1

FIorida Hurricane Catastrophe Fund FIorida Hurricane Catastrophe Fund

Governor & Cabinet Briefing Governor & Cabinet Briefing
November 15, 2011
1
;er;iew ;er;iew
I. FIorida's Hurricane En;ironment
II. FIorida's ResidentiaI Property Insurance Market
III. The FIorida Hurricane Catastrophe Fund
-- Purpose and RoIe
IV. Background Discussion - Recent History
V. Current Status of the CAT Fund
VI. Recommendations

I. FIorida's Hurricane En;ironment I. FIorida's Hurricane En;ironment

Hurricanes
Exposure growth
VoIatiIity of risk capitaI

Ways to Get to $1 BiIIion in Losses Ways to Get to $1 BiIIion in Losses

!rivate
Reinsurers
(approximately 100)
FGA
Florida
nsurance
Guaranty
Association Residential
!olicyholders
(6. million risks insured**)
nsurers - 171
(includes Citizens)
FHCF
$1.3 biIIion ($1.1 billion mandatory coverage &
$188. million optional coverage) FHCF !remium
-- about 13% of the residential premium
$1. biIIion residential
premium (estimated*)
II. FIorida ResidentiaI Property II. FIorida ResidentiaI Property
Insurance MarketpIace Insurance MarketpIace
$.16 triIIion of insured residential exposure values
*Based on Florida Office of nsurance Regulation's QUASR Reporting Summary 6/0/011.
**SOURCE: FHCF 011 Ratemaking Formula Report

Pro;ide a stabIe and on-going source of

reimbursement
Pro;ide additionaI insurance capacity
perate efficientIy as a tax-exempt state trust fund
HeIp stabiIize FIorida's economy from the impact
of hurricanes
Risk management tooI
6
III. FIorida Hurricane Catastrophe Fund: III. FIorida Hurricane Catastrophe Fund:
Purpose & RoIe Purpose & RoIe
FIorida Hurricane
Catastrophe Fund
Basic Structure of the CAT Fund Basic Structure of the CAT Fund
Cash Balance
From Reimbursement
!remiums
From Emergency
Assessments
Cash Balance
Cash BaIance
7
IV. Background Discussion: Recent IV. Background Discussion: Recent
History History
During 6, residentiaI property insurance
became a major issue
CS/HB 1A - Passed in a SpeciaI LegisIati;e
Session in January
Expanded CAT Fund Capacity
8
ProbIems in the FinanciaI Markets & the ProbIems in the FinanciaI Markets & the
Impact on the CAT Fund Impact on the CAT Fund
Sub-Prime mortgage crisis
AbiIity to finance CAT Fund capacity has been
ad;erseIy impacted
LegisIation passed in

V. Current Status of the CAT Fund: 11 V. Current Status of the CAT Fund: 11- -1 1
Co;erage Co;erage
CAT Fund Co;erage Update
W Statutory Maximum Limit of Capacity: $ biIIion
-- Mandatory $1B, ptionaI Abo;e $6B, ptionaI BeIow $1B
W Capacity SeIected -- $1.3 biIIion
W Funding of Losses
-- Cash BaIance: $.1 biIIion
-- Bonding Required: $11.1 biIIion
-- Bonding Estimated: $. biIIion
-- PotentiaI ShortfaII: $3.1 biIIion
10
11
FHCF
C
o
-
!
a
y
m
e
n
t
s
From
Reimbursement
!remiums
From Emergency
Assessments
Cash Balance
Optional Coverage (Up to $10M for Certain Companies)
Optional Coverage (TCL)
!re-Event Notes
Basic Structure of the CAT Fund Basic Structure of the CAT Fund
with ptionaI with ptionaI Co;erages Co;erages & Pre & Pre- -E;ent Notes E;ent Notes
11/1 InitiaI Season
Mandatory & ptionaI Co;erage Estimates
11/1 InitiaI Season
Mandatory & ptionaI Co;erage Estimates
$.1 B Projected 11 Year-End Cash BaIance
$1. B FHCF Capacity
(Loss Adjustment Expense is incIuded
in the capacity)
"$1 MiIIion ption"
$.36 B Industry Retention*
Not fficiaI
(For IIIustrati;e
Purposes nIy)
M
a
n
d
a
t
o
r
y

