Property Insurance in Florida:Balancing the Calm & the Storms

BinTech PartnersEnd of Hurricane Season Forum

St. Petersburg, FLDecember 9, 2010

Lynne McChristian, Florida RepresentativeInsurance Information Institute

Tel: 813.480-6446 lynnem@iii.org www.InsuringFlorida.org

2

Presentation Overview

Insurance Rates: Why Insurers Plan for the WorstHistory Repeating Itself – or Outdoing Itself

Profits & ProfitabilityUnderwriting PerformanceEconomy and InvestmentsThe Role of Reinsurance

Public vs. Private Insurance Model

Concerns About Complacency

How Insurers Establish Rates

They consider loss history and probability forecasts. “Probability” forecast is not the same as a weather forecast.

Forecasters were right! 2010 was the third most active season on record, and, thankfully, no landfall.

In hurricane-free years, insurers are able to build funds for when a catastrophic storm does come. Building this capital means they can write more business.

It’s not only about hurricanes. Non catastrophe losses are rising, i.e., sinkhole claims.

3

Why Rates Have Not Dropped

The threat of storms has not diminished. Cycle of major storms continues.

More people and more property have been built in vulnerable areas. Florida is on track to eclipse NY as the third most populous

state. Population growth was between 2.0% and 2.6% between 1990’s and 2006 (national average was 1%); slowed in 2008.

Coastal exposure in Florida represents 79% of all property exposure in the state.

4

50

100

150

200

250

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

First Half 201095 Events

Number of events in first half of 2010 is close to the annual totals from five of past ten years.

Nu

mb

er

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Natural Disasters in the United States, 1980 – 2010Number of Events (Annual Totals 1980 – 2009 vs. First Half 2010)

Source: MR NatCatSERVICE 5© 2010 Munich Re

6

$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

2.5

$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 10*20??

US Insured Catastrophe Losses

*Estimate through December 31, 2010.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; Munich Re; Insurance Information Institute.

2010 CAT Losses Are Running Below 2009, So Far Figures Do Not Include an Estimate of Deepwater Horizon Loss

$100 Billion CAT Year is Coming Eventually

Estimated 2010 CAT

Losses Are About

Average

($ Billions)

2000s: A Decade of Disaster2000s: $193B (up 117%)

1990s: $89B

33%

35%

38%

46%

47%

48%

52%

54%

63%

75%

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

South Carolina

Georgia

Delaware

New Hampshire

California

Virginia

Texas

Washington

Alaska

Florida

Leading States in Coastal Population Growth, 1980-2003

Source: U.S. Census Bureau and NOAA

Between 1980 and 2003, total coastal population grew by 33 million people, or 28 percent.

Florida – at 75% – had the greatest percent population

change.

333.7

283.1

427.1

104.6

662.9

136.2

1,388.1

254.5

1,136.6

229.1

1,725.8

410.7

2,746.5

3,831.4

4,178.4

12,465.912,703.4

501.0

247.8

0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000

New York

Louisiana

Connecticut

Mississippi

Alabama

Rhode Island

Massachusetts

Maine

New Jersey

Hawaii

South Carolina

Delaware

Maryland

New Hampshire

Virginia

Georgia

North Carolina

Texas

Florida

Population Growth Projections for Hurricane Exposed States (2000 to 2030) (000)

The U.S. as a whole is expected to have a population increase of 82.1 million, or 29.2 percent during the same period.

Source: U.S. Census Bureau, accessed at http://www.census.gov/population/projections/PressTab1.xls

By 2030, Florida is expecting a population increase of 12.7 million, closely followed by Texas with an expected increase of 12.5 million.

1.0%

5.0%

9.0%

12.0%

13.0%

23.0%

26.0%

28.0%

29.0%

34.0%

35.0%

36.0%

54.0%

59.0%

62.0%

64.0%79.0%

11.0%

0% 20% 40% 60% 80% 100%

Maryland

Georgia

NC

Virginia

Alabama

Mississippi

NH

Texas

S. Carolina

Rhode Island

New Jersey

Louisiana

Delaware

Massachusetts

Maine

New York

Connecticut

Florida

Insured Coastal Exposure As a % Of Statewide Insured Exposure In 2007

Source: AIR Worldwide

Most of Florida’s Exposure is Considered Coastal – 79%.

11

Top 12 Most Costly Disastersin US History

(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

Why Rates Have Not Dropped (continued)

Emphasis is on strategic underwriting in a down economy. Insurers strive to match the premiums to the level of risk,

using their loss experience and risk modeling. This has been a challenge in Florida.

