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The Challenges of Insuring Coastal Properties

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  1. The Challenges ofInsuringCoastal Properties 2008 Insurance SymposiumThe Brantley Risk and Insurance Center Appalachian State University Boone, NC July 21, 2008 Steven N. Weisbart, Ph.D., CLU, Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: (212) 346-5540 Fax: (212) 732-1916 stevenw@iii.org  www.iii.org

  2. Coastal States:Continuing Growth and Development

  3. Estimated Insured Value of Coastal Exposure (2007, $ Billions) Over the last three years (2005-2007), the insured value of properties in coastal areas grew at a 7.3%/year compound rate. If this growth rate persists, the insured value will double by 2017. Insured values in Louisiana and Mississippi grew at low rates since 1/1/2004 because Hurricane Katrina destroyed much value in 2005. Source: AIR Worldwide athttp://www.air-worldwide.com/_public/images/pdf/AIR2008_Coastline_at_Risk.pdf?src=email

  4. In Some States, Coastal Exposure is aHigh Percent of the State’s Insured Value “Insured value” is an estimate of the cost to replace structures and their contents, including additional living expenses and business interruption coverage, for all residential and commercial property in a state that is or can be insured. Source: AIR Worldwide June 11, 2008 release, athttp://www.air-worldwide.com/_public/images/pdf/AIR2008_Coastline_at_Risk.pdf?src=email

  5. Projected Population Growth Ratesin Coastal States, 2000-2030 Source: US Census Bureau, at http://www.census.gov/population/projections/PressTab1.xls;projections released April 21, 2005.

  6. Actual Population Growth Ratesin Coastal States, 7/1/2006-6/30/2007 Source: US Census Bureau, data released May 1, 2008.

  7. Catastrophic Loss:What Can We Learn From the Past?What Can We Expect In the Future?

  8. Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss, 1987-2006¹ (Billions of 2006 $) From 1987-2006, hurricanes and tornadoes caused 72% of insured catastrophe losses. The two-decade total: $297.3 billion (in 2006 dollars). 1Catastrophes are all events causing direct insured losses to property of $25 million or more in 2006 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III. Note: “Winter Storms” excludes snow. “Earthquakes” includes other geologic events such as volcanic eruptions and other earth movement. “Wind/Hail/Flood” does not include flood damage covered by the federally administered National Flood Insurance Program. “Fire” includes wildland fires. Source: Insurance Services Office (ISO)..

  9. Number of Tornadoes in 1st & 2nd Calendar Quarters, 2005–2008 I.I.I. estimate, based on preliminary reports and typical adjustment The first two quarters of 2008 were unusually active for tornadoes, driving up catastrophe losses substantially. Sources: US Dept. of Commerce, Storm Prediction Center, National Weather Service,at http://www.spc.noaa.gov/climo/torn/monthlytornstats.pdf

  10. U.S. Insured Catastrophe Losses*(2007 $) $ Billions Largest CAT losses for any 1st quarter since 1994 $100 Billion CAT year is coming – soon? *Excludes $4Bn-$6Bn offshore energy losses from Hurricanes Katrina & Rita. **through 6/24/2008. 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

  11. Homeowners InsuranceIn Some Coastal States Has Not BeenConsistently Profitable

  12. Underwriting Gain (Loss) in Florida Homeowners Insurance, 1992-2007E* Private Insurers** $ Billions Florida’s homeowners insurance market produces small/modest profits in most years and enormous losses in others *2007 estimate by Insurance Information Inst. based on historical loss, expense and premium data for FL. **Does not include Citizens Property Insurance Corporation results.

  13. Cumulative Underwriting Gain (Loss) in Florida Homeowners Insurance, 1992-2007E* Private Insurers** $ 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. *2007 estimate by Insurance Information Inst. based on historical loss, expense and premium data for FL. **Does not include Citizens Property Insurance Corporation results.

  14. Yearly ROEs for HomeownersInsurance in Virginia, 1997-2006 The 10-year (1997-2006) average ROE on Homeowners Insurance in Virginia was -0.5%. Source: NAIC

  15. ROE for Homeowners Insurancein North Carolina, 1997 - 2006 Average HO ROE in NC from 1997 through 2006 was 10.2% -- well below the Fortune 500 All-Industry average. Source: NAIC

  16. ROE for Homeowners Insurance inSouth Carolina, 1997-2006 Average HO ROE in SC from 1997 through 2006 was a healthy 17.5%, but this is end-point sensitive. The comparable number for 1994-2003 was 12.8%. Source: NAIC

