News Journal Online: State-dominated insurance system poses threat to Florida’s economy

Apr 6, 2010

This article was pupblished by the News-Journal Online on April 6, 2010.

A serious threat to Florida’s economic recovery is the possibility that a major hurricane will strike a large metropolitan area this summer or next. The resulting damage to residential and commercial properties could exceed $80 billion.

Many of the claims would be the responsibility of the state. Unfortunately, the state’s two major property insurance entities, Citizens Property Insurance Corporation and the Florida Hurricane Catastrophe Fund (known as the “Cat Fund”) do not have the financial resources necessary to pay losses of such magnitude.

Citizens, the primary insurer of Florida homeowners, will have about $4.2 billion in cash and $8.7 billion in expected reinsurance coverage this year to meet its potential $21 billion obligation from a catastrophic hurricane. Thus, Citizens could be underfunded by more than $8 billion.

Equally concerning, insurance companies would rely on about $23 billion in state Cat Fund coverage. Yet it is projected that the Cat Fund will only have about $6 billion in cash this year, and may be forced to incur debt through bond issues of more than $17 billion to pay its claims.

This leads to a frightening reality: Whatever debt Citizens and the Cat Fund incur must be paid back by Floridians through hidden hurricane taxes — of an unknown amount and duration — that are levied on their auto, boat, homeowners and business policies. In the event of an $80 billion storm, these taxes could cost individual families and businesses thousands of dollars. Most Floridians don’t realize it, but they’re already paying hurricane taxes on their insurance policies to bail out the state’s flawed property insurance system. In fact, we’re all still paying taxes for the 2004 and 2005 hurricanes, because the state ran out of money to pay its claims.

The threat to Florida’s economic recovery arises from three possibilities: additional hurricane taxes may intensify the current recession; the state may not be able to issue enough bonds to pay all of Citizens’ and the Cat Fund’s claims; and the state would have few resources left to pay claims from a second major storm. These possibilities could occur soon, unless we abandon the policy of suppressing insurance rates below actual risks.