Coastal Exposure

1
Coastal Exposure Catastrophic Risk in
Massachusetts

• Massachusetts Special Commission on
• Homeowners Insurance
• Boston, MA
• September 20, 2007

Robert P. Hartwig, Ph.D., CPCU,
President Insurance Information Institute ? 110
William Street ? New York, NY 10038 Tel (212)
346-5520 ? Fax [phone] ? bobh_at_iii.org ?
www.iii.org
2
Presentation Outline

• Review of US Insured Catastrophe Losses
• The Recent History of Hurricane Damage in the US
• Coastal Exposure in Massachusetts
• Hurricane Risk in the Northeast
• Massachusetts County Analysis Hurricane Strikes
  Population Growth
• Massachusetts Property Market of Last Resort
  Growth (MPIUA)
• Flood Risk Coastal Massachusetts is Vulnerable
• Profitability in the P/C Insurance Industry
• Ideas Proposals for Managing Coastal Exposure

3
SummaryMassachusetts Coastal Exposure

• Massachusetts is far more vulnerable to hurricane
  risk than is commonly recognized
• The insured value of coastal property exceeds
  660B
• Historically, the state has experienced a fair
  number of strikes by tropical events, though
  relatively few recently
• Significant growth in the states market of last
  resort
• Proposals/Ideas to Improve Market Conditions

