APCIA
Hurricane Ian and Florida dominate talk at APCIA
A category 4 hurricane smashed across Florida just as APCIA delegates prepared to travel to Dallas, Texas. In the days after the catastrophe, attendees heard Ian repeatedly described as an ‘industry-changing event’.
Just days before re/insurance leaders gathered for this year's APCIA conference in Dallas, Texas, Hurricane Ian hit Florida with sustained wind speeds of 150mph, killing more than 100 people and destroying homes and livelihoods.
Ian made its first devastating landfall in Cuba on September 27 and, after crashing onto the Florida coast on September 28 as a category 4 hurricane and tracking across the state’s peninsula, it went on to hit the US state of South Carolina on September 30.
As a result, Ian is expected to be one of the costliest US hurricanes ever, as more than one industry commentator predicted it would be an “industry-changing event”.
Insured loss estimates to onshore property so far range from $42 to $57 billion, according to the latest figures from Verisk.
Concerns about the re/insurance market in Florida in particular were apparent well before the formation of Ian, or Hurricane Fiona before that in mid-September.
During a panel discussion about the state of the Florida market, held before Ian and Fiona struck, expert speakers outlined a litany of problems blighting the state’s market.
From heightened loss activity from severe weather events, exacerbated by climate change, to insurance premiums almost three times higher than the US national average, fraudulent roof replacement schemes and excessive litigation filed against Florida property insurers, the market’s problems are legion.
And that’s before you consider the persistent calls from re/insurers for legislative reforms to go beyond relying on Citizens to be the insurer of last resort as homeowners in the state face being caught in the crossfire of insurer rating downgrades and mortgage requirements.
For more from the panellists, read the two articles on the following pages, titled ‘Flight from Florida: investors put state insurers on notice’ and ‘The Citizens backstop: a precarious plan unlikely to save the Florida market’.
With existing concerns about Florida and an uncomfortably close view of the developing hurricane in the lead-up to APCIA, Ian was naturally a major talking point at October’s conference.
A market akin to post-Andrew
Mark Vaughan, deputy head of treaty reinsurance at Beazley, spoke to Intelligent Insurer at APCIA and said that the aftermath of Hurricane Ian heralded a market comparable with the post-Hurricane Andrew period in 1993.
He said that while losses from Ian were expected to bring rate rises, this was unlikely to lure much more property-cat capacity into the market.
Vaughan acknowledged that some carriers, including Beazley, might be tempted to commit a little more capacity, but uncertainty around climate change, inflation and the five-year loss record in the cat space would largely outweigh the temptation to commit more.
He stressed that the industry needs significant structural change in price and terms across all markets for confidence to flow back—and that rate increases alone post-Ian are not enough to bridge the gap.
“There are small pockets among reinsurers that could increase by a small margin,” Vaughan said. “But it is hard to see anyone walking in and significantly increasing capacity.”
This means a change in dynamic in the market. He predicted that many cedants will end up doing private deals with reinsurers to secure the treaty capacity they need for the 1/1 renewal, outside of any form of open bidding.
“Post-Ian we are likely to see a market which resembles more closely post-Andrew in 1993.”
Mark Vaughan, Beazley
The same thing happened in the mid-year renewal when, he said, a “huge proportion” of deals were done privately. Vaughan expects that 1/1 will bring “many more private placements to allow cedants to get their placements finished”.
The upshot: higher, uneven pricing on a volatile market. “That will become almost endemic in 2023,” Vaughan said.
“Hurricane Ian speaks more to the five-year loss trend, let’s call it six years now, than it adds to the rate enhancement story,” he said. “Post-Ian we are likely to see a market which resembles more closely post-Andrew in 1993.”
Hurricane Andrew represented “the hardest market we’ve ever seen” and capacity fell well short of demand in that period. “Programmes couldn’t get done at almost any price,” Vaughan recalled.
Subhead - ‘Things going in the wrong direction’
Swiss Re president, US P&C, Keith Wolfe told Intelligent Insurer that multiple macroeconomic factors had already affected the supply-demand imbalance in the US P&C part of the reinsurance market over the last six to 12 months. Losses from Hurricane Ian will only accelerate some of those dynamics.
“Prior to Ian’s formation and landfall, there was already skyrocketing inflation, which was starting to put serious pressure on property lines in terms of replacement costs,” said Wolfe. “That created a timing issue around things being underinsured and what they’re really worth when they are damaged and repaired and replaced.”
In addition to this, supply chain issues continue to create challenges for the industry. Some of this is still related to the COVID-19 pandemic and some to the macroeconomic environment.
