Should There Be A National Reinsurance Catastrophe Pool ?

May 8, 2006Mary Z. SeidelReinsurance Association of America

22

Overview of Speech- Who is the RAA and General Description of RAA position

on Federal Reinsurance Programs for Natural Catastrophes

- Review of 2004-2005 Hurricane Season and Impact on Reinsurance Industry

- RAA Position on Federal Reinsurance Programs for State Cat Funds

• General Observations• Specific Concerns with H.R. 4366

- Political Prospects for Federal Program

33

RAA Membership Important in Context of Debate on

Federal Role­ RAA represents U.S. reinsurance underwriters and brokers. All members are U.S. companies, although 80% are foreign-owned.

­ RAA members are at the pulse of the global reinsurance marketplace.

­ RAA Member Companies write 70% of the reinsurance ceded in the U.S.

­ RAA also represents non-U.S. reinsurers, U.S. reinsurers that do not qualify because of size, and life reinsurers.

44

RAA Membership Important in Context of Debate on

Federal Role Cont’d - RAA believes natural catastrophe risk is insurable in the free market.

- Federal role should be limited to truly catastrophic event, such as $100 billion.­­­­

55

Insurance Industry Still Vibrant Despite Record Events

- Eight of the most expensive disasters in U.S. history occurred over the last 4 years.

- In 2004 four major hurricanes, $30 billion in insured losses, no insurer or reinsurer insolvencies,

limited impact on capacity and pricing.

- 2005 was a year of unprecedented insured losses in terms of frequency and severity.

• 27 named hurricanes and tropical storms set a new record for $80 billion in insured losses.

• The Big Three: Katrina, Rita and Wilma produced losses estimated as high as $60 billion.

66

Insurance Industry Still Vibrant Despite Record Events Cont’d

• Reinsurance industry absorbed approximately 50% of these losses. Played critical role in providing stability in the in the insurance marketplace..

- Solvency Impact – no major insurer or reinsurer insolvencies. - 2005 Earnings event rather than a Capital event.

• If the storms had not hit, the primary industry would have realized a $37.7 billion profit.• The prosperous year combined with the purchase of private reinsurance meant the insurance industry’s

surplus was not altered significantly.

77

Insurance Industry Still Vibrant Industry Still Vibrant Despite Record Events Cont’dDespite Record Events Cont’d

- Reinsurance Market Outlook for 2006• Since Fall 2005 new or existing companies have raised

approximately $21 billion of new reinsurance capacity arriving too late to influence 2006 January renewals.

• January renewals didn’t see major reinsurance capacity crunch that was evident after Hurricane Andrew and September 11, 2001.

• 2006 Spring renewals will likely show reduced capacity in Florida and likely increased prices.

• Last 2 years demonstrate the resilience and importance of the vibrant reinsurance market to U.S. economy.

88

Federal Reinsurance Program for State Cat Funds is not the Solution- RAA believes natural catastrophes are an insurable

risk. Any federal or state program should exhaust private sector reinsurance instead of compete with marketplace.

- Federal and state government’s role should not be as a private reinsurer. Instead, their role should be limited to mitigation, development of land use policies, providing coverage options (e.g., deductible alternatives), and protecting consumers by allowing insurers to charge an appropriate rate for the risk they take as to promote capacity and protect against insolvencies.

99

RAA Position on Catastrophe Funds- Cat funds most likely will become insolvent after either a

series of events or the mega-catastrophe that is well within the range of probability as predicted by scientific experts. Look at Florida.

- Government mandated pools would need to have statewide taxpayer assessments to finance the potentially huge catastrophe related debt. Inland taxpayers essentially will have to pay the cost of insurance for coastal homeowners.

- Government catastrophe funds shift the financial risk of catastrophic losses from private sector insurers to insurance buyers and taxpayers.

- States have rejected state cat funds.

1010

RAA Position on Catastrophe Funds Cont’d

- Government state cat funds encourage development in high risk areas.

- Government intervention in the form of catastrophe funds will serve to drive the private market out of certain states.

- The RAA opposes creating a government mandated catastrophe fund but will continue to work with insurance departments and legislatures to create private market solutions.

1111

Specific Concerns with H.R. 4366

- Trigger levels for federal involvement are too low – competes with private market.

- Federal reinsurance will be under priced.

- Strips previous “private sector right to compete” language and “regional contract” language.

- Only addresses homeowner’s insurance availability. Disasters impact commercial and infrastructure.

- Discourages diversified insurance market.

1212

Political Prospects- No appetite on Capitol Hill or the Administration to create

federal reinsurance program.

- Very limited insurance industry support.

- Assuming there were ever any support, political process would result in a “be careful what you wish for” – Look at TRIA.

• Mandatory offer of coverage• No rate relief at the state level• All risk policy including flood• Significant individual company retention

- Congressional hearings on general issue of natural disaster financing and insurance industry likely this year.

1313

QuestionsQuestions

1414