Louisiana Legislative Women’s Caucus Workshop on Insurance & Economic Development New Orleans, LA

Louisiana Insurance Market Overview:

Toward Viable Insurance Markets in the Post-Katrina & Rita Era

Louisiana Legislative Women’s CaucusWorkshop on Insurance & Economic Development

New Orleans, LA

January 27, 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

Presentation Outline

• Louisiana Insurance Market Overview• Recap of 2005 Hurricane Season• Louisiana Claim Detail: Hurricanes Katrina & Rita• 2007 Hurricane Season Preview• Catastrophes & Insurer Financial Strength • Overview of the National Flood Insurance Program• Insurance Industry Financial Overview & Outlook• The Role of Reinsurance Markets & New Challenges• Review of National Catastrophe Plan Proposals• Katrina Tort Update: Compounding the Uncertainty• Summary of Florida Special Legislative Session on

InsuranceMany Steps in the Wrong Direction

Louisiana Insurance Market

Overview

Louisiana InsuranceMarket Facts

• LA P/C insurance premium volume in 2005 was $7.70 billion, or 1.61% of the US total of $478.5 billion

• LA Homeowners insurance premium volume in 2005 was $1.01 billion, or 1.75% of the US total of $57.5 bill.

• Insured Katrina & Rita homeowners losses of $12.7 billion in LA were nearly 13 times the 2005 premiums of $1.01 billion In MS, HO losses wiped out 17 years of premiums

• The 2005 hurricane losses in homeowners insurance wiped out 25 years of premium and every dollar of profit ever made in the history of the state in this lineHomeowners insurers in LA had earned profits of only $17.3

million, including investment income, since 1985.

Source: Insurance Information Inst. from National Underwriter Highline annual statement database; PCS.

Louisiana & Mississippi Market Shares, All Lines & Homeowners

Louisiana$7.70 1.6%

All Other States

$467.01 97.6%

Mississippi$3.76 0.8%

ALL LINES ($ Billions)

HOMEOWNERS ($ Millions)

Source: Insurance Information Institute from National Underwriter Highline annual statement database.

Louisiana$1,008.54

1.8%

All Other States

$55,899.48 97.2%

Mississippi$580.00 1.0%

LA accounts for less than 2% of the US insurance market but 51% of 2005 hurricane losses

Top 10 Major Disaster Declaration Totals By State: 1953- 2006*

7771

5751 51 47 45 44 42 41

0

10

20

30

40

50

60

70

80

90

Texas

Califo

rnia

Florid

a

Louisi

ana

New Y

ork

Oklahom

a

Alaba

ma

Kentu

cky

Miss

issip

pi

Pennsy

lvan

ia

Total Number

*Through July 12, 2006.Source: Federal Emergency Management Agency (FEMA)

From 1953-2006*, Louisiana ranked fourth in the country in

major disaster declarations

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

Louisiana had $209 billion in insured coastal

property exposure in 2004, 7th highest of any hurricane exposed state

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



MaineVirginia

North CarolinaAlabamaGeorgia

DelawareRhode Island

NewMississippi

Maryland

Source: AIR

Louisiana had $88 billion in insured residential coastal property exposure in 2004

(42% of all LA coastal exposure), 7th highest of any

hurricane exposed state

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



VirginiaMaine

North CarolinaGeorgia

AlabamaMississippi

New HampshireDelaware

Rhode IslandMaryland

Source: AIR

Louisiana had $121 billion in insured commercial coastal property exposure in 2004

(58% of all LA coastal exposure), 7th highest of any

hurricane exposed state

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

Louisiana coastal exposure accounts for 37.9% of all insured

exposure statewide, 6th highest of any state

REVIEW OF 2005 HURRICANE

SEASON DAMAGE

A Year of Infamy

2005 Was a Busy, Destructive, Deadly & Expensive Hurricane Season

Source: WeatherUnderground.com, January 18, 2006.

All 21 names were used for the first time ever, so

Greek letters were used for the

final storms

2005 set a new record for the number of hurricanes &

tropical storms at 28, breaking the old record set in 1933.

2006 Hurricane Season: Much Less Active Than Expected

Source: WeatherUnderground.com, January 26, 2007.

