By Russ Banham
Carrier Management
In his more than quarter-century career as a reinsurance broker representing the mutual insurance market, the January 1, 2023, property reinsurance renewals stand out in Josh Knapp’s memory as a day of reckoning.
“A fundamental shift occurred in reinsurers’ views of severe convective storm risks, the major peril of Midwestern mutuals,” said Knapp, an executive vice president for Gallagher Re.
Such storms, known by the acronym SCS, contain a variety of extreme thunderstorms, intense lightning, tornadoes, hurricanes, and large hail events. From 2018 through the end of 2022, SCS losses totaled $133 billion in the U.S., 90 percent higher than the prior five-year period, according to Swiss Re. The time to pay the piper arrived the next month for many mutual carriers in the nation’s heartland—much higher attachments at the lower layers of the reinsurance program requiring more substantial risk retentions, in addition to significant price increases.
Knapp described the aftereffects.
“Mutuals are definitely retaining more risk at the bottom end, which is where most of the reinsurance pressure is occurring. That doesn’t mean you can’t find coverage below the attachment point. It’s just scarce, and when things become scarce, they become more expensive.”
The January 2024 reinsurance renewals did not offer any relief. Global SCS-fueled insured losses in 2023 continued on an upswing, surpassing an aggregate $60 billion, according to Swiss Re. A record $50 billion of the losses occurred in the U.S., which experienced 19 SCS events in 20 states costing more than $1 billion each, the first time that severe thunderstorms caused this level of loss. “Reinsurers were pleased with their changes in January 2023 from a price and attachment perspective, not that I was pleased with them, as I advocate on behalf of my mutual insurer clients,” Knapp said, explaining that while pricing has stabilized, the high attachments remain in place.
Interviews with three other reinsurance brokers serving the mutual insurance segment throughout the Midwest paint a similarly austere picture, especially for small, geographically concentrated town and county mutuals. As reported in Insurance Journal, three mutual insurers, Cameron Mutual, MutualAid eXchange and United Home, have been put into receivership or liquidation. Wisconsin Reinsurance Corp., a provider of property reinsurance to mutuals in nine states, incurred a similar fate: Five months after it was put into rehabilitation by Wisconsin’s Insurance Commissioner in June 2023, regulators filed a petition to liquidate the company.
“The smaller mutuals have the same challenges the larger mutuals have, but because of their size, regulators require them to purchase very robust reinsurance products, which have become less and less available [to them] in the market,” said Patrick Abbe, U.S. Regional and Mutual Strategic Growth Leader at Aon’s Reinsurance Solutions unit. “It’s just the nature of the regulated insurance ecosystem to compel mutuals to be better stewards of their capital, tempering the amount of business they write until they get their feet under them in a more meaningful way.”
Not all mutual insurers have experienced meaningful dislocations in reinsurance retentions, capacity and pricing. National and multi-state mutuals that benefit from geographic diversification have fared better than their smaller counterparts serving the insurance needs of primarily or exclusively Midwestern businesses and homeowners. Nevertheless, the continuance of high reinsurance prices and internal risk retentions was a hard pill to swallow.
“Many mutuals were used to fairly straightforward and predictable reinsurance transactions and renewals; if they experienced a loss in the previous year, they expected to pay higher prices for a year or two until things evened out said,” Kimberly Roberts, head of North American Peril Advisory at reinsurance broker Guy Carpenter. “But when losses grew to two to five times the average at the bottom of the [reinsurance] program, reinsurers became less willing to insure the lower layers, forcing the mutual to retain these losses and, for some, pay a lot more for their reinsurance.”
A.M. Best’s analysis of mutual insurer balance sheet strength, operating performance, and business profile aligns with these views. While the credit ratings agency at year-end 2023 downgraded a greater percentage of both stock and mutual carriers serving the Midwestern homeowners insurance segment than in the prior year, Senior Director Richard Attanasio said the downgrades “leaned more to the mutual side.”
“I hate to call it a ‘perfect storm,’ but here you have higher loss costs, the impact of inflation on the value of homes and building materials, and more frequent and severe convective storm activity converging, causing reinsurers to respond with less reinsurance at the lower levels,” Attanasio explained. “The challenge for mutuals is that there are more of them writing this business in the region than [shareholder-owned] stock companies.”
Not Just Climate Change
Both types of carriers have little recourse other than to raise prices. Reports suggest that the average premium for homeowners insurance has increased 23 percent from February 2023 to February 2024. To improve their financial results and achieve better reinsurance negotiations, Abbe said some mutual carriers are switching their property insurance coverage from replacement cost to cash value settlements across a growing portion of their portfolio. “What that means is if you have a 30-year-old roof, you’re going to get less coverage in terms of the monetary payout than if your roof is two years old,” he explains.
Another change involves the use of cosmetic damage exclusions. “If a hailstorm blows west to east and damages one side of the house, but the other three sides escape damage, unless the insured has purchased an endorsement to replace the house’s siding in its entirety, only the one damaged side of the house would be replaced by the insurance carrier,” he explained.
Midwestern mutual insurers also are migrating away from what Abbe called “maintenance” insurance policies that absorb the cost of routine damages occurring naturally through the aging of a structure, to providing products that protect insureds from aberrational, severe, or unexpected events, he said.
Such aberrational events include the August 2020 derecho that devastated parts of Nebraska, Iowa, Illinois, Wisconsin, and Indiana, causing estimated damages exceeding $11.2 billion. Derechos—widespread and long-lived windstorms that often include heavy rains, tornado-like winds and flash floods—are fairly rare, but their infrequency is offset by high severity. From an insurance standpoint, that’s a problem.
“The severity of the August 2020 derecho was unanticipated,” said Matt Junge, head of property underwriting, U.S., at Swiss Re. “Climate change is an idea that gets blamed for these severe convective storms, but while it has measurable impacts on some perils, it has not had a big impact on SCS. There are so many different moving pieces. Other factors like inflation, geographic diversification, and appropriate coverage options play a role in the insured losses and reinsurance market reaction.”
Related article: “Humans Driving High Levels of Weather Losses: Guy Carpenter“
Guy Carpenter’s Roberts agreed. “It’s not just climate change or warming temperatures; our internal research shows that 75 percent of rising costs are due to other factors like inflation, human behaviors, higher labor and material costs, supply chain issues, and claims litigation,” she said.
Successfully managing these factors is helping multi-regional mutual insurers like Penn National and national mutual insurer Church Mutual secure more reinsurance capacity at lower layers and better pricing than afforded other mutuals. “We have a relatively small footprint in the Midwest, which is not a significant exposure for us, helping us avoid the same impact that other Midwestern mutuals have experienced,” said Bob Brandon, CEO at Harrisburg, Pennsylvania-based Penn National, which operates in 12 states.
The carrier also benefits from its balanced portfolio of personal lines and commercial lines insurance products and a strong balance sheet, with nearly $1 billion in annual revenues, Brandon said. “Unlike other mutuals with exposures in the Midwest that experienced policyholder surplus declines and ratings downgrades, we improved our policyholder surplus in 2022 and 2023, and were upgraded by A.M. Best [in October 2023]. That helped give us the wherewithal to increase our reinsurance retentions at the January 2023 reinsurance reset,” he explained.
He referred to the reset as the most dramatic he’s experienced across his long career in the industry, likening it to the reinsurance market’s reaction to the mid-1980s liability insurance crisis, a volatile period of increasingly high litigation settlements causing severe disruptions in reinsurance supply. This situation now confronts property insurers, particularly the town mutuals, Brandon said. “The number of town mutuals is shrinking rapidly, with several in receivership or liquidation. I expect we’ll see an uptick in consolidations.”
At Church Mutual, Vice President-ERM and Chief Risk Officer Stephanie Lynn said that severe convective storms add on to other natural hazards confronting the national carrier, a provider of specialized insurance to religious organizations, schools, nonprofits, and other service organizations. “It sometimes seems like we move from one peril to the next—from a stretch of severe wildfires in the west, to a stretch of severe hurricanes in the east, and now a stretch of severe convective storms in the middle of the country. It never seems to calm down,” she said.
While SCS activity had produced “a lot of losses” for the mutual, Lynn said no single catastrophic event hit the reinsurance layers. “We’ve put tremendous effort into managing our SCS exposures, defining tight exposure concentration thresholds across five-mile grids ever since 2011, when we had a substantial amount of SCS activity,” Lynn explained.
She’s referring to the so-called “super outbreak” of 360 tornadoes and other convective storms that struck 21 states over three consecutive days, from April 25 to 28, 2011. Most of the $10.2 billion in damages, the most ever for a tornado outbreak, was confined to Midwestern states.
When new business comes into Church Mutual, Lynn said it is automatically put through the carrier’s enterprise risk management tool to determine if the prospective insured’s exposures will breach the concentration thresholds. “It’s protected us from heavy loss events, which I’d like to think the reinsurers give us credit for. I do believe it has had a positive effect on our reinsurance treatment,” she said.
Asked to elaborate, Lynn pointed to Church Mutual’s reinsurance negotiations in the January 2023 renewal period. “Several reinsurers initially gave us quotes for primary perils like earthquake and hurricanes but not [for] the secondary perils like SCS,” she said. “We responded that we’re not willing to do that and held firm, citing our controls and [loss] experience and what we were doing to manage our perils. Ultimately, we were able to get all-perils coverage.”
Optimism for the Future
Both Brandon and Lynn credit their reinsurance intermediaries for their creativity in making a difficult situation tolerable. As Lynn put it, “Our intermediary has looked under every nook and cranny to find us capacity.”
Brandon concurred, citing the “talent and tools” of Penn National’s reinsurance broker to manage its exposures. “We use deterministic modeling to help us make decisions, taking an historic event that occurred elsewhere and then running it across our geographic footprint with a series of what if questions,” he said. The outcome is assessed in terms of “whether our reinsurance programs will stand up to it.”
Church Mutual also uses deterministic modeling. “Our broker helps us run many different scenarios of what a particular structure would look like from a surplus, balance sheet, and income statement position,” she said. “It helps us do things like stretch the limits at the top of the program a bit more to balance out the retention increase.”
Roberts from Guy Carpenter said many mutuals leverage the broker’s analytics, part of its service agreements with carriers. “A lot of mutuals don’t have internal analytic arms,” he said. “We partner with the, in using our tools to find ways to address the current marketplace conditions, getting them as much capacity as possible at the lower layers.”
Some struggling mutuals are pooling their risks to obtain needed reinsurance protection, she noted. “We’ve seen a bit of this, where two or more mutuals pool their risks to go to reinsurers and purchase top layers. I personally can’t say I’ve seen an increase in this type of behavior, but it is a possible option,” she said. Another is the ILS (insurance-linked securities) market or other types of non-traditional reinsurance providing extra protection like parametric triggers, Roberts added.
Knapp also provides Gallagher Re’s analytics tools to help clients identify and quantify exposure concentrations in their geographic risk portfolios. “The vendor models are grossly inadequate and not a very reliable source for carriers to assess risk potential, which led us to develop our own tools internally,” he said, adding that firm recently introduced a second-generation hail model and another for derecho events.
“By illuminating the concentrations that produce the largest potential losses that contribute significantly to reinsurance costs, we can together formulate strategies to rebalance the portfolio, maybe growing in another geographic area where the concentrations are less,” he explained.
Abbe from Aon echoed something similar. “We’re actively building solutions to help the small mutual segment scale a bit more to present something to the world’s reinsurers that is more compelling,” he said.
Down the line, no interviewee expects a return to the pre-reset period. Like the cost of food and rent in the post-inflation era, high prices are the new prices. “It’s only natural to expect reinsurers to continue to be selective of who they’re partnering with, asking more underwriting questions than ever before,” said Abbe. “We have optimism for the future of the Midwest mutual segment to be open for business, but it will take time.”
Russ Banham is a veteran reporter covering the insurance industry.