South Carolina Property Insurance Markets Issues, Concerns, Solutions Robert P. Hartwig, Ph.D., CPCU, President & Chief Economist Insurance Information Institute  110 William Street  New York, NY Tel: (212)  Fax: (212)   Insurance Information Institute South Carolina Media & Legislative Briefing April 2, 2007 DOWNLOAD AT

Insurers Share the Concern of SC Home & Business Owners PROPERTY OWNERS ECONOMIC CONCERNS The price of residential and commercial property insurance has risen rapidly in coastal SC since 2004 Insurance options for some homeowners have dwindled as some have scaled backed exposure to coastal zones At the same time property taxes are rising in many communities The run-up in real estate prices in some areas has dramatically increased the cost of owning a home Many homeowners adjustable rate mortgages are seeing their interest rate locks expire and are now paying higher interest rates on their mortgages Bottom Line The cost of owning property in South Carolina is rising and home & business owners feel economically squeezed

Any Solution Must Emerge from a Common Set of Facts FACTS ABOUT SOUTH CAROLINA PROPERTY MARKETS South Carolina has more than $150 billion in insured coastal exposure, more than three times that of Mississippi Coastal property exposure values are expected to increase rapidly over the next decade South Carolina’s coastal population is growing rapidly South Carolina (and all other Gulf/Atlantic states) will experience above- average hurricane activity for the next years South Carolina is vulnerable to major hurricanes, as Hurricane Hugo proved, the cost of which is nearly $7 billion in today’s dollars Improvements in building codes and mitigation technologies have been proven to substantially reduce wind damage from hurricanes The current method for financing hurricane-related losses results is an economic burden for some property owners, but at the same times leaves private and state-run insurers with large operating deficits Ultimately, risk will need to be the primary determinant of the price of insurance

Elements of a Shared Solution Arising from a Common Set of Facts TOWARD A LONG-TERM SOLUTION FOR S. CAROLINA’S INSURANCE Insurance in South Carolina’s coast areas needs to be more available and affordable Stronger homes are safer homes and stronger homes (and businesses) cost less to insurance, offer their owners a higher quality of life and are a key part of any solution Strengthening of building codes and mitigation must be encouraged Land use policies have a clear role to play in limiting future storm damage Stronger homes, increased use of mitigation technologies and smarter land use policies will lower insurance losses and costs for home/businesses owners State tax policy can be used to provide mitigation incentives Spread of risk on a global scale is important  Reinsurance, securitization (CAT bonds) can help achieve this objective Insurance capital should be encouraged to flow into SC’s insurance markets The price of insurance must eventually reflect the risk of that property  This will dramatically reduce the need for assessments, diversion of tax revenues or the need for the state to borrow heavily after a major hurricane

CATASTROPHIC LOSSES Catastrophic Losses in the US: Upward Trend is Certain

Most of US Population & Property Has Major CAT Exposure

U.S. Insured Catastrophe Losses* *Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. 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 $ Billions 2006 was a welcome respite was by far the worst year ever for insured catastrophe losses in the US, but the worst has yet to come. $100 Billion CAT year is coming soon Hugo

South Carolina Insured Catastrophe Losses, * *Not displayed for scale purposes: Hurricane Hugo losses of $3.72B (adjusted). Source: Property Claims Service/ISO; Insurance Information Institute. $ Millions, Adjusted to 2005 Dollars Since 1954, SC has sustained $5.73 billion insured CAT losses after adjusting for inflation ($3.81B before adjusting) Avg. annual losses since 1989 are larger

South Carolina Insured Catastrophe Losses, * Source: Property Claims Service/ISO; Insurance Information Institute $ Millions, Adjusted to 2005 Dollars Since 1954, SC has sustained $5.73 billion insured CAT losses after adjusting for inflation ($3.81B before adjusting) Average annual losses have been higher since 1989 Hugo

Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2005) Sources: ISO/PCS; Insurance Information Institute. Seven of the 10 most expensive hurricanes in US history occurred in the 14month period from August 2004 to October Hugo still ranks as the 6 th most expensive hurricane in US history

Number of Major (Category 3, 4, 5) Hurricanes Striking the US by Decade *Figure for 2000s is extrapolated based on data for (6 major storms: Charley, Ivan, Jeanne (2004) & Katrina, Rita, Wilma (2005)). Source: Tillinghast from National Hurricane Center: s – mid-1960s: Period of Intense Tropical Cyclone Activity Mid-1990s – 2030s? New Period of Intense Tropical Cyclone Activity Tropical cyclone activity in the mid-1990s entered the active phase of the “multi-decadal signal” that could last into the 2030s Already as many major storms in as in all of the 1990s

Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss, ¹ Source: Insurance Services Office (ISO).. 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 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. Insured disaster losses totaled $289.1 billion from (in 2005 dollars). Tropical systems accounted for nearly half of all CAT losses from , up from 27.1% from

SOUTH CAROLINA HURRICANE RISK Potential for a Loss Several Times Hugo Looms Large

Total Value of Insured Coastal Exposure (2004, $ Billions) Source: AIR Worldwide South Carolina had nearly $150 billion in insured coastal exposure in 2004 (56% commercial, 44% residential)

Insured Coastal Exposure as a % of Statewide Insured Exposure (2004, $ Billions) *III list Source: AIR Worldwide Who’s to Blame* 1.State & local zoning, land use and building code officials 2.State & local legislators 3.State-run property insurers, pools & plans 4.Washington, DC 5.Property owners

Value of Insured Commercial Coastal Exposure (2004, $ Billions) Source: AIR South Carolina had nearly $84 billion in insured coastal commercial exposure in 2004 (56% of all exposure) & exceeding NC by 85%

Value of Insured Residential Coastal Exposure (2004, $ Billions) Source: AIR South Carolina had more than $65 billion in insured coastal residential exposure in 2004 (56% of all exposure)

County Map of South Carolina Source: NOAA Coastal Services Center, Insurance Info. Institute.

Increase in Population of Coastal/Near Coastal Counties in South Carolina (% Change, ) Sources: Charleston Metro Chamber of Commerce, SC Statistical Abstract, US Census Bureau. Several SC coastal counties have experienced very strong population growth since Home values have also skyrocketed—up 120% in Charleston, Berkeley & Dorchester counties between

Historical Hurricane Strikes in Charleston County, SC, Source: NOAA Coastal Services Center, Insurance Info. Institute. Population in Charleston County has nearly doubled since the 1950s

Historical Hurricane Strikes in Colleton County, SC, Source: NOAA Coastal Services Center, Insurance Info. Institute. Population in Colleton County appears to be increasing in recent decades

Historical Hurricane Strikes in Georgetown County, SC, Source: NOAA Coastal Services Center, Insurance Info. Institute. Population in Georgetown County has nearly doubled since the 1950s

Historical Hurricane Strikes in Horry County, SC, Source: NOAA Coastal Services Center, Insurance Info. Institute. Population in Horry County has doubled since the 1980s and tripled since the 1950s

The 2007 Hurricane Season: Above Average Activity Expected

Outlook for 2007 Hurricane Season: 85% Worse Than Average Average* F Named Storms Named Storm Days Hurricanes Hurricane Days Intense Hurricanes2.375 Intense Hurricane Days5711 Accumulated Cyclone Energy96.2NA170 Net Tropical Cyclone Activity100%275%185% *Average over the period Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 3, 2007.

Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2007 Average*2007F Entire US Coast52%74% US East Coast Including Florida Peninsula 31%50% Gulf Coast from FL Panhandle to Brownsville, TX 30%49% ALSO…Above-Average Major Hurricane Landfall Risk in Caribbean for 2007 *Average over the period Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 3, 2007.

Landfall Probabilities by Region & Intensity, 2007* Landfall probabilities and intensities up everywhere *Figures in parentheses represent averages over the past 100 years. Source: Dr. William Gray, Colorado State University, December 8, (79%)(68%)(52%)(84%)(97%) (59%) (42%)(30%)(60%)(83%)(50%)(44%)(31%)(61%)(81%)

What Role Should the Federal Government Play in Insuring Against Natural Disaster Risks?

South Carolina’s Coastal Plan Spreading recognition that FL actions were fiscally reckless and did nothing to reduce state’s vulnerability SOUTH CAROLINA: Gov. Mark Sanford announced a coastal insurance relief plan March 22, referring to FL’s actions as a “knee-jerk” reaction SC legislation uses tax incentives to reduce risk to property and lower the cost of insurance  Tax deductions for catastrophe savings accounts  Tax credits for disaster mitigation  Tax credits for lower income property owners paying more than 5% of their income in insurance premiums  Tax-free savings accounts for homeowners who carry very large deductibles or create accounts to “self insure”  Tax credits for insurers writing full coverage for coastal dwellers  Tax credits for homeowners who buy supplies to retrofit homes making them more hurricane resistant  Require insurers to offer discounts to people who mitigate Sources: Insurance Information Institute from 3/22/07 press release, Office of Governor Mark Sanford.

