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Hurricanes Katrina & Rita:
Impacts on the Property/Casualty Insurance & Reinsurance Industries
Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org
Insurance Information InstituteOctober 14, 2005
Download at:http://www.disasterinformation.org/disaster2/facts/presentation/
Presentation Outline
• P/C Financial Overview: A Position of Strength• Industry Claims-Paying Resources• Underwriting Performance pre-Katrina• Pricing Impacts• Catastrophe Review:
Loss estimate overview Hurricanes Katrina & Rita’s place in historyLoss distribution (geographic & by line)Impact on financial & underwriting performanceInfluence of legal environment on Katrina claims
• Overview of the Natl. Flood Insurance Program• The Role of the Fed. Government & CAT Risk• Q & A
P/C Financial Overview
Strong Pre-Katrina Results Help Industry Meet the Challenge
P/C Net Income After Taxes1991-2005:H1 ($ Millions)*
$14,178
$5,840
$19,316
$10,870
$20,598
$24,404
$36,819
$30,773
$21,865
-$6,970
$3,046
$30,029$30,925
$20,559
$38,722
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05**ROE figures are GAAP; 2004 figure is return on average surplus. 2005 figure is for first half of year.Sources: A.M. Best, ISO, Insurance Information Institute.
2001 ROE = -1.2%
2002 ROE = 2.2%
2003 ROE = 8.9%
2004 ROE = 10.5%*
2005:H1 ROE = 15.3%
Pre-Katrina/Rita profits were strong,
helping industry cope with mega-loss
“Record” 2004 profits wrongly cited
as reason why insurers should pay excluded flood losses
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
05H
1
05*
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2005F*
*GAAP ROEs except 2004/5 P/C figure = return on average surplus. 2005 figure is III full-year estimate.Source: Insurance Information Institute; Fortune for all industry figures
2005 P/C ROAS = 9.5% after adjusting for Katrina & Rita
2005:H1 P/C ROAS = 15.3%
16.3 Pts.
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05*
ROE Cost of Capital
ROE vs. Equity Cost of Capital: US P/C Insurance: 1991 – 2005*
*First half 2005.Source: The Geneva Association, Ins. Information Inst.
-13.
2 p
ts
-9.0
pts
US P/C insurers missed their cost of capital by an average 6.3 points from 1991 to 2003
-1.7
p
ts
+0.
6 p
ts
+5.
0 p
ts
Because p/c insurers today generally are earning their cost of capital and are financially strong, they
should be able to readily access fresh capital if necessary.
P/C Insurers Stocks Remain Up, Brokers Up Too, Reinsurers Down
3.36%
-6.19%
-0.34%
2.55%
8.20%
12.10%
-1.32%
-10% -5% 0% 5% 10% 15%
S&P 500
Life/Health
All Insurers
P/C
Multiline
Reinsurers
Brokers
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Total Return 2005 YTD Through October 7, 2005
P/C insurer stocks outperforming the
market despite Katrina & Rita
Reinsurers down more on Katrina & Rita news
Brokers up on tight market hopes
4.2%
4.0% 4.
5%
3.8%
2.2% 2.5% 3.
3%
2.7%
3.9%
2.6%
-4.0
%
-3.5
% -2.7
%
-4.1
%
-5.3
%
-4.5
%
-5.7
%
-5.8
%
-6.0
%
-6.2
%
-5.5
%
-6.4
% -4.8
%
-5.5
%
-0.6
%
1.9%
2.1%
3.6%
4.8%
3.4%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
5-Aug 12-Aug 19-Aug 26-Aug 2-Sep 9-Sep 16-Sep 23-Sep 30-Sep 7-Oct
P/C Reinsurers Brokers
Source: SNL Securities; Insurance Information Institute
Change in YTD Stock Performance by Sector Pre- & Post-Katrina/Rita
P/C & reinsurer stocks hurt by Katrina & Rita, broker stocks rose on expectation of tighter conditions and demand for broker services
Katrina strikes Aug. 29
Rita comes ashore Sept. 24
Insurer Claims Paying Resources
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
75 767778 7980 818283 848586 8788 899091 9293 949596 979899 0001 02030405*
U.S. Policyholder Surplus: 1975-2005*
Source: A.M. Best, ISO, Insurance Information Institute *As of 6/30/05.
$ B
illi
ons
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
Capacity TODAY is $412.5B, 45% above its 2002 trough and 22% above its mid-1999 peak. Sufficient
capacity exists to pay all Katrina & Rita claims.
PHS backs all lines of insurance in all states. PHS is not fungible and is frequently misunderstood and misused
US Reinsurers: Change in Policyholder Surplus ($ Billions)
$60.9$58.9 $57.9
$46.8$48.8
$73.0
$64.8
$40
$45
$50
$55
$60
$65
$70
$75
1998 1999 2000 2001 2002 2003 2004
$ B
illi
ons
Source: A.M. Best; Insurance Information Institute
Reinsurer PHS fell 20% from 1998-2002. Capacity today similar to 1998. Same story
globally.
UNDERWRITING
Strong Underwriting Results Pre-Katrina Will Help
Industry Weather the Storm
90
100
110
120
70
71
72
73
74
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
P/C Industry Combined Ratio*2001 = 115.7
2002 = 107.2
2003 = 100.1
2004 = 98.3
2005:H1 = 92.7*
Combined Ratios
1970s: 100.3
1980s: 109.2
1990s: 107.8
2000-05E: 103.9
Sources: A.M. Best; ISO, III. *2005 figure is though 6/30/05.
The industry has just experienced its most remarkable recovery in
recent history. Katrina will partially reverse this
($55)
($45)
($35)
($25)
($15)
($5)
$5
$15
$25
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
E
Underwriting Gain (Loss)1975-2005E*
*2005 estimate is based on annualized actual 05H1 net underwriting profit of $13.2 billion.Source: A.M. Best, Insurance Information Institute
$ B
illi
ons
Before Katrina, p/c insurers were on track for only the second underwriting profit in 26 years
112.
5
110.
2
107.
6
103.
9
109.
7
112.
3
111.
1
122.
3
101.
9
102.
3
97
113.
1
103.
9
104.
5
103.
5
104.
9
99.8 10
2.7
104.
5 109.
9
110.
9
105.
3
98.4
94.3
89
110.
1
110.
3
85
90
95
100
105
110
115
120
125
92 93 94 95 96 97 98 99 00 01 02 03 04 05H1
Commercial--Net Basis Personal--Net Basis
Commercial vs. Personal Lines Combined Ratios, 1993-2005:H1*
Source: A.M. Best; Insurance Information Institute *III estimate for first half 2005. Actual 1H05 combined ratio all lines was 92.7.
Personal lines outperforming
commercial. Underwriting is
now more important in long-
tail commercial lines. Katrina impact will be
severe.
HurricaneAndrew
110
.5
10
5.0 11
3.6 11
9.2
10
4.8
10
0.8
10
0.5
114
.3
10
6.5
12
5.8
111
.0
12
4.6
10
5.8
10
8.8 11
5.8
10
6.9
10
8.5
10
6.7
10
6.0
10
1.9
10
5.9
10
8.0
110
.1 115
.8
10
7.4
10
0.1
98
.3
92
.7
16
2.4
12
6.5
90
100
110
120
130
140
150
160
170
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05E*
Reinsurance All Lines Combined Ratio
Combined Ratio: Reinsurance vs. P/C Industry
*RAA figure for 2005:H1
Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
2001’s combined ratio was the worst-ever for reinsurers; 2002 was bad as well.
2003: Big improvement in primary and reinsurer segments
2004/5: CATs hurt reinsurers
HurricaneAndrew
UNDERWRITING AFFECTS FINANCIAL
STRENGTH
Is There Causefor Concern?
U.S. InsuredCatastrophe Losses ($ Billions)
$7.5$2.7$4.7
$22.9
$5.5
$16.9
$8.3$7.4$2.6
$10.1$8.3$4.6
$26.5
$5.9$12.9
$27.5
$44.0
$0
$10
$20
$30
$40
$50
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05**As of 6/30/05 plus $920 in insured for Hurricane Dennis in July and $40 billion for Hurricane Katrina.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.Source: Property Claims Service/ISO; Insurance Information Institute
$ Billions
2005 is the worst year ever for CAT losses, breaking the
record set in 2004
Reason for P/C Insolvencies(218 Insolvencies, 1993-2002)
Unidentified17%
Impaired Affiliate3%
Overstated Assets2%
Change in Business3%
CAT Losses3%
Reinsurer Failure0%
Rapid Growth10%
Discounted Ops8%
Alleged Fraud3%
Deficient Loss Reserves
51%
Source: A.M. Best, Insurance Information Institute
Reserve deficiencies account for
more than half of all p/c insurers
insolvencies
0.4
5
0.4
1
0.4
3
0.4
2 0.6
8
1.2
2
1.7
1
1.1
2
0.4
4
0.5
8 0.8
2
0.9
9
1.0
5
1.7
8
1.1
0.8
3
1.5
6
1.0
8
0.8
0.5
1
0.4
1
0.9
6
1.9
2
1.9
9
3.3
1.7
9
4.93
0
1
2
3
4
5
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
E
Ra
tio
of
Do
wn
gra
des
to
Up
gra
des
Downgrade/Upgrade Ratio*
Sources: Impairment Rate and Rating Transition Study—1977 to 2002, A.M. Best & Co.
