2019 Ratemaking Formula Report
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1 Prepared for: Florida Hurricane Catastrophe Fund Andrew Rapoport FCAS, MAAA Jared Brown, ACAS March 19, 2019 Paragon Strategic Solutions Inc. 1
2 Agenda 1. What s New? 2. Overall Indications 3. Ratemaking Overview 4. Premium, Rates and Coverage 5. Other Topics of Interest 6. Recap 7. Questions Page 2
3 1. What s New? Paragon Strategic Solutions Inc. 3
4 What s New? Projected Average Coverage Selection Increase % in 2018, % in 2019 FHCF Layer Decrease $23.1 B in 2018, $20.8 B in 2019 Modeled Exposure Trend Increase 2.83% in 2018, 3.72% in 2019 Exposure Trend Methodology Change Increased allocation to new construction Pre-Event Note Expense Decrease $27.7 Million in 2018, $26.1 Million in 2019 Reduction from $2.20 B to $1.65 B Outstanding Page 4
5 Detour: Avg. Rate vs. Overall Avg. Rate Rate Change/Car (Avg. Change) -7.0% Original Price and Distribution Reduced Price, Original Distribution Reduced Price, New Distribution Ave Price/car # of Cars Total Cost Ave Price/car # of Cars Total Cost Ave Price/car # of Cars Total Cost Corolla $18,700 4 $74,800 $17,391 4 $69,564 $17,391 2 $34,782 Lexus nx $36,485 6 $218,910 $33,931 6 $203,586 $33,931 8 $271,448 Fleet $29, $293,710 $27, $273,150 $30, $306,230 Fleet Change (Overall Avg. Change) -7.0% -7.0% 4.3% 4.3% Impact of Mix Change 12.1% 12.1% Page 5
6 What s New? : Shift to Higher Coverage Percentage Coverage Selection Distributions by Year 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 16.0% 35.1% 7.9% 4.7% 76.1% 60.2% 2018 : % 2019 : % 45% 75% 90% Page 6
7 Page 7 What s New? : Smaller Slices for Everyone
8 2. Overall Indications Paragon Strategic Solutions Inc. 8
9 Overall Indications FHCF Reimbursement Premium, Exposure, Coverage, and Rate Premium ($ Billions) Exposure ($ Billions) Overall Avg. Rate (per $1,000) Company Selected Coverage % Avg. Rate 90% (per $1,000) 2018 Actual $ , % Projected $ , % % Change 6.66% 3.72% 2.83% 11.08% -7.43% Page 9
10 Overall Indications Premium, Exposure, Coverage and Rate Changes by Type of Business Type of Business Premium Exposure Overall Avg. Rate Company Selected Coverage % Average Rate Unadjusted for Coverage Change Residential 7.17% 4.00% 3.05% 9.02% -5.47% Tenants -0.69% 4.00% -4.50% 0.26% -4.75% Condos 4.27% 5.00% -0.69% 3.90% -4.42% Mobile Home -3.30% 0.00% -3.30% 0.76% -4.03% Commercial 9.16% 0.00% 9.16% 44.16% % Total 6.66% 3.72% 2.83% 11.08% -7.43% Page 10
11 Overall Indications Rate On Line Changes LIMIT (FHCF) FHCF Layer Change $17,000,000,000 Modeled 6.53% 6.92% 6.04% $17,000,000,000 Actual % 6.92% 6.66% Page 11
12 3. Ratemaking Overview Paragon Strategic Solutions Inc. 12
13 Ratemaking Overview Where Does the FHCF Get Its Funds? Where Do They Go? Investment Income Premium Post event Assessments Operating Expense Financial Products Mitigation Funding Loss & Loss Expense (5%) Balance Premiums are derived from the Ratemaking Formula Page 13
14 Ratemaking Overview 1. Trend 6/30 Prior Year Exposure Data & Send Modelers 2. Combine Results for Industry Excess Loss Costs 3. Add Allocated Loss Adjustment Expense allowance (5%) 4. Misc. Technical Adjustments Retention & limit Law & ordinance Aggregate wind deductible adjustment Page 14
15 Ratemaking Overview 5. Fixed Loadings Operating expenses Pre-event notes expenses 6. Allocation to Classes Type of business, territory, construction, deductible Re-adjust coverage % for territory changes Page 15
16 Ratemaking Overview 7. Rating Classifications for Mitigation Year built Structure opening protection Roof shape 8. Apply Cash Build-up Factor 9. Variable Loadings Reinsurance Page 16
17 4. Premium, Rates and Coverage Paragon Strategic Solutions Inc. 17
18 Coverage Selection Change by Type of Business FHCF Coverage Selection Change by Type of Business Residential Tenants Condos Mobile Home Commercial Total Actual % 87.5% 90.0% 90.0% 89.8% 89.9% Actual % 81.1% 84.0% 89.7% 71.4% 81.6% Actual % 77.7% 81.8% 88.9% 61.9% 75.5% Actual % 77.8% 81.6% 89.1% 57.8% 74.5% Actual % 79.6% 79.7% 88.9% 59.8% 73.5% Projected % 79.9% 82.8% 89.6% 86.2% 81.6% Projected 2019/Actual % 0.26% 3.90% 0.76% 44.16% 11.08% 100.0% FHCF Average Coverage Selection by Year 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Residential Tenants Condos Mobile Home Commercial Total Page 18
19 Coverage Change and Rates FHCF Coverage and Rate History Coverage and Rate/$1,000 Exp Average Coverage % Page 19
20 Coverage Change and Rates FHCF Coverage and Rate History Coverage and Rate/$1,000 Exp Average Coverage % Implied 90% Rate Implied 75% Rate Implied 45% Rate Page 20
21 Coverage Change and Rates FHCF Coverage and Rate History Coverage and Rate/$1,000 Exp Average Coverage % Implied 90% Rate Implied 75% Rate Implied 45% Rate Overall Average Rate Page 21
22 Premium, Rates and Coverage Components of 2019 Premium Change +6.66% $1,180 $1,170 $1,177.3 $1,178.4 $1,176.3 $1,176.3 $1,160 $1,150 $1,140 $1,130 $1,141.3 $1,120 $1,110 $1,100 $1, Actual Exposure Growth (+$38.3M) Modeled Losses & LAE, Coverage Change (+$36.0 M) Operating Exp. (+$1.1 M) Pre Event Note Exp.(-$2.0 M) Reinsurance Cost ($0 M) Page 22
23 Premium, Rates and Coverage Components of 2019 Premium Change +6.66% $1,180 $1,170 $1,160 $1,177.3 $1,178.4 $1,176.3 $1,176.3 $1,150 $1,140 $1,141.3 $1,130 $1,120 $1,110 $1,100 $1, Actual Exposure Growth (+$38.3M) $1,118.6 Modeled Losses & LAE, Pre Coverage Change (-22.6 M) Modeled Losses & LAE, Coverage Change (+$58.7 M) Operating Exp. (+$1.1 M) Pre Event Note Exp.(-$2.0 M) Reinsurance Cost ($0 M) Page 23
24 Premium, Rates and Coverage 3.00% Rate Change Component Impact 2.00% 1.00% 0.00% 2.91% 0.09% -0.17% 0.00% 2.83% -1.00% Modeled Loss & Cov. Change Operating Expense Change Pre Event Notes Reinsurance Total Page 24
25 Premium, Rates and Coverage 5.00% Rate Change Component Impact 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% -1.83% 4.74% 0.09% -0.17% 0.00% 2.83% -2.00% Modeled Loss Pre Cov. Change Modeled Loss & Cov. Change Operating Expense Change Pre Event Notes Reinsurance Total Page 25
26 The Covered Layer 2018 Actual 2019 Projected 47.4 yrs $ B 41.1 yrs $ B $17 Billion for Loss + LAE % $17 Billion for Loss + LAE % 9.8 yrs $7.178 B 9.9 yrs $7.422 B Retained Industry Retained Industry Retained Page 26
27 Coverage 2018 Actual 2019 Proposed FHCF Retention $7.178 B $7.422 B FHCF Limit $ B $ B FHCF Premium $1.103 B $1.176 B Coverage % % Payout Multiple * Retention Multiples for FHCF Coverage Selections 90% % % *Payout multiple based on 12/31/2018 premium of $1.103 B Page 27
28 Exposure by Type of Business 2019 Exposure Distribution 86.5% 1.2% 4.6% 1.1% 6.6% Residential Tenants Condominium-Owners Mobile Home Commercial Page 28
29 Exposure and Loss by Type of Business 100% 90% 80% 70% 60% 50% 40% 30% Tenants Mobile Home Condominium-Owners Commercial Residential 20% 10% 0% Total Exposure Terr 1-5 (48%) Terr 6-10 (25%) Terr (17%) Terr (6%) Terr (4%) Modeled Loss Page 29
30 Retention History 8.0 FHCF Retention History $ Billions Target Ratemaking Retention ($B) 2.0 Actual Retention ($B) Contract Year Page 30
31 5. Other Topics of Interest Paragon Strategic Solutions Inc. 31
32 Modeled Losses ($ Billions) % Change Modeled Exposure $2,238 $2, % Gross Losses $3.174 $ % FHCF Layer Losses $0.788 $ % Loss Cost per $1, % Page 32
