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You are here: Home / Archives for Industry Background

Industry Background

THE UNCERTAINTIES OF PROGNOSTICATIONS OF THE IMPACT OF HURRICANES HARVEY AND IRMA ON CATASTROPHE BONDS

September 25, 2017 by Carlton Fields

We have rarely provided our opinions or market commentaries in our Reinsurance Focus posts, preferring instead to provide our readers hopefully balanced analyses of court opinions, legislation, and regulations affecting the reinsurance market. Recent events, however, have caused us to make an exception to that practice. Much is being written about the extent to which catastrophe bonds (or traditional reinsurance) are “exposed” to or may be called upon to pay losses from Hurricanes Harvey and Irma, and the impact that those storms may have on the ILS market. Some reinsurance agreements use a parametric trigger, and the possible impact of a particular storm on such reinsurance facilities may be reasonably ascertainable in the relatively short term. For example, the Caribbean Catastrophe Risk Insurance Facility, which has developed parametric trigger policies covering wind risks to be backed by traditional reinsurance and capital markets, insuring member countries in the Caribbean, has already determined the amount of payouts on its parametric policies for Harvey and Irma, and has published a report on that issue. However, many of the catastrophe bonds covering wind risks have indemnity triggers, including those to which the Texas Windstorm Insurance Association (the Alamo series) and Florida’s Citizens Property Insurance Corporation (the Everglades series) ceded risks. Moreover, many catastrophe bonds are part of a reinsurance program or tower composed of different types of risk transfer, with different layers, some overlapping or parallel, different attachment points, and different limits.

With the exception of flood losses under the National Flood Insurance Program’s traditional reinsurance program, which does not include catastrophe bonds, few of the “analyses” in the press to date appear to have even attempted to take into account the specific factors that will determine whether, and the extent to which, a particular catastrophe bond or traditional reinsurance agreement is likely to respond to losses, including the trigger of the reinsurance coverage, the attachment point of the reinsurance, the limit of the reinsurance, the percentage of cover for a particular layer, the actual level of losses in the reinsurance program, other inuring reinsurance in the reinsurance program, whether the reinsurance is aggregate or occurrence based, and the extent to which the retention leading up to the attachment point of the reinsurance has been or will be eroded by losses. While one may say that all reinsurance in a tower is “exposed” to losses by any covered event, that is not meaningful without a factually informed analysis of the extent to which a particular catastrophe bond or reinsurance agreement is likely to be called upon to pay losses, given the damage caused by the event and the terms of the applicable reinsurance agreement.

The modeled level of losses from these storms suggested by various brokers and modeling companies are only estimates, and the fact that the modeled losses suggested by different sources conflict with each other and have changed over time is itself good evidence that such numbers are only preliminary estimates, based upon limited reliable data. Many catastrophe bonds frequently attach fairly high in a reinsurance tower, and if few cat bonds actually sustain losses from these two major storms, the impact upon the ILS market may be limited, or even positive. In addition, there has been a great influx of capital into the markets for traditional reinsurance for wind risks and catastrophe bonds over the past several years, and historically major hurricanes have frequently prompted the influx of additional capital.

The bottom line? Only time and accompanying loss development will permit a reasoned evaluation of the impact of Harvey and Irma on the reinsurance and cat bond markets or individual reinsurance agreements or catastrophe bonds.

This post written by Rollie Goss.
See our disclaimer.

Filed Under: Industry Background, Reinsurance Claims, Week's Best Posts

SPECIAL FOCUS: ALTERNATIVE CAPITAL AND REINSURERS

February 23, 2015 by Carlton Fields

One hot topic in the reinsurance industry over the last year or two has been the influx and role of alternative capital.  In a Special Focus article titled Alternative Capital Proving That For Reinsurers, Size Does Not Matter, Bob Shapiro and Scott Shine explore some of the issues in this area.

This post written by Rollie Goss.

See our disclaimer.

Filed Under: Alternative Risk Transfers, Industry Background, Week's Best Posts

REINSURANCE BROKERS UNIFORMLY SEE SOFT PRICING IN CATASTROPHE REINSURANCE MARKET AS CAT BOND MARKET BROADENS

January 20, 2014 by Carlton Fields

The major reinsurance brokers have published their analyses of the reinsurance market for catastrophe risks during fourth quarter of 2013, the catastrophe bond market and predictions for renewal rates for traditional reinsurance during early 2014. These analyses generally predict declines in renewal rates for traditional reinsurance for cat risks in the neighborhood of 10-14%. The factors contributing to the declining rates include: (1) further increases in capital in the market; (2) competition from a strong catastrophe bond market; and (3) moderate levels of cat losses in recent years. A separate report summarizes the activity in the catastrophe bond market during 2013.

  • Aon Benfield suggests that traditional reinsurers enhance their competitiveness by providing unlimited hours for U.S. named storm occurrences and by reducing the cost of reinstatements. Reinsurance Market Outlook: January 2014 (includes a rating agency and regulatory update)
  • Guy Carpenter notes that the softening of rates-on-line has extended to non-cat markets due to increased reinsurance capacity, and that reinsurers have offered the following enhancements to coverages: aggregate and quota share cover; multi-year arrangements; extended hours clauses; better reinstatement provisions; early signing opportunities at reduced pricing; and expanded coverage for terrorism and cyber risks. January 2014 Renewal Report: Capacity, Evolution, Innovation and Opportunity
  • Willis Re also notes an increased capital level in the market, moderate loss levels, softening of rates in non-cat markets and the retention by some major insurance groups of more risk due to stronger balance sheets. Changes in the market include more complex, multi-class and multi-year reinsurance and more pooling arrangements to provide access to the market to smaller reinsurers. 1st View: 1 January 2014
  • A concise summary of the cat bond market in 2013 may be found in a short publication from Property Claim Services titled PCS Full-Year 2013 Catastrophe Bond Report: Underlying Change. Although this report over emphasizes the role of index triggers in cat bonds (as opposed to indemnity triggers), it does highlight the important trends of the broadening of the scope of risks encompassed by cat bonds and the issuance of such bonds by midmarket cedents.

This post written by Rollie Goss.

See our disclaimer.

Filed Under: Industry Background, Reinsurance Transactions, Week's Best Posts

Discussion: Insurance and Reinsurance Issues After Hurricane Sandy

November 29, 2012 by Carlton Fields

InsuranceJournal.com, an industry reporter, provides some questions and answers with insurance attorneys regarding emerging insurance and reinsurance issues arising in the aftermath of Hurricane Sandy, which is quickly climbing the list of costliest disasters in U.S. history. See Q&A With Attorneys on Emerging Business Insurance Topics (Insurance Journal, Nov. 13, 2012) (available at: http://www.insurancejournal.com/news/east/2012/11/13/270332.htm

This post written by John Pitblado.

See our disclaimer.

Filed Under: Industry Background, Reinsurance-Related Organization Links

CREDIT FOR REINSURANCE UPDATE

October 1, 2012 by Carlton Fields

About a year ago we reported on the NAIC’s adoption of amendments to the Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786). Eleven states now have implemented changes to their credit for reinsurance requirements to allow for a ratings-based methodology to allow for reduced collateral requirements for certified, non-U.S. reinsurers. These states include: Florida, New York, New Jersey, Pennsylvania, California, Connecticut, Delaware, Georgia, Indiana, Louisiana, and Virginia. Certain of these states, most notably Florida and New York, already had moved in this direction before the NAIC adopted its revised Models. A number of states, however, enacted legislation during their recently completed legislative sessions.

Some of the state legislation has included variation from the NAIC Models. For example, California’s law, signed by Governor Brown in early September, authorizes the insurance commissioner to disallow credit for reinsurance under certain circumstances notwithstanding technical compliance with the new requirements. California’s law goes into effect January 1, 2013, but will be deemed automatically repealed on January 1, 2016, unless separate legislation provides otherwise. Thus, it appears that California may be taking the NAIC’s revised Model on a three-year test drive.

At the NAIC, the Reinsurance (E) Task Force continues its work on credit for reinsurance matters. Most notably, its Qualified Jurisdiction Drafting Group, led by Missouri’s Director Huff, is focusing on developing the list of qualified jurisdictions. Under the Models, this list will identify the non-U.S. jurisdictions that will qualify as acceptable domiciliary jurisdictions for non-U.S. reinsurers to be eligible for consideration for certification and, potentially, reduced collateral obligations under the Model framework.

This post written by Anthony Cicchetti.

See our disclaimer.

Filed Under: Industry Background, Reinsurance Regulation, Week's Best Posts

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