State storm fund short, official says

Palm Beach Post--October 14, 2008

By RANDY DIAMOND
Palm Beach Post Staff Writer

A state fund responsible for backing up homeowners insurers in the event of a major or catastrophic storm said Tuesday that it could not make good on its $28 billion promise to help pay claims.

Because of ongoing problems in the credit market, the Florida Hurricane Catastrophe Fund estimated that it would fall as much as $10 billion to $15 billion short of the coverage it sold to insurers like Allstate and Nationwide known as reinsurance, or insurance for insurance companies. That’s because, while policyholders eventually would be on the hook through surcharges, the Cat Fund first would have to sell bonds for the roughly $22 billion it does not have on hand.

“Just like many businesses all over the world, the (Cat Fund) is impacted by the current financial market turmoil,” said fund administrator Jack Nicholson.

Florida Insurance Council Vice President Gary Landry said the Cat Fund problems call into question the state’s homeowner insurance rate reduction plan. The plan is based on the state’s selling insurance companies discounted reinsurance from the Cat Fund.

“We’re crossing our fingers and hoping there is not another hurricane this season like everyone else,” Landry said.

The total reimbursement capacity for the fund Tuesday was estimated at $13.2 billion for a 12-month period, and $11.7 billion if bonding were limited to a six-month period, according to the fund’s financial advisers.

The inability to raise cash in the credit markets, which was not anticipated when the state stepped up to offer the reinsurance, also could hit homeowners if a big storm – or a series of storms – slams into the state. Insurers rely on the state fund to help pay claims once they meet a $6.88 billion deductible.

Payouts would have to be huge for there to be a problem. The Cat Fund says it has access to about $10 billion in cash without going to the bond market.

But if a series of weather events were to happen, Nicholson said, it could create serious problems for insurers waiting to be reimbursed.

Bob Hartwig, president of the New York City-based Insurance Information Institute, an industry trade group, said some Florida insurers likely would be forced to delay paying claims in the event the Cat Fund could not reimburse them. The alternative would be to risk facing insolvency from a lack of capital, he said.

”The situation could destroy what remains of the Florida homeowners insurance market,” Hartwig said.

Nicholson said if a large event occurs, the fund would not pay all claims at once.

“It is likely it would take six to nine months to receive and pay about 90 percent of our claims and three to five years to receive and pay the rest,” he said. “Our current cash resources can take us a long way.”

State insurance officials have said Florida residents ultimately have to replenish the Cat Fund through surcharges on their insurance policies that could last as long as 30 years.