Florida Cat Fund reform faces uphill battle

by Matthew Glans on February 20, 2012

Florida has been walking the tightrope with its windstorm insurance policies for years.  Ever since Hurricane Andrew hit Florida in the early 1990s, the state has relied heavily on two state-run entities to insure and manage the states windstorm risk. Both the Florida Hurricane Catastrophe Fund and Citizens Property Insurance Corporation, the state’s windstorm reinsurer and insurer, create a substantial liability to taxpayers that could be imposed in the event of a major storm.  These problems have been evident for years, but due to a combination of politics and sheer luck, little progress has been made on revamping the system and minimizing taxpayer’s exposure windstorm risk through the Cat Fund and Citizens.

In a recent article by the Associated Press, the author discusses recent efforts by some legislators to reform the Catastrophe Fund, and the reluctance of many others to move the proposals forward. Industry experts attribute these setbacks to election year politics; many legislators have shown a reluctance to enact any bill that could potentially raise rates, even though there is no guarantee that the current Cat Fund proposals would raise rates.

From The Associated Press:

“State lawmakers have gambled with their constituents’ money for years when it comes to dealing with Florida’s property insurance issues.

But now, many top industry analysts suggest, the odds may be turning against them after six years without a hurricane hitting Florida. Insurance experts say the Florida Hurricane Catastrophe Fund needs more money and an overhaul before a major storm or series of them strikes the state. If not, consumers could be paying massive surcharges on their insurance coverage and the state government left in financial straits for decades, they say.

Despite these warnings, it doesn’t appear the Legislature will act before the end of its annual session March 9 because any fix will cause higher insurance rates — not a popular decision, particularly in an election year. But any increase would be minuscule compared to those that will be required if a disaster strikes before a fix is made.

Officials have already abandoned a special $12 billion expansion of the fund when it became apparent they wouldn’t be able to fund it and are worried about their ability to meet the present $11.7 billion obligation.”

Proponents of Cat Fund reform, including Jack Nicholson, head of the Florida Cat Fund and Governor Rick Scott, have argued that the Cat Fund doesn’t have the capacity to withstand a major storm and that efforts need to be made to encourage insurers instate to purchase private reinsurance and not rely solely on the Cat Fund.

“Our luck is eventually going to run out,” longtime fund head Jack Nicholson testified at a House Insurance and Banking subcommittee meeting recently. “You can’t continue to roll the dice and be lucky every time.”

Nicholson isn’t sure they would be able to bond more than $8.5 billion, leaving a $3.2 billion shortfall.

He gets plenty of agreement in high places, albeit apparently not enough in the Legislature.

Gov. Rick Scott and others have been pushing legislators to reduce the state’s exposure by forcing the insurance companies to buy more of their reinsurance from private companies. They argue that while that will raise rates, the increase will be much smaller than the post-catastrophe surcharge will be.

“Don’t create a state organization that says they’re selling a product that they’re really not selling. To believe that you can go borrow money after a significant disaster is not realistic. We’ve got to live in reality,” Scott said.

Scott also worries about the state’s ability to meet its current obligation. The state-backed insurer of last resort, Citizen’s Property Insurance Corp., would also be borrowing billions of dollars, driving up interest rates and, ultimately, consumers’ costs in the wake of a catastrophic storm.”

Two Cat Fund reform bills have been considered in the most recent session of the Florida legislature. The first bill, proposed by Rep. Bill Hager, a Republican legislator from Boca Raton was unable to pass out of committee. The second bill, proposed in the Senate by Sen. JD Alexander, is still under consideration but faces a difficult path to passage.

“Hager’s bill (HB 833) would have reduced the state’s liability to $12 billion within four years but the House insurance subcommittee pulled it last month, effectively killing it without a vote, even though it was supported by consumer and business groups.

A similar bill (SB 1372) was approved by the Senate Banking and Insurance Committee on Thursday, but has a long way to go in a short time to win passage. Sponsor JD Alexander, a central Florida Republican, says it’s a priority.”

While some consumer advocates, including Robin Westcott of Florida’s Department of Financial Services argue that the proposed bills were too aggressive, supporters argue that the status quo could lead to dire financial consequences.

Robin Westcott, the consumer advocate in the Department of Financial Services, thinks Hager’s bill was too aggressive. She thinks a drop to $15 billion in exposure is more palatable — it would reduce the state’s long-term risk but lessen the immediate blow to property insurance rates.

“Consumers feel right now that they pay enough for homeowners insurance,” Westcott said. “Anytime you do something this aggressive in one place it will cause a ripple in another.”

Hager is blunt about his colleagues’ inaction.

“A recipe for disaster,” Hager said. “We need to change the CAT fund structure to reflect reality.”

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