The launch of a property insurance clearinghouse in Florida, allowing select private firms to compete with state-sponsored Citizens Property Insurance for policies, will lead to more demand for traditional and non-traditional reinsurance, said Fitch Ratings today.
The Florida Clearinghouse is being launched to try to accelerate the depopulation of policies from Florida Citizens, by allowing qualifying private insurance companies to offer policyholders coverage before Citizens. The end result is expected to be more risk in the private insurance market, which will result in a greater need for reinsurance capacity, either from traditional reinsurers or alternative reinsurance capital and insurance-linked securities (ILS).
As Florida property insurance is increasingly pushed to private insurers demand for reinsurance is set to increase, said Fitch, noting that the moderate increase in demand while welcomed by reinsurers will not be sufficient to reverse recent rate declines. “The continually increasing capacity from both traditional and non-traditional reinsurance providers means the ultimate impact on reinsurance pricing is likely to be muted,” said Fitch.
From the 27th January, applicants for property insurance coverage from Citizens will first be passed through the clearinghouse, where select private insurers will get to offer them coverage first. The effect of this is that Citizens will only offer coverage where the private insurance market declines to or if the rate offered is more than 15% higher than Citizens’ premium rate.
This is expected to modestly reduce the size of Citizens, said Fitch, and will shift business to private insurers who use greater levels of private market reinsurance protection, which has the potential to increase demand.
Recent depopulation efforts, where specialised insurers have taken over portions of Citizens business, have already reduced the number of policies underwritten by Citizens to 1 million from 1.5 million since October 2012. The clearinghouse is expected to accelerate the decline, leaving perhaps the least insurable properties to the state-backed insurer.
Fitch Ratings said; “The movement of business out of Citizens could accelerate the trend of Florida premiums increasingly being ceded to third-party reinsurers.”
Fitch also notes that the Florida Hurricane Catastrophe Fund is seeking up to $1.5 billion of private market reinsurance (as Artemis reported here), through a mix of traditional, collateralized and catastrophe bond coverage, depending on the price available in the market. Alongside this, the result of continuing Citizens depopulation will likely be increased reinsurance demand.
Of course, as Citizens depopulates, it will itself require less reinsurance protection to a degree, so any increase is likely to be moderate. However, with more specialist property insurers taking on more Florida risk in hurricane peak zones we may see more ceded to the capital markets through the use of catastrophe bonds and other more efficient non-traditional reinsurance structures in the future.