Florida insurers brace for challenging risk/reward trade-off – AM Best

Florida Insurers are braced for a challenging risk/reward trade-off in the upcoming June renewals, rating agency AM Best has said in a new Best’s Commentary.

It said that although the 2019 hurricane season did not have a significant impact on Florida, loss creep from prior storms continues to weigh on reinsurers, leading to a likely rise in rates for the upcoming June renewal period.

The reinsurance market for Florida property underwriters saw an initial round of hardening during the June 2019 renewal season. “The reported loss creep has in part been influenced by social inflation in the Florida market, resulting in adverse development of prior year loss reserves stemming from an increase in loss frequency and severity,” said AM Best.

“Despite the lack of hurricanes making landfall last fall, companies—particularly the smaller, Florida-dominant property writers with questionable balance sheet strength—remain more susceptible to prevailing market conditions, such as hardening reinsurance pricing and adverse claims trends. Based on market surveillance, reinsurance rates are likely to increase by 15 percent-20 percent for the June renewal period; companies that depend highly on reinsurance may be most impacted.”

Because of inherent hurricane risk, Florida property writers spend a considerable amount on reinsurance, and AM Best anticipates that rising reinsurance costs could be the next event on the horizon, pressuring some of the more thinly capitalised Florida-specific companies in the market.

“Companies with high reinsurance dependence face difficult choices,” said AM Best. “Higher reinsurance rates may pressure earnings if insurers decide to continue writing business at existing levels. Those opting to retain more business may see declines in capitalisation in the event of catastrophic storms; these companies may be forced to write less business to maintain existing capital.”

The Florida Hurricane Catastrophe Fund (FHCF) remains an important part of companies’ reinsurance structures, with several having room to increase participation should terms prove more favourable than the private market.

AM Best said that insurers may also benefit from Florida’s assignment of benefits (AOB) bill, which took effect on July 1, 2019. The bill clarifies rights afforded various parties, provides more flexibility (allowing for rescission of assignments without penalty), and requires more comprehensive disclosures.

“It addresses several issues that could materially improve operating performance and loss reserve development as they relate to AOB and could lead to lower costs over time, but the near term benefits may be minimal,” said AM Best. “Some in the market are also concerned that the new bill does not address non-AOB water-litigated claims, which could somewhat limit its benefit.”

AM Best anticipates that the considerable stress on companies in the Florida property market is likely to continue, particularly for companies that have not effectively managed the complexities of this challenging market.

“Accordingly, there is a good chance that continued weakened balance sheet strength will spur additional consolidation and, in some cases, require additional capital support to sustain operations,” it said.

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