The Election Season, Tax Breaks and the Eurozone…And

Hurricane Sandy: Assessing the Political Landscape

The Annual Executive Conference New York, NY

December 7, 2012 Robert P. Hartwig, Ph.D., CPCU, President & Economist

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

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Presidential Politics & the P/C Insurance Industry

How Is Profitability Affected by the President’s Political Party?

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15.10%9.40%

8.93%8.65%

8.35%7.98%

7.68%6.98%6.97%

6.65%5.43%

5.03%4.83%

4.43%3.55%

16.43%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

CarterReagan II

G.W. Bush IINixon

Clinton IG.H.W. Bush

Clinton IIReagan I

Nixon/FordTrumanObama

Eisenhower IEisenhower II

G.W. Bush IJohnson

Kennedy/Johnson

*Truman administration ROE of 6.97% based on 3 years only, 1950-52; ROEs for the years 2008 forward exclude mortgage and financial guaranty segments. Estimated ROE for 2012 = 7.0%. Source: Insurance Information Institute

OVERALL RECORD: 1950-2012*

Democrats 7.67% Republicans 7.97%

Party of President has marginal bearing on profitability of P/C insurance industry

P/C Insurance Industry ROE by Presidential Administration, 1950- 2012*

-5%

0%

5%

10%

15%

20%

25%

50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12E

BLUE = Democratic President RED = Republican President Tr

uman

Nixon/Ford

Ken

nedy

/ Jo

hnso

n

Eise

nhow

er

Car

ter

Reagan/Bush I Clinton Bush II

P/C insurance Industry ROE by Presidential Party Affiliation, 1950- 2012*

*ROEs for the years 2008 forward exclude mortgage and financial guaranty segments; Estimated 2012 ROE = 7.0% Source: Insurance Information Institute

Oba

ma

Hurricane Sandy Summary

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Sandy Will Become One of the Most Expensive Events in

Insurance History— And a Highly Politicized Disaster

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Summary of Key Financial Issues Related to Hurricane Sandy Sandy Will Likely Become the 3rd Most Expensive Hurricane in US History in

Terms of Insured Losses—With Insured Losses of Up to $25 Billion Ranks behind 2005’s Katrina ($47.6B) and 1992’s Andrew ($25.0B) [in 2011 $]

Total Claim Count is Estimated at Approximately 1.38 million Hurricane Katrina produced 1.743 million claims

2012 Could Become the 3rd Costliest Year in US History in Terms of Insured Losses—Totaling Approximately $34-$35 Billion as of Late 2012 Ranking behind 2005 ($71.7B) and 1992 ($36.9B) [both stated in 2011 dollars]

2012 Will Likely Be the 2nd Costliest Year for the NFIP (~$7B+), Likely Exhausting the Flood Program’s Remaining Borrowing Authority Record was $17.74B in 2005 (original dollars), the year of Hurricane Katrina

Too Soon to Determine Impact on P/C Insurance Industry Financials Impact of US insurers’ combined ratio and ROEs will be influenced by the degree

to which reinsurance coverage is triggered

US Cat losses had been running 40% - 50% below 2011 levels prior to Sandy

P/C Insurance Industry Entered 2012 Hurricane Very Strong Financially Industry remains very strong in the wake of Sandy, despite high losses

Hurricane Sandy Insured Loss Estimates: Late Season Large Loss* ($ Billions)

$10 - $20B

$16 - $22B

$20 - $25B

$0 $5 $10 $15 $20 $25

Eqecat

AIR

RMS

*US insured property and business interruption losses only. Sandy’s landfall in the northeast US occurred Oct. 29, 2012. Sources: RMS (11/14/12 est.), AIR (11/26/12 est.), Eqecat (11/1/12 est.); Compiled by the Insurance Information Institute.

Average of the midpoints of the 3 risk modeler

estimates is $18.8 billion

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Top 16 Most Costly Disasters in U.S. History

(Insured Losses, 2011 Dollars, $ Billions)

*Estimate as of 11/26/12 based on average of range midpoints from AIR, RMS and Eqecat.. Sources: PCS; Insurance Information Institute inflation adjustments.

