News

Fac breathes new life into catastrophe cover

butterfly large Although the benign catastrophe record of 2006 has encouraged domestic US insurers back into the property catastrophe markets, southern states wind and hail protection is still expensive, which means availability of cover is still somewhat patchy. No wonder the state insurers of last resort are each sitting on enormous exposures – exceeding comfort levels by a significant factor and putting reinsurance premiums beyond reach.

In the aftermath of the 2005 storm season, the number of domestic US carriers offering catastrophe protection to homeowners and small businesses in the southern states plummeted. Much of the business they turned away ended up in the London market as large, individual, scheduled risks or with the increasingly over-burdened state insurers of last resort, which are funded by the taxpayer.

Although quake rates are coming off rapidly, wind and hail protection is not universally available and still relatively expensive

Even though some domestic carriers have now returned to the market, depressing rates by around 15-20%, their balance sheets are still recovering, so they are being more careful about the location and type of risks they take on. This has meant that while quake rates are coming off rapidly, wind and hail protection is not universally available and still relatively expensive.

In the past, state insurers have relied predominantly on treaty reinsurance with some fac ‘top up’ to offset their growing exposures to these more complex, larger risks. But as exposures and treaty costs have risen, premium income has not generated the cash fast enough to make large-scale treaty reinsurance affordable. As a consequence, the exposures of these state insurers have become unacceptably high, putting many citizens and their properties at risk.

BMS has been closely involved with the state pools through the 2005 crisis and beyond, and has been working to come up with a solution to address both the reinsurance issue, and its root cause – exposure overload.

Our joint treaty-fac team know the US markets well. Our approach has been to encourage some domestic carriers back into the market to write homeowners’ property cover by suggesting that they exclude wind and hail coverage. This has led to an increase in capacity (taking pressure off the state insurance programs of last resort) and reduced costs for homeowners by increasing competition and making treaty reinsurance less risky and therefore more affordable.

In the meantime, we have placed the wind and hail risk, which proved too much for the US domestic carriers, into the London market which is dominated by the specialist players who thrive on high risk, high return business. These carriers would not normally entertain the ‘low risk’ homeowners’ book with its attritional drag of small claims which requires an army of administrators if it is to be processed efficiently.

Splitting the risk in this way has proved to be a novel, and highly effective approach to the problem. By playing to the strengths of different markets we have been able to resolve the core issue for the state insurers of last resort – over exposure – whilst at the same time providing a cost effective solution for homeowners.

Teamwork between our facultative and treaty experts on both sides of the Atlantic has been fundamental to our ability both to identify the solution and then to implement it with speed and efficiency.

Splitting the risk has proved to be a novel, and highly effective approach to the problem. By playing to the strengths of different markets we have been able to resolve the core issue for the state insurers of last resort – over exposure – whilst at the same time providing a cost effective solution for homeowners

Our fac and treaty experts enjoy a leading reputation among listed companies, state programs and other brokers for managing large and complex risks like this. We are working increasingly closely together to provide holistic solutions for clients – matching risks to markets on both sides of the Atlantic.

Darren Doherty