Florida Hurricane Catastrophe Fund

Few ports in a storm without Cat Fund reform

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December 4  |  Florida, Florida Hurricane Catastrophe Fund, Hurricanes, News  |   Danielle Szeliga

Our emergency storm kits may still be intact, but after eight storm-free years, a financial burden for all Floridians continues to loom overhead. While the risk associated with Florida’s state-run insurance entities — Citizens Property Insurance Corp. and the Florida Hurricane Catastrophe Fund (Cat Fund) — may now be less, there is still more work that needs to be done.

Unbeknownst to many, the state of Florida has taken on a huge amount of risk. Under the current structure of the Cat Fund, there is a dangerous monetary threat to Floridians if a big storm does in fact make landfall in our great state. This is because the Cat Fund, which was originally intended to provide stability for huge, Hurricane Andrew-sized events, is supported by issuing debt that would have to be repaid by Floridians including homeowners, business owners, renters, churches, charities and automobile policyholders. That means that all the risk is on us.

While the absence of a landfalling storm over the years has provided the Cat Fund with an opportunity to build up a cash reserve, we should not forget that the Cat Fund’s current structure still relies on post-event bond debt to pay hurricane claims, rather than traditional reinsurance, which spreads the risk outside the state.

Florida can only put a limited amount of our funds at risk, and after that current law leaves us at the mercy of the financial markets. We may or may not be able to borrow enough money, or we may face the possibility of having to pay sky-high interest, given our position. That means we might not be able to pay claims, which would be a second disaster, possibly worse than the storm itself.

In fact, in today’s markets, estimated bonding capacity is down, not up. That means that if we had to issue bonds now, there is less capacity and interest rates would be higher.

For years, Florida consumer, business and environmental groups have supported changes to the state-run system. We have studied and understand the financial implications associated with failing to reform the system, and believe that true reform is necessary in order to protect Florida consumers, businesses and the place we call home.

The James Madison Institute and the R Street Institute, members of the Stronger Safer Florida coalition, to which the Florida Consumer Action Network (FCAN) belongs, recently released a report on this subject entitled, “Ten Reforms to Fix Florida’s Property Insurance Marketplace — Without Raising Rates.”

The report suggests, “In its current form, the Cat Fund poses the greatest danger to Florida’s insurance system, as well as the state’s ability to recover quickly after a major hurricane.” One of the feasible reform measures the report cites is an incremental reduction plan, proposed by Rep. Bill Hager (R-Boca Raton).

During the 2012 and 2013 legislative sessions, FCAN supported Hager’s much-needed plan that would have reduced the size of the Cat Fund, and decreased insurers’ reliance on the state rather than private markets. The implementation of this plan is an important step toward a healthier insurance market, which would better protect all consumers from financial disaster in the wake of a major storm or series of storms. By taking advantage of private market opportunities and spreading Florida’s hurricane risk beyond our borders, FCAN believes we can avoid additional debt and potential assessments that would affect Florida consumers. Support for the pro-consumer, bipartisan Hager legislation was demonstrated by other consumer groups, as well as tax, business and environmental groups. Additionally, Florida’s former insurance consumer advocate, Robin Smith-Westcott, who was responsible for representing Florida’s policyholder consumers on property insurance matters, and Cat Fund management, also advocated for the Hager plan.

While opponents of the legislation contended that shrinking the Cat Fund would force Florida insurers to obtain more expensive coverage in the private market and, therefore, increase insurance premiums for consumers, in fact, the opposite is true. The cost of reinsurance is on the decline, and accessing that capital would not increase consumer rates. It is another good reason why we should be taking advantage of the private reinsurance market, which could SAVE consumers’ dollars.

We are just months away from the 2014 legislative session. This is another chance for our elected leaders to implement change that moves us toward a healthier insurance market that spreads insurance risk, reduces the role of government in the reinsurance market and ensures the Cat Fund can reliably pay its bills. The upcoming session is the time for legislators who want to fight for consumers to realize that our good luck will not continue indefinitely. Another Hurricane Andrew, a repeat of the 2004/2005 storm season or worse could happen. We need to align our state’s priorities, particularly those that require Florida to back up private insurance companies. We need smart Cat Fund reform that does not increase debt by bonding out, but instead protects Florida consumers and the financial security of our hurricane-prone state.

Bill Newton is the executive director of the Florida Consumer Action Network.

