The Insurance Economics of Going Green · Presentation Outline • Going Green: Insurance Industry Update ¾A challenge that is being met • Seeing Green: Summary of Insurer Initiatives

The Insurance Economicsof Going Greeng

Insurance at the VanguardInstitute for Business and Home Safety

A l C fAnnual ConferenceTampa, FL

December 1 2009December 1, 2009Download at www.iii.org/Presentations/

R b t P H t i Ph D CPCU P id t & E i tRobert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038

Tel: (212) 346-5520 ♦ Fax: (212) 732-1916 ♦ [email protected] ♦ www.iii.org

Presentation Outline

• Going Green: Insurance Industry UpdateA challenge that is being met

• Seeing Green: Summary of Insurer InitiativesC St di i th D d f G I P d t• Case Studies in the Demand for Green Insurance Products1. Green Home: Home as Power Plants2. Green Commercial Power Generation

• Energy Demand, Energy Policy & Climate ChangeHuge growth in energy demand will fuel demand for insurance

Wh t M ti t I t “G G ”?• What Motivates Insurers to “Go Green”?Role of Catastrophe LossesRole of Demographics & Economics

2Q&A

“Going Green”: gInsurance Industry y

UpdatepGoing and Staying Green is a

Challenge not Unlike CountlessChallenge not Unlike Countless Others Insurers Have Met for

CenturiesCenturies

What “Going Green” Really Means for P/C InsurersMeans for P/C Insurers

• The Fundamental Role of Insurers is to Assess & Quantify Risk• Quantification Permits the Risk to be Accurately Priced• Quantification Permits the Risk to be Accurately Priced• Determination of Price (Premium) Allows Risk to Be

Transferred from Bearers of Risk (Policyholder) to Insurer in Exchange for Risk Appropriate (Actuarially Sound) Premiumg pp p ( y )

• The Role Played Insurers and the Process of Pricing “Green” or or “Climate” or “Environmental” Risks is No Different than Any Other Risk Assumed Over the Centuries

C i A f C i i O• Insurers Can Play a Key Role in the Area of Climate Risk Only if Two Conditions Are Met:• Insurers are allowed to charge risk appropriate premiums on new

products that are designed to mitigate climate risksproducts that are designed to mitigate climate risks• Insurers are allowed to adjust premiums, underwriting criteria, risk

assessment and risk management practices to reflect actual and expected changes arising from climate threats

4

g g• Where These 2 Conditions Are Met, Insurance Markets

Functions Well; Shortages, Govt. Plans if Not Met.• Biggest Threat is Regulatory Interference (Rate, U/W)

Green = Actuarial Sound Rates• The Most Powerful “Green” Impact Associated with Insurance

O i i t ith A t i ll S d R tOriginates with Actuarially Sound Rates• Actuarially Sounds Rates Are a Pure Measure of Risk

Accounting for risk forces all parties to explicitly consider risksg p p y

• Full Accounting of Risks Would Lead Directly to Less Vulnerability to Climate RiskA t i ll S d R t All I t Off Fi i l• Actuarially Sound Rates Allow Insurers to Offer Financial Incentives to Encourage Mitigation

• State Practices of Subsidizing Certain Forms of Insurance and gActively Engaging in Rate Suppression Dilutes the Risk Message Embedded in Rates

• The Battle to Reduce Vulnerability to Climate Change Will Be

5

• The Battle to Reduce Vulnerability to Climate Change Will Be Lost if Governments Take Actions that Unnecessarily Increase Vulnerability

Economics of Green Insurance Follows a Time Tested ProcessFollows a Time-Tested Process

RISKRISKIDENTIFICATION

Property Damage

RISKQUANTIFICATION

Loss Trending

RISKMITIGATION(SOLUTIONS)

Risk Transfer (New orLiability RisksManagement Liability

Political Risk

Catastrophe ModelingScientific Research

Climate Models

Risk Transfer (New or Adapted Insurance

Products)

Capital Market Political RiskEconomic RiskRegulatory Risk

Climate ModelsTort Threat Assessment

Regulatory Environment

SolutionsRisk Retention

Loss Avoidance & Investment Risk Environment Reduction

Building Codes & Land Use

Source: Insurance Information Institute

Uninsurability Issues

Prevalence of Insurer Climate Related Activities: 2008Climate-Related Activities: 2008

Promoting Loss Prevention9%Carbon Risk Disclosure**

Understanding CC Problem6% 9%

Aligning Terms & Conditions w/ Risk-reducing Behavior

6%

14%

Creating innovative insurance solutions

Crafting Innovative InsuranceProducts

22%

insurance solutions is #1 activity, among

643 activities.

