Florida renewal “one of the toughest in recent memory” – JMP Securities

The upcoming June 2022 Florida reinsurance renewals are likely to be one of the toughest in recent memory, as the availability and affordability of lower layer reinsurance dries up, leaving any carrier with capital issues in a challenging position.

This is according to analysts at JMP Securities, who visited the Bermuda market recently and came away with the feeling Florida’s reinsurance renewal challenges will be particularly acute this time around.

While some Florida carriers are expected to fill out higher layers of their reinsurance towers with instruments like catastrophe bonds and other collateralized products from the insurance-linked securities (ILS) market, it’s another story as you move further down, according to the analysts.

With suggestions that multiple downgrades could come for the most thinly capitalised and highly pressured Florida focused homeowners carriers, JMP Securities analyst team said that, “The issue lies in the very structure of the Florida market.”

Further explaining, “Many primary insurers rely on the availability and affordability of low layers of reinsurance protection – the very layers that have been destroyed by the recent elevated frequency of loss events, which has led to reinsurers running away from these layers as quickly as possible.”

Capacity is available for those lower layers of reinsurance towers, in the majority of cases, we understand, but affordability is another question entirely, according to the analysts.

“With pricing of these lowest layers already running ~50 ROL in many instances, the further meaningful price increases that reinsurers desire to retain the risk simply cannot be afforded by the insurers and they do not have the capital to retain the risk net,” they said.

Anecdotally, the JMP Securities analysts said they have been hearing of reinsurers desire to secure rates-on-line in the ~60 to ~70 range, if they are to expose capital to those lower layers of Florida exposed risk.

The analysts suggest there may be a bit of a supply – demand imbalance in reinsurance for those lower layers, which we’d think is more down to risk appetite and caution than down to capital availability.

“Perversely, if Demotech were to downgrade a sizable number of companies, it could work to tip the supply/demand imbalance slightly back in favor of the insurers as we suspect many of these policies would end up at Citizens Property Insurance Corp., which does not purchase nearly the same amount of private market reinsurance as do the insurers in question,” the analysts explained.

Of course, Florida Citizens may already buy not far off twice as much reinsurance and catastrophe bond risk transfer in 2022 anyway, so assuming another glut of policies will only increase its appetite for protection, although it won’t be to the same level as all the private insurers buying their normal towers.

The Florida reinsurance renewal is set to be very challenging and indications provided by the catastrophe bond market suggest multiples of expected loss are set to rise.

With no quick legislative fix expected, as time and appetite runs out for a special session, market dynamics will now play out in real-time as the Florida renewal approaches, which may also have an effect on how early renewals can get completed, as capacity may try to wait out the early forays to get the best rates possible.