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FL Hurricane Cat Fund COO: Private Market Needs 'More Skin in the Game'

Source: A.M. Best

Posted on 17 Aug 2011

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The Florida Hurricane Catastrophe Fund may be unable to cover all of its losses in the event of a major catastrophe — unless significant changes are made to the cat fund — according to fund Chief Operating Officer Jack Nicholson. That's why Nicholson has begun circulating draft legislation, which he said would help put the fund on more solid financial footing.

Among the changes included in the draft legislation are reducing the size of the government-run reinsurer's "mandatory" layer, requiring insurers participating in the fund to pay more, decreasing special taxes the fund might impose on Floridians, and ending the fund's never-funded temporary increase in coverage or TICL layer.

The cat fund is a tax-exempt state trust fund, which provides reinsurance protection to insurance companies that suffer losses as a result of a severe hurricane.

The fund has a mandatory coverage layer of $17 billion, which Nicholson's proposal would reduce to $12 billion by the 2015 contract year. The draft legislation includes provisions that would allow for increases after the fund demonstrates it can fully fund its single-season capacity and its second-season capacity.

Nicholson said his proposal would also seek to have the private market "put more skin in the game" by increasing co-pays from the current level of 10% over the next three years. For the 2013 contract year, the maximum available coverage percentage would be 85%; for the 2014 contract year, the maximum available percentage would go to 80%; and for the 2015 and subsequent contract years, maximum available percentage would go down to 75%.

"We would like to be able to say to the legislature that we can pay 100% of our losses, regardless of what happens. Right now, we can't honestly say that we can," Nicholson said. "These changes would move us much closer to that goal."

Nicholson said it is essential for more private market reinsurers to help bear some of the cat fund's load because the fund is being asked to do things for which it was never designed.

Nicholson said during the economic boom of 2007, lawmakers expanded the role played by the fund to help lower rates. That became a major problem when the mortgage crisis hit, because it caused the fund's debt burden to explode, he said.

"The two markets each have their own role to play. The private sector should play a completing role in terms of capacity that the fund can't support. And our role is to provide stability to the market," Nicholson said. "When those roles began to overlap, there were serious problems."