Workers Compensation Insurance: Th R The Role l off St State t F Funds, d M Market k t Trends and Economic Influences October 12, 2010
Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute ♦ 110 William Street ♦ New York, NY 10038 Tel: 212.346.5520 ♦ Cell: 917.453.1885 ♦
[email protected] ♦ www.iii.org
Presentation Outline The Role of Workers Compensation State Funds
History O Organizational i ti l St Structure t and dE Evolution l ti Market Share Analysis Performance
Property Casualty Insurance and Workers Compensation p Market Overview &Outlook Financial Overview Underwriting Trends
State of the Economy and Impacts on Employers and Workers Compensation Insurance Impacts I off the h “Great “G Recession” R i ” on Exposure E &G Growth h 2
A Brief History: The Role of Workers Compensation State Funds Social Policy, History, Economics, Insurance Market Forces and Politics All Played Important Roles in the Development of Modern WC Systems, State Funds and Their Structure 3
Workers Compensation Timeline Industrialization of US in the Late 19th/Early 20th Century Led to Increasing & Unacceptably High Number of Deaths and Injuries Among Workers In 1912, an estimated 18,000 to 23,000 workers were killed on the job (compared to 5,071 in 2008) and approximately 4.7 million (12% or workforce) suffered a nonfatal illness or injury (compared to 3.7 million 2008) The 1912 death/injury rates would imply 75,600 deaths and 17 million injuries today More awareness of broader impacts on families of injured/killed workers
Workers Could Seek Redress Under Tort Law, But Seldom Prevailed Employers usually won suits filed by injured workers by arguing: – Contributory Negligence: Employee was at least partially to blame for the accident – Assumed Risk: By taking the job, the employee understood the hazards involved – Fellow Servant Rule: A fellow worker caused the accident, so the employer was not at fault
European Countries Began to Implement Workers Compensation Programs Germany (1884); England (1897)
Insurers Began to Sell Commercial Liability Coverage in the Late 1800s Coverage C ffor iinadvertent d t t errors b became more commonplace l In the workforce, such policies became the first employer liability policies Source: Insurance Information Institute.
4
Cumulative Number of WC Laws Passed, 1910-1920 42
45 No. of states
40
37 32
35
43
38
32
30 22
25
24
20 15
13
California’s state fund was founded in 1914 amid a wave of new workers comp laws across the US.
10
10
New York was the first state to pass a WC law in 1910.
5 1 0 1910
1911
1912
1913
1914
1915
1916
1917
1918
Source: http://eh.net/encyclopedia/article/fishback.workers.compensation; Insurance Information Institute.
1919
1920
5
The Role of Workers Compensation State Funds: Public Policy & Economic Missions The Core Public Policy Mission of WC State Funds is to Assure the Availability of Affordable Workers Compensation Coverage to Employers The original catalyst for WC was the recognition that the rapidly increasing number of occupational injuries and deaths were exacting a high and unfair physical and financial toll on injured workers and their families Prior to 1920, there was some question whether the private insurance sector could meet the demand and affordably supply this new type of coverage on its own. State funds were a tool for meeting this new public policy objective. States adopted differing strategies for assuring this obligation was met: competitive and monopolistic state funds whereas others allowed the private sector to satisfy demand (subject to state oversight and regulation) For the state funds formed in the late 1980s and 1990s 1990s, states sought to bring stability to a market where costs were rising rapidly and residual market shares exploding
Secondary Core Public Policy Mission: Reduce Workplace Injuries/Deaths Provision of loss control services and loss sensitive pricing help achieve this goal
Core Economic Mission: Support of the State Economy The availability of affordable WC coverage is a key consideration in many business location and expansion decisions This issue is likely increase in importance in the job-starved 2010s
To Operate Self-Sufficiently (i.e., Minimal Public Financial Support) Source: Insurance Information Institute; Conning.
6
Number of Workers Comp State Funds Formed by Decade, 1910–2010 Number of State Funds Formed 14
13
12
CA CO ID MD NV* NY ND OH OR** PA UT WA WV** WY
1910s
10 8 6 4 2 0
California’s state fund was founded in 1914 amid a wave of new workers comp laws across the US. At that time, state’s were experimenting with different systems: private private, monopolistic state funds and competitive state funds
0
1 OK
0
1920s
1930s
1940s
9
0
1 AZ
0
MN
HI KY LA ME MO MT NM RI TX
1950s
1960s
1970s
1980s
1990s
1
0 2000s**
All But Three of the 26 State Funds Ever Formed Were Founded in the 1910s (the Decade in which Workers Comp Laws Were Put on the Books in Most States) and the 1990s (During a Period of Massive Reform of WC Systems Countrywide) * Nevada’s monopolistic state fund, founded in 1913, was privatized in 1999. There is currently no state fund in the state. **West Virginia’s original (monopolistic) state fund was formed in 1915. Its successor, BrickStreet Mutual, became a competitive state fund in 2006. Oregon’s original (monopolistic) fund, formed in 1914, adopted a competitive structure in 1980. Sources: Insurance Information Institute research.
7
Monopolistic State Funds: Where Are they Today?
St t State
D t started Date t t d
St t Status
Ohio
1911
Still monopolistic
Washington
1911
Monopolistic; referendum sought in 2010
Nevada
1913
State fund privatized in 1999
O Oregon
1913
All Allowed d competition titi iin 1980
West Virginia
1913
Allowed competition in 2008
y g Wyoming
1915
Still monopolistic p
North Dakota
1919
Still monopolistic
Source: Economic History Association, http://eh.net/encyclopedia/article/fishback.workers.compensation, Insurance Information Institute research.
8
Workers Compensation State Funds by Type, 2010 State Funds Competitive: 21 M Monopolistic: li ti 4
Washington has a referendum on the ballot in November (I-1082) that would allow competition
Ohio is considering moving toward a competitive state fund system
= Competitive = Monopolistic = Private Carrier Only
Source: Insurance Information Institute
9
Identity Crisis: The Role of State Funds in 2010 and Beyond The Role and Need for State Funds Is Being Questioned from Within and from Without Two monopolistic state funds have disappeared in recent years (NV and WV); OH and WA are being challenged. AZ will convert to a mutual structure by 2013 A number of state funds can write WC risk for companies domiciled in their home state Several state funds now own subsidiaries that allow them to write risks with no ties to their home state (breach of core mission?)
Factors that Can Lead to Questioning of the Role of WC State Funds Shrinking Residual Markets Intense Private Insurer Competition Prolonged Soft Market Increasing Options (e.g., Captives, Large Deductible Programs) g of Time Since Last WC Crisis ((earlyy 1990s)) Passage State Budget Woes Source: Insurance Information Institute.
