Florida’s Citizens Property Insurance Corporation is debating buying anything from zero to over $3.4 billion of new reinsurance and risk transfer in 2022, with catastrophe bonds an option as usual.
Like other residual insurance markets, Florida Citizens is debating how to manage rising exposures against rising risk transfer pricing in reinsurance and capital markets.
This has led the staff of Florida Citizens to present four options, which range from buying no new risk transfer this year, with all the resulting surcharge and assessment ramifications, to purchasing $3.428 billion in new risk transfer and reinsurance for its Personal Lines Account and Coastal Account.
Florida Citizens exposure has risen significantly just during the last quarter of 2021, as the insurer added 9% in total insured values, taking its exposure to a huge almost $353.8 billion across the PLA and Coastal Accounts.
As a result, Citizens 1-in-100 year probable maximum loss (PML) is also up over 4%, with projections suggesting it will be as high as almost $12.8 billion as of September 2022.
If the 2022 budget for risk transfer and reinsurance procurement is updated to factor in this exposure growth to the end of last year, it means Florida Citizens would be buying $3.428 billion of new risk transfer across the PLA and Coastal Account prior to the 2022 wind season.
That would be added to $1.062 billion of still in-force multi-year coverage, from reinsurance and catastrophe bonds, for total private market risk transfer of $4.488 billion for 2022.
But Florida Citizens is also considering three other scenarios, the first of which would eliminate its consolidated underwriting loss and so mean only $2.878 billion of reinsurance and cat bonds need to be bought this year.
A second scenario contemplates no projected PLA underwriting loss and would see Florida Citizens buying $2.653 billion of new risk transfer and reinsurance.
While the last scenario is much more extreme and contemplates Florida Citizens buying no new risk transfer or reinsurance at all.
Each scenario has ramifications, in terms of surcharges and assessments that would need to be applied in the case of a 1-in-100 year hurricane, which range from $656 million ($450 million for policyholders and $206 million in assessments) for the updated budget, to as much as $2.438 billion ($872m for policyholders and $1.566bn in assessments) for the final scenario and buying no new risk transfer this year.
Lawmakers will be keen to avoid policyholder surcharges, especially at a time when insurance rates in Florida have been rising rapidly.
While assessments on Floridian P&C insurers would also be unpopular and could even throw some companies into financial difficulty, given how thinly capitalised some are at this time.
Florida Citizens staff are going to be working to fine tune the proposal for the Board, which meets this week.
It will be interesting to see what risk transfer strategy is approved. But it is hard to see the extreme option of buying no new risk transfer gaining traction.
Which means Florida Citizens is likely to look to buy at least $2.653 billion of new reinsurance or catastrophe bond backed risk transfer in 2022, perhaps as much as $3.428 billion.