Reinsurers have thus far failed to impose meaningful pricing differentiation on Florida-focused insurers, according to financial analysis firm Demotech, but must do so to avoid the further commoditisation of catastrophe risk.
Analysts noted that reinsurance and insurance-linked securities (ILS) may boost short-term profits by applying price increases across the board, but will dis-incentivise primary insurers to outperform the mean in catastrophe lines.
From a consumer’s perspective, such commoditisation can already be observed in personal lines automobile insurance (35% of the U.S insurance marketplace) and homeowners insurance (nearly 20% of the U.S marketplace), Demotech claimed.
“Which carriers have walked the walk that they described over the past decade?” Demotech queried.
“If 2019 reinsurance costs fail to discern between the primary insurers that walked the walk versus those that talked the talk, the valuable information available from the reality of the impact of the storms of 2016, 2017, and 2018 may have been collected for naught.”
Without the incentive for price differentiation, analysts suggested that Florida-focused insurers may lack the incentive to implement loss mitigation initiatives, enhance data quality, and reward their clientele with appropriately differentiated premium levels.
However, Demotech added that reinsurers have new tools for 2019 pricing that were not available previously, including the data to underwrite, differentiate and influence future cedant results, a lower level of risk on loss adjustment expense, and assignment of benefits (AOB) reform.
Changes to AOB legislation in particular are likely to reverse the continued rise in consumer premiums and significantly lower insurers’ loss adjustment costs, adding some stability to their claims paying capability, particularly in the event of catastrophe event.
“While the extent to which these CAT Fund and AOB savings will not be known with certainty for years, it is a certainty that exposure to catastrophic event risk is now significantly lower,” Demotech stated.
“The cost of reinsurance providing claims paying capability to insurers in the event of catastrophic events should be priced based on a view of risk which reflects these recently enacted measures.”
“With steps forward from the fractured judicial and financial metrics of the past headed toward signature by Governor DeSantis, Demotech’s resultant view of CAT risk will factor in our view of primary insurers’ total risk, balancing the price and quantity of the reinsurance they secure,” the firm concluded.