Financial and Market Impacts of Hurricanes on Property/Casualty Insurers

Transcription

1 Financial and Market Impacts of Hurricanes on Property/Casualty Insurers Past, Present & Future 2007 National Hurricane Conference New Orleans, LA April 5, 2007 Download at: Robert P. Hartwig, Ph.D., CPCU, President & Chief Economist Insurance Information Institute 110 William Street New York, NY Tel: (212) Fax: (212)

2 Presentation Outline Catastrophe Losses are Growing Globally US: Hurricanes are Now #1 Source of Insured CAT Losses Displacing Tornados Loss Potential from Future Storms is Immense & Growing Rapidly Acts of God & The Bottom Line Hurricanes & The Price of Property Insurance Claims Paying Capacity: The Worst Has Yet to Come Why US Hurricanes Become a Global Insurance Problem The Role of State-Run Insurers Post-Katrina Litigation

3 INSURED CATASTROPHE LOSS REVIEW A Decade of Disaster

4 U.S. Insured Catastrophe Losses* $120 $100 $80 $60 $ Billions 2006 was a welcome respite 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 $61.9 $100.0 $40 $20 $0 $ $ $ $ $ $ $ $ $ *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 $ $ $ $ $ $ $ $ ??

5 Global Number of Catastrophic Events, The number of natural and man-made catastrophes has been increasing on a global scale for 20 years Record 248 manmade CATs & record 149 natural CATs in Natural catastrophes Man-made disasters Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 1/2005 and 2/2006.

6 Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2005) $45 $40 $35 $30 Seven of the 10 most expensive hurricanes in US history occurred in the 14 months from Aug Oct. 2005: $40.6 $ Billions $25 $20 $15 $10 $5 Katrina, Rita, Wilma, Charley, Ivan, Frances & Jeanne $3.5 $3.8 $4.8 $5.0 $6.6 $7.4 $7.7 $10.3 $21.6 $0 Georges (1998) Jeanne (2004) Frances (2004) Rita (2005) Hugo (1989) Ivan (2004) Charley (2004) Wilma (2005) Andrew (1992) Katrina (2005) Sources: ISO/PCS; Insurance Information Institute.

7 Insured Loss & Claim Count for Major Storms of 2005* Insured Loss Claims Insured Loss ($ Billions) $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 Hurricanes Katrina, Rita, Wilma & Dennis produced a record 3.3 million claims 104 $ $5.0 1,047 $10.3 1,744 $40.6 2,000 1,800 1,600 1,400 1,200 1, Claims (thousands) Dennis Rita Wilma Katrina Size of Industry Loss ($ Billions) *Property and business interruption losses only. Excludes offshore energy & marine losses. Source: ISO/PCS as of June 8, 2006; Insurance Information Institute.

8 Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss, ¹ Earthquakes 4 6.7% Winter Storms 7.8% Wind/Hail/Flood 5 Terrorism 7.7% 2.8% Civil Disorders 0.4% Fire 6 2.3% Water Damage 0.1% Utility Disruption 0.1% Tornadoes % Insured disaster losses totaled $289.1 billion from (in 2005 dollars). Tropical systems accounted for nearly half of all CAT losses from , up from 27.1% from All Tropical Cyclones % 1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2005 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 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. Source: Insurance Services Office (ISO)..

9 Hurricane Katrina Insured Loss Distribution by State ($ Millions)* Florida, $572.0, 1.4% Alabama, $1,032, 2.5% Mississippi, $13,605, 33.5% Total Insured Losses = $ Billion Tennessee, $59.0, 0.1% Georgia, $36.0, 0.1% Louisiana accounted for 62% of the insured losses paid and 56% of the claims filed Louisiana, $25,275, 62.3% *As of June 8, 2006 Source: PCS division of ISO.

10 Hurricane Katrina Loss Distribution by Line ($ Billions)* Total insured losses are estimated at $ billion from million claims. Excludes $2- $3B in offshore energy losses Commercial Property & BI, $20,847.0, 52% Vehicle, $2,168.0, 5% Homeowners, $17,564.0, 43% *As of June 8, 2006 Source: PCS division of ISO.

