COMMENTARY: Crist’s insurance plans simply don’t add up

Feb 25, 2008

Orlando Sentinel--Feb. 24, 2008
Mike Thomas

Florida’s great socialized insurance experiment is failing.

The state cannot pay its bills if there is a major storm.

Put another way, hurricane insurance in Florida is a fiction. Here is an explanation:

Florida has two state-run insurance companies.

The most familiar one is Citizens Property Insurance, which provides hurricane coverage to most homeowners along the coast. I’ll get back to it later.

For now, let’s look at the other, less visible one: the Florida Hurricane Catastrophe Fund, or Cat Fund for short.

The CAT Fund sells backup insurance to other insurance companies.

This is roughly how it works: The Goofy Insurance Co. insures 100 homes for a total of $1 million. It doesn’t want to take on all that risk itself. So it cuts its exposure in half by buying $500,000 in backup insurance from the CAT Fund.

The CAT Fund isn’t the only source for such backup insurance. There also are private “reinsurers” that sell it, but at a higher cost.

Now, you may recall that Gov. Charlie Crist promised to sharply lower insurance rates last year. His plan involved the CAT Fund.

Before last year, it was capped at $16 billion. That was all the backup insurance it could sell.

Crist expanded the fund to a whopping $28 billion. The idea was that insurance companies would buy more of their backup insurance from the state instead of private re-insurers.

They then were supposed to pass on their savings to us.

But our rates did not drop as much as Crist promised.

Why? A big reason was that the big insurance companies didn’t trust the CAT Fund. It only has about $6 billion in reserves but has committed to paying out $28 billion.

If a major storm hit, the state would have to sell bonds to come up with the difference. Insurers didn’t believe the state could raise that kind of money in a timely manner. And so the companies continued buying backup insurance from private reinsurers.

Time has proved them right.

The bond market is in turmoil. State and local government agencies either can’t sell bonds or are getting slammed with high interest rates. Both the CAT Fund and Citizens Property have run into problems recently trying to raise money in the bond market.

So consider the consequences of a major storm hitting the Tampa Bay area or Miami. The CAT Fund would go running to the chaotic bond market for billions.

And right behind would be Citizens Property, which is even more woefully underfunded.

The notion that a storm-crippled Florida could sell that kind of debt doesn’t even qualify as a fantasy.

The risk is staggering.

If a big hurricane hit Miami, it could inflict $140 billion in damages, with the state obligated to pay much of that. Within 15 years, that figure doubles as the coast grows.

Chief Financial Officer Alex Sink wants to reduce our exposure from the CAT Fund by shrinking it down to $25 billion. That is only a decrease of $3 billion — chump change.

But it’s a start.

There is talk of scaling back the fund more in ensuing years, basically undoing Crist’s botched attempt at “insurance reform.”

Insurers would have to go back to the private market for more backup coverage. And they would pass on the cost to us, meaning higher rates.

But at least we’d be paying for coverage that actually would be there when the big one hits.