1.29% 1.02% 1.03% 1.33% 10-yr Failure Rate = 0.72% 0.79% 0.58% 0.60% % 0.28% 0.23% Source: A.M. Best; Insurance Information Institute

41 Reason for P/C Insolvencies (218 Insolvencies, ) CAT Losses 3% Reinsurer Failure 0% Impaired Affiliate 3% Unidentified 17% Reserve deficiencies account for more than half of all p/c insurers insolvencies Deficient Loss Reserves 51% Change in Business 3% Discounted Ops 8% Overstated Assets 2% Alleged Fraud 3% Rapid Growth 10% Source: A.M. Best, Insurance Information Institute

42 Insolvencies Generating Largest Guarantee Fund (Net) Payouts* $600 $547.5 ($ Millions, Costs-to-Date*) $500 $400 $445.1 $430.8 $300 $297.4 $279.8 $262.6 $231.1 $220.7 $213.3 $204.5 $200 $100 $0 CA Comp Ins Co. Midland Ins. Reliance Superior Natl. Ideal Mutual American Mutual Liability PIE Mutual Integrity Ins. Champion Texas Ins. Employers Ins Assn. *Net expenses form inception to date (November 13, 2003). Source: National Conference of Insurance Guarantee Funds; Insurance Information Institute.

43 Guarantee Fund Net Assessments* ( ) $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 $46.2 $17.8 $49.8 $41.1 $30.6 $97.4 $292.4 $509.4 $903.2 $464.8 $ Millions $713.9 $433.6 Assessments rose dramatically during the last hard market, setting a new record now. $ $360.5 $545.4 $524.9 $94.8 $124.2 $263.7 $263.6 $201.3 $328.6 $734.7 $1,209.0 *Excludes NY and workers comp security funds in NJ and PA. Source: National Conference of Insurance Guarantee Funds; Insurance Information Institute

44 P/C Insurance Industry Prior Year Reserve Development* $25 $20 $15 $10 $ Billions, Calendar Year Basis Adverse reserve development of about $23 billion accounted for most of the industry s 2002 and $17 billion in 2003 $9.9 $22.7 $16.8 $5 $0 ($5) ($10) ($15) $2.3 $2.2 $1.2 $0.3 ($8.5) ($1.5) ($7.5) ($6.7) ($10.0) ($3.7) ($0.3) *Negative numbers indicate favorable development; positive figures represent adverse development. Source: A.M. Best, Morgan Stanley, Dowling & Partners Securities, Insurance Information Institute.

45 Combined Ratio: Impact of Reserve Changes (Points) Points (Reduced)/Increased Adverse reserve development totaling an estimated $23 billion added more than 6 points to the p/c combines ratio in 2002 (0.4) (2.4) Source: ISO, A.M. Best, MorganStanley.

46 Commercial Lines Reserve Shortfalls (Year-End 2002)[update?]* $16 $14 $15.1 $ Billions $12 $10 $8 $9.3 $8.0 $6 $4 $2 $4.7 $3.8 $1.8 $0 ($2) Other Liability** Workers Comp Commercial Multiperil Med Mal** Commercial Auto Products Liability** ($0.1) Specialty Liab *Average of Morgan Stanley top-down and bottoms-up estimates for accident years as of 12/31/02. **Occurrence and claims made basis. Source: Morgan Stanley, January 2004.

47 HOT TOPICS IN INSURANCE: THE MEDIA PERSPECTIVE

48 I.I.I. Media Index: Top Issues (2003 vs. 2002) Number of Articles 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, ,499 12,678 6,600 8,906 Market Workers Conditions Comp 7,684 7, ,382 7,552 4,792 7,503 3,626 3,395 2,503 2,836 Market Conditions & Commercial lines issues dominated the media in 2002 and 2003 The I.I.I. conducted nearly 4,000 media interviews in ,196 1, ,079 Asbestos Med Mal Auto Homeowners Tort Terrorism Credit Scoring 1, Mold CLUE Source: Insurance Information Institute from Lexis/Nexis search.

49 I.I.I. Media Index: Top Issues ( % Change in Coverage, 2003 vs. 2002) 300% 250% 200% 150% 100% 290% 249% 72% 57% 35% The fastest growing areas of media interest were CLUE, Credit & Med Mal. Media interest in mold and terrorism waned substantially. 50% 22% 13% 0% 0% -50% -100% CLUE Credit Scoring Med Mal Auto Workers Comp Market Conditions -6% -17% -56% Tort Asbestos Home Mold Terrorism Source: Insurance Information Institute from Lexis/Nexis search.

50 THE INSURANCE INFORMATION INSTITUTE: THE PLACE FOR INSURANCE INFORMATION

51 I.I.I. ranks 3 rd on Google out of 105 million hits on insurance.

52 Web Traffic on Visits to I.I.I. s public web site increased by 50% in 2003.

53 With 60 million vistors annually, I.I.I drives customers to your site I.I.I. Home Page

54 I.I.I. Hot Topics Home Page Information you need is only a mouse click away

55 I.I.I. Members: Searches by Issue/Topic

56 I.I.I. Members: Searches by Issue/Topic Studies, presentations and message points for all major p/c industry issues

57 I.I.I. Members: Regional Info National, Regional & International news, studies and presentations at your company s fingertips

58 INVESTMENTS: NO SUBSTITUTE FOR SOUND UNDERWRITING

59 Net Investment Income $45 $36 Investment income fell 1.3%in 2002 but rose 3.9% in 2003 Billions (US$) $27 $18 $9 $0 History 1997 Peak = $41.5B 2000= $40.7B 2001 = $37.7B 2002 = $37.2B 2003 = $38.7B Source: A.M. Best, ISO, Insurance Information Institute

60 Interest Rates: Lower Than They ve Been in Decades, But 16% 14% 12% 10% 8% Lower bond yields were the primary driver behind declining investment income in recent years, with the 10- year note reaching a 45-year low in 2003 Higher rates are now a certainty as inflationary expectations build 6% 4% 2% 0% About 2/3 of invested assets are in the form of bonds 3-Month T-Bill 1-Yr. T-Bill 10-Year T-Note Mar 04 Apr 04* *As of April 29, Source: Board of Governors, Federal Reserve System; Insurance Information Institute

61 Total Returns for Large Company Stocks: * 40% S&P 500 was up 28.7% in 2003 but up just 1% through early June as fears of higher interest rates, Iraq, terror & high oil prices paralyze the market 30% 20% 10% 0% -10% -20% -30% 2003 ended a streak of 3 consecutive years of declines for stocks Will the bull market run out of steam in 2004? *Through June 4, Source: Ibbotson Associates, Insurance Information Institute

62 US P/C Net Realized Capital Gains ($ Millions) $20,000 $15,000 $10,000 $5,000 $0 $4,806 $2,880 Realized capital gains rebounded strongly in 2003 $9,893 $9,818 $1,664 $5,997 $10,808 $9,244 $18,019 $13,016 $16,205 $6,631 $6,917 -$1,214 -$5, Sources: A.M. Best, ISO, Insurance Information Institute.

