No post-loss bounce for reinsurers after negligible rate increases at Florida property renewal
01 June 2018
- JLT Re’s Risk-Adjusted Florida Property-Catastrophe Rate-on-Line (ROL) Index rose by 1.2% this year
- Markets continued to differentiate cedents, giving capacity priority to better performing clients
- Dedicated reinsurance capital at record levels despite biggest catastrophe loss year ever in 2017
Research carried out by JLT Re, the global provider of reinsurance broking and consultancy, has shown that low single-digit reinsurance rate increases were recorded at the 1 June 2018 Florida property-catastrophe renewal, once again failing to meet early market expectations.
JLT Re’s Risk-Adjusted Florida Property-Catastrophe ROL Index increased by 1.2% this year, the first rise in seven years (see fig 1). This compared to a reduction of 5.1% last year but 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.
Markets continued to prioritise better performing cedents during the Florida renewal, 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 cedents’ post-event capabilities.
Brian O’Neill, Executive Vice President, JLT Re (North America) Inc., 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.”
Figure 1: JLT Re’s Risk-Adjusted Florida Property-Catastrophe ROL Index – 1992 to 2018 (Source: JLT Re)
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 inevitably 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.
Looking forward, amidst some instances of adverse development for Irma, markets will be closely monitoring loss adjustment expenses and scrutinising any further signs of attritional loss and/or assignment of benefits issues.
Abundant reinsurance capital continues to dominate the reinsurance market. JLT Re estimates that dedicated sector capital will be at record levels by the end of the first half of 2018, recovering strongly from the modest dip sustained last year after the USD 140 billion plus of insured catastrophe losses (see Figure 2). The result is a continued supply and demand imbalance and a market awash with capacity.
David Flandro, Global Head of Analytics, JLT Re, said, “Dedicated reinsurance sector capital has been very strong with growth of over USD 10 billion during the first half of 2018, following roughly USD 7 billion of new capital raised in the final four months of 2017. This affirms the now established trend of third-party capital rapidly entering the sector post-loss to fill the gap more or less immediately. The effects of this were evident in the intense competition at 1 June between alternative and traditional markets culminating in negligible rate rises despite Florida having recently suffered its first landfalling hurricane since 2005. This is a significant contrast to previous large-loss years which were all followed by significant – often double-digit – rate increases. It is now obvious that the means through which the sector raises capital at the margin have completely changed over the last decade, with huge implications for property-catastrophe reinsurance pricing and underwriting in particular.”
Figure 2: Dedicated Reinsurance Sector Capital and Goss Written Premiums – 1998 to H1 2018 (Source: JLT Re)
PROSPECTS FOR REMAINDER OF 2018
The first five months of 2018 have provided carriers with some respite as catastrophe losses have been relatively light. All eyes are now therefore firmly fixed on this year’s hurricane season. Some early season forecasts pointed to above-average activity, although downward revisions have been made in the latest rounds of updates due to unseasonably cold waters across the tropical Atlantic and Caribbean and the possibility of a developing El Niño towards the end of the season. Whatever the outcome, the reinsurance market is strongly position to deal with any potential losses.
The (re)insurance market has responded extremely well to the substantial losses sustained during last year’s hurricane season. Despite the significant costs associated with Irma, single-state carriers in Florida emerged relatively unscathed from their first major test, thanks in large part to the reinsurance protection they purchased. Buyers’ needs were adequately met at 1 June and more of the same is expected through the remaining mid-year renewals and into 2019. The value and efficiency of reinsurance protection is once again being demonstrated by allowing cedents to react speedily to underwriting opportunities.
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NOTES TO THE EDITORS:
JLT Re is the world’s fourth largest reinsurance broker, with approximately 800 professionals across 38 locations in 18 countries, delivering world class risk analysis and risk transfer solutions.
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