11 March 2014 Alternative Risk Transfer

Florida bill could offer reinsurers $3bn

A new Florida bill, designed to reduce the level of coverage granted by the state’s catastrophe pool, could mean that an additional $3 billion of business could move into the private reinsurance sector.

The bill is being drafted in the belief that the burgeoning amount of capacity entering the catastrophe reinsurance markets via structures such as insurance-linked securities (ILS) and other fund-based forms of collateralised coverage will increasingly cover catastrophe risks in the state.

Republican Representative Bill Hager’s proposed bill, HB 391, which was first read this week, would allow insurers in the state to choose between the state’s Florida Hurricane Catastrophe Fund (FHCF) or the private reinsurance market.

The bill will focus on the top $3 billion of limits underwritten by the FHCF, potentially reducing limits for the fund's mandatory coverage by the same amount.

According to the proposed bill, “growth in the capital available for private catastrophe reinsurance and reinsurance alternatives such as catastrophe bonds has created an opportunity to transfer additional hurricane risk to the private sector and to reduce the share of Florida hurricane risk borne by the public without destabilising the residential property insurance market”.

If the bill is passed, the levels of coverage available from the Florida Hurricane Catastrophe Fund will remain available as a “transitional option” to minimise market disruptions while additional hurricane risk is transferred from the public sector to the private sector.

However, there are doubts about insurers leaving the fund to chase currently favourable reinsurance rates, which could see homeowners paying higher insurance rates in the future.

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