SCS losses forcing mutuals to take drastic action as reinsurers retrench
Record 2023 severe convective storm (SCS) losses have caused major damage to earnings and some capital bases at US mutual insurers, leading players of all sizes to attempt to reshape portfolios and de-risk at a time when reinsurance to protect against frequency of severity is challenging to find.
Despite a relatively quiet Atlantic hurricane season so far, Gallagher Re has reported that insured US SCS losses totaled $54bn over the first nine months of 2023, accounting for around two-thirds of the total for all cats globally (see P20-22).
As well as the record SCS losses, there has also been an all-time high number of $1bn+ events.
According to AM Best data, the US mutual insurance sector was already making underwriting losses, with a combined ratio of 109.9 percent last year, after policyholder dividends.
But the upwards march in retentions enforced by reinsurers this year as they drove a step change in the market has left mutuals even more exposed – especially those with smaller balance sheets that are challenged to absorb the frequency of SCS losses.
According to the National Association of Mutual Insurance Companies’ mid-year report, the combined ratio has deteriorated further for the sector to 113.2 percent for H1 2023, up from 107.1 percent in H1 2022.
For some mutuals with concentrations in the Midwest and other areas that have been most struck by the frequency and severity of SCS losses this year, the results are likely much worse, with potential for meaningful capital depletion at some smaller players with greater concentrations of risk.
This includes capital issues for some mutuals as their AM Best BCAR scores are impacted.
There have been plenty of headlines about the drastic steps a number of the largest personal lines-focused stock company insurers and mutuals have taken this year in states like California.
And there are similar actions now being taken by mutuals writing on an admitted basis in swathes of the country not typically exposed to primary cats such as hurricanes and earthquakes, and that have enjoyed stable results for decades before being slammed by elevated activity from SCS and other secondary perils.
Sources said that an assessment of the challenges facing mutuals from SCS needs to be bifurcated between the specific crisis impacting so-called farm mutuals in Wisconsin, Illinois, Missouri and Iowa, and the issues at play that are driving changed behavior and drastic decisions in the broader sector.
As we report on page 4, the farm mutual issues are regulatory as much as underwriting-related, with state insurance departments reassessing long-standing requirements that mutuals have reinsurance in place to effectively provide unlimited sideways protection – which is unavailable as reinsurers have walked away.
But more broadly, the sector is facing the same issues as those personal lines carriers retrenching from states like California, where availability of reinsurance, especially for lower-attaching layers and return periods of 10 years or lower, has become heavily restricted and for many unaffordable if it is available.
This has been exacerbated by demographic patterns that have seen more people move to the Midwest, as well as the impact of inflation on exposures – put simply, there is more in harm’s way when SCS events hit the region.
For mutuals, this leads to some of the same counteractions as those being taken elsewhere as they have to approach the peril as gross underwriters, managing their increased retained exposures.
These include attempts to reshape portfolios by cutting back in areas of concentration; diversifying; managing accumulations; pushing for rate; applying actual cash value replacement cost to roofs; changes to deductibles; and a range of exclusions.
As one senior broking source put it: “You are not going to change your SCS loss if you don’t change your aggregate. And if you are going to keep the aggregate you’ve got to optimize it and charge for it.
“The first thing you need to do is optimize your portfolio based on your gross aggregate,” they added.
The challenge they are facing is that changes to rate and form for admitted carriers takes a meaningful amount of time to begin earning into results – typically between 12 and 18 months, because of the renewal cycle and other factors.
That means mutuals have to bear increased reinsurance costs for a period of time before they can start passing them on to insureds – or look to reduce those costs by de-risking.
Reshaping portfolios away from exposure concentration also has a lag, based on state rules around non-renewing policies.
With no aggregate or sideways cover available for SCS-exposed carriers, the reality is that the frequency of events for some has led to significant surplus erosion.
Multiple sources have pointed to a true day of reckoning for regional players with concentrations in SCS-prone states, where long-established localized distribution relationships with high customer retention rates are now needing to be reset as underwriters are forced to cull sections of their book.
There has been commentary suggesting that under pressure mutuals will increasingly look at surplus relief and structured solutions, as well as parametrics.
However, sources pointed out that providers of these kinds of solutions are not typically running towards secondary perils, including SCS risk.