Insurance & Incentives Insurance & Incentives for Mitigationfor Mitigation

Coastal Cities SummitSt. Petersburg, FL

May 2, 2012

Lynne McChristian, Florida RepresentativeInsurance Information Institute 4775 E. Fowler Ave. Tampa, FL 33617

4

Top 16 Most Costly World Insurance Losses, 1970-2011**

(Insured Losses, 2011 Dollars, $ Billions)

*Average of range estimates of $35B - $40B as of 1/4/12; Privately insured losses only.**Figures do not include federally insured flood losses.Sources: Swiss Re sigma 1/2011; Munich Re; Insurance Information Institute research.

$11.9$13.0 $13.0$13.1

$19.1$21.3

$24.0$25.0

$37.5

$47.6

$7.7 $8.1 $8.3 $8.5 $9.3 $9.7

$0$5

$10$15$20$25$30$35$40$45$50

Hugo (1989)

WinterStormDaria(1991)

ChileQuake(2010)

Ivan (2004)

TyphoonMirielle(1991)

Charley(2004)

Wilma(2005)

ThailandFloods(2011)

NewZealandQuake(2011)

Ike (2008)

Northridge(1994)

SpringTornadoes/

Storms(2011)

WTC TerrorAttack(2001)

Andrew(1992)

JapanQuake,

Tsunami(2011)*

Katrina(2005)

5 of the top 14 most expensive

catastrophes in world history have occurred within the past 2 years

Taken as a single event, the Spring 2011 tornado and

thunderstorm season would likely become the 5th

costliest event in global insurance history

5

Top 14 Most Costly Disastersin U.S. History

(Insured Losses, 2011 Dollars, $ Billions)

*Losses will actually be broken down into several “events” as determined by PCS. Includes losses for the period April 1 – June 30.Sources: PCS; Insurance Information Institute inflation adjustments.

$9.0$11.9 $13.1

$19.1$21.3

$24.0 $25.0

$47.6

$8.5$7.7$6.5$5.5$4.4$4.3

$0$5

$10$15$20$25$30$35$40$45$50

Irene(2011)

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Northridge(1994)

SpringTornadoes& Storms*

(2011)

9/11Attack(2001)

Andrew(1992)

Katrina(2005)

Taken as a single event, the Spring 2011 tornado and storm season are

is the 4th costliest event in US insurance history

Hurricane Irene became the 11th most expense

hurricane in US history

Number of Federal Disaster Declarations, 1953-2012*

13 1

7 18

16

16

7 71

21

22

22

0 25

25

11

11

19

29

17

17

48

46

46

38

30

22 2

54

22

31

52

42

13

42

7 28

23

11

31

38

45

32 3

63

27

54

46

55

04

54

5 49

56

69

48 5

26

37

55

98

19

91

1

43

0

20

40

60

80

100

120

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

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

06

07

08

09

10

11

12

*Through April 10, 2012.Source: Federal Emergency Management Administration: http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute.

The Number of Federal Disaster Declarations Is Rising and Set New Records in 2010 and 2011

The number of federal disaster declarations set a

new record in 2011, with 99, shattering 2010’s record 81

declarations.

There have been 2,056 federal disaster

declarations since 1953. The average

number of declarations per year is 34 from

1953-2010, though that few haven’t been

recorded since 1995.

11 federal disasters were declared

through Apr. 10, 2012

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What’s wrong with these pictures?

Bay St. Louis, LA

Building and rebuilding in vulnerable areas.

Average Square Footage of Completed New Homes in U.S., 1973-2011*

1,66

01,

695

1,64

51,

700

1,72

01,

755

1,76

01,

740

1,72

01,

710

1,72

51,

780

1,78

51,

825 1,90

5 1,99

52,

035

2,08

02,

075

2,09

52,

095

2,10

02,

095

2,12

02,

150

2,19

02,

223

2,26

62,

324

2,32

02,

330

2,34

9 2,43

42,

469

2,52

12,

519

2,43

82,

389

2,51

8

1,500

1,700

1,900

2,100

2,300

2,500

2,700

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 06 07 08 09 10 11*

*2011 figure is weighted average square feet of completed homes in first three quarters of 2011Source: U.S. Census Bureau: http://www.census.gov/const/www/quarterly_starts_completions.pdf; Insurance Information Institute.

Square Ft

The trend toward building larger homes reversed from2008 - 2010, affecting exposure growth beyond the decline in number of units built. Rising again in

2011.

The average size of completed new homes often falls in recessions

(yellow bars), but historically bounces back in expansions

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The average size of completed new homes fell by 147 square feet (5.75%) from 2008-2010. This was the largest recession-based drop in nearly four decades.

9

State Population Growth Rate Projections, 2010-2020*

*based on 2000 census. Source: http://www.census.gov/population/www/projections/projectionsagesex.html Table 7

The Mountain West region is projected to grow the most from now to 2020 (up 17.6%), followed by the South Atlantic (up 14.5%) and Pacific (up 11.2%).The Mid-Atlantic is projected to be the slowest-growing region (up 1.9%).

28.3

%

27.4

%

21.6

%

16.2

%

15.2

%

14.8

%

14.6

%

14.5

%

13.6

%

13.1

%

12.4

%

11.3

%

8.7%

2.5%

2.5%

2.3%

2.1%

2.0%

1.9%

1.6%

0.7%

0.6%

0.4%

-1.0

%

-1.5

%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

NV AZ FL

TX

UT ID NC

DE

WA

GA

OR

VA

US IL

MS LA WY

SD NE

PA NY

OH IA

ND

WV

Projected Population Growth

Highest Growth Rate States

Lowest Growth Rate States

U.S. overall: +8.7%

Risk signals: Not paying attention or paying the price?

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Annual growth in U.S. residual market exposure is averaging close to 18 percent.

Most state-run programs charged rates that do not fully reflect the risk of loss, potentially discouraging private market involvement and mitigation.

FAIR & Beach/Windstorm Plans:

1990 2010

Exposure $54.7 billion $757.9 billion

# of Policies 931,550 2.8 million

Sources: PIPSO, Insurance Information Institute, Government Accountability Office

First steps to incentivize mitigation

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Allow insurance rates to signal risk.

In theory…..

Rates should inform people of the hazards they face.

They should encourage cost-effective mitigation.

In practice….

Coastal homeowners may get “special treatment” because their rates are subsidized by inland dwellers.

A quest for “affordable” rates masks structural and location factors that should bring rates to reflect this risk.

The “insurance effect”

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If premiums are not based on risk, people will invest less in mitigation.

• There is a relationship between availability/pricing of insurance and personal investment in risk reduction.

• Insurance can be a substitute for mitigation.

• It’s complicated!

o There are nonfinancial risks, i.e., lives lost.

o Forecasting science is imperfect.

o Insurers may not be able to efficiently separate risk zones from condition of housing stock and mitigation investments.

Attitudes toward risk

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Some people are more risk averse than others.

• Others underestimate the probability.

“We’ve never had a hurricane hit here before.”

• Personal hurricane experience matters – to a point.

• Peer pressure to “keep up with the Joneses”.

• Demographic differences with higher mitigation participation from whites than from non-whites.

How to incentivize for mitigation

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Give property owners a financial stake.

Accurately set the risk and mitigation-based insurance premium.

Involve financial institutions in subsidizing mitigation costs.

Provide short-term benefits (2-3 years) or delayed costs.

Educate about the true risk and cost of insurance.

Provide feedback on mitigation participation by neighborhood.

Target low-income individuals and minorities with subsidized mitigation programs.

Source: FSU Storm Risk Management Center, “Home Hardening Incentive Program” Report

Financing local mitigation programs

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Preferred Methodof Repayment

Homeowners Local Government

Tied to the Property

71% 19%

Upward property tax adjustment

39% 6%

Long-term property tax assessment

32% 13%

Tied to the Homeowner

15% 70%

Upward current mortgage adjustment

9% 36%

Additional mortgage 6% 34%

Other 14% 11%

Total 100% 100%

Homeowners and local governments have different views.

Source: FSU Storm Risk Management Center

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