Insurance Markets Issues, Concerns, Solutions Robert P. Hartwig, Ph.D., CPCU, President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038 Insurance Information Institute South Carolina Media & Legislative Briefing April 2, 2007 DOWNLOAD AT http:// www.iii.org/media/met/scbriefing /
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South Carolina Property Insurance Markets Issues, Concerns, Solutions
South Carolina Property Insurance Markets Issues, Concerns, Solutions. Insurance Information Institute South Carolina Media & Legislative Briefing April 2, 2007 DOWNLOAD AT http://www.iii.org/media/met/scbriefing/. Robert P. Hartwig, Ph.D., CPCU, President & Chief Economist - PowerPoint PPT Presentation
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South Carolina Property Insurance Markets
Issues, Concerns, Solutions
Robert P. Hartwig, Ph.D., CPCU, President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038
Insurers Share the Concern of SC Home & Business Owners
PROPERTY OWNERS ECONOMIC CONCERNS• The price of residential and commercial property insurance has
risen rapidly in coastal SC since 2004• Insurance options for some homeowners have dwindled as some
have scaled backed exposure to coastal zones• At the same time property taxes are rising in many communities• The run-up in real estate prices in some areas has dramatically
increased the cost of owning a home• Many homeowners adjustable rate mortgages are seeing their
interest rate locks expire and are now paying higher interest rates on their mortgages
Bottom Line
The cost of owning property in South Carolina is rising and home & business owners feel economically squeezed
Any Solution Must Emerge from a Common Set of Facts
FACTS ABOUT SOUTH CAROLINA PROPERTY MARKETS• South Carolina has more than $150 billion in insured coastal exposure, more
than three times that of Mississippi• Coastal property exposure values are expected to increase rapidly over the
next decade• South Carolina’s coastal population is growing rapidly• South Carolina (and all other Gulf/Atlantic states) will experience above-
average hurricane activity for the next 15-20 years • South Carolina is vulnerable to major hurricanes, as Hurricane Hugo
proved, the cost of which is nearly $7 billion in today’s dollars• Improvements in building codes and mitigation technologies have been
proven to substantially reduce wind damage from hurricanes• The current method for financing hurricane-related losses results is an
economic burden for some property owners, but at the same times leaves private and state-run insurers with large operating deficits
• Ultimately, risk will need to be the primary determinant of the price of insurance
Elements of a Shared Solution Arising from a Common Set of Facts
TOWARD A LONG-TERM SOLUTION FOR S. CAROLINA’S INSURANCE• Insurance in South Carolina’s coast areas needs to be more available and
affordable• Stronger homes are safer homes and stronger homes (and businesses) cost less
to insurance, offer their owners a higher quality of life and are a key part of any solution
• Strengthening of building codes and mitigation must be encouraged• Land use policies have a clear role to play in limiting future storm damage• Stronger homes, increased use of mitigation technologies and smarter land use
policies will lower insurance losses and costs for home/businesses owners• State tax policy can be used to provide mitigation incentives• Spread of risk on a global scale is important
Reinsurance, securitization (CAT bonds) can help achieve this objective• Insurance capital should be encouraged to flow into SC’s insurance markets• The price of insurance must eventually reflect the risk of that property
This will dramatically reduce the need for assessments, diversion of tax revenues or the need for the state to borrow heavily after a major hurricane
CATASTROPHIC LOSSES
Catastrophic Losses in the US: Upward Trend is Certain
Most of US Population & Property Has Major CAT Exposure
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. 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.Source: Property Claims Service/ISO; Insurance Information Institute
$ Billions
2006 was a welcome respite. 2005 was by far the worst
year ever for insured catastrophe losses in the US, but the worst has yet to come.
$100 Billion CAT year is coming soon
Hugo
South Carolina Insured Catastrophe Losses, 1954 - 2005*
*Figure for 2000s is extrapolated based on data for 2000-2005 (6 major storms: Charley, Ivan, Jeanne (2004) & Katrina, Rita, Wilma (2005)).Source: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm.
10
1930s – mid-1960s:
Period of Intense Tropical Cyclone Activity
Mid-1990s – 2030s?
New Period of Intense Tropical Cyclone Activity
Tropical cyclone activity in the mid-1990s entered the active
phase of the “multi-decadal signal” that could last into the 2030s
Already as many major storms in
2000-2005 as in all of the 1990s
Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,
1986-2005¹
Utility Disruption0.1%
Terrorism7.7%
All Tropical
Cyclones3
47.5%
Tornadoes2
24.5%
Water Damage0.1%
Civil Disorders0.4%
Fire6
2.3%
Wind/Hail/Flood5
2.8%
Earthquakes4
6.7%
Winter Storms7.8%
Source: Insurance Services Office (ISO)..
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2005 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 $289.1 billion from
1984-2005 (in 2005 dollars). Tropical systems accounted for nearly half of all CAT losses from 1986-2005, up
from 27.1% from 1984-2003.
SOUTH CAROLINA HURRICANE RISK
Potential for a Loss Several Times Hugo Looms Large
Total Value of Insured Coastal Exposure (2004, $ Billions)
$1,901.6$740.0
$662.4$505.8
$404.9$209.3
$148.8$129.7$117.2$105.3
$75.9$73.0
$46.4$45.6$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
South Carolina had nearly $150 billion in
insured coastal exposure in 2004
(56% commercial, 44% residential)
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
*III listSource: AIR Worldwide
Who’s to Blame*
1. State & local zoning, land use and building code officials
2. State & local legislators
3. State-run property insurers, pools & plans
4. Washington, DC
5. Property owners
Value of Insured Commercial Coastal Exposure (2004, $ Billions)
Net Tropical Cyclone Activity 100% 275% 185%*Average over the period 1950-2000.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 3, 2007.
Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2007
Average* 2007F
Entire US Coast 52% 74%
US East Coast Including Florida Peninsula
31% 50%
Gulf Coast from FL Panhandle to Brownsville, TX
30% 49%
ALSO…Above-Average Major Hurricane
Landfall Risk in Caribbean for 2007
*Average over the period 1950-2000.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 3, 2007.
Landfall Probabilities by Region & Intensity, 2007*
89%
71%62%
54%40% 40%
93%
72% 74%
99%92% 90%
56%
79%
64%
0%
20%
40%
60%
80%
100%
120%
Entire US Gulf Coast Florida plus EastCoast
Tropical Storm CAT 1-2 HurricaneCAT 3-4-5 Hurricane All HurricanesNamed Storms
Landfall probabilities
and intensities up everywhere
*Figures in parentheses represent averages over the past 100 years.Source: Dr. William Gray, Colorado State University, December 8, 2006.
(79%
)
(68%
)
(52%
)
(84%
)
(97%
)
(59%
)
(42%
)
(30%
)
(60%
)
(83%
)
(50%
)
(44%
)
(31%
)
(61%
)
(81%
)
What Role Should the Federal Government
Play in Insuring Against Natural Disaster Risks?
South Carolina’s Coastal Plan
• Spreading recognition that FL actions were fiscally reckless and did nothing to reduce state’s vulnerability
• SOUTH CAROLINA: Gov. Mark Sanford announced a coastal insurance relief plan March 22, referring to FL’s actions as a “knee-jerk” reaction
• SC legislation uses tax incentives to reduce risk to property and lower the cost of insurance
Tax deductions for catastrophe savings accounts Tax credits for disaster mitigation Tax credits for lower income property owners paying more than 5% of their
income in insurance premiums Tax-free savings accounts for homeowners who carry very large deductibles
or create accounts to “self insure” Tax credits for insurers writing full coverage for coastal dwellers Tax credits for homeowners who buy supplies to retrofit homes making them
more hurricane resistant Require insurers to offer discounts to people who mitigate
Sources: Insurance Information Institute from 3/22/07 press release, Office of Governor Mark Sanford.
Major Residual Market Plan Estimated Deficits 2004/2005 (Millions of Dollars)
* MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in Federal Aid.Source: Insurance Information Institute
-$516
-$1,425
-$1,770
-$954
-$595 *
-$2,000-$1,800-$1,600-$1,400-$1,200-$1,000
-$800-$600-$400-$200
$0
Florida HurricaneCatastrophe Fund
(FHCF) Florida Citizens Louisiana Citizens
Mississippi WindstormUnderwriting
Association (MWUA)
2004 2005
Hurricane Katrina pushed all of the residual market property plans in
affected states into deficits for 2005, following an already record hurricane loss year in 2004
NAIC’s Comprehensive National Catastrophe Plan
• Proposes Layered Approach to Risk• Layer 1: Maximize resources of private
insurance & reinsurance industry Includes “All Perils” Residential Policy Encourage Mitigation Create Meaningful, Forward-Looking Reserves
• Layer 2: Establishes system of state catastrophe funds (like FHCF)
• Layer 3: Federal Catastrophe Reinsurance Mechanism
Source: Insurance Information Institute
Comprehensive National Catastrophe Plan Schematic
Personal Disaster Account
Private Insurance
State Regional Catastrophe Fund
National Catastrophe Contract Program
Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.
State Attachment
1:50 Event
1:500 Event
Legislation has been introduced and ideas
espoused by ProtectingAmerica.org will likely get a more
thorough airing in 2007/8
INSURER PROFITABILITY:
SOUTH CAROLINA
Selling Home Insurance in Coastal Areas is Challenging
Cumulative Underwriting Gain (Loss) in SC Homeowners Insurance,1985-2005
Source: A.M. Best; Insurance Information Institute.
$ M
illi
ons
On a cumulative basis, insurers remained in the red in the SC
homeowners insurance market 16 years after Hurricane Hugo struck in 1989. It is likely that insurers finally came close
to break even in 2006.
The Facts About Homeowner Insurer Profits and Losses in SC
• During the period from 1985 through 2005, home insurers in SC paid $324 million more in claims than they received in premiumsThis $324 million underwriting loss remains even after 5
consecutive profitable years (2001-2005) It is likely that home insurers in 2006 came close to the
breakeven point for the 22 year period 1985-2006 after including 2006 profits.
If there are no storms in 2007, homeowners insurers will be in the black on a cumulative basis for the first time in more than 20 years
• SC Remains a Difficult Proposition for Most Home Insurers in Terms of ReturnThe average annual rate of return on SC homeowners
insurance was -15.4% from 1985-2005
WHERE YOUR PREMIUM DOLLAR GOES
Bad CAT Year vs.Low CAT Year
PremiumsSelling Expenses
Taxes, Licenses & FeesGeneral Operating
Expenses
Invested Assets
(premiums invested until needed to pay claims
Claims Payments/Losses
Company
Profit/Loss
Reserve Additions/ Releases
Net Worth
(Policyholder Surplus) Source: American Insurance Association,Insurance Information Institute.
Where the SC Premium Dollar Comes From & Where it Goes: 1989 (Hugo)
*Includes temporary living expenses.
Source: Insurance Information Institute from A.M. Best data.
Premiums
$1,000 95%
Investment
Gain$51 5%
Revenue Sources
Total Revenue = $1051
PaymentsTotal Payout = $5548
In a bad year, insurers may
pay out 5+ times what they earn
in premiums and investments
Other Expense
$160 3%
Loss & Loss Adjustment
Expenses Incurred*
$5,203 93%
Selling Expense
$150 3%
Taxes, Fees$35 1%
Where the SC Premium Dollar Comes From & Where it Goes: 2004
*Includes temporary living expenses.
Source: Insurance Information Institute from NAIC Report on Profitability by Line by State, 2004.
Premiums
$1,000 96%
Investment
Gain$39 4%
Revenue Sources
Total Revenue = $1039
PaymentsTotal Payout = $850
In a good year, an insurer might earn $200-$300 for each
$1000 received in premium, including investment gains
Loss Adjustment Expenses*
$57 7%
Fed Taxes$91 11%
Taxes, Fees$33 4%
Losses Incurred
$407 48%
Divs. To Policyholders
$3 0%
General Expense
$45 5%
Selling Expense
$214 25%
Share of Losses Paid by Private Reinsurers, by Disaster*
30%25%
60%
20%
45%
0%
10%
20%
30%
40%
50%
60%
70%
Hurricane Hugo(1989)
Hurricane Andrew(1992)
Sept. 11 TerrorAttack (2001)
2004 HurricaneLosses
2005 HurricaneLosses
*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for 2005.Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.
Reinsurance is playing an increasingly
important role in the financing of mega-CATs; Reins. Costs
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2008F
*2006-8 P/C insurer ROEs are I.I.I. estimates.Source: Insurance Information Institute; ISO, A.M. Best.
1975: 2.4%
1977:19.0% 1987:17.3%
1997:11.6%
2006E:14.0%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years
10 Years 9 Years
Industry Profitability Benefits Insurance Consumers
• Profits compensate shareholders for the assets they put at risk and encourages new capital to enter
• Profitable companies can access capital markets under favorable terms after mega-CATs or if market conditions are poor (e.g., post-9/11); Others will fail, are dissolved or acquired
• Preferred treatment by reinsurers• Profits lead directly to increased capacity• Profits build contingent capacity for mega-CATs• Profitable companies have higher financial strength and
credit ratings
Key Messages on Profitability
• All of the profits earned in 2004 and 2005 and most of the
profits in 2006 were earned in states and from types of
insurance unaffected by the hurricanes
• 2006’s respite in hurricane activity provides insurers with the
ability to rebuilding their claims paying resources
• By law, the rates charged for insurance are based exclusively on
past and expected losses in that state. Profits in other states or
from other types of insurance cannot be used to subsidize losses
in the SC homeowners insurance market. Likewise, losses in
other states cannot be subsidized by South Carolinians