CAT Storms and Risk Data: Lessons from
Public, Private, and International
Insurance Markets
Donald T. Hornstein, Brooks Professor of Law and
Board of Directors, NCIUA/NCJUA
Losses Due to Natural Disasters Worldwide, 1980–
2013 (Overall & Insured Losses)
(Overall and Insured Losses)
(2013 Dollars, $ Billions)
10-Yr. Avg. Losses
US$ bn
400
Overall : $184B
2013 Losses
Insured: $56B
Overall : $125B
Insured: $34B
300
200
There is a clear upward
trend in both insured and
overall losses over the
past 30+ years
100
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Overall losses (in 2013 values)
Source: MR NatCatSERVICE
Insured losses (in 2013 values)
2
Natural Disasters in the United States,
1980 – 2013
Number of Events (Annual Totals 1980 – 2013)
250
200
There were 128 natural
disaster events in 2013
Number
150
100
50
22
19
81
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
6
Geophysical
(earthquake, tsunami,
volcanic activity)
Source: MR NatCatSERVICE
Meteorological (storm)
Hydrological
(flood, mass movement)
Climatological
(temperature extremes,
drought, wildfire)
3
THE INSURANCE INDUSTRY
• Possibly world’s largest industry
• $3.4 trillion premium revenue + $1 trillion
investments
• > GDP of every nation on earth except for US,
China, and Japan
Insurance Industry and the risk
“landscape”
• First fire departments
• First building codes
• First product safety requirements
Federal Budget Implications
• In 2012, US taxpayers paid out $96 billion in
“climate disruption” costs
• That was the largest single expense item in
the 2012 nondefense discretionary budget
• More than 2012 federal education budget
• More than 2012 federal transportation budget
The insurance industry today
Nationwide is ____________________?
Allstate, the ____ _____s people?
Like a good neighbor, ___________ is there?
EXCLUSIONS -- since 1968
WE DO NOT INSURE for loss caused directly or indirectly by any of the
following.
Water Damage.
Water Damage means (a) flood, surface water, waves, tidal water, overflow
of a body of water, or spray from any of these, whether or not driven by wind;
What About Wind?
• “Private insurers in the 21st Century are in the
process of exiting CAT wind markets, just as
they exited CAT flood markets in the 20th
Century.”
• Between 1990 and 2007, state-run “wind
pools” exposure increased from $55 billion to
over $500 billion.
• NCIUA now insures 75% risk Outer Banks
U.S. Residual Market: Total Policies In-Force
(1990-2012) (000)
(000)
Katrina, ratios
Rita for
The combined
and Wilma
both personal and
commercial
lines improved
2,840.4
4 Florida
2,780.6
substantially
in 2013:H1 2,621.3
Hurricanes
3,500
3,000
Hurricane
Sandy
3,311.8
3,227.3
2,841.4
2,479.4
2,500
2,209.3
2,203.9
2,000 Hurricane 1,785.0
1,741.7
Andrew
1,642.3
1,458.1
1,500
1,319.7
1,196.5
1,000
931.6
500
0
1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
In the 23-year period between 1990 and 2012, the total number of policies in-force in
the residual market (FAIR & Beach/Windstorm) Plans has more than tripled.
Source:
PIPSO;-Insurance
Information Institute
12/01/09
9pm
eSlide – P6466 – The Financial Crisis and
the Future of the P/C
12
Risk Pooling – reducing variance
through the law of large numbers
NCIUA/JUA 2014 Risk Financing Structure
Blended Avg
Return Period
$4.285B
112 year
CRC/Post Event Bonding: $270M
$4.015B
100 year
7th Layer: 100% of $300M xs $3.715B
Aggregate
$3.715B
89 year
6th Layer: 100% of $381M xs $3.334B
Aggregate
$3.334B
75 year
5th Layer: 100% of $450M xs $2.884B
Aggregate
$2.884B
60 year
4th Layer - Tar Heel Re Cat Bond:
89.286% of $560M xs $2.324B
Aggregate
45 year
41 year
36 year
33 year
3rd Layer: 100% of $141M xs $2.183B Aggregate
2nd Layer: 100% of $233M xs $1.950B
Aggregate Multi-Year Drop Down
1st Layer: 100% of $150M xs $1.800B Aggregate
4th Layer Reins.: 10.714%
of $560M xs
$2.324B
$2.324B
$2.183B
$1.950B
$1.800B
Member Company Assessments: $1B
$800M
15 year
Retained Earnings: $800M
Catastrophes are Different!