11 Hurricane Rita Loss Distribution, by Line ($ Millions)* Total insured losses are estimated at $5.0 billion (excl. offshore energy of $2-$3B) from 383,000 claims. *As of June 8, 2006 Source: PCS division of ISO. Commercial Property & BI, $1,861.2, 37% Homeowners, $2,974.2, 59% Vehicles, $211.0, 4%

12 Insurers are committed to improving the ability of homes and businesses to withstand major disasters

13 Figure 8. Free Home Inventory Software at Source: Insurance Information Institute

14 HURRICANES: INSURED LOSS POTENTIAL Katrina: Just the Beginning?

15 Total Value of Insured Coastal Exposure (2004, $ Billions) Florida New York Texas Massachusetts New Jersey Connecticut Louisiana S. Carolina Virginia Maine North Carolina Alabama Georgia Delaware New Hampshire Mississippi Rhode Island Maryland $740.0 $662.4 $505.8 $404.9 $209.3 $148.8 $129.7 $117.2 $105.3 $75.9 $73.0 $46.4 $45.6 $44.7 $43.8 $12.1 $1,937.3 $1,901.6 Florida & New York lead the way for insured coastal property at more than $1.9 trillion each. Northeast state insured coastal exposure totals $3.73 trillion. Source: AIR Worldwide $0 $500 $1,000 $1,500 $2,000 $2,500

16 Insured Coastal Exposure as a % of Statewide Insured Exposure (2004, $ Billions) Florida Connecticut New York Maine Massachusetts Louisiana New Jersey Delaware Rhode Island S. Carolina Texas NH Mississippi Alabama Virginia NC Georgia Maryland 13.5% 12.0% 11.4% 8.9% 5.9% 1.4% 37.9% 33.6% 33.2% 28.0% 25.6% 25.6% 23.3% 63.1% 60.9% 57.9% 54.2% 79.3% After FL, many Northeast states have among the highest coastal exposure as a share of all insured exposure in the state. Source: AIR Worldwide 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

17 New Condo Construction in South Miami Beach, Number of New Developments: 15 Number of Individual Units: 2,111 Avg. Price of Cheapest Unit: $940,333 Avg. Price of Most Expensive Unit: $6,460,000 Range: $395,000 - $16,000,000 Overall Average Price per Unit: $3,700,167* Aggregate Property Value: At least $6 Billion *Based on average of high/low value for each of the 15 developments Source: Insurance Information Institute from accessed April 5, 2007.

18 Historical Hurricane Strikes in Galveston County, TX, Population of Galveston County is 5 times what it was when the hurricane of 1900 struck, killing 8,000 Source: NOAA Coastal Services Center, Insurance Info. Institute.

19 Historical Hurricane Strikes in Suffolk County, NY, Population in Suffolk County is 4.5 times what it was in the 1940s Source: NOAA Coastal Services Center, Insurance Info. Institute.

20 Historical Hurricane Strikes in Suffolk County, NY, Population in Barnstable County (Cape Cod) is 5 times what it was in the 1950s Source: NOAA Coastal Services Center, Insurance Info. Institute.

21 Historical Hurricane Strikes in Dare County, NC, Source: NOAA Coastal Services Center, Insurance Info. Institute.

22 Increase in Population of Coastal/Near Coastal Counties in South Carolina (% Change, ) Beaufort Horry 60% 58% Jasper 38% Dorchester 36% Georgetown Berkeley Colleton Charleston 12% 15% 18% 32% Several SC coastal counties have experienced very strong population growth since Home values have also skyrocketed up 120% in Charleston, Berkeley & Dorchester counties between % 10% 20% 30% 40% 50% 60% 70% Sources: Charleston Metro Chamber of Commerce, SC Statistical Abstract, US Census Bureau.

23 Nightmare Scenario: Insured Property Losses for NJ/NY CAT 3/4 Storm Insured Losses: $110B Economic Losses: $200B+ Distribution of Insured Property Losses, by State, ($ Billions) $80 $60 $40 $20 $0 $70 $30 Total Insured Property Losses = $110B, nearly 3 times that of Hurricane Katrina $5 $4 $1 NY NJ PA CT Other Source: AIR Worldwide

24 The 2007 Hurricane Season: Above Average Activity Expected

25 Outlook for 2007 Hurricane Season: 85% Worse Than Average Average* F Named Storms Named Storm Days Hurricanes Hurricane Days Intense Hurricanes Intense Hurricane Days Accumulated Cyclone Energy 96.2 NA 170 Net Tropical Cyclone Activity 100% 275% 185% *Average over the period Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 3, 2007.

