The Florida Legislature is considering a bill that wouldestablish an annual hurricane deductible for insurers and lower thethreshold of losses that an insurer must sustain before recoveringmonies from the Florida Hurricane Catastrophe Fund.

Such an action would help keep residential property insuranceboth available and more affordable for consumers, according to theProperty Casualty Insurers Association of America. “Florida mustact on the lessons learned last season and properly prepare for the2005 hurricane season and beyond,” said William Stander, a regionalmanager for PCI. “The changes that PCI supports will strengthen thecat fund, enable insurers greater access to the fund during amultiple-event season such as 2004, and better assure that futurehurricane losses do not imperil any property insurer's financialstability.”

The availability of additional cat fund resources is crucial topreserving a healthy and competitive insurance marketplace, whichis essential for attracting and retaining property insurancewriters, according to PCI. The fund serves as an importantfinancial backstop for the insurance marketplace and makes itpossible for individual insurance companies to write residentialproperty insurance in a hurricane-prone state such as Florida.“These changes also will help reduce pressure on the state-runinsurance company, Citizens Property Insurance Corp., which failedto recover even one dime from the cat fund and now is $400 millionin the red,” said Stander.

The fund is a state-administered reinsurance facility created asone of the legislative reforms following Hurricane Andrew in 1992.It was designed to help insurers spread hurricane risk. Because ofits state trust fund structure, the fund can accumulate premiums ona tax-exempt basis, unlike private insurance companies, making iteasier to build reserves and serve as a high-level, financialbackstop to individual insurance companies.

Currently, the cat fund relies on a per-event loss retentionthat requires insurance companies to incur a set amount of lossesbefore reinsurance payments are triggered. After all claims areadjusted and paid, the four hurricanes last year are expected togenerate approximately $22 to $25 billion in insurance losspayments, $5 to $7 billion more costly than Andrew, according toPCI. To date, the fund has paid out only $3.2 billion.

“The cat fund paid insurance companies very little compared tothe billions of dollars in losses that insurers experienced,” saidTerry Tyrpin, senior vice president, personal lines and researchfor PCI. “By using an annual hurricane deductible and lowering theretention level, the cat fund would have assumed a much larger rolein paying hurricane claims last season, spared many insurers frombeing financially weakened, and helped to stabilize prices forconsumers.”

In addition to lowering the fund retention, PCI also isproposing that the legislature make use of the rapid cash buildupauthority already in the cat-fund law. “Putting more cash intocat-fund reserves reduces the potential for emergency assessmentsafter a major hurricane,” said Stander. “Those emergencyassessments would affect all consumers of all lines of property andcasualty insurance except medical malpractice and workers'compensation.”