George Gibbs Center for Economic Prosperity

Sun Sen⁠t⁠⁠i⁠nel: B⁠i⁠ll New⁠t⁠on: S⁠t⁠⁠i⁠ll work ⁠t⁠o be done on ⁠i⁠nsurance r⁠i⁠sk ⁠i⁠n Flor⁠i⁠da

By: The James Madison Institute / 2013

Our emergency storm kits may still be intact, but after eight storm-free years, a financial burden for all Floridians continues to loom. While the risk associated with Florida’s state-run insurance entities – Citizens Property Insurance Corp. and the Florida Hurricane Catastrophe Fund – may now be less, there is still more work that needs to be done.Unbeknownst to many, the state of Florida has taken on a huge amount of risk. Under the current structure of the Cat Fund, there is a dangerous monetary threat to Floridians if a big storm does in fact make landfall in our state. This is because the Cat Fund, which was originally intended to provide stability for huge, Hurricane Andrew-sized events, is supported by issuing debt that would have to be repaid by Floridians including homeowners, business owners, renters, churches, charities and automobile policyholders. That means that ALL the risk is on us.

While the absence of a storm over the years has provided the Cat Fund with an opportunity to build up a cash reserve, we should not forget that the Cat Fund’s current structure still relies on post-event bond debt to pay hurricane claims, rather than traditional reinsurance, which spreads the risk outside the state.
Florida can only put a limited amount of our funds at risk, and after that current law leaves us at the mercy of the financial markets. We may or may not be able to borrow enough money, or we may face the possibility of having to pay sky high interest, given our position. That means we might not be able to pay claims, which would be a second disaster, possibly worse than the storm itself.  In fact, in today’s markets, estimated bonding capacity is down, not up. That means that if we had to issue bonds now, there is less capacity and interest rates would be higher.For years, Florida consumer, business and environmental groups have supported changes to the state-run system. We have studied and understand the financial implications associated with failing to reform the system, and believe that true reform is necessary in order to protect Florida consumers.The James Madison Institute and the R Street Institute, members of the Stronger Safer Florida coalition which the Florida Consumer Action Network belongs to, recently released a report entitled, “Ten Reforms to Fix Florida’s Property Insurance Marketplace — Without Raising Rates.” The report suggests, “In its current form, the Cat Fund poses the greatest danger to Florida’s insurance system, as well as the state’s ability to recover quickly after a major hurricane.” One of the feasible reform measures the report cites is an incremental reduction plan, proposed by Rep. Bill Hager, R-Boca Raton.During the 2012 and 2013 Legislative Sessions, FCAN supported Hager’s much-needed plan that would have reduced the size of the Cat Fund, and decreased insurers’ reliance on the state rather than private markets. The implementation of this plan is an important step toward a healthier insurance market, which would better protect all consumers from financial disaster in the wake of a major storm or series of storms. By taking advantage of private market opportunities and spreading Florida’s hurricane risk beyond our borders, FCAN believes we can avoid additional debt and potential assessments that would affect Florida consumers. Support for the pro-consumer, bipartisan Hager legislation was demonstrated by other consumer groups, as well as tax, business and environmental groups. Additionally, Florida’s former Insurance Consumer Advocate Robin Smith-Westcott, who was responsible for representing Florida’s policyholder consumers on property insurance matters, and Cat Fund management also advocated for the Hager plan.While opponents of the legislation contended that shrinking the Cat Fund would force Florida insurers to obtain more expensive coverage in the private market and, therefore, increase insurance premiums for consumers, the opposite is true. The cost of reinsurance is on the decline, and accessing that capital would not increase consumer rates. It is another good reason why we should be taking advantage of the private reinsurance market.
We are just months away from the 2014 Legislative session. This is another chance for our elected leaders to implement change that moves us toward a healthier insurance market that spreads insurance risk, reduces the role of government in the reinsurance market and ensures the Cat Fund can reliably pay its bills.
The upcoming session is the time for legislators who want to fight for consumers to realize our good luck will not continue indefinitely. Another Hurricane Andrew, a repeat of the 2004/2005 storm season or worse could happen. We need to align our state’s priorities, particularly those that require Florida to back-up private insurance companies. We need smart Cat Fund reform that does not increase debt by bonding out, but instead protects Florida consumers and the financial security of our hurricane-prone state.