Overview of Florida Hurricane Insurance Market Economics Florida

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Overview of Florida Hurricane Insurance Market Economics Florida Joint Select Committee on Hurricane Insurance

Overview of Florida Hurricane Insurance Market Economics Florida Joint Select Committee on Hurricane Insurance Tallahassee, FL January 19, 2005 Robert P. Hartwig, Ph. D. , CPCU, Senior Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: (212) 346 -5520 Fax: (212) 732 -1916 bobh@iii. org www. iii. org

Presentation Outline • Hurricane Season of 2004 Ø Statistical Update • Historical Catastrophe Losses

Presentation Outline • Hurricane Season of 2004 Ø Statistical Update • Historical Catastrophe Losses in Florida: A Global Concern • Florida Hurricanes: Impact on Insurer Underwriting Performance • Florida Hurricanes: Impact on Profitability • Capital & Capacity Concerns and Limitations Ø The need to attract more capacity to support economic growth in FL • Influence of Florida & Disaster Losses on US P/C Insurance Industry • Disaster Declarations: Florida’s Dependence on Federal Aid • Homes & Homeowners Insurance: Vital to FL’s Economy

HURRICANE SEASON OF 2004 One for the Record Books

HURRICANE SEASON OF 2004 One for the Record Books

U. S. Insured Catastrophe Losses ($ Billions) 2004 was the second$ worst Billionsyear ever

U. S. Insured Catastrophe Losses ($ Billions) 2004 was the second$ worst Billionsyear ever for natural disaster losses in the US after adjusting for inflation. About 85% of those losses originated in Florida. *2004 figure is as of September 30, 2004. Note: 2001 figure includes $20. 3 B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Source: Property Claims Service/ISO; Insurance Information Institute

Losses from Hurricanes of 2004 Four of the Top 10 hurricanes in US history

Losses from Hurricanes of 2004 Four of the Top 10 hurricanes in US history occurred in 2004 Estimated insured losses from the hurricanes of 2004 = $20. 485 B exceed the $15. 5 B in losses from Hurricane Andrew ($20. 3 B in $2003) Source: ISO/PCS; Insurance Information Institute

Most of the Claims from the 4 Hurricanes Originated in FL Total Claims =

Most of the Claims from the 4 Hurricanes Originated in FL Total Claims = 2. 177 million Florida Only = 1. 692 Mill (78%) Total = 600, 000 Total = 552, 000 Total = 385, 000 Source: PCS/ISO Total = 640, 000

Most Claim Dollars Paid Are Going to FL Policyholders Total Insured Losses = $20.

Most Claim Dollars Paid Are Going to FL Policyholders Total Insured Losses = $20. 485 B Florida Only = 17. 5 B (85%) Billions Total = $6. 0 Billion Total = $4. 4 Billion Total = $3. 2 Billion Source: PCS/ISO Total = $6. 8 Billion

Personal Property Losses Accounted for Largest Share Damage from 2004 Hurricanes* Charley TOTAL Frances

Personal Property Losses Accounted for Largest Share Damage from 2004 Hurricanes* Charley TOTAL Frances Source: ISO/PCS; Insurance Information Institute. Ivan Jeanne *Breakdowns based on FL losses, which accounted for 85% of losses for all affected states.

Insurers Have Responded to the Challenge Claim Closure Rates

Insurers Have Responded to the Challenge Claim Closure Rates

Proportion of Claims Settled from 2004 Hurricanes (as of Dec. 30) About 86% of

Proportion of Claims Settled from 2004 Hurricanes (as of Dec. 30) About 86% of the 1. 7 million claims filed in Florida were settled by year’s end, running well-ahead of the pace set following Hurricane Andrew. Insurers are still receiving 7, 000 to 9, 000 new claims per week. Source: Florida Office of Insurance Regulation

HISTORICAL PERSPECTIVE Florida Property Insurance Markets: Unparalleled Risk

HISTORICAL PERSPECTIVE Florida Property Insurance Markets: Unparalleled Risk

Top 10 Insured Losses Worldwide, 1970 -2004 ($2003) Three of the 10 most expensive

Top 10 Insured Losses Worldwide, 1970 -2004 ($2003) Three of the 10 most expensive disasters is world history occurred in Florida: Hurricanes Andrew, Charley & Ivan *Hurricanes Ivan and Charley in 2004 dollars. Sources: ISO/PCS; Swiss Re, “Natural Catastrophes and Man-Made Disasters in 2003, ” Sigma, no. 1, 2004; except Sept. 11 estimate from Hartwig, Robert P. , 2004 Mid-Year Property/Casualty Insurance Update, Insurance Information Institute. Figure is stated in 2001 dollars.

