Florida renewals relatively flat on a risk-adjusted basis: Goldman Sachs

The Florida reinsurance renewals at June 1st, while up in terms of rates, may actually have been closer to flat on a risk-adjusted basis, if you take into consideration the increases in modelled industry loss expectations in the state.

After the reinsurance market impacts from 2017’s hurricane Irma and the prolonged loss creep and social inflation of claims that still continues to this day, market participants have been recalibrating their risk models to account for higher expected losses in the state of Florida.

In general, analysts from Goldman Sachs believe that the sector may have recalibrated their catastrophe risk models enough to change the industry’s view of risk in Florida by around 10% to 15%.

With reinsurance rates rising across many programs at the recent renewals, but the expected average likely to come in somewhere around the same range, it seems that rates may actually only have risen enough to support this increased modelled view of exposure in Florida.

Of course, this is on a state-wide basis and not everyone takes such a broad-brush approach to measuring the exposure and expected losses within a region as catastrophe exposed as Florida.

The reinsurance and insurance-linked securities (ILS) funds sectors are highly sophisticated and some take a much more granular view of risk, looking at far more than pure rate alone and on a much higher resolution basis.

Not everyone adjusts rates or loss expectations on a state-wide basis though, the analysts explained, with some reinsurance firms preferring to look at modelled exposure by county and client instead.

But for those that take a more broad-brush approach to their underwriting metrics, it looks like the renewal rates may have proven less attractive than first reports had suggested.

But the increased modelled loss expectations are just that and until the underlying risk models, which remain so key to underwriting decisions, are updated the entire industry will not be working off the same base-line assumption of loss magnitude potential.

This is important, as the main vendor catastrophe risk models are such an intrinsic part of reinsurance and ILS underwriting, that despite their calibration and customisation it is the core models that really need to factor in trends around loss inflation and adjustments to the view of risk more rapidly.

It’s also important as the recalibration of reinsurers own modelled views of risk are largely based on social claims inflation and costs from assignments of benefit (AOB) fraud, rather than on a changed view of the risk of large hurricanes hitting the state.

The vendor risk models do need to contain reasonable baseline views of these risks, but they also need to factor in the meteorological, atmospheric and peril related drivers that can exacerbate these inflationary loss trends.

In time we expect that cat risk models will be pushed to update more frequently and rapidly, to enable the industry to know where its benchmarks lie. Then the customised risk curves layered on top of this are at least guaranteed to factor in as recent as possible a baseline view of risk and exposure, rather than one that can sometimes be as much as a few years old.

Retrocession rates rose by more than pure reinsurance at the Florida renewals and with the aggregation of losses across multiple regions such a key factor to retro, it’s likely these have outpaced the pure view of risk in Florida alone.

Of course, it’s impossible to say whether rates should have risen more for everyone. As different strategies, capital efficiency levels and abilities to diversify Florida away within broader portfolios all have a bearing on how much rate is risk commensurate.

Importantly, if rates rose as much as the adjusted view of risk, then at least risk should be getting covered by the market.

For some, the rates likely more than cover the risk, given their lower-costs of capital and efficiencies. But for others, the rates likely don’t come close to covering the true cost of risk for them, if they are over-exposed and lacking in strategies for diversification or capital efficiency.

One underwriters acceptable rate is another’s unacceptable bet. So while rate rises may look relatively flat in the average, when compared to expected loss increases, for some these are likely more than adequate.

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