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Balance of power shifts to reinsurance sellers in Florida: RenRe CEO O’Donnell


The impact of recent hurricane losses and their outsized loss creep, as well as market dynamics of supply and demand, have all served to shift the balance of power from reinsurance buyers to reinsurance sellers at this June renewal in Florida, Kevin O’Donnell CEO of RenaissanceRe explained recently.

Kevin O'Donnell RenaissanceReThe Florida reinsurance renewal is set to be challenging and complex, as capacity levels remain constrained to a degree and the inflation of the last two year’s of hurricane losses has resulted in some reinsurers and ILS funds adjusting their risk appetites for Florida business.

Speaking during his firms recent earnings call, RenaissanceRe CEO Kevin O’Donnell said that the balance of power in reinsurance has now shifted.

“Capital providers are finally waking up to the many difficulties in the Florida market and are increasingly frustrated by them. We believe that reinsurers want to account for the bad behavior in the market and recognise the need to earn more rate for the risk being ceded,” he explained.

Commenting on what has driven this desire to be better compensated for underwriting Floridian risk, O’Donnell explained the three factors that drove the hurricane losses, especially Irma, so much higher than estimated are largely responsible.

The largest catastrophe loss in Florida in 2018 was adverse development on losses from hurricane Irma, O’Donnell said, which alongside “unprecedentedly high rates” of loss adjustment expense, and significant social inflation from litigation and assignment of benefits, served to ensure the view of risk has changed.

In fact, RenRe estimates that social inflation alone added 20% to hurricane Irma’s industry loss and O’Donnell said that there are early signs hurricane Michael could experience similar.

As a result of these impacts, O’Donnell said that, “We expect that reinsurance supply at June 1 will be constrained.”

He gave two reasons for this constraint in capacity, firstly, “We are seeing instances of traditional reinsurers willing to reduce the capital they allocate to the Florida market.”

Adding that, “This willingness to walk away shifts the existing balance of power from reinsurance buyers to sellers.”

While secondly, O’Donnell highlights the impacts to ILS market risk appetite after two years of heavy catastrophe losses.

“The exuberance that ILS managers previously exhibited has diminished,” he explained, adding that “This is in part attributable to having less capital to deploy as a result of substantial losses.”

He said that, just like the traditional reinsurance market, “ILS managers did not estimate these losses very accurately,” referring to the hurricanes.

“This has not only resulted in elevated loss development, but unique to the ILS market it has also resulted in trapped capital that could otherwise have been deployed to take on more risk.”

“Cat bond markets have been similarly affected,” O’Donnell explained and as a result he said, “We have seen diminished appetite for Florida risk.”

O’Donnell went on to explain that RenRe itself is pushing for higher pricing in Florida, saying that, “We have increased our view of risk to reflect the elevated level of social inflation in the state. We have met with our clients to prepare them for the change in rate. Currently, we’re quoting consistent with our increased view of risk, our elevated cost of capital and the need to return to more equitable rates.”

Adding, that if rates are commensurate, “To be clear, we will grow at June 1st if it makes sense.”

However, he also noted that if rates do not live up to RenRe’s new expectations, the reinsurer is also prepared to reduce its exposure at the renewals.

RenRe sees ample opportunities for growth outside of Florida, including in the retrocession and E&S markets, O’Donnell said, so the firm is not afraid to divert its capacity elsewhere if Florida turned out to be a disappointment to it.

That’s a sign of reinsurance becoming a seller’s market, as options emerge for places to deploy capacity that could make Florida a less important piece of the puzzle for some.

Of course, in the ILS market Florida will remain key for many and given the lower cost-of-capital enjoyed by many ILS underwriting strategies, the rate increases currently anticipated look set to be sufficient for most.


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