Florida cat fund (FHCF) to test market for $1bn reinsurance renewal

by Artemis on March 31, 2016

The Florida Hurricane Catastrophe Fund (FHCF) is set to revisit the private reinsurance market in 2016, to test appetite and pricing for a potential renewal of its program which will likely repeat the $1 billion of placement of last year.

At a Florida Cabinet meeting on the 29th March 2016, Executive Director & Chief Investment Officer at the Florida State Board of Administration (SBA), Ash Williams, said that a reinsurance purchase of at least $1 billion was advised, in order to maintain the protection the Florida Hurricane Catastrophe Fund (FHCF) enjoyed this year.

The presentation given to the Cabinet and Florida Governor Rick Scott laid out a number of options, ranging from a $1 billion reinsurance purchase up to a doubling of protection at $2 billion, as well as a number of different attachment point options.

Options ranged from $1 billion of reinsurance coverage at an attachment point of $12.5 billion, which would represent a 1 in 37 year event, all the way up to $2 billion of reinsurance cover at a lower $11.5 billion attachment, so 1 in 33 years, were presented.

The expected premium rate-on-line for these different reinsurance layer options ranged from as low as 5.45% up to 7.08%, depending on the amount of coverage bought and the attachment point selected, with gross costs estimated at $54.5 million up to as high as $136 million for the most cover at the lowest attachment.

The proposal given to the Cabinet and Governor was that the FHCF should look to buy $1 billion of reinsurance in 2016, at the lower attachment point of $11.5 billion. That would equate to a 1-in-33 year risk, with the layer having an expected loss of 2.86% and expected premium rate-on-line of 6.18% to 7.08%.

No vote was taken, but a representative of the State Board of Administration told Artemis that the FHCF would now test the reinsurance markets appetite for this renewal, gaining pricing indications at the same time, and report back to the FHCF’s Trustees in due course.

Appetite from both the traditional reinsurance market and the insurance-linked securities (ILS) market would be expected to be high for this renewal.

Strong support was seen for the 2015 FHCF reinsurance placement, with ILS funds and collateralised markets taking a significant chunk of the overall $1 billion placement. A 2016 placement will likely see similar levels of demand from ILS fund managers keen to access the FHCF’s risk.

As usual there has been some backlash in the Florida press about the FHCF’s plans to buy reinsurance again, with some pointing out to the fact that it did not make a claim on its 2015 program. In some quarters this is seen as an unnecessary cost, but in reality it is protecting Florida tax payers from the potential for assessments or extra taxes being levied after a major hurricane strikes.

The presentation given to the Florida Cabinet on the 29th explained that reinsurance transfers risk away from Florida consumers, without adding more debt. Pre-event debt meanwhile only adds funding, but does not shift risk away from the state and its residents.

While debt does have a lower cost than reinsurance, at comparable attachment points, the FHCF also needs to consider the diversification of its sources of capital and adding the global risk capital markets, in the form of reinsurance and ILS, helps to provide a much broader spread of funding for when disaster strikes.

Interestingly the FHCF also says that doing nothing is an option. But of course, adding no new protection or funding just leaves the Fund open to being eroded should a hurricane strike and then it could take years for it to build back up the levels of capital it has in place today.

Buying risk transfer, in the form of reinsurance or catastrophe bonds, in order to protect the capital the FHCF has built up is prudent and would enable the state to have a source of post-event disaster risk capital, while also providing a stronger buffer for its finances.

Risk transfer, in the form of reinsurance or other instruments such as cat bonds, is the preferred option for the FHCF and current pricing should also be an attraction given Florida property catastrophe reinsurance rates remain soft.

In fact, the FHCF could lock-in low rates over a multi-year period. Of course if no hurricanes occur there will always be those that point to an unnecessary spend, but if one or more major hurricanes did strike the state it would lock-in the attractive pricing at a time that rates hardened.

The presentation noted that prices of risk transfer are currently as comparable to pre-event debt issuance as they have perhaps ever been. Isn’t that a good reason to bulk up on reinsurance or cat bonds now, while there is the ability to get protected at as reasonable a cost as possible?

The FHCF has a June renewal date for its reinsurance program. We will update you as and when more information becomes available.

Also read:

Collateralised & ILS plays role in FHCF’s $1bn reinsurance purchase.

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