Daniel Workman

Blasting past the Everglades, Hurricane Wilma was the most severe of eight tropical storms that hit Florida during 2004 and 2005 and inflicted roughly $35 billion in damage.

Six years later, the Sunshine State continues to feel financial pain from past hurricanes. It's also facing a sinkhole insurance crisis -- in early February, small insurer Mercury General exited Florida's home insurance market because of losses it sustained from sinkhole claims.

Now, protests are growing louder from those who are paying for Florida's vulnerability to disasters -- businesses, charities and auto insurance policyholders, who pay a so-called "hurricane tax" in the form of higher premiums.

Florida's unique insurance structure

A big part of the problem is that Florida's home insurance premiums are at least 70 percent lower than actuarially calculated rates for hurricane coverage, according to the Florida Insurance Council.

Florida subsidizes these low premiums by selling bonds to pay for extreme hurricane claims. Bond sales support two government-operated entities that dominate Florida's property insurance market:

  • Citizens Property Insurance Corp. (Citizens).
  • Florida Hurricane Catastrophe Fund (Cat Fund).

The state-run insurer of last resort, Citizens also is Florida's largest insurance company. According to the Insurance Information Institute, Citizens had more than 1.2 million Florida property insurance policies at the end of September 2010.

Citizens is heavily financed by the Cat Fund, Florida's tax-exempt state trust fund. By reimbursing Citizens and private insurers when losses exceed a pre-determined limit, the Cat Fund imitates how a private reinsurer pays for catastrophic claims. Unlike conventional reinsurance, however, the Cat Fund sells bonds to raise money to pay for hurricane costs rather than charge reasonably priced reinsurance premiums up front.

As a result, the Cat Fund lacks strong cash reserves that private reinsurers are legally required to hold. Had a severe hurricane struck in 2009, the Cat Fund would have faced an estimated $18.5 billion shortfall, according to independent policy researcher Florida TaxWatch.

Hurricane of debt

A ferocious hurricane in 2011 could force the Cat Fund and Citizens to issue billions in new bonds to cover insurance losses.

Currently, according to the Florida Insurance Council, the Cat Fund could sell only an estimated $11 billion worth of bonds -- not enough to pay for a round of large storms. In the worst-case scenario, the Florida government could receive an emergency request for insurance bailout money when the state economy already is crippled by hurricane damages.

Florida's controversial hurricane taxes

To avoid charging coastal property owners sky-high premiums, Florida spreads the burden by charging higher auto, renter's and business insurance premiums for those who live, work and drive throughout the state.

This hurricane tax applies to:

  • Automobile insurance (all drivers in Florida),
  • Commercial insurance (businesses, local governments, nonprofits, religious institutions and school boards).
  • Property-casualty insurance (homeowners and renters throughout Florida).

Inland Floridians angrily object to these hurricane taxes, which pay ongoing interest on bonds that Citizens and the Cat Fund issue to cover claim deficits. Because they live away from the state's hurricane-prone coasts, they reap no benefits from entities that serve homeowners who choose to live in higher-risk areas. In fact, many Floridians pay hurricane insurance taxes multiple times -- on both their auto insurance and business insurance premiums, for example.

In January 2011, a group of Florida businesses and charities sent a letter to the new governor, Rick Scott. The letter communicates their frustration at subsidizing "the state's most fortunate living in expensive homes on the Coast" -- and their concern that premiums will only rise if another major storm hits.

Without significant changes to the Sunshine State's controversial property insurance system, Citizens and the Cat Fund are on the brink of multibillion-dollar shortfalls that could bankrupt Florida after one more major hurricane.