Economic Perspectives on Coastal Property Insurance: Focus ... · On October 15, 1954, Hurricane Hazel—the 9th storm of that hurricane season—made landfall near the North Carolina/South

Economic Perspectives on Coastal Property Insurance:

Focus on North Carolina2015 Coastal Risk Retreat

Greenville, NCApril 14, 2015

Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist

Insurance Information Institute 110 William Street New York, NY 10038

Tel: 212.346.5540 Cell: 917.494.5945 [email protected] www.iii.org

2

Why the Fuss?What’s the Worst

That Could Happen?

2

Coastal Counties in North Carolina

3

4

On October 15, 1954, Hurricane

Hazel—the 9th storm of that hurricane

season—made landfall near the North

Carolina/South Carolina border.

Winds were estimated at 132 mph,

which would have made it a category 4

storm.

If the storm had hit in 2012, given the

population growth and development that

occurred in the 58 years after Hazel hit,

insured claims would have been in the

$20 billion range.

In 1954 Hurricane Hazel Struck the Carolinas With Destructive Force

Sources: Karen Clark & Company, “Historical Hurricanes that Would Cause $10 Billion or More of Insured Losses Today,” August 2012, p. 10; Insurance Information Institute

Hazel’s Highest Winds Struckthe Lower Half of the NC Coast

5


Hazel’s Damage Was SevereAlong the NC Shore

6


7

Exposure toCatastrophic Loss in North Carolina and Neighboring States

7

8

In 2012, Total Value of Insured Coastal Exposure, NC and Neighboring States

(2012, $ Billions)

Source: AIR Worldwide

$106.7

$163.5

$182.3

$239.3

$0 $50 $100 $150 $200 $250

S. Carolina

Virginia

North Carolina

Georgia

The insured value of all Atlantic and Gulf coastal propertywas estimated at $10.6 trillion in 2012 , up 48% from $7.2 trillion in 2004.

9

In 2012, Total Value of Insured Atlantic & Gulf Coastal Exposure: $10.6 Trillion

(2012, $ Billions)

Source: AIR Worldwide

$293.5

$239.3

$182.3

$164.6

$163.5

$118.2

$106.7

$81.9

$64.0

$60.6

$58.3

$17.3

$567.8

$713.9

$849.6

$1,175.3

$2,862.3

$2,923.1

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500

New York

Florida

Texas

Massachusetts

New Jersey

Connecticut

Louisiana

S. Carolina

Virginia

Maine

North Carolina

Alabama

Georgia

Delaware

New Hampshire

Mississippi

Rhode Island

Maryland

The insured value of all coastal property was estimated at $10.6 trillionin 2012 , up 48% from $7.2 trillion in 2004.

Unlike Florida, the insured coastal

exposure in northeast states is concentrated

in a very small area

In terms of exposed value, over half is in Florida + New York.

10

Total Potential Home Value Exposureto Storm Surge Risk in 2014*

($ Billions)

*Insured and uninsured property, assuming total loss of the home.Source: Storm Surge Report 2014, Table 2, CoreLogic, published July 2014.

$0 $50 $100 $150 $200 $250 $300 $350

FloridaNew YorkLouisiana

New JerseyVirginiaTexas

S. CarolinaMassachusetts

N. CarolinaMaryland

ConnecticutGeorgia

MississippiPennsylvania

DelawareAlabama

Rhode IslandMaine

New Hampshire

Extreme Very High High

CoreLogic estimated the reconstruction value of homes exposed to Storm Surge along the Atlantic

and Gulf Coasts as $1.496 trillion in 2014 (assuming total losses). Only a fraction of this is

insured for flood, hence the huge demand for federal aid following major coastal flooding events.

Florida’s “extreme” exposure is greater than any

other state’s “extreme,” “very high,” and “high”

exposure combined

11


($ Billions)


$0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100

Virginia

S. Carolina

N. Carolina

Georgia

Extreme Very High High Moderate Low

CoreLogic estimated the reconstruction value of homes exposed to Storm Surge (assuming total losses). Only a fraction is insured for flood, hence the

huge demand for federal aid following major coastal flooding events.

12


($ Billions)


$15.2 $11.1 $10.8 $7.9$8.5

$0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 $55 $60

N. Carolina

Extreme Very High High Moderate Low

CoreLogic estimated the reconstruction value of homes exposed to Storm Surge (assuming total losses). Only a fraction is insured for flood, hence the

huge demand for federal aid following major coastal flooding events.

P/C Industry Homeowners Claim Frequency, US, 1997-2013

1.57

2.822.34

1.842.32

1.69

2.67 2.572.97

2.28

1.32

3.42

2.39 2.34

3.78

2.73

1.50

6.996.71

6.45 6.266.53

5.83

4.63

3.83 3.64 3.77 3.94 4.01 4.12 4.14 4.213.703.53

0

2

4

6

8

10

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

CAT-related claims Non-CAT-related claims

Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” p.41; Insurance Information Institute

Claims Paid per

100 Exposures

P/C Industry Homeowners Claim Frequency, North Carolina, 1997-2013

1.06

3.29

6.26

1.71

0.09

2.55

4.81

1.80

0.57 0.520.79 1.01 1.08

1.83

6.79

1.83

1.22

7.06

7.767.37 7.49

6.57 6.375.94

3.86 3.91

4.52

3.84

4.53 4.47 4.69 4.634.05

3.60

0

2

4

6

8

10

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

CAT-related claims Non-CAT-related claims

Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” p.81; Insurance Information Institute

Claims Paid per

100 Exposures

P/C Industry Homeowners Average Claim Severity, Inflation-adjusted, 2006-2013

$7,383

$7,849

$8,222

$8,633$8,527 $8,541

$8,718 $8,772

$7,665

$9,051

$6,679

$7,331 $7,332

$7,614

$6,829

$8,823

$6,500

$7,000

$7,500

$8,000

$8,500

$9,000

$9,500

2006 2007 2008 2009 2010 2011 2012 2013

non-cat claims cat claims

Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” 2015 edition, p. 41; BLS inflation calculator,with Insurance Information Institute calculations

2013 dollars

P/C Industry HO Average Claim Severity,Inflation-adjusted, North Carolina, 1997-2013

$3,465 $3,510$3,726 $3,765

$4,237 $4,123

$4,719

$5,478

$5,975$5,615

$6,848$6,463

$7,049 $7,165 $7,059

$7,484

$8,772

$6,812

$3,612

$2,977$3,328

$4,724

$1,782

$3,374 $3,245$3,471

$3,252

$3,671

$4,852

$5,883$5,643

$6,447

$5,858

$8,823

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

non-cat claims cat claims

Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” 2015 edition, p. 81; BLS inflation calculator,with Insurance Information Institute calculations

2013 dollars

17

Pct. Change in Population, Forecast for 2010-2020,for Coastal Shoreline/Watershed Counties, by State

8%9%

19%

23%

10%

18% 18%17%

0%

5%

10%

15%

20%

25%

Virginia North Carolina South Carolina Georgia

Shoreline Watershed

This population growth means not only more homes but more businesses, and more public buildings (schools, hospitals, etc.)

and infrastructure in “harm’s way”

Source: http://stateofthecoast.noaa.gov/features/coastal-population-report.pdf Table 5 and Table 10

http://stateofthecoast.noaa.gov/features/coastal-population-report.pdf

18

Pct. Change in Population, Forecast for 2010-2020, for Coastal Shoreline Counties, by State

19%

23%

10%

18%

0%

5%

10%

15%

20%

25%




Source: http://stateofthecoast.noaa.gov/features/coastal-population-report.pdf Table 5


19

Pct. Change in Population, Forecast for 2010-2020, for Coastal Watershed Counties, by State

9%

17%

8%

18%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%




Source: http://stateofthecoast.noaa.gov/features/coastal-population-report.pdf Table 10


