Property Insurance in Florida: Balancing the Calm & the Storms BinTech Partners End of Hurricane Season Forum St. Petersburg, FL December 9, 2010 Lynne McChristian, Florida Representative Insurance Information Institute Tel:  

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 2 Presentation Overview Insurance Rates: Why Insurers Plan for the Worst  History Repeating Itself – or Outdoing Itself Profits & Profitability  Underwriting Performance  Economy and Investments  The Role of Reinsurance Public vs. Private Insurance Model Concerns About Complacency

How Insurers Establish Rates They consider loss history and probability forecasts.  “Probability” forecast is not the same as a weather forecast.  Forecasters were right! 2010 was the third most active season on record, and, thankfully, no landfall. In hurricane-free years, insurers are able to build funds for when a catastrophic storm does come.  Building this capital means they can write more business. It’s not only about hurricanes.  Non catastrophe losses are rising, i.e., sinkhole claims. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 3

Why Rates Have Not Dropped The threat of storms has not diminished.  Cycle of major storms continues. More people and more property have been built in vulnerable areas.  Florida is on track to eclipse NY as the third most populous state. Population growth was between 2.0% and 2.6% between 1990’s and 2006 (national average was 1%); slowed in  Coastal exposure in Florida represents 79% of all property exposure in the state. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 4

First Half Events Number of events in first half of 2010 is close to the annual totals from five of past ten years. Number Geophysical (earthquake, tsunami, volcanic activity) Climatological (temperature extremes, drought, wildfire) Meteorological (storm) Hydrological (flood, mass movement) Natural Disasters in the United States, 1980 – 2010 Number of Events (Annual Totals 1980 – 2009 vs. First Half 2010) Source: MR NatCatSERVICE 5 © 2010 Munich Re

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 6 US Insured Catastrophe Losses *Estimate through December 31, 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. Sources: Property Claims Service/ISO; Munich Re; Insurance Information Institute CAT Losses Are Running Below 2009, So Far Figures Do Not Include an Estimate of Deepwater Horizon Loss $100 Billion CAT Year is Coming Eventually Estimated 2010 CAT Losses Are About Average ($ Billions) 2000s: A Decade of Disaster 2000s: $193B (up 117%) 1990s: $89B

Leading States in Coastal Population Growth, Source: U.S. Census Bureau and NOAA Between 1980 and 2003, total coastal population grew by 33 million people, or 28 percent. Florida – at 75% – had the greatest percent population change.

Population Growth Projections for Hurricane Exposed States (2000 to 2030) (000) The U.S. as a whole is expected to have a population increase of 82.1 million, or 29.2 percent during the same period. Source: U.S. Census Bureau, accessed at By 2030, Florida is expecting a population increase of 12.7 million, closely followed by Texas with an expected increase of 12.5 million.

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 9 Total Value of Insured Coastal Exposure (2007, $ Billions) Source: AIR Worldwide In 2007, Florida Ranked as the #1 Most Exposed State to Hurricane Loss, with $2.459 Trillion Exposure. The Insured Value of All Coastal Property Was $8.9 Trillion in 2007, Up 24% from $7.2 Trillion in 2004

Insured Coastal Exposure As a % Of Statewide Insured Exposure In 2007 Source: AIR Worldwide Most of Florida’s Exposure is Considered Coastal – 79%.

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 11 Top 12 Most Costly Disasters in US History (Insured Losses, 2009, $ Billions) Sources: PCS; Insurance Information Institute inflation adjustments. 8 of the 12 Most Expensive Disasters in US History Have Occurred Since 2004; 8 of the Top 12 Disasters Affected FL Hurricane Katrina Remains, By Far, the Most Expensive Insurance Event in US and World History

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 12 Distribution of US Insured CAT Losses: FL Losses the Highest, * ($ Billions) * All figures (except loss) have been adjusted to 2005 dollars. Source: PCS division of ISO. Florida’s share of all insured CAT losses is nearly double the combined losses of the other two leading catastrophe-prone states. From : $57.1B out of $297.9B Florida Texas Louisiana Rest of US

Why Rates Have Not Dropped (continued) Emphasis is on strategic underwriting in a down economy.  Insurers strive to match the premiums to the level of risk, using their loss experience and risk modeling. This has been a challenge in Florida.  As a result of rate suppression, insurers have limited their exposure to loss to ensure that money is on hand to pay anticipated claims. The amount of premium collected has declined, due to mandatory credits for mitigation that misrepresent the risk. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 13

Residential Premiums Have Dropped

Homeowners Insurers Fewer Private Insurers in the FL Market Source: FSU Catastrophic Storm Risk Management Center.

