Reinsurance News

Reduced Florida exposure the “most prudent course” despite higher rates: Hiscox

15th June 2020 - Author: Luke Gallin

Despite reports of some meaningful rate increases across the property catastrophe reinsurance sector at the mid-year renewals, Hiscox’s Ross Nottingham has warned that improvements could be offset by the rise in the cost of risk in Florida.

florida-stormAfter consecutive heavy loss years, some fairly significant loss creep and low interest rates, coupled with the impacts of the COVID-19 pandemic, reinsurance rates reportedly trended in a positive manner at the mid-year renewals, with rises of 20% – 30%, or more in some instances.

The June 1st renewals has a focus on the Florida marketplace, and while rate increases will be welcomed by reinsurers after a prolonged softened market state and subsequent pressured returns, the improvements might not be sufficient to account for the increased risk in the region’s market.

This is according to Ross Nottingham, Chair of North America at Hiscox Re and ILS, a division of global insurer and reinsurer Hiscox, who in a recent blog post notes that in spite of rising rates, Hiscox Re has cut back its reinsurance exposure in Florida.

“Why? Because these increases haven’t yet covered our own view of the increased risk in the Florida market which suggests that the amount of risk going into these programmes is a lot higher than thought last year,” says Nottingham. “That means you might get a 30% increase on the programme, but if you’ve measured the risk to the layer and established that it’s potentially worth 40% more in premium than it was last year, the margin has in fact decreased.”

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According to Nottingham, the increases being seen in the Florida market in 2020, while positive, are barely covering the additional risk that is out there as evidenced by the substantial levels of adverse loss development on prior year events.

“And what’s continuing to drive loss creep? The villain of the piece is social inflation – a factor not yet captured in the vendor cat models the industry benchmarks for measuring hurricane risk.

“Social inflation comes from a variety of sources ranging from Assignment of Benefits (AOB) litigation, to loss adjustment inflation. Hiscox research on social inflation reveals that, what was once thought to be a principally Tri County phenomenon, now applies to other counties incorporating key cities Orlando, Tampa, and Fort Myers. This is likely to be due to denser populations and in particular, a high percentage of tiled roofs which correlate with inflated claims because often, if a few tiles are damaged, a claim is made to replace the full roof,” explains Nottingham.

Social inflation occurs when courts increasingly side with plaintiffs in claims against corporations, which for insurers and reinsurers can translate to higher litigation costs and adverse impacts on claims payouts and loss ratios.

Of course, AOB abuse has been mitigated somewhat by a recent reform bill. But ultimately, warns Nottingham, this reform is expected to have a limited impact on catastrophic claims being litigated and related inflation of a claim once lawyers start to get involved through other avenues.

“Despite insurers’ best efforts to change their original policy forms or to de-risk in the worst performing areas, it is expected that AOB or equivalent abuse will continue after the next big loss event,” says Nottingham. “Two years ago, the market thought the physical attributes of Irma were akin to a one in ten-year event. The loss now – with the advent of social inflation fuelled loss creep – looks more like the cost of a one in twenty-year event, but there is no new science to show the expected vulnerability or hazard has changed.”

Another important element impacting reinsurance rates this year is the ongoing COVID-19 pandemic, which, Nottingham says hasn’t been factored into pricing for the months ahead.

Forecasters predict an above-average level of hurricane activity in the Atlantic in 2020, which coupled with the unprecedented impacts of the virus outbreak, presents some unique challenges for the industry.

Unsurprisingly, hurricanes and pandemics are not the best mix, and with the 2020 Atlantic hurricane season now officially underway, there’s a real concern that claims from any major event will be exacerbated by numerous factors, including hindered preparation and mitigation efforts as a result of COVID-19-related restrictions.

“Model vendor companies project that these costs could be 10-20% greater than genuine claims, which is often not baked into pricing, although perhaps taken into account by reinsurers when considering line sizes and how much capital to deploy,” says Nottingham.

Ultimately, Nottingham feels that many reinsurers will conclude that Florida property cat risk is not being adequately priced for in the sector.

“Price of course is not the only factor that a prudent reinsurer will consider. At Hiscox, we will look at other criteria that reflect the quality of the risks a cedant is taking on and what they are doing to reduce their own exposure to social inflation through, for example, their claims capability.

“It should never be a one size fits all product and client segmentation is a core part of our philosophy. But, unless there is a significant change to the social inflation trend, reducing the overall bet on Florida seems the most prudent course until pricing can better reflect the true cost of risk,” says Nottingham.

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