October 26th, 2010

The Future of the Florida Property Market

Posted at 5:00 AM ET

stokes_kevin_gcci2Kevin Stokes, Executive Vice President

As U.S. property/casualty insurers begin to focus on their January 1, 2011 catastrophe renewals, they face a number of complex issues. The first challenge is effectively managing exposures in 2011 after an unexpectedly quiet hurricane season, in terms of losses. Following on the heels of the first six months of 2010, which saw significant losses from global catastrophes including higher levels of wind and hail losses in the midwestern United States, the Atlantic hurricane season was forecasted to be an active one.

The National Hurricane Center predicted 14-20 named storms for 2010, including 8-12 hurricanes, with 4-6 major hurricanes to reach a status of category 3 or stronger. As of mid-October, 16 named storms and nine hurricanes appeared, with five developing into major hurricanes. However, most of the storms that developed did not reach the U.S. coast line. In fact, only 2 of the 16 named storms - Bonnie and Julia - made landfall in the United States. Neither resulted in much damage, let alone insured loss.

If 2011 is an equally quiet season, what is the best way to manage the excess capital that remains in the reinsurance marketplace? The amount of excess capital available at mid-year renewals will only grow absent a market-changing event before the end of this year. This excess surplus capital will lead to increased reinsurance capacity, and despite the economic downturn and low investment yields, the expectation is for reinsurance rates to continue to come under downward pressure next year.

Model Improvements

That said, what may cause a slight headwind against this prediction are the model updates of the major catastrophe modeling firms. AIR released its updated model in June 2010, and RMS will be releasing a new model version by the end of the first quarter of 2011. While several changes are occurring across various regions and perils, a particular focus is on the Atlantic Basin hurricane models. Overall, the changes to modeled loss have increased with AIR and are expected to increase with RMS. The PML changes could be materially different for each portfolio depending on geography and risk characteristics, among other factors. In particular, RMS expects a substantial increase in non-coastal risk, while some coastal counties may see a decrease. While increases in PMLs could increase the ground-up catastrophe reinsurance limit being purchased by insurers, a reduction in the pricing of existing coverage limits next year is still a likely outcome. Initial feedback from reinsurers indicates that they expect the new model results to more closely resemble their internal analysis of clients exposures.

Given these ongoing intricate considerations, the Florida property marketplace remains a challenge. In the past decade, as national carriers pulled back, 45-50 domestic carriers have entered the insurance marketplace to help fill the void, and these carriers rely heavily on reinsurance. With nearly USD3 trillion of wind-exposed property value located in the state, Florida is among the largest catastrophe zones in the world. This, combined with a unique regulatory and legislative environment, presents a number of distinct complications for national, regional and single-state companies.

As a result, Guy Carpenter has enhanced its Florida platform through the formation of a fully dedicated Florida business unit. The new Florida business unit underscores our continued commitment to this region, allowing us to better serve our Florida clients. The unit will coordinate and streamline analytical, modeling and reinsurance design and placement resources and assist clients in navigating this challenging landscape.

Building on Guy Carpenter’s already strong presence in the Florida market, the practice will maximize our global resources in order to benefit local clients in the region as well as national clients. It also will ensure that Guy Carpenter continues to deliver innovative solutions and technology to clients while representing their best interests in the ongoing industry dialogue around Florida issues.

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