Hurricane Katrina: Impacts on the P/C Insurance & Reinsurance Industries

Hurricane Katrina:

Impacts on the P/C Insurance & Reinsurance

Industries

Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038

Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org

Midwest Actuarial ForumBloomington, IL

September 22, 2005

Presentation Outline

• P/C Financial Overview: A Position of Strength• Industry Claims-Paying Resources• Underwriting Performance pre-Katrina• Catastrophe Loss Management:

Loss estimate overview Hurricane Katrina’s place in historyLoss distribution (geographic & by line)Impact on financial & underwriting performanceInfluence of legal environment on Katrina claims

• National Flood Insurance Program Overview• Managing Natural CATs in a Post-9/11 World• Q & A

P/C Financial Overview

Strong Pre-Katrina Results Help Industry Meet the Challenge

P/C Net Income After Taxes1991-2005:H1 ($ Millions)*

$14,178

$5,840

$19,316

$10,870

$20,598

$24,404

$36,819

$30,773

$21,865

-$6,970

$3,046

$30,029$32,500

$20,559

$38,722

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05**ROE figures are GAAP; 2004 figure is return on average surplus. 2005 figure is estimateSources: A.M. Best, ISO, Insurance Information Institute.

2001 ROE = -1.2%

2002 ROE = 2.2%

2003 ROE = 8.9%

2004 ROE = 10.5%*

2004:H1 ROE = 15%E

Pre-Katrina profits were strong, helping industry cope with

mega-loss

“Record” 2004 profits wrongly cited

as reason why insurers should pay excluded flood losses

-5%

0%

5%

10%

15%

20%

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04

05H

1

05*

US P/C Insurers All US Industries

ROE: P/C vs. All Industries 1987–2005F*

*GAAP ROEs except 2004/5 P/C figure = return on average surplus. 2005 figure is III full-year estimate.Source: Insurance Information Institute; Fortune for all industry figures

2005 P/C ROAS = 11% after adjusting for Katrina

2005:H1 P/C ROAS = 15%

16.3 Pts.

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05*

ROE Cost of Capital

ROE vs. Equity Cost of Capital: US P/C Insurance: 1991 – 2005*

*First half 2005 estimate.Source: The Geneva Association, Ins. Information Inst.

-13.

2 p

ts

-9.0

pts

US P/C insurers missed their cost of capital by an average 6.3 points from 1991 to 2003

-1.7

p

ts

+0.

6 p

ts

+5.

0 p

ts

Because p/c insurers today generally are earning their cost of capital and are financially strong, they

should be able to readily access fresh capital if necessary.

P/C Insurers Stocks Remain Up, Brokers Up Too, Reinsurers Down

2.06%

-5.72%

-0.38%

3.32%

8.80%

14.30%

1.31%

-10% -5% 0% 5% 10% 15% 20%

S&P 500

Life/Health

All Insurers

P/C

Multiline

Reinsurers

Brokers

Source: SNL Securities, Standard & Poor’s, Insurance Information Institute

Total Return 2005 YTD Through September 16, 2005

P/C insurer stocks outperforming the

market despite Katrina

Reinsurers down more on Katrina news

4.2% 4.0%4.5%

3.8%

2.2% 2.5%3.3%

-4.0%-3.5%

-2.7%

-4.1%

-5.3%-4.5%

-5.7%-5.5%-6.4%

-4.8%-5.5%

-0.6%

1.9% 2.1%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

5-Aug 12-Aug 19-Aug 26-Aug 2-Sep 9-Sep 16-Sep

P/C Reinsurers Brokers

Source: SNL Securities; Insurance Information Institute

Change in YTD Stock Performance by Sector Pre- & Post-Katrina

P/C & reinsurer stocks hurt by Katrina, broker stocks rose on

expectation of tighter conditions and demand for broker services

Insurer Claims Paying Resources

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

75 767778 7980 818283 848586 8788 899091 9293 949596 979899 0001 02030405*

U.S. Policyholder Surplus: 1975-2005*

Source: A.M. Best, ISO, Insurance Information Institute *As of 3/31/05.

$ B

illi

ons

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

Capacity TODAY is $401.8 billion 21% above its mid-1999 peak and 44%

above its 2002 trough & will be able to pay Katrina claims.

PHS backs all lines of insurance in all states. PHS is not fungible and is frequently misunderstood and misused

US Reinsurers: Change in Policyholder Surplus ($ Billions)

$60.9$58.9 $57.9

$46.8$48.8

$73.0

$64.8

$40

$45

$50

$55

$60

$65

$70

$75

1998 1999 2000 2001 2002 2003 2004

$ B

illi

ons

Source: A.M. Best; Insurance Information Institute

Reinsurer PHS fell 20% from 1998-2002. Capacity today similar to 1998. Same story

globally.

UNDERWRITING

Strong Underwriting Results Pre-Katrina Will Help

Industry Weather the Storm

90

100

110

120

70

71

72

73

74

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

P/C Industry Combined Ratio*2001 = 115.7

2002 = 107.2

2003 = 100.1

2004 = 98.3

2005:H1 = 93*

Combined Ratios

1970s: 100.3

1980s: 109.2

1990s: 107.8

2000-05E: 103.9

Sources: A.M. Best; ISO, III. *2005 figure is III estimate.

The industry has just experienced its most remarkable recovery in

recent history. Katrina will partially reverse this

($55)

($45)

($35)

($25)

($15)

($5)

$5

$15

$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

E

Underwriting Gain (Loss)1975-2005E*

*2005 estimate is based on annualized actual 05Q1 underwriting profit of $7.1 billion.Source: A.M. Best, Insurance Information Institute

$ B

illi

ons

Before Katrina, p/c insurers were on track for only the second underwriting profit in 26 years

112.

