How are catastrophe reinsurance layers structured for a hurricane-exposed insurer?

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AcadiFi · Accepted Answer

A Florida-heavy writer like Gulfline Property Insurance with a 1-in-100 occurrence PML of $850M would structure a cat tower to protect capital across return periods. Typical placement: $100M retention (funded by capital and QS), then successive layers of $150M xs $100M, $200M xs $250M, $300M xs $450M, and a top layer of $100M xs $750M, plus a contingent aggregate. ```mermaid flowchart TB A[PML 1-in-100
$850M] --> B[Top Layer
$100M xs $750M] B --> C[Layer 3
$300M xs $450M] C --> D[Layer 2
$200M xs $250M] D --> E[Layer 1
$150M xs $100M] E --> F[Retention
$100M] ``` Pricing drops by layer: Layer 1 might cost 15% ROL, Layer 2 at 8%, top layer at 2.5%. Reinstatement provisions differ — lower layers often 'prepaid' for two events, higher layers one event pro-rata. Collateral requirements from Bermuda and ILS markets force trust arrangements. Vendor cat models (RMS, AIR) drive pricing, but model blend adjustments reflect near-term climate loadings. A cedent also monitors horizontal diversification (multiple perils) and vertical exhaustion risk (what if a 1-in-250 event happens). Stability clauses, hours clauses (72-hour event definition), and territorial scope matter at claims time. Post-2023 hard market dynamics pushed retentions up 50-100%, forcing insurers to absorb more frequency and focus reinsurance spend on tail protection only.

How are catastrophe reinsurance layers structured for a hurricane-exposed insurer?

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