South Carolina Property Insurance Markets Issues, Concerns, Solutions

48
Insurance Markets Issues, Concerns, Solutions Robert P. Hartwig, Ph.D., CPCU, President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038 Insurance Information Institute South Carolina Media & Legislative Briefing April 2, 2007 DOWNLOAD AT http:// www.iii.org/media/met/scbriefing /

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South Carolina Property Insurance Markets Issues, Concerns, Solutions. Insurance Information Institute South Carolina Media & Legislative Briefing April 2, 2007 DOWNLOAD AT http://www.iii.org/media/met/scbriefing/. Robert P. Hartwig, Ph.D., CPCU, President & Chief Economist - PowerPoint PPT Presentation

Transcript of South Carolina Property Insurance Markets Issues, Concerns, Solutions

Page 1: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

South Carolina Property Insurance Markets

Issues, Concerns, Solutions

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

Insurance Information InstituteSouth Carolina Media & Legislative Briefing

April 2, 2007

DOWNLOAD AThttp://www.iii.org/media/met/scbriefing/

Page 2: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

Insurers Share the Concern of SC Home & Business Owners

PROPERTY OWNERS ECONOMIC CONCERNS• The price of residential and commercial property insurance has

risen rapidly in coastal SC since 2004• Insurance options for some homeowners have dwindled as some

have scaled backed exposure to coastal zones• At the same time property taxes are rising in many communities• The run-up in real estate prices in some areas has dramatically

increased the cost of owning a home• Many homeowners adjustable rate mortgages are seeing their

interest rate locks expire and are now paying higher interest rates on their mortgages

Bottom Line

The cost of owning property in South Carolina is rising and home & business owners feel economically squeezed

Page 3: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

Any Solution Must Emerge from a Common Set of Facts

FACTS ABOUT SOUTH CAROLINA PROPERTY MARKETS• South Carolina has more than $150 billion in insured coastal exposure, more

than three times that of Mississippi• Coastal property exposure values are expected to increase rapidly over the

next decade• South Carolina’s coastal population is growing rapidly• South Carolina (and all other Gulf/Atlantic states) will experience above-

average hurricane activity for the next 15-20 years • South Carolina is vulnerable to major hurricanes, as Hurricane Hugo

proved, the cost of which is nearly $7 billion in today’s dollars• Improvements in building codes and mitigation technologies have been

proven to substantially reduce wind damage from hurricanes• The current method for financing hurricane-related losses results is an

economic burden for some property owners, but at the same times leaves private and state-run insurers with large operating deficits

• Ultimately, risk will need to be the primary determinant of the price of insurance

Page 4: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

Elements of a Shared Solution Arising from a Common Set of Facts

TOWARD A LONG-TERM SOLUTION FOR S. CAROLINA’S INSURANCE• Insurance in South Carolina’s coast areas needs to be more available and

affordable• Stronger homes are safer homes and stronger homes (and businesses) cost less

to insurance, offer their owners a higher quality of life and are a key part of any solution

• Strengthening of building codes and mitigation must be encouraged• Land use policies have a clear role to play in limiting future storm damage• Stronger homes, increased use of mitigation technologies and smarter land use

policies will lower insurance losses and costs for home/businesses owners• State tax policy can be used to provide mitigation incentives• Spread of risk on a global scale is important

Reinsurance, securitization (CAT bonds) can help achieve this objective• Insurance capital should be encouraged to flow into SC’s insurance markets• The price of insurance must eventually reflect the risk of that property

This will dramatically reduce the need for assessments, diversion of tax revenues or the need for the state to borrow heavily after a major hurricane

Page 5: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

CATASTROPHIC LOSSES

Catastrophic Losses in the US: Upward Trend is Certain

Page 6: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

Most of US Population & Property Has Major CAT Exposure

Page 7: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

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

Hugo

Page 8: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

South Carolina Insured Catastrophe Losses, 1954 - 2005*

$87.

2

$1.0

$3.8

$1.6

$47.

4

$1.9 $1

4.8

$4.8 $1

2.0 $3

2.9

$4.7

$1.0

$26.

3

$33.

3

$154

.1

$66.

2

$30.

9

$13.

4

$14.

3

$121

.6

$206

.9

$141

.0

$99.

6

$12.

2

$83.

9

$228

.6

$231

.4

$65.

1

$69.

0

$160

.3

$15.

0

$21.

8

$0

$50

$100

$150

$200

$250

54 59 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

*Not displayed for scale purposes: Hurricane Hugo losses of $3.72B (adjusted).Source: Property Claims Service/ISO; Insurance Information Institute.

$ Millions, Adjusted to 2005 Dollars

Since 1954, SC has sustained $5.73 billion

insured CAT losses after adjusting for inflation

($3.81B before adjusting)

Avg. annual losses since

1989 are larger

Page 9: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

South Carolina Insured Catastrophe Losses, 1954 - 2005*

$87.

2

$1.0

$3.8

$1.6

$47.

4

$1.9

$14.

8

$4.8

$12.

