Property Market Update - Marsh
RIMS CLEVELAND PROPERTY INSURANCE MARKET UPDATE SEPTEMBER 09, 2014
David Letzelter Senior Vice President Pittsburgh, PA Property Leader
3 Does Anyone Know the Meaning of this Number?
MARSH
First Half 2014 State of the Property Insurance Market
MARSH
“You Have to Know the Past to Understand the Present.” – Carl Sagan
MARSH
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
AT THIS TIME LAST YEAR Large Companies
Midsize Companies
Key Events Superstorm Sandy (Oct. 2012) Significant CAT losses in 2010 and 2011 RMS v11.0 MARSH
September 8, 2014
4
To the Present State, But First…
MARSH
Does Anyone Know What This Is?
MARSH
MARSH
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
FIRST HALF 2014 UPDATE Solid underwriting results in 2013 The market is “soft” Downward rate momentum from 2nd half 2013 continued Record capital and surplus Ample CAT capacity for most risks Insurer’s signing on to multi-year deals
MARSH
September 8, 2014
8
Reinsurance Market Trends
MARSH
September 8, 2014
9
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
JUNE 2014 CAT REINSURANCE RENEWALS
Intense competition Traditional reinsurers sought to protect market share…
Alternative Capacity Growth as a Percentage of Global Property Cat Limit Has Increased Steadily Over the Last 6 Years
While alternative providers looked to utilize growing funds Risk-adjusted pricing down 12.5-20% on average Unused limit continued to increase
MARSH
September 8, 2014
10
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
GLOBAL COLLATERALIZED PROPERTY CATASTROPHE LIMITS
Estimates only Almost $50 billion today
Source: GC Securities Proprietary Database and Guy Carpenter & Company LLC. Estimates only.
MARSH
September 8, 2014
11
Natural Catastrophe Review
MARSH
September 8, 2014
12
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
ANNUAL GLOBAL INSURED CAT LOSSES
Hurricane Katrina Hurricane Wilma Hurricane Rita
Superstorm Sandy Hurricane Ike 10-Yr Avg. $59.4B
Source: SwissRe, Marsh
2013 Losses well-below 10-year average
Tohuku EQ/Tsunami New Zealand EQ’s Thailand flooding
2014 First half losses below average MARSH
September 8, 2014
13
The Sweet 16
MARSH
September 8, 2014
14
I Have a Dollar for Anyone Who Can Name the 16 States Most at Risk from Earthquakes. (Yes, $1)
MARSH
September 8, 2014
15
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
THE 16 STATES MOST AT RISK FROM EARTHQUAKES Alaska
Montana
Arkansas
Nevada
California
Oregon
Hawaii
South Carolina
Idaho
Tennessee
Illinois
Utah
Kentucky
Washington
Missouri
Wyoming
MARSH
September 8, 2014
16
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
U.S. “CAT” RISK
MARSH
September 8, 2014
17
Ohio Looks Relatively Benign…
MARSH
September 8, 2014
18
Not so Much 40 Years Ago…
MARSH
September 8, 2014
19
Or 14 Years Ago…
MARSH
September 8, 2014
20
Or 6 Years Ago…
MARSH
September 8, 2014
21
At Least You Are Not These Guys…
MARSH
September 8, 2014
22
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
THE “RING OF FIRE” – NOT JUST A SONG BY JOHNNY CASH
Credit: John Nelson, IDV Solutions
MARSH
September 8, 2014
23
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
PACIFIC RIM “RING OF FIRE”
MARSH
September 8, 2014
24
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
DISTRIBUTION OF GLOBAL INSURED CAT LOSSES 2011-13
Distribution of Loss 2011
Distribution of Loss 2012
Distribution of Loss 2013
Source: Guy Carpenter
North America contributed 64% of global loss from 1980 – 2010; however two of the last three years were driven by international losses MARSH
September 8, 2014
25
Oct. 24, 2005 Why is this Date Significant?
MARSH
September 8, 2014
26
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
HURRICANE SEASON
14% of all major hurricanes make landfall after Oct. 1st MARSH
September 8, 2014
27
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
CATASTROPHE MODELING
Marsh Global Analytics Catastrophe Modeling – How Models Work Model Overview The following figure illustrates the component parts of the common state-of-the art catastrophe models. Each component module represents both analytical work of research scientists and engineers who are responsible for its design and complex computer programs that run the simulations.
