JLT Re Launch June 1st 2011 Property Catastrophe Reinsurance Renewal Florida Focus and Industry Loss Warranty Market Overview

31 May 2011

1. Florida Reinsurance Market and Pricing Overview

The June 1 reinsurance renewal cycle, coinciding with the inception of the North Atlantic Hurricane Season, is largely dominated by Florida Domestic Carriers and National / Global portfolios with Florida exposure. Given the sheer size of top-line premium volume generated by Florida carriers and the relatively high premium volume ceded to reinsurers (approx. $3.5B annually) the strength and vitality of the Florida primary insurance market plays a significant role in the direction and trends of the global reinsurance marketplace.

As has been reported widely, leading up to the June 1 renewal, upward pressure on reinsurance pricing has been driven by:

  • Previous Loss Activity – sizeable aggregate losses from both Q1 International Events and Q2 US Tornado events impacted CAT budgets across the reinsurance industry.
  • Catastrophe Model Changes – RMS version 11 and AIR version 12 have initiated a systemic review of the underlying risk portfolio’s and have signaled potential changes in reinsurer cost of capital going forward.

The combination of the aforementioned market forces created a challenge for reinsurance brokers to effectively manage a disjointed marketplace. Various approaches were adopted with varying outcomes for clients. In some cases, certain strategies resulted in delays in the negotiation process, shortfall covers, re-pricing efforts and additional expense in the process. Ultimately, a wide range of final outcomes were produced, with certain clients seeing a YOY price increase (using the previous year’s model version, risk adjusted to remove the impact of model change) of 5%, with others seeing a YOY price increase of 10% to 15%. Overall, the average YOY risk-adjusted rate increase across all portfolios was approx. 5% to 10%.

Role of Model Change in the June 1, 2011 Reinsurance Renewal

Overall, the markets on both sides of the transaction (ceding company and reinsurer) had yet to fully integrate the RMS v11 model changes into their respective platforms @ June 1, 2011. Thus, the reinsurance quoting / pricing approach and reinsurance buying behaviors varied. What seems clear is that the market will continue to digest the model change from now through January 1, 2012 and June 1, 2012 with the actions of additional stakeholders (Rating Agencies and Regulators, etc.) contributing to the evolution of this process.


Despite the market shift created by sizeable loss activity and model change, overall reinsurance capacity remained adequate and available. Many reinsurers opted

to under-deploy their available capacity. These decisions were driven by a desire to cautiously observe each reinsurer’s loss development activity and the anticipation of increased capital charges going forward stemming from the model change. Capacity deployed in support of upper layers (alongside and above the FHCF) tended to receive higher YOY pricing increases whilst capacity deployed within layers below the FHCF tended to receive smaller YOY price increases.

Additionally, reinsurance capacity was also impacted by ceding company purchasing decisions which trended toward higher aggregate retentions YOY. On average, fewer companies elected to purchase multiple event coverage (3rd and 4th event) at the expense of 1st and 2nd event vertical limit.

Demand for reinsurance capacity was firmed to some degree by significant reinsurance purchases by several state residual markets including Citizens Property Insurance Corporation (Florida) and Texas Windstorm Insurance Association (TWIA), both of which did not purchase catastrophe reinsurance during the prior renewal period. In addition, Alabama Insurance Underwriting Association (AIUA), Louisiana Citizens Property Insurance Corporation, and several other State residual markets purchased significant reinsurance protection.

Non-Florida Renewals

As aforementioned, the June 1 renewal period is driven by the placement of Florida primary insurance risk into the reinsurance marketplace. However, for programs with no Florida exposure or programs with Florida exposure in conjunction with a National / Global portfolio, similar market forces were present and pricing trended upwards YOY to a similar degree depending of course on specific geographical concentration, growth activity, model results and loss history.

2. Industry Loss Warranty

State of the Market

As the North Atlantic Hurricane Season is underway, we can all agree that the last 15 months have been challenging for the global reinsurance marketplace. During this period, the industry has experienced aggregate insured losses in the range of $105bn inclusive of the latest events being the treacherous April/May U.S. tornadoes totaling north of $10bn as well as the most recent Christchurch quake which occurred on June 13th.

For the vast majority of reinsurers, they have already blown their 2011 catastrophe budgets and are now on a knife’s edge in terms of turning a profit for this year. Furthermore, these large scale losses coupled with the recent model release of RMS 11.0 for US Hurricane and a low yield environment have caused many participants to rethink ways to best price risk, manage cost of capital and drive return on equity (RoE).

One of the best “bell weathers” for reinsurance pricing is the Industry Loss Warranty (ILW) market. It’s very responsive to catastrophe-type events and provides value to buyers and sellers alike as demonstrated by recent events.

In order to properly understand today’s ILW market dynamics, let’s review key factors impacting stakeholders. The recurring theme continues to be uncertainty, driven by the following:

  • Tallying up of ultimate insured loss amounts from recent events (Japan, New Zealand, Australia, Tornadoes, Mississippi floods, etc.).
  • Companies globally reviewing their view of risk and adequate pricing – this applies to the US, Japan and “diversifying territories”.
  • A cautious approach and reluctance to deploy capacity by underwriters.
  • Analysis on industry demand vs. supply affecting inwards and outwards business.
  • Evaluation of excess capital positions, when applicable.
  • Rating agency views.
  • Revised Cost of Capital (CoC) and RoE.

