The industry now finds itself prepping for what is essentially a giant game of chicken
For several years now, question marks have sat next to the futures of various Floridian insurers and their ability to remain ongoing concerns should the reinsurers that they heavily rely on hike up rates.
Some argue it’s a flawed model as the insurers involved can only offer coverage in the first place, because they are able to pass the bulk of the risk onto reinsurers who are hungry for premium.
For years, Floridian carriers have been able to take advantage of a reinsurance market that, due to competition and an influx of capital, has been willing to accept risk at low pricing levels. That has happened while larger national players have reduced their participation in the Florida market, owing to the exposures involved and the litigious nature of some parts of the state.
Recent years and hit after hit after hit of catastrophe losses have taken their toll though, and now there seems to be a real desire from reinsurers to put that right and claw something back through rate rises.
As we highlighted last week though, rating agency Demotech has warned that a hardening of the property catastrophe reinsurance market would likely lead to a shakeup of several Floridian insurers’ business models.
For many homeowners’ insurers in Florida, access to affordable reinsurance is what gives them the ratings they need to bring in business. Indeed, Florida’s insurers pass on between 40 and 60 percent of their gross written premiums to the reinsurance industry in order to secure catastrophe reinsurance. Because of this, they are particularly sensitive to pricing and rating changes in the property catastrophe reinsurance market.
It’s a similar situation for some of those operating in California, and there are now issues over their viability in light of the repeated wildfire losses that have passed onto their reinsurance counterparties.
But it is a careful balancing act that reinsurers need to undertake – what is the inflection point where the price rises they demand become too much for their insurer clients?
Discussions ahead of the mid-year renewals have now begun in earnest, and early discussions suggest pricing for property catastrophe exposed reinsurance coverage is going to increase. Sources have said double-digit increases are the bare minimum to be expected, but pushed further, these same contacts indicate they are actually in the hunt of rises in the region of at least 20 percent – depending on the layer.
That is understandable as reinsurers have had to once again revise the pricing of their product in light of the better understanding surrounding their exposure to claims from the 2017 and 2018 hurricanes.
But by pushing for very high increases, there is the threat that reinsurers will price their clients out of buying the protection and, according to sources, that is already happening with the some of the lower layers on various loss affected insurers’ programmes.
The industry now finds itself prepping for what is essentially a giant game of chicken, whereby brokers and insurers will line up against reinsurers to see who yields first when it comes to pricing.
Discussions with reinsurance brokers in recent weeks reveal an understanding that pricing does indeed need to go up, as reinsurers have been hit hard by catastrophe losses from hurricanes and, on the west coast, wildfires. But they’re also mindful that their clients in Florida and California are only able to pay so much.
While I understand there have to be increases to pay back the losses, surely there needs to be a balance where clients aren’t priced out of the market? And that, in places such as Florida and indeed California, is a risky game to play as these companies are so reliant on reinsurance.
There are suggestions from the market that, as with the 1 January renewal, discussions for the upcoming renewal have started late with initial quotations only having been made last week. The next few weeks will see much posturing from both insurers and brokers as well as their reinsurance counterparts as we move closer to key renewal dates when we will find out which group has been brave and stayed true to its course in this giant game of chicken.