Missouri mutuals required to buy more reinsurance post-Joplin tornado

The Missouri Department of Insurance have put new regulation in place which will require the states mutual insurers to take on more reinsurance cover to shore up their financial stability. The regulation has been prompted as a way to preemptively stop a similar run on the mutuals finances such as what happened after the deadly Joplin tornado last year.

The new rule will require Missouri’s mutual insurance companies, non-profits that provide coverage to property owners, to ensure that any losses from future events won’t deplete their surplus funds by more than 20 percent in a single year. The mutuals will be expected to acquire sufficient reinsurance cover to ensure their capital surplus is sufficient to meet claims.

“Regulators and insurance industry groups teamed up to strengthen this regulation, which was vitally needed,” said John M. Huff, director of the Missouri Department of Insurance. “This new requirement prevents farm mutuals from taking on more risk than they can handle. That protects their customers, who are mainly rural Missourians.”

The mutuals serve a mostly rural customer base who often cannot find coverage from traditional property and casualty insurance companies. As such these mutuals provide coverage for homes and businesses in the more rural areas of Missouri, areas that are particularly exposed to severe thunderstorms and tornadoes. Also known as farm mutuals, the new ruling is expected to improve their ability to pay claims after catastrophic events.

After the Joplin tornado, which was one of the most devastating catastrophe events in the U.S. last year, a number of mutuals got into financial problems and some folded. The new regulation will take effect on 1st January 2013, so these mutuals will be looking for reinsurance coverage at the next renewal period.

Given that these mutuals are often quite small entities it might make sense for them to create either a pool for reinsurance coverage or event to look to the catastrophe bond market for the new reinsurance protection. Cat bonds could be ideal as a single transaction could be structured which would cover a number of mutuals on an ultimate net loss (UNL) basis as an indemnity transaction. A structure similar to the recent Combine Re cat bond, which covered two distinct entities on a UNL basis, might be appropriate. By teaming up to acquire reinsurance cover, either from the traditional market via a pooling agreement, or from the capital markets via a cat bond, these mutuals may be able to keep their reinsurance costs down and therefore not have to pass on so much of the cost to policyholders.