North Carolina Insurance Markets in an Era of Mega-Catastrophes

1. North Carolina Insurance Markets in an Era ofMega-Catastrophes Insurance Federation of North Carolina Legislative Day 2006 Raleigh, NC June 14, 2006 Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: (212) 346-5520 Fax: (212) 732-1916 bobh@iii.org  www.iii.org

2. Presentation Outline • Review of Recent Catastrophe Activity: US • Future Hurricane Loss Potential: Worst Yet to Come • 2006 Hurricane Season: Preview to Disaster? • Hurricane Risk in NC: An Inconvenient Truth • Hurricanes & Insurer Profitability in North Carolina • P/C Financials: Mega-CAT Impacts on Performance • Capital & Capacity Trends: Supply & Demand • CAT Losses, Ratings, Solvency & Impairment? • Pricing Trends • Overview of Nationa CAT Plan Proposal • Insurance-to-Value: Too Little Coverage, Too Late? • National Flood Insurance Program (NFIP) Summary • Q & A

3. Review of Recent Catastrophic LossActivity in the USDollars and Cents

4. Most of US Population & Property Has Major CAT Exposure Is Anyplace Safe?

5. U.S. InsuredCatastrophe Losses ($ Billions)* $ Billions $100 Billion CAT year is coming soon 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. 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

6. Global Number of Catastrophic Events, 1970–2005 The number of natural and man-made catastrophes has been increasing on a global scale for 20 years Record 248 man-made CATs & record 149 natural CATs in 2005 Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 1/2005 and 2/2006.

7. Insured Property Catastrophe Losses as % Net Premiums Earned, 1983–2005E US CAT losses were a record 13.8% of net premiums earned in 2005 and were 4.2 times the 1984-2004 average of 3.3% *Insurance Information Institute figure of 13.8% for 2005 based estimated 2005 DPE of $417.7B and insured CAT losses of $57.7B. Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute.

8. 2005 Was a Busy, Destructive, Deadly & Expensive Hurricane Season All 21 names were used for the first time ever, so Greek letters were used for the final 6 storms: Alpha though Zeta 2005 set a new record for the number of hurricanes & tropical storms at 27, breaking the old record set in 1933. Source: WeatherUnderground.com, January 18, 2006.

9. Just 2 Weeks Into the 2006 Season, Alberto Hits FL and Visits NC NC already under siege in 2006 Source: National Hurricane Center.

10. 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 10 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.

11. Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2005) 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 Sources: ISO/PCS; Insurance Information Institute.

12. Top 11 Insured PropertyLosses in US ($2005) Eight of the 11 most expensive disasters is US history occurred within the past 4 years Note: 9/11 loss figure is for property claims only. Total insured losses ($2004) are approximately $34B. Sources: ISO/PCS; Insurance Information Institute.

13. Insured Loss & Claim Count for Major Storms of 2005* Hurricanes Katrina, Rita, Wilma & Dennis produced a record 3.3 million claims *Property and business interruption losses only. Excludes offshore energy & marine losses. Source: ISO/PCS as of June 8, 2006; Insurance Information Institute.

14. Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss, 1985-2004¹ Insured disaster losses totaled $221.3 billion from 1984-2004 (in 2004 dollars). After 2005 season, tropical cyclones will account for about 45% of the total. 1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2004 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 Information Institute estimates based on ISO data.

15. Number of Tornados & Associated Deaths, 1985-2005p There appears to be an upward trend in the number of tornados, though not deaths. Detection Increase? Source: III from National Weather Service data.

16. Hurricane Seasonof 2005Its Place in History

17. Hurricane Katrina Insured Loss Distribution by State ($ Millions)* Louisiana accounted for 62% of the insured losses paid and 56% of the claims filed Total Insured Losses = $40.579 Billion *As of June 8, 2006 Source: PCS division of ISO.

18. Hurricane Katrina Loss Distribution by Line ($ Billions)* Total insured losses are estimated at $40.579 billion from 1.7438 million claims. Excludes $2-$3B in offshore energy losses *As of June 8, 2006 Source: PCS division of ISO.

19. Hurricane Katrina Claim Count Distribution by State* Louisiana accounted for 62%of insured losses paid and 56% of claims filed Total # Claims = 1,743,800 *As of June 8, 2006 Source: PCS division of ISO.

20. Hurricane Rita Loss Distribution, by Line ($ Millions)* Total insured losses are estimated at $5.0 billion (excl. offshore energy of $2-$3B) from 383,000 claims. *As of June 8, 2006 Source: PCS division of ISO.

21. Hurricane Rita Claim Count Distribution by State* Louisiana accounted for 48.3% of the insured losses, Texas 44.6%. Excludes offshore energy losses of $2-3B Total # Claims = 383,000 *As of June 8, 2006 Source: PCS division of ISO.

