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TALLAHASSEE, Fla.—A senior official at Florida's catastrophe fund is urging lawmakers to reduce the fund's role as a reinsurer in the state after a report estimated that the fund could face a $3.2 billion shortfall if a major storm were to hit.
While the report emphasized that it used conservative guidelines to estimate the Florida Hurricane Catastrophe Fund's ability to raise funds to pay claims after a major hurricane, the fund's capacity should still be reduced by about $5 billion, according to the official.
Insurance industry observers echoed concerns of some state lawmakers that the FHCF may be exposed beyond its ability to raise money to pay claims.
The FHCF was established in 1993 to provide reinsurance capacity for Florida insurers after losses from Hurricane Andrew led to a sharp reduction in capacity in the state. The FHCF is funded through premiums from Florida insurers. Participation in the fund is mandatory for nearly all property insurers writing residential business Florida.
Based on its current exposures, the fund could face claims of $18.39 billion if a major hurricane were to hit this year, according to the Oct. 18 report prepared by St. Petersburg, Fla.-based Raymond James & Associates Inc.
The fund is projected to have a year-end balance of $7.17 billion. However, the basis for calculating the FHCF's ability to meet its obligations also factors in the state's ability to raise money through municipal bonds after a catastrophe.
According to the report, taking an average estimate from a panel of leading international investment banks, the fund would be able to raise $8 billion through bond issues in the 12 months after the event, leaving a potential shortfall of about $3.2 billion. The report noted that the banks estimate that the FHCF could raise another $6 billion over a 24-month period, but “based on a desire for conservatism and guidance from FHCF staff about potential payout timing, “ the 12-month time frame was used to estimate the fund's financial resources.
“We have a situation where if we had an event, we might not have enough money to pay for all the coverage purchased from the fund,” said FHCF Chief Operating Officer Jack Nicholson. He said depending on the size of the event, some insurers might not be able to wait two years to receive reinsurance claims payments.
Mr. Nicholson has proposed that Florida lawmakers limit the FHCF's capacity to $12 billion by 2016, down from the current $17 billion. Some insurers also buy additional optional coverage from the FHCF, though that option is being phased out.
At a Sept. 21 Florida Senate Banking and Insurance Committee meeting, state Sen. Mike Fasano, R-New Port Richey, asked Mr. Nicholson if reducing the fund's capacity ultimately would result in higher rates for consumers who buy insurance in Florida.
Mr. Nicholson said yes, “absolutely.”
“Your conclusion was that we need to right-size the cat fund,” said Sen. Don Gaetz, R-Niceville. “By my reckoning as an amateur that means either reducing risk...or we have to increase the cash reserves on hand.”
The fund is in better financial shape now than three years ago. The projected fund balance was only $2.80 billion in October 2008, after the financial crisis sparked worries about the FHCF's ability to raise additional money in the debt markets, according to an FHCF annual report.
“It's gotten better over the years,” said Richard Attanasio, vp of property/casualty ratings at the Oldwick, N.J.-based rating agency A.M. Best Co. Inc. “They've been able to build up cash because there haven't been significant events” in Florida. He added that Best has “some skepticism” about the fund's ability to meet claims in the event of a major catastrophe.
Using its most recent model released in July, EQECAT Inc. estimated a 5% chance that a loss of at least $17 billion might occur in Florida in any given year. The last storm that produced losses of that magnitude was Hurricane Andrew 19 years ago. According to the Insurance Information Institute's most recent estimate, in 2010 dollars, Hurricane Andrew resulted in $22.4 billion in insured losses.
Some insurance industry organizations voiced concerns over the FHCF's funding.
“The Florida Insurance Council's position is that the fund should be structured so it can every year deliver the reinsurance that it sells,” said Sam Miller, the Tallahassee trade group's executive vp.
“There are insurers that are concerned that the FHCF is promising more than it can deliver,” said Bryon Ehrhart, chief strategy officer and chairman of the analytics and investment banking group for Aon Benfield Inc. in Chicago.
It's remains unclear, though, whether reforms will be passed.
“The political environment in the past has been to ignore the problem,” said R.J. Lehmann, deputy director of the center on finance and real estate in Washington at The Heartland Institute. “But insurance in Florida is always among the top issues and we're hopeful that something can move forward.”