The document discusses insurance risks and industry trends. It provides an overview of the insurance industry, including its origins in ancient times and key developments. It also examines risks faced by life and casualty insurers such as mortality, longevity, catastrophes, and lawsuits. Emerging risks from factors like changing demographics and "black swan" events are also assessed. The document concludes by analyzing trends like mergers and acquisitions activity, the role of hedge funds, and what practices are needed for insurers to survive in today's environment.

1. 1
Clarine Usher, CTP
Tower Group, Inc.
VP- Finance
cusher@twrgrp.com
646-625-3597
781-801-9133
TMANE Conference
17 May 2013
Insurance Risks
and
Industry Trends

2. 2
“The insurance industry has changed over
time through different product offerings,
globalization, evolving technology, and
changes in the economic environment.”
National Association of
Insurance Commissioners
NAIC
Insurance Industry

3. What is Insurance?
The traditional business of insurers
and the underlying doctrine of every
insurance transaction is risk transfer.
The essence of the insurance industry is
spreading risk over multiple policy holders,
while maintaining close match between
assets and liabilities.
3
What is Insurance?

4. Overview of Insurance Industry
• Insurance Industry Background
• Reserves and Risk Based Capital (RBC)
• Resiliency in the Marketplace
4
Overview of Insurance Industry

5. Overview of Insurance Industry
• Ancient times – Marine Insurance - Limit Risk by
Redistributing Cargo Among Several Vessels
• Property Insurance as we know it today began in 1666 in
England after “The Great Fire of London”
• Life Insurance in US was established in U.S in 1759 with
the “Presbyterian Ministers’ Fund
5
Insurance Industry Background

6. Reserves and
Risk Based Capital (RBC)
“ In the first three months of 2012, the U.S. P/C industry
experienced a 44% decline in catastrophe- related
losses due to the absence of any major catastrophic
events. Events of note during the quarter included a rare
January tornado outbreak in the central and eastern
United States; a powerful winter storm in February that
spawned tornadoes in the Midwest; and an onslaught of
tornados in March stemming from a significant weather
outbreak.” AM Best
6
Reserves and Risk Based Capital
(RBC)

7. Reserves and
Risk Based Capital (RBC)
RBC formula separates into 4 categories:
C1 – Asset Risks
C2 – Insurance Risks
C3 – Interest Rate Risks
C4 – Business Risks
RBC calculations moving from a formula to a principles
based reserving in Solvency II.
7
Reserves and Risk Based Capital
(RBC)

8. 8
Insurance Risks
• Mortality risk
– All living creatures, when is likelihood of
death expected
– What populations are more at risk
– Baby Boomers – US Census Bureau that in U.S.
“2013 there are 78 Million boomers between
ages of 49 – 67 years”
Insurance Risks
Life Insurers

9. 9
Insurance Risks
• Longevity risk
– UN estimate that by 2013 there will be 3 Million
centenarians
– Low interest rate
“Lost interest rate decade in Japan” will that
occur in U.S?
Insurance Risks
Life Insurers

10. 10
Insurance Risks
Catastrophic Events
– An event that causes $25 million or more in direct
insured losses to property
Demographics
– In 2011 global population considered to have been
6,973,738,433 and over 7 billion in 2012
Insurance Risks
Personal and Commercial Lines

11. 11
Insurance Risks
Lawsuits
– In 2002 in U.S.16 Million civil cases heard
– “Americans spend more on civil lawsuits and have
more lawyers per capita than any other industrialized
country.” How Many Lawsuits are There in the U.S. &
What are They For? An Amazing Overview
by www.SixWise.com
Insurance Risks
Personal and Commercial Lines

12. 12
Insurance Risks
Black Swan Events –
Random and Unexpected”
– 9/11/2001
– Growing Threat of Terrorism Globally and in U.S
– Tsunami – Japan and Asia
– Earthquakes over 8.0 in Richter Scale
– Weather patterns are changing - Storm Sandy
estimated damage was over $50B > than any U.S.
hurricane except Katrina
Insurance Risks
Personal and Commercial Lines

13. 13
Three Drivers
• Regulatory
• Technology
• Globalization
Leading the Charge - 3 Drivers

14. 14
Three Drivers
• Regulatory
– Banking Act of 1933 (Glass-Steagall) Act
– Gramm- Leach- Bliley Act of 1999
• Technology
– Legacy Systems
– Data Warehouses
– Big Data
• Globalization
Leading the Charge - 3 Drivers

