Financial and Market Impacts of Hurricanes on Property/Casualty Insurers Past, Present & Future National Hurricane Conference New Orleans, LA April 5, 2007 Robert P. Hartwig, Ph.D., CPCU, President & Chief Economist Insurance Information Institute  110 William Street  New York, NY Tel: (212)  Fax: (212)  

Presentation Outline Catastrophe Losses are Growing Globally US: Hurricanes are Now #1 Source of Insured CAT Losses  Displacing Tornados Loss Potential from Future Storms is Immense & Growing Rapidly Acts of God & The Bottom Line Hurricanes & The Price of Property Insurance Claims Paying Capacity: The Worst Has Yet to Come  Why US Hurricanes Become a Global Insurance Problem The Role of State-Run Insurers Post-Katrina Litigation

INSURED CATASTROPHE LOSS REVIEW A Decade of Disaster

U.S. Insured Catastrophe Losses* *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 $ Billions 2006 was a welcome respite was by far the worst year ever for insured catastrophe losses in the US, but the worst has yet to come. $100 Billion CAT year is coming soon

Global Number of Catastrophic Events, 1970–2005 Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 1/2005 and 2/2006. The number of natural and man-made catastrophes has been increasing on a global scale for 20 years Record 248 man- made CATs & record 149 natural CATs in 2005

Insured Property Catastrophe Losses as % Net Premiums Earned, 1983–2005E *Insurance Information Institute figure of 13.8% for 2005 based estimated 2005 DPE of $417.7B and insured CAT losses of $57.7B. Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute. US CAT losses were a record 13.8% of net premiums earned in 2005 and were 4.2 times the average of 3.3%

Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2005) Sources: ISO/PCS; Insurance Information Institute. Seven of the 10 most expensive hurricanes in US history occurred in the 14 months from Aug – Oct. 2005: Katrina, Rita, Wilma, Charley, Ivan, Frances & Jeanne

Insured Loss & Claim Count for Major Storms of 2005* *Property and business interruption losses only. Excludes offshore energy & marine losses. Source: ISO/PCS as of June 8, 2006; Insurance Information Institute. Hurricanes Katrina, Rita, Wilma & Dennis produced a record 3.3 million claims

Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss, ¹ Source: Insurance Services Office (ISO).. 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 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. Insured disaster losses totaled $289.1 billion from (in 2005 dollars). Tropical systems accounted for nearly half of all CAT losses from , up from 27.1% from

Hurricane Katrina Insured Loss Distribution by State ($ Millions)* *As of June 8, 2006 Source: PCS division of ISO. Louisiana accounted for 62% of the insured losses paid and 56% of the claims filed Total Insured Losses = $ Billion

Hurricane Katrina Loss Distribution by Line ($ Billions)* Total insured losses are estimated at $ billion from million claims. Excludes $2- $3B in offshore energy losses *As of June 8, 2006 Source: PCS division of ISO.

Hurricane Katrina Claim Count Distribution by State* *As of June 8, 2006 Source: PCS division of ISO. Louisiana accounted for 62%of insured losses paid and 56% of claims filed Total # Claims = 1,743,800

Hurricane Rita Claim Count Distribution by State* *As of June 8, 2006 Source: PCS division of ISO. Louisiana accounted for 48.3% of the insured losses, Texas 44.6%. Excludes offshore energy losses of $2-3B Total # Claims = 383,000

Hurricane Rita Loss Distribution, by Line ($ Millions)* Total insured losses are estimated at $5.0 billion (excl. offshore energy of $2-$3B) from 383,000 claims. *As of June 8, 2006 Source: PCS division of ISO.

Hurricane Wilma Loss Distribution by Line ($ Millions)* Total insured losses are estimated at $10.3 billion from million claims *As of June 8, All losses are in FL. Source: PCS division of ISO.

Hurricane Wilma Claim Count Distribution by Line * Total insured losses are estimated at $10.3 billion from million claims *As of June 8, All losses are in FL. Source: PCS division of ISO.

Hurricane Ophelia Loss Distribution by Line ($ Millions)* Total insured losses are estimated at $35.0 million from 10,600 claims *As of June 8, All losses are in NC. Source: PCS division of ISO.

