‘Big one’ could pose bigger problems

Daytona News-Journal–March 9, 2009

By JIM SAUNDERS
Tallahassee Bureau Chief

TALLAHASSEE — Already mired in severe budget problems, Florida could face a bigger financial crisis if a major hurricane slams the state this year.

A state catastrophe-insurance program is supposed to help insurers pay claims after a devastating storm. But state and industry officials say the program could be as much as $18 billion short of meeting its obligations.

That has left state officials struggling to patch together a financing plan as hurricane season gets ready to start June 1 — including possibly trying to line up help from the federal government.

“We are in economic distress in this country, and this state could be in considerably more economic distress if it gets hit by the big one,” said U.S. Sen. Bill Nelson, D-Fla.

The issue deals with the Florida Hurricane Catastrophe Fund, which sells low-cost “reinsurance” to private insurers and to the state-backed Citizens Property Insurance Corp.

Reinsurance is backup coverage that is a critical part of Florida’s property insurance system. Insurers buy the coverage from private reinsurance companies or the state fund, with the agreement that those reinsurers will help pay claims after hurricanes.

Florida created its fund, commonly known as the Cat Fund, in 1993 after Hurricane Andrew. But lawmakers in 2007 dramatically expanded the amount of reinsurance the fund sells, as homeowners faced soaring insurance rates.

The idea was fairly simple: Insurers would be able to save money by buying more reinsurance from the Cat Fund instead of purchasing it on the private market. Insurers would then pass on those savings to homeowners through lower rates.

But two years later, the Cat Fund faces the prospect of not having enough money to make good on its commitments. That has led to open discussion in Tallahassee about possibly having to go to the federal government for help if a costly hurricane hits.

“It will be 1-800-White House,” said Rep. Ellyn Bogdanoff, a Fort Lauderdale Republican who has worked on insurance issues.

The state always anticipated issuing bonds to cover part of the Cat Fund’s obligations. But a meltdown in the nation’s credit markets makes it highly unlikely the fund could borrow enough money to deal with a major storm this year.

State and industry officials have said in recent weeks they think the Cat Fund would have roughly $10.6 billion in available cash and other financing. But that is about $18.4 billion less than the fund would need in a worst-case hurricane scenario.

“Things come crashing down on us if we can’t get the Cat Fund fixed,” said Sam Miller, executive vice president of the Florida Insurance Council, an industry group.

Gov. Charlie Crist and the state Cabinet are scheduled to discuss potential options for dealing with the Cat Fund during a meeting Tuesday.

Faced with a similar — though smaller — shortfall last year, Crist and the Cabinet agreed to pay $224 million to the company headed by billionaire Warren Buffett to partly shore up the Cat Fund.

Under the agreement, Buffett’s Berkshire Hathaway would have bought bonds to help cover hurricane losses. When no hurricanes hit Florida, Berkshire Hathaway kept the $224 million — and didn’t have to buy the bonds.

With the start of hurricane season less than three months away, however, dealing with this year’s shortfall could be more difficult.

Rep. Pat Patterson, a DeLand Republican who is chairman of a key House insurance committee, said lawmakers might consider reducing the amount of coverage offered by the Cat Fund. That could involve a gradual reduction or getting rid of a large part or all of the expanded coverage approved in 2007.

But reducing the size of the Cat Fund likely would lead to increases in insurance rates for homeowners. That is because insurers would need to buy reinsurance on the private market — at a higher price than they are paying for Cat Fund coverage.

Nelson, meanwhile, has proposed that Florida be able to receive something akin to a line of credit from the federal government. Under such an arrangement, the federal government would loan money to the Cat Fund if needed and be repaid with interest.

Senators from other parts of the country have rejected past attempts to get the federal government involved in helping with Florida’s hurricane-insurance problems. But Nelson and state Chief Financial Officer Alex Sink said they hope the line-of-credit idea will be more palatable.

“We’re not asking for a handout from Washington,” said Sink, who unsuccessfully pushed state legislation last year to reduce the size of the Cat Fund. “We’re just asking for a hand-up.”

Without action by the state or federal governments, the Cat Fund’s problems could have wide-ranging ramifications.

On a most-basic level, the situation raises questions about how claims would be paid after a major storm.

But it also affects the broader insurance market. As an example, industry officials say major insurers are worried they might have to come up with large amounts of money to pay hurricane claims that the Cat Fund was expected to cover.

State Farm, which announced plans in January to pull out of the Florida property insurance market, has to buy extra reinsurance because of the risks from the Cat Fund, a spokesman said recently.

“These big companies believe that they have a tremendous financial exposure,” said former state Sen. Locke Burt, president of the Ormond Beach-based Security First Insurance Co.

Compounding the situation, the state-backed Citizens Property Insurance is the largest purchaser of reinsurance from the Cat Fund.

Crist and lawmakers have kept Citizens’ rates frozen since 2007, which has led to widespread concerns that Citizens would run deficits in paying claims after a large hurricane.

That leads to the possibility that both Citizens and the Cat Fund could face financial problems after such a storm.

“The fact of the matter is, if the big one struck, both Citizens and the Cat Fund would be going to Washington for a taxpayer bailout,” Burt said during an interview last month.