The Florida Insurance Council released a backgrounder on the Florida Hurricane Catastrophe Fund's financial status that predicts dire consequences if immediate reforms are not made.

The Advisory Council to the Cat Fund acknowledged the fund would face a $10-$15 billion shortfall if called upon by a major hurricane to generate its full capacity of claim payouts, which is estimated to be about $28 billion.

The report repeatedly stresses that the Cat Fund cannot live up to the huge financial obligations established by the Florida Legislature, which expanded the program to an unprecedented $28 billion during a Jan. 2007 special legislative session. The Cat Fund's reinsurance program had been about $16 billion prior to 2007.

According to the report, the expansion of the Cat Fund to such an unprecedented level was the legislature's response to market conditions that were driving the costs of reinsurance higher and higher after the 2004 and 2005 hurricane seasons. The idea was to create a lower cost reinsurance program for both private insurers and the government-run insurer, Citizens Property Insurance Corporation. Insurers would purchase coverage from the Cat Fund at costs much cheaper than those on the worldwide reinsurance market, providing a basis for insurers to rollback residential insurance rates.

The report goes on to state that the Cat Fund's fatal flaw was that the reinsurance — which insurers were mandated to purchase from the Cat Fund — was only minimally supported by cash reserves. Instead, the state promised that it could go into the private bond market and borrow unprecedented amounts of cash if and when the funds were needed.

Special Reports /

Cat Fund Falls Short

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