Lawmakers again pushing to Citizens rate hikes, other changes

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June 21  |  Citizens, Florida Hurricane Catastrophe Fund, News  |   Danielle Szeliga

Frustrated but not surprised about a lack of progress on property insurance issues during an election year, a pair of key legislators on Tuesday began preparing for another push once the dust settles in November.

More than three months after lawmakers failed in their bid to to make big  changes to the state’s property insurance landscape, Rep. Bryan Nelson, R-Apopka, and Sen. Garrett Richter, R-Naples, released a three-part position paper they say highlights the hidden risks all insurance policyholders face in the event of a devastating storm.

While the Florida Hurricane Catastrophe Fund and Citizens Property Insurance Corp. are in the best financial shape they have been in years, the pair contends that the programs’ relative health masks their vulnerability and the risks to policyholders.

Despite general agreement that Citizens rates are artificially low and the CAT fund remains vulnerable, solutions remain elusive as political leaders grapple with the cold and hard reality of having nearly 1.5 million policyholders relying on the state-backed insurer while millions more rely on the CAT fund for help.

“When you have 60 percent of the state’s population living within 10 miles of the coast it is political suicide to do the right thing, which is to force people to pay whatever the premium should be,” Nelson said.

As chairmen of their respective chambers’ insurance committees, Nelson and Richter are expected to again spearhead industry-backed efforts to return more of the market to private companies and away from state-backed insurance now being offered at below market rates.

Critics, however, maintain that the sky is not falling and lawmakers should be wary of such claims. The odds of a major storm or series of storms breaking the bank are very long

“These are more ridiculous scare tactics coming straight from the insurance rate hike dream team,” said Sean Shaw, a former Florida insurance consumer advocate whose law firm now represents homeowners.

Nelson and Richter released a series of opinion pieces Tuesday outlining their case that hidden behind artificially low premiums is the possibility that policyholders of all stripes will be hit with assessments if Citizens and the CAT fund fall short.

While attempts can be made to raise premiums for existing Citizens customers, Nelson said it will be difficult to wean policyholders from the plan. Lawmakers are more likely to modify assessments and consider ways to make it more difficult to become a Citizens policyholder in the first place.

“If we keep people from getting into (Citizens), it won’t seem like such a great deal,” Nelson said.

Both sides throw out numbers to justify their positions. In their opinion piece, Nelson and Richter state that a storm costing Citizens more than $13 billion could lead to assessments that could nearly double premiums for Citizens policyholders in the year after a storm.

But critics including Shaw say the odds of that happening are about 1 in 100 while raising rates too high will have its own consequences as the state tries to rebound economically.

“If we listen to the rate hike dream team, we have a 100 percent chance of ruining our delicate housing recovery,” Shaw said in a statement.

Editorial: The Cat Fund is not storm ready

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June 19  |  Florida Hurricane Catastrophe Fund, News  |   Danielle Szeliga

The 2012 hurricane season will bring good news and bad news.

The good news: An especially active season could wash out a substantial portion of Florida’s historic drought. With a declining water table, and lake and river levels visibly falling by the day, it will take multiple storms to restore things to normal.

The bad news: An active season could strain the state of Florida’s finances greatly and send a long-term bill to Florida’s taxpayers. And that bill will not be a small one, by anyone’s measure.

The latest financial estimate shows that Florida needs to buckle down and bolster its emergency hurricane-insurance fund.

The state-owned Florida Hurricane Catastrophe Fund expects to have about $8.5 billion in cash reserves to help cover the cost of storm damage. But despite the seemingly large number, it is not likely to be enough. Just one hurricane, Wilma, in 2005, cost $9.4 billion.

Cat Fund operators say they are prepared to borrow up to $7 billion more, if necessary, to be paid back by a surcharge on every Floridian’s property and auto insurance policies.

With the $8.5 billion in reserves, Florida expects to have access to $15.5 billion.

The problem, reported the Florida Hurricane Catastrophe Fund Advisory Council on May 10, is that the liability faced by the fund is estimated at $17.3 billion.

As a result, the fund could come up $1.8 billion short if hurricanes are cruel to Florida this year. And heaven forbid we have another season like we experienced in 2004 and 2005.

Even the council’s estimate is not based on firm numbers.

While several Wall Street firms worked together to estimate the amount of credit available at $7 billion, and top financial advisers called that figure conservative, one firm — Goldman Sachs — said that just $4 billion would be available.