63 Property/Casualty Insurance Industry Investment Gain* $60 $50 $42.8 $ Billions $47.2 $52.3 $57.9 $51.9 $56.9 $44.4 $45.6 $40 $35.4 $36.0 $30 $20 Investment gains are simply returning to pre-bubble levels $10 $ *Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. Source: Insurance Services Office; Insurance Information Institute.

64 CAPACITY CRUNCH?

65 U.S. Policyholder Surplus: $ Billions $350 $300 $250 $200 $150 Surplus (capacity) peaked at $339.3 Billion in mid-1999 and fell by 15.9% ($53.9 billion) to $285.4 billion at year-end 2002 (a trough?) Surplus increased by $61.6B or 21.6% to $347.0B $53.9 Billion $100 $50 $0 Surplus is a measure of underwriting capacity. It is analogous to Owners Equity or Net Worth in non-insurance organizations Source: A.M. Best, Insurance Information Institute *As of 9/30/03.

66 Capacity of Lloyd s Market After remaining stable at around GBP10bn, Lloyd s capacity has increased by over 40% in the last three years capacity is GBP14.9bn, unchanged from Source: Lloyd s

67 Number of Captive Formations & Liquidations 1993 to 2003E Hard market fueling captive formation Corporate collapses and captive consolidations fueled the upward trend in captive liquidations in E Source: AM Best, Advisen New Captives

68 PRICING: DOWNWARD PRESSURE?

69 How the Risk Dollar is Spent (2003) Firms w/revenues < $1 Billion Firms w/revenues > $1 Billion Liabilty Premiums 14% Retained Liability 11% Admin Costs 5% Property Premiums 16% Retained Property 6% Retained Liability 4% Admin Costs 9% Property Premiums 20% Retained Property 3% WC Premiums 14% Liabilty Premiums 18% Retained WC 21% Other 2% Total Mgmt. Liab. 8% WC Premiums 8% Total Prof. Liab 10% Retained WC 10% Other 4% Total Prof. Liab Total Mgmt. 13% Liab. 7% Source: RIMS (2003); Insurance Information Institute

70 Insurance is the Biggest Concern of Small Business Owners Regulations 11% Competition 9% Labor Qlty. 8% Labor Costs 5% Inflation 1% Credit/Int. Rates 1% Poor Sales 16% Insurance 28% Taxes 17% Source: National Federation of Independent Business (November 2003); Insurance Information Institute

71 Cost of Risk: * $13 $12 $11 $10 $9 $ = -41.8% = % $8.91 $11.96 $8 $7.70 $7.30 $7 $6 $5 $6.10 $6.40 $6.49 $5.70 $5.25 $5.71 $5.20 $4.83 $6.46 $ * Cost of risk includes insurance premiums, retained losses and administrative expenses Source: 2003 RIMS Benchmark Survey; Insurance Information Institute

72 Cost of Risk vs. Commercial Lines Operating Ratio* 110 $11.96 $12 Commercial Lines Operating Ratio Commercial Operating Ratio Cost of Risk $8.30 $7.70 $ $ $6.49 $6.10 $6.40 $5.70 $5.71 $ $ $ $ $10 $8 $6 $4 $2 Cost of Risk/$1000 Revenue $0 Source: RIMS, A.M. Best; Insurance Information Institute * 2003 operating ratio is III estimate.

73 PRICING Commercial Premium Rate Changes Highly Cyclical 14% 11% 13% 12% 12% 10% 12% 11% 9% 9% 9% 16% 19% 18% 18% 17% 16% 22% 22% 28% 31% 31% 28% 30% 32% 33% 28% 29% 30% 32% 30% 27% 25% 28% 35% 30% 25% 20% 15% 10% 5% Pricing power is ebbing Is moderation due to realization of performance and profit goals, increasing capacity/capital, or market-share strategies? Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 Apr-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 Source: MarketScout.com

74 Components of Cost of Risk Per $1,000 of Revenue* % Change $4.0 $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 $ % +90.3% % $2.92 Total WC Costs $3.63 $3.54 $3.57 $1.86 $2.72 Total Liability Costs $1.67 $2.55 Total Property Costs $ % $1.43 $2.07 Other Costs * Cost of risk includes insurance premiums, retained losses and administrative expenses Source: 2003 RIMS Benchmark Survey; Insurance Information Institute % % $1.26 $1.15 $0.96 $0.87 $0.82 $0.46 Total Admin. Costs Total Mgmt. Liability Costs

75 P/C Soft Spots: % Accounts With Negative Price Change(1 st Qtr. 2004) 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 58% Property 30% Casualty/Liability/Terrorism More moderation is evident in the commercial casualty segments 26% 16% 11% 12% 11% 23% Comm Prop Biz Terror Comm Auto WC GL EPL Umbrella Interruption Source: Council of Insurance Agents & Brokers; Insurance Information Institute

76 Proportion of Accounts Renewing With Increase of 20% or More, (Select Lines) D&O Construction Risk GL Terrorism 38% 38% 38% 23% 32% 23% 14% 20% 35% 10% 5% 25% 18% 6% 2% 20% 13% 6% 1% 6% 8% 3% 2% 54% 63% 53% 53% 48% 53% 78% 2002:II 2002:III 2002:IV 2003:I 2003:II 2003:III 2003:IV 2004:I Source: Council of Insurance Agents and Brokers; Insurance Information Institute

77 Proportion of Workers Comp Accounts Renewing With Increase of 20% or More 54% 38% 38% 32% 20% 12% 12% 3% 2002:II 2002:III 2002:IV 2003:I 2003:II 2003:III 2003:IV 2004:I Source: Council of Insurance Agents and Brokers; Insurance Information Institute

78 Average Expenditures on Auto Insurance: US $900 $850 $800 $750 $700 $650 $600 $550 $500 Countrywide auto insurance expenditures are expected to rise 3.5% in 2004 $668 $691 $706 $704 $683 $687 $718 $781 $842 $ * 03* 04* *III Estimates; Estimates for based on BLS CPI data for motor vehicle insurance. Source: NAIC, Insurance Information Institute

79 Average Expenditures on Homeowners Ins.: US $700 $600 $500 $400 Average US HO expenditures are expected to rise by 2.8% in 2004 $418 $440 $455 $481 $488 $508 $529 $551 $591 $608 $300 $ * 02* 03* 04* *III Estimates; Estimates for based on BLS CPI data for tenants and household insurance Source: NAIC, Insurance Information Institute.

