Credit crunch and hurricane forecasts converging at wrong time for insurers

The credit crunch related to the subprime mortgage crisis in the United States, as well as the higher-than-average hurricane forecasts for the eastern seaboard, might be converging at the worst possible time for insurers, according to A.M. Best.
“Turmoil in the credit markets could leave policyholders in limbo if a major hurricane strikes the United States this year, as investors show a limited appetite for capital-market offerings designed to raise cash for claims payments,” A.M. Best notes in its special report, ‘Credit Crunch Clouds Outlook of Hurricane Insurers, Cat Funds.’
A.M. Best observed that Florida’s largest insurer and state-run insurer, because of the credit crunch associated with the subprime mortgage losses, and “dependent on post-event bond offerings to cover any cash shortfall, may lack the funds to immediately pay all claims from a major storm.”
The ratings agency says the Florida Hurricane Catastrophe Fund is exploring other options to manage its liquidity and capacity risk amid tightening credit markets.
At the same time, A.M. Best observes, the subprime mortgage crisis is creating the conditions for increased losses in hurricane-prone states and not because of anything to do with finances.
The number of abandoned properties in hurricane-prone areas is also of concern.
“The subprime mortgage crisis has driven the number of properties in foreclosure past 500,000 in hurricane-prone coastal areas,” the special report notes. “Unoccupied, unsecured properties may be at increased risk in a storm, and financial stress on homeowners may increase the temptation to commit fraud.”