The upcoming Florida reinsurance renewals on June 1st are set to be challenging and late. Quoting has been slow to start, while both cedants and capacity try to gauge market dynamics, but the expectation remains that prices are certainly set to rise.
Insurance and reinsurance giant AIG is among those convinced that rates will move up significantly, with the firms CEO of General Insurance Peter Zaffino saying last week that he expects a meaningful price correction.
“The property reinsurance market has meaningfully underperformed over the last two years,” Zaffino said on Florida.
Explaining that at AIG, “We believe it will undergo a meaningful price correction at June 1st.”
This is being seen in the market, with firm order terms beginning to drip-feed in for some accounts, suggesting average rate increases of 15% or 20% so far.
But the expectation is that Florida will see some reinsurance program layers pricing up even more than that. In particular, the programs that are later to pricing are expected to be the ones where pricing moves up more significantly this year, sources suggest.
Markets have not rushed to provide price indications, quotes or firm order terms, as all sides of the market took a wait and see approach to this renewals.
Partly this seems to have been a result of some nervousness over whether someone would rush in with more capital and drive rates down, as well as a desire not to be seen to be overly keen to build a book of Florida business at any cost.
Underwriters want to be seen to be responsible and disciplined and it seems this is set to result in the largest Florida rate increases for some years.
Zaffino explained his rate expectations, “This is driven by loss activity in 2017 and ’18 and the need to modify loss costs, to account for both increased frequency and severity.”
There is an increasing level of positivity in the industry about the prospects for Florida’s reinsurance renewal rates to rise significantly.
Whether the rises will truly see pricing get back to a level where loss costs are covered remains to be seen, but it seems certain that the market in Florida is set for a correction of sorts, one that will make underwriters portfolios more profitable and deliver higher margins and returns for shareholders and investors.
How long any price increases last remains to be seen. The market is slightly capital constrained this year and the impact of a reduction in retrocession capacity has also served to drive up rate need among reinsurers as well, which on top of the realisation that loss costs have accelerated above rate adequacy means pricing is on the rise.
But capital will flow back in and retrocession capacity will return, or be replaced in another form, all likely before the June 2020 Florida renewals. In addition, reform to the assignment of benefits (AOB) system and other legislation could have a meaningful impact on loss adjustment expenses in the state.
Meaning this could be the best chance of securing rate in Florida for some years and any pricing peak we see may turn out to be exactly that. A peak rather than a step on the path towards somewhere even higher.
There is still a chance that the later to complete reinsurance renewals feel more pricing pressure than those that were successfully placed earlier on.
This is always a risk. As the need to get capacity deployed can result in an evident reduction of discipline in the market, as the all-important June 1st date fast approaches.
This year some of the renewals are expected to be late as well, meaning finalisation of portfolios is going to take much longer than usual for reinsurance firms and ILS funds.
Overall, market dynamics are very different this year at the Florida reinsurance renewal, but the end result is expected to be one that pleases many underwriters of risk.
Of course, rates are likely to please the more efficient and diversified, so those with a lower cost-of-capital. Where as more concentrated players who don’t have an efficiency edge, may feel rates haven’t risen as much as they would have liked. This should make for interesting commentary later this summer.
The market will be hoping that however significant the rate increases are in Florida, that they set the tone for the rest of the year and drive further price firming in January 2020.
But in order to really be encouraged that the market is hardening properly, we will need to see more capital flowing back in and a resolution of much of the trapped collateral that affects the ILS market.
If rates can be sustained at higher levels when the ILS market returns to growth then we can be more confident that a new floor is being set in pricing. Although it is important to note that any pricing floor is only relative to efficiency in the market and there is plenty going on that could drive greater efficiencies for some in the market, allowing them to be keener on price once again.
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