The reinsurance market is one of multiple layers and complexities, and what ends up as the premium on an insurance quote or policy likely has been impacted by various pricing components. For property insurance, after factoring in physical location, the risks of flood, earthquake, hurricane and other possible catastrophic losses have to be entered into the rate- making equation along with the usual exposures of fire and theft. Add the threat of terrorism, the impact on investment income and other variables, and rate making becomes increasingly difficult.

Some reinsurers, as they assess their financial results, may increase their rates to what they see as more reasonable (profitable) levels. Those that do could find themselves losing market share. There is a tremendous amount of capital in the marketplace, with people actively seeking books of business. Some of these insurance and reinsurance entities with surplus capital are fairly new. That means they frequently are working with a blank slate when it comes to loss history, and they are able to develop rates without having to account for past loss history. That can be advantageous when competing for an account or a book of business against someone with legacy loss history issues.

Soft Market to Continue in Florida

For the past several years, the Florida marketplace has experienced declining rates and pricing across most lines. Barring any catastrophe events, that soft market will continue here. The supply side of the supply and demand equation is still ruling the day. “Reinsurers are, for the most part, not as much in control of the direction of pricing in the market as they'd like to be, as there is still more capacity available than demand,” said Dennis Burke, vice president of state relations at RAA. The same can be said for insurance carriers on most classes of business.

Ehrhart said, “The expectation for the most recent reinsurance renewals was a 5- to 10-percent decrease, but it turned out to be more like 10- to 15-percent.” Ehrhart added that he is not distinguishing between treaty renewals (typically provided when reinsuring a program or book of business), and facultative renewals (usually terms provided on a per-account basis).

Those who are waiting and watching the market for indications of what will happen next on property rates and pricing will have to wait a little longer for anything definitive. “Most of the contract renewals occur by July 1 — usually 60 to 65 percent — but the property renewal season doesn't really get serious until after the hurricane season is over,” said Ehrhart.

The Florida Factor

The state of Florida's property insurance market is a significant factor in reinsurance discussions. To explain its predominance, Aon's Ehrhart listed the world order for the top five catastrophe events based on reinsured exposure:

1. U.S. hurricanes

2. U.S. earthquake

3. European windstorm

4. Japanese earthquake

5. Japanese typhoon

Florida is a key component of the number one item on the list. Aon estimates that there are $2.5 trillion dollars of values at risk in the state. What makes that number all the more significant, or potentially so, is the concentration of those values. Ehrhart noted that the recent catastrophes in Chile and Haiti had no real effect on Florida renewals, but a Florida catastrophe event could affect rates elsewhere.

As significant as the size of the market in Florida is to reinsurance companies and brokers, it is complicated by the unpredictable nature of the storm season, and further complicated by the state's legal, regulatory, and political climate. Experts note that private reinsurance placement could be a much more prominent and viable consideration if not for the state's current catastrophe fund structure.

Burke said what many others have stated, or are thinking. “While some in the state of Florida may be concerned about monies going to the private market, domestically or internationally, RAA sees that as a good thing. The [currently structured] Florida Hurricane Catastrophe Fund will have to borrow money to pay catastrophe losses. Private market insurance carriers and reinsurers will pay claims from their funds.”