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GGD-00-57R 1 (2000-02-08)

handle is hein.gao/gaocrptalor0001 and id is 1 raw text is: I GGAO Accountability * Integrity * Reliability United States General Accounting Office General Government Division Washington, D.C. 20548 B-284252 February 8, 2000 The Honorable Ed Royce House of Representatives The Honorable Paul E. Kanjorski House of Representatives The Honorable Rick Hill House of Representatives Subject: Insurers' Ability to Pay Catastrophe Claims The Homeowners' Insurance Availability Act of 1999 (H.R. 21) would establish a federal program to sell reinsurance' (1) to state government programs and (2) at auction to cover some insured losses associated with certain natural disasters. The bill requires that the federal program not displace or compete with the private insurance or reinsurance markets, or compete in the capital markets. However, conflicting claims have been made concerning private insurers' capacity to handle such disasters. You asked us to evaluate current industry capacity to pay natural catastrophe2 claims. To address this issue, we (1) compared available data on industry3 financial resources to estimates of potential insured losses that would result from natural catastrophes of various magnitudes, (2) considered two recent studies of capacity,4 and (3) evaluated factors that may affect the stability of insurer capacity over time. 'Reinsurance is insurance for insurance firms. Under a reinsurance contract, in return for a share of the premium it collects, an insurer is able to transfer a portion of its risk to a reinsurance entity, which, in turn, is obligated to reimburse the insurance company for an agreed-upon share of covered losses. 'The Insurance Services Office, Inc., a company that provides information on the insurance industry, defines a catastrophe as an event that causes at least $25 million in insured property losses and affects a significant number of property and casualty insurers and policyholders. Although some catastrophes are not nature-related (e.g., riots), this report focuses on natural catastrophes. 3The U.S. insurance industry can be divided into (1) an accident, life, and health insurance industry and (2) a property and casualty (liability) insurance industry. This report deals with the property and casualty insurance industry only. 'The studies are (1) Can Insurers Pay for the Big One? Measuring the Capacity of the Insurance Market to Respond to Catastrophic Losses (Wharton School, University of Pennsylvania), July 14, 1999; and (2) P&C RAROC: A Catalyst for Improved Capital Management in the Property and Casualty Industry (Risk Management Solutions, Inc., and Oliver, Wyman, and Company), Fall 1999. GAO/GGD-00-57R Insurers' Ability to Pay Catastrophe Claims Page I

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