10
The Curious Case of Arizona: Conversion of State Fund to a Mutual Insurer Arizona Seems to Have Decided it Doesn’t Need a State Fund (As Did NV) Excerpts from Arizona Senate Bill 1045 (2010 Second Regular Session) On or before January 1, 2013, the state compensation fund board of directors, which terminates on July 1, 2012 pursuant to section 41-3012.19, Arizona Revised Statutes, shall perform all acts necessary to establish a successor mutual insurer corporation. p The successor mutual insurer corporation shall operate to the same extent as any mutual casualty insurer that is licensed and authorized to write insurance in this state, subject to the authority and regulation by the department of insurance pursuant to title 28 20,, chapter p 4,, article 1,, Arizona Revised Statutes,, and with all the p powers and subject to all the laws, rules and requirements of a mutual insurer corporation that is organized under the laws of this state. The successor mutual insurer corporation is not an agency of this state or a p public blic entit entity of this state state. The successor s ccessor mutual m t al insurer ins rer corporation shall not use the term "state compensation fund" or "SCF" in its new name or logo from and after June 30, 2014.
Source: State of Arizona; Insurance Information Institute.
11
Workers Compensation Premium Continues Its Sharp Decline Net Written Premium $ Billions
50
46.5
State Funds ($ B)
47.8
46.5 44 3 44.3
Private Carriers ($ B)
42.3
40
39.3
37.7
34.1 31 3 31 0 31.3 31.0
30
32.1
29.8 30.5 29.1 26.3
28.2
26.9 25.9 25.0
28.6
20 31.0 31.3 29.8 30.5 29.1
10
26.3 25.2 24.2 23.3 22.3 25.0 26.1
29.2 31.1
34.7
37.8 38.6 37.6 33.8
29.8
0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009p p Preliminary
C l d Y Calendar Year
Source: 1990–2008 Private Carriers, Best's Aggregates & Averages; 2009p, NCCI 1996–2009p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements State Funds available for 1996 and subsequent
WC Competitive State Fund Market Share, 1996 – 2009p Market Share (%)
Private insurance markets are highly competitive. State fund market shares have been falling steadily since 2003.
30% 26.4% 25%
22.4%
21.0%
18 7% 18.7%
20%
16.9%
15% 10%
25.4%
12.9%
15.2%
14.1%
12.7%
10.6% 10.0% 10.2% 10.8%
5% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Competition, favorable underwriting trends, coverage options, private insurer innovations in risk management have all helped to make the private sector WC insurance the most attractive option in most cases Source: 1990–2008 Private Carriers, Best's Aggregates & Averages; 2009p, NCCI, Insurance Information Institute Market Share calculations 1996–2009p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements State Funds available for 1996 and subsequent; p: Preliminary
13
10.9
11.0
222.3
224.3
224.9
26.5
29.2
35.1
31.5
222.6
14.4
20
58.3
60.8
56.4
47..4
38.7
40
61.3
65.4
60
552.2
100 .0
100 .0
100 .0
67.2
80
State funds market shares among the 21 competitive state funds vary widely, from nearly 90% in WV (in transition from a monopolistic to a competitive fund market) to barely 10% in PA
87.4
State Fund M arrket Sharee (% )
100
100 .0
Workers Compensation State Fund Market Shares, 2008
0 ND OH WA WY WV MT CO ME RI ID OR UT AZ NY OK NM TX LA MD KY CA HI MO MN PA Source: Conning; Insurance Information Institute. 14
The average competitive workers comp state fund ran a loss ratio of 84.2% in 2008 compared to 77.1% for the US WC market overall
777.1%
72.1 %
64.8%
72.4 %
103 .8%
91.9%
87.0%
83.2%
92.2% 61.6%
117.1%
46 .2%
46 .2%
60%
881.8%
96.0%
61.6%
63.2%
881.2%
100% 80%
13 of the 21 competitive state funds also serve as the market of last resort
1111.9%
120.6%
120%
1111.9%
Incu urred Losss R atio (% )
140%
120.6%
Workers Compensation State Fund Incurred Loss Ratio, 2008
40% 20% AZ CA CO HI
ID KY LA ME MD MN MO MT NM NY OK OR PA RI TX UT WV US*
Yellow bars = states where the state fund is also the market of last resort Source: Conning; A.M. Best; Insurance Information Institute.
15
Comparison of State WC rates WC rates, on average, do not appear to be significantly higher or lower in states with workers comp state funds
California’s WC rates are about average Source: Oregon Workers’ Compensation Premium Rate Ranking 2008. Rates weighted by Oregon’s distribution of exposures by classification
16
P-C Insurance and Workers Compensation Overview & Outlook A Slow Motion Cyclical Turn is Underway
17
Profitability Historically y Volatile
18
$6 65,777
$16,5 531
$3,043
$28,311
$4 44,155
501 $38,5
$30,029
$20 0,559
0,598 $20
$10,870
$3,046
$10,000
$19,,316
$20,000
$5,840
$30,000
$14,178
$40,000
$21,865
$50,000
$30,773
$60,000
2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS1 = 5.8% 2010:H1 ROAS = 6.3%
P-C Industry 2010:H1 profits rose $10.6B from $6.0B in 2009:H1, due mainly to $2.2B in realized capital gains vs vs. -$11.1B $11 1B in previous realized capital losses
19 $36,81
$70 000 $70,000
$24,404 $
$80,000
$62,496
P/C Net Income After Taxes 1991–2010:H1 ($ Millions)
$0 -$10,000
-$6,970 91
92
93
94
95
96
97
98
99
00 01
02
03
04
05
06
07
08
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.5% ROAS for 2010:H1 and 4.6% for 2009. 2009:H1 net income was $19.2 billion and $10.2 billion in 2008:H1 excluding M&FG. Sources: A.M. Best, ISO, Insurance Information Institute
09 10:H1
ROE: P/C vs. All Industries 1987–2009* (Percent)
P/C Profitability Is Cyclical y and Volatile
20%
Katrina, at a, Rita, Wilma
15%
10% Sept. 11 Hugo g
5% %
4 Hurricanes
Lowest CAT Losses in 15 Years
Andrew
0%
Northridge
Financial Fi i l Crisis*
-5% 87
88
89
90
91
92
93
94
95
96
97
US P/C Ins Insurers rers * Excludes Mortgage & Financial Guarantee in 2008 and 2009. Sources: ISO, Fortune; Insurance Information Institute.
