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					Hurricanes Katrina & Rita:
  Impacts on the Property/Casualty
Insurance & Reinsurance Industries

                      Insurance Information Institute
                             October 14, 2005

                                  Download at:
         http://www.disasterinformation.org/disaster2/facts/presentation/


Robert P. Hartwig, Ph.D., CPCU, Senior Vice 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
•   P/C Financial Overview: A Position of Strength
•   Industry Claims-Paying Resources
•   Underwriting Performance pre-Katrina
•   Pricing Impacts
•   Catastrophe Review:
    Loss estimate overview
    Hurricanes Katrina & Rita’s place in history
    Loss distribution (geographic & by line)
    Impact on financial & underwriting performance
    Influence of legal environment on Katrina claims
• Overview of the Natl. Flood Insurance Program
• The Role of the Fed. Government & CAT Risk
• Q&A
 P/C Financial
   Overview
 Strong Pre-Katrina
Results Help Industry
 Meet the Challenge
                    P/C Net Income After Taxes
                    1991-2005:H1 ($ Millions)*
              2001 ROE = -1.2%                               Pre-Katrina/Rita
                                                             profits were strong,
              2002 ROE = 2.2%                                 helping industry
$40,000                                              $36,819                                           $38,722
              2003 ROE = 8.9%                               cope with mega-loss
                                                             $30,773                                      $30,925
              2004 ROE = 10.5%*                                                                $30,029
$30,000
              2005:H1 ROE = 15.3%            $24,404
                                                                    $21,865
                          $19,316        $20,598                          $20,559
$20,000
           $14,178
                                               ―Record‖ 2004
                                 $10,870    profits wrongly cited
$10,000                                         as reason why
                   $5,840
                                             insurers should pay                        $3,046
                                            excluded flood losses
      $0


-$10,000                                                                         -$6,970
              91     92     93      94     95   96      97     98      99   00     01      02     03      04 05*
  *ROE figures are GAAP; 2004 figure is return on average surplus. 2005 figure is for first half of year.
  Sources: A.M. Best, ISO, Insurance Information Institute.
                        ROE: P/C vs. All Industries
                             1987–2005F*
20%
                                  2005:H1 P/C ROAS = 15.3%

15%


10%
                                                                                                                16.3
                                                                                                                Pts.

 5%


 0%               2005 P/C ROAS = 9.5% after
                  adjusting for Katrina & Rita
-5%




                                                                                                   05H1
        87

             88

                   89

                        90

                             91
                                  92

                                       93

                                            94

                                                 95

                                                      96
                                                           97

                                                                98

                                                                     99

                                                                          00

                                                                               01
                                                                                    02

                                                                                         03

                                                                                              04



                                                                                                          05*
                             US P/C Insurers                All US Industries
*GAAP ROEs except 2004/5 P/C figure = return on average surplus. 2005 figure is III full-year estimate.
Source: Insurance Information Institute; Fortune for all industry figures
               ROE vs. Equity Cost of Capital:
                US P/C Insurance: 1991 – 2005*
18%                   Because p/c insurers today generally are earning their
                      cost of capital and are financially strong, they should
16%                     be able to readily access fresh capital if necessary.




                                                                                                                                       +5.0 pts
14%
12%
10%




                                                                                      -9.0 pts

                                                                                                      -1.7 pts

                                                                                                                      +0.6 pts
8%




                                                                         -13.2 pts
6%
4%
2%
             US P/C insurers missed their
0%
             cost of capital by an average
-2%
             6.3 points from 1991 to 2003
-4%
       91     92    93    94    95     96    97    98    99   00    01               02          03              04              05*
*First half 2005.                                                  ROE                    Cost of Capital
Source: The Geneva Association, Ins. Information Inst.
          P/C Insurers Stocks Remain Up,
         Brokers Up Too, Reinsurers Down
              Total Return 2005 YTD Through October 7, 2005

                    -1.32%                                                          S&P 500

                                                                         12.10%     Life/Health
P/C insurer stocks
outperforming the                                             8.20%                 All Insurers
 market despite
                                          2.55%                                     P/C
 Katrina & Rita
                      -0.34%                   Reinsurers down more                 Multiline
    -6.19%
                                              on Katrina & Rita news
                                                                                    Reinsurers
  Brokers up on tight                       3.36%
                                                                                    Brokers
    market hopes

-10%           -5%              0%             5%             10%             15%


 Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
         Change in YTD Stock Performance by
           Sector Pre- & Post-Katrina/Rita
                                                                 P/C & reinsurer stocks hurt by Katrina & Rita,
   P/C    Reinsurers                 Brokers
                                                                   broker stocks rose on expectation of tighter
                                                                   conditions and demand for broker services




                                                                                                                                                                 4.8%
                                                                     Katrina strikes
                                           4.5%
6%
         4.2%



                        4.0%




                                                                                                                                                      3.9%
                                                                        Aug. 29



                                                              3.8%




                                                                                                                                               3.6%




                                                                                                                                                                                   3.4%
                                                                                                                  3.3%



                                                                                                                                    2.7%




                                                                                                                                                                        2.6%
4%




                                                                                                2.5%
                                                                             2.2%




                                                                                                                             2.1%
                                                                                                           1.9%
2%

0%

-2%                                                                                     -0.6%                   Rita comes
                                                                                                              ashore Sept. 24
                                                  -2.7%




-4%
                           -3.5%
                -4.0%




                                                                     -4.1%




                                                                                                   -4.5%
                                                      -4.8%




                                                                                -5.3%
            -5.5%




                                                                 -5.5%




-6%
                                                                                                                     -5.7%



                                                                                                                                           -5.8%



                                                                                                                                                         -6.0%



                                                                                                                                                                           -6.2%
                                   -6.4%




-8%
         5-Aug 12-Aug 19-Aug 26-Aug                                          2-Sep              9-Sep             16-Sep 23-Sep 30-Sep                                  7-Oct
Source: SNL Securities; Insurance Information Institute
 Insurer Claims
Paying Resources
                             U.S. Policyholder Surplus:
                                    1975-2005*
        $450
                       Capacity TODAY is $412.5B, 45% above its 2002
        $400         trough and 22% above its mid-1999 peak. Sufficient
                        capacity exists to pay all Katrina & Rita claims.
        $350

        $300             PHS backs all lines of
$ Billions




        $250
                     insurance in all states. PHS is
                     not fungible and is frequently
        $200
                      misunderstood and misused
        $150
                                                                          “Surplus” is a measure of
        $100                                                              underwriting capacity. It is
                                                                          analogous to “Owners
             $50                                                          Equity” or “Net Worth” in
                                                                          non-insurance organizations
              $0
                   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 0405*

       Source: A.M. Best, ISO, Insurance Information Institute                                  *As of 6/30/05.
                       US Reinsurers: Change in
                     Policyholder Surplus ($ Billions)
               $75
                               Reinsurer PHS fell 20% from
                                                                             $73.0
                             1998-2002. Capacity today similar
               $70             to 1998. Same story globally.
                                                                     $64.8
               $65
                     $60.9
                             $58.9
  $ Billions




               $60                         $57.9

               $55

               $50                                           $48.8
                                                     $46.8
               $45

               $40
                      1998     1999         2000      2001    2002    2003    2004
Source: A.M. Best; Insurance Information Institute
UNDERWRITING
Strong Underwriting Results
   Pre-Katrina Will Help
Industry Weather the Storm
                     P/C Industry Combined Ratio*
                2001 = 115.7                                      Combined Ratios
120                                                                1970s: 100.3
                2002 = 107.2
                                                                   1980s: 109.2
                2003 = 100.1                                       1990s: 107.8

                 2004 = 98.3                                      2000-05E: 103.9

110          2005:H1 = 92.7*




100
                                The industry has just experienced
                                 its most remarkable recovery in
                                    recent history. Katrina will
                                       partially reverse this
 90
       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
Sources: A.M. Best; ISO, III.   *2005 figure is though 6/30/05.
                        Underwriting Gain (Loss)
                             1975-2005E*
             $25
                     Before Katrina, p/c insurers were on track for
             $15     only the second underwriting profit in 26 years
              $5
$ Billions




              ($5)

             ($15)

             ($25)

             ($35)

             ($45)

             ($55)




                     05E
                      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
    *2005 estimate is based on annualized actual 05H1 net underwriting profit of $13.2 billion.
    Source: A.M. Best, Insurance Information Institute
                    Commercial vs. Personal Lines
                    Combined Ratios, 1993-2005:H1*
  Commercial--Net Basis                                      Personal--Net Basis                                                          Personal lines
                                                                                                                                          outperforming




                                                                                                                122.3
                                                                                                                                            commercial.
125                                                    Hurricane                                                                         Underwriting is
                                                                                                                                             now more
120                                                     Andrew                                                                          important in long-
            113.1


                               112.5




                                                                                         112.3
                                                                                                                                         tail commercial




                                                                                                      111.1


                                                                                                                   110.9
                    110.3




                                                                                                                                110.1
                                           110.2

                                                                                                                                          lines. Katrina




                                                                                                     109.9
                                                                             109.7
115
                                                                                                                                          impact will be
                                                         107.6
                                                                                                                                               severe.




                                                                                                                           105.3
                                                       104.9
110
                                   104.5




                                                                                             104.5
                       103.9




                                                                     103.9
                                               103.5




                                                                                 102.7




                                                                                                                                                   102.3
                                                                                                                                           101.9
105
                                                                 99.8




                                                                                                                                        98.4
100




                                                                                                                                                             97
                                                                                                                                                      94.3
 95




                                                                                                                                                                 89
 90

 85
          92         93         94          95          96        97          98          99         00          01         02           03         04 05H1
Source: A.M. Best; Insurance Information Institute                                       *III estimate for first half 2005. Actual 1H05 combined ratio all lines was 92.7.
                              Combined Ratio:
                         Reinsurance vs. P/C Industry
                         Reinsurance                      All Lines Combined Ratio




                                                                                                          162.4
170               2001’s combined ratio was the worst-
                  ever for reinsurers; 2002 was bad as well.
160
                  2003: Big improvement in primary and
150               reinsurer segments
140
                  2004/5: CATs hurt reinsurers
                 126.5




                                                                                                                     125.8



                                                                                                                                           124.6
130
                                                          Hurricane
                                               119.2



                                                           Andrew
                    115.8




                                                                                                             115.8
                                                                                        114.3
                                       113.6




                                                                                                                                111.0
         110.5




120




                                                                                                  110.1
        108.8




                                     108.5




                                                                                     108.0




                                                                                                                        107.4
                             106.9



                                                  106.7




                                                                                                106.5
                                                           106.0



                                                                             105.9




                                                                                                                                                     105.8
                            105.0




                                                          104.8


                                                                   101.9
                                                                   100.8


110
                                                                           100.5




                                                                                                                                   100.1

                                                                                                                                              98.3
100




                                                                                                                                                        92.7
 90
        91       92         93       94         95        96       97      98         99        00        01         02         03         04 05E*
*RAA figure for 2005:H1
Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
  UNDERWRITING
AFFECTS FINANCIAL
    STRENGTH

   Is There Cause
    for Concern?
                       U.S. Insured
               Catastrophe Losses ($ Billions)
                                              $ Billions
              2005 is the worst year ever for
$50             CAT losses, breaking the                                                        $44.0
$40                 record set in 2004
$30                                                                       $26.5            $27.5
                      $22.9
$20                               $16.9
                                                                                     $12.9
                                        $8.3 $7.4     $10.1$8.3
$10 $7.5                     $5.5                                                $5.9
           $2.7 $4.7                              $2.6          $4.6
 $0
       89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05*
*As of 6/30/05 plus $920 in insured for Hurricane Dennis in July and $40 billion for Hurricane Katrina.
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.
Source: Property Claims Service/ISO; Insurance Information Institute
              Reason for P/C Insolvencies
                       (218 Insolvencies, 1993-2002)
                          Impaired Affiliate
                                3%                                          Deficient Loss
                 Unidentified                                                 Reserves
                    17%                                                          51%

                                                                Reserve
CAT Losses                                                    deficiencies
   3%                                                         account for
                                                             more than half
 Reinsurer Failure                                              of all p/c
       0%                                                       insurers
                                                              insolvencies
Change in Business
      3%

      Discounted Ops
           8%
       Overstated Assets
             2%
                     Alleged Fraud     Rapid Growth
                          3%               10% Source: A.M. Best, Insurance Information Institute
                                           Downgrade/Upgrade Ratio*
                                  5                       4.93

