- CoreLogic (via email blast) pegs insurance losses from Harvey between $1 billion and $2 billion. This excludes flood losses covered by National Flood Insurance Program (NFIP) and business interruption.
- This increasingly looks like what Weather Underground calls a “colossal” flood event, with more than 20 inches of rain forecast over an area the size of Massachusetts, including Galveston and Houston. The more extreme models “break the map,” meaning there aren’t enough colors to portray visually the amount of rain forecast.
- The rain plus the storm surge (4+ feet across the 200+ miles from Sargent to Port Mansfield, topping out at 12 feet [Sandy maxed out at 9 feet]) is likely to push flooding into Galveston Bay and Houston’s shipping canal.
- The flooding is likely to test NFIP’s nascent private reinsurance program: 26 percent of losses in the $4 billion excess $4 billion later. (I blogged about the structure here.)
- Remember that the standard homeowners’ policy doesn’t cover flooding – you have to have flood insurance from NFIP or a private policy that specifically covers flood.
- If you are there, follow the advice from I.I.I. CEO Sean Kevelighan in our press release and “listen to local authorities, while also doing what is needed to prepare, such as reinforcing windows with shutters and taking a home inventory, if time permits. If you have to evacuate, bring your financial documents, including your insurance policy, so you can start the claims process once the storm has passed.
“Keep in mind, the more prepared you are, the greater the potential to be more resilient and withstand damage.”
- I would just add that if you have the time, photograph areas likely to flood as evidence for a subsequent claim. Be sure to photograph drapes and carpets, which people seem to forget but can be surprisingly expensive to replace.
Insurance Information Institute research assistant Brent Carris authors today’s post:
In Gen Re’s Property Matters series, Tom Qiu reports that with the super high rise (SHR) construction rate growing each year, there is potential for large scale loss of life and significant property/casualty claims.
Per the Council on Tall Buildings and Urban Habitat (CTBUH) Year in Review: Asia recorded 107 of the 128, or 84% of the completed high rise constructions for 2016. China alone, accounted for 84 (67%) of the global total.
Incidents like the Grenfell Tower fire this year in London (see our prior post) and Address Downtown hotel fire of 2015 in Dubai, remind us of the fire risk and resulting huge claims surrounding high rises.
In order to properly rate SHR buildings, underwriters must carefully assess technical survey reports along with visual inspections. In addition to underwriting risks, claims management can be very difficult due to the numerous types of policies involved in a SHR building fire.
A new Insurance Information Institute white paper examines the impact of alternative capital on reinsurance, says I.I.I. chief actuary and paper co-author Jim Lynch.
What sounds like a dry topic actually may in the long run significantly affect the entire insurance industry, right down to the humble buyer of a homeowners policy.
It’s a dry phrase, so let’s parse the phrase alternative capital on reinsurance by starting at its back end. Reinsurance is the insurance that insurance companies buy. Insurance companies accept risk with every policy. They work hard to ensure they don’t have too much risk in one area, like too many homes along Florida’s Atlantic coast.
When they do, they protect themselves by buying reinsurance. Instead of buying a policy that covers one risk, the insurance company enters into a treaty that can cover thousands in case of a catastrophe like a hurricane.
Catastrophes are a big deal for lines of business like homeowners. More than 30 percent of homeowners claim payments over a 17-year stretch came from catastrophes, according to a recent Insurance Research Council study, and many of those claims were paid by money that ultimately came from reinsurers.
Legally, the insurance company is obligated to pay all claims, regardless of any reinsurance it has. After Hurricane Awful, a homeowner files a claim with his or her insurer, and that insurer is responsible for payment, regardless of any reinsurance it may have purchased.
While reinsurance doesn’t affect the insurer’s obligations, the financial health of the insurer depends on the quality of its reinsurance arrangements. Insurance companies are careful to spread risk across many reinsurance companies, so the plight of one will not devastate their own affairs.
To the average person, a traditional reinsurance company looks a lot like an insurance company, run by professionals who underwrite risk and administer claims. The pool of money to cover extraordinary losses — capital — had been built from contributions by an original set of investors and augmented by earnings retained over decades.
Here’s where the word alternative comes in. The new arrangements feature two twists on traditional reinsurance.
