The U.S. and Global Economies: Outlook and Implications

for P/C InsuranceBrokers & Reinsurance Market Association

BRMA 2011 Committee RendezvousPrinceton, NJApril 11, 2011

Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038Office: 212.346.5540 Cell: 917.494.5945 stevenw@iii.org www.iii.org

2

The Global Economic Outlook*

*Before March 11, 2011 A Two-Speed Recovery:

Emerging Economies in Third Gear, Advanced Economies in First

3

Relative Shares of Global Output,Advanced vs. Developing Economies, 2009

Developing Economies

47.1%

Advanced Economies

52.9%

Source: EDC Economics, “The Moment of Truth: Global Export Forecast Fall 2010, at http://www.edc.ca/english/docs/gef_e.pdf

(3)

0

3

6

9

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 10 11F

12F

Advanced economies Emerging and developing economies

Source: International Monetary Fund, World Economic Outlook Update, January 2011; Ins. Info. Institute.

Emerging economies (led by China) are expected to

grow by 6.5% in 2011.

GDP Growth: Advanced vs.Emerging Economies, 1970-2012F

Advanced economies grew slowly (+3.0%) in 2010 with

deceleration expected in 2011, dampening insurance demand

GDP Growth (%)

5

Forecasts of 2011 & 2012 GDPof Advanced Economies

Sources: IMF, World Economic Outlook, Jan 2011 Update; Blue Chip Economic Indicators (3/2011 issue); Insurance Information Institute.

3.1%1.8%

2.7%1.7% 1.5%

2.8%3.3%

2.2% 2.3% 2.0% 1.8%3.0%

2.3%1.6%1.6%

2.2%2.0%3.0% 2.7%

1.8%1.8%2.0%2.3%2.7%

0%

4%

8%

12%

United States UnitedKingdom

Germany France Japan Canada

2011P 2011BC 2012P 2012BC

The January 2011 IMF forecasts for growth in advanced economies in 2011 is generally around 2%. The March 2011 Blue Chip forecasts are a little higher. The

outcome could be worse if supplies of middle-eastern oil (political disruption), developments involving sovereign debt (the PIGS or other countries) or Japanese

exports (earthquake/tsunami effects) are worse than expected.

6

Forecasts of 2011 & 2012 GDPof Developing Economies

Sources: IMF, World Economic Outlook, Jan 2011 Update; Insurance Information Institute.

9.3%8.3%

4.2%5.0%

4.1%

9.1%8.5%

4.2%5.1%

3.7%4.2%4.5%4.5%

8.4%

9.6%

4.8%4.1%4.4%

8.0%

9.5%

0%

4%

8%

12%

China India Russia Brazil Mexico

2011P 2011BC 2012P 2012BC

IMF says growth in emerging and developing economies will outpace advanced ones in 2011. This will accelerate the growth of insurance exposures in emerging markets relative to the U.S., W. Europe and

Japan.

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2007

:Q1

2007

:Q2

2007

:Q3

2007

:Q4

2008

:Q1

2008

:Q2

2008

:Q3

2008

:Q4

2009

:Q1

2009

:Q2

2009

:Q3

2009

:Q4

2010

:Q1

2010

:Q2

2010

:Q3

Advanced economies Emerging and developing economies

Source: International Monetary Fund, World Economic Outlook Update, January 2011; Ins. Info. Institute.

Emerging economies kept investing (except for

2 quarters) throughout the Great Recession

Real Gross Fixed Investment: Advancedvs. Emerging Economies, 2007:Q1-2010:Q3

Advanced economies dis-invested throughout

the Great Recession

Annualized% Changefrom prior quarter

8

Insurance “Penetration”and “Density”

Beyond Exposure Growth,Insurers Need

Increased Use of Insurance

9

Definitions:Measures of Insurance Usage

“Penetration” The ratio of premium to GDP Indicates the degree to which premium growth

kept up with exposure growth (as proxied by GDP)

“Density” The ratio of premium to total population Indicates the breadth of use of insurance

