Elephants in the Room: Big Problems in Florida’s

Insurance Markets that Nobody Wants to Discuss

Governor’s Hurricane ConferenceMay 26, 2010

Download at www.iii.org/presentationsRobert P. Hartwig, Ph.D., CPCU, President & Economist

Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 bobh@iii.org www.iii.org

2

Florida is America’s #1 Catastrophe Problem

Exposure is Huge and Can Only Grow in the Future Despite

Real Estate Collapse

3

Total Value of Insured Coastal Exposure in 2007*

($ Billions)

*Latest available.Source: AIR Worldwide

$224.4$191.9

$158.8$146.9$132.8

$92.5$85.6$60.6$55.7$51.8$54.1

$14.9

$479.9$635.5

$772.8$895.1

$2,378.9$2,458.6

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000

FloridaNew York

TexasMassachusetts

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

$522B Increase Since 2004,

Up 27%

In 2007, Florida Still Ranked as the #1 Most Exposed State to Hurricane Loss, with

$2.459 Trillion Exposure, an Increase of $522B or 27% from $1.937 Trillion in 2004

The Insured Value of All Coastal Property Was $8.9 Trillion in 2007, Up 24% from $7.2 Trillion in 2004

4

Insured Coastal Exposure as a Percentage of Statewide Insured Exposure, 2007

Source: AIR Worldwide

35%34%

29%28%

26%23%

13%12%

11%9%

5%1%

36%54%

59%62%

64%79%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

FloridaConnecticut

New YorkMaine

MassachusettsDelawareLouisiana

New JerseyRhode Island

S. CarolinaTexas

NHMississippi

AlabamaVirginia

NCGeorgia

Maryland

Nearly 80% of all insured exposure in

Florida is coastal, more than any other state

5

Value of Insured Residential Coastal Exposure in 2007

Source: AIR Worldwide

$96.9$90.1$81.1$78.4$72.6

$46.5$38.1$36.7$31.9$30.8$25.7

$7.2

$250.8$319.5

$373.0$388.3

$660.4$1,238.6

$0 $200 $400 $600 $800 $1,000 $1,200 $1,400

FloridaNew York

TexasMassachusetts

New JerseyConnecticut

LouisianaS. Carolina

MaineNorth Carolina

VirginiaAlabamaGeorgia

DelawareRhode Island

New HampshireMississippi

Maryland

($ Billions)

Residential structures accounted for $1.24

trillion or slightly more than half (50.4%) of all

coastal exposure in Florida in 2007, far more

than any other state

6

Value of Insured Commercial Coastal Exposure, 2007

Source: AIR Worldwide

$127.5$101.8$86.2

$65.9$54.4$47.5$46.0

$26.1$24.9$23.8$22.2$7.7

$229.1$316.0

$399.8$506.8

$1,220.0$1,718.6

$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 $2,000

New YorkFloridaTexas

MassachusettsNew JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaGeorgia

AlabamaMississippi

New HampshireDelaware

Rhode IslandMaryland

($ Billions)

Commercial structures accounted for $1.22

trillion or slightly less than half (49.6%) of all

coastal exposure in Florida in 2007, second

only to New York

7

Florida Population, 2000 – 2035P

23.82122.574

21.247

18.77318.75018.807

15.982

10

12

14

16

18

20

22

24

26

2000 2008 2009 2010 2020 2030 2035

Source: University of Florida, Bureau of Economic and Business Research; US Census Bureau; Insurance Information Institute

Decline in population is small

and temporary

State population growth is

expected to resume in 2010

FL’s population will hit 20 million by 2016 and will

add 2.5 million residents between 2010 and 2020

Despite the Recent Crash in Real Estate Markets and Higher Unemployment, Florida Will Add Millions of New Resident in the Years

Ahead, Putting More Strain on the State’s Fragile Insurance Markets

(Millions)

8

$8

.3

$7

.4

$2

.6 $1

0.1

$8

.3

$4

.6

$2

6.5

$5

.9 $1

2.9 $

27

.5

$6

1.9

$9

.2

$6

.7

$2

7.1

$1

0.6

$1

00

.0

$7

.5

$2

.7

$4

.7

$2

2.9

$5

.5 $1

6.9

$0

$20

$40

$60

$80

$100

$120

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 20??

