Ever since the Washington Post reporters Bob Woodward and Carl Bernstein almost single-handedly brought down the presidency of Richard Nixon, they introduced into the political lexicon one of those clich?s that political pundits and journalists have grown to love and over-use. Be it a scandal or when there is an immediate emergency need on the government's part to help its citizens, you can be assured that at least one voice will be heard condemning the problem at hand and saying, “Follow the money.” Over-used as the phrase is, it is helpful because it creates a kind of mental road map that makes the complicated seem straightforward. It also conjures up an image of someone in a backroom printing up bundles of money to address the latest emerging crisis, especially when that crisis is immediate and devastating to homeowners and the state's economy.

Take, for example, the situation of Citizens Property Insurance Corporation, which is propped up by policyholder assessments. Following the 2005 hurricane season, the residual market reported an estimated loss of $1.73 billion, which would have translated into an 11 percent assessment on policyholders. In an effort to spare policyholders the full brunt of the Citizens' assessment, lawmakers authorized the use of $715 million in sales tax to help offset the deficit. The money reduced an estimated $920 million regular assessment against insurers to $205 million. For policyholders this equaled a difference between an estimated 11 percent assessment to 2.5 percent. And although the state didn't completely subsidize Citizens' losses, lawmakers did agree that the remaining eight percent assessment ($800 million) could be paid off over a 10-year period instead of one year, as previously spelled out in the statute.

Quick to Praise–and to Blame

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

So now, after the latest shuffle of task forces and reports on the state's hurricane risk, one thing has become clear. It is time to retire the old “follow the money” path and realize the new goal is “find the money.” That is why newly elected Governor Charlie Crist and Chief Financial Officer Alex Sink are on board with the legislature to hold a special session in an attempt to prop-up the state's ability to response to hurricanes before the start of the 2007 hurricane season.

“Florida families are suffering from the devastating effects of skyrocketing rates and cancelled insurance policies and they desperately need relief,” said Crist. “I am optimistic that we can find solutions that will address not only our immediate needs, but also will yield a better system to address future storms that are predicted 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 into addressing hurricanes. Since Hurricane Andrew exposed the soft underbelly of the market in 1992, not a year has gone by without some form of property legislation and 2007 will be no exception. Since the issue has been subject to so many task forces, including most recently the Governor's Property and Casualty Insurance Reform Committee, the number of issues has been significantly narrowed. Some of the issues are as simple as encouraging policyholders to take steps to make their homes hurricane resilient.

But the real question, and the greatest source of debate, is how to provide a method of funding hurricane losses that will still make Florida an attractive homeowners' market. After Andrew, a public policy decision was made that the state would primarily use post-event funding to pay off hurricane losses. There were a variety of financial reasons for taking this approach, including the fact that any monies collected by insurers for the purpose of paying off future hurricane losses would be taxable. But lawmakers also knew that the decision to rely on post-event funding was a roll of the dice. As long as hurricane losses were minimal it created the impression of a profitable market, which would attract private insurance to the benefit of consumers.

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

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

From 1992 through 2006, home insurers in Florida paid an estimated $10.4 billion more in claims than they received in premiums. This $10.4 billion loss remains constant despite the fact that the reinsurance industry earned some $3 billion in revenues due to last year's fairly uneventful hurricane season.

It would take until 2009 before reinsurers to break even based on the losses the industry sustained from 1992 through 2006, even if 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 risk and 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 a private homeowners' market in Florida, or at least not one willing to cover wind risk. Created in 1993, the fund is tax-exempt which allows it to accumulate money without having any tax exposure. It can also purchase tax free bonds. Because of this tax advantage the reinsurance offered through the fund is significantly lower than what is available in the private market.

Since the Cat Fund in effect raises money through premiums, all carriers providing homeowners' coverage in the state must purchase some level of the fund's coverage. The insurer can opt to purchase 45 percent, 75 percent, or 90 percent of their hurricane losses after meeting a deductible. To show just how dependent the market is on the Cat Fund, in 2005, 85 percent of the market chose the 90 percent reimbursement option.

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

Prior to the 2004 and 2005 hurricane seasons, the Cat Fund accumulated over $6 billion in cash. But even the Cat Fund was not immune to the financial aftermath of the 2004 and 2005 hurricane seasons. Because of the losses incurred in those two years, the Cat Fund paid out some $6.5 billion. For 2005, the fund had a projected deficit of roughly $1.4 billion, which required it to secure $1.35 billion in bonds. According to the fund's latest report, the fund's revenue is expected to be $800 million in 2006, which includes a 25 percent rapid cash build up. This adds another $200 million to the fund, bringing its total premiums to $1 billion.

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

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

Lawmakers should consider raising the current $15 billion cap per storm season to see what effect it would have on the affordability and availability of coverage. The plan is also designed to see what amount of reinsurance the private market requires beyond the $15 billion.

Look at the possibility of moving the Cat Fund's contract year from June 1 to May 31 of the following year. Specifically, examine if the change would provide more flexibility for carriers and perhaps lower policyholders' premiums.

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

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