State-Backed Insurance Schemes The Role of Insurers

State-Backed Insurance Schemes

The Role of InsurersInsurance Institute of London

London Institute Centenary LectureLondon, UK

6 March 2007

Robert P. Hartwig, Ph.D., CPCU, 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

Presentation Outline

• Historical Role of the State in (Re) Insurance Markets• The Case of Terrorism• The Case of Natural Disaster Risk• Public Policy Remedies: Recent Trends & Developments

in the United States• The Case of ‘Florida Re’• Could ‘United States Re’ be Far Behind?• Outlook for State-Backed Insurance Schemes• Summary• Q&A

Historical Role of the State in Insurance Markets

1. Solvency

2. Rate and Form Regulation

3. Consumer Protection

4. (Re) Insurer of Last (or Only) Resort

5. (Re) Insurer of First Resort

SOLVENCY REGULATION

Government Wants to Insure CATs, but How Well Do They

Regulate that Risk Now?

Reasons for US P/C Insurer Impairments, 1969-2005

*Includes overstatement of assets.

Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;

Catastrophe Losses8.6%

Alleged Fraud11.4%

Deficient Loss

Reserves/In-adequate Pricing62.8%

Affiliate Problems

8.6%

Rapid Growth

8.6%

2003-2005 1969-2005

Reinsurance Failure3.5%

Rapid Growth16.5%

Misc.9.2%

Affiliate Problems

5.6%

Sig. Change in Business

4.6%

Deficient Loss

Reserves/In-adequate Pricing38.2%

Investment Problems*

7.3%

Alleged Fraud8.6%

Catastrophe Losses6.5%

More insurer impairments due to CATs

recently

Major Residual Market Plan Estimated Deficits 2004/2005 (Millions of Dollars)

* MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in Federal Aid.Source: Insurance Information Institute

-$516

-$1,425

-$1,770

-$954

-$595 *

-$2,000-$1,800-$1,600-$1,400-$1,200-$1,000

-$800-$600-$400-$200

$0

Florida HurricaneCatastrophe Fund

(FHCF) Florida Citizens Louisiana Citizens

Mississippi WindstormUnderwriting

Association (MWUA)

2004 2005

Hurricane Katrina pushed all of the residual market property plans in

affected states into deficits for 2005, following an already record hurricane loss year in 2004

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 paid an estimated $20 billion in

flood claims in 2005, indicating a need for a

taxpayer-financed bailout of at least $18 billion

RATE REGULATION

Government Wants to Insure CATs, but Do They Know What

to Charge?

($10.60)

($0.21)

$0.69 $0.43 $0.86 $1.08 $1.23 $1.28 $1.43 $1.16 $1.47 $1.88

($10.39)

($3.73)

$2.75

($12)

($10)

($8)

($6)

($4)

($2)

$0

$2

$4

92 93 94 95 96 97 98 99 00 01 02 03 04 05E 06F

Underwriting Gain (Loss) in Florida Homeowners Insurance,

1992-2006E*

*2005 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2005 residential windstorm losses of $7.35B. 2006 estimate from Ins. Info. Inst.

$ B

illi

ons

Florida’s homeowners insurance market produces

small profits in most years and enormous losses in others

-$10.6-$10.8-$10.1-$9.7

-$8.8-$7.7

-$6.5-$5.2

-$3.8-$2.7

-$1.2

$0.7

-$9.7

-$13.4

-$10.7

($16)

($14)

($12)

($10)

($8)

($6)

($4)

($2)

$0

$2

92 93 94 95 96 97 98 99 00 01 02 03 04 05E 06F

Cumulative Underwriting Gain (Loss) in Florida Homeowners

Insurance, 1992-2006E*

$ B

illi

ons

It took insurers 11 years (1993-2003) to erase the UW loss associated with

Andrew, but the 4 hurricanes of 2004 erased the prior 7 years of profits &

2005 deepened the hole.

Regulator under US law has duty to allow rates

that are “fair,” “not excessive” and “not

unduly discriminatory.”Reality is that regulators

in CAT-prone states suppress rates.

*2005 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2005 residential windstorm losses of $7.35B. 2006 estimate from Ins. Info. Inst.

Rates of Return on Net Worth for Homeowners Ins: US vs. Florida

Source: NAIC; 2005/6 US and FL estimates from the Insurance Information Institute.

-54.3%

0.0%

-183.3%

-714.9%

-80.0%

36.0%

-800%

-700%

-600%

-500%

-400%

-300%

-200%

-100%

0%

100%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05E 06E

US Florida

Averages: 1990 to 2006E

US HO Insurance = -0.7%

FL HO Average = -38.1%

Andrew

4 Hurricanes

Wilma, Dennis, Katrina

RATIONALE FOR GREATER

GOVERNMENT INVOLVEMENT

Insurability, Magnitude of Loss, Price, Availability

Commonly Cited Rationale for Greater State Role in Insurance

1. Insurability Questions of insurability of some risks

2. Magnitude of Loss (Severity) Losses so large only the state can manage?

3. Price Concerns over price charged by private (re)insurers

4. Availability Concerns over availability at “affordable” prices (or

any price at all)5. Government Participation via Aid

State already provides economic relief

Terrorism

The Classic Example for a State Role in (Re) Insurance Markets

Cost of Largest Terrorist Attacks (Millions of 2006 Dollars)

$35,600

$1,000 $825 $803 $744 $237 $166$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

Sept. 11Terrorist

Attack (2001)

Nat WestBombing,

London (1993)

IRA CarBombing,

Manchester,(1996)

World TradeCenter

Bombing(1993)

LondonFinancial

District (1992)

AnthraxAttacks(2001)*

Oklahoma CityBombing

(1995)

$ M

illi

ons

Source: Insurance Information Institute research, GAO.*Clean-Up Expenses: $130M Brentwood Postal; $80M Trenton Postal; $27 Hart Senate Office Bldg.

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?

September 11 terrorist attacks dwarf all other

events

Sept. 11 Industry Loss Estimates($ Billions)

Life$1.0 (3.1%)

Aviation Liability

$3.5 (10.8%)

Other Liability

$4.0 (12.3%)

Biz Interruption

$11.0 (33.8%)

Property -WTC 1 & 2

$3.6 (11.1%) Property - Other

$6.0 (19.5%)

Aviation Hull$0.5 (1.5%)

Event Cancellation$1.0 (3.1%)

Workers Comp

$1.8 (5.8%)

Insured Losses Estimate: $32.5BSource: Insurance Information Institute

Total Loss as %of P/C Surplus

Original Extension 68%

20%12%

6%4%2%2%$0

$50

$100

$150

$200

$250

Chance of an Event

U/W

Lo

ss

($

B)

9/10 3/4 1/2 1/4 1/20 1/25 3/100 1/50 1/100 1/200 1/1000

Industry Loss With TRIA Federal Contribution Excess of TRIA Limit

TRIA’s Extension Modified Industry Retention Limits, but Remains Vital

Allocation of P/C Underwriting Loss—Original vs. Extension

Source: EQECAT, NCCI

The long return period for major terrorism events suggests great

difficulty estimating frequency, making expected loss calculations difficult. Classic insurability problem arises.

Insurance Industry Retention Under TRIA ($ Billions)

$10.0$12.5

$15.0

$25.0$27.5

$0

$5

$10

$15

$20

$25

$30

$35

Year 1(2003)

Year 2(2004)

Year 3(2005)

Year 4(2006)

Year 5(2007)

$ B

illi

ons

Source: Insurance Information Institute

•Individual company retentions rise to 17.5%

in 2006, 20% in 2007

•Above the retention, federal govt. pays 90% in

2006, 85% in 2007

Extension

Insured Terrorism Loss as a % of TRIEA-Exposure Industry Surplus*

515%

130%

28%

296%

70%18%8% 4% 6% 2%

113%61%

0%

100%

200%

300%

400%

500%

600%

New YorkCity

Washington San Francisco Des Moines

Large CNBR Attack Medium CNBR Attack Conventional Truck Bomb

Some terror attack scenarios consume several times the industry’s

estimated TRIEA-exposed 2005 surplus of $151 billion.

*Insurance Information Institute preliminary estimate of 2006 TRIEA-exposed surplus of $151 billion.Source: Insurance Information Institute preliminary estimate of TRIEA exposed p/c insurance industry surplus and calculations using American Academy of Actuaries modeled scenarios, Response to President’s Working Group, Appendix II, April 26, 2006.

Insured Loss Estimates: Large CNBR Terrorist Attack ($ Bill)

Type of Coverage New York WashingtonSan

FranciscoDes

Moines

Group Life $82.0 $22.5 $21.5 $3.4

General Liability 14.4 2.9 3.2 0.4

Workers Comp 483.7 126.7 87.5 31.4

Residential Prop. 38.7 12.7 22.6 2.6

Commercial Prop. 158.3 31.5 35.5 4.1

Auto 1.0 0.6 0.8 0.4

TOTAL $778.1 $196.8 $171.2 $42.3

Source: American Academy of Actuaries, Response to President’s Working Group, Appendix II, April 26, 2006.

Insured Loss Estimates: Medium CNBR Terrorist Attack ($ Bill)


FranciscoDes

Moines

Group Life $37.7 $22.5 $21.5 $3.4


Workers Comp 313.2 126.7 87.5 31.4


Commercial Prop. 77.8 31.5 35.5 4.1

Auto 0.2 0.6 0.8 0.4

TOTAL $446.5 $106.2 $92.2 $27.3


Insured Loss Estimates: Truck Bomb Terrorist Attack ($ Bill)


FranciscoDes

Moines

Group Life $0.3 $0.2 $0.3 $0.1


Workers Comp 3.5 2.8 3.9 1.5


Commercial Prop. 6.8 2.1 3.9 1.2

Auto 0.0 0.0 0.0 0.0

TOTAL $11.8 $5.5 $8.8 $3.0


Terrorism Coverage Take-Up Rate Continues to Rise

Source: Narketwatch: Terrorism Insurance 2006, Marsh, Inc.; Insurance Information Institute

24% 26%33%

44% 46% 44%48% 47%

54%59%

64%

03Q2 03Q3 03Q4 04Q1 04Q2 04Q3 04Q4 05Q1 05Q2 05Q3 05Q4

Terrorism take-up rate for non-WC risk rose steadily

through 2003, 2004 and 2005

TAKE UP RATE FOR WC COMP TERROR

COVERAGE IS 100%!!

Outlook for TerrorismRisk Insurance

• Democratic Control in Congress Implies Less Resistance to Government Involvement in Insurance Markets

• Many key Democrats are from terrorism exposed states: NY, MA, CA

• Senate Banking Cmte. chaired by Christopher Dodd (D-CT); House Financial Services Cmte. by Barney Frank (D-MA)

• Hearings Held Feb. 28 (DC) and March 5 (NYC) Indicating Little Opposition

• Possible Bill Could Emerge by Late April• May Propose Long-Term Solution: 10-20 yrs.

Natural Catastrophes

View by Some that Government Must Play a Larger Role

U.S. Insured Catastrophe Losses*$7

.5

$2.7

$4.7

$22.

