< PreviousCatastrophes 38BEST’S REVIEW • AUGUST 2022 marketplace and transferred a lot of our allocated capital to other ways to support the risk in Florida, such as commercial lines.” He said RenaissanceRe remains committed to Florida, but the state needs to find a way to “limit the additional volatility that the fraudulent behavior and increased litigation environment adds to risk portfolios.” Combating Fraud, Other Challenges Weinstein said the fraud associated with these losses in Florida is one of the industry’s biggest problems. To combat this fraud, Weinstein said, the industry needs two things: public policy reform and private sector innovation. He said he’s pleased with some of the aspects featured in the legislation to reform the troubled homeowners market that was signed by Gov. Ron DeSantis in late May. “I’m encouraged by some of the features in this bill, in particular the changes around the contingency fee multiplier,” Weinstein said. “I’m encouraged by some of the trends we’ve started to see and will see in the Florida court system over time. But we also have an opportunity in the private sector. It takes both, and I think a mix of underwriting practices, ranging from contract to claims practices and the implementation of technology to sort out the wheat from the chaff, are real opportunities for the private sector to enter into Florida, a large and important growing jurisdiction and market, and continue to play the role that the private sector can play, adding real value.” Despite the reinsurance sector’s strong Florida roots, the state’s impact on the reinsurance market is limited due to diversification over the years, Chirico said. In fact, Bermuda reinsurers write 20% of broker-placed European property catastrophe reinsurance and supply 40% of U.K. broker- placed property catastrophe reinsurance market, according to the Association of Bermuda Insurers and Reinsurers. Globally, ABIR members and other Bermuda reinsurers covered 51% of reported liabilities for New Zealand’s aggregated 2010 and 2011 earthquakes, 50% of reported losses for the 2012 Costa Concordia cruise liner sinking and have presences in Canada, Japan, Chile and elsewhere. “Having said that, Florida is an important market and reinsurers are exposed to the same issues as the ceding companies with which they partner including assignment of benefits, an adverse litigation environment, political tensions, commodity inflation, and anemic investment returns,” Chirico said. “It’s been three decades of challenge, but also three decades of success,” Weinstein said. “Who might have thought in the aftermath of Hurricane Andrew we’d see what we’ve seen, with the growth of dozens of homegrown Florida companies innovating new business models to continue providing coverage to Florida consumers, partnering with providers of capital in Bermuda and around the world to keep all their promises over these decades. We have to be clear-eyed about the challenges that the world’s peak-risk market is going to face, but it’s also OK to celebrate the successes that we’ve had together.” BR “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.” Steve Chirico AM BestESSENTIAL TOOLS. FOCUSED INSIGHT. AM Best offers insurance professionals solutions to support strategic research and intelligent decision making. Credit Ratings & Analysis • Financial Data • Capital Adequacy Assessment Rate Changes & New Programs by State • Industry Research & News 22.MK070A Our Insight, Your Advantage ™ Learn More: sales@ambest.com www.ambest.com • (908) 439-220040BEST’S REVIEW • AUGUST 2022 FIU Extreme Events Director: Prototype Facility Will Test Forces of a ‘Category 6’ Hurricane Hurricanes are becoming more powerful and destructive. One of the goals of the facility is to anticipate and learn from what a Category 6 hurricane would bring. The damage and destruction from a 185 mph sustained event hitting a highly developed U.S. coastline would be unprecedented. by Lori Chordas T he intensity of hurricanes continues to rise, resulting in higher sustained wind speeds and increased flooding and storm surge. Since 1924, there have been more than three dozen documented hurricanes in the North Atlantic that packed wind speeds of 157 miles per hour or higher and reached a Category 5 level on the Saffir- Simpson Hurricane Wind Scale. As waters in the Atlantic continue to warm, the potential is created for storms to intensify even more and produce sustained wind speeds that Catastrophes Lori Chordas is a senior associate editor. She can be reached at lori.chordas@ambest.com. Photo courtesy of NSF-NHERI Wall of Wind, Florida International University41BEST’S REVIEW • AUGUST 2022 could reach as high as 200 