florida property insurance markets end of 2007 hurricane season update robert p. hartwig, ph.d.,...
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Florida Property Insurance Markets
End of 2007 HurricaneSeason Update
Robert P. Hartwig, Ph.D., CPCU, PresidentInsurance Information Institute 110 William Street New York, NY 10038
Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org
Insurance Information InstituteMedia Briefing
November 29, 2007
Presentation Outline
• Insured Catastrophe Loss Review2007 Season in Historical Context
• Florida Hurricanes & Insurer Profitability
• Property/Casualty Insurer Profitability
CATASTROPHIC LOSSES
Catastrophic Losses in the US: Upward Trend is Certain and Florida Could Be the Biggest
Part of the Increase
Most of US Population & Property Has Major CAT Exposure
Florida is the most catastrophe prone
state in the US
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
$7.0
$100
.0
$61.
9
$9.2
$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
07**
20??
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. **Estimate through 11/28/07. 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
2006/07 were welcome respites. 2004/2005 were the worst years ever for insured
hurricane losses, but the worst has yet to come.
$100 Billion CAT year will occur
eventually, likely involving FL
Global Insured Catastrophe Losses by Region, 2001-2006
0
10
20
30
40
50
60
70
80
90
2001 2002 2003 2004 2005 2006
Seas/Space
Africa
Oceania/Australia
South America
Asia
Europe
North America*
Notes: 2001-03 figures for N. America include US only. 2001 figure includes only property losses from 9/11. Source: Insurance Information Institute compiled from Swiss Re sigma issues.
North America accounted for 73% of global catastrophe
losses 2001-2006
Florida accounted for a significant
share of global CAT losses in 2004/05
Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,
1987-2006¹
Fire, $6.6 , 2.2%
Tornadoes, $77.3 , 26.0%
All Tropical Cyclones, $137.7 ,
46.3%
Civil Disorders, $1.1 , 0.4%
Utility Disruption, $0.2 , 0.1%
Water Damage, $0.4 , 0.1%Wind/Hail/Flood,
$9.3 , 3.1%
Earthquakes, $19.1 , 6.4%
Winter Storms, $23.1 , 7.8%
Terrorism, $22.3 , 7.5%
Source: Insurance Services Office (ISO)..
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2006 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 $297.3 billion from
1987-2006 (in 2006 dollars). Hurricanes & tropical storms accounted for
$137.7 billion of these—near half of the total.
Distribution of US Insured CAT Losses: TX, FL vs US, 1980-2006*
Texas, $25.6 , 10%
Florida, $57 , 22%
Rest of US, $176 , 68%
Florida accounted for 22% of all US insured CAT losses from 1980-2006: $57B out of
$249.3B
*All figures (except 2006 loss) have been adjusted to 2005 dollars.Source: PCS division of ISO.
$ Billions of 2005 Dollars
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
$41.1
$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 impacted
Florida:
Andrew, Katrina, Wilma, Charley, Ivan, Frances & Jeanne
Historical Hurricane Strikes in Miami-Dade, FL, 1900-2007
Source: NOAA Coastal Services Center, http://maps.csc.noaa.gov/hurricanes/pop.jsp?PopStormStates=FL&PopStormCounty=; Insurance Info. Institute, accessed 11/28/07.
Population of Miami-Dade County is 10
times what it was when the last period of
intense activity began in the 1930s, lasting 30
years
Historical Hurricane Strikes in Monroe County, FL, 1900-2007
Source: NOAA Coastal Services Center, http://maps.csc.noaa.gov/hurricanes/pop.jsp?PopStormStates=FL&PopStormCounty=; Insurance Info. Institute, accessed 11/28/07.
Population of Monroe County is 4 times what
it was when the last period of intense
activity began in the 1930s, lasting 30 years
$20.0$24.0 $26.0
$33.0 $33.0 $34.0 $35.0$41.1 $42.0
$80.0
$0$10$20
$30$40$50$60
$70$80$90
$ B
illi
ons
With rapid coastal development,
$40B+ storms will be more common
Source: AIR Worldwide; PCS.
(Billions of 2005 Dollars) Majority of worst-case scenarios
involve Florida
Insured Losses from Top 10 Hurricanes Adjusted to 2005 Exposure Levels
2007 Hurricane Season:A Welcome Respite
Source: www.wunderground.com, accessed 11/27/07; Insurance Information Institute
A Sigh of Relief
The 2007 season saw 14 named storms (just 1 less than in
2004) including two rare Category 5
storms, that would have been
devastating if they had struck the US
2004 Was Another Busy, Destructive & Expensive Hurricane Season
Source: www.wunderground.com, accessed 11/27/07; Insurance Information Institute.
There were 15 named storms in 2004, the worst in Florida’s
history, just one more than in 2007
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 leads the way for insured coastal
property at more than $1.9 trillion in 2004 and is expected to
double by 2014
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.
