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 recently proposed in the state Legislature by state Sen. Jeff Brandes, a Pinellas County Republican, could save Florida consumers $750 million to $1 billion a year in insurance costs. 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 Beleaguered 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. “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.
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.
“The CAT Fund can withstand additional claims that would follow lowering the retention point,” said Paul Handerhan, FAIR’s president. “The fund is in no immediate danger of becoming insolvent. 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, requiring federal government relief. The mission of the fund is to provide reinsurance capability when needed. 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. Lowering the CAT Fund retention point is one of the ways they can do that.”
Opponents Fear Losing Cushion
Opponents of the reform told the Judiciary Committee that they were concerned it would leave the CAT Fund with fewer reserves to pay claims if a catastrophic storm hits the state.
Gina Wilson, chief operating officer for the CAT Fund, warned that lowering the retention point would lead to more claims from insurance companies, which in turn would reduce the Fund’s reserves and make it more expensive for the Fund to borrow money to pay claims after a hurricane.
While insurers pay a third less cost for reinsurance they buy from the CAT Fund compared to private market reinsurers, the CAT Fund would likely be forced to increase its rates if the reforms are enacted.
“Because we’ll be covering more risk,” Wilson said.
Brandes asked how flush the CAT Fund must become before its officials would be willing to reduce the retention point. That retention point has been steadily increasing for years — from $3.1 billion in 2003-05, as costs to insurers climb, the CAT Fund’s figures show.
Carolyn Johnson, director of business economic development at the Florida Chamber of Commerce, said the Chamber opposes the measure because a depleted CAT Fund would be allowed to levy surcharges on all Florida residents who buy insurance, including auto and home, to make up any claims-paying shortfall.
Before the recent hearing, the Chamber sent emails to members of the Judiciary Committee warning that a yes a vote for the proposal would count against them twice when the Chamber hands out its annual legislative report cards.
“The Chamber has repeatedly opposed any CAT Fund changes that would increase risks of special post-event surcharges or assessments,” said Johnson.
Who’s Behind The Opposition?
Brandes said influential Chamber members include representatives of the private-market reinsurance industry, which stand to lose money if insurers can buy cheaper reinsurance from the CAT Fund, and large insurance companies that can buy reinsurance from their own subsidiaries and wouldn’t benefit from the proposed reforms.
Johnson declined to identify Chamber members opposed to the reforms, noting only that some are insurance companies.
“Some insurance companies in Florida rely on the CAT Fund more than others and some are more capitalized than others,” Johnson pointed out
Handerhan said warnings that the CAT Fund could go insolvent if the retention point is lowered amounted to a “scare tactic.”
“Any event that triggers that type of loss is going to be game-over for the entire insurance industry in Florida,” Handerhan said. “Everyone will be wiped out. You’ll see companies going broke, you’ll see special Legislative sessions to respond to the emergency.”
He pointed out that the sum of all claims paid by the CAT Fund since its 1993 creation is about $15 billion, roughly the amount of the Fund’s current claims-paying ability. When the Fund was originally created, it had zero cash — only the ability to raise money by selling bonds backed by special assessments. Today, the Fund generates $1 billion a year by selling reinsurance and continuing to levy the pre-event Rapid Build Up Factor surcharge, which insurers pass along to their customers.
Sen. Ben Albritton, a Bartow Republican, suggested scheduling a workshop or task force to look at the issues. Wilson said that CAT Fund officials only learned about the proposal 24 hours before the hearing and called for a “deliberate” and “collaborative” process to help legislators understand how the proposals would affect the CAT Fund.