The Florida Insurance Council released a backgrounder on theFlorida Hurricane Catastrophe Fund's financial status that predictsdire consequences if immediate reforms are not made.

The Advisory Council to the Cat Fund acknowledged the fund wouldface a $10-$15 billion shortfall if called upon by a majorhurricane to generate its full capacity of claim payouts, which isestimated to be about $28 billion.

The report repeatedly stresses that the Cat Fund cannot live upto the huge financial obligations established by the FloridaLegislature, which expanded the program to an unprecedented $28billion during a Jan. 2007 special legislative session. The CatFund's reinsurance program had been about $16 billion prior to2007.

According to the report, the expansion of the Cat Fund to suchan unprecedented level was the legislature's response to marketconditions that were driving the costs of reinsurance higher andhigher after the 2004 and 2005 hurricane seasons. The idea was tocreate a lower cost reinsurance program for both private insurersand the government-run insurer, Citizens Property InsuranceCorporation. Insurers would purchase coverage from the Cat Fund atcosts much cheaper than those on the worldwide reinsurance market,providing a basis for insurers to rollback residential insurancerates.

The report goes on to state that the Cat Fund's fatal flaw wasthat the reinsurance — which insurers were mandated to purchasefrom the Cat Fund — was only minimally supported by cash reserves.Instead, the state promised that it could go into the private bondmarket and borrow unprecedented amounts of cash if and when thefunds were needed.