Elephants in the Room: Big Problems in Florida’sBig ... in 2010 FL’s population will hit 20 million by 2016 and will add 2.5 million residents between 2010 and 2020 (Millions)

Elephants in the Room: Big Problems in Florida’sBig Problems in Florida’s

Insurance Markets that Nobody W DiWants to Discuss

Governor’s Hurricane ConferenceGovernor s Hurricane ConferenceMay 26, 2010

Download at www.iii.org/presentationsRobert P. Hartwig, Ph.D., CPCU, President & Economist

Insurance Information Institute ♦ 110 William Street ♦ New York, NY 10038Tel: 212.346.5520 ♦ Cell: 917.453.1885 ♦ [email protected] ♦ www.iii.org

Florida is America’s #1 Catastrophe Problem

Exposure is Huge and Can Only G i th F t D itGrow in the Future Despite

Real Estate Collapse

2

Total Value of Insured Coastal Exposure in 2007*($ Billions)

$2,458.6Florida

$635.5$772.8

$895.1$2,378.9

$2,458.6FloridaNew York

TexasMassachusetts

New Jersey $522B Increase$224.4

$191.9$158.8$146 9

$479.9ConnecticutLouisiana

S. CarolinaVirginia

M i

$522B Increase Since 2004,

Up 27%

$146.9$132.8

$92.5$85.6$60 6

MaineNorth Carolina

AlabamaGeorgia

Delaware

In 2007, Florida Still Ranked as the #1 Most Exposed State to Hurricane Loss, with

$2.459 Trillion Exposure, an Increase of $522B or 27% from $1.937 Trillion in 2004$60.6

$55.7$51.8$54.1

$14.9

DelawareNew Hampshire

MississippiRhode Island

Maryland

The Insured Value of All Coastal Property Was $8.9 Trillion in 2007, Up 24% from $7.2 Trillion in 2004

3

*Latest available.Source: AIR Worldwide

$

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

y

Insured Coastal Exposure as a Percentage of Statewide Insured Exposure, 2007

64%79%Florida

Connecticut

36%54%

59%62%

64%ConnecticutNew York

MaineMassachusetts

Delaware35%

34%29%

28%

36%e a a eLouisiana

New JerseyRhode Island

S. Carolina

Nearly 80% of all insured exposure in

Florida is coastal more26%23%

13%12%

11%

TexasNH

MississippiAlabama

Virginia

Florida is coastal, more than any other state

11%9%

5%1%

VirginiaNC

GeorgiaMaryland

4Source: AIR Worldwide

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

Value of Insured Residential Coastal Exposure in 2007

$1,238.6Florida

($ Billions)

$319.5$373.0$388.3

$660.4$1,238.6Florida

New YorkTexas

MassachusettsNew Jersey

$96.9$90.1$81.1$78 4


S. CarolinaMaine

N th C li

Residential structures accounted for $1.24

trillion or slightly more$78.4$72.6

$46.5$38.1$36 7

North CarolinaVirginia

AlabamaGeorgia

Delaware

trillion or slightly more than half (50.4%) of all

coastal exposure in Florida in 2007, far more

than any other state$36.7$31.9$30.8$25.7

$7.2

DelawareRhode Island

New HampshireMississippi

Maryland

than any other state


$

$0 $200 $400 $600 $800 $1,000 $1,200 $1,400

y

Value of Insured Commercial Coastal Exposure, 2007

$1,718.6New York

($ Billions)

$316.0$399.8

$506.8$1,220.0

$1,718.6New YorkFloridaTexas

MassachusettsNew Jersey

$127.5$101.8$86.2

$65 9


S. CarolinaVirginia

M i

Commercial structures accounted for $1.22

trillion or slightly less than half (49 6%) of all$65.9

$54.4$47.5$46.0

$26 1

MaineNorth Carolina

GeorgiaAlabama

Mississippi

than half (49.6%) of all coastal exposure in

Florida in 2007, second only to New York

$26.1$24.9$23.8$22.2$7.7

MississippiNew Hampshire

DelawareRhode Island

Maryland


$

$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 $2,000

y

Florida Population, 2000 – 2035P

26 Decline in l ti i ll

State population growth is

expected to resume in 2010

FL’s population will hit 20 million by 2016 and will add 2.5 million residents between 2010 and 2020