9

$5.5 $1

6.9

$8.3

$7.4

$2.6 $1

0.1

$8.3

$4.6

$26.

5

$5.9 $1

2.9 $2

7.5

$100

.0

$61.

9

$8.8

$0

$20

$40

$60

$80

$100

$120

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

20??

*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Source: Property Claims Service/ISO; Insurance Information Institute

$ Billions

2006 was a welcome respite. 2005 was by far the worst

year ever for insured catastrophe losses in the US, but the worst has yet to come.

$100 Billion CAT year is coming soon

Insured Loss & Claim Count for Major Storms of 2005*

$1.1

$40.6

$10.3$5.0

104

383

1,047

1,744

$0$5

$10$15$20

$25$30$35

$40$45

Dennis Rita Wilma Katrina

Size of Industry Loss ($ Billions)

Ins

ure

d L

os

s (

$ B

illio

ns

)

02004006008001,0001,2001,4001,6001,8002,000

Cla

ims

(th

ou

sa

nd

s)

Insured Loss Claims

*Property and business interruption losses only. Excludes offshore energy & marine losses.

Source: ISO/PCS as of June 8, 2006; Insurance Information Institute.

Hurricanes Katrina, Rita, Wilma & Dennis produced a record 3.3

million claims

Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2005)

$3.5 $3.8 $4.8 $5.0$6.6 $7.4 $7.7

$10.3

$21.6

$40.6

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

Georges(1998)

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Andrew(1992)

Katrina(2005)

$ B

illi

ons

Sources: ISO/PCS; Insurance Information Institute.

Seven of the 10 most expensive hurricanes in US history

occurred in the 14 months from Aug. 2004 – Oct. 2005:

Katrina, Rita, Wilma, Charley, Ivan, Frances & Jeanne

$20.0$24.0 $26.0

$33.0 $33.0 $34.0 $35.0$41.0 $42.0

$80.0

$0$10$20$30$40$50$60$70$80$90

Homes

tead

Hurr

(194

5, FL)

Ft. Lau

derdale

Hurr

(194

7, FL)

Donna (

1960

, FL)

Okeech

obee

Hurr

(192

8, F

L)

Galve

ston (

1900

, TX)

Bestsy

(196

5, LA)

LI Exp

ress

(193

8, NY)

Katrin

a (20

05, L

A)*

Andre

w (199

2, FL)*

Mia

mi H

urr (1

926,

FL)

$ B

illi

ons

With rapid coastal development,

$40B+ storms will be more common

Source: AIR Worldwide **ISO/PCS estimate as of June 8, 2006

(Billions of 2005 Dollars) Plurality of worst-case

scenarios involve Florida

Insured Losses from Top 10 Hurricanes Adjusted to 2005 Exposure Levels

Source: AIR Worldwide

Insured Losses: $110BEconomic Losses: $200B+

$70

$30

$5 $4 $1$0

$20

$40

$60

$80

NY NJ PA CT Other

Nightmare Scenario: Insured Property Losses for NJ/NY CAT 3/4 Storm

Total Insured Property Losses =

$110B, nearly 3 times that of

Hurricane Katrina

Distribution of Insured Property Losses,

by State, ($ Billions)

Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,

1986-2005¹

Utility Disruption0.1%

Terrorism7.7%

All Tropical

Cyclones3

47.5%

Tornadoes2

24.5%

Water Damage0.1%

Civil Disorders0.4%

Fire6

2.3%

Wind/Hail/Flood5

2.8%

Earthquakes4

6.7%

Winter Storms7.8%

Source: Insurance Services Office (ISO)..

1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2005 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 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 $289.1 billion from

1984-2005 (in 2005 dollars). Tropical systems accounted for nearly half of all CAT losses from 1986-2005, up

from 27.1% from 1984-2003.

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


Florida & New York lead the way for insured coastal property at more than $1.9 trillion each.

Texas has $740B.

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

*III listSource: AIR Worldwide

Who’s to Blame*

1. State & local zoning, land use and building code officials

2. State & local legislators

3. State-run property insurers, pools & plans

4. Washington, DC

5. Property owners

Value of Insured Commercial Coastal Exposure (2004, $ Billions)

$994.8$437.8

$355.8$258.4

$199.4$121.3

$83.7$69.7

$52.6$45.3$43.3$39.4

$23.8$20.9$19.9$17.9$6.7

$1,389.6

$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600

New YorkFlorida

TexasMassachusetts



VirginiaMaine

North CarolinaGeorgia

AlabamaMississippi

New HampshireDelaware

Rhode IslandMaryland

Source: AIR

Value of Insured Residential Coastal Exposure (2004, $ Billions)

$512.1$306.6$302.2

$247.4$205.5

$88.0$65.1$64.5$60.0$60.0

$36.5$29.7$26.6$25.9$24.8$20.9

$5.4

$942.5

$0 $200 $400 $600 $800 $1,000

FloridaNew York

MassachusettsTexas



MaineVirginia

North CarolinaAlabamaGeorgia

DelawareRhode Island

NewMississippiMaryland

Source: AIR

$9 $11 $11 $12 $16$25 $27

$38

$88

$108

$0

$20

$40

$60

$80

$100

$120

San Jo

se, C

A (7-1

-191

1; 6.

6)

Portla

nd, O

R (8-1

2-18

77; 6

.3)

San F

rancis

co (6

-1-1

838;

7.2)

Mar

ked T

ree,

AR (1-5

-184

3; 6.

5)

North

ridge

, CA (1

-17-

1994

; 6.7)

Haywar

d, CA (1

0-21

-186

8; 6.

