Lack of reinstatement premium protection capacity in Florida an ILS opportunity

Some insurance carriers in Florida have struggled to secure sufficient Reinstatement Premium Protection (RPP) coverage for the reinsurance towers they have renewed, due to a lack of capacity for this specific offering and reduced appetite, all of which could present an opportunity for ILS funds.

Speaking during a recent webinar held by Florida focused rating agency Demotech Inc., executives from TigerRisk Partners explained that the renewal season saw a lack of reinsurance capacity to fill every need of every insurance carrier in the Florida market

The retrenchment of reinsurance capacity and re-examination of reinsurer and insurance-linked securities (ILS) fund appetites in Florida at the renewals has resulted in clear gaps in the availability of capacity to fulfil certain needs.

Among these are the pull-back on cascading structures, the reduction of aggregate capacity that was made available, but another noticeable area that capacity was less abundant than before, was in the provision of Reinstatement Premium Protection (RPP) covers.

With aggregate and cascading coverage less readily available, there’s a need for more RPP coverage as well, as this can provide greater certainty on the ability to replace or replenish a reinsurance tower should a first event deplete its protection for the cedent.

The upshot is a lack of specific capacity for RPP protection, something that the TigerRisk executives said could be an opportunity for insurance-linked securities (ILS) fund managers.

They named ILS managers Pillar Capital and Elementum as two that may look to raise specific investor funds to support insurers’ RPP needs, although there are likely others also considering this avenue as well.

ILS funds with rated carriers, or rated fronting access, may also see the provision of reinsurance reinstatement premium coverage as an opportunity as well.

The TigerRisk executives said that it would be down to brokers to work with ILS funds to help them deliver the capital needed, creating new funds in some cases to support deliver of this capacity to meet the need of insurance carriers that may not have been able to secure the RPP they needed.

Reinstatement premium protection financing is an area that the ILS market has been involved in already.

There are transactions which feature specific layers that serve this purpose, including some private catastrophe bonds where a tranche provides RPP capacity for a cedent.

Collateralised reinsurance underwriters will often provide RPP coverage, as the terms of these arrangements are akin to a single-shot reinsurance arrangement, so linked to the underlying occurrence of a peril event.

In Florida these have always been an option in the market, given the higher rates for catastrophe coverage there. Now, with the market hardening, it’s perhaps no surprise demand has risen and capacity is seen to be a little short for them.

But creating a specific fund to support RPP capacity needs is an interesting idea and perhaps reflective of the current state of the market, the elevated view of risk in Florida and also the ability of ILS funds to be flexible in providing solutions that re/insurers really need, while offering something a little different to their investors as well.