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Insurance Journal: Bill Would Take the Florida Cat Fund in the Wrong Direction

Monday, October 07, 2013

Florida state Sen. Jeremy Ring, D-Margate, has filed Senate Bill 228 to maintain the current statutory requirement that the state-run Florida Hurricane Catastrophe Fund, better known as the Cat Fund, sell $17 billion in coverage to the state’s property insurers. The bill further asks that the Cat Fund lower its deductible from $7.5 billion to $5 billion, making it even likelier that insurers will tap the Cat Fund and that it will run through its resources even more quickly.

Like private reinsurers, the Cat Fund provides insurance to insurance companies operating in Florida. When insurers’ total hurricane losses exceed the deductible, or “retention layer” as it is called, the Cat Fund promises to cover a portion of the remaining loss. In return for this promise, the Cat Fund collects premiums from insurers.

The Cat Fund, however, charges less than the private market for comparable coverage, which means it does not actually keep on-hand the funds necessary to pay the claims it can reasonably expect to receive. Instead, if it runs short on money, it has the authority to issue bonds, which it repays by imposing assessments (post-hurricane taxes) on virtually every policy in the state, including homeowners, autos, renters, commercial and so on. Floridians are still paying a 1.3 percent assessment on their insurance policies to pay off the Cat Fund’s bond debts from the 2004 and 2005 hurricane seasons.

For the past several years, the Cat Fund’s own managers estimated it would not have had enough cash on hand or ability to sell enough bonds to fully cover its $17 billion in obligations, had the state been impacted by a sufficiently bad hurricane season. In short, Florida law required the Cat Fund to knowingly sell more coverage than it could pay for.

Thanks to Florida’s unprecedented eight-year “hurricane drought” and the Cat Fund’s cash build-up provision that Sen. Ring’s bill seeks to abolish, the Cat Fund has for the first time in years accumulated enough resources that, combined with issuing bonds, will allow it to fully cover its $17 billion obligations, according to a recent estimate.

However, lowering the Cat Fund’s deductible, as Sen. Ring proposes, would essentially increase the relative risk associated with the coverage sold by the Cat Fund, as well as displacing even more private reinsurance. The probability of the Cat Fund being tapped and having to pay out claims would increase, thus transferring “skin in the game” away from private companies onto the state’s taxpayers.  It would needlessly increase the likelihood of a “pay now AND pay later” scenario where the debt to cover a particular storm would be foisted on Floridians for several years thereafter.

The responsible thing to do is to encourage insurance companies to rely more on their own surplus and private reinsurance coverage. That way, claims would be quickly paid off after a storm rather than incurring bond debt, which would only burden Floridians with additional insurance costs for years during which time the state could very well be impacted by additional storms, compounding the situation.

Sen. Alan Hays, R-Umatilla, and Rep. Bill Hager, R-Boca Raton, filed responsible legislation earlier this year that would have maintained the current deductible, while gradually scaling down the amount of coverage Florida law required the Cat Fund to sell by $3 billion.  This would have decreased the likelihood or severity of post-hurricane debt and taxes, and transferred more hurricane risk onto the private market and away from taxpayers.  Private reinsurance, whose rates are on the decline, would have picked up the slack.

For several years, the Cat Fund was not expected to meet its obligations, which would have resulted in delayed payment of claims and mass insurer insolvencies.  Eventually, a storm will strike the state and the Cat Fund will be tapped dry once again. Now that reinsurance rates are on the decline and the Cat Fund appears to be fully funded, the time is ripe to make the necessary reforms so the Cat Fund is never again in the position where it is selling fake coverage.  Sen. Ring’s bill would take us in the wrong direction.

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