Insurance & Coastal Riskin Florida

An Economic Analysis

Robert P. Hartwig, Ph.D., CPCU, President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038

Tel: (212) 346-5520 Fax: (212) 732-1916 bobh@iii.org www.iii.org

Florida Hurricane Catastrophe Fund7th Annual Participating Insurers Workshop

Orlando, FL

June 7, 2007

Presentation Outline

• Review of Florida Hurricane Risk: An Insurance Industry Perspective

• Florida Exposure AnalysisHow Bad is It?Could it Get Any Worse?

• Are Florida’s Development Patterns Rational?Examination of Stakeholder Incentives

• How Insurers Signal What Should be Built & WherePrivate vs. Government-run Insurers

• Role of Risk Perception• What Works, What Doesn’t• Overview of a National Catastrophe Plan• State-Run Plans• Recommendations

Review of Florida Hurricane Risk:

An Insurance Industry Perspective

U.S. Insured Catastrophe Losses*$7

.5

$2.7

$4.7

$22.

9

$5.5 $1

6.9

$8.3

$7.4

$2.6 $1

0.1

$8.3

$4.6

$26.

5

$5.9 $1

2.9 $2

7.5

$1.2

$100

.0

$61.

9

$9.2

$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

07Q

1

20??

*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

$ Billions

2006 was a welcome respite. 2005 was by far the worst

year ever for insured catastrophe losses in the US, but the worst has yet to come.

$100 Billion CAT year is coming soon

Landfalling Hurricanes: 1900-2006FL Landfalls are Common

183

70

26

0

50

100

150

200

All Landfalling: 1900-2006

FL Landfalling FL CAT 3+Landfalling

Source: HURDAT database; Insurance Information Institute.

A hurricane strikes FL every other year on average—CAT 3+ every 4 years

38% of all hurricane landfalls occur in FL

37% of all FL landfalls are

CAT 3+

1.7 hurricanes make landfall each year on average

Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2005)

$3.5 $3.8 $4.8 $5.0$6.6 $7.4 $7.7

$10.3

$21.6

$40.6

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

Georges(1998)

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Andrew(1992)

Katrina(2005)

$ B

illi

ons

Sources: ISO/PCS; Insurance Information Institute.

Storms affecting Florida in yellow.

Seven of the 10 most expensive hurricanes in US history

occurred in the 14 months from Aug. 2004 – Oct. 2005:

Nine of the 10 affected Florida!

Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,

1986-2005¹

Utility Disruption0.1%

Terrorism7.7%

All Tropical

Cyclones3

47.5%

Tornadoes2

24.5%

Water Damage0.1%

Civil Disorders0.4%

Fire6

2.3%

Wind/Hail/Flood5

2.8%

Earthquakes4

6.7%

Winter Storms7.8%

Source: Insurance Services Office (ISO)..

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 1997. 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.

Insured disaster losses totaled $289.1 billion from

1984-2005 (in 2005 dollars). Tropical systems accounted for nearly half of all CAT losses from 1986-2005, up

from 27.1% from 1984-2003.

Insured Losses from Top 10 Hurricanes Since 1990 & Katrina Adjusted for Inflation, Growth in Coastal

Properties, Real Growth in Property Values & Increased Property Insurance Coverage

$10.1 $11.0 $12.4 $12.6 $13.1 $14.5

$20.8 $21.1

$31.3

$40.0

$65.3

$0

$10

$20

$30

$40

$50

$60

$70

Number 9(1909,

FL)

Hazel(1954,NC)

Number 4(1938,NY)

Number 2(1919,

FL)

Number 4(1928,

FL)

Bestsy(1965,LA)

Number 2(1915,TX)

Number 1(1900,TX)

Andrew(1992,

FL)

Katrina(2005,LA)*

Number 6(1926, FL)

$ B

illi

ons

The p/c insurance industry will likely experience a $20B+ event approximately every 10-12 years, on average—mostly

associated with hurricanes

*ISO/PCS estimate as of October 10, 2005.Source: Hurricane Katrina: Analysis of the Impact on the Insurance Industry, Tillinghast, October 2005; Insurance Info. Institute.

