Domestic Casualty & Property State of the Market Lance J. Ewing, Vice President September 20, 2012
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DISCLAIMER Certain statements provided herein are based solely on the opinions of American International Group, Inc. and are being provided for general information purposes only. Any opinions provided on economic trends should not be relied upon for investment decisions and are solely the opinion of American International Group, Inc. Certain information may be based on information received from sources American International Group, Inc. considers reliable; American International Group, Inc. does not represent that such information is accurate or complete. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements which do not reflect actual results and are based primarily upon applying retroactively a hypothetical set of assumptions to certain historical financial information. Any opinions, projections, forecasts and forward-looking statements presented herein are valid only as of the date of this document and are subject to change. American International Group, Inc. is not soliciting or recommending any action based on any information in this document. U.S. Casualty Road to Rate Adequacy 3
CASUALTY U.S. Casualty Road to Rate Adequacy 4
The Economy Casualty s Catastrophe = Historically Low Interest Rates 1. Interest rates in the US have not been below 2% in the past 50 years! * Yet, today s 10 Year Treasury Bill is yielding 1.9%. Economists do not expect an increase in the foreseeable future. U.S. Casualty Road to Rate Adequacy 5
Casualty s Catastrophe = Historically Low Interest Rates Commercial Casualty is more often dramatically affected by interest rates than other insurance lines due to the long tail nature of casualty losses. For example: To maintain Chartis current combined ratio, 110%, one of two conditions must occur: (1) Either interest rates increase 4 points; or (2) At today s 8-year T-bill rate, (corresponding with excess casualty s 8 year duration), to achieve an after-tax return on equity (ROE) of 8%: Combined ratios increase by 33%, AND Rates increase by 61%. U.S. Casualty Road to Rate Adequacy 6
Executive Summary State of the U.S. Domestic Casualty Insurance Market Where appropriate, accounts are individually evaluated. This presentation generally applies to all worker s compensation, auto, general, and excess casualty in the US market NOT foreign casualty. Four industry-wide, structural drivers are forcing U.S. domestic casualty insurance rates up: 1. Loss costs are increasing; 2. Rates have declined for eight consecutive years; and 3. Underwriting losses continue... 4.... while at the same time, investment returns are experiencing historically sharp declines. U.S. Domestic Casualty Road to Rate Adequacy 7
1981 1986 1991 1996 2001 2006 2011 Index Value (1961=100) 1. U.S. casualty insurance loss costs increase Meteoric rise in cost of medical care 1800 1500 1200 Consumer Price Index: All Items v. Medical Care In the last 20 years, the cost of Medical Care has increased 383%, more than 2.5 times the CPI growth of 147%. 900 600 300 0 All Items Medical Care Source: Department of Labor; Bureau of Labor Statistics. U.S. Domestic Casualty Road to Rate Adequacy 8
1. U.S. casualty insurance loss costs increase Tort costs surged 500% since 1980 900 U.S. Tort Costs Relative to Population 800 700 600 500 400 300 200 100 0 1980 1990 2000 2010 U.S. Population ($ millions) U.S. Tort Costs ($ billions) Tort Costs per capita ($) Source: 2011 Update on U.S. Tort Cost Trends, Towers Watson. January 2012. U.S. Domestic Casualty Road to Rate Adequacy 9
1. U.S. casualty insurance loss costs increase Average of Top 10 Jury Verdicts jumped 17% in one year from $157 million to $184 million A Selection of Top U.S. Jury Verdicts & Total Top 10 2009 2010 2011 $370 Million (Defamation) $505 Million (Product Liability) $482 Million (Patent Infringement) $330 Million (DUI) $132.5 Million (Vehicular) $144 Million (Personal Injury) $89 Million (DUI) $124.5 Million (Vehicular) $116 Million (Fraud) $70 Million (Workers Comp) $89 Million (Product Defect) $95 Million (Sexual Harassment) $65 Million (Vehicular) $82.5 Million (Explosion) $91.5 Million (Wrongful Death) Total Top 10 $1,511 Billion (+12%) $1,568 Billion (+3.7%) $1,839 Billion (+17%) Source: Lawyers USA. U.S. Domestic Casualty Road to Rate Adequacy 10
2. All U.S. P/C commercial insurance rates have declined for eight consecutive years Rates are currently at pre-9/11 levels, lowest in 10 years Cumulative Commercial Rate Change by Account Size Treasury 10-Year Yield Sources: Council of Insurance Agents and Brokers; Insurance Information Institute. U.S. Domestic Casualty Road to Rate Adequacy 11