98
99
00
01
02
03
04
05
06
07
08
09
All US Industries Ind stries
20
ROE vs. Equity Cost of Capital: U.S. P/C Insurance:1991-2010:H1* (Percent) 18% 16%
6% 4% 2% 0%
-9.0 pts
-13.2 p pts
8%
+1.7 pts
10%
-3.2 pts
12%
--6.4 pts
+2 2.3 pts
14%
-2.9 pts
The P/C Insurance Industry Well Short of Its Cost of Capital in 2008 but Narrowed the Gap in 2009 and 2010
The Cost of Capital is the Rate of Return Insurers Need to Attract and Retain Capital to the Business
US P/C Insurers Missed Their Cost of Capital by an Average 6 6.7 7 Points from 1991 to 2002, but on Target or Better 2003-07, Fell Short in 2008-2010
-2% 91
92
93
94
95
96
97
98
99 ROE
00
01
02
03
04
05
06
07 08* 09* 10*
Cost of Capital
* Return on average surplus in 2008-2010 excluding mortgage and financial guaranty insurers. Source: The Geneva Association, Insurance Information Institute
21
A 100 Combined Ratio Isn’t What It Once Was: 90-95 Is Where It’s At Now A combined ratio of about 100 generated a 7% ROE in 2009, 10% in 2005 and 16% in 1979
Combined Ratio / ROE 110 105
15.9% 5 9% 14.3% 100.6
100
100.1
97.5
100.7
12.7%
15% 101.0
99.5
100.1
7.3%
7.5%
12%
9 6% 9.6%
95
18%
92.6
9%
8.9% 90
6% 4.4%
85
3%
80
0% 1978
1979
2003
2005
Combined Ratio
2006
2008*
2009*
2010 H1* 2010:H1*
ROE*
Combined Ratios Must Be Lower in Today’s Depressed Investment Environment to Generate Risk Appropriate ROEs * 2009 and 2010:Q1 figures are return on average statutory surplus. 2008, 2009 and 2010:H1figures exclude mortgage and financial guaranty insurers Source: Insurance Information Institute from A.M. Best and ISO data.
P/C Insurer Impairments, 1969–2009 5 of the 11 are Florida companies (1 of these 5 is a title insurer)
18 8 19
16
8 18 14 15
35
31
29 12
16 14 13
5
69 70 71 72 73 74 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
0
7 6
9
13 12 9
11 9 7
8
10
15 12
20
19
30
31 34
34
40
36
41
50
49 50 47
49
50 48
55
60
60 58 5
70
The Number of Impairments p Varies Significantly g y Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets Source: A.M. Best; Insurance Information Institute.
Reasons for US P/C Insurer Impairments, 1969–2008 Deficient Loss Reserves and Inadequate Pricing Are the Leading Cause of Insurer Impairments, Underscoring the Importance of Discipline. Investment Catastrophe Losses Play a Much Smaller Role Reinsurance Failure Sig. Change in Business
3.7% 4 2% 4.2%
Mi Misc.
9.1% Investment Problems
Affiliate Impairment
7.0%
38.1%
Deficient Loss Reserves/ In adequate Pricing In-adequate
7.9%
7.6% Catastrophe Losses
8.1% Alleged Fraud
14.3% Rapid Growth
Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2009
24
P/C Premium Growth Primarily Driven by the I d t ’ Underwriting Industry’s U d iti Cycle, C l Not the Economy
25
Soft Market Appears to Persist in 2010 but May Be Easing: Relief in 2011? (Percent) 25%
1975-78
1984-87
2000-03 Net Written Premiums Fell 0.7% in 2007 (First Decline Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.
20%
15%
10%
5%
0%
71 1 72 2 73 3 74 4 75 5 76 6 77 7 78 8 79 9 80 0 81 1 82 2 83 3 84 4 85 5 86 6 87 7 88 8 89 9 90 0 91 1 92 2 93 3 94 4 95 5 96 6 97 7 98 8 99 9 00 0 01 1 02 2 03 3 04 4 05 5 06 6 07 7 08 8 09 9 10F F
-5%
NWP was flat with 0.0% growth in 10:H1 vs. -4.4% in 09:H1
Shaded areas denote “hard market” periods Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
26
Change in Commercial Rate Renewals, by Line: 2010:Q2
Su re ty
In te rru EP pt io L n
Bu s.
D
&O
ct io n on st ru C
W C
m om C
br el la m U
L G
lA
ut o
ro p lP
m om C
Al lC
om
m er ci al
Percentage Change (%)
0.0% -0.1%
-1.0% -2.0% -3 3.0% 0% -4.0%
-3.4%
-5.0%
-8.0%
-3.0%
-4.6%
-6.0% -7.0%
-3.3%
-6.3%
-6.4%
6 0% -6.0%
-5.5%
-5.4%
-7.0%
Most Major j Commercial Lines Renewed Down in Q2:2010 at a Faster Pace than a year Earlier Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
27
Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2010:Q2 1999:Q4 = 100
Pricing today is where is was in Q4:2000 (pre-9/11)
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
28
Net Written Premium Growth Forcasts by Line: 2010 - 2012 Line
2010F
2011F
2012F
1.8%
5.0%
5.4%
Personal Auto
3.1
5.2
5.0
H Homeowners
47 4.7
52 5.2
50 5.0
Workers Comp
-4.0
5.5
10.0
Commercial Auto
15 1.5
81 8.1
69 6.9
Commercial Multiperil
1.5
6.3
7.3
General Liability
1.3
5.8
5.8
Inland Marine
2.0
4.5
5.0
All Lines
Source: Conning, Second Quarter 2010 forecast.
Capital/Policyholder p y Surplus (US) Shrinkage, but Not Enough to Trigger Hard Market
30
Policyholder Surplus, 2006:Q4–2010:Q2 ($ Billions)
2007:Q3 Previous Surplus Peak
Surplus set a new record in 2010:Q1*
$560 $540.7
$540
$530.5 $521.8 $517.9 $515.6 $512.8
$520
$511.5
$505.0
$500 $487.1
$496.6 $
$490 8 $490.8 $478.5
$480
$463.0
$455.6
$460
$437.1
$440 $420
06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2
Quarterly Surplus Changes Since 2009:Q1 Trough *Includes $22.5B of paid-in capital from a holding company parent for one insurer’s ’ investment in a non-insurance business Sources: ISO, A.M .Best.
