The mortgage crisis has created yet another concern that could directly impact homeowners and, strangely enough, it is Mother Nature.
A.M. Best Company, a full-service credit rating organization for the financial industries has raised speculation that the credit crunch may affect the ability of insurers and reinsurers to cover claims resulting from coastal disasters.
The company issued a special report this week, quoted extensively in Insurance Journal in which it said that investors are showing 'a limited appetite for capital-market offerings designed to raise cash for claims payments' should a major hurricane strike the coastal U.S. this year.
The company said that, in addition, insurers are heavily exposed in hurricane-prone areas to properties foreclosed by lenders or abandoned due to the crisis. It estimated that more than one-half million properties exist in coastal areas from Texas to Maine. Florida by itself has over 100,000 properties in some stage of foreclosure.
"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."
Best says, in its report, that insurers may not realize this additional exposure, perhaps because Agents have not notified them of suspicious activity such as mail returned as undeliverable or have failed to pass on news of a foreclosure.
State-backed insurance pools such as exist in Florida, Louisiana, and Texas may be at most risk. Florida's largest insurer and its state-backed reinsurer depend on bond sales after a disaster to cover any shortfall and may be unable to immediately pay all claims from a major disaster.
The coast has had a respite from major storms for two years so private insurers have been able to rebuild capital and surpluses, particularly in Florida. The Florida Hurricane Catastrophe Fund (FHCF) is looking for other ways to build its reserves but 'insurers could incur credit risk for their reinsurance recoverables tied to FHCF if the fund has trouble raising money, while claims payments for Citizens' policyholders could be delayed.'
The report warned that it might be necessary to rely on state and federal funds if state-backed insurers cannot pay claims.