Florida cat fund (FHCF) exploring $1bn reinsurance renewal

by Artemis on May 22, 2017

The Florida Hurricane Catastrophe Fund (FHCF) is again looking at utilising risk transfer from the reinsurance markets as a source of additional protection for the 2017 hurricane season, with a $1 billion renewal being explored by the Florida State Board of Administration.

The Florida Hurricane Catastrophe Fund (FHCF) is in the best financial shape in its history, with $17.9 billion of financial resources available to pay out on hurricane damage claims.

However analysts from Raymond James see opportunity for the FHCF to improve this position which would help it to ensure it had capacity available to meet the impacts of larger hurricanes, adding a further buffer to the protection it provides to Florida’s finances and taxpayers.

Reinsurance has become a component of the FHCF’s financial arrangements in the last two years, with a $1 billion reinsurance purchase in 2015 and a renewal in 2016 that saw the attachment point for the reinsurance come down a little, and had participation from insurance-linked securities (ILS) funds.

In 2017 the State Board of Administration is again discussing reinsurance, with a meeting scheduled for this week at which the topic will be on the agenda. Form of risk transfer has not yet been considered, Artemis was told by a representative, so at this time its unclear whether catastrophe bonds could be an option for the FHCF.

The reinsurance coverage purchased in 2016 had an attachment point of $11.5 billion of losses to the FHCF, compared to an attachment point of $12.5 billion in 2015.

In 2017 documents show that the FHCF is looking at a range of reinsurance attachment points, from $10.5 billion to $12.5 billion, with the discussions currently revolving around a $1 billion layer of protection again.

At the June 206 reinsurance renewal the FHCF’s coverage came with a premium of $63.5 million, but in 2017 it looks like costs could be a little lower, as indicative pricing shows an estimated gross cost in a range from $61.2 million to $64.2 million for a repeat of the $1 billion layer at $11.5 billion attachment.

Risk transfer can help to optimise the FHCF’s capital structure, and the cost/benefit of buying reinsurance compares favorably to other capital source alternatives bought at a similar attachment point, according to documents that will be presented to the State Board of Administration this week.

Risk transfer through reinsurance provides the FHCF with an opportunity to reduce the risk of a potential shortfall, and also enhances the ability of the Fund to pay claims in future years after a major hurricane occurs.

Additionally, risk transfer shifts the risk outside of Florida away from insurance consumers, lowers the dependency of the fund on debt capital markets, and has a lower lifetime cost than pre-event financing through bonds and other instruments.

The State Board of Administration will be told that buying no reinsurance is an option, with the FHCF in its best ever financial shape. But risk transfer will lower the risk to policyholders and ensure the FHCF can recover from a major storm more quickly, coming out the other end in better shape to continue serving Florida consumers in the following years.

Should the renewal go ahead it is to be expected that ILS fund and other collateralized reinsurance markets will play a role, as they did in the last year.

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