A combination of market forces and higher costs has caused a dramatic reduction in the size and exposure of the Florida Hurricane Catastrophe Fund (Cat Fund) for this storm season.

Lawmakers greatly expanded the size of the Cat Fund in 2007 as part of an effort to bring down the cost of reinsurance, and by extension, the cost of homeowners' insurance premiums. The growth spurt prompted worries that Florida was overextending itself and putting either the state or rate payers on the hook if large hurricanes hit.

Last year legislators took a series of steps to scale back the size of the Cat Fund — and increase its costs — as a way to gradually reduce the state's exposure in the next several years.

Those efforts appear to be paying off.

The top layer of Cat Fund coverage — known as the Temporary Increase in Coverage Limit (TICL) — had up to $8 billion worth of coverage available for this storm season. However, insurers bought less than $1.3 billion worth.

The state-created fund is divided into two main pieces: The mandatory coverage that every property insurance carrier in Florida must purchase (which has a current estimated total exposure of $17 billion), and the TICL layer. Last year, 73 companies purchased $5.5 billion worth of coverage from this optional layer. This year, only 54 companies purchased $1.28 billion worth.

That's good news for the Cat Fund because it puts the maximum potential losses far below what financial advisors say is the maximum amount it could borrow if there are major storms.

Just two years ago, financial advisors concluded that the Cat Fund had a bonding capacity of no more than $3 billion and would have had trouble covering major losses. The fund now has close to $10 billion available to reimburse insurers before it would need to borrow money. In May, an advisory council estimated that it could borrow an additional $16 billion above that.

COO Jack Nicholson said the reduction in exposure means the fund now has a "strong cushion" as the state prepares to move into the most active part of hurricane season.

"It is a very good result," said Nicholson. "That was better than we anticipated. We don't want to provide the coverage if the private market can do it. It gives us a lot of confidence in the private (reinsurance) market."

Citizens, Others Opt Out

The largest carrier opting out of TICL this year is Citizens Property Insurance Corp., with more than 1 million policyholders. Private carriers such as Royal Palm Insurance, Olympus Insurance Co., HomeWise Insurance Co., and Hartford Insurance Group either greatly reduced the coverage or passed on it completely. Carriers that did purchase TICL opted for less coverage because the price increased and the level of optional coverage available is smaller than it was in 2009.

However, a handful of companies that did not purchase TICL coverage in 2009 chose to buy some this year. Castle Key Insurance Co. and Castle Key Indemnity Co. — subsidiaries of Allstate — bought coverage, as did Edison Insurance Group. Edison was acquired earlier this year by Florida Peninsula Insurance Co., which is among the companies that have the largest amount of TICL coverage. Data provided by Nicholson's office showed that United Property Insurance and Casualty Co. also increased the amount of optional reinsurance from the fund.

Citizens' Contracting Under Fire

Citizens, the state-created "market of last resort," also appears to have "opted out" of the bidding process in the awarding of a number of its contracts.

A South Florida newspaper this summer reported that Citizens had signed off on 33 contracts worth $49 million without seeking competitive bids. The South Florida Sun-Sentinel did a review of contracts worth more than $25,000 and found that Citizens has used exemptions in state law to hire companies to process policies, provide software and manage claims. In some instances, Citizens said an emergency justified the need to hire a company without seeking bids first.

The article came only months after Citizens came under fire for handing out a no-bid contract to a company hired to do home inspections to verify if policyholders deserve the mitigation discounts they are receiving on their bills. These latest revelations could result in legislative action against the company.

Senate President Jeff Atwater — and a Republican candidate for Chief Financial Officer — fired off a letter to Citizens President Scott Wallace that stated "suggestions that contracts have been awarded without healthy competition is troubling." Atwater demanded that Citizens provide detailed information on every contract it has awarded in the last two years, including whether there were any provisions that would allow the state to terminate the contract.

"I am sure you understand the gravity of this situation, and the scrutiny such actions bring upon Citizens and its management," Atwater wrote. "It is imperative that these circumstances be addressed immediately, and that policies and procedures are in place to ensure non-competitive procurement practices do not become the norm."

Atwater also said that if Citizens did not respond,"I cannot see how statutory corrections can be avoided."

In August, Wallace was summoned by Chief Financial Officer Alex Sink to a meeting with her staff to discuss the contracts. Sink said she was "disappointed" with the reports about no-bid contracts.

A Citizens' spokeswoman called the meeting with Sink's staff "very constructive" and said that the carrier planned to provide more detailed information to both Atwater and Sink about its contracting procedures.

Special Reports /

Florida's Cat Fund Exposure Dropping

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