Offering Carbon

Leading by Example17%

RM & Offsets5%

Financing Customer Improvements

Building Awareness & Participating in Public Policy*

14% p2%Investment in CC Solutions

5%

14%

*A maximum of 1 is tallied, as there is too much subjectivity in assigning weights to each individual activity**Multi-year responses to a given disclosure initiative are counted once.Source: Ceres: From Risk to Opportunity: 2008 – Insurer Responses to Climate Change

Insurer Climate-Related Activities 2008 vs 20072008 vs. 2007

Meeting the demand for insurance products is the most

important role of insurers—and is pexperiencing the fastest growth

Source: Ceres: From Risk to Opportunity: 2008 – Insurer Responses to Climate Change

Key Insurer Climate-Related Innovations and TrendsInnovations and Trends


Insurer Climate Risk Practices for Underwriting, Investment and

A t M tAsset Management


Green Insurance Market Map by Insurance Lineby Insurance Line

Homeowners Industrial, energy,

property

Real Estate

Business Interruption

Flood

property

Rebuild more resilient or green after loss

■ ■ ■ ● ●

Bundled carbon offsets ■ ● ● -- --

Incentives for low-emissions or loss-resilient profile

■ ■ ■ ● ●

Performance: Energy savings & carbon reduction risk

● ■ ■ ● --

Performance: Energy production & carbon reduction risk

■ ■ ● ■ --

Finance for carbon-reducing or loss-resilient improvements

■ ● ● -- ●

Advisory inspections or risk ● ●Advisory, inspections, or risk-management services

■ ■ ■ ● ●

Climate-risk modeling services -- ■ ■ ● ●

■ At least one current example of implementation by an insurer reinsurer or intermediary


■ At least one current example of implementation by an insurer, reinsurer, or intermediary

● Applicable but no current insurer implementation

-- Not applicable

Non-Insurers Are Involved in Climate Activities TooActivities Too

189200 A ll ff i d189

160180200 As well as efforts among insurers and

related organizations some 34 non-insurance entities have collaborated in

climate activities.

100120140

27 34406080

820 27

02040

Insurers Reinsurers Intermediaries InsuranceOrganizations

Non-InsuranceEntities


Insurers Are Seeing GreenSeeing Green

Summary of Green Initiatives in Global Insurance &in Global Insurance & Reinsurance Markets

Summary of Insurer Climate Activities in 2008Activities in 2008

• Some 643 specific activities from 246 insurance entities from 29 countriesfrom 29 countries

• These include activities on the part of:189 insurers8 reinsurers8 reinsurers20 intermediaries27 insurance organizations34 non ins rance entities34 non-insurance entities

• Property insurers (Home, Comml., Auto) are driving majority of activity while life-health insurers lag behindSi ifi t i i ti it b li bilit i i t• Significant increase in activity by liability insurers in past year – insurers to willingly bear climate-related litigation costs borne by policyholders?Mi ti it i t l t i d t i l BI i l d• Minor activity in travel, warranty, industrial, BI, inland marine, WC, crop, prof. liability, and comm. auto insurance Source: Ceres: From Risk to Opportunity: 2008 – Insurer Responses to Climate Change

Availability of Insurance for Renewable Energy ProductsRenewable Energy Products

Source: Ceres

Wind power generation risks are readily insurable; Biofuels, waste not far behind.

