The Florida peninsula is the most important market for property reinsurance in the world. Each summer, the third most populous state in the union braces itself for another Atlantic hurricane season. In Florida’s esoteric insurance market, insurers buy reinsurance protection at the beginning of June each year.
Guy Carpenter’s Lara Mowery, Managing Director, discussed the drivers of the continuing rate reductions in Florida and what it means for the rest of the market. Here she discussed the role of insurance-linked securities (ILS) in the market.
What role did ILS funds play in this year’s Florida reinsurance market compared with ‘traditional’ reinsurers?
The influx of capital into catastrophe bond and collateralized reinsurance funds has allowed for decreasing pricing which, in turn, has led to increased demand for reinsurance. Two years ago, we saw an uptick in the overall amount of reinsurance purchased in Florida. Last year demand was flat but this year we did see a slight uptick again in the amount of protection that was purchased.
There is a wide variety of approaches between individual insurers in terms of how they tend to use that capacity from ILS funds. Some have looked at it and taken advantage of it directly, embracing those sources of capacity in their programs. Much of this has come about as a result of growing needs for cover or shifts in products utilized. Others that haven’t changed their program structures materially can find it more difficult to find room on placements for new players, where the existing panel is also quite competitive and has a historical trading relationship with the cedent.
But companies do generally understand that even if they aren’t using collateralized capacity directly, or if they’re using it in supplemental programs, they’re definitely benefiting from that capacity being in the marketplace. If you look at retrocessional coverage, for instance, much of this limit is supported by collateralized capital and it’s helping traditional reinsurers in the way they are able to write business and approach the market. So the fact that collateralized capacity is in the market has a broad impact, whether a company is directly utilizing it or not.
Link to Part II>>
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