*U.S. property/casualty and life/health insurers before 2000; P/C only 2000-2004.
Downgrade to upgrade ratio is falling (primarily because the number of downgrades is falling; only a small increase
in upgrades)
Historical Ratings Distribution,US P/C Insurers, 2000 vs. 2004
A/A-50.2%
D0.2%C++/C+
2.1%
E/F3.5% A++/A+
8.6%
C/C-0.6%
B++/B+25.8%
B/B-9.1%
Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report, November 8, 2004.
A/A-48.4%
D0.2%C++/C+
1.9%
E/F2.3% A++/A+
11.5%
C/C-0.6%
B++/B+28.3%
B/B-6.9%
2000 2004 A++/A+ shrinkage
115.1 115.4
122.8
100.6
141.4
90
100
110
120
130
140
150
160
99 00 01 02 03
US
Re
ins
ure
r C
om
bin
ed
Ra
tio
Reinsurer Combined Ratio
Rating-Large (PHS>$250M)
US Reinsurer Combined Ratio vs. Median Rating, 1999-2003*
*Combined ratio is for all US reinsurers. Rating is for large reinsurers (policyholder surplus exceeding $250 million). The median rating for small reinsurers (PHS<$250M) was A- throughout the 1999-2003 period.
Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report, November 8, 2004.
A+A++A+AA-B++B+B
A A A A
Are ratings related to performance?
P/C Insurers Maintaining Rating of A+ or Better Rating for 50+ Years
P/C Company1. AIU Insurance Co.2. Alfa Mutual Ins. Co.3. Amica Mutual Ins. Co.4. Church Mutual Ins. Co.5. Federal Insurance Co.6. General Reinsurance Corp.
7. Great Northern Ins. Co.8. Lititz Mutual Ins. Co.9. Nationwide Mutual Fire Co.10. Otsego Mutual Fire11. Quincy Mutual Fire Ins. Co.12. State Automobile Mutual Ins. Co.13. State Farm Mutual Auto Ins. Co.14. Vigilant Insurance Co.
Group Affiliation1. American International Group2. Alfa Insurance Group3. Amica Mutual Group4. None5. Chubb Group of Ins Cos.6. Berkshire Hathaway Ins. Group7. Chubb Group of Ins Cos.8. Lititz Mutual Group9. Nationwide Mutual Group10. None11. Quincy Mutual Group12. State Auto Ins. Group13. State Farm Group14. Chubb Group of Ins Cos.
Source: Best’s Review, January 1, 2004.
Cumulative Average Impairment Rates by Best Financial Strength Rating*
0%
10%
20%
30%
40%
50%
60%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15Average Years to Impairment
D
C/C-
C++/C+
B/B-
B++/B+
A/A-
A++/A+
Sources: A.M. Best: Best’s Impairment Rate and Rating Transition Study—1977-2002, March 1, 2004.
Insurers with strong ratings are far less likely to become impaired over
long periods of time. Especially important in long-tailed lines.
*US P/C and L/H companies, 1977-2002
Cumulative Avg. Implied Impairment Ratesby Holding Co. Senior Unsecured Debt
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15Average Years to Impairment
c
b
bb
bbb
a
aa
aaa
Sources: A.M. Best: Best’s Impairment Rate and Rating Transition Study—1977-2002, March 1, 2004.
Insurers with strong credit ratings are far less likely to become impaired
over long periods of time. Especially important in long-tailed lines.
*US P/C and L/H companies, 1977-2002
Rating Agency Actions Following Hurricane Katrina (as of Oct. 6, 2005)*
Companies Under Review w/ Negative Implications
Company A.M. Best Rating1. Allied World A+2. Allmerica Financial P&C Cos . A-3. American Re A4. Balboa Insurance Grp. A5. DaVinci Re A6. Endurance Specialty A7. Florists Mutual Grp. A-8. Glencoe A9. Imagine Insurance Co. Ltd. A-10. IPCRe A+ 11. Louisiana Farm Bureau Mutual A-12. Mississippi Farm Bureau Mutual A+13. Munich Re A+14. Mutual Savings Fire Ins. Co. B-15. Mutual Savings Life Ins. Co. B-16. Odyssey Re A17. PartnerRe Group A+18. PXRE A-19. Renaissance Re A+20. Rosemont Reinsurance Ltd. A-21. Transatlantic Re A+22. XL Capital A+23. XL Life Insurance & Annuity A+24. XL Life Ltd. A+
Companies on Credit Watch with Negative Implications
Company S&P Rating1. Allmerica BBB+2. Allstate Corp. AA3. Aspen Group A4. Oil Casualty Insurance Ltd. A-5. Society of Lloyd’s A6. State Farm AA7. Swiss Re AA8. United Fire Group A
*ACE and Montpelier Re were originally placed on watch/ review but have been removed.Source: Hurricane Katrina: Analysis of the Impact on the Insurance Industry, Tillinghast, October 2005.
Downgrades
Company S&P Rating A.M. Best 1. Alea A- to BBB+ A- to B+
+2. Olympus Re not rated A- to B+3. PXRE A to A- A to A-4. Advent Synd. 780 3pi to 2pi not rated
“…the replenishment of capital alone may not be sufficient to sustain a company’s rating.” A.M. Best press release Sept. 15, 2005
INVESTMENTS
Improvements Still Support Cash Flow
Underwriting
$0
$9
$18
$27
$36
$45
$54
75 76 77 78 79 8081 82 83 84 85 8687 88 89 90 91 92 9394 95 96 97 98 9900 01 02 03 0405*
Net Investment Income$
Bil
lion
s
Growth History
2002: -1.3%
2003: +3.9%
2004: +2.4%
2005:H1: +16.5%**
Source: A.M. Best, ISO, Insurance Information Institute; *Annualized. **2005:H1 over 2004:H1, adjusted for special dividend of $3.1B.
-30%
-20%
-10%
0%
10%
20%
30%
40%
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
Source: Ibbotson Associates, Insurance Information Institute. *Through October 10, 2005.
Total Returns for Large Company Stocks: 1970-2005*
2003/4 were the first consecutive gains since 1999
S&P 500 was up 9% in 2004. Fears of higher interest rates, inflation, the falling dollar, resurgent oil prices are concerns in 2005
2005
Property/Casualty Insurance Industry Investment Gain*
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$52.6$56.9
$51.9
$57.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 02 03 04 05**Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.2005 figure is as of 6/30/05, adjusted for special dividend of $3.1B.Source: Insurance Services Office; Insurance Information Institute.
Investment gains are rising but will still fall short of
their 1998 peak. CAT losses will reduce investable assets.
Proportion of P/C Portfolio Invested in Cash and ST Securities
Source: A.M. Best; Insurance Information Institute
6.41%5.64% 5.26%
5.81%
4.08%
5.30% 5.54%
8.47%9.30%
10.00%
0%
2%
4%
6%
8%
10%
12%
95 96 97 98 99 00 01 02 03 04E
Cash & Short-Term SecuritiesHoldings of cash and short-term securities
has more than doubled since 1999
PRICING TRENDS
Will Katrina & Rita Harden Markets?
-10%
-5%
0%
5%
10%
15%
20%
25%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
Strength of Recent Hard Markets by NWP Growth*
Real NWP Growth During Past 3 Hard Markets
1975-78: 8.6%
1984-87: 11.2%
2001-04: 6.9%
1975-78 1984-87 2001-04
*2005 figure is III forecast based on 05Q1 result.
Premium growth is faltering. Real growth in 2005 will be NEGATIVE
14
%11
% 13
%16
%19
%22
%28
%31
%31
%28
% 30
% 32
% 33
%28
% 29
% 30
% 32
%30
%27
%25
%28
%22
%18
%18
%17
%16
%12
%12
%10
% 12
%11
%9%
7%
7%
5%
4%
4%
2%
2%
2%
1%
0%
-1%
-2%
-2%
-3%
-5%
-6% -5
%
9%
9%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
Ju
l-01
Au
g-0
1S
ep-0
1O
ct-0
1N
ov-0
1D
ec-0
1Ja
n-0
2F
eb-0
2M
ar-
02
Ap
r-02
May
-02
Ju
n-0
2Ju
l-02
Au
g-0
2S
ep-0
2O
ct-0
2N
ov-0
2D
ec-0
2Ja
n-0
3F
eb-0
3M
ar-
03
Ap
r-03
May
-03
Ju
n-0
3Ju
l-03
Au
g-0
3S
ep-0
3O
ct-0
3N
ov-0
3D
ec-0
3Ja
n-0
4F
eb-0
4M
ar-
04
Ap
r-04
May
-04
Ju
n-0
4Ju
l-04
Au
g-0
4S
ep-0
4O
ct-0
4N
ov-0
4D
ec-0
4Ja
n-0
5F
eb-0
5M
ar-
05
Ap
r-05
May
-05
Ju
n-0
5Ju
l-05
Au
g-0
5S
ep-0
5
Source: MarketScout.com
Commercial Premium Rate Changes Are Sharply Lower
The magnitude of rate decreases is leveling off. Will Katrina/Rita reverse the slide
in commercial rates?