  17. ROE for Homeowners Insurance inGeorgia, 1997-2006 Average HO ROE in Georgia from 1997 through 2006 was 3.0%. Source: NAIC

  18. ROE for Homeowners Insurance in Texas, 1992 - 2006 Average ROE in TX 1992 through 2006 was 0.14% Source: NAIC

  19. ROE for Homeowners Insurancein Gulf Coastal States, 2004-6 ++ Source: NAIC

  20. Construction Materials Inflation vs. Overall Consumer Inflation Rate,1998-2007 Catastrophes often cause shortages and, therefore, spikes in the cost of construction materials, which are later reflected in homeowners claims. *12-month change May 2008 vs. May 2007; Sources: US Bureau of Labor Statistics; I.I.I.

  21. The 2008 Hurricane Season

  22. Atlantic Sea Surface Temperatures, 1948-2007 Source: AIR web site, http://www.air-worldwide.com/_public/html/air_currentsitem.asp?ID=1364

  23. Number of Major (Category 3, 4, 5) Hurricanes Striking the US by Decade Mid 1920s – mid-1960s: AMO Warm Phase 1995 – 2030s? AMO Warm Phase Already as many major storms in 2000-2007 as in all of the 1990s *Figure for 2000s is extrapolated based on data for 2000-2007 (6 major U.S. landfalling storms: Charley, Ivan, Jeanne (2004) & Katrina, Rita, Wilma (2005)). Source: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm.

  24. Forecast for 2008 Hurricane Season: 60% Worse Than Average Source: Philip Klotzbach and Dr. William Gray, “Extended Range Forecast of Atlantic Seasonal Hurricane Activity and U.S. Landfall Strike Probability for 2008,” Colorado State University, June 3, 2008. Available at http://hurricane.atmos.colostate.edu/Forecasts/2008/june2008/jun2008.pdf

  25. Increased Likelihood of Landfall with High NTC (based on 1950-2007) • With high NTC (compared to low NTC), • Twice as many named storms made landfall • Three times as many hurricanes made landfall • Three times as many major hurricanes made landfall Source: Philip Klotzbach and Dr. William Gray, Colorado State University, June 3, 2008, p. 32.

  26. Major Hurricanes Might FormBut Not Make Landfall • From Hurricane Irene in 1999 to Hurricane Lili in 2002, 21 consecutive hurricanes developed in the Atlantic basin without a single U.S. landfall. • “This is how nature sometimes works.” • From 1966 to 2003, of 79 major (3-4-5) hurricanes, 19 (24%) made landfall. • During 2004-5, 7 of 13 (54%) major hurricanes made landfall • During 2006-7, 0 of 4 (0%) major hurricanes made landfall Source: Philip Klotzbach and William Gray, “Extended Range Forecast of Atlantic Seasonal Hurricane Activity and U.S. Landfall Strike Probability for 2008,” Department of Atmospheric Science, Colorado State University, June 3, 2008, p. 34.

  27. The Effect ofCatastrophic Losseson Insurers’ Financial Performance

  28. Catastrophes and ROE: P/C vs.All Industries 1987–2008* P/C profitability is cyclical, volatile Sept. 11 Hugo Katrina, Rita, Wilma Andrew Northridge 4 Hurricanes *2007 and 2008 are ROAS. 2008 is annualized based on Q1 2008.Sources: ISO, Fortune; Insurance Information Institute

  29. P/C Insurance Industry ROEs,1975 – 2008* 1987:17.3% 1977:19.0% 2006:12.2% 1997:11.6% 10 Years 10 Years 9 Years 2008Q1: 6.4% (9.5% excl. M&FG) 1975: 2.4% 2001: -1.2% 1984: 1.8% 1992: 4.5% *GAAP ROE for all years except 2007 and 2008 which are ROAS (statutory Return on Average Surplus).2008 ROAS is annualized based on Q1 2008. Excluding mortgage and financial guarantee insurers = 9.5% Sources: ISO;Insurance Information Institute.

  30. P/C Insurance Industry Net Income After Taxes, 1991-2008F Millions Insurer profits peaked in 2006 Year 2008 numbers are annualized based on Q1 2008.Sources: A.M. Best, ISO, I.I.I.

  31. P/C Insurance Industry Combined Ratio, 2001-2008:Q1 Including Mortgage & Fin. Guarantee insurers As recently as 2001, insurers paid out nearly $1.16 for every $1 in earned premiums Relatively low CAT losses, reserve releases 2005 ratio benefited from heavy use of reinsurance which lowered net losses Best combined ratio since 1949 (87.6) Excluding Mortgage & Fin. Guarantee insurers *Excluding Mortgage & Financial Guarantee insurers. Sources: A.M. Best, ISO; III.

  32. UNDERWRITING PROFIT/LOSS (NOMINAL $) 1975-2008:Q1 In 2006, insurers earned an underwriting profit of $31.7 billion— a record, but only the second underwriting profit since 1978. Underwriting profit in 2007 was $19 billion; 2008Q1 loss was $0.6 billion. $ Billions $52.7 billion underwriting loss Sources: A.M. Best, Insurance Information Institute

  33. ReinsuranceIt Takes a (Global) Village to Manage Large-Scale Hurricane Losses

  34. Share of Losses Paid by 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.

  35. US Reinsurer Net Income& ROE, 1985-2007* Reinsurer profitability rebounded post-Katrina but is now falling Source: Reinsurance Association of America. *2007 ROE figure is III estimate based return on average 2007 surplus.

  36. Insurers’ Financial Strength/Claims-Paying Capacity

  37. U.S. P/C Industry Policyholder Surplus: 1977-2008:Q1 Surplus as of 3/31/08 was $515.6 billion, down 0.4% from year-end 2007. Peak was $521.8 billion as of 9/30/07 $ Billions 1977-1987 CAGR: 13.6%1987-1997 CAGR: 11.5%1997-2007 CAGR: 5.5% Surplus exceeded a half trillion dollars for the first time during the 2nd quarter of 2007. Sources: A.M. Best, ISO, Insurance Information Institute.

  38. U.S. P/C Industry Premiums-to-Surplus Ratio: 1985-2008:Q1 Premiums measure risk accepted; surplus is funds beyond reserves to pay unexpected losses. The larger surplus is in relation to premiums—the lower the ratio of premiums to surplus—the greater the industry’s capacity to handle the risk it has accepted. 20070.85:1 again 19980.85:1–the lowest P:S ratio in recent history. Sources: A.M. Best, ISO, Insurance Information Institute.

  39. P/C Insurer Impairment Rates and Underwriting Results, 1969-2007 The 2006 impairment rate was 0.43%, or 1-in-233 companies, half the 0.86% average since 1969; the 2007 rate was a record low of 0.12% Source: A.M. Best; Insurance Information Institute

  40. Reasons for US P/C Insurer Impairments, 1969-2005 2003-2005 1969-2005 Deficient reserves, CAT losses are more important factors in recent years *Includes overstatement of assets. Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report,Nov. 2005;

  41. The Pricing Environment and Claims Litigation

  42. Premium Growth Rates Vary Dramatically 1975-78 1984-87 2000-03 Shaded areas denote “hard market” periods Excluding Mortgage & Financial Guarantee insurers, Q1 2008 NWP dropped 0.9% In 2007 net written premiums fell 0.6%, the first decline since 1943 2008 is Q1 actual (-0.7%), including Mortgage & Financial Guarantee insurersSources: A.M. Best, ISO, Insurance Information Institute

  43. Average Commercial Rate Change,All Lines, (1Q:2004 – 4Q:2007) Magnitude of rate decreases diminished greatly after Katrina but have grown again -0.1% KRW Effect Source: Council of Insurance Agents & Brokers; Insurance Information Institute

  44. Post-Katrina LitigationAdds to Uncertainty, Expense

  45. Hurricane Katrina Claim Status on Storm’s 1st Anniversary* 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.

  46. Hurricane Katrina Claim Status on Storm’s 2nd Anniversary* 99% of the 1.2 million homeowners insurance claims in Louisiana & Mississippi were settled as of the storm’s second anniversary in 2007 *Hurricane Katrina made its north Gulf coast landfall August 29, 2005. **Unsettled implies that the claim is in the process of settlement, involved in mediation or litigated. Source: Insurance Information Institute survey, August 2007.

  47. Flood InsurancePurchase and Lapse RatesSince Katrinain the Gulf States

  48. NFIP Flood Policy Growth in Gulf States Since Katrina* The number of flood insurance policies sold in the Gulf states in the 2 years following Katrina increased by 21.6% *Change from July 2005 through August 2007. Sources: NFIP ; Insurance Information Institute.

  49. Percentage of NFIP Flood Policies Issued Since Katrina That Are Not Renewed* Flood policy nonrenewal rates in Gulf states are surprisingly high *Policies issued since July 2005 as of August 2007. **US figure is nonrenewal rate for all policies in force, average over 12 month period ending August 2007. Sources: NFIP ; Insurance Information Institute.

  50. Can’t Investment ResultsPay For Catastrophe Claims?