26 Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2007 Entire US Coast Average* 52% 2007F 74% US East Coast Including Florida Peninsula 31% 50% Gulf Coast from FL Panhandle to Brownsville, TX 30% 49% ALSO Above-Average Major Hurricane Landfall Risk in Caribbean for 2007 *Average over the period Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 3, 2007.

27 ACTS OF GOD & THE BOTTOM LINE Catastrophic Loss & Insurer Financial Performance

28 ROE: P/C vs. All Industries E 20% P/C profitability is cyclical, volatile and vulnerable 15% 10% Sept. 11 5% 0% -5% Hugo Andrew Northridge US P/C Insurers * P/C insurer ROEs are I.I.I. estimates. Source: Insurance Information Institute; Fortune Lowest CAT losses in 15 years All US Industries Katrina, Rita, Wilma 4 Hurricanes 06E 07F 08F

29 Profitability Peaks & Troughs in the P/C Insurance Industry, F 25% 1977:19.0% 1987:17.3% 2006E:14.0% 20% 15% 10% 10 Years 1997:11.6% 10 Years 9 Years 5% 0% -5% 1975: 2.4% F 08F * P/C insurer ROEs are I.I.I. estimates. Source: Insurance Information Institute; ISO, A.M. Best. 1984: 1.8% 1992: 4.5% 2001: -1.2%

30 Share of Losses Paid by Reinsurers, by Disaster* 70% 60% 50% 40% 30% 20% Reinsurance is playing an increasingly important role in the financing of mega- CATs; Reins. Costs are skyrocketing 30% 25% 60% 20% 45% 10% 0% Hurricane Hugo (1989) Hurricane Andrew (1992) Sept. 11 Terror Attack (2001) 2004 Hurricane Losses 2005 Hurricane Losses *Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.

31 FLORIDA: A CASE STUDY Profitability is Elusive

32 $ Billions $4 $2 $0 ($2) ($4) ($6) ($8) ($10) ($10.60) ($12) Underwriting Gain (Loss) in Florida Homeowners Insurance, E* ($0.21) $0.69 $0.43 $0.86 $1.08 $1.23 $1.28 $1.43 $1.16 $1.47 $1.88 Florida s homeowners insurance market produces small profits in most years and enormous losses in others ($10.39) ($3.73) $ E 06F *2005 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2005 residential windstorm losses of $7.35B estimate from Ins. Info. Inst.

33 $ Billions $2 $0 ($2) ($4) ($6) ($8) ($10) ($12) ($14) ($16) Cumulative Underwriting Gain (Loss) in Florida Homeowners Insurance, E* Regulator under US law has duty to allow rates that are fair, not excessive and not unduly discriminatory. Reality is that regulators in CAT-prone states suppress rates. -$6.5 -$7.7 -$1.2 -$2.7 -$3.8 -$5.2 -$10.6-$10.8 -$10.1-$9.7-$8.8 It took insurers 11 years ( ) to erase the UW loss associated with Andrew, but the 4 hurricanes of 2004 erased the prior 7 years of profits & 2005 deepened the hole. $0.7 -$9.7 -$13.4 -$ E 06F *2005 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2005 residential windstorm losses of $7.35B estimate from Ins. Info. Inst.

34 Rates of Return on Net Worth for Homeowners Ins: US vs. Florida 100% 0% US Florida 0.0% 36.0% -100% -200% -54.3% Averages: 1990 to 2006E US HO Insurance = -0.7% % -80.0% -300% FL HO Average = -38.1% -400% -500% -600% -700% -800% 4 Hurricanes % Andrew Wilma, Dennis, Katrina E 06E Source: NAIC; 2005/6 US and FL estimates from the Insurance Information Institute.

35 PRICES Flat or Down Almost Everywhere: Coastal Increases Reflect Risk

36 Strength of Recent Hard Markets by NWP Growth* 25% 20% 15% (post-katrina) period could resemble (post-andrew) 10% 5% 0% -5% -10% F 2007F 2008F 2009F 2010F Note: Shaded areas denote hard market periods. Source: A.M. Best, Insurance Information Institute 2005: biggest real drop in premium since early 1980s * figures are III forecasts/estimates growth of 0.4% equates to 1.8% after adjustment for a special one-time transaction between one company and its foreign parent figures from III Groundhog Survey.

