Efficient reinsurance and ILS keeps sun shining in Florida, says Kroll


The 2017 Atlantic hurricane season is expected to be an active one, potentially adding further pressure to the profitability of already challenged Floridian insurers. However, the availability of efficient reinsurance and insurance-linked securities (ILS) capacity continues to benefit firms, says Kroll Bond Rating Agency (KBRA).

Map of FloridaReinsurance rates declined for the sixth consecutive year at the June 1st, 2017 renewal season, pushing Florida business rates down by 40% from 2012 levels and just 10% above the previous low of 1999-2000.

As a result, primary Florida-focused insurers have seen profitability come under increasing strain, exacerbated by the notable lack of hurricane losses through assignment of benefits (AOB) claims, says KBRA.

For insurers and insureds in Florida, says KBRA, reinsurance capacity is critical, and as the market heads into what’s expected to be an above average year for Atlantic hurricane activity, the current efficiency of reinsurance capital and the expanding base of willing ILS capital is a plus for Florida companies.

“Fortunately, for primary insurers, availability of catastrophe reinsurance is at an all-time high, and pricing is at or near its lowest point in decades. These insurers have also benefitted from ongoing issuances of catastrophe bonds and the strengthening of the Florida Hurricane Catastrophe Fund (FHCF) as a component of their reinsurance structures,” says KBRA.

Global reinsurance pricing is at or near its lowest point in a very, very long time, and combined with unprecedented volumes of available reinsurance capital, from both traditional and alternative sources, has created a buyers’ market where cedents are able to take advantage of favourable pricing and terms.

Something the Floridian players have been doing to mitigate the challenging market conditions, explains KBRA.

“Available reinsurance capacity and favourable pricing terms are rays of sunshine for the Florida insurance market, which is currently experiencing deteriorating underwriting,” says KBRA.

Coupled with the abundance of efficient reinsurance capital in the marketplace, Florida insurers were also treated to high levels of catastrophe bond issuance in 2016, a trend that has continued and intensified in the opening six months of this year.

As shown by the Artemis Deal Directory, catastrophe bond issuance so far in 2017 is at an all-time high, and provides Florida players with another source of efficient and diversified capital to meet their risk transfer needs. Ultimately supporting the development of strong, diversified balance sheets at a time when underwriting profit is diminishing and low interest rates dampen investment returns.

Furthermore, strong cat bond issuance keeps competition in the global reinsurance market high, which although challenging for reinsurers, keeps pricing in the sector down helping their retrocession as well, but this essentially adds another driver for a continuation of the softening cycle where insurers are able to secure favourable terms and pricing for their reinsurance structures.

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