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Small versus Large Insurers' Fight over Cat Fund Plays Out on Senate Panel

3/14/2013
Gray Rohrer
The Florida Current

A Cat Fund fight broke out at the Senate Banking and Insurance Committee Thursday, as small, Florida-based insurance companies fought with larger carriers and reinsurance companies over two approaches to the state’s reinsurance coverage.

Members of the panel discussed SB 1262, sponsored by Sen. Alan Hays, R-Umatilla, which would reduce the overall coverage of the Florida Hurricane Catastrophe Fund, or Cat Fund, by $1 billion over three years. The maximum coverage in the state’s reinsurance fund is $17 billion.

Hays and other lawmakers are concerned the Cat Fund won’t be able to pay out claims in the event of a large hurricane. The fund has more than $8 billion  to pay claims but must borrow the rest. A study released in October showed the fund with a potential $1.7 billion shortfall if a massive storm were to hit and its coverage was maxed out, down from $3.2 billion the previous year.

“Thankfully we didn’t have a storm so it’s not as dangerously overexposed this year, but it’s still a very weak undergirding and without a firm foundation no industry will be able to stand and without proper financial backing the Cat Fund will not be able to play the claims,” Hays said.

That approach is backed by reinsurance companies and larger private insurance companies that can use more resources to pay for more expensive reinsurance in the private market. Small domestic companies that would feel the effect of higher reinsurance costs and pass them on to homeowners, however, are resisting the bill.

The smaller companies prefer a proposed strike-all amendment from Sen. Jeremy Ring, D-Margate, that would lower the retention level, or deductible, for the Cat Fund from $7.5 billion to $5 billion, and give the fund the ability to bond for claims over three years instead of one.

“It’s complex, we have to wrap our arms around it, but we have to manage rates and risk. This amendment does both,” Ring said.

Hays asserted his bill would have a minimal effect on rates, and pointed to Insurance Consumer Advocate Robin Westcott, who cited studies showing a 1.2 percent annual rate increase resulting from higher reinsurance policies, but added that a more competitive global reinsurance market is driving prices down and could zero out the bill’s effect on rates.

Ring disputed that rates would not rise through Hays’ approach, and said that former Sen.
Locke Burt, president of Security First Insurance, thinks his companies rates will rise 5 percent under Hays’ bill but decrease 8 percent under Ring’s amendment.No vote was taken on the bill.