$7.7 $8.5 $9.0$11.9$13.1

$18.8$19.1$24.0$25.0

$47.6

$7.3$6.9$6.5$5.5$4.4$4.3

$0$5

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

Irene (2011) Jeanne(2004)

Frances(2004)

Rita (2005)

Tornadoes/T-Storms

(2011)

Tornadoes/T-Storms

(2011)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Sandy*(2012)

Northridge(1994)

9/11 Attack(2001)

Andrew(1992)

Katrina(2005)

Hurricane Sandy could become the 5th

costliest event in US insurance history

Hurricane Irene became the 12th most expense hurricane

in US history in 2011

Includes Tuscaloosa, AL,

tornado

Includes Joplin, MO, tornado

NY Gov. Andrew Cuomo has requested $42 billion in federal aid. NJ Gov. Chris

Christie has requested $29.4B

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Top 12 Most Costly Hurricanes in U.S. History

(Insured Losses, 2011 Dollars, $ Billions)

*Estimate as of 11/26/12 based on average of range estimate midpoints from AIR, Eqecat and RMS.. Sources: PCS; Insurance Information Institute inflation adjustments.

$9.0$11.9 $13.1

$18.8

$25.0

$47.6

$8.5$7.7$6.5$5.5$4.4$4.3

$0$5

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

Irene(2011)

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Sandy*(2012)

Andrew(1992)

Katrina(2005)

Hurricane Sandy could become the 3rd costliest

hurricane in US insurance history Hurricane Irene

became the 12th most expense hurricane in

US history in 2011

10 of the 12 most costly hurricanes in insurance history occurred over the past 8 years (2004—2012)

Number of Federal Disaster Declarations, 1953-2012*

1317 18 16 16

7 712 12

22 2025 25

11 1119

2917 17

48 46 4638

3022 25

4223

1524 21

3427 28

2311

3138

4532

3632

7544

6550

45 4549

5669

4852

6375

5981

994643

0

20

40

60

80

100

120

53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 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 07 08 09 10 11 12

*Through Dec. 6, 2012. Source: Federal Emergency Management Administration; http://www.fema.gov/disasters; Insurance Information Institute.

The Number of Federal Disaster Declarations Is Rising and Set New Records in 2010 and 2011. Hurricane Sandy Produced 9 Declarations in 2012.

The number of federal disaster declarations set a

new record in 2011, with 99, shattering 2010’s record 81

declarations.

There have been 2,081 federal disaster

declarations since 1953. The average

number of declarations per year is 35 from

1953-2011, though that few haven’t been

recorded since 1995.

46 federal disasters were declared through

Dec. 6, 2012

11

12

$12.

3

$10.

7

$3.7

$14.

0

$11.

3

$6.0

$33.

9

$7.4 $1

5.9

$32.

9

$71.

7

$10.

3

$7.3

$28.

5

$11.

2

$14.

1

$32.

3

$34.

3

$13.

7

$4.7 $7

.8

$36.

9

$8.6

$25.

8

$0

$10

$20

$30

$40

$50

$60

$70

$80

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

US Insured Catastrophe Losses

*As of 11/26/12 in 2012 dollars. Includes $18.8B gross loss estimate for Hurricane Sandy. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.

US CAT Losses in 2012 Could Become the 3rd Highest in US History on An Inflation-Adjusted

Basis. 2011 Losses Were the 5th Highest

2012 CAT losses were down nearly 50% from 2011 until Sandy struck in late October

Record Tornado Losses Caused

2011 CAT Losses to Surge

($ Billions, 2011 Dollars)

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Flood Loss Paid by the National Flood Insurance Program, 1980-2012E

*Estimate as of 11/25/12. Sources: Department of Homeland Security, Federal Emergency Management Agency, NFIP; Insurance Information Institute.

Billions (Original Values)

$0.23 $0.37 $0.17$1.30

$0.25

$17.74

$0.64 $0.61

$3.47

$0.78 $0.77$1.85

$7.50

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

1980 1985 1990 1995 2000 2005 2006 2007 2008 2009 2010 2011 2012*

Hurricanes Katrina and Rita accounted for the majority of

2005’s record $17.4B payout

Hurricane Ike

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Hurricane Sandy and other events could result in $7.5

billion in payouts from the NFIP in 2012, second only to 2005

and potentially exhausting the NFIP’s borrowing authority

Auto, 230,500 ,

17%

Commercial, 167,500 ,

12%

Homeowner, 982,000 ,

71%

Hurricane Sandy resulted in an

estimated 1.38 million privately insured

claims resulting in an estimated $10 to $25

billion in insured losses. Hurricane

Katrina produced 1.74 million claims and

$47.6B in losses (in 2011 $)

Hurricane Sandy: Number of Claims by Type*

*PCS claim count estimate as of 11/26/12. Loss estimate represents high and low end estimates by risk modelers RMS, Eqecat and AIR. PCS estimate of insured losses as of 11/26/12 $11 billion. All figures exclude losses paid by the NFIP. Source: PCS; AIR, Eqecat, AIR Worldwide; Insurance Information Institute.

