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Agenda
Industry Analysis Firm Analysis Forecasts, Projections, Recommendations Economic Environment Macro Impact on Firm & Industry
Industry Analysis
Economy & The Markets for Insurance
Current wealth
$1,000 gain
Managing Risks
Individuals/corporations can reduce risk by choosing any of the following:
Diversify Accept a lower return on their investments
Buy Insurance
Example:
Fire Insurance Owning fire insurance does not REDUCE the risk of losing your home in fire In case of the unlucky event, the insurance company compensates you for the loss Risk is spread between all the shareholders.. (e.g. 10,000)
Easy to bear 1/10,000th of risk
Insurance Categories
Property & Casualty
Auto, Home etc. Catastrophes
Life & Annuities, Disability Health Medical, Dental, Vision Workers Comp. Unemployment & Disability Specialty
Medical Malpractice Product/Professional Liability Fraud
Industry Size
Insurance Industry is typically categorized under
Financial Services sector
1
2 3
$47,226,012
32,366,506 23,055,892
10.5%
7.2 5.1
15,209,080
3.4
5 6 7 8 9 10
Travelers Property Casualty Corp. & Affiliates Farmers Insurance Group Nationwide Group Zurich Insurance Co. Group Progressive Casualty Group Continental Casualty Group (CNA)
Source: NAIC Annual Statement Database, via National Underwriter Insurance Data Services/Highline Data.
1
2 3 4 5 6 7
$81,300
63,859 56,065 32,149 18,733 16,914 16,803
$677,000
180,559 136,441 134,142 225,853 64,422 147,674
8
9 10 11 12 13 14 15 16 17 18 19 20
Loews (CNA)
Travelers Property Casualty Progressive Chubb USAA St. Paul Cos. Fidelity National Financial Safeco First American Corp. American Family Insurance Group Erie Insurance Group Auto-Owners Insurance W.R. Berkley
15,810
15,139 11,892 11,394 10,593 8,958 7,715 7,358 6,214 5,895 4,717 4,211 3,630
77,881
64,872 16,282 38,361 41,044 39,563 7,312 35,845 4,892 12,239 11,860 9,425 9,335
Demand Factors
Risk Aversion Most companies & people are Risk Averse! Employee Benefits & Workers Compensation Life, Dental, Vision + Short & Long Term Disability Natural Disasters Florida, Gulf-coast: Hurricanes South Asian Tsunami Crisis Fires, Earthquakes, Volcanoes, Floods Man-made Terrorism, 9/11 Re-insurance
Source - http://stats.bls.gov/news.release/pdf/eci.pdf
New Private Housing Starts Housing market remain relatively strong despite rising mortgage rates Exposure outlook for HO insurers in still good in 2004
1.62 1.64 1.57 1.70 1.60 1.85
1.96
1.70
1.48 1.47
YTD (Jan-May) homebuilding is running well ahead of forecasts as people rush to beat rising rates and economy improves
96 97 98 99 00 01 02 03 04E 04F
Source: US Department of Commerce; Insurance Information Institute; 2004 estimates based on actual data for Jan-May. Blue Chip Economic Indicators 6/04 for forecast.
90
92
93
94
95
96
97
98
99
00
01
02
03
$550
$450
$400
41 8
44 0
45 5
48 1
$500
48 8
0*
50 0
1*
51 2
2*
55 3
199
199
199
199
199
200
200
200
200
3*
60 3
0.39%
0.40%
$175,000
$157,800
02
0.38% 0.38%
The cost of homeowners insurance relative to the price of a typical home has fallen!
$110,500 $115,800 $147,800
0.38%
0.36%
$125,000
$107,200
$121,800
$128,400
$150,000
0.33%
$100,000 94 95 96 97 98 99 00 01
0.30%
*As of January 2003. Source: Insurance Information Institute calculations based on data from National Association of Realtors, NAIC.
96
97
98
99
00
01
02
Source: US Department of Commerce; Insurance Information Institute; 2004 estimates based on actual data for Jan-May. Blue Chip Economic Indicators 12/03 forecasts thereafter.
1*
2*
78 4
199
199
199
199
199
200
200
200
200
3*
85 5
Regulations 11%
Insurance 20%
Taxes 19%
Source: National Federation of Independent Business (February 2003); Insurance Information Institute
Cost of risk to corporations fell 42% between 1992 and 2000 Estimated 15% increase in 2001, 25% in 2002
$6.94
Underwriting
Other 5%
Preferred Stock 1%
Bonds 66%
Capital Management
Asset Management
Bond Holdings, by Type Industrial & Misc. Special Revenue Governments 32.5% 30.5% 18.0% 15.4% 3.1%
Parents/Subs/Affiliates 0.5%
Size of Industry
400000 350000 300000
2.50
250000 200000 150000 100000 50000 0 1998 1999 2000 2001 2002 2003
2.00
Current Dollars
1.50
1.00
0.50
Year
Current Dollars
IO Code 524100 524200 Description Insurance carriers (Current $) Insurance agencies, brokerages, and related (Current $) Insurance carriers (% of Total) Insurance agencies, brokerages, and related (% of Total ) Total ALL Industries (in Current $)
2.1%
2.1%
2.0% 1.9%
Commercial insurance premiums as a % of GDP fell 35% between 1988 and 2000 and remains far below late 1980s levels
1.9% 1.9% 1.8% 1.7% 1.6% 1.5% 1.6% 1.5%1.5% 1.8%
More Cover for Less Money: Terms & conditions broadened significantly during the soft market, even as prices fell
89
90
91
92
93
94
95
96
97
98
99
00
01 02E
Sources: Insurance Information Institute, calculated from U.S. Bureau of Economic Analysis and A.M. Best data.
