North American Property/Casualty Insurance Industry Review & Outlook Canadian Insurance Accountants Association Conference The Prince Edward Hotel Charlottetown, Prince Edward Island September 20, 1999 Download this presentation at: Robert P. Hartwig, Ph.D.  Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY Tel: (212)  Fax: (212)  

WORLD OVERVIEW

World P/C Insurance Market Shares Source: Swiss Re, Insurance Information Institute 1997=$897 Billion (US$) Worldwide P/C premiums will surpass $1 trillion in the Year 2000

Global Non-Life Market Share Source: Swiss Re, Insurance Information Institute 1997: Canada became the world’s 6th largest p/c market

North American P/C Insurance Market Place Source: Insurance Information Institute, A.M. Best, Insurance Bureau of Canada 1998 (US$)

Source: Insurance Information Institute, Bureau of Economic Analysis 1997 Foreign Direct Investment in the U.S. Insurance Industry

Liability Auto Personal Property Workers Comp Other A&H Marine&Aircraft Comm. Prop. Reinsurance Product Line Share of Total Premium (1998) Source: A.M. Best, Insurance Bureau of Canada, Insurance Information Institute Percent of Industry NPW

INDUSTRY FINANCIAL PERFORMANCE: 1999 YEAR-TO-DATE

1999 vs US Industry: Stock Performance Source: SNL Securities, Insurance Information Institute 52 Weeks Ending 9/3/99 Full Year 1998

1999 Stock Market Performance, by Segment Source: SNL Securities, Insurance Information Institute Year-to-Date through 09/03/99

1999 Insurer Stock Performance, by Asset Size Source: SNL Securities, Insurance Information Institute Year-to-Date Through 09/03/99

Insurers vs. Banks: 1999 Stock Performance Source: SNL Securities, Insurance Information Institute Year-to-Date Through 09/03/99

Source: A.M. Best, Insurance Bureau of Canada, Insurance Information Institute Growth in Net Premiums Written 1999 NPW Growth Estimates: US: 1.0% Canada: 0.8%

Personal/Commercial Growth in NPW: Canada Source: Insurance Bureau of Canada, Insurance Information Institute

Source: A.M. Best, Insurance Bureau of Canada, Insurance Information Institute Net Premiums Written and Surplus (Equity): Canada

Net Premiums Written to Policyholder Surplus Source: A.M. Best, Insurance Bureau of Canada, Insurance Information Institute (U.S. Est./Forecast) = 0.8

U.S. Insured Catastrophe Losses Source: Property Claims Service, Insurance Information Institute 1st-Half 1999 Cat losses: $5.2B

Combined Ratio: * * 1999 figures based on 1st-half results. Source: A.M. Best, Insurance Bureau of Canada, Insurance Information Institute *

Net Investment Income US Facts 1997 Peak = $41.5B 1998 = $39.9B 1999 (Estimate) = $39B 2000 (Forecast) = $37B Source: A.M. Best, Insurance Bureau of Canada, Insurance Information Institute Billions (US$) Billions (C$)

Return on Equity * Estimate * Source: Insurance Bureau of Canada, Insurance Information Institute

MERGERS AND ACQUISITIONS

Insurance Mergers and Acquisitions Source: Compiled from Conning & Company reports. 1998: 565 deals valued at $165.4 B

A Big Piece of the Pie... Overrepresented? Insurance Share of US GDP = 8.5% Source: Insurance Information Institute, Conning & Company, Securities Data Corp. Insurance Deals = $165.4 Billion or 10.3%

M&As by Segment/Value Source: Conning & Co = $165.4 Billion

M&As by Segment/#Deals Source: Conning & Co = 565 Deals

Major M&A Announcements Involving U.S. Insurers in 1999

How to Get Rid of Overcapacity Pay bigger dividends –policyholder & stock Share buybacks Reduce prices (underwriting losses rise) Buy non-P/C assets Wait for bear market (invest. losses rise) M&As CAN’T DO IT ALONE

DISTRIBUTION & AGENCY/BROKER ISSUES

U.S. Insurance Industry Employment (All Segments) Source: Bureau of Labor Statistics, U.S. Department of Labor. Annual Averages (Thousands)

U.S. Insurance Industry Employment (By Segment) Source: Bureau of Labor Statistics, U.S. Department of Labor. Annual Averages (Thousands)

