The Florida Hurricane Catastrophe Fund

Disaster Insurance, Insurance, Natural Disasters, Storm Insurance

The state of Florida is well known for many things — sunshine, beaches, golf courses and Disney World, to name a few. Unfortunately, it is also known for bearing the wrath of one of Mother Nature’s most fearsome and destructive types of storms: hurricanes.

Hurricane Andrew was one of the worst hurricanes to ever hit Florida. I lived in Fort Lauderdale when Andrew barreled ashore in 1992 and will never forget that sleepless night spent listening to the howling winds and rain and wondering if I would live to see the sun come up the next morning.

Andrew’s Damage and Legacy

Andrew caused a staggering $25 billion in damages in Florida alone — including $16 billion in total insured damages — and destroyed more than 25,000 homes and damaged another 100,000-plus. This had a major impact on insurance companies in the state, many of which questioned whether they could afford to continue providing coverage in Florida.

In the wake of the storm, Florida created the Florida Hurricane Catastrophe Fund (FHCF) in 1993 to help discourage private insurers from leaving the state. The tax-exempt state trust fund is designed to help private insurance companies pay out hurricane-related claims by offering them reinsurance at prices generally lower than in the private market.

According to the FHCF’s website, the purpose of the fund is to “protect and advance the state’s interest in maintaining insurance capacity in Florida by providing reimbursements to insurers for a portion of their catastrophic hurricane losses.” The FHCF is currently funded via a 1.3 percent surcharge on most property/casualty insurance policies issued in the state.

Is the FHCF a Good Model?

Given that the FHCF has now been in existence for more than twenty years, it seems fair to ask the question of whether or not it is a good model for insuring against future catastrophes.

Throughout its history, the FHCF has experienced times when it was flush with cash and times when it literally ran out of money. The latter occurred in 2005 after Florida was hit with eight storms over the course of just two years. The fund had to borrow $2.6 billion to pay off obligations to private insurers after Hurricane Wilma, the last of these eight storms, hit in 2005. This prompted the current 1.3 percent insurance policy surcharge.

However, Florida has not suffered a direct hit from a hurricane since 2005. As a result, the FHCF now has a balance of about $13 billion, which would enable private insurers to borrow more than $8 billion in the event of a catastrophic hurricane, according to the fund’s advisory council. Due to the fiscal health of the fund, the Florida Cabinet recently voted to end the 1.3 percent policy surcharge starting in 2015 — a year sooner than was originally anticipated.

Of course, another Hurricane Andrew could change this situation in an instant. Nevertheless, for now, the FHCF appears to be fiscally sound. In addition, since its inception, the fund has accomplished its primary goal of maintaining insurance capacity in Florida.

While the FHCF is not perfect, this does make it a model for insuring against future catastrophes that other states might at least want to consider.

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