PHILADELPHIA–A former Florida state senator predicted at an insurance conference here that if devastating losses deplete the Florida Hurricane Catastrophe Fund, the federal government will step in to shore it up.
Locke Burt, a Republican who formerly represented the Ormond Beach, Fla., area and now is president of Royal Palm Insurance Company and Security First Insurance Company in Ormond Beach, suggested that current lawmakers were banking on that possibility when they crafted reform legislation earlier this year.
That measure increased the size of the cat fund, among other things, in an effort to lower the cost of insurance for Florida homeowners and businesses.
Responding to a question during a session of the Casualty Actuaries on Reinsurance meeting here last week, Mr. Burt said the federal government would "absolutely" help Florida out, reasoning that the federal government gave $100 billion to Louisiana.
"Florida has 27 electoral votes. It's a swing state," he said. Politically, "Louisiana doesn't count," he added.
Mr. Burt, who attended a special legislative session in January as a business representative, reported that during the debate over Cat Fund proposals, senators said, "One thing they were trying to do was create a large funnel" for the federal government to pour money into, "and it would go to actually paying claims as opposed to disappearing in some swamp."
Opting for a post-funding mechanism rather than prefunding the loss, legislators reasoned that after the loss, "We're going to know exactly what it is. It's just a question of paying for it," Mr. Burt said.
They further reasoned, "We will either have cash in the till, or we raise taxes, or we sell bonds, or go to the Feds–or do all of the above," he said. It is recognized, however, that while the federal government will likely give Florida a lot of money for a big event, "if we have a lot of small events, there's going to be a lot less sympathy," commented Mr. Burt.
Todd Bault, an actuary and an investment analyst for Sanford Bernstein in New York, went on to talk about the complications of post-funding mechanisms and raised novel questions about the interplay between the private insurance market and federal flood insurance program.
"One of the big attacks that people are making on the insurance industry is that the industry is using the federal flood insurance program to avoid paying legitimate wind losses…..This is something we hear from the government constantly."
"That might well be happening," he continued. "But exactly the opposite could also be happening, and in some ways it's more likely," he said, going on to suggest the possibility that legitimate flood claims are being misclassified as wind claims.
Many people didn't buy flood insurance; "they know they can't collect under the flood insurance they don't own," so they may be looking for coverage from wind policies, he reasoned.
"I'm sure there are some legitimate wind claims out there. But I'm not sure it's the majority," he said.
While actuaries in the audience argued that insurers should be allowed to prefund catastrophe losses on a tax-free basis, Mr. Burt said that on a federal level, such proposals are unlikely to clear budget-scoring hurdles that require demonstrating that things are revenue-neutral.
"It would be difficult to show. You're giving up tax revenue," he said.
An actuary in the audience responded that Bermuda insurers in general aren't paying U.S. taxes. "If money stays onshore, it's a net gain to the U.S. economy, even if [insurers] are not paying taxes. And it does dampen the swings in the market," he said.
"I think a revenue argument is missing the point, because when those reinsurance premiums exit the United States to go to London or Bermuda, that tax revenue is lost. And the capital is lost," he said.
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