Florida Hurricane Cat Fund seeks $2.2B private reinsurance approval

by Artemis on March 23, 2015

The Florida Hurricane Catastrophe Fund (FHCF), the state’s backstop reinsurance fund for private insurers, is once again seeking approval from the Cabinet to tap the private reinsurance markets for up to $2.2 billion of protection.

Update: The FHCF was approved to pursue the $2.2 billion of reinsurance and risk transfer on the 24th March.

CEO of the FHCF Jack Nicholson has submitted a proposal that, if approved by Governor Rick Scott and his Cabinet, would allow the FHCF to tap the private reinsurance markets for as much as $2.2 billion of protection.

Any moves like this would be welcomed by reinsurers and the insurance-linked securities (ILS) markets, who have significant amounts of excess capital to put to work and for whom Florida hurricane risk is ground-zero, typically the most attractive and best priced catastrophe-exposed reinsurance business around.

Proposals have been submitted to the Florida governor in the past seeking to shrink the catastrophe fund in Florida, or to ensure it is better protected. They have typically failed, as they have faced pressure from politicians that find sending the risk offshore unpalatable.

Again, this latest proposal has already faced detractors, with one Representative for Miami Frank Artiles urging state officials to reject the reinsurance proposal. Artiles wrote in an op-ed submitted to local newspapers; “The proposed transfer of billions in risk from the Florida Hurricane Catastrophe Fund to the private offshore global reinsurance market is nothing more than corporate welfare and would mean higher property insurance rates for Floridians. If CAT Fund Chief Operating Officer Jack Nicholson is permitted to gift $2 billion into the private re-insurance market, the only beneficiaries would be the reinsurers themselves, mostly based in Bermuda. These are people who actually hope for catastrophes so that they can demand higher rates and larger profits.”

This is a shortsighted approach to protecting Florida’s taxpayers in our opinion. The most effective way to safeguard taxpayers from any impact, should the FHCF face a shortfall after a major hurricane, would be to have reinsurance capacity, or capital markets capacity, available to finance the shortfall and recapitalise the FHCF.

With reinsurance capacity for Florida coastal risks and hurricane exposures currently priced extremely competitively, while capital markets capacity abundant in the catastrophe bond market, the opportunity for the FHCF to offload some of its peak exposure to private markets is clear.

If the FHCF fails again to access the private reinsurance market it will be to the detriment of everyone in Florida. Retaining this risk only exposes the taxpayer to greater assessments should the cat fund face a shortfall. It would make a lot of sense to increase the protection of the catastrophe fund right now while reinsurance capacity is so cheap and abundantly available.

If the FHCF looked to the capital markets it could likely secure a significant portion of the $2.2 billion through a catastrophe bond issue. The example that Florida Citizens has set in using the cat bond market to diversify its sources of reinsurance capacity clearly shows the opportunity that exists.

The submitted proposal seeks to improve the FHCF’s claims paying ability by $2.2 billion and would allow for the use of private reinsurance or risk transfer capacity, which would include cat bonds, as well as pre-event revenue bonds.

Pre-event bonding has been the preferred route in the past but, with the reinsurance and capital markets appetite for risk so high, could 2015 be the year that the FHCF taps a source of private risk transfer?

The proposal is being presented to the Florida Governor and Cabinet tomorrow. Any approved risk transfer or reinsurance arrangements would be allowed to include multi-year contracts and should be designed to attach at a level of losses above the fund’s year-end 2015 projected cash balance, although favourable pricing could allow the attachment point to be brought further down.

So essentially the Florida Hurricane Catastrophe Fund is looking for $2.2 billion of additional risk financing, which can either be provided by reinsurance and risk transfer, or by the issuance of revenue bonds.

It will be interesting to see how the FHCF is instructed to proceed by the Governor and Cabinet and whether the approval is given to speak meaningfully to the reinsurance markets and to gauge their appetite for this risk.

Update: The FHCF was approved to pursue the $2.2 billion of reinsurance and risk transfer on the 24th March.

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