Average Rate Change, All Lines,(1Q:2004 – 2Q:2005)
-0.1%
-3.2%
-7.0%
-9.4% -9.7%
-5.9%
-12%
-10%
-8%
-6%
-4%
-2%
0%
1Q04 2Q04 3Q04 4Q04 1Q05 2Q05Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Magnitude of rate decreases accelerated during the first half of 2005, but flattened out in Q2
Rate Changes by Line,2nd Qtr. 2005
-13.3%
-6.8%-7.3%
-9.1%
-6.6%
-3.8%
-0.5%
-3.6%
-8.4%
-6.0%
-3.8%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
Comm Prop BizInterruption
Comm Auto WC GL Umbrella EPL D&O Surety Const. ALL Lines
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Magnitude of rate decreases flattened out during the second quarter of 2005
Average Commercial Rate Change by Account Size
Commercial accounts have trending downward for 4-5
quarters, with large commercial leading the way.
Now starting to flatten.
Cumulative Quarterly Rate Change by Account Size
At which point do the reductions become destructive?
Commercial rates are well off their late 2003 peaks for accounts of
all size and are approximately where they were in mid-2002
-5%
-11%-9% -8%
-4%
2%
16%
21%
11%
-4%-6%
-20%
-10%
0%
10%
20%
30%
40%
94 95 96 97 98 99 '00 '01 '02 '03 '04 05E
0
20
40
60
80
100
120
rate chnages [left] index level [right]
Sources: Swiss Re, Cat Market Research
Reinsurance Prices are Only at 1995 Levels, Despite Increased Risk
US cat reinsurance price index:
1994 = 100
CATASTROPHE LOSS
MANAGEMENT
Focus on Hurricanes Katrina & Rita
Global Number of Catastrophic Events, 1970–2004
0
50
100
150
200
250
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
Natural catastrophes Man-made disasters
Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 1/2005, page 4.
The number of natural and man-made
catastrophes has been increasing on a global
scale for 20 years
Global Insured CAT Losses, 1970–2004(Property and Business Interruption)
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
Natural catastrophesMan-made disasters
Source: Swiss Re, sigma No. 1/2005, page 6
Billion USD, at 2004 prices
There has been a huge increase in the insured
value of global CTA losses in recent years
Insured Property Catastrophe Losses, 1983–2004
0%
2%
4%
6%
8%
10%
12%
84 89 94 99 '04
US
worldwide
USaverage
Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting
Cat Losses as a % of Non-Life Net Premiums
Earned
2005 Has Been a Busy, Destructive, Deadly & Expensive Hurricane Season
Source: WeatherUnderground.com, October 12, 2005.
Number of Major (Category 3, 4, 5) Hurricanes Striking the US by Decade
4
5
65
4
6
88
5
8
6
9
1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*Figure for 2000s is extrapolated based on data for 2000-2005 (5 major storms: Charley, Ivan, Jeanne (2004) & Katrina, Rita (2005).Source: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm.
9
1930s – mid-1960s:
Period of Intense Tropical Cyclone Activity
Mid-1990s – 2030s?
New Period of Intense Tropical Cyclone Activity
Tropical cyclone activity in the mid-1990s entered the active phase of a normal cycle that
could last into the 2030s
Hurricane Katrina Insured Loss Estimates Still Vary Widely
$14 - $22B
$17 - $25B
$40 - $55B
$40 - $60B
$0 $10 $20 $30 $40 $50 $60
Eqecat
AIR
Tillinghast
RMS
(Billions of $, As of October 10, 2005)
*Rising material costs, e.g., plywood rose 38% and framing lumber by 14% through Sept. 16, 2005.Sources: RMS, AIR, Eqecat, Tillinghast; Compiled by the Insurance Information Institute.
RMS estimate predicts $15-$25B in privately insured flood
losses, mostly commercial (modeled after the event)
Typically unmodeled losses: Demand surge*, LAE, debris removal, tree damage, mold, spoilage, power outage, off-
premises power loss, flood, fraud, civil authority, assessments,
pollution, litigation
Hurricane Katrina Insured Loss Estimates Still Vary Widely
$14 - $22B
$17 - $25B
$34.4B
$40 - $55B
$40-$60B
$0 $10 $20 $30 $40 $50 $60
Eqecat
AIR
ISO/PCS
Tillinghast
RMS
(Billions of $, As of October 10, 2005)
*Rising material costs, e.g., plywood rose 38% and framing lumber by 14% through Sept. 16, 2005.Sources: RMS, AIR, Eqecat, ISO/PCS, Tillinghast; Compiled by the Insurance Information Institute.
RMS estimate predicts $15-$25B in privately insured flood losses, mostly commercial
(modeled after event)
Typically unmodeled losses: Demand surge*, LAE, debris removal, tree
damage, mold, spoilage, power outage, off-premises power loss,
flood, fraud, civil authority, assessments, pollution, litigation
ISO/PCS estimates is $34.4B and 1.6 million claims
Hurricane Rita Losses:Much Smaller & Less Variable
$3.0 - $6.0B
$2.5 - $5.0B
$5.0 - $7.0B
$0 $2 $4 $6 $8
Eqecat
AIR
RMS
(Billions of $, As of September 26, 2005)
Sources: RMS, AIR, Eqecat; Compiled by the Insurance Information Institute.
RMS includes $1-$2B in offshore energy
losses. AIR, Eqecat do not model offshore
energy losses.
Breakdown of RMS $40-$60 Billion Katrina Loss Estimate
Type of Loss Low High
Windstorm & Surge $20 $25
Flood, private (not incl. NFIP)* $15 $25
Off Shore Energy, Marine $2 $5
Misc., Possible Pollution $2 $3
1st Landfall (FL) $1 $2
TOTAL $40 $60*Primarily commercial flood and associated business interruption losses.Sources: RMS; Adapted from Responding to Katrina, Lane Financial LLC, Sept. 16, 2005.
Breakdown of Tillinghast $40-$55 Billion Katrina Loss Estimate
Type of Loss Low High
Personal Property LinesResidential Property $14.0 $17.0
Personal Auto $1.0 $2.0
Personal Watercraft $0.2 $0.3
Total $15.2 $19.3
Commercial Property LinesCommercial Property (excl. Off-Shore) $13.5 $16.0
Business Interruption (excl. marine & energy) $6.0 $9.0
Commercial Auto $0.2 $0.3
Sub-Total Personal & Commercial $19.7 $25.3
Marine & Energy $4.0 $6.0
Liability $1.0 $3.0
Other $0.0 $1.0
Total All Lines $39.9 $54.6
Comparison of HurricanesAndrew & Katrina
Statistic Andrew KatrinaDuration as TS/Hurricane Aug. 17-28, 1992 Aug. 24-31, 2005
Area Affected South FL, LA South FL, LA, MS, AL, TN, FL Panhandle
Saffir-Simpson Category at Major Landfall 5 4
Windspeed at Major Landfall 165mph sustained 145mph sustained
Width of Hurricane-Force Winds at Major Landfall
Approx. 120 miles Approx. 250 miles
Central Pressure at Landfall 922 mbar (hPa) 918 mbar (hPa)
Storm Surge at Major Landfall 17 feet 15-29 feet
Fatalities 65 (26 direct, 39 indirect)
1,193 (as of Oct. 4)
(972 in LA, 221 in MS)
Sources: Hurricane Katrina: Analysis of the Impact on the Insurance Industry, Tillinghast, October 2005; Insurance Information Institute.
Summary of Facts About Insured Losses Regarding Katrina
• As of October 12, 2005: 57 companies had announced pre-tax loss estimatesAnnounced loss total: $22.0B to $24.4BThis works out to 55% - 61%% of a mid-range insured
loss estimate of $40 billion$40B loss is 9.7% of US PHS of $412.5B as of 6/30/05
• Announced Company Loss Estimates:High: $2.55 billion; Low: $1.2 millionUpper loss est. % of 2Q:05 Equity: 0.2% to 46.1%
• At least 20 companies put on watch for possible downgrades by various ratings agencies
• Many Lines Affected: Extreme eventsloss correlations increase
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Reinsurance ($ Millions)*
*Figures are pre-tax, gross of reinsurance, unless indicated otherwise.
**After-tax figure.
Note: If company gave range of estimates, upper end is used.
Sources: Morgan Stanley, Merrill Lynch, Lehman Brothers, Insurance Information Institute, Company Reports.
As of October 12, 57 companies had announced pre-tax losses totaling between $22.0 and $24.4 billion, about 55-61% of a
mid-range industry loss estimate of $40 billion
(As of October 11, 2005)
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Announced Pre-Tax Hurricane Katrina Losses Before Reinsurance
as % 2Q:05 Equity *
Reported losses as a share of US P/C insurance
industry surplus ranged from 0.2% to 46.1%.
Median = 4.8%
*Source loss figures are pre-tax, gross of reinsurance, unless indicated otherwise.
**After-tax loss figure used in calculation.
Note: If company gave range of estimates, upper end is used.
Sources: Morgan Stanley, Merrill Lynch, Insurance Information Institute, Company Reports.
Insured Loss Estimates as a % US Policyholder Surplus*
7.5%8.7%
10.0%11.2%
12.4%13.7%
14.9%
$10
$20
$30
$40
$50
$60
$70
$30 $35 $40 $45 $50 $55 $60
Size of Industry Loss ($ Billions)
Siz
e o
f In
du
str
y L
os
s
0%
2%
4%
6%
8%
10%
12%
14%
16%
% o
f U
S P
/C P
HS
Industry Loss % of PHS*
*Policyholder surplus as of 3/31/05 of $401.8 billion (ISO).
Source: Insurance Information Institute.