Year 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Life, health and medical 812.0 807.4 788.0 797.4 816.8 815.3 808.8 807.7 791.1 792.3
Property/ casualty 568.8 552.0 558.2 566.9 592.0 603.9 591.6 591.3 590.0 606.2
Reinsurers 37.7 36.3 35.4 35.1 34.3 33.5 32.3 31.4 31.7 30.6
Insurance agencies, brokerages and related services (2) 700.3 712.6 726.4 744.1 766.3 783.4 787.8 803.2 820.4 837.0
Total industry 2,118.8 2,108.3 2,108.0 2,143.5 2,209.4 2,236.1 2,220.5 2,233.6 2,223.2 2,266.1
(1) Described by the Bureau of Labor Statistics as direct insurers. (2) Includes claims adjusters, third party administrators of insurance funds and other service personnel such as advisory and insurance ratemaking services. Source: U.S. Department of Labor, Bureau of Labor Statistics.
INSURANCE CEO
Source Insurance Information Institure
2001 was the first year ever with a full year net loss 2002 ROE = 1.0%
$30,000
$19,316 $14,178 $10,870 $24,404 $20,598 $21,865$20,559
$20,000
$10,000
$5,840 $2,903
$0
-$6,970
-$10,000 91 92 93 94 95 96 97 98 99 00
01
02
15%
10%
5%
0%
-5%
There is an enormous gap between the p/c industrys rate of return and 87 that of most major industry 96 88 89 90 91 92 93 94 95 97 groups98
US P/C Insurers
99
00
01
02
03F
All US Industries
$ Billions
P-C insurers paid $30.5 billion more in claims & expenses than they collected in premiums in 2002
1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Source: A.M. Best, Insurance Information Institute
Aviation Liability $3.5 (9%) Event Cancellation $1.0 (2%) Workers Comp Aviation Hull $2.0 (5%) $0.5 (1%)
$ Billions
$20.0$21.0 18.3 $18.0
$0.5
1999
2000
2001
2002P
1.33%
1.02% 1.03%
0.79% 0.60%
0.58% = 0.72%
30
0.21% 0.28% 0.23%
30
38
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Reserve deficiencies account for more than half of all p/c insurers insolvencies
$36
$ Billions
$27
$18
$9
Surplus is a measure of underwriting capacity. It is analogous to Owners Equity or Net Worth in noninsurance organizations
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
$0
Billions (US$)
8% 6% 4% 2%
3-Month T-Bill
0%
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989
1-Yr. T-Bill
1990 1991 1992 1993 1994
2002 = $36.7B
1.
2.
Historically low interest rates are the primary driver behind lower investment yields. Nevertheless, overall insurer investment performance outpaces all major market indices and almost every major category of mutual fund. 66% of the industrys invested assets are in bonds
3-Month T-Bill
0%
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989
1-Yr. T-Bill
1990 1991 1992 1993 1994
10-Year T-Note
1995 1996 1997 1998 1999 2000 2001 2002 2003 *
*As of April 21, 2003. Source: Board of Governors, Federal Reserve System; Insurance Information Institute
TORT-ure
Asbestos Toxic Mold Medical Malpractice Construction Defects Lead Fast/Fattening Foods & Obesity Reality TV Arsenic Treated Lumber Guns Genetically Modified Foods (Corn) Pharmaceuticals & Medical Devices Security exposures (workplace violence, post-9/11 issues) Slavery Whats Next?
($000)
3,902
759
*Figure is for 2000 (latest available) Source: Jury Verdict Research; Insurance Information Institute.
Tort costs consumed 2.0% of GDP annually on average since 1990, expected to rise to 2.4% of GDP by 2005!
