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Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org

Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

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Page 1: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

Mold and Insurance:

Is the Worst Behind Us?

Casualty Actuarial SocietySeminar on Ratemaking

San Antonio, TX

March 27, 2003

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

Page 2: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

Presentation Outline

Mold, the Consumer & the Insurance Industry• Overview of Mold Issue• A Brief History of Mold & Insurance

Experience in Texas & California Influence of Legal Environment & Profiteering

• Media Perception of the Mold Issue• The Economics Of Mold• Commercial Lines & Mold• Regulatory/Legislative Considerations• Q&A

Page 3: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

Overview of Mold Issue

• Complex issue involving

Homeowners—fear of mold; hysteria in some areas

Businesses & Workers—property, construction, WC & liability

issues

Science—taking a back seat to fact; misinformation

Astounding array of ailments attributed to mold

Trial Lawyers—profiting from fear and hype over mold

Remediators—profiteering?

Media—media attention increases as mold claims increase

Regulators—struggling with the issue; options limited

Page 4: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

A BRIEF HISTORY OF MOLD & THE INSURANCE INDUSTRY

Page 5: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

Great Pyramid of Mold

Hysteria

Toxic Mold?

Trial Lawyers

$

Page 6: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

Great Pyramid of Mold

Source: Insurance Information Institute

Page 7: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

HOW DID WE GET HERE & WHERE ARE WE GOING?

Texas was Mold’s Ground Zero, but Effects Have Spread

Page 8: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

TX: Estimated Total Number of Mold Claims

1,050

1,9331,627

2,4724,033

7,145

11,318

14,706

0

3,000

6,000

9,000

12,000

15,000

00:Q1 00:Q2 00:Q3 00:Q4 01:Q1 01:Q2 01:Q3 01:Q4

Source: Texas Department of Insurance.

The number of mold claims rose 1,306% between 2000:I and 2001:IV

Page 9: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

TX: Average Cost Per Mold Claim*

$13,719$15,402

$24,024

$28,061

$36,213 $34,538

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

00:Q1 00:Q2 00:Q3 00:Q4 01:Q1 01:Q2

*Includes loss and loss adjustment expenses.Source: Texas Department of Insurance; Insurance Information Institute estimates.

The average cost of mold claims rose number of mold claims rose 152% between

2000:I and 2001:II

Page 10: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

$0

$50

$100

$150

$200

$250

Jan-

01

Feb-0

1

Mar

-01

Apr-0

1

May

-01

Jun-

01

Jul-0

1

Aug-0

1

Sep-0

1

Oct-0

1

Nov-0

1

Dec-0

1

Jan-

02

Feb-0

2

Mar

-02

Apr-0

2

May

-02

Jun-

02

Jul-0

2

Aug-0

2

Sep-0

2

Oct-0

2

Wa

ter

Da

ma

ge

Pa

id L

os

se

s* ($

Mill

ion

s)

0

5000

10000

15000

20000

25000

30000

Cla

im C

ou

nt

Paid Losses

Claim Count

Source: Texas Department of Insurance; Insurance Information Institute

* Data are for TDI Cause 61: Discharge – Other Damage. Not all claims in cause 61 are mold and mold claims may also arise from other (non-water) causes of loss.

Texas: Mold Losses/Claims Are Finally Moderating*

Page 11: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

99.4%

93.3%

65.0%

100.6%

70.5%

89.7%

58.5%

43.7%49.1%

77.5%

93.5%

44.7%

89.6%

67.7%

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

89 90 91 92 93 94 95 96 97 98 99 00 01 02*

Pre

miu

m p

er

Po

licy

0%

20%

40%

60%

80%

100%

120%

Pa

id L

os

s R

ati

o

Written Premium per Policy

Paid Loss Ratio

*Through October 2002.

Source: Texas Department of Insurance; Insurance Information Institute

Texas HO: Paid Loss Ratio Up Sharply, Premiums Haven’t Kept Pace

Paid loss ratio is up 90.1% since 1999 while average premium is up just 40.1%

Page 12: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

$69

$186

$88 $86 $88$114 $128 $127 $123 $125 $121

$170

$379

$728

12.5%

33.9%

20.7% 20.7%17.6%

25.1%

31.0%

27.0%24.3%

12.4%

61.0%

30.8%

43.4%

18.0%

$0

$100

$200

$300

$400

$500

$600

$700

$800

89 90 91 92 93 94 95 96 97 98 99 00 01 02*

Avg

. Wat

er L

oss

per

Po

licy

0%

10%

20%

30%

40%

50%

60%

70%

All

Wat

er D

am a

s %

To

tal L

oss

es

All Water Damage per Policy

All Water Dam as % Total Losses

*Through October 2002.

Source: Texas Department of Insurance; Insurance Information Institute

Texas HO: Per Policy WaterLosses Have Skyrocketed

Water damage losses per policy are up 328%

between 2000 and 2002*

Page 13: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

0%

10%

20%

30%

40%

50%

60%

70%

89 90 91 92 93 94 95 96 97 98 99 00 01 02*

Water as % Total # LossesWater as % Total $ Losses

Texas HO: Water Loss and Claim Share Up Sharply

*Through October 2002.

Source: Texas Department of Insurance; Insurance Information Institute

Page 14: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

California: Surging Water Claim Frequency and Costs:

Symptom of Growing Mold Problem

$206.1

$276.5$286.6

$383.7

$430.6

24%

29%

27%

32%

31%

$100

$150

$200

$250

$300

$350

$400

$450

1997 1998 1999 2000 2001

20%

22%

24%

26%

28%

30%

32%

34%

Paid Water Losses ($ Mill) Water Claims as % of All Homeowners Claims

Source: Insurance Information Network of California; Insurance Information Institute

•Water losses paid rose 109% from 1997 to 2001 and 50% since 1999

•Water claims accounted for less than 1/4 of all HO claims in 1997, now they account for nearly 1/3.

California may be in a drought, but homeowners say they’re drowning

Page 15: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

Sharply Rising Average Water Claim Cost in CA: Mold Symptom

$2,537$2,631

$3,339

$3,719

$4,730

$2,000

$3,000

$4,000

$5,000

1997 1998 1999 2000 2001

Source: Insurance Information Institute based on data from the Insurance Information Network of California;

The cost of the average water loss in CA surged 27% in 2001 and 80% since 1998

Page 16: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

California: Surging Water Claim Frequency and Costs:

Symptom of Growing Mold Problem

$206.1

$276.5$286.6

$383.7

$430.6

24%

29%

27%

32%

31%

$100

$150

$200

$250

$300

$350

$400

$450

1997 1998 1999 2000 2001

20%

22%

24%

26%

28%

30%

32%

34%

Paid Water Losses ($ Mill) Water Claims as % of All Homeowners Claims

Source: Insurance Information Network of California; Insurance Information Institute

•Water losses paid rose 109% from 1997 to 2001 and 50% since 1999

•Water claims accounted for less than 1/4 of all HO claims in 1997, now they account for nearly 1/3.

California may be in a drought, but homeowners say they’re drowning

Page 17: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

ISO Mold Exclusions

ME

NH

MA

CT

PA

WVVA

NC

LA

TX

OK

NE

ND

MN

MI

IL

IA

ID

WA

OR

AZ

HI

NJ

RI

MDDE

AL

VT

NY

DC

SC

GA

TN

AL

FL

MS

ARNM

KYMOKS

SDWI

IN

OH

MT

CA

NV

UT

WY

CO

Exclusion Approved

No Approved Exclusion

Homeowners policy mold exclusions approved by insurance departments in more than 30 states + DC*

*As of July 29, 2002.

Source: Insurance Services Office

MS

Page 18: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

Wide Variety of Illnesses Alleged to be the Result of Mold Exposure

ALLEGED ILL-EFFECTS•Burning eyes•Headache•Nausea•Nose bleeds•Allergic Reactions•Asthma•Exhaustion•Sinus infections•Cognitive disorders•Pulmonary hemorrhage•Liver damage•Central nervous system damage•Brain damage•Cancer•Death

Stachybotrys chartarum

Page 19: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

The Science Doesn’t Support Those Allegations

List of Known Maladies•“There are very few case reports that toxic molds inside homes can cause unique or rare health conditions…” “The common health concerns from molds include hay-fever like allergic symptoms.”

