Hurricanes Katrina & Rita:
Impacts on the Property/Casualty Insurance & Reinsurance Industries
Institute for Business & Home Safety Orlando, FL October 21, 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 • Managing Natural Disaster Risk in a Post 9/11 World • 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%
$40,000
2002 ROE = 2.2%
2003 ROE = 8.9%
Pre-Katrina/Rita profits were strong, helping industry $36,819 cope with mega-loss
$30,773 $24,404 $20,598
$38,722 $30,029 $30,925
$30,000
2004 ROE = 10.5%* 2005:H1 ROE = 15.3%
$20,000
$14,178
$19,316
$21,865 $20,559
$10,870
$10,000
$5,840
―Record‖ 2004 profits wrongly cited as reason why insurers should pay excluded flood losses
$3,046
$0
-$6,970
-$10,000 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
05H1 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05*
-5%
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% 16% 14% 12%
-9.0 pts
Because p/c insurers today generally are earning their cost of capital and are financially strong, they should be able to readily access fresh capital if necessary.
+5.0 pts -1.7 pts
10%
-13.2 pts
8% 6% 4% 2% 0% -2% -4% 91 92 93 94 95 96 97 98 99 00 01
US P/C insurers missed their cost of capital by an average 6.3 points from 1991 to 2003
02 03 04 05*
*First half 2005. Source: The Geneva Association, Ins. Information Inst.
ROE
Cost of Capital
+0.6 pts
ROE: P/C vs. All Industries 1987–2005E
20%
2004/5 ROEs excl. hurricanes
15%
10%
Sept. 11
5%
Hugo
0%
Lowest CAT losses in 15 years Northridge
90 91 92 93 94 95 96 97 98 99 00 01
Katrina/ Rita 4 Hurricanes
02 03 04 05*
Andrew
-5% 87 88 89
US P/C Insurers
All US Industries
P/C excl. Hurricanes
Source: Insurance Information Institute; Fortune
P/C Insurers Stocks Remain Up, Brokers Up Too, Reinsurers Down
Total Return 2005 YTD Through October 14, 2005
-2.09%
S&P 500
P/C insurer stocks outperforming the market despite Katrina & Rita
-0.33% -5.32%
10.73% 7.87% 3.18%
Life/Health All Insurers P/C Multiline Reinsurers
Reinsurers down more on Katrina & Rita news
2.17%
Brokers up on tight market hopes
-10% -5% 0%
Brokers
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 Reinsurers Brokers
P/C & reinsurer stocks hurt by Katrina & Rita, broker stocks rose on expectation of tighter conditions and demand for broker services
3.8% 3.6% 3.9% 3.3% 3.4% 2.7% 2.5% 2.6% 3.2%
4.5%
4.2%
2.2%
2% 0% -2%
-4.0% -5.5% -3.5% -4.1% -5.5% -0.6% -2.7%
1.9%
-4% -6% -8%
Rita comes ashore Sept. 24
-4.5% -5.7% -5.8% -6.0% -5.3%
-4.8%
-5.3%
2.1%
5-Aug
12Aug
-6.4%
19Aug
26Aug
2-Sep 9-Sep 16-Sep 23-Sep 30-Sep 7-Oct 14-Oct
Source: SNL Securities; Insurance Information Institute
-6.2%
2.2%
4%
4.0%
6%
Katrina: Aug. 29
4.8%
Insurer Claims Paying Resources
U.S. Policyholder Surplus: 1975-2005*
$450 $400 $350 $300
Capacity TODAY is $412.5B, 45% above its 2002 trough and 22% above its mid-1999 peak. Sufficient capacity exists to pay all Katrina & Rita claims.
$250 $200 $150 $100 $50 $0
PHS backs all lines of insurance in all states. PHS is not fungible and is frequently misunderstood and misused
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
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*
$ Billions
Source: A.M. Best, ISO, Insurance Information Institute
*As of 6/30/05.
US Reinsurers: Change in Policyholder Surplus ($ Billions)
$75 $70 $65
Reinsurer PHS fell 20% from 1998-2002. Capacity today similar to 1998. Same story globally.
$73.0
$64.8 $60.9 $58.9 $57.9
$ Billions
$60 $55 $50 $45 $40
$48.8 $46.8
Source: A.M. Best; Insurance Information Institute
1998
1999
2000
2001
2002
2003
2004
Announced Insurer Capital Raising*
($ Millions, as of October 11, 2005)
$1,600 $1,400 $1,200
$ Millions
$1,438
$1,000 $800
As of Oct. 11, insurers had announced plans to raise $5.313 Billion in new capital, 81% of it as common stock. Likely $8-$9B will eventually be raised.
$600 $404 $475 $250 $37
Type of Capital Raised
Common Stock, $4,302 , 81.0% Debt, $200 , 3.8% Preferred Stock, $811 , 15.3%
$620 $476 $300 $305 $143 $102 $164
$600 $400 $200 $0
td .
er es tR e Fa irf ax Fi nl . M ax R M e on tp el ier R e N av ig at or s O dy ss ey R e Pl at in um
ut
ce
sp en
xi s
A
A
En
du ra n
ce L
rg o
*Announced amounts may differ from sums actually raised. Sources: MerrilI Lynch, Company Reports; Insurance Information Institute.
Ev
PX R
na
A
A
E
UNDERWRITING
Strong Underwriting Results Pre-Katrina Will Help Industry Weather the Storm
P/C Industry Combined Ratio*
2001 = 115.7
120
Combined Ratios 1970s: 100.3 1980s: 109.2 1990s: 107.8 2000-05E: 103.9
2002 = 107.2
2003 = 100.1
2004 = 98.3
110
2005:H1 = 92.7*
100
90
Sources: A.M. Best; ISO, III.
The industry has just experienced its most remarkable recovery in recent history. Katrina will partially reverse this
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
*2005 figure is though 6/30/05.
