Florida carriers face “no-win situation” at June reinsurance renewal: ALIRT

At the fast-approaching June 1st reinsurance renewals, Florida focused insurance carriers are facing a “no-win situation”, with rate increases of as much as 50% expected, according to ALIRT Insurance Research.

ALIRT Insurance Research’s Principal David Paul has penned a comprehensive new report on the Florida market, detailing the challenging environment and saying that the outlook for the state’s insurance market continues to be uncertain, despite the significant steps taken in the legislature.

ALIRT has previously driven home the importance of catastrophe reinsurance for the Florida focused property insurers, having said that last year’s hurricane Ian could have sounded a death knell for many of them, were it not for the support they’re receiving from their catastrophe reinsurance arrangements.

But this vital source of capital support is now expected to be more expensive than perhaps ever before, as rate increases are expected to continue at the June reinsurance renewal, adding to the rate increases seen a year ago.

“The impact of Hurricane Ian – at an estimated $45-$50 billion one of the country’s largest catastrophe losses ever – did not have as profound an impact on this peer group as would have been expected, given catastrophe reinsurance protection,” ALIRT’s Paul wrote in the new report.

Adding that, “However, these substantial Ian losses for the global reinsurance community served as a proverbial straw breaking the camel’s back, accelerating a capacity and rate crisis that was already in the making given outsized global catastrophe losses in five of the past six years.”

With reinsurance rates having risen steadily through the last couple of years, accelerating last June for Florida carriers and then spiking globally at the January 2023 reinsurance renewals, ALIRT expect further increases at the mid-year point.

“Rates at the upcoming June reinsurance renewals, which are more impactful for Florida property insurers, are estimated to potentially rise by up to 50% and given a substantial drop in overall reinsurance capital in 2022, severe capacity constraints are a significant issue,” ALIRT’s report explains.

“This sets up a sort of no-win situation for most of the Florida dedicated homeowner insurers in our peer group,” they continue.

Saying, “To wit, if an insurer can even secure the reinsurance limit desired, it may well cost more than the company earns in gross premium, resulting in negative net written premium (an unsustainable business model over the long haul).

“If it cannot obtain (or afford) the desired reinsurance limit, it leaves itself open to potentially solvency-threatening storm losses, should they be large enough to exhaust the reinsurance protection procured.”

Summing up on the reinsurance situation for Florida’s insurers by saying, “While the new legislative landscape for property insurers should address the non-catastrophe loss trend issues that have long weighed on this market, the current reinsurance landscape is fairly bleak.

“While these Florida domestic insurers wait for the insurance reforms of 2022 and early 2023 to fruitfully work their way into income statements (which may take some time given a recent wave of lawsuits filed just before the newest became effective in late March), they will need to keep their fingers crossed on the catastrophe-front – never a great strategy.

“Given all of this, we foresee that financial pressure on the Florida domestic insurer market is unfortunately likely to persist.

ALIRT call the reinsurance market situation, for Florida’s property insurers, an “equally existential challenge” with the litigation and fraud issues they have faced.

Securing sufficient reinsurance at the renewals is critical to many homeowners insurers in Florida and ALIRT attributes the increasing costs in part to the Florida-specific marketplace and social inflationary challenges, but just as much (or more) to severe weather and catastrophe losses.

“The current retrenchment of reinsurance capacity available to the Florida property market, and attendant spike in cost for that which exists, is only partially tied to the man-made legal and claims abuses that contributed to years of poor underwriting results. Much more pertinent is the growth of larger and more frequent weather- related perils that many now attribute to climate change.

“In short, Florida’s unique geographic exposure to hurricanes and other secondary weather events, rapid growth as a retirement/life-style/tax-haven destination (which has driven both the amount and price of real estate), and suppression of actuarially sound property insurance rates, has proven a recipe for chronic (re)insurance losses. It appears that reinsurers, worn down by years of substandard earnings, have also finally cried ‘Uncle,’” ALIRT states.

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