33 Modeled Losses Gross Single Event Severity Distribution Adjusted to 2019 Exposure Level $60 $55 $50 $45 $40 $35 FHCF Layer Loss ($B) $30 $25 $20 $15 $10 $5 $ Return Time (Years) Page 33
34 Retention Limit Adjustment 03/01/2018 Update Millions $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 Aggregate FHCF Layer Liabilities Average(AIR,RMS) Industry Aggregate Average(AIR,RMS) Company Retention Limit Aggregate $ Return Time Page 34
35 Expense for Pre-Event Notes Florida Hurricane Catastrophe Fund Pre-Event Note Expense Loading Contract Term : 6/01/2019 to 5/31/ A Projected Debt Service 2016A Projected Debt Service Total Debt Service Net Cost Reimbursement Deposit Premium 14,000,000 7,000,000 21,000,000 2 Average Market Value 1,000,000, ,081,967 1,695,081,967 3 Exp. Default Loading % 0.3% 0.3% 4 Exp. Default Cost (2)*(3) 3,000,000 2,085,246 5,085,246 5 Total Projected Liquidity Facility Cost (1)+(4) 17,000,000 9,085,246 26,085,246 Notes - This method uses values projected by the FHCF's Financial Advisor, Raymond James (01/18/2019 for 2013A); (1/18/2019 for 2016A); plus a judgmental loading for potential asset loss. - $550 million of $1.2 billion 2016A Bonds come due on 7/1/2019. Page 35
36 Interest Rate Assumption 0.0% 10.0% Monthly FHCF Investment Returns 5.0% Investment Yield 0.0% -5.0% -10.0% Actual Yield Invest. Assumption -15.0% -20.0% Page 36
37 Interest Rate Assumption 0.0% 8.0% Monthly FHCF Investment Returns 7.0% 6.0% 5.0% Investment Yield 4.0% 3.0% 2.0% 1.0% Actual Yield Invest. Assumption 0.0% -1.0% -2.0% Page 37
38 Allocation of Trend by Year Built Residential Exposure ($ Billions) Year Built Year Built Year Built Contract Year 2012 or Later Pre 2012 All Years ,704 1, ,711 1, ,750 1,961 % of Total Exposure 2012 or Later Pre 2012 All Years % 93.4% 100.0% % 91.3% 100.0% % 89.2% 100.0% Year to Year Change 2012 or Later Pre 2012 All Years % 0.5% 2.8% % 2.3% 4.7% Selected Trend 20.90% 2.00% 4.00% Page 38
39 Mitigation Rating Factors Rating Factor Description Commercial Type of Business Mobile Residential Home Tenants Condos Year Built Roof Shape 2012 or later or Earlier Unknown or Mobile Home Hip, Mansard, or Pyramid Gable, Other or Unknown Opening Protection Structure Opening Protection** No Structure Opening Protection On Balance Factor **Structure Opening Protection Credit requires that primary policy has structure opening protection credit. Page 39
40 Loadings and Factors Adjustment Adj. to Gross Losses 4.28% 4.29% Post-model 5.0% 5.0% Retention + Limit 0.299% % Investment Income 0.0% 0.0% Operating Expense $7,932,277 $8,796,525 Pre Event Note Expense $27,723,288 $26,085,246 Reinsurance (Premium net of ceded loss) $27,725,644 $27,725,644 Page 40
41 Proposed 2019 Rating Territories Proposed 2019 Rating Territories Not Rated Page 41
42 Indicated Zip Code Shifts by Year Zip Count Zip Count Zip Count Zip Count Zip Count Zip Count Zip Count Zip Count Zip Count Zip Count Zip Count Zip Count Zip Count Shift Up 1Terr Stayed the Same Shift Down 1 Terr Grand Total The table below outlined how the Modeled Residential exposure, after tempering, has moved relative to last year's territory allocations and 2018 indicated shifts were not implemented, except if the indication was for a change of two or more territories. Residential Exposure Residential Exposure Residential Exposure Residential Exposure Residential Exposure Residential Exposure Residential Exposure Residential Exposure Residential Exposure Residential Exposure Residential Exposure Residential Exposure Residential Exposure Shift Up 1Terr 424,239,189,098 1,052,071,843,315 95,153,867, ,793,850, ,354,576,503 