Reinsurance was easier to find and cheaper in 2007

What a difference a year makes. Florida insurers had to look high and low for reinsurance in 2006, and pay dearly if they could find it.In 2007, it was a different story.

According to Jack Mangiante, senior vice president of Benfield Inc., there was ample reinsurance capacity this year for most programs, which was a departure from last year.

“Most folks found as we did that capacity was extremely tight in 2006,” Mangiante said. In 2006 it was not unusual to see shortfalls in some parts of some programs, but that does not seem to have been the case this year.”

With the losses realized in 2004 and again in 2005 Florida experienced a significant capacity crunch, Mangiante said. “People were looking anywhere they could to fill out programs and finalize layers,” he said at the Demotech/Insurance Journal Florida Private Sector Summit.

However, following the calm 2006 hurricane season, reinsurers loosened their belts, according to Mangiante. He said while price reductions varied on a “layer by layer basis,” insurers generally saw a 10 percent to 30 percent price drop: “Again, that varied based on where you were and what your loss history was.”

Evolving market
The reinsurance market for catastrophe-related business continues to evolve, with catastrophe bonds becoming increasingly popular..

Mangiante said he has seen an increase in nontraditional “cat products” over the past couple of years. “New investors continue to enter the cat bond market, recognizing that there are some attractive yields in non-market correlated returns,” he said.

Paul Dzielinski, senior vice president of U.S. Re Corp., said new “securitized insurance products” are being developed. “Insurance companies transfer underwriting risks to the capital market by transforming underwriting cash flows into tradable financial securities,” Dzielinski said. “The cash flow is contingent upon an insurance event or risk.”

Reinsurers have created so-called sidecars to increase catastrophe capacity and to earn fee income. Dzielinski said the sidecar presents more volatility than cat bonds. Capital provided by the sidecar is not consolidated and therefore has a favorable effect on its sponsor’s profitability and efficiency ratios. It allows for quick underwriting capacity and allows the sponsor to consistently provide sufficient catastrophe capacity, Dzielinski pointed out.

The sidecar also provides benefits for investors. It allows access to specific lines of business, perils and geographies; requires low start-up expenses and, by virtue of its limited duration, guarantees known liquidity at transaction inception.

Transactions will become more efficient as insurance securitization market continues to grow and mature, Dzielinski maintained. As capital market investors become competition for traditional reinsurers, catastrophic exposure will continue to fuel demand while products continue to evolve.

Topics Florida Catastrophe Reinsurance