Florida Hurricane Catastrophe Fund facing $3.2B claims paying capacity shortfall

by Artemis on October 20, 2011

Once again the Florida Hurricane Catastrophe Fund has hit the news after new concerns were raised about the Funds ability to pay claims should a major hurricane strike. The 2011 hurricane season has been kind to Florida so far and it looks like the fund may get away without having to pay for a major storm for another year, but that doesn’t stop concerns growing about its claims-paying capacity.

A study undertaken by the Funds financial adviser shows that the current financial market climate means that it is unlikely that the Fund could raise as much money as it might need through post-event bonds. The report estimates that the fund has just over $15 billion of claims-paying capacity for 2011 but also estimates that the fund has the capacity to raise up to $8 billion in post-event bonds, $3 billion less than the $11 billion in post-event bonds projected at the start of the hurricane season. More worryingly another estimate shows them only able to raise $5 billion in post-event bonds making the potential shortfall as much as $6 billion.

So the fund could face a $3 billion+ shortfall if a major storm were to strike before the end of the season. That would again put the burden on the policyholders by making them pay assessments added to every policy.

We’ve written before about the potential for shortfall at the FHCF and also about the need to shrink it, truly make it the insurer of last resort and allow the private market to take up the slack. Of course if the private market did step in then policyholders are likely to find premiums rising as the FHCF is said to have kept prices artificially low for years. However the private reinsurance market could also bring with it tools such as catastrophe bonds and access to the capital markets through pre-event, proactive risk transfer rather than a post-event bond issuance.

Policymakers need to think about what is most efficient and actually best for taxpayers. The post-event bonding scenario could leave the State with a massive shortfall if, for example, two or more major storms hit Florida in a single year. The post-event bonding may also burden taxpayers in years to come with the need to recapitalise the Fund. The private reinsurance market on the other hand may cause premiums to rise to higher levels, although many would say these would be realistic premiums in a high-risk coastal State, but the private market can at least efficiently offload risk to the capital markets. Neither option is ideal for the policyholders who are bound to face premium increases whatever happens, but the days of subsidised coverage will not last forever.

As ever, the Out of the Storm blog has an interesting perspective.

Subscribe for free and receive weekly Artemis email updates

Sign up for our regular free email newsletter and ensure you never miss any of the news from Artemis.

← Older Article

Newer Article →