Reinsurers cite 25% – 45% Florida increases, as U-shape disappears: KBW

Reinsurance companies and brokers in Bermuda are calling for Florida renewal rate increases to be significant, averaging between 25% to 45% and also believe that they will be enduring, so perhaps set a new floor for catastrophe reinsurance pricing in the state.

Analysts at KBW held meetings with Bermuda-based reinsurers and brokers yesterday and the general consensus was that these will be the steepest increases in Florida catastrophe reinsurance rates for more than a decade and that the market is unlikely to ever again get as cheap as it has been in recent years.

The analysts cite the perfect storm conditions that are affecting the Florida reinsurance renewals, as we explained earlier today, highlighting “years of compounding rate decreases that only materially reversed last year, combined with significant and poorly modeled actual losses, substantial trapped or withdrawn third-party capital, and COVID-19’s twin impacts on (re)insurers’ assets and liabilities.”

“Importantly, the consensus from our meetings was that expected rate increases exceed the roughly 10-15% increases anticipated pre-pandemic,” KBW’s analyst team said.

As well as the fact catastrophe reinsurance program renewals seem to be averaging 25% to 45% up year-on-year, the analysts from KBW also found that industry executives in Bermuda are seeing steep rate increases for primary lines of business as well.

They explained that the market is seeing “rapidly hardening” rates in primary casualty insurance, including D&O and E&O rate increases of between 70% to 100%.

These increases are also “being augmented by double-digit casualty reinsurance rate hikes,” the analysts explained, saying that the “U-shaped” curve of the January renewals appears to have disappeared, with rates across primary and reinsurance steeply rising in tandem, while retrocession is also rising as well.

The January renewals saw primary and retro rates rising more steeply than reinsurance, leading to widespread discussion of a U shaped market where reinsurance rates failed to keep pace.

This now appears to have dissipated, with reinsurance accelerating perhaps faster than retro at the mid-year juncture.

As a result, KBW’s analysts say they are “broadly optimistic” on the prospects for Bermuda’s specialty insurance and reinsurance market players.

In Florida, the more thinly capitalised and underperforming cedents are facing reinsurance rate increases much higher than the 25% to 45% average it seems, with reinsurers trying to get rates back to a more sensible and sustainable over the long-term level.

Outside of Florida itself, the analysts were told by Bermudian players that southeast U.S. property catastrophe programmes that mostly renew on July 1st are facing roughly 5% to 15% rate increases.

Nationwide wind exposed programmes meanwhile, are seeing rates increasing by high single-digit percentages, also targeted for July 1st.

The retrocession market continues to harden as well, with rates said increasing 20% to 25%, adding to the similarly sized increases seen during the January 2020 renewals.

In addition, KBW’s analysts report that Bermuda reinsurance executives are citing “significantly tighter terms and conditions,” that range from the removal of cascading features, to pandemic exclusion addition and a shift back towards named perils coverage in some cases.

Differentiation by cedent is again a key feature of these mid-year reinsurance renewals, with much higher rate increases and tighter terms seen for some programmes.

On the broker side, the renewals are dominated by the larger players and most markets say they would appreciate greater choice here.

Which again, given the low-chances of new players launching with an significant foothold in key underwriting markets, suggests that underwriters and cedents may be better looking to technology platforms that can open up a wide range of capacity sources to them on a more direct basis, reducing the reliance on major broking houses.

Of course, that’s easier said than done when the major broking houses still hold all of the keys to peak peril reinsurance markets such as Florida.

The prospects of a new floor for reinsurance pricing being set is an attractive one for all-sides of the market, but of course once capital begins to flow more readily the floor will lower somewhat.

Given we haven’t seen significant capital inflows for some time now, the effects of a resurgent ILS market will dent rates a degree.

So the question is not so much are we setting a floor now. Rather is the market raising the ceiling sufficiently to ensure the floor rises with it, to occupy a new higher level?

The answer would appear to be yes and those we’ve spoken with show no desire to ever see Florida reinsurance rates fall as low as they have been in recent years.

But, as ever, capital levels will decide this to a degree, along with models and risk appetites.

In future, we’d hope the only way the new floor in pricing (wherever that is set) would be reduced would be as a reaction to lower risk-levels (unlikely), or increased efficiency in the market and as a result returns above cost-of-capital.

Read all of our reinsurance renewal coverage here.