Don’t expect to get paid if there’s a really bad hurricane season

Mother Nature didn’t get the memo about the official start of hurricane season. Tropical storms Alberto and Beryl crashed the party before it started.

In contrast, Florida’s costliest natural disaster — Hurricane Andrew — was the first storm of the 1992 season and did not come ashore in Florida until Aug. 24. The approach of Andrew’s 20th anniversary reminds us that while each storm season is different, one thing remains the same: Florida still has a huge problem with property insurance.

Moreover, when the Legislature adjourned this year without reforming the Florida Hurricane Catastrophe Fund, it left the state in a dangerous position. Indeed, because of the Legislature’s inaction, a total collapse of Florida’s insurance market seems possible if the state’s luck runs out and its six-year hurricane-free spell ends. If this happens, the Legislature and some statewide officials will deserve a huge share of the blame.

Some background: The Cat Fund, as it’s popularly called, provides reinsurance coverage for all of the state’s property insurers, including Citizens Property Insurance Corp., the state agency that sells more insurance in the state than any private company.

Reinsurance is insurance for insurance companies. Unlike private reinsurance, for which companies negotiate in private transactions, every insurer in the state is required to buy Cat Fund coverage. Also unlike private reinsurers — legally required to have enough resources to pay claims they could reasonably expect to receive — the Cat Fund simply does not.

Indeed, the fund’s own managers say that a single bad hurricane season could leave it almost $3.25 billion in the hole — and there are reasons to think this is a conservative estimate.

If this happens, Florida Insurance Commissioner Kevin McCarty says almost half of the state’s 50 largest insurers would lack resources to pay customer claims and would have to enter an “administrative supervision” process, akin to bankruptcy restructuring.

It gets worse. Citizens buys its reinsurance almost entirely from the Cat Fund, unlike most large private insurers, which have at least some private reinsurance. Even though some recently passed reforms of Citizens may help, its finances still have problems.

Leaving aside these technical concerns, the fundamental question on the minds of property owners is this: Will my insurance company be able to pay me if I suffer damage?

The answer, unfortunately, is “not necessarily.” If the insurers, including Citizens, simultaneously encountered problems, more than half of all Florida residents could end up not getting paid for valid insurance claims, leaving them unable to rebuild their homes, businesses and lives.

This situation led almost everyone — insurance groups, the governor, consumer advocates, free-market organizations, a bipartisan majority of state senators and the state’s insurance commissioner — to support a set of modest reforms proposed by the Cat Fund’s chief operating officer. These reforms would reduce reliance on the fund so it could reasonably expect to pay its claims.

When the legislative session began, the bill seemed likely to pass easily. Unfortunately, it encountered one roadblock after another, finally dying in the House when it was removed from the Economic Affairs Committee agenda.

The problem is simple. The state has gone six years without being hit by a major hurricane, and most forecasters believe that the chances of this lull’s continuing are less than one out of 100.

The run of luck can’t continue forever. Eventually, a major storm is going to strike the state. If this happens, Florida’s state government could be in enormous financial trouble, and many legitimate insurance claims could end up going unpaid. The 2012 Legislature’s failure to act will deserve a huge share of the blame.

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