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 16 Insured Losses for Top 12 Most Costly Disasters in U.S. History EVENTBillions in 2009$ Hurricane Katrina, 2005$45.3 Hurricane Andrew, 1992$23.8 9/11 Attacks, 2001$22.8 Northridge Earthquake, 1994$18.2 Hurricane Ike, 2008$12.5 Hurricane Wilma, 2005$11.3 Hurricane Charley, 2004$8.5 Hurricane Ivan, 2004$8.1 Hurricane Hugo, 1989$7.3 Hurricane Rita, 2005$6.2 Hurricane Frances, 2004$5.2 Hurricane Jeanne, 2004$4.2 FLORIDA IMPACT

17 Profits & Profitability Homeowners Insurance is Historically Volatile

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 18 Median ROE for Insurers vs. Financial Firms & Other Key Industries 2009 (Profits as a % of Stockholders’ Equity) Source: Fortune, May 3, 2010; Insurance Information Institute. Stock P/C insurers earned a 7% ROE in 2009, below the 10.5% earned by the Fortune 500 as a whole and well below health insurers’ 14%. P/C Mutuals’ average ROE was 3.5%.

P/C Net Income After Taxes 1991–2010:H1 ($ Millions) 2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS 1 = 5.8% 2010:H1 ROAS = 6.3% * ROE figures are GAAP; 1 Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.5% ROAS for 2010:H1 and 4.6% for :H1 net income was $19.2 billion and $10.2 billion in 2008:H1 excluding M&FG. Sources: A.M. Best, ISO, Insurance Information Institute P-C Industry 2010:H1 profits rose $10.6B from $6.0B in 2009:H1, due mainly to $2.2B in realized capital gains vs. -$11.1B in previous realized capital losses

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 20 ROE: P/C vs. All Industries 1987–2009* * Excludes Mortgage & Financial Guarantee in 2008 and Sources: ISO, Fortune; Insurance Information Institute. P/C Profitability Is Cyclical and Volatile Hugo Andrew Northridge Lowest CAT Losses in 15 Years Sept. 11 Katrina, Rita, Wilma 4 Hurricanes Financial Crisis* (Percent)

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 21 Number of Years with Underwriting Profits by Decade, 1920s–2000s * 2000 through combined ratio excluding mortgage and financial guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an underwriting profit. Note: Data for 1920–1934 based on stock companies only. Sources: Insurance Information Institute research from A.M. Best Data. Number of Years with Underwriting Profits Underwriting Profits Were Common Before the 1980s (40 of the 60 Years Before 1980 Had Combined Ratios Below 100) – But Then They Vanished. Not a Single Underwriting Profit Was Recorded in the 25 Years from 1979 Through 2003

It took 11 years to erase losses from Andrew. Then, 2004 hurricanes erased 7 years’ profits; 2005 deepened the hole. Rates do not reflect this risk. **Does not include Citizens Property Insurance Corporation results. Homeowners Insurance, Florida’s Cumulative Underwriting Gain/Loss

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 23 Distribution of P/C Insurance Industry’s Investment Portfolio Sources: NAIC; Insurance Information Institute research. Invested assets totaled $1.214 trillion as of 12/31/08 Insurers are generally conservatively invested, with more than 2/3 of assets invested in bonds as of 12/31/08 Only about 15% of assets were invested in common stock as of 12/31/08 Even the most conservative of portfolios was hit hard in 2008 Portfolio Facts Bonds Common Stock Real Estate As of December 31, 2008 Cash and Short-term Investments Preferred Stock Other

The Role of Reinsurance 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 24 Reinsurance is “insurance for insurers.”  It is an important risk-sharing mechanism in Florida because it helps spread risk across the global markets.  Keeping all reinsurance within Florida would also mean keeping all the risk within the state. All property/casualty insurers in Florida are required to participate in the state’s reinsurance fund – Florida Hurricane Catastrophe Fund.  If the FHCF does not have the money it needs on hand, it finances losses with debt – that you help to pay.  For example, we’ll pay for 2005 storms through 2014.

Share of Losses Paid by Reinsurers for Major Catastrophic Events Source: Wharton Risk Center, Disaster Insurance Project, Renaissance Re, Insurance Information Institute. Reinsurance plays a very large role in claims payouts associated with major catastrophes

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 26 Global Reinsurance CapacitySource of Decline in 2008 Global Reinsurance Capacity Shrank in 2008, Mostly Due to Investments Source: AonBenfield Reinsurance Market Outlook 2009; Insurance Information Institute estimate for Global Reinsurance Capacity Fell by an Estimated 17% in 2008 Change in Unrealized Capital Losses Realized Capital Losses Hurricanes

27 Public & Private Insurance Model Nearly All Floridians Pay Into the State-run Insurance Pool

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 28 US Residual Market Exposure to Loss Source: PIPSO; Insurance Information Institute Hurricane Andrew 4 Florida Hurricanes Katrina, Rita, and Wilma In the 19-year Period Between 1990 and 2009, Total Exposure to Loss in the Residual Market (FAIR & Beach/Windstorm) Plans Has Surged from $54.7B in 1990 to $703.0B in 2009 ($ Billions)

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 The impact of Hurricane Katrina pushed all of the residual market property plans in the affected states into deficits for 2005, following an already record hurricane loss year in 2004.