3. Underwriting losses continue... Over the last 37 years, only 5 showed an underwriting profit; 2011 will be the 4 th consecutive year of loss $35 $25 $15 U.S. P/C Insurance Industry Underwriting Gain/Loss Since 1975 Industry-wide underwriting losses in 2011 are predicted to be the largest since 2001 = ~$39.4 billion $5 -$5 -$15 -$25 -$35 -$45 -$55 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 1011* *Includes mortgage and financial guaranty insurers in all years. 2011 figure based on underwriting losses of $34.9 billion through Q32011. Source: A.M. Best, ISO; Insurance Information Institute. U.S. Domestic Casualty Road to Rate Adequacy 12
3. Underwriting losses continue... Industry-wide combined ratios climb 120 115.8 U.S. P/C Insurance Industry Combined Ratios* 110 107.5 108.2 100 100.1 98.4 100.8 95.7 101.0 99.3 100.8 92.6 90 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 *2008-2011 excludes Mortgage & Financial Guaranty insurers (including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=110.5). Source: Insurance Information Institute from A.M. Best and ISO data. U.S. Domestic Casualty Road to Rate Adequacy 13
4. At the same time, investment income is down Combined ratios must be lower in today s world to generate appropriate return on equity 110.0 105.0 100.0 95.0 90.0 85.0 80.0 U.S. P/C Insurance Industry Combined Ratios v. Return on Equity 108.2 102.0 100.1 100.8 10.9% 101.0 100.8 99.3 9.6% 12.7% 8.8% 7.4% 7.5% 95.7 92.7 6.1% 4.4% 3.9% 2003 2005 2006 2007 2008 2009 2010 2011 2012F 18% 15% 12% 9% 6% 3% 0% Combined Ratio ROE* 10-Year Treasury *2008-2010 figures are return on average surplus. 2011-2012 combined ratios are A.M. Best estimates. Figures exclude mortgage and financial guaranty insurers. Source: Insurance Information Institute from A.M. Best and ISO data. U.S. Domestic Casualty Road to Rate Adequacy 14
Industry Trends by Line of Business - Workers Compensation - Commercial Automobile - General Liability and Umbrella U.S. Casualty Road to Rate Adequacy 15
Workers Compensation State of the Market Deteriorating Underwriting Results > Underwriting results are the worst they have been in a decade > Manual rates have been inadequate for years > Industry combined ratio is expected to be 118% in 2011 and 120% in 2012 Medical Cost Inflation > Medical cost inflation is outpacing overall inflation > The cost of medical care and prescription drugs has risen steadily over 5 years > Medical costs are projected to account for 70% of total workers compensation costs by 2016 Permanently Injured Workers Live Longer > Life expectancy is now 77.8 years, up from 70.8 30 years ago > The aging workforce suffers longer recovery and extended disability periods Sources: Conning Research & Consulting. Rising Healthcare Costs and How Medical Bill Review Can Save Employers Money. WorkersCompensation.com. National Vital Statistics Reports, Vol. 59, Number 9. Centers For Disease Control & Prevention. 28 September 2011. U.S. Domestic Casualty Road to Rate Adequacy 16
Commercial Automobile State of the Market Workers Compensation Industry combined ratio is expected to be 118% in 2011, driven by rising costs of medical care: Consumer Price Index 2007 2008 2009 2010 YTD June 11 > CPI (General) +2.3 +2.3 +1.7 +1.0 +1.6 > Medical Care Services +6.6 +7.0 +6.4 + 7.0% + 6% > Medical Care Commodities +1.4 +2.1 +3.1 + 3.1% + 2.9% Prescription Drugs +1.4 +2.5 +3.4 + 4.3% + 4.1% >Legal Services +4.1 +4.0 +2.7 + 3.6% + 3.4% 2000 2006 Claim Type Claim Frequency * Claim Severity Property Damage -11% +18% Bodily Injury -19% +22% Personal Injury -14% +19% Property Damage claims have outpaced inflation every year, except 2005-2006 *Number of Claims per 100 insured vehicles. Source: Conning Research & Consulting. U.S. Domestic Casualty Road to Rate Adequacy 17
General Liability & Umbrella State of the Market Severity Continues to Outpace Inflation > In 2011, the industry s top ten jury verdicts increased for the sixth consecutive year, with the average rising to $184 million >Top 25 claims paid by Excess Casualty in 2011 totaled $648.4 million >Closed claims paid by Excess Casualty exceeding $10 million have increased 500%, from nine in 2003 to 50 in 2011 > In 2008, the median personal injury award was $41,397 up 3.4% > Between 2003 and 2008, median personal injury awards were up 38% > U.S. Inflation: 2.25% (5-year annualized rate) or 11.25% in the same period Sources: Top Ten Jury Verdicts of 2011. Lawyers USA. 17 January 2011. Current Award Trends in Personal Injury, Jury Verdict Research. Inflation Data.com. U.S. Domestic Casualty Road to Rate Adequacy 18