Source: Swiss Re, Sigma, various volumes

Non-life Premium/GDP* (Penetration)for Advanced Economies, 2001-2009

4.57%

3.45%

2.22%

2.85%

3.59%

4.98%

4.56%

2.22%

2.97%

3.70%

5.23%

4.75%

2.20%

3.16%

3.82%

5.14%

3.68%

2.25%

3.14%

3.86%

5.01%

3.55%

2.22%

3.13%

3.73%

4.80%

3.40%

2.20%

3.10% 3.60%

4.20%

3.00%

2.10%

3.00%

3.60%

4.60%

2.90%

2.20%

3.00% 3.50%

4.50%

3.00%

2.10%

3.13%

3.70%

0%

1%

2%

3%

4%

5%

6%

U.S. U.K. Japan France Germany

2001 2002 2003 2004 20052006 2007 2008 2009

*both measured in U.S. dollars; premiums exclude cross-border business Source: Swiss Re Sigma, various volumes

From 2001 to 2003, a hard market in the U.S. added 75 basis pointsto the Penetration ratio, but a soft market in subsequent years

shaved a percentage point from the Penetration ratio.

Non-life Premium/GDP* (Penetration)for Emerging Economies, 2001-2009

0.86%

1.51% 1.78%

0.56%

2.78%

0.95%

1.81%

1.74%

0.67%

2.86%

1.03%

2.13%

1.68%

0.62%

2.92%

1.05%

2.22%

1.62%

0.64%

2.95%

0.92%

2.15%

1.68%

0.61%

3.03%

1.00%

2.30%

1.60%

0.60%

3.00%

1.10%

2.40%

1.60%

0.60%

2.80%

1.00%

2.30%

1.60%

0.60%

2.90%

1.10%

2.50%

1.50%

0.60%

2.90%

0%

1%

2%

3%

4%

5%

6%

China Russia Brazil India South Africa

2001 2002 20032004 2005 20062007 2008 2009

*both measured in U.S. dollars; premiums exclude cross-border business Source: Swiss Re Sigma, various volumes

From 2001-2009, Penetration in China and Russia grew steadily—an especially strong showing in light of the rapid growth in GDP (denominator in the Penetration ratio). Similarly, although the Penetration ratios in Brazil and India were essentially

flat, that means premium growth basically kept pace with exposure growth.

Non-life Premium* per capita (Density)for Advanced Economies, 2001-2009

$1,664.0

$825.9

$701.1

$630.6 $809.9

$1,799.0

$1,199.7

$714.7

$714.7 $891.0

$1,980.2

$1,441.4

$768.0 $930.4 $1,120.8

$2,062.6

$1,318.0

$830.8 $1,057.7 $1,265.3

$2,122.0

$1,311.9

$790.4

$1,093.9

$1,268.4

$2,134.2

$1,327.1

$760.4

$1,152.9

$1,300.7

$2,164.4

$1,383.2

$736.0

$1,219.3 $1,427.9

$2,177.4

$1,275.7

$829.2

$1,339.2 $1,572.7

$2,109.6

$1,051.0

$847.5

$1,289.4 $1,539.2

$0

$500

$1,000

$1,500

$2,000

$2,500

U.S. U.K. Japan France Germany

2001 2002 2003 2004 20052006 2007 2008 2009

*excludes cross-border business Source: Swiss Re Sigma, various volumes

From 2001-2009, Insurance Density grew in most advanced economies,retreating only slightly during the global recession.

