Overview of Florida Hurricane Insurance Market Economics Florida Joint Select Committee on Hurricane Insurance Tallahassee, FL January 19, 2005 Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY Tel: (212)  Fax: (212)  

Presentation Outline Hurricane Season of 2004  Statistical Update Historical Catastrophe Losses in Florida: A Global Concern Florida Hurricanes: Impact on Insurer Underwriting Performance Florida Hurricanes: Impact on Profitability Capital & Capacity Concerns and Limitations  The need to attract more capacity to support economic growth in FL Influence of Florida & Disaster Losses on US P/C Insurance Industry Disaster Declarations: Florida’s Dependence on Federal Aid Homes & Homeowners Insurance: Vital to FL’s Economy

HURRICANE SEASON OF 2004 One for the Record Books

U.S. Insured Catastrophe Losses ($ Billions) *2004 figure is as of September 30, 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. Source: Property Claims Service/ISO; Insurance Information Institute $ Billions 2004 was the second worst year ever for natural disaster losses in the US after adjusting for inflation. About 85% of those losses originated in Florida.

Losses from Hurricanes of 2004 Source: ISO/PCS; Insurance Information Institute Estimated insured losses from the hurricanes of 2004 = $20.485B exceed the $15.5B in losses from Hurricane Andrew ($20.3B in $2003) Four of the Top 10 hurricanes in US history occurred in 2004

Most of the Claims from the 4 Hurricanes Originated in FL Total = 385,000 Source: PCS/ISO Total = 552,000 Total = 600,000 Total = 640,000 Total Claims = million Florida Only = Mill (78%)

Most Claim Dollars Paid Are Going to FL Policyholders Billions Total = $3.2 Billion Source: PCS/ISO Total = $4.4 Billion Total = $6.0 Billion Total = $6.8 Billion Total Insured Losses = $20.485B Florida Only = 17.5B (85%)

Personal Property Losses Accounted for Largest Share Damage from 2004 Hurricanes* Source: ISO/PCS; Insurance Information Institute. Charley Ivan Frances Jeanne TOTAL *Breakdowns based on FL losses, which accounted for 85% of losses for all affected states.

Insurers Have Responded to the Challenge Claim Closure Rates

Proportion of Claims Settled from 2004 Hurricanes (as of Dec. 30) Source: Florida Office of Insurance Regulation About 86% of the 1.7 million claims filed in Florida were settled by year’s end, running well-ahead of the pace set following Hurricane Andrew. Insurers are still receiving 7,000 to 9,000 new claims per week.

HISTORICAL PERSPECTIVE Florida Property Insurance Markets: Unparalleled Risk

Top 10 Insured Losses Worldwide, ($2003) *Hurricanes Ivan and Charley in 2004 dollars. Sources: ISO/PCS; Swiss Re, “Natural Catastrophes and Man-Made Disasters in 2003,” Sigma, no. 1, 2004; except Sept. 11 estimate from Hartwig, Robert P., 2004 Mid-Year Property/Casualty Insurance Update, Insurance Information Institute. Figure is stated in 2001 dollars. Three of the 10 most expensive disasters is world history occurred in Florida: Hurricanes Andrew, Charley & Ivan

Top 10 Insured Property Losses in US ($2003)* *Hurricanes Charley, Frances, Ivan and Jeanne stated in 2004 dollars. Note: 9/11 loss figure is for property claims only. Sources: ISO/PCS; Insurance Information Institute. Five of the 10 most expensive disasters is US history occurred in Florida: Hurricanes Andrew, Charley, Ivan, Frances & Jeanne

Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2003)* *Hurricanes Charley, Frances, Ivan and Jeanne stated in 2004 dollars. Note: 9/11 loss figure is for property claims only. Sources: ISO/PCS; Insurance Information Institute. Eight of the 10 most expensive hurricanes in US history affected Florida: Andrew, Charley, Ivan, Frances, Georges, Jeanne, Opal & Floyd

Average Annual Insured Losses* (Top 10 States, $ Millions) *Normalized losses adjusted for inflation, housing density, wealth and wind insurance coverage, based on historical data for 100-year period Source: Tillinghast-Towers Perrin Distribution of Annual Losses

Inflation-Adjusted U.S. Catastrophe Losses By Cause of Loss, ¹ Source: Insurance Services Office, Inc (ISO) 1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2003 dollars. Adjusted for inflation by ISO. 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.

