InsuranceNewsNet.com
by Jeff Jeffrey
August 15, 2011
The Florida Hurricane Catastrophe Fund may be unable to cover all of its losses in the event of a major catastrophe — unless significant changes are made to the cat fund — according to fund Chief Operating Officer Jack Nicholson. That’s why Nicholson has begun circulating draft legislation, which he said would help put the fund on more solid financial footing.
Among the changes included in the draft legislation are reducing the size of the government-run reinsurer’s “mandatory” layer, requiring insurers participating in the fund to pay more, decreasing special taxes the fund might impose on Floridians, and ending the fund’s never-funded temporary increase in coverage or TICL layer.
The cat fund is a tax-exempt state trust fund, which provides reinsurance protection to insurance companies that suffer losses as a result of a severe hurricane.
The fund has a mandatory coverage layer of $17 billion, which Nicholson’s proposal would reduce to $12 billion by the 2015 contract year. The draft legislation includes provisions that would allow for increases after the fund demonstrates it can fully fund its single-season capacity and its second-season capacity.
Nicholson said his proposal would also seek to have the private market “put more skin in the game” by increasing co-pays from the current level of 10% over the next three years. For the 2013 contract year, the maximum available coverage percentage would be 85%; for the 2014 contract year, the maximum available percentage would go to 80%; and for the 2015 and subsequent contract years, maximum available percentage would go down to 75%.
“We would like to be able to say to the legislature that we can pay 100% of our losses, regardless of what happens. Right now, we can’t honestly say that we can,” Nicholson said. “These changes would move us much closer to that goal.”
Nicholson said it is essential for more private market reinsurers to help bear some of the cat fund’s load because the fund is being asked to do things for which it was never designed.
Nicholson said during the economic boom of 2007, lawmakers expanded the role played by the fund to help lower rates. That became a major problem when the mortgage crisis hit, because it caused the fund’s debt burden to explode, he said.
“The two markets each have their own role to play. The private sector should play a completing role in terms of capacity that the fund can’t support. And our role is to provide stability to the market,” Nicholson said. “When those roles began to overlap, there were serious problems.”
The fund and its largest client, Citizens Property Insurance Corp., which is the state’s insurer of last resort, have garnered headlines recently as more and more industry watchers warn of the potential risks associated with the two taxpayer-backed entities, which have the potential to severely hurt the state economy in the event of a severe hurricane.
In June, A.M. Best analysts released a statement that it “continues to be concerned” about the fund’s ability to pay all of its obligations in the event of a severe hurricane.
“[B]ased on the revised estimated claims-paying capacity recently released by the FHCF, the post-event maximum estimated borrowing capacity estimates have been reduced, as compared with the bonding estimates provided in May 2010. As a result of these factors, as well as A.M. Best’s analytical judgment, coverage provided by the FHCF’s mandatory layer will continue to be reduced by 5% in A.M. Best’s assessment of risk-adjusted capitalization. Given the lack of funding regarding the Temporary Increase in Coverage Limits, no credit (100% reduction) will be provided for this layer, as was the case previously. A.M. Best believes that reducing the amount of coverage provided via the FHCF and relating it to the projected borrowing capacity represents a more accurate view of overall risk-adjusted capitalization,” the release said (Best’s News Service, June 1, 2011).
And in May, American Strategic Insurance President and Chief Executive Officer John Auer said both the cat fund and Citizens need some major changes to avoid significantly hurting the state’s economy.
“As we sit currently, far too much risk is being borne by the taxpayers of Florida, through a combination of both Citizens and the Florida Hurricane Catastrophe Fund,” Auer said. “For years Florida has been only one major hurricane away from fiscal crisis. The current system requires all Floridians to pay hurricane taxes to subsidize million-dollar beach homes on Florida’s coast.”
Auer wants Citizens, which has ballooned to become the state’s largest insurer by market share, returned to its original mandate of insurer of last resort (Best’s News Service, May 31, 2011).
Also in May, Florida Gov. Rick Scott signed into law major property insurance legislation that puts additional limits on how claims against Citizens may be filed. The new law raises the minimum surplus requirements for residential property insurers; shortens the time frame for filing windstorm and hurricane claims to three years and sinkhole loss claims to two years; provides a more precise definition of a sinkhole; places limits on public adjuster compensation; and restores the replacement-cost holdback provision for dwelling coverage, among other reforms (BestWeek, May 18, 2011).
But if Nicholson’s proposal is adopted by lawmakers and musters the support of Scott, it would go a long way toward setting the cat fund on more solid financial ground, said Eli Lehrer, a vice president of the Heartland Institute.
Lehrer said while he would have liked to see Nicholson’s proposal set a higher level of retention for the fund, ensuring fewer storms would rise to the level of needing its backing, he believes the draft legislation includes a number of positive suggestions. Lehrer said he thinks ending the TICL layer of coverage would go a long way in improving the fund.
“The instability of the catastrophe fund is one of the single biggest problems facing the Florida property market and it’s the one receiving the least amount of attention. While Florida Citizens has its own problems, it isn’t likely to bankrupt the state,” Lehrer said. “The catastrophe fund could.”
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