4
U.S. CATASTROPHE LOSSESUS Catastrophe Losses
Are Trending Upwards
5
Most of US Population Property Has Major CAT
Exposure
Is Anyplace Safe?
6
U.S. Insured Catastrophe Losses
Billions
100 Billion CAT year is coming soon
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.
Excludes 4B-6b offshore energy losses from
Hurricanes Katrina Rita. III estimate through
07Q3. 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
7
Inflation-Adjusted U.S. Insured Catastrophe
Losses By Cause of Loss, 1986-2005¹
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.
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.
Source Insurance Services Office (ISO)..
8
REVIEW OF RECENT RECORD HURRICANE DAMAGEA
Glimpse intothe Future?
9
Top 10 Most Costly Hurricanes in US History,
(Insured Losses, 2005)
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
Sources ISO/PCS Insurance Information
Institute.
10
Number of Major (Category 3, 4, 5) Hurricanes
Striking the US by Decade
1930s mid-1960s Period of Intense Tropical
Cyclone Activity
Mid-1990s 2030s? New Period of Intense Tropical
Cyclone Activity
10
Tropical cyclone activity in the mid-1990s
entered the active phase of the multi-decadal
signal that could last into the 2030s
Already as many major storms in 2000-2007 as in
all of the 1990s
Figure for 2000s is extrapolated based on data
for 2000-2005 (6 major storms Charley, Ivan,
Jeanne (2004) Katrina, Rita, Wilma
(2005)). Source Tillinghast from National
Hurricane Center http//www.nhc.noaa.gov/pastint.
shtm.
11
Insured Loss Claim Count for Major Storms of
2005
Hurricanes Katrina, Rita, Wilma Dennis produced
a record 3.3 million claims
Property and business interruption losses only.
Excludes offshore energy marine losses. Source
ISO/PCS as of June 8, 2006 Insurance Information
Institute.
12
Top 11 Insured PropertyLosses in US (2005)
Eight of the 11 most expensive disasters is US
history occurred since 2001
Note 9/11 loss figure is for property claims
only. Sources ISO/PCS Insurance Information
Institute.
13
COASTAL EXPOSURE IN MASSACHUSETTSThe Risk is
Larger than is Commonly UnderstoodPopulation
GrowthCoastal ConstructionSoaring Real Estate
Values
14
Total Value of Insured Coastal Exposure (2004,
Billions)
Northeast states insured coastal exposure totals
3.73 trillion. With 662 billion in exposure MA
ranks 4th in US, 2nd in the Northeast and 1st in
New England
Source AIR Worldwide
15
Insured Coastal Exposure as a of Statewide
Insured Exposure (2004, Billions)
54.2 of all insured exposure in Massachusetts is
coastal5th highest among all hurricane exposed
states
Source AIR Worldwide
16
Value of Insured Residential Coastal Exposure
(2004, Billions)
Massachusetts has 307 billion in insured
residential exposure and counting, 3rd highest
among hurricane exposed states.
Source AIR
17
Value of Insured Commercial Coastal Exposure
(2004, Billions)
Massachusetts has 356 billion in insured
commercial exposure, 4th highest among hurricane
exposed states.
Source AIR
18
POPULATION GROWTH TRENDS IN MASSACHUSETTSPopulat
ion Growth in Vulnerable Area Fuels Increase in
Exposure
19
Population Growth Projections for NE Hurricane
Exposed States, by Number 2000-2030
Massachusetts will experience the largest
population gain among coastal New England states
by 2030, adding nearly 663,000 residents by
2030an increase of 10.4.
Population Gain
Source U.S. Census Bureau
20
Population Growth Projections for Hurricane
Exposed States, by Percentage 2000-2030
Percent
Massachusetts will experience is expected to see
a 10.4 increase in population by 2030, adding
nearly 663,000 residents.
Source U.S. Census Bureau
21
Coastal Population Density for New England
States, 1980 vs. 2008
Coastal population density in MA has increased
15 since 1980.
Density number of persons per square
mile Source NOAA U.S. Census Bureau
22
HOUSING GROWTH TRENDS IN MASSACHUSETTSHome
Construction in Vulnerable Areas Fuels Exposure
Growth
23
Percentage Increase in Estimated Housing Units
for MA Counties, 2000 to 2006
Coastal growth in housing construction in MA
exceeds the state overall by a wide margin.
Barnstable, Dukes, Plymouth and Nantucket
counties are seeing large increases in housing
units.
Source Population Division, U.S. Census Bureau
24
Leading States in Coastal Seasonal Housing in 2000
Massachusetts ranks 6th in the entire US for
coastal seasonal housing, with 95,000 units.
Source NOAA U.S. Census Bureau
25
Percentage Increase in Seasonal Homes in12 MA
Coastal Counties, 1990 to 2000
Seasonal home construction in Nantucket and
Marthas Vineyard has been boomingup nearly 50
during the 1990s
Source Population Division, U.S. Census Bureau
26
Distribution of Seasonal Homesin Massachusetts
by County, 2000
Barnstable, Dukes, Plymouth and Nantucket
counties account for 75 of all seasonal homes in
Massachusetts
Source U.S. Census Bureau
27
Hurricane Risk in the NortheastIs it Real?
28
Nightmare Scenario Insured Property Losses for
NJ/NY CAT 3/4 Storm
Insured Losses 110B Economic Losses 200B
Distribution of Insured Property Losses, by
State, ( Billions)
Total Insured Property Losses 110B, nearly 3
times that of Hurricane Katrina
Source AIR Worldwide
29
Number of Hurricanes Directly Indirectly
Affecting the Northeast Since 1900
Tropical cyclone activity in the Northeast is not
all that uncommon
Massachusetts has experienced 6 direct and 33
indirect storms since 1900, more than any other
Northeast state.
Source New Hampshire Office of Emergency
Management
30
Track of Great New England Hurricane of 1938

• Great New England Hurricane of 1938 a.k.a.Long
  Island Express caused severe damage through much
  of the Northeast.
• 600 Deaths
• 308 million

Source WeatherUnderground.com, accessed February
4, 2006.
31
Storm Season of 1944A Busy one for the Northeast

• Three storms affected NY, NJ and New England in
  1944, including Great Atlantic Hurricane
• 46 deaths
• 100 million damage
• 109mph gusts in Hartford

Source WeatherUnderground.com, accessed May 31,
2006 NOAA loss fatality figures.
32
Storm Season of 1954The Northeast Hit Again

• NY/New England areas hit by Carol Edna two
  weeks apart
• Carol 8-10 ft. floodwaters in Providence
• Edna hits Cape Cod
• Combined 80 deaths, 501 million losses

Source WeatherUnderground.com, accessed May 31,
2006 NOAA loss fatality figures.
33
Storm Season of 1960Brenda Donna Came to Visit

• NY/New England areas were hit twice in 1960.
• Donna killed 50, 387 million damage along East
  Coast

