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Blow Hard

Florida’s combative insurance commissioner, Kevin McCarty, sees no knockout punch from a major storm in his state’s future.

By  Ed Leefeldt

A visit to Kevin McCarty’s office is like a trip to the Pentagon: two levels of passkey security, long claustrophobic hallways, an escort at all times. Is Florida’s insurance commissioner under siege?

You bet. And he never knows where the next storm is brewing. He got a ray of sunshine when the Insurance Law Center named him “Regulator of the Year.” Then a top state senator called on Gov. Charlie Crist to fire McCarty for being “incompetent and cowardly.”

Cowardly? No way. McCarty, who cut his teeth as an insurance regulator just before Hurricane Andrew in 1992, relishes a fight. He proved it when one disgruntled insurer hired a private detective to blackmail him. McCarty turned the tables and won a $2.5 million settlement. “He’s got chops,” says a lobbyist, who’s both a critic and an admirer.

In 2007, the storm-battered state searched for a way to cut soaring homeowners insurance costs. Crist and the legislature froze rates at the state-run insurance company, Citizens Property Insurance Corp., and put Florida into the reinsurance business with a $28 billion catastrophe fund. McCarty, who supported the governor, was squarely in the crosshairs. Insurers nationwide attacked him, warning that a major hurricane could put the state, its taxpayers and bondholders underwater, both literally and fiscally.

That nightmare was avoided when Hurricane Ike missed the state in 2008 before tearing up Texas. But Florida’s controversial plan brought other perils that year. First, Citizens Property revealed that it was nearly bankrupt. Then the catastrophe fund, wracked by the U.S. credit crunch, admitted it was more than $12 billion under-funded. Finally, in January 2009, State Farm announced that it was leaving the state after McCarty’s department rejected a proposed rate hike.

Florida politicians did an abrupt and politically astute about-face. Just before Crist announced his U.S. Senate run, he said he’d sign a bill raising Citizens property rates 10% a year, ending the state-run insurer’s price advantage. This also lowered the cat fund’s exposure by $12 billion, a tacit acknowledgment that the program was not adequately funded.

But the most important question was left unanswered: How would McCarty—and Florida—cope if “the Big One” roared in, a Category 5 hurricane in a state with 19 million souls and $2 trillion of property exposure?

Leader’s Edge: Sooner or later Florida will face another major storm. How big a hurricane can Florida handle?

McCarty: Currently the cat fund’s cash on hand plus combined industry reserves would enable about $14 billion in claims to be paid immediately. From that point on, bonds would be issued. There is enough capacity to pay claims for several years while the cat fund is generating more money.

You said Florida could handle a year like 2005, when Wilma cost the state’s insurers $10 billion. But what about 2004, when four hurricanes hit the state, or if a Katrina-type storm blasts in?