NU Online News Service, April 15, 4:20 p.m. EDT
Loosening credit markets have boosted the Florida Hurricane Catastrophe Fund's anticipated post-event bonding capacity by an additional $5 billion, easing the shortfall in projected claims-paying ability for the fund, a FHCF spokesman said.
The FHCF had projected it had $3 billion in post-event bonding capacity heading into the upcoming hurricane season, said Dennis MacKee, director of communications for the FHCF, but it is now projected to have as much as $8 billion.
Mr. MacKee said the additional bonding capacity has "significantly altered the picture." Essentially, with the $8 billion combined with pre-existing capacity, the mandatory layer of the cat fund has an estimated $15.6 billion in claims-paying ability, versus $10.6 billion in previous estimates.
That $15.6 billion, combined with the $7 billion deductible the insurance industry would have to pay in the event of a major hurricane, means the state of Florida would now be able to handle an event comparable to 1992′s Hurricane Andrew, which would cost $22 billion in today's dollars, Mr. MacKee said.
If the credit markets continue to loosen, the capacity could increase further, he said.
However, Sam Miller, executive vice president of the Florida Insurance Council, noted the mandatory layer of the catastrophe fund still has over a $2 billion shortfall to cover its maximum obligation of $17.7 billion.
He also said while the $8 billion bonding capacity figure is a "good-faith estimate," there is a chance Florida will not be able to sell $8 billion in bonds after a hurricane.
Additionally, the optional cat fund layer that sits above the mandatory layer, called TICL, remains unfunded, Mr. Miller said.
Every homeowners insurer in the state has to buy into the mandatory layer of the cat fund, Mr. Miller said. Most companies also buy into TICL as well, but those companies are essentially buying "phantom insurance," he added.
Mr. Miller explained the TICL layer by stating that if a major hurricane strikes Florida, an insurance company or the state's homeowners carrier of last resort–state-backed Citizens–would be responsible for its share of a $7 billion total deductible.
Once the company pays that amount, it can access its share of the $17.7 billion mandatory cat fund layer. If the company still has losses, the TICL layer kicks in to cover losses over the mandatory program up to an additional $12 billion total for all companies.
To sum up the cat fund's financial woes, Mr. Miller said there is still a shortfall in the mandatory program, though it is "hopefully a lot less than we thought a month ago," and the upper layer, TICL, is not funded at all.
A financial services team (FST) consisting of investment banks, reinsurance brokers, legal counsel and financial advisor Raymond James & Associates Inc. that was hired to look into options to close the FHCF shortfall has recommended against purchasing financial products in the private market to reduce the funding gap. The FST reported that no financial products appear to meet the FHCF's cost and capacity parameters at this time.
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