florida property insurance markets economic and financial update robert p. hartwig, ph.d., cpcu,...

Florida Property Insurance Markets

Economic and Financial Update

Robert P. Hartwig, Ph.D., CPCU, PresidentInsurance Information Institute 110 William Street New York, NY 10038

Tel: (212) 346-5520 Fax: (212) 732-1916 bobh@iii.org www.iii.org

Insurance Information InstituteMedia BriefingTallahassee, FL

January 22, 2008

Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2005)

$3.5 $3.8 $4.8 $5.0$6.6 $7.4 $7.7

$10.3

$21.6

$41.1

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

Georges(1998)

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Andrew(1992)

Katrina(2005)

$ B

illi

ons

Sources: ISO/PCS; Insurance Information Institute.

Seven of the 10 most expensive hurricanes in US history impacted

Florida:

Andrew, Katrina, Wilma, Charley, Ivan, Frances & Jeanne

Landfalling Hurricanes: 1900-2007FL Landfalls are Common

184

70

26

0

50

100

150

200

All Landfalling: 1900-2007

FL Landfalling FL CAT 3+Landfalling

Source: HURDAT database; Insurance Information Institute.

A hurricane strikes FL every other year on average—CAT 3+ every 4 years

38% of all hurricane landfalls occur in FL

37% of all FL landfalls are

CAT 3+

1.7 hurricanes make landfall each year on average

Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,

1987-2006¹

Fire, $6.6 , 2.2%

Tornadoes, $77.3 , 26.0%

All Tropical Cyclones, $137.7 ,

46.3%

Civil Disorders, $1.1 , 0.4%

Utility Disruption, $0.2 , 0.1%

Water Damage, $0.4 , 0.1%Wind/Hail/Flood,

$9.3 , 3.1%

Earthquakes, $19.1 , 6.4%

Winter Storms, $23.1 , 7.8%

Terrorism, $22.3 , 7.5%

Source: Insurance Services Office (ISO)..

1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2006 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.

Insured disaster losses totaled $297.3 billion from

1987-2006 (in 2006 dollars). Hurricanes & tropical storms accounted for

$137.7 billion of these—near half of the total.

Distribution of US Insured CAT Losses: TX, FL vs US, 1980-2006*

Texas, $25.6 , 10%

Florida, $57 , 22%

Rest of US, $176 , 68%

Florida accounted for 22% of all US insured CAT losses from 1980-2006: $57B out of

$249.3B

*All figures (except 2006 loss) have been adjusted to 2005 dollars.Source: PCS division of ISO.

$ Billions of 2005 Dollars

Total Value of Insured Coastal Exposure (2004, $ Billions)

$1,901.6$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

$0 $500 $1,000 $1,500 $2,000 $2,500

FloridaNew York

TexasMassachusetts

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

Source: AIR Worldwide

Florida leads the way for insured coastal

property at more than $1.9 trillion in 2004 and is expected to

double by 2014

Historical Hurricane Strikes in Miami-Dade, FL, 1900-2007

Source: NOAA Coastal Services Center, http://maps.csc.noaa.gov/hurricanes/pop.jsp?PopStormStates=FL&PopStormCounty=; Insurance Info. Institute, accessed 11/28/07.

Population of Miami-Dade County is 10

times what it was when the last period of

intense activity began in the 1930s, lasting 30

years

FLORIDA HURRICANES & INSURER

PROFITABILITY:

Selling Home Insurance in Florida is Challenging

($9.30)

($3.77)

$2.96 $3.40

($10)

($8)

($6)

($4)

($2)

$0

$2

$4

$6

2004 2005 2006 2007E

Underwriting Gain (Loss) in Florida Homeowners Insurance,

2004 - 2007E*

*2007 estimate by Insurance Information Inst. based on historical loss, expense and premium data for FL.**Does not include Citizens Property Insurance Corporation results.

$ B

illi

ons

Over the past four years, underwriting losses

exceeded premiums in Florida by an estimated

$6.7 billion

Private Insurers**

($10.60)

($0.21)

$0.69 $0.43$0.86 $1.08 $1.23 $1.28 $1.43 $1.15 $1.38 $1.76

($9.30)

($3.77)

$2.96 $3.40

($12)

($10)

($8)

($6)

($4)

($2)

$0

$2

$4

$6

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E

Underwriting Gain (Loss) in Florida Homeowners Insurance,

1992-2007E*

*2007 estimate by Insurance Information Inst. based on historical loss, expense and premium data for FL.**Does not include Citizens Property Insurance Corporation results.

$ B

illi

ons

Florida’s homeowners insurance market produces small/modest

profits in most years and enormous losses in others

Private Insurers**

-$10.6-$10.8-$10.1-$9.7

-$8.8-$7.7

-$6.5

-$5.2

-$3.8-$2.7

-$1.3

$0.5

-$8.8

-$12.6

-$9.6

-$6.2

($14)

($12)

($10)

($8)

($6)

($4)

($2)

$0

$2

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E

Cumulative Underwriting Gain (Loss) in Florida Homeowners

Insurance, 1992-2007E*

$ B

illi

ons

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.

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.

*2007 estimate by Insurance Information Inst. based on historical loss, expense and premium data for FL.**Does not include Citizens Property Insurance Corporation results.

Private Insurers**

Rates of Return on Net Worth for Homeowners Ins: US vs. Florida

Source: NAIC; 200/6 US and FL estimates from the Insurance Information Institute.

-54.3%

-2.8%

-183.3%

-714.9%

-53.4%

36.0%

-800%

-700%

-600%

-500%

-400%

-300%

-200%

-100%

0%

100%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06E

US Florida

Averages: 1990 to 2006E

US HO Insurance = -0.9%

FL HO Average = -36.5%

Andrew

4 Hurricanes

Wilma, Dennis, Katrina

1990 – 2006E

The Facts About Homeowner Insurer Profits and Losses in Florida

• During the period from 1992 through 2007, private home insurers in Florida paid an estimated $6.2 billion more in claims than they received in premiumsThis $6.2 billion underwriting loss remains even after including

$2.96 billion in profits in 2006 and $3.4 billion in 2007 (est.) It will take until 2009 for insurers just to get to the breakeven point

for the 15 year period 1992-2009 even if there no storm losses in 2008 and 2009

• Florida Has Been a Money-Losing Proposition for Most Home Insurers in Terms of ReturnThe average annual rate of return on FL homeowners insurance

was -36.5% from 1990-2006, despite a profitable 2006Even if insurers were to earn a 40% rate of return (implying no

storm activity) every year, the average return for insurers will not exceed 0% until 2022. To reach the current 5% risk-free return on 10-year Treasury bonds would take until 2026 and a 10% return is unachievable until 2033

Florida State-Run Insurer Residual Deficits 2004/2005 (Millions of Dollars)

Source: Insurance Information Institute research.

-$516

-$1,425

-$1,770-$2,000

-$1,800

-$1,600

-$1,400

-$1,200

-$1,000

-$800

-$600

-$400

-$200

$0Florida Hurricane Catastrophe Fund (FHCF) Florida Citizens

2004 2005

The hurricanes seasons of 2004/5 weakened the FL Hurricane CAT

Fund and Citizens, producing a gross state-run insurer deficit of $3.7 billion

FL’s guarantee fund will also assess for at

least $400 million

Insurance Information Institute On-Line

If you would like a copy of this presentation, please email me at bobh@iii.org