Sharp rate declines in April; worse expected in June
Reinsurance prices in the April renewals softened by more than expected and further sharp declines in rates should be expected in the June renewals, a critical point for the Florida property-catastrophe market.
That is the view of rating agency Fitch in a report covering the recent April 1 renewals. But it also said that, despite the decline, overall reinsurance spending was close to flat as increased demand from specialist insurers offset falling rates.
The April 1 renewal period primarily focused on the Asian market. Japanese catastrophe loss free pricing was down as much as 17.5 percent for earthquake and 15 percent for wind and flood risks.
US and UK/Europe property catastrophe reinsurance pricing at April 1 was down 10 percent to 20 percent for loss free accounts, in line with declines experienced at the January 1 renewals.
The price declines, along with more generous policy terms and conditions, result from recent low catastrophe losses and continued abundant reinsurance capacity from both traditional reinsurance and the growing alternative capital market, the rating agency said.
The June 2014 reinsurance renewals are particularly important as they primarily relate to Florida property-catastrophe risk, the largest market for US peak zone risk. Florida property is among the most widely modelled catastrophe risks and is therefore the area of focus for third-party capital.
Consequently it has experienced the most reinsurance pricing pressure and Fitch expects competition between traditional and non-traditional reinsurers to remain fierce this year.
Florida rates dropped by up to 25 percent last June and further double digit declines are now expected this year.
The build-up of capital is also contributing to ample capacity. No major hurricane has made landfall in the US since Hurricane Wilma hit Florida in 2005 – the longest interlude since the 1860s.
But Fitch said that it still believes Florida reinsurance risk is adequately priced despite the recent rate declines, particularly compared with property-catastrophe reinsurance pricing in other countries, which tends to be more fragmented and not as easily modelled.
The recent growth of Florida-only specialist insurers could also help reverse recent weaker demand. These firms use more private market reinsurance and now account for more than half of the homeowners' insurance market in the state. Overall reinsurance spending could therefore hold steady.
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