Florida should reform FHCF cat fund, use it instead of Citizens: Fried

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Florida’s property insurance crisis continues to get increasingly political, with candidates for the Governor role in the state now blasting each other’s proposals for improving the insurance marketplace and its access to reinsurance.

florida-insurance-marketFlorida Commissioner of Agriculture and Consumer Services, Nikki Fried, who is a Democratic candidate seeking to become Florida’s Governor, has written to incumbent Governor Ron DeSantis, himself hoping to become a Presidential candidate, calling for a reversal of the recently announced arrangement that sees Florida’s Citizens Property Insurance Corporation stepping in to guarantee homeowner claims for still viable, but downgraded and practically insolvent carriers.

The Florida Office of Insurance Regulation (OIR) recently launched a temporary market stabilisation, or reinsurance guarantee-like, arrangement through Citizens Property Insurance Corporation to support any downgraded, but still viable carriers.

We reported more details on that arrangement with Citizens here, explaining that it is more of a guarantee arrangement, than reinsurance, offering a way for claims above FIGA caps to be covered, to allow a carriers’ policies to remain in-force even after it had been downgraded.

Florida’s Agriculture and Consumer Services Commissioner Nikki Fried called actions taken so far to try and resolve the state’s property insurance crisis are “a band-aid fix to a massive wound.”

In addition, she said the state seems to be taking a wait-and-see approach, which alongside the actions taken is “too little, too late.”

Average property insurance costs have risen from $1,989 to $3,585 since DeSantis took office, Fried said, leaving homeowners facing a “perfect storm of devastating financial proportions” as property insurance rates reach highs, while insurers keep failing or getting downgraded in Florida.

Fried has called for the plan to use Florida Citizens as a backstop to be cancelled, saying, “The state should simply use the Florida Hurricane Catastrophe Fund, after all, this is what it was created for.”

She highlighted that Citizens itself is “woefully underfunded and under-reinsured to handle a major storm, given its explosive growth.”

“Adding further unfunded mandates to Citizens could result in every Florida homeowner paying higher premiums to recoup any losses,” Fried said.

Further explaining that the FHCF, or cat fund as its known, is well-funded and in a superior financial position, with as much as $12.8 billion expected to be held “in the bank” by the cat fund by year-end.

In addition, the FHCF is “globally recognized as the primary reinsurer for Florida companies,” Fried noted.

In order to further stabilise the Florida property insurance market, Fried calls for the FHCF to be reformed.

The Cat Fund should allow smaller carriers to access it, Fried said, as these are “priced out of affordable private reinsurance by the Cat Fund’s inflated retention and unneeded premium surcharges.”

Lowering the retention to enable companies to tap the FHCF earlier, or for smaller companies to do so, would layer more risk on the state, of course.

But as Fried said the FHCF is in reasonable financial condition and of course it’s important to also remember that the FHCF can buy private market retrocession as well.

On top of this, Fried calls for recently approved Citizens rate increases to be rescinded, to ensure coverage remains affordable for homeowners that need to call on the residual market for a policy.

Neither homeowners or insurers in Florida can wait for a resolution to the crisis, Fried said, urging swift action from the Governor.

“To simply hope and pray until the end of hurricane season, or wait and see if the policies you and the Legislature have put forward have any positive effect, is a lot more than a day late and a dollar short – coming at the expense of Florida’s Citizens.”

The “dire situation” demands urgent action, Fried explained.

There is a lot to be said for expanding the remit of the FHCF to be a Cat Fund to more insurance carriers and to be able to help those that are struggling.

The availability of reinsurance for harder-pressed carriers could have helped them sustain a rating, in some cases, perhaps negating the need for the Citizens based guarantee arrangement.

However, it seems unlikely a reformed FHCF would make much of a difference now, but it could be a significant help next reinsurance renewal season, in June 2023.

The FHCF’s ability to tap into private reinsurance markets, to provide more loss-bearing capacity, could be a significant benefit as well, as this would see more risk flowing to private markets and being priced properly, sending the right kind of signals to the market as well.

The FHCF had purchased reinsurance up until the 2020 renewal, when it said market capacity and pricing made it less appealing.

Given the much harder and more capacity constrained market we currently see, who’s to say the FHCF could afford reinsurance anyway?

A reformed FHCF could be a better longer-term solution for some of Florida’s challenges, alongside more risk-commensurate pricing in the broader marketplace, but the Citizens guarantee may be a better last-minute resort this year, perhaps.

However, the private market needs to see risk being priced in a transparent and correct manner, and a significant reduction in litigation and social inflationary costs in Florida, that’s the really critical area of reform now needed.

RenaissanceRe’s CEO commented on the FHCF and said lowering the retention for it wouldn’t help his company regain its appetite for risk in Florida.

The fact the market got to a stage where the Citizens guarantee was needed and we’re discussing other ways to prop it up, shows just how dysfunctional Florida’s property insurance sector has become, and how ineffective the last minute reforms announced in May were.

Read all of our news and analysis on the Florida insurance and reinsurance market.

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