Days after Florida Gov. Rick Scott vetoed a bill that would have devoted up to $1.5 billion in funding to the Florida Hurricane Catastrophe Fund through a new program of tax credits, he joined with other members of the Florida Cabinet April 24 in approving a 15% increase in rates the Cat Fund will charge in 2012.
The Cat Fund’s 2012 premium formula assumes a per event retention of $7.4 billion and a limit level of $17.0 billion. It is estimated to to contribute a roughly 2% rise in consumer property insurance rates.
Though it is hardly the full-scale overhaul of the Cat Fund’s financing structure that we would have liked to have seen in this year’s legislative session, the rate hike is still certainly welcome news for a state-run reinsurer that was projected to have a $3.2 billion funding shortfall this past year.
Another attempt to shore up the Cat Fund’s financing fell by the wayside with Scott’s decision to veto H.B. 5505, which would have offered discounts to insurers that agreed to “pre-pay” their state premium taxes. While the bill’s primary goal was to improve efficiencies in the state’s Division of Workers’ Compensation, banking groups successfully lobbied to include a provision that would have called for issuing $1.5 billion in tax certificates whose proceeds would have been devoted to the Cat Fund.
This is, of course, simply robbing Peter to pay Paul. The certificates didn’t create any new funding; they simply shifted premium tax funds that would have gone to Florida’s general account to the Cat Fund instead. The Cat Fund would eventually be expected to pay back any funds used by the program. We at The Heartland Institute didn’t have a formal position on the bill, and while we certainly support shoring up the Cat Fund’s finances, we do think it would set something of a dangerous precedent to do so with general account funds.
“I am convinced that the governor did exactly the right thing to veto H.B. 5505 because of the provisions that were added at the last minute that were unvetted and included the prospect of several unintended consequences,” said Heartland Senior Fellow Don Brown, a former chairman of the Florida House Insurance Committee. “The governor made a good ‘catch’ on this one.”
In other Cat Fund news, the AA rating of the fund, its $3.5 billion in pre-event floating rate notes and its $1.6 billion in outstanding post-event bonds were all reaffirmed April 24 by Fitch Ratings.
Fitch said it views the Cat Fund’s ability to levy assessments of up to 6% a year and 10% for cumulative years on nearly all insurance policies in the state to be “a very stable source of revenue.” Because non-payment of emergency assessments is grounds for cancellation of the policy, collection rates are close to 100%, the rating agency noted.
The lines are very broad and include all property and casualty insurance, excluding only accident and health, workers’ compensation and medical malpractice. As the Florida economy overall was hit very hard by the recession, the base declined from a high of $37.6 billion in 2006 to a low of $33.3 billion in 2009. The base has stabilized and at the current level of $33.6 billion it could generate up to $3.4 billion per year in support of debt service, or almost 9 times (x) maximum annual debt service on bonds currently outstanding.
However, Fitch did warn that Florida’s insurance market remains somewhat unstable and vulnerable.”
“Many larger, financially stronger insurers have either stopped writing new policies or are completely exiting the market, shifting the risk to the smaller, thinly capitalized, Florida-only insurers that are mostly unrated or low rated,” the rating agency said.