Insurance & Coastal Risk in Florida
An Economic Analysis
Florida Hurricane Catastrophe Fund 7th Annual Participating Insurers Workshop Orlando, FL
June 7, 2007
Robert P. Hartwig, Ph.D., CPCU, President & Chief Economist Insurance Information Institute ♦ 110 William Street ♦ New York, NY 10038 Tel: (212) 346-5520 ♦ Fax: (212) 732-1916 ♦ [email protected] ♦ www.iii.org Presentation Outline
• Review of Florida Hurricane Risk: An Insurance Industry Perspective • Florida Exposure Analysis ¾ How Bad is It? ¾ Could it Get Any Worse? • Are Florida’s Development Patterns Rational? ¾ Examination of Stakeholder Incentives • How Insurers Signal What Should be Built & Where ¾ Private vs. Government-run Insurers • Role of Risk Perception • What Works, What Doesn’t • Overview of a National Catastrophe Plan • State-Run Plans • Recommendations Review of Florida Hurricane Risk:
An Insurance Industry Perspective U.S. Insured Catastrophe Losses*
$ Billions $120 $100 Billion 2006 was a welcome respite. CAT year is coming soon $100.0 $100 2005 was by far the worst $80 year ever for insured
catastrophe losses in the US, $61.9 $60 but the worst has yet to come. $40 $27.5 $26.5 $22.9 $16.9
$20 $12.9 $10.1 $9.2 $8.3 $8.3 $7.5 $7.4 $5.9 $5.5 $4.7 $4.6 $2.7 $2.6 $0 $1.2 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 20?? *Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. 07Q1 Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B. Source: Property Claims Service/ISO; Insurance Information Institute Landfalling Hurricanes: 1900-2006 FL Landfalls are Common
A hurricane strikes FL every other year on average—CAT 3+ every 4 years 200 183 1.7 hurricanes make landfall each year on average
150 38% of all hurricane 37% of all FL landfalls occur in FL landfalls are CAT 3+ 100 70
50 26
0 All Landfalling: FL Landfalling FL CAT 3+ 1900-2006 Landfalling Source: HURDAT database; Insurance Information Institute. Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2005)
$45 Seven of the 10 most expensive $40.6 $40 hurricanes in US history $35 occurred in the 14 months from $30 Aug. 2004 – Oct. 2005: $25 Nine of the 10 affected Florida! $21.6 $20 $ Billions $ $15 Storms affecting Florida in yellow. $10.3 $10 $6.6 $7.4 $7.7 $4.8 $5.0 $5 $3.5 $3.8 $0 Georges Jeanne Frances Rita Hugo Ivan Charley Wilma Andrew Katrina (1998) (2004) (2004) (2005) (1989) (2004) (2004) (2005) (1992) (2005)
Sources: ISO/PCS; Insurance Information Institute. Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss, 1986-2005¹
5 Wind/Hail/Flood Civil Disorders Water Damage 2.8% 0.1% 6 0.4% Fire Tornadoes2 Earthquakes4 2.3% Utility Disruption 24.5% 6.7% 0.1% Insured disaster losses Winter Storms 7.8% totaled $289.1 billion from 1984-2005 (in 2005 dollars). Terrorism Tropical systems accounted 7.7% for nearly half of all CAT losses from 1986-2005, up from 27.1% from 1984-2003.
