1. South Carolina Property Insurance Markets Issues, Concerns, Solutions
Insurance Information Institute
South Carolina Media & Legislative Briefing
April 2, 2007
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Robert P. Hartwig, Ph.D., CPCU, President & Chief Economist
Insurance Information Institute  110 William Street  New York, NY 10038
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2. 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

3. 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

4. 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

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

6. Most of US Population & Property Has Major CAT Exposure

7. U.S. Insured Catastrophe Losses*
$ Billions
$100 Billion CAT year is coming soon
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.
Hugo
*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

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

9. Number of Major (Category 3, 4, 5) Hurricanes Striking the US by Decade
1930s – mid-1960s:
Period of Intense Tropical Cyclone Activity
Mid-1990s – 2030s?
New Period of Intense Tropical Cyclone Activity 10
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
*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:

10. Source: Insurance Services Office (ISO)..
Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss, ¹
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
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.
Source: Insurance Services Office (ISO)..

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

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

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

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

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

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

17. Increase in Population of Coastal/Near Coastal Counties in South Carolina (% Change, 1990 - 2005)
Several SC coastal counties have experienced very strong population growth since Home values have also skyrocketed—up 120% in Charleston, Berkeley & Dorchester counties between
Sources: Charleston Metro Chamber of Commerce, SC Statistical Abstract, US Census Bureau.

18. Historical Hurricane Strikes in Charleston County, SC, 1900-2002
Population in Charleston County has nearly doubled since the 1950s
Source: NOAA Coastal Services Center, Insurance Info. Institute.

19. Historical Hurricane Strikes in Colleton County, SC, 1900-2002
Population in Colleton County appears to be increasing in recent decades
Source: NOAA Coastal Services Center, Insurance Info. Institute.

20. Historical Hurricane Strikes in Georgetown County, SC, 1900-2002
Population in Georgetown County has nearly doubled since the 1950s
Source: NOAA Coastal Services Center, Insurance Info. Institute.

21. Historical Hurricane Strikes in Horry County, SC, 1900-2002
Population in Horry County has doubled since the 1980s and tripled since the 1950s
Source: NOAA Coastal Services Center, Insurance Info. Institute.

22. The 2007 Hurricane Season: Above Average Activity Expected

23. Outlook for 2007 Hurricane Season: 40% Worse Than Average
2005
2007F
Named Storms
9.6 28 14
Named Storm Days
49.1
115.5 70
Hurricanes
5.9 7
Hurricane Days
24.5
47.5 35
Intense Hurricanes
2.3 3
Intense Hurricane Days 5 8
Net Tropical Cyclone Activity
100%
275%
140%
*Average over the period
Source: Dr. William Gray, Colorado State University, December 8, 2006.

24. Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2007
Average*
2007F
Entire US Coast
52%
64%
US East Coast Including Florida Peninsula
31%
40%
Gulf Coast from FL Panhandle to Brownsville, TX
30%
ALSO…Above-Average Major Hurricane
Landfall Risk in Caribbean for 2007
*Average over past century.
Source: Dr. William Gray, Colorado State University, December 8, 2006.

25. Landfall Probabilities by Region & Intensity, 2007*
Landfall probabilities and intensities up everywhere
(79%)
(68%)
(52%)
(84%)
(97%)
(59%)
(42%)
(30%)
(60%)
(83%)
(50%)
(44%)
(31%)
(61%)
(81%)
*Figures in parentheses represent averages over the past 100 years.
Source: Dr. William Gray, Colorado State University, December 8, 2006.

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

27. 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.

28. Major Residual Market Plan Estimated Deficits 2004/2005 (Millions of Dollars)
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
* MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in Federal Aid.
Source: Insurance Information Institute

29. 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

30. Comprehensive National Catastrophe Plan Schematic
1:500 Event
National Catastrophe Contract Program
1:50 Event
State Regional Catastrophe Fund
Private Reinsurance
State Attachment
Personal Disaster Account
Private Insurance
Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.

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

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

33. Underwriting Gain (Loss) in SC Homeowners Insurance, 1985-2005
$ 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
Source: A.M. Best; Insurance Information Institute.

34. Cumulative Underwriting Gain (Loss) in SC Homeowners Insurance,1985-2005
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.
$ Millions
Source: A.M. Best; Insurance Information Institute.

35. 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

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

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

38. Where the SC Premium Dollar Comes From & Where it Goes: 1989 (Hugo)
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
*Includes temporary living expenses.
Source: Insurance Information Institute from A.M. Best data.

39. Where the SC Premium Dollar Comes From & Where it Goes: 2004
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
*Includes temporary living expenses.
Source: Insurance Information Institute from NAIC Report on Profitability by Line by State, 2004.

40. Share of Losses Paid by Private Reinsurers, by Disaster*
Reinsurance is playing an increasingly important role in the financing of mega-CATs; Reins. Costs are skyrocketing
*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 2005.
Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.

41. P/C INSURER PROFITABILITY National Perspective

42. ROE: US P/C vs. All Industries 1987–2008E
P/C profitability is cyclical, volatile and vulnerable
Sept. 11
Hugo
Katrina, Rita, Wilma
Lowest CAT losses in 15 years
Andrew
Northridge
4 Hurricanes
* P/C insurer ROEs are I.I.I. estimates.
Source: Insurance Information Institute; Fortune

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

44. 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

45. 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

46. Insurance Information Institute On-Line
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