Capital Alternatives for Florida Property Insurers

The new Florida legislation SB 408 was designed to make it easier for insurers to pass the costs of reinsurance onto customers, highlighting the current reality that the retreat of well-funded national property insurers from Florida has left Floridians reliant on smaller carriers that depend on private reinsurance. 

Insurers are facing increased challenges in finding reinsurance that meets their needs. 

Reinsurance rates have increased over the past six months, primarily due to global reinsurers accumulating so far this year over twice as much loss as was expected and version RMS 11.0 of the widely used catastrophe model (released February 28, 2011) forecasting a 6.5% increase in expected Florida hurricane losses.  James Elsner, director of the Hurricane Climate Lab at Florida State University, says the forecast is for up to 8-10 hurricanes, and the hurricanes will probably be stronger and do more damage than previous hurricanes.

Insurers also have to deal with a new competitor for reinsurance capacity, as Citizens Property Insurance Corporation has departed from tradition this year and purchased private reinsurance above and beyond the Florida Hurricane Catastrophe Fund – $575 million worth.

RMS 11.0 also increased the expected strength of hurricanes as they move inland, leading to forecasted losses inland increasing significantly more than coastal forecasts. 

Insurers have been seeking alternative forms of reinsurance, such as Industry Loss Warranties and sidecars.  Entering a market normally reserved for reinsurers, a Florida insurer recently sold a catastrophe bond.

Will these capital alternatives be adequate? Are the new assumptions underlying RMS 11.0 reasonable?  Should RMS 11.0 have factored in the recent data and assumptions more gradually to avoid sudden spikes in individual policyholder rates?  Do you agree with former catastrophe modeling firm founder Karen Clark, when she states, “If we were getting closer to reality with each model update, then the variability and volatility in loss estimates would be decreasing, not increasing as we’ve seen with recent model updates?”

Let us know what you think.