As reported here, here, and here, Florida legislators and insurance regulators actively are seeking to shed some of the state’s hurricane risk and to strengthen the financial condition of the Florida Hurricane Catastrophe Fund (the “Fund”). As reported here, the Fund, which was established after Hurricane Andrew, provides reinsurance coverage for residential property insurers in Florida in the event of major windstorm events.
Since the storms of 2004 and 2005, the Fund has sought to replenish its diminished reserves and increase its ability to pay claims. In 2008, Florida paid Berkshire Hathaway 224 million dollars for its promise to purchase approximately 4 billion dollars in bonds from the Fund at predetermined prices if a major storm hit Florida in 2008. The state apparently made this decision after concluding that the cost of traditional reinsurance was too high. The option expired when a major storm did not occur in 2008.
In a letter to numerous state legislative committees, Florida Chief Financial Officer Alex Sink has recently suggested a multi-step strategy for decreasing state hurricane risk involving: (1) gradually reducing the Fund’s exposure by phasing out the temporary increase in coverage limit (‘TICL”) layer over several years; (2) increasing investments in a state sponsored home loss prevention scheme; (3) changing the time for negotiating renewals of Fund reinsurance protections from spring to autumn; and (4) returning, in phases, to actuarially sound pricing at the state-owned Citizen’s Insurance Company so that it again can be a genuine insurer of last resort.
For 2009, the Fund has decided not to buy private reinsurance or renew the put option it purchased from Berkshire Hathaway last year. Officials in Florida apparently believe that an additional 5 billion dollars in bonds could be sold after a storm if necessary, bringing the Fund’s total post-event bonding capacity to approximately 8 billion dollars. However, potential reforms to the Fund’s TICL could boost demand for increased limits of indemnity from the private reinsurance market. According to some estimations, significant reductions in the TICL layer could yield an incremental demand for private reinsurance coverage of as much as 3 billion dollars.