Florida bill could see $3Bn of risk move to private reinsurance market

The Florida legislative season is upon us and moves to enable greater private reinsurance market participation and shrink Florida’s reliance on state backed catastrophe insurance and reinsurance facilities continue to make progress.

One of the latest bills to come to light is HB 391, proposed by Republican Representative Bill Hager, which would give insurers the option of using the Florida Hurricane Catastrophe Fund or the private market for reinsurance protection.

The bill targets the top $3 billion of limits which are underwritten by the catastrophe fund, so the peak risk held by the fund which is perhaps the most attractive piece to cede to private reinsurers or the capital markets. Hager’s bill would allow insurers to stop using the fund for coverage within the top $3 billion layer, allowing them to pursue options in the private reinsurance and capital markets to secure equivalent protection.

The end result, if the bill is passed, could be for the catastrophe fund to be shrunk by $3 billion at the top end, if every insurer was to move to the private market instead. Of course that’s unlikely to be so sweeping and it is more probable that some insurers would choose to stay with the cat fund, but the end result would be a shrinking of the funds size at the upper end of its cover and more risk with private reinsurers.

Hager believes that by leaving the catastrophe fund insurers would actually get a better deal on their reinsurance, resulting in cheaper prices for their customers.

Jack Nicholson, the COO of the Florida Hurricane Catastrophe Fund, drafted the bill’s language, according to A.M. Best. He believes that this bill is worth supporting as it might result in a reduction in the cat funds capacity, a stated aim of Nicholson’s.

The issue is complicated by complaints that private reinsurance could result in much higher homeowner insurance costs in years to come. With reinsurance pricing currently so attractive, insurers who decided to leave the cat fund could find themselves at the whim of reinsurer price rises in years to come, putting customers at risk of higher rates.

A number of other bills are currently doing the Florida legislative dance and there is a risk that, like last year, debating too many similar bills results in a stalling of the proposals and no real progress being made.

The Florida Hurricane Catastrophe Fund’s plan to look to private reinsurance, collateralized cover and catastrophe bonds (which we covered here in January) for up to $1.5 billion of cover is still being considered by the State Board of Administration. Progress on that measure has also been hindered by concerns over placing the risk with the private market where rates will no longer be subsidised.

We also reported in January that as much as $300m of new reinsurance premium could be generated by the various measures to shrink Florida Citizens and reinsure the catastrophe fund. This latest bill as additional to that and could increase that amount by around another $150m to $200m we estimate.

The private reinsurance market and the capital market of insurance-linked securities funds and investors are both likely to strongly support any additional reinsurance demand coming out of Florida. Competition for any new demand for reinsurance capacity will be high and it could result in additional pressure on pricing at the mid-year renewals as traditional reinsurance firms and alternative capital providers compete for signings.