The ongoing credit crisis, combined with increasing exposures for state-backed insurers of last resort, could hamper the ability of these plans to cover losses from a major hurricane this year, a rating firm announced.
This year is expected to be an above-average year for hurricane activity, noted the A.M. Best report, titled "Credit Crunch Clouds Outlook of Hurricane Insurers, Cat Funds."
Some states–particularly Florida with its insurer of last resort, Citizens Property Insurance Corp., and its state-run reinsurer, Florida Hurricane Catastrophe Fund (FHCF)–are relying on post-event bond offerings to cover any shortfalls resulting from claims payments after a major storm.
However, the report stated, "In today's difficult investment climate, that could mean delays for policyholders and even no payments at all if a storm of significant wrath were to exhaust the cash on hand that Citizens and the FHCF have stashed away for claims."
Florida officials now worry that investors may not be willing to buy the FHCF bonds that would help Citizens pay claims. The problem is compounded by the increasing amount of risks that Citizens has been exposed to in recent years.
Citizens' in force policies grew from nearly 874,000 at the end of 2004 to 1.3 million at the end of 2007. The report said that some lawmakers in the state tried to reduce FHCF's capacity for the 2008 hurricane season, but the legislation failed to pass.
Should the FHCF experience problems raising money in the wake of a major storm, the problems could be far-reaching, the report noted, sweeping up insurers beyond Citizens.
While Citizens would possibly have to delay claims payments to policyholders, other insurers could face credit risk for their reinsurance recoverables tied to the FHCF, the report said. Insurers might have trouble paying claims along with Citizens, as they would need to be reimbursed by the FHCF after a storm.
While Florida "has bet more than any other state" on finding hurricane losses through post-event bond offerings, the report noted that other states may also be in danger of not meeting their obligations after a storm due to the increase in liability exposures for state plans.
"Insurance regulators and lawmakers in a growing number of states have had to examine current claims-paying arrangements for wind and beach pools because of the significant growth in these plans' liabilities in recent years," the report found.
For example, Best reported that the Texas Windstorm Insurance Association (TWIA), the insurer of last resort for coastal residents, has seen its insured exposure for building and contents increase by 55.6 percent to $59.6 billion from December 31 2006 to March 2008.
In the search for more funding, the Texas Legislature has twice considered bills to allow the TWIA to issue both pre- and post-event bonds, and it may consider this measure again in 2009. Texas has also resorted to rate increases and limiting some exposure to help the TWIA meet its obligations should a major storm hit.
Eventually, according to Best, the federal government may have to step up in the event of a major hurricane to alleviate some pressure due to the increasing exposures of state insurers of last resort.
"Ultimately, the federal government may be called upon, depending on the magnitude of losses from future hurricanes in Florida and elsewhere," the report said.
It noted one proposal in Congress to allow state residual plans access to liquidity loans from the U.S. Treasury. The state plans would be able to access these loans "if their liabilities weren't fully funded after a catastrophe and if the plans weren't able to access funds in the capital markets."
The credit crisis may also have another impact regarding hurricane season: damage to foreclosed, abandoned, or unsold houses. "How many of these houses will sit with no plywood or shutters covering their windows?" the report asked.
It noted that partial losses may become total losses, and "financially distressed homeowners may be less inclined to minimize damage that will be insured anyway. "Will some turn to outright fraud?" wondered the report, answering its questions by stating that, at this time, no one knows for sure.
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