Citizens Property Insurance, the state backed property insurer of last resort in Florida, has said that it plans to take out some reinsurance from the private market this year. The last time Citizens accessed the private reinsurance market was two years ago as they have tended to rely on a cheaper source of reinsurance from the Florida Hurricane Catastrophe Fund.
This year they intend to return to the private reinsurance market to secure a level of cover above the one afforded to them by the catastrophe fund.
In total Citizens plan to spend $585m on reinsurance, with $460m spent on $6.5 billion worth of coverage from the catastrophe fund. Private reinsurance will cost Citizens as much as three times more per dollar but yesterday the Citizens board approved the spending of $125m to buy $300m to $580m of cover from private reinsurers. Part of the private layer of reinsurance will be structured in such a way that it will only payout in the event of a major hurricane and Citizens’ losses exceeded $6.3 billion.
Private reinsurance is a way to help pay claims in the event of major hurricanes and prevent the burden being passed on to policyholders in the way of premium hikes. The CFO of Citizens, Sharon Binnun, said that shifting some risk to the private sector will also help allay politicians fears that Citizens poses a financial risk to the state.
The problem for Citizens is that they will get slammed in the press if no hurricanes hit land and they have paid out so much for private market reinsurance (when compared to cat fund cover). If they buy private reinsurance and no major hurricane makes landfall or qualifies to trigger the policy then they will come under scrutiny. If they don’t buy private reinsurance and a hurricane strikes then they may not have enough cover and will end up forcing premium hikes on policyholders. So it’s not an easy situation for Citizens.
Buying the private reinsurance cover will require Citizens to raise rates to Florida homeowners anyway, to cover the payment for more expensive cover. Would a multi-year source of cover be a better solution for Citizens, locked in reinsurance at a fixed cost to meet claims above certain levels of losses after hurricanes strike? That sounds like the kind of cover a catastrophe bond would afford Citizens. Given the pricing of reinsurance in Florida and the current cat bond market, it may not be that much more expensive to issue a cat bond than to purchase private reinsurance. It could actually work out cheaper as the price of the reinsurance cover a cat bond affords can be locked in over a number of years. Another benefit could be that it might be possible to better structure a cat bond, than reinsurance, to provide better layering of protection for Citizens.
We suspect that conversations about catastrophe bond cover will have taken place and for whatever reason, possibly cost, it looks like private reinsurance has been favoured this year. The Florida cat bond question is likely to keep arising though and as the market becomes more sophisticated and the price of issuing a cat bond comes more in line with buying reinsurance, it could become a more attractive option to Citizens. For Florida legislators, private reinsurance or catastrophe bonds must be an attractive option as it would allow them to spread the risk outside of Florida into the hands of international reinsurance companies and investors, helping them to lower the financial risk to the state.