News & Updates


Florida hurricane catastrophe fund under scrutiny


Rating agencies are watching how Florida insurers set up reinsurance plans for the 2009 hurricane season.


The two rating agencies that track Florida-based insurers are closely monitoring the state’s hurricane catastrophe fund over the next few weeks. 

A.M. Best and Demotech are checking with the Florida insurers whose health they rate to evaluate how they are setting up their backup insurance programs for the 2009 hurricane season. That’s because many of these insurers rely heavily on the coverage from the Florida Hurricane Catastrophe Fund, which has said it would not be able to raise the cash it needs to cover potential losses.

Back in November, A.M. Best, which rates startup insurers, placed several companies on watch for a possible downgrade out of concern for their levels of capital and whether the catastrophe fund had enough money to pay future claims. The insurers escaped downgrade by proving they had enough capital.

Many companies have a June 1 deadline for deciding how much reinsurance they will buy from the state fund or from private companies.

Demotech put the 59 Florida insurers it rates on notice last November that it was concerned about the ability of the catastrophe fund to cover all its potential losses. On Monday, it told the companies that insufficient reinsurance programs could affect their ratings — either a downgrade or withdrawal of their ratings.

Based on responses from the insurers it follows, 46 will turn to private reinsurers for additional coverage if they can’t buy it from the Florida fund. Fourteen companies are writing less new coverage and renewing fewer policies to reduce their exposure.

Three insurers are considering raising more capital from investors, while 13 hope to secure letters of credit.

Barry Koestler, senior financial analyst and Demotech’s chief ratings officer, said, “It’s still a fluid situation because companies are still negotiating their reinsurance programs.”

The Florida catastrophe fund sells lower-cost backup coverage to insurers operating in the state. This reinsurance helps those companies cover some of the losses they could face if a massive storm hits the state, allowing them to preserve their capital.

The fund has told state officials that it wouldn’t be able to raise all the cash it would need after a storm to meet its obligations this year because of the crisis in the credit markets. The fund has nearly $8 billion now.

But it can potentially sell up to $29 billion of backup insurance to insurers for the 2009 hurricane season, which starts June 1. So it faces a huge gap to fill with borrowed dollars.

This week, U.S. Sen. Bill Nelson told state lawmakers he will introduce a bill to provide a federal guarantee to any private loans made to the Florida catastrophe fund or any state catastrophe fund. He said such a guarantee might be easier to set up than a direct line of credit from the feds, given the current economic environment.

Gov. Charlie Crist and Insurance Commissioner Kevin McCarty have made trips to Washington, D.C., in recent weeks to lobby federal officials to provide some type of assistance for the Florida CAT fund.

Bills currently in the state Legislature could reduce the size of the catastrophe fund. A pair of bills proposes creating a statewide hurricane insurance pool. Neither has gotten final approval yet.

”We have always been concerned about the amount of dollars the CAT fund has contemplated raising when the markets were good. Now we’re waiting to see what comes out of this session,” said Anthony Diodato, an analyst at A.M. Best.