2010 Hurricane Season Begins: Knowing, Understanding and Better Managing the Risks, Part II: Florida Hurricane Catastrophe Fund, Innovative Products
One of the critical components in the majority of Florida contracts renewing at June 1 is the structure of the Florida Hurricane Catastrophe Fund (FHCF). While factors influencing the FHCF structure overall were dealt with earlier than in prior years, there remained questions regarding the viability of the TICL layer and rating agencies’ treatment of TICL within the reinsurance structure. In 2009 there was considerable concern regarding the viability of this upper layer of coverage due to the impact of the financial crisis on the municipal bond market, which the FHCF utilizes to pay post event claims above their available cash on hand. Statutorily, the legislature reduced coverage offered by USD2 billion to USD10 billion last year. Due in part to companies’ concerns regarding the timing of payments received from TICL, only USD5.56 billion was taken up. Of this, approximately 65 percent was selected by Citizens Property Insurance Corporation (Citizens).
This year, the FHCF TICL layer was further reduced to USD8 billion and in light of last year’s take-up rate and Citizens’ decision not to purchase coverage, the FHCF is estimating a take-up of USD2.72 billion of TICL coverage. In addition to companies’ own concerns regarding the timing of payments from TICL, Demotech specifically provided criteria in 2010 that companies would have to meet in order to utilize the TICL layer within their reinsurance structure and maintain an A rating or better. These criteria include a liquidity ratio greater than 1.0, a ratio of total liabilities to policyholders’ surplus of 3.0 or less and favorable one and two year reported loss development.
The FHCF has recently released their May bonding estimates and as expected the financial markets’ continued improvement has had a positive impact on the FHCF, as well. Total possible FHCF obligations in 2010 are USD25.461 billion, assuming USD8 billion of TICL coverage. The new capacity estimates cover the full USD25.461 billion at an estimated 5 percent post-event assessment, assuming current financial market conditions. This includes the projected Fund balance of USD6.02 billion, USD3.50 billion of pre-event notes and just under USD16 billion of bonding.
Guy Carpenter offers a suite of proprietary products for the Florida marketplace. Those that offer multi-year covers, multiple limits over multiple years and the associated pricing benefits have demonstrated broad appeal. Also, index-linked risk transfer instruments (industry loss warranties, insurance-linked derivatives, catastrophe bonds*, etc.) continue to play an increasing role in meeting the capacity needs of catastrophe-exposed insurers. While these instruments offer many advantages, they expose insurers to varying degrees of basis risk, i.e., the risk that actual losses will deviate from the loss payments provided by the contract. To address this shortcoming, Guy Carpenter developed the County Weighted Industry Loss (CWIL), a PCS index-based trigger that allows risk to be hedged at the more granular county level and is designed to materially lower basis risk. The lowering of basis risk is particularly important in Florida where the potential for a large loss is great.
* Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized and regulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product.