The Lessons of Hurricane Andrew: Is Florida Really Ready?

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1 The Lessons of Hurricane Andrew: Is Florida Really Ready? Economic Incentives for Building Safer Communities Wharton Risk Management and Decision Processes Center Roundtable Institute for Building and Home Safety The Wharton School June 11, 2002 Robert P. Hartwig, Ph.D., Senior Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY Tel: (212) Fax: (212)

2 Hurricane Andrew: A Summary of the Devastation Andrew struck S. FL on August 24, 1992 with sustained winds of 140 mph, gusts to 175 mph $15.5B insured losses ($20B in 2001 $) $26 billion economic losses ($34B 2001 $) 23 direct deaths 700,000 homeowners claims 28,066 home destroyed 107,380 homes damaged 82,000 businesses destroyed/damaged 7,800 businesses closed as of Sept ,000 out of work as of Sept. 1992

3 World s Largest Catastrophes (by insured loss) $40 $35 $30 $25 $20 $15 $10 $5 $0 $38.2 $20.1 $16.8 $ Billions, in 2001 Dollars $7.3 $6.3 $6.2 $6.0 $4.7 $4.3 $4.3 Terrorist Attacks ('01)* Hurr. Andrew ('92) Northridge Eq. ('94) Typh. Mireille WS Daria WS Lothar Hurr. Hugo ('95) Misc Storms/Floods WS Vivian Typh Bart *III Estimate; Includes life, liability, availtion and workers compensation losses. Source: Insurance Information Institute, Swiss Re;

4 United States: Disasters Waiting to Happen

5 No Shortage of Potential Disasters in U.S. (by insured loss) $90 $84.4 $ Billions $80 $70 $60 $50 $69.7 $57.7 $53.0 $45.0 $42.5 $40 $30 $20 $10 $0 San Francisco EQ Mag. 8.4 Memphis Earthquake Mag. 8.6 Los Angeles Earthquake Mag. 7.0 Miami Hurricane CAT 5 NYC Hurricane CAT 4 Houston Hurricane CAT 4 Source: AIR Risk Engineering, ARPC Earthquake Engineering, Univ. of Southern California, Ins. Info Inst.

6 Probable Costs of Future U.S. Natural Disasters Source: AIR Risk Engineering, ARPC Earthquake Engineering, University of Southern California SEATTLE $33.3 BILLION 7.5 EARTHQUAKE $45 BILLION CLASS 4 HURRICANE $84.4 BILLION 8.2 EARTHQUAKE $52 BILLION CLASS 4 HURRICANE NEW YORK SAN FRANCISCO ASBURY PARK LOS ANGELES $69.7 BILLION 8.6 EARTHQUAKE MEMPHIS HAMPTON $57.7 BILLION 7.0 EARTHQUAKE HONOLULU $30 BILLION CLASS 4 HURRICANE GALVESTON $42.5 BILLION CLASS 5 HURRICANE NEW ORLEANS $25.6 BILLION CLASS 5 HURRICANE $33.5 BILLION CLASS 5 HURRICANE $53 BILLION CLASS 5 HURRICANE MIAMI

7 10 Costliest Disasters in U.S. History (by insured loss) $25 $20 $15 $20.3 $19.6 $14.9 $ Billions $10 $5 $5.9 $3.2 $2.9 $2.5 $2.4 $2.1 $2.0 $0 Terrorist Attack: Sept Hurricane Andrew: August 1992 Northridge Earthquake: Jan Hurricane Hugo: Sept Hurricane Georges: Sept Hurricane Betsy: Sept TS Allison: July 2001 Hurricane Opal: October 1995 Hurricane Floyd: Sept Hurricane Iniki: Sept Source:Insurance Services Office, Insurance Information Institute.

8 U.S. Insured Catastrophe Losses $ Billions CAT Losses for 2001 Set a Record 20 events (lowest since 1969) $ million claims 9/11: $20.3B = 51,000 claims $ $16.9 $10.1 $7.5 $8.3 $7.3 $8.3 $2.7 $4.7 $5.5 $4.3 $2.6 $ * 02** *Includes $20.3B for 9/11 losses estimated by ISO/PCS as of 6/18/02. Includes only business and personal property claims, business interruption and auto claims. **Through April Source: Property Claims Service, Insurance Information Institute

