Florida has been preparing for the storm
Published in the Tallahassee Democrat on May 30, 2015
While there is no preventative measure to stop hurricanes from reaching Florida, preparation is paramount and it requires going beyond buying generators and stocking up on batteries, bread and water. It requires financial preparation, which is something that Florida leadership has been focused on in recent years.
In March, Citizens Property Insurance Corporation, the state-backed insurer of last resort, shrank to less than 600,000 policies, well below its 1.5 million peak in 2005. Additionally, the State Board of Administration (SBA) enhanced the state's financial resiliency when it authorized the Florida Hurricane Catastrophe (Cat) Fund to transfer up to $1 billion of potential catastrophic risks and losses to the global private market. This coverage is another prudent step in protecting residents, businesses and nonprofits from new hurricane taxes in the event of catastrophic losses. The Cat Fund, created to help stabilize the property insurance market, sells insurers $17 billion of backup coverage.
The move to transfer Cat Fund risk is smarter than an over-reliance on pre-event bonding. Cat Fund managers plan to rely on $3.2 billion in pre-event debt to help them pay claims. They will pay interest on the $3.2 billion, whether there is a hurricane or not. If the borrowed money is used to pay losses, it must be paid back — with interest. As the cost to transfer the risk is barely higher than the cost of borrowing, with no obligation to pay anything back, the decision to transfer risk in lieu of additional bonding makes good economic sense.
As with any policy issue, there are opponents who believe inland Floridians should continue paying the bulk of post-storm taxes so the privileged are able to enjoy beachfront properties. The reality is Florida's post-hurricane financial system is designed to levy taxes on all policyholders when the Cat Fund runs out of money. By beefing up the Cat Fund and shrinking Citizens, the likelihood and magnitude for future hurricane taxes is reduced.
Risk transfer opponents are often from ritzy coastal areas and favor the government insurance scheme that relies on others to pick up the tab for high-risk, high cost development. These government entities encourage more risky coastal development, putting lives and property at risk. This serves to increase homeowner insurance premiums statewide and pushes potential hurricane costs to all Floridians.
The Cat Fund has a cash balance due largely to an incredible 10 storm-free years, which has enabled managers to collect $3 billion in hurricane taxes from all policyholders since 2005. Even Cat Fund managers recognize a large hurricane or series of powerful storms would wipe away those reserves. Then, Floridians will be back to paying hurricane taxes.
Everyone hopes for a slow 2015 hurricane season, but if storm hits, Florida is now better prepared than in 2014, due to smart policy decisions by its leaders.
Steve Pociask is president of the American Consumer Institute, a nonprofit educational and research organization. Visit theamericanconsumer.org or follow @consumerpal.