“ There is really no state on the Eastern Seaboard or the Gulf Coast where if the worst-case scenario happened, the state-run insurers would remain solvent.”
$10 billion in 2009), the TICL has been reduced by a further $2 billion in 2011. With the price differential between the TICL and the private market shrinking, cedants are expected to buy more of their reinsurance protection from private sources.
“The reduction in subsidised FHCF cover would certainly increase
demand in the private market (and there are already signs that this is happening with companies buying open-market TICL alternatives),” said Simon Clutterbuck, a director at broker BMS. “But at the same time, there would need to be a further increase in primary rates to offset the additional private reinsurance spend, as without this, policies will find their way back into Citizens, therefore putting pressure back on to the state.”
He does not think the state’s involvement in catastrophe re/insurance
is sustainable. “First, Citizens, the state-funded ‘insurer of last resort’, became the ‘insurer of first resort’ for distressed properties or those on the coast, and the policy count ballooned to more than one million. Thus the state provided a direct subsidy to the Florida homeowner by selling cover for well under market rates and gambling on the outcome.”
STATE-BACKED REINSURANCE While there has been less talk this year about state-subsidised catastrophe insurance and reinsurance, the residual remain a big issue in the US market. There are more than 30 fair access to insurance requirements (FAIR) plans in the US, several beach and windstorm plans (such as the Texas Windstorm Insurance Association), two state-run insurance companies (Florida and Louisiana Citizens) and one state-run reinsurer (the Florida Hurricane Catastrophe Fund, FHCF).
Had Irene been a more intense hurricane when it made landfall, the
weaknesses in the plans would have been exposed, suggested Hartwig. “There is really no state on the Eastern Seaboard or the Gulf Coast where if the worst-case scenario happened, the state-run insurers would remain solvent.”
In Florida in particular, where politics and insurance have always been
an uneasy mix, the ability of the state-backed insurer Citizens and the FHCF to absorb large storm losses has been questioned in recent years, with Berkshire Hathaway stepping in at the height of the financial crisis with a guarantee to buy bonds.
The decision to increase the fund’s capacity four years ago caused
a great deal of controversy. Not only was this seen as unwelcome competition with private reinsurers, the fund’s ability to raise post- event capital led many to question whether the cover being offered to insurers was robust. Rating agency Demotech has encouraged insurers to purchase more cover from the private market in order to maintain their financial strength ratings.
It is hoped that the gradual reduction in the FHCF’s Temporary
Increase in Coverage Limits (TICL) will boost demand from the private market. From $8 billion a year ago (down from $12 billion in 2008 and
“Second, the state doesn’t currently have the ability to fund all obligations associated with the FHCF in the case of a severe hurricane, which is why there is new draft legislation out last month from the FHCF that would incrementally decrease the mandatory layer from $17 billion to $12 billion by 2015, as well as reducing the maximum available coverage from 90 percent of the mandatory layer in 2012 by 5 percent per annum to a maximum of 75 percent in 2015, as well as increasing the industry retention above which the cat fund sits.”
While Irene was not a big enough storm to test the residual market, it
has highlighted the lack of flood insurance in the northeastern US. Most of the damage from the storm was caused by extensive flooding, which is largely uninsured, according to cat modelling agency Eqecat. Should the National Flood Insurance Program (NFIP) be reformed—as has been recommended under Bill HR 1309—it could provide an opportunity for the private reinsurance market to step in and provide cover, particularly in such underinsured loss-hit areas.
Another cat pool that could see reform or even non-renewal is the country’s terrorism backstop, which became all-important following the events of September 11, 2001, when conventional terrorism reinsurance was largely unavailable. Today, the Terrorism Risk Insurance Program Reauthorisation Act (TRIPRA) covers acts of foreign and domestic terror but does not cover nuclear, biological, chemical and radiological (NCBR) attacks.
Other legislative changes could also encourage more participation in
the US market from international reinsurers. The Non-admitted and Reinsurance Reform Act 2010 (NRRA) opens the door for reform of the 100 percent collateral requirements for foreign reinsurers in many states. So far, Florida, Indiana, New Jersey and New York have relaxed their rules for reinsurance collateral and others are expected to follow suit.
November 2011 | INTELLIGENT INSURER | 27
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