Cat fund and other pre-Irma insurance decisions saved Florida from economic disaster
While $8 billion is no small number, had the storm stayed on its original forecast track just 50 to 100 miles east of its eventual path — had it directly hit Miami-Dade County and traveled up the entire peninsula, losses easily could have been topped $100 billion.
For most of us in the Sunshine State, life has returned to a sense of normalcy. Debris has been removed, roofs have been shingled and businesses have resumed normal operations. For that, we can thank the prudent decisions of the Florida Legislature and Gov. Rick Scott, their handling of the Florida Hurricane Catastrophe Fund and Citizens Property Insurance Corp., a favorable reinsurance market and quite a bit of luck from Mother Nature.
Since 2006, Florida saw an unprecedented run of 10 hurricane-free years. In that time, the Florida Legislature wisely chose to build up cash in the Cat Fund, which provides backup coverage called reinsurance both to Citizens and to the state’s many primary insurance companies. This literal “rainy day” fund has a statutory mandate to sell roughly $17 billion in coverage, even when it doesn’t have the resources to pay all of those claims. When a sufficiently bad hurricane strikes the state and the Cat Fund doesn’t have enough cash on hand, it finances those losses by issuing debt. That debt is repaid by policyholders through “hurricane taxes” on their policies for several years.
Were the Cat Fund to be struck by a second large loss in a given year, the claims could even exceed its ability to issue new debt. We don’t really have an answer as to what would happen should that occur, but it certainly would be messy.
To avoid these undesirable scenarios, the Cat Fund has in recent years started to purchase reinsurance of its own. Reinsurers use diversification to pool risks from around the globe, taking on earthquakes in Asia and hurricanes in Florida, with the odds that very large catastrophes in all of these different markets are unlikely to happen all at once.
Had the Legislature and Gov. Scott not acted to shrink the size of Citizens and shore up the resources of the Cat Fund, including through reinsurance, Irma could have left Florida taxpayers with billions in debt. It also likely would have destabilized the Florida insurance market and the state’s economy.
Instead, the losses have been quite manageable. In fact, just days after the storm had cleared the Panhandle, insurance companies, with reinsurance payments in hand, were able to begin paying claims. This allowed rebuilding efforts to begin and infused the state’s economy with outside capital.
Despite the losses from Irma, the Cat Fund looks likely to remain fully funded. Florida’s private insurance companies were able to make good on their claims quickly and without any disruptions.
Just as politicians should learn from their mistakes, so too should they learn from and build upon their success on this issue by staying the course.