Hurricane Matthew’s impact on Florida and the resulting insurance losses will provide a measure of the states start-up carriers reinsurance arrangements, catastrophe preparedness and ability to respond to major loss events, according to A.M. Best.
The majority of carriers likely to be affected by hurricane Matthew will have ” sufficient capital and appropriate reinsurance programs in place to effectively absorb this event” rating agency A.M. Best says, but the hurricane also provides a chance for the firm to assess the new wave of Florida insurance start-ups ability to withstand storms.
In the last decade numerous insurance carriers have launched in Florida with business models often driven initially by an ability to take-out large numbers of policies from Florida Citizens, while utilising significant amounts of reinsurance capacity to cover potential claims.
Many of these insurers have not experienced a major loss event yet, having sprung to life since hurricane Wilma struck the state in 2005 and so remain untested by a major or complex catastrophe loss event.
These start-ups are also known for making use of capital markets reinsurance arrangements, with some having third-party capital backed internal reinsurance vehicles and others direct arrangements with third-party capital providers to provide capacity.
Collateralised reinsurance from ILS funds and catastrophe bonds backed by ILS investors proliferate among Florida carriers these days. While cat bonds are unlikely to respond, given the magnitude of the loss from Matthew being below where they typically attach, some collateralised reinsurance is likely to come into play.
These arrangements remain untested by a major hurricane hitting Florida and so Matthew provides another opportunity for the ILS sector to demonstrate its claims paying ability.
So Matthew has provided that opportunity, to assess how Florida’s start-up carriers respond, how well they manage claims, how rapidly their reinsurance arrangements pay out and ultimately how good their risk management processes are when placed under stress.
The reinsurance arrangements are going to be one area that comes under particular scrutiny, perhaps especially so given the proportion of capital markets and ILS fund coverage is relatively high for some of the Florida start-up carriers.
With ILS backed capacity and other third-party reinsurance capital arrangements largely fully collateralised, with cash held in trusts, it is an opportunity for the ILS market to demonstrate its willingness and ability to pay claims quickly in support of insurers losses.
The same is true of traditional reinsurers as well, many of whom have not been tested in Florida for some years. Matthew will also provide some visibility of which companies have really pulled back in the state and which have continued to deploy capacity at recent lower pricing.
A.M. Best said that it “Does not anticipate a significant number of rating actions related to Hurricane Matthew, as most rated insurance carriers have sufficient capital and appropriate reinsurance programs in place to effectively absorb this event.”
“Comprehensive reinsurance programs,” as well as robust risk management capabilities, should help to ensure that carriers are “adequately protected from the potential losses to emanate from the storm,” the rating agency explained.
As a result A.M. Best believes that hurricane Matthew will be more of a fourth-quarter earnings event and is unlikely to affect overall balance-sheet strength for the majority of carriers.
However, some of the smaller carriers which are more geographically concentrated could find that loss assessment takes time, meaning that determining the extent of the loss and paying claims is not as quick for them.
“It is possible that the impact to these smaller, more concentrated companies will adversely affect earnings and capitalization,” A.M. Best notes.
“Reinsurance coverage and risk concentration parameters will have a material influence on mitigating the impact of the hurricane losses,” the rating agency continued.
That suggests that reinsurance arrangements will come under particular scrutiny with Matthew and so primary carriers may be looking for payouts to be made as early as is possible, once the size of their losses are understood.
It will be important for ILS players and other collateralised reinsurance providers or vehicles to strive to payout as quickly as possible to help carriers to meet their obligations and as a result hurricane Matthew will provide another valuable test of the market.
Hurricane Matthew (and Hermine before it) provides Florida and its insurers with a reminder of the threat they face from the tropical storms that can target the state, perhaps a valuable reminder given the prolonged period with no landfalling storms.
A.M. Best said that this “brings into focus the need for companies to continue employing prudent risk management practices that adjust as risk factors such as business profile and company retentions shift over time.”
It also brings reinsurance arrangements and the ability to make recoveries quickly, in order to support insurers with their claims payments, to the fore. Hence there will be some scrutiny of arrangements and the reliability of reinsurance recoveries from the rating agencies, and as a result the ILS market will no doubt be closely watched when paying its share.
“Initial indications suggest that total losses will be within established catastrophe reinsurance limits for A.M. Best-rated entities,” the rating agency commented.
Reinsurance arrangements pay a vital role for insurers in catastrophe prone regions such as coastal Florida and the ILS market is now one of the main providers of risk capital.
“Newer start-up companies, such as in Florida, remain fairly untested regarding risk management and reinsurance coverage,” A.M Best said, and it is vital that these arrangements prove their worth. By supporting Florida carriers in their time of need the ILS market can prove itself to be the long-term capital partner these insurers need by their side.