US Insured Catastrophe Losses: Florida Accounts for More Insured Loss than Any Other State

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; Insurance Information Institute.

Florida’s Demographics and Land Use Policies Make it Certain that Catastrophe Losses in the State Will Rise in the Future

$100 Billion CAT Year is Coming Eventually, Likely

Involving FL

2009 CAT Losses

Were Down 61% from

2008

($ Billions)

2000s: A Decade of Disaster

2000s: $193B (up 117%)

1990s: $89B

Sources: MR NatCatSERVICE

U.S. Significant Natural Catastrophes, 1950 – 2009

Number of Events ($1+ Bill economic loss and/or 50+ fatalities)

Losses due to tropical activity are rising,

impacting Florida directly

10

Top 12 Most Costly Disastersin US History—Most Have Impacted FL

(Insured Losses, 2009, $ Billions)

Sources: PCS; Insurance Information Institute inflation adjustments.

$11.3 $12.5

$18.2$22.8 $23.8

$45.3

$8.5$8.1$7.3$6.2$5.2$4.2

$0$5

$10$15$20$25$30$35$40$45$50

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Northridge(1994)

9/11Attacks(2001)

Andrew(1992)

Katrina(2005)

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 Caused About $600

Million in Insured Losses in Florida

11

Distribution of US Insured CAT Losses: TX, FL, LA vs. US, 1980-2008*

($ Billions)

* All figures (except 2006-2008 loss) have been adjusted to 2005 dollars.Source: PCS division of ISO.

Florida Accounted for 19% of All US Insured CAT Losses from 1980-2008: $57.1B out of $297.9B

Insured Losses in FL Are Nearly Double that of Any Other State Over the Past 30 Years

$176 , 60% $57.10 ,

19%

$31.20 , 10%

$33.60 , 11%

Florida

Texas

Louisiana

Rest of US

12

Florida is America’s Most Dysfunctional but Not Most

Uninsurable Property Insurance Market

Rate Suppression, Not Hurricanes Are the Principal Source of Dysfunctionality

Source: James Madison Institute, February 2008.

ME

NH

MA

CT

PA

WV

VA

NC

LA

TX

OK

NE

ND

MN

MI

IL

IA

ID

WA

OR

AZ

HI

NJRI C

DE

AL

VT

NY

MD

SC

GA

TN

AL

FL

MS

ARNM

KYMOKS

SDWI

IN

OH

MT

CA

NV

UT

WY

CO

AK

= A= B= C= D= F= NG

Source: Heartland Institute, 2010 Property and Casualty Report Card: A State-by-State Analysis of Regulatory Burden, May 2010.

A- A-

A-

B-

B-

B-

B-

B-

B-B-

B-B-

B-

B-

B-

B-

B- C-

C-

C-

C -

C-

D-D-

A

A

A

A

B+

B+

B+

B

B

B

B

B

B

C+

C+

C

D+

D+D+

D

NG

NG

D F

F

2010 Property and Casualty InsuranceReport Card: Regulatory Burden

Not Graded: District of ColumbiaMississippiLouisiana

Florida is one of only two states to receive a

grade of “F” in 2010

14

Cumulative Profits on Homeowners Insurance Transactions: 1985–2008

Note: Southeast states are AL, FL, GA, LA, MS, NC, SC and TX. Source: Robert W. Klein (2009), “Hurricane Risk and Property Insurance Markets: An Update and Extension,” Wharton Risk Center Working Paper #2009-10-07 based on data from NAIC Report on Profitability by Line by State and author’s calculations.