5

110.

2

107.

6

103.

9

109.

7

112.

3

111.

1

122.

3

101.

9

102.

3

95

113.

1

103.

9

104.

5

103.

5

104.

9

99.8 10

2.7

104.

5

109.

9

110.

9

105.

3

98.4

94.3

91

110.

1

110.

3

90

95

100

105

110

115

120

125

92 93 94 95 96 97 98 99 00 01 02 03 04 05H1

Commercial--Net Basis Personal--Net Basis

Commercial vs. Personal Lines Combined Ratios, 1993-2005:H1*

Source: A.M. Best; Insurance Information Institute *III estimate for first half 2005.

Compression of results is due to

low interest. Underwriting is

now more important in

long-tail commercial lines. Katrina impact will be severe.

HurricaneAndrew

117.7

158.4

113.6118.4

112.7

121.7

101.0

108.2111.4

121.7

109.3

98.295.1

150

113.0109.4

90

100

110

120

130

140

150

160

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

Homeowners Insurance Combined Ratio

Average 1990 to 2004E= 114

Insurers have paid out an average of $1.15 in losses for every dollar earned

in premiums over the past 14 years

Sources: A.M. Best; III

Katrina will devastate the HO combined ratio

HurricaneAndrew

Homeowners Insurance:Rates of Return on Net Worth vs.

P/C Insurance All Lines

Source: NAIC, Insurance Information Institute

* Average is 1.22% if excluding 1992 (year of Hurricanes Andrew and Iniki.

-0.9%-6.6%

-54.3%

2.5%-1.7% -4.2%

3.8%

-7.2%

2.1%

10.0%5%

8.8% 9.6%4.5% 5.6%

8.7% 9.3%11.6%8.5% 6.0% 5.8%

-2.6%

9.4%11.5%

3.6%

12.4%

5.4%5.4%

4.4%

11.0%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

NAIC HomeownerMulti-Peril

P/C Insurance AllLines

Homeowners insurance consistently underperforms the p/c insurance generally

1990-2004EHomeowners: -1.7%All P/C Lines: +7.5%

110

.5

10

5.0 11

3.6 11

9.2

10

4.8

10

0.8

10

0.5

114

.3

10

6.5

12

5.8

111

.0

12

4.6

10

5.8

10

8.8 11

5.8

10

6.9

10

8.5

10

6.7

10

6.0

10

1.9

10

5.9

10

8.0

110

.1 115

.8

10

7.4

10

0.1

98

.3

93

16

2.4

12

6.5

90

100

110

120

130

140

150

160

170

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

Reinsurance All Lines Combined Ratio

Combined Ratio: Reinsurance vs. P/C Industry

* First half 2005 III estimate for all lines. RAA figure for 2005:H1

Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute

2001’s combined ratio was the worst-ever for reinsurers; 2002 was bad as well.

2003: Big improvement in primary and reinsurer segments

2004/5: CATs hurt reinsurers

HurricaneAndrew

UNDERWRITING AFFECTS FINANCIAL

STRENGTH

Is There Causefor Concern?

Reason for P/C Insolvencies(218 Insolvencies, 1993-2002)

Unidentified17%

Impaired Affiliate3%

Overstated Assets2%

Change in Business3%

CAT Losses3%

Reinsurer Failure0%

Rapid Growth10%

Discounted Ops8%

Alleged Fraud3%

Deficient Loss Reserves

51%

Source: A.M. Best, Insurance Information Institute

Reserve deficiencies account for

more than half of all p/c insurers

insolvencies

Historical Ratings Distribution,US P/C Insurers, 2000 vs. 2004

A/A-50.2%

D0.2%C++/C+

2.1%

E/F3.5% A++/A+

8.6%

C/C-0.6%

B++/B+25.8%

B/B-9.1%

Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report, November 8, 2004.

A/A-48.4%

D0.2%C++/C+

1.9%

E/F2.3% A++/A+

11.5%

C/C-0.6%

B++/B+28.3%

B/B-6.9%

2000 2004 A++/A+ shrinkage

115.1 115.4

122.8

100.6

141.4

90

100

110

120

130

140

150

160

99 00 01 02 03

US

Re

ins

ure

r C

om

bin

ed

Ra

tio

Reinsurer Combined Ratio

Rating-Large (PHS>$250M)

US Reinsurer Combined Ratio vs. Median Rating, 1999-2003*

*Combined ratio is for all US reinsurers. Rating is for large reinsurers (policyholder surplus exceeding $250 million). The median rating for small reinsurers (PHS<$250M) was A- throughout the 1999-2003 period.

Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report, November 8, 2004.

A+A++A+AA-B++B+B

A A A A

Are ratings related to performance?

P/C Insurers Maintaining Rating of A+ or Better Rating for 50+ Years

P/C Company1. AIU Insurance Co.2. Alfa Mutual Ins. Co.3. Amica Mutual Ins. Co.4. Church Mutual Ins. Co.5. Federal Insurance Co.6. General Reinsurance Corp.

7. Great Northern Ins. Co.8. Lititz Mutual Ins. Co.9. Nationwide Mutual Fire Co.10. Otsego Mutual Fire11. Pharmacists Mutual Ins. Co.12. Quincy Mutual Fire Ins. Co.13. State Automobile Mutual Ins. Co.14. State Farm Mutual Auto Ins. Co.15. Vigilant Insurance Co.