9 How Exposed is Florida Today?

10 Average Annual Insured Losses* (Top 10 States, $ Millions) $1,500 $1,250 $1,423.0 All Other 15.7% Distribution of Annual Losses Florida 49.5% $1,000 $750 $500 $250 $615.0 Mississippi 2.7% N. Carolina 3.8% Louisiana 6.8% Texas 21.4% $196.0 $109.0 $77.0 $64.0 $62.0 $61.0 $61.0 $51.0 $154.0 $0 FL TX LA NC MS MA SC AL NY CT All Other *Normalized losses adjusted for inflation, housing density, wealth and wind insurance coverage, based on historical data for 100-year period Source: Tillinghast-Towers Perrin

11 Hurricanes Making Landfall During the 20 th Century Frequency Cost* CAT 2 = 38 Storms 23% CAT 3 = $943Mill 32.5% CAT 4 = $1,579Mil 55.0% CAT 1 = 62 Storms 38% CAT 3 = 47 Storms 29% CAT 2 = $243Mil 8.3% CAT 5 = 2 Storms 1% CAT 4 = 15 Storms 9% CAT 1 = $76 Mil 2.6% CAT 5 = $41 Mil 1.4% *Normalized to adjusted for inflation, housing density, wealth and wind insurance coverage.

12 Estimated New Construction in Miami-Dade County, ($ Millions) $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 Huge build-up in exposure in Florida since % residential 19% commercial $3.4 Billion $3,095.3 South Miami-Dade $305.5 $16.1 Billion $3,069.7 $12,981.8 All Miami-Dade New Residential Exposure New Commercial Exposure Source: Best s Review, June 2002 (International Hurricane Center, Florida International University), Ins. Info. Institute

13 Estimated New Construction Miami-Dade County, Florida South Miami-Dade was designated the county s high-impact zone following Hurricane Andrew. Estimates include construction from 1992 through 2001 South Miami Dade New Residential Exposure (Construction) New Commercial Exposure (Construction) $3,095,273,681 $305,492,393 All Miami-Dade New Residential Exposure(Construction) New Commercial Exposure(Construction) $12,981,843,085 $3,069,654,106 Source: Best s Review, June 2002 (International Hurricane Center, Florida International University)

14 Insured Losses in Florida if Hurricane Andrew Hit Today Insured losses, $ Billions $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 $20.3 Andrew's Original Path $36.2 Moved 0.1 degree North Source: Best s Review, June 2002 (EQECAT) $46.7 $48.2 $46.3 Moved 0.2 degrees North Moved 0.3 degrees North Moved 0.4 degrees North $43.5 Moved 0.5 degrees North 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.

15 2000 Capacity of Florida Property Insurance Market $16.1B Overall Industry Loss $1.896B Ind. Co-payments $11 Billion Capacity $7.36B Bonding Capacity (Includes Loss Adj. Expenses) $3.64B Cash* $3.212B Industry Agg. Retention *Projected for year-end 2000 Source: Florida Hurricane Catastrophe Fund

16 Insurers Not Anxious to Assume Wind Risk in FL: U.S. UW Loss in HO Insurance, F $0 -$0.3 ($2) ($4) -$2.2 -$2.8 -$4.0 -$2.9 -$2.6 -$2.4 -$3.6 $ Billions ($6) ($8) ($10) ($12) -$11.5 -$5.4 Underwriting losses in US homeowners insurance from 2000 to 2002 alone are estimated at $19.0 billion, 14.5% above the $16.6 billion in 9/11 property losses. -$8.9 -$ E 2002F Source: A.M. Best, Insurance Information Institute

17 Policies & Exposure: US Residual Market Plans 1,700,000 1,500,000 Policies in Force FAIR Plans Exposure 1,518,799 $170.0 $180 $160 1,300,000 1,100, , , , , ,211 1,069,593 1,093,873 $140.3 $140 $120 $122.5 $124.4 $ ,113, ,000 $ ,000 $76.8 $64.2 $69.4 $ , Source: Insurance Information Institute, PIPSO 949,571 $100 $80 $60 Billions

18 Policies in Force: Florida P/C JUA 900, ,271 JUA is showing signs of growth 800, , , , , , , , , , , , , ,628 67, , ,027 0 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Feb-02 Source: Insurance Information Institute, PIPSO

19 Florida s Windstorm Underwriting Association 650, , , , , ,000 50,000 $7.0 $7.5 57,305 Policies in Force $ ,074 $ ,724 Exposure $75.4 $49.5 $ , ,824 $ , , ,369 $86.4 $ , , $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 Billions Source: Insurance Information Institute, PIPSO

20 Southeast States Homeowners Insurance Premiums vs. US $1,000 $800 $600 $861 Highest in US $657 $594 $505 $487 Lowest in US $457 $448 $400 $266 $200 $0 TX FL MS SC US AL GA WI Source: Insurance Information Institute from NAIC Data, 1999.

