Floridians May Turn To Reinsurance As Demotech Highlights Concerns

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Includes: GLRE, HVRRF, HVRRY, SSREF, SSREY, TPRE
by: Steve Evans

Floridian primary insurers, particularly the smaller firms, may turn to greater use of reinsurance, particularly quota shares, as they seek to offset capital pressures that could be brought about by rating pressure in the wake of assignment of benefits (AOB) claims escalation.

Demotech said this week that it has suspended guidance for property insurers in the state of Florida, saying that insurers need to review their protocols, and that recent court decisions had revised claims procedures, practices, and protocols from industry standards.

The concern is that ongoing assignment of benefits (AOB) issues in the state are causing claims escalation and according to sources this is anticipated to provide the biggest threat to smaller Floridian property insurers.

Demotech said that some insurers will face ratings downgrades, as they are unlikely to be able to meet required financial strength ratings, which reinsurance of course plays into, but two recent court cases and the AOB issue threaten to weaken Floridian insurers financial positions even further, making rating downgrades more likely.

A source told Artemis that the threat will be greatest to the smaller Florida carriers, particularly those with capital levels below $25 million and that these companies may now be compelled to use more quota share reinsurance, in order to gain surplus relief and take the volatility pressure off their limited capital bases.

Some companies may also need to raise equity capital, as they seek to sort out their affairs for Statutory Statement of Accounting Principles Number 72 (SSAP 72). Private debt issuances could also be possible in future, as these Floridian primaries are forced to shift their capital models to account for some of the issues they currently face.

Florida's insurers are already heavy users of reinsurance capital, from traditional excess of loss and quota share arrangements, to catastrophe bonds and collateralised reinsurance contracts.

The chances of more demand emerging in the wake of Demotech's note are reasonable, but it is likely that collateralised quota shares would be the way that any ILS funds or investors would benefit.

Of course a forward-thinking Floridian primary could establish its own special purpose insurance vehicle to use as a collateralised quota share sidecar, there by bringing the benefits of third-party reinsurance capital directly into its business model and offering it a way to extract some fees from the additional risk it may need to cede.

Some Floridian primary insurers have proactively sought to address the growing AOB crisis in the state, partnering with or even acquiring service providers to help them manage water claims better and head off the chances of lawfirms coming between them and their claimants.

These companies may find themselves best positioned in future and it shows the importance of working to get closer to your customer, for a primary insurer, and for reinsurers or ILS funds it shows the importance of understanding what processes and procedures your cedents have in place to deal with issues such as this.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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