Report shows bad hurricane season could knock Florida Cat Fund for a loop
While the estimate suggests the Cat Fund would be able to meet its $17.002 billion of potential obligations in the 2013-14 hurricane season, largely by borrowing money in the capital markets that would later be repaid through assessments on policyholders, the aftermath wouldn’t be pretty.
In the year following a hurricane season that exhausted its $17 billion capacity, the Cat Fund’s claims-paying capacity would fall about $9.2 billion short of its potential obligations. The estimates assume the fund could find takers in the capital markets for up to $6.1 billion of bonds in the first year and $5.7 billion in a subsequent season, a total bonding capacity that was actually down by $2.1 billion from Raymond James’ estimate in May 2013. Moreover, the fund would need to assess up to $3.62 billion of post-storm hurricane taxes on nearly every policy in the state every year until it paid down its debts.
“Florida’s unprecedented eight-year ‘drought’ in hurricanes has allowed, for the first time in several years, the Cat Fund to accumulate enough cash that, coupled with issuing billions in debt, will allow it to fully cover its obligations,” R Street Florida Director Christian Camara said. “But Floridians would still be socked with billions in taxes and the fund would be left bare to cover subsequent storms. Now that the Cat Fund is at its healthiest, the time is right to shift some of that risk to the private market, so the Cat Fund is never again in a position where it is selling fake coverage.”
In 2012, the Florida Office of Insurance Regulation estimated that if the Cat Fund experienced a shortfall of 25 percent, 24 of the state’s top 50 insurers – representing 35 percent of the market — would have less than the statutory minimum of $5 million in surplus.
In a forthcoming paper issued in conjunction with the James Madison Institute, R Street proposes ten reforms Florida lawmakers could adopt immediately to improve the domestic property insurance market without raising rates on homeowners. These include gradually reducing the Cat Fund’s obligations to take advantage of better pricing in the private reinsurance market in recent years.
The paper also calls for transparency reforms based on the federal Sarbanes-Oxley Act to avoid potential conflicts of interest, such as when companies responsible for auditing the Cat Fund or Citizens subsequently doing business with the firm in other fields like participating in stock and bond offerings.