State aims to shift insurance risk

Feb 20, 2008

Reagan’s plan would put portion of burden back on private firms

Bradenton Herald– Feb. 20, 2008

State Rep. Ron Reagan plans to introduce a bill Thursday that would shift some of the hurricane-risk burden from taxpayers back to private insurers.

As part of a joint resolution with state senators, the Bradenton Republican is proposing a $3 billion reduction in the state’s risk exposure through the Florida Hurricane Catastrophe Fund, a pool for paying storm damages that is funded through premium assessments on property, auto and business insurance policies.

"What it does is it shifts more risk back to outside insurance companies," Reagan said. "Instead of the state picking up the risk, it will go back to the private market."

The move, which comes at the behest of Florida Chief Financial Officer Alex Sink, is an about-face from what legislators did during their special session last year to address the property-insurance crisis. At the time, legislators agreed to expand the CAT fund from $16 billion to $28 million in order to provide more affordable backup insurance – known as reinsurance – to private companies, thus enticing them into writing more policies in the state.

But with two hurricane-free storm years under Florida’s belt, and more insurers re-entering or increasing their business in the state, Reagan and others think it’s time to let insurers reassume some of the risk.

"We have a situation out there where we have exposed the state of Florida and the CAT fund to billions of dollars in potential exposure," Reagan said. "The reason being, there was no market at the time."

Much of that exposure relies on the state issuing bonds, which puts Florida even more on the line for potential storm damages, said Tara Klimek, a spokesperson for Sink.

"Right now, if we had a $35 billion-dollar storm, which would be a Cat. 3 in Miami or a Cat. 3 in Tampa, that would essentially force the state to go out and bond $28 billion dollars," Klimek said. "And the state would pay back, through assessments, $1.8 billion dollars every year for 30 years. That’s just astronomical. Our proposal to reduce that risk would essentially result in a reduction of $184 million per year for 30 years or a total savings in assessments of $5.5 billion."

Though assessments would be decreased, homeowners could potentially see increases in premiums of as much as 2 percent, Klimek said.

But because private reinsurance rates have continued to come down, homeowners may see no increase at all, Klimek added.

Jeff Grady, president and chief executive officer of the Florida Association of Insurance Agents, said if the state was going to undertake such a move, now is the time to do it.

"The good news is, this is being asked at a time where the reinsurance market rates have come down considerably," Grady said. "So if they’re going to do this, this is probably the time to do this. My personal view is it’s the prudent thing to do because the exposure to taxpayers right now is enormous."

State Rep. Bill Galvano, R-Bradenton, also agrees with the move, but wants more details about the math.

"After having two good hurricane years of being able to build reserves, we need to start moving back toward a more free-market insurance world in Florida," Galvano said. "So this type of thing is a step in that direction. The exact number, how far and how fast we move in that regard, I’ve not decided what is and what isn’t appropriate."

Galvano said it also remains to be seen whether such a move will have support from Gov. Charlie Crist.

A call to the governor’s press office seeking comment was not returned.

"There is not anything coming out of the executive branch about this type of move right now," Galvano said. "For anything to be successful, it’s going to require the support of the governor."