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Florida's inability to borrow spells trouble for catastrophe fund

By Jennifer Liberto, Times staff writer
In print: Tuesday, October 7, 2008

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TALLAHASSEE —The global financial crisis threatens to unravel Florida's property insurance system if a major hurricane hits during the last two months of this hurricane season.

The reason is the system is based on a promise that the state can help cover claims after a major hurricane by borrowing large amounts of money. And in 2007, state legislators, looking to suppress any increases in insurance premiums, made the system even more reliant on borrowing money.

Early that year, the Legislature expanded the Florida Hurricane Catastrophe Fund, which offers cheap backstop insurance for insurers. And the state forced insurers, by law, to do business with the state if the state's product was the cheapest. Insurers would pass on savings to consumers. The state promised to pay claims by bonding billions of dollars. The bonds would be repaid by assessments on Florida insurance policies, such as after the 2005 hurricanes.

But with the financial markets in turmoil, the state can't find investors willing to buy its bonds right now. And it's unclear when it'll be able to issue bonds, said catastrophe fund senior adviser Jack Nicholson.

"In the short term, we're at the mercy of the financial markets," Nicholson said. Although he added that if a major hurricane hit, the state wouldn't need to bond the same day. It can take months for hurricane claims to get processed and passed on, and the catastrophe fund has saved several billions to pay claims. By the time the state needs to borrow money, the credit crisis may have eased.

Right now, the state has quick access to $6-billion in cash and other types of pre-event financing, which kicks in after the insurers have exhausted $6-billion out of their own pockets.

If it's a major storm or series of storms, causing more than $25-billion in damage, the catastrophe fund has a contract with Warren Buffett's Berkshire Hathaway company for $4-billion in bonds, a move that had been criticized earlier this year, because it cost $224-million and had about a 3 percent chance of occurring.

But the difficulty in borrowing large amounts of money has prompted some of the state's property insurers to wonder whether they're paying the state for an empty promise, especially because state law gives the catastrophe fund an out. If the catastrophe fund can't bond, the state doesn't have to pay claims.

"We have to participate, we're effectively forced, and ultimately, if they don't pay us, we can't pay claims," said Missy Shelley, chief actuary for Florida Farm Bureau in Gainesville. "We kind of have to hold our breath. If the cat fund can't pay us or they're slow to pay us, we're putting our policyholders at risk."

Most insurers and Chief Financial Officer Alex Sink said the credit crisis makes it increasingly likely that the state would have to turn to the federal government for a big loan if a major storm hits and it can't issue bonds. However, unlike other companies whose ability to fully pay back the federal government is uncertain, Florida has a more dependable way of paying the federal government back: assessing insurance policyholders.

The Hurricane Catastrophe Fund Advisory Board is scheduled to meet next Tuesday to discuss the details of what kind of claims-paying capacity the fund has right now.

"It's pretty obvious that they're not going to be able to say that they're going to cover the full limit, which might be pretty awkward for us if there's an October storm," said Locke Burt, a former state senator who runs Royal Palm Insurance Co.