1347 / Maison to look to alternatives, cat bonds an option

1347 Property Insurance Holdings (PIH) struggled to find adequate pricing and the right level of capacity for its top and drop and aggregate reinsurance contract, leading the firm to look at other methods, outside of the traditional reinsurance space, with catastrophe bonds seen as an option.

During the firm’s third-quarter 2016 earnings release call, the company was questioned about its top and drop and aggregate reinsurance protection in light of the softening marketplace and the impact of an elevated frequency of adverse weather events.

Doug Raucy, President and Chief Executive Officer (CEO) of PIH, which has a dedicated property underwriting insurer Maison, stressed that the firm values its top and drop and aggregate protection, explaining that it really helped the company in both 2015 and early in 2016, and could benefit them again before the treaty year is over.

However, and perhaps due to the current, challenging and softening reinsurance marketplace, reinsurers appear unwilling to write the business in the current environment, leading PIH to look elsewhere for coverage in the future, outside of the traditional space.

“We hit that (top and drop and aggregate) back in 2015 and early in 2016, and that was a little bit more difficult for us to place because we did hit it pretty hard, and we found that to be the one area that we kind of struggled getting the price we wanted, the capacity we wanted. And this year we’re going to look at a few different things, we’re going to look at some bonds, and a few other ways to try and fill in that top and drop and that aggregate,” said Raucy.

Raucy continued to explain that a lot of reinsurance companies simply do not want to write that top and drop and aggregate business, meaning that the capacity simply wasn’t available in the traditional marketplace. But PIH found little trouble finding the capacity for its traditional reinsurance towers that it has in place, and fails to see any trouble filling this as the market moves into the next treaty year, “but that top and drop and aggregate, that will be our challenge,” said Raucy.

Unable to find the right pricing and capacity in the traditional marketplace, PIH may well find a better response with the willing and able insurance-linked securities (ILS) space, utilising the abundance of sophisticated capital markets’ investor-backed capacity to fill the coverage gap.

Catastrophe bonds were designed to cover high severity, low risk catastrophe exposures and typically sit at the top of a reinsurance tower, providing diversified and efficient protection that supplements a traditional reinsurance placement.

But the ILS market is also becoming increasingly adept at providing top and drop type covers, which can provide a cascading protection that responds to severe or frequent events, depending on the specific structure.

According to Raucy, it seems that 1347 PIH will be exploring the potential benefits of catastrophe bonds and other forms of alternative risk transfer in the coming months so that the firm can secure the protection it requires at the right pricing.

ILS players, like traditional reinsurers, are eager to capitalise on opportunities and expand their remit in the challenging environment, and providing efficient capacity where the traditional reinsurers aren’t able to, or are unwilling to provide the required coverage, could help the sector continue down its impressive growth path.

The majority of reinsurers now work with the alternative reinsurance market in some way or another, and while catastrophe bond market growth has moderated somewhat in recent times, the collateralised reinsurance sub-sector continues to drive the overall expansion of the ILS space.

It will be interesting to see whether PIH utilises the ILS and catastrophe bond space to meet its risk transfer needs in the coming months. Private cat bonds may also be an option and the market has seen some of these issued using a top and drop structure.

Should the firm be able to find the pricing and capacity it requires in the capital markets, and outside of the traditional space, it’s further evidence of the benefits of embracing both the traditional and alternative markets, essentially using a range of risk transfer tools to optimise portfolios and create the most efficient reinsurance programme in the face of increasingly frequent and severe weather events.