Major Residual Market Plan Estimated Deficits 2004/2005 (Millions of Dollars) * MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in Federal Aid. Source: Insurance Information Institute Hurricane Katrina pushed all of the residual market property plans in affected states into deficits for 2005, following an already record hurricane loss year in 2004

Florida Citizens Exposure to Loss (Billions of Dollars) Source: PIPSO; Insurance Information Institute Exposure to loss in Florida Citizens nearly doubled in 2006

NAIC’s Comprehensive National Catastrophe Plan Proposes Layered Approach to Risk Layer 1: Maximize resources of private insurance & reinsurance industry  Includes “All Perils” Residential Policy  Encourage Mitigation  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 Personal Disaster Account Private Insurance State Regional Catastrophe Fund National Catastrophe Contract Program Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst. State Attachment 1:50 Event 1:500 Event

Legislation has been introduced and ideas espoused by ProtectingAmerica.org will likely get a more thorough airing in 2007/8

INSURER PROFITABILITY: SOUTH CAROLINA Selling Home Insurance in Coastal Areas is Challenging

Underwriting Gain (Loss) in SC Homeowners Insurance, Source: A.M. Best; Insurance Information Institute. $ Millions South Carolina’s homeowners insurance market is volatile and prone to mega-scale losses. The average rate of return for home insurers is -15.4% from

Cumulative Underwriting Gain (Loss) in SC Homeowners Insurance, Source: A.M. Best; Insurance Information Institute. $ Millions On a cumulative basis, insurers remained in the red in the SC homeowners insurance market 16 years after Hurricane Hugo struck in It is likely that insurers finally came close to break even in 2006.

The Facts About Homeowner Insurer Profits and Losses in SC During the period from 1985 through 2005, home insurers in SC paid $324 million more in claims than they received in premiums  This $324 million underwriting loss remains even after 5 consecutive profitable years ( )  It is likely that home insurers in 2006 came close to the breakeven point for the 22 year period after including 2006 profits.  If there are no storms in 2007, homeowners insurers will be in the black on a cumulative basis for the first time in more than 20 years SC Remains a Difficult Proposition for Most Home Insurers in Terms of Return  The average annual rate of return on SC homeowners insurance was -15.4% from

WHERE YOUR PREMIUM DOLLAR GOES Bad CAT Year vs. Low CAT Year

Premiums Selling Expenses Taxes, Licenses & Fees General Operating Expenses Invested Assets (premiums invested until needed to pay claims Claims Payments/Losses Company Profit/Loss Reserve Additions/ Releases Net Worth (Policyholder Surplus) Source: American Insurance Association, Insurance Information Institute.

Where the SC Premium Dollar Comes From & Where it Goes: 1989 (Hugo) *Includes temporary living expenses. Source: Insurance Information Institute from A.M. Best data. Revenue Sources Total Revenue = $1051 Payments Total Payout = $5548 In a bad year, insurers may pay out 5+ times what they earn in premiums and investments

Where the SC Premium Dollar Comes From & Where it Goes: 2004 *Includes temporary living expenses. Source: Insurance Information Institute from NAIC Report on Profitability by Line by State, Revenue Sources Total Revenue = $1039 Payments Total Payout = $850 In a good year, an insurer might earn $200-$300 for each $1000 received in premium, including investment gains

Share of Losses Paid by Private Reinsurers, by Disaster* *Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute. Reinsurance is playing an increasingly important role in the financing of mega- CATs; Reins. Costs are skyrocketing

P/C INSURER PROFITABILITY National Perspective

ROE: US P/C vs. All Industries 1987–2008E * P/C insurer ROEs are I.I.I. estimates. Source: Insurance Information Institute; Fortune Andrew Northridge Hugo Lowest CAT losses in 15 years Sept Hurricanes Katrina, Rita, Wilma P/C profitability is cyclical, volatile and vulnerable

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2008F * P/C insurer ROEs are I.I.I. estimates. Source: Insurance Information Institute; ISO, A.M. Best. 1975: 2.4% 1977:19.0%1987:17.3% 1997:11.6% 2006E:14.0% 1984: 1.8% 1992: 4.5% 2001: -1.2% 10 Years 9 Years

Industry Profitability Benefits Insurance Consumers Profits compensate shareholders for the assets they put at risk and encourages new capital to enter Profitable companies can access capital markets under favorable terms after mega-CATs or if market conditions are poor (e.g., post-9/11); Others will fail, are dissolved or acquired Preferred treatment by reinsurers Profits lead directly to increased capacity Profits build contingent capacity for mega-CATs Profitable companies have higher financial strength and credit ratings

Key Messages on Profitability All of the profits earned in 2004 and 2005 and most of the profits in 2006 were earned in states and from types of insurance unaffected by the hurricanes 2006’s respite in hurricane activity provides insurers with the ability to rebuilding their claims paying resources By law, the rates charged for insurance are based exclusively on past and expected losses in that state. Profits in other states or from other types of insurance cannot be used to subsidize losses in the SC homeowners insurance market. Likewise, losses in other states cannot be subsidized by South Carolinians

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