Three traits of high performance property and casualty insurers in the digital age
Financial and Market Impacts of Hurricanes on Property/Casualty Insurers Past, Present & Future
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Transcript of Financial and Market Impacts of Hurricanes on Property/Casualty Insurers Past, Present & Future
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Financial and Market Impacts of Hurricanes on
Property/Casualty Insurers
Past, Present & FutureNational Hurricane Conference
New Orleans, LAApril 5, 2007
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 [email protected] www.iii.org
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Presentation Outline
• Catastrophe Losses are Growing Globally• US: Hurricanes are Now #1 Source of Insured CAT
LossesDisplacing Tornados
• Loss Potential from Future Storms is Immense & Growing Rapidly
• Acts of God & The Bottom Line• Hurricanes & The Price of Property Insurance• Claims Paying Capacity: The Worst Has Yet to Come
Why US Hurricanes Become a Global Insurance Problem• The Role of State-Run Insurers• Post-Katrina Litigation
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INSURED CATASTROPHE LOSS REVIEW
A Decade of Disaster
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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
$100
.0
$61.
9
$8.8
$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
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
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Global Number of Catastrophic Events, 1970–2005
0
50
100
150
200
250
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
Natural catastrophes Man-made disasters
Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 1/2005 and 2/2006.
The number of natural and man-made
catastrophes has been increasing on a global
scale for 20 years
Record 248 man-made CATs &
record 149 natural CATs in 2005
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Insured Property Catastrophe Losses as % Net Premiums Earned, 1983–2005E
0%
2%
4%
6%
8%
10%
12%
14%
16%
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05E
USWorldwideUS average: 1984-2004
*Insurance Information Institute figure of 13.8% for 2005 based estimated 2005 DPE of $417.7B and insured CAT losses of $57.7B.
Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute.
US CAT losses were a record 13.8% of
net premiums earned in 2005 and were 4.2 times the 1984-2004 average
of 3.3%
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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.
Seven of the 10 most expensive hurricanes in US history
occurred in the 14 months from Aug. 2004 – Oct. 2005:
Katrina, Rita, Wilma, Charley, Ivan, Frances & Jeanne
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Insured Loss & Claim Count for Major Storms of 2005*
$1.1
$40.6
$10.3$5.0
104
383
1,047
1,744
$0$5
$10$15$20
$25$30$35
$40$45
Dennis Rita Wilma Katrina
Size of Industry Loss ($ Billions)
Ins
ure
d L
os
s (
$ B
illio
ns
)
02004006008001,0001,2001,4001,6001,8002,000
Cla
ims
(th
ou
sa
nd
s)
Insured Loss Claims
*Property and business interruption losses only. Excludes offshore energy & marine losses.
Source: ISO/PCS as of June 8, 2006; Insurance Information Institute.
Hurricanes Katrina, Rita, Wilma & Dennis produced a record 3.3
million claims
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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 $289.1 billion from
1984-2005 (in 2005 dollars). Tropical systems accounted for nearly half of all CAT losses from 1986-2005, up
from 27.1% from 1984-2003.
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Hurricane Katrina Insured Loss Distribution by State ($ Millions)*
Mississippi, $13,605 , 33.5%
Louisiana, $25,275 , 62.3%
Tennessee, $59.0 , 0.1%Florida, $572.0 , 1.4%
Georgia, $36.0 , 0.1%Alabama, $1,032 ,
2.5%
*As of June 8, 2006Source: PCS division of ISO.
Louisiana accounted for
62% of the insured losses
paid and 56% of the claims filed
Total Insured Losses =
$40.579 Billion
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Hurricane Katrina Loss Distribution by Line ($ Billions)*
Homeowners, $17,564.0 , 43%
Commercial Property & BI, $20,847.0 , 52%
Vehicle, $2,168.0 , 5%
Total insured losses are
estimated at $40.579 billion
from 1.7438 million claims.
Excludes $2-$3B in offshore energy losses
*As of June 8, 2006Source: PCS division of ISO.