Personal Lines ($146B) $82.6B Ind. Agents/ Brokers 27% Captive Agents 56.5% $39.5B Direct Response 9.8% Source: Insurance Information Institute, A.M. Best, Datamonitor Banks 2.8% ($4.1B) $14.3 Other 3.0% ($4.4B) Internet 0.9% ($1.3B) P/C Premium Distribution 1998

Commercial Lines ($135B) $36B Ind. Agents/ Brokers 73% Captive Agents 27% $99B Direct Response 0.3% ($0.4B) Source: Insurance Information Institute, A.M. Best P/C Premium Distribution 1998

Shifting Distribution Channels: Life/Health Insurers Source: Datamonitor

Respondents Extremely/Very Comfortable Purchasing Auto Insurance(%), by Outlet Source: Insurance Information Institute’s 1999 Insurance Pulse

Respondents Having Better Relationship with Agents, Banks, or Neither Source: Insurance Information Institute’s 1999 Insurance Pulse

Distribution Channels Continue to Proliferate CustomerInsurer Agent Broker Mail Telephone Bank Internet Dealerships Payroll Plans ???

The Electrons Are Coming...

E-Agencies (As of Sept. 1999) Just 3% (1,200) of the 42,000 independent agencies in the US have a web site

THE DOLLARIZATION DEBATE

Advantages of a Single Currency  Benefits to insurers are peripheral  Elimination of FX risk  Reduced transaction cost  Facilitates cross-border investment (real/financial)  Encourages dollar-zone investment  Promotes economic integration

EU Directives Affecting Non-Life Insurance  Reinsurance/Retrocession (February 2, 1964) –Abolished nationality-based restrictions on reinsurance transactions  First Generation Directives (July 24, 1973[life];1979[non- life]) –Objective: Increase competition Insurers from one member state allowed to operate in other member states Insurers remained protectionist Had right to sell, few allowed to buy Largely ineffective until 1990s

EU Directives Affecting Non-Life Insurance  Second Generation Directives (June 22, 1988) –Allowed medium/large commercial risks to buy P/L coverage in insurance markets of member states –Personal lines excluded  Third Generation Directives (June 18, 1992) –Objective: Remove remaining obstacles to open competition Single license (issued by home country) permits operation in all EU states Home country supervisory authority may not require prior approval of rates, policy conditions, or forms Can’t deny entry based on “market disruption” Standardization of regulatory oversight (esp. solvency) Foreign branch operations regulated by home country

Lingering Problems for Insurers  No uniformity of contract law  No standardization of corporate law  Limited uniformity of insurance taxation  General-good provision  Language (11+ languages spoken in 15 EU nations)  Cultural differences  Weak euro?  Defections before 2002?

EMERGING ISSUES  Y2K  Financial Services Reform  Banks and Insurance  Firearms Exposure?  Fraud

Insurers’ Estimated Y2K Exposure: Worst Case Scenario* *High estimate ($35 billion); M&R estimates range from $15 - $35 billion. Source: Milliman & Robertson

Financial Services Reform: Work (Still) in Progress Senate Banks, securities firms & insurers must operate as holding cos. Fed oversight Bar banks from entering commercial businesses/bar non-fin. cos. from thrifts Small, rural banks exempt from CRA Criminalize privacy breaches House Holding cos/national bank subsidiary structures permitted Fed/OCC oversight Banks can enter commercial services/non- fin. cos can own thrifts Extend CRA to holding companies Disclosure policies, customer consent

1997 Bank Insurance Premiums Source: Association of Banks-in-Insurance Total = $27.8 Billion

Firearms Exposure: Long Shot or Bull’s-Eye? Source: FBI Rate per 100,000 population (1997)

Raises questions for insurance regulators in small states Adds fuel to federal v. state oversight debate Current safeguards designed to minimize insolvency risk, not risk of financial fraud. NAIC role/position Martin Frankel: Disappeared with $215 million in policyholder funds

Insurance Information Institute On-Line Tips on safety, disaster preparedness Consumer advice Information for Insurance Professionals Media Resources Industry Financial Results, Surveys & Polls Download this presentation at:

Major P/C Industry Trends DISTRIBUTION GLOBALIZATION –Most investment coming from Europe –Asia: So bad it’s good CONSOLIDATION –Lots more ahead (all segments but brokers) –Driven by bull market

Major P/C Industry Trends DEMUTUALIZATION –Mostly on life side –Possible regulatory/shareholder backlash –Who needs more capital anyway? –Some distinct advantages to mutual form FIN. SERVICE INTEGRATION –Historical record poor (AmEx, Sears) –Gains from ‘cross-selling’ unproven –Undercut by technology –Retirement/tax deferral show promise