Category: Insurance Industry

Topic 72

Mark Harle — Fri, 22 Jan 2010 07:44:00 GMT

Title: Benchmarking
Overview:

Good benchmarking data enables risk managers to make informed decisions about the strengths and weaknesses of their insurance programs. Marsh has created a dedicated Global Benchmark Portal, with information on more than 75,000 placements in the United States, Europe, Middle East & Africa (EMEA), and the Asia-Pacific regions. Peer groups are selected based on a variety of factors, including sales, number of employees, industry, ownership type, and market value. The reports combine the latest benchmarking data into a single document with focus on a specific industry.

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Building a Foundation for Informed Decisions

Benchmarking is one of the key tools with which informed risk management decisions are built. Benchmark data provide you with points of comparison that tell you what’s happening with other organizations’ risk management and insurance programs. With credible data, you can identify strengths and areas for improvement, justify investments needed to drive costs down, and prove the return on investment in your efforts.

Marsh has created a dedicated Global Benchmark Portal where colleagues access benchmark reports for their clients based on the latest available data to support negotiating positions and to make informed decisions.

Global Benchmark Portal

The quality of our benchmarking services is directly related to the extensive scope of the data that we have accumulated. Our portal currently includes information on more than 75,000 placements in the United States, Europe, Middle East & Africa (EMEA), and the Asia-Pacific regions. This covers about $US50 billion in premium placements, $US4 trillion in limits, and $US15.5 trillion in insured value. This extensive database includes benchmarking on property, including both “all-risk” and terrorism coverage; casualty, including auto liability, general liability, workers’ compensation, and umbrella/excess; and the financial and professional lines of directors and officers (D&O) liability, fidelity, fiduciary liability, and employment practices liability insurance.

Peer groups are selected based on a variety of criteria including sales, number of employees, industry (up to 20 major industry groups and 90-plus sub-industry groups), location (region, state, and city), ownership type (public, private, or government), market value, asset size, or total insured value (TIV) of property.

Industry Reports

Benchmarking starts with the right data, but it doesn’t end there. Marsh’s comprehensive analytics, coupled with deep industry expertise and a broad-reaching palette of solutions, create a powerful framework for providing both data and perspective.

In 2009, we published benchmark reports on the following industries: Real Estate; Chemical; Financial Institutions; Hospitality & Gaming; Life Sciences; and Communications, Media & Technology. To access these reports, contact your Marsh representative. Clients may access the reports through MarshConnect.

These reports combine our latest benchmarking data into a single document focused on a specific industry. Our information is collected, aggregated, and analyzed by our global industry and risk practice experts. They outline recent trends in the insurance market for the industry and provide data for each of the main insurance lines.

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Practice Leader Name: Dean Klisura
City: New York
State: NY
Telephone: (212) 345-5969
Email: dean.klisura@marsh.com
Head Shot: klisura.png
Podcast Code:
Flip Book URL: http://www.insurancemarketreport.com/portals/116/flipbooks/benchmarking/index.html
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Topic 40

Thu, 31 Dec 2009 00:52:00 GMT

Title: Reinsurance
Overview:

Reinsurance rates for most lines of business decreased at the January 1, 2010 renewal, in response to a substantial recovery in the capitalization of the reinsurance sector. The combination of the rally in investment markets, much reduced catastrophe loss activity, and recessionary effects on demand resulted in an excess of supply and increased competition. Macro-economic trends had an impact on reinsurance capital and pricing, and the environment in which reinsurers operate will continue to be influenced by global economic conditions as much as by underwriting.

Looking Ahead
The start of 2010 has the reinsurance market at ample capacity, with January 1, 2010 renewals reflecting price declines. Competitive conditions may be tempered by rising accident-year loss ratios, diminishing releases from prior year loss reserves, inflation, and increased capital demands..

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Reinsurance rates for most lines of business decreased at the January 1, 2010, renewal, according to data from Guy Carpenter, a Marsh sister company. The Guy Carpenter World Catastrophe Rate on Line (ROL) Index decreased by 6 percent in response to a swift and substantial recovery in the capitalization of the reinsurance sector. The combination of the rally in investment markets, much reduced catastrophe loss activity, and recessionary effects on demand resulted in an excess of supply and increased competition. This was reflected in a slow renewal in which many contracts closed very late in the season as buyers sought to gain maximum advantage. The overall movements in pricing have also occurred against a complicated background of exposure adjustments, model revisions, program changes, and other market noise.

Guy Carpenter’s complete report, Rates Retreat as Capital Rebounds: Global Reinsurance Renewals at January 1, 2010, can be found at www.GCCapitalIdeas.com.