09:Q1: -$84.7B (-16.2%) 09:Q2: -$58.8B $58.8B (-11.2%) ( 11.2%) 09:Q3: -$31.8B (-5.9%) 09:Q4: -$10.3B (-2.0%)
10:Q1: +$18.9B (+3.6%) 10:Q2: -$10.2B $10.2B (-1.9%) ( 1.9%)
31
Investment Performance Investments Are a Principle S Source off Declining D li i P Profitability fi bili
32
Property/Casualty Insurance Industry Investment Gain: 1994–2010:H11 2009:H1 gain was $12.5B
($ Billions) $70
$64.0 $58.0 $56.9 $52.3 $51.9 $47.2
$60 $50
$42.8
$59.4 $55.7 $48.9 $45.3
$44.4
$40 $35.4
$39 0 $39.0
$36.0
$31.7
$30
$25.8
Investment gains in 2010 are on track to be their best since 2007
$20 $10 $0 94
95
96
97
98
99
00
01
02
03
04
05*
06
07
08
09 10:H1
In 2008, Investment Gains Fell by 50% Due to Lower Yields and Nearly $20B of Realized Capital Losses p Losses But Declining g Investment Income 2009 Saw Smaller Realized Capital Investment Gains Are Recovering So Far in 2010 1
Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. * 2005 figure includes special one-time dividend of $3.2B. Sources: ISO; Insurance Information Institute.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain y Line* Constant ROE, by s ne i L
-5 5.7%
-5.2%
-4.3%
-3.7%
-3.3%
-3.3%
-3.1% %
-2..1%
-1.9%
-3.6%
-2..0%
-1.8%
0% -1% -2% -3% -4% -5% -6% -7% -8%
-1.8%
y l et es o p t r a s n i o u a Li rc s Au op ty Pr C /S al al r s e l s n y n t t a P u M m m m m l o li ra di rs rs rp tP ar C de ed om om om re om e e v u i C P P P C C C C F W S M W to u A
R
a ur s n ei
** e nc
-7.3%
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline *Based on 2008 Invested Assets and Earned Premiums **US domestic reinsurance only Source: A.M. Best; Insurance Information Institute.
34
Underwriting Trends – Financial Crisis Does Not Directly Impact Underwriting Performance: Cycle, Catastrophes Were 2008’s Drivers
35
P/C Insurance Industry Combined Ratio, 2001–2010:H1* As Recently as 2001, Insurers Paid Out Nearly $1.16 $1 16 for Every $1 in Earned Premiums
Heavy Use of Reinsurance Lowered Net Losses
Relatively Low CAT L Losses, Reserve Releases
Relatively Low CAT L Losses, Reserve Releases
Cyc ca Cyclical Deterioration
120 115.8
110
Lower CAT Losses, More Reserve R l Releases
Best Combined Ratio Since 1949 (87 (87.6) 6)
107.5
100.1 100
101.0
100.8 98.4
99 3 99.3
100.1
2009*
2010:H1
95.7 92.6 90 2001
2002
2003
2004
2005
2006
2007
2008
* Excludes Mortgage & Financial Guaranty insurers in 2008, 2009 and 2010. Including M&FG, 2008=105.1, 2009=100.7, 2010:H1=101.7 Sources: A.M. Best, ISO.
36
P/C Reserve Development, 1992–2011E
$25 $20
23.2
Impact on Combined Ratio
$15
13.7
11.7
9.9
$10 $ $5
2.3
7.3
1 -2.1
$10 -$10
-2.6
-4.1
-6 6 -6.6
-8.3
-5
67 -6.7 -9.5
-9.9 -9.8
-$15
-2
-6 11E E
E 10E
09
07
06
05
04 4
03
2 02
01
00
99
98
97
96
95
4 94
93
4
-4
-14.6-16 -15
-$20 92 2
6
0
$0 -$5
8
2
08
Priorr Yr. Reserve e Release ($ $B)
Prior Yr. Reserve Development ($B)
Impac ct on Combined Ratio ((Points)
$30
Prior year reserve releases totaled $8.8 billion in the first half of 2010 2010, up from $7.1 billion in the first half of 2009
Reserve Releases Are Continuing Strong in 2010 But Should Begin to Taper Off in 2011 Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclay’s Capital; A.M. Best.
37
Workers Compensation p Operating Environment The Weak Economy and Soft Market Have M d th Made the Workers W k C Comp O Operating ti Increasingly Challenging 38
100
107.0
115.3 8.2 118 121.7 110.9 110.0 107.0 102.7 98.4 103 3.5 104 4.3 109.8 116.0 117.0 0 117.0 0
105
102.0 0
110
96.8 99.9 101.1 4.2 104 103 3.6 99.4 96.4 101.4 102..8 103 3.9
115
97.0 100.0 101.0
112.5
120
109.1
125
121.9 118 8.8 121.1 117..6 118 8.4 118 8.2 117.4 4 122.6 121.5
Workers Compensation Combined Ratio: 1973–2012P
95 90 85 80 73
75
77
79
81 83
85
87
89
91
93
95 97
99
01
03
05
07
Workers Comp Underwriting Results Are Deteriorating Markedly Sources: A.M. Best; Insurance Information Institute.
09 11P
Calendar Year Reserve Deficiency Increased in 2009 WC Loss and LAE Reserve Deficiency: Private Carriers
$ Billions 30
2009 Tabular Discount Is $5.3 Billion 25
20
21
18
20
18 15
15 15
12 10
9
9
10
6 5 5
4
2
2
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Calendar Year Considers all reserve discounts as deficiencies Loss and LAE figures are based on NAIC Annual Statement data for each valuation date and NCCI latest selections Source: NCCI analysis
2006
2007
2008
2009
Workers Compensation p Medical & Indemnity Claim Cost Trends Rising Medical Costs Exert Pressure While I d Indemnity it Costs C t Rise Ri Well W ll Ahead Ah d off Wage Inflation 41
Workers Comp Medical Claim Costs Continue to Rise Medical Claim Cost ($000s)
$30 $25
Annuall Ch A Change 1991–1993: 1991 1993 Annual Change 1994–2001: Annual Change 2002-2009:
$20 $15 $10 $8.5 $8.6 $8.4 $9.2
+1.9% +1 9% +8.9% +6.6%
$27.2 $25.9 $24.3 $23.0 $21 9 $21.9 $20.3 $19.2 $18.0 $16.6 $ $14.6 $13 6 $13.6 $12.3 $11.4 Cumulative Change = 224% $9.6$10.3
(1993-2009p)
$5 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09p Accident Year 2009p: Preliminary based on data valued as of 12/31/2009 1991-2008: Based on data through 12/31/2008, developed to ultimate Based on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies
WC Medical Severity Rising at Twice the Medical CPI Rate 16% 13.5%
14% 12%
10.6%
10.1% 10%
8.8%
8.3% 7.4%
8% 6% 4% 2% 0%
Average annual increase in WC medical severity form 1995 through 2009 was y twice the medical CPI ((7.6% vs. nearly 3.9%). New healthcare reform legislation is unlikely to have any impact on the gap.