(Billions of 2005 Dollars) Plurality of worst-case

scenarios involve Florida

Hurricane Damage from Top 10 Hurricanes Since 1900 Adjusted for Inflation, Growth in Coastal Properties, Real Growth in Property Values*

$19.2 $23.9$30.3 $34.3 $35.0

$50.2 $50.8 $53.1

$80.0

$129.7

$0

$20

$40

$60

$80

$100

$120

$140

$ B

illi

ons

Hurricanes causing $50B+ in economic losses will

become more frequently

*Includes damage form wind and storm surge but generally excludes inland flooding.Source: Roger Pielke and Christopher Landsea, December 2005; Insurance Info. Institute.

(Billions of 2004 Dollars) Great Miami Hurricane

Florida Homeowners InsuranceMarket Share (As of 12/31/06)

16.3%

6.6%

4.3%

4.2%

4.0%

3.7%

2.8%

2.7%

2.3%

35.0%

18.1%

0% 5% 10% 15% 20% 25% 30% 35% 40%

State Farm

FL Citizens

Allstate

Tower Hill

Universal P&C

USAA

Nationwide

Liberty Mutual

ARX Holding Corp.

Universal Ins. Co. Grp.

All Other

*Computed based in direct premiums written (DPW). Actual exposure to hurricane loss may differ due to reinsurance purchased and location of risk.Source: Fitch Ratings, Hurricane Season 2007: A Desk Reference for Investors, June 1, 2007.

While State Farm leads in premium, Citizens leads in

exposure

Florida Residential Insurance Admitted Market Breakdown

Citizens30%

PUPs*30%

Other10%

FL-Only Unaffiliated Cos

30%

Risk is highly concentrated in

Florida in Citizens and FL-only companies

*PUPs are Florida-only subsidiaries of companies with multi-state or national operations.Source: Citizens Property Insurance Corp.

2006

Florida Property Insurance Market Breakdown (as of 12/31/05)

Source: Florida Citizens Property Insurance Corp.; Insurance Info, Institute.

Admitted97%

Surplus3%

Residential Commercial

Most commercial market risks covered in surplus lines market. Implies

regulators need to allow more flexibility for residential insurers.

Admitted40%

Surplus60%

Top 10 Deadliest Hurricanes to Strike the US: 1851-2006

372 390 400 408 7001,250 1,323 1,500

2,500

8,000

01,0002,0003,0004,0005,0006,0007,0008,0009,000

LA-Gra

nde Isle

(190

9)

Audre

y-SW

LA,T

X (195

7)

LA-Las

t Isla

nd (185

6)

FL Key

s (19

35)

GA/SC (1

881)

LA-Chen

iere (

1893

)***

**

Katrin

a (SE

LA, M

S)***

*

SC/GA S

ea Is

lands (

1893

)***

SE FL/L

. Oke

chob

ee (1

928)

**

Galva

ston (1

900)

*

*Could be as high as 12,000 **Could be as high as 3,000 ***Midpoint of 1,000 – 2,000 range****Associated Press total as of Dec. 11, 2005. *****Midpoint of 1,100-1,400 range.Sources: NOAA; Insurance Information Institute.

Hurricane Katrina was the deadliest hurricane to strike the US since 1928

Fear of death is no longer a factor in decision process

Total NFIP Claim Payments by State (Top 10) Jan 1, 1978 - Dec. 2004

$ Millions

$2,702.0

$2,226.7

$1,727.3

$687.2$419.9 $384.4 $377.8 $276.6

$422.6$473.4$598.2

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

TX FL LA NC NJ PA SC MO VA AL MS

Source: FEMA, National Flood Insurance Program (NFIP)

Until Katrina, Florida ranked 2nd in terms of

total flood claims payments.

Outlook for 2007 Hurricane Season: 85% Worse Than Average

Average* 2005 2007F

Named Storms 9.6 28 17Named Storm Days 49.1 115.5 85

Hurricanes 5.9 14 9Hurricane Days 24.5 47.5 40Intense Hurricanes 2.3 7 5

Intense Hurricane Days 5 7 11

Accumulated Cyclone Energy 96.2 NA 170

Net Tropical Cyclone Activity 100% 275% 185%*Average over the period 1950-2000.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, May 31, 2007.

Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2007

Average* 2007F

Entire US Coast 52% 74%

US East Coast Including Florida Peninsula

31% 50%

Gulf Coast from FL Panhandle to Brownsville, TX

30% 49%

ALSO…Above-Average Major Hurricane

Landfall Risk in Caribbean for 2007

*Average over the period 1950-2000.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, May 31, 2007.

Number of Major (Category 3, 4, 5) Hurricanes Striking the US by Decade

4

6

65

4

6

88

5

8

6

9

1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s

*Figure for 2000s is extrapolated based on data for 2000-2005 (6 major storms: Charley, Ivan, Jeanne (2004) & Katrina, Rita, Wilma (2005)).Source: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm.

10

1930s – mid-1960s:

Period of Intense Tropical Cyclone Activity

Mid-1990s – 2030s?

New Period of Intense Tropical Cyclone Activity

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

2000-2005 as in all of the 1990s

Florida Hurricane Exposure Analysis:

How Bad Is It? (Bad) Could It Get Any Worse?

(Yes)

Total Value of Insured Coastal Exposure (2004, $ Billions)

$1,901.6$740.0

$662.4$505.8

$404.9$209.3

$148.8$129.7$117.2$105.3

$75.9$73.0

$46.4$45.6$44.7$43.8

$12.1

$1,937.3

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

FloridaNew York

TexasMassachusetts

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

Source: AIR Worldwide

Florida has nearly $2 trillion in insured coastal exposure

Insured Coastal Exposure as a % of Statewide Insured Exposure (2004, $ Billions)

63.1%60.9%

57.9%54.2%

37.9%33.6%33.2%

28.0%25.6%25.6%

23.3%13.5%

12.0%11.4%

8.9%5.9%

1.4%

79.3%

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

FloridaConnecticut

New YorkMaine

MassachusettsLouisiana

New JerseyDelaware

Rhode IslandS. Carolina

TexasNH

MississippiAlabamaVirginia

NCGeorgia

Maryland

*III listSource: AIR Worldwide

Nearly 80% of Florida’s total insured

exposure is coastal

Value of Insured Residential Coastal Exposure (2004, $ Billions)

$512.1$306.6$302.2

$247.4$205.5

$88.0$65.1$64.5$60.0$60.0

$36.5$29.7$26.6$25.9$24.8$20.9

$5.4

$942.5

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

FloridaNew York

MassachusettsTexas

New JerseyConnecticut

LouisianaS. Carolina

MaineVirginia

North CarolinaAlabamaGeorgia

DelawareRhode Island

NewMississippiMaryland

Source: AIR

Florida has nearly $1 trillion in insured

residential coastal exposure

Value of Insured Commercial Coastal Exposure (2004, $ Billions)

$994.8$437.8

$355.8$258.4

$199.4$121.3

$83.7$69.7

$52.6$45.3$43.3$39.4

$23.8$20.9$19.9$17.9$6.7

$1,389.6

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

New YorkFlorida

TexasMassachusetts

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaGeorgia

AlabamaMississippi

New HampshireDelaware

Rhode IslandMaryland

Source: AIR

Florida has nearly $ trillion in insured residential commercial exposure

Florida for Sale: 24/7/365

Florida oceanfront real estate is advertised for

sale throughout the country year round,

like these ads from the New York Times and Wall Street Journal

Florida for Sale: 24/7/365

Ft. Lauderdale West Palm Miami Beach

New Condo Construction inSouth Miami Beach, 2007-2009

• Number of New Developments: 15

• Number of Individual Units: 2,111

• Avg. Price of Cheapest Unit: $940,333

• Avg. Price of Most Expensive Unit: $6,460,000

• Range: $395,000 - $16,000,000

• Overall Average Price per Unit: $3,700,167*

• Aggregate Property Value: At least $6 Billion*Based on average of high/low value for each of the 15 developments

Source: Insurance Information Institute from www.miamicondolifestyle.com accessed April 5, 2007.

Great Miami Hurricane of 1926: Hurricane Damage Adjusted for Inflation, Growth in Coastal

Properties, Real Growth in Property Values*

$0.76

$500

$130

$73

$0

$100

$200

$300

$400

$500

$600

1926 1998 2005 2020

$ B

illi

ons

Repeat of Great Miami Hurricane of

1926 could cause $500B in damage by 2020 given current

demographic trends

*Includes damage form wind and storm surge but generally excludes inland flooding.Source: Roger Pielke and Christopher Landsea, December 2005; Insurance Info. Institute.

(Billions of 2004 Dollars)

Track of 1926 storm

FINANCIAL STRENGTH &

RATINGS Industry Has Weathered

the Storms Well

Reasons for US P/C Insurer Impairments, 1969-2005

*Includes overstatement of assets.

Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;

Catastrophe Losses8.6%

Alleged Fraud11.4%

Deficient Loss

Reserves/In-adequate Pricing62.8%

Affiliate Problems

8.6%

Rapid Growth

8.6%

2003-2005 1969-2005

Deficient reserves,

CAT losses are more important factors in

recent years

Reinsurance Failure3.5%

Rapid Growth16.5%

Misc.9.2%

Affiliate Problems

5.6%

Sig. Change in Business

4.6%

Deficient Loss

Reserves/In-adequate Pricing38.2%

Investment Problems*

7.3%

Alleged Fraud8.6%

Catastrophe Losses6.5%

P/C Insurer Impairments,1969-2006

815

127

11 934

913 12

199

16 14 1336

4931

3449 49

5460

5841

2915

1231

18 1949 50

4735

1813 15

0

10

20

30

40

50

60

70

69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

The number of impairments varies significantly over the p/c insurance cycle,

with peaks occurring well into hard markets

Source: A.M. Best; Insurance Information Institute

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2006

90

95

100

105

110

115

120

69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Co

mb

ined

Rat

io

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

Imp

airm

ent R

ate

Combined Ratio after DivP/C Impairment Frequency

Impairment rates are highly

correlated underwriting performance

Source: A.M. Best; Insurance Information Institute

2006 impairment rate was 0.43%, or 1-in-233 companies, half the 0.86% average since 1969

The Insurance Economics of Florida

Hurricanes

Drivers of Private InsurerBehavior in Florida

FLORIDA HURRICANES & UNDERWRITING PERFORMANCE:

Homeowners Insurers Have Lost Billions

in Florida

($10.60)

($0.21)

$0.69 $0.43 $0.86 $1.08 $1.23 $1.28 $1.43 $1.16 $1.47 $1.88

($10.39)

($3.73)

$2.75

($12)

($10)

($8)

($6)

($4)

($2)

$0

$2

$4

92 93 94 95 96 97 98 99 00 01 02 03 04 05E 06F

Underwriting Gain (Loss) in Florida Homeowners Insurance,

1992-2006E*

*2005 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2005 residential windstorm losses of $7.35B. 2006 estimate from Ins. Info. Inst.

$ B

illi

ons

Florida’s homeowners insurance market produces

small profits in most years and enormous losses in others

-$10.6-$10.8-$10.1-$9.7

-$8.8-$7.7

-$6.5-$5.2

-$3.8-$2.7

-$1.2

$0.7

-$9.7

-$13.4

-$10.7

($16)

($14)

($12)

($10)

($8)

($6)

($4)

($2)

$0

$2

92 93 94 95 96 97 98 99 00 01 02 03 04 05E 06F

Cumulative Underwriting Gain (Loss) in Florida Homeowners

Insurance, 1992-2006E*

$ B

illi

ons

It took insurers 11 years (1993-2003) to erase the UW loss associated with

Andrew, but the 4 hurricanes of 2004 erased the prior 7 years of profits &

2005 deepened the hole.

Regulator under US law has duty to allow rates

that are “fair,” “not excessive” and “not

unduly discriminatory.”Reality is that regulators

in CAT-prone states suppress rates.

*2005 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2005 residential windstorm losses of $7.35B. 2006 estimate from Ins. Info. Inst.

Rates of Return on Net Worth for Homeowners Ins: US vs. Florida

-1.7%

9.7%

-4.2%

3.6%

12.4%

5.4%

2.5%

5.4%3.8% 1.4%

-7.2%

35.7%

13.1%

31.5%28.6%29.3% 29.0%

31.3%

23.1%

35.4%

-16.1%

33.6%

-20%

-10%

0%

10%

20%

30%

40%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Averages: 1993 to 2003

US HO Insurance = +2.8%; FL= +25.0%

Source: NAIC

Profits were earned most years after Andrew but before 2004

1993 - 2003

Rates of Return on Net Worth for Homeowners Ins: US vs. Florida

Source: NAIC; 200/6 US and FL estimates from the Insurance Information Institute.

