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As hurricane-ridden September passes by, much of the news in Florida appears good: Hurricanes, so far, have stayed away from U.S. coastlines, the Legislature has passed a few common-sense reforms to the state's property insurance system and state CFO Alex Sink says that the state's troubled Hurricane Catastrophe Fund (Cat Fund) has gained a firmer fiscal footing.
But all this good news hides a darker reality: Even if Florida avoids catastrophe during the 2009 hurricane season, the state's system for insuring itself against hurricanes will remain dangerously unstable. Without further reforms and efforts to bring in more private insurers, it remains quite possible that a single bad storm could cause massive fiscal woes for the state.
At least three steps could make the state a lot safer: a phase-down of the Cat Fund, a concerted effort to attract insurers willing to write policies on ordinary homes and significant investments in making Florida's existing homes safer.
The Cat Fund sits at the center of the state's current ills. Although slightly healthier and somewhat smaller than it was last year, the fund -- intended to provide low-cost reinsurance to the primary insurers who write policies on Florida's homes -- simply doesn't work.
Although total Cat Fund liabilities top $25 billion, the fund has only about $4 billion in hard assets. It would try to pay the balance by selling bonds and then taxing Floridians at enormous rates to pay them back (a household might have to pay more than $1,500 in ``assessments'' following a storm).
While Sink is right to say that the Cat Fund could sell more bonds than it could last year, it can't sell anywhere near the $20 billion in bonds it would need to following a Katrina-like storm. No state has ever sold more than $13 billion in bonds all at once.
The Legislature has put the Cat Fund on a glide path to a smaller size. But that isn't enough. Because it focuses all of its risk in Florida rather than spreading it around the world the way that private reinsurance markets do, a fund capable of sustaining itself would have to charge more for coverage than existing private companies. Private investors, not Florida taxpayers, should bear the risk of Florida hurricane losses.
But getting rid of the Cat Fund likely won't solve Florida's problems since insurers continue to flee the state. State Farm, a $104 billion company, has begun plans to leave the state entirely, and other large companies such as Allstate, USAA, Nationwide and the Hartford have stopped writing new policies in most areas.
While nine new Florida-only companies have started writing a few homeowners policies and one medium-sized multistate carrier has entered, the $600 million or so in assets they bring simply isn't enough. (They aren't doing well either, as one of the nine appears highly likely to shut down and another is on the verge of doing so.)
The result is that about one Floridian in five buys property insurance from Florida Citizens Property Insurance Corporation -- a state agency -- and Citizens, in turn, relies almost entirely on the Cat Fund to pay hurricane claims. Private insurance companies will continue their exodus as long as rates are determined by politicians looking out for their careers and the bureaucrats who placate them.
Without a system that allows rates based on market forces and risk, private insurance won't come back and state taxpayers will remain on the hook for tens of billions of dollars in hurricane risk. There's no way to avoid the costs. Without an orderly rate increase in certain areas, all Floridians will have to pay massive hurricane taxes later.
However, to keep rates reasonable, Florida needs to do more to make itself safer and more resistant to hurricanes. Current building standards mean that new construction is about as resistant as it can be, but about 70 percent of Florida homes don't meet them.
Individual homeowners need to do more to reinforce their own homes -- they'll get many of the costs back in insurance premium savings -- and local businesses and governments should also work to retrofit their facilities. For residents of modest means, the government should provide retrofitting assistance. The state used to do this through a program called My Safe Florida Home but, in a classic penny-wise, pound-foolish move, Gov. Crist eliminated the program's 2010 funding. The Legislature should restore it.
Florida has improved its insurance system slightly over the past year. But creating a stable insurance environment will take a lot more work.