Insurance & Coastal Risk in Florida

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1 Insurance & Coastal Risk in Florida Lessons on Availability & Affordability Florida Coastal High Hazard Study Committee Ft. Lauderdale, FL December 13, 2005 Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY Tel: (212) Fax: (212)

2 Presentation Outline Review of Florida Hurricane Risk: An Insurance Industry Perspective Florida Exposure Analysis How Bad is It? Could it Get Any Worse? Are Florida s Development Patterns Rational? Examination of Stakeholder Incentives How Insurers Signal What Should be Built & Where Private vs. Government-run Insurers Role of Risk Perception What Works, What Doesn t Overview of a National Catastrophe Plan Recommendations

3 Review of Florida Hurricane Risk: An Insurance Industry Perspective

4 U.S. Insured Catastrophe Losses ($ Billions) $60 $50 $ Billions 2005 will be by far the worst year ever for insured catastrophe losses in the US at more than twice 2004 s record. $55.3 $40 $30 $20 $10 $0 $26.5 $27.5 $22.9 $16.9 $7.5 $2.7 $4.7 $5.5 $8.3$7.4 $10.1 $12.9 $8.3$4.6 $5.9 $ * *Includes $50.3 billion per ISO/PCS plus $5B 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

5 *Hurricanes Katrina, Rita and Wilma stated in 2005 dollars. Sources: ISO/PCS; Insurance Information Institute. Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2004) $45 $40 $35 $30 Seven of the 10 most expensive hurricanes in US history occurred in the 14 months from Aug Oct. 2005: $40.0 $ Billions $25 $20 Nine of the 10 affected Florida! $20.9 $15 $10 $5 Storms affecting Florida in yellow. $3.4 $3.7 $4.6 $4.7 $6.1 $6.4 $7.1 $7.5 $0 Georges (1998) Jeanne (2004) Frances (2004) Rita (2005)* Wilma (2005)* Hugo (1989) Ivan (2004) Charley (2004) Andrew (1992) Katrina (2005)*

6 Hurricane Damage from Top 10 Hurricanes Since 1900 Adjusted for Inflation, Growth in Coastal Properties, Real Growth in Property Values* $ Billions $140 $120 $100 $80 $60 $40 $20 $0 Camille (1969, MS) $19.2 Donna (1960, FL) $23.9 Lake Okeechobee (1928, FL) (Billions of 2004 Dollars) Hurricanes causing $50B+ in economic losses will become more frequently $30.3 $34.3 $35.0 Storm 9 (1944) New England (1938) Number 2 (1915, TX) $50.2 $50.8 $53.1 Andrew (1992, FL) *Includes damage form wind and storm surge but generally excludes inland flooding. Source: Roger Pielke and Christopher Landsea, December 2005; Insurance Info. Institute. Galveston (1900, TX) Great Miami Hurricane Katrina (2005, LA)* $80.0 Number 6 (1926, FL) $129.7

7 Top 10 Deadliest Hurricanes to Strike the US: ,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 LA-Grande Isle (1909) Hurricane Katrina was the deadliest hurricane to strike the US since Audrey-SW LA,TX (1957) Fear of death is no longer a factor in decision process LA-Last Island (1856) FL Keys (1935) 700 GA/SC (1881) LA-Cheniere (1893)***** 1,250 1,323 1,500 Katrina (SE LA, MS)**** SC/GA Sea Islands (1893)*** 2,500 SE FL/L. Okechobee (1928)** 8,000 Galvaston (1900)* *Could be as high as 12,000 **Could be as high as 3,000 ***Midpoint of 1,000 2,000 range ****Associated Press total as of Dec. 11, *****Midpoint of 1,100-1,400 range. Sources: NOAA; Insurance Information Institute.

8 Total NFIP Claim Payments by State (Top 10) Jan 1, Dec $3,000 $2,500 $2,000 $1,500 $ Millions $2,702.0 $2,226.7 $1,727.3 Florida ranks 2 nd in terms of total flood claims payments. $1,000 $500 $687.2 $598.2 $473.4 $422.6 $419.9 $384.4 $377.8 $276.6 $0 TX FL LA NC NJ PA SC MO VA AL MS Source: FEMA, National Flood Insurance Program (NFIP)

9 Property Owners Do Not Seem to React to Expectations of Increased Storm Frequency & Intensity Average* 2005** 2006F Named Storms Named Storm Days Hurricanes Hurricane Days Intense Hurricanes Intense Hurricane Days Net Tropical Cyclone Activity 100% 263% 195% *Average over the period **As of December 4, Source: Dr. William Gray, Colorado State University, December 6, 2005.

10 Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2006 Average* 2006F Entire US Coast 52% 81% US East Coast Including Florida 31% 64% Peninsula Gulf Coast from FL Panhandle 30% 47% to Brownsville, TX ALSO Above-Average Major Hurricane Landfall Risk in Caribbean for 2006 *Average over past century. Source: Dr. William Gray, Colorado State University, December 6, 2005.

11 *Figure for 2000s is extrapolated based on data for (6 major storms: Charley, Ivan, Jeanne (2004) & Katrina, Rita, Wilma (2005)). Source: Tillinghast from National Hurricane Center: Number of Major (Category 3, 4, 5) Hurricanes Striking the US by Decade 1930s mid-1960s: Mid-1990s 2030s? Period of Intense Tropical Cyclone Activity New Period of Intense Tropical Cyclone Activity 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 as in all of the 1990s 1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s

12 Florida Hurricane Exposure Analysis: How Bad Is It? (Bad) Could It Get Any Worse? (Yes)

13 Total Value of Insured Coastal Exposure (2004, $ Billions) Florida New York Texas Massachusetts New Jersey Connecticut Louisiana S. Carolina Virginia Maine North Carolina Alabama Georgia Delaware New Hampshire Mississippi Rhode Island Maryland $740.0 $662.4 $505.8 $404.9 $209.3 $148.8 $129.7 $117.2 $105.3 $75.9 $73.0 $46.4 $45.6 $44.7 $43.8 $12.1 $1,937.3 $1,901.6 Florida has nearly $2 trillion in insured coastal exposure Source: AIR Worldwide $0 $500 $1,000 $1,500 $2,000 $2,500

14 Insured Coastal Exposure as a % of Statewide Insured Exposure (2004, $ Billions) Florida Connecticut New York Maine Massachusetts Louisiana New Jersey Delaware Rhode Island S. Carolina Texas NH Mississippi Alabama Virginia NC Georgia Maryland *III list Source: AIR Worldwide 13.5% 12.0% 11.4% 8.9% 5.9% 1.4% 37.9% 33.6% 33.2% 28.0% 25.6% 25.6% 23.3% 63.1% 60.9% 57.9% 54.2% 79.3% Nearly 80% of Florida s total insured exposure is coastal 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

15 Value of Insured Residential Coastal Exposure (2004, $ Billions) Florida New York Massachusetts Texas New Jersey Connecticut Louisiana S. Carolina Maine Virginia North Carolina Alabama Georgia Delaware Rhode Island New Mississippi Maryland $88.0 $65.1 $64.5 $60.0 $60.0 $36.5 $29.7 $26.6 $25.9 $24.8 $20.9 $5.4 $306.6 $302.2 $247.4 $205.5 $512.1 $942.5 Florida has nearly $1 trillion in insured residential coastal exposure Source: AIR $0 $200 $400 $600 $800 $1,000

16 Value of Insured Commercial Coastal Exposure (2004, $ Billions) New York Florida Texas Massachusetts New Jersey Connecticut Louisiana S. Carolina Virginia Maine North Carolina Georgia Alabama Mississippi New Hampshire Delaware Rhode Island Maryland $437.8 $355.8 $258.4 $199.4 $121.3 $83.7 $69.7 $52.6 $45.3 $43.3 $39.4 $23.8 $20.9 $19.9 $17.9 $6.7 $994.8 $1,389.6 Florida has nearly $ trillion in insured residential commercial exposure Source: AIR $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600

17 Florida for Sale: 24/7/365 Florida oceanfront real estate is advertised for sale throughout the country year round, like these ads from the December 11, 2005 edition of the New York Times Magazine.

18 Metro Areas w/ Biggest Increase in Median Home Price Over Past Year (through Sept. 2005) Phoenix, AZ 47.0% Cape Coral, FL 45.2% Palm Bay, FL Orlando, FL Sarasota, FL Reno, NV Miami, FL Deltona-Daytona/Ormand Bch Durham, NC 36.5% 34.3% 32.1% 31.7% 31.2% 30.9% 40.0% Six of the 9 fastest appreciating real estate markets in the year following the 4 hurricanes of 2004 were in FL. Hurricane risk has little impact on price or location decisions, in part because many property owners receive subsidized insurance. 25% 30% 35% 40% 45% 50% Source: National Association of Realtors, US Dept. of Commerce.

19 Insured Losses from Top 10 Hurricanes Since 1990 & Katrina Adjusted for Inflation, Growth in Coastal Properties, Real Growth in Property Values & Increased Property Insurance Coverage $ Billions $70 $60 $50 $40 $30 $20 $10 (Billions of 2005 Dollars) The p/c insurance industry will likely experience a $20B+ event approximately every years, on average mostly associated with hurricanes $10.1 $11.0 $12.4 $12.6 $13.1 $14.5 $20.8 $21.1 Plurality of worst-case scenarios involve Florida $31.3 $40.0 $65.3 $0 Number 9 (1909, FL) Hazel (1954, NC) Number 4 (1938, NY) Number 2 (1919, FL) Number 4 (1928, FL) Bestsy (1965, LA) Number 2 (1915, TX) Number 1 (1900, TX) Andrew (1992, FL) Katrina (2005, LA)* Number 6 (1926, FL) *ISO/PCS estimate as of October 10, Source: Hurricane Katrina: Analysis of the Impact on the Insurance Industry, Tillinghast, October 2005; Insurance Info. Institute.

20 Great Miami Hurricane of 1926: Hurricane Damage Adjusted for Inflation, Growth in Coastal Properties, Real Growth in Property Values* $ Billions $600 $500 $400 $300 $200 $100 $0 Track of 1926 storm $0.76 (Billions of 2004 Dollars) Repeat of Great Miami Hurricane of 1926 could cause $500B in damage by 2020 given current demographic trends $73 $130 $ *Includes damage form wind and storm surge but generally excludes inland flooding. Source: Roger Pielke and Christopher Landsea, December 2005; Insurance Info. Institute.

21 The Insurance Economics of Florida Hurricanes Drivers of Private Insurer Behavior in Florida

22 FLORIDA HURRICANES & UNDERWRITING PERFORMANCE: Homeowners Insurers Have Lost Billions in Florida

23 Underwriting Gain (Loss) in Florida Homeowners Insurance, E* $ Billions $4 $2 $0 ($2) ($4) ($6) ($8) ($10) ($12) ($10.60) ($0.21) $0.69 $0.43 $0.86 $1.08 $1.23 $1.28 $1.43 $1.16 $1.47 $1.88 Florida s homeowners insurance market produces small profits in most years and enormous losses in others ($9.31) E *2004 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2004 residential windstorm losses of $11.2B; 2003 figure is also from III estimates of loss and expense.

24 Cumulative Underwriting Gain (Loss) in Florida Homeowners Insurance, E* *2004 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2004 residential windstorm losses of $11.2B; 2003 figure is also from III estimates of loss and expense. $2 $0.7 $0 $ Billions ($2) ($4) ($6) ($8) ($10) ($12) -$10.6-$10.8 -$10.1-$9.7 -$8.8 -$7.7 -$5.2 -$3.8 -$2.7 -$1.2 -$6.5 It took insurers 11 years ( ) to erase the UW loss associated with Andrew, but the 4 hurricanes of 2004 erased the past 7 years of profits -$ E

25 FLORIDA HURRICANES & PROFITABILITY: Selling Homeowners Insurance in Florida is Tremendously Unprofitable

26 Rates of Return on Net Worth for Homeowners Ins: US vs. Florida 40% 30% 20% 10% 0% 2.5% 35.4% -1.7% 13.1% 3.6% 33.6% 31.5% 12.4% 29.3% 28.6% 31.3% 29.0% 23.1% Profits were earned most years after Andrew but before % 5.4% 3.8% 1.4% 28.3% 9.0% -10% -20% -4.2% -7.2% Averages: 1993 to 2003E -16.1% US HO Insurance = +2.8%; FL= 23.3% E Source: NAIC; 2003 US figure is Insurance Information Institute estimate. FL estimate based on average Florida homeowners RNW from

27 Rates of Return on Net Worth for Homeowners Ins: US vs. Florida 100% 0% US Florida 5.0% -100% -200% -300% -400% -54.3% Averages: 1990 to 2004E US HO Insurance = -1.8% FL HO Average = -48.5% % -500% -600% -700% -800% % Andrew 4 Hurricanes E 04E Source: NAIC; 2003 US figure is Insurance Information Institute estimate. FL figure based on average Florida homeowners RNW from

28 CAPITAL & CAPACITY CONSIDERATIONS: INSURERS MUST PUT LARGE AMOUNTS OF CAPITAL AT RISK TO OFFER INSURANCE IN FLORIDA

29 Rating Agency Actions Following Hurricane Katrina (as of Oct. 6, 2005)* Companies Under Review w/ Negative Implications Company A.M. Best Rating 1. Allied World A+ 2. Allmerica Financial P&C Cos. A- 3. American Re A 4. Balboa Insurance Grp. A 5. DaVinci Re A 6. Endurance Specialty A 7. Florists Mutual Grp. A- 8. Glencoe A 9. Imagine Insurance Co. Ltd. A- 10. IPCRe A+ 11. Louisiana Farm Bureau Mutual A- 12. Mississippi Farm Bureau Mutual A+ 13. Munich Re A+ 14. Mutual Savings Fire Ins. Co. B- 15. Mutual Savings Life Ins. Co. B- 16. Odyssey Re A 17. PartnerRe Group A+ 18. PXRE A- 19. Renaissance Re A+ 20. Rosemont Reinsurance Ltd. A- 21. Transatlantic Re A+ 22. XL Capital A+ 23. XL Life Insurance & Annuity A+ 24. XL Life Ltd. A+ Companies on Credit Watch with Negative Implications Company S&P Rating 1. Allmerica BBB+ 2. Allstate Corp. AA 3. Aspen Group A 4. Oil Casualty Insurance Ltd. A- 5. Society of Lloyd s A 6. State Farm AA 7. Swiss Re AA 8. United Fire Group A Downgrades Company S&P Rating A.M. Best 1. Alea A- to BBB+ A- to B++ 2. Olympus Re not rated A- to B+ 3. PXRE A to A- A to A- 4. Advent Synd pi to 2pi not rated the replenishment of capital alone may not be sufficient to sustain a company s rating. A.M. Best press release Sept. 15, 2005 *ACE and Montpelier Re were originally placed on watch/ review but have been removed. Source: Hurricane Katrina: Analysis of the Impact on the Insurance Industry,

30 ($ Millions) $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $471 Estimated New Insurance Capital Required to Support Growth in FL Homeownership, * Florida needs to attract about $500 million in fresh homeowners insurance capital in 2005 just to keep pace with demographic trends, rising to more than $1 billion per year by $523 $580 $644 $715 $794 $881 $978 $1,339 $1,206 $1,086 $ *Estimate assumes 1:1 premium-to-surplus ratio and continuation of CAGR in direct premiums written of 11% (actual rate for period ). Source: Insurance Information Institute

31 Estimated Cumulative New Insurance Capital Required to Support Growth in FL Homeownership, * ($ Millions) $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 Florida may need to attract more than $9 billion in new capital over the next decade, assuming recent demographic trends continue. $471 $4,607 $3,726 $2,932 $2,217 $1,573 $993 $5,585 $6,672 $7,877 $9, *Estimate assumes 1:1 premium-to-surplus ratio and continuation of CAGR in direct premiums written of 11% (actual rate for period ). Source: Insurance Information Institute

32 Are Florida s Development Patterns Rational?

33 Excessive Catastrophe Exposure: Outcome of Economically & Politically Rational Decision Process? Property Owners Make economically rational decision to live in disaster-prone areas Low cost of living, low real estate prices & rapid appreciation, low/no income tax, low property tax, rapid job growth Government-run insurers (e.g., CPIC, NFIP) provide implicit subsidies by selling insurance at below-market prices with few underwriting restrictions Government aid, tax deductions, litigation recovery for uninsured losses No fear of death and injury Local Zoning/Permitting Authorities Allowing development is economically & politically rational & fiscally sound Residential construction creates jobs, attracts wealth, increases tax receipts, stimulates commercial construction & permanent jobs, develops infrastructure Increases local representation in state legislature & political influence Property and infrastructure damage costs shifted to others (state and federal taxpayers, policyholders in unaffected areas) Developers Coastal development is a high-margin business Financial interest reduced to zero after sale Source: Insurance Information Institute.

34 Excessive Catastrophe Exposure: Outcome of Economically & Politically Rational Decision Process? State Legislators Loathe to pass laws negatively impacting development in home districts Local development benefits local economy and enhances political influence Rapid development lessens need for higher income and property taxes Can redistribute CAT losses to unaffected policyholders and taxpayers Can suppress insurance prices via state insurance regulator, suppress pricing and weaken underwriting standards in state-run insurer & redistribute losses Congressional Delegation Home state development increases influence in Washington Political representation, share of federal expenditures Loathe to pass laws harming development in home state/district Tax law promotes homeownership and actually produces supplemental benefits for property owners in disaster-prone areas Large amounts of unbudgeted disaster aid easily authorized Tax burden largely borne by those outside CAT zone & those with no representation (children & unborn) President Presidential disaster declarations and associated aid are increasing Political benefits to making declarations and distributing large amounts of aid Direct impact on favorability ratings & election outcomes Losses can be distributed to other areas and the unrepresented

35 How Insurers Signal What Should be Built and Where

36 Private Insurer Signals on Questions concerning land use and zoning are devisive issues in every state as concerns over urban sprawl, traffic, environmental degradation, pollution, etc. Insurers do not generally get involved in these issues directly Insurers assess risks that owners of property want to transfer Insurers send signals about relative risk through several mechanisms: Price (premiums) Deductibles/retentions (e.g., 2%+ wind deductibles in FL) Limits/caps on coverage (e.g., limit on value of structure to be insured) Mitigation credits Underwriting restrictions (limits/refusals to write coverage) Capital allocation decisions, based on ROE Profit motive, tight solvency regulations of private insurance industry effectively restrict unwise development Except that rates are often suppressed by regulators/political pressure Government-run insurers operate very differently philosophy Where and How to Build

37 Government-Run Insurers Lead to Poor Development Decisions Government-run insurers (markets of last resort) serve as a vital safety valve after major market disruptions, but also serve as an enabler of unwise development Government-run property insurers wash away market-based signals about relative risk Consequence is runaway development in disaster-prone areas Government-run insurers: Generally fail to charge actuarially sound rates Have weak underwriting standards Are thinly capitalized Can assess losses to policyholders other than their own Vulnerable to political pressure Inadequate premiums, insufficient capital and weak underwriting mean that most government plans, from Citizens Property Insurance Corporation to the National Flood Insurance Program operate with frequent deficits

38 Negative Outcomes from Flaws in Government-Run Insurers True risk associated with building on a particular piece of property is obscured Subsidies are generated leading to market distortions/inequities: Many thousands of homes likely would not have been built (or built differently) if property owner obligated to pay actuarially sound rates CPIC assessments from Wilma will require grandmothers living in trailer parks on fixed incomes in Gainesville to subsidize million dollar homes in Marco Island via assessment (surcharges). Serial rebuilding in disaster-prone areas is the norm Property owners come to assume that the government rate is the fair rate and object to moves to actuarially sound rates. Government-run insurer can t control its own exposure Legislature mandates that CPIC offer coverage in most cases if no private insurer will offer coverage due to high risk, near certainty of destruction No restrictions on value of property, so high-valued properties represent disproportionate share of potential loss Taxpayer Burden: NFIP will borrow $20B+ in 2005

39 Insurance-in-Force: CPIC vs. Voluntary (Private) Insurers That s why it s broke! Private insurers accept relatively little wind risk in South FL

40 Risk Perception Is Disaster Risk Factored into the Buy/Build/Move Decision?

41 Average Annual Population Growth Rates of Atlantic States, & Connecticut Delaware Florida Georgia Massachusetts Maryland Maine North Carolina United States Source: US Census Bureau. 0.48% 0.5% 0.48% 0.7% 0.62% 0.9% 1.11% 1.5% 1.31% 1.2% 1.1% 1.0% 1.6% 1.4% 1.49% 1.93% 2.33% % 0% 1% 1% 2% 2% 3% 3% 4%

42 Average Annual Population Growth Rates of Atlantic States, & Florida 2.33% 3.2% New Hampshire New Jersey 0.9% 0.66% 1.40% 2.0% New York 0.2% 0.37% South Carolina 1.3% 1.19% Rhode Island 0.5% 0.53% Virginia 1.4% 1.35% United States 1.1% 1.01% Source: US Census Bureau. 0% 1% 1% 2% 2% 3% 3% 4%

43 Average Annual Population Growth Rates of Gulf Coast States, & Alabama 0.8% 0.61% Florida 2.33% 3.2% Louisiana Mississippi 0.28% 0.7% 0.56% 1.2% Texas 1.8% 1.84% United States 1.1% 1.01% 0% 1% 1% 2% 2% 3% 3% 4% Source: US Census Bureau.

44 Average Annual Population Growth Rates of Florida Coastal Cities, Cape Coral/Fort Myers Daytona Jacksonville Miami/Ft. Lauderdale/Miami Beach Naples/Marco Island Orlando Pensacola Palm Bay/Melbourne Sarasota/Bradenton Tampa/St. Petersburg 1.01% 1.8% 1.43% 1.36% 1.9% 1.72% 1.8% 1.8% 1.53% 1.5% 1.38% 2.1% 1.9% 1.80% 2.29% 2.8% 2.74% 3.0% 3.35% % Source: US Census Bureau. 0% 1% 2% 3% 4% 5% 6%

45 State Population Growth Rates by Decade, Gulf Coast, % 3.78% 1.21% 0.60% 2.08% 1.26% 5.73% 9.57% 6.41% 5.90% 10.05% 9.71% 10.31% 9.52% 21.00% 17.74% 20.50% 28.40% 0 AL FL LA MS TX US Source: Statistical Abstract of the United States, US Census Bureau

46 Projected Percent Population Growth of Atlantic States, Connecticut 5.8% Delaware 21.4% Florida 52.2% Georgia 32.5% Massachusetts 8.6% Maryland 24.3% Maine 7.7% North Carolina 37.5% United States 20.9% 0% 10% 20% 30% 40% 50% 60% Source: US Census Bureau.

47 Projected Percent Population Growth of Atlantic States, Florida 52.2% New Hampshire 24.5% New Jersey 12.6% New York 1.5% South Carolina 21.6% Rhode Island 6.9% Virginia 28.5% United States 20.9% 0% 10% 20% 30% 40% 50% 60% Source: US Census Bureau.