20

$35.5

$12.9$15.3

$0.6 $0.6$3.5

$0.8 $0.8$2.4

$8.8

$0.4

$10.7$7.6

$29.6

$11.6$14.6

$34.1

$0

$5

$10

$15

$20

$25

$30

$35

$40

2006 2007 2008 2009 2010 2011 2012 2013 2014E

Privately-insured NFIP

Post-KatrinaU.S. Insured Catastrophe Losses

Sources: Property Claims Service/ISO; https://www.fema.gov/statistics-calendar-year/loss-dollars-paid-calendar-yearInsurance Information Institute.

These numbers are national, not coastal, but are often largely coastal in origin. The volatility is obvious.

($ Billions, $ 2013)

20

Pvt Ins. Annual Data

Mean: $19.1B

Median: $14.6B

NFIP Annual Data

Mean: $2.24B

Median: $0.75B

https://www.fema.gov/statistics-calendar-year/loss-dollars-paid-calendar-year

21

$1

2.8

$1

1.1

$3

.8

$1

4.5

$1

1.7

$6

.2

$3

5.2

$7

.7

$1

6.5

$3

4.2

$7

4.5

$1

0.7

$7

.6

$2

9.6

$1

1.6

$1

4.6

$3

4.1

$3

5.5

$1

2.9

$1

5.3

$1

4.2

$4

.9

$8

.1

$3

8.3

$8

.9

$2

6.8

$0

$10

$20

$30

$40

$50

$60

$70

$80

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14E

U.S. Insured Catastrophe Losses

*Through 12/31/14.

Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.)

Sources: Property Claims Service/ISO; Insurance Information Institute.

2013-14 were welcome respites from 2011-12, which were among the costliest years for insured disaster

losses in U.S. history. Longer-term trend is for more—not fewer—costly events.

2012 was the 3rd most expensive year ever for

insured CAT losses

$15.3 billion in insured CAT

losses estimated for 2014

($ Billions, $ 2013)

21

22

10 Costliest Coastal Storms in U.S. History (Adjusted for Development into 2012)

(Insured Losses,2012 Dollars, $ Billions)

$50 $50

$65

$125

$50$40$40

$35$25

$20

$0

$20

$40

$60

$80

$100

$120

$140

Hazel (1954) Donna

(1960)

New England

(1938)

Katrina

(2005)

Galveston

(1915)

Andrew

(1992)

Ft.

Lauderdale

(1947)

Galveston

(1900)

Lake

Okeechobee

(1928)

Great Miami

(1926)

Even today, Hurricane Hazel makes the list of ten

costliest coastal storms ever

The $7.9 billion in today’s dollars doesn’t reflect the significant additional construction of homes and businesses adde since 1989.


23

Many People Who Probably Should Buy Flood Insurance

Don’t

24

Even Frequent & Severe Floods Didn’t Change Flood Insurance Ownership Much

1Asked of those who have homeowners insurance and who responded “yes”.

Source: Insurance Information Institute Annual Pulse Survey.

Q. Do you have a separate flood insurance policy?1

Despite extensive flooding (and wide publicity),few U.S. homeowners say they have a flood insurance policy;

moreover, there is no upward trend.

19%

5%

13%12%

21%

14%

6% 6%

20%

11%

7%8%

15%

10%

12%11%

0%

5%

10%

15%

20%

25%

South Northeast Midwest West

May 2011May 2012May 2013May 2014

After Hurricane

Irene

After SuperStorm

Sandy

Source: Wharton Center for Risk Management and Decision Processes, Issue Brief, Nov. 2012; Insurance Information Institute.

Residential NFIP Flood Take-Up Rates in NJ (2010) & Sandy Storm Surge

25

Flood coverage penetration rates were extremely low in

many very vulnerable areas in NJ, with take-up rates far below

50% in many areas

Source: Wharton Center for Risk Management and Decision Processes, Issue Brief, Nov. 2012; Insurance Information Institute.

