elephants in the room: big problems in florida’s insurance markets that nobody wants to discuss...
TRANSCRIPT
Elephants in the Room: Big Problems in Florida’s
Insurance Markets that Nobody Wants to Discuss
Governor’s Hurricane ConferenceMay 26, 2010
Download at www.iii.org/presentationsRobert P. Hartwig, Ph.D., CPCU, President & Economist
Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org
2
Florida is America’s #1 Catastrophe Problem
Exposure is Huge and Can Only Grow in the Future Despite
Real Estate Collapse
3
Total Value of Insured Coastal Exposure in 2007*
($ Billions)
*Latest available.Source: AIR Worldwide
$224.4$191.9
$158.8$146.9$132.8
$92.5$85.6$60.6$55.7$51.8$54.1
$14.9
$479.9$635.5
$772.8$895.1
$2,378.9$2,458.6
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000
FloridaNew York
TexasMassachusetts
New JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaAlabamaGeorgia
DelawareNew Hampshire
MississippiRhode Island
Maryland
$522B Increase Since 2004,
Up 27%
In 2007, Florida Still Ranked as the #1 Most Exposed State to Hurricane Loss, with
$2.459 Trillion Exposure, an Increase of $522B or 27% from $1.937 Trillion in 2004
The Insured Value of All Coastal Property Was $8.9 Trillion in 2007, Up 24% from $7.2 Trillion in 2004
4
Insured Coastal Exposure as a Percentage of Statewide Insured Exposure, 2007
Source: AIR Worldwide
35%34%
29%28%
26%23%
13%12%
11%9%
5%1%
36%54%
59%62%
64%79%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
FloridaConnecticut
New YorkMaine
MassachusettsDelawareLouisiana
New JerseyRhode Island
S. CarolinaTexas
NHMississippi
AlabamaVirginia
NCGeorgia
Maryland
Nearly 80% of all insured exposure in
Florida is coastal, more than any other state
5
Value of Insured Residential Coastal Exposure in 2007
Source: AIR Worldwide
$96.9$90.1$81.1$78.4$72.6
$46.5$38.1$36.7$31.9$30.8$25.7
$7.2
$250.8$319.5
$373.0$388.3
$660.4$1,238.6
$0 $200 $400 $600 $800 $1,000 $1,200 $1,400
FloridaNew York
TexasMassachusetts
New JerseyConnecticut
LouisianaS. Carolina
MaineNorth Carolina
VirginiaAlabamaGeorgia
DelawareRhode Island
New HampshireMississippi
Maryland
($ Billions)
Residential structures accounted for $1.24
trillion or slightly more than half (50.4%) of all
coastal exposure in Florida in 2007, far more
than any other state
6
Value of Insured Commercial Coastal Exposure, 2007
Source: AIR Worldwide
$127.5$101.8$86.2
$65.9$54.4$47.5$46.0
$26.1$24.9$23.8$22.2$7.7
$229.1$316.0
$399.8$506.8
$1,220.0$1,718.6
$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 $2,000
New YorkFloridaTexas
MassachusettsNew JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaGeorgia
AlabamaMississippi
New HampshireDelaware
Rhode IslandMaryland
($ Billions)
Commercial structures accounted for $1.22
trillion or slightly less than half (49.6%) of all
coastal exposure in Florida in 2007, second
only to New York
7
Florida Population, 2000 – 2035P
23.82122.574
21.247
18.77318.75018.807
15.982
10
12
14
16
18
20
22
24
26
2000 2008 2009 2010 2020 2030 2035
Source: University of Florida, Bureau of Economic and Business Research; US Census Bureau; Insurance Information Institute
Decline in population is small
and temporary
State population growth is
expected to resume in 2010
FL’s population will hit 20 million by 2016 and will
add 2.5 million residents between 2010 and 2020
Despite the Recent Crash in Real Estate Markets and Higher Unemployment, Florida Will Add Millions of New Resident in the Years
Ahead, Putting More Strain on the State’s Fragile Insurance Markets
(Millions)
8
$8
.3
$7
.4
$2
.6 $1
0.1
$8
.3
$4
.6
$2
6.5
$5
.9 $1
2.9 $
27
.5
$6
1.9
$9
.2
$6
.7
$2
7.1
$1
0.6
$1
00
.0
$7
.5
$2
.7
$4
.7
$2
2.9
$5
.5 $1
6.9
$0
$20
$40
$60
$80
$100
$120
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 20??
US Insured Catastrophe Losses: Florida Accounts for More Insured Loss than Any Other State
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.Sources: Property Claims Service/ISO; Insurance Information Institute.
Florida’s Demographics and Land Use Policies Make it Certain that Catastrophe Losses in the State Will Rise in the Future
$100 Billion CAT Year is Coming Eventually, Likely
Involving FL
2009 CAT Losses
Were Down 61% from
2008
($ Billions)
2000s: A Decade of Disaster
2000s: $193B (up 117%)
1990s: $89B
Sources: MR NatCatSERVICE
U.S. Significant Natural Catastrophes, 1950 – 2009
Number of Events ($1+ Bill economic loss and/or 50+ fatalities)
Losses due to tropical activity are rising,
impacting Florida directly
10
Top 12 Most Costly Disastersin US History—Most Have Impacted FL
(Insured Losses, 2009, $ Billions)
Sources: PCS; Insurance Information Institute inflation adjustments.
$11.3 $12.5
$18.2$22.8 $23.8
$45.3
$8.5$8.1$7.3$6.2$5.2$4.2
$0$5
$10$15$20$25$30$35$40$45$50
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo(1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Ike (2008)
Northridge(1994)
9/11Attacks(2001)
Andrew(1992)
Katrina(2005)
8 of the 12 Most Expensive Disasters in US History Have Occurred Since 2004;
8 of the Top 12 Disasters Affected FL
Hurricane Katrina Remains, By Far, the Most Expensive Insurance Event in US and World History Caused About $600
Million in Insured Losses in Florida
11
Distribution of US Insured CAT Losses: TX, FL, LA vs. US, 1980-2008*
($ Billions)
* All figures (except 2006-2008 loss) have been adjusted to 2005 dollars.Source: PCS division of ISO.
Florida Accounted for 19% of All US Insured CAT Losses from 1980-2008: $57.1B out of $297.9B
Insured Losses in FL Are Nearly Double that of Any Other State Over the Past 30 Years
$176 , 60% $57.10 ,
19%
$31.20 , 10%
$33.60 , 11%
Florida
Texas
Louisiana
Rest of US
12
Florida is America’s Most Dysfunctional but Not Most
Uninsurable Property Insurance Market
Rate Suppression, Not Hurricanes Are the Principal Source of Dysfunctionality
Source: James Madison Institute, February 2008.
ME
NH
MA
CT
PA
WV
VA
NC
LA
TX
OK
NE
ND
MN
MI
IL
IA
ID
WA
OR
AZ
HI
NJRI C
DE
AL
VT
NY
MD
SC
GA
TN
AL
FL
MS
ARNM
KYMOKS
SDWI
IN
OH
MT
CA
NV
UT
WY
CO
AK
= A= B= C= D= F= NG
Source: Heartland Institute, 2010 Property and Casualty Report Card: A State-by-State Analysis of Regulatory Burden, May 2010.
A- A-
A-
B-
B-
B-
B-
B-
B-B-
B-B-
B-
B-
B-
B-
B- C-
C-
C-
C -
C-
D-D-
A
A
A
A
B+
B+
B+
B
B
B
B
B
B
C+
C+
C
D+
D+D+
D
NG
NG
D F
F
2010 Property and Casualty InsuranceReport Card: Regulatory Burden
Not Graded: District of ColumbiaMississippiLouisiana
Florida is one of only two states to receive a
grade of “F” in 2010
14
Cumulative Profits on Homeowners Insurance Transactions: 1985–2008
Note: Southeast states are AL, FL, GA, LA, MS, NC, SC and TX. Source: Robert W. Klein (2009), “Hurricane Risk and Property Insurance Markets: An Update and Extension,” Wharton Risk Center Working Paper #2009-10-07 based on data from NAIC Report on Profitability by Line by State and author’s calculations.