80 World Rate-On-Line Index (1990 = 100) Reinsurance prices rising, limits falling: ROL up significantly, though not as much as after Hurricane Andrew in Source: Guy Carpenter

81 Average Expenditures on Auto Insurance: ID, OR vs. Ohio $900 $800 $700 $600 $500 $651 Average Auto expenditures in OR and ID are well below the US average. $445 $565 $668 $447 $565 $691 $465 $585 $706 $479 $620 $704 $494 $630 $683 US ID OR $621 $687 $718 $625 $643 $494 $505 $523 $ Source: NAIC, Insurance Information Institute

82 Average Expenditures on Homeowners Ins.: ID, OR vs. US $700 $600 $500 Average HO expenditures in OR and ID are well below the US average. $440 $455 $481 $488 $508 $400 $300 $312 $314 $321 $324 $319 $334 $343 $326 $ Source: NAIC, Insurance Information Institute.

83 PERSONAL LINES ISSUES Auto Homeowners

84 AUTO INSURANCE OVERVIEW

85 Private Passenger Auto is Enormous Part of P/C Industry Total 2002 Direct Personal + Commercial Premiums Written = $399.7 Billion PPA Liability Private passenger auto accounted for 36% or $145.1B in DPW in 2002 $83.9B 21% PPA Phys Dam 15% $61.2B All Commercia Lines 53% $211.6B $43.0B Homeowners 11% Source: A.M. Best; Insurance Information Institute

86 Auto Insurance: Direct Premiums Written Billions $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 $95.7B $100.7B +5.2% PP Auto Liability $106.0B +5.3% $110.5B +4.3% $116.1B +5.0% PP Auto Phys Damage $118.9B +2.4% $120.6B +1.4% $122.2B +1.3% $34.4 $36.0 $38.2 $40.6 $43.8 $47.3 $49.9 $51.6 $132.1B +8.1% $56.2 $145.1B +9.8% $61.2 $61.3 $64.7 $67.8 $70.0 $72.3 $71.6 $70.7 $70.6 $75.9 $83.9 $159B +9.5% $ E Source: A.M. Best; Insurance Information Institute

87 Private Passenger Auto Combined & Operating Ratios, F Average Combined 1993 to 2003E = Many auto insurers have shown significant improvements in underwriting performance since mid Combined Ratio Operating Ratio E 04F Sources: A.M. Best; III

88 Key Auto Insurance Stats: OR, ID vs. US, 2002 vs. 2003* $10,000 $8, % $7,902 $7,764 $9,357 $8, % +3.9% $9,475 $9, $6,000 $4, % +2.4% +2.5% $2,000 $2,314 $2,315 $2,163 $2,215 $2,441 $2,485 $0 OR Bodily Injury OR PD Liability ID Bodily Injury ID PD Liability US Bodily Injury US PD Liability *Average for 4 quarters ending with the 4th quarter of 2003 vs. full year Source: Insurance Services Office, Insurance Information Institute

89 RNW: Private Passenger Auto, Select OR, ID vs. US, % 20% 15% 10% 5% 0% 23% 21% 16% 14% 15% 14% 12% 12% 14% 14% 12% 12% 11% 12% 12% 10% 11% 9% 9% 9% 8% 10% 7% 9% 6% 8% 5% Source: NAIC; Insurance Information Institute OR ID US Private passenger auto profitability deteriorated throughout the 1990s 2% 3% 2% 11% 5% 4%

90 Average Expenditures on Auto Insurance: US $900 $850 $800 $750 $700 $650 $600 $550 $500 Countrywide auto insurance expenditures are expected to rise 3.5% in 2004 $668 $691 $706 $704 $683 $687 $718 $781 $842 $ * 03* 04* *III Estimates; Estimates for based on BLS CPI data for motor vehicle insurance. Source: NAIC, Insurance Information Institute

91 Average Auto Insurance Expenditure: Top/Bottom 5 vs. US (2001) $1,200 $1,000 $800 $600 $1,028 $1,015 $936 $912 $880 Most expensive states are in Northeast, least in upper Midwest. $686 $523 $523 $513 $510 $498 $400 $200 $0 NJ NY MA CT RI US ID WY IA SD ND Source: NAIC; Insurance Information Institute.

92 Average Auto Insurance Expenditure, Selected States: $826 $750 Auto insurance costs in the NW vary widely. Most expensive states are in NE, least in upper midwest. $705 $689 $643 $523 $ Rank 10 Rank 15 Rank 21 Rank 23 Rank 28 Rank AK WA HI CA OR ID US Source: NAIC; Insurance Information Institute.

93 PPA Affordability Pain Index: Not an Issue in Select States* 1.8% 1.6% 1.4% Ratio of Avg. Auto Ins Expenditure to Median Income for Family of %1.64% 1.53% 1.47% 1.44% No major pain in Alaska, Washington, Oregon, California, Hawaii and Idaho 1.2% 1.16% 1.18% 1.14% 1.09% 1.08% 1.07% 1.02% 1.0% 0.8% LA DC NY AZ NV AK WA OR CA HI ID US *Ratio of 2001 state average auto expenditure to states median income for family of 4. Sources: Auto Insurance Report, August 18, 2003

94 Return on Equity: Western States PP Auto* year average 8.7% 10.0% 10.3% Washington Oregon Idaho 19.8% Hawaii 7.2% Alaska 11.9% California 8.8% US 0% 5% 10% 15% 20% 25% Source: NAIC, Insurance Information Institute

95 PPA Affordability Pain Index: Not an Issue in Select States* 1.8% 1.6% 1.4% 1.2% Ratio of Avg. Auto Ins Expenditure to Median Income for Family of %1.64% 1.53% 1.47% 1.44% While the highest premiums are concentrated in the NE, measures of affordability have considerable geographic spread. 1.18% 1.0% 0.90% 0.88%0.88% 0.85% 0.83% 0.8% LA DC NY AZ NV US KS* VA WI SD IA *Ratio of 2001 state average auto expenditure to states median income for family of 4. Sources: Auto Insurance Report, August 18, 2003

96 Motor Vehicle Retail Sales (Millions of Units) New Motor Vehicle Sales Sales of automobiles remained relatively strong despite the weak economy in recent years. Economic recovery, incentives, low rates & demographics will keep exposure picture bright for auto insurers F 05F 06F 07F 08F 09F Source: US Department of Commerce; Insurance Information Institute; Blue Chip Economic Indicators as of December 2003.

97 Private Passenger Auto: Investment Gain* 7% 6% 5% 6.6% 6.0% 6.5% 6.1% 6.0%5.8% 5.4% 5.1% 4.8% 5.1% 4% 3% Average Inv. Gain 1993 to 2002= 5.5% PPA investment gain (as a % of earned premium fell by more than 50% from ), due primarily to historically low interest rates. 3.2% 4.1% 2% E 04F *Ratio to earned premiums Sources: A.M. Best; III estimate/forecast for 2003/4.

98 2002 Return on Net Worth: Private Passenger Auto 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% 11.9%11.7%11.5% 11.1% 10.8% Profitability of PPA line varies enormously by state. Unlike homeowners, the variation is not significantly the result of CAT activity. 4.1% -1.3% -2.2% -2.4% -3.2% -4.1% ND MN KS ID GA US FL KY LA CO MI Sources: NAIC; Insurance Information Institute

99 US Bodily Injury: Severity Trends Now Offset Declining Claim Freq. 6% 4% 2% Medical inflation a powerful driving force 4.7% Frequency Severity 3.5% 3.6% 3.9% 0% -2% -4% -6% -0.3% -0.9% -2.2% -4.0% -4.2% -4.6% Source: ISO Fast Track data.

