Flood Re secures £1.29bn traditional retro from 6 counterparties

Flood Re, the UK’s government backed reinsurance scheme to help make flood insurance more accessible to property owners, has secured its first tranche of retrocession, securing £1.29 billion of cover from six traditional counterparties.

The six players providing this slice of the Flood Re retro reinsurance program capacity were led by global players Munich Re and Swiss Re, who provided “very significant support” according to Flood Re’s statement.

The other four counterparties for this tranche of the program were Hannover Re, Amlin, Hiscox and Tokio Millennium Re.

Flood Re is aiming to secure £2.1 billion of retrocession in total, with this £1.29 billion the first slice. The coverage secured from the six counterparties is on a multi-year basis, with contracts having a three-year term.

Brendan McCafferty, Chief Executive of Flood Re, said; “The successful completion of phase one of the reinsurance procurement process is an important milestone on the road towards Flood Re becoming a reality. We are delighted by the strong demand within the reinsurance market, which saw the programme being significantly oversubscribed. This bodes well for phase two and means we are on course to provide protection up to the planned £2.1 billion annual liability limit.

“Flood Re is a complex scheme and while we are pleased with the progress which is being made, we are not complacent. Plenty of hard work remains ahead of us. Over the next few months we need to ensure that every insurer who wishes to test with Flood Re is able to do so, that we successfully complete phase two of the reinsurance process and that we continue to work closely with the financial regulators.”

The program is being placed by reinsurance broker Guy Carpenter and the process now enters a second phase, with another £720 million of reinsurance protection being sought. This is expected tobe secured in January 2016.

Charles Whitmore, Managing Director and head of Guy Carpenter’s Property Solutions Group, commented; “The reinsurance market’s response to this major opportunity has been very impressive, with carriers showing a strong appetite to work with the public sector to ensure affordable flood cover will be made available to UK households. The process has been conducted in accordance with the European Public Procurement regulations which we believe is a first in the UK for the procurement of reinsurance cover.”

The Flood Re retrocessional reinsurance program is one of the five largest in the world and the second largest in Europe.

As a new risk to come to the market, demand will have been high and Flood Re said the program was oversubscribed unsurprisingly. As a result this has provided an opportunity for some reinsurers to put excess capital to work, but it won’t affect rates or pricing as this level of additional demand won’t be sufficient alone to sway the competitive market.

It’s hard to say whether any of the six reinsurers put any insurance-linked securities (ILS) capital to work in this layer. Clearly a few of them have their own access to third-party capita, Amlin with ILS manager Leadenhall, Hiscox with ILS manager Kiskadee, while Hannover Re, Tokio Millennium often front for ILS capacity. Munich Re and Swiss Re no doubt have plenty of their own capital to put to work in a deal like this, although as would the others in reality so if ILS capital was backing any of this layer it is likely to have been minimal.

It will be interesting to see what form the next layer of £720 million of retro reinsurance comes in.

The traditional market could clearly provide this capacity, but so could the ILS market if structured in an acceptable manner. We’ve yet to hear any rumours of a Flood Re catastrophe bond, but wouldn’t count that out entirely as there would be time to launch one in the coming week or two for completion in January.

Of course the traditional and collateralised reinsurance markets are likely to be extremely competitive on price for this risk, although we’re sure that cat bond investors would be too. But frictional cost could make a cat bond less attractive as UK flood risk is relatively untested in that market, unless of course Flood Re values the diversification of risk capital enough to proceed with a securitisation.