Announced Insurer Capital Raising*($ Millions, as of October 11, 2005)
$1,438
$37
$404
$250
$600$475
$300 $305
$620
$143 $102$164
$476
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$ M
illi
ons
*Announced amounts may differ from sums actually raised.Sources: MerrilI Lynch, Company Reports; Insurance Information Institute.
As of Oct. 11, insurers had announced plans to raise $5.313 Billion in new capital, 81% of
it as common stock
Type of Capital Raised
Common Stock,
$4,302 , 81.0%
Debt, $200 , 3.8%
Preferred Stock, $811 , 15.3%
Hurricanes Katrina & Rita:
Their Place in History
Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2004)
$2.6 $3.4 $3.7 $4.1 $4.6$6.4 $7.1 $7.5
$20.9
$35.0
$0
$5
$10
$15
$20
$25
$30
$35
$40
Opal(1995)
Georges(1998)
Jeanne(2004)
Rita(2005)*
Frances(2004)
Hugo(1989)
Ivan (2004)
Charley(2004)
Andrew(1992)
Katrina(2005)*
$ B
illi
ons
*Estimates as of September 26, 2005 in 2005 dollars.Sources: ISO/PCS; Insurance Information Institute.
Six of the 10 most expensive hurricanes in US history
occurred in the past 13 months: Katrina, Rita, Charley, Ivan,
Frances & Jeanne
Insured Losses from Top 10 Hurricanes Since 1990 & Katrina Adjusted for Inflation, Growth in Coastal
Properties, Real Growth in Property Values & Increased Property Insurance Coverage
$10.1 $11.0 $12.4 $12.6 $13.1 $14.5
$20.8 $21.1
$31.3
$40.0
$65.3
$0
$10
$20
$30
$40
$50
$60
$70
Number 9(1909,
FL)
Hazel(1954,NC)
Number 4(1938,NY)
Number 2(1919,
FL)
Number 4(1928,
FL)
Bestsy(1965,LA)
Number 2(1915,TX)
Number 1(1900,TX)
Andrew(1992,
FL)
Katrina(2005,LA)*
Number 6(1926, FL)
$ B
illi
ons
The p/c insurance industry will likely experience a $20B+ event approximately every 15
years, on average—mostly associated with hurricanes
*ISO/PCS estimate as of October 10, 2005.Source: Hurricane Katrina: Analysis of the Impact on the Insurance Industry, Tillinghast, October 2005; Insurance Info. Institute.
(Billions of 2005 Dollars)
Top 10 Insured PropertyLosses in US ($2004)
$3.7 $4.1 $4.6$6.4 $7.1 $7.5
$15.9$20.1 $20.8
$35.0
$0
$5
$10
$15
$20
$25
$30
$35
$40
$ B
illi
ons
*Estimate, stated in 2005 dollars, as of 9/26/05.Note: 9/11 loss figure is for property claims only. Total insured losses ($2004) are approximately $34B.Sources: ISO/PCS; Insurance Information Institute.
Seven of the 10 most expensive disasters is US history occurred within
the past 4 years
Top 11 Insured Property Losses Worldwide, 1970-2005 ($2004)*
$5.0 $6.4 $6.6 $6.6 $7.8 $8.0$11.0
$15.9$20.0 $21.5
$35.0
$0
$5
$10
$15
$20
$25
$30
$35
$40
$ B
illi
ons
*All figures are for total losses across all locations, not just US. Katrina loss est. is preliminary and stated in 2005 dollars.Sources: ISO/PCS; Swiss Re, “Natural Catastrophes and Man-Made Disasters in 2003,” Sigma, no.1, 2004
Five of the 11 most expensive disasters is world history affected the US within the
past 4 years.
Government Aid After Major Disasters (Billions)*
$75.4
$43.9
$17.7 $15.5 $15.0
$0
$10
$20
$30
$40
$50
$60
$70
$80
Hurricane Katrina(2005)*
Sept. 11 TerroristAttack (2001)
Hurricane Andrew(1992)
Northridge Earthquake(1994)
Hurricanes Charley,Frances, Ivan &Jeanne (2004)
$ B
illi
ons
*In 2005 dollars.Source: United States Senate Budget Committee as of 9/19/05; Insurance Information Institute.
Hurricane Katrina aid will dwarf aid following all
other disasters. Congress may authorize $150-$200 billion ultimately (about $400,000 for each of the
500,000 displaced families). Is the incentive to buy
insurance and insure to value diminished?
Within 3 weeks of Katrina’s LA landfall, the federal government had
authorized as much aid as it did for the 9/11 terrorist
attacks, 2004’s 4 hurricanes and Hurricane
Andrew combined!
Itemization of Federal Government Spending on Hurricane Relief
Legislation 5-Yr. Cost Status
Emergency Spending Supplement #1, HR 3645 $10.500 Public Law 109-61
Emergency Spending Supplement #2, HR 3673 $51.8 Public Law 109-62
Flood Insurance Borrowing Authority $2.000 Passed House & Senate
Pell Grant Relief, H.R. 3169 $0.002 Passed House & Senate
TANF Disaster Relief, H.R. 3672 $0.294 Passed House & Senate
Katrina Short-Term Tax Relief Bill, H.R. 3768 $6.500 Passed Senate
Sarbanes Housing Amend. To H.R. 2862 $3.500 Passed Senate
Harkin Legal Services Amend. To H.R. 2862 $0.008 Passed Senate
Snowe Small Business Amen. To H.R. 2862 $0.595 Passed Senate
Baucus Economic Develop. Amend to H.R. 2862 $0.210 Passed Senate
TOTAL $75.409
Emergency Health Care Relief Act, S. 1716 $5.0-$7.0B Introduced in Senate
Additional Flood Insurance Borrowing Authority $10.0-$30.0B N/A
Hurricane Katrina:
Loss Distributions
Property Damage from Hurricane Katrina Flood & Storm Surge ($ Millions)*
LA Storm Surge Loss, $16,200 , 36.8%
New Orleans Flood Loss, $22,600 , 51.3%
FL Storm Surge Loss, $32 , 0.1%
AL Storm Surge Loss, $793 , 1.8%
MS Storm Surge Loss, $4,400 , 10.0%
*Value of property damage by flood and storm surge whether or not insured.Source: AIR Worldwide, September 29, 2005.
Hurricane Katrina caused $44 billion in flood and storm
surge damage, most of it uninsured, 88.1% of it in
Louisiana
Hurricane Katrina Insured Loss Distribution by State ($ Billions)*
Mississippi, $9,800 , 28.6%
Louisiana, $22,600 , 66.0%
Tennessee, $46.1 , 0.1%Florida, $468.0 , 1.4%
Georgia, $22.2 , 0.1%Alabama, $1,300 ,
3.8%
*As of October 4, 2005Source: PCS division of ISO.
Louisiana accounted for
2/3 of the insured losses
paid and 55% of the claims filed
Hurricane Katrina Claim Count Distribution by State ($ Billions)*
Mississippi, 490,000 , 30.0%
Tennessee, 8,400 , 0.5%
Louisiana, 900,000 , 55.1%
Florida, 110,000 , 6.7% Georgia, 3,300 , 0.2%
Alabama, 123,000 , 7.5%
*As of October 4, 2005Source: PCS division of ISO.
Louisiana accounted for 2/3 of insured losses paid and 55% of
claims filed
Hurricane Katrina Insured Loss and Claim Distribution by State*
State Losses ($Mill) # Claims % Losses % Claims
LA $ 22,600.0 900,000 66.0% 55.1%
MS $ 9,800.0 490,000 28.6% 30.0%
AL $ 1,300.0 123,000 3.8% 7.5%
FL $ 468.0 110,000 1.4% 6.7%
TN $ 46.1 8,400 0.1% 0.5%
GA $ 22.2 3,300 0.1% 0.2%
Totals $ 34,236.3 1,634,700 100.0% 100.0%
*As of October 4, 2005Source: PCS division of ISO.
Distribution of Katrina Losses by Market ($Billions)
Market Percentage Amount
Insurers 47% - 53% $18.8 - $28.9
Reinsurers 52% - 44% $20.7 - $24.0
Capital Markets 1% - 3% $0.4 - $1.6
TOTAL 100% $39.9 - $54.6
Source: Hurricane Katrina: Analysis of the Impact on the Insurance Industry, Tillinghast, October 2005.
Hurricane Rita Loss Distribution by Line ($ Billions)*
Homeowners, $2.56 , 62%
Commercial Property & BI,
$1.44 , 35%
Personal Auto, $0.12 , 3%
*As of September 26, 2005Source: Insurance Information Institute
Total insured losses are
estimated at $4.1 billion (excl.
offshore energy)
Number of Homes Destroyedby Major Hurricanes*
28,000 27,500
275,000
0
50,000
100,000
150,000
200,000
250,000
300,000
Andrew (1992) Charley, Frances, Ivan,Jeanne (2004)
Katrina (2005)
Katrina appears to have destroyed 10 times as many homes as Andrew in 1992 or the 4 storms to hit Florida and the Southeast in 2004
*Destruction is defined as a structure made uninhabitable or damaged beyond economic repair. Source: National Association of Home Builders, National Red Cross (as of 9/15/05).
Personal Property Losses Accounted for Largest Share Damage from
2004 Hurricanes*
56%
4%
40%
Source: ISO/PCS; Insurance Information Institute.
