Q&A with: Jack Nicholson

The Florida Current
By Gray Rohrer
June 11, 2012

Jack Nicholson has held the position of chief operating officer of the Florida Hurricane Catastrophe Fund since its inception in 1994. Before that he was in the Department of Insurance for eight years. He has a doctorate in risk management insurance from the University of Georgia and has taught at his alma mater as well as at the University of Iowa and Florida State University.

What happened to the insurance market after Hurricane Andrew that led to the Cat Fund’s creation?

What happened is that Hurricane Andrew was kind of a wake-up call because prior to Hurricane Andrew causing all the damage, insurance companies didn’t think they could have this type of damage from a hurricane.

A lot of the companies realized they had way too much risk, they cancelled policies. At one point we had companies threatening to cancel 670,000 policies – I think Allstate alone was threatening to cancel 500,000 policies.

But the state said to the insurance companies, “We’re going to limit your exit to the state but we’re going to create a catastrophe fund to provide you with reinsurance,” because that was one of the reasons they were leaving the state is they didn’t have reinsurance because the reinsurers recognized they were way overexposed, too.

How was the Cat Fund affected by higher insurance rates after the 2004 and 2005 hurricanes? How did it get as large as it is today, covering a maximum $17.3 billion?

So we had the 2006 elections where all the people running for office in Florida had too many objectives to lower property taxes – that was a big issue – and then also lower insurance rates.

That was done by expanding the Cat Fund. You know if it works, which everybody agreed, it was kind of like a model for the nation back in 2006. And in 2007 they said, “We’ll let’s just expand it by $12 billion. A little bit is good, let’s just create more!”

A recent bond capacity report showed that the Cat Fund would need to borrow nearly $8.76 billion to pay its maximum potential claims this year, but it’s only estimated to be able to bond for $7 billion. How does the current global climate play into the fund’s bond capacity and its fiscal soundness?

It’s the retail and the bond funds that are basically our investment base right now. It used to be the banks too. But the banks, once the subprime (mortgage crisis) hit and the economy started to compress, they started looking very carefully at municipalities and knowing how their revenues could be affected.

It’s the whole aftermath of what happened with the subprime (mortgage crisis). It’s the whole mentality of now having to do a lot more research and analysis on municipal debt. The concern of buying something that investors don’t understand …. analysts began to be held accountable for that investment.

So how dire is the outlook for the Cat Fund?

A lot of people write about this. Some of the people that write about it represent the reinsurance industry and want to characterize it a certain way so it looks like the Cat Fund is failing. Or some other people have characterized the Cat Fund a certain way because they don’t like assessments. The fact is there can only be a shortfall at the time of an event. We’ve never had a shortfall.

The number that we used this year was $15.56 billion, which is less than the coverage that we potentially offered this year. Actually it turned out, based on coverage selections and everything, that the maximum we would have to pay under the law or that we could pay under the law was $17.2 billion.

Given the problems passing legislative reforms to the Cat Fund, will it take another storm or the calming of the bond market to provide stability?

Forget about the bond market stabilizing, OK? The economy’s never going to stabilize, so we’re always going to have that risk, so forget about it.

The other part is whether there’ll be a political appetite to do anything for the Cat Fund and I guess Citizens as well – we’re all in the mix of dealing with the insurance problems. Since these guys haven’t been elected yet, I don’t know.

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