Florida June reinsurance renewal pricing may have some teeth: Analysts

While pricing at the June reinsurance renewals of all-important Florida underwriting business fell short of expectations a year ago, in 2019 market sentiment remains on the positive side, with analysts suggesting that this time around it might be different.

Following reports of early renewals pricing up at firm order terms and that some underwriters are adding so-called social inflation factors into their reinsurance pricing models for Florida, the market is quietly confident that rates will improve by a reasonable amount at this June 1st.

A year ago, hopes were high for improved reinsurance pricing at the June and July 2018 renewal season. But in the end hopes were dashed, as the majority of renewals came in relatively flat, or with rate increases that were much lower than hoped for.

Since then, the ongoing hurricane Irma loss creep, which has driven this so-called social inflation through assignment of benefits (AOB) related costs and increasing claims inflation, as well as higher loss adjustment expenses (LAE), has driven losses from the 2017 catastrophe year even higher.

And with some Floridian primary insurers suffering up to 140% loss creep from hurricane Irma alone, it is easy to now see why the reinsurance and insurance-linked securities (ILS) market has a much firmer resolve to push for even firmer pricing this time around.

It’s already been widely reported that Floridian primary insurer Universal’s reinsurance renewal has priced up to reach firm order terms at approximately 30% up on the prior year.

Universal was one of the insurers that suffered particularly badly from hurricane Irma related loss creep, more than doubling its ultimate loss from its initial for the storm.

As a result, analysts suggest that this level of price increase was fully warranted, hence it could be considered an outlier, analysts at JMP Securities say.

But the question is how much by and at what level will other Floridian insurance firms achieve their firm orders on their reinsurance placements this time around?

The other story of note is in major players such as Nephila Capital and RenaissanceRe telling the market that they are pricing for the loss creep they have suffered and ready to walk away where rate increases are not supportive of their capacity.

“It feels like pricing may have some teeth this time around,” the analysts at JMP Securities explain.

After discussions with senior re/insurance sector executives, the analysts also said that these discussions, “Left us feeling that the rate increase picture for June 1 could prove to be stronger than we initially anticipated.”

JMP Securities analyst team also said, “While the renewal is still roughly six weeks away and we anticipate it will come down to the wire, we expect the coming weeks will likely see more data points made public as some carriers could opt, like Universal, to wrap up negotiations early in order to secure capacity.”

As a result of a renewal where ceding companies are likely to be judged on their past performance, ability to deal with loss creep, the accuracy of their reserving and their willingness to support their reinsurance markets needs for data and transparency, the analysts said that this renewal is likely to be one with wild differences in rate changes.

As a result, “More so than in past years, we believe the “average” rate change at June 1 will be a largely meaningless data point.”

Now, this data point often promoted by brokerages has been relatively useless for years, we would suggest, as it often masks the true renewal market dynamics that lie far underneath.

In fact, rate changes alone are not the whole story of a renewal, as risk adjusted pricing can be influenced significantly by better terms and conditions, while how exactly you access the risk can also have a significant influence (in terms of costs of access), which also enhances the true risk adjusted benefits of underwriting a contract.

Relationships matter too, as some Floridian primary insurers seek to develop deeper working partnerships with markets, particularly some of the leading ILS funds and investors, that can guarantee them access to the capital they need to trade, but of course that will come at a price after the recent losses.

The JMP Securities analysts expect the spread around the mean price change to be especially significant this year at the renewals, as markets enforce stricter pricing policies and look if not for payback (which as we’ve said before has expired), then for better payment (to cover expected losses, enterprise expenses, and importantly loss costs).

Importantly, data is likely to be a large contributor to reinsurance and ILS fund decisions on whose programs to underwrite and participate on, as well as at what cost.

With ample data collected from the last two years of catastrophes and experience gained on who are the best performers after the loss creep, underwriters have new information with which to inform their pricing expectations.

As reinsurance becomes an increasingly data driven industry, this new information that underwriters can glean is likely to hold significant sway over what rate increases ceding companies are going to have to pay at this June and July.

The analysts also suggest that reinsurance and ILS markets may penalise some insurers that have integrated construction and related services, that were designed to try to stem the AOB tide, as this has not yet demonstrated its value.

Some insurers may have received preferential pricing based on having these integrated service providers embedded within their enterprises in recent years, but with the main companies doing this some of those experiencing the worst Irma loss creep there could be some reversal of any price breaks they received.

We’d suggest here that Irma was a unique case, affecting much of the Florida peninsula with a single storm, coming right after Harvey and right before Maria, hence the confluence of events and demand has led to significant loss inflation for the largest Florida primary players.

But however that is viewed it is of course the legislative environment that drives much of the costs and while there are efforts underway to resolve that, it isn’t going to happen anytime soon or to the degree many would like to see, it appears.

Hence there is plenty of emerging evidence and anecdotes, as well as sentiment in the market, that this year’s Florida and July reinsurance renewals may have more teeth, when it comes to pricing.

But as usual, supply of capacity and the appetite to underwrite more business, among major players on both traditional and alternative sides, are the key factors that could moderate rate increases somewhat.

However, in our discussions with both global reinsurance players and the largest ILS funds, the message is clear.

Rates have to rise in Florida at this renewal, at the very least across all loss affected accounts, likely more broadly. While there is also an ambition to ensure loss impacted regions of the U.S. also see some firming of price this year.

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