8.3.3.2. Natural Catastrophes and Insurer Solvency
Historical weather-related insolvencies illustrate the vulnerability of large
and small insurers to the types of natural disasters that potentially are associated
with climate change (Stipp, 1997; Swiss Re, 2000a; Mills et al., 2001).
Nearly 650 U.S. insurers became insolvent between 1969 and 1998 (Figure
8-4b) (Matthews et al., 1999).
Of the 36 of 426 specifically attributed insolvencies occurring primarily as
a result of natural catastrophes, more than half occurred between 1989 and 1993—the
period of Hurricanes Hugo, Iniki, and Andrew—despite increased insurer
capacity (Davidson, 1997; Doherty, 1997; Matthews et al., 1999; Swiss
Re, 2000b). Given the multi-factorial nature of most insolvencies, weather-related
losses were no doubt a contributing factor in other cases as well. Although
small or geographically specialized firms are most vulnerable, insolvencies
of larger and more regionally diversified companies have occurred in the European
Union (Swiss Re, 2000a) and in the United States (see Section
15.2.7). As a result of Hurricane Andrew, the largest U.S. home insurer,
State Farm Fire and Casualty, was brought to the brink of insolvency by a US$4
billion loss and had to be rescued by its parent company (Stipp, 1997). The
second largest U.S. home insurer, Allstate, paid out US$1.9 billion (which was
US$500 million more than it had made in profits from its Florida operations
from all types of insurance, including investment income, over the 53 years
it had been in business) and also had to be rescued by its parent company (III,
2000a).
Little analysis of historic insolvencies in relation to natural catastrophes
has been conducted outside the United States. Data for property/casualty firms
in France, Germany, the UK, and the United States show that annual "baseline"
insolvencies range from 0 to 0.5% of all firms to more than 2% in years with
larger natural disasters (Swiss Re, 2000a). Natural disasters contributed to
the severe difficulties experienced by the London market, including Lloyd's
of London's near insolvency.
Future-oriented analyses of insurer solvency also have been conducted; these
analyses show PMLs of US$45-100 billion, which—despite several recognized
conservatisms in the analyses—would result in serious levels of insolvency
in the industry (ISO, 1996; Cummins et al., 1999; Kelly and Zeng, 1999). As
many as 45% of insurers in the United States (representing 62% of the market
share) could be placed in this position (GAO, 2000a,b). These findings are comparable
to an earlier study showing that the rise in PMLs is stretching insurers'
adaptive capacity (AIRAC, 1986).
Although much attention is focused on catastrophic loss events, "small"
loss events are responsible for 50% of total economic and insured losses from
weather-related events globally (Munich Re, 2000). If such events are closely
spaced, they also can generate insolvencies or deplete surplus (Swiss Re, 1997;
Ryland, 2000). Hybrid events involving multiple sources of insurance losses
are of particular concern (White and Etkin, 1997; Francis and Hengeveld, 1998).
This concern is exemplified in the case of ENSO events. A series of small events
could be worse for insurers, in fact, than a single large event because individual
losses per event often are capped (Stipp, 1997). Very little has been published
on this subject since the mid-1980s (AIRAC, 1986).
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