The rating agency that sets the bar for capital standards among Florida-focused insurance carriers does not think its newly tightened guidelines will distress much of the industry that covers the hurricane-prone Sunshine State.

Demotech Inc. recently told Florida-oriented P&C writers to maintain enough capital to pay claims for a 1-in-130-year first loss event, a heightened financial standard from the previous one that required solvency to handle a 1-in-100-year loss event.

Following two straight years of substantial storm damage in Florida, Demotech upped the capital requirements for a geographic insurance segment that depends for survival on the rating agency's passing grades.

But even before the new standard was announced, companies had been maximizing their capital base and their reinsurance coverage, Demotech analyst Bob Warren said in an interview. The new standard requiring companies to cover a more devastating potential first storm will affect only about 10 of the more than 50 companies Demotech rates, he said.

"While it sounds pretty dramatic, the 100 [years] to 130 [years], quite honestly wasn't that big of a deal to most of the players," said Warren.

The new guidelines for probable maximum loss for the first storm will require the most financial adjustments from smaller carriers, the Demotech analyst said. Most companies were already capitalized to absorb losses from a 1-in-130-year first-storm event, he noted. Companies find it easier to get more reinsurance to offset losses from second, third or subsequent storms because multiple hurricane landfalls are less likely.

Most companies Demotech rates have insurance and reinsurance arrangements that have allowed them to comfortably absorb even the steep losses seen in the past two years, Warren said. A group of Demotech-rated insurers combined for an estimated around $200 million unfavorable prior-year reserve build in their 2018 statements.

Easing the burden on Demotech's elevated capital requirements is the agency's loosening of maximum loss assumptions for subsequent storms. Companies now have to maintain coverage for a second event with the damage assumed for a 1-in-50-year storm rather than for a 1-in-70-year storm. That makes the new Demotech guidelines less onerous to companies than it would have been otherwise, said Ted Blanch, a Florida market insurance veteran and CEO of startup brokerage COIN Reinsurance.

Also supporting the property underwriting sector is the fact that the Florida hurricane catastrophe fund that backs their operations has remained well funded, Warren said.

Demotech warned that higher reinsurance costs could pressure the financial results, and potentially the ratings, of some of the companies it covers. Carriers could see some increase in reinsurance rates, but Demotech does not believe increases will be especially steep. Capacity from insurance companies and the availability of capital from the insurance-linked securities market remains strong, Warren said.

"Are we talking about double-digit increases for these players? I don't think so," he said.

If rates do climb, Demotech will not be tempted to ease maximum loss assumptions, according to chief ratings officer Barry Koestler.

The reinsurance industry has been spoiling for a hardening environment with upward momentum in rates, but that is not a certainty, COIN Re's Blanch said in an email.

"Wanting is not always rewarded by getting," Blanch said.

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