Florida Hurricane Catastrophe Fund

Study guide: Exam 6U

The Florida Hurricane Catastrophe Fund (FHCF) is a tax-exempt state trust fund, administered by the State Board of Administration of Florida, that reimburses residential property insurers for a share of their Florida hurricane losses. Participation is mandatory: every insurer authorised to write residential property in Florida (above a de minimis exposure) must buy its reimbursement contract, which works like a layer of catastrophe reinsurance with no profit or risk load.

$\text{Reimbursement}_i = \min\big\{1.10\,c\,(L_i - R_i)^+,\ \text{Limit}_i\big\}$

Symbols. $L_i$ is insurer $i$ 's covered residential loss from one hurricane, $R_i$ its retention, $c$ its coverage percentage — $45\%$ , $75\%$ or $90\%$ , chosen each year — and the factor $1.10$ is the $10\%$ allowance for loss adjustment expense. $(x)^+ = \max(x, 0)$ .
Retention and limit are the insurer's shares of industry figures. The retention is the insurer's FHCF premium times a retention multiple, set so that retentions sum to the industry retention ( $\$9.9$ billion for 2024–25); the limit is the premium times a payout multiple, set so that limits sum to the statutory maximum of $\$17$ billion for a season. The full retention applies to an insurer's two largest hurricanes in a season, and one-third of it to any others.
Origin. Created in November 1993 after Hurricane Andrew (1992) caused over $\$15$ billion of insured losses and at least $11$ insurer insolvencies, to provide a "stable and ongoing" source of reimbursement and so maintain insurance capacity in Florida.
Funding. The FHCF charges an actuarially indicated premium — adequate but not excessive, reflecting each insurer's exposure — plus a $25\%$ cash build-up factor. When its cash is insufficient it issues post-event revenue bonds, repaid by emergency assessments on most Florida property and casualty premiums (workers' compensation, medical malpractice, accident and health and federal flood are exempt), capped at $6\%$ of premium for losses from one year and $10\%$ for losses from several years. Its obligation is not a full-faith-and-credit obligation of the state: capacity is cash plus what it can borrow.
Why it is cheaper than private reinsurance: no profit or risk load, exemption from federal tax, and the ability to fund losses after the event rather than hold capital in advance. The last is also its main weakness — see the second example.
Evaluation. It has kept reinsurance costs down and stabilised a volatile market, but its real capacity depends on bond-market access after a major storm, and its post-event funding shifts part of the cost of coastal residential risk onto all Florida property and casualty policyholders. Compare Catastrophe Risk, CAT Bonds and Government Program Evaluation.

An Insurer's FHCF Recovery For the 2024–25 contract year the retention multiple at $90\%$ coverage was $6.3136$ and the payout multiple $11.8595$ . An insurer paid an FHCF premium of $\$20$ million and chose $90\%$ coverage. A hurricane causes it $\$300$ million of covered residential losses. Find its reimbursement.
Answer
 $\begin{align*} R &= 6.3136 \times \$20\text{M} \\ &= \$126.27\text{M} \\[4pt] \text{Limit} &= 11.8595 \times \$20\text{M} \\ &= \$237.19\text{M} \end{align*}$ 
 $\begin{align*} \text{Loss reimbursed} &= 0.90 \times (\$300\text{M} - \$126.27\text{M}) \\ &= \$156.36\text{M} \\[4pt] \text{With LAE allowance} &= 1.10 \times \$156.36\text{M} \\ &= \$171.99\text{M} \end{align*}$ 
Within the $\$237.19$ million limit, so the insurer recovers about $\$172$ million. It keeps the $\$126$ million retention and the $10\%$ co-participation above it; that retained layer, and any loss above the FHCF limit, is what it must cover with private reinsurance and capital.

Who Pays for Post-Event Bonds? After a severe season the FHCF issues post-event bonds with annual debt service of $\$700$ million. The assessable premium base is $\$92.8$ billion. What emergency assessment is needed, and who pays it?
Answer
 $\begin{align*} \text{Assessment rate} &= \frac{\$0.70\text{B}}{\$92.8\text{B}} \\ &= 0.75\% \end{align*}$ 
Well within the $6\%$ cap, and levied for as many years as the bonds are outstanding.

The evaluation point is the base, not the rate. The assessment falls on most Florida property and casualty policies — private auto, commercial lines, surplus lines — not only on residential property. An inland renter's auto policy helps repay the reinsurance of coastal homes. That cross-subsidy is what lets the FHCF price below the private market, and it is a policy choice to be stated rather than a free lunch. The other constraint is capacity: bonds can be issued only in the amounts the market will absorb after a catastrophe, which is why the FHCF estimates its claims-paying capacity twice a year.