Stock market
Hurricanes
Insurance
Fat Tail Heuristics
Historical averages just keep
growing
US Flood Claims per $ Income by
County and Year
“If there is a 1% chance [of extreme
climate change impacts], we have
to treat is as a certainty in terms
of our response”
(Actually, he was speaking about Pakistani assistance
For an al-Qaeda nuclear weapon)
THIS JUST IN . . . .
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GENERAL ASSEMBLY OF NORTH CAROLINA
SESSION 2015
S
SENATE BILL 208*
1
Short Title:
Property Insurance Fairness.
(Public)
Sponsors:
Senators Cook, Brown, Hartsell (Primary Sponsors); Clark, B. Jackson, Pate, Rabin, Sanderson,
Smith, Smith-Ingram, and Waddell.
Referred to: Rules and Operations of the Senate.
March 11, 2015
A BILL TO BE ENTITLED
AN ACT TO INCREASE THE FAIRNESS AND EQUITY OF PROPERTY INSURANCE RATE MAKING IN NORTH CAROLINA BY
REQUIRING THAT CERTAIN PROPERTY INSURANCE DATA BE MADE AVAILABLE TO THE PUBLIC; BY PROVIDING THE
COMMISSIONER WITH THE AUTHORITY TO ORDER A DECREASE IN RATES IN A PROPERTY INSURANCE
RATE-MAKING PROCEEDING; BY PROVIDING THE NORTH CAROLINA INSURANCE UNDERWRITING ASSOCIATION
THE AUTHORITY TO HAVE ISSUED TAX-EXEMPT BONDS TO COVER LOSS-RELATED LIABILITIES; BY REFORMING
CONSENT TO RATE PRACTICES; BY REQUIRING THAT CATASTROPHE MODELING USED FOR PROPERTY RATE-MAKING
PURPOSES MORE ACCURATELY REFLECT POTENTIAL IMPACTS IN NORTH CAROLINA; AND BY CREATING THE JOINT
LEGISLATIVE STUDY COMMITTEE ON PROPERTY INSURANCE RATE MAKING.
NCIUA/JUA 2014 Risk Financing Structure
Blended Avg
Return Period
$4.285B
112 year
CRC/Post Event Bonding: $270M
$4.015B
100 year
7th Layer: 100% of $300M xs $3.715B
Aggregate
$3.715B
89 year
6th Layer: 100% of $381M xs $3.334B
Aggregate
$3.334B
75 year
5th Layer: 100% of $450M xs $2.884B
Aggregate
$2.884B
60 year
4th Layer - Tar Heel Re Cat Bond:
89.286% of $560M xs $2.324B
Aggregate
45 year
41 year
36 year
33 year
3rd Layer: 100% of $141M xs $2.183B Aggregate
2nd Layer: 100% of $233M xs $1.950B
Aggregate Multi-Year Drop Down
1st Layer: 100% of $150M xs $1.800B Aggregate
4th Layer Reins.: 10.714%
of $560M xs
$2.324B
$2.324B
$2.183B
$1.950B
$1.800B
Member Company Assessments: $1B
$800M
15 year
Retained Earnings: $800M
PLA/CLA Estimated Liquidity & Claims-Paying Resources1 – 1 in 100 Year Event
No Regular Assessment - 2012 Season
Citizens’ Losses
 Emergency Assessment
not required until at least
1-72 year event
1 / 100-year PML
$9.194B
Emergency Assessments - $2.045 Billion (0.48% for 30 years)
$7.149B
1 / 72-year PML
 Citizens Policyholders
Surcharge triggered at
about 1-58 year event
Citizens' Policyholders Surcharge - $1.089 Billion (30.00%)
$6.060B
1 / 58-year PML
Surplus - $1.561 Billion
 1 in 100 year PML - $9.194
Billion at 12/31/11
including 10% LAE
$4.499B
1 / 40-year PML
10% of
$3.234B
=
$323MM
paid from
Surplus
FHCF Mandatory Coverage (90% of $3.234B in excess of $1.265B)
$2.911 Billion
$1.265B
1 / 12-year PML
Surplus - $1.265 Billion
(Not to scale)
1
Please see Notes & Assumptions attached hereto.