100 US PD Liability: Severity Trend Now Offset Declining Claim Freq. 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% Fewer accidents, but more damage when they occur: SUV Effect? 4.3% 0.8% -1.5% 6.3% 0.0% Frequency 3.9% -2.0% Severity 3.3% -2.3% 2.5% Source: ISO Fast Track data.

101 US PIP Liability: Claim Frequency & Severity Falling 20% Frequency Severity 15.9% 15% 10% Crackdown on fraud and abuse evident in severity statistics. 6.6% 5% 3.0% 0% 0.6% -0.6% 0.0% -0.6% -5% -3.7% Source: ISO Fast Track data.

102 US Collision: Severity Trends Trail Declining Claim Freq. 8% 6% 4% 2% Fewer accidents, but more damage when they occur: SUV Effect? 2.6% 4.1% 6.9% 1.8% Frequency 3.8% Severity 3.7% 3.7% 0% -2% -0.4% -4% -6% -3.8% -5.1% * Source: ISO Fast Track data.

103 US Comprehensive: Severity Now Offsets Falling Claim Freq. 10% 8% 8.8% Frequency Severity 7.3% 6% 4% 2.9% 3.2% 2% 0% -2% -4% -6% -8% -1.7% -2.7% -2.1% -2.3% -4.7% -5.9% Source: ISO Fast Track data.

104 Auto Theft Rates: On the Rise 6% 5% 4% 3% 5.9% Reasons for Rising Auto Theft rates: Economy Do not chase restrictions Fraud Export/Chop Shop Demand 2% 1% 0.7% 1.4% 0.9% 0% *Through first half of 2003 Source: FBI Uniform Crime Report *

105 The Nation s Worst Major Metropolitan Areas for Vehicle Theft in 2002 Rate* 1,400 1,200 1, Phoenix-Mesa, AZ 1, Fresno, CA Number of Vehicle Thefts Reported per 100,000 Population (*Based on 2000 Census) 1, Modesto, CA 1, , Stockton-Lodi, CA Source: National Insurance Crime Bureau (NICB) Las Vegas, NV Miami, FL Sacramento, CA Oakland, CA Seattle-Bellevue-Everett, WA Tacoma, WA

106 Fraud Costs Insurers Billions PP Auto 11% Disability 1% Life 12% Total Fraud = $96.4 Billion Private passenger auto fraud costs insurers at least $10 billion annually. Health 64% P/C (excl. PPA) 12% Source: Conning & Co., Insurance Information Institute

107 Germany 9.09 Countries with Lowest Traffic Death Rates: 1970 vs (deaths per 100 million miles driven) * NA NA NA Switzerland Denmark *Australian rate is from Australia Britain Sweden America s ranking has fallen from first to ninth in the course of 30 years. Reasons for this include the rise in speeding and drunk driving, lower seat-belt use, and the proliferation of SUVs and pickup trucks. Finland Canada Norway Source: New York Times 11/27/03, Organization for Economic Cooperation and Development, as well as data compiled by traffic agencies in Australia, France and the US, and by Dr. Leonard Evans US

108 UNINSURED MOTORISTS

109 Percentage of Uninsured Motorists, Top/Bottom 5, (2000) 35% 30% 25% 20% 15% 32.0% 30.0% 28.0% CO has/had the highest UM rate in US. ME has the lowest. 25.0% 22.0% 14.0% Enforcement of compulsory insurance laws varies significantly by state. 10% 5% 7.0% 7.0% 6.0% 6.0% 4.0% 0% CO NM SC AL CA US WY MA SD ND ME Sources: Insurance Research Council; Insurance Information Institute

110 PERSISTENCY IN AUTO INSURANCE

111 Why Persistency Makes Sense for Insurers & Policyholders Claims Costs: Loss ratios for new customers 5-10 pts. higher than for those who have persisted for 1+ yrs. Acquisition Costs: USAA has 99% persistency rate, one of the lowest acquisition costs in the industry Volume: Hartford has 96% retention rate with AARP Customer Service: Amica: Has 95% retention rate, rated #1 by J.D. Power & Associates for 4 years in a row Guaranteed Insurability: Safeco: Pledge of Lifetime Insurability eligible if: Age 50+, insured 3 consecutive years, or 9 years accident free (regardless of age) Deductible Reduction: MetLife Auto & Home: Reduces deductible for each year of persistency

112 HOMEOWNERS INSURANCE OVERVIEW

113 Homeowners as a Percentage of the P/C Industry Total 2002 Direct Personal + Commercial Premiums Written = $399.7 Billion Homeowners insurance accounted for 11% or $43.0B in DPW in 2002 $83.9B PPA Liability 21% PPA Phys Dam 15% $61.2B All Commercial Lines 53% $211.6B $43.0B Homeowners 11% Source: A.M. Best; Insurance Information Institute

114 Homeowners Insurance: Direct Premiums Written $60 Homeowners Multiple Peril Billions $50 $40 $30 $22.9B $24.4B +6.6% $26.0B +6.6% $27.4B +5.4% $29.1B +6.2% $30.9B $32.5B +5.8% +5.2% $34.6B +6.5% $37.6B +8.7% $43.0B +14.4% $49.0B +14.0% $20 $10 $ E Source: A.M. Best; Insurance Information Institute

115 Homeowners Insurance Combined Ratio Average 1990 to 2002= 117 Insurers have paid out an average of $1.17 in losses for every dollar earned in premiums over the past 13 years 2002 Loss: $3.4 Billion 2001 Loss: $7.4 Billion F 04F Sources: A.M. Best; III

116 Rates of Return on Net Worth for Homeowners Ins: US vs. OR & ID 20% 15% 10% 5% 0% -5% -10% -15% -20% 2.5% 7.4% 16.0% -1.7% 3.6% -2.7% -4.2% 15.1% 12.4% 11.6% 7.5% 10.8% 5.4% 3.8% 5.4% Averages: 1993 to 2002 US HO Insurance = -3.29%* Oregon HO Insurance = +6.1% Idaho HO Insurance = +2.4% 8.2% -7.2% US Oregon Idaho 5.3% -18.1% % Source: NAIC, Insurance Information Institute * US Average is 1.35% if excluding 1992 (year of Hurricanes Andrew and Iniki.

117 Average Expenditures on Homeowners Ins.: US $700 $600 $500 $400 Average US HO expenditures are expected to rise by 2.8% in 2004 $418 $440 $455 $481 $488 $508 $529 $551 $591 $608 $300 $ * 02* 03* 04* *III Estimates; Estimates for based on BLS CPI data for tenants and household insurance Source: NAIC, Insurance Information Institute, TX Department of Insurance.

