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

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)

UW Cycle Analysis • 2012 industry results countrywide – Data includes all NAIC filers – For WC excludes State Comp (CA) since only 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/ 2

UW Cycle - Drivers Casualty Market Pricing Competition – Pricing responds to Calendar Year results – Accident Year results ultimately reflect pricing – Ultimate AY results affect Cal Yr results – I M P O R T A N C E cyclical, aka reserve development Loss Trends – Loss trends reflects economic, social, and legal issues – frequency / severity – Pricing response lags loss changes – cyclical – If losses stable, UW cycle dominated by pricing Economic Environment – 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 3

UW Cycle - Phases Casualty Market Unprofitable Profitable Profitable Unprofitable Hard Hard Soft 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 4

Workers Compensation Premium & Price • Workers Compensation WP and Price Price = WP / Payroll • 60,000,000 3.00% Payroll used as exposure 57,500,000 (from Bureau of Labor 55,000,000 2.75% DWP 52,500,000 Statistics) 50,000,000 2.50% DWP/Payroll – 47,500,000 2009 decline, 1 st in 45,000,000 2.25% over 20 years 42,500,000 Written Premium ($000s) 40,000,000 2.00% – 2010 flat 37,500,000 35,000,000 1.75% – Increased 3.2% and 32,500,000 3.6% in 2011-2012 30,000,000 1.50% • 27,500,000 Historical cycles 25,000,000 1.25% 22,500,000 – Prior peak in1991 20,000,000 1.00% – 17,500,000 Soft cycle to 2000 15,000,000 0.75% – 12,500,000 Peak in 2005 10,000,000 0.50% – 7,500,000 Soften to 2010 5,000,000 0.25% • Hardening market in 2011 2,500,000 0 0.00% and 2012 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 5

Workers Compensation Acc Yr Gross, Ceded, Net Results Workers Compensation Gross Ceded Net 1 • 150% Ceded L/R’s follow same cycle as gross L/R 140% – More volatile 130% • During unprofitable AYs, 120% ceded business fares 110% significantly worse 100% • Recent ceded Loss Ratio 90% outperforming direct but depends on 80% booked ceded 70% reserves 60% • During other parts of 50% Gross Loss&LAE Ratio cycle ceded slightly better Ceded Loss&LAE Ratio 40% Net Loss&LAE Ratio 30% 20% 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 Accident Year Note: Assumed and ceded data may be distorted due to intercompany cessions 6

Workers Compensation Accident Year Loss Development Workers Compensation Ultimate vs Original 2 • Original L/R’s stable over 110% adjacent time periods • Cyclical Ultimate L/R’s 100% develop up to +/- 20pts • 90% AYs 2007-2011 loss ratios deteriorating 80% • Recent AYs 2011-2012 showing improvement Loss Ratio 70% – Reflects pricing 60% • Est. $6.3B deficiency – 50% $4.6B deficiency in Latest Booked Loss&ALAE Ratio core 2003-2012 AYs 40% (significant increase Original Loss&ALAE Ratio from 2011 analysis) 30% Projected Loss&ALAE Ratio – $1.7B deficiency in 2002 and priors AYs 20% 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 (decrease from 2011) Accident Year 7

Workers Compensation Calendar Year Development • Calendar Year results Workers Compensation AY vs CY w Dev follow lagged Accident Year 120.0% 2,500,000 results Reserve Development • Cal Year results tend to be Net AY Loss&ALAE Ratio 110.0% 2,000,000 Net CY Loss&ALAE Ratio less volatile than Acc Year results 100.0% 1,500,000 – Price increase 90.0% 1,000,000 between 2000-05 lead to profitability 80.0% 500,000 – Deterioration to 2010 70.0% 0 – 2011-12 continued unprofitability 60.0% -500,000 • Adverse development 50.0% -1,000,000 booked in 2012 – 40.0% -1,500,000 Increased from 2011 – Deficiency increased 30.0% -2,000,000 significantly as well 20.0% -2,500,000 – Implies continued 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 deterioration in future calendar years 8

