How tiny Bermuda influences prices of Louisiana home insurance: 'A slow-moving catastrophe'

HAMILTON, Bermuda — Inside the sprawling Hamilton Princess hotel, overlooking a harbor where yachts bobbed in cobalt waters, businessmen in blazers and brightly-colored shorts anxiously scrolled their phones.

Hurricane Milton was ripping through the Gulf's warm waters nearly 2,000 miles away, toward Florida. If the storm was catastrophic, the reinsurance executives, brokers and investors stood to lose billions of dollars.

Their gathering here resembled a sportsbook in Las Vegas during a football game with heavy betting on the line. Organizers set up a giant screen in the lobby with forecast tracks. In the evening, BBC coverage of Milton played nonstop on the TV at the hotel bar.

Louisiana's Insurance Commissioner Tim Temple, 1,500 miles away from home, mingled among the suits. He was there to make a plaintive but urgent pitch.

As Milton neared landfall, Temple told those gathered that he had ushered in policy changes to make life easier for insurance companies. It was a plea to get more insurers to enter the state — and for the industry in Bermuda to take on more of Louisiana's considerable risks.

"My focus is trying to make sure Louisiana is doing everything it can so you feel comfortable doing business in our state," Temple said.

Temple, who grew up in the insurance business, has been coming to Bermuda periodically since he was a child. But since being elected a year ago, he has traveled here three times, trips that tell a larger story about Louisiana's insurance crisis.

Fully understanding why insurance premiums for residents of south Louisiana have soared begins on this tiny British territory in the middle of the Atlantic Ocean. What happens here — agreements worth billions of dollars covering the risk of catastrophes that could cost even more — underpins the cost of insurance in places from Louisiana to Libya.

After his speech, Temple acknowledged that no matter what Louisiana does, a hurricane like Milton can upend insurance rates back home virtually overnight.

"It is a global market," Temple said. "It is bigger than us. It's bigger than Louisiana."

Island of risk

Hamilton's pastel-colored office buildings, surrounded by pink-sand beaches and white slate roofs, are home to a complex global industry that has made Bermuda the "world's risk capital."

The insurance companies that take premiums from Louisiana homeowners don't keep all the risk — or all of the premium dollars. They send a lot of both further up the chain, to reinsurance companies in Bermuda, Singapore, London and the like. If a natural disaster causes enough damage, the reinsurance companies are on the hook to pay.

The relationship is not unlike that of a homeowner to their insurance company. Typically, an insurer must pay for damage up until a deductible is met. Then, reinsurance kicks in. Insurers cobble together a "tower" of reinsurance protection from an array of companies around the world.

This dynamic is especially important for Louisiana insurers.

Data provided by AM Best, the leading ratings agency for insurers, shows that many of the most active companies in Louisiana's market rely far more on reinsurance than insurers in the rest of the country. By one metric that measures the share of premiums sent to reinsurers, the six largest Louisiana-only insurers rely on reinsurance at a rate of more than three times the national average.

That means that Louisiana can experience much greater swings in insurance prices because of what's happening in Bermuda than states without a great deal of risk from natural disasters.

Louisiana insurers have offloaded risk to Bermuda for decades. But as climate change, inflation, migration into risky areas and a series of natural disasters have pounded the nation, the reinsurance industry has responded with huge price increases. The tumult is rocking Louisiana's insurance market and driving premium increases that are threatening the existence of communities all over the southern part of the state.

After 1992's Hurricane Andrew caused mass damage and caught insurers by surprise, the Bermuda industry exploded. Eight new reinsurers sprung up as the industry looked to backstop its risk in the face of major disasters. By setting up shop in Bermuda, reinsurers took advantage of friendly regulators, allowing them to get to market more quickly, and low taxes.

Now, Bermuda backs up a significant share of Louisiana's hurricane risk. After Hurricane Ida in 2021, Bermuda reinsurers paid $6 billion to cover U.S. claims, according to the Association of Bermuda Insurers and Reinsurers.

For instance, in 2023, Louisiana Citizens, the state's insurer of last resort, took in $618 million in premium dollars from policyholders. But it didn't keep all that money. Instead, it paid — "ceded," in insurance parlance — $263 million to reinsurers around the world, who then assumed a share of Citizens' risk.

Of that, about 40% went to companies in Bermuda, 16% went to London and 7% went to Singapore, according to a Times-Picayune | Advocate analysis of Citizens financial filings.

Ripple effect

After a recent string of natural disasters around the world, starting with wildfires in California in 2017, reinsurers dramatically raised the rates they charge insurers. One index of reinsurance costs shows a spike of 107% since 2017, with increases every year. And reinsurance companies have forced insurers to take on more risk, by increasing the level at which they start to pay out after a disaster.

