A Year After 9-11, Cat Re Still Elusive
A year after September 11 terrorist attacks left their indelible mark, the group life market is still trying to reconstruct catastrophe reinsurance risk coverage for this growing market segment.
As one market expert put it, “it was like a death. It took time to realize that cat is not available.”
But now, after months of regrouping, weighing options and calling on Congress to provide a terrorism backstop that would cover group life writers, signs of some market solutions are starting to turn up.
Among these solutions are at least one new product idea and some variations on risk pools. However, some direct writers have decided to forego coverage and just go bare.
The drivers behind the emerging solutions are scarcity and skyrocketing costs to cover what reinsurers say are risks that pack a double punch of being unidentifiable and huge.
Here is a sampling of what group writers say they are finding in the market. It illustrates why they say cat re is now a big-ticket item that is sending many of them into sticker shock:
- A jump from $100,000 a year in premium to $4 million plus terrorism exclusions;
- An increase from $200,000 in premium annually two years ago to $1.5 million this year. Previous cat re coverage went up to $100 million and included all perils. Current cover totals $30 million after losses above $20 million;
- An increase in premium from $500,000 to $17 million with a deductible that increased from $5 million to $150 million.
These kinds of war stories vastly outnumber the few potential solutions that have emerged to date.
Cecil Bykert, executive vice president and chief actuary with Mutual of Omaha in Omaha, Neb., says there was a glimmer of hope after a really tight market at the start of the year. But in the last two months, he continues, the glimmer has faded and now the market is as tight as ever.
One idea under consideration, he says, is to bring groups of direct writers together to trade risks. So, for example, if there was a concentration of risks in Omaha, Bykert explains, a trade of some of that risk could be made with a company with a geographic concentration in another city such as Denver.
Bykert says it is not surprising that a generation of new products has not arisen to meet a real need. “We are dealing with risks that the industry has either previously ignored or not even thought about.” (See sidebar.)
Scott Machut, vice president-special risk reinsurance with ING Re, Minneapolis, concurs that the market has not relented since September 11. “It is as hard, if not harder than soon after 9-11. We thought that some long-term cat players were just taking a breather, but in fact that has not happened. The economy certainly has not helped.”
Stock reinsurance companies, Machut explains, do not want to take unknown risks that could increase volatility and jeopardize earnings in what is already a volatile stock market.
But some direct writers boards of directors may require coverage of some sort, he says. ING Re, he continues is offering a product that will try to meet market need.
The product offers an accidental death carveout, Machut says. So, for instance, if there is a $500,000 net retention with cat cover for any amount over $40 million, the retention would be split 50-50 with the direct writer, he explains. The direct writer would keep the more predictable death risk and ING Re would take the accident risk, Machut adds.
The product includes a surcharge for terrorism depending on the riskiness of the type of business being written, Machut says. So, for example, are Boeing jetliners or oil refineries being underwritten, he asks, or other businesses that are perceived to be less risky?
While the cat market is excluding biological, nuclear and chemical events, ING Re is not excluding those risks from its AD carveout product because direct writers are not being allowed to exclude those risks, Machut says.
The goal, he continues, is to co-insure the risk being accepted with a $20 million limit per occurrence. The goal of this AD carveout product is to help companies manage their net retentions.
However, he continues, ING Re is “very cognizant of where we write business,” requiring zip code information, and in some instances, the cases street address. The company has created a concentration database, he adds.
The business being written is also being spread geographically, Machut continues. Single cases have been written in Georgia, Pennsylvania and Utah and only two to three cases will likely be written in the Northeast, although the West is wide open, he adds. There is a focus on midsized to smaller markets, Machut continues.
Yet another option for group writers in the offing is a pilot that should fully launch by Jan. 1, 2003 and is a variation on the current risk pool approach. The pool that Dion Durrell, a Toronto consulting firm, is establishing seeks to factor in concentration risk, according to the firms consulting actuary, Mark Van Zanden.
Currently, pools do not take concentration risk into account. So, he explains, under most existing pools, a company with $100 million in risk in one building would be treated the same way as an insurer with $100 million of risks spread across a number of states.
Target clients are publicly traded companies worldwide with over $7 billion in market capitalization, Van Zanden says.
To date, of 20 companies approached, two have signed on, he says, and eight are taking a serious look. He adds that the goal is to have another two signed on by the end of the month.
Chris Stroup, CEO of Swiss Res North American Life & Health operations in Armonk, N.Y., agrees that the market is tight but say there are “tools in the toolbox” that can ease the situation.
Among the options Stroup cites are increasing the number of lives that will trigger cat re coverage to 5 from 3, securing more quota share protection in which the ceding company and reinsurer share a proportionate amount of premiums and losses, and increasing retention of risk.
Reinsurers are not writing cat re because they cannot get reinsurance themselves, says David Nussbaum, vice president-group life and special risks with Hannover Life Res East Rockaway, N.Y. office. “We canceled all the in-force coverage ourselves because we cant get coverage.”
Nussbaum predicts that availability of cat re will return but very slowly because companies are “very scared of a large liability.”
Carveouts for accidental death and dismemberment coverage are being requested by some direct writers, says Nussbaum, but for the reinsurer, it is really a whole new product. Under this scenario, a reinsurer could expect to pay out claims on AD&D since the likelihood of accidents is more certain than the possibility of a catastrophic event, he explains.
As long as reinsurers can find less risky ways to earn a return on their capital, the cat re market will be tight, says Joseph F. Kolodney, managing director of the life reinsurance practice group, AON Re Inc., Stamford, Conn.
Previously, coverage was so inexpensive that it made sense to buy it, he adds. But now, “there will always be that dark shadow of what could happen next.”
A “meaningful number” of companies are going naked because they are waiting for the market to get soft, although it hasnt yet, explains Mitchell Schepps, an AON Re vice president, also based in Stamford, Conn.
At John P. Woods Co., Jersey City, N.J., an insurance broker, Brian T. Farrell, vice president with the life, accident & health division, says the available maximum capacity for carriers can range from $250 million to $1 billion depending on the direct writers product portfolio, coverage requirements and data provided. However, given the price of cat re, most carriers, he says, have been unwilling to pay the market price for coverage above $250 million.
Group carriers offered their assessment of the current market.
The coverage has been available outside the U.S. in Bermuda and in London, says Julie Bosworth, second vice president with Fortis Benefits, Kansas City, Mo.
These cat re providers have traditionally been in the property-casualty market but “perhaps, they saw an opportunity after 9-11,” she says. “But their capacity comes at a price.”
Additionally, direct writers can participate in the Special Risk Reinsurance Administrators pool, although the number of companies opting for that choice is on the decline, says Rod Hook, senior vice president-finance for group insurance at Prudential Financial, Newark, N.J.
Hook concurs that the market is really tight and says the current anecdotal word in the industry is that if terrorism can be traced to a sovereign nation, it would be deemed an act of war and not covered by cat re insurance.
Because of the cost and concerns about coverage, direct writers have to make an economic decision over whether or not to carry it, Hook says. But then other factors need to be considered such as what rating agencies may say if companies go without coverage.
Prudential is going to continue to buy it and evaluate the situation, he adds.
Raising rates to reflect higher cat re costs is difficult because the group life market is already competitive and “margins are already being squeezed,” Hook says.
Given these realities, certain large carriers with diversified businesses such as Metropolitan Life, New York, choose not to use cat re.
And a group of 15 carriers is still working toward a federal backstop, says Donna Mundy, senior vice president, government relations with UnumProvident, Portland, Maine.
Regarding the dearth of new products to fill a real need, Mundy says, “no one has figured out how to offer coverage and make money.”
Reproduced from National Underwriter Life & Health/Financial Services Edition, August 26, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.