118 Homeowners Insurance Expenditure as a % of Median Home Price Median Home Sales Price $200,000 $175,000 $150,000 $125,000 $107, % 0.38% The cost of homeowners insurance relative to the price of a typical home has fallen $110,500 Median Sales Price of Existing Homes HO Insurance Expenditure as a % of Sales Price $115, % $121, % $128, % $133, % $139, % $147,800 $158, % $170, % 0.35% 0.40% 0.38% 0.35% 0.33% HO Expenditure as % of Sales Price $100, % Source: Insurance Information Institute calculations based on data from National Association of Realtors, NAIC.

119 Change in Cost of Homes vs. Change in Cost of Homeowners Insurance $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 -$2,000 $3,300 Recent increases in the cost of homeowners insurance are miniscule in comparison to the soaring cost of homes -$2 $5,300 $22 $6,000 $15 $6,600 $26 $4,900 $7 $5,700 $20 $8,800 $10,300 $21 $11,900 $ $40 Change in Cost of Median Existing Home Change in Average Homeowners Insurance Expenditure Source: Insurance Information Institute calculations based on data from Natl. Association of Realtors, NAIC HO figures are III estimates.

120 Homeowners Affordability HURT Index * (Top/Bottom 5 States) 1.8% 1.6% 1.4% 1.2% Ratio of Avg. Homeowners Ins Expenditure to Median Income for Family of % 1.52% 1.28% 1.26% 1.20% CAT-prone and moldy states have biggest affordability issues 1.0% 0.8% 0.6% 0.4% 0.55% 0.54% 0.50% 0.47% 0.43% 0.82% 0.2% 0.0% TX LA MS OK FL VA OH MD DE WI US *Ratio of 2000 state average auto expenditure to states median income for family of 4. Sources: Property Insurance Report, Sept 8, 2003

121 Estimated Insured Mold Losses: $ Billions $3.0 $2.5 Insured mold losses rose by 500% from 2000 to $3.0 $2.0 $1.5 $1.4 $1.0 $0.5 $0.5 $0.0 Source: Insurance Information Institute

122 Texas: Mold Losses/Claims Continuing to Moderate* Water Damage Paid Losses* ($Millions) $250 $200 $150 $100 $50 $0 Jan-01 Mar-01 May-01 Paid Losses Claim Count Jul-01 Sep-01 Nov-01 Jan-02 Mar-02 May-02 Jul-02 Sep-02 Nov-02 Jan-03 Mar-03 May-03 Jul-03 Sep Claim Count Source: Texas Department of Insurance; Insurance Information Institute * Data are for TDI Cause 61: Discharge Other Damage. Not all claims in cause 61 are mold and mold claims may also arise from other (non-water) causes of loss.

123 Top/Bottom 5 Markets for Homeowners Insurance By Average RNW* 60% 40% 44.6% Profitability of HOMEOWNERS line varies enormously by state. 20% 0% 23.9% 19.5%11.9% 11.1% 2.1% -20% -11.6% -17.6%-20.6% -25.5% -40% -60% -57.2% -80% HI FL RI MA CO US IN SD KY MN ND Sources: NAIC; Insurance Information Institute

124 Causes of Homeowners Insurance Losses, * 100% 80% 60% Percent of Losses Incurred Liability All other property damage Theft 40% 20% 0% Water damage and freezing Wind and hail Fire, lightning and debris removal *Data exclude tenants and condominium owners insurance. All other property damage includes vandalism and malicious mischief. Liability includes bodily injury and property damage, medical payments and credit card and other. Source: Insurance Services Office, Inc (ISO)

125 Average Annual Insured Losses* (Top 10 States, $ Millions) Distribution of Annual Losses $1,500 $1,423.0 Florida 49.5% $1,250 All Other 15.7% $1,000 $750 $500 $250 $615.0 Mississippi 2.7% N. Carolina 3.8% Louisiana 6.8% Texas 21.4% $196.0 $109.0 $77.0 $64.0 $62.0 $61.0 $61.0 $51.0 $154.0 $0 FL TX LA NC MS MA SC AL NY CT All Other *Normalized losses adjusted for inflation, housing density, wealth and wind insurance coverage, based on historical data for 100-year period Source: Tillinghast-Towers Perrin

126 New Private Housing Starts (Millions of Units) New Private Housing Starts Housing market remain strong. Virtually no exposure impact for insurers F 05F Source: US Department of Commerce; Blue Chip Economic Indicators (4/04), Insurance Info. Institute

127 Workers Compensation Residual Market

128 Workers Comp Residual Market Premium Volume $ Billions $6 $5 $4 $3 $2 $1 $1.2 NCCI-Serviced Workers Compensation Residual Market Pools as of December 31, 2003 $2.6 $2.8 $2.1 $4.0$4.4$4.8 $4.1 $3.5 $3.1 Size of residual market nearly quadrupled from 1999 to 2003 $2.0 $1.0 $0.6 $0.3 $0.3$0.4 $1.1B $0.6B $1.4B $0 2003** * 1991* 1990* 1989* 1988* * Excludes Maine Residual Market Pool ** Incomplete Policy Year Projected to Ultimate Source: NCCI Policy Year

129 Workers Compensation Residual Market Shares Continue to Rise Percent Workers Compensation Insurance Plan States* Premium as a Percent of Direct Written Premium Residual market share quadrupled from 3% to 12% from 1999 to p p Preliminary NCCI Plan states plus DE, IN, MA, MI, NJ, NC Source: NCCI Calendar Year

130 Workers Compensation Residual Market Combined Ratios Percent NCCI-Serviced Workers Compensation Residual Market Pools As of December 31, ** * 1991* 1990* 1989* 1988* * Excludes Maine Residual Market Pool ** Incomplete Policy Year Projected to Ultimate Source: NCCI Policy Year

131 WC Residual Market Underwriting Results Continue to Decline $ Millions NCCI-Serviced Workers Compensation Residual Market Pools As of December 31, 2003 ($937) ($1,359) ($1,793) ($1,876) ($2,059) ($1,674) ($1,176) ($537) ($126) $88 $116 $24 ($13) ($46) ($49) ($64) ($95) ($171) ($180) ,000-1,500-2,000-2, * 1989* 1990* 1991* 1992* ** * Excludes Maine Residual Market Pool ** Incomplete Policy Year Projected to Ultimate Source: NCCI Policy Year

132 WORKERS COMPENSATION MEDICAL COSTS: CRITICAL CONDITION

133 Workers Comp Medical Claims Continue to Climb Medical Claim Cost ($000s) $19 $17 Annual Change : +3.9% Annual Change : +9.0% $16.3 $17.8 $15 $13 $11 $9 $7.9 $8.0 $7.8 $8.5 $8.9 $9.6 $10.3 $11.1 $12.0 $13.1 $14.7 $7 $ p 2003p: Preliminary based on data valued as of 12/31/ : Based on data through 12/31/2002, developed to ultimate Based on the states where NCCI provides ratemaking services Excludes the effects of deductible policies Accident Year

134 Med Costs Share of Total Costs is Increasing Steadily 2003p 1993 Indemnity 45% Medical 55% 1983 Indemnity 51% Medical 49% Indemnity 56% Medical 44% Source: NCCI (based on states where NCCI provides ratemaking services).