Top 10 Insured Property Losses in US ($2003)* Five of the 10 most expensive

Top 10 Insured Property Losses in US ($2003)* Five of the 10 most expensive disasters is US history occurred in Florida: Hurricanes Andrew, Charley, Ivan, Frances & Jeanne *Hurricanes Charley, Frances, Ivan and Jeanne stated in 2004 dollars. Note: 9/11 loss figure is for property claims only. Sources: ISO/PCS; Insurance Information Institute.

Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2003)* Eight of the

Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2003)* Eight of the 10 most expensive hurricanes in US history affected Florida: Andrew, Charley, Ivan, Frances, Georges, Jeanne, Opal & Floyd *Hurricanes Charley, Frances, Ivan and Jeanne stated in 2004 dollars. Note: 9/11 loss figure is for property claims only. Sources: ISO/PCS; Insurance Information Institute.

Average Annual Insured Losses* (Top 10 States, $ Millions) Distribution of Annual Losses *Normalized

Average Annual Insured Losses* (Top 10 States, $ Millions) Distribution of Annual Losses *Normalized losses adjusted for inflation, housing density, wealth and wind insurance coverage, based on historical data for 100 -year period 1900 -1999. Source: Tillinghast-Towers Perrin

Inflation-Adjusted U. S. Catastrophe Losses By Cause of Loss, 1984 -2003¹ Catastrophes are all

Inflation-Adjusted U. S. Catastrophe Losses By Cause of Loss, 1984 -2003¹ Catastrophes are all events causing direct insured losses to property of $25 million or more in 2003 dollars. Adjusted for inflation by ISO. 2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood Insurance Program. 6 Includes wildland fires. 1 Source: Insurance Services Office, Inc (ISO)

How Exposed is Florida Today?

How Exposed is Florida Today?

Insured losses, $ Billions Insured Losses in Florida if Hurricane Andrew Hit Today •

Insured losses, $ Billions Insured Losses in Florida if Hurricane Andrew Hit Today • Each 0. 1 degree equals about 7 miles • A path of 0. 3 degrees north of Andrew’s original location would create a direct hit on Miami • Estimates are losses in today’s dollars after application of deductibles. Source: Best’s Review, June 2002 (EQECAT)

Estimated New Construction in Miami-Dade County, 1992 -2001 Huge build-up in exposure in Florida

Estimated New Construction in Miami-Dade County, 1992 -2001 Huge build-up in exposure in Florida since 1992 $16. 1 Billion • 81% residential • 19% commercial $3. 4 Billion Source: Best’s Review, June 2002 (International Hurricane Center, Florida International University), Ins. Info. Institute

Estimated New Construction Miami-Dade County, Florida South Miami-Dade was designated the county’s high-impact zone

Estimated New Construction Miami-Dade County, Florida South Miami-Dade was designated the county’s high-impact zone following Hurricane Andrew. Estimates include construction from 1992 through 2001 South Miami Dade New Residential Exposure (Construction) New Commercial Exposure (Construction) $3, 095, 273, 681 $305, 492, 393 All Miami-Dade New Residential Exposure(Construction) $12, 981, 843, 085 New Commercial Exposure(Construction) $3, 069, 654, 106 Source: Best’s Review, June 2002 (International Hurricane Center, Florida International University)

Hurricanes Making Landfall During the 20 th Century Frequency Cost* *Normalized to adjusted for

Hurricanes Making Landfall During the 20 th Century Frequency Cost* *Normalized to adjusted for inflation, housing density, wealth and wind insurance coverage. Source: Tillinghast-Towers Perrin

