OPINION: Florida Insurance Council in support of solvency for the cat fund

South Florida Sun-Sentinel--Mar. 20, 2008
By Gary Landry

The uncertain economy is yielding a deep concern over the state’s ability to raise the full $28 billion that legislators obligated the state’s catastrophe fund to come up with when a major hurricane or series of hurricanes strike Florida.

The concern is forcing public decision-makers to re-evaluate the proper sustainable level of cat fund coverage. While it certainly is wise to review the fund’s ability to deliver on its promises, the legislature should proceed with caution so not to underestimate the fund’s true capacity, either.

Lawmakers need to remember that, as the state continues to grapple with the issue of maintaining an insurance market that can provide ample coverage at affordable rates for Florida families, the cat fund not only provides greater reinsurance capacity which, in turn, enables a larger amount of insurance to be written in the state than could otherwise be written if the fund did not exist, but it also plays a role in helping lower premiums for residential property insurance.

The lower rates are made possible as the cat fund provides residential hurricane reinsurance rates to the government-run insurer, Citizens Property Insurance Corp., and to private insurers at rates that are one-quarter to one-third as high as rates on the unregulated, offshore private reinsurance market. Those rates increased as much as 76 percent following the 2004-2005 hurricane seasons in which eight hurricanes struck Florida causing some $32 billion in insured losses.

These lower rates are possible due to the cat fund’s tax exempt status, low administrative costs and lack of any profit as it sells bonds on the open market to theoretically raise the cash it needs. Therein lies the predicament the state finds itself in as the national and Florida economies show signs of stuttering. Financial experts, who serve as consultants to the cat fund, first raised concerns back in August of 2007 that market conditions had cooled, making it questionable that there would be any takers willing to purchase the level of bonds the state obligated itself to a year ago.

Those same consultants have since presented both House and Senate committees with some sobering news about the cat fund’s ability to meet its financial obligations in a timely manner. John Forney, consultant with Raymond James and Associates, said he could not guarantee the cat fund could sell $25 billion in bonds, “or even come close to it.” Extreme delays in the payment of claims, if claims could be paid at all, would be a real possibility if that were to happen.

Certainly, Chief Financial Officer Alex Sink recognizes the problem. Her office is recommending the Legislature reduce the cat fund’s capacity by 25 percent in an attempt to present the bond market with a more palatable sale. She acknowledges, however, any reduction in the cat fund’s capacity would result in an increase in property insurance rates as insurers would have to replace the state-backed reinsurance with more expensive reinsurance from the global market.

It’s a careful balancing act. If the fund is called upon to come up with a level of reinsurance that it is unable to meet, the state will be forced to pass special taxes, or assessments on every homeowner’s insurance policy, every auto insurance policy and every business liability policy to make up for the shortfall.

As legislators debate the options, The Florida Insurance Council, the state’s largest not-for-profit insurance trade association representing some 200 insurers and insurer groups writing all lines of coverage in Florida, believes the debate at hand is a welcome shift of focus to solvency — solvency of the cat fund, as well as solvency of individual insurers.

Gary Landry is vice president of the Florida Insurance Council.