SunSentinel.com
By Julie Patel
November 3, 2011
Florida TaxWatch released a report on Wednesday on the need to reduce the size and risk of the Florida Hurricane Catastrophe Fund, which sells cheaper backup insurance to insurers so they can pass the savings to consumers.
The problem is, all property and automobile insurance policyholders pay fees to offset the fund’s deficits after major hurricanes: Floridians are still paying 1.3 percent of their premiums for deficits from the 2005 hurricane season. What’s more, it’s unclear if the fund would be able to raise the full $17 billion in coverage it offers to help pay claims if a major hurricane strikes. There would likely be $3.2 billion shortfall, according to TaxWatch.
But the problem with shrinking the fund is that it would lead to rate hikes for consumers.
The report quantifies the impact of various proposals to reduce the fund’s risk. It would cost the average policyholder:
$19.25 more a year, or $95 million for all policyholders, if what amounts to the industry’s deductible was increased from $7 billion to $8 billion;
$92 more a year, or $453 million for all policyholders, if the coverage amount offered was decreased from $17 billion to $12 billion;
$115 more a year, or $566 million for all policyholders if the coverage offered was reduced slightly, by $3 billion, and the minimum co-pay for insurers was increased from 10 percent to 25 percent; and
$173 more a year, or $850 million for all policyholders, under a scenario where all three proposals are implemented, the coverage drops $5 billion and the deductible and co-pay increases.
TaxWatch acknowledges there are pros and cons to any funding system. If the cat fund shrinks, policyholders pay more upfront in premiums and insurers use the money to buy reinsurance, or backup coverage, from private insurers.
If the cat fund stays as is, policyholders could have to pay fees to offset deficits after a major hurricane but they can use the extra money they’d have now to spend money and stimulate Florida’s economy.
The TaxWatch report said there are several disadvantages. Consumers’ policies can be canceled if they can’t pay fees charged after a major hurricane bankrupts the fund and policyholders who may not benefit from the catastrophe fund would still be subject to paying fees to support it. For instance, some policyholders may move into the state years after a hurricane but they’d still have to pay fees to support claims from the hurricane. Charities and businesses don’t benefit from the potential savings offered by the cat fund because the fund doesn’t cover commercial claims, yet they are still subject to the fees.
Several groups – Associated Industries of Florida, the Florida Wildlife Federation and the James Madison Institute – on Wednesday voiced their support for the TaxWatch report and for proposals to shrink the cat fund and state-backed Citizens Property Insurance.
“Despite the fact we’ve been hurricane-free for years, hurricane taxes of the past continue to haunt us,” said Manley Fuller, president of the Wildlife Federation. “We urge the Florida Legislature to enact reform that will end the practice of allowing Citizens and the Cat Fund to subsidize reckless coastal development.”
Proposals to shrink state insurance programs are backed by many in the insurance industry. Policyholders of Florida, a group formed by Tampa Attorney Sean Shaw, released a video Thursday urging lawmakers to give both insurers and consumers a voice in policy-making during the legislative session that starts in January.