FLORIDA HURRICANES & UNDERWRITING PERFORMANCE: Homeowners Insurers Have Lost Billions in Florida

FLORIDA HURRICANES & UNDERWRITING PERFORMANCE: Homeowners Insurers Have Lost Billions in Florida

Underwriting Gain (Loss) in Florida Homeowners Insurance, $ Billions 1992 -2004 E* Florida’s homeowners

Underwriting Gain (Loss) in Florida Homeowners Insurance, $ Billions 1992 -2004 E* Florida’s homeowners insurance market produces small profits in most years and enormous losses in others *2004 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2004 residential windstorm losses of $11. 2 B; 2003 figure is also from III estimates of loss and expense.

$ Billions Cumulative Underwriting Gain (Loss) in Florida Homeowners Insurance, 1992 -2004 E* It

$ Billions Cumulative Underwriting Gain (Loss) in Florida Homeowners Insurance, 1992 -2004 E* It took insurers 11 years (19932003) to erase the UW loss associated with Andrew, but the 4 hurricanes of 2004 erased the past 7 years of profits *2004 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2004 residential windstorm losses of $11. 2 B; 2003 figure is also from III estimates of loss and expense.

FLORIDA HURRICANES & PROFITABILITY: Selling Homeowners Insurance in Florida is Tremendously Unprofitable

FLORIDA HURRICANES & PROFITABILITY: Selling Homeowners Insurance in Florida is Tremendously Unprofitable

Rates of Return on Net Worth for Homeowners Ins: US vs. Florida Profits were

Rates of Return on Net Worth for Homeowners Ins: US vs. Florida Profits were earned most years after Andrew but before 2004 Averages: 1993 to 2003 E US HO Insurance = +2. 8%; FL= 23. 3% Source: NAIC; 2003 US figure is Insurance Information Institute estimate. FL estimate based on average Florida homeowners RNW from 1993 -2002.

Rates of Return on Net Worth for Homeowners Ins: US vs. Florida Averages: 1990

Rates of Return on Net Worth for Homeowners Ins: US vs. Florida Averages: 1990 to 2004 E US HO Insurance = -1. 8% FL HO Average = -48. 5% Andrew Source: NAIC; 2003 US figure is Insurance Information Institute estimate. FL figure based on average Florida homeowners RNW from 1993 -2002. 4 Hurricanes

CAPITAL & CAPACITY CONSIDERATIONS: INSURERS MUST PUT LARGE AMOUNTS OF CAPITAL AT RISK TO

CAPITAL & CAPACITY CONSIDERATIONS: INSURERS MUST PUT LARGE AMOUNTS OF CAPITAL AT RISK TO OFFER INSURANCE IN FLORIDA

U. S. Policyholder Surplus: 1975 -2004* $ Billions Capacity TODAY is just 8. 8%

U. S. Policyholder Surplus: 1975 -2004* $ Billions Capacity TODAY is just 8. 8% above its mid-1999 peak Surplus (capacity) has been on a rollercoaster rise in the p/c insurance industry over the past 6 years $5 3. 9 Bi lli on “Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations Source: A. M. Best, ISO, Insurance Information Institute *As of 9/30/04.

US Reinsurers: Change in Policyholder Surplus ($ Billions) Reinsurer PHS fell 20% from 1998

US Reinsurers: Change in Policyholder Surplus ($ Billions) Reinsurer PHS fell 20% from 1998 -2002. Capacity today similar to 1998. Same story globally. Source: A. M. Best; Insurance Information Institute

Capital Myth: US P/C Insurers Have $350 Billion to Pay Hurricane Claims • Personal

Capital Myth: US P/C Insurers Have $350 Billion to Pay Hurricane Claims • Personal lines policyholder surplus must be available to pay claims arising in all 50 states • None of the surplus was earned by FL homeowners operations Only 42% of surplus backs personal lines operations Commercial includes all lines except homeowners and private passenger auto. Source: Insurance Information Institute estimates based on A. M. Best Q. A. R Data.