Among the report’s major findings:

Property Catastrophe Rates Decline
Risk-adjusted catastrophe prices in the United States decreased by an average of 6 percent. This picture is somewhat complicated by adjustments to vendor catastrophe models that have decreased predicted losses for earthquake and wind perils in many cases. By applying the 2010 modeling assumptions retrospectively to 2009, the revised impact is a reduction of as much as 11 percent on average. Meanwhile, the great majority of risk covers (especially the larger ones) renew at mid-year. The significant exception to the general downward trend in pricing is programs with primarily tornado/hail exposure in the middle of the country. Many of these programs sustained losses in 2009, and as margins traditionally have been very competitive, pricing has generally adjusted upward in response to the loss activity.

Casualty Rates Remain Soft
Rates for U.S. casualty lines were typically flat to down 10 percent over the past two renewal cycles. Given the weakness in insurers’ finances in the latter half of 2008, it would have been reasonable to expect that rates would have increased at a substantial rate, reflecting reduced supply and the absence of external financial capital. However, a different dynamic seemed to control the market. In early 2009, strong commercial insurers, taking advantage of their competitors’ weakness, moved aggressively in terms of price and market conditions to gain market share. Later in the year, when it became clear that the commercial insurance market was not going into meltdown, these players reversed roles and the weaker competitors put pressures on pricing to regain market share that had been sacrificed earlier for survivability. There were some pockets of resistance, with rates for financial institutions’ professional indemnity generally showing single-digit increases, particularly in London.

Catastrophe Losses Low
A very quiet hurricane season in the North Atlantic, coupled with relatively low losses for other weather-related events, meant insured losses reached $US24 billion in 2009 (according to Swiss Re), a significant fall from $US52 billion in 2008. Weather-related events continued to be the largest source of losses in 2009 at $US21 billion.

Catastrophe Bond Market Conditions Improve

Despite the challenging financial conditions of late 2008 and early 2009, the catastrophe bond market continued to play a critical role for both sponsors and investors over the past 12 months. Throughout the year, as financial markets stabilized generally, catastrophe bond issuance conditions continued to improve. In 2009 $US3.4 billion of risk capital was issued through 18 transactions. In terms of risk capital, this is a 25 percent increase over 2008.

In the third and fourth quarters, pricing generally declined 25 percent to 40 percent and, depending on transaction features, is now tracking with 2007 levels. Heading into 2010, the catastrophe bond market continues to provide an increasingly attractive and worthwhile supplement to sponsors’ risk transfer programs. Aside from what could potentially prove to be attractive levels to lock in fixed pricing on a multiyear basis, other transaction features such as trigger mechanics and choice of collateral solution (among other features) continue to progress and offer greater value to protect buyers and sellers.

Macroeconomic Trends and Market Security
Macroeconomic trends had an outsized effect on reinsurance capital and pricing, with asset-side movements and investment returns the greatest drivers of sector profitability and capital adequacy in 2009. The environment in which reinsurers operate will continue to be influenced by global economic conditions as much as by underwriting. As the financial crisis unfolded in 2008 and in the first quarter of 2009, almost all reinsurers experienced significant capital stress. Asset-side volatility in the 18 months leading to the January 1, 2010, renewal arguably had a greater effect on reinsurance balance sheets in aggregate than all underwriting losses combined.

Commercial rating agencies reacted to the initial capital write-downs in 2008 and early 2009 with downgrades to insurer financial strength ratings, significantly changing the credit profile of the reinsurance industry. The following chart shows the shareholders’ funds of the Guy Carpenter Reinsurance Composite by Standard & Poor’s rating. Where the bulk of reinsurance capital was rated in the ‘AA’ range at the end of 2007, the majority was rated in the ‘A’ range at the end of 2009. This has had significant implications for reinsurance buyers worldwide, many of whom had required ‘AA’ ratings for certain classes of business previously.

Majority of Reinsurance Capital Now Rated in Single "A" Range

Although asset-side losses were initially significant, the speed at which balance sheets recovered was also remarkable. By the end of 2009, reinsurance industry capital positions were nearly as high as at the end of 2007, a time when industry capital levels were historically high. This had important implications for the supply of available capital, and in turn, for the demand for reinsurance. In historical terms, industry capital levels at the end of 2009 were, to the surprise of many, as healthy as at any time in the last 10 years.

Retrocession Capacity Increases
Capacity for treaty retrocession increased modestly. Two underwriters in Lloyd’s and Bermuda entered the market to write U.S. treaty retrocession, while a number of existing markets showed an increased appetite. Uncertainty about Berkshire Hathaway’s intentions was an issue in the earlier stages of the renewal. Pricing in the underlying market was generally down by 5 percent to 7.5 percent.

