Insurance & Coastal Risk in Florida

Insurance & Coastal Risk in Florida An Economic Analysis Florida Hurricane Catastrophe Fund 7 th Annual Participating Insurers Workshop Orlando, FL June 7, 2007 Robert P. Hartwig, Ph.D., CPCU, 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

Presentation Outline Review of Florida Hurricane Risk: An Insurance Industry Perspective Florida Exposure Analysis How Bad is It? Could it Get Any Worse? Are Florida s Development Patterns Rational? Examination of Stakeholder Incentives How Insurers Signal What Should be Built & Where Private vs. Government-run Insurers Role of Risk Perception What Works, What Doesn t Overview of a National Catastrophe Plan State-Run Plans Recommendations

Review of Florida Hurricane Risk: An Insurance Industry Perspective

U.S. Insured Catastrophe Losses* $120 $100 $80 $60 $40 $20 $0 $7.5 $2.7 $4.7 $ Billions 2006 was a welcome respite. 2005 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 $22.9 $5.5 $16.9 $8.3 $7.4 $2.6 $10.1 $8.3 $4.6 $26.5 $5.9 $12.9 $27.5 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07Q1 20?? *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 $61.9 $9.2 $1.2 $100.0

Source: HURDAT database; Insurance Information Institute. Landfalling Hurricanes: 1900-2006 FL Landfalls are Common 200 A hurricane strikes FL every other year on average CAT 3+ every 4 years 183 1.7 hurricanes make landfall each year on average 150 100 50 38% of all hurricane landfalls occur in FL 70 37% of all FL landfalls are CAT 3+ 26 0 All Landfalling: 1900-2006 FL Landfalling FL CAT 3+ Landfalling

Sources: ISO/PCS; Insurance Information Institute. 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. 2004 Oct. 2005: $40.6 $ Billions $25 $20 Nine of the 10 affected Florida! $21.6 $15 $10 $5 Storms affecting Florida in yellow. $3.5 $3.8 $4.8 $5.0 $6.6 $7.4 $7.7 $10.3 $0 Georges (1998) Jeanne (2004) Frances (2004) Rita (2005) Hugo (1989) Ivan (2004) Charley (2004) Wilma (2005) Andrew (1992) Katrina (2005)

Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss, 1986-2005¹ 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 2 24.5% All Tropical Cyclones 3 47.5% 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 1997. 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).. Insured disaster losses totaled $289.1 billion from 1984-2005 (in 2005 dollars). Tropical systems accounted for nearly half of all CAT losses from 1986-2005, up from 27.1% from 1984-2003.

Insured Losses from Top 10 Hurricanes Since 1990 & Katrina Adjusted for Inflation, Growth in Coastal Properties, Real Growth in Property Values & Increased Property Insurance Coverage $ Billions $70 $60 $50 $40 $30 $20 $10 (Billions of 2005 Dollars) The p/c insurance industry will likely experience a $20B+ event approximately every 10-12 years, on average mostly associated with hurricanes $10.1 $11.0 $12.4 $12.6 $13.1 $14.5 $20.8 $21.1 Plurality of worst-case scenarios involve Florida $31.3 $40.0 $65.3 $0 Number 9 (1909, FL) Hazel (1954, NC) Number 4 (1938, NY) Number 2 (1919, FL) Number 4 (1928, FL) Bestsy (1965, LA) Number 2 (1915, TX) Number 1 (1900, TX) Andrew (1992, FL) Katrina (2005, LA)* Number 6 (1926, FL) *ISO/PCS estimate as of October 10, 2005. Source: Hurricane Katrina: Analysis of the Impact on the Insurance Industry, Tillinghast, October 2005; Insurance Info. Institute.

Hurricane Damage from Top 10 Hurricanes Since 1900 Adjusted for Inflation, Growth in Coastal Properties, Real Growth in Property Values* $ Billions $140 $120 $100 $80 $60 $40 $20 $0 Camille (1969, MS) $19.2 Donna (1960, FL) $23.9 Lake Okeechobee (1928, FL) (Billions of 2004 Dollars) Hurricanes causing $50B+ in economic losses will become more frequently $30.3 $34.3 $35.0 Storm 9 (1944) New England (1938) Number 2 (1915, TX) $50.2 $50.8 $53.1 Andrew (1992, FL) *Includes damage form wind and storm surge but generally excludes inland flooding. Source: Roger Pielke and Christopher Landsea, December 2005; Insurance Info. Institute. Galveston (1900, TX) Great Miami Hurricane Katrina (2005, LA)* $80.0 Number 6 (1926, FL) $129.7

