Reinsurance industry sceptical on federal cat fund proposal
Reinsurance leaders have reacted with scepticism to the proposed creation of a federal backstop funding source for state-sponsored reinsurance facilities in the US that could not meet their financial obligations in the future.
Republican representative Dennis Ross has filed the Homeowners Insurance Protection Act that would cover funding shortfalls for state catastrophe funds, such as the Florida Hurricane Catastrophe Fund, in the event of a one-in-200 year disaster.
The bill would also allow other state-sponsored insurance programmes such as the California Earthquake Authority to purchase reinsurance from the new fund.
“When a once-in-a-lifetime disaster strikes, whole communities are lost and people want to rebuild and they want to rebuild quickly,” said Ross in a statement. “The Homeowners Insurance Protection Act will provide a safety net to insurers and markets, allowing them to provide affordable insurance to homeowners and allow Americans to rebuild.”
But Frank Nutter, president of the Reinsurance Association of America (RAA), said the bill was no different to proposals that had been rejected many times by Congress before and would do nothing to address the problem of state-run funds being badly structured or insufficiently capitalised. These problems, he said, would simply be passed to Federal taxpayers.
“It is essentially the same proposal that Congress has rejected for the last decade,” Nutter said. “Florida has a dysfunctional insurance market due to its own practices and policies of underfunding premiums for the state run Florida Citizens and the Cat Fund. The Federal proposal would simply transfer this fiscal situation to Federal taxpayers and encourage other states to do the same.”
He compared the proposed fund with the National Flood Insurance Program, which he said has a debt burden that now exceeds $20 billion. “You wouldn’t want to replicate it that,” Nutter added.
The proposal comes on the back of separate proposals to restructure the Florida Hurricane Catastrophe Fund. The fund provides property insurers with up to $17.5 billion in coverage for a single storm season and another $11 billion for losses from a second storm.
Florida lawmakers are looking at lowering its mandatory annual capacity due to concerns that one major storm could exhaust its resources and leave insurers without further coverage. The fund currently has $8.5 billion in cash and an estimated bonding capacity of $7 billion. This leaves it with a potential shortfall.
As such, it is being proposed that its obligations be reduced in an attempt to ensure it remains financially viable in the long term. This, however, would mean insurers would either have to increase their retentions or buy more reinsurance in the private sector – both things that could cause insurance premiums to increase.
