Citizens, private insurers push back against Cat Fund reforms

The following article was published in The Florida Current on January 6, 2012:

Citizens, private insurers push back against Cat Fund reforms

By Gray Rohrer

Although some insurance groups are backing a slate of bills in the 2012 legislative session, including legislation to shrink the size of the Florida Hurricane Catastrophe Fund, or Cat Fund, that support is not monolithic.

Citizens Property Insurance, Florida’s state-backed property insurer, and other private insurance companies are raising concerns about HB 833 and SB 1372, which would shrink the Cat Fund from $17 billion to $12 billion during the course of four years, and increase the amount of co-pay that insurers pay into the fund.

Former state senator Locke Burt, president of Security First Insurance, an Ormand Beach-based property insurer with 147,000 policies, says that will push him to buy reinsurance in the private market, which costs more.

“If HB 833 is passed as written we would have to raise our rates 14 percent over the next four years,” Burt said, adding that number assumes the cost of private reinsurance won’t increase.

Although the solvency of the Cat Fund in the wake of a catastrophic event or series of storms is highly important, some private insurers argue, reforms of the fund should take place in tandem with reforms to Citizens. Increasing the cost of reinsurance and by extension, the cost of private insurance, would simply make Citizens more affordable, they claim.

The Florida Association of Insurance Agents wrote a letter last month to Gov. Rick Scott telling him the Cat Fund reforms are counter to his plans to reduce Citizens’ policy count of 1.5 million,which makes it  the largest insurer in the state.

“However, reforms that isolate only the potential for a Cat Fund deficit, especially those reducing coverage at the bottom end, will create the need for private carriers to increase their rates and likely result in a reduction of voluntary market capacity. Inevitably, this will drive more consumers to Citizens — contrary to the goals in your ‘777-Plan’ and counter to the purpose of the Cat Fund reforms themselves,” the letter states.

The Citizens board also voted last month to draft a letter critical of the proposed changes to the Cat Fund.

The Cat Fund acts as the state’s reinsurance arm for Citizens and private insurers. A report released in October showed the fund’s bond capacity in the aftermath of a catastrophic storm fell to $8 billion, leaving the fund $3.2 billion short if a major storm hit the state.

Jack Nicholson, chief operating officer of the Cat Fund, proffered the changes included in the proposed legislation as a way to eliminate the potential of a shortfall. He says criticisms of the bill are overblown, and that private companies are simply going to have to rely on the private reinsurance market more.

“The problem is they’re getting cause and effect mixed up. The cause is the financial markets. The legislation is a solution to avoid a catastrophic situation where we pull the rug out from under some companies,” Nicholson said.

But Burt thinks Nicholson is overselling the situation, and doubts that the Cat Fund would actually blow through their surplus and bonding capacity by paying claims within two years after a large storm hit, since the fund is still paying out claims from 2005.

“Jack Nicholson has done an excellent job of manufacturing a crisis where none exists,” Burt said.

Reporter Gray Rohrer can be reached at grohrer@thefloridacurrent.com.

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