Insurer Climate Activities in 2008• European insurers have deepest history with climate

initiativesinitiatives• Some 37% of all activities logged in the United States, the

most of any country.• More activity in Europe as a whole (47%) vs North• More activity in Europe as a whole (47%) vs. North

America (40%)• Growth since 2007 in all areas, but particularly: climate

science and anal sis crafting inno ati e prod ctsscience and analysis, crafting innovative products, carbon RM and offsets, and leading by example

• Areas with lowest year-over-year increase in activity are: l ti d di t i t t i li t f i dlloss prevention and direct investment in climate-friendly industries.

• In past 10 years, the number of climate-related activities h i d i ht f ldhas increased eight-fold


Key Innovations and Trendsy• Many more insurers offering “green-buildings” products

and servicesand services• Almost all climate-related innovations in D&O, political

risk, prof. liability and enviro. liability have appeared in past yearpast year

• Auto and Transport: two dozen insurers now offer pay-as-you-drive (PAYD) insurance with discounts up to 60% for policyholders who drive less than avg driverfor policyholders who drive less than avg. driver

• 2008 First: insurance products to manage risks from carbon capture and storage (CCS) projectsM tt bl k t f• More attn. on renewable energy as a market for insurance

• Climate-related microinsurance – coverage for low-i l ti / t t t diti l iincome populations w/out access to traditional insurance – about 7 million policyholders


Key Innovations and Trends• Insurer investment in and financing of low- and no-

carbon technologies more common but still smallcarbon technologies more common but still small proportion of total investments

• Increasing participation in carbon markets, including carbon trading ins for credit risks political risks pluscarbon trading, ins. for credit risks, political risks, plus advisory services, and carbon-neutral products

• At least 25 insurers now prepare annual Corporate Social Responsibility reportsResponsibility reports

• More insurers recognizing correlation between sustainable practices and reduced risk, e.g. discounts on WC and Enviro for customers with sustainable practicesWC and Enviro. for customers with sustainable practices

• Insurers increasingly recognize importance of addressing carbon footprints, e.g. 17 insurers and reinsurers & 6brokers have achieved carbon neutralitybrokers have achieved carbon neutrality.


Green BuildingsGreen BuildingsEncouraging GHG reductions while reducing risk: green

b ildibuildings• High impact: ~40% of GHG emissions are associated with

building use– green building practices can reduce emissions by 50%+• Loss prevention benefits of green buildings– improved indoor air quality– disaster resilience• Large potential market: $140B in green building in US by

2013• 39 products from 22 companies39 p oducts o co pa es• New idea: “retro-commissioning”

Source: Ceres

ClimateWise InitiativeClimateWise Initiative• 40+ insurers under the ClimateWise umbrella recently

called for a 40% cut in global GHG emissions by 2020called for a 40% cut in global GHG emissions by 2020

The climate crisis poses a systemic risk to the globalp y geconomy…Climate change must be tackled now if insurers

are to continue to play their fullest role in managingclimate risk. … If governments fail to act today,

substantial markets may become uninsurable tomorrow.”

-ClimateWise statement, 22 October 2009

Source: ClimateWise: http://www.climatewise.org.uk/

• ClimateWise is result of work initiated by HRH The Prince of Wales in the UK with the insurance industry

Climate Risk DisclosureThe SEC is moving toward mandating disclosure in 2010:

• Oct. 2 speech by Commissioner Walter – “I believe that it is time for us to consider issuing interpretive guidance regarding [climate risk] disclosure.”

• Oct 19 interview with Walter – SEC staff are preparing recommendations Two• Oct. 19 interview with Walter – SEC staff are preparing recommendations. Two options on the table: guidance and rulemaking.