Event Generation
Hazard
Database of events that represent full spectrum of likely events that can impact exposures. Each event is described by its physical parameters, location, and frequency of occurrence
Determines the event intensity at each property for every stochastic event that is likely to cause loss at that location. Examines important site characteristics such as soil condition and elevation.
Event Location Event Severity Event Likelihood
Ground Motion Peak Wind Gust Local Conditions
MARSH
Vulnerability
Financial Model
Calculate the mean damage ratio and coefficient of variation to buildings, contents, and the resulting loss of use (such as business interruption or additional living expenses).
Calculated losses to different financial participants within the insurance and reinsurance structure specified
Mean Damage Ratio Uncertainty
September 8, 2014
Insured Loss Insurer Loss Reinsurer Loss 28
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
MODELED PERILS Earthquake ─ Fire following ─ Sprinkler leakage Tropical Cyclone ─ Storm surge Winter Storm Tornado/Hail/Severe Thunderstorm River/Inland Flood Terrorism
MARSH
September 8, 2014
29
What Will Change the Market Direction?
MARSH
Persistent Low Interest Rates?
MARSH
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
WHEN THE PROFIT MOTIVE MEETS INNOVATION
7.0%
5.0%
4.0%
3.0%
2.0%
10-Year U.S. Treasury Yield on Jan. 1
6.0%
1.0%
MARSH
September 8, 2014
32
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
AND YOU INVEST A PILE OF DOUGH
MARSH
September 8, 2014
33
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
INTEREST RATES BECOME LESS CRITICAL
MARSH
September 8, 2014
34
Alternative Capital Evaporates?
MARSH
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
POTENTIAL INSURANCE CAPITAL
MARSH
September 8, 2014
36
A Black Swan Event?
MARSH
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
BLACK SWAN #1: CHICAGO TORNADO
Photo from USA Today and Arthur Harvey (AP)
Moore EF5 tornado track overlaid on zip codes in Cook County, Illinois. Source: Swiss Re
MARSH
September 8, 2014
38
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
BLACK SWAN #2: REPEAT OF THE GREAT MIAMI HURRICANE
MARSH
September 8, 2014
39
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
BLACK SWAN #3: THE “BIG” BIG ONE
MARSH
September 8, 2014
40
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
PAST BLACK SWAN EVENTS To understand the future, it is instructive to learn from the past… 2001 → WTC ─ Industry surplus ~ $225B
Disruptive Market Event
─ $43B loss in 2014 dollars 2005 → Hurricane Katrina ─ $48B loss in 2014 dollars
Market Turning Event
─ Industry surplus ~ $400B 2012 → Superstorm Sandy ─ $19B loss
Risk-Specific Event
─ Industry surplus ~ $600B
MARSH
September 8, 2014
41
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
WHAT WILL CHANGE THE MARKET? Economic collapse – e.g., the Great Depression 2 Rising interest rates? The earth becomes dislodged from its magnetic axis when the Cleveland Browns win the Super Bowl More likely some combination of events ─ Poor economic conditions ─ Multiple large natural catastrophe losses ─ Deterioration in underwriting results ─ Regulatory event – e.g. authorities forcing coverage
MARSH
September 8, 2014
42
The Hard Market Cycle Will Return…
MARSH
Just Like This Guy…
MARSH
Back to Your Renewal…
MARSH
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
WHAT TO EXPECT AT RENEWAL? It depends This is not the late 90’s Average rate decreases in excess of 5% and significantly better in many cases Better outcomes ─ Loss Free ─ Programs that have not been marketed aggressively ─ Quota share programs ─ Large CAT buyers (depending) TRIPRA
MARSH
September 8, 2014
46
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
KEYS TO A SUCCESSFUL RENEWAL Start early Use meaningful benchmarking data Establish goals for renewal Have high-quality data Meet with underwriters Understand your exposures ─ Key suppliers and customers ─ CAT ─ MFL’s Be willing to go to the mat
MARSH
September 8, 2014
47
Emerging Risks
MARSH
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
EMERGING RISKS USGS earthquake remapping Cyber B.I. Supply Chain disruption of all sorts Solar storm EMP geopolitical attack Others?
MARSH
September 8, 2014
49
The information contained in this document is confidential, may be privileged, and is intended for the use of the individual or entity named above. If you are not the addressee, please do not read, copy, forward, use, or store this document or any of the information contained herein.