7.3%
7.4%
7.3%
6.7% 5.6%
5.1% 4.5% 3.5% 2.8%
3.2% 3.5%
4 1% 4.1%
4.6% 4.7%
4.0%
5.4% 5.4%
5.0%
4 4% 4 4.4% 4.4% 4% 4.2% 2% 4.0% 4 3.7% 3.4%
Change in Medical CPI Change Med Cost per Lost Time Claim
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
WC Insurers Experience Inflation More Intensely than 2009 CPI Suggests (Percent increase Dec 08 to Dec 09)
8% Inpatient Services Rose 6.7%; O t ti t S Outpatient Services i Rose 7.4%
6.9% Excludes Food and Energy
6%
4% 2.7%
3.0%
3.0%
Physicians' Services
Dental Services
3.4%
3.1%
3.4%
1.8%
2%
0% Overall CPI
"Core" CPI
Hospital Services
Prescription Medical Care Medical CPI Drugs Commodities
Healthcare H lth C Costs t A Are a M Major j WC IInsurance C Costt D Driver. i Th They A Are Likely to Increase Faster than the CPI for the Next Few Years, at Least Source: Bureau of Labor Statistics; Insurance Information Institute.
44
Workers Compensation Lost-Time Claim Frequency Continues to Decline* Lost-Time Claims
(Percent)
Cumulative Change of -54.7%
0.3% %
0.5% %
2%
(1991 – 2008)
0%
-10% 10% 91
92
-9.2%
93
94
95
96
97
98
99
00
01
-4.0%
-3.4 4%
-3 3.0% -6.2 2%
% -6.6%
% -3.7%
-6.9%
-8%
-4.1%
-4.5%
% -3.9%
-4.5% -6.5% %
-6%
-4.4%
-4.2%
-4% 4%
-4.5%
-2.3%
-2%
Claim frequency fell in 4.0% in 2009, in part due to the recession
02
03
04
05
06
07
08 09P
2009p: Preliminary based on data valued as of 12/31/2009; *Frequency is defined as the number of lost-time claims per 100,000 workers. 1991-2008: Based on data through 12/31/2008, developed to ultimate Based on the states where NCCI provides ratemaking services including state funds; Excludes the effects of deductible policies 45
Med Costs Share of Total Costs is Increasing Steadily
2009p 1999
Medical 58%
1989 Indemnity 53%
Indemnity 42%
IIndemnity d it 48%
Medical 52%
Medical 47%
Source: NCCI (based on states where NCCI provides ratemaking services).
WC Med Cost Will Equal 2/3 of Total by 2019 if Trends Hold
2019 Estimate
Indemnity 33% Medical 67%
Source: Insurance Information Institute.
This trend will likely be supported by the increased labor force p participation p of workers age 55 and older.
Indemnity Claim Cost Trends Indemnity Costs Continue to Rise at a P Pace Ab Above Wage W Inflation I fl ti
48
Workers Comp Indemnity Claim Costs Continue to Grow Indemnity Claim Cost ($ 000s) 25
Annual Change 1991–1993: Annual Change 1994–2001: Annual Change 2002–2008:
23 21
-1.7% +7.3% +4.0%
+4.5 +5.8
+5.0% +5.0% 3 1% +3.1% +4.1%+1.7% +9.2%+3.1% +10.1%
19 17
$23 3.0
$2 20.8
$ $19.8
$18.8
$18.3
$18.0
$16.7
$15.3
$13.8
$12.5 5
$11.5
$10 0.7
$10.1
$9 9.9
$ $9.4
$9.7
7
$10.0
11 +1.0% -3.1% -2.8% 9
$17.3
13
+10.1% +9.0% 9 0% +7.7% +5.9% +4.9%+1.7%
$22.0
15
5 1991
1993
1995
1997
1999
2001
Accident Year 2009p: Preliminary based on data valued as of 12/31/2009 1991–2008: Based on data through 12/31/2008, developed to ultimate Based on the states where NCCI provides ratemaking services Excludes the effects of deductible policies
2003
2005
2007
2009p
WC Indemnity Severity vs. Wage Inflation 12%
Change in CPS Wage
Change in Indemnity Cost per Lost-Time Claim
10.1%
10%
WC indemnity i d i severity i is once again outpacing wage inflation
9.2%
9.0% 10.1% 7.7%
8% 5.9%
5.8%
6% 4%
5.0% 5.0%
6.3% 3 6% 3.6%
5 2% 5.2% 4.2%
5.6% 3 1% 3.1%
4.7%
3.1% 4.7% 4.6% 1.7%
2%
2.7%
2.3%
1.7%
4.5%
4.1%
3.5% 2.3%
1 7% 1.7% 1.1%
0%
-1.0%
-2% 2% 1995
1997
1999
2001
2003
2005
2007
2009p
2009p: Preliminary based on data valued as of 12/31/2009; 1991-2008: Based on data through 12/31/2008, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. CPS = Current Population Survey. Source: NCCI
Dollar Change* in Average Hourly Earnings, g , June 2006 – August g 2010 $0.30 The pace of hourly earnings growth has slowed dramatically since the onset of the economic downturn
$0 25 $0.25 $0.20 $0.15 $0.10 $0.05
Jul 10
Jan 10
Jul 09
Jan 09
Jul 08
Jan 08
Jul 07
Jan 07
Jun 06
$0 00 $0.00
Average H A Hourly l E Earnings i Gre att Least Grew L t $0.05 $0 05 in Every 3-Month Period Since June 2006. *3-month net change, seasonally adjusted Source: http://data.bls.gov/PDQ/servlet/SurveyOutputServlet
51
Total Wages, California 2001-2009 All Employers
Private Employers
Billions $850 $ $790.44
$50 08.16
$588.32
$630.69 $555.40
$614.54
$5 521.08
$619.15 $5 518.60
$550
$6 661.15
$6 659.99
$667.52
54 $627.5
$703.99
$700
$600
$753.97
$749.50
$750
$650
$797 79 $797.79
$618.17
$800
Wages fallen W f ll sharply in hard hit states like California
$500 $450 $ 00 $400 2001
2002
2003
2004
2005
2006
2007
2008
2009p
Recessions Cause Payrolls to Shrink. The 2001 Recession Saw a 2.0% Decline in Private Wages; the 2008-09 Dropoff was 6.3%. Source: http://data.bls.gov
52
Where Will the Growth in WC Exposure Come From? Industry and Occupation Growth Analysis
53
Fastest Growing Occupations, 2008–2018: Health/Science/Tech Dominate
Occupations O i Biomedical engineers Network systems and data communications analysts Home health aides
Number of new jobs
WC exposure growth the fastest in the health, science and tech areas
Percent change h 72
(i thousands) (in h d ) 11.6
Wages (May 2008 median) di ) $ 77,400
53
155.8
71,100
Education/training d i / i i category Bachelor's degree Bachelor's degree
50
460.9
20,460
Short-term on-the-job training
Personal and home care aides
46
375.8
19,180
Short-term on-the-job training
Financial examiners
41
11 1 11.1
70 930 70,930
Bachelor'ss degree Bachelor
40
44.2
72,590
Doctoral degree
39
29.2
81,230
Master's degree
Skin care specialists
38
14.7
28,730
Postsecondary vocational award
Biochemists and biophysicists
37
8.7
82,840
Doctoral degree
Athletic trainers t aine s Physical therapist aides Dental hygienists
37 36 36
60 6.0 16.7 62.9
39 640 39,640 23,760 66,570
