Florida cat fund approved to pursue up to $2.2B of risk transfer

by Artemis on March 24, 2015

The Florida Cabinet and Governor Scott have just approved the CEO of the Florida Hurricane Catastrophe Fund (FHCF) to go to the private reinsurance and capital markets to establish options and pricing for up to $2.2 billion of risk transfer.

It’s a ground breaking step for the FHCF, which has been the subject of attempts to shift risk out of the hands of the state and into the private reinsurance or risk transfer markets for some years.

The CEO of the FHCF Jack Nicholson has been approved by the State Board of Administration to take the proposal, that we covered yesterday here, forwards to the market, to assess options for how best to secure risk transfer, including from reinsurance, capital markets and pre-event bonding sources.

The CEO will then be required to bring back any information on the options available and the pricing to the Cabinet to seek approval to move forwards.

The discussions in today’s Cabinet meeting revolved around the state of the market and the fact that the FHCF may be in a stronger position to secure attractive pricing than it has ever been before.

Given the appetite of reinsurance markets and capital providers to take on additional risk, the FHCF perhaps faces the best market conditions to seek to offload some of its risk in history.

The result could be a mix of reinsurance, catastrophe bond, insurance-linked securities (ILS) or collateralized reinsurance solutions and pre-event bonding if required. At this time it seems CEO Nicholson will assess the reinsurance market options first.

It stands to reason that the capital markets will feature heavily in the design of any reinsurance programme to cover this $2.2 billion amount of the Cat Fund, given the market penetration of ILS investors in Florida. The successful issuance of catastrophe bonds by Florida Citizens in the past will likely help to position the asset class as a key source of protection that the FHCF could tap into.

The Florida state CFO Jeff Attwater said that he was happy to approve the FHCF to “go to the market” as long as options and pricing were brought back to the Cabinet for approval in plenty of time so any placement can be made in advance of the U.S. hurricane season.

“We will keep you informed with a high level of specificity on where we are,” Nicholson, the CEO of the Cat Fund, responded.

Attwater said that he appreciated that there is time to secure any transaction and that the market is hungry to place capital right now, making it a good time for the FHCF to approach the reinsurance market.

“If we have to be in the buying place now, that’s a good thing for the taxpayer of Florida and the consumer,” Attwater said.

A motion was passed giving CEO Nicholson approval to approach the private risk transfer and reinsurance markets.

The motion will read a little like this: Begin a process to see about placing up to $2.2 billion of risk transfer in the marketplace from a combination of sources, but before signing a deal on where it is placed the Cabinet has the opportunity to agree to the placements and the pricing.

The coalition of statewide business, consumer and conservation groups who represent Stronger Safer Florida issued the following statement on the decision; “Stronger Safer Florida commends the State Board of Administration for authorizing the Florida Hurricane Catastrophe Fund to seek opportunities to transfer risk away from Floridians and onto the global private reinsurance market. If attractive reinsurance rates exist for Florida, it would be wise for the Cat Fund to act so policyholders are less likely to face hurricane taxes in the event of a future hurricane.”

As this is the Florida Hurricane Catastrophe Fund, which provides reinsurance to primary insurers in the state, this will be a retrocessional reinsurance placement. It will be interesting to see whether that plays into the design of the programme, for example whether an industry loss based approach may feature or whether indemnity cover would be the preferred route.

One things for certain, the reinsurance and ILS market will be more than ready to support the retro needs of the FHCF and it can expect to see very keen pricing. In fact the pricing it encounters may be as good as it can get, given the reductions in rates especially on ILS and catastrophe bonds.

It’s also worth noting that as this would be the first time the FHCF has transferred risk to the private market, it signifies incremental premium income for reinsurers which is certain to mean competition for signings on any program, traditional or ILS based, that emerges. That should also help to ensure keen pricing.

As further information emerges on the FHCF’s interaction with the reinsurance market, it has yet to appoint a reinsurance broker although it has had conversations we understand, we will keep you updated in the coming weeks.

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