Role of Model Change in Current ILW Market

The release of RMS 11.0 and resulting changes to the industry loss curve are significant. For example, the 1-in-100 year return period EP in v10 has now become 1-in-45 year return period in v11 due to updates for (i) degree of “windfall degradation”, (ii) storm surge exposure and (iii) inventory of topography.

This material model update has generated numerous questions and created a divergence of views between buyers/sponsors, sellers and investors. As a result, the market has experienced a certain level of dislocation. We’re in a transition period whereby companies will review the model updates and decide on the impact on capital models which drives each company’s pricing behavior. In all respects, we have seen increased demand, especially in higher return periods and industry loss levels, in comparison to 2009 and 2010.

ILW Market Pricing

ILW Prices have been on the rise following the Tohoku quake, other Q1 catastrophe losses and the release of v11.0. The magnitude differs by region/peril and on average, we would estimate the following changes since January 1:

  • US Windstorm / All Natural Perils: +5% to +25%
  • US / California Quake: +5% to +20%
  • Europe Windstorm: Flat to +7.5%
  • Japan Quake / All Natural Perils: +20% to 50%
  • Japan Tyhoon: Flat to +5%
  • Cold spot ILWs: trigger thresholds increased from $3bn generally to $5bn-$10bn in the form of occurrence or aggregate covers.

The analysis above excludes live-cat or dead-cat/post-cat ILW pricing.


The ILW market has seen price increases across the board in light of global catastrophe losses, v11.0 model release, deteriorating combined ratios, uncertainty around pricing of risk and resulting impact on cost of capital. The demand for this product, as well as other innovative solutions to manage peak risks effectively, continues to grow as alternative means of risk transfer, which should not come as a surprise considering recent catastrophe market activity and, at times, a lack of capacity available especially on the retrocessional side.

However, there are funded and shelf sidecars that have already surfaced with more to come. Hence, recent cash inflows in the ILS sector along with Reinsurance/Retro companies should stabilize pricing and cater to current demand to bridge any potential mismatch between demand and supply in the US and internationally. This compounded with the return of ILS markets to the negotiation table and the cedant’s increased comfort level with customized basis risk transactions will increase trading activity as we look forward to the 3rd and 4th Quarters. The industry is certainly in a transition period with a lot of unanswered questions. Most will be addressed throughout the summer while we keep a close eye on weather-related events and any changes to the dynamics between supply and demand.

3. ISO U.S. Casualty Index

On March 29th, ISO announced the launch of the ISO Casualty Index (the "Index"), a new service providing loss ratio and loss development trends for select lines of casualty insurance. The Index is designed for use by actuaries, underwriters, and other insurance professionals, in addition to participants in the insurance-linked securities markets and the granularity of the data is what differentiates this Index and ISO. ISO developed the Index over the last year and JLT Re was integral in cultivating interest and input from its customer base and active market participants ranging from reinsurance companies to capital markets.

The Index is based on ISO's statistical data collected from more than 700 insurer groups throughout the United States and containing more than 15 billion transactional records. Currently, the Index covers ten defined segments within the general liability and commercial auto lines of business. The Index is updated quarterly for the rolling 10 experience years within each segment.

JLT Re is the first company to license the ISO Casualty Index to facilitate innovative casualty risk-transfer and insurance-linked securities transactions. For more

information on the U.S. Casualty Index, email Greg Habay or utilize the following link:


JLT Re (North America, Inc.)

  • Shaping Sound Reinsurance Strategy
  • Driving Strategic Growth Opportunities for Clients

Each reinsurance renewal has its own unique characteristics and the appropriate strategy must be set from inception. Each client has a unique portfolio, unique reinsurance needs and its own specific goals and opportunities. It is mandatory that your reinsurance broker accurately foresee the changing dynamics of each renewal process while setting proactive and sound strategies to secure the optimum pricing and capacity within each market cycle, regardless of the challenges.

JLT Group and its 6000+ industry professionals is a leading global provider of reinsurance and insurance solutions, with over 100 offices across 35 countries specializing in:

  • Reinsurance and Insurance Brokering
  • Risk Management
  • Employee Benefits Administration Services
  • Consultancy and Strategic Growth Initiatives

Should you have any questions regarding your June 1, 2011 Reinsurance Renewal, Catastrophe Modeling and Analytics Consultation or future Growth Strategy please don’t hesitate to contact us at the listings provided below for an initial consultation at no expense to you. We look forward to the opportunity to be of service.

Craig Darling Aaron Cubbison Greg Habay
President & Senior Vice President Senior Vice President
Chief Executive Officer Florida Practice Leader ILW / ART Practice Leader
600 Fifth Avenue – 16th Floor 401 E. Las Olas Blvd – Suite 1400 600 Fifth Avenue – 16th Floor
New York, NY Fort Lauderdale, FL 33301 New York, NY
Tel: (212) 510-1801 Tel: (954) 332-2397 Tel: (212) 510-1816

contact Isabella Gaster
Head of Communications & Marketing, JLT Re