A clear picture of a divergent Florida property catastrophe marketplace is emerging, as the 1 June 2010 renewal season starts to come into focus.
International reinsurers are preparing to differentiate themselves based on the relative credit quality of cedants, given the high number of company failures in the past 12 months - even in a benign year for catastrophes.
This would see them engage in a flight to quality and relatively aggressive levels of competition for the business of the most desirable and solvent cedants.
Reinsurers will also look to either sidestep entirely those most likely to experience financial strain over the upcoming financial year or burden them with punitive upfront premium payment terms.
Florida is one of the largest sources of cat reinsurance business, generating around $3.5bn of premiums in total and with around two-thirds flowing into the private reinsurance market (with many located overseas, in Bermuda, Europe and London).
Market sources suggest that in line with the overall softening market trend some of the most favoured clients should be able to achieve discounts of around 10 percent.
Those viewed less favourably, meanwhile, are likely to be offered discounted terms on a sliding scale down to zero, with the least preferred asked to stump up large percentages of the annual premium at inception (instead of being allowed, as is typical market practice, to fund reinsurance spend on a quarterly basis).
In the firm's first quarter investor call, Everest Re president and COO Ralph Jones explained that reinsurers had engaged in particularly intense scrutiny of the often thinly capitalised privately owned players in the Floridian marketplace.
"A lot of these are private companies," said Jones. "So you have to go way beyond the statutory statement to see what's actually going on."
Everest disclosed that it writes the reinsurance for just 16 companies out of 60 of the Demotech-rated local Florida insurers.
Reinsurers concerns have been heightened following the failure of seven relatively young companies in the past 12 months, most of which were formed under Florida's capital build-up programme formed in the wake of the costly 2004-05 hurricane seasons.
Sources have explained that some of the more marginal firms were unable to make quarterly reinsurance premium payments during the last 12 months, instead offering loan notes to reinsurers.
The reinsurers' general overview is that many local carriers have been caught in a squeeze between their need to buy correctly priced but relatively expensive reinsurance in the commercial market, and their inability to pass this cost on to consumers because they are forced by regulators and politicians into writing business at uneconomic rates.
In a first quarter conference call David Brown, CEO of Flagstone Re - which is active in Florida - also made specific reference to the difficulties of doing business in the state, singling out the issue of solvency.
The global reinsurer's CEO took the initial standpoint that rates are clearly inadequate at the primary level in Florida.
"It's quite interesting that we have seen several companies go into receivership in 2009 in a cat-free year," Brown told analysts.
"So, if your business model doesn't work when the wind doesn't blow, how is it going to work when the wind does blow?"
And for the upcoming season, Flagstone Re will be looking at the credit quality of the companies it deals with using a "rigorous multi-point approach to assessing clients and scoring them", Brown explained.
See below for our 3-page Florida special report