New Florida reinsurance demand could generate $300m of premium

The increased need for reinsurance coverage resulting from new initiatives aiming to put more of the risk in the private or ILS market will amount to around $318m of new premium income to be split between traditional reinsurers and third-party capital, say analysts.

Analysts from the equities research team at Macquarie USA, led by Amit Kumar and Emily Gadsden, suggest this figure as the likely total new reinsurance premiums resulting from the continued depopulation of Florida’s Citizens Property Insurance, the new reinsurance buying appetite of the Florida Hurricane Catastrophe Fund and the Florida Clearinghouse initiative.

The clearinghouse alone could result in an estimated reinsurance premium of $66m, if around 100,000 policies move out of Citizens and back into the private Florida property insurance market, according to the analysts. They estimate that around half of this would end up in the hands of traditional reinsurers, with the rest going to the ILS and third-party reinsurance capital market.

The ongoing depopulation of Citizens, which sees large chunks of policies passed onto new or established insurers with a desire to take on more risk in the state, could result in another $99m of reinsurance premium coming to the market. Again, around half would be expected to go to traditional reinsurers in the current environment, with the remainder going to alternative reinsurance capital investors and providers.

The Florida Hurricane Catastrophe Fund’s reinsurance buying needs may result in as much as $153m of premium income, split as $101m to traditional reinsurers and the rest to the alternative market, due to third-party capital being effectively cheaper, by Macquarie’s analysts reckoning.

According to the analysts estimates those three initiatives could bring $318m of new premium income to traditional reinsurers and alternative capital or ILS players over the course of 2014, which will be welcomed by both sides of the market at this competitive time.

The Macquarie analysts estimate that traditional reinsurers will see approximately $183.8m of this new premium income, while the remaining $134m of premiums, or so, would be absorbed by insurance-linked securities and third-party reinsurance capital.

Macquarie also notes that Citizens is set to renew a good amount of its reinsurance program in 2014 and it has expressed a desire to leverage the capital markets for as much as 50% of this limit (a new Everglades Re is possible this year). Macquarie notes that there is considerable uncertainty in this mix, the appetite of capital market investors is sure to drive some of this uncertainty.

Citizens has budgeted $200m to renew $1.6 billion of its reinsurance program in 2014. Macquarie believes it may get that limit for a lower cost due to the price declines on property catastrophe lines of business. Macquarie estimates that the renewal will bring traditional reinsurers another $108m of premium, while third-party capital will take $55.6m for this renewal.

The numbers are all based on estimates made by Macquarie’s analysts using the limit required, or an estimate of this, and average rates on line for traditional reinsurance versus third-party backed fully-collateralized reinsurance capacity.

With so much limit required and the potential for so much new premium to be available it is expected that the competition for signings may increase again. It will be interesting to see how this plays out at the Florida renewals towards the middle of the year and whether the new premiums help to encourage further growth of the ILS and third-party reinsurance capital market.