Earnings Pressure Mounts
Following two years in which asset-side movements have been the dominant drivers of reinsurance sector capital and earnings, the focus may revert to insurer profitability in 2010. There are several factors that could affect earnings and valuations in the next few years, including:

Reserves: In the years since 2005, most carriers’ earnings have been enhanced by reserve releases, particularly on accident years since 2002. For example, in 2008 and in the first nine months of 2009, the Guy Carpenter Reinsurance Composite experienced a 7.1 percentage point benefit to its calendar year combined ratio due to prior year reserve releases. This high level of reserve releases is not expected to continue, meaning that reserve releases cannot be considered as reliable a source of earnings in the future as they have been in recent years.

Inflation: Inflation could influence company earnings in the longer term. Although inflation expectations are currently subdued by historical standards, it is worth noting that forward expectations (as measured by the bond market) are higher in future years.

Valuation and Forward-Operating Conditions: The above and other factors—such as issues with near-term yields—may contribute to a more difficult operating environment for insurance and reinsurance carriers in coming years. As some traditional sources of earnings may become scarcer in the near future, carriers’ ability to service costs of capital will be more dependent on accident-year underwriting. To address this, some insurers are considering strategic growth into more profitable lines of business. Reinsurance is being utilized to enable cedents to focus on new areas where possible. In addition, some insurance groups are increasing the level of share buybacks, and others are considering inorganic growth.

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Looking Ahead:

The reinsurance market enters 2010 rejuvenated and with ample capacity. The general weakening of pricing at the January 1, 2010, renewal reflected this, but the modest rate of decrease was essentially a return to the downward trend established since 2006. Reinsurers will be faced with the choice of trying to protect or grow market share in a more competitive environment, considering M&A, or returning capital to shareholders. Meanwhile, some longer-term clouds on the horizon in the form of rising accident-year loss ratios, diminishing releases from prior year loss reserves, inflation, and (in Europe) increased capital demands from Solvency II may temper competitive conditions in time.

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Practice Leader Name: Chris Klein
City: London
Telephone: +44 20 7357 1000
Email: christopher.klein@guycarp.com
Head Shot: klein.png
Flip Book URL: http://www.insurancemarketreport.com/portals/116/flipbooks/reinsurance/index.html
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Topic 39

Thu, 31 Dec 2009 00:51:00 GMT

Title: U.S. P/C Industry Overview
Overview:

The U.S. property and casualty (P/C) insurance industry remains strong despite the global financial crisis that has impacted many companies since 2008. Although the industry has suffered from sharp declines in asset values, its capital position has proved sufficient to weather the crisis. Declines in net underwriting losses, as well as minimal hurricane losses in 2009 (compared to near-record level losses reported in 2008), contributed to this improvement.

Looking Ahead

Although the financial markets continue to stabilize in early 2010, investment returns likely will be modest as interest rates are expected to remain low. Insurers’ profitability should remain stable--though volatility in the investment world and large-scale catastrophic events can change the outlook for the insurance industry quickly and dramatically.

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Practice Leader Name: Paul Sherbine
City: New York
State: NY
Telephone: (212) 345-0090
Email: paul.f.sherbine@marsh.com
Head Shot: greyguy.gif
Podcast Code:
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Nine-Month 2009 Results

Based on earnings reported through the first nine months of the year, 2009 is shaping up well for U.S. property/casualty (P/C) insurers. The industry reported net income after taxes of $US16.6 billion through the third quarter of 2009, partially recovering from the steep decline reported in net income one year prior. The profit was earned entirely in the second and third quarters. While profitability remains on the low side, signs of improvement were being seen in the second half of the year.

Overall profitability as measured by the rate of return on average equity improved to 4.8 percent for the first nine months of 2009 compared to 1.3 percent one year earlier.
Contributing to these improvements was an 88 percent year-over-year decline in net underwriting losses reported by the industry. Net underwriting losses for the first nine months of 2009 were $US2.4 billion.
The industry benefited from minimal hurricane losses in 2009, compared to near-record level losses reported in 2008.

The industry’s combined ratio for the first nine months of 2009 was 101.2 percent, a 4.6 point improvement over the same period prior year. Although this compares favorably to the prior year, insurers will need to post significantly better underwriting results if they are to return to levels of profitability they have seen in the past. Insurers, like others, continue to experience historically low interest rates, and investment yields have yet to return to historic levels. Net investment income for the industry fell 7 percent, to $US36.4 billion for the first nine months of 2009. Despite some recovery in the financial markets, net realized capital losses through the first nine months of the 2009 remained substantial, totaling $US9.5 billion.

Third-quarter 2009 results represented a significant improvement and illustrate that the magnitude of these losses are trending downwards. The industry reported third-quarter net realized capital gains of $US1.5 billion according to SNL Financial, which is a marked improvement from the net realized capital losses of $US3.1 billion and $US8.0 billion in the second and first quarters, respectively.

