Overview of the Florida Overview of the Florida Hurricane Risk MarketHurricane Risk Market

Florida Office of Insurance Florida Office of Insurance RegulationRegulation

August 24, 2005August 24, 2005

PurposePurpose

Hurricane Risk is what makes the Florida Hurricane Risk is what makes the Florida Property Insurance Market Unique and Property Insurance Market Unique and why this Task Force was assembledwhy this Task Force was assembled

This Overview is intended to provide This Overview is intended to provide context for the Task Forcecontext for the Task Force

Hurricane Risk and Other Hurricane Risk and Other Catastrophic RisksCatastrophic Risks

Catastrophic RiskCatastrophic Risk: A function of frequency, severity, : A function of frequency, severity, andand correlationcorrelation

““Risk of RuinRisk of Ruin”” for suppliers of capital that for suppliers of capital that taketake the riskthe risk

Hurricanes are not the only natural source of Hurricanes are not the only natural source of catastrophic risk, a catastrophic risk, a global marketglobal market is developingis developing

In some cases, these are considered insurable, in other In some cases, these are considered insurable, in other cases not.cases not.

Global Catastrophic RiskGlobal Catastrophic Risk

MunichRe World Risk Map

Western Hemisphere Catastrophic Western Hemisphere Catastrophic RiskRisk

MunichRe Risk Map

US Catastrophic RiskUS Catastrophic Risk

RMS Risk Map

Catastrophic Insured Losses in the Catastrophic Insured Losses in the USUS

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

$ Bil (2004)

Data From ISO

Insuring Catastrophic RiskInsuring Catastrophic Risk

The Property/Casualty and Reinsurance The Property/Casualty and Reinsurance IndustryIndustry

Alternative Private Market Capital SourcesAlternative Private Market Capital Sources

Public Enterprises (federal, state and local Public Enterprises (federal, state and local government)government)

Insurance and ReinsuranceInsurance and Reinsurance

For insurers, catastrophic risk is part and For insurers, catastrophic risk is part and parcel of their core business, parcel of their core business, They have a finite and slowly growing They have a finite and slowly growing national capital basenational capital baseReinsurance addresses catastrophic risks Reinsurance addresses catastrophic risks specifically; amount available is cyclical.specifically; amount available is cyclical.In 2003, global property reinsurance In 2003, global property reinsurance premiums $53 billion (IAIS), nonpremiums $53 billion (IAIS), non--life $117life $117

US Property/Casualty Insurer US Property/Casualty Insurer Aggregate SurplusAggregate Surplus

0

50

100

150

200

250

300

350

400

450

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

US P/C Surplus

Data: NAIC and ISO

$ Billion

““AlternativeAlternative”” MarketsMarketsCatastrophe securities in existence since 1995. On Catastrophe securities in existence since 1995. On average 10average 10--15 transactions per year, transferring 115 transactions per year, transferring 1--1.5 1.5 billion in risk. billion in risk.

Deal size per transaction between $200Deal size per transaction between $200--500 million500 million

Institutional and hedge fund investment demand strong, Institutional and hedge fund investment demand strong, currently exceeding supplycurrently exceeding supply

There have been other attempts with options and There have been other attempts with options and futures, not economically successful to date futures, not economically successful to date

Public Insurance MarketsPublic Insurance Markets

Beach PlansBeach Plans

Catastrophe Funds and Authorities (CA FL Catastrophe Funds and Authorities (CA FL HI)HI)

Other Residual MarketsOther Residual Markets

Florida Hurricane RiskFlorida Hurricane Risk

FrequencyFrequency: Exogenous Meteorological : Exogenous Meteorological PhenomenonPhenomenon

SeveritySeverity: Mixed, part meteorological, part : Mixed, part meteorological, part coverage, part physical structurecoverage, part physical structure

CorrelationCorrelation: demographics, building: demographics, building

FrequencyFrequency

Best Evidence: MultiBest Evidence: Multi--decadal cycles, decadal cycles, currently in active cycle (since 1995)currently in active cycle (since 1995)Result invariant to current debate on Result invariant to current debate on global warmingglobal warmingImprecise Measurement and IdentificationImprecise Measurement and IdentificationRecall that Hurricane Andrew struck Recall that Hurricane Andrew struck during a during a ““low activitylow activity”” phase of the cyclephase of the cycle

