Florida stress tests insurers reinsurance arrangements, including ILS

The Florida Office of Insurance Regulation (FLOIR) has completed its third annual catastrophe stress test of Florida-based property insurers, looking at their reinsurance adequacy, including any insurance-linked securities (ILS), as well as capital and surplus, in the face of major loss scenarios.

The regulator wants to be sure that property insurers operating in the state of Florida can withstand catastrophic shocks caused by years that see multiple major hurricanes or storms. Part of the stress test involves an assessment of the insurers reinsurance arrangements and coverage, including types of insurance, traditional or alternative, and all passed.

With the alternative and ILS market having a significant share of Florida property insurers programs it is testament to the robustness of ILS structures such as catastrophe bonds, as well as the collateralized nature of capital markets backed reinsurance, that all passed the stress test this year.

The FLOIR performs an annual reinsurance data call, asking insurers for details of their reinsurance programs, including the types of reinsurance purchased, whether traditional or alternative, as well as details of any ILS arrangements or cat bonds, plus the cost of these arrangements.

Then the FLOIR performs a number of stress tests, involving running modelled scenarios of severe hurricane years, ranging from specific 1-in-100 year type historical storms, to seasons with multiple major hurricane events.

The FLOIR explains:

The Catastrophe Stress Test uses information obtained in the Data Call to simulate how an insurance company’s financial position would be impacted by a specific, historical hurricane. It requires insurance companies to model a historical storm scenario, or a series of historical storm scenarios, and apply its purchased reinsurance program to the associated modeled loss. This loss is then used by the Office to estimate the surplus of the insurance company after the occurrence of the event. Essentially, the Catastrophe Stress Test determines whether each insurance company would continue to meet its minimum surplus requirement after each storm scenario.

Types of reinsurance utilised, including whether they are traditional, ILS, catastrophe bond or another structure, are all reviewed as part of the data call and factored into the results for each property insurer.

The analysis of each insurers reinsurance arrangements includes reviewing such factors as the diversification of reinsurance products used, the diversification of reinsurance counterparties, as well as a review of the collectability of reinsurance should a major loss event occur.

The regulator told Artemis that it doesn’t assign values to different types of reinsurance structure or coverage, rather looking at factors such as claims paying ability and robustness it seems. Which given the diversity of products and counterparties available in the market these days would seem prudent.

The FLOIR said that of the 112 insurers that provided reinsurance data, all had sufficient reinsurance, capital and surplus to meet claims in a 1-in-100 year storm event or higher.

That’s impressive and shows the robustness of the reinsurance market and its product set, as well as the protection purchased by Floridian primary insurers. The additional catastrophe stress test also showed that 67 Florida property could get through any of the three storm event scenarios they were modelled against with the legal minimum capital and surplus still intact.

For consumers that should be comforting, to know that this many Florida property insurers can withstand hurricane seasons that throw three major storms at them. Of course it also shows that they have enough reinsurance in place for this, which means they likely don’t need to buy more right now unless the legal minimums, for capital and surplus, were adjusted at all.

Kevin M. McCarty, Florida’s Insurance Commissioner explained; “Florida’s insurance companies have benefitted from an influx of capital into the reinsurance market, which has allowed them to lower rates, boost surplus and protect against catastrophes. Floridians should have confidence not only in the results of this year’s Catastrophe Stress Test, but also in the development of this tool to assess the risk of hurricanes.”

The fact that ILS and catastrophe bonds are taken into consideration by the FLOIR in its catastrophe stress tests, in the market where they are perhaps most prevalent, and nothing detrimental is found but in fact insurers are found to be very well protected by quality reinsurance capital should be seen as a very positive finding from the FLOIR.

It also helps to underscore the fact that diversifying your sources of protection to include the capital markets and ILS protection such as catastrophe bonds does not have any detrimental impact to the regulators view of an insurers ability to pay its claims.

The FLOIR concludes that the catastrophe stress test results show “signs that the Florida property insurance market is more diverse, robust, and competitive than it has been in years.”

The abundance of efficient reinsurance capital, the increasing use of ILS and catastrophe bonds and other collateralized reinsurance structures, as well as the lower-cost of risk transfer, have all helped to put the Florida market in good shape. The capital markets has certainly contributed strongly to that.

You can access more information on the stress tests, as well as the full report and the results by insurance company, via the FLOIR website here.