Authors: Bryan Friendshuh Adam Schwebach
Following three consecutive years of double-digit risk adjusted rate increases, Florida’s reinsurance market was overdue for a pause in 2024.
For the most part, this is what looks to have been delivered at the 6.1 renewal, with risk-adjusted rates on most programs either flat, or down by up to 10%. As we pointed out a year ago, 2023 was always likely to represent ‘Peak Florida’.
Despite the modest softening, reinsurers are likely to view this year’s result positively as there was noticeable market softening earlier in the renewal process, which levelled off as capacity became less abundant in the run-up to June 1.
Insurers who completed their programs in early May were able to take advantage of an environment where supply was readily available, with many reinsurers looking to deploy increased capacity.
But this dynamic shifted closer to June 1, following forecasts that this year’s North Atlantic hurricane season would be more severe than average.
On May 23, the US National Oceanic and Atmospheric Administration predicted “above normal” hurricane activity between June and November this year1, with up to 13 hurricanes amongst up to 25 named storms. Forecasters at Colorado State University estimated a 42% chance of landfall on the Gulf Coast2, up from the long-run average probability of 27%.
This may have helped to set a more cautious tone among some capacity providers. Retro capacity also seemed to dry up and remaining capacity was deployed opportunistically and at higher prices.
May was also a record-setting month for catastrophe bonds, with USD3.92 billion in issuance. But this did not benefit the Florida market as much as it could; much of the issuance in May specifically targeted hurricane risks outside the state. If the Florida proportion of May issuance had tracked the January through April trend, it would have had a further beneficial impact on the Florida renewals.
2024 is expected to be another record-breaking year of cat bond issuance overall, with USD11.25 billion in non-life Underwritten Rule 144A issuance through May 31, 2024, vs. USD7.97 billion through the same date in 2023.
Risk spreads, however, have widened since February 2024, but this is primarily due to a robust pipeline. Predictions for an active hurricane season, together with some cat model changes, have contributed – but we think to a lesser extent. And US wind exposed risk spreads remain significantly below where they were a year ago, down roughly 15% since January 2023.
It is also notable that more than 80% of cat bonds issued year to date have hurricane exposure, a higher percentage than in the past; and that 2024 has seen several new Florida-focused cat bond sponsors. Only a handful of larger programs now lack cat bond capacity.
Among the traditional reinsurers, the capacity story was positive this renewal. Most quoting markets indicated increased capacity, with some looking to defend their positions on programs with competitive quotes and increased line sizes. Insurers were mostly judged by reinsurers on their prior-year loss development within their property programs. As ever, cedants who can tell a good story on their underwriting – and evidence it – will prosper.
Additional observations
We noted there was less migration of capacity to higher layers, with more markets willing to support lower down in programs; and limited pressure to increase retentions. Insureds observed the largest quoted decreases on layers above the Florida Hurricane Catastrophe Fund (the mandatory state fund that reimburses insurers for a portion of their residential losses) which could have provided the incentive for reinsurers to consider additional support lower down.
Layers alongside and just above the FHCF had a wide range of quoted rates-on-line, driven by a differing review of loss adjustment expenses.
Furthermore, we have also seen a rebound in quota share capacity with cat coverage. This is due to rate increases in the primary market, and to legislative reforms in Florida that give insurers credit for improved attritional loss ratios.
