A committee of the Florida Legislature today heard testimony that a major weather event could mean severe difficulties for the state's Hurricane Catastrophe Fund, which support's the state insurance pool insuring homeowners.

The ability of Florida's state-run insurer, Citizens Property Insurance Corp, to pay claims after a significant weather event would be imperiled if the Hurricane Catastrophe Fund lacks financial resources and has to raise cash, an attorney explained.

John Forney, outside counsel for Citizens, spoke at a hearing of the Florida House Insurance Committee. He told lawmakers that “if the cat fund has difficulties, the whole thing breaks down.”

Citizen's, according to Chief Financial Officer Sharon Binnun, has different mechanisms with which to provide funding for claims. Initially, the company makes use of its surplus, followed by payments from the cat fund and the use of pre-event financing through bonds and other forms of debt.

Beyond that, she said, would be assessments–first on Citizens' policyholders, then a general assessment on insurers, followed if needed by an “emergency assessment” on all property and casualty policyholders except for workers' compensation and medical liability.

“I think there is–and I hesitate to use this word–slack in the system” to ensure that claims will be paid without significant assessments, Mr. Forney said.

In the event of a once-a-century level storm, Mr. Forney said the cat fund would have to float bonds totaling roughly $25-to-$27 billion to cover all of its obligations, which accounts for Citizens and other insurers' losses, likely in the tax-free market.

That figure, he noted, would account for nearly 10 percent of that market during an average year, and would be made even more difficult given the economic situation the state would be facing in the aftermath of such a storm and the recent troubles in the capital markets.

It would be “very hard to overestimate” such difficulties, Mr. Forney told the committee.

Rep. Don Brown, R-DeFuniak Springs, chairman of the committee, questioned how such a system would work in a worst-case scenario, in terms of whether insurers could be reasonably expected to pay nearly $4 billion in assessments after dealing with their own losses.

He asked whether Citizens would have to pro-rate its claims payments if funds were not available.

For the insurers, Ms. Binnun said she expects that private carriers would calculate their exposures, including to assessments, although she did not know for certain that they have. She also said she was “not aware” of any plan at Citizens involving reduced claims payments, but added that “I would be hesitant to say that something will never happen.”

Committee members questioned the rates that Citizens charges, noting they appear to be inadequate. Citizens had filed in 2005 for a significant rate increase, which was approved by the state Office of Insurance Regulation but was ultimately rolled back by the legislature. “We know where that responsibility lies,” acknowledged Rep. Dennis Ross, R-Lakeland.

Today's hearing will not directly lead to any actions by lawmakers. Rep. Brown said the panel convened to “hear information” about the potential problems, and that it was “more of an evidence-gathering kind of meeting.”

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