Insurers leery of state fund
Some look into buying backup insurance in case the Catastrophe Fund runs dry.
By JENNIFER LIBERTO
Published June 20, 2007
ORLANDO - The state's bold decision last January to accept some of the hurricane risk for insurance companies, in exchange for lower premiums for consumers, has hit a new snag: Insurance companies don't trust it.
Several insurance companies are considering paying for a second layer of backup insurance to protect themselves in case the state-financed Catastrophe Fund goes bankrupt in the wake of a big storm.
Although it's not clear if the cost of that extra layer could be passed on to policyholders, the emergence of this new insurance shows how difficult it can be for the state to control a complex financial market like property insurance.
Royal Palm Insurance Co. is one of several companies looking at buying this new kind of coverage, said president Locke Burt to a roomful of actuaries at an Orlando conference on Tuesday.
"It's a new type of reinsurance in case the CAT fund defaults, " Burt said during the meeting of the Casualty Actuarial Society.
This all goes back to the special session last January, when the state decided the best way to cut premiums for homeowners was to get into the business of selling reinsurance or backup insurance, which had gotten very expensive for retail insurance companies.
Lawmakers expanded the state's CAT Fund, offering cheap reinsurance with the requirement that the savings be passed on to consumers in the form of lower premiums.
However, by requiring insurers to buy so much from the state, the state has taken on significant financial risk for hurricane damage. That has alarmed the financial rating companies such as AM Best, which looks at the financial strength of insurers.
Enter "Florida Hurricane Catastrophe Fund Recovery Shortfall Reinsurance, " which promises to pay the bills of insurance companies if the state gets inundated and the CAT Fund runs out of money. It also will provide up-front cash for insurance companies if the CAT Fund is slow to disperse money, since the new insurance law in Florida also requires that some claims be paid within 90 days.
As backup insurance goes, it's relatively cheap. So far, Fort Lauderdale-based Universal Property and Casualty Insurance Co. has bought it, paying about $7.5-million for about $965-million worth of shortfall coverage, according to a federal SEC filing.
State Farm Florida also is looking at doing something similar, likely with its own parent company, said State Farm spokesman Chris Neal.
It's just not clear who will pay for it.
Burt said that he has heard of other companies purchasing the coverage too, and he thinks it could be considered a legitimate reinsurance cost, meaning it could be included in the rates charged to policyholders.
"It's not that we don't trust the state, it's that we trust you, but for $7-million dollars, I'm going to cover my back, " Burt said in an interview with the St. Petersburg Times. "If the CAT Fund didn't pay, your company would be insolvent. You'd have customers beating on your door and saying, 'Where's my money?' "
State regulators know insurers are turning to these new insurance policies, but they point out that the CAT Fund can pay for $52.2-billion of hurricane damage by taking on debt and issuing bonds, on top of having another $5-billion in the bank.
"Companies are allowed to purchase these products, " Jonathan Kees, a spokesman for the state Office of Insurance regulation, "but our office will not allow a company to duplicate the coverage of the Hurricane Catastrophe Fund and pass that on in the form of rates charged to their policyholders."
Sen. Bill Posey, R-Rockledge, and Rep. Don Brown, R-DeFuniak Springs, two lawmakers who helped craft the insurance package, said they haven't heard about the new kind of insurance coverage, but they're certain regulators won't allow insurers to pass on the cost - from two different perspectives.
Posey said state law prevents insurers from charging consumers for coverage that duplicates what they buy from the state CAT Fund.
Brown said he thinks the insurers should be able to charge for the risk, but that regulators probably won't let them.
"What would you do if you're being forced by law to rely on a promise that can't be upheld?" Brown said. "But if the state allows insurers to wrap the cost of that product into their rate, in doing so, they will admit the foolishness of their decision."