All Tropical Cyclones3 47.5% 1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2005 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III. 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. Source: Insurance Services Office (ISO).. Insured Losses from Top 10 Hurricanes Since 1990 & Katrina Adjusted for Inflation, Growth in Coastal Properties, Real Growth in Property Values & Increased Property Insurance Coverage
(Billions of 2005 Dollars) $70 Plurality of $65.3 worst-case The p/c insurance industry scenarios involve $60 will likely experience a $20B+ Florida $50 event approximately every 10- $40.0 $40 12 years, on average—mostly associated with hurricanes $31.3 $30 $ Billions $ $20.8 $21.1 $20 $14.5 $12.4 $12.6 $13.1 $10.1 $11.0 $10
$0 Number 9 Hazel Number 4 Number 2 Number 4 Bestsy Number 2 Number 1 Andrew Katrina Number 6 (1909, (1954, (1938, (1919, (1928, (1965, (1915, (1900, (1992, (2005, (1926, FL) FL) NC) NY) FL) FL) LA) TX) TX) FL) LA)*
*ISO/PCS estimate as of October 10, 2005. Source: Hurricane Katrina: Analysis of the Impact on the Insurance Industry, Tillinghast, October 2005; Insurance Info. Institute. Hurricane Damage from Top 10 Hurricanes Since 1900 Adjusted for Inflation, Growth in Coastal Properties, Real Growth in Property Values*
(Billions of 2004 Dollars) $140 Great Miami Hurricane $129.7 $120 Hurricanes causing $50B+ $100 in economic losses will $80.0 $80 become more frequently $60 $50.2 $50.8 $53.1 $ Billions $ $40 $30.3 $34.3 $35.0 $19.2 $23.9 $20 $0
) ) 44) X L )* 19 T F A ( L 1960, FL) 9 92, (1915, (19 005, orm 2 nna ( t 2 w o S er amille (1969, MS)D C New England (1938)umb Andre mber 6 (1926, FL) N Katrina ( u Galveston (1900, TX) N
Lake Okeechobee (1928, FL)
*Includes damage form wind and storm surge but generally excludes inland flooding. Source: Roger Pielke and Christopher Landsea, December 2005; Insurance Info. Institute. Florida Homeowners Insurance Market Share (As of 12/31/06)
State Farm 18.1%
FL Citizens 16.3% Allstate 6.6%
Tower Hill 4.3% Universal P&C 4.2% While State Farm USAA 4.0% leads in premium, Nationwide 3.7% Citizens leads in Liberty Mutual 2.8% exposure ARX Holding Corp. 2.7%
Universal Ins. Co. Grp. 2.3% All Other 35.0%
0% 5% 10% 15% 20% 25% 30% 35% 40% *Computed based in direct premiums written (DPW). Actual exposure to hurricane loss may differ due to reinsurance purchased and location of risk. Source: Fitch Ratings, Hurricane Season 2007: A Desk Reference for Investors, June 1, 2007. Florida Residential Insurance Admitted Market Breakdown 2006 FL-Only Unaffiliated Cos Other 30% 10%
Risk is highly concentrated in Florida in Citizens and FL-only Citizens companies 30%
PUPs* 30% *PUPs are Florida-only subsidiaries of companies with multi-state or national operations. Source: Citizens Property Insurance Corp. Florida Property Insurance Market Breakdown (as of 12/31/05) Residential Commercial
Surplus Admitted 3% 40% Admitted 97%
Most commercial market Surplus risks covered in surplus lines market. Implies 60% regulators need to allow more flexibility for residential insurers.
Source: Florida Citizens Property Insurance Corp.; Insurance Info, Institute. Top 10 Deadliest Hurricanes to Strike the US: 1851-2006
9,000 Hurricane Katrina was the deadliest 8,000 8,000 7,000 hurricane to strike the US since 1928 6,000 5,000 Fear of death is no longer a 4,000 3,000 factor in decision process 2,500 2,000 1,250 1,323 1,500 1,000 372 390 400 408 700 0 ) ) * 9) 6 5) * ** )* 0 81) *** 8) 8 *** 900 (1957 (193 1 S) 1 X d (185 ( 893)** n ys 893)** , M 1 (192 la 1 s ( ( A bee ton ( Ke e L o GA/SC h FL SE land alvas nier ( a Is G ey-SW LA,T he ina e Okec LA-Grande Isle (19 LA-Last Is -C r S . udr at A LA K /GA E FL/L SC S *Could be as high as 12,000 **Could be as high as 3,000 ***Midpoint of 1,000 – 2,000 range ****Associated Press total as of Dec. 11, 2005. *****Midpoint of 1,100-1,400 range. Sources: NOAA; Insurance Information Institute. Total NFIP Claim Payments by State (Top 10) Jan 1, 1978 - Dec. 2004
$ Millions Until Katrina, Florida nd $3,000 ranked 2 in terms of $2,702.0 total flood claims $2,500 $2,226.7 payments.