As a result of rate suppression, insurers have limited their exposure to loss to ensure that money is on hand to pay anticipated claims.

The amount of premium collected has declined, due to mandatory credits for mitigation that misrepresent the risk.

13

Residential Premiums Have Dropped

Homeowners Insurers

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

0

50

100

150

200

250

300

FloridaLouisianaMississippiSouth Carolina

Fewer Private Insurers in the FL Market

Source: FSU Catastrophic Storm Risk Management Center.

16

Insured Losses for Top 12 Most Costly Disasters in U.S. History

EVENT Billions in 2009$

Hurricane Katrina, 2005 $45.3

Hurricane Andrew, 1992 $23.8

9/11 Attacks, 2001 $22.8

Northridge Earthquake, 1994 $18.2

Hurricane Ike, 2008 $12.5

Hurricane Wilma, 2005 $11.3

Hurricane Charley, 2004 $8.5

Hurricane Ivan, 2004 $8.1

Hurricane Hugo, 1989 $7.3

Hurricane Rita, 2005 $6.2

Hurricane Frances, 2004 $5.2

Hurricane Jeanne, 2004 $4.2

FLORIDAIMPACT

17

Profits & Profitability

Homeowners Insurance is Historically Volatile

P/C Net Income After Taxes1991–2010:H1 ($ Millions)

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $3

6,8

19

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$1

6,5

31$2

8,3

11

-$6,970

$6

5,7

77

$4

4,1

55

$2

0,5

59

$3

8,5

01

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10:H1

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS1 = 5.8% 2010:H1 ROAS = 6.3%

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.5% ROAS for 2010:H1 and 4.6% for 2009. 2009:H1 net income was $19.2 billion and $10.2 billion in 2008:H1 excluding M&FG.Sources: A.M. Best, ISO, Insurance Information Institute

P-C Industry 2010:H1 profits rose $10.6B from $6.0B in 2009:H1, due mainly to $2.2B in realized

capital gains vs. -$11.1B in previous realized capital losses

20

ROE: P/C vs. All Industries1987–2009*

* Excludes Mortgage & Financial Guarantee in 2008 and 2009.Sources: ISO, Fortune; Insurance Information Institute.

-5%

0%

5%

10%

15%

20%

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

US P/C Insurers All US Industries

P/C Profitability IsCyclical and Volatile

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

21

Number of Years with Underwriting Profits by Decade, 1920s–2000s

0 0

3

54

8

10

76

0

2

4

6

8

10

12

1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*

* 2000 through 2009. 2009 combined ratio excluding mortgage and financial guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an underwriting profit.Note: Data for 1920–1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data.

Number of Years with Underwriting Profits

Underwriting Profits Were Common Before the 1980s (40 of the 60 Years Before 1980 Had Combined Ratios Below 100) –

But Then They Vanished. Not a Single Underwriting Profit Was Recorded in the 25 Years from 1979 Through 2003

It took 11 years to erase losses from Andrew. Then, 2004 hurricanes erased 7 years’ profits; 2005 deepened the hole.

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

-$8.8-$7.7

-$6.5-$5.2

-$3.8-$2.7

-$1.3

$0.5

-$8.8

-$12.6

-$9.6

-$6.2

-$4.1

($14)

($12)

($10)

($8)

($6)

($4)

($2)

$0

$2

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E 08E

Rates do not reflect this risk.

**Does not include Citizens Property Insurance Corporation results.

Homeowners Insurance,1992-2007

Florida’s Cumulative Underwriting Gain/Loss

The Role of Reinsurance

24

Reinsurance is “insurance for insurers.” It is an important risk-sharing mechanism in Florida

because it helps spread risk across the global markets.

Keeping all reinsurance within Florida would also mean keeping all the risk within the state.

All property/casualty insurers in Florida are required to participate in the state’s reinsurance fund – Florida Hurricane Catastrophe Fund. If the FHCF does not have the money it needs on hand, it

finances losses with debt – that you help to pay.

For example, we’ll pay for 2005 storms through 2014.

27

Public & Private Insurance Model

Nearly All Floridians Pay Into the State-run Insurance Pool

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

MississippiWindstorm

UnderwritingAssociation (MWUA)

2004 2005

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.

Florida Citizens Exposure to Loss ($ Billions)

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

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 Hurricane Catastrophe Fund. – 6 percent for 2010.– Plus emergency assessment.

1 percent in 2010; increases to 1.3% in 2011 through 2014.

Citizens Emergency Assessment.– 1.4 percent through 2017.– Plus a Regular Assessment when needed.

Emergency Management Fund.– $2 for homeowners/$4 for commercial.

Federal Insurance Guarantee Fund Recoupment.

Florida’s Assessments

Estimated Assessments by Storm Level

1 in 25 1 in 100 1 in 250

Citizens Private Citizens Private Citizens Private

Homeowners 8.7% 8.7% 91.5% 54.4% 157.9% 128.4%

Auto 8.7% 8.7% 54.4% 54.4% 89.2% 89.2%

Business 8.7% 8.7% 54.4% 54.4% 128.4% 128.4%

32

Source: Florida Insurance Consumer Advocate Office, July 2009.

Current Florida law does not allow single year assessments for double-digit numbers, so losses will be paid over time in the event of major storms. Losses associated with any private insurer insolvencies are not included in the calculation.

22%30% 31%

32%33%

28%

0%

10%

20%

30%

40%

50%

60%

70%

Coastal Counties Interior Counties Noncoastal States

Somewhat Unfair Very unfair

Public Attitude Monitor 2006: Unfairness of Policyholder Subsidies

Growth in residual market mechanisms may be due in part to implicit support of residents of coastal communities.

Coastal States

Source: Insurance Research Council

29%25%

30%

22% 34%31%

0%

10%

20%

30%

40%

50%

60%

70%

Coastal Counties Interior Counties Noncoastal States

Somewhat Unfair Very unfair

Public Attitude Monitor 2006: Unfairness of Taxpayer Subsidies

Some 59% of those living in interior counties and 61% in noncoastal states think taxpayer-subsidized insurance is unfair, compared to just 51% of those living in coastal counties.

Coastal States

Source: Insurance Research Council

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, 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

Not Graded: District of ColumbiaMississippiLouisiana

Florida earned an “F” grade.

36

Concerns About Complacency

Does Florida Suffer from Hurricane Amnesia?

37

Unemployment Rates by State, September 2010:Highest 25 States*

9.6

9.49.

9

9.7

9.8

9.8

9.2

9.0

9.1

8.99.3

9.0

9.09.4

10.611

.5

10.0

10.0

10.1

10.111

.0

13.0

12.4

11.9

14.4

0

2

4

6

8

10

12

14

16

NV MI CA FL RI SC OR KY IN OH GA IL MS DC AZ NC TN NJ MO WV CT WA PA ID AL

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for September 2010, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In September, state and regional unemployment rates were little changed.

Some 29 states and DC reported unemployment rate decreases from a

year earlier, 16 states had increases and 5 had no change.

The US unemployment rate was 9.6% in

September

What Will It Take to Lower Rates?

Awareness & Planning. Those who plan ahead rebound the fastest.

Overcome entitlement mentality. “FEMA is not for you.”

Closing loopholes related to insurance claims. Change 5-year statute to file a hurricane claim?

Require those who get insurance money for a sinkhole claim to fix the damage.

Mitigation. We must make our property and people less vulnerable.

Majority of existing home was built before the stronger building codes of 2002.

38

Get Fortified: Institute for Building & Home Safety

39

The insurance industry is committed to building stronger, safer homes and helping people learn how to retrofit existing property.

www. DisasterSafety.org

40

The Nation’s Judicial Hellholes: 2010

Source: American Tort Reform Association; Insurance Information Institute

South Florida

West VirginiaIllinoisCook County

New MexicoAppellate

Courts

Watch List

California Alabama Madison County, IL Jefferson County, MS Texas Gulf Coast Rio Grande Valley, TX

Dishonorable Mention

AR Supreme Court MN Supreme Court ND Supreme Court PA Governor MA Supreme

Judicial Court Sacramento County

New JerseyAtlantic County (Atlantic City)

New York City

2009 Top Ten Jury Verdicts

Source: Lawyers USA, January 15, 2010.

Value Issue State

$370 Million Defamation California

$330 Million Personal Injury (Drunk driving case) Florida

$300 Million Personal Injury (Tobacco verdict) Florida

$89 Million Personal Injury (Drunk driving case) Missouri

$78.75 Million Personal Injury (Prempro) New Jersey

$77.4 Million Medical Malpractice New York

$71 Million Conversion and Breach of Fiduciary Duty Texas

$70 Million Workers Comp Case Texas

$65 Million Personal Injury Florida

$60 Million Medical Malpractice New York

I.I.I. Resources: Florida website, national website, Spanish-language communication

Until next hurricane season……

43

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