Florida’s “significant” renewal rate increases won’t match post-Katrina: KBW

Florida reinsurance renewal rate increases are expected to be “significant” but are unlikely to match the increases seen in the post-Katrina market except in some extreme cases, according to analysts at KBW.

The analysts have held meetings with Florida market participants in recent days and with the June 1st reinsurance renewal just around the corner, they conclude that the market is facing “significant rate increases following years of significant (and initially underestimated) losses, combined with elevated risk sensitivity and likely lower deployable capital.”

With the average Florida reinsurance renewal price increase expected to be around 20%, according to KBW, there are also pockets of activity where rate increases are significantly higher than that.

But overall, the analysts do not expect the Florida reinsurance renewal to see hardening at the pace or scale of that seen in the wake of hurricane Katrina.

“We don’t expect aggregated rate increases to replicate the post-Katrina era’s widespread 50-70% rate increases, but we expect average increases of 20% or higher,” the analysts explained.

They are seeing extreme cases though, with reinsurance rate increases continuing to be dependent on a cedent’s loss and loss development experience, overall capital adequacy and how much exposure to the tri-county area that a program has, given that is seen as the region where the most aggressive litigation is concentrated.

The analysts report anecdotal comments from a Floridian carriers CEO who said they have heard of 30% to 50% rate increases, as well as cases where particularly vulnerable carriers have been given just 24 hours to decide on whether to accept 75% plus rate increases.

But, “We caution against extrapolating from extreme examples,” the analysts at KBW said.

The Florida renewals are seeing a flight to quality, something that has been evident in the insurance-linked securities (ILS) market and also in catastrophe bonds.

But this selective approach is on both-sides of the reinsurance renewal market, the analysts said, “with reinsurers preferring books that are underweight the tri-county area and/ or diversified across multiple states, and primary insurers trying to be selective about preferred reinsurance partners, given still- significant market uncertainty.”

KBW’s analyst team has noted an incremental increase in interest in the Florida reinsurance renewals from some of the big European carriers, but also a shrinking of interest among some Bermudians, with the market overall expected to have sufficient capacity support to meet cedents needs.

“Our understanding is that there is enough capacity in the market to expect almost all programs to be filled more or less on time, which seems broadly consistent with several CEOs noting generally stable reinsurance panels,” the analysts said.

As ever, the Florida renewals looks set to see significant differences in approach and appetites emerging, both on the ILS fund market side and among traditional reinsurers.

In recent days we’ve heard of ILS fund underwriters downing pens on Florida renewal business, in reaction to the pricing and terms on offer.

But at the same time, large chunks of programs are getting written by both traditional and collateralised markets, with preferred cedents seemingly likely to be the winners in terms of getting the best pricing for their reinsurance program placements.

Then you have Florida Citizens latest catastrophe bond, which saw its pricing leap and then saw a $200 million chunk of the issuance withdrawn, presumably to place directly with traditional or collateralised markets.

We later spoke with Citizens CFO, who said that the pricing proved irrational and not conducive to locking in multi-year cat bond coverage at this time.

Clearly the Florida reinsurance renewals are proving testing for many, with the meeting of cedents appetites for paying for protection with markets appetites for returns at times wide apart.

As the Florida reinsurance market struggles to clear, as this is what is expressed in these challenges – an inefficient marketplace operating in a manner where risk and capital struggle to adequately express appetites and meet on a level-playing field, it points to the need for much more innovation around the reinsurance placement and syndication process itself.

Downing pens, demands for a certain price, pulling deals from one market segment to another, all of which suggest pricing and capacity is not being as efficiently managed as it could be in the reinsurance market, which can be just as detrimental to cedents and capital providers alike.