Florida’s home insurers have been in the red on a cumulative basis since

Hurricane Andrew struck the state in 1992

(Profits as a Share of Net Earned Premiums, e.g. -0.4 = -40%)

15

Average Homeowners Insurance Premium in Florida, 2007:Q2–2009:Q4

*HO-3 policies, excluding Florida Citizens.Source: Quarterly Supplemental Reports (QUASR) filed with the FL OIR, prepared by, prepared by Security First Insurance; Insurance Information Institute.

($ Billions)

$1,915 $1,914

$1,857

$1,770

$1,655$1,634 $1,630 $1,641$1,647

$1,666$1,710

$1,500

$1,600

$1,700

$1,800

$1,900

$2,000

07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4

The average homeowners insurance premium as of 12/31/09 is down $274 or 14% since 3/31/07

The state has required rates to be reduced even though they were not adequate to begin with. Discounts don’t

make actuarial sense unless the discount is applied to an actuarially sound rate. Both factors have led most private

insurers to reduce their presence in the state.

The Passage HB1A in January 2007 and the Requirement to Provide Full Mitigation Discounts Since March 2007 Have

Caused a Dramatic Loss in Premium Income and Caused Many Insurers to Lose Money Even Without a Major Hurricane Strike

16

Florida Home Insurance Rate Levels and Cumulative Change, 2007:Q1 vs. 2009:Q3

*All policy forms.Source: Quarterly Supplemental Reports (QUASR) filed with the FL OIR, prepared by prepared by Security First Insurance; Insurance Information Institute.

The average loss per policy $254.50 in 2007 to $421.22 in 2009, an

increase of 65.5%

Rates fell approximately 30%

from 2007:Q1 through 2009:Q3

17

Florida Non-Hurricane Homeowner Loss Experience, 2007 vs. 2009

The average loss per policy $254.50 in 2007 to $421.22 in 2009, an

increase of 65.5%

*All policy forms.Source: Quarterly Supplemental Reports (QUASR) filed with the FL OIR, prepared by prepared by Security First Insurance; Insurance Information Institute.

The frequency and severity (cost) of claims in Florida is up sharply

(even excluding hurricane claims) while premiums have fallen, leading to losses for

many insurers

18

Hostile Regulatory Environment is Ultimately Anti-Consumer

Rate Suppression Leads to Reduced Consumer Choice, Less Competition, Weakening Among

Some Insurers

19

U.S. Residual Market Exposure to Loss

*Preliminary 2009 PIPSO data. Includes 2008 data for TX, SC, MD, DC, OR and WA (latest data available).Source: PIPSO; Insurance Information Institute (I.I.I.).

$54.7

$150.0

$281.8

$221.3 $244.2$292.0

$372.3$430.5 $419.5

$656.7$696.4

$639.0

$771.9

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*

($ Billions)

In the 20-year period between 1990 and 2009, total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54.7

billion in 1990 to approximately $639 billion in 2009.

Hurricane Andrew (1992)

4 Florida Hurricanes

Katrina, Rita and Wilma

Florida accounted for 64% of all

residual market exposure in 2009

20

Florida Citizens Exposure to Loss

* Preliminary 2009 PIPSO figures.Source: PIPSO; Insurance Information Institute (I.I.I.).

$154.6$195.5 $206.7 $210.6

$408.8

$485.1

$421.9 $406.0

$0

$100

$200

$300

$400

$500

$600

2002 2003 2004 2005 2006 2007 2008 2009*

($ Billions)

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 Citizens’ exposure in in

recent years has approach one-half

trillion dollars

21

Is Florida America’s Greece?

Florida is Very Dependent on Volatile Credit Markets, Exposing

the State to Instability

22

Overview of FHCF Claims-Paying Capacity Funding Sources, Assuming 100% TICL Take-Up, 2010

Source: Florida Hurricane Catastrophe Fund, Claims Paying Capacity, May 2010; Insurance Information Institute.

Borrowing accounts for the majority of the

FHCF’s theoretical/projected

claims paying capacity. A private reinsurer would be required to have the

“money in the bank”

Heavy Reliance on Borrowing Brings

Many Risks

-Capacity shortfall

-Credit market seizures

-Interest rate spikes

-Vulnerability to global systemic

financial market risk

-Credit risk

23

Bonding Capacity of the Florida Hurricane Catastrophe Fund, 10/08-5/10

Source: FHCF, Raymond James; Insurance Information Institute.