First, the capital to protect against big losses doesn’t come from within the reinsurance company. It comes from outside investors like hedge funds, pensions and sovereign wealth funds.
Second, the reinsurance doesn’t sit within the confines of the traditional reinsurance company. Companies called collateralized reinsurers and sidecars let investors pop in and out of the reinsurance world relatively quickly. Some reinsurance is placed in the financial markets through structures known as catastrophe bonds.
The new investors don’t use the traditional structure, but they do use traditional tools. Most ally with traditional reinsurers to tap those companies’ underwriting acumen, and they use sophisticated models to price risks, just as reinsurers do. Deals are structured so to be as safe as placing a treaty with a traditional reinsurer.
Such deals have grown; their share of global reinsurance capital has doubled since the end of 2010, according to Aon Benfield Analytics.
The amount of capital in the reinsurance market drives prices in classic supply-demand fashion. As capital grows, reinsurance prices fall, and alternative capital has driven reinsurance rates lower, particularly for catastrophe reinsurance.
If insurers pay less for reinsurance, they pass along the savings to customers. Citizens Property Insurance, Florida’s largest homeowners writer, reduced rates 3.7 percent last year, in part because of lower reinsurance costs.
If, as some experts argue, alternative capital is the new normal, consumers will continue to benefit from lower rates. If, as others contend, it is akin to an investment fad, rates could creep higher as the fad recedes.
The I.I.I. white paper looks at the types of alternative capital, its growth and its future.
As world leaders gather to discuss climate change at the United Nations this week, a new report from the Global Reinsurance Forum (GRF) says risk prevention and mitigation measures as well as risk transfer are the key to managing this threat.
According to the report, up to 65 percent of climate risks can be averted by adaptation measures including infrastructure development, technology advancements, shifts in systems and behaviors such as improved building codes and land use management, and financial measures.
The global re/insurance industry plays a vital role in planning and implementation of such measures. As the GRF says:
The world cannot simply insure its way out of the effects of climate change, but adaptation allows the global burden of potential loss to be reduced and shared, helping to keep the most vulnerable from being overwhelmed.”
The report points out that the reinsurance industry is particularly exposed to the impact of climate change given its role as an ultimate destination of risk:
Citing a 2012 IPCC report, the GRF notes that extreme weather events, such as storms, floods, droughts, heat waves as well as rising sea levels, crop failures and water shortages have become more numerous and severe.
Reinsurers can make an important contribution by developing protection and mitigation-finance solutions to address the specific challenges that climate change presents.
At the same time, the GRF says reinsurers are advancing understanding of climate change-related risk through the development of natural catastrophe models and via collaboration with universities and scientific institutions. They are also monitoring relevant phenomena such as urbanization, population concentration, property and commercial activity in high-risk areas along the coasts and flood plains.
Check out a great I.I.I. backgrounder on climate change and insurance issues here.
Reinsurance executives will be gathering in Monte Carlo this weekend for the sectorÃ¢â‚¬â„¢s 2013 Reinsurance Rendezvous.
Already, #MCRe13 is seeing a lot of activity on Twitter ahead of this yearÃ¢â‚¬â„¢s conference.
A just-published report from Aon Benfield found that global reinsurer capital reached a record level of $510 billion at June 30, 2013. This was an increase of 1 percent ($5 billion) from December 31, 2012, Aon Benfield said.
Business Insurance has more on this story.
Meanwhile, a newly-issued report from ratings agency A.M. Best finds that despite a subpar operating climate, global reinsurers have managed to squeeze out relatively reasonable returns on capital and compensate investors while sustaining organic growth in capacity.
Quite an accomplishment, considering all the obstacles reinsurers continue to navigate. According to A.M. Best:
Over the past two-and-a-half years, catastrophes worldwide have inflicted approximately USD 190 billion in insured losses. For global reinsurers, these events were primarily a drag on earnings, as balance sheets remained robust. The challenge of managing loss accumulation from global catastrophes was evident in 2011, and since 2008 reinsurers have faced numerous hurdles due to a weakened global economy: deteriorating investment returns; more volatile investments; suppressed growth opportunities; increased client retentions and competitive pricing.Ã¢â‚¬
Guy Carpenter recently reported that July 1 reinsurance renewals indicate that downward pressure on reinsurance rates is likely to continue through 2013, despite catastrophe losses reaching $20 billion in the first half of the year.