-54.3%

-2.8%

-183.3%

-714.9%

-53.4%

36.0%

-800%

-700%

-600%

-500%

-400%

-300%

-200%

-100%

0%

100%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06E

US Florida

Averages: 1990 to 2006E

US HO Insurance = -0.9%

FL HO Average = -36.5%

Andrew

4 Hurricanes

Wilma, Dennis, Katrina

1990 – 2006E

Major 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

-$516

-$1,425

-$1,770

-$954

-$595 *

-$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

Mississippi WindstormUnderwriting

Association (MWUA)

2004 2005

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

CAPITAL & CAPACITY CONSIDERATIONS:

INSURERS MUST PUT LARGE AMOUNTS OF CAPITAL AT

RISK TO OFFER INSURANCE IN FLORIDA

$471 $523 $580

$644 $715

$794 $881

$978 $1,086

$1,206 $1,339

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

($ M

illi

ons)

Estimated New Insurance Capital Required to Support Growth in FL

Homeownership, 2005-2015*

*Estimate assumes 1:1 premium-to-surplus ratio and continuation of CAGR in direct premiums written of 11% (actual rate for period 1996-2003).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.

$471 $993

$1,573 $2,217

$2,932 $3,726

$4,607

$5,585

$6,672

$7,877

$9,216

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

($ M

illi

ons)

Estimated Cumulative New Insurance Capital Required to Support Growth in

FL Homeownership, 2005-2015*

*Estimate assumes 1:1 premium-to-surplus ratio and continuation of CAGR in direct premiums written of 11% (actual rate for period 1996-2003).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.

Are Florida’s Development

Patterns Rational?

Excessive Catastrophe Exposure:Outcome of Economically & Politically

Rational Decision Process?• Property Owners

Make economically rational decision to live in disaster-prone areas Low cost of living, low real estate prices & rapid appreciation, low/no income tax, low

property tax, rapid job growth Government-run insurers (e.g., CPIC, NFIP) provide implicit subsidies by selling

insurance at below-market prices with few underwriting restrictions Government aid, tax deductions, litigation recovery for uninsured losses No fear of death and injury

• Local Zoning/Permitting Authorities Allowing development is economically & politically rational & fiscally sound Residential construction creates jobs, attracts wealth, increases tax receipts, stimulates

commercial construction & permanent jobs, develops infrastructure Increases local representation in state legislature & political influence Property and infrastructure damage costs shifted to others (state and federal taxpayers,

policyholders in unaffected areas)• Developers

Coastal development is a high-margin business Financial interest reduced to zero after sale

Source: Insurance Information Institute.

Excessive Catastrophe Exposure:Outcome of Economically & Politically

Rational Decision Process?• State Legislators

Loathe to pass laws negatively impacting development in home districts Local development benefits local economy and enhances political influence Rapid development lessens need for higher income and property taxes Can redistribute CAT losses to unaffected policyholders and taxpayers Can suppress insurance prices via state insurance regulator, suppress pricing and weaken

underwriting standards in state-run insurer & redistribute losses • Congressional Delegation

Home state development increases influence in Washington Political representation, share of federal expenditures

Loathe to pass laws harming development in home state/district Tax law promotes homeownership and actually produces supplemental benefits for property

owners in disaster-prone areas Large amounts of unbudgeted disaster aid easily authorized Tax burden largely borne by those outside CAT zone & those with no representation (children

& unborn)• President

Presidential disaster declarations and associated aid are increasing Political benefits to making declarations and distributing large amounts of aid Direct impact on favorability ratings & election outcomes Losses can be distributed to other areas and the unrepresented

Source: Insurance Information Institute.

How Insurers Signal What Should be Built

and Where

Government-Run Insurers Lead to Poor Land Use/Design Decisions

• Government-run insurers (markets of last resort) serve as a vital safety valve after major market disruptions, but also serve as an enabler of unwise development…

• Government-run property insurers wash away market-based signals about relative risk

• Consequence is runaway development in disaster-prone areas• Government-run insurers:

Generally fail to charge actuarially sound rates Have weak underwriting standards Are thinly capitalized Can assess losses to policyholders other than their own Vulnerable to political pressure

• Inadequate premiums, insufficient capital and weak underwriting mean that most government plans, from Citizens Property Insurance Corporation to the National Flood Insurance Program operate with frequent deficits

Negative Outcomes from Flaws in Government-Run Insurers

• True risk associated with building on a particular piece of property is obscured

• Subsidies are generated leading to market distortions/inequities: Many thousands of homes likely would not have been built (or built differently) if

property owner obligated to pay actuarially sound rates CPIC assessments from Wilma will require grandmothers living in trailer parks on

fixed incomes in Gainesville to subsidize million dollar homes in Marco Island via assessment (surcharges).

