The June 1st Florida reinsurance renewals have seen the worst fears of many in the traditional market realised with rate reductions reported from 15% to as much as 25% not uncommon on property catastrophe programs renewing at the mid-year.
The reinsurance renewals have seen high levels of competition for signings once again, as traditional reinsurance capital competes strongly with alternative reinsurance capital and insurance-linked securities (ILS). Once again investors in the ILS space have shown a willingness to make the most of their lower cost-of-capital and the traditional market has again chased prices down as it seeks to secure premium.
During a conference call held by investment bank UBS to review the June reinsurance renewals, Jeff Clements, Chief Underwriting Officer of Validus Re, one of the largest reinsurers that gets to see many of the Florida programs at renewal time, commented that supply continues to outpace demand for reinsurance helping to drive pricing down further than perhaps expected.
Clements said that demand for reinsurance protection was actually up in Florida, which does buck the trend somewhat as other recent renewals have seen higher retention by insurers seeking to optimise their use of reinsurance. Clements said that there was an increase in reinsurance limits purchased, led by Florida Citizens which has grown its private reinsurance program considerably. An increase in reinsurance limits purchased was also seen in the Florida company market, with startups and existing companies increasing the limits purchased by 10% to better protect their portfolios.
So more reinsurance protection was purchased, meaning there were more premiums on offer for traditional and ILS players, but the increase in demand was not as strong as the increase in supply, meaning that an imbalance continues to exist with supply outpacing the demand growth, helping to pressure prices further.
Additional capacity from the largest ILS funds was once again one source of increased supply, while smaller, Florida focused reinsurers also aggressively made the most of their last chance to secure premiums this year. Retro also brought significant capacity to bear in Florida at the mid-year renewals, applying further pressure on rates.
Clements said that rate reductions of 15% to 25% were not uncommon at the Florida renewals. This is perhaps at the top end of what was expected as possible and much higher than had been discussed at the start of 2014.
As a result of the price decline, some reinsurers or ILS managers that have aggressively competed on price may find themselves with significantly more exposure on their books for the amount of premium they have commanded, just as we move into the U.S. hurricane season.
Interestingly, Clement noted, some of the largest price reductions were secured by companies considered weaker, in terms of relationships with the reinsurance market and their internal data. The pricing for these insurers, which are considered the weaker cedents in Florida, came in at a similar margin as the most respected insurers with the best relationships. This perhaps shows that relationships are becoming less important as peak catastrophe cover becomes more commoditised in some well-modelled regions of the world.
Clements said that there was not a great movement in terms and conditions at this Florida renewal, with the hours clause the main change moving from the 96 hour mark to the new 120 hour standard. There was more focus on aggregate and multi-year covers, but that is now becoming more the norm after recent renewals.
Clements pointed out that there is perhaps some more evidence emerging of a pricing floor being near, as some programs struggled to get placed due to pricing being too low, having to be re-quoted right before the deadline for renewing.
Clements said that in Validus’ view Florida is no longer the most attractively priced property catastrophe reinsurance segment in the market anymore. Previously Florida portfolios provided the best return on equity for reinsurers like Validus, but Clements noted that Florida business is now returning an RoE sometimes 15% lower than property catastrophe portfolios in other areas of the world. As a result Florida has become less attractive, which could increase the urgency of reinsurers efforts to grow new markets in emerging economies and regions of the world.
Florida remains the epicenter for ILS, said Clements. Validus feels that some ILS players have needed to deploy capital and as a result discipline has suffered, echoing comments made by Validus CEO Ed Noonan after the April renewals. Clement suggested that the Florida regulators may need to look closely at how some insurers capital structure now sits, as with ILS taking every greater shares of reinsurance programs for some primary companies, the chances of capital being locked-up after an event may have increased.
This is a fair point, as there can be a risk of capital lock-up in certain ILS structures. As ILS becomes ever more prevalent in reinsurance programs cedents could risk not having a sufficiently diversified source of risk capital to ensure they can pay claims promptly after major catastrophe events occur. It seems that Clements was suggesting that some Floridian insurers could find paying claims post-event a more difficult prospect with large chunks of their reinsurance programs provided by ILS structures.
Of course this has yet to be properly tested so it is hard to forecast whether the return of capital would be any more difficult or slow now, with more ILS in place, than it has been in the past when it was all traditional reinsurance and there were still issues after hurricanes struck Florida as reinsurers could not pay promptly. This is definitely an issue to watch for though.
Clements said that Validus feels that some ILS players are using their lower cost-of-capital as an excuse to reduce discipline and terms in their underwriting and trying to take full programs, or as much a program as they can. This is putting significant pressure on brokers and traditional reinsurers and is leading the traditional market into a position where it is chasing down pricing to compete.
That is no surprise to hear. The market appears to have got itself into a chicken and egg situation of pricing being chased down by one sides ability to underwrite with a lower cost and the others appetite to maintain market share. Of course this situation works both ways as well, with traditional reinsurers relaxing terms and some ILS players trying to match them. The end result has been a spiral down in pricing and increasing stretching of terms and conditions.
It is encouraging to hear that some evidence of a price floor may have been found at the June reinsurance renewals but the question has to be, what is there to stop further price declines next January? If we don’t see any major losses or market dislocation then competition will drive prices down below any floor that has been found at these recent renewals, that is inevitable. But with the amount of capital in the sector and the amount sitting on the sidelines still, the size of event required to change the pricing trajectory is growing all the time making any return to harder market conditions increasingly less likely.
This is the first report on the Florida reinsurance renewals we have managed to source. We expect to cover the brokers reports as they are released over the coming days and it will be interesting to see how comment tone differs between reinsurers and brokers at this renewal.
Keep up with all our reinsurance renewal news and analysis here.