A combination of market forces and higher costs has caused adramatic reduction in the size and exposure of the FloridaHurricane Catastrophe Fund (Cat Fund) for this storm season.

Lawmakers greatly expanded the size of the Cat Fund in 2007 aspart of an effort to bring down the cost of reinsurance, and byextension, the cost of homeowners' insurance premiums. The growthspurt prompted worries that Florida was overextending itself andputting either the state or rate payers on the hook if largehurricanes hit.

Last year legislators took a series of steps to scale back thesize of the Cat Fund — and increase its costs — as a way togradually reduce the state's exposure in the next severalyears.

Those efforts appear to be paying off.

The top layer of Cat Fund coverage — known as the TemporaryIncrease in Coverage Limit (TICL) — had up to $8 billion worth ofcoverage available for this storm season. However, insurers boughtless than $1.3 billion worth.

The state-created fund is divided into two main pieces: Themandatory coverage that every property insurance carrier in Floridamust purchase (which has a current estimated total exposure of $17billion), and the TICL layer. Last year, 73 companies purchased$5.5 billion worth of coverage from this optional layer. This year,only 54 companies purchased $1.28 billion worth.

That's good news for the Cat Fund because it puts the maximumpotential losses far below what financial advisors say is themaximum amount it could borrow if there are major storms.

Just two years ago, financial advisors concluded that the CatFund had a bonding capacity of no more than $3 billion and wouldhave had trouble covering major losses. The fund now has close to$10 billion available to reimburse insurers before it would need toborrow money. In May, an advisory council estimated that it couldborrow an additional $16 billion above that.

COO Jack Nicholson said the reduction in exposure means the fundnow has a "strong cushion" as the state prepares to move into themost active part of hurricane season.

"It is a very good result," said Nicholson. "That was betterthan we anticipated. We don't want to provide the coverage if theprivate market can do it. It gives us a lot of confidence in theprivate (reinsurance) market."

Citizens, Others Opt Out

The largest carrier opting out of TICL this year is CitizensProperty Insurance Corp., with more than 1 million policyholders.Private carriers such as Royal Palm Insurance, Olympus InsuranceCo., HomeWise Insurance Co., and Hartford Insurance Group eithergreatly reduced the coverage or passed on it completely. Carriersthat did purchase TICL opted for less coverage because the priceincreased and the level of optional coverage available is smallerthan it was in 2009.

However, a handful of companies that did not purchase TICLcoverage in 2009 chose to buy some this year. Castle Key InsuranceCo. and Castle Key Indemnity Co. — subsidiaries of Allstate —bought coverage, as did Edison Insurance Group. Edison was acquiredearlier this year by Florida Peninsula Insurance Co., which isamong the companies that have the largest amount of TICL coverage.Data provided by Nicholson's office showed that United PropertyInsurance and Casualty Co. also increased the amount of optionalreinsurance from the fund.

Citizens' Contracting Under Fire

Citizens, the state-created "market of last resort," alsoappears to have "opted out" of the bidding process in the awardingof a number of its contracts.

A South Florida newspaper this summer reported that Citizens hadsigned off on 33 contracts worth $49 million without seekingcompetitive bids. The South Florida Sun-Sentinel did a review ofcontracts worth more than $25,000 and found that Citizens has usedexemptions in state law to hire companies to process policies,provide software and manage claims. In some instances, Citizenssaid an emergency justified the need to hire a company withoutseeking bids first.

The article came only months after Citizens came under fire forhanding out a no-bid contract to a company hired to do homeinspections to verify if policyholders deserve the mitigationdiscounts they are receiving on their bills. These latestrevelations could result in legislative action against thecompany.

Senate President Jeff Atwater — and a Republican candidate forChief Financial Officer — fired off a letter to Citizens PresidentScott Wallace that stated "suggestions that contracts have beenawarded without healthy competition is troubling." Atwater demandedthat Citizens provide detailed information on every contract it hasawarded in the last two years, including whether there were anyprovisions that would allow the state to terminate thecontract.

"I am sure you understand the gravity of this situation, and thescrutiny such actions bring upon Citizens and its management,"Atwater wrote. "It is imperative that these circumstances beaddressed immediately, and that policies and procedures are inplace to ensure non-competitive procurement practices do not becomethe norm."

Atwater also said that if Citizens did not respond,"I cannot seehow statutory corrections can be avoided."

In August, Wallace was summoned by Chief Financial Officer AlexSink to a meeting with her staff to discuss the contracts. Sinksaid she was "disappointed" with the reports about no-bidcontracts.

A Citizens' spokeswoman called the meeting with Sink's staff"very constructive" and said that the carrier planned to providemore detailed information to both Atwater and Sink about itscontracting procedures.