Florida Hurricane Fund May be Too Big
Sep 21, 2011
The following article was published in Florida Today on September 21, 2011:
Hurricane Fund May be Too Big
By the Associated Press
Florida’s hurricane fund chief is warning that the state-created fund used to help insurers pay off claims after a big storm is in danger.
The state has relied on a hurricane fund ever since Hurricane Andrew devastated South Florida almost 20 years ago. Insurers get help to pay homeowners if a hurricane — or a series of hurricanes — results in widespread damages.
But Jack Nicholson, the chief operating officer of the fund, told state legislators today that the fund is on “shaky ground.” He said ongoing turmoil in the world financial markets is raising questions about whether the fund could borrow enough money to help insurers after a hurricane.
This year the fund is providing $18.5 billion worth of coverage, and while it has more than $7 billion worth of cash on hand, it would still need to borrow another $11 billion.
“I think we are dangerously overexposed considering the current reality of the marketplace,” Nicholson said. “… It scares me to death where we are
Nicholson used the warnings as part of a pitch to state lawmakers to scale back the size of the Florida Hurricane Catastrophe Fund. That likely would cause insurance premiums to rise, but it has the backing of many key Republicans, including Gov. Rick Scott.
Every insurer in Florida is required to purchase coverage from the “Cat Fund.” The fund provides a backstop to insurers at a rate that is generally cheaper than reinsurance sold by private companies. Nicholson estimated that this low-cost option probably results in insurance premiums being about 25 percent cheaper.
If a storm causes enough damages the insurer can ask for reimbursements from the fund. But if the hurricane fund runs out of cash because of a large storm, it borrows money to pay insurers.
The state pays off its debts with an assessment, or what some call a “hurricane tax,” that is placed on nearly almost insurance policy in the state, including auto insurance policies. Right now, homeowners and drivers in Floria are paying off charges primarily because of Hurricane Wilma
Nicholson, however, said he’s less worried about future hikes in the “hurricane tax” because right now he’s not sure he can even borrow enough money. He said the turbulence in the financial markets this summer has created “tremendous uncertainty.”
The Republican-led Legislature — including then House Speaker Marco Rubio — agreed with Gov. Charlie Crist to greatly expand the size of the fund back in 2007 as part of an effort to lower insurance rates. Two years later, legislators started whittling the fund back down, but Nicholson says more needs to be done.
“The Cat Fund needs to be right-sized,” Nicholson said. “It’s too much when you are expecting to depend on 10 billion or greater of debt.”
State Sen. Alan Hays, R-Umatilla, said he considered it “fraud” to force insurers to buy coverage from the fund if there is no guarantee the fund can pay for storm damages.
“We’re taking a tremendous gamble, which I find unacceptable,” Hays said.
But any move by state lawmakers to change the hurricane fund could run into opposition from coastal lawmakers concerned about raising insurance rates during bad economic times.
“We need to go very slowly,” said State Sen. Mike Fasano, R-New Port Richey. “I have great concerns of the ramifications of what this will do to every property insurance policy holder in the state. We’re not just talking about homeowners. We’re talking about mobile home owners, condo owners and small business owners.”
The governor, however, agrees with Nicholson. He said he would prefer insurers to rely on other sources of help instead of utilizing the state-created hurricane fund.
“I like free markets, I believe free markets work,” Scott said. “I believe free markets are efficient so I would like to downsize the Cat Fund responsibly.”