21 5% Business Closure Scenario

22 Figure 3A: 5% Hurricane Closure Scenario Number of Business Closures 2,500 2,000 1,500 1, Dade 2,459 Broward 1,532 Palm Bch Estimated number of business establishments that would be closed assuming a 5% closure rate. 1,272 H'borough 921 Lee 401 Monroe 127 Source: Insurance Information Institute from US Census of Manufactures data.

23 Figure 3B: 5% Hurricane Closure Scenario Sales Lost Millions $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 Dade $3,828 Broward $2,637 Palm Bch Estimated sales losses assuming a 5% establishment closure rate. $1,523 H'borough $1,962 $500 $137 Lee Monroe Source: Insurance Information Institute from Florida Department of Revenue data.

24 Figure 3C: 5% Hurricane Closure Scenario Sales & Use Tax Losses Millions ($) $90 $80 $70 $60 $50 $40 $30 $20 $10 $81.8 $67.5 Estimated loss of sales and use taxes assuming a 5% establishment closure rate. $49.9 $48.0 $18.6 $6.0 $0 Dade Broward Palm Bch H'borough Lee Monroe Source: Insurance Information Institute from Florida Department of Revenue data.

25 Figure 3D: 5% Hurricane Closure Scenario Payroll Losses Millions $800 $700 $600 $500 $400 $300 $200 $100 $0 Dade $798 Broward $579 Palm Bch $432 $427 H'borough Estimated payroll losses assuming a 5% establishment closure rate. $113 Lee Monroe $23 Source: Insurance Information Institute from Florida Department of Revenue data.

26 Figure 3E: 5% Hurricane Closure Scenario Job Losses 35,000 30,000 25,000 20,000 15,000 10,000 5, ,036 Dade Broward 22,039 Palm Bch Estimated job losses assuming a 5% establishment closure rate. 15,640 16,756 H'borough 5,151 Lee Monroe 1,184 Source: Insurance Information Institute from US Census of Manufactures data.

27 Figure 3F: 5% Hurricane Closure Scenario Total Losses Millions ($) $5,000 $4,000 $3,000 $2,000 $1,000 $0 $4,708 Dade Broward $3,283 Palm Bch Estimated total lost revenue, sales & use tax and payroll assuming a 5% establishment closure rate. $2,004 H'borough $2,437 $631 Lee Monroe $165 Source: Insurance Information Institute from US Census of Manufactures and Florida Department of Revenue data.

28 10% Business Closure Scenario (approximates Hurricane Andrew experience in 1992)

29 Figure 4A: 10% Hurricane Closure Scenario Number of Business Closures 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Dade 4,918 Broward 3,063 Palm Bch Estimated number of business establishments that would be closed assuming a 10% closure rate. 2,543 H'borough 1,842 Lee 802 Monroe 254 Source: Insurance Information Institute from US Census of Manufactures data.

30 Figure 4B: 10% Hurricane Closure Scenario Sales Lost Millions $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 Dade $7,657 Broward $5,273 Palm Bch Estimated sales losses assuming a 10% establishment closure rate. $3,045 H'borough $3,925 $999 $274 Lee Monroe Source: Insurance Information Institute from Florida Department of Revenue data.

31 Figure 4C: 10% Hurricane Closure Scenario Sales & Use Tax Losses Millions ($) $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 $163.7 Dade Broward $135.0 Palm Bch Estimated loss of sales and use taxes assuming a 10% establishment closure rate. $99.9 H'borough $95.9 $37.3 Lee Monroe $11.9 Source: Insurance Information Institute from Florida Department of Revenue data.

32 Figure 4D: 10% Hurricane Closure Scenario Payroll Losses Millions $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 $1,596 Dade Broward $1,157 Palm Bch $863 $853 H'borough Estimated payroll losses assuming a 10% establishment closure rate. $226 Lee Monroe $45 Source: Insurance Information Institute from Florida Department of Revenue data.

33 Figure 4E: 10% Hurricane Closure Scenario Job Losses 70,000 60,000 50,000 40,000 30,000 20,000 10, ,072 Dade Broward 44,079 Palm Bch Estimated job losses assuming a 10% establishment closure rate. 31,280 33,512 H'borough 10,303 Lee Monroe 2,369 Source: Insurance Information Institute from US Census of Manufactures data.

