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Tallahassee Democrat: With insurance, our good luck will run out

Wednesday, February 22, 2012

Lynne McChristian: With insurance, our good luck will run out

We are all citizens of Citizens Property Insurance Corp. and its cousin, the Florida Hurricane Catastrophe Fund. We created them, subsidize them and are on the hook to bail them out.

Today, more people are waking up to the fact that both are significantly overexposed to a catastrophic financial failure, with enormous consequences for us all.

Some of us wonder what took so long for an alarm to sound.

The system is simple — and scary. Florida is financing the recovery from storms, which may strike any year, with future money from the pockets of every person with a homeowner’s insurance policy or an auto, business or boat insurance policy — no matter what insurance company has their business. The resulting economic dangers Florida faces from the costs of a major hurricane are real, not imagined.

Eight of the top 12 historical natural disasters to strike the U.S. affected Florida, and seven of Florida’s most damage-causing hurricanes occurred in a seven-year period. While we’ve been lucky enough to have six consecutive hurricane-free years, luck has a way of running out. That is what is driving discussions and decisions to shrink both of the state-run insurance programs before a big storm reminds us that ignoring the past is no way to plan for the future.

Luck is not a business strategy, as the head of Florida Hurricane Catastrophe Fund (CAT Fund) knows. Jack Nicholson notes that, when a major hurricane strikes, even cooperative, willing investors will bring in no more than $8 billion in bonds to meet the CAT Fund’s current obligation of $18.4 billion. The Cat FUND expects to have around $8 billion in cash, but there’s no way today’s world financial markets would find investors willing to buy nearly $11 billion in bonds to close the gap.

With a smaller CAT Fund, insurers would make up the difference using reinsurance in the private market, rather than buying it from the state. That costs more, because reinsurers provide claims-paying capital upfront, so the fees would be passed on to consumers. But paying a little more now is better than risking unpaid claims after a storm while paying a lot more in the future.

Tempers understandably flare with any talk of property insurance rate increases, so let’s sum up in one four-letter word what is propelling these reform efforts: debt.

Financing future storms with debt seems popular with people who are getting lower rates today. That tune changes when the bill comes due, including the bill we are still paying from Hurricane Wilma in 2005. Insurance claims drive insurance premiums. If sufficient money is not available the year it is needed, the two state-run insurance programs collect it on the back end for as long as necessary. “Pay it forward” is what the private market is required to do; “pay it backward” — year after year — is the way the state insurance programs run, by design.

This year, policymakers are considering ways to reduce the size of Citizens and gradually shrink the CAT Fund. Any effective solution must face reality and directly acknowledge the risks we all face from betting on quick bailouts from private insurers, who then are allowed to add an assessment for this to your property, auto, business and boat insurance policies.

Florida has been betting its future economy for a dangerously long time, and what was once politically popular will prove disastrous when the wind blows. The danger signal over financing catastrophes with money the state does not have is a real alarm, not a false alarm. It’s time to heed it before we wish we had.


Lynne McChristian is the Flor­ida representative for the Insurance Information Insti­tute. Contact her at

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