Cheaper reinsurance and cat bonds allows Citizens to lower rates

Florida’s Citizens Property Insurance Corporation, which managed to purchase $1 billion of additional reinsurance protection in 2014 for lower spend than in 2013, is set to lower seven out of ten of its primary insurance customers rates in 2015.

Citizens cites the cheaper reinsurance, saying that global market conditions have made it possible to buy reinsurance at increasingly reasonable rates. As a result, on top of its improved surplus of $7.3 billion, Citizens has more protection from storms than in any other recent year.

Citizens said that as well as the required capital to pay claims being lower the cost to access that capital is lower too, helped by its surplus and risk transfer, hence the ability to recommend lower insurance rates for many of its customers.

Citizens said that it is committed to accessing global reinsurance and private risk transfer markets as a way to lower the amount of any assessment that became necessary during the storms season. However it notes that after a major storm an assessment on taxpayers and customers may still be necessary, highlighting that no matter how much protection it buys Citizens exposure is still much greater.

Citizens explains:

Due to lower rates for traditional private reinsurance and catastrophe bonds, Citizens was able to transfer substantially more risk away from Florida policyholders (including non-Citizens policyholders, who would pay emergency assessments if storms caused significant deficits) without a significant impact to the rate indications.

Last year, Citizens transferred $1.851B of Coastal Account risk to private investors and reinsurers at a net cost of $253M. This year, Citizens transferred $3.269B of Coastal Account risk to the private sector at a net cost of $191M.

“Net cost” refers to the gross expenditure on risk transfer less the expected hurricane losses that would be subject to the agreement. The 2014 net cost represented around 9.8% of the total premium from the 2014 indication. The 2015 net cost represents 9.0% of the total premium from the 2015 indication.

So while the amount of private reinsurance purchased has increased from last year to this year, the net costs, and thus the impact to the 2015 indication, actually decreased slightly.

The savings made are significant and put Citizens in the best financial state at the beginning of the hurricane season in recent years. Citizens has been helped significantly by the lack of Florida hurricane impacts in recent years, which have resulted in its increased surplus and contributed to the lower reinsurance rates.

Of course the high levels of traditional reinsurance capital have had a major bearing on the trajectory of Florida catastrophe reinsurance pricing in 2014, as has the continued strong interest from the capital markets and alternative reinsurance capital.

Citizens topped its 2014/2015 reinsurance programme with the record sized $1.5 billion Everglades Re Ltd. (Series 2014-1) catastrophe bond, which secured it a layer of protection considerably cheaper than its previous cat bond issues had managed.

The combination of higher surplus due to lower storm claims in recent years, cheaper traditional reinsurance capital due to lower catastrophe losses in the global property catastrophe reinsurance market and more abundant alternative reinsurance capital have come together to put Citizens in a position to promise rate decreases to its customers.

How long those rate decreases last will depend on the 2014 Atlantic Hurricane Season and whether any storms impact Florida this year. If they do the rate decreases could be short-lived and reinsurance capital could become a more expensive commodity for Citizens again. How much more expensive is the question…

It’s worth noting that a cheaper insurance rate for homeowners does not necessarily equal lower cost of insurance as with inflation raising construction and rebuilding costs the actual premiums paid could even be higher for some of Citizens customers.