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New Jersey, 360,000 ,

36%

All Other, 292,000 ,

30%

New York, 330,000 ,

34%

Hurricane Sandy •Estimated 982,000

homeowners claims**

•$6.6 billion in insured losses.

•Average loss per claim is $6,718

•About 1/3 of claims in NY, 1/3 in NJ and

1/3 in all other states

Hurricane Sandy: Number of Homeowners Claims by State*

*Preliminary as of 11/26/12. Source: PCS.

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New Jersey, $2,500 , 38%

New York, $2,300 , 35%

All Other, $1,797 , 27%

Hurricane Sandy: Value of Homeowners Claims Paid, by State* ($ Millions)

*Preliminary as of 11/26/12. Source: PCS.

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Hurricane Sandy •Estimated 982,000

homeowners claims**

•$6.6 billion in insured losses.

•Average loss per claim is $6,718 •Claims in NJ

estimated at $2.5 billion (38%) and $2.3

billion in NY (35%)

New Jersey, 60,000 , 26%

All Other, 40,500 , 18%

New York, 130,000 ,

56%

Hurricane Sandy •Estimated 230,500

vehicle claims •$779 million in insured losses.

•Average loss per claim is $3,380

•Nearly 60% of the claims occurred in

NY state.

Hurricane Sandy: Number of Auto Claims by State*

*Preliminary as of 11/26/12. Source: PCS.

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Federal Aid Requests by States With Greatest Sandy Impact (as of 12/6/12)

*Midpoint of $45B to $55B range currently under consideration. Source: New York Times, Dec. 6, 2012; Insurance Information Institute.

Billions

$0

$10

$20

$30

$40

$50

$60

New York New Jersey Connecticut Obama AdministrationProposal

Mitigation/PreventionRepair

States Are Requesting Enormous Sums in Sandy Aid in the Middle of a Massive Budget Struggle at the Edge of the “Fiscal Cliff”

$33.0

$7.4

$29.5

$42.0 $9.0

$6.0

$36.9

$7.9

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$33B to repair subways, hospitals and other

facilities; $9B to upgrade infrastructure against future storms

$3.2

$50.0*

$39.5B to repair schools roads, bridges,

businesses, homes and other facilities; $7.4B to

for mitigation and prevention against future

storms

$3.2B to bury power lines, upgrade transmission

systems, build sewage treatment plants and other

mitigation projects

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Political and Regulatory Environment Related to Hurricane Sandy Political and Regulatory Environment

Sandy immediately became a highly politicized event Gov. Andrew Cuomo NY and Gov. Chris Christie of NJ (both often mentioned as

future presidential candidates) were highly public and aggressive on every dimension of Sandy as was NYC Mayor Bloomberg

Politicians commanded enormous media air time Both governors issues a significant number of executive orders, some affecting

insurance within days of landfall Governors’ actions have made them, in effect, regulators regarding Sandy Issues Moratoria on cancellations and nonrenewals in NY and NJ; Data calls Sen. Schumer press conference on hurricane deductibles (Nov. 11) DFS created an “Insurer Report Card” Documenting Responsiveness Metrics:

– www.NYInsure.ny.gov

Investigative Moreland Commission formed in NY—members include DFS Superintendent Benjamin Lawsky (current focus is utilities); Subpoena authority.

Also created “NYS 2100 Commission” (Report due Jan. 3, 2013) – The NYS 2100 Commission is tasked with finding ways to improve the resilience and strength of

the state’s infrastructure in the face of natural disasters and other emergencies – Among other things, the Commission is tasked with identifying “Reforms in the area of insurance

and risk management related to natural disasters and other emergencies.”

Flood Insurance Program: 2012 Reforms

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2012 Reforms Were a Step in the Right Direction—But Too Late to

Help With Sandy Shortfall

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Source: Wharton Center for Risk Management and Decision Processes, Issue Brief, Nov. 2012; Insurance Information Institute.