Hurricane Ophelia Claim Count Distribution by Line * *As of June 8, All losses are in NC. Source: PCS division of ISO. Total insured losses are estimated at $35.0 million from 10,600 claims

U.S. Catastrophe Losses 2006: States With Largest Losses ($ Millions) *ISO defines a catastrophe event as an event causing $25 million or more in insured property losses. Source: ISO; Insurance Information Institute SURPRISE!! Indiana led the US with $1.5 billion in insured CAT losses in 2006 Some 33 catastrophe events* in 34 states cost insurers an estimated $8.8bn in 2006, compared with $61.9bn in Cat losses in the following five states -- totaling $4.5bn -- represent half the total catastrophe losses for the year.

Number of Tornadoes, 1985 – 2006p Source: US Dept. of Commerce, Storm Prediction Center, National Weather Service; Ins. Info. Inst. There are usually more than 1,000 confirmed tornadoes each year in the US. They accounted for about 25% of catastrophe losses since 1985

Insurers are committed to improving the ability of homes and businesses to withstand major disasters

Source: Insurance Information Institute Figure 8. Free Home Inventory Software at

HURRICANES: INSURED LOSS POTENTIAL Katrina: Just the Beginning?

Total Value of Insured Coastal Exposure (2004, $ Billions) Source: AIR Worldwide Florida & New York lead the way for insured coastal property at more than $1.9 trillion each. Northeast state insured coastal exposure totals $3.73 trillion.

Insured Coastal Exposure as a % of Statewide Insured Exposure (2004, $ Billions) Source: AIR Worldwide After FL, many Northeast states have among the highest coastal exposure as a share of all insured exposure in the state.

New Condo Construction in South Miami Beach, Number of New Developments: 15 Number of Individual Units: 2,111 Avg. Price of Cheapest Unit: $940,333 Avg. Price of Most Expensive Unit: $6,460,000 Range: $395,000 - $16,000,000 Overall Average Price per Unit: $3,700,167* Aggregate Property Value: At least $6 Billion *Based on average of high/low value for each of the 15 developments Source: Insurance Information Institute from accessed April 5,

Value of Insured Residential Coastal Exposure (2004, $ Billions) Source: AIR Florida has nearly $1 trillion in insured residential exposure and counting. Nearly 1,000 people move to the state per day!

Value of Insured Commercial Coastal Exposure (2004, $ Billions) Source: AIR Commercial property exposure also implies significant business interruption losses.

With rapid coastal development, $40B+ storms will be more common Source: AIR Worldwide * *ISO/PCS estimate as of June 8, 2006 (Billions of 2005 Dollars) Plurality of worst-case scenarios involve Florida Insured Losses from Top 10 Hurricanes Adjusted to 2005 Exposure Levels

Historical Hurricane Strikes in Galveston County, TX, Source: NOAA Coastal Services Center, Insurance Info. Institute. Population of Galveston County is 5 times what it was when the hurricane of 1900 struck, killing 8,000

Historical Hurricane Strikes in Suffolk County, NY, Source: NOAA Coastal Services Center, Insurance Info. Institute. Population in Suffolk County is 4.5 times what it was in the 1940s

Historical Hurricane Strikes in Dare County, NC, Source: NOAA Coastal Services Center, Insurance Info. Institute.

Increase in Population of Coastal/Near Coastal Counties in South Carolina (% Change, ) Sources: Charleston Metro Chamber of Commerce, SC Statistical Abstract, US Census Bureau. Several SC coastal counties have experienced very strong population growth since Home values have also skyrocketed—up 120% in Charleston, Berkeley & Dorchester counties between

Source: AIR Worldwide Insured Losses: $110B Economic Losses: $200B+ Nightmare Scenario: Insured Property Losses for NJ/NY CAT 3/4 Storm Total Insured Property Losses = $110B, nearly 3 times that of Hurricane Katrina Distribution of Insured Property Losses, by State, ($ Billions)

Percentage of California Homeowners with Earthquake Insurance, * *Includes CEA policies beginning in **2006 estimate from Insurance Information Network of CA. Source: California Department of Insurance; Insurance Information Institute. The vast majority of California homeowners forego earthquake coverage & play Russian Roulette with their most valuable asset.

