Florida Citizens reinsurance & cat bond budget hiked ~60% for 2022

In 2022, there is a strong chance Florida’s Citizens Property Insurance Corporation buys more private market risk transfer in the form of reinsurance and catastrophe bonds through its Everglades Re program, although the Board has directed a review of risk transfer versus pre-event financing to see how money can be saved.

This comes as Florida Citizens Board recommended an across-the-board rate increase of up to 12% for policyholders in 2022, due to concerns over the sustainability in the face of rapid exposure growth.

As we explained recently, Florida Citizens continues to see rapidly increasing policy counts as ongoing challenges in the private market drive policyholders back to the residual market.

At the same time, reinsurance, which is one of Citizens major costs each year, has seen its pricing rise considerably, which is going to raise expenses for the insurer of last resort in the coming year.

As a result, the Citizens Board is keen to explore all financing avenues, including pre-event financing such as debt and revenue bonds, to see whether there is a mix of instruments that can be used to bring down costs in 2022.

But, no matter what this analysis finds, it seems inevitable that Florida Citizens will buy more private market risk transfer, split between reinsurance and its catastrophe bond program in 2022, and also pay more per-unit of coverage secured.

As a result, the Citizens Board saw a placeholder for 2022 risk transfer costs of $400 million for 2022, which is almost 60% up on the estimated spend this year.

It’s split $190 million for the personal lines account (PLA) and $210 million for the Coastal account, while at this stage no recommendation has been made on how to spend the money next year.

That will depend on reinsurance pricing and catastrophe bond investor appetite, with Florida Citizens set to buy in the most cost-effective manner and depending on what it does in the way of pre-event financing through bond issuances.

Florida Citizens risk transfer costs have soared in recent years, but so too has its premium written.

As recently as 2019, Florida Citizens underwrote around $1 billion of premiums, but the projection for 2021 is now over $1.8 billion of premium and for 2022 the figure is expected to explode higher to $3 billion.

So, that’s a 66% increase in premiums by the end of 2022. Considering which, the roughly 60% forecast increase in budget for reinsurance and cat bonds doesn’t seem so bad, in the context of a hardening reinsurance marketplace.

“Our budget assumptions contemplate continued growth in the short term, and we must depend on additional traditional reinsurance and Insurance Linked Security (ILS) placements in 2022 to protect the Citizens’ financial security,” Citizens President and CEO Barry Gilway reported to the Board.

Citizens Chairman Carlos Beruff explained that the widening premium gap along with with high litigation rates has made it virtually impossible for Citizens to shrink and return to its role as the Florida’s residual insurer, seeing the rate increases as necessary to stem growth.

“We need to take a look at all our options to stop this unsustainable trajectory,” Beruff said. “Any solution is going to require legislative action to provide Citizens with the tools and flexibility to return to its role as an insurer of last resort.”

“We have a litigation system that is truly, absolutely out of control,” added Gilway.

It’s not yet clear how the budget will end up apportioned to risk transfer for 2022, but given the growth trajectory it is almost certain more risk transfer will be required, even if more bonding and pre-event financing is taken up.

Florida Citizens team will now explore all the options and try to come up with an optimal financing mix for 2022, among which it is safe to assume catastrophe bonds will continue to play a significant role.