Florida Senate bill aims to create capital markets risk transfer facility

A bill will be heard today by the Florida Senate Banking and Insurance Committee which proposes a capital markets risk transfer facility which would pool risks from the states primary insurers and issue catastrophe bonds or other insurance-linked security (ILS) structures to transfer the risks to the capital markets. The proposal, SPB 7018, contains a number of proposals to reform the Florida insurance market, downsize Florida Citizens and enable easier access to reinsurance and risk transfer.

It’s a very interesting set of proposals which will be popular among those seeking to reduce the burden on the state and policyholders or taxpayers after major hurricane impacts. The proposals include a continuation of the de-population strategy which Citizens has been successfully following, but also includes this proposal to formalise a facility which would pool the resulting hurricane risks and facilitate transferring them to the capital and reinsurance markets.

The specific proposal within the bill related to the risk pooling and transfer facility calls for the establishment of the ‘Florida Catastrophe Risk Capital Access Facility’ to help increase the access of small domestic insurers to the risk-capital markets. The Florida legislature, it says, has found that the global market for catastrophe risk has been expanding and this has resulted in the availability of billions of dollars of new capital markets capacity for risk transfer and new, innovative risk transfer mechanisms.

Having access to new sources of risk capital will help smaller, domestic insurers in the state underwrite more business and diversify their sources of reinsurance and catastrophe risk, but the bill says that it can be hard for those smaller insurers to access the capital markets efficiently or cost effectively due to their smaller risk transfer needs.

Therefore the bill seeks to enable the pooling of these insurers catastrophe risks with the aim of helping them to transfer the risk to new risk capital sources more efficiently. The bill suggests that such a facility could be established within the State Board of Administration by July 2013.

If this facility was passed the bill states it should aggregate the demand for risk finance from global capital markets among these smaller, domestic property insurers who are operating in Florida. Using the pooled risk the facility would design and execute risk transfer tools such as catastrophe bonds, insurance-linked securities and other securitization models if appropriate, using onshore or offshore special purpose vehicles or protected cells as deemed appropriate to increase access to sources of risk capital for these insurers.

The facility would target risk transfer at layers of risk below, alongside and also above the cover afforded by the Florida Hurricane Catastrophe Fund. That’s interesting as it could suggest that a goal of this facility in the future might be to shrink or reduce reliance on the fund as well.

The facility would be supported to begin with but the desire is to make it fully funded by participating insurers on a pro-rata basis.

This facility could be groundbreaking for the Florida insurance market and also for the ILS and cat bond space if it was successfully approved by the Legislature and created. The amount of risk it could bring to the capital markets could be very large and it could answer one of the issues that faces investors who find opportunities to deploy capital lacking due to the size of the market at times.

By providing a risk transfer service to insurers who are helping to de-populate Citizens it would also enable that insurer to become more self-sustained. By aggregating the states hurricane risk and issuing cat bonds out the back of the facility it could change the balance of the ILS market though, resulting in the ILS market becoming even more Florida wind top-heavy, which could make diversification a little more challenging for some.

The bill also contains measures designed to help reduce the reliance on Citizens and the Florida cat fund going forwards which meets a lot of the goals that various bills in the past have tried to achieve. Many of these bills have struggled to get through the Legislature so it will be interesting to see if this one is successful.

It’s a positive step though and will be welcomed as an idea by the majority of investors interested in catastrophe and reinsurance risk as an asset class who will see this as an opportunity to gain more access to catastrophe risk. We’ll follow up on this as the feedback on the bill from the Senate committee becomes available.