Residential NFIP Flood Take-Up Rates in NY, CT (2010) & Sandy Storm Surge

26

In many very vulnerable

areas of NY and CT, take-up rates were far below 50%

27

Share of Flood Damaged Structures with Flood Insurance: Long Island

Source: Newsday, 1/14/13 from FEMA and Small Business Administration.

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Nassau Suffolk

Insured

Uninsured

The Maximum FEMA Grant is $31,900. The Average Grant Award to Homeowners and Renters on Long Island is About $7,300

46,681

$15.0

28,055

$2.2

27

74,736

20,798

5,747

Only 37.5% of flood damaged buildings in Nassau County were insured for flood, 62.5% uninsured

27.6% of flood damaged buildings in Suffolk County were insured for

flood, 72.4% uninsured

15,051

Number of

buildings

28

What are the odds of a 100-Year flood occurring? In any single year, 1 chance in a 100

So why buy flood insurance, year after year, for an

event that is highly unlikely to happen?

But suppose you own your home for 30 years. What

is the chance of seeing a 100-year flood during the

time you live there?1 chance in a 4

And the longer you live there, the greater the odds of a

flood hitting your home

Why Don’t They Buy? They Don’t Think They Will Ever Be Flooded

29

Flood Insurance Policies in Brunswick County, NC (as of 1/31/2015)

Number of Policies in Force 17,923

Amount of Insurance in Force $5,423,191,100

Amount of Insurance per policy $302,583

Annual Premium on in-Force Policies $20,920,329

Annual Premium per policy $1,167.23

Policies in Force as a Percent of Housing Units* 22.6%

Total Number of Claims, 1/1/1978 –1/31/2015

6,928

Total Payments, 1/1/1978 – 1/31/2015 $46,071,518.99

Claims Closed without Payment,1/1/1978 – 1/31/2015

2,853

Claims Closed with Payment 4,075

Average Payment per Claim Closed with Payment

$11,305.89

Claims still open 0*number of housing units is for 2013

Sources: http://bsa.nfipstat.fema.gov/reports/1011.htm#NCT ; http://quickfacts.census.gov/qfd/states/37/37019.html (housing

units); I.I.I.

http://bsa.nfipstat.fema.gov/reports/1011.htm#NCT

http://quickfacts.census.gov/qfd/states/37/37019.html

Inconsistent Financial Behavior

3030

31

Imagine you have this choice:

You may choose a gamble that offers an 80 chance

of winning $4,000 and a 20% chance of winning

nothing, or

You get a guaranteed $3,000.

Which choice do you make?

4 out of 5 people chose the $3,000.

A Risk Preference Test, Part 1

Source: David Rolpeik, How Risky Is It Really?: Why Our Fears Don’t Always Match the Facts (New York: McGraw-Hill, 2010),

p. 40, citing Kahneman and Tversky.

32

Now imagine that you won the gamble and have

$4,000 and you now have this choice:

You may choose a gamble that offers an 80 chance

of losing the $4,000 and a 20% chance of not losing

it, or

You pay $3,000 of your $4,000 to avoid the gamble.

Which choice do you make?

92% of people chose the gamble.

A Risk Preference Test, Part 2



33

In the first test, involving only positive (or at worst non-

negative) outcomes, most people are risk-averse. They

choose the “sure thing.” In part this is because the first dollars are more valuable to

them than the higher amounts.

In the second test, involving only negative outcomes,

most people are loss-averse. They choose the gamble,

hoping the worse outcome doesn’t happen. In part this is because the first dollars lost are more

valuable to them than the higher amounts

Risk Preference Test Observations



34

An amount of money a person considers acceptable

spending for a particular purpose Classic example: you paid $100 for a ticket for a concert but

when you arrive to see it the ticket is gone. Another ticket is

available for another $100.– Do you spend another $100 or

– Have you spent the money in “the concert account” and go

home?

