Florida CFO Alex Sink recently sat down with FloridaUnderwriter's Joan Collier and Gary Fineout to discuss CitizensProperty Insurance Corp, the Cat Fund, and the state of theindustry in general.

Q. Florida Underwriter: The Cat Fund has been getting some verynegative comments lately from the Florida Insurance Council, A.M.Best, and other industry observers. How bad do you think thingsare, and how are you going to fix them?

A. Sink: The notion of the Cat Fund is a good and solid one. Wehave heard our advisor say that many times over – the structure weset up after Hurricane Andrew, with the mandatory layer, was good,and did provide stability in the insurance market.

But then we all heard the hue and cry about the big run-up ininsurance rates and the Legislature felt compelled (as they shouldhave) to do something about the rates. Nobody's pocketbook couldtake those 40-, 50-, and 80-percent rate increases. So the decisionwas made to put the $12 billion extra layer in with the idea itwould reduce rates by 15 to 20 percent. Some companies did reducetheir rates by that much; others didn't. But it did cause theresidential market to stabilize.

The two things that are different are: Number one, the globalmarkets came back to us. They saw a year of no storms; theyrealized that we took $12 billion off the table. Fortunately forour commercial market, those rates have come down 40 to 50 percent.Last year when we met with Lloyd's we saw that they were lookingfor markets. So it said to me, "Let's go shopping. Let's see what'sout there. Maybe we have an opportunity to reduce ourexposure."

Number two item is the state of the credit markets, and ourcapacity to even bond at the $20 billion level. That's a bigquestion mark. That's why you're seeing today these issues beingraised by many people — even in the Legislature — recognizing wehave an issue that needs to be dealt with. We've signed a contractwith these insurance companies that we're going to providereinsurance, and when they come with their claims, they expect thepeople of Florida to write them their checks. As disappointed as Iam that the proposal I set forth last year did not get passed — Ithink it should have, because the expectation was that there wouldbe very minimal if any increase in residential rates as a result ofpassage of taking off the $3 billion layer — it didn't happen. Butit got the conversation going. I think the table has been set thisyear to readdress the exposure in the Cat Fund.

[The issues are] the two issues I talked about — the ability ofthe private market to provide some liquidity there, and the creditmarket issues – plus the issue of not wanting to go back and doanother Warren Buffet-style deal. And the big elephant in the roomis that the $12 billion layer sunsets. So, like it or not, theLegislature has to deal with this. I don't believe they are goingto let $12 billion just go back to lala land, because it will have,I would predict, double-digit impact on rates.

We are now talking to our staff about what kind of proposal Imight present. We want to talk to the Bermuda reinsurers. Theywrite the most reinsurance for residential. We want to go back andget our intelligence and determine what we think the markets are.We want to find that balance of reducing that exposure — whether wedo it up the side or across the top — and having a reasonableimpact upon residential rates. So maybe it's a kind of Ken Pruitt"glide path." Maybe we reduce it by $3 million a year for the nextfour years. We need to have a longer-term view of what our policyaround this TICL [Temporary Increase in Coverage Limit] layer is.Then you get back to the mandatory layer. I feel that the mandatorylayer is something that is appropriate. It is basically $10 billionof exposure. We haven't had a major storm in three years. We willhave an equity buildup of several billion by the end of this year.The more years we go with no storms, the better off we will be. TheCat Fund has operated well for lo these many years, and I thinkit's one step at a time.

Q. Sam Miller of FIC has stated that eventually carriers willhave to buy reinsurance in the private market, and if they do, theywill have to be able to pass those costs along.

A. What I have heard from the insurance companies is, "OK,Florida, you reduce the TICL layer, and we have to go out and makethat up in the private market and we need to be able toreincorporate it in our rates." Well, I think that's fair. Theirconcern is that the commissioner will just say, "No, give it forfree." If they have to go out and [spend more in the privatemarket], I think it's legitimate to reincorporate that in theirrate base. But they have to be totally transparent. We have to behonest with the residential policyholders.

We should not be making policy for the Cat Fund at 11:00 atnight on the last day of session. We should be working on it rightnow, surveying the market, going shopping, figuring out thecapacity. It's like the federal reserve. In times when there's notmuch capacity out there and it would cause rates to jack up, that'sthe time for government to step in and say, "We're going to writereinsurance."

But at times when there's a lot of liquidity and we think we cango shopping and maybe negotiate some good deals, then we tell thecompanies, "OK, this is what the state's program for this year isgoing to be, so that you have the maximum ability to drive thehardest bargain you possibly can."