Underwriting Gain (Loss) 1975-2005E*
$25 $15 $5
$ Billions
Before Katrina, p/c insurers were on track for only the second underwriting profit in 26 years
($5) ($15) ($25) ($35) ($45) ($55)
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 05E
*2005 estimate is based on annualized actual 05H1 net underwriting profit of $13.2 billion. Source: A.M. Best, Insurance Information Institute
Commercial vs. Personal Lines Combined Ratios, 1993-2005:H1*
Commercial--Net Basis
125
Personal--Net Basis
122.3
113.1
120 115 110 105 100 95 90 85
Hurricane Andrew
112.5 112.3 111.1 109.9 110.3 110.2 107.6 104.9 109.7
104.5
103.9
103.9 99.8
103.5
102.7
104.5
110.1 105.3
Personal lines outperforming commercial. Underwriting is now more important in longtail commercial lines. Katrina impact will be severe.
110.9
101.9 98.4
102.3 94.3
04 05H1
92
93
94
95
96
97
98
99
00
01
02
03
Source: A.M. Best; Insurance Information Institute
*III estimate for first half 2005. Actual 1H05 combined ratio all lines was 92.7.
89
97
Combined Ratio: Reinsurance vs. P/C Industry
Reinsurance
170 160 150 140 130 120 110 100 90
All Lines Combined Ratio
162.4 125.8
2001’s combined ratio was the worst-ever for reinsurers; 2002 was bad as well.
2003: Big improvement in primary and reinsurer segments 2004/5: CATs hurt reinsurers
126.5 115.8 119.2
114.3 108.0
113.6 108.5
115.8
Hurricane Andrew
104.8 106.0 100.5 105.9 100.8 101.9
110.5 108.8
106.5 110.1
105.0 106.9
106.7
107.4
111.0
124.6 100.1 98.3
91
92
93
94
95
96
97
98
99
00
01
02
03
04 05E*
*RAA figure for 2005:H1 Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
92.7
105.8
UNDERWRITING AFFECTS FINANCIAL STRENGTH
Is There Cause for Concern?
U.S. Insured Catastrophe Losses ($ Billions)
2005 will be by farBillions $ the worst year ever for insured catastrophe losses in the US. 2004 is the second worse.
$60 $50 $40 $30 $20
$49.0
$22.9 $16.9 $8.3 $7.4 $5.5
$26.5 $10.1 $8.3 $4.6 $2.6
$27.5
$10 $7.5 $2.7 $4.7 $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, $40 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
$12.9 $5.9
Reason for P/C Insolvencies
(218 Insolvencies, 1993-2002)
Impaired Affiliate 3% Unidentified 17% CAT Losses 3% Reinsurer Failure 0% Deficient Loss Reserves 51%
Reserve deficiencies account for more than half of all p/c insurers insolvencies So far, Katrina appears to have claimed just 1 victim—Rosemont Re— expected to go into run-off
Rapid Growth 10% Source: A.M. Best, Insurance Information Institute
Change in Business 3% Discounted Ops 8% Overstated Assets 2% Alleged Fraud 3%
Downgrade/Upgrade Ratio*
5 4.93
Ratio of Downgrades to Upgrades
4
3
Downgrade to upgrade ratio is falling (primarily because the number of downgrades is falling; only a small increase in upgrades)
1.92 1.99 1.08 0.8 0.51 0.41 0.96
98 99 00 01 02
3.3
03 04E
1.22
1.12
0.44 0.58 0.82 0.99 1.05
1
0
78 79
80 81 82 83 84
0.45 0.41 0.43 0.42 0.68
85 86 87 88
89 90 91 92 93
Sources: Impairment Rate and Rating Transition Study— 1977 to 2002, A.M. Best & Co.
*U.S. property/casualty and life/health insurers before 2000; P/C only 2000-2004.
94 95 96 97
1.1 0.83
1.56
2
1.71
1.78
1.79
Historical Ratings Distribution,
US P/C Insurers, 2000 vs. 2004
2000
C/CC++/C+ 0.6% 1.9% B/B6.9% D 0.2% E/F 2.3% A++/A+ 11.5%
2004
D E/F C/C3.5% C++/C+ 0.6% 0.2% 2.1% B/B9.1%
A++/A+ shrinkage
A++/A+ 8.6%
B++/B+ 28.3%
B++/B+ 25.8% A/A50.2%
A/A48.4%
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+
US Reinsurer Combined Ratio
150 140 130 120 110 100 90
A
A
141.4
A
A
Are ratings related to performance?
115.1 115.4
122.8
A++ A+ A AB++ B+ B
Reinsurer Combined Ratio Rating-Large (PHS>$250M)
100.6
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 1. AIU Insurance Co. 2. Alfa Mutual Ins. Co. 3. Amica Mutual Ins. Co. 4. Church Mutual Ins. Co. 5. Federal Insurance Co. 6. General Reinsurance Corp. 7. Great Northern Ins. Co. 8. Lititz Mutual Ins. Co. 9. Nationwide Mutual Fire Co. 10. Otsego Mutual Fire 11. Quincy Mutual Fire Ins. Co. 12. State Automobile Mutual Ins. Co. 13. State Farm Mutual Auto Ins. Co. 14. Vigilant Insurance Co. Group Affiliation 1. American International Group 2. Alfa Insurance Group 3. Amica Mutual Group 4. None 5. Chubb Group of Ins Cos. 6. Berkshire Hathaway Ins. Group 7. Chubb Group of Ins Cos. 8. Lititz Mutual Group 9. Nationwide Mutual Group 10. None 11. Quincy Mutual Group 12. State Auto Ins. Group 13. State Farm Group 14. Chubb Group of Ins Cos.
Source: Best’s Review, January 1, 2004.
Cumulative Average Impairment Rates by Best Financial Strength Rating*
60% 50% 40% 30% 20% 10%
A++/A+
Insurers with strong ratings are far less likely to become impaired over long periods of time. Especially important in long-tailed lines.
D C/CC++/C+ B/BB++/B+ A/A-
0% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
*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.
Average Years to Impairment
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 40% important in long-tailed lines.
35% 30% 25% 20% 15% 10% 5% 0% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
*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.
c b bb bbb a aa aaa
Average Years to Impairment
Rating Agency Actions Following Hurricane Katrina (as of Oct. 6, 2005)*
Companies Under Review w/ Negative Implications 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. Company A.M. Best Rating Allied World A+ Allmerica Financial P&C Cos . AAmerican Re A Balboa Insurance Grp. A DaVinci Re A Endurance Specialty A Florists Mutual Grp. AGlencoe A Imagine Insurance Co. Ltd. AIPCRe A+ Louisiana Farm Bureau Mutual AMississippi Farm Bureau Mutual A+ Munich Re A+ Mutual Savings Fire Ins. Co. BMutual Savings Life Ins. Co. BOdyssey Re A PartnerRe Group A+ PXRE ARenaissance Re A+ Rosemont Reinsurance Ltd. ATransatlantic Re A+ XL Capital A+ XL Life Insurance & Annuity A+ XL Life Ltd. A+ Companies on Credit Watch with Negative Implications 1. 2. 3. 4. 5. 6. 7. 8.
