Category Archives: Reinsurance

Bermuda and Insurance: Small Country,
Mighty Contribution

By John Novaria, Managing Director, Amplify

Bermuda is more than pink beaches and golden sunsets – it’s a major force in the re/insurance industry. The Association of Bermuda Insurers & Reinsurers (ABIR) works to raise the profile of Bermuda’s reinsurers and insurers and represents their public policy interests around the world.

ABIR CEO John Huff recently sat down with Triple-I CEO Sean Kevelighan to discuss the contribution of Bermuda companies to global resiliency. Some of those contributions include:

  • Bermuda insurers and reinsurers paid $2.7 billion in claims from last winter’s storms in Texas.
  • Some Bermuda companies are preparing to step up and help fund new U.S. infrastructure projects through their investment portfolios.
  • According to the Bermuda Monetary Authority, the island nation is home to 1,200 (re)insurers holding more than $980 billion total assets and writing gross premium of approximately $240 billion.

Huff is excited about the role the re/insurance industry is playing in securing a more resilient future for society.

“If you talk to your kids, this may be the first time our work is resonating with the next generation,” he says. “I do think it’s our opportunity to lead in the area of climate, resilience and adaptation.”

In discussing the Bermuda value proposition, Huff noted the concentration of exceptional talent within a square mile of Hamilton’s business district, which has captured the attention of investors who have plowed capital into the jurisdiction to form startup companies. Huff also said many established companies in Bermuda are scaling up by expanding their capabilities to take on more risk through analytics, underwriting and capital allocation.

Indeed, Bermuda is full of surprises. Huff said the general public doen’t realize that Bermuda companies underwrite half of the mortgage insurance sold in the US, creating opportunities for more young families to purchase their first home.

Learn more about ABIR.

Is California Serious About Wildfire Risk?

Wildfire is a critical risk facing California, but at least one insurance industry leader argues that the state government isn’t taking it seriously enough.

“Yes, the governor has committed some $2 billion dollars to wildfire budget items,” writes John Norwood of Norwood Associates LLC in an Insurance Journal Op-Ed piece. “These include $404.8 million to hire staff and purchase firefighting equipment; $1.128 billion for forest management, such as thinning and prescribed burns; and $616 million to community investments.”

The details can be found in the Wildfire and Climate Change Fact Sheet provided by the governor’s office.

“However,” the Op-Ed continues, “if you compare that commitment of dollars to the list of other budget allocations the governor has just signed, it appears the administration and the Legislature determined the wildfire problem was only as worthy as some of the lower-priority budget allocations, like cleaning up trash ($1.5 billion) and paying-off delinquent water and electrical bills ($2 billion).”

Norwood is one of California’s top legislative advocates and managing partner of Norwood Associates.  He is considered the leader in the state’s insurance, financial services, and small business sector.

Rising insurance costs

Wildfires over the past five years have burned millions of acres in California, destroyed entire towns, wiped out well over 10,000 homes, killed scores of residents, and blanketed the state with unhealthy air.

“California homeowners and businesses are paying five- and six-figure premiums for property insurance, and that is only when they can find insurance at any price,” Norwood writes. “California’s largest industries – agriculture  and wine production – are being devastated by the lack of available insurance.”

And yet, he continues, “the $2 billion dollars committed to wildfire risks doesn’t even make it into the top five issues in the state based on the budget allocation committed to the fight.”

Role of reinsurance

Reinsurers — which insure insurers — are crucial to how the world handles natural disasters. As the frequency and severity of small-scale disasters increase, they’re having to pay more attention. S&P Global observes that “around one-half of the reinsurers we rate reduced their exposure in absolute terms, with very few players taking on additional catastrophe risk.”

It adds that this “de-risking trend” among reinsurers has been particularly visible in North America in recent years.

Without reinsurance, primary insurance rates must rise as properties in some areas become uninsurable.

Norwood argues that availability and affordability of property insurance are unlikely to change until the global reinsurance market believes California is serious about addressing its wildfire risks and there are demonstrable results in reducing the number and severity of wildfires in the state.

Without the reinsurance market backing California property/casualty insurance companies, there will continue to be an availability crisis in the state for property insurance and prices for such coverage will continue to increase substantially to the detriment of California’s homeowners and businesses.

ABIR Op-Ed: Working toward a sustainable future

By John Huff

As we celebrate Earth Day, it’s important to remember that every day is Earth Day in the re/insurance industry. Our industry plays a critical role in developing innovative adaptation solutions, in measuring and pricing climate risks to inform risk management, and in providing economic support to people and communities when disasters strike.

Climate risk is a priority for member companies of the Association of Bermuda Insurers & Reinsurers (ABIR). They bring their expertise, innovation, commitment and claims paying capacity to secure a more resilient world.

With partners from government, our internationally recognized consolidated regulator the Bermuda Monetary Authority (BMA), and the re/insurance industry with its historic legacy of leadership in responding to global natural catastrophes, Bermuda has the foundational elements to become a leader in climate risk finance.

The recently announced BMA climate sandbox will give Bermuda’s financial services ecosystem the requisite regulatory and supervisory guidance, support and parameters to pursue innovative solutions to climate change risk. When Bermuda innovation and entrepreneurship prevails, consumers around the world benefit. 

Over the past 20 years. Bermuda’s re/insurers have paid more than quarter of a trillion dollars in claims from natural and man-made disasters in the United States and European Union alone. All told, Bermuda represents over one-third of the global property & casualty reinsurance market and has a history of taking risks in some of the world’s most disaster-prone regions. At the heart of this commitment is talent. The people who work for our ABIR member companies are second to none when it comes to modeling, analytics and underwriting risk. 

Underpinning this risk assessment is scientific research. Because of its location, Bermuda is a ready-made climate lab, surrounded by an ocean that serves as a real-life classroom for studying the forces behind our changing climate. The Bermuda Institute of Ocean Sciences, or BIOS, observes and analyzes oceanographic and atmospheric conditions from a research vessel in the Sargasso Sea, which is one of the world’s most diverse open-ocean ecosystems.

The Bermuda market joins insurers and reinsurers across the world committed to activating the global sustainable agenda by fostering new mitigation technologies through their assumption of risk and by investing in sustainable assets.

Armed and informed with the latest research and data, Bermuda is working diligently to close the world’s protection gap of $113 billion in 2020 – the difference between natural catastrophe and man-made economic losses and insured losses.

Most of that gap exists in emerging economies, so ABIR member companies join with the Insurance Development Forum (IDF) in committing $5 billion of re/insurance capacity to developing nations by 2025. In addition, IDF and its affiliates are developing an accessible, open modeling platform – with Bermuda leadership – that will greatly improve predictive capabilities in some of the world’s most disaster-prone regions.

ABIR is proud to join its industry partners from around the world in these efforts. Championed by the Global Federation of Insurance Associations (GFIA), which represents nearly 90% of the global insurance market, we are contributing to the effort to build a sustainable planet. Leveraging their tools, talent and capital, all stakeholders will work together toward resilient and sustainable recovery. As an industry, we are strongly committed to this critical joint effort to #RestoreOurEarth.

On behalf of ABIR and its member companies, Happy Earth Day.

John M. Huff is President and CEO of the Association of Bermuda Insurers and Reinsurers (ABIR) and a former president of the U.S. National Association of Insurance Commissioners (NAIC).

Triple-I CEO to speak
at RAA Catastrophe Risk Management Conference

Sean Kevelighan, Triple-I CEO, will be a featured speaker at the Reinsurance Association of America’s 18th annual Cat Risk Management conference as part of a COVID-19 panel. The panel will discuss the economic impact of the pandemic on insurers, pandemic-related litigation, and reinsurance issues.

The online conference takes place March 22-24 and features a powerhouse roster of experts who will share their views on lessons learned from the tumultuous year just passed, explore risk-management issues, and offer insights on how decision makers can navigate 2021. 

Conference registration includes three full days of information, plus an on-demand capability that lets attendees preview sessions before the scheduled presentations and review sessions they might have missed or wish to view again.

The conference targets financial-sector professionals–including insurers, reinsurers, and investment banks–responsible for catastrophe risk management; attorneys specializing in reinsurance; academics; federal/state government officials; and regulators. In addition to the exceptional technical program, it’s a great networking opportunity. 

Review the agenda and register at www.reinsurance.org

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.