There is a finite amount of risk that can be reinsured by the industry. The question is at what point does that risk begin to spill over in a significant way to the financial markets? For instance, let's say that you are a big insurer and you need to raise liquidity to provide cash for incoming claims. Most of that cash will come from selling US Treasuries. No big deal. It is the most liquid market in the world--so long as the Chinese are buying our paper. What if there is a serious dislocation due to some crisis in China that temporarily undermines their ability to purchase US Treasury Securities? What you will have is insurance companies selling into a steepening yield curve (lower prices) to meet liquidity needs which will trigger follow on selling from US financial institutions. Essentially, you get a run on the financial markets. And given the need to finance our debt abroad to rebuild here, the effects could be more devastating than the original damage of the storms.
Here is an update to this entry
SEC Eases Capital Rules for Insurers
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October 04,2005 | WASHINGTON -- The Securities and Exchange Commission is easing rules for insurance companies to raise capital, responding to concern that the billions of dollars of losses from Katrina and Rita could make it harder for the insurers to pay victims' claims.
The SEC announced the move Tuesday, saying it would among other things allow publicly traded insurance companies to submit reduced paperwork for registering new issues of stock with the agency.
"The SEC remains committed to doing everything possible for the victims of Hurricane Katrina and Hurricane Rita," agency Chairman Christopher Cox said in a statement. "... We will work to ensure that our regulatory processes do not interfere with market access. The SEC will do what it can to see to it that every victim's insurance has the capital to back it up, and that there are no unnecessary delays in paying claims due to a lack of" available money.
The changes will be in effect through Dec. 1