Florida Homeowners Insurance Market Share (As of 12/31/06) State Farm 18.1% FL Citizens 16.3% Allstate Tower Hill Universal P&C USAA Nationwide Liberty Mutual ARX Holding Corp. Universal Ins. Co. Grp. All Other 6.6% 4.3% 4.2% 4.0% 3.7% 2.8% 2.7% 2.3% While State Farm leads in premium, Citizens leads in exposure 35.0% 0% 5% 10% 15% 20% 25% 30% 35% 40% *Computed based in direct premiums written (DPW). Actual exposure to hurricane loss may differ due to reinsurance purchased and location of risk. Source: Fitch Ratings, Hurricane Season 2007: A Desk Reference for Investors, June 1, 2007.

Florida Residential Insurance Admitted Market Breakdown FL-Only Unaffiliated Cos 30% 2006 Other 10% Risk is highly concentrated in Florida in Citizens and FL-only companies Citizens 30% PUPs* 30% *PUPs are Florida-only subsidiaries of companies with multi-state or national operations. Source: Citizens Property Insurance Corp.

Florida Property Insurance Market Breakdown (as of 12/31/05) Residential Commercial Surplus 3% Admitted 97% Admitted 40% Most commercial market risks covered in surplus lines market. Implies regulators need to allow more flexibility for residential insurers. Surplus 60% Source: Florida Citizens Property Insurance Corp.; Insurance Info, Institute.

Top 10 Deadliest Hurricanes to Strike the US: 1851-2006 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 LA-Grande Isle (1909) Hurricane Katrina was the deadliest hurricane to strike the US since 1928 372 390 400 408 Audrey-SW LA,TX (1957) Fear of death is no longer a factor in decision process LA-Last Island (1856) FL Keys (1935) 700 GA/SC (1881) LA-Cheniere (1893)***** 1,250 1,323 1,500 Katrina (SE LA, MS)**** SC/GA Sea Islands (1893)*** 2,500 SE FL/L. Okechobee (1928)** 8,000 Galvaston (1900)* *Could be as high as 12,000 **Could be as high as 3,000 ***Midpoint of 1,000 2,000 range ****Associated Press total as of Dec. 11, 2005. *****Midpoint of 1,100-1,400 range. Sources: NOAA; Insurance Information Institute.

Total NFIP Claim Payments by State (Top 10) Jan 1, 1978 - Dec. 2004 $3,000 $2,500 $2,000 $1,500 $ Millions $2,702.0 $2,226.7 $1,727.3 Until Katrina, Florida ranked 2 nd in terms of total flood claims payments. $1,000 $500 $687.2 $598.2 $473.4 $422.6 $419.9 $384.4 $377.8 $276.6 $0 TX FL LA NC NJ PA SC MO VA AL MS Source: FEMA, National Flood Insurance Program (NFIP)

Outlook for 2007 Hurricane Season: 85% Worse Than Average Average* 2005 2007F Named Storms Named Storm Days Hurricanes Hurricane Days Intense Hurricanes 9.6 49.1 5.9 24.5 2.3 28 115.5 14 47.5 7 17 85 9 40 5 Intense Hurricane Days 5 7 11 Accumulated Cyclone Energy 96.2 NA 170 Net Tropical Cyclone Activity 100% 275% 185% *Average over the period 1950-2000. Source: Philip Klotzbach and Dr. William Gray, Colorado State University, May 31, 2007.

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 1950-2000. Source: Philip Klotzbach and Dr. William Gray, Colorado State University, May 31, 2007.

*Figure for 2000s is extrapolated based on data for 2000-2005 (6 major storms: Charley, Ivan, Jeanne (2004) & Katrina, Rita, Wilma (2005)). Source: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm. Number of Major (Category 3, 4, 5) Hurricanes Striking the US by Decade 1930s mid-1960s: Mid-1990s 2030s? Period of Intense Tropical Cyclone Activity New Period of Intense Tropical Cyclone Activity 8 8 8 9 10 4 6 5 6 4 5 6 6 Tropical cyclone activity in the mid-1990s entered the active phase of the multi-decadal signal that could last into the 2030s Already as many major storms in 2000-2005 as in all of the 1990s 1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s

