Cat Fund Changes Urged

As we pass the halfway mark for the 2008 hurricane season, more state politicians are becoming anxious about the prospect that the Cat Fund will be financially unable to sustain itself in the event of a large storm. That would mean the state would have to recoup its losses through large assessments on insurance policies that could take years to pay back. Florida's gamble is even gaining national media coverage, with publications such as Time magazine wondering if the state "could survive the Big One?" [Time, September 5]

Major havoc in the nation's financial markets is another factor that is adding to the level of anxiety. The severity of the credit crisis is reinforcing fears that Florida would have great difficulty in obtaining backing for the billions in bonds that could be needed if a major storm hit the state. This summer, Florida already took the unusual step of paying Berkshire Hathaway $224 million just to guarantee that the state would have access to $4 billion in financing if damages exceeded $25 billion.

Chief Financial Officer Alex Sink says that "the federal government would have to step up," if Florida gets hit with a large storm right now.

The Cat Fund was first created in the wake of Hurricane Andrew in 1992, but state lawmakers and Governor Charlie Crist greatly expanded the program's scope in Jan. 2007. The intent was to provide carriers with a cheap alternative to private reinsurance, with the savings passed on to consumers. Lawmakers authorized an additional $12 billion in coverage, known as the Temporary Increase in Coverage Limit (TICL), to bring covered losses up to $28 billion.

But consumers have complained that the savings have not been as big as promised, while Democrat Sink and some Republicans contend that the state has overextended itself. Right now the fund has about $8.1 billion available, through a combination of cash reserves and previous bond proceeds, to help pay claims.

The fund is already charging a one percent emergency assessment on policies to pay for bonds it issued in 2006 and 2008.

Lawmakers Must Act Soon

Florida has avoided large catastrophic storms so far this year, so the fund has not been hit with any major losses. Even Tropical Storm Fay brought most of its damage through flooding, which is covered through the National Flood Insurance Program. The state's largest property insurer, Citizens Property Insurance Corporation, said it had less than 4,000 claims related to damage from Fay.

But even if Florida avoids a large hurricane for another year, state lawmakers will have to make a decision about the Cat Fund by the spring of 2009. That's because the $12 billion in added exposure will only be offered to insurers for one more hurricane season if legislators do nothing.

Last spring Sink tried to get legislators to peel back just $3 billion in coverage provided by the fund, but her idea was blocked by the state Senate. Representative Ron Reagan (R-67), an insurance agent and one of the lawmakers who worked on this year's insurance package, said fears that reducing state exposure would trigger rate hikes, even small ones, proved fatal during an election year.

"It was a political year, and we couldn't do a heck of a lot," said Reagan. He said that he remains hopeful that lawmakers will scale back the size of the Cat Fund during the 2009 session. "We've got to seriously look at it and make a decision whether to keep that level of exposure."

Sink has not made a final decision on whether she will recommend changes to Florida's exposure, but she said that she can't imagine that legislators would agree to extend the $12 billion in additional coverage beyond the 2009-2010 contract year.

"The legislature is going to be forced to address the issue, and I'm certainly not of a mind to go for the whole $12 billion layer again," said Sink.

Ring is also cautiously optimistic that legislators will seriously look at the level of exposure for the Cat Fund, but he warned that the ongoing state budget crisis could divert attention and energy away from the issue. He added that lawmakers need to realize that if Florida gets hit with a major storm, it could take years for the state to recover financially.

The main obstacle to making changes will be whether a reduction in the amount of state-subsidized reinsurance will lead to large rate hikes by those insurance carriers doing business in Florida.

Insurance Commissioner Kevin McCarty was skeptical that the complete elimination of the $12 billion TICL layer could occur without leading to rate hikes. "You could move it all to the private sector and you couldn't be able to afford the premiums," said McCarty.

But McCarty also said other factors, such as the extent of Ike's damage in Texas, could have a huge impact on whether the private reinsurance market was in a position to absorb the coverage now offered by Florida.

"This is going to have to be a public policy decision," said McCarty. "A lot is going to depend on how much damage we see out of Houston, what impact that's going to have on the cost of global reinsurance, and how that's going to price out in the Gulf of Mexico and in Florida. Again, it is all tied to the cost of global reinsurance. If the market continues to go down like it has in the past two years, that would be the time to reduce some of the Cat Fund."

Change to Attract Private Reinsurance

But state officials are hoping that one small change put in place this fall could help attract more private reinsurance to Florida. Crist and members of the Cabinet approved a new rule that will give wide discretion to McCarty to waive current collateral requirements for foreign-based reinsurance companies.

In the past, Florida required reinsurers not accredited in the state or licensed in the United States to post 100 percent collateral to cover any reinsurance risk issued to insurers doing business in the state. Lawmakers gave McCarty the power to waive that requirement in 2007, but the state had waited until now before adopting the rule in an effort to get other states to adopt similar measures. Florida went ahead and adopted the rule even though New York is the only other state to adopt a similar measure.

McCarty said at this point the rule change may have a "minimal" effect on attracting more reinsurance to the state because foreign companies will still have capital tied up in other states. Currently, 92 percent of the reinsurance purchased by companies doing business in Florida is provided by foreign-based companies.

Still, McCarty said the change, which was strongly supported by companies such as Lloyd's of London, could prompt other states to follow, and removes unfair barriers to international trade.

"This rule will allow the foreign reinsurers to be more competitive in our market," said McCarty. "And it will make Florida a national leader in attracting capital via the reinsurance industry."

McCarty said that his office, however, would only waive the collateral requirements for those reinsurance companies that have a strong financial background and have a demonstrated history of paying reinsurance claims.