Broker panel: reinsurers should view Japan and Florida renewal differently from 1.1
Senior broking executives expect upcoming 1 April Japanese and mid-year Florida-dominated US wind renewals to see different dynamics from those experienced by buyers at 1.1, largely because of the rate increases and structural changes that have already been achieved by reinsurers in recent years.
Speaking on a panel at the Bermuda Risk Summit on Tuesday, Guy Carpenter’s global head of distribution Lara Mowery said there had been a lot of lessons learned at 1 January for upcoming renewal periods in “this very dynamically evolving market”.
“So when we take all that and we apply it to April through July renewals, I would almost set Florida aside from that as it has its own ecosystem... the insurance company dynamics are very different than a lot of other places.
“When we think about how we’re going to navigate that... and I know all the reinsurers in the room are going to be thrilled to hear me say this, but Florida already has undergone pretty significant rate improvement on the reinsurance side [and] some structural improvement on the reinsurance side,” she commented.
She pointed to the “significant market movement” at 1 June last year, and noted that since 2017 pricing has increased by 123 percent, according to Guy Carpenter’s rate on line index for property cat business in the Sunshine State.
And while she acknowledged the view that changes in the 2022 legislative special sessions will take time to have an impact, she said earlier reforms had already begun to deliver improvements for the sector.
In particular, Mowery highlighted the comparison between Hurricanes Irma and Ian. Irma in 2017 saw an average of 14.5 claims per day with an assignment of benefits (AOB) attached, while last year’s Ian saw just one AOB claim every four to five days.
The average severity of claims at 120 days out for an AOB claim versus a non AOB claim has also dropped significantly.
“So you’re seeing this significant decrease in those AOBs coming in, and you’re seeing this significant difference in severities. All of that has a major impact on how we should be thinking going forward – and that’s before the change to the one way attorney fees,” she added.
As previously reported, the removal of one way attorney fees from the statute was cited by Florida insurance CEOs in an earlier Bermuda Risk Summit panel as “transformational” for the sector.
Japanese cedants have already paid back
Ben Radford, head of Gallagher Re in Bermuda, said that his firm is communicating to the market that every renewal in every geography needs to be viewed on its own merit.
He noted that some are viewing the European renewal at 1.1 as undoing 10 years of market softening in two weeks but said that the same issues are not there for mid-year renewals.
“When you look at Japan, they've obviously behaved very well post loss in the past. In 2011, they significantly changed their programs, and they changed the price accordingly.
“And when we look at the direction that they've been on since 2018, there's been significant adjustment, again, in terms of attachment point but also in terms of price. We looked at it and since then there's an argument to suggest pricing is up 70 percent over that period,” he commented.
Radford agreed with Mowery that Florida buyers have already been through a transition for a number of years and that the kind of changes to strip back coverage seen at 1.1 had been implemented previously in the Sunshine state.
“There are a number of Florida participants that are already buying on a wind only basis and a number of Florida participants that already are utilizing a kind of a different pool of capacity from the index space. So it’s a different dynamic to what we saw at 1.1,” he said.
Radford also said he would challenge the contention of reinsurers that the impact of Florida legislative reforms shouldn’t be fully taken into account this year.
“If you look at when you hit peak wind season there’s an argument to suggest two thirds of the underlying policies would have renewed on the new form, which means the restriction to AOB and the one year time restriction [on claims] will come into force,” he argued.
Low layer challenges
Nevertheless, the panel acknowledged the challenges in finding capacity to support low down layers beneath the Florida Hurricane Catastrophe Fund.
“Price is going to be price – reinsurers are going to decide what that looks like,” said Guy Carpenter’s Mowery. “The retention issue for the Florida domestics is probably the most critical.
“When you look at the numbers, the cat fund attaches on average between the eight and ten year return period, so most domestics buy a tremendous amount of reinsurance below the cat fund.”
A key feature of the 1 January renewal in the US was pressure on attachment points, with many buyers having to increase retentions.
If attachment points for Florida carriers moved up to the FHCF attachment layer, that would average out to a retention that would be 170 percent of a domestic insurer’s surplus.
“Obviously that’s not a structure that they can navigate or trade forward on,” she observed.
The target for a cedant would be around 15 percent of surplus. And Mowery argued that with the way low layers are now priced it would be a break-even proposition for reinsurers on that part of a program.
“Okay, fine, you don’t make a great amount of money. But if you write the first layer, and then write the rest of the program, you actually allow a company to trade forward,” she said.
The executive acknowledged that individual characteristics of buyers would range considerably.
Chris Bonard, CEO of Ed Broking in Bermuda, said that companies would be viewed by reinsurers according to their individual circumstances, including leadership.
“It’s going to come down to the quality of management teams and I think there’s going to be differentiation between those,” he commented.
“Ultimately it’s going to be can we convince reinsurers that the changes that have happened are going to actually show through in the numbers. They haven’t made money for a number of years and capital isn’t rolling in. It’s sitting on the sidelines saying, ‘Do we believe that this year is the year it actually works and everyone makes money?’” the executive continued.
Also speaking on the panel, Jim Fiore, executive managing director and chief strategy officer of Aon’s capital advisory unit, suggested there is no one solution in Florida.
“This is going to be multiple solutions, it's going to be very creative. The biggest challenge we do have is the low layer cats. But I think we will find a way... we always do get through it, and renewals will get done.
“But we just have to be very, very creative and looking at the management teams is really important for differentiation. How companies handle their claims is also really important. The legislation changes are going to help, they're going to help a lot. But it will take a little bit of time,” he suggested.
He said legislative reform alone wouldn’t solve the problem, suggesting there should also be a focus on areas like the need for continued improvement in building codes, and for deductibles to be used in a better, more sensible way.