Group Affiliation1. American International Group2. Alfa Insurance Group3. Amica Mutual Group4. None5. Chubb Group of Ins Cos.6. Berkshire Hathaway Ins. Group7. Chubb Group of Ins Cos.8. Lititz Mutual Group9. Nationwide Mutual Group10. None11. None12. Quincy Mutual Group13. State Auto Ins. Group14. State Farm Group15. Chubb Group of Ins Cos.

Source: Best’s Review, January 1, 2004.

PRICING TRENDS

Will Katrina & Rita Harden Markets?

-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

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

Strength of Recent Hard Markets by NWP Growth*

Real NWP Growth During Past 3 Hard Markets

1975-78: 8.6%

1984-87: 11.2%

2001-04: 6.9%

1975-78 1984-87 2001-04

*2005 figure is III forecast based on 05Q1 result.

Premium growth is faltering. Real growth in 2005 will be NEGATIVE

$668$691

$706 $704$683 $687

$720

$774

$834$857 $870

$600

$650

$700

$750

$800

$850

$900

$950

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

Average Expenditures on Auto Insurance

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

Countrywide auto insurance expenditures are expected to

rise 1.5% in 2005

Will the “big guys” stay disciplined? So

far, so good. Will adopt tiering to avoid

adverse selection

$418$440

$455$481 $488

$508$536

$593

$636$660

$677

$400

$450

$500

$550

$600

$650

$700

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

Average Expenditures on Homeowners Insurance

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

Countrywide home insurance expenditures

are expected to rise 2.5% in 2005

14

%1

1% 13

% 16

% 19

% 22

%2

8% 3

1%

31

%2

8% 30

% 32

%3

3%

28

%2

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% 32

%3

0%

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%2

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%1

8%

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%1

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7%

7%

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2%

2%

2%

1%

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-1%

-2%

-2%

-3%

9%

9%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

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Source: MarketScout.com

Commercial Premium Rate Changes Are Sharply Lower

Is moderation due to realization of performance and profit goals, increasing capacity/ capital, or market- share strategies?

Average Rate Change, All Lines,(1Q:2004 – 2Q:2005)

-0.1%

-3.2%

-7.0%

-9.4% -9.7%

-5.9%

-12%

-10%

-8%

-6%

-4%

-2%

0%

1Q04 2Q04 3Q04 4Q04 1Q05 2Q05Source: Council of Insurance Agents & Brokers; Insurance Information Institute

Magnitude of rate decreases accelerated during the first half of 2005, but flattened out in Q2

Rate Changes by Line,2nd Qtr. 2005

-13.3%

-6.8%-7.3%

-9.1%

-6.6%

-3.8%

-0.5%

-3.6%

-8.4%

-6.0%

-3.8%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

Comm Prop BizInterruption

Comm Auto WC GL Umbrella EPL D&O Surety Const. ALL Lines

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

Magnitude of rate decreases flattened out during the second quarter of 2005

Average Commercial Rate Change by Account Size

Commercial accounts have trending downward for 4-5

quarters, with large commercial leading the way.

Now starting to flatten.

Cumulative Quarterly Rate Change by Account Size

At which point do the reductions become destructive?

Commercial rates are well off their late 2003 peaks for accounts of

all size and are approximately where they were in mid-2002

CATASTROPHE LOSS

MANAGEMENT

Focus on Hurricane Katrina

2005 Has Been a Busy, Destructive & Expensive Hurricane Season

Source: WeatherUnderground.com, 9/22/05.

Hurricane Katrina Insured Loss Estimates Still Vary Widely

$14 - $22B

$17 - $25B

$40 - $60B

$0 $10 $20 $30 $40 $50 $60

Eqecat

AIR

RMS

(Billions of $, As of September 11, 2005)

*Rising material costs, e.g., plywood rose 38% and framing lumber by 14% through Sept. 16, 2005.Sources: RMS, AIR, Eqecat; Compiled by the Insurance Information Institute.

RMS estimate predicts $15-$25B in privately insured flood losses, mostly commercial

(modeled after the event)

Typically unmodeled losses: Demand surge*, LAE, debris removal, tree damage, mold, spoilage, power outage, off-premises

power loss, flood, fraud, civil authority, assessments, pollution, litigation

Breakdown of RMS $40-$60 Billion Loss Estimate

Type of Loss Low High

Windstorm & Surge $20 $25

Flood, private (not incl. NFIP)* $15 $25

Off Shore Energy, Marine $2 $5

Misc., Possible Pollution $2 $3

1st Landfall (FL) $1 $2

TOTAL $40 $60*Primarily commercial flood and associated business interruption losses.Sources: RMS; Adapted from Responding to Katrina, Lane Financial LLC, Sept. 16, 2005.

Summary of Facts About Insured Losses Regarding Katrina

• As of 9/15/05: 35 companies announced pre-tax loss estimatesAnnounced loss total: $11.8B to $13.0BThis works out to about 35% of the mid-range

insured loss estimate of $35 billion$35B loss is 8.7% of US PHS; $60B is 14.9%

• Announced Company Loss Estimates:High: $2.55 billion; Low: $2 millionUpper loss est. % of 2Q:05 Equity: 0.2% to 46.1%

• At least 20 companies put on watch for possible downgrades by various ratings agencies

• Many Lines Affected: Extreme eventsloss correlations increase

(As of September 20, 2005)

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Distribution of Announced Hurricane Katrina Losses ($ Millions)*

Sources: Morgan Stanley, Company Reports

As of September 15, 35 companies had announced pre-tax losses totaling between

$10.7 and $11.9 billion, about 32% of a mid-range industry loss estimate of $35 billion

*If company gave range estimate, upper end is used.

