Seen in Insurance Journal:
The bill, introduced last week and prepared by Democratic Florida Reps. Ron Klein and Tim Mahoney, would use private investors to build a national backup fund that states could use after the worst catastrophes.[...]
Under the bill, investors would take the chance that a Category 5 hurricane wouldn’t make a direct hit on an area like Tampa Bay, or that a major earthquake wouldn’t be centered in a city like San Francisco. If disaster did not strike, they would get their original investment and interest returned after the contracted period, likely between two and four years.
If however, a disaster is so large that state catastrophe funds and private insurance cannot cover losses, investors could lose some or all of their investment, depending on how much of the federal fund is depleted.
The article mentions that this plan differs from prior attempts to create a federal catastrophe backstop as this plan would be voluntary—states could opt in or out on their own—and apparently primarily funded by investors.
These both, theoretically, address the concerns with prior versions of the catastrophe backstop, in which the program could be designed and presented as midwesterners subsidizing hurricane risk on the Atlantic and Gulf Coasts, and earthquake exposure on the west coast and in the New Madrid zone.
However, skimming through the description of the plan, I wonder how much of a help this sort of a program would really be. It sounds almost like a federally-sponsored securitization of the upper layers of the various Florida hurricane programs and the California quake fund. True, it potentially aids in diversifying the risk, so maybe there will be a slight discount off the risk premium.
However, you still have a structure that will rely on private investment, and therefore will see a significant load arising from the level of return expected due to the inherent riskiness of the vehicle.
It’s certainly intriguing, and I’ll be interested to see if it adds fuel to the anemic-but-improving insurance securities market. But I doubt that it’s the “make the problem go away” solution that Florida legislators have been looking for.
At least it’s a sounder idea than simply federalizing all cat wind risk through an expanded NFIP.