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					   South Carolina Property
     Insurance Markets
      Issues, Concerns, Solutions
                   Insurance Information Institute
             South Carolina Media & Legislative Briefing

                                 April 2, 2007

                          DOWNLOAD AT
                http://www.iii.org/media/met/scbriefing/

      Robert P. Hartwig, Ph.D., CPCU, President & Chief Economist
Insurance Information Institute  110 William Street  New York, NY 10038
    Tel: (212) 346-5520  Fax: (212) 732-1916  bobh@iii.org  www.iii.org
            Insurers Share the Concern of SC
                Home & Business Owners
PROPERTY OWNERS ECONOMIC CONCERNS
• The price of residential and commercial property insurance has
  risen rapidly in coastal SC since 2004
• Insurance options for some homeowners have dwindled as some
  have scaled backed exposure to coastal zones
• At the same time property taxes are rising in many communities
• The run-up in real estate prices in some areas has dramatically
  increased the cost of owning a home
• Many homeowners adjustable rate mortgages are seeing their
  interest rate locks expire and are now paying higher interest
  rates on their mortgages
                             Bottom Line
        The cost of owning property in South Carolina is rising
       and home & business owners feel economically squeezed
              Any Solution Must Emerge from a
                   Common Set of Facts
FACTS ABOUT SOUTH CAROLINA PROPERTY MARKETS
• South Carolina has more than $150 billion in insured coastal exposure, more
  than three times that of Mississippi
• Coastal property exposure values are expected to increase rapidly over the
  next decade
• South Carolina’s coastal population is growing rapidly
• South Carolina (and all other Gulf/Atlantic states) will experience above-
  average hurricane activity for the next 15-20 years
• South Carolina is vulnerable to major hurricanes, as Hurricane Hugo
  proved, the cost of which is nearly $7 billion in today’s dollars
• Improvements in building codes and mitigation technologies have been
  proven to substantially reduce wind damage from hurricanes
• The current method for financing hurricane-related losses results is an
  economic burden for some property owners, but at the same times leaves
  private and state-run insurers with large operating deficits
• Ultimately, risk will need to be the primary determinant of the price of
  insurance
                Elements of a Shared Solution
             Arising from a Common Set of Facts
TOWARD A LONG-TERM SOLUTION FOR S. CAROLINA’S INSURANCE
• Insurance in South Carolina’s coast areas needs to be more available and
  affordable
• Stronger homes are safer homes and stronger homes (and businesses) cost less
  to insurance, offer their owners a higher quality of life and are a key part of
  any solution
• Strengthening of building codes and mitigation must be encouraged
• Land use policies have a clear role to play in limiting future storm damage
• Stronger homes, increased use of mitigation technologies and smarter land use
  policies will lower insurance losses and costs for home/businesses owners
• State tax policy can be used to provide mitigation incentives
• Spread of risk on a global scale is important
     Reinsurance, securitization (CAT bonds) can help achieve this objective
• Insurance capital should be encouraged to flow into SC’s insurance markets
• The price of insurance must eventually reflect the risk of that property
     This will dramatically reduce the need for assessments, diversion of tax revenues or
      the need for the state to borrow heavily after a major hurricane
CATASTROPHIC
   LOSSES
Catastrophic Losses in the US:
  Upward Trend is Certain
Most of US Population & Property
   Has Major CAT Exposure
                 U.S. Insured Catastrophe Losses*
                                                                $ Billions




                                                                                                                                                $100.0
$120                                                                                                 $100 Billion
                 2006 was a welcome respite.                                                         CAT year is
$100              2005 was by far the worst                                                          coming soon
                     year ever for insured




                                                                                                                                 $61.9
  $80
                 catastrophe losses in the US,
  $60            but the worst has yet to come.




                                                                                                                         $27.5
                                                                                                  $26.5
                 Hugo
                                $22.9




  $40
                                               $16.9




                                                                                                                 $12.9
                                                                            $10.1




                                                                                                                                         $8.8
                                                       $8.3




                                                                                    $8.3
          $7.5




                                                              $7.4




                                                                                                          $5.9
                                        $5.5




  $20
                         $4.7




                                                                                           $4.6
                  $2.7




                                                                     $2.6

   $0
          89
                  90
                         91
                                92
                                        93
                                               94
                                                       95
                                                              96
                                                                     97
                                                                            98
                                                                                    99
                                                                                           00
                                                                                                  01
                                                                                                          02
                                                                                                                 03
                                                                                                                         04
                                                                                                                                   05
                                                                                                                                         06
                                                                                                                                                20??
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.
Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business
and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.
Source: Property Claims Service/ISO; Insurance Information Institute
                     Top 10 Most Costly Hurricanes in
                      US History, (Insured Losses, $2005)
               $45       Seven of the 10 most expensive                                                  $40.6
               $40      hurricanes in US history occurred
               $35         in the 14month period from
               $30        August 2004 to October 2005.
  $ Billions




               $25                                                                              $21.6
                         Hugo still ranks as the 6th most
               $20
                        expensive hurricane in US history
               $15
                                                                                       $10.3
               $10                                         $6.6     $7.4     $7.7
                               $3.8     $4.8      $5.0
               $5    $3.5

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



Sources: ISO/PCS; Insurance Information Institute.
                    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


                                                                                                                     10
                                                                  9
                      8                     8           8
                                                                                                                      4
           6                                                                6                                   6
                                  5                                                                5
                                                                                                                      6
                                                                                        4
                                Tropical cyclone activity in the
                                 mid-1990s entered the active                                Already as many
                                                                                             major storms in
                              phase of the ―multi-decadal signal‖                           2000-2005 as in all
                                 that could last into the 2030s                                of the 1990s

         1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s
*Figure for 2000s is extrapolated based on data for 2000-2005 (6 major storms: Charley, Ivan, Jeanne (2004) &
 Katrina, Rita, Wilma (2005)).
Source: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm.
                          Inflation-Adjusted U.S. Insured
                       Catastrophe Losses By Cause of Loss,
                                                         1986-2005¹
                 Wind/Hail/Flood5            Civil Disorders         Water Damage
                      2.8%                                                0.1%
                                                 6 0.4%
                                            Fire                                  Tornadoes 2
       Earthquakes 4
                                            2.3%             Utility Disruption     24.5%
           6.7%
                                                                    0.1%

      Winter Storms
                                                                                     Insured disaster losses
          7.8%                                                                    totaled $289.1 billion from
                                                                                 1984-2005 (in 2005 dollars).
            Terrorism                                                            Tropical systems accounted
              7.7%                                                                 for nearly half of all CAT
                                                                                   losses from 1986-2005, up
                                                                                from 27.1% from 1984-2003.
                                                                         All Tropical
                                                                            Cyclones 3
                                                                               47.5%
   1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2005 dollars.

   Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.
   2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions

   and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood
   Insurance Program. 6 Includes wildland fires.
Source: Insurance Services Office (ISO)..
SOUTH CAROLINA
HURRICANE RISK
 Potential for a Loss Several
 Times Hugo Looms Large
                       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
    S. Carolina
                          $209.3
                        $148.8
                                                      South Carolina had
       Virginia         $129.7                       nearly $150 billion in
         Maine         $117.2
 North Carolina        $105.3                           insured coastal
      Alabama         $75.9
       Georgia        $73.0                            exposure in 2004
      Delaware
New Hampshire
                     $46.4
                     $45.6
                                                      (56% commercial,
     Mississippi
  Rhode Island
                     $44.7
                     $43.8
                                                       44% residential)
      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%              Who’s to Blame*
     Delaware                                33.2%
  Rhode Island                           28.0%         1.   State & local zoning, land use
    S. Carolina                        25.6%                and building code officials
         Texas                         25.6%
            NH
                                                       2.   State & local legislators
                                     23.3%
     Mississippi             13.5%                    3.    State-run property insurers,
      Alabama               12.0%                           pools & plans
       Virginia            11.4%
            NC           8.9%                         4.    Washington, DC
       Georgia        5.9%                            5.    Property owners
     Maryland      1.4%

               0%       10%   20%      30%     40%     50%     60%    70%     80%       90%
*III list
Source: AIR Worldwide
                    Value of Insured Commercial
                   Coastal Exposure (2004, $ Billions)
     New York                                                              $1,389.6
        Florida                                             $994.8
         Texas                           $437.8
 Massachusetts                        $355.8
    New Jersey                   $258.4
   Connecticut                 $199.4
      Louisiana
    S. Carolina
                          $121.3
                         $83.7
                                            South Carolina had nearly
       Virginia         $69.7                  $84 billion in insured
         Maine         $52.6
 North Carolina       $45.3                     coastal commercial
       Georgia        $43.3
      Alabama         $39.4                 exposure in 2004 (56% of
     Mississippi
New Hampshire
                     $23.8
                     $20.9
                                            all exposure) & exceeding
      Delaware
  Rhode Island
                     $19.9
                    $17.9
                                                   NC by 85%
      Maryland      $6.7

                   $0    $200      $400     $600   $800   $1,000 $1,200 $1,400 $1,600
Source: AIR
                    Value of Insured Residential
                   Coastal Exposure (2004, $ Billions)
       Florida                                                        $942.5
    New York                                         $512.1
Massachusetts                              $306.6
        Texas                              $302.2
   New Jersey                          $247.4
  Connecticut                       $205.5
     Louisiana            $88.0
   S. Carolina
        Maine
                        $65.1
                        $64.5
                                              South Carolina had more
      Virginia
North Carolina
                        $60.0
                        $60.0
                                             than $65 billion in insured
     Alabama         $36.5                       coastal residential
      Georgia        $29.7
     Delaware       $26.6                     exposure in 2004 (56% of
 Rhode Island       $25.9
          New       $24.8                           all exposure)
    Mississippi     $20.9
     Maryland      $5.4

                  $0              $200        $400      $600   $800   $1,000
Source: AIR
                           County Map of South Carolina




Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
                Increase in Population of Coastal/Near
                  Coastal Counties in South Carolina
                                   (% Change, 1990 - 2005)

    Beaufort                                                                    60%

       Horry                                                                  58%

       Jasper                                            38%

  Dorchester                                          36%

 Georgetown                                        32%

                                                     Several SC coastal counties have
    Berkeley                       18%
                                                    experienced very strong population
                                                   growth since 1990. Home values have
     Colleton                  15%                    also skyrocketed—up 120% in
                                                    Charleston, Berkeley & Dorchester
   Charleston                12%                       counties between 1996-2005.

            0%         10%         20%       30%         40%      50%        60%        70%
Sources: Charleston Metro Chamber of Commerce, SC Statistical Abstract, US Census Bureau.
                       Historical Hurricane Strikes in
                      Charleston County, SC, 1900-2002




                                                                                                     Population in
                                                                                                  Charleston County
                                                                                                  has nearly doubled
                                                                                                    since the 1950s

Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
                          Historical Hurricane Strikes in
                          Colleton County, SC, 1900-2002




                                                                                                       Population in
                                                                                                     Colleton County
                                                                                                       appears to be
                                                                                                       increasing in
                                                                                                      recent decades
Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
                     Historical Hurricane Strikes in
                    Georgetown County, SC, 1900-2002




                                                                                                    Population in
                                                                                                 Georgetown County
                                                                                                 has nearly doubled
                                                                                                   since the 1950s

Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
                          Historical Hurricane Strikes in
                           Horry County, SC, 1900-2002




                                                                                               Population in Horry
                                                                                               County has doubled
                                                                                                since the 1980s and
                                                                                              tripled since the 1950s

Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
    The 2007
Hurricane Season:
Above Average Activity
      Expected
                    Outlook for 2007 Hurricane
                 Season: 40% Worse Than Average
                                                            Average*     2005    2007F
 Named Storms                                                    9.6       28     14
 Named Storm Days                                               49.1     115.5    70
 Hurricanes                                                      5.9       14     7
 Hurricane Days                                                 24.5      47.5    35
 Intense Hurricanes                                              2.3        7     3
 Intense Hurricane Days                                          5         7       8
 Net Tropical Cyclone Activity                                 100%      275%    140%
*Average over the period 1950-2000.
Source: Dr. William Gray, Colorado State University, December 8, 2006.
                      Probability of Major Hurricane
                      Landfall (CAT 3, 4, 5) in 2007
                                                                Average*   2007F
 Entire US Coast                                                    52%    64%
 US East Coast Including            31%       40%
 Florida Peninsula
 Gulf Coast from FL Panhandle       30%       40%
 to Brownsville, TX
       ALSO…Above-Average Major Hurricane
          Landfall Risk in Caribbean for 2007

*Average over past century.
Source: Dr. William Gray, Colorado State University, December 8, 2006.
                          Landfall Probabilities by
                          Region & Intensity, 2007*
              Tropical Storm                       CAT 1-2 Hurricane             Landfall
              CAT 3-4-5 Hurricane                  All Hurricanes              probabilities
              Named Storms                                                    and intensities
  120%                                                                        up everywhere
                                  99%
  100%       89%               93%                                   92%                 90%
                    79%                                                               74%
    80%                                       71%              72%
                       64%                                                 62%
    60%                                             54%                       56%
                                                       40%                       40%
    40%
                                               (59%)
               (79%)




               (97%)


                                               (42%)
                                               (30%)




                                                                           (50%)



                                                                           (61%)
                                                                           (81%)
               (68%)
               (52%)
               (84%)




                                               (60%)
                                               (83%)



                                                                           (44%)
                                                                           (31%)
    20%

      0%
                     Entire US                       Gulf Coast             Florida plus East
*Figures in parentheses represent averages over the past 100 years.
Source: Dr. William Gray, Colorado State University, December 8, 2006.            Coast
What Role Should the
Federal Government
  Play in Insuring
  Against Natural
  Disaster Risks?
                  South Carolina’s Coastal Plan
•      Spreading recognition that FL actions were fiscally reckless and
       did nothing to reduce state’s vulnerability
•      SOUTH CAROLINA: Gov. Mark Sanford announced a coastal
       insurance relief plan March 22, referring to FL’s actions as a
       ―knee-jerk‖ reaction
•      SC legislation uses tax incentives to reduce risk to property and
       lower the cost of insurance
          Tax deductions for catastrophe savings accounts
          Tax credits for disaster mitigation
          Tax credits for lower income property owners paying more than 5% of
           their income in insurance premiums
          Tax-free savings accounts for homeowners who carry very large
           deductibles or create accounts to ―self insure‖
          Tax credits for insurers writing full coverage for coastal dwellers
          Tax credits for homeowners who buy supplies to retrofit homes making
           them more hurricane resistant
          Require insurers to offer discounts to people who mitigate
Sources: Insurance Information Institute from 3/22/07 press release, Office of Governor Mark Sanford.
              Major Residual Market Plan Estimated
              Deficits 2004/2005 (Millions of Dollars)

                Florida Hurricane                 2004      2005              Mississippi Windstorm
                Catastrophe Fund                                                   Underwriting
                      (FHCF)          Florida Citizens   Louisiana Citizens    Association (MWUA)
      $0
   -$200
   -$400
   -$600                             -$516
   -$800                                                                                -$595 *
 -$1,000
                                                                 -$954
 -$1,200
 -$1,400                                           Hurricane Katrina pushed all of the
 -$1,600              -$1,425                       residual market property plans in
                                                   affected states into deficits for 2005,
 -$1,800
                                           -$1,770     following an already record
 -$2,000                                                hurricane loss year in 2004

* MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in Federal Aid.
Source: Insurance Information Institute
                      NAIC’s Comprehensive
                     National Catastrophe Plan
• Proposes Layered Approach to Risk
• Layer 1: Maximize resources of private
  insurance & reinsurance industry
           Includes ―All Perils‖ Residential Policy
           Encourage Mitigation
           Create Meaningful, Forward-Looking Reserves
• Layer 2: Establishes system of state
  catastrophe funds (like FHCF)
• Layer 3: Federal Catastrophe Reinsurance
  Mechanism
Source: Insurance Information Institute
                        Comprehensive National
                       Catastrophe Plan Schematic
   1:500 Event




                       National Catastrophe Contract Program

  1:50 Event



                              State Regional Catastrophe Fund
State Attachment

                        Personal
                        Disaster                          Private Insurance
                        Account
Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.
 Legislation has been
 introduced and ideas
       espoused by
ProtectingAmerica.org
  will likely get a more
   thorough airing in
           2007/8
      INSURER
   PROFITABILITY:
  SOUTH CAROLINA

 Selling Home Insurance in
Coastal Areas is Challenging
                                  Underwriting Gain (Loss) in SC
                                  Homeowners Insurance, 1985-2005




                                                                                                                                                                                         $276.9
               $400




                                                                                                                                                                                $150.7
                                                                                                                                                                       $140.5
                                                                                                                                                       $91.7
                                                                                                                   $85.0




