Windstorm Insurance in Florida Protect Our Economy

Transcription

1 Windstorm Insurance in Florida Protect Our Economy

2 Table of Contents The Problem...slide 3 The Solution slide 5 Improve Risk Methodology slide 6 Wind versus Water.slide 9 Collier County....slide 10 Lee County. slide 13 Miami-Dade County....slide 14 Monroe County...slide 15 Building Strength...slide 19 RMS. slide 27 Depopulate Citizens and Incentivize Private Insurers......slide 33 Require Multi-Peril Coverage. slide 36 Limit Increases. slide 39 Extend Use and File....slide 40 Conclusion slide 41 About FIRM..slide 43 1/12/2012 Slide 2

3 THE PROBLEM Windstorm risk is not adequately spread throughout the private market in Florida. Windstorm risk is over-estimated in coastal areas due to inadequacies in risk models. Citizens Property Insurance, a quasigovernmental entity, bears the majority of windstorm risk in Florida. 1/12/2012 Slide 3

4 The Problem (continued) This results in continually escalating and unaffordable premiums that unnecessarily burden Floridians force some Floridians to sell their homes dampen our real estate recovery and create economic instability. Since 1992, the Legislature has struggled to find a workable solution to this problem. 1/12/2012 Slide 4

5 THE SOLUTION 1. Improve the methodology that predicts risk 2. Depopulate Citizens combining its capital with the Cat Fund to create a new reinsurance fund for the private market 3. Require all insurance companies to offer multi-peril policies throughout the state 4. Limit Citizens increases to 10% in the interim 5. Extend file and use indefinitely 1/12/2012 Slide 5

6 1. Improve risk methodology 1. Improve the methodology that predicts risk by better allocating hurricane damage between that caused by wind and that caused by water accurately accounting for on-the-ground distinctions in building strength This will result in lower wind Probable Maximum Loss (PML) in many expensive coastal areas which should encourage the private market to offer wind coverage. 1/12/2012 Slide 6

7 THE MODELS ARE WRONG. The models used to establish insurance rates by predicting wind damage do not account for: Wind vs. Water damage Models assume that ALL hurricane damage is created by wind and paid by windstorm insurance. In many coastal areas, both actuarial and meteorological evidence suggests that a significant portion of hurricane damage is caused by storm surge and paid by flood insurance. Building strength by territory Some areas of the State have stronger building codes and histories of sturdier building stock than others. Models assume all structures start out weak. 1/12/2012 Slide 7

8 The models are wrong. This results in: an over-estimate of WIND loss in low-lying coastal areas in areas with verifiably strong building stock fear of loss that keeps the private carriers from offering wind coverage unaffordable premiums for insured Floridians In some areas of the state, windstorm premiums can exceed a mortgage payment. As they continue to rise, they put greater pressure on the struggling real estate economy to recover. 1/12/2012 Slide 8

9 MODELING WIND VS. WATER In many coastal areas the greatest potential damage from a hurricane is from water and storm surge, not from wind. This is confirmed by meteorologists from NOAA and the National Weather Service. It is logical based on the percentage of coastal areas that lie within storm surge zones. It is verified by actual damage attributable to wind versus water in coastal areas. Flood insurance pays for storm surge damage. January 12, 2012 Slide 9

10 Modeling Wind vs. Water Collier County For example, most of Collier County would feel the impact of a storm surge from a Category 2 or greater hurricane. Percentage of Structures in Collier County by Storm Zone Based on Maximum Surge Levels 12% 12% 24% 12% 14% SOURCE: Collier County Local Mitigation Plan 26% TS or 5 Not in Zone 1/12/2012 Slide 10

11 Modeling Wind vs. Water Collier County In Collier County half of any hurricane damage in a Category 3 storm or greater would be caused by flood. Estimated Wind Damage in Collier County maximum wind damage loss determined by subtracting the flood damage loss Category Storm from the total structure value in the storm surge zone noted No. of Buildings Building Flood Loss Buildings Value Max Wind loss (building value less flood damage) Flood Damage as % of Building Value Maximum Possible Wind Damage as % of Building Value TS 13,078 $2,756,417,748 $9,338,401,859 $6,581,984,111 30% 70% Cat 1 26,220 $5,636,685,288 $16,804,681,772 $11,167,996,484 34% 66% Cat 2 40,862 $8,296,879,223 $24,266,434,972 $15,969,555,749 34% 66% Cat 3 69,457 $15,476,848,322 $32,529,085,250 $17,052,236,928 48% 52% Cat 4 or 5 95,594 $21,917,836,814 $39,590,841,833 $17,673,005,019 55% 45% SOURCE: Collier County Property Appraiser and Collier County Local Mitigation Plan 1/12/2012 Slide 11

