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Florida Hurricane Catastrophe Fund

Florida Hurricane Catastrophe Fund. The World Bank Session IV: Building National Risk Transfer Programs International Experience. June 2, 2003. What is the FHCF?.

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Florida Hurricane Catastrophe Fund

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  1. Florida Hurricane Catastrophe Fund The World Bank Session IV: Building National Risk Transfer Programs International Experience • June 2, 2003

  2. What is the FHCF? • State Tax-Exempt Trust Fund created by the Florida Legislature for the purpose of providing a stable and ongoing source of reimbursement to insurers for a portion of their catastrophic hurricane losses in order to provide additional insurance capacity for the state. • A state run reinsurance program. • Mandatory for insurers writing residential property insurance in Florida.

  3. Florida Property Insurance Marketplace Private Reinsurers (approximately 140) FHCF $498.5 million FHCF Premium (about 13.5% of residential premium) FIGA Florida Insurance Guarantee Association Insurers - 254 (includes Citizens) $3.7 billion residential premium (estimated) Residential Policyholders (5.8 million risks insured)

  4. Benefits of the FHCF • Provides reinsurance at one-fourth to one-third the cost of private reinsurance. • Helps keeps residential rates down. • Helps stabilize the market. • Helps keep business out of the residual market.

  5. Example: Rate-on-Line Comparisons of The Private Reinsurance Market versus the FHCF 7% - 8% ROL 4.5% ROL $11 Billion Capacity FHCF 12% - 15% ROL $1.389 B Industry Co-Payments 25% - 30% ROL $4.058 B Industry Aggregate Retention *Return time not adjusted for premium/exposure growth. Not Drawn to scale.

  6. Population Growth of Florida Year Population 1970 6,789,443 1980 9,746,324 1990 12,937,926 2000 15,982,378* 2010 (Projected) 19,700,000 135% 32.7% 23.5% NOTE: Florida is growing at the rate of about 3 million people per decade. This number of people is represented by the entire populations of Arkansas, Iowa, Kansas, Mississippi or Utah. As of April 2001, the Florida population was 16,330,601. * Average total growth per day 833 people.

  7. Growth In FHCF Residential Exposure 47% *Excludes Section II (Excess Insurance)

  8. The Threat of Hurricanes In the last 100 years: 904 Tropical Storms 522 Hurricanes 56 Hurricanes making landfall in Florida (every other year on average) 24 Hurricanes Category 3 (Winds> 111mph) or higher (one every 4 years on average) The Average Annual Cost of Residential Insured Hurricane Damage is $1.9 Billion.

  9. 7 4 10 6 5 1 Over 5 million people and $321.8 billion of exposure values (29% of the statewide exposure) are located in three of the most vulnerable counties. 8 2 9 3

  10. 2002 Exposure Concentration by County ($ billions) $321.8 $346.3

  11. 11 Concentration of Residential Exposures (5 Digit Zip Codes) Number of 5 Digit Zip Codes with greater than: TOTAL $1 billion of exposure – 440 $2 billion of exposure -- 177 $3 billion of exposure -- 55 $4 billion of exposure -- 15 $5 billion of exposure -- 3 $7 billion of exposure -- 1* *Zip Code 33480 in Palm Beach County is 4.1 square miles and has an exposure of $7.0 Billion

  12. 12 Concentration of Residential Exposures (5 Digit Zip Codes in Dade, Broward, and Palm Beach Counties) Number of 5 Digit Zip Codes with greater than: TOTALDadeBrowardPalm Beach $1 billion of exposure – 125 38 47 40 $2 billion of exposure -- 68 17 26 25 $3 billion of exposure -- 24 6 6 12 $4 billion of exposure -- 9 2 0 7 $5 billion of exposure -- 2 0 0 2 $7 billion of exposure -- 1 0 0 1

  13. FHCF Background • Created in the November 1993 Special Legislative Session. • Administered by the State Board of Administration of Florida. • Tax Exempt State Trust Fund. • Office of Insurance Regulation in the Department of Financial Services enforces.

  14. Reasons for the Creation of the FHCF • Following Hurricane Andrew, reinsurance capacity contracted. • Insurers attempted (or threatened) to withdraw from the state and/or cancel or nonrenew policyholders in large numbers. • State action was needed to stabilize the marketplace. • A state program was created to add insurance capacity.

  15. Oversight of the FHCF (Beginning January 2003 – Government Reorganization) • State Board of Administration of Florida • Governor • Attorney General • Chief Financial Officer • Executive Director (Coleman Stipanovich) • Senior FHCF Officer (Jack Nicholson) • Nine (9) member Advisory Council – to provide the SBA with advice and information

  16. How the FHCF Operates • SBA required to enter into reimbursement contracts with insurers writing “covered policies.” • Covered policies – residential policies covering structures or contents including policies covering apartments and condominiums. • Participating insurers – those authorized insurers and JUAs writing “covered policies.” • Insurers are required to report exposures.

  17. How the FHCF Operates –continued • Premiums are paid in installments on 8/1, 10/1, and 12/1. • Actuarially indicated rates are based on location, construction type, and deductible level; credits for mitigation; rates include expenses and mitigation funding. • Computer hurricane models are used. • Covered event – any one storm declared to be a hurricane by the National Hurricane Center which causes losses in Florida.

  18. How the FHCF Operates –continued • Losses – reported by 12/31 and quarterly thereafter. • Loss adjustment expenses (LAE) – flat 5% of reimbursable losses. • Additional living expense (ALE) – new coverage in 2002. • Reimbursement coverage is for 45%, 75%, or 90% of covered losses above the retention.

  19. How the FHCF Operates –continued • Each company’s retention is based on a multiple of its FHCF premium. • Each company’s expected payout is equal to the insurer’s share of the FHCF’s capacity. • If premiums collected are insufficient to pay losses, revenue bonds are issued. • Emergency assessment – all P&C insurers excluding WC and A&H, up to 2% - 4% of gross direct written premium. • Additional 2% is available for subsequent season coverage (4% limitation in one year, 6% aggregate).

  20. How the FHCF Operates –continued • The state of Florida is not liable for any shortfall. • The FHCF is only liable to the extent of its assets and borrowing capacity. • Currently, the maximum limit of liability of the FHCF is $11 billion. • Mitigation – the Legislature appropriates a minimum of $10 million annually or up to 35% of investment income unless the actuarial soundness is jeopardized.

  21. Current Operational and Financial Status • Year-end fund balance for 2002 – $4.921 billion • Projected premiums for 2002 – $498.5 million • $19 million for mitigation projects for 2002 • Potential emergency assessments $767.8 million at 4% maximum • Revenue to service debt – $1.265 billion • Bonding capacity – $6.1 billion (tax-exempt debt) estimate that only 2.05% assessment will be needed producing revenue of $394 million • Total capacity – $11 billion • Subsequent season capacity about $10.8 billion

  22. Participating Insurers • 254 Insurers (for 2002/2003 contract year) • FHCF Potential Liabilities • Top 4 represent 50% • Top 17 represent 75% • Top 45 represent 90% • Top 66 represent 95% • Top 112 (44% of the insurers) represent 99% • Remaining 142 insurers (56% of the insurers) represent less than 1% of the FHCF’s potential liabilities

  23. Coverage Selections Based on FHCF Premium Data as of 1/2/03

  24. Initial Season Capacity For the 2002 Hurricane Season (Estimates Updated 1/6/03) 45 year return time* Emergency Assessment Base of $768 million $11 Billion Capacity (only $394 million needed) $16.447 B Overall Industry Loss $6.079 B Bonding Capacity (Includes Loss Adjustment Expense) $1.389 B Industry Co-Payments 2.05% $4.921 B Projected 2002 Year-end Cash Balance $4.058 B Industry Aggregate Retention *Return time not adjusted for premium/exposure growth. Not Drawn to scale.

  25. 2003 Subsequent Season Capacity (based on $11 billion of capacity being used for the 2002 hurricane season; estimates updated 1/6/03) 44 year return time* Emergency Assessment Base of $768 million ($758 million needed) $10.823 Billion Capacity $16.587 B Overall Industry Loss $10.330 B Bonding Capacity (Includes Loss Adjustment Expense) 3.95% $1.367 B Industry Co-Payments $493 M Projected Year-end Cash Balance $4.397 B Aggregate Industry Retention Not Drawn to scale. *Return time not adjusted for premium/exposure growth.

  26. FHCF Coverage* Payout Multiple – 22.06 Retention Multiples – 8.03106, 9.63727, 16.06212 Expected Payout Insurers have three coverage options 45%, 75%, or 90% FHCF 22.06 x FHCF Premium 10% 90% coverage Retention 8.03106 X FHCF Premium *Not drawn to scale

  27. FHCF Coverage Example*For the 2002 Hurricane Season FHCF Coverage option 90% $22,060,000 Payout 10% 90% coverage Retention $8,031,060 $1,000,000 FHCF Premium *Not drawn to scale.

  28. FHCF Bonding Program • Creation of legal structure: public benefits corporation (FHCF Finance Corporation) • Supreme Court validation of bonds (up to $10 B) • Development of financing structure and legal documents • Obtained credit ratings: A1/A+/A+ ( Moody’s, S&P, and Fitch) • IRS private letter ruling to issue tax-exempt debt • Team of underwriters, financial advisor, & bond counsel in place

  29. Historical Capacity of the Fund

  30. FHCF StructureHistorical & Projected Growth of FHCF Capacity & Assessments*(Current FHCF Statute with $11 billion limit, 4% one year, 6% Aggregate)Based on October 2002 yield curve Today Millions $14,915 $4,396 $11,000 6.0% 4.0% $8,317 3.53% 2.55% .98% *Based on various actuarial assumptions. Subject to interest rate volatility. Assumes no loss scenario. These numbers are for illustration purposes and should not be relied on since the underlying assumptions are subject to change.

  31. Summary • The FHCF is a mandatory state operated reinsurance program. • The FHCF is tax-exempt as a state entity and can issue tax-exempt debt. • Provides $11 billion of reinsurance capacity to the state of Florida. • Financed by reinsurance premiums paid by participating residential property insurers. • Premiums are based on insurer’s exposure (insured values subject to hurricane loss) in the state. • If the cash balance is not sufficient to pay losses, bonding is required. • The bonds are financed by emergency assessments on all property & casualty lines of business except workers’ compensation.

  32. 32 Contact Information • Jack Nicholson – Senior FHCF Officer • Telephone: (850) 413-1340 • Fax: (850) 413-1344 • E-Mail: nicholson_jack@fsba.state.fl.us • Website: http://www.fsba.state.fl.us/fhcf • Address: Florida Hurricane Catastrophe Fund • State Board of Administration of Florida • 1801 Hermitage Boulevard • Tallahassee, Florida 32308

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