• Serial rebuilding in disaster-prone areas is the norm• Property owners come to assume that the government rate is the

“fair” rate and object to moves to actuarially sound rates. • Government-run insurer can’t control its own exposure

Legislature mandates that CPIC offer coverage in most cases if no private insurer will offer coverage due to high risk, near certainty of destruction

No restrictions on value of property, so high-valued properties represent disproportionate share of potential loss

• Taxpayer Burden: NFIP borrowed $20B+ in 2005

Insurance-in-Force: CPIC vs. Voluntary (Private) Insurers

Private insurers accept relatively little wind

risk in South FL

That’s why operating in

the red is unavoidable

Risk Perception

Is Disaster Risk Factored into the Buy/Build/Move

Decision?

Average Annual Population Growth Rates of Atlantic States, 1960-1980 & 1980-2003

1.5%

3.2%

1.6%

0.5%

1.4%

0.7%

1.2%

1.1%

0.48%

1.31%

2.33%

1.93%

0.48%

1.11%

0.62%

1.49%

1.0%

0.9%

0% 1% 1% 2% 2% 3% 3% 4%

Connecticut

Delaware

Florida

Georgia

Massachusetts

Maryland

Maine

North Carolina

United States

1960-1980

1980-2003

Source: US Census Bureau.

Average Annual Population Growth Rates of Atlantic States, 1960-1980 & 1980-2003

2.0%

0.9%

0.2%

1.3%

0.5%

1.4%

1.1%

2.33%

1.40%

0.66%

0.37%

1.19%

0.53%

1.35%

1.01%

3.2%

0% 1% 1% 2% 2% 3% 3% 4%

Florida

New Hampshire

New Jersey

New York

South Carolina

Rhode Island

Virginia

United States

1960-1980

1980-2003

Source: US Census Bureau.

Average Annual Population Growth Rates of Gulf Coast States, 1960-1980 & 1980-2003

3.2%

1.2%

0.7%

1.8%

1.1%

0.61%

2.33%

0.28%

0.56%

1.84%

1.01%

0.8%

0% 1% 1% 2% 2% 3% 3% 4%

Alabama

Florida

Louisiana

Mississippi

Texas

United States

1960-1980

1980-2003

Source: US Census Bureau.

Average Annual Population Growth Rates of Florida Coastal Cities, 1990-2003

1.8%

1.9%

2.1%

5.0%

3.0%

1.8%

1.8%

1.9%

1.5%

2.74%

1.43%

1.72%

1.36%

3.35%

2.29%

1.01%

1.53%

1.80%

1.38%

2.8%

0% 1% 2% 3% 4% 5% 6%

Cape Coral/Fort Myers

Daytona

Jacksonville

Miami/Ft. Lauderdale/Miami Beach

Naples/Marco Island

Orlando

Pensacola

Palm Bay/Melbourne

Sarasota/Bradenton

Tampa/St. Petersburg

1990-20002000-2003

Source: US Census Bureau.

3.7

8%

0.4

0%

2.0

8%

17

.74

%

9.7

1%

9.5

7%

21

.00

%

5.7

3% 1

0.0

5%

20

.50

%

10

.31

%

1.21

% 6.41

%

0.60

%

1.26

% 5.90

% 9.52

%

28

.40

%

0AL FL LA MS TX US

1980-1990 1990-2000 2000-2003

State Population Growth Rates by Decade, Gulf Coast, 1980-2003

Source: Statistical Abstract of the United States, US Census Bureau

Florida has posted the fastest growth of any Gulf Coast state since 1980, driving

its exposure to hurricane loss

Projected Percent Population Growth of Atlantic States, 2003-2030

24.5%

12.6%

1.5%

21.6%

6.9%

28.5%

20.9%

52.2%

0% 10% 20% 30% 40% 50% 60%

Florida

New Hampshire

New Jersey

New York

South Carolina

Rhode Island

Virginia

United States

Source: US Census Bureau.

Florida is expected to grow faster than any Atlantic Coast state through 2030, driving its exposure

to hurricane loss still higher

Projected Percent Population Growth of Atlantic States, 2003-2030

21.4%

52.2%

32.5%

8.6%

24.3%

7.7%

37.5%

20.9%

5.8%

0% 10% 20% 30% 40% 50% 60%

Connecticut

Delaware

Florida

Georgia

Massachusetts

Maryland

Maine

North Carolina

United States

Source: US Census Bureau.