If we wait every year until May 30, when the last possible timeto buy reinsurance is due, then they've got you. It's dumb. Myoriginal proposal was to have another elected body in the Cabinet;have us make the decisions about what the program was going to befor the Cat Fund at a time when it offers us the most flexibility,which will result in the most reasonable rates possible.

Q. Do you think your proposal failed, at least partly, becauseit was an election year?

A. Certainly. What we heard was that everybody kind of finkedout on the plan because they were told, "You better not supportthat, because your opponent will say you voted to raise insurancerates."

Q. Well, 2009 is not an election year.

A. Right. It will be a much better environment to get thingsdone. [Whatever the plan is] must be put up against the questions,"To what extent are you complementing, and not replacing, theprivate market?" and "Can we fulfill our contractual obligationswhen the time comes?"

We live in this political world of 10-second sound bites. Andyou can't deal with these complex insurance policy issues in soundbites. It takes careful analysis and thought.

Florida is a hurricane-prone state. We all know that. We are notever going to have cheap insurance. This is not part of theequation. Now, we can't have it be outrageously expensive either.So there is that issue of, "Where is that middle ground?"

Q. Can you discuss the assessment issue?

A. I've had some indication that Florida TaxWatch would bewilling to do a study of the impact of the assessments. One of theissues we've had is we can't articulate what the assessments meanto the average homeowner, so we're hoping that TaxWatch willundertake a study so that the public can understand. We know it's abillion and a half per year for 30 years if we have to bond out $20billion, but what does that really mean to the homeowner of a$2,000 policy?

If we had to bond out $20 billion today we'd be in Washington,just like the big banks are. It's a terrible situation to be in.But take your pick — you're going to go to the federal government,or tell Florida residents to expect an increase in insurance rates,year by year.

Q. But at some point, don't we have to tell everybody they haveto bite the bullet, and we are going to raise rates? Who has thepower and authority to do that?

A. The Governor and Legislature, as far as I can tell. All I cando is lay out the options and help evaluate them.

Q. Citizens is another challenge. It keeps getting bigger, andagents continue to complain about service. Agents also say there isa market now, and their carriers want to write business.

A. One of the issues we have to confront is that we have spawnedthese Florida domestic companies, and they have provided a veryimportant release valve. The predictions originally were thatCitizens would be at about 50 percent market share. But they'vebeen sitting there at about 30 percent. They've been kind of SteadyEddie. So that's good.

Let me tell you what I'm worried about with the take-outpolices. We know that Citizens' rates are actuarially unsound; asmuch as 40 to 50 percent for their coastal policies. And all ofFlorida is subsidizing Citizens' rates.

To me, the missing link there is you've got these private entitycompanies trying to build an insurance business, and they've got tobe taking policies out of Citizens that are being written atactuarially unsound rates. That concerns me from a financialstandpoint. That's another place where we need to have aconversation in our state. "How much is it fair for us to besubsidizing the Citizens' policyholder?" If we want to subsidizerates by 40 percent, then we should all say that's OK and that'swhat we do, and we all understand the risk we bear when a stormcomes along. Or, do we want to say, "OK, we're willing to subsidizebusiness owners to another 10 to 15 percent"? If we're going to dothat, then you've got to tell those Citizens' policyholders, "We'renot going to jack your rates up by 80 percent today, but over thecourse of the next few years, this is what your insurance premiumswill be doing to close this gap to make it more fair to everybody.So prepare your budgets accordingly."

Q. Can you comment on the Citizens' rate freeze?

A. I said last year that I was opposed to extending the ratefreeze. Citizens needs to operate like a well-run functioningbusiness. Transparency and governance issues have been a big issuewith me. They are a big public company. The Mission Task Force ismoving along. We're following that closely. Whatever changes wemake have to be done with an eye on the pocketbook of the Floridahomeowner.

Q. Do you think Insurance Commissioner Kevin McCarty is too hardline [on rates]?

A. These Florida domestic companies that are coming up, we haveto support them and let them grow their business. And they've gotto be able to write business at a rate that enables them to befinancially sound. If we don't, then we have a big storm comealong, and they're going to end up in FIGA, and we're going to bepaying for all of those assessments as well.

I put a lot of trust in the job of the insurance commissioner,which is to ensure that we have a healthy insurance market, that wehave a lot of people writing insurance, that the ones doing it aredoing so in a financially responsible way.