Best's Review


Reinsurance Market
A Hard Reality

While loss creep from recent major catastrophes, inflation and other factors are tightening reinsurance capacity this year, the global COVID-19 pandemic could add another layer of challenges to the reinsurance market. Special Section sponsored by Munich Re.
  • Lori Chordas
  • August 2020
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POWERFUL FORCE: Current reinsurance market conditions are feeling the effects of loss creep from storms like Hurricane Irma in 2017, which, by some accounts, destroyed roughly 25% of homes in the Florida Keys.
POWERFUL FORCE: Current reinsurance market conditions are feeling the effects of loss creep from storms like Hurricane Irma in 2017, which, by some accounts, destroyed roughly 25% of homes in the Florida Keys.


The Reinsurance Special Section is sponsored by Munich Re. Click on the microphone icon to listen to the Munich Re podcast.


Key Points

  • Winds of Changes: Catastrophe losses from the past several years have contributed to hardening conditions in the reinsurance market.
  • Finding Shelter: Some insurers have pulled back on their reinsurance purchases or their risk transfer programs during recent renewals.
  • The Aftermath: It’s still too early to tell what effect COVID-19 will have on the reinsurance market and what that will mean for reinsurance buyers.


With forecasts of more than a dozen named storms hanging over the United States this year, some buyers of reinsurance wonder what rising catastrophe losses from those and other natural catastrophes could mean for the already hardening property catastrophe reinsurance market.

Current market conditions prompted some cedents to pull back on their reinsurance levels during 2020 midyear renewals, while others shed policies in high-risk areas or elected not to participate in a private reinsurance placement this year.

Mother Nature's wrath isn't the only concern in the market right now. The unprecedented COVID-19 pandemic has upended the economy worldwide and continues to take a toll on insurers and reinsurers.

Even prior to the onset of COVID-19, loss creep from recent major losses, falling interest rates, increased uncertainty around casualty reserving and ongoing disruption in the retrocession market were expected to drive a modest tightening of reinsurance capacity as 2020 progressed, said Mike Van Slooten, head of business intelligence for Aon's Reinsurance Solutions business.

Now the “confluence of new headwinds associated with the pandemic,” including a global recession, even lower interest rates and investment returns, and higher costs of capital have added to the challenges facing insurers and “entrenched positions further,” Guy Carpenter reported in a June 23 GC Capital Ideas blog post.

John Polak Texas Windstorm Insurance Association

Similar to 2019, TWIA this year has access to $4.2 billion to handle storm claims through a combination of catastrophe bonds and traditional reinsurance.

John Polak
Texas Windstorm Insurance Association

Fallout from the Storm

So far the global pandemic hasn't significantly slowed down the issuance of catastrophe bonds and other insurance-linked securities, according to data from the Artemis Deal Directory.

By midyear, data shows, total cat bond and ILS market volume stood at $41.8 billion.

Also during that time, issuers had brought more than $6 billion to the market, including a record first quarter with more than $5 billion issued through 27 transactions, according to Artemis data.

But by the second quarter, new issuance slowed slightly to about $1.06 billion as of mid-May and, Artemis reported, COVID-19 was a factor in several deals being pulled.

While effects of the pandemic continue to unfold, the coronavirus, along with other factors, had a hand in the tightening of deployable capital among traditional and alternative markets at June 1 renewal, along with significantly slowing down third-party capital inflows into collateralized reinsurance and sidecar vehicles “as investors assess the uncertainty associated with COVID-19 and prepare for the possibility of further trapped capital,” Guy Carpenter noted in the June post.

Even before the pandemic hit, a prolonged period of uncertainty in the reinsurance market had forced insurers and reinsurers to reevaluate pricing adequacy and risk exposures, especially in catastrophe-prone areas.

Years of successive losses, concerns over assignment of benefits issues, climate change and sustained prior-year hurricane loss creep have altered reinsurers' views and appetites for peak zone exposures, according to Guy Carpenter in its June 23 blog post.

