Florida Insurance Market Update:Trends, Insight, Business

Insurance & Risk Management

Association of Contingency Planners, Tampa ChapterMarch 19, 2014

Lynne McChristian, Florida RepresentativeInsurance Information Institute 110 William Street New York, NY 10038Cell: 813.480.6446 lynnem@iii.org www.iii.org www.Insuring.Florida

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Presentation Outline

Catastrophe Loss Update

It’s Not Just Hurricanes Anymore!– Tornadoes & Thunderstorms– Flood/Surge—Key Issues in Flood Insurance

Florida Insurance MarketOverview of Profitability & Hurricane HistoryWhat the Future Holds

Flood Insurance & the Storm Surge Threat Business Insurance

Supply Chain Risk ManagementKey Person Coverage

3

$1

2.6

$1

1.0

$3

.8

$1

4.3

$1

1.6

$6

.1

$3

4.7

$7

.6

$1

6.3

$3

3.7

$7

3.4

$1

0.5

$7

.5

$2

9.2

$1

1.5

$1

4.4

$3

3.6

$3

5.0

$1

2.8

$1

4.0

$4

.8

$8

.0

$3

7.8

$8

.8

$2

6.4

$0

$10

$20

$30

$40

$50

$60

$70

$80

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13*

U.S. Insured Catastrophe Losses

Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute. *Through 12/31/13.

2013 CATs Were Well Below Recent Years. 2012 Was 3rd Highest Year for Insured Losses in

U.S. History on Inflation-Adj. Basis. 2011 Losses Were the 6th Highest.

2012 was the third most expensive year ever for insured CAT

losses

Record tornado losses caused

2011 CAT losses to surge

($ Billions, $ 2012)

3

Andrew

Storms of 2004/05

Number of Federal Major Disaster Declarations, 1953-2014*

53

55

57

59

61

63

65

67

69

71

73

75

77

79

81

83

85

87

89

91

93

95

97

99

01

03

05

07

09

11

13

0

20

40

60

80

100

120

13 1

7 18

16

16

7 71

21

22

22

0 25

25

11

11

19

29

17

17

48

46

46

38

30

22 2

54

22

31

52

42

13

42

7 28

23

11

31

38 4

3 45

32 3

63

27

54

46

55

04

54

5 49

56

69

48 5

26

37

55

98

19

94

75

51

0

*Through March 12, 2014.Source: Federal Emergency Management Administration; http://www.fema.gov/disasters; Insurance Information Institute.

The Number of Federal Disaster Declarations Is Rising and Set New Records in 2010 and 2011 Before Dropping in 2012/13.

The number of federal disaster declarations set a new record in 2011, with 99, shattering 2010’s

record 81 declarations.

There have been 2,154 federal disaster

declarations since 1953. The average

number of declarations per year is 35 from

1953-2013, though this few haven’t been

recorded since 1995.

10 federal disasters declared so far in 2014*

4

5

Federal Disasters Declarations by State, 1953 – 2014: Highest 25 States*

88

79

74

67

66

60

57

56

55

55

53

52

52

51

51

50

50

49

48

47

47

46

44

43

40

0

10

20

30

40

50

60

70

80

90

100

TX CA OK NY FL LA AL KY MO AR IL MS IA TN WV MN KS PA NE VA OH WA ND SD ME

Dis

as

ter

De

cla

rati

on

s

Over the past 60 years, Florida has had the 5th

highest number of Federal Disaster

Declarations (32 were associated with tropical events).

*Through Jan. 25, 2014. Includes Puerto Rico and the District of Columbia.Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.

Hurricanes Tornadoes Floods Freezes

Wildfires Severe T-Storms

High Winds Extreme Tides

6

Federal Disasters Declarations by State, 1953 – 2014: Lowest 25 States*

42

40

39

37

36

36

35

33

29

28

26

26

26

26

24

24

23

23

22

19

17

15

15

13

11

11

9

0

10

20

30

40

50

NC AK IN WI GA VT NJ NH MA OR PR HI MI NM AZ MD ID MT CO CT NV DE SC DC UT RI WY

Dis

as

ter

De

cla

rati

on

s

Over the past 60 years, Wyoming and Rhode Island had the fewest

number of Federal Disaster Declarations.

*Through Jan. 25, 2014. Includes Puerto Rico and the District of Columbia.Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.

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Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1993–20121

0.1%

1.7%

3.8%4.7%

6.3%

7.1%

36.0%

40.4%

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2012 dollars.2. Excludes snow.3. Does not include NFIP flood losses4. Includes wildland fires5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.Source: ISO’s Property Claim Services Unit.

Hurricanes & Tropical Storms, $158.2

Fires (4), $6.5

Tornadoes (2), $140.9

Winter Storms, $27.8

Terrorism, $24.8

Geological Events, $18.4

Wind/Hail/Flood (3), $14.9

Other (5), $0.2

Wind losses, by far, cause the most

catastrophe losses, even if hurricanes/TS

are excluded.

Tornado share of CAT losses is

rising

Insured CAT losses from 1993-2012

totaled $391.7B, an average of $19.6B per year or $1.6B

per month

U.S. Thunderstorm Insured Loss Trends, 1980 – 2013

8Source: Property Claims Service, and MR NatCatSERVICE

Thunderstorm losses in 2013 totaled $10.3 billion, the 6th

highest on record

Average thunderstorm

losses are up 7 fold since the early

1980s. The 5-year running average

loss is up sharply

Hurricanes get all the headlines, but thunderstorms are consistent

producers of large scale loss. 2008-2013 are the most expensive

years on record.

Severe Weather Reports in Florida: 2013

9Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2013_annual_summary.html#

There were 400 severe weather reports in 2013

37 Tornadoes

47 Large Hail Reports

316 High Wind Events

Florida Insurance Market

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Q: Big Profits in Storm-Free Years?A: Nope

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Return on Equity: Property/Casualty Insurance vs. Fortune 500, 1987–2013E*

* Excludes Mortgage & Financial Guarantee in 2008 – 2013E. 2013 P/C ROE is through 2013:Q3. Sources: ISO, Fortune; Insurance Information Institute.

-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 06 07 08 09 10 11 12 13E

P/C Profitability Is Both by Cyclicality and Ordinary Volatility

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

Record Tornado Losses

Sandy

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Return on Net WorthHomeowners: FL vs. U.S., 2003-2012

Sources: NAIC.

-200%

-150%

-100%

-50%

0%

50%

100%

03 04 05 06 07 08 09 10 11 12

US HO FL HO

(Percent)

Average 2003-2012US: 6.0%FL: 0.0%

2004/2005 hurricanes

183.3%

-53.4%

The average rate of return on the FL homeowners line is ZERO percent over the decade from 2003 - 2012

Homeowners: 10-Year Average Return on Net Worth: FL & Nearby States

-14.4%

0.0%

6.0%

10.7%

19.9%

-19.2%

-7.2%

-30% -20% -10% 0% 10% 20% 30%

South Carolina

North Carolina

U.S.

Florida

Georgia

Alabama

Louisiana

Source: NAIC, Insurance Information Institute

2003-2012At 0.0%, Florida Homeowners profitability is below the US average and above the regional

average

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Return on Net WorthCommercial Multi-Peril: FL vs. U.S.,

Sources: NAIC.

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

03 04 05 06 07 08 09 10 11 12

US Comm M-P FL Comm M-P

(Percent)

Average 2003-2012US: 9.0%FL: 7.3%

2004/2005 hurricanes

-77.2%

-28.8%

2003-2012

15

Return on Net WorthPrivate Passenger Auto: FL vs. U.S.

Sources: NAIC.

0%

2%

4%

6%

8%

10%

12%

14%

03 04 05 06 07 08 09 10 11 12

US PP Auto FL PP Auto

Average 2003-2012US: 7.6%FL: 4.7%

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Return on Net WorthWorkers Comp: FL vs. U.S.

Sources: NAIC.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

03 04 05 06 07 08 09 10 11 12

US WComp FL WComp

(Percent)

Average 2003-2012US: 7.1%FL: 11.0%

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Top States by Inflation-Adjusted Insured Catastrophe Losses, 1983–2012

9.0%

10.4%

14.3%66.3%

Source: PCS unit of ISO, Verisk Company.; Insurance Information Institute.

Over the Past 30 Years Florida Has Accounted for the Largest Share of Catastrophe Losses in the U.S., Followed by Texas and Louisiana.

Rest of the U.S.$309.9BFlorida

$66.7B

Texas$48.8B

Louisiana$42.0B

Total: $467.5 Billion, an average of

$16.6B per year or $1.3B per month

FL is the most costly state for

CATs, with nearly $67B in insured losses

over the past 30 years.

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Top 16 Most Costly Disastersin U.S. History

(Insured Losses, 2012 Dollars, $ Billions)

$7.8 $8.7 $9.2 $11.1$13.4$18.8

$23.9 $24.6$25.6

$48.7

$7.5$7.1$6.7$5.6$5.6$4.4

$0

$10

$20

$30

$40

$50

$60

Irene (2011) Jeanne(2004)

Frances(2004)

Rita (2005)

Tornadoes/T-Storms

(2011)

Tornadoes/T-Storms

(2011)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Sandy*(2012)

Northridge(1994)

9/11 Attack(2001)

Andrew(1992)

Katrina(2005)

Hurricane Andrew remains the second

most expensive natural disaster in US history.

Includes Tuscaloosa, AL,

tornado

Includes Joplin, MO, tornado

12 of the 16 Most Expensive Events in US History Have

Occurred Over the Past Decade.

*PCS estimate as of 4/12/13.Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.

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Top 12 Most Costly Hurricanesin U.S. History

(Insured Losses, 2012 Dollars, $ Billions)

*PCS estimate as of 4/12/13.Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.

$9.2 $11.1$13.4

$18.8

$25.6

$48.7

$8.7$7.8$6.7$5.6$5.6$4.4

$0

$10

$20

$30

$40

$50

$60

Irene(2011)

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Sandy*(2012)

Andrew(1992)

Katrina(2005)

Hurricane Sandy is the costliest tropical event

to not impact FL.

6 of the 12 most costly hurricanes in insurance history impacted Florida.

Florida Primed for Growth

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A Cautionary Tale: Coastal Exposure to Risk

Will Increase.

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Florida’ Economy: Primed for Growth; Hurricane Vulnerability Increases

Home Construction in FL Will Rise Sharply. 110,000 new homes are expected to be built in FL in 2014.

148,000 in 2015; 167,000 in 2016 and 168,000+ in 2017.

Florida will account for 1-in-10 new homes built in the US.

Real Economic Growth Average About 3% through 2017. Will fuel commercial property exposures.

Population Growth Will Greatly Exceed the US Overall 1.3% to 1.4% per year, almost double ~0.75% for the US.

In 2014, FL likely to overtake NY as the 3rd most populace state.

More than 1 million increase through 2017.

Will drive demand for housing, infrastructure, commercial prop.

Increase of about 600,000 jobs through 2017.

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Strong Florida Population Growth Will Drive Coastal Exposure Sharply Upward

18.5418.68

18.88

19.11

19.35

19.59

19.86

20.13

20.41

20.71

0.8% 0.8%

1.1%1.2% 1.2%

1.3% 1.3%1.4% 1.4%

1.4%

18.0

18.5

19.0

19.5

20.0

20.5

21.0

08 09 10 11 12 13E 14F 15F 16F 17F

Po

pu

lati

on

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

An

nu

al G

row

th R

ate

Florida Population Annual Growth Rate

(Millions)

Florida is expected to add 1.1 million new residents by 2017

relative to 2013

At 1.3% to 1.4%, FL’s population growth will well above the US

Source: US Census Bureau; University of Central Florida Institute for Economic Competitiveness: http://iec.ucf.edu/post/2014/01/07/Florida-Metro-Forecast-December-2013.aspx ; Insurance Information Institute.

Florida Total Private Housing Starts,2000 – 2017F

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The economic outlook for most of

the US is positive for the first time in many

years

Source: University of Central Florida Institute for Economic Competitiveness: http://iec.ucf.edu/post/2014/01/07/Florida-Metro-Forecast-December-2013.aspx

CRASH, CRATER, RECOVERY Homebuilding in FL continues

to recover, adding substantially to coastal exposures.

(Thousands of Units)

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Total Value of Insured Coastal Exposure in 2012

(2012, $ Billions)

Source: AIR Worldwide

$293.5$239.3

$182.3$164.6$163.5

$118.2$106.7$81.9$64.0$60.6$58.3

$17.3

$567.8$713.9

$849.6$1,175.3

$2,862.3$2,923.1

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500

New YorkFloridaTexas

MassachusettsNew JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

In 2012, New York Ranked as the #1 Most Exposed State to Hurricane Loss, Overtaking Florida with $2.862 Trillion. Texas is very exposed too, and

ranked #3 with $1.175 Trillionin insured coastal exposure

The Insured Value of All Coastal Property Was $10.6 Trillion in 2012 , Up 20% from $8.9 Trillion in 2007 and

Up 48% from $7.2 Trillion in 2004

The value of coastal exposure in FL was nearly $2.9 trillion in 2012, up 19% or $465 billion since 2007

despite the housing collapse.

Flood Insurance

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Flood Exposure: Reforms on Hold

• Flood Rates, True Risk & Subsidies• Private Flood Insurance Options

26

Total NFIP Policies in Force, 2012

Source: U.S. Department of Homeland Security, Federal Emergency Management Agency; Insurance Information Institute.

Florida

Texas

Louisana

California

New Jersey

South Carolina

New York

North Carolina

Virginia

Georgia

0 500,000 1,000,000 1,500,000 2,000,000 2,500,000

2,058,201

645,911

486,525

256,836

238,738

204,895

173,312

138,378

115,703

96,847

Florida has almost three times as much flood

insurance in force as any other state, accounting for

37% of all policies in the US

Median Value of Flood Properties

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000 402,768

223,692

339,842

306,107

All U.S. Homes; 165,344

Media

n H

om

e V

alu

es,

2006

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A CBO survey indicated the typical home with flood insurance is worth significantly more than the typical home. The typical

subsidized coastal risk was worth more than unsubsidized risks.

Congressional Budget Office 2007 survey of coastal risks, with U.S. owner-occupied home median from Bureau of Census, 2005 American Housing Survey; Insurance Information Institute.

What kind of Buildings Does Flood Insurance Protect?

Other0.4%

Principal Res-idence74.5%

Secondary/ Vacation19.5%

Non-residential5.6%

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One-fourth of all flood policies are written on commercial (non-residential) risks or on secondary homes.

Sources: Congressional Budget Office (2007), Insurance Information Institute.

29

I.I.I. Poll: Disaster Preparedness

1Asked of those who have homeowners insurance and who responded “yes”.

Source: Insurance Information Institute Annual Pulse Survey.

Q. Do you have a separate flood insurance policy?1

Only 13 percent of American homeowners say they have a flood insurance policy; the percentage is lowest in the Northeast at 10 percent.

5%

13%

19%

12%14%14%

6%

21%

6%

13%

10%12%

15%

11%13%

0%

5%

10%

15%

20%

25%

Northeast Midwest South West Total U.S.

May-11 May-12 May-13

Percentage of people with flood

insurance is unchanged

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I.I.I. Poll: Disaster Preparedness

1Asked of those who have homeowners insurance and who responded “yes”.

Source: Insurance Information Institute Annual Pulse Survey.

16%

12%

32%

9%

20%23%

14%

32%

12%

22%24%

16%

29%

10%

21%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Northeast Midwest South West Total U.S.

May-11 May-12 May-13

Q. Does your homeowners policy cover damage from flooding during a hurricane?1

The proportion of homeowners who believe their homeowners policy covers damage from flooding during a hurricane stands at 21 percent. This proportion rises eight percentage points in the South, to 29 percent.

About 30 percent of homeowners in the South still believe

flooding from a hurricane is covered

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Top 12 Most Costly Flood Events by NFIP Payout*

(NFIP Insured Losses, $ Millions)

*Expressed in original dollars (not inflation-adjusted).Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.

$585 $537 $493 $473$1,104$1,319$1,607$2,670

$7,298

$16,277

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

Katrina(2005)

Sandy(2012)

Ike (2008)

Ivan (2004)

Irene (2011)

Allison(2001)

LouisianaFlood (1995)

Isaac (2012)

Isabel (2003)

Rita (2004)

Katrina and Sandy are by far the most

costly events in NFIP history

8 of the 10 most costly events in NFIP history occurred over the past decade (2004‒2013);

NFIP deficit now totals $24 billion

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Total Potential Home Value Exposure to Storm Surge Risk in 2013*

($ Billions)

*Insured and uninsured property. Based on estimated property values as of April 2013.Source: Storm Surge Report 2013, CoreLogic.

$65.2$51.0$50.3

$35.0$22.4$20.5

$15.9$10.4$7.2$4.7$3.1$2.7$2.6$0.6

$65.6$72.0$78.0

$118.8$135.0

$386.5

$0 $50 $100 $150 $200 $250 $300 $350 $400 $450

FloridaNew York

New JerseyVirginia

LouisianaS. CarolinaN. Carolina

TexasMassachusetts

ConnecticutMarylandGeorgia

DelawareMississippi

Rhode IslandAlabama

MaineNew

PennsylvaniaDC

The Value of Homes Exposed to Storm Surge was $1.147 Trillion in 2013.* Only a fraction of this is insured, hence the huge demand for federal aid

following major coastal flooding events.

Florida is by the state most vulnerable to storm surge.

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$6,558$10,994

$44,563

$57,277

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

Homeowners* Vehicle Commercial NFIP Flood**

Commercial (i.e., business claims) are more expensive

because the value of property is often higher as well as the impact of insured business

interruption losses

*Includes rental and condo policies (excludes NFIP flood). **As of Oct. 31, 2013.Sources: Catastrophe loss data is for Catastrophe Serial No. 90 (Oct. 28 – 31, 2012) from PCS as of March 2013; Insurance Information Institute.

Hurricane Sandy: Average Claim Payment by Type of Claim

The average insured flood loss was nearly 9 times larger than the average non-flood insured loss

(mostly wind)

Post-Sandy, the I.I.I. worked very hard to make help media, consumers and regulators understand the distinction between a flood claim and a

standard homeowners claim. NFIP is $24B in debt.

34

Business Insurance:Supply Chain Risk Management

34

The longer the supply chain the greater likelihood of a weak link.

Global, Intertwined Economy

Over 50% of Fortune 500 profit now comes from overseas.

Supply chains have become more complex, extending to multiple levels.

Demographic change has placed more business in harm’s way.

Catastrophe events are having deeper, wide-spread impact.

How to Manage Supply Chain Disruptions

Identification of Risk Conduct thorough supply chain mapping exercise. Look at processes as they come together to create final

products. Look in reverse: starting with where profits are generated

and work backwards to identify greatest financial threats.

Avoidance Remove the threat of exposure to the supply chain.

Mitigation Reduce the threat associated with exposures.

Manage Includes transfer of risk through insurance.

The Challenge: Risk

You can outsource operations, but that doesn’t mean you are outsourcing risk.

Managing Risk

The majority of property loss is preventable, even in supply chains.

“Nearly 90 percent of firms do not conduct a risk assessment when outsourcing production.”

“Supply Chain Risk: It’s Time to Measure It” Harvard Business Review Blog, Feb. 5, 2010

Avoid or Mitigate the Interruption

Understand your supply chain at every tier.

Identify weaknesses.

Map the manufacturing process and overlay it with financial mapping and a business impact analysis.

Harden facilities, owned or otherwise.

Define acceptable risk.

Create contingency and disaster plans.

Risk Transfer Products

Insurance is part of the solution.

Insurance products evolve, so keep in tune.Traditionally, coverage is for physical damage,

business interruption and contingent coverage.

Business interruption has two levels:Gross earnings (Production-based).

Gross profits (Sales-based).

Contingent Business Interruption

Chain Rule

To Supplier, Customer,

Dependent Property

PhysicalDamage or Loss

Which Causes an

InterruptionOf the Type

Covered

For a Defined

Indemnity Period

Insured Loss

Key Person Insurance

Life and disability coverage on key individuals.

Amount of coverage depends on the individual’s worth to the business or organization. A review of the employee’s responsibilities can help

determine the amount.

Costs are based on the same factors that apply to anyone seeking such coverage, i.e., age, height/weight, medical history.

The business owns the policy, pays the premiums and is the beneficiary.

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