Florida Hurricane Catastrophe Fund Chief Operating Officer Jack Nicholson has proposed reforms that would put the giant taxpayer-backed reinsurer on sounder financial footing.
In these proposals, he includes provisions that would reduce the size of the government-run reinsurer’s “mandatory” layer, require insurers participating in the fund to pay more, reduce special taxes the fund might impose on Floridians, and end the “temporary increase in coverage layer,” which the state has never funded.
Many of the proposals echo those made in “Solutions to Restore Florida’s Property Insurance Marketplace to Protect Taxpayers and the Insured,” a James Madison Institute report written by Heartland Institute Vice President Eli Lehrer, who runs Heartland’s Center on Finance, Insurance & Real Estate.
Although several catastrophe fund reform proposals were floated during the last legislative session, none received a floor vote.
More Uncertain Than Ever
Don Brown, a Heartland Institute senior fellow and former Florida legislator, says Nicholson’s proposals are necessary for Florida’s future.
“For some time we have known that the Florida Hurricane Catastrophe Fund might not be able to borrow enough money to fully fund its mandatory coverage limit after a major storm,” Brown said. “The uncertainty is now greater than ever given the status of the world financial markets.
“The proposal recently advanced to restructure the Catastrophe Fund to more accurately reflect its ability to fund post-loss obligations is not only timely but, in my opinion, not optional,” Brown added. “We must thank Dr. Nicholson for his leadership and adopt his proposal as soon as possible.”
Christian Cámara, director of The Heartland Institute’s Florida office, agreed.
Risk to Future
“As currently structured, the Cat Fund poses an enormous risk to Florida taxpayers and the state’s economic future. This plan would be a major step in the right direction that would not only help insulate taxpayers from years of devastating post-hurricane taxes, but also promote the transfer of billions of dollars’ worth of hurricane risk outside our borders.
“The less hurricane risk taxpayers bear, the less likely it is that taxpayers will have to bail out the state after a storm,” Cámara said.
Key reform proposals include:
- Reducing the size of the mandatory coverage layer. This would lower the limits of the fund’s mandatory coverage layer from the current $17 billion over three years. For the 2013 contract year, the limit would be reduced to $15.5 billion; for the 2014 contract year, the limit would go to $14 billion; and for the 2015 and subsequent contract years, the limit would be reduced to $12 billion (with provision for increased limits after the FHCF can fully fund its single-season capacity and its second-season capacity).
- Increasing the participating insurer co-pay. The participating insurer co-pay would reduce the maximum available coverage percentage from the current 90 percent over three years. For the 2013 contract year, the maximum available percentage would be 85 percent; for the 2014 contract year, the maximum available percentage would be 80 percent; and for the 2015 and subsequent contract years, the maximum available percentage would be 75 percent. The current, lower coverage options (45 and 75 percent) would remain available.
- Increasing insurer retention. Aggregate insurer retention would increase to $8 billion for the 2013-2014 contract year. The proposal retains current provisions that automatically adjust retention each year based on FHCF exposure growth.
- Increasing the cash build-up factor. Under current law, the cash build-up factor, which is added to the actuarially determined premiums, is scheduled to increase by 5 percentage points a year until it reaches 25 percent for the 2013 contract year. The draft continues this annual 5 percentage point growth until the 2018 contract year, when the factor would reach 50 percent.
- Reducing emergency assessment caps. The draft reduces the maximum emergency assessment for a single year’s losses to 5 percent instead of 6 percent, and for all losses from all years to 8 percent instead of 10 percent, beginning in 2015.
- Terminating the TICL layer. The optional coverage in excess of the mandatory FHCF layer would not be available after the 2012 contract year. Current law provides for elimination of TICL after the 2013 contract year.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