0

$32.

9

$4.7

$1.0

$26.

3

$33.

3

$154

.1

$66.

2

$30.

9

$3,7

20.2

$13.

4

$14.

3

$121

.6

$206

.9

$141

.0

$99.

6

$12.

2

$83.

9$2

28.6

$231

.4

$65.

1

$69.

0$1

60.3

$15.

0

$21.

8

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

54 59 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

Source: Property Claims Service/ISO; Insurance Information Institute

$ Millions, Adjusted to 2005 Dollars

Since 1954, SC has sustained $5.73 billion

insured CAT losses after adjusting for

inflation ($3.81B before adjusting)

Average annual losses have been higher since 1989

Hugo

Page 10: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

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 14month period from August 2004 to October 2005.

Hugo still ranks as the 6th most expensive hurricane in US history

Page 11: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

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

Page 12: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

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.

Page 13: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

SOUTH CAROLINA HURRICANE RISK

Potential for a Loss Several Times Hugo Looms Large

Page 14: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

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

South Carolina had nearly $150 billion in

insured coastal exposure in 2004

(56% commercial, 44% residential)

Page 15: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

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

*III listSource: AIR Worldwide

Who’s to Blame*

1. State & local zoning, land use and building code officials

2. State & local legislators

3. State-run property insurers, pools & plans

4. Washington, DC

5. Property owners

Page 16: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

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

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaGeorgia

AlabamaMississippi

New HampshireDelaware

Rhode IslandMaryland

Source: AIR

South Carolina had nearly $84 billion in insured coastal commercial

exposure in 2004 (56% of all exposure) & exceeding

NC by 85%

Page 17: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

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

New JerseyConnecticut

LouisianaS. Carolina

MaineVirginia

North CarolinaAlabamaGeorgia

DelawareRhode Island

NewMississippiMaryland

Source: AIR

South Carolina had more than $65 billion in insured

coastal residential exposure in 2004 (56% of

all exposure)

Page 18: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

County Map of South Carolina

Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.

Page 19: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

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.

Page 20: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

Historical Hurricane Strikes in Charleston County, SC, 1900-2002

Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.

Population in Charleston County has nearly doubled

since the 1950s

Page 21: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

Historical Hurricane Strikes in Colleton County, SC, 1900-2002

Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.

Population in Colleton County

appears to be increasing in

recent decades

Page 22: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

Historical Hurricane Strikes in Georgetown County, SC, 1900-2002

Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.

Population in Georgetown County has nearly doubled

since the 1950s

Page 23: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

Historical Hurricane Strikes in Horry County, SC, 1900-2002

Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.

Population in Horry County has doubled since the 1980s and

tripled since the 1950s

Page 24: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

The 2007 Hurricane Season:

Above Average Activity Expected

Page 25: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

Outlook for 2007 Hurricane Season: 85% Worse Than Average

Average* 2005 2007F

Named Storms 9.6 28 17Named Storm Days 49.1 115.5 85

Hurricanes 5.9 14 9Hurricane Days 24.5 47.5 40Intense Hurricanes 2.3 7 5

Intense Hurricane Days 5 7 11

Accumulated Cyclone Energy 96.2 NA 170

Net Tropical Cyclone Activity 100% 275% 185%*Average over the period 1950-2000.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 3, 2007.

Page 26: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

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

Average* 2007F

Entire US Coast 52% 74%

US East Coast Including Florida Peninsula

31% 50%

Gulf Coast from FL Panhandle to Brownsville, TX

30% 49%

ALSO…Above-Average Major Hurricane

Landfall Risk in Caribbean for 2007

*Average over the period 1950-2000.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 3, 2007.

Page 27: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

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%

)

Page 28: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

What Role Should the Federal Government

Play in Insuring Against Natural Disaster Risks?

Page 29: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

South Carolina’s Coastal Plan

• Spreading recognition that FL actions were fiscally reckless and did nothing to reduce state’s vulnerability

• SOUTH CAROLINA: Gov. Mark Sanford announced a coastal insurance relief plan March 22, referring to FL’s actions as a “knee-jerk” reaction

• SC legislation uses tax incentives to reduce risk to property and lower the cost of insurance

Tax deductions for catastrophe savings accounts Tax credits for disaster mitigation Tax credits for lower income property owners paying more than 5% of their

income in insurance premiums Tax-free savings accounts for homeowners who carry very large deductibles

or create accounts to “self insure” Tax credits for insurers writing full coverage for coastal dwellers Tax credits for homeowners who buy supplies to retrofit homes making them

more hurricane resistant Require insurers to offer discounts to people who mitigate

Sources: Insurance Information Institute from 3/22/07 press release, Office of Governor Mark Sanford.

Page 30: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

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

Page 31: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

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

Page 32: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

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

Page 33: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

Legislation has been introduced and ideas

espoused by ProtectingAmerica.org will likely get a more

thorough airing in 2007/8

Page 34: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

INSURER PROFITABILITY:

SOUTH CAROLINA

Selling Home Insurance in Coastal Areas is Challenging

Page 35: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

($31

.0)

$0.9

$6.0

$2.5

($62

.6)

($9.