Charley
63%
4%
33%
Ivan
66%
4%
30%
Frances
73%
4%
23%
Jeanne
Personal Property
63%
Vehicle
4%
Comm. Property
33%
TOTAL
*Breakdowns based on FL losses, which accounted for 85% of losses for all affected states.
Average Annual Tropical Cyclone Insured Losses*
(Top 10 States, $ Millions)
$1,423.0
$615.0
$196.0$109.0 $77.0 $64.0 $62.0 $61.0 $61.0 $51.0
$154.0
$0
$250
$500
$750
$1,000
$1,250
$1,500
FL TX LA NC MS MA SC AL NY CT AllOther
*Normalized losses adjusted for inflation, housing density, wealth and wind insurance coverage, based on historical data for 100-year period 1900-1999.Source: Tillinghast-Towers Perrin
Florida49.5%
Texas 21.4%
All Other15.7%
Mississippi2.7%
N. Carolina
3.8%
Louisiana6.8%
Distribution of Annual Losses
Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,
1985-2004¹
Utility Disruption0.1%
Terrorism9.7% All Tropical
Cyclones3
34.6%
Tornadoes2
30.4%
Water Damage0.2%
Civil Disorders0.5%
Fire6
2.9%
Wind/Hail/Flood5
3.4%
Earthquakes4
8.4%
Winter Storms9.7%
Source: Insurance Information Institute estimates based on ISO data.
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2004 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.
Insured disaster losses totaled $221.3 billion from
1984-2004 (in 2004 dollars). After 2005 season, tropical
cyclones will account for 50%+ of the total.
Total Value of Insured Coastal Exposure (2004, $ Billions)
$1,901.6$740.0
$662.4$505.8
$404.9$209.3
$148.8$129.7$117.2$105.3
$75.9$73.0
$46.4$45.6$44.7$43.8
$12.1
$1,937.3
$0 $500 $1,000 $1,500 $2,000 $2,500
FloridaNew York
TexasMassachusetts
New JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaAlabamaGeorgia
DelawareNew Hampshire
MississippiRhode Island
Maryland
Source: AIR Worldwide
Insured Coastal Exposure as a % of Statewide Insured Exposure (2004, $ Billions)
63.1%60.9%
57.9%54.2%
37.9%33.6%33.2%
28.0%25.6%25.6%
23.3%13.5%
12.0%11.4%
8.9%5.9%
1.4%
79.3%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
FloridaConnecticut
New YorkMaine
MassachusettsLouisiana
New JerseyDelaware
Rhode IslandS. Carolina
TexasNH
MississippiAlabamaVirginia
NCGeorgia
Maryland
Source: AIR Worldwide
Hurricane Katrina:
Exacting a Toll on Underwriting
Performance & Profits
U.S. InsuredCatastrophe Losses ($ Billions)
$7.5$2.7$4.7
$22.9
$5.5
$16.9
$8.3$7.4$2.6
$10.1$8.3$4.6
$26.5
$5.9$12.9
$27.5
$44.0
$0
$10
$20
$30
$40
$50
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05**As of 6/30/05 plus $920 in insured for Hurricane Dennis in July, $35 billion (est.) for Hurricane Katrina in August, $800 million (AIR est.) for Hurricane Ophelia in September and $4.1B for Hurr. 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.Source: Property Claims Service/ISO; Insurance Information Institute
$ Billions2005 will be by far the worst year ever for insured catastrophe losses in
the US. 2004 is the second worse.
-5%
0%
5%
10%
15%
20%
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 P/C excl. Hurricanes
ROE: P/C vs. All Industries 1987–2005E
Source: Insurance Information Institute; Fortune
Andrew Northridge
Hugo Lowest CAT losses in 15 years
Sept. 11
2004/5 ROEs excl. hurricanes
4 Hurricanes
Katrina/ Rita
Legal Environment Will Affect
Katrina’s Outcome
Business Leaders Ranking of Liability Systems for 2005
Best States1. Delaware2. Nebraska3. North Dakota4. Virginia5. Iowa6. Indiana7. Minnesota8. South Dakota9. Wyoming10. Idaho
Worst States41. Hawaii42. Florida43. Arkansas44. Texas45. California46. Illinois
47.Louisiana48.Alabama49. West Virginia
50.Mississippi
Source: US Chamber of Commerce 2005 State Liability Systems Ranking Study; Insurance Info. Institute.
New in 2005
ND, IN, SD, WY
Drop-Offs
ID, UT, NH, KS
Newly Notorious
HI, FL
Rising Above
MO, MT
LA, AL and MS’s liability systems are
ranked among the worst in the country by the US Chamber of Commerce
The Nation’s Judicial Hellholes
Source: American Tort Reform Association; Insurance Information Institute
CALIFORNIA
Los Angeles County
Orleans Parish, LA
Jefferson County, TX
South Florida
Philadelphia, PA
Hampton County, SC
ILLINOIS
Madison County
St. Clair County
West Virginia
It’s bad news for insurers that Orleans Parish, Louisiana, is one
of the nation’s “judicial hellholes”
Types of Lawsuits Being Filed in the Wake of Hurricane Katrina
• Homeowners Insurance Lawyers (e.g., Dicky Scruggs) and Mississippi Attorney General Jim Hood are
suing insurers over whether homeowners policies should cover flood. TX judge ordered one company to stop denying claims to people claim for
additional living expense who could not provide immediate documentation of damage. Hearing scheduled for Oct. 20.
• Oil Spills Lawyers have sued the energy industry over ruptured oil tanks and pipelines that
have fouled Louisiana neighborhoods.
• Fishing Grounds At least 2 cases filed on behalf of LA’s fishermen over damage to estuaries, bays
and oyster beds caused by the oil spills.
• Wetlands One suit filed against the oil & gas industry for its alleged role in the disappearance
of wetlands that protected Louisiana from storm surges.
Source: Wall Street Journal, 9/26/05, p. B1; Houston Chronicle, Oct. 12, 2005; Insurance Information Institute
Legal Theories Being Floating by Trial Bar to Get Insurers to Pay Excluded Flood Losses
• Valued Policy Law Idea is that if property is a total loss the insurer cannot dispute the value of the
property and must pay limits. Insurers will argue that flood is an excluded peril and VPL doesn’t apply. Insurers lost Mierzwa case in FL, but FL provided a legislative “fix” for that wayward court decision. Could result in policyholders with flood coverage receiving 200% of limits. Applies only to insureds with flood cover. VPL for fire only in MS, none in AL.
• Wind Efficient Proximate Cause of Surge Says that because surge was driven by wind and because wind is a covered cause
of loss, it is the efficient proximate cause of the flood and should therefore should be triggered.
Also alleges storm surge is not specifically excluded by name
• Barge Breach Levee A barge crashed into one levee, causing it to rupture. Theory is that this is a
covered cause of loss because it’s not excluded (even though damage produced a flood).
Relevant Homeowners Insurance Policy Language Governing Water Damage
• Wind and Hail Coverage (a named peril)
• Flood Exclusion
• FEMA/NFIP Flood Definition
• Fungus & Mold Exclusion
• Earth Movement Exclusion
Source: Insurance Information Institute
Wind Coverage in HO Policy:Limits and Boundaries of Coverage
• Wind and Hail Coverage ( Named Peril) Windstorm or Hail “We do not pay for loss to the interior of a
building or to personal property inside, caused by rain, snow, sleet, sand or dust unless the wind or hail first damages the roof or walls and the wind forces rain, snow, sleet, sand or dust through the opening.”
Source: Insurance Information Institute
Typical Flood Exclusion in Homeowners Insurance Policy
• Flood Exclusion Water Damage, meaning any loss caused by, resulting from,
contributed to or aggravated by:1. flood, surface water, waves, tidal water or overflow of any body of water,
or spray from any of these, whether or not driven by wind.2. Water or water-borne material which backs up through sewers or drains, or
which overflows or is discharged from a sump pump, sump pump well or other system that is designed to remove subsurface water which is drained from the foundation area; or
3. Water or water-borne material below the surface of the ground, including water which exerts pressure on, or flows, seeps or leaks through any part of a building, sidewalk, foundation, driveway, swimming pool or other structure or water that causes earth movement.This exclusion applies whether or not the water damage is caused by or results from human or animal forces or any act of nature.
Facts About the Flood Exclusion
• Has existed in policies for decades
• Flood Exclusion is effectively absolute—excluding water under all circumstances
• It is the reason for the existence of FEMA’s NFIP program since it was established in 1968
• Approved by regulators in all 50 statesSource: Insurance Information Institute
NFIP Flood Definition: Covers Exactly What HO Policies Don’t
• "A general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or of two or more properties (at least one of which is the policyholder's property) from:
Overflow of inland or tidal waters; or Unusual and rapid accumulation or runoff of surface waters
from any source; or Mudflow; or Collapse or subsidence of land along the shore of a lake or
similar body of water as a result of erosion or undermining caused by waves or currents of water exceeding anticipated cyclical levels that result in a flood as defined above."
Source: FEMA/National Flood Insurance Program: http://www.floodsmart.gov/floodsmart/pages/whatflood.jsp.
Typical Fungus & Mold Exclusion in Homeowners Insurance Policy
• Fungus and Mold Exclusion
“We do not cover loss or damage, no matter how caused, to the property which results directly or indirectly from fungus and mold. There is no coverage for loss which, in whole or in part, arises out of, is aggravated by, contributed to by acts or omissions of persons, or results from fungus and mold. This exclusion applies regardless of whether fungus and mold arises from any other cause of loss, including but not limited to a loss involving water, water damage or discharge, which may be otherwise covered by this policy, except as granted [by exception].”