(Millions)

23.82122.574

21.24722

24

26 population is small and temporary

resume in 2010 between 2010 and 2020

18.77318.75018.807

15.98216

18

20

12

14

16

102000 2008 2009 2010 2020 2030 2035

Despite the Recent Crash in Real Estate Markets and Higher Unemplo ment Florida Will Add Millions of Ne Resident in the Years

7Source: University of Florida, Bureau of Economic and Business Research; US Census Bureau; Insurance Information Institute

Unemployment, Florida Will Add Millions of New Resident in the Years Ahead, Putting More Strain on the State’s Fragile Insurance Markets

US Insured Catastrophe Losses: Florida Accounts for More Insured Loss than Any Other State

100.

0$120

$100 Billion CAT Year is Coming Eventually, Likely

Involving FL($ Billions)

2000 A D d f Di t

$61.

9

$

$80

$100 2009 CAT Losses

Were Down 61% from

2008

2000s: A Decade of Disaster2000s: $193B (up 117%)

1990s: $89B

3 4 0.1

3

$26.

5

2.9 $2

7.5

$

2

$27.

1

0.6

5 $22.

9

16.9

$40

$60$8

.3

$7.4

$2.6 $1

0

$8.3

$4.6

$5.9 $1 $9. 2

$6.7 $10

$7.5

$2.7

$4.7

$5.5 $

$0

$20

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 20??

Florida’s Demographics and Land Use Policies Make it Certain that Catastrophe Losses in the State Will Rise in the Future

8

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

U.S. Significant Natural Catastrophes, 1950 – 2009Number of Events ($1+ Bill economic loss and/or 50+ fatalities)

Losses due to tropical activity are rising,

impacting Florida directly

Sources: MR NatCatSERVICE

Top 12 Most Costly Disastersin US History—Most Have Impacted FL(Insured Losses, 2009, $ Billions)

$45 3$50 Hurricane Katrina Remains By Far the

$23 8

$45.3

$30$35$40$45$50 Hurricane Katrina Remains, By Far, the

Most Expensive Insurance Event in US and World History Caused About $600

Million in Insured Losses in Florida

$11.3 $12.5$18.2

$22.8 $23.8

$8.5$8.1$7.3$6.2$5.2$4 2$10$15$20$25$

$5.2$4.2

$0$5

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Northridge(1994)

9/11Attacks(2001)

Andrew(1992)

Katrina(2005)

(2001)

8 of the 12 Most Expensive Disasters in US History Have Occurred Since 2004;

8 f th T 12 Di t Aff t d FL

10Sources: PCS; Insurance Information Institute inflation adjustments.

8 of the Top 12 Disasters Affected FL

Distribution of US Insured CAT Losses: TX, FL, LA vs. US, 1980-2008*($ Billions)

$

Texas

$31.20 , 10%

$33.60 , 11%

Louisiana

$176 , 60% $57 10

Rest of US60% $57.10 ,

19%Florida

Florida Accounted for 19% of All US Insured CAT Losses from 1980-2008: $57.1B out of $297.9B

I d L i FL A N l D bl th t f A Oth

11* All figures (except 2006-2008 loss) have been adjusted to 2005 dollars.Source: PCS division of ISO.

