Cross your fingers, because Florida may have survived another hurricane season without a major storm. With about six weeks left before the official end of the hurricane season, forecasters say the state will exit 2012 without incurring significant losses from tropical storms. Twenty years after Hurricane Andrew devastated southern Florida, that should be good news.
The lull in activity means we will have another year to build up the Florida Hurricane Catastrophe Fund that reimburses insurance companies for storm-related losses. The fund is a reinsurance scheme, really, financed by all property insurance companies in the state. Without the fund, insurers would have to purchase reinsurance on the open market, and chances are good that would cost a lot more. The increase in the insurance companies’ costs would translate into higher premiums and a tougher property insurance market for consumers.
By law, there should be enough in the fund to cover two hurricane seasons of devastation: $17 million for one season and $11 billion for a second. But the fund is not just a mattress full of money. There is cash, certainly, but when the time comes, the state issues bonds to make up the difference.
At this time last year, for example, the fund had access to $7 billion in cash and could issue, at most, $7 billion in bonds — a shortfall of at least $3 billion. Because the Legislature promised insurance companies the fund would cover two seasons, the state would be looking at issuing $3 billion in bonds for year one and $11 billion for year two. That is a really big bond offering.
While Florida has not faced a catastrophic storm for some time, other places have. The bond market took a few serious hits with the Japanese tsunami and California earthquakes, but financial advisors are cautiously optimistic that the market has stabilized. The Catastrophe Fund’s executive director believes that the market has improved, but he would still like to see lawmakers lower the first season minimum and make other changes to the fund’s structure.
Fortunately, it looks as if the state will have another year to work on that.
Source: Insurance Journal, “Florida Hurricane Fund in Better Shape But Could Still Be Short on Cash,” Michael Adams, Oct. 11, 2012
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