Non-life Premium* per capita (Density) for Emerging Economies, 2001-2009

$7.80

$32.6

$53.2

$2.4 $69.1

$9.50

$43.5

$45.0

$3.0 $64.8

$11.20

$64.3

$46.8

$3.5

$107.4

$12.9 $89.6

$55.2

$4.0

$141.0

$15.80 $116.5

$72.1

$4.4

$156.2

$19.40 $1

46.9

$88.4

$5.2

$160.2

$25.5

$203.3

$106.9

$6.2

$159.5

$33.7

$268.1

$129.1

$6.2

$163.6

$40.00

$276.4

$124.0

$6.7

$161.3

$0

$300

$600

$900

$1,200

$1,500

China Russia Brazil India South Africa

2001 2002 20032004 2005 20062007 2008 2009

* premiums measured in U.S. dollars, exclude cross-border business Source: Swiss Re Sigma, various volumes

From 2001-2009, Insurance Density in India tripled, and in China it grew 5-fold.But the most spectacular Density growth in these years belongs to Russia:

in 2009 Insurance Density in Russia was 9 times what it was in 2001!

14

The New World Order: A New Level of Risk for Business Best Growth Opportunities are No Longer in Low-Risk Markets (W. Europe,

US/Canada, Japan) Growth Rates are 2-3 Times Higher in Developing World

Business investment will remain high, much of it in need of insurance Investment conditions will remain challenging for decades

Unemployment Rates Are Much Lower in Emerging Economies Establishment of a middle class and a wealthy upper class

Incomes Are Rising Faster in Emerging Economies Fueling demand for goods and services Foreign Direct Investment (FDI) and insurance exposure/demand

Immature Institutions Raise Risk/Possible Systemic Risks Legal system, financial markets, regulation, infrastructure issues

Instability in Emerging Nations Will Remain High Political instability; Corruption in some countries Economic vulnerability (trade, xrt risk, credit risk, commodities, energy)

Natural Hazard Risks Are Often Elevated w/Minimal Mitigation

15

Foreign Direct Investment

To Find Insurance Exposure Growth, Follow the

Foreign-Direct-Investment “Dollar”

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Sources: World Bank; Insurance Information Institute.

Most non-life insurer growth will be in parts of the world whereForeign Direct Investment (FDI) is high. FDI flows are highly volatile

(so new income streams for insurers will also be volatile).

Trillions of Current US Dollars

In 2008, financial services accounted

for nearly 20% of FDI

FDI dropped by 60% in 2001-02 and

52% in 2007-09

Global Foreign Direct Investment,*Net Inflows: 1990-2010

*Foreign Direct Investment: The net inflow of investment to acquire a lasting management interest (at least 10% of voting stock) in an enterprise operating in an economy other than that of the investor.

17

Following the Money Trail:Foreign Direct Investment

Source: The Economist, Nov. 13 -19, 2010

The UK’s share of FDI peaked at 45% in 1914

The US’s share of FDI peaked at 50% in 1967

China’s share of FDI stood at 6%

in 2009

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

$1,000,000

$1,100,000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

UK Europe (excl. UK) U.S.

*Foreign Direct Investments are defined as the net inflows of investment to acquire a lasting management interest (at least 10% of voting stock) in an enterprise operating in an economy other than that of the investor. Outward FDI represents flow from investing country to rest of the world.Source: United Nations UNCTADSTAT; Insurance Information Institute.

European Foreign Direct Investment Abroad Was Hit Much Harder than Asia or the Americas

Millions of Current US Dollars

European FDI in the rest of the world plunged 60% during the global financial crisis. UK FDI

fell by a remarkable 79%.

Europe & U.S.: OutwardForeign Direct Investment*: 1990-2009

$26,531$24,407

$16,985$19,369

$59,374

$11,345

$17,463

$5,514

$45,726

$27,196

$44,979

$61,081

$50,581$52,269

$25,000$21,437

$17,713

$8,254$2,825$2,448

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

China Hong Kong South Korea

*Foreign Direct Investments are defined as the net inflows of investment to acquire a lasting management interest (at least 10% of voting stock) in an enterprise operating in an economy other than that of the investor. Outward FDI represents flow from investing country to rest of the world.Source: United Nations UNCTADSTAT; Insurance Information Institute.

Despite the Crash in Foreign Direct Investment During the Global Financial Crisis, Chinese Investments Abroad Remain Near Record Levels.

Implication: Growth Opportunities for Insurers May Not Be in China but In Chinese Investment Target Nations/Companies/Industries.