8)

$9.7

$13.

7

$30.

6

$43.

1

$85.

0

$50.

2

($35

.9)

($72

.6)

$91.

7

$75.

4

$140

.5

$150

.7

$276

.9

($7.

0)

($1,113.5)($1,200)

($1,000)

($800)

($600)

($400)

($200)

$0

$200

$400

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

Underwriting Gain (Loss) in SC Homeowners Insurance, 1985-2005

Source: A.M. Best; Insurance Information Institute.

$ M

illi

ons

South Carolina’s homeowners insurance market is volatile and prone to mega-scale losses. The average rate of return for home

insurers is -15.4% from 1985-2005.

Page 36: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

($31

.0)

($30

.1)

($24

.1)

($21

.6)

($1,

197.

6)

($1,

207.

4)

($1,

197.

7)

($1,

191.

1)

($1,

160.

5)

($1,

117.

4)

($1,

032.

4)

($98

2.2)

($1,

018.

1)

($1,

090.

7)

($99

9.0)

($92

3.6)

($78

3.1) ($

602.

4)

($32

4.2)

($1,

204.

7)

($1,

135.

0)

($1,400)

($1,200)

($1,000)

($800)

($600)

($400)

($200)

$0

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

Cumulative Underwriting Gain (Loss) in SC Homeowners Insurance,1985-2005

Source: A.M. Best; Insurance Information Institute.

$ M

illi

ons

On a cumulative basis, insurers remained in the red in the SC

homeowners insurance market 16 years after Hurricane Hugo struck in 1989. It is likely that insurers finally came close

to break even in 2006.

Page 37: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

The Facts About Homeowner Insurer Profits and Losses in SC

• During the period from 1985 through 2005, home insurers in SC paid $324 million more in claims than they received in premiumsThis $324 million underwriting loss remains even after 5

consecutive profitable years (2001-2005) It is likely that home insurers in 2006 came close to the

breakeven point for the 22 year period 1985-2006 after including 2006 profits.

If there are no storms in 2007, homeowners insurers will be in the black on a cumulative basis for the first time in more than 20 years

• SC Remains a Difficult Proposition for Most Home Insurers in Terms of ReturnThe average annual rate of return on SC homeowners

insurance was -15.4% from 1985-2005

Page 38: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

WHERE YOUR PREMIUM DOLLAR GOES

Bad CAT Year vs.Low CAT Year

Page 39: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

PremiumsSelling Expenses

Taxes, Licenses & FeesGeneral Operating

Expenses

Invested Assets

(premiums invested until needed to pay claims

Claims Payments/Losses

Company

Profit/Loss

Reserve Additions/ Releases

Net Worth

(Policyholder Surplus) Source: American Insurance Association,Insurance Information Institute.

Page 40: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

Where the SC Premium Dollar Comes From & Where it Goes: 1989 (Hugo)

*Includes temporary living expenses.

Source: Insurance Information Institute from A.M. Best data.

Premiums

$1,000 95%

Investment

Gain$51 5%

Revenue Sources

Total Revenue = $1051

PaymentsTotal Payout = $5548

In a bad year, insurers may

pay out 5+ times what they earn

in premiums and investments

Other Expense

$160 3%

Loss & Loss Adjustment

Expenses Incurred*

$5,203 93%

Selling Expense

$150 3%

Taxes, Fees$35 1%

Page 41: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

Where the SC Premium Dollar Comes From & Where it Goes: 2004

*Includes temporary living expenses.

Source: Insurance Information Institute from NAIC Report on Profitability by Line by State, 2004.

Premiums

$1,000 96%

Investment

Gain$39 4%

Revenue Sources

Total Revenue = $1039

PaymentsTotal Payout = $850

In a good year, an insurer might earn $200-$300 for each

$1000 received in premium, including investment gains

Loss Adjustment Expenses*

$57 7%

Fed Taxes$91 11%

Taxes, Fees$33 4%

Losses Incurred

$407 48%

Divs. To Policyholders

$3 0%

General Expense

$45 5%

Selling Expense

$214 25%

Page 42: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

Share of Losses Paid by Private 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

Page 43: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

P/C INSURER PROFITABILITY

National Perspective

Page 44: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

-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

06E

07F

08F

US P/C Insurers All US Industries

ROE: US 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

Page 45: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

-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

Page 46: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

Industry Profitability Benefits Insurance Consumers

• Profits compensate shareholders for the assets they put at risk and encourages new capital to enter

• 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• Profitable companies have higher financial strength and

credit ratings

Page 47: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

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

• 2006’s respite in hurricane activity provides 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. Profits in other states or

from other types of insurance cannot be used to subsidize losses

in the SC homeowners insurance market. Likewise, losses in

other states cannot be subsidized by South Carolinians

Page 48: South Carolina Property  Insurance Markets Issues, Concerns, Solutions

Insurance Information Institute On-Line

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