Florida Property Insurance Markets Issues, Concerns, Solutions

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Florida Property Insurance MarketsIssues,
Concerns, Solutions

• Insurance Information Institute
• Media Briefing
• January 5, 2007

Robert P. Hartwig, Ph.D., CPCU, President
Chief Economist Insurance Information Institute ?
110 William Street ? New York, NY 10038 Tel
[phone] ? Fax [phone] ?
bobh_at_iii.org ? www.iii.org
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Insurers Share the Concern of Florida Home
Business Owners

• PROPERTY OWNERS ECONOMIC CONCERNS
• The price of residential and commercial property
  insurance has risen rapidly in Florida since 2004
• Home and business owners have also been assessed
  more than 3 billion to cover deficits in
  Citizens, the Florida Hurricane Catastrophe Fund
  Fund and the Florida Insurance Guarantee Fund
• Insurance options for many Florida homeowners
  have dwindled as some have scaled backed
  operations and a few FL-based insurers (e.g.,
  Poe) became insolvent
• At the same time property taxes are rising
  dramatically in many communities
• The run-up in real estate prices in Florida prior
  to 2006 dramatically increased the cost of owning
  a home in Florida
• 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
Florida is rising and home business owners feel
economically squeezed
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Any Solution Must Emerge from a Common Set of
Facts

• FACTS ABOUT FLORIDA PROPERTY MARKETS
• There is more coastal exposure in Florida than
  any other state (about 2 trillion as of 2004)
• Floridas coastal property exposure values are
  expected to double by 2014
• Florida is now the 3rd most populous state in the
  country and population growth rates are expected
  to be at least twice that of most other states
• Florida (and all other Gulf/Atlantic states) will
  experience above-average hurricane activity for
  the next 15-20 years
• Improvements in building codes and mitigation
  technologies have been proven to substantially
  reduce wind damage from hurricanes
• Florida insurers paid 31 billion in insured
  losses on more than 3 million claims over the
  2004/2005 hurricane season
• The current method for financing
  hurricane-related losses results is an economic
  burden for Florida 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

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

• TOWARD A LONG-TERM SOLUTION FOR FLORIDAS
  INSURANCE
• Insurance in Florida 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
• 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 Florida 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

