Flood Re finalises £2.1bn retro reinsurance using ~40 counterparties

Flood Re, the UK’s government-backed reinsurance scheme designed to make flood insurance more accessible to property owners, has successfully added another roughly £800m of cover to the £1.29 billion of retrocession it secured in 2015, to complete its £2.1 billion ($3.025bn) reinsurance program.

As new risk coming to the market, the Flood Re retro reinsurance program has seen strong demand, according to sources, with pricing said to have been extremely attractive according to people familiar with the terms offered.

Flood Re secured the remaining roughly £800m ($1.15bn) of retro limit through 38 counterparties, it said, adding to the £1.29 billion ($1.86bn) of cover it secured from 6 traditional reinsurance counterparties in late 2015.

The total program at £2.1 billion is one of the five largest natural peril reinsurance programs in the world, the second largest in Europe and possibly the largest pure flood risk reinsurance placement, demonstrating the appetite among markets to assume this risk if sensibly structured.

It perhaps demonstrates a way in which the U.S. National Flood Insurance Program could improve its financial standing, by leveraging private reinsurance and risk transfer markets to support its capital needs.

Brendan McCafferty, Chief Executive of Flood Re, called the completion of the reinsurance program a “milestone” however Flood Re has more work to do, including receiving full approval from the regulators, before it officially begins operations in April 2016.

McCafferty commented; “Securing £2.1 billion in annual protection is an important milestone towards Flood Re being ready to accept policies for flood risk households. The reinsurance programme has been significantly oversubscribed and we are pleased by the strong demand from the reinsurance market. This is an innovative solution that demonstrates the thought leadership only found in the UK insurance industry.

“Although the reinsurance process has now been completed on time and ahead of planned budget, there is still a lot of work to be done. We are testing our systems with insurers to ensure they work effectively and will also continue to work closely with the financial regulators to obtain the authorisation we need to operate.”

The provision of reinsurance capital to support the UK’s home insurance industry in providing flood cover to high-risk properties is the ultimate goal, enabling access to flood risk insurance to be eased. The softened reinsurance market conditions have likely made this goal much more attainable, than it perhaps would have looked five years ago, with this reinsurance program likely costing significantly less than it would have when Flood Re was first considered.

The first £1.29 billion slice of Flood Re’s retrocession program was backed by 6 of the largest global reinsurance players, Munich Re and Swiss Re, Hannover Re, Amlin, Hiscox and Tokio Millennium Re.

The second slice of the program, the £780m of retrocessional reinsurance secured in January, was backed by another 38 reinsurance markets, taking the total number of counterparty signings backing Flood Re to 44.

Flood Re said the process was oversubscribed, with 45 markets seeking to participate in this latest tranche of its retro program. In the end 38 signed to provide the capacity required, which Flood Re said was “a sign of confidence in the UK insurance market.”

Given the size of the program and the number of counterparties involved it seems unthinkable that Flood Re’s retrocession doesn’t include an element of collateralised coverage (fronted or otherwise) from some of the largest ILS fund managers in the world.

Given the penetration of ILS capital into major global reinsurance programs, as well as the domination of global retro markets by some collateralised ILS fund players, it seems assured that the ILS market has played some role in helping Flood Re to secure this second layer of retro cover. However, at the time of publishing Flood Re would not confirm this.

UK flood risk would be a welcome addition to some ILS fund managers portfolios and with collateralised capacity possibly the most efficient in the market Flood Re would seem unwise to have gone traditional only, given recent reinsurance and retro market dynamics.

However it’s also assured that the traditional reinsurance markets will have been extremely competitive on price for the Flood Re retro program. Competition for signings will likely have been high, all helping to deliver a better price and ultimately more affordable and efficient protection for the UK property owners that will benefit from Flood Re reinsurance protection in years to come.

Reinsurance broker Guy Carpenter placed the program, the first UK reinsurance buy to be made under European Public Procurement regulations.

Charles Whitmore, Head of the Property Solutions Group at Guy Carpenter, said; “The reinsurance market has proved incredibly supportive of Flood Re from the outset, acknowledging both the opportunity and the level of professionalism running through the whole process. As a result the final placement was relatively straightforward with the world’s largest reinsurers providing the majority of the capacity.”

It’s really no surprise that Flood Re has received such strong and broad reinsurance support. Any incremental opportunity such as this will be heavily oversubscribed to be the world’s largest reinsurers, with great interest also shown by ILS players and smaller reinsurers, or Lloyd’s syndicates, we’d imagine.