Miami remembers Hurricane Andrew. The 1992 storm devastated South Florida and swept away the reserves of insurance companies in the area. Florida lawmakers responded by establishing a hurricane fund that would help insurers pay homeowners’ property claims if a storm were to level part of the state.
Financial experts reviewed the Florida Hurricane Catastrophe Fund recently and found it wanting. They predict a $3.2 billion shortfall in the event of a major storm or a series of storms. The fund, like many Floridians, is the victim of the financial market turmoil and the slow pace of recovery.
The fund is a kind of reinsurance policy for insurance companies. When the companies’ losses exceed their own reserves, the reinsurance kicks in. We’ve talked about reinsurance in past posts. If the reinsurance fund can’t cover the excess, though, someone has to go out and borrow money. In this case, Florida would be the one with its hand out.
Currently, the fund has promised to cover $18.4 billion of losses. By the end of the year, the fund balance should be near $7 billion (in ready cash). If that big storm were to hit, another $11 billion would have to come from somewhere else.
The analysis suggests that another $6 billion could be available to the state over the two-year, post-storm period. There is no mention of where the money would come from.
The fund’s chief operating officer voiced his concerns to state legislators last month. He has some ideas on how to deal with the shortage. We’ll discuss those in our next post.
Source: Insurance Journal, “Florida Hurricane Fund Has $3.2 Billion Shortfall,” Gary Fineout, Oct. 20, 2011Share