As issues continue to plague Florida’s property insurance market, there’s a risk that many programs will not be fully placed at what appears to be a very late June 1st, 2022, reinsurance renewals, according to analysts at KBW.
After meeting with re/insurance industry executives on day one of its Bermuda tour, analysts at KBW have determined that, by all accounts, “this year’s June 1 reinsurance renewals are very late, and many programs risk not getting filled.”
Reinsurer appetite for Florida property catastrophe risk has faded in recent times as the state battles rising litigation and fraudulent claims, alongside an active period for storms. While reinsurers have been seeking more rate to account for the heightened exposure, lower layers of programs are expected to be very tough to fill as sellers of protection look to move up the tower and avoid the riskier layers.
In fact, one executive noted reduced reinsurer appetite for the risk at essentially any price, with capacity down in 2022 as those that pulled back from the Florida property cat market resist the temptation to reverse course despite rising rates.
For these lower layers, KBW says that some rates-on-line (ROL) will likely come in at or above 100%.
As our readers will be aware, Florida’s governor called a special session to debate a range of bills designed to stem the tide of litigation and fraudulent claims in the state, and also address the more immediate reinsurance needs of domestic carriers.
However, virtually all of the executives KBW spoke with doubt that the special session, which convened earlier this week, “will materially impact either rate trends or reinsurers underwriting appetites for the June 1 renewals.”
Although, analysts do suggest that the Reinsurance to Assist Policyholders’ program could provide some capacity for the “difficult-to-place lower layers.” This is essentially a $2 billion, state-backed fund structured as a lower layer of reinsurance to sit below the Florida Hurricane Catastrophe Fund (FHCF), effectively lowering the FHCF attachment without adjusting the fund itself.
The Reinsurance to Assist Policyholders’ fund is one of the proposals that has passed the first hurdle and moved onto the Senate. And, while it’s unclear whether it will attract reinsurance capacity, it’s promising to see legislation making quick progress.
On rates specifically, KBW says that all the execs it met with yesterday anticipate Florida property catastrophe price rises “well above the January 1, 2022 renewals’ low double-digit pace.” One of the executives estimated a 20% risk-adjusted average rate increase, with substantial variance by loss experience, geography, and reserve development history.
Others went further, describing a 90% ROL as completely rationale, with even 100%+ ROLs making economic sense because of the automatic reinstatement, report analysts.
At the same time, executives “do not expect the major European reinsurers to materially disrupt this year’s hardening Florida market.” This reflects the fact that while overall the appetite for catastrophe risk among Europe’s big four reinsurers is on the rise, it seems to be focused outside of the State of Florida.
Unsurprisingly, Russia’s invasion of Ukraine was discussed by analysts and the Bermuda-based executives, with several of the latter noting an expectation of “very significant” reinsurance rate rises for lines such as marine, cargo, aviation, and political violence.
“Reinsurers are repricing – and in many cases restructuring – exposed products, especially (generally London-based) contracts that cover bundled niche products via composite covers, through which some Russia- related losses are creeping into retrocessional programs,” say analysts.
The cyber market was also discussed by the KBW team and Bermudian execs, given the fact recent volatility in this line has led to a decline in reinsurer appetite.
“We expect individual (re)insurer strategies to diverge; one executive reported a preference for larger, more sophisticated insureds that have active risk management processes, while others are likely to focus on smaller accounts with accompanying smaller limits,” says KBW.
For the most part, the executives KBW met with yesterday prefer to expand in primary insurance than within traditional reinsurance, which they say is a reflection of lower earnings volatility seen in insurance, rising ceding commissions, and previously-lagging reinsurance rate increases.
“More positively, another executive noted growing recent pushback against rising ceding commissions in light of slowly decelerating primary insurance rate increases, although with several reinsurers shrinking their capital-consumptive property catastrophe books, we expect sustained competition – via ceding commissions – for more attractive primary lines with much-improved expected returns, like D&O, excess casualty, offshore energy, and other lines.
“As has happened in all past pricing cycles, currently-decelerating primary rate increases should eventually evolve into rate decreases, but that still seems far off. To date, (re)insurers reportedly remain broadly disciplined and focused on financial and social inflation, rising reinsurance costs, and the potential for elevated and unexpected catastrophe losses,” say analysts.
