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?
2
How did we get here?
The Florida marketplace and HB 1A
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
4
There are three public insurance mechanisms
for 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
5
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
6
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
7
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
8
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
9
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
10
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
11
Citizens is now the largest property insurer in Florida,
with more than 25% of the market
30%
27
25%
Market Share %
22
20%
14
14
15%
12
13
12
13
13
11
10
10
10%
5%
0%
2002
2003
Citizens
Notes:
2004
2005
2006
2007*
State Farm
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.
12
Citizens is the second largest P/C insurer in Florida,
responsible for 10% of all premiums written
14%
13
12
12
12
12%
11
11
10
Market Share %
10%
8
8%
7
7
7
7
6
6
6%
4
4%
4
4
3
2%
0%
2002
Citizens
Notes:
2003
2004
State Farm
2005
2006
2007*
Allstate
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.
13
How bad could it be?
Analysis of assessment costs
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
15
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
16
In the event of a major storm,
most claim payments will be funded after-the-fact
$90
80.0
$80
Billions of Dollars
$70
$60
55.0
54.2
49.5
$50
43.8
$40
35.0
37.4
34.5
$30
25.0
20.0
$20
9.9
31.4
24.1
14.6
25.8
$10
10.1
10.4
10.9
12.4
15.0
17.6
1 in 20
1 in 30
1 in 50
1 in 70
1 in 85
1 in 100
$0
Pre-event funding
1 in 250
Hurricane Probability
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”.
17
Potential long-term costs of 2007 hurricanes could
overshadow 2007 premium savings for consumers
Hurricane Probability
Savings
This illustration does not
contemplate the possibility of
hurricanes beyond 2007,
which would further constrain
funding and result in
additional assessments
265
1 in 20 1,005 721
1 in 30
1,486 1,066
3,503
1 in 50
1 in 70
2,528
4,416
1 in 85
3,219
4,694
3,497
4,956
1 in 100
1 in 250
3,752
7,855
0
2,000
4,000
6,116
6,000
8,000
10,000
12,000
14,000
16,000
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.
18
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
Tallahassee
Average Savings
$20
Cost of 1-in-30 storm
$2,000
Cost is 100 times average savings
Average Savings
$30
Cost of 1-in-30 storm
$2,075
Cost is 69 times average savings
Tampa
Average Savings
$100
Cost of 1-in-30 storm
$2,300
Cost is 23 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.
19
Annual assessments per average household would
extend out thirty years under various scenarios
(here, a 1 in 50 storm in 2007)
600
Average Dollar Assessment per Household
500
402
400
300
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
200
100
Citizens Regular Assessments
FIGA Regular Assessments
Citizens Emergency Assessments
FIGA Emergency Assessments
2037
2036
2035
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
0
FHCF Assessments
Note: Number of households is based on 2007 households and is not adjusted for population growth.
20
Annual assessments per average household would
extend out thirty years under various scenarios
(here, a 1 in 100 storm in 2007)
600
509
Average Dollar Assessment per Household
500
377 377 377 377 377 377 377 377 377 377
400
300
221 221 221 221 221 221 221 221 221 221 221 221 221 221 221 221 221 221 221 221
200
100
Citizens Regular Assessments
FIGA Regular Assessments
Citizens Emergency Assessments
FIGA Emergency Assessments
2037
2036
2035
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
0
FHCF Assessments
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 250 storm in 2007)
600
509
Average Dollar Assessment per Household
500
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
400
300
200
100
Citizens Regular Assessments
FIGA Regular Assessments
Citizens Emergency Assessments
FIGA Emergency Assessments
2037
2036
2035
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
0
FHCF Assessments
Note: Number of households is based on 2007 households and is not adjusted for population growth.
22
What does the future hold?
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
24
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
25
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
26
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
27
Questions?