Florida is expected to grow faster than any Atlantic Coast state through 2030, driving its exposure

to hurricane loss still higher

Projected Percent Population Growth of Gulf Coast States, 2003-2030

52.2%

6.6%

7.1%

41.0%

20.9%

8.0%

0% 10% 20% 30% 40% 50% 60%

Alabama

Florida

Louisiana

Mississippi

Texas

United States

Source: US Census Bureau.

Florida is expected to grow faster than any Gulf Coast state through

2030, driving its exposure to hurricane loss still higher

18.22%

23.88%

38.37%

33.36%

0Atlantic Coast Gulf Coast

2003 2030

Percent of Atlantic & Gulf Coast Populations Living in FL, 2003 and

2030

Source: US Census Bureau

The proportion of Atlantic and Gulf coast population living in FL will

continue to swell in the decades ahead

What Works,What Doesn’t

Successful Tools for Controlling Hurricane Exposure

• Strengthened building codes• Stringent enforcement of building codes• Fortified home programs• Insurance rates based on sound actuarial

principles (risk-based rates that are not government controlled); Works for commercial insurers

• Disciplined underwriting• Removing impediments to capital flows• Incentives to adopt mitigation• Forcing communities to consider and take a

larger stake in their catastrophe exposureSource: Insurance Information Institute

Unsuccessful Tools for Controlling Hurricane Exposure

• Insurance rates that are not actuarially sound (i.e., don’t reflect true risk)

• Political interference in rate process• Inadequate underwriting controls• Subsidies

Intra-state (policyholders/taxpayers)US Taxpayer

• Voluntary flood coverage• Litigation

Source: Insurance Information Institute

Faux Pas & Fatal Flaws in Florida’s Approach to Managing CAT Risk

FAUX PAS• Governor has unnecessarily, unjustifiably and counterproductively

vilified private insurers and reinsurers Insurers want to find ways to cover the majority of hurricane-exposed property

in FL and will do so if given the opportunity Insurers and capital markets can be partners in finding lasting and innovative

solutions to Florida’s permanent hurricane problem

• Changes to market are arbitrary, capricious and punitive and violate virtually all laws of modern economics, finance, statistics and actuarial science

• Meteorological and actuarial reality have been forced to take a back seat to politics

• Political risk to insurers now exceeds hurricane risk• Bottom Line: Residents of Florida are Now the Most Financially

Exposed People on Earth to Catastrophic Risk

FATAL FLAWS• Virtually no diversification

Basically monoline, single state, single risk• No true spread of risk

Citizens market share is concentrated in riskiest areas FHCF is Citizen’s sole reinsurer; FHCF doesn’t access retrocessional mkt.

• Rates in Citizens not even remotely close to actuarially sound• Citizens & FHCF are too thinly capitalized• Losses are substantially funded via post-event assessment• Plants seeds of animosity between non-coastal & coastal dwellers

(within state and with non-coastal states) Largest beneficiaries are residents of southeast coast

• Plan will alienate business community (liability lines assessed)• Homeowners insurance has been converted into a regressive income

and wealth transfer mechanism• May have harmed chances for Fed Natural Catastrophe Fund• Little done to address true risk of hurricanes

Faux Pas & Fatal Flaws in Florida’s Approach to Managing CAT Risk

Problem Issues• Local control of land use and permitting

creates significant incentive problemsBenefits accrue locally while many costs can be

redistributed to others via taxes, insurance and aid

• Prospect of government aid reinforces unsound building and location decisions

• States don’t want to raise taxes to pay for mitigation/prevention even if state is sole beneficiaryE.g., NO levees; Beach replenishment

Source: Insurance Information Institute

Pre- vs. Post-Event in FL for 2007 Hurricane Season

$12.

4

$15.

0

$17.

6

$25.

8

$9.9

$14.

6

$24.

1

$31.

4

$34.

5

$37.

4

$54.

2

$10.9$10.4$10.1$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

1-in-20 1-in-30 1-in-50 1-in-70 1-in-85 1-in-100 1-in-250

Pre-Event Funding Post-Event Funding (Assessments & Bonds)

Bil

lion

s

Total = $20.0 Billion

Notes: Pre-event funding includes funds available to Citizens, FHCF and private carriers plus contingent funding available through private reinsurance to pay claims in 2007. Post-event funding is on a present value basis and does not includefinancing costs. Probabilities are expressed as “odds of a single storm of this magnitude or greater happening in 2007.”Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.