Guy Carpenter noted the increasing influence of alternative capacity, estimating that some $45 billion in additional capital from third-party investors had entered the market. This represents around 14 percent of the current global property catastrophe reinsurance limit.
Check out I.I.I. information on reinsurance.
Reinsurance executives have been gathering in Monte Carlo this past weekend for the sectorÃ¢â‚¬â„¢s 2012 Reinsurance Rendezvous.
If you canÃ¢â‚¬â„¢t be there in person, check out #MCRe2012 on Twitter for the latest conference happenings.
Insurance Journal writes that the reinsurance industryÃ¢â‚¬â„¢s key concerns are the ongoing financial crisis in the euro zone, interest rates and capital.
Meanwhile, Artemis blog tells us that one of the hot topics of conversation at Monte Carlo this year is the convergence of the reinsurance and capital markets.
Industry appetite for mergers and acquisitions is the subject of a Bloomberg BusinessWeek report.
The improving capital position of the reinsurance sector has been the dominant theme of recent industry briefings.
A new study from Aon BenfieldÃ‚ found that global reinsurer capital reached a record level of $480 billion at June 30, 2012, up 5 percent from December 31, 2011, amid lower catastrophe activity.
Similarly, Guy Carpenter recently reported that reinsurance renewals took place against a backdrop of plentiful capacity at July 1, 2012.
Check out I.I.I. information on reinsurance.
Reinsurance executives have been gathered in Monte Carlo this past weekend for the sectorÃ¢â‚¬â„¢s 2010 September Rendezvous.
If you werenÃ¢â‚¬â„¢t able to make the trip this year, not to worry, reinsurance girlÃ¢â‚¬â„¢s blog will transport you to the gilded ballroomsÃ‚ with its virtual Monte Carlo reports. Also, check out Twitter #rvmc2010 for the conference gossip.
SeveralÃ‚ newly-published studies on the state of the reinsurance market are also worth reading.Ã‚ Here are a few selections.
Guy CarpenterÃ¢â‚¬â„¢s World Catastrophe Reinsurance Market 2010 report finds that reinsurance rates continue to decline, despite costly disaster losses in the first half of the year.
Global catastrophe reinsurance rates fell by 6 percent on average throughout the 2010 renewal season, according to the Guy Carpenter World Rate on Line (ROL) Index.
Guy Carpenter estimates that the reinsurance market was overcapitalized by as much as $20 billion, or 12 percent, at the beginning of 2010. While this amount came down to approximately 8 percent by the end of June, reinsurersÃ¢â‚¬â„¢ excess capital continued to be the main driver of rate reductions at the 2010 renewals.
If no market-changing event were to occur in the second half of the year, surplus capital is likely to remain the driving force behind continued rate softening at next yearÃ¢â‚¬â„¢s January 1 renewal, according to the study.
Meanwhile, ratings agency A.M. Best says robust earnings reports mask challenges ahead for the global reinsurance industry: a convergence of market pressures, low interest rates and tightening financial and market regulations that could impact the industryÃ¢â‚¬â„¢s capital.
Despite seemingly ripe conditions for consolidation Ã¢â‚¬“ excess capital and a soft market Ã¢â‚¬“ the bleak outlook for profitability has reinsurers across the board trading near or below book value, which constrains the market for mergers and acquisitions.Ã¢â‚¬
A.M. Best says that prudent reinsurers are looking at every aspect of their operations Ã¢â‚¬“ capital management, underwriting discipline, the size of their balance sheets and even their countries of domicile.
It notes that insurers and reinsurers continue to prepare for Solvency II, the European UnionÃ¢â‚¬â„¢s new solvency directive, which A.M. Best believes will drive business to highly rated reinsurers.
Check out I.I.I. information on reinsurance.
While we were out on vacation, online insurance exchange MarketScout published its latest market barometer.
For those of you that missed it, MarketScoutÃ¢â‚¬â„¢s analysis reveals the composite rate for property and casualty placements in the U.S. measured down three percent for July 2010, compared to minus six percent a year ago.
MarketScout founder and CEO Richard Kerr, observed that insurers got just what they needed to continue aggressive pricing for the balance of the year: favorable midyear reinsurance terms.
Barring a major catastrophic event, we predict an overall soft market for the balance of 2010. Rates will continue to moderate in select coverages or industries but the composite rate will probably continue to show a small reduction from the immediately preceding year.Ã¢â‚¬
General liability was the most aggressively priced product line (down 5 percent) in July, followed by BOP and commercial property at minus four percent.
Crime (flat), D&O liability, EPLI, professional liability and surety (down 1 percent) were the coverage classes experiencing the smallest decreases.
The very word tax usually sends shivers up oneÃ¢â‚¬â„¢s spine. But tax is an unavoidable part of our industry and the broader business community, so here goes.
A hearing on Capitol Hill today will address a long-running industry debate over whether reinsurance (insurance for insurers) is being used to shift profits from the United States to low-tax or no-tax jurisdictions, creating a competitive advantage for U.S. subsidiaries of foreign corporations.
TodayÃ¢â‚¬â„¢s hearing before the Select Revenue Measures Subcommittee of the House Ways and Means Committee concerns HR 3424, a bill sponsored by Rep. Richard E. Neal (D-MA).
Essentially the bill would limit the deduction taken by a U.S. property/casualty insurer for non-taxed reinsurance premiums paid to related foreign parties.
As with many issues in our industry this is one that elicits differing viewpoints among the industryÃ¢â‚¬â„¢s many and diverse participants.
Insurance Journal reports that the Neal bill is backed by the Coalition for a Domestic Insurance Industry, headed by William Berkley, chairman of W.R. Berkley Corp. The coalition represents 13 major U.S.-based groups.
On the other side, the Coalition for Competitive Insurance Rates (CCIR) opposes the bill. The Coalition notes that nearly 40 independent experts, state government officials, business owners, and associations have publicly filed opposition letters to the proposed legislation.
An updatedÃ‚ study commissioned by the CCIR and prepared by the Brattle Group suggested that the enactment of HR 3424 would: cost consumers an additional $11 billion to $13 billion per year to maintain their current insurance coverage; significantly weaken competition; and reduce reinsurance capacity in the U.S. by 20 percent.
However, in an interview with National Underwriter online, Mr. Berkley disputed the studyÃ¢â‚¬â„¢s findings and noted that the Neal bill has a Ã¢â‚¬Å“very narrow focusÃ¢â‚¬ that would create a level playing field for both domestic and offshore insurers and reinsurers.
A recent post on reinsurance girlÃ¢â‚¬â„¢s blog is worth checking out for more on this story, as isÃ‚ GC Capital Ideas blogÃ‚ for background infoÃ‚ on the Neal bill here. Also check out I.I.I. information on reinsurance.
Despite significant catastrophe losses during the first half of 2010, including the Chilean earthquake, reinsurance rates continued to decline at the July 1, 2010Ã‚ reinsurance renewal, according to a newly released report from Guy Carpenter.
The report found that U.S. property rates decreased by as much as 15 percent, with pricing for the year down 12 percent. Meanwhile, across the energy and casualty sectors, conditions were flat or down, though the Deepwater Horizon rig disaster has the potential to put upward pressure on rates.
Predictions of an active hurricane season have had only a slight impact on June and July renewals, with quoting behavior firmer than expected, but if the forecasts are right, there is a greater chance the marketplace will look very different at the January 1, 2011 renewal, Guy Carpenter said.
It went on to explain that while the Deepwater Horizon loss is potentially a market-changing event, it is geared principally towards energy and liability exposures. Reinsurers will be hard-pressed to justify rate increases for clients writing traditional marineÃ‚ cargo/hull accounts, it suggested.
ReinsurersÃ¢â‚¬â„¢ quotes on international placements were unaffected by the Deepwater Horizon loss, as accounts were underwritten separately based on specific account losses and exposures.
However, marine excess of loss pricing is expected to increase substantially for reinsurance buyers with energy exposures. Increases of greater than 10 percent were seen for deepwater drilling risks similar to those of the Deepwater Horizon, Guy Carpenter said.