C
o
;
e
r
a
g
e
$1. B
3. Years -
3.%
. Years -
11.%
16. Years -
6.%
$.11 B SeIected by EIigibIe Companies
$.16B
Not Drawn to Scale.
.
$1. B of TICL Co;erage SeIected
COVERAGE SELECTED: $18.389 Billion**
1. Years -
.%
Return Times,
Probabilities, &
Ground Up
Losses
*ndividual company retentions are their share of the industry retention.
** Total potential FHCF coverage $17 B (mandatory coverage), $. B of TCL coverage, and
$. B (up to $10 million optional coverage for select companies).
$. B of TICL Co;erage SeIected
$3. B Pre-E;ent Bonding
Not A;aiIabIe
$.3 B SeIected by EIigibIe Companies
$31. B
$.36 B
TICL Temporary
ncrease
in Coverage
Limit
.
$11.1 B PotentiaI Bonding
SeIected Capacity**
$ . B TICL
$ 1. B FHCF
$ .3 B 1M pt
$ 1.3 B
- .1 B Cash
$ 11.1 B Bonding
. B Limit
-$3.1 B ShortfaII
$1.1 B
1
$. B
1
FinanciaI Markets FinanciaI Markets
U.S. and worId financiaI markets
Changes in the municipaI market since
HistoricaI CIaims HistoricaI CIaims- -Paying Capacity of the Fund Paying Capacity of the Fund
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The substantial increase in Estimated Future Capacity from May 006 to Oct 006 is due predominantly to the change in the coverage requirements of the FHCF's
bonds from 1.0x to 1.x.
() The substantial increase in nitial and Subsequent Season Capacity and decrease in Estimated Future Capacity from Oct 006 to May 007 is due predominantly to
the change in legislation which increased the FHCF's maximum single-season statutory claims-paying capacity from $1.8 billion to $8. billion.
() nitial Season Capacity reflects estimated capacity, including !ost-Event Borrowing Capacity over the next 1 months. Subsequent Season Capacity reflects
projected fund balance only. Any potential borrowing capacity in subsequent season will be used for nitial Season.
$0
$3,000
$6,000
$9,000
$12,000
$15,000
$18,000
$21,000
$24,000
$27,000
$30,000

O
c
t

1
9
9
9

M
a
y

2
0
0
0

O
c
t

2
0
0
0

M
a
y

2
0
0
1

O
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2
0
0
1

M
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y

2
0
0
2

O
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2
0
0
2

M
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2
0
0
3

O
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2
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3

M
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2
0
0
4

O
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2
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4

M
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2
0
0
5

O
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2
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0
5

M
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2
0
0
6

O
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2
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0
6

(
1
)

M
a
y

2
0
0
7

(
2
)
O
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2
0
0
7
M
a
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2
0
0
8

O
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2
0
0
6

(
3
)
(
i
n

m
i
l
l
i
o
n
s
)
Initial Season Capacity
Subsequent Season Capacity
Estimated Future Capacity
Reduction
in Capacity
3-6
AbIe to FuIIy
Fund
Subsequent
Seasons

1
O
c
t

2
0
0
8

(
3
)
$36
$28
$43 $43
$60 $39
$73 $72
$63
$73
$33
$33
$33 $33
$181*
$30 $80
$110
$139
$94
$113
$80
514S
$133
542
532
$26
566
$07
$00
$30
$100
$130
$200
$230
$300
$330
May