Florida Needs to Attract Huge Amounts of Capital to Support Future Economic Growth

Florida Needs to Attract Huge Amounts of Capital to Support Future Economic Growth

Estimated New Insurance Capital Required to Support Growth in FL Homeownership, 2005 -2015* Florida

Estimated New Insurance Capital Required to Support Growth in FL Homeownership, 2005 -2015* Florida needs to attract about $500 million in fresh homeowners insurance capital in 2005 just to keep pace with demographic trends, rising to more than $1 billion per year by 2013. *Estimate assumes 1: 1 premium-to-surplus ratio and continuation of CAGR in direct premiums written of 11% (actual rate for period 1996 -2003). Source: Insurance Information Institute

Estimated Cumulative New Insurance Capital Required to Support Growth in FL Homeownership, 2005 -2015*

Estimated Cumulative New Insurance Capital Required to Support Growth in FL Homeownership, 2005 -2015* Florida may need to attract more than $9 billion in new capital over the next decade, assuming recent demographic trends continue. *Estimate assumes 1: 1 premium-to-surplus ratio and continuation of CAGR in direct premiums written of 11% (actual rate for period 1996 -2003). Source: Insurance Information Institute

Initial Season Capacity For the 2005 Hurricane Season (Projection for 2005 Estimate) Assumes Cash

Initial Season Capacity For the 2005 Hurricane Season (Projection for 2005 Estimate) Assumes Cash Balance is Reduced $3 billion 53 year return time* $1. 9 B Industry Note: The insurance industry aggregate retention is adjusted to grow with exposure growth. Co-Payments $21. 86 B Overall Industry Loss $15 Billion Capacity $11. 19 B Bonding Capacity (Includes Loss Adjustment Expense) Credit Ratings: Aa 3, AA-, AA $3. 81 B Projected 2005 Year-end Cash Balance Maximum Emergency Assessment -$1. 608 billion (only $750. 4 million needed) 2. 80% Note: Since the FHCF year-end cash balance will not grow due to losses in 2004, it remains at $15 billion. Had there been no losses the capacity would have grown to $16. 5 billion. $4. 96 B Industry Aggregate Retention Source: FHCF, Jan. 14, 2005 Not Drawn to scale. *Return time not adjusted for premium/exposure growth.

Florida’s Hurricane Residual Market Size, 1991 -2004* Citizens is not a true source of

Florida’s Hurricane Residual Market Size, 1991 -2004* Citizens is not a true source of “capacity” *Data for 1991 – 2001 are for the Florida Windstorm Underwriting Association; Beginning with 2002 Data are for Citizens Property Insurance Corporation. **As of December 31. Sources: Insurance Information Institute, CPIC, PIPSO

Potential Sources of Capital: All Have Limitations, Drawbacks • Private Insurers Ø 15 insurers

Potential Sources of Capital: All Have Limitations, Drawbacks • Private Insurers Ø 15 insurers to-date have required capital to support ongoing FL ops. Ø These commitments exceed $1 billion (FL OIR, 12/30/04) Ø Historically FL has provided poor returns on invested capital • Private Reinsurers Ø Need to aggregate manage exposure • Florida Hurricane Catastrophe Fund Ø No increase in 2005 because of 2004 losses • Capital Markets/Securitization: Only limited interest • Higher Policyholder Deductibles Ø Move to seasonal, 1% deductibles increases capital requirements • Bonding Authority • Assessments: • Tax Levies

CATASTROPHIC LOSS: A National Perspective IMPACTS ON INSURER UNDERWRITING PERFORMANCE

CATASTROPHIC LOSS: A National Perspective IMPACTS ON INSURER UNDERWRITING PERFORMANCE

P/C Net Income After Taxes 1991 -2004* ($ Millions) 4 Hurricanes Sept. 11 Andrew

P/C Net Income After Taxes 1991 -2004* ($ Millions) 4 Hurricanes Sept. 11 Andrew Northridge Lowest CAT losses in 15 years *First 9 months 2004 Sources: A. M. Best, ISO, Insurance Information Institute.

