Perceived value of reinsurance, relative to other capital, is high: Moody’s

by Artemis on July 16, 2015

Relative to other forms of capital used for financing or risk transfer, the perceived value of reinsurance is currently high, as evidenced by the first time use of reinsurance by the Florida Hurricane Catastrophe Fund (FHCF), according to Moody’s.

Rating agency Moody’s Investors Service highlights the increased perceived value that has been attached to reinsurance capital currently, something which has helped to boost demand in peak peril zones such as Florida.

The increased and ongoing interest in catastrophe reinsurance as an asset class has assisted with this enhancement of the value of reinsurance capital to cedents. Not only has the FHCF purchased private reinsurance protection for the first time, but other Florida based cedents have been buying more cover or using private reinsurance capital to offset their FHCF participation in 2015.

The enhanced value attached to reinsurance capacity at this time has had a welcomed muting effect on price declines, helping the Florida market to come through its key renewal with the lowest decline in three years. Property catastrophe rates are still down in high-single digits at the June renewal, but that is a much slower rate of decline than was seen a year earlier.

“FHCF’s first entrance into private risk transfer market highlights the perceived current value of reinsurance relative to other forms of capital, such as pre-event bonds,” Moody’s noted in a recent report.

The perceived value of reinsurance capital over other forms of financing, such as the more typical pre-event bonds, has been assisted by the low-levels of catastrophe losses in recent years and also the growing pool of insurance-linked securities (ILS) capital.

Moody’s continued; “Pricing for property catastrophe reinsurance has declined significantly over the past few years owing to a supply/ demand imbalance that has been exacerbated by large inflows of alternative capital into the market from institutional investors in the form of catastrophe bonds, collateralized reinsurance and reinsurance sidecars.”

It’s a fascinating development for the Florida reinsurance market, to see private reinsurance capital from the traditional and alternative markets becoming perceived as better value than pre-event bonding for the FHCF.

This has enabled the FHCF to establish a much greater diversification within its own risk capital sources, which should put it in a healthier position if a major loss event did occur.

Moody’s notes the healthy participation in the FHCF’s $4 billion reinsurance placement of the alternative markets, with at least 24.35% of the placement going to collateralised or ILS players, a percentage that may actually be higher due to some fronting relationships.

It’s also fascinating that in the same year that the FHCF has turned to private reinsurance capital and the ILS market, primary insurance companies in Florida have also been increasingly doing so, some favoring private reinsurance capital over the FHCF cover itself.

This really is testament to the cost-effective and efficient nature of insurance-linked securities (ILS) capacity, which has largely been the capacity used to replace or reduce FHCF participation by Florida based cedents.

Moody’s sees the FHCF’s landmark reinsurance purchases a positive for the supply and demand balance in Florida and for reinsurance pricing more broadly.

The rating agency explained; “While we believe that the property catastrophe reinsurance market is still searching for a pricing floor after several years of price declines, FHCF’s large reinsurance purchase reduces, even if modestly, the supply/demand imbalance in the Florida market and provides some support for reinsurance pricing, which is credit positive for reinsurers.”

For as long as reinsurance capital, be that traditional of alternative and ILS based, is perceived as valuable relative to other forms of financing, it can be expected that more new risk will be ceded into the market.

For government or state backed insurance pools, now is a time to shed risk to the private market, with decadal low pricing and high appetite enabling them to secure risk transfer at very attractive terms. That could lead to other initiatives to take risk to the private reinsurance market.

With conditions to reinsure catastrophe risks so attractive right now, helped by the appetite of third-party investors, perhaps even the National Flood Insurance Program could be encouraged to test the waters of the reinsurance and ILS market?

Also read:

Collateralised & ILS plays role in FHCF’s $1bn reinsurance purchase.

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