Facts about Coastal Alabama’s

Homeowners’ Insurance Crisisand

The Two Solution Strategies.

It’s time to FIX this Crisis -- Not Dabble at it

ALABAMA RATE STATUTES•Alabama statute says that rates must not be:

* Excessive* Inadequate* Unfairly discriminatory

1) The newly-passed State Clarity Law that focuses on non-discriminatory

treatment of Alabama’s Coastal Counties

2) A Special Multi-State Coastal InsuranceBand

The first strategy

The new Alabama Insurance Clarity Law

Let’s get a couple myths out of the way,

first.

$0$50

$100$150$200$250$300$350$400$450$500$550$600

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11*

Source: A.M. Best, ISO, Insurance Information Institute. * As of 6/30/11.

“Surplus” is a measure of underwriting capacity. It is

analogous to “Owners Equity” or “Net Worth” in

non-insurance organizations

($ Billions)

Surplus as of 6/30/11 was a near-record $559.1 down 1% from the record $564.7B as of

3/31/11, but up 27.9% ($122B) from the crisis trough of $437.1B at 3/31/09. Prior peak was

$521.8 as of 9/30/07. Surplus as of 6/30/11 was 7.1% above 2007 peak.

Despite the increase in natural disasters, the U.S. insurance industry was the richest

it has ever been in March 2011.

Dr. Robert Hartwig slide

US Policyholder Surplus:1975–2011*

$560 Billion

in “Net Worth”

Pre-Tax Post-TaxEVENT 2010 DOLLAR LOSS 1. Hurricane Katrina, August 2005 $45.5 billion $29.62. World Trade Center, Pentagon terrorist attacks, September 2001 22.9 14.93. Hurricane Andrew, August 1992 22.4 14.64. Northridge, California earthquake, January 1994 17.3 11.25. Hurricane Ike, September 2008 12.7 8.36. Hurricane Wilma, October 2005 11.4 7.47. Hurricane Charley, August 2004 8.5 5.58. Hurricane Ivan, September 2004 8.1 5.39. Hurricane Hugo, September 1989 6.7 4.410. Hurricane Rita, September 2005 6.2 4.0

The catastrophes were ranked by III based on size of loss in 2005 dollars, which we do not display here. What is displayed is the actual dollars in the year of the event. We calculate the post-tax figure by deducting the corporate tax rate of 35 percent.

Source: Insurance Services Office (ISO); Insurance Information Institute (See http://www.iii.org/facts_statistics/catastrophes-us.html). (Ranked on constant dollar cost to insurers)

Putting their $560 billion “net worth” in perspective. . .

. . . the cumulative, pre-tax cost of the Top 10 U.S. Catastrophes over the last 22 years totals $161.7 billion.

(The post-tax total is $105.2 billion.)

They’re not broke.

Another myth to get behind us . . .

•All licensed insurers writing P&C coverage insurance in Alabama•Current Members (Plan year 2011)•485 Companies•329 Exempt from participation•306 write no P & C in AL•156 Companies are subject to assessments ranging from .0001% up to 19.5546% •69 Companies report voluntary written premium in eligible areas•23 voluntarily write sufficient coastal property to be exempt from AIUA assessments11/21/2011 Alabama Insurance Underwriting Association

Who are Plan Members?

156“admitted” companies write Homeowners Insurance in Alabama.

(485 are licensed to write it)

A lack of competition is not the problem

If Money’s not the Problem&

and Competition’s not the problem?. . .

What

is The Problem?

The Problem:The Wildly Experimental Hurricane Catastrophe Models &

an Alabama Department of Insurance (DOI) lack of information

& bias . . .. . .that leads to unfairprice discrimination

against the Coastal Counties.

The DOI assumes Alabama’s Coastal Counties are more expensive to repair due to wind-and-hail

than the rest of the state. Significantly more.

In 2006,when this Crisis Started

the coastal counties

paid the State Average.

