Complacency a factor in ‘undisciplined’ Florida reinsurance market

Some reinsurers in Florida may have become complacent on the back of a period of light reinsurance industry catastrophe losses, leading to a reduction in discipline on pricing, terms and structures, suggested Montpelier Re CEO Chris Harris recently.

The subject of discipline and whether reinsurers in regions where alternative capital has the largest impact, such as Florida, are becoming less disciplined as they compete strongly to hold onto valuable property catastrophe business, was raised during the Montpelier Re first quarter earnings call.

The level of discipline among traditional rated reinsurers and their third-party capital backed ILS and collateralized reinsurance counterparts has featured in a number of reinsurer earnings calls this quarter.

First Ed Noonan CEO of Validus Holdings said that there is some evidence of discipline waning among ILS managers operating in Florida. Next RenaissanceRe’s CEO Kevin O’Donnell said that at a macro level there is evidence of discipline being lost and risk being priced inadequately in the reinsurance market.

The next to discuss this topic was Montpelier Re, whose executives were questioned during the firms first quarter earnings call at the end of last week about their opinion on how the increasing pressure on pricing and terms are being dealt with in the Florida reinsurance market.

First Chris Schaper, President of Montpelier Reinsurance Ltd., discussed reinsurance demand, saying; “For Florida, we’re certainly seeing greater limits being requested, frankly, from different cedants. Some of those cedants are existing firms and some are new within the State of Florida and so demand is actually up a bit. That being said, certainly supply is there to take care of that.”

Next Schaper referred to the high levels of competition for that business in Florida; “Rates are under pressure, competition is significant and both, I would say, ILS or collateralized businesses as well as the rated businesses are competing, in some cases for the same business, but generally in different parts of the overall structure. But either way, it is a competitive environment there in Florida.”

On the subject of discipline and whether it is being eroded in the current highly competitive reinsurance market environment, Schaper said that there is evidence of a lack of discipline among some, but it does depend on what part of the market they are playing in and it is not restricted to ILS or third-party capital backed firms.

“As far as third party capital, it depends. Some are being, I would say, more disciplined, others are not. It depends on where they’re focused. We’re seeing, some are more focused on the retro space, some are not focused specifically there. So it just depends, it’s a dynamic market right now without a doubt and you’re kind of seeing a blend of some disciplined and undisciplined players in both the collateralized space as well as the rated space,” Schaper explained.

President and CEO of Montpelier Re Holdings Chris Harris then raised a very good point, that the reinsurance market has not suffered any major catastrophe loss impacts in recent years and this may have led to complacency among both traditional and non-traditional players.

Harris said; “I would describe it as, we’ve come out of a period of relatively light industry catastrophe activity and I think there is some level of complacency in the market and you’re seeing that reflected in pricing pressure and pressure on terms and structures in some cases.”

It has often been said that reinsurers have a tendency to suffer from short memories and that it only takes a very short time for them to forget heavy loss years and to bulk back up on risk, not always at the most attractive pricing.

There is certainly an element of this in the current market environment with some players, both in the traditional reinsurance space and the collateralized or ILS space, seemingly willing to take on risk at levels that other deem unattractive.

Of course there is the cost of capital to factor in as well. Some of the third-party capital backed ILS specialists have considerably lower frictional costs than their much larger reinsurance counterparts, making them very hard to compete with on price alone.

But perhaps the complacency created following a number of years without a major hurricane impacting Florida is having a bigger impact on discipline than we think? Combine complacency with high competition and new capital which underwrites with a lower cost-of-capital and it’s easy to see how complacency could be another factor that is fueling the fire for some to compete ever more strongly on price, terms and structures.

Harris closed the call by explaining how Montpelier Re will approach the upcoming reinsurance renewals in a competitive market; “When you’re in an environment like that I think it is very important that you stay focused on managing your risk profile and that’s certainly something that we’re focused on at Montpelier. When you’re in the that environment, picking your clients and making sure the predictability and the persistence of your portfolio is high is very important and that’s really what we’re going to be focused on as we go through this mid-year renewal season.”

Montpelier Re, it seems, is determined to be anything but complacent.