Reasons for US P/C Insurer Impairments, *Includes overstatement of assets. Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005; Deficient reserves, CAT losses are more important factors in recent years

ACTS OF GOD & THE BOTTOM LINE Catastrophic Loss & Insurer Financial Performance

P/C Net Income After Taxes E ($ Millions)* *ROE figures are GAAP; 1 Return on avg. surplus ROAS = 9.8% after adj. for one-time special dividend paid by the investment subsidiary of one company. 2 Based on 9-month results; Sources: A.M. Best, ISO, Insurance Information Inst.  2001 ROE = -1.2%  2002 ROE = 2.2%  2003 ROE = 8.9%  2004 ROE = 9.4%  2005 ROE= 10.5%  2006 ROAS 1,2 = 13.4% Though up in 2006, insurer profits are highly volatile (2001 was the industry’s worst year ever). ROEs generally fall below that of most other industries.

ROE: P/C vs. All Industries 1987–2008E * P/C insurer ROEs are I.I.I. estimates. Source: Insurance Information Institute; Fortune Andrew Northridge Hugo Lowest CAT losses in 15 years Sept Hurricanes Katrina, Rita, Wilma P/C profitability is cyclical, volatile and vulnerable

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2008F * P/C insurer ROEs are I.I.I. estimates. Source: Insurance Information Institute; ISO, A.M. Best. 1975: 2.4% 1977:19.0%1987:17.3% 1997:11.6% 2006E:14.0% 1984: 1.8% 1992: 4.5% 2001: -1.2% 10 Years 9 Years

ROE vs. Equity Cost of Capital: US P/C Insurance: E *Based on 2006:9M ROAS of 13.4% Source: The Geneva Association, Ins. Information Inst. The p/c insurance industry achieved its cost of capital in 2005/6 for the first time in many years** pts +0.2 pts US P/C insurers missed their cost of capital by an average 6.7 points from 1991 to 2002, but on target or better pts +3.9 pts -9.0 pts The cost of capital is the rate of return insurers need to attract and retain capital to the business

Insurance & Reinsurance Stocks: Strong Finish in 2006 Source: SNL Securities, Standard & Poor’s, Insurance Information Institute Total Returns for 2006 P/C insurer & reinsurer stocks rallied in late 2006 as hurricane fears dissipated and insurers turned in strong results Broker stocks held back by weak earnings

Insurance & Reinsurance Stocks: Slow Start in 2007 Source: SNL Securities, Standard & Poor’s, Insurance Information Institute Total YTD Returns Through March 16, 2007 P/C insurer & reinsurer stocks slipping on soft market concerns and general financial market malaise

UNDERWRITING Extremely Strong 2006, Momentum for 2007

P/C Industry Combined Ratio Sources: A.M. Best; ISO, III. *Estimates/forecasts based on III’s 2007 Groundhog survey figure benefited from heavy use of reinsurance which lowered net losses 2006 could produce the best underwriting result since the 93.2 combined ratio in As recently as 2001, insurers were paying out nearly $1.16 for every dollar they earned in premiums 2007/8 deterioration due primarily to falling rates, but results still strong assuming normal CAT activity

Share of Losses Paid by Reinsurers, by Disaster* *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 Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute. Reinsurance is playing an increasingly important role in the financing of mega- CATs; Reins. Costs are skyrocketing

Claim Payouts Typically Exceed Premiums Earned* Source: A.M. Best, Insurance Information Institute *2006E of $32.5B is annualized 9 mos. gain of $24.4B $ Billions Losses exceed premiums in 28 of the 32 years from Underwriting Gain (Loss) E, $Bill Underwriting Losses Underwriting Profits Andrew Sept. 11 KRW

Ten Lowest P/C Insurance Combined Ratios Since 1920 Sources: A.M. Best; Insurance Information Institute. *III Groundhog Survey forecast, Feb The projected 2006 combined ratio of 93.2 would be the best since 1936, a span of 70 years

Commercial Lines Combined Ratio, E* Source: A.M. Best; Insurance Information Institute. Outside CAT- affected lines, commercial insurance is doing fairly well. Caution is required in underwriting long- tail commercial lines results will benefited from relatively disciplined underwriting and low CAT losses Commercial coverages have exhibited extreme variability. Are current results anomalous?

