Financial and Market Impacts of Hurricanes on

Property/Casualty Insurers

Past, Present & FutureNational Hurricane Conference

New Orleans, LAApril 5, 2007

Robert P. Hartwig, Ph.D., CPCU, President & Chief EconomistInsurance 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

• Catastrophe Losses are Growing Globally• US: Hurricanes are Now #1 Source of Insured CAT

LossesDisplacing 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

INSURED CATASTROPHE LOSS REVIEW

A Decade of Disaster

U.S. Insured Catastrophe Losses*$7

.5

$2.7

$4.7

$22.

9

$5.5 $1

6.9

$8.3

$7.4

$2.6 $1

0.1

$8.3

$4.6

$26.

5

$5.9 $1

2.9 $2

7.5

$100

.0

$61.

9

$8.8

$0

$20

$40

$60

$80

$100

$120

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

20??

*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

$ Billions

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.

$100 Billion CAT year is coming soon

Global Number of Catastrophic Events, 1970–2005

0

50

100

150

200

250

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

Natural catastrophes Man-made disasters

Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 1/2005 and 2/2006.

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

Insured Property Catastrophe Losses as % Net Premiums Earned, 1983–2005E

0%

2%

4%

6%

8%

10%

12%

14%

16%

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05E

USWorldwideUS average: 1984-2004

*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.

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%

Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2005)

$3.5 $3.8 $4.8 $5.0$6.6 $7.4 $7.7

$10.3

$21.6

$40.6

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

Georges(1998)

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Andrew(1992)

Katrina(2005)

$ B

illi

ons

Sources: ISO/PCS; Insurance Information Institute.

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

Insured Loss & Claim Count for Major Storms of 2005*

$1.1

$40.6

$10.3$5.0

104

383

1,047

1,744

$0$5

$10$15$20

$25$30$35

$40$45

Dennis Rita Wilma Katrina

Size of Industry Loss ($ Billions)

Ins

ure

d L

os

s (

$ B

illio

ns

)

02004006008001,0001,2001,4001,6001,8002,000

Cla

ims

(th

ou

sa

nd

s)

Insured Loss Claims

*Property and business interruption losses only. Excludes offshore energy & marine losses.

Source: ISO/PCS as of June 8, 2006; Insurance Information Institute.

Hurricanes Katrina, Rita, Wilma & Dennis produced a record 3.3

million claims

Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,

1986-2005¹

Utility Disruption0.1%

Terrorism7.7%

All Tropical

Cyclones3

47.5%

Tornadoes2

24.5%

Water Damage0.1%

Civil Disorders0.4%

Fire6

2.3%

Wind/Hail/Flood5

2.8%

Earthquakes4

6.7%

Winter Storms7.8%

Source: Insurance Services Office (ISO)..

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.

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.

Hurricane Katrina Insured Loss Distribution by State ($ Millions)*

Mississippi, $13,605 , 33.5%

Louisiana, $25,275 , 62.3%

Tennessee, $59.0 , 0.1%Florida, $572.0 , 1.4%

Georgia, $36.0 , 0.1%Alabama, $1,032 ,

2.5%

*As of June 8, 2006Source: PCS division of ISO.

Louisiana accounted for

62% of the insured losses

paid and 56% of the claims filed

Total Insured Losses =

$40.579 Billion

Hurricane Katrina Loss Distribution by Line ($ Billions)*

Homeowners, $17,564.0 , 43%

Commercial Property & BI, $20,847.0 , 52%

Vehicle, $2,168.0 , 5%

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, 2006Source: PCS division of ISO.

Hurricane Rita Loss Distribution, by Line ($ Millions)*

Homeowners, $2,974.2 , 59%

Commercial Property & BI, $1,861.2 , 37%

Vehicles, $211.0 , 4%Total insured

losses are estimated at $5.0

billion (excl. offshore energy of $2-$3B) from 383,000 claims.

*As of June 8, 2006Source: PCS division of ISO.

Hurricane Wilma Loss Distribution by Line ($ Millions)*

Homeowners, $7,350 , 72%

Commercial Property & BI, $2,200 , 21%

Vehicle, $750 , 7%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.

Insurers are committed

to improving the ability of homes and businesses to withstand

major disasters

Source: Insurance Information Institute

Figure 8.

Free Home Inventory

Software at www.iii.org

HURRICANES: INSURED LOSS

POTENTIAL

Katrina:Just the Beginning?

