InsuranceNewsNet.com
By Diana Rosenberg
September 27, 2011
The chief operating officer of the Florida Hurricane Catastrophe Fund, worried about volatility and uncertainty in the capital markets, is looking for state lawmakers to shrink the state-run reinsurer and reduce its reliance on borrowing.
“I don’t know where we stand right now in terms of the marketing ability of our debt,” said COO Jack Nicholson. The cat fund, created in November 1993 during a special legislative session after Hurricane Andrew, currently has $7.25 billion of cash on hand and some $18.55 billion of exposure — meaning in the event of a major hurricane, the cat fund may need to borrow $11.3 billion to meet its obligations.
Of the amount of exposure, some $17 billion is mandatory coverage. Nicholson wants to get that down to $12 billion, removing $5 billion of capacity over three years beginning in 2013.
He is working on a presentation to the state Senate, where he will outline proposals he hopes will be used as the basis of a bill for the next legislative session. In addition to lowering capacity by at least $5 billion through higher co-pays phased in over three years, Nicholson wants to immediately eliminate the optional layer, known as the Temporary Increase in Coverage Layer, or TICL, currently being phased out and due to dry up in 2014 (Best’s News Service, Aug. 15, 2011).
His goal is to seek no more than $5 billion to $7 billion from the capital markets, if necessary, rather than $10 billion or more.
Nicholson said he is “really concerned” about the long term and a one-in-a-100 year event.
“I don’t want to be in a situation where if we’re lucky, we survive,” said Nicholson, adding he doesn’t want the fund to “live on the edge” but live “comfortably.”
Lawmakers’ moves in 2007 to expand the cat fund in a bid to lower homeowners’ premiums “went too far,” Nicholson said. “The situation needs to be corrected.”
“We’re going to be as responsible as we can going forward” and structure things properly for the future, Nicholson said, adding he doesn’t want the fund structured in a way where it must offer a large amount of debt at the worst possible time. State law requires that if the cat fund doesn’t have sufficient cash to pay losses, other insurance lines — homeowners’, automobile, and commercial — be assessed to fund revenue bonds to pay for the losses. The current assessment is 1.3% for all policies written or renewed this year. The fund issued bonds in 2006, 2008 and 2010 to cover adverse loss developments from reopened claims from the 2005 hurricane season. Those bonds will be paid entirely in 2016, Nicholson said.
Citizens Property Insurance Corp., the state’s largest homeowners’ insurer and the cat fund’s biggest customer, agreed in May to pay $460 million for $6.6 billion of reinsurance coverage from the cat fund (Best’s News Service, May 12, 2011).
The cat fund is required by law to estimate its bonding capacity every May and October, Nicholson said. In May, four companies that provide those estimates for the fund had a wide spread of estimates — from as low as $4 billion to $23 billion.
Since the underwriting opinions were issued, the markets have been rocked by bickering over the U.S. federal budget deficit, Standard & Poor’s downgrade of long-term U.S. debt, concerns about European sovereign debt as well as U.S. municipal debt, Nicholson said.
When underwriters come up with new opinions next month, Nicholson is hoping for a narrower range among the estimates.
In June, A.M. Best released a statement that it “continues to be concerned” about the cat fund’s ability to pay all of its obligations in the event of a severe hurricane (Best’s News Service, June 1, 2011).
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