Florida reinsurance may rise 20% in June as loss creep weighs: A.M. Best

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Reinsurance pricing could rise by as much as 20% at the Florida renewals in June 2020, with the continued pressure from loss creep on both insurers and reinsurers the main driver, according to A.M. Best.

florida-beach-imageLoss creep from 2017’s hurricane Irma struck some players again in the fourth-quarter of 2019, with a number of reports of further escalation of claims totals from the storm and some primary players adding considerably to their ultimates.

In addition, further loss creep has been reported by some insurance-linked securities (ILS) funds and collateralised reinsurance players, among which Markel CATCo was the latest last week.

On the traditional side of the market, AXIS Capital reported that further hurricane Irma loss creep hit the firm in Q4, while primary insurers that have most of their premiums exposed to Florida property insurance risks continue to report additional losses from the storm.

Irma is becoming an example of a hurricane with a tail, as the complexity of the loss and claims situation continues, with further impacts falling to insurance, reinsurance and retrocessional levels of the Florida market’s protection base.

The upshot of this is not unexpected.

“Loss creep from prior storms continues to weigh on reinsurers, leading to a likely rise in rates for the upcoming June renewal period,” rating agency A.M. Best explains.

After an initial hardening at the June 2019 renewals, A.M. Best expects something more meaningful at the middle of this year.

The reason is that Floridian writers are increasingly pressured, after losses eroded capital for many of them and they continue to pass on losses to reinsurers where creep can be ceded.

“Despite the lack of hurricanes making landfall last fall, companies—particularly the smaller, Florida-dominant property writers with questionable balance sheet strength—remain more susceptible to prevailing market conditions, such as hardening reinsurance pricing and adverse claims trends,” the rating agency said.

A.M. Best believes that reinsurance rates for Florida are set for a more significant firming at the June 2020 renewals.

The rating agency explained, “Based on market surveillance, reinsurance rates are likely to increase by 15%-20% for the June renewal period; companies that depend highly on reinsurance may be most impacted.”

Florida property insurers rely on reinsurance to sustain their business models, in many cases, as the exposure to hurricane risks they assume through their writings is very capital intensive and requires hedging.

Insurance-linked securities (ILS) are therefore also prevalent in the Florida reinsurance market, with collateralised sources of coverage gaining in popularity and market share all the time.

Given the reliance on reinsurance, rising costs are expected to pressure some carriers in the state of Florida, making their business models even more tenuous in some cases.

As a result, efficiency of reinsurance capital and other capital sources is going to be key in 2020.

A.M. Best explains the challenges some may face, “Companies with high reinsurance dependence face difficult choices. Higher reinsurance rates may pressure earnings if insurers decide to continue writing business at existing levels. Those opting to retain more business may see declines in capitalization in the event of catastrophic storms; these companies may be forced to write less business to maintain existing capital.”

Weakened balance-sheet strength, caused by losses, loss creep, social inflation and assignment of benefits (AOB), as well as higher reinsurance costs, have caused carriers results to deteriorate notably.

But demand for reinsurance is not likely to slip at all, as carriers still need this capacity to maintain as much of their writings as they can.

“There is a good chance that continued weakened balance sheet strength will spur additional consolidation and, in some cases, require additional capital support to sustain operations,” A.M. Best says.

On the back of all of these issues, the rating agency expects that Floridian carriers will face a challenging risk/reward trade-off when it comes to the reinsurance renewals in June 2020.

Again, this trade-off could drive more to the ILS market as a source of efficient capacity able to support their peak peril coverage needs.

But carrier performance is going to be a key factor in ILS funds and other collateralised markets decision-making, when it comes to pricing and availability of capacity for these insurers.

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