NAIC unanimously passed a climate disclosure survey in March y y2009 – Two areas of focus:Climate Change Impact Assessment• Geographic areas subject to rate increases or non renewals • Investment risk • Loss reserves• Geographic areas subject to rate increases or non-renewals • Investment risk • Loss reserves

• Covered perils subject to future exclusions or limitations • Access to reinsurance

• Solvency risk and capital requirements • Cat modeling

Climate Change Mitigation Activities

Source: Ceres; NAIC

Climate Change Mitigation Activities• Loss mitigation and prevention: – Policies and products – Risk classification

• Invested assets

McGraw Hill Construction Green Outlook 2009Outlook 2009

•Green building has become a growing part of today’s construction industryconstruction industry•Despite the market downturn, 75% of commercial real estate execs say they will continue to build greeny y g•By 2013 McGraw-Hill Construction estimates today’s green building market will more than double to $96-$140B vs. $36-$49B today for residential and nonresidential buildings$49B today for residential and nonresidential buildings• Green building has expanded rapidly due to no. of factors such as growing public awareness of green practices, heavy g g p g p , yincrease in govt. interventions, and recognition by owners of bottom line advantages• The amount of green office space constructed in 2008 was

Source: McGraw Hill 2009 Green Outlook

• The amount of green office space constructed in 2008 was about 25X the amount in 2000 and is growing at 50X that rate

Green Buildings: Hype or Sound Investment?Investment?

Study by University of San Diego and commercial real estate broker CB Richard Ellis Group found that:broker CB Richard Ellis Group found that:•Tenants in green buildings are more productive based on: av. # of sick days and a productivity change•Respondents reported an average of 2.88 fewer sick days in their current green office vs. their previous non-green office• Decrease in sick days translated into a net impact of nearly $5.00 y p y $per sq ft per year based on av. tenant salary, office space of 250 sq ft per worker and 250 workdays a year. Increase in productivity translates into net impact of $20 per sq ft• Study also found green buildings have 3.5% lower vacancy ratesand 13% higher rental rates than the market• Findings based on surveys of 154 buildings under CBRE’s

Source: Business Week, Green Buildings: Fewer Sick Days, Higher Rents, by Chris Palmeri, November 19, 2009

Findings based on surveys of 154 buildings under CBRE s management totaling over 51.6m sq ft, housing 3,000 tenants in 10 markets across U.S.

Case Study #1Case Study #1The Green Home

Green Home Insurance: Product Innovations Will Continue, but There Are Risks,CostsWill Continue, but There Are Risks,Costs

“Green” Homes Have Distinct Insurance Turning Coverage Needs

•Photovoltaic panels•Electrolizer (splits

Turning a home “green”

is not Electrolizer (splits water into H2, O2 molecules for night

use)C

without risk or cost—a

i i •Fuel Cell (recombines H2, O2

to generate electricity)

mini power plant

•Water Tank•Additional

plumbing, wiring

Source: National Geographic, Sept. 2009; Insurance Information Institute

p g, g•Charging Systems

for Electric Car

Solar Means Bring and Storing the Energy of the Sun to Where it’s Needed, When Neededthe Sun to Where it s Needed, When Needed

“Green” Energy Needs Infrastructure &Red areas Infrastructure &

Insurance Solutions•Solar Involves

Investment in New, R idl Ch i

Red areas are sunny

and flat, but energy

needs to be Rapidly Changing Technology

•Generation: Massive Solar Arrays;

needs to be stored,

transportedSolar Arrays;

Photovoltaic; heated oil•Transmission: Need to

Hook into Grid, ,Transport Hundreds of

Miles•Storage: When sun

doesn’t shine need to

Source: National Geographic, Sept. 2009; Insurance Information Institute

doesn’t shine, need to store power—molten

salt power tower

C St d #2Case Study #2Green Commercial PowerGreen Commercial Power

Generation

Alternative Energy is More than Just Pretty Windmills It’s Big BusinessPretty Windmills—It s Big Business

“Green” Energy Also Has Distinct InsuranceHas Distinct Insurance

Needs•Expensive Equipment

•CAT Exposure•CAT Exposure•New Technology•Liability Risks

(k d k )(known and unknown)•Massive Infrastucture

Investment (generation(generation,

transmission, distribution)

•Marine Risks

Source: Insurance Information Institute

•Employment Risks

Climate Change/Energy g gy

PolicyyRisks and Opportunities for

Insurers AboundInsurers Abound

Climate Change/Energy Policyg gy yOpportunities Abound…

M i i i ti it dMassive increase in energy generation capacity and infrastructure required over next 20 years will drive demand for energy markets and related insurance productsLarge investments in traditional and alternative energyLarge investments in traditional and alternative energyHeavy investment in technology requiredSome insurers want to participate in “cap and trade”

…As Do RisksConcern that EPA designation of CO2 as a pollutant could lead to litigationState GHG emission standards may vary by state, causing confusion and litigationP liti l i k i hi h l b ll l b l f i

30Source: Insurance Information Inst.