Company S&P Rating Allmerica BBB+ Allstate Corp. AA Aspen Group A Oil Casualty Insurance Ltd. ASociety of Lloyd’s A State Farm AA Swiss Re AA United Fire Group A
Downgrades Company S&P Rating Alea A- to BBB+ Olympus Re not rated PXRE A to AAdvent Synd. 780 3pi to 2pi A.M. Best A- to B++ A- to B+ A to Anot rated
1. 2. 3. 4.
―…the replenishment of capital alone may not be sufficient to sustain a company’s rating.‖ A.M. Best press release Sept. 15, 2005 *ACE and Montpelier Re were originally placed on watch/ review but have been removed. 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 $36 $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.
2002: -1.3% 2003: +3.9%
$ Billions
2004: +2.4% 2005:H1: +16.5%**
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% -20%
1970 1972 1974 1976 1978
2003/4 were the first consecutive gains since 1999
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Source: Ibbotson Associates, Insurance Information Institute.
*Through October 14, 2005.
2004
2005
-30%
Property/Casualty Insurance Industry Investment Gain*
$ Billions
$60 $52.3 $50 $40 $30 $20 $10 $0 $35.4 $47.2 $42.8 $57.9 $51.9 $44.4 $36.0 $45.3 $56.9 $52.6 $48.9
Investment gains are rising but will still fall short of their 1998 peak. CAT losses will reduce investable assets.
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 12% 10%
Holdings of cash and short-term securities has more than doubled since 1999
8.47%
10.00% 9.30%
8%
6.41%
6% 4% 2% 0% 95
5.64% 5.26% 5.81% 4.08%
5.30% 5.54%
96
97
98
99
00
01
02
03
04E
Source: A.M. Best; Insurance Information Institute
Interest Rate Forecast, 2005F-2016F
6.0% 6.0%
7% 6% 5% 4% 3%
3-Month T-Bill
5.0%
10-Year T-Note
5.4% 5.3% 5.3% 5.2% 5.3% 5.4% 4.4%
11F
4.6%
4.4%
4.4%
4.3%
4.3%
4.0%
4.3%
3.5%
1.6%
3.2%
1% 0%
00 01 02
1.0%
2%
03
1.4%
04
05F
4.0%
Long/Short-term rates are expected to rise and then stabilize
06F 07F 08F 09F 10F 1216F
Source: Board of Governors, Fed. Reserve System; Blue Chip Economic Indicators as of Oct. 2005.
4.3%
4.4%
5.5%
PRICING TRENDS
Will Katrina & Rita Harden Markets?
Strength of Recent Hard Markets by NWP Growth*
25% 20% 15% 10% 5% 0% -5% -10%
1975-78 1984-87 2001-04
Real NWP Growth During Past 3 Hard Markets
1975-78: 8.6% 1984-87: 11.2% 2001-04: 6.9%
Premium growth is faltering. Real growth in 2005 will be NEGATIVE
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%
15%
20%
25%
30%
35%
0%
5%
-10% -5%
Source: MarketScout.com
14% Jul-01 11% Aug-01 13% Sep-01 16% Oct-01 19% Nov-01 22% Dec-01 28% Jan-02 31% Feb-02 31% Mar-02 28% Apr-02 30% May-02 32% Jun-02 33% Jul-02 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% 16% Aug-03 12% Sep-03 12% Oct-03 10% Nov-03 12% Dec-03 11% Jan-04 9% Feb-04 9% Mar-04 9% Apr-04 7% May-04 7% Jun-04 5% Jul-04 4% Aug-04 4% Sep-04 Oct-04 2% Nov-04 2% Dec-04 2% Jan-05 1% Feb-05 0% Mar-05 -1% Apr-05 -2% May-05 -2% Jun-05 -3% Jul-05 -5% Aug-05 -6% Sep-05 -5%
Commercial Premium Rate Changes Are Sharply Lower
The magnitude of rate decreases is leveling off. Will Katrina/Rita reverse the slide in commercial rates?
Average Rate Change, All Lines,
(1Q:2004 – 2Q:2005)
0%
-0.1%
-2% -4% -6% -8% -10% -12%
1Q04 2Q04 3Q04 4Q04 1Q05 2Q05
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
-3.2% -5.9% -7.0%
Magnitude of rate decreases accelerated during the first half of 2005, but flattened out in Q2
-9.4%
-9.7%
Rate Changes by Line,
2nd Qtr. 2005
0% -2% -4% -6% -8% -10% -12% -14% -13.3%
Comm Prop Biz Comm Auto WC Interruption GL Umbrella EPL D&O Surety Const. ALL Lines
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
-0.5% -3.6%
-3.8% -3.8% -6.0% -6.8% -7.3% -9.1% -6.6%
-8.4%
Magnitude of rate decreases flattened out during the second quarter of 2005
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
40% 30%
21%
US cat reinsurance price index: 1994 = 100
120 100
20% 10%
2%
16% 11%
80
?
60 40
0% -10% -20%
94 95 96 97 98 99 '00 '01 '02 '03 '04 05E 06F
-5% -11% -9% -8% -4% -4% -6%
20 0
rate changes [left]
Sources: Swiss Re, Cat Market Research; Insurance Information Institute estimate for 2006.
index level [right]
CATASTROPHE LOSS MANAGEMENT
Focus on Hurricanes Katrina & Rita
Global Number of Catastrophic Events, 1970–2004
250
200
The number of natural and man-made catastrophes has been increasing on a global scale for 20 years
150
100
50 Natural catastrophes 0 Man-made disasters
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 1/2005, page 4.
2004
Global Insured CAT Losses, 1970–2004
(Property and Business Interruption)
Billion USD, at 2004 prices
$45 $40 $35 $30 $25 $20 $15 $10 $5 $0 Natural catastrophes Man-made disasters
There has been a huge increase in the insured value of global CTA losses in recent years
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Source: Swiss Re, sigma No. 1/2005, page 6
2004
Insured Property Catastrophe Losses, 1983–2004
12%
Cat Losses as a % 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 23, 2005.