135 WC Drug Costs as % of Total WC Medical Costs* 10% 9% 8% 7.7% 8.6% 9.5% 9.6% 7% 6.5% 6% 5% 4% 3% 2% 1% 0% WC drug costs account for an increasingly large share of WC medical costs. They are a major driver behind the accelerating cost of providing medical care to injured workers *Analysis is on an accident year (AY) basis, developed through 8 th report. Source: National Council on Compensation: Prescription Drugs: Comparison of Drug Costs and Patterns of Use in Workers Compensation and Group Health Plans.

136 Impact of Price & Utilization on Workers Comp Drug Costs* Utilization has greater impact on WC drug costs than price. Reflects trend toward new/more powerful drugs and more prescriptions Price Impact Utilization Impact Total Impact Source: National Council on Compensation: Prescription Drugs: Comparison of Drug Costs and Patterns of Use in Workers Compensation and Group Health Plans.

137 Generic Prescriptions Written When Generics Available in WC % of times generic available but not prescribed Additional cost savings if generic used 100% of time when available 79% 21% 8% 92% % of times generic available but not prescribed All other brand and prescription drug costs Source: National Council on Compensation Insurance: Prescription Drugs: Comparison of Drug Costs and Patterns of Use in Workers Compensation and Group Health Plans.

138 Prescription Drug Cost Breakdown: WC vs. General Health Workers Comp % Total Paid Group Health % Total Paid Muscle Relaxants 20% Antidepressants 14% All Other 11% Antidepressants 15% Antiinfectives 13% Painkillers 55% All Other 54% Cardiovascular 18% Source: National Council on Compensation Insurance: Prescription Drugs: Comparison of Drug Costs and Patterns of Use in Workers Compensation and Group Health Plans.

139 Top 10 Prescription Drugs by Total Paid in Workers Comp DRUG NAME Celebrex (anti-inflammatory) Oxycontin (painkiller) Vioxx (anti-inflammatory) Hydrocodone (painkiller) Neurontin (painkiller) Ultram (painkiller) Carisoprodol (muscle relaxant) Cyclobenzaprine (muscle relaxant) Soma (muscle relaxant) Ambien (sedative) Source: National Council on Compensation Insurance. Brand vs. Generic Brand (generic not available) Brand (generic not available) Brand (generic not available) Generic Brand (generic not available) Brand (generic available) Generic (same as Soma) Generic Brand (Same as carisoprodol) Brand (generic not available)

140 Reasons for Increased Prescription Drug Utilization in Workers Comp Aggressive Marketing Major pharmaceuticals spend twice as much on advertising as on R&D Greater Availability & Dependence on Medications for Treatments Aging Workforce: requires more assistance from prescription drugs Unhealthy Workforce E.g.,: About 2/3 of adults are overweight or obese, increasing the frequency of some types of injuries and making recovery more difficult relative to a healthy weight individual. Addiction? (e.g., Oxycontin) Source: National Council on Compensation Insurance, Insurance Information Institute

141 LEGAL LIABILITY & TORT ENVIRONMENT (full presentation available upon request to III members)

142 Cost of U.S. Tort System ($ Billions) $350 $300 $250 $200 $150 Tort costs consumed 2.23% of GDP in 2002 Per capita tort tax expected to rise to $1,003 by 2005, up from $809 in 2002 $129 $130 $141 $144 $148 $159 $156 $156 $167 $169 $180 $205 $233 $298 $100 $50 $ F Source: Tillinghast-Towers Perrin.

143 Personal, Commercial & Self (Un) Insured Tort Costs* $250 Commercial Lines Personal Lines Self (Un)Insured Total = $208.8 Billion Billions $200 $150 $100 $50 $0 Total = $39.5 Billion $5.4 $17.1 $17.0 *Excludes medical malpractice Source: Tillinghast-Towers Perrin Total = $120.2 Billion $20.1 $51.0 $29.6 $70.9 $49.1 $57.2 Total = $157.7 Billion $42.9 $78.5 $

144 Where the Tort Dollar Goes (2002) Tort System is extremely inefficient: Only 22% of the tort dollar compensates victims for economic losses At least 54% of every tort dollar never reaches the victim Claimants' Attorney Fees 19% Awards for Non-Economic Loss 24% Defense Costs 14% Awards for Economic Loss 22% Administration 21% Source: Tillinghast-Towers Perrin

145 THE U.S. LEGAL SYSTEM: IS IT OUT OF CONTROL? TRENDS, CONDITIONS & OUTLOOK

146 TORT-ure Asbestos New Silicosis Toxic Mold Medical Malpractice Construction Defects Lead Fast/Fattening Foods & Obesity New Reality TV New Arsenic Treated Lumber Guns Genetically Modified Foods & Labeling Generic Drugs, Pharmaceuticals & Medical Devices Security exposures (workplace violence, post-9/11 issues) Slavery

147 Business Leaders Ranking of Liability Systems for 2004 Best States 1. Delaware 2. Nebraska 3. Virginia 4. Iowa 5. Idaho 6. Utah 7. New Hampshire 8. Minnesota 9. Kansas 10. Wisconsin Worst States 41. Missouri 42. Arkansas 43. Montana 44. Illinois 45. Texas 46. California 47. Louisiana 48. Alabama 49. West Virginia 50. Mississippi Source: US Chamber of Commerce States Liability Systems Ranking Study; Insurance Info. Institute.

148 The Nation s Judicial Hellholes CALIFORNIA Alameda County Madison County, IL Los Angeles County San Francisco County TEXAS Jefferson County Hidalgo County City of St. Louis, MO Mississippi s 22 nd Judicial District I Starr County Orleans Parish, LA Source: American Tort Reform Association; Insurance Information Institute

149 Average Jury Awards 1994 vs. 2001and 2002 $8,000 $7,000 $6, ,246 7,795 5,601 ($000) $5,000 $4,000 $3,000 $2,000 $1,000 $ ,210 1,199 Overall Vehicular Liability Premises Liability 1,185 3,099 4,421 Wrongful Death 1,140 3,913 Medical Malpractice 1,744 Products Liability Source: Jury Verdict Research; Insurance Information Institute.

150 Median Jury Award, $50,000 $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 $36,250 $38,604 $38,000 $29,983 $45,000 $42,945 The median award fell by 1/3 between 2000 to 2002, but average awards rose because of a large number of jumbo awards $30, Source: 2003 Current Award Trends, Jury Verdicts Research.

