Not Just a Giveaway

Published August 11, 2008

In an insurance environment as dynamic and challenging as Florida’s, unique economic and environmental circumstances have led to a diverse mix of regulatory and funding programs designed to help homeowners weather wind and storm damages. In an effort to hedge the state catastrophe fund against a large hurricane, the Florida State Board of Administration has made an arrangement with Berkshire Hathaway to pay more than $220 million for its commitment to bond out $4 billion to help shore up the Florida Hurricane Catastrophe Fund (“Is state’s insurance deal win-win for a billionaire?” July 31).

Out-of-the-box thinking is essential, but the paternalistic desire to protect the citizenry has led some regulators in Florida to implement poorly conceived reforms, and this hurricane insurance policy is no exception. Florida has become increasingly reliant on the Catastrophe Fund, both through its insurer of last resort, Citizens Property Insurance Corporation, and its efforts to finance new start-up companies to reduce Citizens’ growing policy burden.

The new bonds are essentially a risk-free investment for Berkshire Hathaway. Berkshire Hathaway’s bond commitment provides the state with a total of $12 billion if the cat fund is tapped for more than $25 billion. According to the Jacksonville Business Journal, the state would have to access the bond market for the rest. If it can’t, say because of the tumult in the credit markets, all policyholders will get hit with assessments.

The catastrophe fund has been stretched beyond its practical limits. The new policy is merely a patch job on a much larger problem: the state’s subsidization of hurricane risk. The policy is a gamble at best, padding the pockets of Warren Buffet and intervening in the insurance market, which has already driven many private providers out of the state.

Matthew Glans ([email protected]) is a legislative specialist for The Heartland Institute.