While costs associated with damages from Hurricane Floyd have been projected at between $10 billion and $15 billion, it remains unclear whether damages from the storm will trigger losses for investors in catastrophe bonds.
But a multiple event - namely Hurricane Gert, the storm brewing in the Atlantic at press time - may provide the straw that broke the camel's back.
According to a report from Standard & Poor's Ratings Group released last week, two catastrophe bond issues have potential exposures to Hurricane Floyd, Residential Re III and Juno Re. The report stated that if Floyd maintained its strength in the geographic areas covered by the two issues, damages could exceed the insurance companies' probable maximum loss allowances by 30%. This figure was deemed sustainable.
However, Hurricane Gert, packing 175 mile-per-hour winds as of Friday, may stress catastrophe insurance concerns if it makes landfall in the eastern region of the U.S.
"A second event of historic size following closely upon a first could stress capital," S&P said in a statement.
While second-event reinsurance coverage is common, multiple events are the primary reason many insurers are seeking a federal backstop for natural catastrophes, S&P said, in order to mitigate big losses from several, same-location events.
Compared with the hits providers took from the devastation caused by Hurricane Andrew in 1992, insurance companies now appear to be in a better position to pay claims without dislocating effects on capital. One reason among several is their ability to access the capital markets through cat bond securitizations, S&P said.