AdminFL.Hurricane

Reading: “FHCF 2022 Annual Report,” 2022, pp. 4-5, 7, 10-11.

Author: Florida Hurricane Catastrophe Fund, State Board of Administration of Florida

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BA Quick-Summary: Florida Hurricanes The Florida Hurricane Catastrophe Fund (FHCF) is a state trust fund designed to provide reimbursement to residential property insurers for catastrophic hurricane losses. The fund aims to stabilize the insurance market by: offering reliable coverage at lower cost than private insurance (due to its tax-exempt status and exclusion of profit margins) Participation in the FHCF is mandatory for most Florida residential property insurers. It operates by: charging actuarially-determined premiums utilizing post-event revenue bonds for additional funds (when necessary)

Study Tips

This a pretty easy reading. There is 1 extremely simple calculation problem, otherwise it's memorization. I think there is a high probability of a question on hurricanes appearing on the exam.

Hurricanes is a "hot" topic in Florida! Get it? 🤯

Estimated study time: ½ day (not including subsequent review time)

BattleTable

No past exam questions are available for this reading.

reference	part (a)	part (b)	part (c)	part (d)

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In Plain English!

Page 4-5

What is the Florida Hurricane Catastrophe Fund?

This short section covers very basic information about FHCF. Memorize these answers!

Question: What is the FHCF (Florida Hurricane Catastrophe Fund.)

• a state trust fund that provides reimbursement to residential property insurers for a portion of their Florida catastrophic hurricane losses

Question: Briefly describe the reason for the creation of the FHCF (Florida Hurricane Catastrophe Fund.)

• hurricane Andrew in 1992 caused billions in damage and multiple insurer insolvencies
• an unstable property insurance market can negatively impact Florida's economy
• FHCF provides a stable and ongoing source of reimbursement to insurers (thus protecting and advancing the state's insurance capacity)

Question: Why are FHCF premiums lower versus market prices. (2)

• FHCF does not include a profit factor or risk load
• FHCF is exempt from federal taxes

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How Does the FHCF Work?

Participation in FHCF is mandatory for insurers with exposures above a de minimis threshold. Insurers purchase a "policy" or reimbursement contract with FHCF, and this policy has a specified retention and coverage limit. (Insurers are responsible for losses below the retention and above the coverage limit.)

→ FHCF then covers a percentage of an insurer's losses between the retention and the coverage limit.

→ plus a 10% allowance for LAE

This percentage is selected by the insurer upon execution of its FHCF reimbursement contract where the options are: 90%, 75%, or 45%.

→ Premiums, retentions, and coverage limits are based on each insurer’s annual reporting of insured values.

Question: Briefly describe how the FHCF is self-supporting.

• FHCF charges insurers actuarially-determined premiums
• FHCF can rely on proceeds from bonds backed by assessments (if the cash balance of the FHCF fund is insufficient)
• FHCF engages in finance and risk-transfer activities (improves liquidity and minimizes assessments)

If the above question came up on the exam, I would write a concise answer as follows:

→ FHCF charges actuarially-determined premiums, issues bonds, invests funds, engages in risk-transfer

There is a table in the source text that describes 5 FHCF Operational Responsibilities. This looks like a potential exam question.

Question: Briefly describe the operation responsibilities of the FHCF.

• FHCF manages in-house operations, oversees outside service providers
• FHCF specific staff responsibilities include: admin, financial operations, audit prep, claims examinations, debt financing, legal
• FHCF contracts with outside service providers (Ex: actuarial)
• FHCF relies on SBA (State Board of Administration) for investment & technology services
• FHCF Advisory Council provides advice regarding implementation of the FHCF statute

A quick way to remember the bullet points above is just to remember the underlined words. Note that 2 of the 5 bullet points don't have underlined words but exam questions rarely ask for ALL the answers. They usually just ask for 2 (or sometimes 3.)

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Page 7

Participation

The source text has a very simple example how to calculate the following quantities for a participating insurer:

• retention level
• coverage limit

To calculate the retention level you need 3 pieces of information:

1. insurer's FHCF premium
2. the coverage percentage the insurer selected (either 90%, 75%, or 45%)
3. the retention multiples for the given year for each coverage percentage

Formula:    retention level  =  (FHCF premium)  x  (retention multiple)

The retention multipliers may be given in a table as follows:

Coverage Percentage	2022 - 2023 Retention Multiple
90%	5.9418
75%	7.1302
45%	11.8837

Then if the insurer had chosen a coverage percentage of 75% and their FHCF premium was $1,000,000 this insurer's retention is simply:

• $1,000,000  x  7.1302  =  $7,130,200

All you have to memorize here are the 3 required pieces of information and the formula. The calculation is extremely simple.

Calculating the coverage limit is just as simple but instead of a retention multiplier, you need the payout multiple.

Formula:    coverage limit  =  (FHCF premium)  x  (payout multiple)

If the payout multiple for a given year is:

• 12.2371

Then the coverage limit for the insurer described above is:

• $1,000,000  x  12.2371  =  $12,237,100

Easy-peezy, lemon-squeezy!

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Page 10-11

Claims-Paying Capacity

It's important to note that the reimbursement insurers receive under FHCF is not unlimited. According to the the source text:

→ The FHCF does not constitute a full-faith-and-credit obligation of the State of Florida.

I take this to mean that if a really HUGE hurricane hit Florida, FHCF could be forced to reduce its reimbursement to insurers to amounts below what was stipulated in the original reimbursement contract. The source text goes on to say:

→ FHCF’s potential obligation for a particular contract year is limited to its [1] cash balance [2] risk transfer recoveries [3] amounts it is able to borrow (through bonds)

FHCF recalculates its claims-paying capacity each May and October for the upcoming 12-month and 24-month period. This is critical for market stability.

Debt Financing and Risk Transfer

FHCF uses debt financing and risk transfer to serve the marketplace. When FHCF issues bonds, this is a form of debt financing.

Question: After a hurricane, under what circumstances would FHCF issue bonds?

• when the projected reimbursement payments to insurers exceed cash resources

Question: How are FHCF-issued bonds repaid?

• emergency assessments on (most) property and casualty insurance premiums

(WC, medical malpractice, accident and health, federal flood insurance premiums are exempt from assessment)

Question: What is the maximum permissible assessment that FHCF can charge insurers?

• 6% of losses attributable to any ONE year
• 10% of losses attributable to MULTIPLE years

Question: What organization handles the issuance of bonds for FHCF?

• State Board of Administration Finance Corporation

One issue for FHCF is whether they have enough resources to pay reimbursements to insurers. A second issue however, is whether they have enough liquid resources to pay promptly. Prompt payments are something insurers rely on.

Question: How does FHCF meet its liquidity need? (in terms of making prompt payments to insurers)

• by issuing "pre-event" debt

(doesn't add to its claims-paying capacity, but helps assure prompt payments)

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