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The Florida Property Market. Examination of the Marketplace After HB 1A. Tapio Boles, FCAS November 12, 2007. Agenda. How did we get here? How bad could it be? What does the future hold?. How did we get here? The Florida marketplace and HB 1A. - PowerPoint PPT Presentation
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The Florida Property Market
Examination of the Marketplace After HB 1A
Tapio Boles, FCAS
November 12, 2007
2
Agenda
How did we get here?
How bad could it be?
What does the future hold?
How did we get here?The Florida marketplace and HB 1A
4
Historical context for HB 1A(Hurricane Preparedness and Property Insurance Bill)
Problems began in 1992 with Hurricane Andrew $21.6B insured losses ($2005); 700,000+ claims Escalation in home and commercial property insurance prices
Issue resurfaced in 2004: Charlie, Frances, Ivan & Jeanne $23B in insured catastrophe losses; 2.3 million claims Large rate increases requested 100,000+ homeowners non-renewals issued Channeling of policies into expensive market of last resort
Issue exploded in 2005: Dennis, Katrina, Wilma $12B in insured losses; 1.2 million claims More large rate requests 125,000+ non-renewals Several insurers announce moratoria on new policies Failure of Poe Financial Group
5
There are three public insurance mechanismsfor Florida property
Citizens Property Insurance Company (Citizens) Originally the insurer of last resort for personal and
commercial properties in Florida Writes a variety of wind-only policies for
policyholders in high risk areas Today writes multiple peril coverage for
homeowners and commercial property
The Florida Hurricane Catastrophe Fund (FHCF) Provides reinsurance to Citizens and private carriers
The Florida Insurance Guaranty Association (FIGA) The guaranty fund for private insurers
6
Overview of HB 1A and subsequent legislation
Reduced rates and encouraged growth of Citizens
Expansion of FHCF with subsidized rates
Restrictions placed on private insurers writing business in Florida
Goal is to expand availability and reduce rates for policyholders
7
Effect of HB 1A on Citizens
Reduced rates Rolled back 2007 rate increases Freezes rates through year-end 2008 Rates no longer required to be actuarially sound Allows rates to be competitive with private insurance
Loosens eligibility requirements
Increases scope of coverage for non-wind, multi-peril, and commercial property insurance
Expanded Citizens’ assessment base to include most lines, including auto
8
Effect of HB 1A on the FHCF
Expansion of coverage layers
“Mandatory Cover” ~$16B xs $6B (similar to 2006)
Two new layers below mandatory FHCF layer Temporary Emergency Additional Coverage Option
(“TEACO”); ~$3B xs $3B Up to $10M for Limited Apportionment Companies
in Insurance Capital Build-up Incentive Program
Additional layers of cover above mandatory layer Temporary Increase in Coverage Limits (“TICL”):
Twelve options (up to ~$12B) of coverage above mandatory FHCF layer
9
Additional changes to the FHCF
Eliminates “rapid cash build-up factor” (25% load in rates)
Authorizes the State Board of Administration to purchase capital market instruments to back FHCF obligations (cat bonds, industry loss warranties, etc.)
Changes effective for 2007 wind season Scheduled to sunset in three years
10
Regulatory requirements and restrictions
Presumed factor filing for FHCF savings
Restricts appeal for disapproved rate filings
Requires notice of non-renewal to consumers and OIR at least 100 days prior to renewal date or June 1 (whichever earlier)
90 days to pay or deny claim
CEO/CFO/Chief Actuary certification that savings from Act passed through to consumers
Prohibits “excess insurer profits” over 10 year period
If company writes auto in FL and HO in another state, must write HO in FL effective 1/1/08
11
What does this mean?
Insurers are scaling back exposures
Citizens continues to grow
FHCF is expanded Crowding out of private capital from the FL market
Rates for Citizens and FHCF are inadequate by design
Citizens and FHCF are thinly capitalized
A major hurricane or series of storms could lead to substantial policyholder assessments
12
Citizens is now the largest property insurer in Florida, with more than 25% of the market
10
1314 14
22
27
12 12 13 1311
10
0%
5%
10%
15%
20%
25%
30%
2002 2003 2004 2005 2006 2007*
Mar
ket
Sha
re %
Citizens State Farm
Notes: Data for 2002-2006 from A.M. Best. Includes Special Property, Commercial Multiple Peril (Non-Liability), and Homeowners/Farmowners.* 2007 data projected based on Citizens’ 2007 Operating Budget and flat growth assumptions for private carriers.
13
Citizens is the second largest P/C insurer in Florida, responsible for 10% of all premiums written
3
44 4
8
10
1312 12
1211 11
76 6
7 7 7
0%
2%
4%
6%
8%
10%
12%
14%
2002 2003 2004 2005 2006 2007*
Mar
ket
Sha
re %
Citizens State Farm Allstate
Notes: Data for 2002-2006 from A.M. Best. Includes all lines from the P/C annual statement.* 2007 data projected based on Citizens’ 2007 Operating Budget and flat growth assumptions for private carriers.
How bad could it be?Analysis of assessment costs
15
Background on the assessment mechanisms
In the event of a major storm or series of storms, claims in excess of available cash resources will need to be financed via the issuance of bonds by Citizens, FHCF, and FIGA; the principal and interest on these bonds will be repaid by assessments on Florida policyholders Levied on various types of property/casualty
insurance, including homeowners, auto, commercial property, and liability
HB 1A expanded the overall exposure of Citizens and FHCF, increasing the potential amount and duration of assessments
16
Background on the assessment mechanisms (cont’d)
Bonds will be financed over the course of several years, and interest charges will add to the cost paid by policyholders
The potential cost to consumers will be felt two ways Directly through assessments on the homeowners
and auto insurance premiums consumers pay Indirectly, as business owners will pass on the cost
of assessments on their commercial insurance premiums to consumers through higher prices on goods and services
17
In the event of a major storm, most claim payments will be funded after-the-fact
10.1 10.4 10.9 12.4 15.0 17.625.8
9.914.6
24.1
31.434.5
37.4
54.2
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
1 in 20 1 in 30 1 in 50 1 in 70 1 in 85 1 in 100 1 in 250
Hurricane Probability
Bill
ion
s o
f Do
llars
Pre-event funding Post-event funding (assessments and bonds)
Notes: Pre-event funding includes funds available to Citizens, FHCF, and private carriers, plus contingent funding available through private reinsurance to pay claims in 2007. Post-event funding is on a present-value basis and does not include cumulative financing costs. Probabilities are expressed as “odds of a single storm of this magnitude or greater happening in the 2007 season”.
20.0
25.0
35.0
43.8
49.5
55.0
80.0
18
Potential long-term costs of 2007 hurricanes couldovershadow 2007 premium savings for consumers
7,855
4,956
4,694
4,416
3,503
1,486
1,005
6,116
3,752
3,497
3,219
2,528
1,066
721
265
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000
1 in 250
1 in 100
1 in 85
1 in 70
1 in 50
1 in 30
1 in 20
Savings
Hu
rric
an
e P
rob
ab
ility
Nominal Savings/Cost per Household
Savings Direct Costs Indirect Costs
Notes: Assumed average homeowners premium per household is $1,300 in 2007. Savings for 2007 premiums reflects 24.3% savings on hurricane costs, which are assumed to be 63% of total premiums. These savings are based on the statewide OIR estimate. Actual savings may be less. Direct costs include assessments paid by policyholders on homeowners and personal auto premiums. Indirect costs include assessments on commercial lines passed onto consumers through higher prices. Amounts expressed here are the nominal costs, or the total cost of borrowing including financing charges paid over the term of the bond.
This illustration does not contemplate the possibility of
hurricanes beyond 2007, which would further constrain
funding and result in additional assessments
19
Exposure to the nominal cost of future assessments and surcharges is not proportionate to savings…
Miami
Average Savings $1,120
Cost of 1-in-30 storm $3,375
Cost is 3 times average savings
Statewide Average
Average Savings $265
Cost of 1-in-30 storm $2,550
Cost is 10 times average savings
Tallahassee
Average Savings $20
Cost of 1-in-30 storm $2,000
Cost is 100 times average savings
…meaning that policyholders in lower risk areas would subsidize high-risk areas if a major event occurs.
Note: Cost includes direct assessments and indirect costs to repay bond principal and financing charges. This illustration assumes that homeowners rates in Miami, Orlando, Tallahassee and Tampa are 180%, 53%, 46% and 76% of statewide average premiums, respectively.
Tampa
Average Savings $100
Cost of 1-in-30 storm $2,300
Cost is 23 times average savings
Orlando
Average Savings $30
Cost of 1-in-30 storm $2,075
Cost is 69 times average savings
20
Annual assessments per average household would extend out thirty years under various scenarios(here, a 1 in 50 storm in 2007)
402
188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188
0
100
200
300
400
500
6002
00
7
20
08
20
09
20
10
20
11
20
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20
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Ave
rage
Dol
lar
Ass
essm
ent p
er H
ouse
hold
Citizens Regular Assessments Citizens Emergency Assessments FHCF Assessments
FIGA Regular Assessments FIGA Emergency Assessments
Note: Number of households is based on 2007 households and is not adjusted for population growth.
21
Annual assessments per average household would extend out thirty years under various scenarios(here, a 1 in 100 storm in 2007)
509
377 377 377 377 377 377 377 377 377 377
221 221 221 221 221 221 221 221 221 221 221 221 221 221 221 221 221 221 221 221
0
100
200
300
400
500
6002
00
7
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
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20
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20
28
20
29
20
30
20
31
20
32
20
33
20
34
20
35
20
36
20
37
Ave
rage
Dol
lar
Ass
essm
ent p
er H
ouse
hold
Citizens Regular Assessments Citizens Emergency Assessments FHCF Assessments
FIGA Regular Assessments FIGA Emergency Assessments
Note: Number of households is based on 2007 households and is not adjusted for population growth.
22
Annual assessments per average household would extend out thirty years under various scenarios(here, a 1 in 250 storm in 2007)
509
449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449
0
100
200
300
400
500
6002
00
7
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
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20
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20
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20
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20
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20
28
20
29
20
30
20
31
20
32
20
33
20
34
20
35
20
36
20
37
Ave
rage
Dol
lar
Ass
essm
ent p
er H
ouse
hold
Citizens Regular Assessments Citizens Emergency Assessments FHCF Assessments
FIGA Regular Assessments FIGA Emergency Assessments
Note: Number of households is based on 2007 households and is not adjusted for population growth.
What does the future hold?
24
Issues spread to other coastal states
New York has proposed to create a catastrophe reserve fund
New Jersey and Massachusetts are considering similar proposals
Connecticut’s attorney general recently accused reinsurers of conspiring to fix prices and allocate markets to eliminate competition
There is talk of creating a coalition of coastal states, from Texas to Maine, to speak with a unified voice to the insurance industry
25
A federal solution?
The “Put Option”: Expectation that the Federal Government will come to aid in the event of a major catastrophe
Expansion of the National Flood Insurance Program to cover windstorm losses
There is growing support for a national catastrophe fund
26
In round 1 of Florida roulette, the chamber was empty...
If there are no hurricanes, everyone wins Insurers win Policyholders win Lawmakers look like heroes
If the big one happens, everyone loses Insurers lose Public insurance system crumbles Policyholders are stuck with the bill
27
What are the fundamental issues?
Pre-event funding vs. post-event funding
Private vs. public reinsurance
Actuarial equity vs. cross subsidization By location Between insurance lines of business
Actuarially sound premiums vs. affordability
Insufficient risk pooling
Implications for coastal land use
Questions?