Millions of Current US Dollars

Chinese foreign direct investment increased 5,600% from 2000 to 2008. The recession caused only a minor

disruption in Chinese investment abroad

China, Hong Kong, South Korea:Outward FDI: 1990-2009*

20

21

Economic Threatsto the Global (Re)Insurance

IndustryAt Least Eight to Monitor

22

Near-Term Issues

Effects of the March 11 Earthquake/Tsunami/ Nuclear Reactor AccidentLost final productionDisrupted supply chainsLost Japanese consumption

Inflation Transmitted GloballyChina, Brazil and other countriesSoaring food and other commodity pricesOil prices and supply reliability

Tighter monetary/fiscal policy => Slower Growth?

Source: Insurance Information Institute.

Inflation Rate Forecast for Largest EuropeanEconomies & Euro Area, 2011F-2012F

1.8% 2.0%

3.4%

1.6%1.9%1.7%

2.0% 2.2%1.8% 1.8%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Germany France UK Netherlands EuroZone

2011F2012F

Source: Blue Chip Economic Indicators, March 2011 issue

Change from Prior Year Inflation is forecast to be around

2% across most major European economies. If so, interest rates will remain low, obscuring tight conditions in trade credit markets

Inflation Rate Forecastfor Other Important Countries, 2011-12F

4.3%

7.7%

5.3%

2.2%

8.6%

3.7%

6.5%

4.8%

0.0%

2.2%

7.4%

-0.2%-1%0%1%2%3%4%5%6%7%8%9%

China India Brazil Japan Canada Russia

2011F 2012F

Source: Blue Chip Economic Indicators, March 2011 issue

% Change from Prior Year

Inflation is much higher in fast-growing economies such as Brazil, Russia, India, and China (the BRIC group). Inflation there can spread to advanced economies

because the advanced countries import significantly from the BRICs.

25

Commodity Price Changesin 2010-2011*

8090

100110120130140150160170180190200210

1/1/

2010

1/15

/201

0

1/29

/201

0

2/12

/201

0

2/26

/201

0

3/12

/201

0

3/26

/201

0

4/9/

2010

4/23

/201

0

5/7/

2010

5/21

/201

0

6/4/

2010

6/18

/201

0

7/2/

2010

7/16

/201

0

7/30

/201

0

8/13

/201

0

8/27

/201

0

9/10

/201

0

9/24

/201

0

10/8

/201

0

10/2

2/20

10

11/5

/201

0

11/1

9/20

10

12/3

/201

0

12/1

7/20

10

12/3

1/20

10

1/14

/201

1

Metals Food Raw Materials Crude Oil Gold

*data are through Jan. 20, 2011Source: International Monetary Fund World Economic Outlook January 2011 update at http://www.imf.org/external/pubs/ft/weo/2010/update/01/data/figure_2.csv

Index (Jan 1, 2010 = 100) Raw materials prices doubled over the course

of 2010. Some other commodity prices

dropped during the year but ended 20-30% higher.

26

Longer-Term Issues

Persistently Low Interest Rates Lower investment income, more pressure on u/w profitCurrency Market InstabilitySovereign Bond Market Concerns (Greece,

Spain, Ireland, etc.)Strong Capital Flows to Emerging/Developing

Economies => Asset Price Bubbles?Regulatory Backlash/Developments Solvency II, Basel III US Financial Services Reform

Source: Insurance Information Institute.

Forecast: End-of-Year 3-Month Interest Ratesfor Major Global Economies, 2011-2012F

1.30%

0.24%

1.09%

0.20%

4.57%5.16%

7.79%

2.18%

0.33%

2.14%

1.10%

4.78%

5.57%

7.23%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Euro Area Japan U.K. U.S. China Australia India

2011F 2012F

Source: Blue Chip Economic Indicators, March 2011 issue

Interest rates remain generally low in much of the world, depressing insurer investment

earnings. Some countries, including the U.S., are intentionally holding rates low.

Other countries are intentionally raising rates to fight inflation.

3.40%

3.60%

3.80%

4.00%

4.20%

4.40%

4.60%

2011:Q1 2011:Q2 2011:Q3 2011:Q4 2012:Q1 2012:Q2

U.S. Euroland U.K. Canada

Source: Wells Fargo Economics Group, Global Chartbook, March 2011

As these nations’ economies improve, and actions to keep interest rates low are ended, the yields on longer-term bonds are expected to rise. But persistent high rates of unemployment and excess capacity, plus central bank concerns about inflation, will likely keep them from rising more than

one percentage point by mid-2012.

10-Year Bond: Yield Forecastsfor 2011:Q1-2012:Q2

30

PIGS Government Bond Spreads(2-Year Yield Spreads over German Bunds) in 2010-2011*

0

200

400

600

800

1000

1200

1400

1600

1800

1/1/

2010

1/15

/201

0

1/29

/201

0

2/12

/201

0

2/26

/201

0

3/12

/201

0

3/26

/201

0

4/9/

2010

4/23

/201

0

5/7/

2010

5/21

/201

0

6/4/

2010

6/18

/201

0

7/2/

2010

7/16

/201

0

7/30

/201

0

8/13

/201

0

8/27

/201

0

9/10

/201

0

9/24

/201

0

10/8

/201

0

10/2

2/20

10

11/5

/201

0

11/1

9/20

10

12/3

/201

0

12/1

7/20

10

12/3

1/20

10

1/14

/201

1

Greece Ireland Portugal Spain

*data are through Jan. 21, 2011Source: International Monetary Fund World Economic Outlook January 2011 update at http://www.imf.org/external/pubs/ft/weo/2010/update/01/data/figure_2.csv

Basis PointsFor one day in 2010,

it took nearly 18 percentage points

more yield to lure an investor to a 2-Year

Greek bond vs. a comparable German

bond

110-billion-Euro rescue package

drove the Greece bond spread down

below 700 bp…

…but the market isn’t convinced the rescue will work

65

70

75

80

85

90

95

100

105

110

115

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Trade-Index-WeightedU.S. Dollar Exchange Rate*

*The Major Currency index is a weighted average of the foreign exchange values of the U.S. dollar against a subset of the currencies of a large group of major U.S. trading partners. The index weights, which change over time, are derived from U.S. export shares and from U.S. and foreign import shares. Sources: US Federal Reserve, Board of Governors; Insurance Information Institute.

The global financial crisis created significant exchange-rate volatility in 2008-09 and 2010—when the world needed a “safe haven” currency.

As global stability returns, the dollar is depreciating again.

Monthly, January 2000 through February 2011

Depreciation of dollar after Tech bubble

and post 9-11

Post-crisis depreciation

of dollar

Dollar appreciates as role as global “reserve

currency” affirmed during global financial crisis

Greece anxiety

32

But Exchange-Rate Changes Generally Have Little Effect on U.S. Import Prices

In theory, a change in the value of the dollar should raise or lower the cost of foreign goods, thereby reducing or increasing U.S. demand for imports.

However, numerous economic studies have shown that when the dollar fluctuates against foreign currencies, U.S. import prices tend to show much less change.

Using data for 1999 to 2008, a recent paper estimates exchange rate pass-through to U.S. import prices for aggregate U.S. imports (all imports excluding oil and consumer goods), and for prices of imports from Japan, the European Union (EU), Canada, the NIEs, and Latin America. The exchange rate pass-through estimates were found to be low (0.47 for

all imports excluding oil and 0.26 for consumer goods) over 4 quarters. Estimates of bilateral exchange- rate pass-through range from 0.59 for Latin

America (largely Mexico) to 0.0 for the NIEs (Taiwan, Singapore, South Korea, and Hong Kong).

Source: U.S. International Trade Commission at http://www.usitc.gov/publications/332/working_papers/ID-21_revised.pdf.

33

Exchange Rate Indices*Daily (Jan 1, 2010 = 100)

85

90

95

100

105

110

115

120

1/1/

2010

1/15

/201

0

1/29

/201

0

2/12

/201

0

2/26

/201

0

3/12

/201

0

3/26

/201

0

4/9/

2010

4/23

/201

0

5/7/

2010

5/21

/201

0

6/4/

2010

6/18

/201

0

7/2/

2010

7/16

/201

0

7/30

/201

0

8/13

/201

0

8/27

/201

0

9/10

/201

0

9/24

/201

0

10/8

/201

0

10/2

2/20

10

11/5

/201

0

11/1

9/20

10

12/3

/201

0

12/1

7/20

10

12/3

1/20

10

1/14

/201

1

Euro Yen Renminbi Pound Sterling*data are through Jan. 21, 2011Source: International Monetary Fund World Economic Outlook January 2011 update at http://www.imf.org/external/pubs/ft/weo/2010/update/01/data/figure_2.csv

Index

34

Political Risk Insurance

Covers Various Risks, Including Currency Inconvertibility,

Sovereign Non-Payment, Political Interference, Strikes, War/Riot

35

Political Risk: Insurers’ Greatest Opportunities Are Often in Risky Nations

Source: Aon

The fastest growing markets are generally

also among the politically riskiest

36

34

76

111

88

104

88

0

25

50

75

100

125

War/Civil War ExchangeTransfer

Sabotage/RiotTerrorism/Civil

Commotion

Sovereign Non-Payment

Legal/RegulatoryRisk

PoliticalInterference

(Number of countries)

Source: Aon, published January 19, 2011, accessed at http://aon.mediaroom.com/index.php?s=43&item=2162

Aon: 2011 Political Risk,by Country Count

Chinese Banks’ Lending Activity Abroad Showed Little Impact from the Global Financial Crisis

Risk

37

Changes onAon’s 2011 Political Risk Map

Aon 19 downgraded countries at the start of 2011: Algeria, Benin, Comoros, Antigua and Barbuda, Bahamas, Barbados, Bermuda, Cayman Islands, Dominica, Granada, Haiti, Netherlands Antilles, St. Kitts and Nevis, St. Lucia, St. Vincent, Trinidad, Myanmar, Iceland, Bahrain. Many of these were downgraded because they rely on tourism

for their prosperity and the global recession severely cut that revenue/ profit source

Aon upgraded 8 countries/territories:Kenya, Mozambique, Rwanda, Uganda, Zambia, Panama, Georgia, Uzbekistan, Indonesia, Malaysia, India

Source: Aon, published January 19, 2011, accessed at http://aon.mediaroom.com/index.php?s=43&item=2162

Bottom Line: Political and financial instabilityremain a feature of the business landscape in 2011.

A.M. Best: Country Risk Evaluation*

13

9

1112

14

0

2

4

6

8

10

12

14

16

CRT-1 CRT-2 CRT-3 CRT-4 CRT-5

Source: http://www3.ambest.com/ratings/cr/crisk.aspx

*Country risk: the risk that country-specific factors could adversely affect an insurer’s ability to meet its financial obligations. A. M. Best places countries into one of five tiers: Country Risk Tier 1 (CRT-1, a stable environment with the least amount of risk), to Country Risk Tier 5 (CRT-5, countries that pose the most risk and greatest challenge to an insurer’s financial stability, strength and performance).

Countries in CRT-5): Algeria, Belarus, Bosnia and Herzegovina, Dominican Republic, Ghana,Jamaica, Kenya, Lebanon, Libya, Nigeria, Pakistan, Syria, Ukraine and Vietnam.

Number of countries

Special cases:GibraltarGuernseyIsle of Man

Small countries:LuxembourgSingapore

Least risk

Special cases:BarbadosBritish Virgin IslandsCayman IslandsLiechtensteinMacau

Small countries:BermudaHong Kong Taiwan

Special cases:AnguillaBahamasCyprusMaltaNetherlands AntillesOmanTrinidad and Tobago

Special cases:Antigua and BarbudaMauritius

www.iii.org

Thank you for your timeand your attention!

Insurance Information Institute Online: