Rising reinsurance costs could pose a major hurdle for carriers in Florida, according to A.M. Best, potentially diminishing earnings and pushing companies into looking at more alternative risk transfer options.
The rating agency noted that the cost benefit of doing business in the state has changed considerably in recent years due to the higher frequency of severe weather, as well as rising loss costs attributed to assignment of benefits (AOB) and litigation issues.
While recent AOB reform bills have helped to relieve pressure, some sources report that reinsurance pricing has risen by an average of 15-20%, with even higher increase for more loss-affected insurers.
The change in pricing is also likely to be much more individualised than in years past, analysts said, as reinsurers are placing greater emphasis on performance, loss development, program mix, and quality of risks.
A.M. Best believes that higher reinsurance costs may result in carriers exploring more cost-effective options to secure protection, such as insurance-linked securities (ILS) and alternative risk transfer mechanisms such as catastrophe bonds.
Similarly, several insurers have elected to increase their participation rate with the Florida Hurricane Catastrophe Fund (FHCF), with more opting for 90% participation, as the cost is more desirable than what is currently being offered by reinsurers.
Higher reinsurance costs are likely to diminish potential earnings and strain the operating performance of many Florida property writers, A.M. Best added, who spend a considerable amount on reinsurance because of inherent hurricane risk.
Analysts suggested that those with stronger risk-adjusted capital or flexible reinsurance programs will be better prepared to face any significant changes in reinsurer pricing or appetite.
“The Florida insurance market has proved challenging, with a revolving door of issues stemming from an increase in the frequency of hurricanes, to sinkhole losses of years past, to more recent AOB activity,” A.M. Best stated.
“Although regulation can take considerable time to pass, the state legislature has proven responsive to pressures,” it added. “Issues in Florida have forced carriers to remain nimble in strategy and proactively manage several forms of risk, with rising reinsurance costs potentially being the next event on the horizon.”