Business Regulation and Consumer Protection:
Insurers' Ability to Pay Catastrophe Claims
GGD-00-57R, Feb 8, 2000
Pursuant to a congressional request, GAO provided information on the insurance industry's capacity to pay natural catastrophe claims, focusing on: (1) comparing available data on industry financial resources to estimates of potential insured losses that would result from natural catastrophes of various magnitudes; (2) two recent studies of capacity; and (3) factors that may affect the stability of insurer capacity over time.
GAO noted that: (1) the insurance industry's financial resources have grown substantially since 1990 and are large relative to the natural catastrophe claims estimated to arise from a single major disaster; (2) however, not all of those resources would be available to pay claims from any single catastrophe because individual insurance companies, not the industry as a whole, pay disaster claims; (3) because any analysis of insurers' capacity requires making assumptions about both the level of their available resources and the timing, location, and size of catastrophes, any estimate is subject to potentially serious limitations; (4) to estimate how insurers might be affected by a particular catastrophe, GAO compared estimates made by a catastrophe modelling firm of potential losses from a major catastrophe in the 10 states that the firm estimated would face the largest losses in such a catastrophe to the net worth of insurers that operate in each of those states; (5) the results of GAO's analysis suggest that some insurers might lose a significant share of their assets to a major catastrophe; (6) catastrophes can disrupt insurance markets and harm insurance companies and consumers even in cases where all claims are paid; (7) therefore, determining whether insurance companies have resources to pay all claims arising from a given natural catastrophe may ignore other important aspects of insurer capacity; (8) the two recent studies of capacity GAO reviewed found that the insurance industry as a whole, implicitly including reinsurance, possesses the financial resources needed to support its natural catastrophe risk; (9) one study found that the catastrophes it modelled--a $100-billion catastrophe and a $20-billion Florida hurricane--would cause a number of insurer insolvencies; (10) the other study noted that it could not account for differences in individual insurers' capital adequacy; (11) neither study evaluated in detail the degree of insurance market disruption that a major catastrophe might cause; (12) although it appears the insurance industry as a whole may be able to pay for most or all claims arising from a 1-in-100-year loss, the current level of insurer resources to pay catastrophe claims is unlikely to be stable over time; (13) a catastrophe loss greater than a 1-in-100-year loss or a closely spaced series of smaller disasters could temporarily deplete insurer resources, including the supply of reinsurance; and (14) such disasters could lead to a larger number of insurer insolvencies, or reduce the availability of insurance in catastrophe-prone areas of the country.