Citizens to add $750m of traditional reinsurance, doubling budgeted risk transfer

Citizens Property Insurance, the state backed property insurer of last resort in Florida, who recently completed the largest catastrophe bond ever with the $750m Everglades Re Ltd., is planning to double the total amount of private market risk transfer purchased this year to $1.5 billion. Earlier this year we reported that Citizens would seek $750m of risk transfer with up to $250m coming from a cat bond, but now, thanks to the size of Everglades Re Citizens are looking to double their private market protection.

At a board meeting held yesterday Citizens approved a plan to acquire $750m of traditional reinsurance to add to the $750m of cover from the Everglades Re cat bond. Citizens will begin talking to brokers to attempt to secure a two-year $250m layer of reinsurance cover as well as a one-year $500m layer of reinsurance.

Interestingly, the addition of the extra cover will allow Citizens to forgo purchasing the Florida Hurricane Catastrophe Fund (FHCF) Temporary Increase in Coverage Limit (TICL), while they will still purchase the mandatory FHCF coverage. This will please those campaigning to reduce the insurers reliance on the FHCF and take some pressure off the underfunded catastrophe fund.

The Everglades Re Ltd. cat bond is a two-year deal and Citizens plans to put the additional $250m two-year traditional reinsurance alongside this in their overall coverage (somewhere between a 35 year and 42 year probable-maximum-loss). The one-year $500m layer of reinsurance will sit directly above this providing protection for events with more than a 42 year probable-maximum-loss.

The graphic below, taken from yesterdays board meeting documentation, shows the layering of Citizens coastal account cover including these layers of traditional reinsurance coverage and the Everglades Re cat bond.

Citizens coastal account risk transfer

Citizens 2012 risk transfer program will be welcomed by many parties, the cat bond market for the addition of $750m of risk to the markets capacity, the traditional reinsurance market for an extra $250m of cover being purchased and the legislators and campaigners for reducing their reliance on the FHCF. It’s going to be extremely interesting to see what Citizens do for 2013 as if pricing is right we could see them reduce the reliance on the FHCF even further through issuance of additional cat bond tranches or traditional reinsurance purchases.