Catastrophes Insurable vs. Non-Insurable Catastrophes History of Insured Losses from Catastrophes Reasons for Growth in Catastrophe Exposure How Insurers Deal with Catastrophe Exposure What Is Being Done to Help Industry Cope with Catastrophes New Developments

Insurable vs. Non-Insurable Catastrophes Ideal Criteria for an Insurable Exposure 1 Large Number of Similar Exposure Units 2 Fortuitous Losses 3 Catastrophe Unlikely 4 Definite Losses 5 Determinable Probability Distribution 6 Economic Feasibility

What Makes a Loss Uninsurable? 1 Large Number of Similar Exposure Units If losses are concentrated in a particular area Earthquakes, Floods 2 Fortuitous Losses If location and timing of losses can be predicted Flooding downstream after upstream area affected Catastrophe Unlikely If potential loss could hurt financial condition of industry Tornadoes, riots can be covered War, nuclear disaster cannot be covered

History of Insured Losses from Catastrophes - 1

History of Insured Losses from Catastrophes - 2

History of Insured Losses from Catastrophes - 3 Significant change in size of catastrophes occurred starting in 1989 The ten largest insured losses have all occurred since 1989 Taking inflation into account, eight of the ten largest losses have occurred since 1989 Current estimates of possible losses New Madrid Fault Earthquake $116 billion California Earthquake $77 billion Florida Hurricane $76 billion Northeast Hurricane $21 billion

Reasons for Growth in Catastrophe Exposure Weather Pattern Change 1949-1989 Period of Unusually Good Weather (?) Recent Return to the Long Term Norm Population Growth in At Risk Areas for Hurricanes Southeastern seacoast Lowered Building Standards Lulled by Reduced Storm Activity Overwhelmed by Population Growth Mandates to Cover Earthquakes Impact of Catastrophe on Repair/Rebuilding Costs

How Insurers Deal with Catastrophe Exposure Reinsurance Managing Exposures Sophisticated catastrophe modeling Limiting concentration of exposures Monitoring by zip code Higher deductibles Premium Increases Withdrawals from Some Markets

What Is Being Done to Help Industry Cope with Catastrophes California Earthquake Authority Florida Hurricane Catastrophe Fund Hazard Mitigation Grant Program (Floods) Homeowners Insurance Availability Act (1999) Not enacted yet Would provide catastrophe reinsurance Tax Deferred Catastrophe Reserves Proposals under consideration in Congress

New Developments Securitization of Catastrophe Risk Catastrophe bonds Contingent surplus notes Exchange-traded catastrophe options Catastrophe equity puts