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.

A lack of understanding the critical differences between Cat Fund coverage and traditional reinsurance can lead to unintended consequences. Examples of these differences include calculation of loss adjustment expenses (LAE), potential cash flow issues associated with the ex post funding model of the Cat Fund, and availability of sufficient limits to cover multiple events.