For four out of the last seven years, the Florida Hurricane Catastrophe Fund has been projected to have a shortfall should a major hurricane impact the state and cause the fund to pay out to its coverage limits. This is one of those years. Currently, the Cat Fund is projected to experience a shortfall of $1.5 billion should a sufficiently bad hurricane strike Florida this year.
What does this mean for the average Floridian?
Some background: The Cat Fund sells reinsurance to every property insurer selling coverage in the state of Florida. Reinsurance is insurance for insurance companies. Florida law requires property insurance companies to purchase a minimum amount of this coverage from the Cat Fund, and the rest they can purchase from the private reinsurance market.
The purpose of requiring insurers to purchase some of their reinsurance coverage from the Cat Fund is to keep insurance prices relatively stable for consumers, as the price of private reinsurance can fluctuate from year to year. As such, the Cat Fund is meant to stabilize the Florida insurance market.
Policyholders Face Payment Risks
However, a potential shortfall of the Cat Fund would be anything but stabilizing. Because every insurer in the state relies on the coverage they purchase from the Cat Fund to pay claims in the event of a storm, if the fund is unable to pay out what it has promised each company after a hurricane, consumers may not get their claims paid in full. On a larger scale, many of the state insurance companies would themselves become insolvent (meaning: broke) or close enough to it that the Office of Insurance Regulation would have to take some type of action.
Mass insurance company insolvencies after a hurricane and the resultant inability of storm-ravaged areas of the state to quickly rebuild would have a catastrophic impact on the state’s economy and the thousands of families reeling from the aftermath of a hurricane who expected their insurance companies to fulfill their promises.
A House committee is scheduled to consider legislation that would gradually decrease the amount of coverage the Cat Fund can sell, to a level it could be reasonably expected to pay. Currently, the law requires the Cat Fund to sell $17 billion worth of coverage. It has roughly $8.5 billion in reserves and would have to go out into the bond market and sell another $8.5 billion in bonds to pay out the full $17 billion. However, the Cat Fund’s internal managers and outside firms alike believe it would be able to sell only roughly $7 billion in bonds, leaving a $1.5 billion shortfall.
Attempts to Shrink Capacity
Legislation up for consideration would gradually decrease the fund’s capacity from $17 billion to $14 billion over three years.
Similar legislation was filed last year but was rejected by the legislature because decreasing the Cat Fund by $3 billion would have required insurance companies to seek that coverage from the private reinsurance market, which is generally more expensive than the state-run Cat Fund. That would have driven up insurance rates, albeit by just a little more than 1 percent per year. Florida’s Insurance Consumer Advocate, Robin Westcott, opposed the legislation on these grounds.
This year, however, private reinsurance rates are projected to continue declining (by 7 percent), which would make it an ideal time to consider rightsizing the Cat Fund. In fact, Westcott favors this year’s legislation. After running the numbers with the projected decreases in private reinsurance, her office actuary projected  property insurance rates would possibly remain the same but more than likely would decrease if these reforms were enacted by the legislature.
As such, legislators in the House and Senate insurance committees no longer have last year’s hard choice to make between slightly higher rates and gambling with the state’s economic future. This year the choice is a lot easier: They can secure the state’s economic future without raising rates, or do nothing and continue peddling false, phantom coverage at great risk to the state.
Christian Cámara (email@example.com ) is Florida director of the R Street Institute. Used with permission of InsuranceJournal.com, where an earlier version of this article appeared.