Florida’s Citizens Property Insurance, the property insurer of last resort in the sunshine state, has been on a mission to reduce its exposures to ensure its claims paying ability is retained. This has involved a lot of discussion on the potential ‘depopulation’ of Citizens, or offloading of policies and customers to private insurers, and now Citizens has transferred 31,000 wind only insurance customers to private insurance firm, Weston Insurance Co.
The transfer is significant, both in terms of the exposure it removes (or reinsures) from Citizens book of business and because this is the first time Citizens has depopulated wind-only policies from its Coastal Account, the segment of its business on the Florida coastline which is most exposed to hurricanes.
“Citizens is very excited about this first ever depopulation of commercial wind-only policies from our Coastal Account,” commented Citizens President and CEO Barry Gilway. “We’ve already begun to receive positive feedback from other insurers and believe this agreement can serve as a model for future depopulation efforts.”
The transaction sees Florida-based Weston Insurance Company taking on roughly 31,000 Personal Residential, Commercial Residential and Commercial Nonresidential wind-only policies from Citizens. This totals $30 billion of hurricane exposure for Citizens’ Coastal Account, and Citizens says that it will reduce the potential for Emergency Assessments on Floridians by 11.9%.
The reduction of Citizens hurricane exposure by $30 billion equates to a decrease of approximately $840m in Citizens’ Coastal Account’s probable maximum loss (PML) in the event of a 1 in 100-year hurricane. That’s a significant drop and the lower probable maximum losses will make Citizens purchases of reinsurance protection for the Coastal Account potentially cheaper and may cause them to restructure some of that cover.
The transfer of policies to Weston takes the form of a quota share reinsurance agreement at first, under which Weston will reinsure and pay all claims for the wind-only policies it plans to assume, effective December 21, 2012, and continuing through May 31, 2013. During this period, Citizens will pay a reinsurance premium for the policies covered under the reinsurance agreement. The assumption of the subject policies by Weston will take place between March of June 2013, just in time for the start of the hurricane season. Weston will only be allowed to raise premiums for policyholders by 10% maximum per year for three years.
So, by effectively removing $30 billion of exposure from its Coastal Account, Citizens has potentially altered the riskiness of its first cat bond, the $750m Everglades Re Ltd. which it sponsored last year. The Everglades Re cat bond covers the Coastal Account, providing cover for Citizens indemnity losses from an attachment point of $6.35 billion up to an exhaustion point of $7.35 billion.
While the Coastal Account is still huge and contains a significant exposure of wind-only coastal Florida properties, by removing a portion of these policies the risk of loss to the Everglades Re cat bond has likely been reduced somewhat. The attachment point will remain the same but the probability of attachment seems likely to have reduced somewhat due to the lower amount of Coastal Account exposure.
The Everglades Re cat bond has an annual reset on the 1st May each year which uses exposure data from the previous 31st December and seeks to keep the attachment probability the same by examining the exposures and modifying the attachment point if necessary. With this transaction effectively having removed $30 billion of exposure from the Coastal Account on the 21st December it is likely that this will be taken into account at the reset this May.
Whether that will actually alter the attachment point for Everglades Re is uncertain, with the risk reduced a little and the probability of attachment kept the same at the next reset, the attachment point may actually have to be decreased a little. But, with the probability of attachment kept the same the modelled riskiness of the deal will not change. In fact this could bring the effective attachment levels for all of Citizens private reinsurance risk transfer down a little.
Whatever the results of the reset, the risk profile of the Everglades Re cat bond has to have changed with this depopulation agreement and with future offloading of policies likely it could be changed further in time. In the run up to the next reset the risk of attachment has dropped but of course with the hurricane season not starting until after Everglades Re is next reset that won’t really matter.
It will be interesting to see how Citizens approaches its reinsurance buying this year. The reduced exposure in its Coastal Account may make buying further cat bonds even more cost-effective as it may be able to achieve a better price in the capital markets.