$2,000 $1,727.3
$1,500
$1,000 $687.2 $598.2 $473.4 $422.6 $419.9 $384.4 $500 $377.8 $276.6
$0 TX FL LA NC NJ PA SC MO VA AL MS
Source: FEMA, National Flood Insurance Program (NFIP) Outlook for 2007 Hurricane Season: 85% Worse Than Average
Average* 2005 2007F Named Storms 9.6 28 17 Named Storm Days 49.1 115.5 85 Hurricanes 5.9 14 9 Hurricane Days 24.5 47.5 40 Intense Hurricanes 2.3 7 5 Intense Hurricane Days 5 7 11 Accumulated Cyclone Energy 96.2 NA 170 Net Tropical Cyclone Activity 100% 275% 185%
*Average over the period 1950-2000. Source: Philip Klotzbach and Dr. William Gray, Colorado State University, May 31, 2007. Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2007
Average* 2007F Entire US Coast 52% 74% US East Coast Including 31% 50% Florida Peninsula Gulf Coast from FL Panhandle 30% 49% to Brownsville, TX ALSO…Above-Average Major Hurricane Landfall Risk in Caribbean for 2007
*Average over the period 1950-2000. Source: Philip Klotzbach and Dr. William Gray, Colorado State University, May 31, 2007. Number of Major (Category 3, 4, 5) Hurricanes Striking the US by Decade
1930s – mid-1960s: Mid-1990s – 2030s? Period of Intense Tropical New Period of Intense Cyclone Activity Tropical Cyclone Activity
10 9 8 8 8 4 6 6 6 5 5 6 4 Tropical cyclone activity in the Already as many mid-1990s entered the active major storms in phase of the “multi-decadal signal” 2000-2005 as in all that could last into the 2030s of the 1990s
1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s
*Figure for 2000s is extrapolated based on data for 2000-2005 (6 major storms: Charley, Ivan, Jeanne (2004) & Katrina, Rita, Wilma (2005)). Source: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm. Florida Hurricane Exposure Analysis:
How Bad Is It? (Bad) Could It Get Any Worse? (Yes) Total Value of Insured Coastal Exposure (2004, $ Billions)
Florida $1,937.3 New York $1,901.6 Texas $740.0 Massachusetts $662.4 New Jersey $505.8 Connecticut $404.9 Louisiana $209.3 S. Carolina $148.8 Virginia $129.7 Florida has nearly $2 Maine $117.2 North Carolina $105.3 trillion in insured Alabama $75.9 Georgia $73.0 coastal exposure Delaware $46.4 New Hampshire $45.6 Mississippi $44.7 Rhode Island $43.8 Maryland $12.1
$0 $500 $1,000 $1,500 $2,000 $2,500 Source: AIR Worldwide Insured Coastal Exposure as a % of Statewide Insured Exposure (2004, $ Billions)
Florida 79.3% Connecticut 63.1% New York 60.9% Maine 57.9% Massachusetts 54.2% Louisiana 37.9% New Jersey 33.6% Delaware 33.2% Rhode Island 28.0% S. Carolina 25.6% Texas 25.6% NH 23.3% Nearly 80% of Mississippi 13.5% Alabama 12.0% Florida’s total insured Virginia 11.4% exposure is coastal NC 8.9% Georgia 5.9% Maryland 1.4% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% *III list Source: AIR Worldwide Value of Insured Residential Coastal Exposure (2004, $ Billions)
Florida $942.5 New York $512.1 Massachusetts $306.6 Texas $302.2 New Jersey $247.4 Connecticut $205.5 Louisiana $88.0 S. Carolina $65.1 Maine $64.5 Florida has nearly $1 Virginia $60.0 North Carolina $60.0 trillion in insured Alabama $36.5 Georgia $29.7 residential coastal exposure Delaware $26.6 Rhode Island $25.9 New $24.8 Mississippi $20.9 Maryland $5.4
$0 $200 $400 $600 $800 $1,000 Source: AIR Value of Insured Commercial Coastal Exposure (2004, $ Billions)
New York $1,389.6 Florida $994.8 Texas $437.8 Massachusetts $355.8 New Jersey $258.4 Connecticut $199.4 Louisiana $121.3 S. Carolina $83.7 Virginia $69.7 Florida has nearly $ trillion Maine $52.6 North Carolina $45.3 in insured residential Georgia $43.3 Alabama $39.4 commercial exposure Mississippi $23.8 New Hampshire $20.9 Delaware $19.9 Rhode Island $17.9 Maryland $6.7
$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 Source: AIR Florida for Sale: 24/7/365
Florida oceanfront real estate is advertised for sale throughout the country year round, like these ads from the New York Times and Wall Street Journal Florida for Sale: 24/7/365
Ft. Lauderdale West Palm Miami Beach New Condo Construction in South Miami Beach, 2007-2009
• Number of New Developments: 15 • Number of Individual Units: 2,111 • Avg. Price of Cheapest Unit: $940,333 • Avg. Price of Most Expensive Unit: $6,460,000 • Range: $395,000 - $16,000,000 • Overall Average Price per Unit: $3,700,167* • Aggregate Property Value: At least $6 Billion *Based on average of high/low value for each of the 15 developments Source: Insurance Information Institute from www.miamicondolifestyle.com accessed April 5, 2007. Great Miami Hurricane of 1926: Hurricane Damage Adjusted for Inflation, Growth in Coastal Properties, Real Growth in Property Values*
$600 (Billions of 2004 Dollars) Repeat of Great $500 $500 Miami Hurricane of $400 1926 could cause $500B in damage by Track of $300 1926 storm 2020 given current
$ Billions $ demographic trends $200 $130 $100 $73 $0.76 $0 1926 1998 2005 2020