SeveritySeverity

MeteorologicalMeteorological: storms are expected to : storms are expected to be strongerbe strongerCoverageCoverage: What is included in the : What is included in the insurance policy, deductible and policy insurance policy, deductible and policy limitslimitsPhysical StructuresPhysical Structures: Age of construction, : Age of construction, location, and mitigationlocation, and mitigation

CorrelationCorrelation

State Hurricane Loss Potential State Hurricane Loss Potential ProfileProfile

0

10

20

30

40

50

60

70

80

90

100

3 4 5 6 7 8 9 10 15 20 40 50 100 200 500 1000

Return Time (years)

Stru

ctur

al L

oss

$bill

ion

Data from FHCF 2005 Rate Report

Florida Private Insurance Property Florida Private Insurance Property MarketMarket

4.84.84.994.9918418412/31/0412/31/04

4.24.24.94.921021012/31/0312/31/03

3.83.85.15.122822812/31/0212/31/02

3.83.85.65.623223212/31/0112/31/01

3.53.55.55.525125112/31/0012/31/00

Premium Premium Written ($ Written ($ billion)billion)

Number of Number of Policies in Force Policies in Force (millions)(millions)

No. of Reporting No. of Reporting CompaniesCompanies

DateDate

Source: FL-OIR QUASAR

Florida Underwriting ExperienceFlorida Underwriting Experience

Combined Ratio- Florida's 13 Largest Groups

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

300.00%

350.00%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Data: NAIC Annual Statements

Historical PerformanceHistorical Performance

-5,000,000,000

10,000,000,00015,000,000,00020,000,000,00025,000,000,000

1995 1995 to1996

1995 to1997

1995 to1998

1995 to1999

1995 to2000

1995 to2001

1995 to2002

1995 to2003

1995 to2004

Florida Direct Premiums Earned FL Losses Incurred, LAE Incurred & Expenses

Data: NAIC Annual Statements

IssuesIssues

Previous slide demonstrates the multiPrevious slide demonstrates the multi--year year nature of catastrophe risknature of catastrophe riskCurrent accounting and reserving not Current accounting and reserving not geared for these eventsgeared for these eventsMost other developed countries have taxMost other developed countries have tax--deferred catastrophic reserves, Rep Foley deferred catastrophic reserves, Rep Foley introduced HR 2668introduced HR 2668Many other countries have a national risk Many other countries have a national risk fund/poolfund/pool

Public InsurancePublic Insurance

CitizenCitizen’’s Property Insurance: a unique s Property Insurance: a unique residual market mechanismresidual market mechanism

Florida Hurricane Catastrophe FundFlorida Hurricane Catastrophe Fund

CitizenCitizen’’s Policy Counts Policy Count

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

Aug-03

Oct-03

Dec-0

3Feb

-04

Apr-04

Jun-

04Aug

-04Oct

-04Dec

-04

Feb-0

5Apr

-05Ju

n-05

Personal ResHigh Risk Policies

DATA: Citizen’s Exposure Reports

Recent CitizenRecent Citizen’’s Experiences Experience

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05

Personal ResHigh Risk Policies

DATA: Citizen’s Exposure Reports

FHCF ExposureFHCF Exposure(in $Billions)(in $Billions)

$0$200$400$600$800

$1,000$1,200$1,400$1,600

1995

/96

1996

/97

1997

/98

1998

/9919

99/20

0020

00/20

0120

01/20

0220

02/20

0320

03/20

0420

05/20

06

Average Annual Compound Growth Rate over the Period is 6.5%

Data: FHCF Rate Reports

SummarySummary

Florida Hurricane is one of many global Florida Hurricane is one of many global catastrophic risks available in the marketcatastrophic risks available in the market

Traditional capital has not kept up with Traditional capital has not kept up with demand, especially in FLdemand, especially in FL

Alternative markets have not grown to Alternative markets have not grown to meet the demandsmeet the demands

SummarySummary

Accounting and tax policy does not suit Accounting and tax policy does not suit catastrophic riskcatastrophic riskOther bodies have developed national Other bodies have developed national plansplansCitizenCitizen’’s is a dominant footprint in the s is a dominant footprint in the marketmarketExposure load for FHCF growing steadilyExposure load for FHCF growing steadily