Financially, state is betting against a major hurricane this year
Jul 1, 2008
Orlando Sentinel--July 1, 2008
Aaron Deslatte
Tallahassee Bureau
TALLAHASSEE
For the second consecutive year, Florida’s policymakers are betting the state won’t be hit by a major hurricane.
Gov. Charlie Crist and the Florida Cabinet had told the state’s risk managers to find potential buyers for as much as $11 billion in bonds that would be needed to pay claims if the state is racked by a Katrina-sized hurricane.
But with financial markets in tatters, state money managers say they’ve struck out.
“The terms that we are getting are just outrageously expensive,” said Jack Nicholson, director of the state’s hurricane catastrophe fund.
Translation: The state now will hope for the best.
For the past two summers, Florida has tried unsuccessfully to shift risk from the catastrophe fund to private markets.
The fund sells discounted reinsurance to private carriers — allowing them, theoretically, to pass the savings on to consumers. The Legislature dramatically expanded the fund in 2006, leaving it liable for as much as $29.1 billion this year if a massive storm should strike Tampa or Miami.
If that happens, Florida would have to sell bonds to help insurers pay claims. But with about $8 billion in cash and the expectation the state could sell a maximum of $10 billion in bonds, officials fear a possible $11 billion shortfall.
The catastrophe fund faces “its highest potential liability ever” at a time of “global financial markets that have been exceptionally volatile and fragile,” financial adviser John Forney wrote to state officials in mid-June.
To unload some of that risk, Florida asked experts from firms such as Lehman Brothers and JP Morgan Chase to shop for reinsurance or to set up advance bonding agreements that a buyer would have to honor after the storm.
The cheapest reinsurance they could find would cost taxpayers $1 billion this summer — and cover less than half of that $11 billion gap.
The bonding option would cost at least $280 million — just to reserve the right to sell $5 billion in bonds.
The catastrophe fund can cover its losses if Florida takes a mid-sized hit, or even a series of storms as in 2004 that don’t directly hit the biggest markets.
“They are in good shape for a lot of storms,” said Sam Miller, with the Florida Insurance Council.
“It’s just that monster storm that’s real problematic.”