Ever since the Washington Post reporters Bob Woodward and CarlBernstein almost single-handedly brought down the presidency ofRichard Nixon, they introduced into the political lexicon one ofthose clich?s that political pundits and journalists have grown tolove and over-use. Be it a scandal or when there is an immediateemergency need on the government's part to help its citizens, youcan be assured that at least one voice will be heard condemning theproblem at hand and saying, “Follow the money.” Over-used as thephrase is, it is helpful because it creates a kind of mental roadmap that makes the complicated seem straightforward. It alsoconjures up an image of someone in a backroom printing up bundlesof money to address the latest emerging crisis, especially whenthat crisis is immediate and devastating to homeowners and thestate's economy.

Take, for example, the situation of Citizens Property InsuranceCorporation, which is propped up by policyholder assessments.Following the 2005 hurricane season, the residual market reportedan estimated loss of $1.73 billion, which would have translatedinto an 11 percent assessment on policyholders. In an effort tospare policyholders the full brunt of the Citizens' assessment,lawmakers authorized the use of $715 million in sales tax to helpoffset the deficit. The money reduced an estimated $920 millionregular assessment against insurers to $205 million. Forpolicyholders this equaled a difference between an estimated 11percent assessment to 2.5 percent. And although the state didn'tcompletely subsidize Citizens' losses, lawmakers did agree that theremaining eight percent assessment ($800 million) could be paid offover a 10-year period instead of one year, as previously spelledout in the statute.

Quick to Praise–and to Blame

The $715 million used to offset Citizens' deficits was realmoney having been generated by the additional sales tax paid forhurricane supplies. And it did inspire a measure of confidence inthe government on the part of policyholders. But it also showed thelimits of following the money. While policyholders can be quick topraise government in the immediate aftermath of a storm, they canbe even quicker to seize on the government's failures. As a majorportion of New Orleans–the 36th largest city in the country–stilllies in ruins, it quickly brings home to policyholders thepotential damage a major hurricane could do if it made landfall inMiami or Tampa.

So now, after the latest shuffle of task forces and reports onthe state's hurricane risk, one thing has become clear. It is timeto retire the old “follow the money” path and realize the new goalis “find the money.” That is why newly elected Governor CharlieCrist and Chief Financial Officer Alex Sink are on board with thelegislature to hold a special session in an attempt to prop-up thestate's ability to response to hurricanes before the start of the2007 hurricane season.

“Florida families are suffering from the devastating effects ofskyrocketing rates and cancelled insurance policies and theydesperately need relief,” said Crist. “I am optimistic that we canfind solutions that will address not only our immediate needs, butalso will yield a better system to address future storms that arepredicted to make landfall in Florida.”

Good luck.

A Well Traveled Road

When it comes to studying and preparing for a natural disaster,no state exceeds the time and effort Florida has put intoaddressing hurricanes. Since Hurricane Andrew exposed the softunderbelly of the market in 1992, not a year has gone by withoutsome form of property legislation and 2007 will be no exception.Since the issue has been subject to so many task forces, includingmost recently the Governor's Property and Casualty Insurance ReformCommittee, the number of issues has been significantly narrowed.Some of the issues are as simple as encouraging policyholders totake steps to make their homes hurricane resilient.

But the real question, and the greatest source of debate, is howto provide a method of funding hurricane losses that will stillmake Florida an attractive homeowners' market. After Andrew, apublic policy decision was made that the state would primarily usepost-event funding to pay off hurricane losses. There were avariety of financial reasons for taking this approach, includingthe fact that any monies collected by insurers for the purpose ofpaying off future hurricane losses would be taxable. But lawmakersalso knew that the decision to rely on post-event funding was aroll of the dice. As long as hurricane losses were minimal itcreated the impression of a profitable market, which would attractprivate insurance to the benefit of consumers.

However, in the 2004 and 2005 hurricane seasons, the state, withits $36 billion in losses, finally lost its bet. And now the statefinds itself once again facing a financial crisis over how toattract private insurers and avoid a spiral where all the state'swind exposure ends up in Citizens.

