A move to restructure Florida’s state-run property reinsurance facility by lowering its financial obligation to insurers is facing an uphill legislative battle as both lawmakers and members of the industry find themselves in conflict over the plan.
Florida Hurricane Catastrophe Fund officials have been sending out warnings over the past several years that under the fund’s current financial obligations to the industry it is unlikely that they could raise the $17 billion to reimburse insurers as prescribed by law.
Cat Fund Executive Director Jack Nicholson recently told lawmakers that the fund is in immediate need of restructuring. He said based on a financial analysis that took into effect market conditions and the size of the fund’s obligations, it is in real danger of not being able to cover all its liabilities.
“We have looked over the Cat Fund’s claims paying capacity and in four of the last six years we could not have funded the coverage we sold the insurance companies,” said Nicholson.
The House Insurance and Banking Subcommittee held a workshop last week on HB 1107, sponsored by Rep. Bill Hager (R-Boca Raton), which is designed to reduce the Cat Fund’s obligations over three years so that the market has time to adapt to the changes.
Specifically, the bill would reduce the fund’s single-hurricane season capacity from $17 billion to $14 billion by 2016.
The bill would also reduce the Cat Fund’s offer of coverage to insurers from a maximum of 90 percent this year to 75 percent in 2016. Significantly, the bill also contemplates increasing the industry’s co-pay from its current level of 10 percent to 25 percent over the same time period.
Lawmakers have debated these proposals before. But they have discarded them based on the perception that any transfer in risk from the Cat Fund to the private reinsurance market would inevitably lead to rate increases for policyholders.
This year, however, reform proponents are hanging their hopes on reports that the reinsurance market has plenty of capacity that insurers can tap at a price that would avoid any sticker-shock on policyholders.
Florida Consumer Advocate Robin Westcott last year came out against Cat Fund reform based on an analysis it could raise rates by as much as 10 percent. This year, however, she is backing reform, arguing that in today’s reinsurance market, insurers could replace the Cat Fund coverage without paying higher premiums.
“From everything I’ve see and read, this year private reinsurance is stable and we will so no change in price and in all likelihood a drop,” said Westcott.
For some lawmakers, however, that was a point of debate. Opponents of the bill noted that while insurers may be able to purchase reinsurance in the open market at a reasonable cost, there is no guaranty that the price will not be driven up sharply in the event of catastrophes around the world.
Rep. Doug Broxson (R-Milton) argued that there is no way to transfer the risk from the Cat Fund to private insurers without seeing some rate increases.
“If you reduce the Cat Fund, admitted carriers are going to have to find more reinsurance and that is going to increase the size of their package,” said Broxson.
Nicholson, however, said the issue is less about rates and more about capacity. As it is, said Nicholson, the fund is selling “phantom coverage” because it is selling reinsurance coverage it may not be able to honor.
If that happens, he said, the issue will not be rates but the fact that up to 50 percent of the state’s market might become insolvent after a major storm because there is not enough money in the Cat Fund to cover claims.
“The most expensive reinsurance you can purchase is the type that doesn’t pay claims,” said Nicholson. “That is what we are trying to avoid here.”
Rep. George Moritias (R-Fort Lauderdale), however, does not buy Nicholson’s arguments. He questions whether the whole issue may be overblown given the Cat Fund currently has nearly $10 billion in cash.
“I feel sometimes we hear a lot of doom,” said Moritias. “The fund has built up a lot of cash and I don’t share the necessity to do this yet.”
Complicating the political future for Cat Fund reform is that a split has emerged in the industry with many of the large insurers in favor of reform while the state’s domestic market is balking at any changes.
Representing the domestic group, the Florida Property and Casualty Association, Chuck Grimsley actually said that instead of reducing the fund’s capacity, lawmakers should increase it, reminding lawmakers that they also want to depopulate the state-backed property insurer Citizens Property Insurance Corp. and any increase in private reinsurance would stymie that objective.
“Our members are the only groups writing new business and taking policies out of Citizens,” noted Grimsley, speaking on behalf of the majority of domestic insurers. “We believe this would make us less competitive with Citizens.”
A environmental, taxpayer and business coalition called Stronger Safer Florida is urging lawmakers to support the proposed restructuring to lower the fund’s obligations. In a letter to the subcommittee, the 11 signatories stated that the whole state is at risk due to the Cat Fund’s overexposure and this could result in more assessments for Floridians.
“The time for gimmicks rather than real reform in our state is over,” stated the group. “We must not rearrange the deck chairs on the Titanic, especially when we can choose to promote meaningful reform.”