COLUMN: Crisis looms for Florida’s hurricane catastrophe fund

Sarasota Herald--October 22, 2008

By SAM MILLER GUEST COLUMNIST

The Advisory Council to the Florida Hurricane Catastrophe Fund acknowledged last week that the fund’s real claims-paying capacity is only about half what it promised to Citizens Property Insurance Corp. and private insurers.

That shocking announcement should send shivers down the backs of Florida’s political leaders and consumers alike. It is even more terrifying when considering how close Hurricane Ike came to hitting Homestead and Miami as a Category 3 or 4 storm last month.

Had Ike struck Florida, as it threatened to do for a time, homeowners and business owners almost certainly would now be experiencing delays in having their claims paid despite the promises to the contrary made by the Legislature and the Office of Insurance Regulation.

Following a south Florida landfall by Hurricane Ike, the Cat Fund probably would have run out of money temporarily; as would have Citizens, which is highly dependent on this program and the purchaser of about 40 percent of total Cat Fund capacity. Private insurers would have been hurt as well, especially the rapidly growing domestic insurance industry, which now accounts for 44 percent of the residential market.

As the Advisory Council concluded in its report, “Given the state of the financial markets and the FHCF’s senior managing underwriters’ estimate of current borrowing capacity, the FHCF has an estimated loss reimbursement capacity of $11.786 billion over the next six months and $13.286 billion over the next 12 months.”

This means the Cat Fund could not deliver the $28 billion in maximum capacity it sold to Citizens and private insurers for the 2008 hurricane season, including the $12 billion optional upper-layer coverage that was the basis for state-mandated rate rollbacks averaging 14 percent or 15 percent. It also means the Cat Fund could not finance all of its $16 billion basic, reinsurance program, which every residential insurance company must join under state law.

To illustrate the crisis facing our Cat Fund, we only need recall the devastation caused by Hurricane Wilma, a Category 1 storm that struck Dade and Broward in 2005 and produced $11 billion in total insured property losses.

Hurricane Ike as a category 3 or 4 storm in Homestead and Miami might not have triggered TICL or perhaps would have activated only a portion of it. It almost certainly, however, would have stretched the Cat Fund’s basic program, leaving a shortfall of up to several billion dollars.

Florida may avoid a major hurricane landfall this year, and there probably is nothing we can do at this late date to stabilize the Cat Fund anyway. But policymakers must act before the 2009 hurricane season.

The Florida House and Senate must determine what is realistic for the Cat Fund and adjust the program accordingly. How much money can the Cat Fund be expected to timely deliver if the current national economic crisis continues into the 2009 hurricane season?

A more realistic level could be $16 billion — the Cat Fund’s capacity before the January 2007 special session and adoption of the $12 billion TICL program. It could be less — $11 billion to $12 billion — the Cat Fund’s capacity until an increase several sessions ago.

Florida Insurance Council member companies will be deliberating on what they believe is real and truly deliverable by the Cat Fund and the state following a major hurricane and will submit our recommendations to the Legislature. Establishing a deliverable, “real” Cat Fund program may require an increase in the premiums charged to Citizens Property and private insurers.

Once the Cat Fund has been restored to a state of stability and soundness, private carriers — and probably Citizens as well — must go out into the private reinsurance market and purchase additional catastrophe claims protection. Coverage available from the Cat Fund will not be sufficient by itself. Insurers must be allowed to include their additional reinsurance costs in the rate base.

What this scenario means for insurance rates is not clear — and probably varies from insurer to insurer. But it will produce catastrophe reinsurance we can count on. Unfortunately, some of the Cat Fund reinsurance — granted, mainly the high layers that won’t be triggered until a nightmare hurricane — has become worthless paper.

Sam Miller is executive vice president, Florida Insurance Council (www.flains.org).