In these proposals, which were presented by Dr. Nicholson both in several public speeches and in a widely circulated piece of draft legislation, (a summary and full text version of the bill is available below), Dr. Nicholson includes provisions that would reduce the size of the government-run reinsurer’s “mandatory” layer, requires insurers participating in the fund to pay more, reduces special taxes the fund might impose on Floridians, and ends the fund’s never-funded TICL (temporary increase in coverage) layer.
Many of the proposals echo those made in a James Madison Institute report, written by Eli Lehrer, vice president of Washington, DC operations for Heartland, titled “Solutions to Restore Florida’s Property Insurance Marketplace to Protect Taxpayers and the Insured.” Although several Cat Fund reform proposals were floated during the previous legislative session, none received a floor vote.
Don Brown, a Heartland Institute senior fellow and former Florida legislator, says Nicholson’s proposal is necessary for Florida’s future. “For some time we have known that the Florida Hurricane Catastrophe Fund might not be able to borrow enough money to fully fund its mandatory coverage limit after a major storm. The uncertainty is now greater than ever given the status of the world financial markets.
“The proposal recently advanced to restructure the Catastrophe Fund to more accurately reflect its ability to fund post-loss obligations is not only timely but, in my opinion, not optional,” Brown continued. “We must thank Dr. Nicholson for his leadership and adopt his proposal as soon as possible.”
Heartland’s Florida director, Christian Cámara, agreed. “As currently structured, the Cat Fund poses an enormous risk to Florida taxpayers and the state’s economic future. This plan would be a major step in the right direction that would not only help insulate taxpayers from years of devastating post-hurricane taxes, but also promote the transfer of billions of dollars’ worth of hurricane risk outside our borders.
“The less hurricane risk taxpayers bear, the less likely it is that taxpayers will have to bail out the state after a storm,” Cámara said.
Summary of FHCF Coverage Restructuring Draft 2012 (August 9, 2011)
Reducing the size of the mandatory coverage layer lowers the limits of the FHCF mandatory coverage layer from the current $17 billion over a three-year period. For the 2013 contract year, the limit is reduced to $15.5 billion; for the 2014 contract year, the limit is reduced to 14 billion; and for the 2015 and subsequent contract years, the limit is reduced to $12 billion (with provision for increased limits after the FHCF can fully fund its single-season capacity and its second-season capacity).
Increasing the participating insurer copay Increases the participating insurer copay by reducing the maximum available coverage percentage from the current 90 percent over a three-year period. For the 2013 contract year, the maximum available percentage is 85 percent; for the 2014 contract year, the maximum available percentage is 80 percent; and for the 2015 and subsequent contract years, maximum available percentage is 75 percent. The current, lower coverage options (45 and 75 percent) will also remain available.
Increasing insurer retention
Increases aggregate insurer retention to $8 billion for the 2013-2014 contract year, and retains current provisions that automatically adjust retention each year based on FHCF exposure growth.
Increasing the cash build-up factor
Under current law, the cash build-up factor, which is added to the actuarially-determined premiums, is scheduled to increase by 5 percentage points a year until it reaches 25 percent for the 2013 contract year. The draft continues this annual 5 percentage point growth until the 2018 contract year, when the factor will reach 50 percent.
Reducing emergency assessment caps
The draft reduces the maximum emergency assessment for a single year’s losses to 5% (instead of 6%) and for all losses from all years to 8% (instead of 10%), beginning in 2015.
Terminating the TICL layer
Provides that TICL coverage (optional coverage in excess of the mandatory FHCF layer) will not be available after the 2012 contract year. Current law provides for elimination of TICL after the 2013 contract year.
Florida Hurricane Catastrophe Fund Finance Corporation Changes the name of the Florida Hurricane Catastrophe Fund Finance Corporation to the “State Board of Administration Finance Corporation.”
Full PDF Version: FHCF Coverage Restructuring Bill Draft 2012