mph. Richard Olson, director of the Extreme Events Institute at Florida International University, spoke with AM Best TV about FIU’s reception of a National Science Foundation grant to design and prototype a facility to test winds of 200 mph, waves and storm surge. “What we’re hoping to do is inform the public sector and the private sector and the insurance industry to get ahead of the loss curves so that the reserves and coverages are tailored for what is coming, not for what has happened in the past.” Following is an edited transcript of the interview. Can you tell us about the award that FIU received from the National Science Foundation and your plans to create a new state-of-the-art storm testing facility that will be able to test the forces of a storm with wind speeds in excess of 200 mph? The key to understanding what we’re facing is to try to stay with and hopefully ahead of nature as nature changes. Hurricanes have three components. They have the wind, of course, which everyone realizes, but there’s also the storm surge and the wave action on top of the storm surge. That leads to flooding and water impacts. People forget that you hide from wind but you run from water. Water is the actual principal cause of death in most hurricanes. Our intention is to design and prototype a facility that can integrate extreme winds, storm surge water movement, wave action, and then flooding. You have to get all of the components of a hurricane together in a single experimental facility if we want to truly understand not only what we’re facing, but what we will be facing in the years to come. How will you be partnering with other universities and private companies to design and construct the facility’s prototype? Our university partners, it’s a power group. I call it the Dream Team for research—University of Florida, Oregon State University, Stanford, Notre Dame, Georgia Tech, Illinois, Colorado State, Wayne State, and the private firm Aerolab, which has extensive experience with wind tunnel creation. When you look at the combination of research expertise, it’s really important, because this is a complementary team where everybody brings a particular experience and expertise to the table. It’s a research dream team, as far as I’m concerned, although our researchers—they’re more modest than I am. I can’t imagine a better team of research universities. What’s driving the rising intensity of hurricanes in the Atlantic basin, and is that prompting the need for a new category to the Saffir-Simpson scale? What would be the characteristics and benefit of creating a Category 6 designation? First, I have to say that Category 6 does not officially exist for the National Hurricane Center, NOAA’s National Hurricane Center. Category 5 starts at 157 mph wind speed. I have to tell you, when I saw Hurricane Patricia off the west coast of Mexico in 2015, Patricia hit 214 mph. Then in 2019, we had Dorian next door to us in the Bahamas. Dorian hit 185 mph sustained, right next door to South Florida. Truth of the matter is, Dorian swung at the last minute, thankfully, to the north, but for several days, WALL OF WIND: Current research at Florida International University is leading to performance-based designs that are making a significant impact on mitigating hurricane damage and influencing enhanced building codes. To perform hurricane mitigation research, the wind engineering team at the Extreme Events Institute’s International Hurricane Research Center and College of Engineering and Computing at FIU has built the largest and most powerful university research facility of its kind, capable of simulating a Category 5 hurricane. The National Science Foundation has designated the Wall of Wind as one of the nation’s major “Experimental Facilities” under the Natural Hazards Engineering Research Infrastructure program. Catastrophes 42BEST’S REVIEW • AUGUST 2022 it looked like it was heading up 8th Street in Miami. That really got our attention. This is more personal. When I see a storm at 185 mph or 180 even, anything above that, it just feels like a different … I know I’m not supposed to say that it’s a thing, but it felt like a different animal. I was looking at that storm and I was going—I’ve been through a few hurricanes here—I am really scared. It looked different, and I saw those numbers. For us here, we call this our Cat 6 project. What potential physical damages and other types of losses could a storm of that magnitude cause? You have your finger on the key question. When you looked at a hazard that is changing, a hazard that is increasing, Dr. Rick Knabb at The Weather Channel, who is a former director of the National Hurricane Center, captured it by saying these