As a result of these two factors alone, Swiss Re was starting to see cedants require more limit in the mid-year renewal—in the region 12 to 15 percent. This meant a greater demand from insurers for property-catastrophe capacity across the board, he said.
Yet, Wolfe explained, this timing dovetailed with a number of factors that caused reinsurance capacity to shrink. Unrealised investment losses in many big reinsurers shrank balance sheets—in the short term, at least. That removed capacity from the property-catastrophe market, just when it was needed most.
“Two things are both going in the wrong direction, to create a really bad situation,” Wolfe said. “There’s a lot less supply and a lot more demand, all at the same time, independent of any events, including Hurricane Ian.”
Final loss figures as a result of Hurricane Ian are still a way off. Wolfe said that whatever the final number, the event will put a lot more pressure on the system. Capital will be eroded further as a result of the losses. That will create an even more pronounced supply-demand imbalance going into the year-end renewal.
Prior to attending APCIA, Wolfe attended another major event the week before: the National Association of Mutual Insurance Companies. At that, Wolfe has been involved in client meetings. While stressing those discussions were pre-Hurricane Ian, Wolfe said discussions centred around the factors mentioned above, especially the supply-demand imbalance.
Wolfe believes it is inevitable that rates will harden on the back of this combination of events. They are making current pricing levels, especially in the property space, untenable, he believes.
Wolfe noted some of the actions taken by some of Swiss Re’s competitors, which have decided to either curtail or exit property-cat business because the volatility has become too much for the size of their portfolio.
“That kind of dynamic changes the supply-demand imbalance—again, not for the good,” Wolfe said. “This imbalance that I expect to see at 1/1 is not good for the industry; it’s not good for anybody.”
Hurricane Ian will have a particularly pronounced impact on the Florida insurance market. The state already had deep problems in its insurance sector, mainly stemming from its legal system. Although some reforms have been passed, a number of insurers have been downgraded and others declared insolvent this year, partly because of a lack of reinsurance capacity in the market.
“There’s a lot less supply and a lot more demand, all at the same time.”
Keith Wolfe, Swiss Re
Fuel to the inflation fire
Axel Freiboth, managing director and chief underwriting officer of Hannover Re’s North American Treaty Division, told Intelligent Insurer that before Hurricane Ian hit, the industry had been grappling with the issue of inflation. Now, Ian has made things worse.
“We have significant issues to tackle with inflation alone,” Freiboth said. “A lot of companies, including reinsurers, were hoping for a quiet 2022 and we were on a good track until hurricanes Fiona and Ian—and the hurricane season isn’t over yet, we still have a couple of months to go. There is pressure on the insurance and reinsurance markets.”
According to Freiboth, capital will be trapped for insurance-linked securities (ILS) investors and capacity will continue to be short, having already been scarce before Ian, adding yet more pressure. He said that the overall situation in the re/insurance market in North America has been driven by loss activity in areas that was not anticipated. This was especially true for secondary perils such as wildfires and winter storms.
Freiboth said that while Ian was an expected event, it came on the heels of an already active year. This will make some market participants look at future retention increases, given that more capacity will be needed to compensate for value increases.
“We don’t know how much capacity is available, among other possible adjustments to terms and conditions,” he said.
“Ian is, for some companies, not just an earnings event but a capital event,” Freiboth warned. “And the Florida market has its own challenges. It’s going to be interesting to see how claims develop over the next several months and even years.”
He said there was still some uncertainty, especially with possible further activity in the hurricane season. He stressed that with capacity short many market participants will be scrutinising terms and conditions carefully. The hard market will, in his view, continue for the immediate future.
Florida reform falls short
Florida’s recent regulatory reforms have likely fallen short of what is required to put a lid on the runaway litigation that has reinsurers fleeing the jurisdiction and insurers being downgraded and going insolvent, participants on a panel discussion during the APCIA convention underway in Dallas told delegates.
The session, called “Reinsurance panel: state of the market”, featured Kerri Hamm, head of business development for Munich Re in the US; Paul Anderson, Aon’s US property growth leader; and Will Garland, president, Centres of Excellence at Guy Carpenter. It was moderated by Dana Perino, the former White House Press Secretary and an anchor on Fox News.
“I don’t think the legislative changes went far enough in Florida,” Hamm said. With assignment of benefits still in place and longish claim periods still available, Hamm “would like to see Florida go further”.
As the first category 4 hurricane to impact southwest Florida since Charley in 2004, Ian is expected to be the harbinger of the worst losses Florida has seen in 30 years, since Hurricane Andrew struck the state in 1992. Like Andrew before it, Ian is widely expected to be an industry-changing event.
Image: Shutterstock / Felix Mizioznikov
