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