Insured Losses in FL Are Nearly Double that of Any Other State Over the Past 30 Years

Florida is America’s Most Dysfunctional but Not MostDysfunctional but Not Most

Uninsurable Property Insurance MarketInsurance Market

Rate Suppression, Not ppHurricanes Are the Principal Source of Dysfunctionality

12

y y

2010 Property and Casualty InsuranceReport Card: Regulatory Burden

ME

NH

ND

MN

WA

AL

VTMT

AK

B-B-

B

C -A

BF NH

MA

CT

PA

NE

MN

MI

IL

IA

IDOR

NJRI C

DE

NY

MD

SD WI

INOH

NV

WY

= A= B= C= D

A-

B-

B

B-B-

B-

B- C-A

B+B+

BB

C+

C+

C

D+F

WVVA

NC

OK

IL

AZSC

TN

ARNM

KYMOKS

IN

CA

NV

UTCO

D= F= NG

A- A-

B-B-

B

B-

B-

B-C-

C-

D-D-

AB

B

C+

D+D+D

Source: James Madison Institute, February 2008.

LATX

HI GAAL

FL

MS

NM

B- B-B-C-

C-A B+ BNG

NGNot Graded: District of ColumbiaMississippi

Source: Heartland Institute, 2010 Property and Casualty Report Card: A State‐by‐State Analysis of Regulatory Burden, May 2010.

D Fpp

Louisiana Florida is one of only two states to receive a

grade of “F” in 2010

Cumulative Profits on Homeowners Insurance Transactions: 1985–2008

(Profits as a Share of Net Earned Premiums, e.g. -0.4 = -40%)

Florida’s home insurersFlorida s home insurers have been in the red on a cumulative basis since

Hurricane Andrew struck the state in 1992

14

Note: Southeast states are AL, FL, GA, LA, MS, NC, SC and TX. Source: Robert W. Klein (2009), “Hurricane Risk and Property Insurance Markets: An Update and Extension,” Wharton Risk CenterWorking Paper #2009-10-07 based on data from NAIC Report on Profitability by Line by State and author’s calculations.

Average Homeowners Insurance Premium in Florida, 2007:Q2–2009:Q4($ Billions)

$2,000

The state has required rates to be reduced even though they were not adequate to begin with. Discounts don’t

make actuarial sense unless the discount is applied to an actuarially sound rate. Both factors have led most private

$1,915 $1,914$1,857

$1,770$1,800

$1,900 The average homeowners insurance premium as of 12/31/09 is down $274 or 14% since 3/31/07

y pinsurers to reduce their presence in the state.

$1,770

$1,655 $1,634 $1,630 $1,641$1,647$1,666$1,710

$1 600

$1,700

$1,800 is down $274 or 14% since 3/31/07

$1,500

$1,600

07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4

The Passage HB1A in January 2007 and the Requirement to Provide Full Mitigation Discounts Since March 2007 Have

Caused a Dramatic Loss in Premium Income and Caused Many I t L M E With t M j H i St ik

15

*HO-3 policies, excluding Florida Citizens.Source: Quarterly Supplemental Reports (QUASR) filed with the FL OIR, prepared by, prepared by Security First Insurance; Insurance Information Institute.

Insurers to Lose Money Even Without a Major Hurricane Strike

Florida Home Insurance Rate Levels and Cumulative Change, 2007:Q1 vs. 2009:Q3

The average loss per policy $254.50 in 2007 to $421.22 in 2009, an

i f 65 5%

Rates fell approximately 30%

f 2007 Q1 th h

*All policy forms.

increase of 65.5%from 2007:Q1 through 2009:Q3

16

All policy forms.Source: Quarterly Supplemental Reports (QUASR) filed with the FL OIR, prepared by prepared by Security First Insurance; Insurance Information Institute.

Florida Non-Hurricane Homeowner Loss Experience, 2007 vs. 2009

The frequency and

The average loss per policy $254.50 in 2007 to $421.22 in 2009, an

i f 65 5%

The frequency and severity (cost) of claims in Florida is up sharply

(even excluding hurricane claims) while

increase of 65.5%

*All policy forms.