Bachelo 's degree Bachelor's deg ee Short-term on-the-job training Associate degree
Veterinary technologists and technicians
36
28.5
28,900
Associate degree
Dental assistants
36
105.6
32,380
Moderate-term on-the-job training
Computer software engineers, applications
34
175 1 175.1
85 430 85,430
B h l ' d Bachelor's degree
Medical assistants
34
163.9
28,300
Moderate-term on-the-job training
Physical therapist assistants
33
21.2
46,140
Associate degree
Veterinarians
33
19.7
79,050
Self-enrichment education teachers
32
81.3
35,720
First professional degree Work experience in a related occupation p
Compliance officers, except agriculture, construction, health and safety, and transportation
31
80.8
48,890
Medical scientists, except epidemiologists Physician assistants
Long-term on-the-job training
SOURCE: BLS Occupational Employment Statistics and Division of Occupational Outlook
Sources: US Bureau of Labor Statistics: Occupational Outlook Handbook, 2010-2011 Edition; Insurance Information Institute
54
Occupations with Largest Numerical Growth, 2008–2018: Health, Services Dominate Dollar growth in WC exposures should grow the most (at current rate levels) in the health and services industries
Occupations Registered nurses Home health aides Customer service representatives
Number of new jobs
(in thousands) 581.5 460.9 399.5
Percent change 22 50 18
394.3
15
16,430
Short-term on-the-job training
375.8 374.7 358.7 279.4
46 8 12 22
19,180 20,510 25,320 59,430
Short-term on-the-job training Short-term on-the-job training Short-term on-the-job training Bachelor's degree
Nursing i aides, id orderlies, d li and d attendants d
2 60 276.0
19 9
23 8 0 23,850
Postsecondary d vocationall award d
Postsecondary teachers Construction laborers
256.9 255.9
15 20
58,830 28,520
Doctoral degree Moderate-term on-the-job training
Elementary school teachers, except special education
244.2
16
49,330
Bachelor's degree
Truck drivers, heavy and tractor-trailer
232.9
13
37,270
Short-term on-the-job training
L d Landscaping i and d groundskeeping d k i workers
217.1
18
23,150
Short-term on-the-job training
Bookkeeping, accounting, and auditing clerks
212.4
10
32,510
Moderate-term on-the-job training
Executive secretaries and administrative assistants
204.4
13
40,030
Work experience in a related occupation
Management analysts
178.3
24
73,570
Bachelor's or higher degree, plus work experience
175.1
34
85,430
Bachelor's degree
24,550 38,940
Short-term on-the-job training Long-term on-the-job training
Combined food preparation and serving workers, including fast food Personal and home care aides Retail salespersons Office clerks, general Accountants and auditors
Computer software engineers, applications Receptionists and information clerks Carpenters SOURCE: BLS Occupational Employment Statistics
172.9 15 165.4 13 and Division of Occupational Outlook
Wages (May 2008 median) Education/training category $ 62,450 Associate degree 20,460 Short-term on-the-job training 29,860 Moderate-term Moderate term on-the-job on the job training
Sources: US Bureau of Labor Statistics: Occupational Outlook Handbook, 2010-2011 Edition; Insurance Information Institute
55
Occupations With Largest Numerical Growth Across the States, 2006–2016 Number of new jobs
Percent Change
State
Occupations
California
Retail salespersons
109,300
22
Texas
Combined food preparation and serving workers, incl. fast food
88,520
33
Texas
Retail salespersons
78,600
24
California
Personal and home care aides
76,900
27
Texas
Personal and home care aides
74,800
56
Texas
Customer service representatives
65,630
31
California
Office clerks, general
63,100
15
Texas
Elementary school teachers, except special education
62,280
43
California
Registered nurses
59,600
25
Texas Florida
Registered nurses Retail salespersons
59,590 55,930
38 20
California
Customer service representatives
55,600
28
Texas
Waiters and waitresses
53,650
31
California
Combined food preparation and serving workers, incl. fast food
53,200
25
California
Waiters and waitresses
52 800 52,800
23
New York
Home health aides
52,320
38
Florida
Customer service representatives
51,830
32
California
Postsecondary teachers
51,300
30
California
Elementary school teachers, except special education
51,300
27
Texas
Child care workers
44,230
30
Sources: State Occupational Projections (Long-term), http://www.projectionscentral.com/
Texas and California will see the most job growth through 2016, much of it in health and retail occupations p
56
The Economic Storm Whatt the Wh th Financial Fi i l Crisis C i i and d Recession Mean for the Industry’s E Exposure Base, B G Growth th and d Profitability 57
3.2%
3.0%
2.8%
2.5%
2.3%
1.8%
1.6%
3.7% %
1.6%
0.6%
2.9%
2.3%
3.2%
2.7%
3.1%
3.6% %
2.5%
The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%
0.9%
2%
1.8%
4%
1.1%
6%
4.1% %
Real GDP Growth (%)
5.0 0%
US Real GDP Growth*
-0.7%
11:4 4Q
11:3 3Q
11:2 2Q
11:1 1Q
10:4 4Q
10:3 3Q
10:2 2Q
09:4 4Q
09:3 3Q
09:2 2Q
10:1 1Q
Economic growth up sharply in late 2009 with rebuilding of inventories and stimulus. M More moderate d t growth th expected in 2010/11 but no “double dip”
-4.9% 09:1 1Q
08:4 4Q-6.8%
-4.0% % 08:3 3Q
08:2 2Q
07:4 4Q
07:3 3Q
07:2 2Q
07:1 1Q
2006 6
2005 5
2004 4
2000 0
-8%
2003 3
-6%
2002 2
-4%
2001 1
Recession began in Dec. 2007. Economic toll of credit crunch, housing slump, labor market contraction has been severe but modest recovery is underway
08:1 1Q
-2%
-0.7%
0%
Demand Commercial Insurance Continues To Be Impacted by Sluggish Economic Conditions * Estimates/Forecasts from Blue Chip Economic Indicators. Source: US Department of Commerce, Blue Economic Indicators 7/10; Insurance Information Institute.
