Market Cycle Analysis UW Results and Trends Casualty Market: - - PowerPoint PPT Presentation

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Market Cycle Analysis UW Results and Trends Casualty Market: - - PowerPoint PPT Presentation

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Market Cycle Analysis UW Results and Trends Casualty Market: Workers Compensation General Liability (Occurrence) 2012 Year-end Data CARe Reinsurance Seminar 2013 Is This Really a Hard Market Raju Bohra EVP, Willis Re

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SLIDE 1

Market Cycle Analysis UW Results and Trends

Casualty Market: Workers Compensation General Liability (Occurrence) 2012 Year-end Data CARe Reinsurance Seminar 2013 “Is This Really a Hard Market” Raju Bohra EVP, Willis Re (raj.bohra@willis.com)

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SLIDE 2

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UW Cycle Analysis

  • 2012 industry results countrywide

– Data includes all NAIC filers – For WC excludes State Comp (CA) since

  • nly in database for 2011-2012

– For GL data is for occurrence

  • Analysis of trends and relationships

– Premiums and price – AY and Cal Year results – Reserves and cash flow

  • Mathematical model can be found in working

paper by Dave Clark (2010)

– “How to Create a Market Cycle” – http://www.casact.org/research/wp/

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SLIDE 3

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UW Cycle - Drivers

Casualty Market

Pricing Competition Loss Trends Economic Environment

–

Pricing responds to Calendar Year results

–

Accident Year results ultimately reflect pricing

–

Ultimate AY results affect Cal Yr results – cyclical, aka reserve development

–

Loss trends reflects economic, social, and legal issues – frequency / severity

–

Pricing response lags loss changes – cyclical

–

If losses stable, UW cycle dominated by pricing

–

Capital, asset, interest, and inflation changes important, but secondary issues

–

Recent drop in investment yields significant

–

Casualty pricing appears not to be ROE based

–

However, watch UW cash flows – cyclical

I M P O R T A N C E

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SLIDE 4

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UW Cycle - Phases

Casualty Market

Unprofitable Hard Profitable Hard Profitable Soft Unprofitable Soft

  • AccYr Ult L/R
  • AY Ult vs Orig
  • Indicated

Reserve Development

  • Ceded WP
  • Pricing Level
  • CalYr L/R
  • CalYr vs AY L/R
  • Reported

Development

  • UW Cash Flow
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SLIDE 5

5

Workers Compensation

Premium & Price

  • Price = WP / Payroll
  • Payroll used as exposure

(from Bureau of Labor Statistics)

–

2009 decline, 1st in

  • ver 20 years

–

2010 flat

–

Increased 3.2% and 3.6% in 2011-2012

  • Historical cycles

–

Prior peak in1991

–

Soft cycle to 2000

–

Peak in 2005

–

Soften to 2010

  • Hardening market in 2011

and 2012

0.00% 0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00% 2.25% 2.50% 2.75% 3.00% 2,500,000 5,000,000 7,500,000 10,000,000 12,500,000 15,000,000 17,500,000 20,000,000 22,500,000 25,000,000 27,500,000 30,000,000 32,500,000 35,000,000 37,500,000 40,000,000 42,500,000 45,000,000 47,500,000 50,000,000 52,500,000 55,000,000 57,500,000 60,000,000 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Written Premium ($000s)

Workers Compensation WP and Price

DWP DWP/Payroll

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SLIDE 6

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Workers Compensation

Acc Yr Gross, Ceded, Net Results

  • Ceded L/R’s follow same

cycle as gross L/R

–

More volatile

  • During unprofitable AYs,

ceded business fares significantly worse

  • Recent ceded
  • utperforming direct

but depends on booked ceded reserves

  • During other parts of

cycle ceded slightly better

20% 30% 40% 50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Loss Ratio Accident Year

Workers Compensation Gross Ceded Net 1

Gross Loss&LAE Ratio Ceded Loss&LAE Ratio Net Loss&LAE Ratio Note: Assumed and ceded data may be distorted due to intercompany cessions

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SLIDE 7

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Workers Compensation

Accident Year Loss Development

  • Original L/R’s stable over

adjacent time periods

  • Cyclical Ultimate L/R’s

develop up to +/- 20pts

  • AYs 2007-2011 loss ratios

deteriorating

  • Recent AYs 2011-2012

showing improvement

–

Reflects pricing

  • Est. $6.3B deficiency

–

$4.6B deficiency in core 2003-2012 AYs (significant increase from 2011 analysis)

–

$1.7B deficiency in 2002 and priors AYs (decrease from 2011)

