Proposals to lower the aggregate retention point of the Florida Hurricane Catastrophe Fund (FHCF) are facing opposition, as concerns are raised over the condition that a major hurricane loss event would leave the Fund in, if it exhausted earlier.
Senator Brandes raised the proposal to lower the aggregate attachment point for the Florida Hurricane Catastrophe Fund (FHCF) from $8.2 billion to as low as $4.5 billion at a recent Committee hearing in the Florida Senate.
Brandes argues that the FHCF is well-capitalised at the moment and so it would be right to find ways to transfer some of the financial benefits to Florida’s homeowners, for who insurance rates have been rising significantly in recent years.
The Cat Fund has a roughly $11.3 billion balance-sheet at this time, on top of which industry co-payments and bonding take the total capacity to around $17 billion, which kicks in above the current industry loss attachment point of $8.1 billion.
Brandes estimates that Florida’s homeowners could save around $150 per year each on their property insurance in the state, if the attachment of the Cat Fund was to be lowered significantly.
Arguing that recent legislation designed to try and stabilise Florida’s insurance marketplace has not worked, while reinsurance market hardening also poses an additional threat that could drive higher costs for insurance protection in the state again this year, Brandes believes a more radical approach is required, to pass on the benefits of the FHCF’s capitalisation to homeowners.
Dropping the aggregate attachment point for the FHCF means Florida’s property insurers would be able to claim on this public reinsurance earlier and for smaller industry loss events.
But, in order to make that work without adding undue pressure on the Florida insurance market, it would be vital to consider the costs of coverage and how the FHCF might deal with challenging catastrophe loss years.
Attaching lower would also mean exhausting lower-down, while that would also imply bonding resources would be tapped quicker and more frequently, adding repayment costs and possibly increasing the costs of borrowing further down the line.
While it could also drive the FHCF back to the private reinsurance and risk transfer markets for what is seen as the wrong reasons, to shore up its protection to the insurers rather than to expand on it, or make it more efficient.
Opposition to the proposal has emerged, as you might expect.
Gina Wilson, COO of the FHCF, said this would be a substantial reset to the catastrophe fund and so requires far greater analysis, to understand the impacts of any changes.
She said that any moves to reduce the attachment could weaken the Cat Fund, while the Florida Chamber of Commerce also expressed its concerns, saying the current FHCF structure helps to not only keep it viable over the longer-term, but reduces the risk of assessments, which could be far higher if the attachment was reduced.
The Chamber is exploring other ways to try and make Florida’s insurance market more affordable and resilient over the longer-term.
Brandes has also cited a desire to onshore more of the reinsurance premiums that Florida’s insurers send to international reinsurance markets as a benefit of his proposal, of lowering the Cat Fund retention.
That might also suggest that his proposal could apply to extending the top of the FHCF limit as well as lowering the attachment, to make it a larger provider of hurricane reinsurance to the state.
But that would effectively move Florida’s property insurance market away from one that transfers a significant proportion of its risk offshore and into private markets, to one that is retaining more risk within the United States and also has a growing reliance on debt issuance.
While debt, or municipal bonding, might have been a cheap way to shore up the Cat Fund’s capital through recent years, it is not necessarily always going to be the case.
If the bonding layers were expanded and also began to attach lower down, a run of challenging hurricane seasons could see the investor base for the FHCF’s bonding becoming far less willing to take on the risk, driving higher costs and perhaps reducing availability of this cheap form of capital.
Of course, there are other ways to tap into the capital markets that the FHCF could use to extend its financing, with insurance-linked securities (ILS) such as catastrophe bonds perhaps one way that could be appealing.
The FHCF could issue cat bonds that attach based on the industry co-payments being exhausted by 80%, for example, or by using a more traditional industry loss trigger.
Catastrophe bonds would naturally cost more than the municipal debt approach, but there could be other ways to take the bonding issuances the FHCF is more traditionally known for and embed a trigger, or make them non-repayable, so more akin to a catastrophe bond.
Which would not only make them a differentiated source of responsive funding, but also potentially unlock more of the capital markets appetite for alternative asset classes, alongside its large municipal bond investment community.
The Florida Hurricane Catastrophe Fund plays a key role in making insurance more affordable in the state, but in these times of climate-related concern it seems more homeowners are going to have to pay risk commensurate rates anyway, so perhaps one of the key reforms coming for the Cat Fund should be to focus its protection to ensure those that might struggle to pay the necessary insurance rates are covered by it.
Not every homeowner in Florida struggles to pay their property insurance and, in fact, many of those in the most hurricane exposed regions are, in the main, easily able to afford the rising rates (coastal property prices would suggest).
So, perhaps Florida needs to shift its catastrophe insurance focus away from a one-size-fits-all Cat Fund, to something that can ensure both the burden and the benefits of living in a hurricane exposed state are more fairly distributed.