*Includes damage form wind and storm surge but generally excludes inland flooding. Source: Roger Pielke and Christopher Landsea, December 2005; Insurance Info. Institute. FINANCIAL STRENGTH & RATINGS Industry Has Weathered the Storms Well Reasons for US P/C Insurer Impairments, 1969-2005 2003-2005 1969-2005
Affiliate Deficient Reinsurance Deficient Sig. Change Problems Loss Failure Loss in Business 8.6% Reserves/In- 3.5% Reserves/In- 4.6% adequate Misc. adequate Catastrophe Pricing Pricing 9.2% Losses 38.2% 62.8% 8.6%
Investment Alleged Problems* Fraud 7.3% 11.4% Affiliate Deficient Problems Rapid reserves, 5.6% Growth CAT losses 8.6% Catastrophe are more Losses important 6.5% Alleged Rapid factors in Fraud Growth recent years 8.6% 16.5% *Includes overstatement of assets. Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005; P/C Insurer Impairments, 1969-2006 The number of impairments varies significantly over the p/c insurance cycle, with peaks occurring well into hard markets
70 60 58
60 54 50 49 49 49 49 47 50 41 36 35 34 40 34 31 31 29 30 19 19 18 18 16 15 15 20 15 14 13 13 13 12 12 12 11 9 9 9 8
10 7
0 69 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 Source: A.M. Best; Insurance Information Institute P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2006
Impairment Combined Ratio after Div rates are highly P/C Impairment Frequency correlated 120 underwriting 2 performance 1.8 115 1.6 1.4 110 1.2 105 1 0.8 Combined Ratio
100 Impairment Rate 0.6 0.4 95 2006 impairment rate was 0.43%, or 1-in-233 0.2 90 companies, half the 0.86% average since 1969 0 69 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
Source: A.M. Best; Insurance Information Institute The Insurance Economics of Florida Hurricanes
Drivers of Private Insurer Behavior in Florida FLORIDA HURRICANES & UNDERWRITING PERFORMANCE: Homeowners Insurers Have Lost Billions in Florida Underwriting Gain (Loss) in Florida Homeowners Insurance, 1992-2006E* $4 $2.75 $1.88 $1.28 $1.43 $1.47 $2 $0.86 $1.08 $1.23 $1.16 $0.69 $0.43 $0 ($0.21) ($2)
($4) Florida’s homeowners ($3.73) $ Billions ($6) insurance market produces
($8) small profits in most years and enormous losses in others ($10) ($10.60) ($10.39) ($12) 92 93 94 95 96 97 98 99 00 01 02 03 04 05E 06F
*2005 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2005 residential windstorm losses of $7.35B. 2006 estimate from Ins. Info. Inst. Cumulative Underwriting Gain (Loss) in Florida Homeowners Insurance, 1992-2006E* $2 Regulator under US law $0.7 has duty to allow rates $0 that are “fair,” “not ($2) excessive” and “not unduly discriminatory.” -$1.2 ($4) Reality is that regulators -$2.7 in CAT-prone states -$3.8 ($6) suppress rates. -$5.2
$ Billions ($8) -$6.5 -$7.7 ($10) -$8.8 -$10.1-$9.7 -$9.7 ($12) -$10.6 It took insurers 11 years (1993-2003) -$10.7 -$10.8 to erase the UW loss associated with ($14) Andrew, but the 4 hurricanes of 2004 erased the prior 7 years of profits & -$13.4 2005 deepened the hole. ($16) 92 93 94 95 96 97 98 99 00 01 02 03 04 05E 06F *2005 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2005 residential windstorm losses of $7.35B. 2006 estimate from Ins. Info. Inst. Rates of Return on Net Worth for Homeowners Ins: US vs. Florida 1993 - 2003 40% 35.4% 31.5% 35.7% 33.6% 28.6% 31.3% 29.3% 29.0% 30% 23.1%
20% Profits were earned most years after Andrew but before 2004 2.5% 12.4% 13.1% 9.7% 10% 3.6% 3.8% 1.4% -1.7% 5.4% 0% 5.4%
-7.2% -10% -4.2% Averages: 1993 to 2003 -20% -16.1% US HO Insurance = +2.8%; FL= +25.0% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Source: NAIC Rates of Return on Net Worth for Homeowners Ins: US vs. Florida 1990 – 2006E US Florida 100% -2.8%36.0% 0% -53.4% -100% -54.3% Averages: 1990 to 2006E -200% US HO Insurance = -0.9% -183.3% -300% FL HO Average = -36.5% -400%
-500% 4 Hurricanes -600%
-700% -714.9% Andrew Wilma, Dennis, Katrina -800% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06E
Source: NAIC; 200/6 US and FL estimates from the Insurance Information Institute. Major Residual Market Plan Estimated Deficits 2004/2005 (Millions of Dollars)
Florida Hurricane 2004 2005 Mississippi Windstorm Catastrophe Fund Underwriting $0 (FHCF) Florida Citizens Louisiana Citizens Association (MWUA) -$200 -$400 -$600 -$516 -$800 -$595 * -$1,000 -$1,200 -$954 -$1,400 Hurricane Katrina pushed all of the -$1,600 -$1,425 residual market property plans in -$1,800 affected states into deficits for 2005, following an already record -$1,770 -$2,000 hurricane loss year in 2004
* MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in Federal Aid. Source: Insurance Information Institute CAPITAL & CAPACITY CONSIDERATIONS:
INSURERS MUST PUT LARGE AMOUNTS OF CAPITAL AT RISK TO OFFER INSURANCE IN FLORIDA
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$1,600 $1,400 $1,200 $1,000 ($ Millions) ($ *Estimate assumes 1:1 premiu (actual rate for period 1996-2003). Source: Insurance Information Institute
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7 Florida may need to attract more than $9 billion in new capital over the next decade, assuming recent demographic trends continue.
