Cat Fund announces claims capacity
Those property insurance companies that haven’t purchased reinsurance for the upcoming hurricane season have just nine days left in a market that is still described as hard, with some companies struggling to find available, affordable reinsurance needed to maintain their policy counts. The Citizens Property Insurance Board of Governors, in its Tuesday, May 16 meeting, discussed Citizens 2023-2024 risk transfer. Citizens originally budgeted $506 million for Florida Hurricane Catastrophe Fund (Cat Fund) premium and $725 million for private reinsurance. In a previous meeting, the Board questioned this expense for private reinsurance, with the Chairman challenging the return on investment of the expenditure. The material (which can be viewed here) presented at last week’s Board meeting indicates a lower risk transfer budget amount of $675 million for private reinsurance costs that includes its spend of $61 million for the Lightning Re industry loss catastrophe bond it sponsored in March. The $675 million is comprised of $300 million for the Coastal account and $375 million for the Personal Lines account.
Jennifer Montero. Courtesy, Citizens Property Insurance Corp.
Citizens is working diligently to attempt to purchase $1.9 billion in private reinsurance for the Coastal Account at an average rate on line of 11% for their total reinsurance tower of $2.75 billion. For the Personal Lines account, Citizens is attempting to purchase an additional $2.094 billion in private reinsurance at an average rate on line of 12.8% for their $2.919 billion reinsurance tower. Citizens CFO Jennifer Montero is an amazing finance professional leading the discussions and negotiations. Montero said at the meeting, “We’re still in the market and the 2023 capital markets cat bond, Everglades Re, is in the same layer as the traditional. So that allows us to leverage the two against each other, and see which ones we can get the most coverage for at the best pricing. We’re still collecting quotes and modelling different scenarios to achieve the most effective pricing and capacity.”
By all accounts, the reinsurance market is experiencing steep price increases with Florida insurance company purchasers “experiencing rate increases of approximately 30 to 50%. Pricing indications for non-Florida risk is up 10 to 20%,” according to Montero, and she went on to explain, “This (reinsurers charging more) is primarily due to the increased scrutiny on credit and risk, increased costs of capital, macro-level stress in the financial markets and alternative investment opportunities.”
If Citizens is able to purchase these high limits of private reinsurance at their target rates on line, the risk of an assessment in the event of a 1-in-100 year event is still imminent. According to the figures presented to the Board of Governors, a 1-in-100 year event will cost Citizens $2.5 billion in surplus and require an assessment of $3.25 billion. And as our reinsurance expert readers know, a shortfall in the reinsurance placement will only increase the amount of an assessment. Citizens continues to grow policy count by about 6,600 policies per week and now stands at 1.28 million policies.
The Citizens board signed off for staff to proceed with both the catastrophe bond and reinsurance placements, within the $675 million full-year risk transfer budget for 2023. All eyes are on June 1 to see if the markets cooperate with Citizens ideas, requests, and needs.
The next day on May 17, the Florida Hurricane Cat Fund (Cat Fund) Advisory Council approved the estimated May 2023 Claims Paying Capacity report presented by Cat Fund staff and its financial advisors. The Cat Fund raised yet again its retention for the 2023-2024 season from $8.5 billion to $9.1 billion. The statutory $17 billion stays constant.
The report indicated that the Cat Fund will have to bond for at least $9.8 billion for it to reach its $17 billion limit, yet the Cat Fund’s financial team believes, in the current bond arena, the Cat Fund can only bond for $8.6 billion. The Cat Fund’s assessment base is $72.6 billion and has doubled in the last 10 years. This strong financial resource can raise billions in bond debt service with a policyholder assessment of 2.32% over 10 years or 1.33% over 30 years for the 2023-2024 season should the need arise.
The report noted that the claims paying estimate includes the Cat Fund’s $19 billion it has reserved to pay the estimated claims from Hurricanes Irma ($7.8 billion), Michael ($1.45 billion), and Ian ($10 billion), with Hurricane Irma’s and Hurricane Michael’s Cat Fund claims submission deadline (known as a commutation) of June 2023 and June 2024, respectively.
All eyes are on the Cat Fund’s Hurricane Ian exposure. The Ian proof of loss reports earlier this year for all carriers totaled approximately $6 billion. If that figure holds, the $10 billion Cat Fund estimate should be revised leading to more positive news.
LMA Newsletter of 5-22-23