The Alabama Average today is about

$850a year

ALABAMA HOMEOWNERS RATESAverage Premium Relativity (with Wind) by City for a $200,000 Home:

Birmingham (35242) = 100%Huntsville (35801) = 110%Montgomery (36117) = 111%Tuscaloosa (35401) = 120%Camden (36726) = 135%Gadsden (35901) = 136%Dothan (36301) = 139%Saraland (36571) = 263%Mobile (36608) = 294%Bay Minette (36507) = 300%Fairhope (36532) = 311%Gulf Shores (36542) = 328%

Alabama Coastal Premiums todayare 250 to 325% Higher

than other Parts of the State.

The DOI method

understates

the actual

difference

In 2006(the time of abundant news about Global Warming)

The DOI decided Alabama’s coastal countieswould be wildly more expensive to repair than

the rest of the state.

Warmer oceans would make hurricanesmore frequent and damaging.

So . . .The Alabama DOI allowed/ required Insurance Companies to introduce

Wildly Experimental

Hurricane Catastrophe Models in their price-setting.

This is the Big Change

Coastal Insurance Prices skyrocketed

10,000s of Mobile and Baldwin Families were Dumped

10,000s of Coastal Families are NowFunctionally Uninsured or have simply Dropped

Their insurance Altogether.

Some have Lost their Homes.

$200 million premiums in excess of the State Average is siphoned out of our Two Counties

each year. That’s a lot of Jobs.

Was the DOI right?

Are Coastal Counties

REALLY300% more Expensive

To RepairThan the Rest of the State?

Let’s look at the evidence.

?

For starters, let’s be clear: Hurricane Catastrophe Models are

NOTthe Weather Channel predictions of a hurricane’s path.

© 2011 Risk Management Solutions, Inc. 17

Model component Main changes (methodology, input data) Impact (scale)

Inland Filling Model New model uses landfall predictors to determine more accurate decay rates

Landfall Frequency Updated landfall rates drive decreases along coast

Roughness ModelIncorporate results of new researchon over water roughness reduces risk over land

Vulnerability ModelClaims Data and regional vulnerability distinctions validated by roofing experts

Surge ModelingNew detailed methodology uses dynamic modeling over parametric methods

Post Event Loss Amplification

Reduction in Economic Demand Surge to reflect current state of economy

low

high

© 2011 Risk Management Solutions, Inc. 14

Assess WindSpeed Calculate DamageDefine Hurricane Quantify Financial

Loss

Cat models are typically structured into various components that mimic the process of estimating hurricane risk to a portfolio.

A stochastic event component which simulates physical parameters, location, and frequency for each storm in a set of stochastic storms covering the full range of potential hurricanes.

A hazard model determines the relevant variables, for example the peak-gust wind speed for each stochastic storm and analyzed location.

A vulnerability module that links hazard and damage. A financial model that estimates the loss given the damage.

Quantify FinancialLoss

90%$ Loss

Hurricane Catastrophe Models use

formulas that estimate

Tens of thousands of hurricane sizes & wind speeds, &

deterioration over land, & their effects on roofs and walls,

the effects of hills and valleys, future global warming,

price surge after a catastrophe, and so onand predict

. . .

How much it will cost to repair your house due to hurricane

damage over the next

50,000Years!

To date, they have never predicted

the outcome accurately.

Yet the Alabama DOI requires they be used to figure premiums in coastal Alabama

How wrong have they

been?

In 2006The Wildly Experimental

Hurricane Catastrophe Modelspredicted

$60+ billion

in US hurricane losses over the forthcoming 5 years(from 2006 – 2010)

Karen Clark – the Inventor of the Models – found that the actual losses were only

$15 Billion.(The models overpredicted losses by $45 billion.)

In 2011

Risk Management Solutions (RMS)

dramatically revised its

Hurricane Catastrophe Model.

(RMS is one of the modeling companies that predicted $60+ billion in coastal losses.)

Slide 52 taken from the RMS report given to Alabama DOI April 2011 -- their colored map shows the effects of their revisions.

Their model had Overstated the costs in Mobile & Baldwin counties 50%.

They Understated the costs inland by as much as 400%.

Karen,-- the Inventor of the

Hurricane Catastrophe Models -- has

Repudiated her Invention.

Is the CoastREALLY

more Expensive to Repair than Inland?If not. . .

then Coastal Alabamashould pay the State Average

like it always PaidIn the Past

$850a year

There’s more evidence . . .

