Property Insurance in Florida: Balancing the Calm & the Storms

1. Property Insurance in Florida:Balancing the Calm & the Storms BinTech Partners End of Hurricane Season Forum St. Petersburg, FL December 9, 2010 Lynne McChristian, Florida Representative Insurance Information Institute Tel: 813.480-6446  lynnem@iii.org  www.InsuringFlorida.org

2. Presentation Overview • Insurance Rates: Why Insurers Plan for the Worst • History Repeating Itself – or Outdoing Itself • Profits & Profitability • Underwriting Performance • Economy and Investments • The Role of Reinsurance • Public vs. Private Insurance Model • Concerns About Complacency eSlide – P6466 – The Financial Crisis and the Future of the P/C

3. How Insurers Establish Rates • They consider loss history and probability forecasts. • “Probability” forecast is not the same as a weather forecast. • Forecasters were right! 2010 was the third most active season on record, and, thankfully, no landfall. • In hurricane-free years, insurers are able to build funds for when a catastrophic storm does come. • Building this capital means they can write more business. • It’s not only about hurricanes. • Non catastrophe losses are rising, i.e., sinkhole claims. eSlide – P6466 – The Financial Crisis and the Future of the P/C

4. Why Rates Have Not Dropped • The threat of storms has not diminished. • Cycle of major storms continues. • More people and more property have been built in vulnerable areas. • Florida is on track to eclipse NY as the third most populous state. Population growth was between 2.0% and 2.6% between 1990’s and 2006 (national average was 1%); slowed in 2008. • Coastal exposure in Florida represents 79% of all property exposure in the state. eSlide – P6466 – The Financial Crisis and the Future of the P/C

5. Natural Disasters in the United States, 1980 – 2010Number of Events (Annual Totals 1980 – 2009 vs. First Half 2010) Number of events in first half of 2010 is close to the annual totals from five of past ten years. First Half 2010 95 Events Number Meteorological (storm) Climatological (temperature extremes, drought, wildfire) Geophysical (earthquake, tsunami, volcanic activity) Hydrological (flood, mass movement) Source: MR NatCatSERVICE © 2010 Munich Re 5

6. US Insured Catastrophe Losses $100 Billion CAT Year is Coming Eventually ($ Billions) 2000s: A Decade of Disaster 2000s: $193B (up 117%) 1990s: $89B Estimated 2010 CAT Losses Are About Average 2010 CAT Losses Are Running Below 2009, So FarFigures Do Not Include an Estimate of Deepwater Horizon Loss *Estimate through December 31, 2010. 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. Sources: Property Claims Service/ISO; Munich Re; Insurance Information Institute. 6 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

7. Leading States in Coastal Population Growth, 1980-2003 Between 1980 and 2003, total coastal population grew by 33 million people, or 28 percent. Florida – at 75% – had the greatest percent population change. Source: U.S. Census Bureau and NOAA

8. Population Growth Projections for Hurricane Exposed States (2000 to 2030) (000) By 2030, Florida is expecting a population increase of 12.7 million, closely followed by Texas with an expected increase of 12.5 million. The U.S. as a whole is expected to have a population increase of 82.1 million, or 29.2 percent during the same period. Source: U.S. Census Bureau, accessed at http://www.census.gov/population/projections/PressTab1.xls

9. Insured Coastal Exposure As a % Of Statewide Insured Exposure In 2007 Most of Florida’s Exposure is Considered Coastal – 79%. Source: AIR Worldwide

10. Top 12 Most Costly Disastersin US History (Insured Losses, 2009, $ Billions) Hurricane Katrina Remains, By Far, the Most Expensive Insurance Event in US and World History 8 of the 12 Most Expensive Disasters in US History Have Occurred Since 2004; 8 of the Top 12 Disasters Affected FL Sources: PCS; Insurance Information Institute inflation adjustments. eSlide – P6466 – The Financial Crisis and the Future of the P/C