15. Technology
– Banking Act of 1933 (Glass-Steagall) Act
– Gramm- Leach- Bliley Act of 1999
– Solvency II
• Greater Transparency and Disclosures
15
Leading the Charge –
Regulatory

16. Technology
• Legacy Systems
• Data Warehouses
• Social Media
• Mobile Devices
• “Big Data”
16
Leading the Charge –
Technology

17. Globalization
• Company Size
• Multi-National Insurance Corporations
• Appetite for Risk
• Growth and Migration in Global Population
17
Leading the Charge –
Globalization

18. Regulatory Issues
• Greater Transparency and Disclosures
• Stronger Internal Controls and Compliance
• Solvency II
18
Insurance Regulatory Issues

19. Regulatory Issues
• Solvency II –Effective January 1, 2014
– Three Pillar Approach
• Pillar I – Quantitative Requirements
– Involving Measurement of Assets, Liabilities, and Capital
• Pillar II - Assessment of Risk Exposures
– Governance and Supervision includes ORSA –
Own Risk and Solvency Assessment
• Pillar III – Group Risk Capital and Prospective
Solvency Assessment
– Disclosure and Transparency
19
Insurance Regulatory Issues

20. Regulatory Issues
– Financial Flexibility
– Liquidity
– Enterprise Risk
Management
– Competitive Position
- Investments
- Capital
- Operating
Performance
- Management Corporate
Strategy
Standard &Poor’s 2011 20
Rating Agencies
Major Factors for Rating Insurance
Companies

21. 21
Industry Trends
• Mergers and Acquisitions Activity
• Hedge Funds
• Survival of the Fittest
Insurance Industry Trends

22. 22
Industry Trends
– “Property and Casualty (P&C) deal activity suffered from
low valuations, concerns about the prolonged soft pricing
market and reserve adequacy.
– Life and Health deal activity also suffered from the
malaise of 2011 as poor investment yields took a toll on
earnings and surplus.” Top Ten Issues for Insurance
M&A in 2012 by Deloitte
– 2013 - Still a soft market however that may change for
latter half of year
Insurance Industry Trends
Mergers and Acquisitions Activity

23. 23
Industry Trends
• Guggenheim Partners
– Buys Equi Trust Life Insurance Company in Des Moines, IA in
Dec 30, 2012 and in Aug 17,2012 AM Best issues new rating to
bbb+ from bbb-
• Apollo Global Management
– Buys Aviva U.S. operations on Dec 21, 2012 for US$1.55 B
• Fairfax Financial Holdings
– Filed suit in 2006 on hedge funds SAC Capital, Exis Capital and
Lone Pine Capital for stock manipulation
Insurance Industry Trends
Hedge Funds

24. 24
Industry Trends
• Property and Casualty
– Less natural disasters
• Life Insurance Companies
– Improvements in technology
• Applies to Both
– Strong Capital Surplus
– Rising Interest Rate
– Control of Costs
– Diversification of Product Lines and Geography
Insurance Industry Trends
Survival of the Fittest

25. 25
Industry Trends
– Low Interest Rate Environment
– Surplus Requirements
– Changing Regulatory Landscape
– Growth and Diversification
– Raising Capital
– Demographic Changes
Insurance Industry
Challenges

26. • Capital Strength
– Holistic Approach to Working Capital Enhancement
– Strong Capital Reserves
– Close Match between Assets and Liabilities
• Diversification
– Product line, Distribution and Geography
• Reduce Risks and Vulnerability
– Appetite for Risk
26
Better Insurance Practices

27. • Enterprise Risk Management (ERM)
– Top – Down Approach
• Better Customer Service “Wow Me” –
“Press 1 if you want to….press 9 if you want to”
– Informed Consumer
– Plethora of insurance and financial choices
27
Better Insurance Practices

28. • Robust model testing
– Include probability of extreme events – “Black Swans”
• Partnerships
– Rating Agencies
• Sarbanes- Oxley
– Strong Internal Controls and Transparency
28
Better Insurance Practices

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Q & A
Insurance Risks
and
Industry Trends

30. The views expressed are those of the presenter
and not of the Company.
Material taken from the presenter’s insurance industry
experience and from the following sources:
AM Best – Supplement to Best’s Review November
2012
NAIC – The Center for Insurance Policy and Research
(CIPR) Study April 2012
30
Insurance Risks
and
Industry Trends

31. Clarine Usher, CTP
cusher@twrgrp.com
646-625-3597
781-801-9133
Insurance Risks
and
Industry Trends