I thought this story in Florida Today was big news: Gov. Crist, who has faced criticism over leaving state taxpayers exposed for the state’s $32 billion catastrophe fund, is quietly considering seeking up to $6 billion in reinsurance from the private market. The fund is paid for by premiums on insurance policies, but if a shortfall occurred — for example, if a large hurricane hit before the fund has actually accumulated sufficient money — the state would have to issue bonds paid for by taxpayers.
The story is ambiguous but suggests it is not Crist who is seeking reinsurers but rather reinsurers that are seeking Crist, looking to take some of the risk in return for a payout of $167 million:
A parade of the nation’s top financial firms has passed through the offices of Crist and CFO Alex Sink to make a pitch for being paid to take a share of Florida’s hurricane risk.
Would-be sellers or brokers include Goldman Sachs, Bear Stearns and Benfield, which visited Crist’s office last week. Florida’s options include not only buying reinsurance, but also other capital market transactions, including issuing catastrophe bonds.
This would be a strange turnaround for Crist, who has tended to dismiss the chances of a monster hurricane wiping out the Cat fund, and some have estimated the chances of such a storm hitting this year at less than 2 percent. Ironically, paying the $167 to reinsurers would make less money available in the fund for small and medium hurricanes, although the $6 billion in reinsurance would probably come at the mid or lower levels of the fund’s payout and make up the difference. The Legislature recently authorized a doubling of the Cat fund, in part so that some of the fund’s money could be used as reserves for the state to act as a reinsurer. The idea was to provide reinsurance to insurance companies at much cheaper rates than the private market would allow for — 3 percent — thus leading to a lowering of Florida homeowner insurance premiums. It had been said that the Florida insurance crisis was in large part a reinsurance crisis, but that turns out to be only partially true: the availability of subsidized reinsurance has led to much less of a drop in premiums than had been hoped — around 10 percent.
Crist will also have to weigh whether it looks bad for Florida to purchase reinsurance at 9 cents for every dollar of reinsurance. Relatively speaking, the price is a good deal compared to prices last year that were more than double that amount. Nevertheless, it could look bad politically, like the state was being hoodwinked by sharp financiers, because Florida is selling its own reinsurance so much cheaper. Another option for the state to lay off some of the risk is to offer its own catastrophe bonds, an option that is also apparently being discussed.
I also thought it was interesting that, according to this story by Lavonne Kuykendall of Dow Jones Newswires, State Farm is going to offer its own $4 billion Cat bond. (Details of the offering aren’t available, so I’m not necessarily implying the State Farm bond is related to Florida hurricanes).