The key to this question is pure and simple: the position of theFlorida Hurricane Catastrophe Fund in the market. According to thetask force's report, in the wake of Katrina, Wilma, Rita, and otherhurricanes, the demand for private reinsurance has increased by 120percent over last year while at the same time the availability hasdecreased by 20 percent. The Insurance Information Instituterecently issued a study bearing out why private reinsurers havelittle incentive to absorb a large portion of Florida's risk:

From 1992 through 2006, home insurers in Florida paid anestimated $10.4 billion more in claims than they received inpremiums. This $10.4 billion loss remains constant despite the factthat the reinsurance industry earned some $3 billion in revenuesdue to last year's fairly uneventful hurricane season.

It would take until 2009 before reinsurers to break even basedon the losses the industry sustained from 1992 through 2006, evenif there are no hurricane losses in 2007, 2008, and 2009.

The average annual rate of return on Florida homeowners'insurance was minus 38.1 percent between 1990 and 2006.

Florida is competing against other markets that have lower riskand the promise of a greater return on capital.

The Cash Box of Sand

If it were not for the Cat Fund there probably wouldn't be aprivate homeowners' market in Florida, or at least not one willingto cover wind risk. Created in 1993, the fund is tax-exempt whichallows it to accumulate money without having any tax exposure. Itcan also purchase tax free bonds. Because of this tax advantage thereinsurance offered through the fund is significantly lower thanwhat is available in the private market.

Since the Cat Fund in effect raises money through premiums, allcarriers providing homeowners' coverage in the state must purchasesome level of the fund's coverage. The insurer can opt to purchase45 percent, 75 percent, or 90 percent of their hurricane lossesafter meeting a deductible. To show just how dependent the marketis on the Cat Fund, in 2005, 85 percent of the market chose the 90percent reimbursement option.

There are three key pillars that support the Cat Fund and,arguably, the private market. The Cat Fund by law must chargecarriers actuarial rates based on a period running from June 1 toMay 31 of the following year, which coincides with the hurricaneseason. Since the Cat Fund's payout for any one-storm season is $15million, an insurer's coverage is limited to its share of thefund's overall premium. Therefore, if an insurer paid 10 percent ofthe fund's premiums its reimbursement would be limited to $1.5billion. Lastly, an insurer must pay a retention–which works like adeductible–before being reimbursed. Using the same example, aninsurer paying 10 percent of the fund's premiums would have aretention of $530 million, or 10 percent of $15 billion.

Prior to the 2004 and 2005 hurricane seasons, the Cat Fundaccumulated over $6 billion in cash. But even the Cat Fund was notimmune to the financial aftermath of the 2004 and 2005 hurricaneseasons. Because of the losses incurred in those two years, the CatFund paid out some $6.5 billion. For 2005, the fund had a projecteddeficit of roughly $1.4 billion, which required it to secure $1.35billion in bonds. According to the fund's latest report, the fund'srevenue is expected to be $800 million in 2006, which includes a 25percent rapid cash build up. This adds another $200 million to thefund, bringing its total premiums to $1 billion.

The Cat Fund has always generated controversy. Smaller companieswant a lower retention point, which reinsurers say prices them outof the market. Larger carriers are also against this change sinceit could increase their Cat Fund premium. Other carriers want the$15 billion cap increased as a means to expand the availability ofreinsurance. Specifically, the task force issued four items thatthe legislature should consider. They are as follows:

The legislature should maintain the current retention level, butconsider offering coverage below the retention level on a voluntarybasis to all carriers participating in the Cat Fund. The rate forthe temporary lower retention level should be increased to a “nearmarket rate,” but still allow for savings, which can be passed toconsumers. Carriers who access this temporary layer must pass thissavings on to consumers after making a new rate filing. In effect,the plan offers carriers more reinsurance at a lower cost, butprevents them from deriving any profit from the plan.

Lawmakers should consider raising the current $15 billion capper storm season to see what effect it would have on theaffordability and availability of coverage. The plan is alsodesigned to see what amount of reinsurance the private marketrequires beyond the $15 billion.

Look at the possibility of moving the Cat Fund's contract yearfrom June 1 to May 31 of the following year. Specifically, examineif the change would provide more flexibility for carriers andperhaps lower policyholders' premiums.

Amend the state constitution so that some of the Cat Fund'sassets could be used for other purposes. The constitutional changewould apply to funds in excess of $10 million and must be containedin a separate bill and approved by three-fourths of the members ofthe House and Senate.