                                                                                                                                                               $75.4
                                                                                                                           $50.2
                                                                                                           $43.1
               $200




                                                                                                   $30.6
                                                                                           $13.7
                                                                           $9.7
                                         $6.0
                                  $0.9


                                                $2.5
                 $0



                                                                  ($9.8)
                        ($31.0)




                                                                                  ($7.0)




                                                                                                                                   ($35.9)
                                                        ($62.6)




                                                                                                                                             ($72.6)
              ($200)
$ Millions




              ($400)

              ($600)
                                                                               South Carolina’s homeowners
                                                                              insurance market is volatile and
              ($800)
                                                                              prone to mega-scale losses. The
             ($1,000)                                                         average rate of return for home
                                                ($1,113.5)
                                                                            insurers is -15.4% from 1985-2005.
             ($1,200)
                        85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

         Source: A.M. Best; Insurance Information Institute.
                        Cumulative Underwriting Gain (Loss)
                        in SC Homeowners Insurance,1985-2005
                 $0



                                                      ($21.6)
                                            ($24.1)
                        ($31.0)
                                  ($30.1)

              ($200)                                                              On a cumulative basis, insurers
                                                                                   remained in the red in the SC
                                                                             homeowners insurance market 16 years




                                                                                                                                                                                                                                                                      ($324.2)
              ($400)                                                         after Hurricane Hugo struck in 1989. It
                                                                             is likely that insurers finally came close
                                                                                       to break even in 2006.
$ Millions




              ($600)




                                                                                                                                                                                                                                                           ($602.4)
              ($800)




                                                                                                                                                                                                                                                ($783.1)
                                                                                                                                                                                                                                     ($923.6)
             ($1,000)




                                                                                                                                                                                     ($982.2)
                                                                                                                    ($1,204.7)




                                                                                                                                                                                                                          ($999.0)
                                                                                                                                                                                                ($1,018.1)
                                                                                                                                                                        ($1,032.4)




                                                                                                                                                                                                             ($1,090.7)
                                                                                                                                                           ($1,117.4)
                                                                ($1,135.0)




             ($1,200)                                                                                                                         ($1,160.5)
                                                                                                                                 ($1,191.1)
                                                                             ($1,197.6)


                                                                                                       ($1,197.7)
                                                                                          ($1,207.4)




             ($1,400)
                        85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

         Source: A.M. Best; Insurance Information Institute.
             The Facts About Homeowner
           Insurer Profits and Losses in SC
• During the period from 1985 through 2005, home
  insurers in SC paid $324 million more in claims than
  they received in premiums
   This $324 million underwriting loss remains even after 5
    consecutive profitable years (2001-2005)
   It is likely that home insurers in 2006 came close to the
    breakeven point for the 22 year period 1985-2006 after
    including 2006 profits.
   If there are no storms in 2007, homeowners insurers will be
    in the black on a cumulative basis for the first time in more
    than 20 years
• SC Remains a Difficult Proposition for Most Home
  Insurers in Terms of Return
   The average annual rate of return on SC homeowners
    insurance was -15.4% from 1985-2005
WHERE YOUR PREMIUM
   DOLLAR GOES
  Bad CAT Year vs.
   Low CAT Year
                            Premiums
   Selling Expenses                                   Invested Assets
Taxes, Licenses & Fees                            (premiums invested until
                                                    needed to pay claims
  General Operating
       Expenses


               Reserve                     Claims
              Additions/               Payments/Losses
               Releases

                             Company
                            Profit/Loss

                              Net Worth
                                                    Source: American Insurance Association,
                         (Policyholder Surplus)     Insurance Information Institute.
                Where the SC Premium Dollar Comes
                From & Where it Goes: 1989 (Hugo)
       Revenue Sources                                                      Payments
    Total Revenue = $1051                                         Total Payout = $5548
                                                                       Selling
            Investment                                                                         Taxes, Fees
                                                                      Expense
               Gain                                                                               $35
                $51
                                                                        $150
                                                                Other                             1%
                5%                                                       3%
                             Premiums                          Expense
                               $1,000                           $160
                                95%                              3%