What a difference a year makes! Just 10 tropical cyclones (9 named) in 2006 vs.

28 in 2005!

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.

Top 10 Deadliest Hurricanes to Strike the US: 1851-2005

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)

**

Galve

ston (

1900

)*

*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

Katrina Deaths by State****

LA, 1,075 , 81.3%

GA, 2 , 0.2%

FL, 14 , 1.1%

AL, 2 , 0.2%

MS, 230 , 17.4%

Number of Homes Destroyedby Major Hurricanes*

28,000 27,500

275,000

0

50,000

100,000

150,000

200,000

250,000

300,000

Andrew (1992) Charley, Frances, Ivan,Jeanne (2004)

Katrina (2005)

Katrina appears to have destroyed 10 times as many homes as Andrew in 1992 or the 4 storms to hit Florida and the Southeast in 2004

*Destruction is defined as a structure made uninhabitable or damaged beyond economic repair. Source: National Association of Home Builders, National Red Cross (as of 9/15/05).

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

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

HurricanesKatrina & Rita:

Louisiana Insured Loss Claim Detail

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

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


Hurricane Katrina Claim Count Distribution by State*

Mississippi, 515,000 , 29.5%

Tennessee, 15,000 , 0.9%

Louisiana, 975,000 , 55.9%

Florida, 122,000 , 7.0%

Georgia, 7,800 , 0.4%

Alabama, 109,000 , 6.3%


Louisiana accounted for 62%of insured

losses paid and 56% of claims filed

Total # Claims = 1,743,800

Hurricane Rita Claim Count Distribution by State*

Texas, 171,000 , 44.6%

Tennessee, 3,500 , 0.9%

Louisiana, 185,000 , 48.3%

Arkansas, 5,500 , 1.4%Florida, 6,000 , 1.6%

Alabama, 5,000 , 1.3%

Mississippi, 7,000 , 1.8%


Louisiana accounted for 48.3% of the

insured losses, Texas 44.6%.

Excludes offshore energy losses of $2-3BTotal # Claims

= 383,000

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.


$50,

000

$7,0

00

$15,

647

$150

,000

$6,7

44

$15,

174

$130

,000

$4,7

00

$12,

821

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

Vehicle Home Commercial

Rita Katrina Combined

LA: Average Cost per Claim by Type of Claim and Storm*

*As of February 8, 2006Source: PCS division of ISO.

Commercial (business) claims are about 10 times more expensive

than homeowners claims on average. Katrina HO claims 22%

more expensive than Rita.

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.

Katrina’s Path of Destruction Through the Offshore Energy Industry

Source: “Hurricane Katrina: Profile of a Super Cat,” RMS, October 2005.

Katrina (& Rita) tore through

offshore facilities

Katrina & Rita: Total Energy Losses, Onshore vs. Offshore*

$6.63$4.982

$2.53

$0.915

$0

$2

$4

$6

$8

$10

Katrina Rita

Offshore Onshore

Bil

lion

s

Total = $9.15 Billion

Source: Willis, Energy Market Review, May 2006. *Loss estimates are total losses, not just insured losses.

Total = $5.89 Billion

GOVERNMENT AID

Where Has All the Money Gone?

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.

Hurricane Katrina aid will dwarf aid following

all other disasters. Congress may authorize

$150-$200 billion ultimately (about

$400,000 for each of the 500,000 displaced

families). Is the incentive to buy insurance and

insure to value diminished?

Within 3 weeks of Katrina’s LA landfall, the federal government

had authorized $75B in aid—more than all the federal aid for the 9/11 terrorist attacks, 2004’s

4 hurricanes and Hurricane Andrew combined! $29B more

was authorized in Dec. 2005. At least $80B more is sought.

$1.3

$17.0

$42.0

$5.8$1.7

$25.4

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

HUD FEMA US Army Corps ofEngineers

Spent Allocation

Spending on Hurricane Katrina Reconstruction (Through Dec. 2006)

Source: Wall Street Journal, January 27, 2007, p. A1.

Only a fraction of promised

government relief has reached the hands of those

affected

The 2007 Hurricane Season:

Preview to Disaster?

