Anyone who thinks that the world of insurance-linked securities is too indigestible and dull to generate excitement got a rude awakening last week, when sparks of contention flew between advocates and opponents of the government's role as a reinsurance provider for claims after catastrophic storms.
A financial advisor to three of Florida's reinsurance backstop programs and a representative of ProtectingAmerica.org, a group that advocates public/private reinsurance initiatives, says that the government should develop reinsurance backstop programs. Private market advocates, however, abhor the thought.
Aware that many of its citizens face storm perils, the Florida legislature has long been at work on initiatives to keep property insurance affordable. In 1970, it created the Florida Insurance Guaranty Corp. (FIGA), a backstop for insolvent insurance companies. Since 2002, the Citizens Property Insurance Corp., has provided coverage to citizens who live in high-risk areas and others who have trouble finding coverage in the open market. Homeowner insurance losses from Hurricane Katrina in 2005 and subsequent skyrocketing premiums prompted the Florida state legislature to double the capacity of the Florida Hurricane Catastrophe Fund (FHCF), commonly known as the Cat Fund, in January.
That decision grabbed a lot of industry attention, some of it negative. But why did the Cat decision surprise anyone? Living in the path of powerful storms comes at a price, as John Forney, a managing director of public finance at Raymond James & Associates, which acts as financial advisor to Citizens, FHCF, and FIGA says. A Miami resident with a house assessed at $250,000 might expect to pay between 10% and 15% of the house's value in so-called carrying costs this year, after totaling mortgage, property tax and homeowner's insurance costs. Forney, among other industry participants, spoke at the Securities Industry and Financial Markets Association (SIFMA) conference on insurance and risk-linked securities early last week.
"You cannot ignore their plight," said Forney.
The private insurance industry argues that, with the backing of the capital markets, it is vibrant and profitable enough to assume the risk of property damage from heavy storms.
"Three years [and] $150 billion worth of insurance industry profits - it's clear that a federal subsidy is necessary," Dennis Burke, vice president of state relations for the Reinsurance Association of America, quipped.
One alternative might be to adapt to new markets. In the commercial property and casualty market, the reinsurance industry cried poverty so loudly after the terrorist attacks of Sept. 11, 2001, that Congress passed a temporary government reinsurance backstop called the Terrorism Risk Insurance Act.
During the SIFMA conference, Ed Collins, national director of ProtectingAmerica.org, quoted former President John F. Kennedy: "The time to repair the roof is when the sun is shining." Well, outside the New York Marriott Marquis, where SIFMA convened the conference, the weather was glorious. Insurance and capital markets professionals came together to hammer out new ways of managing risk. Why, then, were they pounding on each other instead?
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