11. Why Rates Have Not Dropped (continued) • Emphasis is on strategic underwriting in a down economy. • Insurers strive to match the premiums to the level of risk, using their loss experience and risk modeling. This has been a challenge in Florida. • As a result of rate suppression, insurers have limited their exposure to loss to ensure that money is on hand to pay anticipated claims. • The amount of premium collected has declined, due to mandatory credits for mitigation that misrepresent the risk. eSlide – P6466 – The Financial Crisis and the Future of the P/C

12. Residential Premiums Have Dropped

13. Fewer Private Insurers in the FL Market Homeowners Insurers Source: FSU Catastrophic Storm Risk Management Center.

14. Insured Losses for Top 12 Most Costly Disasters in U.S. History FLORIDAIMPACT eSlide – P6466 – The Financial Crisis and the Future of the P/C

15. Profits & Profitability Homeowners Insurance is Historically Volatile 17

16. P/C Net Income After Taxes1991–2010:H1 ($ Millions) P-C Industry 2010:H1 profits rose $10.6B from $6.0B in 2009:H1, due mainly to $2.2B in realized capital gains vs. -$11.1B in previous realized capital losses • 2005 ROE*= 9.6% • 2006 ROE = 12.7% • 2007 ROE = 10.9% • 2008 ROE = 0.3% • 2009 ROAS1 = 5.8% • 2010:H1 ROAS = 6.3% * ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.5% ROAS for 2010:H1 and 4.6% for 2009. 2009:H1 net income was $19.2 billion and $10.2 billion in 2008:H1 excluding M&FG. Sources: A.M. Best, ISO, Insurance Information Institute

17. ROE: P/C vs. All Industries1987–2009* (Percent) P/C Profitability IsCyclical and Volatile Katrina, Rita, Wilma Sept. 11 Hugo Lowest CAT Losses in 15 Years 4 Hurricanes Andrew Northridge Financial Crisis* * Excludes Mortgage & Financial Guarantee in 2008 and 2009. Sources: ISO, Fortune; Insurance Information Institute. eSlide – P6466 – The Financial Crisis and the Future of the P/C

18. Number of Years with Underwriting Profits by Decade, 1920s–2000s Number of Years with Underwriting Profits Underwriting Profits Were Common Before the 1980s (40 of the 60 Years Before 1980 Had Combined Ratios Below 100) – But Then They Vanished. Not a Single Underwriting Profit Was Recorded in the 25 Years from 1979 Through 2003 * 2000 through 2009. 2009 combined ratio excluding mortgage and financial guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an underwriting profit. Note: Data for 1920–1934 based on stock companies only. Sources: Insurance Information Institute research from A.M. Best Data. 21 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

19. Florida’s Cumulative Underwriting Gain/Loss Rates do not reflect this risk. It took 11 years to erase losses from Andrew. Then, 2004 hurricanes erased 7 years’ profits; 2005 deepened the hole. Homeowners Insurance,1992-2007 **Does not include Citizens Property Insurance Corporation results.

20. The Role of Reinsurance • Reinsurance is “insurance for insurers.” • It is an important risk-sharing mechanism in Florida because it helps spread risk across the global markets. • Keeping all reinsurance within Florida would also mean keeping all the risk within the state. • All property/casualty insurers in Florida are required to participate in the state’s reinsurance fund – Florida Hurricane Catastrophe Fund. • If the FHCF does not have the money it needs on hand, it finances losses with debt – that you help to pay. • For example, we’ll pay for 2005 storms through 2014. eSlide – P6466 – The Financial Crisis and the Future of the P/C

21. Public & Private Insurance Model Nearly All Floridians Pay Into the State-run Insurance Pool 27

22. Residual Market Plan Estimated Deficits 2004/2005 (Millions of Dollars) The impact of Hurricane Katrina pushed all of the residual market property plans in the affected states into deficits for 2005, following an already record hurricane loss year in 2004. * MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in Federal Aid. Source: Insurance Information Institute

23. Florida Citizens Exposure to Loss ($ Billions) Since its creation in 2002, total exposure to loss in Florida Citizens has increased by 163 percent, from $154.6 billion to $406 billion in 2009. Source: PIPSO; Insurance Information Institute (I.I.I.).

