Some Florida property insurers are exiting business to make their catastrophe reinsurance more affordable as prices continue to rise.
Bob Warren, client services manager at ratings agency Demotech Inc., said that, based on a review of proposed reinsurance programs for the upcoming June 1 reinsurance renewals, companies were either jettisoning policies outright or repositioning their portfolios away from areas in the state that their models calculate would lead to bigger reinsurance bills. June 1 renewals are historically dominated by the Florida market.
Warren in an interview said a majority of companies that Demotech covers, which accounts for around two-thirds of the Sunshine State's residential property insurers, are trying to cut their reinsurance costs by reducing exposure.
A tough market
Florida is unique both because of the potential for catastrophe losses and also the claims environment, where assignment of benefits lawsuits continue to inflate claims bills.
S&P Global Market Intelligence data shows that the eight insurers that derived at least 75% of their 2020 direct premiums written from Florida homeowners and allied lines business, and wrote more than $250 million of that business, had an average ceded premium ratio of 46.46%. The Florida Hurricane Catastrophe Fund, the state's reinsurance pool, is the biggest reinsurer of these Florida-focused insurers, based on premium ceded, while Berkshire Hathaway Inc., Swiss Re AG and Lloyd's of London syndicates dominate the private reinsurance market.
Many Florida-based insurers have expanded beyond their home state and into Texas, Louisiana and other Southeastern states that Warren said "pretty much got hammered in 2020 from multiple events." This has hit the bottom layer of those insurers' catastrophe excess-of-loss reinsurance programs, which sits between their retention and the Florida Hurricane Catastrophe Fund's portion. That layer will now "probably a little bit pricier for some," he said.
Warren also noted that some features of reinsurance programs geared to covering subsequent events, such as top-and-drop structures where upper layers of cover untouched by a first event shift down to help cover those subsequent events, mostly disappeared at the previous renewal season.
"I don't see that returning," he said.
The combination of loss potential and the legal environment means reinsurers continue to be wary of Florida insurers. John Doucette, Everest Re Group, Ltd.'s then head of reinsurance, during an April 29 earnings call said the company would deploy levels of capacity in Florida similar to the previous year, but would focus on improving rates and terms and conditions.
"There is likely to be quite a lot of discipline about the deployment of capacity into the Florida market at June 1 this year," Mike Van Slooten, head of business intelligence at broker Aon plc's reinsurance solutions division, said in an interview.
Even so, Florida's insurers should be able to get the reinsurance they need, according to Warren. "I have not heard of anyone where they are just getting completely stonewalled," he said.
He also expects the dollar spend on reinsurance for Demotech's covered insurers to be less at this year's renewals versus 2020, though how much "remains to be seen."
While reinsurance prices keep rising, there should be little scope for big spikes. Given that the risks of the Florida market are now well known, rates will be "refined instead of reset," Lara Mowery, global head of distribution at Marsh & McLennan Companies, Inc.'s reinsurance arm Guy Carpenter & Co. LLC, said in an email.
Slowing increases
The June 1 renewals make up part of the U.S.-focused mid-year renewal season, along with July 1, when nationwide and other regional programs renew. There is a sense that overall, property-catastrophe rate rises are slowing down; Wade Gulbransen,
Mowery said changes to rates and terms and conditions this season "should be narrower" than those seen in 2020. Reinsurers have addressed many concerns they had through rate increases and re-balancing their business portfolios over the past two years, she said. Although market stresses have not been eliminated, positive developments over the past several months "have led to not only greater available capacity, but also a willingness by reinsurers to deploy that capacity," she added.
Pricing rigor is expected to remain, however. Van Slooten noted that a group of global insurers and reinsurers Aon tracks reported an average combined ratio of 102.3% and an average return on equity of 4.8% over the past four years.
"There is a lot of pressure on management teams to improve results, and I think that is something that is going to underpin discipline going forward," he said.