                                                                         Downgrade to upgrade ratio
                                                                          is falling (primarily because
Ratio of Downgrades to Upgrades




                                  4
                                                                         the number of downgrades is




                                                                                                                                    3.3
                                                                         falling; only a small increase
                                  3
                                                                                   in upgrades)




                                                                                                                            1.99
                                                                                                                           1.92



                                                                                                                                          1.79
                                                                                     1.78
                                                       1.71




                                  2




                                                                                                     1.56
                                                1.22



                                                                 1.12




                                                                                                                   1.08
                                                                              1.05
                                                                              0.99



                                                                                               1.1




                                                                                                                  0.96
                                                                                            0.83
                                                                            0.82




                                                                                                                0.8
                                         0.68




                                  1
                                                                         0.58




                                                                                                             0.51
                                      0.45




                                                                        0.44
                                      0.43
                                      0.42
                                      0.41




                                                                                                            0.41
                                  0




                                                                                                                                    04E
                                      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
Sources: Impairment Rate and Rating Transition Study—                                *U.S. property/casualty and life/health insurers before
1977 to 2002, A.M. Best & Co.                                                        2000; P/C only 2000-2004.
                  Historical Ratings Distribution,
                               US P/C Insurers, 2000 vs. 2004
                                                                                                   A++/A+
                          2000                                                     2004           shrinkage
               C/C-           D                                         C/C-   D E/F
                            0.2%     E/F                                          3.5%
       C++/C+ 0.6%
                                    2.3%     A++/A+              C++/C+ 0.6% 0.2%                     A++/A+
        1.9%                                                      2.1%                                 8.6%
                                             11.5%
          B/B-
          6.9%                                                      B/B-
                                                                    9.1%




B++/B+
28.3%                                                       B++/B+
                                                            25.8%

                                                                                                                  A/A-
                                                 A/A-                                                            50.2%
                                                48.4%

Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report,
November 8, 2004.
                                       US Reinsurer Combined Ratio
                                      vs. Median Rating, 1999-2003*
                              160                                                                                     A++
                                       A+                                                                             A+
                              150
US Reinsurer Combined Ratio




                                                  A             A                A                      A             A
                                                                                                                      A-
                              140                              141.4
                                    Are ratings related                                                               B++
                              130                                                                                     B+
                                     to performance?                             122.8                                B
                              120    115.1        115.4

                              110
                                             Reinsurer Combined Ratio                                 100.6
                              100
                                             Rating-Large (PHS>$250M)
                               90
                                      99           00           01                 02                   03
*Combined ratio is for all US reinsurers. Rating is for large reinsurers (policyholder surplus exceeding $250 million).
The median rating for small reinsurers (PHS<$250M) was A- throughout the 1999-2003 period.
Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report,
November 8, 2004.
                P/C Insurers Maintaining Rating of
                A+ or Better Rating for 50+ Years
 P/C Company                              Group Affiliation
 1.   AIU Insurance Co.                   1.  American International Group
 2.   Alfa Mutual Ins. Co.                2.  Alfa Insurance Group
 3.   Amica Mutual Ins. Co.               3.  Amica Mutual Group
 4.   Church Mutual Ins. Co.              4.  None
 5.   Federal Insurance Co.               5.  Chubb Group of Ins Cos.
 6.   General Reinsurance Corp.           6.  Berkshire Hathaway Ins. Group
 7.   Great Northern Ins. Co.             7.  Chubb Group of Ins Cos.
 8.   Lititz Mutual Ins. Co.              8.  Lititz Mutual Group
 9.   Nationwide Mutual Fire Co.          9.  Nationwide Mutual Group
 10. Otsego Mutual Fire                   10. None
 11. Quincy Mutual Fire Ins. Co.          11. Quincy Mutual Group
 12. State Automobile Mutual Ins. Co.     12. State Auto Ins. Group
 13. State Farm Mutual Auto Ins. Co.      13. State Farm Group
 14. Vigilant Insurance Co.               14. Chubb Group of Ins Cos.



Source: Best’s Review, January 1, 2004.
                Cumulative Average Impairment Rates by
                   Best Financial Strength Rating*
             Insurers with strong ratings are far
 60%         less likely to become impaired over
               long periods of time. Especially                                                       D
 50%            important in long-tailed lines.
                                                                                                      C/C-
 40%                                                                                                  C++/C+

 30%                                                                                                  B/B-

                                                                                                      B++/B+
 20%
                                                                                                      A/A-
 10%
                                                                                                      A++/A+
  0%
            1     2    3     4     5    6     7     8     9 10 11 12 13 14 15
                                 Average Years to Impairment                  *US P/C and L/H companies, 1977-2002
Sources: A.M. Best: Best’s Impairment Rate and Rating Transition Study—1977-2002, March 1, 2004.
                Cumulative Avg. Implied Impairment Rates
                 by Holding Co. Senior Unsecured Debt
     Insurers with strong credit ratings are
 45% far less likely to become impaired over
         long periods of time. Especially                                                                c
 40%
          important in long-tailed lines.
 35%                                                                                                     b
 30%                                                                                                     bb
 25%                                                                                                     bbb
 20%
                                                                                                         a
 15%
 10%                                                                                                     aa
  5%                                                                                                     aaa
  0%
            1     2    3     4     5    6     7     8     9 10 11 12 13 14 15
                                 Average Years to Impairment                 *US P/C and L/H companies, 1977-2002
Sources: A.M. Best: Best’s Impairment Rate and Rating Transition Study—1977-2002, March 1, 2004.
              Rating Agency Actions Following
             Hurricane Katrina (as of Oct. 6, 2005)*
  Companies Under Review w/ Negative Implications                       Companies on Credit Watch with
                                                                            Negative Implications
      Company                        A.M. Best Rating
1.    Allied World                           A+                       Company                  S&P Rating
2.    Allmerica Financial P&C Cos .          A-
                                                             1.       Allmerica                   BBB+
3.    American Re                            A
4.    Balboa Insurance Grp.                  A               2.       Allstate Corp.              AA
5.    DaVinci Re                             A               3.       Aspen Group                 A
6.    Endurance Specialty                    A               4.       Oil Casualty Insurance Ltd. A-
7.    Florists Mutual Grp.                   A-              5.       Society of Lloyd’s          A
8.    Glencoe                                A               6.       State Farm                  AA
9.    Imagine Insurance Co. Ltd.             A-              7.       Swiss Re                    AA
10.   IPCRe                                  A+              8.       United Fire Group           A
11.   Louisiana Farm Bureau Mutual           A-
12.   Mississippi Farm Bureau Mutual         A+                                      Downgrades
13.   Munich Re                              A+
14.   Mutual Savings Fire Ins. Co.           B-                   Company         S&P Rating                      A.M. Best
15.   Mutual Savings Life Ins. Co.           B-         1.        Alea            A- to BBB+                       A- to B++
16.   Odyssey Re                             A          2.        Olympus Re        not rated                      A- to B+
17.   PartnerRe Group                        A+
                                                        3.        PXRE               A to A-                        A to A-
18.   PXRE                                   A-
19.   Renaissance Re                         A+         4.        Advent Synd. 780 3pi to 2pi                       not rated
20.   Rosemont Reinsurance Ltd.              A-            ―…the replenishment of capital alone may not be sufficient to
21.   Transatlantic Re                       A+          sustain a company’s rating.‖ A.M. Best press release Sept. 15, 2005
22.   XL Capital                             A+         *ACE and Montpelier Re were originally placed on watch/
23.   XL Life Insurance & Annuity            A+         review but have been removed.
24.   XL Life Ltd.                           A+         Source: Hurricane Katrina: Analysis of the Impact on the Insurance Industry,
INVESTMENTS
Improvements Still
Support Cash Flow
  Underwriting
                               Net Investment Income
             $54
                          Growth History

             $45          2002: -1.3%
                          2003: +3.9%
             $36          2004: +2.4%
$ Billions




                    2005:H1: +16.5%**
             $27


             $18


             $9


             $0
               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 0405*
       Source: A.M. Best, ISO, Insurance Information Institute;
       *Annualized. **2005:H1 over 2004:H1, adjusted for special dividend of $3.1B.
                       Total Returns for Large
                     Company Stocks: 1970-2005*
                  S&P 500 was up 9% in 2004. Fears of higher interest rates, inflation,
                      the falling dollar, resurgent oil prices are concerns in 2005
  40%

  30%

  20%

  10%

   0%

 -10%
                                                2003/4 were the first
                                                consecutive gains since 1999
 -20%

 -30%




                                                                                                                                           2005
           1970

                    1972

                           1974

                                  1976

                                         1978

                                                1980

                                                       1982

                                                              1984

                                                                     1986

                                                                            1988

                                                                                   1990

                                                                                          1992

                                                                                                 1994

                                                                                                        1996

                                                                                                               1998

                                                                                                                      2000

                                                                                                                             2002

                                                                                                                                    2004
Source: Ibbotson Associates, Insurance Information Institute.                                       *Through October 10, 2005.
                   Property/Casualty Insurance
                    Industry Investment Gain*
                                                   $ Billions
                                         $57.9
 $60                                                     $56.9
                                 $52.3           $51.9                                           $52.6
                         $47.2                                                           $48.9
 $50                                                             $44.4           $45.3
                 $42.8
 $40     $35.4                                                           $36.0

 $30
                 Investment gains are rising
 $20               but will still fall short of
 $10
                 their 1998 peak. CAT losses
                 will reduce investable assets.
   $0
          94      95      96      97      98      99      00      01      02      03      04     05*
*Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.
2005 figure is as of 6/30/05, adjusted for special dividend of $3.1B.
Source: Insurance Services Office; Insurance Information Institute.
        Proportion of P/C Portfolio Invested
            in Cash and ST Securities

    Cash & Short-Term Securities
                                                      Holdings of cash and
                                                      short-term securities
 12%                                                 has more than doubled
                                                           since 1999                   10.00%
 10%                                                                               9.30%
                                                                           8.47%
  8%
         6.41%
  6%
                   5.64% 5.26% 5.81%                         5.30% 5.54%
                                                     4.08%
  4%

  2%

  0%
            95         96        97        98         99      00    01      02      03   04E
Source: A.M. Best; Insurance Information Institute
   PRICING
   TRENDS
Will Katrina & Rita
Harden Markets?
             Strength of Recent Hard Markets
                    by NWP Growth*
                       1975-78                1984-87                                        2001-04
25%
                                                         Real NWP Growth During
20%                                                        Past 3 Hard Markets
                                                                1975-78: 8.6%
15%
                                                                1984-87: 11.2%
10%                                                             2001-04: 6.9%

 5%


 0%


-5%                                         Premium growth is faltering. Real
                                            growth in 2005 will be NEGATIVE
-10%
       1970
       1971
       1972
       1973
       1974
       1975
       1976
       1977
       1978
       1979
       1980
       1981
       1982
       1983
       1984
       1985
       1986
       1987
       1988
       1989
       1990
       1991
       1992
       1993
       1994
       1995
       1996
       1997
       1998
       1999
       2000
       2001
       2002
       2003
       2004
       2005
Note: Shaded areas denote hard market periods.
Source: A.M. Best, Insurance Information Institute      *2005 figure is III forecast based on 05Q1 result.
                               -10%
                                            0%
                                                 5%
                                                      10%
                                                            15%
                                                                  20%
                                                                           25%
                                                                                     30%
                                                                                                35%




                                      -5%
                           Jul-01                          14%
                          Aug-01                        11%
                          Sep-01                          13%
                           Oct-01                            16%
                          Nov-01                                19%
                          Dec-01                                   22%
                           Jan-02                                        28%
                          Feb-02                                            31%
                          Mar-02                                            31%




Source: MarketScout.com
                          Apr-02                                         28%
                          May-02                                           30%
                           Jun-02                                            32%
                           Jul-02                                             33%
                          Aug-02                                         28%
                          Sep-02                                          29%
                           Oct-02                                          30%
                          Nov-02                                             32%
                          Dec-02                                           30%
                           Jan-03                                       27%
                          Feb-03                                      25%
                          Mar-03                                         28%
                          Apr-03                                   22%
                          May-03                               18%
                           Jun-03                              18%
                           Jul-03                             17%
                          Aug-03                             16%
                          Sep-03                         12%
                           Oct-03                        12%
                          Nov-03                       10%
                          Dec-03                         12%
                           Jan-04                       11%
                          Feb-04                      9%
                          Mar-04                      9%
                          Apr-04                      9%
                          May-04                    7%
                           Jun-04                   7%
                           Jul-04                 5%
                          Aug-04                 4%
                          Sep-04                 4%
                           Oct-04              2%
                          Nov-04               2%
                          Dec-04               2%
                                                                                                          Commercial Premium Rate
                                                                                                          Changes Are Sharply Lower




                           Jan-05             1%
                          Feb-05             0%
                          Mar-05         -1%
                          Apr-05       -2%
                                                                            in commercial rates?




                          May-05       -2%
                                                                           The magnitude of rate




                           Jun-05    -3%
                           Jul-05  -5%
                          Aug-05 -6%
                                                                        decreases is leveling off. Will
                                                                        Katrina/Rita reverse the slide




                          Sep-05   -5%
               Average Rate Change, All Lines,
                               (1Q:2004 – 2Q:2005)
    0%
              -0.1%
   -2%

   -4%                       -3.2%

   -6%
                                            -5.9%
   -8%                                                     -7.0%
                   Magnitude of rate decreases
 -10%            accelerated during the first half                        -9.4%    -9.7%
                 of 2005, but flattened out in Q2
 -12%
               1Q04           2Q04           3Q04            4Q04           1Q05   2Q05
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
                        Rate Changes by Line,
                                          2nd Qtr. 2005
  0%
                                                                            -0.5%
 -2%

 -4%                                                                                  -3.6%
                                                              -3.8% -3.8%
 -6%
                          -6.0%
                 -6.8%                             -6.6%
 -8%                              -7.3%
                                                                                              -8.4%
-10%                                      -9.1%
                                                       Magnitude of rate decreases
-12%                                                    flattened out during the
                                                         second quarter of 2005
-14% -13.3%
       Comm Prop Biz Comm Auto WC            GL    Umbrella    EPL   D&O     Surety   Const. ALL Lines
              Interruption
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Average Commercial Rate
 Change by Account Size
               Commercial accounts have
               trending downward for 4-5
                   quarters, with large
              commercial leading the way.
                 Now starting to flatten.
        Cumulative Quarterly Rate
         Change by Account Size
Commercial rates are
well off their late 2003
 peaks for accounts of
    all size and are
 approximately where
they were in mid-2002



                               At which point do the
                           reductions become destructive?
                     Reinsurance Prices are Only at 1995
                        Levels, Despite Increased Risk
                                                      US cat reinsurance price index:
         40%                                                    1994 = 100                            120

         30%                                                                                          100
                                                                              21%
         20%                                                            16%                           80
                                                                                    11%
         10%                                                                                          60
                                                                   2%
           0%                                                                                         40
                               -5%                           -4%                          -4%
                                                                                                -6%
       -10%                                     -9%    -8%                                            20
                                         -11%

       -20%                                                                                           0
                       94       95       96     97     98 99       '00 '01 '02 '03 '04 05E

                                     rate chnages [left]                index level [right]

Sources: Swiss Re, Cat Market Research
CATASTROPHE
    LOSS
MANAGEMENT

Focus on Hurricanes
  Katrina & Rita
                               Global Number of
                        Catastrophic Events, 1970–2004
                       The number of natural
     250
                          and man-made
                       catastrophes has been
     200               increasing on a global
                         scale for 20 years
     150



     100



       50

                                                                  Natural catastrophes                         Man-made disasters
         0
              1970

                      1972

                             1974

                                     1976

                                            1978

                                                    1980

                                                           1982

                                                                    1984

                                                                           1986

                                                                                  1988

                                                                                          1990

                                                                                                 1992

                                                                                                        1994

                                                                                                               1996

                                                                                                                      1998

                                                                                                                             2000

                                                                                                                                    2002

                                                                                                                                           2004
Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 1/2005, page 4.
              Global Insured CAT Losses, 1970–2004
                      (Property and Business Interruption)
                                         Billion USD, at 2004 prices
$45

$40                 There has been a huge
$35                 increase in the insured
$30
                      value of global CTA
                     losses in recent years
$25

$20                        Natural catastrophes
                           Man-made disasters
$15

$10

 $5

 $0
      1970

             1972

                    1974

                           1976

                                  1978

                                         1980

                                                1982

                                                       1984

                                                              1986

                                                                     1988

                                                                            1990

                                                                                   1992

                                                                                          1994

                                                                                                 1996

                                                                                                        1998

                                                                                                               2000

                                                                                                                      2002

                                                                                                                             2004
                                  Source: Swiss Re, sigma No. 1/2005, page 6
                         Insured Property Catastrophe
                              Losses, 1983–2004
                                                        Cat Losses as a %
     12%                                         of Non-Life Net Premiums Earned

                                US
     10%
                                worldwide

       8%                       US
                                average

       6%


       4%


       2%


       0%
                84                          89                     94      99      '04

Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting
                 2005 Has Been a Busy, Destructive,
                Deadly & Expensive Hurricane Season




Source: WeatherUnderground.com, October 12, 2005.
                   Number of Major (Category 3, 4, 5)
                  Hurricanes Striking the US by Decade
                                                1930s – mid-1960s:                                       Mid-1990s – 2030s?
                                             Period of Intense Tropical                                 New Period of Intense
                                                 Cyclone Activity                                      Tropical Cyclone Activity



                                                                 9                                                      9
                      8                     8          8

           6                                                                                                             4
                                                                            6                                 6
                                 5                                                                 5
                                                                                        4                                5
                                 Tropical cyclone activity in the
                                  mid-1990s entered the active
                                  phase of a normal cycle that
                                    could last into the 2030s

        1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s
*Figure for 2000s is extrapolated based on data for 2000-2005 (5 major storms: Charley, Ivan, Jeanne (2004) & Katrina, Rita (2005).
Source: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm.
                  Hurricane Katrina Insured Loss
                   Estimates Still Vary Widely
                         (Billions of $, As of October 10, 2005)
                             Typically unmodeled losses:
                            Demand surge*, LAE, debris
                            removal, tree damage, mold,
           RMS               spoilage, power outage, off-                                  $40 - $60B
                          premises power loss, flood, fraud,
                             civil authority, assessments,
Tillinghast                       pollution, litigation                                $40 - $55B

              AIR                                                             RMS estimate predicts $15-
                                               $17 - $25B                    $25B in privately insured flood
                                                                               losses, mostly commercial
      Eqecat                                                                    (modeled after the event)
                                         $14 - $22B
                   $0             $10            $20             $30            $40                $50   $60

*Rising material costs, e.g., plywood rose 38% and framing lumber by 14% through Sept. 16, 2005.
Sources: RMS, AIR, Eqecat, Tillinghast; Compiled by the Insurance Information Institute.
                  Hurricane Katrina Insured Loss
                   Estimates Still Vary Widely
                         (Billions of $, As of October 10, 2005)
                          Typically unmodeled losses: Demand
                           surge*, LAE, debris removal, tree
                             damage, mold, spoilage, power                                  $40-$60B
           RMS              outage, off-premises power loss,
                              flood, fraud, civil authority,
Tillinghast                 assessments, pollution, litigation                        $40 - $55B

   ISO/PCS                ISO/PCS estimates is $34.4B
                             and 1.6 million claims
                                                                                         $34.4B

              AIR                                                $17 - $25B                  RMS estimate predicts
                                                                                             $15-$25B in privately
                                                                                              insured flood losses,
      Eqecat                                                 $14 - $22B                        mostly commercial
                                                                                             (modeled after event)

                   $0             $10            $20             $30            $40                $50   $60

*Rising material costs, e.g., plywood rose 38% and framing lumber by 14% through Sept. 16, 2005.
Sources: RMS, AIR, Eqecat, ISO/PCS, Tillinghast; Compiled by the Insurance Information Institute.
                   Hurricane Rita Losses:
                Much Smaller & Less Variable
                  (Billions of $, As of September 26, 2005)

                  RMS includes $1-$2B
                    in offshore energy                                                 $5.0 -
                 losses. AIR, Eqecat do
    RMS            not model offshore                                                  $7.0B
                       energy losses.

                                                                   $2.5 -
      AIR                                                          $5.0B

                                                                              $3.0 -
Eqecat                                                                        $6.0B

          $0                  $2                  $4                  $6                $8

Sources: RMS, AIR, Eqecat; Compiled by the Insurance Information Institute.
                 Breakdown of RMS $40-$60
                 Billion Katrina Loss Estimate
 Type of Loss                                             Low                   High
 Windstorm & Surge                                        $20                   $25
 Flood, private (not incl. NFIP)*                         $15                   $25
 Off Shore Energy, Marine                                 $2                    $5
 Misc., Possible Pollution                                $2                    $3
 1st Landfall (FL)                                        $1                    $2

 TOTAL                                                    $40                   $60
*Primarily commercial flood and associated business interruption losses.
Sources: RMS; Adapted from Responding to Katrina, Lane Financial LLC, Sept. 16, 2005.
            Breakdown of Tillinghast $40-$55
              Billion Katrina Loss Estimate
Type of Loss                                    Low     High
Personal Property Lines
Residential Property                            $14.0   $17.0
Personal Auto                                    $1.0    $2.0
Personal Watercraft                              $0.2    $0.3
Total                                           $15.2   $19.3
Commercial Property Lines
Commercial Property (excl. Off-Shore)           $13.5   $16.0
Business Interruption (excl. marine & energy)    $6.0    $9.0
Commercial Auto                                  $0.2    $0.3
Sub-Total Personal & Commercial                 $19.7   $25.3
Marine & Energy                                  $4.0    $6.0
Liability                                        $1.0    $3.0
Other                                            $0.0    $1.0
Total All Lines                                 $39.9   $54.6
                       Comparison of Hurricanes
                          Andrew & Katrina
   Statistic                                          Andrew                 Katrina
   Duration as TS/Hurricane                           Aug. 17-28, 1992       Aug. 24-31, 2005
   Area Affected                                      South FL, LA           South FL, LA, MS, AL,
                                                                             TN, FL Panhandle
   Saffir-Simpson Category at Major Landfall          5                      4
   Windspeed at Major Landfall                        165mph sustained       145mph sustained
   Width of Hurricane-Force Winds at Major            Approx. 120 miles      Approx. 250 miles
   Landfall
   Central Pressure at Landfall                       922 mbar (hPa)         918 mbar (hPa)

   Storm Surge at Major Landfall                      17 feet                15-29 feet

   Fatalities                                         65 (26 direct, 39      1,193 (as of Oct. 4)
                                                      indirect)              (972 in LA, 221 in MS)
Sources: Hurricane Katrina: Analysis of the Impact on the Insurance Industry, Tillinghast, October
2005; Insurance Information Institute.
        Summary of Facts About Insured
          Losses Regarding Katrina
• As of October 12, 2005:
   57 companies had announced pre-tax loss estimates
  Announced loss total: $22.0B to $24.4B
  This works out to 55% - 61%% of a mid-range
   insured loss estimate of $40 billion
  $40B loss is 9.7% of US PHS of $412.5B as of 6/30/05
• Announced Company Loss Estimates:
  High: $2.55 billion; Low: $1.2 million
  Upper loss est. % of 2Q:05 Equity: 0.2% to 46.1%
• At least 20 companies put on watch for possible
  downgrades by various ratings agencies
• Many Lines Affected:
   Extreme eventsloss correlations increase
                                                                                                                     $500
                                                                                                                                $1,000
                                                                                                                                             $1,500
                                                                                                                                                                $2,000
                                                                                                                                                                                    $2,500
                                                                                                                                                                                                        $3,000




                                                                                                             $0
                                                                                             Lloyds                                                                                       $2,550




**After-tax figure.
                                                                              Berkshire Hathaway                                                                                         $2,500
                                                                                St. Paul Travelers                                                                                       $2,500
                                                                                            Zurich                                                           $1,900
                                                                                                AIG                                                      $1,692
                                                                                          Swiss Re                                       $1,200
                                                                                             Aspen                                $925
                                                                                        XL Capital                               $875
                                                                                             CNA                              $750
                                                                                     IPC Holdings                             $750
                                                                                           Ace Ltd.                           $733
                                                                                     Montpelier Re                           $675
                                                                                      Axis Capital                          $650
                                                                                        Everest Re                          $638
                                                                                             Chubb                         $600
                                                                                            Allianz                        $585
                                                                                        Munich Re                        $500
                                                                                        Endurance                       $474
                                                                                  Renaissance Re                        $450
                                                                                        Partner Re                    $350




Note: If company gave range of estimates, upper end is used.
                                                                                            Markel                   $321
                                                                                          Hannover                   $313
                                                                                             PXRE                    $300
                                                                                 White Mountains                     $300




