Florida Hurricane Catastrophe Fund still facing shortfall

by Artemis on May 17, 2012

At least once every year the Florida Hurricane Catastrophe Fund hits the headlines as people discuss the lack of financing the fund has to cope with an extremely severe Atlantic hurricane season. In 2012 this hasn’t changed, its’ still thought that the cat fund could only cope with two reasonably sized landfalling hurricanes and if one was to strike Miami head-on and at full strength then it’s probable that a single storm would be enough to wipe out all of the cat funds finances.

The Funds advisory council have issued a statement on the cat funds claims paying ability. It’s expected that the fund will have the ability to pay up to $15.5 billion of claims, this includes reserves of $8.5 billion and an ability to borrow as much as $7 billion after an event (post-event borrowing would be paid back by surcharges on every policyholder). Now, when you consider that a single hurricane, Wilma ins 2005, cost around $9.4 billion, it’s easy to see how an active hurricane season could quickly put the cat fund into the red.

It’s thought that the cat fund has a total liability of around $17.3 billion which would leave them with a shortfall around $1.8 billion if the worst should happen.

Could the catastrophe bond market provide some of that capacity if the Florida Hurricane Catastrophe Fund copied their local insurer Citizens and reached out to the capital markets for a source of reinsurance coverage? Citizens have just managed to secure $750m of cat bond coverage for Florida hurricanes just for their coastal account. The cat funds exposure spreads across the whole of Florida and includes auto as well as homeowners insurance so you would think they could at least lessen the potential shortfall by issuing a cat bond.

The question would be whether cat bond and insurance-linked security investors would have the appetite for another large chunk of Florida hurricane risk. Given the state of the cat bond market right now, and the amount of investor interest that is being seen, it’s likely that they could secure at least some of the shortfall in cat bond capacity if the coupon offered was attractive enough and the deal structured with the right return-period. However it would increase the U.S. hurricane weighting of the wider cat bond market.

Of course it is very unlikely that the cat fund would turn to the cat bond market when they can borrow from the government or force consumers to pay surcharges, but perhaps a cat bond and capital market investor funding would be a better solution for the funds longevity? Or would an alternative be for the cat fund to look to reinsurers like SCOR and create a contingent capital solution of some description?

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Hamish Raw May 17, 2012 at 4:54 pm

The Florida Hurricane Catastrophe Fund should be an intermediary between the capital markets (the guys with the money) and the Florida citizens (the guys that need it). This is a standard process in capital markets, i.e. wholesale cash markets, intermediary banks, citizens that want to buy a house. Unfortunately it would appear that the insurance sector isn’t able to create packages of instruments that the capital markets want…….and they do want them since the performance correlation between these catastrophe instruments and the capital market instruments is so low thereby creating a new ‘safe haven’.
Furthermore a $17.3bn liability ‘should the worst happen’ totally understimates the potential for major damage. Pielke,R,Jr & Co: ‘Normailized hurricane damage in the United States: 1900-2005, Natural Hazards Review 9 (1):29-42’ estimate that in today’s terms the 1926 hurricane that hit Miami would have done an equivalent $140-157bn damage in 2005 prices! Andrew, in 1992, did $54-60bn at 2005 levels!
Complacency or what!!

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