08 CcL

08** May

09 CcL

09 May

10 CcL

10 May

11 CcL

11
L
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(
5

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8
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)
Lst|mated C|a|ms ay|ng Capac|ty and Lxcess]Shortfa|| to otent|a| Max|mum Needs
ro[ecLed lund 8alance reLvenL noLes Senlor Managers LsLlmaLed osLLvenL 8ondlng CapaclLy ShorLfall Surplus
5292
5232
5184
52SS
5188
5186
5278
528
* osLevenL LheoreLlcal capaclLy ** lncludes $48 puL opLlon
S2 Shortfa|| 101 Shortfa|| 3S Lxcess 176 Shortfa||
1
Continued FinanciaI Market VoIatiIity: Impact Continued FinanciaI Market VoIatiIity: Impact
on the CAT Fund & PotentiaI Impact on on the CAT Fund & PotentiaI Impact on
Participating Insurers Participating Insurers
LegaI Requirement: Estimated CIaims Paying
Capacity in May and ctober (for aII reinsurance
and reguIatory purposes)
VoIatiIity in Bonding Estimates
PotentiaI Impact on Participating Insurers
16
17
ProbIems ProbIems
PotentiaI insurer insoI;encies
Growth of Citizens
Cost of pri;ate reinsurance after an e;ent
A;aiIabiIity of pri;ate reinsurance capacity after an
e;ent
Lack of CAT Fund subsequent season capacity and
the impact on consumers
Impact on FIorida's economy
VI. Recommendations: VI. Recommendations:
CAT Fund needs to be "right sized"
GoaI is to reIy more on cash resources
Funding with post-e;ent re;enue bonds Iimited to $-$ biIIion
Structured to stabiIize the insurance market and economy
Reduce emergency assessments
Pre-e;ent financing
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ProposaI for FHCF LegisIati;e Changes ProposaI for FHCF LegisIati;e Changes
1. Reducing mandatory co;erage $1 B to $1 B
. Increasing the co-payments 1% to %
3. Increasing retention (deductibIe) from $. B to $ B
. Increasing the cash buiId-up factor by % per year untiI %
. Reducing emergency assessment caps from 6%/1% to %/%
6. Terminating the Temporary Increase in Co;erage Limit (TICL)
co;erage
. Name change for the finance corporation
. A phased in approach or immediate reduction in capacity
1
Not Drawn to Scale
Not Official
For Illustrative Purposes
Only
Restructuring the FHCF Restructuring the FHCF
$17B
Lowering Statutory Limits to
'Right Size" the FHCF
$1.B

0
%
C
o
-
!
a
y
m
e
n
t
s
$1B

%
C
o
-
!
a
y
m
e
n
t
s
$1B
2012-13
2015-16
2013-14
2014-15
$8.6B* $8.B* $8B
$7.7
#0903943
%e Retention is projected to grow at 4% in tese examples.
Less
Bonding
Required
More Cash Funding

o
n
d
i
n
g
C
a
s

ssessment Caps
6%/10%
ssessment Caps
6%/10%
ssessment Caps
6%/10%
ssessment Caps
5%/8%
Cas uild
Up 25% --
continues
5% per year
for anoter
5 years to
50%.
0
Estimated Estimated Increase in ResidentiaI Premium Increase in ResidentiaI Premium
Cost from a Reduction in CAT Fund Capacity Cost from a Reduction in CAT Fund Capacity
Statutory changes shouId be made to refIect the reaIity of the
marketpIace so as to a;oid insurer insoI;encies and reduce
risk for the State
Capacity reduction is expected to resuIt in a 1% "a;erage"
increase in premiums o;er years*
Expected impact per year: .3% in 13, .% in 1, 3.%
in 1, and .% in 16, 1, and 1**
Further study needs to be done to determine the potentiaI
rate impact by territory, etc.
Pri;ate reinsurance industry can easiIy absorb the capacity
according to the Reinsurance Association of America (RAA)
1 **f the CAT Fund's capacity is impacted earlier by the financial market, the rate impact would
be expected to occur sooner
* Based on a preliminary analysis.

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