The cost of obtaining reinsurance against damage from hurricanes in Florida could fall sharply again this year, according to Fitch Ratings.
It is becoming less expensive to reinsure against all kinds of natural catastrophes, partly because losses have been low for the last several years and partly because of competition from private investors willing to take on this risk. But Florida is the largest, and most widely modeled, market for U.S. property casualty risk and therefore the market where private investors have been most active. Consequently it has experienced the most reinsurance pricing pressure. Fitch said in a report published today that it expects competition between traditional and non-traditional reinsurers to remain fierce at the traditional June renewals seasons.
Last June, Florida reinsurance rates dropped by 25%, and since then prices have been falling in other markets as well. For example, the recently completed April reinsurance renewals, which are focused on the Asian market, resulted in a bigger-than-expected drop in prices. Japanese catastrophe loss free pricing was down as much as 17.5% for earthquake and 15% for wind and flood risks, according to Fitch. The rating agency said that this drop reflects the effective payback reinsurers have received in the three years since the Tohoku earthquake losses in 2011, which resulted in significant rate increases.
In addition to Japan, both U.S. and UK/Europe property catastrophe reinsurance pricing at 1 April was down 10% to 20% for loss free accounts, in line with declines experienced at the January renewals.
“The price declines, along with more generous policy terms and conditions, result from recent low catastrophe losses and continued abundant reinsurance capacity from both traditional reinsurance and the growing alternative capital market,” the report stated.
The build-up of capital is also contributing to ample capacity, as no major hurricane has made landfall in the U.S. since Hurricane Wilma hit Florida in 2005 - the longest interlude since the 1860s, according to Fitch. “But we still believe Florida reinsurance risk is adequately priced despite the recent rate declines, particularly compared with property catastrophe reinsurance pricing in other countries, which tends to be more fragmented and not as easily modeled,” the report stated.
Among the insurers in the market this season is Florida’s Citizens Property Insurance Corp., which is marketing a $400 million catastrophe bond, according to a presale report published this week by Standard & Poor’s. Citigroup Global Markets is the sole structuring agent and bookrunner.
Everglades Re 2014-1 has an expected term of three years and a preliminary B’ rating from S&P. It will provide reinsurance against claims resulting from hurricanes on an annual aggregate basis. That means that losses from multiple smaller events could result in a triggering event, allowing Florida Citizens to hold use principal to pay claims. This is in contrast with Florida Citizens first two cat bonds, which were per-occurrence notes, according to the presale report.