Outlook for 2007 Hurricane Season: 40% Worse Than Average

Average* 2005 2007F

Named Storms 9.6 28 14

Named Storm Days 49.1 115.5 70

Hurricanes 5.9 14 7

Hurricane Days 24.5 47.5 35

Intense Hurricanes 2.3 7 3

Intense Hurricane Days 5 7 8

Net Tropical Cyclone Activity 100% 275% 140%

*Average over the period 1950-2000.Source: Dr. William Gray, Colorado State University, December 8, 2006.

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

Average* 2007F

Entire US Coast 52% 64%

US East Coast Including Florida Peninsula

31% 40%

Gulf Coast from FL Panhandle to Brownsville, TX

30% 40%

ALSO…Above-Average Major Hurricane

Landfall Risk in Caribbean for 2007

*Average over past century.

Source: Dr. William Gray, Colorado State University, December 8, 2006.

Landfall Probabilities by Region & Intensity, 2007*

89%

71%62%

54%40% 40%

93%

72% 74%

99%92% 90%

56%

79%

64%

0%

20%

40%

60%

80%

100%

120%

Entire US Gulf Coast Florida plus EastCoast

Tropical Storm CAT 1-2 HurricaneCAT 3-4-5 Hurricane All HurricanesNamed Storms

Landfall probabilities

and intensities up everywhere

*Figures in parentheses represent averages over the past 100 years.Source: Dr. William Gray, Colorado State University, December 8, 2006.

(79%

)

(68%

)

(52%

)

(84%

)

(97%

)

(59%

)

(42%

)

(30%

)

(60%

)

(83%

)

(50%

)

(44%

)

(31%

)

(61%

)

(81%

)

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

Average Annual Tropical Cyclone Insured Losses, 20th Century*

(Top 10 States, $ Millions)

$1,423.0

$615.0

$196.0$109.0 $77.0 $64.0 $62.0 $61.0 $61.0 $51.0

$154.0

$0

$250

$500

$750

$1,000

$1,250

$1,500

FL TX LA NC MS MA SC AL NY CT AllOther

*Normalized losses adjusted for inflation, housing density, wealth and wind insurance coverage, based on historical data for 100-year period 1900-1999.Source: Tillinghast-Towers Perrin

Florida49.5%

Texas 21.4%

All Other15.7%

Mississippi2.7%

N. Carolina

3.8%

Louisiana6.8%

Distribution of Annual Losses

FINANCIAL STRENGTH & MEGA-

CATASTROPHES

Is There Causefor Concern?

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%

The Flood Insurance Purchase

& Retention Decision

Flood Insurance is a Tough Sell

Total Claim Payments by State (Top 11) Jan 1, 1978 - Feb. 2006

$ Millions

$3,2

28.8

$2,7

75.0

$2,5

54.6

$600

.0

$426

.0

$425

.5

$423

.2

$14,309.1

$655

.2

$721

.2

$851

.6

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

LA FL TX MS AL NC NJ PA NY SC CA

Source: FEMA, National Flood Insurance Program (NFIP)

Louisiana and Mississippi rank 1st and 4th respectively

in terms of total claims payments (up from 3rd and 11th pre-Katrina). Florida ranks 2nd and Texas 3rd.

Flood Insurance Penetration Rates:Top 25 Counties/Parishes in US*

81.5%80.0%

78.7%77.1%

74.1%69.6%

68.4%68.1%

66.7%65.9%65.5%

62.4%59.0%

56.2%51.6%

49.6%48.0%

46.3%44.4%

42.8%42.8%

42.0%41.9%

40.1%

84.0%

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

JEFFERSON/LAWALTON/FL

BROWARD/FLCOLLIER/FL

LEE/FLGALVESTON/TX

GLYNN/GAST. BERNARD/LAMIAMI-DADE/FL

ORLEANS/LACARTERET/NC

ST. CHARLES/LAST. JOHNS/FL

CHARLOTTE/FLST. TAMMANY/LA

HORRY/SCINDIAN RIVER/FL

BAY/FLBRUNSWICK/NC

NASSAU/FLBERKELEY/SC

PINELLAS/FLBRAZORIA/TXCHATHAM/GA

TERREBONNE/LA

LA parishes have among the highest

flood coverage penetration rates

in the US (12 of the top 75)

*As of 12/31/05.Source: New Orleans Times-Picayune, 3/19/06, from NFIP and US Census Bureau data.