As RMS figured out,when hurricanes strike Alabama’s coastal counties,

they don’t stop at the county line.

Hurricanes do significant inland damage,

too.

FEMA declared 65 of Alabama’s 67 counties Disasters after Hurricane Ivan

Designated Counties for Alabama Hurricane IvanDisaster Summary For FEMA-1549-DR, Alabama

Declaration Date: September 15, 2004Incident Type: Hurricane Ivan

Incident Period: September 13, 2004 through September 30, 2004Individual Assistance

(Assistance to individuals and households):

Public Assistance(Assistance to State and local governments for the repair or replacement of disaster-damaged public facilities): Autauga, Baldwin, Bibb, Bullock, Butler, Calhoun, Cherokee, Chilton, Choctaw, Clarke, Cleburne, Coffee, Colbert, Conecuh, Coosa, Covington, Crenshaw, Cullman, Dale, Dallas, Dekalb, Elmore, Escambia, Franklin, Geneva, Greene, Hale, Houston, Jackson, Jefferson, Lamar, Lawrence, Lee, Lowndes, Marengo, Marion, Marshall, Mobile, Monroe, Montgomery, Perry, Pickens, Pike, Shelby, Sumter, Talladega, Tallapoosa, Tuscaloosa, Washington, Wilcox, and Winston Counties for assistance for debris removal and emergency protective measures, including direct Federal assistance, at 100 percent Federal funding of the total eligible costs for a period of up to 72 hours.

Hazard Mitigation Grant Program(Assistance to State and local governments for actions taken to prevent or reduce long term risk to life and property from natural hazards): All counties are eligible to apply for assistance under the Hazard Mitigation Grant Program.

FEMA Disaster Summary For FEMA-1549-DR, Alabama

Alabama’s Disaster Counties after Hurricane Ivan

Autauga, Baldwin, Barbour, Bibb, Blount, Bullock, Butler, Calhoun, Chambers, Chilton, Choctaw, Clarke, Clay, Coffee, Colbert, Coosa, Conecuh, Covington, Crenshaw, Cullman, Dale, Dallas, DeKalb, Elmore, Escambia, Etowah, Fayette, Franklin, Geneva, Greene, Hale, Henry, Houston, Jackson, Jefferson, Lamar, Lauderdale, Lawrence, Lee, Limestone, Lowndes, Macon, Madison, Marengo, Marshall, Marion, Mobile, Monroe, Montgomery, Morgan, Perry, Pickens, Pike, Randolph, Russell, Shelby, St. Clair, Sumter, Talladega, Tallapoosa, Tuscaloosa, Walker, Washington, Wilcox, and Winston Counties.

Two-thirds of all claims after Ivan were made north of Mobile and Baldwin counties,according to a source cultivated by Alabama State Senator Trip Pittman.

Not only that . . .

Some hurricanes do more damage inland

than on the coast.The eye of Hurricane Katrina,

skipped Alabama’s coastal counties, curved from the Mississippi Coast back east to clip the northwestern corner of Alabama,

the only part of the state that the “eye” touched.

Your tax money being spent for Katrina Relief in

Tuscaloosa.

8:50am Aug 24 – Landfall in FL

8:30am – Aug 26 – Landfall in LA

Mid-day – Aug 28 – Began to Dissipate

Hurricane Andrew behaved in a similar way

Hurricane data alone suggests inland Alabama incurs more wind losses than the models predict.

And the models just deal with Hurricanes alone.

What about Other Kinds

of wind-and-hail events?

**Through Dec, 7, 2011.Source: PCS Division of ISO.

2011 Catastrophic Homeowners* Claim Activity in Alabama, by Event**

Date Perils Avg. Pmt $ Total $ Pd. # Claims HO $ % HO # %

*Includes all categories of dwelling policies, such as home, condo and renters’ policies

2011 YTD Totals

Event Total2011:Q1 Total

Event Total

Event Total

Event Total2011:Q2 Total

2011:Q3 TotalEvent Total

Alabama suffered

Five“Catastrophic”

Wind or Hail events in 2011 – not just one.

Four others in addition to the April 27 Tragedy.

It suffered significant wind damages in

2009,

Too.

