When it announced last week that it would rely on the Florida Hurricane Catastrophe Fund alone for its reinsurance, Florida Citizens Property Insurance Corporation placed an already financially troubled state in deeper fiscal peril. In a transaction worthy of unscrupulous financier Bernard Madoff, Citizens, a government agency that writes property insurance for almost one Floridian in four, has thrown away $173 million in taxpayer-paid premium funds for an illusory reinsurance contract.
The dubious reinsurance contract that Citizens’ bought promises that the so-called TICL layer of the Cat Fund will pay $3.5 billion if the state-run insurers’ claims exceed certain thresholds. The Cat Fund, however, has neither the money nor the legal obligation to actually make good on its promise. The $3.5 billion in coverage simply doesn’t exist and never will. Not even the Cat Fund’s own advisers believe it could pay TICL after spending $17 billion paying underlying “mandatory” claims.
All this matters because Citizens, like almost all other sizeable insurers, pays day-to-day claims stemming from everything from falling trees to dog-bites out of its own capital while relying on reinsurance—insurance for insurance companies—for “catastrophic” claims that stem from major events like hurricanes. Or, at least, it should.
Because both Citizens and the Cat Fund are government-run agencies that
rely on more-or-less same assessment—tax base to fund their operations,
transferring money from one to the other accomplishes almost nothing at all. The Cat Fund could spend all the money it has in the bank (currently about $3 billion) and issue more bonds than any state or local government has ever issued in U.S. history ($12.3 billion is the current record) and it still wouldn’t be able to pay off the TICL layer claims.
In fact, Florida’s statutes make it clear that the Cat Fund simply doesn’t have to pay if it runs out of money. Largely because the Cat Fund’s ability to pay out these high-level claims is so dubious, the legislature has already approved legislation (which the governor will almost certainly sign) that incrementally reduces the Cat Fund’s ability to purport to sell this type of high-level coverage in the future.
Cut through all the talk of “reinsurance layers” and “risk transfer” and, for all intents and purposes, one part of the Florida government has shifted $173 million in funds to another part of the same government in order to make both agencies’ books look better. (The Cat Fund has more cash, Citizens, theoretically, has more claims paying ability.) Most likely, in fact, Citizens policy holders have become worse off: the entity they rely to pay their claims on has $173 million less in cash on hand. If a major storm hits, much or all of the money from Citizens will probably end up going to pay the claims of other insurers which are required by law to participate in the “lower” mandatory layer of the Cat Fund. Citizens’ own policy holders will have nothing to show for the waste.
If things got really bad, it appears quite possible that both Citizens and the Cat Fund would simply declare themselves insolvent and go begging to Tallahassee (first) and then, inevitably, to Washington for a taxpayer bailout. And the total bill for a simultaneous collapse of both could run as high as $28 billion—a sum Florida taxpayers would have to pay back with interest.
Citizens, quite literally, would have done better to put the $173 million in coffee cans and bury it behind its headquarters in Tallahassee. And Floridians will end up paying an enormous amount for Citizens’ decision to throw away its money.
Eli Lehrer is a senior fellow at the Competitive Enterprise Institute.