According to a report, the proposal seeking approval for a $1.5 billion private reinsurance purchase by the Florida Hurricane Catastrophe Fund has stalled in the legislature and could be running out of time ahead of the 2014 hurricane season.
As Artemis wrote back in January, Jack Nicholson the COO of the Florida Hurricane Catastrophe Fund took a bill to the state legislature seeking approval for the fund to buy up to $1.5 billion of private reinsurance. Nicholson said at the time that he favored using catastrophe bonds and collateralized reinsurance for at least some of the private reinsurance protection.
Florida’s Palm Beach Post newspaper has reported that the measure has stalled in front of the state government and failed to make it to the Florida Cabinet on Tuesday of this week. This leaves the amount of time available to get the bill to the legislature, have it debated and approved in advance of the hurricane season significantly shrunken.
The plan to buy private reinsurance for the Cat Fund has received a lukewarm reception, with some Florida government officials branding the idea as ‘insane’. Their fear is that by placing reliance on the private reinsurance market the Cat Fund would have to raise consumer rates to pay for the protection but could find itself buying reinsurance unnecessarily if there are no hurricane losses this year.
The idea of buying private reinsurance protection for the Florida Hurricane Catastrophe Fund is to reduce or eliminate the need for assessments on insurance consumers if a large hurricane event wipes out the Funds capital. However, with Florida having gone 8 years without a major storm some lawmakers see this as unnecessary.
This is perhaps a little short-sighted. Should Florida face two major hurricane landfalls in 2014 the Cat Fund would likely find its capital exhausted meaning it would need to raise funds from somewhere and that will come back to taxes and assessments on consumers. A layer of private reinsurance protection would be designed to minimise the impact to consumers from these assessments, a valuable buffer.
The issue of giving more money to offshore reinsurance firms is a hot topic in Florida at the moment, with some extremely vociferous opponents in the legislature. This could prevent a number of bills, designed to lower the risk of the Cat Fund, making it through once again this year.
Of course, if you look back to the early 2000’s when Florida was faced with hurricane losses in consecutive years the use of private reinsurance looks a lot more sensible. The fact that Florida has remained storm free in recent years seems to cloud the memory of the very people who need to ensure consumers are protected from hefty assessments and rate rises.
Perhaps it would be more palatable for the Florida Hurricane Catastrophe Fund to issue a $1.5 billion catastrophe bond which could be sold to the international investor community, rather than sending more cash to traditional reinsurers.
The Cat Fund uses the issuance of post-event bonds to boost its capital after an event anyway, so surely selling pre-event bonds, with multi-year terms designed to provide reinsurance protection in the event of a hurricane, would be a reasonable alternative?
The problem is that lawmakers will always complain if money is spent on reinsurance which isn’t used if no major storms impact the state. The question is whether that is as important as making sure that Florida’s insurance buyers are as protected as possible if the hurricane season throws two or three major storms directly at the state in a single season?
We’ll update you if we hear anymore on this topic.
Read other recent articles on Florida, reinsurance and catastrophe bonds: