Florida reinsurance renewal terms key, as rate expectations falter

The upcoming June 1st reinsurance renewals in Florida are still expected to see broad rate increases of between 5% to 15%, according to our sources, but this is lower than where expectations had been sitting a few months ago.

The market had been hoping for more significant firming, but we’re now told that early indications from orders coming in in advance of the June 1st reinsurance contract signings are showing lower increases than anticipated.

There will be significant rate increases for those thinly capitalised companies who are going to rely on reinsurance capital more than ever, as well as for some of those still reporting loss creep from prior years, we’re told.

At the same time, the more loss affected accounts from last year’s named storm season and those hit by severe weather, are likely to have to pay more for their renewed reinsurance protection in 2021.

But overall, while Florida is expected to be another step higher in reinsurance pricing, this isn’t going to be at the levels many were hoping for, it seems.

Which makes terms and conditions even more critical, as this is the other lever reinsurance capital providers have for improving the return potential and qualities of their portfolios.

Of course, the price improvements are still going to be considered as attractive by many in the market, which is especially true if terms can be improved at the same time.

Risk-adjusted improvements are about more than just pure rate, with terms, cedent quality, and how you access the reinsurance business, all additional factors in driving higher portfolio returns, for reinsurers and ILS managers.

As we’ve explained before, the terms of coverage can be as important as rates and are on often overlooked factor in the return potential of an ILS fund portfolio.

Cession quality is also increasingly elevated, as claims processes have improved in Florida, even if the claims inflation and creep hasn’t gone away yet.

Sources we’ve spoken with said that while the rates being seen in early firm order terms are a little disappointing in some cases, the overall quality of the risk on offer does seem to be improving, thanks often to term related tightening.

Insurance-linked securities (ILS) fund managers we’ve spoken with say that improving terms is now as important as gaining additional rate, when it comes to reinsurance renewal negotiations.

For some, terms have delivered more improvement to their books in the last few years than expected, in particular terms around naming of perils, collateral and of course buffer loss tables, which have all been adjusted to add return potential and just as importantly to make portfolio performance a little more predictable, even when catastrophes strike.

One area of concern among reinsurers, is that primary rates are still outpacing reinsurance at renewals across much of the US.

While this means reinsurance hasn’t caught up and doesn’t look likely to this year, this does suggest that firming in Florida will continue over consecutive years even though primary rates there are more restricted by regulation. Which may be a more healthy way of finding a balance than significant rate hikes that make risk capital far less affordable for many carriers in the market.

Dan Peed, CEO of UPC Insurance explained recently, “The property catastrophe market remains firm, especially the Florida personal lines market which is expected to remain very firm for the foreseeable future.”

RenaissanceRe’s CEO Kevin O’Donnell has been vocal on Florida lately, saying that the market there continues to have “structural issues” and saying that while RenRe will continue to support its good partners in Florida, it may pull back on others and perhaps even reduce its writings in the state again this year.

O’Donnell said of Florida, “We believe additional material rate increases are necessary to offset credit risk, operational deficiencies and social inflation.”

In some quarters, material rate increases are definitely being seen, at the upper 15% of the rate range being broadly seen, but then in pockets and for more distressed and thinly capitalised players in Florida the increases are likely to be even higher.

But the broad market rate increase does not look likely to be as high as many would have liked, a function of demand and capital availability as much as anything (again).

Making terms negotiations a key feature of the June reinsurance renewals in Florida, again.