And It’s Not Over Yet… Wilma’s Wanderings
Source: National Hurricane Center, October 23, 2005.
After Running Out of Names, Greek Letters Are Now Used
Source: National Hurricane Center, October 23, 2005.
Number of Major (Category 3, 4, 5) Hurricanes Striking the US by Decade
1930s – mid-1960s: Period of Intense Tropical Cyclone Activity Mid-1990s – 2030s? New Period of Intense Tropical Cyclone Activity
9 8 6 5 4
Tropical cyclone activity in the mid-1990s entered the active phase of a normal cycle that could last into the 2030s
9
8
8 6 5 5 6
4
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, spoilage, power outage, offpremises power loss, flood, fraud, civil authority, assessments, pollution, litigation
RMS Tillinghast AIR Eqecat
$0
$40 - $60B $40 - $55B
RMS estimate predicts $15$25B in privately insured flood losses, mostly commercial (modeled after the event)
$17 - $25B $14 - $22B
$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 outage, off-premises power loss, flood, fraud, civil authority, assessments, pollution, litigation ISO/PCS estimates is $34.4B and 1.6 million claims
RMS Tillinghast ISO/PCS AIR Eqecat
$0
$40-$60B $40 - $55B $34.4B
RMS estimate predicts $15-$25B in privately insured flood losses, mostly commercial (modeled after event)
$17 - $25B $14 - $22B
$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 losses. AIR, Eqecat do not model offshore energy losses.
RMS
$5.0 $7.0B $2.5 $5.0B $3.0 $6.0B
AIR
Eqecat
$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
Windstorm & Surge
Low
$20
High
$25
Flood, private (not incl. NFIP)* Off Shore Energy, Marine
Misc., Possible Pollution 1st Landfall (FL)
$15 $2
$2 $1
$25 $5
$3 $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 Personal Property Lines
Residential Property Personal Auto Personal Watercraft Total
Low
$14.0 $1.0 $0.2 $15.2 $13.5 $6.0 $0.2 $19.7 $4.0 $1.0 $0.0
High
$17.0 $2.0 $0.3 $19.3 $16.0 $9.0 $0.3 $25.3 $6.0 $3.0 $1.0
Commercial Property Lines
Commercial Property (excl. Off-Shore) Business Interruption (excl. marine & energy) Commercial Auto Sub-Total Personal & Commercial Marine & Energy Liability Other
Total All Lines
$39.9
$54.6
Comparison of Hurricanes Andrew & Katrina
Statistic
Duration as TS/Hurricane Area Affected Saffir-Simpson Category at Major Landfall Windspeed at Major Landfall Width of Hurricane-Force Winds at Major Landfall Central Pressure at Landfall Storm Surge at Major Landfall Fatalities
Andrew
Aug. 17-28, 1992 South FL, LA 5 165mph sustained Approx. 120 miles 922 mbar (hPa) 17 feet 65 (26 direct, 39 indirect)
Katrina
Aug. 24-31, 2005 South FL, LA, MS, AL, TN, FL Panhandle 4 145mph sustained Approx. 250 miles 918 mbar (hPa) 15-29 feet 1,193 (as of Oct. 4) (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 14, 2005:
58 companies had announced pre-tax loss estimates Announced loss total: $22.1B 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 High: $2.55 billion; Low: $1.2 million Upper loss est. % of 2Q:05 Equity: 0.2% to 46.1%
• Announced Company Loss Estimates:
• At least 20 companies put on watch for possible downgrades by various ratings agencies • Many Lines Affected:
Extreme eventsloss correlations increase
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
$500
$3,900 $2,550 $2,500 $2,500 $1,900 $1,692
$0
(As of October 20, 2005)
*Figures are pre-tax, gross of reinsurance, unless indicated otherwise. **After-tax figure. Note: If company gave range of estimates, upper end is used. Sources: Morgan Stanley, Merrill Lynch, Lehman Brothers, Insurance Information Institute, Company Reports.
Distribution of Announced Pre-Tax Hurricane Katrina Losses Before Reinsurance ($ Millions)*
As of October 20, 59 companies had announced pre-tax losses totaling between $26.0 and $28.3 billion, about 65-71% of a mid-range industry loss estimate of $40 billion
Allstate Lloyds Berkshire Hathaway St. Paul Travelers Zurich AIG Swiss Re Aspen XL Capital CNA IPC Holdings Ace Ltd. Montpelier Re Axis Capital Everest Re Chubb Allianz Munich Re Endurance Renaissance Re Partner Re Markel Hannover PXRE White Mountains Platinum Transatlantic Fairfax AXA Progressive Arch Capital** Manulife** HCC Alfa Safeco Hartford** Odyssey Re Max Re Quanta Cap. Hldgs.** Royal Sun Alliance SCOR WR Berkely Cincinnati Finl Unitrin Zenith State Auto Converium Horace Mann American Finl Grp RLI Midland Company American Natl Argonaut United American Philadelphia Consolidated EMC Ins Grp** 21st Century Kingsway PMA Capital Vesta $1,200 $925 $875 $750 $750 $733 $675 $650 $638 $600 $585 $500 $474 $450 $350 $321 $313 $300 $300 $270 $270 $220 $200 $174 $173 $165 $160 $125 $120 $104 $100 $90 $58 $46 $43 $35 $34 $32 $30 $26 $25 $23 $20 $19 $18 $15 $10 $9 $8 $4 $3 $2 $2 $1
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
46.1% 42.5% 39.0%
**After-tax loss figure used in calculation.
Note: If company gave range of estimates, upper end is used.
*Source loss figures are pre-tax, gross of reinsurance, unless indicated otherwise.
Sources: Morgan Stanley, Merrill Lynch, Insurance Information Institute, Company Reports.
