Florida cat bond facility Bill passes another Senate hurdle

A Bill which contains a measure aiming to ease smaller Florida insurers access to capital market sources of risk transfer continues to make its way through the Florida Senate successfully. What began as Bill SPB 7018 which we covered in a previous article here, has now been submitted as submitted as Committee Bill SB 1770 and has passed through the Florida Senate to the Senate Appropriations Committee who yesterday voted unanimously in its favour.

The Bill contains a number of measures aimed at improving the Florida property insurance market, including items such as a measure to make Florida Citizens rates actuarially sound (risk-based pricing), increased rates for second homeowners, a measure to allow higher rates to be charged to cover insurers purchase of additional reinsurance. Generally the Bill aims to improve the way hurricane risk is priced, managed, insured, reinsured and transferred within the state of Florida.

The piece of this Bill which we find particularly interesting and innovative is the call for the creation of the Florida Catastrophe Risk Capital Access Facility. This facility, if approved and this Bill still has a long way to go, would enable smaller, primary domestic insurers operating in Florida to access the capital markets through the pooling of risks and the use of instruments such as catastrophe bonds, insurance-linked securities and other securitizations.

Bill documentation shows that if created the facility would perform four functions:

• Aggregate the demand for risk finance from global capital markets among smaller volume domestic property insurance companies;
• Design and execute risk-transfer tools such as insurance-linked securities and other securitization models for participating insurers, and use special purpose vehicles or protected cells, onshore or offshore, as appropriate, to increase access to risk capital;
• Identify and coordinate appropriate risk-transfer products and opportunities, with an initial focus on the portion of the reinsurance market that provides layers of coverage below, alongside, and above the CAT Fund; and
• Establish and maintain contact with global risk capital market participants, institutions, and investors for the purpose of satisfying and coordinating insurer demand for additional risk capital.

The facility is designed to enable smaller insurers to diversify their sources of risk capital and leverage some of the interest that is being shown in providing capacity by capital market investors. With the recent success of Florida Citizens second catastrophe bond deal this is currently a topic getting some publicity in the state.

The Bill is by no means certain to succeed however, it contains many initiatives which would result in higher rates for homeowners in Florida, something that has forced other Bills to be dropped in the past. However this specific measure is designed to become self-funding, after an initial boost from the state coffers, and so is much more palatable.

The Florida Catastrophe Risk Capital Access Facility makes a lot of sense. Enabling insurers in Florida to gain access to the cat bond market and other collateralized sources of reinsurance capacity by pooling their risks could increase the amount of protection Florida receives, diversify it away from purely traditional reinsurers, take some pressure off the Florida Hurricane Catastrophe Fund and encourage new insurers into the market.

The facility would also be welcomed by investors seeking access to returns from catastrophe reinsurance. A pooling facility could allow risk transfer to occur on a county basis or in coastal zones within Florida, thus allowing for some level of diversification within the State to be attained. That would also prevent the cat bond and ILS market from becoming too ‘all Florida wind’ exposed as well, which might become a concern otherwise.

As said above, there are no guarantees that this Bill will actually come to fruition, it’s a complicated topic which always causes concern among Floridians. However it is one step closer after being unanimously approved by the Appropriations committee. We’ll keep you posted on the progress of this initiative though, as if it is successful the Florida Catastrophe Risk Capital Access Facility could come into existence by July of this year.