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Hurricane Rita Loss Distribution, by Line ($ Millions)*
Homeowners, $2,974.2 , 59%
Commercial Property & BI, $1,861.2 , 37%
Vehicles, $211.0 , 4%Total insured
losses are estimated at $5.0
billion (excl. offshore energy of $2-$3B) from 383,000 claims.
*As of June 8, 2006Source: PCS division of ISO.
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Hurricane Wilma Loss Distribution by Line ($ Millions)*
Homeowners, $7,350 , 72%
Commercial Property & BI, $2,200 , 21%
Vehicle, $750 , 7%Total insured
losses are estimated at $10.3 billion from 1.047
million claims
*As of June 8, 2006. All losses are in FL.Source: PCS division of ISO.
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Insurers are committed
to improving the ability of homes and businesses to withstand
major disasters
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Source: Insurance Information Institute
Figure 8.
Free Home Inventory
Software at www.iii.org
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HURRICANES: INSURED LOSS
POTENTIAL
Katrina:Just the Beginning?
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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 & New York lead the way for insured coastal property at more than $1.9 trillion each.
Northeast state insured coastal exposure totals
$3.73 trillion.
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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
Source: AIR Worldwide
After FL, many Northeast states have
among the highest coastal exposure as a share of all insured
exposure in the state.
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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.
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Historical Hurricane Strikes in Galveston County, TX, 1900-2002
Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
Population of Galveston County is 5
times what it was when the hurricane of 1900 struck, killing 8,000
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Historical Hurricane Strikes in Suffolk County, NY, 1900-2002
Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
Population in Suffolk County is 4.5 times what it was in the 1940s
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Historical Hurricane Strikes in Dare County, NC, 1900-2002
Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
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Increase in Population of Coastal/Near Coastal Counties in South Carolina
(% Change, 1990 - 2005)
58%
38%
36%
32%
18%
15%
12%
60%
0% 10% 20% 30% 40% 50% 60% 70%
Beaufort
Horry
Jasper
Dorchester
Georgetown
Berkeley
Colleton
Charleston
Sources: Charleston Metro Chamber of Commerce, SC Statistical Abstract, US Census Bureau.
Several SC coastal counties have experienced very strong population
growth since 1990. Home values have also skyrocketed—up 120% in
Charleston, Berkeley & Dorchester counties between 1996-2005.
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Source: AIR Worldwide
Insured Losses: $110BEconomic Losses: $200B+
$70
$30
$5 $4 $1$0
$20
$40
$60
$80
NY NJ PA CT Other
Nightmare Scenario: Insured Property Losses for NJ/NY CAT 3/4 Storm
Total Insured Property Losses =
$110B, nearly 3 times that of
Hurricane Katrina
Distribution of Insured Property Losses,
by State, ($ Billions)
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ACTS OF GOD & THE BOTTOM
LINE
Catastrophic Loss & Insurer Financial Performance
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-5%
0%
5%
10%
15%
20%
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2008E
*2006-8 P/C insurer ROEs are I.I.I. estimates.Source: Insurance Information Institute; Fortune
Andrew Northridge
Hugo Lowest CAT losses in 15 years
Sept. 11
4 Hurricanes
Katrina, Rita, Wilma
P/C profitability is cyclical, volatile and vulnerable
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-5%
0%
5%
10%
15%
20%
25%
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 0607
F08
F
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2008F
*2006-8 P/C insurer ROEs are I.I.I. estimates.Source: Insurance Information Institute; ISO, A.M. Best.
1975: 2.4%
1977:19.0% 1987:17.3%
1997:11.6%
2006E:14.0%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years
10 Years 9 Years
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115.8
107.4
100.198.3
100.7
93.2
98.696.6
90
100
110
120
01 02 03 04 05 06E 07F 08F
P/C Industry Combined Ratio
Sources: A.M. Best; ISO, III. *Estimates/forecasts based on III’s 2007 Groundhog survey.