58
Length of US Business Cycles, 1929–Present* Duration (Months) 120 110 100 90 80 70 60 50 40 30 20 10 0
Contraction
Length of Expansions Greatly Exceeds Contractions
Expansion Following
106 92
Average Duration** Recession = 10.4 Mos Expansion = 60.5 Mos
80
120
73 58
50
45
43
39
37
36 24
13
8
11
10
8
10
11
16 6
12
19
16 8
8
13
Aug May Feb Nov Jul Aug Apr Dec Nov Jan Jul Jul Mar Dec 1929 1937 1945 1948 1953 1957 1960 1969 1973 1980 1981 1990 2001 2007 Month Recession Started * Through July 2010. Assumes “official” end of recession was June 2009. ** Post-WW II period through end of most recent expansion. Sources: National Bureau of Economic Research; Insurance Information Institute.
59
State Economic Growth Varied Tremendously in 2008 Percent Change in Real GDP by State, 2007–2008
Rocky Mountain 2.2
WA 2.0
MT 1.8
OR 1.6
WY 4.4 NV -0.6
UT 1.4
CA 0.4
Plains 2.0 ND 7.3
ID 0.0
Mountain, Plains States Growing the Fastest Great Lakes -0.4
MN 20 2.0
IA 2.1
CO 2.9
KS 2.2
MI -1.5
IL 0.3
IN -0.6
NY 1.6 OH -0.7
AZ -0.6
OK 2.7
NM 2.0 TX 2.0
WV 2.5
AR 07 0.7
LA 0.3
MS 1.7
AL 0.7
VA 1.3 NC 0.1
TN 0.5
SC 0.6 GA -0.6
Southwest 1.7
RI CT -0.9 -0.4 NJ 0.6 DE -1.6
Mideast 1.3 DC 3.0
US = 0.7 Highest Quintile Fourth Quintile
FL -1.6
HI 0.7
MA 1.9
Third Quintile
AK -2.0
US Bureau of Economic Analysis
PA 1.1 MD 1.3
MO 1.3 KY -0.1
Far West 0.6
ME 1.4 VT NH 1.7 18 1.8
WI 0.7
SD 3.5 NE 1.3
New England 1.0
Southeast 0.0
Second Quintile L Lowest t Quintile Q i til
60
Labor Market Trends Massive Job Losses Sapped the Economy and Commercial/Workers Comp Exposure, But Trend is Improving 61
Unemployment and Underemployment Rates: Rocketed Up in 2008-09; Stabilizing in 2010? January 2000 through August 2010, Seasonally Adjusted (%) 18 16 14 12
Traditional Unemployment Rate U U-3 3
U-6 U 6 went from 8.0% in March 2007 to 17.5% in Oct 2009; Stood at 16.7% in July 2010
Unemployment + Underemployment Rate U-6
Recession ended in November 2001
Unemployment U l t kept rising for 19 more months
Recession R i began in December 2007
Unemployment rate was 9.6% in J l July
10
Unemployment peaked at 10.1% in Oct. 2009, highest g est monthly o t y rate since 1983.
8 6 4
Aug 10
Peak rate in the last 30 years: 10.8% in Nov Dec 1982
2 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Source: US Bureau of Labor Statistics; Insurance Information Institute.
62
US Unemployment Rate
4.9% 08 8:Q1
4.6% 07 7:Q3
4.8%
4.5% 07 7:Q2
07 7:Q4
4.5%
5.0%
07 7:Q1
6.0%
5.4%
7.0%
6.1% %
8.0%
9.2%
9.4%
9.5%
9.6%
9.6%
9.7%
10.0 0%
9.7%
9.0%
p y likely y Unemployment peaked at 10% in late 2009. 6.9%
9.0%
8.1% %
10.0%
9.3%
Rising unemployment eroded payrolls and workers comp’s exposure base.
11.0%
9.6%
2007:Q1 to 2011:Q4F*
Unemployment p y forecasts remain stubbornly high through 2011
* = actual; = forecasts Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (9/10); Insurance Information Institute
11 1:Q4
11 1:Q3
11 1:Q2
11 1:Q1
10 0:Q4
10 0:Q3
10 0:Q2
10 0:Q1
09 9:Q4
09 9:Q3
09 9:Q2
09 9:Q1
08 8:Q4
08 8:Q3
08 8:Q2
4.0%
63
Unemployment Rates Vary Widely by State and Region: July 2010* Great Lakes
4.7% % 4.4% 3.6%
6.8% 6.8% 6.5%
7.8%
9.22%
Great Plains 10.3% 10.3% 10.2%
8.8% % 8.0% 7.2% 7.3% 6.7% ID
9%
9..6% 8.2% 8.2% 6.9%
12%
133.1%
Mountain
Southwest
AZ A
6%
*Provisional figures for July 2010, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute.
ND
SD
NE
KS
IA
MN
MO
WI W
IN
OH
IL
MI
WA A
OR
CA
NV
WY
MT
UT
CO O
OK
0%
TX
3%
NM M
U nem ployym ent R ate (% )
15%
14.3% 12.33% 10.6% 8.9 %
Far West
64
Unemployment Rates Vary Widely by State and Region: July 2010* (cont’d)
6 6.0% 5..8%
9.0 % 8.9 % 8.1%
6%
66.3%
11.9% % 9 9.7% 9.33% 8.4% % 8.2% 7.1%
9%
11.5% 10.8% 10.8% 9 9.9% 99.9% 99.8% 99.8% 99.7% 8.6% % 7.4% 7.2% 7.0%
U nem ployym ent R ate (% )
12%
New England
Mid-Atlantic
7.7%
Southeast
15%
3%
*Provisional figures for July 2010, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute.