Flood Insurance Penetration Rates:Counties/Parishes Ranked 26-50*

39.7%39.2%39.1%

38.7%37.2%

36.5%36.2%

34.2%33.0%

32.1%30.6%

28.3%27.6%

27.0%26.8%26.4%26.1%

25.4%25.3%25.2%

23.4%23.3%

22.1%21.7%

39.8%

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

BALDWIN/ALSARASOTA/FL

PALM BEACH/FLCHARLESTON/SC

MANATEE/FLMARTIN/FL

ATLANTIC/NJLAFOURCHE/LA

OKALOOSA/FLGEORGETOWN/SC

FLAGLER/FLMAUI/HI

LIVINGSTON/LABREVARD/FL

SUSSEX/DEVOLUSIA/FL

ST. LUCIE/FLJEFFERSON/TX

HAMPTON CITY/VAOCEAN/NJ

HARRIS/TXPASCO/FL

BOSSIER/LANEW HANOVER/NC

BRONX/NY

Mid-Atlantic/Northeast Counties are

underrepresented

People along the eastern

seaboard have not gotten the

message


Flood Insurance Penetration Rates:Counties/Parishes Ranked 51-75*

20.9%20.1%

19.1%18.3%

17.8%17.7%17.5%

16.7%16.3%

15.8%15.6%15.4%

14.5%14.0%

13.3%12.9%

12.6%11.7%11.6%

11.3%10.2%

9.3%9.1%

8.5%

21.6%

0% 5% 10% 15% 20% 25%

CAMERON/TXFORT BEND/TX

SANTA ROSA/MSHARRISON/MS

JACKSON/MSNORFOLK CITY/VA

HILLSBOROUGH/FLLAFAYETTE/LA

EAST BATON ROUGE/LAVIRGINIA BEACH

ESCAMBIA/FLHONOLULU/HI

SACRAMENTO/CACALCASIEU/LA

MONTGOMERY/TXCITRUS/FL

MERCED/CACHESAPEAKE,

OSCEOLA/FLHUDSON/NJ

DUVAL/FLBARNSTABLE/MA

MARIN/CATULARE/CA

MONMOUTH/NJ


MS coastal counties

rank abysmally

low

Barnstable is only county in all of New England among Top 75

28%

61%

22%

60%

49%

1%1%3%

0.6% 0.4%0%

10%

20%

30%

40%

50%

60%

70%

Northeast South Midwest West Overall US

In SFHA*Out of SFHA

NFIP Flood PolicyPenetration Rates, by Region

*Special Flood Hazard Areas.Source: The National Flood Insurance Program’s Market Penetration Rate:Estimates and Policy Implications, RAND, 2006.

Flood is more commonly

purchased in the South, but

many still forego coverage

88.3

% 90.8

%

91.0

%

91.6

%

90.6

%

92.0

%

91.9

%

87.5

%

88.8

%

89.3

% 92.1

%

92.0

%

93.2

%

92.7

%

93.2

%

93.1

%

90.6

% 92.5

%

84.6

%

75%

80%

85%

90%

95%

100%

Aug-04

Sep-0

4

Oct-0

4

Nov-04

Dec-0

4

Jan-0

5

Feb-0

5

Mar

-05

Apr-05

May

-05

Jun-0

5

Jul-0

5

Aug-05

Sep-0

5

Oct-0

5

Nov-05

Dec-0

5

Jan-0

6

Feb-0

6

Flood Insurance Retention Rates,March 2005-February 2006

Flood insurance retention rates are a problem. Program lapse rate is too high.

Customer acquisition is expensive.

Source: FEMA/NFIP web site accesses 5/8/06: http://www.fema.gov/business/nfip/statistics/stats.shtm.

Factors Influencing NFIP Flood Penetration Rates

• Price• Change in Price• Number of Homes in a Community’s Special Flood

Hazard Area (SFHA)Mandatory purchase requirements less vigorously enforced

in communities with fewer structures in SFHAsQuestions about enthusiasm in selling or knowledge of agents

regarding program

• Coastal Flooding PotentialPenetration rate much higher for coastal communities

subject to flooding versus those that are not (63% vs. 35%)

• Mandatory Purchase RequirementSource: The National Flood Insurance Program’s Market Penetration Rate:Estimates and Policy Implications, RAND, 2006.

