Statutory Change In Florida Cat Fund Contract Year May Create Unintended Accounting Issues for Ceding Carriers in 2010

Recently, there has been much discussion highlighting an accounting issue created by 2009 Florida legislation amending the laws governing the Florida Hurricane Catastrophe Fund (“FHCF”).  House Bill 1495, which, among other actions, amended section 215.555, Florida Statutes, providing for a transition of the FHCF contract year from a fiscal year to a calendar year basis.  Currently, the contract year is from June 1, 2009 to May 31, 2010.  Section 215.555(2)(e)1 provides that “[i]n 2010, the contract year begins June 1, 2010, and ends December 31, 2010.”  The 2010 FHCF contract year, therefore, is only seven months.  However, due to the requirement that the FHCF must charge an actuarially-sound premium, the reduction in the contract term will not lead to a similar reduction in premium charged by the FHCF.  Starting in 2011, and thereafter, the FHCF contract year will be from January 1 to December 31. 

The Statement of Statutory Accounting Principles, Number 62, Property and Casualty Reinsurance (“SSAP 62”) governs the treatment of the cost of reinsurance as earned over the contract period.  Therefore, in current practice, a portion of the FHCF premium is booked as unearned at the end of the calendar year, which is consistent with the manner in which the direct premium is earned.  The change in the FHCF contract year creates unintended statutory accounting issues for ceding carriers in 2010, when cedants will be required to account for unearned premiums for the last five months of the 2009-2010 FHCF contract, as well as the entire 2010 FHCF contract premium. It would appear that this accounting treatment would result in a permanent decrease in the ceding insurer’s surplus at year-end 2010, as compared to year-end 2009.    

Colodny Fass is currently working to address the accounting issues related to the amendment to section 215.555, Florida Statutes.  We welcome comments addressing the issue.  In the meantime, we advise you to review the matter and consult with your accounting professionals to determine the appropriate method to account for the change in the FHCF contract year. 

Should you have any questions or would like to discuss this issue, please feel free to contact Colodny Fass.