Last year, it was the Gulf Coast. This year, climatologists say, a major hurricane could strike anywhere along the East Coast – from hard-hit Florida, to New York or farther north. One estimate puts the chances of a major U.S. landfall at 55 percent above average.
And given the coastline’s dense population, the A.M. Best Co. predicts in a new report, the potential for massive losses to insurers – and hardships for consumers – is substantial.
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“Given the buildup of population and heavy real estate development in areas of high catastrophe risk,” the report says, “it only is a matter of time before insured property losses top $100 billion from one event or a combination of events in one year.”
A $100-billion loss would be almost twice the toll of last year’s hurricane season, but after the havoc wreaked by Katrina, Rita and other storms, insurance companies are increasingly considering worst-case scenarios – as are reinsurers and financial rating firms.
Fitch Inc. and Standard & Poor’s have both issued warnings about hurricane exposure.
“2006 is likely to bring a greater than average number of named storms, hurricanes and major hurricanes,” Chicago-based Fitch analysts warned June 1, adding that costs would be “disproportionately borne” by insurers and – for the largest storms – by reinsurers.
Standard & Poor’s said it might cut the ratings of bonds sold by insurance companies that would transfer some hurricane expenses to investors.
A.M. Best analyzed two hypothetical “mega-hurricanes” and predicted that while the industry in aggregate could weather such storms, 20 to 40 insurance companies – 3 to 7 percent of the market – would be “vulnerable to failure.” Companies at greatest risk are “thinly capitalized” insurers with, the report says.
At the high end, the report says, impairments would nearly equal all catastrophe-induced insurance failures of the past 37 years, reaching roughly three times the number seen after Hurricane Andrew in 1992.
For policyholders, the impact could also be severe, the report says, with possible delays in the payment of claims and difficulties in finding coverage as insurers seek to mitigate their exposures in high-value coastal areas.
In an interview, analyst John Williams, who co-authored the report with analyst Carole Ann King, said insurers know how to protect themselves – by getting reinsurance, raising capital and reducing their exposures. But for consumers’ sake, King added, some states are considering “catastrophe” funds, such as one that Florida has created.
“I think there’s a recognition by regulators that some of these companies are going to need more help,” King said. Asked whether such bailout funds are needed, she replied: “I think that’s an issue that’s being debated in the industry and is really beyond the scope of our study.”
With Bloomberg News reports