ROE: P/C vs. All Industries 1987– 2004 E* 2004 ROE excl. hurricanes Sept. 11

ROE: P/C vs. All Industries 1987– 2004 E* 2004 ROE excl. hurricanes Sept. 11 Hugo Lowest CAT losses in 15 years Andrew Northridge *2004 p/c estimate based on first 9 months data. Source: Insurance Information Institute; Fortune 2004 ROE reduced due to hurricanes

P/C Industry Combined Ratio 2001 = 115. 7 2003 = 100. 1 2004 1

P/C Industry Combined Ratio 2001 = 115. 7 2003 = 100. 1 2004 1 st Half = 94. 4 2004 E = 98 The combined ratio is the ratio losses & associated expenses paid relative to premiums earned Sources: A. M. Best; ISO, III

$ Billions Underwriting Gain (Loss) 1975 -2004 E Source: A. M. Best, Insurance Information

$ Billions Underwriting Gain (Loss) 1975 -2004 E Source: A. M. Best, Insurance Information Institute

Combined Ratio: Reinsurers Reinsurer results are greatly affected by catastrophe activity Andrew Sept. 11

Combined Ratio: Reinsurers Reinsurer results are greatly affected by catastrophe activity Andrew Sept. 11 Northridge Few CATs Source: A. M. Best, ISO, Reinsurance Association of America, Insurance Information Institute

Homeowners Insurance Combined Ratio Hurricane Andrew produced record homeowners losses even in national results

Homeowners Insurance Combined Ratio Hurricane Andrew produced record homeowners losses even in national results Average 1990 to 2003= 115 Insurers have paid out an average of $1. 15 in losses for every dollar earned in premiums over the past 13 years Sources: A. M. Best; III

RNW for Major P/C Lines, 1992 -2001 Average CAT losses contribute to low (negative

RNW for Major P/C Lines, 1992 -2001 Average CAT losses contribute to low (negative profitability of homeowners insurance) Source: NAIC; Insurance Information Institute

CATASTROPHIC LOSS: A National Perspective IMPACTS ON INSURER PROFITABILITY

CATASTROPHIC LOSS: A National Perspective IMPACTS ON INSURER PROFITABILITY

Homeowners Insurance: Rates of Return on Net Worth Homeowners insurance is an extremely volatile

Homeowners Insurance: Rates of Return on Net Worth Homeowners insurance is an extremely volatile line of insurance Averages: 1990 to 2002 HO Insurance = -3. 05%* Andrew Source: NAIC, Insurance Information Institute * Average is 1. 22% if excluding 1992 (year of Hurricanes Andrew and Iniki. 4 Hurricanes

Homeowners Insurance: Rate of Return on Net Worth vs. Fortune 500 Averages: 1990 to

Homeowners Insurance: Rate of Return on Net Worth vs. Fortune 500 Averages: 1990 to 2002 HO Insurance = -3. 05%* Fortune 500 = 12. 64% Source: NAIC, Insurance Information Institute * Average is 1. 22% if excluding 1992 (year of Hurricanes Andrew and Iniki.

Homeowners Insurance: Rates of Return on Net Worth vs. P/C Insurance All Lines Homeowners

Homeowners Insurance: Rates of Return on Net Worth vs. P/C Insurance All Lines Homeowners insurance consistently underperforms the p/c insurance generally 1990 -2004 E Homeowners: -1. 7% All P/C Lines: +7. 5% Source: NAIC, Insurance Information Institute * Average is 1. 22% if excluding 1992 (year of Hurricanes Andrew and Iniki.

Rates of Return on Net Worth for Homeowners Ins: US vs. Florida (add 1990

Rates of Return on Net Worth for Homeowners Ins: US vs. Florida (add 1990 -92) Averages: 1993 to 2003 E US HO Insurance = +2. 85% Source: NAIC; 2003 figure is Insurance Information Institute estimate.

