The Florida Property Market

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

2. Agenda • How did we get here? • How bad could it be? • What does the future hold?

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

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

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

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

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

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

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

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

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

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

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

14. How bad could it be?Analysis of assessment costs

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

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

17. In the event of a major storm, most claim payments will be funded after-the-fact 80.0 55.0 49.5 43.8 35.0 25.0 20.0 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”.

18. Potential long-term costs of 2007 hurricanes couldovershadow 2007 premium savings for consumers This illustration does not contemplate the possibility of hurricanes beyond 2007, which would further constrain funding and result in additional assessments 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.

19. Tallahassee Tampa Average Savings $20 Cost of 1-in-30 storm $2,000 Cost is 100 times average savings Average Savings $100 Cost of 1-in-30 storm $2,300 Cost is 23 times average savings Exposure to the nominal cost of future assessments and surcharges is not proportionate to savings… Statewide Average Average Savings $265 Cost of 1-in-30 storm $2,550 Cost is 10 times average savings Orlando Average Savings $30 Cost of 1-in-30 storm $2,075 Cost is 69 times average savings Miami Average Savings $1,120 Cost of 1-in-30 storm $3,375 Cost is 3 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.

20. Annual assessments per average household would extend out thirty years under various scenarios(here, a 1 in 50 storm in 2007) Note: Number of households is based on 2007 households and is not adjusted for population growth.

21. Annual assessments per average household would extend out thirty years under various scenarios(here, a 1 in 100 storm in 2007) Note: Number of households is based on 2007 households and is not adjusted for population growth.

22. Annual assessments per average household would extend out thirty years under various scenarios(here, a 1 in 250 storm in 2007) Note: Number of households is based on 2007 households and is not adjusted for population growth.

23. What does the future hold?

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

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

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

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

28. Questions?