Florida Loss Creep Expected To Weigh on June Reinsurance Renewals

Anticipated reinsurance rate increases for Florida-specific property insurance companies in the upcoming June 2020 renewal period potentially could pressure the more thinly capitalized companies in the market, according to A.M. Best.

A new Best's Commentary, titled "Florida Insurers Brace for Challenging Risk/Reward Trade-Off in Upcoming June Renewals," states that reinsurance rates could increase by 15–20 percent as loss creep from prior storms continues to weigh on reinsurers and highlight the risk embedded in the catastrophe-exposed market.

The reported loss creep in part has been influenced by social inflation in the Florida market, resulting in adverse development of prior-year loss reserves. Because of inherent hurricane risk, Florida property writers spend a considerable amount on reinsurance, given the need for prudent catastrophe reinsurance programs.

Companies with high reinsurance dependence likely will face difficult choices. 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 capitalization in the event of catastrophic storms; these companies may be forced to write less business to maintain existing capital. Through August 2019, the approvals of rate increases have been growing, and the higher rates may help somewhat to offset the rise in reinsurance costs.

The substantial pressure of loss creep from prior storms, assignment of benefits issues, and the specter of rising reinsurance rates have led to a notable deterioration in the financial results of a number of Florida property writers. The weakened state of some of these entities has led to a heightened level of consolidation in the market, and A.M. Best expects that the continued weakened balance sheet strength will spur additional consolidation, and in some cases, require companies to seek additional capital support to sustain operations. A.M. Best will continue to monitor the Florida property market and the impact on rated entities.

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