Florida-Based Property Insurers CEO Group
Editorial
September 21, 2011
Florida Hurricane Catastrophe Fund Chief Operating Officer Jack Nicholson told the next Senate president and other Senate leaders Wednesday the Cat Fund is “dangerously over-exposed” and was asked to submit “a business plan” to make it financially sound.
Nicholson’s concerns were acknowledged by Sen. Don Gaetz, R-Destin, designated earlier this week to succeed Senate President Mike Haridopolis after the 2012 session, and Senate Banking & Insurance Committee Chairman Garrett Richter, R-Naples. Both asked Nicholson to submit a Cat Fund “right-sizing” proposal to the Banking & Insurance Committee staff.
Nicholson is expected to submit the proposal he has discussed before the Florida Insurance Council and other groups this summer. Provisions include reducing the mandatory program from $17 billion to $12 billion over the next three years; and increasing the participating insurer co-pay by reducing the maximum available coverage percentage from the current 90 percent to 75 percent over a three-year period.
Nicholson told the Senate Banking & Insurance Committee he is concerned that the Cat Fund could not sell the more than $11 billion in bonds it would need to fully fund selected coverage for the 2012 hurricane season because of the country’s economic crisis. “We are dangerously over-exposed, given the reality of the current marketplace,” he said.
The emergency assessments “are not the biggest problem,” Nicholson said. “The biggest problem is having the obligation and not being able to issue the debt and not being able to pay the companies.”
Before the House Banking & Insurance Subcommittee Tuesday, Nicholson expressed similar concerns. His presentation came at the end of the meeting and there was no time for responses from committee members. Wednesday, there was extensive discussion about Cat Fund financial instability following a monster hurricane and formal interest in pursuing the matter expressed by the two key Senate leaders.
The Cat Fund should be restructured so it no longer depends on $10 billion in debt; $5 billion to $7 billion in debt is more realistic, Nicholson said. He described the difference between $10 billion in debt and $5 billion as “like night and day.”
The Cat Fund has issued $18.55 billion in coverage for the 2012 hurricane season. It is backed by $7.25 billion in cash, the most in its history and more than the $6.2 billion entering the 2004 hurricane season, Nicholson reported. If required to pay $18.55 billion, it would have to sell $11.3 billion in debt.
In May, the Cat Fund Advisory Council adopted a $12 billion bonding estimate, which covers the $11.3 billion bonding requirement, but with little cushion. And this estimate was based on two reports from underwriters – one estimating $3 to $3 billion in bonding capacity and the other $24 billion.
“A lot of things have changed since May,” Nicholson said, He mentioned, among other developments, the down-grading of the country’s credit rating and the worsening economic crisis worldwide. The Advisory Council reassesses the bonding and claims-paying estimates in mid-October. Nicholson said he has not idea what it will do.
“I’m extremely disturbed that our Cat Fund is dangerously over-exposed,” said Sen. Alan Hays, R-Umatilla. “Companies are going to be stiffed…if we can’t raise that $12 billion.” Hays expressed concern about Citizens Property Insurance C orporation being able to pay all of its claims, with its huge reliance on the Cat Fund and suppressed rates.
“What do you think we should do and what do you think we can do?” Senate President-Designate Gaetz asked Nicholson.
Richter instructed Nicholson to get with committee staff to develop “a business plan for right-sizing the Cat Fund; among other reasons, so he can sleep at night, the chairman added.
Here are the major provisions of the Nicholson plan to restructure the Cat Fund:
Reducing the limits of the FHCF mandatory coverage layer from the current $17 billion over a three-year period. For the 2013 contract year, the limit is reduced to $15.5 billion; for the 2014 contract year, the limit is reduced to 14 billion; and for the 2015 and subsequent contract years, the limit is reduced to $12 billion (with provision for increased limits after the FHCF can fully fund its single-season capacity and its second-season capacity).
Increasing the participating insurer copay by reducing the maximum available coverage percentage from the current 90 percent over a three-year period. For the 2013 contract year, the maximum available percentage is 85 percent; for the 2014 contract year, the maximum available percentage is 80 percent; and for the 2015 and subsequent contract years, maximum available percentage is 75 percent. The current, lower coverage options (45 and 75 percent) will also remain available.
Increasing aggregate insurer retention to $8 billion for the 2013-2014 contract year, and retaining current provisions that automatically adjust retention each year based on FHCF exposure growth.
Increasing the cash build-up factor. Under current law, the cash build-up factor, which is added to the actuarially-determined premiums, is scheduled to increase by 5 percentage points a year until it reaches 25 percent for the 2013 contract year. The draft continues this annual 5 percentage point growth until the 2018 contract year, when the factor will reach 50 percent.
Reducing the maximum emergency assessment for a single year’s losses to 5% (instead of 6%) and for all losses from all years to 8% (instead of 10%), beginning in 2015.
Terminating the TICL layer after the 2012 contract year. Current law provides for elimination of TICL after the 2013 contract year.
