Editor’s Note: Yes, I know it’s a Sunday. This is a special edition given the circumstances. It doesn’t seem people are aware of the threat to the FHCF’s solvency so I wanted to get this analysis out immediately.

Editor’s Note 2: I had been having some trouble with the site host over the last week. This is the first post from the new host. Hopefully, all goes OK. You should actually find the site faster now. If you had trouble reaching the site over the last week, my apologies. Hopefully it’s all straight now.

In the rush to survey the damage from Hurricane Ian and put out loss estimates, mostly overlooked is the ramifications of the future of the Florida insurance market. Let’s do conclusions first:

  • The Florida Hurricane Cat Fund (FHCF) may exhaust its surplus and be able to provide much less, if any, protection for insurers next year.
  • Many of the Florida specialists will likely blow through their reinsurance and fail.
  • Citizens appears to be in fairly good shape all things considered.

The Future of the FHCF

So let’s start with the big one that I’m surprised nobody is talking about yet.

The FHCF as we know it is likely done. While they do have the potential for post event bonds and potentially can receive a bailout from the state, they will need to rebuild surplus if they trade forward.

This means they will provide much, much less cover to private markets next year. While private reinsurers could fill the void, the price they would charge is unaffordable. Thus, private insurers (and Citizens) will be far more exposed to cat risk next summer. More on this a little later.

Before we go too far down that path, I made a bold claim. I ought to back it up.

The Math

It’s fairly simple actually. The FHCF provides very public disclosure. Their surplus ended 2021 at $11.3B. They assumed it would be $12.7B at YE22 (presumably if there were no or limited losses).

Next, they tell you how big a gross loss would wipe out each layer of their protection. To wipe out the full $12.7B takes a gross loss of between $21.6 and $29.4B (see below, from p.3 of the linked report) based on different calculation methods they use.

My understanding is the lower # assumes every insurer in the state is exposed to an event while the higher makes assumptions about how many will be exposed, so the real answer is probably in the middle.

The FHCF discloses loss scenarios that wipe out its surplus

Now, there are some big unknowns here. Is that $29B personal lines only? Home only? Something else? It’s unclear, but helpfully they show the number is $19B for Hurricane Irma. Thus, I’m going to assume it’s homeowners only to be conservative.

So the question is could we get a $29B home event? There are a few ways to estimate that. First, a $50B overall event is probably right around $29B for home. So if you believe the estimates of a $50+B event, then the FHCF is out of surplus.

The other method is to look at Citizens. They initially suggested a $3.8B loss. Then, they revised it to $1.9-3.8B.

We know they have about a 10-13% market share of the affected regions. So at the high end that implies a $30-40B home loss. At the low end it’s more like $15-20B. Thus, a $29B home loss is certainly very realistic.


What does it mean if the FHCF is out of surplus? They will have to rely on their “post-event” funding model of raising bonds to pay claims. Note, back after Wilma, they raised around $30B of post-event bonds, so they could in theory do this again, but it’s very dangerous.

Essentially, bond buyers are assuming the state will pay no matter what so the state is then underwriting hurricane risk directly and hoping for no losses in order to pay back the bonds. Will they really want to make that mistake again? They got away with it once but that was a dangerous gamble.

Even if they can do it again, they would likely have to reduce coverage levels dramatically. They estimate on p.16 of the report they could raise a total of $12B of bonds ($4B this year and $8B next) but this would leave them with half the claims paying capacity for next season.

No more cheap low layer reinsurance. The rate on line would have to go up, the participation go down, and they would likely have to attach higher up forcing bigger retentions on the primaries.

Which brings us to the next topic.

The Specialist Spiral

There are two big problems affecting the ability of the local Florida home insurers to be going concerns. First, see above. They are not going to be able to buy as much reinsurance (if any) from the FHCF next year.

Since the private market can’t provide cover at anywhere near the same price, the primaries really have two choices: retain a lot more risk or shut the doors. And even that is a Hobbesian choice because, in reality retaining more risk is not an option. They will lose their Demotech rating.

So even if they can survive the losses, it’s hard to see how they will have the capital to continue writing business next year. But, let’s say the FHCF finds a solution (or that losses end up being less than their surplus), can the insurers even pay Ian’s claims while remaining solvent?

The good news about this event, relatively speaking, is it’s one event meaning one $50B event is only one retention before reinsurance vs. two $25B storms leading to two retentions. Given the precarious capital position of most of these carriers, two full retention losses would be death.

So should we be optimistic because they only take one retention and cede the rest? Well, that’s only true if they don’t exhaust their reinsurance tower. I think most observers would suggest a $50+B storm breaks most of these towers (even if it’s not supposed to).

One of the big risks is the damage is spread over many regions in Florida – Fort Myers clearly but also Orlando and Jacksonville and many points in between.

This means if you “diversified” your book by writing across the state thinking you would only get hit in one zone per storm…oops! Yeah, that didn’t work out so well.

So maybe your reinsurance is adequate for the Fort Myers losses but you weren’t counting on also having losses elsewhere and your tower is now exhausted. I suspect we will see a few cases of this.

But between the disappearance of more primaries and the loss of some or all of the FHCF capacity, we are getting close to a full blown availability crisis.

The Model Citizen(s) Award

There is one glimmer of hope though. While Citizens will have meaningful losses, they will not be devastating.

Citizens has actually had the best capital position in the state with roughly $7B of capital against ~$3B of premium. This contrasts to the private carriers who are writing premium at multiples of their capital!

Assuming Citizens takes a full loss below the FHCF (across both the PLA and coastal accounts) they are facing a $2B loss. That leaves them with $5B of capital (more like $5.5B assuming a tax benefit on the loss).

Even assuming policy count continues to grow and they have $4B of premium next year, that is still less than surplus. Given the risk of the book, it’s not ideal, but it’s not excessively levered.

There is one other concern which is the guarantee Citizens provided to the state guaranty fund over the summer now may have some exposure as primaries default, but hopefully that is not large enough to change the overall story.

It will certainly be more challenging for Citizens going forward especially as the exposure continues to grow, but they are the smallest problem facing the state right now.


Just to reiterate, there are ways out of this for FHCF even as bad as it looks on the surface.

First, the personal lines loss may be smaller than the models. I am actually partial to that argument. Most of the devastation was confined to Sanibel and Fort Myers Beach. Further inland and to the north and south, the pictures I am seeing are of more minor damage like downed trees, missing roof tiles, etc. but not widespread total losses.

Yes, AOB is a concern but, ironically, some of the AOB scams meant people affected have stronger roofs than they would have otherwise which actually may have prevented losses. God bless the lawyers!!!

And yes, demand surge is a concern and something I have been worried about all summer, but take a look at commodity prices. Shortages of lumber, paint, roof materials, etc. are largely behind us. Cost of construction are coming down (not that they’re low, but they’re off the peaks).

I’m less worried about demand surge than I expected to be, especially with some of the anecdotal stories I am hearing about people getting debris removed already for cheap. Not saying it’s a non-issue but I don’t think it’s going to be as bad as feared.

One other big caveat is I could be misunderstanding that FHCF chart and their loss won’t be as bad as I fear (if anyone has a different interpretation, please let me know) or perhaps they will gamble on large bond funding again and trade forward and hope for the best.

But, from my point of view, the risk to the system is the FHCF is the finger holding back the dam. If it gets removed, most of the local insurers are going to get washed away.

6 thoughts on “The End of the FHCF As We Know It?”

  1. This is a very interesting read! I do have an observation/question. With regards to the potential impact to the FHCF, only losses directly related to wind are covered and reimbursable. As I understand the damages from Ian, a very large portion of them will be due to flood/surge and these are not covered by the “Fund”. Does the math change significantly if this distinction is taken into account?

    1. Good question! I am basing my analysis on a $50B insured loss which is what the major modeling firms are suggesting. As I noted at the end, I think it’s possible the insured estimates are too high because the wind damages will prove lower than expected. However, since I don’t have the means to replicate the models, I am using the consensus of the professionals that insured losses will be $50B or higher as the basis for my conclusions about the FHCF. If they are too pessimistic, the FHCF will be in a better position.

  2. Ian,

    Do you have a source / data on Citizens’ 10-13% market share of the affected region? I believe their overall FL Residential market share is around 22%. Are they that underweight in Charlotte and Lee county?

    Will Marzolf

    1. Thanks Will, don’t have in front of me but as I recall, those were from the OIR or another FL entity. They may have been slightly dated as I don’t recall how current they were. Can try to dig it up again if you need it.
      The overall statewide market share is 15%. $15B of premium and as of 6/30 they were at $2.3B per the OIR.

  3. Ian,

    Based on the 9/27/22 update, Citizens Personal and Commercial Lines Account and Coastal Account combine for 22% of FHCF premium (FHCF election independent) or 23% simple math. Of course that reflects only FHCF subject business. But in projecting subject to FHCF loss, maybe this is a more accurate market share figure? Thoughts?

    Appreciate it,

    1. It appears you’re looking at share of premium paid into the FHCF. That is not the same as direct homeowners market share which I was using. I’ll send you an email to follow up.

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