2005 figure benefited from heavy use of reinsurance which lowered net losses
2006 could produce the best underwriting
result since the 93.2 combined ratio in 1936.
As recently as 2001, insurers were paying out nearly $1.16 for
every dollar they earned in premiums
2007/8 deterioration due primarily to falling rates, but results still strong assuming
normal CAT activity
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Share of Losses Paid by Reinsurers, by Disaster*
30%25%
60%
20%
45%
0%
10%
20%
30%
40%
50%
60%
70%
Hurricane Hugo(1989)
Hurricane Andrew(1992)
Sept. 11 TerrorAttack (2001)
2004 HurricaneLosses
2005 HurricaneLosses
*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for 2005.Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.
Reinsurance is playing an increasingly
important role in the financing of mega-CATs; Reins. Costs
are skyrocketing
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($55)($50)($45)($40)($35)($30)($25)($20)($15)($10)($5)$0$5
$10$15$20$25$30$35
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
Claim Payouts TypicallyExceed Premiums Earned*
Source: A.M. Best, Insurance Information Institute *2006E of $32.5B is annualized 9 mos. gain of $24.4B
$ B
illi
ons
Losses exceed premiums in 28 of the 32 years from
1975-2006
Underwriting Gain (Loss) 1975-2006E, $Bill
Underwriting Losses
Underwriting Profits
AndrewSept. 11
KRW
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FLORIDA:A CASE STUDY
Profitability is Elusive
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($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
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-$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.
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Rates of Return on Net Worth for Homeowners Ins: US vs. Florida
Source: NAIC; 2005/6 US and FL estimates from the Insurance Information Institute.
-54.3%
0.0%
-183.3%
-714.9%
-80.0%
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 05E 06E
US Florida
Averages: 1990 to 2006E
US HO Insurance = -0.7%
FL HO Average = -38.1%
Andrew
4 Hurricanes
Wilma, Dennis, Katrina
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PRICES
Flat or Down Almost Everywhere: Coastal Increases Reflect Risk
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-10%
-5%
0%
5%
10%
15%
20%
25%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
F2
00
7F
20
08
F2
00
9F
20
10
F
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
Strength of Recent Hard Markets by NWP Growth*
1975-78 1984-87 2001-04
*2006-10 figures are III forecasts/estimates. 2005 growth of 0.4% equates to 1.8% after adjustment for a special one-time transaction between one company and its foreign parent. 2006-2008 figures from III Groundhog Survey.
2006-2010 (post-Katrina) period could resemble 1993-97
(post-Andrew)
2005: biggest real drop in premium since early 1980s
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Growth in Net Written Premium, 2000-2008F
Source: A.M. Best; Forecasts from the Insurance Information Institute. Full-year estimate from III’s Groundhog survey: http://www.iii.org/media/industry/financials/groundhog2007/. 9-month actual value is 3.8% adjusted for special transactions.
5.1%
8.1%
14.1%
9.8%
4.7%
0.4%
3.3%1.8% 1.9%
2000 2001 2002 2003 2004 2005 2006E* 2007F 2008F
P/C insurers will experience their slowest growth rates since the late 1990s…but underwriting results are
expected to remain healthy!
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$418$440 $455
$481 $488$508
$536
$593
$668$693
$776
$711$739
$400
$450
$500
$550
$600
$650
$700
$750
$800
95 96 97 98 99 00 01 02 03 04* 05* 06* 07*
Average Expenditures on Homeowners Insurance
*Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute
Countrywide home insurance expenditures are expected to rise 4% in 2007, but much more
in hurricane zones
Hurricane zone residents can expect increases in the 20%-
100% range, especially if insured by a state entity
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Price Increases for Louisiana Citizens—State’s High Risk Insurer of Last Resort
$1,315
$2,165$2,630 $2,690
$4,235
$2,460
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
2004 2005 2006
Coastal Homeowner Coastal Business
Source: Louisiana Citizens Property Insurance Corp. from USA Today, April 3, 2007, p. 1A..
