Posted on 09 Oct 2012 by Neilson
A state-created fund that backs up private insurers in Florida could fall short of the money it needs to pay off hurricane insurance claims if a major storm were to pound the state.
A new round of estimates drawn up for an advisory panel concludes that the state could fall $1.52 billion short of what's needed to cover its obligations for the fund.
On Tuesday, the panel will review and approve the estimates, which are similar to ones drawn up earlier this year.
Florida created a special fund after Hurricane Andrew caused widespread damage 20 years ago.
The Florida Hurricane Catastrophe 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.
But the fund has to borrow money if claims exceed its cash reserves.
Right now, the fund provides $17 billion worth of coverage. It would take a storm slightly larger than Andrew - which damaged tens of thousands of homes - to force the fund to cover all of its obligations.
The new estimates, which were drawn up by consulting with Wall Street firms, conclude the fund is expected to have $8.5 billion in the bank at the end of this year. The fund can also borrow up to $7 billion in the first year following a hurricane, which means it could still fall short of its obligations.
The $7 billion would be paid back with a surcharge placed on every property and auto insurance policy in the state.
Jack Nicholson, executive director of the fund, said one piece of good news is that the latest estimates were similar to ones drawn up last May right before the annual hurricane season.
In the last few years, ongoing fluctuations in the bond markets have made it hard to predict how much money the state could borrow.
But Nicholson says the volatility in bond markets is one reason why he continues to advocate for shrinking the size of the fund before the next hurricane season. Such a move is controversial because it could force insurance premiums to rise.
"We have been lucky the last six years, we haven't been smart," said Nicholson, noting the absence of any major storms hitting Florida since 2005.
The top financial advisers to the catastrophe fund emphasize that trying to figure out how much the state could borrow after a major hurricane is an "inexact science." In the past financial advisers have also emphasized that the fund does not need all its funding at once since it can take months for insurance claims to be filed and paid.
The gap is slightly smaller than what it was in May, but it still reinforces the view of critics who maintain the fund could wind up being a financial disaster for the state. There is a fear that it would require direct aid from the state and federal government if the catastrophe fund is unable to cover all of its claims.