Florida Hurricane Exposure Analysis: How Bad Is It? (Bad) Could It Get Any Worse? (Yes)

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 has nearly $2 trillion in insured coastal exposure Source: AIR Worldwide $0 $500 $1,000 $1,500 $2,000 $2,500

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 *III list Source: AIR Worldwide 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% Nearly 80% of Florida s total insured exposure is coastal 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Value of Insured Residential Coastal Exposure (2004, $ Billions) Florida New York Massachusetts Texas New Jersey Connecticut Louisiana S. Carolina Maine Virginia North Carolina Alabama Georgia Delaware Rhode Island New Mississippi Maryland $88.0 $65.1 $64.5 $60.0 $60.0 $36.5 $29.7 $26.6 $25.9 $24.8 $20.9 $5.4 $306.6 $302.2 $247.4 $205.5 $512.1 $942.5 Florida has nearly $1 trillion in insured residential coastal exposure Source: AIR $0 $200 $400 $600 $800 $1,000

Value of Insured Commercial Coastal Exposure (2004, $ Billions) New York Florida Texas Massachusetts New Jersey Connecticut Louisiana S. Carolina Virginia Maine North Carolina Georgia Alabama Mississippi New Hampshire Delaware Rhode Island Maryland $437.8 $355.8 $258.4 $199.4 $121.3 $83.7 $69.7 $52.6 $45.3 $43.3 $39.4 $23.8 $20.9 $19.9 $17.9 $6.7 $994.8 $1,389.6 Florida has nearly $ trillion in insured residential commercial exposure Source: AIR $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600

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New Condo Construction in South Miami Beach, 2007-2009 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 www.miamicondolifestyle.com accessed April 5, 2007.

Great Miami Hurricane of 1926: Hurricane Damage Adjusted for Inflation, Growth in Coastal Properties, Real Growth in Property Values* $ Billions $600 $500 $400 $300 $200 $100 $0 Track of 1926 storm $0.76 (Billions of 2004 Dollars) Repeat of Great Miami Hurricane of 1926 could cause $500B in damage by 2020 given current demographic trends $73 $130 $500 1926 1998 2005 2020 *Includes damage form wind and storm surge but generally excludes inland flooding. Source: Roger Pielke and Christopher Landsea, December 2005; Insurance Info. Institute.

FINANCIAL STRENGTH & RATINGS Industry Has Weathered the Storms Well

Reasons for US P/C Insurer Impairments, 1969-2005 2003-2005 1969-2005 Affiliate Problems 8.6% Catastrophe Losses 8.6% Deficient Loss Reserves/Inadequate Pricing 62.8% Sig. Change in Business 4.6% Misc. 9.2% Reinsurance Failure 3.5% Deficient Loss Reserves/Inadequate Pricing 38.2% Alleged Fraud 11.4% Rapid Growth 8.6% Deficient reserves, CAT losses are more important factors in recent years Investment Problems* 7.3% Affiliate Problems 5.6% Catastrophe Losses 6.5% Alleged Rapid Fraud Growth 8.6% 16.5% *Includes overstatement of assets. Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;

P/C Insurer Impairments, 1969-2006 70 The number of impairments varies significantly over the p/c insurance cycle, with peaks occurring well into hard markets 7 8 9 9 9 15 12 11 13 12 16 14 13 15 12 13 15 19 18 19 18 34 31 34 29 31 36 35 41 49 49 49 49 50 47 54 60 58 60 50 40 30 20 10 0 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 Source: A.M. Best; Insurance Information Institute

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2006 Combined Ratio 120 115 110 105 100 95 90 Impairment rates are highly correlated underwriting performance Combined Ratio after Div P/C Impairment Frequency 2006 impairment rate was 0.43%, or 1-in-233 companies, half the 0.86% average since 1969 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 Impairment Rate Source: A.M. Best; Insurance Information Institute

The Insurance Economics of Florida Hurricanes Drivers of Private Insurer Behavior in Florida

FLORIDA HURRICANES & UNDERWRITING PERFORMANCE: Homeowners Insurers Have Lost Billions in Florida

Underwriting Gain (Loss) in Florida Homeowners Insurance, 1992-2006E* $ Billions $4 $2 $0 ($2) ($4) ($6) ($8) ($10) ($10.60) ($12) ($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) $2.75 92 93 94 95 96 97 98 99 00 01 02 03 04 05E 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. 2006 estimate from Ins. Info. Inst.