*Figures are pre-tax, gross of reinsurance, unless indicated otherwise.
                                                                                          Platinum                  $270
                                                                                     Transatlantic                  $270
                                                                                            Fairfax                $220
                                                                                               AXA                 $200
                                                                                       Progressive                $174
                                                                                   Arch Capital**                 $173
                                                                                       Manulife**                 $165
                                                                                               HCC                $160
                                                                                               Alfa              $125
                                                                                             Safeco              $120
                                                                                        Hartford**              $104
                                                                                       Odyssey Re               $100
                                                                                                                $90
                                                                                                                                                                                              (As of October 12, 2005)




                                                                                            Max Re
                                                                            Quanta Cap. Hldgs.**               $58
                                                                               Royal Sun Alliance              $46
                                                                                             SCOR              $43
                                                                                      WR Berkely               $35
                                                                                    Cincinnati Finl
Sources: Morgan Stanley, Merrill Lynch, Lehman Brothers, Insurance Information Institute, Company Reports.     $34
                                                                                            Unitrin            $32
                                                                                             Zenith            $30
                                                                                         State Auto           $26
                                                                                                                                                                                                                               Reinsurance ($ Millions)*




                                                                                        Converium             $25
                                                                               American Finl Grp              $20
                                                                                                RLI           $19
                                                                                Midland Company               $18
                                                                                    American Natl             $15
                                                                                                                                               As of October 12, 57 companies had




                                                                                          Argonaut            $10
                                                                                 United American              $9
                                                                                                                                                                                                                          Hurricane Katrina Losses Before




                                                                         Philadelphia Consolidated            $8
                                                                                                                                            announced pre-tax losses totaling between
                                                                                                                                            $22.0 and $24.4 billion, about 55-61% of a




                                                                                                              $4
                                                                                                                                                                                                                         Distribution of Announced Pre-Tax




                                                                                   EMC Ins Grp**
                                                                                     21st Century             $3
                                                                                                                                           mid-range industry loss estimate of $40 billion




                                                                                          Kingsway            $2
                                                                                      PMA Capital             $2
                                                                                              Vesta           $1
                                                                                                                                                                                                                                                                                                 0%
                                                                                                                                                                                                                                                                                                 5%
                                                                                                                                                                                                                                                                                                10%
                                                                                                                                                                                                                                                                                                15%
                                                                                                                                                                                                                                                                                                20%
                                                                                                                                                                                                                                                                                                25%
                                                                                                                                                                                                                                                                                                30%
                                                                                                                                                                                                                                                                                                35%
                                                                                                                                                                                                                                                                                                40%
                                                                                                                                                                                                                                                                                                45%
                                                                                                                                                                                                                                                                                                50%
                                                                                                       Montpelier Re                                                                                                                                                                                                                                 46.1%
                                                                                                        IPC Holdings                                                                                                                                                                                                                              42.5%
                                                                                                                PXRE                                                                                                                                                                                                                           39.0%
                                                                                                           Endurance                                                                                                                                                                                                    22.6%
                                                                                                          Axis Capital                                                                                                                                                                                                21.0%
                                                                                                             Platinum                                                                                                                                                                                                 21.0%
                                                                                                      Renaissance Re                                                                                                                                                                                                 19.4%
                                                                                                           Everest Re                                                                                                                                                                                            15.3%
                                                                                                                  Alfa                                                                                                                                                                                       11.1%




                                                                                                                                                           **After-tax loss figure used in calculation.
                                                                                                           Partner Re                                                                                                                                                                                      9.7%
                                                                                                                Aspen                                                                                                                                                                                      9.3%
                                                                                                               Markel                                                                                                                                                                                     9.0%
                                                                                                              Max Re                                                                                                                                                                                      8.8%
                                                                                                                Zurich                                                                                                                                                                                    8.7%
                                                                                                           XL Capital                                                                                                                                                                                   7.0%
                                                                                                         Arch Capital                                                                                                                                                                                  6.5%




                                                                                            Note: If company gave range of estimates, upper end is used.
                                                                                                        Transatlantic                                                                                                                                                                                  6.4%
                                                                                                            Hannover                                                                                                                                                                                   6.3%
                                                                                                              Ace Ltd.                                                                                                                                                                                5.5%
                                                                                                                Chubb                                                                                                                                                                                 5.3%
                                                                                                             Swiss Re                                                                                                                                                                                 5.3%
                                                                                                         21st Century                                                                                                                                                                                5.1%
                                                                                                    White Mountains                                                                                                                                                                                  4.8%




                                                                                                                                                                                                          *Source loss figures are pre-tax, gross of reinsurance, unless indicated otherwise.
                                                                                                               Fairfax                                                                                                                                                                               4.7%
                                                                                                          Odyssey Re                                                                                                                                                                                3.8%
                                                                                                                Zenith                                                                                                                                                                             3.1%
                                                                                                                 HCC                                                                                                                                                                               3.0%




Sources: Morgan Stanley, Merrill Lynch, Insurance Information Institute, Company Reports.
                                                                                                                                                                                                                                                                                                   3.0%
                                                                                                                                                                                                                                                                                                                                                         (As of October 11, 2005)




                                                                                                   Midland Company
                                                                                                                  RLI                                                                                                                                                                             2.0%
                                                                                                               Safeco                                                                                                                                                                             2.0%
                                                                                                           Munich Re                                                                                                                                                                             1.3%
                                                                                                                  AIG                                                                                                                                                                            1.0%
                                                                                                   American Finl Grp                                                                                                                                                                             1.0%
                                                                                                            Argonaut                                                                                                                                                                             1.0%
                                                                                            Philadelphia Consolidated                                                                                                                                                                            1.0%
                                                                                                                                                                                                                                                                                                                                                                                           as % 2Q:05 Equity *




                                                                                                        PMA Capital                                                                                                                                                                              1.0%
                                                                                                          Progressive                                                                                                                                                                            1.0%
                                                                                                     United American                                                                                                                                                                             1.0%
                                                                                                                                                                                                                                                                                                                                                                                         Losses Before Reinsurance




                                                                                                               Unitrin                                                                                                                                                                           1.0%
                                                                                                      Hartford Finl**                                                                                                                                                                           0.7%
                                                                                                               Allianz                                                                                                                                                                           0.8%
                                                                                                         WR Berkely                                                                                                                                                                             0.7%
                                                                                                                                                                                                                                                                                                                               of US P/C insurance
                                                                                                                                                                                                                                                                                                                               from 0.2% to 46.1%.




                                                                                                                 AXA                                                                                                                                                                            0.5%
                                                                                                                                                                                                                                                                                                            Median = 4.8%




                                                                                                                                                                                                                                                                                                0.4%
                                                                                                                                                                                                                                                                                                                             industry surplus ranged




                                                                                                       Cincinnati Finl
                                                                                                                                                                                                                                                                                                                            Reported losses as a share




                                                                                                       American Natl                                                                                                                                                                            0.3%
                                                                                                                                                                                                                                                                                                                                                                                    Announced Pre-Tax Hurricane Katrina




                                                                                                            Kingsway                                                                                                                                                                            0.2%
                                    Insured Loss Estimates as a %
                                      US Policyholder Surplus*
                                                   Industry Loss        % of PHS*

                             $70                                                              14.9%   16%
                                                                                      13.7%
                                                                         12.4%                        14%
                             $60                               11.2%
     Size of Industry Loss




                                                                                                      12%




                                                                                                            % of US P/C PHS
                                                   10.0%
                             $50          8.7%                                                        10%
                                   7.5%
                             $40                                                                      8%
                                                                                                      6%
                             $30
                                                                                                      4%
                             $20
                                                                                                      2%
                             $10                                                                      0%
                                   $30    $35       $40        $45         $50        $55     $60
                                                 Size of Industry Loss ($ Billions)


*Policyholder surplus as of 3/31/05 of $401.8 billion (ISO).
Source: Insurance Information Institute.
                          Announced Insurer Capital Raising*
                                    ($ Millions, as of October 11, 2005)
                                                                                                Type of Capital Raised
              $1,600
                         $1,438
                                            As of Oct. 11, insurers                        Common
                                                                                                                     Debt,
              $1,400                                                                        Stock,
                                             had announced plans                           $4,302 ,                  $200 ,
                                                                                                                     3.8%
                                                                                            81.0%
              $1,200                         to raise $5.313 Billion                                                Preferred
                                                                                                                     Stock,
              $1,000                        in new capital, 81% of
 $ Millions




                                                                                                                     $811 ,
                                              it as common stock                                                     15.3%
               $800
                                                                    $600                        $620
               $600                                                          $475                                          $476
                                                 $404
               $400                                                                 $300 $305
                                                           $250
               $200                                                                                    $143 $102 $164
                                         $37
                 $0
                                                                                             .




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*Announced amounts may differ from sums actually raised.
Sources: MerrilI Lynch, Company Reports; Insurance Information Institute.
Hurricanes Katrina
     & Rita:
Their Place in History
                     Top 10 Most Costly Hurricanes in
                      US History, (Insured Losses, $2004)
               $40
                                Six of the 10 most expensive                                               $35.0
               $35                hurricanes in US history
               $30            occurred in the past 13 months:
               $25             Katrina, Rita, Charley, Ivan,
  $ Billions




                                                                                                  $20.9
               $20
                                     Frances & Jeanne
               $15

               $10                                                             $7.1     $7.5
                                                                      $6.4
                                         $3.7     $4.1      $4.6
               $5    $2.6       $3.4

               $0
                      Opal     Georges   Jeanne     Rita    Frances    Hugo     Ivan    Charley   Andrew   Katrina
                     (1995)     (1998)   (2004)   (2005)*    (2004)   (1989)   (2004)    (2004)   (1992)   (2005)*

*Estimates as of September 26, 2005 in 2005 dollars.
Sources: ISO/PCS; Insurance Information Institute.
                     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 of 2005 Dollars)
              $70                                                                                                         $65.3

              $60        The p/c insurance industry
                        will likely experience a $20B+
              $50
                        event approximately every 15                                                           $40.0
 $ Billions




              $40        years, on average—mostly
                                                                                                     $31.3
              $30
                         associated with hurricanes
                                                                               $20.8      $21.1
              $20                                                    $14.5
                                        $12.4    $12.6    $13.1
                    $10.1      $11.0
              $10

              $0
                    Number 9   Hazel    Number 4 Number 2 Number 4   Bestsy   Number 2 Number 1 Andrew          Katrina Number 6
                     (1909,    (1954,    (1938,   (1919,   (1928,    (1965,    (1915,   (1900,  (1992,          (2005, (1926, FL)
                       FL)      NC)       NY)       FL)      FL)      LA)       TX)      TX)      FL)            LA)*

*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.
                                          Top 10 Insured Property
                                           Losses in US ($2004)
               $40                 Seven of the 10 most                                                                                                                   $35.0
               $35
                                 expensive disasters is US
               $30
                                  history occurred within
  $ Billions




               $25                                                                                                                                      $20.8
                                                                                                                                          $20.1
               $20                    the past 4 years                                                                    $15.9
               $15
               $10                                                          $6.4          $7.1             $7.5
                            $3.7          $4.1              $4.6
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*Estimate, stated in 2005 dollars, as of 9/26/05.
Note: 9/11 loss figure is for property claims only. Total insured losses ($2004) are approximately $34B.
Sources: ISO/PCS; Insurance Information Institute.
                                  Top 11 Insured Property Losses
                                  Worldwide, 1970-2005 ($2004)*
             $40          Five of the 11 most expensive                                                                                                                       $35.0
             $35            disasters is world history
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$ Billions




             $25                                                                                                                                               $21.5
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             $20                                                                                                                 $15.9
             $15                                                                                                   $11.0
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*All figures are for total losses across all locations, not just US. Katrina loss est. is preliminary and
stated in 2005 dollars.
Sources: ISO/PCS; Swiss Re, “Natural Catastrophes and Man-Made Disasters in 2003,” Sigma, no.1, 2004
                            Government Aid After Major
                               Disasters (Billions)*
                                              Within 3 weeks of                   Hurricane Katrina aid will
                                         Katrina’s LA landfall, the              dwarf aid following all other
               $80       $75.4             federal government had                  disasters. Congress may
                                         authorized as much aid as               authorize $150-$200 billion
               $70                       it did for the 9/11 terrorist
                                               attacks, 2004’s 4                  ultimately (about $400,000
                                         hurricanes and Hurricane                   for each of the 500,000
               $60                                                                displaced families). Is the
                                              Andrew combined!
                                                                                  incentive to buy insurance
               $50                           $43.9
  $ Billions




                                                                                      and insure to value
               $40
                                                                                          diminished?