Source WeatherUnderground.com, accessed May 31,
2006 NOAA loss fatality figures.
34
After a 25 Year Hiatus, Hurricane Gloria Hit in
1985

• NY/New England areas were hit by Gloria 9/27/85
• 8 deaths
• 900 million damage

Source WeatherUnderground.com, accessed May 31,
2006 NOAA loss fatality figures.
35
Floyd Visited in 1999, Causing 15 Million in
Losses in MA

• NY/New England areas were hit by Floyd 9/14
  9/17/99
• 4.5 B in damage US
• 15 million in MA

Source WeatherUnderground.com, accessed
September 16, 2007 NOAA loss fatality figures.
36
Historical Analysis of Hurricane Strikes
PopulationThose Who Forget the Past are
Condemned to Repeat It
37
Barnstable County, Massachusetts
The population of Barnstable County is five times
larger than it was during the last period of
intense hurricane activity (1940-1960).
Last period of intense hurricane activity ran
from the 1930s to 1960
Barnstable County is mostly comprised of Cape Cod
38
Bristol County, Massachusetts
39
Dukes County, Massachusetts
Dukes County consists of Marthas Vineyard and
the Elizabeth Islands
40
Essex County, Massachusetts
41
Nantucket County, Massachusetts
42
Plymouth County, Massachusetts
43
Suffolk County, Massachusetts
44
MASSACHUSETTS PROPERTY RESIDUAL MARKET Rapid
Growth isSymptomatic of Problems
45
Massachusetts FAIR Plan Total Policy Count
(1990-2006)

• In the 16-year period between 1990 and 2006,
  total policy count for the MA FAIR plan has
  surged by 337 from 49,628 policies in 1990 to
  217,056 policies in 2006.
• 147 increase over the past five years alone
  (2001-2006)

Source PIPSO Insurance Information Institute.
99.55 of all MA FAIR plan policies are
habitational
46
Massachusetts FAIR Plan Habitational Policy Count
(1990-2006)
The number of residential policies in the MA FAIR
plan continues to rise, surging by 375 from
45,480 policies in 1990 to 216,074 policies in
2006.
Source PIPSO Insurance Information Institute.
99.55 of all MA FAIR plan policies are
habitational
47
Massachusetts FAIR Plan Exposure to Loss
(Billions of Dollars)

• In the 16-year period between 1990 and 2006,
  total exposure to loss in the MA FAIR Plan surged
  nearly 17 foldan increase by 1573, from 4.1B
  in 1990 to 68.6B in 2006.
• Over the most recent five years (2001-2006)
  exposure is up 311

Source PIPSO Insurance Information Institute
48
Massachusetts FAIR Plan Average Insured Value per
Policy
In the 16-year period between 1990 and 2006,
average exposure per policy increased by 283,
from 82,615 in 1990 to 316,047 in 2006 Up 76
since 2000.
Source Insurance Info. Inst. calculations from
PIPSO data. 99.55 of all MA FAIR plan policies
are habitational
49
Massachusetts FAIR Plan Net Income/Loss, 000
(1968-2006)
000
The MPIUA reported a net loss in 28 out of 38
years since 1968. The cumulative net loss over
the period was 117 million.
Based on earned premiums Source MPIUA
50
Growth in MPIUA HO Policies, Barnstable/Dukes/Na
ntucket vs. MA
Barnstable/Dukes and Nantucket Counties have seen
rapid annual growth in their share of MPIUA HO
policies relative to the state overall.
Source MPIUA
51
MPIUA HO Premium Growth Barnstable/Dukes/Nantucket
v. MA
Source MPIUA
52
MPIUA Annual HO Market Share By Territory Based
on Written Premium
The MPIUAs market share has swollen to 1/3 of
the market in Barnstable/Dukes and Nantucket
Counties, compared to 13 in the remainder of the
state
2006 Market Share is based on preliminary
data Source MPIUA
53
National Flood Insurance ProgramBay States
Exposure to Flood is Significant and Flood
Insurance Penetration is Worrisome
54
Flood Insurance Penetration RatesTop 25
Counties/Parishes in US
Highest flood insurance penetration rates are in
LA and FL, but most are underinsured
No counties in the Northeast are represented in
Top 25
As of 12/31/05. Source New Orleans
Times-Picayune, 3/19/06, from NFIP and US Census
Bureau data.
55
Flood Insurance Penetration RatesCounties/Parish
es Ranked 26-50
Mid-Atlantic/Northeast Counties are
underrepresented
People along the eastern seaboard have not gotten
the message
As of 12/31/05. Source New Orleans
Times-Picayune, 3/19/06, from NFIP and US Census
Bureau data.
56
Flood Insurance Penetration RatesCounties/Parish
es Ranked 51-75
MS coastal counties rank abysmally low
Barnstable is only county in all of New England
among Top 75
As of 12/31/05. Source New Orleans
Times-Picayune, 3/19/06, from NFIP and US Census
Bureau data.
57
Ideas ProposalsInsurers Policymakers Are
Trying to Tackle this Difficult Issue
58
Proposals Ideas Abound