37 $800 $750 $700 $650 $600 $550 $500 $450 $400 Average Expenditures on Homeowners Insurance Countrywide home insurance expenditures are expected to rise 4% in 2007, but much more in hurricane zones $536 $508 $481 $488 $440 $455 $418 $593 $668 $693 $776 $711 $ * 05* 06* 07* *Insurance Information Institute Estimates/Forecasts Source: NAIC, Insurance Information Institute Hurricane zone residents can expect increases in the 20%-100% range, especially if insured by a state entity

38 $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 Price Increases for Louisiana Citizens State s High Risk Insurer of Last Resort Coastal Homeowner $1, % $2,630 $2,690 $2,165 Coastal Business +2.3% +13.6% $2,460 LACPIC went broke in 2005 by $965 million Source: Louisiana Citizens Property Insurance Corp. from USA Today, April 3, 2007, p. 1A % $4,235

39 Price Increases for MS Windstorm Underwriting Association State s Insurer of Last Resort 300% 250% 200% 150% 100% Coastal Homeowner MWUA went broke in 2005 by $595 million an has received massive state tax subsidies Coastal Business 90% 267% 50% 22% 22% 0% Source: Mississippi Windstorm Underwriting Association from USA Today, April 3, 2007, p. 1A..

40 Percent of Commercial Accounts Renewing w/positive Rate Changes, 2 nd Qtr % 70% 60% 50% 40% 30% 20% 10% 0% Commercial Property Business Interruption 71% 63% Largest increases for Commercial Property & Business Interruption are 48% in the Southeast, smallest in Midwest 32% 35% 21% 28% 21% 12% 10% Southeast Southwest Pacific NW Northeast Midwest Source: Council of Insurance Agents and Brokers

41 Percent of Commercial Accounts Renewing w/positive Rate Changes, 4 th Qtr % 25% 20% 15% 10% 5% 0% 25% 8% Commercial Property 11% 6% 6% 6% 6% Business Interruption Largest increases for Commercial Property & Business Interruption are in the Southeast, but are diminishing; Smallest in Midwest 3% 0% 0% Southeast Southwest Pacific NW Northeast Midwest Source: Council of Insurance Agents and Brokers

42 CLAIMS PAYING CAPACITY 2006 Respite: Rebuilding Year

43 U.S. Policyholder Surplus: E* $ Billions $550 $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 Capacity as of 12/31/06 is $481.5B (est.), 13.1% above year-end 2005, 69% above its 2002 trough and 44% above its 1999 peak. Foreign reinsurance and residual market mechanisms absorbed 45% of 2005 CAT losses of $62.1B 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 *III Estimate.

44 Capital Raising by Class Within 15 Months of KRW $ Billions Insurers & Reinsurers raised $33.7 billion in the wake of Katrina, Rita, Wilma Insurance Linked Securities, $6.253, 19% New Cos., $8.898, 26% Sidecars, $6.359, 19% Existing Cos., $12.145, 36% Source: Lane Financial Trade Notes, January 31, 2007.

45 Annual Catastrophe Bond Transactions Volume, Risk Capital Issued Number of Issuances Risk Capital Issues ($ Mill) $5,000 $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 Catastrophe bond issuance has soared in the wake of Hurricanes Katrina and the hurricane seasons of 2004/2005 $1,729.8 $1,991.1 $1,139.0 $966.9$1,219.5 $846.1 $984.8 $1,142.8 $633.0 $4, Number of Issuances Source: MMC Securities and Guy Carpenter; Insurance Information Institute.

46 Reinsurance & Capital Markets are Globally Linked Global Premiums Ceded Reinsurance Market Losses Paid States like LA, MS paid little into the global reinsurance pool but got a lot in return, shrinking global claims paying resources and pushing up reinsurance costs for all

47 STATE RUN INSURERS Solution or Ticking Time Bombs?

48 Florida Citizens Exposure to Loss (Billions of Dollars) $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 Exposure to loss in Florida Citizens nearly doubled in 2006 and is now the largest home insurer in the state $154.6 $195.5 $206.7 $ Source: PIPSO; Insurance Information Institute

