NU Online News Service, Oct. 24, 2:34 p.m.EST

It came as no surprise to anyone that has followed the Florida'sreinsurance fund that it could potentially have a $3.2 billionshortfall but that doesn't make the news any easier.

The Florida Hurricane Catastrophe Fund (FHCF) will not be ableto raise enough money in the capital markets via post-event bondsto cover all of its claims-paying obligations, according to newreport issued by independent-financial advisor Raymond James.

The FHCF has nearly $18.4 billion in obligations and ayear-end cash balance of $7.17 billion. This means the fund needsto raise about $11.22 billion from bonding to meets its obligationsafter a storm.

“Bonding needs of this size are extremely large by marketstandards,” says Raymond James, which asked four financial-servicesfirms to estimate the FHCF's bonding capacity over the next 12months.

The average of the estimates from the firms—Citi, Barclay's,Goldman Sachs and JP Morgan—is $8 billion, leaving a $3.2 billiondeficit.

Beyond the cash balance, Florida policyholders will end upshouldering the bill via assessments to pay the debt.

The Heartland Institute, a public policy think tank, says the $8billion post-event bonding capacity estimate may be optimistic.Goldman Sachs, for instance, says the FHCF could raise just $5billion in the capital markets.

Heartland, a promoter of free-market policies, has long opinedabout the harmful effects of past legislation intended toartificially keep homeowners' rates down. R.J. Lehmann, deputydirector of Heartland's Center on Finance, Insurance, and RealEstate, says the “flaws of that strategy are becoming more and moreevident by the day.”

He adds, “Florida must allow risk-based rates to prevail, bothfor primary insurance and reinsurance, or face the potential ofclaims the state simply cannot afford to pay.”

Jack Nicholson, chief operating officer of the FHCF, says ashortfall following a weather disaster in Florida could have“severe consequences” in the state's property-insurance market.Every insurer, by law, has to purchase reinsurancecoverage—typically at a lower rate than the private market—from thefund. Some do more than others.

“There's the potential that companies will not be able to payclaims because the coverage they relied on the [catastrophe fund]for does not exist,” he says.

However, Nicholson insists the state's “very hazardous”consistent reliance on the bond market to pay claims can beremedied.

Nicholson says he has two sponsors for a billto right a ship that has not been righted since legislation in 2007left the state over-exposed and overly dependent on fickle economicclimates.

“We don't have to face that risk,” Nicholson insists. His billwould gradually get rid of $5 billion of the fund's mandatorylayer. An optional layer is already being phased out—a product ofrecent legislation.

That would leave the fund with a capacity of $12 billion, andNicholson says it “shouldn't be a question” whether the FHCF canfund it.

Another hurricane season could pass without a landfall inFlorida. If that's the case, the FHCF will have $8.4 billion incash for next season. It is feasible to fund the rest of the fund'sobligations with bonds.

“We're trying to be more financially responsible,” Nicholsonsays.

The plan would transfer more risk to the private-insurancemarkets.

Dennis Burke, vice president of state relations for theReinsurance Association of America, says Florida's hurricane risk“is insurable in the private sector, and the RAA supports effortsto transfer that risk from taxpayers to the global insurance andreinsurance markets.”

He adds, “Reinsurers have the capacity and willingness to assumemore Florida risk, which will protect Florida's taxpayers and helpinsurers meet their promises to Florida's consumers.”