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  • Betting On Disaster: FL Rep Tries To Block Corporate Welfare For Insurers

    A proposal to allow Florida’s catastrophe fund to offload risk onto private investors enjoys wide support, but one state lawmaker says it is simply corporate welfare for foreign companies.

    According to the Tampa Bay Times, Republican state Rep. Frank Artiles “wants state officials to reject a proposal by the Florida Hurricane Catastrophe Fund to issue $2.2 billion in reinsurance bonds,” which Republican Gov. Rick Scott’s cabinet will consider Tuesday.

    The FHCF, also known as the CAT Fund, serves as a safety net for Florida insurers in the event of a major natural disaster that overwhelms their ability to pay claims, and the proposed bond issue would offer the fund similar protections.

    If a disaster occurs within a specified period, the principal from the bonds would be available to pay insurance claims, but if there is no catastrophe, the state must pay interest to investors. (RELATED: Growth, Not Global Warming, To Blame For Disaster Damage)

    In an op-ed sent to Florida newspapers Monday, Artiles wrote that, “The proposed transfer of billions in risk from the [FHCF] to the private offshore global reinsurance market is nothing more than corporate welfare and would mean higher property insurance rates for Floridians.”

    However, in a blog post Monday, the investment news website Artemis called Artiles’ position “a shortsighted approach to protecting Florida’s taxpayers,” noting that capital markets currently have excess capacity for reinsurance risks, making prices historically low.

    “Retaining this risk only exposes the taxpayer to greater assessments should the cat fund face a shortfall,” the post argues, concluding that, “It would make a lot of sense to increase the protection of the catastrophe fund right now while reinsurance capacity is so cheap and abundantly available.”

    Artiles also predicted that, “If CAT Fund Chief Operating Officer Jack Nicholson is permitted to gift $2 billion into the private re-insurance market, the only beneficiaries would be the reinsurers themselves, mostly based in Bermuda,” who he claimed, “actually hope for catastrophes so that they can demand higher rates and larger profits.”

    An analysis by Schroders analysts Tim Carr and Anja May seems to back up Artiles’ claim that reinsurers are essentially betting on catastrophes. (RELATED: Allstate Insurance Backs Group Pushing for Federal Natural Disaster Fund)

    “Following a particularly destructive natural disaster,” they explain, “a number of factors serve to inflate insurance premiums (and thus the potential returns to catastrophe risk securities), providing investors with the opportunity to recoup some, if not all, of their losses within a relatively short time-frame.”

    Although such investors incur large losses when a disaster does happen, “their risk exposure can be dramatically reduced by diversifying across many different catastrophe bonds,” Carr and May assert, because “the likelihood of incurring extreme losses is far lower than the chance of benefitting from extreme returns.”

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