The Challenge of Communicating Flood Risk 2006 National Flood Conference National Flood Insurance Program May 9, 2006 Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist Insurance Information Institute ♦ 110 William Street ♦ New York, NY 10038 Tel: (212) 346-5520 ♦ Fax: (212) 732-1916 ♦ [email protected]♦ www.iii.org
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The Challenge of Communicating Flood Risk · Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist Insurance Information Institute ♦110 William Street ♦New York,
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The Challenge of Communicating Flood
Risk2006 National Flood Conference
National Flood Insurance Program
May 9, 2006
Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief EconomistInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038
*Value of property damage by flood and storm surge whether or not insured.Source: AIR Worldwide, September 29, 2005.
Hurricane Katrina caused $44 billion in flood and storm
surge damage, most of it uninsured, 88.1% of it in
Louisiana
Media Coverage of Flood Insurance, 2000-2006E*
10,526
4,647
146
655
349
479
2005
13,242
5,772
171
456
804
1,518
2006E
3,368
2,177
36
231
55
124
2003
6,377
2,994
65
463
45
122
2004
3,1282,7142,761
US-All Print Media**
1,9191,8821,961US*
343864NY161227215FL
262020MS108111 76LA
200220012000State
*Newspaper coverage as of May 8, 2006. 2006 is III estimate.**Includes newspapers, magazines, wire services, etc.Source: Insurance Information Institute analysis based on Nexis search.
1,96
1
1,88
2
1,91
9
2,17
7
2,99
4 4,64
7 5,77
2
2,76
1
2,71
4
3,12
8
3,36
8
6,37
7
10,5
26
13,242
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
2000 2001 2002 2003 2004 2005 2006E
US* US-All Print Media**
Media Coverage of Flood Insurancein the US Overall, 2000-2006E*
US newspaper coverage of flood insurance rose an
estimated 165% between 2003 and 2006 and rose 293%
across all print media
*Newspaper coverage as of May 8, 2006. 2006 is III estimate. **Includes newspapers, magazines, wire services, etc. Source: Insurance Information Institute analysis based on Nexis search.
76 111 108 124 122
479
1,518
20 20 26 55 45
349
804
0
200
400
600
800
1,000
1,200
1,400
1,600
2000 2001 2002 2003 2004 2005 2006E
LA MS
Media Coverage of Flood Insurancein LA & MS, 2000-2006E*
*Newspaper coverage as of May 8, 2006. 2006 is III estimate. Source: Insurance Information Institute analysis based on Nexis search.
Media coverage of flood insurance in Louisiana rose an
estimated 1,144% between 2003 and 2006 and 1,362% in
Mississippi. Coverage rose 165% for the US overall.
215 227161
231
463
655
456
0
100
200
300
400
500
600
700
2000 2001 2002 2003 2004 2005 2006E
Media Coverage of Flood Insurancein Florida, 2000-2006E*
*Newspaper coverage as of May 8, 2006. 2006 is III estimate. Source: Insurance Information Institute analysis based on Nexis search.
Media coverage of flood insurance in Florida rose an
estimated 184% between 2003 and 2005 but may fall
by 30% in 2006
64
38 34 36
65
146
171
0
20
40
60
80
100
120
140
160
180
2000 2001 2002 2003 2004 2005 2006E
Media Coverage of Flood Insurancein New York State, 2000-2006E*
*Newspaper coverage as of May 8, 2006. 2006 is III estimate. Source: Insurance Information Institute analysis based on Nexis search.
Media coverage of flood insurance in New York State
rose an estimated 175% between 2003 and 2006
27% 29
%
44%
28% 32
%
48%
31%34
%
34%
49%
34%
25%
22%
17%
24%
19%
33%
32%
43%
33%
42%
18%
19%
25%
25%
21%
44%47
%
33% 35
%
0%
10%
20%
30%
40%
50%
60%
Los Angeles Bay Area Sacramento San Diego CentralValley
Flood Earthquake WildfireSlides Storms Tsunami
California Hazards: % People Stating Prepared/Very Prepared
Source: Insurance Information Network of California Survey, February 2006.
The Flood Insurance Purchase
& Retention Decision
Flood Insurance is a Tough Sell
$756
.7
$756
.7
$768
.5
$773
.4
$784
.7
$792
.3
$801
.9
$811
.1 $828
.5 $851
.5
$860
.6
$870
.2
4.58 4.59 4.60 4.60
4.65 4.664.68
4.73
4.78 4.804.83
4.85
$680
$700
$720
$740
$760
$780
$800
$820
$840
$860
$880
Mar-05
Apr-05
May-05
Jun-05
Jul-05
Aug-05
Sep-05
Oct-05
Nov-05
Dec-05
Jan-06
Feb-06
Insu
ranc
e in
For
ce ($
Bill
ions
)
4.40
4.45
4.50
4.55
4.60
4.65
4.70
4.75
4.80
4.85
4.90
Polic
ies
in F
orce
(Mill
ions
)
Insurance in Force ($B)
Number of Policies
Flood Insurance in Force,March 2005-February 2006
Source: FEMA/NFIP web site accesses 5/8/06: http://www.fema.gov/business/nfip/statistics/stats.shtm.
NFIP policy count is up 6% Mar. 2005 – Feb. 2006. Exposure is up 15.0%
88.3
% 90.8
%
91.0
%
91.6
%
90.6
%
92.0
%
91.9
%
87.5
%
88.8
%
89.3
% 92.1
%
92.0
%
93.2
%
92.7
%
93.2
%
93.1
%
90.6
% 92.5
%
84.6
%
75%
80%
85%
90%
95%
100%
Aug-04Sep
-04Oct-
04Nov-0
4Dec
-04Ja
n-05Feb
-05Mar-
05Apr-0
5May
-05Ju
n-05Ju
l-05
Aug-05Sep
-05Oct-
05Nov-0
5Dec
-05Ja
n-06Feb
-06Flood Insurance Retention Rates,
March 2005-February 2006
Flood insurance retention rates are a problem. Program lapse rate is too
high. Customer acquistion is expensive.
Source: FEMA/NFIP web site accesses 5/8/06: http://www.fema.gov/business/nfip/statistics/stats.shtm.
28%
61%
22%
60%
49%
1%1%3%
0.6% 0.4%0%
10%
20%
30%
40%
50%
60%
70%
Northeast South Midwest West Overall US
In SFHA*Out of SFHA
NFIP Flood PolicyPenetration Rates, by Region
*Special Flood Hazard Areas.Source: The National Flood Insurance Program’s Market Penetration Rate:Estimates and Policy Implications, RAND, 2006.
While nearly half of people
outside SFHAspurchase flood coverage, only
1% outside SFHAs do
Flood Insurance Penetration Rates:Top 25 Counties/Parishes in US*
81.5%80.0%
78.7%77.1%
74.1%69.6%
68.4%68.1%
66.7%65.9%65.5%
62.4%59.0%
56.2%51.6%
49.6%48.0%
46.3%44.4%
42.8%42.8%42.0%41.9%
40.1%
84.0%
0% 20% 40% 60% 80% 100%
JEFFERSON/LAWALTON/FL
BROWARD/FLCOLLIER/FL
LEE/FLGALVESTON/TX
GLYNN/GAST. BERNARD/LAMIAMI-DADE/FL
ORLEANS/LACARTERET/NC
ST. CHARLES/LAST. JOHNS/FL
CHARLOTTE/FLST. TAMMANY/LA
HORRY/SCINDIAN RIVER/FL
BAY/FLBRUNSWICK/NC
NASSAU/FLBERKELEY/SC
PINELLAS/FLBRAZORIA/TXCHATHAM/GA
TERREBONNE/LA
Highest flood insurance penetration rates are in LA and FL, but most
are underinsured
No counties in the Northeast
are represented in Top 25
*As of 12/31/05.Source: New Orleans Times-Picayune, 3/19/06, from NFIP and US Census Bureau data.