Cumulative Underwriting Gain (Loss) in Florida Homeowners Insurance, 1992-2006E* $ Billions $2 $0 ($2) ($4) ($6) ($8) ($10) ($12) ($14) ($16) 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 (1993-2003) 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 -$10.7 92 93 94 95 96 97 98 99 00 01 02 03 04 05E 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. 2006 estimate from Ins. Info. Inst.

Rates of Return on Net Worth for Homeowners Ins: US vs. Florida 40% 30% 35.4% 33.6% 1993-2003 31.5% 35.7% 29.3% 28.6% 31.3% 29.0% 23.1% 20% 10% 0% 2.5% -1.7% 13.1% 3.6% 12.4% Profits were earned most years after Andrew but before 2004 5.4% 5.4% 3.8% 1.4% 9.7% -10% -20% -4.2% -7.2% Averages: 1993 to 2003-16.1% US HO Insurance = +2.8%; FL= +25.0% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: NAIC

Rates of Return on Net Worth for Homeowners Ins: US vs. Florida 100% 0% -100% -200% -300% -400% US -54.3% Florida 1990 2006E Averages: 1990 to 2006E US HO Insurance = -0.9% FL HO Average = -36.5% -2.8% 36.0% -53.4% -183.3% -500% -600% -700% -800% 4 Hurricanes -714.9% Andrew Wilma, Dennis, Katrina 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06E Source: NAIC; 200/6 US and FL estimates from the Insurance Information Institute.

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 -$1,770 2004 2005 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

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

($ Millions) $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $471 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. $523 $580 $644 $715 $794 $881 $978 $1,339 $1,206 $1,086 $0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 *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

Estimated Cumulative New Insurance Capital Required to Support Growth in FL Homeownership, 2005-2015* ($ Millions) $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 Florida may need to attract more than $9 billion in new capital over the next decade, assuming recent demographic trends continue. $471 $4,607 $3,726 $2,932 $2,217 $1,573 $993 $5,585 $6,672 $7,877 $9,216 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 *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

Are Florida s Development Patterns Rational?

Excessive Catastrophe Exposure: Outcome of Economically & Politically Rational Decision Process? Property Owners Make economically rational decision to live in disaster-prone areas Low cost of living, low real estate prices & rapid appreciation, low/no income tax, low property tax, rapid job growth Government-run insurers (e.g., CPIC, NFIP) provide implicit subsidies by selling insurance at below-market prices with few underwriting restrictions Government aid, tax deductions, litigation recovery for uninsured losses No fear of death and injury Local Zoning/Permitting Authorities Allowing development is economically & politically rational & fiscally sound Residential construction creates jobs, attracts wealth, increases tax receipts, stimulates commercial construction & permanent jobs, develops infrastructure Increases local representation in state legislature & political influence Property and infrastructure damage costs shifted to others (state and federal taxpayers, policyholders in unaffected areas) Developers Coastal development is a high-margin business Financial interest reduced to zero after sale Source: Insurance Information Institute.

Excessive Catastrophe Exposure: Outcome of Economically & Politically Rational Decision Process? State Legislators Loathe to pass laws negatively impacting development in home districts Local development benefits local economy and enhances political influence Rapid development lessens need for higher income and property taxes Can redistribute CAT losses to unaffected policyholders and taxpayers Can suppress insurance prices via state insurance regulator, suppress pricing and weaken underwriting standards in state-run insurer & redistribute losses Congressional Delegation Home state development increases influence in Washington Political representation, share of federal expenditures Loathe to pass laws harming development in home state/district Tax law promotes homeownership and actually produces supplemental benefits for property owners in disaster-prone areas Large amounts of unbudgeted disaster aid easily authorized Tax burden largely borne by those outside CAT zone & those with no representation (children & unborn) President Presidential disaster declarations and associated aid are increasing Political benefits to making declarations and distributing large amounts of aid Direct impact on favorability ratings & election outcomes Losses can be distributed to other areas and the unrepresented Source: Insurance Information Institute.