(As of October 11, 2005)
Announced Pre-Tax Hurricane Katrina Losses Before Reinsurance as % 2Q:05 Equity *
Montpelier Re IPC Holdings PXRE Endurance Axis Capital Platinum Renaissance Re Everest Re Alfa Partner Re Aspen Markel Max Re Zurich XL Capital Arch Capital Transatlantic Hannover Ace Ltd. Chubb Swiss Re 21st Century White Mountains Fairfax Odyssey Re Zenith HCC Midland Company RLI Safeco Munich Re AIG American Finl Grp Argonaut Philadelphia Consolidated PMA Capital Progressive United American Unitrin Hartford Finl** Allianz WR Berkely AXA Cincinnati Finl American Natl Kingsway
22.6% 21.0% 21.0% 19.4% 15.3% 11.1% 9.7% 9.3% 9.0% 8.8% 8.7% 7.0% 6.5% 6.4% 6.3% 5.5% 5.3% 5.3% 5.1% 4.8% 4.7% 3.8% 3.1% 3.0% 3.0% 2.0% 2.0% 1.3% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 0.7% 0.8% 0.7% 0.5% 0.4% 0.3% 0.2%
Reported losses as a share of US P/C insurance industry surplus ranged from 0.2% to 46.1%.
Median = 4.8%
Insured Loss Estimates as a % US Policyholder Surplus*
Industry Loss % of PHS* 14.9% 13.7% 12.4% 11.2% 10.0% 8.7% 7.5%
$70
Size of Industry Loss
16% 14% 10% 8% 6% 4% 2% 0%
% of US P/C PHS
$60 $50 $40 $30 $20 $10 $30 $35 $40
12%
$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.
Hurricanes Katrina & Rita:
Their Place in History
Top 10 Deadliest Hurricanes to Strike the US: 1851-2005
9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
(1 9 Is le
$ Billions
Hurricane Katrina was the deadliest hurricane to strike the US since 1928
2,500 372
09 )
8,000
390
(1 95 7)
400
(1 85 6)
408
93 5)
700
1,250
1,300
1,500
*Could be as high as 12,000 **Could be as high as 3,000 ***Midpoint of 1,000 – 2,000 range ****Preliminary as of Oct. 14, 2005 *****Midpoint of 1,100-1,400 range. Sources: NOAA; Insurance Information Institute.
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Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2004)
$45 $40 $35 $30
Six of the 10 most expensive hurricanes in US history occurred in the 13 months from Aug. 2004 – Sep. 2005: Katrina, Rita, Charley, Ivan, Frances & Jeanne
$2.6
Opal (1995)
$40.0
$ Billions
$25 $20 $15 $10 $5 $0
$20.9
$3.4
$3.7
$4.1
$4.6
$6.4
$7.1
$7.5
Georges (1998)
Jeanne (2004)
Rita (2005)*
Frances (2004)
Hugo (1989)
Ivan (2004)
Charley (2004)
Andrew (1992)
Katrina (2005)*
*III estimates as of October 14, 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
$70 $60 $50
(Billions of 2005 Dollars)
$65.3
$ Billions
$40 $30 $20
The p/c insurance industry will likely experience a $20B+ event approximately every 15 years, on average—mostly associated with hurricanes
$20.8 $10.1 $11.0 $12.4 $12.6 $13.1 $14.5 $21.1
$40.0 $31.3
$10 $0
Number 9 (1909, FL) Hazel (1954, NC) Number 4 Number 2 Number 4 (1938, (1919, (1928, NY) FL) FL) Bestsy (1965, LA) Number 2 Number 1 Andrew (1915, (1900, (1992, TX) TX) FL) Katrina Number 6 (2005, (1926, 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)
$45 $40 $35 $30 $25 $20 $15 $10 $5 $0
ne eJ ea n
$ Billions
Seven of the 10 most expensive disasters is US history occurred within the past 4 years
$15.9 $4.6 $6.4 $7.1 $7.5 $3.7 $4.1
$40.0
$20.1
$20.8
(1 99 2)
(2 00 5) *
(2 00 4)
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*III estimate, stated in 2005 dollars, as of 10/14/05. Note: 9/11 loss figure is for property claims only. Total insured losses ($2004) are approximately $34B. Sources: ISO/PCS; Insurance Information Institute.
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Top 11 Insured Property Losses Worldwide, 1970-2005 ($2004)*
$45 $40 $35 $30 $25 $20 $15 $10 $5 $0
20 ra nc es (
Five of the 11 most expensive disasters is world history affected the US within the past 4 years.
$20.0 $15.9 $11.0 $5.0 $6.4 $6.6 $6.6 $7.8 $8.0 $21.5
$40.0
$ Billions
19 99 )
*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
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Government Aid After Major Disasters (Billions)*
$80 $70 $60
$75.4
Within 3 weeks of Katrina’s LA landfall, the federal government had authorized as much aid as it did for the 9/11 terrorist attacks, 2004’s 4 hurricanes and Hurricane Andrew combined!
$ Billions
$50 $40 $30 $20 $10 $0
Hurricane Katrina (2005)*
$43.9
Hurricane Katrina aid will dwarf aid following all other disasters. Congress may authorize $150-$200 billion ultimately (about $400,000 for each of the 500,000 displaced families). Is the incentive to buy insurance and insure to value diminished?
$17.7
$15.5
$15.0
Sept. 11 Terrorist Attack (2001)
Hurricane Andrew (1992)
Northridge Earthquake (1994)
*In 2005 dollars. Source: United States Senate Budget Committee as of 9/19/05; Insurance Information Institute.
Hurricanes Charley, Frances, Ivan & Jeanne (2004)
Itemization of Federal Government Spending on Hurricane Relief
Legislation
Emergency Spending Supplement #1, HR 3645 Emergency Spending Supplement #2, HR 3673 Flood Insurance Borrowing Authority Pell Grant Relief, H.R. 3169 TANF Disaster Relief, H.R. 3672 Katrina Short-Term Tax Relief Bill, H.R. 3768 Sarbanes Housing Amend. To H.R. 2862 Harkin Legal Services Amend. To H.R. 2862
5-Yr. Cost Status
$10.500 $51.8 $2.000 $0.002 $0.294 $6.500 $3.500 $0.008 Public Law 109-61 Public Law 109-62
Passed House & Senate Passed House & Senate Passed House & Senate
Passed Senate Passed Senate Passed Senate
Snowe Small Business Amen. To H.R. 2862
Baucus Economic Develop. Amend to H.R. 2862
$0.595
$0.210
Passed Senate
Passed Senate
TOTAL
Emergency Health Care Relief Act, S. 1716
Additional Flood Insurance Borrowing Authority
$75.409
$5.0-$7.0B
$10.0-$30.0B
Introduced in Senate
N/A
Hurricane Katrina:
Loss Distributions
Hurricane Katrina Insured Loss Distribution by State ($ Billions)*
Florida, $468.0 , 1.4% Alabama, $1,300 , 3.8% Mississippi, $9,800 , 28.6% Tennessee, $46.1 , 0.1% Georgia, $22.2 , 0.1%
Louisiana accounted for 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)*
Florida, 110,000 , 6.7% Alabama, 123,000 , 7.5% Louisiana, 900,000 , 55.1% Mississippi, 490,000 , 30.0% Tennessee, 8,400 , 0.5% Georgia, 3,300 , 0.2%
*As of October 4, 2005 Source: PCS division of ISO.