Reinsurance buyers, too, have responded to those concerns with modifications to their reinsurance levels or risk transfer programs, especially among Florida-domiciled insurers hard hit by a recent succession of destructive storms.

In 2017 and 2018, following a 12-year reprieve, the Sunshine State was the target of 32 named storms, including mammoth hurricanes Irma and Michael. Insured losses from the two storms, much of which occurred in Florida, could fall in the range of $34 billion to $42 billion, according to estimates from the Insurance Information Institute.

“Unprecedented circumstances like the creep from Irma is something this marketplace has never seen or experienced before,” said Jim Graganella, president and CEO of Capitol Preferred, Southern Fidelity Insurance Co. and Preferred Managing Agency.

Along with losses from years-old events like Irma, he said, “fraud and abuse by attorneys, roofers and water mitigation companies” has created a domino effect in the primary and retrocession reinsurance markets, reducing reinsurance capacity and driving up rates for policyholders.

In June, reinsurance renewal pricing in Florida climbed, on average, 20% or higher on a broad basis, “but much more in individual cases where cedents have faced stress, underperformed or come under pressure in recent years,” according to Artemis.

Rising rates was the impetus behind Capitol Preferred's decision to shed 23,800 policies in the state this year in an effort to “reduce loss ratio and reinsurance exposure” and head off a financially hazardous condition following years of heavy losses, including a $25.7 million loss in 2019, Graganella said.

Tightening conditions in the property catastrophe reinsurance market caused Florida's property insurer of last resort, Citizens Property Insurance Corp., to rethink its reinsurance plan this year and eventually led to its decision to withdraw a layer of its latest issuance from the catastrophe bond market during midyear renewals.

Company spokesman Michael Peltier said Florida Citizens' decision to drop a $200 million tranche from its 2020 Everglades Re II Ltd. series from the Coastal Account was based on “a pricing issue” and the company “was not willing to pay asking price for that coverage.”

He also pins rising prices in the reinsurance market on causing the company to slightly scale back the amount of new reinsurance coverage purchased for the 2020 catastrophe season.

Earlier in the year, Florida Citizens, whose risk transfer package includes a balance of traditional reinsurance and protection through the cat bond markets, announced plans to purchase up to $1.3 billion in new reinsurance coverage to augment $400 million in existing coverage, for a total of $1.7 billion in coverage, Peltier said.

But current dislocation in the reinsurance markets, significant price increases and the company's decision “not to chase the market and not to lock in the currently elevated rates on a multiyear basis” led to its final decision to “only place a cost efficient risk transfer program of $1.02 billion, which includes $620 million of new placement and the $400 million of multiyear coverage from 2018,” Florida Citizens chief financial officer Jennifer Montero told members of the board during a spring meeting.

Despite the slight dip in property catastrophe reinsurance coverage this year, “we are fortunate to be sitting in a very financially sound position. So we're able to reduce our risk transfer purchases from this year while still being able to weather the most severe storms, including a one-in-100-year event,” Peltier said.

Feeling the Effects

While Florida has been hit by a number of record-breaking natural catastrophes over the past several years, states like Louisiana have been enjoying a recent reprieve from those high-loss-generating calamities.

But despite the current calm in the state, Louisiana Citizens Property Insurance CEO Richard Newberry said losses in other geographies like Florida are having a big impact on his organization's reinsurance program.

“The cyclical and global nature of the reinsurance market is driving up reinsurers' cost of capital and bringing higher reinsurance costs for all purchasers of property catastrophe reinsurance, even if they weren't impacted by the loss,” he said.

During June 1 renewals, Louisiana Citizens was able to fully place its program at a single digit risk-adjusted price increase, Newberry said, “with the only notable change to terms and conditions being the insertion of a communicable disease exclusion in response to COVID.”

Several years ago, Louisiana Citizens diversified its capital sources by incorporating cat bond capacity into its program, starting with a Pelican Re Ltd. Series 2012-1 cat bond issued in 2012, which, he noted, paid a coupon of 13.73%.

