With the property-catastrophe market drying up following back-to-back years of record hurricane losses in 2004 and 2005, Florida lawmakers took a huge leap into the abyss by passing a law to provide cheaper reinsurance for primary carriers—with the savings to be passed on to policyholders.

There was only one problem—in a worst-case scenario, the move ultimately leaves citizens of Florida (that is, individual residents—not Citizens, the state’s property insurer of last resort) with tens of billions in potential exposure.

Before the year’s first month was over, Gov. Charlie Crist had signed into law a hastily assembled program the Property Casualty Insurers Association of America had dismissed as a “quick fix” that ignored serious long-term implications.

In a letter to lawmakers that appeared in an ad before the legislature overwhelmingly approved the bill, PCI officers lamented that “in an effort to deliver on election campaign promises of 25-to-30 percent rate cuts, this reform package transfers the cost of paying for future hurricanes to generations of taxpayers, mortgaging our economic future on the hope that a major storm won’t strike anytime soon.”

After the vote, a local official for the American Insurance Association warned that “while providing some immediate rate relief to policyholders who live in the most hurricane-threatened areas of the state, [the new law] does nothing to encourage insurers to invest additional private capital in Florida, which should be the ultimate goal of public policymakers.”

The only solace insurers could take was that the final measure could have been worse. Excised were sections barring insurers from setting up Florida-specific subsidiaries and requiring the state to factor in the national profits of an insurer when considering a rate request.

What the law did do, however, was let primary carriers buy reinsurance from the Florida Hurricane Catastrophe Fund—created in November 1993 after Hurricane Andrew—at below-market rates, while allowing Citizens Property Insurance Company to compete for business with private insurers.

However, since no prospective funding was ordered to cover potentially catastrophic losses, the burden will inevitably fall heavily on policyholders via steep assessments if a major storm hits in the next few years.

Since the law was passed, implementation has been anything but smooth. At first, there were headlines predicting doom as reinsurers—particularly in Bermuda—were effectively shut out of the huge Florida market and profits plummeted. There was even talk that excess reinsurance capacity might spill over into other lines and exacerbate an already softening casualty market.