Political risk is high globally on global for energy issuesSome calls to regulate investments of insurers

World Net Effective Electric Power Generation 1990 2030 ( t )

33.335

Power Generation, 1990-2030 (est.)Trillions of Kilowatt Hours

24 4

27.5

30.430

17.3

21.0

24.4

20

25

11.3

14.612.6

10

15The current economic

downturn will have little if5

downturn will have little, if any, long-term impact on electric power generation

01990 1995 2000 2005 2010 2015 2020 2025 2030

Source: Energy Information Administration, 2008 International Energy Outlook, Insurance Information Institute.

US Electricity Capacity Additionsby Fuel Type 2008-2030Fby Fuel Type, 2008 2030F

55.0

1

60 Gigawatts

40

50Energy insurance demand

will rise as capacity across all fuel types grows, led by

natural gas and renewables30

.35

27.1

3

1.5425

.43 29

.98

84

30

40 natural gas and renewables

Renewable growth will require new

i l ti21

2 9.33 11

.64

8.57

13.2

917.8

10

20insurance solutions

1.181.75 3.32

2.46

00

10

Coal Natural Gas Nuclear Renewables/Other

2008-2015 2016-2020 2021-2025 2026-2030

Sources: Energy Information Administration, Annual Energy Outlook, March 2009.

World Electricity Generation by Fuel 2005-2030F2005 2030F

5.36

1

16

18

Th h i iTrillions of Kilowatt Hours

15

12

14

16 The sharp increase in generation and the

changing composition of f l ill i fl

7.15

28.38

9

8

10

12 fuel source will influence insurance demand and the

nature of products sold

2.63 3.

16 3.42

2

4

3.75

4 4.99

6

56

4

6

0.76

4

0.95

0

2

Liquids Nuclear Renewables Natural Gas Coalq2005 2010 2015 20202025 2030

Source: US Department of Energy Report #:DOE/EIA-0484 ( Sept. 2008); Insurance Information Institute

Non-Hydro Renewable Electricity Generation by Energy Source (US): 2005-2030Fy gy ( )

450 Billions of Kilowatt Hours 428.25

350

400 Electricity generation from renewable sources is

expected to rise 315% between 2007 and 2030 317.76

200

250

300between 2007 and 2030

requiring new property and liability insurance solutions

180.55

100

150

200

103.27

180.55

0

50

2007 2010 2020 20302007 2010 2020 2030

MSW/LFG* Biomass Wind Solar Thermal Geothermal

Sources: Energy Information Administration, Annual Energy Outlook, March 2009. *Municipal Solid Waste/Landfill Gas.

Grid Connected Electricity Generation from Renewables: 1990-2030F*

500

from Renewables: 1990-2030FBillions of Kilowatt Hours

400

450

500

Generation from renewables such as wind, biomass and solar could overtake hydro by 2019

250

300

350

150

200

250

HydroOther Renewables The energy insurance

i d t ill l

0

50

100 industry will evolve as customer needs change

1990

1995

2000

2005

2010

2015

2020

2025

2030

Sources: Energy Information Administration, Annual Energy Outlook, March 2009; Insurance Information Institute.

Electricity Supply Infrastructure:Despite Crisis, Huge Investments Needed Al With I 2001 2030 (E )Along With Insurance: 2001-2030 (Est.)