               $30

               $20
                                                                 $17.7                 $15.5                  $15.0
               $10

               $0
                     Hurricane Katrina   Sept. 11 Terrorist   Hurricane Andrew   Northridge Earthquake   Hurricanes Charley,
                          (2005)*          Attack (2001)            (1992)               (1994)           Frances, Ivan &
*In 2005 dollars.                                                                                          Jeanne (2004)
Source: United States Senate Budget Committee as of 9/19/05; Insurance Information Institute.
              Itemization of Federal Government
                 Spending on Hurricane Relief
Legislation                                      5-Yr. Cost Status
Emergency Spending Supplement #1, HR 3645        $10.500        Public Law 109-61
Emergency Spending Supplement #2, HR 3673        $51.8          Public Law 109-62
Flood Insurance Borrowing Authority              $2.000         Passed House & Senate

Pell Grant Relief, H.R. 3169                     $0.002         Passed House & Senate

TANF Disaster Relief, H.R. 3672                  $0.294         Passed House & Senate

Katrina Short-Term Tax Relief Bill, H.R. 3768    $6.500         Passed Senate
Sarbanes Housing Amend. To H.R. 2862             $3.500         Passed Senate
Harkin Legal Services Amend. To H.R. 2862        $0.008         Passed Senate
Snowe Small Business Amen. To H.R. 2862          $0.595         Passed Senate
Baucus Economic Develop. Amend to H.R. 2862      $0.210         Passed Senate
TOTAL                                            $75.409
Emergency Health Care Relief Act, S. 1716        $5.0-$7.0B     Introduced in Senate
Additional Flood Insurance Borrowing Authority   $10.0-$30.0B   N/A
Hurricane Katrina:
  Loss Distributions
                  Property Damage from Hurricane
               Katrina Flood & Storm Surge ($ Millions)*

              AL Storm Surge Loss,                  FL Storm Surge Loss,
                  $793 , 1.8%                            $32 , 0.1%
                                                                            Hurricane Katrina
                                                                            caused $44 billion
                                                                            in flood and storm
                                                                           surge damage, most
MS Storm Surge Loss,                                                          of it uninsured,
  $4,400 , 10.0%                                                               88.1% of it in
                                                                                 Louisiana


      LA Storm Surge Loss,                                              New Orleans Flood
        $16,200 , 36.8%                                                Loss, $22,600 , 51.3%




  *Value of property damage by flood and storm surge whether or not insured.
  Source: AIR Worldwide, September 29, 2005.
               Hurricane Katrina Insured Loss
               Distribution by State ($ Billions)*
                                 Tennessee, $46.1 ,
        Florida, $468.0 , 1.4%        0.1%
                                         Georgia, $22.2 , 0.1%
  Alabama, $1,300 ,
       3.8%                                             Louisiana
  Mississippi, $9,800 ,                               accounted for
         28.6%                                          2/3 of the
                                                      insured losses
                                                    paid and 55% of
                                                     the claims filed
                                            Louisiana, $22,600 ,
                                                  66.0%

*As of October 4, 2005
Source: PCS division of ISO.
               Hurricane Katrina Claim Count
               Distribution by State ($ Billions)*
                               Tennessee, 8,400 ,
          Florida, 110,000 ,
                                    0.5%            Georgia, 3,300 , 0.2%
                6.7%

  Alabama, 123,000 ,
        7.5%


                                                             Louisiana, 900,000 ,
                                                                   55.1%

 Mississippi, 490,000 ,
        30.0%
                                                                   Louisiana
                                                               accounted for 2/3
                                                               of insured losses
                                                               paid and 55% of
*As of October 4, 2005                                            claims filed
Source: PCS division of ISO.
              Hurricane Katrina Insured Loss
              and Claim Distribution by State*

     State           Losses ($Mill)         # Claims % Losses   % Claims
     LA          $         22,600.0          900,000   66.0%      55.1%
     MS          $             9,800.0       490,000   28.6%      30.0%
     AL          $             1,300.0       123,000    3.8%       7.5%
     FL          $              468.0        110,000    1.4%       6.7%
     TN          $               46.1          8,400    0.1%       0.5%
     GA          $               22.2          3,300    0.1%       0.2%

     Totals      $         34,236.3      1,634,700     100.0%    100.0%

*As of October 4, 2005
Source: PCS division of ISO.
                   Distribution of Katrina Losses
                       by Market ($Billions)

   Market                                  Percentage                   Amount
   Insurers                                    47% - 53%                    $18.8 - $28.9
   Reinsurers                                  52% - 44%                    $20.7 - $24.0
   Capital Markets                               1% - 3%                      $0.4 - $1.6

   TOTAL                                          100%                  $39.9 - $54.6


Source: Hurricane Katrina: Analysis of the Impact on the Insurance Industry, Tillinghast, October 2005.
              Hurricane Rita Loss Distribution
                    by Line ($ Billions)*
                          Commercial
                         Property & BI,
                          $1.44 , 35%
                                                              Personal Auto,
                                                                $0.12 , 3%
  Total insured
    losses are
estimated at $4.1
  billion (excl.
offshore energy)

                                          Homeowners, $2.56
                                               , 62%
*As of September 26, 2005
Source: Insurance Information Institute
                 Number of Homes Destroyed
                   by Major Hurricanes*

300,000            Katrina appears to have                                   275,000
                 destroyed 10 times as many
250,000          homes as Andrew in 1992 or
200,000           the 4 storms to hit Florida
                  and the Southeast in 2004
150,000
100,000
 50,000              28,000                       27,500
       0
                  Andrew (1992)          Charley, Frances, Ivan,           Katrina (2005)
                                             Jeanne (2004)
*Destruction is defined as a structure made uninhabitable or damaged beyond economic repair.
Source: National Association of Home Builders, National Red Cross (as of 9/15/05).
               Personal Property Losses Accounted for
                    Largest Share Damage from
                         2004 Hurricanes*
   Charley                               TOTAL                                  Ivan
                 4%                                                                        4%
                                                           Vehicle
   56%                                                     4%                63%
                                                                                         33%
               40%
                                 Personal
                                 Property               Comm.
                                                       Property
                                  63%
    Frances                                            33%                     Jeanne
                  4%                                                                        4%

   66%
                                                                                            23%
                 30%                                                           73%


                                                    *Breakdowns based on FL losses, which accounted
Source: ISO/PCS; Insurance Information Institute.    for 85% of losses for all affected states.
                       Average Annual Tropical
                       Cyclone Insured Losses*
                               (Top 10 States, $ Millions)
                                                      Distribution of Annual Losses
                                                                                Florida
 $1,500 $1,423.0                                                                49.5%
                                               All Other
 $1,250                                         15.7%



 $1,000                                    Mississippi
                                             2.7%
                                                 N.
   $750                                      Carolina
                  $615.0                       3.8%

                                                                           Texas
   $500                                                  Louisiana
                                                                           21.4%
                                                           6.8%

   $250                    $196.0                                              $154.0
                                    $109.0 $77.0 $64.0 $62.0 $61.0 $61.0
                                                                         $51.0
      $0
             FL      TX      LA      NC      MS      MA         SC   AL      NY      CT      All
                                                                                            Other
*Normalized losses adjusted for inflation, housing density, wealth and wind insurance coverage,
 based on historical data for 100-year period 1900-1999.
Source: Tillinghast-Towers Perrin
                      Inflation-Adjusted U.S. Insured
                   Catastrophe Losses By Cause of Loss,
                                                            1985-2004¹
                                            Civil Disorders            Water Damage
         Wind/Hail/Flood5
                                                 0.5%                      0.2%
              3.4%
                                         Fire 6
Earthquakes 4                            2.9%
                                                                 Utility Disruption         Tornadoes 2
    8.4%                                                                0.1%                  30.4%
                                                                                         Insured disaster losses
Winter Storms
                                                                                       totaled $221.3 billion from
    9.7%                                                                              1984-2004 (in 2004 dollars).
                                                                                      After 2005 season, tropical
                                                                                        cyclones will account for
                                                                                           50%+ of the total.
          Terrorism
            9.7%                                                             All Tropical
                                                                              Cyclones 3
                                                                               34.6%
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2004 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 Information Institute estimates based on ISO data.
                       Total Value of Insured
                   Coastal Exposure (2004, $ Billions)
        Florida                                                 $1,937.3
     New York                                                  $1,901.6
         Texas                           $740.0
 Massachusetts                        $662.4
    New Jersey                    $505.8
   Connecticut                 $404.9
      Louisiana           $209.3
    S. Carolina         $148.8
       Virginia         $129.7
         Maine         $117.2
 North Carolina        $105.3
      Alabama         $75.9
       Georgia        $73.0
      Delaware       $46.4
New Hampshire        $45.6
     Mississippi     $44.7
  Rhode Island       $43.8
      Maryland      $12.1

                   $0         $500          $1,000   $1,500   $2,000       $2,500
Source: AIR Worldwide
               Insured Coastal Exposure as a % of
            Statewide Insured Exposure (2004, $ Billions)
       Florida                                                                79.3%
  Connecticut                                                        63.1%
    New York                                                       60.9%
        Maine                                                    57.9%
Massachusetts                                                 54.2%
    Louisiana                                   37.9%
  New Jersey                                33.6%
    Delaware                                33.2%
 Rhode Island                           28.0%
   S. Carolina                        25.6%
        Texas                         25.6%
           NH                       23.3%
    Mississippi             13.5%
     Alabama               12.0%
      Virginia            11.4%
           NC           8.9%
      Georgia        5.9%
    Maryland      1.4%

              0%     10%     20%      30%    40%        50%    60%    70%    80%   90%
Source: AIR Worldwide
Hurricane Katrina:
  Exacting a Toll on
    Underwriting
Performance & Profits
                         U.S. Insured
                 Catastrophe Losses ($ Billions)
                                 $ the worst year
               2005 will be by farBillions
             ever for insured catastrophe losses in
$50            the US. 2004 is the second worse.                                                   $44.0
$40
$30                                                                          $26.5             $27.5
                        $22.9
$20                                 $16.9
                                                                                        $12.9
                                           $8.3 $7.4     $10.1$8.3
$10 $7.5                       $5.5                                                 $5.9
             $2.7 $4.7                               $2.6          $4.6
  $0
         89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05*
*As of 6/30/05 plus $920 in insured for Hurricane Dennis in July, $35 billion (est.) for Hurricane Katrina
in August, $800 million (AIR est.) for Hurricane Ophelia in September and $4.1B for Hurr. 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.
Source: Property Claims Service/ISO; Insurance Information Institute
                        ROE: P/C vs. All Industries
                              1987–2005E
 20%
                                         2004/5 ROEs excl. hurricanes
 15%


 10%
                                                                              Sept. 11
  5%

             Hugo                                      Lowest CAT                                  Katrina/
  0%                                                losses in 15 years                              Rita
             Andrew                    Northridge                                         4 Hurricanes
 -5%
        87    88   89   90   91   92    93   94   95   96   97   98      99    00   01   02   03   04 05*

          US P/C Insurers                All US Industries                P/C excl. Hurricanes
Source: Insurance Information Institute; Fortune
Legal Environment
    Will Affect
Katrina’s Outcome
                 Business Leaders Ranking of
                  Liability Systems for 2005
Best States      New in 2005                           Worst States
1. Delaware                                            41. Hawaii
                                                                                    Newly
                ND, IN, SD, WY                                                     Notorious
2. Nebraska                                            42. Florida
3. North Dakota   Drop-Offs                            43. Arkansas                   HI, FL
4. Virginia     ID, UT, NH, KS                         44. Texas                      Rising
5. Iowa                                                45. California                 Above
6. Indiana                                             46. Illinois
                                                                                     MO, MT
7. Minnesota                                           47.Louisiana
8. South Dakota
9. Wyoming                                             48.Alabama
10. Idaho       LA, AL and MS’s                        49. West Virginia
                           liability systems are
                        ranked among the worst         50.Mississippi
                        in the country by the US
                         Chamber of Commerce
Source: US Chamber of Commerce 2005 State Liability Systems Ranking Study; Insurance Info. Institute.
                The Nation’s Judicial Hellholes


                                                                                      Philadelphia,
CALIFORNIA                                                            West                 PA
Los Angeles                                        ILLINOIS          Virginia
  County
                                               Madison County
                                               St. Clair County
                                                                                     Hampton
                                                                                    County, SC

