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Ben Rodriguez, an insurance agent who owns Brightway’s insurance agency in Algiers, is getting more involved with the reinsurance market. Third-party agencies provide reinsurance to insurance companies as protection and pay that insurance company’s claims once they exceed a certain dollar amount.
“These companies that operate in our region obviously need to self-insure,” Rodriguez said. “The reinsurers basically dictate our premium markets.”
Typically, reinsurance along the Gulf Coast comes into play after a major hurricane or other natural disaster, Rodriguez said, as insurance companies struggle to meet demand in the devastated region.
While southern Louisiana was spared the effects of major hurricanes in 2022, reinsurance rates are still rising in 2023. Most reinsurance policies are due for renewal on June 1, Rodriguez said, and tensions in the industry are mounting as that date approaches.
“Some of these companies may not be able to pay their reinsurance costs to continue operating in the state,” he said.
Louisiana Insurance Commissioner Jim Donelon said the increase in reinsurance rates is definitely a concern statewide. The reason for the rise this year, Donelon said, will not surprise anyone watching the economy as the threat of a recession looms.
“Companies depend on this reinsurance market, and right now it’s certainly being challenged by rising interest rates and shrinking coverage availability, or capacity as it’s called,” Donelon said.
That capacity has shrunk as the return on investment in reinsurance has shrunk, Donelon said.
“There are fewer investors willing to invest in the reinsurance market this hurricane season. In part, that’s driven by disasters,” he said. “Perhaps even more significant than that are the rising interest rates that investors can take advantage of to get better opportunities in the stock market, bond market, etc. compared to what has ever been a very low interest rate environment since the great recession of 2008. The low Reinsurance companies’ return on investment had prompted many of them to invest in more reinsurance coverage around the world and they’ve lost money on their books around the world in recent years.”
Donelon said he’s been watching the reinsurance issue closely. Last October he made a trip to London to visit Lloyd’s of London, a major reinsurer, and the International Underwriting Association of London. In December, he traveled to Bermuda for the annual general meeting of the Association of Bermuda Insurers and Reinsurers.
Both trips proved insightful, Donelon said, and he was able to make contacts with the major reinsurers who gave him an insight into the current market situation.
“What I’m hearing from the early placements of reinsurance protection signed for by insurers in London and Bermuda is that it’s not as bad as feared,” Donelon said. “The rate increases they saw earlier this year, and some coverage is already in place, were in the 10 to 15 per cent range, not the 15 to 20 per cent they feared. Some were up just 10 percent, others between 10 and 15. That was encouraging. Well, that can go down instantly, and it can go up to 15 to 20 percent as reinsurance capacity dries up. So far that has not happened.”
Given the ongoing insurance crisis in Louisiana, Donelon said it’s worth keeping an eye on the reinsurance issue because increases in reinsurance are directly impacting the pricing of insurance coverage. However, reinsurance rates are ultimately tied to interest rates, which the Federal Reserve continues to adjust in hopes of averting a recession.
“It’s going to deepen the crisis, no question, and the crisis is both an affordability crisis and an availability crisis,” Donelon said. “If companies don’t get reinsurance, they can’t underwrite business because they would put their business at risk of bankruptcy because they can’t underwrite more than they can reinsure.”
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