Residential NFIP Flood Take-Up Rates in NJ (2010) & Sandy Storm Surge

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Flood coverage penetration rates were extremely low in

many very vulnerable areas in NJ, with take-up rates far below

50% in many areas

Source: Wharton Center for Risk Management and Decision Processes, Issue Brief, Nov. 2012; Insurance Information Institute.

Residential NFIP Flood Take-Up Rates in NY, CT (2010) & Sandy Storm Surge

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Flood coverage

penetration rates were

extremely low in many very vulnerable

areas of NY and CT, with take-up rates far below 50% in many areas

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Flood Insurance Reform & Modernization Act of 2012: Key Provisions Reauthorized NFIP and Its Financing Through 9/30/17 Increase in Average Annual Limit on Premium Increase Increases annual limit on premium increase from 10% to 20%

Phase-in of Actuarial Rates for Certain Properties Applies to non-primary residences, severe repetitive loss

properties, properties where flood losses have exceed property value, business property, property that has sustained damage > 50% of fair market value

Actuarial Sound Rates for Certain Severe Repetitive Loss Properties Charge actuarially sound rates to any prospective or repetitive

loss properties that refused to accept offers of mitigation assistance after a major disaster

Prohibition of Premium Rate Subsidy on New or Lapsed Policies

Source: Independent Insurance Agents and Brokers Association at http://www.iiaba.net/webfolder/na/jeff/big%20i%20firm%20summary.pdf; Insurance Information Institute.

Terrorism Risk Insurance Program

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2014 Expiration Beginning to Loom Large

25

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Key Provisions: Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) TRIPRA Expires Dec. 31, 2014

End of 7-year extension

First Congressional Hearing Was Held 9/11/12 Before House Financial Services Subcommittee on Insurance, Housing & Community Opportunity Chaired by Judy Biggert (R-IL) but who lost re-election bid

Little institutional memory on committees in next Congress (last extension was in 2007)

Terrorism Program Extension Viewed as Critical Throughout Industry Significant educational effort will be needed

Efforts to Extend Program Could Face Opposition in Congress Some believe this risk is best managed entirely in the private sector

Expect Hearings, Studies, Reports in 2013/2014

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Terrorist Risk Index, 2011

Sources: Maplecroft Terrorism Risk Index; Guy Carpenter; Insurance Information Institute.

The threat of terrorism is highest in

South Asia, Russia, the Middle East and Central

and East Africa

The US is still

considered to be at

“Medium Risk” for a

terrorist attack

Life$1.2 (3%)

Aviation Liability

$4.3 (11%)

Other Liability

$4.9 (12%)

Biz Interruption $13.5 (33%)

Property -WTC 1 & 2*$4.4 (11%) Property -

Other$7.4 (19%)

Aviation Hull$0.6 (2%)

Event Cancellation

$1.2 (3%)Workers Comp

$2.2 (6%)

Total Insured Losses Estimate: $40.0B** *Loss total does not include March 2010 New York City settlement of up to $657.5 million to compensate approximately 10,000 Ground Zero workers or any subsequent settlements.

**$32.5 billion in 2001 dollars.

Source: Insurance Information Institute.

Loss Distribution by Type of Insurance from Sept. 11 Terrorist Attack ($ 2011)

($ Billions)

Exhibit 1

Eurozone: Economic Stagnation Continues

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Europe’s Problems Are Both Political and Economic in Nature

29

30

Real GDP Growth Forecasts: Major Economies: 2011 – 2013F

Sources: Blue Chip Economic Indicators (11/2012 issue); Insurance Information Institute.

1.7

%

0.7

% 1.5

%

3.1

%

2.2

%

-0.1

%

0.9

%

7.7

%

2.0

%

2.0

%

1.2

%

0.2

% 1.0

%

7.9

%

1.1

%

9.2%

-0.7%-0.4%-2%

0%

2%

4%

6%

8%

10%

US UK Euro Area Germany China Japan

2011 2012F 2013F

Growth Prospects Vary Widely by Region: Stabilizing in the US, Recession in the Eurozone but Followed by Stagnation, A “Soft Landing” in China

and India, Reconstruction Stimulus in Japan and Modest Growth in America’s Largest Trading Partners—Canada and Mexico.

The Eurozone and UK are in

recession. Both should end in 2013

China growth has slowed, but remains strong in an expected “soft landing”

scenario

Tepid US recovery

continues

Rebuilding acts as a

stimulus to Japanese economy

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Thank you for your time and your attention!

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