34 Figure 4F: 10% Hurricane Closure Scenario Total Losses Millions ($) $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 $9,416 Dade Broward $6,566 Palm Bch Estimated total lost revenue, sales & use tax and payroll assuming a 10% establishment closure rate. $4,009 H'borough $4,874 $1,263 Lee Monroe $331 Source: Insurance Information Institute from US Census of Manufactures and Florida Department of Revenue data.

35 Has Florida Learned Anything over the Past Decade?

36 Mitigating Catastrophe Risk Education Regulation Financial Incentives Mitigation

37 Regulation: Timeline for Florida Building Code 1926 A disastrous hurricane strikes Florida s greater Miami area, leading to the adoption of construction standards Florida adopts statewide minimum standards for construction 1957 Adoption of South Florida Building Code in Dade County. The code originated with the Uniform Building Code of the International Conference of Building Officials 1970s-1990s Florida experiences a building boom. Nearly 70% of buildings in Broward and Palm Beach counties are erected between 1970 and Andrew, a Category 4 hurricane with gusts up to 175 mph, devastates South Florida, exposing weaknesses in the building code and construction industry. A survey by the Sun Sentinel showed that nearly all the homes inspected that had construction flaws were built between 1975 and 1992, during the peak of South Florida s residential growth. A survey conducted to identify code violations and construction deficiencies concluded that the majority of failures were attributed to noncompliance with the prescriptive requirements of the area building code 1994 The code used in Broward and Miami-Dade counties adopts tougher standards for walls, roofs, windows and shutters The Florida Building Code Commission is formed to evaluate the existing system and recommend ways to improve it. In 1997, it concluded that the state needed a single code The commission adopts a Standard Building Code as a base rulebook and sets out to define a uniform building code for Florida 2002 The unified building code goes into effect. Since Andrew, South Florida s most effective mitigation effort has been an overhaul of construction standards. Counties have instituted strict testing and approval for all building products, so materials are more likely to withstand hurricane-force winds and other pressures. Contractors must follow stricter construction guidelines and install certain approved products on homes and businesses. Hurricane shutters must pass stringent impact and wind tests. Source: Best s Review, June 2002 (Risk Management Solutions)

38 What Insurers are Doing: Education Most insurers have catastrophe safety information on their web sites: Similar information available through trade associations: Insurance Information Institute: Institute for Building and Home Safety:

39 What Insurers are Doing: Education (continued) Mitigation of Property Damage Secondary issue in earthquakes (though not mutually exclusive from preservation of life) Excellent information available from IBHS Buying appropriate catastrophe coverage III good source of information Banks/agents sometimes weak link in chain Lessons from Floyd: Flood insurance, windstorm deductibles

40 What Insurers are Doing: Education Available free from IBHS at Is Your Home Protected From Earthquake Disaster? A Homeowner s Guide to Earthquake Retrofit Also from IBHS Open for Business: Disaster Recovery Guide for Small Business III Brochures/web: Am I Covered: Common Questions Asked by Homeowners about Insurance Settling Insurance Claims after a Disaster Insuring Your Business Against a Catastrophe

41 What Insurers are Doing: Mitigation Sponsor research (and education) through IBHS and other organizations Support state and local efforts to strengthen building codes (ISO BCEGS Program): Building Code Effectiveness Grading Schedule

42 Financial Incentives Discounts Mandatory 2% wind deductibles Higher premiums Excluding wind Refusal to write beachfront properties

43 Serious Obstacles to Reducing CAT Losses in FL Unwillingness to significantly alter land use policies No risk-based lending practices Political/lobbying efforts by developers, real estate interests defeat restrictions Homeowners oppose added cost to dwellings Subsidies (e.g., flood insurance, rate suppression) Continued strong demographics # housing units rising by 4%+ in FL, 2% nationally 17% increase in number of commercial/residential units, & 50% increase in replacement value of properties FEMA Will emphasis shift to Homeland Security? FEMA was an independent agency with 5,100 employees Added layers of bureaucracy? Reduced effectiveness? Loss of focus? Running Against the Wind? Is Florida in Denial

44 Mitigation: Much, Much More Needed Mitigation is an Effective Tool, But Impact so Far Limited Much more to be done! Only 15-20% of S. FL building stock constructed since 1994 Loss reduction of post 1994-buildings only about 10% Even if replaced entire stock, impact would be modest

45 Insurance Information Institute On-Line If you would like a copy of this presentation, please give me your business card with address

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