How Insurers Signal What Should be Built and Where

Government-Run Insurers Lead to Poor Land Use/Design Decisions Government-run insurers (markets of last resort) serve as a vital safety valve after major market disruptions, but also serve as an enabler of unwise development Government-run property insurers wash away market-based signals about relative risk Consequence is runaway development in disaster-prone areas Government-run insurers: Generally fail to charge actuarially sound rates Have weak underwriting standards Are thinly capitalized Can assess losses to policyholders other than their own Vulnerable to political pressure Inadequate premiums, insufficient capital and weak underwriting mean that most government plans, from Citizens Property Insurance Corporation to the National Flood Insurance Program operate with frequent deficits

Negative Outcomes from Flaws in Government-Run Insurers True risk associated with building on a particular piece of property is obscured Subsidies are generated leading to market distortions/inequities: Many thousands of homes likely would not have been built (or built differently) if property owner obligated to pay actuarially sound rates CPIC assessments from Wilma will require grandmothers living in trailer parks on fixed incomes in Gainesville to subsidize million dollar homes in Marco Island via assessment (surcharges). Serial rebuilding in disaster-prone areas is the norm Property owners come to assume that the government rate is the fair rate and object to moves to actuarially sound rates. Government-run insurer can t control its own exposure Legislature mandates that CPIC offer coverage in most cases if no private insurer will offer coverage due to high risk, near certainty of destruction No restrictions on value of property, so high-valued properties represent disproportionate share of potential loss Taxpayer Burden: NFIP borrowed $20B+ in 2005

Insurance-in-Force: CPIC vs. Voluntary (Private) Insurers That s why operating in the red is unavoidable Private insurers accept relatively little wind risk in South FL

Risk Perception Is Disaster Risk Factored into the Buy/Build/Move Decision?

Average Annual Population Growth Rates of Atlantic States, 1960-1980 & 1980-2003 Connecticut Delaware Florida Georgia Massachusetts Maryland Maine North Carolina United States Source: US Census Bureau. 0.48% 0.5% 0.48% 0.7% 0.62% 0.9% 1.11% 1.5% 1.31% 1.2% 1.1% 1.0% 1.6% 1.4% 1.49% 1.93% 2.33% 1960-1980 1980-2003 3.2% 0% 1% 1% 2% 2% 3% 3% 4%

Average Annual Population Growth Rates of Atlantic States, 1960-1980 & 1980-2003 Florida 2.33% 3.2% New Hampshire New Jersey 0.9% 0.66% 1.40% 2.0% 1960-1980 1980-2003 New York 0.2% 0.37% South Carolina 1.3% 1.19% Rhode Island 0.5% 0.53% Virginia 1.4% 1.35% United States 1.1% 1.01% Source: US Census Bureau. 0% 1% 1% 2% 2% 3% 3% 4%

Average Annual Population Growth Rates of Gulf Coast States, 1960-1980 & 1980-2003 Alabama 0.8% 0.61% 1960-1980 1980-2003 Florida 2.33% 3.2% Louisiana Mississippi 0.28% 0.7% 0.56% 1.2% Texas 1.8% 1.84% United States 1.1% 1.01% 0% 1% 1% 2% 2% 3% 3% 4% Source: US Census Bureau.

Average Annual Population Growth Rates of Florida Coastal Cities, 1990-2003 Cape Coral/Fort Myers Daytona Jacksonville Miami/Ft. Lauderdale/Miami Beach Naples/Marco Island Orlando Pensacola Palm Bay/Melbourne Sarasota/Bradenton Tampa/St. Petersburg 1.8% 1.43% 1.9% 1.72% 2.1% 1.36% 2.29% 1.8% 1.01% 1.8% 1.53% 1.9% 1.80% 1.5% 1.38% 2.8% 2.74% 3.35% 3.0% 1990-2000 2000-2003 5.0% Source: US Census Bureau. 0% 1% 2% 3% 4% 5% 6%

State Population Growth Rates by Decade, Gulf Coast, 1980-2003 1980-1990 1990-2000 2000-2003 28.40% 21.00% Florida has posted the fastest growth of any Gulf Coast state since 1980, driving its exposure to hurricane loss 17.74% 20.50% 0 3.78% 9.57% 1.21% 6.41% 0.40% 5.73% 0.60% 2.08% 10.05% 1.26% 5.90% 9.71% 10.31% AL FL LA MS TX US 9.52% Source: Statistical Abstract of the United States, US Census Bureau

Projected Percent Population Growth of Atlantic States, 2003-2030 Florida 52.2% New Hampshire 24.5% New Jersey New York South Carolina Rhode Island Virginia 1.5% 6.9% 12.6% 21.6% 28.5% Florida is expected to grow faster than any Atlantic Coast state through 2030, driving its exposure to hurricane loss still higher United States 20.9% 0% 10% 20% 30% 40% 50% 60% Source: US Census Bureau.

