Floridians will pay more later if big hurricane hits
By BAIRD HELGESON | The Tampa Tribune
and RUSSELL RAY | The Tampa Tribune
Published: May 29, 2009
TAMPA – Monday marks the beginning of a hurricane season that forecasters say could yield up to three powerful storms.
Can Florida cover the losses caused by even one major hurricane in these tight economic times?
Yes, say state officials who oversee Florida’s Hurricane Catastrophe Fund.
But the state of the so-called Cat Fund highlights the peril of lawmakers’ decision to keep Floridians’ insurance bills lower today and risk higher insurance bills later if a major storm hits.
Florida’s fund could cover the state’s share of a storm that causes up to $22.8 billion in claims, but it would do so by borrowing about half of the money and paying it through assessments on Floridians’ insurance policies.
"We will have assessments if we have a major hurricane," said Sam Miller, spokesman for the Florida Insurance Council. "It won’t take much of a hurricane for the Cat Fund to run out of cash."
Big one means borrowing
Florida lawmakers created the Cat Fund in 1993 to comfort jittery insurance companies walloped by Hurricane Andrew, which left 40 dead, caused $16 billion in damage and threw a 17-foot storm surge at Miami. Many insurers started pulling out of the state.
Since then, lawmakers expanded the fund, allowing insurers to buy into a cheap, state-backed catastrophe pool to protect against major losses and keep rates down.
This year, the fund will collect up to $1.7 billion in premiums. But if a bad storm hits, the fund must sell bonds to come up with more money for claims. To repay the bond debt, state officials would have to tack on an assessment to all property insurance policies, including auto and boat.
Florida policyholders are still paying a 1 percent Cat Fund assessment to cover claims for Hurricane Wilma, which caused $11.5 billion in losses in 2005.
This year brings a new problem: the tanking credit market. The same factors that have cut off loans for homes, cars and businesses are limiting how much money can be borrowed to cover storm losses.
In the past, fund managers felt they could easily sell $28 billion in bonds, the maximum allowed. The fund’s authority to levy assessments on Florida policyholders was a comfort for investors.
This year, fund analysts estimate they could raise only $8 billion.
"That was a shocker for most people," said Jack Nicholson, the Cat Fund’s chief operating officer.
Too much for Warren Buffett
Cat Fund managers have taken other steps to raise money.
In July, the fund inked an agreement with Berkshire Hathaway Inc., owned by billionaire investor Warren Buffett. Under the agreement, Florida paid the company $224 million for a guarantee that the state could borrow up to $4 billion to help cover future losses.
That agreement has expired.
It wouldn’t have been enough anyway. Analysts estimate a worst-case storm, the kind that hits once every 100 years, could cause $52.9 billion in damage in Florida.
Storm claims must hit about $7.2 billion before insurers could tap the Cat Fund.
Officials of the State Board of Administration, which oversees the fund, said the catastrophe pool can pay up to $15.6 billion in claims using cash and debt. That’s enough to cover losses from a storm that hits every 30 years, still much larger than Wilma, the 2005 storm that left millions without power across South Florida.
If a big storm hits and the fund exhausts its borrowing ability, consumers would face an assessment on their premiums of up to 6 percent for 30 years. That means a motorist who spends $1,000 a year for car insurance would pay an extra $60 a year to bail out the fund. Over 30 years, that motorist would kick in $1,800 to repay the debt.
"That would be the maximum, worst-case scenario," Nicholson said.
Critics argue that Florida lawmakers have created a flawed insurance system, saying they keep rates artificially low to please voters while gambling that big storms stay away. The catastrophe fund’s reliance on borrowing increases the risk that consumers will be tapped for assessments, they say. And it also relies on a flush credit market.
"Over time, assessments will be layered on top of each other," said Robert Hartwig, president of the Insurance Information Institute, an industry group in New York.
Higher insurance premiums up front would be cheaper than the interest consumers would pay on future debt, he said.
And an even bigger threat looms, critics such as Hartwig argue.
Could Florida get a loan?
Florida’s insurance model is so underfunded, they say, the federal government would be forced to bail out the state if a major storm hits an urban area such as Tampa.
A.M. Best Co., a rating agency, has expressed concern that poor economic conditions could make it hard for the Cat Fund to borrow the money needed to pay claims.
Insurers have their concerns, too.
They must buy coverage from the fund. If the fund runs out of money, insurers won’t be able to pay claims. They worry they are propping up a fund that might collapse before they use it.
Florida is "one large storm away from some very difficult circumstances," said Jeff Grady, president of the Florida Association of Insurance Agents.
"Florida has created a fragile system of insurance that leaves Florida homeowners and taxpayers at great financial risk," he said.
Gov. Charlie Crist and the Legislature took a small step this year to minimize consumer liability for paying hurricane claims through the Cat Fund.
Last week, Crist signed a bill reducing the maximum amount that can be paid out of the fund by $2 billion a year for the next six years. The legislation also increases the amount insurers must pay to buy coverage from the pool, helping fill the fund’s cash reserves.
"It’s a good first step to restoring some financial sanity to the market," said William Stander, a lobbyist with the Property Casualty Insurers Association of America.
Stander noted that analyst predictions still leave many questions about the fund.
"The only thing that’s going to determine if it is working is the next hurricane season."
Reporter Baird Helgeson can be reached at email@example.com or (813) 259-7668.