Hurricane Loss Mitigation Program
Section I: Florida Responds to Disaster - An Historical Perspective
Florida is known worldwide for its natural wonders and vibrant communities. World class attractions and miles of seemingly endless beaches make it one of the most beautiful and enchanting places to live. Preliminary figures made available from the year 2000 Census indicate that an estimated 16 million people call Florida home. Over 80 percent of our residents live and work along Florida's 1,350 miles of coastline. While Florida is stunning in its natural beauty, it can also be a risky place to live. In essence, our state is a sub-tropical peninsula jutting out into the warm, but sometimes turbulent waters of the Atlantic Ocean and the Gulf of Mexico. Nearly $900 billion in residential and commercial property is exposed to the threat of hurricanes and severe coastal storms. No other state is so openly exposed to these threats.
Talk of risk in Florida is far from academic. Hurricane Andrew put an end to that. While visited by devastating and deadly storms in its past, nothing in recent memory approached the fury and destruction wrought by Hurricane Andrew. In Florida, August 24, 1992 is truly a day that lives in infamy. People worldwide place themselves in history based on historical events or occurrences. For Floridians, that seminal event is Hurricane Andrew. Our time is reckoned in terms of Before Andrew and After Andrew. The Category 4 behemoth tore through the communities of South Miami and Homestead, causing over $25 billion in damage and leaving 43 people dead in its wake. Hurricane Andrew became one of the nation's costliest disasters. Over $16 billion of these losses were in insured residential or commercial properties.
If Hurricane Andrew had hit more populated areas just a few miles further north, the death and destruction meted out could have been much worse. All parties involved, emergency planners, insurance experts, and members of the Florida Legislature, realized that we were not prepared.
Before Andrew, Florida, and the nation as a whole, had a familiar formula for dealing with disasters: Use insurance and emergency relief dollars to restore conditions to the way they were before disaster struck. Then, wait for the next disaster, and rebuild again. But Andrew's catastrophic disaster recovery costs threatened to undermine property insurance companies doing business in the state - the primary underwriters of disaster risk - and our first defense in disaster recovery.
The tightly-wound super tornado-like spiral that was Hurricane Andrew threatened to hurl our state into a spiral of economic devastation. What is commonly referred to as the insurance crisis is a basic side effect of this economic impact. If insurance companies are unwilling or unable to underwrite risk, banks will be unable to offer mortgages on home purchases. Without the promise of a secured mortgage, the market for purchasing new conventionally site-built or manufactured or mobile homes will disappear. A decreased demand for new housing translates into a decreased demand for a whole host of other goods, from construction materials to durable goods like washers, dryers, and refrigerators. One storm can - and did - have truly chilling economic reverberations.
The Legislature realized that it needed to ensure that homeowners unable to find coverage from a private insurance company could obtain insurance. While a complete description of insurance in Florida and the work of the Legislature to ensure its availability is lengthy, a brief survey is essential in setting the context for the kinds of initiatives undertaken by the Hurricane Loss Mitigation Program.
The private insurance market was devastated by Hurricane Andrew in 1992. The good news, however is that competition has returned to the Florida marketplace. After Andrew, the insurance needs of Florida's most vulnerable residents were left to be met by the Florida Windstorm Underwriting Association and the Florida Residential Property and Casualty Joint Underwriting Association.
The Florida Windstorm Underwriting Association - the Florida Windstorm pool - was created by the Florida Legislature in 1970 to cover wind risk in the Florida Keys. It has since expanded to 29 of Florida's 35 coastal counties. The Florida Windstorm Underwriters Association is governed by a board comprised mainly of insurance industry representatives and provides coverage for wind damage in the coastal areas of Florida. The Florida Windstorm Underwriting Association's purpose is to "provide Florida citizens adequate wind and hail coverage, when it is not available in the insurance market place; and pay insured claims when losses occur." Since Hurricane Andrew, the size of the Florida Windstorm Underwriting Association has soared, with more than 427,000 policyholders bringing its exposure to loss to more than $86 billion.
The Florida Residential Property and Casualty Joint Underwriting Association, commonly known as the JUA, was created in a special session of the Florida Legislature in December 1992, just months after Hurricane Andrew. In Andrew's wake, 11 small property insurance companies became insolvent, while most of the large insurance companies doing business in the state realized they were seriously exposed to large hurricane losses, and stopped writing new policies. An increasingly growing number of homeowners were left without property insurance coverage.
The basic mission of the Florida Residential Property and Casualty Joint Underwriting Association, as set out in state statute, is to provide residential property insurance coverage "for applicants who are in good faith entitled, but are unable, to procure insurance through the voluntary market." The good news about the Florida Residential Property and Casualty Joint Underwriting Association is that, through a series of state-sponsored incentives, they have been able to transition from a high of nearly 937,000 policies and $98 billion in exposure in the fall of 1996, to just 59,628 policies and about $9.5 billion in exposure by April 30, 2000. This depopulation is a sign that private insurance companies are returning to the Florida marketplace.
The Florida Windstorm Underwriting Association and the Florida Residential Property and Casualty Joint Underwriting Association differ in a number of important areas. While the Florida Windstorm Underwriters Association is run by a board comprised mainly of representatives of private insurance companies and only provides coverage for wind damage in its designated areas of service, the Florida Residential Property and Casualty Joint Underwriting Association is run by a 13 member board of governors whose membership is set out by state statute. Although created by the Florida Legislature and subject to public record laws and legislative oversight, it is not a state agency.
The primary contrast between the two associations is that the Florida Residential Property and Casualty Joint Underwriting Association provides multi-peril coverage through its personal lines residential and commercial lines residential policies to property owners in all 67 Florida counties. The Florida Residential Property and Casualty Joint Underwriting Association is barred by state law from writing policies with wind coverage in Florida Windstorm Underwriting Association territories. A homeowner that has a Florida Residential Property and Casualty Joint Underwriting Association policy in those territories has to obtain their wind coverage from the Florida Windstorm Underwriting Association and obtain a separate policy from the Florida Residential Property and Casualty Joint Underwriting Association to cover other perils like theft, fire and liability.
Through creation of the Florida Residential Property and Casualty Joint Underwriting Association and by expansion of the Florida Windstorm Underwriting Association area of coverage, the Legislature provided an insurance availability safety net that helped stave off the insurance crisis. The missing link in the equation remained how to ensure that in the event of another disaster private insurance companies doing business in the state, as well as the Florida Windstorm Underwriting Association and the Florida Residential Property and Casualty Joint Underwriting Association, would have the economic undergirding to underwrite future potential disaster loss.
The Florida Hurricane Catastrophe Fund, commonly know as the "Cat Fund," section 215.555, F.S., was created by the Legislature in 1993 to help the Florida Windstorm Underwriting Association, the Florida Residential Property and Casualty Joint Underwriting Association, and private insurance companies cover their losses from a major hurricane. It is a state run reinsurance fund. The Florida Hurricane Catastrophe Fund was created from the intent of the Legislature, as outlined in statute, " to balance equitably its concerns about mitigation of hurricane impact, insurance affordability and availability, and the risk of insurer and Joint Underwriting Association insolvency."
Private insurers, as well as the Florida Windstorm Underwriting Association and the Florida Residential Property and Casualty Joint Underwriting Association, pay an annual premium to the fund which builds up over time. If a major storm hits, private insurers, as well as the Florida Windstorm Underwriting Association and the Florida Residential Property and Casualty Joint Underwriting Association, draw money from the Florida Hurricane Catastrophe Fund based on pre-determined formulas. The insurers can recoup the annual premiums they pay to the Florida Hurricane Catastrophe Fund from their policy holders through rate filings.
In passing the Florida Hurricane Catastrophe Fund, the Legislature acknowledged that providing a stable and ongoing source of reimbursement to insurers for a portion of their catastrophic hurricane losses would create additional insurance capacity sufficient to ameliorate the current dangers to the state's economy and to the public health, safety and welfare. Because of the size of the fund, the statute outlined that it would be essential to the functioning of the state program to increase insurance capacity that revenues received be exempt from federal taxation. While the Florida Hurricane Catastrophe fund was originally established to cover all residential and commercial property, amendments passed in 1995 made only residential property insurers eligible for reimbursement from the fund.
The precedent for dedicating a portion of the interest income from the Florida Hurricane Catastrophe Fund to support mitigation was set in part due to the Legislature's intent for the revenues received through the Florida Hurricane Catastrophe Fund to be exempt from federal taxation. To obtain the tax exempt status for the Florida Hurricane Catastrophe Fund, the Florida Legislature negotiated with the Internal Revenue Service and entered into a settlement that bound the state to three conditions, as follows; 1) to provide an initial state capital contribution from a broad based revenue source, 2) to increase the broad based emergency assessments that support the fund when premium revenues are insufficient, and 3) to expand the monies available for a wider range of hurricane loss mitigation projects.
The passage of the Florida Hurricane Catastrophe Fund directed the Legislature to annually appropriate from the fund no less than $10 million, but no more than 35 percent of investment income from the prior year. The funding of mitigation programs under the legislation was delayed until the State Fiscal Year 1997-1998. The uses authorized for mitigation funding are very broad based. They include funding of local government, state agencies, public and private educational institutions and non-profit organizations to support programs intended to improve hurricane preparedness, reduce potential losses in the event of a hurricane, provide research into hurricane loss reduction, educate or inform the public about ways to reduce hurricane losses, assist the public in determining the appropriateness of structural upgrades or protect local infrastructure from potential damage from a hurricane.
Close to $28 million has been appropriated from the Florida Hurricane Catastrophe Fund since State Fiscal Year 1997-1998. A significant portion of this allocation was used as the requisite state match to federal disaster recovery and mitigation grants for natural disasters that occurred from 1995 to 1998, including, but not limited to Hurricanes Erin, Opal and Georges. The use of the Florida Hurricane Catastrophe Fund to support hazard mitigation has greatly benefited the State of Florida not only in terms of providing disaster match, but also in promoting innovative projects. While the types of projects funded by the Florida Hurricane Catastrophe Fund are detailed in Section II of this report, they range from physical projects like beach and dunes restoration, public school hurricane mitigation, and mobile home safety, to outreach and education projects, including implementing the unified Florida Building Code.