US policyholders could be left "in limbo” if a major hurricane strikes, warns AM 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. This is the conclusion of a new report from AM Best.

According to the report, Florida’s largest insurer and state-run reinsurer, dependent on post-event bond offerings to cover any cash shortfall, may lack the funds to immediately pay all claims from a major storm.

Other states have examined similar financing as wind and beach pools see significant growth in liabilities.

The Florida Hurricane Catastrophe Fund (FHCF) is exploring other options to manage its liquidity and capacity risk amid tightening credit markets.

Florida’s Citizens Property Insurance Corp and Louisiana Citizens Property Insurance Corp are restructuring auction-rate debt in response to turmoil in that part of the municipal bond market.

Insurers could incur credit risk for their reinsurance recoverables tied to the FHCF if the fund has trouble raising money, while claims payments for Citizens’ policyholders could be delayed.

The Texas Legislature, when it reconvenes in 2009, may give the Texas Windstorm Insurance Association bonding authority after its exposure increased 55.6% in the 15 months through March 2008.

State and federal funds ultimately may come into play if hurricane losses exhaust the resources of insurers of last resort.