)premiums have fallen, leading to losses for

many insurers

17

All policy forms.Source: Quarterly Supplemental Reports (QUASR) filed with the FL OIR, prepared by prepared by Security First Insurance; Insurance Information Institute.

Hostile Regulatory EnvironmentHostile Regulatory Environment is Ultimately Anti-Consumer

Rate Suppression Leads to ppReduced Consumer Choice, Less Competition, Weakening Among

18

p , g gSome Insurers

U.S. Residual Market Exposure to Loss

$

$900

($ Billions)Katrina, Rita and Wil

Florida accounted f 64% f ll

$656.7$696.4

$639.0

$771.9

$600

$700

$800

4 Florida Hurricanes

Wilmafor 64% of all residual market

exposure in 2009

$281.8$244 2

$292.0

$372.3$430.5 $419.5

$300

$400

$500 Hurricane Andrew (1992)

$54.7

$150.0$221.3 $244.2

$100

$200

$300

$01990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*

In the 20-year period between 1990 and 2009, total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54.7

19

*Preliminary 2009 PIPSO data. Includes 2008 data for TX, SC, MD, DC, OR and WA (latest data available).Source: PIPSO; Insurance Information Institute (I.I.I.).

residual market (FAIR & Beach/Windstorm) Plans has surged from $54.7 billion in 1990 to approximately $639 billion in 2009.

Florida Citizens Exposure to Loss

$485.1$500

$600($ Billions)

Florida Citizens’ i i

$408.8

$485.1

$421.9 $406.0$400

$500 exposure in in recent years has

approach one-half trillion dollars

$154.6$195.5 $206.7 $210.6

$200

$300

$0

$100

$02002 2003 2004 2005 2006 2007 2008 2009*

Since its creation in 2002, total exposure to loss in Florida Citizens has increased by 163 percent from $154 6 billion to $406 billion in 2009

20

* Preliminary 2009 PIPSO figures.Source: PIPSO; Insurance Information Institute (I.I.I.).

increased by 163 percent, from $154.6 billion to $406 billion in 2009.

Is Florida America’s Greece?Is Florida America s Greece?

Florida is Very Dependent on y pVolatile Credit Markets, Exposing

the State to Instability

21

y

Overview of FHCF Claims-Paying Capacity Funding Sources, Assuming 100% TICL Take-Up, 2010

Heavy Reliance on

Borrowing accounts for the majority of the

yBorrowing Brings

Many Risks-Capacity shortfall

C dit k tFHCF’s theoretical/projected

claims paying capacity. A private reinsurer would be required to have the

-Credit market seizures

-Interest rate spikes-Vulnerability tobe required to have the

“money in the bank”-Vulnerability to global systemic

financial market risk-Credit risk

22

Source: Florida Hurricane Catastrophe Fund, Claims Paying Capacity, May 2010; Insurance Information Institute.

Bonding Capacity of the Florida Hurricane Catastrophe Fund, 10/08-5/10

$16$16

$18($ Billions)

The financial crisis and seizure of credit markets caused bonding authority

$11

$10

$12

$14caused bonding authority

to plunge in late 2008, implying a possible

funding shortfall of up to $19 billion

$8

$6

$8

$10

$3

$0

$2

$4

$0Oct. 2008 May-09 Oct. 2009 May-10

Bonding capacity has recovered since the 2008-2009 financial crisis, but Florida’s chosen method of post-event debt financing exposes the state unnecessarily to

t i i k i th l b l fi i l t R t l tilit t th i k

23Source: FHCF, Raymond James; Insurance Information Institute.

systemic risks in the global financial system. Recent volatility suggests the risk remains. The availability of private (re)insurance was not impacted by the crisis.

