Research & Commentary: Florida Hurricane Catastrophe Fund

Published January 25, 2012

As in all states with significant hurricane risks, windstorm coverage is expensive for people in Florida. To control the costs of this coverage, Florida’s legislature has established the Florida Hurricane Catastrophe Fund, a massive government-owned reinsurance entity. All private insurers operating in the state are required to buy coverage from the Cat Fund (as it’s commonly known), and the Florida Citizens Property Insurance Corporation buys only Cat Fund coverage. 

In theory, the Cat Fund provides reinsurance (insurance for insurance companies) at below-market rates and thereby produces savings they can pass on to consumers. This system, however, poses enormous risks to Florida’s fiscal future. According to Ray Lehmann, deputy director of the Center on Finance, Insurance, and Real Estate at The Heartland Institute, these liabilities have risen to multibillion-dollar levels: “The Florida Hurricane Catastrophe Fund has $18.4 billion of liabilities this year, and the fund’s own management concedes that its funding structure would leave it billions short of its obligations should a major storm hit the Sunshine State.” 

These liabilities are impossible to pay. No state ever gas issued more than $11 billion in bonds all at once. Changes are needed to reform the Cat Fund. 

New reform proposals include H.B. 833, a bill sponsored by state Rep. Bill Hager (R-Boca Raton). The bill is based on a reform previously proposed by Jack Nicholson, the Florida Cat Fund’s chief operating officer, and is designed to reduce or eliminate the possibility of the fund going broke after a storm and posing a risk to the state’s fiscal future. 

The following articles examine the financial foundations and implications of the Florida Hurricane Catastrophe Fund.

Workable Solutions for Florida’s Challenging Insurance Problems
In a study from the James Madison Institute, JMI adjunct scholars Eli Lehrer and Ray Lehmann of The Heartland Institute examine Florida’s property and casualty insurance environment and its unique challenges. They make a case for reform of the system and outline several recommendations for changes that could be implemented in the 2012 legislative session. 

Hard Feelings, Doubts Linger over Florida Insurance Reform Law
Heartland Institute Research Fellow Steve Stanek writes in the Heartlander digital magazine about S.B. 408, a proposed Florida law designed to lower costs for property insurance carriers and increase competition. Stanek speaks with Christian Camara, Florida director of Heartland, and quotes the bill’s sponsors.

Catastrophe Risk and the Regulation of Property Insurance
Robert Klein examines the regulation of property insurance markets affected by catastrophe risk, particularly the risk of tropical storms and hurricanes. The severe storm seasons of 2004–2005 and insurers’ resulting reassessment of hurricane risk and related actions have raised a number of issues and a range of regulatory reactions in various states. Klein reviews the areas of regulation that are most pertinent to the affected insurance markets and outlines principles and realities that generally pertain to these areas. 

Florida Catastrophe Fund Faces Shortfall: Official Advocates Reduction of Fund’s Reinsurance Role
Sonja Ryst speaks with several insurance experts and regulators about the Florida Hurricane Catastrophe Fund. Several of these experts advocate reduction of the program and call for reform. 

Patching Florida’s Catastrophe Fund
This editorial from the Tampa Tribune discusses an insurance reform proposal offered by state Rep. Bill Hager (R-Boca Raton) and based on reforms previously proposed by Jack Nicholson, the Florida Cat Fund’s chief operating officer. The legislation would shift more of the risk to insurers and reduce the cap for the special insurance tax that can be levied after an emergency. 

Insurers, Regulators Spar Over Hurricane Risks
Writing in FIRE Policy News, The Heartland Institute’s Matthew Glans discusses the argument between Florida insurers and state regulators over how windstorm insurance regulations work and affect the insurance market. 

Property Insurance Solutions to Protect Homeowners, Taxpayers, and Florida Government from Financial Devastation
This paper explains why and how the Florida Legislature and the state’s other elected leaders could revise the state’s laws and reduce the state’s fiscal peril. 

Florida Cat Fund Officer Proposes Reforms for Safer Financial Footing
Writing in the Heartlander digital magazine, Matthew Glans describes the proposed reforms crafted by Florida Hurricane Catastrophe Fund Chief Operating Officer Jack Nicholson to put the giant taxpayer-backed reinsurer on a sounder financial footing.

Hurricanes: Florida’s Fund Can Be Repaired
Eli Lehrer of The Heartland Institute notes in this Jacksonville Times-Union op-ed that opportunities to reform Florida’s catastrophe fund do exist and should be considered before the state faces a storm it cannot afford.