20% 30% 40% 50% 60% 70% 80% 90% 100% 110% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Loss Ratio Accident Year

Workers Compensation Ultimate vs Original 2

Latest Booked Loss&ALAE Ratio Original Loss&ALAE Ratio Projected Loss&ALAE Ratio

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SLIDE 8

8

Workers Compensation

Calendar Year Development

  • Calendar Year results

follow lagged Accident Year results

  • Cal Year results tend to be

less volatile than Acc Year results

–

Price increase between 2000-05 lead to profitability

–

Deterioration to 2010

–

2011-12 continued unprofitability

  • Adverse development

booked in 2012

–

Increased from 2011

–

Deficiency increased significantly as well

–

Implies continued deterioration in future calendar years

  • 2,500,000
  • 2,000,000
  • 1,500,000
  • 1,000,000
  • 500,000

500,000 1,000,000 1,500,000 2,000,000 2,500,000 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% 110.0% 120.0% 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Workers Compensation AY vs CY w Dev

Reserve Development Net AY Loss&ALAE Ratio Net CY Loss&ALAE Ratio

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SLIDE 9

9

Workers Compensation

Acc Yr Premium & Loss Trends

  • Acc Year results move

inversely with pricing

–

Pricing changes cause AY results not vice versa

  • Since 1995 cycle driven

by price competition with recent hardening market

  • 2011-2012 AYs trending

favorable but still unprofitable

  • Recent loss trends flat

–

Investigate freq / severity trends

–

Classes, states

  • Potential threats

–

Neg freq dissipates

–

Reform roll-back

0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0% 2.2% 2.4%

20% 30% 40% 50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Loss Ratio Accident Year

Workers Compensation AY vs Prem & Loss 1

Net AY Loss&ALAE Ratio DWP/Payroll Net AY Loss&ALAE/Payroll

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SLIDE 10

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Workers Compensation

Pricing vs. Calendar Year Results

  • Pricing tends to follow

Calendar Year results

  • Pricing up in 2011-12
  • Hard market will continue

as growing reserve deficiencies will pressure calendar year loss ratios

  • Forecasting pricing

depends of Calendar Year projections

–

Indicated reserve position is key

–

Projected Cal Year results will be adversely impacted

–

Increased price increase pressure

  • 25%
  • 20%
  • 15%
  • 10%
  • 5%

0% 5% 10% 15% 20% 25% 20% 30% 40% 50% 60% 70% 80% 90% 100% 110% 120% 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Workers Compensation CY vs Pricing

DWP/Payroll % Change CY Loss&ALAE Ratio

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SLIDE 11
  • 2,500,000
  • 2,000,000
  • 1,500,000
  • 1,000,000
  • 500,000

500,000 1,000,000 1,500,000 2,000,000 2,500,000 20% 30% 40% 50% 60% 70% 80% 90% 100% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Workers Compensation Dev vs Cash Flow

Reserve Development Net Paid Loss / Net WP

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Workers Compensation

Reserve Position & UW Cash Flow

  • UW Cash Flow appears to be

an early indicator of future reserve development

–

If pricing is weak, reserves generally inadequate paid losses rise relative to WP

–

Reverse is true as well

  • Cash flow improvement may

imply reserve deficiencies have peaked

  • Cycle determined by:

–

Cash precedes reserve changes

–

Reserve changes cause cal year results

–

Cal year results impact pricing

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SLIDE 12

12

Other Liability – Occurrence

Premium & Price

  • Price = WP / GDP

–

GDP measures industry exposure

–

GDP up 4% in 2012 (nominal)

  • Historical cycles

–

Prior spike 1987

–

Soft cycle to 2000

–

Peak in 2004

–

Soften to 2010

  • Pricing slightly increasing

in 2012

0.00% 0.02% 0.04% 0.06% 0.08% 0.10% 0.12% 0.14% 0.16% 0.18% 0.20% 0.22% 0.24% 0.26% 0.28% 0.30% 0.32% 0.34% 0.36% 0.38% 0.40% 0.42% 0.44% 0.46% 0.48% 0.50% 2,500,000 5,000,000 7,500,000 10,000,000 12,500,000 15,000,000 17,500,000 20,000,000 22,500,000 25,000,000 27,500,000 30,000,000 32,500,000 35,000,000 37,500,000 40,000,000 42,500,000 45,000,000 47,500,000 50,000,000 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Written Premium ($000s)

Other Liabiltiy (Occ.) WP and Price

DWP DWP/GDP

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SLIDE 13

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Other Liability – Occurrence

