Insurance Journal
By Gary Fineout
October 20, 2011
Florida’s hurricane fund is confronting a potential $3.2 billion shortfall, financial experts said in a new estimate of the money available to the pool intended to help insurers make disaster payments.
The fund was created after Hurricane Andrew devastated South Florida in 1992. Insurers get help to pay homeowners if a storm results in widespread damages.
But the fund doesn’t have enough cash on hand to meet all of its obligations in the event of a big storm, or just as bad, a series of hurricanes. So the fund must go out and borrow what it needs.
Financial experts for the fund, however, have drawn up new estimates that contend that turmoil in financial markets and a weak economy have made it unlikely that the fund would have enough money to help insurers after a hurricane.
This year the fund is providing $18.4 billion worth of coverage. It should have more than $7 billion of cash on hand by the end of the year, but it would still need to borrow another $11 billion if a storm were to strike.
The new estimates, which were to be presented to a state panel Tuesday, suggest the fund could borrow just $8 billion over a 12-month period.
The new figures, however, do suggest that the fund — formally known as the Florida Hurricane Catastrophe Fund — could borrow an additional $6 billion during a period one to two years following a major storm.
The news that the fund’s financial strength has eroded isn’t completely unexpected.
Last month Jack Nicholson, the chief operating officer of the fund, told state legislators that the fund is on “shaky ground.”
“I think we are dangerously overexposed considering the current reality of the marketplace,” Nicholson said at the time. “… It scares me to death where we are.”
Nicholson wants state lawmakers to scale back the size of the fund. That would likely cause insurance premiums to rise but it has the backing of many key Republicans, including Gov. Rick Scott.
Every insurer currently in Florida is required to purchase coverage from the “Cat Fund” as it also called. The fund provides a backstop to insurers at a rate that is generally cheaper than reinsurance sold by private companies. Nicholson estimated that this low-cost option probably results in insurance premiums being about 25 percent cheaper.
If a storm causes enough damages the insurer can ask for reimbursements from the fund. But if the hurricane fund runs out of cash due to a large storm, it borrows money to pay insurers.
The state pays off its debts with an assessment, or what some call a “hurricane tax,” that is placed on nearly every insurance policy in the state, including auto insurance policies. Right now, homeowners and drivers in Florida are paying off charges due primarily to Hurricane Wilma.
http://www.insurancejournal.com/news/southeast/2011/10/20/220845.htm
