OPINION: Reduce the public risk from hurricane claims

Mar 21, 2008

Palm Beach Post--Mar. 21, 2008

As part of the constant effort to deal with Florida’s property insurance crisis, the Legislature this year must undo a little of what the Legislature did last year.

In January 2007, the Legislature increased the Hurricane Catastrophe Fund from $16 billion to $28 billion. The fund, which the state created after Hurricane Andrew in 1992, provides state-subsidized reinsurance to help insurers pay claims from a bad storm or season. Once a company’s claims exceed a certain level, the company can tap the fund, which is financed through small assessments on all policies. As former Insurance Commissioner Tom Gallagher once said of the fund, “Without it, there’s no private insurance market in South Florida.”
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A year ago, insurers had blamed the cost of private reinsurance – sold globally – for higher premiums. The Legislature assumed that offering an added $12 billion worth of optional state reinsurance would fix that. It didn’t, at least not as much as the state had hoped. Now, Chief Financial Officer Alex Sink is worried about another problem.

To pay claims from the catastrophe fund, the state would have to issue bonds backed by the fund. In August, the fund went to the markets to raise just $7 billion, for cash on hand. But the state could raise just $3.5 billion, despite the fund’s AA rating, because of what then was a nationwide credit problem caused by bad subprime loan investments. That credit problem has become a credit crisis. And as a last resort, money for the fund would come from assessments on every Floridian’s home, car and boat policy.

So Ms. Sink wants to “take some of our risk off the table.” She wants to lower the amount of that new, optional catastrophe fund coverage from $12 billion to $9 billion and allow the state to review the fund each year, after assessing the private reinsurance market. These days, Ms. Sink said, “Global reinsurers are hungry, hungry, hungry to come back into Florida.” Obviously, if private reinsurers could assume more of the risk, that would leave Floridians less exposed.

How much less? According to Ms. Sink’s office, if after a worst-case year the state had to issue 30-year bonds to pay claims, the savings over that time would be $5.5”billion. The savings per year would be $184”million. Of course, there’s a catch.

The catch is that premiums might have to increase, since private companies would be taking on that risk. Ms. Sink’s office estimates that the increase would be 1 percent to 2 percent. “And we’ve met with a couple of insurers,” Ms. Sink says, “who said they wouldn’t need to increase rates at all.” A spokesman for Ms. Sink said insurance regulators are working with legislators so that the bills – Senate Bill 2156 and House Bill 7021 – “provide safeguards on policies” to prevent insurers from raising rates beyond what the changes to the catastrophe fund would cause.

Obviously, no one likes the idea of even a tiny rate increase. But a part of the private insurance market finally is breaking Florida’s way. Spreading more of the risk responsibly would help Florida, and could help to undo the insurance crisis.