2006 “mega-hurricanes” could lead to insurer failures: A.M. Best

A 2006 “mega-hurricane” causing damages of more than US$100 billion would likely result in a failure rate of between 3% and 7% of insurers with related catastrophe exposure, according to an A.M. Best report.
“A.M. Best’s statistical analysis of two hypothetical mega-hurricanessuggests that anywhere from 20 to 40 insurers, or 3% to 7% of all insurers with related catastrophe exposure, would be vulnerable to failure,” the A.M. Best report says. “At the high end, the spike in insurer impairments would nearly equal all of the catastrophe-induced insurance failures of the past 37 years.
“This would mean an insurer failure count up to roughly three times the toll of Hurricane Andrew in 1992.”
The two mega-cat scenarios include a hypothetical Category 4 storm reaching landfall north of Atlantic City, New Jersey, which then pushing north through the centre of New Jersey into New York and then Canada. Under this scenario, AIR, EQECAT and RMS models predict damages between US$95-110 billion, with 91% of the damage losses being in New York or New Jersey.
“Roughly 770 insurers would suffer losses as a result of this hurricane, with possibly 20 to 30 of them succumbing to severe financial stress,” A.M. Best reports.
In the second scenario, a Category 5 hurricane hits Miami head-on, sweeps inland up Florida’s east coast, and passes out into the Atlantic just north of Cape Canaveral. AIR, EQECAT and RMS models peg damages in this scenario at US$95-140 billion.
“Property losses that would exceed US$140 billion are limited to Florida,” according to A.M. Best’s Miami scenario. “Nearly 520 insurers would be exposed to claims, and 20 to 40 or so could be vulnerable to severe financial stress.”
In general, the A.M. Best report notes, companies at the greatest risk of impairment tend to be thinly-capitalized insurers with an A.M. Best financial strength rating of ‘B’ or below.