Principal and Interest Due on Existing FHCF Post-Event Tax-Exempt Debt, 2010-2016

$400

($ Millions)

($341 9)($378.5) ($375.2) ($363.1) ($373.7) ($375.7)

($349 9)

$72.4$95.8 $78.4 $63.1

$48.7 $33.3$16.4

$250

$300

$350($341.9) ( ) ($349.9)

$269.5 $282.7 $296.8 $300.0 $325.0 $342.5 $333.5$150

$200

$250

$0

$50

$100

$02010 2011 2012 2013 2014 2015 2016

Principal Interest

From 2010 through 2016, Florida homeowners, drivers and business owners will be assessed $2 6 billi ($2 15 i i i l d $408 2 illi i i t t) t f d bt i d d i

24

$2.6 billion ($2.15 in principal and $408.2 million in interest) to pay for debts incurred during the 2004 and 2005 hurricane season. Future storms could add to the burden. Future

generations will pay for the state’s approach to insurance decades in the past.Source: Florida Hurricane Catastrophe Fund, Claims Paying Capacity, May 2010; Insurance Information Institute.

Florida’s Government-Run I D d H ilInsurers Depend Heavily on

Subsidies

Drivers, Business Owners and People , pWho Don’t Own Homes Are All

Chipping In

25

pp g

State Residual Property Market Plan Deficits in 2004/2005

Mi i i i

2004 2005($ Millions)

Florida HurricaneCatastrophe Fund

( C ) C C

MississippiWindstorm

UnderwritingAssociation

( )

$516-$600-$400-$200

$0(FHCF) Florida Citizens Louisiana Citizens (MWUA)

-$1 425

-$954

-$595-$516

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

-$800$600

$1,425-$1,770-$2,000

-$1,800$1,600

The impact of Hurricane Katrina pushed all of the residual market

property plans in the affected states into deficits for 2005, following an already record

26

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

hurricane loss year in 2004.

Florida Hurricane Catastrophe Fund Assessment Base, 1990-2009

The FHCF’s assessment base is shrinking, which

could result in higher future

Only about 25% of the FHCF’s

$33.3B t

could result in higher future assessments in % terms

assessment base is

associated with homeowners

insurance—theinsurance the rest is auto and

business policies*

27

*The FHCF’s assessment base includes all p/c lines except workers compensation, medical malpractice, accident and health and federal flood.Source: Florida Hurricane Catastrophe Fund, Claims Paying Capacity, May 2010; Insurance Information Institute.

Florida Citizens Property Insurance Corporation Projected 2010 Assessment Base

($ Billions)Homeowners

$9.05 , 27%

$6.70 , 20%

All Other Lines%

$4.35 , 13% Commercial

$13.40 , 40%

Auto

Lines other than Homeowners Insurance Account for 80% of Citizens

Auto

28

Projected 2010 Assessment Base

*Citizens assessment base includes all p/c lines except workers compensation, medical malpractice, accident and health and federal flood.Source: Citizens Property Insurance Corporation, Presentation to the Florida Cabinet, April 13, 2010; Insurance Information Institute.

Florida Citizens: Estimated 2010 Claims-Paying Resources

No assessment for a 1-in-5 year

event; $8.6 million for a 1 inmillion for a 1-in-

25 year event

29Source: Citizens Property Insurance Corporation, Presentation to the Florida Cabinet, April 13, 2010; Insurance Information Institute.

Florida Citizens: Estimated 2010 Claims-Paying Resources

Assessments1-in-50: $2.964B

1 in 100: $10 996B1-in-100: $10.996B

30Source: Citizens Property Insurance Corporation, Presentation to the Florida Cabinet, April 13, 2010; Insurance Information Institute.

Insurance Information Institute Online:

www iii orgwww.iii.org

Thank you for your timed tt ti !and your attention!

Download at www.iii.org/presentationsg pTwitter: twitter.com/bob_hartwig

Documents

Elephants in the Room: Big Problems in Florida’sBig ... in 2010 FL’s population will hit 20 million by 2016 and will add 2.5 million residents between 2010 and 2020 (Millions)