Reinsurance costs rise as Gulf insurers brace for Francine impact

AM Best anticipates that most losses from Hurricane Francine will be manageable and largely absorbed by primary insurers due to the industry’s recent shift toward higher reinsurance attachments.

However, insurers focused on expanding in Gulf Coast states will face a critical test as claims related to the hurricane begin to emerge.

In its report, AM Best noted that reinsurers have increasingly adopted higher attachment points as part of de-risking measures following Hurricane Ian in 2022. In the case of Hurricane Francine, the storm made landfall in a sparsely populated part of Louisiana, which is expected to limit its overall economic impact.

Additionally, the hurricane has been more of a flooding event than a wind event, potentially reducing the volume of insured losses.

“However, there could be pockets of concentrations in which insurers with higher dependence on reinsurance could see greater impacts, which will take time to determine,” said Jason Hopper, associate director at AM Best.

Since 2017, half of the 10 costliest hurricanes in US history have hit, with Florida, Texas, and Louisiana affected by eight of them. AM Best has identified 72 companies whose direct property catastrophe premiums in the five Gulf Coast states – Texas, Louisiana, Mississippi, Alabama, and Florida – make up more than two-thirds of their total premiums.

These Gulf Coast property catastrophe specialists have increased their share of the regional market, accounting for around 20% of the Gulf Coast property catastrophe net premium written over the last five years. The portion of premiums ceded to reinsurers by these companies has more than doubled since 2020.

As reinsurance becomes more costly in the Gulf Coast region, managing counterparty risk has become an essential part of enterprise risk management, according to AM Best. About 27% of the premiums ceded by Gulf Coast property specialists go to reinsurers based in Bermuda, and over half of those premiums are ceded to reinsurers that are not rated by AM Best.

The report also highlighted the growing leverage seen in ceded premiums, which have more than doubled since 2020. While rated Gulf Coast property catastrophe specialists account for just 20% of ceded premiums for the region’s entire population of property catastrophe specialists, this is a decline from 25% in 2019. Part of the increase in ceded premiums is attributed to higher premiums per exposure, driven by rate increases and inflation adjustments.

AM Best noted that rated companies generally have more favorable reinsurance counterparty ratings compared to those that are unrated. Among Gulf Coast property specialists, a significant portion of the ceded premiums goes to unrated reinsurers, particularly those domiciled in Bermuda. The use of captives in the region is limited, with most of the business ceded to captives coming from companies based in Florida.

The top 20 reinsurers handling business from these companies account for 75% of the premiums ceded to unaffiliated reinsurers, with Berkshire Hathaway assuming the largest share of this business.

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