Florida Hurricane Catastrophe Fund Approves 2010 Premium Formula for Development and Final Adoption

 

The Florida Hurricane Catastrophe Fund (“FHCF”) Advisory Council (“Council”) held a regularly scheduled meeting on March 18, 2010, during which it reviewed the 2010 FHCF Reimbursement Premium Formula.  To view the agenda and related materials, which include the 2010 Ratemaking Formula Report,  click here.

The following is a summary of the meeting:

After the election of David Walker as the new Chair and Robert Peduto as Vice Chair, Paragon Strategic Solutions representatives Paul Budde and Andy Rapoport gave a presentation on the 2010 FHCF Premium Formula. Major points of their report included:

• The 2010 Premium Formula includes a statutory cash build-up factor increase on the mandatory FHCF layer from five percent to 10 percent.
• The optional Temporary Increase in Coverage Limits (“TICL”) premium increases by a factor of 300 percent in 2010, 400 percent in 2011 and 500 percent in 2012.
• The FHCF’s maximum TICL limit declines from $10 billion to $8 billion.
• The FHCF Contract Year has been shortened to seven months. However, if either Senate Bill 1460, or its companion, House Bill 949 are passed into law, either of these would restore the FHCF Contract Year to its former 12-month length.
• The FHCF interest rate assumption reduces from 3 percent to 2.5 percent.
• The cap on FHCF mitigation credits/debits doubled from approximately 10 percent to approximately 20 percent.
• The FHCF mandatory layer is capped at $17 billion until sufficient capacity is available.
• Under the new law, the industry retention would reset to $7.142B for 2010.
• Without the passage of SB 1460/HB 949, the total ratemaking indication for 2010 is 1.496. (This reflects a 16.22 percent rate change). The TICL layer will increase by 20.19 percent and the mandatory layer will increase by 4.81 percent. These indications are slightly lower if the aforementioned legislation becomes law.

It was noted that, because reinsurance capacity is increasing, minimal increases in the FHCF premiums will likely not have a significant impact on consumer premiums.

FHCF Chief Operating Officer Jack Nicholson added that less exposure will limit the FHCF’s need to issue and sell bonds.

The Council proceeded to discuss modeling. To assist in its ratemaking, the FHCF uses all five models approved by the Florida Commission on Hurricane Loss Projection Methodology. Actuaries on hand at the Council meeting noted that the FHCF accords more weight to models with less extreme indications.  From among these models, the one with the highest weight indicated a significant increase in mobile home rates.  Generally, modeled losses increased 2.7 percent from 2009 to 2010.

The Council discussed the FHCF’s processes in regard to premiums, rates and coverages that were included in the report. It was noted that political pressures and pricing need to be considered when determining pre-event versus post-event claims payments. It was noted that political pressures and pricing need to be considered when determining pre event versus post event payment of losses.

Dr. Nicholson reported on proposed Rule 19-8.028 relating to the FHCF Reimbursement Premium Formula.  This Rule reflects current law and is scheduled to go before the Florida Cabinet for rulemaking development notice approval on April 13.  However, if SB 1460/HB 949 is signed into law prior April 13, then an emergency rule would be offered.

A motion to adopt the FHCF Premium Formula and proposed Rule 19-8.028 for notice and ultimate final adoption was approved by the Council.

In his Chief Operating Officer’s report, Dr. Nicholson said that the 2004 and 2O05 hurricane losses continue to increase. Currently, $824 million in outstanding losses are expected.

Dr. Nicholson explained that the FHCF’s commutation process (to resolve remaining claims) will begin for 2004 in June 2010. While 2004 losses are approximately 99 percent closed out, the 2005 losses will be commuted in June 2011 and likely will be a more difficult process because additional outstanding claims are expected.

Council member Michael Cawood suggested that the FHCF should fund the 2004 and 2005 losses with existing premiums. Dr. Nicholson noted that doing so would threaten the FHCF’s tax-exempt status.

Dr. Nicholson briefly reviewed legislative actions, including pending bills addressing public adjusters and property insurance.

The next Council meeting is scheduled for May 18. The purpose of this meeting is to review bonding capacity estimates and hear an update on the 2010 Florida Legislative Session.

 

 

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

 

 

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