< PreviousCaptives 28BEST’S REVIEW • AUGUST 2022 hunkered down. It was kind of an interesting perfect storm for captive growth because the industry was not traveling all over the world and regulators were able to deal with huge volumes of new captive applications,” he said. Serricchio said the captive growth is tied to challenging market conditions and is spread across different lines of coverage, including property, liability, directors and officers, cyber and workers’ compensation, among others. “We saw all of those lines growing and challenged, so the captive industry responded and you saw a lot of captives form,” Serricchio said. States’ Actions States also have been passing legislation that can contribute to the growth of the captive insurance market. Delaware recently approved the use of captives by corporations to cover directors, officers, employees and other indemnifiable people, as long as they acted in good faith and there is no reasonable cause to believe their conduct was unlawful. The action was taken in response to a hardening market, Delaware Department of Insurance Senior Policy Adviser Christina Haas said in an email. “In many cases, there has been a sharp increase in premium, more exclusions, resulting in less coverage,” Haas said. When premiums began to dramatically rise in 2020, she said the Delaware General Assembly worked to enact the legislation quickly. No new captive insurers had been approved in the state resulting from this legislation as of June 10, Haas said. In all, Delaware has 748 captives. Recent legislation enacted in Vermont also clarified laws surrounding captives. The bill clarifies the ability of Vermont’s captive insurance companies to enter into the parametric risk transfer contracts, which pay a sum in the case of a quantifiable event, such as a hurricane of a specific category hitting a specific area, whether the contract holder suffers a loss or not. In signing the bill into law, Vermont Gov. Phil Scott said parametric contracts are becoming more common as a form of protection against catastrophic events. “We always thought it was legal anyhow, but we wanted to put it into the statute to make sure it was very clear that it was approved by the department,” Provost said.”It’s one of those things that kept popping up. We were getting questions about whether or not it was acceptable, so we just decided to put it right in there to make clear that it was.” “Vermont’s always on the cutting edge of new and innovative thinking,” Serricchio said. He said he expects other states to follow suit because, for the most part, these types of contracts are not excluded by law. “It gets people thinking about it,” Serricchio said. “It gets captive owners thinking about it. It gets them talking to reinsurers. I have predicted for a couple of years that parametrics would grow in captives, and I think you’re starting to see that.” “The fact that Vermont has incorporated it into their overall insurance strategy is a good thing because it gives employers the ability to have another avenue to consider when structuring the insurance needs in light of some of the changes within the market,” Carter said. “Ultimately, each domicile will have to make the decision as to what works best for the domicile, how the domicile will grow and what they want to be able to offer their captive owners.” Serricchio said he expects to see growth to continue among these captives and the new captives as they expand their existing lines of coverage. “I do think you’re going to see some growth in the next 18 months,” Serricchio said. “I don’t know if it’s going to be as stellar as the last two years, but the activity, the phone calls, the education that we do continues and it hasn’t slowed down. We actually hired some more folks to take on new feasibility studies and new educational sessions with our clients. When you have a lot of new captives and they get formed with one, two or three lines of coverage, year after year, they want to do more, and they want to increase.” ”It is hot,” Provost said of the current captive market. “Anybody in captives is busy right now. Every domicile I talk to is having record years or near record years. Every captive manager is loaded up with existing business and new business. It’s a hard market still and whenever that happens, captives start getting active again. The insurance market permanently loses a fair chunk of business every time they go through hard markets like that.” BRILLUMINATE THE DETAILS OF INSURER PERFORMANCE Enhance top-level research and support intelligent decision-making with Best’s Credit Reports, for insight into the financial performance of insurers worldwide, and Best’s Financial Reports, for the latest company information. 22.BCFR002AA Our Insight, Your Advantage ™ Learn More: sales@ambest.com www.ambest.com • (908) 439-220030BEST’S REVIEW • AUGUST 2022 Life Insurance Startup Founder Hopes to Help People Find `Ferrari in the Garage’ by Taking Life Settlements Mainstream Lucas Siegel, the founder and chief executive officer of Harbor Life Settlements, wants to make the life settlements industry resemble how homes are sold and bought online. By doing that, he’s hoping his company and the larger industry will grow by making the process more transparent and navigable for consumers. by Terrence Dopp A t first glance, the real estate market isn’t an obvious comparison when it comes to anything touching on the life insurance industry. Yet the property market is exactly where Lucas Siegel, founder of Harbor Life Settlements, is looking for inspiration as he tries to grow both his company and the settlements space beyond a niche and into the mainstream. Terrence Dopp is a senior associate editor. He can be reached at terry.dopp@ambest.com. Key Points Marketplace: Harbor Life Settlements is looking to create an end-to-end process like Zillow or eBay that allows people to determine the value of their life insurance policies and list them for competitive bidding. Overlooked: With a mix of resistance on the part of life insurers and a market that can be confusing, the life settlements industry is valued at $7.3 billion a year, although Siegel and others say it should be even bigger. Lapsing: Each year, many consumers let their life policies lapse with just the cash surrender value covered by providers. Siegel and brokers already in the space want to see that change.31BEST’S REVIEW • AUGUST 2022 He’s looking toward the “Zillowfication” of a previously opaque world: creating an open market for buying and selling policies—akin to the online real estate portal that he hopes builds consumer confidence and entices more into the industry. Along the way he wants to make selling insurance policies a go-to component of finance to the benefit of individuals and the larger industry. “We see the asset class, and the future of this asset class, as something that should be created off a template of real estate,” Siegel said. “If you were selling your house, would you sell it to the one guy with a sign that says ‘We buy ugly houses?’ Or would you put it on MLS [multiple listing service] and try to get a bunch of offers to try and drive up the price?” Siegel describes Harbor Life Settlements as really a marketing technology company operating within the world of life settlements rather than as an entity focused solely on insurance-related products. He said just 2% of those who would benefit from selling a policy wind up doing so. “Every year in the U.S. there are some $200 billion in life policies that are lapsing that could have been sold. People just don’t know,” he said. “That means 98% of the time people are just throwing away their assets that they could have sold.” Overlooked Option At their most simple level, life settlements are the sale of life insurance policies for a sum that is above what the carrier would pay out for the cash surrender value but less than the full death benefit. The buyer of the policy must pay all premiums throughout the life of the insured, making life expectancy a critical part of the transactions. According to a 2021 report by Conning Insurance Research, the life settlements market saw a fifth straight year of growth in the amount of face value settled in 2020 even amid the disruption caused by the COVID-19 pandemic. The virus could even be a factor in growth going forward as so-called COVID long-haulers look to settle policies. The firm’s average 10-year forecast of the industry’s growth is about $233 billion and the outlook calls for annual volume of new settlements of $7.3 billion, both figures up from previous estimates. The industry is evolving more toward the direct-to-consumer market, the report said. To grow it, Siegel is hoping to entice greater consumer interest through My Policy Predictor, an online tool that functions much like the online Zestimate real estate calculators on the website Zillow, which allow homeowners to gauge an approximate value of their home. Based upon that number, they can then decide whether to list the property. On the professional side, the company also has developed an artificial intelligence tool that combs through the client books of financial advisers and flags those policies ripe for a settlement. Brokers can then notify people of the potential value. Asset Value In both cases, if the clients assume the price is attractive enough, they can then list the policy through an online auction site on which prospective buyers—hopefully—bid up the price. Harbor Life Settlements bought the underlying code for the exchange from eBay and the theory is similar in that a consumer will offer the policy and receive bids. Siegel is betting that increased knowledge on the part of policyholders will translate to a greater comfort and willingness to sell. “We believe fundamentally that people have the right to know the value of their assets. Period. They have the right to know the value of their house. They have the right to know the value of their car. And they have the right to know the resale value of their life insurance policy.” Lucas Siegel Harbor Life SettlementsLife Insurance 32BEST’S REVIEW • AUGUST 2022 “We believe fundamentally that people have the right to know the value of their assets. Period,” he said. “They have the right to know the value of their house. They have the right to know the value of their car. And they have the right to know the resale value of their life insurance policy.” The prime benefits are twofold, he said. First, expanding the market and making life settlements more common will create an enormous new source of liquidity for Americans, Siegel said. At the same time, he said every net- worth calculation prepared by advisers based solely on surrender values is wrong and the process will become more common through education and transparency. It’s also designed to take an underwriting process that traditionally stretches as much as three months and compress it into a one-minute stage driven by AI. Siegel said life settlement underwriting has traditionally been painful and inexact, and he called estimating life expectancy “brutal.” Data-hoarding by carriers has been a long-standing problem, he said. “They have all the data but they make money because 90% of people lapse their policy—they pay for 30 years and get nothing,” Siegel said. “The less transparent settlements are, the more lapsation will happen, which increases their net worth.” Christopher Conway, a principal and chief development officer at life expectancy underwriter ISC Services, said insurance companies are in the business of taking premiums and managing money rather than paying death benefits. The marketing of life insurance as a needed liability rather than an asset has created a climate in which policyholders too often simply don’t know selling a policy is an option. “That establishes within the consumer’s mind a different perspective about that instrument than it actually possesses or should be applied to it,” Conway said. “It creates in the public’s mind a perception that this is not the van Gogh in the basement. It’s an obligation and nothing more.” Hidden Fees In 2021, ordinary life insurance lapses fell to a 10-year low of 4.1%, according to Best’s Special Report: US Life: Earnings Decline in 2021 Despite Highest New Premium Growth in Over Three Decades. To put that number in context, in 2020 there was a total of more than $55.3 trillion of in-force life insurance across the industry. Yuhmei Chen, a senior financial analyst covering insurance-linked securities at AM Best, said the life settlements industry has gotten more attention since its beginning with viatical settlements in the early 1980s during the onset of the HIV crisis. In many states, regulations also have become more stringent, she said. Settlements have faced pushback from the life insurance industry because lapse rates are factored into the business models and pricing of most insurance contracts, she said. As a result, some insurance carriers raise the cost of insurance for certain specific products. Still, Chen said the lack of transparency has crimped the business. “What people talk about a lot are the hidden fees—the commissions to the broker and the providers’ fees,” she said. “Brokers are supposed to work for the sellers, the policyholders, to get them the highest price to sell the policy but from the provider’s point of view, they want to be able to buy a policy for the least price.” Brokers retain a large amount of the control over the process and can factor in those fees, as Because consumers don’t know selling a policy is an option, “it creates in the public’s mind a perception that this is not the van Gogh in the basement. It’s an obligation and nothing more.” Christopher Conway ISC Services33BEST’S REVIEW • AUGUST 2022 well as their relationship with prospective buyers, as they present offers to clients. “As a seller you don’t really know how many bidders there are because you get the information from the broker. I think that’s the thing,” Chen said. John Welcom, who is founder and CEO of Welcome Funds (JW), a life settlements broker in Florida, and chairman of the Life Insurance Settlement Association, said most states have regulations concerning transparency that include upfront disclosure of all fees and a full accounting of the bids JW receives for a policy. “The fact is that transparency happens on a majority of the transactions that we close,” Welcom said. “Every regulated state has a different law and we have a notice of disclosure within our applications for each state so that we can comply.” Enough Room Steven Shapiro, president and chief executive officer at New York-based Q Capital Strategies, a life settlement provider and servicer, said as a buyer in the transactions he’s worked with both brokers and bought policies on Harbor Life’s platform. He doesn’t see the two as mutually exclusive and said one possible outcome is consumers gravitating to whichever means makes sense in their case. Brokers by nature gravitate to larger policies, while technology-focused solutions might be the right choice for people who are looking to sell policies with a smaller face value, he said. “I think there’s space for both of them. They’re just two different approaches,” Shapiro said. “One is using a technology approach to the bidding process and the other is just using a more personal approach to relationships and calls. I think there’s a place for both of them.” Siegel said the technology and Harbor Life Settlements together will change the entire life insurance industry as it inverts the traditional model of how both consumers and advisers view settlements. “They’ve got a Ferrari sitting in the garage that they didn’t even realize they had,” he said. “It’s going to liberate financial advisers to give financial advice.” BR 22.BCS002B1A Take advantage of AM Best’s long history and in-depth knowledge of the insurance industry: Best’s Custom Services creates data solutions to your specifications. You choose: • Years of data (30+ available) • Data points • Company population • Aggregation • Group structure • Format (Excel ® , Access ® , comma delimited, txt, fixed field, tab delimited, csv) • Delivery method (FTP, web services) and frequency FOCUSED INSURANCE INFORMATION SOLUTIONS, DEFINED BY YOUR NEEDS Our Insight, Your Advantage ™ Learn more: custom_products@ambest.com www.ambest.com • (908) 439-220034BEST’S REVIEW • AUGUST 2022 30 Years After Hurricane Andrew, Bermuda Reinsurers, Florida ‘Joined at the Hip’ Hurricane Andrew made landfall in Florida in 1992, changing the face of the global reinsurance market just as it was beginning to emerge. by Anthony Bellano Catastrophes35BEST’S REVIEW • AUGUST 2022 T hirty years ago, the Bermuda reinsurance market was just beginning to emerge when Hurricane Andrew hit Florida on Aug. 24, 1992. The storm caused some $30 billion in insured losses in 2021 dollars, according to the Insurance Information Institute, fundamentally changing the face of the global reinsurance market. The storm’s aftermath spawned eight new reinsurance companies domiciled in Bermuda, enterprise risk management, risk-based capital requirements and the use of catastrophe models. It also placed the Bermuda reinsurance market in the forefront of global reinsurance coverage. Bermuda reinsurers make up about 36% of the global reinsurance market based on property/ casualty net premiums earned, according to AM Best. Domestically, they provide more than 60% of the hurricane reinsurance in Florida and Texas, according to the Association of Bermuda Insurers and Reinsurers. “Bermuda has a vested interest in seeing a healthy Florida, a stable Florida where companies provide valuable coverage and survive an event to trade into new markets and new cycles,” said Bermuda Business Development Agency Chairman Stephen Weinstein. “The challenges that Florida has encountered over these last few years are not only a challenge for Florida consumers and Florida insurers, but to their partners in Bermuda.” “Florida and Bermuda are connected virtually at the hip,” RenaissanceRe Senior Vice President and Chief Underwriting Officer for Property Justin O’Keefe said, noting that over the last few years, matters of litigation have contributed to RenaissanceRe reducing its participation in the Florida market. One of only four Category 5 hurricanes to hit Key Points The Situation: Hurricane Andrew, which made landfall in Florida in 1992, spurred the rise of the Bermuda reinsurance market. Aftermath: Bermuda reinsurers currently provide more than 60% of the hurricane reinsurance in Florida and Texas. Speed Bump: Bermuda reinsurers are concerned about fraud and litigation currently facing the Florida homeowners market. Anthony Bellano is an associate editor. He can be reached at anthony.bellano@ambest.com.Catastrophes 36BEST’S REVIEW • AUGUST 2022 the continental United States in the last century, Hurricane Andrew caused immense destruction that led to the insolvency of several Florida insurers. The aftermath saw the birth of eight reinsurers that came to be known as the Class of 1993: Mid Ocean Reinsurance Company Ltd., Global Capital Re, Cat Ltd., Tempest Re, LaSalle Re, RenaissanceRe, PartnerRe and IPCRe Limited. RenaissanceRe still operates independently today; the others were acquired by other insurance/reinsurance entities, according to AM Best analysts. French mutual insurance group Covéa last month said it had completed its acquisition of PartnerRe from investment group Exor NV. Every dollar of capital for newly formed reinsurers in the immediate aftermath of Hurricane Andrew ended up in Bermuda, Weinstein said. “Every company that I was associated with chose Bermuda for what at the time was a robust regulatory environment,” Weinstein said. “To some degree its location—90 minutes outside of New York—was helpful, but so also the speed with which the capital was able to form and get into the market, which remains an advantage in Bermuda today.” Forging Other Changes There are other ways in which Hurricane Andrew changed the market. Over the last 30 years, there has been a significant increase in the use of technology as well as the pace of change across all facets of risk management, according to AM Best Senior Director Richard Attanasio. “In particular, the availability and affordability of property-specific details has fostered a greater understanding of risk profiles and a deeper view of what drives losses and how to mitigate them where possible,” Attanasio said. “For the most part, companies today have a significantly better understanding of their exposures and potential range of outcomes in different scenarios than they had previously.” “Hurricane Andrew was the catalyst for the advent of what we now call enterprise risk management and risk-based capital requirements in the reinsurance industry today,” AM Best Director Steve Chirico said. “The concept of exposure management in the form of specific risk modeling, potential loss accumulation, rate on line and per- risk pricing came to the forefront as reinsurers that took heavy losses recalibrated their organizations, and new company formations learned from the lessons of the existing companies. The existing reinsurers and the ‘reinsurance class of 1993’ utilized data and technology to model risk, exercise underwriting discipline, and expand geographically in order to mitigate losses from the lessons learned from Hurricane Andrew.” Aon Edge President and Chief Executive Officer John Dickson spoke about how the storm accelerated the development of the wind model, as well as the use of catastrophe models. “The industry was slowly and reluctantly moving in that direction,” Dickson said. “Actuarial science is robust and mature and has been tested and proven to be reliable. You can have 10 years of no events and actuarial science will say you have a credible experience period, you have enough business written that the tenets of actuarial science apply, but you can have this outlier event that upends your balance sheet. You have to balance the two.” Put to the Test In Florida, there was a near total lack of catastrophic weather for 12 years after Andrew hit in 1992. But in 2004, four hurricanes struck the Sunshine State in a six-week span, according to the National Weather Service. Hurricanes Charley, Frances, Ivan and Jeanne hit Florida between Aug. 13 and Sept. 26. This was the first real test of the revamped reinsurance sector covering Florida risk. O’Keefe said RenaissanceRe began to grow at that point, becoming one of the largest reinsurance companies serving Florida by 2008, with Florida risk a significant part of RenaissanceRe’s catastrophe insurance portfolio. O’Keefe said that, while the emergence of the use of technology was important, companies had to keep in mind it was only part of the answer. “Human involvement in underwriting is still really critical in the overall insurance/reinsurance business, particularly in catastrophe underwriting,” O’Keefe said. The industry learned several lessons, including that “the concept of cash flow underwriting and managing an insurer predicated on premium growth, if left unchecked, will manifest in huge eventual losses without an educated view of 37BEST’S REVIEW • AUGUST 2022 pricing and exposure management,” Chirico said. “The concept of risk-based capital requirements replaced the old fixed-capital standards in use prior to the early 1990s. Risk-based capital has been through several iterations as it has responded to the increased complexity of operating a (re)insurer in today’s world,” he said. Bermuda reinsurers often paid the insurer when the insurer pays a claim, O’Keefe said. “RenRe has been known at times to step up and pay valid reinsurance claims in a very timely manner and in a manner that eliminates the cash flow distress for our clients,” he said. “It’s the week after an event where insurance companies are out on the road with their catastrophe response teams writing checks, and cash flow is very important for them financially.” Chirico added that Florida improved its development standards. “Florida building codes were vastly improved to decrease the impact of future hurricanes. It is widely recognized that South Florida building codes are some of the most stringent in the United States,” Chirico said. Weinstein said that, at this point, one of the most understood hazards in the world is the Florida hurricane. “Market participants have investigated significantly to assess the potential frequency and severity of the storms, how they respond to specific types of construction in Florida, and what actually exists in Florida. The global reinsurance industry has pioneered techniques to absorb and apply data to support capital allocation, and nowhere has this been done more robustly, thoroughly or continuously than for Florida,” Weinstein said. He said that while the industry understands hurricanes are a climate-driven risk, it is still something it struggles with. This encompasses wildfires, too. “The science is out there, the tools are out there in the broader world to be imported into our industry, and to collaborate with partners to provide solutions that boost everyone’s financial and pragmatic resiliency to these climate-driven risks,” Weinstein said. “To ignore them won’t lessen the risk.” “Whether driven by climate risk or changing demographics with people moving to more exposed areas, volatility in results continues to be an issue,” Attanasio said. “Accordingly, the management of catastrophe risk remains a critical factor in the industry—particularly for those in higher-risk areas. The second issue is the increased occurrences of so-called secondary perils—events such as wildfires, tornadoes, etc. These events have become just as impactful as larger events such as a Hurricane Andrew.” Florida’s active litigation environment is also an issue. The current trend began in 2017, O’Keefe said, with attorney’s fees and the number of claims and lawsuits that followed a hurricane season that included six major hurricanes resulting in an exceptional amount of loss. “It’s our job to match desirable, well-structured risk with the most efficient capital,” O’Keefe said, adding that the influx of litigation has made it difficult for RenaissanceRe to match risk assumptions with investor capital. “It doesn’t mean that RenaissanceRe does not take Florida exposures,” O’Keefe said. “However, we’ve had to reposition how RenRe assumes Florida hurricane risk and change our portfolio construction around that. We have reduced our support of the admitted homeowners domestic “The challenges that Florida has encountered over these last few years are not only a challenge for Florida consumers and Florida insurers, but to their partners in Bermuda.” Stephen Weinstein Bermuda Business Development AgencyNext >