1,034,102,124, ,982,310, ,372,324, ,038,689,041 30,355,393, ,301,968-3,863,182,393 Stayed the Same 876,709,520, ,189,825, ,246,787,074 1,329,194,622,054 1,068,072,705, ,624,555, ,054,403,377 1,064,750,757, ,963,061, ,059,146,159 1,609,421,358,880 1,643,489,426,318 1,007,348,125,861 Shift Down 1 Terr 194,377,582,850 39,769,466, ,485,686, ,788,837, ,251,133, ,042,393, ,657,288, ,116,842,049 9,470,255, ,630,004,707 18,497,846,898 30,552,736, ,805,357,599 Grand Total 1,495,326,292,877 1,644,031,135,044 1,591,886,341,123 1,623,777,310,369 1,568,678,414,996 1,540,769,074,140 1,504,694,002,832 1,469,239,924,466 1,505,472,006,014 1,552,044,543,911 1,628,039,507,746 1,674,042,163,263 1,756,016,665,853 Billions 2,000 1,800 1,600 1,400 1,200 1, Shift Up 1Terr Stayed the Same Shift Down 1 Terr Page 42
43 Proposed 2019 % Rate Change by Zip Code Percent Change < -15% -15% to -10% -10% to -5% -5% to 0% 0% to 5% 5% to 10% 10% to 15% > 15% Page 43
44 % Rate Changes for 2019 % Change in Rates Maximum Decrease % Minimum Decrease 20.93% Percentage of Residential Percentage of Residential Exposure Percentage of Threshold Count of ZIP Zip Codes in Exposure Res Exposure in Risk Counts Risk Counts in From To Codes Group (in 000's) Group (Houses) Group Less Than -15% % 365,453, % 835, % -15% -10% % 379,351, % 863, % -10% -5% % % % -5% 0% % 589,670, % 1,230, % 0% 5% % 417,677, % 966, % 5% 10% % 1, % % 10% 15% % 804, % % Greater Than 15% % 3,057, % 6, % % 1,756,016, % 3,902, % New ZIP Codes in % % % % 1,756,016, % 3,902, % Page 44
45 6. Recap Paragon Strategic Solutions Inc. 45
46 History of Components (Supplemental Versions) Discounted Loss 990,619, ,000, ,038, ,475,818 1,073,304,022 1,023,717, ,570, ,610, ,345, ,274, ,237, ,780,342 Operating Expense 82,136,065 65,463,190 64,889,850 55,642,505 21,910,834 39,000,556 43,140, ,128, ,323, ,848,000 96,655,565 97,881,771 Cash Build Up 0 51,623, ,092, ,067, ,042, ,679, ,177, ,934, ,792, ,405, ,223, ,665,528 Modeled Premiums 1,072,755,114 1,084,086,503 1,156,021,171 1,181,186,071 1,314,257,827 1,328,398,044 1,275,888,380 1,214,674,191 1,157,461,089 1,175,527,673 1,112,115,989 1,176,327,641 Investment Discount 127,479,463 88,670,499 78,563,624 45,594, Modeled Undiscounted Premiums 1,200,234,577 1,172,757,002 1,234,584,795 1,226,780,830 1,314,257,827 1,328,398,044 1,275,888,380 1,214,674,191 1,157,461,089 1,175,527,673 1,112,115,989 1,176,327,641 Millions 1,600 1,400 1,200 Modeled Premiums Millions 1,600 1,400 1,200 Modeled Undiscounted Premiums 1,000 1, Discounted Loss Operating Expense Cash Build Up Discounted Loss Investment Discount Operating Expense Cash Build Up Page 46
47 Overall Indications FHCF Reimbursement Premium, Exposure, Coverage, and Rate Premium ($ Billions) Exposure ($ Billions) Overall Avg. Rate (per $1,000) Company Selected Coverage % Avg. Rate 90% (per $1,000) 2018 Actual $ , % Projected $ , % % Change 6.66% 3.72% 2.83% 11.08% -7.43% Page 47
48 Overall Indications Premium, Exposure, Coverage and Rate Changes by Type of Business Type of Business Premium Exposure Overall Avg. Rate Company Selected Coverage % Average Rate Unadjusted for Coverage Change Residential 7.17% 4.00% 3.05% 9.02% -5.47% Tenants -0.69% 4.00% -4.50% 0.26% -4.75% Condos 4.27% 5.00% -0.69% 3.90% -4.42% Mobile Home -3.30% 0.00% -3.30% 0.76% -4.03% Commercial 9.16% 0.00% 9.16% 44.16% % Total 6.66% 3.72% 2.83% 11.08% -7.43% Page 48
49 Overall Indications Rate On Line Changes LIMIT (FHCF) FHCF Layer Change $17,000,000,000 Modeled 6.53% 6.92% 6.04% $17,000,000,000 Actual % 6.92% 6.66% Page 49
50 7. Questions Paragon Strategic Solutions Inc. 50
51 Questions Page 51
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