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Florida's Cat Fund Faces Potential $3.2 Billion Shortfall

Source: AP

Posted on 19 Oct 2011

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Florida’s hurricane fund is confronting a potential $3.2 billion shortfall, financial experts said Tuesday in a new estimate of the money available to the pool intended to help insurers make disaster payments.

The fund was created after Hurricane Andrew devastated South Florida in 1992. Insurers get help to pay homeowners if a storm results in wide damage.

But the fund doesn’t have enough cash on hand to meet all of its obligations in the event of a big storm, or just as bad, a series of hurricanes. So the fund must go out and borrow what it needs.

Financial experts for the fund have drawn up new estimates that contend that turmoil in financial markets and a weak economy have made it unlikely that the fund would have enough money to help insurers after a hurricane.

This year the fund is providing $18.4 billion worth of coverage. It should have more than $7 billion of cash on hand by year’s end, but it would still need to borrow $11 billion more if a storm struck.

The new estimates, which were to be presented to a state panel Tuesday, suggest the fund could borrow just $8 billion over a 12-month period. The new figures do suggest, however, that the Florida Hurricane Catastrophe Fund could borrow an additional $6 billion in a period one to two years following a major storm.

The news isn’t unexpected. Last month Jack Nicholson, the chief operating officer of the fund, told legislators that it is on “shaky ground.” “I think we are dangerously overexposed considering the current reality of the marketplace,” he said. “It scares me to death where we are.”

Nicholson wants state lawmakers to scale back the size of the fund. That would likely cause insurance premiums to rise. It has the backing of many key Republicans, including Gov. Rick Scott.

Every insurer now in Florida is required to purchase coverage from the “Cat Fund.” The fund provides a backstop to insurers at a rate that is generally cheaper than reinsurance sold by private companies. Nicholson estimated this low-cost option probably results in insurance premiums being about 25 percent cheaper.

If a storm causes enough damages, the insurer can ask for reimbursements from the fund. But if the hurricane fund runs out of cash due to a large storm, it borrows money to pay insurers.

The state pays off its debts with an assessment placed on nearly every insurance policy in the state, including auto policies. Homeowners and drivers now are paying off charges due mainly to Hurricane Wilma.