$3

$8

$11

$16

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

Oct. 2008 May-09 Oct. 2009 May-10

($ Billions)

Bonding capacity has recovered since the 2008-2009 financial crisis, but Florida’s chosen method of post-event debt financing exposes the state unnecessarily to systemic risks in the global financial system. Recent volatility suggests the risk remains. The availability of private (re)insurance was not impacted by the crisis.

The financial crisis and seizure of credit markets caused bonding authority

to plunge in late 2008, implying a possible

funding shortfall of up to $19 billion

24

Principal and Interest Due on Existing FHCF Post-Event Tax-Exempt Debt, 2010-2016

$269.5 $282.7 $296.8 $300.0 $325.0 $342.5 $333.5

$72.4$95.8 $78.4 $63.1

$48.7 $33.3$16.4

$0

$50

$100

$150

$200

$250

$300

$350

$400

2010 2011 2012 2013 2014 2015 2016

Principal Interest

($ Millions)

From 2010 through 2016, Florida homeowners, drivers and business owners will be assessed $2.6 billion ($2.15 in principal and $408.2 million in interest) to pay for debts incurred during

the 2004 and 2005 hurricane season. Future storms could add to the burden. Future generations will pay for the state’s approach to insurance decades in the past.

Source: Florida Hurricane Catastrophe Fund, Claims Paying Capacity, May 2010; Insurance Information Institute.

($341.9)($378.5) ($375.2) ($363.1) ($373.7) ($375.7)

($349.9)

25

Florida’s Government-Run Insurers Depend Heavily on

Subsidies

Drivers, Business Owners and People Who Don’t Own Homes Are All

Chipping In

26

State Residual Property Market Plan Deficits in 2004/2005

-$1,425

-$1,770

-$954

-$595-$516

-$2,000-$1,800-$1,600-$1,400-$1,200-$1,000

-$800-$600-$400-$200

$0

Florida HurricaneCatastrophe Fund

(FHCF) Florida Citizens Louisiana Citizens

MississippiWindstorm

UnderwritingAssociation

(MWUA)

2004 2005

* 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.

($ Millions)

27

Florida Hurricane Catastrophe Fund Assessment Base, 1990-2009

*The FHCF’s assessment base includes all p/c lines except workers compensation, medical malpractice, accident and health and federal flood.Source: Florida Hurricane Catastrophe Fund, Claims Paying Capacity, May 2010; Insurance Information Institute.

Only about 25% of the FHCF’s

$33.3B assessment

base is associated with

homeowners insurance—the rest is auto and

business policies*

The FHCF’s assessment base is shrinking, which

could result in higher future assessments in % terms

28

Florida Citizens Property Insurance Corporation Projected 2010 Assessment Base

($ Billions)

Lines other than Homeowners Insurance Account for 80% of Citizens Projected 2010 Assessment Base

$9.05 , 27%

$13.40 , 40%

$6.70 , 20%

$4.35 , 13%

Auto

Homeowners

Commercial

All Other Lines

*Citizens assessment base includes all p/c lines except workers compensation, medical malpractice, accident and health and federal flood.Source: Citizens Property Insurance Corporation, Presentation to the Florida Cabinet, April 13, 2010; Insurance Information Institute.

29

Florida Citizens: Estimated 2010 Claims-Paying Resources

Source: Citizens Property Insurance Corporation, Presentation to the Florida Cabinet, April 13, 2010; Insurance Information Institute.

No assessment for a 1-in-5 year

event; $8.6 million for a 1-in-

25 year event

30

Florida Citizens: Estimated 2010 Claims-Paying Resources

Source: Citizens Property Insurance Corporation, Presentation to the Florida Cabinet, April 13, 2010; Insurance Information Institute.

Assessments

1-in-50: $2.964B

1-in-100: $10.996B

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