Source: Insurance Information Institute
Relevant Homeowners Insurance Policy Language Governing Water Damage
• Earth Movement Exclusion Applies to any loss caused by, resulting from, contributed to or
aggravated by events that include, but are not limited to:1. Earthquake and earthquake aftershocks;2. Volcanic eruption and volcanic effusion;3. Sinkhole;4. Subsidence;5. Mudslide including landslide, mudflow, debris flow, avalanche or
sediment;6. Erosion or excavation collapse;7. The sinking, rising, shifting, expanding, bulging, cracking, settling or
contracting of the earth, soil or land; and8. Volcanic explosion and lava flow except [by exception]
This exclusion applies whether or not the earth movement is combined with water or caused by or results from human or animal forces or any act of nature.
Consequences of Mississippi AG’s Actions
• Sept. 15 suit by MS AG Hood constitutes and attempt to retroactively rewrite all HO insurance contracts in MS. “Contract certainty” extinguished.
• Suit amounts to little more than an attempt to expropriate shareholder assets (and the equity of mostly non-MS policyholders of mutual insurers)
• The risk is fundamentally political, cannot be modeled or priced
• Insurers will necessarily be motivated to protect shareholder equity (and claims paying resources generally). Reinsurers will exert pressure too.
• Also continues dangerous trend of AG assertion of authority over state insurance regulators
Source: Insurance Information Institute
Consequences if Coverage Rulings Went Against Insurers
• Creates dangerous precedent of contract abrogation• Effectively renders flood exclusion null and void & usurps
authority of state insurance regulator• Creates enormous financial liability for explicitly excluded
peril for which no premium was collected• HO insurance rates countrywide become instantaneously
inadequate Would provoke largest homeowners insurance rate in history on a national
basis
• Insurers would likely pull back from many markets because of lack of contract certainty
• Renders NFIP program useless• Unfair to NFIP policyholders and other insureds
Source: Insurance Information Institute
MS AG and Scruggs Suits Not Supported by Governor, Regulator
• Recent Quotes: “It’s crucial that people who enter contracts keep their contracts. And that’s what an
insurance policy is, a contract….For those people [who didn’t buy flood coverage] we are working very hard that if they don’t have insurance or don’t have coverage, that we can up with a way to help them financially.”
Mississippi Governor Haley Barbour, WSJ, 9/19/05, p.C9.
“The insurance industry can take care of so many, the flood insurance program can take care of so many…but there are still others out there that do not fit under either of these.”
Mississippi Insurance Commissioner George Dale, WSJ, 9/19/05, p.C9.
For the government to make payments to people who didn’t buy flood insurance “undermines the purpose of an insurance scheme…If the government becomes the insurer of last resort, even when people don’t get insurance, then people won’t buy any insurance.”
White House Budget Director Joshua Bolten as quoted in the WSJ, 9/26/05, p.A2.
Status of Litigation Against Insurers on Flood vs. Wind Issue
• MS Atty. General Hood: Called actions of insurers “unconscionable.” Filed an unsuccessful order for
immediate injunctive relief against 5 insurers seeking to stop them from drawing wind/water distinction. Suit was remanded to a federal court because it makes reference to NFIP. Will likely die there soon.
• Scruggs Case: Stated that will he bring suits against insurers in MS week of 9/19/05. Because of recent tort reform changes in MS, Scruggs can’t bring a class action,
has to try cases individually. Says he will take “drastically” reduced contingency fee Failure of AG suit should kill Scruggs’ case. FYI: Scruggs’ Pascagoula home was heavily damaged. He had flood coverage.
• Louisiana Suit Suit is like MS. LA Supreme Court looking at it as contract law case Likely to be resolved soon in insurers favor
FEMA’s National Flood Insurance
Program
Percentage of Homes With Flood Insurance Policies: Coastal Counties
Affected by Katrina
57.4%
52.5%
45.6%
43.2%
40.0%
30.8%
23.5%
23.4%
11.7%
10.4%
7.3%
7.0%
3.9%
57.7%
0% 10% 20% 30% 40% 50% 60% 70%
St. Bernard (LA)
Jefferson (LA)
St. Charles (LA)
Plaquemines (LA)
St. Tammany (LA)
Orleans (LA)
St. John the Baptist (LA)
Baldwin (AL)
Hancock (MS)
Harrison (MS)
Jackson (MS)
Tangipahoa (LA)
St. James (LA)
Mobile (AL)
Source: Census Bureau, FEMA, New York Times.
Proportion of homes with federal flood coverage was
miserably low in most coastal counties affected
by Katrina
NFIP: Policies in Force and Total Coverage (Exposure)
2.5 2.62.8
3.0
3.53.7
4.1 4.2 4.3 4.4 4.5 4.64.5 4.7$764.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
91 92 93 94 95 96 97 98 99 00 01 02 03 04
Pol
icie
s in
For
ce (
Mill
ions
)
$200
$300
$400
$500
$600
$700
$800
Total C
overage ($ Billions)
Policies in Force Total Coverage (Exposure)
Sources: FEMA, National Flood Insurance Program (NFIP)
Nearly 5 million property owners per year buy
NFIP policies
The NFIP insured property with a total value of $764.5 billion in
2004
NFIP: Total Policies in Force by Calendar Year 1978-2004
1.4 1.
8 2.1
1.9
1.9 2.0
1.9 2.0 2.1
2.1
2.1 2.3 2.
5 2.5 2.6 2.
8
3.5 3.
7 4.1 4.2 4.3 4.4 4.5 4.5 4.6 4.7
3.0
0
1
2
3
4
5
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
Source: FEMA, National Flood Insurance Program (NFIP)
Millions
No.
of
Pol
icie
s
Nearly 5 million property owners per year by NFIP policies
NFIP: Total Premium by Calendar Year 1978-2004
$0.1
$0.1
$0.2 $0
.3$0
.4$0
.4$0
.4$0
.5$0
.5$0
.6$0
.6$0
.6$0
.7$0
.7$0
.8 $0.9 $1
.1 $1.3 $1
.5 $1.7
$1.7
$1.7
$1.7
$1.8 $1
.9 $2.1
$1.0
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
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
Source: FEMA, National Flood Insurance Program (NFIP)
$ Billions
The NFIP now collects more than $2 billion
annually in premiums
NFIP: Total Coverage by Calendar Year 1978-2004
$50.
5$7
4.4
$99.
3$1
02.1
$107
.3$1
17.8
$124
.4$1
39.9
$155
.7$1
65.1
$175
.8$2
65.2
$213
.6$2
23.1
$236
.8$2
67.9
$349
.1$4
00.7
$462
.6$4
97.6
$534
.1$5
67.6
$611
.9$6
53.8
$691
.8$7
64.5
$295
.9$0
$200
$400
$600
$800
$1,000
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
Source: FEMA, National Flood Insurance Program (NFIP)
$ Billions
The NFIP insured property with a total value of $764.5
billion in 2004
NFIP: Policies in Force By Coverage Type (As of July 31, 2005)
Building Coverage Only,
39.7%
Contents Coverage Only,
1.5%
Both Bldg. & Cont. Cvg,
58.7%
Source: FEMA, National Flood Insurance Program (NFIP)
Coverage Type Policies in Force
Building Coverage Only 1,845,481
Contents Coverage Only 72,008
Both Bldg & Cont Cvg 2,729,267
All Policies 4,646,756
NFIP: Policies in Force By Occupancy Type (As of July 31, 2005)
2 to 4 Family Unit3.4%
Other Residential
3.0%
Non-Residential
4.6%
Single Family Home68.5%
Condos 20.5%
Source: FEMA, National Flood Insurance Program (NFIP)
Occupancy Type Policies in Force
Single Family Home 3,184,010
2 to 4 Family Unit 158,124
Condominiums 951,240
Other Residential 138,583
Non-Residential 214,799
Unknown Occupancy --
All Policies 4,646,756
NFIP: No. of Losses Paid by Calendar Year 1978-2004
37,6
5936
,271
25,2
2043
,503
16,3
4747
,22057
,338
30,3
3352
,67862
,440
36,0
4444,6
5128
,554
14,7
6636
,247
7,75
813
,399
13,7
8938
,675
27,6
8851
,584
32,8
3123
,261
41,9
1870
,613
29,1
22
21,5
83
01000020000300004000050000600007000080000
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
Source: FEMA, National Flood Insurance Program (NFIP)
No. of Losses
NFIP: Loss Dollars Paid by Calendar Year 1978-2004
$147
.7$4
83.3
$230
.4$1
27.1
$198
.3 $439
.5$2
54.6
$368
.2$1
26.4
$105
.4$5
1.0
$661
.7$1
67.9 $3
53.7
$710
.2$6
59.1
$1,2
95.5
$828
.0$5
19.5
$886
.0$7
54.8
$251
.5$1
,276
.4$4
32.5
$759
.8$1
,207
.2
$411
.1$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
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
Source: FEMA, National Flood Insurance Program (NFIP)
$ MillionsThe NFIP will pay an estimated $10 billion in
flood claims in 2005, indicating a need for a
taxpayer-financed bailout of at least $7.5 billion
NFIP: Average Cost of Claim By Calendar Year 1978-2004
Source: FEMA, National Flood Insurance Program (NFIP)
Average Cost of Claim
$5,0
72$6
,844
$5,4
96$5
,464
$6,0
40 $8,5
20$9
,195
$9,5
20$9
,167
$7,8
66$6
,574
$18,
255
$11,
371
$12,
387
$15,
906
$18,
286
$19,
047
$20,
748
$15,
718
$17,
127
$15,
103
$15,
985
$15,
385
$29,
341
$17,
149
$20,
948
$32,
056
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
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
The average cost of a flood claim in 2004 was $32,056. The
average premium was $438.
NFIP: Insurance In Force By Month (As of July 31, 2005)
$784.7$773.4
$768.5$756.7
$756.7$751.4
$745.8$740.5$731.7
$722.7$711.2
$792.3
$660
$680
$700
$720
$740
$760
$780
$800
Aug-04
Sep-04
Oct-04
Nov-04
Dec-04
Jan-05
Feb-05
Mar-05
Apr-05
May-05
Jun-05
Jul-05
Source: FEMA, National Flood Insurance Program (NFIP)
$ Billions
Average Premium Preferred Risk Policy* For Buildings with Basement Under NFIP
$136$162
$204$231
$262$278
$293$330
$351
$0
$50
$100
$150
$200
$250
$300
$350
$400
$20,000 $30,000 $50,000 $75,000 $100,000 $125,000 $150,000 $200,000 $250,000
Building deductible: $500. Contents deductible: $500. Deductibles applied separately.
*Under the NFIP a low-cost Preferred Risk Policy is available to homeowners located in low- to moderate-risk areas.Sources: FEMA, National Flood Insurance Program (NFIP)
Average Premium
Average Premium Preferred Risk Policy* For Buildings without Basement
Under NFIP
$111$137
$179$206
$232$248
$263$295
$316
$0
$50
$100
$150
$200
$250
$300
$350
$20,000 $30,000 $50,000 $75,000 $100,000 $125,000 $150,000 $200,000 $250,000
Building deductible: $500. Contents deductible: $500. Deductibles applied separately.
*Under the NFIP a low-cost Preferred Risk Policy is available to homeowners located in low- to moderate-risk areas.Sources: FEMA, National Flood Insurance Program (NFIP)
Average Premium
Policy Retention Rates, As OfJuly 31, 2005
88.3%
90.8% 91.0%91.6%
90.6%
92.0% 91.9%91.2% 90.9% 91.0%
85.5% 85.5%
Aug-04
Sep-04
Oct-04
Nov-04
Dec-04
Jan-05
Feb-05
Mar-05
Apr-05
May-05
Jun-05
Jul-05
Source: FEMA, National Flood Insurance Program (NFIP)
Retention rates in the NFIP are poor, with 10-15% of policyholders allowing policies to lapse annually.
Total Claim Payments by State (Top 10) Jan 1, 1978 - Dec. 2004
$ Millions
$2,702.0
$2,226.7
$1,727.3
$687.2$419.9 $384.4 $377.8 $276.6
$422.6$473.4$598.2
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
TX FL LA NC NJ PA SC MO VA AL MS
Source: FEMA, National Flood Insurance Program (NFIP)
Louisiana and Alabama rank 3rd and 10th
respectively in terms of total claims payments. Mississippi ranks 13th.
What Role Should the Federal Government
Play in Insuring Against Natural Disaster Risks?
Pros/Cons of Federal CAT(Re) Insurance Facility
• Rationale FOR Federal Involvement Insurance was not meant to handle mega-catastrophes Such risks are fundamentally uninsurable Federal government already heavily involved in insuring against weather-
related mega-catastrophes (e.g., flood, crop) Insurers are not allowed to charge risk appropriate rates (including rising
reinsurance costs) Price/availability of private reinsurance is volatile
• Rationale AGAINST Federal Involvement Crowds-out pvt. insurance/reinsurance markets; stifles innovation Relationship between price and risk assumed is diminished since fed
insurance programs are seldom actuarially sound Increases federal involvement and regulatory authority in p/c insurance
(not a negative for some market participants) Cost to US Treasury (esp. taxpayers in less disaster prone states) Diminishes incentives for mitigation, tougher building codes and wiser land
use policies if Fed rate are politically influenced
Options for a Federal Role in the Financing of Natural Disaster Risk
1. National Natural Disaster Pool
2. Regional Natural Disaster Pool(s)
3. Federal Reinsurance Program
4. Tax-Favored Pre-Event Reserving
National Natural Disaster Pool
• KEY ELEMENTS Share of property premiums (homeowners, commercial property) premiums
collected would be ceded to pool and used to finance mega-catastrophes Funds would earn investment income tax-free to speed accumulation and
keep prices modest Risk is diversified geographically and by peril (e.g., wind vs. quake) Federal government would provide a backstop to the pool as:
Reinsurance purchased by pool from the government Line of credit offset by assessing authority
• KEY CHALLENGES Is participation by insureds mandatory or optional? If optional, significant adverse selection problem Determination of “actuarially sound” rates Keeping rates free of political influence and manipulation Maintaining significant role for private reinsurers and ART Formula for assessing shortfalls in pool (including taxpayer share) Attracting support of states not prone to mega-catastrophes Appeasing deficit hawks, advocates of small government
Regional Natural Disaster Pool(s)
• KEY ELEMENTS Share of property premiums in certain states (homeowners, commercial
property) premiums collected would be ceded to pool and used to finance mega-catastrophes in participating states
Funds would earn investment income tax-free to speed accumulation Federal government would provide a backstop to the pool as:
Reinsurance purchased by pool from the government Line of credit offset by assessing authority
• KEY CHALLENGES Is participation by insureds mandatory or optional? If optional, significant adverse selection problem Determination of “actuarially sound” rates Maintaining role for private reinsurance Keeping rates free of political influence and manipulation Formula for assessing shortfalls in pool (including taxpayer share) Attracting support of states not prone to mega-catastrophes Appeasing deficit hawks, advocates of small government
Federal Reinsurance Program
• KEY ELEMENTSInsurers purchase CAT reinsurance from federal
government
• KEY CHALLENGESDetermination of “actuarially sound” ratesMaintaining significant role for private reinsurersMaintaining significant role for ART and risk
securitization Keeping rates free of political influence and manipulationAppeasing advocates of small governmentKeeping natural disaster risk programs separate and
distinct from terrorism risk
Tax-Preferred Treatment ofPre-Event Catastrophe Reserving
• KEY ELEMENTSInsurers would be allowed to deduct from their taxable
income amounts set aside in reserve for natural disaster risks in advance of the occurrence of the actual event
Presently, US tax law does not allow for such treatment Most other countries already permit pre-event reserving
• KEY CHALLENGESDetermination of appropriate reserve levelsOvercoming criticism of impact on US Treasury receipts
Note that impact on Treasury is limited to time value of tax receipts
Managing Natural Catastrophes in aPost-9/11 World
L James Valverde, Ph.D., Director, Economics & Risk Management
Presentation Outline• Managing Natural Catastrophes
Emergency preparedness and response in the wake of 9/11 Emerging questions and lessons from Hurricane Katrina The centrality of risk management, for both public and private stakeholders
• The U.S. Department of Homeland Security The National Strategy for Homeland Security and the genesis of DHS Historic moment for America or bureaucracy writ large?
• Emergency Preparedness and Response The homeland security context All-hazards vs. terrorist myopia?
• FEMA Past, present, and future What went wrong and why? All-hazards context: The National Planning Scenarios Challenges in the years ahead
• Implications for P/C Insurers
• Concluding Remarks and Discussion
The National Strategy for Homeland Security and the Genesis of DHS
• In the wake of 9/11, President Bush issued the National Strategy for Homeland Security in July 2002
• Legislation creating the U.S. Department of Homeland Security (DHS) was signed in November 2002
• The creation of DHS represents a fusion of numerous federal agencies, with the objective of coordinating and centralizing the leadership of the nation’s homeland security activities under a single, cabinet-level department
Began operations in March 2003
22 separate agencies
Approximately 180,000 employees
DHS: Historic Moment or Bureaucracy Writ Large?
• The creation of DHS represents a historic moment of almost unprecedented action by the federal government to transform how the nation protects itself from acts of terrorism
• Rarely in the nation’s history has such a large and complex reorganization of government been attempted, with such a singular and urgent purpose
• DHS represents a unique opportunity to transform a disparate group of agencies with multiple missions, values, and cultures into an effective cabinet-level department
• A central aspect of DHS’s mission involves coordinating efforts to protect critical infrastructure, prepare for possible attacks and other emergencies, and respond to catastrophic incidents and events
• Accountability and performance thus far? Hurricane Katrina as a specific case in point – first real test of the system? DHS Inspector General U.S. GAO Academics and Think Tanks
Homeland Security: The Essential Tension
• Any coordinated and sustained effort to effectively manage homeland security must contend with two competing tasks:
The prevention of terrorist acts
Mitigation of consequences arising from acts of terrorism
• In a decision context like this, resource allocation under uncertainty is one of the central challenges the federal government faces in its efforts to manage homeland security
The National Strategy for Homeland Security
• The National Strategy for Homeland Security describes six critical missions areas:
Intelligence and Warning
Border and Transportation Security
Domestic Counterterrorism
Protecting Critical Infrastructure and Key Assets
Defending Against Catastrophic Threats
Emergency Preparedness and Response
• The President has also issued several additional documents – so-called Homeland Security Presidential Directives (HSPD) – that provide more detailed guidance on various homeland-security-related mission areas and initiatives
Emergency Preparedness and Response: Key Elements of the National Strategy
For the Emergency Preparedness and Response mission area, the National Strategy identifies 12 separate initiatives:
1. Integrate separate federal response plans into a single all-discipline incident management plan
2. Create a national incident management system
3. Improve tactical counter terrorist capabilities
4. Enable seamless communication among all responders
5. Prepare health care providers for catastrophic terrorism
6. Augment America’s pharmaceutical and vaccine stockpiles
Emergency Preparedness and Response: Key Elements of the National Strategy (cont.)