$35.0B

$25.0B

$43.8B $49.5B

$55.0B

$80.0BThere is a very significant likelihood of major, multi-year assessments in 2007

Per Household Savings vs. Long-Term Costs of FL Legislation for

2007 Hurricane Season

$3

,50

3

$4

,41

6

$4

,69

4

$4

,95

6

$7

,85

5

$2

,52

8

$3

,21

9

$3

,49

7

$3

,75

2

$6

,11

6

$265$1,005 $1,486

$1,066$721

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

Savings 1-in-20 1-in-30 1-in-50 1-in-70 1-in-85 1-in-100 1-in-250

Direct Costs Indirect Costs

Bil

lion

s

Total = $1,726

Notes: Assumes average homeowners insurance premium of $1300 in 2007. Savings for 2007 reflects 24.3% savings on hurricane costs, assumed to be 63% of premium. Savings based on statewide OIR estimate. Actual savings may be less.Direct costs include assessments paid by policyholders on home and personal auto premiums. Indirect costs includeassessments on commercial lines passed on to policyholders via higher prices. Amounts are in nominal dollars, or the totalcost of borrowing including finance charges over the term of the bond. Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.

$2,552

$6,031 $7,635

$8,191 $8,708

$13,971

Savings dwarfed by potential costs under

most scenarios

Average Annual Assessment per Household, 1-in-100 Year Event in 2007

Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.

The average Florida household will pay $8,699 over 30 years in assessments if a 1-in-100 year

event strikes in 2007. Assessments could rise if additional storms hit

in 2007 or beyond.

Savings vs. Costs by Region: Neither Equitable nor Proportionate

TALLAHASSEEAverage Savings: $20

Cost of 1-in-30 Storm: $2,000Cost is 100 times avg. savings

TAMPAAverage Savings: $100

Cost of 1-in-30 Storm: $2,300Cost is 23 times avg. savings

ORLANDO

Average Savings: $30

Cost of 1-in-30 Storm: $2,075

Cost is 69 times avg. savings

MIAMI

Average Savings: $1,120

Cost of 1-in-30 Storm: $3,375

Cost is 3 times avg. savings

STATEWIDE AVERAGEAverage Savings: $265

Cost of 1-in-30 Storm: $2,550Cost is 10 times avg. savings

Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.

Overview of Plans for a National

Catastrophe Insurance Plan

NAIC’s Comprehensive National Catastrophe Plan

• Proposes Layered Approach to Risk• Layer 1: Maximize resources of private

insurance & reinsurance industry Includes “All Perils” 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

Comprehensive National Catastrophe Plan Schematic

Personal Disaster Account

Private Insurance

State Regional Catastrophe Fund

National Catastrophe Contract Program

Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.

State Attachment

1:50 Event

1:500 Event

Objectives of NAIC’s Comprehensive National Catastrophe Plan

• Should Promote Personal Responsibility Among Policyholders

• Supports Reasonable Building Codes, Development Plans & Other Mitigation Tools

• Maximize the Risk Bearing Capacity of the Private Markets

• Should Provide Quantifiable Risk Management to the Federal Government

Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.

Legislation has been introduced and ideas

espoused by ProtectingAmerica.org will likely get a more

thorough airing in 2007/8

STATE RESIDUAL MARKETS

Still Growing Despitea Quiet 2006

Florida Citizens Exposure to Loss (Billions of Dollars)

Source: PIPSO; Insurance Information Institute

408.8

$210.6$206.7$195.5

$154.6

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

2002 2003 2004 2005 2006

Exposure to loss in Florida Citizens nearly doubled in 2006

Major 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

-$516

-$1,425

-$1,770

-$954

-$595 *

-$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

Mississippi WindstormUnderwriting

Association (MWUA)

2004 2005

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

Recommendations

Recommendations for Controlling Hurricane Exposure

• Raise public awareness of riskMandatory risk disclosure in all residential real estate transactionsRequire signed waivers if decline flood coverage that also waive rights

to any and all disaster aid, orMandate flood coverage

• Continue to strengthen & enforce of building codes• Allow markets to determine all property insurance rates

Role of state focused on difficult-to-insure or income issues• Increase incentives to mitigate• Require state-run insurer to charge actuarially sound rates

and limit high value exposure• Require communities/counties to a financial stake in their

catastrophe exposureReimburse disaster aid to state/federal government

Insurance Information Institute On-Line

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