INSURER PROFITABILITY

The Truth About Insurer Profitability

P/C Net Income After Taxes1991-2006E ($ Millions)*

$14,178

$5,840

$19,316

$10,870

$20,598$24,404

$36,819

$30,773

$21,865

-$6,970

$3,046

$30,029

$59,813

$43,013

$20,559

$38,501

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

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

06F

*ROE figures are GAAP; 1Return on avg. surplus. 2005 ROAS = 9.8% after adj. for one-time special dividend paid by the investment subsidiary of one company. 2Based on 9-month results; Sources: A.M. Best, ISO, Insurance Information Inst.

2001 ROE = -1.2%2002 ROE = 2.2%2003 ROE = 8.9%2004 ROE = 9.4%2005 ROE= 10.5%2006 ROAS1,2 = 13.4%

Though up in 2006, insurer profits are highly volatile (2001 was the industry’s worst year ever). ROEs

generally fall below that of most other industries.

-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

-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

The Importance of Profits

• Profits compensate shareholders for the assets they put at risk• Allows mutuals to realize primary objective of growing surplus• Profitable companies can access capital markets under favorable

terms after mega-CATs or if market conditions are poor (e.g., post-9/11); Others will fail, are dissolved or acquired

• Preferred treatment by reinsurers• Profits lead directly to increased capacity• Profits build contingent capacity for mega-CATs• Profits enable investments in the future of the enterprise (tech,

people, etc.) and to seize upon new opportunities (new states, M&A, etc.)

• Profitable companies have higher financial strength and credit ratings

• Profitable companies can help support research into safer home, cars and businesses

Key Messages on Profitability

• All of the profits earned in 2004 and 2005 and most of the profits in 2006 were earned in states and from types of insurance unaffected by the hurricanes

• The respite in hurricane activity in 2006 provided insurers with the ability to rebuilding their claims paying resources

• By law, the rates charged for insurance are based exclusively on past and expected losses in that state.

DRIVERS OF PROFITABILITY

Many Factors Contribute to Profits

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

$62.

1

$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

115.8

107.4

100.198.3

100.7

91.5

97.6

94.3

90

100

110

120

01 02 03 04 05 06 9-Mos.Actual

06 IIIForecast*

07 IIIForecast

P/C Industry Combined Ratio

Sources: A.M. Best; ISO, III. *III forecast for 2006 full year.

2005 figure benefited from heavy use of reinsurance which lowered net losses

2006 could produce the best underwriting

result since the 94.9 combined ratio in 1955, Actual 9-mos. Result of 91.5 is best since 1948.

As recently as 2001, insurers were paying out nearly $1.16 for

every dollar they earned in premiums

2007 deterioration due primarily to falling rates, but results still strong assuming

normal CAT activity

Property/Casualty Insurance Industry Investment Gain*

$ Billions

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.2

$51.9$56.9

$51.9

$57.9

$0

$10

$20

$30

$40

$50

$60

94 95 96 97 98 99 00 01 02 03 04 05** 06E*Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 estimate based on actual annualized 2006: 9 month result of $38.936B. **2005 figure includes special one-time dividend of $3.2B. Source: ISO; Insurance Information Institute.

Investment gains are up but are only now comparable to gains seen in the late 1990s

PRICING PRESSURE

Non-CAT Zone Pricing Flat/Falling

Growth in Net Written Premium, 2000-2008F

Source: A.M. Best; Forecasts from the Insurance Information Institute. Full-year estimate from III’s Early Bird survey: http://www.iii.org/media/industry/financials/forecast2007/. 9-month actual value is 3.8% adjusted for special transactions.