Total Value of Insured Coastal Exposure (2004, $ Billions)

$1,901.6$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

$0 $500 $1,000 $1,500 $2,000 $2,500

FloridaNew York

TexasMassachusetts

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

Source: AIR Worldwide

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.

Insured Coastal Exposure as a % of Statewide Insured Exposure (2004, $ Billions)

63.1%60.9%

57.9%54.2%

37.9%33.6%33.2%

28.0%25.6%25.6%

23.3%13.5%

12.0%11.4%

8.9%5.9%

1.4%

79.3%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

FloridaConnecticut

New YorkMaine

MassachusettsLouisiana

New JerseyDelaware

Rhode IslandS. Carolina

TexasNH

MississippiAlabamaVirginia

NCGeorgia

Maryland

Source: AIR Worldwide

After FL, many Northeast states have

among the highest coastal exposure as a share of all insured

exposure in the state.

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

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

Population of Galveston County is 5

times what it was when the hurricane of 1900 struck, killing 8,000

Historical Hurricane Strikes in Suffolk County, NY, 1900-2002

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

Population in Suffolk County is 4.5 times what it was in the 1940s

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)

58%

38%

36%

32%

18%

15%

12%

60%

0% 10% 20% 30% 40% 50% 60% 70%

Beaufort

Horry

Jasper

Dorchester

Georgetown

Berkeley

Colleton

Charleston

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

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.

Source: AIR Worldwide

Insured Losses: $110BEconomic Losses: $200B+

$70

$30

$5 $4 $1$0

$20

$40

$60

$80

NY NJ PA CT Other

Nightmare Scenario: Insured Property Losses for NJ/NY CAT 3/4 Storm

Total Insured Property Losses =

$110B, nearly 3 times that of

Hurricane Katrina

Distribution of Insured Property Losses,

by State, ($ Billions)

ACTS OF GOD & THE BOTTOM

LINE

Catastrophic Loss & Insurer Financial Performance

-5%

0%

5%

10%

15%

20%

US P/C Insurers All US Industries

ROE: P/C vs. All Industries 1987–2008E

*2006-8 P/C insurer ROEs are I.I.I. estimates.Source: Insurance Information Institute; Fortune

Andrew Northridge

Hugo Lowest CAT losses in 15 years

Sept. 11

4 Hurricanes

Katrina, Rita, Wilma

P/C profitability is cyclical, volatile and vulnerable

-5%

0%

5%

10%

15%

20%

25%

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 0607

F08

F

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2008F

*2006-8 P/C insurer ROEs are I.I.I. estimates.Source: Insurance Information Institute; ISO, A.M. Best.

1975: 2.4%

1977:19.0% 1987:17.3%

1997:11.6%

2006E:14.0%

1984: 1.8% 1992: 4.5% 2001: -1.2%

10 Years

10 Years 9 Years

115.8

107.4

100.198.3

100.7

93.2

98.696.6

90

100

110

120

01 02 03 04 05 06E 07F 08F

P/C Industry Combined Ratio

Sources: A.M. Best; ISO, III. *Estimates/forecasts based on III’s 2007 Groundhog survey.

2005 figure benefited from heavy use of reinsurance which lowered net losses

2006 could produce the best underwriting

result since the 93.2 combined ratio in 1936.

As recently as 2001, insurers were paying out nearly $1.16 for

every dollar they earned in premiums

2007/8 deterioration due primarily to falling rates, but results still strong assuming

normal CAT activity

Share of Losses Paid by Reinsurers, by Disaster*

30%25%

60%

20%

45%

0%

10%

20%

30%

40%

50%

60%

70%

Hurricane Hugo(1989)

Hurricane Andrew(1992)

Sept. 11 TerrorAttack (2001)

2004 HurricaneLosses

2005 HurricaneLosses

*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.

Reinsurance is playing an increasingly

important role in the financing of mega-CATs; Reins. Costs

are skyrocketing

($55)($50)($45)($40)($35)($30)($25)($20)($15)($10)($5)$0$5

$10$15$20$25$30$35

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

Claim Payouts TypicallyExceed Premiums Earned*

Source: A.M. Best, Insurance Information Institute *2006E of $32.5B is annualized 9 mos. gain of $24.4B

$ B

illi

ons

Losses exceed premiums in 28 of the 32 years from

1975-2006

Underwriting Gain (Loss) 1975-2006E, $Bill

Underwriting Losses

Underwriting Profits

AndrewSept. 11

KRW

FLORIDA:A CASE STUDY

Profitability is Elusive

($10.60)

($0.21)

$0.69 $0.43 $0.86 $1.08 $1.23 $1.28 $1.43 $1.16 $1.47 $1.88

($10.39)

($3.73)

$2.75

($12)

($10)

($8)

($6)

($4)

($2)

$0

$2

$4

92 93 94 95 96 97 98 99 00 01 02 03 04 05E 06F

Underwriting Gain (Loss) in Florida Homeowners Insurance,

1992-2006E*

*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.

$ B

illi

ons

Florida’s homeowners insurance market produces

small profits in most years and enormous losses in others

-$10.6-$10.8-$10.1-$9.7

-$8.8-$7.7

-$6.5-$5.2

-$3.8-$2.7

-$1.2

$0.7

-$9.7

-$13.4

-$10.7

($16)

($14)

($12)

($10)

($8)

($6)

($4)

($2)

$0

$2

92 93 94 95 96 97 98 99 00 01 02 03 04 05E 06F

Cumulative Underwriting Gain (Loss) in Florida Homeowners

Insurance, 1992-2006E*

$ B

illi

ons

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.

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.

*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

Source: NAIC; 2005/6 US and FL estimates from the Insurance Information Institute.

-54.3%

0.0%

-183.3%

-714.9%

-80.0%

36.0%

-800%

-700%

-600%

-500%

-400%

-300%

-200%

-100%

0%

100%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05E 06E

US Florida

Averages: 1990 to 2006E

US HO Insurance = -0.7%

FL HO Average = -38.1%

Andrew

4 Hurricanes

Wilma, Dennis, Katrina

PRICES

Flat or Down Almost Everywhere: Coastal Increases Reflect Risk

-10%

-5%

0%

5%

10%

15%

20%

25%

19

70

19

71

19

72

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

F2

00

7F

20

08

F2

00

9F

20

10

F

Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute

Strength of Recent Hard Markets by NWP Growth*

1975-78 1984-87 2001-04

*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.

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

(post-Andrew)

2005: biggest real drop in premium since early 1980s

Growth in Net Written Premium, 2000-2008F

Source: A.M. Best; Forecasts from the Insurance Information Institute. Full-year estimate from III’s Groundhog survey: http://www.iii.org/media/industry/financials/groundhog2007/. 9-month actual value is 3.8% adjusted for special transactions.

5.1%

8.1%

14.1%

9.8%

4.7%

0.4%

3.3%1.8% 1.9%

2000 2001 2002 2003 2004 2005 2006E* 2007F 2008F

P/C insurers will experience their slowest growth rates since the late 1990s…but underwriting results are

expected to remain healthy!

$418$440 $455

$481 $488$508

$536

$593

$668$693

$776

$711$739

$400

$450

$500

$550

$600

$650

$700

$750

$800

95 96 97 98 99 00 01 02 03 04* 05* 06* 07*

Average Expenditures on Homeowners Insurance

*Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute

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

$1,315

$2,165$2,630 $2,690

$4,235

$2,460

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

2004 2005 2006

Coastal Homeowner Coastal Business

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

+64.6%

+2.3%+13.6%

+57.4%

LACPIC went broke in 2005 by $965 million.

Price Increases for MS Windstorm Underwriting Association—

State’s Insurer of Last Resort

22%

90%

22%

267%

0%

50%

100%

150%

200%

250%

300%

2003 2006

Coastal Homeowner Coastal Business

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

MWUA went broke in 2005 by $595 million an

has received massive state tax subsidies

Average Commercial Rate Change,All Lines, (1Q:2004 – 4Q:2006)

-0.1%

-3.2%

-7.0%

-9.4%-9.7%

-4.6%

-2.7%-3.0%

-5.3%

-9.6%

-5.9%

-8.2%

-12%

-10%

-8%

-6%

-4%

-2%

0%

1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06

Source: Council of Insurance Agents & Brokers; Insurance Information Institute

Magnitude of rate decreases has diminished greatly since

mid-2005 but is growing again

KRW Effect

Percent of Commercial Accounts Renewing w/Positive Rate Changes, 2nd Qtr. 2006

71%

48%

28%21%

63%

32%

21%

12% 10%

35%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Southeast Southwest Pacific NW Northeast Midwest

Commercial Property Business Interruption

Source: Council of Insurance Agents and Brokers

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

Percent of Commercial Accounts Renewing w/Positive Rate Changes, 4th Qtr. 2006

25%

6% 6%

0%

8%6% 6%

3%

0%

11%

0%

5%

10%

15%

20%

25%

30%

Southeast Southwest Pacific NW Northeast Midwest

Commercial Property Business Interruption

Source: Council of Insurance Agents and Brokers

Largest increases for Commercial Property &

Business Interruption are in the Southeast, but

are diminishing; Smallest in Midwest

CLAIMS PAYING CAPACITY

2006 Respite:Rebuilding Year

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

7576777879808182838485868788899091929394959697989900010203040506

U.S. Policyholder Surplus: 1975-2006E*

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

$ B

illi

ons

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

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.

