United States Senator Bill Nelson (D-FL) introduced a bill last week to provide a guarantee for the Florida Hurricane Catastrophe Fund from the Federal Reserve. The legislation would also provide federal guarantees for the catastrophe funds in Texas and Louisiana and the earthquake insurance pool in California (the “Cat Funds”). Essentially, the legislation would permit the Federal Reserve to guarantee bonds issued by each of the four states’ Cat Fund. As currently drafted, the bill also could guarantee bonds issued by Citizens Property Insurance, Florida’s state operated insurer of last resort.

The Florida Cat Fund currently is permitted to sell a maximum of 29 billion dollars in lower-cost reinsurance to private carriers that write homeowners policies in Florida. The reinsurance is designed to help insurers protect their capital by covering a portion of the losses the insurers would face after a major storm event.

In Florida’s Cat Fund, there is currently about $7.6 billion to cover such losses; any shortfall following a catastrophe theoretically would be covered by the sale of bonds. However, given the state of the credit markets, officials in Florida, Texas, Louisiana and California have been concerned that bond sales would not yield enough money for the Cat Funds to cover their obligations. The legislation would require the Federal Reserve to cover the states’ bond obligations in the event of a default. According to Senator Nelson’s office, if the Federal Reserve guaranteed the bonds issued by a state Cat Fund, investors would have more confidence in the bonds, and the market for the securities would thereby be strengthened

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