As in all states with significant hurricane risks, windstorm coverage is expensive for people in Florida. In an attempt to bring down the costs of this coverage, Florida’s Legislature in the early 1990s established the Florida Hurricane Catastrophe Fund, a massive government-owned reinsurance entity. All private insurers operating in the state are required to buy coverage from the Cat Fund (as it’s commonly known), and the Florida Citizens Property Insurance Corp., historically, only bought Cat Fund coverage (it has recently gone to the market with a $250 million catastrophe bond.)
In theory, the Cat Fund provides reinsurance (insurance for insurance companies) at below-market rates and thereby produces savings they can pass on to consumers. This system, however, poses enormous risks to Florida’s fiscal future. A Florida legislator who has championed reform of the state’s beleaguered Cat Fund is warning policyholders and insurers in the state that the recent failure of reform legislation could have negative long-term effects on the state’s insurance system and leave taxpayers on the hook for billions in damages after a major storm.
In an editorial published today in the Tampa Tribune, Rep. Bill Hager, R-Boca Raton, argues that the state’s failure to address the problems facing the overburdened Cat Fund could lead to a collapse of the state’s insurance system after a major hurricane. Florida has been lucky to avoid a major hurricane in the past six years, but the state cannot continue to rely on good luck to keep the Cat Fund solvent.
Just weeks ago, the Florida Legislature ended its regularly scheduled session, and while some important legislation that benefits the citizens of this great state passed, legislation to address the much-needed reform of the Florida Hurricane Catastrophe Fund failed.
Meanwhile, the countdown has begun: The start of the 2012 Atlantic hurricane season is around the corner.
Based on its own analysis, the Cat Fund would have been unable to pay its claims in three of the past four years. Even with “hurricane tax” assessments levied on the insurance policies of all Floridians, as of October 2011 the fund faced a potential $3.2 billion shortfall.
In the wake of the next major storm or storms, this shortfall has the potential to dramatically impact the state. Analytical data suggests that if the Cat Fund has a shortfall of 20 percent after a storm, a significant number of Florida insurers would be insolvent or otherwise unable to stay in business.
Rep. Hager, a former Iowa insurance commissioner, argued that several bills that were proposed during the last legislative session would have taken on several of the flaws in the current Cat Fund system: taxpayer assessments and overexposure. While those opposing the reforms argued that the changes would lead to higher rates, Hager counters that rates are likely to increase regardless and that the Cat Fund provides an unfair subsidy because it doesn’t collect enough in premiums to cover its claims.
Working with Sen. JD Alexander, R-Lakes Wales, we sponsored House Bill 833 and Senate Bill 1372, which were based on a proposal by the Cat Fund’s chief operating officer, Jack Nicholson. Supported by consumer, taxpayer, environmental, nonprofit and business groups, the bills would have reduced the risk associated with annual “hurricane tax” assessments, which could last as long as 30 years and will be levied on all homeowner, business and automobile policyholders.
Additionally, the legislation aimed to begin the process of “right sizing” the Cat Fund to ensure the fund can fully pay its obligations in the future, and would have helped foster a more stable property insurance market that encourages strong companies to return to our state and compete for our business.
Opponents of the legislation argued HB 833 and SB 1372 would have caused rates to go up. However, in reality the bond markets have already created the rate impact, and rates may very well go up without the legislation.
As an elected official, my objective is not to create a situation that negatively affects my constituents or any other Floridian. In fact, I am simply working to correct a situation that has been wrong for many years. The Cat Fund knowingly fails to collect enough premiums in advance, subsidizing the few at the expense of the many by relying on taxpayer-backed bonds to pay their claims. This is unfair. There are dire consequences associated with allowing the fund to continue along this current path.