Bonds “only a partial solution” to FHCF shortfall

The following article, dated May 20, 2009, was re-printed from Reactions Magazine.

Bonds “only a partial solution” to FHCF shortfall

The shortfall in available funding for the Florida Hurricane Catastrophe Fund (FCHF) has raised concerns that it may not be able to meet its liabilities if there is a large hurricane this year.

According to Chris O’Kane, CEO of Aspen Re, efforts by the Florida legislature to issue bonds to make up for some of the potential shortfall is “at best only a partial solution” to the problem.

At present, House Bill 1495 is awaiting approval from Governor Charlie Crist, having already been passed by the Florida House and Senate.

The Bill proposes a reduction in the Temporary Increase in Coverage Limit (TICL) layer of the FCHF over the next six years, to decrease the FHCF exposure.

At the federal level, US senator Bill Nelson has filed S 886, which would provide a federal guarantee on debt issued by the FHCF.

However, according to Guy Carpenter, there is still uncertainty over whether the FHCF could bond to meet its necessary obligations if a catastrophic even occurred, as a result of reduced liquidity in the market.

If HB 1495 is signed into law (Governer Crist has until May 30 2009 to sign or veto the Bill – if he does not take action the Bill will become law without his signature), the FHCF’s theoretical capacity will be $46.8bn, according to Guy Carpenter.

However, its estimated capacity for post-event bonding is only $8bn within the 12 months after an event. In addition, pre-event notes total $3.5bn, which includes floating rate notes maturing on October 15 2012. Added to the FHCF’s estimated year-end balance of $4.33bn, the FHCF estimates $7.83bn in total liquid resources.

In the event that the FHCF could not meet its liabilities, O’Kane says: “The government may step in to cover the balance of the losses, but how quickly would remain to be seen and some smaller insurers may go out of business in the meantime.”

He notes that, as a result of the uncertainty, some insurers have already switched part of their reinsurance cover from the FHCF to private carriers. O’Kane expects this to accelerate if HB 1495 is passed as law. As a result, he says reinsurance prices will rise.

“If the TICL layer is wound down as proposed, there is likely to be an ever bigger rise in demand for private reinsurance for the 2009 hurricane season,” says O’Kane. “With Florida accounting for approximately 15% of the worldwide cat market, the effect of increases in demand and premiums in the state is likely to have a positive influence on prices in the property segment as a whole.”