Crist’s hurricane-insurance plan robs Peter to pay Ponzi
March 12, 2009
The federal bailout plan for Florida’s property-insurance mess goes like this:
Big hurricane hits.
State catastrophe-insurance fund goes bust.
Gov. Charlie Crist calls Fed Chairman Ben Bernanke on the Bat Phone.
Ben zips over to the Bureau of Engraving and Printing and snatches $18billion in fresh Benjamins off the smoking presses.
He lends them to Charlie.
And the People’s Governor saves his people.
As for repaying the money, maybe we will. But there’s always a presidential election on the horizon, and we are a crucial swing state. (Wink, wink.)
I think this is a dandy plan, although I’m not sure how the people in Kentucky might feel about it.
Chief Financial Officer Alex Sink, the only responsible adult in Tallahassee, says we have no choice.
"The only person who has liquidity is the federal government," she says.
I’m not sure an organization that is $11trillion in debt can be defined as liquid.
But these are desperate times. And reasons go deeper than simply re-roofing half of South Florida when the next Cat5 blows through.
To keep insurance rates low, Charlie expanded the state’s hurricane catastrophe fund to $28billion. He uses it to sell insurance companies backup coverage for major storms.
This is like me selling you the Brooklyn Bridge. I don’t have it, just like Charlie doesn’t have $28billion.
He comes up about $19billion short.
So if the winds howl and a tree comes crashing into your living room, you might want to invest in a very durable tent because every insurance company relies on the catastrophe fund to pay its bills.
Watch your rating
We even have a problem if the wind doesn’t blow.
Insurance rating companies are getting squirrelly about giving credit ratings to Florida insurers because they depend on this catastrophe fund. If the companies begin yanking their ratings, this will make lenders holding home mortgages squirrelly because suddenly, their asset is in jeopardy.
If you check the terms of your mortgage agreement, you probably will find that you are required to have insurance from a rated carrier.
If there is a wholesale yanking of insurance companies’ ratings, Florida’s insurance market could fall into even greater chaos. Thousands of homeowners with unrated companies could find themselves hunting for policies from a shrinking pool of rated insurers.
And lenders would be even more skittish about lending in Florida.
Can startups pass test?
Making matters worse, Florida’s insurance market is being taken over by dozens of small startup companies that don’t have a bunch of money in the bank. And so the catastrophe fund is absolutely critical to them.
The rating agency that specializes in these small insurers, Demotech, has given them until May15 to demonstrate their ability to pay up if the catastrophe fund cannot.
"We want our companies to be able to settle meritorious claims as quickly as they can," says Demotech President Joseph Petrelli.
It’s quite a fix we find ourselves in.
And there are only two ways to resolve it.
One is to drastically reduce the size of the state catastrophe fund. This would force insurers to buy their backup hurricane coverage on the private market, which would cost a bundle. They would pass the cost on, sending insurance premiums through the roof.
The other solution is to get the federal government to agree to cover shortfalls in the catastrophe fund. Of course, this resolution carries moral hazard with it because it rewards Crist for turning Florida’s insurance market into a huge Ponzi scheme. It would allow him to continue suppressing premiums for political gain, while transferring the risk from state taxpayers to Washington.
The feds won’t stand for that, unless Florida does its part — by raising our rates.
Because unlike banks, we have to prove we are responsible.
Mike Thomas can be reached at email@example.com or 407-420-5525.