Filed Under:Carrier Innovations, Regulation/Legislation

Florida Bid For U.S. Cat Fund Support Is Tough Sell

NU Online News Service, April 15, 9:45 a.m. EDT

WASHINGTON--Florida lawmakers' moves to provide a federal backstop to the state's severely underfunded Hurricane Catastrophe Fund are running into strong headwinds.

The latest effort is a bill introduced by Sen. Bill Nelson, D-Fla., that was filed after the Treasury Department declined recently to issue a line of credit to the state Hurricane Catastrophe Fund. That fund provides reinsurance to the state's home insurer of last resort, Citizen's Property Insurance Corporation Fund.

The Treasury would not comment, but Sen. Nelson's office confirmed that Assistant Treasury Secretary Alan Krueger told state officials in a phone call several weeks ago that the department doesn't have the authority to issue a line of credit.

Sen. Nelson's new legislation would create a consortium similar to that of a government sponsored enterprise that would give the Treasury Department authority to provide aid to any state that suffers a catastrophe.

The bill (S. 505) also contains a second provision that would create a National Homeowners Insurance Stabilization Program.

Mr. Nelson's measure came under immediate criticism. According to Eli Lehrer, a fellow at the Competitive Enterprise Institute, a conservative think tank, this second provision likely applies only to Florida.

It would authorize the Secretary of the Treasury to provide loans to a state that suffers a catastrophe.

The measure allows the Treasury to provide the funds if the loan is backed by the full faith and credit of the state that receives it and the state demonstrates that it has the ability to repay the loan.

It mandates that the funds be repaid over five or 10 years, but the payback provision is "meaningless because there is no means of enforcing it because Congress could always extend the loan," Mr. Lehrer said.

"It is a special program for one state," he said.

According to Mr. Lehrer, Citizens' sells more property insurance than any insurer in Florida and ranks among America's 100 largest home insurers. The Cat Fund is the only state fund of its type in the United States, he said.

In a statement, Sen. Nelson's spokesman said, "We're confident a way will be found to shore up the Cat fund."

The spokesman said, "We've got one bill already filed giving Treasury the authority to issue a line of credit, and we're working on a second one with a number of state insurance commissioners to allow Treasury to guarantee private-sector loans to Cat funds."

According to Mr. Lehrer, the Florida Cat fund has an estimated $29 billion in liabilities, but only $3 billion in available assets to cover potential losses in the event of a bad storm.

But, in a paper issued yesterday, Mr. Lehrer said it would be a mistake for Congress to pass such legislation. "It would potentially impose huge liabilities on Treasury, it encourages development where it shouldn't happen, and it guts the private reinsurance market," Mr. Lehrer said.

He also argued in his paper that "Florida's current insurance system, which Gov. Charles Crist, R, and the state Legislature created in order to reduce prices, simply does not work.

"It has no way to fund its liabilities and has resulted in nearly all large private insurers leaving the state," he said.

Under the current system, if a major hurricane occurs, Florida plans to fund the operations of its Cat fund by selling bonds and then paying off those bonds by imposing enormous special taxes called "assessments" on nearly all insurance policies in the state, he said.

"Although Florida could sell some Cat Fund bonds, it is almost inconceivable that it could sell anything close to the $25 billion it might need--no state has ever sold more than $12.3 billion in bonds all at the same time," Mr. Lehrer said.

He further argued that if Federal loans to Florida are intended to be paid back, then they will have little advantage over private lending, and that, although the federal government might offer slightly lower rates than the private sector, federal loans would still have to be paid off or forgiven.

Moreover, he said in his paper, "Florida does not have a practical plan or the proper tools to pay them back, so all U.S. taxpayers would end up footing the bill for whatever Florida borrows.

"Florida has no state income tax, a statewide cap on property taxes, and a roughly average state sales tax. While the merits of Florida's tax policies are beyond the scope of this paper, Florida simply does not have many revenue-producing tools at its disposal. If it did, it could sell debt on the private market," Mr. Lehrer said.

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