COLUMN: A reckless storm forecast
By Randy Schultz
Palm Beach Post Editor of the Editorial Page
Sunday, May 10, 2009
As the Florida House debated property insurance legislation last week, Rep. Alan Hays, R-Umatilla, repeatedly claimed that Florida is "one storm away from bankruptcy." Whoa. That sounds bad. Was he right?
Yes, if you assume:
That the "one storm" would be a Category 5 striking Miami or Fort Lauderdale, then striking the Tampa Bay area still as a Cat 5;
That if Florida’s worst-worst scenario happened, the federal government would ignore what happened after Katrina and Ike and abandon this state in a way that it did not abandon Louisiana and Texas;
That Rep. Hays knows more than the insurance commissioner and the man who supervises the hurricane-claims paying fund.
Some forecasters recklessly hype storms. Florida remains more vulnerable than we’d like, geographically and financially, to hurricanes. But politicians don’t help when they substitute hysteria for perspective.
Start with the basics:
In 1992, Hurricane Andrew hit Miami-Dade County, causing $16 billion in insured losses. To guard against such losses, insurers buy reinsurance, like bookies laying off big bets. After Andrew, private reinsurers didn’t want to back up Florida homeowner policies. So in 1993, the Legislature created the Hurricane Catastrophe (CAT) Fund, financed by a surcharge on all policies, to offer subsidized reinsurance. That incentive provides what passes for a private insurance market.
If, after a bad storm or a bad season, a company’s losses reach a certain point, the company can tap the CAT fund to pay claims. Obviously, that depends on the $28 billion fund – a first layer of $16 billion and a second layer of $12 billion – having money. If the fund ran out of cash and couldn’t sell bonds, the state would have to make up the difference. Which brings us to Rep. Hays’ "one storm away from bankruptcy" comment.
To even tap the fund, however, industry losses would have to top $7 billion. That number comes from Ash Williams, director of the State Board of Administration. Among his duties is the CAT fund. Mr. Williams told me last week that, if necessary, the fund right now could supply $15.5 billion from cash and bond sales. "That’s very conceivable."
The concern is over the extra $12 billion, which the state added in 2007 and will phase out over the next six years. But as the Board of Administration trustees – Gov. Crist, Attorney General Bill McCollum, Chief Financial Officer Alex Sink – heard last month, credit markets have loosened. As Insurance Commissioner Kevin McCarty notes, the CAT fund remains double A-rated. And it wouldn’t need all the money at once. Claims can be filed up to three years later. Bond sales would be broken up and stretched out.
"We could take an Andrew and still pay claims," Mr. McCarty said. He estimates the chance of claims from a storm or season overrunning the CAT fund at "less than 2”percent." Mr. Williams puts the chance at "between 3”percent and 3.5”percent." California, he said, has the lowest bond rating of any state, but just completed two $5 billion bond sales.
When I spoke with Rep. Hays on Thursday, he said that his apocalyptic comment "depends on how you define bankruptcy. The state couldn’t pay the debts it owed." His solution is to "let the free, open market take care of premiums," even though the "free, open market" forced Florida to create the CAT fund.
Ideally, Florida would have no CAT fund and no Citizens, the state-run insurer. Realistically, both will be around indefinitely. In California, a state-run company similar to Citizens sells earthquake insurance. In Massachusetts, far from Florida, a state-run company must offer hurricane coverage to people who can’t get private insurance.
As Rep. Hays acknowledges, he was in Florida 16 years ago but doesn’t know what went into creation of the CAT fund. In fact, it was one of the Legislature’s finest moments, a bipartisan effort that might not be possible in today’s ideology-driven, term-limited Legislature. Like it or not, every Floridian from Umatilla to Key West is in the hurricane insurance pool. Understanding that would put the state one step closer to reality.
Randy Schultz is the editor of the editorial page of The Palm Beach Post. His e-mail address is firstname.lastname@example.org