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Overview of Florida Hurricane Insurance Market Economics

Overview of Florida Hurricane Insurance Market Economics. Florida Joint Select Committee on Hurricane Insurance Tallahassee, FL January 19, 2005. Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist

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Overview of Florida Hurricane Insurance Market Economics

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  1. Overview of Florida Hurricane Insurance Market Economics Florida Joint Select Committee on Hurricane Insurance Tallahassee, FL January 19, 2005 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 bobh@iii.org  www.iii.org

  2. Presentation Outline • Hurricane Season of 2004 • Statistical Update • Historical Catastrophe Losses in Florida: A Global Concern • Florida Hurricanes: Impact on Insurer Underwriting Performance • Florida Hurricanes: Impact on Profitability • Capital & Capacity Concerns and Limitations • The need to attract more capacity to support economic growth in FL • Influence of Florida & Disaster Losses on US P/C Insurance Industry • Disaster Declarations: Florida’s Dependence on Federal Aid • Homes & Homeowners Insurance: Vital to FL’s Economy

  3. HURRICANE SEASON OF 2004One for the Record Books

  4. U.S. InsuredCatastrophe Losses ($ Billions) 2004 was the second worst year ever for natural disaster losses in the US after adjusting for inflation. About 85% of those losses originated in Florida. $ Billions *2004 figure is as of September 30, 2004. 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

  5. Losses from Hurricanes of 2004 Four of the Top 10 hurricanes in US history occurred in 2004 Estimated insured losses from the hurricanes of 2004 = $20.485B exceed the $15.5B in losses from Hurricane Andrew ($20.3B in $2003) Source: ISO/PCS; Insurance Information Institute

  6. Most of the Claims from the 4 Hurricanes Originated in FL Total Claims = 2.177 million Florida Only = 1.692 Mill (78%) Total = 640,000 Total = 600,000 Total = 552,000 Total = 385,000 Source: PCS/ISO

  7. Most Claim Dollars Paid Are Going to FL Policyholders Total Insured Losses = $20.485B Florida Only = 17.5B (85%) Total = $6.8 Billion Total = $6.0 Billion Total = $4.4 Billion Billions Total = $3.2 Billion Source: PCS/ISO

  8. Personal Property Losses Accounted for Largest Share Damage from2004 Hurricanes* Ivan Charley TOTAL Jeanne Frances *Breakdowns based on FL losses, which accounted for 85% of losses for all affected states. Source: ISO/PCS; Insurance Information Institute.

  9. Insurers Have Responded to the Challenge Claim Closure Rates

  10. Proportion of Claims Settled from 2004 Hurricanes (as of Dec. 30) About 86% of the 1.7 million claims filed in Florida were settled by year’s end, running well-ahead of the pace set following Hurricane Andrew. Insurers are still receiving 7,000 to 9,000 new claims per week. Source: Florida Office of Insurance Regulation

  11. HISTORICAL PERSPECTIVEFlorida Property Insurance Markets: Unparalleled Risk

  12. Top 10 Insured Losses Worldwide,1970-2004 ($2003) Three of the 10 most expensive disasters is world history occurred in Florida: Hurricanes Andrew, Charley & Ivan *Hurricanes Ivan and Charley in 2004 dollars. Sources: ISO/PCS; Swiss Re, “Natural Catastrophes and Man-Made Disasters in 2003,” Sigma, no. 1, 2004; except Sept. 11 estimate from Hartwig, Robert P., 2004 Mid-Year Property/Casualty Insurance Update, Insurance Information Institute. Figure is stated in 2001 dollars.

  13. Top 10 Insured PropertyLosses in US ($2003)* Five of the 10 most expensive disasters is US history occurred in Florida: Hurricanes Andrew, Charley, Ivan, Frances & Jeanne *Hurricanes Charley, Frances, Ivan and Jeanne stated in 2004 dollars. Note: 9/11 loss figure is for property claims only. Sources: ISO/PCS; Insurance Information Institute.

  14. Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2003)* Eight of the 10 most expensive hurricanes in US history affected Florida: Andrew, Charley, Ivan, Frances, Georges, Jeanne, Opal & Floyd *Hurricanes Charley, Frances, Ivan and Jeanne stated in 2004 dollars. Note: 9/11 loss figure is for property claims only. Sources: ISO/PCS; Insurance Information Institute.

