Property Insurance: General

Senate Banking & Insurance Committee interim study, September 2001: Achieving Tax-Exempt Status and Efficiencies of Operations for Florida's Residual Market Property Insurers

Achieving Tax Exempt Status for Fla Residual Markets, Summary


Updated on September 18, 2009

Additional information is available from the Cat Fund Internet site through this link:
Florida Hurricane Catastrophe Fund

Florida residential insured property exposure totaled $2.1 trillion at the end of 2008.

There were 6.389 million residential risks, including 4.5 million single-family homes.

The Florida Hurricane Catastrophe Fund was described years ago by its highly-respected chief operating officer, Jack Nicholson, as “the backbone” of the Florida property insurance system.

The Cat Fund helps insure this $2.1 trillion in exposure and 6.4 million risks. It is the largest source in Florida of “catastrophe reinsurance,” which pays a significant portion of claims from medium and large hurricanes. It has approximately 50 percent of the hurricane exposure in Florida and is one of the largest hurricane insurers in the world. It provides coverage in quantities often unavailable from private reinsurers in London, Zurich and Bermuda and at significantly lower
premiums, producing savings in overall property insurance premiums for Florida citizens.

The Cat Fund responded quickly and totally during the unprecedented four-hurricane seasons of 2004 and 2005, paying $9 billion to Citizens Property Insurance Corporation and private insurers, which guaranteed in turn, payment of claims to victims of the eight storms. The largest event was Hurricane Wilma. Cat Fund reimbursements for Wilma losses are continuing to grow, but are currently projected at $5.2 billion.

The Florida Legislature dramatically expanded the FHCF during a January 2007 special session. It reacted to the Cat Fund’s successful performance during the 2004 and 2005 hurricane seasons and gigantic rate increases from Citizens Property and private insurers in 2006 which became the number one issue in that fall’s statewide elections. Catastrophe reinsurance to be offered by the Cat Fund was expanded from $16 billion to an unprecedented $28 billion, through creation of the Temporary Increase in Limits Program (TICL). Most of the money was to be raised from post-hurricane, tax-exempt bonds sold on the New York financial markets.

The FHCF Advisory Council confirmed on October 14, 2008 what many insurance industry experts had been worried about for nearly two years - that because of a national economic meltdown triggered by the sub-prime lending crisis, the Cat Fund could not raise $28 billion or even come close. As the Advisory Council concluded in its report, “Given the state of the financial markets and the FHCF’s senior managing underwriters’ estimate of current borrowing capacity, the FHCF has an estimated loss reimbursement capacity of $11.786 billion over the next six months and $13.286 billion over the next 12 months.” The Senate Banking & Insurance Committee painted an even bleaker picture last December, saying the potential shortfall was up to $19 billion. These reports were shocking in light of how close Hurricane Ike had come to striking Homestead and Miami as a category 3 or 4 storm in September.

The Cat Fund Advisory Council is describing a significantly improved situation for the 2009 hurricane season, although a huge potential deficit remains. The council announced June 17 estimated loss reimbursement capacity of $16 billion. There is a potential $1.2 billion shortfall in the $17.2 billion traditional Cat Fund program which would be activated partially or totally by a major hurricane season - down from $6.7 billion projected by Senate Banking & Insurance last December. There is a $5.6 billion shortfall in TICL, which would be triggered after the basic coverage is deleted by something like a Hurricane Katrina striking Miami. The 2009 Legislature did begin a phase-out of TICL and authorize insurers to buy private reinsurance to replace or back up Cat Fund TICL reinsurance during a five-year transition period. Most private insurers chose not to buy TICL this year.

Cat Fund Enters 2009 Hurricane Season in Much Better Shape Than Last Year

The Cat Fund has $7.8 billion to pay claims from the 2009 hurricane season before it would have to sell additional bonds. That is only about $1 billion less than it paid out in all of 2004 and 2005. “You are not out of money when you have $7.8 billion,” FHCF COO Nicholson said during the facility’s annual Participating Insurers Conference. This liquidity, plus the improving New York markets for government-issued, tax-exempt bonds, will enable the Cat Fund to handle something substantially greater than a repeat of 2004/2005. The hurricanes which have barely dodged Florida the last few years, including Ike last fall, would generate massive losses, however. There will be concern in some quarters until the Cat Fund has 100 percent funded the mandatory layer and financed at least a portion of TICL.

The capacity estimate of  $16 billion includes a projection of $8 billion in tax-exempt, post-hurricane debt that could be issued on the New York markets. Last October, the Cat Fund Advisory Council projected only $3 billion in post-event bonding and there was skepticism that even this goal could be met. As noted above, the Cat Fund still has a $1.2 billion deficit in
the basic program. Joe Petrelli, president of  Demotech, a major rating agency for Florida domestic insurers, concluded that is close enough and announced Demotech will provide 100 percent credit for reinsurance purchased by domestics from the Cat Fund’s mandatory program

TICL is unfunded, but this program is less than half its size last year. The Legislature reduced from $12 billion to $10 billion the amount of TICL which could be sold by the Cat Fund this hurricane season. In addition, rates for TICL were doubled and private insurers were given greater flexibility to buy TICL-comparable coverage from the worldwide private reinsurance market. Of the $10 billion TICL program available this year, only $5.6 billion was sold - with $4.4 billion left untouched. Citizens Property Insurance Corporation purchased $3.5 billion,  63 percent of TICL coverage sold. Citizens has the ability to levy statewide assessments and issue bonds and apparently is confident it could get by until the Cat Fund was able to deliver the Citizens TICL allotment.

The Cat Fund’s $7.8 billion in liquidity is produced by $4.5 billion in cash projected at the end of this year, plus $3.5 billion from bonds issued in 2007. This is one of the strongest liquidity positions in the 16-year history of the Cat Fund.

"It would take a $12 billion event to exhaust the Cat Fund's cash balance. This has a probability of about 7 percent, or an event occurring every 14.3 years," Nicholson says. "It would take a $31.31 billion hurricane to exhaust the total capacity actually selected, $23.173 billion. This size event has a 2.4 percent probability of occurring, or represents an event occurring around once every 42 years. It would take an event occurring around once every nine years to trigger the Cat Fund, although incidential triggering could occur with greater frequency since a company triggers by having a loss that exceeds its share of the $7.223 billion industry retention. The FHCF's Mandatory Caplacity is exhausted with a ground up loss of about $26.31 billion, a probability of 3.1 percent and a return time of 32 years."

Key Cat Fund Statistics for the 2009 Hurricane Season

The actual coverage selected for 2009/2010 was $23.173 billion. This is broken down as follows:

$5./557 billion for TICL

$17.175 billion for the FHCFR Mandatory Coverage

$441 million for the "up to $10 million of optional coverage" before the FHCF's retention available to small insurers, including Limited Apportionment Companies.

195 companies are participating this hurricane season, with 172 buying at the 90 percent coverage level and 23 at the 45 percent coverage option. No company exercised the 75 percent coverage option this year. 25 participating insurers selected the $10 million coverage. Total premium from insurers for 2009 will be $1.466 billion.


The Cat Fund does not cover commercial risks, including shopping centers and individual businesses. It is a residential reinsurance program which does include "commercial-residential," condos and apartments. Conventional commercial risks like stores and businesses were covered initially, but were excluded in 1994  when legislators determined the private market for business insurance was sound and that the Cat Fund should focus on the troubled residential property insurance market.

Cat Fund Paid Out Over $9 Billion for 2004/2005 Hurricane Seasons

The Cat Fund has reimbursed Citizens Property and private insurers $9.15 billion for claims from the 2004 and 2005 hurricane seasons (as of mid-April, according to an April 17, 2009, report by the House Appropriations Council on General Government).

The fund had sufficient funds to cover $3.95 billion due to the 2004 hurricane season. It faced a deficit when it reimbursed insurers $5.2 billion for the 2005 hurricanes, primarily Hurricane Wilma. The deficit was covered through a 1 percent a statewide assessment for eight years on residential property, commercial property and auto insurance.

Governor, CFO, Attorney General Administer Cat Fund

Florida's Cat Fund is administered by the State Board of Administration, the agency which invests the state's pension funds. The Trustees of the SBA are Governor Crist, CFO Sink and Attorney General McCollum. Major policy decisions are reviewed for the SBA by the Florida Hurricane Catastrophe Fund Advisory Council. Advisory Council members include John Auer, St.
Petersburg, American Strategic Insurance Corp. president, who represents the Florida Insurance Council.