storms are bigger, stronger, wetter, slower. The loss curve, the loss estimates—we have to get ahead of those, because right now, it isn’t just additive. There are points, obviously, when we’re looking at very extreme winds, and storm surge, and wave action, where we’re going to see or we have the risk of damage and destruction that we’ve just never seen before. You already talked about Dorian and some of the other hurricanes that we’ve seen over the years. In recent years, are there other hurricanes in the Atlantic basin that would fall into what we maybe would call the designation of a Category 6 event? We’ve seen what can happen with our urbanization and our coastal development, and the way that we get hit, especially within the first 10 to 15 miles of the coastline, by the combinations of wind and water. That includes flooding. None of us will forget Hurricane Katrina in New Orleans and then the storm surge along the Gulf Coast. These are learning events—actually, they’re teaching events—but you have to be paying attention to do the learning. For me, Hurricane Dorian in 2019 was a teaching event that we missed, because it didn’t hit us, because it swung north. We didn’t actually pay enough attention to what could have happened with 185 mph sustained storm hitting a major urban area like Miami. We have to get ahead of what storms like Dorian will present to us. It’s a challenge to learn from what nature is doing and how nature is changing. The damage and destruction from a 185 mph sustained event hitting a U.S. coastline that is highly developed would be unprecedented. How will the research from the testing facility be used? How will those findings aid in the creation of more-resilient communities and protecting civil infrastructure during extreme events? One of the keys to what we call community resilience is to see not only the physical components, but how the physical components of resilience will mesh with social, economic and even political aspects. The public wants to be able to trust science and government that we can get “Our intention is to design and prototype a facility that can integrate extreme winds, storm surge water movement, wave action, and then flooding. You have to get all of the components of a hurricane together in a single experimental facility if we want to truly understand not only what we’re facing, but what we will be facing in the years to come.” Richard Olson Extreme Events Institute at Florida International University43BEST’S REVIEW • AUGUST 2022 ahead of these increasing hazard events. For me, when you look at resilience, you’re looking at it as a multidimensional requirement, and we have to include social, economic, policy, political, public health along with the evolving hazard. It is the challenge of the next 30 to 50 years. How will insurers be able to use the research and benefit from the findings? What we’re hoping to do is inform the public sector and the private sector and the insurance industry to get ahead of the loss curves so that the reserves and coverages are tailored for what is coming, not for what has happened in the past. Craig Fugate, the director of FEMA in the Obama administration, had three words to describe resilience. He said insurance is resilience. No truer words have ever been spoken. The key to that is that the insurance industry is the backbone, you might say, the financial backbone for most people to be able to bounce back, which is vernacular understanding of resilience. Without the insurance industry, and without them being, in a sense, together with nature and, from my point of view, ahead of natural hazards, we are going to be in deep trouble. They need to be on the curve and, I would say, ahead of it, of potential losses. The losses look like they’re going to be going up with these more intense hurricanes. What are the next steps for the new storm testing facility? When will it be operational? When do you expect to start seeing data and results from the testing? The National Science Foundation is very careful with its funding. This is a design and prototype project because NSF is not going to invest in a large-scale facility—I mean, the eventual facility could be the size of a football stadium—they’re not going to do that until we can demonstrate with our university research partners that the design is feasible and that the prototype at a scale, that they’re both feasible. At that point, then the science and the engineering will come together for a major proposal. Now, time frame. There is a chance that we could retrofit an existing facility and add fans, etc. That’s one option. The other option is to build a new facility from the ground up, brand new. We don’t know yet, because there’s a cost- effectiveness, there’s a trade-off. Maybe a retrofit would work. Maybe it would be better to do a facility from the ground up. I don’t expect us to be able to make that decision until the end of this year, 2022, maybe earlier. Then we will do the prototype, and then if everything proves out, then this integrated or combination, if we go with a different option, then this kind of research, which would be wind, surge, wave, flooding, I would say in three to four years, we could hopefully be starting that. Then it’s a question of construction. I think we’re still looking six, seven years out. We’re trying to go as fast as we can, but you can’t go too fast or you’ll make a mistake. FIU’s Extreme Events Institute has been doing so many exciting things over the years. Can you share some of the other projects that you’ve been working on? We work very closely with NOAA’s National Hurricane Center, which is on the FIU campus. It’s a big campus, so there’s a bit of a drive. You don’t walk there. We have been working with them very closely on storm surge in the Caribbean Basin. Not just the islands, but also the east coasts of the Central American nations. One of the more exciting aspects to it is that we’re providing the technology that supports high-resolution but low-cost storm surge mapping. In many countries, when you get an evacuation order, and you don’t trust or you have had bad experiences with previous evacuation orders, you don’t follow the evacuation. That’s what we call life safety risk. We’re very enthused about that. We also have the hurricane public loss model, which is a wind-based model for insurance losses in the state of Florida. One other project that is the basis for what we’re doing is the current Wall of Wind, which is a hurricane simulator capable of reaching Category 5, 157 mph. I’ve seen it hit 162 and it shook me up. BR AM Best TV Visit www.bestreview.com to watch the interview with Richard Olson.44BEST’S REVIEW • AUGUST 2022 Latin America Insurers AM Best Retains Negative Outlook on Peru’s Insurance Industry According to Best’s Market Segment Report: Market Segment Outlook: Peru Insurance, overall, economic conditions continue to recover from the pandemic, due to the country’s macro-stability. However, many of the actions taken to enhance economic recovery have aroused political interest, creating challenges for the current and future performance of the insurance market. A M Best is maintaining its Negative outlook on Peru’s insurance industry, based on the following factors: •The extended negative impact of the early withdrawals in the private pension funds (PPFs) on revenues and results. •The difficult underwriting conditions going into 2022, as companies aim to reflect claims experience in key life and health segments. •The lower capital base in the system as a whole. Partially mitigating these factors is the industry’s solid capitalization despite a lower capital base, in conjunction with active and responsive regulation, which provides insurers financial flexibility. Economy Recovering, Still Facing Challenges As the impact of the pandemic on Peru’s economy continues to subside and economic growth recovers, the country still faces domestic and global challenges. The disruptions in global supply chains and rising oil, gas, and grain prices have driven inflation to levels well above the central bank’s target, while domestic political instability remains a challenge not only for the insurance industry but also for many insurance-related industries. The IMF expects GDP to grow around 3% in 2022 after substantial growth of 13.3% in 2021, following the 11% contraction in 2020 due to the pandemic. The implementation of public expenditure and sufficient fiscal and monetary policies are key for a sustainable recovery, particularly for domestic consumption and construction. Claims experience continues to recover to pre- pandemic levels, further negatively impacted by early withdrawals of the insurance component from the Private Pension Funds (PPF). In AM Best’s view, controlled distribution of benefits, as well as ongoing dialogue among Congress, the PPFs, and the central bank, is critical to avoid distress in Peru’s financial markets and insurance industry. However, proposed changes to the PPF system aim to eliminate the mandatory pension savings scheme and make enrollment in the system voluntary. The proposed reform could adversely affect earnings and the distribution of benefits over the short term, while the insurance industry promotes alternative life and savings offerings, such as in the years following 2016 when the government approved early surrenders of individual accounts for pensioners over the age of 65. However, this time withdrawals are unlikely to migrate to the insurance system, as many eligible beneficiaries are facing economic distress instead of planning for retirement. 45BEST’S REVIEW • AUGUST 2022 AM Best will continue to monitor the financial markets for any disruptions that could negatively affect the insurance industry’s solvency. A Concentrated Market As of December 2021, Peru’s insurance market amounted to USD4.4 billion in premiums, with a penetration rate of 2% of GDP. The non-life segment accounted for 47.9%, and the life segment, 52%. As of May 2022, the market consisted of 18 companies, with six accounting for 80% of the market share. The country has a developed regulatory framework that encompasses microinsurance and alternative distribution channels, and although IFRS 17 is not mandatory yet, many companies are already working toward implementation. Risk-Adjusted Capitalization Impacted by Market Developments Risk-adjusted capitalization as of December 2021 remained at what would be considered the strongest levels if the industry is seen as an operating insurance company according to the AM Best’s Capital Adequacy Ratio (BCAR) score. This measure points to the excess (expressed as percentage) of available capital over net required capital in a 1-in- 250 year scenario. Net required capital accounts for assets as well as underwriting and business risks, in addition to net probable maximum losses for catastrophic events, adjusted for covariance. Based on data from Superintendencia de Banca, Seguros y AFP (Peru’s insurance regulator), AM Best calculated a BCAR score of 52%, depicting a larger growth rate in risk requirements than in available capital, versus the 2020 score of 63%. The industry’s available capital side contracted by around 8.8%, due mainly to lower unrealized valuations on investments, lower net income and capital outflows from cumulative results. On the capital requirements side, growth was driven by investment risk (a sovereign downgrade during 2021) and to a lower extent by net premium risk. The unrealized loss on investments comes from a heightened perception of risk because of political uncertainty and global conditions, in conjunction with rate hikes to counteract inflationary pressures, as Peru’s central bank raised the reference rate by 225 basis points during the second half of 2021. The system’s reported surplus has also diminished due to dividend payments by the dominant market participants, as the three largest insurance companies account for around 67% of the industry’s equity. Net Income and Risk-Adjusted Capitalization Net income has been limited by the resurgence in claims and an increase in administrative expenses as businesses start returning to normalcy. Life-related claims specifically from the private pension funds have shown the greater relative increase, such as survivor annuities, fixed annuities and credit life. On the health side, COVID claims continued to push claims during the first half of 2021, while on the property/casualty side, the rebound in auto usage, along with inflationary pressures, the scarcity of spare parts, and recovering car sales, have pushed the cost of claims higher. We will continue to monitor the Peruvian sol’s parity with the U.S. dollar and its effects on claims costs, investment income, and asset-liability management. The net required capital component of the BCAR scores is still being influenced by higher capital requirements for Peruvian securities following the sovereign downgrade in 2021. In addition, required capital mandates capital for underwriting risks, recognizing the large growth in the life segment, including those coverages provided to private pension funds. The BCAR score takes into account the increase in prices in the life business owing to the pandemic, but its full effect on the health business will not be clear for some time. System reserves remain ample, and releases may be possible in 2022 if the life segment starts to perform better than expected, as severity diminishes. Challenges Leading to Opportunities In AM Best’s view, the challenges Peru’s insurers face could lead to significant opportunities. A higher unaffiliated population to the PPF system could help boost microinsurance offerings targeted for this segment under the current regulatory framework. In competitive lines such as life, health, and auto, the advantage will be to companies able to create efficient administrative structures and valuable insurance solutions (amid a recovering FINANCIAL CENTER: A view of the San Isidro district in Lima, Peru. As of December 2021, Peru’s insurance market amounted to USD4.4 billion in premiums, with a penetration rate of 2% of GDP.Latin America Insurers 46BEST’S REVIEW • AUGUST 2022 economy). The surety segment will continue to depend on public expenditures, infrastructure, and political decisions. Overall, economic conditions continue to recover from the pandemic, due to the country’s macro-stability. However, many of the actions taken to enhance economic recovery have aroused political interest, creating challenges for the current and future performance of the insurance market. Despite insurers’ experience navigating similar political and economic cycles in the past, further positive developments would be needed for a Stable outlook. BR Best’s Rankings Largest Latin America Insurers – 2022 Edition Ranked by 2020 gross premiums written. (US$ thousands) RankAMB #Company/Group Country of DomicileGross Premiums WrittenCapital & Surplus 1085165Bradesco Saúde S.A.Brazil4,910,4361,709,788 2093357Amil Assistencia Medica Internacional SABrazil3,801,0172,527,258 3085612Grupo Nacional Provincial S.A.B.Mexico3,670,634873,702 4092225Sul América Companhia de Seguro SaúdeBrazil3,533,9861,419,266 5084188MetLife México, S.A.Mexico2,860,470993,666 6077089BBVA Seguros México, S.A. de C.V.Mexico2,327,836809,019 7085571AXA Seguros, S.A. de C.V.Mexico2,036,8391,067,468 8084189Brasilseg Companhia de Seguros, S.A.Brazil1,870,139332,485 9085590IRB - Brasil Resseguros S.A.Brazil1,845,732849,408 10087168Porto Seguro Companhia de Seguros GeraisBrazil1,827,455780,371 11093956Notre Dame Intermédica Saúde S/ABrazil1,751,0791,079,473 12083016Quálitas Compañía de Seguros SA de CVMexico1,677,674547,110 13085870Seguros Monterrey New York Life SA de CVMexico1,650,086804,302 14089951Bradesco Vida e Previdência SABrazil1,553,3161,439,155 15078644Citibanamex Seguros, S.A. de C.V.Mexico1,538,796461,183 16086279Seguros de Vida Suramericana S.A.Colombia1,447,465531,204 17085883MAPFRE Seguros Gerais S/ABrazil1,354,500527,891 18078007Seguros Banorte SA de CV Grupo BanorteMexico1,353,3791,476,999 19084237Tokio Marine Seguradora S.A.Brazil1,290,045682,315 20077317Rímac Seguros y ReasegurosPeru1,212,816644,106 21093896Hapvida Assistencia Medica LtdaBrazil1,189,589489,388 22086855Bradesco Auto/Re Cia de SegurosBrazil1,048,475325,135 23077318Pacifico Compañia Seguros y ReasegurosPeru1,022,399690,358 24089953Caixa Seguradora S.A.Brazil1,019,500507,635 25077145Banco de Seguros del EstadoUruguay1,016,081426,258 26093564Central Nacional Unimed - Coop CentralBrazil997,484291,084 27086238Instituto Nacional de SegurosCosta Rica989,6231,730,495 28077080MetLife Chile Seguros de Vida S.A.Chile987,187658,568 29077981Chubb Seguros Mexico S.A.Mexico950,365379,549 30087006Seguros Inbursa, S.A.Mexico947,1251,336,217 Source: and AM Best research; data as of June 30, 2022.47BEST’S REVIEW • AUGUST 2022 Cyber Insurance AM Best: With Cyberattacks Becoming More Complex, US Cyber Market to Remain Hard Rate increases are driving a large part of the premium growth and are expected to continue to rise through 2022. Editor’s Note: The following is an excerpt from the Best’s Market Segment Report: US Cyber: The Hardest of the Property/Casualty Markets. Visit www.ambest.com to access the full report. C ybercrime, in the form of high-profile attacks on educational institutions, hospitals, and other establishments, garnered significant headlines throughout 2021. These attacks, most notably the Colonial Pipeline ransomware hack in May 2021, underscore the urgency of addressing cyberthreats, which require brokers, underwriters, managing general agents, and customers to work together, along with some legislative and regulatory involvement. Despite the ongoing growth in cyber claims in 2021, cyber insurers’ underwriting performance still improved, due largely to strong rate increases, which exceeded 30% in the fourth quarter. The segment also benefited from an overall decrease in cost-containment expenses. Cyber insurance originated as a liability cover; insureds were covered for third-party claims when hackers stole clients’ or employees’ personal data. In recent years, however, first-party claims or ransomware have become dominant. Should insurers pay ransomware? Does paying the ransom encourage bad actors? The majority of respondents to an audience poll conducted at AM Best’s Review & Preview conference in March 2022 believe that, yes, ransomware should be covered because it is an important value for the clients. The rising frequency and severity of ransomware attacks suggest that insurers need to be more proactive with their clients’ cyberrisk profiles to prevent these incidents. OUT OF GAS: Fuel reserves in North Carolina were depleted after the Colonial Pipeline was shut down by a ransomware attack in 2021. Next >