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CATASTROPHIC LOSSESCatastrophic Losses in the
US Upward Trend is Certain
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Most of US Population Property Has Major CAT
Exposure
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U.S. InsuredCatastrophe Losses ( Billions)
100 Billion CAT year is coming soon
Billions
2005 was by far the worst year ever for insured
catastrophe losses in the US, but the worst has
yet to come.
Excludes 4B-6b offshore energy losses from
Hurricanes Katrina Rita. As of Sept. 30,
2006. 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
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Insured Losses from Top 10 Hurricanes Adjusted to
2005 Exposure Levels
(Billions of 2005 Dollars)
Majority of worst-case scenarios involve Florida
With rapid coastal development, 40B storms
will be more common
Source AIR Worldwide ISO/PCS estimate as
of June 8, 2006
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Top 10 Most Costly Hurricanes in US History,
(Insured Losses, 2005)
Seven of the 10 most expensive hurricanes in US
history impacted Florida Andrew, Katrina, Wilma,
Charley, Ivan, Frances Jeanne
Sources ISO/PCS Insurance Information
Institute.
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Number of Major (Category 3, 4, 5) Hurricanes
Striking the US by Decade
1930s mid-1960s Period of Intense Tropical
Cyclone Activity
Mid-1990s 2030s? New Period of Intense Tropical
Cyclone Activity
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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
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.
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Inflation-Adjusted U.S. Insured Catastrophe
Losses By Cause of Loss, 1986-2005¹
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.
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.
Source Insurance Services Office (ISO)..
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Total Value of Insured Coastal Exposure (2004,
Billions)
Florida leads the way for insured coastal
property at more than 1.9 trillion in 2004
Source AIR Worldwide
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The 2007 Hurricane SeasonAbove Average
Activity Expected
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Outlook for 2007 Hurricane Season 40 Worse Than
Average
Average over the period 1950-2000. Source Dr.
William Gray, Colorado State University, December
8, 2006.
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Probability of Major Hurricane Landfall (CAT 3,
4, 5) in 2007
Average over past century. Source Dr. William
Gray, Colorado State University, December 8, 2006.
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Landfall Probabilities by Region Intensity,
2007
Landfall probabilities and intensities up
everywhere
(59)
(79)
(68)
(52)
(84)
(97)
(42)
(30)
(60)
(83)
(50)
(44)
(31)
(61)
(81)
Figures in parentheses represent averages over
the past 100 years. Source Dr. William Gray,
Colorado State University, December 8, 2006.
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WHERE YOUR PREMIUM DOLLAR GOESBad CAT Year
vs.Low CAT Year
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Premiums
Invested Assets (premiums invested until needed
to pay claims
Selling Expenses Taxes, Licenses Fees General
Operating Expenses
Claims Payments/Losses
Reserve Additions/ Releases
Company Profit/Loss
Net Worth (Policyholder Surplus)
Source American Insurance Association, Insurance
Information Institute.
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Where the Florida Premium Dollar Comes From
Where it Goes 2004
Revenue Sources Total Revenue 1049
Payments Total Payout 3719
In a bad year, insurers may pay out 3 to 4 time
what they earn in premiums and investments
Includes temporary living
expenses. Source Insurance Information
Institute from NAIC Report on Profitability by
Line by State, 2004.
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Where the Florida Premium Dollar Comes From
Where it Goes 2003
Revenue Sources Total Revenue 1030
Payments Total Payout 797
In a good year, an insurer might earn 200-300
for each 1000 received in premium, including
investment gains
Includes temporary living
expenses. Source Insurance Information
Institute from NAIC Report on Profitability by
Line by State, 2003.
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Florida State-Run Insurer Residual Deficits
2004/2005 (Millions of Dollars)
The hurricanes seasons of 2004/5 weakened the FL
Hurricane CAT Fund and Citizens, producing a
gross state-run insurer deficit of 3.7 billion
FLs guarantee fund will also assess for at least
400 million
Source Insurance Information Institute research.
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Share of Losses Paid by Private Reinsurers, by
Disaster
Reinsurance is playing an increasingly important
role in the financing of mega-CATs Reins. Costs
are skyrocketing
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.
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FLORIDA HURRICANES INSURER PROFITABILITYSelli
ng Home Insurance in Florida is Challenging
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Underwriting Gain (Loss) in Florida Homeowners
Insurance, 1992-2006E
Billions
Floridas homeowners insurance market produces
small profits in most years and enormous losses
in others
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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Cumulative Underwriting Gain (Loss) in Florida
Homeowners Insurance, 1992-2006E
It will take home insurers in FL until 2009 just
to break even over the period from 1992-2009 IF
there are 0 in hurricane losses over the next 3
years
Billions
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.
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
Averages 1990 to 2006E US HO Insurance
-0.7 FL HO Average -38.1
4 Hurricanes
Andrew
Wilma, Dennis, Katrina
Source NAIC 2005/6 US and FL estimates from
the Insurance Information Institute.
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The Facts About Homeowner Insurer Profits and
Losses in Florida

• During the period from 1992 through 2006, home
  insurers in Florida paid an estimated 10.7
  billion more in claims than they received in
  premiums
• This 10.7 billion underwriting loss remains even
  after including an estimated 2.75 billion in
  profits in 2006
• It will take until 2009 for insurers just to get
  to the breakeven point for the 15 year period
  1992-2006 even if there no storm losses in 2007,
  2008 and 2009
• Florida Remains a Money-Losing Proposition for
  Most Home Insurers in Terms of Return
• The average annual rate of return on FL
  homeowners insurance was -38.1 from 1990-2006,
  despite 2006 being a profitable year.
• Even if insurers were to earn a 40 rate of
  return (implying no storm activity) every year,
  the average return for insurers will not exceed
  0 until 2023. To reach the current 5 risk-free
  return on 10-year Treasury bonds would take until
  2027 and a 10 return is unachievable until 2034

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P/C INSURER PROFITABILITY National Perspective
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ROE P/C vs. All Industries 19872006E
Insurers may match Fortune 500 group for the
first time since 1987
2004/5 ROEs excl. hurricanes
Sept. 11
Hugo
Katrina, Rita, Wilma
Lowest CAT losses in 15 years
Andrew
Northridge
4 Hurricanes
2006 P/C insurer ROE is I.I.I. estimate. Source
Insurance Information Institute Fortune
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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

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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
• 2006s 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 Florida homeowners insurance
  market. Likewise, losses in other states cannot
  be subsidized by Floridians

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If you would like a copy of this presentation,
please email me at bobh_at_iii.org