- Florida Hurricane Catastrophe Fund Advisory Council Approves May 2012 Estimated Claims Paying Capacity; Will Review Pre-Event Financing Options
- May 15, 2012
- Law Firm: Colodny Fass Talenfeld Karlinsky Abate Webb P.A. - Fort Lauderdale Office
The Florida Hurricane Catastrophe Fund ("FHCF") Advisory Council ("Council") met in Tallahassee yesterday, May 10, 2012.
After Council Chairman John Auer called the meeting to order, FHCF Chief Operating Officer Dr. Jack Nicholson provided a very brief update on the 2012 FHCF Premium Formula approval. He noted that the formula has been approved by State Board of Administration Trustees.
John Forney of Raymond James and Associates, the FHCF Financial Advisor, presented a draft of the FHCF's May 2012 estimated claims-paying capacity (by law, estimates are given twice a year). The FHCF's total obligations are $17 billion for the mandatory layer of coverage. Only $317 million in Temporary Increase in Coverage Limits was purchased last year. Meanwhile, the FHCF has $17.3 billion of obligation, $8.56 billion in cash on hand and $8.757 in potential bonding needs.
In response to whether claims-paying capacity exists, Mr. Forney cited as an encouraging statistic that California has been able to acquire over $20 billion over a 12-month period. He was optimistic that the FHCF could access its bonding needs. Council Member Don Brown noted that California is able to access large bonding capacity because its assessment base is so large. As a result, Florida may not be able to rely on California's bonding capacity as an accurate indicator, he added.
Based on an average of the senior management estimates, the FHCF's estimated bonding capacity is $7 billion for 0-12 months, with an additional $5 billion for 12-24 months. Including the projected FHCF end-fund balance of $8.56 billion, the total claims-paying capacity over 24 months is $20.56 billion.
Dr. Nicholson added that the purpose of the FHCF is to be a "market stabilization" entity, with the intention of lowering rates. He noted that the FHCF needs to be able to pay claims for a 1-in-100 year event during a 12-month period, preferably within six months. The purpose of this estimate is to give insurers an idea of where the FHCF stands, so they can purchase adequate private reinsurance as needed.
He also noted the current statutory framework requiring a number on estimated capacity is flawed. The capacity has had dramatic fluctuations, sometimes within a six-month period. This makes it difficult for insurers to determine the FHCF's reliability, he said, which is why he believes that full bonding capacity should be $5 to $6.5 billion.
Mr. Brown illucidated potential shortcomings of the FHCF's current situation. For example, the $8.56 billion fund balance could be erased quickly (i.e. with one storm). Suddenly, during his discussion, an anonymous caller participating in the meeting via telephone vehemently challenged the purpose behind Mr. Brown's presentation, suggesting a conflict of interest. Although the caller was asked to identify himself multiple times, he would not do so, and subsequently hung up.
Dr. Nicholson discussed the importance and use of pre-event financing. The Council discussed several pre-event options, including issuing pre-event financing for the full FHCF capacity. There are tax-exempt issues that raise concerns for a large pre-event option.
The Council approved the 2012 post-event estimated claims-paying capacity at $7 billion after a motion for $6.5 billion was not considered because there was no second. Raymond James suggested the $7 billion estimate.
$15.56 billion is the estimated claims-paying capacity that will be published in Florida Administrative Weekly.
Following the approval of the estimated claims-paying ability, Dr. Nicholson facilitated a discussion on the use of pre-event financing, which adds a degree of certainty to pay claims. Chairman Auer supported securing pre-event financing up to market capabilities. A motion was made and passed to allow the FHCF to investigate pre-event options.
Leonard Schulte provided the FHCF Staff report, including a 2012 legislative update, 2012-2013 FHCF Contract Year structure, information about pre-event financing and an exposure examination program update. He noted that HB 5505, which was vetoed by Florida Governor Rick Scott, included a proposal to provide alternative pre-event funding for the FHCF.
The FHCF's exposure examination program is expected to be completed in September 2012. Out of 168 participating companies, 102 of those scheduled for examination comprise over 99 percent of the FHCF's premium. To date, 64 exams have been concluded, accounting for 95 percent of the FHCF premium.
The FHCF Participating Insurers Workshop is scheduled for May 15 and 16 at Disney's Coronado Springs Resort.
The next Council meeting is scheduled via conference call in September to request approval to file notices of proposed rulemaking.