*As of 12/31/05.Source: New Orleans Times-Picayune, 3/19/06, from NFIP and US Census Bureau data.
MS coastal counties
rank abysmally
low
Barnstable is only county in all of New England among Top 75
16%
56%
66%
0%
10%
20%
30%
40%
50%
60%
70%
Under 500 501 - 5,000 More Than 5000
Proportion of Homes Buying Flood Insurance by No. of Homes in SFHA*
Communities with few SFHAs are the most likely to not
buy flood insurance
*Special Flood Hazard Areas.Source: The National Flood Insurance Program’s Market Penetration Rate:Estimates and Policy Implications, RAND, 2006.
Factors Influencing NFIP Flood Penetration Rates
• Price• Change in Price• Number of Homes in a Community’s Special Flood
Hazard Area (SFHA)Mandatory purchase requirements less vigorously enforced in communities with fewer structures in SFHAsQuestions about enthusiasm in selling or knowledge of agents regarding program
• Coastal Flooding PotentialPenetration rate much higher for coastal communities subject to flooding versus those that are not (63% vs. 35%)
• Mandatory Purchase RequirementSource: The National Flood Insurance Program’s Market Penetration Rate:Estimates and Policy Implications, RAND, 2006.
Reasons Why People BuyFlood Insurance
Mortgage Lender Requirement, 27%
Not Near Water, But Don't Want to Take
Chances, 29%
Agent/Broker Recommendation,
20%
House Near Body of Water, 24%
Source: Poll of 700 conducted by Opinion Research Corporation by Chubb Group of Insurance Companies, summarized in March 2006 press release “Katrina Doesn’t Motivate Many Homeowners to Protect Their Investment.”
Risk aversion and compulsion are the two most important
• Education/Income of Homeowner• Tendency to Decline Most Optional Coverages
Only 13% of CA homeowners buy earthquake insurance• Lack of Understanding of Actual Risk
Most people do not understand the meaning or implications of 1-in-100 year flood riskMost people have never looked at a flood map
• Coverage Limits (e.g., $250K cap)• Expectation of Post-Event Aid
Potentially a more important factor for future events• Litigation Suggesting that Flood is Covered Under
Standard Homeowners Insurance PoliciesMS Attorney General Hood, Attorney Richard Scruggs, etc.
Source: Insurance Information Institute
Percentage of California Homeowners with Earthquake
Insurance, 1994-2004*
32.9% 33.2%
19.5%17.4%
14.6% 13.3% 13.8%15.8%15.7%
16.8%
0%
5%
10%
15%
20%
25%
30%
35%
94 96 97 98 99 00 01 02 03 04*Includes CEA policies beginning in 1996.Source: California Department of Insurance; Insurance Information Institute.
Selling any type of voluntary catastrophe insurance is tough. The vast majority of
California homeowners forego earthquake coverage & play Russian
Roulette with their most valuable asset.
I.I.I. Actions to Promote Flood
Risk Awareness & Preparedness
Refer people/media to NFIP resources. Echo message that everyone is at risk.
I.I.I. Initiatives onFlood Insurance
• Thousands of Media InterviewsStressing importance of purchasing floodProviding media with key information
• Video News Release (VNR) on Flood InsurancePre-packaged segment for new broadcasts (needs update)
• VNR on Hurricane Preparedness• VNR on Disaster Preparedness• Presentations to Agents, Insurer Groups & Others
Potentially a more important factor for future eventsTestimony before regulatory/legislative bodies
• Home Inventory Software (FREE!!)Download at www.knowyourstuff.org
• Northeast Insurance Summit: July 19, 2006 in NYC
Source: Insurance Information Institute
What Should & Could be Done?
Lessons from the Past
What Should Have Been Done Pre-Katrina: Carrots or Sticks?
