Bad odds for cat fund.

Florida's public policy for financing hurricane losses seems to have been dreamed up in another sunny state---Las Vegas. Our state's policy for financing storm losses is tantamount to betting the house and our life's savings on one wild Nevada crapshoot.

It has taken a while for Florida taxpayers to fully comprehend the ill-conceived public policy adopted by lawmakers over the past two or three years and the huge financial liability that policy has placed on their backs, but they understand it now and, to say the least, they are not happy about it. They like even less the fact that it effectively forces working class inland residents to subsidize multi-million dollar coastal homes creating an "us versus them" mentality that is good for no community.

The wild card in the scenario being played out before us is the real villain--hurricanes. Florida, fortunately, has been spared from any major hurricane impact the past three seasons after being devastated by eight back-to-back hurricanes during the 2004-2005 seasons. However, it's not a question of if we are struck again; it's a question of when. The even bigger question is, will the state be financially prepared?

Clearly, the answer is "no". The Florida Hurricane Catastrophe Fund (Cat Fund) created following 1992's Hurricane Andrew, was repeatedly tinkered with over the past couple of years, to the point that it is financially incapable of coming close to meeting its obligations, should disaster strike. That has a direct impact on every homeowner in the state.

In addition to obligating the fund way beyond its means, lawmakers forced private insurers to utilize the fund's unrealistic capacity as a financial backstop. The purpose of the Cat Fund is to provide ready access to cash to immediately pay claims following a major storm strike. However, the fund's inadequate surplus of dollars and its inability to raise the cash in a timely manner could severely jeopardize this process.

Bad Public Policy

Then there's the government-created Citizens Property Insurance Corp., which has now grown to be the largest single property insurer in the state with more than one million policies. Almost half of the cash Citizens would need to pay claims in the event of a major hurricane are designed to come from the Cat Fund--and, as just noted, the fund doesn't have the cash on hand. Further, the director of the Cat Fund has testified before the Florida Cabinet and the House and Senate that current financial market conditions have made it impossible to raise the cash.

Neither the troubled Cat Fund nor the topsy-turvy financial markets are to be cited as the root cause of our hurricane-financing dilemma, however. What is at fault is the public policy that has forced the Cat Fund to far overreach its ability to pay. That bad policy was driven by a priority philosophy of artificially holding down rates of insurance premiums without regard to the impact of that rate suppression to the stability or financial solvency of our financial mechanisms for paying for storm losses.

Despite the gloomy outlook, there is good news emerging out of the state capital. A new crop of legislators is coming to town this year following the November election cycle. Many of them heard their constituents' displeasure regarding the flawed policy as they campaigned last summer and fall. Many returning lawmakers also are bringing with them a change of heart as a result of the campaign season.

Floridians want realistic, sound solutions to the hurricane-financing crisis we face. They have had enough of the political solutions of recent years.

Lawmakers of every political stripe, from all corners of the state, are moving away from the rate suppression philosophy that got us into this mess. They have pledged to work to find the proper balance that will bring stability to the property insurance market and keep rates affordable.

Rate Freezes Must End

Among those solutions being talked about is an end to the unwise rate freezes that are producing too little premium for the growing risk, and the restoration of a realistic Cat Fund. Rates must be allowed to match the risk. The longer we put it off, the larger the disparity grows and the harder it will be for homeowners to absorb the cost when the day of reckoning finally comes.

The Cat Fund must be as large as possible without overreaching its cash on hand or its ability to readily access cash to meet its obligations to both Citizens and to private insurers that rely upon the fund as a stable financial backstop.

With a realistic Cat Fund, companies will have to seek other financial backstops in the private reinsurance market. That will mean higher costs that companies must be allowed to pass on--something that flawed public policy of recent years refused to allow, giving companies no other choice but to reduce the number of policies they can write. That reduction led to the massive growth of Citizens and to the availability problems that plague us to this day.

Senate President Jeff Atwater (R-North Palm Beach) has come up with a reasonable plan to transition to rate adequacy through what he terms a "glide path" that allows rates to rise in a series of steps to ease the financial impact on homeowners.

The insurance community supports these solutions and is eager to work with all of our public officials in reversing the Vegas-like policy that got us where we are today. The last thing our state and our economy need to hear is that Elvis has left the building and the insurance industry has left with him.

By Gary Landry, vice president, Florida Insurance Council