Florida carriers better protected by reinsurance, reporting lower attritional losses: KBRA

Painting a picture of an insurance marketplace recovering after a challenging period, rating agency KBRA notes that reporting suggests Florida property insurance carriers are in a much better place, while the reinsurance market has responded and helped carriers increase their protection in advance of the expected busy hurricane season.

In response to forecasts for a particularly active hurricane season in 2024, KBRA notes that, “Many Florida property insurers have prepared by purchasing increased reinsurance limits and coverage to protect their balance sheets.”

At the same time, “Recent regulatory reforms, combined with insurers obtaining extensive rate increases, have attracted reinsurers to participate in the market.”

KBRA notes that, across its ratings universe, “Primary insurance companies took different approaches in anticipation of higher losses.

“These included utilizing a combination of the traditional and capital markets, captives, and the Florida Hurricane Catastrophe Fund, as well as recalibrating quota share agreements and various expansions of their excess of loss reinsurance programs.”

The improved availability of reinsurance capacity and its greater propensity towards being deployed in Florida, with confidence in that market recovering, meant that, “Increased reinsurance capacity provided opportunities for insurance companies to purchase larger towers, provide better protection for multiple-event coverage, and adjust retentions,” KBRA further said.

Another factor that has helped Florida’s property insurers is the recovery in the insurance-linked securities (ILS) market, with increased deployable assets under management now available.

KBRA said that at the recent renewals, “Non-traditional (e.g., insurance-linked securities) markets also increased their participation in the wake of higher pricing and releases of trapped capital from prior periods.”

“Conditions have generally rebounded, as regulatory reforms have largely addressed runaway litigation costs and insurers have obtained rate increases. These developments have made the profitability profile of current books of business more attractive to reinsurance markets,” the rating agency continued.

Property insurers were seen to buy protection to higher return periods than before, taking the opportunity that improved reinsurance market conditions presented to buy more and higher up their towers, while also securing reinstatements in some cases.

In addition, KBRA noted some more activity at the lower-end of reinsurance towers.

Explaining, “Greater availability of reinsurance at lower attachment points (a direct implication of the improved profitability profile coming out of 2023) allowed primary companies to reduce retentions to lower percentages of capital and surplus, mitigating the impact of multiple large-loss events.”

Speaking with its ratings universe, KBRA said that there was a, “nearly unanimous sentiment that reinsurance pricing remained the same or declined slightly YoY.”

Adding, “These companies also noted that there were generally more reinsurers participating in the renewal process and with larger pools of capacity, as many reinsurers cited the more favorable legal and underwriting environment relative to prior years. Looking ahead, the extent to which reinsurance pricing remains stable will depend on a combination of 2024’s storm season activity as well as how well programs ultimately perform this year.”

Perhaps most encouraging though, in KBRA’s report, is the attritional loss ratio of Florida’s property insurers and how much it has improved in recent years.

It reflects a property insurance market in much better shape since the legislative reforms, it seems.

KBRA said that, “Recent attritional loss ratios (excluding catastrophe losses) have declined sharply, frequently well below 50% and, in some cases, ranging as low as 10% to 30% for certain books of business. If this trend continues, KBRA would expect continued growth in capital bases across the sector, although pricing pressure and new business volumes will be key factors.”

That is very positive for the continued interest and attention of reinsurance and ILS markets. As long as pricing remains risk-commensurate, it seems Florida’s property insurers may have an easier time of renewing their reinsurance in future years as well, if the improvements continue.