Not reforming Florida Cat Fund places taxpayers at risk

by Matthew Glans on March 16, 2012

By not reforming the Florida Hurricane Catastrophe Fund, the Florida legislature has placed the people of Florida, and its insurance industry, at risk. In a recent release from the Association of Bermuda Insurers and Reinsurers (ABIR), its president, Bradley Kading, argued that legislators in Florida placed politics ahead of good policy, and that despite efforts by the head of the Cat Fund to address many of the issues with the state reinsurer, the legislature was unable, or unwilling to address what is a growing funding problem. The Cat Fund is simply not prepared to cover the losses after a major hurricane.

From the Insurance Journal:

“Florida policy holders risk higher hurricane tax assessments, higher hurricane insurance prices and the risk their insurer will become insolvent due to the inability of the Cat Fund to fully pay its hurricane reimbursement obligations to ceding insurers,” Kading stated.

Kading stated: “The legislature’s failure to act this year is a sign of election year politics trumping sound fiscal policy and long term consumer protection. We commend Jack Nicholson, and state Rep. Bill Hager and Sen. J.D. Alexander for their leadership in supporting Cat Fund reform. We also commend the Florida Consumer Action Network, Florida Tax Watch, Florida Chamber of Commerce, Associated Industries of Florida, the League of Municipalities and the Florida Wildlife Federation for their support of this important legislation and their commitment to further reducing the post-event hurricane tax assessment burden.”

Kading also stressed the remarkable contribution of global reinsurers in 2011 in paying record-setting claims from floods, hurricanes, fires, earthquakes, tornados and tsunamis. International reinsurers paid an estimated $47 billion of the record $105 billion in global catastrophe losses last year.

The ABIR’s bulletin explained that “Florida Hurricane Catastrophe Fund Chief Operating Officer Jack Nicholson led the fight for Cat Fund ‘right-sizing’ legislation in 2012 that would have reduced the size of the Cat Fund to where it could be supported by the debt financing assessments.

“Nicholson noted that in three of the last four years the Cat Fund has been mandated by law to sell catastrophic protection to Florida’s ceding insurers but, due to bond market volatility, would not likely have been able to issue sufficient bonds to pay all the claims from a large hurricane – including events that may occur in 2012.”

The Cat Fund’s shortfall is not a surprise to legislators or regulators, but the consequences of a failure of the Cat Fund are profound. Many insurance experts, including Florida Insurance Commissioner Kevin McCarty have argued that if the Fund were to fail many home insurance writers in the state would face a capital deficit.

The companies affected by a Cat fund failure make up around 35 percent of the Florida home insurance market and Kading believes that a failure “could cause insurance rates to increase an average of seven percent due to the inability of the Cat Fund to provide additional protection for hurricanes in following years.”

Kading argues that the private reinsurance industry, which he represents, is better equipped to handle the risk of Florida insurance policies then the Cat Fund. The private reinsurance industry is more versatile and better capitalized the state reinsurer and does not place the risk of failure on the shoulders of taxpayers.

“Reinsurers are strongly regulated with robust capital requirements, stress testing and financial examinations by regulators including the Bermuda Monetary Authority,” he noted. “Their resilience in spite of these losses demonstrates that reinsurers stand ready to fulfill the promises they make to their clients.

Kading added: Reinsurers provide “dependable, growing capacity” to meet US consumer needs, and, in addition have “pre-event capital in the bank to pay their claims, something in which government funds like the Florida Cat Fund are deficient. Such funds are dependent on bond debt and assessments on all Florida consumers to pay their claims. These bonds saddle future consumers with an unnecessary and growing debt burden.”

Kading described the “politically inspired restrictions on the ability of reinsurers to provide capacity for their clients,” as the “biggest threats to US Cat markets.” He explained that they result in “rate suppression, government run reinsurance funds or protectionist measures like US Rep. Richard Neal’s (D-MA) discriminatory reinsurance tax.” All of which “drive away private capital and deprive consumers of the benefit of competitive markets.”

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