$ BillionsNorth American investment

could total $1 876 trillion $ Billions

$1,876 $1,913$2 000

$2,500 Investments in electricity supply infrastructure

globally are expected to

could total $1.876 trillion

$1,351

$ ,

$1,500

$2,000 globally are expected to total $9.841 trillion

between 2001 and 2030

$809

$377$744

$258$609

$783$799

$500

$1,000

$0

rope

rth

eric

a

cific

ssia

hina

Asi

a

Asi

a

tin eric

a

ddle

ast

fric

a

Eur

Nor

Am

e

Pac

Rus Ch

E. A

S. A

Lat

Am

e

Mid Ea Af

Source: International Atomic Energy Agency , World Outlook for Electricity Investment.36

Share of Electricity Generating Capacity Based on Nuclear by Country, 2008

104 nuclear facilities currently t 20% f th US l t i it

76%

70%

80%generate 20% of the US electricity supply. 17 companies have applied

for $122 in federal loan guarantees to

50%

60%

gbuild 21 new reactors. Construction

for the first 7 could begin by 2011 and come online by 2015-16

28% 25%20% 15%20%

30%

40%y

4%13%

15%

0%

10%

20%

0%France Germany Japan US Canada UK Mexico

Source: International Atomic Energy Agency ; Insurance Information Institute.37

Growth in Global Nuclear Electricity Generation by Region 2007—2020FGeneration by Region, 2007 2020F

D it it i th US 325.4%

250%

300%

350% Despite new capacity in the US, the developing world will see the

fastest growth in nuclear l t i it ti b th

150%

200%

250% electricity generation because the current capacity base is small

9 3%49.6%

78.0% 83.7% 98.4%

50%

100%

150%

-16.1%

9.3%

-50%

0%

Western North Eastern Far East Latin Africa MiddleWesternEurope

NorthAmerica

EasternEurope

Far East LatinAmerica

Africa MiddleEast/South

AsiaSource: Blue Chip Economic Indicators, 3/10/09 edition.

World Energy Supply Infrastructure Investment by Category: 2001-2030 (Est )Investment by Category: 2001-2030 (Est.)

Generation will account$ Billions

Distribution, $3,755 , 38%

Generation will account for 46% or $4.5 trillion

of all investment through 2030 to meetthrough 2030 to meet

rising demand. Current downturn will have no impact on long-term

Transmission, $1,568 ,

global energy demand and the need to develop supply infrastructure

Generation-New, $4,080 , 42%

16%

Generation-Refurbished, $439 , 4%

Source: International Atomic Energy Agency , World Outlook for Electricity Investment.

World Electricity Generation by Fuel Source Share: 2005 vs 2030F

2005 2030Source Share: 2005 vs. 2030F

Liquids6%

N l

Liquids2% Nuclear

11%

Nuclear15%

Renewable15%

Renewables

Coal41% Coal

47%

Natural Gas

18%

Natural Gas25%Surprisingly, coal as a source

20%p g y,

of electricity generation is expected rise through 2030.

CO2, pollution issues?Source: Insurance Information Institute from data reported in US Department of Energy Report #:DOE/EIA-0484 ( Sept. 2008).

What Motivates Insurers to Go

Green?Green?CATs, Demographics,

DemandDemand

Concern Over Global Warming Remains High But Has WanedRemains High, But Has Waned

% The percentage of Americans who believe global warming is happening fell from

72%80% 84% 85%

80

100g g pp g85% in 2006 to 72% in late 2009

72%

60

80

A j it f A i l b l40

A majority of Americans say global warming has been occurring and is a serious problem, but skepticism has

0

20 grown since 2006. Possibly due to concern being redirected to the economy.

0Mar 06 Apr 07 July 08 Now

Source: Washington Post – ABC News poll, 11/24/09

Catastrophic LossCatastrophic Loss Catastrophe Losses Trends

A T di Ad lAre Trending Adversely, Though How Much, if Any, IsThough How Much, if Any, Is

Due to Climate Change Is UnknownUnknown

Global Natural Disasters: Economic and Insured Losses:1980 – 2009:H1and Insured Losses:1980 – 2009:H1

Overall and insured losses (Annual totals vs. first half-years)

US$

bn

Overall losses*: Insured losses*:Annual totals Annual totals

First half-years First half-years *Losses in 2008 valuesAs of July 2009

Source: Geo Risks Research, NatCatSERVICE © 2009 Münchener Rückversicherungs-Gesellschaft 44

Insured Property Catastrophe Losses as % Net Premiums Earned 1984–2008as % Net Premiums Earned, 1984 2008

16% US CAT losses were d 14 4% f

12%

14% US

US average: 1984-2008

a record 14.4% of net premiums

earned in 2005 and were 4 times the

1984 2008

8%

10%1984-2008 average

of 3.6%

4%

6%

8%

0%

2%

4%

0%

84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute.

