Florida Hurricane Catastrophe Fund 2011 Participating Insurers Workshop Report

 

The Eleventh Annual Florida Hurricane Catastrophe Fund (“FHCF”) Participating Insurers Workshop was held in Orlando, Florida on May 24-25, 2011.

State of Florida Chief Financial Officer Jeff Atwater served as the keynote speaker.  In his address, he discussed how the nationwide mortgage crisis is still felt throughout the State of Florida. One of CFO Atwater’s primary objectives is to tackle mortgage fraud, which he said undermines the stability of Florida’s economy and impacts the hardworking citizens of Florida.  CFO Atwater vowed there will be no mercy for those who cheat the system.

 

FHCF Update

FHCF Director of Legal Analysis and Risk Evaluation Leonard Schulte provided workshop attendees with FHCF-specific updates.

Mr. Schulte reviewed the legislation from Florida’s 2011 Regular Legislative Session that will impact the FHCF.  Most notable are the changes to the Florida Statutes relating to the definition of “covered losses,” the collection of assessments on surplus lines policies and the Insurance Capital Build-up Incentive Program.  Mr. Schulte predicted there will be future legislation addressing public record exemptions for loss reporting and structural changes to the FHCF. Mr. Schulte provided additional information on the FHCF’s current financial status.  The FHCF has a projected 2011 cash balance of $7.25 billion with a projected maximum liability of $18.5 billion.

 

2011 Florida Insurance Legislation

A Colodny Fass lawyer provided an update on the 2011 Florida Legislative Session, which he prefaced with a review of Florida’s political environment leading up to this year’s Session.  He noted there was tremendous support from the Governor and the Cabinet to address Citizens Property Insurance Corporation (“Citizens”) and other cost drivers in the insurance market; however, most legislation addressing these concerns was not passed during Session.

The presentation focused on the insurance “Cost Driver Bill” CS/CS/CS/HB 408, which was signed into law on May 17, 2011.  The new law significantly changed the handling of sinkholes and established statutes of limitations for the filing of specific claims as it relates to sinkholes, hurricanes and windstorm.  In addition, the new law expands the definition of “losses” and amends the RCV/ACV provisions. 

Colodny Fass also reviewed other insurance-related bills considered during the 2011 Session.  These included CS/CS/SB 1816, relating to surplus lines; CS/CS/HB 99, which relates to commercial lines deregulation; CS/CS/CS/CS/HB 479 relating to medical malpractice;  CS/HB 1087 relating to workers’ compensation and insurer notification; and CS/HB 1007 pertaining to insurer insolvency all of which passed.  Bills concerning topics such as credit scoring, bad faith, captive insurance, personal injury protection, Citizens and flex rating all failed during various stages of the legislative process.

 

World Wide Catastrophic Events and the Reinsurance Market

Aon Benfield Analytics Chief Operating Officer Kevin Campion discussed the effects of worldwide catastrophic events on the reinsurance market.  He explained factors influencing reinsurance pricing in the Florida such as the demand for reinsurance, residual market purchases, reinsurer capital (supply), FHCF capacity, capital market involvement, significant catastrophe loss activity and catastrophe models.  U.S. hurricanes remain the peak reinsurance market with the highest reinsurer margin. FHCF capacity increased substantially in 2007 resulting in reduced demand and pricing in the private market.  However, the financial crisis of 2008 led to insecurity in capacity causing an increase in the demand and prices for private reinsurance.  Mr. Campion concluded by stating the reinsurance market pricing outlook for June 1 /July 1 renewals remains at flat to -5 percent.

Guy Carpenter Managing Director and Property Specialty Leader Lara Mowery added that Guy Carpenter estimates 2011 reinsurance sector natural catastrophe losses are now more than double the amount budgeted by reinsurers.   The sector’s excess capital position has been significantly diminished. Other factors influencing market conditions are low investment yields, weakening cash flow and the sustainability of reverse releases.  Ms. Mowery indicated the April 1 renewal rate change was flat to +5 percent, whereas June/July renewals remains in progress with significant variability.

The 2011 variation in the average quote in Florida ranges from -15 percent to +20 percent indicating significant difference in reinsurers’ response to market factors.  This is a noteworthy distinction in the projections from Aon Benfield Analytics.

