Hurricane Catastrophe Fund reform could save $1 billion/yr

Insurance customers could reap benefits of new proposal

Florida home insurance customers could get a substantial break from rising rates — saving about $150 a year — if they no longer had to pay into the state’s hurricane insurance reserve fund and if insurance companies could access those reserves more easily — with fewer overall claims losses.

Reforms proposed in the state Legislature on Thursday by state Sen. Jeff Brandes, a Pinellas County Republican, could save Florida consumers $750 million to $1 billion a year in insurance costs, he said.

The savings would come from two major reforms to the Florida Hurricane Catastrophe Fund (CAT Fund), which sells reinsurance — which is insurance that insurers must buy to guarantee they can pay claims after a major hurricane or other catastrophe.

The CAT Fund has accumulated $11.3 billion in cash reserves and has an additional $3.5 billion in bond funding. Some of that money should be used to reduce spiraling costs for Florida home insurance customers, proponents argued in a Senate Judiciary Committee hearing last week.

Supporters say the reforms would: Reduce the level of losses that insurance companies in Florida must suffer before they can access the CAT Fund from $8.2 billion to $4.5 billion. Each insurance company has its own separate threshold of losses that must be met before seeking money from the CAT Fund. Think of this number as you would your own deductible. It’s based on each company’s policy count, value of insured property, and exposure to risks. All of those deductibles collectively add up to what’s called the aggregate retention point, which is what Brandes is proposing should be reduced. Lowering that level would make required reinsurance coverage available at a lower price to private market insurers because, unlike private market reinsurers, the CAT Fund is tax exempt and not allowed to make a profit. Most private market reinsurers are located in Bermuda or other foreign countries. Enabling insurers to buy more reinsurance from the CAT Fund would keep more money in Florida, Brandes said.

Suspend an insurance policy tax that all property owners pay as part of their coverage costs. The tax is called the Rapid Cash Buildup Factor, and it raises more than $300 million a year that helps the CAT Fund grow. Reform supporters say the Fund earns enough money each year from its sales of reinsurance.

Under the proposal, insurers who take advantage of lower rates made possible by the reforms would be required to pass those savings onto their customers.

A boost for consumers

The reforms “are not a panacea” and more needs to be done to stop home insurance costs from increasing by 30% to 40% every year or two, said Brandes, who has been actively involved in negotiating insurance reform proposals during much of his Legislative tenure but is prevented by term limits from seeking reelection this year.

Florida’s property insurance market is in “critical condition” and on “life support,” Brandes told the Senate Judiciary Committee on Thursday. “Because this is my last year, I’ve made a commitment to do everything I possibly can to lower insurance costs for Floridians.”

Brandes filed the proposal as an amendment to a bill that had already been approved by two Senate committees and was on its third and final committee stop. After a lengthy debate, he withdrew but said he would likely bring it back up on the Senate floor or before the Senate Banking and Insurance Committee next week.

Brandes argued that the state needs to loosen its grip on the $11.3 billion in cash reserves to help policyholders now instead of sitting on it indefinitely and waiting for a huge storm that may not come anytime soon. If a catastrophic storm does come and wipe out its reserves, the CAT Fund can replenish itself by borrowing money and repaying it by levying surcharges on all Florida policyholders, he said.

Some of that cash should be used now to prevent Florida’s private property insurance market from going broke, Brandes said. Most Florida-based insurers have been losing money since Hurricane Irma in 2017, thanks to steadily rising hurricane and non-hurricane claims and increased litigation over those claims.

Supporters of the reform proposal include Fort Lauderdale-based Federal Association for Insurance Reform (FAIR), a consumer-focused watchdog group.

Paul Handerhan, FAIR’s president, said the CAT Fund can withstand additional claims that would follow lowering the retention point. “The fund is in no immediate danger of becoming insolvent,” he said in an interview on Friday. “It would take such a low probability event for that happen.”

Depleting the CAT Fund’s revenues would require such a huge hurricane that everyone would be broke, including insurance companies, government relief operations, he said. “the mission of the fund is to provide reinsurance capability when needed,” Handerhan said. “It was never intended to be a rainy day fund.”

The measure is also supported by the Florida Association of Insurance Adjusters, said Kyle Ulrich, its executive director. “The Legislature can take action to reduce rates immediately,” he said in an interview. “Lowering the CAT Fund retention point is one of the ways they can do that.”