Projected Percent Population Growth of Atlantic States, 2003-2030 Connecticut 5.8% Delaware 21.4% Florida 52.2% Georgia Massachusetts Maryland Maine North Carolina 8.6% 7.7% 24.3% 32.5% 37.5% Florida is expected to grow faster than any Atlantic Coast state through 2030, driving its exposure to hurricane loss still higher United States 20.9% 0% 10% 20% 30% 40% 50% 60% Source: US Census Bureau.

Projected Percent Population Growth of Gulf Coast States, 2003-2030 Alabama 8.0% Florida 52.2% Louisiana Mississippi Texas 6.6% 7.1% Florida is expected to grow faster than any Gulf Coast state through 2030, driving its exposure to hurricane loss still higher 41.0% United States 20.9% 0% 10% 20% 30% 40% 50% 60% Source: US Census Bureau.

Percent of Atlantic & Gulf Coast Populations Living in FL, 2003 and 2030 2003 2030 The proportion of Atlantic and Gulf coast population living in FL will continue to swell in the decades ahead 18.22% 23.88% 33.36% 38.37% 0 Atlantic Coast Gulf Coast Source: US Census Bureau

What Works, What Doesn t

Successful Tools for Controlling Hurricane Exposure Strengthened building codes Stringent enforcement of building codes Fortified home programs Insurance rates based on sound actuarial principles (risk-based rates that are not government controlled); Works for commercial insurers Disciplined underwriting Removing impediments to capital flows Incentives to adopt mitigation Forcing communities to consider and take a larger stake in their catastrophe exposure Source: Insurance Information Institute

Unsuccessful Tools for Controlling Hurricane Exposure Insurance rates that are not actuarially sound (i.e., don t reflect true risk) Political interference in rate process Inadequate underwriting controls Subsidies Intra-state (policyholders/taxpayers) US Taxpayer Voluntary flood coverage Litigation Source: Insurance Information Institute

Faux Pas & Fatal Flaws in Florida s Approach to Managing CAT Risk FAUX PAS Governor has unnecessarily, unjustifiably and counterproductively vilified private insurers and reinsurers Insurers want to find ways to cover the majority of hurricane-exposed property in FL and will do so if given the opportunity Insurers and capital markets can be partners in finding lasting and innovative solutions to Florida s permanent hurricane problem Changes to market are arbitrary, capricious and punitive and violate virtually all laws of modern economics, finance, statistics and actuarial science Meteorological and actuarial reality have been forced to take a back seat to politics Political risk to insurers now exceeds hurricane risk Bottom Line: Residents of Florida are Now the Most Financially Exposed People on Earth to Catastrophic Risk

Faux Pas & Fatal Flaws in Florida s Approach to Managing CAT Risk FATAL FLAWS Virtually no diversification Basically monoline, single state, single risk No true spread of risk Citizens market share is concentrated in riskiest areas FHCF is Citizen s sole reinsurer; FHCF doesn t access retrocessional mkt. Rates in Citizens not even remotely close to actuarially sound Citizens & FHCF are too thinly capitalized Losses are substantially funded via post-event assessment Plants seeds of animosity between non-coastal & coastal dwellers (within state and with non-coastal states) Largest beneficiaries are residents of southeast coast Plan will alienate business community (liability lines assessed) Homeowners insurance has been converted into a regressive income and wealth transfer mechanism May have harmed chances for Fed Natural Catastrophe Fund Little done to address true risk of hurricanes

Problem Issues Local control of land use and permitting creates significant incentive problems Benefits accrue locally while many costs can be redistributed to others via taxes, insurance and aid Prospect of government aid reinforces unsound building and location decisions States don t want to raise taxes to pay for mitigation/prevention even if state is sole beneficiary E.g., NO levees; Beach replenishment Source: Insurance Information Institute

