We’re told that underwriters from some of the biggest insurance-linked securities (ILS) fund managers have effectively “downed pens” on the Florida reinsurance renewals, in reaction to the pricing and terms on offer.
The Florida reinsurance renewals at June 1st 2020 were always going to be contentious.
Enough has happened over the last few years in Florida, in the way of fresh hurricane and severe weather losses, ongoing loss creep and loss inflation due to the assignment of benefits (AOB) crisis in the state, that rates were expected to firm up considerably at the mid-year 2020 reinsurance renewals.
That was the expectation even before Covid-19 came along.
But now, with the reinsurance and ILS market both disrupted and threatened by additional losses caused by the pandemic, the expectation for even firmer rates had been high. As well as for a tightening of terms.
But we’re told that some of the largest ILS funds have now put down their pens and are declining to write renewal business, in reaction to the terms and pricing being presented to them by brokers.
We’d already heard some murmurs from ILS funds that the early renewals that were in the market through March and April were not reflective of the risk-adjusted returns that ILS fund managers believe Florida business should now be delivering.
Of course, this has been the case for some years, that ILS funds have in some cases pulled back a little on their shares of Florida reinsurance renewals, with the traditional reinsurance market taking up the slack in the majority of cases.
We also understand that there is consternation in the market about the fact some brokers appear to be directing larger lines to a handful of the biggest reinsurers and main Florida focused traditional markets. We’ve heard the words “preferential terms” mentioned more than once in the last week, during our discussions with markets on both sides.
It’s always a little difficult to see through the rhetoric when it comes to renewals and this year there could be more rhetoric than ever, but it does seem that ILS funds feel the pricing may not be moving as fast as they would like it to.
At the same time we’ve also heard of cases where attempts have been made to tighten up collateral release terms again (making them even more stringent), something that was attempted before the 1/1 renewals as well, but largely failed.
Downing pens tends to happen every so often, almost in protest at the lack of change in the marketplace. But one source told us that this year it’s possible some ILS funds could write a much smaller book of Florida business, as a result of this current reaction to pricing and terms.
Of course the brokers could bring the programs in question back with enhancements or inducements to get more markets to sign onto them, but we understand that there still seems ample appetite among traditional reinsurers at this time for these risks so that may not even be necessary.
Overall though, this is another sign of discipline in the ILS market, as some players stop writing business that does not meet their return expectations.
That’s good for the market and its investors, just so long as their capital can still be deployed to earn a return.
We understand that while these Florida specific renewals are proving less attractive than hoped for, the broader July 1st renewals are showing a little more promise.
There’s also a chance that any ILS funds pulling back slightly on collateralised reinsurance in Florida may find opportunities in the catastrophe bond market over the coming weeks that better meet their return hurdles.
With cat bonds often more strictly named peril and having a clearer set of terms around extension clauses for retention of collateral, the fully securitised 144a structures are perhaps coming back into favour, at least on the investment side.
With two and a half weeks roughly to go, the June 1st reinsurance renewals look set to be another interesting one, when the balance of capacity deployed may shift slightly back towards traditional players, as well as traditional reinsurers’ capital markets vehicles.
It seems increasingly likely that June 1st could mirror the April renewal, when there was a varied outcome for ILS funds and some pulled back, with overall insurance-linked securities (ILS) capacity deployed falling a little.
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