The U.S. P/C industry’s policyholders’ surplus grew 7 percent to $US493 billion through the first nine months of 2009. Following a 13 percent drop in policyholders’ surplus in 2008, insurers began to increase their cash holdings and reduce share buyback activity, which had been a common practice before the financial crisis. Share repurchases bottomed out in the first quarter of 2009. Companies have regained confidence and share buybacks have returned to the agenda and are on the upswing. The third quarter of 2009 saw $US1.8 billion in repurchases among public P/C companies, compared to just $US389 million spent on share repurchases in the first quarter of 2009.

The U.S. P/C industry's growth in policyholders' surplus continues to firmly outpace growth in net premiums written, which declined 5.0 percent during the first nine months of 2009 to $US323 billion. The decline in net premiums written can be directly related to a weak pricing environment and economic conditions as a result of recession that began in December 2007. According to the Insurance Information Institute, negative premium growth for full-year 2009 will mark the first three-year sequential decline in premiums written since the Great Depression, when industry premiums fell for four consecutive years after peaking in 1929. The rise in unemployment rate tends to decrease demand for insurance and increase the frequency for certain insured losses. In addition, reductions in manufacturing and construction activity are also byproducts of a struggling economy that, in turn, reduce insurable risks further.

Continued soft market conditions, particularly in commercial lines, remain a challenge for insurers. According to the Council of Insurance Agents & Brokers (CIAB) data, the magnitude of price decreases improved to a decline of 5.8 percent in the third quarter of 2009 from a 13.8 percent drop in the first quarter of 2008.

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Year-End 2009 Comments

The U.S. P/C insurance industry proved relatively resilient to the global financial crisis that crippled so many companies and industries in 2008 and into 2009. Although the industry suffered from sharp declines in asset values, its capital position proved more than sufficient to weather the crisis, despite the illiquid state of the capital markets and their essential shutdown for an extended period of time. By the third quarter of 2009, the strong recovery of the stock and credit markets enabled the industry to regain much of the capital lost in 2008. The continued rally and healing of the financial markets during the fourth quarter bode well for insurer profitability during the final three months of 2009.

Due to the improved state of the capital markets, the P/C insurance industry was able to recover a significant amount of the sizable unrealized losses it recorded in 2008 with the majority of P/C insurers returning to an unrealized net gain position by the end of the third quarter of 2009. Although insurers generally manage very conservative investment portfolios, the recent global financial crisis is a reminder of how volatile the current investment environment is and, in turn, how unpredictable investment returns can be. In response, many insurers took steps to “de-risk” their investment portfolios further by reducing their exposure to riskier, more volatile asset classes. Despite the overall turnaround in investment performance, the P/C industry will continue to face near-term investment challenges as historically low interest rates continue to produce lower yields. In turn, insurers will be forced to focus on underwriting profitability.

The global financial crisis also exposed risk management and regulatory shortfalls in the insurance industry. Several high-profile insurance companies required government assistance during the crisis and as the major financial guarantee insurers contributed heavily to the crisis, insurance regulation is being revisited. The financial services activities of various insurers were not regulated by an insurance regulator; rather they were overseen by the Office of Thrift Supervision. A key area up for review is the creation of a national insurance office. The most recent legislation pertaining to this topic is the Federal Insurance Office Act, which was introduced in 2009 and recently passed the House Financial Services Committee. The Act calls for the creation of an arm of the U.S. Department of Treasury that would provide some level of federal oversight of insurance. Debate centers on the potential level of federal regulation. Actual change to insurance regulation could still be far off as the federal government continues to deal with the more pressing challenges of the banking industry.

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Looking Ahead in 2010

Despite navigating fairly well through the financial crisis that embraced much of 2009, the U.S. P/C industry faces continued challenges in 2010. Although the financial markets continue to stabilize in early 2010 and investment returns generally are improving, they likely will be modest as interest rates are expected to remain low. In the past, insurers relied heavily on investment earnings to support their business. In 2009 it became clear that investment earnings can not be viewed as a consistently reliable source of significant earnings. Insurers will be forced to return to basics and manage their businesses with the intentions of achieving underwriting profitability each year. Insurers will need to be extremely disciplined in underwriting if they are to achieve risk-appropriate rates. This will be the biggest challenge for insurers in 2010 as broad-based hardening of rates is not expected in the near term.

Overall, the P/C insurance industry remains quite strong, both financially and fundamentally. 2010 begins with guarded optimism about the economy as financial markets continue to stabilize. While insurers’ profitability in 2010 likely will be at least as good as it was in 2009, it is important to be aware that the investment world is extremely volatile and that large-scale catastrophic events can change the outlook for the insurance industry quickly and dramatically. P/C insurers’ concern and attention in 2010 generally will focus on efforts to protect their balance sheets, including pricing adequacy and underwriting discipline, capital planning, and capturing catastrophe exposures in preparation for the possibility of large-scale catastrophe losses.

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