Florida Hurricane Catastrophe Fund Advisory Council Meeting Report: March 17, 2011

 

The Florida Hurricane Catastrophe Fund (“FHCF”) Advisory Council (“Council”) met via teleconference on March 17, 2011 to approve the 2011 FHCF Contract Year Premium Formula and the filing of proposed Rule 19-8.028, entitled “Reimbursement Premium Formula,” for Notice of Proposed Rulemaking.   The Council also elected new FHCF officers during the meeting.

After Chairman David Walker called the meeting to order, the Council elected new officers, unanimously selecting Robert Peduto as chairman and John Auer as vice chairman.  It was noted that the position of vice chairman automatically rotates to chairman.

Paul Budde and Andy Rapoport of Paragon Strategic Solutions, Inc. then discussed the 2011 FHCF Ratemaking Formula Report (“Report”) at length.  Highlights of the Report include: 

 

• The recommendation of a 6.28 percent increase in FHCF mandatory rates for the 2011 Contract Year. According to the Report, this increase is largely due to the change in the Cash Build-Up factor from 10 percentin 2010 to 15 percentfor the 2011 FHCF Contract Year.
• Based on the recommended rate change, the FHCF premium for mandatory coverage would increase by $70 million from $1.111 billion to $1.181 billion
• As required by law, the rates for the FHCF’s Temporary Increase in Coverage Limit (“TICL”) optional coverage would increase by approximately 25 percent,and the maximum TICL limit would decrease from $8 billion to $6 billion.

Although TICL limits are decreasing, it continues to exist because people still buy it, one of the consultants explained.  He said its existence is finite.

“It will be going away,” he said.

According to the 2011 Ratemaking Formula Report, two major factors are affecting the FHCF overall rate and premium levels for the 2011 Contract Year.  The factors are listed below.

 

• By law, industry retention is equal to $4.5 billion, which is adjusted for the increase in reported exposure from 2004 through 2009. Inasmuch as exposures have grown 63.8 percent during that time period, the modeled retention for 2011 is $7.369 billion.
• By law, the mandatory FHCF limit is equal to $17 billion until there is sufficient estimated claims-paying capacity to fund $17 billion of loss in subsequent Contract Years. Because Florida’s State Board of Administration has not yet determined whether that capacity is sufficient, the mandatory FHCF limit for 2011 is $17 billion.

The Report states that the above changes will vary by policy deductible, type of construction and territory. 

Rate change indications follow for mandatory FHCF coverage according to business type and include the effect of the change in Cash Build-Up:

 

• Residential: 6.94 percent
• Tenants: 0.35 percent
• Condominium Unit Owner: 8.88 percent
• Mobile Home: 11.87 percent
• Commercial Habitational: 0.36 percent

Changes that affected the FHCF’s 2011 Ratemaking Formula are:

 

1.      The interest rate assumption used to determine investment income credit has been adjusted down to 1.5 percent from 2.5 percent.

2.      The Cash Build-Up Factor has increased from 10 to 15 percent.

3.      Maximum TICL availability has been reduced from $8 billion to $6 billion and the indicated TICL premium has been quadrupled.

4.      The special loading for recovery of multiple-deductible reimbursements has been discontinued.

 

The Report shows that the bulk of exposure distribution lies in residential property, with a total distribution of 83.9 percent.  Commercial habitation accounts for 9.8 percent; condominium, 3.9 percent; mobile homes, 1.6 percent; and tenants, 0.8 percent.

Mr. Rapoport explained how premiums are derived from the Ratemaking Formula by briefly summarizing how the FHCF generates its funds.

The FHCF receives money from premiums and investment income earned on those premiums, Mr. Rapoport explained.   If a hurricane strikes, the FHCF uses that money to pay off post-event assessments.  The biggest portion of money is spent on loss and loss adjustment, he added.

“We are required to spend a minimum of $10 million most of which is spent on mitigation funding,” he said.  One change this year is the addition of a new rating classification for mitigation called “structure opening protection.”

In reviewing the components of the FHCF’s 2011 mandatory premium change, Mr. Rapoport explained that a premium increase from $1,111.4 million to $1,181.2 million is mostly due to a Cash Build-Up factor of 10 to 15 percent.

“The overall Cat Fund rates are reasonably stable and the coverage is probably very similar,” Mr. Rapoport said.  “There is likely more weight given to smaller events and less to larger events.  The result is the return time is a little lower in the low side and a little higher in the high side.”

Because the payoff multiple is decreasing and premiums are increasing, coverage remains stable, holding at $17 billion, as it was in 2010, he pointed out.  Of further note:  TICL limits have steadily decreased from $12 billion in 2007 to $6 billion in 2011.

TICL limits will decrease by $2 billion per year, expiring in 2013, he added.  TICL will drop to $4 billion in 2012 and $2 billion in 2013.  Modeled 2011 exposure rates decrease only slightly from the 2010 rates, falling from $2,238 billion in 2010 to $2,160 in 2011, he said in his presentation.

After hearing a full report on the FHCF Premium Formula, the Council unanimously voted to approve the 2011 Premium Formula and file proposed Rule 19-8.028 for notice and adoption if no hearing is requested.

In other business, Jack Nicholson gave the chief operating officer’s report.  He said the agency is watching the progress of  several bills in the State Legislature, including HB 803 relating to the increase in surplus requirements for certain insurers by State Representative John Wood;  and SB 408 by Senator Alan Hays, which would expand the definition of “losses” to include “all incurred losses” under covered policies.

Dr. Nicholson said the May 24 Council meeting will be cancelled.  With no further business before the Council, the meeting was adjourned.

To access complete meeting materials, including the 2011 Ratemaking Formula Report  (“Report”) and meeting agenda, click here.

 

 

 

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

 

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