24. Florida’s Assessments • Florida Hurricane Catastrophe Fund. • 6 percent for 2010. • Plus emergency assessment. • 1 percent in 2010; increases to 1.3% in 2011 through 2014. • Citizens Emergency Assessment. • 1.4 percent through 2017. • Plus a Regular Assessment when needed. • Emergency Management Fund. • $2 for homeowners/$4 for commercial. • Federal Insurance Guarantee Fund Recoupment.

25. Estimated Assessments by Storm Level Current Florida law does not allow single year assessments for double-digit numbers, so losses will be paid over time in the event of major storms. Losses associated with any private insurer insolvencies are not included in the calculation. Source: Florida Insurance Consumer Advocate Office, July 2009. eSlide – P6466 – The Financial Crisis and the Future of the P/C

26. Public Attitude Monitor 2006: Unfairness of Policyholder Subsidies Growth in residual market mechanisms may be due in part to implicit support of residents of coastal communities. Coastal States Source: Insurance Research Council

27. Public Attitude Monitor 2006: Unfairness of Taxpayer Subsidies Some 59% of those living in interior counties and 61% in noncoastal states think taxpayer-subsidized insurance is unfair, compared to just 51% of those living in coastal counties. Coastal States Source: Insurance Research Council

28. 2010 Property and Casualty InsuranceReport Card Florida earned an “F” grade. C - AK AL A WA ME B- B MT ND VT B- B- F NH MN A- D+ MA OR ID C+ NY WI B- CT SD = A = B = C = D = F = NG B RI C MI A B- NJ WY C B PA B- B+ C- IA B- B+ MD OH NE C+ DE NV IL IN WV C- A- D- UT VA B A- CO B- D- MO KY A D KS B B- B- CA NC D+ TN D+ B- OK SC C- B- AR AZ NM B- Source: James Madison Institute, February 2008. B- C- A HI AL GA MS B+ B NG LA TX NG FL Not Graded: District of Columbia Mississippi Louisiana D F Source: Heartland Institute, May 2010

29. Concerns About Complacency Does Florida Suffer from Hurricane Amnesia? 36

30. Unemployment Rates by State, September 2010:Highest 25 States* In September, state and regional unemployment rates were little changed. Some 29 states and DC reported unemployment rate decreases from a year earlier, 16 states had increases and 5 had no change. The US unemployment rate was 9.6% in September *Provisional figures for September 2010, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute.

31. What Will It Take to Lower Rates? • Awareness & Planning. • Those who plan ahead rebound the fastest. • Overcome entitlement mentality. “FEMA is not for you.” • Closing loopholes related to insurance claims. • Change 5-year statute to file a hurricane claim? • Require those who get insurance money for a sinkhole claim to fix the damage. • Mitigation. • We must make our property and people less vulnerable. • Majority of existing home was built before the stronger building codes of 2002. eSlide – P6466 – The Financial Crisis and the Future of the P/C

32. Get Fortified: Institute for Building & Home Safety The insurance industry is committed to building stronger, safer homes and helping people learn how to retrofit existing property. www. DisasterSafety.org eSlide – P6466 – The Financial Crisis and the Future of the P/C

33. Watch List • California • Alabama • Madison County, IL • Jefferson County, MS • Texas Gulf Coast • Rio Grande Valley, TX Dishonorable Mention • AR Supreme Court • MN Supreme Court • ND Supreme Court • PA Governor • MA Supreme Judicial Court • Sacramento County The Nation’s Judicial Hellholes: 2010 Illinois Cook County West Virginia New York City New Jersey Atlantic County (Atlantic City) New Mexico Appellate Courts South Florida Source: American Tort Reform Association; Insurance Information Institute eSlide – P6466 – The Financial Crisis and the Future of the P/C

34. 2009 Top Ten Jury Verdicts Source: Lawyers USA, January 15, 2010.

35. I.I.I. Resources: Florida website, national website, Spanish-language communication

36. Until next hurricane season…… eSlide – P6466 – The Financial Crisis and the Future of the P/C

37. Insurance Information Institute Online: www.iii.orgwww. InsuringFlorida/org Thank you for your timeand attention! Twitter: twitter.com/InsuringFLA