                                Jefferson
                               County, TX



                                                                                     South Florida


                 It’s bad news for insurers that
              Orleans Parish, Louisiana, is one                   Orleans Parish,
              of the nation’s “judicial hellholes”                      LA

Source: American Tort Reform Association; Insurance Information Institute
                Types of Lawsuits Being Filed in the
                    Wake of Hurricane Katrina
• Homeowners Insurance
      Lawyers (e.g., Dicky Scruggs) and Mississippi Attorney General Jim Hood
       are suing insurers over whether homeowners policies should cover flood.
      TX judge ordered one company to stop denying claims to people claim for
       additional living expense who could not provide immediate documentation of
       damage. Hearing scheduled for Oct. 20.
• Oil Spills
      Lawyers have sued the energy industry over ruptured oil tanks and pipelines
       that have fouled Louisiana neighborhoods.
• Fishing Grounds
      At least 2 cases filed on behalf of LA’s fishermen over damage to estuaries,
       bays and oyster beds caused by the oil spills.
• Wetlands
      One suit filed against the oil & gas industry for its alleged role in the
       disappearance of wetlands that protected Louisiana from storm surges.
Source: Wall Street Journal, 9/26/05, p. B1; Houston Chronicle, Oct. 12, 2005; Insurance Information Institute
          Legal Theories Being Floating by Trial Bar to
           Get Insurers to Pay Excluded Flood Losses

• Valued Policy Law
   Idea is that if property is a total loss the insurer cannot dispute the value of the
    property and must pay limits. Insurers will argue that flood is an excluded
    peril and VPL doesn’t apply. Insurers lost Mierzwa case in FL, but FL
    provided a legislative “fix” for that wayward court decision. Could result in
    policyholders with flood coverage receiving 200% of limits. Applies only to
    insureds with flood cover. VPL for fire only in MS, none in AL.
• Wind Efficient Proximate Cause of Surge
   Says that because surge was driven by wind and because wind is a covered
    cause of loss, it is the efficient proximate cause of the flood and should
    therefore should be triggered.
   Also alleges storm surge is not specifically excluded by name
• Barge Breach Levee
   A barge crashed into one levee, causing it to rupture. Theory is that this is a
    covered cause of loss because it’s not excluded (even though damage
    produced a flood).
               Relevant Homeowners Insurance Policy
                Language Governing Water Damage

•      Wind and Hail Coverage (a named peril)

•      Flood Exclusion

•      FEMA/NFIP Flood Definition

•      Fungus & Mold Exclusion

•      Earth Movement Exclusion
Source: Insurance Information Institute
                  Wind Coverage in HO Policy:
                Limits and Boundaries of Coverage

• Wind and Hail Coverage ( Named Peril)
      Windstorm or Hail
      ―We do not pay for loss to the interior of a
       building or to personal property inside, caused
       by rain, snow, sleet, sand or dust unless the
       wind or hail first damages the roof or walls
       and the wind forces rain, snow, sleet, sand or
       dust through the opening.”

Source: Insurance Information Institute
                Typical Flood Exclusion in
               Homeowners Insurance Policy
•    Flood Exclusion
        Water Damage, meaning any loss caused by, resulting from,
         contributed to or aggravated by:
    1.   flood, surface water, waves, tidal water or overflow of any body of
         water, or spray from any of these, whether or not driven by wind.
    2.   Water or water-borne material which backs up through sewers or
         drains, or which overflows or is discharged from a sump pump, sump
         pump well or other system that is designed to remove subsurface
         water which is drained from the foundation area; or
    3.   Water or water-borne material below the surface of the ground,
         including water which exerts pressure on, or flows, seeps or leaks
         through any part of a building, sidewalk, foundation, driveway,
         swimming pool or other structure or water that causes earth
         movement.
         This exclusion applies whether or not the water damage is caused by
         or results from human or animal forces or any act of nature.
               Facts About the Flood Exclusion

•      Has existed in policies for decades

•      Flood Exclusion is effectively absolute—
       excluding water under all circumstances

•      It is the reason for the existence of FEMA’s
       NFIP program since it was established in 1968

•      Approved by regulators in all 50 states
Source: Insurance Information Institute
                  NFIP Flood Definition: Covers
                  Exactly What HO Policies Don’t
•        "A general and temporary condition of partial or complete
        inundation of two or more acres of normally dry land area or of two
        or more properties (at least one of which is the policyholder's
        property) from:
        Overflow of inland or tidal waters; or
        Unusual and rapid accumulation or runoff of surface waters
           from any source; or
        Mudflow; or
        Collapse or subsidence of land along the shore of a lake or
           similar body of water as a result of erosion or undermining
           caused by waves or currents of water exceeding anticipated
           cyclical levels that result in a flood as defined above."
    Source: FEMA/National Flood Insurance Program: http://www.floodsmart.gov/floodsmart/pages/whatflood.jsp.
              Typical Fungus & Mold Exclusion in
                 Homeowners Insurance Policy
• Fungus and Mold Exclusion

      “We do not cover loss or damage, no matter how caused, to
       the property which results directly or indirectly from fungus
       and mold. There is no coverage for loss which, in whole or in
       part, arises out of, is aggravated by, contributed to by acts or
       omissions of persons, or results from fungus and mold. This
       exclusion applies regardless of whether fungus and mold arises
       from any other cause of loss, including but not limited to a loss
       involving water, water damage or discharge, which may be
       otherwise covered by this policy, except as granted [by
       exception].”

Source: Insurance Information Institute
           Relevant Homeowners Insurance Policy
            Language Governing Water Damage
•    Earth Movement Exclusion
     Applies to any loss caused by, resulting from, contributed to or
       aggravated by events that include, but are not limited to:
    1. Earthquake and earthquake aftershocks;
    2. Volcanic eruption and volcanic effusion;
    3. Sinkhole;
    4. Subsidence;
    5. Mudslide including landslide, mudflow, debris flow,
       avalanche or sediment;
    6. Erosion or excavation collapse;
    7. The sinking, rising, shifting, expanding, bulging, cracking,
       settling or contracting of the earth, soil or land; and
    8. Volcanic explosion and lava flow except [by exception]

        This exclusion applies whether or not the earth movement is
        combined with water or caused by or results from human or
        animal forces or any act of nature.
                     Consequences of Mississippi
                           AG’s Actions
•     Sept. 15 suit by MS AG Hood constitutes and
      attempt to retroactively rewrite all HO insurance
      contracts in MS. “Contract certainty” extinguished.
•     Suit amounts to little more than an attempt to
      expropriate shareholder assets (and the equity of
      mostly non-MS policyholders of mutual insurers)
•     The risk is fundamentally political, cannot be
      modeled or priced
•     Insurers will necessarily be motivated to protect
      shareholder equity (and claims paying resources
      generally). Reinsurers will exert pressure too.
•     Also continues dangerous trend of AG assertion of
      authority over state insurance regulators
Source: Insurance Information Institute
                   Consequences if Coverage
                  Rulings Went Against Insurers
•      Creates dangerous precedent of contract abrogation
•      Effectively renders flood exclusion null and void & usurps
       authority of state insurance regulator
•      Creates enormous financial liability for explicitly excluded
       peril for which no premium was collected
•      HO insurance rates countrywide become instantaneously
       inadequate
          Would provoke largest homeowners insurance rate in history on a national
           basis
•      Insurers would likely pull back from many markets because
       of lack of contract certainty
•      Renders NFIP program useless
•      Unfair to NFIP policyholders and other insureds
Source: Insurance Information Institute
            MS AG and Scruggs Suits Not
          Supported by Governor, Regulator
• Recent Quotes:
    “It’s crucial that people who enter contracts keep their contracts. And that’s what
     an insurance policy is, a contract….For those people [who didn’t buy flood
     coverage] we are working very hard that if they don’t have insurance or don’t
     have coverage, that we can up with a way to help them financially.”
        Mississippi Governor Haley Barbour, WSJ, 9/19/05, p.C9.


    “The insurance industry can take care of so many, the flood insurance program
     can take care of so many…but there are still others out there that do not fit under
     either of these.”
        Mississippi Insurance Commissioner George Dale, WSJ, 9/19/05, p.C9.


    For the government to make payments to people who didn’t buy flood insurance
     “undermines the purpose of an insurance scheme…If the government becomes
     the insurer of last resort, even when people don’t get insurance, then people won’t
     buy any insurance.”
        White House Budget Director Joshua Bolten as quoted in the WSJ, 9/26/05, p.A2.
           Status of Litigation Against Insurers
                 on Flood vs. Wind Issue
•   MS Atty. General Hood:
       Called actions of insurers “unconscionable.” Filed an unsuccessful order for
        immediate injunctive relief against 5 insurers seeking to stop them from
        drawing wind/water distinction. Suit was remanded to a federal court
        because it makes reference to NFIP. Will likely die there soon.
•   Scruggs Case:
       Stated that will he bring suits against insurers in MS week of 9/19/05.
       Because of recent tort reform changes in MS, Scruggs can’t bring a class
        action, has to try cases individually.
       Says he will take “drastically” reduced contingency fee
       Failure of AG suit should kill Scruggs’ case.
       FYI: Scruggs’ Pascagoula home was heavily damaged. He had flood
        coverage.
•   Louisiana Suit
       Suit is like MS. LA Supreme Court looking at it as contract law case
       Likely to be resolved soon in insurers favor
FEMA’s National
Flood Insurance
   Program
                      Percentage of Homes With Flood
                    Insurance Policies: Coastal Counties
                            Affected by Katrina
        St. Bernard (LA)                                                        57.7%
          Jefferson (LA)                                                        57.4%
        St. Charles (LA)                                                     52.5%
       Plaquemines (LA)                                            45.6%
      St. Tammany (LA)                                           43.2%
           Orleans (LA)                                        40.0%
St. John the Baptist (LA)                              30.8%
           Baldwin (AL)                        23.5%
          Hancock (MS)                         23.4%     Proportion of homes with
          Harrison (MS)              11.7%              federal flood coverage was
           Jackson (MS)             10.4%                 miserably low in most
       Tangipahoa (LA)         7.3%                      coastal counties affected
         St. James (LA)        7.0%
                                                                by Katrina
            Mobile (AL)      3.9%

                        0%     10%      20%      30%       40%         50%      60%     70%
Source: Census Bureau, FEMA, New York Times.
                                             NFIP: Policies in Force and
                                             Total Coverage (Exposure)
                                      Policies in Force              Total Coverage (Exposure)

                               5.0         Nearly 5 million property                                                         $800
                                                                                                         4.5   4.6   4.7
                                             owners per year buy                       4.3   4.4   4.5
                                                                                                                           $764.5
                               4.5                                   4.1         4.2
                                                NFIP policies
                                                                                                                             $700




                                                                                                                                    Total Coverage ($ Billions)
Policies in Force (Millions)




                               4.0                                   3.7
                                                               3.5
                               3.5
                                                         3.0                                                                 $600
                               3.0                 2.8
                                     2.5     2.6
                               2.5                                                                                           $500
                               2.0
                                                                                                                             $400
                               1.5
                               1.0                                         The NFIP insured property with a                  $300
                               0.5                                         total value of $764.5 billion in 2004
                               0.0                                                                                           $200
                                     91      92    93    94    95    96     97   98    99    00    01     02   03    04


Sources: FEMA, National Flood Insurance Program (NFIP)
                            NFIP: Total Policies in Force
                            by Calendar Year 1978-2004
                                                       Millions
                               Nearly 5 million




                                                                                 4.7
                                                                                4.6
                                                                                4.5
                  5




                                                                               4.5
                                                                               4.4
                                                                              4.3
                             property owners per




                                                                              4.2
                                                                             4.1
                                                                          3.7
No. of Policies




                  4          year by NFIP policies




                                                                         3.5
                                  3.0
                               2.8
                              2.6
                             2.5
                  3

                             2.5
                            2.3
                           2.1
                          2.1
                          2.1
                          2.1




                          2.0
                         2.0
                         1.9
                         1.9
                        1.9
                        1.8




                  2
                      1.4




                  1

                  0
                      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


            Source: FEMA, National Flood Insurance Program (NFIP)
                  NFIP: Total Premium by
                  Calendar Year 1978-2004
                                         $ Billions
$2.5         The NFIP now collects




                                                                    $2.1
              more than $2 billion




                                                                   $1.9
                                                                  $1.8
                                                                 $1.7
                                                                $1.7
                                                                $1.7
                                                                $1.7
$2.0         annually in premiums




