1. Insurance & Incentives for Mitigation Coastal Cities Summit St. Petersburg, FL May 2, 2012 Lynne McChristian, Florida Representative Insurance Information Institute  4775 E. Fowler Ave.  Tampa, FL 33617

2. 2 Is this a riskier world? 2011 was the Highest loss year on record for economic losses globally.  Extraordinary number of severe natural catastrophes: Earthquakes, tsunami, floods and tornadoes were the primary causes of loss.  $380 billion in economic losses. –Exceeds previous record of $270 billion in 2005.  $105 billion in insured losses. –2011 losses were 2.5 times 2010 insured losses of $42 billion. –Over 5 times the 30-year average of $19 billion. Nationally, $72.8 billion in economic losses last year.  Represents a 129% increase over the $11.8 billion amount through the first half of 2010.  $35.9 Billion in insured losses from 171 catastrophic events, 5 th highest year on record.  Represents 51% increase over the $23.8 billion total in 2010. Source: Munich Re; Insurance Information Institute.

3. Natural Catastrophes Worldwide 1980 – 2011 Insured losses US$ 870bn - Percentage distribution per continent ContinentInsured losses US$ m America (North and South America) 566,000 Europe 146,000 Africa 2,000 Asia 115,000 Australia/Oceania 41,000 66% 16% <1% 13% 5% 3 Source: MR NatCatSERVICE In 2011, 61% of natural catastrophe losses were in the Asia/Pacific region, nearly 3.5 times the average of 13% over the prior 30 years (1981-2010)

4. 12/01/09 - 9pm 4 Top 16 Most Costly World Insurance Losses, 1970-2011** (Insured Losses, 2011 Dollars, $ Billions) *Average of range estimates of $35B - $40B as of 1/4/12; Privately insured losses only. **Figures do not include federally insured flood losses. Sources: Swiss Re sigma 1/2011; Munich Re; Insurance Information Institute research. 5 of the top 14 most expensive catastrophes in world history have occurred within the past 2 years Taken as a single event, the Spring 2011 tornado and thunderstorm season would likely become the 5 th costliest event in global insurance history

5. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 5 Top 14 Most Costly Disasters in U.S. History (Insured Losses, 2011 Dollars, $ Billions) *Losses will actually be broken down into several “events” as determined by PCS. Includes losses for the period April 1 – June 30. Sources: PCS; Insurance Information Institute inflation adjustments. Taken as a single event, the Spring 2011 tornado and storm season are is the 4 th costliest event in US insurance history Hurricane Irene became the 11 th most expense hurricane in US history

6. Number of Federal Disaster Declarations, 1953-2012* *Through April 10, 2012. Source: Federal Emergency Management Administration: http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute.http://www.fema.gov/news/disaster_totals_annual.fema The Number of Federal Disaster Declarations Is Rising and Set New Records in 2010 and 2011 The number of federal disaster declarations set a new record in 2011, with 99, shattering 2010’s record 81 declarations. There have been 2,056 federal disaster declarations since 1953. The average number of declarations per year is 34 from 1953-2010, though that few haven’t been recorded since 1995. 11 federal disasters were declared through Apr. 10, 2012 6

7. What’s wrong with these pictures? Bay St. Louis, LA Building and rebuilding in vulnerable areas.

8. Average Square Footage of Completed New Homes in U.S., 1973-2011* *2011 figure is weighted average square feet of completed homes in first three quarters of 2011 Source: U.S. Census Bureau: http://www.census.gov/const/www/quarterly_starts_completions.pdf; Insurance Information Institute.http://www.census.gov/const/www/quarterly_starts_completions.pdf Square Ft The trend toward building larger homes reversed from2008 - 2010, affecting exposure growth beyond the decline in number of units built. Rising again in 2011. The average size of completed new homes often falls in recessions (yellow bars), but historically bounces back in expansions 8 The average size of completed new homes fell by 147 square feet (5.75%) from 2008-2010. This was the largest recession-based drop in nearly four decades.

9. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 9 State Population Growth Rate Projections, 2010-2020* *based on 2000 census. Source: http://www.census.gov/population/www/projections/projectionsagesex.html Table 7http://www.census.gov/population/www/projections/projectionsagesex.html The Mountain West region is projected to grow the most from now to 2020 (up 17.6%), followed by the South Atlantic (up 14.5%) and Pacific (up 11.2%). The Mid-Atlantic is projected to be the slowest-growing region (up 1.9%). Projected Population Growth Highest Growth Rate States Lowest Growth Rate States U.S. overall: +8.7%

10. Risk signals: Not paying attention or paying the price? 10  Annual growth in U.S. residual market exposure is averaging close to 18 percent.  Most state-run programs charged rates that do not fully reflect the risk of loss, potentially discouraging private market involvement and mitigation.  FAIR & Beach/Windstorm Plans: 19902010 Exposure$54.7 billion$757.9 billion # of Policies931,5502.8 million Sources: PIPSO, Insurance Information Institute, Government Accountability Office

11. First steps to incentivize mitigation 11 Allow insurance rates to signal risk. In theory…..  Rates should inform people of the hazards they face.  They should encourage cost-effective mitigation. In practice….  Coastal homeowners may get “special treatment” because their rates are subsidized by inland dwellers.  A quest for “affordable” rates masks structural and location factors that should bring rates to reflect this risk.

12. The “insurance effect” 12 If premiums are not based on risk, people will invest less in mitigation. There is a relationship between availability/pricing of insurance and personal investment in risk reduction. Insurance can be a substitute for mitigation. It’s complicated! o There are nonfinancial risks, i.e., lives lost. o Forecasting science is imperfect. o Insurers may not be able to efficiently separate risk zones from condition of housing stock and mitigation investments.

13. Attitudes toward risk 13 Some people are more risk averse than others. Others underestimate the probability. “We’ve never had a hurricane hit here before.” Personal hurricane experience matters – to a point. Peer pressure to “keep up with the Joneses”. Demographic differences with higher mitigation participation from whites than from non-whites.

14. How to incentivize for mitigation 14 Give property owners a financial stake. Accurately set the risk and mitigation-based insurance premium. Involve financial institutions in subsidizing mitigation costs. Provide short-term benefits (2-3 years) or delayed costs. Educate about the true risk and cost of insurance. Provide feedback on mitigation participation by neighborhood. Target low-income individuals and minorities with subsidized mitigation programs. Source: FSU Storm Risk Management Center, “Home Hardening Incentive Program” Report

15. Financing local mitigation programs 15 Preferred Method of Repayment HomeownersLocal Government Tied to the Property71%19% Upward property tax adjustment 39%6% Long-term property tax assessment 32%13% Tied to the Homeowner 15%70% Upward current mortgage adjustment 9%36% Additional mortgage6%34% Other14%11% Total100% Homeowners and local governments have different views. Source: FSU Storm Risk Management Center

16. www.iii.org www.InsuringFlorida.org Insurance Information Institute Online: