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The Florida Property Market Examination of the Marketplace After HB 1A Tapio Boles, FCAS November 12, 2007

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The Florida Property Market. Examination of the Marketplace After HB 1A. Tapio Boles, FCAS November 12, 2007. Agenda. How did we get here? How bad could it be? What does the future hold?. How did we get here? The Florida marketplace and HB 1A. - PowerPoint PPT Presentation

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Page 1: The Florida Property Market

The Florida Property Market

Examination of the Marketplace After HB 1A

Tapio Boles, FCAS

November 12, 2007

Page 2: The Florida Property Market

2

Agenda

How did we get here?

How bad could it be?

What does the future hold?

Page 3: The Florida Property Market

How did we get here?The Florida marketplace and HB 1A

Page 4: The Florida Property Market

4

Historical context for HB 1A(Hurricane Preparedness and Property Insurance Bill)

Problems began in 1992 with Hurricane Andrew $21.6B insured losses ($2005); 700,000+ claims Escalation in home and commercial property insurance prices

Issue resurfaced in 2004: Charlie, Frances, Ivan & Jeanne $23B in insured catastrophe losses; 2.3 million claims Large rate increases requested 100,000+ homeowners non-renewals issued Channeling of policies into expensive market of last resort

Issue exploded in 2005: Dennis, Katrina, Wilma $12B in insured losses; 1.2 million claims More large rate requests 125,000+ non-renewals Several insurers announce moratoria on new policies Failure of Poe Financial Group

Page 5: The Florida Property Market

5

There are three public insurance mechanismsfor Florida property

Citizens Property Insurance Company (Citizens) Originally the insurer of last resort for personal and

commercial properties in Florida Writes a variety of wind-only policies for

policyholders in high risk areas Today writes multiple peril coverage for

homeowners and commercial property

The Florida Hurricane Catastrophe Fund (FHCF) Provides reinsurance to Citizens and private carriers

The Florida Insurance Guaranty Association (FIGA) The guaranty fund for private insurers

Page 6: The Florida Property Market

6

Overview of HB 1A and subsequent legislation

Reduced rates and encouraged growth of Citizens

Expansion of FHCF with subsidized rates

Restrictions placed on private insurers writing business in Florida

Goal is to expand availability and reduce rates for policyholders

Page 7: The Florida Property Market

7

Effect of HB 1A on Citizens

Reduced rates Rolled back 2007 rate increases Freezes rates through year-end 2008 Rates no longer required to be actuarially sound Allows rates to be competitive with private insurance

Loosens eligibility requirements

Increases scope of coverage for non-wind, multi-peril, and commercial property insurance

Expanded Citizens’ assessment base to include most lines, including auto

Page 8: The Florida Property Market

8

Effect of HB 1A on the FHCF

Expansion of coverage layers

“Mandatory Cover” ~$16B xs $6B (similar to 2006)

Two new layers below mandatory FHCF layer Temporary Emergency Additional Coverage Option

(“TEACO”); ~$3B xs $3B Up to $10M for Limited Apportionment Companies

in Insurance Capital Build-up Incentive Program

Additional layers of cover above mandatory layer Temporary Increase in Coverage Limits (“TICL”):

Twelve options (up to ~$12B) of coverage above mandatory FHCF layer

Page 9: The Florida Property Market

9

Additional changes to the FHCF

Eliminates “rapid cash build-up factor” (25% load in rates)

Authorizes the State Board of Administration to purchase capital market instruments to back FHCF obligations (cat bonds, industry loss warranties, etc.)

Changes effective for 2007 wind season Scheduled to sunset in three years

Page 10: The Florida Property Market

10

Regulatory requirements and restrictions

Presumed factor filing for FHCF savings

Restricts appeal for disapproved rate filings

Requires notice of non-renewal to consumers and OIR at least 100 days prior to renewal date or June 1 (whichever earlier)

90 days to pay or deny claim

CEO/CFO/Chief Actuary certification that savings from Act passed through to consumers

Prohibits “excess insurer profits” over 10 year period

If company writes auto in FL and HO in another state, must write HO in FL effective 1/1/08

Page 11: The Florida Property Market

11

What does this mean?

Insurers are scaling back exposures

Citizens continues to grow

FHCF is expanded Crowding out of private capital from the FL market

Rates for Citizens and FHCF are inadequate by design

Citizens and FHCF are thinly capitalized

A major hurricane or series of storms could lead to substantial policyholder assessments

Page 12: The Florida Property Market

12

Citizens is now the largest property insurer in Florida, with more than 25% of the market

10

1314 14

22

27

12 12 13 1311

10

0%

5%

10%

15%

20%

25%

30%

2002 2003 2004 2005 2006 2007*

Mar

ket

Sha

re %

Citizens State Farm

Notes: Data for 2002-2006 from A.M. Best. Includes Special Property, Commercial Multiple Peril (Non-Liability), and Homeowners/Farmowners.* 2007 data projected based on Citizens’ 2007 Operating Budget and flat growth assumptions for private carriers.

Page 13: The Florida Property Market

13

Citizens is the second largest P/C insurer in Florida, responsible for 10% of all premiums written

3

44 4

8

10

1312 12

1211 11

76 6

7 7 7

0%

2%

4%

6%

8%

10%

12%

14%

2002 2003 2004 2005 2006 2007*

Mar

ket

Sha

re %

Citizens State Farm Allstate

Notes: Data for 2002-2006 from A.M. Best. Includes all lines from the P/C annual statement.* 2007 data projected based on Citizens’ 2007 Operating Budget and flat growth assumptions for private carriers.

Page 14: The Florida Property Market

How bad could it be?Analysis of assessment costs

Page 15: The Florida Property Market

15

Background on the assessment mechanisms

In the event of a major storm or series of storms, claims in excess of available cash resources will need to be financed via the issuance of bonds by Citizens, FHCF, and FIGA; the principal and interest on these bonds will be repaid by assessments on Florida policyholders Levied on various types of property/casualty

insurance, including homeowners, auto, commercial property, and liability

HB 1A expanded the overall exposure of Citizens and FHCF, increasing the potential amount and duration of assessments

Page 16: The Florida Property Market

16

Background on the assessment mechanisms (cont’d)

Bonds will be financed over the course of several years, and interest charges will add to the cost paid by policyholders

The potential cost to consumers will be felt two ways Directly through assessments on the homeowners

and auto insurance premiums consumers pay Indirectly, as business owners will pass on the cost

of assessments on their commercial insurance premiums to consumers through higher prices on goods and services

Page 17: The Florida Property Market

17

In the event of a major storm, most claim payments will be funded after-the-fact

10.1 10.4 10.9 12.4 15.0 17.625.8

9.914.6

24.1

31.434.5

37.4

54.2

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

1 in 20 1 in 30 1 in 50 1 in 70 1 in 85 1 in 100 1 in 250

Hurricane Probability

Bill

ion

s o

f Do

llars

Pre-event funding Post-event funding (assessments and bonds)

Notes: Pre-event funding includes funds available to Citizens, FHCF, and private carriers, plus contingent funding available through private reinsurance to pay claims in 2007. Post-event funding is on a present-value basis and does not include cumulative financing costs. Probabilities are expressed as “odds of a single storm of this magnitude or greater happening in the 2007 season”.

20.0

25.0

35.0

43.8

49.5

55.0

80.0

Page 18: The Florida Property Market

18

Potential long-term costs of 2007 hurricanes couldovershadow 2007 premium savings for consumers

7,855

4,956

4,694

4,416

3,503

1,486

1,005

6,116

3,752

3,497

3,219

2,528

1,066

721

265

0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000

1 in 250

1 in 100

1 in 85

1 in 70

1 in 50

1 in 30

1 in 20

Savings

Hu

rric

an

e P

rob

ab

ility

Nominal Savings/Cost per Household

Savings Direct Costs Indirect Costs

Notes: Assumed average homeowners premium per household is $1,300 in 2007. Savings for 2007 premiums reflects 24.3% savings on hurricane costs, which are assumed to be 63% of total premiums. These savings are based on the statewide OIR estimate. Actual savings may be less. Direct costs include assessments paid by policyholders on homeowners and personal auto premiums. Indirect costs include assessments on commercial lines passed onto consumers through higher prices. Amounts expressed here are the nominal costs, or the total cost of borrowing including financing charges paid over the term of the bond.

This illustration does not contemplate the possibility of

hurricanes beyond 2007, which would further constrain

funding and result in additional assessments

Page 19: The Florida Property Market

19

Exposure to the nominal cost of future assessments and surcharges is not proportionate to savings…

Miami

Average Savings $1,120

Cost of 1-in-30 storm $3,375

Cost is 3 times average savings

Statewide Average

Average Savings $265

Cost of 1-in-30 storm $2,550

Cost is 10 times average savings

Tallahassee

Average Savings $20

Cost of 1-in-30 storm $2,000

Cost is 100 times average savings

…meaning that policyholders in lower risk areas would subsidize high-risk areas if a major event occurs.

Note: Cost includes direct assessments and indirect costs to repay bond principal and financing charges. This illustration assumes that homeowners rates in Miami, Orlando, Tallahassee and Tampa are 180%, 53%, 46% and 76% of statewide average premiums, respectively.

Tampa

Average Savings $100

Cost of 1-in-30 storm $2,300

Cost is 23 times average savings

Orlando

Average Savings $30

Cost of 1-in-30 storm $2,075

Cost is 69 times average savings

Page 20: The Florida Property Market

20

Annual assessments per average household would extend out thirty years under various scenarios(here, a 1 in 50 storm in 2007)

402

188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188

0

100

200

300

400

500

6002

00

7

20

08

20

09

20

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11

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Ave

rage

Dol

lar

Ass

essm

ent p

er H

ouse

hold

Citizens Regular Assessments Citizens Emergency Assessments FHCF Assessments

FIGA Regular Assessments FIGA Emergency Assessments

Note: Number of households is based on 2007 households and is not adjusted for population growth.

Page 21: The Florida Property Market

21

Annual assessments per average household would extend out thirty years under various scenarios(here, a 1 in 100 storm in 2007)

509

377 377 377 377 377 377 377 377 377 377

221 221 221 221 221 221 221 221 221 221 221 221 221 221 221 221 221 221 221 221

0

100

200

300

400

500

6002

00

7

20

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09

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Ave

rage

Dol

lar

Ass

essm

ent p

er H

ouse

hold

Citizens Regular Assessments Citizens Emergency Assessments FHCF Assessments

FIGA Regular Assessments FIGA Emergency Assessments

Note: Number of households is based on 2007 households and is not adjusted for population growth.

Page 22: The Florida Property Market

22

Annual assessments per average household would extend out thirty years under various scenarios(here, a 1 in 250 storm in 2007)

509

449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449 449

0

100

200

300

400

500

6002

00

7

20

08

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09

20

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20

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20

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Ave

rage

Dol

lar

Ass

essm

ent p

er H

ouse

hold

Citizens Regular Assessments Citizens Emergency Assessments FHCF Assessments

FIGA Regular Assessments FIGA Emergency Assessments

Note: Number of households is based on 2007 households and is not adjusted for population growth.

Page 23: The Florida Property Market

What does the future hold?

Page 24: The Florida Property Market

24

Issues spread to other coastal states

New York has proposed to create a catastrophe reserve fund

New Jersey and Massachusetts are considering similar proposals

Connecticut’s attorney general recently accused reinsurers of conspiring to fix prices and allocate markets to eliminate competition

There is talk of creating a coalition of coastal states, from Texas to Maine, to speak with a unified voice to the insurance industry

Page 25: The Florida Property Market

25

A federal solution?

The “Put Option”: Expectation that the Federal Government will come to aid in the event of a major catastrophe

Expansion of the National Flood Insurance Program to cover windstorm losses

There is growing support for a national catastrophe fund

Page 26: The Florida Property Market

26

In round 1 of Florida roulette, the chamber was empty...

If there are no hurricanes, everyone wins Insurers win Policyholders win Lawmakers look like heroes

If the big one happens, everyone loses Insurers lose Public insurance system crumbles Policyholders are stuck with the bill

Page 27: The Florida Property Market

27

What are the fundamental issues?

Pre-event funding vs. post-event funding

Private vs. public reinsurance

Actuarial equity vs. cross subsidization By location Between insurance lines of business

Actuarially sound premiums vs. affordability

Insufficient risk pooling

Implications for coastal land use

Page 28: The Florida Property Market

Questions?