Florida’s legislature is looking to reduce the Florida Hurricane Catastrophe Fund (FHCF) by $3 billion, a move that could spell opportunity for Bermuda players, particularly those with a capital markets focus.
The recent bill, proposed by Republican Representative Bill Hager, is motivated by the need to reduce the burden of state-backed coverage on Florida taxpayers and the rising availability of capital markets and traditional reinsurance capacity at increasingly competitive rates.
The bill states that “growth in the capital available for private catastrophe reinsurance and reinsurance alternatives such as catastrophe bonds has created an opportunity to transfer additional hurricane risk to the private sector and to reduce the share of Florida hurricane risk borne by the public without destabilizing the residential property insurance market.”
It is apparent that the legislature intends to make good on its intention to transfer more risk into the private market, reducing the scope of FHCF capacity down from its present $17 billion, to $14 billion under the proposed changes. This will in turn encourage Florida insurers to consider their private alternatives more closely.
As an intermediate measure the bill will extend the $3 billion of withdrawing coverage on a temporary basis through the creation of a “coverage limit increase option”, which will enable the state to deploy the reduced coverage should the need arise.
The intention is for the coverage limit increase option to “balance the opportunity for greater risk transfer with the continuing need to maintain a stable and ongoing source of reimbursement” for state insurers.
Market conditions are evidently tempting the Florida legislature to consider the private alternatives more closely. Talking with Thomas McKevitt, executive vice president, global catastrophe strategy and Bermuda reinsurance at Allied World recently, Bermuda:Re found that Florida rates have come under particular pressure from fierce competition between traditional and alternative capital.
McKevitt says that capital flooding the Florida market has served to deepen and extend an already soft reinsurance cycle.
It is likely that such conditions are helping to provide further impetus to reductions in the FHCF’s coverage and the depopulation of Citizens.
While rates are under pressure in Florida, the move spells opportunity for those Bermuda reinsurers and capital market players who can extend competitive capacity to insurers in the state.
The proposal is also a welcome change of course from the legislature’s past intransigence regarding the need for depopulation and the reduction of state-backed solutions.
Florida, Bermuda, FHCF, bill, hurricane