April 7th, 2016

US Residual Markets, Part I

Posted at 1:00 AM ET

The US residual property insurance market segment is comprised of Fair Access to Insurance Requirements (FAIR) Plans, Beach and Windstorm Plans and two state run insurance companies - Florida Citizens Property Insurance Company (Florida Citizens) and Louisiana Citizens Property Insurance Corporation (Louisiana Citizens). These insurance facilities grew out of the civil strife in the 1960s to ensure continued access to insurance in urban areas. Over time they have evolved and their mandate has grown beyond their urban focus. Today these facilities are significant providers of some of the most wind- and earthquake-exposed property insurance in the country.

Between 1990 and 2011, total exposure to loss in the FAIR Plans expanded by 1,679 percent, growing from USD 40.2 billion to a peak of USD 715.3 billion (1). Since 2011, however, FAIR plan exposure, of which Florida Citizens comprises over 50 percent, has declined 38 percent from its 2011 peak to USD 445.6 billion. In addition to its efforts to transfer insurance policies to the private sector through its policy de-population efforts, Florida Citizens has been expanding its use of private sector reinsurance, including catastrophe bonds, to manage its hurricane exposure. Louisiana Citizens, another legislatively created insurer of last resort for Louisiana, has been moving in the same risk reduction direction as well through the use of depopulation and premium rate changes. Since 2011, exposure of the US residual markets has come off its peak, declining 30 percent between 2011 and 2013.

As the risk capital landscape has evolved and expanded, and reinsurance pricing has come down in the United States, a number of the larger residual market facilities have been expanding their access to reinsurance. Residual market facilities across 14 states, including those with significant exposure to hurricane and earthquake, utilize reinsurance as a component of their risk financing programs. Guy Carpenter, which has a dedicated team of professionals from its various business segments (Analytics, Strategic Advisory, capital markets and treaty broking) that focus on the needs of residual market facilities in the United States, is involved with facilities in 10 of the 14 states.


Link to Part II>>

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1. Insurance Information Institute: Residual Market Property Plans: From Markets of Last Resort to Markets of First Choice, September, 2014.

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