Tag Archives: Reinsurance

Private Market Flood Insurance Is Budding

Private carriers are dipping their toes in the turbulent waters of flood insurance, writes Insurance Information Institute (I.I.I.) research manager Maria Sassian.

This year, for the first time, insurers were required to report in their annual statements data on private flood insurance.

I.I.I. has compiled a list of top insurers in the market by 2016 direct premiums written, based on data from S&P Global Market Intelligence:

As you can see, the top three companies hold almost 81 percent of the market share, and at number one FM Global has a 54 percent market share. Direct premiums written for all companies total $376 million.

Private flood includes both commercial and private residential coverage, primarily first-dollar standalone policies that cover the flood peril and excess flood. It excludes sewer/water backup and the crop flood peril.

Some of the reasons private insurers are becoming more comfortable covering flood risk include: improved flood mapping technology; improved flood modeling; the construction of flood resistant buildings; and encouragement from Congress.

The Federal Emergency Management Agency’s National Flood Insurance Program (NFIP) is billions of dollars in debt due to large losses from Hurricanes Katrina, Rita and Superstorm Sandy. Opening the market to private insurers is one of several measures enacted by lawmakers to get the program out of debt.

Another step in shoring up the NFIP took place with the January 2017 transfer of over $1 billion in financial risk to private reinsurers. FEMA gained the authority to secure reinsurance from the private reinsurance and capital markets through the Biggert-Waters Flood Insurance Reform Act of 2012 and the Homeowners Flood Insurance Affordability Act of 2014 (HFIAA).

The Rise of Alternative Capital

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.

Reinsurers Play Vital Role in Climate Change Prevention and Mitigation Efforts

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:

Future insurability will depend on well-planned adaptation: without it, property insurance will become less affordable and less accessible.

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:

The industry identified climate change as an emerging risk more than twenty years ago; it has since become a key component of every company’s long-term risk management strategy.”

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 Rendezvous 2013

Reinsurance executives will be gathering in Monte Carlo this weekend for the sector’s 2013 Reinsurance Rendezvous.

Already, #MCRe13 is seeing a lot of activity on Twitter ahead of this year’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.†

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 Rendezvous

Reinsurance executives have been gathering in Monte Carlo this past weekend for the sector’s 2012 Reinsurance Rendezvous.

If you can’t be there in person, check out #MCRe2012 on Twitter for the latest conference happenings.

Insurance Journal writes that the reinsurance industry’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 Benfield  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 Rendezvous

Reinsurance executives have been gathered in Monte Carlo this past weekend for the sector’s 2010 September Rendezvous.

If you weren’t able to make the trip this year, not to worry, reinsurance girl’s blog will transport you to the gilded ballrooms  with its virtual Monte Carlo reports. Also, check out Twitter #rvmc2010 for the conference gossip.

Several  newly-published studies on the state of the reinsurance market are also worth reading.  Here are a few selections.

Guy Carpenter’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, reinsurers’ 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 year’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 industry’s capital.

Despite seemingly ripe conditions for consolidation – excess capital and a soft market – the bleak outlook for profitability has reinsurers across the board trading near or below book value, which constrains the market for mergers and acquisitions.†

A.M. Best says that prudent reinsurers are looking at every aspect of their operations – 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 Union’s new solvency directive, which A.M. Best believes will drive business to highly rated reinsurers.

Check out I.I.I. information on reinsurance.

Reinsurance Tax Bill Under Spotlight

The very word tax usually sends shivers up one’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.

Today’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 industry’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 updated  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 study’s findings and noted that the Neal bill has a “very narrow focus† that would create a level playing field for both domestic and offshore insurers and reinsurers.

A recent post on reinsurance girl’s blog is worth checking out for more on this story, as is  GC Capital Ideas blog  for background info  on the Neal bill here. Also check out I.I.I. information on reinsurance.

Reinsurance Rate Erosion Continues – For Now

Despite significant catastrophe losses during the first half of 2010, including the Chilean earthquake, reinsurance rates continued to decline at the July 1, 2010Â  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 marine  cargo/hull accounts, it suggested.

Reinsurers’ 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.

Check out I.I.I. background  information on reinsurance.

Reinsurance Rates: Disciplined Softening

Reinsurance rates across most property/casualty lines were lower at January 1, 2010 renewals, according to the latest round of broker reports. A briefing from Guy Carpenter found that its world catastrophe rate on line (ROL) index declined by six percent at January 1, as the reinsurance market recovered and swiftly recapitalized in the wake of the global financial crisis and large reduction in catastrophe losses. Rates for U.S. property catastrophe business were down by an average of six percent and by as much as 11 percent, according to Guy Carpenter. Rates for U.S. casualty business fell by as much as 10 percent. Meanwhile Aon Benfield noted that the remarkable recovery of both insurer and reinsurer capital translated into a catastrophe reinsurance renewal market for January 2010 that was focused on rate decreases in the market’s peak zones of U.S. hurricane and U.S. earthquake. Capacity for the global catastrophe reinsurance market has been restored to near its all time peak of December 2007 and is meaningfully higher than the levels witnessed throughout the January 2009 renewal season, according to Aon Benfield. In another report, Willis Re said strong underwriting profits, a recovery in the global investment markets and a lack of premium growth for primary underwriters have resulted in a disciplined softening of reinsurance pricing at January 1 renewals. The disciplined rating approach, says Willis Re, reflects reinsurers’ concern that the excellent 2009 underwriting results are less due to attractive pricing than a below average pattern of natural catastrophe and man-made losses. Check out I.I.I. information on reinsurance.

Inflation Threat

The potential impact of inflation on insurers and reinsurers is a growing concern among industry commentators. On Friday, Towers Perrin warned that future inflation may damage reinsurers’ profitability on all lines of business, with casualty lines hardest hit, leading them to reduce the business they write next year. Towers Perrin estimates that an inflation rate of 3 percent would mean a $1 million claim today could cost a reinsurer $1.113 million on average tomorrow. A five percent inflation rate could result in a claim of $1.195 million – 119 percent of the original claim size. Towers Perrin makes the point that because several years often elapse between rates being set and claims being paid out under reinsurance contracts, inflation is a potential threat and can become a real problem. In addition to claim severity, inflation can also have a knock-on effect on frequency. Periods of high inflation generally correspond with greater numbers of claims. Looking at historical loss ratios for casualty lines, Towers Perrin says the impact of inflation can be seen with a two-year lag. An inflation high point of 3.4 percent in 2000 was followed by a loss ratio of 99 percent on casualty lines in 2002. Conversely, an inflation low point of 1.6 percent in 2002 saw loss ratios fall to 73 percent in 2004. Check out I.I.I. information on reinsurance.