Mother Nature has been kind to Florida's coastline lately with arecord run of seven years without a hurricane making landfall,allowing property insurers time to re-stock their depletedcoffers.

As a result, when the new six-month hurricane season getsunderway on Saturday, state insurance officials say the industry isready to withstand a major storm. “We are better positioned todaythan I have seen in 10 years,” Kevin McCarty, who heads the state'sOffice of Insurance Regulation, told Reuters.

Still, industry experts question whether Florida'sstate-controlled insurance system is able to cope in the longterm.

“It's very fortunate for Florida that is has been able to buildup its reserves, but the fact of the matter is that Florida isliving on borrowed time,” said Robert Hartwig, president of theInsurance Information Institute.

Just this week, Republican Governor Rick Scott signed a newproperty insurance law designed to reduce the state's exposure tohurricane losses by gradually steering homeowners towards privateinsurers. The new law also slashes the value of homes that thestate-run Citizens Property Insurance can cover, down from $2million to $700,000.

Because of its size and geographical position, with 1,200 milesof coastline on a peninsula sticking out into the warm waters wherethe Caribbean meets the Atlantic, Florida is a uniquely riskyinsurance market. Most of its insured residential and commercialproperty – 79 percent – lies in coastal areas vulnerable to bothwind damage and flooding.

Coastal property is valued at just under $3 trillion, accordingto a report due to be released next week by AIR Worldwide, a globalleader in catastrophe risk modeling. Florida accounts for almost 30percent of the nation's entire $10 trillion coastal exposure, AIRfound.

Only New York has as much exposure, with $3 trillion in coastalproperty, and that compares to $239 billion in South Carolina and$107 billion in Georgia.

Florida is peculiar in other ways too. Unlike most other stateswhere private companies dominate the market, Florida's insurancesystem is tightly controlled by the state, and requires allcompanies to pay into a state-run Hurricane Catastrophe Fund whichacts as a safety net. Louisiana has a similar system for its stateproperty insurer, also called Citizens, and California has its ownsafety net for earthquakes.

Florida's private insurance industry was ravaged in 1992 byHurricane Andrew, which caused $26 billion in damages in Miami-Dadecounty. The state was badly hit again when a series of storms hitsouth Florida in 2004 and 2005.

Designed as a state-run insurer of last resort, Citizens hasbeen left holding more than 1.3 million policies, making it thestate's largest property insurer, with about 21 percent of theentire residential market. Due to the lack of recent storms,Citizens has managed to build up a cash surplus of about $6.6billion, plus another $1.8 billion in reinsurance.

Citizens has tried to manage its exposure by issuing catastrophebonds, which allow insurance companies to transfer risk to privateinvestors. Buyers of so-called cat bonds receive enhanced returnsin exchange for the risk that their principal could be wiped out inthe event of disasters of a certain kind or size.

By the end of this year cat bonds will provide well over $10billion in coverage to the south-east and Florida, according toJohn Seo, co-founder at cat bond investor Fermat CapitalManagement.

Still, critics say the state's consumer-wary politicians haveallowed Citizens to charge below-market rates, leaving the insurerunder-funded. They note that its total insured exposure has morethan doubled since 2005, and it faces a potential $21 billionpayout in the event of a once in a 100 years storm.

“With the risk transfer we have really narrowed the gap. Wehaven't closed the gap but we have narrowed the gap significantly,”Sharon Binnun, Citizens' chief financial officer, told Reuters.

VULNERABLE TO A ONE-TWO PUNCH

Property insurance typically does not cover hurricane-relatedflood damage, which has to be insured separately. Private insurersdon't cover many coastal homes in Florida which are insured insteadby the federal flood insurance program.

The state's 'Cat Fund', created to back up private insurersafter Andrew, has also managed to build a large surplus, amassingalmost $12 billion to pay potential claims in the event of a majorstorm, according to its director, Jack Nicholson.

Although he denied it was under-funded, Nicholson said the fundwas vulnerable to volatility in the municipal bond market, which itrelies on to meet a $17 billion obligation mandated by thestate.

A.M. Best, the main credit ratings agency for the insuranceindustry, said Friday it recognized the Cat Fund's position hadimproved of late.

The recent run of weather luck may have saved the state frombankruptcy, said Hartwig of the Insurance Information Institute,noting that if a major storm had hit Florida in the midst of therecession, the state would likely have been turned away by the bondmarket.

Nicholson worries that unless the Cat Fund increases its cashreserve, one big storm could leave it empty, exposing insurers tothe next big storm.

If it has to borrow money to meet claims, the Fund is requiredto place an “assessment” on almost all insurance policies in thestate, from homes to cars, no matter if they live in inland areasnot prone to hurricanes. Such assessments are decried by some as atax that provides “welfare” for wealthy beachfront homeowners.Policy holders are still paying off an assessment from the lasthurricane, Wilma in 2005.

The bill signed by Governor Scott on Wednesday aims to steerhomeowners away from Citizens and cap the value of homes that canbe insured by the state-run company. The legislature rejected atougher bill that would have accelerated that process by chargingnew Citizens enrollees much higher premiums.

“Citizens has gotten way too big…There was no way in asignificant hurricane that Citizens was going to be able to pay,”Scott told emergency officials in Miami on Thursday.

(Additional reporting by Sarah Mortimer in London, HarrietMcLeod in South Carolina and Kevin Gray in Miami; Editing byClaudia Parsons)