151 Probability of Plaintiff Verdict is Rising Premises Liability 43% 45% 49% Business Negligence NA 57% 62% Vehicular Liability 58% 59% 63% Products Liability 39% 39% 61% Source: Jury Verdict Research, 2003 Current Award Trends

152 There is Was is Was a Glimmer of Hope for Tort Reform Best Chance for Tort Reform in Years Medical Malpractice States already happening: 20+ states have caps Federal reform discussed in Congress but bill failed in Senate Attempt to get caps for specialties failed February 2004 Class Action Reform Class Action Fairness Act Failed by 1 Vote 10/22/03; Likely back up 2004??? Asbestos Reform Fairness in Asbestos Injury Resolution of 2003; Failed Apr Punitive Damages What s Reasonable Supreme Court ruled favorably in Campbell v. State Farm

153 Medical Malpractice: Tort Cost Growth is Skyrocketing $22 $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 $1.2 $1.5 $1.9 $2.3 $2.9 $3.6 $4.4 $5.4 $6.5 $7.1 $7.0 $ Billions Over the period from 1990 through 2000, medical malpractice tort costs rose 140%, more than double the 60% increase in medical costs generally over the same period! Over the period from 1975 through 2000, medical malpractice tort costs skyrocketed by 1,642% while medical costs generally rose 449%, nearly 4 times as fast! $6.8 $7.1 $7.2 $7.9 $8.7 $9.4 $10.8 $11.6 $12.4 $13.5 $14.6 $16.2 $17.6 $19.4 $ Sources: Tillinghast-Towers Perrin, US Bureau of Labor Statistics, Insurance Information Institute

154 Who Will Pay for the US Asbestos Mess? Estimated Total US Settlements & Expenses = $200 billion Asbestos Defendants 39% $78 billion $60 billion US Insurers 30% $62 billion Source: Tillinghast-Towers Perrin; Insurance Information Institute Foreign Insurers 31%

155 INSURANCE SCORING (CREDIT)

156 Texas Auto: Relative Loss Ratio (by Credit Score Decile, Total Market)* Avg. Relative Loss Ratio No Score st Decile = Lowest Credit Scores 10 th Decile = Highest Credit Scores st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th Score Range Interpretation: Those with poorest credit scores generated losses more than double that of those with the best scores Extremely strong statistical evidence linking credit score with loss/claim outcomes: Credit score & likelihood of positive claim (p<.0001) Size of loss related to credit score (p<.0001) Correlation between relative loss ratio and credit score (r =.95) *Each decile contains approximately 15,300 policies. Includes standard and non-standard policyholders. Source: University of Texas, Bureau of Business Research, March 2003.

157 Texas Auto: Average Loss per Policy (by Credit Score Decile, Total Market) Avg. Incurred Loss per Policy $1,000 $900 $800 $700 $600 $668 $918 $846 Average Loss = $695 $791 $707 $703 $681 1 st Decile = Lowest Credit Scores 10 th Decile = Highest Credit Scores. Interpretation: Those with poorest credit scores generated incurred losses 65% higher those with the best scores $631 $584 $568 $558 $500 No Score 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th Score Range Source: University of Texas, Bureau of Business Research, March 2003.

158 Indicated Relative Pure Premium by Insurance Score (PD Liability)* Relative Pure Premium % No Hit/Thin File Source: EPIC Actuaries, June % 18% 10% 3% 0% -7% -11% -14% -15% -19% Score Range Interpretation: Those with poorest credit scores had loss experience 33% above average while those with the best scores had loss experience that was 19% below average

159 Importance of Rating Factors by Coverage Type Coverage Factor 1 Factor 2 Factor 3 BI Liability Age/Gender Ins. Score Geography PD Liability Age/Gender Ins. Score Geography PIP Ins. Score Geography Yrs. Insured Med Pay Ins. Score Limit Age/Gender Comprehensive Model Year Age/Gender Ins. Score Collision Model Year Age/Gender Ins. Score Source: The Relationship of Credit-Based Insurance Scores to Private Passenger Automobile Insurance Loss Propensity Michael Miller, FCAS and Richard Smith, FCAS (EPIC Actuaries), June 2003 (Presented at June 2003 NAIC meeting).

160 Adverse Impact: No Evidence

161 New Private Housing Starts (Millions of Units) New Private Housing Starts Housing market remains strong F Source: US Department of Commerce; National Association of Realtors; Insurance Info. Institute *Annualized January 2004 figure

162 U.S. Homeownership Rate, 1990 to 2003 Homeownership is at a record high. Because you can t buy a home without insurance, insurance is clearly available and affordable, including to millions of Americans of modest means and all ethnic groups. 66.3% 66.8% 67.4% 67.8% 67.9% 68.3% 65.4% 65.7% 63.9% 64.1% 64.5% 64.0% 64.7% Source: U.S. Census Bureau

163 Homeownership Rates in Central Cities, 1990 to 2003 Homeownership rates in central cities is at an all time record high. Because you can t buy a home without insurance, insurance is clearly available and affordable, including to millions of Americans of modest means and all ethnic groups. 52.3% 51.9% 51.7% 51.4% 50.4% 49.5% 49.7%49.9%50.0% 49.2% 48.7% 48.7% 48.6% 48.5% Source: U.S. Census Bureau

164 Homeownership Rates Among Minorities is Rising, 1994 to % 48% 46% 44% 42% Homeownership rates for minorities are at or near record highs Minorities are using their good credit to buy homes and get insurance 42.3% 41.2% 42.7% 42.1% 44.1% 42.8% 44.8% 43.3% 45.6% 44.7% 46.3% 45.5% Blacks Hispanics 47.2% 46.3% 47.7% 47.3% 47.4% 46.7% 48.1% 47.0% 40% Source: U.S. Census Bureau

165 Homeownership Rates in Oregon, 1990 to 2003 Homeownership rates in Oregon are at an all-time record high. 68.0% 65.2% 64.4% 64.3% 63.8% 63.9% 63.2% 63.1% 65.3% 65.8%66.2% 64.3% 63.4% 61.0% Source: U.S. Census Bureau

166 Homeownership Rates in Idaho, 1990 to 2003 Homeownership rates in Idaho are at an all-time record high. 69.4% 68.4% 70.3% 72.1% 70.7% 72.3% 72.6% 72.0% 71.4% 70.3% 70.5% 71.7% 73.0% 74.4% Source: U.S. Census Bureau

167 Percent Change in Homeownership, % 80% 70% 60% 50% Homeownership rates have increased much faster for minority groups than for whites Minorities are using their good credit to buy homes and get insurance 4.3 million minority net new homeowners were created between 1995 and % 83.5% 40% 30% 20% 10% 10.7% 23.2% 0% White Black Hispanic Other* *Includes American Indian, Eskimo, Aleut, Asian and Pacific Islander. Source: U.S. Census Bureau

168 Credit Contrast: Western States vs. US NW states generally have above-average credit scores, but income varies widely Income Rank = 15 Income Rank = 30 Income Rank = 9 Income = 26 Income Rank =3 Income Rank =9 Income = 26 Score =51 Inc.=18 WA ID HI OR AK CA AZ NV US Note: Range of possible scores is 300 to 900. Source: Experian; Insurance Information Institute.