                                          In a bad year,                                                     Loss & Loss
                                        insurers may pay                                                     Adjustment
                                           out 5+ times                                                       Expenses
                                         what they earn                                                       Incurred*
                                                                                                                $5,203
                                        in premiums and                                                          93%
                                           investments
                                                                           *Includes temporary living expenses.
Source: Insurance Information Institute from A.M. Best data.
                Where the SC Premium Dollar Comes
                   From & Where it Goes: 2004
       Revenue Sources                                                             Payments
    Total Revenue = $1039                                  Divs. To
                                                                         Total Payout = $850
                                                                          Fed Taxes
                                                         Policyholders       $91
                                                               $3            11%
   Investment
                                                              0%
      Gain                             Premiums                                                                Losses
      $39                               $1,000            Taxes, Fees
                                                                                                              Incurred
      4%                                                     $33
                                         96%                                                                    $407
                                                             4%
                                                                                                                48%




                                                               Selling
                                                               Expense
                                                                $214
                                                                25%


                In a good year, an insurer might                         General
                 earn $200-$300 for each $1000                           Expense                    Loss
                                                                           $45                  Adjustment
                 received in premium, including                            5%                   Expenses*
                        investment gains                                                            $57
                                                                            *Includes temporary living expenses.
                                                                                                    7%
Source: Insurance Information Institute from NAIC Report on Profitability by Line by State, 2004.
              Share of Losses Paid by Private
                 Reinsurers, by Disaster*
70%      Reinsurance is playing
              an increasingly                     60%
60%
          important role in the
50%         financing of mega-                                                          45%
         CATs; Reins. Costs are
40%            skyrocketing
           30%
30%                     25%
                                                                     20%
20%

10%

0%
         Hurricane Hugo Hurricane Andrew          Sept. 11 Terror 2004 Hurricane      2005 Hurricane
               (1989)              (1992)          Attack (2001)      Losses               Losses
*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer,
which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at
$3.85 billion for 2004 and $4.5 billion for 2005.
Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.
 P/C INSURER
PROFITABILITY
National Perspective
                  ROE: US P/C vs. All Industries
                         1987–2008E
 20%
                       P/C profitability is cyclical, volatile and vulnerable
 15%


 10%
                                                                           Sept. 11
  5%

             Hugo                                     Lowest CAT                                            Katrina,
  0%                                                                                                       Rita, Wilma
                                                   losses in 15 years
             Andrew                         Northridge                                          4 Hurricanes
 -5%




                                                                                                         06E
                                                                                                               07F
                                                                                                                     08F
        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
*2006-8 P/C insurer ROEs are I.I.I. estimates.
Source: Insurance Information Institute; Fortune
               Profitability Peaks & Troughs in the
               P/C Insurance Industry, 1975 – 2008F
 25%
                      1977:19.0%                  1987:17.3%            2006E:14.0%
 20%
                                                      1997:11.6%
 15%


 10%


  5%


  0%
           1975: 2.4%                1984: 1.8%            1992: 4.5%    2001: -1.2%
 -5%




        07F
        08F
         75
         76
         77
         78
         79
         80
         81
         82
         83
         84
         85
         86
         87
         88
         89
         90
         91
         92
         93
         94
         95
         96
         97
         98
         99
         00
         01
         02
         03
         04
         05
         06
*2006-8 P/C insurer ROEs are I.I.I. estimates.
Source: Insurance Information Institute; ISO, A.M. Best.
            Industry Profitability Benefits
                Insurance Consumers
• Profits compensate shareholders for the assets they put
  at risk and encourages new capital to enter
• Profitable companies can access capital markets under
  favorable terms after mega-CATs or if market
  conditions are poor (e.g., post-9/11); Others will fail,
  are dissolved or acquired
• Preferred treatment by reinsurers
• Profits lead directly to increased capacity
• Profits build contingent capacity for mega-CATs
• Profitable companies have higher financial strength
  and credit ratings
          Key Messages on Profitability
• All of the profits earned in 2004 and 2005 and most of the
  profits in 2006 were earned in states and from types of
  insurance unaffected by the hurricanes
• 2006’s respite in hurricane activity provides insurers with the
  ability to rebuilding their claims paying resources
• By law, the rates charged for insurance are based exclusively on
  past and expected losses in that state. Profits in other states or
  from other types of insurance cannot be used to subsidize losses
  in the SC homeowners insurance market. Likewise, losses in
  other states cannot be subsidized by South Carolinians
  Insurance Information
     Institute On-Line




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