David Letzelter Senior Vice President Pittsburgh, PA Property Leader
3 Does Anyone Know the Meaning of this Number?
MARSH
First Half 2014 State of the Property Insurance Market
MARSH
“You Have to Know the Past to Understand the Present.” – Carl Sagan
MARSH
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
AT THIS TIME LAST YEAR Large Companies
Midsize Companies
Key Events Superstorm Sandy (Oct. 2012) Significant CAT losses in 2010 and 2011 RMS v11.0 MARSH
September 8, 2014
4
To the Present State, But First…
MARSH
Does Anyone Know What This Is?
MARSH
MARSH
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
FIRST HALF 2014 UPDATE Solid underwriting results in 2013 The market is “soft” Downward rate momentum from 2nd half 2013 continued Record capital and surplus Ample CAT capacity for most risks Insurer’s signing on to multi-year deals
MARSH
September 8, 2014
8
Reinsurance Market Trends
MARSH
September 8, 2014
9
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
JUNE 2014 CAT REINSURANCE RENEWALS
Intense competition Traditional reinsurers sought to protect market share…
Alternative Capacity Growth as a Percentage of Global Property Cat Limit Has Increased Steadily Over the Last 6 Years
While alternative providers looked to utilize growing funds Risk-adjusted pricing down 12.5-20% on average Unused limit continued to increase
MARSH
September 8, 2014
10
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
GLOBAL COLLATERALIZED PROPERTY CATASTROPHE LIMITS
Estimates only Almost $50 billion today
Source: GC Securities Proprietary Database and Guy Carpenter & Company LLC. Estimates only.
MARSH
September 8, 2014
11
Natural Catastrophe Review
MARSH
September 8, 2014
12
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
ANNUAL GLOBAL INSURED CAT LOSSES
Hurricane Katrina Hurricane Wilma Hurricane Rita
Superstorm Sandy Hurricane Ike 10-Yr Avg. $59.4B
Source: SwissRe, Marsh
2013 Losses well-below 10-year average
Tohuku EQ/Tsunami New Zealand EQ’s Thailand flooding
2014 First half losses below average MARSH
September 8, 2014
13
The Sweet 16
MARSH
September 8, 2014
14
I Have a Dollar for Anyone Who Can Name the 16 States Most at Risk from Earthquakes. (Yes, $1)
MARSH
September 8, 2014
15
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
THE 16 STATES MOST AT RISK FROM EARTHQUAKES Alaska
Montana
Arkansas
Nevada
California
Oregon
Hawaii
South Carolina
Idaho
Tennessee
Illinois
Utah
Kentucky
Washington
Missouri
Wyoming
MARSH
September 8, 2014
16
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
U.S. “CAT” RISK
MARSH
September 8, 2014
17
Ohio Looks Relatively Benign…
MARSH
September 8, 2014
18
Not so Much 40 Years Ago…
MARSH
September 8, 2014
19
Or 14 Years Ago…
MARSH
September 8, 2014
20
Or 6 Years Ago…
MARSH
September 8, 2014
21
At Least You Are Not These Guys…
MARSH
September 8, 2014
22
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
THE “RING OF FIRE” – NOT JUST A SONG BY JOHNNY CASH
Credit: John Nelson, IDV Solutions
MARSH
September 8, 2014
23
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
PACIFIC RIM “RING OF FIRE”
MARSH
September 8, 2014
24
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
DISTRIBUTION OF GLOBAL INSURED CAT LOSSES 2011-13
Distribution of Loss 2011
Distribution of Loss 2012
Distribution of Loss 2013
Source: Guy Carpenter
North America contributed 64% of global loss from 1980 – 2010; however two of the last three years were driven by international losses MARSH
September 8, 2014
25
Oct. 24, 2005 Why is this Date Significant?
MARSH
September 8, 2014
26
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
HURRICANE SEASON
14% of all major hurricanes make landfall after Oct. 1st MARSH
September 8, 2014
27
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
CATASTROPHE MODELING
Marsh Global Analytics Catastrophe Modeling – How Models Work Model Overview The following figure illustrates the component parts of the common state-of-the art catastrophe models. Each component module represents both analytical work of research scientists and engineers who are responsible for its design and complex computer programs that run the simulations.
