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I.I.I. Exec Proposes Six-Point Plan To Control Hurricane Exposure

Addressing a recent "Statewide Policy Summit on Insurance & Coastal Risk in Florida," Robert P. Hartwig, PH.D., CPCU, the Insurance Information Institute's Executive Vice President & Chief Economist, made six priority recommendations for controlling hurricane exposure:
1. Raise public awareness of risk by mandating risk disclosure in all residential real estate transactions and require buyers who decline flood coverage to sign waivers of rights to any and all disaster aid.
2. Continue to strengthen and enforce building codes.
3. Allow markets to determine all property insurance rates.
4. Increase incentives to mitigate.
5. State-run insurer and reinsurer to charge actuarially sound rates and limit the state-run insurer's exposure to high-value properties.
6. Require communities/counties to take a financial stake in their catastrophe exposure and reimburse disaster aid to state/federal governments.
Hartwig presented a starkly realistic picture of Florida's vulnerability to disastrous hurricanes. Noting that 2005 with $61.2 billion of insured cat losses was by far the most costly year ever, he predicted that the worst is yet to come. The good news is a June 30 forecast that Florida cat losses for 2006 will be only $5.2 billion. However, he expects that increased frequency, severity, and rapidly expanding insured values will bring a $100 million cat year in Florida in the next few years.
Seven of the 10 most expensive hurricanes in U.S. history occurred in the 14 months from August 2004 to October 2005 and nine of them affected Florida. Hartwig noted that AIR Worldwide, the premier modeling firm, estimated the total value of insured coastal exposure in Florida in 2004 was $1.937 trillion, with New York coming in second at $1,901 trillion. Insured values in Florida, continue to escalate with six of the nine metro areas with the biggest increase in median home price located in Florida, he pointed out. Perhaps Hartwig's most sobering forecast was that a repeat of the Great Miami Hurricane of 1926 could cause $500 billion in damage by 2020 given current demographic trends.
Government-run insurers or markets of last resort such as Citizens Insurance Company in Florida serve as a vital safety valve after major market disruptions, but also enable unwise development, according to Hartwig. He contended the residual markets contribute to runaway development in disaster-prone areas. Why? Hartwig said these government entities generally fail to charge actuarially sound rates; have weak underwriting standards; are thinly capitalized; can assess losses to policyholders other than their own; and are vulnerable to political pressure. One consequence is the inadequate premiums, insufficient capital, and weak underwriting mean that most government plans, from Citizens to the National Flood Insurance Program, operate with frequent and large deficits.
Hartwig's presentation is available in Power Point format by contacting him at the Insurance Information Institute (212-346-5520 or bobh@iii.org).