Out of the more than fifty Floridian insurance carriers that are rated by Demotech, Inc. roughly two-thirds are already meeting or exceeding the raised requirement to buy first event reinsurance protection to the 1-in-130 year loss level, but 16 may need to buy more coverage.
The change to Demotech’s reinsurance requirement for the carriers it rates was introduced at the end of February, when it increased the requirement that reinsurance bought should cover at least a 100 year first-event loss for Floridian insurers to at least a 130 year first-event loss.
As we explained, Demotech sent a memo to carriers detailing the new requirement to boost reinsurance towers to ensure a first-event loss at the 1-in-130 year probability is now covered, while at the same time allowing more flexibility in the way coverage further up the reinsurance tower is structured, for second and subsequent loss events.
Alongside this, there is an emerging trend in Florida that sees some carriers switching away from private market reinsurance to buy more protection from the Florida Hurricane Catastrophe Fund (FHCF), as a way to hedge the rising cost of reinsurance in the state of Florida.
The question of how all of this change will affect the June renewals in Florida remains. Some feel the FHCF increases could lower demand, although this is likely a minor amount given the way FHCF coverage works, but the Demotech change could increase demand and may be a more noticeable factor in the renewals it seems.
However, the Demotech increase is unlikely to be a particularly widespread issue for carriers anyway, as the majority are already adequately protected by reinsurance.
Demotech told Artemis that its change would likely have a relatively minimal impact, only affecting around 16 carriers according to its research.
Hence roughly two-thirds of the Floridian primary insurance carriers it rates are deemed to already buy sufficient reinsurance towers to cover the 130-year first-event.
Joseph Petrelli, President of Demotech, Inc., told Artemis in a statement, “We are pleased to review and rate more than fifty carriers actively focused on Florida and also writing in other jurisdictions. Countrywide we review and rate additional insurers with a countrywide count of more than 410.
“Prior to instituting this enhanced minimum level of coverage, we reviewed the last several years of actual purchases by the carriers that we review and rate in Florida. It appears to us that only 16 insurers will be impacted by our enhanced requirement for the vertical limit of first event. This relatively low number is a tribute the breadth and strength of the catastrophe reinsurance programs that Demotech rated carriers have had in place for decades.”
Demotech constantly assesses the state of the insurance market in Florida and considers the reinsurance needs of carriers to remain financially viable, as well as ways that the reinsurance tower and FHCF could be structured to complement each other.
This constant assessment means that it can respond to the state of the market, carriers needs and also consumer needs as well, resulting this time in the increases first-event coverage requirements.
However, “The enhancement to our first event vertical limit’s minimum being met or exceed by approximately two-thirds of the insurers that we review and rate was not viewed as a marked change in protocol or practice,” Petrelli said.
Demotech has said that any carriers failing to meet the enhanced minimum first-event vertical catastrophe reinsurance requirement could find their ratings downgraded.
As a result, it’s expected that all will seek to meet that requirement at the renewals this year. Potentially through a combination of FHCF adjustment and buying more private reinsurance market protection.
How this translates into demand remains to be seen, as well as how it plays out across traditional and collateralized reinsurance markets.
There is a chance that some insurers could look to catastrophe bonds for the higher layers to reach the 130-year requirement, given the efficiency of cat bond coverage at that level in the reinsurance tower.
But renewal demand from these Florida market dynamics is unlikely to be a major change and it is more likely to be the appetite of major traditional reinsurers that once again drive demand and also pricing at the upcoming Florida renewals.
If rates rise as much as some hope, the major global reinsurers are likely to try to fill their boots at the renewal, we understand, given they are now largely under-represented in the state having downsized their Florida portfolios in recent years.
This could have a much bigger influence on the market at this renewal, but of course it’s also likely to suppress rate increases as well. Hence the appetite of major reinsurers could once again moderate renewal rates, as was seen in January this year.