I argue that the reason why some people don’t buy

certain insurance coverages is that they have a

psychological or mental account that is too small

What is a “Psychological Account”?

Source: Barry Schwartz, The Paradox of Choice: Why More is Less (New York: Harper, 2004), pp. 64-65

35

Public AttitudesAbout Flood Insurance

35

Even with Subsidies,

Most People Weren’t Buying It

36

1 in 4 with Homeowners Insurance Think That it covers Flood Claims



16%

12%

32%

9%

23%

14%

32%

12%

24%

16%

29%

10%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Northeast Midwest South West

May 2011

May 2012

May 2013

Q. Does your homeowners policy cover damage from flooding during a hurricane?1

You might think that homeowners in the South, with perhaps greater exposure to flooding from hurricanes and thunderstorms, would be more aware that

homeowners insurance doesn’t cover flood claims.

Sandy didn’t teach very

well

37

Flood Insurance: It’s Not “Fair” for Premiums to Reflect Expected Claims


46% 47%

58% 61%

0%

20%

40%

60%

80%

Northeast West Midwest South

Q. The federal government plans to raise the price of flood insurance so it reflects the costs of paying claims. Do you believe this is fair?

A majority of Americans do not think it is fair for the federal government to raise its flood insurance premiums to better reflect claims payouts or to

charge people who live in high-risk areas actuarially-fair premiums.

[% Responding “NO”]

4%

37%

59%

Q. Do you think that it is fair that people who live in areas affected by record storms in 2011 and 2012 should pay more for their homeowners insurance in the future?

YesNo

Don’t Know

38

I.I.I. Poll: Disaster Preparedness



Q. Will the government pay for damage to your home that is not covered in your homeowners policy?1

Sixty-four percent of homeowners say that the government will not pay for damage to their homes that is

not covered by their homeowners policy.

8%

55%

38%

5%

61%

34%

8%

64%

27%

0%

10%

20%

30%

40%

50%

60%

70%

Yes No Don't know

May-10 May-11 Nov.-12

39

Why Buy Flood Insurance?

Q. Will the government provide you with funds to pay some of the disaster costs to your property?


30% of Americans believe the governmentwill pay some of their disaster costs.

11%

29%

60%

Don’t know

Yes

No4% 1%

5%0%

0%

20%

40%

60%

80%

100%

Northeast Midwest South West

Q. Have recent flooding events such as Hurricane Sandy or Hurricane Irene motivated you to buy flood coverage?1

Percent saying “yes”

40

I.I.I. Poll: Should Flood Insurance Premiums Reflect Flood Risk?

Q. Is it fair that flood insurance premium increases are higher if people who live in high flood risk areas and rebuild their homes do not elevate them?


In the South, a somewhat smaller percentage (than in the U.S. overall) believe that higher flood insurance premium increases

should apply to homes that aren’t elevated against flooding.

6%

63%

31%

Don’t know

Yes

No

8%

57%35%

NoYes

Don’t know

U.S. Overall South

41

I.I.I. Poll: Should Flood Insurance Premiums Reflect Flood Risk?

Q. Should flood insurance premiums reflect the risk of flooding no matter what the cost or should the government subsidize the cost of flood insurance with taxpayers’ dollars?

Source: Insurance Information Institute Annual Pulse Survey (Nov. 2013).

Three-fifths of Americans in the U.S. South think flood insurance premiums should be raised to reflect the risk of flooding.

10%

60%

30%

Don’t know

Premiums should reflect flood risk

and not be subsidized

Government should subsidize

premiums with taxpayers’ dollars

South

42

It passed the Biggert-Waters Flood Insurance Reform

Act in mid-2012The act had a 1-year wait to implement some

provisions

The act had a 2-year wait to implement some other

provisions

During that period, we asked another poll question…

Congress Followed the Polls

43

I.I.I. Poll: Should the Subsidies Be Restored?

Q. The federal government provides insurance coverage at taxpayer-subsidized rates for damage from floods through the National Flood Insurance Plan. A new law eliminates the subsidy and raises rates. Should the rate increase should be repealed?