22. Hurricane Wilma Loss Distribution by Line ($ Millions)* Total insured losses are estimated at $10.3 billion from 1.047 million claims *As of June 8, 2006. All losses are in FL. Source: PCS division of ISO.

23. Hurricane Wilma Claim Count Distribution by Line* Total insured losses are estimated at $10.3 billion from 1.047 million claims *As of June 8, 2006. All losses are in FL. Source: PCS division of ISO.

24. Hurricane Ophelia Loss Distribution by Line ($ Millions)* Total insured losses are estimated at $35.0 million from 10,600 claims *As of June 8, 2006. All losses are in NC. Source: PCS division of ISO.

25. Hurricane Ophelia Claim Count Distribution by Line* Total insured losses are estimated at $35.0 million from 10,600 claims *As of June 8, 2006. All losses are in NC. Source: PCS division of ISO.

26. Future Hurricane Loss Potential The Worst IsYet to Come

27. Total Value of Insured Coastal Exposure (2004, $ Billions) North Carolina has more than $105 billion in insured coastal property exposure Source: AIR Worldwide

28. Insured Coastal Exposure as a % of Statewide Insured Exposure (2004, $ Billions) About 9% of all insured exposure in North Carolina is on the coast Source: AIR Worldwide

29. Value of Insured Residential Coastal Exposure (2004, $ Billions) North Carolina has $60 billion of insured residential coastal exposure Source: AIR

30. Value of Insured Commercial Coastal Exposure (2004, $ Billions) North Carolina has about $45 billion of insured commercial coastal exposure Source: AIR

31. The 2006 Hurricane Season:Preview to Disaster?

32. Outlook for 2006 Hurricane Season *Average over the period 1950-2000. Source: Dr. William Gray, Colorado State University, May 31, 2006.

33. Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2006 *Average over past century. Source: Dr. William Gray, Colorado State University, May 31, 2006.

34. Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2006 Source: Dr. William Gray, Colorado State University, May 31, 2006; NOAA (May 2006).

35. CAT Models for 2006 Show Increase in Hurricane Frequency & Severity Expected frequency and severity are up in every region Frequency in the Carolinas is up 40% and severity 25% Source: EQECAT

36. Hurricane Risk in North Carolina An Inconvenient Truth

37. Insured Losses from Hurricanes Affecting NC, 1949-2005 (2005$) North Carolina has experienced 28 hurricanes since 1949 producing $5.5 billion in damage in 2005 dollars: Avg. Annual Loss (2005$): 1949-2005: $95.7 Million 1949-1988: $10.6 Million 1989-2005: $296.1 Million Sources: ISO/PCS; Adjusted to 20005 dollars by the Insurance Information Institute.

38. Population Growth in Coastal NC Counties, 1960-2005 Several coastal North Carolina counties have experienced explosive population growth, including Dare, Brunswick and Currituck Counties. All are among the state’s most vulnerable to hurricane damage. NC Coastal population has doubled since 1960! Sources: Insurance Information Institute computed from US Census Bureau data.

39. Growth in Number of Housing Units, 1995-2005 Most coastal states have seen explosive building activity. The insured value of coastal property is likely to double every 10 years Sources: AIR Worldwide

40. Famous Names in NC Hurricane History: Past as Prologue? 1955 Hurricane Season $70 Mill. Damage* Hurricane Hugo Sept. 17-22, 1989 $1.01 Bill. Damage* Hurricane Fran Sept. 5-8, 1996 $1.61 Bill. Damage* Hurricane Floyd Sept. 14-16, 1999 $1.64 Bill. Damage* *Stated in 2005 dollars. Source: Insurance Information Institute from WeatherUnderground.com; PCS.

41. Historical Hurricane Strikes in Beaufort County, NC, 1900-2002 Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.

42. Historical Hurricane Strikes in Bertie County, NC, 1900-2002 Population in Suffolk County is 4.5 times what it was in the 1940s Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.

43. Historical Hurricane Strikes in Brunswick County, NC, 1900-2002 Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.

44. Historical Hurricane Strikes in Camden County, NC, 1900-2002 Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.

45. Historical Hurricane Strikes in Carteret County, NC, 1900-2002 Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.

46. Historical Hurricane Strikes in Chowan County, NC, 1900-2002 Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.

47. Historical Hurricane Strikes in Currituck County, NY, 1900-2002 Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.

48. Historical Hurricane Strikes in Dare County, NY, 1900-2002 Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.

49. Historical Hurricane Strikes in Hyde County, NC, 1900-2002 Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.

50. Historical Hurricane Strikes in New Hanover County, NC, 1900-2002 Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.