Florida Insurance Fund Stronger as Storm Season Looms

Florida is heading into a new storm season with some good news for once.

The state-created fund that backs up private insurers in Florida is in the best financial shape it has been in years – maybe the best since it was created in 1993.

And new estimates drawn by financial consultants and Wall Street firms suggest that the fund should be able to borrow enough money to cover its obligations for the coming hurricane season, which starts June 1.

“We’re as healthy as we have ever been,” said Jack Nicholson, executive director of the Florida Hurricane Catastrophe Fund.

The situation still isn’t perfect: One big storm could wipe out the fund and leave it short of money the next year. That could prompt insurers to stop writing policies and damage the state’s economy.

“We don’t want to be a one-storm wonder and have a crisis the next day,” Nicholson said.

Still, this year’s situation is much better than it was during the height of the Great Recession, when convulsions in the financial industry created fears that the fund would not be able to pay off its claims.

Some legislators this past session – citing recent problems – pushed to shrink the overall size of the fund even though there were concerns such a move would push up insurance prices in the state.

“We own and operate a reinsurance company that has sold phantom reinsurance,” Rep. Bill Hager, R-Delray Beach, said late last month during debate over an insurance bill.

The fund, which is also called Cat Fund by state regulators and those in the insurance industry, was created after Hurricane Andrew caused widespread damage.

The fund offers insurance companies reinsurance at prices generally lower than those in the private market. It was designed to help keep private insurers from leaving the state. Every company is required to purchase coverage to pay off claims after insurers reach a certain level of damages.

But the fund has to borrow money if claims exceed its cash reserves.

That money is then repaid by placing a surcharge, sometimes dubbed a hurricane tax, on nearly every insurance policy in the state, including those for vehicles. Floridians are still paying a surcharge placed on insurance bills due to Hurricane Wilma in 2005.

Heading into this year’s storm season, the fund will provide slightly more than $17 billion worth of coverage. It would take a storm a bit larger than Andrew – which damaged tens of thousands of homes – to force the fund to cover all of its obligations.

Projections show that the fund should have nearly $12 billion available this year. The fund has been able to build up cash over the past several years because Florida has not been hit by any hurricanes since Wilma sliced through South Florida.

An advisory panel for the fund will be asked Thursday to approve new borrowing estimates developed by the fund’s financial consultant in concert with major Wall Street firms. Those estimates show that the fund could borrow as much as $7.3 billion if it needed more money.

That’s a swing from last year, when estimates concluded that the fund would fall short of what it needed to cover claims.

But Nicholson cautioned against reading too much in the latest estimates.

“It is a good faith estimate, but it is not perfect,” Nicholson said. “The uncertainty in the financial markets are a problem.”

Another concern is whether the state could borrow that much money at one time. In the past, financial advisers have emphasized that the fund does not need all its funding at once because it can take months for insurance claims to be filed and paid.

“If we end up paying the bulk of our losses over a three- to five-year period rather than in the first six months – no matter how large the storm – we could raise the $7.2 billion in that timeframe,” Nicholson said. “But if a large Category 5 hits and we have to pay out our entire limit in six months or less – that could be a problem.”