While storm-prone Florida experienced fewer hurricanes in the last decade, the state's Hurricane Catastrophe Fund is still at risk, says a local economist.
Weather patterns, even when analyzed with utmost care and the latest technology, can change unpredictably at any time. The fact that Florida has seen no landfall hurricanes since 2005 itself defies the odds, but serves little assurance in the insurance field.
The average Floridian might reason that no events equals bigger coffers for the state, and in a sense, he or she would be right. When no events precipitate, the money that’s reserved for storm emergencies is able to remain stable and accumulate — theoretically.
Florida’s fund happens to rely on borrowed money, however; and the problem arises because of insurance complications.
“As is common with other types of portfolios, managers reduce risk by hedging, often by purchasing options that will protect their position,” Jerry Parrish, chief economist for the Florida Chamber Foundation, said. “In Florida’s case, that would be purchasing reinsurance to protect a portion of the cash balance in the fund, or cover the money the fund borrowed in advance to be ready for the hurricane season.”
Managing Florida’s risk fund, while necessary as a preventative measure, itself costs money, Parrish said. So although the fund is not depleted, it’s still sitting on debt. Additionally, Florida’s population has increased by 2.5 million in the last 10 years, a significant number to add to the equation.
Even without another Hurricane Andrew, just a few successive small storms can wreak havoc on Florida’s finances. Since no one can see what’s coming ahead of time, Florida should not be in a rush to minimize its risk protection, the Florida Chamber analyst said.