Reinsurance in Florida

Cecil Pearce: Private reinsurance not Florida's real challenge
Gainesville, October 26, 2010 at 1:33 p.m.

The recently published articles related to reinsurance misrepresent the very real challenges confronting our great state. The Florida Insurance Council (FIC) is the state's largest company trade association and its members and other affiliated insurers protect hundreds of thousands of Florida homes. FIC's mission includes educating the media, consumers and public on the business of insurance. Our member companies purchase the catastrophe reinsurance referred to in the articles, both from the private market on a voluntary basis and on a mandatory basis from the state-sponsored Florida Hurricane Catastrophe Fund (FHCF). While reinsurance is vitally important to our members, it does not represent Florida's principal challenge.

At last week's symposium, "Moving the Market Forward," sponsored by the Florida Office of Insurance Regulation, Commissioner Kevin McCarty noted, "Florida's property insurance market is wholly unique." That is exactly right. Florida is the world's peak risk zone for natural disasters, with experts estimating that we are subject to an average annual loss of $9.7 billion per year. This represents more than 60 percent of the expected average annual loss for windstorms in the entire United States, and is more than six times higher than the next closest state, Texas. Eight of the 12 most costly U.S. disasters have affected Florida. FIC's members are aware that Florida has real exposures that require risk management expertise, operational competency and responsible, transparent accounting. Moreover, our members must have access to global capital to spread our unique risks beyond our state and around the world.

No region benefits more from private market reinsurance, with the ability to globally diversify perils, than the Sunshine State. Reinsurance, which is simply insurance for insurance companies, enables even locally focused companies to protect themselves from catastrophic losses by obtaining coverage from a network of foreign and domestic reinsurers who diversify and spread complex or severe risks, like Florida's hurricane threat, across the globe. If risk is effectively spread, no single company is saddled with a financial burden beyond its ability to pay. Indeed, international reinsurers paid billions to Florida companies in 2004 and 2005 to help consumers and businesses rebuild from the storms of those years.

Despite these benefits, readers of this week's articles might conclude that reinsurance industry practices are directly responsible for the rates our members charge. That is not the case. The Florida Office of Insurance Regulation (OIR) is in charge of regulating all personal lines of insurance company rates, including homeowners insurance. Insurers cannot raise rates without OIR approval, whether the reason is attributed to reinsurance or any other cause. The challenges our members face in today's insurance market relate less to reinsurance pricing and availability and more to the ongoing sinkhole crises. Other cost drivers currently harming our members and therefore Florida's consumers include mitigation inspection fraud, the current requirement to pay replacement costs without regard to whether the work has been or will ever be done or the item replaced and the abusive practices of certain "public adjusters."

Over the past few years, our elected leaders have worked to better protect Floridians by reducing the risk associated with the FHCF and Citizens Property Insurance Corporation, and have put our state on the "glide-path" to stability. Unfortunately, this process stalled last spring when Gov. Crist vetoed important reforms that would have enhanced the solvency of Florida's insurers and reduced the fraud and abuses that are harming consumers and businesses statewide. When the legislature reconvenes, we urge our elected officials to return to these reforms, and impose reasonable statutes of limitations on stale claims, reform abusive practices relating to public adjusters and mitigation inspections and put our bad faith laws on an even playing field. We believe these reforms will improve the market for private insurance in Florida and contribute to an environment in which more businesses will commit capital to our state and compete for our business.

Florida's hurricane exposure cannot be wished away, nor should it be blamed on others. However, it can be dealt with if we begin to understand the problem more clearly. In FIC's view, those challenges arise fundamentally from our inherent exposure to hurricanes and secondly from years of well-intentioned public policy decisions that have had adverse unintended consequences. It is this path we must continue to reverse. FIC and its members are committed to diagnosing our ailments correctly, and helping to find the appropriate solutions.

Cecil Pearce, President
Florida Insurance Council

(Brokers have told FIC that catastrophe reinsurance premiums declined 10 to 20 percent in 2008 and 2007 after a more than 75 percent spike in 2006. This report in the Financial Times of London is a sign of further declines for 2009 unless there are major losses in the final weeks of the 2008 hurricane season.)

Financial Times  London
Willis gloom on reinsurance pricing

By Andrea Felsted in London
Published: September 8 2008

It would take $50bn-$100bn of insured catastrophe losses to stem the slide in prices in many areas of the insurance and reinsurance markets, Willis, the broker, has warned.

Without heavy catastrophe losses, it could be the end of 2009 or into 010 before the markets stabilises, said Joe Plumeri, chairman and the chief executive.

Mr Plumeri's comments will make grim reading for reinsurers gathering this week for their annual gettogether in Monte Carlo.

The meetings over the next few days in the ornate salons of the Riviera  kick off price negotiations on policies set to be renewed in January.

"All the signs are that I don't think the soft market is going to last a long long time . . . but it does not seem to be something that is going to end in a few months," Mr Plumeri said in an interview with the Financial Times.

"It feels more like the last half of next year or 2010."

Insurers' and reinsurers' balance sheets have been bolstered by three years of relatively strong premiums, together with a dearth of big catastrophe losses. However premium rates are falling in many areas while claims are rising.

Mr Plumeri said balance sheets were still strong, unlike in the period before the September 11, 2001 terrorist attacks, when they had been depleted.

But profits from writing policies were now under pressure, while investment income was being eroded by the turmoil in global financial markets.

Catastrophe losses in the $50bn-$100bn range could "accelerate" market stabilization, Mr Plumeri said.

However, he said even this level of catastrophe losses would be unlikely to transform the insurance and reinsurance markets overnight.

"If you had a loss like that, it does not change things tomorrow. It takes a while for that to flow through the system."

Mr Plumeri said that insurers and reinsurers faced a myriad of risks,  such as those from more extreme weather, terrorism and technology.

"You would think that with all of the risk that is apparent around us,  that pricing would be more cautious, but it is not," he said.

The comments come amid the most active hurricane season for three years.

Hurricane Gustav hit the US Gulf Coast last week, but insurers and reinsurers hope to escape significant claims after it weakened and made landfall in a less populous area.

Several major reports have come out on the status of the worldwide reinsurance market headed into the final quarter of 2008. They are important background on the Florida hurricane insurance system because it relies heavily on private reinsurance as well as the Florida Hurricane Catastrophe Fund.

World Catastrophe Reinsurance Market 2008 is produced by Guy Carpenter, a reinsurance broker. Notes Brad Kating, president of the Association of Bermuda Insurers and Reinsurers, "this Guy Carpenter report contains tables that show two successive years of reinsurance price declines and
also has a table on reinsurer profitability." The reports demonstrate that "reinsurers are not
price gouging and that reinsurance prices do not increase by 300%."

See this link:

Guy Carpenter: Worldwide Insurance, Late 2008

 Reinsurance Market Update, September, 2008, is produced by another reinsurance broker, AON Re Global It shows that "reinsurers remain strong admid the national credit crisis."

See this link:

AON Re: Reinsurance Market Update, September, 2008,



With a very profitable 2007 now all but assured, the last 24 months represent a period of exceptional profitability for the reinsurance industry. Nevertheless, despite many statements about the importance of cycle management, the industry is showing signs of reverting to its historic pattern of feast or famine.

Willis Re Worldwide Outlook, Jan.. 1, 2008

Global reinsurance review, January 2008

Insurers took advantage of a buyer's market. Many 2008 renewals closed late as insurers held out for lower rates in the continuing soft market. 

Guy Carpenter Reinsurance Outlook, Early 2008