DISASTER DECLARATIONS & DISASTER AID: Florida’s Dependence on Federal Aid is Not Sustainable

DISASTER DECLARATIONS & DISASTER AID: Florida’s Dependence on Federal Aid is Not Sustainable

Major Disaster Declarations By Year, 1977 -2004 Declarations A total of 1, 079 major

Major Disaster Declarations By Year, 1977 -2004 Declarations A total of 1, 079 major disaster declarations have been issued since 1977 & the number is trending upward Source: Federal Emergency Management Agency (FEMA)

Top 10 Major Disaster Declaration Totals By State (1972 - 2004) Total Number Source:

Top 10 Major Disaster Declaration Totals By State (1972 - 2004) Total Number Source: Federal Emergency Management Agency (FEMA) Since 1972, Florida has experienced more major disasters than all but 2 states

FEMA Disaster Expenditures* (1990 -2004 E) $ Billions 2004’s hurricanes pushed federal disaster assistance

FEMA Disaster Expenditures* (1990 -2004 E) $ Billions 2004’s hurricanes pushed federal disaster assistance payments to new records in 2004 *Funding represents total FEMA expenditures obligated from the President’s Disaster Relief Fund for declared disasters, emergencies and fire suppression grants as of February 29, 2000. Expenditures include costs for FEMA’s disaster assistance programs, hazard mitigation, mission assignments, contractual services and administrative expenses. Figures are stated in current dollars and do not include funding provided separately by other participating federal agencies. Source: FEMA; 2004 figure is III estimate.

HOMEOWNERS INSURANCE: AN IMPORTANT BUSINESS FOR INSURERS AND THE ECONOMY

HOMEOWNERS INSURANCE: AN IMPORTANT BUSINESS FOR INSURERS AND THE ECONOMY

Property Insurance Direct Premiums Written* Revenue Growth Drivers: • Record new home construction •

Property Insurance Direct Premiums Written* Revenue Growth Drivers: • Record new home construction • Trend toward larger, more expensive homes • Rates • Little commercial exposure gain since 20002002 but now picking up. *Includes Fire, Allied Lines, Multi Peril Crop, Federal Flood, Farm & Homeowners Multi-Peril, CMP-non liability, Inland Marine, Earthquake & Burglary & Theft Source: Best’s Aggregates & Averages - Property/Casualty; Insurance Information Institute

Homeowners as a Percentage of the P/C Industry Homeowners insurance accounted for 11% or

Homeowners as a Percentage of the P/C Industry Homeowners insurance accounted for 11% or $48. 7 B in DPW in 2003 $91. 7 B $64. 9 B $237. 3 B Source: A. M. Best; Insurance Information Institute $48. 7 B

Billions Homeowners Insurance: Direct Premiums Written $22. 9 B $43. 0 B +14. 4%

Billions Homeowners Insurance: Direct Premiums Written $22. 9 B $43. 0 B +14. 4% $37. 6 B $34. 6 B +8. 7% $32. 5 B $30. 9 B +5. 2% +6. 5% $29. 1 B $27. 4 B +6. 2% +5. 8% $26. 0 B +5. 4% $24. 4 B +6. 6% Source: A. M. Best; Insurance Information Institute $48. 7 B +13. 3%

Billions FLORIDA: HO Insurance Market: Direct Premiums Written Source: A. M. Best; Insurance Information

Billions FLORIDA: HO Insurance Market: Direct Premiums Written Source: A. M. Best; Insurance Information Institute

Homeownership Rates in Florida, 1990 to 2003 Homeownership is at an all-time record high

Homeownership Rates in Florida, 1990 to 2003 Homeownership is at an all-time record high in Florida and is higher than the US overall. Florida will need to attract large amounts of insurance capacity to fuel continued growth in homeownership Source: U. S. Census Bureau

Top States: Change in Number of Housing Units, 2000 -2003 Number of new housing

Top States: Change in Number of Housing Units, 2000 -2003 Number of new housing units in FL was second highest in US, 2000 -03 • Strong demographics is fueling home construction in FL. • Combined with the permanent risk of hurricanes, FL must ensure this vital growth engine remains healthy by making certain that homeowners insurance is a viable business going forward. Source: US Census Bureau

Homeownership Rates in Major Florida Metro Areas, 1995 vs. 2003 Homeownership rates for most

Homeownership Rates in Major Florida Metro Areas, 1995 vs. 2003 Homeownership rates for most FL metro areas are at or near record highs Source: U. S. Census Bureau

Insurance Information Institute On-Line If you would like a copy of this presentation, please

Insurance Information Institute On-Line If you would like a copy of this presentation, please give me your business card with e-mail address