Acc Yr Gross, Ceded, Net Results

  • Ceded L/R’s follow same

cycle as gross L/R

–

More volatile

  • During inadequate soft

cycles, ceded business fares significantly worse

  • During other parts of

cycle slightly better

–

Excess ceded business generally has low expenses

  • Current cycle showing

ceded results performing better than gross

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150% 160% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Loss Ratio Accident Year

Other Liabiltiy (Occ.) Gross Ceded Net 1

Gross Loss&LAE Ratio Ceded Loss&LAE Ratio Net Loss&LAE Ratio Note: Assumed and ceded data may be distorted due to intercompany cessions

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SLIDE 14

20% 30% 40% 50% 60% 70% 80% 90% 100% 110% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Loss Ratio Accident Year

Other Liabiltiy (Occ.) Ultimate vs Original 2

Latest Booked Loss&ALAE Ratio Original Loss&ALAE Ratio Projected Loss&ALAE Ratio

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Other Liability – Occurrence

Accident Year Loss Development

  • Original L/R’s stable over

adjacent time periods

  • Cyclical Ultimate L/R’s

develop up to +/- 20pts

  • Recent AY loss ratios

profitable

  • Implied industry reserve

position as of 2011 is redundant based on Willis Re analysis

–

Cushion increasing from 2011

  • Est. $4.4B redundancy

–

Increasing margin in recent AY’s

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SLIDE 15

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Other Liability – Occurrence

Calendar Year Development

  • Calendar Year results

follow lagged Accident Year results

  • Cal Year results slightly

less volatile

–

Timely pricing change in 2000

–

2011 profitable

  • Favorable development

booked in 2012

  • Redundant reserves will

benefit future calendar years

  • 2,500,000
  • 2,000,000
  • 1,500,000
  • 1,000,000
  • 500,000

500,000 1,000,000 1,500,000 2,000,000 2,500,000 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% 110.0% 120.0% 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Other Liabiltiy (Occ.) AY vs CY w Dev

Reserve Development Net AY Loss&ALAE Ratio Net CY Loss&ALAE Ratio

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SLIDE 16

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Other Liability – Occurrence

Acc Yr Premium & Loss Trends

  • Acc Year results move

inversely with pricing

–

Pricing changes cause AY results not vice versa

  • While loss trends have

varied somewhat, most of LR variation driven by pricing movements

  • Current loss trends flat
  • Past trends declining

–

Investigate freq / severity trends

–

Classes, states

–

Investigate better exposure metrics

  • Potential threats

–

Neg freq dissipates

–

Reform roll-back

0.000% 0.025% 0.050% 0.075% 0.100% 0.125% 0.150% 0.175% 0.200% 0.225% 0.250% 0.275% 0.300% 0.325% 0.350% 0.375% 0.400% 0.425% 0.450% 0.475% 0.500%

20% 30% 40% 50% 60% 70% 80% 90% 100% 110% 120% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Loss Ratio Accident Year

Other Liabiltiy (Occ.) AY vs Prem & Loss 1

Net AY Loss&ALAE Ratio DWP/GDP Net AY Loss&ALAE/GDP

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SLIDE 17

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Other Liability – Occurrence

Pricing vs. Calendar Year Results

  • Pricing tends to follow

Calendar Year results

  • Pricing materially

increased in 2012

  • Continued favorable

calendar year results may cause difficulty in sustaining price increases

  • Forecasting pricing

depends of Calendar Year projections

–

Indicated reserve position is key

–

Projected Cal Year profitably will be supported

–

Less pressure for price increases

  • 25.0%
  • 20.0%
  • 15.0%
  • 10.0%
  • 5.0%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% 100.00% 110.00% 120.00% 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Other Liabiltiy (Occ.) CY vs Pricing

DWP/GDP % Change CY Loss&ALAE Ratio

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SLIDE 18

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Other Liability – Occurrence

Reserve Position & UW Cash Flow

  • UW Cash Flow appears to be

an early indicator of future reserve development

–

If pricing is weak, reserves generally inadequate paid losses rise relative to WP

–

Reverse is true as well

  • Cycle determined by:

–

Cash precedes reserve changes

–

Reserve changes cause cal year results

–

Results impact pricing

  • No dramatic deterioration in

cash flow

–

Supports indication of reserve redundancy

  • 2,500,000
  • 2,000,000
  • 1,500,000
  • 1,000,000
  • 500,000

500,000 1,000,000 1,500,000 2,000,000 2,500,000 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% 100.00% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Other Liabiltiy (Occ.) Dev vs Cash Flow

Reserve Development Net Paid Loss / Net WP

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SLIDE 19

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