49 MS Windstorm Plan: Exposure to Loss (Millions of Dollars) $2,000 $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 Total exposure to loss in the Mississippi Windstorm Underwriting Association (MWUA) has surged by 431 percent, from $352.9m in 1990 to $1.9bn in $352.9 $637.1 $917.9 $864.9 $848.6 $1,121.7 $1,344.3 $1,631.8 $1, Source: PIPSO; Insurance Information Institute

50 TX Windstorm Insurance Assoc.: Growth In Exposure to Loss Building & Contents Only, $ Billions $40 $35 $30 $25 $20 $15 TWIA s liability in-force for building & contents has surged by nearly 200 percent in the last six years from $12.1bn in 2000 to $35.9bn in 2006 $12.1 $13.2 $16.0 $18.8 $20.8 $23.3 $35.9 $10 $5 $ * Source: TWIA (as of 11/30/06); Insurance Information Institute

51 Major Residual Market Plan Estimated Deficits 2004/2005 (Millions of Dollars) $0 -$200 -$400 -$600 -$800 -$1,000 -$1,200 -$1,400 -$1,600 -$1,800 -$2,000 -$1,425 -$516 -$1, Florida Hurricane Catastrophe Fund (FHCF) Florida Citizens Louisiana Citizens -$954 Mississippi Windstorm Underwriting Association (MWUA) -$595 * Hurricane Katrina pushed all of the residual market property plans in affected states into deficits for 2005, following an already record hurricane loss year in 2004 * MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in Federal Aid. Source: Insurance Information Institute

52 What Role Should the Government Play in Insuring Against Natural Disaster Risks?

53 Government Aid After Major Disasters (Billions)* $ Billions $120 $100 $80 $60 $110.0 Katrina federal aid was more than all the federal aid for the 9/11 terrorist attacks, 2004 s 4 hurricanes, the Northridge earthquake and Hurricane Andrew combined. $43.9 $40 $20 $17.7 $15.5 $15.0 $0 Hurricane Katrina (2005) Sept. 11 Terrorist Attack (2001) Hurricane Andrew (1992) Northridge Earthquake (1994) Hurricanes Charley, Frances, Ivan & Jeanne (2004) *In 2005 dollars. Source: United States Senate Budget Committee, Insurance Information Institute as of 12/31/05.

54 Comprehensive National Catastrophe Plan Schematic 1:500 Event National Catastrophe Contract Program 1:50 Event State Regional Catastrophe Fund State Attachment Personal Disaster Account Private Insurance Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.

55 POST-KATRINA LITIGATION Suits Add to Uncertainty, Expense

56 Hurricane Katrina Claim Status on Storm s 1 st Anniversary* 95% of the 1.2 million homeowners insurance claims in Louisiana & Mississippi are settled, with just 2% in dispute In Process, 3% Mediation/ Litigation, 2% Settled, 95% *Hurricane Katrina made its north Gulf coast landfall August 29, Source: Insurance Information Institute survey, August 2006.

57 Likely Market Impacts of Post- Katrina Litigation Litigation Creates an Additional Layer of Uncertainty in What is Already a Very Difficulty Market Ultimate Thrust of Litigation is to Compel Insurers to Pay Water Damage (Flood/Surge) Losses for Which They Have Never Received A Penny in Premium Some Courts Apparent Willingness to Retroactively Rewrite Long-Standing, Regulator Approved Terms & Conditions of Insurance Contracts Creates an Unpriceable Risk Compounded by juries willing to award millions in punitives People Discouraged from Buying Flood Coverage BOTTOM LINE: Weather, Courts, Juries Together Create Nearly Impossible Operating Environment Coverage Under These Circumstances Will Necessarily Become More Expensive, Less Available

58 Summary Insured catastrophe losses are on the rise, in the US and globally Hurricanes are the #1 source of US catastrophe losses, by far Rapid coastal development (driven by strong demographics) & rising property values are the primary reasons for the upward trend in insured catastrophe losses in the US Government subsidies to coastal dwellers exacerbate problem Financial impacts on property/casualty insurance industry have been severe ($81 billion in hurricane losses in 2004/2005) but were manageable due to global spread of losses Expectations for more frequent & more severe storms is driving risk-based, actuarially sound rates upward Insurers remain deeply committed to helping policyholders reduce vulnerability by supporting stronger building codes and mitigation But insurers have no control over local land use decisions Ultimately, insurance prices must reflect true risk Market signals on risk provide incentives to fortify structures Litigation creates unmanageable level of uncertainty

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