Florida reinsurance dynamics adjust again after RAP shrinks, FORA repealed

Insurance carriers in Florida are likely to turn to the private reinsurance and capital markets for even more limit after two state funded reinsurance facilities were amended in recent days.

Governor Ron DeSantis signed House Bill 5013 into law last week, which sets in motion the shrinking of one state-backed reinsurance facility by more than half, while cancelling another completely.

HB 5013 takes aim first at the Reinsurance to Assist Policyholders program, which was established in the special legislative session of 2022.

The so-called RAP acted as a kind-of lower-layer to the Florida Hurricane Catastrophe Fund (FHCF), providing a taxpayer funded reinsurance support mechanism for insurance carriers that were struggling to pay for and complete their reinsurance towers at lower-levels.

It was only ever supposed to be available for two years but, in the wake of hurricane Ian, Florida’s insurance capital stack was decimated and that drove some more use of the RAP as a state-funded reinsurance alternative.

As a result, the Reinsurance to Assist Policyholders program still exists, but now it has been shrunk by more than half, with the bill signed into law by DeSantis stating that the maximum payout possible to industry players from the RAP program has been decreased to $900 million, from the original $2 billion.

The same bill has also repealed the legislation that enabled the Florida Operational Reinsurance Assistance Program (FORA), which was a further $1 billion taxpayer backed source of reinsurance designed to sit below the FHCF protection.

Again, this was widely used for a time, but it’s use has decreased in the last year.

It’s important to note that these state-funded property reinsurance programs have not been taken up by every primary insurance carrier in Florida each hurricane season though and their use has declined as the property insurance market improved in the state and private reinsurance and catastrophe bond capacity became more accessible and affordable to carriers there.

There had been questions about whether FORA had attached low-enough down to be truly useful anyway.

But, it’s worth highlighting that this is a potential $2.1 billion of state-funded reinsurance that is now going away for good.

In the current market environment, where supply of reinsurance and insurance-linked securities (ILS) capital has been outstripping demand and the cost of catastrophe bond coverage has become far more compelling this is likely fine, as long as Florida’s insurance market remains in its now more healthy state and major catastrophes don’t strike the region.

These state-funded reinsurance programs have provided real and meaningful support to carriers at a time when some could have failed as they were struggling to buy sufficient reinsurance to maintain their creditworthiness.

But, any re-emergence of some of the challenges the Florida insurance market had been facing, or of significant hurricane losses and the carriers may find the cost of private market reinsurance or cat bond protection much more onerous again, at which stage questions could be asked about whether such state-funded facilities should have been kept more accessible, although perhaps with some qualifying gates to ensure they were only used by carriers in need of this support.

At the same time, for any carriers that had been using these facilities, there may now be a need to source more protection from the traditional markets, or ILS capital, which could potentially serve to drive some increase in demand for risk capital next year.