Where the Money Goes: Off-shore Reinsurance, Part 2

In our last post, we talked about Florida’s homeowner insurance market and a newspaper investigation into the industry’s growing reliance on off-shore reinsurance companies. The issue is a sensitive one for Floridians, given the multiple rate hikes over the past few years. The news report links the shift from “traditional” insurance companies to Hurricane Katrina.

When it became clear to one of the nation’s largest insurers that Katrina was going to cost the company a bundle, a company executive admitted that the insurer “had no moral or legal obligation to provide this kind of coverage to people.” It was the first step in what turned out to be a mass exodus of national insurance companies from the east coast insurance market. In Florida, the retreat translated into 2.2 million homeowner policies being canceled or non-renewed between 2005 and 2008, and Citizens Property Insurance moved into first place for hurricane coverage.

Florida regulators and private insurance companies needed alternative financing if catastrophic coverage were to be available at all in the state. What small and newly formed insurance companies discovered was ample amounts of reinsurance dollars from off-shore companies. The reinsurance pot of gold meant that companies with just a few million dollars in the bank were able to write billions of dollars in coverage.

According to the newspaper, the typical insurance company took on a new look: A business with no employees that pays an affiliate to manage the business. It’s an expensive arrangement. For one company, reinsurers take 86 cents of every premium dollar collected (the information was gathered from financial filings). In 2009, that amounted to $9 million paid out of $10.5 million earned. For consumers, it translates into the company paying 33 cents for every $1 of protection against the most common type of storms — or, an annual premium of $66,000 for a home worth $200,000.

The paper’s investigation turned up more than half a dozen insurers in the state that paid more than 50 cents on the dollar for hurricane coverage. That’s the highest in the world, according to brokers. And it means that the money the companies collect in premiums is spent to buy more reinsurance policies, when a better business model would call for those funds to be used to shore up the insurer’s own capital base.

More to come in our next post.

Resource: Sarasota Herald-Tribune “Property Insurers Sending Billions Overseas” 10/25/10

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