  15. Average Annual Insured Losses*(Top 10 States, $ Millions) Distribution of Annual Losses *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

  16. Inflation-Adjusted U.S. Catastrophe Losses By Cause of Loss, 1984-2003¹ 1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2003 dollars. Adjusted for inflation by ISO. 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. Source: Insurance Services Office, Inc (ISO)

  17. How Exposed isFlorida Today?

  18. Insured Losses in Florida ifHurricane Andrew Hit Today • Each 0.1 degree equals about 7 miles • A path of 0.3 degrees north of Andrew’s original location would create a direct hit on Miami • Estimates are losses in today’s dollars after application of deductibles. Insured losses, $ Billions Source: Best’s Review, June 2002 (EQECAT)

  19. Estimated New Construction in Miami-Dade County, 1992-2001 Huge build-up in exposure in Florida since 1992 • 81% residential • 19% commercial $16.1 Billion $3.4 Billion Source: Best’s Review, June 2002 (International Hurricane Center, Florida International University), Ins. Info. Institute

  20. Estimated New ConstructionMiami-Dade County, Florida Source: Best’s Review, June 2002 (International Hurricane Center, Florida International University)

  21. Hurricanes Making Landfall During the 20th Century Frequency Cost* *Normalized to adjusted for inflation, housing density, wealth and wind insurance coverage. Source: Tillinghast-Towers Perrin

  22. FLORIDA HURRICANES & UNDERWRITING PERFORMANCE:Homeowners Insurers Have Lost Billionsin Florida

  23. Underwriting Gain (Loss) in Florida Homeowners Insurance, 1992-2004E* $ Billions Florida’s homeowners insurance market produces small profits in most years and enormous losses in others *2004 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2004 residential windstorm losses of $11.2B; 2003 figure is also from III estimates of loss and expense.

  24. Cumulative Underwriting Gain (Loss) in Florida Homeowners Insurance, 1992-2004E* $ Billions It took insurers 11 years (1993-2003) to erase the UW loss associated with Andrew, but the 4 hurricanes of 2004 erased the past 7 years of profits *2004 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2004 residential windstorm losses of $11.2B; 2003 figure is also from III estimates of loss and expense.

  25. FLORIDA HURRICANES & PROFITABILITY:Selling Homeowners Insurance in Florida is Tremendously Unprofitable

  26. Rates of Return on Net Worth for Homeowners Ins: US vs. Florida Profits were earned most years after Andrew but before 2004 Averages: 1993 to 2003E US HO Insurance = +2.8%; FL= 23.3% Source: NAIC; 2003 US figure is Insurance Information Institute estimate. FL estimate based on average Florida homeowners RNW from 1993-2002.

  27. Rates of Return on Net Worth for Homeowners Ins: US vs. Florida Averages: 1990 to 2004E US HO Insurance = -1.8% FL HO Average = -48.5% 4 Hurricanes Andrew Source: NAIC; 2003 US figure is Insurance Information Institute estimate. FL figure based on average Florida homeowners RNW from 1993-2002.

  28. CAPITAL & CAPACITY CONSIDERATIONS:INSURERS MUST PUT LARGE AMOUNTS OF CAPITAL AT RISK TO OFFER INSURANCE IN FLORIDA

  29. U.S. Policyholder Surplus: 1975-2004* Capacity TODAY is just 8.8% above its mid-1999 peak Surplus (capacity) has been on a rollercoaster rise in the p/c insurance industry over the past 6 years $53.9 Billion $ Billions “Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations Source: A.M. Best, ISO, Insurance Information Institute *As of 9/30/04.

  30. US Reinsurers: Change in Policyholder Surplus ($ Billions) Reinsurer PHS fell 20% from 1998-2002. Capacity today similar to 1998. Same story globally. Source: A.M. Best; Insurance Information Institute

  31. Capital Myth: US P/C Insurers Have $350 Billion to Pay Hurricane Claims • Personal lines policyholder surplus must be available to pay claims arising in all 50 states • None of the surplus was earned by FL homeowners operations Only 42% of surplus backs personal lines operations Commercial includes all lines except homeowners and private passenger auto. Source: Insurance Information Institute estimates based on A.M. Best Q.A.R Data.

  32. Florida Needs to Attract Huge Amounts of Capital to Support Future Economic Growth

  33. Estimated New Insurance Capital Required to Support Growth in FL Homeownership, 2005-2015* Florida needs to attract about $500 million in fresh homeowners insurance capital in 2005 just to keep pace with demographic trends, rising to more than $1 billion per year by 2013. *Estimate assumes 1:1 premium-to-surplus ratio and continuation of CAGR in direct premiums written of 11% (actual rate for period 1996-2003). Source: Insurance Information Institute

  34. Estimated Cumulative New Insurance Capital Required to Support Growth in FL Homeownership, 2005-2015* Florida may need to attract more than $9 billion in new capital over the next decade, assuming recent demographic trends continue. *Estimate assumes 1:1 premium-to-surplus ratio and continuation of CAGR in direct premiums written of 11% (actual rate for period 1996-2003). Source: Insurance Information Institute

