The Florida Legislature is considering a bill that would establish an annual hurricane deductible for insurers and lower the threshold of losses that an insurer must sustain before recovering monies from the Florida Hurricane Catastrophe Fund.
Such an action would help keep residential property insurance both available and more affordable for consumers, according to the Property Casualty Insurers Association of America. “Florida must act on the lessons learned last season and properly prepare for the 2005 hurricane season and beyond,” said William Stander, a regional manager for PCI. “The changes that PCI supports will strengthen the cat fund, enable insurers greater access to the fund during a multiple-event season such as 2004, and better assure that future hurricane losses do not imperil any property insurer's financial stability.”
The availability of additional cat fund resources is crucial to preserving a healthy and competitive insurance marketplace, which is essential for attracting and retaining property insurance writers, according to PCI. The fund serves as an important financial backstop for the insurance marketplace and makes it possible for individual insurance companies to write residential property insurance in a hurricane-prone state such as Florida. “These changes also will help reduce pressure on the state-run insurance company, Citizens Property Insurance Corp., which failed to recover even one dime from the cat fund and now is $400 million in the red,” said Stander.
The fund is a state-administered reinsurance facility created as one of the legislative reforms following Hurricane Andrew in 1992. It was designed to help insurers spread hurricane risk. Because of its state trust fund structure, the fund can accumulate premiums on a tax-exempt basis, unlike private insurance companies, making it easier to build reserves and serve as a high-level, financial backstop to individual insurance companies.
Currently, the cat fund relies on a per-event loss retention that requires insurance companies to incur a set amount of losses before reinsurance payments are triggered. After all claims are adjusted and paid, the four hurricanes last year are expected to generate approximately $22 to $25 billion in insurance loss payments, $5 to $7 billion more costly than Andrew, according to PCI. To date, the fund has paid out only $3.2 billion.
“The cat fund paid insurance companies very little compared to the billions of dollars in losses that insurers experienced,” said Terry Tyrpin, senior vice president, personal lines and research for PCI. “By using an annual hurricane deductible and lowering the retention level, the cat fund would have assumed a much larger role in paying hurricane claims last season, spared many insurers from being financially weakened, and helped to stabilize prices for consumers.”
In addition to lowering the fund retention, PCI also is proposing that the legislature make use of the rapid cash buildup authority already in the cat-fund law. “Putting more cash into cat-fund reserves reduces the potential for emergency assessments after a major hurricane,” said Stander. “Those emergency assessments would affect all consumers of all lines of property and casualty insurance except medical malpractice and workers' compensation.”
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