12 Modeling Wind vs. Water Collier County Actual claims data bears this out. In the past nine years in Collier County (including the worst storm years of 2004 and 2005), Citizens Property Insurance collected $122,793,759 more in premiums than they paid in claims. In other words, Citizens made well over a hundred million dollars in Collier even through the worst series of storms in state history. SOURCE: Collier County Local Mitigation Plan and Citizens Property Insurance data provided December /12/2012 Slide 12

13 Modeling Wind vs. Water Lee County Most of coastal Lee County would be inundated by a Category 3 storm, and nearly all of it by a Category 5. Here too, Citizens made $93,868,435 in premiums less claims in the past nine years a gross profit of nearly $100 million through the worst hurricane cycle we ve experienced. SOURCE: Lee County Local Mitigation Plan and Citizens Property Insurance data provided December /12/2012 Slide 13

14 Modeling Wind vs. Water Miami-Dade County Much of Miami-Dade County would experience storm surge of well over 6 feet in a Category 5 hurricane. SOURCE: Miami-Dade Department of Emergency Management and Homeland Security 1/12/2012 Slide 14

15 Modeling Wind vs. Water Monroe County Most of the Florida Keys would flood in a storm of Category 2 or greater. A Category 3 or higher storm would cause significant flood damage. SOURCE: Monroe County Emergency Management January Slide 1512, 2012 January 12, Slide

16 Modeling Wind vs. Water Monroe County In Monroe County, a historical analysis suggests that the SLOSH models actually under-predict storm surge. The SLOSH model covers inland areas. The Keys and other barrier islands have no inland. The SLOSH model does not take into account the wave action that is experienced in the Keys due to low elevation. Storm SLOSH Predicted Surge Actual Experienced Surge Not Named feet 14 feet Not Named feet 20 to 24 feet Hurricane Donna 8 feet 12 to 14 feet Damage caused by flooding/surge and paid for by flood insurance may even be greater than SLOSH models predict. SOURCE: Matt Strahan, Meteorologist in Charge, National Weather Service, Key West January 12, 2012 Slide 16

17 Modeling Wind vs. Water Monroe County In the Keys after Hurricane Wilma, flood insurance paid 14 times more in claims than wind insurance did. Flood claims for Hurricane Wilma alone exceeded all wind claims paid in 2005 for four named storms (Dennis, Katrina, Rita, Wilma). In the past nine years in the Florida Keys, Citizens made $504,334,876 in premiums less claims or a gross profit of half a billion dollars through the worst series of storms we ve experienced. Premiums in the Keys are grossly in excess of that required to cover the risk. (1) Citizens Property Insurance as of February 28, 2006 (2) National Flood Insurance Program as of 6/30/09 (3) Citizens Property Insurance as of July 2008 and December 2011 January 12, 2012 Slide 17

18 Modeling Wind vs. Water - Conclusion Scientists with the Florida Public Hurricane Model have confirmed that they are capable of distinguishing between damage attributable to water vs. wind but do not have the funding to do so. The technology to model wind vs. water is readily available. However, most private insurance companies choose not to instruct their modelers to use it, and the Florida Commission on Hurricane Loss Projection Methodologies has not required modelers to do so. Requiring modelers to differentiate between damage from wind versus water would result in a more accurate allocation of wind risk and demonstrate that risk from wind in coastal areas is worth the investment and entice the private market back to the state. January 12, 2012 Slide 18

19 MODELING FOR BUILDING STRENGTH Risk models traditionally assume that all homes in Florida are weak structures. However, there is a vast difference in the strength of homes built in some coastal areas versus other areas. Models assess only the initial construction date of a building and do not reflect significant structural improvements and hardening efforts made during renovations. January 12, 2012 Slide 19

20 Modeling for Building Strength Computer models assign structures a strength classification based on a set of assumptions regarding the building stock in the modeled areas. Strength Classification Garage Door Sheathing Nailing Roof to Wall Connections Roof Shape Opening Protection Weak Weak (30 psf) 6d (55 psf) Toe nails Gable or Hip None or Plywood Medium Weak (30 psf) 6d (80 psf) Clips Gable or Hip None or Plywood Strong Strong (52 psf) 8d 130 psf) Straps Gable or Hip None or Plywood The Miami-Dade code in South Florida exceeds these standards. These assumptions do not take into account construction realities in places like Monroe County: Monroe has few garages, builds to 150MPH wind gusts, and opening protections and clips have been required for decades. January 12, 2012 Slide 20