+64.6%
+2.3%+13.6%
+57.4%
LACPIC went broke in 2005 by $965 million.
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Price Increases for MS Windstorm Underwriting Association—
State’s Insurer of Last Resort
22%
90%
22%
267%
0%
50%
100%
150%
200%
250%
300%
2003 2006
Coastal Homeowner Coastal Business
Source: Mississippi Windstorm Underwriting Association from USA Today, April 3, 2007, p. 1A..
MWUA went broke in 2005 by $595 million an
has received massive state tax subsidies
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Average Commercial Rate Change,All Lines, (1Q:2004 – 4Q:2006)
-0.1%
-3.2%
-7.0%
-9.4%-9.7%
-4.6%
-2.7%-3.0%
-5.3%
-9.6%
-5.9%
-8.2%
-12%
-10%
-8%
-6%
-4%
-2%
0%
1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Magnitude of rate decreases has diminished greatly since
mid-2005 but is growing again
KRW Effect
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Percent of Commercial Accounts Renewing w/Positive Rate Changes, 2nd Qtr. 2006
71%
48%
28%21%
63%
32%
21%
12% 10%
35%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Southeast Southwest Pacific NW Northeast Midwest
Commercial Property Business Interruption
Source: Council of Insurance Agents and Brokers
Largest increases for Commercial Property & Business Interruption are in the Southeast, smallest in Midwest
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Percent of Commercial Accounts Renewing w/Positive Rate Changes, 4th Qtr. 2006
25%
6% 6%
0%
8%6% 6%
3%
0%
11%
0%
5%
10%
15%
20%
25%
30%
Southeast Southwest Pacific NW Northeast Midwest
Commercial Property Business Interruption
Source: Council of Insurance Agents and Brokers
Largest increases for Commercial Property &
Business Interruption are in the Southeast, but
are diminishing; Smallest in Midwest
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CLAIMS PAYING CAPACITY
2006 Respite:Rebuilding Year
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$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
$550
7576777879808182838485868788899091929394959697989900010203040506
U.S. Policyholder Surplus: 1975-2006E*
Source: A.M. Best, ISO, Insurance Information Institute *III Estimate.
$ B
illi
ons
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
Capacity as of 12/31/06 is $481.5B (est.), 13.1% above year-end 2005,
69% above its 2002 trough and 44% above its 1999 peak.
Foreign reinsurance and residual market
mechanisms absorbed 45% of 2005 CAT
losses of $62.1B
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Capital Raising by Class Within 15 Months of KRW
Existing Cos., $12.145 , 36%
New Cos., $8.898 , 26%
Sidecars, $6.359 , 19%Insurance Linked
Securities, $6.253 , 19%
Insurers & Reinsurers raised $33.7 billion in the wake of Katrina,
Rita, Wilma
Source: Lane Financial Trade Notes, January 31, 2007.
$ Billions
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Annual Catastrophe Bond Transactions Volume, 1997-2006
$966.9
$1,729.8
$4,693.4
$1,991.1
$1,142.8$1,219.5$846.1$984.8
$1,139.0
$633.0
$0$500
$1,000$1,500
$2,000$2,500$3,000
$3,500$4,000
$4,500$5,000
97 98 99 00 01 02 03 04 05 06
Ris
k C
apita
l Iss
ues
($ M
ill)
02
46
81012
1416
1820
Nu
mb
er o
f Iss
uan
ces
Risk Capital Issued Number of Issuances
Source: MMC Securities and Guy Carpenter; Insurance Information Institute.
Catastrophe bond issuance has soared in the wake of Hurricanes
Katrina and the hurricane seasons of 2004/2005
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STATE RUN INSURERS
Solution or TickingTime Bombs?
