CFO, lawmakers trying to shore up backup fund’s solvency

Apr 2, 2008

Miami Herald--Apr. 01, 2008

A tightening global credit market is contributing to Florida’s insurance woes, prompting officials to look at reducing the amount of money in the state’s catastrophe fund, which pays hurricane claims when private insurers can’t.

Right now, if a Category 3 hurricane were to strike a populated area – likely resulting in a minimum of $35 billion in damage – Floridians would be faced with a $1.8 billion assessment each year for 30 years to pay claims that would exceed the money available in Florida’s Hurricane Catastrophe Fund.

And it would result in Floridians with insurance on their homes, cars or businesses being hit with a surcharge of as much as 4.8 percent on all of their premiums.

That makes lawmakers nervous.

“It’s a very precarious position for us to be in,” said the state’s Chief Financial Officer, Alex Sink, who is attempting to wean the state’s from its high stakes commitment in the marketplace at a time private reinsurance is available at rates “way down from last year.”

Sink noted that investment advisers told her on Monday “that all bets were off” if the state tried to sell enough bonds to reimburse insurance companies – and therefore its claimants – in a timely manner.

Sink has enlisted bipartisan help in the Legislature that would reduce the CAT fund’s liability by $3 billion. Committees in the Senate and House are scheduled to hear proposals (SB 2156 and HB 7031) on Thursday.

“It’s not as much as I’d like, but it’s a good start,” Sink said Tuesday.

Fund managers are now authorized to sell up to $28 billion in coverage to insurers, including Citizens Property Insurance, the state-backed insurer and the fund’s largest customer.

But the CAT Fund, as it’s known, depends on credit markets to raise most of the money it would require to back up insurers. And that money is tight.

“The way things are right now, with the CAT fund, the only thing you can be certain of is the $3 billion they have in cash,” said Sam Miller, executive vice president of the Florida Insurance Council. “All of a sudden the system we have in place may or may not deliver and work the way we thought it would.”

And that troubles virtually everyone involved with Florida’s property insurance woes.

“We have a concern about the ability to bond,” said Bob Lee, an actuary at the Office of Insurance Regulation. “If you can’t fund it in the bond market, short-term, that would have an impact on getting their claims paid.”

Just a year ago, CAT fund managers were able to sell only about half of the $7 billion it had sought in bonds.

“The new twist now is how reliable is massive amounts of debt?” asked Miller. “At some point, if the CAT fund doesn’t deliver, Citizens either stops paying claims or moves immediately to assessments.”

Florida lawmakers are also asking the U.S. Congress to consider a National Catastrophe Fund.

“It’s serious business and we need to keep the pressure on,” said Sen. Bill Posey, who advanced two measures Tuesday calling for federal help in the Senate Banking and Insurance Committee he chairs.

Florida’s Hurricane Catastrophe Fund was created after Hurricane Andrew in 1992 to sell backup insurance to companies selling policies in Florida. It’s role was expanded last year by lawmakers who wanted to provide cheaper backup insurance to help insurers keep premiums lower, but the results have been mixed.