Louisiana accounted for 2/3 of insured losses paid and 55% of claims filed
Hurricane Katrina Insured Loss and Claim Distribution by State*
State LA MS
AL FL TN GA Totals
Losses ($Mill) $ $
$ $ $ $ $
# Claims % Losses 900,000 490,000
123,000 110,000 8,400 3,300 1,634,700
% Claims 55.1% 30.0%
7.5% 6.7% 0.5% 0.2% 100.0%
22,600.0 9,800.0
1,300.0 468.0 46.1 22.2 34,236.3
66.0% 28.6%
3.8% 1.4% 0.1% 0.1% 100.0%
*As of October 4, 2005 Source: PCS division of ISO.
Breakdown of Tillinghast $40-$55 Billion Katrina Loss Estimate
Type of Loss Personal Property Lines
Residential Property Personal Auto Personal Watercraft Total
Low
$14.0 $1.0 $0.2 $15.2 $13.5 $6.0 $0.2 $19.7 $4.0 $1.0 $0.0
High
$17.0 $2.0 $0.3 $19.3 $16.0 $9.0 $0.3 $25.3 $6.0 $3.0 $1.0
Commercial Property Lines
Commercial Property (excl. Off-Shore) Business Interruption (excl. marine & energy) Commercial Auto Sub-Total Personal & Commercial Marine & Energy Liability Other
Total All Lines
$39.9
$54.6
Distribution of Katrina Losses by Market ($Billions)
Market
Insurers Reinsurers Capital Markets
Percentage
47% - 53% 52% - 44% 1% - 3%
Amount
$18.8 - $28.9 $20.7 - $24.0 $0.4 - $1.6
TOTAL
100%
$39.9 - $54.6
Source: Hurricane Katrina: Analysis of the Impact on the Insurance Industry, Tillinghast, October 2005.
Percentage of Losses Ceded to Reinsurers for Select Insurers*
Ceded to Reinsurers 100% 80% 60% 40% 36.7% 37.5% 42.7% 44.5% Net Loss
Share of loss ceded to reinsurers varies significantly, but underscores great importance of spread of risk
51.4%
57.4% 91.8%
63.3%
20% 0% ACE
62.5%
57.3%
55.5%
48.6%
42.6% 8.2%
Zurich
*Pre-Tax. Source: Morgan Stanley from Company Reports as of October 13, 2005
St. Paul Trav.
Hartford
AHL
CNA
Endurance
Hurricane Rita Loss Distribution by Line ($ Billions)*
Commercial Property & BI, $1.44 , 35%
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
Personal Auto, $0.12 , 3%
Property Damage from Hurricane Katrina Flood & Storm Surge ($ Millions)*
AL Storm Surge Loss, $793 , 1.8% FL Storm Surge Loss, $32 , 0.1%
MS Storm Surge Loss, $4,400 , 10.0%
Hurricane Katrina caused $44 billion in flood and storm surge damage, most of it uninsured, 88.1% of it in Louisiana
LA Storm Surge Loss, $16,200 , 36.8%
New Orleans Flood Loss, $22,600 , 51.3%
*Value of property damage by flood and storm surge whether or not insured. Source: AIR Worldwide, September 29, 2005.
Number of Homes Destroyed by Major Hurricanes*
300,000 250,000 200,000 150,000 100,000 50,000 0
Andrew (1992) Charley, Frances, Ivan, Jeanne (2004) Katrina (2005)
Katrina appears to have destroyed 10 times as many homes as Andrew in 1992 or the 4 storms to hit Florida and the Southeast in 2004
275,000
28,000
27,500
*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
4% 56% 40%
TOTAL
Vehicle
Ivan
4% 63% 33%
4%
Personal Property
63%
Frances
66% 30% 4%
Comm. Property
33%
Jeanne
4% 23% 73%
Source: ISO/PCS; Insurance Information Institute.
*Breakdowns based on FL losses, which accounted for 85% of losses for all affected states.
Average Annual Tropical Cyclone Insured Losses*
(Top 10 States, $ Millions)
Distribution of Annual Losses
$1,500 $1,423.0 $1,250 $1,000 $750 $500 $250 $0 FL TX LA NC MS MA SC AL NY CT All Other
All Other 15.7%
Florida 49.5%
$615.0
Mississippi 2.7% N. Carolina 3.8% Louisiana 6.8%
Texas 21.4%
$196.0
$154.0 $109.0 $77.0 $64.0 $62.0 $61.0 $61.0 $51.0
*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
Wind/Hail/Flood5 3.4% Earthquakes 4 8.4% Civil Disorders 0.5% Fire 6 2.9% Water Damage 0.2% Utility Disruption 0.1% Tornadoes 2 30.4%
Winter Storms 9.7%
Insured disaster losses totaled $221.3 billion from 1984-2004 (in 2004 dollars). After 2005 season, tropical cyclones will account for 50%+ of the total.