Since then, the Louisiana property insurer of last resort has added other forms of capital markets capacity into its program, thereby reducing its pricing and capacity volatility by allowing the company “to annually place capacity with the most efficient capital source each year,” Newberry said. “The benefit of our diversification approach was amplified by this renewal's market conditions and our need to shift course among these capacity sources several times in the process.”

Like Louisiana, Texas is also coming off a relatively quiet catastrophe season in 2019.

This year, the Texas Windstorm Insurance Association's catastrophe funding levels will remain unchanged or steady, said general manager John Polak.

Similar to 2019, TWIA this year has access to $4.2 billion to handle storm claims through a combination of catastrophe bonds and traditional reinsurance, he said.

At the end of last year, TWIA's board voted to assess member insurance companies an additional $90 million based on losses from Hurricane Harvey, in 2017, and voted to defer further consideration of action regarding TWIA insurance rates on residential and commercial policies until its next statutorily required rate filing, which is scheduled for this month.

TWIA said the assessment of member insurance companies is in addition to the $282 million already assessed, and is based on an updated loss estimate for Harvey of $1.7 billion.

Richard Newberry Louisiana Citizens Property Insurance

Now added to the list of impending concerns are questions about how events like COVID-19 will factor into future reinsurance renewals.

Richard Newberry
Louisiana Citizens Property Insurance

Market Conditions

So far this year, COVID-19 has “already undermined earnings for 2020” and is adding a “whole new layer of uncertainty,” Aon's Van Slooten said.

As a result, he said, the tightening has been accelerated and reinsurers are being much more discerning about how they are allocating their capacity.

Since 2015, the Florida Hurricane Catastrophe Fund, which provides reimbursements to insurers for a portion of their catastrophic hurricane losses, “has had the benefit of participating in the reinsurance market without reducing the amount of capacity available to direct writers in the state's market thanks to an abundance of private capital and significant risk transfer capacity,” said John Kuczwanski, a spokesman for Florida's State Board of Administration, which oversees the state hurricane catastrophe fund.

But now limited availability of capital in the market is ushering in some big changes and causing organizations like the Florida Hurricane Catastrophe Fund to opt not to participate in a private reinsurance placement this year.

The good news, Kuczwanski noted, is that the Florida Hurricane Catastrophe Fund is “financially strong” with $12.3 billion in liquid resources available to pay claims for this year's hurricane season.

“Also, those resources will allow the Fund to seek other opportunities to optimize its capital structure and maximize its claims-paying capacity,” he said.

Despite continued tightening of the property catastrophe reinsurance market and the outbreak of unprecedented global events, AM Best maintains its outlook for the global reinsurance market as stable.

In its April 3 Best's Market Segment Report, AM Best said it expects third-party capital to continue to grow, albeit at a tempered pace, “following a period of high frequency and severity of losses, owing to the improving but relatively anemic pricing environment.”

Also, authors of the report noted that although market conditions have “seemingly begun to improve,” looming concerns remain, including insufficient rate adequacy relating to certain U.S. casualty lines, a steady decline in the benefit of favorable reserve releases and the pervasive low interest rate environment.

Now added to the list of impending concerns are questions about how events like COVID-19 will factor into future reinsurance renewals, said Newberry of Louisiana Citizens.

Even before COVID-19, he said, “market conditions were already changing. But when you add a true black swan event to the equation then that really strains the renewal placement process. And we have to react to these events in real-time, with only days or weeks to respond and change course on a renewal strategy that had been in place for months.”

Despite the pandemic, along with staggering global economic market conditions and other potential concerns, Florida Citizens' Peltier expects a “calming” of the reinsurance market by year's end, the result of which he hopes will favorably impact future reinsurance purchases.

“With current market conditions, we chose not to take any multiyear coverage this year with anticipation of things calming down with the various things going on now in the market and with COVID,” he said.

“Now we're allowing ourselves to take a breath. We think rates will soon become a bit more reasonable, and then we'll be able to carry on from that point,” Peltier said.

Lori Chordas is a senior associate editor. She can be reached at

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