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The Florida Hurricane Catastrophe Fund probably sounds like a good idea to most of the state’s residents who have experienced the devastating results of a hurricane blowing through their community. But they probably aren’t aware of exactly how it works and why they should be concerned about the debate in fall 2011 over whether it is adequately funded. It’s something consumers of insurance in Daytona Beach should be worried about. The “Cat Fund,” as it is often called, was established in 1993 after Hurricane Andrew tried to wipe much of South Florida off the map. The category 5 monster caused $26.5 billion in damage and brought the state’s insurance industry to its knees. Even though it did not come near insurance customers in Daytona Beach, they felt the damage, too. In order to help property and casualty insurers weather the storms, so to speak, the state developed the catastrophe fund to help provide them with reinsurance. Insurers buy reinsurance to help cover losses from catastrophic events. With Andrew, the cost of reinsurance went way up and, after the turn of the century, it kept going up as 9-11, Katrina, the Florida hurricanes of 2004 and more hit. The big reason the state fund sells reinsurance, though, is to keep insurers in the state so Florida homeowners could get property and casualty insurance. Also, it is an effort to keep the cost of insurance down. If a catastrophe hits and the Cat Fund can’t cover its obligations, and insurers other reinsurance isn’t adequate, here’s what can happen: -- The state will have to sell even more bonds than it is currently authorized to do under the Cat Fund legislation, putting it in an even bigger financial bind. -- Insurers, unable to fund all the claims they have to pay, will go under right and left. -- Florida consumers will get hit with huge premium increases, if they can get insurance at all. Citizens Insurance, the state-backed insurer of last resort could become the insurer of only resort. Experts estimate the Cat Fund could face claims of more than $18 billion if a major hurricane hits. It is expected to end 2011 with a balance of about $7 billion. The state could issue bonds to cover another $8 billion and make up the difference the second year. The fund actually is legislatively capped at $17 billion. However, a state official with the agency that oversees the fund wants to reduce the cap to $12 billion and have more insurers go to the private market for reinsurance. That would limit the state’s liability in case of a major storm. Insurers, who are having an increasingly difficult time getting reinsurance at rates they can afford, want the state to leave the fund as it is and continue trying to build up the reserve. The issue could be decided in the 2012 Florida legislative session, one that consumers of insurance in Daytona Beach should watch closely. The O’Quinn Agency provides insurance in Daytona Beach as well as most of East Central Florida.
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