PropertyCasualty360.com
By Chad Hemenway
October 24, 2011
It came as no surprise to anyone that has followed the Florida’s reinsurance fund that it could potentially have a $3.2 billion shortfall but that doesn’t make the news any easier.
The Florida Hurricane Catastrophe Fund (FHCF) will not be able to raise enough money in the capital markets via post-event bonds to cover all of its claims-paying obligations, according to new report issued by independent-financial advisor Raymond James.
The FHCF has nearly $18.4 billion in obligations and a year-end cash balance of $7.17 billion. This means the fund needs to raise about $11.22 billion from bonding to meets its obligations after a storm.
“Bonding needs of this size are extremely large by market standards,” says Raymond James, which asked four financial-services firms to estimate the FHCF’s bonding capacity over the next 12 months.
The average of the estimates from the firms—Citi, Barclay’s, Goldman Sachs and JP Morgan—is $8 billion, leaving a $3.2 billion deficit.
Beyond the cash balance, Florida policyholders will end up shouldering the bill via assessments to pay the debt.
The Heartland Institute, a public policy think tank, says the $8 billion post-event bonding capacity estimate may be optimistic. Goldman Sachs, for instance, says the FHCF could raise just $5 billion in the capital markets.
Heartland, a promoter of free-market policies, has long opined about the harmful effects of past legislation intended to artificially keep homeowners’ rates down. R.J. Lehmann, deputy director of Heartland’s Center on Finance, Insurance, and Real Estate, says the “flaws of that strategy are becoming more and more evident by the day.”
He adds, “Florida must allow risk-based rates to prevail, both for primary insurance and reinsurance, or face the potential of claims the state simply cannot afford to pay.”
Jack Nicholson, chief operating officer of the FHCF, says a shortfall following a weather disaster in Florida could have “severe consequences” in the state’s property-insurance market. Every insurer, by law, has to purchase reinsurance coverage—typically at a lower rate than the private market—from the fund. Some do more than others.
“There’s the potential that companies will not be able to pay claims because the coverage they relied on the [catastrophe fund] for does not exist,” he says.
However, Nicholson insists the state’s “very hazardous” consistent reliance on the bond market to pay claims can be remedied.