How Exposed is Florida Today?

Insured Losses in Florida if Hurricane Andrew Hit Today Source: Best’s Review, June 2002 (EQECAT) Insured losses, $ Billions Each 0.1 degree equals about 7 miles A path of 0.3 degrees north of Andrew’s original location would create a direct hit on Miami Estimates are losses in today’s dollars after application of deductibles.

Estimated New Construction in Miami-Dade County, $3.4 Billion $16.1 Billion Source: Best’s Review, June 2002 (International Hurricane Center, Florida International University), Ins. Info. Institute Huge build-up in exposure in Florida since % residential 19% commercial

Estimated New Construction Miami-Dade County, Florida Source: Best’s Review, June 2002 (International Hurricane Center, Florida International University) South Miami-Dade was designated the county’s high-impact zone following Hurricane Andrew. Estimates include construction from 1992 through 2001 South Miami Dade New Residential Exposure (Construction)$3,095,273,681 New Commercial Exposure (Construction)$305,492,393 All Miami-Dade New Residential Exposure(Construction)$12,981,843,085 New Commercial Exposure(Construction)$3,069,654,106

Hurricanes Making Landfall During the 20 th Century *Normalized to adjusted for inflation, housing density, wealth and wind insurance coverage. Source: Tillinghast-Towers Perrin Frequency Cost*

FLORIDA HURRICANES & UNDERWRITING PERFORMANCE: Homeowners Insurers Have Lost Billions in Florida

Underwriting Gain (Loss) in Florida Homeowners Insurance, E* *2004 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2004 residential windstorm losses of $11.2B; 2003 figure is also from III estimates of loss and expense. $ Billions Florida’s homeowners insurance market produces small profits in most years and enormous losses in others

Cumulative Underwriting Gain (Loss) in Florida Homeowners Insurance, E* *2004 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2004 residential windstorm losses of $11.2B; 2003 figure is also from III estimates of loss and expense. $ Billions It took insurers 11 years ( ) to erase the UW loss associated with Andrew, but the 4 hurricanes of 2004 erased the past 7 years of profits

FLORIDA HURRICANES & PROFITABILITY: Selling Homeowners Insurance in Florida is Tremendously Unprofitable

Rates of Return on Net Worth for Homeowners Ins: US vs. Florida Averages: 1993 to 2003E US HO Insurance = +2.8%; FL= 23.3% Source: NAIC; 2003 US figure is Insurance Information Institute estimate. FL estimate based on average Florida homeowners RNW from Profits were earned most years after Andrew but before 2004

Rates of Return on Net Worth for Homeowners Ins: US vs. Florida Source: NAIC; 2003 US figure is Insurance Information Institute estimate. FL figure based on average Florida homeowners RNW from Averages: 1990 to 2004E US HO Insurance = -1.8% FL HO Average = -48.5% Andrew 4 Hurricanes

CAPITAL & CAPACITY CONSIDERATIONS: INSURERS MUST PUT LARGE AMOUNTS OF CAPITAL AT RISK TO OFFER INSURANCE IN FLORIDA

U.S. Policyholder Surplus: * Source: A.M. Best, ISO, Insurance Information Institute*As of 9/30/04. $ Billions Surplus (capacity) has been on a rollercoaster rise in the p/c insurance industry over the past 6 years “Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations $53.9 Billion Capacity TODAY is just 8.8% above its mid-1999 peak

US Reinsurers: Change in Policyholder Surplus ($ Billions) Source: A.M. Best; Insurance Information Institute Reinsurer PHS fell 20% from Capacity today similar to Same story globally.

Capital Myth: US P/C Insurers Have $350 Billion to Pay Hurricane Claims Commercial includes all lines except homeowners and private passenger auto. Source: Insurance Information Institute estimates based on A.M. Best Q.A.R Data. Only 42% of surplus backs personal lines operations Personal lines policyholder surplus must be available to pay claims arising in all 50 states None of the surplus was earned by FL homeowners operations

Florida Needs to Attract Huge Amounts of Capital to Support Future Economic Growth

Estimated New Insurance Capital Required to Support Growth in FL Homeownership, * *Estimate assumes 1:1 premium-to-surplus ratio and continuation of CAGR in direct premiums written of 11% (actual rate for period ). Source: Insurance Information Institute Florida needs to attract about $500 million in fresh homeowners insurance capital in 2005 just to keep pace with demographic trends, rising to more than $1 billion per year by 2013.