We have known for years about the state’s extreme financial vulnerability should a “big one” hit. But lawmakers have been reluctant to tackle the insurance reforms necessary to spread the risk beyond state government.

Luckily, the last several hurricane seasons have been relatively benign.

Rather than illogically hoping for hurricanes to steer clear of Florida year after year, the Florida Legislature and Gov. Rick Scott must buckle down and close Florida’s insurance gap. They must do so in a manner that continues to make insurance available and affordable enough for homeowners to make use of it.

Lynne McChristian: With insurance, our good luck will run out!

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February 24  |  Citizens, Florida Hurricane Catastrophe Fund, News  |   Danielle Szeliga

We are all citizens of Citizens Property Insurance Corp. and its cousin, the Florida Hurricane Catastrophe Fund. We created them, subsidize them and are on the hook to bail them out.

Today, more people are waking up to the fact that both are significantly overexposed to a catastrophic financial failure, with enormous consequences for us all.

Some of us wonder what took so long for an alarm to sound.

The system is simple — and scary. Florida is financing the recovery from storms, which may strike any year, with future money from the pockets of every person with a homeowner’s insurance policy or an auto, business or boat insurance policy — no matter what insurance company has their business. The resulting economic dangers Florida faces from the costs of a major hurricane are real, not imagined.

Eight of the top 12 historical natural disasters to strike the U.S. affected Florida, and seven of Florida’s most damage-causing hurricanes occurred in a seven-year period. While we’ve been lucky enough to have six consecutive hurricane-free years, luck has a way of running out. That is what is driving discussions and decisions to shrink both of the state-run insurance programs before a big storm reminds us that ignoring the past is no way to plan for the future.

Luck is not a business strategy, as the head of Florida Hurricane Catastrophe Fund (CAT Fund) knows. Jack Nicholson notes that, when a major hurricane strikes, even cooperative, willing investors will bring in no more than $8 billion in bonds to meet the CAT Fund’s current obligation of $18.4 billion. The Cat FUND expects to have around $8 billion in cash, but there’s no way today’s world financial markets would find investors willing to buy nearly $11 billion in bonds to close the gap.

With a smaller CAT Fund, insurers would make up the difference using reinsurance in the private market, rather than buying it from the state. That costs more, because reinsurers provide claims-paying capital upfront, so the fees would be passed on to consumers. But paying a little more now is better than risking unpaid claims after a storm while paying a lot more in the future.

Tempers understandably flare with any talk of property insurance rate increases, so let’s sum up in one four-letter word what is propelling these reform efforts: debt.

Financing future storms with debt seems popular with people who are getting lower rates today. That tune changes when the bill comes due, including the bill we are still paying from Hurricane Wilma in 2005. Insurance claims drive insurance premiums. If sufficient money is not available the year it is needed, the two state-run insurance programs collect it on the back end for as long as necessary. “Pay it forward” is what the private market is required to do; “pay it backward” — year after year — is the way the state insurance programs run, by design.

This year, policymakers are considering ways to reduce the size of Citizens and gradually shrink the CAT Fund. Any effective solution must face reality and directly acknowledge the risks we all face from betting on quick bailouts from private insurers, who then are allowed to add an assessment for this to your property, auto, business and boat insurance policies.

Florida has been betting its future economy for a dangerously long time, and what was once politically popular will prove disastrous when the wind blows. The danger signal over financing catastrophes with money the state does not have is a real alarm, not a false alarm. It’s time to heed it before we wish we had.


Lynne McChristian is the Florida representative for the Insurance Information Institute.

Citizens assessment bill moves ahead as its concerns stall Cat Fund proposal

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January 31  |  Citizens, Florida Hurricane Catastrophe Fund, News  |   Danielle Szeliga

A bill to allow private insurance companies more time to recoup losses from customers in the aftermath of a storm passed swiftly through a House panel Tuesday. Under HB 1127, nearly all regular assessments on insurance policies after a catastrophic storm — which are due to state-backed Citizens Property Insurance Corp. 90 days after they are assessed — are transferred to emergency assessments, which can be recouped over a longer period of time.

Supporters of the bill say it will make the Florida property insurance market more attractive to out-of-state capital and reduce the short-term exposure of the private market. But another bill, HB 833– designed to reduce back-door assessments on policyholders by reducing the amount of reinsurance backed by the state, is drawing complaints from Citizens and private insurers.

They contend that because the bill shrinks the size of the Florida Hurricane Catastrophe Fund, or Cat Fund, and increases the amount of co-pays for private insurers, it will force them to raise their premiums. That means Citizens, whose rate increases are capped at 10 percent annually, would be more attractive to consumers, the exact opposite of the intent of Gov. Rick Scott and other elected officials seeking to bring more private insurance capital to Florida.

Both HB 1127 and HB 833 were discussed in a workshop meeting of the House Insurance and Banking Subcommittee last week. Whereas HB 1127 passed through the committee Tuesday with two negative votes, HB 833 did not come up for a vote.

Rep. Bill Hager, R-Boca Raton, who is sponsoring the bill, said he doesn’t agree with the contention of some private insurance companies that say Citizens must be reformed along with the Cat Fund, but is willing to make changes to the legislation. Regardless of any potential amendments, Hager said, the bill should move forward because the Cat Fund faces a potential $3.2 billion shortfall if a catastrophic storm hit the state.

“The Cat Fund bill can, in fact, move forward with or without changes to Citizens,” Hager said. “I think I’ll come forward with modifications of the bill. I may have something that deals with a piece of Citizens, but I think it’s wrong for us to wait, particularly with the start of hurricane season five months away.”

Citizens itself is also critical of HB 833. In a narrow vote last month, its Board of Governors voted to draft a letter noting its concern.

“We have concerns about enacting into law reductions to the size of the FHCF and the potential impact it could have on Citizens’ policy count as the result of reduced depopulation activity,” the letter reads in part.

Although there has been comparatively little talk in the Senate about the potential Cat Fund shortfall, Sen. JD Alexander, R-Lake Wales, sponsor of the companion SB 1372, said he won’t wait for other reforms to Citizens before moving forward.

“We’ve been talking about some possible changes to it to accommodate some of those concerns. My ultimate goal is to reduce the risk. Quite frankly, when you’re going in the wrong direction, any step in the right direction is helpful,” Alexander said.

Gray Rohrer, 01/24/2012 – 05:45 PM

Fla. hurricane fund has $3.2B shortfall

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October 19  |  Florida Hurricane Catastrophe Fund, News  |   Danielle Szeliga
The Miami Herald

Associated Press

Florida’s hurricane fund is confronting a potential $3.2 billion shortfall, financial experts said Tuesday in a new estimate of the money available to the pool intended to help insurers make disaster payments.The fund was created after Hurricane Andrew devastated South Florida in 1992. Insurers get help to pay homeowners if a storm results in wide damage.

But the fund doesn’t have enough cash on hand to meet all of its obligations in the event of a big storm, or just as bad, a series of hurricanes. So the fund must go out and borrow what it needs.

Financial experts for the fund have drawn up new estimates that contend that turmoil in financial markets and a weak economy have made it unlikely that the fund would have enough money to help insurers after a hurricane.

This year the fund is providing $18.4 billion worth of coverage. It should have more than $7 billion of cash on hand by year’s end, but it would still need to borrow $11 billion more if a storm struck.

The new estimates, which were to be presented to a state panel Tuesday, suggest the fund could borrow just $8 billion over a 12-month period. The new figures do suggest, however, that the Florida Hurricane Catastrophe Fund could borrow an additional $6 billion in a period one to two years following a major storm.

The news isn’t unexpected. Last month Jack Nicholson, the chief operating officer of the fund, told legislators that it is on “shaky ground.” “I think we are dangerously overexposed considering the current reality of the marketplace,” he said. “It scares me to death where we are.”

Nicholson wants state lawmakers to scale back the size of the fund. That would likely cause insurance premiums to rise. It has the backing of many key Republicans, including Gov. Rick Scott.

Every insurer now in Florida is required to purchase coverage from the “Cat Fund.” The fund provides a backstop to insurers at a rate that is generally cheaper than reinsurance sold by private companies. Nicholson estimated this low-cost option probably results in insurance premiums being about 25 percent cheaper.

If a storm causes enough damages, the insurer can ask for reimbursements from the fund. But if the hurricane fund runs out of cash due to a large storm, it borrows money to pay insurers.

The state pays off its debts with an assessment placed on nearly every insurance policy in the state, including auto policies. Homeowners and drivers now are paying off charges due mainly to Hurricane Wilma.

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