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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 and is now the largest home insurer in the state
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MS Windstorm Plan: Exposure to Loss (Millions of Dollars)
Source: PIPSO; Insurance Information Institute
$1,873.0
$1,631.8
$1,344.3
$1,121.7
$848.6$864.9$917.9
$637.1
$352.9
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
1990 1995 1999 2000 2001 2002 2003 2004 2005
Total exposure to loss in the Mississippi Windstorm Underwriting Association (MWUA) has surged by 431 percent, from $352.9m in 1990 to $1.9bn in 2005.
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TWIA Growth In Exposure to Loss (Building & Contents Only, $ Billions)
Source: TWIA (as of 11/30/06); Insurance Information Institute
$35.9
$23.3$20.8
$18.8$16.0
$13.2$12.1
$0
$5
$10
$15
$20
$25
$30
$35
$40
2000 2001 2002 2003 2004 2005 2006*
Exposure to Loss (Building & Contents Only)
TWIA’s liability in-force for building & contents has surged by nearly 200 percent in the last six years from $12.1bn in 2000
to $35.9bn in 2006
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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
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What Role Should the Government Play in
Insuring Against Natural Disaster Risks?
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Government Aid After Major Disasters (Billions)*
$110.0
$43.9
$17.7 $15.5 $15.0
$0
$20
$40
$60
$80
$100
$120
Hurricane Katrina(2005)
Sept. 11 TerroristAttack (2001)
Hurricane Andrew(1992)
NorthridgeEarthquake (1994)
Hurricanes Charley,Frances, Ivan &Jeanne (2004)
$ B
illi
ons
*In 2005 dollars.Source: United States Senate Budget Committee, Insurance Information Institute as of 12/31/05.
Katrina federal aid was more than all the federal aid for the 9/11
terrorist attacks, 2004’s 4 hurricanes, the Northridge earthquake and Hurricane
Andrew combined.
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NAIC’s Comprehensive National Catastrophe Plan
• Proposes Layered Approach to Risk• Layer 1: Maximize resources of private
insurance & reinsurance industry Includes “All Perils” Residential 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
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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
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POST-KATRINA LITIGATION
Suits Add to Uncertainty, Expense
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Hurricane Katrina Claim Status on Storm’s 1st Anniversary*
In Process, 3%
Mediation/ Litigation, 2%
Settled, 95%
95% of the 1.2 million
homeowners insurance claims in Louisiana & Mississippi are
settled, with just 2% in dispute
*Hurricane Katrina made its north Gulf coast landfall August 29, 2005.Source: Insurance Information Institute survey, August 2006.
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Likely Market Impacts of Post-Katrina Litigation
• Litigation Creates an Additional Layer of Uncertainty in What is Already a Very Difficulty Market
Ultimate Thrust of Litigation is to Compel Insurers to Pay Water Damage (Flood/Surge) Losses for Which They Have Never Received A Penny in Premium
• Some Courts’ Apparent Willingness to Retroactively Rewrite Long-Standing, Regulator Approved Terms & Conditions of Insurance Contracts Creates an Unpriceable Risk
Compounded by juries willing to award millions in punitives• People Discouraged from Buying Flood Coverage• BOTTOM LINE: Weather, Courts, Juries Together
Create Nearly Impossible Operating Environment• Coverage Under These Circumstances Will Necessarily
Become More Expensive, Less Available
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Summary• Insured catastrophe losses are on the rise, in the US and globally• Hurricanes are the #1 source of catastrophe losses, by far• Rapid coastal development (driven by strong demographics) & rising
property values are the primary reasons for the upward trend in insured catastrophe losses in the US Government subsidies to coastal dwellers exacerbate problem
• Financial impacts on property/casualty insurance industry have been severe ($81 billion in hurricane losses in 2004/2005) but were manageable due to global spread of losses
• Expectations for more frequent & more severe storms is driving risk-based, actuarially sound rates upward
• Insurers remain deeply committed to helping policyholders reduce vulnerability by supporting stronger building codes and mitigation But insurers have no control over local land use decisions
• Ultimately, insurance prices must reflect true risk• Market signals on risk provide incentives to fortify structures
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Insurance Information Institute On-Line
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