 

State of the Economy and Financial Markets

John Forney, Managing Director of Raymond James and Associates, Inc. discussed current financial conditions in the United States and where he projects the economy is going.

Mr. Forney stated the recession is over and the U.S. economy has been in a slow recovery since the third quarter in 2009.  Unemployment and the housing market, however, have yet to stabilize, resulting in low consumer confidence.  Mr. Forney presented a chart illustrating how the equity markets value entities insuring catastrophic risk by showing that publically-traded reinsurers trade at low multiples relative to book value.

Mr. Forney addressed the rising U.S. debt (public and private) that is now approximately $36 trillion, or 359 percent of the gross domestic product (“GDP”).   Entitlement expenses have increased 10 times over the period from 1965-2010, while GDP has increased only 2.7 times during that time frame.  Mr. Forney suggested that by raising GDP, prioritizing spending and spending more on high return on investment programs will help to stabilize the economy.  Mr. Forney concluded his presentation emphasizing the importance of the FHCF in Florida and the economic benefits for the state.

 

Florida Catastrophic Storm Risk Management Center:  Current Research Efforts

Patrick Maroney, Director of the Florida Catastrophic Storm Risk Management Center (“Center”), reviewed the Center’s legislative intent and the public and private institution partnerships that collaborate to facilitate that intent.  Mr. Maroney discussed the current projects the Center is undertaking including addressing issues relating to the collection and dissemination of accurate data. Additional ongoing Center projects include: determining capital market capacity of catastrophic risk, seeking to develop realistic models for catastrophe financing in light of current market conditions, and examination of the challenges of financing the FHCF and the value of the private-public relationship.

Lorilee A. Medders, Associate Director of the Center, added that the Windstorm Inspection Study is completed.  The Center is now working on taking the data and creating incentive programs to mitigate damages, including Innovative Finance Concepts for Wind Mitigation and Home Hardening. The Center is also working with local governments to design financing programs.

 

2011 Reimbursement Contract and Data Call Changes

Paragon Managing Director Martin Helgestad and Director Kathy Mackenthun discussed the current FHCF reimbursement contract and how the 2011 legislative changes will impact the contract.  They also addressed the data call and the changes made including:

• Construction Types for Commercial, Tenants, and Condominium Unit Owners were expanded
• The Florida Building Code Indicator was changed from “meeting” the code to “built under” the code and now includes dwellings located in Miami-Dade or Broward counties  built under the 1994 South Florida Building Code in addition to dwellings built under the 2001 Florida Building Code.
• Eliminating the Basic versus Hurricane/Engineered Shutters/FBC Equivalent reporting structure
• Eliminating the Roof-Wall Connection field
• Eliminating the Roof-Deck attachment field and adding it as a specific construction category

 

2011 FHCF Premium Formulas:  Rates, Retention Multiples, and Payout Multiples

Paragon Strategic Solutions Managing Director and Actuary Andy Rapoport explained the FHCF Premium Formula.  The following are changes for 2011:

• 15 Percent Cash Build-Up Factor included in rates
• Quadruple TICL Premium
• TICL Limit reduced to $6 billion
• New construction classes for commercial, tenants, and condominium owners

 

Commutation of 2005 Losses

Martin Helgestad moderated a discussion on the commutation of 2005 losses.

Along with Kathy Mackenthun from Paragon, the panel consisted of FHCF staff members Jessica Wilder and Gina Wilson.

The 2005 hurricane commutation period is from June 1, 2009 thru June 1, 2011. The panel explained the commutation process and provided the 2005 update.  As of April 30, 2011, 114 companies triggered FHCF coverage, 37 companies have been fully reimbursed and there are 77 companies with $496 million in outstanding reimbursements. 

The program also included several breakout sessions led by various FHCF staff members. The Workshop was broken into two groups: FHCF Basics and FHCF Advanced Issues and Questions.

The final agenda item was a roundtable discussion on the FHCF Data Call, Exposure Examinations and general FHCF-related questions and answers.

Copies of the presentations provided throughout the conference are available on the FHCF Website at www.sbafla.com/fhcf.

 

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