Florida under review: ‘social inflation’ fears drive repricing demands

The impact of Hurricane Irma loss creep is coming to the fore ahead of the June renewals, as reinsurers raise concerns over whether Florida business is fully priced for the risk of “social inflation” or litigated claims.

At this point, it is the scale of rate increases that is the key unknown in the upcoming Florida renewal and a source of concern for those that believe the risks may be under-priced.

RenaissanceRe’s CUO of property Justin O’Keefe told sister publication The Insurance Insider that its review of recent Florida losses led it to focus on social inflation, which he defined as “an increase in both the frequency and severity of claims due to both assignment of benefits (AOB) and/or claims that are in litigation – or otherwise that have a lawyer involved”.

The RenRe executive said that when AOB or litigation is involved the loss is three times higher on average and loss adjusting expenses (LAE) four times higher.

“Therefore, we have storms that you would expect to occur relatively frequently causing severity losses to reinsurance programmes.”

O’Keefe said that RenRe had already implemented a new residential hurricane model for Florida to account for the “social inflation” element, which would be used ahead of 1 June.

He continued: “The way RenRe thinks about it is that at the end of the day our clients are insuring people, not houses, and this behavioural element is the next step into catastrophe modelling.”

Nephila’s chief investment officer Adolfo Peña said that expectations of repricing in this year’s renewal were not a case of “looking for payback”.

“The only concern is whether there has been risk in these companies’ programmes that wasn’t considered in pricing,” he said.

Kean Driscoll, CEO at Validus Re, said the carrier believed that recent trends are not represented in the current vendor model views on Florida.

“After Irma, we identified several trends, notably increased claims severity from lower wind speed events, and higher LAE as a percentage of ultimate claims,” Driscoll told The Insurance Insider.

The Validus Re CEO said that as a result he expected aggregate loss costs to increase for Florida residential portfolios.

Peña said that for hurricanes Irma and Michael, the LAE from Florida was “way over” what would have been expected, based on the previous expectations of insurers’ claims-handling capabilities.

The Nephila principal flagged that some reinsurance layers that were supposed to trigger above cover from the state-backed Florida Hurricane Catastrophe Fund (FHCF) had paid out before the FHCF response triggered, due to the scheme’s cap on LAE coverage that leaves these expenses to be picked up by private reinsurers. 

“If that is taken into account, the risk taken on the layers to the side and above the FHCF is much higher than people thought,” he said. “While the risk metrics are up across the board, the increase in risk is greater higher up.”

Scale of rate increases the key unknown

More hard-line reinsurers are said to be pushing for rate rises in the range of 20-30 percent, although the biggest relative increases are expected to come on the ‘sliver’ layers and layers excess the FHCF, which carry lower rates on line.

As well as factors that are endemic to the Florida market, higher retro expenses will also drive up reinsurers’ cost of capital – although these retro increases are coming off notably low baseline levels. 

Broking sources and some more restrained underwriting sources have suggested that the increases are likely to be closer to 5-15 percent. Despite Irma’s creep, some higher layers have not been touched by losses in the past two years and these are unlikely to face steep increases, one underwriter said.

More differentiation is also expected based on cedants’ loss-handling record. Earlier this year, the Florida Farm Bureau  negotiated a low renewal increase after paying up significantly in 2017, due partly to its record on expenses, sources said.

Countering the case for higher rates, overall capacity levels are still expected to be sufficient, despite some shrinkage of ILS assets under management in late 2018. However, rate rises could also be diluted if cedants that are relatively underweight in Florida, such as Swiss Re, look to grow their books.

Trapped capital is likely to be less of an issue for Michael than for Irma, given the limited geographical impact of the storm and more optimistic outlook on the ability to contain the loss.  

On the other hand, insurers are pushing back against the higher end of projected rate increases on concerns over affordability.

However, the shift to higher take-up of reinsurance from the FHCF will mitigate these concerns as it means cheaper cover at the riskier end of programmes.

“Between FHCF and Demotech you might see some folks having to buy a little more limit but it is not in an area where rates on line are going to be an affordability issue,” one broker said.

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