Credit crunch and high hurricane activity could create ‘perfect storm’ in 2008

The credit crunch related to the subprime mortgage crisis in the United States and 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 the Florida Hurricane Catastrophe Fund, the state’s largest insurer, 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 because of the increasing number of abandoned properties in hurricaneprone areas.

“The subprime mortgage crisis has driven the number of properties in foreclosure past 500,000 in hurricaneprone 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.”