1 The Disaster Insurance Project Wharton Center for Risk Management and Decision Processes University of Pennsylvania Insurance Information Institute and Center for Risk Management and Insurance Research Georgia State University Advisory Committee Meeting Wharton School University of Pennsylvania June 16, 2006

2 Nature of the Problem Natural disasters in the US have caused severe insured losses in recent years –Hurricane Katrina: $40-$55 billion –Hurricane Andrew: $21.5 billion (2004 dollars) Most costly years in the history of catastrophe insurance: 2005 and 2004 in that order. Will 2006 or 2007 be even worse? Victims complain about receiving substantially less than the actual costs to repair or rebuild their damaged structures from Katrina Federal government is committed to providing liberal disaster assistance to aid the victims of Katrina and rebuild the Gulf Coast

3 Questions for the Wharton Disaster Insurance Project Who are the interested parties involved in dealing with natural disasters, and what are their goals, values and objectives? What role can the public sector play in partnering with the private sector in general and the insurance sector in particular to lever its strengths (knowledge, network, financial capacity) in reducing the potential losses from future natural disasters and increasing the speed and efficiency of recovery from any large scale disaster? How will losses be shared among affected parties after the next disaster? What are the current loss sharing mechanisms in place? What are the costs, benefits and tradeoffs associated with alternative risk mitigation strategies?

4 Analysis Plan Focus on homeowner insurance (as a first step; possible extension to commercial later on) Focus on disaster insurance and reinsurance markets in 5 states and metropolitan areas : -Florida (Miami) -Texas (Houston) -New York (specific zip codes of NYC) -South Carolina (Charleston) -California (Oakland)

5 Supply/Demand Econometric Analysis Characteristics of Property Insurance in Selected States and Metropolitan Areas State Market & Regulatory Analyses Reinsurance & Capital Market Analysis Developing EP Curves with Modeling Firms Integrating Data for Assessing Alternative Policy Options Alternative Policy Options 1.Private Sector Roles 2.Public Sector Roles 3.Mitigation Measures 4.Other Options Socioeconomic & Demographic Analysis Structure of Disaster Insurance Project Evaluation of Alternative Policy Options

6 Timeline (2006) First workshop (with sponsors): June 15, 2006 (Wharton) Preliminary report (September) and Feedback from sponsors and other organizations (October) Wharton Disaster Insurance Forum (wider group of participants) : Autumn 2006 (Date to be announced) Publication of final report: End of 2006

7 Questions for Discussion Should all property owners be required to have protection against catastrophic losses? –Mandatory insurance coverage –Tax on all property based on actuarial risk How many homeowners are uninsured against damage from natural hazards in risk-prone areas? What role should regulation play? –Challenges in states permitting risk-based insurance rates –Reexamination of accounting standards for capital market instruments What are the liability issues? –Paying for water damage even though homeowners insurance doesn’t cover it –Lawsuits filed in Mississippi and Louisiana following Katrina claiming that homeowners policies should provide protection against water damage What type of special treatment should be given low income families residing in hazard-prone areas? (equity issues) –Types of subsidies, grants or loans that should be given to this group –Determining proportion of home eligible for special treatment