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Florida renewal takeaways: Surviving the perfect storm

florida capitol storm3.jpg

Florida’s insurers faced a perfect storm in this year’s June reinsurance renewal.

Tepid reinsurance appetite combined with increased opportunities for reinsurers to deploy elsewhere in the US. Along with this, they had to deal with forecasts for another above-average hurricane season and late reform interventions that drove short-term delays (even if they may help in the long term).

Despite many Floridians heavily shrinking their books in the past year, a number of reinsurers have chosen to consolidate their book in the state to a strictly limited number of players.

There were a few exceptions, as we have noted, but reinsurers also had other opportunities to grow because larger US insurers were facing up to the impact of inflation on their growing exposures and seeking significantly more cover. State Farm bought significantly more outwards protection, just as Allstate did.

After being deluged with rain, but avoiding the first named storm of the year over the weekend, the state's insurers have for the most part fended off the immediate challenge to their short-term survival, but further upheaval is bound to emerge.

1. Credit risk tackled

Lifting headline prices was a key focus for reinsurers this year, but they also emphasized that terms and conditions moved in their favour, particularly in the final days of renewals as insurers needed to secure capacity.

This included increased take-up of named windstorm coverage, especially on lower layers, removing exposure to minor convective storm perils and, by extension, minimising the exposure to roof repair fraud.

Premium prepayments or other mechanisms of minimising credit risk were also a big win, although not universal. These included more favourable premium offset clauses, which now allows reinsurers to discount claims payouts for “all future premium” due, rather than the prior restrictions that only allowed recognition of “premium paid or present”.

This helps to allay some of reinsurers’ pain should they end up paying out claims to a carrier that has gone bust.

Some reinsurers also chose to press for loss adjustment expense (LAE) caps, although private caps remain above the 10% limit enforced by the Florida Hurricane Catastrophe Fund, estimated by one source in the high teens.

For some Florida insurers with less capital headroom, the lack of convective storm coverage could cause issues down the line if they face higher than expected attritional losses early on, or fail to secure top-up cover later in the year.

2. Out from the danger zone

After Demotech warned on 24 May that as many as 20 to 25 insurers risked falling short on their reinsurance, many gaps closed in the days after Memorial Day. Southern Fidelity was the exception in having its ratings withdrawn, but Demotech said that for the 10 carriers that had at least secured first-event coverage, more time was available to fill out their full towers.

Among the reinsurers willing to write last-minute deals, hedge fund and collateralised writer DE Shaw has been offering a form of “capacity wrap” to insurers in which its limit could be used to plug gaps throughout programmes, this publication wrote.

3. Reform hopes

Last-minute reform bills brought a mixed reaction from the industry – some insurers had hoped for more public reinsurance extensions, but praised the reforms delivered on the long-term litigation problems plaguing the market.

These reforms were welcomed by one new capital provider to the market, Hale Partnership, which had agreed to invest $15mn in Monarch National and which told this publication it considered Florida the most attractive distressed sector at present.

However, reinsurers said they had largely ignored the reforms as they want to see evidence that the potential gains can be realised – a stance justified by the quick legal attack brought on the bill by contractors unhappy about the assignment of benefit reforms, and the mixed response seen to last year’s reforms.

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