Pre- vs. Post-Event in FL for 2007 Hurricane Season Billions $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 Pre-Event Funding $9.9 $10.1 $14.6 $10.4 Post-Event Funding (Assessments & Bonds) There is a very significant likelihood of major, multiyear assessments in 2007 Total = $20.0 Billion $25.0B $35.0B $24.1 $10.9 $43.8B $31.4 $12.4 $49.5B 1-in-20 1-in-30 1-in-50 1-in-70 1-in-85 1-in-100 1-in-250 Notes: Pre-event funding includes funds available to Citizens, FHCF and private carriers plus contingent funding available through private reinsurance to pay claims in 2007. Post-event funding is on a present value basis and does not include financing costs. Probabilities are expressed as odds of a single storm of this magnitude or greater happening in 2007. Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida s Property Insurance Mechanisms, 3/07. $34.5 $15.0 $55.0B $37.4 $17.6 $80.0B $54.2 $25.8

Per Household Savings vs. Long- Term Costs of FL Legislation for 2007 Hurricane Season $16,000 $14,000 Direct Costs Indirect Costs $13,971 Billions $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 Savings dwarfed by potential costs under most scenarios $265 Total = $2,552 $1,726 $1,066 $721 $1,005 $1,486 $6,031 $2,528 $3,503 $7,635 Savings 1-in-20 1-in-30 1-in-50 1-in-70 1-in-85 1-in-100 1-in-250 Notes: Assumes average homeowners insurance premium of $1300 in 2007. Savings for 2007 reflects 24.3% savings on hurricane costs, assumed to be 63% of premium. Savings based on statewide OIR estimate. Actual savings may be less. Direct costs include assessments paid by policyholders on home and personal auto premiums. Indirect costs include assessments on commercial lines passed on to policyholders via higher prices. Amounts are in nominal dollars, or the total cost of borrowing including finance charges over the term of the bond. Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida s Property Insurance Mechanisms, 3/07. $3,219 $4,416 $8,191 $3,497 $4,694 $8,708 $3,752 $4,956 $6,116 $7,855

Average Annual Assessment per Household, 1-in-100 Year Event in 2007 The average Florida household will pay $8,699 over 30 years in assessments if a 1-in-100 year event strikes in 2007. Assessments could rise if additional storms hit in 2007 or beyond. Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida s Property Insurance Mechanisms, 3/07.

Savings vs. Costs by Region: Neither Equitable nor Proportionate STATEWIDE AVERAGE Average Savings: $265 Cost of 1-in-30 Storm: $2,550 Cost is 10 times avg. savings TALLAHASSEE Average Savings: $20 Cost of 1-in-30 Storm: $2,000 Cost is 100 times avg. savings ORLANDO Average Savings: $30 Cost of 1-in-30 Storm: $2,075 Cost is 69 times avg. savings TAMPA Average Savings: $100 Cost of 1-in-30 Storm: $2,300 Cost is 23 times avg. savings MIAMI Average Savings: $1,120 Cost of 1-in-30 Storm: $3,375 Cost is 3 times avg. savings Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida s Property Insurance Mechanisms, 3/07.

Overview of Plans for a National Catastrophe Insurance Plan

NAIC s Comprehensive National Catastrophe Plan Proposes Layered Approach to Risk Layer 1: Maximize resources of private insurance & reinsurance industry Includes All Perils Policy Encourage Mitigation Create Meaningful, Forward-Looking Reserves Layer 2: Establishes system of state catastrophe funds (like FHCF) Layer 3: Federal Catastrophe Reinsurance Mechanism Source: Insurance Information Institute

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.

Objectives of NAIC s Comprehensive National Catastrophe Plan Should Promote Personal Responsibility Among Policyholders Supports Reasonable Building Codes, Development Plans & Other Mitigation Tools Maximize the Risk Bearing Capacity of the Private Markets Should Provide Quantifiable Risk Management to the Federal Government Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.

Legislation has been introduced and ideas espoused by ProtectingAmerica.org will likely get a more thorough airing in 2007/8

STATE RESIDUAL MARKETS Still Growing Despite a Quiet 2006

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 $154.6 $195.5 Source: PIPSO; Insurance Information Institute $206.7 $210.6 408.8 2002 2003 2004 2005 2006

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 -$1,770 2004 2005 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

Recommendations

Recommendations for Controlling Hurricane Exposure Raise public awareness of risk Mandatory risk disclosure in all residential real estate transactions Require signed waivers if decline flood coverage that also waive rights to any and all disaster aid, or Mandate flood coverage Continue to strengthen & enforce of building codes Allow markets to determine all property insurance rates Role of state focused on difficult-to-insure or income issues Increase incentives to mitigate Require state-run insurer to charge actuarially sound rates and limit high value exposure Require communities/counties to a financial stake in their catastrophe exposure Reimburse disaster aid to state/federal government

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