2. 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: http://www.iii.org/media/ciaa/index.html Robert P. Hartwig, Ph.D.  Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY 10038 Tel: (212) 669- 9214  Fax: (212) 732-1916  bobh@iii.org  www.iii.org

3. WORLD OVERVIEW

4. 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

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

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

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

8. 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

9. INDUSTRY FINANCIAL PERFORMANCE: 1999 YEAR-TO-DATE

10. 1999 vs. 1998 US Industry: Stock Performance Source: SNL Securities, Insurance Information Institute 52 Weeks Ending 9/3/99 Full Year 1998

11. 1999 Stock Market Performance, by Segment Source: SNL Securities, Insurance Information Institute Year-to-Date through 09/03/99

12. 1999 Insurer Stock Performance, by Asset Size Source: SNL Securities, Insurance Information Institute Year-to-Date Through 09/03/99

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

14. 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%

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

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

17. Net Premiums Written to Policyholder Surplus Source: A.M. Best, Insurance Bureau of Canada, Insurance Information Institute 1999-2000 (U.S. Est./Forecast) = 0.8

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

19. Combined Ratio: 1970-1999* * 1999 figures based on 1st-half results. Source: A.M. Best, Insurance Bureau of Canada, Insurance Information Institute *

20. 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$)

21. Return on Equity 1975 - 1998 * Estimate * Source: Insurance Bureau of Canada, Insurance Information Institute

22. MERGERS AND ACQUISITIONS

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

24. 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%

25. M&As by Segment/Value Source: Conning & Co. 1998 = $165.4 Billion

26. M&As by Segment/#Deals Source: Conning & Co. 1998 = 565 Deals

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

28. 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

29. DISTRIBUTION & AGENCY/BROKER ISSUES

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

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

32. 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

33. 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

34. Shifting Distribution Channels: Life/Health Insurers Source: Datamonitor 2003 1998

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

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

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

38. The Electrons Are Coming...

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

40. THE DOLLARIZATION DEBATE

41. 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

42. 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

43. 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

44. 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?

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

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

47. 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

48. 1997 Bank Insurance Premiums Source: Association of Banks-in-Insurance Total = $27.8 Billion

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

50. 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

51. 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: http://www.iii.org/media/ciaa/index.htm

52. 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

53. 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