5.1%

8.1%

14.1%

9.8%

4.7%

0.4%

2.8%1.5% 1.2%

2000 2001 2002 2003 2004 2005 2006E* 2007F 2008F

P/C insurers will experience their slowest growth rates

since the late 1990s

$651 $6

68 $691 $7

05

$703

$685

$690 $7

24

$780 $8

23 $851

$847

$838

$847

$600

$650

$700

$750

$800

$850

$900

$950

94 95 96 97 98 99 00 01 02 03 04 05* 06* 07*

Average Expenditures on Auto Insurance

*Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute

Countrywide auto insurance expenditures

are expected to fall 0.5% in 2007, the first drop

since 1999

Lower underlying frequency and modest

severity are keeping auto insurance costs in check

$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

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 3Q06

Source: Council of Insurance Agents & Brokers; Insurance Information Institute

Magnitude of rate decreases has diminished greatly since

mid-2005 but is growing again

REBUILDING CAPACITY

Insurers (Re) Building Capacity

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

7576777879808182838485868788899091929394959697989900010203040506

U.S. Policyholder Surplus: 1975-2006E* ($ Billions)

Source: A.M. Best, ISO, Insurance Information Institute *III estimate for 2006.

$ 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

Announced Capital Raising by Insurance Start-Ups($ Millions, as of April 15, 2006)

$1,500

$1,000$1,000$1,000$1,000$1,000$1,000

$500 $500 $500 $500

$220 $180$100

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Harbo

r Poi

nt*

Amlin

Ber

muda

Flagsto

ne Re

Validus H

oldin

gs

Lanca

shire

Re*

*

Augsb

urg R

e

Ariel R

e

Hiscox

Ber

mud

a

New C

astle

Re

Arrow

Cap

ital

XL/Hig

hfiel

ds

Green

light

Re

Omeg

a Spec

ialty

Ascen

dent R

e

$ M

illi

ons

*Chubb, Trident are funding Harbor Point. Announced amounts may differ from sums actually raised. **Stated amount is $750 million to $1 billion. ***XL Capital/Hedge Fund venture. Arrow Capital formed by Goldman Sachs.Sources: Investment Bank Reports; Insurance Information Institute.

As of April 15, 14 start-ups plan to raise as

much as $10 billion.

REINSURANCE MARKETS

Higher Reinsurance Costs Squeezing Insurers, Even in

Non-Coastal Areas

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

Reinsurance: Global Spreading & Redistribution of Risk

Insurer 1 Insurer 2 Insurer 3 Insurer 4 Insurer 5 Insurer 6 Insurer 7

US Reinsurer Swiss Reinsurer German Reinsurer

Cede Premium

s

Pay Losse

s

Retrocessionaire Retrocessionaire

Cede Premium

s

Pay Losse

s

Reinsurance is insurance for

insurance companies

Transmission of Shock Through Insurance/Reinsurance Markets

Sh

ock

Primary Insurer Loss of Capacity

Reinsurer Loss of Capacity

Retrocessional Loss of Capacity

Higher Retentions

Higher Re Prices

Higher Retail Price/Less

Capacity for Insurance

Reinsurance Markets are Globally Linked

Global Reinsurance

Market

States like LA, MS paid little into the global

reinsurance pool but got a lot in return, shrinking

global claims paying resources and pushing up reinsurance costs for all

Premiums Ceded

Losses Paid

Overview of Proposed National

Catastrophe Insurance Plan

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

KATRINA TORT UPDATE

Suits Add to Uncertainty, Expense

Katrina Litigation Timeline for Significant Wind/Flood Disputes

Date Case State Judge

Outcome for

Industry Ruling

9/05

Hood v. State Farm, et al MS

State/Fed* Negative

Suit was held up for 15 months on jurisdictional grounds, but ultimately remanded back to a MS state court in Dec. 2006.

4/06 Buente v. Allstate MS

Senter Positive

Upheld flood exclusion. Rules flood exclusions in policy are “clear are unambiguous”

5/06

Tuepker v. State Farm MS

Senter Negative

Storm surge as excludable flood loss upheld, but ruled that policy language on losses caused by both wind and water was ambiguous and therefore unenforceable

*Originally filed 9/15/05 in MS state court, but jurisdiction challenged by insurers because suit also references the federal government’s National Flood Insurance Program.Sources: Lehman Brothers, Insurance Information Institute.