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$9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000
$10,000 ($ Millions) ($ *Estimate assumes 1:1 premiu (actual rate for period 1996-2003). Source: Insurance Information Institute Are Florida’s Development Patterns Rational? Excessive Catastrophe Exposure: Outcome of Economically & Politically Rational Decision Process? • Property Owners ¾ Make economically rational decision to live in disaster-prone areas ¾ Low cost of living, low real estate prices & rapid appreciation, low/no income tax, low property tax, rapid job growth ¾ Government-run insurers (e.g., CPIC, NFIP) provide implicit subsidies by selling insurance at below-market prices with few underwriting restrictions ¾ Government aid, tax deductions, litigation recovery for uninsured losses ¾ No fear of death and injury • Local Zoning/Permitting Authorities ¾ Allowing development is economically & politically rational & fiscally sound ¾ Residential construction creates jobs, attracts wealth, increases tax receipts, stimulates commercial construction & permanent jobs, develops infrastructure ¾ Increases local representation in state legislature & political influence ¾ Property and infrastructure damage costs shifted to others (state and federal taxpayers, policyholders in unaffected areas) • Developers ¾ Coastal development is a high-margin business ¾ Financial interest reduced to zero after sale Source: Insurance Information Institute. Excessive Catastrophe Exposure: Outcome of Economically & Politically Rational Decision Process? • State Legislators ¾ Loathe to pass laws negatively impacting development in home districts ¾ Local development benefits local economy and enhances political influence ¾ Rapid development lessens need for higher income and property taxes ¾ Can redistribute CAT losses to unaffected policyholders and taxpayers ¾ Can suppress insurance prices via state insurance regulator, suppress pricing and weaken underwriting standards in state-run insurer & redistribute losses • Congressional Delegation ¾ Home state development increases influence in Washington y Political representation, share of federal expenditures ¾ Loathe to pass laws harming development in home state/district ¾ Tax law promotes homeownership and actually produces supplemental benefits for property owners in disaster-prone areas ¾ Large amounts of unbudgeted disaster aid easily authorized ¾ Tax burden largely borne by those outside CAT zone & those with no representation (children & unborn) • President ¾ Presidential disaster declarations and associated aid are increasing ¾ Political benefits to making declarations and distributing large amounts of aid ¾ Direct impact on favorability ratings & election outcomes ¾ Losses can be distributed to other areas and the unrepresented Source: Insurance Information Institute. How Insurers Signal What Should be Built and Where Government-Run Insurers Lead to Poor Land Use/Design Decisions
• Government-run insurers (markets of last resort) serve as a vital safety valve after major market disruptions, but also serve as an enabler of unwise development… • Government-run property insurers wash away market-based signals about relative risk • Consequence is runaway development in disaster-prone areas • Government-run insurers: ¾ Generally fail to charge actuarially sound rates ¾ Have weak underwriting standards ¾ Are thinly capitalized ¾ Can assess losses to policyholders other than their own ¾ Vulnerable to political pressure • Inadequate premiums, insufficient capital and weak underwriting mean that most government plans, from Citizens Property Insurance Corporation to the National Flood Insurance Program operate with frequent deficits Negative Outcomes from Flaws in Government-Run Insurers
• True risk associated with building on a particular piece of property is obscured • Subsidies are generated leading to market distortions/inequities: ¾ Many thousands of homes likely would not have been built (or built differently) if property owner obligated to pay actuarially sound rates ¾ CPIC assessments from Wilma will require grandmothers living in trailer parks on fixed incomes in Gainesville to subsidize million dollar homes in Marco Island via assessment (surcharges). • Serial rebuilding in disaster-prone areas is the norm • Property owners come to assume that the government rate is the “fair” rate and object to moves to actuarially sound rates. • Government-run insurer can’t control its own exposure ¾ Legislature mandates that CPIC offer coverage in most cases if no private insurer will offer coverage due to high risk, near certainty of destruction ¾ No restrictions on value of property, so high-valued properties represent disproportionate share of potential loss • Taxpayer Burden: NFIP borrowed $20B+ in 2005 Insurance-in-Force: CPIC vs. Voluntary (Private) Insurers