**After-tax figure. $900 million after reinsurance recoverables.

(As of September 15, 2005)

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swa

y

Announced Hurricane Katrina Losses as % 2Q:05 Equity*

Sources: Morgan Stanley, Company Reports

Reported losses as a share of US P/C insurance

industry surplus ranged from 0.2% to 46.1%.

*If company gave range estimate, upper end is used.

NA

NA

NA

Median = 5.1%

Insured Loss Estimates as a % US Policyholder Surplus*

7.5%8.7%

10.0%11.2%

12.4%13.7%

14.9%

$10

$20

$30

$40

$50

$60

$70

$30 $35 $40 $45 $50 $55 $60

Size of Industry Loss ($ Billions)

Siz

e o

f In

du

str

y L

os

s

0%

2%

4%

6%

8%

10%

12%

14%

16%

% o

f U

S P

/C P

HS

Industry Loss % of PHS*

*Policyholder surplus as of 3/31/05 of $401.8 billion (ISO).

Source: Insurance Information Institute.

Hurricane Katrina:

Her Place in History

Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2004)

$2.2 $2.6 $3.4 $3.7 $4.6$6.4 $7.1 $7.5

$20.9

$35.0

$0

$5

$10

$15

$20

$25

$30

$35

$40

Floyd(1999)

Opal(1995)

Georges(1998)

Jeanne(2004)

Frances(2004)

Hugo(1989)

Ivan (2004)

Charley(2004)

Andrew(1992)

Katrina(2005)*

$ B

illi

ons

*Estimate as of September 9, 2005 in 2005 dollars.Sources: ISO/PCS; Insurance Information Institute.

Five of the 10 most expensive hurricanes in US history occurred in the past 13

months: Katrina, Charley, Ivan, Frances & Jeanne

Top 10 Insured PropertyLosses in US ($2004)

$3.4 $3.7 $4.6$6.4 $7.1 $7.5

$15.9$20.1 $20.8

$35.0

$0

$5

$10

$15

$20

$25

$30

$35

$40

$ B

illi

ons

*Estimate, stated in 2005 dollars.Note: 9/11 loss figure is for property claims only.Sources: ISO/PCS; Insurance Information Institute.

Six of the 10 most expensive disasters is US history occurred within

the past 4 years

Top 11 Insured Property Losses Worldwide, 1970-2005 ($2004)*

$5.0 $6.4 $6.6 $6.6 $7.8 $8.0$11.0

$15.9$20.0 $21.5

$35.0

$0

$5

$10

$15

$20

$25

$30

$35

$40

$ B

illi

ons

*All figures are for total losses across all locations, not just US. Katrina loss est. is preliminary and stated in 2005 dollars.Sources: ISO/PCS; Swiss Re, “Natural Catastrophes and Man-Made Disasters in 2003,” Sigma, no.1, 2004

Five of the 11 most expensive disasters is world history affected the US within the

past 4 years.

Government Aid After Major Disasters (Billions)*

$68.4

$20.0$15.5 $14.0

$10.8$7.6 $7.0

$3.1

$0

$10

$20

$30

$40

$50

$60

$70

$80

HurricaneKatrina(2005)*

Sept. 11Terrorist

Attack (2001)

NorthridgeEarthqauke

(1994)

FloridaHurricanes

(2004)

HurricaneAndrew(1992)**

Loma PrietaEarthquake

(1989)

MidwestFloods (1993)

HurricaneHugo (1989)

$ B

illi

ons

*In 2005 dollars.**Actual Congressional authorizations approved as of 9/21/05. Includes $6.1B in special tax breaks.Source: Economy.com, White House; Insurance Information Institute.

Hurricane Katrina aid will dwarf aid following all

other disasters. Congress may authorize $150-$200 billion ultimately (about $400,000 for each of the

500,000 displaced families). Is the incentive to buy

insurance and insure to value diminished?

Within 10 days of Katrina’s LA landfall, the federal

government had authorized more aid than for the 9/11

terrorist attacks, the 4 hurricanes that hit FL in 2004, Hurricane Andrew

and the Northridge Earthquake combined!

Hurricane Katrina:

Loss Distribution

Hurricane Katrina Loss Distribution by Line ($ Billions)*

Offshore Energy, $5.0 , 14%

Personal Auto, $2.0 , 6%

Homeowners, $16.8 , 48%

Comm. Multi Peril, $11.2 , 32%

*As of September 9, 2005Source: Merrill-Lynch

Total insured losses could be as high as $35 billion

Number of Homes Destroyedby Major Hurricanes*

28,000 27,500

275,000

0

50,000

100,000

150,000

200,000

250,000

300,000

Andrew (1992) Charley, Frances, Ivan,Jeanne (2004)

Katrina (2005)

Katrina appears to have destroyed 10 times as many homes as Andrew in 1992 or the 4 storms to hit Florida and the Southeast in 2004

*Destruction is defined as a structure made uninhabitable or damaged beyond economic repair. Source: National Association of Home Builders, National Red Cross (as of 9/15/05).

Personal Property Losses Accounted for Largest Share Damage from

2004 Hurricanes*

56%

4%

40%

Source: ISO/PCS; Insurance Information Institute.

Charley

63%

4%

33%

Ivan

66%

4%

30%

Frances

73%

4%

23%

Jeanne

Personal Property

63%

Vehicle

4%

Comm. Property

33%

TOTAL

*Breakdowns based on FL losses, which accounted for 85% of losses for all affected states.

