Homeowners InsuranceRates Are Rising In Some Places:

Here’s WhySpring 2012

Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038Office: 212.346.5540 Cell: 917.494.5945 stevenw@iii.org www.iii.org

2

Homeowners Insurance Rates May Be Rising Because…

Insurers expect severe weather; record claims likely follow

Investment income, which would lessen reliance on premiums, is down

Currently, premiums aren’t enough to cover expected claims and expenses

Insurers’ costs, especially for reinsurance, are rising

Severe Weather in Recent Years Caused Record-Setting

Insured Claim Payouts.Insurers Expect Claims in Future Years to Set New

Records, too.

3

Natural Disaster Insured Claims Payouts in the United States: 2011

4Source: MR NatCatSERVICE *Includes flood losses insured through the NFIP.

We can’t count on this in 2012

Insurers’ Investment Income (Mainly From Interest On Bonds) Is Down Significantly Since 2007.

Premium Rates Often Rise When Investment Income Slumps.

5

Property/Casualty Insurance Industry Net Investment Gain,1 1994–2011

$35

$43

$47

$52

$44

$36

$45 $4

9

$59

$56

$64

$32

$39

$53 $5

6$58

$52

$57

$25

$30

$35

$40

$45

$50

$55

$60

$65

94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11

Investment gains in 2010-11 continued the rebound from year-end 2008. However, they are still weak in relation to gains in 2007,

especially considering that invested assets were 4.3% greaterat year-end 2011 vs. year-end 2007.

1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.

$ Billions

6

Since 2008, Insurers Have Paid Out More for Homeowners Insurance Claims and Operating Expenses Than They Received

In Premium Dollars.This Isn’t a Sustainable

Business Model.

7

8

Homeowners Insurance Industry Combined Ratio,* 2001–2010

*Ratio of (Claims + Expenses)/(Premiuums); Operating Ratio is Combined Ratio adjusted for Investment Income attributable to that line of business. A ratio over 100 means outgo exceeded income.Source: A.M. Best, Aggregates & Averages, 2011 P/C edition, p. 372.

95.6

105.

7

106.

7

118.

4

105.

6

94.9

91.7 96

.4

85.4

91.8

114.

7

103.

0

103.

7

116.

8

88.9

100.

3

98.4

98.2

109.

3

121.

7

80

90

100

110

120

130

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Combined Ratio After DividendsOverall Operating Ratio

It would seem that homeowners rates were inadequate in

these years

9

Price Index for Residential Maintenance and Repair, Monthly, 2005-2012

Sources: U.S. Bureau of Labor Statistics, Producer Price Index; Insurance Information Institute.

154.

515

6.3

158.

315

9.4

159.

016

0.3

161.

916

2.9 166.

216

8.8

166.

116

8.7

168.

617

0.5

173.

417

5.0

176.

117

6.9

177.

417

4.6

173.

017

2.9

173.

317

3.2

174.

317

6.5

178.

618

0.1

180.

018

1.4

179.

618

0.1

180.

018

3.0

182.

118

3.2

184.

2 187.

819

0.2 19

4.7 19

8.2 20

2.7

201.

820

3.0

196.

719

0.1

184.

918

5.4

183.

618

2.5

183.

418

4.7

186.

518

5.5

187.

118

6.9

185.

818

7.0

187.

218

9.6

189.

319

1.6

193.

819

5.1

193.

819

3.5

194.

019

3.6

194.

619

5.5

196.

819

9.0

200.

9 205.

020

7.9

209.

920

9.6

210.

720

9.1

209.

720

8.4

208.

420

7.6

208.

821

0.9

214.

1

165.

4

150

160

170

180

190

200

210

220

Jan

05

Jul 0

5

Jan

06

Jul 0

6

Jan

07

Jul 0

7

Jan

08

Jul 0

8

Jan

09

Jul 0

9

Jan

10

Jul 1

0

Jan

11

Jul 1

1

Jan

12

The effect of repair costs on claims

depends on when the work is priced.12.7% increase in Sept. 2008

vs. Sept. 2007— during the “Great Recession”!)

Price Index

Prices for residential maintenance and repair rose by over 40% from December 2004 (through March 2012).

Annual Price Changes

2005: +7.9%2006: +7.3%2007: +3.3%2008: +7.8%2009: -3.9%2010: +4.3%2011: +7.1%

Global Reinsurance Rates Are Rising.

Reinsurance Provides Coverage and Is an ExpenseItem for Insurers.

Reinsurance Is One of Insurers’ Most Volatile Expense Factors.

10

11

Recent Significant CAT Losses, Reinsurer Share

Source: Insurance Information Institute from reinsurance share percentages provided in RAA, ABIR and CEA press release, Jan. 13, 2012.

Billions of 2011 Dollars

$0$5

$10$15$20$25$30$35$40

JapanEarthquake/

Tsunami (Mar2011)

New Zealand Earthquake (Feb

2011)

Thailand Floods(Aug - Nov 2011)

Chile Earthquake(Feb. 2010)

AustraliaCyclone/ Floods(Jan-Feb 2011)

Reinsurer SharePrimary Insurer Share

40% Reinsurance share of total insured loss

Reinsurers paid a high proportion of insured losses arising from major catastrophic events around the world in recent years

$0.4$4.0

$22.5$9.5

$15.0

$3.5

$37.5

$13.0

$6.0

$10.0

$7.9

$8.3

$2.2$2.8

$5.0

73%60%

95%44%

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Because Of Its Conservative Business Model, Insurers Have Maintained Financial Strength

Amid Great Economic Uncertainty. Adequate Rates

Are an Important Component of That Model.

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For Additional Information…

Homeowners Insurance Rates – Video: Dr. Steven Weisbart explains the five reasons homeowners rates are rising.

Facts and Statistics: Homeowners and Renters Insurance

Why Are Homeowners Insurance Rates Rising? – Background paper

How to Save Money on Your Homeowners Insurance – Consumer tips

www.iii.org

Insurance Information Institute Online: