While Floridian renewals in recent years have been challenging affairs — with strained capacity and state-wide legislative reforms complicating the process — 2023 painted a very different picture. Many programs were marketed far earlier in the cycle and, thanks to increased capacity, were filled relatively early.
This change was driven by the considerably higher rates-on-line available on Florida homeowners reinsurance layers below the cat fund and significant rate increases higher up the towers, attracting back a wide range of reinsurers and allaying fears of a capacity crunch.
Featuring commentary from Gallagher Re EVPs Joshua Knapp, Martin Verrills, Bryan Friendshuh and Adam Schwebach, this episode considers why the renewal was more orderly in 2023 and why — even with capacity returning to the market — there were still a number of challenging hurdles to overcome to get placements home.
Charlie Thomas: Hello, and welcome to the latest in Gallagher Re’s series of post-renewals podcasts, where we go beyond the headlines of rate movements, T & C tussles and retention levels and investigate some of the reasons as to why the renewal played out in the manner it did, what lessons can be learned, what we might infer for future renewals, and the difference that the reinsurance broker made for their clients.
In this episode we’re looking at 6.1, the Florida renewals. If you cast your minds back, previous Floridian renewals in recent years have been challenging affairs. In 2022, a late announcement about state-wide legislative reforms, a withdrawal of capacity from some of the biggest players and some early optimistic FOTs which then had to resubmitted resulted in a complicated, stressful and ultimately late renewal.
But what a difference a year makes. Fast forward to 2023, and lessons have clearly been learned. Many programs were filled early this year, with marketing starting more than a month in advance of FOTs being issued. This was helped in part by the considerably higher rates-on-line available on Florida homeowner’s reinsurance layers below the cat fund and significant rate increases higher up the towers, attracting back a wide range of reinsurers including Berkshire Hathaway, DE Shaw, Arch and Ariel Re, and ultimately allaying fears of capacity crunch for most buyers.
Joshua Knapp, executive vice president at Gallagher Re, picks up the thread:
Joshua Knapp: So, what I would say is that both the clients and the reinsurers were very much more prepared for this renewal season. And a few examples of that would be, clients and broker teams within Gallagher established a very early timeline to begin the marketing trips. And there was an overemphasis on marketing this year, given the challenges that were experienced last 6.1. Clients were put in positions to put their best foot forward in front of the reinsurers, and those marketing trips really tried to differentiate themselves amongst the other cedants highlighting, you know, key things around financial stability, portfolio changes, and other key factors that drive a reinsurer’s interest in their programme.
Those marketing trips really started 30 to 60 days in advance of normal. And then we were very pleasantly surprised as we headed into the renewal season. And there were key reinsurers that had definitive plans in place for the mid-year renewals. They knew, both from a price and capacity perspective, what they wanted to achieve, who they wanted to play with. And ultimately, that led to doing some early trades in the marketplace where we were able to lock up both price and capacity certainty and create leverage on our clients’ placements…
The biggest difference was the capacity was there this renewal. In 2022, we ran into a situation where there was a lot of pulling back and reluctance to participate in various regions, or I should say, in various regions of our clients’ reinsurance towers. Capacity at the bottom ends of programs was very, very challenging to come by. And in some instances, companies were not able to fill layers at the bottom ends of programmes and had to utilise captives for their own, wholly owned captives, for example, to complete those placements.
CT: Part of the reason for the capacity drying up in 2022 was the State of Florida convening a special session to consider new Senate bills relating to property insurance in Florida less than a month before the 6.1s were due to incept. The resulting bills were signed on May 26, meaning that anyone who hadn’t got their programs squared away early now had a frantic race to digest the impact of the reforms and get those outstanding elements of programs home.
Here’s Adam Schwebach, Tampa branch manager and EVP for Gallagher Re, with more.
Adam Schwebach: Unfortunately, in 2022, we have the state convening a special session at the last week of May. And so, while that was broadly a positive, the timing of it was incredibly complicated. It caused a lot of reinsurers to pause. As soon as a special session was announced, reinsurers basically put their pens down and stopped working. There were, at that point, there were some cedants that were further along than others in the reinsurance placement. But once the special session was completed, it left some companies with roughly a week to make some very tough decisions. So last year’s renewal, the 6.1 2022 renewal, for various reasons, but mostly because of a special session very, very late in the renewal cycle, caused everything to run very late.
And I think that that was also in the back of people's minds, it caused people to start earlier this year, saying, ‘I don't want to be in the same position I was in last year where it was uncertain about what the state was going to do reinsurers have limited capacity — I want to start early, and try to lock in whatever capacity I can, while I can, and not have to potentially have some reinsurers change their mind the last couple of weeks and maybe change their appetite.’
…The more orderly nature of the 6.1 renewals was definitely driven by earlier conversations with key markets, and those markets, really willing, their willingness to step up, and, and in many instances, provide substantial capacity at pricing that cedants could live with that seemed reasonable. And they were able to complete large chunks of their placements earlier, before heading out to the rest of the market to complete their placements.
CT: It wasn’t all plain sailing though. As Bryan Friendshuh explains. Appetite levels depended on loss experience, prior relationships and whether the cedant was a nationwide carrier or a Florida domestic, among other factors:
Bryan Friendshuh: I would say there from reinsurers perspective, you know, there was two different avenues or a couple of different areas, you could go down as one. Some wanted to support more, there was generally more appetite for nationwide carriers, and less, I would say for the Florida domestics which have been, you know, financially strained and, you know, for insolvencies over the last 12-18 months. You know, so I think that transition away in a reinsurance market towards more nationwide cause more stress on our Florida domestic companies, and, you know, created the need to go out early and get things moving.
I think, from a reinsurer perspective, as it applies to the Florida domestics, I think there was generally a couple different perspectives, there were some markets that were out there, trying to just go deeper and further with their existing clients, tried to lock up that capacity very early. And, you know, in some cases, be done by, you know, the end of April, for the most part.
And then there were others that wanted to wait, you know, kind of more opportunistic, and see how the, you know, ended up waiting for the maximum capacity or maximum dollar they could get for the reinsurance and then also pushing tighter restrictions on terms and conditions and, and those types of things.
CT: Coverage below the Florida Hurricane Catastrophe Fund and layers at the lower end of programs continued to be tough to place, a situation that was seen in wholesale markets in London as well as other carriers. Here’s Martin Verrills, EVP at Gallagher Re.
Martin Verrills: I think the biggest changes for London was below the FHCF was more difficult. There's less of an appetite on two levels below the FHCF and below one in 10. And it proved to be the case that we were able to get less capacity over here. That probably eased off a little bit towards the end, when people realised, I think, that we were going to have to leverage signings at the top against whatever was placed at the bottom. One or two refused to do that, and therefore got signed down. Others came to the party supporting the bottom end in a small way, not necessarily what they did previous years, but in a small way. But overall, a lot more capacity available over here for above the FHCF.
T's and C's were pretty orderly this year, across the whole market base for mid-year. First of January was really difficult from that point of view as we were seeing syndicates putting a laundry list of requirements on each and every quote, without necessarily even looking at what was on the contract the year before. And we had to try and weed out what was relevant, what wasn't, what we could agree to or not. And it came to a [a point where] there were really four clauses or four demands that they wanted, excluding cyber, excluding [contagious disease (CD)], excluding terror without any write backs, and excluding riot, The riot element has eased off a little bit too, including looting, in respect of named perils like Hurricane, but those are the four pillars - everything else we can negotiate and remove most part, but those four pillars, and that stayed the same at mid-year.
CT: In more challenged renewals, alternative capacity was sought to help pick up any shortfall left behind by the traditional carriers, and while the wave of capital that came in for 6.1 meant most programs could be filled by those players, there were still pockets where ILWs in particular were sought.
Here’s Bryan again:
BF: In the end … I think enough traditional capital came in and things got done on more what we would call the traditional UL basis. I think where ILW or sorry, the alternative capital came in was on the ILW side, there's significant interest in ILW's cat bonds, which is just, you know, from the investor perspective, a very clean risk that they can write support without some of the nuances that come along with traditional UNL type cover.
CT: Adam Schwebach noted that the Floridian reforms weren’t just attractive over the long term for traditional capacity, there was a significant upside for cat bonds and their investors too.
AS: I think we saw a good mix, actually, you know, that it was one of those strange things where I think everybody, you know, in an honest moment will admit that the reforms that have been made in Florida are fantastic long term. Both for the carriers, but also very specifically for reinsurers, and maybe even more specifically, very beneficial for the collateralized markets. You know, shortening the window to file a claim is going to have a very beneficial impact on trapped collateral in the long run. You know, I don't think I honestly don't think anybody ever thought that we would see the elimination of one-way attorney statute in the state of Florida. You know, I lived in Florida for 16 years now. And that just that was one of those things that you could just never imagine the legislation really having the fortitude to push past trial bar, and to get that done, I think is going to have very positive long-term ramifications.
CT: And while reinsurers were perhaps reluctant to actively price in that reform for these 6.1s, preferring to wait for the proof of its effectiveness to emerge, some cedants were sufficiently confident about the impact of the reforms that they offered to make contractual or structural changes around their programs, to take certain risks off the table for reinsurers. Loss expenses was one such area, as Adam explains:
AS: I don't think that the cedants are, or that reinsurers are giving credit for all of the legislative reforms yet, just as I said, because they do want to see some proof before they start to price stuff in there. But that doesn't mean that there aren't some instances where we could allow the company to take some of that benefit on their own right if they if companies felt very strongly about certain legislative reforms. You know, there are structural changes, there are contractual changes that can be made to the reinsurance contracts to allow the companies to, in a sense, bet on themselves and take certain risks off the table for reinsurers where we would look at it and say, Okay, this is this is kind of the one of those middle grounds where we know that the legislation will have a positive impact on this area, let's, for instance, LE, right? I think LE is a great component of that. If we believe that the legislation is going to have a very positive impact on litigation rates and hurricanes going forward, that should have a positive benefit on LE for future hurricane events. Reinsurers aren't going to give you the benefit of that unless you're willing to maybe contractually put in some sort of an LE factor or something like that, which, you know, if you feel strongly about the reforms, then you're willing to do that and kind of take that bet on yourself. So there are ways that companies could take some of that risk away from reinsurers and get some additional benefit from the reforms that the state’s put forward.
CT: There were other considerations for cedants and their reinsurance partners this year. The impact of Hurricane Ian, which hit in September 2022, was one such factor, but the increase in so-called unmodelled or secondary perils was another focus, given the rise in losses associated with perils such as severe convective storms.
The concerns aren’t just related to the physical damage caused by those storms, but also the rising levels of litigation abuse and fraud, as Adam Schwebach explains:
AS: I've been the victim of this myself, unfortunately, I knew what I was dealing with, but I got the text messages saying that, hey, there was a storm that happened on this date, and it went over your house and let us come out and we'll look and see if there's hail damage, or if there's, you know, if you have any wind damage to your roofs, and so, oftentimes those SCS losses are just purely manufactured.
But SCS has been an issue, and Florida counties have dealt with those losses. I mean, whether or not they were real or not, at the end of the day, given the previous kind of legal environment in the state. Those were losses that were deemed to be paid by insurance companies and oftentimes passed on to reinsurer, so, I think that's going to be this funny area where we see… I'd like to kind of refer back to, you know, sinkholes; when sinkhole legislation was passed, suddenly the ground stopped sinking. You know, I have a feeling that given his past legislation that was just passed in December, you know, we're going to see a much, much smaller amount of SCS loss going forward, both for insurance carriers, and for reinsurers, it just, it's gotten the point now, where it doesn't make any sense.
CT: Another consideration is the not-so-simple task of administration, as Joshua Knapp explains…
JK: Yeah, so I think the biggest challenge that the clients are facing right now is — and it goes back to that five years straight of rate increases — is the playing the catchup game, because when they received their bill for reinsurance, they then have to go do a reinsurance true up rate filing with the state - that takes time. And then it ultimately takes a good 12 to 18 months to flow through their balance sheet. So, when you get those compounding rate increases, it becomes challenging for the primary companies in the state of Florida to be profitable. And this will likely be a scenario where this year if the wind doesn't blow, the vast majority of the company should make money. However, there are some that once they pay their retention, if there is a loss, they're signing on to a combined ratio that's going to be greater than 100. So, it's a constant battle of learning what your bill is from the reinsurers, then taking that and putting it working at a three-year rate to determine how much those needs to increase, taking that to the state, getting approval, implementing it into your policy admin system, and then ultimately, passing that on to consumers.
CT: That’s all we’ve got time for in this episode but be sure to subscribe so you don’t miss our second Floridian renewals episode, where we talk about tactical versus strategic reinsurer relationships, whether we’ve now reached peak rate for Floridian cat, and how the broker made the difference.