Florida Citizens Exposure to Loss ($ Billions) Source: PIPSO; Insurance Information Institute (I.I.I.). Since its creation in 2002, total exposure to loss in Florida Citizens has increased by 163 percent, from $154.6 billion to $406 billion in 2009.

 Florida Hurricane Catastrophe Fund. –6 percent for –Plus emergency assessment.  1 percent in 2010; increases to 1.3% in 2011 through  Citizens Emergency Assessment. –1.4 percent through –Plus a Regular Assessment when needed.  Emergency Management Fund. –$2 for homeowners/$4 for commercial.  Federal Insurance Guarantee Fund Recoupment. Florida’s Assessments

Estimated Assessments by Storm Level 1 in 251 in 1001 in 250 CitizensPrivateCitizensPrivateCitizensPrivate Homeowners8.7% 91.5%54.4%157.9%128.4% Auto8.7% 54.4% 89.2% Business8.7% 54.4% 128.4% 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 32 Source: Florida Insurance Consumer Advocate Office, July Current Florida law does not allow single year assessments for double-digit numbers, so losses will be paid over time in the event of major storms. Losses associated with any private insurer insolvencies are not included in the calculation.

Public Attitude Monitor 2006: Unfairness of Policyholder Subsidies Growth in residual market mechanisms may be due in part to implicit support of residents of coastal communities. Coastal States Source: Insurance Research Council

Public Attitude Monitor 2006: Unfairness of Taxpayer Subsidies Some 59% of those living in interior counties and 61% in noncoastal states think taxpayer-subsidized insurance is unfair, compared to just 51% of those living in coastal counties. Coastal States Source: Insurance Research Council

Source: James Madison Institute, February ME NH MA CT PA WV VA NC LA TX OK NE ND MN MI IL IA ID WA OR AZ HI NJ RI C DE AL VT NY MD SC GA TN AL FL MS AR NM KY MO KS SD WI IN OH MT CA NV UT WY CO AK = A = B = C = D = F = NG Source: Heartland Institute, May 2010 A- B- C- D- A A A A B+ B B B B B B C+ C D+ D NG D F F 2010 Property and Casualty Insurance Report Card Not Graded: District of Columbia Mississippi Louisiana Florida earned an “F” grade.

36 Concerns About Complacency Does Florida Suffer from Hurricane Amnesia?

37 Unemployment Rates by State, September 2010: Highest 25 States* *Provisional figures for September 2010, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute. In September, state and regional unemployment rates were little changed. Some 29 states and DC reported unemployment rate decreases from a year earlier, 16 states had increases and 5 had no change. The US unemployment rate was 9.6% in September

What Will It Take to Lower Rates? Awareness & Planning.  Those who plan ahead rebound the fastest.  Overcome entitlement mentality. “FEMA is not for you.” Closing loopholes related to insurance claims.  Change 5-year statute to file a hurricane claim?  Require those who get insurance money for a sinkhole claim to fix the damage. Mitigation.  We must make our property and people less vulnerable.  Majority of existing home was built before the stronger building codes of /01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 38

Get Fortified: Institute for Building & Home Safety 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 39 The insurance industry is committed to building stronger, safer homes and helping people learn how to retrofit existing property. www. DisasterSafety.org

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 40 The Nation’s Judicial Hellholes: 2010 Source: American Tort Reform Association; Insurance Information Institute South Florida West Virginia Illinois Cook County New Mexico Appellate Courts Watch List California Alabama Madison County, IL Jefferson County, MS Texas Gulf Coast Rio Grande Valley, TX Dishonorable Mention AR Supreme Court MN Supreme Court ND Supreme Court PA Governor MA Supreme Judicial Court Sacramento County New Jersey Atlantic County (Atlantic City) New York City

2009 Top Ten Jury Verdicts Source: Lawyers USA, January 15, ValueIssueState $370 MillionDefamationCalifornia $330 MillionPersonal Injury (Drunk driving case)Florida $300 MillionPersonal Injury (Tobacco verdict)Florida $89 MillionPersonal Injury (Drunk driving case)Missouri $78.75 MillionPersonal Injury (Prempro)New Jersey $77.4 MillionMedical MalpracticeNew York $71 MillionConversion and Breach of Fiduciary DutyTexas $70 MillionWorkers Comp CaseTexas $65 MillionPersonal InjuryFlorida $60 MillionMedical MalpracticeNew York

I.I.I. Resources: Florida website, national website, Spanish-language communication

Until next hurricane season…… 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 43

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