The industry raked in huge profits in 2023. Analysts say it's partly because reinsurers tightened terms on the reinsurance deals, such as raising the level of damage it takes to trigger their payments.

Those changes prompted Citizens — which took on a huge number of new customers because a dozen private insurers collapsed — to raise rates on its policyholders by an average of 63% in 2023. Another insurer executive said they had to "put their foot down" and refuse staggering cost hikes from the reinsurance industry that year.

In Temple's pitch to reinsurers, he asked companies to be upfront about areas they are unwilling to cover. In an interview, he said there are "voids" in the most risky parts of Louisiana where the private market has pulled back.

Indeed, tens of thousands of Louisianans in risky areas have flocked to the insurer of last resort since a dozen insurers went belly-up in recent years. The remaining private insurers are mostly lower-rated companies that have raised concerns about their ability to survive major disasters.

Temple believes part of the problem is that for almost a decade, a group of thinly capitalized insurers in Louisiana took advantage of a lack of hurricanes and "chased premiums down" to unsustainable levels. Premiums will likely never return to those levels, he said.

In the long run, Temple said encouraging the building of stronger homes, through Louisiana's fortified roof program and stronger building codes, can make insurance more affordable in the state. Still, the heavy reliance on companies in Bermuda and London means that catastrophes elsewhere can have a ripple effect in Louisiana.

"We'll see what happens tonight with Milton, and by all accounts, it's going to be substantial," Temple said in an interview on the evening the storm was making landfall. "(But) if you do the good things. ... if we have a big rise (next year), then it may not be as steep."

'It frightens me'

Reinsurers, in many ways, are in the business of betting on the likelihood of disasters. To gain an edge, they use a network of companies that model risk, in a bid to predict where and when the biggest disasters will happen.

But that industry is struggling.

Risk modelers have faltered as climate change has accelerated, making it increasingly difficult to predict the most unlikely — and most damaging — catastrophes.

Karen Clark pioneered the modern risk modeling industry. After Hurricane Andrew smashed into south Florida in 1992, Clark's models estimated the losses at about $13 billion, well above industry estimates, and she was proven right.

Clark said in an interview that the current spike in prices is not only because of climate change, noting inflation has made rebuilding houses more expensive. That is also driving up premiums.

At the same time, she said rates are unlikely to come down unless communities take on significant mitigation efforts, like upping building codes. And for all the uncertainty about how well risk models are keeping pace with climate change, Clark said another question looms over the industry: what will humans do to combat it?

"Are we going to invest heavily in green energy?" Clark said. "There's a lot of uncertainty there."

Kerry Emanuel, a professor of atmospheric science at MIT who has worked with reinsurance companies for decades, said there is simply not enough data to predict losses from the most severe disasters, especially as climate change continues.

"Frankly it frightens me," Emanuel said. "So much of what we do is based on statistics that are really not fit for purpose today."

Disasters that happen once every 100 years can make or break the industry. To accurately predict those, you need 1,000 years of data, which "we don't have," Emanuel said.

In the years after Hurricane Katrina, reinsurance rates spiked but then fell as hurricane activity abated. And Emanuel said in an interview there is sure to be volatility in the future. But it will continue to barrel toward unaffordability for people in the most risky places, raising questions about how society should deal with it, he said. That leaves the government with a difficult challenge of convincing people to move out of harm's way or strengthening their homes enough to become insurable.

"I think it is a slow-moving catastrophe for the market," Emanuel said. "Sooner or later, something is going to give. The whole question in my mind is how can governments engineer this to be as graceful a transition as humanly possible, and hurt as few people as humanly possible."

Market upended

In 2022, as always, Allied Trust Insurance CEO Brian Keefer made his annual trip to London, Bermuda and other cities to meet with reinsurers and put together a package of protection. It was an exercise crucial to the insurer's business: Given the firm's small size and exposure to coastal areas, it needs to offload most of its risk to be equipped to handle major hurricanes.

But things had changed.

Reinsurers were no longer willing to cover Allied Trust for as many perils as before. They required Keefer's company to pay a higher retention — essentially a deductible before their coverage kicked in. And the rates he had to pay were soaring. Some parts of the reinsurance package were so expensive that Allied Trust, like other companies, took on more of the risk itself.

Allied Trust and the other private insurers who have remained active in south Louisiana increased rates dramatically as a response. And the cost increases have turned into a full-blown crisis in many south Louisiana communities. Some are having trouble selling homes they can no longer afford. Others are dropping coverage entirely, risking their nest egg the next time a hurricane hits.

By 2023, Allied Trust was paying $240 million to reinsurance companies for its coverage. That same year, it only took in $230 million in premium dollars. It was going to lose money even if it didn't have to pay a single claim.

"Now you wonder why your insurance costs are going up," Keefer said.