Credit Woes May Cause Turbulence in Catastrophe Markets
The credit crunch in the U.S. financial markets that boiled over due to the subprime mortgage meltdown may affect the ability of insurers and reinsurers that cover coastal areas to raise cash for claims payments should a major hurricane strike the United States this year, according to a special report released May 19 by A.M. Best.
Investors are showing a limited appetite for capital-market offerings designed to raise cash for claims payments, Best said. Insurers’ exposure in hurricane-prone states to properties foreclosed and abandoned as a result of the subprime mortgage crisis has come under review. More than 500,000 properties in coastal areas from Maine to Texas have been foreclosed on due to the subprime mortgage crisis.
“Unoccupied, unsecured properties may be at increased risk in a storm, and financial stress on homeowners may increase the temptation to commit fraud,” according to the report, titled “Credit Crunch Clouds Outlook of Hurricane Insurers, Cat Funds.”
States like Florida, Louisiana and Texas, which rely on state-backed wind and coastal area insurance pools, may be most at risk. As a result of tightening credit, Florida’s largest insurer and state-run reinsurer, both of which depend on post-event bond offerings to cover any cash shortfall, may lack the funds to immediately pay all claims from a major storm, the report says.
Best warned that state and federal funds may be tapped if hurricane losses should exceed the ability of state-backed insurers of last resort to pay claims. Meanwhile, in addition to companies, municipalities are suffering from limited access to cash at affordable rates.
Hurricane forecasters have indicated the 2008 hurricane season may be busier than usual. Hurricane Katrina in 2005 holds the record for the highest insured losses from a hurricane in the U.S. at $44.9 billion. Hurricane Andrew in 1992 comes in second, with $25.6 billion (in 2008 dollars) and Hurricane Wilma in 2004 ranked third with $11.4 billion in insured losses.
Louisiana
Louisiana’s insurer of last resort, Citizens Property Insurance Corp., nearly became the insurer of only resort in Louisiana’s southern region after Hurricanes Katrina and Rita hit in 2005. By the end of 2007 it had ballooned to become the state’s second largest homeowners carrier, according to the Louisiana Department of Insurance. However, it recently began transferring some properties to private insurers and CEO John Wortman said the group hopes to shed as many as 35,000 policies over the course of a year. Citizens also plans to offer another round of bidding for private companies to take over more policies.
Best said Citizens had to issue $978.2 million of bonds in 2006 after the FAIR Plan it manages incurred a $953.7 million deficit following the 2005 hurricanes. In December 2006 the state legislature passed a dollar-for-dollar tax credit for the assessments to pay off the bonds, Best said.
Citizens has not filed financial results from 2006 and 2007, though, and Best said as a result Citizens could have a tough time accessing more funds in the capital markets.
Texas
There was strong push in the 2005 and 2007 Texas legislative sessions to pass bills to restructure the funding mechanism for the Texas Windstorm Insurance Association, which is believed to be underfunded. A bill that would have allowed for TWIA to issue pre-event and post-event bonds to help pay claims should a major hurricane hit populated coastal areas died on the last day of the 2007 session.
Regulators approved TWIA’s request for a proposed $1.5 billion in reinsurance for the 2008 hurricane season (see sidebar). But many observers believe the bonding proposal is still needed and the issue is expected to be resurrected in the 2009 legislative session. Meanwhile, continued population growth along the Texas coastline has pushed TWIA’s potential cat exposure to more than $65 billion, up from an estimated $38.3 billion at the end of 2006.