Workers Compensation Acc Yr Premium & Loss Trends • Acc Year results move Workers Compensation AY vs Prem & Loss 1 inversely with pricing 140% 2.4% – Pricing changes 2.2% 130% cause AY results not vice versa 120% 2.0% • Since 1995 cycle driven 1.8% 110% by price competition with 1.6% 100% recent hardening market • 90% 1.4% 2011-2012 AYs trending Loss Ratio favorable but still 1.2% 80% unprofitable 70% 1.0% • Recent loss trends flat 60% 0.8% – Investigate freq / 0.6% 50% severity trends – Net AY Loss&ALAE Ratio Classes, states 40% 0.4% DWP/Payroll • Potential threats Net AY Loss&ALAE/Payroll 30% 0.2% – Neg freq dissipates 0.0% 20% 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 – Reform roll-back Accident Year 9

Workers Compensation Pricing vs. Calendar Year Results Workers Compensation CY vs Pricing • Pricing tends to follow 120% 25% Calendar Year results • DWP/Payroll % Change 110% 20% Pricing up in 2011-12 CY Loss&ALAE Ratio • Hard market will continue 100% 15% as growing reserve 90% 10% deficiencies will pressure calendar year loss ratios 80% 5% • Forecasting pricing depends of Calendar Year 70% 0% projections 60% -5% – Indicated reserve position is key 50% -10% – Projected Cal Year 40% -15% results will be adversely impacted 30% -20% – Increased price increase pressure 20% -25% 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 10

Workers Compensation Reserve Position & UW Cash Flow Workers Compensation Dev vs Cash Flow • UW Cash Flow appears to be 100% 2,500,000 an early indicator of future reserve development 2,000,000 90% – If pricing is weak, 1,500,000 reserves generally 80% inadequate 1,000,000 paid losses rise 70% relative to WP 500,000 – Reverse is true as well 60% 0 • Cash flow improvement may -500,000 imply reserve deficiencies 50% have peaked -1,000,000 • Cycle determined by: 40% -1,500,000 – Cash precedes Reserve Development 30% reserve changes -2,000,000 Net Paid Loss / Net WP – Reserve changes 20% -2,500,000 cause cal year results 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 – Cal year results impact pricing 11

Other Liability – Occurrence Premium & Price • Price = WP / GDP Other Liabiltiy (Occ.) WP and Price – GDP measures 50,000,000 0.50% industry exposure 0.48% 47,500,000 0.46% 45,000,000 – GDP up 4% in 0.44% 42,500,000 0.42% 2012 (nominal) 40,000,000 0.40% • DWP 0.38% Historical cycles 37,500,000 0.36% 35,000,000 – DWP/GDP Written Premium ($000s) 0.34% Prior spike 1987 32,500,000 0.32% – Soft cycle to 2000 30,000,000 0.30% 0.28% 27,500,000 – Peak in 2004 0.26% 25,000,000 0.24% – 22,500,000 Soften to 2010 0.22% 20,000,000 0.20% • Pricing slightly increasing 0.18% 17,500,000 0.16% in 2012 15,000,000 0.14% 12,500,000 0.12% 10,000,000 0.10% 0.08% 7,500,000 0.06% 5,000,000 0.04% 2,500,000 0.02% 0 0.00% 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 12

Other Liability – Occurrence Acc Yr Gross, Ceded, Net Results Other Liabiltiy (Occ.) Gross Ceded Net 1 • Ceded L/R’s follow same 160% cycle as gross L/R 150% – More volatile 140% • 130% During inadequate soft Gross Loss&LAE Ratio cycles, ceded business 120% Ceded Loss&LAE Ratio fares significantly worse 110% Net Loss&LAE Ratio • 100% During other parts of 90% cycle slightly better Loss Ratio 80% – Excess ceded 70% business generally 60% has low expenses • 50% Current cycle showing 40% ceded results performing 30% better than gross 20% 10% 0% 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 Accident Year Note: Assumed and ceded data may be distorted due to intercompany cessions 13