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Kai Ryssdal: We have our first hurricane of the 2009 season. Hurricane Andres is expected to reach Mexico's west coast later today. In prime U.S. hurricane territory, that is, mostly, the state of Florida, there are still fresh memories of the devastating storms they have had there the past several years.
Strangely though, insurance rates haven't kept pace with public worries. Florida froze insurance premiums two years ago. That let builders keep building in the face of a saturated real-estate market. And it could mean everybody gets soaked if the weather gets really bad. From Miami, Marketplace's Dan Grech reports.
DAN GRECH: Florida keeps insurance rates low by doing something no other state has tried: it subsidizes the cost of reinsurance. Reinsurance is basically insurance for insurance companies. An insurer agrees to cover, say, the first $10 billion in damage after a storm.
Reinsurance kicks in to cover the rest.
Private firms charge around 25 cents for each dollar of reinsurance protection. The state-run Hurricane Catastrophe Fund, or Cat Fund, charges two cents for each dollar of protection. So homeowners pay lower premiums.
There's one big problem: the Cat Fund can't cover its commitments.
JIM MASSIE: Our current strategy in Florida is prayer.
That's Jim Massie with the Reinsurance Association of America.
MASSIE: We're praying that we don't have a hurricane. And prayer is good, but I don't know that we can count on it to pay insurance claims.
The Florida Cat Fund relies on its ability to borrow money to pay claims. But last fall, the credit markets seized. The Cat Fund was suddenly short $17 billion. Massie says Florida's experiment in state-subsidized reinsurance could end in disaster.
MASSIE: The Cat Fund violates one of the cardinal principles of insurance, which is spreading the risk. The Cat Fund concentrates the risk within the state of Florida. Private reinsurers sell that risk around the world. To Bermuda, Japan, London.
Florida created its Cat Fund after Hurricane Andrew in 1992. The fund has since grown to sell $27 billion in storm protection, making it the state's dominant reinsurer. By keeping premiums low, the Cat Fund made property in Florida more affordable. That helped pave the way for Florida's building boom.
Robert Hartwig is president of the Insurance Information Institute. He says cut-rate insurance allowed Florida developers to overbuild and Florida homeowners to overbuy.
ROBERT HARTWIG: There's no question that the state's policy of providing subsidized insurance has led and contributed to the state's real-estate disaster.
Hartwig says the only way for the Cat Fund to have enough money to cover its obligations would be for it to hike the premiums it charges. That would reflect the true cost of re-insurance.
Ron Klein is a Democratic Congressman from South Florida. He says Florida needs to rely more heavily on private reinsurance. But the government must take a role in keeping those companies in check.
RON KLEIN: Unfortunately there's sort of a failure of the market. It's a handful of companies charging whatever they can charge. A lot of people would say that's whatever the market will bear. But people can't afford it. You're pricing them out of their home. That's not a good thing.
Klein wants to create a national pool for catastrophic risk that could sell bonds to the private market. Others suggest the federal government should float mega-catastrophe bonds after a major disaster. But those solutions are far off.
Despite new state legislation, the Florida Cat Fund is still short billions of dollars this hurricane season. In the event of a big one, the state may not have the money to pay claims.
In Miami, I'm Dan Grech for Marketplace.