That’s why operating in the red is unavoidable
Private insurers accept relatively little wind risk in South FL Risk Perception
Is Disaster Risk Factored into the Buy/Build/Move Decision? Average Annual Population Growth Rates of Atlantic States, 1960-1980 & 1980-2003
0.9% 1960-1980 Connecticut 0.48% 1980-2003 1.5% Delaware 1.31% 3.2% Florida 2.33% 1.6% Georgia 1.93% 0.5% Massachusetts 0.48% 1.4% Maryland 1.11% 0.7% Maine 0.62% 1.2% North Carolina 1.49% 1.1% United States 1.0%
0% 1% 1% 2% 2% 3% 3% 4%
Source: US Census Bureau. Average Annual Population Growth Rates of Atlantic States, 1960-1980 & 1980-2003
3.2% Florida 2.33% 2.0% New Hampshire 1.40% 1960-1980 0.9% 1980-2003 New Jersey 0.66% 0.2% New York 0.37% 1.3% South Carolina 1.19% 0.5% Rhode Island 0.53% 1.4% Virginia 1.35% 1.1% United States 1.01%
0% 1% 1% 2% 2% 3% 3% 4% Source: US Census Bureau. Average Annual Population Growth Rates of Gulf Coast States, 1960-1980 & 1980-2003
1960-1980 0.8% Alabama 0.61% 1980-2003
3.2% Florida 2.33%
1.2% Louisiana 0.28%
0.7% Mississippi 0.56%
1.8% Texas 1.84%
1.1% United States 1.01%
0% 1% 1% 2% 2% 3% 3% 4%
Source: US Census Bureau. Average Annual Population Growth Rates of Florida Coastal Cities, 1990-2003
Cape Coral/Fort Myers 2.8% 2.74% Daytona 1.8% 1.43% 1990-2000 Jacksonville 1.9% 2000-2003 1.72% Miami/Ft. Lauderdale/Miami Beach 2.1% 1.36% Naples/Marco Island 5.0% 3.35% Orlando 3.0% 2.29% Pensacola 1.8% 1.01% Palm Bay/Melbourne 1.8% 1.53% Sarasota/Bradenton 1.9% 1.80% Tampa/St. Petersburg 1.5% 1.38%
Source: US Census Bureau. 0% 1% 2% 3% 4% 5% 6% 0 Source: Statistical Abstract of th
3.78% LF AM XUS TX MS LA FL AL 9.57%
1.21% 1980-1990 State Population GrowthRatesby Decade, GulfCoast, 1980-2003
28.40% e United States, US Census Bureau US Census e United States, 21.00%
6.41% 1990-2000 any GulfCoaststate the fastestgrowthof since 1980,driving 0.40% Florida hasposted its exposureto hurricane loss 5.73% 0.60% 2000-2003
2.08% 10.05% 1.26%
17.74% 20.50% 5.90%
9.71% 10.31% 9.52% Projected Percent Population Growth of Atlantic States, 2003-2030
Florida 52.2%
New Hampshire 24.5%
New Jersey 12.6% Florida is expected New York 1.5% to grow faster than any Atlantic Coast South Carolina 21.6% state through 2030, driving its exposure Rhode Island 6.9% to hurricane loss still higher Virginia 28.5%
United States 20.9%
0% 10% 20% 30% 40% 50% 60%
Source: US Census Bureau. Projected Percent Population Growth of Atlantic States, 2003-2030
Connecticut 5.8%
Delaware 21.4%
Florida 52.2%
Georgia 32.5% Florida is expected to grow faster than Massachusetts 8.6% any Atlantic Coast state through 2030, Maryland 24.3% driving its exposure to hurricane loss Maine 7.7% still higher North Carolina 37.5%
United States 20.9%
0% 10% 20% 30% 40% 50% 60%
Source: US Census Bureau. Projected Percent Population Growth of Gulf Coast States, 2003-2030
Alabama 8.0%
Florida 52.2%
6.6% Florida is expected to grow faster Louisiana than any Gulf Coast state through 2030, driving its exposure to hurricane loss still higher Mississippi 7.1%
Texas 41.0%
20.9% United States 0% 10% 20% 30% 40% 50% 60%
Source: US Census Bureau. Percent of Atlantic & Gulf Coast Populations Living in FL, 2003 and 2030
2003 2030 38.37% The proportion of Atlantic and Gulf coast population living in FL will 33.36% continue to swell in the decades ahead 23.88% 18.22%
0 Atlantic Coast Gulf Coast
Source: US Census Bureau What Works, What Doesn’t Successful Tools for Controlling Hurricane Exposure • Strengthened building codes • Stringent enforcement of building codes • Fortified home programs • Insurance rates based on sound actuarial principles (risk-based rates that are not government controlled); Works for commercial insurers • Disciplined underwriting • Removing impediments to capital flows • Incentives to adopt mitigation • Forcing communities to consider and take a larger stake in their catastrophe exposure
Source: Insurance Information Institute Unsuccessful Tools for Controlling Hurricane Exposure • Insurance rates that are not actuarially sound (i.e., don’t reflect true risk) • Political interference in rate process • Inadequate underwriting controls • Subsidies ¾Intra-state (policyholders/taxpayers) ¾US Taxpayer • Voluntary flood coverage • Litigation