Foreign reinsurance and residual market

mechanisms absorbed 45% of 2005 CAT

losses of $62.1B

Capital Raising by Class Within 15 Months of KRW

Existing Cos., $12.145 , 36%

New Cos., $8.898 , 26%

Sidecars, $6.359 , 19%Insurance Linked

Securities, $6.253 , 19%

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

Rita, Wilma

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

$ Billions

Annual Catastrophe Bond Transactions Volume, 1997-2006

$966.9

$1,729.8

$4,693.4

$1,991.1

$1,142.8$1,219.5$846.1$984.8

$1,139.0

$633.0

$0$500

$1,000$1,500

$2,000$2,500$3,000

$3,500$4,000

$4,500$5,000

97 98 99 00 01 02 03 04 05 06

Ris

k C

apita

l Iss

ues

($ M

ill)

02

46

81012

1416

1820

Nu

mb

er o

f Iss

uan

ces

Risk Capital Issued Number of Issuances

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

Catastrophe bond issuance has soared in the wake of Hurricanes

Katrina and the hurricane seasons of 2004/2005

STATE RUN INSURERS

Solution or TickingTime Bombs?

Florida Citizens Exposure to Loss (Billions of Dollars)

Source: PIPSO; Insurance Information Institute

408.8

$210.6$206.7$195.5$154.6

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

2002 2003 2004 2005 2006

Exposure to loss in Florida Citizens nearly doubled in

2006 and is now the largest home insurer in the state

MS Windstorm Plan: Exposure to Loss (Millions of Dollars)

Source: PIPSO; Insurance Information Institute

$1,873.0

$1,631.8

$1,344.3

$1,121.7

$848.6$864.9$917.9

$637.1

$352.9

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

1990 1995 1999 2000 2001 2002 2003 2004 2005

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.

TWIA Growth In Exposure to Loss (Building & Contents Only, $ Billions)

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

$35.9

$23.3$20.8

$18.8$16.0

$13.2$12.1

$0

$5

$10

$15

$20

$25

$30

$35

$40

2000 2001 2002 2003 2004 2005 2006*

Exposure to Loss (Building & Contents Only)

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

Major Residual Market Plan Estimated Deficits 2004/2005 (Millions of Dollars)

* MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in Federal Aid.Source: Insurance Information Institute

-$516

-$1,425

-$1,770

-$954

-$595 *

-$2,000-$1,800-$1,600-$1,400-$1,200-$1,000

-$800-$600-$400-$200

$0

Florida HurricaneCatastrophe Fund

(FHCF) Florida Citizens Louisiana Citizens

Mississippi WindstormUnderwriting

Association (MWUA)

2004 2005

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

What Role Should the Government Play in

Insuring Against Natural Disaster Risks?

Government Aid After Major Disasters (Billions)*

$110.0

$43.9

$17.7 $15.5 $15.0

$0

$20

$40

$60

$80

$100

$120

Hurricane Katrina(2005)

Sept. 11 TerroristAttack (2001)

Hurricane Andrew(1992)

NorthridgeEarthquake (1994)

Hurricanes Charley,Frances, Ivan &Jeanne (2004)

$ B

illi

ons

*In 2005 dollars.Source: United States Senate Budget Committee, Insurance Information Institute as of 12/31/05.

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.

NAIC’s Comprehensive National Catastrophe Plan

• Proposes Layered Approach to Risk• Layer 1: Maximize resources of private

insurance & reinsurance industry Includes “All Perils” Residential 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

Comprehensive National Catastrophe Plan Schematic

Personal Disaster Account

Private Insurance

State Regional Catastrophe Fund

National Catastrophe Contract Program

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

State Attachment

1:50 Event

1:500 Event

POST-KATRINA LITIGATION

Suits Add to Uncertainty, Expense

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

In Process, 3%

Mediation/ Litigation, 2%

Settled, 95%

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

• 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• Insured catastrophe losses are on the rise, in the US and globally• Hurricanes are the #1 source of 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

Insurance Information Institute On-Line

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