Risk-Based Rates Key to Shrinking Florida Taxpayers’ Hurricane Loss Exposure

Risk-Based Rates Key to Shrinking Florida Taxpayers’ Hurricane Loss Exposure
October 30, 2012

As the leaderships of both the Florida Hurricane Catastrophe Fund and Citizens Property Insurance Corp. consider the state-run funds’ fiscal exposure to catastrophes, the R Street Institute is urging state lawmakers and regulators to commit to risk-based rates to protect taxpayers and policyholders from costly post-storm assessments.

The Cat Fund Advisory Council heard a presentation on October 9 from its financial advisor, Raymond James & Associates, showing the reinsurance fund’s estimated claims-paying capacity over the next year would leave it with a $1.52 billion shortfall should a major storm strike the state. The latest report shows the Cat Fund has roughly $8.5 billion in cash resources but would be able to raise only $7 billion in post-event bonds, leaving it short of its $17 billion in maximum obligations.

‘Promises It Cannot Keep’

“Another year and another projection show the Cat Fund is making promises to residents it simply cannot keep,” said Christian R. Cámara, R Street’s Florida director. “Florida has dodged hurricanes for nearly seven years, but this unusual streak of good luck will not last forever. The Legislature must enact reforms to ensure that the Cat Fund is able to deliver on its promises so Floridians can get their claims paid in full and Florida’s economy can recover quickly after a hurricane. Waiting to do this until after the wind blows will be too late.”

Citizens put off a scheduled October 19 vote of its Board of Governors on a plan to shed 300,000 of its 1.4 million policies by lending up to $350 million from the insurer’s surplus to well-capitalized insurers that agree to take out the policies for at least 10 years. Any policies transferred through this process would continue to be subject to Citizens’ 10 percent cap on rate hikes for the first three years.

Reduced Exposure

Advocates of the plan note that, if successful, it would reduce Floridians’ potential exposure to emergency assessments from $3.06 billion to $1.89 billion, a reduction in risk that would otherwise require $2.4 billion in reinsurance payments over the next decade to achieve. In addition, take-out insurers would be required to pay the loans back with interest over the next 20 years.

The plan is now on hold, however, as Board Chairman Carlos Lacasa has asked Citizens President Barry Gilway to solicit independent analysis.

“The proposal under consideration by the Citizens board is by no means a perfect solution, much less a final one,” Cámara said. “Unlike previous plans, this one has safeguards that greatly reduce the chances that these policies would go back into Citizens.

“This, in turn, reduces Citizens’ overall exposure and the massive risk it poses to taxpayers. Ultimately, it is a good initial plan to unload policies into the private market; however, it must be followed up with reforms by the legislature that address rate and eligibility requirements to reduce the current influx of new policies into Citizens. Otherwise, we’ll be back to square one.”

Source: R Street Institute