FHCF Financing Options Considered

As part of the Florida State Board of Administration (“SBA”) agenda during the March 10, 2009 Florida Cabinet meeting, Florida Hurricane Catastrophe Fund (“FHCF”) financial advisor John Forney provided an overview of the current FHCF status in relation to financial markets. 

To move the FHCF toward liquidity, explained Mr. Forney, a multifaceted approach that includes federal assistance would be a prudent route.  Currently, the FHCF has approximately $15 billion in cash and insurer retention, which is enough to pay for 94 percent of potential claims.

The SBA’s Ash Williams summarized various FHCF financing options.  The following products were discussed:

1. Cash capital market products such as “pre-event financing” similar to the purchase of such products in the past
2. Bank market standby agreements to provide the FHCF with a liquidity bridge
3. Contingent capital market products which include put options or similar agreements
4. Traditional reinsurance
5. Finite reinsurance
6. Alternative risk transfer products such as catastrophe bonds or industry loss warranties

Mr. Williams explained that C, D, and E were the most viable options based on the financial markets and the FHCF’s needs, and asked that SBA Staff provide a pricing structure report on these products.  This sparked a short debate on whether or not the federal government will commit to buy FHCF bonds.

Florida Attorney General Bill McCollum remarked that it appears Congress would need to authorize the U.S. Treasury to buy FHCF bonds, but Governor Charlie Crist rebutted this comment by asserting that the federal government will be involved in the FHCF regardless of whether it authorizes the purchase of bonds before or after an event. 

Attorney General McCollum said that U.S. Representative Ron Klein is advocating legislation to authorize the purchase of FHCF bonds.

Florida Chief Financial Officer (“CFO”) Alex Sink and Attorney General McCollum stated that one SBA member should take the lead on any negotiations with the federal government. The Attorney General stated that it should be Governor Crist, but the SBA ultimately assigned Mr. Williams to coordinate all of these communications.

Mr. Forney provided a financial snapshot of the FHCF, stating that it has $7.6 billion in cash.  He added that, once the retention of about $7 billion is included, it appears that the FHCF won’t need to worry about post-event bonding until a $15 billion catastrophe occurs-an event with a six percent likelihood of happening.  Mr. Forney stated that, because a shortfall of about $20 billion in FHCF obligations yet remains, it is prudent to look at financial mechanisms to fill this gap.  A high degree of uncertainty remains regarding whether the FHCF could raise the needed $20 billion. 

Mr. Forney continued with a brief summary of financing options, which included:

• Effect a “top-down” approach by reducing the FHCF’s obligations.  Cons: private reinsurers are under a lot of stress and may not have the capacity to write the reinsurance that the FHCF will no longer cover.
• Transfer risk outside Florida by purchasing private reinsurance.  Cons:  Reinsurance is expensive.  Mr. Forney stated that the FHCF could use all of its premiums to buy reinsurance and reinsure to about half of the Temporary Increase in Coverage Limits (“TICL”) layer.  Additionally, Mr. Forney warned that this option could take away capacity from private insurers.
• Issue pre-event bonds.  This option is more uncertain than it ever was, although this market is showing improvement.
• “Put” options. Mr. Forney stated that there may be capacity for this, but that he thought the best way to accomplish it is for the SBA to put forward a term sheet on what it wants, rather than what providers would give, and let the financial services team work with those parameters.
• A federal option.  This is viewed as the best option, and Mr. Forney offered to assist in facilitating in any way he can.

Mr. Forney concluded that the SBA should not put “all its eggs in one basket” and should continue looking at alternatives in private markets, such as reinsurance and finite reinsurance.  He reminded the group that the shortfall this year exists in the mandatory layer, which is where coverage needs are most efficiently addressed. 

CFO Sink inquired whether the coverage would be for the mandatory layer, TICL, or both?  FHCF Senior Officer Jack Nicholson reminded that because the TICL layer coverage rate is statutory, it affords no increase option.

He also stated that coverage would be evaluated in the FHCF mandatory layer, as well as the TICL layer. 

CFO Sink asked a series of questions about the FHCF financial services team and financial proposals it has generated.  The CFO also asked if Mr. Forney has been working with the members on a one-on-one basis or if the Team Members are in group discussions and bouncing items off each other. Mr. Forney stated that the Team has had both group and one-on-one discussions via telephone and in-person.  Additionally, the CFO requested that the best proposals be heard on all options presented by the FHCF financial services team, and that Mr. Forney make a specific recommendation on the proposal that he feels is the best option.

To view the complete March 10 SBA agenda, click here.

 

Florida Office of Insurance Regulation (“OIR”)

Prior to the SBA’s agenda discussion, Florida Insurance Commissioner Kevin McCarty presented the OIR agenda.  The Cabinet, acting as the Florida Financial Services Commission, approved the following proposed Rules:

 

Rules 69O-163.0075,.009,.011; Credit Life and Credit Disability

Commissioner McCarty stated that this Rule change is the result of legislation passed during 2008.  The Commissioner explained that prior to the passage of House Bill 343, the term of both credit life insurance and credit disability insurance was not to exceed ten years. However, because of this legislation, the prohibition now only applies to credit life insurance and not to credit disability insurance. The Rule makes this clarification.

 

Rule 69O-164.040; Determining Reserve Liabilities for Pre-need Life Insurance

Commissioner McCarty stated that this proposed Rule brings Florida in compliance with the National Association of Insurance Commissioners guidelines relating to reserve liability for Pre-need Life Insurance policies.  Commissioner McCarty testified that Pre-need Life Insurance is purchased by consumers who seek to pre-fund funeral services before their death, and that this insurance typically is bought in anticipation of impending death, on a guaranteed-issue basis with no underwriting.  This differs from “regular” life insurance, where underwriting is an important factor in determining premiums and whether coverage will be issued at all.  The Commissioner stated that this Rule will help ensure that companies selling this product have adequate reserves to pay for consumers’ funeral services.

 

Rules 69O-157.302,.303,.304; Long-Term Care

Commissioner McCarty explained that the change in this Rule will publish the “new business rate” for 2009 Long-Term Care Products.  Section 627.9407(7)(c), F.S., provides that rates charged to an insured for renewal of an existing long-term care insurance policy may not exceed the price charged by the insurer for newly-issued polices.

According to Commissioner McCarty, this law is intended to address “closed blocks” of business, which occur when a particular insurance product is no longer being sold to new customers.  He stated that the statute protects policyholders in that closed block by prohibiting an insurer from having higher renewal rates in the closed block than its rates for new business. For insurers that are not currently issuing new policies, the statute requires the OIR to establish and publish a “new business rate,” above which the renewals cannot be priced.  The new business rate is published annually by the OIR, and is determined by averaging rates from the previous year.

 

Rules 69O-149.205,.207; Standard Risk Rates

Commissioner McCarty explained that this Rule gives the OIR more latitude when evaluating the maximum allowable “standard risk rates” in health insurance, which are defined as average rates charged in the individual market for health insurance. 

 

Rules 69O-149,.003,.005,.007; Health Rate Filing Standards

Commissioner McCarty explained that these Rules will establish parameters for pooling cancer claims, prohibit an insurer from knowingly pricing an individual rate to be charged to a consumer to be excessive, and clarify the requirements for rate certifications to insure that when an insurer annually states that its rates meet Florida law, that statement is true.  The proposed Rules also establish that knowingly filing a false rate certification constitutes an unfair and deceptive trade practice.

 

To view the complete OIR Cabinet agenda, click here.

 

Should you have any questions or comments, please contact Colodny Fass.

 

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