21 Modeling for Building Strength The South Florida Building Code has exceeded statewide norms since the late 1970s. Monroe County specifically built according to the Southern Building Code with Hurricane- Resistant Construction. Since 1982, Monroe County code has had the highest 3-second gust wind-speed rating in the state, and buildings are currently required to withstand 150 mile-per-hour winds. January 12, 2012 Slide 21

22 Modeling for Building Strength In many coastal areas and especially the Florida Keys, things like shutters or impact-resistant windows and hurricane straps are requirements. These are not mitigation factors. These are fundamental structural requirements that should qualify such homes as at least medium if not strong in the models. As older homes are remodeled, they are hardened to current standards. But insurers and modelers do not recognize this hardening through renovation. January 12, 2012 Slide 22

23 Modeling for Building Strength Until 2008, much of the Panhandle was exempt from having to meet the Florida Building Code standards. Other interior areas of the state, some hit hard by storms like Frances and Jeanne, have much less stringent strengthening requirements. Yet models assume homes in these areas are equivalent to homes built to stricter wind resistant standards. January 12, 2012 Slide 23

24 Modeling for Building Strength Models assume all homes start out equally weak, even though some areas build to much stronger wind-resistant codes. 1/12/2012 Slide 24

25 Modeling for Building Strength The Construction Conundrum High Cost to Harden Home High Cost Factor in Rate + High Replacement Cost = High Premium because Hardened Home Lower PML It costs more to build sturdy homes. Insurance companies Build high cost factors into the base rate Charge high replacement costs Do not adequately account for sturdier homes Why bother building a sturdy structure? January 12, 2012 Slide 25

26 Modeling for Building Strength Underestimating construction standards by area results in: An inaccurate assessment of the ability of structures to withstand windstorms by region. An over-prediction of loss from wind and overprediction of risk for private insurers. Requiring models to reflect on-the-ground building strength would demonstrate the lower risk in many coastal areas and attract the private market there. January 12, 2012 Slide 26

27 Modeling for Building Strength - RMS A STATISTICAL DEMONSTRATION In 2011, Risk Management Solutions (RMS) conducted the largest ever numerical modeling study (WRF) of hurricane behavior during landfall. The result was a significant finding that risk along the coasts may have been overstated in past models. 1/12/2012 Slide 27

28 Modeling for Building Strength Analysis based on observed wind speeds indicates that hurricane wind strength does not decay as it moves inland as much as previously believed. TO READ: Red represents areas where the new model predicts wind hazard risk greater than that predicted by the existing model; in blue, the new model predicts lower hazard risk (and thus lower rates). 1/12/2012 Slide 28

29 Modeling for Building Strength - RMS Analysis of actual claims data indicates that southeast Florida is less vulnerable to wind damage than previously thought. TO READ: Red represents areas where actual wind claims were greater than that predicted by the existing hazard model; in blue, actual claims were lower than would have been predicted. 1/12/2012 Slide 29

30 Modeling for Building Strength - RMS The combined effect of RMS analyses indicates potential increase in expected losses inland and a relative projected decrease in losses in coastal areas. TO READ: Red represents areas where observed windspeeds were greater than that predicted by the existing hazard model; in blue, observed windspeeds were lower than predicted. 1/12/2012 Slide 30

31 Modeling for Building Strength - RMS The RMS model has been approved but is not used in rate-making by Citizens Property Insurance Corporation. Factors examined in the RMS model, along with additional factors related to building strength and storm surge, should be examined by all modelers. 1/12/2012 Slide 31

32 MODELING: CONCLUSION Premiums are traditionally higher in coastal areas due to higher replacement costs which are driven by: Higher cost of living on the coasts Requirements to build sturdy (and expensive) homes The combination of higher replacement costs and resulting premiums (due to higher building costs) and lower PML (due to sturdier structures and more damage attributable to surge) indicated by more accurate models would attract the private property insurance market back to Florida. 1/12/2012 Slide 32

33 2. Depopulate Citizens & Incentivize Private Insurers Depopulating Citizens over time Gets the State out of the business of actually providing insurance Makes available Citizens $7 billion in capital 1/12/2012 Slide 33

