Catastrophe Fund: Florida System Dangerously Unstable
As September passed by, much of the news here in Florida appears good: Hurricanes have stayed away from U.S. coastlines, the Legislature has passed a few common-sense reforms to the state's property insurance system, and CFO Alex Sink says the state's troubled Hurricane Catastrophe 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 storms will remain dangerously unstable.
If it wants to make things better, the state should do at least three things: Phase down the Cat Fund, attract more insurers to write policies on ordinary homes, and invest in making Florida's existing homes safer.
The Cat Fund sits at the center of the state's current ills. Although slightly healthier and smaller than it was last year, the fund — intended to provide low-cost reinsurance to the insurers who write policies on Florida's homes — doesn't work.
Although the 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 typical household might have to pay more than $1,500, for example.
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. And those companies, not Florida taxpayers, should take the risks. But eliminating the Cat Fund won't solve Florida's problems, since insurers continue to flee.
State Farm, a $104 billion company, plans to leave the state entirely, and other large companies have stopped writing new policies in most areas. New capacity hasn't come: Only 10 companies have entered the market to write ordinary policies, and of those, one has entered the process of shutting down and another appears likely to do so.
As a result, about one Floridian in five buys property insurance from the Florida Citizens Property Insurance Corp. — a state agency. Citizens, in turn, relies almost entirely on the Cat Fund.
Private insurance companies will stay away as long as politicians and bureaucrats set insurance rates. Without a system that allows rates based on market forces and risk, private insurance won't come back. In short, rates should rise in many areas. Unless they do, all Floridians will have to pay massive hurricane taxes later.
However, to keep rates reasonable, Florida needs to do more to make itself more resistant to hurricanes.
Current building standards mean that new construction is pretty safe, but about 70 percent of Florida homes don't meet them. Individual homeowners need to do more to reinforce their own homes. 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 funding. Florida has improved its insurance over the past year. But the state still isn't safe.