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Heritage’s move is a reminder that, in Florida, reinsurers are never negotiating just with a cedant

When I am interviewing prospective new reporters, I always make sure I counter any lingering impression they may have that a career in insurance journalism is going to be in any way boring.

I always say that the great thing about a career covering insurance is that, if there is anything interesting on the evening news, they can come into work and write about it first thing in the morning.

And because we are covering a tightly regulated industry, politics is also a topic we must follow closely.

In Florida you are never far away from colourful and vibrant politics, but get two hurricane years in a row in the Sunshine State and you can guarantee it will take centre stage.

In 2007, Charlie Crist was swept into the governor’s office on a ticket to make insurance cheap again.

2006 had been the year when all hell broke loose. The high-frequency medium-severity year of 2004 was followed by the blowout of hurricanes Katrina, Rita and Wilma in 2005, and had wreaked a devastating effect on the market.

The Florida cat fund was underwater after racking up hurricane losses of $3.95bn in 2004 and $4.5bn a year later.

Its accounts sported net negative assets of $1.5bn at its 30 June 2006 year end. It was still $60mn in the hole a year later, despite the loss-free 2006 season.

If it were a private insurer it wouldn’t just have been in run-off, it would have been properly bankrupt.

But using the magic wand of regulatory power and the AA credit rating of the state, Crist came and increased the fund’s limits temporarily so that local insurers could make the most of the fund’s subsidised pricing and pass it on to hard-pressed voters.

Crist had called the reinsurance market’s bluff.

After dishing out the largest loss to third-party reinsurers in history, he turned his back on the market’s post-loss pricing and practically transformed the entire state into a government-backed onshore captive. So much for prudent partnership!

The state allowed local insurers to buy increasing amounts of reinsurance from an entity with fewer than zero tangible assets. If major losses hit in 2007 the state would have to fund the losses after the event via the debt markets.

Whether this was in any way wise was beyond the point, because it was a political imperative. Voters didn’t want rate hikes and Crist wasn’t going to give it to them.

He gambled on the patience and mercy of bond markets over and above the loss-struck reinsurance markets. Note these were the go-go credit bubble days before the global financial crisis proved what a dumb idea this would have been had disaster struck.

Luckily, we never had to find out.

Since then, pricing has been ever so slowly gliding closer to actuarially sound levels and the state slowly got out of the way. But it never left.

Why am I digging up this ancient history?

Last week, Heritage CEO Bruce Lucas invoked the ghost of Charlie Crist as he looked to outmanoeuvre reinsurers seeking price rises at the mid-year renewals.

He announced a doubling of his firm’s usage of the Florida Hurricane Catastrophe Fund this season, increasing to the maximum 90 percent limit purchase.

The lack of losses mean that, as at 30 June 2018, the fund had net assets of $12.7bn.

This was based on a total estimated final bill for Irma of $2.5bn with a paid total of $678mn. We will see how much this has crept in due course, but the fund is definitely in the black.

Heritage’s move is a reminder that, in Florida, reinsurers are never negotiating just with a cedant. For the first time in over a decade, the state’s presence is once again exerting an influence on the market.

It never went away, but was merely sleeping.

The ghost of Charlie Crist could yet come to haunt us all once more – and this time he has net assets!

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