In our last post, we were talking about the state's Hurricane Catastrophe Fund. The fund was established to help Florida's property insurance companies pay claims after a major storm. Recently, financial analysts determined that the fund, in its current state, would be unable to cover a big storm.
The fund hasn't done as well as expected for the same reasons so many of us haven't: the ups and downs of financial markets and the sluggish economic recovery. According to the fund's chief operating officer, the legislature must act quickly to get the fund off this "shaky ground."
In a presentation to a panel of lawmakers, the COO recommended reducing the size of the fund. Doing so, however, would likely increase premiums. The burden would once again be shifted to consumers.
Why? As we said in our last post, the cat fund is essentially state-backed reinsurance. The state charges less than private sector reinsurance companies, but it charges nonetheless. Those savings are passed on to the consumers, lowering premiums by as much as 25 percent, the COO estimated.
Reducing the size of the fund, then, would mean a smaller pool for insurers to draw from. They would need more private sector reinsurance coverage, which will cost more. That cost would be passed on to policyholders.
Policyholders will feel a hit if nothing changes, too. If the fund falls short of its obligations, the state has to borrow money. In our last post, we stated that there was no mention of where the state would find that money. It shouldn't be a surprise to anyone that the answer is "the taxpayers."
Perhaps not directly, but certainly in the long run the state would levy a hurricane tax to cover its losses. The money up front would likely come from reinsurance companies or bonds, but that loan -- and the interest it accrues -- will be paid back with taxpayer dollars.
Most insurance policyholders -- including people with auto insurance -- are already familiar with the hurricane assessment. They have been paying off the debt incurred cleaning up after Hurricane Wilma. At the beginning of 2011, the state raised that assessment to 1.3 percent.
Source: Insurance Journal, "Florida Hurricane Fund Has $3.2 Billion Shortfall," Gary Fineout, Oct. 20, 2011