Florida Still Has Too Much Hurricane Risk
While Florida has billions of dollars invested in hurricane risk, we’ve been fortunate no hurricane has made landfall since 2005. However, there’s a really tricky thing about hurricanes — they are impossible to predict when and where they will hit in advance of the season.
As someone who makes forecasts for a living — economic forecasts, not weather — we know that using the past to forecast the future is fraught with difficulty. If you had taken a look at the history of hurricane landfalls in Florida, you would likely have never forecast zero hurricanes to hit Florida during any year. Frankly, had you forecast the number hitting Florida to be zero in the last 10 years, nobody would have believed you, but that’s what has happened.
And even though Florida’s Hurricane Catastrophe Fund has a substantial amount of cash, most Floridians don’t realize the CAT Fund borrows money (called pre-event bonding) to make sure we have enough resources in case a severe storm or series of storms hits.
The fund currently relies on about $2.7 billion in borrowed money. This gives the fund the liquidity it needs to cover its obligations for the year. However, the risk is that once we deplete the fund or have to draw it down substantially, Floridians are at risk in subsequent hurricane seasons. On top of that, we’ll have to pay back the borrowed money.
The fortunate thing is the lack of hurricanes hitting Florida has given the fund an opportunity to increase its cash on hand as it prepares for the inevitable hurricanes. However, Florida still has too much hurricane risk in its overall portfolio.
As is common with other types of portfolios, managers reduce risk by hedging, often by purchasing options that will protect their position. In Florida’s case, that would be purchasing reinsurance to protect a portion of the cash balance in the fund, or cover the money the fund borrowed in advance to be ready for the hurricane season. Managing Florida’s risk to preserve the fund’s cash so that Floridians will be paid in a timely manner for storm damages helps to lay off risk to others. Yes, it costs money, just as it costs money to insure any other asset.
Some people will say we don’t need to lay off any of our risk to those outside the state — and you know they just might be right — none of us will know until after the hurricane season ends. But we also know they can’t predict hurricanes with any certainty either.
We should remember that a storm the size of Andrew, and the damage that it inflicted on Florida, was widely believed to not be possible at the time. All the hurricane models had to be updated after Andrew, and insurance became almost unobtainable in many parts of Florida after that storm.
Even after the multiple hurricanes of 2004-05, we learned that a series of smaller storms can deplete the cash of the fund, and assessments or “hurricane taxes” are applied to insurance policies on Floridians’ homes, cars, boats and motorcycles.
And much has changed to increase our risk since the last hurricane landfall. Our state has grown by an additional 2.5 million people.
While it may be challenging to predict the future based on past experience, one thing is certain. It took Florida more than 10 years to build up the cash we currently have to help pay for future storms. Given that reinsurance costs are near historic lows, now might be a good time to insure some of the $2.7 billion Florida has borrowed.
May 17, 2016 | Articles | SunSentinel.com
By Dr. Jerry Parrish, Chief Economist, Florida Chamber Foundation
Just in Time for Hurricane Season: Property Insurance Catastrophe Fund is in Good Fiscal Condition
Good news just in time for the 2015 hurricane season. For the first time since its 1993 creation, the Florida Hurricane Catastrophe Fund (CAT Fund) has enough liquidity to cover the $17 billion statutory coverage, according to state data released last week. Claims-paying estimates provided to the CAT Fund Advisory Council show the program will have $12.8 billion in cash on hand at the end of 2015. Two years ago, the CAT Fund began transferring risk and now has $4.2 billion in pre-event bonds and private reinsurance – providing the $17 billion capacity to pay claims for the 2015 hurricane season.
The Florida Chamber of Commerce has long-supported transferring risk to the private reinsurance market to aid in the fiscal health of the CAT Fund. However, there’s more work to be done. While the CAT Fund is now in a better position to protect insurers from their initial season of losses, the CAT Fund could still experience trouble if a second season of storms occurs, according to the data.
The claims-paying estimate data released last week also examined the CAT Fund’s capacity for a second season of storms. The report assumes that the CAT Fund would not use the pre-event bonding in the first season, and instead would turn to the market for bonds – leaving the pre-event bonding to finance a second season of storms.
The estimated bonding capacity of the CAT Fund is $7.7 billion, which is down $600 million from the October 2014 estimate. This would allow the CAT Fund to pay only 69 percent of its obligation for the second season, leaving roughly $5 billion in losses uncovered. Post-issued bonds will be paid back through assessments, or “hurricane taxes,” by all property and casualty policyholders, including automobile insurance. Additionally, insurers may experience trouble during a second season of storms due to the lack of capacity for the CAT Fund to pay claims in this season.
To make Florida more competitive, the Florida Chamber has long-supported reducing the size of the CAT Fund – allowing insurers to plan for more than one season of storms. Share your voice. Contact Carolyn Johnson at firstname.lastname@example.org to learn how you can help.
Florida Chamber-Backed Property Insurance Reform Approved
The Florida State Board of Administration this week approved a Florida Chamber-backed effort to protect Floridians from future hurricane tax assessments. Governor Rick Scott, Attorney General Pam Bondi, and Chief Financial Officer Jeff Atwater approved giving the Florida Hurricane Catastrophe Fund (CAT Fund) authority to pursue transferring up to $2.2 billion in storm risk to global financial markets in an effort to prevent Floridians from paying future hurricane taxes.
“The Florida Chamber applauds the decision by the State Board of Administration to explore global financial markets to transfer risk from CAT Fund out of the state’s border,” said David Hart, Executive Vice President for the Florida Chamber. “While reinsurance rates are among the lowest in many years, and with the unpredictability of a looming hurricane season, the time to act is now.”
The Florida Chamber has long-advocated that homeowners should be provided with creative, market-based solutions to Florida’s natural disaster risks. Earlier this year, the state of Florida eliminated CAT Fund hurricane tax assessments on Floridians. Thanks to the State Board of Administration’s action this week, future storm risks may be transferred to the private reinsurance market and likely prevent Floridians from being assessed hurricane taxes in the future.
Watch Insurance Leaders Speak: