Recent U.S. Credit Crunch Having Negative Impact On Florida’s Catastrophe Fund

Good morning everyone. I’m keeping an eye on the weather here in New Jersey since there is a chance for an afternoon or evening thunderstorm. I checked the Weather Channel forecast when I got up, and noticed that they’re calling for a slight chance for a storm with things clearing out during the evening. Well, anyway, what I really wanted to chat with you about today was an article that I saw from the Miami Herald that discussed the impact of the credit crunch in the United States on Florida’s Catastrophe Fund.

For those of you that are not aware, Florida put together a Catastrophe Fund, the first of its kind in the United States after Hurricane Andrew roared ashore and devastated South Florida in August 1992. Last year, the fund was utilized by insurers in the Sunshine State, and got the extra insurance it provided. The fund acts as a safety net to provide additional insurance in the event that a catastrophic storm such as an Andrew, Katrina, or Rita strikes. However, during the course of last season, the fund began to have problems. The problems were attributed to the difficulties in the credit market that resulted from the housing bubble, and a collapse of the sub-prime mortgage market. In recent days, the credit crunch has taken a toll on Wall Street with the near collapse and eventual federal government bailout of Bear Stearns.

What do the problems in the credit market have to do with the Florida Catastrophe Fund, or CAT? Well, the Florida Catastrophe Fund works in a way where it raises the rest of its money besides the $6 billion in cash that it has in reserves by relying on these credits markets through the selling of bonds. When times are good, the fund is able to sell all the bonds it can. However, when there is a financial crisis like the one we are having now, the fund struggles. For example, the article, written by Beatrice Garcia, points out that the CAT fund was only able to sell about half the amount of bonds that it wanted to sell. As a result, insurers have been forced to get their additional insurance from the private insurance market.

Consequently, the CAT Fund may not be able to have the money it needs to provide the funding necessary to those that will need it in the event of another Andrew, Katrina, or Rita. Florida law states that it must be able to cover the losses up to the level of money it can raise by selling bonds. If a major hurricane were to strike this season, the fund would face a shortfall of a little more than $21 billion dollars, and that would mean that the people in charge of running the fund would have to issue a surcharge that would probably be passed down to those living along the Florida coastline. For every $1,000 in insurance premiums on every insurance policy, there would be a surcharge of $40.60, and if you own both a car and a home, that would translate to $81.20. In other words, residents would be hit twice in many cases.

Last year, Florida’s state government considered reworking and modifying the CAT Fund to iron out some problems with it. Florida’s model has been proposed in other states including New Jersey. Organizations such as Protecting America have urged coastal states from Maine to Texas to propose such a fund to bail them out in the event that a catastrophic event such as a major hurricane, tornado, or terrorist attack would occur. New Jersey’s proposed plan would raise funds that would be allocated to insurance companies in the event of a catastrophe, and then in years of no incidents they money would be used to help emergency management functions so that they would have the necessary equipment it would need to perform the essential tasks to help the public before, during, and after the event. In addition, the fund would also go toward educating the public, and ensuring it to be better prepared. As of last season, the bill was in committee, and now it doesn’t even appear listed on the current session of the New Jersey State Legislature.