Sidecars a likely focus of ILS exposure to Florence

Quota share sidecars and low-lying retro covers are likely to be among the hotspots of ILS market exposure to claims from Hurricane Florence.

But with flood risks the focus of concern as Florence nears the US coast, this could mean that the cost of damage is another hit to the public purse through the National Flood Insurance Program (NFIP) – and its reinsurance and cat bond in turn a major likely source of exposure.

The residual insurers for the Carolinas could be another source of ILS and reinsurance exposure, although these schemes rely much more on industry levies than reinsurance, relative to their Florida peers.

The Lloyd’s market is also said to have major exposure to South Carolina beachfront property risk, written on an excess and surplus lines basis and through binders, so quota shares or other retro for these carriers could transfer some losses to the ILS markets.

But in general, the high market share of nationwide-based insurers in the Carolinas (see tables below) should mitigate losses being ceded to the reinsurance market, given the extremely high retentions on their programmes.

Quota shares are generally among the ILS vehicles that routinely take a slice of cat losses that make their way to the reinsurance market, but with the overall market loss expected to be easily an earnings event and nationwide insurers expected to retain a significant share of the total claims, they are not expected to be heavily impacted.

Some of the nationwide carriers operate aggregate programmes with ILS participation, such as USAA or Nationwide, but they have only just started a fresh year for loss tallies. However, there is one cat bond (a layer of the Blue Halo Re deal for Nephila/Allianz Risk Transfer) that has a multi-year aggregate structure compounding losses.

There are some regional carriers in the top 10 lists, such as local mutual and Florida-based UPC in eighth place of the South Carolina homeowners’ market.

The NFIP’s reinsurance triggered last year on another major flood event, Harvey. Last year, these placements were led by Munich Re and Swiss Re.

This year the reinsurance arrangements that trigger at $400mn of losses were joined by cat bond cover from the $500mn FloodSmart deal, including one layer that triggers on losses to the NFIP of between $5bn and $10bn, with the rest picking up claims from $7.5bn to $10bn.

Within the local state-backed schemes, according to SNL, the insurer of last resort for homeowners in coastal areas – the North Carolina Insurance Underwriting Association (NCIUA) – placed a combined $350mn of aggregate reinsurance cover for this year, $100mn excess $1bn and $250mn excess $2.69bn.

The first layer is set to trigger at a 1-in-25-year modelled loss, with the final stretch covering the insurer to a 1-in-100-year event. In between the two placements, the organisation has $590mn of retained profits, with the remainder covered by levies on insurers active in the state, according to their market share.

The residual insurer for non-coastal business in North Carolina – the Joint Underwriting Association – buys a $151mn excess $130mn programme, SNL reported.

The South Carolina Wind and Hail Underwriting Association is protected at an even lower layer. The association’s 2018 cat programme offers a total $740mn of cover above a $10mn retention.