Re-insurers: “Almost Pirates of Caribbean”
A Florida newspaper has run a sharply critical report on Bermuda-based re-insurers — accusing the “almost-pirates of the almost-Caribbean” of exploiting the state’s catastrophic hurricane seasons in 2004 and 2005 to boost earnings.
After eight deadly hurricanes slammed into the Sunshine State, Floridians suffered another blow when Bermuda reinsurance companies seized on the crisis to double or triple their rates.
“These reinsurance companies, which insure the insurance companies, are the lifeblood for scores of under-capitalised, highly leveraged start-up insurers. Most carriers could not remain in business without costly reinsurance policies geared to cover their losses,” reported the Sarasota Herald-Tribune on Sunday. “But in 2006, many reinsurers reduced the storm coverage they were willing to give Florida. Some purposefully refused to write policies for months, convinced they could extract an even higher price from insurers that neared collapse.
“First-hand accounts, brokerage reports and copies of reinsurance contracts written that year show Florida insurers were still cobbling together hurricane protection in August and September, during the peak of danger, and paying three times the January rate.”
The cost was paid by Florida property owners, some of whom suddenly faced premiums as high as their house payments. Real estate agents complained they were losing home sales as buyers no longer qualified for mortgages, and Florida bank leaders trouped to Tallahassee begging relief.
“That’s what we saw after hurricane Andrew and that’s what will happen again, in my opinion, the next time we have a major hurricane,” said Steve Alexander, actuary for the office of the Florida Insurance Consumer Advocate.
The state represents the largest catastrophe risk in the insured world. It also has more small, thinly capitalised insurance companies than any other state. Thus, Florida’s demand for reinsurance almost always outstrips supply, most of which comes from a few dominant reinsurers.
The 59 reinsurers based in Bermuda provide billions of dollars of hurricane protection for nearly every home in Florida, from swamp trailer to coastal high-rise condominium developments. In the aftermath of the 2004/2005 hurricane seasons, the average cost of reinsurance coverage in Florida climbed from $9.90 per $100 in exposure to $20, the highest in the US. The average home premium increased 80 percent. Florida Residents near the coast saw increases of 300 percent. More than 300,000 Floridan families lost their private coverage, forced to find a new company or join Citizens, the state-run insurer of last resort.
A few industry leaders were troubled. The late Bill Riker, president at the time of Renaissance Reinsurance, said the Bermuda reinsurers overreached, hurting their own market. “The reinsurers didn’t do themselves well at all,” he told the Herald-Tribune. They “lost track of what they’re all about.”
“It’s an oligopoly, I don’t know what else to call it,” said Floridian insurer Reese Bowen referring to the $470 billion Bermuda reinsurance sector. Oligopolies can artificially drive prices higher without explicitly trying, a practice economists call “tacit collusion.” Such actions are difficult to control and frustrate antitrust authorities, international law expert Sigrid Stroux told the Herald-Tribune.
What’s more, the insurance industry as a whole is largely exempted from American anti-trust laws. “It’s not a free market when people conspire to set rates,” said US Rep. Bill Posey, a Republican from South Florida who for years chaired the state Senate’s insurance committee.
American regulators have raised no challenge to consensus pricing. But controversy surrounding its use overseas prompted the European Union to investigate in 20007. Examiners concluded such practices distort market prices, “to the benefit of the reinsurers imposing it and to the detriment of the reinsured.”
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Base level populist logic that will appeal to many. I love how the article doesn’t even attempt to explain that more hurricanes = more damage and thus bigger bills to be paid to repair that damage.
Unfortunately, one of the PR problems that all insurance companies face, whether domestic or offshore, is that risk and probability are difficult to understand and so people think paying anything to protect from it is too much. That is the same reason they buy lottery tickets; they don’t understand that 0.00000001% chance = no chance.
@ matt
I have a background in Insurance Sales. That is my field. I was shocked to discover how much money is traded in Bermuda and how only 2% of it gets released into our local money supply.
I believe in the service that I am offering our community. I also believe that these companies could do a lot more to help the community.
I do not defend or agree with much of what my employer does.
Without Bermuda they would pay alot more in premiums. People who don’t understand how Insurance/Reinsurance works, really should not criticise the way offshore companies operate.
I think it’s fair to assume the late Bill Riker, one of the best liked and most highly respected figures in the Bermuda re/insurance industry, understood how offshore companies operate. He shared precisely the same misgivings about the Bermuda reinsurers’ decision to put the squeeze on Florida’s insurers (and, by extension, its homeowners) as the state’s insurance regulators and politicians. Some of the more cut-throat “almost-pirates” of the Bermuda reinsurance industry have more than just a PR problem to contend with. They actually embody what David Hume meant when he called avarice the spur of industry. Their insatiable greed will be the ruin of Bermuda’s reputation. And of this sector.
Matt,
The problem is that the only actuaries view pricing of insurance in terms of risk and probability.
By the time it gets to the CEO/CFO it becomes (quite rightly) a question of profitability. The truth is combination of the two i.e. if you adjust the pricing/risk models based on 2004/2005 activity then the business was unprofitable unless rates went up substantially.
Also I think you are doing people a disservice when you suggest that they don’t understand. What people DO understand is that reason insurance companies exist is to collect as much premium as they can while paying out as little as they can get away wth in losses/claims.
If you get it right, its very good business – ask Warren Buffet: the cash flow from insurance business is the engine which drives Berkshire Hathaway.
The problem comes when peoples’ view insurance as a necessity (and a right) comes up against the business of insurance companies….
Well…looks like we have a bag of ‘M&M’s’ here. Now go back to ripping us off.
Lord…this is sounding like a debate on BIAW…….which one is Eastend………….
This article never goes into how much insured losses were generated by Florida properties and how much of that burden was carried by the Bermuda Insurance Market. I read an article by AM Best that stated that all of the premiums/profits that were written post Hurricane Andrew were obliterated in Hurricanes Katrina, Rita and Wilma. That means that if you were writing from 1992 through to 2004, you didn’t make any money as an insurer. That’s a long time to be in business and not turn a profit. It also means that rates were inadequate.
The dynamics of supply and demand applies to all of us, everyday, in every business. Why do we think it should be any different economically in Re/insurance? I suggest the reason we think this is because we see the devastation of hurricanes first hand and we feel bad for those trying to put their lives back together without the benefit of proper insurance coverage. That’s understandable but business simply doesn’t factor in this sort of emotion.
If a person wants to build a wood frame house on the Florida coast where it is susceptible to wind and storm surge, he really shouldn’t be surprised at his insurance premiums. Neither should any of the “Thinly Capitalized” Florida primary writers. As the article stated, “The state represents the largest catastrophe risk in the insured world”, doesn’t it stand to reason that they pay the most as well ?
As ugly as it is sometimes, this is capitalism …a system that many of us subscribe too and benefit from.
The Virtual Reinsurance boys are masters or the rip off. If you knew how much they take and party and drink and eat the finest on your tab you might launch your own Bermuda Pirate Company^^