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Financial and Market Impacts of Hurricanes on Property/Casualty Insurers Past, Present & Future 2007 National Hurricane Conference New Orleans, LA April 5, 2007 Download at: www.iii.org/media/presentations/nhc2007 Robert P. Hartwig, Ph.D., CPCU, President & Chief Economist

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financial and market impacts of hurricanes on property casualty insurers past present future

Financial and Market Impacts of Hurricanes on Property/Casualty InsurersPast, Present & Future

2007 National Hurricane Conference

New Orleans, LA

April 5, 2007

Download at: www.iii.org/media/presentations/nhc2007

Robert P. Hartwig, Ph.D., CPCU, 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

presentation outline
Presentation Outline
  • Catastrophe Losses are Growing Globally
  • US: Hurricanes are Now #1 Source of Insured CAT Losses
    • Displacing Tornados
  • Loss Potential from Future Storms is Immense & Growing Rapidly
  • Acts of God & The Bottom Line
  • Hurricanes & The Price of Property Insurance
  • Claims Paying Capacity: The Worst Has Yet to Come
    • Why US Hurricanes Become a Global Insurance Problem
  • The Role of State-Run Insurers
  • Post-Katrina Litigation
u s insured catastrophe losses
U.S. Insured Catastrophe Losses*

$ Billions

$100 Billion CAT year is coming soon

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.

*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

global number of catastrophic events 1970 2005
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.

top 10 most costly hurricanes in us history insured losses 2005
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.

insured loss claim count for major storms of 2005
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.

inflation adjusted u s insured catastrophe losses by cause of loss 1986 2005
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)..

hurricane katrina insured loss distribution by state millions
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.

hurricane katrina loss distribution by line billions
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.

hurricane rita loss distribution by line millions
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.

slide12

Insurers are committed to improving the ability of homes and businesses to withstand major disasters

slide13

Figure 8.

Free Home Inventory Software at www.iii.org

Source: Insurance Information Institute

total value of insured coastal exposure 2004 billions
Total Value of Insured Coastal Exposure (2004, $ Billions)

Florida & New York lead the way for insured coastal property at more than $1.9 trillion each.

Northeast state insured coastal exposure totals $3.73 trillion.

Source: AIR Worldwide

insured coastal exposure as a of statewide insured exposure 2004 billions
Insured Coastal Exposure as a % of Statewide Insured Exposure (2004, $ Billions)

After FL, many Northeast states have among the highest coastal exposure as a share of all insured exposure in the state.

Source: AIR Worldwide

new condo construction in south miami beach 2007 2009
New Condo Construction inSouth Miami Beach, 2007-2009
  • Number of New Developments: 15
  • Number of Individual Units: 2,111
  • Avg. Price of Cheapest Unit: $940,333
  • Avg. Price of Most Expensive Unit: $6,460,000
  • Range: $395,000 - $16,000,000
  • Overall Average Price per Unit: $3,700,167*
  • Aggregate Property Value: At least $6 Billion

*Based on average of high/low value for each of the 15 developments

Source: Insurance Information Institute from www.miamicondolifestyle.com accessed April 5, 2007.

historical hurricane strikes in galveston county tx 1900 2002
Historical Hurricane Strikes in Galveston County, TX, 1900-2002

Population of Galveston County is 5 times what it was when the hurricane of 1900 struck, killing 8,000

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

historical hurricane strikes in suffolk county ny 1900 2002
Historical Hurricane Strikes in Suffolk County, NY, 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.

historical hurricane strikes in suffolk county ny 1900 200220
Historical Hurricane Strikes in Suffolk County, NY, 1900-2002

Population in Barnstable County (Cape Cod) is 5 times what it was in the 1950s

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

historical hurricane strikes in dare county nc 1900 2002
Historical Hurricane Strikes in Dare County, NC, 1900-2002

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

increase in population of coastal near coastal counties in south carolina change 1990 2005
Increase in Population of Coastal/Near Coastal Counties in South Carolina(% Change, 1990 - 2005)

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.

Sources: Charleston Metro Chamber of Commerce, SC Statistical Abstract, US Census Bureau.

nightmare scenario insured property losses for nj ny cat 3 4 storm
Nightmare Scenario: Insured Property Losses for NJ/NY CAT 3/4 Storm

Insured Losses: $110B

Economic Losses: $200B+

Distribution of Insured Property Losses,

by State, ($ Billions)

Total Insured Property Losses = $110B, nearly 3 times that of Hurricane Katrina

Source: AIR Worldwide

outlook for 2007 hurricane season 85 worse than average
Outlook for 2007 Hurricane Season: 85% Worse Than Average

*Average over the period 1950-2000.

Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 3, 2007.

probability of major hurricane landfall cat 3 4 5 in 2007
Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2007

*Average over the period 1950-2000.

Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 3, 2007.

roe p c vs all industries 1987 2008e
ROE: P/C vs. All Industries 1987–2008E

P/C profitability is cyclical, volatile and vulnerable

Sept. 11

Hugo

Katrina, Rita, Wilma

Lowest CAT losses in 15 years

Andrew

Northridge

4 Hurricanes

*2006-8 P/C insurer ROEs are I.I.I. estimates.

Source: Insurance Information Institute; Fortune

profitability peaks troughs in the p c insurance industry 1975 2008f
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2008F

1977:19.0%

1987:17.3%

2006E:14.0%

10 Years

1997:11.6%

9 Years

10 Years

1975: 2.4%

1984: 1.8%

1992: 4.5%

2001: -1.2%

*2006-8 P/C insurer ROEs are I.I.I. estimates.

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

share of losses paid by reinsurers by disaster
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.

underwriting gain loss in florida homeowners insurance 1992 2006e
Underwriting Gain (Loss) in Florida Homeowners Insurance, 1992-2006E*

$ Billions

Florida’s 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.

cumulative underwriting gain loss in florida homeowners insurance 1992 2006e
Cumulative Underwriting Gain (Loss) in Florida Homeowners Insurance, 1992-2006E*

Regulator under US law has duty to allow rates that are “fair,” “not excessive” and “not unduly discriminatory.”

Reality is that regulators in CAT-prone states suppress rates.

$ 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.

rates of return on net worth for homeowners ins us vs florida
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.

strength of recent hard markets by nwp growth
Strength of Recent Hard Markets by NWP Growth*

1975-78

1984-87

2001-04

2006-2010 (post-Katrina) period could resemble 1993-97 (post-Andrew)

2005: biggest real drop in premium since early 1980s

*2006-10 figures are III forecasts/estimates. 2005 growth of 0.4% equates to 1.8% after adjustment for a special one-time transaction between one company and its foreign parent. 2006-2008 figures from III Groundhog Survey.

Note: Shaded areas denote hard market periods.

Source: A.M. Best, Insurance Information Institute

slide37

*Insurance Information Institute Estimates/Forecasts

Source: NAIC, Insurance Information Institute

Average Expenditures on Homeowners Insurance

Countrywide home insurance expenditures are expected to rise 4% in 2007, but much more in hurricane zones

Hurricane zone residents can expect increases in the 20%-100% range, especially if insured by a state entity

price increases for louisiana citizens state s high risk insurer of last resort
Price Increases for Louisiana Citizens—State’s High Risk Insurer of Last Resort

+57.4%

+2.3%

+13.6%

+64.6%

LACPIC went broke in 2005 by $965 million.

Source: Louisiana Citizens Property Insurance Corp. from USA Today, April 3, 2007, p. 1A..

price increases for ms windstorm underwriting association state s insurer of last resort
Price Increases for MS Windstorm Underwriting Association—State’s Insurer of Last Resort

MWUA went broke in 2005 by $595 million an has received massive state tax subsidies

Source: Mississippi Windstorm Underwriting Association from USA Today, April 3, 2007, p. 1A..

percent of commercial accounts renewing w positive rate changes 2 nd qtr 2006
Percent of Commercial Accounts Renewing w/Positive Rate Changes, 2ndQtr. 2006

Largest increases for Commercial Property & Business Interruption are in the Southeast, smallest in Midwest

Source: Council of Insurance Agents and Brokers

percent of commercial accounts renewing w positive rate changes 4 th qtr 2006
Percent of Commercial Accounts Renewing w/Positive Rate Changes, 4thQtr. 2006

Largest increases for Commercial Property & Business Interruption are in the Southeast, but are diminishing; Smallest in Midwest

Source: Council of Insurance Agents and Brokers

u s policyholder surplus 1975 2006e
U.S. Policyholder Surplus: 1975-2006E*

Capacity as of 12/31/06 is $481.5B (est.), 13.1% above year-end 2005, 69% above its 2002 trough and 44% above its 1999 peak.

