InsuranceNewsNet.com
By Jeff Jeffrey
October 19, 2011
The chief operating officer of the Florida Hurricane Catastrophe Fund has picked up some major support in his effort to shrink the state-run reinsurer and reduce its reliance on borrowing.
COO Jack Nicholson has been pushing to “right-size” the fund, arguing that unless the state legislature acts to lower $17 billion exposure in mandatory coverage to around $12 billion over the next three years, it may be unable to meet its obligations in the event of a major catastrophe. Earlier this week, financial experts hired by the fund told a state Senate panel the fund faces a $3.2 billion shortfall if a major catastrophe strikes Florida.
“We need to create confidence in the fund again,” Nicholson told Best’s News Service. “There will be serious consequences if a major catastrophe hits and we can’t cover our obligations, including some insurers who may become insolvent.”
The cat fund was created in November 1993 during a special legislative session after Hurricane Andrew and is designed to help insurers pay homeowners’ claims if a major storm results in widespread damage. It currently has $7.25 billion of cash on hand and some $18.55 billion of exposure. In the event of major hurricane, the fund may need to borrow $11.3 billion to meet its obligations.
Nicholson is working on a presentation to the state Senate, where he will outline proposals he hopes will be used as the basis of a bill for the next legislative session. In addition to lowering capacity by at least $5 billion through higher co-pays phased in over three years, Nicholson wants to immediately eliminate the optional layer, known as the Temporary Increase in Coverage Layer, which is expected to dry up in 2014 (Best’s News Service, Aug. 15, 2011).
Nicholson said his goal is to seek no more than $5 billion to $7 billion from the capital markets, rather than $10 billion or more (Best’s News Service Sept. 26, 2011).
Recently, several organizations have come out in support of Nicholson’s proposals, including The Heartland Institute, the Florida Wildlife Federation and Americans for Prosperity-Florida.
“The release of the fall bonding and claims-paying capacity estimates goes to show even after years of Florida not being hit by a hurricane the current system leaves taxpayers very vulnerable,” said Christian Camara, director of Florida Insurance Project at The Heartland Institute, in a statement. “The legislature would do well in making necessary reforms to the cat fund in order to protect the state and residents from an economic disaster, and the current reform proposal by COO Jack Nicholson is a step in the right direction.”
Nicholson said picking up the support of those organizations will help to “convey the message that the fund is dangerously overexposed.”
“Communication has been a problem,” Nicholson said. “There is always the misunderstanding that the changes that are needed will increase costs for consumers. But the fund will be in a highly volatile situation until we get it to the right size. It is yet to be seen how the support will actually help in motivating the legislature, but any support for what we’re doing is seen as a positive.”
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