Florida Cat Fund Closes Shortfall Gap

NU Online News Service, Aug. 25, 3:22 p.m. EDT

On the 17^th anniversary of Hurricane Andrew, a Florida insurers association produced an appraisal of the condition of the state's catastrophe insurance market.

They Florida Insurance Council released its material yesterday after Tropical Storm Claudette made landfall in less than 24 hours taking many people living in the Florida panhandle by surprise over the previous weekend.

Focusing on the state's marketplace, the FIC noted the Florida Catastrophe Fund has closed its potential shortfall gap from earlier this year by more than $11 billion through a combination of less insurers purchasing optional reinsurance through the plan and an increase in bonding capacity.

The FIC explained that the program is split into two layers. The first layer is the mandatory program all insurers must buy into that amounts to $17.2 billion. The second layer, the optional reinsurance layer called the Temporary Increase in Coverage Limit (TICL), totals $5.6 billion.

What this translates into, the organization said, is a potential shortfall of more than $7 billion for the overall program. Of that $7 billion, $1.2 billion falls to the mandatory program, while the remainder covers the TICL.

The state's property insurer of last resort, Citizens Property Insurance, was the primary purchaser of TICL for a total of $3.6 billion. An additional 73 companies purchased the coverage, down from 133 last year, according to a report from the State Board of Administration. Total TICL capacity declined by $2 billion to $10 billion by legislation, as the state seeks to eventually close the program.

The Florida Hurricane Catastrophe Fund Chief Operating Officer Jack Nicholson explained to National Underwriter that the current estimated shortfall is based on a maximum loss of more than $23 billion, calculated to be a 1-in-49 year storm loss.

FIC's review noted that despite three years of being spared a major hurricane the state remains the most prone to tropical cyclone events.

"The history of hurricanes shows clearly this lucky streak cannot continue," the FIC said.

Historically, a major hurricane of Category 3 or higher strikes the state every four years on average and 37 percent of all hurricanes make landfall on the state.

Mr. Nicholson said the mandatory limit of $17.2 billion that all insurers buy into amounts to a 1-in-30 year loss.

The TICL, he noted, is not guaranteed and insurers buying the coverage could end up not getting paid if not enough funds are available, he noted.

"They went into it with eyes open," he remarked.

However, all of that could change as bond markets continue to improve, which they did from January to June, allowing the Cat fund to raise its bonding power from $3 billion to $8 billion.

The FIC report also notes that Citizens Property Insurance says it has $16 billion in claims-paying ability through a combination of surplus, reinsurance, pre-event bonding and lines of credit.