The Cat Fund was created during a special legislative session in November 1993 as a response to the $30 billion in losses generated by Hurricane Andrew. It was intended as a backstop to both private insurers and Citizens. The fund is financed by three sources: reimbursement premiums charged to participating insurers, investment earnings on the fund, and emergency assessments on property & casualty insurers. 

During a presentation by COO Jack Nicholson to the Senate Banking and Insurance Subcommittee last month, Nicholson reported that in 2000 the Cat Fund "had about a trillion in exposure and today we have about $2 trillion." He further noted that this year the fund is providing $18.5 billion worth of coverage.

In a question-and-answer session, Nicholson agreed with panel members that, "considering the current reality of the marketplace," the Cat Fund is "dangerously overexposed."

"The problem is the volatility in the financial markets," Nicholson said. "We also can collect assessments (or a hurricane tax), if necessary, to fund the operations of the Cat Fund. This is something that private reinsurance cannot do but we can, and we need to do it judiciously.  We should not plan on bonding for issues that we are not certain we can deliver."

According to information posted on its website, the Cat Fund issued bonds in the amount of $1.35 billion in 2006 and $625 million in 2008. These are currently being financed by a 1-percent assessment on premiums for most property & casualty and surplus lines policies renewed after Jan. 1, 2007. The fund issued bonds in the amount of $675.92 million in 2010. The assessment percentage of 1 percent was increased to 1.3 percent on the assessable lines of business effective on all policies written or renewed on or after Jan. 1, 2011.

Nicholson reminded legislators that the fund's "original purpose was to help maintain a viable insurance market … not to replace reinsurance. The Cat Fund needs to be right-sized." His proposals to accomplish that include reducing the size of the government-run reinsurer's mandatory layer, increasing the participating insurers' co-pay, reducing special taxes the fund might impose on Floridians, and terminating the temporary increase in coverage layer.

The problem with "right-sizing"—at least in the minds of many legislators and consumers—is that scaling back the size of the Cat Fund likely will result in higher reinsurance costs and ultimately higher insurance premiums. Nicholson told the committee, "We save the state $2 billion a year with the existence of the Cat Fund.  Rates are 25 percent lower than they would be without the Cat Fund. "

Get ready for the second verse.