With hurricane season upon us, sensible consumers have been hanging hurricane shutters and putting together a hurricane-preparedness kit. While these steps are important in getting ready for the 2012 Atlantic Hurricane Season, the financial consequences we all face in the wake of a major storm or series of storms may be far harder to recover from than the physical storm damage.
This financial risk is the direct result of many elected officials continually ignoring recommendations from experts and failing to reform the state-run Citizens Property Insurance Corporation and the Florida Hurricane Catastrophe Fund.
Contrary to news reports that continue to quote individuals who believe the mention of crippling hurricane tax assessments is nothing more than a scare tactic, the proof is in the numbers, and there are some things we know for certain:
• Citizens is far from the insurer of last resort, with approximately 25 percent of Florida’s homeowners insurance market and rates that are about 40 percent below where they need to be to cover its risk. Citizens claims are subsidized by non-Citizens policyholders, which account for the 75 percent of Florida homeowners who have private homeowners insurance.
So, 75 percent of Floridians are not only paying for their own risk but are also being taxed (assessed) to help pay past storm claims for Citizens policyholders. And, depending on the severity or frequency of storms that make landfall in Florida this year, unfortunately and in all probability, they will be required to pay more in the future. If these hurricane taxes unnerve you, you have company. Businesses, drivers, renters and charities are also subsidizing Citizens policyholders through hurricane taxes on their policies.
• We know the municipal bond market is not what it used to be. Every year various factors contribute to determining the Cat Fund’s average bonding potential, which is what the fund mainly relies on to pay its claims because it does not collect enough premiums in advance. A recently released report compiled by the fund’s financial adviser indicated a very wide range of bonding potential from several different financial services companies.
While Barclays believes the fund could generate between $9 billion and $11 billion, Goldman Sachs estimates bonds will bring in between $1.5 billion and $4 billion. With the Cat Fund issuing over $17 billion in coverage for the 2012 hurricane season, the uncertainty in the bond markets is troubling. The Cat Fund, which has estimated a wide number of bonding shortfalls in three of the past four years, is being obligated to sell coverage that it is not confident it can pay.
Even if it can, the financial security of our state and its citizens is at risk because any bonds will need to be paid back through hurricane tax assessments levied on all homeowner, business, and automobile insurance policies.
• Eight of the 12 most costly U.S. disasters have affected Florida. Before hurricane season officially began, Tropical Storm Beryl made landfall in Jacksonville. We cannot be so ignorant to believe that Florida, the most hurricane-prone state in the U.S., will be spared continuously. This fact, in and of itself, is the reason that Florida should be globally diversifying its risk instead of concentrating it within our state and burdening its residents.
The facts are not scare tactics, but they are scary. There is a real possibility that all Floridians, including homeowners, business owners, renters, churches and charitable organizations, will be on the hook annually for up to 30 years paying off hurricane tax assessments should another Hurricane Andrew or series of storms like those of 2004 and 2005 make landfall in Florida. It’s also scary that many of the officials we select to make decisions on our behalf continually refuse to implement much-needed reform of both Citizens and the Cat Fund.
Each and every year our state is challenged from our inherent exposure to hurricanes in conjunction with well-intentioned public policy decisions that no longer work in today’s economic environment. The Florida Insurance Council and its members are committed to working with elected officials to help find the appropriate solutions to our state’s problems. That reform is long overdue.
Sam Miller is executive vice president of the Florida Insurance Council.