All Tropical Cyclones 3 34.6%
Terrorism 9.7%
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 New York Texas Massachusetts New Jersey Connecticut Louisiana S. Carolina Virginia Maine North Carolina Alabama Georgia Delaware New Hampshire Mississippi Rhode Island Maryland $1,937.3 $1,901.6 $740.0 $662.4 $505.8 $404.9 $209.3 $148.8 $129.7 $117.2 $105.3 $75.9 $73.0 $46.4 $45.6 $44.7 $43.8 $12.1
$0
Source: AIR Worldwide
$500
$1,000
$1,500
$2,000
$2,500
Insured Coastal Exposure as a % of Statewide Insured Exposure (2004, $ Billions)
Florida Connecticut New York Maine Massachusetts Louisiana New Jersey Delaware Rhode Island S. Carolina Texas NH Mississippi Alabama Virginia NC Georgia Maryland 79.3% 63.1% 60.9% 57.9% 54.2% 37.9% 33.6% 33.2% 28.0% 25.6% 25.6% 23.3% 13.5% 12.0% 11.4% 8.9% 5.9% 1.4%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Source: AIR Worldwide
Hurricanes Katrina & Rita:
Demand Surge is a Big Problem
Hurricanes Have Hurt Economic Growth and Sparked Inflation
Real GDP Growth 4% 3% 2% 1% 0% 05:Q1 05:Q2 05:Q3E 05:Q4F
Inflation Rate (CPI-U)
4%
3.6% 3.1% 2.8% 2.6%
3.6% 3.0% 2.9%
3.6%
3% 2% 1% 0%
Inflation is resulting demand surge (higher prices for materials & labor needed for rebuilding)
05:Q1
05:Q2
05:Q3E
05:Q4F
Source: Blue Chip Economic Indicators, Oct. 10, 2005; Insurance Information Institute
Construction Materials Prices Expected to Surge, Raising Rebuilding Costs
Q2:05-Q4:06
8% 7% 6% 5% 4% 3% 2% 1% 0% 3.4% 5.0%
Q4:06-Q4:08
6.7%
5.8%
6.7%
5.8%
Construction materials costs are arising rapidly and expected to increase at a pace well above the inflation rate for years.
4.8% 4.2%
3.9% 3.3%
Overall Inflation (CPI-U) 2005: 3.2% 2006: 2.9% 2007: 2.5% 2008: 2.5%
3.0%
2.3%
Lumber & Fabricated Wood Structural Products Metal Products
Gypsum Products
Cement
Plumbing Fixtures
Heating Equipment
Source: “The Economic and Construction Outlook in the Gulf States After Hurricane Katrina,” American Institute of Architects, Oct. 2005, (from Economy.com); Insurance Information Institute.
Hurricane Katrina:
Exacting a Toll on Underwriting Performance & Profits
U.S. Insured Catastrophe Losses ($ Billions)
2005 will be by farBillions $ the worst year ever for insured catastrophe losses in the US. 2004 is the second worse.
$60 $50 $40 $30 $20
$49.0
$22.9 $16.9 $8.3 $7.4 $5.5
$26.5 $10.1 $8.3 $4.6 $2.6
$27.5
$10 $7.5 $2.7 $4.7 $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, $40 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
$12.9 $5.9
ROE: P/C vs. All Industries 1987–2005E
20%
2004/5 ROEs excl. hurricanes
15%
10%
Sept. 11
5%
Hugo
0%
Lowest CAT losses in 15 years Northridge
90 91 92 93 94 95 96 97 98 99 00 01
Katrina/ Rita 4 Hurricanes
02 03 04 05*
Andrew
-5% 87 88 89
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
New in 2005 Best States 1. Delaware ND, IN, SD, WY 2. Nebraska Drop-Offs 3. North Dakota 4. Virginia ID, UT, NH, KS 5. Iowa 6. Indiana 7. Minnesota 8. South Dakota 9. Wyoming LA, AL and MS’s 10. Idaho
Worst States 41. Hawaii 42. Florida 43. Arkansas 44. Texas 45. California 46. Illinois
Newly Notorious
HI, FL
Rising Above
MO, MT
47.Louisiana 48.Alabama
49. West Virginia
liability systems are ranked among the worst in the country by the US Chamber of Commerce
50.Mississippi
Source: US Chamber of Commerce 2005 State Liability Systems Ranking Study; Insurance Info. Institute.
The Nation’s Judicial Hellholes
CALIFORNIA Los Angeles County
ILLINOIS Madison County St. Clair County
West Virginia
Philadelphia, PA
Hampton County, SC Jefferson County, TX
South Florida
It’s bad news for insurers that Orleans Parish, Louisiana, is one of the nation’s “judicial hellholes”
Orleans Parish, 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
1. 2. Water Damage, meaning any loss caused by, resulting from, contributed to or aggravated by: 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. 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 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.
3.
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
•
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.
Earth Movement Exclusion
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. 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. Suit is like MS. LA Supreme Court looking at it as contract law case Likely to be resolved soon in insurers favor
•
Scruggs Case:
•
Louisiana Suit
FEMA’s National Flood Insurance Program
Percentage of Homes With Flood Insurance Policies: Coastal Counties Affected by Katrina
St. Bernard (LA) Jefferson (LA) St. Charles (LA) Plaquemines (LA) St. Tammany (LA) Orleans (LA) St. John the Baptist (LA) Baldwin (AL) Hancock (MS) Harrison (MS) Jackson (MS) Tangipahoa (LA) St. James (LA) Mobile (AL) 11.7% 10.4% 7.3% 7.0% 3.9% 23.5% 23.4% 30.8% 45.6% 43.2% 40.0% 57.7% 57.4% 52.5%
Proportion of homes with federal flood coverage was miserably low in most coastal counties affected by Katrina
40% 50% 60% 70%
0%
10%
20%
30%
Source: Census Bureau, FEMA, New York Times.
