Florida insurers’ combined ratios up on lower rates & attrition in 2016

by Artemis on January 4, 2017

The combined ratios of Florida domestic insurance firms rose by around 13% on average in the third-quarter, as the impact of continuing rate declines and attritional non-catastrophe weather losses hurt the sector, which suggests more reinsurance support was or will be required.

According to insight from brokers at Guy Carpenter, provided to Artemis by market sources, the Floridian domestic insurance market has been suffering from the impact of attritional losses in 2016.

The prevalence of non-catastrophe losses, due to severe weather, thunderstorms, hail, tornadoes and rainfall events, on top of the impact of hurricanes Hermine and Matthew which both struck the state, is set to stress Floridian direct property underwriters in particular in 2016.

The insight from broker Guy Carpenter suggests that Q3 2016 saw the average combined ratio of a direct Florida writer rising by 13% to 105.1% on a net basis, while net losses and loss adjustment expenses ratios reached 63.8% which was an increase of almost 11%.

With hurricane Matthew coming in early Q4 2016 a similar experience is to be expected in the fourth-quarter results of these insurers, with a number of other attritional events also being seen around northern Florida in early Q4 as well there is an increasing chance that attritional non-catastrophe losses and Matthew combined will have increased aggregate losses for some players.

How that impacts reinsurance markets is yet to be seen, but Artemis understands that there are some Florida aggregate covers which have neared attachment points. With insurance-linked securities (ILS) markets participating in a number of these it is as yet uncertain whether there could be the chance of any calls to hold collateral at year-end.

It’s not just Florida domestic insurers, but also those focused on property risks in states such as Texas, the Carolina’s, Georgia, Lousiana and others as well, after a year of attritional weather and non-catastrophe losses served to raise combined rations

Of course the Gator Re catastrophe bond is a prime example of an annual aggregate reinsurance cover that has been creeping nearer to its attachment point in recent months and one that is exposed not just to Florida, although that is where a good percentage of the losses have been suffered for the ceding insurer.

Gator Re’s qualifying aggregate losses have now passed the trigger point by $20 million and as we revealed earlier today a $35 million partial extension notice has been filed.

Aggregate multi-peril or all natural peril reinsurance covers are increasingly popular among small and mid-sized U.S. domestic insurers, providing a way for losses to be capped over a calendar year and a flexible source of additional reinsurance that can sit alongside occurrence covers for major catastrophe losses.

With these covers having become more popular in recent years, the ILS fund market is increasingly exposed to non-catastrophe losses and severe weather events, making the year-end a time (particularly in 2016) when some managers will be awaiting final loss reports to give them certainty that collateral can be released.

We saw this at the end of 2015 as well, as a number of aggregate reinsurance layers reached very close to their attachment points at year-end resulting in some uncertainty surrounding the likelihood of losses being faced.

2016 looks set to see a similar number of aggregate programs needing the full-year loss figures to be released before ceding companies will be happy to see collateral withdrawn and released.

Of course a year that sees lower profitability from Florida primary insurers, due to decreases in rates and higher attritional non-catastrophe losses, could result in a greater reliance on reinsurance capital next year and a further increase in use of aggregate coverage.

That would be positive for the ILS market going into 2017, with alternative capital already taking a significant share of available reinsurance programs, the impact of attritional losses and higher combined ratios may result in even more opportunities for the capital markets this year.

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