The Florida Hurricane Catastrophe Fund is almost dry.

While discussions on the viability of a federal catastrophe programme and state funding continue in the aftermath of yet more destructive hurricanes in 2005, it transpires that the Florida Hurricane Catastrophe Fund (FHCF) is in danger of running dry.

Following two intense hurricane seasons in 2004 and 2005, reserves of $3.1bn are currently earmarked to cover losses of $2.585bn – although this figure could yet grow. “Although reported losses for the 2005 hurricane season do not exceed the $3.1bn year-end 2005 cash balance available for paying claims, we anticipate there is likely to be ‘adverse loss development' if past patterns emerge,” warns Mike McCauley, FHCF's director of investment services and communications. “The size of any shortfall will help dictate the FHCF's response,” he adds.

Despite this situation McCauley is not overly concerned. “When available resources are not sufficient to pay losses, the FHCF has the ability to finance any shortfall by the issuance of revenue bonds,” he explains. Nevertheless, while the FHCF does have the ability to finance reserves with revenue bonds and other debt this is not the intended model. The fund was designed to accrue funds in years of little hurricane activity to ensure plenty was available for those years that suffer heavy losses.

With other states and even the Federal Government looking to the FHCF as a role model, McCauley admits that a new solution may be in order to confirm that the model works. “The FHCF has been expanded in recent years, but there may need to be other additional solutions sought since the expansion of the FHCF tends to lead to a reliance on more and more debt financing.”

One potential solution is the inclusion of a rapid cash build-up factor in the FHCF rates – in other words a short-term rate hike to replenish lost reserves. Currently the FHCF is considering including a rapid cash build-up factor as high as 25%. But McCauley warns, “Just because a rapid cash build-up factor is being ‘talked about' doesn't mean it is going to be implemented. It has been talked about since 2002 and has yet to be used.”