Estimated Cumulative New Insurance Capital Required to Support Growth in FL Homeownership, * *Estimate assumes 1:1 premium-to-surplus ratio and continuation of CAGR in direct premiums written of 11% (actual rate for period ). Source: Insurance Information Institute Florida may need to attract more than $9 billion in new capital over the next decade, assuming recent demographic trends continue.

$4.96 B Industry Aggregate Retention $11.19 B Bonding Capacity (Includes Loss Adjustment Expense) 53 year return time* Initial Season Capacity For the 2005 Hurricane Season (Projection for 2005 Estimate) Assumes Cash Balance is Reduced $3 billion Initial Season Capacity For the 2005 Hurricane Season (Projection for 2005 Estimate) Assumes Cash Balance is Reduced $3 billion Maximum Emergency Assessment -- $1.608 billion 2.80% $21.86 B Overall Industry Loss $3.81 B Projected 2005 Year-end Cash Balance $15 Billion Capacity (only $750.4 million needed) $1.9 B Industry Co-Payments Not Drawn to scale. Source: FHCF, Jan. 14, 2005*Return time not adjusted for premium/exposure growth. Note: Since the FHCF year-end cash balance will not grow due to losses in 2004, it remains at $15 billion. Had there been no losses the capacity would have grown to $16.5 billion. Note: The insurance industry aggregate retention is adjusted to grow with exposure growth. Credit Ratings: Aa3, AA-, AA

Florida’s Hurricane Residual Market Size, * *Data for 1991 – 2001 are for the Florida Windstorm Underwriting Association; Beginning with 2002 Data are for Citizens Property Insurance Corporation. **As of December 31.Sources: Insurance Information Institute, CPIC, PIPSO Citizens is not a true source of “capacity”

Potential Sources of Capital: All Have Limitations, Drawbacks Private Insurers  15 insurers to-date have required capital to support ongoing FL ops.  These commitments exceed $1 billion (FL OIR, 12/30/04)  Historically FL has provided poor returns on invested capital Private Reinsurers  Need to aggregate manage exposure Florida Hurricane Catastrophe Fund  No increase in 2005 because of 2004 losses Capital Markets/Securitization: Only limited interest Higher Policyholder Deductibles  Move to seasonal, 1% deductibles increases capital requirements Bonding Authority Assessments: Tax Levies

CATASTROPHIC LOSS: A National Perspective IMPACTS ON INSURER UNDERWRITING PERFORMANCE

P/C Net Income After Taxes * ($ Millions) *First 9 months 2004 Sources: A.M. Best, ISO, Insurance Information Institute. Andrew Northridge Lowest CAT losses in 15 years Sept Hurricanes

ROE: P/C vs. All Industries 1987–2004E* *2004 p/c estimate based on first 9 months data. Source: Insurance Information Institute; Fortune Andrew Northridge Hugo Lowest CAT losses in 15 years Sept ROE excl. hurricanes 2004 ROE reduced due to hurricanes

P/C Industry Combined Ratio 2001 = = st Half = E = 98 The combined ratio is the ratio losses & associated expenses paid relative to premiums earned Sources: A.M. Best; ISO, III

Underwriting Gain (Loss) E Source: A.M. Best, Insurance Information Institute $ Billions

Combined Ratio: Reinsurers Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute Reinsurer results are greatly affected by catastrophe activity Andrew Northridge Sept. 11 Few CATs

Homeowners Insurance Combined Ratio Average 1990 to 2003= 115 Insurers have paid out an average of $1.15 in losses for every dollar earned in premiums over the past 13 years Sources: A.M. Best; III Hurricane Andrew produced record homeowners losses even in national results

RNW for Major P/C Lines, Average Source: NAIC; Insurance Information Institute CAT losses contribute to low (negative profitability of homeowners insurance)

