A.M. Best, Insurers Concerned over Florida’s Catastrophe Fund Capabilities

The Florida Hurricane Catastrophe Fund Advisory Council recently presented its 2008 October bonding estimates, rattling the nerves of insurers in the process.

While David Sampson, president and chief executive officer of the Property Casualty Insurers Association of America, recognizes that the FHCF, a.k.a. the CAT Fund, is the backbone of the state’s property insurance system, he also acknowledged that the current financial crisis plaguing the nation directly impacts the Fund’s ability to pay claims.

“Whatever post-storm costs that the state cannot access in the bond market, taxpayers will be on the hook for through assessments on their property and auto insurance bills,” Sampson said. “Policymakers, consumers and insurers need to work together and reexamine the future of the Florida homeowners insurance market. The first step is to speak openly and honestly about the challenges we face. Ultimately, only reasonable long-term solutions will restore a healthy insurance market in Florida.”

With $742 million in potential liabilities resulting from reopening claims incurred during the 2004 and 2005 Florida hurricane seasons and only $615 million available in the CAT Fund, there is a current $127 million projected shortfall depending on loss development. Jack Nicholson, chief operating officer of the CAT Fund says this is being closely monitored.

Based on the considerable credit market contraction and recently announced revision in the CAT Fund’s claims-paying capacity, A.M. Best Co. is “concerned with the contingent capital nature of the FHCF.” The rating firm previously indicated its concerns regarding the state’s ability to fund all obligations associated with a severe hurricane.

“These concerns were largely based on the contingent capital nature of the FHCF and capital market acceptance of what would likely be one of the largest public debt offerings,” A.M. Best analyst Richard Attanasio said. “The potential liquidity and cash flow issues that might arise from such an event create an additional level of
uncertainty,” he added.

Despite the winding-down of the 2008 hurricane season, Attanasio said it is prudent to re-evaluate these expectations in the assignment of ratings, based on current market conditions.

With the 2007 implementation of Florida’s Temporary Increase in Coverage Limits, the CAT Fund increased its overall exposure considerably. As a result, in February 2007, A.M. Best increased the credit risk factor associated with the CAT Fund. With recent events in the credit markets, these concerns have been increased considerably.
“A.M. Best continues to view catastrophe risk as a primary threat to solvency due to the rapid and unexpected deterioration that can occur,” Attanasio said. “Accordingly, A.M. Best has begun to assess the impact on rated entities’ risk-adjusted capitalization based on the reduction in the potential coverage available from the FHCF (CAT Fund).”

According to A.M. Best, the assessment is based on both the revised claims paying capacity recently released as well as its analytical judgment regarding the amount of capital that could realistically be raised in today’s volatile capital markets.

A.M. Best realizes the CAT Fund’s current financial position including cash on hand and previously arranged pre-event bonding. It also recognizes that not all funding will be required immediately and could conceivably be spread over time.

“However, in the case of a major event, the ability to bond the amount necessary to fund all previous obligations in a timely fashion could be difficult given these challenging economic conditions,” Attanasio said.
While it’s possible that the federal government could intervene via the purchase of the bonds directly or some other form of support in such a severe event, Attanasio says A.M. Best cannot pre-suppose such an action when evaluating individual carriers’ risk-adjusted capital position.

Companies with significant potential gaps in reinsurance coverage and correspondingly inadequate risk-adjusted capitalization will be placed under review with negative implications pending additional discussions with company management regarding improving this key metric, Attanasio said.

“Beyond the immediate term, A.M. Best will continue to evaluate the amount of credit given to the FHCF in the context of both standard and stress-tested risk-adjusted capitalization through its proprietary capital model,” Attanasio said. “This assessment will be based on both the stated claims paying ability of the FHCF as well as A.M. Best’s analytical judgment in terms of capital raising capability. Given the overall importance of the FHCF in Florida-property writers’ overall reinsurance structures and its contingent capital structure, A.M. Best believes this is the most prudent approach in the assignment of its ratings given these historic market dynamics.”

PCI’s Sampson believes the Florida Legislature should take the opportunity now to make homes stronger, families safer and the insurance system more stable.

“We need to assess the realistic capacity of Citizens and the CAT fund,” Sampson said. “If we limit the state’s role as a direct insurer, we take the risk burden off of Florida taxpayers.”