• Levees should have been strengthened or land use policies revised decades ago
• Offer incentives to mitigate many years agoLevees and homes/businessesWould have been cost effective
• Update of flood maps• Actuarially sound rates—Send Market Signal on Risk
Stop subsidizing coastal development; burdening taxpayers• Reduce lapse rates: Keep the customers you have!• Experience: Stepped-up marketing is of limited value• Expand Mandatory Purchase Requirement???• Require written affirmation if flood is declined with
waiver of rights to federal and state aid???
What Can be Done?Pick the Low Hanging Fruit First
• Target communities with small numbers of structures in Special Flood Hazard Areas (SFHAs)
• Target inland communities vs. coastal: More Potential
• Increase coverage carried by coastal dwellers
• Increase compliance with mandatory purchase requirement
Make coverage mandatory irrespective of mortgage status??Source: The National Flood Insurance Program’s Market Penetration Rate:Estimates and Policy Implications, RAND, 2006; Insurance Information Institute.
APPENDIX 1 Flood Facts
Key Flood Program Statistics
NFIP: Policies in Force and Total Coverage (Exposure)
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
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
Total Claim Payments by State (Top 11) 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
Source: FEMA, National Flood Insurance Program (NFIP)
Louisiana and Alabama rank 3rd and 10th
respectively in terms of total claims payments. Mississippi ranks 11th.
Total Claim Payments by State (Top 11) Jan 1, 1978 - Feb. 2006
$ Millions
$3,2
28.8
$2,7
75.0
$2,5
54.6
$600
.0
$426
.0
$425
.5
$423
.2
$14,309.1
$655
.2
$721
.2
$851
.6
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
LA FL TX MS AL NC NJ PA NY SC CA
Source: FEMA, National Flood Insurance Program (NFIP)
Louisiana and Mississippi rank 1st and 4th respectively
in terms of total claims payments (up from 3rd and 11th pre-Katrina). Florida ranks 2nd and Texas 3rd.
APPENDIX 2 Catastrophe Facts
Key Hurricane Statistics
U.S. InsuredCatastrophe Losses ($ Billions)*
$7.5
$2.7
$4.7
$22.
9
$5.5 $1
6.9
$8.3
$7.4
$2.6 $1
0.1
$8.3
$4.6
$26.
5
$5.9 $1
2.9 $2
7.5
$57.
7
$100
$0
$20
$40
$60
$80
$100
$120
89 91 93 95 97 99 01 03 05
*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
2005 was by far the worst year ever for insured
catastrophe losses in the US, but the worst has yet to come.
$100 Billion CAT year is coming soon
Global Number of Catastrophic Events, 1970–2005
0
50
100
150
200
250
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Natural catastrophes Man-made disasters
Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 1/2005 and 2/2006.
The number of natural and man-made
catastrophes has been increasing on a global
scale for 20 years
Record 248 man-made CATs &
record 149 natural CATs in 2005
Insured Property Catastrophe Losses as % Net Premiums Earned, 1983–2005E
Dennis Rita Wilma KatrinaSize of Industry Loss ($ Billions)
Insu
red
Loss
($ B
illio
ns)
02004006008001,0001,2001,4001,6001,8002,000
Cla
ims
(thou
sand
s)
Insured Loss Claims
*Property and business interruption losses only. Excludes offshore energy & marine losses.Source: ISO/PCS as of February 8, 2006 for Dennis, Rita, Katrina and March 27, 2006 for Wilma; Insurance Information I tit t
Hurricanes Katrina, Rita, Wilma & Dennis produced a record 3.3
million claims
Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,
1985-2004¹
Utility Disruption0.1%
Terrorism9.7% All Tropical Cyclones3
34.6%
Tornadoes2
30.4%
Water Damage0.2%
Civil Disorders0.5%
Fire6
2.9%
Wind/Hail/Flood5
3.4%
Earthquakes4
8.4%
Winter Storms9.7%
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, tropical cyclones will account for about 45% of the total.