Floridian insurers are better protected with catastrophe reinsurance than in the early 1990’s pre-hurricane Andrew, thanks to the use of both vertical and sideways protection, according to financial analysis firm Demotech Inc.
In advance of the 2015 Atlantic hurricane season, Demotech believes that homeowners insurers in Florida have “superior” protection in place. This is no doubt helped by the competitive reinsurance market and the softened state of Florida property catastrophe reinsurance prices.
Demotech has released a preliminary assessment of the preparedness of 56 Florida property insurers that it reviews and rates and concludes that they can withstand a severe hurricane season, featuring a 1 in 100 year storm, thanks to superior reinsurance purchasing.
Catastrophe reinsurance purchased by the 56 insurers includes sufficient protection to for a “first event probable maximum loss to a 100 year event with a second event probable maximum loss to a 1 in 50 year event as determined by modeled results.”
Demotech puts this in perspective by noting that hurricane Andrew in 1992, at the time the costliest hurricane to hit the U.S., was a 1 in 40 year storm.
Joseph L. Petrelli, President of Demotech said; “More than twenty years after Andrew struck Florida, many citizens and some of those who author articles on insurance topics remain traumatized by its impact. Clearly, Andrew was a sentinel event for Floridians.”
Reinsurance market conditions for Floridian primary insurer buyers have been as good as perhaps ever seen in the last year, with rates having come down as both traditional and alternative capital provide growing pools of capacity to the market.
“Demotech’s review of reinsurance, including the output of catastrophe models, indicates that insurers are purchasing catastrophe reinsurance, on both a vertical and horizontal level, superior to that purchased in the early 1990s. Based on Demotech’s review, we believe that aggregate reinsurance coverage purchased in 2015 is likely to be sufficient. Equally as important, the fundamental financial stability of the carriers is excellent,” Petrelli explained.
Barry J. Koestler, Chief Ratings Officer at Demotech, agreed; “In 2014, the purchase of reinsurance represented more than 50% of the premium written by the Florida property carriers that we reviewed. Even with the soft pricing of reinsurance in 2015 and the attractiveness of alternative mechanisms, our reinsurance requirements should result in a similar impact in 2015.”
It is testament to the growth of insurance-linked securities (ILS), with major ILS players and alternative capital managers providing large shares of the Florida property catastrophe reinsurance market, that conditions have become so attractive that insurers can be better protected.
Alongside robust catastrophe response plans, the availability and lower costs of reinsurance cover help insurers to respond better to claims in the event of major hurricanes. In 2015 the insurers rated by Demotech have a superior level of coverage available to them, thanks to improved buying conditions, aggregate covers and enhanced terms.
Catastrophe bonds and collateralized reinsurance covers, provided by ILS players and the capital markets, are now playing a key role in helping Florida to become better protected.
With rates continuing to soften and conditions remaining competitive, the buyers market will likely continue, perhaps even if the state sees a major landfall this year thanks to the amount of capital in the reinsurance market.