Category Archives: Reinsurance

NFIP taps reinsurance market again in 2018

The National Flood Insurance Program returned to the private reinsurance market for 2018, paying $235 million for $1.458 billion coverage from a single flood event.

The coverage limit is 40 percent more than what the NFIP purchased last year ($1.042 billion), and the premium is 56 percent higher than the $150 million NFIP paid last year. The 2017 treaty was the first significant foray for the government insurer into the private sector, and the government recovered the entire $1.042 billion from Hurricane Harvey’s floods.

The structure is a bit different this year. Last year reinsurers covered 26 percent of $4 billion in losses after NFIP retained $4 billion losses. Reinsurers will pay 18.6 percent of the first $2 billion of losses excess of $4 billion and will pay 54.3 percent of the $2 billion excess $6 billion.

Both last year and this, the NFIP gets no protection for the first $4 billion of any flood event – the $4 billion acts similar to a deductible on an insurance policy. After that, the worse the flood gets, the more NFIP recovers, and this year the maximum is $1.458 billion.

Examples:

  • A $5 billion flood would result in a recovery of $186 million – $5 billion minus $4 billion is $1 billion and 18.6 percent of that is $186 million.
  • A $7.5 billion flood would result in a recovery of $1.1865 billion:
    • For the first $6 billion, the recovery would be $372 million, being 18.6 percent of $2 billion (after the $4 billion “deductible.”)
    • For the $1.5 billion in losses above $6 billion, the recovery would be $814.5 million, being 54.3 percent of $1.5 billion.

NFIP explains the structure in a press release, with program Director Roy E. Wright adding his thoughts in a blog post.

Harvey was the third worst flood in NFIP’s 50 years, behind Hurricane Katrina in 2005 ($16.3 billion) and Superstorm Sandy in 2012 ($8.7 billion). Harvey has generated 91,514 claims through January 5, according to messaging from FEMA, and 90.9 percent of them have closed. The average payment has been $108,825.

The I.I.I. has more information on floods and flood insurance here.

NFIP reinsurance protection a good thing

From January 1, 2017, FEMA – the Federal Emergency Management Agency – secured increased reinsurance protection to share a meaningful portion of the risk of large and unexpected flooding with private reinsurance markets.

This placement of reinsurance transferred $1.042 billion in risk above a $4 billion deductible to 25 reinsurance companies.

Under this agreement, the reinsurers can cover 26 percent of losses between $4 billion and $8 billion arising from a single flooding event.

As Artemis blog reports here, with flood losses from Hurricanes Harvey and Irma on the rise, estimates suggest that the NFIP reinsurance program will pay out in full with losses from Hurricane Harvey alone.

Per Artemis: “The NFIP reinsurance program is a per-occurrence arrangement, meaning it covers a single loss event.”

Also noted by Artemis at the very end of its blog post, the NFIP reinsurance layer does not have a reinstatement provision.

This means that the NFIP cannot also claim on the program for its losses from Hurricane Irma as a second and separate event.

Nevertheless, it’s a good thing that NFIP secured first event coverage. A reinsurance payment for Hurricane Harvey flood losses will be welcome.

Hurricane Harvey: 8/25 Evening Update

  • 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.

High rise fire risk in Asia

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.

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.

New York MTA in Storm Surge Catastrophe Bond First

Superstorm Sandy highlighted the enormous risk of storm surge along the Gulf and Atlantic coasts, so we’re interested to read that the captive insurer of the New York Mass Transit Authority (MTA) has accessed the capital markets to cover it in the event of storm surge resulting from a named storm.

Artemis blog reports that this is the first time in the history of the catastrophe bond market that a transaction has provided cover just for storm surge:

Hurricane and tropical storm induced storm surge is included in many U.S. wind cat bonds, so it is not particularly diversifying, but it has never been structured into a cat bond as the sole peril in this way and is an interesting addition to the market that could spur more issuance of storm surge cat bonds. It’s another sign of the increasing maturity and flexibility in the cat bond market, as well as the increasing appetite investors are showing for catastrophe risk.

Artemis adds that the sponsor, the captive insurer of the New York Mass Transit Authority (MTA), has significant exposure to storm surge, as evidenced by the losses it faced from last year’s hurricane Sandy:

The MTA suffered a loss in the region of $5 billion from the storm, predominantly from surge due to flooded transit tunnels and subways, so it is encouraging to see it turn to the catastrophe bond market for a new source of reinsurance protection.

The $125 million catastrophe bond will be issued by First Mutual Transportation Assurance Co. (FMTAC), the MTA’s captive insurer and sold via MetroCat Re Ltd, a Bermuda domiciled special purpose insurer.

Artemis says the deal offers protection against named storms that generate a storm surge event index that equals or exceeds 8.5 feet for Area A or 15.5 feet for Area B. Area A includes tidal gauges located in The Battery, Sandy Hook and Rockaway Inlet, while Area B includes tidal gauges in East Creak and Kings Point.

Business Insurance has more on this story.

Check out I.I.I. facts and statistics on catastrophe bonds.

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.

Isaac and Catastrophe Bonds

As Hurricane Isaac hit the Gulf coast as a Category 1 storm, an interesting tidbit came across the wires regarding state-run property insurer Louisiana Citizens Property Insurance Corp.

In a press release, think tank R Street Institute noted that Pelican Re – a $125 million catastrophe bond issued by Louisiana Citizens – would be triggered if the storm produces more than $200 million in losses for the residual market entity.

If these conditions are met, Isaac would be the first storm ever to trigger a catastrophe bond issued by a state-run insurer.

Over at Artemis blog, there was more discussion:

Pelican Re does not cover pure flood damage so that is in its favour, however we believe storm surge caused by hurricane is covered and wind damage most certainly is. Louisiana Citizens has a great amount of exposure in the coastal areas where hurricane Isaac is currently making the greatest impact. As Pelican Re is an indemnity cat bond it is unlikely we will understand whether there has been an impact for some time as claims come in and losses to Louisiana Citizens are quantified.†

An updated paper on the residual market property plans from the Insurance Information Institute (I.I.I.) notes that a growing number of plans are accessing the capital markets as part of their reinsurance strategy, bolstering their ability to fund losses during hurricane season.

As well as Louisiana Citizens, Florida Citizens also accessed the capital markets in 2012, issuing a $750 million catastrophe bond – making it the largest single peril catastrophe bond in the history of the insurance-linked securities market.

They join a growing list that includes North Carolina’s Beach and Windstorm Plan and the Massachusetts Fair Plan.

For more information on the catastrophe bond market, check out this I.I.I. backgrounder on alternative risk-financing options.