More than half of Americans polled for the November 2013 survey said National Flood Insurance premium hikes should be repealed.

10%

55%36%

Don’t know

YesNo

It is inconsistent for the public to support full-risk rates while wanting to maintain subsidies,

but this exactly mirrors Congressional sentiments.

Claims Management

4444

Following KRW, the P/C Insurance Industry

learned that it needed more claims adjusters

45

Number of NFIP Claims Paid, Yearly,2005-2013*

36,849

55,856

213,290

24,62023,169

74,727

30,99629,111

77,801

148,448

16,86425,314

43,589

16,362

47,24557,352

30,338

0

50,000

100,000

150,000

200,000

250,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

How many adjusters are needed each year to handle flood claims? Three times since 2005 NFIP has paid 75,000 claims in a calendar year; that never

happened before. (And this excludes claims closed without payment.)

*calendar years; latest available (posted 7/24/2014)

Source: http://www.fema.gov/statistics-calendar-year/number-losses-paid-calendar-year ; Insurance Information Institute

Average for

1997-2004:

39,100

Average for

2006-2013:

53,200

http://www.fema.gov/statistics-calendar-year/number-losses-paid-calendar-year

46

U.S. Employment in Independent (Non-carrier) Claims Adjusting, 1990–2015*

Thousands

40

42

44

46

48

50

52

54

56

58

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

*As of January, 2015; not seasonally adjusted.

Note: Recessions indicated by gray shaded columns.

Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

Hurricane Andrew

Hurricanes Katrina,

Rita, Wilma

Hurricanes Bertha,

Gustav, Ike

Tornado Devastation

47

Number of NFIP Claims Paid, 2013-14,* NC and Neighboring States

447

560

128 155

457

275

12471300

0

300

600

900

1,200

1,500


2013 2014

The number of paid claims varies from one year to the next.

*fiscal years, ending Sept 30 2013 and Sept 30 2014, respectively

Source: https://www.fema.gov/media-library/assets/documents/21075 ; Insurance Information Institute

https://www.fema.gov/media-library/assets/documents/21075

48

Number of NFIP Claims Paid, 2013-14,* Coastal New England and Mid-Atlantic States

75300

1560 174038 27 122 39 71 1401 652 53 434

58300

6258110110164344

0

20,000

40,000

60,000

80,000

Main

e

New

Ham

psh

ire

Massach

usett

s

Rh

od

e Isla

nd

Co

nn

ecti

cu

t

New

Yo

rk

New

Jers

ey

Dela

ware

Mary

lan

d

2013 2014

The number of paid claims varies from one year to the next and the trend isn’t consistent from state to state.

*fiscal years, ending Sept 30 2013 and Sept 30 2014, respectively

Source: https://www.fema.gov/media-library/assets/documents/21075 ; Insurance Information Institute

https://www.fema.gov/media-library/assets/documents/21075

49

A [Really] Brief Historyof Flood Insurance

in the U.S.

50

$669

$5,328

$13,473

$26,525

$989$2,727

$7,594

$29,192

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

1978-1981 1982-1991 1992-2001 2002-2011

Premiums Payments

NFIP Premiums and Claims Payments

Sources: Rawle King, “The National Flood Insurance Program: Status and Remaining Issues for Congress,” Congressional Research

Service, Feb. 6, 2013, Table 3; Insurance Information Institute.

Claims payments exceeded premiums by over $3 billion in the most recent decade

$ Billions

51

$0 $2

65

$6

27

$9

17

$5

22

$5

41

$3

45

$6

00

$1

0

$0

$0 $2

25

$1

6,8

85

$1

7,5

35

$1

7,3

60

$1

9,0

00

$1

8,5

00

$1

7,7

50

$0

$5,000

$10,000

$15,000

$20,000

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

20

07

20

08

20

09

20

10

20

11

NFIP’s Cumulative Debtto the U.S. Treasury, 1994-2011

Sources: Rawle King, “The National Flood Insurance Program: Status and Remaining Issues for Congress,” Congressional Research

Service, Feb. 6, 2013, Table 4; Insurance Information Institute.