                                                              $1.5
                                                           $1.3
$1.5




                                                          $1.1
                   $1.0
                $0.9
               $0.8
               $0.7
              $0.7
$1.0         $0.6
             $0.6
            $0.6
            $0.5
           $0.5
          $0.4
          $0.4
         $0.4
        $0.3
       $0.2




$0.5
       $0.1
       $0.1




$0.0
       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



Source: FEMA, National Flood Insurance Program (NFIP)
                  NFIP: Total Coverage by
                  Calendar Year 1978-2004
                                         $ Billions
             The NFIP insured property
$1,000




                                                                       $764.5
             with a total value of $764.5




                                                                     $691.8
                                                                    $653.8
                                                                   $611.9
 $800              billion in 2004




                                                                 $567.6
                                                                $534.1
                                                               $497.6
                                                              $462.6
                                                             $400.7
 $600




                                                            $349.1
                 $295.9
                $265.2



                $267.9
               $236.8
               $223.1
              $213.6
             $175.8
 $400
             $165.1
             $155.7
            $139.9
            $124.4
           $117.8
           $107.3
           $102.1
           $99.3
          $74.4
         $50.5




 $200

   $0
         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


Source: FEMA, National Flood Insurance Program (NFIP)
              NFIP: Policies in Force By Coverage
                  Type (As of July 31, 2005)

                                                           Building
                                                        Coverage Only,
                                                            39.7%


   Both Bldg. &
    Cont. Cvg,
      58.7%

                                                     Contents
                                                  Coverage Only,
                                                      1.5%

                                                         Coverage Type          Policies in Force
                                                         Building Coverage Only 1,845,481
                                                         Contents Coverage Only 72,008
                                                         Both Bldg & Cont Cvg   2,729,267
                                                         All Policies           4,646,756
Source: FEMA, National Flood Insurance Program (NFIP)
           NFIP: Policies in Force By Occupancy
                Type (As of July 31, 2005)
                                              Non-
                      Other                 Residential
                    Residential               4.6%
                      3.0%
         Condos
          20.5%

                                                          Occupancy Type       Policies in Force
                                                          Single Family Home   3,184,010
    2 to 4 Family
                                                          2 to 4 Family Unit   158,124
         Unit
        3.4%                                              Condominiums         951,240
                                                          Other Residential    138,583
                                        Single Family
                                                          Non-Residential      214,799
                                            Home
                                           68.5%          Unknown Occupancy    --
                                                          All Policies         4,646,756



Source: FEMA, National Flood Insurance Program (NFIP)
                           NFIP: No. of Losses Paid by
                            Calendar Year 1978-2004
 No. of Losses
                  70,613



80000




                                                                              62,440



                                                                            57,338
70000




                                                                          52,678
                                                51,584




                                                                        47,220
                                                                       44,651




                                                                       43,503
60000
                           41,918




                                                                     38,675




                                                                     37,659
                                                                    36,247




                                                                    36,271
                                                                    36,044
50000
                                       32,831




                                                                  30,333
         29,122




                                                                 28,554
                                                                 27,688




                                                                25,220
                                                                21,583
                                    23,261




40000




                                                             16,347
                                                            14,766
                                                           13,789
                                                           13,399

30000
                                                         7,758

20000
10000
    0
         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



Source: FEMA, National Flood Insurance Program (NFIP)
               NFIP: Loss Dollars Paid by
                Calendar Year 1978-2004
             The NFIP will pay an           $ Millions




                                                            $1,295.5




                                                                                            $1,276.4
           estimated $10 billion in




                                                                                                                      $1,207.2
             flood claims in 2005,
$1,400      indicating a need for a
          taxpayer-financed bailout
             of at least $7.5 billion




                                                                                   $886.0
$1,200




                                                                                 $828.0




                                                                                                             $759.8
                                                                                $754.8
                      $710.2
$1,000



                    $661.7




                    $659.1




                                                                            $519.5
                 $483.3




 $800




                 $411.1
                $439.5




                                                                                                       $432.5
               $368.2




               $353.7
 $600
             $254.6




                                                                       $251.5
             $230.4

            $198.3




           $167.9
           $147.7


          $127.1




          $126.4
          $105.4


 $400
         $51.0



 $200
   $0
         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


Source: FEMA, National Flood Insurance Program (NFIP)
              NFIP: Average Cost of Claim
              By Calendar Year 1978-2004
 Average Cost of Claim
                            The average cost of a flood




                                                                                                       $32,056
                                                                               $29,341
$35,000
                         claim in 2004 was $32,056. The
$30,000                    average premium was $438.




                                                                                             $20,948
                                                                 $20,748
                                                               $19,047
$25,000




                                            $18,255




                                                              $18,286




                                                                                         $17,149
                                                             $17,127

                                                            $15,985
                                                            $15,906




                                                           $15,718




                                                           $15,385
                                                          $15,103
$20,000




                                                       $12,387
                                                      $11,371
$15,000
                $9,520
               $9,195

               $9,167
              $8,520




             $7,866
            $6,844




            $6,574
           $6,040
          $5,496
          $5,464
          $5,072




$10,000

 $5,000

     $0
          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


 Source: FEMA, National Flood Insurance Program (NFIP)
               NFIP: Insurance In Force By
               Month (As of July 31, 2005)
$800
                                                $ Billions                                           $792.3
                                                                                            $784.7
                                                                                   $773.4
$780                                                                      $768.5
                                                                 $756.7
                                                        $756.7
$760                                           $751.4
                               $740.5 $745.8
$740                  $731.7
             $722.7
    $711.2
$720

$700

$680

$660
    Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul-
     04   04   04   04   04   05   05   05   05   05   05   05
Source: FEMA, National Flood Insurance Program (NFIP)
            Average Premium Preferred Risk Policy*
            For Buildings with Basement Under NFIP
Average Premium
 $400
                                                                                             $351
 $350                                                                              $330
                                                                        $293
 $300                                                         $278
                                                    $262
 $250                                     $231
                               $204
 $200
                     $162
 $150      $136

 $100

  $50

    $0
          $20,000 $30,000     $50,000   $75,000    $100,000 $125,000 $150,000 $200,000 $250,000


          Building deductible: $500. Contents deductible: $500. Deductibles applied separately.

*Under the NFIP a low-cost Preferred Risk Policy is available to homeowners located in low- to moderate-
risk areas.
Sources: FEMA, National Flood Insurance Program (NFIP)
             Average Premium Preferred Risk Policy*
                 For Buildings without Basement
                          Under NFIP
Average Premium
 $350
                                                                                             $316
                                                                                   $295
 $300
                                                                        $263
                                                              $248
 $250                                               $232
                                          $206
 $200                          $179

 $150                $137
           $111
 $100

  $50

    $0
          $20,000 $30,000     $50,000   $75,000    $100,000 $125,000 $150,000 $200,000 $250,000


          Building deductible: $500. Contents deductible: $500. Deductibles applied separately.

*Under the NFIP a low-cost Preferred Risk Policy is available to homeowners located in low- to moderate-
risk areas.
Sources: FEMA, National Flood Insurance Program (NFIP)
                 Policy Retention Rates, As Of
                         July 31, 2005
       Retention rates in the NFIP are poor, with 10-15% of
         policyholders allowing policies to lapse annually.

                          91.6%            92.0% 91.9%
         90.8% 91.0%                                        91.2% 90.9% 91.0%
                                  90.6%

88.3%


                                                                                85.5% 85.5%




 Aug-     Sep-     Oct-    Nov-     Dec-    Jan-        Feb- Mar- Apr- May- Jun- Jul-05
  04       04       04      04       04      05          05   05   05   05   05

Source: FEMA, National Flood Insurance Program (NFIP)
              Total Claim Payments by State
             (Top 10) Jan 1, 1978 - Dec. 2004
                       $ Millions               Louisiana and Alabama
 $3,000
                                                   rank 3rd and 10th
           $2,702.0                             respectively in terms of
 $2,500           $2,226.7
                                                total claims payments.
                                                Mississippi ranks 13th.
 $2,000                    $1,727.3

 $1,500

 $1,000
                                  $687.2 $598.2
                                               $473.4 $422.6 $419.9 $384.4 $377.8
   $500                                                                             $276.6

      $0
             TX       FL     LA       NC   NJ     PA    SC    MO     VA     AL       MS

Source: FEMA, National Flood Insurance Program (NFIP)
What Role Should the
Federal Government
  Play in Insuring
  Against Natural
  Disaster Risks?
                 Pros/Cons of Federal CAT
                  (Re) Insurance Facility
• Rationale FOR Federal Involvement
    Insurance was not meant to handle mega-catastrophes
    Such risks are fundamentally uninsurable
    Federal government already heavily involved in insuring against
     weather-related mega-catastrophes (e.g., flood, crop)
    Insurers are not allowed to charge risk appropriate rates (including
     rising reinsurance costs)
    Price/availability of private reinsurance is volatile
• Rationale AGAINST Federal Involvement
    Crowds-out pvt. insurance/reinsurance markets; stifles innovation
    Relationship between price and risk assumed is diminished since fed
     insurance programs are seldom actuarially sound
    Increases federal involvement and regulatory authority in p/c
     insurance (not a negative for some market participants)
    Cost to US Treasury (esp. taxpayers in less disaster prone states)
    Diminishes incentives for mitigation, tougher building codes and
     wiser land use policies if Fed rate are politically influenced
    Options for a Federal Role in the
   Financing of Natural Disaster Risk

1. National Natural Disaster Pool


2. Regional Natural Disaster Pool(s)


3. Federal Reinsurance Program


4. Tax-Favored Pre-Event Reserving
             National Natural Disaster Pool
• KEY ELEMENTS
    Share of property premiums (homeowners, commercial property)
     premiums collected would be ceded to pool and used to finance
     mega-catastrophes
    Funds would earn investment income tax-free to speed accumulation
     and keep prices modest
    Risk is diversified geographically and by peril (e.g., wind vs. quake)
    Federal government would provide a backstop to the pool as:
        Reinsurance purchased by pool from the government
        Line of credit offset by assessing authority
• KEY CHALLENGES
    Is participation by insureds mandatory or optional?
    If optional, significant adverse selection problem
    Determination of ―actuarially sound‖ rates
    Keeping rates free of political influence and manipulation
    Maintaining significant role for private reinsurers and ART
    Formula for assessing shortfalls in pool (including taxpayer share)
    Attracting support of states not prone to mega-catastrophes
    Appeasing deficit hawks, advocates of small government
          Regional Natural Disaster Pool(s)
• KEY ELEMENTS
    Share of property premiums in certain states (homeowners,
     commercial property) premiums collected would be ceded to pool
     and used to finance mega-catastrophes in participating states
    Funds would earn investment income tax-free to speed accumulation
    Federal government would provide a backstop to the pool as:
        Reinsurance purchased by pool from the government
        Line of credit offset by assessing authority
• KEY CHALLENGES
    Is participation by insureds mandatory or optional?
    If optional, significant adverse selection problem
    Determination of ―actuarially sound‖ rates
    Maintaining role for private reinsurance
    Keeping rates free of political influence and manipulation
    Formula for assessing shortfalls in pool (including taxpayer share)
    Attracting support of states not prone to mega-catastrophes
           Federal Reinsurance Program
• KEY ELEMENTS
  Insurers purchase CAT reinsurance from federal
    government

• KEY CHALLENGES
  Determination of ―actuarially sound‖ rates
  Maintaining significant role for private reinsurers
  Maintaining significant role for ART and risk
    securitization
  Keeping rates free of political influence and manipulation
  Appeasing advocates of small government
  Keeping natural disaster risk programs separate and
    distinct from terrorism risk
          Tax-Preferred Treatment of
        Pre-Event Catastrophe Reserving
• KEY ELEMENTS
  Insurers would be allowed to deduct from their taxable
    income amounts set aside in reserve for natural disaster
    risks in advance of the occurrence of the actual event
  Presently, US tax law does not allow for such treatment
       Most other countries already permit pre-event reserving

• KEY CHALLENGES
  Determination of appropriate reserve levels
  Overcoming criticism of impact on US Treasury receipts
       Note that impact on Treasury is limited to time value of tax
        receipts
Managing Natural
Catastrophes in a
 Post-9/11 World
 L James Valverde, Ph.D., Director,
  Economics & Risk Management
                     Presentation Outline
•   Managing Natural Catastrophes
      Emergency preparedness and response in the wake of 9/11
      Emerging questions and lessons from Hurricane Katrina
      The centrality of risk management, for both public and private stakeholders

•   The U.S. Department of Homeland Security
      The National Strategy for Homeland Security and the genesis of DHS
      Historic moment for America or bureaucracy writ large?

