Summary
Now that Florida is retaining a much larger portion of their more predictable catastrophe losses, insurers and reinsurers should be able to buy the high layer coverage they want at affordable prices. The risk load charged for this high layer coverage would be significantly less than the risk load included in last years quotes for such coverage. I would expect a moderate decline in premium due to normal competitive pressures after a great year, but higher expected combined ratios and lower expected returns on equity. I would also expect less use of sidecars as investors search for opportunities that offer better risk adjusted returns. All else being equal, I would expect stock prices of Bermuda reinsurers to be under pressure as hedge funds reduce their positions. Finally, I would expect diversification efforts of Bermuda reinsurers to intensify, primarily due to rating agency pressure.
Analysis
Bermuda Reinsurers will likely limit the decline in premium volume by writing more back-up covers and retrocessions, as well as expanding diversification efforts. The increase in risk assumed and reduction in expected returns will reduce risk adjusted returns.
