Legislators rethink state storm fund

Feb 12, 2008

Miami Herald–Feb. 12, 2008

Soon after the insurance reform bill was passed last January, some lawmakers and state officials started to worry about the big tab Florida taxpayers would have to cover if a massive storm hit the state.

The Florida Hurricane Catastrophe Fund was expanded to cover up to $28 billion in hurricane losses in order to give insurers an opportunity to buy less expensive back-up insurance. Their savings were to translate into lower insurance rates for their policyholders.

This year, lawmakers are looking to backtrack and reduce that CAT Fund exposure by $3 billion.

A bill sponsored by Sen. Bill Posey, R-Rockledge, has been introduced in the Senate and a companion is in the works in House of Representatives that would require insurers to buy more reinsurance in the private market.

Why make changes after just one year? Several factors are at work.

The private reinsurance market has recovered so the state doesn’t have to provide the cheaper back-up insurance. Reinsurance rates dropped 10 to 15 percent last year and are likely to fall an equal amount this year, said James Massie, lobbyist for the Reinsurance Association of America.

Also, with more time to ponder the impact of the CAT Fund expansion, lawmakers and regulators have realized that a strong Category 3 hurricane — with wind speeds from 111 to 130 mph — hitting a major metro center such as Miami or Tampa could produce about $35 billion in losses.

Such a storm would easily blow through all the CAT fund coverage and beyond — leaving Florida taxpayers with big assessments.

The CAT fund ended 2007 with $8 billion. It would have to sell bonds to make good on its $28 billion IOU.

With the credit market still in turmoil because of the subprime mortgage meltdown, raising billions of dollars won’t be an easy task.

Last summer, the CAT Fund could raise only $3.5 billion, rather than the $7 billion it wanted to stockpile. And it had to pay a higher interest rate on the bonds it did sell.

The CAT Fund’s advisory council sent a letter to the Florida Cabinet three weeks ago expressing its concern about the fund’s ability to raise enough money to cover its obligations.

Here’s the rub for Florida residents: The bonds would be paid through surcharges on every insurance policy in the state, except medical malpractice and workers comp policies.

That means residents and business with auto insurance, homeowners and commercial insurance would be hit several times.

Florida Chief Financial Officer Alex Sink is a big proponent of reducing the state’s exposure. She initially had proposed having the Cabinet adjust the CAT Fund’s exposure based on reinsurance needs.

The bills lawmakers are working on have the Legislature setting the level of CAT Fund exposure.

In a presentation to the House Insurance Committee, Michael Carlson, director of legislative affairs for the Department of Financial Services, said requiring insurers to buy more reinsurance in the private market could push insurance rates up 1.5 percent to 3 percent.

Rep. Dan Gelber, a Miami Beach Democrat, would like to see the Cabinet or the State Board of Administration set the CAT Fund’s exposure level, giving it the ability to expand or recede based on how the private reinsurance market is doing.

But he would still like to see the CAT Fund used as a tool to help reduce the policy count in Citizens Property Insurance, the state-run insurer and biggest seller of windstorm coverage in the state.

”This is the fight we’re going to have,” said Gelber.