$ Billions

Foreign reinsurance and residual market mechanisms absorbed 45% of 2005 CAT losses of $62.1B

“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations

Source: A.M. Best, ISO, Insurance Information Institute *III Estimate.

capital raising by class within 15 months of krw
Capital Raising by Class Within 15 Months of KRW

$ Billions

Insurers & Reinsurers raised $33.7 billion in the wake of Katrina, Rita, Wilma

Source: Lane Financial Trade Notes, January 31, 2007.

annual catastrophe bond transactions volume 1997 2006
Annual Catastrophe Bond Transactions Volume, 1997-2006

Catastrophe bond issuance has soared in the wake of Hurricanes Katrina and the hurricane seasons of 2004/2005

Source: MMC Securities and Guy Carpenter; Insurance Information Institute.

reinsurance capital markets are globally linked
Reinsurance & Capital Markets are Globally Linked

Global Reinsurance Market

Premiums Ceded

States like LA, MS paid little into the global reinsurance pool but got a lot in return, shrinking global claims paying resources and pushing up reinsurance costs for all

Losses Paid

florida citizens exposure to loss billions of dollars
Florida Citizens Exposure to Loss (Billions of Dollars)

Exposure to loss in Florida Citizens nearly doubled in 2006 and is now the largest home insurer in the state

Source: PIPSO; Insurance Information Institute

ms windstorm plan exposure to loss millions of dollars
MS Windstorm Plan: Exposure to Loss (Millions of Dollars)

Total exposure to loss in the Mississippi Windstorm Underwriting Association (MWUA) has surged by 431 percent, from $352.9m in 1990 to $1.9bn in 2005.

Source: PIPSO; Insurance Information Institute

tx windstorm insurance assoc growth in exposure to loss
TX Windstorm Insurance Assoc.:Growth In Exposure to Loss

Building & Contents Only, $ Billions

TWIA’s liability in-force for building & contents has surged by nearly 200 percent in the last six years from $12.1bn in 2000 to $35.9bn in 2006

Source: TWIA (as of 11/30/06); Insurance Information Institute

major residual market plan estimated deficits 2004 2005 millions of dollars
Major Residual Market Plan Estimated Deficits 2004/2005 (Millions of Dollars)

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

* MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in Federal Aid.

Source: Insurance Information Institute

government aid after major disasters billions
Government Aid After Major Disasters (Billions)*

Katrina federal aid was more than all the federal aid for the 9/11 terrorist attacks, 2004’s 4 hurricanes, the Northridge earthquake and Hurricane Andrew combined.

*In 2005 dollars.

Source: United States Senate Budget Committee, Insurance Information Institute as of 12/31/05.

comprehensive national catastrophe plan schematic
Comprehensive National Catastrophe Plan Schematic

1:500 Event

National Catastrophe Contract Program

1:50 Event

State Regional Catastrophe Fund

Private Reinsurance

State Attachment

Personal Disaster Account

Private Insurance

Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.

hurricane katrina claim status on storm s 1 st anniversary
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.

likely market impacts of post katrina litigation
Likely Market Impacts of Post-Katrina Litigation
  • Litigation Creates an Additional Layer of Uncertainty in What is Already a Very Difficulty Market
    • Ultimate Thrust of Litigation is to Compel Insurers to Pay Water Damage (Flood/Surge) Losses for Which They Have Never Received A Penny in Premium
  • Some Courts’ Apparent Willingness to Retroactively Rewrite Long-Standing, Regulator Approved Terms & Conditions of Insurance Contracts Creates an Unpriceable Risk
    • Compounded by juries willing to award millions in punitives
  • People Discouraged from Buying Flood Coverage
  • BOTTOM LINE: Weather, Courts, Juries Together Create Nearly Impossible Operating Environment
  • Coverage Under These Circumstances Will Necessarily Become More Expensive, Less Available
summary
Summary
  • Insured catastrophe losses are on the rise, in the US and globally
  • Hurricanes are the #1 source of US catastrophe losses, by far
  • Rapid coastal development (driven by strong demographics) & rising property values are the primary reasons for the upward trend in insured catastrophe losses in the US
    • Government subsidies to coastal dwellers exacerbate problem
  • Financial impacts on property/casualty insurance industry have been severe ($81 billion in hurricane losses in 2004/2005) but were manageable due to global spread of losses
  • Expectations for more frequent & more severe storms is driving risk-based, actuarially sound rates upward
  • Insurers remain deeply committed to helping policyholders reduce vulnerability by supporting stronger building codes and mitigation
    • But insurers have no control over local land use decisions
  • Ultimately, insurance prices must reflect true risk
  • Market signals on risk provide incentives to fortify structures
  • Litigation creates unmanageable level of uncertainty
insurance information institute on line
Insurance Information Institute On-Line

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