Floridan primary insurers handle major catastrophe losses particularly well, especially the specialist underwriting firms who focus on coastal and catastrophe exposed property business. But a hurricane industry loss of greater than $100 billion would trouble the sector.
Insurance and reinsurance broker Aon says that the Florida specialist P&C insurers are adept at attracting capital, have strong oversight through their ratings process and make use of reinsurance and the Florida Hurricane Catastrophe Fund (FHCF) to help them outperform in catastrophe years.
But this out-performance only seems possible as long as they do not blow through the top of their reinsurance towers and the broker warns of the potential for failures if a really major loss event occurs.
Aon says that the Florida domestic market specialist insurers business model, of carefully leveraging their balance-sheets and buying a lot of reinsurance protection, results in little in the way of net catastrophe exposure and helps them deliver double-digit returns most years.
Aon said that based on $6+ billion of premium volume, it models Florida specialists delivering as high as 17% returns on equity (RoE) in year’s where no hurricane impacts occur.
Even with a landfalling hurricane, or two, these insurers can still manage positive RoE’s, due to the protection provided by their own reinsurance and also the FHCF coverage they all buy.
“The rewards are bountiful,” Aon explains, but warns that there are two major risks to these specialist Florida property underwriters.
First is unsurprisingly the issues related to claims litigation and assignment of benefits (AOB), which creates loss inflation for them (as seen with hurricane Irma) and puts pressure on expense ratios for claims management and adjustment.
Of course, while AOB claims inflation is an overhead the actual costs of it can be passed onto reinsurance providers in many cases, again as seen with hurricane Irma and the ongoing loss creep experienced by traditional reinsurers and ILS funds.
The second major threat is one where reinsurance may not be able to help Floridian primary insurers, as it is the risk that a major hurricane loss causes them to exhaust the reinsurance they have purchased, leaving them exposed to huge losses with little additional financial support.
“Many insurers might survive a $100 billion industry event but survivability drops precipitously for some on losses above that level,” Aon explained.
On the flip side, the Florida units of national insurers may survive such an extreme hurricane loss more readily, given their reinsurance typically kicks in higher up.
These companies are more conservative underwriters in the state, but do not benefit from reinsurance for smaller storms, as their treaties kick in at higher levels of loss to the insurers.
But Aon ponders, “If or when a monster hurricane tests the claims-paying ability of the Florida specialists, will the market reward this strategic stance?”
But of course the Florida domestic specialists may find recapitalising relatively straightforward following a $100 billion or greater hurricane industry loss, as the promise of higher rates would likely lure in capital to support them.
But they would likely need to upsize on their reinsurance as well, to help them trade forwards, providing opportunity for the ILS market as a key provider of collateralized and fronted capacity for the Florida domestic insurance market.
Reinsurance availability is key to the Florida specialists ability to survive then, under a scenario that would significantly impact their capital base and see them draw down fully on their reinsurance.
Hence it’s no surprise that these insurers are increasingly tapping the capital markets, through catastrophe bonds and collateralized reinsurance, a trend that is likely to continue as their partnerships with ILS funds and investors expand.
It is noteworthy though, that a $100 billion hurricane industry loss would be more than twice the size of hurricane Andrew in today’s dollar terms, so it would be a really significant event and therefore it’s no surprise it would shake up the sector.