Event Generation
Hazard
Database of events that represent full spectrum of likely events that can impact exposures. Each event is described by its physical parameters, location, and frequency of occurrence
Determines the event intensity at each property for every stochastic event that is likely to cause loss at that location. Examines important site characteristics such as soil condition and elevation.
Event Location Event Severity Event Likelihood
Ground Motion Peak Wind Gust Local Conditions
MARSH
Vulnerability
Financial Model
Calculate the mean damage ratio and coefficient of variation to buildings, contents, and the resulting loss of use (such as business interruption or additional living expenses).
Calculated losses to different financial participants within the insurance and reinsurance structure specified
Mean Damage Ratio Uncertainty
September 8, 2014
Insured Loss Insurer Loss Reinsurer Loss 28
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
MODELED PERILS Earthquake ─ Fire following ─ Sprinkler leakage Tropical Cyclone ─ Storm surge Winter Storm Tornado/Hail/Severe Thunderstorm River/Inland Flood Terrorism
MARSH
September 8, 2014
29
What Will Change the Market Direction?
MARSH
Persistent Low Interest Rates?
MARSH
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
WHEN THE PROFIT MOTIVE MEETS INNOVATION
7.0%
5.0%
4.0%
3.0%
2.0%
10-Year U.S. Treasury Yield on Jan. 1
6.0%
1.0%
MARSH
September 8, 2014
32
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
AND YOU INVEST A PILE OF DOUGH
MARSH
September 8, 2014
33
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
INTEREST RATES BECOME LESS CRITICAL
MARSH
September 8, 2014
34
Alternative Capital Evaporates?
MARSH
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
POTENTIAL INSURANCE CAPITAL
MARSH
September 8, 2014
36
A Black Swan Event?
MARSH
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
BLACK SWAN #1: CHICAGO TORNADO
Photo from USA Today and Arthur Harvey (AP)
Moore EF5 tornado track overlaid on zip codes in Cook County, Illinois. Source: Swiss Re
MARSH
September 8, 2014
38
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
BLACK SWAN #2: REPEAT OF THE GREAT MIAMI HURRICANE
MARSH
September 8, 2014
39
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
BLACK SWAN #3: THE “BIG” BIG ONE
MARSH
September 8, 2014
40
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
PAST BLACK SWAN EVENTS To understand the future, it is instructive to learn from the past… 2001 → WTC ─ Industry surplus ~ $225B
Disruptive Market Event
─ $43B loss in 2014 dollars 2005 → Hurricane Katrina ─ $48B loss in 2014 dollars
Market Turning Event
─ Industry surplus ~ $400B 2012 → Superstorm Sandy ─ $19B loss
Risk-Specific Event
─ Industry surplus ~ $600B
MARSH
September 8, 2014
41
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
WHAT WILL CHANGE THE MARKET? Economic collapse – e.g., the Great Depression 2 Rising interest rates? The earth becomes dislodged from its magnetic axis when the Cleveland Browns win the Super Bowl More likely some combination of events ─ Poor economic conditions ─ Multiple large natural catastrophe losses ─ Deterioration in underwriting results ─ Regulatory event – e.g. authorities forcing coverage
MARSH
September 8, 2014
42
The Hard Market Cycle Will Return…
MARSH
Just Like This Guy…
MARSH
Back to Your Renewal…
MARSH
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
WHAT TO EXPECT AT RENEWAL? It depends This is not the late 90’s Average rate decreases in excess of 5% and significantly better in many cases Better outcomes ─ Loss Free ─ Programs that have not been marketed aggressively ─ Quota share programs ─ Large CAT buyers (depending) TRIPRA
MARSH
September 8, 2014
46
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
KEYS TO A SUCCESSFUL RENEWAL Start early Use meaningful benchmarking data Establish goals for renewal Have high-quality data Meet with underwriters Understand your exposures ─ Key suppliers and customers ─ CAT ─ MFL’s Be willing to go to the mat
MARSH
September 8, 2014
47
Emerging Risks
MARSH
PROPERTY MARKET UPDATE
RIMS CLEVELEAND
EMERGING RISKS USGS earthquake remapping Cyber B.I. Supply Chain disruption of all sorts Solar storm EMP geopolitical attack Others?
MARSH
September 8, 2014
49
The information contained in this document is confidential, may be privileged, and is intended for the use of the individual or entity named above. If you are not the addressee, please do not read, copy, forward, use, or store this document or any of the information contained herein.