Personal Lines Combined Ratio, E Source: A.M. Best; Insurance Information Institute. A very strong 2006 resulted from favorable frequency & severity trends and low CAT activity

FLORIDA: A CASE STUDY Profitability is Elusive

Underwriting Gain (Loss) in Florida Homeowners Insurance, E* *2005 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2005 residential windstorm losses of $7.35B estimate from Ins. Info. Inst. $ Billions Florida’s homeowners insurance market produces small profits in most years and enormous losses in others

Cumulative Underwriting Gain (Loss) in Florida Homeowners Insurance, E* $ Billions It took insurers 11 years ( ) to erase the UW loss associated with Andrew, but the 4 hurricanes of 2004 erased the prior 7 years of profits & 2005 deepened the hole. Regulator under US law has duty to allow rates that are “fair,” “not excessive” and “not unduly discriminatory.” Reality is that regulators in CAT-prone states suppress rates. *2005 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2005 residential windstorm losses of $7.35B estimate from Ins. Info. Inst.

Rates of Return on Net Worth for Homeowners Ins: US vs. Florida Source: NAIC; 2005/6 US and FL estimates from the Insurance Information Institute. Averages: 1990 to 2006E US HO Insurance = -0.7% FL HO Average = -38.1% Andrew 4 Hurricanes Wilma, Dennis, Katrina

PRICES Flat or Down Almost Everywhere: Coastal Increases Reflect Risk

P/C Insurer Net Written Premiums F ($ Billions) Sources: A.M. Best; Insurance Information Institute. Premium growth accelerated briefly after the 2004/5 hurricane seasons, but has since fallen back

Note: Shaded areas denote hard market periods. Source: A.M. Best, Insurance Information Institute Strength of Recent Hard Markets by NWP Growth* * figures are III forecasts/estimates growth of 0.4% equates to 1.8% after adjustment for a special one-time transaction between one company and its foreign parent figures from III Groundhog Survey (post-Katrina) period could resemble (post-Andrew) 2005: biggest real drop in premium since early 1980s

Growth in Net Written Premium, F Source: A.M. Best; Forecasts from the Insurance Information Institute. Full-year estimate from III’s Groundhog survey: 9-month actual value is 3.8% adjusted for special transactions. P/C insurers will experience their slowest growth rates since the late 1990s…but underwriting results are expected to remain healthy!

Average Expenditures on Homeowners Insurance *Insurance Information Institute Estimates/Forecasts Source: NAIC, Insurance Information Institute Countrywide home insurance expenditures are expected to rise 4% in 2007, but much more in hurricane zones Hurricane zone residents can expect increases in the 20%- 100% range, especially if insured by a state entity

Price Increases for Louisiana Citizens— State’s High Risk Insurer of Last Resort Source: Louisiana Citizens Property Insurance Corp. from USA Today, April 3, 2007, p. 1A % +2.3% +13.6% +57.4% LACPIC went broke in 2005 by $965 million.

Price Increases for MS Windstorm Underwriting Association— State’s Insurer of Last Resort Source: Mississippi Windstorm Underwriting Association from USA Today, April 3, 2007, p. 1A.. MWUA went broke in 2005 by $595 million an has received massive state tax subsidies

Average Commercial Rate Change, All Lines, (1Q:2004 – 4Q:2006) Source: Council of Insurance Agents & Brokers; Insurance Information Institute Magnitude of rate decreases has diminished greatly since mid-2005 but is growing again KRW Effect

Percent of Commercial Accounts Renewing w/Positive Rate Changes, 2 nd Qtr Source: Council of Insurance Agents and Brokers Largest increases for Commercial Property & Business Interruption are in the Southeast, smallest in Midwest

Percent of Commercial Accounts Renewing w/Positive Rate Changes, 4 th Qtr Source: Council of Insurance Agents and Brokers Largest increases for Commercial Property & Business Interruption are in the Southeast, but are diminishing; Smallest in Midwest

CLAIMS PAYING CAPACITY 2006 Respite: Rebuilding Year

U.S. Policyholder Surplus: E* Source: A.M. Best, ISO, Insurance Information Institute*III Estimate. $ Billions “Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations Capacity as of 12/31/06 is $481.5B (est.), 13.1% above year-end 2005, 69% above its 2002 trough and 44% above its 1999 peak. Foreign reinsurance and residual market mechanisms absorbed 45% of 2005 CAT losses of $62.1B

Capital Raising by Class Within 15 Months of KRW Insurers & Reinsurers raised $33.7 billion in the wake of Katrina, Rita, Wilma Source: Lane Financial Trade Notes, January 31, $ Billions

Annual Catastrophe Bond Transactions Volume, Source: MMC Securities and Guy Carpenter; Insurance Information Institute. Catastrophe bond issuance has soared in the wake of Hurricanes Katrina and the hurricane seasons of 2004/2005

Reinsurance & Capital Markets are Globally Linked Global Reinsurance Market States like LA, MS paid little into the global reinsurance pool but got a lot in return, shrinking global claims paying resources and pushing up reinsurance costs for all Premiums Ceded Losses Paid

Debate Over Reinsurance Market Performance & Government Reinsurance markets typically suffer large shocks, followed by a period of higher prices and transient capacity constraints A new equilibrium between Supply and Demand is typically found within 18 months, commensurate with changes in the risk landscape. This is Economics 101 and is a textbook illustration of how capitalism works. A competing hypothesis suggests that reinsurance markets “fail” because they do not provide a stable price or quantity of protection as is required in an economy with continuously exposed fixed assets, especially one that is growth oriented Public Policy Solution: Acting on this hypothesis generally results in displacement of private (re)insurance capital by government intermediaries Question Asked: Are policyholders and the economy better served through free markets, government or some hybrid? Sources: Insurance Information Institute

STATE RUN INSURERS Solution or Ticking Time Bombs?

US FAIR Plans Exposure to Loss* (Billions of Dollars) Source: PIPSO; Insurance Information Institute*Hurricane exposed states only. In the 15-year period between 1990 and 2005, total exposure to loss in the FAIR plans has surged by a massive 965 percent, from $40.2bn in 1990 to $387.8bn in 2005! Total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54.7bn in 1990 to $419.5 billion in 2005.

Florida Citizens Exposure to Loss (Billions of Dollars) Source: PIPSO; Insurance Information Institute Exposure to loss in Florida Citizens nearly doubled in 2006 and is now the largest home insurer in the state

MS Windstorm Plan: Exposure to Loss (Millions of Dollars) Source: PIPSO; Insurance Information Institute Total exposure to loss in the Mississippi Windstorm Underwriting Association (MWUA) has surged by 431 percent, from $352.9m in 1990 to $1.9bn in 2005.

TWIA Growth In Exposure to Loss (Building & Contents Only, $ Billions) Source: TWIA (as of 11/30/06); Insurance Information Institute TWIA’s liability in-force for building & contents has surged by nearly 200 percent in the last six years from $12.1bn in 2000 to $35.9bn in 2006

Major Residual Market Plan Estimated Deficits 2004/2005 (Millions of Dollars) * MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in Federal Aid. Source: Insurance Information Institute Hurricane Katrina pushed all of the residual market property plans in affected states into deficits for 2005, following an already record hurricane loss year in 2004

What Role Should the Government Play in Insuring Against Natural Disaster Risks?

Government Aid After Major Disasters (Billions)* *In 2005 dollars. Source: United States Senate Budget Committee, Insurance Information Institute as of 12/31/05. Katrina federal aid was more than all the federal aid for the 9/11 terrorist attacks, 2004’s 4 hurricanes, the Northridge earthquake and Hurricane Andrew combined.

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

Guiding Principles of NAIC’s National Catastrophe Plan National program should promote personal responsibility among policyholders National program should support reasonable building codes, development plans & mitigation tools National program should maximize risk- bearing capacity of private markets, and National plan should provide quantifiable risk management to the federal government Source: Insurance Information Institute from NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005.

Comprehensive National Catastrophe Plan Schematic Personal Disaster Account Private Insurance State Regional Catastrophe Fund National Catastrophe Contract Program Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst. State Attachment 1:50 Event 1:500 Event

Legislation has been introduced and ideas espoused by ProtectingAmerica.org will likely get a more thorough airing in 2007/8

POST-KATRINA LITIGATION Suits Add to Uncertainty, Expense

Hurricane Katrina Claim Status on Storm’s 1 st Anniversary* 95% of the 1.2 million homeowners insurance claims in Louisiana & Mississippi are settled, with just 2% in dispute *Hurricane Katrina made its north Gulf coast landfall August 29, Source: Insurance Information Institute survey, August 2006.

