In another sign of the increasing importance of the insurance-linked securities (ILS) market and collateralized reinsurance protection, United Insurance Holdings (UPC Insurance) has revealed that 70% of the open market limit placed for its June 2017 reinsurance renewal was on a fully-collateralized basis.
The 2017 reinsurance program, that protects UPC Insurance, via subsidiaries American Coastal Insurance Company, United Property and Casualty Insurance Company, Family Security Insurance Company, and Interboro Insurance Company, featured participation from 43 reinsurers.
United said that the use of fully-collateralized reinsurance limit is seen as a way to “mitigate credit risk” within the reinsurance program, with all other reinsurers being A- rated or better.
United has secured $1.9 billion of aggregate open market catastrophe reinsurance coverage, against the perils of named or numbered windstorms and earthquakes across all states the insurer and its subsidiaries operate in.
This main chunk of the reinsurance program has been structured in multiple layers, using a cascading approach so each layer can drop down to replace any layer that has been exhausted beneath.
United said that this ensures there are “no potential gaps in coverage up to the $2.8 billion program exhaustion point.”
$87.5 million of the reinsurance coverage is on a multi-year basis, while United said that it has managed to do away with the hours clause for hurricane losses, so that terms of the program now mean the coverage would include losses suffered during the entire life of a storm.
Additionally, United opted for 45% participation in the Florida Hurricane Catastrophe Fund (FHCF) coverage, which offers approximately $789 million of aggregate reinsurance cover, at a range of retentions and limits, with three FHCF contracts all inuring to the benefit of the open market reinsurance layers.
For this 2017 to June 2018 catastrophe reinsurance program, United has revealed a cost of around $314.2 million.
The reinsurance program purchased at June 1st puts United into its best protected position for the start of a hurricane season, with the overall program exhaustion set at $2.8 billion and coverage now in place for a 1 in 400 year single event, or a 1 in 100 followed by a 1 in 50 in the same season.
Group retention is $55 million for a first catastrophe event and $30 million for second and subsequent, with $5 million retention for the company’s captive reinsurer BlueLine Cayman Holding. United notes that this represents around 11% of group equity for a first event loss, which it says is lower than in any previous year.
The reinsurance program was placed in combination with that of recently acquired American Coastal, which offered some synergies and cost savings to the firm, which United said surpassed the savings target of $20 million.
United of course also has its Laetere Re Ltd. (Series 2016-1). catastrophe bond that remains in-force at this time, expanding the collateralized and ILS market participation in its reinsurance arrangements.
The insurer also has its January renewal aggregate excess of loss catastrophe reinsurance and the quota share arrangement it entered into with the backing of Nephila Capital, which expands its protection from the capital markets even further.
U.S. primary insurers, like United, have been increasingly bringing the ILS and collateralized reinsurance market into their reinsurance programs and now it seems, for some insurers at least, we are at a stage where collateralized markets are larger participants than traditional reinsurers.
Is this down to cost-efficiencies, are ILS markets able to undercut the large traditional players? Or is there a realisation that the efficiency, lack of credit risk and also ILS markets ability to be flexible, while understanding the clients needs, makes ILS and other collateralized markets good reinsurance partners?
This could be a sign that the ILS markets are going to take an enlarged share at the mid-year reinsurance renewals, or it could just be one insurer that has already created strong relationships with the ILS funds and collateralized markets confirming its willingness to cede more risk to them.
Join Artemis in Singapore on July 13th 2017 for ILS Asia, tickets on sale here