The State Board of Administration (SBA), whose members are the governor, chief financial officer and attorney general, has a unique opportunity to lower Florida’s risk of hurricane taxes and make it more likely the Florida Hurricane Catastrophe Fund (Cat Fund) will be able to pay its claims in a timely manner.
Global investors are interested in investing a small percentage of their assets in opportunities which do not correlate with the economy. Weather catastrophes fit that criterion, making Florida Ground Zero for these investors. And, because of the oversupply of capital, the cost of that capital has decreased tremendously in the past several years.
For example, rates online for reinsurance are now lower than they were in 1994.
Today, the Cat Fund is obligated to provide up to $17 billion of coverage to Florida’s homeowners insurance companies. If the Cat Fund does not have sufficient cash to pay these claims, it attempts to obtain the rest from the bond market. In three of the past five years, the Cat Fund’s financial advisers have indicated the fund would not have the bonding capacity to make up the difference.
Bonds issued by the Cat Fund are paid back annually over a period of up to 30 years by assessing premiums, commonly called hurricane taxes, on almost all property and casualty policies. This means automobile policyholders, businesses, charities, religious institutions, local governments and school boards are paying hurricane taxes to subsidize the homeowners’ insurance market. None of these groups benefit from the Cat Fund, which strictly reinsures homeowners’ insurance claims.
In order to ensure the Cat Fund will be better prepared to pay its claims in a timely manner, and reduce the potential hurricane taxes on Florida’s citizens and businesses, the SBA, as fiduciaries for the state, should authorize its professional staff to explore the global capital and reinsurance markets to determine if Florida can economically move some of its hurricane risk out of the state into global financial markets. The time is now, while reinsurance rates are at an all-time low, and the unpredictability of a looming hurricane season waits.
David Hart, executive vice president, Florida Chamber of Commerce, Tallahassee