Likely Market Impacts of Post- Katrina Litigation Litigation Creates an Additional Layer of Uncertainty in What is Already a Very Difficulty Market  Ultimate Thrust of Litigation is to Compel Insurers to Pay Water Damage (Flood/Surge) Losses for Which They Have Never Received A Penny in Premium Some Courts’ Apparent Willingness to Retroactively Rewrite Long-Standing, Regulator Approved Terms & Conditions of Insurance Contracts Creates an Unpriceable Risk  Compounded by juries willing to award millions in punitives People Discouraged from Buying Flood Coverage BOTTOM LINE: Weather, Courts, Juries Together Create Nearly Impossible Operating Environment Coverage Under These Circumstances Will Necessarily Become More Expensive, Less Available

Katrina Litigation Timeline for Significant Wind/Flood Disputes DateCaseStateJudge Outcome for IndustryRuling 9/05 Hood v. State Farm, et al MS State/Fed*Negative Suit was held up for 15 months on jurisdictional grounds, but ultimately remanded back to a MS state court in Dec /06 Buente v. AllstateMS SenterPositive Upheld flood exclusion. Rules flood exclusions in policy are “clear are unambiguous” 5/06 Tuepker v. State FarmMS SenterNegative Storm surge as excludable flood loss upheld, but ruled that policy language on losses caused by both wind and water was ambiguous and therefore unenforceable *Originally filed 9/15/05 in MS state court, but jurisdiction challenged by insurers because suit also references the federal government’s National Flood Insurance Program. Sources: Lehman Brothers, Insurance Information Institute.

Katrina Litigation Timeline for Significant Wind/Flood Disputes (cont’d) DateCaseStateJudge Outcome for IndustryRuling 5/06 Turk, et al v. Louisiana Citizens, et al LA HaikPositive Upheld flood exclusion. Ruling says that if policy only covered wind damage then flood-related damage not covered 8/06 Class Action CertificationMS SenterPositive Refuses to certify class actions cases involving State Farm Katrina cases 8/06 Leonard v. NationwideMSSenterPositive Flood exclusion upheld. Nationwide ordered to pay only for wind damage of $1, /06 Levee BreaksLADuvalNegative Losses from levee breaks should be covered by insurers 1/19/07 Broussard v. State FarmMS SenterNegative Rules against State Farm for refusing to cover Katrina damage. Ordered to pay full value of policy by judge of $233,393 plus jury award of $2.5 million in punitive damages Sources: Lehman Brothers, Insurance Information Institute.

DateCaseStateJudge Outcome for IndustryRuling 1/07 Congressional Investigations MS NANegative Rep, Gene Taylor (D-MS) calls for Congressional investigations into insurer claims handling practices. Separately, Dept. of Homeland Security inspector general must submit results of investigation by 4/1/07. 1/23/07 Tejedor v. State Farm MS SenterNegative State Farm settles for an estimated $1 million based on $96,000 in uncovered losses. Home insured for $260,000; recovered $200,000 from NFIP and $13,944 from SF on structure. Also recovered $80,000 from NFIP on $130,000 contents Sources: Lehman Brothers, Insurance Information Institute. Katrina Litigation Timeline for Significant Wind/Flood Disputes (cont’d)

DateCaseStateJudge Outcome for IndustryRuling 1/23/07 State Farm Class Action Settlement MS Senter*Negative State Farm settles civil suit with MS AG Hood for at least $50 million. SF will offer about 1000 homeowners whose homes were completely destroyed at least 50% of the policy’s value, and offer some payment to other homeowners as well affecting as many as 35,000 policyholders. Families can reject offers and seek arbitration. Settlement also resolves a criminal investigation by AG into allegations that claims were fraudulently denied. Settlement does not involve any other insurers. 1/23/07 “Woullard Agreement”MS NANegative State Farm agrees to pay $79.5 million to 639 families in private suit. Suit handled by Richard Scruggs. Sen. Trent Lott (R-MS) was party to this suit. Sources: Insurance Information Institute. *Pending certification of settlement. Refused to certify 1/26/07. Scruggs legal team will earn as much as $46 million from these settlements, paid in addition to sums offered to plaintiffs ($26M for the “Woullard Agreement” and up to $20M for the class action case)