FLORIDA HURRICANES & INSURER
PROFITABILITY:
Selling Home Insurance in Florida is Challenging
($9.30)
($3.77)
$2.96 $3.40
($10)
($8)
($6)
($4)
($2)
$0
$2
$4
$6
2004 2005 2006 2007E
Underwriting Gain (Loss) in Florida Homeowners Insurance,
2004 - 2007E*
*2007 estimate by Insurance Information Inst. based on historical loss, expense and premium data for FL.**Does not include Citizens Property Insurance Corporation results.
$ B
illi
ons
Over the past four years, underwriting losses
exceeded premiums in Florida by an estimated
$6.7 billion
Private Insurers**
($10.60)
($0.21)
$0.69 $0.43$0.86 $1.08 $1.23 $1.28 $1.43 $1.15 $1.38 $1.76
($9.30)
($3.77)
$2.96 $3.40
($12)
($10)
($8)
($6)
($4)
($2)
$0
$2
$4
$6
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E
Underwriting Gain (Loss) in Florida Homeowners Insurance,
1992-2007E*
*2007 estimate by Insurance Information Inst. based on historical loss, expense and premium data for FL.**Does not include Citizens Property Insurance Corporation results.
$ B
illi
ons
Florida’s homeowners insurance market produces small/modest
profits in most years and enormous losses in others
Private Insurers**
-$10.6-$10.8-$10.1-$9.7
-$8.8-$7.7
-$6.5
-$5.2
-$3.8-$2.7
-$1.3
$0.5
-$8.8
-$12.6
-$9.6
-$6.2
($14)
($12)
($10)
($8)
($6)
($4)
($2)
$0
$2
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E
Cumulative Underwriting Gain (Loss) in Florida Homeowners
Insurance, 1992-2007E*
$ 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.
*2007 estimate by Insurance Information Inst. based on historical loss, expense and premium data for FL.**Does not include Citizens Property Insurance Corporation results.
Private Insurers**
Rates of Return on Net Worth for Homeowners Ins: US vs. Florida
Source: NAIC; 200/6 US and FL estimates from the Insurance Information Institute.
-54.3%
-2.8%
-183.3%
-714.9%
-53.4%
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 05 06E
US Florida
Averages: 1990 to 2006E
US HO Insurance = -0.9%
FL HO Average = -36.5%
Andrew
4 Hurricanes
Wilma, Dennis, Katrina
1990 – 2006E
Share of Losses Paid by Private 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
The Facts About Homeowner Insurer Profits and Losses in Florida
• During the period from 1992 through 2007, private home insurers in Florida paid an estimated $6.2 billion more in claims than they received in premiumsThis $6.2 billion underwriting loss remains even after including
$2.96 billion in profits in 2006 and $3.4 billion in 2007 (est.) It will take until 2009 for insurers just to get to the breakeven point
for the 15 year period 1992-2009 even if there no storm losses in 2008 and 2009
• Florida Remains a Money-Losing Proposition for Most Home Insurers in Terms of ReturnThe average annual rate of return on FL homeowners insurance
was -36.5% from 1990-2006, despite a profitable 2006Even if insurers were to earn a 40% rate of return (implying no
storm activity) every year, the average return for insurers will not exceed 0% until 2022. To reach the current 5% risk-free return on 10-year Treasury bonds would take until 2026 and a 10% return is unachievable until 2033
Florida State-Run Insurer Residual Deficits 2004/2005 (Millions of Dollars)
Source: Insurance Information Institute research.
-$516
-$1,425
-$1,770-$2,000
-$1,800
-$1,600
-$1,400
-$1,200
-$1,000
-$800
-$600
-$400
-$200
$0Florida Hurricane Catastrophe Fund (FHCF) Florida Citizens
2004 2005
The hurricanes seasons of 2004/5 weakened the FL Hurricane CAT
Fund and Citizens, producing a gross state-run insurer deficit of $3.7 billion
FL’s guarantee fund will also assess for at
least $400 million
Florida Citizens Exposure to Loss (Billions of Dollars)
Source: PIPSO; FL Citizens; Insurance Information Institute. *As of March 31
$408.8$434.3
$210.6$206.7$195.5$154.6
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
2002 2003 2004 2005 2006 Q1 2007*
Exposure to loss in Florida Citizens more than doubled by Q1 2007 relative to year
end 2005
Pre- vs. Post-Event in FL for 2007 Hurricane Season
$12.
4
$15.
0
$17.
6
$25.
8
$9.9
$14.
6
$24.
1
$31.
4
$34.
5
$37.
4
$54.