169 THE CHALLENGE OF TERRORISM

170 TRIA UPDATE TRIA expires 12/31/05 House subcommittee hearings held April 28 went well Senate hearings May 18 many committee members amenable Industry coalescing around a 2-year extension Some life insurers trying to push for inclusion of group life Treasury required to complete a study of the program by 6/05 Broad support from non-insurance industry groups/coalitions Reauthorization opposed by: Consumer Federation of America Some conservative think tanks (e.g., American Enterprise Institute) Laissez-faire academics Make Available requirement expires this year Treasury must make ruling on extension of this provision by 9/1/04. Industry, non-insurers and regulators support extension

171 Terrorism: Is it Insurable Three Years After 9/11? Traditional arguments against insurability still apply No solid sense of frequency or severity of future events despite modeling efforts Most major modern industrialized democracies have determined that terrorism risk is appropriately borne or at least shared by the state UK, Spain, France, Germany Australia, Israel, South Africa No appreciable reinsurance market has developed Very little securitization of terrorism risk Very limited standalone market Workers comp terror exposure problem seems insoluble Terrorism is the face of warfare in the 21 st century NEW: Increasing politicization of terrorism is compromising the integrity of the threat assessment process NEW: Budget and turf battles in Washington could harm funding for antiterror programs & initiatives (e.g., Homeland Security, esp. TSA funding)

172 Sept. 11 Industry Loss Estimates ($ Billions) Life Other $1.0 (3.1%) Liability $4.0 (12.3%) Property - WTC 1 & 2 $3.6 (11.1%) Property - Other $6.0 (19.5%) Aviation Liability $3.5 (10.8%) Event Cancellation $1.0 (3.1%) Aviation Hull $0.5 (1.5%) Workers Comp $1.8 (5.8%) Biz Interruption $11.0 (33.8%) Current Insured Losses Estimate: $32.5B Source: Insurance Information Institute

173 Capital Myth: US P/C Insurers Have $300 Billion to Pay Terrorism Claims Total PHS = $298.2 B as of 6/30/01 = $291.1 B as of 12/31/02 "Target" Commercial* $116 billion 40% Only 40% of industry surplus backs up target lines Personal $123 billion 42% * 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 based on A.M. Best Q.A.R Data. Other Commercial $53 billion 18%

174 Terrorism Take-Up Rates, Coverage Types & Pricing

175 Terrorism Coverage Take-Up Rate Rising Terrorism take-up rate rose through 2003 as commercial property premiums level-off or fall 23.5% 26.0% 32.7% 27.3% FACTS on Take-Up Rates Highest = Energy Industry = 40.5% Lowest = Construction = 12.2% Northeast = Highest = 30.3% West = Lowest = 18.6% 2003:II 2003:III 2003:IV Average Source: Marsh, Inc.; Insurance Information Institute

176 Terrorism Coverage: Take-Up Rates by Industry Energy Media Food & Beverage Habitational/Hospitality Healthcare Real Estate Transportation Utility Financial Institution Public Entity Tech/Telecom Education Retail Manufacturing Construction 12.2% 35.3% 34.7% 31.5% 31.0% 30.2% 29.5% 27.1% 26.8% 25.9% 22.1% 21.6% 20.0% 18.2% 40.5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Source: Marsh, Inc.

177 Terrorism Coverage: Take-Up Rates by Region 30.3% Terrorism take-up rate is highest in the Northeast 26.2% 21.8% 18.6% Northeast Midwest South West Source: Marsh, Inc.; Insurance Information Institute

178 Terrorism Coverage Take-Up Rates by Total Insured Value (TIV)* $ Millions 39.7% Nearly 40% of firms with TIV between $500 million and $1 billion buy terror coverage 26.3% 27.1% 27.3% 18.2% Take-Up Rates for Small Firms TIV: Between $5 million and $50 million take-up rate estimated at 30% TIV below $5 million: Terror coverage regularly purchased via package policies <$100 $100-$500 $500-$1,000 >$1,000 Average *Does not include firms that buy coverage through package policies. Source: Marsh, Inc.; Insurance Information Institute

179 Terrorism Premium as a Percentage of Property Premium 5.18% Increase reflects fall in price of property coverage rather than increase in price of terror coverage 3.67% 4.26% 4.36% FACTs on Terror Premium Relative to Property Premium Highest = Energy Industry = 8.03% Lowest = Construction = 2.36% 2003:II 2003:III 2003:IV Average Source: Marsh, Inc.; Insurance Information Institute

180 Terrorism Pricing: Median Rates by Total Insured Value (TIV)* % The price of terrorism coverage fell during 2003 helps explain increase in take-up rate % % % FACTS on Price Relative to TIV Highest = Energy Industry = % Lowest = Education =.0030% 2003:II 2003:III 2003:IV Average *Excludes risks with nominal $1 premium or built into all risks policy Source: Marsh, Inc.; Insurance Information Institute

181 Terrorism Premium as Percentage of Property Premium, by Industry Energy Habitational/Hospitality Media Real Estate Utility Education Transportation Food & Beverage Public Entity Technology/Telecom Retail Financial Institutions Healthcare Manufacturing Construction 6.07% 5.09% 4.94% 4.76% 4.76% 4.69% 4.20% 4.02% 3.75% 3.56% 3.31% 3.10% 2.36% 8.03% 7.65% Source: Marsh, Inc. 0% 1% 2% 3% 4% 5% 6% 7% 8% 9%

182 Terrorism Pricing: Median Rates as Percentage of Total Insured Value Energy Habitational/Hospitality Real Estate Construction Financial Institutions Transportation Food & Beverage Media Utility Technology/Telecom Manufacturing Public Entity Retail Healthcare Education % % % % % % % % % % % % % % % 0.000% 0.002% 0.004% 0.006% 0.008% 0.010% 0.012% 0.014% Source: Marsh, Inc.

183 World Rate-On-Line Index* (1990 = 100) After unprecedented disasters, reinsurance prices rise, limits fall so ROL rises: : +221% Reinsurers didn t exclude windstorm after Andrew in 1992, but generally excluded terror post 9/11, so ROL not up as much : % Source: Guy Carpenter *Rate-on-Line is the ratio of premium to loss limit.

184 Types of Terrorism Coverage Being Purchased 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% :II 2003:III 2003:IV Average TRIA Only TRIA & Non- Certified TRIA Only Source: Marsh, Inc.

185 Types of Terrorism Coverage Being Purchased 35% 32.7% 30% 25% 23.5% 26.0% 27.3% TRIA & Non- Certified 20% 15% 19.0% 23.3% 29.6% 23.9% 10% 5% 0% 4.5% 2.7% 3.1% 3.4% 2003:II 2003:III 2003:IV Average TRIA Only Source: Marsh, Inc.

186 THE POLITICIZATION OF TERRORISM

187 If They Don t Know, Insurers Can t Presume to Know Either

188 They re Here and Plans are 90% Complete to Attack Most major government officials believe another attack is imminent Terrorists plans are 90% complete for next attack Government has no idea of how, when, where, who or what kind of attack is next.