Selective Insurance has reported that its reinsurance renewal prices at January 1 were in some cases higher than it expects to generate on the underlying insurance policies it sells.
The company warns that the accelerating cost of reinsurance will likely impact its underwriting profitability over 2021,
At the same time, it has witnessed a reduction in reinsurance capacity and a tightening of terms and conditions, which mean underwriting risk continues to increase.
Selective utilises a significant amount of reinsurance, including a property catastrophe reinsurance program and property and casualty excess of loss reinsurance treaties.
But it says that the COVID-19 pandemic has led to new coverage exclusions related to communicable diseases and cyber risk, particularly for business interruption losses in property treaties and, to a lesser extent, in casualty treaties.
“To the extent we are exposed to losses on our primary policies from risks, such as communicable disease, these losses will most likely be excluded from coverage under our new reinsurance treaties, and we now face increased underwriting risk,” the company said.
“This increased underwriting risk could increase our net loss and loss expenses and increase the volatility in our underwriting results. Decreased reinsurance capacity also would increase our underwriting risk if we cannot fully place our existing reinsurance treaties upon renewal.”
Selective recorded revenue growth of 10% over the fourth quarter of 2020 and premium growth of 8% despite the challenges of the pandemic.
The insurer also offered an update on its reinsurance program as of January 1, including the renewal of its property catastrophe treaty, which covers both standard market and E&S business.
For the main property catastrophe excess of loss treaty program, Selective maintained its expiring retention and purchased an additional $50 million in limit at the top of its program, thereby extending its coverage to $785 million in excess of a $40 million retention.
Additionally, it renewed a separate catastrophe treaty of $35 million in excess of $5 million that covers events outside its 2015 22-state footprint and supports a standard lines geographic expansion into Arizona, New Hampshire, Colorado, Utah, and New Mexico and a growing E&S property book.
Both treaties were renewed with broadly the same terms but with added communicable disease and cybersecurity restrictions in coverage.