The fall-out from the credit crunch could have a big impact on insurers' ability to pay out on claims in the event of a hurricane striking.

That is the view of ratings agency AM Best & Co., which reckons turmoil in the credit markets could leave policyholders in limbo if a major hurricane hits the US this year, with investors showing a limited appetite for capital-market offerings designed to raise cash for claims payments.

The largest insured property loss from hurricanes in the US was Hurricane Katrina in 2005 at $44.9 billion in insured losses, followed by Hurricane Andrew in 1992 with $25.6 billion and Hurricane Wilma, also two years ago, at $11.4 billion.

Best's 2008 Special Report reveals that Florida's largest insurer and state-run reinsurer, dependent on post-event bond offerings to cover any cash shortfall, may lack the funds to immediately pay all claims from a major storm.

The Florida Hurricane Catastrophe Fund (FHCF) is also looking at other options to manage its liquidity and capacity risk amid tightening credit, with insurance companies possibly incurring credit risk for their reinsurance recoverables tied to the FHCF if the fund has trouble raising money, while claims payments for Florida and Louisiana Citizens Property Insurance Corps' policyholders could be delayed, according to the findings.

"Amid the most severe credit crunch in more than a decade, companies and municipalities are finding it harder to raise cash at attractive rates," the report read. "Meanwhile, forecasters are in agreement that 2008 is likely to be a busier than average hurricane season."

The report went on to say that turmoil in late 2007 and early 2008 in the auction-rate securities market had resulted in substantially higher financing costs for Citizens on as much as $4.75 billion in outstanding auction-rate debt, with Citizens moving to restructure the debt, which had been part of its $6.5 billion pre-event liquidity programme.

For the FHCF, it said, trouble started brewing last August when the fund tried to raise $7 billion of "pre-event" bonds, which add to the capacity it has on hand to pay claims, but by October the fund was only able to sell $3.5 billion of the bonds at substantially higher prices than had been anticipated as the sub-prime mortgage crisis kicked into full gear.

In January, the fund's advisory council expressed concern about the FHCF's "realistic potential to adequately fund" its maximum coverage limit of $28 billion, according to a letter from the advisory council's chair addressed to Florida's governor, attorney general and chief financial officer, with its considered opinion to reduce cat funds to a level that can be financed with greater certainty.

A shortfall of as much as $25.75 billion in anticipated FHCF capacity caused by a large hurricane combined with unfavourable financial market conditions has been predicted based on the FHCF's total capacity of $27.83 billion for the 2007 hurricane season.