Stabilizing climate risk coverage

Cloudy skies from oncoming Hurricane Milton over residences in Tampa — Cloudy skies ahead of Hurricane Milton's expected landfall in Tampa, Florida, on Oct. 8, 2024.

Jonathan Collura of Specialty Risk RE — Jonathan Collura, president and CEO of Specialty Risk RE

To respond to climate risks and insurability for homeowners, California's insurance regulator last year decided to allow carriers to include the net cost of reinsurance (NCOR) in their rates. Specialty Risk RE is a reinsurer that aims to stabilize the industry in areas throughout the U.S. seeing increasing natural disasters and insurer pullbacks. Digital Insurance spoke with Jonathan Collura, president and CEO of Specialty Risk RE, about how it assesses risks, works with carriers, and solutions for climate-related insurance issues.

This article is from a longer interview and edited for clarity.

What's your overall strategic approach in the market?

Our approach is to truly function a lot like a capital provider versus a traditional reinsurance company. We underwrite the carrier and look at their underwriting and their risks. We're a standby capital provider, to give them additional capacity, so that they can grow and expand their book. We stand side-by-side with them, so as they grow, we grow as well. We're select about the carrier partners that we look at. We're really looking at best in class underwriters in the business and being a true partner to them, above and beyond just selecting and taking individual risks.

How do you gauge the risks being taken on by insurers you support?

We look at geography. We look at the classes of business that are being underwritten and we choose carriers that have a similar appetite in classes of business. We definitely prefer the casualty business. But when we look at the programs, we look at the limits and the like, to make sure that there's diversification. By taking the whole book, we're getting a larger slice of programs. That gives us additional diversification.

Would a nationwide pool for climate risks work?

You are going to have to pool risks to make it work. If you're focused on just climate risks in one geography, it's not going to be balanced. It does need to be a larger geography and obviously we're seeing consistent cat issues. What we're writing is not cat specific by any means. It can be cat exposed. For reinsurers going forward, they're going to need a larger pool of risks and different classes of risks to ultimately make it work. There's definite strain on some of the states and their governments to back some of these risks. That's where there may be opportunity for capital providers to work with them on a larger solution.

You need to start looking at other perils and other jurisdictions to make something work. We have seen that the larger players -- the carriers associated with this are hitting a lot of headwinds with some of the states, and they're pulling out of markets because they can't get the premium they need. A solution is going to have to be larger, and work with the states to subsidize it, making sure that there are other classes of business in it so that it works.

What do you look for when you're considering a potential partner company?

I approach it from underwriting it much like I would a credit risk. Here it's people, processes and systems, first and foremost, and looking at their history, their balance sheet, looking at how many programs have they underwritten. What is their acceptance rate? What is their history with those programs? Are they able to manage the claims associated with those and more than anything else, it's about the people.

We are working on an AI component as a tool for us to quickly digest information and gain insights, and it has a dashboard, so we can actively evaluate the portfolio, its balance and its geography risks. It will tell us effectively, like a heat map, if there are areas that are running hot, so we can approach those. The key to the AI system is getting live information to actively manage the book of business.

What are the next challenges and projects for Specialty Risk RE?

Looking at complimentary business lines to the reinsurer, that will make sense to us to help us be competitive in the market. We've seen quite a bit of evolution in the program space since 2020. For us to come in and be a strategic player, we need to execute. Some of the challenges are capacity needs in the space, a lot of duplication of classes of business and a lot of MGAs in the space. This is why we focus on carriers as the primary partners, fronting carriers [licensed insurers that represent clients' self-insurance plans] specifically, more than anything else, and then dedicate to them, finding ways to take advantage of things we see in the market.

The industry is going to catch up and focus on the whole book business, where it's more standby capital. We are very credit focused, but we will diversify by adding lines of business. We can look at other ways that we can help our partners in this space.

Will AI be used to make coverage decisions?

AI is a fantastic tool to digest information. I don't know that it can make decisions because insurance is so different in predictability. We're using it to digest data, organize data and analyze data. Then we will make human decisions based on what we see. That's the trend we have seen since insurtechs came into the market. There definitely have been changes associated with that. The key is it's all about the people. The human component of it is very important.

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