One of the side-effects of Florida’s Citizens Property Insurance’s, the property insurer of last resort, plan to reduce the risk it holds through depopulation of some of its policies and increasing its own use of private market risk transfer will be an increase in the amount of Florida hurricane risk in the private reinsurance market. This will lead to opportunities for reinsurers, both traditional and the collateralized variety as well as private investors seeking reinsurance market exposure.
Florida Citizens is actively de-risking itself by offloading policies to new start-up insurers. We saw the first of these transactions last week with its transfer of 31,000 wind only insurance customers from its coastal account to private insurance firm Weston Insurance Co. There are expected to be more start-up insurers emerging to take on chunks of Citizens policies in future and the Insider reported this week that another start-up insurer called Qorval is being backed by Axis Capital to take on policies from Citizens.
The upshot of this is that some of the highest risk Florida hurricane exposed insurance policies are changing hands from an insurer of last resort to private insurance companies which will have their own need for reinsurance protection. Weston Insurance is expected to seek at least $1 billion of protection from the private reinsurance markets, according to the Insider, and we have to assume that Qorval and any other forthcoming Florida start-ups (of which we hear there is at least one more raising funds) will look to do similar.
Florida Citizens is also actively increasing its use of the private reinsurance and risk transfer markets. As we wrote earlier this week the insurer is set to add to its catastrophe bond cover and is actively looking to issue a $250m follow-on deal to Everglades Re. At the same time it has been increasing its use of traditional reinsurance cover in recent years, in 2011 the insurer bought $575m of reinsurance protection, upping that by almost three times to the $1.5 billion bought in 2012 and now looking for $1.75 billion of reinsurance cover in 2013.
The way this is going the private reinsurance market is going to find itself with a lot more peak Florida windstorm risk on its books. Over time, if Citizens finds the depopulation strategy works well for it, the amount of private reinsurance limit placed on hurricane exposed Florida properties could grow significantly.
This is going to provide opportunities to traditional reinsurers and collateralized players, with sidecars and reinsurance funds focused on Florida renewals and investors set to benefit from the attractive Florida level premiums. Cat bond investors are already benefitting from Citizens own use of the cat bond market, but there is a distinct possibility that one of the start-ups could look to cover its peak risks in the capital markets with a cat bond too.
While a glut of Florida wind risk provides premium opportunities to reinsurers and investors in the reinsurance space, it also comes with a heavy risk attached. These are some of the most hurricane exposed property insurance policies in the world and the risks are high for those who become over-exposed.
It will be interesting to see how the June renewals, where a lot of the Florida wind reinsurance renewals occur, pan out and whether there is significant competition for the new risks. It will also be interesting to see whether the 2013 U.S. hurricane season becomes a more closely watched event by reinsurers if the volume of risk in the market from Florida properties has increased significantly.