katrina

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

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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

$5

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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

$30 affected the US within the

past 4 years.

$ Billions









$25 $21.5

$20.0

$20 $15.9

$15 $11.0

$10 $6.6 $6.6 $7.8 $8.0

$5.0 $6.4

$5

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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

$1.1

$1.5









$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

billion in 2004









$567.6

$800









$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

$165.1



$400

$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

52,678

70000

51,584









47,220

44,651









43,503

60000

41,918









38,675









37,659

36,247









36,271

36,044

32,831









50000









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









$886.0

$1,200 of at least $7.5 billion









$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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