Florida’s home insurers have been in the red on a cumulative basis since
Hurricane Andrew struck the state in 1992
(Profits as a Share of Net Earned Premiums, e.g. -0.4 = -40%)
15
Average Homeowners Insurance Premium in Florida, 2007:Q2–2009:Q4
*HO-3 policies, excluding Florida Citizens.Source: Quarterly Supplemental Reports (QUASR) filed with the FL OIR, prepared by, prepared by Security First Insurance; Insurance Information Institute.
($ Billions)
$1,915 $1,914
$1,857
$1,770
$1,655$1,634 $1,630 $1,641$1,647
$1,666$1,710
$1,500
$1,600
$1,700
$1,800
$1,900
$2,000
07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4
The average homeowners insurance premium as of 12/31/09 is down $274 or 14% since 3/31/07
The state has required rates to be reduced even though they were not adequate to begin with. Discounts don’t
make actuarial sense unless the discount is applied to an actuarially sound rate. Both factors have led most private
insurers to reduce their presence in the state.
The Passage HB1A in January 2007 and the Requirement to Provide Full Mitigation Discounts Since March 2007 Have
Caused a Dramatic Loss in Premium Income and Caused Many Insurers to Lose Money Even Without a Major Hurricane Strike
16
Florida Home Insurance Rate Levels and Cumulative Change, 2007:Q1 vs. 2009:Q3
*All policy forms.Source: Quarterly Supplemental Reports (QUASR) filed with the FL OIR, prepared by prepared by Security First Insurance; Insurance Information Institute.
The average loss per policy $254.50 in 2007 to $421.22 in 2009, an
increase of 65.5%
Rates fell approximately 30%
from 2007:Q1 through 2009:Q3
17
Florida Non-Hurricane Homeowner Loss Experience, 2007 vs. 2009
The average loss per policy $254.50 in 2007 to $421.22 in 2009, an
increase of 65.5%
*All policy forms.Source: Quarterly Supplemental Reports (QUASR) filed with the FL OIR, prepared by prepared by Security First Insurance; Insurance Information Institute.
The frequency and severity (cost) of claims in Florida is up sharply
(even excluding hurricane claims) while premiums have fallen, leading to losses for
many insurers
18
Hostile Regulatory Environment is Ultimately Anti-Consumer
Rate Suppression Leads to Reduced Consumer Choice, Less Competition, Weakening Among
Some Insurers
19
U.S. Residual Market Exposure to Loss
*Preliminary 2009 PIPSO data. Includes 2008 data for TX, SC, MD, DC, OR and WA (latest data available).Source: PIPSO; Insurance Information Institute (I.I.I.).
$54.7
$150.0
$281.8
$221.3 $244.2$292.0
$372.3$430.5 $419.5
$656.7$696.4
$639.0
$771.9
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*
($ Billions)
In the 20-year period between 1990 and 2009, total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54.7
billion in 1990 to approximately $639 billion in 2009.
Hurricane Andrew (1992)
4 Florida Hurricanes
Katrina, Rita and Wilma
Florida accounted for 64% of all
residual market exposure in 2009
20
Florida Citizens Exposure to Loss
* Preliminary 2009 PIPSO figures.Source: PIPSO; Insurance Information Institute (I.I.I.).
$154.6$195.5 $206.7 $210.6
$408.8
$485.1
$421.9 $406.0
$0
$100
$200
$300
$400
$500
$600
2002 2003 2004 2005 2006 2007 2008 2009*
($ Billions)
Since its creation in 2002, total exposure to loss in Florida Citizens has increased by 163 percent, from $154.6 billion to $406 billion in 2009.
Florida Citizens’ exposure in in
recent years has approach one-half
trillion dollars
21
Is Florida America’s Greece?
Florida is Very Dependent on Volatile Credit Markets, Exposing
the State to Instability
22
Overview of FHCF Claims-Paying Capacity Funding Sources, Assuming 100% TICL Take-Up, 2010
Source: Florida Hurricane Catastrophe Fund, Claims Paying Capacity, May 2010; Insurance Information Institute.
Borrowing accounts for the majority of the
FHCF’s theoretical/projected
claims paying capacity. A private reinsurer would be required to have the
“money in the bank”
Heavy Reliance on Borrowing Brings
Many Risks
-Capacity shortfall
-Credit market seizures
-Interest rate spikes
-Vulnerability to global systemic
financial market risk
-Credit risk
23
Bonding Capacity of the Florida Hurricane Catastrophe Fund, 10/08-5/10
Source: FHCF, Raymond James; Insurance Information Institute.
$3
$8
$11
$16
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
Oct. 2008 May-09 Oct. 2009 May-10
($ Billions)
Bonding capacity has recovered since the 2008-2009 financial crisis, but Florida’s chosen method of post-event debt financing exposes the state unnecessarily to systemic risks in the global financial system. Recent volatility suggests the risk remains. The availability of private (re)insurance was not impacted by the crisis.
The financial crisis and seizure of credit markets caused bonding authority
to plunge in late 2008, implying a possible
funding shortfall of up to $19 billion
24
Principal and Interest Due on Existing FHCF Post-Event Tax-Exempt Debt, 2010-2016
$269.5 $282.7 $296.8 $300.0 $325.0 $342.5 $333.5
$72.4$95.8 $78.4 $63.1
$48.7 $33.3$16.4
$0
$50
$100
$150
$200
$250
$300
$350
$400
2010 2011 2012 2013 2014 2015 2016
Principal Interest
($ Millions)
From 2010 through 2016, Florida homeowners, drivers and business owners will be assessed $2.6 billion ($2.15 in principal and $408.2 million in interest) to pay for debts incurred during
the 2004 and 2005 hurricane season. Future storms could add to the burden. Future generations will pay for the state’s approach to insurance decades in the past.
Source: Florida Hurricane Catastrophe Fund, Claims Paying Capacity, May 2010; Insurance Information Institute.
($341.9)($378.5) ($375.2) ($363.1) ($373.7) ($375.7)
($349.9)
25
Florida’s Government-Run Insurers Depend Heavily on
Subsidies
Drivers, Business Owners and People Who Don’t Own Homes Are All
Chipping In
26
State Residual Property Market Plan Deficits in 2004/2005
-$1,425
-$1,770
-$954
-$595-$516
-$2,000-$1,800-$1,600-$1,400-$1,200-$1,000
-$800-$600-$400-$200
$0
Florida HurricaneCatastrophe Fund
(FHCF) Florida Citizens Louisiana Citizens
MississippiWindstorm
UnderwritingAssociation
(MWUA)
2004 2005
* MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in federal aid.Source: Insurance Information Institute.
The impact of Hurricane Katrina pushed all of the residual market
property plans in the affected states into deficits for 2005, following an already record hurricane loss year in 2004.
($ Millions)
27
Florida Hurricane Catastrophe Fund Assessment Base, 1990-2009
*The FHCF’s assessment base includes all p/c lines except workers compensation, medical malpractice, accident and health and federal flood.Source: Florida Hurricane Catastrophe Fund, Claims Paying Capacity, May 2010; Insurance Information Institute.
Only about 25% of the FHCF’s
$33.3B assessment
base is associated with
homeowners insurance—the rest is auto and
business policies*
The FHCF’s assessment base is shrinking, which
could result in higher future assessments in % terms
28
Florida Citizens Property Insurance Corporation Projected 2010 Assessment Base
($ Billions)
Lines other than Homeowners Insurance Account for 80% of Citizens Projected 2010 Assessment Base
$9.05 , 27%
$13.40 , 40%
$6.70 , 20%
$4.35 , 13%
Auto
Homeowners
Commercial
All Other Lines
*Citizens assessment base includes all p/c lines except workers compensation, medical malpractice, accident and health and federal flood.Source: Citizens Property Insurance Corporation, Presentation to the Florida Cabinet, April 13, 2010; Insurance Information Institute.
29
Florida Citizens: Estimated 2010 Claims-Paying Resources
Source: Citizens Property Insurance Corporation, Presentation to the Florida Cabinet, April 13, 2010; Insurance Information Institute.
No assessment for a 1-in-5 year
event; $8.6 million for a 1-in-
25 year event
30
Florida Citizens: Estimated 2010 Claims-Paying Resources
Source: Citizens Property Insurance Corporation, Presentation to the Florida Cabinet, April 13, 2010; Insurance Information Institute.
Assessments
1-in-50: $2.964B
1-in-100: $10.996B
www.iii.org
Thank you for your timeand your attention!
Download at www.iii.org/presentationsTwitter: twitter.com/bob_hartwig
Insurance Information Institute Online: