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.
Posts Tagged ‘capital’
The continued flow of new capital into the (re)insurance industry constitutes the largest change to the sector’s capital structure in recent memory. New capital has entered the market through investments in insurance-linked securities (ILS) funds, sidecars, hedge fund-backed reinsurance companies and collateralized reinsurance vehicles. Investors have increasingly been attracted to low correlation returns from catastrophe risk relative to traditional capital markets risks and the attractive yield for the measured (re)insurance risk relative to other investments, particularly in the current low inflation, low yield era.
In addition to internal risk management, models are typically used in risk transfer negotiations. Both traditional and alternative risk markets require extensive analysis of portfolios when considering risk transfer. Sharing a portfolio’s standardized model output is critical to imparting the loss potential of a particular portfolio from which risk-capital can be unlocked to support the risk financing needs of a reinsurance buyer. Using technology is critical when partnering governments with the private sector. Whether partnering with developed or emerging economies, these tools bring together the risk knowledge and historical data of the public sector with risk management techniques of the insurance industry. The result is an enhanced understanding of risk that provides stability and attracts partners.
Public sector-related data can be expansive, containing census data, property risk characteristics, historical loss information, risk rating matrices and natural hazard event scientific tracking. In order to facilitate packaging the sometimes unwieldy data in a way that is useful for risk decision making, utilizing outside resources to improve data transparency can be valuable. Public sector resources devoted to building tools that measure risks that are perceived as “uninsurable” can unlock private sector funding.
The 2015 Global Insurance Forum addressed the topic “Filling the Protection Gap” (1). During the conference, key speakers noted the growing divide between the economic losses societies are facing and the role of the insurance industry. Many (re)insurance leaders believe the industry can play a significant role in a rapidly changing global risk landscape with pre-loss financing solutions designed to spread risk, relieve the burden on public finances and improve the resiliency of communities.
Differing approaches between the accountability and transparency required of public entities and near term profit expectations of the private sector can result in culture clashes. (Re)insurance support is a function of profit potential over time. The following factors should be considered to align the competing interests of public and private sector entities:
Everest Re successfully issued two tranches of Kilimanjaro Re Ltd. Series 2015-1 Notes representing an aggregate principal amount of USD 625 million. The catastrophe bonds provide Everest Re Group, Ltd. with protection against U.S. earthquake and named storm events on a per-occurrence, PCS-reported industry insured index-derived basis. The Class D Notes carry a one-year expected loss of 5.25 percent, based on AIR’s WSST catalog and investors receive an initial interest spread of 9.25 percent per annum (initial price guidance was quoted as 9.00 percent to 9.75 percent). The Class E Notes carry a one-year expected loss of 3.00 percent, based on AIR’s WSST catalog, with investors receiving an initial interest spread of 6.75 percent per annum (initial price guidance was quoted as 6.50 percent to 7.00 percent). The Series 2015-1 Notes represent the third time Everest Re has accessed the capital markets since 2014 with USD 1.575 billion aggregate limit currently outstanding.
After 2015 began with record historical issuance levels in the first quarter, the fourth quarter of 2015 was dramatically different as only USD 1.425 billion of 144A property and casualty (P&C) catastrophe bonds benefiting five sponsors were completed. This represented the second lowest level since 2005 and the lowest level since 2009. One explanation for this development may be that sponsors who would ordinarily have been willing to issue in the fourth quarter of the calendar year may have had the flexibility to delay their issuance to the following first quarter in order to obtain best execution and/or avoid transaction crowding. We view sponsors’ willingness to focus on best execution rather than specific renewal dates (while still important for overall capital planning purposes) as a further sign of the maturity of the insurance-linked securities (ILS) space. The ILS space is perceived as performing in a manner similar to the broader capital markets with their availability of capital throughout the calendar year.
There is a great deal of overlap between the goals of government regulators and credit rating agencies. The difference, however, is in the output, with regulators providing a license to trade, or not, and the rating agencies offering a graduated scale of relative strength. Regulatory solvency approval can be viewed as a “qualifier” or minimum standard required to be considered by a customer. A credit rating, on the other hand, can act as a “winner” or differentiating factor that results in a successful sale.
Current capital requirements in the United States are set at a legal-entity level. Yet there are currently no global requirements for companies that operate in more than one country, and calculation formulas for capital requirements typically vary in each jurisdiction. Solvency II is the closest to mandating a group standard. Solvency II uses the concept of “equivalence” to deal with differing capital regimes between the European Union and the rest of the world including the United States, instead of forcing Solvency II standards on a third country.