The Florida Hurricane Catastrophe Fund (FHCF) has decided not to renew its reinsurance program in 2020, citing reduced reinsurance market capital levels and in response to the firming marketplace.
It’s the latest clear sign of the hardening of Florida reinsurance rates, which as we explained last week sees rates increasing broadly by more than 20%, but but by much more in pockets of the Florida renewal market.
A year ago, Florida’s State Board of Administration (SBA), which administers and procures reinsurance for the Florida Hurricane Catastrophe Fund (FHCF), placed a $920 million reinsurance program which it said was achieved at “competitive and cost effective terms”.
The 2019 reinsurance renewal for the FHCF saw insurance-linked securities (ILS) players playing a larger role than the prior year, so the fact this program is now not being renewed for 2020 means a chunk of the Florida business they had been supporting has been taken away for now.
It now seems that costs of reinsurance are deemed too high by the SBA, meaning the FHCF won’t have the extra layer of reinsurance protection that it has been buying since 2015.
John Kuczwanski, Manager of External Affairs at Florida’s State Board of Administration, explained, “Prior to the beginning of each hurricane season, the Florida Hurricane Catastrophe Fund (FHCF), reviews the FHCF’s financial condition and evaluates all available opportunities in the global risk transfer and financial markets that may assist in maximizing the FHCF’s claims-paying capacity.
“Since 2015, there has been an abundance of private capital and significant risk transfer capacity, which allowed the FHCF to participate in the reinsurance market without reducing the amount of capacity available to direct writers in the Florida market. In the current environment, capital is less abundant than in prior years. After evaluation of this market, and in collaboration with our trusted consultants, the State Board of Administration (SBA) has decided not to participate in a private reinsurance placement this year.
“The SBA will reevaluate risk transfer within its capital structure next year.”
It’s a shame, but understandable.
The FHCF is well funded and the reinsurance has been something it was trying to build up, but as ever cost is a consideration for a facility that is supportive of risks in the more peak layers of insurers programs.
That said, the insurance-linked securities (ILS) market has supported layers of Florida carrier programs around the FHCF coverage in the past. So it’s also a shame that the FHCF hadn’t looked at securing multi-year reinsurance protection from the capital markets in previous years.
Had it done so, it could have had catastrophe bond backed reinsurance protection still in-force, meaning it could have let the traditional aspects of the nearly $1 billion program lapse but at least had some protection in place.
The benefits of hindsight, of course.
The way the Florida reinsurance market is hardening could drive more cedents to look to multi-year coverage and the cat bond is a great source of that protection, allowing costs to be locked in and more predictable over the longer-term.
The FHCF’s reinsurance renewal will be missed, it was a significant source of risk premium for some reinsurers and ILS funds.
But we expect the program will return, either when rates moderate or after some additional budget work to ensure that any new pricing floor for Florida catastrophe reinsurance purchases is accounted for.
For the 2020 hurricane season Kuczwanski said, “The FHCF is in a strong financial position with $12.3 billion in liquid resources available to pay claims for the upcoming hurricane season and will seek other opportunities to optimize its capital structure and maximize its claims-paying capacity.”