Florida Reinsurance Prices Decline 10-12% at Renewal: Guy Carpenter

Reinsurance pricing at the June 1, 2010 Florida renewal are down by 10 percent to 12 percent on average, on a year-over-year risk adjusted basis.
That’s according to reinsurance intermediary Guy Carpenter & Co., which says the decline reflects a return of significant reinsurer capital into the marketplace and brings pricing approximately back in line with 2008 levels.

Guy Carpenter said that 2010 firm order terms averaged a decrease of 5 percent to 7 percent in the lower layers, where capacity was less abundant, and 13 percent to 15 percent in the upper layers.

Also, while average quotes at the June 1, 2010 renewal dropped by 5 percent to 7 percent from 2009 quotes, quotes were almost flat when compared to 2009 firm order terms – surprising, given the general expectation of decreasing pricing.

Overall, pricing has shifted closely back to levels prevalent in 2008. Despite the global economic turmoil of 2009, pricing has remained within a consistent, narrow band since 2007, the broker said.

“Florida always presents a set of unique challenges for companies designing and placing their reinsurance programs, and this year was no exception,” said Lara Mowery, global head of Property Specialty for Guy Carpenter, a unit of Marsh & McLennan Cos. “However, the continued downward trend in pricing that resulted from a return of capital to the marketplace, balancing the scarcity of capital we witnessed last year, is certainly viewed as a positive development.”

Still, the Florida market faces challenges, according to the reinsurance specialist. Among these challenges:

• The structure of the Florida Hurricane Catastrophe Fund (FHCF) remains a critical factor for Florida contracts renewing at June 1, 2010 renewals.
• Questions persist regarding the viability of the temporary increase in coverage limit (TICL) layer and rating agencies’ treatment of it within the reinsurance structure. Of the $10 billion offered in 2009, only $5.56 billion was taken up. This year, the TICL layer was further reduced to $8 billion, with a take-up of $2.72 billion expected.
• Both the Florida Office of Insurance Regulation (OIR) and the rating firm Demotech contributed commentary on appropriate risk transfer approaches, which had an impact on some companies’ purchasing decisions.
• Economic issues continued to weigh heavily on Florida insurers. It will take time before the effects of any approved rate increases and other corrective actions can substantially impact the erosion of capital.

Source: Guy Carpenter & Co.