  35. Initial Season Capacity For the 2005 Hurricane Season (Projection for 2005 Estimate) Assumes Cash Balance is Reduced $3 billion Maximum Emergency Assessment -- $1.608 billion 53 year return time* $15 Billion Capacity (only $750.4 million needed) $21.86 B Overall Industry Loss $11.19 B Bonding Capacity (Includes Loss Adjustment Expense) $1.9 B Industry Co-Payments 2.80% Credit Ratings: Aa3, AA-, AA Note: Since the FHCF year-end cash balance will not grow due to losses in 2004, it remains at $15 billion. Had there been no losses the capacity would have grown to $16.5 billion. $3.81 B Projected 2005 Year-end Cash Balance Note: The insurance industry aggregate retention is adjusted to grow with exposure growth. $4.96 B Industry Aggregate Retention Not Drawn to scale. Source: FHCF, Jan. 14, 2005 *Return time not adjusted for premium/exposure growth.

  36. Florida’s Hurricane Residual Market Size, 1991-2004* Citizens is not a true source of “capacity” *Data for 1991 – 2001 are for the Florida Windstorm Underwriting Association; Beginning with 2002 Data are for Citizens Property Insurance Corporation. **As of December 31. Sources: Insurance Information Institute, CPIC, PIPSO

  37. Potential Sources of Capital:All Have Limitations, Drawbacks • Private Insurers • 15 insurers to-date have required capital to support ongoing FL ops. • These commitments exceed $1 billion (FL OIR, 12/30/04) • Historically FL has provided poor returns on invested capital • Private Reinsurers • Need to aggregate manage exposure • Florida Hurricane Catastrophe Fund • No increase in 2005 because of 2004 losses • Capital Markets/Securitization: Only limited interest • Higher Policyholder Deductibles • Move to seasonal, 1% deductibles increases capital requirements • Bonding Authority • Assessments: • Tax Levies

  38. CATASTROPHIC LOSS:A National PerspectiveIMPACTS ON INSURER UNDERWRITING PERFORMANCE

  39. P/C Net Income After Taxes1991-2004* ($ Millions) 4 Hurricanes Sept. 11 Andrew Northridge Lowest CAT losses in 15 years *First 9 months 2004 Sources: A.M. Best, ISO, Insurance Information Institute.

  40. ROE: P/C vs. All Industries 1987–2004E* 2004 ROE excl. hurricanes Sept. 11 Hugo Lowest CAT losses in 15 years 2004 ROE reduced due to hurricanes Andrew Northridge *2004 p/c estimate based on first 9 months data. Source: Insurance Information Institute; Fortune

  41. P/C Industry Combined Ratio 2001 = 115.7 2003 = 100.1 2004 1st Half = 94.4 2004E = 98 The combined ratio is the ratio losses & associated expenses paid relative to premiums earned Sources: A.M. Best; ISO, III

  42. Underwriting Gain (Loss)1975-2004E $ Billions Source: A.M. Best, Insurance Information Institute

  43. Combined Ratio: Reinsurers Reinsurer results are greatly affected by catastrophe activity Sept. 11 Andrew Northridge Few CATs Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute

  44. Homeowners Insurance Combined Ratio Hurricane Andrew produced record homeowners losses even in national results Average 1990 to 2003= 115 Insurers have paid out an average of $1.15 in losses for every dollar earned in premiums over the past 13 years Sources: A.M. Best; III

  45. RNW for Major P/C Lines,1992-2001 Average CAT losses contribute to low (negative profitability of homeowners insurance) Source: NAIC; Insurance Information Institute

  46. CATASTROPHIC LOSS:A National PerspectiveIMPACTS ON INSURER PROFITABILITY

  47. Homeowners Insurance:Rates of Return on Net Worth Homeowners insurance is an extremely volatile line of insurance Averages: 1990 to 2002 HO Insurance = -3. 05%* 4 Hurricanes Andrew Source: NAIC, Insurance Information Institute * Average is 1.22% if excluding 1992 (year of Hurricanes Andrew and Iniki.

  48. Homeowners Insurance:Rate of Return on Net Worth vs. Fortune 500 Averages: 1990 to 2002 HO Insurance = -3. 05%* Fortune 500 = 12.64% Source: NAIC, Insurance Information Institute * Average is 1.22% if excluding 1992 (year of Hurricanes Andrew and Iniki.

  49. Homeowners Insurance:Rates of Return on Net Worth vs. P/C Insurance All Lines Homeowners insurance consistently underperforms the p/c insurance generally 1990-2004E Homeowners: -1.7% All P/C Lines: +7.5% Source: NAIC, Insurance Information Institute * Average is 1.22% if excluding 1992 (year of Hurricanes Andrew and Iniki.

  50. Rates of Return on Net Worth for Homeowners Ins: US vs. Florida (add 1990-92) Averages: 1993 to 2003E US HO Insurance = +2.85% Source: NAIC; 2003 figure is Insurance Information Institute estimate.

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