Flood Re planning £2.1bn ($3.27bn) reinsurance purchase

The UK’s new government backed reinsurance scheme, Flood Re, is planning to buy £2.1 billion ($3.27 billion) of retrocessional reinsurance cover, which is likely to include collateralised or ILS markets, adding another welcome source of new demand for capacity.

The reinsurance purchase from Flood Re will be welcomed by both reinsurers and the ILS market, as another new source of demand helps reinsurers and ILS players put capacity to work.

Flood Re had said previously that it was open to alternative capital solutions for its retrocessional reinsurance needs. The expectation is that insurance-linked securities (ILS) funds and other collateralized markets would be likely to participate in any retro purchase, given these markets are now able to put out larger lines that many traditional reinsurance providers such as Lloyd’s syndicates.

The FT reports that Flood Re is preparing to make what would be among the world’s top five purchases of catastrophe reinsurance protection, as it seeks to protect the scheme and taxpayers.

It’s thought that Flood Re will seek to buy retrocessional reinsurance to cover all losses over £100m suffered by the flood pool every year, with an expectation that Flood Re will pay between £90m and £100m in premiums for the cover.

UK flood risk is likely to be attractive to both traditional reinsurers and the alternative or ILS markets as a source of diversification, which should enable Flood Re to achieve keen pricing.

The FT says that Flood Re will look for a multi-year approach to its retrocessional reinsurance protection, likely seeking a cover of between three and five years and that the program could feature as many as 30 markets. Flood catastrophe bonds could be a potential solution, as part of the overall reinsurance program put together by Flood Re’s broker Guy Carpenter.

Any Flood Re cat bond could utilise an industry loss trigger, or perhaps even be structured using an indemnity trigger. While indemnity cat bonds for retrocession are less common, being a government backed flood scheme may enable Flood Re to generate the support required to get such a deal to market.

Any UK flood cat bond would see high demand from capital market investors due to the diversification it would offer.

However, being Flood Re’s first visit to the global reinsurance and capital markets it’s perhaps more likely that a traditional program with some collateralised reinsurance backing from ILS players is a more likely solution.

The additional reinsurance demand from a new government backed risk pool will be welcomed by the reinsurance market. It will be interesting to see what level of participation the capital markets and ILS players take in the program.

Given the appetite for catastrophe risk right now, particularly new and diversifying opportunities, competition between alternative, or ILS / capital market capacity, and traditional reinsurers could be fierce.