With Hurricane Ian being one of the most significant insured US catastrophe losses in recent times, experts give their views on how the event will impact the captive market.

The full cost to the (re)insurance industry of Hurricane Ian’s powerful strike on the Florida west coast and subsequent movements may not be known for some time, but safe to say it will have long-lasting effects on various sections of the market, including the captive market.

Although overall insured loss estimates vary widely, ranging from $31 billion up to $74 billion, Moody’s said it still expects it to be one of the costliest hurricanes to ever strike the US.

Risk modeller RMS set its best estimate at $67 billion, excluding another $10 billion in losses from storm surge and inland flooding for the National Flood Insurance Program, with the company’s chief risk modeling officer Mohsen Rahnama saying it was a “historic and complex event that will reshape the Florida insurance market for years to come”.

As the first major category hurricane to make landfall in Florida since Hurricane Michael in 2018, insurers with captives have already begun reporting how much they expect to retain.

United Insurance Holdings Corp (UPC Insurance), which expects to have gross total losses from Hurricane Ian of $1 billion, stated that $20 million would be retained by its captive reinsurer UPC Re, with another $16.4 billion retained by subsidiaries United Property & Casualty Insurance Company and American Coastal Insurance Company.

Heritage Insurance Holdings expects to incur $40 million of net retained losses, inclusive of reinstatement premiums and participation by the company’s captive reinsurer, Osprey Re, with gross losses expected to fall within layer 2 of its catastrophe excess of loss programme, between $140 million and $960 million.

Universal Insurance Holdings expects its gross total losses from Hurricane Ian to be $1 billion, but has not clarified how much it expects to retain in its insurance and captive insurance entity subsidiaries.

Reinsurance capacity

The bulk of the losses will be picked up by the reinsurance industry, which property captives access to mitigate the financial impact of catastrophic events like Hurricane Ian.

Artex’s senior vice-president and director of reinsurance Steve McElhiney says this will have protected many affected captives from disaster, with the severity risk associated with Hurricane Ian – as well as other large-scale events – transferred to global reinsurers.

Instead, captives would tend to retain more predictable frequency type loss events, McElhiney explained.

However, in turn, Hurricane Ian will have directly impacted the amount and cost of reinsurance capacity for all market participants, including captives.

“We can’t give a precise estimate of the average increases in premium costs for Florida at this juncture, but prospective insurance and reinsurance capacity will be more constrained and such risks will be seeing heightened underwriting controls and scrutiny,” McElhiney said. “Rate increases will be also examined by carriers and reinsurers on whether the insured is a ‘loss affected’ or ‘loss free’ account.”

He added that 2022 had already been quite an active year for a variety of global insured natural catastrophe losses, with capacity for some Floridian risks having already been constrained, for condo risks in particular.

McElhiney said: “A hardening market has always been a catalyst for captive formations and the interest in captive solutions should continue from its current active pace.”

Rob Collins, Guy Carpenter’s captive segment leader, agreed Hurricane Ian’s impact would only exacerbate what was an already firming property reinsurance market, affected by inadequate reinsurer returns and the decision of several capital providers to exit the market, on which, he said, risk transfer prices would continue to rise throughout 2023.

Captive solutions

Nevertheless, Collins further stated that “captives remain a effective solution to help moderate both these price and capacity challenges”.

“Captive owners should continue to work with their risk management professionals to find new or alternative ways to use their captives and the reinsurance market to efficiently retain risk to manage this challenging market,” he added.

Collins said that many of Guy Carpenter’s captive clients are actively pursuing solutions that will expand their use of non-traditional or structured reinsurance capacity to help manage their exposure over the medium and long term.

“This strategy can help insulate the captive from market volatility and/or free up capital to be deployed now to offset the firming market,” he added.

“In our view, for well-capitalised owners and captives, Hurricane Ian could accelerate the utilisation of captive solutions.”

Florida

Randy Fuller, Guy Carpenter’s Florida segment leader, echoed Collins’ thoughts and said that the use of captives in the Florida market continues to grow.

“In a high-risk state like Florida, captives will continue to be a useful vehicle to strategically manage risk,” Fuller said. “This is especially true in hard market environments, which we expect Florida to continue to experience going forward.”

Exactly how much more captives can expect to pay for reinsurance going forward would depend on many factors, Collins went on to say.

This includes the direct loss experience retained within the captive, the captive’s capital position and ability to retain more risk, as well as the owner’s risk management goals for the captive going forward.

Additionally, Owen Williams, global programme and captives regional director, UK at AXA XL, warned that the amount of capital devoted to Florida property was driven just as much by macroeconomics as insurable risk patterns.

“If higher rates of return can be made in other investments, capital entering the insurance and reinsurance industry will diminish and vice versa – so any purchaser of insurance or reinsurance will have this dynamic to consider,” he said.

Pricing insulation

But simply in having a captive, it can offer some insulation from the pricing volatility now expected in the commercial insurance market, according to Rick Hartmann, senior vice-president at Guy Carpenter.

He said that, historically, organisations and corporations have turned to captives when commercial insurance becomes expensive or too difficult to obtain. And he also thinks today’s marketplace will be no different, since captives have proven to be “effective tools in responding to changing market conditions”.

“Most recently, in response to rising commercial insurance costs, corporations and risk managers have looked to increase the utilisation of their captive, or form a captive in order to both transfer and finance risk more efficiently,” Hartmann said. “Specifically, through the use of multi-year structured reinsurance covers and insurance-linked securities, or in short catastrophe bonds.”

The benefit of these reinsurance solutions is that they provide certainty of pricing over a multi-year period, balance sheet protection against unexpected or severe losses and the flexibility to remain nimble in a changing market.

“Captive insurers remain uniquely positioned to access additional capital providers, including treaty and facultative reinsurers and the capital markets in order to attract capacity and mitigate exposure to pricing volatility,” he added.

The RMS loss estimate reflected losses from property damage, contents and business interruption across residential, commercial, industrial, automobile, infrastructure, watercraft, as well as other specialty lines.

Hurricane Ian made landfall on the southwest coast of Florida on 28 September, causing significant damage, especially to the areas of Fort Myers and Cape Coral.

However, the hurricane also caused losses in South Carolina, North Carolina, Georgia and Virginia, as well as parts of the Caribbean, particularly Cuba.

Hurricane Ian was the seventh US major hurricane landfall since 2017, following Hurricanes Harvey, Irma, Michael, Laura, Zeta and Ida.