U.S. Insured Catastrophe Losses

0.0

$120$ Billions

2008 CAT losses exceeded$100 Billion CAT

year is coming t ll

$100

.9

$100

$120 2008 CAT losses exceeded 2006/07 combined. 2005 was by

far the worst year ever for insured catastrophe losses in the

eventually

2009 cat losses were down 29%

5 5 0

$61.

$60

$80 insured catastrophe losses in the US, but the worst has yet to come.

down 29% in H1 from $10.6B in H1 2008

$7.5

2.7 4.7

$22.

95.

5 $16.

9$8

.3$7

.42.

6 $10.

1$8

.34.

6$2

6.5

5.9 $12.

9 $27.

5

$6.7

$26.

0$7

.5

$9.2$20

$40

$ $2 $4 $5 $ $ $2$ $ $4 $ $ $$

$0

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*

20??

46

2

*Based on PCS data through June 30 = $7.5 billion.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

46

Top 12 Most Costly Disasters in US History (Insured Losses $2008)US History, (Insured Losses, $2008)

$45 3$50 8 of the 12 most expensive disasters in

$45.3

$35$40$45 US history have occurred since 2004;

8 of the top 12 disasters affected FL

$22.8 $23.8$25$30$35

Bill

ions In 2008, Ike became the 4th most

expensive insurance event and 3rd most expensive hurricane in US history

$7 3 $8.1 $8.5$11.3 $11.3 $12.5

$10$15$20$

B expensive hurricane in US history arising from about 1.35 mill claims

$4.2 $5.2 $6.2 $7.3 $8.1 $

$0$5

$10

Jeanne Frances Rita Hugo Ivan Charley Wilma Northridge Ike 9/11 Andrew KatrinaJeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Northridge(1994)

Ike(2008)*

9/11Attacks(2001)

Andrew(1992)

Katrina(2005)

*PCS estimate as of August 1, 2009.Sources: PCS; Insurance Information Institute inflation adjustments.

47

Total Value of Insured Coastal Exposure (2007 $ Billions)Coastal Exposure (2007, $ Billions)

$2 378 9$2,458.6Florida

New York $2,378.9$895.1

$772.8$635.5

$479 9

New YorkTexas

MassachusettsNew Jersey

Connecticut

$522B increase since 2004, up 27%

$479.9$224.4

$191.9$158.8$146 9

ConnecticutLouisiana

S. CarolinaVirginia

Maine

In 2007, Florida still ranked as the #1 most exposed state to hurricane loss,

with $2.459 trillion exposure, an increase of $522B or 27% from $1.937 $146.9

$132.8$92.5$85.6

$60 6

MaineNorth Carolina

AlabamaGeorgia

Delaware

trillion in 2004.The insured value of all coastal

property was $8.9 trillion in 2007, up 24% f $7 2 t illi i 2004$60.6

$55.7$51.8$54.1

$14 9

DelawareNew Hampshire

MississippiRhode Island

Maryland

24% from $7.2 trillion in 2004.

$14.9

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000

Maryland

Source: AIR Worldwide 48

DemographicsDemographicsVulnerable Population and Property Values Are RisingProperty Values Are Rising

Population of Florida,1960—2030F1960 2030F

Increasing coastal population and development are the principal reasons

Millions

28 686

35

development are the principal reasons driving higher insured catastrophe losses today, but they increase vulnerability to

climate change. State subsidies to coastal dwellers both increase vulnerability and 28.686

23.407

19 25225

30 dwellers both increase vulnerability and contribute to climate change problems

9 74612.938

19.25215.982

15

20

Florida’s population

4.9526.789

9.746

5

10p p

will have doubled between 1980 and

2010, according to the US Census Bureau

50

01960 1970 1980 1990 2000 2010F 2020F 2030F

US Census Bureau

50Source: US Census Bureau; Insurance Information Institute.

