Challenges in Delivering the Promise Insurance Consumer Affairs Exchange October 4, 2005 Gary Kerney, AIC, RPA Property Claim Services

Catastrophes: Their Impact on Insurers Presentation OutlinePresentation Outline The Role of PCSThe Role of PCS Impact of Recent Hurricanes on InsurersImpact of Recent Hurricanes on Insurers Issues Affecting Claims HandlingIssues Affecting Claims Handling Expectations of the Recovery ProcessExpectations of the Recovery Process

PCS Overview Formation traced back to 1921Formation traced back to 1921 Serves over 1000 primary carriers and reinsurers globallyServes over 1000 primary carriers and reinsurers globally Industry’s source for insured catastrophe loss informationIndustry’s source for insured catastrophe loss information Extensive staff expertiseExtensive staff expertise

PCS Overview Catastrophe DefinitionCatastrophe Definition  An event causing $25 million or more of insured property damage and affecting a significant number of policyholders and insurers

Catastrophe Estimating Preliminary Estimate – 7 to 10 DaysPreliminary Estimate – 7 to 10 Days Resurvey EstimateResurvey Estimate If preliminary estimate is over $250 MillionIf preliminary estimate is over $250 Million Or, unusual circumstances warrant close monitoringOr, unusual circumstances warrant close monitoring PCS resurveys and reports every 60 daysPCS resurveys and reports every 60 days Final EstimateFinal Estimate No new claims, most closed, confidence in reservesNo new claims, most closed, confidence in reserves PCS always uses the term “Estimate”PCS always uses the term “Estimate”

Property Claim Services Estimate Confirmation Hurricane Hugo Hurricane Hugo SC = $2.66 Billion vs. PCS = $2.55 BillionSC = $2.66 Billion vs. PCS = $2.55 Billion Difference of 4.3%Difference of 4.3% Loma Prieta Earthquake Loma Prieta Earthquake CA = $902 Million vs. PCS = $960 MillionCA = $902 Million vs. PCS = $960 Million Difference of 6.5%Difference of 6.5% Hurricane Andrew Hurricane Andrew FL = $ Billion vs. PCS = $15 BillionFL = $ Billion vs. PCS = $15 Billion Difference of.1%Difference of.1% Northridge Earthquake Northridge Earthquake CA = $12.3 Billion vs. PCS = $12.5 BillionCA = $12.3 Billion vs. PCS = $12.5 Billion Difference of 1.6%Difference of 1.6%

Estimate Distinctions Florida Hurricanes Florida OIRFlorida OIR $21.2 billion$21.2 billion 1.6 million claims1.6 million claims $21.2 B$21.2 B - $1.7 for deductibles- $1.7 for deductibles - $1.0 for LAE- $1.0 for LAE $18.5 billion total$18.5 billion total PCS $19.0 billion claims (+3%)

2004 Catastrophe Loss 1995 to 2004 Comparison YearEstimated Insured DamageFrequency 1995$8,325,000, $7,375,000, $2,600,000, $10,070,000, $8,341,000, $4,570,000, $26,548,500, $5,850,000, $12,885,000, $27,490,000,00022 Total $114,054,500,000276

Were the hurricanes as bad as it can get for claims? Request to AIR to model the 1938 HurricaneRequest to AIR to model the 1938 Hurricane Parameters well definedParameters well defined Impact Verified across 13 states from Virginia to MaineImpact Verified across 13 states from Virginia to Maine Total number of risks – 41.2 millionTotal number of risks – 41.2 million Estimated loss at $25 billionEstimated loss at $25 billion

This could be the worst scenario!

New View from Cat Models The use of catastrophe models is changingThe use of catastrophe models is changing Dollar LossDollar Loss Number of ClaimsNumber of Claims Frequency – not just severityFrequency – not just severity And not only frequency of hurricanes but events occurring in sequence, e.g. hurricane and earthquake (Hugo and Loma Prieta, Andrew and Iniki, Northridge and six winter storms.And not only frequency of hurricanes but events occurring in sequence, e.g. hurricane and earthquake (Hugo and Loma Prieta, Andrew and Iniki, Northridge and six winter storms.

Hurricane Impact Charley$7.5 BillionCharley$7.5 Billion Gaston$65 MillionGaston$65 Million Frances$4.6 BillionFrances$4.6 Billion Ivan$7.1 BillionIvan$7.1 Billion Jeanne$3.7 BillionJeanne$3.7 Billion Dennis$1.1 BillionDennis$1.1 Billion KatrinaKatrina OpheliaOphelia RitaRita

Hurricane Impact Since 1949:Since 1949: 1,439 Catastrophe Events1,439 Catastrophe Events Cost Insurers $201.3 Billion (nominal)Cost Insurers $201.3 Billion (nominal) 81 Hurricanes (5%)81 Hurricanes (5%) Cost Insurers $64.2 Billion (nominal)Cost Insurers $64.2 Billion (nominal) Or, 1/3 of the insured loss from hurricanesOr, 1/3 of the insured loss from hurricanes

Issues Affecting Claims Handling Evacuations in 2004 but not in 2005Evacuations in 2004 but not in 2005 Widespread and long term power outages.Widespread and long term power outages. Weeks to restoreWeeks to restore Hotel room shortage – largest evacuation ever and many could not go home.Hotel room shortage – largest evacuation ever and many could not go home. Adjusters need to drive long distances.Adjusters need to drive long distances. My hotel in Jackson, MSMy hotel in Jackson, MS Gas shortage – long lines and long time.Gas shortage – long lines and long time. Contractor issues will arise again in 2005.Contractor issues will arise again in 2005.

Issues Affecting Claims Handling Determine claims as wind v. waterDetermine claims as wind v. water Inspection of propertiesInspection of properties Attribute loss to one peril or the otherAttribute loss to one peril or the other Lawsuits already filedLawsuits already filed Florida - “One good thing – the losses were all in the same place.”Florida - “One good thing – the losses were all in the same place.” Adjuster assignments in particular.Adjuster assignments in particular. Customer service.Customer service. Reduced overhead.Reduced overhead. Improved supervision.Improved supervision. Not in 2005 – NC, FL, AL, MS, LA, TX, TN, GANot in 2005 – NC, FL, AL, MS, LA, TX, TN, GA