Citizens to turn to catastrophe bonds as part of risk reduction plan

by Artemis on January 4, 2012

Citizens Property Insurance, the state backed property insurer of last resort in Florida, is planning to increase its use of the private reinsurance markets in 2012 by increasing the amount of reinsurance cover it purchases and also issuing what we believe would be their first catastrophe bond.

Citizens has long been thought to be too reliant on the Florida Hurricane Catastrophe Fund and as the Fund could be about to shrink anyway the time seems right for Citizens to increase their use of private market risk transfer tools. In 2011 Citizens returned to the private reinsurance market for the first time in two years to acquire reinsurance cover to complement the cover afforded to them through the state Fund.

Now, for 2012, Citizens are budgeting for an increased level of private market reinsurance cover, their 2012 budget commentary document (available here) suggests as much as $750m of reinsurance cover will be sought from the traditional reinsurance markets (an increase from 2011). The budget commentary also states that they will be seeking $250m in alternative risk transfer as well which is said to be the catastrophe bond. Citizens are budgeting $50m for the premiums for the cat bond portion of their coverage.

We haven’t seen any official news on this development yet but it has also received a mention in reinsurance broker Aon Benfield’s Reinsurance Market Outlook report which was published this week.

It makes sense as part of a strategy to reduce Citizens reliance on the catastrophe fund, which is said to be underfunded to the tune of $3.2 billion in claims paying capacity and unlikely to be able to respond to any major hurricane losses without having to levy assessments on every policyholder.

It seems that state backed catastrophe and disaster funds are becoming one of the more regular users of the catastrophe bond market with a number of other funds and state backed insurers already issuing cat bonds or investigating their use as part of their risk transfer mix.

We’ll bring you further details if / when they come to light.

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