HI H
AK
NH
VT
ME
CT
MA
RI R
MD
NY
DE
PA
NJ N
VA
LA
AR
WV V
AL A
NC
TN
KY K
GA
SC
MS
FL
0%
65
Monthly Change Employment*
200
14 39
400
The job gain and loss figures in 2010 are severely distorted by the hiring and termination of temporary Census workers. So far in 2010, 763,000 private sector jobs have been created.
64
600
208 313 3 432 4
January 2008 through August 2010* (Thousands)
-600 -800
-109
Jan 08 8 Feb 08 8 Mar 08 8 Apr 08 8 May 08 8 Jun 08 8 Jul 08 8 Aug 08 8 Sep 08 8 Oct 08 8 Nov 08 8 Dec 08 8 Jan 09 9 Feb 09 9 Mar 09 9 Apr 09 9 May 09 9 Jun 09 9 Jul 09 9 Aug 09 9 Sep 09 9 Oct 09 9 Nov 09 9 Dec 09 9 Jan 10 0 Feb 10 0 Mar 10 0 Apr 10 0 May 10 0 Jun 10 0 Jul 10 0 Aug 10 0
-1,000
Monthly Losses in Dec. 08–Mar. 09 Were the Largest in the Post-WW II Period
-175 -54 4 -54 4
-400
-597 7 -681 -779 -726 -753 -52 28 -387 -51 15 -346 -212 -225 -224
-200
-72 -144 -122 -160 -137 -161 -128 -175 -321 -380
0
Job Losses Since the Recession Began in Dec. 2007 Peaked at 8 4 Mill in 8.4 i Dec. D 09; 09 St Stands d att 7 7.7 7 Milli Million Through Th h August A t 2010; 2010 14.9 Million People are Now Defined as Unemployed *Estimate based on Reuters poll of economists. Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
66
Estimated Effect of Recessions* on Payroll y ((Workers Comp p Exposure) p ) (Percent Change) 10% 8% 6%
(All Post WWII Recessions) Recessions in the 1970s and 1980s saw smaller exposure impacts because of continued wage inflation, a factor not present during the 2007-2009 recession
The Dec. 2007 to mid2009 recession caused the largest impact on WC exposure in 60 years
8.5%
4.6% 3.7%
4%
3.5% 2.1%
1.1%
2% 0%
-0.5%
1 1% -1.1%
-2% 2% -2.0% -4% -6%
-3.6%
-4.4% 19481949
19531954
19571958
19601961
19691970
19731975
1980
19811982
19901991
2001
20072009
Recession Dates (Beginning/Ending Years)
*Data represent maximum recorded decline over 12-month period using annualized quarterly wage and salary accrual data Source: Insurance Information Institute research; Federal Reserve Bank of St. Louis (wage and salary data); National Bureau of Economic Research (recession dates).
Frequency: 1926–2009 A Long-Term Drift Downward Manufacturing – Total Recordable Cases Rate of Injury and Illness Cases per 100 Full-Time Workers
Note: Recessions indicated by gray bars. Sources: NCCI from US Bureau of Labor Statistics; National Bureau of Economic Research.
68
Crisis-Driven Exposure p Drivers Economic Obstacles to Growth in P/C Insurance, g Workers Compensation p Including 69
Business Bankruptcy Filings, 1980-2010:H1 90,000 80,000
50,000 40,000 30,000 , 20,000 10,000 0
1980-82 1980-87 1980 87 1990-91 2000-01 2006-09
58.6% 88 7% 88.7% 10.3% 13.0% 208.9%*
There were 60,837 Th 60 837 business b i bankruptcies b k t i in i 2009, 2009 up 40% from 2008 and the most since 1993. 2010:H1 bankruptcies totaled 29,059, down 4% from H1:2009, but still very high by historical standards.
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 10:H1
60,000
43,6 694 48 8,125
70,000
00 69,30 62,436 64,004 277 71,2 81,235 8 82,446 63,853 63,235 3 64,853 71,5 549 70,6 43 62,304 5 52,374 51,959 5 53,549 5 54,027 44,3 367 37,884 4 35,472 99 40,09 38,540 0 35,037 34,317 39,20 1 19 ,695 28,322 546 43,5 60,837 29,059
% Change Surrounding Recessions
Significant Exposure Implications for All Commercial Lines. There Are Some Preliminary Indications that Business Bankruptcies Are Beginning to Decline.
Source: American Bankruptcy Institute; Insurance Information Institute
70
Private Sector Business Starts, 1993:Q2 – 2009:Q4* (Thousands) 192 188 187 189 186 190 4 194 191 199 204 202 19 95 19 96 19 96 206 206 201 192 198 206 206 203 211 205 212 200 205 204 204 197 203 209 201 203 192 192 3 193 201 204 202 210 212 209 6 216 220 2 223 220 2 220 2 210 221 212 204 21 18 209 207 199 191 193 3
230 220 210
170 160
171
180,000 180 000 businesses started in 2009:Q4, the best quarter in 2009. 2009 was the slowest year for new business starts since 1993.
180
169
177
180
186 17 74
180
175 1
190
186
200
150 93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
Business Starts Are Down Nearly y 20% in the Current Downturn,, Holding Back Most Types of Commercial Insurance Exposure *Latest available as of September 12, 2010, seasonally adjusted Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm.
71
Recovery in Capacity Utilization is a Positive Sign for Insurance Exposure Percent of Capacity Utilized (Manufacturing, Mining, Utilities)
“Full Capacity”
82%
Hurricane H i Katrina
80%
Recession began December 2007
78%
Manufacturing capacity stood at 74.8% in July 2010, above the June 2009 low of 68.2% 68 2% but well below the pre-crisis peak of 80%+
76% 74% 72%
Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm.
72
Jun 10
Mar 10
Dec 09
Sep 09
Jun 09
Mar 09
Dec 08
Sep 08
Jun 08
Mar 08
Dec 07
Sep 07
Jun 07
Mar 07
Dec 06
Sep 06
Jun 06
Mar 06
Dec 05
Sep 05
Jun 05
Mar 05
Dec 04
Sep 04
Jun 04
Mar 04
Sep 03
Jun 03
Mar 03
Dec 02
Sep 02
Jun 02
Mar 02
Dec 01
Sep 01
Jun 01
Mar 01
68% 66%
The closer the economy y is to operating at “full capacity,” the greater the demand for insurance
March M h 20012001 November 2001 recession
Dec 03
70%
Insurance Information Institute Online:
www iii org www.iii.org Thank you for your time and d your attention! tt ti ! Twitter: twitter.com/bob_hartwig _ g