General Liability & Umbrella State of the Market (cont.) The U.S., a Litigious Society > In 2010, U.S. tort costs increased by 5.1%, totaling $264.6 billion > In 2008, the average: > Personal Injury award was $926,651, up 19% since 2003 > Premise Liability award was $838,578; and the > Product Liability award was $4,579,219 Civil Justice System Abuse > Excessive Awards > Improper Class Certification > Difficulty in Achieving Tort Reform > Improper Venue Selection > Frivolous lawsuits Sources: 2010 Update on U.S. Tort Costs Trends, Towers Watson. Current Award Trends in Personal Injury, Jury Verdict Research. U.S. Domestic Casualty Road to Rate Adequacy 19
General Liability & Umbrella Attachment Points & Limits Are Not What They Used to Be > General Liability attachment points have remained largely unchanged since the 1980 s > With verdict, medical and wage inflation, more losses breach the $1 million attachment > A $3.92 million attachment point would be needed in 2012 to provide the same level of protection a $1 million attachment provided in 1984 > A $100 million insurance program in 2002 now needs to be a $160 million program to have the same value in 2012 dollars Source: Chartis Inc. U.S. Domestic Casualty Road to Rate Adequacy 20
PROPERTY U.S. Casualty Road to Rate Adequacy 21
1 200 1 000 800 Natural Catastrophes Worldwide 1980 2011 There were 820 Catastrophe events in 2011 Geophysical events (Earthquake, tsunami, volcanic eruption) Meteorological events (Storm) 600 400 200 Hydrological events (Flood, mass movement) Climatological events (Extreme temperature, drought, forest fire) 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 400 2011 Overall losses totaled $380 billion; Insured losses totaled $105 billion Overall losses (in 2011 values) Insured losses (in 2011 values) 350 300 250 2Q2012 -$26 B Total loss vs. 10-Yr Avg of $75.6B $12 Source: B Insured MunichRe loss vs. 10-Yr Avg of $19.2 B. 200 150 100 50 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 22
Natural Disasters in the United States, 1980 2011 300 250 200 150 100 50 There were 171 Catastrophe events in 2011 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Geophysical events (Earthquake, tsunami, volcanic eruption) Meteorological events (Storm) Hydrological events (Flood, mass movement) Climatological events (Extreme temperature, drought, forest fire) Overall losses (in 2011 values) Insured losses (in 2011 values) 2011 Overall losses totaled nearly Source: $80 MunichRe billion; Insured losses exceeded $35 billion 23
Property State of the Market Industry wide for 2102 in the U.S., companies without losses generally saw increases of between 10 percent and 20 percent on renewal. Certain insureds with losses typically saw increases in excess of 20 percent, which is due in part to a disproportionate increase of insured values in catastrophe-exposed areas. Underwriting decisions continue to utilize all underwriting tools including catastrophe model revisions, which began to impact pricing in the second half of 2011. 2012 Capacity remains ample at this time. No new capacity has entered the U.S. market as of June 2012. Some insurers reduced their exposure to natural catastrophe risk and a small number stopped writing new business altogether. Select European insurers began restricting the capacity offered in certain critical catastrophe zones. Source: Marsh 24
IT S HARD TO PLAY DEAD WHEN THE BEAR IS EATING YOU
The data contained in this presentation is for general informational purposes only. The advice of a professional insurance broker and counsel should always be obtained before purchasing any insurance product or service. The information contained herein has been compiled from sources believed to be reliable. No warranty, guarantee, or representation, either expressed or implied, is made as to the correctness or sufficiency of any representation contained herein. 2012 Chartis Inc. All rights reserved. Chartis is a world leading property-casualty and general insurance organization serving more than 70 million clients around the world. With one of the industry s most extensive ranges of products and services, deep claims expertise and excellent financial strength, Chartis enables its commercial and personal insurance clients alike to manage virtually any risk with confidence. Chartis is the marketing name for the worldwide property-casualty and general insurance operations of Chartis Inc. For additional information, please visit our website at http://www.chartisinsurance.com. All products are written by insurance company subsidiaries or affiliates of Chartis Inc. Coverage may not be available in all jurisdictions and is subject to actual policy language. Non-insurance products and services may be provided by independent third parties. Certain coverage may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds.