Analysts at JMP Securities have warned that the upcoming June 1 Florida reinsurance renewals are set to be “one of the toughest in recent memory,” as conditions in the state continue to be regarded as unsustainable.
Last week, rating agency Demotech suggested that up to 20 Florida carriers could be downgraded in the coming weeks, and called for urgent legislative reforms to address insurance challenges in the state.
Suggested reforms would aim to minimise litigation, address The Florida Hurricane Catastrophe Fund’s suspension of a rapid cash build-up, and improve the Fund’s capability to provide lower level attachment points to maintain the net catastrophe retentions of carriers at a reasonable level.
“It is no secret that the Florida homeowners’ market is in a very difficult spot,” JMP Securities wrote in a new report.
“The issue lies in the very structure of the Florida market,” it continued. “Many primary insurers rely on the availability and affordability of low layers of reinsurance protection – the very layers that have been destroyed by the recent elevated frequency of loss events, which has led to reinsurers running away from these layers as quickly as possible.”
With pricing of these lowest layers already running at around 50 ROL in many instances, analysts warn that the further meaningful price increases that reinsurers desire to retain the risk simply cannot be afforded by the insurers, who do not have the capital to retain the risk net.
JMP Securities believes many reinsurers are seeking ROLs in the 60 to 70 range to expose capital in the lowest layers.
However, it notes that, if Demotech were to downgrade a sizable number of companies, it could work to tip the supply/demand imbalance slightly back in favour of the insurers.
Analysts conjecture that many of these policies would end up at Citizens Property Insurance Corp., which does not purchase nearly the same amount of private market reinsurance as do the insurers in question.