ALEX SINK: We can reduce Floridians’ insurance risks

Feb 18, 2008

Miami Herald–Mon, Feb. 18, 2008

Right now, every Florida homeowner, automobile owner and business owner is liable for ”hidden taxes” in the form of assessments from Florida’s Hurricane Catastrophe (CAT) Fund. The risk we face results from an attempt by the state to reduce homeowners’ insurance during the insurance-rate crisis following the 2004 and 2005 hurricane seasons.

In 2007, the state increased the amount of reinsurance we sell though the CAT Fund to private insurance companies by $12 billion. Florida’s CAT Fund sells discounted reinsurance to private insurance companies looking to back up their homeowners’ insurance exposure. Last year’s expansion was predicted to lower homeowners’ insurance premiums by a statewide average of 24 percent.

We have not benefited from this bargain. Floridians with insurance policies on homes, apartments, cars, boats or businesses are at risk for thousands of dollars in assessments when the next hurricane causes billions in damages.

If a Category 3 hurricane strikes Tampa Bay or South Florida this summer, it could easily cause $35 billion in damages. This kind of storm would force the state to issue $28 billion in bonds to raise enough money to pay homeowners’ claims. And to pay for these bonds, the state assesses Floridians’ insurance policies. Look at your current insurance statement; you’re already paying assessments to cover a fraction of the damage we currently are liable for. With a Category Three hurricane in the wrong place, our home, auto and business insurance policies could be taxed a total of $1.8 billion each year for 30 years.

Volatility in the world financial markets has already hampered Florida’s ability to raise capital in the bond markets. I am concerned about our ability to sell bonds of this magnitude at a reasonable price. The CAT Fund’s Advisory Council last month expressed concern about the ”realistic potential to adequately fund” our increased insurance risk.

We have a real opportunity to act now, as the private market is well-positioned to take a portion of this risk. My proposal to Florida’s legislators increases the amount of coinsurance that an insurance company must have to obtain discounted reinsurance through our CAT Fund. This would reduce our risk exposure by $3 billion. While this is a small part of the extra risk we assumed last year, it does represent a first step without a significant impact on rates. This plan would save Floridians from paying yearly assessments of at least $111 million a year for 30 years when hurricanes return to our state’s coastlines. That’s a tax savings for Floridians of at least $3.3 billion.

Reducing the risk Floridians face — and reducing exorbitant assessments — makes good business sense. Contact your legislators and ask them to support this proposal to reduce the risk of assessments through the CAT Fund. Floridians should not bear a weighty tax burden when we have the opportunity to spread the risk among worldwide investors.

ALEX SINK, state chief financial officer, Tallahassee