October 8, The Challenges of Dealing With Natural Catastrophes: Florida Larry D. Johnson, FCAS AVP, Allstate Insurance

October 8, Roll Credits! Dr. Jack Nicholson, Senior FHCF Officer, Florida State Board of Administration Rade Musulin, ACAS, Vice President, Florida Farm Bureau Insurance Companies Apologies: no handouts, but file will be posted on CAS website Disclaimer: Opinions are the author’s. No Farm Bureau Actuaries or SBA Staff were knowingly harmed in the making of this presentation

October 8, Southeast Florida Population Growth During the 1990’s SE Florida population grew by 1 million (25%)

October 8, The Challenge of Growing Exposure In 1992 Hurricane Andrew inflicted $16.7 billion insured loss, $12 billion residential Population has grown by 25% and per-unit insured values have grown 4% per year, both with no signs of abating Another Andrew at Homestead would now inflict $27 insured loss, $21 billion residential Another Andrew north of Homestead would cost $40 to $80 billion Are we keeping up or are we falling behind in this race?

October 8, Approaches to Dealing With Catastrophe Risk Spread over time Spread over broader populations Reduce or mitigate

October 8, Spread Over Time PrivateGovernment Adequate Rates (risk adjusted?) Use of Models, Risk-Based Class Plans FL Commission on Hurricane Modeling Debt FinancingDebt financing, cost reflected in rates FHCF, JUA, FWUA, Citizens w/assessments Tax TreatmentTax-Deferred Proposals Tax-Deferred Proposals (?)

October 8, Spread Over Broader Populations PrivateGovernment Reinsurance, CAT Bonds, Swaps, etc. Used ExtensivelyFHCF, Natural CAT & Terrorism “Reins.” Proposals Debt financing through broad assessments Collect assessmentsFHCF Market RestructuringPartial/Total withdrawals, new entrants, coverage changes JUA, FWUA, Citizens, Guarantee Funds Tax TreatmentN/AFHCF, Citizens Tax- Exempt Status Disaster ReliefN/AFederal & state funded; spread over tax base

October 8, Reduce or Mitigate Loss PrivateGovernment Building CodesAdvocateEnact, Regulate and Inspect Land Use CodesAdvocate???? Incentives for enforcing codes BCEGS Incentives for mitigation Credits, Discounts§ Mandates for Credits, Discounts

October 8, Spread Over Time – Adequate Rates FL Commission on Hurricane Loss Projection Modeling Established 1995; 11 statutorily defined voting members representing government, consumers and insurance industry, including experts in actuarial, insurance, finance, meteorology, engineering, statistical and computer sciences. Model audits done by Professional Team consisting of experts in same fields Standards: General (7), Meteorological (9), Engineering (7), Actuarial (17), Computer (8), Statistical (5), 53 total 1 st models accepted 1996; in 2002 AIR, ARA, RMS, & EQECAT accepted Standards added or enhanced this year: Actuarial, for modeling building mitigation features. Statistical, for modeling uncertainty and sensitivity analysis

October 8, Spread Over Time – Adequate Rates FWUA (now Citizens) risk based class plan Implemented July 1, 2000, with 93% rate increase spread over 2000, 2001 & 2002 Base class is frame, unbraced gable, pre-1972 building codes, not mitigated Primary class factors: construction, secondary water resistance, sheathing attachment, shuttering, hurricane straps, roof type, gable bracing Secondary class factors: roof covering, absence of garage-car ports-porches-2 nd story-sliding glass doors, single vs. double garage doors, bracing of garage doors Hurricane premium discounts of up to 85%

October 8, Reduce or Mitigate Losses Statewide Building Codes Effective , statewide code replaces local codes Defines 3 zones: High Velocity Hurricane Zone (>140mph), Wind-Born Debris Zone (>120mph), all other areas Specifies enhancements appropriate to zone for roof strength & covering, roof to wall strength, foundation attachment, opening protection

October 8, Reduce or Mitigate Losses § Mandated Discounts and Credits On , rate filings must include discounts or credits for major features in new code In addition to major features, must provide rating for roof shape, construction, reinforced doors & garages, gable end bracing By , all insurers must file for discounts and credits Departments of Insurance and Community Affairs sponsored public domain study performed by ARA DOI recognizes “…study results as a basis for deriving actuarially reasonable differential…”; may rely on other studies “…as long as filings include comparable documentation…” Must specify how construction features will be verified Cannot offset hypothetical premium loss, but can temper discounts by 50%

October 8, Spread Over Time – Debt Financing Florida Hurricane Catastrophe Fund Created 1993, began operation 1994 Controlled by State Board of Administration; Governor, Treasurer & Comptroller are Trustees Trustees advised by 9 member Advisory Council Day-to-day operations managed by Senior FHCF Officer and SBA staff All active personal and commercial residential property insurers must purchase coverage, including JUA, FWUA, Citizens Coverage options 90%, 75%, 40% above retention; 2002 average 88% Projected 2002 premiums $468 million; effective “rate-on- line” 4.255%

October 8, Historical FHCF Capacity

October 8, $3.837 B Industry Aggregate Retention $6.104 B Bonding Capacity (Includes Loss Adjustment Expense) 45 year return time Emergency Assessment Base of $768 million 2.21% $ B Overall Industry Loss $4.896 B Projected 2002 Year-end Cash Balance $11 Billion Capacity (only $425 million needed) $1.489 B Industry Co-Payments Not Drawn to scale. FHCF Initial Season Capacity – 2002

October 8, Spread Over Time – Debt Financing Florida Hurricane Catastrophe Fund 1995 – tax exempt status for the fund; up to 4% assessment on all P&C premium 1996 – public benefits corporation created to be able to issue tax-exempt debt; obtained credit ratings: A1/A+ (S&P, Moody’s, and Fitch) 1998 – began using more than 1 model for ratemaking; use all commission-approved models, 4 for statewide rates, 3 for territories 1999 – creation of subsequent season capacity; additional 2% assessment 2002 – Addition of additional living expense (ALE), collateral protection insurance, and rapid cash buildup factor

October 8, Projected Growth FHCF Capacity & Assessments* (Current FHCF Statute with $11 billion limit, 4% initial year, 6% aggregate) * Based on various actuarial assumptions. Subject to interest rate volatility. Assumes no losses. These numbers are for illustration purposes and should not be relied on since the underlying assumptions are subject to change. Millions

October 8, “Balanced Growth” FHCF Capacity & Assessments* (Proposed FHCF Legislation 5% initial year, 8% aggregate, $11 billion limit adjusted for exposure growth starting 2003) * Based on various actuarial assumptions. Subject to interest rate volatility. Assumes no losses. These numbers are for illustration purposes and should not be relied on since the underlying assumptions are subject to change. Millions

October 8, Spread Over Broader Populations – Market Restructure In 1992 about 50% of Southeast Florida Personal Property Insurance written by “top two” companies Now “top two” companies write less than 20% A significant number of insurers withdrew Other companies non-renewed policies 1993 Moratorium Law, extended annually, limited annual non-renewals

October 8, Spread Over Broader Populations – Market Restructure Expansion of FWUA territories Explosion of JUA to over 900,000 policies JUA, FWUA “take out” programs New insurers enter, focused on writing property insurance JUA, FWUA policies decline; JUA to 60,000 Moratorium law expires in 2000 More insurers withdraw JUA, FWUA begin to grow again; JUA to over 120,000

October 8, Citizens Property Insurance Corporation Senate Bill 1418 Effective , Florida Property JUA and Florida Windpool (FWUA) were merged into Citizens Tax-exempt state insurer (court ruling on JUA) State Treasurer appoints the Citizens Board, the CEO, senior managers, and Technical Advisory Group All contractual obligations of JUA and FWUA transferred to Citizens 3 accounts: Personal & Commercial from JUA, and “High Risk” from FWUA The JUA and FWUA law on funding deficits through assessments applies to Citizens, but base expanded to include Surplus Lines premiums

October 8, JUA received $230 refund on Prior Fed Income Tax in September

October 8,

October 8, Citizens Property Insurance Corporation JUA rating law applies to Citizens: rates must be “actuarially sound” and no lower than the highest of top 20 by county “High Risk” wind rates capped at 110% of final FWUA rates until Citizens initially to sell same policies as JUA and FWUA Board will develop plan to sell “Quota Share” policies, for FWUA areas Under “Quota Share”, Citizens insures 50% or 90% of wind peril with private insurer insuring 50% or 10%. Participation is voluntary for insurers (but see 2007, 2012 rules). Consumers subject to “Takeout” or “Keep Out” have the right to continue with current agent, if agent is licensed under approved risk apportionment plan

October 8, Citizens Property Insurance Corporation Board may determine that market is healthy in a FWUA “High Risk” area and remove wind-only policy If by the 100-year Citizens PML is not 25% lower (~$2.6B) than JUA-FWUA the Board shall reduce “High Risk” area eligible for wind- only policy to produce 25% reduction If by the 100-year Citizens PML is not 50% lower (~$4B) than JUA-FWUA the Board shall reduce “High Risk” area to only property 1,000 feet inland from Intracoastal Waterway

October 8, Citizens Property Insurance Corporation 40% of arbitrated FWUA rates eliminated (as “unnecessary” with tax-exempt status) The “High Risk” area squeeze in 2007 and 2012: where will these risks go? The JUA is 100% 2002 than at November 2000, and FWUA is 3% 2002, total projected 100-year PML is $5 billion for FWUA and $1.8 billion for JUA Existing private capacity may not keep pace with growth in Southeast Florida, especially with these rules

October 8, Florida Cabinet Reorganization State Treasurer and Comptroller positions replaced by Chief Financial Officer CFO responsible for treasury, accounting, auditing, risk management, administration, legal services, etc CFO also responsible for insurer rehabilitation, insurance fraud, ins. agent licensing, ins. consumer advocate, workers compensation Creates Financial Services Commission, consisting of the Governor and Cabinet The Commission oversees the Office of Insurance Regulation and Office of Financial Institutions and Securities Regulation

October 8, Florida Cabinet Reorganization SBA Trustees – Governor, CFO, Attorney General The Office of Insurance Regulation: regulation of insurance companies; licensing, rates, forms, solvency, claims, adjusters, market conduct, etc Office of Financial Institutions and Securities Regulation: banks, credit unions, finance companies, and the securities industry. The Directors are appointed by the Commission; both Governor and CFO must concur Impact on insurance regulation unknown, but Insurance Director no longer elected

October 8, Is Capacity Keeping up With Exposure? Growth in Southeast Florida 6% per year Florida Hurricane Catastrophe Fund: $11B+$9.6B coverage, plus low cost Private reinsurance increased, but current pricing may not be economic at today’s primary rates Stronger Building Codes and incentives Massive restructure of market brings in more capital But… companies still non-renewing, withdrawing JUA-FWUA-Citizens exposure is growing again Modeling estimates assume no mold exposure Safe to say capacity not keeping up