Hurricane Katrina Loss Distribution by State ($ Billions)*

Louisiana, $24,500 , 70%

Mississippi, $7,000 , 20%

Alabama, $3,500 , 10%


Louisiana accounted for 70% of the insured losses

Louisiana: Hurricane Katrina Loss Distribution by Line ($000)*

Offshore Energy, $3,500 , 14%

Personal Auto, $1,400 , 6%

Homeowners, $11,760 , 48%

Comm. Multi Peril, $7,840 , 32%


Louisiana insured losses are estimated at $24.5 billion

Average Annual Insured Losses*(Top 10 States, $ Millions)

$1,423.0

$615.0

$196.0$109.0 $77.0 $64.0 $62.0 $61.0 $61.0 $51.0

$154.0

$0

$250

$500

$750

$1,000

$1,250

$1,500

FL TX LA NC MS MA SC AL NY CT AllOther

*Normalized losses adjusted for inflation, housing density, wealth and wind insurance coverage, based on historical data for 100-year period 1900-1999.Source: Tillinghast-Towers Perrin

Florida49.5%

Texas 21.4%

All Other15.7%

Mississippi2.7%

N. Carolina

3.8%

Louisiana6.8%

Distribution of Annual Losses

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

1984-2004E¹

Terrorism9.7%

All Tropical

Cyclones3

34.1%

Tornadoes2

31.3%

Water Damage0.2%

Civil Disorders0.4%

Fire6

2.9%

Wind/Hail/Flood5

3.6%

Earthquakes4

8.2%

Winter Storms9.6%

Source: Insurance Information Institute estimates based on ISO data.

1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2004 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 $221.3 billion

from 1984-2004 (in 2004 dollars). After 2005

season will be more 50% tropical cyclones

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

$1,901.7$740.0

$662.4$505.8

$404.9$209.3

$148.8$129.7$117.1$105.3

$75.9$73.0

$46.5$45.7$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

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

Hurricane Katrina:

Exacting a Toll on Underwriting

Performance & Profits

U.S. InsuredCatastrophe Losses ($ Billions)

$7.5$2.7$4.7

$22.9

$5.5

$16.9

$8.3$7.4$2.6

$10.1$8.3$4.6

$26.5

$5.9

$12.9

$27.5

$39.9

$0$5

$10$15$20$25$30$35$40

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05**As of 6/30/05 plus $920 in insured for Hurricane Dennis in July, $35 billion (est.) for Hurricane Katrina in August and $800 million (AIR est.) for Hurricane Ophelia in September.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.Source: Property Claims Service/ISO; Insurance Information Institute

$ Billions2005 will be by far the worst year ever for insured catastrophe losses in

the US. 2004 is the second worse.

-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*

US P/C Insurers All US Industries P/C excl. Hurricanes

ROE: P/C vs. All Industries 1987–2005E

Source: Insurance Information Institute; Fortune

Andrew Northridge

Hugo Lowest CAT losses in 15 years

Sept. 11

2004/5 ROEs excl. hurricanes

4 Hurricanes

Katrina

Legal Environment Will Affect

Katrina’s Outcome

Business Leaders Ranking of Liability Systems for 2005

Best States1. Delaware2. Nebraska3. North Dakota4. Virginia5. Iowa6. Indiana7. Minnesota8. South Dakota9. Wyoming10. Idaho

Worst States41. Hawaii42. Florida43. Arkansas44. Texas45. California46. Illinois

47.Louisiana48.Alabama49. West Virginia

50.Mississippi

Source: US Chamber of Commerce 2005 State Liability Systems Ranking Study; Insurance Info. Institute.

New in 2005

ND, IN, SD, WY

Drop-Offs

ID, UT, NH, KS

Newly Notorious

HI, FL

Rising Above

MO, MT

LA, AL and MS’s liability systems are

ranked among the worst in the country by the US Chamber of Commerce

The Nation’s Judicial Hellholes

Source: American Tort Reform Association; Insurance Information Institute

CALIFORNIA

Los Angeles County

Orleans Parish, LA

Jefferson County, TX

South Florida

Philadelphia, PA

Hampton County, SC

ILLINOIS

Madison County

St. Clair County

West Virginia

It’s bad news for insurers that Orleans Parish, Louisiana, is one

of the nation’s “judicial hellholes”

Legal Theories Being Floating by Trial Bar to Get Insurers to Pay Excluded Flood Losses

• Valued Policy Law Idea is that if property is a total loss the insurer cannot dispute the value of the

property and must pay limits. Insurers will argue that flood is an excluded peril and VPL doesn’t apply. Insurers lost Mierzwa case in FL, but FL provided a legislative “fix” for that wayward court decision. Could result in policyholders with flood coverage receiving 200% of limits. Applies only to insureds with flood cover. VPL for fire only in MS, none in AL.

• Wind Efficient Proximate Cause of Surge Says that because surge was driven by wind and because wind is a covered cause

of loss, it is the efficient proximate cause of the flood and should therefore should be triggered.

Also alleges storm surge is not specifically excluded by name

• Barge Breach Levee A barge crashed into one levee, causing it to rupture. Theory is that this is a

covered cause of loss because it’s not excluded (even though damage produced a flood).

Relevant Homeowners Insurance Policy Language Governing Water Damage

• Wind and Hail Coverage (a named peril)

• Flood Exclusion

• FEMA/NFIP Flood Definition

• Fungus & Mold Exclusion

• Earth Movement Exclusion

Source: Insurance Information Institute

Wind Coverage in HO Policy:Limits and Boundaries of Coverage

• Wind and Hail Coverage ( Named Peril) Windstorm or Hail “We do not pay for loss to the interior of a

building or to personal property inside, caused by rain, snow, sleet, sand or dust unless the wind or hail first damages the roof or walls and the wind forces rain, snow, sleet, sand or dust through the opening.”