Katrina Litigation Timeline for Significant Wind/Flood Disputes (cont’d)


Outcome for

Industry Ruling

5/06

Turk, et al v. Louisiana Citizens, et al LA Haik Positive

Upheld flood exclusion. Ruling says that if policy only covered wind damage then flood-related damage not covered

8/06

Class Action Certification MS

Senter Positive

Refuses to certify class actions cases involving State Farm Katrina cases

8/06Leonard v. Nationwide MS Senter Positive

Flood exclusion upheld. Nationwide ordered to pay only for wind damage of $1,228.

11/06Levee Breaks LA Duval Negative

Losses from levee breaks should be covered by insurers

1/19/07

Broussard v. State Farm MS

Senter Negative

Rules against State Farm for refusing to cover Katrina damage. Ordered to pay full value of policy by judge of $233,393 plus jury award of $2.5 million in punitive damages

Sources: Lehman Brothers, Insurance Information Institute.


Outcome for

Industry Ruling

1/07

Congressional Investigations MS NA Negative

Rep, Gene Taylor (D-MS) calls for Congressional investigations into insurer claims handling practices. Separately, Dept. of Homeland Security inspector general must submit results of investigation by 4/1/07.

1/23/07Tejedor v. State Farm MS

Senter Negative

State Farm settles for an estimated $1 million based on $96,000 in uncovered losses. Home insured for $260,000; recovered $200,000 from NFIP and $13,944 from SF on structure. Also recovered $80,000 from NFIP on $130,000 contents

Sources: Lehman Brothers, Insurance Information Institute.




Outcome for

Industry Ruling

1/23/07

State Farm Class Action Settlement MS Senter* Negative

State Farm settles civil suit with MS AG Hood for at least $50 million. SF will offer about 1000 homeowners whose homes were completely destroyed at least 50% of the policy’s value, and offer some payment to other homeowners as well affecting as many as 35,000 policyholders. Families can reject offers and seek arbitration. Settlement also resolves a criminal investigation by AG into allegations that claims were fraudulently denied. Settlement does not involve any other insurers.

1/23/07“Woullard Agreement” MS

NA Negative

State Farm agrees to pay $79.5 million to 639 families in private suit. Suit handled by Richard Scruggs. Sen. Trent Lott (R-MS) was party to this suit.

Sources: Insurance Information Institute. *Pending certification of settlement. Refused to certify 1/26/07.

Scruggs legal team will earn as much as $46 million from these

settlements, paid in addition to sums offered to plaintiffs ($26M for the “Woullard Settlement and up to $20M for the class action case)

Katrina Litigation Timeline: UPDATE!!

• On January 26, 2007, Judge L.T. Senter refused to certify the settlement of the State Farm civil suit with MS Atty. General Hood

• Judge Senter cited lack of information as the reason:

• “In the absence of substantially more information than I now have before me, I am unable to say, even preliminarily, that the proposed settlement establishes a procedure that is fair, just, balanced or reasonable.”

• Senter rejected the settlement “without prejudice,” allowing lawyers to present a new agreement that satisfies his concerns

Source: Insurance Information Institute from Associated Press reports 1/26/07.

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

FLORIDA SPECIAL SESSION

LEGISLATIVE CHANGES

Insurer, Policyholder & State Impacts

Summary: Florida Legislature Special Session (January 2007)

1. Exponential Expansion of the Role of the State in Insuring Homes & In Reinsurance Markets

More than doubles exposure of Florida Hurricane Catastrophe Fund to $35 billion from $16 billion (FHCF only has $1B cash), greatly displacing private reinsurers

Allows Florida Citizens to compete with private insurers by lowering rates and lowering eligibility standards

Allows Florida Citizens to displace private insurers by expanding into non-wind coastal business

Disbands disciplined, small and adequately priced Commercial JUA and transfers business to poorly run, underpriced, Citizens Commercial Account

Sources: Zurich Insurance Technical Center; Insurance Information Institute.


