Hurricanes: Florida's Fund Can Be Repaired
Florida has a golden opportunity to fix the state's long-troubled Hurricane Catastrophe Fund.
Since its creation in 1993, the Cat Fund has served to provide reinsurance (insurance for insurance companies) when a hurricane hits Florida.
The fund provides a "backstop" largely by promising to issue taxpayer-backed bonds to help pay insurance claims in the wake of a major disaster. Private reinsurers need to have hard assets before they can sell reinsurance.
While this "pay later" system may lower upfront insurance premiums, it imposes massive potential costs on Florida taxpayers. According to the Cat Fund's own analysis, it currently has around $4.5 billion in hard assets to pay potential claims that could top $28 billion in a bad year.
Because no state has ever sold more than $13 billion in bonds all at one time, Florida almost certainly could not raise enough money and would have to get either a bailout from Washington or, more likely, default on its debts and enter something like a bankruptcy process.
Realizing this danger, in 2009 the Legislature voted to phase back a part of the Cat Fund by a total of $12 billion over six years. While this was a good first step, it didn't do much to remove the danger the Cat Fund poses in the short term.
Now, however, it appears that Florida has an opportunity to cut the size of the Cat Fund drastically without producing the big insurance rate hikes that politicians fear would come from doing so. For the first time in a while, the private reinsurance market has lots of money that could back Florida policies -- as much as $15 billion.
The reinsurers' plans to engage in buybacks of their shares provide proof that they have excess capital.
Furthermore, because there's now more money than the market knows what to do with, competition will likely force down the cost of new, private reinsurance needed to replace the Cat Fund.
Taking advantage of these market conditions, however, will take swift legislative action.
If the Legislature acts quickly, it can cut back the Cat Fund deeply without significantly raising rates for Floridians.
In the first weeks of its session, it should consider efforts to accelerate the cuts to the Cat Fund already slated while looking for other cuts elsewhere.
If the Legislature does the right thing, it can make Florida a lot safer and reduce the ultimate amount that Floridians will have to pay for insurance.
(Originally published in the Jacksonville Times-Union February 11, 2010)