What Needs to Happen for the NFIP To Be More Effective
• Move to actuarially based rates
Include loading to build-up reserve fund Expand refusals on irresponsible construction & repeats
•
•
Expand mandatory purchase requirements beyond 1-in-100 year flood plain (250 or 500-year plain) Update & digitize flood maps
Need process for continuous updating Coordinate inundation & flood maps
•
Create/formalize central lender-based authority for tracking properties subject to mandatory purchase requirement
Source: Insurance Information Institute
NFIP: Policies in Force and Total Coverage (Exposure)
Policies in Force
5.0 4.5
Total Coverage (Exposure) 4.5 4.5 4.6 4.7
$800
Policies in Force (Millions)
Nearly 5 million property owners per year buy 4.1 NFIP policies
3.5 2.5 2.6 2.8 3.0 3.7
4.2
4.3
4.4
$764.5
$700 $600 $500 $400
Total Coverage ($ Billions)
4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 91 92 93 94
The NFIP insured property with a total value of $764.5 billion in 2004
95 96 97 98 99 00 01 02 03 04
$300 $200
Sources: FEMA, National Flood Insurance Program (NFIP)
NFIP: Total Policies in Force by Calendar Year 1978-2004
Millions
5
No. of Policies
3 2 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)
1.4 1.8 2.1 1.9 1.9 2.0 1.9 2.0 2.1 2.1 2.1 2.3 2.5 2.5 2.6 2.8 3.0
4
3.5 3.7 4.1 4.2 4.3 4.4 4.5 4.5 4.6 4.7
Nearly 5 million property owners per year by NFIP policies
NFIP: Total Premium by Calendar Year 1978-2004
$ Billions
$1.1 $1.3 $1.5 $1.7 $1.7 $1.7 $1.7 $1.8 $1.9 $2.1
$2.5 $2.0 $1.5 $1.0 $0.5 $0.0
The NFIP now collects more than $2 billion annually in premiums
$0.1 $0.1 $0.2 $0.3 $0.4 $0.4 $0.4 $0.5 $0.5 $0.6 $0.6 $0.6 $0.7 $0.7 $0.8 $0.9 $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 Coverage by Calendar Year 1978-2004
$ Billions
$349.1 $400.7 $462.6 $497.6 $534.1 $567.6 $611.9 $653.8 $691.8 $764.5
$1,000 $800 $600 $400 $200 $0
The NFIP insured property with a total value of $764.5 billion in 2004
$50.5 $74.4 $99.3 $102.1 $107.3 $117.8 $124.4 $139.9 $155.7 $165.1 $175.8 $265.2 $213.6 $223.1 $236.8 $267.9 $295.9
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 All Policies
Source: FEMA, National Flood Insurance Program (NFIP)
2,729,267 4,646,756
NFIP: Policies in Force By Occupancy Type (As of July 31, 2005)
Other Residential 3.0% Condos 20.5%
Occupancy Type Policies in Force 3,184,010 158,124 951,240 138,583 214,799
NonResidential 4.6%
2 to 4 Family Unit 3.4% Single Family Home 68.5%
Single Family Home 2 to 4 Family Unit Condominiums Other Residential Non-Residential
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
80000 70000 60000 50000 40000 30000 20000 10000 0
70,613
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)
27,688 38,675 13,789 13,399 7,758 36,247 14,766 28,554 44,651 36,044 21,583 62,440 52,678 30,333 57,338 47,220 16,347 43,503 25,220 36,271 37,659
41,918
23,261 32,831
29,122
51,584
NFIP: Loss Dollars Paid by Calendar Year 1978-2004
$1,400 $1,200 $1,000 $800 $600 $400 $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)
$828.0 $519.5 $886.0 $754.8 $251.5
The NFIP will pay an estimated $10 billion in flood claims in 2005, indicating a need for a taxpayer-financed bailout of at least $7.5 billion
$1,295.5
$1,276.4
$ Millions
$147.7 $483.3 $230.4 $127.1 $198.3 $439.5 $254.6 $368.2 $126.4 $105.4 $51.0 $661.7 $167.9 $353.7 $710.2 $659.1 $411.1
$432.5 $759.8
$1,207.2
NFIP: Average Cost of Claim By Calendar Year 1978-2004
$35,000 $30,000 $25,000 $20,000
$5,072 $6,844 $5,496 $5,464 $6,040 $8,520 $9,195 $9,520 $9,167 $7,866 $6,574 $29,341 $32,056 $17,149 $20,948
Average Cost of Claim
The average cost of a flood claim in 2004 was $32,056. The average premium was $438.
$11,371 $12,387 $15,906 $18,286 $19,047 $20,748 $15,718 $17,127 $15,103 $15,985 $15,385 $18,255
$15,000 $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 $780 $760 $740 $720 $700 $680 $660
$711.2 $731.7 $722.7 $740.5 $745.8 $751.4 $756.7 $756.7
$ Billions
$784.7 $768.5 $773.4
$792.3
Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul04 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 $350 $300 $250 $200 $150 $100 $50 $0
$20,000 $30,000 $50,000 $75,000 $100,000 $125,000 $150,000 $200,000 $250,000
$330 $262 $231 $204 $162 $136 $278 $293
$351
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 moderaterisk areas. Sources: FEMA, National Flood Insurance Program (NFIP)
Average Premium Preferred Risk Policy* For Buildings without Basement Under NFIP
Average Premium
$350 $300 $250
$295 $232 $206 $179 $137 $111 $248 $263
$316
$200 $150 $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 moderaterisk 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.
90.8% 91.0% 88.3% 85.5% 85.5% 91.6% 90.6% 92.0% 91.9% 91.2% 90.9% 91.0%
Aug04
Sep04
Oct04
Nov04
Dec04
Jan05
Feb- Mar- Apr- May- Jun- Jul-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
$3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 $687.2 $598.2 $473.4 $422.6 $419.9 $384.4 $377.8 $2,702.0 $2,226.7 $1,727.3
Louisiana and Alabama rank 3rd and 10th respectively in terms of total claims payments. Mississippi ranks 13th.
$276.6
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: • 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
Reinsurance purchased by pool from the government Line of credit offset by assessing authority
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 National Strategy for Homeland Security and the genesis of DHS Historic moment for America or bureaucracy writ large? The homeland security context All-hazards vs. terrorist myopia?
•
The U.S. Department of Homeland Security
•
Emergency Preparedness and Response
•
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. 2. Integrate separate federal response plans into a single all-discipline incident management plan Create a national incident management system
3.
4. 5.
Improve tactical counter terrorist capabilities
Enable seamless communication among all responders 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 Plan for military support to civil authorities
8.
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. 2. 3. 4. 5. 6. 7. Nuclear Detonation – 10-Kiloton Improvised Nuclear Device Biological Attack – Aerosol Attack Biological Disease Outbreak – Pandemic Influenza Biological Attack – Plague Chemical Attack – Blister Agent Chemical Attack – Toxic Industrial Chemicals Chemical Attack – Nerve Agent
National Planning Scenarios (cont.)
8. 9. Chemical Attack – Chlorine Tank Explosion 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
Infrastructure Damage Evacuations/Displaced Persons Contamination Economic Impact Recovery Timeline
1,000 fatalities; 5,000 hospitalizations
Buildings destroyed; large debris 1 million evacuated; 100,000 homes seriously damaged From hazardous materials, in some areas Billions of dollars 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.
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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
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