What’s the Florida risk?
Insurance companies rely on reinsurance to provide the financial backing to help pay claims from big storms such as Hurricanes Michael and Irma and whatever the upcoming 2019 Atlantic hurricane season has in store for us. But how that reinsurance is being priced this season has turned into high-stake gamesmanship between reinsurers seeking relief from years of rate doldrums and insurance companies wanting credit for their reduced financial risk exposure.
As we mentioned at the top of this newsletter, reinsurance has to be priced appropriately based on a variety of factors. They must include legislative and regulatory changes, together with improvements that individual carriers have made to improve their financial stability going into the next hurricane season. That evaluation process should be no different this year than in past years.
Several insurance company CEOs have been quoted in trade publications over the past two weeks as speculating the entire reinsurance market for Florida is going through a “price correction” at mid-year renewals and that part of it can be attributed to loss creep of lingering claims from Hurricanes Irma and Florence.
Yet again to Demotech’s point: reinsurers have so far failed to impose meaningful pricing differentials on Florida insurance companies. Even after Demotech this winter required some of those same carriers to beef-up their reinsurance. Even after the legislative changes this spring to ease AOB abuse and raise the loss adjustment expense from 5% to 10% that the Florida Hurricane Catastrophe Fund reimburses to insurers.
The loss adjustment expense (LAE) is an issue the private reinsurance market has been abuzz, with threats for significant reinsurance rate increases from Bermuda and London. Fortunately, there was agreement that the Cat Fund needs to step up and absorb more of this LAE coverage and the provisions will apply to this year’s cat fund contracts.
If Citizens Property Insurance Corporation is any indication, rates are definitely up. The state’s insurer of last resort recently reported its increased reinsurance costs going into the 2019 hurricane season. Citizens is spending $110 million to secure $703 million of new reinsurance coverage. That’s quite an increase from the $92 million budgeted to purchase $940 of reinsurance last year.
If you want a deeper understanding of bond pricing, Guy Carpenter’s Director of Actuarial Research, John Major, is out with Methodological Considerations in the Statistical Modeling of Catastrophe Bond Prices. This article aims to help actuaries, financial analysts, statisticians, data scientists and their clients better investigate how property catastrophe risk, and particularly catastrophe bonds, are priced.
LMA Newsletter of 5-20-19