26
TWIA 2012 Funding
Including Reinsurance
Presentation as of 8/31/12
Page 27
What about NFIP Risk Modeling and
Financing?
$60
$40
$25.6
$30
$18.8
$20
$10
$0
$48.7
10 of the 12 most costly hurricanes in insurance
history occurred over the past 9 years (2004—2012)
$50
$5.6
$6.7
$7.8
$8.7
$9.2
$4.4
$5.6
Irene
(2011)
Jeanne
(2004)
Frances
(2004)
Rita
(2005)
Hugo
(1989)
Ivan
(2004)
Charley
(2004)
$11.1
Wilma
(2005)
$13.4
Ike
(2008)
Sandy*
(2012)
Andrew
(1992)
Katrina
(2005)
Meet Mr. and Mrs. Smith
• Lifelong Residents of
Hatteras Island
• Small Business Owners
The Smith’s Home
• Constructed 1983
• 4 Bedroom/ 3 Bath
• Elevated 7’
• Worth ~$900k
• Hope to Sell Soon
• Severely Damaged
Twice
The Smiths’ Business
• Hurricanes
• “Home of the
Hurricane Burger”
• Established 1970
• Worth ~$150k
• Hope to sell soon
Ideal Location
The House
• Zone AE
o Currently 4’ Below BFE
o Paying at BFE
• Actuarial Rate= $9,500
• $1,410 premium in 2013
• Thank You Grandfathering!
Hurricanes
• Subsidized PreFIRM Rate
• $2000 annual premium
• Actuarial rate= $9,537
• Thank you PreFIRM!
Biggert-Waters NFIP Reform Act of 2012
• Loss of Pre-FIRM rates
o Transfer of Property
o Intentional Coverage Lapse
o “Severe Repetitive Loss” Property
o Improving property more than 50% of FMV
o All Non-Primary Residential Property
• 25% annual increase until actuarial rate
Biggert-Waters NFIP Reform Act of 2012
• Mapping Changes
o Orders remapping of key flood risk maps,
especially in order to take account of new riskexperience data
o Refresh of all maps within five years
Homeowner Flood Insurance
Affordability Act of 2014
• Enacted March 21, 2014
• Bipartisan
• Directly amends BW12
• Restores
Homeowner Flood Insurance
Affordability Act of 2014
o Grandfathered rates
o PreFIRM rates for primary residences


Pass on to buyers
Lapses
• Pays back rate increases
• $25 (residential)/ $250 (other) per year surcharge
• 18% Cap on annual increase on individual policies
Life is Good!
After 2014 Act
• House keeps grandfathered rate
• BUT “Hurricanes” still loses PreFIRM rate
• Pay $250 and $25 annual surcharge
• Waiting for key timelines from FEMA
Second homes, investment properties,
commercial properties, repeatedly
flooded properties
still subject to “Biggert-Waters” rate
increases
Battles over accuracy of newly mapped flood
areas (“Special Flood Hazard Areas”)
Battles over individual “elevations”
The “hardscape” response
Rising Waters in the Netherlands
Photo: www.biodiversity.ru/coastlearn/pp-eng/caseholland.html
•Maeslantkering storm barrier
•Main channel to Rotterdam harbor
•Expected to close once every 10 yrs.
•Cost to build: US$570m
Strategies for protection vs. reducing vulnerability.(Left) Strategy S2c reduces the length of
the coastline of the NYC-NJ area as much as possible, to minimize flood protection costs.
J C J H Aerts et al. Science 2014;344:473-475
Published by AAAS