CATASTROPHE INSURANCE

Insurance 101 TheMyth:

RISK PURE RISK - chance of

a loss – usually computed in $$$.

SPECULATIVE RISK – chance of a loss or gain in $$$$$.

Risk taking behavior – Individuals will take more chances to incur a gain than a loss.

Insurability

Events are separate, occur many times and have relatively small damage amounts.

Frequency and severity of loss can be predicted from previous history.

Combining many similar risks increases ability to predict future losses.

Pooling many similar risks increases profit.

Rates can be set to account for projected losses.

Catastrohpe

Risks are specific, not evenly distributed. Frequency and severity are not reasonably

predictable. $$ Losses are larger with a longer pay out

period. Pooling similar risks is NOT a good idea.

Casualty Insurance

Catastrophic Loss Stress Point

Insured Losses > $100 BillionMegaCat

$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ Katrina: $45B$$$$$$$$$$$$$$$$$$

Andrew: $22B$$$$$$$$$$

WTC : $21B$$$$$$$$

North-ridge: $18.5B$$$$$$

Reinsurance

An insurance policy an insurance company buys to cover some of its losses.

Companies are multinational.

Are not regulated by State or US.

CURRENT PROBLEMS

Risk taking behavior.

Nature of Insurance – replacement.

Industry and regulators’ response.

Subsidies and Rate Control

Federal disaster payouts.

Earthquake/Casualty Insurance –

Catch 22 Casualty insurance – coverage you buy that you hope you don’t have to use. Statistically there is a fairly good chance that you

will within a defined period of time.

Catastrophe/Earthquake Insurance – coverage

you buy that you probably won’t get to use.Statistically a small probability of a very large loss; smaller loss would be below deductible.

Insurance “Puts you back where you were”. SHOULD YOU STILL BE THERE???

Industry and Public Reactions

Need a sufficient number of policies. Only 14% of Western Washington homeowners

carry earthquake insurance. Those that do represent the riskier end of the spectrum.

Companies limit new policies after disaster.

Need to insure to value (actuarily sound rates) “Homeowners Against Citizens Florida petitions

state leaders to stop increasing homeowners rates.” (St Petersburg Times 9/14/06)

Subsidies and Rate Control

Subsidies are politically motivated and an inefficient use of tax dollars.

“Senators Landrieu and Vitter of Louisiana object to the senate rate increases for flood insurance, fearing they would price their constituents out of the market”.(Times-Picayune, 9/13/06)

Rate Control is not actuarily driven, gives preference to certain groups.

Federal Disaster Payouts

IF THE GOVERNMENT HANDS OUTMONEY, DO WE REALLY NEED INSURANCE???

“No, I didn’t have any damage, but I just want what everyone else is getting”. (New Orleans resident angry that he couldn’t get a new ‘fridge, October 18, 2005.)

CURRENT PROGRAMS

National Flood Insurance Program Federal program

established 1968. Low overall participation. Not solvent on its own.

$20.8B underfunded. Current “fixes” in

dispute.

California Earthquake Authority Quasi public, quasi

private program. Low participation. Would not be solvent if

more of the at-risk properties were covered.

Florida Hurricane Catastrophe Insurance State reinsurance. Question on whether the

threshold amounts are correct.

Could be severly underfunded.

Terrorism Risk Insurance Act National Reinsurance. Good until 2008 Take up rate increasing. 100% of Workers’ Comp.

Citizens Property InsurersInsurer of Last Resort

Book of Business includes: High risk properties, whether

by location or construction, High value properties.

Rates are controlled, not actuarily sound.

Funded by premiums from policy holders and assessments from companies.

$1M plus properties represent 10% of the premium dollars but only 2% of the policies written.

Catastrophe ProposalsPublicly FreeFunded_____________________ Market Federally Funded and controlled

Federal Reinsur-ance

Regional Reinsur-ance

Tax and Law Changes

CAT Bonds

Similar to NFIP

Similar to TRIA

Similar to Florida CAT Pool

Surplus changes

No subsidies

Invest-ment tool

Specula-tive risk.

Could it Work? Hard to Say - Need:

Assumption of risk at the personal level. Full participation with opt out provision. If a person opts out will not get funds. Disasters need to be rated separately. Companies need to know the maximum probable

loss, so need to base rates on value. Reinsurance needs to be available no matter what

the market. Federal stop loss provision?