The fund, however, is legally obligated to offer up to $29 billion in coverage for the coming year, even though right now there is no guarantee that the state could borrow the money it needs for claims if a major storm hits. The ongoing credit crisis has shredded the state's ability to go out and find potential sources of funding.

The current risk models show that there is a six percent chance that Florida could get hit with a storm of enough force to wipe out the fund's current finances. If that happens, it could cause the collapse of the state's entire economy.

“We're really in a bad situation,” conceded Cat Fund CEO Jack Nicholson.

Cat Fund Woes Could Rattle Industry

The news that the Cat Fund lacked the financial resources in the event of a big storm surfaced last fall when the credit crisis first gripped Wall Street. However, there were expectations that the crisis would ease before private insurers needed to go out and purchase reinsurance for the 2009 season.

Instead, the problem has grown more acute. That is because of the multi-layered way the Cat Fund works. The fund has optional coverage it offers to insurance companies, as well as a mandatory coverage that all carriers must purchase.

The largest optional coverage, called the Temporary Increase in Coverage Limit, is roughly $12 billion worth of risk that state lawmakers authorized in 2007. Companies are under no obligation to buy it, but many do. (State law says that if private companies turn to private reinsurance to provide this level of coverage they cannot pass on any of the higher costs on to their customers.)

But the bigger problem now is that the fund's shortfall is so significant that it also includes part of the roughly $17 billion in mandatory coverage that all carriers must buy in order to do business in Florida. Most carriers who purchase the mandatory coverage purchase a policy that covers 90 percent of their losses once they meet their deductible limits.

The looming shortfall could have tremendous ramifications throughout Florida's private insurance market. If the Cat Fund cannot pay off claims, it puts private insurers at risk of being unable to cover storm damages and potentially going insolvent.

But even without a storm, the Cat Fund troubles could force insurers to spend substantially more money in the private reinsurance market at a time when reinsurance rates are expected to climb. Rating agencies may be forced to downgrade the financial condition of private insurers because of the problem.

“Make no mistake about it — there is no more significant entity in the Florida property insurance market than the Florida Hurricane Catastrophe Fund,” said John Forney of Raymond James & Associates, who acts at the Cat Fund's financial advisor.

Demotech Inc., a rating company that has rated the smaller start-up domestic companies in Florida over the last several years, warned in a November letter that it could begin changing rates by May 15 unless it got “definitive financial information” that showed the fund had access to cash it could use.

Crisis May Force Lawmakers to Act

This unraveling of the Cat Fund places additional pressure on lawmakers to act during their annual session that convenes in March.

The $12 billion in optional coverage is due to expire in 2010. Some legislative leaders, such as Senate President Jeff Atwater (R-North Palm Beach), have already been pushing forward the idea of a “stair-stepping” or “glide path” downward of the amount of Cat Fund coverage this year. Atwater and other legislators favored a gradual decline so that there would not be a need to sharply increase insurance rates.

But such an approach may be insufficient if the unthinkable happens and the state is hit with a major storm this year. Plus, some legislators say it is wrong to sell reinsurance to companies if there is no way the claim can be paid.

“To me, that is being dishonest,” said Rep. Alan Hays, a Umatilla Republican and vice chairman of the House Insurance, Business and Financial Affairs Committee.

However, if lawmakers chose to eliminate a large portion of the Cat Fund coverage, it would inevitably lead insurers to seek rate hikes to offset the purchase of more expensive private reinsurance. Nicholson told lawmakers last month that the Cat Fund results in about a 30 percent premium savings for customers.

In a Jan. 30 memo, Forney said that he sees three options: Lower the amount of coverage offered by the fund, have the state purchase financial backing in the private market, or look to the government for help.

Last year, the fund spent $224 million to purchase a $4 billion loan guarantee from Berkshire Hathaway, Inc. But the outlook for a similar type of deal this time is murky; meetings between Nicholson and the company have not yielded any concrete arrangements.

If the state turns to the private reinsurance market and purchases up to $5 billion in coverage, then it will be at a hefty price. According to the fund's financial advisors, such a deal could cost the fund as much as $1.25 billion, which would also force up insurance premiums.

Forney admits that even doing this won't be enough to cover the sizable shortfall. He has recommended that if the state does purchase private reinsurance, then it use it to shore up the mandatory coverage layer.

Possible Federal Bailout

The other possible solution is to turn to the state or federal government for help.

Back in 2006, Florida did help shore up Citizens, but the current meltdown in the economy has sapped the state's financial resources. Florida lawmakers have already slashed billions in state spending, and they expect to do even more cutting in the next few months.

Insurance Commissioner Kevin McCarty traveled to Washington D.C. in February to lobby Florida's congressional delegation on the idea of trying to obtain a line of credit that the state could use in the event there was a problem with the fund.

“We are not oblivious to this situation,” said Deputy Insurance Commissioner Belinda Miller. “We would like to see a federal backstop if we could obtain one.”

But it's not clear that such an approach will work. Past lobbying efforts to convince Congress to create a national catastrophe fund have been blocked by politicians from non-coastal states concerned that their taxpayers would wind up subsidizing residents of California, Florida, and Texas.

There is a fourth option, one we have relied on before: Wait and throw the dice, betting that Florida can stay lucky for yet another year.