June 10th, 2010

2010 Hurricane Season Begins: Knowing, Understanding and Better Managing the Risks, Part I: State of the Florida Marketplace

Posted at 1:00 AM ET

Lara Mowery, Managing Director and Julian Alovisi, Senior Vice President

The 2010 hurricane season kicked-off on June 1 and the meteorological forces wasted no time in getting down to business. Tropical storm Agatha slammed into Central America, killing at least 101 people. The hurricane season kick-off and the storm occurred as backdrops to the wrap up of the June 1, 2010 reinsurance renewals, traditionally centered on the Florida property marketplace.

Reinsurance Renewal: Price Declines Continue

This year, commentary and guidance on risk transfer approaches from ratings agencies and Florida regulators, combined with the unique economic turmoil of Florida, brought additional challenges.

In the renewal, which ran late this year, Guy Carpenter & Company, LLC saw the trend of price declines continue. On a risk adjusted basis, prices dropped year over year by 10 percent to 12 percent on average. This drop returns pricing to a level close to that seen in 2008, particularly in upper layers.

Reinsurers writing Florida business tend to view metrics for this exposure within a very narrow band, more so than other catastrophe exposed regions. Variation in average quotes ranged from declines of 3 percent to increases of 3 percent, which is similar to those seen in the Florida renewals of 2009. The forecasts of higher than historical average rates of storm activity this year, while weighing on minds, did not directly impact prices.

Concerns over Florida primary insurer credit quality affected reinsurance rates as well. In 2009, five primary insurers came under supervision of the Florida Office of Insurance Regulation (OIR) or ceased operations completely, leaving some reinsurers unpaid. Where there were concerns over primary insurer creditworthiness, surcharges on pricing were seen. Alternatively, insurers with better quality financials received larger reductions on pricing. 

Capacity in this market is plentiful this year. Early in the 2009 Florida renewal there was a perceived imbalance of excess demand chasing limited capacity, driving prices higher. As the renewal reached completion, however, the market saw capacity ultimately exceeding demand by 15 percent to 20 percent. This year, capacity needs of clients have remained stable with retentions and limits remaining essentially the same as last year. Reinsurers, with their balance sheets largely improved, have excess capacity available.

Regulatory Initiatives

OIR released a memorandum stating that companies should not necessarily focus on purchasing to the one in 100 year event as this would not be an OIR requirement, but they should also evaluate giving equal weight to protecting surplus from multiple storms of smaller magnitude. This did not have an impact on some companies that chose to purchase less limit on top in order to place other coverages providing protection such as second or third event structures.

The OIR has also indicated that they want to work with companies on the utilization of alternative products to help them achieve more efficient reinsurance pricing, further driving growth for alternative products in the Florida marketplace. Among the options for alternative risk financing products in Florida, catastrophe bonds have not formed a substantial part of primary insurers’ catastrophe programs.

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