8)

Ft. Tejo

n, CA (1

-9-1

857;

7.9)

Charle

ston, S

C (8-3

-188

6; 7.

3)*

New M

adrid

, MO (2

-7-1

812;

7.7)

*

San F

rancis

co (4

-18-

1906

; 7.9)

$ B

illi

ons

With development along major fault lines, the threat of

$25B+ quakes looms large


(Billions of 2005 Dollars)

3 of the Top 10 are not West Coast events

Insured Losses from Top 10 Earthquakes Adjusted to 2005 Exposure Levels

ARE COASTAL DEVELOPMENT

PATTERNS RATIONAL? The Answer May

Surprise You

Excessive Catastrophe Exposure:Outcome of Economically & Politically

Rational Decision Process?• Property Owners

Make economically rational decision to live in disaster-prone areas Low cost of living, low real estate prices & rapid appreciation, low/no income tax, low

property tax, rapid job growth Government-run insurers (e.g., CPIC, NFIP) provide implicit subsidies by selling

insurance at below-market prices with few underwriting restrictions Government aid, tax deductions, litigation recovery for uninsured losses No fear of death and injury

• Local Zoning/Permitting Authorities Allowing development is economically & politically rational & fiscally sound Residential construction creates jobs, attracts wealth, increases tax receipts, stimulates

commercial construction & permanent jobs, develops infrastructure Increases local representation in state legislature & political influence Property and infrastructure damage costs shifted to others (state and federal taxpayers,

policyholders in unaffected areas)• Developers

Coastal development is a high-margin business Financial interest reduced to zero after sale

Source: Insurance Information Institute.

Excessive Catastrophe Exposure:Outcome of Economically & Politically

Rational Decision Process?• State Legislators

Loathe to pass laws negatively impacting development in home districts Local development benefits local economy and enhances political influence Rapid development lessens need for higher income and property taxes Can redistribute CAT losses to unaffected policyholders and taxpayers Can suppress insurance prices via state insurance regulator, suppress pricing and weaken

underwriting standards in state-run insurer & redistribute losses • Congressional Delegation

Home state development increases influence in Washington Political representation, share of federal expenditures

Loathe to pass laws harming development in home state/district Tax law promotes homeownership and actually produces supplemental benefits for property

owners in disaster-prone areas Large amounts of unbudgeted disaster aid easily authorized Tax burden largely borne by those outside CAT zone & those with no representation (children

& unborn)• President

Presidential disaster declarations and associated aid are increasing Political benefits to making declarations and distributing large amounts of aid Direct impact on favorability ratings & election outcomes Losses can be distributed to other areas and the unrepresented

Source: Insurance Information Institute.

UNDERWRITING CAPACITY

Are the Industry’s Claims Paying Resources are

Adequate?

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

7576777879808182838485868788899091929394959697989900010203040506

U.S. Policyholder Surplus: 1975-2006E* ($ Billions)

Source: A.M. Best, ISO, Insurance Information Institute *III estimate for 2006.

$ B

illi

ons

“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations

Capacity as of 12/31/06 is $481.5B (est.), 13.1% above year-end 2005,

69% above its 2002 trough and 44% above its 1999 peak.

Foreign reinsurance and residual market

mechanisms absorbed 45% of 2005 CAT

losses of $62.1B

Announced Insurer Capital Raising*($ Millions, as of December 1, 2005)

$1,500

$38

$400$450$600

$710

$300$100$140

$600

$129$297

$620

$124$202$150$299

$490

$3,200

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$ M

illi

ons

*Existing (re) insurers. Announced amounts may differ from sums actually raised. Sources: Morgan Stanley, Lehman Brothers, Company Reports; Insurance Information Institute.

As of Dec. 1, 19 insurers announced plans to raise $10.35 billion in new capital. Fourteen start-ups plan to raise as much as $10 billion more for a total of $20.4 billion. Actual total higher as Lloyd’s syndicates

have added capacity for 2006.

Announced Capital Raising by Insurance Start-Ups($ Millions, as of April 15, 2006)

$1,500

$1,000$1,000$1,000$1,000$1,000$1,000

$500 $500 $500 $500

$220 $180$100

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Harbo

r Poi

nt*

Amlin

Ber

muda

Flagsto

ne Re

Validus H

oldin

gs

Lanca

shire

Re*

*

Augsb

urg R

e

Ariel R

e

Hiscox

Ber

mud

a

New C

astle

Re

Arrow

Cap

ital

XL/Hig

hfiel

ds

Green

light

Re

Omeg

a Spec

ialty

Ascen

dent R

e

$ M

illi

ons

*Chubb, Trident are funding Harbor Point. Announced amounts may differ from sums actually raised. **Stated amount is $750 million to $1 billion. ***XL Capital/Hedge Fund venture. Arrow Capital formed by Goldman Sachs.Sources: Investment Bank Reports; Insurance Information Institute.

As of April 15, 14 start-ups plan to raise as

much as $10 billion.

Capital Raising by Class Within 15 Months of KRW

Existing Cos., $12.145 , 36%

New Cos., $8.898 , 26%

Sidecars, $6.359 , 19%Insurance Linked

Securities, $6.253 , 19%

Insurers & Reinsurers raised $33.7 billion in the wake of Katrina,

Rita, Wilma

Source: Lane Financial Trade Notes, January 31, 2007.

$ Billions

Capital Market Participation Post-KRW Reaches Record Highs


115.8

107.4

100.198.3

100.7

93.2

98.696.6

90

100

110

120

01 02 03 04 05 06E 07F 08F

P/C Industry Combined Ratio

Sources: A.M. Best; ISO, III. *Estimates/forecasts based on III’s 2007 Early Bird survey.

2005 figure benefited from heavy use of reinsurance which lowered net losses

2006 could produce the best underwriting

result since the 93.3 combined ratio in 1936.

As recently as 2001, insurers were paying out nearly $1.16 for

every dollar they earned in premiums

2007/8 deterioration due primarily to falling rates, but results still strong assuming

normal CAT activity

87.6

91.2

92.1 92.3 92.493.0 93.1 93.2 93.393.1

85

86

87

88

89

90

91

92

93

94

1949 1948 1943 1937 1935 1950 1939 1953 2007E 1936

Ten Lowest P/C Insurance Combined Ratios Since 1920

Sources: A.M. Best; Insurance Information Institute. *III Groundhog Survey forecast, Feb. 2007.

The projected 2006 combined ratio of 93.2 would be the best since 1936, a span of 70 years

PRICING

Are Low and Stable Prices Valid Arguments for an Expanded Role of

the State?

Percent of Commercial Accounts Renewing w/Positive Rate Changes, 2nd Qtr. 2006

71%

48%

28%21%

63%

32%

21%

12% 10%

35%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Southeast Southwest Pacific NW Northeast Midwest

Commercial Property Business Interruption

Source: Council of Insurance Agents and Brokers

Largest increases for Commercial Property & Business Interruption are in the Southeast, smallest in Midwest

Average Commercial Rate Change,All Lines, (1Q:2004 – 4Q:2006)

-0.1%

-3.2%

-7.0%

-9.4%-9.7%

-4.6%

-2.7%-3.0%

-5.3%

-9.6%

-5.9%

-8.2%

-12%

-10%

-8%

-6%

-4%

-2%

0%

1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 3Q06

Source: Council of Insurance Agents & Brokers; Insurance Information Institute

Magnitude of rate decreases has diminished greatly since

mid-2005 but is growing again

KRW Effect

REINSURANCE MARKETS

View Among Some that Reinsurance Markets “Failed” Post-Katrina

Share of Losses Paid by Reinsurers, by Disaster*

30%25%

60%

20%

45%

0%

10%

20%

30%

40%

50%

60%

70%

Hurricane Hugo(1989)

Hurricane Andrew(1992)

Sept. 11 TerrorAttack (2001)

2004 HurricaneLosses

2005 HurricaneLosses

*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for 2005.Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.

Reinsurance is playing an increasingly

important role in the financing of mega-CATs; Reins. Costs

are skyrocketing

Loss Distribution of 2005 CAT Losses


Reinsurers and Retro market

absorbed nearly half of 2005 CAT

losses

Transmission of Shock Through Insurance/Reinsurance Markets

Sh

ock

Primary Insurer Loss of Capacity

Reinsurer Loss of Capacity

Retrocessional Loss of Capacity

Higher Retentions

Higher Re Prices

Higher Retail Price/Less

Capacity for Insurance

$19.93 $19.44$21.21

$24.85$26.69

$29.50$30.63

$28.76

$25.33

$10

$15

$20

$25

$30

$35

97 98 99 00 01 02 03 04 05

$ B

illi

ons

Pre

miu

ms

Wri

tten

US reinsurance premiums written grew 54% between 1997 and 2003, but fell 17%

from 2003 through 2005

Source: Reinsurance Association of America; Insurance Information Institute Fact Book 2007, p. 38.

($ Billions)

Reinsurers Net Written Premiums, US Business, 1997 - 2005

Premiums written are actually falling

despite higher prices

Reinsurance Markets are Globally Linked

Global Reinsurance

Market

States like LA, MS paid little into the global

reinsurance pool but got a lot in return, shrinking

global claims paying resources and pushing up reinsurance costs for all

Premiums Ceded

Losses Paid

Debate Over Reinsurance Market Performance & Government

• Reinsurance markets typically suffer large shocks, followed by a period of higher prices and transient capacity constraints

• A new equilibrium between Supply and Demand is typically found within 18 months, commensurate with changes in the risk landscape. This is Economics 101 and is a textbook illustration of how capitalism works.

• A competing hypothesis suggests that reinsurance markets “fail” because they do not provide a stable price or quantity of protection as is required in an economy with continuously exposed fixed assets, especially one that is growth oriented

• Public Policy Solution: Acting on this hypothesis generally results in displacement of private (re)insurance capital by government intermediaries

• Open Question: Are policyholders and the economy better served through free markets, government or some hybrid?

Sources: Insurance Information Institute

What Role Should the Federal Government

Play in Insuring Against Natural Disaster Risks?

PUBLIC POLICY REMEDIES

Helpful or Harmful?

Public Policy: The Role of the State

• Government Disaster Aid

• State-Run Residual Markets (Markets of

Last Resort)

• Federal Natural Catastrophe Plan

• Socialization of the (Re) Insurance

Markets

GOVERNMENT AID

Helpful but Inefficient & Not a Solution

Top 10 Major Disaster Declaration Totals By State: 1953- 2006*

7771

5751 51 47 45 44 42 41

0

10

20

30

40

50

60

70

80

90

Texas

Califo

rnia

Florid

a

Louisi

ana

New Y

ork

Oklahom

a

Alaba

ma

Kentu

cky

Miss

issip

pi

Pennsy

lvan

ia

Total Number

*Through July 12, 2006.Source: Federal Emergency Management Agency (FEMA)

Federal aid is routinely authorized after even very

modest-sized disasters in the US

Government Aid After Major Disasters (Billions)*

$110.0

$43.9

$17.7 $15.5 $15.0

$0

$20

$40

$60

$80

$100

$120

Hurricane Katrina(2005)

Sept. 11 TerroristAttack (2001)

Hurricane Andrew(1992)

NorthridgeEarthquake (1994)

Hurricanes Charley,Frances, Ivan &Jeanne (2004)

$ B

illi

ons

*In 2005 dollars.Source: United States Senate Budget Committee, Insurance Information Institute as of 12/31/05.

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 $75B in aid—more than all the federal aid for the 9/11 terrorist attacks, 2004’s

4 hurricanes and Hurricane Andrew combined! $29B more

was authorized in Dec. 2005. At least $80B more is sought.

$1.3

$17.0

$42.0

$5.8$1.7

$25.4

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

HUD FEMA US Army Corps ofEngineers

Spent Allocation

Spending on Hurricane Katrina Reconstruction (Through Dec. 2006)

Source: Wall Street Journal, January 27, 2007, p. A1.

Only a fraction of promised

government relief has reached the hands of those

affected

STATE RESIDUAL MARKETS

How Big is Too Big?

US FAIR Plans Exposure to Loss* (Billions of Dollars)

Source: PIPSO; Insurance Information Institute *Hurricane exposed states only.

$387.8$400.4

$345.9

$269.6

$140.7$113.3

$170.1

$96.5

$40.2

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

1990 1995 1999 2000 2001 2002 2003 2004 2005

In the 15-year period between 1990 and 2005, total exposure to loss in the FAIR plans has

surged by a massive 965 percent, from $40.2bn in 1990

to $387.8bn in 2005!

Total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54.7bn in 1990 to $419.5 billion in 2005.

US Beach and Windstorm Plans Exposure to Loss (Bill. of Dollars)

Source: PIPSO; Insurance Information Institute. *Hurricane exposed states only.

$31.7$30.0$26.4$22.4

$103.5$108.0$111.8

$53.5

$14.5

$0

$20

$40

$60

$80

$100

$120

1990 1995 1999 2000 2001 2002 2003 2004 2005

In the 15-year period between 1990 and 2005, total exposure

to loss in the Beach and Windstorm plans has more

than doubled, from $14.5bn in 1990 to $31.7bn in 2005.

In 2002 Florida combined its Windstorm and Joint Underwriting Association to create Florida Citizens, so Florida data shifted to the FAIR plans from this date.

Florida Citizens Exposure to Loss (Billions of Dollars)

Source: PIPSO; Insurance Information Institute

408.8

$210.6$206.7$195.5

$154.6

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

2002 2003 2004 2005 2006

Exposure to loss in Florida Citizens nearly doubled in 2006

MS Windstorm Plan: Exposure to Loss (Millions of Dollars)

Source: PIPSO; Insurance Information Institute

$1,873.0

$1,631.8

$1,344.3

$1,121.7

$848.6$864.9$917.9

$637.1

$352.9

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

1990 1995 1999 2000 2001 2002 2003 2004 2005

Total exposure to loss in the Mississippi Windstorm Underwriting Association (MWUA) has surged by 431 percent, from $352.9m in 1990 to $1.9bn in 2005.

Texas: TWIA Growth In Exposure to Loss (Building & Contents Only, $ Bill)

Source: TWIA (as of 11/30/06); Insurance Information Institute

$35.9

$23.3$20.8

$18.8$16.0

$13.2$12.1

$0

$5

$10

$15

$20

$25

$30

$35

$40

2000 2001 2002 2003 2004 2005 2006*

Exposure to Loss (Building & Contents Only)

TWIA’s liability in-force for building & contents has surged by nearly 200 percent in the last six years from $12.1bn in 2000

to $35.9bn in 2006

Overview of Plans for a National

Catastrophe Insurance Plan

NAIC’s Comprehensive National Catastrophe Plan

• Proposes Layered Approach to Risk• Layer 1: Maximize resources of private

insurance & reinsurance industry Includes “All Perils” Residential Policy Encourage Mitigation Create Meaningful, Forward-Looking Reserves

• Layer 2: Establishes system of state catastrophe funds (like FHCF)

• Layer 3: Federal Catastrophe Reinsurance Mechanism

Source: Insurance Information Institute

Guiding Principles of NAIC’s National Catastrophe Plan

• National program should promote personal responsibility among policyholders

• National program should support reasonable building codes, development plans & mitigation tools

• National program should maximize risk-bearing capacity of private markets, and

• National plan should provide quantifiable risk management to the federal government

Source: Insurance Information Institute from NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005.

Comprehensive National Catastrophe Plan Schematic

Personal Disaster Account

Private Insurance

State Regional Catastrophe Fund

National Catastrophe Contract Program

Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.

State Attachment

1:50 Event

1:500 Event

Legislation: Comprehensive National Catastrophe Plan

• H.R. 846: Homeowners Insurance Availability Act of 2005 Introduced by Representative Ginny Brown-Waite (R-FL) Requires Treasury to implement a reinsurance program offering contracts

sold at regional auctions

• H.R. 4366: Homeowners Insurance Protection Act of 2005 Also worked on by Rep. Brown-Waite Establishes national commission on catastrophe preparation and protection Authorizes sale of federally-backed reinsurance contracts to state catastrophe

funds

• H.R. 2668: Policyholder Disaster Protection Act of 2005 Backed by Rep. Mark Foley (R-FL) Amends IRS code to permit insurers to establish tax-deductible reserve funds

for catastrophic events 20-year phase-in for maximum reserve Use limited to declared disasters

Source: NAIC, Insurance Information Institute

Layer 1: The Insurance Contract, Enhancing Capacity & Shaping the Risk

• All Perils PolicyNo exclusion except acts of warContains standard deductibles of $500 - $1000 but requires

separate CAT deductible of 2% – 10% of insured value; Consumer could buy down the deductible to non-CAT fixed dollar amount

• Encouraging Mitigation Policy will provide meaningful discounts for effective

mitigation measures• Creating Meaningful, Forward-Looking Reserves

Change tax law to allow insurers to set aside a share of premiums paid by policyholders as a reserve for future events

Amount set aside would be actuarially basedPhased-in to maximum reserve over 20 yearsUse limited to declared disasters


Layer 2: State Level Public/Private Partnership (State CAT Fund)

• Requirement to Create FundTo participate in national fund, states must establish state

CAT fund or participate in regional CAT fundFunds responsible for managing capacity of their funds up to

costs expected for combined 1-in-50 year CAT loss level• Operation of State/Regional CAT Funds

Operating structures left to states’ discretion, including– Financing mechanism (e.g., debt, pool etc.)– Trigger point for qualifying loss (if any)– Amount of retention between private insurers & state fund– Participation by surplus lines & residual markets

Requirement that rates are actuarially soundRequirement that fund will finance a level of mitigation

education and implementation


Layer 2: State Level Public/Private Partnership (State CAT Fund) [Cont’d]

• Building CodesParticipating states expected to establish effective (enforced)

building codes that properly reflect their CAT exposures as well as the latest in accepted science and engineering

States also required to develop high land use plans where appropriate

• Anti-Fraud MeasuresState funds and DOIs maintain rigorous anti-fraud programs

to ensure losses paid actaully due to insured CAT loss

• MitigationDOIs required to establish & implement effective mitigation

plansReview of mitigation plans will be considered as part of an

NAIC certification process


Layer 3:The Role of a National Mechanism

• The National Catastrophe Plan MechanismFederal legislation is needed to create a National Catastrophe

Insurance Commission (NCIC) NCIC purpose is to serve as conduit between state funds and US

Treasury for purpose of providing reinsurance to state funds for insured losses resulting from catastrophic events beyind the state-mandated 1-in-50 year exposure

States & NCIC will enter into National Catastrophe Financing Contracts Reinsurance will attach at 1-in-50 year level and provide protection

through the 1-in-500 year level event


Layer 3: [Cont’d]

The Role of a National Mechanism

• The National Catastrophe Insurance Commission Structure & Duties NCIC would annually establish actuarially sound rates, with no profit

factor, for each state’s aggregate catastrophic exposure State fund responsible for collecting premium and remitting to NCIC. NCIC remits premiums to US Treasury general revenues

No separate fund is created, nor are any funds accumulated In the event of a loss, US Treasury provides funds pursuant to catastrophe

financing contract

NCIC will consist of 11 members serving 6-year terms 1 member from each of 4 NAIC zones, 1 US Treasury rep., remainder are to be

experts in actuarial science, engineering, meteorological/seismic science, consumer affairs & p/c insurance

Members are selected by the President & confirmed by the Senate with chair appointed by the President


Interaction of State Funds, National Commission & US Treasury

StateFunds Pay Premium to the Commission

National Commission

US Treasury

$

$

$

$$$ to General Revenue

Reimbusements Under the Catastrophe Contract

State Fund A

State Fund BState Fund C


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

Proponents/Opponents ofNational Catastrophe Plan

• Proponents of a National Catastrophe Plan Some major personal lines insurers: Allstate, State Farm Insurance regulators from some CAT-prone states: FL, CA, NY as well

as NY (but not TX) Some elected officials in state legislatures & Congress, esp. from disaster-

prone states like FL Coalition building on-going (ProtectingAmerica.org)

• Opponents of a National Catastrophe Plan Reinsurers, American Insurance Association, numerous large insurers

both domestic and foreign Many smaller insurers concerned about federal intrusion into the p/c

regulatory arena Many insurers operating outside areas prone to major CAT risk Some regulators in states not prone to major catastrophic risk Likely opposition among legislators and policymakers in Washington

opposed to deeper involvement of government in p/c insurance sector

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

FLORIDA SPECIAL SESSION

LEGISLATIVE CHANGES

Insurer, Policyholder & State Impacts

Summary: Florida Legislature Special Session (January 2007)

1. Exponential Expansion of the Role of the State in Insuring Homes & In Reinsurance Markets

Doubles exposure of Florida Hurricane Catastrophe Fund to $32 billion from $16 billion (FHCF only has $1B cash), greatly displacing private reinsurers

Allows Florida Citizens to compete with private insurers by lowering rates and lowering eligibility standards

Allows Florida Citizens to displace private insurers by expanding into non-wind coastal business

Disbands disciplined, small and adequately priced Commercial JUA and transfers business to poorly run, underpriced, Citizens Commercial Account

Sources: Zurich Insurance Technical Center; Insurance Information Institute.


2. Dramatically Increases Exposure of Florida Policyholders to Post-Catastrophe Taxes

Expands the Citizens assessment base more than 4 fold

Increases maximum annual assessment facing Florida policyholders from $9.2 billion to $25 billion

Increases maximum general liability and commercial auto assessment exposure from 14% to 74% (These are 2 types of insurance that having nothing to do with hurricane risk)

Accelerates growth of Citizens, already the largest home insurers in the state and which doubled in size in 2006, by lowering rates and making access easier



3. Disincentives for Insurers to Offer Policies in Florida Introduces “excess profits law” (a virtual oxymoron in FL) Requires Executive Officer review on routine rate filings

Threatens perjury charges and administrative penalties

Increases cost of processing and maintaining policies Requires “premium discounts” even if not actuarially justified

4. Threatens State of Florida’s Credit Rating Major event could result in simultaneous issuance of $40+

billion in debt from Cat Fund, Citizens and Guarantee Fund Governor’s promise to cut property taxes could compound

state’s fiscal problems after an event


$8.3

$1.3

$35.0 $35.0 $35.0

$11.2

$35.0

$8.3 $8.3

$35.0

$11.2

$0

$5

$10

$15

$20

$25

$30

$35

$40

FL CitizensPersonal

Lines Acct.

FL CitizensCommercialLines Acct.

FL High RiskAcct.

FLHurricaneCat Fund

FL PCJUA FLGuarantee

Assoc.

2006 2007

Florida Hurricane Assessment Base, 2006 vs. 2007* ($ Bill)

The FL legislature

quadrupled the assessment

base for Citizens

Sources: Zurich Insurance Technical Center; Ins. Info. Inst. *Per special legislative session, Jan. 2007.

$1

.66

0

$0

.26

0

$7

.0

$7

.0

$7

.0

$0

.44

8

$3

.50

0

$1

.66

0

$1

.66

0 $3

.5

$0

.44

8

$0

$1

$2

$3

$4

$5

$6

$7

$8

FL CitizensPersonal

Lines Acct.

FL CitizensCommercialLines Acct.

FL High RiskAcct.

FLHurricaneCat Fund

FL PCJUA FLGuarantee

Assoc.

2006 2007

Florida Hurricane Max. Policyholder Annual Burden, 2006 vs. 2007* ($ Bill)

The FL legislature nearly tripled state

insurers’ assessment base from $9.2B to

$25B, an increase of $15.8B or 174%

Sources: Zurich Insurance Technical Center; Ins. Info. Inst. *Per special legislative session, Jan. 2007.

Why There is Concern Over the Florida Legislature’s & Governor’s Changes

• Risk is Now Almost Entirely Borne Within State• Virtually Nothing Done to Reduce Actual Vulnerability• Creates Likelihood of Very Large Future Assessments• Potentially Crushing Debt Load• State May be Forced to Raise/Levy Taxes to Avoid Credit

Downgrades• Many Policyholder Will See Minimal Price Drop

“Savings” came from canceling recent/planned rate hikes• Residents in Lower-Risk Areas, Drivers, Business

Liability Policyholders Will Come to Resent Subsidies to Coastal Dwellers

• Governor’s Emergency Order for Rate Freezes & Rollbacks Viewed as Unfair & Capricious

Sources: Insurance Information Institute.

WHAT REALLY HAPPENED?

“Florida Re”

What Really Happened in Florida?

• Problems Began in 1992 with Hurricane AndrewContinuous escalation in home and commercial property

insurance prices; $21.6B insured losses ($2005); 700K+ claims• Issue Ignited in 2004: Charlie, Frances, Ivan & Jeanne

$23B in insured catastrophe losses; 2.3 million claimsLarge rate increases requested; Wind deductibles triggered100,000+ homeowners non-renewals issuedChanneling of policies into expensive market of last resort

• Issue Exploded in 2005: Dennis, Katrina, Wilma$12B in insured losses; 1.2 million claimsMore large rate requests125,000+ non-renewalsSeveral insurers announce moratoria on new policiesSharply higher commercial property pricesFailure of Poe Financial Group

What Really Happened in Florida?(Cont’d)

• Florida Elections of 2006: Populist Issues Dominant #1 Campaign Issue: Lowering insurance costs Populist tide was unstoppable Promises made by all political candidates, new governor on down Republicans completely abandoned free market principles

• Insurers Offered No Cohesive Plan of Their Own Reflects disunity about how to approach natural cat exposure in the US; Some

support state’s expansion, others do not Industry misjudged populist groundswell Opportunist politicians filled the void

• “Record” Profits of 2006 Spawned Resentment & Made Insurers Easy Political/Media Targets

• Calm Storm Season of 2006 Allowed Politicians and Media to Assert that Insurers Were “Gouging” Public

• Inability/No Willingness of Public to Understand Potential Post-CAT Assessments; Debt Load Impacts

FUTURECASE STUDY?

“United States Re”???

Could the Florida Model be Adopted in Other State or Federal Level?

• (Re) Insurers Fear Export of Florida ModelLouisiana is a concern

• Several States Considering State/Regional CAT FundsLouisiana, South Carolina, Massachusetts & othersWould be a major negative for private reinsurers

• Federal LevelSeveral bills introduced to facilitate Natl. CAT Plan conceptWould be a negative development for private reinsurers

• New Federal Bill: Multiple Peril Insurance Act of 2007HR 920: Would further expand federal role by requiring

government to provide flood and wind coverageTheoretically coverage offered on “actuarial basis” but given

history of National Flood Insurance Program is unlikely

CONCLUSIONS

Are State-Backed Insurance Schemes the

Wave of the Future?

Conclusions: Role of the State in Insurance Markets

• Government’s Role as Provider of Re/Insurance GrowsFederal and State LevelDemocratic Congress less opposed to state involvement

• Significant Displacement of Private Insurance MarketsReinsurer displacement supported by some insurersAs much as 15-20% percent of US property-cat reinsurance market

displaced by FL; If other states follow, up to 30-35%• Government Programs Tend to Become Entrenched

Displacement could become permanentPolitical determination of rates could cause further displace of

private capacity in the future• Opportunity: State’s May Look to Offload Risk to Avoid

Fiscal Crisis and Debt DowngradesStates will quietly look for ways to offload riskPrivate reinsurance, ILS offer solutions

Insurance Information Institute On-Line

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Documents

State-Backed Insurance Schemes The Role of Insurers