Analysts at regional and specialty insurer-focused financial analysis firm, Demotech, Inc., expect Floridian property insurers’ 2018 results to include further loss and loss adjustment expense reserve hardening.
At the same time, the firm warns that regardless of any changes to the cost of catastrophe reinsurance protection, it will not relax its reinsurance requirements for the 52 Florida carriers it both reviews and rates.
Demotech has reviewed the anticipated year-end 2018 financial results for its universe of Florida-focused property insurance companies, and has discussed a number of observations.
Prior to 2017 and the impact of Hurricane Irma, more than a decade had passed without a major (Category 3 or higher) hurricane making landfall on the Florida coast. Irma served as a reminder to the industry that large loss events are a matter of when and not if for the re/insurance industry, a notion further supported by the impacts of Hurricane Michael in 2018.
As if the direct impacts of the property damage caused by Irma and Michael aren’t enough, the region has a severe issue with assignments of benefits (AOB) and other judicial precedents, which, according to Demotech, is expected to result in additional loss and loss adjustment expense reserve strengthening.
“Carriers have had several years to adjust to the difficult operational environment associated with assignment of benefits (AOB) and other judicial precedents that expanded insurer liability and resulted in Florida being named the top Judicial Hellhole by the American Tort Reform Foundation (2017-2018).
“Demotech has consistently prodded many carriers to move their loss and loss adjustment expense reserve selection from the midpoint to the upper end of their actuary’s range of results,” says the firm.
Analysts continue to note that in mid-2018, it advised numerous carriers in Florida to fix their adverse reserve development, adding that in order for this to happen, 2018 year-end results need to show significant reserve development.
As Irma and the subsequent loss creep experienced by some market participants shows, most notably insurance-linked securities (ILS) funds, catastrophe losses, and especially large ones such as Irma, take time to develop. And when issues such as AOB further complicate and prolong the ultimate loss development, companies need to be mindful of their reserving practices.
“Expect capital contributions to offset reserve strengthening. Carriers that increased their loss and loss adjustment expense reserves were required to infuse capital to maintain policyholder’s surplus at a level that sustains the Financial Stability Rating,” says Demotech.
Interestingly, analysts also turn their focus to Floridian insurers’ reinsurance utilisation. Advising that regardless of any change in the cost of catastrophe reinsurance protection, Demotech “will not relax our reinsurance requirements”.
Despite very high levels of cat losses in 2017 and then lower, but still above-average levels of cat losses in 2018, the reinsurance market remains a buyers’ one, underpinned by a supply / demand imbalance and intense competition from both traditional and alternative sources, ultimately driving a soft market environment.
“Despite a market characterized as soft, carriers currently cede 40-60% or more of their gross written premium to secure meaningful levels of catastrophe reinsurance protection. Should the cost of catastrophe reinsurance increase suddenly or markedly, the business models of several insurers will collide with a financial reality that impinges on their ability to sustain the Financial Stability Rating currently assigned,” says Demotech.
After a January 2019 renewal season that has been described by many participants as disappointing, the April and mid-year renewals are expected to result in greater reinsurance price rises, at least for the loss-affected lines in Japan and the U.S.