Once the cumulative debt ballooned to over $16 billion (and made worse in 2008 by Hurricanes Gustav and Ike) it became clear that the

NFIP would never be able to retire the debt

$ Millions

Effect of Hurricanes Katrina, Rita, and Wilma in 2005

52

Before superstorm Sandy struck, there were

about 240,000 flood policies in force in New

Jersey

In the year after superstorm Sandy struck,

75,300 flood insurance claims were filed

So a little less than 1 in 4 flood insurance

policyowners filed a claim in one year

People Don’t Buy Flood Insurance Because They Don’t Think They Will Ever Be Flooded, and Yet…

53

The Flood Insurance Reform Act of 2012 (Biggert-Waters)

54

Judy Biggert, Republican,

former congresswoman from

Illinois’ 13th district

Maxine Waters, Democrat,

congresswoman from California’s

43rd district

Who Are Biggert and Waters?

55

Biggert-Waters: Main Provisions

Eliminates subsidies onSecond homes

Commercial properties

Properties with severe repetitive claims

Properties that incurred damage in excess of fair

market value

Policies lapsed (not immediately renewed)

Primary homes when sold

National Academy of Sciences to report on the

“affordability” of NFIP premiums

56

The HomeownerFlood Insurance Affordability

Act of 2014

Signed into law on March 21, 2014

Repeals and modifies some provisions of Biggert-

Waters Flood Insurance Reform Act of 2012

Makes other changes not in B-W

57

Lowers recent rate increases on some policies

Prevents some future rate increases

Implements an annual surcharge on all policies $25 on primary residences

$250 on all other properties

Annual surcharges remain until all premiums are at actuarially

appropriate levels and all subsidies are eliminated

Repeals certain rate increases that had already gone

into effect Provides refunds

Increases maximum deductibles

Mandates that FEMA develop an installment plan for non-

escrowed flood insurance premiums

Summary of the 2014 Law

58

Creates a “Flood Insurance Advocate” to advocate

for fair treatment of NFIP policyholdersHelps policyholders and property owners understand the

procedures related to– appealing preliminary flood maps and

– Implementing measures to mitigate evolving flood risks

Educate property owners on– measures to reduce flood insurance rates through effective

mitigation

– The flood insurance rate map review and amendment

process

Help potential policyholders in obtaining and verifying

accurate and reliable flood insurance rate information

when buying or renewing a flood insurance policy

Summary of the 2014 Law (cont’d)

59

Authorizes additional resources for a study of

affordability by the National Academy of Sciences Due September 2015

The “affordability framework” must consider– Accurate communication to consumers of the flood risk

– Targeted assistance based on financial ability to pay

– Individual and community actions to mitigate flood risk or lower

the cost of flood insurance

– The effect of increases in premium rates on participation in NFIP

– The impact of mapping updates on affordability of flood

insurance

Must include proposals for ensuring that flood insurance is

affordable among low-income populations.

Summary of the 2014 Law (cont’d)

Private Insurance Capacity Against Property Claims

60

Capital Accumulation in the Reinsurance Sector Exerts

Downward Pressure on Windstorm Rates (for Now)

60

61

Return on Net Worth, Property Insurance, North Carolina, 2004-2013

18

.2%

21

.5%

26

.1%

25

.4%

13

.7%

20

.2%

17

.9%

-44

.6%

20

.5%

20

.6%

20

.0%

24

.7%

23

.3%

22

.9%

19

.0%

11

.4%

17

.0%

-16

.1%

20

.7%

17

.2%

-75%

-50%

-25%

0%

25%

50%

4 5 6 7 8 9 10 11 12 13 4 5 6 7 8 9 10 11 12 13

Sources: NAIC, Report on Profitabilty by Line by State in 2013; Insurance Information Institute.

Homeowners Commercial Multiple-Peril

62

Return on Net Worth, Property Insurance, North Carolina, 2004-2013

46

.2%

40

.0%

32

.8%

21

.0%

20

.6%

11

.2%

20

.2%

23

.7% 35

.8%

15

.3%

36

.1% 51

.0%

43

.6%

45

.7%

41

.3%

44

.4%

43

.8%

-45

.9%

35

.4%

34

.9%

-75%

-50%

-25%

0%

25%

50%

75%

4 5 6 7 8 9 10 11 12 13 4 5 6 7 8 9 10 11 12 13

Sources: NAIC, Report on Profitabilty by Line by State in 2013; Insurance Information Institute.

Fire Insurance Allied Lines

63

Policyholder Surplus, 2006:Q4–2014:Q3

Sources: ISO, A.M .Best.

($ Billions)

$487.1

$496.6

$512.8

$521.8

$478.5

$455.6

$437.1 $463.0 $

490.8 $511.5 $

540.7

$530.5

$544.8

$559.2

$559.1

$538.6

$550.3

$567.8

$583.5

$586.9 $607.7

$614.0

$624.4 $

653.3

$671.6

$673.9

$662.0

$570.7

$566.5

$505.0

$515.6

$517.9

$400

$450

$500

$550

$600

$650

$700

06:Q

4

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

12:Q

1

12:Q

2

12:Q

3

12:Q

4

13:Q

1

13:Q

2

13:Q

3

13:Q

4

14:Q

1

14:Q

2

14:Q

3

2007:Q3Pre-Crisis Peak

Surplus as of 9/30/14 stood at a record high $673.9B

2010:Q1 data includes $22.5B of

paid-in capital from a holding

company parent for one insurer’s

investment in a non-insurance

business .

The industry now has $1 of surplus for every $0.73 of NPW,close to the strongest claims-paying status in its history.

Drop due to near-record 2011 CAT losses

The P/C insurance industry entered 2015in very strong financial condition.

$0.50

$0.75

$1.00

$1.25

$1.50

$1.75

$2.00

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*

Premium-to-Surplus Ratio:1985–2014*

* As of 9/30/14.

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

The larger surplus is in relation to premiums—the lower the P:S ratio—and the great the industry’s capacity

to handle the risk it has accepted

(Ratio of NWP to PHS)

The Premium-to-Surplus Ratio Stood at $0.75:$1 as of9/30/14, a Record Low (at Least in Recent History)

Surplus as of 9/30/14 was $0.75:$1, a near-record low (at least in modern history)

9/11, Recession & Hard Market

Global Reinsurance Capital (Traditional and Alternative), 2006 - 2014

2014 data is as of June 30, 2014.

Source: Aon Benfield Analytics; Insurance Information Institute.

Total reinsurance capital reached a record $570B in 2013, up 68% from

2008.

But alternative capacity has grown 210% since 2008, to $50B. It has more than doubled in the past three years.

Growth of Alternative Capital Structures, 2002 - 2014

2014 data is as of June 30, 2014.

Source: Aon Benfield Analytics; Insurance Information Institute.

Collateralized Re’s Growth Has Accelerated in the

Past Three Years.

Collateralized Reinsurance and Catastrophe Bonds Currently Dominate the Alternative Capital Market.

Final Thoughts

6767

68

Extensive educational and outreach programs are

neededNature and extent of the risk

Benefits of flood insurance over government loans

and grants

Cost-effective Mitigation strategies

Properties on which a subsidized flood insurance

rate is “grandfathered” should be advertised as

entitled to a flood insurance “sale”

If We Believe More Coastal Property Should be Insured Against Flooding…

www.iii.org

Thank you for your timeand your attention!

Insurance Information Institute Online:

69

Documents

Economic Perspectives on Coastal Property Insurance: Focus ... · On October 15, 1954, Hurricane Hazel—the 9th storm of that hurricane season—made landfall near the North Carolina/South