Reinsurance market — a critical part of Florida’s P&C insurance system — is improving as Florida insurers try to bounce back after two years of homeowners losing policies and facing major rate increases because of financial troubles in the industry.
Reinsurance, which is essentially insurance for insurers, helps drive the catastrophe-prone Florida insurance system.
When the market for reinsurance is tight and costly, the effects trickle down to homeowners’ policies.
According to Global Reinsurance Property Catastrophe Market Outlook, reinsurance has been available this year for Florida insurers during a critical period in June and July when many reinsurance contracts are renewed. Reinsurance prices are up.
The 2023 mid-year renewal was orderly for Florida-domiciled insurers, which are heavily reliant on reinsurance to trade and meet solvency and ratings requirements, according to Aon report.
Reinsurance market in Florida faces increasingly challenge
The global reinsurance market, particularly in Florida, have been facing increasingly challenging conditions since 2020, and this trend has persisted into 2023. Florida’s insurance market has witnessed a significant decline in reinsurance capacity as a result.
Florida insurers will have a challenging June reinsurance renewal, even with the implementation of the legislative reforms. he introduction of the Reinsurance to Assist Policyholders Program (RAP) and the Florida Operational Reinsurance Assistance Program (FORA) will help soften the reinsurance market to some extent.
Larger property and casualty insurers in the Florida market are likely to benefit from recently enacted tort reforms, and it remains to be seen how those changes will affect other carriers in the Sunshine State, according to S&P Global.
The Civil Remedies bill, signed into law by Gov. Ron DeSantis on March 24, is the type of legislation that insurers have been advocating for while navigating a litigation environment that DeSantis described as a judicial hellhole.
The new law eliminates one-way attorneys fees and fee multipliers, changes standards regarding comparative negligence and modifies bad-faith rules when insurers are sued.
Florida’s insurance market has stabilized
The changes bring Florida more in line with other states in dealing with claims. What is not clear is how to quantify that improvement, given that the changes focus on litigation issues, rather than how claims are handled.
Florida’s recently implemented tort reform package, which seeks to address abuses of the legal system, is perhaps the most significant action taken so far to stabilize Florida’s insurance market.
Florida Hurricane Catastrophe Fund, the so-called CAT Fund, plays a vital role in Florida’s property-insurance system as it provides relatively low-cost reinsurance, which is backup coverage needed by insurers. Under state law, the fund’s maximum potential liability for claims is $17 bn.
Prior accident year results remain a challenge, but as the full benefits of tort reform materialize, the supply of property insurance in Florida should increase.
Combined with improved terms and conditions, the reform should also help attract additional reinsurance capacity to the state going forward.
Overall, there was sufficient supply to clear renewals, albeit at meaningful price increases compounding over multiple years.
Gallagher Re
Despite concerns post Hurricane Ian of a potential capacity crunch for Floridian insurers, catastrophe reinsurance capacity was available at mid-year, at a price.
Catastrophe bonds hedges against risks
Property insurers buy reinsurance and a type of financial instrument known as catastrophe bonds to hedge against risks. Being able to offload a portion of risk is vital for insurers in situations such as last year’s Hurricane Ian, which caused tens of billions of dollars in insured losses (see how Reinsurance Market Faced a Very Complex & Frustrating Renewal).
But while many homeowners might not realize it, the costs of what is known as “risk transfer” get baked into their insurance premiums.
Risk transfer pricing is up for the year with most Florida carriers experiencing rate increases of approximately 30%-50%, while pricing indications for non-Florida risk is up 10%-20%.
Board of Governors
The state-backed Citizens, which is Florida’s largest property insurer, plans to spend $650 mn this year for its risk-transfer program, which would provide $5.38 bn in coverage.
Insurers rely on a combination of reinsurance bought in the private market and from the state-run Florida Hurricane Catastrophe Fund, which can provide the coverage at a relatively low cost.
With the property-insurance market crumbling in May 2022 — before Ian hit Southwest Florida — lawmakers agreed to spend $2 bn in tax dollars to temporarily provide additional reinsurance coverage to insurers.
They followed up in December by approving a program that effectively offered additional levels, known as layers, of reinsurance funded through $1 bn in state tax dollars and premiums paid by insurers.
The past year and half have seen major changes in the global Reinsurance Property Catastrophe market. In the recent reinsurance renewals we have seen robust price improvements, increased net retentions and much tighter terms and conditions, according to Swiss Re report “The State of the Reinsurance Cat market”.
The briefing below looks to provide valuable insights into the current trends in the reinsurance property CAT market and we hope it will be a useful resource to CFOs, reinsurance buyers and reinsurance brokers.
Backed with data from the Swiss Re Institute, we explored the state of the Reinsurance Property CAT market and found that:
- Insured losses exceeding USD 100bn p.a. globally are likely here to stay, and will grow further fuelled by economic value growth, urbanisation, and climate change.
- Insurers and reinsurers leveraged capital positions have rapidly unwound as the volume of alternative capital has declined.
- Balance between capital supply and increasing demand yet to find its footing.
- While the 2023 renewals have provided significant strides towards a new pricing equilibrium, investor trust in the reinsurance segment will be fully earned through delivery of sustainable economic returns.
- Strong partnerships and innovative reinsurance structures and solutions will be key to managing volatility and re-establishing financial results in line with market expectations.
Over the last two decades, low interest rates have contributed to an increase in financial markets risk appetite, with an increasing share of the capital to support catastrophe risk sourced from alternative capital markets, in the form of cat bonds and other insurance linked securities.
The balance sheets of reinsurers, by extension, have become increasingly leveraged to other sources of capital than their own equity and debt, creating a vulnerability to short term capital flows.
In effect, the reinsurance market for catastrophic business went from being a self-supported funding model to one that is heavily reliant on continued availability of external capital leverage (see Global Reinsurance Capital in 2023). The barriers to exit of this alternative capital are also much lower than if you are running your own balance sheet.
Edited by 
Oleg Parashchak
