April reinsurance renewals resulted in a bigger-than-expected drop in prices and suggest that there will be another double-digit fall in rates for Florida in the key June renewals, according to Fitch Ratings.
“But overall reinsurance spending may be closer to flat as increased demand from specialist insurers offsets falling rates,” Fitch added.
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 June 2014 reinsurance renewals are particularly important as they primarily relate to Florida property catastrophe risk, the largest market for US peak zone risk. Florida property is among the most widely modeled catastrophe risks and is therefore the area of focus for third-party capital. Consequently it has experienced the most reinsurance pricing pressure and we expect competition between traditional and non-traditional reinsurers to remain fierce this year. Florida rates dropped by up to 25% last June.
The build-up of capital is also contributing to ample capacity, as no major hurricane has made landfall in the US since Hurricane Wilma hit Florida in 2005 – the longest interlude since the 1860s. 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 modelled.
The recent growth of Florida-only specialist insurers could help reverse recent weaker demand. These firms use more private market reinsurance and now account for more than half of the homeowners’ insurance market in the state. Overall reinsurance spending could therefore hold steady.
The 1 April renewal period primarily focused on the Asian market. Japanese catastrophe loss free pricing was down as much as 17.5% for earthquake and 15% for wind and flood risks. This reflects the effective payback reinsurers have received in the three years since the Tohoku earthquake losses in 2011, which resulted in significant rate increases. US 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 1 January renewals.