48 Projected Percent Population Growth of Gulf Coast States, Alabama 8.0% Florida 52.2% Louisiana 6.6% Mississippi 7.1% Texas 41.0% United States 20.9% 0% 10% 20% 30% 40% 50% 60% Source: US Census Bureau.

49 Source: US Census Bureau Percent of Atlantic & Gulf Coast Populations Living in FL, 2003 and % 38.37% 23.88% 18.22% 0 Atlantic Coast Gulf Coast

50 What Works, What Doesn t

51 Successful Tools for Controlling Hurricane Exposure Strengthened building codes Stringent enforcement of building codes Fortified home programs Insurance rates based on sound actuarial principles (rates that are not government controlled); Works for commercial insurers Limits on underwriting Removing impediments to capital flows Incentives to adopt mitigation Forcing communities to consider their catastrophe exposure Source: Insurance Information Institute

52 Unsuccessful Tools for Controlling Hurricane Exposure Insurance rates that are not actuarially sound Political interference in rate process Inadequate underwriting controls Subsidies Intra-state (policyholders/taxpayers) US Taxpayer Voluntary flood coverage Source: Insurance Information Institute

53 Problem Issues Local control of land use and permitting creates significant incentive problems Benefits accrue locally while many costs can be redistributed to others via taxes, insurance and aid Prospect of government aid reinforces unsound building and location decisions States don t want to raise taxes to pay for mitigation/prevention even if state is sole beneficiary E.g., NO levees; Beach replenishment Source: Insurance Information Institute

54 Overview of Plans for a National Catastrophe Insurance Plan

55 NAIC s Comprehensive National Catastrophe Plan Proposes Layered Approach to Risk Layer 1: Maximize resources of private insurance & reinsurance industry Includes All Perils Policy Encourage Mitigation Create Meaningful, Forward-Looking Reserves Layer 2: Establishes system of state catastrophe funds (like FHCF) Layer 3: Federal Catastrophe Reinsurance Mechanism Source: Insurance Information Institute

56 Comprehensive National Catastrophe Plan Schematic 1:500 Event National Catastrophe Contract Program 1:50 Event State Regional Catastrophe Fund State Attachment Personal Disaster Account Private Insurance Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.

57 Objectives of NAIC s Comprehensive National Catastrophe Plan Should Promote Personal Responsibility Among Policyholders Supports Reasonable Building Codes, Development Plans & Other Mitigation Tools Maximize the Risk Bearing Capacity of the Private Markets Should Provide Quantifiable Risk Management to the Federal Government Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.

58 Legislation: Comprehensive National Catastrophe Plan H.R. 846: Homeowners Insurance Availability Act of 2005 Introduced by Ginny Brown-Waite (Rep-FL) Requires Treasury to implement a reinsurance program offering contracts sold at regional auctions H.R. 4366: Homeowners Insurance Protection Act of 2005 Also worked on by Rep. Brown-Waite Establishes national commission on catastrophe preparation and protection Authorizes sale of federally-backed reinsurance contracts to state catastrophe funds H.R. 2668: Policyholder Disaster Protection Act of 2005 Amends IRS code to permit insurers to establish tax-deductible reserve funds for catastrophic events Source: NAIC, Insurance Information Institute

59 Recommendations

60 Recommendations for Raise public awareness of risk Mandatory risk disclosure in all residential real estate transactions Require signed waivers if decline flood coverage that also waive rights to any and all disaster aid, or Mandate flood coverage Continue to strengthen & enforce of building codes Allow markets to determine all property insurance rates Increase incentives to mitigate Require state-run insurer to charge actuarially sound rates and limit high value exposure Require communities/counties to a financial stake in their catastrophe exposure Reimburse disaster aid to state/federal government Controlling Hurricane Exposure

61 Insurance Information Institute On-Line If you would like a copy of this presentation, please give me your business card with address

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