Florida Faces Fiscal Facts

It looks like someone’s realized that you can’t just wish away the cost of cat cover.  Seen in an Orlando Sentinel blog:

The Cat Fund could face an $11 billion gap between the cash it has on hand and can raise($18 billion), and what it could have to pay following a major disaster this year ($29 billion). And the only options are for Florida itself to buy re-insurance on the open market, or try to set up tax-exempt bonding agreements in advance that a buyer couldn’t refuse to honor after the storm.

Nicholson says the only way to completely cover all the risk Florida has assumed is to buy reinsurance. But since the state is offering this coverage to private companies at a steal to lower rates, Florida would have to pay out the gazoo if it then turns around and buys the same coverage private carriers would otherwise purchase.

In other words, ensuring the state could pay the entire $12 billion in added risk Crist and Florida lawmakers took on in 2006 could cost taxpayers $1.7 billion this year. All Florida will charge in premium to private carriers for the extra state risk is $250 million.

Now, while I will admit that the insurance and reinsurance markets aren’t always as efficient or logical as we would sometimes like to believe, that doesn’t alleviate the fact that the cost of insuring catastrophe risk really is expensive.  Not only do you have to fund the expected loss, but you also have to acknowledge the need to maintain a large pool of assets on hand to pay claims in the event of disaster.  

The folks who provide that cash, generally would like to see expected income for the use of that cash commensurate with the risk they face.  Unless we suddenly become a communist or wholly altruistic society, that is a cold, hard fact of life.