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June 1st Florida reinsurance renewals hit by “perfect storm” – TigerRisk’s O’Neill


The Florida reinsurance renewals have been hit by a “perfect storm” of market conditions, according to TigerRisk Partners exec Brian O’Neill, who who says support from core reinsurance partners will be critical to help carriers weather the storm.

florida-map-flagAs we explained yesterday, Florida reinsurance renewal pricing is reportedly up on average 20% or higher on a broad basis, but much more in individual cases where cedents have faced stress, underperformed, or come under pressure in recent years.

Yesterday, Florida-focused insurance company rating agency Demotech concluded that the year 2020 will not be “business as usual” for insurers in the state, highlighting the increased costs of catastrophe reinsurance and limited interest of those offering it as one key reason some insurers may struggle this year.

“Our view is that the financial and market-based criteria affecting residential property insurance have never been more difficult to navigate. Moreover, insurers and the reinsurers that support them have responded to eleven tropical storms and eight hurricanes over the period 2016 through 2019 in addition to the added effort and expense of dealing with COVID-19,” Demotech explained.

Changes in business models and operating plans have been announced by a number of Florida carriers, Capitol Preferred Insurance Company, People’s Trust Insurance Company, and Avatar Property and Casualty Insurance Company, with more expected in future.

Joseph Petrelli, ACAS, MAAA, President and co-founder of Demotech said, “As of this date, Demotech has reviewed each of the preliminary proposed reinsurance programs for the June 1, 2020 through May 31, 2021 storm season. Reviews of final programs will follow shortly to evaluate vertical and horizontal limits purchased, the reinsurers assigned to each treaty, and the impact of the actual cost of reinsurance on the carriers’ operations.”

Bob Warren, CPCU, CPA, Client Services Manager, added, “I have contacted each carrier to schedule a conference call. The purpose of each call is three-fold: a review the final CAT program, discussion of first quarter results, and a review of the financial projection for the balance of 2020.  We will issue affirmations as soon as these aspects of carrier analysis have been reviewed.”

“Our review and analysis process is consistent with prior periods with adaptation of our process to reflect the emerging impact of COVID-19 as well as the affordability and availability of reinsurance associated with 2020 renewals,” explained Barry J. Koestler, II, CFA, Chief Ratings Officer.

Brian O’Neill, Partner and Florida Client Executive at reinsurance brokerage and risk capital advisor TigerRisk also commented on the state of the Florida insurance market as the 2020 wind season begins and the catastrophe reinsurance renewals draw towards their culmination.

“We have not experienced market conditions like we are seeing this year since 2006. We are a supply and demand economy, and given the shortage of retro cover available (especially low attaching cover), the loss creep from Irma and to some degree Michael, the lack of legislative reforms to fix the one way attorney fee statutes in the state, and then throw in a Global Pandemic – you have a perfect storm hitting the June 1st renewals,” O’Neill said.

Adding that, “The carriers in the state are truly performing their best to weather this storm. Support from core reinsurance partners will be critical in this environment along with creating unique risk management solutions and raising reinsurance capacity to optimally manage each carrier’s operational and financial needs.”

Capital is king to many of the relatively thinly capitalised Florida insurance carrier marketplace and this year capital is also expensive.

As we’ve been reporting, the cost-of-capital has risen across the market, on the insurance-linked securities (ILS) side due to higher investor return requirements, as well as on the traditional side where reinsurance companies face losses and are now pushing for higher increases in the rates that had already been rising even before the pandemic.

As we reported yesterday, some Florida carriers have been facing particularly significant rate increases, while the average across the market is seen as around 20% up so far.

We’ve also reported that some major ILS fund underwriters had downed their pens, in reaction to the pricing and terms on offer to them.

Chunks of reinsurance programmes have been ceded privately, competition is high. While other programmes are still looking to be filled.

A number of ILS players have been said to be growing their books, while some of the leading ILS funds are being very selective in Florida this year, looking to upsize key relationships and drop underperforming cedents.

All of which, alongside the challenges in securing sufficient retrocession, have contributed to the perfect storm that O’Neill describes.

Finally, we reported this morning that Florida Citizens CFO explained to us the reason for the withdrawal of the larger layer of its new catastrophe bond.

It’s down to elevated return expectations in both the reinsurance and capital markets, making multi-year coverage far less attractive, as the insurer of last resort cannot afford to lock in at the current higher rates.

Calling pricing “irrational” Citizens CFO Jennifer Montero explained to us that the insurer would look to fill as much of the Coastal account layer of its program from the reinsurance market on a single-year basis.

The perfect storm at the Florida reinsurance renewals is forcing everyone to respond, perhaps in ways they had never envisaged would be necessary.

As ever, there will be winners and losers at this mid-year reinsurance renewals.

But, for the Florida carriers that had already been struggling, the higher costs of reinsurance capital may make legacy business models harder to sustain.

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