Typical Flood Exclusion in Homeowners Insurance Policy

• Flood Exclusion Water Damage, meaning any loss caused by, resulting from,

contributed to or aggravated by:1. flood, surface water, waves, tidal water or overflow of any body of water,

or spray from any of these, whether or not driven by wind.2. Water or water-borne material which backs up through sewers or drains, or

which overflows or is discharged from a sump pump, sump pump well or other system that is designed to remove subsurface water which is drained from the foundation area; or

3. Water or water-borne material below the surface of the ground, including water which exerts pressure on, or flows, seeps or leaks through any part of a building, sidewalk, foundation, driveway, swimming pool or other structure or water that causes earth movement.This exclusion applies whether or not the water damage is caused by or results from human or animal forces or any act of nature.

Facts About the Flood Exclusion

• Has existed in policies for decades

• Flood Exclusion is effectively absolute—excluding water under all circumstances

• It is the reason for the existence of FEMA’s NFIP program since it was established in 1968

• Approved by regulators in all 50 statesSource: Insurance Information Institute

NFIP Flood Definition: Covers Exactly What HO Policies Don’t

• "A general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or of two or more properties (at least one of which is the policyholder's property) from:

Overflow of inland or tidal waters; or Unusual and rapid accumulation or runoff of surface waters

from any source; or Mudflow; or Collapse or subsidence of land along the shore of a lake or

similar body of water as a result of erosion or undermining caused by waves or currents of water exceeding anticipated cyclical levels that result in a flood as defined above."

Source: FEMA/National Flood Insurance Program: http://www.floodsmart.gov/floodsmart/pages/whatflood.jsp.

Typical Fungus & Mold Exclusion in Homeowners Insurance Policy

• Fungus and Mold Exclusion

“We do not cover loss or damage, no matter how caused, to the property which results directly or indirectly from fungus and mold. There is no coverage for loss which, in whole or in part, arises out of, is aggravated by, contributed to by acts or omissions of persons, or results from fungus and mold. This exclusion applies regardless of whether fungus and mold arises from any other cause of loss, including but not limited to a loss involving water, water damage or discharge, which may be otherwise covered by this policy, except as granted [by exception].”


Relevant Homeowners Insurance Policy Language Governing Water Damage

• Earth Movement Exclusion Applies to any loss caused by, resulting from, contributed to or

aggravated by events that include, but are not limited to:1. Earthquake and earthquake aftershocks;2. Volcanic eruption and volcanic effusion;3. Sinkhole;4. Subsidence;5. Mudslide including landslide, mudflow, debris flow, avalanche or

sediment;6. Erosion or excavation collapse;7. The sinking, rising, shifting, expanding, bulging, cracking, settling or

contracting of the earth, soil or land; and8. Volcanic explosion and lava flow except [by exception]

This exclusion applies whether or not the earth movement is combined with water or caused by or results from human or animal forces or any act of nature.

Consequences of Mississippi AG’s Actions

• Sept. 15 suit by MS AG Hood constitutes and attempt to retroactively rewrite all HO insurance contracts in MS. “Contract certainty” extinguished.

• Suit amounts to little more than an attempt to expropriate shareholder assets (and the equity of mostly non-MS policyholders of mutual insurers)

• The risk is fundamentally political, cannot be modeled or priced

• Insurers will necessarily be motivated to protect shareholder equity (and claims paying resources generally). Reinsurers will exert pressure too.

• Also continues dangerous trend of AG assertion of authority over state insurance regulators


Consequences if Coverage Rulings Went Against Insurers

• Creates dangerous precedent of contract abrogation• Effectively renders flood exclusion null and void & usurps

authority of state insurance regulator• Creates enormous financial liability for explicitly excluded

peril for which no premium was collected• HO insurance rates countrywide become instantaneously

inadequate Would provoke largest homeowners insurance rate in history on a national

basis

• Insurers would likely pull back from many markets because of lack of contract certainty

• Renders NFIP program useless• Unfair to NFIP policyholders and other insureds


MS AG and Scruggs Suits Not Supported by Governor or Regulator

• Recent Quotes:

“It’s crucial that people who enter contracts keep their contracts. And that’s what an insurance policy is, a contract….For those people [who didn’t buy flood coverage] we are working very hard that if they don’t have insurance or don’t have coverage, that we can up with a way to help them financially.” Mississippi Governor Haley Barbour, WSJ, 9/19/05, p.C9.

“The insurance industry can take care of so many, the flood insurance program can take care of so many…but there are still others out there that do not fit under either of these.” Mississippi Insurance Commissioner George Dale, WSJ, 9/19/05, p.C9.

Status of Litigation Against Insurers on Flood vs. Wind Issue

• MS Atty. General Hood: Called actions of insurers “unconscionable.” Filed an unsuccessful order for

immediate injunctive relief against 5 insurers seeking to stop them from drawing wind/water distinction. Suit was remanded to a federal court because it makes reference to NFIP. Will likely die there soon.

• Scruggs Case: Stated that will he bring suits against insurers in MS week of 9/19/05. Because of recent tort reform changes in MS, Scruggs can’t bring a class action,

has to try cases individually. Says he will take “drastically” reduced contingency fee Failure of AG suit should kill Scruggs’ case. FYI: Scruggs’ Pascagoula home was heavily damaged. He had flood coverage.

• Louisiana Suit Suit is like MS. LA Supreme Court looking at it as contract law case Likely to be resolved soon in insurers favor

FEMA’s National Flood Insurance

Program

NFIP: Policies in Force and Total Coverage (Exposure)

2.5 2.62.8

3.0

3.53.7

4.1 4.2 4.3 4.4 4.5 4.64.5 4.7$764.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

91 92 93 94 95 96 97 98 99 00 01 02 03 04

Pol

icie

s in

For

ce (

Mill

ions

)

$200

$300

$400

$500

$600

$700

$800

Total C

overage ($ Billions)

Policies in Force Total Coverage (Exposure)

Sources: FEMA, National Flood Insurance Program (NFIP)

Nearly 5 million property owners per year buy

NFIP policies

The NFIP insured property with a total value of $764.5 billion in

2004

NFIP: Total Premium by Calendar Year 1978-2004

$0.1

$0.1

$0.2 $0

.3$0

.4$0

.4$0

.4$0

.5$0

.5$0

.6$0

.6$0

.6$0

.7$0

.7$0

.8 $0.9 $1

.1 $1.3 $1

.5 $1.7

$1.7

$1.7

$1.7

$1.8 $1

.9 $2.1

$1.0

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

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

Source: FEMA, National Flood Insurance Program (NFIP)

$ Billions

The NFIP now collects more than $2 billion

annually in premiums

NFIP: Policies in Force By Coverage Type (As of July 31, 2005)

Building Coverage Only,

39.7%

Contents Coverage Only,

1.5%

Both Bldg. & Cont. Cvg,

58.7%


Coverage Type Policies in Force

Building Coverage Only 1,845,481

Contents Coverage Only 72,008

Both Bldg & Cont Cvg 2,729,267

All Policies 4,646,756

NFIP: Policies in Force By Occupancy Type (As of July 31, 2005)

2 to 4 Family Unit3.4%

Other Residential

3.0%

Non-Residential

4.6%

Single Family Home68.5%

Condos 20.5%


Occupancy Type Policies in Force

Single Family Home 3,184,010

2 to 4 Family Unit 158,124

Condominiums 951,240

Other Residential 138,583

Non-Residential 214,799

Unknown Occupancy --

All Policies 4,646,756

NFIP: No. of Losses Paid by Calendar Year 1978-2004

37,6

5936

,271

25,2

2043

,503

16,3

4747

,22057

,338

30,3

3352

,67862

,440

36,0

4444,6

5128

,554

14,7

6636

,247

7,75

813

,399

13,7

8938

,675

27,6

8851

,584

32,8

3123

,261

41,9

1870

,613

29,1

22

21,5

83

01000020000300004000050000600007000080000

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


No. of Losses

NFIP: Loss Dollars Paid by Calendar Year 1978-2004

$147

.7$4

83.3

$230

.4$1

27.1

$198

.3 $439

.5$2

54.6

$368

.2$1

26.4

$105

.4$5

1.0

$661

.7$1

67.9 $3

53.7

$710

.2$6

59.1

$1,2

95.5

$828

.0$5

19.5

$886

.0$7

54.8

$251

.5$1

,276

.4$4

32.5

$759

.8$1

,207

.2

$411

.10

200

400

600

800

1000

1200

1400

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


$ Millions

NFIP: Average Cost of Claim By Calendar Year 1978-2004


Average Cost of Claim

$5,0

72$6

,844

$5,4

96$5

,464

$6,0

40 $8,5

20$9

,195

$9,5

20$9

,167

$7,8

66$6

,574

$18,

255

$11,

371

$12,

387

$15,

906

$18,

286

$19,

047

$20,

748

$15,

718

$17,

127

$15,

103

$15,

985

$15,

385

$29,

341

$17,

149

$20,

948

$32,

056

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

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

The average cost of a flood claim in 2004 was $32,056. The

average premium was $438.

NFIP: Insurance In Force By Month (As of July 31, 2005)

$784.7$773.4

$768.5$756.7

$756.7$751.4

$745.8$740.5$731.7

$722.7$711.2

$792.3

$660

$680

$700

$720

$740

$760

$780

$800

Aug-04

Sep-04

Oct-04

Nov-04

Dec-04

Jan-05

Feb-05

Mar-05

Apr-05

May-05

Jun-05

Jul-05


$ Billions

Average Premium Preferred Risk Policy* For Buildings with Basement Under NFIP

$136$162

$204$231

$262$278

$293$330

$351

$0

$50

$100

$150

$200

$250

$300

$350

$400

$20,000 $30,000 $50,000 $75,000 $100,000 $125,000 $150,000 $200,000 $250,000

Building deductible: $500. Contents deductible: $500. Deductibles applied separately.

*Under the NFIP a low-cost Preferred Risk Policy is available to homeowners located in low- to moderate-risk areas.Sources: FEMA, National Flood Insurance Program (NFIP)

Average Premium

Average Premium Preferred Risk Policy* For Buildings without Basement

Under NFIP

$111$137

$179$206

$232$248

$263$295

$316

$0

$50

$100

$150

$200

$250

$300

$350

$20,000 $30,000 $50,000 $75,000 $100,000 $125,000 $150,000 $200,000 $250,000

Building deductible: $500. Contents deductible: $500. Deductibles applied separately.

*Under the NFIP a low-cost Preferred Risk Policy is available to homeowners located in low- to moderate-risk areas.Sources: FEMA, National Flood Insurance Program (NFIP)

Average Premium

Policy Retention Rates, As OfJuly 31, 2005

88.3%

90.8% 91.0%91.6%

90.6%

92.0% 91.9%91.2% 90.9% 91.0%

85.5% 85.5%

Aug-04

Sep-04

Oct-04

Nov-04

Dec-04

Jan-05

Feb-05

Mar-05

Apr-05

May-05

Jun-05

Jul-05


Retention rates in the NFIP are poor, with 10-15% of policyholders allowing policies to lapse annually.

Total Claim Payments by State (Top 10) Jan 1, 1978 - Dec. 2004

$ Millions

$2,702.0

$2,226.7

$1,727.3

$687.2$419.9 $384.4 $377.8 $276.6

$422.6$473.4$598.2

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

TX FL LA NC NJ PA SC MO VA AL MS


Louisiana and Alabama rank 3rd and 10th

respectively in terms of total claims payments. Mississippi ranks 13th.

Managing Natural Catastrophes in aPost-9/11 World

L James Valverde, Ph.D., Director, Economics & Risk Management

The National Strategy for Homeland Security and the Genesis of DHS

• In the wake of 9/11, President Bush issued the National Strategy for Homeland Security in July 2002

• Legislation creating the U.S. Department of Homeland Security (DHS) was signed in November 2002

• The creation of DHS represents a fusion of numerous federal agencies, with the objective of coordinating and centralizing the leadership of the nation’s homeland security activities under a single, cabinet-level department

Began operations in March 2003

22 separate agencies

Approximately 180,000 employees

DHS Organizational Structure: FEMA’s Place in the Larger Context of Homeland Security

The National Strategy for Homeland Security

• The National Strategy for Homeland Security describes six critical missions areas:

Intelligence and Warning

Border and Transportation Security

Domestic Counterterrorism

Protecting Critical Infrastructure and Key Assets

Defending Against Catastrophic Threats

Emergency Preparedness and Response

• The President has also issued several additional documents – so-called Homeland Security Presidential Directives (HSPD) – that provide more detailed guidance on various homeland-security-related mission areas and initiatives

Emergency Preparedness and Response: Key Elements of the National Strategy

For the Emergency Preparedness and Response mission area, the National Strategy identifies 12 separate initiatives:

1. Integrate separate federal response plans into a single all-discipline incident management plan

2. Create a national incident management system

3. Improve tactical counter terrorist capabilities

4. Enable seamless communication among all responders

5. Prepare health care providers for catastrophic terrorism

6. Augment America’s pharmaceutical and vaccine stockpiles

Emergency Preparedness and Response: Key Elements of the National Strategy (cont.)

7. Prepare for chemical, biological, radiological, and nuclear decontamination

8. Plan for military support to civil authorities

9. Build the Citizen Corps

10. Implement the First Responder initiative of the FY03 budget

11. Build a national training and evaluation system

12. Enhance the victim support system

FEMA: Past, Present, and Future

“Two years ago in a lecture at the Naval Postgraduate School … I told students that FEMA was not capable of adequately responding to a major hurricane, let alone a catastrophic terrorist attack. My comments were based on an assessment that morale at FEMA was then the worst since the agency was created. The very people the nation depended on to help out during our time of greatest need were being demoralized by an indifferent, inexperienced leadership that neither understood emergency management nor had the skills to ensure the agency had the resources to meet its all-hazard mission.”

“Those who think we have overemphasized terrorism in the wake of September 11, should be concerned with a knee-jerk reaction to Katrina. What we need is balance. We must be prepared to respond to both terrorism and natural disasters. The FEMA I know is capable of rising to the occasion and accomplishing both missions.

Mike WalkerFormer FEMA Deputy DirectorThe Washington Times, 13 Sept. 2005

National Planning Scenarios

The Homeland Security Council has developed 15 all-hazard planning scenarios for use in national, federal, state, and local homeland security preparedness activities:

1. Nuclear Detonation – 10-Kiloton Improvised Nuclear Device

2. Biological Attack – Aerosol Attack

3. Biological Disease Outbreak – Pandemic Influenza

4. Biological Attack – Plague

5. Chemical Attack – Blister Agent

6. Chemical Attack – Toxic Industrial Chemicals

7. Chemical Attack – Nerve Agent

National Planning Scenarios (cont.)

8. Chemical Attack – Chlorine Tank Explosion

9. Natural Disaster – Major Earthquake

10. Natural Disaster – Major Hurricane

11. Radiological Attack – Radiological Dispersal Devices

12. Explosives Attack – Bombing Using Improvised Explosive Device

13. Biological Attack – Food Contamination

14. Biological Attack – Foreign Animal Disease (Foot and Mouth Disease)

15. Cyber Attack

Mismanagement of Emergency Preparedness and Response Can Impact the Economic Losses

Associated with Natural Disasters

• Clearly, there is a relationship between response time and “recovery time” and the economic losses associated with a natural catastrophe such as Hurricane Katrina Business interruption losses increase with response lag Fires burn uncontrolled Failed law enforcement, rioting and looting Delayed flood drainage Untimely mitigation of environmental release/contamination etc.

• While precise estimates of this relationship will require future empirical study, a couple of points are worth considering in light of Katrina: A key responsibility for P/C insurers is to play their important and substantial role in

the risk mitigation process It is important for federal, state, and local officials to understand and appreciate the

role that insurance can play in both minimizing loss and expediting recovery Both P/C insurers and property owners, alike, have a vested interested in seeing that

the overall system works as best as possible

Insurance Information Institute On-Line

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Documents

Hurricane Katrina: Impacts on the P/C Insurance & Reinsurance Industries