Demotech sends warning to Florida carriers that rely on reinsurance

Florida carriers should not expect any leniency, when it comes to assessing their financial strength, if their catastrophe reinsurance costs rise, Demotech, Inc. warned.

With the price of catastrophe reinsurance for the Florida market having softened to record lows in recent years, but hurricanes buffeted the state in the last two, Demotech wants to see that primary insurers operating in the state don’t scrimp on their reinsurance provisions.

With many of Florida’s primary carriers operating a strategy that sees them heavily reinsured, both from the traditional reinsurance market and increasingly ILS players, any change in pricing at the next renewal season could affect the ability of some to sustain their business models.

Demotech warned today that Florida carriers should not expect it to relax its reinsurance requirements, should costs increase.

Carriers currently cede as much as 40-60% or even more of their gross written premiums to reinsurance and ILS partners, Demotech explained.

This enables them to secure “meaningful levels of catastrophe reinsurance protection” but this has been at very attractive pricing for a number of years now.

With losses from Florida having hit reinsurers and the ILS market in the last two years, after hurricanes Matthew, Irma and Michael, there is now a concerted push for higher reinsurance pricing at the next Florida renewals in June 2019.

Irma from 2017 in particular has driven a significant loss, as well as ongoing loss creep, which has hit reinsurers and ILS players hard and resulted in a desire to see rates increase.

Hurricane Michael, which struck Florida in 2018, was a smaller loss, but still meaningful enough on the back of 2017’s losses.

The two consecutive year’s of Florida hurricane losses and the significant loss creep has been enough to steel the resolve of reinsurers and ILS funds and this looks set to result in at least some rate increases at this year’s renewals.

But carriers operating a heavily reinsured strategy may find the additional costs a shock to the system, but Demotech warns that they should be prepared as its expectations will not change when it comes to assessing them for their ratings.

“Should the cost of catastrophe reinsurance increase suddenly or markedly, the business models of several insurers will collide with a financial reality that impinges on their ability to sustain the Financial Stability Rating® currently assigned,” Demotech warns.

Should this give reinsurers and ILS players the confidence to raise rates? Perhaps, as it suggests buyers will have to continue to buy their protection to maintain their reinsurance buffers.

But it perhaps also suggests that there are carriers who may require more protection as well, as Demotech says some carriers have been required to infuse capital after the losses and it’s possible others may need to buy more protection as a result.