Glut of capacity makes for disappointing Florida cat renewals
A continued glut of capacity dampened rate increases in the recent June 1 renewals for Florida property-cat business. While rates did increase by 1.2 percent, the first rise in seven years, pricing remains 40 percent down on 2012, according to a new report by JLT Re.
JLT Re’s Risk-Adjusted Florida Property-Catastrophe ROL Index noted that the 1.2 percent increase compared to a reduction of 5.1% last year. But it did not match the rate increases recorded for US property-catastrophe business at 1 January 2018 despite a greater number of loss-affected programmes renewing after Hurricane Irma’s landfall in Florida last year.
As a result, pricing for Florida property-catastrophe business remains 40% down on 2012 levels and only 13% above the previous cyclical low of 1999/2000, the report noted.
The report noted some interesting dynamics during the renewal as companies tended to try to protect market share from the ILS markets and prioritise better performing cedants, with underwriting and claims handling key areas of focus.
“Although Irma had a relatively muted impact on price, it did provide reinsurers with an opportunity to assess cedants’ post-event capabilities,” it said.
It particularly noted that given the rapid reload of alternative capital following these events, insurance-linked securities (ILS) markets were vigorously looking to deploy capital at the Florida property-catastrophe renewal. Significantly, there was some evidence through the renewal process of ILS players extending provisions into areas traditionally dominated by traditional reinsurers, such as reinstatements. In doing so, they proved to be as competitive on price as the traditional market, with single-shot transactions such as top or drop aggregate cover and reinstatement premium protection occasionally coming in cheaper.
This put traditional reinsurers under pressure to defend market share. These competitive conditions were nevertheless not unexpected as an overabundance of capacity at the 1 January and 1 April renewals had already suppressed rate increases and prevented the type of market reaction that had followed other large-loss years. Specifically, price momentum in the retrocession market has receded through the course of the year, and, given its historical correlation with the Florida property-catastrophe market, traditional reinsurers were prepared for the environment they confronted at 1 June, the report said.
Brian O’Neill, executive vice president, JLT Re (North America), said: “Renewal experiences in Florida were wide-ranging, with some cedents’ loss-affected layers seeing risk-adjusted rate increases in the mid-to-high single-digit range. Cedents who had demonstrated strong post-event capabilities clearly benefitted from the additional capacity in the market. Rate increases for loss-impacted layers were muted, while in some cases, loss-free layers were even down modestly. Overall, the renewal was highly competitive, reflecting abundant capacity and only moderate increases in demand despite the market suffering its most expensive catastrophe loss year on record in 2017.”
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