2. Dramatically Increases Exposure of Florida Policyholders to Post-Catastrophe Taxes

Expands the Citizens assessment base more than 4 fold

Increases maximum annual assessment facing Florida policyholders from $9.2 billion to $25 billion

Increases maximum general liability and commercial auto assessment exposure from 14% to 74% (These are 2 types of insurance that having nothing to do with hurricane risk)

Accelerates growth of Citizens, already the largest home insurers in the state and which doubled in size in 2006, by lowering rates and making access easier



3. Discourages Insurers to Offer Policies in Florida Introduces “excess profits law” (a virtual oxymoron in FL) Requires Executive Officer review on routine rate filings

Threatens perjury charges and administrative penalties

Increases cost of processing and maintaining policies Requires “premium discounts” even if not actuarially justified

4. Threatens State of Florida’s Credit Rating Major event could result in simultaneous issuance of $40+

billion in debt from Cat Fund, Citizens and Guarantee Fund Governor’s promise to cut property taxes could compound

state’s fiscal problems after an event


$8.3

$1.3

$35.0 $35.0 $35.0

$11.2

$35.0

$8.3 $8.3

$35.0

$11.2

$0

$5

$10

$15

$20

$25

$30

$35

$40

FL CitizensPersonal

Lines Acct.

FL CitizensCommercialLines Acct.

FL High RiskAcct.

FLHurricaneCat Fund

FL PCJUA FLGuarantee

Assoc.

2006 2007

Florida Hurricane Assessment Base, 2006 vs. 2007* ($ Bill)

The FL legislature

quadrupled the assessment

base for Citizens

Sources: Zurich Insurance Technical Center; Ins. Info. Inst. *Per special legislative session, Jan. 2007.

$1

.66

0

$0

.26

0

$7

.0

$7

.0

$7

.0

$0

.44

8

$3

.50

0

$1

.66

0

$1

.66

0 $3

.5

$0

.44

8

$0

$1

$2

$3

$4

$5

$6

$7

$8

FL CitizensPersonal

Lines Acct.

FL CitizensCommercialLines Acct.

FL High RiskAcct.

FLHurricaneCat Fund

FL PCJUA FLGuarantee

Assoc.

2006 2007

Florida Hurricane Max. Policyholder Annual Burden, 2006 vs. 2007* ($ Bill)

The FL legislature nearly tripled state

insurers’ assessment base from $9.2B to

$25B, an increase of $15.8B or 174%

Sources: Zurich Insurance Technical Center; Ins. Info. Inst. *Per special legislative session, Jan. 2007.

Why the Florida Legislature Special Session’s Changes Could Fail

• Risk is Now Almost Entirely Borne Within State• Virtually Nothing Done to Reduce Actual Vulnerability• Guarantees Very Large Future Assessments• Potentially Crushing Debt Load• State May be Forced to Raise/Levy Taxes to Avoid

Credit Downgrades• Many Policyholder Will See Minimal Price Drop

“Savings” came from canceling recent/planned rate hikes

• Residents in Lower-Risk Areas, Drivers, Business Liability Policyholders Will Come to Resent Subsidies to Coastal Dwellers

Sources: Insurance Information Institute.

What Does theFuture Hold for

Louisiana Buyers of Insurance?

What the Future Holds for Louisiana Home/Business Property Owners

• Effects Concentrated in Southern Louisiana• Market Needs to Reach a New Equilibrium to Stabilize• Price of Insurance Will Rise to Adjust to Higher Plateau of

Risk Going Forward Over Period of YearsNot recoupment of 2005 lossesHigher reinsurance costs ( up 100%+) are major driver

• Reduced Supply as Some Insurers Restrict New SalesCitizens will become the only option for some

• Assessments from CitizensEspecially if significant growth before next event

• Coverage Emerges Through Surplus Lines Mkt.• Experimentation with “Take-Out” Programs?• Alternative Risk Transfer & Securitization?

Factors that Will Increase Private Insurance Sector Receptivity to

Operating in Louisiana• Opportunity to earn a fair rate of return given the

extraordinary risk being assumed• Ability to move capital in and out of the state with

relative ease Investors don’t want to put money into a capital “trap”

• Price/Rate Flexibility; Some want federal regulator• Stronger Building Codes & Enforcement

Wise land use policies help• Incentives to Mitigate• Improvement in Tort Environment• Strong Working Partnership with Major Stakeholders• Absence of “Punitive” Measures that Create Unfavorable

Operating Environment

Insurance Information Institute On-Line

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Louisiana Legislative Women’s Caucus Workshop on Insurance & Economic Development New Orleans, LA

Documents

Transcript of Louisiana Legislative Women’s Caucus Workshop on Insurance & Economic Development New Orleans, LA