$298
$205
$167 $169
$180
95
96
97
98
99
00
01
05F
Life $11.8 billion 12% Disability $0.5 billion 1% Prop./Casualty $22.4 billion 23%
Introduction to AIG
AIG
International Presence, multiple subsidiary companies Services Commercial, Institutional & Individual Customers
Through Worldwide Property-Casualty (P/C) and Life Insurance Networks on any insurer
In US AIG Companies underwriters of Commercial & Industrial Insurance AIG American General Life Insurance Other Businesses:
Financial Services
Aircraft Leasing, Financial Products, Trading & Market Making Consumer Finance
AIG Performance
90 80 70
USD Billions
Dollars (Millions)
93
94
96
95
97
98
99
00
01
02
03
19
19
19
19
19
19
19
20
20
20
20
20
04
AIG Performance
AIG: Revenue & Profits
120000 100000 14.0% 12.0% 10.0% 8.0% 60000 6.0% 40000 20000 0 1993 1994 1996 1995 1997 1998 1999 2000 2001 2002 2003 2004 4.0% 2.0% 0.0% Revenue Net Income Net Profit
Dollars (Millions)
80000
AIG vs Industry
Ratios
60 40 20 0 1993 1994 1996 1995 1997 1998 1999 2000 2001 2002 2003 2004
Source AIG Annual Report
20.5 20 19.5 19 18.5 18 17.5 1993 1994 1996 1995 1997 1998 1999 2000 2001 2002 2003 2004 Expense Ratio
Underwriting Profit (Loss) 6000 4000 2000 0 -2000 General Insurance Operating Income Net Income
19 93 19 94 19 96 19 95 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04
Source AIG Annual Report
400000 300000 200000 100000 0 1993 1994 1996 1995 1997 1998 1999 2000 2001 2002 2003 Total Invested Assets Total Reserves
General Insurance Net Investment Income Life insurance Net Investment Income
20 18 16 14 12 10 8 6 4 2 0
ROE(%)
Strengths
Global Presence
Founded in 1919 in Shanghai Operations in 130 Countries Market share in individual countries is often very small compared to local competitors
Ample opportunity for continued growth
Most extensive worldwide property-casualty and life insurance networks of any insurer.
Agreement with the Peoples Insurance Company of China (PICC) to develop the market for accident and health products in China Largest foreign life insurer in China Combined Ratio of 92.43 Operating efficiency
Underwriting results and tight expense control (combined ratio) have consistently outperformed the industry.
General Insurance expense ratio further improved to 19.10 from 20.19 a year ago.
Weaknesses
Large complex entity
Demands excess capital be set aside in low-risk, low return manner Insurance is commodity-like
vulnerable to price-cutting Constraints return on capital
AIG Strategy
Practices diversification & expansion
Example - Financial Services, Aircraft Leasing
Helps to protect & cushions from exposure to pure insurance markets
Claims Management
Recommendations
Spreading risk between
Insureds, Insurers, Re-insurers & the State (Appendix A)
Global Expansion
With Partners AIG is clearly demonstrated its partnership capabilities
Economic Environment
Employee Insurance
People Corporations
Workers Comp
Financial Aid
Macro Impact
Catastrophic events
Claim Events Natural Disasters Life Event Loss of Property Man-made: Terrorism
Employee Insurance
People Corporations
Workers Comp
Catastrophic event
Interest Rates
Financial Markets
Stocks, Treasuries, Bonds
Insurance Industry
State
CLAIMS
INCREASE!
People Corporations
Employee Insurance
Workers Comp
Financial Aid
Wrap Up
Appendix A
The role of the State & Insurance Industry
Back Up Slides
AIG Facts & Figures
AIG Worldwide
AIG Facts
86,000 Employees 50 Million Customers 628,000 Sales Representatives 130 Countries & Jurisdictions
$10,000
$3,300
Change in Cost of Median Existing Home Change in Average Homeowners Insurance Expenditure
*August 2002 Source: Insurance Info. Inst. calculations based on data from Natl. Association of Realtors, NAIC.
Commercial Lines
Personal Lines
Self (Un)Insured
Total = $157.7 Billion
$29.6 $20.1
$70.9 $51.0
$49.1
$57.2
1990
2000
US Insurers 30%
$78 billion $60 billion
$62 billion
$7.1
$7.1
$7.0
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
$1.2
$1.5
$1.9
$4
$2.3
$2.9 $3.6
$4.4
$5.4
$8
$6.5
$6.8
$7.2
$7.9
$8.7
$9.4
$10.8
$11.6
$12.4
$13.5
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!
$14.6
$16.2
$17.6
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!
$20.9
Health care inflation is affecting the cost of medical care, no matter what system it is delivered through
7.3% 7.4% 7.3% 8.1% 7.6% 8.0%
10%
6.4%
5.1%
1.3%
2.1%
5%
2.5%
0%
-5%
92
93
-2.1%
94
-1.1%
95
96
0.2%
97
6.1% 5.7%
98
99
00
WC
14.7% 12.0%
02
$14.25B
$19.675B
($ Billions)
$20 $15
$0.125B
$18.00
$15.75
$25
$18.75 $12.50
$5 $0
$8.75
Assumes $30B Commercial Prop & WC Loss, $125B At Risk Commercial DPE
$10.575
Sources/Links
http://www.aig.com http://www.aigcorporate.com http://www.businessinsurance.com/cgi-bin/news.pl?newsId=4870 http://www.wsj.com http://www.businessweek.com http://www.iii.org http://www.bls.gov http://www.bea.gov http://www.swissre.com http://www.bigcharts.com Principles of Economics, Third Edition, N. Gregory Mankiw, Thomson, South-Western