34 2. Depopulate Citizens & Incentivize Private Insurers (continued) The Florida Insurance Incentive and Consumer Assistance Fund will Be created by combining Citizens capital with that of today s Florida Catastrophe Fund Begin with approximately $15 billion in liquid unleveraged capital Have borrowing capacity in excess of $10 billion Be a re-insurance facility for all insurers offering multi- and all-perils policies, providing low-cost reinsurance for the private market. 1/12/2012 Slide 34

35 2. Depopulate Citizens & Incentivize Private Insurers (continued) The Florida Insurance Incentive and Consumer Assistance Fund may fall somewhat short of coverage for a 1 in 100 year catastrophic storm, however: The new Incentive Fund would have the ability to build risk capital over time to address a worst-case scenario. The CAT Fund assessment mechanism may still be necessary, but would likely be used far less frequently. Purchasing additional reinsurance from the private reinsurance market may also be considered to bridge that gap. 1/12/2012 Slide 35

36 3. Require ALL Insurers to Offer Multi-Peril Policies o Requiring all insurance companies in the State that offer P&L lines to offer Multi- or All-Peril policies (excluding flood) is an essential step in the solution. It must be done with steps 1 and 2 because those actions Statistically demonstrate the real wind risk to the private market Offer a reasonably-priced reinsurance option to the private market 1/12/2012 Slide 36

37 3. Require ALL Insurers to Offer Multi-Peril Policies (continued) o Requiring all insurers to offer Multi- or All-Peril policies (excluding flood) makes sense because Recent historical loss data and weather patterns indicate that hurricane risk exists everywhere in Florida, and the economic impact of large and small storms is felt state-wide. This is the only way to ensure that risk is spread across all insurance companies and all insureds in the State. It eliminates the possibility of using affiliated or Florida subsidiary companies to siphon off profits to out-of-state or national parent companies. 1/12/2012 Slide 37

38 3. Require ALL Insurers to Offer Multi-Peril Policies (continued) o It is highly unlikely that insurers will walk away from Florida due to this requirement because With 19 million full-time residents and millions of other out-ofstate homeowners, Florida represents the 4 th largest market in America. We are valuable. Other states have imposed similar requirements and the insurance companies still operate in them. Accurate models will demonstrate the financial viability of doing business here. The Incentive Fund provides more affordable reinsurance to protect the private market. 1/12/2012 Slide 38

39 4. Limit Increases to 10% The existing cap on rate increases from Citizens Property Insurance should be extended for at least five years to ensure economic stability in our real estate market as the transition to private coverage is made. In addition, new efforts by Citizens to increase premiums through denial of mitigation techniques proven to diminish risk should be examined. These are tactics to increase premiums by violating the spirit if not the letter of the law. 1/12/2012 Slide 39

40 5. Extend File and Use It will be necessary to extend file and use (where rates are approved by the Office of Insurance Regulation before they are promulgated) indefinitely to Confirm that insurers are utilizing best-practice modeling information Confirm that insurers are accessing the new Incentive Fund and accurately calculating rates Manage a smooth transition away from Citizens without making coverage unaffordable and damaging our economy 1/12/2012 Slide 40

41 CONCLUSION The five steps outlined here are necessary to protect our economy and help Floridians preserve their homes. Taken together, they will Provide the private market with Assurance that coastal wind risk in particular has been overstated An incentive to assume wind risk (see Citizens profits in coastal Collier, Lee and Monroe Counties) A reward for doing so (access to low-cost reinsurance) 1/12/2012 Slide 41

42 CONCLUSION (continued) These five steps will also Provide Floridians with Access to market choice in property insurance Protection against wildly fluctuating insurance rates Decreased reliance on assessments Get the State out of the insurance business All five steps must be taken to finally solve the ongoing windstorm insurance crisis in Florida. 1/12/2012 Slide 42

43 WHO IS FIRM? Grassroots group founded in Key West in February 2006 to address skyrocketing windstorm insurance rates in Monroe County Run primarily by volunteers and funded by donations 501(c)(4) organization OUR MISSION: To advocate for, promote and encourage the promulgation of fair, impartial and actuarially sound windstorm insurance rates for owners of commercial and residential properties within the geographic boundaries of Monroe County, Florida. January 12, 2012 Slide 43

44 Who is FIRM? Contact Information Annalise Mannix, P.E., Executive Director Commissioner Heather Carruthers, President January 12, 2012 Slide 44