Source: Insurance Information Institute Faux Pas & Fatal Flaws in Florida’s Approach to Managing CAT Risk
FAUX PAS • Governor has unnecessarily, unjustifiably and counterproductively vilified private insurers and reinsurers ¾ Insurers want to find ways to cover the majority of hurricane-exposed property in FL and will do so if given the opportunity ¾ Insurers and capital markets can be partners in finding lasting and innovative solutions to Florida’s permanent hurricane problem • Changes to market are arbitrary, capricious and punitive and violate virtually all laws of modern economics, finance, statistics and actuarial science • Meteorological and actuarial reality have been forced to take a back seat to politics • Political risk to insurers now exceeds hurricane risk • Bottom Line: Residents of Florida are Now the Most Financially Exposed People on Earth to Catastrophic Risk Faux Pas & Fatal Flaws in Florida’s Approach to Managing CAT Risk FATAL FLAWS • Virtually no diversification ¾ Basically monoline, single state, single risk • No true spread of risk ¾ Citizens market share is concentrated in riskiest areas ¾ FHCF is Citizen’s sole reinsurer; FHCF doesn’t access retrocessional mkt. • Rates in Citizens not even remotely close to actuarially sound • Citizens & FHCF are too thinly capitalized • Losses are substantially funded via post-event assessment • Plants seeds of animosity between non-coastal & coastal dwellers (within state and with non-coastal states) ¾ Largest beneficiaries are residents of southeast coast • Plan will alienate business community (liability lines assessed) • Homeowners insurance has been converted into a regressive income and wealth transfer mechanism • May have harmed chances for Fed Natural Catastrophe Fund • Little done to address true risk of hurricanes Problem Issues • Local control of land use and permitting creates significant incentive problems ¾Benefits accrue locally while many costs can be redistributed to others via taxes, insurance and aid • Prospect of government aid reinforces unsound building and location decisions • States don’t want to raise taxes to pay for mitigation/prevention even if state is sole beneficiary ¾E.g., NO levees; Beach replenishment Source: Insurance Information Institute Pre- vs. Post-Event in FL for 2007 Hurricane Season
$90 Pre-Event Funding Post-Event Funding (Assessments & Bonds) $80.0B $80 There is a very significant $70 likelihood of major, multi- $60 year assessments in 2007 $55.0B $49.5B $50
$43.8B $54.2
Billions $40 $35.0B
$30 Total = $25.0B $37.4
$20.0 Billion $34.5 $20 $31.4 $24.1 $14.6 $10 $9.9 $10.1 $10.4 $10.9 $25.8 $17.6 $15.0 $0 $12.4 1-in-20 1-in-30 1-in-50 1-in-70 1-in-85 1-in-100 1-in-250 Notes: Pre-event funding includes funds available to Citizens, FHCF and private carriers plus contingent funding available through private reinsurance to pay claims in 2007. Post-event funding is on a present value basis and does not include financing costs. Probabilities are expressed as “odds of a single storm of this magnitude or greater happening in 2007.” Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07. Per Household Savings vs. Long- Term Costs of FL Legislation for 2007 Hurricane Season $16,000
$14,000 Direct Costs Indirect Costs $13,971 $12,000
$10,000 Savings dwarfed by $8,708 potential costs under $8,191 $6,116 $8,000 most scenarios $7,635 $6,031
Billions $6,000 $3,752 $3,497 $4,000 Total = $2,552 $3,219
$1,726 $2,528 $7,855 $2,000 $265 $1,066 $4,956
$721 $4,694 $4,416
$1,005 $1,486 $3,503 $0 Savings 1-in-20 1-in-30 1-in-50 1-in-70 1-in-85 1-in-100 1-in-250 Notes: Assumes average homeowners insurance premium of $1300 in 2007. Savings for 2007 reflects 24.3% savings on hurricane costs, assumed to be 63% of premium. Savings based on statewide OIR estimate. Actual savings may be less. Direct costs include assessments paid by policyholders on home and personal auto premiums. Indirect costs include assessments on commercial lines passed on to policyholders via higher prices. Amounts are in nominal dollars, or the total cost of borrowing including finance charges over the term of the bond. Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07. Average Annual Assessment per Household, 1-in-100 Year Event in 2007
The average Florida household will pay $8,699 over 30 years in assessments if a 1-in-100 year event strikes in 2007. Assessments could rise if additional storms hit in 2007 or beyond.
Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07. Savings vs. Costs by Region: Neither Equitable nor Proportionate
STATEWIDE AVERAGE Average Savings: $265 Cost of 1-in-30 Storm: $2,550 Cost is 10 times avg. savings ORLANDO TALLAHASSEE Average Savings: $30 Average Savings: $20 Cost of 1-in-30 Storm: $2,075 Cost of 1-in-30 Storm: $2,000 Cost is 69 times avg. savings Cost is 100 times avg. savings
TAMPA MIAMI Average Savings: $100 Average Savings: $1,120 Cost of 1-in-30 Storm: $2,300 Cost of 1-in-30 Storm: $3,375 Cost is 23 times avg. savings Cost is 3 times avg. savings
Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07. Overview of Plans for a National Catastrophe Insurance Plan NAIC’s Comprehensive National Catastrophe Plan • Proposes Layered Approach to Risk • Layer 1: Maximize resources of private insurance & reinsurance industry y Includes “All Perils” Policy y Encourage Mitigation y Create Meaningful, Forward-Looking Reserves • Layer 2: Establishes system of state catastrophe funds (like FHCF) • Layer 3: Federal Catastrophe Reinsurance Mechanism
Source: Insurance Information Institute Comprehensive National Catastrophe Plan Schematic
1:500 Event
National Catastrophe Contract Program
1:50 Event
State Regional Catastrophe Fund
State Attachment Personal Disaster Private Insurance Account
Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst. Objectives of NAIC’s Comprehensive National Catastrophe Plan • Should Promote Personal Responsibility Among Policyholders • Supports Reasonable Building Codes, Development Plans & Other Mitigation Tools • Maximize the Risk Bearing Capacity of the Private Markets • Should Provide Quantifiable Risk Management to the Federal Government
Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst. Legislation has been introduced and ideas espoused by ProtectingAmerica.org will likely get a more thorough airing in 2007/8 STATE RESIDUAL MARKETS Still Growing Despite a Quiet 2006 Florida Citizens Exposure to Loss (Billions of Dollars)
Exposure to loss in Florida $450 Citizens nearly doubled in 2006 408.8 $400 $350 $300
$250 $210.6 $195.5 $206.7 $200 $154.6 $150 $100 $50 $0 2002 2003 2004 2005 2006 Source: PIPSO; Insurance Information Institute Major Residual Market Plan Estimated Deficits 2004/2005 (Millions of Dollars)
Florida Hurricane 2004 2005 Mississippi Windstorm Catastrophe Fund Underwriting $0 (FHCF) Florida Citizens Louisiana Citizens Association (MWUA) -$200 -$400 -$600 -$516 -$800 -$595 * -$1,000 -$1,200 -$954 -$1,400 Hurricane Katrina pushed all of the -$1,600 -$1,425 residual market property plans in -$1,800 affected states into deficits for 2005, following an already record -$1,770 -$2,000 hurricane loss year in 2004
* MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in Federal Aid. Source: Insurance Information Institute Recommendations Recommendations for Controlling Hurricane Exposure • Raise public awareness of risk ¾ Mandatory risk disclosure in all residential real estate transactions ¾ Require signed waivers if decline flood coverage that also waive rights to any and all disaster aid, or ¾ Mandate flood coverage • Continue to strengthen & enforce of building codes • Allow markets to determine all property insurance rates ¾ Role of state focused on difficult-to-insure or income issues • Increase incentives to mitigate • Require state-run insurer to charge actuarially sound rates and limit high value exposure • Require communities/counties to a financial stake in their catastrophe exposure ¾ Reimburse disaster aid to state/federal government Insurance Information Institute On-Line
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