PCI: Fla. Hurricane Cat Fund Changes are Key to Property Market Stability

The Property Casualty Insurers Association of America (PCI) is urging the Florida Legislature to establish an annual hurricane deductible for insurers and lower the threshold of losses that an insurer must sustain before it can recover money from the Florida Hurricane Catastrophe Fund (Cat Fund). Such an action would reportedly help keep residential property insurance both available and more affordable for consumers.

“Florida must act on the lessons learned last season, and properly prepare for the 2005 hurricane season and beyond,” said William Stander, regional manager for PCI. “The changes PCI supports will strengthen the Cat Fund, enable insurers greater access to the fund during a multiple-event season like 2004, and better assure that future hurricane losses do not imperil any property insurer’s financial stability.”

The availability of additional Cat Fund resources is crucial to preserving a healthy and competitive insurance marketplace, which is essential for attracting as well as retaining property insurance writers, according to PCI.

The Cat Fund serves as an important financial backstop for the insurance marketplace and makes it possible for individual insurance companies to write residential property insurance in a hurricane-prone state like Florida. “These changes will also help reduce pressure on the state-run insurance company, Citizens Property Insurance Corporation (Citizens), which failed to recover even one dime from the Cat Fund and is now $400 million in the red,” said Stander.

The Cat Fund is a state-administered reinsurance facility created as one of the legislative reforms following Hurricane Andrew in 1992. It helps insurers spread hurricane risk, especially for storms that wreak major financial havoc like Andrew did in 1992.

After a large hurricane, the Cat Fund pays claims made by insurance companies that purchased reinsurance from the facility. Because of its state trust fund structure, the Cat Fund can accumulate premiums on a tax-exempt basis, unlike private insurance companies. This tax feature makes it easier for the Cat Fund to build reserves and serve as a high-level, financial backstop to individual insurance companies after major hurricane events. The Cat Fund is a vital factor in stabilizing the property insurance market, making it possible for insurers to continue to write property coverage despite sustaining millions of dollars of hurricane losses.

Currently, the Cat Fund relies on a per-event loss retention that requires insurance companies to incur a set amount of losses before reinsurance payments are triggered. After all claims are adjusted and paid, the four hurricanes last year are expected to generate approximately $22-25 billion in insurance loss payments, $5 to $7 billion more costly than Andrew. However, the Cat Fund has paid out only $3.2 billion.

“The Cat Fund paid insurance companies very little compared to the billions of dollars in losses that insurers experienced,” said Terry Tyrpin, senior vice president, personal lines and research for PCI. “By using an annual hurricane deductible and lowering the retention level, the Cat Fund would have assumed a much larger role in paying hurricane claims last season, spared many insurers from being financially weakened and helped to stabilize prices for consumers. This approach is not unique — keep in mind that the Legislature used this same logic in December during a special session when it mandated annual hurricane deductibles for policyholders. By moving to the annual hurricane deductible for consumers, insurers assume more claims-paying responsibility, which makes adopting an annual hurricane deductible for insurers under the Cat Fund even more important.”

The financial woes of insurers such as Citizens, the state’s second largest insurer, can reportedly be directly traced to the inability of insurers to access capital from the Cat Fund.

In 2004, under the current law, Citizens experienced losses exceeding $1.8 billion, yet it collected no money from the Cat Fund. The result is that Citizens has a projected deficit of $400 million and will enter the 2005 hurricane season with its surplus or financial reserves depleted. As a result, Citizens projects it will have to place a 5.3 percent assessment on all Florida property insurance premiums.

Citizens would not reportedly fare much better under the Office of Insurance Regulation’s initial proposal which would set the industry retention under the Cat Fund at $4 billion for each of the first two storms and $1.3 billion for each subsequent storm. However, if an annual retention of $4 to $5 billion had been in place during the 2004 hurricane season, Citizens would have received $585 million in reimbursement from the Cat Fund, a cash shortfall would have been avoided, and it would enter the 2005 season with a surplus for hurricane wind damage of $185 million.

In addition to lowering the Cat Fund retention, PCI is also proposing that the Legislature make use of the rapid cash buildup authority already in the Cat Fund law. “Putting more cash into Cat Fund reserves reduces the potential for emergency assessments after a major hurricane,” said Stander. “Those emergency assessments would affect all consumers of all lines of property and casualty insurance except medical malpractice and workers compensation.”

“The Legislature should protect the policyholders of insurance companies that do not write residential property insurance from bearing a disproportionate burden to stabilize the residential property insurance market,” said Stander. “The most equitable and fiscally sound approach is to restructure and strengthen the Cat Fund, and enable insurers to more appropriately spread their catastrophic risk in a way that does not significantly increase costs for consumers.”