Tornado Tracks by Enhanced Fujita(EF) Scale, January – July 2011

12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

Source: NOAA at: http://www.spc.noaa.gov/wcm/2011-jan-jul.png

Alabama averaged 59 tornadoes per year from 2000-2010, but 128 from Jan. – July

2011, the highest in the country

AL had the highest concentration of EF-3, 4 and 5 storms in 2011

“Alabama averaged

59 tornadoes each year from 2000-2010. . .”

Alabama averaged

One Hurricane every 11 years (during the 20th Century)

649Tornadoes per Hurricane

59 (Tornadoes a Year) X 11 (Years between each Hurricane) =

Severe Weather Reports in Alabama,January 1—December 5, 2011

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

There were 1,288 severe

weather reports in AL through

Dec. 5

In 2011 alone,

in Alabama alone,

there were

217

“severe” Hail reports

170

Tornadoes

901 other “severe”

wind reports

Are the Coastal Counties

REALLY more expensive

?How do we answer that question?

Simple

Compare the costs to repair the coastal counties with the cost to repair inland counties.

So.

Why not do this?

Because theAlabama Department of Insurance

does

not collect data

on a county-by-county basis.

This is why the

Clarity Actis so significant.

It allows us to do the math.It requires the DOI to collect, aggregate, and publish on- line,

by zip code and peril:a) dollar amount of claims b) dollar amount of premiums

c) total number of Policies.This information makes it possible to compare

coastal losses with inland losses.

ALABAMA RATE STATUTES

•Alabama statute says that rates must not be:* Excessive* Inadequate* Unfairly discriminatory

Alabama Law & Policy requires that the DOI

insure fair pricing practices.

If Clarity Act data shows we’re not more expensive (or only 50% more expensive),

then law and policy say that the DOI must prohibit “unfairly discriminatory”

pricing statewide.

If the Clarity Act Data shows Mobile and Baldwin counties are not more expensive to repair, then the coastal counties should not

pay more than the rest of the state.

The $3,000 premium in Lake Forest should be reduced to the approximate level of the state average,

that is . . . reduced from $3,000 a year to about $950 a year.

Action Step:

You and all of us must monitor the production of the data and be prepared in November to speak to the need for non-discriminatory fairness.

To do this, stay connected to HHII emails and/or meetings.

The Second Strategy

The Special (Joe Faust or) Multi-state Coastal Reinsurance Band

Keeping

$48+ Billion at home

All experts agree that (a) the wildly-experimental hurricane catastrophe models and (b) the cost of reinsurance are the two factors driving our high wind insurance costs. The Alabama Clarity Law exposes the wildly experimental wind catastrophe models.

The Coastal Catastrophic Insurance Band cuts foreign reinsurance companies out of the picture, and can put wind and flood insurance together.

AREACategory Number

ALL 1,2,3,4,5

MAJOR 3,4,5 1 2 3 4 5

U.S. (Texas to Maine) 58 36 47 15 2 158 64

Texas 12 9 9 6 0 36 15

(North) 7 3 3 4 0 17 7

(Central) 2 2 1 1 0 6 2

(South) 3 4 5 1 0 13 6

Louisiana 8 5 8 3 1 25 12

Mississippi 1 1 5 0 1 8 6

Alabama 4 1 5 0 0 10 5

Florida 17 16 17 6 1 57 24

(Northwest) 9 8 7 0 0 24 7

(Northeast) 2 7 0 0 0 9 0

(Southwest) 6 3 6 2 1 18 9

(Southeast) 5 10 7 4 0 26 11

Georgia 1 4 0 0 0 5 0

South Carolina 6 4 2 2 0 14 4

North Carolina 10 4 10 1 * 0 25 11

Virginia 2 1 1 * 0 0 4 1 *

Maryland 0 1 * 0 0 0 1 * 0

Delaware 0 0 0 0 0 0 0

New Jersey 1 * 0 0 0 0 1 * 0

New York 3 1 * 5 * 0 0 9 5 *

Connecticut 2 3 * 3 * 0 0 8 3 *

Rhode Island 0 2 * 3 * 0 0 5 * 3 *

Massachusetts 2 2 * 2 * 0 0 6 2 *

New Hampshire 1 * 1 * 0 0 0 2 * 0

Maine 5 * 0 0 0 0 5 * 0

Hurricane direct hits on the mainland U.S. coastline and for individual states 1900-1996 by Saffir/Simpson category. Notes: * - Indicates all hurricanes in this group were moving faster than 30 mph.State totals will not necessarily equal U.S

The Hurricane Insurance crisis impacts all Gulf

and Atlantic states.

In the last century New York had 9

hurricanes; Alabama had 10.

5 of New York’s hurricanes were

Cat-3s;5 Alabama

hurricanes wereCat-3.

Based on hurricane tracks during the last 150 years. . .

The formation of the Gulf-Coast-East-Coast Grassroots Coalition and the Coastal Band Re-Insurance Strategy unites us and

spreads the cost across a base that can pay for losses each year.

This Gulf-Coast-East-Coast/ HHII

Coastal Catastrophic Insurance Entity would: -- Be a band 70 miles inland from the beach, running from Maine to Mexico; -- Collect the hurricane premiums currently paid in the coastal band; -- Pay for wind damages that resulted from named storms in the band; -- Encourage and protect private insurance companies selling non-catastrophic wind insurance and extended homeowners and commercial policies in the band.

$

Coastal Wind Reinsurance Economics

An estimated $8-20 billion in home-owners hurricane insurance premium is collected in this band each year. The bulk of that goes to reinsurers out of the country.

Since 2005 it would have collected between $48 to $140 billion in premiums. During that same time reinsurers only paid about $15 billion in hurricane-related claims in the band. $48-140

Billionleft the country

$15 BillionPaid in Claims

Had the revenue stream been managed by a domestic Catastrophic Insurance Band, its fund would have $33-$125 billion in reserves today.

The Coastal Wind Entity would Keep this Money at Home!

$48-140 Billion$

$

$

$

If premiums had been collected by the Coastal Band at half the current level since 2006, the band. . . -- would be collecting between $4 to $10 billion annually. -- and would have accumulated between $16 and $62 billion after paying hurricane losses.

The average Cat 3 hurricane costs about $3 billion in wind losses in the Coastal Band.

Keeping the Money at Home & Cutting Wind Premiums in Half. . .

$48-140 Billion

With premiums cut in half, this Plan. . .-- Insures our homes at an affordable price -- Requires no tax money -- Protects insurance companies from catastrophic events-- Brings insurance companies back to the coast in droves -- Has no affect on inland constituencies, thus removes obstacles raised by inland politicians

The Governing Body of Coastal Band would be -- a non-profit entity,

-- crafted by a Congressional Act or State Compacts,-- serving and governed by consumers.

Governance of the SpecialCoastal Band Insurance District

One of the nations leading insurance experts (from the consumer point of view)

says the Coastal Band is -- a strong

-- economically viableapproach to fixing the wind crisis.

J. Robert Hunter

J. Robert Hunter is aformer Texas Insurance

Commissioner; Heran the national flood program

Eight of the 17 Gulf and Atlantic states are already working together in . . . New York, New Jersey, North Carolina, South Carolina, Florida, Alabama, Mississippi, & Louisiana. The National United Policy Holders Organization and Robert Hunter are working with them. They hold semi-monthly conference calls . They held a two-day, multi-state conference in Biloxi. They’ve assisted Rep. Faust and Bracy as they develop the Multi-state Coastal Legislators Caucus They’ve met with state senators and representatives in 4 coastal states They’ve generated news coverage in the Wall Street Journal, and several coastal newspapers . . .

Because of work done by Repo Faust, Alabama’s Coastal Legislators, and HHII:

If fixing this crisis in a hurry depends on money . . . We need volunteers networking and funding sources . . . What you can do . . . -- help network locally and in

other states; -- find and speak to foundations

and others about financial support;

-- join the HHII Business Council

1)

Enabling Legislation Passed

Public PressurePublic Education & Networking

Funding, networking, joining

TodayHelp Open Doors

This 2011 photograph was taken just before an Alabama House Banking and Insurance Committee

began one of its meetings. Lining the walls are insurance lobbyists.

If we don’t require Congress to act on our behalf . . .

One closing question. . .

On whose behalf do you think Congress will act?

What we ask you to do . . .