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 Note Source: Property Claims Service/IS Source: Property claims, busi and personal property *Excludes $4B-$6b offshore $100 $120 $20 $40 $60 $80 $0 : 2001 figureincludes $20.3B for 9/ 89 $7.5 but theworst hasyettocome catastrophe lossesin theUS, 2006 wasawelcome respite. U.S. Insured Catastrophe Losses* 90 $2.7 2005 wasbyfarthe worst 91 $4.7 year everforinsured 92 $22.9 energy losses from Hu losses energy 93 $5.5 ness interruption and auto clai O; Insurance Information Institute Information O; Insurance 94 $16.9 11 losses reported through 12/3 95 $8.3 96 $7.4 $ Billions 97 $2.6 rricanes Katrina & Rita. 98 $10.1 99 $8.3 00 $4.6 . ms. Non-prop/BI losses =$12.2B. 01 $26.5 1/01. Includes only business 1/01. Includes only coming soon CAT yearis 02 $5.9 $100 Billion 03 $12.9 04 $27.5 05 $61.9 06 $9.2 07Q1 $1.2 20?? $100.0 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 worst-case $65.3 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 $140 1900 Adjusted for Inflation, Growth in Coastal $120 Properties, Real Growth in Property Values* $100 $80 Hurricanes causing $50B+ $ Billions$60 $40 in economic losses will become more frequently $20 (Billions of 2004 Dollars) $0 $19.2 $23.9 Camille (1969, MS) *Includes damage form wind and storm su $30.3 Source: Roger Pielke and Christ Donna (1960, FL) $34.3 Lake Okeechobee (1928, FL) $35.0 Great Miami Storm 9 (1944) $50.2 Hurricane opher Landsea, December 2005; New England (1938) $50.8 rge but generally ex $129.7 Number 2 (1915, TX) $53.1 $80.0 cludes inland flooding. Andrew (1992, FL) Insurance Info. Institute. Galveston (1900, TX) Katrina (2005, LA)* Number 6 (1926, FL) 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. 9,000 Top 10 Deadliest Hurricanes to 8,000 7,000 6,000 5,000 Hurricane KatrinaStrike was the the US: deadliest 1851-2006 4,000 hurricane to strike the US since 1928 3,000 2,000 1,000 Fear of death is no longer a 0 372 factor in decision process LA-Grande Isle (1909) 390 400 408 *Could be as high ****Associated Press total as Sources: NOAA; InsuranceAudrey-SW Information LA,TX Institute. (1957) LA-Last Island (1856) as 12,000 **Could be as high as 3,000 FL Keys (1935) 700 1,250 of Dec. 11, 2005. *****Mi GA/SC (1881) 1,323 LA-Cheniere (1893)***** 8,000 1,500 Katrina (SE LA, MS)**** 2,500 dpoint of 1,100-1,400 range. SC/GA Sea Islands (1893)*** ***Midpoint of 1, SE FL/L. Okechobee (1928)** Galvaston (1900)* 000 – 2,000 range 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)).