One hurricane away from ‘largest tax hike’

Worried that it couldn’t pay for a big hit, state may reduce its fund that aids insurers

Herald Tribune--Feb. 21, 2008

TALLAHASSEE This is the first in a series of stories looking at major issues facing the Florida Legislature, which convenes its annual session March 4.

Still miffed that their gamble to reduce out-of-control insurance premiums largely failed last year, Florida lawmakers are about to debate another roll of the dice.

Advisers warn Gov. Charlie Crist and others that U.S. financial markets are so weak that Florida would be unable to deliver on its current promise to protect insurance companies by paying up to $28 billion in hurricane claims.

The solution offered by Chief Financial Officer Alex Sink is to roll back Florida’s catastrophe fund before the next hurricane season — a move that might protect the state from a big storm but could end up increasing premiums for millions of homeowners.

The bill, which had its first public airing this week, redraws familiar battle lines between the House and Senate over how much risk to take in the elusive campaign to corral insurance rates.

“It’s not just about lowering rates,” said House Speaker Marco Rubio, who endorses Sink’s bill. “We have an unaffordable insurance market. We also have an unsustainable one. We are basically one hurricane away from the largest tax hike in Florida history.”

The risk he was talking about is a potential bill from the Florida Hurricane Catastrophe Fund, a state pool created years ago to help insurers pay claims from a large catastrophe.

In their efforts to lower home insurance rates at almost any cost last year, lawmakers doubled the size of the Cat Fund, selling insurers backup hurricane coverage at a fraction of the rate charged by unregulated, largely offshore reinsurers.

The concept was to pass those savings — an estimated 20 percent rate cut — to consumers. But the reality is that many insurers simply doubled up on their reinsurance, giving homeowners reductions that averaged 12 percent, if there was a reduction at all, while racking up an estimated $3.7 billion profit in a storm-free year.

Insurance executives told a Senate investigative panel this month that such profits are justifiable in the face of the losses they risk in Florida.

Unconvinced, Senate Banking and Insurance Chairman Bill Posey is calling for the appointment of an independent counsel to investigate the industry. He joins Gov. Charlie Crist in accusing the industry of greed at the expense of suffering homeowners.

“Last year we had $3.7 billion in profits go out of this state and we’re going to hear the companies whine like crazy if they have to pay a dime for another storm,” Posey said. “I think the people back home tend to think they’ve been shafted pretty badly and I tend to agree with them.”

In the meantime, lawmakers this week took up Sink’s plan to lay off some of the risk Florida undertook in doubling the size of the state Cat Fund. The bill promises to keep insurance at the forefront of the legislative session that starts next month.

Proponents of the reduction say Florida should seize the opportunity to reduce the state’s exposure to hurricanes, a risk that carries its own threat to consumers.

The Cat Fund works like a giant insurance policy. In trade for about $1 billion in premiums a year, the Cat Fund promises to pick up $28 billion in insurers’ hurricane losses. But the money is not banked.

To cover storm claims, the fund would have to sell what would be some of the biggest bonds in U.S. history, in uncertain markets. Those bonds would then be paid off by consumers in the state, through surcharges on home, auto and business policies.

Actuaries say a Category 3 hurricane hitting an area such as Tampa would result in surcharges of 4.77 percent a year for 30 years — or $57.24 a year on a $1,200 homeowner’s policy.

Sink estimates that reducing the Cat Fund by $3 billion would reduce that assessment by half a percent.

But that $6.83 a year potential savings could cost homeowners as much as a 3.9 percent increase in their insurance bills before the wind ever blows as insurers replace their discounted Cat Fund coverage with protection from private reinsurers.

Sink argues that current changes outside Florida make that a good deal.

After two years of spectacular rises, reinsurance prices are now tumbling, in part because of hefty competition from Florida’s Cat Fund.

In year-end earnings calls this month, Bermuda insurers report their sales in U.S. hurricane regions are down 20 percent and more; they remain four to eight times higher than what the state charges.

“We lost business to people who are giving 40 percent reductions. And I find it mind-boggling that that’s happening, but it happened, so we canceled the business,” Aspen Insurance Holdings CEO Christopher O’Kane told analysts last week.

If the Legislature does nothing to the Cat Fund, those reductions would be passed to homeowners. But Sink contends they can be used to offset the cost of her Cat Fund cut.

“It would be a wash,” said spokeswoman Tara Klimek.

Democratic Senate Minority Leader Steve Geller, co-chairing the Senate’s insurance investigative panel, wants the savings passed on to consumers.

“I think reducing insurance rates is one of the most critical issues in the state of Florida,” he said.

The Legislature will not vote on Sink’s plan until after the session begins in March, but Sink is already soliciting support from the private sector. She traveled to New York earlier this month to explain the plan to the Reinsurance Association of America.