These trends point to the risk of ILS capital being squeezed out to a degree as rated reinsurers step up participations across the risk spectrum.
However, some providers, such as DE Shaw, and in some instances Nephila, are said to have been among those looking to capitalise on this year’s “rate on rate” gains for reinsurers.
Another offset is that more Florida insurers have used the cat bond market this year than last, offering ILS funds a different route to this risk.
But some shifts in buying from domestics are less favourable to alternative capital.
Reinstatement premium protection (RPP) business was typically a big area of participation for ILS in the past, as the covers are one-shot in nature.
But some Florida domestics have moved to buy their lower reinsurance layers with prepaid reinstatements this year in lieu of sourcing RPP covers to pay reinstatement premiums at a later date. This change is occurring as Floridians seek to draw in traditional reinsurance capacity at a level where they have been struggling to source cover, with rates on line for such prepaid deals shooting up to 100%-140%, sources said.
This has drawn in traditional reinsurance capacity, and in some cases made double collateralising worthwhile for ILS managers with the risk appetite to take high risk-return deals, though this option is still considered by some to be capital inefficient.
Meanwhile on the upper layers of programmes toward which ILS appetite also steers, sources describe deals being over-subscribed owing to the rating environment, leading to some capacity being signed down. One ILS source said that their returned capacity was 10%-20% of the authorised line.
Another noted that Berkshire Hathaway's 2023 appetite for cat risk had "taken away quite a lot of business." Trading Risk revealed last week that Berkshire had offered a $1bn line on Florida’s Citizens programme.
Meanwhile, Florida cat bond deals have been oversubscribed by 100% or more, leading to significant upsizing from conservative initial targets. Citizens' latest Everglades Re increased 275% on its initial target, raising $750mn of annual aggregate, indemnity-based coverage.
With a couple of deals still in the marketing process, the 2023 volumes are closing in on $2bn, well ahead of the $560mn issued by Florida domestics last year.
No capacity crunch
The fear of a few months ago that there would be a capacity crunch in Florida has not happened.
Across layers and cedants, sources put ballpark price increases at 20%-30%, risk-adjusted, for quality cedants and closer to the 40% mark for accounts with weaker track records.
Regarding upper layers, people are using terms like "healthy" and "orderly” to describe the renewal and pricing, and in the sense of a more equal push-pull between supply and demand.
Despite moves from some reinsurers to take larger early participations on deals, sources said underwriting discipline was prevailing. One ILS fund source said that they had on a couple of occasions provided quotes which had not been acceptable, only for the buyer to go away and shop around and later return and accept the original quoted terms.
A few short-fall covers have been sought as well as firm order terms (FOTs) being adjusted upward 2%-3%.
Underlying this is a keen awareness of the need to maintain the required return for end capital.
One ILS manager said: "Investors want high double-digit returns, two to three years in a row. Right now, we are still on brittle ground ... even if there is another storm and the market makes money."
Investor-friendly adjustments to terms achieved at 1 June last year have been maintained and the focus on quality of cedants’ data and claims history is a continuing theme, as well as concerns around credit quality.
Premium payment terms in certain instances might look like 80% upfront and 20% in October, rather than spread over four quarterly payments.
Social inflation still a fear despite reforms
There remains a good amount of scepticism about the effects of social inflation and fraud on Florida claims. Sources question how much of an impact will be felt from legislative reforms to the assignment of benefits (AoB) rules.
“You may be getting 30%, 40%, 50% or 60% more that you were a few years ago. But is it enough to make money? The situation with claims and AoB, you don’t know,” a source said.
There's also an ongoing question around the relative quality of reporting on Ian claims so far. While cedants may say they have outperformed the market average, sources note that this can't be true for all, and it will take time before there is real clarity on the hurricane’s final damages.