2
$10.9$10.4$10.1$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
1-in-20 1-in-30 1-in-50 1-in-70 1-in-85 1-in-100 1-in-250
Pre-Event Funding Post-Event Funding (Assessments & Bonds)
Bil
lion
s
Total = $20.0 Billion
Notes: Pre-event funding includes funds available to Citizens, FHCF and private carriers plus contingent funding available through private reinsurance to pay claims in 2007. Post-event funding is on a present value basis and does not includefinancing costs. Probabilities are expressed as “odds of a single storm of this magnitude or greater happening in 2007.”Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.
$35.0B
$25.0B
$43.8B $49.5B
$55.0B
$80.0BThere is a very significant likelihood of major, multi-
year assessments ahead
Cost of Borrowing for State Could Exceed Expectations
Source: Insurance Information Institute; Federal Reserve Board of Governors.
$766.7$854.1
$932.6$1,044.0
$1,158.4
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
4.23% (Jan2007 Rate)
4.64% (Aug2007 Rate)
5.00% 5.50% 6.00%
If FL were to need to borrow money to fund state insurer deficits, the cost was 11.4% higher ($87.4 million) per billion
borrowed in August (midst of credit crunch & hurricane season) than in January when legislation was passed
Interest Charge to Borrow $1 Billion at State/Municipal Bond Rates, Amortized Over 30 Years
If state/muni bond rates rise to 6%, interest cost would be 51% higher than in January 2007, adding $392 million to the cost of each billion borrowed
Mill
ion
s
Flood Insurance
Analysis of Flood Policy Purchase and Lapse Rates Since Katrina in Florida
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000JU
L 9
3 P
IF
JA
N 9
4 P
IF
JU
LY
94 P
IF
JA
N 9
5 P
IF
JU
L 9
5 P
IF
JA
N 9
6 P
IF
JU
L 9
6 P
IF
JA
N 9
7 P
IF
JU
L 9
7 P
IF
JA
N 9
8 P
IF
JU
L 1
998 P
IF
JA
N 1
999 P
IF
JU
L 1
999 P
IF
JA
N 2
000 P
IF
JU
L 2
000 P
IF
JA
N 2
001 P
IF
JU
L 2
001 P
IF
JA
N 2
002 P
IF
JU
L 2
002 P
IF
JA
N 2
003 P
IF
JU
L 2
003 P
IF
JA
N 2
004 P
IF
JU
L 2
004 P
IF
JA
N 2
005 P
IF
JU
L 2
005 P
IF
JA
N 2
006 P
IF
JU
L 2
006 P
IF
JA
N 2
007 P
IF
JU
L 2
007 P
IF
*Mandatory purchase of flood coverage for structures in floodplains with federally backed mortgagesbecame effective in 1993. NFIP National Advertising Campaign began in 1993. PIF= Policies In Force.Source: NFIP; Insurance Information Institute
Florida: NFIP Flood Policies in Force: July 1993 – July 2007*
Surge in Sales: Katrina Effect
Hu
rric
ane
Kat
rina
Au
gust
29,
200
5
NFIP Flood Policy Growth in Gulf States Since Katrina*
26.69%
14.15%
29.04%
80.24%
40.54%
21.62%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Alabama Florida Louisiana Mississippi Texas Total GulfStates
*Change from July 2005 through August 2007.Sources: NFIP ; Insurance Information Institute.
The number of flood insurance policies sold in the Gulf
states in the 2 years following Katrina
increased by 21.6%
Percentage of NFIP Flood Policies Issued Since Katrina That Are Not Renewed*
23%
32%
17%19%
25%
8.6%
0%
5%
10%
15%
20%
25%
30%
35%
Alabama Florida Louisiana Mississippi Texas US***Policies issued since July 2005 as of August 2007. **US figure is nonrenewal rate for all policies in force, average over 12 month period ending August 2007.Sources: NFIP ; Insurance Information Institute.
Flood policy nonrenewal rates in Gulf states are surprisingly high
P/C INSURER PROFITABILITY
National Perspective
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
07F
08F
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2008E
*2007 is actual first half ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate.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
Insurer Financial Strength Benefits Consumers
• Profits compensate shareholders for the assets they put at risk and encourages new capital to enter
• Profitable companies can access capital markets under favorable terms after mega-CATs or if market conditions are poor (e.g., post-9/11); Others will fail, are dissolved or acquired
• Preferred treatment by reinsurers• Profits lead directly to increased capacity• Profits build contingent capacity for mega-CATs• Profitable companies have higher financial strength and
credit ratings
Key Messages on Profitability
• All of the profits earned in 2004 and 2005 and most of the profits
in 2006/7 were earned in states and from types of insurance
unaffected by the hurricanes
• 2006and 2007’s respite in hurricane activity provides insurers and
reinsurers with the ability to rebuilding their claims paying
resources
• By law, the rates charged for insurance are based exclusively on
past and expected losses in that state. Profits in other states or
from other types of insurance cannot be used to subsidize losses in
the Florida homeowners insurance market. Likewise, losses in
other states cannot be subsidized by Floridians
Insurance Information Institute On-Line
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