“Government Insurers Study Note,” CAS Study Note, May 2006 – W
Florida Hurricane Catastrophe Fund – started in 1993 after Hurricane Andrew.
All private insurers that insure residential property in the state are required to participate (except for reinsurance and E&S).
Covered: Contents, additional living expense.
Not covered: fair rental value, loss of use, business interruption.
Insurer retention = company “multiple” (determined by FHCF) * reimbursement premium (amt company contributes to the fund). The “multiple” = projected max claim paying capacity of FHCF (currently $15B) divided by estimated FHCH premium (currently $708M). Reimbursement premiums based on actuarial indications by zip code, deductible, construction, type of cvg, etc.
FHCF pays claims from the fund balance, reinsurance purchased by the fund, and from revenue bonds secured by insurer premiums. They also pay costs of getting reinsurance, debt service on revenue bonds, admin costs, and mitigation program costs. About $10M a year goes to improve hurricane preparedness, wind resistance of buildings, and education.
The FHCF served to stabilize the FL property insurance market until 2004 & 2005 when they got hit by lots of hurricanes, and the fund dropped to $6.1B in 2004 and $3.1B in 2005. Previously, the fund increased about $600M a year. If FHCF can’t meet this need, private reinsurance would probably not assume the exposure w/o a significant increase in price.
It appears that this program is a successful cooperation between govt and private insurers.
California Earthquake Authority – started in 1996 after Northridge EQ.
CA requires all insurers to offer EQ cvg, but after Northridge in 1994, they started non-renewing and not writing new policies.
CEA established in 1996. It doesn’t receive funds from or contributes premium into the state general fund. They also aren’t protected by CA Ins Guaranty Assoc. CA can’t help to pay claims if CEA goes insolvent, but the State Treasurer may sell bonds to fund the CEA.
An insurer can choose to participate in the program. (Currently there are 18 participants that provide initial capital.)
CEA can buy reinsurance, enter into capital market contracts, and issue bonds.
CEA is required to hold $350M capital. They can assess the insurers if there’s a shortfall.
The CEA can set aside funds to establish an EQ Loss Mitigation Fund.
CEA “issues” about 2/3 of CA EQ policies.
Rates consider: location, soil, construction, age, presence of EQ hazard reduction factors, etc.
The CEA has successfully provided protection by allowing private insurers to provide coverage.