FLORIDA SPECIAL SESSION LEGISLATIVE CHANGES Insurer, Policyholder & State Impacts

Summary: Florida Legislature Special Session (January 2007) 1.Exponential Expansion of the Role of the State in Insuring Homes & In Reinsurance Markets  More than doubles exposure of Florida Hurricane Catastrophe Fund to $35 billion from $16 billion (FHCF only has $1B cash), greatly displacing private reinsurers  Allows Florida Citizens to compete with private insurers by lowering rates and lowering eligibility standards  Allows Florida Citizens to displace private insurers by expanding into non-wind coastal business  Disbands disciplined, small and adequately priced Commercial JUA and transfers business to poorly run, underpriced, Citizens Commercial Account Sources: Zurich Insurance Technical Center; Insurance Information Institute.

Summary: Florida Legislature Special Session (January 2007) 2.Dramatically Increases Exposure of Florida Policyholders to Post-Catastrophe Taxes  Expands the Citizens assessment base more than 4 fold  Increases maximum annual assessment facing Florida policyholders from $9.2 billion to $25 billion  Increases maximum general liability and commercial auto assessment exposure from 14% to 74% (These are 2 types of insurance that having nothing to do with hurricane risk)  Accelerates growth of Citizens, already the largest home insurers in the state and which doubled in size in 2006, by lowering rates and making access easier Sources: Zurich Insurance Technical Center; Insurance Information Institute.

Summary: Florida Legislature Special Session (January 2007) 3.Disincentives for Insurers to Offer Policies in Florida  Introduces “excess profits law” (a virtual oxymoron in FL)  Requires Executive Officer review on routine rate filings  Threatens perjury charges and administrative penalties  Increases cost of processing and maintaining policies  Requires “premium discounts” even if not actuarially justified 4.Threatens State of Florida’s Credit Rating  Major event could result in simultaneous issuance of $40+ billion in debt from Cat Fund, Citizens and Guarantee Fund  Governor’s promise to cut property taxes could compound state’s fiscal problems after an event Sources: Zurich Insurance Technical Center; Insurance Information Institute.

Florida Hurricane Assessment Base, 2006 vs. 2007* ($ Bill) The FL legislature quadrupled the assessment base for Citizens Sources: Zurich Insurance Technical Center; Ins. Info. Inst. *Per special legislative session, Jan

Florida Hurricane Max. Policyholder Annual Burden, 2006 vs. 2007* ($ Bill) The FL legislature nearly tripled state insurers’ assessment base from $9.2B to $25B, an increase of $15.8B or 174% Sources: Zurich Insurance Technical Center; Ins. Info. Inst. *Per special legislative session, Jan

Why There is Concern Over the Florida Legislature’s & Governor’s Changes Risk is Now Almost Entirely Borne Within State Virtually Nothing Done to Reduce Actual Vulnerability Creates Likelihood of Very Large Future Assessments Potentially Crushing Debt Load State May be Forced to Raise/Levy Taxes to Avoid Credit Downgrades Many Policyholder Will See Minimal Price Drop  “Savings” came from canceling recent/planned rate hikes Residents in Lower-Risk Areas, Drivers, Business Liability Policyholders Will Come to Resent Subsidies to Coastal Dwellers Governor’s Emergency Order for Rate Freezes & Rollbacks Viewed as Unfair & Capricious Sources: Insurance Information Institute.

Summary Insured catastrophe losses are on the rise, in the US and globally Hurricanes are the #1 source of catastrophe losses, by far Rapid coastal development (driven by strong demographics) & rising property values are the primary reasons for the upward trend in insured catastrophe losses in the US  Government subsidies to coastal dwellers exacerbate problem Financial impacts on property/casualty insurance industry have been severe ($81 billion in hurricane losses in 2004/2005) but were manageable due to global spread of losses Expectations for more frequent & more severe storms is driving risk-based, actuarially sound rates upward Insurers remain deeply committed to helping policyholders reduce vulnerability by supporting stronger building codes and mitigation  But insurers have no control over local land use decisions Ultimately, insurance prices must reflect true risk Market signals on risk provide incentives to fortify structures

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