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90% FHCF participation will have a “positive impact on reinsurance pricing,” Heritage CEO

5th March 2019 - Author: Luke Gallin

Heritage Insurance Holdings, Inc. has doubled its Florida Hurricane Catastrophe Fund (FHCF) participation to 90%, a move the insurer expects others to follow and one that is likely to have a very positive impact on reinsurance pricing, according to Chairman and Chief Executive Officer (CEO), Bruce Lucas.

Heritage Insurance logoSpeaking during the Florida headquartered property casualty insurer’s fourth-quarter and full-year 2018 earnings call, Chairman and CEO Lucas provided an update on the firm’s reinsurance use.

He explained that while it will take another month or two before its reinsurance tower is complete, Heritage has increased its FHCF participation from 45% to 90%.

“In my opinion, I do believe you are going to see most of the Florida carriers move to a minimum of 75% if not 90% across the board, due to uncertainties around reinsurance pricing,” said Lucas.

According to Lucas, were everyone in the market to adjust their FHCF participation to the 90% mark, it would result in roughly $3 billion of open market capacity that would usually be assumed by the private market, but instead will be removed from the space as a result of increased FHCF participation across the state of Florida.

“We think that will have a very, very positive impact on reinsurance pricing as we move throughout this program,” said Lucas.

By doubling its FHCF participation, Heritage is essentially securing reinsurance pricing at “incredibly modest rate increases”, when compared to what is potentially available in the private marketplace.

“So, it serves as a pretty big hedge on year-over-year price increases for the reinsurance tower,” added Lucas.

“Our position prior was that you should use the cat fund as a hedge. And so, if reinsurance rates are incredibly low, and you can bind private layers at or below the cat fund cost, you should go to 45%, and then use the cat fund at 90% in the event that there is a hardening event in the reinsurance market that could potentially move rates higher,” he explained.

Reinsurance market dynamics remain challenging, underpinned by ample available capacity from both traditional and alternative sources. While rates increased in some areas at the key January renewals, most in the market have noted disappointment at both the level and sustainability of the post-event price hikes.

Many in the sector are hopeful of more meaningful and lasting rate increases at the April and mid-year renewals, driven by the fact much of the loss-affected business in Japan and the U.S. is up for renewal during these times.

But regardless of what might happen as the market moves through 2019, there is uncertainty surrounding reinsurance pricing, which is pushing the likes of Heritage to take action in order to mitigate the uncertainty.

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