In January the Florida state legislators fulfilled their promise to voters when they passed legislation that will essentially double the amount of cover that the Florida Hurricane Catastrophe Fund (FHCF) provides to insurers in Florida.

The potential impact on the property catastrophe reinsurance market was not lost on investors and shares of Bermudian reinsurers suffered a dip on the back of the news. Investors' concerns may not have been a total overreaction given that market analysts have suggested that the increase in the FHCF cover could result in reinsurers losing an estimated US$2 billion in premiums. With global property catastrophe premiums estimated at US$10 billion, the loss of US$2 billion in premiums may be significant, particularly to some of the newer entrants in the Bermuda reinsurance market. Analysts are now predicting increased competition amongst the Bermuda property cat writers (many of whom have significant capacity and ambitious premium targets) and further pressure on rates.

Although the intention is that cheaper reinsurance will result in lower premiums for Florida homeowners, questions are already being asked regarding the economic expediency of the expanded FHCF and whether it would be able to cover its losses from a series of storms. In addition, the fact that the FHCF's rates will be lower than market rates, some believe that the fund is simply transferring much of the future risk of hurricanes to Florida taxpayers.

This Viewpoint item appeared in issue 112 of JTW News - February 2007

Author: Michael Tagg - KPMG Financial Advisory Services Ltd