CATASTROPHIC LOSS: A National Perspective IMPACTS ON INSURER PROFITABILITY

Homeowners Insurance: Rates of Return on Net Worth Source: NAIC, Insurance Information Institute * Average is 1.22% if excluding 1992 (year of Hurricanes Andrew and Iniki. Averages: 1990 to 2002 HO Insurance = %* Homeowners insurance is an extremely volatile line of insurance Andrew 4 Hurricanes

Homeowners Insurance: Rate of Return on Net Worth vs. Fortune 500 Source: NAIC, Insurance Information Institute * Average is 1.22% if excluding 1992 (year of Hurricanes Andrew and Iniki. Averages: 1990 to 2002 HO Insurance = %* Fortune 500 = 12.64%

Homeowners Insurance: Rates of Return on Net Worth vs. P/C Insurance All Lines Source: NAIC, Insurance Information Institute * Average is 1.22% if excluding 1992 (year of Hurricanes Andrew and Iniki. Homeowners insurance consistently underperforms the p/c insurance generally E Homeowners: -1.7% All P/C Lines: +7.5%

Rates of Return on Net Worth for Homeowners Ins: US vs. Florida (add ) Source: NAIC; 2003 figure is Insurance Information Institute estimate. Averages: 1993 to 2003E US HO Insurance = +2.85%

DISASTER DECLARATIONS & DISASTER AID: Florida’s Dependence on Federal Aid is Not Sustainable

Major Disaster Declarations By Year, Source: Federal Emergency Management Agency (FEMA) Declarations A total of 1,079 major disaster declarations have been issued since 1977 & the number is trending upward

Top 10 Major Disaster Declaration Totals By State ( ) Total Number Source: Federal Emergency Management Agency (FEMA) Since 1972, Florida has experienced more major disasters than all but 2 states

FEMA Disaster Expenditures* ( E) $ Billions *Funding represents total FEMA expenditures obligated from the President’s Disaster Relief Fund for declared disasters, emergencies and fire suppression grants as of February 29,2000. Expenditures include costs for FEMA’s disaster assistance programs, hazard mitigation, mission assignments, contractual services and administrative expenses. Figures are stated in current dollars and do not include funding provided separately by other participating federal agencies. Source: FEMA; 2004 figure is III estimate. 2004’s hurricanes pushed federal disaster assistance payments to new records in 2004

HOMEOWNERS INSURANCE: AN IMPORTANT BUSINESS FOR INSURERS AND THE ECONOMY

Property Insurance Direct Premiums Written* *Includes Fire, Allied Lines, Multi Peril Crop, Federal Flood, Farm & Homeowners Multi-Peril, CMP-non liability, Inland Marine, Earthquake & Burglary & Theft Source: Best’s Aggregates & Averages - Property/Casualty; Insurance Information Institute Revenue Growth Drivers: Record new home construction Trend toward larger, more expensive homes Rates Little commercial exposure gain since but now picking up.

Homeowners as a Percentage of the P/C Industry Source: A.M. Best; Insurance Information Institute Homeowners insurance accounted for 11% or $48.7B in DPW in 2003 $237.3B $48.7B $91.7B $64.9B

Homeowners Insurance: Direct Premiums Written Billions $22.9B Source: A.M. Best; Insurance Information Institute $24.4B +6.6% $26.0B +6.6% $27.4B +5.4% $29.1B +6.2% $30.9B +5.8% $32.5B +5.2% $34.6B +6.5% $37.6B +8.7% $43.0B +14.4% $48.7B +13.3%

FLORIDA: HO Insurance Market: Direct Premiums Written Billions Source: A.M. Best; Insurance Information Institute

Homeownership Rates in Florida, 1990 to 2003 Source: U.S. Census Bureau Homeownership is at an all-time record high in Florida and is higher than the US overall. Florida will need to attract large amounts of insurance capacity to fuel continued growth in homeownership

Top States: Change in Number of Housing Units, Source: US Census Bureau Strong demographics is fueling home construction in FL. Combined with the permanent risk of hurricanes, FL must ensure this vital growth engine remains healthy by making certain that homeowners insurance is a viable business going forward. Number of new housing units in FL was second highest in US,

Homeownership Rates in Major Florida Metro Areas, 1995 vs Source: U.S. Census Bureau Homeownership rates for most FL metro areas are at or near record highs

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