•   Emergency Preparedness and Response
      The homeland security context
      All-hazards vs. terrorist myopia?

•   FEMA
        Past, present, and future
        What went wrong and why?
        All-hazards context: The National Planning Scenarios
        Challenges in the years ahead

•   Implications for P/C Insurers

•   Concluding Remarks and Discussion
       The National Strategy for Homeland
        Security and the Genesis of DHS

• In the wake of 9/11, President Bush issued the National Strategy for
  Homeland Security in July 2002

• Legislation creating the U.S. Department of Homeland Security (DHS)
  was signed in November 2002

• The creation of DHS represents a fusion of numerous federal agencies,
  with the objective of coordinating and centralizing the leadership of
  the nation’s homeland security activities under a single, cabinet-level
  department

     Began operations in March 2003

     22 separate agencies

     Approximately 180,000 employees
                   DHS: Historic Moment or
                   Bureaucracy Writ Large?
•   The creation of DHS represents a historic moment of almost unprecedented action by
    the federal government to transform how the nation protects itself from acts of terrorism

•   Rarely in the nation’s history has such a large and complex reorganization of
    government been attempted, with such a singular and urgent purpose

•   DHS represents a unique opportunity to transform a disparate group of agencies with
    multiple missions, values, and cultures into an effective cabinet-level department

•   A central aspect of DHS’s mission involves coordinating efforts to protect critical
    infrastructure, prepare for possible attacks and other emergencies, and respond to
    catastrophic incidents and events

•   Accountability and performance thus far?
        Hurricane Katrina as a specific case in point – first real test of the system?
        DHS Inspector General
        U.S. GAO
        Academics and Think Tanks
                    Homeland Security:
                   The Essential Tension
• Any coordinated and sustained effort to effectively manage
  homeland security must contend with two competing tasks:

    The prevention of terrorist acts

    Mitigation of consequences arising from acts of terrorism

• In a decision context like this, resource allocation under
  uncertainty is one of the central challenges the federal
  government faces in its efforts to manage homeland
  security
               The National Strategy for
                  Homeland Security
• The National Strategy for Homeland Security describes six critical
  missions areas:

     Intelligence and Warning

     Border and Transportation Security

     Domestic Counterterrorism

     Protecting Critical Infrastructure and Key Assets

     Defending Against Catastrophic Threats

     Emergency Preparedness and Response

• The President has also issued several additional documents – so-called
  Homeland Security Presidential Directives (HSPD) – that provide
  more detailed guidance on various homeland-security-related mission
  areas and initiatives
         Emergency Preparedness and Response:
          Key Elements of the National Strategy
For the Emergency Preparedness and Response mission area, the National
Strategy identifies 12 separate initiatives:

    1.    Integrate separate federal response plans into a single all-discipline
          incident management plan

    2.    Create a national incident management system

    3.    Improve tactical counter terrorist capabilities

    4.    Enable seamless communication among all responders

    5.    Prepare health care providers for catastrophic terrorism

    6.    Augment America’s pharmaceutical and vaccine stockpiles
  Emergency Preparedness and Response:
Key Elements of the National Strategy (cont.)

7.   Prepare for chemical, biological, radiological, and nuclear
     decontamination

8.   Plan for military support to civil authorities

9.   Build the Citizen Corps

10. Implement the First Responder initiative of the FY03 budget

11. Build a national training and evaluation system

12. Enhance the victim support system
        FEMA

Past, Present, and Future
DHS Organizational Structure: FEMA’s Place
 in the Larger Context of Homeland Security
       FEMA: Informed Opinion Prior
          to Hurricane Katrina

“…consolidate DHS response missions into
FEMA and strengthen that agency. FEMA
should be engaged squarely in its
traditional role of planning for national (not
just federal) response to emergencies…
[emphasis added].”
                                DHS 2.0
                                Heritage Foundation
                                December 2004
    FEMA in the Wake of Hurricane Katrina

• According to a recent WSJ article, FEMA
  has, in some circles, become synonymous
  with the government’s bungled response to
  the hurricane
• To what extent is this a fair characterization
  of this agency and the difficult situation it
  now finds itself in?
      FEMA: Past, Present, and Future
“Two years ago in a lecture at the Naval Postgraduate School … I told
students that FEMA was not capable of adequately responding to a major
hurricane, let alone a catastrophic terrorist attack. My comments were based
on an assessment that morale at FEMA was then the worst since the agency
was created. The very people the nation depended on to help out during our
time of greatest need were being demoralized by an indifferent, inexperienced
leadership that neither understood emergency manage-ment nor had the skills
to ensure the agency had the resources to meet its all-hazard mission.”

“Those who think we have overemphasized terrorism in the wake of
September 11, should be concerned with a knee-jerk reaction to Katrina. What
we need is balance. We must be prepared to respond to both terrorism and
natural disasters. The FEMA I know is capable of rising to the occasion and
accomplishing both missions.

                                   Mike Walker
                                   Former FEMA Deputy Director
                                   The Washington Times, 13 Sept. 2005
     FEMA: What Went Wrong and Why?

• Over the course of the next several months, many
  theories and explanations will be forthcoming
• Much of what will likely be said will contain the
  following core elements:
    The agency is no longer cabinet-level, but rather a small
     cog within the organizational and bureaucratic
     behemoth that is DHS
    FEMA’s mission to help states prepare for “all hazards”
     – from terrorism to natural disasters – has become lost
     within DHS’s myopic focus on terrorism
    FEMA should perhaps revert to being an independent,
     cabinet-level agency
Importance of the All-Hazards Context
           HSPD 8 – National Preparedness:
           The National Planning Scenarios
• Developed under the leadership of the Homeland Security
  Council
• Overarching goals are to
    Create the agility and flexibility to meet a wide range of threats and
     hazards
    Provide a structure for the development of national preparedness
     standards
• 15 planning scenarios provide parameters regarding the
  nature, scale, and complexity of incidents of national
  significance, which include both terrorism and natural
  disasters
• Each scenario provides a basis for defining prevention,
  protection, response, and recovery tasks that need to be
  performed, as well as required capabilities
         National Planning Scenarios
The Homeland Security Council has developed 15 all-hazard planning
scenarios for use in national, federal, state, and local homeland security
preparedness activities:
         1.   Nuclear Detonation – 10-Kiloton Improvised Nuclear Device

         2.   Biological Attack – Aerosol Attack

         3.   Biological Disease Outbreak – Pandemic Influenza

         4.   Biological Attack – Plague

         5.   Chemical Attack – Blister Agent

         6.   Chemical Attack – Toxic Industrial Chemicals

         7.   Chemical Attack – Nerve Agent
National Planning Scenarios (cont.)

8.   Chemical Attack – Chlorine Tank Explosion

9.   Natural Disaster – Major Earthquake

10. Natural Disaster – Major Hurricane

11. Radiological Attack – Radiological Dispersal Devices

12. Explosives Attack – Bombing Using Improvised Explosive Device

13. Biological Attack – Food Contamination

14. Biological Attack – Foreign Animal Disease (Foot and Mouth
    Disease)

15. Cyber Attack
           Scenario 10: Natural Disaster –
                A Major Hurricane
• In this scenario, a Category 5 hurricane hits a major metropolitan area
     Sustained winds are at 160 mph, with a storm surge greater than 20 feet
      above normal
     As the storm moves closer to land, massive evacuations are required
     Some low-lying escape routes are inundated by water anywhere from 5
      hours before the eye of the hurricane reaches land
• Consequences associated with Scenario 10:
    Casualties                           1,000 fatalities; 5,000
                                         hospitalizations
    Infrastructure Damage                Buildings destroyed; large debris
    Evacuations/Displaced Persons        1 million evacuated; 100,000 homes
                                         seriously damaged
    Contamination                        From hazardous materials, in some
                                         areas
    Economic Impact                      Billions of dollars
    Recovery Timeline                    Months
Looking Towards the Future

   Where Do We Go From Here?
          Challenges in Emergency Preparedness

Adopting an All-Hazards Approach

•   The National Strategy calls for the creation of

           “a fully integrated national emergency response system that is adaptable
           enough to deal with any terrorist attach, no matter how unlikely or catastrophic,
           as well as all manner of natural disasters” [emphasis added]

•   Challenges:

      Identifying the types of emergencies for which they should be prepared and the requirements
       for responding effectively

      Assessing current capabilities against those requirements

      Developing and implementing effective, coordinated plans among multiple first responder
       disciplines and jurisdictions

      Defining the roles and responsibilities of federal, state, and local governments and private
       entities
        Challenges in Emergency Preparedness

Improving Intergovernmental Planning and Coordination

• The National Strategy emphasizes a shared national responsibility –
  involving all levels of government – in responding to a serious
  emergency

• In May 2004, GAO reported that a major challenge involves what they
  saw as lack of coordination within DHS in terms of the agency’s
  ability to prepare for, respond to, and recover from terrorist and other
  emergency incidents:
        “…there has been a lack of regional planning and coordination for developing
          first responder preparedness, defining preparedness goals, identifying
          spending priorities, and expending funds” (GAO-04-433)
      Challenges in Emergency Preparedness

Establishing Emergency Preparedness Standards

• The National Strategy makes mention of benchmarks,
  standards, and other performance measures for emergency
  preparedness

• However, in January 2005, GAO found that

      “…there is not yet a complete set of preparedness standards for
      assessing first responder capacities, identifying gaps in those
      capacities, and measuring progress in achieving performance
      goals” (GAO-05- 33)
          Desirable Attributes for a
       Reconstrued and Revised FEMA

•   Nimble
•   Responsive
•   Communicative
•   Empowered
•   Coordinating
•   Flexible
•   Accountable
•   Resiliant
Implications for the P/C
  Insurance Industry
          Mismanagement of Emergency Preparedness
         and Response Can Impact the Economic Losses
               Associated with Natural Disasters

•   Clearly, there is a relationship between “recovery time” and the economic
    losses associated with a natural catastrophe such as Hurricane Katrina
        Business interruption losses increase exponentially with response lag
        Fires burn uncontrolled
        Failed law enforcement, rioting and looting
        Delayed flood drainage
        Untimely mitigation of environmental release/contamination
        etc.

•   While precise estimates of this relationship will require future empirical study,
    a couple of points are worth considering in light of Katrina:
      A key responsibility for P/C insurers is to play their important and substantial role
       in the risk mitigation process
      It is important for federal, state, and local officials to understand and appreciate the
       role that insurance can play in both minimizing loss and expediting recovery
      Both P/C insurers and property owners, alike, have a vested interested in seeing
       that the overall system works as best as possible
Prospective Challenges for P/C Insurers
           Challenges for P/C Insurers:
              Uncertainty of Losses
• Natural disasters pose vexing challenges for insurers
  because they involve potentially high losses that are
  characterized by large degrees of uncertainty
• Moreover, natural disasters involve spatially correlated
  losses or the simultaneous occurrence of many losses from
  a single event
• Hurricane Katrina suggests a new “externality” for P/C
  insurers to consider:

      Mismanagement of the government’s response
       and recovery efforts in the affected region(s)
         Rethinking Traditional Approaches to CAT
      Modeling and Risk Management in Light of Katrina

• Traditional approaches to risk assessment and CAT
  Modeling need to be revised to explicitly consider some of
  these new “externalities” (e.g., political uncertainty, etc.)
  into their overall analytical frameworks
• A clear need for increased geo-spatial sophistication and
  detail within CAT models, combined with the ability to
  perform “cascaded inference” (broken levee  ּ ּ ּ 
  evacuation of affected area)
• Seriously rethink the implications of changes in risk
  appetite/tolerance and ambiguity aversion for risk
  management strategies and corporate decision-making
                                  Summary
• 2005:H1 was likely the p/c insurance industry’s zenith in the current cycle
  for underwriting/earnings
• Industry was financially strong and well capitalized pre-Katrina/Rita
• 2005 CATs unlikely to provoke widespread hard market conditions (only
  about 5% of global p/c capital)
• Effects mostly confined mostly to specific lines & regions: HO,
  Commercial Property, Property CAT Reinsurance & retrocessional
  markets, PPA Comprehensive; Energy/Marine
     Areas most impacted are Gulf & Atlantic coasts
• Cyclical concerns will quickly return as dominant issue
• Rising investment returns insufficient to support deep soft market in
  terms of price, terms & conditions
• Clear need to remain more underwriting focused
• Major Challenges:
    Maintaining price/underwriting discipline
    Managing variability/volatility of results
    New/emerging/re-emerging risks
     Insurance Information
        Institute On-Line




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