Proposal to shrink Florida Hurricane Catastrophe Fund sent to Governor

by Artemis on November 17, 2011

We wrote earlier this year about the need to shrink the Florida Hurricane Catastrophe Fund and allow the private reinsurance and risk transfer markets to step in to provide cover where the Fund is now struggling. The Fund faces a large shortfall should any major hurricane strike the State of Florida and likely couldn’t manage to pay the resulting claims without forcing tax rises on every Floridian family and issuing bonds post-event.

Then more recently we wrote about the potential $3.2 billion shortfall that the Fund could face if a major storm blew in. This time the shortfall has been predicted because the financial markets are unlikely to support the bond issuance that the Florida Hurricane Catastrophe Fund would need to issue to shore itself up. Estimates came to the $3.2 billion shortfall and again that would result in the Fund having to call on Florida residents to make up the difference.

Now, it seems that the cat Fund itself is coming to terms with the difficulties it faces and the Director of the Fund, Jack Nicholson, has taken a proposal to Gov. Rick Scott, Florida cabinet members and the legislative, suggesting that the Florida Hurricane Catastrophe Fund’s capacity be reduced from $17 billion to $12 billion (thus wiping out the shortfall) and shifting the other $5 billion of liabilities to the private reinsurance market.

One of the reasons for this new realisation that Florida needs private reinsurers and risk transfer providers to step in is that an initial examination of the status of the Fund showed that the shortfall could lead to the insolvency of seven of the major eleven insurance carriers in the State.

Of course, you can’t reduce the funded source of reinsurance cover without having some knock-on effect on consumers premiums and estimates suggest premium rises of 10% over the next seven or eight years if the Fund does indeed shrink and allow reinsurers to take up the slack.

The Governor has said he favours the idea, and the situation does seem impossible to stay as is, so it is likely that reinsurers will be taking on more Florida homeowners risk soon and that will of course push more Florida hurricane risk into the reinsurance market. The knock-on effect of that will be additional hurricane risk to offload to the capital markets and this could increase the volume of catastrophe bonds exposed to the State, particularly if cat bonds can be kept price comparable to reinsurance.

Separately, Citizens, the State funded insurer is likely to be raising rates for some Florida homeowners by as much as 20% soon. This again will filter into the reinsurance market and is likely to mean rates steadily increase for Florida hurricane risk.

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