• Insurers and Policymakers Have Proposed and
  Support a Wide Range of Ideas and Proposals
• Proposals Reflect Different Assessments of the
  Risk and About the Appropriate Role of Government
  vis a vis Private Markets
• Approaches Range from Free Market, Pure
  Risk-Based Pricing to Significant and Active Role
  by State/Federal Government
• Some Proposals Call for a Government Back Stop
  That Comes into Play at Some Level of Loss
  (National CAT Fund)
• Some Believe that Level is When an Event
  Threatens Solvency
• Remaining Availability/Affordability Issues May
  Lend Themselves to Government Role Under Any Plan

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P/C PROFITAn Historical PerspectiveProfitabili
ty is Highly Volatile in the P/C Insurance
Industry
61
ROE P/C vs. All Industries 19872008E
P/C profitability is cyclical, volatile and
vulnerable
Sept. 11
Hugo
Katrina, Rita, Wilma
Lowest CAT losses in 15 years
Andrew
Northridge
4 Hurricanes
2007-08 P/C insurer ROEs are I.I.I.
estimates. Source Insurance Information
Institute Fortune
62
Profitability Peaks Troughs in the P/C
Insurance Industry, 1975 2008F
197719.0
198717.3
200614.0
10 Years
199711.6
9 Years
10 Years
1975 2.4
1984 1.8
1992 4.5
2001 -1.2
2007-08 P/C insurer ROEs are I.I.I.
estimates. Source Insurance Information
Institute ISO, A.M. Best.
63
Top Industries by ROE P/C Insurers Still
Underperformed in 2006
P/C insurer profitability in 2006 ranked 30th out
of 50 industry groups despite renewed
profitability
P/C insurers underperformed the All Industry
median for the 19th consecutive year
Excludes 1 ranked Airline category at 65.1 due
to special one-time bankruptcy-related
factors. Source Fortune, April 30, 2007 edition
Insurance Information Institute
64
Key Messages on Profitability

• All of the profits earned in 2004 and 2005 and
  most of the profits in 2006 were earned in states
  and from types of insurance unaffected by the
  hurricanes (e.g., auto, workers comp, etc.)
• The current respite in hurricane activity
  provides insurers with the ability to rebuild
  their claims paying resources
• By law, the rates charged for insurance are based
  exclusively on past and expected losses in that
  state and that state only.

65
The Importance of Profits

• Profits compensate shareholders for the assets
  they put at risk and allow mutuals to achieve
  their objective of growing surplus
• Profitable companies can access capital markets
  under favorable terms after mega-CATs or if
  market conditions are poor (e.g., post-9/11)
  Others will fail, are dissolved or acquired
• Preferred treatment by reinsurers
• Profits build contingent capacity for mega-CATs
• Profits enable investments in the future of the
  enterprise (tech, people, etc.) and to seize upon
  new opportunities (new states, MA, etc.)
• Profitable companies have higher financial
  strength and credit ratings

66
SummaryMassachusetts Coastal Exposure

• Massachusetts is far more vulnerable to hurricane
  risk than is commonly recognized
• The insured value of coastal property exceeds
  660B
• Historically, the state has experienced a fair
  number of strikes by tropical events, though
  relatively few recently
• Significant growth in the states market of last
  resort
• Proposals/Ideas to Improve Market Conditions

67
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