State Readies For Hurricanes’ Financial Hits

Tampa Tribune--March 11, 2009

By CATHERINE DOLINSKI

The property insurance merry-go-round continues as Florida’s leaders struggle to balance the cost of homeownership against financial pressures on the state.

With hurricane season only a few months off, state officials are searching for some means of protecting the state from massive losses in the event of a major storm. Tuesday, state advisers offered a list of options to Chief Financial Officer Alex Sink and Gov. Charlie Crist, none of which, they said, will come cheap.

Lawmakers and Crist expanded Florida’s exposure to storm losses in 2007 by offering private insurers cheap backup coverage, or “reinsurance,” through the state’s Hurricane Catastrophe Fund.

Doing so, they hoped, would keep premiums down because private insurers blamed rate increases largely on the cost of purchasing private reinsurance. Now, however, the Cat Fund is $18 billion short of covering its obligations in the event of a major storm. The state must find some way to fill the gap.

In 2008, filling the gap meant paying $224 million to Warren Buffett’s company Berkshire Hathaway in exchange for its pledge to buy up to $4 billion in state bonds if a massive hurricane hit. No such storm emerged, and Buffett’s company pocketed the money without having to bail out the state.

Florida might be able to ink a similar deal this year, although there are no guarantees, said financial adviser John Forney of Raymond James Financial. Other options, he said, include pre- and post-storm bonding, although turmoil in the financial markets limits that option.

Forney, who is based in St. Petersburg, said it would take a storm as big as Katrina or Andrew to cause more than $15 billion in damage but that the Cat Fund needs to be ready for $20 billion if a monster storm strikes.

Jack Nicholson, chief operating officer for the Cat Fund, said it is hard to guess how much the state will have to pay to cover its liabilities this year.

Whatever strategies the state chooses to shore up the Cat Fund, he said, it may raise insurance premiums. Crist and Sink asked Forney to return soon to formally recommend options.

Ideally, the state will be able to look to the federal government for something like a loan or line of credit, said Ash Williams, executive director of the State Board of Administration.

“What we’re not talking about is a buyout or a bailout,” he said. Instead, the state would look to the federal government to “buy our commercial paper” as opposed to asking for the kind of handout that banks and other financial companies have received.

The Legislature also has a role – lowering the state’s exposure through the Cat Fund – but with budget pressures bearing down hard both this session and last, lawmakers have been slow to address the overexposure problem, which carries cost implications for consumers. Shrinking the fund likely would force insurers to purchase more expensive private reinsurance, which would raise rates.

Some lawmakers are talking this session about creating a statewide wind pool. The program would ease the pressure on the Cat Fund in the event of a major hurricane and possibly even replace the fund in time. The idea remains in the early stage, however.

“It’s a heavy lift,” said House sponsor Ellyn Bogdanoff, R-Fort Lauderdale, but drastic change is necessary. “I don’t think people understand what we’re up against.”

Although he has staked his reputation on pushing for lower property taxes and insurance premiums, Crist also said he could support rate increases for Citizens Property Insurance Corp., the state’s insurer of last resort and largest purchaser of reinsurance through the Cat Fund.

Lawmakers imposed a three-year freeze on Citizens’ rates, which are set to return to actuarially sound levels in 2010 unless lawmakers block it. Citizens’ managers say their rates are not adequate to cover their risk, increasing the prospect of assessments on policyholders.

Crist said he could he endorse moderate rate increases for the state-run insurer. “I want to make sure that it’s sound, that’s why.”