Average Square Footage of New Homes in US 1973 2008New Homes in US,1973-2008

Insurers protect homes d th i

34 469

2,52

12,

5192,700

and their owners, irrespective of the size of

their carbon footprint

5 80 75 95 95 00 95 120

,150

2,19

02,

223

2,26

62,

324

2,32

02,

330

2,34

9 2,4 3 2,4 2 2

2,300

2,500

5 0 0 55 60 40 0 0 25 780

785

1,82

51,

905 1,99

52,

035

2,08

2,07 2,09

2,09

2,1

2,0 9 2,1 2,

1,900

2,100

Size of average new

1,66

01,

695

1,64

51,

700

1,72 1,7

1,7

1,7 4

1,72

1,71

01,

72 1,7

1,7 1

1 500

1,700

, ghomes typically falls in recessions, and periods of high energy prices

51

1,500

73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Source: US Census Bureau: http://www.census.gov/const/C25Ann/sftotalmedavgsqft.pdf; Insurance Information Institute.

U.S. Residual Market Exposure to Loss (Billions of Dollars)to Loss (Billions of Dollars)

$900 In the 19-year period

$771.9$696.4

$656.7$700$800$900 In the 19-year period

between 1990 and 2008, total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54 7bn in

Katrina, Rita and Wilma

4 Florida

$372 3$430.5

$656

$419.5$500$600

has surged from $54.7bn in 1990 to $696.4bn in 2008.

4 Florida Hurricanes

H i

$150 0

$281.8$244.2

$292.0$372.3

$221.3

$

$200$300$400 Hurricane

Andrew

$54.7

$150.0

$0$100$200

1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: PIPSO; Insurance Information Institute

1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Subsidized Insurance Increases Vulnerability to Climate ChangeVulnerability to Climate Change

Key Impacts of Subsidized Insurance:E /E bl D l t i V l bl d• Encourages/Enables Development in Vulnerable and Ecologically Sensitive Areas

• Increases Vulnerability to:Elevated frequency/severity of hurricanes and other severe stormsElevated frequency/severity of hurricanes and other severe stormsStorm surgeBeach erosionFlooding d e to sea le el riseFlooding due to sea level rise

• Leads Directly to Increased GHG Emissions Due to Increased Development & Destruction of Carbon Sinks• Loss of coastal woodlands wetlands and mangrove forests• Loss of coastal woodlands, wetlands and mangrove forests

• Increased Risk to State’s Finances• ALSO: Subsidized Insurance Distorts Real Estate Prices

• Florida’s coastal subsidies contributed to the state’s real estate bubble

53

• Florida’s coastal subsidies contributed to the state’s real estate bubble and therefore are partially responsible for its collapse

U.S. Residual Market Property Policies In ForceExposurePolicies In-ForceExposure

2,840.42 780 6

3,000In the 19-year period between 1990 and 2008, total residual

k t li t (FAIR &

2,209.3

2,621.32,780.6

2,203.92,500

market policy count (FAIR & Beach/Windstorm Plans) has nearly tripled to more than 2.6

million policies

1,319.7

1,785.0

1,196.5

1,642.31,741.7

1,458.11,500

2,000

Katrina, Rita and Wilma

931.61,196.5

500

1,000and Wilma

4 Florida Hurricanes

0

500

1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: PIPSO; Insurance Information Institute

Insurance Information Institute On LineInstitute On-Line

THANK YOU FOR YOUR TIME ANDTHANK YOU FOR YOUR TIME AND

YOUR ATTENTION!

Download at : www.iii.org/presentations

5555

Documents

The Insurance Economics of Going Green · Presentation Outline • Going Green: Insurance Industry Update ¾A challenge that is being met • Seeing Green: Summary of Insurer Initiatives