7. Prepare for chemical, biological, radiological, and nuclear decontamination
8. Plan for military support to civil authorities
9. Build the Citizen Corps
10. Implement the First Responder initiative of the FY03 budget
11. Build a national training and evaluation system
12. Enhance the victim support system
FEMA
Past, Present, and Future
DHS Organizational Structure: FEMA’s Place in the Larger Context of Homeland Security
FEMA: Informed Opinion Prior to Hurricane Katrina
“…consolidate DHS response missions into FEMA and strengthen that agency. FEMA should be engaged squarely in its traditional role of planning for national (not just federal) response to emergencies… [emphasis added].”
DHS 2.0
Heritage Foundation
December 2004
FEMA in the Wake of Hurricane Katrina
• According to a recent WSJ article, FEMA has, in some circles, become synonymous with the government’s bungled response to the hurricane
• To what extent is this a fair characterization of this agency and the difficult situation it now finds itself in?
FEMA: Past, Present, and Future
“Two years ago in a lecture at the Naval Postgraduate School … I told students that FEMA was not capable of adequately responding to a major hurricane, let alone a catastrophic terrorist attack. My comments were based on an assessment that morale at FEMA was then the worst since the agency was created. The very people the nation depended on to help out during our time of greatest need were being demoralized by an indifferent, inexperienced leadership that neither understood emergency manage-ment nor had the skills to ensure the agency had the resources to meet its all-hazard mission.”
“Those who think we have overemphasized terrorism in the wake of September 11, should be concerned with a knee-jerk reaction to Katrina. What we need is balance. We must be prepared to respond to both terrorism and natural disasters. The FEMA I know is capable of rising to the occasion and accomplishing both missions.
Mike WalkerFormer FEMA Deputy DirectorThe Washington Times, 13 Sept. 2005
FEMA: What Went Wrong and Why?
• Over the course of the next several months, many theories and explanations will be forthcoming
• Much of what will likely be said will contain the following core elements:The agency is no longer cabinet-level, but rather a
small cog within the organizational and bureaucratic behemoth that is DHS
FEMA’s mission to help states prepare for “all hazards” – from terrorism to natural disasters – has become lost within DHS’s myopic focus on terrorism
FEMA should perhaps revert to being an independent, cabinet-level agency
Importance of the All-Hazards Context
HSPD 8 – National Preparedness: The National Planning Scenarios
• Developed under the leadership of the Homeland Security Council
• Overarching goals are to Create the agility and flexibility to meet a wide range of threats and
hazards Provide a structure for the development of national preparedness
standards• 15 planning scenarios provide parameters regarding the
nature, scale, and complexity of incidents of national significance, which include both terrorism and natural disasters
• Each scenario provides a basis for defining prevention, protection, response, and recovery tasks that need to be performed, as well as required capabilities
National Planning Scenarios
The Homeland Security Council has developed 15 all-hazard planning scenarios for use in national, federal, state, and local homeland security preparedness activities:
1. Nuclear Detonation – 10-Kiloton Improvised Nuclear Device
2. Biological Attack – Aerosol Attack
3. Biological Disease Outbreak – Pandemic Influenza
4. Biological Attack – Plague
5. Chemical Attack – Blister Agent
6. Chemical Attack – Toxic Industrial Chemicals
7. Chemical Attack – Nerve Agent
National Planning Scenarios (cont.)
8. Chemical Attack – Chlorine Tank Explosion
9. Natural Disaster – Major Earthquake
10. Natural Disaster – Major Hurricane
11. Radiological Attack – Radiological Dispersal Devices
12. Explosives Attack – Bombing Using Improvised Explosive Device
13. Biological Attack – Food Contamination
14. Biological Attack – Foreign Animal Disease (Foot and Mouth Disease)
15. Cyber Attack
Scenario 10: Natural Disaster – A Major Hurricane
• In this scenario, a Category 5 hurricane hits a major metropolitan area Sustained winds are at 160 mph, with a storm surge greater than 20 feet
above normal As the storm moves closer to land, massive evacuations are required Some low-lying escape routes are inundated by water anywhere from 5
hours before the eye of the hurricane reaches land
• Consequences associated with Scenario 10:
Casualties 1,000 fatalities; 5,000 hospitalizations
Infrastructure Damage Buildings destroyed; large debris
Evacuations/Displaced Persons 1 million evacuated; 100,000 homes seriously damaged
Contamination From hazardous materials, in some areas
Economic Impact Billions of dollars
Recovery Timeline Months
Looking Towards the Future
Where Do We Go From Here?
Challenges in Emergency Preparedness
Adopting an All-Hazards Approach
• The National Strategy calls for the creation of
“a fully integrated national emergency response system that is adaptable enough to deal with any terrorist attach, no matter how unlikely or
catastrophic, as well as all manner of natural disasters” [emphasis added]
• Challenges:
Identifying the types of emergencies for which they should be prepared and the requirements for responding effectively
Assessing current capabilities against those requirements
Developing and implementing effective, coordinated plans among multiple first responder disciplines and jurisdictions
Defining the roles and responsibilities of federal, state, and local governments and private entities
Challenges in Emergency Preparedness
Improving Intergovernmental Planning and Coordination
• The National Strategy emphasizes a shared national responsibility – involving all levels of government – in responding to a serious emergency
• In May 2004, GAO reported that a major challenge involves what they saw as lack of coordination within DHS in terms of the agency’s ability to prepare for, respond to, and recover from terrorist and other emergency incidents:
“…there has been a lack of regional planning and coordination for developing first responder preparedness, defining preparedness goals, identifying spending priorities, and expending funds” (GAO-04-433)
Challenges in Emergency Preparedness
Establishing Emergency Preparedness Standards
• The National Strategy makes mention of benchmarks, standards, and other performance measures for emergency preparedness
• However, in January 2005, GAO found that
“…there is not yet a complete set of preparedness standards for assessing first responder capacities, identifying gaps in those capacities, and measuring progress in achieving performance goals” (GAO-05- 33)
Desirable Attributes for a Reconstrued and Revised FEMA
• Nimble• Responsive• Communicative• Empowered• Coordinating• Flexible• Accountable• Resiliant
Implications for the P/C Insurance Industry
Mismanagement of Emergency Preparedness and Response Can Impact the Economic Losses
Associated with Natural Disasters
• Clearly, there is a relationship between “recovery time” and the economic losses associated with a natural catastrophe such as Hurricane Katrina Business interruption losses increase exponentially with response lag Fires burn uncontrolled Failed law enforcement, rioting and looting Delayed flood drainage Untimely mitigation of environmental release/contamination etc.
• While precise estimates of this relationship will require future empirical study, a couple of points are worth considering in light of Katrina: A key responsibility for P/C insurers is to play their important and substantial role
in the risk mitigation process It is important for federal, state, and local officials to understand and appreciate the
role that insurance can play in both minimizing loss and expediting recovery Both P/C insurers and property owners, alike, have a vested interested in seeing that
the overall system works as best as possible
Prospective Challenges for P/C Insurers
Challenges for P/C Insurers:Uncertainty of Losses
• Natural disasters pose vexing challenges for insurers because they involve potentially high losses that are characterized by large degrees of uncertainty
• Moreover, natural disasters involve spatially correlated losses or the simultaneous occurrence of many losses from a single event
• Hurricane Katrina suggests a new “externality” for P/C insurers to consider:
Mismanagement of the government’s response and recovery efforts in the affected region(s)
Rethinking Traditional Approaches to CAT Modeling and Risk Management in Light of Katrina
• Traditional approaches to risk assessment and CAT Modeling need to be revised to explicitly consider some of these new “externalities” (e.g., political uncertainty, etc.) into their overall analytical frameworks
• A clear need for increased geo-spatial sophistication and detail within CAT models, combined with the ability to perform “cascaded inference” (broken levee ּ ּ ּ evacuation of affected area)
• Seriously rethink the implications of changes in risk appetite/tolerance and ambiguity aversion for risk management strategies and corporate decision-making
Summary• 2005:H1 was likely the p/c insurance industry’s zenith in the current cycle for
underwriting/earnings• Industry was financially strong and well capitalized pre-Katrina/Rita• 2005 CATs unlikely to provoke widespread hard market conditions (only about 5% of
global p/c capital)• Effects mostly confined mostly to specific lines & regions: HO, Commercial Property,
Property CAT Reinsurance & retrocessional markets, PPA Comprehensive; Energy/Marine Areas most impacted are Gulf & Atlantic coasts
• Cyclical concerns will quickly return as dominant issue• Rising investment returns insufficient to support deep soft market in terms of price, terms &
conditions• Clear need to remain more underwriting focused• Major Challenges:
Maintaining price/underwriting discipline Managing variability/volatility of results New/emerging/re-emerging risks
Insurance Information Institute On-Line
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