All eyes on Florida

US state's plans could create opportunities for ILS market

Florida PicFlorida is a major beneficiary of the burgeoning insurance linked securities industry, which accounts for a hefty slice of reinsurance coverage there. So it is no surprise that the industry’s eyes were on the Sunshine State this week as it played host to the 15th Anniversary Windstorm Insurance Conference.

But there were additional reasons to focus on the Orlando gathering this year, as it was rife with talk about events taking place in the state that could provide significant opportunities for alternative reinsurance market expansion.

Florida is shaking up its state insurance by creating a clearinghouse to drive more private competition and by planning to invest in private reinsurance through its Florida Hurricane Catastrophe Fund for the first time to the tune of more than $1 billion, with a significant portion likely to go to the alternative side of the industry.

Florida state has a stake in the insurance market through the government-owned insurance companies, Citizens and the Florida Hurricane Catastrophe Fund. State involvement began following Hurricane Andrew, which in 1992 caused $26.5 billion damage and led to 11 insurance firms going bankrupt. As a result, surviving insurance companies began limiting the number of high-risk policies they wrote, leaving many people along the Florida coast unable to insure their homes.

The state moved in to fill this gap, creating the Florida Hurricane Catastrophe Fund, which provides reimbursements to insurers for a portion of their catastrophic hurricane losses. It also launched the Florida Residential Property and Casualty Joint Underwriting Association and the Florida Windstorm Underwriting Association, which later merged to become the Citizens Property Insurance Corporation (Citizens).

Citizens was originally designed as an insurance company of last resort, but it has become much more than this and in fact provides insurance for a large proportion of homes in Florida. It buys both catastrophe bonds and reinsurance.

All this points to a huge pool of risk that the reinsurance industry could potentially cover and which the state is opening up to the private sector by purchasing private reinsurance for the Florida Hurricane Catastrophe Fund for the first time. Its initial investment is likely to be between $1 billion and $1.5 billion according to reports and is meant to reduce the fund’s reliance on taxpayer-backed funding.

This is likely to mean new business for the insurance linked securities industry, after Jack Nicholson, the Florida Hurricane Catastrophe Fund’s chief operating officer, said at a recent ILS summit in Orlando that he favoured using catastrophe bonds and collateralised reinsurance to cover the fund. In addition to this, a property insurance clearinghouse was launched in the state on January 27th, which allows select private companies to compete with Citizens for insurance policies.

This will mean applicants for cover from state-sponsored Citizens Property Insurance first go through a clearinghouse that allows private insurers to offer them coverage. The clearinghouse was created by the 2013 Florida legislature to reduce the state’s exposure to insurance risk and means Citizens can only provide coverage if a private market offer is not available or if the rate is more than 15% higher than Citizens’ premium rate.

According to Fitch Ratings, the effect of this will be to “shift business to private insurers who use greater levels of private market reinsurance protection, which has the potential to increase demand.”

Fitch added that “with more specialist property insurers taking on more Florida risk in hurricane peak zones we may see more ceded to the capital markets through the use of catastrophe bonds and other more efficient non-traditional reinsurance structures in the future.”

So this move to reduce the size of Citizens is also likely to open up a new avenue of business for insurance linked securities. On top of this, eyes are on Florida because of the June renewals. Unlike most of the insurance industry, for which renewals come in January, in Florida they are on June 1st.

January renewals saw pricing drops across the board as did Florida’s June renewals last year. The question now is where there will be further price reductions in Florida this coming June and, if so, by how much.

Posted: Monday, February 3rd, 2014