20 October 2014Re/insurance

Putting the money to work

A key focus for the Association of Bermuda Insurers and Reinsurers (ABIR) is how to grow the market. There is more capital available and our challenge is to work with capital providers and try to get that capital deployed effectively.

We think the money from pension funds is committed long term. This could be put to work in developed markets by taking risk out of government programmes and putting it back into the private sector. It could also be used to help boost insurance penetration and help clients better understand natural disaster risk portfolios and the aggregation of risk to design reinsurance programmes.

The UK flood reinsurance programme is an example of this. At our recent board meeting we had presentations from UK and US experts on the redesign of flood insurance mechanisms. The Association of British Insurers (ABI) presented its views on how the programme would use reinsurance to manage the risk.

Bermuda companies view that as a positive step—an example of a good partnership where additional reinsurance capital can be put to work taking on risk that we understand.

The UK is fairly well modelled; it’s a market with a great deal of flood knowledge and an example of a partnership that we think can bear fruit and be meaningful. According to the ABI, between £800 million and £2.5 billion of coverage will be purchased in the UK in the coming years.

There is similar potential in the US. In the same board meeting we had a presentation on Guy Carpenter’s research project for the US flood insurance programme run by the Federal Emergency Management Agency (FEMA). Guy Carpenter’s research presents FEMA with a study of flood methodologies around the world and gives them five options for how to increase private sector take-up of flood risk.

The report will note that they estimate $7 to $8 billion of reinsurance coverage being available in the current market to take on flood risk. That could grow to $15 to $20 billion over time.

Private capital is increasingly being used to take on US hurricane risk. The Florida model of creating specialised insurers to take on home risk is spreading throughout the southeastern and coastal parts of the US.

If you look at the Florida Citizens Property Insurance Corporation, it has already depopulated Citizens from its peak by 30 percent, and 400,000 take-outs have been approved for conversations with policy owners by year end. That’s a policyholder’s choice: it doesn’t mean that 400,000 policies will leave but there is a chance to further depopulate Citizens quite substantially in the current market. It could become half of what it was only two years ago and many observers believe it could depopulate even more.

Private capital is also being used to take on earthquake risk in the US. Fannie Mae and Freddie Mac, the secondary mortgage market insurers, are now buying their own mortgage default risk products from reinsurers to reduce the risk accumulating on their balance sheet from the potential for mortgage defaults.

In Canada there are ongoing conversations about how to increase flood and earthquake penetration.

Following the 2011 events, there is additional interest in the China and southeast Asia markets having increased penetrations. Much of that will be slow and incremental but it is an example of how there are opportunities in both developed and developing markets to take on additional risk.

Now is the time to do that. We are trying to raise our voice to support that action in working with insurance policymakers around the world to make sure that this point of view and the opportunity are understood in the current market.