The Florida Catastrophe Fund would shrink by about $5 billion over the next four years under a prescription offered to the governor and Cabinet Tuesday that would raise Floridians’ average insurance premiums by about 10 percent over the next several years.
The Catastrophe Fund, which is paid into by insurers, is the state-backed re-insurance fund for insurance companies tapped in cases where they can’t pay claims.
Responding to requests from Gov. Rick Scott, Cabinet members and the Legislature, CAT fund Director Jack Nicholson outlined a series of changes including a plan to reduce the state backup fund’s capacity from $17 billion to $12 billion by shifting that liability to the private reinsurance market.
Currently, the CAT fund is about $3.2 billion short in its ability to pay its obligations, a deficit brought on largely by turmoil in the global investment market and the inability of the state to sell bonds if needed to pay off hurricane claims.
“The state is taking the risk today that it doesn’t need to take,” Nicholson told members during a lengthy presentation that will likely become the grist for legislation.
Global financial instability has made it increasingly difficult in the past few years to obtain the level of private financing needed to meet the CAT fund’s mandatory coverage level of $17 billion.
While state insurance officials just a year ago year ago enjoyed a $6.6 billion surplus, current markets if fully tapped would fall about 18 percent below the mandatory obligation. A preliminary examination indicates that such a shortfall, could lead to the insolvency of seven of 11 “major carriers,” state officials say.
Among other changes proposed Tuesday was an increase in co-payments on CAT fund coverage from 10 percent to 25 percent.
“We’re dealing with a house of cards based on the global market,” said Attorney General Pam Bondi.
The proposal also would extend the 5 percent cash build- up provision until 2018 in an effort to bolster the fund while reducing the maximum emergency assessment caps from 6-10 percent to 5-8 percent.
Another cost saving proposal would be to eliminate nearly $1 billion in additional coverage over and above the $17 billion mandatory level.
Nicholson said additional insurance needs could be provided by private reinsurance, a transfer that would add an estimated 2-3 percent annually to homeowners’ premiums over the next several years.
Insurance industry representatives were cautiously supportive Tuesday, saying that state needs to address an insurance structure that currently does not have the ability to pay its obligation in the event of a catastrophic storm.
One offshoot of the CAT fund’s precarious status is to push more policyholders toward the state-backed Citizens Property Insurance Corp., which now has nearly 1.5 million policies.
“All of these things taken together will certainly help,” said Sam Miller, vice president of the Florida Insurance Council, which represents private insurers. “Sooner or later, the Legislature is going to have to take some very unpopular steps.”
What’s less clear is whether lawmakers will take up the issue in January. Most changes in the CAT fund would not occur until 2013 under the proposal, making it possible for lawmakers to postpone action until then to deal with the issue.
“When you look at the cost of not doing this, it’s pretty significant,” Nicholson said.