Underwriting property catastrophe reinsurance in Florida is a uniquely difficult undertaking. In general, property catastrophe deals written on an excess of loss (XOL) basis are considered relatively simple compared to other lines of reinsurance. In Florida, however, when selling XOL coverage for residential risks, incorporating the effect of the state-run reinsurance company, the Florida Hurricane Catastrophe Fund (Cat Fund), adds complexity to otherwise straightforward deals.
Residential insurers in Florida are required to purchase at least some Cat Fund coverage, and many elect to purchase the maximum amount of limit possible from the mandatory layer. Cat Fund coverage is therefore a critical aspect of a Florida residential insurer’s reinsurance program and must be blended with traditional products.
The answer to the question “What happens to the other 5 percent?” of LAE is, “The reinsurers on the second and third layers pay it.” Traditional reinsurance usually has a clause stating that Cat Fund recoveries inure to the benefit of the reinsurance. That means if the Cat Fund is supposed to reimburse an insurer for a loss, the private reinsurance will not pay it. If it is not reimbursable by the Cat Fund, and is otherwise covered under their treaty, then the private reinsurance will pay it. LAE clearly falls in this category, and to the extent that LAE is greater than 5 percent, it will not be reimbursed by the Cat Fund but rather will “bleed” into the second and third layers of the private program.
LAE Mismatch and Unexpected Losses