Florida Hurricane Catastrophe Fund Advisory Council Approves 2012 Premium Formula and Rule Filing

 

During a March 22, 2012 teleconference, the Florida Hurricane Catastrophe Fund (“FHCF”) Advisory Council (“Council”) unanimously approved the 2012 FHCF Contract Year Premium Formula and the filing of proposed Rule 19-8.028, entitled “Reimbursement Premium Formula” for Notice of Proposed Rulemaking.  The formula must now be approved by Florida’s State Board of Administration.  The meeting materials and draft of Proposed Rule 19-8.028 are attached.

After approval of the minutes from the January 12, 2012 meeting and introducing new FHCF Council member Dr. Kurt Gurley, a presentation was given on the 2012 FHCF Contract Year Premium Formula by Andrew Rapoport and Paul Budde of Paragon Strategic Solutions Inc.  The pair discussed the 2012 FHCF Ratemaking Formula Report (“Report”) at length, highlighting the fact that the 2012 FHCF Premium of approximately $1.3 billion is predicted to insure a maximum of mandatory $17 billion of exposure.

Highlights of the Report include the following “new” items:

• The 2012 Report reflects a “no growth” exposure trend — the same amount of homes and insureds are covered in 2012 as in 2011
• A statutory change that affects cash build-up factor, increasing it from 15 percent to 20 percent
• A statutory change that affects optional Temporary Increase in Coverage Limits (“TICL”) premium, raising it from 400 percent of the indication in 2011 to 500 percent of the indication in 2012
• The available TICL limit is declining from $6 billion to $4 billion
• Investment interest rate assumption is dropping from 1.5 percent to zero
• A mitigation charge that is related to investment income is being eliminated from the premium
• Current pre-event notes are expiring in October 2012

Of particular note are the indications that reflect a 14.8 percent increase in the FHCF mandatory rate for the 2012 Contract Year from the 2011 Contract Year. 

The breakdown is as follows:

• 2012 projected FHCF premium is $1,314 billion, up 14.8 percent from $1.145 billion in 2011
• 2012 projected TICL layer is $47 million, down 47.8 percent from $90 million in 2011
• 2012 projected FHCF plus TICL premium is $1.361 billion, up 10.2 percent from $1.235 billion in 2011

The primary source of funds for the FHCF is the premium charged annually for participating insurers, which is calculated based on of the ratemaking formula, it was explained.  Earned investment income combined with post-event assessments also provide funding.

The FHCF pays losses according to the reinsurance contract it enters into with each of the separate companies, based on the losses that are covered, it was stated.  Within the layer of reinsurance, the FHCF also pays an additional five percent toward the cost of loss adjustment, which is incorporated statutorily.

Rates are determined after a review of the exposure data submitted by insurance companies that are covered by the FCHF.  The data is sent to catastrophe modelers, which produce model losses and loss costs, it was explained.

Three key components driving the rate change for 2012 are as follows: 

1.      Modeled losses and expenses are being adjusted upwards by 6.2 percent

2.      Investment income and mitigation are being adjusted upwards by 3.6 percent

3.      Statutory cash build-up is increased by 4.4 percent.

The Report shows that the bulk of exposure distribution lies in residential property, with a total distribution of 83.9 percent-the same as a year ago.  Commercial habitation accounts for 9.6 percent; condominium, 4 percent; mobile home, 1.6 percent; and tenants, 0.9 percent.

The Council then heard a brief report by FHCF Chief Operating Officer Jack Nicholson, which included a 2004/2005 hurricane losses update, a legislative update and a 2012 Hurricane Season funding update.

With no further business before the Council, the meeting was adjourned.

 

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

 

 

Click here to follow Colodny Fass on Twitter (@CFTLAWcom)

 

 

To unsubscribe from this newsletter, please send an email to Brooke Ellis at bellis@cftlaw.com.