Centers for Disease Control and Prevention

Stachybotrys chartarum

Page 20: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

Litigiousness in US Society Compounded the Problem

Documented Toxic Mold SuitsFormer

Owners of Sold Homes

10%Bad Faith

Against Insurers

50%Builder for

Construction Defects

20%

HO Associations

for Improper Maintenance

20% Source: www.toxlaw.com; Guy Carpenter

1,000 Cases

2,000 Cases

5,000 Cases

2,000 Cases

Page 21: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

As Did Countless Profiteers…

Source: The Austin Chronicle, August 10,2001

Page 22: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

The Media & Mold:A Marriage Made in Heaven

Source: Insurance Information Institute based Nexis search.

Since January 1, 2000, more than 10,000 articles have been published on the subject of “toxic” mold

Page 23: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

Media Attention on the Mold Issue Peaked in 2002

1,2551,505

1,708

2,922

3,282

2,838

0

1,000

2,000

3,000

4,000

1998 1999 2000 2001 2002 2003*

Sources: Insurance Information Institute based on Nexis search.* Estimate.

More Than 10,000 “Toxic Mold” Articles Since 2000

Page 24: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

2001: Increased Media AttentionIn the Papers Two Years Ago

“Haunted by Mold” New York Times Magazine, August 12, 2001

“Beware: Toxic Mold” Time Magazine, July 2, 2001

“Insurers, Builders Criticized Over Mold” Austin American Statesman, June 27, 2001

“Mold Problems Spur Hearings Across Texas” Corpus Christi Caller Times, June 17, 2001

“Insurers Blanch at Proliferation of Mold Claims” Wall Street Journal, June 3, 2001

“Insurer Must Pay Family $32 Million” San Antonio Express-News, June 11, 2001

Page 25: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

Source: New York Daily News, September 10, 2001

Page 26: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

Source: New York Times Magazine, August 12, 2001

Page 27: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

“Heeeeeeere’s Stachy…”Mold Goes Hollywood

•Ed McMahon filed $20 million suit against insurer & mold remediation contractor•Ed only gave away $10 million in sweepstakes•Says mold sickened him, his wife and staff•Says mold killed Muffin the family dog•Alleges breach of contract, negligence and intentional infliction of emotional distress•Nearly 100 articles between April 10 and May 17, 2002!

“Ed McMahon Sues Over Toxic Mold Invasion,” --USA Today, April 11, 2002

Page 28: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

2002/3: Financial & Market ConsequencesIn the Papers Over the Past Year

“The Turmoil Over Mold in Buildings” New York Times, March 23, 2003

“Landlords Add Mold Clauses to Apartment Leases" Wall Street Journal, March 18, 2003

“Insurers in Kansas Won’t Cover Mold" Kansas City Business Journal, February 21, 2003

“More Limited Form of Mold Insurance Emerges" Wall Street Journal, February 5, 2003

"State Farm Halts New Policies [in FL]" Tampa Tribune, June 29, 2002

“Hit With Big Losses, Insurers Put Squeeze on Homeowners” Wall Street Journal, May 14, 2002

“Can Toxic Mold Spoil a Stock Offering?” Business Week, April 29, 2002

“Apartment Owners Face Growing Liability” Wall Street Journal, April 24, 2002

“State Farm Won’t Write New Homeowners Policies [in CA]” Los Angeles Times, April 23, 2002

“Oklahoma Home Insurers Limiting Fungus Coverage” The Oklahoman, April 2, 2002

“Some Insurers Ending Coverage for Home Builders” Minneapolis Star Tribune, February 16, 2002

Page 29: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

Great Pyramid of Mold

Source: Insurance Information Institute

Page 30: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

THE ECONOMICS OF MOLD:

WHAT WILL MOLD COST POLICYHOLDERS & THE INSURANCE INDUSTRY ?

Page 31: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

Impacts on Affordability and Availability

Real Consequences for Homeowners & Housing Markets

Page 32: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

States With Highest HO-3Insurance Premiums

$879

$714 $657$606

$487

$0

$200

$400

$600

$800

$1,000

Expenditures/Rank

Texas Louisiana Florida Hawaii US

Source: Insurance Information Institute from NAIC Data, 1999.

1 2 3 4

FL is 3rd without the mold “stressor”

Page 33: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

States with Highest Premium/Income Ratios*

1.72%

1.41%1.32% 1.25% 1.24%

0.86%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

TX LA MS OK FL US

Pre

miu

m a

s %

of

Inco

me

*As a % of the median family of 4’s income, 1998. Source: NAIC, Insurance Information Institute

HO insurance is very affordable, consuming less than 0.9% of the

typical family’s income nationally, but 1.24% in FL and climbing! Can

we afford another price stressor?

Page 34: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

Mold-Induced Rate Increases Will Impact Affordability*

1.72%

2.40%2.60%

0.86%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

TX TX--40% Hike TX--50% Hike US

Pre

miu

m a

s %

of

Inco

me

*As a % of the median family of 4’s income. Source: NAIC, Insurance Information Institute

Mold costs could push HO insurance costs to 2.5%+ of the typical

family’s income in TX.

Page 35: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

Consumers Can’t Afford Mold, Neither Can Insurers

Page 36: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

P/C Net Income After Taxes1991-2002E ($ Millions)

$14,178

$5,840

$19,316

$10,870

$20,598

$24,404

$36,819

$30,773

$21,865$20,559

-$6,970

$12,419

-$10,000

-$5,000

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

91 92 93 94 95 96 97 98 99 00 01 02*

*I.I.I. estimate based on first 9 months of 2002 data.Sources: A.M. Best, ISO, Insurance Information Institute.

2001 was the first year ever with a full year net loss

2002 9-Month ROE = 4.4%

Page 37: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

-$2.2-$2.8

-$4.0

-$2.9

-$5.4

-$0.3

-$2.6 -$2.4

-$3.6

-$8.9

-$6.5

-$11.5($12.0)

($10.0)

($8.0)

($6.0)

($4.0)

($2.0)

$0.019

91

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

E

2002

F

Underwriting Loss in HO Insurance, 1991-2002F

Source: Insurance Information Institute. A.M. Best

$ B

illi

ons

Underwriting losses in homeowners insurance from 2000 to 2002 alone are

estimated at $19.0 billion, 14.5% above the $20.3 billion in 9/11 property losses. Mold

was not the only factor in these losses.

Page 38: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

States with Most New Homes Built*, 2000

Source: National Association of Homebuilders, Insurance Information Institute

* Single family units

(000)

108.3 104.999.9

59.248.2

TX FL CA NC AZ

New Private Housing Starts States with biggest mold

problems highly dependent on home construction sector

Page 39: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

Number of People Employed in Construction of Single-Family Homes

Source: National Association of Homebuilders, Insurance Information Institute

* Single family units, based on year 2000 construction figures

265,118

256,795

244,555

Texas Florida California

Mold Puts Jobs at Risk

Construction of single-family homes supports about one-

quarter million jobs in states with the biggest mold problems

Page 40: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

Billions in Wages Depend on Construction of Single-Family Homes

Source: National Association of Homebuilders, Insurance Information Institute

* Single family units, based on year 2000 construction figures

$8.6

$8.3

$7.9

Texas Florida California

Mold Puts Wages at Risk

Construction of single-family homes supports $8 billion - $9 billion in wages in construction and related

industries in states with biggest mold problems.

$ Billions

Page 41: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

MOLD & COMMERCIAL INSURANCE

Page 42: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

Construction Defect Litigation Destroying CA Condo Market

$1.87

$2.95

$1.00

$1.25

$1.50

$1.75

$2.00

$2.25

$2.50

$2.75

$3.00

1998 2000

Source: ISO, Insurance Information Institute

Condo construction in parts of CA has come to a virtual stop.

Insurer costs rose 58% in just 2 years!

Ratio of Losses Paid Out to Premiums Taken In

“Right-to-Cure” laws now in 5

states: AZ, CA, NV, TX, WA

16 considering such laws.

Page 43: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

Where are the Next Battlefields for Mold?

• Homeowners issue probably crested in 2002• Migration to commercial area affects many lines:

Commercial Property Commercial LiabilityProducts Liability Builders Risk/Construction DefectsWorkers Comp…(very little)

• Hot Spots: Apartments/Condos/Co-ops Office Structures Schools Municipal BuildingsCars? (GM case in NC)

• Trend toward class actions since science doesn’t support massive individual non-economic damagesMuch more lucrative for trial lawyers to form class

Source: Insurance Information Institute.

Page 44: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

TEXAS INSURANCE REFORM:

IS MORE REGULATION THE ANSWER?

Page 45: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

Texas Insurers Drowning in a Sea of New Regulation in 2003

Number of House/Senate Bills Introduced that Could Impact Insurers (as of Jan. 31)

16

108

6 6 6 5 52 1 1

0

5

10

15

20 •At least 66 pieces of legislation have been introduced, most of which would adversely impact insurers

Page 46: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

258

280287 290

313299

277 271 272 273 276263

240

220204

194181

162151

138128 127

0

50

100

150

200

250

300

350

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01

Source: Texas Coalition for Affordable Insurance Solutions from A.M. Best data; Insurance Information Institute

Number of HomeownersInsurers in Texas

The number of insurers writing HO coverage in Texas

has been declining steadily.

Page 47: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

Road to Reform:A Lot Like the Road to Baghdad

• It is a myth that insurers in TX are “unregulated”E.g., solvency, forms…

• Solution to TX insurance problems will not be be found in new, expansive, and expensive regulations as proposed

• Need market-based solutions that work to attract/retain insurers and fresh capital, not drive them away

• Issue needs to be de-politicized• Prior approval will increase insurer and TDI expenses and increase

politicization of insurance regulation• Prior approval increases lag between recognition of change intrend and

implentation of rate change• Insurers need access to modern, fair and efficient underwriting tools such as

credit

Page 48: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

1.07

1.53

1.35

1.14

0.990.94

0.99

0.83 0.810.74 0.75

0.4

0.6

0.8

1.0

1.2

1.4

1.6

NoScore

1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th

Score Range

Avg

. Rel

ativ

e L

oss

Rat

ioTexas Auto: Relative Loss Ratio (by Credit Score Decile, Total Market)*

*Each decile contains approximately 15,300 policies.

Includes standard and non-standard policyholders.

Interpretation:

Those with poorest credit scores generated losses more than double that of those with the best scores

Source: University of Texas, Bureau of Business Research, March 2003.

1st Decile = Lowest Credit Scores

10th Decile = Highest Credit Scores.

Extremely strong statistical evidence linking credit score with loss/claim outcomes:•Credit score & likelihood of positive claim (p<.0001)•Size of loss related to credit score (p<.0001)•Correlation between relative loss ratio and credit score (r = .95)

Page 49: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

1.07

1.53

1.28

1.061.00 0.99

0.880.84

0.780.72

0.76

0.4

0.6

0.8

1.0

1.2

1.4

1.6

NoScore

1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th

Score Range

Avg

. Rel

ativ

e L

oss

Rat

ioTexas Auto: Relative Loss Ratio

(by Credit Score Decile, Standard Market)

Interpretation:

Those with poorest credit scores generated relative losses more than

double that of those with the best scores*

*Correlation between relative loss ratio and credit score is .95 and statistically significant.Source: University of Texas, Bureau of Business Research, March 2003.

1st Decile = Lowest Credit Scores

10th Decile = Highest Credit Scores.

Page 50: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

Average Loss = $695

$668

$918

$846

$791

$707 $703$681

$631

$584$568 $558

$500

$600

$700

$800

$900

$1,000

NoScore

1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th

Score Range

Avg

. In

curr

ed L

oss

per

Pol

icy

Texas Auto: Average Loss per Policy (by Credit Score Decile, Total Market)

Interpretation:

Those with poorest credit scores generated incurred losses 65% higher

those with the best scores

Source: University of Texas, Bureau of Business Research, March 2003.

1st Decile = Lowest Credit Scores

10th Decile = Highest Credit Scores.

Page 51: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,

9

12 12

11 11

10 10 10 10

9 9

6

8

10

12

14

NoScore

1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th

Score Range

% W

ith

Rel

ativ

e L

oss

Rat

io >

1.0

Texas Auto: % Insureds with Relative Loss Ratio Above 1.0

(by Credit Score Decile, Total Market)

Interpretation:

Insureds with poorest credit scores are 33% more likely to have relative

loss ratios greater than 1.0

(indicates higher frequency of claims)

Source: University of Texas, Bureau of Business Research, March 2003.

1st Decile = Lowest Credit Scores

10th Decile = Highest Credit Scores.

Page 52: Mold and Insurance: Is the Worst Behind Us? Casualty Actuarial Society Seminar on Ratemaking San Antonio, TX March 27, 2003 Robert P. Hartwig, Ph.D.,